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Report on Trend and Progress of Banking in India for the year endedJune 30, 2012 submitted to the Central Government in te...
Sale Price:In India   –     ` 150     (Normal)           –     ` 190     (Inclusive of Postal Charges)           –     ` 1...
ContentsSr. No.                                                         Particulars                                       ...
Sr. No.                                                        Particulars                                                ...
List of BoxesSr. No.                                                   Particulars                                        ...
List of TablesSr.No.                                                   Particulars                                        ...
Sr.No.                                                  Particulars                                                      P...
Sr.No.                                                     Particulars                                                    ...
Sr.No.                                                   Particulars                                                      ...
List of ChartsSr. No.                                                   Particulars                                       ...
Sr. No.                                                 Particulars                                                      P...
Sr. No.                                                    Particulars                                                    ...
List of Appendix TablesSr. No.                                                Particulars                                 ...
List of Select AbbreviationsAD       Authorised Dealer                        CAS         Common Accounting SystemADR     ...
CP      Card Present                               EL         Expected LossCPSS    Committee on Payment and               ...
FMI     Financial Market Infrastructure             IBA        Indian Banks’ AssociationFMU     Financial Market Utilities...
KA      Key Attributes                         MSME       Micro, Small and MediumKCC     Kisan Credit Card                ...
NPCI        National Payments Corporation           RIDF       Rural Infrastructure Development            of India       ...
SME      Small and Medium Enterprise            UBD    Urban Banks DepartmentSMFC     State Micro-Finance Council         ...
Chapter I                  Perspectives on the Indian Banking Sector     Headwinds from international and domestic economi...
Report on Trend and Progress of Banking in India 2011-12requirements of banks along with a move towards                cou...
Perspectives on the Indian Banking SectorUnder Basel III, common equity capital will be the         regulators and positio...
Report on Trend and Progress of Banking in India 2011-12                                                Box I.1 :         ...
Perspectives on the Indian Banking Sector                                           Box I.2 :   Bilateral Memorandum of Un...
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
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Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
Indian Banks : Trends and Progress, RBI
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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

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  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 requirements.technology 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. 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

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