The Road Ahead of Banking Reforms in India

Presented by : Shagufta Khan M1224

Introduction
The Indian banking sector is an important constituent of the Indian financial system Without a sound and effective banking system, India can not be considered as a healthy economy Substantial role in the growth of the economy

Need for banking reforms : Public had lesser confidence on banks Enough room for growth and healthy competition

Major Implications of Narsimham Committee I (1991)

Reduction in SLR and CRR : - Reduction from 63.5 % to 31.5% - This has left more funds with banks for allocation to agriculture, industry, trade, etc. Prudential norms : - Proper classification of assets and full disclosure of A/cs of banks & FI Deregulation of interest rates on loans from Rs. 20 lakhs to Rs. 2 lakhs Setting up of Asset Reconstruction Fund (ARF) : - To take over a portion of loan portfolio of banks whose recovery has become difficult Stopped Direct Credit Programme : - Reduced the profitability of banks Public sector banks allowed for direct access to capital markets : - The Banking Companies (Acquisition and Transfer of Undertakings) Act was amended to enable the banks to raise capital through public issues

Major Implications of Narsimham Committee II (1998)

Autonomy in banking : - To implement this, criteria for autonomous status was identified - 17 banks were considered eligible Increase in FDI Limit : - In private banks the limit has been increased from 49% to 74% Stronger banking system : - Use of mergers to build the size and strength of operations for each bank - There were a string of mergers in banks during the late 90s and early 2000s Capital Adequacy Ratio : - To improve inherent strength of banks & to improve their risk absorption capacity (RBI norms : 9%)

Reduction in NPAs : - 14.4 % in 1998 to 7.2 % in 2004

Basel II Norms
Pillar One : - Minimum capital requirements similar to Basel I, i.e. 9 % except that credit risk calculation is reformed and a new charge for operational risk to be added Pillar Two : - Banks have to establish Internal Capital Adequacy Assessment Process which shall be subject to rigorous supervisory review process Pillar Three : - Public disclosures to enhance market transparency - Specific list includes capital structure, capital adequacy, composition of loan / credit portfolios by risk rating and detailed risk parameters for each risk-rating category

Basel III Norms

Pillar 1 : - Minimum Regulatory Capital Requirements based on Risk Weighted Assets (RWAs) : Maintaining capital calculated through credit, market and operational risk areas Increased from 2.5% to 7%

Pillar 2 : - Supervisory Review Process : Regulating tools and frameworks for dealing with peripheral risks that banks face
Pillar 3 : - Market Discipline : Increasing the disclosures that banks must provide to increase the transparency of banks

Future Outlook of Banking

E - banking : Branchless banking Providing customers with cost effective services Capability to cater to large customers

Consolidation : It help save costs and improve operational efficiency Owing to the diversified operations and credit profiles of merging banks, it is likely to serve as a risk-mitigation exercise

Rural banking : Delivery of banking services at an affordable cost to vast sections belonging to low income groups

Future Outlook of Banking

Stronger crisis management tools integrated with technology : It will ensure competitive advantage Upgradation in technology proportionately so that the MIS and the analytical tools for risk management are available Enhanced use of technology : An integrator which holds the key to the future success of banks Foreign banks have raised the expectation of the customer (Mobile banking and wireless tools) Speed, accuracy and quality in operations and delivery mechanism act as cost efficiency Better financial system architecture : Better regulatory guardrails that stops the financial system from driving off cliffs