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Indian Banks : Trends and Progress, RBI


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This report is published by Reserve Bank of India showing the detail analysis of the Indian Banking Industry and various tenets like NPA's, Deposit growth, types of credit etc

This report is published by Reserve Bank of India showing the detail analysis of the Indian Banking Industry and various tenets like NPA's, Deposit growth, types of credit etc

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  • 1. Report on Trend and Progress of Banking in India for the year endedJune 30, 2012 submitted to the Central Government in terms ofSection 36(2) of the Banking Regulation Act, 1949 REPORT ON TREND AND PROGRESS OF BANKING IN INDIA 2011-12 RESERVE BANK OF INDIA
  • 2. Sale Price:In India – ` 150 (Normal) – ` 190 (Inclusive of Postal Charges) – ` 110 (Concessional – at Counter) – ` 150 (Concessional – Including Postage)Abroad – US$ 12 (Inclusive of Air Mail Courier Charges)© Reserve Bank of India 2012All rights reserved. Reproduction is permitted provided an acknowledgement of the source is made.Published by Sanjay Kumar Hansda for the Reserve Bank of India, Mumbai 400 001 and designed and printedby him at Alco Corporation, A2/73, Shah and Nahar Industrial Estate, Lower Parel (W), Mumbai - 400 013
  • 3. ContentsSr. No. Particulars Page No.Chapter I: Perspectives on the Indian Banking Sector ............................................... 1. Introduction .................................................................................................... 1 2. Forces Shaping the Environment..................................................................... 1 3. Operational and Strategic Responses ............................................................ 3 4. Challenges ....................................................................................................... 6 5. The Way Forward............................................................................................. 9Chapter II: Global Banking Developments ................................................................. 1. Introduction .................................................................................................... 10 2. Global Banking Trends ................................................................................... 11 3. Banking Trends in Select Regions and Countries ............................................ 15 4. Analysis of the Performance of Top 100 Global Banks .................................... 21 5. Global Policy Reforms ..................................................................................... 24 6. Overall Assessment ......................................................................................... 25Chapter III: Policy Environment............................................................................... 1. Introduction .................................................................................................... 27 2. Monetary Policy ............................................................................................... 28 3. Credit Delivery ................................................................................................ 29 4. Financial Inclusion .......................................................................................... 34 5. Prudential Regulatory Policy ............................................................................ 35 6. Supervisory Policy ........................................................................................... 40 7. Regional Rural Banks ...................................................................................... 42 8. Co-operative Banks ......................................................................................... 43 9. Non-Banking Financial Companies.................................................................. 44 10. Customer Service in Banks ............................................................................. 44 11. Financial Markets............................................................................................ 46 12. Payment and Settlement Systems .................................................................... 47 13. Technological Developments............................................................................ 50 14. Banking Sector Legislation .............................................................................. 50 15. Overall Assessment ......................................................................................... 52Chapter IV: Operations and Performance of Commercial Banks ................................. 1. Introduction .................................................................................................... 54 2. Balance Sheet Operations of Scheduled Commercial Banks............................ 54 3. Financial Performance of Scheduled Commercial Banks ................................. 60 4. Soundness Indicators...................................................................................... 62
  • 4. Sr. No. Particulars Page No. 5. Sectoral Deployment of Bank Credit ............................................................... 72 6. Operations of Scheduled Commercial Banks in Capital Market ...................... 75 7. Shareholding Pattern in Scheduled Commercial Banks .................................. 78 8. Foreign Banks’ Operations in India and Overseas Operations of Indian Banks 78 9. Technological Developments in Scheduled Commercial Banks ....................... 79 10. Customer Service ............................................................................................ 82 11. Financial Inclusion .......................................................................................... 84 12. Local Area Banks ............................................................................................ 88 13. Regional Rural Banks ...................................................................................... 90 14. Overall Assessment ......................................................................................... 91Chapter V: Developments in Co-operative Banking .................................................... 1. Introduction .................................................................................................... 93 2. Urban Co-operative Banks .............................................................................. 94 3. Rural Co-operatives ........................................................................................ 104 4. Progress on Licensing of Rural Co-operatives.................................................. 113 5. Progress relating to Revival of Rural Co-operatives ......................................... 116 6. Progress relating to Rural Credit Measures that have Specific Implications for Co-operatives .................................................................................................. 118 7. Overall Assessment ......................................................................................... 119Chapter VI: Non-Banking Financial Institutions ........................................................ 1. Introduction .................................................................................................... 120 2. Financial Institutions ...................................................................................... 120 3. Non-Banking Financial Companies.................................................................. 124 4. Primary Dealers .............................................................................................. 138 5. Overall Assessment ......................................................................................... 141 vi
  • 5. List of BoxesSr. No. Particulars Page No. I.1 Technological Innovations and Efficiency Gains in the Banking Sector ........... 4 I.2 Bilateral Memorandum of Understanding (MoU) with Reserve Bank’s Overseas Counterparts for Improved Cross-Border Supervision and Co- operation ........................................................................................................ 5 II.1 Issues in LIBOR Fixation and Implications for Banks .................................... 15 II.2 Eurozone Crisis and the Sovereign-Bank Nexus: Sovereign Rating Downgrades and Implications for Global Banking System ............................. 18 III.1 Unique Customer Identification Code for Banks’ Customers in India ............. 39 III.2 White-Label ATMs (WLAs) .............................................................................. 49 IV.1 What Drives the Profitability of Indian Banks?: A Du Pont Analysis for Bank Groups ........................................................................................................... 63 IV.2 Bank Lending to Infrastructure and Asset-Liability Mismatches: How Strong is the Linkage? ............................................................................................... 74 IV.3 Priority Sector Lending – is there a Bias towards Bigger Credit Needs?.......... 76 IV.4 Changing Trend of the Payment Systems from Cash to Cashless .................... 81 V.1 An Analysis of Market Concentration within the UCB Sector .......................... 98 V.2 Weakening Long-Term Co-operative Credit Structure: A Comparative Analysis of the Apex-Level Institutions............................................................ 113 V.3 Reforms for the Revival of Short-term Rural Co-operatives ............................ 117 VI.1 Micro Finance Institutions (Development and Regulation) Bill, 2012 and its Impact on Microfinance Sector ....................................................................... 126 VI.2 Guidelines on Fair Practices Code for NBFCs ................................................. 133 vii
  • 6. List of TablesSr.No. Particulars Page No. II.1 Return on Assets of Banks for Select Countries ............................................. 13 II.2 Growth in International Assets and Liabilities of Banks ................................. 15 II.3 Capital to Risk-Weighted Assets Ratio of Banks in Select Countries ............... 16 III.1 Agricultural Debt Waiver and Debt Relief Scheme .......................................... 32 III.2 Phase-wise Timeline for Basel III Implementation .......................................... 36 IV.1 Consolidated Balance Sheet of Scheduled Commercial Banks ....................... 55 IV.2 Growth in Balance Sheet of Scheduled Commercial Banks ............................ 56 IV.3 Non-SLR Investments of Scheduled Commercial Banks ................................. 57 IV.4 International Liabilities of Banks - by Type .................................................... 58 IV.5 International Assets of Banks Classified by Type ............................................ 58 IV.6 Maturity (Residual) and Sectoral Classification of Consolidated International Claims of Banks ............................................................................................. 59 IV.7 Consolidated International Claims of Banks on Countries other than India ... 59 IV.8 Bank Group-wise Maturity Profile of Select Liabilities/Assets (As at end-March) ........................................................................................... 61 IV.9 Trends in Income and Expenditure of Scheduled Commercial Banks ............ 62 IV.10 Return on Assets and Return on Equity of SCBs – Bank Group-wise ............. 62 IV.11 Cost of Funds and Returns on Funds - Bank Group-wise ............................... 64 IV.12 Capital to Risk-Weighted Assets Ratio under Basel I and II – Bank Group-wise (As at end-March) ........................................................................................... 65 IV.13 Component-wise Capital Adequacy of SCBs (As at end-March)....................... 65 IV.14 Trends in Non-Performing Assets - Bank Group-wise..................................... 67 IV.15 NPAs of SCBs Recovered through Various Channels ....................................... 69 IV.16 Details of Financial Assets Securitised by SCs/RCs ........................................ 69 IV.17 Trends in Provisions for Non-Performing Assets – Bank Group-wise ............. 70 IV.18 Classification of Loan Assets - Bank Group-wise ............................................ 70 IV.19 Sector-wise NPAs of Domestic Banks ............................................................. 72 IV.20 Sectoral Deployment of Gross Bank Credit .................................................... 73 IV.21 Priority Sector Lending by Banks (As on last reporting Friday of March 2012) 75 IV.22 Retail Portfolio of Banks ................................................................................. 77 IV.23 Public Issues from the Banking Sector ........................................................... 77 IV.24 Resources Raised by Banks through Private Placements ................................ 77 IV.25 Risk-Return Performance, Turnover and Capitalisation of Bank Stocks ......... 77 IV.26 Number of Public Sector Banks Classfied by Percentage of Private Shareholding (As at end-March 2012) ............................................................ 78 viii
  • 7. Sr.No. Particulars Page No. IV.27 Overseas Operations of Indian Banks (As at end-March) ................................ 79 IV.28 ATMs of Scheduled Commercial Banks (As at end-March 2012) .................... 80 IV.29 Credit and Debit Cards Issued by Scheduled Commercial Banks (As at end-March) ........................................................................................... 80 IV.30 Volume and Value of Electronic Transactions by SCBs ................................... 82 IV.31 Region-wise Complaints Received at Banking Ombudsman Offices ................ 83 IV.32 Select Indicators of Financial Inclusion-Cross Country Comparison .............. 84 IV.33 Region-wise and Population Group-wise New Bank Branches Opened During 2011-12 .............................................................................................. 85 IV.34 Number of ATMs of SCBs at Various Locations (At end-March 2012) ............. 86 IV.35 Progress in Road Map for Providing Banking Outlets in Villages with Population of more than 2000 (As on March 31, 2012) .................................. 86 IV.36 Progress under Financial Inclusion Plans ....................................................... 88 IV.37 Progress of Micro-finance Programmes (As at end-March) ............................. 88 IV.38 Profile of Local Area Banks (As at end-March) ............................................... 89 IV.39 Financial Performance of Local Area Banks ................................................... 89 IV.40 Consolidated Balance Sheet of Regional Rural Banks..................................... 90 IV.41 Financial Performance of Regional Rural Banks ............................................. 90 IV.42 Purpose-wise Distribution of Credit from Regional Rural Banks .................... 91 V.I Tier-wise Distribution of Urban Co-operative Banks (As at end-March 2012) 96 V.2 Rating-wise Distribution of UCBs (As at end-March 2012) ............................. 96 V.3 Distribution of UCBs by Deposits and Advances ............................................ 97 V.4 Liabilities and Assets of Urban Co-operative Banks ....................................... 99 V.5 Investments by Urban Co-operative Banks ..................................................... 100 V.6 Financial Performance of Scheduled and Non-Scheduled Urban Co-operative Banks (As at end-March 2012) ....................................................................... 101 V.7 Select Indicators of Profitability of UCBs ........................................................ 101 V.8 Non-Performing Assets of UCBs ..................................................................... 102 V.9 Distribution of UCBs by CRAR (At end-March 2012) ...................................... 102 V.10 Composition of Credit to Priority Sectors by UCBs (As at end-March 2012).. 103 V.11 Distribution of Districts and Banking Business of UCBs across Regions ........ 104 V.12 Volume of Banking Business per Branch for UCBs by Region ........................ 104 V.13 A Profile of Rural Co-operatives (As at end-March 2011)................................ 105 V.14 Liabilities and Assets of State Co-operative Banks (At end-March 2011) ........ 106 ix
  • 8. Sr.No. Particulars Page No. V.15 Trends in Select Balance Sheet Indicators of Scheduled State Co-operative Banks ............................................................................................................. 106 V.16 Financial Performance of State Co-operative Banks ....................................... 106 V.17 Soundness Indicators of State Co-operative Banks ........................................ 107 V.18 Liabilities and Assets of District Central Co-operative Banks ......................... 108 V.19 Financial Performance of District Central Co-operative Banks ....................... 108 V.20 Soundness Indicators of District Central Co-operative Banks ........................ 109 V.21 Primary Agricultural Credit Societies - Select Balance Sheet Indicators ......... 110 V.22 Liabilities and Assets of State Co-operative Agriculture and Rural Development Banks ....................................................................................... 112 V.23 Financial Performance of State Co-operative Agriculture and Rural Development Banks ....................................................................................... 114 V.24 Asset Quality of State Co-operative Agriculture and Rural Development Banks ............................................................................................................. 114 V.25 Liabilities and Assets of Primary Co-operative Agriculture and Rural Development Banks ....................................................................................... 115 V.26 Financial Performance of Primary Co-operative Agriculture and Rural Development Banks ....................................................................................... 115 V.27 Asset Quality of Primary Co-operative Agriculture and Rural Development Banks ............................................................................................................. 116 VI.1 Ownership Pattern of Financial Institutions (As on March 31, 2012).............. 120 VI.2 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 121 VI.3 Liabilities and Assets of Financial Institutions (As at end-March) ................... 121 VI.4 Resources Mobilised by Financial Institutions ................................................ 122 VI.5 Resources Raised by Financial Institutions from Money Market (As at end- March 2012) .................................................................................................. 122 VI.6 Pattern of Sources and Deployment of Funds of Financial Institutions ........... 122 VI.7 Weighted Average Cost and Maturity of Rupee Resources Raised by Select Financial Institutions ..................................................................................... 123 VI.8 Long-term PLR Structure of Select Financial Institutions ............................... 123 VI.9 Financial Performance of Select All India Financial Institutions ..................... 123VI.10 Select Financial Parameters of Financial institutions...................................... 123VI.11 Net Non-Performing Assets (As at end-March) ................................................ 124VI.12 Asset Classification of Financial Institutions .................................................. 124VI.13 Capital to Risk (Weighted) Assets Ratio of Select Financial Institutions (As at end-March) ........................................................................................... 125VI.14 Ownership Pattern of NBFCs (As on March 31, 2012) .................................... 127 x
  • 9. Sr.No. Particulars Page No.VI.15 Profile of NBFCs ............................................................................................. 127VI.16 Consolidated Balance Sheet of NBFCs-D ........................................................ 128VI.17 Major Components of Liabilities of NBFCs-D by Classification of NBFCs ....... 128VI.18 Public Deposits held by NBFCs-D by Deposit Ranges ..................................... 129VI.19 Public Deposits held by NBFCs-D - Region-wise ............................................. 129VI.20 Public Deposits held by NBFCs-D - Deposit Interest Rate Range-wise ............ 130VI.21 Maturity Pattern of Public Deposits held by NBFCs-D .................................... 130VI.22 Sources of Borrowings by NBFCs-D by Classification of NBFCs ..................... 131VI.23 Major Components of Assets of NBFCs-D by Classification of NBFCs ............ 131VI.24 Assets of NBFCs-D by Asset-Size Ranges (As at end-March) ........................... 131VI.25 Break-Up of Assets of NBFCs-D by Activity..................................................... 132VI.26 Financial Performance of NBFCs-D ................................................................ 132VI.27 NPA Ratios of NBFCs-D .................................................................................. 132VI.28 NPAs of NBFCs-D by Classification of NBFCs ................................................. 133VI.29 Classification of Assets of NBFCs-D by Category of NBFCs............................. 134VI.30 Capital Adequacy Ratio of NBFCs-D ............................................................... 135VI.31 Net Owned Fund vis-à-vis Public Deposits of NBFCs-D by Classification ....... 135VI.32 Range of Net Owned Fund vis-à-vis Public Deposits of NBFCs-D ................... 135VI.33 Profile of RNBCs............................................................................................. 136VI.34 Public Deposits Held by RNBCs - Region-wise ................................................ 136VI.35 Investment Pattern of RNBCs ......................................................................... 136VI.36 Consolidated Balance Sheet of NBFCs-ND-SI ................................................. 137VI.37 Borrowings of NBFCs-ND-SI Sector by Region ............................................... 137VI.38 Financial Performance of NBFCs-ND-SI Sector .............................................. 138VI.39 NPA Ratios of NBFCs-ND-SI Sector ................................................................ 138VI.40 Capital Adequacy Ratio of NBFCs-ND-SI - By Type of NBFC .......................... 138VI.41 Bank Exposure of NBFCs-ND-SI Sector ......................................................... 138VI.42 Performance of the PDs in the Primary Market (At end-March) ...................... 139VI.43 Performance of Standalone PDs in the Secondary Market (At end-March) ...... 139VI.44 Sources and Applications of Funds of Standalone Primary Dealers ................ 140VI.45 Financial Performance of Standalone Primary Dealers ................................... 140VI.46 Financial Indicators of Standalone PDs .......................................................... 140VI.47 CRAR of the standalone PDs (At end-March) .................................................. 140 xi
  • 10. List of ChartsSr. No. Particulars Page No. II.1 Global Macroeconomic Trends ....................................................................... 11 II.2 Three-Month Moving Average of Bank Credit Growth, in per cent .................. 12 II.3 Sovereign and Bank CDS Spreads in Select Economies ................................. 13 II.4 Bank Stock Indices in Select Economies/Economy Groups ............................ 14 II.5 Leverage in the Banking Systems of Select Economies ................................... 16 II.6 Asset quality of Banks in Select Economies.................................................... 16 II.7 Progress in the US Banking System ............................................................... 17 II.8 Sectoral Credit and Delinquency of US Banks ................................................ 17 II.9 European Banks Funding Structure and Inter-Bank Market .......................... 19 II.10 LTRO and Loans to Private Sector in the Euro Area ....................................... 20 II.11 European Banks’ Exposure to Greece ............................................................ 20 II.12 UK Banks’ Lending to Private Non-Financial Corporations ............................. 21 II.13 Chinese Banking Indicators............................................................................ 21 II.14 Location of Global Banking Statistics ............................................................. 21 II.15 Share of Countries in Total Assets of Top 100 Global Banks .......................... 22 II.16 Percentage Distribution of Top 100 Global Banks by Return on Assets .......... 22 II.17 Percentage Distribution of Top 100 Global Banks By CRAR ........................... 22 II.18 Percentage Distribution of Top 100 Global Banks by Capital to Assets Ratio (CR) ...................................................................................................... 23 II.19 Percentage Distribution of Top Global Banks by NPL Ratio ............................ 23 II.20 Changes in Soundness Indicators of Top Global Banks.................................. 23 IV.1 Share of Bank Groups in Total Liabilities/Assets of SCBs (end-March 2012) . 56IV.2(A) Share of CASA Deposits in Total Deposits (end-March) .................................. 57IV.2(B) Composition of Deposits (end-March 2012) ................................................... 57 IV.3 Incremental C-D and I-D Ratios of SCBs ........................................................ 59 IV.4 Bank Group-wise Incremental C-D and I-D Ratios (end-March 2012) ............ 60 IV.5 Trend in Maturity Profile of Assets and Liabilities (as at end-March).............. 60 IV.6 Off-balance Sheet Exposure (notional) as percentage of On-balance sheet Liabilities (as at end-March) ........................................................................... 61 IV.7 Trend in Efficiency Indicators ........................................................................ 64IV.8(A) Cost of Funds ................................................................................................. 65IV.8(B) Return on Funds ............................................................................................ 65IV.9(A) Distribution of Banks According to CRAR (end-March 2012) ......................... 66IV.9(B) Tier I CRAR of PSBs (end-March 2012) .......................................................... 66 xii
  • 11. Sr. No. Particulars Page No. IV.10 Trend in Capital Adequacy (end-March 2012) ................................................ 66 IV.11 Growth Rates of NPAs vis-à-vis Advances....................................................... 66 IV.12 Gross NPAs as Percentage of Gross Advances ................................................ 67 IV.13 Trend in Important Ratios Relating to NPAs ................................................... 68 IV.14 Bank Group-wise Ratios Relating to NPAs (end-March 2012) ......................... 68 IV.15 Restructured Advances as per cent of Gross Advances of SCBs (end-March) ..................................................................................... 68 IV.16 Restructured Advances as per cent of Gross Advances: Bank Group-wise (end-March) ....................................................................... 69IV.17(A) Gross NPA Ratio (Priority Sector): Bank Group-wise ..................................... 71IV.17(B) Gross NPA Ratio (Non-Priority Sector) Bank Group-wise ............................... 71 IV.18 Percentage Composition of NPAs of SCBs (end-March 2011 and 2012) .......... 71 IV.19 Trend in Infrastructure Credit........................................................................ 73 IV.20 Priority Sector Lending by Public Sector Banks (end-March 2012) ................ 75 IV.21 Relative Performance of Bankex and BSE Sensex 2011-12............................. 78 IV.22 Government Shareholding in Select Public Sector Banks (end-March 2012)........................................................................................... 78IV.23(A) Number of Credit / Debit Cards Outstanding .................................................. 80IV.23(B) Share of Bank Groups in Total Credit / Debit Cards (as at end-March 2012) . 80IV.24(A) Bank Group-wise Break-up of Major Complaint Types 2011-12 ..................... 83IV.24(B) Share of Bank Groups in Total Complaints .................................................... 83IV.25(A) Share of Population Groups in Increment of ATMs: 2011-12 ......................... 85IV.25(B) Share of Regions in Total Number of New ATMs opened: 2011-12 ................. 85IV.26(A) Share of Bank Groups in News Banking Outlets Opened in Villages with Population >2000 (end-March 2012) ............................................................. 87IV.26(B) Composition of Public Sector Banks having Banking Outlets in Villages with Population >2000 (end-March 2012) ............................................................. 87 IV.27 Trend in Profitability of RRBs ........................................................................ 90 V.1 Structure of Co-operative Credit Institutions in India (As at end-March 2012) 94 V.2 Number and Composition of UCBs based on Financial Strength .................... 95 V.3 Progress of Consolidation of the UCB Sector in Each State, At end-March 2012 ........................................................................................ 95 V.4 Tier-wise Composition of UCBs ...................................................................... 96 V.5 Distribution of UCBs by Size of Assets ........................................................... 97 V.6 Growth in Assets of UCBs .............................................................................. 99 xiii
  • 12. Sr. No. Particulars Page No. V.7 Share of Scheduled and Non-Scheduled UCBs in Total Assets of UCB Sector 100 V.8 Credit-Deposit and Investment-Deposit Ratios for UCBs compared with SCBs 100 V.9 Gross NPA Growth and Ratio ......................................................................... 101 V.10 Provisioning Coverage Ratio of UCBs ............................................................. 102 V.11 Distribution of UCBs by CRAR, 2012 ............................................................. 102 V.12 Percentage Distribution of Credit to Select Priority Sectors by UCBs.............. 103 V.13 Percentage Distribution of Credit to Weaker Sections by UCBs....................... 103 V.14 Composition of Rural Co-operative Credit Structure by Short and Long-term Credit Co-operatives ...................................................................................... 104 V.15 Profitability of Rural Co-operative Credit Institutions ..................................... 105 V.16 Indicators of Financial Health of StCBs .......................................................... 107 V.17 Financial Health of StCBs by Region .............................................................. 108 V.18 Indicators of Financial Health of DCCBs ........................................................ 109 V.19 Financial Health of DCCBs by Region ............................................................. 109 V.20 Comparison of Financial Health of StCBs and DCCBs ................................... 110 V.21 Growth in Credit Outstanding from PACS ...................................................... 110 V.22 Borrower-to-Member Ratio of PACS ............................................................... 111 V.23 Percentage of PACS in Profit and Loss ............................................................ 111 V.24 Comparison of NPA Ratio of SCARDBs with other Co-operative and Commercial Banking Institutions ................................................................... 114 V.25 A Regional Comparison of Financial Health of SCARDBs ............................... 114 V.26 Profitability Indicators of PCARDBs ............................................................... 115 V.27 Financial Health of PCARDBs compared with SCARDBs ................................ 116 V.28 Shares of Rural Credit Institutions in Total KCCs issued ............................... 118 V.29 Share of Rural Credit Institutions in Direct Agricultural Credit ...................... 118 VI.1 Number of NBFCs Registered with the Reserve Bank ..................................... 127 VI.2 Ratio of Public Deposits of NBFCs to Broad Liquidity (L3) and Aggregate Deposits of SCBs ............................................................................................ 127 VI.3 Share of Public Deposits held by NBFCs-D by deposits Ranges ...................... 129 VI.4 Share of Public Deposits held by NBFCs-D: Region-wise ................................ 129 VI.5 Public Deposits held by NBFCs-D - Deposit Interest Rate Range-wise (Per cent) ........................................................................................................ 130 VI.6 Maturity Pattern of Public Deposits held by NBFCs-D (Per cent) .................... 130 VI.7 Financial Performance of NBFCs-D ................................................................ 132 xiv
  • 13. List of Appendix TablesSr. No. Particulars Page No. IV.1 Indian Banking Sector at a Glance ................................................................. 142 IV.2 Off-Balance Sheet Exposure of Scheduled Commercial Banks in India .......... 143 IV.3 Bank Group-wise Lending to the Sensitive Sectors ........................................ 144 IV.4 Share Prices and Price/ Earning Ratios of Bank Stocks at BSE (As on the last Reporting Friday of March) ..................................................... 145 IV.5 Shareholding Pattern of Domestic Scheduled Commercial Banks (As at end-March 2012) .................................................................................. 146 IV.6 Branches and ATMs of Scheduled Commercial Banks (As at end-March 2012) .................................................................................. 148 IV.7 Statement of Complaints Received at Banking Ombudsman Office ................ 151 IV.8 Credit-Deposit Ratio and Investment plus Credit-Deposit Ratio of Scheduled Commercial Banks –Region/State-wise ........................................................... 154 V.1 Select Financial Parameters of Scheduled UCBs ............................................ 155 V.2 Major Indicators of Financial Performance of Scheduled UCBs ...................... 156 V.3 State-wise Distribution of UCBs (As at end-March 2012) ............................... 158 V.4 Salient Indicators of Financial Health of State Co-operative Banks - Region and State-wise (As at end-March) ................................................................... 159 V.5 Salient Indicators of Financial Health of District Central Co-operative Banks - Region and State-wise (As at end-March) ....................................................... 160 V.6 Select Indicators of Primary Agricultural Credit Societies - State-wise (As at March 31, 2011)................................................................................... 161 V.7 Salient Indicators of Financial Health of State Co-operative Agriculture and Rural Development Banks - State-wise (As at end-March) .............................. 163 V.8 Salient Indicators of Financial Health of Primary Co-operative Agriculture and Rural Development Banks - State-wise (As at end-March) .............................. 164 V.9 Kisan Credit Card Scheme: State-wise Progress (As at end-March 2012) ....... 165 VI.1 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 166 VI.2 Financial Performance of Primary Dealers ..................................................... 168 VI.3 Select Financial Indicators of Primary Dealers ............................................... 169 xv
  • 14. List of Select AbbreviationsAD Authorised Dealer CAS Common Accounting SystemADR American Depository Receipt CASA Current Account and SavingsADWDR Agricultural Debt Waiver and Account Debt Relief Scheme CBI Central Bureau of InvestigationAEs Advanced Economies CBLO Collateralised Borrowing andAFC Asset Finance Companies Lending ObligationAFI Annual Financial Inspection CBS Core Banking SolutionsAIFIs All-India Financial Institutions CCAR Comprehensive Capital Analysis and ReviewALM Asset-Liability Management CCB Capital Conservation BufferAMA Advanced Measurement Approach CCF Credit Conversion FactorsAML Anti-Money Laundering CCP Central Counter PartyANBC Adjusted Net Bank Credit CD Certificate of DepositARDB Agriculture and Rural CD Ratio Credit to Deposit Ratio Development Bank CDS Credit Default SwapsASA Alternate Standardised Approach CE Common EquityATM Automated Teller Machine CEO Chief Executive OfficerBBA British Bankers’ Association CEOBSE Credit Equivalent Amount ofBC Business Correspondent Off-Balance Sheet ExposureBCBS Basel Committee on Banking CFSA Committee on Financial Sector Supervision AssessmentBCP Business Continuity Plan CFT Combating Financing of TerrorismBCP-DR Business Continuity Planning and Disaster Recovery CGFS Committee on Global Financial StabilityBCSBI Banking Codes and Standards Board of India CGS Credit Guarantee SchemeBF Business Facilitator CGTMSE Credit Guarantee Fund Trust for Micro and Small EnterprisesBFS Board for Financial SupervisionBIFR Board for Industrial and CIBIL Credit Information Bureau of Financial Reconstruction India LimitedBIS Bank for International CIC Credit Information Company Settlements CICs-ND-SI Systemically Important CoreBO Banking Ombudsman Investment CompaniesBoD Board of Directors CICs Core Investment CompaniesBoM Board of Management CMB Cash Management BillsBPR Business Process Re-engineering CMCG Compensation Monitoring Contact GroupBSE Bombay Stock Exchange Ltd. CME Capital Market ExposureCAMELS Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, CNP Card Not Present and Systems & Control CoR Certificate of RegistrationCAR Capital Adequacy Ratio CP Commercial Paper xvi
  • 15. CP Card Present EL Expected LossCPSS Committee on Payment and EME Emerging Market Economy Settlement System EMV Euro pay MasterCard VisaCR Capital to Assets Ratio ESA European SupervisoryCRAR Capital to Risk-Weighted Assets Authorities Ratio ESFS European System of FinancialCRAs Credit Rating Agencies SupervisorsCRDIV Capital Requirements Directive IV ESM European Stability MechanismCRR Cash Reserve Ratio ESMA European Securities and MarketsCTC Cheque Truncation System AuthorityDCCB District Central Co-operative ESRB European Systemic Risk Board Bank EU European UnionDGA Duration Gap Analysis EURIBOR Euro Inter-Bank Offered RateDICGC Deposit Insurance and Credit EWS Economically Weaker Sections Guarantee Corporation EXIM Bank Export Import Bank of IndiaDIN Director Identification Number FASB Financial Accounting StandardsDLIC District Level Implementation Board Committee FATF Financial Action Task ForceDMFC District Micro-Finance FB Foreign Banks Committee FCs Financial ConglomeratesDR Disaster Recovery FCA Financial Conduct AuthorityDRT Debt Recovery Tribunal FCCB Foreign Currency ConvertibleDSA Direct Selling Agents BondsD-SIB Domestic Systemically Important FCMD Financial Conglomerate Bank Monitoring DivisionEaR Earnings at Risk FCNR (B) Foreign Currency Non-ResidentEBA European Banking Authority (Banks)EBT Electronic Benefit Transfer FCRA Foreign Contribution (Regulation) ActECCS Express Cheque Clearing System FDIC Federal Deposit InsuranceECS Electronic Clearing Service CorporationEDEs Emerging and Developing FEMA Foreign Exchange Management Economies ActEEFC Exchange Earners’ Foreign FFC Fair Practices Code Currency FHC Financial Holding CompanyEFSF European Financial Stability Facility FI Financial InstitutionEFSM European Financial Stabilisation FII Foreign Institutional Investments Mechanism FIP Financial Inclusion PlanEIOPA European Insurance and FLCC Financial Literacy and Credit Occupational Pensions Authority Counselling Centres xvii
  • 16. FMI Financial Market Infrastructure IBA Indian Banks’ AssociationFMU Financial Market Utilities ICAI Institute of Chartered AccountantsFPC Financial Policy Committee of IndiaFSA Financial Services Authority ICB Independent Commission on BankingFSAP Financial Sector Assessment ICs Investment Companies Programme ICICI Industrial Credit and InvestmentFSB Financial Stability Board Corporation of IndiaFSDC Financial Stability and ICT Information and Communications Development Council TechnologyFSLRC Financial Sector Legislative IDBI Industrial Development Bank of Reforms Commission IndiaFSOC Financial Stability Oversight IDFC-NBFC Infrastructure Debt Fund-Non- Council Banking Financial CompaniesFSR Financial Stability Report ID Ratio Investment-to-Deposit RatioGAAP Generally Accepted Accounting IDRBT Institute for Development and Principles Research in Banking TechnologyG-Sec Government Securities IFC Infrastructure Finance CompanyGCC General Credit Card IFRS International Financial ReportingGDP Gross Domestic Product StandardsGDR Global Depository Receipt IIBI Industrial Investment Bank ofGFSR Global Financial Stability Report IndiaGHOS Governors and Heads of IL Incurred Loss Supervision IMA Internal Models ApproachGIC General Insurance Corporation of IMF International Monetary Fund India INFINET Indian Financial NETworkGNPA Gross Non-Performing Assets IOSCO International Organisation ofG-SIB Global Systemically Important Securities Commission Bank IRB Internal Rating BasedHFCs Housing Finance CompaniesHLSC High-Level Steering Committee IRC Incremental Risk ChargeHRM Human Resource Management IRDA Insurance Regulatory and Development AuthorityHR Human Resource IRSD Interest Rate Sensitivity underHSBC Hong Kong and Shanghai Duration Gap Analysis Banking Corporation ISO Independent Service OrganisationHTM Held to Maturity IS Information SecurityIADs Independent ATM Deployers IT Information TechnologyIAS International Accounting Standards IVR Interactive Voice ResponseIASB International Accounting IWG Internal Working Group Standards Board JLGs Joint Liability Groups xviii
  • 17. KA Key Attributes MSME Micro, Small and MediumKCC Kisan Credit Card EnterprisesKYC Know Your Customer MVE Market Value of EquityLAB Local Area Bank NABARD National Bank for Agriculture and Rural DevelopmentLAF Liquidity Adjustment Facility NAFSCOB National Federation of State Co-LCBG Large and Complex Banking operative Banks Group NBFC Non-Banking Financial CompanyLCR Liquidity Coverage Ratio NBFC-D Non-Banking Financial Company-LCs Loan Companies Deposit takingLDB Land Development Bank NBFC-ND Non-Deposit taking Non-BankingLEI Long-term Economic Impact Financial CompanyLGD Loss Given Default NBFC-ND- Systemically Important Non-LIBOR London Inter-Bank Offered Rate SI Deposit taking Non-Banking Financial CompanyLIC Life Insurance Corporation of India NBFC-MFI Non-Banking FinancialLIG Low Income Groups Companies - Micro-Finance InstitutionsLTRO Long-Term Refinancing Operations NBFI Non-Banking Financial InstitutionLTCCS Long-Term Co-operative Credit NCC National Credit Council Structure NDS-OM Negotiated Dealing System -LWE Left Wing Extremism Order MatchingMAG Macroeconomic Assessment NDTL Net Demand and Time Liability Group NECS National Electronic ClearingMAP Monitorable Action Plan ServiceMCA Ministry of Corporate Affairs NEFT National Electronic Fund TransferMDG Modified Duration Gap NGO Non-Government OrganisationMENA Middle East and North AfricanMFDC Macro Finance Development NG-RTGS New Generation-Real Time Gross Council Settlement SystemMFDEF Micro Finance Development and NHB National Housing Bank Equity Fund NII Net Interest IncomeMFI Micro Finance Institution NIM Net Interest MarginMHP Minimum Holding Period NIMC National Implementing andMIS Management Information System Monitoring CommitteeMNOs Mobile Network Operators NOC No Objection CertificateMoU Memorandum of Understanding NOF Net Owned FundMRR Minimum Retention Requirement NOHC Non-Operative Holding CompanyMSE Micro and Small Enterprise NOOPL Net Overnight Open Position LimitMSF Marginal Standing Facility NPA Non-Performing Asset xix
  • 18. NPCI National Payments Corporation RIDF Rural Infrastructure Development of India FundNPLs Non-Performing Loans RNBC Residuary Non-Banking CompanyNRE Non-Resident External RoA Return on AssetsNREGA National Rural Employment RoE Return on Equity Guarantee Act RORWA Return on Risk Weighted AssetsNRRDA National Rural Roads RRB Regional Rural Bank Development AgencyNRO Non-Resident Ordinary RSA Rate Sensitive AssetsNSFR Net Stable Funding Ratio RSL Rate Sensitive LiabilitiesOBS Off-Balance Sheet RTGS Real Time Gross Settlement SystemOECD Organisation for Economic Co-operation and Development RWAs Risk-Weighted AssetsOMO Open Market Operations SAO Seasonal Agricultural OperationsOMT Outright Monetary Transactions SAR Special Administrative RegulationsOSMOS Off-Site Monitoring and Surveillance System SARFAESI Securitisation and Reconstruction of Financial Assets andOTC Over the Counter Enforcement of Security InterestPACS Primary Agricultural Credit SBLP SHG-Bank Linkage Programme Society SC Scheduled CastePAT Profit After TaxPBT Profit Before Tax SCAP Supervisory Capital Assessment ProgrammePCARDB Primary Co-operative Agriculture and Rural Development Bank SCARDB State Co-operative Agriculture and Rural Development BankPCR Provisioning Coverage Ratio SCB Scheduled Commercial BankPD Primary Dealer SCS/RCs Securitisation Companies/PDO – NDS Public Debt Office- Negotiated Reconstruction Companies Dealing System SDS Special Dispensation SchemePE Price Earning SEBI Securities and Exchange Board ofPFRDA Pension Fund Regulatory and India Development Authority SHG Self-Help GroupPIN Personal Identification Number SIDBI Small Industries’ DevelopmentPoS Point of Sale Bank of IndiaPPIs Pre-paid Payment Instruments SIFCL Sahara India FinancialPRA Prudential Regulatory Authority Corporation LimitedPRB Private Sector Bank SIFI Systemically Important FinancialPSB Public Sector Bank InstitutionRCS Registrar of Co-operative SLIMC State Level Implementing and Societies Monitoring Committee SLR Statutory Liquidity Ratio xx
  • 19. SME Small and Medium Enterprise UBD Urban Banks DepartmentSMFC State Micro-Finance Council UCB Urban Co-operative BankSPV Special Purpose Vehicle UKPT Unique Key Per TerminalSSI Small Scale Industry UCIC Unique Customer IdentificationST Scheduled Tribe CodeStCB State Co-operative Bank UO Umbrella OrganisationsSTCCS Short-Term Co-operative Credit USBs Ultra Small Branches Structure WEO World Economic OutlookSRR Special Resolution Regime WLA White-Label ATMTAG Technical Advisory GroupT/B Treasury Bills WSHG Women Self-Help GroupTAFCUB Task Force for Urban VAPT Vulnerability Analysis and Co-operative Bank Penetration TestTGA Traditional Gap Analysis VaR Value at RiskTLE Terminal Line Encryption XML Extensible Mark-up Language xxi
  • 20. Chapter I Perspectives on the Indian Banking Sector Headwinds from international and domestic economic developments posed challenges to the banking sector during the year 2011-12. While banks maintained their profitability, their asset quality was impaired. As things stand, several initiatives are under way to strengthen the regulatory and accounting frameworks aimed at increasing the resilience of the institutions. However, higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk is likely to raise the funding costs of banks. Compliance with Basel III stipulations along with the credit needs of a growing economy will require banks to tap various avenues to raise capital. Broad estimates suggest that for public sector banks, the incremental equity requirement due to implementation of Basel III norms by March 2018 is expected to be approximately `750-800 billion. Meeting these capital requirements will entail the use of innovative and attractive market based funding channels by the banks. The convergence with the International Financial Reporting Standards (IFRS) may also place additional demands on the banks’ technical as well as human resources. Considering the granularity of data required for effective supervisory review, efforts should be to automate data flow from reporting entities through the adoption of straight-through processing systems. With regard to financial inclusion, quantitative coverage has improved, but meaningful financial inclusion through the evolution of sustainable business and delivery models needs to be achieved. Notwithstanding the multitude of challenges, the regulatory responses and the inherent strengths underlying the Indian economy should ensure that the banking system continues to play a positive role in supporting the financing needs of our growing economy.1. Introduction manifested in an improvement in the capital base and maintenance of profitability. A series of stress1.1 The global economy showed deeper signs tests conducted by the Reserve Bank in respect ofof stress during the past year. With the deteriorating credit, liquidity and interest rate risks showedmacroeconomic situation in the euro area that banks remained reasonably resilient.interacting with a loss of growth momentum in However, under extreme shocks, some banksthe US and in emerging and developing economies could face moderate liquidity problems and their(EDEs), the risks of potentially large negative profitability could be affected.spillovers have increased. Domestically, themacroeconomic situation continues to raise 1.3 While global banking developments areconcerns. Even as growth has slowed significantly, covered in Chapter II, some perspectives on theinflation remains well beyond the comfort level of factors that are likely to shape the banking milieuthe Reserve Bank. in the period ahead and the challenges facing the banks are outlined here.1.2 The headwinds from domestic andinternational economic developments posed 2. Forces Shaping the Environmentchallenges to the banking sector during the year2011-12. Though asset impairment increased, the 1.4 The multi-pronged regulatory initiativesresilience of the Indian banking sector was undertaken in the area of prudential and capital
  • 21. Report on Trend and Progress of Banking in India 2011-12requirements of banks along with a move towards countercyclical capital buffer for India may requiregreater convergence in banking regulation globally some changes, as the recommended metric ofare likely to have a major impact on the functioning credit-to-GDP ratio could potentially impact theof banks in the period ahead. structural drivers underlying credit growth in India. Thus, there may be a need for someMove towards greater global convergence in adjustments to capital buffer guidance. The issuethe banking regulation is being examined by an internal group in the1.5 The recent financial crisis has redefined Reserve Bank.the broad contours of regulation of the banking International capital standards for effectivesector globally. The need for convergence in risk managementbanking regulation stems from the fact that whilebanking has become global, banking regulation is 1.8 In response to the need to implement Baselnational. Therefore, addressing the issue of III to strengthen the resilience of the Indianregulatory arbitrage is at the centre-stage of policy banking sector, the Reserve Bank has announcedconcern. The international standard-setting the final guidelines on Basel III capital regulations.bodies have been attempting to achieve convergence These would be effective from January 1, 2013 inby issuing broad principles that should shape a phased manner with the Basel III capital ratiosnational regulatory frameworks. to be fully implemented by end-March 2018. Regarding the implementation of Basel III, one1.6 In the post-crisis period, the Financial issue had been why an emerging economy likeStability Board (FSB) has emerged as the most India, should adopt onerous regulation such asimportant international body to address the Basel III norms which could, potentially, have avulnerabilities in the global financial system and negative impact on output growth. The rationaleto guide the development and implementation of for adopting these standards is two-fold. One,strong regulatory, supervisory and other policies India cannot remain non- compliant within the interest of financial stability. Besides international standards, especially when Indianimplementation of Basel III capital requirements, banks are venturing abroad and the markets arethe FSB is addressing the issue of Systemically opened up for international participants. Two,Important Financial Institutions (SIFIs), which even while the financial system is much simplerinvolves determination of global SIFIs and their and does not have many of the features that ledloss absorbency; resolution tools and regimes for to the crisis, the country is vulnerable to contagionthem; and supervisory intensity and effectiveness from the global economy and the higher defencesfor such SIFIs with the aim of reducing both the built under Basel III will provide the financialprobability and impact of the failure of a SIFI. system with the much-needed resilience.1.7 The broader endeavour of global 1.9 The objectives of Basel III are to improveconvergence in the banking regulation will, the banking sector’s ability to absorb shockshowever, have to account for country-specific arising from financial and economic stress, thuscircumstances to enable customised adoption of reducing the risk of spillover from the financialguidance of international standard-setting bodies sector to the real economy. Towards this end,as already recognised in many cases by the Basel Basel III has some micro-prudential elementsCommittee on Banking Supervision (BCBS). To along with a macro-prudential overlay that willthe extent that the systemically important take care of issues relating to systemic risk.jurisdictions harmonise and converge to agreedinternational best practices, there are positive 1.10 Basel III guidelines stipulate a stringentexternalities from India’s stand-point. In particular, definition of regulatory capital and higherthe BCBS guidance on the conduct of the requirement of common equity than Basel II. 2
  • 22. Perspectives on the Indian Banking SectorUnder Basel III, common equity capital will be the regulators and positioning of banks to meet thepredominant form of regulatory capital and needs of inclusive growth, besides a review of theinnovative features such as step-up or other regulatory framework for the micro-finance sector.incentives to redeem in non-equity capital Steps initiated towards improved cross-instruments are no longer acceptable. In addition, border supervision and co-operationBasel III has introduced two new liquiditystandards, viz., Liquidity Coverage Ratio (LCR) 1.14 The recent financial crisis has necessitatedand the Net Stable Funding Ratio (NSFR) to a re-examination of the tools used by supervisorsimprove the resilience of banks to liquidity shocks. to oversee financial institutions, particularly systemically important institutions with cross-Need to further leverage technology in the border operations. One major flaw in this regardbanking sector has been the ineffective supervisory co-operation1.11 Banks have adopted core banking solutions among national bank supervisors. As a result,(CBS) that effectively address the transactional need has been felt for the use of supervisoryrequirements of the banks. With the implementation colleges to supervise global financial institutions,of CBS, the banking system is now seamlessly in particular, the systemically important financialintegrated. With the basic technology adoption institutions. The overarching objective of abeing complete in banks, there is, therefore, a supervisory college is to help its members developneed to move from a transaction processing a better understanding of the risk profile of thesystem to an information processing system. In banking group. Moreover, information exchangeits IT Vision Document 2011-17, the Reserve Bank and co-operation between supervisors can helpof India has highlighted the need for banks to move strengthen the supervision of the individualforward and leverage IT in areas like Management components of a banking group. Colleges can alsoInformation Systems (MIS), overall risk complement wider peer review processes bymanagement, financial inclusion, customer promoting a coherent approach across differentrelationship management (CRM) and enhancing jurisdictions to the consistent and effectiveautomated data flow within the banks and to the implementation of macro- and micro-prudentialReserve Bank without manual intervention. Banks policy tools.need to augment their innovation capabilities in 1.15 The growing global activities of some largeterms of new products, services and strategies Indian banks have necessitated putting in place awhich would enable them to maximise their formal mechanism of supervisory co-operationefficiency gains (Box I.1). and information exchange with host supervisors1.12 With the computerisation and adoption of for effective cross-border consolidated supervision.CBS in banks almost reaching the final stage of In India, at present no supervisory colleges havecompletion, the focus has now shifted to adoption been set up. However, the Reserve Bank has beenof more advanced technologies in banking which attending the supervisory colleges of some of thewould enhance their CRM by using appropriate major foreign banks operating in India. The High-tools, improving internal effectiveness including Level Steering Committee on the Review ofMIS and managing risks arising out of IT Supervisory Processes for Commercial Banks ( C h a i r m a n : D r. K . C . C h a k r a b a r t y ) h a simplementation. recommended setting up supervisory colleges for large globally active Indian banks with a significant3. Operational and Strategic Responses (around 15 per cent) share of assets from foreign1.13 The strategic and operational responses operations as a percentage of total assets.during the year pertained to policy initiatives with Accordingly as an initial step, supervisory collegesregard to enhancing co - ordination among of SBI and ICICI Bank are being planned. 3
  • 23. Report on Trend and Progress of Banking in India 2011-12 Box I.1 : Technological Innovations and Efficiency Gains in the Banking SectorWith the advent of the process of liberalisation in the early Globally, the effect of IT on the banking industry has been’nineties, the demands on banks’ resources and capabilities positive. In general, studies have concluded two positiveincreased as banks had to match the challenges of being effects regarding the relation between IT and banks’financial service providers in a globalised, competitive performance. First, IT can reduce banks’ operational costsenvironment. This posed a dual challenge for the banking (the cost advantage). Second, IT can facilitate transactionsindustry. The first challenge was to manage the growing needs among customers within the same network (the networkof their existing customer segments and business locations effect). Eyadat and Kozak (2005) examined the impact of thefor better and more efficient services, and the second was, progress in IT on the profit and cost efficiencies of the UShow to expand the reach of their services and business banking sector during the period 1992-2003. The researchbeyond the traditional services and locations, which had showed a positive correlation between the level of implementedlarge socio-economic implications because large parts of the IT and both profitability and cost savings. Berger (2003) alsopopulation did not have access to even basic banking showed improvements in bank performance and consolidationservices. At this juncture, banks in India were looking at of the banking industry in the US during the deployment ofhuge potential in business growth as well as several new technologies.constraints, such as inadequacy of infrastructure and human In the Indian context, technological innovation andresources, geographical, topographical and distance investment in IT during the period 2005-06 to 2009-10 ledlimitations, communication inefficiencies, cost implications to efficiency gains for the scheduled commercial banksand delivery, as well as the processing capability to manage (Rajput and Gupta, 2011). Technology is encompassing themore business information and larger accounts. entire set of business processes in the banking industry and technological innovations are enabling banks to cope withIncreased use of information technology emerged as the key burgeoning customer requirements, social and developmentalto meeting these challenges. Several measures were mooted expectations, strategic and competitive business needs,at the level of the Government, the Reserve Bank and internal control and risk management needs, governanceindustry, which provided an impetus to adoption of and regulatory reporting in the banking sector. CBS implementation has However, going forward, banks need to innovate appropriatelymade customer account maintenance seamless and enhanced in terms of products, services and strategies and will alsodata storage and retrieval capabilities tremendously. It has need to align their IT and business perspectives to fullyalso enhanced the banks’ capacity to develop and market leverage the benefits of technology. Predictive analytics cannew products, as technology has increased information bring in competitive advantage in banking and help banksavailability and the capacity for analysis and communication move from product-centric to customer-centric operations.manifold. Such capabilities and efficiencies are poised torise further with the advent and adoption of evolving References :technologies like cloud computing and virtualisation, which Rajput, N. and Gupta, M. (2011), ‘Impact of IT on Indianhave the potential to significantly bring down financial and Commercial Banking Industry: DEA Analysis’, Global Journalmanagement costs. of Enterprise Information System, Volume 3 Issue I.Economic theory supported by empirical evidence suggests Subbarao D. (2009), ‘Information Technology and Bankingthat, in general, increases in technology investment will raise – A Continuing Agenda’ Keynote Address delivered at theproductivity, lower costs, and allow firms to operate more Institute for Development & Research in Banking Technology,efficiently. Information technologies and the innovations they Hyderabad.enable are strategic tools, since they reduce the costs of Eyadat M. and Kozak, S. (2005), ‘The Role of Informationfinancial transactions, improve the allocation of financial Technology in the Profit and Cost Efficiency Improvementsresources and increase the competitiveness and efficiency of the Banking Sector’, Journal of Academy of Business andof financial institutions. Technological innovation not only Economics.enables a broader reach for consumer banking and financial Berger, A.N. (2003), ‘The Economic Effects of Technologicalservices, but also enhances its capacity for continued and Progress: Evidence from the Banking Industry’, Journal ofinclusive growth (Subbarao, 2009). Money, Credit and Banking, Volume 35.1.16 In this context, Reserve Bank has initiated Strategic role for banks in ensuring inclusivethe process of setting up of a cross-border growthsupervision and supervisory co - operation 1.17 Banks play a dominant role in India’smechanism, which allows for signing Memorandum financial system and are, therefore, expected toof Understanding (MoU) with overseas regulators play a key role in furthering the agenda of financialon supervisory co-operation and exchange of inclusion with a view to achieving inclusive growthinformation with them (Box I.2). and development. Accordingly, a bank-led model 4
  • 24. Perspectives on the Indian Banking Sector Box I.2 : Bilateral Memorandum of Understanding (MoU) with Reserve Bank’s Overseas Counterparts for Improved Cross-Border Supervision and Co-operationGenesis formal arrangements for supervisory co-operation with overseas supervisors through an MoU, in accordance withThe concept of supervisory co-operation on cross-border the various BCBS Principles as well as in consonance withsupervision dates back to the report released by the the various laws/statutes of the land.Committee on Banking Regulations and SupervisoryPractices in 1975. However, the seminal idea of having a Establishment of MOUs with Overseas Supervisoryform of MoU first found mention in the report titled “The AuthoritiesSupervision of Cross-Border Banking” (October, 1996) by To start with, 16 countries were identified. These werea working group which comprised members of the BCBS. primarily countries whose bank regulators had evincedThe Group recommended that the understandings between interest in having such an arrangement with the Reservethe supervisors might take the form of bilateral MoUs or Bank and also those jurisdictions where an MoU betweenexchange of letters which may formulate what each party the Reserve Bank and the host country regulator was aexpects from the relationship. Taking forward the concept, prerequisite for Indian banks. The Reserve Bank has alsothe BCBS released a document titled “Essential Elements started adopting the principle of mutual banking presenceof a Statement of Co-operation Between Banking Supervisors” to initiate a dialogue on an MoU with overseas regulatorsin May 2001, listing key elements that could form part of a and supervisory jurisdictions with such a mutual bankingstatement of co-operation or MoU between “Home” and footprint. In the process, the list of identified countries was“Host” country supervisors. expanded to 38.Need for MoU - Indian Scenario Current Status on Signing of MOUs with Overseas SupervisorsUntil recently, cross-border supervision of the overseasoperations of Indian banks has been carried out through a So far, the Reserve Bank has executed MoUs with tencombination of need-based on-site inspection, an off-site overseas supervisors. In addition, proposals for MoUs withreporting framework and informal exchange of supervisory 28 overseas supervisors are in various stages of finalisation.information with overseas regulators/supervisors. However, Going forward, while the current objective of the Reserveduring the past few years the cross-border operations of Bank is to establish MoUs with the supervisors of thoseIndian banks have expanded significantly. Some banks have jurisdictions where Indian banks have substantialset up banking and other financial services subsidiaries operations or are planning to scale up their operations, theabroad. Against this backdrop, a need was felt to enter into longer-term goal of the Reserve Bank is to first stabilise theMoUs with bank regulators, and an Internal Working Group mechanism of the MoU through frequent interactions with(IWG) was constituted to lay down the road-map for adopting the host country supervisors and then to leverage on thea suitable framework. Based on the recommendations of supervisory co-operation with these domains and benefitthe IWG, a policy framework was put in place. The policy from the knowledge and views of the host countryprovides, inter alia, for establishing legally non-binding supervisors for better oversight of Indian banking entities.of financial inclusion has been adopted in the as also customer service. With respect to mobilecountry. Based on the experience of countries like payment companies, the Reserve Bank does notKenya, and the massive growth and expansion of have similar regulatory authority. Third, entry intomobile phones in the country, there have been the banking space has to be on open, transparentdemands for experimenting with a model of and contestable criteria. Thus, it may not bemobile-led banking for financial inclusion. prudent to allow mobile operators privilegedHowever, it has been argued that mobile-led access into commercial banking through thebanking takes care of only remittance products mobile route. However, efforts have been made toas against a bouquet of products, such as a leverage the reach of mobile network companiesvariable recurring deposit product, an overdraft by allowing banks to appoint corporates to act asand an emergency credit product in the form of Business Correspondents (BCs), but it is still earlyKisan Credit Card (KCC)/General Credit Card days and the success of these arrangements(GCC). Second, banks are prudently regulated and between banks and the companies will be analysedthis helps address the concerns about KYC/AML in the coming years. 5
  • 25. Report on Trend and Progress of Banking in India 2011-12National Strategy on financial literacy aims of MFIs functioning in the State compulsory withto further the financial inclusion process a view to regulate their functioning. The Reserve Bank had then set up a Sub-Committee of its1.18 Financial literacy is a prerequisite for Central Board of Directors (Chairman: Shriachieving the objectives set out under financial Y.H.Malegam) to study the issues and concerns,inclusion, as it enables the common man to inter-alia, with regard to interest rates, lendingunderstand the need and benefits of the products and recovery practices in the micro-finance sector.and services offered by formal financial institutions. Based on the recommendations of the MalegamFinancial education plays a vital role in making Committee, a separate category of NBFC-MFIs hasthe demand side respond to the initiatives of been created. The proposed regulatory frameworksupply-side interventions. Increased emphasis is puts in place restrictions and safeguards withnow being given towards creating awareness and regard to minimum standards of governance,spreading financial literacy as an important management and customer protection as well asdemand-side push towards achieving the goal of the financial health of MFIs. A fair and adequatefinancial inclusion. Since a large number of regulation of NBFCs will encourage the growth ofstakeholders are involved in spreading financial this sector, while adequately protecting theliteracy, a broad national strategy is a prerequisite interests of borrowers. A Micro Finance Institutionsto ensure that they work in tandem with the (Development and Regulation) Bill, 2012 proposingstrategy. Towards this objective, a draft National to exempt MFIs registered with and regulated byStrategy prepared under the aegis of the Sub- the Reserve Bank from State money-lending acts,Committee of the Financial Stability andDevelopment Council (FSDC) has been under which NBFC-MFIs were regulated by thesimultaneously released by all financial sector Andhra Pradesh Government, is pending inregulators including the Reserve Bank. With this Parliament. In the long run, MFIs will benefit frommove, India has joined countries like the such a regulatory framework, as it enables orderlyNetherlands, New Zealand, Spain, the UK and the growth and reduces uncertainty.Czech Republic, which have already implementeda national strategy for financial education. 4. ChallengesRegulatory framework for the micro-finance 1.20 Going forward, a move towards highersector to ensure customer protection and capital requirements and the need for meaningfulfinancial health financial inclusion are the primary challenges before banks. The convergence to International1.19 The micro-finance sector comprising the Financial Reporting Standards (IFRS) is also likelySelf-Help Group (SHG)-Bank linkage programme, to pose demands on banks’ resources. Thefor-profit Non-Banking Finance Companies-Micro- slippage in asset quality needs to be containedFinance Institutions (NBFC-MFIs) registered with and the risks posed by global factors need to bethe Reserve Bank and all other small not-for-profit addressed carefully.MFIs registered as trusts, societies, etc., plays animportant role in extending credit as part of Move towards Basel III to entail capitalfinancial inclusion efforts in India. While the SHG- infusionBank linkage programme was sought to be 1.21 Effective implementation of Basel III isstrengthened by NABARD through fresh guidelines, needed for developing the resilience of the bankingthe focus firmly remained on the NBFC-MFIs. It sector to future shocks. The challenges inmay be recalled that the State of Andhra Pradesh implementing Basel III should not behad issued an Ordinance in October 2010, which underestimated. In general, Basel III will increasewas later enacted into a law, making registration the capital requirements on Indian banks. The 6
  • 26. Perspectives on the Indian Banking Sectorcurrent capital adequacy levels for the Indian Issues in convergence with Internationalbanking system are comfortable. However, the Financial Reporting Standards (IFRS)capital requirements, including equity, would be 1.24 The Ministry of Corporate Affairs (MCA),substantial to support the high GDP growth; Government of India, released a road map infurther the credit to GDP ratio, which is currentlyquite modest at about 55 per cent, is bound to January 2010 which entailed IFRS convergenceincrease substantially due to structural changes in a phased manner commencing from April 1,in the economy. 2011 onwards, with commercial banks in India scheduled to converge with effect from April 1,1.22 Broad estimates suggest that in order to 2013. India’s path to convergence with IFRS hasachieve full Basel III implementation by end-March however, become difficult due to several issues,2018, public sector banks (PSBs) would require both domestic and international. The convergencecommon equity of `1.4-1.5 trillion on top of of certain categories of corporates that wasinternal accruals, in addition to `2.65-2.75 trillion scheduled for April 1, 2011 has not the form of non-equity capital. Banks would Currently lack of clarity exists regarding thehave continued to require additional capital to convergence schedule in Basel II capital ratios had Basel III capitalratios not been implemented. Therefore, in case 1.25 At the global level, the Internationalof PSBs, the incremental equity requirement due Accounting Standards Board (IASB) has embarkedto enhanced Basel III capital ratios is expected to on a project to replace the existing standard onbe `750-800 billion. Similarly, major private financial instruments (IAS 39: Financialsector banks would require common equity of Instruments: Recognition and Measurement) with`200-250 billion on top of internal accruals, in the new standard IFRS 9: Financial Instruments.addition to `500-600 billion in the form of non- This project has not progressed as per scheduleequity capital. These projections are based on the since IASB could not finalise certain criticalconservative assumption of uniform growth in proposals relating to impairment and hedgeRisk-Weighted Assets of 20 per cent per annum accounting. In view of the developments at theindividually for all banks and individual bank’s international level, it appears unlikely that IFRSassessment of internal accruals (in the range of 9 would be ready in its entirety before mid-2013.1.0-1.2 per cent of Risk-Weighted Assets). The biggest challenge to the banking sector in1.23 For every bank, it is critical to work out the India which is of equal concern to regulators ismost cost-effective model for implementing Basel the lack of clarity and uncertainty regarding theIII. Banks will have to issue fresh capital finalisation of IFRS 9 and its convergence with USparticularly towards the later years of Generally Accepted Accounting Principles (GAAP),implementation. Although Indian banks have the besides of course the major technical and humanadvantage of a strong starting base in the form of resources issues arising for Indian banks in thea higher capital to risk-weighted assets ratio course of convergence.(CRAR) with a larger component of core equity Need for improvement in the asset quality ofcapital, the large equity needs, though over an banksextended time-frame, could put downwardpressure on the banks’ Return on Equity (RoE). 1.26 The asset quality of banks is an importantIn the long term, the higher capital requirements indicator of their financial health, and also reflectswould bring down risks in the banking sector the efficacy of banks’ credit risk management andinducing investors to accept a lower RoE. In the the recovery environment. The asset quality of theshort term, though, the only solution is to raise banking system has deteriorated significantlyproductivity. The Government of India being the during the year 2011-12 after a period of sustainedowner of public sector banks will have to play a improvement. Inadequate credit appraisal duringproactive role in this process. the boom period of 2003-07 coupled with the 7
  • 27. Report on Trend and Progress of Banking in India 2011-12adverse economic situation in the domestic as well through-processing systems. The use of dataas the external front resulted in the current warehousing for processing should be strengthenedincrease in NPAs. To further strengthen the NPA to improve the quality, integrity and delivery ofmanagement framework of the Indian banks, in data. Second, there is a need for close co-terms of the Monetary Policy Statement for the ordination between statisticians and bankyear 2012-13, banks were advised to put in place supervisors, both in the commercial and co-a robust mechanism for early detection of signs operative banking space, to identify and mitigateof distress, and measures to preserve the economic data gaps in the supervisory review process andvalue of assets. Banks were also advised to have to facilitate appropriate risk assessment for theproper system-generated segment-wise data on banking system. Third, the data reporting systemtheir NPA accounts, write-offs, compromise needs to be geared towards automated datasettlements, recovery and restructured accounts. capture from the source systems. An improved and granular database of the banking infrastructureFinancial system remains robust though in the country is essential to gauge the extent ofglobal factors pose elevated risks financial inclusion and to assess the efficacy of1.27 The financial system of the country remains various policy actions taken in this regard. Torobust. Risks to stability are, however, elevated ensure faster and more accurate transmission ofdue to global factors and domestic macroeconomic uniform data for quick decision-making, datafactors. Domestic growth has slowed. Savings and should be captured at the base-level entity. Thisinvestment rates are also lower. Although inflation can be facilitated by a move away from the existinghas moderated, it is still above the level conducive return-based reporting system to a data-basedfor sustained growth. Risks are also posed by the reporting system.high levels of current account and fiscal deficits. Financial inclusion: need for meaningfulRisks from global developments, viz., growth inclusionslowdown, continuing instability in the euro area,uncertain capital flows and the impact of 1.29 Universal financial inclusion is both adeleveraging by banks, could be accentuated by national commitment and a policy priority. Thedomestic macroeconomic risks. Notwithstanding Reserve Bank and the Government of India havethese, the intrinsic strength of the domestic taken several initiatives in this direction. Theeconomy remains intact. The findings of the provision of BCs in several villages has created aperiodic Systemic Risk Surveys conducted by the sense of awareness among villagers about banking.Reserve Bank reveal that financial system However, major challenges remain as about 40stakeholders retained their confidence in the per cent of our population lacks access to evenstability of the system. However, distress the simplest kind of formal financial services. Independencies among banks have risen, warranting order to ensure that the financial inclusioncloser monitoring. initiatives fructify, there is a need to enlarge the number and value of transactions in no-frillsData integrity is a prerequisite for effective accounts.supervisory review 1.30 Banks should endeavour to have a BC1.28 The need for granular data for policy touch-point in every village. However, to make itdecisions has increased. It is, therefore, important a self-sustaining business model, banks should,to further improve the database of the banking over a period of time, ensure that all bankinginfrastructure in the country. In keeping with the services, viz., remittances, recurring deposits,Reserve Bank’s IT Vision, the efforts should be to entrepreneurial credit in the form of KCC andautomate data flow from the reporting entities GCC, insurance (life and non-life) and otherthrough the adoption of appropriate straight- banking services are available to all residents of 8
  • 28. Perspectives on the Indian Banking Sectorthe village through a mix of brick-and-mortar sanction loan monitoring systems to minimise andbranches and a BC network. mitigate the problem of increasing NPAs.Enhanced usage of technology requires 1.34 Going ahead, banks need to tap intoimproved risk management tools untapped business opportunities for resources to power the growth engine. This requires harnessing1.31 Due to the operational risks associated with resources and fortune at the bottom of thethe use of technology, information security is an pyramid. Small customers are an important keyarea that is gaining importance. The issues related to big business opportunities waiting to be information security, data integrity and storage The challenge before banks is to make the bestas also communication channels have acquired use of technology and innovation to bring downchallenging dimensions in the electronic intermediation costs while protecting their bottomenvironment. The IT management systems in the lines. The recent regulatory initiatives like thebanks have to be robust enough to meet these newchallenges effectively, on a continuing basis. deregulation of savings bank deposit interest rates and opening up government business to more5. The Way Forward banks, imminent steps, such as licensing of new1.32 Going forward, banks will need to move banks and subsidiarisation of the foreign banktowards the mandated higher capital standards, branches, on the one hand, and the changingstricter liquidity and leverage ratios and a more profile and simultaneously rising aspirations andcautious approach to risk. This implies that Indian expectations of customers on the other, shouldbanks will need to improve efficiency even as their make the turf more competitive and increasingly,costs of doing business go up. They will need to a buyers’ market. As the Indian banking sector isrefine their risk management skills for enterprise- propelled forward to a higher orbit, banks wouldwide risk management. In addition, banks need have to strive to remain relevant in the changedto have in place a fair and differentiated risk economic environment by reworking theirpricing of products and services since capital business strategy, designing products with thecomes at a cost. This involves costing, a quantitative customer in mind and focussing on improving theassessment of revenue streams from each product efficiency of their services. The challenge forand service and an efficient transfer-pricing Indian banks is to reduce costs and pass on themechanism that would determine capital benefits to both depositors and lenders.allocation. 1.35 Notwithstanding the multitude of challenges1.33 During the year 2011-12, the NPA stock to be braved by the Indian banking sector againsthas risen. The slippage ratio of the banking the backdrop of a difficult domestic and globalsystem, which showed a declining trend during macroeconomic environment, the regulatory2005-08, increased during 2008-12. Banks need responses and the inherent strengths underlyingto, not only utilise effectively, the various measures the Indian economy would ensure that the bankingput in place by the Reserve Bank and the system withstands the transitory difficult phaseGovernment of India for the resolution and and plays a positive intermediation role inrecovery of bad loans, but also have to strengthen supporting the financing needs of our growingtheir due diligence, credit appraisal and post- economy. 9
  • 29. Chapter II Global Banking Developments The global banking system was affected by the weakening of global growth, escalation of the sovereign debt crisis and financial market stress. While US banks have been able to reduce their leverage and reliance on wholesale funding, European banks’ dependence on wholesale funding remains high. The fundamentals of the banking sector in emerging economies were better, reflecting higher economic growth and relative balance sheet strength on the back of higher domestic funding and sound capital base. Significant progress has been made on the regulatory front, such as Basel III, SIFIs and shadow banking, but implementation challenges remain. Many advanced countries have made substantial progress in putting in place effective resolution regimes and bail-in mechanisms. The European Union and European Central Bank (ECB) have undertaken various measures to address funding and deleveraging risks, but concerns remain. In the long term, banks should focus on cost reduction strategies and work towards restoring investor confidence.1. Introduction the UK financial system also and the funding costs for banks have risen sharply, leading to higher2.1 The global banking system in 2011 and2012, so far, witnessed severe setbacks as it interest rates and lower credit availability forcontinued to be affected by tepid recovery in global household and corporate borrowers in the UK.growth; the re-emergence of the euro area 2.3 An analysis of the performance of the topsovereign debt crisis; and funding and deleveraging 100 global banks shows that the share of emergingrisks for global banks. Uncertainties emanating economies in global banking continued tofrom the ongoing euro area sovereign debt crisis, increase. Among emerging and developingthe downgrade in the outlook of several advanced countries, Chinese banks have registeredeconomies (AEs), and stability issues of euro area substantial gains in the top 100 bank ratings. Onbanks amidst bank recapitalisation concerns, the global policy reforms front, there has beenamong other factors, kept international financial some progress in rule framework for the Baselmarkets and the banking system volatile during Rule, systemically important financial institutionsmost of 2011-12. (SIFIs), shadow banking, resolution regimes and2.2 Global credit growth demonstrated a mixed bail-in mechanisms.picture: in emerging market economies it was Global growth remains considerably weaksustained, in the US it showed some revival; butin Europe it decelerated. The return on assets 2.4 The global economy suffered a major(RoA) improved for banks in the US and some setback in late 2011 as concerns about financialEMEs, but declined in European countries. The stability in the euro area came to the fore. Marketbanking trends in select regions and countries stress spread throughout the euro area and bondshow that the US banking system has made yields soared in peripheral economies as investorssubstantial progress in repairing balance sheets were increasingly concerned about the risk of aand enhancing capital. In the euro zone banking sovereign default. These developments dramaticallysystem, the risks remain at an elevated level on highlighted the risk of adverse, self-fulfilling shiftsaccount of the vicious circle between banks and in market sentiment that could rapidly pushsovereigns. The crisis in the euro area has affected fragile sovereigns into a bad equilibrium of rising
  • 30. Global Banking Developmentsyields, a funding squeeze for domestic banks, and performance of the top-100 banks having majora worsening economy [IMF’s Global Financial global presence. Section 5 highlights the majorStability Report (GFSR) – April 2012]. regulatory and supervisory policy initiatives with2.5 Global growth moderated to 3.8 per cent regard to the global banking system during thein 2011 compared with 5.1 per cent achieved in year. Section 6 presents the overall assessment2010 (Chart II.1). The slow growth was mainly and outlook for the global banking sector fordriven by weakening growth in the advanced 2013.economies. On the other hand, emerging marketeconomies continued to grow at a higher rate. For 2. Global Banking Trendsthe year 2012, various forecasts have suggested 2.7 The recent financial crisis brought to thethe continuation of sluggish global growth. TheIMF’s World Economic Outlook (WEO) – October fore the weaknesses in the global banking industry,2012 has projected global growth to moderate to which, in turn, was manifested in dwindling public3.3 per cent in 2012 with significant downward confidence in the banking industry. The recentrisks. financial crisis has led to a realisation of the inadequacies in the banking sector. Banks had2.6 Against this global macroeconomic setting, failed to secure stable and diversified sources ofSection 2 reviews the performance of the globalbanking system using major indicators of banking income and to contain costs, which resulted inactivity and soundness for select advanced and liquidity stress for the institutions. Secondly,emerging economies. Section 3 looks into the opaque balance sheets significantly impaireddetailed individual performance of the banking analysis of risk, thus preventing timely awarenesssystems in few advanced and emerging economies/ of the weakness of banks’ capital buffers (BISeconomy groups. Section 4 analyses the Annual Report – 2011-12). 11
  • 31. Report on Trend and Progress of Banking in India 2011-12Divergence in the credit growth across regions2.8 Mirroring the divergence in the growth across economies demonstrated an unevenperformance of economies, the credit growth pattern (Chart II.2). 12
  • 32. Global Banking DevelopmentsReturn on assets showed a declining trend in Table II.1: Return on Assets of Banks forgeneral Select Countries (per cent)2.9 The return on assets (RoA), an indicator Country 2007 2008 2009 2010 2011 2012of the banking system’s profitability, showed a Advanced economiesdivergent trend across economies. In general, it France - 0.1 0.3 0.6 0.4 - Germany 0.3 -0.1 0.2 0.4 - -witnessed a declining trend (Table II.1). Greece 1.0 0.2 -0.1 -0.6 -2.1 - Italy 0.8 0.3 0.3 0.3 -0.9 -Financial stress continued to be at an Japan 0.5 0.3 -0.3 0.2 0.3 -elevated level Portugal 1.1 0.3 0.4 0.5 -0.3 0.1 Spain 1.1 0.8 0.6 0.5 0.2 -2.10 I n l a t e 2 0 1 1 , c o n c e r n s a b o u t t h e United Kingdom 0.4 -0.4 0.1 0.1 0.1 - United States 1.2 -0.1 -0.1 0.9 1.2 1.0sustainability of fiscal deficit in the advanced Emerging and developing economiescountries, especially in euro area countries, re- Russia 3.0 1.8 0.7 1.9 2.5 -escalated. The heightened risk perception by the China 0.9 1.0 0.9 1.1 1.3 - India 0.9 1.0 1.0 0.9 1.0 1.0markets resulted in the widening of the credit Malaysia 1.5 1.5 1.2 1.5 1.5 1.6default swap (CDS) spread of the sovereign bonds Brazil 3.5 1.6 2.4 3.2 1.5 1.4 Mexico 2.3 1.4 1.5 1.8 1.5 1.8of the affected economies in the euro area. The Note: - Not available.banking industry came under severe funding 2011 data for Japan and Greece pertain to September.stress, as indicated by the rising CDS spreads for 2012 data for Portugal, US, India, Malaysia and Brazil pertain to June and for Mexico pertain to banks (Chart II.3). The funding of the EME Source: Compiled from Financial Soundness Indicators, IMF . 13
  • 33. Report on Trend and Progress of Banking in India 2011-12banks was relatively unaffected due to their limited and 2010-11 (Table II.2). The contraction in thereliance on wholesale deposits for funding. The flow of cross-border credit was due to banks’financial stress reduced following the measures efforts to strengthen their capital base. Thetaken by advanced economies. reduction was especially marked for cross-border claims on the euro area.Contagion spreads to bank stocks Financial Soundness of Banks2.11 Bank stocks, particularly in the advanced Capital adequacy levels vary across countrieseconomies, declined sharply, reflecting the 2.13 Intensified efforts by the banks to strengthendowngrade of sovereign debt of some countries their capital position reflected in an increase infor most part of 2011 and 2012 (Chart II.4). the level of capital adequacy in several economies.Further, the uncovering of serious allegations However, few European countries and EMEsregarding money laundering and trading losses exhibited a decline in their capital adequacy levelsby a few banks has dented market confidence in (Table II.3).the global banking system. Banking stocks in theEMEs declined reflecting the risk aversion arising Uneven decline in leveragefrom the euro area sovereign debt crisis and 2.14 An analysis of the leverage ratio asinflationary concerns in some EMEs. The recent measured by the percentage of total capital (andLIBOR controversy has drawn the world’s reserves) to total assets across countries revealsattention to how a few large global financial an uneven pattern in deleveraging by the bankinginstitutions allegedly manipulated one of the most sector (Chart II.5).commonly used market rates (Box II.1). Improvement in asset qualityDecline in international banking business 2.15 Globally, there was an improvement in the asset quality of banks in 2011, except in the crisis-2.12 During 2011-12, the international banking ridden euro area countries (Chart II.6). Amongbusiness (by location of reporting banks) EMEs, most of the economies showed considerablewitnessed a contraction. This is in contrast to the improvement in asset quality in the years followingrevival in international business between 2009-10 the crisis. 14
  • 34. Global Banking Developments Box II.1: Issues in LIBOR Fixation and Implications for BanksThe recent London Interbank Offered Rate (LIBOR) fixing discussion paper to solicit public feedback on August 10,incident has added further uncertainty to the fragile financial 2012. Based on the public feedback, the Committeemarkets. The incident brought to the fore the flaws in the submitted its final report on September 28, 2012. Themethodology underlying the computation of LIBOR, one of Committee has recommended a ten-point plan forthe most commonly used market rates, which lent itself to comprehensive reform for LIBOR, which has been acceptedmanipulation by certain key players. by the UK Government. The major reforms include (i) administering LIBOR, and submitting to LIBOR, becomeLIBOR is a benchmark used by banks, securities houses regulated activities under the Financial Services and Marketsand investors to gauge the cost of unsecured borrowing in Act, 2000 (Regulated Activities) Order 2001, (ii) The BBAthe London interbank market. Its significance as a should transfer responsibility for LIBOR to a newbenchmark has risen since its introduction in the 1980s, administrator, (iii) Submitting banks should make explicitbecause it acts as a reference rate for the majority of financial and clear use of transaction data to corroborate theirproducts, such as, interest rate swaps, corporate loans, and submissions, (iv) The BBA, and in due course, the newresidential mortgages. The LIBOR is published by the British Administrator, should cease the compilation and publicationBankers’ Association (BBA) and is calculated each day by of LIBOR for those currencies and tenors for which there isThomson Reuters, to whom major banks submit their cost insufficient trade data. This will result in decline of numberof borrowing unsecured funds for 15 periods of time in 10 of published rates from 150 to 20.currencies. The highest and lowest submissions are The controversy has added further uncertainty to the globaldiscarded and the average of the remaining submissions is financial system and reduced market confidence in keytaken to compute LIBOR for the given day. benchmark rates as well as in the banking system. The bankSince LIBOR is not derived from real rates but is based on stocks of some of the allegedly involved banks have declinedthe submissions of the 18 largest international banks on following the LIBOR fixation incident. The banking institutions involved in the incident could face stringent finestheir estimates of the levels at which they could borrow from and penalties, as a large number of lawsuits have alreadyother banks, banks could influence the LIBOR benchmark. been filed against these companies. This may hamper theThe bankers attempted to engineer the benchmark rate by banks’ efforts to strengthen their balance sheet.nudging their own firms’ submissions up or down in smallincrements to benefit their trading books during the period The incident also brought forth wider debate over how other benchmark rates and indices are calculated. Some2005 to 2008. The banks lowered their rate submissions to benchmarks are already under scrutiny; the Internationalprovide a healthier picture of their finances particularly at Organisation of Securities Commissions (IOSCO) isthe height of the financial crisis during 2008 to 2009. investigating oil spot prices, while the European CommissionThe incident has brought into focus the need for regulatory is looking into other financial benchmarks, such as the Euroreforms in the fixation of LIBOR benchmarks. The UK Interbank Offered Rate (EURIBOR).Government requested the Financial Services Authority References:(FSA) to review the framework for the setting of LIBOR led BBA website <>.by Martin Wheatley, its Managing Director. The Terms ofReference for the Committee included: (i) necessary reforms U.K. Government (2012), The Wheatley Review of Libor:in the current framework for setting and governing LIBOR; Initial Discussion Paper, London, August.(ii) the adequacy and scope of sanctions to appropriately U.K. Government (2012), The Wheatley Review of Libor:tackle LIBOR manipulation; and (iii) whether analysis of the Final Report, London, September.failings of LIBOR has implications on other global Wallace, P (2012), Trading-Libor - How Do You Solve a .benchmarks. The Wheatley Committee had placed an initial Problem Like Libor?, The Banker.Table II.2: Growth in International Assets and 3. Banking Trends in Select Regions and Liabilities of Banks Countries (Per cent)Item 2008- 2009- 2010- 2011- US banking system – substantial progress in 09 10 11 12 repairing balance sheets and enhancingTotal assets -17.5 0.2 5.8 -1.9 capital1. External assets -17.5 0.1 5.7 -2.3 Loans and deposits -19.0 -1.0 6.9 -2.3 2.16 The US banking system has made Holdings of securities and other assets -13.2 3.0 2.4 -2.4 considerable progress towards repairing balance2. Local assets in foreign currency -17.5 0.7 6.9 1.6 sheets and building capital since the recentTotal liabilities -18.0 -0.7 7.4 -0.91. External liabilities -18.6 0.2 6.8 -1.4 financial crisis. Large US banks have reduced Loans and deposits -21.2 -1.3 5.9 -2.1 their reliance on short-term wholesale funding. Own issues of securities and other -2.0 7.4 11.0 1.7 liabilities The banks have reduced impaired assets through2. Local liabilities in foreign currency -14.4 -6.1 11.8 2.2 charge-offs, write-downs and asset disposals andSource: Compiled from BIS Locational Banking Statistics. increased the Tier-1 capital. Concomitantly, the 15
  • 35. Report on Trend and Progress of Banking in India 2011-12 Table II.3: Capital to Risk-Weighted Assets banks’ equity capital and equity assets ratio has Ratio of Banks in Select Countries seen an improvement (Chart II.7). (Per cent) The Stress Tests for US banks show improvedCountry 2007 2008 2009 2010 2011 2012 resilience Advanced economiesFrance - 10.5 12.4 12.7 12.3 - 2.17 The stress tests conducted under theGermany 12.9 13.6 14.8 16.1 16.4 17.0Greece 11.2 9.4 11.7 12.2 10.1 - Comprehensive Capital Analysis and ReviewItaly 10.1 10.4 11.7 12.1 12.7 - (CCAR) in March 2012 show that most of the 19Japan 13.3 12.3 12.4 13.3 14.2 -Portugal 10.5 9.4 10.5 10.3 9.8 12.3 banking firms would have sufficient capital toSpain 11.4 11.3 12.2 11.9 12.4 -United Kingdom 12.6 12.9 14.8 15.9 15.7 - withstand a period of intense economic andUnited States 12.8 12.8 14.3 15.3 15.3 15.3 financial stress and still be able to sustain their Emerging and developing economies lending capacity.Russia 15.5 16.8 20.9 18.1 14.7 14.6China 8.4 12.0 11.4 12.2 12.7 12.9India 12.3 13.0 13.2 13.6 14.2 13.6 Improvement in the credit quality of US banksMalaysia 14.8 16.1 18.2 17.5 17.7 17.2Brazil 18.8 18.3 19.0 17.7 17.3 17.2Mexico 15.9 15.3 16.5 16.9 15.7 15.7 2.18 There has been significant growth in creditNote: - Not available. to the industrial sector, but credit to real estate2011 data for Japan and Greece pertain to September. and individual loans remains muted. The overall2012 data for Germany, Portugal, US, China, India, Malaysia andBrazil pertain to June and for Mexico and Russia pertain to March. delinquency rates on loan portfolios have fallen,Source: Compiled from Financial Soundness Indicators, IMF . but given the wide difference across sectors in 16
  • 36. Global Banking Developmentsterms of asset quality, concerns remain collapse of market confidence in the European(Chart II.8). Union (EU) banking sector, affecting adversely the cost and availability of funds.Euro area banking system – risks remain atan elevated level Risk aversion during euro area crisis led to freezing of inter-bank market2.19 The current euro area debt crisis has 2.20 The EU banks are more reliant onhighlighted the existence of a vicious circle wholesale funds than customer deposits. The ratiobetween banks and sovereigns (Box II.2). Their of residential deposits to total liabilities for theseincreasing inter-linkage has led to a prolonged banks is placed at around 51 per cent (Chart II.9). 17
  • 37. Report on Trend and Progress of Banking in India 2011-12 Box II.2: Eurozone Crisis and the Sovereign-Bank Nexus: Sovereign Rating Downgrades and Implications for Global Banking SystemThe recent global financial crisis and the consequent The interdependency between the sovereign and their banksdeepening of the euro debt crisis clearly indicate the can be clearly seen for euro area GIIPS countries, as bothinterdependencies between banks and sovereign risk. Several sovereign and bank risk (largest bank in the respectiveresearch studies have found a link between the fiscal and country), as measured by CDS spreads, tend to movefinancial distress. Discussing the transmission channels together during the crisis (Chart 2).during the fiscal and financial turmoil, Reinhart and Rogoff(2011) present a set of four stylised facts. First, private andpublic debt booms ahead of banking crises. Second, bankingcrises, both home-grown and imported, usually accompanyor lead sovereign debt crises. Third, public borrowingincreases sharply ahead of sovereign debt crises, and,moreover, it turns out that the government has additional“hidden debts” (domestic public debt and contingent privatedebt). Fourth, the composition of debt shifts towards theshort term before both a debt and banking crisis. Further,a default may take place if the financial crisis ignites acurrency crash that impairs the sovereign’s ability to repayforeign currency debt.The bailout of banks by their respective countries duringthe recent global financial crisis has led to a shift of creditrisk from the financial sector to national governments andled to an increase in sovereign risk (Acharya et al 2010).However, historically, the transmission of distress has oftenmoved from sovereign to banks with sovereign defaultstriggering bank crises (Caprio and Honahan 2008). Theanaemic economic growth combined with high debt-to-GDPratio has led to frequent downgrades of the sovereign ratingsof euro area Greece, Ireland, Italy, Portugal and Spain (GIIPS)countries by credit rating agencies (Chart 1). With an increasein sovereign debt risk, banks were also affected as they werethe major holders of sovereign bonds.There are multiple channels through which the increase insovereign risk feeds into the banks’ funding costs: (i) losseson holdings of government debt weaken banks’ balancesheets, increasing their riskiness and making funding morecostly and difficult to obtain; (ii) higher sovereign riskreduces the value of the collateral which banks can use toraise wholesale funding and central bank liquidity; (iii)sovereign downgrades generally flow through to lower ratingsfor domestic banks, increasing their wholesale funding costs,and potentially impairing their market access and (iv) aweakening of the sovereign reduces the funding benefits thatbanks derive from implicit and explicit governmentguarantees (CGFS-BIS 2011). (Contd...) 18
  • 38. Global Banking Developments(Concld....)The sovereign and banking stress increased as investors’ Barth, James R., Apanard Prabha & Greg Yun (2012), “Theconcerns about the political situation in Greece and the Eurozone Financial Crisis: Role of Interdependenciesimplications of the difficulties experienced by the Spanish between Bank and Sovereign Risk”, Journal of Financialbanking system, were compounded by a perceived lack of Economic Policy, Vol.4.cohesion among governments in upgrading the crisis Caprio, Gerard & Patrick Honahan (2008), “Banking Crisis”,management mechanisms in the euro area. Center for Development Economics, Williams College. CGFS-BIS (2011), “The Impact of Sovereign Credit Risk onReferences: Bank Funding Conditions”, CGFS Papers No.43, Bank forAcharya, Viral V., Drechsler, I & Schnabl (2011), “A Pyrrhic International Settlements.Victory? Bank Bailouts and Sovereign Credit Risk”, NBER Rogoff, Kenneth S. & Carmen M. Reinhart (2011), “A DecadeWorking Papers 17136, National Bureau of Economic of Debt,” NBER Working Papers 16827, National Bureau ofResearch. Economic Research.During the current euro area sovereign crisis, such the financial stress. The EU banks, however, havea structure of funding had made EU banks more not used the LTRO funds to extend private credit,vulnerable, as it increased their funding costs to but sought to protect their balance sheetsunsustainable levels. This led to the freezing of (Chart II.10). The predominant share of LTROwholesale funding markets for European banks. funds has been re-deposited with the ECB.In countries such as Greece, Italy and Spain, therewas a fall in customer deposits – including from Efforts to increase capital are on, but concernsnon-residents. The Euribor-OIS spread, an remainindicator of counterparty risk in unsecured inter- 2.22 As the crisis continued to escalate, thebank markets, rose sharply in the second half of markets were increasingly concerned about asset2011, before showing a decline in the subsequent quality, the size of capital buffers and their abilityperiod (Chart II.9). to cope with future credit losses. In order to2.21 In order to ease the funding pressures on alleviate these concerns, the European BankingEU banks, the ECB undertook Long-Term Authority (EBA) undertook an EU-wide stress testRefinancing Operations (LTRO) on December 21, as well as conducted a capital exercise of 71 banks2011 and February 29, 2012 amounting to more in November 2011 to assess their capital needsthan € 1 trillion. This has temporarily alleviated and advised the banks to build a temporary capitalthe funding pressures on EU banks and reduced buffer to reach a 9 per cent core Tier 1 ratio by 19
  • 39. Report on Trend and Progress of Banking in India 2011-12June 30, 2012. The EBA found that 27 banks credit availability for household and corporateacross Europe needed to raise capital totalling borrowers in the UK (Bank of England). In spite€76 billion to meet the 9 per cent core Tier 1 ratio. of the policy actions of the authorities, the flow ofThe final report by the EBA on October 3, 2012 credit through the banking system – whichshowed that 27 banks have strengthened their households and many businesses necessarily relycapital position by € 116 billion as of June 2012. on – has remained impaired. Recent data showThough the results are positive, concerns remain that the stock of lending to UK businesses hasas several of the banks surveyed require bailouts, contracted (Chart II.12).particularly, banks in Greece and Spain. Chinese banking system exhibits continuedEU banks deleveraging their exposure to GIIPS growthcountries 2.25 The Chinese banking system continued to2.23 EU banks have been reducing their grow in 2011, with higher capital to assets ratioexposures to affected countries in the euro area, and low level of non-performing loans (NPLs) atparticularly Greece. The latest BIS data show thatafter write-downs and asset sales, the totalexposure of European banks to Greek publicsector debt fell by more than 70 per cent quarter-on-quarter as at end-March 2012 (Chart II.11).UK banking system – contagion from euroarea crisis2.24 The crisis in the euro area has affected theUK financial system and has led to a markeddeterioration in the outlook for the UK economy.Even though UK banks have built up considerablebuffers of loss-absorbing capital, they wereaffected by the general increase in the marketuncertainty and widespread risk aversionassociated with problems in the euro area. This,in turn has caused funding costs for banks to risesharply, leading to higher interest rates and lower 20
  • 40. Global Banking Developmentsjust about 1 per cent (Chart II.13). However, advanced economies to EMEs continued in theconcerns remain, as the rapid growth of the year 2011, as evident from both the compositionChinese banking industry may be hard to sustain of number and assets of the top 100 global banksdue to the slowdown in the national economy and (Chart II.14). This shift reflects the continuedlarge exposure to Chinese property markets. credit growth in the EMEs, as well as the decline in credit growth in the advanced economies. The4. Analysis of the Performance of Top 100 decline in the asset share of advanced economiesGlobal Banks between 2010 and 2011 was concentrated in USShare of EMEs in global banking continued and European banks (Chart II.15). Among EMEs,to increase Chinese banks have exhibited a significant2.26 The analysis of the top 100 global banks improvement in the top 100 banks ratings, as fourby the Banker Database shows that the trend of banks are listed among the top 10 banks basedmoderate shift in the global banking business from on Tier 1 capital for the first time. 21
  • 41. Report on Trend and Progress of Banking in India 2011-12Profitability of global banks remains subdued Some progress is evident in the deleveraging2.27 The profits of the top 100 banks, which of global bankshad staged a recovery after the financial crisis 2.29 With the pressure on global banks toreceived a setback during 2011. The aggregate deleverage, especially after the global financialprofits of these banks recorded a moderate fall to crisis, the banks have made some progress inUS$ 702 billion in 2011 from US$ 709 billion in reducing their leverage (Chart II.18). At the end of2010. Moreover, the percentage of loss makingbanks [reporting negative return on assets (RoA)]also recorded an increase from 5 per cent in 2010to 10 per cent in 2011 (Chart II.16).Global banks strengthen their capitaladequacy position2.28 The capital adequacy position of the top100 banks reveals that the number of banks inthe higher bracket of capital adequacy ratio, i.e.,13 to 17 per cent, showed an increase, reflectingglobal initiatives to strengthen the capital positionof banks. However, the number of banks with aCRAR range of more than 17 per cent declined(Chart II.17). All the top 100 banks (barring onefor which data are not available) show that theyare maintaining a higher capital adequacy levelthan the BCBS norm of 8 per cent CRAR stipulatedunder the Basel II framework. 22
  • 42. Global Banking Developments2011, the number of banks that are highly more than 5 per cent of non-performing loansleveraged with a capital to assets ratio – a measure (NPL) ratio declined from 16 to 6 (Chart II.19).of financial leverage – of less than 4 per cent and Further, number of banks with a lower NPA ratio,between 4 - 6 per cent came down, while the i.e., 0 - 1 per cent showed an increase.number of banks in the range of 6 - 8 per centshowed an increase. 2.31 The scatter plots of the top 20 banks covering three indicators of CRAR, leverage andImprovement in the asset quality of global NPA ratio, clearly revealed that while banks werebanks in the process of increasing their CRAR between2.30 Amidst an uncertain global financial 2010 and 2011, little improvement was discernibleenvironment, global banks showed an improvement in the leverage and NPA ratios of banksin their asset quality. The number of banks with (Chart II.20). 23
  • 43. Report on Trend and Progress of Banking in India 2011-125. Global Policy Reforms reviewed periodically. Implementation of the revised G-SIB standards will be phased in fromProgress on Basel rules implementation 2016.2.32 The Basel rules on banking supervision, Framework for Domestic Systemicallyviz., Basel II, Basel II.5 and Basel III, aim at Important Banks (D-SIBs)strengthening the resilience of the global bankingsector. The timely and consistent implementation 2.34 The G-20 leaders requested the BCBS andof these rules across jurisdictions is important Financial Stability Board (FSB) to design anto ensure stability in the global banking system. appropriate risk mitigating framework forThe Basel Committee on Banking Supervision domestic systemically important banks (D-SIBs).(BCBS) is carrying out an assessment of the Accordingly, in June 2012, the BCBS came outimplementation of Basel rules across member with a consultative document containing acountries. The progress report on Basel III framework for dealing with D -SIBs. Thisimplementation by BCBS in October 2012 shows framework for D-SIBs will complement the G-SIBsthat many of the member countries are yet to issue framework, by concentrating on the impact ofthe guidelines and, in the case of countries which failure of D-SIBs on the domestic economy. Inhave issued the guidelines, there is a possibility contrast to the G-SIBs framework, the D-SIBsof weaker national standards than the globally framework allows considerable national discretionagreed norms. Some G-20 countries such as for the assessment and application of the policyIndia, Japan, China and Saudi Arabia have tools in order to tailor the framework to thealready announced final rules for implementation structural characteristics of the domestic financialof Basel III from early 2013, but the majority are system. The principles require the nationalstill in the drafting or consulting stage. The US authority to assess the systemic risks withand EU have moved closer to a final rule with the reference to the domestic financial system andpublication of draft legislation on Basel III. risks should be assessed with regard to bank- specific factors such as size, inter-connectedness,Reforms related to Systemically Important substitutability/ financial institution infrastructureFinancial Institutions (SIFIs) and complexity. Based on the consultation2.33 In November 2011, the BCBS issued the process, the BCBS has published the finalfinal rule to assess the global systemic importance framework for the regulation of D-SIBS in Octoberand to quantify the required additional loss 2012.absorbency capacity of large institutions, i.e., Oversight and regulation of the shadowglobal systemically important banks (G-SIBs). The banking systemrationale was to contain the risks posed by theseinstitutions to the global financial sector and 2.35 The Financial Stability Board (FSB) in Aprilincludes the methodology to identify G-SIBs and 2012 defined shadow banking system as “ Creditthe details of additional loss absorbency capital intermediation involving entities and activitiesrequirements to be met with common equity to outside the regular banking system”.discourage any increase in systemic importance. 2.36 At the Cannes Summit in November 2011,The initial list of 29 G-SIBs has been published, G-20 leaders agreed to strengthen the oversightwhich will be revised annually and the methodology and regulation of the shadow banking system, 24
  • 44. Global Banking Developmentsand endorsed the FSB’s initial recommendations impediments to cross-border co-operation, andwith a work plan to further develop them in the to ensure that recovery and resolution plans andcourse of 2012. The FSB has adopted a two- crisis management groups are in place, at leastpronged approach. First, the FSB will enhance for banking groups that have been designated asthe monitoring framework by continuing its G-SIFIs.annual monitoring exercise to assess global 2.39 The FSB is undertaking the first peertrends and risks, with more jurisdictions review to evaluate FSB member jurisdictions’participating in the exercise. Second, the FSB will existing resolution regimes and consider anydevelop recommendations to strengthen the planned changes to those regimes using keyregulation of the shadow banking system, where attributes (KAs) as a benchmark.necessary, to mitigate the potential systemic risks. 2.40 Progress has been made in the regulatoryThe FSB in its Report on Shadow Banking to the reform agenda, but the work is not complete, andG-20 leaders in April 2012 reviewed the progress important implementation challenges remain. Fullmade and indicated that other policy implementation, however, will depend on strongrecommendations will be made by the end of political commitment, as it will require legislation,2012. among other things, to enhance cross-border co-Resolution regimes and bail-in mechanisms operation and information sharing and extend2.37 The global financial crisis demonstrated the range and scope of resolution powers forthe urgent need to improve resolution regimes so financial groups in home and host to enable authorities to resolve failing financialinstitutions quickly without destabilising the 6. Overall Assessmentfinancial system or exposing taxpayers to the risk 2.41 The global banking system faced a numberof loss from solvency support. The U.S. of challenges in 2011 and 2012 so far, such asGovernment’s Dodd-Frank Act has broadened the weakening global growth, escalation of theFederal Deposit Insurance Corporation’s (FDIC) sovereign debt crisis and related funding andauthority in dealing with the failure of large and deleveraging risks, especially for Europeansystemically important non-bank entities as well banks. In the year 2013, these challenges areas financial institutions. Similarly, the UK likely to persist, as downward risks continue,Government has implemented a special resolution unless various measures taken by the advancedregime (SRR) and special administration regime countries’ central banks revive growth. The fiscal(SAR) to ensure orderly resolution of banks and austerity measures taken in response will alsoinvestment firms. The European Commission has weaken the prospects of growth and employmentalso issued a proposal to develop an EU-wide in the advanced countries. Banks in the EMEsCrisis Management and Bank Resolution are better placed, as they have limited fundingFramework to harmonise the resolution tools and dependency on international markets, but theythe approach of national authorities. also face downward risks, such as freezing trade finance, decline in global risk appetite, capital2.38 The FSB in November 2011 released outflows and forex market volatility, if the eurostandards for effective resolution regimes. It area sovereign debt crisis continues.requires jurisdictions to have resolutionauthorities with a broad range of powers to 2.42 In the recent period, the advanced countriesresolve G-SIFIs (including non-banks), to reduce undertook monetary stimulus measures to boost 25
  • 45. Report on Trend and Progress of Banking in India 2011-12economic growth. The US Federal Reserve and reduced the financial stress. The launchingannounced Quantitative Easing-III (QE-III) an of € 500 billion permanent bailout fund “Europeanopen-ended endeavour to purchase additional Stability Mechanism” and the proposal for singleagency mortgage-backed securities amounting to banking regulator under the ECB also helped inUS$ 40 billion per month. The ECB has announced reducing the financial market stress.the “sterilised” Outright Monetary Transactions 2.43 Thus, going forward, weak global growth(OMT) programme, to buy sovereign bonds of theeuro area in the secondary markets to tackle the and the evolving new regulatory environment willissue of sovereign debt in Europe. The Bank of pose challenges for banks as cost of doingJapan has also increased the total size of the Asset business will increase, which will put pressurePurchase Program by about 21 trillion yen, taking on their profitability. In the long term, globalthe total to about 91 trillion yen. These measures banks should focus on cost reduction strategieshave alleviated the funding pressures of EU banks and work towards restoring investor confidence. 26
  • 46. Chapter III Policy Environment Global financial conditions deteriorated further during 2011-12. Amidst the subdued global growth and its increasing spillover risks, the Indian economy witnessed weakening domestic macroeconomic fundamentals. While the Western world continues to contend with dampening growth, a worsening sovereign debt crisis and repairing its financial regulatory architecture, the emerging lesson undeniably remains that financial/ banking regulations have to keep pace with the emerging market dynamics, while ensuring that such regulations do not throttle entrepreneurship and innovation. In this milieu, the Reserve Bank focused on enhancing the resilience of the banking sector. Several policy measures were initiated during 2011-12 with a greater focus on regulatory and supervisory apparatus, in line with the ongoing global initiatives such as migration to Basel II advanced approaches, setting the roadmap for Basel III implementation, efforts to move for a dynamic provisioning framework/ countercyclical capital buffers, securitisation norms, sound compensation practices and adoption of a risk-based supervisory approach for banks. Steps were also initiated to check the menace of money laundering/ terrorism financing, combating frauds, widening access to payment and settlement systems and improving customer service in banks. The Reserve Bank continued to spearhead the agenda of financial inclusion through policy initiatives combined with its outreach visits programme.1. Introduction the flaws in the Basel II prudential regulatory framework, micro-supervisory approach and its3.1 Amidst an adverse external environment, procyclical nature. Though the need for reorientingthe Indian economy during 2011-12 traversed a prudential policies to have a macro dimensiondifficult terrain characterised by inflationarypressures, growth slowdown and deteriorating was recognised the world over after the crisis offiscal and external sector balances. Against the 2008, India was well ahead in adopting macro-backdrop of a difficult macroeconomic setting, prudential policies even before the crisis.monetary policy had the difficult task of reining Nonetheless, in the light of lessons from the globalin inflation, arresting the growth slowdown, financial crisis, the Reserve Bank has beenproviding adequate liquidity in the system to constantly reviewing and refining its regulatoryensure non-disruptive functioning of the financial and supervisory policies to ensure a strong capitalmarkets and containing volatility in the forex base, effective risk management and bestmarket. The Reserve Bank continued to maintain corporate governance standards in the bankingan anti-inflationary stance up till mid-December sector. In recent years, the focus has also been on2011. With the emerging evidence on growth improving credit delivery, customer service andslowdown, the Reserve Bank front-loaded its promoting financial inclusion.action and cut the policy rates in April 2012, 3.3 The Reserve Bank continued to undertakebefore reverting to pause mode in the wake of several policy initiatives during the year to makepersisting inflationary pressures. the Indian banking system sound, resilient and3.2 The Indian banking industry has largely inclusive, consistent with the developments inremained insulated from the global financial global regulatory reforms. This chapter traces theturbulence. The global crisis brought to the fore major developments in various areas of banking
  • 47. Report on Trend and Progress of Banking in India 2011-12sector policy, with greater focus on regulatory and not addressed, could lead to disruption in creditsupervisory initiatives undertaken during flow and exacerbate growth risks, the Reserve2011-12. Bank reduced the CRR by 125 basis points effective January 28, 2012 and March 10, 2012.2. Monetary Policy Keeping in view the growth slowdown, the ReserveMonetary policy attuned to containing Bank front loaded the policy rate reduction byinflation and mitigating the risks to growth bringing down the key policy repo rate by 50 basisslowdown points to 8 per cent on April 17, 2012. Further, based on an assessment of the prevailing3.4 The monetary policy stance during macroeconomic situation, the Reserve Bank cut2011-12 was shaped by the overarching priorities the CRR by 50 basis points to 4.25 per centof controlling inflation and arresting the growth effective September 22, 2012 and November 3,slowdown. While in the first half, monetary policy 2012. Taking its cue from the Reserve Bank’shad to address the risk of entrenchment of change in the policy rate, banks have respondedinflationary pressures and elevated inflation by attuning their deposit and lending interestexpectations, during the second half, with signs rates.of marked deceleration of domestic growth,monetary policy sought to strike a balance 3.6 Even as core inflation moderated, itbetween the objectives of growth stabilisation and continued to be well above the historical trend.low and stable inflation. Concomitantly, with Headline inflation continued to remain sticky, evenliquidity deficit breaching the indicative comfort as growth moderated. Monetary policy, in such azone for an extended period due to both frictional scenario had to maintain a fine balance, such that,and structural factors, the Reserve Bank had to while addressing short-term growth concerns,embark on an active liquidity management with price stability is maintained to ensure sustainablea slew of measures including OMOs to inject growth over the medium-term.durable liquidity, so as to ensure non-disruptive Deregulation of savings bank deposit rate tofunctioning of the domestic financial markets. bring finer pricing in savings depositsThis also posed a challenge for monetary policy 3.7 The continued regulation of savings depositin effectively communicating the intent of rate hampered competition with both banks andliquidity- easing steps as distinct from its depositors acting passively, which reduced itsmonetary policy stance. relative attractiveness and inhibited product3.5 The headline WPI inflation during April- innovation. Moreover, in recognition of the factNovember 2011 remained stubbornly high, that deregulation of interest rate on savingsaveraging at 9.7 per cent. Treading the path of an deposits would make the rate flexible and facilitateanti-inflationary stance, the Reserve Bank raised monetary transmission, the Reserve Bank duringits key policy repo rate five times by 175 basis 2011-12 initiated two major changes on thepoints during April-November 2011. From the liability side of banks’ balance sheet, viz., (a)beginning of the fourth quarter of 2011-12, while deregulation of savings bank deposit interest ratethere were growing indications of a moderating effective October 25, 2011 and (b) deregulation ofinflation on account of deceleration in food interest rates on both savings deposits and terminflation, the downside risks to growth were deposits of maturity of one year and above underclearly on the rise. In addition, the deficit liquidity Non-Resident External (NRE) accounts, andconditions persisted way beyond the comfort zone savings deposits under Non-Resident Ordinaryof the Reserve Bank. Considering that such (NRO) accounts effective December 16, 2011. Thestructural liquidity constraints in the economy, if transition phase in the post-deregulated period for 28
  • 48. Policy Environmenteach of these items has been smooth so far. With permitted to avail of funds from the Reserve Bankthese reforms, on the liability side, current under the MSF against their excess SLR holdings.account deposits, Foreign Currency Non-Resident In order to provide a greater liquidity cushion, the(Banks) [FCNRB] deposits and borrowings under borrowing limit was further raised to 2 per centoverseas line of credit continue to remain regulated of NDTL effective April 17, the Reserve Bank. On the assets side, buyers Bank Rate aligned with MSF Ratecredit to importers continues to be regulated. 3.11 In the context of changed operatingHike in interest ceiling on FCNR (B) deposits procedure of monetary policy, the policy repo rateto attract foreign currency inflows and the MSF rate have become operational, while3.8 With a view to augmenting foreign currency the Bank Rate continued to remain at 6 per cent.inflows into the economy, the interest rate ceiling The Bank Rate acts as the penal rate charged onon FCNR(B) deposits was raised to LIBOR/ Swap banks for shortfalls in meeting their reserverates plus 200 basis points for 1-3 year maturity requirements. The Bank Rate is also used byand LIBOR/ Swap rates plus 300 bps for 3-5 year several other organisations as a reference rate formaturity, effective May 5, 2012 from LIBOR/ Swap indexation purposes. Being the discount rate asrates plus 125 basis points for 1-5 year maturity per the Reserve Bank Act, the Bank Rate shouldearlier. The interest rate ceiling for overseas line technically be higher than the policy repo rate.of credit for exporters by banks is currently at 6 Therefore, the Reserve Bank felt that the Bankmonths LIBOR/ EURO LIBOR/ EURIBOR plus 250 Rate should stay aligned with the MSF rate, which is instituted at 100 basis points above the policybasis points effective November 15, 2011, subject repo rate. Accordingly, the Bank Rate wasto a review as and when warranted. The current increased by 350 basis points from 6.0 per centall-in-cost ceiling on buyers credit is at 6 months to 9.5 per cent per annum, with effect fromLIBOR plus 350 basis points, subject to a review February 13, 2012. This was a one-time technicalbased on experience gained in this regard. adjustment to align the Bank Rate with the MSFDeregulation of export credit interest rate to rate rather than any change in the monetary policyfacilitate foreign currency loans stance. Consequently, the Bank Rate has remained3.9 The interest rate on export credit in foreign aligned to the MSF rate.currency was deregulated effective May 5, 2012.This measure is expected to increase foreign 3. Credit Deliverycurrency loans to exporters. 3.12 The Reserve Bank has been laying considerable emphasis on ensuring adequate andEnhanced liquidity cushion for banks under timely credit at reasonable rates to differentMSF sectors of the economy. For achieving the objective3.10 With a view to contain volatility in the of sustainable and inclusive economic growth, itovernight inter-bank money market, the Marginal is important to bring the under-served sectors/Standing Facility (MSF) Scheme was introduced sections of society within the banking fold. Againsteffective May 9, 2011, under which scheduled this backdrop, several initiatives were takencommercial banks (SCBs) were allowed to borrow during the year, which include revising the priorityovernight up to one per cent of their respective sector norms to refocus direct agricultural lendingNet Demand and Time Liabilities (NDTL) without by banks; extending the interest subvention reliefthe obligation to seek a specific waiver for default to farmers to post-harvest operations; setting upin SLR compliance arising out of use of this facility. a new short-term refinance facility for on-lendingEffective December 21, 2011, banks were also to agriculture; providing debt relief under the 29
  • 49. Report on Trend and Progress of Banking in India 2011-12Agricultural Debt Waiver and Debt Relief (ADWDR) micro enterprises. The revised guidelines aim toScheme, 2008; revising the Kisan Credit Card refocus direct agricultural lending to individuals,(KCC) Scheme to suit current requirements; and Self-Help Groups (SHGs) and Joint Liabilityintroducing measures to enhance the flow of credit Groups (JLGs) engaged in agriculture and alliedto micro and small enterprises (MSEs). Steps were activities, while keeping the targets unchangedalso taken during the year to promote Women both under direct and indirect agriculture lending.SHGs in backward and Left-Wing Extremism Bank loans to farmers through entities like(LWE)-affected districts of the country. Further, to Primary Agricultural Credit Societies (PACS)make the approach and design of the SHG-Bank ceded to or managed/ controlled by banks haveLinkage Programme more flexible, some client- been included under direct lending to agriculture.friendly product level changes were also made in This would facilitate banks that do not have a widetune with the changing requirements of customers. presence in rural areas and would otherwise have difficulty in meeting the targets. In view ofAmbit of priority sector lending revisited inadequate credit flow to the services sector, some3.13 The changing economic conditions and changes were made by expanding the definition ofexperience from the operation of the priority the services sector to include services, which weresector lending scheme over the years led to a need not specifically listed earlier under priority sectorfor revisiting the priority sector guidelines and lending, with a ceiling of `10.0 million per unit.updating it in line with current national priorities. 3.15 As per the revised guidelines, the itemsAccordingly, the Reserve Bank in August 2011 set that would be reckoned under the priority sectorup a Committee (Chairman: Shri M. V. Nair) to include loans up to `2.5 million for housing inre-examine the existing classification and suggest metropolitan centres (with population above 10revised guidelines with regard to priority sector lakh) and `1.5 million at other centres; loans tolending classification and related issues. The individuals for education including vocationalCommittee submitted its report in February 2012. courses up to `1.0 million in India and `2.0In the light of comments/ suggestions on the million abroad; loans for housing projects forCommittee’s recommendations received from the economically weaker sections (EWS) and lowvarious stakeholders, priority sector lending income groups (LIG), provided the cost does notguidelines were revised by the Reserve Bank on exceed `0.5 million per dwelling unit; loans toJuly 20, 2012. Under the revised guidelines, there distressed farmers indebted to non-institutionalis no change in the overall target of priority sector lenders; loans to individuals other than farmerssince it was felt that fresh targets would distort up to `50,000 to prepay their debt to non-the allocation of credit. However, in view of the institutional lenders; and loans to individuals togrowing network of foreign banks, it was felt that set up off-grid solar and other renewable energythere is a need to relook into the preferential solutions for households.treatment given to them under priority sector 3.16 Further, in the light of discussions heldlending. Accordingly, it was decided that foreign with select banks on the operational issues andbanks that have 20 branches or more will be based on the feedback received, certain additions/subject to the same targets as domestic banks, to amendments were made in the guidelines onbe achieved within a period of five years from April October 17, 2012. It was decided that loans up to1, 2013; in the case of other foreign banks, the `20 million to corporates including farmers’existing overall target of 32 per cent would producer companies, partnership firms andcontinue to apply. co-operatives of farmers directly engaged in3.14 The focus of the Committee was on direct agriculture and allied activities will also belending by banks to small/ marginal farmers and classified as direct finance to agriculture. The limit 30
  • 50. Policy Environmentfor loans under priority sector in respect of to introduce a separate Short-Term Refinanceservices provided by MSEs was raised to `20 Facility from NABARD for Central Co-operativemillion and and the cost of dwelling unit for Banks (CCBs) with sound financial position andhousing projects for EWS and LIG categories was a new line of short-term refinance support forraised to `1 million. Further it was decided to public sector banks and RRBs for financing theinclude under priority sector, bank loans to PACS in such areas where CCBs are weak. TheHousing Finance Companies (HFCs) for on- quantum of refinance is fixed at a uniform rate oflending for housing up to `1 million per borrower 45 per cent of the Realistic Lending Programme.provided the interest rate charged to the ultimate The facility is available at an interest rate of 4.5borrower does not exceed the lowest lending rate per cent per annum provided that the rate chargedof the lending bank for housing loans plus two per to the ultimate borrower for crop loans upto `0.3cent per annum. million does not exceed 7 per cent per annum.Interest rate subvention relief to farmers Additional refinance facility for agricultureextended to post-harvest operations in the Eastern and North-Eastern Regions3.17 In order to make credit available at a 3.19 NABARD extended additional refinance toreasonable cost to the farmers, it was announced the co-operative banks and RRBs in the Easternin the Union Budget 2006-07 that the farmers and North-Eastern Regions (including hillywould be made available short term credit at an regions), which are disbursing crop loans uptointerest rate of 7.0 per cent per annum, with an `0.3 million per borrower at 7 per cent interestupper limit of `0.3 million on the principal per annum. Accordingly, State Co-operative Banksamount. Towards this end, the Government of (StCBs) and RRBs in the Eastern and North-India announced interest subvention for public Eastern Region are eligible to receive additionalsector banks, RRBs and co-operative banks. The quantum of refinance of 5 per cent and 25 perUnion Budget 2011-12 provided interest cent, respectively, over and above the normalsubvention of 2 per cent for short-term production quantum of refinance. Further, the facility ofcredit up to `0.3 million and enhanced the additional refinance of 5 per cent was madeadditional interest subvention for prompt-paying applicable to banks in 28 districts of Eastern Uttarfarmers to 3 per cent, so that the effective interest Pradesh.rate for such farmers would be 4 per cent. Further, Concessional refinance support for agriculturethe benefit of interest subvention has been investment activitiesextended to small and marginal farmers who havea Kisan Credit Card (KCC) for a further period of 3.20 The scheme to provide refinance at aupto six months (post-harvest) against negotiable concessional rate of 7.5 per cent per annum towarehouse receipts. This is expected to discourage banks was introduced in the year 2011-12 todistress sale of crops by these farmers and ensure investments in agriculture to enhance theencourage them to store their produce in production and productivity of crops in thewarehouses. As announced in the Union Budget Eastern Region. The operative period of the2012-13, the scheme of interest subvention will scheme is two financial years, viz., 2011-12 andcontinue for the year 2012-13 on the same lines. 2012-13. Four activities, viz., water resource development, land development, farm equipmentNew short-term refinance facility for on- (including tractor financing on group mode basis)lending to agriculture and seed production area are covered under the3.18 With a view to provide adequate and timely Scheme. The banks were offered refinance pluscredit to farmers, during 2011-12, it was decided support for (a) forming and linking of JLGs, 31
  • 51. Report on Trend and Progress of Banking in India 2011-12(b) awareness programmes for promoting the simplifying and attuning the Scheme to suitscheme, (c) organising sensitisation meets for current requirements and to facilitate the issue ofbranch officials and (d) training and capacity Electronic Kisan Credit Cards, a Working Groupbuilding needs of entrepreneurs identified under (Chairman: Shri T.M. Bhasin), was constituted.the Scheme. Pursuant to its recommendations, a revised KCCProgress under the Agricultural Debt Waiver scheme was put in place in May 2012. The salientand Debt Relief (ADWDR) Scheme, 2008 features of the revised scheme include KCC limit to comprise crop loan portion, post-harvest3.21 Under the ADWDR scheme, lending expenses, consumption requirements, workinginstitutions were compensated by the Government capital and investment credit for agriculture andof India in a staggered manner (Table III.1). The allied activities; all farmers/ owner cultivators,Government has so far released `525 billion in tenant farmers, oral lessees and share croppersfive installments. Of this, about `293 billion was to be eligible for finance under KCC; limit to bepassed on to NABARD for reimbursement to RRBs drawn through any delivery channel, such asand co-operatives. Besides, an amount of `232 ATMs, Business Correspondents (BCs), point ofbillion was released for reimbursement by the sale (PoS) and mobile-based transactions withReserve Bank to SCBs, Local Area Banks (LABs) agricultural input dealers and mandis; interestand Urban Co-operative Banks (UCBs). Of this, subvention/ incentive for prompt repayment; andas on September 10, 2012, an amount of `232 loan against the warehouse receipt. The Nationalbillion has been disbursed, while `0.81 billon is Payments Corporation of India (NPCI) will designbeing held as balance in the relevant account by the KCC to be adopted by all banks.the Reserve Bank for further payments, if any,and/ or for refund to the Government of India. Greater focus on lending to MSMEsNew Electronic Kisan Credit Card to facilitate 3.23 A High Level Task Force was constitutedcredit delivery to farmers by the Government of India (Chairman: Shri T. K. A. Nair), to consider various issues relating to the3.22 The Kisan Credit Card (KCC) has proved Micro, Small and Medium Enterprises (MSMEs)to be an innovative credit delivery mechanism to in September 2009. The Task Force submitted itsmeet the production credit requirements of Report in January 2010. Pursuant to itsfarmers in a timely and hassle-free manner. The recommendations, SCBs were advised that thescheme has been under implementation in the share of micro enterprises in MSE lending shouldentire country and has received wide acceptability amount to 60 per cent. This is to be achieved inamong bankers and farmers. With a view to a phased manner, i.e., 50 per cent during 2010- Table III.1: Agricultural Debt Waiver and 11, 55 per cent in 2011-12 and 60 per cent in Debt Relief Scheme 2012-13, with 10 per cent annual growth in the (Amount in ` billion) number of micro enterprise accounts and also 20Lending Amount Reimbursed by Government of IndiaInstitutions (in instalments) per cent y-o-y growth in MSE lending. The Reserve First Second Third Fourth Fifth Total Bank is closely monitoring the achievements of Sept Jul Jan Nov Mar targets by banks on a quarterly basis. The Reserve 2008 2009 2011 2011 2012 Bank has held one to one meetings with banks toRRBs and 175 105 12 0.4 0.0 293 know the constraints and also impress upon themCo-operativesSCBs, UCBs 75 45 101 10 1* 232 to devise strategies to gear up the credit mechanismand LABs for the sector. It has also taken up the matter withTotal 250 150 113 11 1* 525 the banks that have failed to achieve the targets *includes ` 0.81 billion balance held by RBI. prescribed by the Task Force. 32
  • 52. Policy EnvironmentRural Infrastructure Development Fund maintained separately or used for intra-group(RIDF) lending; providing need-based access to funds and longer tenure of credit from banks through the3.24 The RIDF was established in NABARD in introduction of a cash credit system to obviate the1995 as a repository of the shortfall in priority need for frequent documentation and also delayssector lending by commercial banks. The corpus in the renewal of loans; extending JLG or otherof the fund for the year 2011-12 would be non-collateral lending models of higher creditcontributed by domestic scheduled commercial needs to smaller livelihood groups; a self-ratingbanks, having shortfall in achievement of priority mechanism to improve the quality of the group;sector lending target (40 per cent) and/ or and developing federations to continuously guide,agriculture lending target (18 pre cent) and/ or nurture and cater to the needs of the groups.weaker sections lending target (10 per cent), ason the last reporting Friday of March 2011. Funds Promotion of women SHGs in backward andfrom RIDF are lent to State Governments for LWE districtsimplementing rural infrastructure projects. 3.26 A scheme for promotion and financing ofOriginally, the objective was to allocate these funds Women Self-Help Groups (WSHG) in associationonly to finance the funding gap, that is, to provide with the Government of India is being implementedfinancing for projects that are nearly, but not fully, across 150 backward and Left-Wing Extremismcomplete. RIDF funding is now available for 31 affected districts of the country. The scheme aimseligible activities relating to rural infrastructure to encourage viable and self-sustainable WSHGsprojects. Since 1995-96, the Government has by involving NGOs/ support agencies, which shallannounced an annual allocation in each Union promote and facilitate credit linkage of theseBudget to the Fund. Since RIDF I, the corpus has groups with banks, provide continuousgrown manifold and stood at `180 billion under handholding support and also take responsibilityRIDF XVII (2011-12). The total cumulative for loan repayments. NABARD shall provide grantallocation across all tranches taken together stood support of `10,000 per SHG to these NGOs andat `1,525 billion including `185 billion under a also bear the cost of training and other capacity-separate window for funding rural roads under building initiatives.the Bharat Nirman Programme. Further, underRIDF XVII, `20 billion has been exclusively Promotional assistance for capacity buildingdedicated for the creation of warehousing facilities. of SHGs/ JLGs and MFIsMicrofinance 3.27 The Revolving Fund Assistance, Capital Support and Grant Support for rating providedRevisiting the SHG Bank Linkage Programme to eligible microfinance institutions (MFIs) by3.25 The SHG Bank Linkage Programme (SHG NABARD out of the Microfinance Development- BLP) continues to be the leading model in India’s and Equity Fund (MFDEF) has been discontinuedmicrofinance sector. To make the approach and from April 1, 2011 following the announcementdesign of SHG-BLP more flexible, guidelines were in the Union Budget 2011-12. Accordingly, theissued by NABARD on March 27, 2012 suggesting existing MFDEF will henceforth be exclusivelysome client friendly product level changes in tune used for the purpose of training and capacitywith the changing needs of customers under building support for SHGs and MFIs, supportingSHGs, such as allowing voluntary savings by matured SHGs to undertake livelihood promotionmembers with surplus funds, which could be activities and forming JLGs. 33
  • 53. Report on Trend and Progress of Banking in India 2011-124. Financial Inclusion being granted to domestic scheduled commercial banks for opening branches in Tier III to Tier VI3.28 In India, growth with equity has been the centres was extended to opening branches in Tiercentral objective right from the inception of the II centres (with population of 50,000 to 99,999 asplanning process. In this direction, the objective per Census 2001) without the need to takeof financial inclusion is to provide financial permission from the Reserve Bank in each case,services at affordable cost to those who areexcluded from the formal financial system. This subject to vital for sustaining long-term equitable Inter-operability at retail outletsdevelopment, since a sizeable proportion of 3.30 In order to facilitate financial inclusionhouseholds/ areas do not have access to basic further, it was decided to permit inter-operabilitybanking facilities, notwithstanding the existence at the retail outlets or sub-agents of Businessof a vast institutional framework in the country. Correspondents (i.e., at the point of customerIn recent years, there has been growing emphasis interface), provided the technology available withby the Government and the Reserve Bank on the bank that has appointed the BC supportsproviding formal financial services to the hitherto inter- operability, subject to the followingunbanked/ under-banked areas. A multi-pronged conditions: (i) the transactions and authenticationsstrategy has been adopted to enhance the outreach at such retail outlets or sub-agents of BCs areof banking services across all sections of society. carried out on-line; (ii) the transactions are carriedIn order to achieve the objective of universal out on a core banking solution (CBS) platform;financial inclusion, banks have been directed touse a combination of strategies, which include: and (iii) the banks follow the standard operating(a) provision of basic banking products; (b) procedures to be advised by the Indian Banks’introduction of the Business Correspondent/ Association (IBA). However, the BC or its retailBusiness Facilitator (BF) model; (c) relaxation of outlet or sub-agent at the point of customerexisting regulatory guidelines in the form of lenient interface would continue to represent the bankKnow Your Customer (KYC) norms; (d) enhanced that has appointed the BC.use of technology; and (e) setting up financial Intermediate brick-and-mortar structure toliteracy and credit counseling centres in districts facilitate Business Correspondentsto achieve greater outreach. During 2011-12, the 3.31 Recognising the fact that the success ofReserve Bank continued with the policy initiatives the BC model is dependent on the supportaimed at expanding the outreach of banking provided and monitoring by the base branches ofservices to remote parts of the country. the concerned banks, the Reserve Bank hadBranch authorisation policy geared for advised banks that they may establish outlets ingreater rural outreach rural centres, which are intermediate brick-and-3.29 Keeping in view the goal of bringing mortar structures (Ultra-Small Branches)banking services to an identified 72,800 villages between the existing base branch and BCwith a population above 2,000 by March 2012, locations, so as to provide support to a cluster ofand thereafter progressively to all villages over a about 8-10 BC units at a reasonable distance ofperiod, banks were advised that while preparing about 3-4 kilometers. Such Ultra-Small Branchestheir Annual Branch Expansion Plan, they should should have the minimum required infrastructure,allocate at least 25 per cent of the total number such as a CBS, and would have to be managedof branches proposed to be opened during a year full-time by bank officers/ employees. It isto unbanked rural (Tier V and Tier VI) centres. expected that such an arrangement would lead toWith the aim of providing enhanced banking efficiency in cash management, documentation,services in Tier II centres, the general permission redressal of customer grievances and close 34
  • 54. Policy Environmentsupervision of BC operations. Further, BCs can Migration to Basel II advanced approachesoperate from such Ultra-Small Branches, which 3.34 The Basel II framework provides two broadwould enhance their legitimacy and credibility in methodologies, namely, the Foundation/the area and boost confidence among the public Standardised Approach and more advancedto use their services. approaches, to banks to calculate the capitalSpecial Dispensation Scheme to improve requirements for credit, market and operationalbank presence in the North-Eastern Region risks. All the SCBs in India have been Basel II3.32 Under the Special Dispensation Scheme, compliant as per the standardised approach withthe Reserve Bank had undertaken to reimburse a effect from April 1, 2009. In July 2009, theone-time capital cost and recurring expenses for timetable for the phased adoption of advancedfive years to banks for setting up branches at approaches was also placed in the public domain.agreed centres in the North-Eastern Region, and Migrating to Basel II advanced approaches offersthe State Governments had agreed to provide the many benefits to banks which, inter-alia, includenecessary premises, security and rental improvement in risk assessment and management,accommodation for the bank staff. The special monitoring and reporting processes, accuratedispensation provided by the Reserve Bank would risk-adjusted pricing of products and efficientbe available for only those branches that have been allocation of capital. Nonetheless, to adopt theseopened at allotted centres by June 30, 2012. advanced risk-sensitive approaches, banks also5. Prudential Regulatory Policy need to be more sophisticated in terms of overall risk management infrastructure, systems,3.33 The recent global financial crisis has practices and culture.redefined the broad contours of regulation of thebanking sector. There is a growing recognition that 3.35 Banks desirous of moving to advancedregulatory and supervisory policies need to be approaches under Basel II have been advised thatstrengthened, particularly by adopting a system- they can apply for migrating to advancedwide approach to counteract pro - cyclical approaches of Basel II for capital calculation onmovements in the banking sector. The regulatory a voluntary basis based on their preparednessinitiatives by the Reserve Bank during the year and subject to the Reserve Bank approval. Thecontinued to focus on adopting international best appropriate guidelines for advanced approachespractices. The migration of commercial banks to of market risk, operational risk and credit riskthe Basel II framework has made considerable were issued in April 2010, April 2011 andprogress and efforts are on to move towards December 2011, respectively. Banks are presentlyadvanced approaches. One of the important assessing their preparedness and applying to theinitiatives taken during the year was setting up theroadmap for Basel III implementation. Measures Reserve Bank for migrating to advancedwere also taken to examine the implementation of approaches.countercyclical capital buffers in India. Initiatives Roadmap set for Basel III implementationhave also been undertaken to move towards adynamic provisioning framework, aligning 3.36 The Basel Committee on Bankingsecuritisation norms with international best Supervision (BCBS) issued a comprehensivepractices, adopting sound compensation practices, reform package, “Basel III: A global regulatorysetting up prudential limits on banks’ investment framework for more resilient banks and bankingin non-financial companies, checking the menace systems” in December 2010. The objective of theof money laundering/ terrorism financing activities reform package is to improve the banking sector’sand regulating foreign contributions to banks. ability to absorb shocks arising from financial and 35
  • 55. Report on Trend and Progress of Banking in India 2011-12economic stress, whatever the source, thus January 1, 2013 to January 1, 2017, duringreducing the risk of spillover from the financial which banks should strive to maintain asector to the real economy. Consequently, the minimum Tier 1 leverage ratio of 4.5 per cent.Reserve Bank issued final guidelines on Basel III The leverage ratio requirement will beimplementation in Indian banks on May 2, 2012 finalised taking into account the finalafter due consideration of the comments/ proposal of the Basel Committee.suggestions received from various stakeholders 3.38 The implementation period of Basel IIIon the draft guidelines issued on December 30, capital requirements, including capital2011. conservation buffer and regulatory deductions,3.37 The guidelines issued by the Reserve Bank will begin from January 1, 2013 and will be fullywill become effective from January 1, 2013 in a implemented by March 31, 2018, before thephased manner. In order to allow banks to prepare timeline (January 1, 2019) indicated in Basel IIIand plan and also to minimise any unintended rules. In India, implementation of Basel III hasconsequences arising out of higher capital been advanced by nine months to ensure that full implementation is co-terminus with the financialrequirements, a long phase-in period has been closure of banks (Table III.2).provided. The Basel III norms will be made fullyapplicable from March 31, 2018. 3.39 As a prudential measure, the Reserve Bank has always prescribed minimum capital adequacyThe key features of the guidelines are as follows: ratio 1 per cent higher at 9 per cent compared to(i) Minimum capital requirements: Total 8 per cent stipulated by the Basel Committee capital must be at least 9 per cent of risk- under Basel I/ Basel II capital adequacy framework. weighted assets (RWAs). Tier 1 capital must The higher prescription has served Indian banking be at least 7 per cent of RWAs; and Common system well over the years. The higher capital Equity Tier 1 (CET1) capital must be at least adequacy norms will ensure that individual banks 5.5 per cent of RWAs. are stronger and internationally competitive. The higher prescription also enhances the resilience(ii) Capital Conservation Buffer (CCB): The of the Indian banking system. It is important to CCB in the form of common equity of 2.5 per consider that banks are exposed to certain risks, cent of RWAs is required to be maintained; which cannot be properly explained and quantified. and total capital with CCB will be 11.5 per Therefore, such risks can be taken care of to a cent of RWAs. larger extent by the additional capital cushion.(iii) Leverage ratio: A non-risk-based Tier 1 Besides the Basel Committee provides flexibility leverage ratio has been prescribed. There will to national regulators in deciding the higher be a parallel run for the leverage ratio from minimum capital requirements in their respective Table III.2: Phase-wise Timeline for Basel III Implementation (Per cent of RWAs)Minimum Capital Ratios Jan 1, 2013 Mar 31, 2014 Mar 31, 2015 Mar 31, 2016 Mar 31, 2017 Mar 31, 2018Minimum Common Equity Tier 1 (CET1) 4.5 5.0 5.5 5.5 5.5 5.5Capital Conservation Buffer (CCB) - - 0.625 1.25 1.875 2.5Minimum CET1+ CCB 4.5 5.0 6.125 6.75 7.375 8.0Minimum Tier 1 Capital 6.0 6.5 7.0 7.0 7.0 7.0Minimum Total Capital 9.0 9.0 9.0 9.0 9.0 9.0Minimum Total Capital + CCB 9.0 9.0 9.625 10.25 10.875 11.5Phase-in of all deductions from CET1 (in %) 20.0 40.0 60.0 80.0 100.0 100.0 36
  • 56. Policy Environmentjurisdictions. Many regulators have prescribed theoretical model indicated by the Reserve Bank.higher capital adequacy requirements than the Other banks would have to use the standardisedminimum prescribed by the Basel Committee. calibration arrived at by the Reserve Bank.Working Group to examine countercyclical Revised guidelines on securitisation to aligncapital buffers in India with international best practices3.40 Procyclicality has been among the identified 3.42 The market for securitisation of standardunderlying causes for the recent global financial assets was growing significantly during the pre-crisis. Against this backdrop, the BCBS has financial crisis period. In order to ensure orderlyprescribed the creation of a countercyclical capital development of the market, the Reserve Bank hadbuffer to protect the banking sector from periods issued a set of guidelines on securitisation ofof excess aggregate credit growth often associated standard assets in February 2006. However,with build-up of system-wide risk. This would during the global financial crisis, market failuresenable the banking sector to have capital on hand in securitisation, particularly securitisations ofto maintain the flow of credit even during periods US subprime mortgages, played a precipitatingof system-wide stress. To operationalise the role. Though the securitisation market in India issystem of a countercyclical capital buffer in India, marked by relatively simple structures and stablean internal Working Group (Chairman: Shri B. ratings, concerns over asset quality have affectedMahapatra) has been constituted within the investor appetite for securitisation in the post-Reserve Bank to examine the appropriateness of crisis scenario.the credit-to-GDP guide and to consider other 3.43 Post-crisis, international endeavours toindicators that may be used for the capital buffer better align the incentives of the originators anddecision in the Indian context. investors of securitisation by way of regulatoryEfforts are on to move towards Dynamic changes resulted in many new regulatory proposalsProvisioning Framework being considered. The important features of such endeavours were a Minimum Holding Period3.41 In the context of the recent global financial (MHP) and Minimum Retention Requirementcrisis, there has been a growing emphasis on a (MRR). The regulations proposed that originatorsreview of the impairment-accounting framework should be allowed to securitise assets only afterfor financial assets, which is engaging the attention demonstrating a minimum recovery performanceof accounting standard-setting bodies, the Basel and the originators should continue to have aCommittee and other international bodies. To stake throughout the life of the transaction by wayaddress the pro-cyclicality of provisioning of retention of a portion of the assets securitised.requirements, efforts at the international level are In order to adopt the best international practices,being made to introduce dynamic provisioning the Reserve Bank issued revised guidelines onframework. The Reserve Bank accordingly securitisation transactions in May 2012. Theprepared a discussion paper on the dynamic guidelines have introduced norms on MHP MRR, ,provisioning framework and placed it on its prohibition of securitisation of single loans, loanwebsite on March 30, 2012. The comments and origination standards, standards of due diligence,feedback received from banks and other etc., with regard to securitisation transactions.stakeholders on the discussion paper are currently Concomitantly, the Reserve Bank has issued a setunder examination. Banks with the capability to of detailed guidelines on transactions involvingcalibrate their own parameters may, with the prior transfer of assets through direct assignment ofapproval of the Reserve Bank, introduce the cash flows and the underlying securities to dodynamic provisioning framework using the away with the possible regulatory arbitrage that 37
  • 57. Report on Trend and Progress of Banking in India 2011-12existed between the securitisation route and the experts from member jurisdictions, with regulatorydirect assignment route. or supervisory responsibility on compensation practices. The Reserve Bank is also a member ofSound compensation practices among Indian CMCG.banks Prudential limits set on banks’ investment in3.44 In the aftermath of the global financial non-financial companiescrisis, the Financial Stability Board (FSB) broughtout a set of principles and implementation 3.47 Banks’ investments in companies that arestandards on sound compensation practices in not subsidiaries are governed by Section 19(2) ofApril and September 2009, respectively. The the Banking Regulation Act, 1949. Hitherto, thereprinciples are intended to reduce incentives was no requirement for obtaining prior approvaltowards excessive risk-taking that may arise from of the Reserve Bank for such investments exceptthe structure of compensation schemes. The in cases where the investee companies wereprinciples call for effective governance of financial services companies. It was, therefore,compensation and its alignment with prudent possible that banks could, directly or indirectlyrisk-taking, effective supervisory oversight and through their holdings in other entities, exercisestakeholder engagement. Based on the FSB control on such companies or have significantprinciples for sound compensation practices, the influence over such companies and, thus, engageReserve Bank had in July 2010 placed draft in activities directly or indirectly not permitted toguidelines on compensation on its website, inviting banks under Section 6(1) of the Act. This wouldpublic comments. Meanwhile, in October 2010 be against the spirit of the provisions of the Actthe BCBS brought out a consultative paper and and is not considered appropriate from aissued the final paper in May 2011. prudential perspective. It was, therefore, decided to lay down prudential guidelines for banks’3.45 Taking into account the feedback received investments in companies that are not subsidiarieson the draft guidelines and the impact analysis and are not ‘financial services companies’. Thecarried out with the help of external consultants revised guidelines prescribe prudential limits forand methodologies prescribed by the BCBS on bank’s investments in non-financial companies inrisk alignment, the Reserve Bank issued final order to ensure that banks do not engage inguidelines in January 2012 applicable to all activities that are not permitted under the Act.private sector and foreign banks operating inIndia. The guidelines are implemented from Banks to identify/ assess risks of moneyfinancial year 2012-13. These guidelines require laundering/ financing of terrorismthe board of directors of banks to ensure effective 3.48 The Government of India constituted angovernance of compensation of employees, Anti-Money Laundering (AML)/ Combatingalignment of compensation with prudent risk- Financing of Terrorism (CFT) Risk Assessmenttaking and appropriate disclosure of compensation. Committee to present a comprehensive overviewThe banks have also been advised that, as hitherto, of AML/ CFT risk in the financial sector in aprivate sector banks and foreign banks operating consolidated manner. As recommended by thein India would be required to obtain regulatory Committee, banks/ FIs have been advised to takeapproval for grant of remuneration to their whole- steps to identify and assess their ML/ TF risk fortime directors/ Chief Executive Officers. customers, countries and geographical areas as3.46 To undertake ongoing monitoring of the also for products/ services/ transactions/ deliveryprogress in implementing the FSB principles, the channels. In this regard, banks/ FIs are requiredFSB has recently established a Compensation to have in place policies, controls and procedures,Monitoring Contact Group (CMCG) comprising duly approved by their boards, to effectively 38
  • 58. Policy Environmentmanage and mitigate their risk by adopting a risk- circulating the same instrument as cash for 6based approach and apply enhanced measures months. In compliance with the recommendationsfor products, services and customers with a of the IMG, banks were advised that with effectmedium or high risk rating. from April 1, 2012, they should not make payment of cheques/ drafts/ pay orders/ banker’s chequesForeign Contribution (Regulation) Act, 2010 bearing that date or any subsequent date, if theyto regulate receipt of foreign contributions are presented beyond the period of three months3.49 The Government of India enacted the from the date of such instrument.Foreign Contribution (Regulation) Act in 1976 to Unique Customer Identification Code (UCIC)regulate the receipt of foreign contributions and to enable better risk profiling of bankacceptance of hospitality by various entities. Over customersthe years, deficiencies in the existing Act werenoticed. Accordingly, the Government enacted the 3.51 Banks were advised to introduce UCIC fornew Foreign Contribution (Regulation) Act, 2010 their customers in India. The UCIC will help banksand notified Foreign Contribution (Regulation) to identify customers, track the facilities availedRules, 2011 framed there under, which came into of, monitor financial transactions in a holisticforce from May 1, 2011. Banks were advised to manner and enable banks to have a betterensure compliance with the relevant provisions of approach to risk profiling of customers. It wouldFCRA, 2010 through guidance under Section 36(1) also smoothen banking operations for customers.(a) of the Banking Regulation Act, 1949. The risk categorisation of customers, compilation, periodic updating of customer profiles andReduction in the validity period of cheques/ monitoring of accounts by banks are extremelydrafts important for effective implementation of KYC/3.50 The Government of India constituted an AML/ CFT measures. Banks were advised toInter-Ministerial Group (IMG) on Street Financing complete the process of risk categorisation andas there were reports of certain persons misusing compiling/ updating profiles of all their existingthe existing 6 month validity of cheques/ drafts by customers by end-March 2013 (Box III.1). Box III.1: Unique Customer Identification Code for Banks’ Customers in IndiaOne of the fundamental building blocks of financial data have voluntarily developed a Unique Customer Identificationis reference data about companies, organisations, firms Code (UCIC), in the absence of regulatory prescription, thisand individual customers. An essential component of practice was so far not followed uniformly by all banks. Areference data is a systematic structure or code that UCIC will help banks to identify a customer, track theuniquely identifies each entity/ individual. Around the facilities availed of, monitor financial transactions inglobe, regulators are considering ways to create common various accounts, improve risk profiling, take a holisticidentifiers. A unique Legal Entity Identifier is considered view of customer profiles and smoothen banking operationsideal for financial data as it assists in improving regulation for the customer. In this regard, a working group constitutedand risk management. The importance of creating a by the Government of India has proposed the introductioncommon system of identifiers has been recognised by the of unique identifiers for customers across different banksFinancial Stability Board (FSB) and G-20 Finance and financial institutions. While such a system for the entireMinisters and leaders. The FSB has been supporting the financial system is desirable, it is likely to take some timework by financial regulators and industry to establish a for a complete roll-out.single global system for uniquely associating individuals/ Against this backdrop, the Reserve Bank has advised banksinstitutions with financial transactions. to initiate steps to allot a UCIC number to all their newIn India, banks are required to follow customer identification customers to begin with. Banks have also been advised toprocedures while opening new accounts to reduce the risk allot UCIC to existing individual customers by the close ofof fraud and money laundering. While some banks in India April 2013. 39
  • 59. Report on Trend and Progress of Banking in India 2011-12Grant of new bank licenses after the Reserve Bank. IIBI is under the process ofAmendment of the BR Act, 1949 voluntary winding-up. During 2011-12, in view of the difficulties expressed by NABARD and NHB,3.52 It was announced in the Union Budget on their aggregate borrowing limit has been enhancedFebruary 26, 2010 that the Reserve Bank was to 11 times of their net owned funds (NOF) forconsidering providing additional banking licenses one year, subject to a review. Further, the aggregateto private sector players, and non banking borrowing limit for EXIM Bank has been enhancedfinancial companies could also be considered, if to 12 times of NOF for a period of one year, i. e.,they meet the required eligibility criteria. The up to August 31, 2013 due to fund constraintsReserve Bank has accordingly prepared a and thereafter it will revert back to 10 times ofdiscussion paper taking into account international NOF Additionally, borrowing under the umbrella .practices and experience with private sector limit for all four FIs has been enhanced from 100banks, and placed it in the public domain in per cent of NOF to 150 per cent of NOF for a periodAugust 2010. After examining the comments and of one year, subject to a review. The guidelines onsuggestions received from the public and holding prudential norms issued to banks are also madedetailed discussions with all the stakeholders and applicable to select all-India FIs.the Government, the draft guidelines wereprepared and placed in the public domain on 6. Supervisory PolicyAugust 29, 2011. Strengthening concurrent audit to combat3.53 The draft guidelines stipulate conditions fraudsrelating to eligible promoters, minimum capital,foreign shareholding, business model and 3.55 A study of large-value frauds, includingdesirable corporate structure and governance frauds under housing loan segment, reported bystandards of the applicant group. As indicated in banks to the Reserve Bank was undertaken tothe draft guidelines, certain amendments to the identify gaps in the control mechanism thatBanking Regulation Act, 1949 are under contributed to the perpetration of these frauds,consideration by the Government of India particularly when the branches were also underincluding a few that are vital for finalisation and concurrent audit. It was observed that a largeimplementation of the policy for licensing new number of frauds were perpetrated on accountbanks in the private sector. The final guidelines of the submission of forged documents bywill be issued and the process of inviting borrowers, which had been certified byapplications for setting up new banks in the professionals, i.e., valuers/ advocates/ charteredprivate sector will be initiated only after the accountants. In light of the findings of the study,Banking Regulation Act is amended. banks were advised to enhance the efficacy of concurrent audit, inter alia, to ensure verificationEnhancement of borrowing limit for FIs of title documents, especially for large-value3.54 As at end-March 2012, there were five loans; seek verification reports from local revenuefinancial institutions (FIs) under the regulation of authorities in the case of loans against the securitythe Reserve Bank, viz., EXIM Bank, NABARD, of land; conduct independent verification of theNational Housing Bank (NHB), Small Industries’ authenticity of chartered accountants’ certificates,Development Bank of India (SIDBI) and Industrial property valuation certificates and legal certificatesInvestment Bank of India (IIBI). Of these, four FIs submitted by the borrower; and inculcate internal(EXIM Bank, NABARD, NHB and SIDBI) are under discipline, staff rotation, and a system of checksfull-fledged regulation and supervision of the and balances. 40
  • 60. Policy EnvironmentA new return to capture interest rate HLSC recommends a risk-based supervisorysensitivity of banks approach for banks3.56 In terms of a notification dated November 3.58 The banking sector in India has witnessed4, 2010, a new return was introduced under DSB considerable changes in recent years withreturns to capture banks’ interest rate sensitivity significant growth in size, number and complexitiesunder Duration Gap Analysis (economic value in the banking business. To improve the qualityperspective) with effect from the quarter ended of the Reserve Bank’s supervisory processes/June 2011. The format of the extant report of the techniques and benchmark them with global bestinterest rate sensitivity under Traditional Gap practices, the Reserve Bank had set up a High-Analysis (earnings perspective) has also been Level Steering Committee (HLSC) (Chairman: Dr.revised to capture the global position and the K. C. Chakrabarty), which submitted its reportrelevant currencies (against the existing reporting on June 11, 2012. The HLSC has recommendedof domestic position and the Indian rupee). measures to transform the extant supervisoryBFS initiatives to strengthen the supervisory approach of examining past performance throughsystem of banks a transaction-testing based (CAMELS) framework to a risk-based approach using trend analysis to3.57 The Board for Financial Supervision find risk drivers and predict the path and passage(BFS), constituted in November 1994, has been of risks in the banks’ books. The present ‘one sizethe chief guiding force behind the Reserve Bank’s fits all approach’ of annual financial inspectionsupervisory and regulatory initiatives. The BFS of banks is intended to be replaced with ahad 10 meetings during the period July 2011 to continuous supervision approach that is basedJune 2012. The BFS examined, inter alia, theperformance and the financial position of banks on the risks posed by the bank to the supervisoryand financial institutions during 2009-10 and objectives. The supervisory stance of the Reserve2010-11, besides reviewing memorandum on Bank based on the position of the bank in theinspection reports. It reviewed memorandum on risk matrix could be one of four - “Baseline88 inspection reports of banks/ FIs. The BFS also Monitoring”, “Close Monitoring”, “Active Oversight”reviewed summaries of inspection reports/ and “Corrective Action” - and would comprisefinancial highlights pertaining to scheduled urban specific supervisory actions to be initiated by theco-operative banks. Keeping in view the directions supervisor during the supervisory cycle. The riskof the BFS, various initiatives were taken to assessment and the supervisory actions arestrengthen the supervisory system of banks such intended to enable identification of risks andas reviewing the coverage of the Annual Financial effective intervention at an early stage so as toInspection Reports and putting in place a revised minimise losses/ potential disruptions to theformat and the new guidelines; conducting banking system. Overall, the Committee’sthematic reviews on areas like real estate and recommendations are intended to encourageKYC/ AML and appraising their findings to BFS; banks to adopt risk-based business conductadvising the foreign banks that the CEO should within an indicative timeframe through a systembe held responsible for effective oversight over of incentives and disincentives. The Committee’sthe audit process and its compliance; and recommendations are under examination foradvising banks not to include stamp duty, implementation. As a first step, banks have beenregistration and other documentation charges for advised of the decision to make transition to aarriving at the eligible bank finance as these risk based approach to supervision from the nextcharges are not realisable. supervisory cycle (2013-14). They have been 41
  • 61. Report on Trend and Progress of Banking in India 2011-12advised to assess the status of their risk to recapitalise the RRBs by infusing funds to themanagement architecture, culture, practices and extent of ` 22 billion. The shareholder-wise GoI/related processes against certain essential sponsor banks/ State Governments proportionrequirements identified for the introduction of and amount is 50:35:15 and `11 billion: `8 billion:risk based supervision. `3 billion, respectively. The Government of India made a budgetary provision of `5 billion for theStrengthening supervisory/ regulatory financial year 2011-12 for this purpose.framework for financial conglomerates underFSDC umbrella 3.61 An amount of `10 billion was released to 27 RRBs in 16 States as on March 31, 2012. The3.59 One of the mandates for the Financial recapitalisation is complete in respect of 16 RRBsStability and Development Council (FSDC) and (in Odisha, Madhya Pradesh, Uttaranchal, Assam,its sub-Committee is supervision of Financial Arunachal Pradesh, Nagaland, Tripura, JammuConglomerates (FCs). To institutionalise the and Kashmir and Karnataka). Six Stateframework for supervision of FCs and monitoring Governments (Manipur, Uttar Pradesh, Westand management of systemic risks emanating Bengal, Rajasthan, Mizoram and Jammu andfrom the activities of FCs, the Sub-Committee of Kashmir) have not released any amount in respectthe FSDC has approved the creation of an Inter- of 13 RRBs. Among the 16 fully recapitalisedRegulatory Forum under the Chairmanship of the RRBs, as on March 31, 2012, 12 have achievedDeputy Governor, Reserve Bank with Executive the stipulated CRAR of 9 per cent. Further, of theDirector-level membership from other peer 82 RRBs, 15 RRBs have failed to achieve theregulatory/ supervisory agencies. The Inter- stipulated CRAR level.Regulatory Forum would be responsible forframing policies for the FCs (such as identification, Branch expansion of RRBs to promote thegroup-wide risk management, group-wide capital agenda of financial inclusionadequacy and corporate governance) as well as 3.62 As part of the strategy to promote financialfor conducting high-level supervision of FCs. The inclusion, the RRBs were advised to undertake anForum would also try to strengthen the supervisory aggressive branch expansion programme,co-ordination/ co-operation mechanism among particularly in hitherto unbanked areas. With thethe domestic supervisors for effective supervision help of technology and the consolidation of RRBs,of FCs. staff can be judiciously deployed in branches in the expansion plan. As on March 31, 2012, RRBs7. Regional Rural Banks had a network of 16,914 branches. As per theRecapitalisation to revive the financial advice of the Government of India, RRBs were toposition of RRBs open 2,000 branches in two years, i.e., 2010-11 and 2011-12. Against this, RRBs have opened 5213.60 On accepting the recommendations of the branches during 2010-11 and 913 branchesCommittee (Chairman: Dr. K. C. Chakrabarty) to during 2011-12 and have fallen short of the the current level of capital to risk-weighted The Government of India has advised all sponsorassets ratio (CRAR) of RRBs and to suggest a banks of RRBs that 10 per cent of the existingroadmap for enhancing the same to 9 per cent by RRB branch network will be the target for the yearMarch 31, 2012, the Government of India 2012-13. Accordingly, RRBs will be required toannounced a Recapitalisation Programme in 40 open 1,700 branches during the year 2012-13.of the 82 RRBs to ensure that their CRAR levelreaches 9 per cent by March 2012. The Government 3.63 Under the agenda of financial inclusion,of India, along with other shareholders, decided 73,000 villages that are not covered by any bank 42
  • 62. Policy Environmentand have a population of 2,000 and above were dwelling unit; those in the Tier II category wereto be covered by RRBs through ICT-enabled permitted to extend individual housing loans uptoBusiness Correspondents by March 31, 2012. a maximum of `7.0 million per beneficiary of aRRBs have been allocated 20,000 villages and, at dwelling unit, subject to extant prudentialplaces where it is not viable to open a brick-and- exposure limits. Based on the representationsmortar branch, the banks may start with Ultra- received from the UCB sector, the maximumSmall Branches (USBs); thereafter, at places repayment period of housing loans granted bywhere the bank reaches the desired level of UCBs was revised from the present 15 years tobusiness, the Ultra-Small Branches can be 20 years.upgraded into regular bank branches. Extension of interest rate subvention onSupervisory and regulatory initiatives for Rupee export creditRRBs 3.67 With a view to encouraging exports in3.64 During the year 2011-12, several policy certain specified sectors, the Government of Indiainitiatives were undertaken on supervision related decided to extend interest subvention of 2 per centmatters of RRBs. These measures include revised on rupee export credit for these sectors.guidelines to improve the fraud monitoring and Accordingly, the AD category 1 UCBs were advisedreporting system; circulation of modus operandi of the decision to extend interest subvention of 2of attempted fraud and best practices followed by per cent on pre-shipment and post-shipmentsome banks to strengthen the internal checks and Rupee export credit to these sectors from April 1,control systems; conducting sensitisation 2011 to March 31, 2012 and from April 1, 2012workshops covering aspects related to to March 31, 2013, respectively.implementation of KYC guidelines; ensuring Grant of NDS-OM membership to UCBscompliance with the provisions of the Prevention 3.68 NDS-OM is a screen-based electronicof Money Laundering Act; internal checks and anonymous order matching system for secondarycontrol system; corporate governance; and asset market trading in government securities ownedliability management. by the Reserve Bank. At present, membership is open to entities like banks, primary dealers,8. Co-operative Banks insurance companies and mutual funds. UCBsUrban Co-operative Banks that fulfill certain eligibility criteria were allowed direct access to the negotiated dealing systemInternet banking permitted for eligible UCBs (NDS) order matching (OM), subject to obtaining3.65 Scheduled UCBs that have a minimum net prior approval from the Reserve Bank.worth of `1 billion, CRAR of at least 10 per cent, Submission of credit information to CIBILnet NPA less than 5 per cent and have earned net and other credit information companiesprofit continuously in the last three financial yearswere allowed to offer an internet banking facility 3.69 UCBs were advised to submit quarterly, awith the approval of the Reserve Bank so as to list of suit-filed accounts of `10.0 million andenable them to serve their customers better. above that were classified as doubtful or loss and a list of suit-filed accounts of willful defaulters ofRevision in housing loan limits and repayment `2.5 million and above to the Credit Informationperiod Bureau of India Limited (CIBIL) and/ or any other3.66 UCBs in the Tier I category were permitted credit information company that has obtained ato extend individual housing loans upto a Certificate of Registration (CoR) from the Reservemaximum of `3.0 million per beneficiary of Bank and of which the bank is a member. 43
  • 63. Report on Trend and Progress of Banking in India 2011-12Supervisory Action Framework for UCBs (NBFCs) against gold in the recent period. There are also complaints that some NBFCs are not3.70 The Reserve Bank monitors and initiates scrupulously following the proper documentationsupervisory actions based on its assessment of process and KYC norms, among others, in orderthe financial position of UCBs. A Supervisory to quickly dispose of the cases relating to goldAction Framework was introduced for UCBs with loans. Gold imports have also increased sharply,effect from March 1, 2012. The framework raising macroeconomic concerns. To undertake aenvisages self-corrective action by the management detailed study of these aspects, a Working Groupof the UCBs themselves in the initial stage of (Convener: Shri K. U. B. Rao) was constituted. Thedeterioration in the financial position and major terms of reference of the Group were: (i) tosupervisory action by the Reserve Bank in case assess the trends in demand for gold loans andthe financial position of the bank does not how they have influenced gold imports; (ii) toimprove. analyse the implications of gold imports forConvergence of IAS with IFRS standards external and financial stability; (iii) to study the3.71 As announced in the Annual Monetary trends in gold prices and to examine whetherPolicy Statement 2010-11, UCBs with net worth NBFCs that extend gold loans play any role inin excess of `3 billion were advised to take influencing the price of gold; (iv) to examine thenecessary steps to ensure that they are in sources of funds of NBFCs for gold loans,readiness to adopt the Indian Accounting especially their borrowings from the bankingStandards (IAS) converged with International system; and (v) to examine the current practicesFinancial Reporting Standards (IFRS) from April of NBFCs involved in lending against the collateral1, 2013 and those with net worth in excess of `2 of gold. The Working Group submitted its Reportbillion but not exceeding `3 billion from April 1, in August 2012.2014. 10. Customer Service in BanksRevision of UCBs exposure to housing/commercial real estate loans Implementation of the Damodaran Committee recommendations to improve customer3.72 The UCBs were earlier permitted to service in banksassume aggregate exposure on real estate,commercial real estate and housing loans upto a 3.74 The Committee on Customer Service inmaximum of 10 per cent of their total assets, with Banks (Chairman: Shri M. Damodaran) submittedan additional limit of 5 per cent of their total assets its report in July 2011. The Committee made afor housing loans upto `1.5 million. It was decided total of 232 recommendations, of which 152to permit UCBs to utilise the additional limit of 5 recommendations have since been implemented.per cent of their total assets for granting housing The Reserve Bank has held discussions with theloans up to `2.5 million, so that all priority sector IBA, the Banking Codes and Standards Board ofhousing loans are covered under this additional India (BCSBI), the Institute for Development andlimit. Research in Banking Technology (IDRBT) and the National Payment Corporation of India (NPCI) to9. Non-Banking Financial Companies work out the modalities for taking forward the implementation of the remaining recommendations.Working Group to examine issues relating to The IBA has now constituted a sub-group togold loans examine the implementation of the remaining3.73 There has been a significant increase in recommendations after studying the relevantloans by Non-Banking Financial Companies international standards and best practices. 44
  • 64. Policy EnvironmentAbolition of foreclosure charges to lead to would also take care of customer grievancesbetter pricing of home loans regarding charges for non-maintenance of a minimum balance.3.75 The Committee on Customer Service inBanks (Chairman: Shri M. Damodaran) observed Banks to ensure minimal variation in interestthat foreclosure charges levied by banks on rates on depositsprepayment of home loans were resented by home 3.77 Despite the stipulation by the Reserve Bankloan borrowers across the board, especially since that banks should not discriminate in the interestbanks were found to be hesitant in passing on the rate paid on deposits, except in respect of fixedbenefits of lower interest rates to existing deposit schemes specifically meant for residentborrowers in a falling interest rate scenario. As Indian senior citizens and single term deposits ofsuch, foreclosure charges were seen as a restrictive `1.5 million and above, wide variations werepractice that deterred borrowers from switching observed in banks’ retail and bulk deposit rates,to a cheaper available source. It was, therefore, making it unfair to retail depositors. Banks weredecided that banks would not be permitted to also offering significantly different rates oncharge foreclosure charges/ pre-payment penalties deposits with very little difference in maturities.on home loans on a floating interest rate basis, This suggested an inadequate liquidity managementwith immediate effect. The removal of foreclosure system and inadequate pricing methodologiescharges on home loans will lead to a reduction in among banks. In the Annual Monetary Policythe discrimination between existing and new Statement 2012-13, the Reserve Bank, therefore,borrowers, and the competition among banks will announced that banks should have a Board-result in finer pricing of home loans with the approved transparent policy on pricing offloating rate. liabilities and they should also ensure that variation in interest rates on single term depositsBanks to offer basic savings bank deposit of `1.5 million and above and other term depositsaccount to all customers is minimal.3.76 To take forward the agenda of financial Facilitating intra-bank deposit accountsinclusion, in November 2005, the Reserve Bank portabilityadvised the banks to make available a basic 3.78 Some banks were insisting that customersbanking ‘no-frills’ account with either ‘nil’ or very open a fresh account when the customer requestedlow minimum balance as well as charges that a transfer of account from one branch to anotherwould make such accounts accessible to vast branch of the same bank. This practice, whichsections of the population. The experience since required the customer to undergo KYC procedurethe introduction of ‘no frills’ accounts highlights again, was causing inconvenience, resulting inthe fact that banks had taken this initiative more poor customer service. Under the core bankingto achieve their targets on compliance. On a review, solution environment, this practice was notit was decided to modify the guidelines on opening reasonable. Banks were, therefore, advised thatof basic banking ‘no-frills’ accounts and make if full KYC was done by one branch of the bank,basic banking facilities available in a more uniform it should be valid for transfer of the account withinmanner across the banking system. In the Annual the bank. The customer should be allowed toMonetary Policy Statement 2012-13, it was transfer his/ her account from one branch toannounced that banks should offer a ‘basic savings another branch without restrictions. In order tobank deposit account’ with certain minimum comply with KYC requirements of correct addresscommon facilities and without the requirement of of the person, fresh address proof may be obtaineda minimum balance to all their customers. This upon such transfer by the transferee branch. 45
  • 65. Report on Trend and Progress of Banking in India 2011-12Banks to levy fair service charges for of the INR against the USD by more than 20 peroutstation cheques and speed clearing cent since August 2011, a number of administrative3.79 The Reserve Bank accorded banks the measures were initiated by the Reserve Bank onfreedom to determine collection charges for December 15, 2011 such as withdrawing thecheques valuing above `0.1 million cleared facility of cancellation and rebooking of contractsthrough speed clearing and the out-station cheque available under contracted exposure to residentsclearing mechanism, subject to such charges being and foreign institutional investors (FIIs); reducinglevied in a fair and transparent manner. The term the limit under past performance facility for‘fair and transparent manner’, inter-alia, included importers to 25 per cent of the current limitfixing the service charges on a cost-plus basis. available; making the past performance facilityHowever, there were instances of banks levying available to exporters and importers only oncharges as an arbitrary percentage of the value of delivery basis; making all transactions by the ADsthe instrument. The Reserve Bank, therefore, on behalf of clients be undertaken for actualadvised such banks to review and fix the charges remittances/ delivery only, which could not beon a cost-plus basis. Banks were also advised to cancelled/ cash settled; reducing the Net Overnightensure that the collection charge fixed for Open Position Limit (NOOPL) of ADs; andinstruments valuing `0.1 million is lower under specifying that the intra-day position/ daylightspeed clearing vis-à-vis out-station cheque limit of ADs should not exceed the existing NOOPLcollection, so as to encourage the use of speed approved by the Reserve Bank.clearing. 3.82 Guidelines were also issued on May 10, 2012, stipulating that out of the balances in the11. Financial Markets Exchange Earners’ Foreign Currency (EEFC)Steps to strengthen the PD system accounts, 50 per cent should be converted3.80 Various policy initiatives were taken during forthwith into rupee balances and credited to thethe year 2011-12 to strengthen the primary rupee accounts within a fortnight. Further, indealers (PDs) system. Final guidelines on the respect of all future forex earnings, an exchangeauthorisation of PDs were issued on August 30, earner is eligible to retain 50 per cent (as against2011, covering, inter-alia, seasoning requirement the previous limit of 100 per cent) in non-interest-to become PDs, minimum turnover in government bearing EEFC accounts. The balance 50 per centsecurities on behalf of mid-segment and retail shall be surrendered for conversion to rupeeinvestors and the exit/ termination process. With balances.a view to providing market participants a tool to 3.83 The Reserve Bank initiated furthertransfer and manage the credit risk associated measures to contain volatility in the foreignwith corporate bonds, the Reserve Bank introduced exchange market on May 21, 2012. TheseCredit Default Swaps (CDS) on corporate bonds include: the current NOOPL of the banks asin November 2011. Standalone PDs can undertake applicable to the positions involving the Rupeetransactions in CDS, both as market-makers as as one of the currencies shall not include thewell as users. As a user, a PD can use CDS to hedgecredit risk in corporate bonds held in its trading positions undertaken in the currency futures/book. options segment in the exchanges; the positions in the exchanges cannot be netted/ offset byAdministrative steps to curb volatility in the undertaking positions in the OTC market andforex market vice versa; the positions initiated in the exchanges3.81 In view of the volatility in the Indian forex shall be liquidated/ closed in the exchanges only;market during 2011-12, especially the depreciation and the position limit for the trading member AD 46
  • 66. Policy EnvironmentCategory I bank in the exchanges for trading relating to remittance towards participation incurrency futures and options to be US$ 100 lottery, money circulation schemes and othermillion or 15 per cent of the outstanding open fictitious offers of cheap funds. Co-operativeinterest, whichever is lower. In order to provide banks have also been sensitised in the matter.some operational flexibility to exporters, theywere allowed to cancel and rebook 25 per cent 12. Payment and Settlement Systemsof the total contracts booked for hedging their 3.87 The regulatory initiatives of the Reserveexport exposure on July 31, 2012. Bank during the year were guided by the mission3.84 Further, on a review on July 31, 2012, it statement laid down in the Payment Visionwas decided to restore the erstwhile stipulation Document 2009-12. The major policy initiativesof allowing credit of 100 per cent foreign exchange taken during the year include the following.earnings to the EEFC account subject to the Express cheque clearing systemcondition that the sum total of the accruals in the operationalisedaccount during a calendar month should beconverted into Rupees on or before the last day of 3.88 The Express Cheque Clearing Systemthe succeeding calendar month after adjusting for (ECCS) introduced in 2011 for non-MICR1 clearingutilisation of the balances for approved purposes houses with the facility of speed clearing for out-or forward commitments. station cheques has been operationalised at 1,170Caution against fictitious offers like cheap out of 1,241 centres (as on June 30, 2012).funds/ lottery winnings from abroad Expansion of Cheque Truncation System3.85 The Reserve Bank has launched several (CTS)public awareness campaigns to fight the menace 3.89 The scope of the CTS was expanded byof fictitious offers of cheap funds from abroad introducing grid-based CTS in Chennai. The gridthrough advertisements in the electronic and print clearing allows banks to present/ receive chequesmedia, letters to colleges/ schools and interactive/ to/ from multiple cities to a single clearing housetraining sessions with police personnel by the through their service branches in the Chennai gridRegional Offices. The Reserve Bank has given the location. The pan-India roadmap for rolling outlist of nodal agencies with whom the public can the grid-based CTS across the country has alsoregister complaints on its website. In this regard, been finalised by NPCI, which has been entrusteda detailed Press Release was issued on February with this task.6, 2012. It has also been decided to includefictitious offers as one of the agenda items of the Access criteria revised to enable wider accessState Level Security Committee Meeting. Campaign to electronic payment systemsagainst fictitious offers has been included as part 3.90 In order to facilitate wider access toof the outreach programme of the Bank. payment systems and strengthen the risk3.86 The IBA has been advised to publicise the management framework, the access criteria wereissue among member banks. All SCBs have been revised in September 2011. Two sets of accessadvised that they would be held responsible for criteria, viz., one for centralised payment systemslosses incurred by customers if they are found to and the other for decentralised payment systems,be in violation of the regulations, KYC/ AML and/ were accordingly laid down. The revised andor other regulatory/ statutory requirements rationalised criteria enable access to both 1 Clearing house where cheque sorting is not mechanised. 47
  • 67. Report on Trend and Progress of Banking in India 2011-12centralised and decentralised payment systems issued in electronic form with minimum detailsbased on CRAR, NPA , networth and the of the customer, (b) instruments from `10,001 torecommendation of the regulatory department. `50,000 can be issued in electronic but non-Under the new access criteria, approval has been reloadable form by accepting any ‘officially validaccorded to 53 banks as on June 30, 2012 for document’ defined under the Prevention of Moneybecoming members of the centralised payment Laundering Act, and (c) instruments up to `50,000systems. A sub-membership route was also with full KYC can be reloadable in nature. Theintroduced in April 2012 to enable all licensed extant domestic fund transfer scheme was alsobanks to participate in the centralised payment rationalised to enable person to person fundsystems. This was in addition to the facility transfer. Simultaneously, the escrow mechanismprovided to RRBs to participate in National has been strengthened by mandating the non-bank entities that the escrow account should be creditedElectronic Fund Transfer (NEFT) through their immediately as and when the issuer/ agent/Sponsor banks. As on June 2012, 71 out of 82 distributor sells a PPI to the end-user. It has beenRRBs (12,000 RRB branches) were participating reiterated that the balances in the escrow accountin NEFT. should be adequate to cover the outstanding3.91 Banks that were managing clearing houses/ balances on the PPIs with end-users and theprocessing centres were permitted to levy obligations to merchants arising out of the usageprocessing charges with effect from July 2011 of PPIs by the end users at any given point of time.from the originating banks. Service charges for Promotion of mobile banking to step upoutward transactions in the RTGS System were financial inclusionalso introduced from October 2011. 3.93 Mobile banking transactions refer toCriterion for pre-paid payment instruments banking transactions through mobile phones byrelaxed to provide impetus to alternate bank customers that involve credit/ debit to theirpayment channels accounts. To enhance usage through mobile3.92 The guidelines for pre-paid payment banking, the threshold limit of transactionsinstruments (PPIs) were first issued in the year permitted without end-to-end encryption was2009. During the year 2011-12, around 591 raised from `1,000 to `5,000. Further, the limitmillion PPIs were issued for a value of over `70 of `50,000 per transaction was done away withbillion. The average monthly issuance of PPIs was by permitting banks to fix the limits based on their own risk perception. With “for-profit”about 49 million for a value of `6 billion. The companies being allowed to act as Businessgrowth in the issuance of PPIs is yet to gain Correspondents, which include mobile networksubstantial traction. In order to provide impetus operators (MNOs), it is expected that this uniqueto this payment channel, the following relaxations bank-MNO partnership model being piloted inwere effected: (i) mobile wallets (a category of India will provide a boost to mobile payments andPPIs), that could earlier be issued up to `5000 help in financial inclusion, given the wide networkwere brought on par with other PPIs by raising of the MNOs in terms of providing mobile servicesthe limit to `50,000; (ii) banks were permitted to to their customers.issue PPIs to listed corporates, with the verificationof employee identity being the responsibility of the White Label ATMs to provide access in un-corporate concerned. Additionally, rationalisation banked/ under-banked areasin the categorisation and value limits of PPIs was 3.94 To deepen the ATM infrastructure in theeffected by introducing three broad categories country especially in Tier III to Tier VI centres,such as (a) instruments up to `10,000 can be non-banks have been permitted to set up, own 48
  • 68. Policy Environmentand operate White-label ATMs (WLAs) in India. the domestic money transfer guidelines wereTo operate WLAs, entities need to obtain relaxed in October 2011 to provide for fundauthorisation from the Reserve Bank as laid transfer without the need for bank accounts atdown under the Payment and Settlement Systems both ends. (For details refer to Box. No. IX.1 ofAct, 2007. They can choose any one of the three the Annual Report 2011-12)schemes as laid down in the guidelines. To spread Payment Systems in India: Vision 2012-2015the ATM infrastructure in under-banked areas, aims to make payment system safe, secureit has been mandated that 10 per cent of the new and inclusiveWLAs under any scheme must be installed in TierV and VI centres. This initiative is expected to 3.96 The Payment System Vision Documentexpand the availability of access points for 2012-15 has been released. The document setspayment services (Box III.2). out the path for the period 2012-15 to enable the payment systems to meet the growing paymentEnabling migrant population to access the needs of the country. Towards this end, the Visionformal money transfer system Document outlines the course of action over the3.95 To bring in the migrant population that is three-year period to make the payment systemsfinancially excluded into the formal banking fold, in the country safe, efficient, inter-operable, Box III.2: White-Label ATMs (WLAs)The Automated Teller Machine (ATM) has been hailed as any aspect related to the operation of such ATMs, includingone of the most innovative and revolutionary technological cash loading.developments in the history of banking. The channel, which Under both models, an additional important revenuewas initially a medium for disbursal of cash to customers source is through on-site advertisements. A large portionat bank branches, has now developed into a touch-point for of the revenue for the IAD/ ISO is generated through suchdelivery of a wide variety of banking services at branches advertisements.and convenient off-site locations. Though banks initiallyowned and deployed their own ATMs, over time this has ATMs and WLA Scheme in Indiaundergone a broad change, with banks now preferring The number of ATMs in the country stands at 98,074, ofoutsourcing all or many of the activities associated with which 38 per cent are owned by private sector banks, 33ATM operations - starting from deployment, maintenance, per cent by public sector banks, 27 per cent by the SBI andcash loading and technology upgrading. This has helped Associates, and 2 per cent by foreign banks. There has beenthem reduce their operational costs and stay more focused a 30 per cent year-on-year growth in the number of ATMson their core business. deployed in the country since 2008, but the penetrationInternationally, in addition to bank-owned and deployed of ATMs in Tier III to Tier VI centres remains below theATMs, Independent ATM Deployers (IADs) and Independent desired level. In order to ensure deeper penetration of ATMsService Organisations (ISOs) are engaged in the ATM in unbanked/ under-banked areas, the Reserve Bank hasbusiness. Such ATMs are called White-label ATMs (WLAs). permitted White-Label ATMs in the country to supplementIADs and ISOs are almost similar in their operations, the existing ATM schemes operated by banks. Under thebarring the following differences: policy guidelines, non-bank entities incorporated in India under the Companies Act, 1956 would be authorised to(i) ISOs are usually larger operators that own and deploy set up, own and operate ATMs in India, which will provideATMs and the entire related infrastructure. They have a banking services to the customers of banks in India, basedsponsorship arrangement with the banks for cash loading on the cards (debit/ credit/ pre-paid) issued by banks. Suchand services. The relationships with sponsor banks are non-bank entities should have a minimum net worth of `1guided by local regulatory requirements. The ISO scheme billion as per the latest financial year’s audited balanceworks either through a single sponsor bank or the multi- sheet, which is to be maintained at all times. The modelsponsor bank model. envisages that cash management and customer redressal(ii) In the IAD model, the entities concentrate on investment would continue to be the responsibility of the sponsorin the assets (ATMs). They own the ATM and connect to any banks. The scheme offers scope for large volumes,existing network provider for the payment infrastructure. especially in unbanked/ under-banked areas. It is expectedThe IADs can include entities ranging from individual that WLA operators in India will use the features of the IADbusiness owners to large retail outlets/ supermarkets. Such and ISO models, as permitted under the guidelines, andentities do not have a direct arrangement with any bank for collaborate closely with the sponsor banks. 49
  • 69. Report on Trend and Progress of Banking in India 2011-12authorised, accessible, inclusive and compliant approval of their Board/ Top Management forwith international standards. The vision proactively BCP/ DR/ VAPT calendars.aims to encourage electronic payment systems for Putting in place appropriate frameworks forushering in a less-cash society in the country. IT and IS governanceOversight of payment and settlement systems 3.99 As announced in the Annual Monetary3.97 The Reserve Bank exercises and carries Policy Statement 2012-13, adoption of well-out its oversight functions, through on-site structured IT governance models will assist banksinspections, off-site surveillance complemented in enabling better alignment between IT andby market intelligence under the powers derived business, create efficiencies, enhance conformityunder the Payment and Settlement Systems Act, to internationally accepted best practices and2007. Eleven entities including the National improve overall IT performance, as also enablePayments Corporation of India (NPCI) were better control and security. In order to achieveinspected during 2011-12. As a part of the off-site these objectives, banks need to move towardssurveillance mechanism, data pertaining to adoption of well-structured IT governance models.payment systems are being collected in structured Further, banks are increasingly relying on varioustemplates through the Online Return Filing IT based channels to operate their businesses andSystem (ORFS). market interactions. Ability of banks to take advantage of new opportunities is largely contingent13. Technological Developments upon their capability to provide accessible and secure service channels. However, this would alsoBanks conduct business continuity/ increase their exposure to technology andvulnerability assessment and penetration operational risks, which have potential implicationstests for individual banks as also for the entire financial3.98 Today technology plays a very important sector. Adoption of comprehensive informationrole in driving banking business. In view of the security (IS) frameworks suiting the prevalentincreasing dependence on technology, managing banking environment, business goals, processes,business continuity remains a challenge for people and technology will be imperative to meetoverall financial stability. It is, therefore, these challenges. Therefore, banks have beenimportant for the banks to put in place appropriate advised to take suitable steps to adopt appropriateBusiness Continuity Plan (BCP). Further, in order frameworks for IT and IS governance and put into test their CBS and other internal systems to place the proper structure and systems, whichhandle unforeseen disruptions, it is important would ensure that the issues relating to governance,for the banks to conduct Disaster Recovery (DR) information security and business continuity getDrills on a regular basis. It is also important that adequate attention at the Board level.these arrangements are subject to periodictesting. Further, considering that cyber attacks 14. Banking Sector Legislationcould threaten the confidentiality, integrity and 3.100 During the year, a number of legislativeavailability of data and the systems, it is changes were initiated to review the laws pertainingimperative for the banks to conduct Vulnerability to the banking sector. The most importantAssessment and Penetration (VAPT) Tests development has been the move towards settingperiodically to prevent any such attacks. This up the Financial Sector Legislative Reformsinformation is received by the Reserve Bank on Commission, which would pave the way for thea quarterly basis; the summary of which is taken examination and review of the extant architectureas an input for the Financial Stability Report. of the legislative and regulatory system governingBanks have also been advised to obtain the the financial sector in India. 50
  • 70. Policy Environment(A) Factoring Regulation Act, 2011 billion to `100 billion. It also provides for the appointment of two whole-time directors by the3.101 The Factoring Regulation Act, 2011 came Central Government to the Board of EXIM Bank.into force on April 2, 2012. The Act provides aregulatory framework under which factors would (D) The Constitution (97th Amendment) Act,be required to register with the Reserve Bank. The 2011 to promote democratic and professionalReserve Bank has been empowered to issue management of co-operativesdirections, call for information and prohibit 3.104 T h e C o n s t i t u t i o n ( N i n e t y - s e v e n t hfinancial institutions from undertaking factoring Amendment) Act, 2011 came into force onbusiness if they fail to comply with its directions. February 15, 2012. The Act adds a new DirectivePenalties are provided for non-compliance with Principle of State Policy, which requires the Statethe directions of the Reserve Bank. It enables any to promote voluntary formation, autonomouscompany, big or small, to register with the Reserve functioning, democratic control and professionalBank for conducting the business of factoring, management of co-operative societies. Part IX Bwhich is made subject to the provisions of Chapter in the Constitution empowers Parliament inIIIB of the Reserve Bank of India Act, 1934 as well respect of Multi-State Co-operative Societies andas the Factoring Regulation Act. It is expected that State legislatures in the case of other co-operativefinancing against receivables will pick up with the societies to make an appropriate law for therequired registration of assignments with the incorporation, regulation and winding up ofCentral Registry (constituted under the SARFAESI co-operative societies. This law would be basedAct, 2002). This will reduce the risk in multiple on the principles of democratic member-control,financing against the same receivables and is a member-economic participation and autonomoussignificant milestone towards fewer NPAs for functioning, and would specify that the maximumbanks. Even companies that do not have financial number of directors of a co-operative societyactivity as their principal activity would now come should not exceed 21 members with a fixed tenurewithin the regulatory ambit of the Reserve Bank. of five years from the date of election in respect(B) The Coinage Act, 2011 consolidates laws of the elected members of the Board and its officerelating to Coinage and Mints bearers. The State Legislature will have to ensure3.102 The Coinage Act, 2011 came into force on that the State laws adhere to the principles laidMarch 28, 2012. The Act seeks to consolidate the down in the Constitution and State interferencelaws relating to Coinage and the Mints, and repeals will be reduced. The Amendment states that thethe earlier Coinage Acts. It prohibits the making, provisions of the Banking Regulation Act, 1949melting or destroying of coins except by persons relating to supersession and suspension of theauthorised by the Government of India and Board of Directors will be applicable toprescribes penalties for contravention of these co-operative societies that carry out bankingprovisions. Bringing in a piece of metal to be used a coin by sea, land or air without the permission (E) Enforcement of the Security Interest andof the Government continues to be prohibited. Recovery of Debts Laws (Amendment) Bill,(C) The EXIM Bank (Amendment) Act, 2011 2011strengthens its capital base 3.105 This Bill was introduced in the Lok Sabha3.103 T h e E x p o r t- I m p o r t B a n k o f I n d i a on December 12, 2011 and is pending. It seeks to(Amendment) Act, 2011 came into force on amend the Securitisation and Reconstruction ofFebruary 1, 2012. The Act provides for an increase Financial Assets and Enforcement of Securityin the authorised capital of EXIM Bank from ` 20 Interest Act, 2002 and the Recovery of Debts Due 51
  • 71. Report on Trend and Progress of Banking in India 2011-12to Banks and Financial Institutions Act, 1993. The 15. Overall AssessmentBill empowers banks and financial institutions to 3.108 The banking sector policy during 2011-12accept the immovable property in full or partialsatisfaction of the bank’s claim against the was attuned to the broader objectives ofdefaulting borrower when they cannot find a buyer macroeconomic policy, such as price stability,for the securities. The measures for recovery growth, broader financial and banking sectorthrough the Debt Recovery Tribunal (DRT), which development, while ensuring uninterrupted credithad not been available to multi-state co-operative flow to the productive sectors of the economy. Inbanks, are now made available by including multi- the context of weakening domestic macroeconomicstate co-operative banks under the definition of conditions, the Reserve Bank had to maintain a‘bank’ in DRT Act, thereby providing them the fine balance between price stability and growth.option of an additional effective recovery The Reserve Bank undertook several measures tomechanism apart from the mechanism available maintain adequate liquidity in the system tounder the Multi-State Co-operative Societies Act, ensure smooth functioning of the financial2002. markets. Several administrative steps were also(F) Banking Laws (Amendment) Bill, 2011 initiated to contain volatility in the forex market.3.106 On December 13, 2011, the Standing 3.109 During the year, the priority sector normsCommittee on Finance presented its report to the were revisited to refocus direct agriculturalLok Sabha on the Banking Laws (Amendment) lending to individuals, SHGs and JLGs, and toBill, 2011, which was introduced before the Lok focus on direct lending by banks and not throughSabha on March 22, 2012. intermediaries. The KCC Scheme was revised to(G) Financial Sector Legislative Reforms suit the current requirements of farmers and aCommission special and concessional refinancing facility was also extended to improve the availability of credit3.107 The Government of India, pursuant to theannouncement made in the Union Budget to agriculture.2010-11, set up the Financial Sector Legislative 3.110 Amidst turbulent global financial marketReforms Commission (Chairman: Justice B.N. conditions, banks and financial entities have toSrikrishna), on March 24, 2011. The terms of grapple with growing complexities and risksreference are wide in their ambit and include the associated with their businesses. In this context,examination of the architecture of the legislative policy initiatives, such as the adoption of Baseland regulatory system governing the financial II advanced approaches, the phasedsector in India and reviewing the existing laws that implementation of Basel III norms, efforts togovern the financial sector. The comments, move towards a dynamic provisioning framework/suggestions and inputs from the Reserve Bank countercyclical capital buffers, adoption ofhave been submitted to the Commission, whichinclude the need for a clear and specific mandate securitisation norms in line with best internationalto the Reserve Bank for the pursuit of financial practices, sound compensation practices and thestability, monopoly of the Reserve Bank in the adoption of a risk-based supervisory approachregulation of public deposits, the consolidation of for banks will go a long way in placing the Indianbanking laws, the need for globally compatible banking system on a strong footing and enhancesecrecy laws and continuation of the debt the banking sector’s ability to absorb shocksmanagement function with the Reserve Bank. arising from any financial and economic stress 52
  • 72. Policy Environmentand encourage prudent risk-taking. The include the setting up of the Financial Sectorimplementation of the recommendations of the Legislative Reforms Commission.Committee on Customer Service in Banks 3.111 Going forward, a steady movement(Chairman: Shri M. Damodaran) are expected to towards improving the resilience of financialimprove customer service in banks. The multi- institutions and banks, with focused attention onpronged strategy and outreach visits for financial containing systemic risks, would pave the way forinclusion are expected to enhance the outreach financial stability. The growth in the financial andof the banking system to the remotest parts of banking sector has to keep pace with growth inthe country. The other major policy developments the real sector and has to be in tune with domesticinclude steps to combat money laundering/ macroeconomic fundamentals. The bankingterrorism financing activities and steps to sector has to pursue the agenda of financialstrengthen the payment and settlement systems. inclusion with a greater sense of social commitmentThe major development that would pave the way to usher in inclusive growth of the overalltowards further reforms in the financial sector economy. 53
  • 73. Chapter IV Operations and Performance of Commercial Banks Performance of the Indian banking sector during 2011-12 was influenced by the slowdown in the domestic economy. Consequently, balance sheet expansion of banks was lower than the previous year. Major profitability indicators, i.e., return on assets (RoA) and return on equity (RoE) dipped marginally. However, cost to income ratio of banks improved during 2011-12, reflecting marginal gains in efficiency. Though Indian banks remained well-capitalised, concerns about the growing non-performing assets (NPAs) loomed large. Banks’ exposure to the stressed power and airline sectors particularly added to deterioration in their asset quality. Though progress has been made in expanding banking coverage, more efforts are needed to achieve meaningful financial inclusion. Customer services of banks need to be strengthened to face the emerging challenges.1. Introduction 2. Balance Sheet Operations of Scheduled4.1 Indian banking sector, which withstood the Commercial Banksturmoil of the global financial crisis during 2008- Balance sheet expansion slowed down led by09, started showing some signs of stress during muted growth in deposits as well as loansthe subsequent period. Performance of Indian and advancesbanks during the post-crisis period was conditionedto a large extent by fragile recovery of the global 4.3 Consolidated balance sheet of SCBs grewfinancial markets as well as a challenging at a slower pace during 2011-12 as compared withoperational environment on the domestic front, the previous year. On the liabilities side, thewith high inflation and muted growth performance. deceleration in growth was broad-based with theIn addition, stressed financial condition of some major items of liabilities, i.e., capital, depositsState Electricity Boards and airline companiesfurther added to the deterioration in the asset and borrowings, registering moderation in growth.quality of banks. On the assets side, the slowdown was mainly attributed to deceleration in growth of loans and4.2 Against this backdrop, this chapter advances, reflecting the slowdown in all keyanalyses the operations and performance of Indian segments of domestic macro-economy (Tables IV.1banking sector (including regional rural banks and IV.2).and local area banks) during 2011-12, based onthe audited balance sheets of banks and off-site 4.4 Reflecting the deceleration in the balancereturns submitted to the Reserve Bank. Various sheet of public sector banks, their share in totalsections of this chapter focus on balance sheet assets of the banking system dipped marginallyoperations, profitability and efficiency indicators, during 2011-12. Notwithstanding this, Indiansoundness position, overseas operations,operations in the capital market, customer banking sector remained broadly public in natureservices and technological developments. Progress with public sector banks accounting for more thanunder financial inclusion plans is delineated in a two-thirds of total assets of all scheduledseparate section. The concluding section highlights commercial banks, as at end-March 2012major issues that emerge from the analysis. (Chart IV.1).
  • 74. Operations and Performance of Commercial Banks Table IV.1: Consolidated Balance Sheet of Scheduled Commercial Banks (Amount in ` billion)Item As at end-March 2012 Public SBI Nationalised Private Old New Foreign All sector group banks* sector private private banks scheduled banks banks sector sector commercial banks banks banks1 2 3 4 5 6 7 8 9 1. Capital 183 12 171 48 13 35 406 637 2. Reserves and Surplus 3,373 1,061 2,312 1,545 266 1,279 531 5,449 3. Deposits 50,020 14,050 35,970 11,746 3,159 8,587 2,771 64,537 3.1. Demand Deposits 3,844 1,197 2,647 1,659 258 1,401 801 6,303 3.2. Savings Bank Deposits 12,140 4,537 7,604 2,729 578 2,152 419 15,289 3.3. Term Deposits 34,036 8,317 25,719 7,358 2,323 5,035 1,551 42,945 4. Borrowings 4,618 1,588 3,030 2,584 198 2,386 1,199 8,401 5. Other Liabilities and Provisions 2,186 1,002 1,184 855 114 741 929 3,970Total Liabilities/Assets 60,380 17,712 42,668 16,778 3,750 13,028 5,836 82,9941. Cash and Balances with RBI 2,800 791 2,009 706 167 538 232 3,7372. Balances with Banks and Money at 1,760 482 1,278 366 71 295 312 2,437 Call and Short Notice3. Investments 15,041 4,173 10,868 5,260 1,093 4,166 2,005 22,305 3.1 Government Securities (a+b) 12,580 3,513 9,067 3,474 785 2,688 1,376 17,429 a) In India 12,494 3,494 9,000 3,468 785 2,683 1,376 17,338 b) Outside India 85 19 67 5.6 - 5.6 - 91 3.2 Other Approved Securities 10 0.2 9.7 0.2 0.2 0.01 - 10 3.3 Non-Approved Securities 2,451 660 1791 1,786 308 1,478 629 4,8664. Loans and Advances 38,783 11,520 27,263 9,664 2,301 7,363 2,298 50,746 4.1 Bills Purchased and Discounted 2,307 888 1,419 357 113 244 257 2,922 4.2 Cash Credits, Overdrafts, etc. 16,085 4,958 11,127 2,860 1,120 1,740 1,099 20,044 4.3 Term Loans 20,391 5,674 14,717 6,447 1,068 5,380 942 27,780 5. Fixed Assets 383 74 309 134 27 107 50 567 6. Other Assets 1,613 672 941 649 91 558 939 3,201Note: -: Nil/negligible. Components may not add up to their respective totals due to rounding off numbers to ` billion.*: Includes IDBI Bank Ltd.Source: Annual accounts of respective banks.Major Liabilities of SCBs Proportion of CASA deposits in total deposits declinedDeposits grew at a subdued pace4.5 As at end-March 2012, deposits constituted 4.6 The share of current and savings accountmore than three-fourths of the total liabilities of (CASA) deposits in total deposits declined duringthe banking sector. Deposits grew at a slower rate 2011-12 due to the decline in demand depositsthan the previous year, which mainly emanated as well as slowdown in savings bank depositfrom contraction of demand deposits as well as mobilisation. As at end-March 2012, CASAslower growth of savings bank deposits. On the deposits formed almost one-third of total depositsother hand, growth in term deposits accelerated. of SCBs. Bank group-wise analysis of compositionGoing forward, the slowdown in demand and of deposits revealed that foreign banks had thesavings banks deposit mobilisation, which are highest proportion of CASA deposits followed bythe least cost sources of funds, could put new private sector banks. This could be partlydownward pressure on profitability of Indian explained by the fact that number of private sectorbanks (Table IV.2). banks revised their savings bank deposits rates 55
  • 75. Report on Trend and Progress of Banking in India 2011-12 Table IV.2 : Growth in Balance Sheet of Scheduled Commercial Banks (Per cent)Item Public sector Private sector Old private New private Foreign All scheduled banks banks sector banks sector banks banks commercial banks 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-121 2 3 4 5 6 7 8 9 10 11 12 13 1. Capital 40.7 -4.2 5.1 - 7.9 -4.2 4.1 1.7 15.1 15.6 21.3 8.0 2. Reserves and Surplus 19.3 24.4 15.9 15.5 18.7 18.5 15.4 14.9 18.8 15.7 18.2 20.8 3. Deposits 18.4 14.4 21.9 17.1 14.9 19.6 24.6 16.3 3.7 15.1 18.3 14.9 3.1. Demand Deposits 11.3 -6.3 18.1 4.4 12.2 6.5 19.2 4.0 6.8 9.9 12.3 -1.8 3.2. Savings Bank Deposits 22.1 12.1 23.0 19.1 14.0 16.3 25.8 19.9 8.8 5.6 21.8 13.1 3.3. Term Deposits 18.2 18.2 22.5 19.7 15.5 22.1 25.8 18.6 0.6 21.0 18.2 18.6 4. Borrowings 26.4 16.4 24.5 38.9 26.4 80.3 24.4 36.4 36.1 29.1 27.1 24.4 5. Other Liabilities and Provisions 20.9 -6.8 21.0 20.6 -0.7 13.5 25.6 21.8 16.3 21.3 20.0 3.9Total Liabilities/Assets 19.2 14.1 21.5 20.0 14.9 21.4 23.5 19.6 12.8 18.8 19.2 15.51. Cash and Balances with RBI 30.1 -20.5 13.5 -18.1 7.4 -7.9 15.2 -20.8 6.3 14.2 25.4 -18.52. Balances with Banks and Money at 9.3 40.7 -18.2 15.6 -31.3 80.4 -16.0 6.5 33.2 13.8 6.0 32.4 Call and Short Notice3. Investments 9.9 12.6 19.2 24.6 11.0 18.0 21.7 26.5 3.9 21.1 11.3 16.0 3.1 Government Securities 7.4 16.2 9.1 32.0 6.3 21.5 10.1 35.4 -4.7 22.9 6.6 19.6 3.2 Other Approved Securities -43.4 -65.1 -71.4 -78.8 -82.2 -65.0 74.8 -97.6 -57.1 -100.0 -45.1 -65.6 3.3 Non-Approved Securities 23.9 -2.2 41.0 12.5 24.9 10.0 45.0 13.0 28.1 17.5 29.8 5.14. Loans and Advances 22.3 17.4 26.1 21.2 19.8 24.6 28.1 20.1 19.8 17.6 22.9 18.1 4.1 Bills Purchased and Discounted 30.3 25.8 20.2 8.2 10.3 14.7 25.0 5.5 10.2 9.6 26.6 21.8 4.2 Cash Credits, Overdrafts, etc. 24.0 17.9 41.2 27.6 23.4 33.3 54.6 24.2 27.1 18.4 26.2 19.2 4.3 Term Loans 20.3 16.1 21.1 19.3 17.8 17.7 21.8 19.6 14.9 18.9 20.3 16.9 5. Fixed Assets 4.9 5.9 26.8 3.0 6.5 6.9 32.8 2.1 2.0 1.2 9.1 4.8 6. Other Assets 33.9 15.3 21.6 35.5 12.0 28.0 23.4 36.8 13.5 21.1 25.0 20.7- : Negligible/Nil.Source: Balance sheets of respective banks. upwards after the deregulation of savings bank interest rate in October 2011 (Chart IV.2). Recourse to borrowings higher during 2011-12 4.7 As at end-March 2012, borrowings constituted almost 10 per cent of the total liabilities of the banking sector, which was marginally higher than the previous year (Table IV.1). Major Assets of SCBs Lower credit off-take led by both demand and supply side factors 4.8 Total loans and advances witnessed moderation in growth compared with the previous year. The deceleration in bank credit was broad- 56
  • 76. Operations and Performance of Commercial Banksbased with credit off-take by all major sectors mutual funds. However, banks’ investments inslowing down during 2011-12. Credit to industry commercial papers increased sharply (Table IV.3).and services sector, which together constitutedmore than two-thirds of total bank credit, Table IV.3: Non-SLR Investments of Scheduled Commercial Banksrecorded slower growth. (Amount in ` billion)Risk aversion by banks was evident from Instrument As on Growth over As on Growth over March corresponding Sept correspondinghigher investment in government securities 23, period of 21, period of 2012 previous year 2012 previous year4.9 In contrast with the overall slowdown 1 2 3 4 5observed in the major balance sheet items of 1 Commercial 196 59.2 357 90.6banks, growth in investments accelerated during Paper (7.2) (10.9)2011-12 compared with the previous year. As 2 Shares 402 -12.0 426 -1.4 (14.8) (13.2)against deceleration in credit growth, banks’ a) PSU 72 76investment in government securities increased b) Private 301 318 corporatesubstantially. This trend partly reflected increase sectorin risk aversion by banks with a growing preference c) Public FIs 23.8 25 d) Others 5.2 7to park funds in safer instruments, against the 3 Bonds/ 1,861 11.5 2,002 15.5backdrop of weak macro-economic outlook as Debentures (68.7) (61.2)well as rising NPAs. a) PSU 412 341 b) Private 741 884Investments in non-SLR instruments declined corporate sector c) Public FIs 359 3424.10 As at end-March 2012, banks’ investments d) Others 349 435in non-SLR instruments contracted compared 4 Units of UTI/ 251 -47.2 485 -26.8with the corresponding period of the previous year, other MFs (9.3) (14.8)due to decline in investments in shares and mutual Total Investments 2,710 -0.6 3,270 8.4 (1 to 4) (100.0) (100.0)funds. The decline in investments in mutual fundscould be partly attributed to the policy tightening Note: Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. Figures inby the Reserve Bank in order to curb banks’ parentheses indicate share in respective totals. Source: Section 42(2) returns submitted by SCBs.exposure to liquid/short term debt schemes of 57
  • 77. Report on Trend and Progress of Banking in India 2011-12International Liabilities and Assets of Scheduled deposit and term deposits under NRE accountsCommercial Banks (Table IV.4).While growth in total international liabilities 4.12 In contrast, international assets of themoderated, international assets registered banking sector registered higher growth in 2011-higher growth 12 compared with the previous year, mainly led by foreign currency loans to residents, and Nostro4.11 During 2011-12, total international balances (Table IV.5).liabilities of banks grew at a lower rate comparedwith the previous year, mainly due to the Consolidated international claims registeredcontraction in other liabilities owing to a decline higher growthin ADRs/GDRs issued by the domestic banks.However, inflows through NRE rupee deposits 4.13 Continuing the trend observed during theincreased which could be due to the increase in previous year, total consolidated internationalinterest rate under NRE term deposits following claims registered accelerated growth during 2011-the deregulation of interest rates on both savings 12. However, no significant change was discernible in the maturity (residual)-wise as well as sector- Table IV.4: International Liabilities of wise composition of total international claims Banks - by Type (` billion) (Table IV.6). The growth in the consolidatedLiability Type Amount Percentage international claims of banks on countries other Outstanding Variation (as at end-March) Table IV.5: International Assets of Banks 2011 2012 2010-11 2011-12 Classified by Type1 2 3 4 5 (` billion)1. Deposits and Loans 3,782 4,472 11.7 18.2 Asset Type Amount Percentage (72.5) (79.0) Outstanding Variation of which a) Foreign Currency Non 774 805 7.2 4.0 March March 2010-11 2011-12 Resident Bank [FCNR (14.8) (14.2) 2011 2012 (B)] Scheme 1. Loans and Deposits 2,787 3,410 17.5 22.3 b) Foreign Currency 954 1,100 28.3 15.3 (96.8) (97.3) Borrowings * (18.3) (19.4) of which c) Non-Resident 1,212 1,626 -0.9 34.1 (23.2) (28.7) a) Loans to Non-Residents* 144 156 41.4 8.1 External Rupee (NRE) (5.0) (4.4) A/C b) Foreign Currency Loans 1,401 1,652 13.4 17.9 d) Non-Resident 411 532 33.2 29.6 to Residents ** (48.6) (47.2) Ordinary (NRO) (7.9) (9.4) c) Outstanding Export Bills 613 725 21.4 18.3 Rupee Deposits drawn on Non-Resident (21.3) (20.7)2. Own Issues of 46 56 -15.9 23.0 by Residents Securities/Bonds (0.9) (1.0) d) Nostro Balances@ 624 865 19.6 38.73. Other Liabilities 1,387 1,133 28.2 -18.3 (21.7) (24.7) (26.6) (20.0) 2. Holdings of Debt Securities 2.0 - 351.3 - of which: (0.1) (0.0) a) ADRs/GDRs 347 271 14.2 -21.8 3. Other Assets @@ 91 94 0.1 2.9 (6.7) (4.8) (3.2) (2.7) b) Equities of banks 732 536 45.4 -26.8 held by non-residents (14.0) (9.5) Total International Assets 2,881 3,504 16.9 21.6 (100.0) (100.0) c) Capital/remittable 308 326 12.2 5.8 profits of foreign (5.9) (5.8) * Includes rupee loans and foreign currency (FC) loans out of non- banks in India and residents deposits. other unclassified ** Includes loans out of FCNR(B) deposits, Packing Credit in Foreign international Currency (PCFC’s), FC lending to and FC deposits with banks in liabilities India etc. @ Includes placements made abroad and balances in term depositsTotal International 5,215 5,661 15.3 8.6 with non-resident banks.Liabilities (100.0) (100.0) @@ Capital supplied to and receivable profits from foreign branches/ subsidiaries of Indian banks and other unclassified international* Inter- bank borrowings in India and from abroad, external commercial assets.borrowings of banks. Notes: 1. Figures in parentheses are percentages to total.Notes: 1. Figures in parentheses are percentages to total. 2. Based on Locational Banking Statistics (LBS) statements. 2. Based on Locational Banking Statistics (LBS) statements. 3. Percentage variation could be slightly different as absolute 3. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. numbers have been rounded off to ` billion. 4. -: Nil/Negligible. 58
  • 78. Operations and Performance of Commercial Banksthan India was mainly led by claims of banks on Table IV.7: Consolidated International Claimsthe UAE, Hong Kong, the US, Singapore and the of Banks on Countries otherUK (Table IV.7). than India (` billion)Credit-Deposit (C-D) and Investment-Deposit Country Amount Percentage Outstanding Variation(I-D) Ratios March March 2010-11 2011-12Incremental C-D ratio remained well above 2011 2012 1 2 3 4 5incremental I-D ratio Total Consolidated 2,464 2,809 5.9 14.04.14 The incremental C-D ratio declined during International Claims (100.0) (100.0) Of Whichthe first three quarters of 2011-12, partly reflecting 1. United States of America 548 643 3.2 17.2 (22.2) (22.9)the slowdown in bank credit. There was a sharp 2. United Kingdom 344 364 -4.9 6.0rise in the ratio during the fourth quarter of (13.9) (13.0) 3. Hong Kong 184 220 -3.2 19.5 (7.5) (7.8) Table IV.6: Maturity (Residual) and Sectoral 4. Singapore 185 216 0.6 16.3 Classification of Consolidated International (7.5) (7.7) 5. United Arab Emirates 155 221 14.5 42.8 Claims of Banks (6.3) (7.9) (` billion) 6. Germany 142 118 16.3 -16.6 (5.7) (4.2)Residual Maturity/Sector Amount Percentage Outstanding Variation Notes: 1. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. March March 2010-11 2011-12 2. Figures in parentheses are percentages to total. 2011 20121 2 3 4 5Total Consolidated 2,464 2,809 5.9 14.0 2011-12 as deposits growth decelerated sharplyInternational claims (100.0) (100.0) even as growth in credit remained stable.a) Maturity-wise 1. Short-term (residual 1,539 1,832 6.6 19.0 Incremental C-D ratio was highest for new private maturity of less than (62.5) (65.2) sector banks while foreign banks recorded the one year) 2. Long-term (residual 872 924 6.5 5.9 highest incremental investment-deposit (I-D) ratio maturity of one year (35.4) (32.9) and above) (Charts IV.3 and IV.4)1. 3. Unallocated 53 54 -18.8 1.7 (2.1) (1.9)b) Setor-wise 1. Bank 1,091 1,286 11.5 17.8 (44.3) (45.8) 2. Non-Bank Public 9 19 -39.7 114.1 (0.4) (0.7) 3. Non-Bank Private 1,364 1,505 2.2 10.3 (55.4) (53.6)Notes:1. Figures in parentheses are percentages to total.2. Unallocated residual maturity comprises maturity not applicable (e.g., for equities) and maturity information not available from reporting bank branches.3. Bank sector includes official monetary institutions (e.g., IFC, ECB, etc.) and central banks.4. Prior to the quarter ended March 2005, non-bank public sector comprised of companies/institutions other than banks in which shareholding of State/Central governments was at least 51 per cent, including State/Central government and its departments. From March 2005 quarter, ‘Non-bank public’ sector comprises only State/ Central government and its departments and, accordingly, all other entities excluding banks are classified under ‘Non-bank private sector.5. Based on CBS (Consolidated Banking Statistics) statements - Immediate Country Risk Basis.6. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion.1 Incremental C-D and I-D ratios for bank groups were calculated from consolidated balance sheet of SCBs for end-March 2011 and end-March 2012. 59
  • 79. Report on Trend and Progress of Banking in India 2011-12Maturity Profile of Assets and Liabilities (notional) as percentage of on-balance sheet liabilities was significantly higher for foreign banksMaturity mismatch continued to persist with as compared with other bank groups, due to theirproportion of short-term liabilities registeringan increase higher exposure in forward contracts, guarantees and acceptance/endorsements (Chart IV.6 and4.15 The persistent mismatch in the average Appendix Table IV.2).maturity profile of assets with that of liabilitieshas been a concern for Indian banking sector in 3. Financial Performance of Scheduledrecent years. The proportion of short-term Commercial Banksliabilities registered an increase from 2008onwards. On the other hand, the proportion of 4.17 Financial performance of banks cameshort-term assets in total assets exhibited a under pressure during 2011-12, mainly due todeclining trend from 2008 onwards (Chart IV.5 the increased cost of deposits in the backdrop ofand Table IV.8). an elevated interest rate environment. However, on a positive note, the efficiency of banksOff-Balance Sheet Operations of SCBs improved. The two main indicators of profitability,Off-balance sheet exposures continued to i.e., RoE and RoA declined marginally duringincrease, albeit, at a slower pace 2011-12, reflecting deceleration in the net profit of banks.4.16 In recent years, off-balance sheet activitiesof banks have come under the scrutiny of the ProfitabilityReserve Bank, especially given the fact that the Growth in consolidated net profit slowedexcessive growth in off-balance sheet exposure of down due to spurt in interest expenditurebanks in advanced economies has been one of thefactors behind the global financial turmoil. During 4.18 Despite accelerated growth in total income,2011-12, total off-balance sheet liabilities (notional) the consolidated net profit of the banking sectorof banks registered lower growth than the previous increased at a slower rate compared with theyear. Bank group-wise analysis of off-balance sheet previous year, mainly due to the steep increase inexposure revealed that, off-balance sheet exposure interest expended. 60
  • 80. Operations and Performance of Commercial Banks Table IV.8: Bank Group-wise Maturity Profile of Select Liabilities/Assets (As at end -March) (Per cent to total under each item)Liabilities/assets Public sector Private sector Old private New private Foreign banks All SCBs banks banks sector banks sector banks 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 20121 2 3 4 5 6 7 8 9 10 11 12 13 I. Deposits a) Up to 1 year 48.2 49.6 46.1 48.7 45.3 48.1 46.4 48.9 63.7 61.8 48.5 50.0 b) Over 1 year and up to 3 years 28.6 25.3 38.6 30.0 40.6 39.2 37.9 26.6 27.3 29.8 30.4 26.3 c) Over 3 years and upto 5 years 8.1 8.5 6.1 5.7 8.5 6.9 5.2 5.2 8.9 8.3 7.8 8.0 d) Over 5 years 15.1 16.6 9.1 15.7 5.6 5.8 10.4 19.3 - 0.1 13.4 15.7 II. Borrowings a) Up to 1 year 39.9 45.4 42.4 50.3 54.5 63.7 41.7 49.2 78.8 84.5 46.1 52.6 b) Over 1 year and up to 3 years 12.5 12.2 16.2 11.8 12.5 13.4 16.4 11.7 14.7 9.2 13.8 11.7 c) Over 3 years and upto 5 years 12.3 15.2 9.8 12.5 11.4 7.8 9.7 12.9 2.1 2.7 10.2 12.5 d) Over 5 years 35.3 27.2 31.6 25.4 21.6 15.1 32.2 26.2 4.4 3.5 29.9 23.2 III Loans and Advances a) Up to 1 year 36.0 34.3 37.6 35.2 41.9 44.0 36.3 32.4 68.1 67.4 37.8 35.9 b) Over 1 year and up to 3 years 36.3 37.4 36.4 37.1 38.4 36.1 35.8 37.4 17.0 15.5 35.4 36.3 c) Over 3 years and upto 5 years 10.9 11.0 11.4 11.3 9.9 9.1 11.9 12.0 4.2 4.5 10.7 10.8 d) Over 5 years 16.8 17.3 14.5 16.4 9.8 10.8 16.0 18.2 10.7 12.5 16.1 17.0 IV. Investments a) Up to 1 year 18.1 20.1 36.6 42.5 28.7 30.3 38.8 45.7 79.9 76.6 27.5 30.4 b) Over 1 year and up to 3 years 12.7 12.6 22.7 17.3 12.2 12.2 25.6 18.6 14.2 12.9 15.0 13.7 c) Over 3 years and upto 5 years 14.4 14.2 10.0 9.2 11.7 13.0 9.5 8.2 3.4 5.2 12.4 12.2 d) Over 5 years 54.8 53.1 30.7 31.0 47.3 44.4 26.1 27.5 2.5 5.3 45.0 43.7Note: - Nil/negligibleSource: Balance sheets of respective banks.4.19 Interest expended on deposits accounted in the proportion of relatively high-cost termfor more than three-fourths of the total interest deposits, led to an acceleration in the interest costexpenditure of banks. This, along with an increase of banks. In addition, retail deposits became more costly in the backdrop of a high interest rate environment. Net interest margin dipped slightly 4.20 During 2011-12, the net interest margin (NIM) of banks dipped marginally compared with the previous year, mainly reflecting the steep rise in interest expended (Table IV.9). Consequent to the slowdown in net profit, RoA and RoE dipped marginally 4.21 During 2011-12, two major indicators of profitability, RoA and RoE dipped marginally compared with the previous year, mainly reflecting the slowdown in net profit caused by increased interest expenditure (Table IV.10). A more detailed 61
  • 81. Report on Trend and Progress of Banking in India 2011-12 Table IV.9: Trends in Income and Table IV.10: Return on Assets and Return onExpenditure of Scheduled Commercial Banks Equity of SCBs – Bank Group-wise (Amount in ` billion) (Per cent) Item 2010-11 2011-12 Bank group/year Return on Return on Assets Equity Amount Percentage Amount Percentage Variation Variation 2010- 2011- 2010- 2011- 11 12 11 121 2 3 4 5 1 2 3 4 51. Income 5,712 15.5 7,408 29.7 1 Public sector banks 0.96 0.88 16.90 15.33 a) Interest Income 4,913 18.3 6,551 33.3 1.1 Nationalised banks* 1.03 0.88 18.19 15.05 b) Other Income 799 0.7 857 7.3 1.2 SBI Group 0.79 0.89 14.11 16.002. Expenditure 5,009 14.5 6,591 31.6 a) Interest Expended 2,989 9.9 4,305 44.0 2 Private sector banks 1.43 1.53 13.70 15.25 b) Operating Expenses 1,231 23.1 1,371 11.3 2.1 Old private sector banks 1.12 1.20 14.11 15.18 of which : Wage Bill 727 31.6 780 7.3 2.2 New private sector banks 1.51 1.63 13.62 15.27 c) Provisions and 788 20.8 915 16.1 Contingencies 3 Foreign banks 1.75 1.76 10.28 10.793. Operating Profit 1,491 22.0 1,732 16.1 All SCBs 1.10 1.08 14.96 14.604. Net Profit 703 23.2 817 16.1 Notes: 1. Return on Assets for a group is obtained as weighted average5. Net Interest Income 1,924 34.5 2,245 16.7 of return on assets of individual banks in the group, being the (1a-2a) proportion of total assets of the bank as percentage to total Memo Item: assets of the group. 2. Return on Equity = Net profit/average of capital and reservesNet Interest Margin (NII 2.91 2.90 and surplus for current and previous percentage of average 3. * Nationalised banks include IDBI Bank Ltd.assets)Note: Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. because low cost CASA deposits formed a higherSource: Annual accounts of respective banks. proportion of total deposits for foreign banks (Table IV.11 and Chart IV.8).analysis of RoA and RoE of bank groups isprovided in Box IV.1. 4. Soundness IndicatorsEfficiency 4.24 All scheduled commercial banks in India have become Basel II compliant as per theOperating efficiency, as captured by cost to standardised approach with effect from April 1,income ratio witnessed improvement 2009. For migrating to advanced approaches of4.22 During 2011-12, operating efficiency of Basel II, the Reserve Bank issued separate set ofbanks in terms of cost-to-income ratio2 witnessed guidelines and the applications received froman improvement. The other efficiency indicator, banks for migration to advanced approaches ofNIM, dipped marginally, which implied reduction Basel II are at various stages of examination within cost of financial intermediation (Chart IV.7). the Reserve Bank. Parallel to this process, theCost/Return on funds Reserve Bank came out with the final guidelines for implementation of Basel III in May 2012. TheSpread of banks narrowed due to increased guidelines issued by the Reserve Bank will becomecost of funds effective from January 1, 2013. Against this4.23 During 2011-12, both cost as well as return backdrop, it is important to examine the existingon funds increased for the banks. However, the capital position and other soundness indicatorsspreads narrowed due to the higher increase in of Indian banks in order to assess banks’cost of funds. At the bank group level, cost of funds preparedness to migrate to the more advancedwas lower in the case of foreign banks, partly regulatory approaches.2 Calculated as operating expenses as percentage of total income. 62
  • 82. Operations and Performance of Commercial Banks Box IV.1: What Drives the Profitability of Indian Banks?: A Du Pont Analysis for Bank GroupsProfitability of banks facilitates many aspects, which includes, Table 1.1: RoE Analyis of Profitability: 2011-12inter alia, enhancing the ability of banks to mobilise resources Bank Group Return Profitability Leverage Capitalfrom the capital market, as well as better management of non- on of Assets to Assetsperforming assets. In addition, sound profitability of banks Equity Ratioenhances their ability to augment the financial inclusion 1 2 3 4 5process. During the pre-liberalisation period, banks in Indiawere operating in a rather tight regulatory environment. After SBI group 16 0.91 17.58 0.07liberalisation, Indian banks operated in a less regulated Nationalised banks 15.05 0.87 17.37 0.4environment in terms of interest rate liberalisation, reduction Old private sector banks 15.18 1.15 13.23 0.35 New private sector banks 15.27 1.57 9.72 0.27in reserve requirements, and entry deregulation. In addition, Foreign banks 10.79 1.75 6.15 6.95with the advent of complex financial products, banks’ businesshas expanded in recent years beyond the traditional financialintermediation process. Also, off-balance sheet exposure of RoA and leverage, captured by the ratio of total average assetsbanks has witnessed a significant increase in recent years. to total average equity. Further, decomposition of RoE suggestsAgainst this backdrop, it is important to analyse the main that banks’ profitability can be associated with higher returnsources of profitability of Indian banks. from assets or higher leverage or both. There are some studies which focused on the possibility of getting a higher RoE byIn recent years, significant variation in profitability has been substitution of equity capital with lower cost long-term debt.observed among bank groups. It was observed that, generally While higher return on assets is always considered good, aprofitability of foreign banks was higher than that of other higher leverage ratio exposes bank to the risk of groups. Some past studies on profitability of Indianbanks concluded that higher profitability of foreign banks It follows from the empirical result presented in Table 1.1,could be attributed to their access to low cost CASA deposits, that the higher RoE for the SBI group and nationalised banksdiversification of income as well as higher “other income”. was associated with a higher leverage ratio, while for newDuring 2011-12, foreign banks accounted for close to 12 per private sector banks, the higher RoE was attributable to highercent of the total net profit of SCBs. As against this, their share profitability of assets and lower leverage. Among the bankin total assets of Indian banking sector stood at 7 per cent groups, foreign banks had the highest return from assets as(Charts 1.A and 1.B). well as the lowest leverage ratio. The capital to assets ratio, as calculated for various bank groups using balance sheet data,In order to understand the sources of profitability across further corroborates the findings of RoE analysis. As at end-bank groups, RoE analysis and Du Pont analysis have been March 2012, this ratio was highest for foreign banks, indicatingcarried out taking the bank group-wise data for 2011-12. The their better capital position vis-à-vis other bank groups.RoE analysis decomposes the profitability of banks into twocomponents, i.e., profitability of bank assets, as captured by Du Pont analysis decomposes profitability of banks into two components, viz., asset utilisation and cost management. Asset utilisation is captured by the total income net of interest expenditure and provisions/contingencies as percentages of average total assets. The ratio of operating expenses to average total assets indicates how efficiently a bank is using its resources and is thus termed as a parameter to understand the efficiency of cost management by banks. Better profit of banks can be attributed to better asset utilisation or better cost management or both simultaneously. Table 1.2 summarises the result of Du Pont analysis carried out on banks, for 2011-12. According to the results of Du Pont analysis, foreign banks registered the highest RoA among bank groups, mainly on account of better asset utilisation, though their operating expenses to assets ratio was also higher when compared to other bank groups. This result corroborates the findings of past literature according to which foreign banks’ higher profitability could be attributed to better fund management practices. Table 1.2: Du Pont Analysis of Profitability: 2011-12 Bank Group Asset Utilisation Cost Management 1 2 3 SBI group 2.85 1.94 Nationalised banks 2.35 1.48 Old private sector banks 3.06 1.91 New private sector banks 3.81 2.24 Foreign banks 4.27 2.52 63
  • 83. Report on Trend and Progress of Banking in India 2011-12 Capital Adequacy CRAR under both Basel I and II remained well above the stipulated norm 4.25 The capital to risk-weighted assets ratio (CRAR) remained well above the stipulated 9 per cent for the system as a whole as well as for all bank groups during 2011-12, indicating that Indian banks remained well-capitalised. Also, the CRAR (Basel II) at the system-level improved marginally compared with the previous year (Table IV.12). Tier I capital constituted more than 70 per cent of capital funds of banks 4.26 The component-wise breakup of capital funds indicated that Tier I capital accounted for Table IV.11: Cost of Funds and Returns on Funds - Bank Group-wise (Per cent)Sr. Bank group/year Cost of Cost of Cost of Return on Return on Return on Spreadno. Deposits Borrowings Funds Advances Investments Funds1 2 3 4 5 6 7 8 9= (8-5)1 Public sector banks 2010-11 5.12 2.28 4.89 9.09 6.80 8.41 3.52 2011-12 6.36 2.81 6.06 10.30 7.54 9.52 3.461.1 Nationalised banks* 2010-11 5.13 2.36 4.93 9.21 6.83 8.49 3.56 2011-12 6.51 2.78 6.22 10.32 7.44 9.49 3.271.2 SBI Group 2010-11 5.09 2.14 4.79 8.84 6.72 8.22 3.43 2011-12 5.97 2.85 5.66 10.26 7.78 9.59 3.932 Private sector banks 2010-11 4.97 2.33 4.56 9.65 6.53 8.55 3.99 2011-12 6.43 2.92 5.84 10.99 7.26 9.69 3.852.1 Old private sector banks 2010-11 5.63 2.24 5.50 10.42 6.20 8.98 3.48 2011-12 7.24 4.34 7.10 11.98 7.37 10.47 3.372.2 New private sector banks 2010-11 4.73 2.33 4.27 9.41 6.62 8.42 4.15 2011-12 6.14 2.81 5.45 10.69 7.23 9.46 4.013 Foreign banks 2010-11 3.30 2.56 3.11 8.75 7.39 8.11 5.00 2011-12 4.34 2.60 3.83 9.61 8.10 8.91 5.084 All SCBs 2010-11 5.01 2.33 4.73 9.18 6.79 8.42 3.69 2011-12 6.28 2.81 5.90 10.40 7.53 9.52 3.62Notes : 1. Cost of Deposits = Interest paid on deposits/Average of current and previous year’s deposits. 2. Cost of Borrowings = Interest paid on borrowings/Average of current and previous year’s borrowings. 3. Cost of Funds = (Interest paid on deposits + Interest paid on borrowings)/(Average of current and previous year’s deposits plus borrowings). 4. Return on Advances = Interest earned on advances /Average of current and previous year’s advances. 5. Return on Investments = Interest earned on investments /Average of current and previous year’s investments. 6. Return on Funds = (Interest earned on advances + interest earned on investments) / (Average of current and previous year’s advances plus investments). 7. *: Includes IDBI Bank Ltd.Source: Calculated from balance sheets of respective banks. 64
  • 84. Operations and Performance of Commercial Banksmore than 70 per cent of the total capital of Indian Table IV.13: Component-wise Capitalbanks both under Basel I and II, reflecting the Adequacy of SCBssound capital position of banks. As at end-March (As at end-March) (Amount in ` billion)2012, the core CRAR stood well above thestipulated minimum of 6 per cent (Table IV.13). Item Basel I Basel II 2011 2012 2011 20124.27 As at end-March 2012, the majority of 1. Capital funds (i+ii) 6,745 7,810 6,703 7,780public sector banks had Tier I capital adequacy i) Tier I capital 4,765 5,685 4,745 5,672ratio within the range of 8 to 12 per cent ii) Tier II capital 1,980 2,124 1,958 2,109(Chart IV.9). 2. Risk-weighted assets 51,807 60,375 47,249 54,623 3. CRAR (A as % of B) 13.0 12.9 14.2 14.2 Table IV.12: Capital to Risk-Weighted of which: Tier I 9.2 9.4 10.0 10.4 Assets Ratio under Basel I and II – Tier II 3.8 3.5 4.1 3.9 Bank Group-wise (As at end-March) Source: Based on off-site returns submitted by banks. (Per cent)Bank Group Basel I Basel II 2011 2012 2011 2012 Leverage Ratio1 2 3 4 5Public sector banks 11.78 11.88 13.08 13.23 Leverage ratio remained well above 4.5Nationalised banks* 12.15 11.84 13.47 13.03 per centSBI group 11.01 11.97 12.25 13.70Private sector banks 15.15 14.47 16.46 16.21 4.28 In 2011-12, the leverage ratio, calculatedOld private sector banks 13.29 12.47 14.55 14.12 as Tier I capital (under Basel II) as percentage ofNew private sector banks 15.55 14.90 16.87 16.66Foreign banks 17.71 17.31 16.97 16.74 total assets increased compared with the previousScheduled commercial banks 13.02 12.94 14.19 14.24 year and remained above 4.5 per cent3. This wasNote: *: Includes IDBI Bank Ltd. in sync with the increase in CRAR (underSource: Based on off-site returns submitted by banks. Basel II) (Chart IV.10).3 As per the Basel III guidelines, the statutory minimum for the leverage ratio has been prescribed at 4.5 per cent, during the parallel run period . 65
  • 85. Report on Trend and Progress of Banking in India 2011-12Non-Performing Assets domestic economy as well as inadequate appraisal and monitoring of credit proposalsGross NPA ratio at system-level increased, (Chart IV.11)4.mainly on account of the deterioration inasset quality of public sector banks 4.30 The deterioration in asset quality was more4.29 During 2011-12, the deteriorating asset pronounced in the case of public sector banks.quality of the banking sector emerged as a major During 2011-12, the gross NPAs of public sectorconcern, with gross NPAs of banks registering a banks increased at a higher rate as compared withsharp increase. The spurt in NPAs could be the growth rate of NPAs at a system-level (Tableattributed to the slowdown prevailing in the IV.14 and Chart IV.12).4 Growth rate of gross NPAs and advances were calculated based on the data collected from off-site returns. 66
  • 86. Operations and Performance of Commercial Banks Table IV.14: Trends in Non-performing Assets - Bank Group-wise (Amount in ` billion)Item Public Nationalised SBI Private Old New Foreign Scheduled sector banks* Group sector private private banks commercial banks banks sector sector banks banks banks1 2 3 4 5 6 7 8 9Gross NPAsClosing balance for 2010-11 746 442 303 182 36 145 50 979Opening balance for 2011-12 746 442 303 182 36 145 50 979Addition during 2011-12 928 586 341 98 27 71 45 1,071Recovered during 2011-12 478 325 152 73 20 52 32 585Written off during 2011-12 23 13 10 19 1 18 - 43Closing balance for 2011-12 1,172 690 482 187 42 145 62 1,423Gross NPAs as per cent of Gross Advances**2010-11 2.4 2.1 3.4 2.5 1.9 2.7 2.5 2.52011-12 3.3 2.8 4.6 2.1 1.8 2.2 2.6 3.1Net NPAsClosing balance for 2010-11 360 212 147 44 9 34 12 417Closing balance for 2011-12 591 389 202 44 13 30 14 649Net NPAs as per cent of Net Advances***2010-11 1.2 1.0 1.7 0.6 0.5 0.6 0.6 1.12011-12 1.7 1.6 2.0 0.5 0.6 0.5 0.6 1.4Notes: 1. *: Includes IDBI Bank Ltd. 2. **: Calculated taking gross NPAs from annual accounts of respective banks and gross advances from off-site returns. 3. ***: Calculated taking net NPAs from annual accounts of respective banks and net advances from off-site returns. 4. -: Nil/negligible.Source: Balance sheets of respective banks. Slippage ratio deteriorated, though recovery ratio witnessed an improvement 4.31 In addition to an increase in gross NPAs at the system-level, fresh accretion of NPAs, as captured by the slippage ratio5 also increased during 2011-12 compared with the previous year. However, on a positive note, the recovery ratio6 of the banking sector witnessed an improvement during the year. During 2011-12, the written-off ratio7 was significantly lower as compared with the previous year (Chart IV.13). 4.32 At the bank group level, the accretion to NPAs as captured by the slippage ratio was higher in the case of public sector banks and foreign banks. However, their recovery performance was also better than private sector banks. Among5 Slippage ratio is defined as fresh accretion of NPAs during the year as percentage of standard assets at the beginning of the year.6 Recovery ratio is defined as NPAs recovered during the year as percentage of gross NPAs outstanding at the beginning of the year.7 Written-off ratio is defined as NPAs written-off during the year as percentage of gross NPAs outstanding at the beginning of the year. 67
  • 87. Report on Trend and Progress of Banking in India 2011-12 caused by burgeoning NPAs. Consequent to the slowdown in domestic economy, banks, especially public sector banks actively resorted to restructuring their advances under the special dispensation scheme of the Reserve Bank announced during 2008. The scheme enabled banks to retain the status of standard accounts even after restructuring. The steep increase in gross NPAs during 2011-12 was accompanied by a considerable pick-up in the growth of restructured advances. This was mainly due to the steep increase in restructured advances by public sector banks, particularly nationalised banks (Charts IV.15 and IV.16). 4.34 During 2011-12, total amount of NPAs recovered through the Securitisation and R e c o n s t r u c t i o n o f Fi n a n c i a l A s s e t s a n d Enforcement of Security Interest Act (SARFAESIvarious bank groups, new private sector banks Act), Debt Recovery Tribunals (DRTs) and Lokrelied more on writing off NPAs as a measure to Adalats registered a decline compared with thecontain their NPAs level (Chart IV.14). previous year. Of the total amount recoveredRestructured standard advances increased through these channels, recoveries under thesignificantly SARFAESI Act constituted almost 70 per cent.4.33 In recent years, restructuring of advances 4.35 Banks approach the DRTs in case they failhas been one of the important channels used by to recover total amount of their bad loans throughbanks to contain the deterioration in asset quality the SARFAESI Act. At present, there are 33 DRTs 68
  • 88. Operations and Performance of Commercial Banks Table IV.15: NPAs of SCBs Recovered through Various Channels (Amount in ` billion)Recovery channel 2010-11 2011-12 No. of cases Amount Amount Col. (4) as % No. of cases Amount Amount Col.(8) as % referred involved recovered* of Col. (3) referred involved recovered* of Col.(7)1 2 3 4 5 6 7 8 9i) Lok Adalats 6,16,018 53 2 3.7 4,76,073 17 2 11.8ii) DRTs 12,872 141 39 27.6 13,365 241 41 17.0iii) SARFAESI Act 1,18,642# 306 116 37.9 1,40,991# 353 101 28.6Total 7,47,532 500 157 31.4 6,30,429 611 144 23.6Notes: 1. *: Refers to amount recovered during the given year, which could be with reference to cases referred during the given year as well as during the earlier years. 2. #: Number of notices issued. Provisioning coverage ratio declined 4.37 Though total provisioning increased at a higher rate, in sync with the higher growth of NPAs, the provisioning coverage ratio (PCR) dipped compared with the previous year. This was mainly due to the decline in the PCR of public sector banks (Table IV.17). Net NPAs increased significantly 4.38 In sync with the acceleration in growth of gross NPAs as well as a lower provisioning coverage, net NPAs registered higher growth. Net NPA ratio was on a higher side for public sector banks, as compared with private sector and foreign banks (Also see Table IV.14). Table IV.16: Details of Financial Assets Securitised by SCs/RCsand five Debt Recovery Appellate Tribunals across (Amount in ` billion)the country. NPAs recovered through DRTs Item End-March End-June 2012 2012constituted almost 28 per cent of total NPAs 1 2 3recovered through these three channels (Table 1 Book value of assets acquired 769 805IV.15). 2 Security Receipts issued by SCs/RCs 165 167 3 Security Receipts subscribed by4.36 As at end-June 2012, banks subscribed to (a) Banks 115 116almost 70 per cent of total security receipts issued (b) SCs/RCs 35 36 (c) FIIs 1 1by 14 securitisation/reconstruction companies. (d) Others (Qualified Institutional Buyers) 14 15These companies, which function under the 4 Amount of Security Receipts completely 79 82SARFAESI Act, acquire NPAs from banks, which redeemedhelps the banking sector to improve the quality of Source: Quarterly Statement submitted by Securitisation Companies/ Reconstruction Companies (SCs/RCs).their balance sheets (Table IV.16). 69
  • 89. Report on Trend and Progress of Banking in India 2011-12 Table IV.17: Trends in Provisions for Non-performing Assets – Bank Group-wise (Amount in ` billion)Item Public Nationalised SBI Private Old New Foreign Scheduled sector banks* group sector private private banks commercial banks banks sector sector banks banks banks1 2 3 4 5 6 7 8 9Provisions for NPAsAs at end-March 2011 366 212 154 135 24 110 38 540Add : Provisions made during the year 381 219 161 56 8 47 34 472Less : Write-off, write- back of excess during the year 190 152 38 51 7 43 23 264As at end-March 2012 558 279 278 140 25 114 49 747 Memo: Provisioning Coverage Ratio (Ratio of outstanding provisions to gross NPAs (per cent))End-March 2011 49.0 47.9 50.7 74.0 64.9 75.6 75.0 55.1End-March 2012 47.6 40.4 57.7 74.9 61.0 78.6 79.0 52.5Note: *: Includes IDBI Bank Ltd.Source: Balance sheets of respective banks.NPAs became stickier, with proportion of sub- the form of rising sub-standard/doubtful assetsstandard as well as doubtful assets in gross as a percentage of gross advances. Increase inadvances registering an increase these two categories of NPAs as percentage of gross4.39 Apart from an increase in NPAs, the advances indicated that NPAs became stickierdeterioration in asset quality was also evident in (Table IV.18). Table IV.18: Classification of Loan Assets - Bank Group-wise (As at end-March) (Amount in ` billion)Sr. Bank group Year Standard assets Sub-standard assets Doubtful assets Loss assetsNo. Amount Per cent* Amount Per cent* Amount Per cent* Amount Per cent*1 2 3 4 5 6 7 8 9 10 111 Public sector banks 2011 32,718 97.8 350 1.0 332 1.0 65 0.2 2012 38,255 97.0 623 1.6 490 1.2 60 0.21.1 Nationalised banks** 2011 22,900 98.1 218 0.9 193 0.8 32 0.1 2012 26,910 97.5 402 1.5 268 1.0 21 0.11.2 SBI Group 2011 9,818 97.0 132 1.3 139 1.4 33 0.3 2012 11,345 95.9 221 1.9 222 1.9 39 0.32 Private sector banks 2011 7,936 97.8 45 0.6 108 1.3 29 0.4 2012 9,629 98.1 52 0.5 104 1.1 29 0.32.1 Old private sector banks 2011 1,836 98.0 13 0.7 18 1.0 6 0.3 2012 2,287 98.2 18 0.8 17 0.7 7 0.32.2 New private sector banks 2011 6,100 97.7 33 0.5 90 1.4 22 0.4 2012 7,342 98.1 34 0.4 87 1.2 22 0.33 Foreign banks 2011 1,943 97.5 19 0.9 21 1.1 11 0.5 2012 2,284 97.3 21 0.9 22 0.9 20 0.84. Scheduled commercial banks 2011 42,596 97.8 414 0.9 461 1.1 104 0.2 2012 50,168 97.2 695 1.3 617 1.2 109 0.2Notes: 1. Constituent items may not add up to the total due to rounding off. 2. * : As per cent to gross advances. 3. **: Includes IDBI Bank Ltd.Source: Off-site Returns. 70
  • 90. Operations and Performance of Commercial BanksSector-wise Analysis of Non-performing Assets8 micro and small enterprises in total NPAs of the banking sector came down as compared with theDeterioration in asset quality of public sector previous year (Chart IV.18 and Table IV.19).banks was spread across priority and non-priority sectors Liquidity4.40 Bank group-wise analysis of the ratio of Liquidity ratio exhibited marginal declinegross NPAs to gross advances indicated that for 4.43 During 2011-12, the liquidity of banks waspublic sector banks, this ratio increased for both adversely affected by many structural andthe priority and non-priority sectors. In addition, frictional factors, which include, inter alia,the gross NPAs to gross advances ratio (priority deceleration in deposits growth rate, growingsector) was significantly higher for public sector mismatch in maturity profile of assets andbanks than other bank groups (Chart IV.17).Nearly half of the total NPAs were attributedto priority sectors4.41 During 2011-12, total priority sector NPAsincreased at a significantly higher rate than thegrowth rate of credit to the priority sector.However, the share of the priority sector in totalNPAs declined compared with the previous year.Among bank groups, proportion of priority sectorin total NPAs was higher for public sector banks.Share of agricultural sector in total NPAsregistered an increase4.42 The sectoral classification of NPAs revealedthat, during 2011-12, the share of agriculture intotal NPAs increased marginally. However, despitethe subdued industrial performance, the share of8 Analysis in this section is based on data collected from off-site returns. 71
  • 91. Report on Trend and Progress of Banking in India 2011-12 Table IV.19: Sector-wise NPAs of Domestic Banks* (Amount in ` billion)Bank group Priority Of which Non-Priority Of which Total NPAs sector sector Agriculture Micro and Small Others Public Sector Enterprises Amt. Per cent Amt. Per cent Amt. Per cent Amt. Per cent Amt. Per cent Amt. Per cent Amt. Per centPublic sector banks2011 413 58.1 145 20.4 144 20.2 124 17.5 298 41.9 3 0.4 711 100.02012 562 50.0 227 20.1 178 15.9 157 14.0 563 50.0 32 2.9 1,125 100.0Nationalised banks**2011 257 59.9 92 21.5 105 24.4 60 14.0 172 40.1 3 0.6 430 100.02012 323 48.3 129 19.3 134 20.0 61 9.1 345 51.7 10 1.5 668 100.0SBI group2011 156 55.3 53 18.7 39 13.9 64 22.7 126 44.7 - 0 281 100.02012 239 52.3 98 21.4 45 9.8 97 21.1 218 47.7 22 4.9 457 100.0Private sector banks2011 48 26.8 22 12.1 13 7.2 14 7.5 132 73.2 2 0.8 180 100.02012 51 27.9 22 11.8 17 9.4 12 6.7 132 72.1 0 0 183 100.0Old private sector banks2011 16 43.3 4 11.3 6 14.9 6 17.1 21 56.7 2 4.1 37 100.02012 18 42.9 6 13.4 7 16.8 5 12.8 24 57.1 0 0 42 100.0New private sector banks2011 32 22.6 18 12.3 8 5.2 7 5.1 111 77.4 0 0 143 100.02012 33 23.4 16 11.3 10 7.1 7 4.9 108 76.6 0 0 141 100.0All SCBs2011 461 51.8 167 18.7 157 17.6 138 15.5 430 48.2 4 0.5 891 100.02012 613 46.9 248 19.0 195 14.9 169 13.0 695 53.1 32 2.5 1,308 100.0Notes: 1. * : Excluding foreign banks. 2. - : Nil/negligible 3. Amt. – Amount; Per cent – Per cent of total NPAs. 4. **- Includes IDBI Bank Ltd.Source: Based on off-site returns (domestic) submitted by banks.liabilities as well as exposure to long-run cyclical and structural factors partly explains theinfrastructure projects. The percentage of liquid slowdown in credit off-take. The overall slowdownassets (cash and balances with the Reserve Bank in non-food bank credit during 2011-12 mainlyin excess of CRR requirements, and investments emanated from slower growth in credit to industry,and advances with maturity up to one year) in total services and personal loans.assets can be taken as a rough measure of banks’liquidity condition. This ratio deteriorated 4.45 Given that majority of the personal loansmarginally during 2011-12. are long-term in nature, growth in personal loans assumes special significance, especially in the5. Sectoral Deployment of Bank Credit backdrop of increase in NPAs during 2011-12. On a year-on-year basis, the growth in personal loansDeceleration evident in the growth of aggregate decelerated during 2011-12 compared with thenon-food bank credit previous year. Within the personal loans segment,4.44 The growth in aggregate non-food bank housing credit slowed down (Table IV.20).credit decelerated in 2011-12. This trend is in Credit to infrastructure grew at a slower paceconsonance with the overall slowdown observedin the growth of loans and advances in banks’ 4.46 Following the overall deceleration in creditconsolidated balance sheet. Sluggish growth growth, credit to infrastructure also slowed down.performance of the domestic economy due to As at end-March 2012, power sector accounted 72
  • 92. Operations and Performance of Commercial Banks Table IV.20: Sectoral Deployment of Gross Bank Credit (Amount in ` billion)Sr Sector Outstanding as on Percentage VariationNo. Mar-11 Mar-12 2010-11 2011-121 Agriculture and Allied Activities 4,603 5,226 10.6 13.52 Industry, of which 16,208 19,659 23.6 21.3 2.1 Infrastructure 5,266 6,191 38.6 17.6 2.2 Micro and Small Industries 2,291 2,592 11.0 13.13 Services 9,008 10,330 23.9 14.7 3.1 Trade 1,863 2,209 13.2 18.6 3.2 Commercial Real Estate 1,118 1,205 21.4 7.8 3.3 Tourism, Hotels & Restaurants 277 313 42.9 12.9 3.4 Computer Software 151 154 20.3 2.1 3.5 Non-Banking Financial Companies (NBFCs) 1,756 2,218 54.8 26.34 Personal Loans 6,854 7,683 17.0 12.1 4.1 Credit Card Outstanding 181 204 -10.2 12.9 4.2 Education 437 502 18.6 14.8 4.3 Housing (Including Priority Sector Housing) 3,461 3,880 15.0 12.1 4.4 Advances against Fixed Deposits (Including FCNR (B), NRNR Deposits etc.) 605 685 24.4 13.25 Total Non-food Gross Bank Credit 36,674 42,897 20.6 17.06 Total Gross Bank Credit 37,315 43,714 20.8 17.1Notes: 1. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. 2. Components may not add up due to rounding off numbers of ` billion.Source: Sectoral and Industrial Deployment of Bank Credit Return (Monthly).for more than half of total infrastructure credit In addition, lending to infrastructure, being long-(Chart IV.19). Also, the growth of credit to power term in nature may result in an increase insector was higher than the overall growth of credit maturity mismatch. A detailed analysis of theto infrastructure. Going forward, there is a need same is provided in Box monitor the impact of lending to power sectoron banks’ asset quality, especially given the Credit to Priority Sectorsslowdown observed in this sector in recent times. 4.47 During 2011-12, public and private sector banks’ advances to priority sectors were less than 40 per cent of adjusted net bank credit/credit equivalent off-balance sheet exposure, whichever is higher. In addition, advances to agriculture and weaker sections by both public and private sector banks were less than 18 per cent and 10 per cent, respectively, at the aggregate level (Table IV.21). Domestic banks’ failure to meet the priority sector target remains a concern 4.48 The bank-wise provisional data on priority sector lending as on last reporting Friday of March 2012 indicates that 16 out of 26 public sector banks could not meet the overall priority sector target of 40 per cent. The number of public sector banks, which could not meet the sub-target of priority sector lending to agriculture and weaker 73
  • 93. Report on Trend and Progress of Banking in India 2011-12 Box IV.2: Bank Lending to Infrastructure and Asset-Liability Mismatches: How Strong is the Linkage?In a developing country like India, infrastructure plays a Table 2.1: Result of Regression Analysiscrucial role in sustaining the growth momentum of the Dependent variable: ALMcountry. According to the Approach Paper of 12th Five-YearPlan, the investment requirements in the infrastructure Sample period: 2004-2012sector are estimated to be around `45 trillion during the Coefficients Standard t-Stat12th Plan period. This implies that infrastructure investment Errorto GDP ratio needs to increase from about 8 per cent during Intercept 30.43 17.27 1.76*2011-12 to 10 per cent by 2016-17. However, investment in Proportion of term deposits -0.31 0.27 -1.14*infrastructure development bears some special significance Proportion of infrastructure credit 0.38 0.12 3.17**for the financial sector of the country as these investments R Square 0.68 Durbin-Watsonare typically lump sum and involving long gestation, thus statistic: 2.3having implications for asset liability management. Apart Adjusted R Square 0.58from this, infrastructure projects are often subject toprocedural delays and thus expose the lender to the risk of Notes: 1.*:Not significant.non-realisation of return in time. 2. **: Significant at 1 per cent.During the last few years, the total credit extended by the out taking the ALM as dependent variable, and credit toSCBs to infrastructure segment increased within a range of infrastructure as percentage of total non-food gross bank-40-43 per cent. Also, infrastructure accounted for almost credit and proportion of term deposits in total deposits, as15 per cent of total non-food gross bank credit in recent explanatory variables. While increased proportion of termyears. As against this, there was an increase in short- deposits is expected to increase the stability of balanceterm liabilities of the banking sector during recent years. sheet and thus reduce asset liability mismatches, increaseThe asset-liability mismatch (ALM), calculated as the gap in infrastructure lending could further exacerbate the asset-between proportion of short-term deposits and borrowings liability mismatches. Empirical results of the analysis are(with maturity up to one year) and proportion of short-term presented in Table and investments (with maturity up to one year) alsowitnessed an upward trend in recent years (Chart 2.1). From the results, it can be seen that proportion of infrastructure credit in total non-food gross bank creditIn order to understand the possible impact of is positively correlated with the ALM and this correlationinfrastructure lending on asset liability mismatches of was statistically significant. However, though the coefficientthe banking sector, a regression analysis was carried associated with proportion of term deposits was negative, the corresponding “t” value came out as statistically insignificant. Recognising the possible adverse impact of infrastructure financing by banks on their asset-liability management, the Reserve Bank has taken certain measures in recent years such as permitting banks to enter into take out financing arrangement with IDFC/other FIs. Going forward, there is a need to conduct detailed impact analysis of the effect of infrastructure lending on asset liability mismatches of banks. Also, there is a need to make infrastructure projects commercially viable, apart from strengthening the corporate bond market, which would reduce the dependence on banks for infrastructure funds.sections stood at 15 and 11, respectively. As on Banks’ retail loan portfolio expanded at athe last reporting Friday of March 2012, 6 private higher ratesector banks could not meet the overall prioritysector target of 40 per cent. In addition, 13 private 4.49 During 2011-12, banks’ retail loan portfoliosector banks could not achieve the sub-target set witnessed expansion at a higher rate as comparedfor agriculture (Chart IV.20). A detailed analysis with the previous year, mainly led by growth inof priority sector lending is provided in Box IV.3. credit card receivables and other personal loans. 74
  • 94. Operations and Performance of Commercial Banks Table IV.21: Priority Sector Lending by Banks (As on last reporting Friday of March 2012) (Amount in ` billion)Item Public Sector Banks Private Sector Banks Foreign Banks*** Amount Per cent of Amount Per cent of ANBC/ Amount Per cent of Outstanding ANBC/OBE* Outstanding OBE* Outstanding ANBC/OBE*1 2 3 4 5 6 7Total Priority Sector Advances 11,307 37.2 2,864 39.4 805 40.9of whichAgriculture** 4,786 15.8 1,042 14.3 1 0.1Weaker Sections 2,888 9.5 389 5.4 - -Small Enterprises 3,966 13.1 1,105 15.2 217 11Notes: 1. *: Priority sector lending target set at 40 per cent of adjusted net bank credit (ANBC) or credit equivalent amount of off-balance sheet exposure (OBE), whichever is higher as on March 31st of the previous year. 2. **:For agriculture, the sub-target is set at 18 per cent of ANBC/OBE, whichever is higher as at end-March of the previous year. 3. ***: For foreign banks, the target of priority sector lending is set at 32 per cent of ANBC/OBE, whichever is higher, as at end-March of the previous year. 4. Figures reported as “per cent of ANBC/OBE” are calculated as amount of priority sector advances as per cent of ANBC/OBE, whichever is higher, as at end-March of the previous year. 5. - Nil/negligible. 6. Data are provisional.Housing loans continued to constitute almost half due to price fluctuations in related asset/productof total retail portfolio of banks (Table IV.22). markets. During 2011-12, growth in credit to sensitive sectors slowed down as compared withCredit flow to sensitive sectors registered the previous year. As a consequence, proportionsubdued growth of credit to sensitive sectors in total credit also4.50 The Reserve Bank considers capital registered a decline. Real estate exposuremarket, real estate, and commodities as sensitive accounted for more than 90 per cent of total banksectors as sudden spurt in credit to these sectors exposure to sensitive sectors. At the bank groupcould adversely affect the asset quality of banks level, foreign banks’ exposure to these sectors was higher as compared with other bank groups (Appendix Table IV.3). 6. Operations of Scheduled Commercial Banks in Capital Market Resource mobilisation through public and private placements slowed down 4.51 In an increasingly liberalised and competitive market, banks’ resource mobilisation through the capital market provides an important avenue for growth in their balance sheet. However, following the uncertainties prevailing in the domestic market and relatively subdued performance of the equity market during the first half of 2011-12, banks abstained from raising resources through public issues during 2011-12 (Table IV.23). 75
  • 95. Report on Trend and Progress of Banking in India 2011-12 Box IV.3: Priority Sector Lending – is there a Bias towards Bigger Credit Needs? The effort of extending formal credit to key priority sectors, i.e., agriculture and small scale industries had been set in motion back in 1968, when the Reserve Bank, in consultation with the National Credit Council (NCC) for the first time emphasised the need to increase commercial banks’ commitment to priority sector lending. The description of the priority sectors was later formalised in 1972 on the basis of the report submitted by the Informal Study Group on Statistics relating to advances to the priority sectors. Although no specific target was fixed for lending to priority sectors during the initial years, banks were advised to increase the share of these sectors in their aggregate advances to the level of 33 per cent by March 1979. Later, banks were advised to increase the proportion of their priority sector lending to 40 per cent by March Agro-processing units accounted for almost 5 per cent of 1985. the total agricultural credit during the same period. Subsequently, other committees and working groups on Data on credit to micro and small enterprises also revealed priority sector lending continued with the recommendation a bias in favour of relatively bigger enterprises. As on the of a specific priority sector mandate for banks, though last reporting Friday of March 2011, of the total credit there have been periodic changes in the scope of priority outstanding to the micro and small enterprises, only sector definition from time to time. The recent development 21.1 per cent was disbursed to micro (manufacturing) regarding priority sector lending involved constitution enterprises with investment up to `5 lakh and micro of a Working Group within the Reserve Bank under the (service) enterprises with investment up to `2 lakh as Chairmanship of Shri M. V. Nair, with the mandate of against the prescribed target of 40 per cent. re-examining the existing classification and suggesting Priority sector loans across different sectors to certain revised guidelines with regard to priority sector lending borrowers are classified as weaker sections and a separate classification and related issues. target of 10 per cent of ANBC is prescribed for this category. As per the revised priority sector norms, there is no change Though number of accounts in weaker section category in the overall target of 40 per cent. However, foreign banks witnessed higher growth during late 2000s as compared having 20 branches or more will be subject to same targets with early 2000s, amount outstanding under small and as domestic banks, to be achieved within a period of five marginal farmers, DRI beneficiaries as well as SHGs years (from April 1, 2013); in the case of other foreign decelerated during late 2000s (Table 3.1). banks, the existing target of 32 per cent continues to apply. Thus, within the priority sectors, especially within In this context, an attempt has been made to understand agriculture and micro and small enterprises, majority of whether loans are concentrated in larger accounts at the loans are concentrated in relatively larger accounts. There is a need to change credit concentration within the priority cost of small borrowers within the priority sectors. sector in order to further facilitate the process of inclusive Agriculture is one of the most important employment growth. intensive sectors of the economy, and as such a sub-target of 18 per cent of ANBC is prescribed for ensuring adequate Table 3.1: Priority Sector Lending of SCBs credit flow to this sector. While there have been concerns (As on Last Reporting Friday of March 2011) about non-adherence to this target by banks in general, a further disaggregated analysis shows that only about one- Category Number of Amount Accounts Outstanding fourth of total agricultural credit is going to small and 2006 2011 2006 2011 marginal farmers. Further, the share of small and marginal over over over over farmers in total agricultural accounts continued to 2001 2006 2001 2006 decline during past two decades. However, on the positive Weaker Sections 3.4 9.8 24.9 26.7 side, share of small and marginal farmers in the total Small and Marginal Farmers 7.9 9.9 31.7 25.8 agricultural credit outstanding witnessed an increasing DRI beneficiaries -9.7 12.2 11.6 7.1 trend from the 2000 onwards (Chart 3.1). Importantly, Advances to SHGs 72.9 19.0 99.7 35.6 13.6 per cent of total agricultural credit was absorbed by corporate, partnership firms and institutions engaged in Source: Priority sector returns submitted by banks to the Reserve Bank. agriculture, as on the last reporting Friday of March 2011. 76
  • 96. Operations and Performance of Commercial Banks Table IV.22: Retail Portfolio of Banks Table IV.24: Resources Raised by Banks (Amount in ` billion) through Private PlacementsItem Outstanding as at Percentage (Amount in ` billion) end-March Variation Category 2010-11 2011-12 2011 2012 2010-11 2011-12 No. of Amount No. of Amount1 2 3 4 5 Issues Raised Issues Raised1 Housing Loans 3,607 4,118 15.1 14.2 1 2 3 4 52 Consumer Durables 46 27 50.3 -40.93 Credit Card Receivables 187 223 -13.5 19.6 Private Sector Banks 5 61 10 624 Auto Loans 1,002 1,162 27.8 16.0 Public Sector Banks 25 209 9 445 Other Personal Loans 2,469 3,069 18.5 24.3 Total 30 270 19 106Total Retail Loans (1 to 5) 7,310 8,599 17.0 17.6 (18.3) (18.4) Note: Data for 2011-12 are provisional. Source: Merchant Bankers and Financial Institutions.Note: 1. Figures in parentheses represent percentage share of retail loans in total loans and advances. 2. The amount of total loans and advances are as provided in the volatility of the BSE Bankex was also higher than off-site returns (domestic) of SCBs. 3. Percentage variation could be slightly different as absolute the BSE Sensex, reflecting the higher risk numbers have been rounded off to ` billion. perception in banking stocks. However, 4. Components may not add up to total due to rounding off numbers to ` billion. performance of BSE Bankex improved in the laterSource: Based on Off-site returns (domestic). part of the year and during February-March 2012, it outperformed the BSE Sensex (Table IV.25 and4.52 D u r i n g 2 0 1 1 - 1 2 , b a n k s ’ r e s o u r c e Chart IV.21).mobilisation through private placements alsoslowed down as compared with the previous year. 4.54 In sync with the overall trend of the BSEThis reduction in resource mobilisation through Bankex, most banks recorded a lower priceprivate placements was in the case of public sector earning (P/E) ratio in 2011-12 compared with thebanks, while private sector banks continued to previous year. During 2011-12, though the shareraise resources through private placements. Due of bank stocks in total turnover maintained anto the global uncertainties emanating from the upward trend, banks’ share in total marketdeteriorating European sovereign debt crisis, capitalisation declined as compared with theIndian banks did not mobilise resources from previous year (Appendix Table IV.4 and Tableeuro issues (Table IV.24). IV.25).Performance of BSE Bankex was subdued Table IV.25: Risk-Return Performance, Turnover4.53 I n d i a n e q u i t y m a r k e t w i t n e s s e d and Capitalisation of Bank Stockssluggishness until December 2011, before picking Item 2009-10 2010-11 2011-12 2012-13#up in the fourth quarter of 2011-12 following 1 2 3 4 5renewed FII buying. In tandem, the BSE Bankex, 1. Return*which represents the banking sector scrips, BSE Bankex 137.2 24.9 -11.6 11.8 BSE Sensex 80.5 10.9 -10.5 7.8recorded negative return during 2011-12. The 2. Volatility@ BSE Bankex 16.5 10.3 9.7 4.8 Table IV.23: Public Issues from the BSE Sensex 11.9 6.3 6.2 3.8 Banking Sector 3. Share of turnover of 8.3 9.5 11.4 14.4 (` billion) bank stocks in total turnoverYear Public Sector Private Sector Total 4. Share of 10.0 11.9 11.5 12.0 Banks Banks capitalisation of bank stocks in total market Equity Debt Equity Debt Equity Debt capitalisation **1 2 3 4 5 6 7 Notes: 1. * : Percentage variations in indices on a point-to-point basis.2010-11 43.3 - 9.2 - 52.5 - 2. @ : Defined as coefficient of variation.2011-12 - - - - - - 3. **: As at end-period.- Nil/Negligible. 4. #: April-September 28, 2012.Source: SEBI. Source: BSE. 77
  • 97. Report on Trend and Progress of Banking in India 2011-12 Table IV.26: Number of Public Sector Banks Classified by Percentage of Private Shareholding* (As at end-March 2012) Class of shareholding Private Private Total private resident non-resident shareholding shareholding shareholding 1 2 3 4 Up to 10 per cent - 17 - More than 10 and up to 5 9 2 20 per cent More than 20 and up to 8 - 4 30 per cent More than 30 and up to 8 - 6 40 per cent More than 40 and up to 5 - 14 43 per cent –: Nil/Negligible. * Including 19 nationalised banks, SBI and IDBI Bank Ltd. March 2012, 10 out of 26 public sector banks had private shareholding ranging from 20 per cent to7. Shareholding Pattern in Scheduled 40 per cent. In addition, foreign shareholding inCommercial Banks public sector banks was only upto 17.4 per cent.Government shareholding in PSBs was well As at end-March 2012, foreign shareholding inabove the statutory requirement private sector banks was upto 70.7 per cent, which was within the stipulated limit of 74 per cent4.55 During 2011-12, majority of public sector (Table IV.26 and Appendix Table IV.5).banks had Government shareholding of more thanthe stipulated 51 per cent, though for a number 8. Foreign Banks’ Operations in India andof public sector banks, this percentage was close Overseas Operations of Indian Banksto the statutory floor (Chart IV.22). As at end- 4.56 As at end-March 2012, there were 41 foreign banks operating in India with 323 branches. Another 46 foreign banks had their representative offices in India. Among foreign banks, Standard Chartered had the maximum spread of bank branches in India (96 branches) followed by HSBC (50 branches), Citi Bank N.A. (42 branches) and Royal Bank of Scotland N.V. (31 branches). 4.57 As at end-March 2012, 23 Indian banks had overseas presence with a total number of overseas branches of 250, as compared with 244 during the previous year. Of these overseas branches, 215 branches were of public sector banks. Among these banks, the State Bank had maximum number of overseas branches followed by Bank of Baroda and Bank of India. In addition, 78
  • 98. Operations and Performance of Commercial Banks Table IV.27: Overseas Operations of Indian Banks (As at end-March)Name of the Bank Branch Subsidiary Representative Office Joint Venture Bank Total 2011 2012 2011 2012 2011 2012 2011 2012 2011 20121 2 3 4 5 6 7 8 9 10 111 Allahabad Bank 1 1 0 0 1 1 0 0 2 22 Andhra Bank 0 0 0 0 2 2 0 0 2 23 Bank of Baroda 47 47 9 9 3 2 1 1 60 594 Bank of India 24 24 3 4 5 5 1 0 33 335 Canara Bank 4 5 0 0 1 1 0 0 5 66 Corporation Bank 0 0 0 0 2 2 0 0 2 27 Indian Bank 4 4 0 0 0 0 0 0 4 48 Indian Overseas Bank 6 6 1 0 4 3 0 0 11 99 IDBI Bank Ltd. 1 1 0 0 0 0 0 0 1 110 Punjab National Bank 4 4 3 3 4 5 1 1 12 1311 State Bank of India 45 52 5 5 8 8 4 4 62 6912 State Bank of Travancore 0 0 0 0 0 1 0 0 0 113 Syndicate Bank 1 1 0 0 0 0 0 0 1 114 UCO Bank 4 4 0 0 2 1 0 0 6 515 Union Bank 1 1 0 0 5 5 0 0 6 616 United Bank of India 0 0 0 0 1 1 0 0 1 117 Oriental Bank of Commerce 0 0 0 0 1 1 0 0 1 118 Axis Bank 3 4 0 0 3 3 0 0 6 719 HDFC Bank Ltd. 2 2 0 0 2 2 0 0 4 420 ICICI Bank Ltd. 8 9 3 3 8 8 0 0 19 2021 IndusInd Bank Ltd. 0 0 0 0 2 2 0 0 2 222 Federal Bank Ltd. 0 0 0 0 1 1 0 0 1 123 Kotak Mahindra Bank Ltd. 0 0 0 0 1 1 0 0 1 1 Total 155 165 24 24 56 55 7 6 242 25025 Indian banks had a total of 55 representative areas. The IT Vision Document, 2011-17 of theoffices in other countries. The number of Reserve Bank sets out the roadmap forsubsidiaries and joint ventures of Indian banks implementation of key IT applications in bankingabroad stood at 24 and 6, respectively (Table with special emphasis on seamless delivery ofIV.27). banking services through effective implementation of Business Continuity Management (BCM),9 . Te c h n o l o g i c a l D e v e l o p m e n t s i n Information Security Policy, and Business ProcessScheduled Commercial Banks Re-engineering (BPR).4.58 Over the years, the Reserve Bank has laid 4.59 With the computerisation and adoption ofspecial emphasis on technology infusion in the Core Banking Solutions in banks almost reachingday to day operations of banks. Technology, apart the final stage of completion, the focus has nowfrom increasing the efficiency of banking services, shifted to adoption of more advanced technologiesis expected to boost the ongoing process of in banking, which would use analytics andfinancial inclusion emphasised by the Reserve business intelligence to enhance their CustomerBank. In recent years, increase in the number of Relationship Management (CRM) and improveoff-site ATMs in various locations as well as use internal effectiveness including Managementof mobile phones for delivering banking technology Information Systems (MIS) and managing riskshas further facilitated banking outreach in remote arising out of IT implementation. 79
  • 99. Report on Trend and Progress of Banking in India 2011-12Sustained increase in total number of ATMs Table IV.29: Credit and Debit Cards Issued byindicating move towards door-step banking Scheduled Commercial Banks (As at end-March)4.60 During 2011-12, an additional 21,000 (in million)ATMs were deployed by the banks. Public sector Sr. Bank group Outstanding Outstanding No Number of Number ofbanks accounted for more than 60 per cent of the Credit Cards Debit Cardstotal number of ATMs as at end-March 2012, while 2011 2012 2011 2012close to one -third of the total ATMs were 1 2 3 4 5 6attributable to new private sector banks 1. Public sector banks 3.08 3.06 170 215 1.1 Nationalised banks 0.78 0.84 80 103(Table IV.28). 1.2 SBI group 2.30 2.22 90 112Public sector banks were major issuers of 2. Private sector banks 9.32 9.67 53 60debit cards 2.1 Old private sector banks 0.04 0.04 12 14 2.2 New private sector banks 9.28 9.63 41 464.61 Issuance of credit cards declined, while 3. Foreign banks 5.64 4.92 3.9 3.8debit cards showed a high growth trend. Foreign All SCBs (1+2+3) 18.04 17.65 228 278banks, however, showed a small decline in the Note: Components may not add up to total due to rounding off numbers to million.issuance of debit cards. More than three-fourthsTable IV.28: ATMs of Scheduled Commercial Banks of the total debit cards outstanding as at the end (As at end-March 2012) of March 2012 were issued by public sector banks.Sr. Bank group On-site Off-site Total In contrast, more than half of the outstandingNo ATMs ATMs number of ATMs credit cards as at the end of March 2012 were1 2 3 4 5 issued by new private sector banks (Table IV.291. Public sector banks 34,012 24,181 58,1931.1 Nationalised banks* 18,277 12,773 31,050 and Chart IV.23).1.2 SBI group 15,735 11,408 27,1432. Private sector banks 13,249 22,830 36,079 Both volume and value of transactions2.1 Old private sector banks 3,342 2,429 5,771 through major electronic payment systems2.2 New private sector banks 9,907 20,401 30,3083. Foreign banks 284 1,130 1,414 registered an increaseAll SCBs (1+2+3) 47,545 48,141 95,686 4.62 A trend in favour of cashless payments isNote: *: Excluding IDBI Bank Ltd. discernible in recent years with both volume and 80
  • 100. Operations and Performance of Commercial Banks Box IV.4: Changing Trend of the Payment Systems from Cash to CashlessIn India, cash continues to be the pre-dominant mode ofpayment. The policy initiatives and the regulatory stanceof the Reserve Bank has continued to focus on increasingthe acceptance and penetration of safe, secure and efficientnon-cash payment modes comprising cheques, credit/debitcards, and transactions through ECS/RTGS/NEFT, over theyears. Due to these measures the average ratio of non-cashretail payment to GDP continues to hover around 6 per centover the last three years. (Table 4.1).The bank-led model for mobile banking has also startedgaining popularity in the recent months. As at the end ofJune 2012, 69 banks were granted approval to providemobile banking facility, of which 49 have started operations.In November 2010, National Payment Corporation of India(NPCI) was given approval to launch Interbank MobilePayment Service (IMPS), which is a unique 24X7 inter-bankelectronic funds transfer system providing instantaneouscredit to the beneficiaries. With this channel having nowstabilised and gaining further customer acceptance, theearlier transaction limit for mobile banking has beenremoved by the Reserve Bank. The banks are now free tofix their own per transaction limit based on their own riskperception with the approval of their respective Boards.Apart from this, the volume and value of transactionsthrough the two major electronic payment systems of thecountry, i.e., RTGS and NEFT has increased rapidly (Chart4.1A and 4.1B).Pre-paid payment instruments (PPIs) have emerged as aconvenient replacement/substitution for cash transaction,besides providing a proper audit trail. PPIs are payment issued by non-banks (Table 4.2). However, efforts areinstruments that facilitate purchase of goods and services underway to migrate these paper based PPIs to electronicagainst the value stored on such instruments. As at end- modes.June 2012, 40 banks (including the Department of Posts, Going forward, the relaxations in the domestic moneyGoI) and 21 non-bank entities were granted approval/ transfer guidelines introduced in October 2011 are expectedauthorisation under the Payment and Settlement System to provide further impetus towards financial inclusion(PSS) Act, 2007 to issue PPIs in India. Three types of through electronic PPIs, including the use of m-wallets, byPPIs are popularly issued viz., paper voucher, cards and enabling all authorised entities (both banks as well as non-m-wallets. Amongst these, the paper vouchers are the most banks) to increase domestic remittances through formalpopular in terms of numbers and value. These were mainly payment channels. Table 4.1: Trend in Payments Systems (` billion) Table 4.2: Spread of Pre-payment InstrumentsYear Non-cash Non-cash retail Currency in (end-March 2012) retail payments to circulation as (Volume in million and Value in ` billion) payments* GDP ratio a percentage of GDP Pre-paid Instrument Number Percentage Value Percentage Type of PPIs to total of PPIs to total2006-07 1,94,459 4.53 11.77 issued PPIs issued PPIs2007-08 3,05,382 6.12 11.85 issued issued2008-09 3,29,736 5.91 12.38 Paper voucher 42.00 97.0 1.76 60.82009-10 4,06,116 6.29 12.38 Card based 0.57 1.3 1.04 35.82010-11 4,76,291 6.21 12.36 Mobile account/ wallet 0.55 1.3 0.1 3.52011-12 5,16,332 5.83 12.04 Total 43.00 100.0 2.9 100.0* Cheques, ECS, NEFT, Cards, RTGS Customer transactions.Source: Various RBI publications and Database on Indian Economy Note: Components may not add up to total due to rounding off (DBIE). numbers to million/ ` billion. 81
  • 101. Report on Trend and Progress of Banking in India 2011-12 Table IV.30: Volume and Value of Electronic Transactions by SCBs (Volume in million, Value in ` billion)Year Volume Percentage Variation Value Percentage Variation 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 1 2 3 4 5 6 7 8 9ECS Credit 117 122 19.5 3.6 1,817 1,838 54.5 1.2ECS Debit 157 165 5.0 5.1 736 834 5.9 13.3Credit cards 265 320 13.2 20.7 755 966 22.2 27.9Debit cards 237 328 39.3 38.2 387 534 46.6 38.0NEFT 132 226 99.5 70.9 9,321 17,903 127.6 92.1RTGS 49 55.0 48.5 11.6 4,84,872 5,39,307 22.9 11.2Note: Percentage variation could be slightly different as absolute numbers have been rounded off to million/` billion.value of transactions through major electronic seamless flow of data from their transaction servermodes of payments registering an increase to their management information system (MIS)(Table IV.30 and Box IV.4). server while the second phase would involve the Reserve Bank to introduce a system for generatingImplementation of Business Continuity Plan all returns from banks’ MIS. Implementation of(BCP) and Automated Data Flow is in progress the first phase is in progress, and is monitored4.63 At the present juncture, banking in India and reviewed at quarterly intervals. The projectis largely dependent on technology. It is, therefore, is expected to be completed by March 2013. Innecessary that banks have appropriate and the second phase, the Reserve Bank wouldadequate arrangements for disaster recovery and introduce a system for the flow of data from thebusiness continuity to face any event of natural MIS server of banks in a straight through process.disasters or operational failure. During recentyears, an integrated Business Continuity 4.65 Considering the tremendous growth inManagement (BCM) arrangement encompassing volume of transactions through the RTGS system,continuity planning for all business functions a Technical Advisory Group (TAG) with membersincluding data centres has evolved, with support from technology institutes, banks and the Reserveprovided by the Reserve Bank. In addition, to Bank was constituted in order to review the RTGSaddress the issues of disruption in business system. The Group recommended building up theprocess arising from technology failure, New Generation RTGS (NG-RTGS) system, whichappropriate disaster recovery and business would encompass key features such as (i) liquidity-continuity arrangements have been implemented saving mechanism (ii) advanced queue managementat RBI data centres. system (iii) various modes of access as per the size of the bank (iv) Extensible Mark-up Language4.64 Considering the importance of accuracy (XML) based messaging system and (v) real-timeand timeliness in regulatory reporting, a project information and transaction monitoring andon automating data flow from the core banking control system having the dashboard facility.solution (CBS) or other IT systems of commercialbanks to the Reserve Bank was announced in the 10. Customer ServiceMonetary Policy Statement of 2010-11. TheApproach Paper released in November 2011, 4.66 Providing efficient and hassle-free bankingprepared by a core group with representation from services has been one of the important prioritiesbanks, the Reserve Bank, IDRBT and the IBA pursued by the Reserve Bank. A separateenvisages the implementation in two phases. In Customer Services Department was set up withinthe first phase, banks were advised to ensure the Reserve Bank in July 2006 to oversee the 82
  • 102. Operations and Performance of Commercial Banks Table IV.31: Region-wise Complaints Received Majority of complaints relate to credit/debit at Banking Ombudsman Offices cards and violation of fair practices codeBO office Number of Percentage Complaints Variation 4.68 According to the category-wise data on 2010-11 2011-12 2011-12 complaints sourced from all 15 BO offices,Ahmedabad 5,190 4,590 -11.6 majority of complaints were regarding credit/debitBangalore 3,470 3,486 0.5Bhopal 5,210 5,953 14.3 cards followed by non-observance of the fairBhubaneswar 1,124 1,826 62.5 practices code, deposits account, failure ofChandigarh 3,559 3,521 -1.1Chennai 7,668 6,614 -13.7 commitments made under the BCSBI code andGuwahati 584 708 21.2 pensions.Hyderabad 5,012 5,167 3.1Jaipur 3,512 4,209 19.8Kanpur 8,319 9,633 15.8 Public sector banks accounted for almostKolkata 5,192 4,838 -6.8 two-thirds of total complaintsMumbai 7,566 7,905 4.5New Delhi 10,508 9,180 -12.6Patna 2,283 2,718 19.1 4.69 In continuation of the trend observedThiruvananthapuram 2,077 2,541 22.3 during the previous year, public sector banksTotal 71,274 72,889 2.3 accounted for bulk of the complaints (70 per cent)Source: Various Regional Offices of Banking Ombudsman. received during 2011-12. Within public sector banks, the State Bank group alone accounted forgrievance redressal mechanism of various banks almost 38 per cent of total complaints receivedas well as the Reserve Bank as also administering during 2011-12. Though across all majorthe Banking Ombudsman (BO) scheme. Atpresent, the BO is functional across 15 major categories of complaints, the combined share ofbanking centres of the country. the State Bank group and nationalised banks was more than 50 per cent, it was particularly markedMajor metropolitan cities accounted for for complaints related to pensions (Chart IV.24almost 40 per cent of total complaints and Appendix Table IV.7).4.67 The major metropolitan centres, i.e., NewDelhi, Mumbai, Kolkata, and Chennai accounted 4.70 Going forward, there is a need to improvefor almost 40 per cent of the total number customer services in public sector banks acrossof complaints received across the country all spheres of banking and particularly in areas(Table IV.31). related to deposit accounts, loans and advances, 83
  • 103. Report on Trend and Progress of Banking in India 2011-12failure of commitments made under the BCSBI 11. Financial Inclusioncode and pensions. In addition, services related 4.74 In sync with the objective of inclusiveto credit/debit cards, which have been subject to growth, the Reserve Bank has given high priorityfrequent complaints from customers in recent to the agenda of financial inclusion over the pastyears, need to be improved across all bank groups. few years. Initiatives were taken by the ReserveWith the advent of technology, there is a need to Bank in recent years to expand banking servicesfurther strengthen customer service in areas of to remote areas of the country. This includesnet and mobile banking to enhance customer relaxation of branch authorisation policy, andconfidence in these technologies. directing commercial banks to open at least 254.71 There is a further need to improve the per cent of their total branches in hithertocustomer data base, which apart from facilitating unbanked areas of the country. In addition,banks to acquaint themselves with the considering the difficulty of opening brick-and-whereabouts of the customers, would help them mortar branches in all the remote parts of the country, the Reserve Bank has been encouragingto prevent incidents of fraud/money-laundering. banks to improve banking penetration throughA new initiative, namely, Unique Customer Business Correspondents (BCs)/ BusinessIdentification Code (UCIC) has been taken up by Facilitators (BFs). Further, the Reserve Bank hasthe Reserve Bank in this area (refer to Box III.1 also allowed for-profit organisations to work asof Chapter III). BCs. Apart from this, leverage of technology forNeed to improve customer awareness to the expansion of banking services has beencontain incidents of frauds involving encouraged by the Reserve Bank in recent years.customers The use of mobile technology to deliver banking services is an important initiative in this4.72 With greater infusion of technology in direction. Despite all the attempts made by thebanking, the incident of frauds in internet banking Reserve Bank, the extent of financial exclusionhas witnessed an increase in recent times. continued to be significant in India, whenEnsuring efficiency of the banking sector by way compared with some of the advanced as well asof technology infusion while minimising the developing countries (Table IV.32).occurrence of such fraudulent events has becomeone of the major objectives of the Reserve Bank Table IV.32: Select Indicators of Financial Inclusion-Cross Country Comparisonin recent years. Complaints related to unauthorisedfund transfers, fraudulent withdrawals from Country Number of branches Number of ATMs Bank loan as Bank deposits asATMs using duplicate cards, phishing E-mails (per 0.1 (per 0.1 per cent of per cent of million million GDP GDPaimed at extracting personal information have adults) adults)registered significant increase in recent times. 1 2 3 4 5 India 10.64 8.90 51.75 68.434.73 Going forward, there is a need for building Australia 29.61 166.92 128.75 107.10up a robust mechanism to prevent incidents of Brazil 46.15 119.63 40.28 53.26 France 41.58 109.80 42.85 34.77fraud in areas of mobile/net banking and Mexico 14.86 45.77 18.81 22.65electronic fund transfer. Along with this, the United States 35.43 - 46.83 57.78initiatives by various BO offices to improve Korea 18.80 - 90.65 80.82customer education and awareness need to be Philippines 8.07 17.70 21.39 41.93stepped up further, which would require active Notes: - : Data not available. All data pertain to 2011. Source: Financial Access Survey, IMF .support from banks as well as State Governments. 84
  • 104. Operations and Performance of Commercial BanksMajority of the new bank branches were Table IV.33: Region-wise and Populationopened in rural and semi-urban areas Group-wise New Bank Branches Opened during 2011-124.75 In accordance with the efforts put forward Region Rural Semi- Urban Metropolitan Totalby the Reserve Bank for opening new bank urbanbranches in rural areas, more than two-thirds of 1 2 3 4 5 6total new branches opened during 2011-12 were Central 543 483 240 119 1,385 Eastern 301 352 217 89 959in rural or semi-urban areas. Among the regions, North-Eastern 43 60 49 - 152southern region accounted for almost 30 per cent Northern 450 425 187 205 1,267of total new bank branches opened (Table IV.33). Southern 647 871 315 247 2,080 Western 269 387 122 297 1,075Majority of the new bank branches were Total 2,253 2,578 1,130 957 6,918located in Tier 2-6 centres newly opened ATMs. Southern region had4.76 Consequent to the liberalisation of the maximum number of newly opened ATMs,branch authorisation policy, banks are not followed by northern region. However, the sharerequired to take prior approval from the Reserve of rural areas in the total number of ATMsBank in order to open branches in Tier-2 to Tier- continued to remain small (Chart IV.25 and6 centres. Of the total new bank branches opened Table IV.34).during 2011-12, almost 70 per cent (4,831 bankbranches) were located in Tier-2 to Tier-6 centres. The process of providing banking outlets in all villages with population more than 2,000Off-site ATMs as substitute for brick-and- is on the verge of completionmortar branches 4.78 As at end-March 2012, 99 per cent of the4.77 Off-site ATMs play an important role by identified villages have been provided with bankingproviding the basic banking services like cash outlets. Four States, viz., Uttar Pradesh, Bihar,withdrawal, transfer of funds even without the West Bengal and Andhra Pradesh accounted forpresence of full-fledged brick-and-mortar more than 50 per cent of these newly openedbranches. During 2011-12, there was an addition banking outlets. On a positive note, all identifiedof 14,365 new off-site ATMs. However, metropolitan villages in the north-eastern region have beenareas accounted for the maximum number of provided with banking outlets. Region-wise 85
  • 105. Report on Trend and Progress of Banking in India 2011-12 Table IV.34: Number of ATMs of SCBs at expanding the banking network in rural India Various Locations (Chart IV.26). (At end-March 2012) 4.80 Further, in sync with the Government’sBank group Rural Semi– Urban Metro- Total urban politan mandate of transferring all benefits directly to the1 2 3 4 5 6 beneficiaries’ bank accounts, the Reserve Bank isPublic sector banks 6,673 15,135 19,213 17,172 58,193 encouraging banks to implement Electronic (11.5) (26.0) (33.0) (29.5) (100.0)Nationalised Banks 3,383 6,800 10,186 10,681 31,050 Benefit Transfers (EBT). Since the social security (10.9) (21.9) (32.8) (34.4) (100.0) beneficiaries may be residing in villages with aState Bank Group 3,290 8,335 9,027 6,491 27,143 (12.1) (30.7) (33.3) (23.9) (100.0) population of less than 2000, there is an immediatePrivate sector banks 1,937 7,520 11,525 15,097 36,079 need for expanding EBT-enabled bank accounts (5.4) (20.8) (31.9) (41.8) (100.0)Old Private Sector Banks 523 2,025 1,876 1,347 5,771 across smaller villages. (9.1) (35.1) (32.5) (23.3) (100.0)New Private Sector Banks 1414 5,495 9,649 13,750 30,308 Initiatives undertaken for implementation of (4.7) (18.1) (31.8) (45.4) (100.0) the process of EBTForeign Banks 29 22 268 1,095 1,414 (2.1) (1.6) (19.0) (77.4) (100.0)Total 8,639 22,677 31,006 33,364 95,686 4.81 The Reserve Bank has issued guidelines to (9.0) (23.7) (32.4) (34.9) (100.0) SLBC convenor banks in June 2012 mandatingGrowth overprevious year (20.7) (25.4) (28.9) (32.4) (28.4) them to prepare a roadmap covering all un-banked villages of population less than 2,000 and allotNote: Figures in parentheses indicate population group-wise percentage share of total ATMs under each bank group. these villages to banks for providing banking services, in a time-bound manner. Banks have also been advised to have a BC touch point in eachanalysis of the progress made in banking of the villages in the country, to start with, forpenetration indicated that significant progress has provision of EBT services.been made in eastern as well as north-easternregion on this front (Table IV.35). 4.82 Further, banks have been advised to give priority, in the initial stages, to provide door stepPublic sector banks and regional rural banks services to EBT beneficiaries through regularplay a key role in financial inclusion process visits by BCs to the allotted villages, for making it4.79 Bank group-wise analysis of new banking a self-sustaining business model and over a periodoutlets in identified villages revealed that public of time, ensure that all kinds of banking services,sector banks as well as RRBs played a key role in viz., remittances, recurring deposit, entrepreneurial Table IV.35: Progress in Roadmap for Providing Banking Outlets in Villages with Population of more than 2000 (As on March 31, 2012)Region No. of Banking outlets opened in villages Total no. of Banking penetration in villages villages covered with population> 2000 during villages in March 2012 as multiple of (March 2010) April 2010 - March 2012 covered position of March 2010 (March 2012) Branches BC Other Modes TotalNorthern 4,363 241 7,868 67 8,176 12,539 2.9North-Eastern 1,093 382 2,795 7 3,184 4,277 3.9Eastern 6,767 444 19,019 579 20,042 26,809 4.0Central 6,935 491 19,256 535 20,282 27,217 3.9Western 3,409 208 6,849 816 7,873 11,282 3.3Southern 5,894 727 13,587 328 14,642 20,536 3.5All-India 28,461 2,493 69,374 2,332 74,199 1,02,660 3.6 86
  • 106. Operations and Performance of Commercial Bankscredit in the form of KCC and GCC, and other including through BC-ICT; v) issuing Kisan Creditbanking services are available to all the residents Cards (KCCs) and General Credit Cards (GCCs),of the village through a mix of brick-and-mortar and other specific products designed by them tobranches and BC network. cater to the financially excluded segments.4.83 Keeping in view the difficulty faced by one 4.85 The progress, so far, by banks in achievinglead bank in implementing EBT across all villages FIP during the last two years has been impressive.of the concerned district under the erstwhile “one A brief analysis of the progress shows thatdistrict-one bank” model, the Reserve Bank has penetration of banking has increased multi-foldrecommended the implementation of EBT through in rural areas. As at end-March 2012, villagesthe “one district-many banks-one leader bank”model, in its “Operational Guidelines for covered through BCs constituted more than 80Implementation of EBT and its Convergence with per cent of the total villages covered under the FIP.Financial Inclusion Plan”. Under this model, all This indicates move towards the widespreadbanks having presence in the concerned district acceptance of BC model of financial inclusion bywould participate in EBT, though for administrative banks as well as consumers in rural India.convenience, the Government would deal with only Volume of transactions through ICT-basedone leader bank. The revised model is expected accounts increased steadilyto expedite EBT implementation due to itssimplicity and scalability. 4.86 No-frills accounts enable small customersFinancial Inclusion Plan (FIP) is in progress to avail of hassle-free credit in the form of in-built overdraft facility. As at end-March 2012, the total4.84 All public and private sector banks were number of no-frills accounts had surpassed 100advised to put in place Board approved three-year million. However, only two per cent of these no-financial inclusion plans (FIPs) from April 2010 frills accounts had overdraft facility. One welcomeonwards. The FIP should broadly contain self-settargets with respect to; i) opening rural brick and development noticed in this regard is that, themortar branches; ii) deployment of BCs; iii) number of ICT-based accounts as percentage ofcoverage of villages with population of more than no-frills accounts has witnessed steady increase2000 as also other un-banked villages with in the last two years, indicating increasedpopulation below 2,000 through branches/BCs/ acceptance of ICT-based products among ruralother modes; iv) opening no-frills accounts customers. 87
  • 107. Report on Trend and Progress of Banking in India 2011-124.87 In the ensuing year, focus would be on the SHGs linked to different banks. Though thenumber and value of transactions in the no-frills number of SHGs maintaining savings accountsaccounts and credit disbursed through ICT-based with banks increased during 2011-12, comparedBC outlets. For the purpose, banks have been with the previous year, total amount of SHGadvised to ensure that FIPs prepared by their savings outstanding in banks declined.Head Offices are disaggregated at the respectivecontrolling offices and at the branch level and a 4.89 In recent years, micro-finance institutionsmechanism is put in place to monitor the have emerged as an important conduit ofprogress at these levels periodically. Details of channelling credit to the rural parts of the country,the progress made by banks under FIP are given due to their widespread reach in these areas asin Table IV.36. well as the ability to offer customised financial products, suited to the needs of average ruralSHG-Bank Linkage Programme and Micro- customers (Table IV.37).Finance4.88 The self-help group (SHG) - bank linkage 12. Local Area Banksprogramme started in 1992 as a pilot project 4.90 Local Area Banks (LABs) play an importantinitiated by NABARD and involving three agencies,viz., the SHGs, banks and NGOs. Though progress role in financial inclusion process. LABs cameunder the SHG-bank linkage programme was slow into existence in 1996, as a result of the initiativesduring the initial years of commencement, it taken by the Reserve Bank to establish local banksstarted expanding rapidly after 1999. As at end- in private sector with minimum paid up capitalMarch 2012, about 103 million rural households of ` 500 million. It was expected that LABs wouldhad access to regular savings through 7.96 million extend credit to agriculture and allied activities, small-scale industries, agro-industrial activities, Table IV.36: Progress under Financial Inclusion Plans Table IV.37: Progress of Micro-finance ProgrammesSr Particulars As on As on (As at end-March)no Mar Mar 2011 2012 Item Self-Help Groups*1 2 3 4 Number (in million) Amount (` billion)1 Total No. of Customer Service Points 60,993 1,16,548 2009- 2010- 2011- 2009- 2010- 2011- deployed 10 11 12P 10 11 12P2 Total banking outlets in villages, of which 1,16,208 1,81,753 Loans disbursed by 1.5 1.2 1.1 145 145 165 2.1 Branches 34,811 37,471 banks (0.27) (0.2) (0.2) (22) (25) (26) 2.2 BCs 80,802 1,41,136 Loans outstanding 4.8 4.8 4.4 280 312 363 2.3 Other modes 595 3146 with banks (1.3) (1.3) (1.2) (63) (78) (80.5)3 Urban Locations covered through BCs 3,771 5,891 Savings with banks 6.9 7.5 8.0 62 70 66 (1.7) (2.0) (2.1) (13) (18) (14)4 ICT-Based A/Cs-through BCs (No. in million) 32 575 ICT-Based A/Cs-Transactions (No. in million) 84 141 Item Micro-finance Institutions6 ICT-Based A/Cs-Transactions (Amt in billion) 58 93 Number (in million) Amount (` billion)7 Number of No-Frills Accounts (in million) 105 139 2009- 2010- 2011- 2009- 2010- 2011-8 Amount in No-Frills Accounts (` billion) 76 120 10 11 12P 10 11 12P9 Number of No-Frills Accounts with OD 0.6 2.7 Loans disbursed by 691 469 465 81 76 52 (in million) banks10 Amount in No Frills A/Cs with OD 0.3 1.1 Loans outstanding 1,513 2,176 1,960 101 107 115 (` billion) with banks11 Number of KCCs outstanding (in million) 27 30 Notes: 1. *: Figures in brackets indicate the details about SHGs covered12 Amount in KCCs outstanding (` billion) 1,600 2,068 under Swarnajayanti Gram Swarozgar Yojana (SGSY).13 Number of GCCs outstanding (in million) 1.7 2.1 2. P: Provisional data.14 Amount in GCCs outstanding (` billion) 35 42 Source: NABARD. 88
  • 108. Operations and Performance of Commercial Banks Table IV.38: Profile of Local Area Banks (As at end-March) (Amount in ` billion)Bank Assets Deposits Gross Advances 2011 2012 2011 2012 2011 20121 2 3 4 5 6 7Capital Local Area Bank Ltd. 7.50 9.67 6.48 8.20 4.20 5.18 (67.8) (71.0) (72.3) (73.8) (65.2) (67.2)Coastal Local Area Bank Ltd. 1.58 1.93 1.22 1.51 1.00 1.26 (14.3) (14.2) (13.6) (13.6) (15.6) (16.4)Krishna Bhima Samruddhi Local Area Bank Ltd. 1.38 1.35 0.93 1.00 0.88 0.84 (12.4) (9.9) (10.3) (9.0) (13.7) (10.9)Subhadra Local Area Bank Ltd. 0.61 0.68 0.34 0.39 0.36 0.43 (5.5) (5.0) (3.8) (3.5) (5.5) (5.6)All LABs 11.07 13.63 8.97 11.10 6.44 7.71 (100) (100) (100) (100) (100) (100)Note: Figures in parentheses indicate percentage share in total. Percentage shares calculated could slightly differ due to rounding off numbers to ` billion.Source: Based on off-site returns (domestic).trading activities and the non-farm sectors. LABs 4.91 Though initially six LABs were licensed byare also subject to the requirement of priority the Reserve Bank, only four of them remainedsector lending target set at 40 per cent of ANBC operational in the subsequent years. Of these fourand at least 25 per cent of their priority sector banks, Capital Local Area Bank accounted fordeployment is to be disbursed to the weaker more than 70 per cent of total assets of all foursections. LABs taken together (Table IV.38 and IV.39). Table IV.39: Financial Performance of Local Area Banks (Amount in ` billion) Amount Percentage Variation 2010-11 2011-12 2010-11 2011-121 2 3 4 51. Income (i+ii) 1.2 1.5 19.2 25.0 i) Interest income 1.1 1.4 24.4 27.3 ii) Other income 0.2 0.2 -5.6 -2. Expenditure (i+ii+iii) 1.1 1.3 15.4 18.2 i) Interest expended 0.6 0.8 7.8 33.3 ii) Provisions and contingencies 0.1 0.1 62.5 7.7 iii) Operating expenses 0.4 0.4 15.6 - of which : Wage Bill 0.2 0.2 21.4 -3. Profit i) Operating Profit/Loss 0.3 0.3 52.4 - ii) Net Profit/Loss 0.2 0.2 46.2 -4. Spread (Net Interest Income) 0.5 0.6 48.6 20.05. Total Assets 11.1 13.6 17.0 22.56. Financial Ratios @ - - i) Operating Profit 3.0 2.6 - - ii) Net Profit 1.8 1.5 - - iii) Income 12.1 12.3 - - iv) Interest income 10.5 11.0 - - v) Other Income 1.6 1.3 - - vi) Expenditure 10.3 10.8 - - vii) Interest expended 5.4 6.2 - - viii) Operating expenses 3.7 3.6 - - ix) Wage Bill 1.6 1.7 - - x) Provisions and Contingencies 1.2 1.1 - - xi) Spread (Net Interest Income) 5.1 4.9 - - Notes: 1. @ Ratios to total average assets. 2. Percentage changes calculated could slightly differ due to rounding off numbers to ` billion. 3. - : Nil/Negligible. Source : Based on off-site returns. 89
  • 109. Report on Trend and Progress of Banking in India 2011-1213. Regional Rural Banks4.92 As in the case of SCBs, the consolidatedbalance sheet of RRBs registered lower growthduring 2011-12 compared with the previous year.On the liabilities side, the lower growth was mainlydue to lower growth in deposits as well asborrowings. On the assets side, the decelerationin the balance sheet was attributable to reductionin balances with the Reserve Bank as well asdeceleration in investments. It is noteworthy that,the share of CASA deposits in total deposits ofRRBs was higher than the corresponding sharefor SCBs (Table IV.40).4.93 During 2011-12, out of total 82 RRBsoperating in the country, 79 made profit whereasthe remaining three RRBs incurred loss. Though recent years, their net margin exhibited a mixednet profits of RRBs witnessed improvement in trend (Chart IV.27 and Table IV.41). Table IV.40: Consolidated Balance Sheet of Table IV.41: Financial Performance of Regional Rural Banks Regional Rural Banks (Amount in ` billion) (Amount in `billion)Sr. Item At end-March Percentage Variation Sr. Item Amount Percentage VariationNo. No. 2011 2012P 2010-11 2011-12P 2010-11 2011-12P 2010-11 2011-12P1 Share Capital 2 2 0.0 0.0 1 2 3 4 5 62 Reserves 96 113 18.6 17.9 1 Income (i + ii) 162 201 17.2 24.13 Share Capital Deposits 41 50 2.3 22.3 i Interest income 152 189 17.6 24.3 ii Other income 10 11 12.4 10.04 Deposits 1,662 1,863 14.6 12.1 4.1 Current 92 104 13.9 12.7 2 Expenditure (i+ii+iii) 145 181 21.4 24.8 i Interest expended 86 112 16.7 30.2 4.2 Savings 911 986 20.1 8.2 ii Operating expenses 49 55 38.0 12.2 4.3 Term 659 774 7.9 17.4 of which, Wage bill 38 40 42.9 5.35 Borrowings 265 303 41.1 14.3 iii Provisions and 10 13 -3.9 30.0 5.1 from NABARD 160 213 28.2 33.0 contingencies 5.2 Sponsor Bank 98 88 58.3 -10.4 3 Profit 5.3 Others 7 2 696.4 -71.4 i Operating profit 27 33 -6.9 22.2 5.4 Other Liabilities 88 95 9.5 7.4 ii Net profit 17 20 -8.5 17.6 Total liabilities/Assets 2,154 2,425 17.0 12.6 4 Total assets 2,154 2,425 17.0 12.66 Cash in Hand 21 23 19.1 9.5 5 Financial ratios #7 Balances with RBI 99 89 20.9 -10.2 i Operating profit 1.3 1.48 Other Bank Balances 452 478 15.6 5.9 ii Net profit 0.8 0.89 Investments 542 603 14.5 11.2 iii Income (a + b) 7.5 8.3 (a) Interest income 7.0 7.810 Loans and Advances (net) 947 1,130 19.7 19.3 (b) Other income 0.5 0.511 Fixed Assets 5 7 21.1 40.0 iv Expenditure (a+b+c) 6.7 7.412 Other Assets # 89 96 7.5 7.9 (a) Interest expended 4.0 4.6 (b) Operating expenses 2.3 2.3 Memo Items of which, Wage Bill 0.6 1.61 Credit -Deposit Ratio 59.5 63.3 (c) Provisions and 0.5 0.52 Investment -Deposit Ratio 52.0 49.8 contingencies3 (Credit + Investment) 111.5 113.1 -Deposit Ratio Notes: 1. P: Provisional. 2. #: Financial ratios are with respect to average total assets.Notes: 1. P: Provisional. 3. Percentage variation could be slightly different as absolute 2. #: Includes accumulated losses. numbers have been rounded off to ` billion. 3. Percentage variation could be slightly different as absolute 4. Components may not add up to total due to rounding off numbers have been rounded off to ` billion. numbers to ` billion.Source: NABARD. Source: NABARD. 90
  • 110. Operations and Performance of Commercial Banks Table IV.42: Purpose-wise Distribution of Progress made by banks under the financial Credit from Regional Rural Banks inclusion plans was broadly satisfactory. (Amount in ` billion) Deterioration in asset quality of banksSr. Purpose As at end-MarchNo remains a concern 2011 2012P1 2 3 4 4.96 The deterioration in asset quality, as1. Agriculture (i to iii) 551 641 evident by a steep rise in NPAs for banks in (55.7) (53.2) i Short-term credit (crop loans) 407 474 general, and public sector banks in particular, has ii Term credit 144 167 emerged as a serious concern. Moreover, fresh (for agriculture and allied activities) accretion to NPAs, as captured by the slippage iii Indirect advances - - ratio witnessed an increase. Further, the2. Non-agriculture (i to iv) 439 564 (44.3) (46.8) provisioning coverage ratio declined. Though i Rural artisans 9 11 banks aggressively resorted to restructuring of ii Other industries 26 36 iii Retail trade 51 66 advances, in the long-run it may have implications iv Other purposes 353 452 for asset quality, in case, significant proportion ofTotal (1+2) 989 1,206 these restructured advances turn into bad loans. Memo item : Need to closely monitor impact of infrastructure(a) Priority sector 826 974 lending on asset-liability mismatch(b) Non-Priority sector 163 231(c) Percentage share of priority sector in total credit 83.5 80.8 4.97 The liquidity condition of banks remainedNotes: 1. P: Provisional. - : Nil/Negligible. under stress, reflecting structural issues as well 2. Percentage share in total credit as provided in parentheses could slightly differ due to rounding off numbers to ` billion. as the policy environment prevailing during 3. Components may not add up to total due to rounding off numbers to ` billion. 2011-12. Though credit to infrastructure registeredSource: NABARD. slower growth, it continued to account for almost one-third of total bank credit to industry. Large exposure to long-gestation infrastructure projects4.94 As at end-March 2012, priority sector could further exacerbate the maturity mismatchadvances comprised of more than 80 per cent of prevailing in the banking sector. Going forward,the total credit of RRBs. Purpose-wise composition Indian banking sector needs careful monitoringof credit disbursed by RRBs remained broadly of rising bad loans as well as exposure to long-termunchanged during 2011-12, with more than half infrastructure projects.of total credit going to the agricultural sector(Table IV.42). Banks’ inability to meet priority sector lending target remained a concern14. Overall Assessment 4.98 During 2011-12, majority of public sector4.95 Performance of banks during 2011-12 was banks failed to meet the priority sector target.conditioned by slowdown in the domestic economy Though at an aggregate level, foreign banks’coupled with higher interest rate environment. performance was better as compared to domesticHowever, Indian banks remained well-capitalised. banks, bank-wise data revealed that some foreignIn addition, the efficiency of banks improved as banks also failed to meet the priority sectorreflected by lower cost-to-income ratio and NIM. lending target. 91
  • 111. Report on Trend and Progress of Banking in India 2011-12Need to further strengthen financial inclusion complaints from customers in recent years.and improve customer service Though progress in financial inclusion was broadly satisfactory, there is still a long way to go,4.99 Data on complaints received from various especially given that India continues to lag behindOmbudsman offices showed that public sector some major developing countries in terms ofbanks accounted for the majority of complaints financial inclusion. With increased use ofunderlining the need to improve customer services technology in banking, greater emphasis isparticularly with respect to pensions accounts, as required for improving customer services in thetheir share of complaints in this area was areas of net banking and credit/debit cards as wellsignificantly high. In addition, non-observance of as further developing the existing electronicthe fair practices code by banks led to number of payment systems. 92
  • 112. Chapter V Developments in Co-operative Banking Over recent years, the financial health of the urban co-operative sector has shown an improvement. In 2011-12, the sector showed an increased return on assets and a further fall in the ratio of Non- Performing Assets (NPAs). As per the new CAMELS rating model, 61 per cent of the UCBs, accounting for about 78 per cent of the total banking business of the UCB sector, had ratings of ‘A’ and ‘B’, indicating the good financial health of this sector. As regards rural co-operatives, State Co-operative Banks and District Central Co-operative Banks showed some signs of improvement in profitability and asset quality in 2010-11, partly attributable to the prudential regulatory reforms and implementation of the revival package for the short-term rural co-operative sector. However, long-term rural co-operatives, such as State and Primary Co-operative Agriculture and Rural Development Banks, showed very weak financial health. Going forward, it is necessary to persevere with recapitalisation and regulatory reforms so that the rural co-operative sector can lend support to financial inclusion and agriculture.1. Introduction Document of 2005 aimed at creating a consolidated and stronger urban co-operative banking sector.5.1 Co-operatives account for a relatively small As regards the short-term arm of rural co-share in the bank-dominated Indian financial operatives, the application of prudential regulationssystem; however, given their geographic and followed by recapitalisation has paved the waydemographic outreach, they hold a key position towards improving the financial health of thesein the system1. Geographically, co-operatives have institutions. Apart from these ongoing initiatives,been instrumental in extending formal financial several new policy measures have been introducedservices to villages and small towns in India. with regard to the co-operative sector in 2011-12,Demographically, these institutions have enabled which are discussed in Chapter 3.access to financial services to low and middle-income groups in both rural and urban areas. 5.3 In light of these policy initiatives, this chapter analyses the performance of co-operatives5.2 Notwithstanding their role in enhancing in 2011-12, drawing time-series as well as cross-the inclusiveness of the financial system, these sectional comparisons with other segments of theinstitutions have been marred by weak financial financial system, where necessary. As data onhealth, partly on account of operational and rural co-operatives are available with a lag of onegovernance-related concerns. Hence, there has year, the analysis for these institutions only goesbeen an ongoing effort to revitalise these institutions as far as 2010-11. The analysis covered in thisby means of various development and regulatory chapter broadly pertains to 1,618 Urban Co-initiatives. In the case of urban co-operatives, the operative Banks (UCBs) and 94,531 rural co-Reserve Bank has moved towards a more unified operatives, including short-term and long-termregulatory framework consequent to its Vision co-operatives, as given in Chart V.1. 1 As at end-March 2011, the assets of rural and urban co-operatives taken together were about 12 per cent of the total assets held by Scheduled Commercial Banks (SCBs).
  • 113. Report on Trend and Progress of Banking in India 2011-125.4 The chapter is organised into six sections. the Reserve Bank conceived a Vision DocumentSection 2 analyses the performance of UCBs, using for the revival of this sector. Through thedata on their assets and liabilities, income and Document, the Reserve Bank laid down a multi-expenditure, and soundness indicators. Section layered regulatory and supervisory approach3 reviews the performance of various tiers of the aimed at the merger/amalgamation of viable UCBsshort-term and long-term rural co-operative credit and the exit of unviable UCBs. On account of thisstructure. Sections 4 and 5 discuss salient process of consolidation, there has been adevelopments pertaining to rural co-operatives continued reduction in the number of UCBs (Chartwith regard to licensing and implementation of V.2). In continuation with this trend, at end-Marchthe revival package for these institutions. Section 2012, the total number of UCBs stood at 1,6186 enumerates the developments related to Kisan as against 1,645 at end-March 2011. Further, thereCredit Cards (KCCs), a scheme for rural credit was a steady rise in the number of financiallyinvolving rural co-operatives. Section 7 concludes stronger UCBs (defined as UCBs belonging towith the major observations from the chapter. Grades I and II) and a decline in the number of financially weaker UCBs (defined as UCBs2. Urban Co-operative Banks belonging to Grades III and IV) between 2005 andEmergence of a stronger UCB sector through 20112.consolidation 5.6 Maharashtra, the State with the largest5.5 The Urban Co-operative Bank (UCB) sector concentration of UCBs, accounted for thehas emerged financially stronger since 2005, when maximum number of mergers. In the total number2 The data on grade-wise distribution of UCBs are not available for 2012 as this classification has been discontinued and a new rating-wise classification of UCBs has been introduced (see details later in the chapter). Grades were decided based on the financial performance of UCBs, which included parameters such as capital adequacy, level of NPAs and history of profit/loss. 94
  • 114. Developments in Co-operative Bankingof mergers that took place until end-March 2012 Rapid growth of Tier II UCBs in 2011-12since 2005, Maharashtra had a share of about 61 indicates an expansion of the UCB sectorper cent, followed by Gujarat with a share of 19per cent and Andhra Pradesh with a share of 8 5.7 Following the Vision Document of 2005,per cent (Chart V.3). UCBs were classified into Tier I and Tier II categories based on their deposit base, and a differentiated regulatory treatment was laid down for these two categories3. In recent years, Tier II banks, which have a larger deposit base and wider geographical presence, have grown in terms of both number and asset size (Table V.1 read with Chart V.4). A new CAMELS rating method for judging the financial strength of UCBs 5.8 UCBs were earlier classified into various grades based on their financial health for regulatory and supervisory purposes. However, with the introduction of the CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and systems & control) rating model, this classification was discontinued and a newer dimension was introduced to judge the financial3 Tier I UCBs were defined as UCBs with:  Deposit base below `1 billion operating in a single district.  Deposit base below `1 billion operating in more than one district provided the branches were in contiguous districts, and deposits and advances of branches in one district separately constituted at least 95 per cent of the total deposits and advances, respectively, of the bank.  Deposit base below `1 billion, whose branches were originally in a single district but subsequently became multi-district due to re-organisation of the district.All other UCBs were defined as Tier II UCBs. 95
  • 115. Report on Trend and Progress of Banking in India 2011-12 Table V.1: Tier-wise Distribution of Urban Co-operative Banks (As at end-March 2012) (Amount in ` billion)Tier Type No. of banks Deposits Advances Assets Number % to Total Amount % to Total Amount % to Total Amount % to Total1 2 3 4 5 6 7 8 9Tier I UCBs 1,234 76.3 410 17.2 260 16.5 527 17.4Tier II UCBs 384 23.7 1,975 82.8 1,320 83.5 2,506 82.6All UCBs 1,618 100.0 2,385 100.0 1,580 100.0 3,033 100.0Note: Data are provisional.strength of UCBs, namely, the credit rating of these about 7 per cent of the UCBs had the lowest ratinginstitutions. of D, representing the weakest financial health (Table V.2).5.9 Under the new CAMELS rating model, acomposite rating of A/B/C/D (in decreasing order Table V.2: Rating-wise Distribution of UCBsof performance) is being given to a bank, based (As at end-March 2012)on the weighted average rating of the individual (Amount in ` billion)components of CAMELS. The rating of A/B/C is Rating Number Percentage Deposits Percentage Advances Percentage of UCBs to total to total to totalsuffixed with a ‘+’ or ‘-’ sign, wherever necessary, number deposits advancesto reflect granularity in the components and 1 2 3 4 5 6 7composite rating of the bank. The rating of D A+ 5 0.3 36 1.5 27 1.7 A 46 2.8 366 15.3 251 15.9represents the lowest rating. A- 140 8.7 388 16.3 263 16.65.10 As per this new classification, at end-March B+ 296 18.3 491 20.6 332 21.0 B 353 21.8 432 18.1 284 18.02012 about 61 per cent of the UCBs had composite B- 141 8.7 148 6.2 93 5.9ratings of A and B, accounting for about 78 per C+ 318 19.7 303 12.7 193 12.2cent of the total banking business (represented by C 145 9.0 79 3.3 49 3.1deposits plus credit) of the UCB sector. Further, C- 59 3.6 52 2.2 32 2.0 D 115 7.1 91 3.8 56 3.632 per cent of the UCBs had a composite rating Total 1,618 100.0 2,385 100.0 1,580 100.0of C; these UCBs accounted for about 18 per cent Note: Data are provisional.of the banking business of the UCB sector. Only 96
  • 116. Developments in Co-operative Banking Table V.3: Distribution of UCBs by Deposits and AdvancesDeposits (` billion) Number of UCBs Amount of Deposits Advances (` billion) Number of UCBs Amount of Advances No. % share Amt. % share No. % share Amt. % share1 2 3 4 5 6 7 8 9 100 - 0.10 258 15.9 17 0.7 0 - 0.10 459 28.4 29 1.80.10 - 0.25 392 24.2 72 3.0 0.10 - 0.25 450 27.8 75 4.80.25 - 0.50 324 20.0 122 5.1 0.25 - 0.50 256 15.8 93 5.90.50 - 1.0 300 18.5 321 13.5 0.50 - 1.0 199 12.3 146 9.21.0 - 2.5 205 12.7 314 13.2 1.0 - 2.5 149 9.2 256 16.22.5 - 5.0 60 3.7 194 8.1 2.5 - 5.0 50 3.1 177 11.25.0 - 10.0 40 2.5 264 11.1 5.0 - 10.0 34 2.1 227 14.410.0 and above 39 2.4 1,081 45.3 10.0 and above 20 1.2 577 36.5Total 1,618 100.0 2,385 100.0 Total 1,618 100.0 1,580 100.0Asset concentration within the UCB sector various statistical measures of marketrose in 2011-12 concentration.5.11 Over the years, partly as a fall-out of Asset growth of UCBs slowed down in 2011-12consolidation, there has been an increase in asset 5.13 The growth in the assets of UCBs pickedconcentration within the UCB sector. The number up significantly from a single-digit figure to aof UCBs with an asset size of more than `10 billion double-digit one since the beginning of thequadrupled between 2008 and 2012. Notably, the process of consolidation in 2005. However, afterpercentage share of such UCBs in the total assets peaking at 18 per cent in 2009-10, growth steadilyof the UCB sector increased from about 37 per slowed but remained in the double digitscent to 48 per cent during this period (Chart V.5). (Chart V.6).5.12 At end-March 2012, UCBs with a deposit 5.14 The growth in credit witnessed a slowdownbase of over `10 billion accounted for 45 per cent in 2011-12, possibly reflecting the high interestof total deposits. Further, UCBs with a credit size and slack credit demand prevailing during mostof over `10 billion accounted for about 37 per part of the year. Investments, the second majorcent of total advances of the UCB sector (Table use of funds of UCBs, also posted slower growthV.3). Box V.1 provides a detailed discussion on in 2011-12, on account of a decline in the growththe concentration within the UCB sector, using of SLR investments (Tables V.4 and V.5). 97
  • 117. Report on Trend and Progress of Banking in India 2011-12 Box V.1: An Analysis of Market Concentration within the UCB SectorSince the formation of the Vision Document and issuance ofguidelines aimed at consolidation of the Urban Co-operativeBank (UCB) sector, the sector has exhibited phenomenalgrowth. It accounted for 3.7 per cent of the SCB sector byend-March 2012 by posting an exponential rate of growthof about 13 per cent per annum between 2005 and 2012.As the sector has consolidated, there has been a rise inthe extent of concentration within this sector. Thoughmarket concentration is analysed using several statisticalmeasures, a few measures have been selected here, keepingin view the availability of data on the UCB sector. The twomeasures used are the following:(a) Share of top four/eight/ten market entities (CR4/CR8/ CR10) defined as kCRk =∑i =1 Si The coefficient ranges between 0 and 1, with 0 indicatingwhere, Si represents share of ‘i’th entity, perfectly equal shares and 1 indicating perfect monopoly. This measure remains insensitive to the number of entitiesk represents the number of ‘k’ leading entities. (ibid.).While this measure is relatively simple, it is sensitive to the As the concentration coefficient ranged above 0.5, the UCBtotal number of entities within a given market (Bikker and sector showed a relatively high degree of concentrationHaaf, 2000). As per this measure, a sector is usually said to as per this measure. Moreover, there was a moderatebe highly concentrated when CR4 ranges above 50 per cent rise in the extent of concentration over time, as borne outand CR8 ranges above 75 per cent. both from the concentration curve and the concentrationAs per this measure, it can be said that the UCB sector coefficient (Chart 1 read with Table 2).was moderately concentrated in 2012 and the extent ofconcentration showed an increase in the recent period In conclusion, it could be said that the UCB sector was(Table 1). marked by a moderate to high degree of asset concentration and the degree of concentration has increased over time,(b) The Lorenz curve and the associated concentration partly on account of the regulatory reforms aimed at coefficient (LR) is defined as the curve representing the consolidating the sector. cumulative distribution of the number of entities and their corresponding market shares. The concentration Table 2: Concentration Coefficient for the coefficient is worked out using the following formula: UCB SectorConcentration coefficient = 1 - ∑ (Xk+1 – Xk)(Yk+1 + Yk) Year Concentration coefficientwhere k starts from 0 and ends at n-1 2008 0.748X refers to cumulative proportion of entities 2011 0.757 2012 0.761Y refers to cumulative proportion of market share. Note: The coefficient is worked out taking shares of UCBs within the Table 1: Share of Top Four/Eight/Ten UCBs in Total total assets of the UCB sector. Assets of UCB Sector (in per cent) Reference: Measure 2011 2012 Bikker, J.A. and K. Haaf (2000), “Measures of Competition CR4 17.8 19.4 and Concentration in the Banking Industry: A Review of CR8 23.9 26.2 Literature”, De Nederlandsche Bank, Research Series CR10 26.4 28.7 Supervision No. 27.Rising share of scheduled UCBs suggests a a general trend of expansion in the capital base oftrend of expansion in the capital base of UCBs UCBs (Chart V.7). Scheduled UCBs are banks included in the Second Schedule of the RBI Act,5.15 Over recent years, there has been a rising 1934 and include banks that have paid-up capitaltrend in the share of scheduled UCBs, suggesting and reserves of not less than `0.5 million and 98
  • 118. Developments in Co-operative Banking Persistently lower CD ratio for UCBs than SCBs 5.16 Though there has been a rising trend in the Credit-Deposit (CD) ratio of UCBs reflecting the general expansion in banking business of these institutions, the ratio has been persistently lower than that of SCBs (Chart V.8). Correspondingly, investments were the preferred use of funds among UCBs than SCBs. Remarkable improvement in profitability of UCBs driven by high growth in total income 5.17 The overall levels of UCB profits exhibited an improvement in 2011-12, attributable to an almost doubling of the growth in the total income of these institutions (Table V.6). This increase wascarry out their business in the interest of on account of an expansion in both interest anddepositors to the satisfaction of the Reserve Bank. non-interest components of income. Table V.4: Liabilities and Assets of Urban Co-operative Banks (As at end-March) (Amount in ` billion)Asset/Liability Scheduled UCBs Non-Scheduled UCBs All UCBs Rate of growth (%) (All UCBs) 2011 2012 2011 2012 2011 2012 2011-121 2 3 4 5 6 7 8Liabilities1. Capital 19 23 44 50 63 73 16.1 (1.6) (1.6) (2.9) (3.1) (2.3) (2.4)2. Reserves 112 126 151 143 263 270 2.7 (9.3) (8.9) (9.9) (8.9) (9.7) (8.9)3. Deposits 923 1,104 1,195 1,281 2,119 2,385 12.6 (77.1) (77.4) (78.7) (79.8) (78.0) (78.6)4. Borrowings 28 21 16 15 44 36 -18.7 (2.3) (1.5) (1.1) (0.9) (1.6) (1.2)5. Other Liabilities 116 152 113 117 230 269 17.3 (9.7) (10.7) (7.4) (7.3) (8.4) (8.9)Assets1. Cash 6 8 17 22 24 30 26.1 (0.5) (0.5) (1.1) (1.4) (0.9) (1.0)2. Balances with Banks 110 122 133 141 242 263 8.7 (9.1) (8.6) (8.7) (8.8) (8.9) (8.7)3. Money at Call and Short Notice 6 9 5 7 11 16 44.5 (0.5) (0.6) (0.4) (0.4) (0.4) (0.5)4. Investments 335 369 516 511 850 880 3.5 (27.9) (25.9) (33.9) (31.8) (31.3) (29.0)5. Loans and Advances 617 744 748 836 1,365 1,580 15.8 (51.5) (52.1) (49.2) (52.1) (50.2) (52.1)6. Other Assets 125 175 101 89 226 264 16.8 (10.4) (12.3) (6.7) (5.5) (8.3) (8.7)Total Liabilities / Assets 1,198 1,427 1,519 1,606 2,718 3,033 11.6 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0)Notes: 1. Figures in parentheses are percentages to total liabilities/assets. 2. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. 3. Components may not add up to the whole due to rounding off. 99
  • 119. Report on Trend and Progress of Banking in India 2011-12 Table V.5: Investments by Urban Co-operative Banks (Amount in ` billion)Item As at Percentage end-March Variation 2011 2012 2010-11 2011-121 2 3 4 5Total Investments (A+B) 850 880 7.4 3.5 (100.0) (100.0)A. SLR Investments 785 814 10.7 3.8 (i to vi) (92.3) (92.5) i) Central Government 513 564 25.7 10.0 Securities (60.4) (64.1) ii) State Government 93 108 18.8 17.2 Securities (10.9) (12.3) iii) Other Approved 5 3 29.4 -38.4 Securities (0.6) (0.4) iv) Term Deposits with 53 42 -16.6 -20.8 StCBs (6.2) (4.8) v) Term Deposits with 107 76 -22.9 -28.9 DCCBs (12.6) (8.6) vi) Others, if any 14 21 -18.3 44.7 (1.7) (2.3)B. Non-SLR Investments 65.5 65.7 -20.5 0.4 Both the Return on Assets (RoA), defined as net (7.7) (7.5) profits as per cent of average assets, as well asNotes: 1. Figures in parentheses are percentages to total. Return on Equity, defined as net profits as per 2. Percentage variation could be slightly different as absolute cent of average equity, showed a perceptible rise numbers have been rounded off to ` billion. 3. Components may not add up to the whole due to rounding during the year. off. 5.19 Further, the rise in RoA could be seen not just at the aggregate or system-wide level but alsoRising trend in various indicators of at the disaggregated level; there was a discernibleprofitability for UCBs upward shift in RoA among all scheduled UCBs5.18 In continuation of the past trend, there in 2011-12. No scheduled UCB reported ahas been an improvement in the major indicators negative RoA in this year unlike in the pastof profitability of UCBs in 2011-12 (Table V.7). (Appendix Table V.1). 100
  • 120. Developments in Co-operative Banking Table V.6: Financial Performance of Scheduled and Non-Scheduled Urban Co-operative Banks (As at end-March 2012) (Amount in ` billion)Item Scheduled UCBs Non-Scheduled UCBs All UCBs Percentage Variation (All UCBs) 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-121 2 3 4 5 6 7 8 9A. Total Income (i+ii) 98 124 125 158 224 281 13.4 25.9 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) i. Interest Income 90 113 119 148 209 261 14.2 25.2 (91.3) (91.7) (95.0) (93.9) (93.4) (92.9) ii. Non-Interest Income 9 10 6 10 15 20 2.4 35.4 (8.7) (8.3) (5.0) (6.1) (6.6) (7.1)B. Total Expenditure (i+ii) 78 100 107 131 185 230 9.6 24.9 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) i. Interest Expenditure 55 74 75 92 131 166 8.8 27.2 (70.9) (74.3) (70.6) (70.5) (70.8) (72.1) ii. Non-Interest Expenditure 23 26 31 39 54 64 11.4 19.1 (29.1) (25.7) (29.4) (29.5) (29.2) (27.9) of which: Staff Expenses 12 13 16 19 28 32 -0.3 15.0C. Profits i. Amount of operating profits 20 24 19 27 39 51 35.7 30.7 ii. Provisions, contingencies, taxes 8 10 9 13 17 23 2.6 37.0 iii. Amount of net profits 12 14 10 14 22 28 78.0 26.1Notes: 1. Figures in parentheses are percentages to total income/expenditure. 2. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. 3. Components may not add up to the whole due to rounding off. 4. Data for 2011-12 are provisional.Improvement in the asset quality of UCBs was their gross NPA ratio in 2011-12 (Chart V.9 readsustained with Table V.8).5.20 UCBs have shown a steady improvementin their asset quality over recent years. There hasbeen a decline in gross Non-Performing Assets(NPAs), both in absolute and ratio terms. Incontinuation of this trend, UCBs reported negativegrowth in gross NPAs and also showed a fall in Table V.7: Select Indicators of Profitability of UCBsIndicator Scheduled Non-Scheduled All UCBs UCBs UCBs 2010- 2011- 2010- 2011- 2010- 2011- 11 12 11 12 11 121 2 3 4 5 6 7Return on Assets 1.07 1.08 0.7 0.9 0.9 1.0Return on Equity 9.6 10.1 5.5 7.3 7.1 8.4Net Interest Margin 3.1 3.0 3.1 3.6 3.1 3.3Note: Data for 2011-12 are provisional. 101
  • 121. Report on Trend and Progress of Banking in India 2011-12 Table V.8: Non-Performing Assets of UCBs Table V.9: Distribution of UCBs by CRAR (Amount in ` billion) (As at end-March 2012)Item 2011 2012 CRAR (in per cent) Scheduled Non-Scheduled All UCBs1 2 3 UCBs UCBs1. Gross NPAs 115 111 1 2 3 42. Net NPAs 27 29 CRAR < 3 8 79 873. Gross NPA Ratio (per cent) 8.4 7.0 3 < CRAR < 6 1 14 154. Net NPA Ratio (per cent) 2.1 2.0 6 < CRAR < 9 - 50 505. Provisioning (1-2) 88 82 9 < CRAR < 12 8 197 2056. Provisioning Coverage Ratio (per cent) (5/1) 76.6 73.6 12 < CRAR 35 1,226 1,261 Total 52 1,566 1,618Rising Provisioning Coverage Ratio (PCR) for Note: Data are provisional.UCBs Chart V.11). However, the capital position of5.21 Not only were the NPAs of UCBs on the scheduled UCBs was much weaker than that ofdecline, but also their provisions were on a steady non- scheduled UCBs. Moreover, it was arise in recent years. As a result, their Provisioning disquieting feature that most of the scheduledCoverage Ratio (PCR), defined as provisions as UCBs with CRAR below the regulatory minimumper cent of gross NPAs, also showed a largely rising had a negative CRAR.trend (Chart V.10). Small enterprises and housing – principalMajority of UCBs reported CRAR above the elements in UCB credit in 2011-12statutory minimum in 2011-12, but capital 5.23 Given their urban focus, UCBs mainly caterposition of scheduled UCBs was much weaker to the credit needs of small enterprises and thethan non-scheduled UCBs housing sector. These two sectors accounted for5.22 The majority of UCBs (about 91 per cent) over one-third of the total credit of UCBs in 2011-reported Capital to Risk-Weighted Assets Ratio 12 (Chart V.12 read with Table V.10). Further, they(CRAR) above the statutory minimum of 9 per had a share of around 70 per cent in the totalcent at end-March 2012 (Table V.9 read with priority sector credit of UCBs. 102
  • 122. Developments in Co-operative Banking Table V.10: Composition of Credit to Priority Sectors by UCBs (As at end-March 2012) (Amount in ` billion) Sector Composition of Of which, total priority composition of sector credit credit to weaker sections Amount Percentage Amount Percentage to total to total 1 2 3 4 5 1. Agricultural credit 58 3.7 21 1.3 1.1 Direct 19 1.2 8 0.5 agricultural credit 1.2 Indirect 39 2.5 13 0.8 agricultural credit 2. Small Enterprises 366 23.1 74 4.7 2.1 Direct credit to 306 19.5 58 3.7 small enterprises 2.2 Indirect credit to 60 3.9 16 1.0 small enterprises 3. Micro Credit 142 9.0 41 2.6 3.1 Loans to SHGs/JLGs 10 0.6 3 0.2 3.2 Loans to others 132 8.5 38 2.4Increase in the provision of micro credit by 4. State-sponsored 2 0.1 1 0.03 organisations for SC/UCBs ST 5. Education loans 20 1.2 7 0.45.24 Micro credit, a component of the priority 6. Housing loans 183 11.6 53 3.4sector, has increased in terms of importance for All priority sectors 770 48.7 195 12.4UCBs. Within the total priority sector credit given Notes: 1. Percentages are with respect to total credit of weaker sections, which can be taken as a 2. Components may not add up to the whole due to rounding off.reflection of the contribution of UCBs to financial branch too was significantly higher in the westerninclusion, micro credit showed a significant and southern regions (Table V.12).increase in 2011-12. It competed closely withhousing and small enterprises, the two majorpriority sectors for UCBs (Chart V.13).A high but declining degree of geographicalconcentration of banking business of UCBs5.25 The banking business of UCBs capturedby credit plus deposits remained spatiallyconcentrated in the western region followed bythe southern region. These two regions accountedfor only 27 per cent of total districts in India andyet controlled about 92 per cent of the totalbanking business of UCBs (Table V.11 read withAppendix Table V.3). On the other hand, theremaining four regions accounted for about 73per cent of total districts, but had a share of lessthan 9 per cent in the total banking business ofUCBs. The volume of banking business per 103
  • 123. Report on Trend and Progress of Banking in India 2011-12 Table V.11: Distribution of Districts and Table V.12: Volume of Banking Business per Banking Business of UCBs across Regions Branch for UCBs by RegionRegion Percentage share Percentage share in Region Volume of banking business in total number of total banking per branch districts business of UCBs (in ` million)1 2 3 2009 2011 2012 Regions of low concentration 1 2 3 4Northern region 17.5 3.2 Northern region 290 320 367North-eastern region 9.9 0.4 North-eastern region 151 262 313Eastern region 18.3 1.7 Eastern region 342 403 445Central region 27.0 3.2 Central region 234 285 290Sub-total 72.7 8.5 Western region 395 490 557 Regions of high concentration Southern region 214 289 332 All-India 341 426 481Western region 10.4 76.2 Coefficient of variation 0.33 0.26 0.25Southern region 17.0 15.3Sub-total 27.4 91.5All-India 100.0 100.0Note: Banking business refers to deposits plus credit of UCBs. with the earlier years, when there was a continued increase in the losses reported by these co- operatives. The improvement in the profitability5.26 However, it is noteworthy that the degree of short-term credit co-operatives could be partlyof concentration of banking business of UCBs attributed to the reforms implemented acrossshowed some signs of decline over time. The several States as part of the revival package forcoefficient of variation in the banking business of these institutions5. On the other hand, long-termUCBs across regions showed a mild but steady credit co - operatives showed a continuedfall between 2009 and 2012 (Table V.12).3. Rural Co-operatives4Short-term co-operatives dominate rural co-operative credit structure5.27 Over the years, there has been a growingdominance of short-term credit co-operatives inthe rural co - operative credit structure.Concomitantly, the share of long-term credit co-operatives has been on a steady decline (ChartV.14 read with Table V.13).Revival in profitability of short-termco-operatives as against long-termco-operatives5.28 The profitability of short-term credit co-operatives, at the aggregate level, has shown adistinct revival since 2008-09. This is in contrast4 The section is based on the year 2010-11 given the lagged availability of data for rural co-operatives.5 The details of the revival package for short-term credit co-operatives are discussed later in Section 5. 104
  • 124. Developments in Co-operative Banking Table V.13: A Profile of Rural Co-operatives (As at end-March 2011) (Amount in ` billion)Item Short-term Long-term StCBs DCCBs PACS SCARDBs PCARDBs1 2 3 4 5 6A. Number of Co-operatives 31 370 93,413 20 697B. Balance Sheet Indicators i. Owned Funds (Capital + Reserves) 112 242 145 45 49 ii. Deposits 783 1,651 372 10 5 iii. Borrowings 319 424 540 162 128 iv. Loans and Advances 640 1,308 878 178 116 v. Total Liabilities/Assets 1,302 2,541 1,442+ 285 252C. Financial Performance i. Institutions in Profit a. Number 30 318 44,554 9 329 b. Amount of Profit 5.2 14 18 1 2 ii. Institutions in Loss a. Number 1 52 38,065 10 368 b. Amount of Loss 0.6 5 20 4 4 iii. Overall Profit (+)/Loss (-) 4.6 9 -2 -3 -2D. Non-performing Assets i. Amount 57 153 227++ 61 48 ii. As percentage of Loans Outstanding 8.9 11.6 25.2 34.3 41.7 E. Recovery of Loans to Demand Ratio (Per cent) 91.8 78.8 - 40.0 39.4StCBs: State Co-operative Banks; DCCBs: District Central Co-operative Banks; PACS: Primary Agricultural Credit Societies; SCARDBs: StateCo-operative Agriculture and Rural Development Banks; PCARDBs: Primary Co-operative Agriculture and Rural Development Banks.-: Not available. +: Working capital. ++: Total overdues.Note: Manipur SCARDB is defunct.Source: NABARD and NAFSCOB.deterioration in profitability with absolutely no Short-term rural credit co-operativessigns of revival (Chart V.15). State Co-operative Banks Slowdown in the growth of the balance sheet of StCBs in 2010-11 5.29 There was a decline in the growth of the balance sheet of State Co-operative Banks (StCBs) in 2010-11 over 2009-10. On the liabilities side, the growth in the balance sheet of StCBs in 2010- 11 emanated from high growth in borrowings, while on the assets side, the growth was attributed to loans and advances or credit (Table V.14). Possibility of a slowdown in growth of the balance sheet of scheduled StCBs in 2011-12 5.30 Advance information on scheduled StCBs for 2011-12 available from Section 42(2) returns has been analysed to gauge the more recent trends. 105
  • 125. Report on Trend and Progress of Banking in India 2011-12 Table V.14: Liabilities and Assets of Turnaround in profitability of StCBs in 2010- State Co-operative Banks 11 on account of higher growth in income (At end-March 2011) (Amount in ` billion) 5.31 There was a near-doubling of net profitsItem As at Percentage of StCBs in 2010-11, suggesting a complete end-March Variation turnaround from the negative growth in profits 2010 2011 2009-10 2010-11 shown by these institutions in 2009-10 (Table1 2 3 4 5Liabilities V.16). The increased profitability of StCBs was on1. Capital 16 21 4.0 25.8 account of the growth in income outpacing that of (1.3) (1.6)2. Reserves 76 91 -26.3 19.8 expenditure. The growth in income was primarily (6.2) (7.0) attributable to a higher growth in interest income.3. Deposits 812 783 15.5 -3.6 (66.1) (60.2)4. Borrowings 234 319 12.0 36.3 5.32 Within the total expenditure of StCBs, there (19.1) (24.5)5. Other Liabilities 90 88 79.1 -1.8 was increased growth in provisions and (7.3) (6.8)Assets contingencies, necessitated partly by the increased1. Cash and Bank Balances 105 84 32.4 -20.8 growth in the NPAs of these institutions in (8.6) (6.4)2. Investments 553 502 18.9 -9.2 2010-11. (45.1) (38.6)3. Loans and Advances 493 640 1.8 29.8 High growth in NPAs of StCBs in 2010-11, (40.1) (49.1)4. Other Assets 76.7 76.8 47.8 0.2 though NPA ratio was largely maintained (6.2) (5.9)Total Liabilities/Assets 1,228 1,302 13.6 6.0 (100.0) (100.0) 5.33 There was a deterioration in the NPA position of StCBs in 2010-11. However, on accountNotes: 1. Figures in parentheses are percentages to total liabilities/ assets. Table V.16: Financial Performance of 2. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. State Co-operative BanksSource: NABARD. (Amount in ` billion) Item As during PercentageThe trends suggest that although there has been Variationa revival in the growth of both deposits and SLR 2009- 2010- 2009- 2010-investments of scheduled StCBs in 2011-12, there 10 11 10 11has been a slowdown in the growth of credit from 1 2 3 4 5 A. Income (i+ii) 82 87 8.8 5.9StCBs during this year (Table V.15). (100.0) (100.0) i. Interest Income 78 83 7.6 6.5 Table V.15: Trends in Select Balance (94.9) (95.5) Sheet Indicators of Scheduled State ii. Other Income 4.2 3.9 38.0 -5.4 Co-operative Banks (5.1) (4.5) (Amount in ` billion) B. Expenditure (i+ii+iii) 80 83 10.1 3.4Item 2009-10 2010-11 2011-12 (100.0) (100.0) i. Interest Expended 66 68 15.3 2.71 2 3 4 (82.5) (82.0)Deposits 652 594 640 ii. Provisions and Contingencies 3.96 4.05 -10.2 2.1 (24.0) (-8.9) (7.8) (5.0) (4.9)Credit 433 587 694 iii. Operating Expenses 10 11 -8.6 8.0 (2.3) (35.4) (18.3) (12.5) (13.1) Of which, Wage Bill 6 7 -14.4 18.3SLR Investments 239 213 209 (39.2) (-10.8) (-1.8) (7.3) (8.3) C. ProfitsCredit plus SLR Investments 673 800 904 i. Operating Profits 6.4 8.7 -15.0 35.2 (12.9) (19.0) (12.9) ii. Net Profits 2.4 4.6 -21.7 88.8Notes: 1. Figures in parentheses indicate growth in per cent over the Notes: 1. Figures in parentheses are percentages to total income/ previous year. expenditure. 2. Percentage variation could be slightly different as absolute 2. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. numbers have been rounded off to ` billion.Source: Final Form A/B under Section 42(2) of the RBI Act, 1934. Source: NABARD. 106
  • 126. Developments in Co-operative Bankingof high growth in credit from StCBs, the NPA ratio Table V.17: Soundness Indicators of(defined as NPAs as per cent of loans outstanding) State Co-operative Bankswas largely maintained at around 8.9 per cent in (Amount in ` billion)2010-11 (Table V.17). The high growth in NPAs in Item As at Percentage end-March Variation2010-11 emanated from sub-standard assets, 2010 2011 2009-10 2010-11since the growth in doubtful and loss assets 1 2 3 4 5showed a slight moderation over the previous year. A. Total NPAs (i+ii+iii) 44 57 -24.5 31.4Like the NPA ratio, the recovery-to-demand ratio i. Sub-standard 13 17 -20.6 28.7suggesting the extent of recovery of loans as a (30.6) (30.0) ii. Doubtful 22 25 42.3 12.9proportion of the expected recovery, was (51.0) (43.8)maintained at 92 per cent in 2010-11. iii. Loss 8 15 231.0 86.9 (18.4) (26.2)Perceptible improvement in the financial B. NPA-to-Loans Ratio (%) 8.8 8.9 - -health of StCBs C. Recovery-to-Demand Ratio (%) 91.8 91.8 - - Notes: 1. Figures in parentheses are percentages to total NPAs.5.34 There have been signs of distinct 2. Percentage variation could be slightly different as absoluteimprovement in the financial health of StCBs in numbers have been rounded off to ` billion. Source: NABARD.recent years. Between 2008 and 2011, there wasno increase in the NPA ratio of StCBs. The ratioeither showed a decline or was, at best, maintained ratios could be seen across most regions exceptat the previous year’s level (Chart V.16). There was the western region (Chart V.17 read with Appendixa similar trend for the recovery ratio, with the Table V.4). The NPA ratio showed a rising trend,ratio either showing a rise or remaining unchanged. while the recovery ratio posted a decline in the western region in complete contrast to the trendBroad-based improvement in financial healthof StCBs across most regions, except the observed across all other regions.western region District Central Co-operative Banks5.35 The improvement in the financial health Like StCBs, slowdown in the growth of theof StCBs as suggested by the NPAs and recovery balance sheet of DCCBs 5.36 Similar to StCBs, District Central Co- operative Banks (DCCBs) witnessed a slowdown in their balance sheet in 2010-11 (Table V.18). The slowdown in the balance sheet of DCCBs was on account of a slowdown in deposits on the liabilities side and investments on the assets side, although the credit growth of DCCBs posted an increase. Declining trend in the profits of DCCBs 5.37 Although DCCBs as a whole reported profits in 2010-11, there was a decline in the quantum of profits reported by these institutions (Table V.19). The decline in profitability mainly emanated from a high growth in operating expenses, which outpaced the growth in income of these institutions. 107
  • 127. Report on Trend and Progress of Banking in India 2011-12Further improvement in asset quality of ratio in 2010-11 (Table V.20). Also, contrary toDCCBs the trends observed in the case of StCBs, there was a decline in absolute terms in the NPAs of5.38 There was a continued improvement in the DCCBs between 2009-10 and 2010-11 (Table V.20asset quality of DCCBs, with a decline in the NPA read with Table V.17). The recovery ratio of DCCBs increased in 2010-11. Table V.18: Liabilities and Assets of District Central Co-operative Banks Table V.19: Financial Performance of District (Amount in ` billion) Central Co-operative BanksItem As at Percentage (Amount in ` billion) end-March Variation Item As during Percentage 2010 2011 2009-10 2010-11 Variation1 2 3 4 5 2009- 2010- 2009- 2010- 10 11 10 11Liabilities1. Capital 73 79 11.3 8.5 1 2 3 4 5 (3.2) (3.1) A. Income (i+ii) 177 188 10.0 6.32. Reserves 144 163 -38.0 13.1 (6.4) (6.4) (100.0) (100.0)3. Deposits 1,529 1,651 19.8 8.0 i. Interest Income 159 176 9.0 10.7 (67.8) (65.0) (90.0) (93.7)4. Borrowings 287 424 3.6 47.9 ii. Other Income 18 12 19.4 -33.6 (12.7) (16.7) (10.0) (6.3)5. Other Liabilities 222 224 109.2 1.2 B. Expenditure (i+ii+iii) 166 179 12.1 8.0 (9.8) (8.8) (100.0) (100.0) i. Interest Expended 103 111 11.8 7.3Assets (62.3) (61.9)1. Cash and Bank Balances 154 171 19.1 11.4 (6.8) (6.7) ii. Provisions and Contingencies 22.3 21.9 4.1 -1.92. Investments 789 854 21.9 8.2 (13.4) (12.2) (35.0) (33.6) iii. Operating Expenses 40 46 17.8 15.13. Loans and Advances 1,106 1,308 11.2 18.3 (24.2) (25.9) (49.1) (51.5) Of which, Wage Bill 26 31 16.7 18.24. Other Assets 206 208 10.3 1.2 (15.8) (17.3) (9.1) (8.2) C. ProfitsTotal Liabilities/Assets 2,254 2,541 15.2 12.7 i. Operating Profits 34 31 -2.7 -7.5 (100.0) (100.0) ii. Net Profits 11 9 -13.7 -18.6Notes: 1. Figures in parentheses are percentages to total assets/ Notes: 1. Figures in parentheses are percentages to total income/ liabilities. expenditure. 2. Percentage variation could be slightly different as absolute 2. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. numbers have been rounded off to ` billion.Source: NABARD. Source: NABARD. 108
  • 128. Developments in Co-operative Banking Table V.20: Soundness Indicators of District Central Co-operative Banks (Amount in ` billion)Item As at Percentage end-March Variation 2010 2011 2009-10 2010-111 2 3 4 5A. Total NPAs (i+ ii + iii) 164 153 -8.7 -6.9 i) Sub- standard 73 60 -9.4 -17.1 (44.4) (39.6) ii) Doubtful 64.8 65.0 -10.3 0.3 (39.6) (42.6) iii) Loss 26 27 -1.8 3.5 (16.0) (17.8)B. NPA-to-Loans Ratio (%) 14.8 11.6 - -C. Recovery-to-Demand Ratio (%) 75.7 78.8 - -Notes: 1. Figures in parentheses are percentages to total NPAs. 2. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion.Source: NABARD.Distinct improvement in the financial healthof DCCBs, like StCBs5.39 There was a distinct improvement in the this improvement was not spread across allfinancial health of DCCBs in recent years, again regions (Chart V.19 read with Appendix Table V.5).partly reflecting the outcome of the reform package On the one hand, DCCBs in the southern andbeing implemented for these institutions. The northern regions were financially most sound, asrecovery ratio of DCCBs showed a consistent indicated by low NPAs and a high recovery ratio,increase, while the NPA ratio posted a decline on the other hand, the financial health of DCCBs(Chart V.18). in the central, eastern and western regions appeared relatively less robust. However, overSigns of improvement in financial health of recent years, the regional gap in terms of bothDCCBs across all regions these indicators narrowed considerably, suggesting5.40 Though there was an improvement in the an increase in the financial soundness of DCCBsfinancial health of DCCBs at the aggregate level, across the country. 109
  • 129. Report on Trend and Progress of Banking in India 2011-12Notwithstanding improvement, DCCBs had compared to 2009-10 (Chart V.21 read withmuch weaker financial health than StCBs Table V.21).5.41 Notwithstanding the decline in the NPA Persistently low borrower-to-member ratioratio and the rise in the recovery ratio, it is for PACSnoteworthy that the financial health of DCCBs 5.43 The borrower-to-member ratio is a usefulremained generally much weaker than that of indicator of access to credit from PACS. This ratioStCBs (Chart V.20). has generally remained below 50 per cent sincePrimary Agricultural Credit Societies 2003, suggesting that only about half the members of PACS access credit during each year6. Moreover,Slower credit growth for PACS in 2010-11 among the backward groups, viz., Scheduled5.42 The credit growth of Primary Agricultural Castes and Scheduled Tribes (SCs/STs), the ratioCredit Societies (PACS) slowed slightly in 2010-11 generally ranged below 30 per cent. The ratio Table V.21: Primary Agricultural Credit Societies - Select Balance Sheet Indicators (Amount in ` billion) Item As at Percentage end-March Variation 2010 2011 2010-11 1 2 3 4 A. Liabilities 1. Total Resources (2+3+4) 995 1,057 6.2 2. Owned Funds (a+b) 125 145 15.9 a. Paid-up Capital 72 76 5.6 Of which, Government Contribution 7 6 -6.1 b. Total Reserves 53 69 29.5 3. Deposits 353 372 5.5 4. Borrowings 518 540 4.3 5. Working Capital 1,352 1,442 6.7 B. Assets 2. Total Loans Outstanding (a+b) 765 878 14.8 a) Short-Term 550 636 15.8 b) Medium-Term 215 241 12.2 Note: Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. Source: NAFSCOB.6 The ratio rose to a high of 60 per cent only in 2007-08 on account of a sharp rise by 65 per cent in the number of borrowers. However, going by the trend in the previous and subsequent years, this seems to be an outlier. 110
  • 130. Developments in Co-operative Banking loss-making PACS competed closely with the percentage of profit-making PACS (Chart V.23)7. 5.45 The percentage of loss-making PACS was much larger in the eastern and north-eastern regions (Chart V.23 read with Appendix Table V.6). Long-term rural credit co-operatives State Co-operative Agriculture and Rural Development Banks Expansion in the balance sheet of SCARDBs in 2010-11 5.46 The balance sheet of SCARDBs in 2010-11 reflected a high growth in borrowings, which accounted for about 60 per cent of the total liabilities of these institutions. On the assets side, the major driver of growth was credit, which alsoamong small farmers too was relatively low when accounted for a little over 60 per cent of the totalcompared with the overall borrower-to-member assets of these institutions (Table V.22).ratio (Chart V.22). 5.47 A comparison of the balance sheets ofA trend of slow decline in the number of loss- apex-level institutions of the short-term and long-making PACS term co-operative structures distinctly brought out5.44 There was a slow decline in the percentage the dwindling asset and credit size and weakeningof loss-making PACS over recent years, particularly capital position of SCARDBs in comparison withsince 2008. Despite the decline, the percentage of StCBs during recent years (Box V.2).7 As regards the remaining PACS, either they broke even, reporting neither profit nor loss, or there was no information available on their financial health. 111
  • 131. Report on Trend and Progress of Banking in India 2011-12 Table V.22: Liabilities and Assets of State fluctuated around a rising trend in recent years Co-operative Agriculture and Rural (Chart V.24). Development Banks (Amount in ` billion) Asset quality of SCARDBs in the westernItem As at Percentage region was the weakest end-March Variation 2010 2011 2009-10 2010-11 5.50 Similar to StCBs, the SCARDBs in the1 2 3 4 5 western region were observed to be financially theLiabilities most fragile. At end-March 2011, SCARDBs in the1. Capital 8.2 8.4 1.0 2.5 (3.2) (3.0) western region had an abysmally high NPA ratio2. Reserves 34 (13.4) 37 (13.0) 7.3 7.8 of 74 per cent. This implied that only one-fourth3. Deposits 8 10 6.7 25.2 of the loan assets of these institutions were (3.0) (3.3)4. Borrowings 156 162 -1.7 4.2 standard assets (Chart V.25 read with Appendix (61.0) (57.0) Table V.7).5. Other Liabilities 50 68 3.2 35.7 (19.5) (23.7)Assets Primary Co-operative Agriculture and Rural1. Cash and Bank Balances 2.0 2.4 4.3 19.6 Development Banks (0.8) (0.8)2. Investments 31 29 6.8 -9.2 (12.3) (10.0) Marginal growth in the balance sheet of3. Loans and Advances 170 178 3.5 4.8 PCARDBs in 2010-11 (66.5) (62.6)4. Other Assets 52 76 -10.5 45.0 (20.4) (26.6) 5.51 There was negligible expansion in theTotal Liabilities/Assets 256 285 0.7 11.4 (100.0) (100.0) balance sheet of Primary Co-operative AgricultureNotes: 1. Figures in parentheses are percentages to total assets/ and Rural Development Banks (PCARDBs) in liabilities. 2010-11. The major component of uses of funds 2. SCARDB in Manipur is defunct. 3. Percentage variation could be slightly different as absolute of PCARDBs, namely credit, and that of sources numbers have been rounded off to ` billion.Source: NABARD. of funds, namely borrowings, showed a negligible growth of less than 1 per cent in 2010-11, broadlyAs in the past, SCARDBs reported losses in in line with the trend during the previous year2010-11 (Table V.25).5.48 SCARDBs reported losses in 2010-11, as Like SCARDBs, PCARDBs reported continuedwas the case in 2009-10. The loss-making position losses in 2010-11of SCARDBs was on account of a negative growth 5.52 Similar to SCARDBs, PCARDBs reportedin total income coupled with increased growth in losses in 2010-11 at the aggregate level (Tabletheir total expenditure arising from a steep rise V.26). The majority of these institutions werein interest as well as operating expenses loss-making during the year (Chart V.26 read with(Table V.23). Appendix Table V.8). Moreover, a disquietingWeak asset quality of SCARDBs feature is that there was no perceptible5.49 The asset quality of SCARDBs has been improvement in the profitability of PCARDBs inpoor, with the NPA ratio nearing 34 per cent (Table the recent past.V.24). A comparison of SCARDBs with StCBs, In terms of financial health, PCARDBs wereUCBs and commercial banks brings out the far weaker than SCARDBsdismal quality of assets of SCARDBs. Moreover,contrary to a declining trend in the NPA ratios of 5.53 Although the long-term co-operativeStCBs and UCBs, the NPA ratio of SCARDBs has structure as a whole was weak, within this 112
  • 132. Developments in Co-operative Banking Box V.2: Weakening Long-Term Co-operative Credit Structure: A Comparative Analysis of Apex-Level InstitutionsOrigin and rationale for long-term credit co-operatives Table: Comparison of Assets, Credit and Capital Size of SCARDBs and StCBsCo-operatives were the first formal institution created to (in `)address the rural credit needs in the country in the early 20thcentury, following co-operative societies that had been very Year Amount of Amount of Amount ofsuccessful in some Western European countries. However, assets of credit of capital of SCARDBs per SCARDBs per SCARDBs perunlike other countries that experimented with credit co- `100 of assets `100 of credit `100 of capitaloperatives, in India two distinct sets of co-operatives viz., of StCBs of StCBs of StCBsshort-term and long-term co-operatives, were created withspecific development objectives. While short-term co- 2008 26 37 80 2009 23 34 52operatives were created to meet the credit needs of farmers 2010 21 34 51for seasonal agricultural activities and marketing of crops, 2011 22 28 40long-term co-operatives in the form of land mortgage banks(LMBs) were created in order to meet the long-term credit Source: Calculated based on data from NABARD.needs of farmers for land development. Over time, theselong-term co-operatives diversified their lending operations long-term and short-term structures (Table above). Thisand were renamed - first, as Land Development Banks analysis suggests that(LDBs) and then as Agriculture and Rural Development (a) For every `100 of total assets of StCBs, SCARDBsBanks (ARDBs) (GoI, 2004). reported assets worth `26 in 2008. By 2011, theSlowdown in disbursal of long-term co-operative credit relative asset size of SCARDBs had declined to `22.In recent years, there has been a perceptible slowdown (b) The contraction was even more striking when the sizein the disbursal of long-term co-operative credit (Chart of the credit portfolio of SCARDBs was compared withbelow). The share of long-term credit in total co-operative that of StCBs. For every `100 of credit reported bycredit (disbursed) stood at 32 per cent in 2000-01, which StCBs, SCARDBs reported credit worth `37 in 2008.almost halved to 17 per cent by 2009-10. Even in absolute By 2011, the relative amount for SCARDBs had shrunkterms, there was a decline in the amount of long-term credit to `28.disbursed through co-operatives for certain years in the (c) The relative weakening of SCARDBs was particularly2000s. evident from the changes in the capital base of theseDwindling asset size and capital base of SCARDBs institutions. For every `100 of capital of StCBs, therelative to StCBs amount of capital for SCARDBs was `80 in 2008.A comparison of apex-level institutions of long-term and By 2011, there was a steep reduction in the relativeshort-term co-operatives, namely SCARDBs and StCBs, amount of capital for SCARDBs, reaching half its levelbrings out the growing divergence between the growth of in 2008. The revival package, as recommended by the Vaidyanathan Committee of 2004, has been under implementation for short-term co-operatives since 2006 and, by 2012, 25 States have taken steps towards reviving their short-term co-operatives (refer to Section 5 of this chapter). However, as regards long-term co-operatives, the implementation of such a package is still awaited. Evidently, the sustainability of long-term co-operatives is under pressure, and these institutions are in need of an urgent revival through appropriate reforms. Reference: Government of India (2004), “Task Force on Revival of Rural Co-operative Credit Institutions (Long-term)” (Chairman: Prof. A. Vaidyanathan), New Delhi.structure financial health deteriorated significantly 4. Progress on Licensing of Rural Co-as we moved from the higher tier to the lower tier. operativesIn other words, the financial health of PCARDBswas much more fragile than that of SCARDBs 5.54 The Reserve Bank, the licensing authority(Table V.27 read with Table V.24; Chart V.27). for StCBs and DCCBs under the Banking 113
  • 133. Report on Trend and Progress of Banking in India 2011-12 Table V.23: Financial Performance of State Co-operative Agriculture and Rural Development Banks (Amount in ` billion)Item As during Percentage Variation 2009- 2010- 2009- 2010- 10 11 10 111 2 3 4 5A. Income (i+ii) 21 19 -31.6 -6.2 (100.0) (100.0) i. Interest Income 17.75 17.81 -36.0 0.4 (86.3) (92.4) ii. Other Income 3 2 19.9 -47.9 (13.7) (7.6)B. Expenditure (i+ii+iii) 21 22 -28.2 3.5 (100.0) (100.0) i. Interest Expended 13 14 -0.3 2.8 (62.4) (62.0) ii. Provisions and Contingencies 5 4 -65.1 -17.8 (22.8) (18.1) iii. Operating Expenses 3 4 31.6 39.1 (14.8) (19.9) Of which, Wage Bill 2 3 20.3 37.5 co-operative space. The Reserve Bank also issued (11.0) (14.6)C. Profits revised guidelines in 2009, in consultation with i. Operating Profits 4.2 1.4 -70.9 -67.0 NABARD, for granting licences to rural co- ii. Net Profits -0.7 -2.7 - - operative banks that had a CRAR of 4 per centNotes: 1. Figures in parentheses are percentages to total income/ expenditure. and above, as per the latest inspection report of 2. SCARDB in Manipur is defunct. NABARD, and that also complied with the CRR 3. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. and SLR requirements during the past one year.Source: NABARD. The Reserve Bank has since granted licences to co-operative banks that complied with the aboveRegulation Act, 1949 [As Applicable to Co- conditions and has been undertaking a periodicoperative Societies (AACS)], had drawn a roadmapto ensure that only licensed entities operate in theTable V.24: Asset Quality of State Co-operative Agriculture and Rural Development Banks (Amount in ` billion)Item As at Percentage end-March Variation 2010 2011 2009-10 2010-111 2 3 4 5A. Total NPAs (i+ii+iii) 57 61 14.2 8.3 i. Sub-standard 28 34 -3.7 21.4 (50.2) (56.3) ii. Doubtful 27 26 38.4 -4.5 (48.3) (42.6) iii. Loss 0.9 0.7 145.7 -18.5 (1.6) (1.2)B. NPA-to-Loans Ratio (%) 33.2 34.3 - -C. Recovery-to-Demand Ratio (%) 40.5 40.0 - -Notes: 1. Figures in parentheses are percentages to total NPAs. 2. Percentage variation could be slightly different as absolute numbers have been rounded off to ` billion. 114
  • 134. Developments in Co-operative Banking Table V.25: Liabilities and Assets of Table V.26: Financial Performance of Primary Co-operative Agriculture and Rural Primary Co-operative Agriculture and Rural Development Banks Development Banks (Amount in ` billion) (Amount in ` billion)Item As at Percentage Item As during Percentage end-March Variation Variation 2010 2011 2009-10 2010-11 2009- 2010- 2009- 2010-1 2 3 4 5 10 11 10 11Liabilities 1 2 3 4 51. Capital 15.3 14.5 0.8 -4.8 A. Income (i+ii) 18 21 -9.4 12.4 (6.1) (5.8) (100.0) (100.0)2. Reserves 34.74 34.75 -0.5 0.03 i. Interest Income 13 15 -9.8 12.3 (13.9) (13.8) (70.5) (70.5)3. Deposits 4.61 4.58 15.2 -0.5 ii. Other Income 5.4 6.1 -8.7 12.7 (1.8) (1.8) (29.5) (29.5)4. Borrowings 128.3 128.4 3.8 0.1 B. Expenditure (i+ii+iii) 22.4 22.6 0.8 0.8 (51.3) (50.9) (100.0) (100.0)5. Other Liabilities 67 70 -4.7 4.1 i. Interest Expended 11.4 11.6 -6.5 1.8 (26.9) (27.8) (50.8) (51.3)Assets ii. Provisions and Contingencies 6.0 5.8 9.3 -3.31. Cash and Bank Balances 2.68 2.73 13.6 2.2 (26.6) (25.5) (1.1) (1.1) iii. Operating Expenses 5.0 5.2 10.1 3.52. Investments 11.7 11.9 4.0 2.3 (22.5) (23.1) (4.7) (4.7) Of which, Wage Bill 2.8 2.9 49.2 0.63. Loans and Advances 114.8 116.1 1.9 1.1 (12.7) (12.7) (45.9) (46.0) C. Profits4. Other Assets 121.2 121.7 -0.8 0.5 i. Operating Profits 1.9 3.8 -58.5 100.5 (48.4) (48.2) ii. Net Profits -4.1 -2.0 - -Total Liabilities/Assets 250 252 0.8 0.8 (100.0) (100.0) Notes: 1. Figures in parentheses are percentages to total income/ expenditure.Notes: 1. Figures in parentheses are percentages to total assets/ 2. Percentage variation could be slightly different as absolute liabilities. numbers have been rounded off to ` billion. 2. Percentage variation could be slightly different as absolute Source: NABARD. numbers have been rounded off to ` billion.Source: NABARD. DCCBs attained the eligibility for issue of a license in the shortest possible time. The Task Forcereview of unlicensed banks in consultation withNABARD.5.55 As on March 31, 2012, 43 banks, i.e., 1StCB and 42 DCCBs, remained unlicensed. Thecompliance regarding unlicensed co-operativebanks was once again reviewed in co-ordinationwith NABARD and it was decided that to ensurestability of the financial system and to protect theinterest of depositors of the unlicensed banks andthe public in general, unlicensed banks may beprohibited from accepting fresh deposits underSection 35A of the Banking Regulation Act, 1949(AACS).5.56 Further, it was decided to form a TaskForce to closely monitor the progress of unlicensedDCCBs through a Monitorable Action Plan (MAP).This plan would be prepared by the concernedbanks and approved by the Task Force. The aimof this Task Force would be to ensure that the 115
  • 135. Report on Trend and Progress of Banking in India 2011-12 Table V.27: Asset Quality of Primary structure and examine alternatives including the Co-operative Agriculture and Rural feasibility of setting up a two-tier structure instead Development Banks of the existing three-tier structure. The Committee (Amount in ` billion) would also examine the feasibility of mergingItem As at Percentage weak/unviable DCCBs with financially strong end-March Variation 2010 2011 2009-10 2010-11 DCCBs in adjacent districts. In places where1 2 3 4 5 DCCBs were financially defunct, the Committee would explore alternate channels of rural creditA. Total NPAs (i+ii+iii) 48.9 48.3 3.1 -1.1 i. Sub-standard 27.7 28.2 0.2 1.7 delivery, such as commercial banks lending to (56.7) (58.4) PACS. It would also examine the enhancement of ii. Doubtful 20.6 19.5 6.5 -5.0 (42.1) (40.4) CRAR by StCBs/DCCBs to 9 per cent and suggest iii. Loss 0.57 0.61 33.7 5.8 ways to augment the capital of these institutions. (1.2) (1.3)B. NPA-to-Loans Ratio (%) 42.6 41.7 - - 5. Progress relating to Revival of RuralC. Recovery-to-Demand Ratio (%) 37.2 39.4 - - Co-operativesNotes: 1. Figures in parentheses are percentages to total NPAs. 2. Percentage variation could be slightly different as absolute Considerable progress has been made in numbers have been rounded off to ` billion.Source: NABARD. reviving the short-term co-operative credit structurewould also examine alternative formal channels 5.58 A major development in the area of ruralof credit in the regions where these banks were co-operatives has been their revival through afunctioning to ensure that banking services in practical plan of action that follows thegeneral and credit flow to important sections of recommendations of the Task Force on Revival ofthe economy, and agriculture in particular, were Co-operative Credit Institutions (Short-term)not adversely affected, if the unlicensed banks (Chairman: Prof. A. Vaidyanathan) in 2004. Thewere not in a position to acquire a licence. plan of action was finalised by the Government of5.57 Further, as suggested in the Annual Policy India in consultation with the State Governments.Statement for 2012-13, a Working Group The package broadly aimed at providing financial[rechristened as an “Expert Committee” (Chairman: assistance to co-operatives and introducing legalDr. Prakash Bakshi) following induction of outside and institutional reforms in these institutions. Theexperts in the Working Group] was set up in July current status of these reforms is discussed in2012 to review the short-term rural co-operative Box V.3. 116
  • 136. Developments in Co-operative Banking Box V.3: Reforms for the Revival of Short-term Rural Co-operativesThe major components of the plan of action include administrative and financial matters in co-operatives; (c)providing recapitalisation assistance to rural co-operatives ensuring timely elections before the expiry of the term ofto bring them to an acceptable level of health. Further, it the existing Boards; and (d) limiting the powers of the Stateaims to introduce certain legal and institutional reforms in Government to supersede elected boards.these institutions to ensure the democratic, self-reliant andefficient functioning of these institutions. Training reformsRecapitalisation assistance NABARD has designed nine training modules for capacity building of functionaries of co-operatives besides Board ofAn amount of `98.5 billion (including `90 billion as theCentral Government’s share and `8.5 billion as the State Directors and Chief Executive Officers. The programmesGovernment’s share) was released up to March 31, 2012 to are being conducted by the training establishments ofrecapitalise 54,728 short-term co-operatives (54,715 PACS NABARD, along with the training partners of the States andand 13 DCCBs) in 17 States to wipe out the accumulated the National Council of Co-operative Training (NCCT).losses prevailing as at end-March 2004 and to enable them Corporate Governance reformsto reach a minimum CRAR of 7 per cent by end-March2004. The Reserve Bank has prescribed ‘Fit and Proper’ criteriaLegislative reforms for the appointment of Chief Executive Officers and professional Directors in StCBs and DCCBs. FollowingAt end-March 2012, 21 States had amended their respective these prescriptions, all co-operative banks have beenState co-operative societies’ acts. These included Andhra implementing these criteria.Pradesh, Arunachal Pradesh, Bihar, Gujarat, Haryana,Karnataka, Jammu and Kashmir, Jharkhand, Madhya Technological reformsPradesh, Maharashtra, Manipur, Mizoram, Meghalaya, NABARD has finalised the core software and made itNagaland, Odisha, Rajasthan, Sikkim, Tamil Nadu,Tripura, Uttar Pradesh and West Bengal. Further, the available to 20 States, viz., Arunachal Pradesh, Assam,State Governments of Chhattisgarh and Assam accorded Bihar, Chhattisgarh, Gujarat, Jammu and Kashmir,cabinet approval to the proposed amendments to their co- Jharkhand, Karnataka, Madhya Pradesh, Maharashtra,operative societies’ acts, pending the actual amendment, Manipur, Meghalaya, Mizoram, Nagaland, Odisha,which would take a little longer. The amendments to the Rajasthan, Sikkim, Tripura, Uttar Pradesh and Westco-operative societies’ acts in Punjab and Uttarakhand are Bengal. The trial run of the software has been completed inunder consideration by their respective State Governments. 10 States, viz., Assam, Arunachal Pradesh, Chhattisgarh,The legislative reforms aimed at providing full functional Gujarat, Jharkhand, Maharashtra, Madhya Pradesh,autonomy to co-operatives including: (a) ensuring full Odisha, Uttar Pradesh and West Bengal, and is in progressvoting membership rights to all users of financial services, in Karnataka, Rajasthan and Tripura. The remaining Statesincluding depositors; (b) removing state intervention in have initiated steps for the trial run.5.59 Since the finalisation of this plan of action, operative Credit Institutions (Long-term) was25 States have entered into a Memorandum of constituted by the Government of India in 2005Understanding (MoU) with GoI and NABARD to (Chairman: Prof. A. Vaidyanathan) to suggest animplement this plan. They include Andhra implementable action plan for reforming long-Pradesh, Arunachal Pradesh, Assam, Bihar, term co-operatives. The Central GovernmentChhattisgarh, Gujarat, Haryana, Jammu and discussed the recommendations of the Task ForceKashmir, Jharkhand, Karnataka, Madhya with the State Governments in October 2007,Pradesh, Maharashtra, Manipur, Meghalaya, January 2008 and February 2008 in threeMizoram, Nagaland, Odisha, Punjab, Rajasthan, specially convened meetings. In the Union BudgetSikkim, Tamil Nadu, Tripura, Uttarakhand, Uttar 2008-09, it was indicated that a consensus wasPradesh and West Bengal, which covers more than reached with the State Governments on the modalities of the plan of action for revival of long-96 per cent of the short-term co-operatives in the term 5.61 Subsequent to the implementation of theRevival package for long-term co-operative Agricultural Debt Waiver and Debt Relief Schemecredit structure is awaited and feedback received from the State Governments,5.60 As in the case of short-term cooperative the Central Government revised the reformstructure, the Task Force on Revival of Rural Co- package for long-term co-operatives. However, 117
  • 137. Report on Trend and Progress of Banking in India 2011-12before announcing the package, the CentralGovernment decided to relook at the viability andrelevance of a separate package for long-term co-operatives in the backdrop of: (i) the implementationof a package for short-term co-operatives and (ii)the aggressive branch and business expansion bycommercial banks and Regional Rural Banks inrural areas in recent years, as a consequence ofthe policy of financial inclusion.5.62 Consequently, a separate Task Force wasconstituted in September 2009 (Chairman: ShriG. C. Chaturvedi). The Task Force submitted itsreport in 2010 and is under consideration by theCentral Government. The announcement of thereform package by the Central Government forlong-term co-operatives is, thus, awaited.6. Progress relating to Rural Credit Measures KCC emerging as a driver of agricultural creditthat have Specific Implications for Co- in general, and agricultural credit suppliedoperatives through commercial banks in particularKisan Credit Card 5.66 A comparison of the three institutions providing agricultural credit, viz., co-operatives,5.63 The Kisan Credit Card (KCC) scheme is commercial banks and RRBs, in terms of theirbeing implemented through co-operatives, SCBs share in the total number of KCCs issued andand RRBs to provide easy access to adequate, amount of direct agricultural credit reveals atimely and cost-effective credit for farmers. similarity in trends (Charts V.28 read with Chart V.29).Commercial banks leading in KCC distribution5.64 Commercial banks were leading in thedistribution of KCCs, accounting for 58 per centof the total cards issued at end-March 2012. Co-operatives had a share of about 25 per cent in thetotal cards issued, with RRBs accounting for theremaining 17 per cent (Chart V.28 read withAppendix Table V.9).5.65 Since the inception of the KCC scheme in1998-99, the shares of commercial banks andRRBs have witnessed a sharp increase in the totalnumber of cards issued, while the share of co-operatives has slowed (Chart V.28). Although therehas been a turnaround in the share of co-operatives since 2008-09, commercial banks havecontinued to be the most important means of KCCdistribution in the country. 118
  • 138. Developments in Co-operative Banking5.67 In the 2000s, total and direct agricultural Banks (StCBs) and District Central Co-operativecredit in India showed sharp growth. This growth Banks (DCCBs) in 2010-11, these institutionswas primarily attributable to commercial banks, reported overall profits and showed a decline inwith commercial banks overtaking co-operatives their NPA ratios. Moreover, the improvement inand emerging as the most important source of profitability and asset quality could be seenagricultural credit in the country. Interestingly, the broadly across all regions, but with the notable2000s was also a period when the share of exception of the western region.commercial banks in the total number of KCCs 5.70 While there were signs of revival, financialissued showed a rapid rise. Therefore, it can be health weakened as one moved to the lower tiers.deduced that KCCs, in some ways, were The financial health of StCBs was better than thatinstrumental in stepping up agricultural credit in of DCCBs, which, in turn, was better than thethe country and raising the share of commercial financial health of Primary Agricultural Creditbanks in agricultural credit in the 2000s. Societies (PACS). Thus, PACS still remained the weakest spot in the short-term co-operative credit7. Overall Assessment structure, having very high levels of overdues andA more profitable, sound and growing UCB losses.sector, but with concerns relating to capital Financial health of long-term rural co-adequacy operative sector continues to be fragile5.68 Within the co-operative sector, UCBs 5.71 In contrast to short-term rural co -present the story of a sector that has turned itself operatives, long-term rural co-operatives continuedaround to a considerable extent since the initiation to post losses and also exhibited weak assetof regulatory reforms in 2005. The sector, as a quality in 2010-11, as in the past. The growth inwhole, has posted double-digit growth in assets the asset size of both State and Primary Co-along with an improvement in profitability and operative Agriculture and Rural Developmentasset quality in 2011-12, as in the recent past. As Banks (SCARDBs and PCARDBs) remained mucha fall-out of consolidation, there has been growth lower than their short-term counterparts in 2010-in stronger entities and the exit of weaker entities 11, as in the recent past. This led to a gradualfrom this sector. Concomitantly, there has been a decline in the share of long-term co-operatives inrise in the degree of asset concentration within the total assets of the rural co-operative sector.this sector. On the downside, though the level ofcapital adequacy of UCBs was satisfactory at the 5.72 In sum, reforms pertaining to the urbanaggregate level, the capital position of scheduled co-operative and short-term rural co-operativeUCBs appeared much weaker. A few of the sectors seem to have set in motion a process ofscheduled UCBs even reported a negative CRAR. revival in these sectors. As regards the urban co- operative sector, the improvement in financialFinancially weak short-term rural co - performance and health is better established byoperative sector, with some signs of revival now; for the short-term rural co-operative sector,at the apex levels the revival is more fragile and yet to spread across5.69 Within rural co-operatives, short-term all regions in the country and all tiers of the sector.rural co-operatives at the apex levels showed some In the coming years, it needs to be seen whethersigns of revival in terms of profitability and asset the revival is sustained and broad-based. Further,quality in 2010-11, as in the recent past, which it is imperative to pave the way for a revival of thecould be partly attributed to ongoing reforms in long-term rural co-operative sector given the vitalthis sector. Though there was a slowdown in the role played by these institutions in stepping upgrowth of the balance sheet of State Co-operative capital formation in Indian agriculture. 119
  • 139. Chapter VI Non-Banking Financial Institutions The non-banking financial sector is witnessing a consolidation process, with smaller NBFCs (deposit- taking) opting for either merger or closure and some larger ones getting converted into non-deposit- taking NBFCs. NBFCs are comfortably placed with higher capital. The financial performance of deposit-taking Non-Banking Financial Companies (NBFCs-D) showed an improvement as reflected in the increase in their operating profits mainly emanating from growth in fund-based income. Systemically Important-Non-deposit taking NBFCs (NBFCs-ND-SI) segment continued to rely on bank finances for their resource requirement. There is sign of deterioration in the quality of assets in respect of NBFCs-ND-SI. The set of regulations prescribed for NBFCs sector is expected to make the NBFCs more resilient in the medium term. The combined balance sheets of financial institutions (FIs) expanded and operating profit as well as net profit have increased significantly. The impaired assets of the FIs showed increase and are a matter of concern. The increase in expenses of PDs more than compensated for the increase in income which led to reduced profit. PDs are comfortably placed with higher CRAR.1. Introduction regulation and supervision of the Reserve Bank, viz., Export Import Bank of India (EXIM Bank),6.1 Non-banking financial institutions (NBFIs) National Bank for Agriculture and Ruralare an important part of the Indian financialsystem. The NBFIs at present consist of a Development (NABARD), National Housing Bankheterogeneous group of institutions that cater to (NHB), Small Industries Development Bank ofa wide range of financial requirements. The major India (SIDBI) and Industrial Investment Bank ofintermediaries include financial institutions (FIs), India (IIBI) (Table VI.1). However, IIBI is in thenon-banking financial companies (NBFCs) and process of voluntary winding-up.primary dealers (PDs).6.2 This chapter provides an analysis of the Table VI.1: Ownership Pattern offinancial performance and soundness indicators Financial Institutionsrelated to each segment of NBFIs during 2011-12. (As on March 31, 2012)The chapter is organised into five sections. Section Institution Ownership Per cent2 analyses the financial performance of FIs, while 1 2 3Section 3 discusses the financial performance of EXIM Bank Government of India 100NBFCs-D and NBFCs-ND-SI, including RNBCs. NABARD Government of India 99.3 Reserve Bank of India 0.7Section 4 provides an analysis of the performance NHB Reserve Bank of India 100of PDs in the primary and secondary markets, SIDBI * Public Sector Banks 62.5followed by the overall assessment in Section 5. Insurance Companies 21.9 Financial Institutions 5.32. Financial Institutions Others 10.3 *IDBI Bank Ltd. (19.2 per cent), State Bank of India (15.5 per cent) and6.3 As at end-March 2012, there were five Life Insurance Corporation of India (14.4 per cent) are the three major shareholders in institutions (FIs) under the full-fledged
  • 140. Non-Banking Financial InstitutionsOperations of Financial Institutions Table VI.3: Liabilities and Assets of Financial InstitutionsCombined balance sheets of financial (As at end-March) (Amount in ` million)institutions (FIs) expanded Item 2011 2012 P Percentage6.4 The financial assistance sanctioned and Variationdisbursed by FIs increased during 2011-12 due Liabilitiesto increase in sanctions and disbursements made 1. Capital 49,000 62,000 26.5 (1.7) (1.8)by investment institutions (LIC and GIC) and 2. Reserves 4,26,071 4,65,001 9.1specified financial institutions (IVCF and TFCI). (14.7) (13.8)However, sanctions and disbursements made by 3. Bonds & Debentures 9,00,968 10,72,973 19.1 (31.0) (31.9)IFCI have declined in 2011-12 (Table VI.2 and 4. Deposits 9,27,817 10,90,780 17.6 (31.9) (32.4)Appendix Table VI.1). 5. Borrowings 4,26,807 4,95,207 16.0 (14.7) (14.7)Assets and Liabilities of FIs 6. Other Liabilities 1,75,493 1,77,294 1.0 (6.0) (5.3)6.5 The combined balance sheets of FIs Total Liabilities/Assets 29,06,156 33,63,255 15.7expanded during 2011-12. On the liabilities side, Assetsdeposits and ‘bonds and debentures’ remain the 1. Cash & Bank Balances 65,219 67,398 3.3 (2.2) (1.9)major sources of borrowings during 2011-12. On 2. Investments 1,18,023 1,25,559 6.4the assets side, ‘loans and advances’ continued to (4.1) (3.7)be the single largest component, contributing 3. Loans & Advances 25,61,759 29,82,001 16.4 (88.2) (88.7)more than four-fifth of the total assets of the FIs 4. Bills Discounted/ 35,422 29,636 -16.3(Table VI.3). Rediscounted (1.2) (0.9) 5. Fixed Assets 5,374 5,364 -0.2 (0.2) (0.2) 6. Other Assets 1,86,822 1,53,297 -17.9Table VI.2: Financial Assistance Sanctioned and (6.4) (4.6) Disbursed by Financial Institutions (Amount in ` billion) P: Provisional. Notes: 1. Data pertain to 4 FIs, viz., EXIM Bank, NABARD, NHB &Category Amount Percentage SIDBI. Variation 2. Figures in parentheses are percentages to total Liabilities/ Assets. 2010-11 2011-12 2011-12 Source: Audited OSMOS Returns of EXIM Bank, NABARD and SIDBI ended March 31, and for NHB June 30. S D S D S D1 2 3 4 5 6 7(i) All-India 545 472 478 478 -12.2 1.2 Resources Mobilised by FIs Term-lending Institutions * Commercial Paper (CP) is the major source of(ii) Specialised 9 5 11 8 21.3 66.8 funds Financial Institutions # 6.6 The resources mobilised by FIs during(iii) Investment 450 401 544 520 20.8 29.5 Institutions @ 2011-12 were considerably higher than in theTotal Assistance by 1,004 878 1,033 1,006 2.9 14.5 previous year. The NHB has mobilised the largestFIs (i+ii+iii) amount of resources, followed by NABARD, SIDBIS:Sanctions. D: Disbursements. and EXIM Bank (Table VI.4).* : Relating to IFCI, SIDBI and IIBI.# : Relating to IVCF ICICI Venture and TFCI. , 6.7 During 2011-12, there was a significant@ : Relating to LIC and GIC & erstwhile subsidiaries (NIA, UIIC and OIC). increase in the resources raised by FIs throughNotes: 1. Components may not add up to the whole due to rounding off. commercial paper (CP), which accounted for more 2. Data pertaining to 2011-12 are provisional. than 70 per cent of the total resources mobilisedSource: Respective Financial Institutions. from the money market (Table VI.5). 121
  • 141. Report on Trend and Progress of Banking in India 2011-12 Table VI.4: Resources Mobilised by Financial Institutions (Amount in ` billion)Institutions Total Resources Raised Total Outstanding (As at end-March) Long Term Short Term Foreign Currency Total 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2010-11 2011-12 2011 20121 2 3 4 5 6 7 8 9 10 11EXIM Bank 111 88 15 55 111 84 237 227 472 547NABARD 97 179 185 90 - - 283 269 339 423NHB 75 555 295 827 - - 370 1,382 109 607SIDBI 100 139 23 80 12 20 135 239 341 440Total 384 961 518 1,052 123 104 1,025 2,117 1,261 2,016- : Nil/Negligible.Note: Long-term Rupee resources comprise borrowings by way of bonds/debentures; short-term resources comprise CP term deposits, ICDs, CDs and , borrowing from the term money market. Foreign currency resources largely comprise bonds and borrowings in the international market.Source: Respective FIs.Sources and Uses of Funds the weighted average maturity of Rupee resources raised by SIDBI and NABARD has gone up, in the6.8 The majority of the funds raised were used case of EXIM Bank and NHB they came downfor fresh deployments, followed by repayment of during 2011-12 (Table VI.7). While both EXIMpast borrowings (Table VI.6). Bank and SIDBI raised their prime lending rateMaturity and Cost of Borrowings and Lending during the year, the NHB kept it unchanged6.9 The weighted average cost of Rupee (Table VI.8).resources raised went up across the board. While Table VI.6: Pattern of Sources and Deployment of Funds of Financial Institutions Table VI.5: Resources Raised by Financial (Amount in ` billion) Institutions from Money Market Item As at As at Percentage (As at end-March 2012) end- end- Variation (Amount in ` million) March March 2011 2012 Instrument EXIM NABARD NHB SIDBI Total 1 2 3 41 2 3 4 5 6 A. Sources of Funds (i+ii+iii) 2,978 4,252 42.8A. Total 49,355 90,347 28,953 50,915 2,19,570 (100.0) (100.0) i) Term Deposits 8,193 70 2,184 8,419 18,866 i. Internal 1,632 2,623 60.7 ii) Term Money - 4,381 - - 4,381 (54.8) (61.7) iii) Inter- ii. External 1,191 1,495 25.6 (40.0) (35.2) corporate Deposits - - - - - iii. Others@ 155 134 -13.7 (5.2) (3.2) iv) Certificate of Deposits 536 12,810 - - 13,346 B. Deployment of Funds (i+ii+iii) 2,978 4,252 42.8 v) Commercial (100.0) (100.0) Paper 40,626 73,086 4,889 42,496 1,61,097 i. Fresh Deployment 1,747 2,739 56.8 vi) Short-term (58.7) (64.4) loans from ii. Repayment of past borrowings 840 1,290 53.7 banks - - 21,880 - 21,880 (28.2) (30.4)Memo: iii. Other Deployment 391 222 -43.2 (13.1) (5.2)B. Umbrella Limit 75,458 2,07,941 41,550 89,673 4,14,622 of which: Interest Payments 142 145 1.9C. Utilisation of 65.4 43.5 69.7 56.8 53.0 (4.8) (3.4) Umbrella limit (A as percentage @ Includes cash and balances with banks, balances with the Reserve of B) Bank and other banks. Notes: 1. EXIM Bank, NABARD, NHB and SIDBI.- : Nil/Negligible. 2. Figures in parentheses are percentages to totals.Source: Fortnightly return of resources mobilised by financial institutions, Source: Respective FIs. 122
  • 142. Non-Banking Financial Institutions Table VI.7: Weighted Average Cost and Table VI.9: Financial Performance of Select Maturity of Rupee Resources Raised by All-India Financial Institutions Select Financial Institutions (Amount in ` million)Institutions Weighted Average Cost Weighted Average Maturity 2010-11 2011-12 Variation (Per cent) (years) Amount Percentage 2010-11 2011-12 P 2010-11 2011-12 P A) Income (a+b) 1,85,018 2,26,647 41,629 22.51 2 3 4 5 a) Interest Income 1,80,167 2,16,887 36,720 20.4 (97.4) (95.7)EXIM Bank 8.4 9.0 2.9 2.8 b) Non-Interest 4,851 9,760 4,909 101.2SIDBI 7.0 7.2 2.5 3.7 Income (2.6) (4.3)NABARD 7.1 9.5 1.1 1.9 B) Expenditure (a+b) 1,37,422 1,62,908 25,486 18.5NHB 7.2 8.8 2.5 0.9 a) Interest 1,22,589 1,48,852 26,263 21.4 Expenditure (89.2) (91.4)P: provisional. b) Operating 14,833 14,057 -776 -5.2Source: Respective FIs. Expenses (10.8) (8.6) of which Wage Bill 10,981 10,175 -806 -7.3Financial Performance of FIs C) Provisions for 12,819 16,451 3,632 28.3 TaxationThe profitability of FIs substantially increased D) Profitwith reduction in wage bill Operating Profit (PBT) 39,374 48,849 9,475 24.1 Net Profit (PAT) 26,556 32,399 5,843 22.06.10 Both the operating profit and net profit of E) Financial Ratios @FIs increased significantly during 2011-12 (Table Operating Profit 1.46 2.81 Net Profit 0.98 1.03VI.9). The return on assets (RoA) is highest for Income 6.85 7.23SIDBI followed by the NHB, EXIM Bank and Interest Income 6.67 6.92NABARD (Table VI.10). Other Income 0.18 0.31 Expenditure 5.09 5.20 Interest Expenditure 4.54 4.75 Other Operating 0.55 0.45 Expenses Table VI.8: Long-term PLR Structure of Select Wage Bill 0.41 0.32 Provisions 0.47 0.52 Financial Institutions Spread 2.13 2.17 (Per cent) (Net Interest Income)Effective EXIM Bank SIDBI NHB @: as percentage of Total Average Assets.1 2 3 4 Notes: 1. Figures in parentheses are percentages to total Income/ Expenditure.March 2011 14.0 11.0 10.5 2. Percentage variation could be slightly different becauseMarch 2012 15.0 12.75 10.5 absolute numbers have been rounded off to ` million. Source: Audited OSMOS Returns of EXIM Bank, NABARD and SIDBISource: Respective FIs. ended March 31, and for NHB June 30. Table VI.10: Select Financial Parameters of Financial Institutions (As at end-March) (Per cent)Institution Interest Income/ Non-Interest Income/ Operating Profit/ Return on Average Assets Net Profit per Employee Average Working Funds Average Working Funds Average Working Funds (Per cent) (` million) 2011 2012 2011 2012 2011 2012 2011 2012 2011 20121 2 3 4 5 6 7 8 9 10 11EXIM Bank 6.5 7.1 0.5 0.6 2.2 2.5 1.2 1.1 24 27NABARD 6.2 6.5 0.1 0.2 1.3 1.4 0.9 0.9 3 4NHB * 7.7 8.6 0.04 0.05 1.7 2.1 1.1 1.3 32 38SIDBI 8.0 8.5 0.3 0.2 2.9 3.4 1.8 2.0 5 5*: Position as at the end of June.Source: Statements furnished by the FIs. 123
  • 143. Report on Trend and Progress of Banking in India 2011-12Soundness Indicators: Asset Quality Table VI.11: Net Non-Performing Assets (As at end-March)NPAs of FIs have gone up substantially during (Amount in ` million)the year Institutions Net NPAs Net NPAs/Net Loans (Per cent) 2011 2012 2011 20126.11 At the aggregate level, the net NPAs of FIs 1 2 3 4 5have increased substantially. The increase in net EXIM Bank 930 1,558 0.2 0.3NPAs, however, was attributable mainly to SIDBI NABARD 298 371 0.02 0.02and EXIM Bank. While NABARD has maintained NHB .. .. .. .. SIDBI 1,321 1,847 0.3 0.4the same level, the NHB has reported no NPAs All FIs 2,549 3,776 0.1 0.13during 2011-12 (Table VI.11). .. : Not Available. Source: Audited OSMOS Returns of EXIM Bank, NABARD and SIDBI6.12 There was a substantial increase in the ended March 31, and for NHB June 30.sub-standard and doubtful assets of EXIM Bank(Table VI.12). The higher NPAs in respect of EXIM companies (NBFCs accepting public deposits orBank may be a reflection of the continued NBFCs-D), and Category ‘B’ companies (NBFCsunfavourable external environment, especially in not raising public deposits or NBFCs-ND).the context of India’s increased integration with NBFCs-D are subject to requirements of capitalthe world economy. adequacy, liquid assets maintenance, exposureCapital Adequacy norms (including restrictions on exposure toFIs are comfortably placed with capital investments in land, building and unquoted shares), ALM discipline and reporting6.13 During the year 2011-12, all four FIs have requirements; in contrast, until 2006 NBFCs-NDmaintained a higher CRAR than the minimum were subject to minimal regulation. Since April 1,stipulated norm of 9 per cent (Table VI.13). 2007, non-deposit taking NBFCs with assets of `1 billion and above are being classified as3. Non-Banking Financial Companies Systemically Important Non-Deposit taking NBFCs (NBFCs-ND-SI), and prudential regulations,Three new categories of NBFCs have been such as capital adequacy requirements andcreated – Infrastructure Debt Funds (NBFC-IDF), exposure norms along with reporting requirements,Micro Finance Institution (NBFC-MFI) and NBFC- have been made applicable to them. The assetFactors liability management (ALM) reporting and6.14 NBFCs are classified into two categories, disclosure norms have also been made applicablebased on the liability structure, viz., Category ‘A’ to them at different points of time. Table VI.12: Asset Classification of Financial Institutions (As at end-March) (Amount in ` million)Institution Standard Sub-Standard Doubtful Loss 2011 2012 2011 2012 2011 2012 2011 20121 2 3 4 5 6 7 8 9EXIM Bank 4,55,628 5,37,340 1,966 4,044 2,456 3,871 358 44NABARD 13,94,594 16,49,324 - 221 681 681 10 10NHB * 2,25,814 2,85,185 .. .. .. .. .. ..SIDBI 4,59,215 5,36,034 1,427 2,123 1,364 385 - 1,227All FIs 25,35,251 30,07,883 3,393 6,388 4,501 4,937 368 1,281- : Nil/Negligible. .. : Not Available. *: Position as at the end of June 2011 as per OSMOS returns.Source: Audited OSMOS Returns of EXIM Bank, NABARD and SIDBI ended March 31, and for NHB June 30. 124
  • 144. Non-Banking Financial Institutions Table VI.13 Capital to Risk (Weighted) Assets 85 per cent of its net assets are in the nature of Ratio of Select Financial Institutions “qualifying assets”, (iii) the income it derives from (As at end-March) (Per cent) the remaining 15 per cent assets in accordanceInstitution 2011 2012 P with the regulations specified in that behalf. An1 2 3 NBFC which does not qualify as an NBFC-MFIEXIM Bank 17.0 16.4 shall not extend loans to the micro finance sector,NABARD 21.8 20.6 in excess of 10 per cent of its total assets. GivenNHB * 20.7 19.7 the functional hardship faced by the MFI sectorSIDBI 31.6 29.2 following the Andhra Pradesh Micro Finance*: Position as at the end of June 2012 as per OSMOS returns.P: Provisional. Institutions (Regulations of Money Lending)Source: Audited OSMOS Returns of EXIM Bank, NABARD and SIDBI Ordinance, 2010 and to give reprieve to the ended March 31, and for NHB June 30. sector, the Reserve Bank modified the regulatory6.15 NBFCs are also classified in terms of framework for MFIs to allow for time foractivities into Asset Finance Companies (AFC), compliance to regulations and allow them toInvestment Companies (IC), Loan Companies register with the Bank as NBFC-MFI early.(LC), Infrastructure Finance Companies (IFC), Considering the importance of this sector for theCore Investment Companies (CIC), Infrastructure development and regulation of micro-financeDebt Fund - Non-Banking Financial Companies institutions to promote financial inclusion, the(IDF-NBFC), Non-Banking Financial Company– Micro-Finance Institutions (Development andMicro Finance Institutions (NBFC-MFI) and Regulation) Bill, 2012 was introduced in the LokNBFC -Factors. During 2011-12, two new Sabha on May 22, 2012 (Box VI.1).categories of NBFCs, viz., Infrastructure Debt 6.17 The ownership pattern of NBFCs-ND-SI asFunds – NBFC (NBFC-IDF) and Micro Finance well as deposit-taking NBFCs as at end-MarchInstitution (NBFC-MFI) – were created and 2012, suggested that government owned companiesbrought under separate regulatory framework. In have a share of below 3 per cent (Table VI.14).addition, a new category of NBFC-Factors wasintroduced in September 2012. Earlier in April Profile of NBFCs (including RNBCs)2010, a regulatory framework for Systemically Non-Banking financial companies’ segment isImportant Core Investment Companies (CIC ND- witnessing consolidationSI) was created for companies with an asset sizeof `1 billion and above, whose business is 6.18 The total number of NBFCs registered withinvestment for the sole purpose of holding stakes the Reserve Bank declined marginally to 12,385in group concerns, are not trading in these as at end-June 2012 (Chart VI.1). A similar trendsecurities and are accepting public funds. was observed in the case of deposit-taking NBFCsPrudential requirements in the form of Adjusted (NBFCs-D) during 2011-12, mainly due to theNet Worth and leverage were also prescribed for cancellation of Certificates of Registration (COR)CIC-ND-SIs as they were given exemption from and their exit from deposit-taking activities.NOF, capital adequacy and exposure norms. 6.19 Despite the decline in the number of6.16 An NBFC-MFI is defined as a non-deposit- NBFCs, their total assets as well as net ownedtaking NBFC (other than a company licensed funds registered an increase during 2011-12,under Section 25 of the Indian Companies Act, while public deposits recorded a decline. The1956) that fulfils the following conditions: (i) share of Residuary Non-Banking CompaniesMinimum Net Owned Funds of `5 crore (`2 crore (RNBCs) in the total assets of NBFCs showed afor the North-eastern Region), (ii) Not less than decline. The net owned funds of RNBCs have 125
  • 145. Report on Trend and Progress of Banking in India 2011-12 Box VI.1: Micro Finance Institutions (Development and Regulation) Bill, 2012 and its Impact on the Microfinance SectorThe Micro Finance Institutions (Development and has the authority to set the ceiling on the rate of interestRegulation) Bill, 2012 aims at providing a framework for the charged and the margin by MFIs. Margin is defined as thedevelopment and regulation of micro-finance institutions. difference between the lending rate and the cost of funds (inThe Bill defines a micro-finance institution (MFI) as an percentage per annum).organisation, other than a bank, providing micro-finance The Reserve Bank shall create the Micro-Financeservices as micro credit facilities not exceeding `5 lakh in Development Fund (MFDF). The sums are raised fromaggregate, or with the Reserve Bank’s specification of `10 donors, institutions and the public along with thelakh per individual. Subsidiary services like collection of outstanding balance from the existing Micro-Financethrift, pension or insurance services and remittance of Development and Equity Fund. The central government,funds to individuals within India also come under these after due appropriation from Parliament, may grant moneyservices. The Bill allows the Central Government to create to this fund. The fund can provide loans, grants and othera Micro-Finance Development Council (MFDC) that will micro-credit facilities to any MFIs.advise on policies and measures for the development ofMFIs. Besides, the Bill allows the Central Government to The Reserve Bank is responsible for redressal of grievancesform State Micro-Finance Councils (SMFC), which will for beneficiaries of micro-finance services. The Reservebe responsible for co-ordinating the activities of District Bank is empowered to impose a monetary penalty of upMicro-Finance Committees in the respective states. to `5 lakh for any contravention of the Bill’s provisions. No civil court will have jurisdiction against any MFI overDistrict Micro-Finance Committees (DMFC) can be any penalty imposed by the Reserve Bank. The Bill givesappointed by the Reserve Bank. The Bill requires all MFIs the Central Government the authority to delegate certainto obtain a certificate of registration from the Reserve powers to the National Bank for Agriculture and RuralBank. The applicant needs to have a net owned fund (the Development (NABARD) or any other Central Governmentaggregate of paid-up equity capital and free reserves on the agency. However, the Central Government has the power tobalance sheet) of at least `5 lakh. The Reserve Bank should exempt certain MFIs from the provisions of the Bill.also be satisfied with the general character or managementof the institution. The Bill and its likely Impact on the Microfinance SectorEvery MFI will have to create a reserve fund and the The Bill envisages that the Reserve Bank would be theReserve Bank may specify a percentage of net profit to be overall regulator of the MFI sector, regardless of legaladded annually to this fund. There can be no appropriation structure. The Reserve Bank has provided the views on thefrom this fund unless specified by the Reserve Bank. At the Bill to the Government of India. The aims of the Bill are toend of every financial year, MFIs are required to provide regulate the sector in the customers’ interest and to avoidan annual balance sheet and profit and loss account for a multitude of microfinance legislation in different states.audit to the Reserve Bank. They will also have to provide The proper balancing of the resources at the Reserve Banka return, detailing their activities within 90 days of the to supervise these additional sets of institutions besides theBill being passed. Any change in the corporate structure existing regulated institutions could be an important issue.of a MFI, such as shut-down, amalgamation, takeover or Requiring all MFIs to register is a critical and necessary steprestructuring can only take place with approval from the towards effective regulation. The proposal for appointmentReserve Bank. of an Ombudsman will boost the banking industry’s ownThe Bill has entrusted the Reserve Bank with the power to efforts to handle grievances better. Compulsory registrationissue directions to all MFIs. This could include directions of the MFIs would bring the erstwhile money-lenders intoon the extent of assets deployed in providing micro-finance the fold of organised financial services in the hinterlandservices, ceilings on loans or raising capital. The RBI who had been acting as MFIs hitherto.however remained at more or less same level Banks (SCBs) in 2011-12 indicates a decline. Theduring 2011-12 (Table VI.15). ratio of deposits of NBFCs to the broad liquidity6.20 The ratio of public deposits of NBFCs to aggregate of L31 also declined during the yearaggregate deposits of Scheduled Commercial (Chart VI.2). 1 Includes NM3 + Postal Deposits + Term Money + Certificates of Deposit + Term Deposit + public deposits with NBFCs. 126
  • 146. Non-Banking Financial Institutions Table VI.14: Ownership Pattern of NBFCs (As on March 31, 2012) (Number of Companies)Ownership NBFCs-ND-SI Deposit-taking NBFCs1 2 3A. Government Companies 9 7 (2.4) (2.6)B. Non-Government Companies 366 266 (97.6) (97.4) 1. Public Ltd Companies 198 263 (52.8) (96.3) 2. Private Ltd Companies 168 3 (44.8) (1.1)Total No. of Companies (A)+(B) 375 273 (100.0) (100.0)Note: Figures in parentheses are percentages to total number of NBFCs.Operations of NBFCs-D (excluding RNBCs)Financial performance of deposit-taking Non-Bank Financial Companies (NBFCs-D) showedimprovement category for NBFCs-D, constituting about three-6.21 The balance sheet size of NBFCs-D fourth of their total assets. The investmentexpanded at the rate of 10.8 per cent in 2011-12 constituted the second most important category,(Table VI.16). The borrowings constituted around which witnessed subdued growth during 2011-12two-third of the total liabilities of NBFCs-D. The mainly due to a decline in non-SLR investments.public deposits of NBFCs-D, which are subject to 6.22 Asset Finance Companies (AFCs) held thecredit ratings, continued to show an increasing largest share in the total assets of NBFCs-D attrend during 2011-12. On the assets side, loans end-March 2012 (Table VI.17).and advances remained the most important Table VI.15: Profile of NBFCs (Amount in ` billion)Item As at end-March 2011 2012P NBFCs of which: NBFCs of which: RNBCs RNBCs1 2 3 4 5Total Assets 1,169 115 1,244 76 (9.8) (6.1)Public Deposits 120 79 101 43 (66.0) (42.2)Net Owned Funds 180 30 225 31 (16.6) (13.7)P: ProvisionalNote: 1. NBFCs comprise NBFCs-D and RNBCs. 2. Figures in parentheses are percentage shares in respective total. 3. Of the 273 deposit-taking NBFCs, 196 NBFCs filed Annual Returns for the year ended March 2012 by the cut-off date, September 8, 2012.Source: Annual/Quarterly Returns. 127
  • 147. Report on Trend and Progress of Banking in India 2011-12 Table VI.16.Consolidated Balance Sheet of NBFCs-D (Amount in ` billion)Item As at end-March Variation 2010-11 2011-12 P 2011 2012P Absolute Per Cent Absolute Per Cent1 2 3 4 5 6 7Paid-Up Capital 36 32 -3 -6.4 -4 -11.5 (3.5) (2.8)Reserves Surplus 135 162 13 10.9 27 20.2 (12.8) (13.9)Public Deposits 41 58 12 43.5 18 43.8 (3.9) (5.0)Borrowings 698 809 57 9.0 111 15.9 (66.2) (69.2)Other Liabilities 144 107 32 28.3 -37 -25.9 (13.7) (9.1)Total Liabilities/ Assets 1,054 1,169 112 11.9 114 10.8 (100.0) (100.0)Investments 211 159 26 14.1 -52 -24.8(i) SLR Investments@ 135 134 39 40.0 -1.0 -0.7 (12.8) (11.5)(ii) Non-SLR Investments 76 25 -12 -14.1 -51 -67.6 (7.2) (2.1)Loans and Advances 780 874 68 9.6 94 12.1 (74.0) (74.8)Other Assets 63 103 18 39.3 40 62.3 (6.0) (8.8)P: Provisional@ SLR investments comprise approved Securities and unencumbered term deposits in Scheduled Commercial Banks; Loans & advances include HirePurchase and Lease Assets.Notes: 1. Figures in parentheses are percentages to respective total.Source: Annual/Quarterly Returns.Size-wise Classification of Deposits of NBFCs-D cent of total deposits at end-March 2012. However, only 7 NBFCs-D belonged to thisLarger NBFCs are more successful in raising category, constituting about 3.6 per cent of thepublic deposits total number of NBFCs-D. It indicates that only6.23 A sharp increase was discernible in the relatively larger NBFCs-D were able to raiseshare of NBFCs-D with a deposit size of ` 500 resources through deposits (Table VI.18 andmillion and above, accounting for about 93.2 per Chart VI.3). Table VI.17: Major Components of Liabilities of NBFCs-D by Classification of NBFCs (As at end-March) (Amount in ` billion)Classification of NBFCs No. of Companies Deposits Borrowings Liabilities 2011 2012P 2011 2012P 2011 2012P 2011 2012P1 2 3 4 5 6 7 8 9Asset Finance Companies 174 160 36 45 490 581 740 856 (89.4) (76.9) (70.2) (71.8) (70.2) (73.2)Loan Companies 43 36 4 13 208 228 314 313 (10.6) (23.1) (29.8) (28.2) (29.8) (26.8)Total 217 196 40 58 698 809 1,054 1,169P: Provisional.Note: Figures in parentheses are percentage share to total. 128
  • 148. Non-Banking Financial Institutions Table VI.18: Public Deposits held by NBFCs-D Table VI.19: Public Deposits held by by Deposit Range NBFCs-D - Region-wise (Amount in ` million) (Amount in ` million) Region As at end-MarchDeposit Range As at end-March 2011 2012 P No. of Amount of NBFCs deposit Number of Public Number of Public NBFCs-D Deposits NBFCs-D Deposits 2011 2012 P 2011 2012 P 1 2 3 4 51 2 3 4 5 North 144 1,882 125 3,2851. Less than `5 million 134 117 194 138 East 8 39 5 392. More than `5 million and up 38 34 442 377 West 20 9,286 17 14,880 to `20 million South 45 29,416 49 40,2063. More than `20 million and up 28 27 1,287 1,131 Total 217 40,623 196 58,410 to ` 100 million4. More than ` 100 million and 7 7 1,084 1,092 Metropolitan cities: up to ` 200 million Kolkata 5 39 3 395. More than ` 200 million and 2 4 807 1,201 Chennai 26 28,638 30 39,338 up to ` 500 million Mumbai 6 9,074 5 14,6826. ` 500 million and above 8 7 36,809 54,467 New Delhi 50 976 43 2,390Total 217 196 40,623 58,406 Total 87 38,728 81 56,450P: Provisional P: ProvisionalSource: Annual/Quarterly Returns. Source: Annual Returns.Region-wise Composition of Deposits held by Interest Rate on Public Deposits with NBFCsNBFCs NBFCs-ND-SI segment continues to rely heavily6.24 Among metropolitan cities, New Delhi on bank financeaccounted for the largest number of NBFCs-D, 6.25 There was an increase in the share ofwhile Chennai held the largest share of 69.7 per public deposits in the interest rate range of 10 percent in total public deposits of NBFCs-D (Table cent to 12 per cent during 2011-12 (Table VI.20VI.19 and Chart VI.4). and Chart VI.5). 129
  • 149. Report on Trend and Progress of Banking in India 2011-12Table VI.20: Public Deposits held by NBFCs-D – Table VI.21: Maturity Pattern of Public Interest Rate Range-wise Deposits held by NBFCs-D (Amount in ` million) (Amount in ` million)Interest Rate Range As at end-March Maturity Period As at end-March 2011 2012 P 2011 2012P1 2 3 1 2 3Up to 10 per cent 29,963 32,460 1. Less than 1 year 9,816 11,720 (73.8) (55.6) (24.2) (20.1)More than 10 per cent and up to 12 per cent 9,454 24,870 2. More than 1 and up to 2 years 7,942 15,530 (23.3) (42.6) (19.6) (26.6)12 per cent and above 1,206 1,080 3. More than 2 and up to 3 years 19,877 24,980 (48.9) (42.8) (3.0) (1.8) 4. More than 3 and up to 5 years 2,221 6,170Total 40,623 58,410 (5.5) (10.6) (100.0) (100.0) 5. 5 years and above@ 769 10 (1.9) (0.0)P: ProvisionalNote: 1. The rate of interest on public deposits cannot exceed 12.5 Total 40,624 58,410 per cent. (100.0) (100.0) 2. Figures in parentheses are percentages to total.Source: Annual Returns. P: Provisional @ includes unclaimed public deposits. Note: Figures in parentheses are percentages to respective total. Source: Annual Returns.Maturity Profile of Public Deposits6.26 The largest proportion of public deposits commercial paper, borrowings from mutual fundsraised by NBFCs-D belonged to the short to and any other types of funds that were not treatedmedium end of the maturity spectrum. In 2011- as public deposits) also registered a declining12, there was an increase in the shares of deposits trend (Table VI.22).for more than 2 years (Table VI.21 and Chart VI.6). Assets of NBFCs6.27 Banks and financial institutions were the Expansion in assets of AFCs was noticeablemajor providers of funds for NBFCs-D, constitutingabout 50 per cent during 2011-12. This share has 6.28 The total assets of NBFCs-D sectorcome down marginally. Others (which include, registered a moderate growth during 2011-12inter alia, money borrowed from other companies, mainly due to an increase in the assets of asset 130
  • 150. Non-Banking Financial Institutions Table VI.22: Sources of Borrowings by NBFCs-D by Classification of NBFCs (Amount in ` billion)Classification As at end-March Government Banks and Financial Debentures Others Total Borrowings Institutions 2011 2012P 2011 2012P 2011 2012P 2011 2012P 2011 2012P1 2 3 4 5 6 7 8 9 10 11Asset Finance 0.0 0.0 283 300 123 198 84 83 490 581 (0.0) (0.0) (80.2) (74.9) (85.7) (83.3) (59.0) (71.2) (70.2) (71.8)Loan Companies 59 54 70 101 20 40 59 33 208 228 (100.0) (100.0) (19.8) (25.1) (14.3) (16.7) (41.0) (28.8) (29.8) (28.2)Total 59 54 353.2 401 143 238 143 116 698 809P: ProvisionalNote: Figures in parentheses are percentage to respective total.Source: Annual companies (Table VI.23). As at end-March significant growth, whereas investment declined.2012, more than two-third of the total assets of These two categories of activities constituted overthe NBFCs-D sector was held by asset finance 90 per cent share in total assets of the NBFCs-Dcompanies. Component-wise, advances accounted sector (Table VI.25).for the predominant share of total assets, followed Financial Performance of NBFCs-Dby investment. Fund-based income of the NBFCs-D segmentDistribution of NBFCs-D According to Asset has increasedSize 6.31 The financial performance of NBFCs-D6.29 At end-March 2012, only 6 per cent of witnessed improvement as reflected in theNBFCs-D had an asset size of more than ` 5,000million, which had a share of 97 per cent in the Table VI.24: Assets of NBFCs-D by Asset-Size Rangestotal assets of all NBFCs-D (Table VI.24). (As at end-March)Distribution of Assets of NBFCs – Type of (Amount in ` million)Activity Asset Range No. of Assets Companies6.30 During 2011-12, assets held in the form 2011 2012P 2011 2012Pof loans and advances of NBFCs-D witnessed 1 2 3 4 5 1. Less than `2.5 million 2 0 2 0.0 Table VI.23: Major Components of Assets of 2. More than `2.5 million and up to` 5.0 million 9 11 35 45 NBFCs-D by Classification of NBFCs 3. More than `5.0 million (Amount in ` billion) and up to `20 million 70 55 804 691Classification As at end-March 4. More than `20 million and up to `100 million 73 65 3,471 2,917 Assets Advances Investments 5. More than `100 million 2011 2012P 2011 2012P 2011 2012P and up to `500 million 34 34 8,224 7,1471 2 3 4 5 6 7 6. More than `500 million and up to `1,000Asset Finance 740 856 557 656 126 180 million 8 11 5,079 6,910Companies (70.2) (73.2) (71.5) (75.0) (59.9) (94.1) 7. More than `1,000Loan Companies 314 313 222 218 85 11 million and up to (29.8) (26.8) (28.5) (25.0) (40.1) (5.9) `5,000 million 6 8 8,309 19,052Total 1,054 1,169 779 874 211 191 8. Above `5,000 million 15 12 1,028,388 1,131,913 Total 217 196 1,054,312 1,168,676P: ProvisionalNote: Figures in parentheses are percentage to respective total. P: ProvisionalSource: Annual Returns. Source: Annual Returns. 131
  • 151. Report on Trend and Progress of Banking in India 2011-12 Table VI.25: Break-up of Assets of NBFCs-D by Activity (Amount in ` billion)Activity As at Percentage end-March Growth 2011 2012P 2011-12P1 2 3 4Loans and Advances 779 874 12.2 (73.9) (74.8)Investments 211 192 -9.2 (20.0) (16.4)Other assets 64 103 60.0 (6.1) (8.8)Total 1,054 1,169 10.8P: ProvisionalNote: Figures in parentheses are percentages to respective total.Source: Annual Returns.increase in their operating profits during 2011-12.This increase in profit was mainly on account ofgrowth in fund-based income (Table VI.26).Table VI.26: Financial Performance of NBFCs-D Expenditure as a percentage to average total assets (Amount in ` billion) witnessed a marginal increase during 2011-12.Item As at end-March The same trend is seen in terms of income as a 2011 2012P percentage to average total assets of NBFCs-DA. Income (i+ii) 152 181 (Chart VI.7). (i) Fund-Based 151 180 (99.2) (99.3) (ii) Fee-Based 1 1 Soundness Indicators: Asset Quality of NBFCs-D (0.8) (0.7)B. Expenditure (i+ii+iii) 109 133 Deterioration in asset quality of NBFCs-D (i) Financial 68 81 segment (62.3) (60.9) of which Interest Payment 9 8 (8.2) (6.0) 6.32 During 2011-12, there was a significant (ii) Operating 30 35 increase in the gross NPAs to total advances of (27.1) (26.4) (iii) Others 11 17 NBFCs-D, which is a deviation from recent trends. (10.5) (12.8)C. Tax Provisions 14 16 Table VI.27: NPA Ratios of NBFCs-DD. Operating Profit (PBT) 43 48 (per cent)E. Net Profit (PAT) 29 33 As at end-March Gross NPAs to Net NPAs toF. Total Assets 1,054 1,169 Total Advances Net AdvancesG. Financial Ratios (as % to Total Assets) 1 2 3 i) Income 14.4 15.5 ii) Fund Income 14.3 15.4 2002 10.6 3.9 iii) Fee Income 0.0 0.1 2003 8.8 2.7 iv) Expenditure 10.4 11.4 2004 8.2 2.4 v) Financial Expenditure 0.1 6.9 2005 5.7 2.5 vi) Operating Expenditure 2.8 3.0 2006 3.6 0.5 vii) Tax Provision 1.3 1.3 2007 2.2 0.2 viii) Net Profit 2.7 2.8 2008 2.1 # 2009 2.0 #H. Cost to Income Ratio 72.0 73.3 2010 1.3 #P: Provisional 2011 0.7 #Note: 1. Figures in parentheses are percentages to respective total. 2012 P 2.1 0.5 2. Percentage variation could be slightly different because absolute numbers have been rounded off to ` billion. P: Provisional. # Provision exceeds NPASource: Annual Returns. Source: Half-Yearly returns on NBFCs-D. 132
  • 152. Non-Banking Financial Institutions Table VI.28: NPAs of NBFCs-D by Classification of NBFCs (Amount in ` billion)Classification/End-March Gross Gross NPAs Net Advances Net NPAs Advances Amount % to Gross Advances Amount % to Net Advances1 2 3 4 5 6 7Asset Finance2010-11 517 3 0.5 508 -7 -1.42011-12 P 663 16 2.3 651 3 0.5Loan Companies2010-11 183 2 1.3 181 -0.1 0.02011-12 P 208 3 1.6 206 2 0.8All Companies2010-11 700 5 0.7 689 -7 -1.02011-12 P 871 19 2.1 857 5 0.5P: ProvisionalSource: Half-Yearly returns on NBFCs-D.Net NPAs which remained negative till 2011 from 12 as evident from an increase in the gross NPAs2008, with provisions exceeding NPAs registered to gross advances ratio for these companiesan increase of 0.5 per cent of total net advances (Table VI.28).as on March 31, 2012 (Table VI.27). In order to improve transparency and6.33 There was deterioration in the asset quality understanding by borrowers, the Reserve Bankof asset finance and loan companies during 2011- has issued a revised fair practices code (Box VI.2). Box VI.2: Guidelines on Fair Practices Code for NBFCsThe Reserve Bank has revised the guidelines on Fair Practices Code (i) The Board of each NBFC shall adopt an interest rate model(FPC) for all NBFCs issued on September 28, 2006 in the light of taking into account relevant factors, such as cost of funds,the recent developments in the NBFC sector. The salient features of margins and risk premium.the revised circular dated March 26, 2012 are as follows: (j) NBFCs must have a built-in re-possession clause in theGeneral contract/loan agreement with the borrower which must be legally enforceable.(a) All communications to the borrower shall be in the vernacular language or a language as understood by the borrower. (k) To ensure transparency, the terms and conditions of the contract/loan agreement should also contain provisions(b) Loan application forms should include necessary information regarding: (a) notice period before taking possession; (b) that affects the interests of the borrower. circumstances under which the notice period can be waived;(c) Loan agreement should contain all details. (c) the procedure for taking possession of the security; (d) a(d) NBFCs should refrain from interference in the affairs of the provision regarding final chance to be given to the borrower for repayment of loan before the sale / auction of the property; (e) borrower except for the purposes provided in the terms and the procedure for giving repossession to the borrower and (f) conditions of the loan agreement. the procedure for sale/ auction of the property.(e) In the matter of recovery of loans, the NBFCs should not resort NBFC-MFIs to undue harassment and ensure that the staffs are adequately trained to deal with customers. In addition to the general principles above, NBFC-MFIs are required to adopt the following fair practices that are specific to their lending(f) The Board of Directors of NBFCs should also lay down the business and regulatory framework. appropriate grievance redressal mechanism within the organisation. (a) A statement shall be made in vernacular language and displayed by NBFC-MFIs in their premises and in loan cards(g) The Fair Practices Code should be put in place by all NBFCs articulating their commitment to transparency and fair lending with the approval of their Boards. The same should be put up practices; on their website. (b) Field staff should be trained to make necessary enquiries with(h) Boards of NBFCs should lay out appropriate internal principles regard to existing debt of the borrowers, and training, if any, and procedures to determine interest rates and processing offered to the borrowers shall be free of cost. and other charges. (Contd...) 133
  • 153. Report on Trend and Progress of Banking in India 2011-12(Concld...)(c) The effective rate of interest charged and the grievance redressal (b) Proper assaying procedure for the jewellery received. mechanism set up by the NBFC-MFIs should be prominently (c) Internal systems to satisfy ownership of the gold jewellery. displayed in all its offices; (d) The policy shall also cover putting in place adequate systems(d) A declaration that the MFI will be accountable for preventing for storing the jewellery in safe custody, reviewing the systems inappropriate staff behaviour and timely grievance redressal on an on-going basis, training the concerned staff and periodic shall be made in the loan agreement; inspection by internal auditors to ensure that the procedures(e) All sanctioning and disbursement of loans should be done only are strictly adhered to. at a central location and more than one individual should be (e) Loans against the collateral of gold should not be extended by involved in this function; branches that do not have appropriate facility for storage of the jewellery.(f) All NBFC-MFIs shall have a Board-approved standard form of loan agreement, preferably in the vernacular language; (f) The jewellery accepted as collateral should be appropriately insured.(g) The loan card should reflect the details, including the effective rate of interest charged; (g) The Board-approved policy with regard to auction of jewellery in case of non-repayment shall be transparent and adequate(h) Non-credit products issued shall be with the full consent of prior notice to the borrower should be given before the auction borrowers and the fee structure shall be communicated in the date. loan card itself; (h) The auction should be announced to the public by issue of(i) Recovery should normally be made only at a central designated advertisements in at least 2 newspapers, one in vernacular place; language and another in national daily newspaper.(j) NBFC-MFIs shall ensure that a Board-approved policy is in (i) As a policy the NBFCs themselves shall not participate in the place with regard to Code of Conduct by field staff. auctions held.Lending against collateral of gold jewellery (j) Gold pledged will be auctioned only through auctioneers approved by the Board.(a) Adequate steps to ensure that the KYC guidelines stipulated by the RBI are complied with and to ensure that adequate due (k) The policy shall also cover systems and procedures to be put diligence is carried out on the customer before extending any in place for dealing with fraud, including separation of duties loan. of mobilisation, execution and approval.6.34 There was an increase in the shares of all underlining the marginal deterioration in assetthree NPA categories of sub-standard, doubtful quality of these institutions. This mainly emanatedand loss assets of all companies in 2011-12, from asset finance companies (Table VI.29). Table VI.29: Classification of Assets of NBFCs-D by Category of NBFCs (Amount in ` billion) Standard Assets Sub-standard Assets Doubtful Assets Loss Assets Gross NPAs Gross Advances1 2 3 4 5 6 7Asset Finance Companies2010-11 515 2.1 0.3 0.1 2.5 517 (99.5) (0.4) (0.1) (0.0) (0.5) (100.0)2011-12P 648 10 4 2 15 663 (97.7) (1.5) (0.5) (0.3) (2.3) (100.0)Loan Companies2010-11 180 1 2 0 2 183 (98.7) (0.6) (0.4) (0.0) (1.3) (100.0)2011-12P 205 2 1 0.4 3 208 (98.4) (1.0) (0.4) (0.2) (1.6) (100.0)All Companies2010-11 695 3 2 0.1 5 700 (99.3) (0.5) (0.1) (0.0) (0.7) (100.0)2011-12P 852 12 4 2 19 871 (97.8) (1.4) (0.5) (0.3) (2.2) (100.0)P: ProvisionalNote: Figures in parentheses are per cent to total credit exposures.Source: Half Yearly returns on NBFCs-D. 134
  • 154. Non-Banking Financial Institutions Table VI.30: Capital Adequacy Ratio of Table VI.31: Net Owned Fund vis-à-vis NBFCs-D Public Deposits of NBFCs-D (Number of companies) by ClassificationCRAR Range 2010-11 2011-12P (Amount in ` billion) AFC LC Total AFC LC Total Classification Net Owned Fund Public Deposits1 2 3 4 5 6 7 2010-11 2011-12P 2010-11 2011-12P1) Less than 12 per cent 1 1 2 1 1 2 1 2 3 4 5 a) Less than 9 per cent 1 1 2 1 1 2 Asset Finance Companies 108 139 36 45 b) More than 9 per cent 0 0 0 0 0 0 (0.3) (0.3) and up to 12 per cent Loan Companies 42 56 4 132) More than 12 per cent 1 2 3 1 0 1 (0.1) (0.2) and up to 15 per cent Total 150 195 41 583) More than 15 per cent 5 3 8 8 3 11 (0.3) (0.3) and up to 20 per cent P: Provisional.4) More than 20 per cent 19 3 22 16 2 18 Note: Figures in parentheses are ratio of public deposits to net owned and up to 30 per cent funds.5) Above 30 per cent 142 27 169 131 27 158 Source: Annual Returns.Total 168 36 204 157 33 190P: Provisional concentrated in the category of `5,000 million andNote: AFC-Asset Finance Companies; LC-Loan CompaniesSource: Half-yearly returns. above (Table VI.32). Residuary Non-Banking Companies (RNBCs)6.35 At end-March 2012, of 190 reportingNBFCs, 187 had CRAR of more than 15 per cent RNBCs are in the process of migrating to other(Table VI.30). This could be an indication that the business modelsNBFC sector is undergoing a consolidation 6.36 The assets of RNBCs declined by 34 perprocess in the past few years, wherein weaker cent during the year ended March 2012. TheNBFCs are gradually exiting and paving the way assets mainly consist of investments infor stronger ones. The ratio of public deposits to unencumbered approved securities, bonds/Net Owned Funds (NOF) of NBFCs taken together debentures and fixed deposits/certificates ofhas more or less remained same as at end-March deposit of SCBs. The NOF of RNBCs has also2012 (Table VI.31). There was a significant registered a decline of 52.2 per cent in 2011-12increase in NOF and public deposits of NBFCs-D (Table VI.33). The decline in the expenditure ofduring 2011-12. The increase in NOF was mainly RNBCs during 2011-12 was more than the decline Table VI.32: Range of Net Owned Funds vis-à-vis Public Deposits of NBFCs-D (Amount in ` million)Range of NoF 2010-11 2011-12P No. of Net Owned Public No. of Net Owned Public Companies Fund Deposits Companies Fund Deposits1 2 3 4 5 6 7Up to `2.5 million 2 -2,003 324 1 -1 1.2More than `2.5 million and up to `20 million 113 838 320 89 750 242More than `20 million and up to `100 million 65 2,662 1,359 67 2,894 1,271More than `100 million and up to `500 million 20 4,529 1,133 21 4,468 1,252More than `500 million and up to `1000 million 2 1,204 1,038 4 2,869 817More than `1000 million and up to `5000 million 7 17,118 4,526 7 13,876 15,612Above `5000 million 8 1,25,527 31,923 7 1,69,792 39,212Total 217 1,49,874 40,623 196 1,94,648 58,406P: ProvisionalNote: Figures in parentheses are public deposits as ratio of respective net owned fund.Source: Annual returns 135
  • 155. Report on Trend and Progress of Banking in India 2011-12 Table VI.33: Profile of RNBCs Table VI.34: Public Deposits Held by (Amount in ` million) RNBCs – Region-wise (Amount in ` billion)Item 2010-11 2011-12P Percentage Variation Item 2010-11 2011-12P 2010-11 2011-12P No. of Public No. of Public1 2 3 4 5 RNBCs Deposits RNBCs DepositsA. Assets (i to v) 1,14,670 75,430 -26.6 -34.2 1 2 3 4 5 Central 1 53 1 21 (i) Investment in (66.9) (50.0) Unencumbered Approved Securities 13,080 8,380 -47.0 -36.0 Eastern 1 26 1 21 (33.1) (50.0) (ii) Investment in Total 2 79 2 42 Fixed Deposits / Certificate Metropolitan Cities of Deposits of Scheduled Kolkata 1 26 1 21 Comm. Banks/ Total 1 26 1 21 Public Financial Institutions 26,520 13,900 -45.4 -47.6 P: Provisional (iii) Debentures/Bonds/ Note: Figures in parentheses are percentages to respective totals. Commercial Source: Annual returns. Papers of Govt. Companies/Public Sector Banks/ significant decline in 2011-12, mainly due to a Public Financial Institution/ substantial decline in the deposits held by SIFCL Corporation 28,760 7,510 -45.6 -73.9 (Table VI.34). (iv) Other Investments 490 4,330 -96.2 784.3 (v) Other Assets 45,820 41,310 166.6 -9.8 Investment Pattern of RNBCsB. Net Owned Fund 29,880 14,270 2.3 -52.2 6.38 Following the decline in deposits, there wasC. Total Income (i+ii) 11,590 3,320 -40.4 -71.3 a decline in the investments of RNBCs in 2011-12. (i) Fund Income 11,280 2,940 -41.3 -73.9 (ii) Fee Income 310 380 19.2 24.1 The decline was noticeable in all segments ofD. Total Expenses (i+ii+iii) 10,060 1,660 -28.1 -83.5 investment (Table VI.35). (i) Financial Cost 6,310 460 -35.2 -92.7 (ii) Operating Cost 3,680 520 7.3 -85.9 NBFCs-ND-SI (iii) Other Cost 70 680 -91.6 876.9 Though borrowing from banks is sizable, aE. Taxation 620 570 -62.2 -8.1F. Operating Profit (PBT) 1,530 1,670 -72.0 8.9 substantial increase in borrowings by way ofG. Net Profit (PAT) 910 1,100 -76.2 20.5 debentures was witnessedP: Provisional. PBT: Profit Before Tax. PAT: Profit After Tax. 6.39 The assets of NBFCs-ND-SI for the yearSource: Annual returns ended March 2012 showed an increase of 21 perin income, as a result of which the operating Table VI.35. Investment Pattern of RNBCsprofits of RNBCs increased during the year. As a (Amount in ` million)result of decline in the provision for taxation, the Item 2010-11 2011-12Pnet profits of RNBCs increased sharply during 1 2 32011-12. Aggregate Liabilities to the Depositors (ALD) 79,020 42,650Regional Pattern of Deposits of RNBCs (i) Unencumbered approved securities 13,080 8,380 (16.6) (19.6) (ii) Fixed Deposits with banks 26,520 13,9006.37 At end-March 2012, there were two RNBCs, (33.6) (32.6)registered with the Reserve Bank. One each is (iii) Bonds or debentures or commercial papers 28,760 7,510 of a Govt. Company / public sector bank / (36.4) (17.6)located in central and eastern regions. Both the public financial Institution / corporationsRNBCs are in the process of migrating to other (iv) Other Investments 490 4,330 (0.6) (10.2)business models and have been directed to reduce P: Provisionaltheir deposit liabilities to ‘nil’ by 2015. Public Note: Figures in parentheses as percentages to ALDs. Source: Annual returns.deposits held by the two RNBCs registered a 136
  • 156. Non-Banking Financial Institutionscent. Total borrowings (secured and unsecured) 6.40 The NBFCs-ND-SI segments is growingby NBFCs-ND-SI showed a significant increase of rapidly. Borrowings comprise their largest source23.6 per cent, constituting more than two-third of funds, mostly sourced from banks and financialof the total liabilities (Table VI.36). Secured institutions. To the extent that they rely on bankborrowings constituted the largest source of funds financing, there is an indirect exposure tofor NBFCs-ND -SI, followed by unsecured depositors. While the concentration of funding hasborrowings, reserves and surplus. risks, the caps on bank lending to NBFCs may constrain their growth. However, the leverage ratio Table VI.36: Consolidated Balance Sheet of of the NBFCs-ND-SI sector remains the same as NBFCs-ND-SI in the previous year. (Amount in ` billion)Item 2010-11 2011-12 Variation