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  • Report on Trend and Progress of Banking in India for the year endedJune 30, 2011 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 2010-11 RESERVE BANK OF INDIA
  • Sale Price:In India – ` 200 (Normal) – ` 240 (Inclusive of Postal Charges) – ` 150 (Concessional – at Counter) – ` 190 (Concessional – Including Postage)Abroad – US$ 22 (Inclusive of Air Mail Courier Charges)© Reserve Bank of India 2011All rights reserved. Reproduction is permitted provided an acknowledgement of the source is made.Published by Mohua Roy for the Reserve Bank of India, Mumbai 400 001 and designed and printed by herat Jayant Printery, 352/54, Murlidhar Compound, Girgaum Road, Mumbai - 400 002.
  • ContentsSr.No. Particulars Page No.Chapter I : Perspectives on the Indian Banking Sector ............................................... 1. Introduction ................................................................................................... 1 2. Forces Shaping the Environment ..................................................................... 2 3. Strategic and Operational Responses ............................................................... 3 4. Challenges ..................................................................................................... 5 5. The Way Forward ........................................................................................... 8Chapter II : Global Banking Developments ................................................................. 1. Introduction ................................................................................................... 10 2. Global Banking Trends ................................................................................... 11 3. Banking Trends in Select Regions and Countries .............................................. 19 4. An Analysis of the Performance of Top 100 Global Banks .................................. 22 5. Global Policy Reforms ..................................................................................... 25 6. Conclusions ................................................................................................... 29Chapter III : Policy Environment .............................................................................. 1. Introduction ................................................................................................... 31 2. Monetary Policy .............................................................................................. 32 3. Credit Delivery ................................................................................................ 33 4. Financial Inclusion ......................................................................................... 36 5. Prudential Regulatory Policy ............................................................................ 38 6. Supervisory Policy .......................................................................................... 42 7. Regional Rural Banks ..................................................................................... 45 8. Cooperative Banks .......................................................................................... 46 9. Non-Banking Financial Companies .................................................................. 49 10. Customer Service in Banks ............................................................................. 51 11. Financial Markets ........................................................................................... 52 12. Payment and Settlement System ..................................................................... 54 13. Technological Developments ............................................................................ 55 14. Banking Sector Legislation .............................................................................. 56 15. Conclusions ................................................................................................... 57Chapter IV: Operations and Performance of Commercial Banks ................................... 1. Introduction ................................................................................................... 59 2. Balance Sheet Operations of Scheduled Commercial Banks .............................. 60 3. Financial Performance of Scheduled Commercial Banks ................................... 69 4. Soundness Indicators ..................................................................................... 73 v
  • Sr.No. Particulars Page No. 5. Sectoral Deployment of Bank Credit ................................................................. 83 6. Operations of Scheduled Commercial Banks in Capital Market .......................... 87 7. Shareholding Pattern in Scheduled Commercial Banks ..................................... 88 8. Foreign Banks’ Operations in India and Overseas Operations of Indian Banks ... 90 9. Technological Developments in Scheduled Commercial Banks ........................... 90 10. Customer Service ............................................................................................ 92 11. Financial Inclusion ......................................................................................... 93 12. Regional Rural Banks ..................................................................................... 100 13. Local Area Banks ............................................................................................ 100 14. Conclusions ................................................................................................... 101Chapter V - Developments in Cooperative Banking 1. Introduction ................................................................................................... 105 2. Urban Cooperative Banks ............................................................................... 107 3. Rural Cooperatives ......................................................................................... 116 4. Role of NABARD in Reviving the Rural Cooperatives ......................................... 125 5. Conclusions ................................................................................................... 130Chapter VI: Non-Banking Financial Institutions 1. Introduction ................................................................................................... 131 2. Financial Institutions ...................................................................................... 132 3. Non-Banking Financial Companies .................................................................. 136 4. Primary Dealers .............................................................................................. 150 5. Conclusions ................................................................................................... 153 vi
  • List of BoxesBox No. Particulars Page No. II.1 European Banks’ Exposure to Euro Area Sovereign Debt ................................ 22 II.2 Key Objectives and Features of the Basel III Framework ................................. 27 II.3 Counter-Cyclical Capital Buffer: Concept and Working ................................... 28 III.1 Monitoring Interest Rate Sensitivity based on Duration Gap Analysis ............. 46 III.2 Report of the Committee on Customer Service in Banks ................................. 52 III.3 Recommendations of the Working Group on Securing Card Present Transactions .................................................................................................. 55 IV.1 Asset Liability Mismatches (ALM) in the Indian Banking Sector: The Extent and Persistence .................................................................................................... 68 IV.2 Profitability versus Risks: An Analysis of Off-Balance Sheet Exposures in the Indian Banking Sector ................................................................................... 70 IV.3 Net Interest Margin of the Indian Banking Sector: Efficiency versus Profitability .................................................................................................... 73 IV.4 Impact of Restructuring of Advances on the Asset Quality of the Banking Sector .............................................................................................. 79 IV.5 Robust Credit Growth and Credit Booms – An Analysis of the Indian Banking Sector ................................................................................... 82 V.1 Merger and Amalgamation of Urban Cooperative Banks ................................. 108 V.2 Soundness of StCBs ....................................................................................... 121 V.3 Role of Rural Cooperatives in Financial Inclusion – Some Emerging Issues ..... 126 VI.1 Inter-connectedness of NBFCs and Banks in India ......................................... 138 VI.2 Credit Rating of NBFCs – Practices and Prospects .......................................... 140 VI.3 Recommandations of the Working Group on the Issues and Concerns in the NBFC Sector ......................................................................... 151 vii
  • List of TablesTable No. Particulars Page No. II.1 Return on Assets of Banks for Select Economies ............................................ 12 II.2 Growth in International Assets and Liabilities of Banks .................................. 14 II.3 Capital to Risk-Weighted Assets Ratio of Banks in Select Economies .............. 15 II.4 Rank Correlation Coefficients for Top Global Banks between 2009 and 2010 .. 23 III.1 Compensation under Agriculture Debt Waiver and Debt Relief Scheme ........... 36 IV.1 Consolidated Balance Sheet of Scheduled Commercial Banks ......................... 61 IV.2 Growth in Balance Sheet of Scheduled Commercial Banks ............................. 62 IV.3 Non-SLR Investments of Scheduled Commercial Banks .................................. 64 IV.4 International Liabilities of Banks – By Type .................................................... 65 IV.5 International Assets of Banks – By Type ......................................................... 65 IV.6 Classification of Consolidated International Claims of Banks on Countries Other than India – By Maturity and Sector ..................................................... 66 IV.7 Consolidated International Claims of Banks on Countries other than India .... 66 IV.8 Bank Group-wise Maturity Profile of Select Liabilities/Assets ......................... 67 IV.9 Asset Liability Mismatches in the Indian Banking Sector ................................ 69 IV.10 Trends in Income and Expenditure of Scheduled Commercial Banks .............. 71 IV.11 Return on Assets and Return on Equity of SCBs – Bank Group-wise .............. 71 IV.12 Cost of Funds and Return on Funds – Bank Group-wise ................................ 72 IV.13 Capital to Risk-Weighted Assets Ratio under Basel I and II – Bank Group-wise 74 IV.14 Component-wise Capital Adequacy of SCBs .................................................... 74 IV.15 Trends in Non-Performing Assets – Bank Group-wise ..................................... 76 IV.16 NPAs of SCBs Recovered through Various Channels ....................................... 78 IV.17 Details of Financial Assets Securitised by SCs/RCs ........................................ 78 IV.18 Sector-wise NPAs of Domestic Banks .............................................................. 80 IV.19 Trends in Provisions for Non-Performing Assets – Bank Group-wise ............... 81 IV.20 Classification of Loan Assets – Bank Group-wise ............................................ 81 IV.21 Sectoral Deployment of Gross Bank Credit ..................................................... 84 IV.22 Priority Sector Lending by Public and Private Sector Banks ............................ 85 IV.23 Priority Sector Lending by Foreign Banks ....................................................... 87 IV.24 Retail Portfolio of Banks ................................................................................. 87 IV.25 Public Issues from the Banking Sector ........................................................... 87 IV.26 Resources Raised by Banks through Private Placements ................................. 88 IV.27 Resource Mobilisation through Euro Issues by the Banking Sector ................. 88 IV.28 Risk-Return Performance, Turnover and Capitalisation of Bank Stocks .......... 89 viii
  • Table No. Particulars Page No. IV.29 Number of Public Sector Banks Classified by Percentage of Private Shareholding ................................................................................................. 89 IV.30 Overseas Operations of Indian Banks ............................................................. 91 IV.31 ATMs of Scheduled Commercial Banks ........................................................... 91 IV.32 Debit Cards Issued by Scheduled Commercial Banks ..................................... 92 IV.33 Credit Cards Issued by Scheduled Commercial Banks .................................... 92 IV.34 Volume and Value of Electronic Transactions by Scheduled Commercial Banks ........................................................................ 93 IV.35 Region-wise Complaints received at Banking Ombudsman Offices .................. 93 IV.36 Bank-Group-wise Complaints received at Banking Ombudsman Offices ......... 94 IV.37 Progress of Financial Inclusion ....................................................................... 94 IV.38 Distribution of New Bank Branches Across Regions and Population Groups ......................................................................................... 95 IV.39 Number of ATMs of SCBs Located at Various Locations .................................. 96 IV.40 Progress Made Under Financial Inclusion Plans ............................................. 98 IV.41 Progress of Micro-Finance Programmes .......................................................... 99 IV.42 Consolidated Balance Sheet of Regional Rural Banks ..................................... 100 IV.43 Financial Performance of Regional Rural Banks ............................................. 101 IV.44 Purpose-wise Distribution of Credit from Regional Rural Banks ...................... 101 IV.45 Profile of Local Area Banks ............................................................................. 102 IV.46 Financial Performance of Local Area Banks .................................................... 102 V.1 Grade-wise Distribution of Deposits and Advances of Urban Cooperative Banks 107 V.2 Distribution of Urban Cooperative Banks by Size of Deposits and Advances ... 110 V.3 Tier wise Distribution of Urban Cooperative Banks ......................................... 110 V.4 Liabilities and Assets of Urban Cooperative Banks ......................................... 111 V.5 Investments by Urban Cooperative Banks ...................................................... 112 V.6 Financial Performance of Scheduled and Non-Scheduled Urban Cooperative Banks ............................................................................................................ 113 V.7 Select Financial Indicators of UCBs ................................................................ 113 V.8 Non-Performing Assets of UCBs ..................................................................... 114 V.9 Advances to Weaker Sections by Urban Cooperative Banks ............................ 115 V.10 A Profile of Rural Cooperative Banks .............................................................. 117 V.11 Elected Boards under Supersession ............................................................... 117 V.12 Liabilities and Assets of State Cooperative Banks, end-March 2010 ................ 118 V.13 Financial Performance of State Cooperative Banks ......................................... 119 V.14 Soundness Indicators of State Cooperative Banks .......................................... 119 ix
  • Table No. Particulars Page No. V.15 Liabilities and Assets of District Central Cooperative Banks ........................... 120 V.16 Financial Performance of District Central Cooperative Banks ......................... 120 V.17 Soundness Indicators of District Central Cooperative Banks .......................... 122 V.18 Primary Agricultural Credit Societies – Select Balance Sheet Indicators .......... 122 V.19 Liabilities and Assets of State Cooperative Agriculture and Rural Development Banks ....................................................................................... 123 V.20 Financial Performance of State Cooperative Agriculture and Rural Development Banks ....................................................................................... 124 V.21 Soundness Indicators of State Cooperative Agriculture and Rural Development Banks ....................................................................................... 124 V.22 Liabilities and Assets of Primary Cooperative Agriculture and Rural Development Banks ....................................................................................... 124 V.23 Financial Performance of Primary Cooperative Agriculture and Rural Development Banks ....................................................................................... 125 V.24 Asset Quality of Primary Cooperative Agriculture and Rural Development Banks ....................................................................................... 125 V.25 NABARD’s Credit to StCBs, State Governments and RRBs .............................. 127 V.26 Tranche-wise Details of RIDF (As at end-March 2011) .................................... 128 V.27 Progress under Kisan Credit Card Scheme ..................................................... 128 VI.1 Ownership Pattern of Financial Institutions ................................................... 132 VI.2 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 133 VI.3 Liabilities and Assets of Financial Institutions ................................................ 134 VI.4 Resources Mobilised by Financial Institutions ................................................ 134 VI.5 Resources Raised by Financial Institutions from Money Market ...................... 134 VI.6 Pattern of Sources and Deployment of Funds of Financial Institutions ........... 135 VI.7 Weighted Average Cost and Maturity of Rupee Resources Raised by Select Financial Institutions ........................................................................... 135 VI.8 Long-term PLR Structure of Select Financial Institutions ............................... 135 VI.9 Financial Performance of Select All-India Financial Institutions ...................... 136 VI.10 Select Financial Parameters of Financial Institutions ..................................... 136 VI.11 Net Non-Performing Assets of Financial Institutions ....................................... 136 VI.12 Asset Classification of Financial Institutions .................................................. 137 VI.13 Capital to Risk (weighted) Assets Ratio of Select Financial Institutions ........... 137 VI.14 Ownership Pattern of NBFCs .......................................................................... 139 VI.15 Profile of NBFCs ............................................................................................. 139 VI.16 Consolidated Balance Sheet of NBFCs-D ........................................................ 141 VI.17 Major Components of Liabilities of NBFCs-D by Classification of NBFCs ......... 142 x
  • Table No. Particulars Page No. VI.18 Public Deposits held by NBFCs-D by Deposit Ranges ...................................... 142 VI.19 Public Deposits held by NBFCs-D Region-wise ................................................ 143 VI.20 Public Deposits held by NBFCs-D - Deposit Interest Rate Range-wise ............. 143 VI.21 Maturity Pattern of Public Deposits held by NBFCs-D ..................................... 144 VI.22 Sources of Borrowings by NBFCs-D by Classification of NBFCs ...................... 144 VI.23 Major Components of Assets of NBFCs-D by Classification of NBFCs .............. 145 VI.24 Assets of NBFCs-D by Asset-Size Ranges ........................................................ 145 VI.25 Distribution of Assets of NBFCs-D by Activity ................................................. 145 VI.26 Financial Performance of NBFCs-D ................................................................ 146 VI.27 NPA Ratios of NBFCs-D .................................................................................. 146 VI.28 NPAs of NBFCs-D by Category of NBFCs ........................................................ 146 VI.29 Classification of Assets of NBFCs-D by Category of NBFCs ............................. 147 VI.30 Capital Adequacy Ratio of NBFCs-D ............................................................... 147 VI.31 Net Owned Fund vis-à-vis Public Deposits of NBFCs-D by Category ................ 147 VI.32 Range of Net Owned Fund vis-à-vis Public Deposits of NBFCs-D ..................... 148 VI.33 Profile of RNBCs ............................................................................................ 148 VI.34 Public Deposits held by RNBCs - Region-wise ................................................. 149 VI.35 Investment Pattern of RNBCs ......................................................................... 149 VI.36 Consolidated Balance Sheet of NBFCs-ND-SI .................................................. 149 VI.37 Borrowings of NBFCs-ND-SI-By Region .......................................................... 150 VI.38 Financial Performance of NBFCs-ND-SI .......................................................... 150 VI.39 NPA Ratios of NBFCs-ND-SI ........................................................................... 150 VI.40 Dependence on Public Funds ......................................................................... 152 VI.41 Capital Adequacy Ratio of NBFCs-ND-SI ........................................................ 152 VI.42 Bank Exposure of NBFCs-ND-SI ..................................................................... 152 VI.43 Performance of the PDs in the Primary Market ............................................... 153 VI.44 Performance of Standalone PDs in the Secondary Market ............................... 153 VI.45 Sources and Applications of Funds of Standalone Primary Dealers ................. 154 VI.46 Financial Performance of Standalone Primary Dealers .................................... 154 VI.47 Financial Indicators of Primary Dealers .......................................................... 154 VI.48 CRAR of the Standalone PDs .......................................................................... 155 VI.49 Select Indicators of Primary Dealers ............................................................... 155 xi
  • List of ChartsChart No. Particulars Page No. II.1 Global Macro-economic Trends ........................................................................ 11 II.2 Three-year Moving Average of Bank Credit Growth, in per cent ......................... 13 II.3 Bank Stock Indices in Select Economies/Economy Groups ............................... 14 II.4 International Assets/Liabilities of Advanced and Emerging Economies .............. 15 II.5 Leverage in the Banking Systems of Select Economies ...................................... 16 II.6 Asset Quality of Banks in Select Economies ..................................................... 16 II.7 CDS Spread of Global Banks ........................................................................... 17 II.8 Sovereign and Bank CDS Spreads in Select Economies ..................................... 17 II.9 Demographic Access to Banking Services across Select Economies .................... 18 II.10 Usage of Banking Services across Select Economies – Deposits ......................... 18 II.11 Usage of Banking Services across Select Economies – Credit ............................. 19 II.12 Asset Growth in the US Banking Sector ........................................................... 19 II.13 Sectoral Rates of Growth of Credit of US Banks ................................................ 20 II.14 Sectoral Delinquency Rates of US Banks .......................................................... 20 II.15 Balance Sheet Indicators of Banks in the Euro zone ......................................... 20 II.16 Expectations about Credit Conditions for SME Sector in the Euro zone .............. 20 II.17 Movements in Euro Inter-Bank Offered Rate .................................................... 21 II.18 Interest Rates on Bank Deposits from Non-financial Corporations (with Less than One Year Maturity), Select Euro zone Economies ...................... 21 II.19 Expectations about Bank Credit Availability to SMEs in the UK ......................... 22 II.20 Write-off Rates of UK Banks ............................................................................ 23 II.21 Growth in Balance Sheets of Chinese Banks .................................................... 23 II.22 Location of Global Banking Business ............................................................... 24 II.23 Share of Countries in Total Assets of Top 100 Global Banks .............................. 24 II.24 Percentage Distribution of Top 100 Global Banks by Return on Assets ............... 24 II.25 Percentage Distribution of Top 100 Global Banks by CRAR ............................... 25 II.26 Percentage Distribution of Top 100 Global Banks by Capital Adequacy (Leverage) Ratio .............................................................................................................. 25 II.27 Percentage Distribution of Top Global Banks by NPLs Ratio .............................. 25 II.28 Changes in Soundness Indicators of Top 20 Global Banks ................................ 26 IV.1 Composition of Deposits 2010-11 .................................................................... 62 IV.2 Deposits and Borrowings 2010-11 ................................................................... 63 IV.3 Credit as per cent of Deposits plus Borrowings 2010-11 .................................... 66 IV.4 Incremental Credit- and Investment-Deposit Ratios of SCBs ............................. 67 IV.5 Composition of Off-Balance Sheet Exposures of the Banking Sector 2010-11 ..... 69 IV.6 Net Profits of SCBs ......................................................................................... 72 xii
  • Chart No. Particulars Page No. IV.7 Cost of Funds and Return on Funds – Bank Group-wise 2010-11 ...................... 74 IV.8 Tier I Ratio of Public Sector Banks ................................................................... 75 IV.9 Trends in Gross Non-Performing Assets ........................................................... 75 IV.10A NPAs Written Off as per cent of Previous Year’s Gross NPAs .............................. 76 IV.10B Written Off Ratio – Bank Group-wise 2010-11 .................................................. 76 IV.11A Slippage Ratio ................................................................................................ 77 IV.11B Slippage Ratio - Bank Group-wise 2010-11 ...................................................... 77 IV.12A NPAs Recovered as per cent of Previous Year’s Gross NPAs ................................ 77 IV.12B Recovery Ratio - Bank Group-wise 2010-11 ...................................................... 77 IV.13 Ratio of NPAs to Advances ............................................................................... 78 IV.14 Composition of Incremental NPAs of Domestic Banks 2010-11 .......................... 80 IV.15 Shares of Population Groups in Agricultural and Industrial Credit ..................... 84 IV.16A Priority Sector Lending: Target and Achievement 2010-11 ................................. 86 IV.16B Agricultural Advances: Target and Achievement 2010-11 .................................. 86 IV.17A Priority Sector Advances - Target and Achievement 2010-11 ............................. 86 IV.17B Export Credit – Target and Achievement 2010-11 ............................................. 86 IV.18 Relative Performance of BSE Bankex and BSE Sensex - 2010-11 ....................... 88 IV.19 Government Shareholding in PSBs .................................................................. 89 IV.20 Foreign Shareholding in Domestic Banks ......................................................... 89 IV.21 Shares of Bank Groups in Outstanding Debit Cards ......................................... 91 IV.22 Shares of Bank Groups in Outstanding Credit Cards ........................................ 92 IV.23 Major Complaints against Bank Groups 2010-11 .............................................. 94 IV.24 Bank Branches Opened in Hitherto Unbanked Centres (April-March) ................ 95 IV.25 Region-wise Population per Bank Branch (end-March 2011) .............................. 96 IV.26 Population Group-wise Distribution of ATMs (end-March 2011) ......................... 96 IV.27 Share of Regions in Total Net Increase in ATMs 2010-11 ................................... 97 IV.28 Distribution of Deposit and Credit According to Banking Centres – March 2011 . 97 IV.29A Region-wise Share in Credit – March 2011 ....................................................... 98 IV.29B Population Group-wise Share in Credit – March 2011 ....................................... 98 V.1 Structure of Cooperative Credit Institutions in India ......................................... 106 V.2 Grade-wise Distribution of Number of UCBs and Share in Total Advances and Deposits ......................................................................................................... 108 V.3 Changing Profile of UCBs ................................................................................ 109 V.4 Asset Size-wise Distribution of UCBs ............................................................... 109 V.5 Composition of Investments of UCBs ............................................................... 112 V.6 Distribution of UCBs according to CRAR .......................................................... 113 V.7 CRAR and RoA of UCBs .................................................................................. 114 xiii
  • Chart No. Particulars Page No. V.8 Composition of Advances to Priority Sectors by UCBs ....................................... 114 V.9 Region-wise and State-wise Profile of UCBs ...................................................... 115 V.10 Percentage Share of Top and Bottom Five States in Total Number of UCBs......... 116 V.11 Select Balance Sheet Indicators of Scheduled StCBs ......................................... 118 V.12 Percentage Share of Different Categories of NPAs of StCBs ................................ 119 V.13 Purpose-wise Details of Projects and Loans Sanctioned under RIDF ................... 127 VI.1 Net Non-Performing Assets/Net Loans ............................................................. 137 VI.2 Number of NBFCs Registered with Reserve Bank of India .................................. 139 VI.3 Ratio of Public Deposits of NBFCs to Broad Liquidity (L3) andAggregate Deposits of SCBs ............................................................................................ 141 VI.4 Share of Public Deposits held by NBFCs-D-by Deposits Ranges ......................... 142 VI.5 Share of Public Deposits held by NBFCs-D Region-wise .................................... 143 VI.6 Public Deposits held by NBFCs-D-Deposit Interest Rate Range-wise .................. 143 VI.7 Maturity Pattern of Public Deposits held by NBFCs-D ....................................... 144 VI.8 Financial Performance of NBFCs-D .................................................................. 146 xiv
  • List of Appendix TablesTable No. Particulars Page No. IV.1 Off-Balance Sheet Exposures of Scheduled Commercial Banks in India .......... 156 IV.2(A) Non-Performing Assets of Public Sector Banks - Sector-wise ........................... 157 IV.2(B) Non-Performing Assets of Private Sector Banks - Sector-wise .......................... 158 IV.2(C) Non-Performing Assets of Foreign Banks - Sector-wise ................................... 159 IV.3(A) Non-Performing Assets in Advances to Weaker Sections - Public Sector Banks 160 IV.3(B) Non-Performing Assets in Advances to Weaker Sections - Private Sector Banks 161 IV.4(A) Advances of Public Sector Banks to Agriculture and Weaker Sections ............. 162 IV.4(B) Advances of Private Sector Banks to Agriculture and Weaker Sections ............ 163 IV.4(C) Advances of Foreign Banks to Micro and Small Enterprises (MSE) and Export sectors ................................................................................................ 164 IV.5(A) Targets Achieved by Public Sector Banks under the Priority Sector ................. 165 IV.5(B) Targets Achieved by Private Sector Banks under the Priority Sector ................ 166 IV.5(C) Targets Achieved by Foreign Banks under the Priority Sector ......................... 167 IV.6 Bank Group-wise Lending to the Sensitive Sectors ......................................... 168 IV.7 Share Prices and Price/Earning Ratios of Bank Stocks at BSE ....................... 169 IV.8 Shareholding Pattern of Domestic Scheduled Commercial Banks .................... 170 IV.9 Branches and ATMs of Scheduled Commercial Banks .................................... 172 IV.10 Statement of Complaints Received at Banking Ombudsman Office ................. 175 IV.11 Credit-Deposit Ratio and Investment plus Credit-Deposit Ratio of Scheduled Commercial Banks - Region/State-wise .......................................................... 178 V.1 Select Financial Parameters of Scheduled UCBs ............................................ 179 V.2 Major Indicators of Financial Performance of Scheduled UCBs ....................... 180 V.3 State-wise Distribution of UCBs ..................................................................... 182 V.4 Working Results of State Cooperative Banks - Region and State-wise ............. 183 V.5 Working Results of District Central Cooperative Banks - Region and State wise 184 V.6 Select Indicators of Primary Agricultural Credit Societies-State wise ............... 185 V.7 Working Results of State Cooperative Agriculture and Rural Development Banks - State-wise ........................................................... 187 V.8 Working Results of Primary Cooperative Agriculture and Rural Development Banks -State-wise ............................................................ 188 V.9 Sanctions and Disbursements Under RIDF - State-wise ................................. 189 V.10 Kisan Credit Card Scheme: State-wise Progress .............................................. 192 VI.1 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 193 VI.2 Financial Performance of Primary Dealers ...................................................... 194 VI.3 Select Financial Indicators of Primary Dealers ................................................ 195 xv
  • List of Select AbbreviationsAD Authorised Dealer CCF Credit Conversion FactorsADR American Depository Receipt CCP Central Counter PartyADWDR Agricultural Debt Waiver and Debt CDs Certificates of Deposit Relief Scheme CDS Credit Default SwapsAFC Asset Finance Companies CE Common EquityAFI Annual Financial Inspection CEO Chief Executive OfficerAIFIs All India Financial Institutions CEOBSE Credit Equivalent Amount Off-BalanceALM Asset-Liability Mismatch Sheet ExposureAMA Advanced Measurement Approach CFSA Committee on Financial Sector AssessmentAML Anti-Money Laundering CFT Combating Financing of TerrorismANBC Adjusted Net Bank Credit CGFS Committee on Global FinancialASA Alternate Standardised Approach StabilityATM Automated Teller Machine CGS Credit Guarantee SchemeBC Business Correspondent CGTMSE Credit Guarantee Fund Trust for MicroBCBS Basel Committee on Banking and Small Enterprises Supervision CIC Credit Information CompanyBCP-DR Business Continuity Management and CICs-ND-SI Systemically Important Non-deposit Disaster Recovery taking Core Investment CompaniesBCSBI Banking Codes and Standards Boards CMB Cash Management Bills of India CME Capital Market ExposureBFS Board for Financial Supervision CNP Card Not PresentBIS Bank for International Settlements CoR Certificate of RegistrationBO Banking Ombudsman CPs Commercial PapersBoD Board of Directors CP Card PresentBoM Board of Management CPSS Committee on Payment andBPR Business Process Re-engineering Settlement SystemBSE Bombay Stock Exchange Ltd. CRAR Capital to Risk-Weighted Assets RatioCAR Capacity Adequacy Ratio CRAs Credit Rating AgenciesCAS Common Accounting System CRCS Central Registrar of CooperativeCASA Current Account and Savings Account Societies CRE Commercial Real EstateCBI Central Board of Investigation CRR Cash Reserve RatioCBLO Collateralised Borrowing and Lending Obligation DCCB District Central Cooperative BanksCBS Core Banking Solutions DGA Duration Gap AnalysisCCAR Comprehensive Capital Assessment DICGC Deposit Insurance and Credit Review Guarantee Corporation xvi
  • DIN Director Identification Number FI Financial InstitutionDLIC District Level Implementation FII Foreign Institutional Investments Committee FIP Financial Inclusion PlanDR Disaster Recovery FLCC Financial Literacy and CreditDRT Debt Recovery Tribunal Counselling CentresDSA Direct Selling Agents FMI Financial Market InfrastructureEaR Earnings at Risk FMU Financial Market UtilitiesEBA European Banking Authority FPC Financial Policy CommitteeECCS Express Cheque Clearing System FSA Financial Services AuthorityECS Electronic Clearing Service FSAP Financial Sector Assessment ProgrammeEFSF European Financial Stability Facility FSB Financial Stability BoardEFSM European Financial Stabilisation Mechanism FSDC Financial Stability and Development CouncilEIOPA European Insurance and Occupational Pensions Authority FSLRC Financial Sector Legislative Reforms CommissionEL Expected Loss FSOC Financial Stability Oversight CouncilEME Emerging Market Economy FSR Financial Stability ReportEMV Euro pay MasterCard Visa G Sec Government SecuritiesESA European Supervisory Authorities GCC General Credit CardESFS European System of Financial Supervisions GDP Gross Domestic ProductESM European Stability Mechanism GDR Global Depository ReceiptESMA European Securities and Markets GFSR Global Financial Stability Report Authority GHOS Governors and Heads of SupervisionESRB European Systemic Risk Board GIC General Insurance Corporation ofEU European Union IndiaEURIBOR Euro Inter-Bank Offered Rate GNPA Gross Non-Performing AssetsEXIM Bank Export Import Bank of India GoI Government of IndiaFASB Financial Accounting Standards Board GSIB Global Systemically Important BankFATF Financial Action Task Force HRM Human Resource ManagementFB Foreign Banks HSBC Hong Kong and Shanghai Banking CorporationFCA Financial Conduct Authority HTM Held to MaturityFCCB Foreign Currency Convertible Bonds IAS International Accounting StandardFCMD Financial Conglomerate Monitoring Division IASB International Accounting Standards BoardFCNR (B) Foreign Currency Non-Resident (Banks) IBA Indian Banks’ AssociationFEMA Foreign Exchange Management Act ICs Investment CompaniesFHC Financial Holding Company ICB Independent Commission on Banking xvii
  • ICDs Inter Corporate Deposits MAG Macro-economic Assessment GroupICICI Industrial Credit and Investment MCA Ministry of Corporate Affairs Corporation of India MDG Modified Duration GapICT Information and Communications MENA Middle East and North African Technology MFI Micro Finance InstitutionIDBI Industrial Development Bank of India MICR Magnetic Ink Character RecognitionIDRBT Institute for Development and Research in Banking Technology MIS Management Information SystemIFC Infrastructure Finance Company MoU Memorandum of UnderstandingIFRS International Financial Reporting MSE Micro and Small Enterprise Standards MSF Marginal Standing FacilityIIBI Industrial Investment Bank of India MSME Micro, Small and Medium EnterprisesIL Incurred Loss MVE Market Value of EquityIMA Internal Models Approach NABARD National Bank for Agriculture andIMF International Monetary Fund Rural DevelopmentInd ASs Indian Accounting Standards NAFSCOB National Federation of StateINFINET Indian Financial NETwork Cooperative BanksIOSCO International Organisation of NBFC Non-Banking Financial Company Securities Commission NBFC-D Non-Banking Financial Company-IRB Internal Rating Based Deposit takingIRC Incremental Risk Charge NBFC-ND Non-Deposit taking Non-Banking Financial CompanyIRDA Insurance Regulatory and Development Authority NBFC-ND-SI Systemically Important Non-Deposit taking Non-Banking FinancialIRSD Interest Rate Sensitivity under Company Duration Gap Analysis NBFIs Non-Banking Financial InstitutionsIT Information Technology NDS Negotiated Dealing SystemIVR Interactive Voice Response NDTL Net Demand and Time LiabilityJLGs Joint Liability Groups NECS National Electronic Clearing ServiceKCC Kisan Credit Card NEFT National Electronic Fund TransferKYC Know Your Customer NGO Non-Government OrganisationLAB Local Area Bank NHB National Housing BankLAF Liquidity Adjustment FacilityLCBG Large and Complex Banking Group NII Net Interest IncomeLCR Liquidity Coverage Ratio NIM Net Interest MarginLCs Loan Companies NIMC National Implementing and Monitoring CommitteeLEI Long-term Economic Impact NOC No Objection CertificateLGD Loss Given Default NOF Net Owned FundLIBOR London Inter-Bank Offered Rate NOHC Non-Operative Holding CompanyLIC Life Insurance Corporation of India NPA Non-Performing AssetLTCCS Long-Term Cooperative Credit Structure NRE Non-Resident External xviii
  • NREGA National Rural Employment SAO Seasonal Agricultural Operations Guarantee Act SARFAESI Securitisation and Reconstruction ofNRRDA National Rural Roads Development Financial Assets and Enforcement of Agency Security InterestNRO Non-Resident Ordinary SBLP SHG-Bank Linkage ProgrammeNSFR Net Stable Funding Ratio SC Scheduled CasteOBS Off-balance Sheet SCAP Supervisory Capital Assessment ProgrammeOECD Organisation for Economic Corporation and Development SCARDB State Cooperative Agriculture and Rural Development BankOSMOS Off-Site Monitoring and Surveillance System SCB Scheduled Commercial BankOTC Over the Counter SCs/RCs Securitisation Companies/ Reconstruction CompaniesPACS Primary Agricultural Credit Society SEBI Securities and Exchange Board of IndiaPAT Profit After Tax SHG Self-Help GroupPBT Profit Before Tax SIDBI Small Industries Development Bank ofPCARDB Primary Cooperative Agriculture and India Rural Development Bank SIFI Systemically Important FinancialPD Primary Dealer InstitutionPDO – NDS Public Debt Office – Negotiated Dealing SLIMC State Level Implementing and System Monitoring CommitteePE Price Earning SLR Statutory Liquidity RatioPFRDA Pension Fund Regulatory and SME Small and Medium Enterprises Development Authority SPV Special Purpose VehiclePIN Personal Identification Number SSI Small Scale IndustryPOS Point of Sale ST Scheduled TribePRA Prudential Regulation Authority StCB State Cooperative BankPRBs Private Sector Banks STCCS Short-Term Cooperative CreditPSB Public Sector Bank StructureRCS Registrar of Cooperative Societies T/B Treasury BillsRIDF Rural Infrastructural Development TAFCUB Task Force for Urban Cooperative Bank Fund TGA Traditional Gap AnalysisRNBC Residuary Non-Banking Company TLE Terminal Line EncryptionRoA Return on Assets UBD Urban Banks DepartmentROE Return on Equity UCB Urban Cooperative BankRORWA Return on Risk Weighted Assets UKPT Unique Key Per TerminalRRB Regional Rural Bank UO Umbrella OrganisationsRSA Rate-Sensitive Assets VAPT Vulnerability Analysis and PenetrationRSL Rate-Sensitive Liabilities TestRTGS Real Time Gross Settlement System VaR Value at Risk xix
  • Chapter I Perspectives on the Indian Banking Sector Domestic banks continued to manage growth with resilience during 2010-11 with ample reserves of capital and liquidity, improved performance in profitability and asset quality. With high growth potential of the Indian economy and favourable demographics, banks have immense opportunities to further expand their business both with traditional and innovative products and through financial inclusion using technology enabled sustainable business models. However, the prevailing interest rate environment and slowing growth in the near-term amidst somewhat skewed exposures to interest sensitive sectors will require adept management of such exposures going forward. Further, it will be challenging for banks to raise additional capital and liquidity to support higher growth and to comply with Basel III stipulations. This would require banks to use innovative and attractive market based funding channels, especially when capital continues to remain expensive and the Government support may be constrained by fiscal considerations. The challenge to converge with the International Financial Reporting System would require banks to upgrade infrastructure including information technology and human resources. Given the focus on inclusive growth, banks are also expected to renew efforts to broaden the scope of financial inclusion and use viable business models to achieve their targets. Finally, sustained pursuit of forward looking strategies aimed at mitigating risks, diversifying revenue sources, containing asset-liability mismatches, providing effective response to changing global market environment and improving customer relationships should strengthen the overall growth of the banking sector in the medium term.1. Introduction of higher growth in India will depend crucially on the ability of the banking sector to mobilise1.1 The banking sector in India emerged the savings and meet the credit needs of thelargely unscathed from the global financial crisis growing economy through innovative financialof 2007-08, but faced a slowdown in the instruments and services that foster financialmomentum of growth due to the weakening of inclusion and provide efficient and transparenttrade, finance and confidence channels. delivery of credit.However, post crisis, the economic growth inmost emerging market economies (EMEs) 1.2 Despite the challenging headwinds fromincluding India recovered, while growth remains domestic and international developments, theanemic in advanced economies. Instability of performance of Indian banks remained robustsovereign debt markets in the Euro zone, during 2010-11. The resilience of the bankingpolitical turmoil in the Middle East and North sector was marked by improvement in theAfrican (MENA) region, calamities in Japan, capital base, asset quality and profitability. Thesovereign debt downgrade of the United States profitability of scheduled commercial banksin August this year and the persistently elevated (SCBs) improved both in terms of return onlevels of commodity prices have together led to assets (RoA) and return on equity (RoE).an accentuation of downside risks to global Simultaneously, both gross and net NPA ratiosgrowth. While these risks are expected to recede declined in comparison with the previous year.gradually over time, the long-term sustainability Since the Indian financial system is bank
  • Report on Trend and Progress of Banking in India 2010-11dominated, banks’ ability to withstand stress is 1.5 One point to note though is that thecritical to overall financial stability. A series of comparative position is at the aggregate level; astress tests conducted by the Reserve Bank in few individual banks may fall short of the Baselrespect of credit, liquidity and interest rate risks III norms and will have to augment their capital.showed that banks remained reasonably There will be challenges of upgrading riskresilient. However, under extreme shocks, some management systems and meeting the creditbanks could face moderate liquidity problems needs of a rapidly growing economy even whileand their profitability could be affected. adjusting to a more demanding regulatory regime. In addition to countercyclical capital1.3 A detailed description of perspectives on buffers, Basel III also envisages countercyclicalglobal developments is covered in Chapter II on provisions.Global Banking Developments. Against thisbackground, some relevant perspectives about 1.6 In India, banks have a stock of floatingthe Indian banking sector are outlined. provisions which the Reserve Bank has not permitted to be used, except under a situation2. Forces Shaping the Environment of systemic stress. While the floating provisions may serve the purpose of countercyclicalAre Indian banks adequately prepared for provision, a framework is necessary for allowingmigration to Basel III regime? its use. As an interim measure, the Reserve1.4 Commercial banks in India have already Bank has been trying to develop a methodologyadopted standardised approaches under Basel based on the Spanish dynamic provisioningII. It is time for larger banks to seriously consider system. This, however, has not been easy givenupgrading their systems and migrating to the lack of required data and analytics with theadvanced approaches. Adoption of advanced banks. Migration to Basel III requires a high levelapproaches requires simultaneous use of the of liquidity to be maintained through a pool ofunderlying processes in the day-to-day risk liquid assets. The definition of liquid assets ismanagement of banks. In the background of the very stringent including the requirement thatrecent global regulatory developments, a they should be freely available.question often discussed is whether the Indianbanks are prepared for Basel III. The building Are the Indian banks geared up forblocks of Basel III are by now quite well known: transition to the International Financialhigher and better quality capital; an Reporting System (IFRS)?internationally harmonised leverage ratio to 1.7 Converging to global accountingconstrain excessive risk taking; capital buffers standards, i.e., IFRS facilitates comparabilitywhich would be built up in good times so that between enterprises operating in differentthey can be drawn down in times of stress; jurisdictions. Convergence would help to reduceminimum global liquidity standards; and both the cost of capital and cost of compliancestronger standards for supervision, public for industry. Training, education and skilldisclosure and risk management. Quick development are cornerstones of a successfulassessments show that at the aggregate level IFRS implementation. All the stakeholdersIndian banks will not have any problem in including investors, accountants, auditors,adjusting to the new capital rules both in terms customers, software and hardware vendors,of quantum and quality. Indian banks are rating agencies, analysts, audit committees,comfortably placed in terms of compliance with actuaries, valuation experts and otherthe new capital rules. specialists will need to develop an understanding 2
  • Perspectives on the Indian Banking Sectorof IFRS provisions to varying degrees and what impact may be more significant if other entitiesthey need to do. It is not only the accounting like other banks, NBFCs, and mutual funds areissues but how to address the non-accounting included for analysis.issues that will determine how successfullybanks make a transition to IFRS. Additionally, Current and emerging environment offersbanks will need to upgrade their infrastructure, sound business opportunities to the banksincluding IT and human resources to face the 1.9 The emerging economic environmentcomplexities and challenges of IFRS. Some major provides a number of opportunities for thetechnical issues arising for Indian banks Indian banking sector. Factors like expectedduring the convergence process are the positive economic performance, strong savingsdifferences between the IFRS and current growth spurred by the favourable demographicregulatory guidelines, in particular, those within dividend, emphasis on expansion of physicalthe ambit of International Accounting Standard infrastructure and the extent of financial(IAS) 39 replacement project relating to exclusion to be bridged will ensure growth ofclassification and measurement of financial the banking sector in medium term. To exploitassets and liabilities. emerging opportunities and to benefit from their strengths, Indian banks need to be globallyInterconnectedness in the banking sector competitive. From a strategic perspective,and vulnerability of financial system competitiveness can be achieved by balancing1.8 Post-crisis, macro-prudential policy has factors such as scale, scope, prudence andemerged as an important tool for addressing knowledge.systemic risk, highlighting its time and the crosssectional dimensions. While the time dimension 3. Strategic and Operational Responsesrefers to pro-cyclical elements that give rise to Migration of financial conglomerates inthe evolution of aggregate risk over time, the India to holding company structurecross section dimension is concerned withdistribution of risks which can be exacerbated 1.10 At present, most of the financial groups inowing to the interconnectedness in the financial India are led by banks and organised under thesystem. Financial interconnectedness as a part Bank Subsidiary model. This model putsof macro-financial surveillance is the key issue the onus on the parent bank for corporatein discussions on prudential regulation policies governance, performance and capitalas it can magnify idiosyncratic shocks across requirement of subsidiaries. Besides, the parentthe financial system. To put in place an effective carries very substantial reputational risk. Thesystem of macro-prudential surveillance of the Working Group on ‘Introduction of Holdingfinancial system, the Reserve Bank has started Company structure in India for banks’ hasusing network analysis techniques to model recommended migration of major financialinter-bank exposures. The analysis revealed that conglomerates to the holding company structurethe banking sector in India is deeply connected. to address these limitations to some extent. TheFurther, the contagion analysis made on the main challenges in implementing thebasis of network analysis underlined that recommendations include, formulating a newinterconnectedness in the banking sector gives law governing functioning of financial holdingrise to vulnerability of financial system in the companies, providing right incentives to theevent of failure of one or more banks depending existing financial conglomerates throughon the degree of interaction. The contagion appropriate tax treatment and resolutionimpact is relatively contained due to regulatory of strategic and public policy issues by thelimits on interbank exposures. However, the Government in the case of public sector banks. 3
  • Report on Trend and Progress of Banking in India 2010-11Introducing innovative financial products as March 2008 to 2.21 per cent at end March 2010,an efficient way to manage risks followed by a slight moderation to 2.01 per cent in 2011. The concern is that the recoveries have1.11 Introducing innovative financial products not kept pace with slippages since an efficient way to manage risks involved inthe banking business. From this point of view, Rising interest rates and substantial amount ofthe decision to introduce credit default swaps restructuring done during the crisis period, if(CDS) with effect from October 24, 2011 is a not done with due care, are likely to put furtherwelcome development. However, given their pressure on asset quality of banks. Further,complex nature, CDS shall be permitted on asset quality of banks needs to be closelylisted corporate bonds, unlisted but rated bonds watched in the changing interest rateof infrastructure companies and unlisted/ environment as the sticky loan portfolio of smallunrated bonds issued by the Special Purpose and medium enterprises might rise. Therefore,Vehicles (SPVs) set up by infrastructure there is a need for banks to step up efforts tocompanies as reference obligations, and the resolve their existing NPAs and tighten theirreference entities shall be single legal resident credit risk management systems.entities. The guidelines also require market Robust business continuity management andparticipants to build robust and appropriate risk disaster recoverymanagement systems. Newer skill sets formanaging newer areas and unfamiliar elements 1.13 The extensive use of technology systemsof risks would continue to pose questions even in transaction processing and settlement into the most advanced banks. The retail as well as inter-institution and interbankimplementation of innovative financial products markets requires adequate availability andrequires diligent assessment of counterparty capacity to handle the increasing load on theseand related risks. Banks will have to adopt an systems for smooth functioning of financialapproach to re-evaluate their risk management markets and banking industry in India. Dataacumen in a manner that calls for higher levels centres managed by the Reserve Bank, andof transparency, structural integrity and Indian Financial Network (INFINET), theoperational control. While expanding market is communication backbone for the financial sectora matter of survival, a further challenge for the managed by the Institute for Development andbanks would be to ring-fence their operations Research in Banking Technology (IDRBT),by establishing a sound risk management continued to provide robust support during thesystem that is not only protective but also year. Software changes were made in Real Timeinclusive and acts as a business enabler. Gross Settlement (RTGS) and Public Debt Office- Negotiated Dealing System (PDO-NDS)Management of asset quality applications to enhance performance and1.12 While gross NPAs, in percentage terms, introduce new functionalities. The nexthave declined steadily from 15.70 per cent at generation RTGS with advanced technology andend March 1997 to 2.25 per cent at end March new functionalities is also in the pipeline, which2011, this does not fully reveal the underlying would have features such as advanced liquidityrealities and some trends are a matter of management facility, extensible markupconcern, which could put pressure on asset language based messaging system conformingquality of banks in future. Aggressive lending to ISO 2002, and real time information andduring the high credit growth phase followed transaction monitoring and control the crisis resulted in slippage with gross NPA Periodic drills were conducted to get feedbackratio steadily rising from 1.81 per cent at end and assurance on the effectiveness of the 4
  • Perspectives on the Indian Banking SectorBusiness Continuity management and Disaster inclusion will provide banks access to sizeableRecovery (BCP-DR) arrangements for shared low cost funds as also opportunities for lendinginfrastructure and Payment and Settlement in the small volume segment. The latter shouldSystems. A quarterly report on the BCP-DR and be possible since the Reserve Bank hasVulnerability Analysis and Penetration Testing deregulated the interest rate that can be charged(VAPT) exercise conducted by commercial banks on small value loans. To gainfully pursueat their end was also obtained and significant financial inclusion, banks will need to constantlypoints emerging out of the same are included in reinvent their business models and designthe inputs for analysis and suitable incorporation products and services demanded by a growingin the periodical Financial Stability Report. economy with rapid structural transformation.4. Challenges Challenges to further strengthening inclusive growthNeed for further improving the efficiency 1.16 The banking sector is a key driver ofparameters of the Indian Banks inclusive growth. There are supply side and1.14 The Indian banking sector has recorded demand side factors driving inclusive impressive improvement in productivity over Banks and other financial services playersthe last 15 years; many of the productivity/ largely are expected to mitigate the supply sideefficiency indicators have moved closer to the processes that prevent poor and disadvantagedglobal levels. There has been a particularly social groups from gaining access to the financialdiscernible improvement in banks’ operating system. Banks were advised to ensure closeefficiency in recent years owing to technology and continuous monitoring of Businessup-gradation and staff restructuring. However, Correspondents (BCs). They were also advisedto sustain high and inclusive growth, there is a to focus, in future, on opening of some form ofneed to raise the level of domestic savings and low cost brick and mortar branches between thechannel those savings into investment. This base branch and BC locations. Further, banksimplies that banks need to offer attractive were required to make efforts to increase theinterest rates to depositors and reduce the number of transactions in no-frill accounts.lending rates charged on borrowers - in other There should be seamless integration of thewords, reduce the net interest margin (NIM). The financial inclusion server with their internal coreNIM of the Indian banking system is higher than banking solution (CBS) systems and in the casethat in some of the other emerging market of end-to-end solution, there should be a cleareconomies even after accounting for mandated demarcation of the technology related activitiessocial sector obligations such as priority sector and BC related activities of their servicelending and credit support for the Government’s providers. However, banks must bear in mindanti-poverty initiatives. that apart from the supply side factors, demand side factors, such as lower income and /or asset1.15 By far the most important task is to further holdings also have a significant bearing onimprove operating efficiency on top of what has inclusive growth.already been achieved by optimising operatingcosts, i.e., non-interest expenses including 1.17 Banks also need to take into accountwages and salaries, transaction costs and various behavioural and motivational attributesprovisioning expenses. This will enable banks of potential consumers for a financial inclusionto lower lending rates while preserving their strategy to succeed. Today, access to financialprofitability. If pursued effectively, financial products is constrained by several factors, which 5
  • Report on Trend and Progress of Banking in India 2010-11include: lack of awareness about the financial Need to review laws governing the Indianproducts, unaffordable products, high banking sectortransaction costs, and products which are not 1.19 The extant statutory arrangement isconvenient, inflexible, not customised and of low complex with different laws governing differentquality. A major challenge of the next decade is segments of the banking industry. Thefinancing the millions in the unorganised sector, nationalised banks are governed by the Bankingself-employed in the micro and small business Companies (Acquisition and Transfer ofsector, the small and marginal farmers as also Undertaking) Acts of 1970 and 1980. State Bankrural share-croppers in the agricultural sector. of India and its subsidiaries are governed byOther challenges include financing affordable their respective statutes. Private sector bankshousing and education needs of low income come under the purview of the Companies Act,households. 1956 and the Banking Regulation Act, 1949. Foreign banks which have registered theirNeed for effective corporate governance in documents with the registrar under Section 592banks of the Companies Act are also banking1.18 Banks are different from other corporates companies under the Banking Regulation important respects and that makes corporate Certain provisions of the Banking Regulation Actgovernance of banks not only different but also have been made applicable to public sectormore critical. Banks facilitate economic growth, banks. Similarly, some provisions of the RBI Actare the conduits of monetary policy transmission too are applicable to nationalised banks, SBIand constitute the economy’s payment and and its subsidiaries, private sector banks andsettlement system. By the very nature of their foreign banks. Notwithstanding this wide arraybusiness, banks are highly leveraged. They of legislations of varying vintage, the statutoryaccept large amounts of uncollateralised public arrangement has served the system well byfunds as deposits in a fiduciary capacity and helping maintain an orderly banking system.further leverage those funds through credit Needless to say, each of the statutes was craftedcreation. Banks are interconnected in diverse, in a setting reflecting the needs and concernscomplex and opaque ways underscoring their of the time. Almost all the statutes have had to‘contagion’ potential. If a corporate fails, the be amended from time to time to reflect changesfallout can be restricted to the stakeholders. If in circumstances and context. There is a stronga bank fails, the impact can spread rapidly case for reviewing all the various legislations andthrough to other banks with potentially serious recasting them for a number of reasons. Thereconsequences for the entire financial system and is also a need to iron out inconsistencies betweenthe macro economy. While regulation has a role the primary laws governing the banking sectorto play in ensuring robust corporate standards and other laws applicable to the banking banks, the point to recognise is that effective The decision of the Government to set up aregulation is a necessary, but not a sufficient Financial Sector Legislative Reformscondition for good corporate governance. In this Commission “to rewrite and clean up thecontext, the relevant issues pertaining to financial sector laws to bring them in line withcorporate governance of banks in India are bank the requirements of the sector” is very timelyownership, accountability, transparency, ethics, and very vital. It is important, however, tocompensation, splitting the posts of chairman recognise that changes in policy or in theand CEO of banks and corporate governance regulatory architecture cannot be the remit of aunder financial holding company structure, Legislative Reforms Commission. Rather, theywhich should engage adequate attention. should be debated and decided upon as a 6
  • Perspectives on the Indian Banking Sectorprelude to the work of the Commission so that Costs and risks in using technology tothe Commission has a clear mandate on the change the face of bankingpolicy directions. 1.21 Technology adoption has changed the face of banking in India. Wide spread technologyCan the Indian banks aim to become global deployment in the banking business has alsoin stature? brought to the fore some new issues and1.20 Of late, there is a debate on whether the challenges. These can be broadly divided intoIndian banks should aim to become global? In two categories - costs and risks. Costs, in termsthis context, there is a need to view the related of increasing expenditure on IT deployment andcosts and benefits analytically and also view this risks that are resulting from reliance on ITas an aspiration consistent with India’s growing systems without necessary safeguards. Costinternational profile. Two specific questions that aspects can be addressed by synergising ITneed clarity in this context are: (i) can Indian deployment objectives with the broader,banks aspire to achieve global size? and (ii) strategic business objectives to ensure adequateshould Indian banks aspire to attain global size? operational and management controls overOn the first question, it is unlikely that any of purchase as well as maintenance of appropriatethe Indian banks will come in the top ten of the technology solutions. The second aspect relatingglobal league even after reasonable to IT risks is a very critical issue. With theconsolidation. On the next question, those who increased use of IT, there are attendant risksargue that banks must go global contend that posed to the banks as well as their customersthe issue is not so much the size of our banks in terms of monetary loss, data theft, breach ofin global rankings but of Indian banks having a privacy and banks need to be extremelystrong enough global presence. The main cognizant of such risks. Another significantargument is that the increasing global size and aspect of banking business is regulatory andinfluence of Indian corporates warrant a supervisory compliance. With the growth andcorresponding increase in the global footprint globalisation of markets in general and in theof Indian banks. The opposing view is that Indian aftermath of recent crisis in particular, numberbanks should look inwards rather than of such compliance requirements is increasing.outwards, focus their efforts on financial Basel II and III implementation brings in hugedeepening at home rather than aspiring to global challenges. Banks have adopted technology, butsize. It is possible to take a middle path and the benefit of technology has not fully percolatedargue that looking outwards towards increased in terms of cost, speed and presence and looking inwards towards Empowering customers with technology-drivendeeper financial penetration are not mutually benefits is a big challenge.exclusive; it should be possible to aim for both.In the wake of the global financial crisis, there Emerging trends in payment systems andhas definitely been a pause to the rapid related challengesexpansion overseas of our banks.Notwithstanding the risks involved, it will be 1.22 The smooth functioning of the marketopportune for some of the larger banks to be infrastructure for enabling payment andlooking out for opportunities for consolidation. settlement systems is essential for market andThe surmise, therefore, is that Indian banks financial stability, as also for economic efficiency,should increase their global presence. In the and for the smooth functioning of financialrapidly changing global financial landscape, it markets. The financial sector and the paymentis imperative for the Indian banks to think global and settlement system infrastructure have tobut act local. be subservient to the real sector. The evolving 7
  • Report on Trend and Progress of Banking in India 2010-11payment systems scenario offers new challenges remaining in the NBFC sector that impinge onand opportunities to all segments of this financial stability are being addressed byindustry. To leverage on the opportunities enhancing the scope of the regulatory perimeterprovided by new products, the system while vulnerabilities in the liquidity riskproviders/banks need to ensure that the management systems of domestic centralchallenges are adequately addressed. It also has counterparties are being weighed in terms ofto be ensured that the products cover all new mechanisms for bail-outs.segments of the population and provide anincentive to adopt these products. The 5. The Way Forwardregulatory process will support all orderly 1.24 While the opportunities to grow further aredevelopment of new systems and processes, on increase, banks do have to contend with newwithin the legal mandate. The important issues challenges as they move forward. The recentin this context are how banks can provide cost- deregulation of savings bank deposit interesteffective, safe, and speedier and hassle free rates announced on October 25, 2011 maypayment and settlement products and solutions. initially lead to some competition, as banks with low share of savings deposits may like to garnerSome concerns related to financial stability a larger share of such deposits. However, this1.23 Despite the fragility of the global macro- process may not be disruptive. The provisioningfinancial environment, the macroeconomic in lieu of pension liabilities and slippages infundamentals for India have remained robust. incrementally high growth loan portfolios inFurther, since December 2010, the financial sensitive sectors such as retail and real estatemarkets remained stress-free and the forecast sectors may impact profitability. A specific areaof the values of the Financial Stress Indicator of concern that has come to the fore is thepointed out that they were likely to remain stable concentrated and high pace of lending to thein the near term. Some emerging trends that infrastructure sector by the public sector banksmay be of immediate concern in respect of (PSBs), raising the apprehensions of increasingfinancial stability are, (i) the possibility of delinquencies in the future. As mentionedspillovers from increasing financialisation of earlier, banks also face challenges in respect ofcommodities to financial markets, (ii) interest demanding needs of supporting growth throughrate differentials vis-à-vis advanced economies, financial inclusion and efficient creditwhich could propel foreign funding by Indian intermediation through technology and productcorporates leading to currency mismatches, (iii) innovation.rollover risks of maturity of Foreign Currency 1.25 It is important to recognise that withConvertible Bonds (FCCBs) requiring further globalisation, consolidation, deregulationrefinancing at higher interest rates, and (iv) and diversification of the financial system, thedisproportionate growth in bank credit to four banking business is set to become more complexspecific sectors, viz., real estate, infrastructure, and riskier. Issues like complex riskNBFCs and retail credit coupled with persistent management, appropriate liquidity managementasset-liability mismatches, reliance on borrowed and enhancing skill development are somefunds and enhanced requirement of provisioning challenges already visible in the Indian context.for NPAs. Stress tests suggest that the banking The interface between banks and financialsector remains fairly well capitalised and markets has undergone a fundamental shift inresilient to asset quality shocks and other the recent times. The banks have becomeplausible adverse changes in macroeconomic intricately linked to financial markets and hencescenario. Issues pertaining to regulatory gaps more vulnerable to financial markets stress. 8
  • Perspectives on the Indian Banking SectorWhile technological advancements in IT have led compulsions of diversity. As articulated earlier,to discernible improvement in the efficiency of expected economic performance, robust savings,banking services, banks have not gained in policy thrust to expand infrastructure andterms of efficiency partly because of lack of further strengthening of financial inclusion arebusiness process re-engineering. The challenge expected to ensure robust growth of the bankingis to leverage technology optimally to balance sector in medium term.growth, efficiency and risk management 1.27 In the long term, however, the mostobjectives. significant task of the Indian banking sector isMedium term outlook to ensure that banking products and services are made available to every individual in the1.26 To take full advantage of the opportunities country efficiently to achieve total financialwhile addressing the new challenges, theprocess of institutional strengthening assumes inclusion. Going forward, filling the void calledcritical importance. Banks need to build on four ‘financial exclusion’ is the critical responsibilityprinciples, viz., efficiency, stability, transparency of banks. Despite all the challenges and issuesand inclusion. The three balancing acts that the to be addressed, the banking sector in India canbanking sector development strategy needs to look forward to enormous opportunities in theirperform are: between the drivers of banking quest for long term growth. The banking sectorsector growth and the requirements of the larger needs to focus on growth through inclusion,growth and development agenda; between the innovation and diversification while complyingbenefits and risks of greater global integration; with domestic regulations and internalisingand between the advantages of scale and the international best practices. 9
  • Chapter II Global Banking Developments The year 2010, and 2011 so far, has been a difficult period for the global banking system, with challenges arising from the global financial system as well as the emerging fiscal and economic growth scenarios across countries. The Global Financial Stability Report in September 2011 has cautioned that for the first time since October 2008, the risks to global financial stability have increased, signaling a partial reversal in the progress made over the past three years. Banking systems in advanced economies have continued to be on uncertain grounds on account of a lacklustre economic revival and increasing sovereign credit strains. The US, despite riding on the QE2 wave, has witnessed its economic recovery losing steam and has experienced a downgrading of its sovereign. The US banking system, which showed signs of improvement in credit growth and profitability in 2010, now faces a serious question about whether this revival in the banking system would continue in the near future. The banking system in the Euro zone, as a whole, stands vulnerable to mounting credit, market and funding risks as a result of severe deterioration in public finances in certain European countries. Further, many of these banks require recapitalisation to cushion them from the risk of sovereign defaults. In the UK too, banking system continues to be beleaguered by high leverage and weak asset quality. In major emerging economies, credit growth has been at relatively high levels and is being regarded as a cause of concern given the growing inflationary pressures and increasing capital inflows. Further, concerns are also being expressed about the credit growth laying foundations for a weak asset quality in the years to come. On the positive side, both advanced and emerging economies, individually, and multi-laterally, have moved forward towards strengthening macro-prudential oversight of their banking systems. While it is important to keep up efforts towards strengthening the banking system from within, it is also equally important to develop effective solutions for containing fiscal and economic risks, which at the present juncture, threaten the stability of the global banking system from without. All such solutions need to be designed keeping in mind the larger interests of the global economy.1. Introduction (MENA) region. The beginning of 2011 has seen2.1 For the global economy, the year 2010 the optimism giving way to greater concerns onwas replete with a mixed sense of optimism and account of a projected slowdown of the globalconcerns. The optimism was attributed to a economy in general, and the US economy insomewhat encouraging ‘two speed’ recovery, in particular, for 2011. Further, sovereign risksadvanced and emerging economies, after a have strengthened even in the US with anmajor slump in economic growth in 2009 increase in sovereign debt ceiling along with afollowing the financial crisis. The concerns, downgrading of the rating of the US sovereign byhowever, were on account of escalating the credit rating agency of Standard and Poor’s.sovereign risks in the Euro zone and 2.2 In this milieu, the performance of theheightened inflationary pressures marked by global banking system too has beenuncertainty in the Middle East and North Africa characterised by a mixed bag of a few positive
  • Global Banking Developmentsdevelopments and a number of shortfalls. The policy initiatives with regard to the globalpositive developments have been in terms of the banking system during the year.efforts by countries towards revamping theirregulatory and supervisory architecture learning 2. Global Banking Trendsfrom the crisis, along with an effort to step up 2.4 The current global macro-economiccapital adequacy of banks. The major shortfalls, situation is characterised by an unbalancedhowever, have been the lack of a widespread economic recovery across advanced andrevival of the global banking activity, which could emerging economies, moderation in economicbe characterised by improved credit growth, prospects in 2011, high levels of unemploymentprofitability and asset quality, and lower and inflationary pressures, and elevated levels ofleverage. government debt (Chart II.1).2.3 Against this setting, this chapter analyses Macro-economic risks have increasedthe performance of the global banking system substantiallyusing major indicators of banking activity andsoundness for select advanced and emerging 2.5 In its September 2011 World Economiceconomies. It also looks into the detailed Outlook, the International Monetary Fund (IMF)individual performance of the banking systems has estimated a growth of 4.0 per cent for thein few advanced and emerging economies/ world economy as a whole during 2011, witheconomy-groups. Finally, at the institutional emerging and developing economies growing atlevel, it analyses the performance of the top-100 6.4 per cent and advanced economies growingbanks having major global presence. It then only at 1.6 per cent. The estimate for advancedhighlights the major regulatory and supervisory economies of 1.6 per cent provided in September Chart II.1: Global Macro-economic Trends Global Growth Trends Rate of Investment (as per cent of GDP) 10 35 8 30 6 25 Per cent 4 Per cent 20 2 15 0 10 -2 5 -4 2006 2007 2008 2009 2010 2011 Est 0 -6 World Advanced economies 2006 2007 2008 2009 2010 2011 Est Emerging and developing economies Advanced economies Emerging and developing economies Rate of Unemployment and Inflation Gross Government Debt (as per cent of GDP) 9 8.5 120 Unemployment rate (per cent) Inflation rate (per cent) 8 8.0 7 7.5 100 6 7.0 80 Per cent 5 6.5 4 6.0 60 3 5.5 2 5.0 40 1 4.5 0 4.0 20 2006 2007 2008 2009 2010 2011 Est Advanced economies (Rate of inflation) 0 Emerging and developing economies (Rate of inflation) 2006 2007 2008 2009 2010 2011 Est Advanced economies (Rate of unemployment) Advanced economies Emerging and developing economies Note: The rate of unemployment is not reported separately for emerging and developing economies. Source: Calculated from World Economic Outlook database 11
  • Report on Trend and Progress of Banking in India 2010-112011 was lower than the estimate of 2.2 per cent Table II.1: Return on Assets of Banksprovided in June 2011 in light of the lower for Select Economiesquarterly GDP growth of leading advanced Country 2007 2008 2009 2010 2011*economies. The rate of unemployment in Advanced economies France 0.4 0.0 0.4 0.6 ...advanced economies has been little over 8 per Germany 0.3 -0.1 0.2 … ...cent in 2010 albeit with some moderation Greece 1.0 0.2 -0.1 -0.6 -0.3 Italy 0.7 0.3 0.2 … ...expected in 2011 as per the IMF estimates. Japan 0.3 -0.3 0.2 0.4 ...Inflationary pressures, which had become Portugal 1.2 0.4 0.4 0.5 0.5 Spain 1.1 0.8 0.6 0.5 ...stubborn in 2010, more so for emerging United Kingdom 0.4 -0.4 0.1 0.2 ...economies as a fallout of rising oil, food and United States 1.2 -0.1 -0.1 0.9 1.2 Emerging and developing economiescommodity prices, are expected to aggravate Russia 3.0 1.8 0.7 1.9 2.3further in 2011. China 0.9 1.0 0.9 1.0 ... India 0.9 1.0 1.1 1.1 ...Uncertainty about credit revival continues Malaysia 1.5 1.5 1.2 1.5 1.8 Brazil 3.4 1.5 2.4 3.2 3.32.6 Against the macro-economic backdrop Mexico 2.3 1.4 1.5 1.8 1.6discussed in the foregoing section, banking Source: Compiled from Financial Soundness Indicators, IMFbusiness in some advanced economies showed … Not available * Up to the period ending Marchsigns of revival in 2010. An increase in thegrowth of bank credit was evident in the US,Germany and France in the first quarter of 2011 France in 2010 (Table II.1). The RoA of US banksafter entering into the negative growth zone after turned positive by 2010 after staying in thethe crisis. However, there is an uncertainty negative zone in 2008 and 2009; it showed aabout whether this credit revival would continue further increase in 2011 (March). In Russia,or not, given the picture of economic revival China and Malaysia, RoA of the banking system,looking bleak in the US and now, even in which had dipped between 2008 and 2009,Germany1. In fact, credit growth has again recovered between 2009 and 2010. In Russiawitnessed a slump in the second quarter of 2011 and Malaysia, the trend of increase in RoAin the US. In the UK and Japan, bank credit continued even in 2011 (March). The RoA ofgrowth, which had entered a downtrend since Indian banks too showed a modest rise betweenthe beginning of 2009, has shown a recovery in 2008 and 2010.2011, but has remained in the negative zone. Disappointing performance of bank stocksOther advanced economies from Europe, 2.8 Changes in bank stock indices, which areparticularly countries with fiscal strains, namely generally associated with changes in balancePortugal, Spain and Italy, showed a steep fall in sheet and profitability growth of banks, werethe growth in bank credit with no signs of revival globally on a path of slow recovery since theby 2011 (Chart II.2). beginning of 2009. In the US, there was anReturn on Assets showed a moderate increase upward movement in the prices of bank stocks2.7 Apart from the pickup in credit growth, but this was within a narrow range, reflectingReturn on Assets (RoA), an indicator of banking weak confidence of investors in these stockssystem’s profitability and soundness, also (Chart II.3). Moreover, there was a strikingshowed a moderate increase in the US and downtrend in bank stocks in the US since the1 The US GDP growth in the first quarter of 2011 slowed down to 0.4 per cent and recovered, albeit moderately, to 1.3 per cent in the second quarter. In Germany, GDP growth was 1.3 per cent in the first quarter of 2011 but declined to 0.1 per cent in the second quarter of the year. 12
  • 4 0 3 -2 2 -1 1 6 4 0 10 8 2 12 -10 0 10 20 30 40 50 60 70 -6 6 -4 4 0 10 8 -2 2 12 0 5 10 15 20 25 30 35 12-2007 12-2007 12-2007 12-2007 04-2008 02-2008 02-2008 02-2008 02-2008 06-2008 04-2008 04-2008 04-2008 08-2008 04-2008 06-2008 06-2008 06-2008 10-2008 06-2008 08-2008 08-2008 08-2008 12-2008 08-2008 10-2008 10-2008 10-2008 02-2009 10-2008 12-2008 12-2008 12-2008 04-2009 12-2008 02-2009 02-2009 02-2009 06-2009 02-2009 04-2009 04-2009 04-2009 08-2009 04-2009 06-2009 06-2009 06-2009 08-2009 US 10-2009 06-2009 08-2009 08-2009 China 10-2009 Russia 12-2009 08-2009 10-2009 10-2009 Portugal Germany 12-2009 12-2009 02-2010 10-2009 12-2009 02-2010 12-2009 02-2010 02-2010 04-2010 04-2010 04-2010 04-2010 06-2010 02-2010 06-2010 06-2010 06-2010 08-2010 04-2010 08-2010 08-2010 08-2010 10-2010 06-2010 10-2010 10-2010 10-2010 12-2010 08-2010 12-2010 12-2010 12-2010 02-2011 02-2011 10-2010 02-2011 02-2011 04-2011 04-2011 12-2010 04-2011 04-2011 06-2011 06-2011 02-2011 06-2011 06-2011 08-2011 0 10 20 30 40 5 15 25 35 6 16 4 14 0 10 8 -2 2 12 0 10 20 -5 5 15 25 -3 -2 -1 0 1 2 3 4 5 Note: 12-2007 12-2007 12-2007 12-2007 02-2008 02-2008 02-2008 02-2008 04-2008 04-2008 04-2008 04-2008 06-2008 06-2008 06-2008 06-2008 08-2008 08-2008 08-2008 10-2008 08-2008 10-2008 10-2008 12-2008 10-2008 12-2008 12-2008 country. 02-2009 02-2009 12-2008 02-2009 04-2009 04-2009 02-2009 04-2009 06-2009 06-2009 04-2009 06-2009 08-2009 08-2009 06-200913 08-2009 Italy 10-2009 10-2009 08-2009 Brazil Japan 10-2009 France 12-2009 12-2009 10-2009 12-2009 02-2010 02-2010 12-2009 04-2010 02-2010 04-2010 02-2010 06-2010 04-2010 06-2010 04-2010 08-2010 06-2010 08-2010 06-2010 10-2010 08-2010 10-2010 12-2010 08-2010 10-2010 12-2010 02-2011 10-2010 12-2010 02-2011 04-2011 04-2011 12-2010 02-2011 countries, it refers to total bank credit. 06-2011 06-2011 02-2011 04-2011 08-2011 08-2011 04-2011 06-2011 Source: Calculated from Thomson Reuters, DataStream out using three-year moving average method. -10 0 10 -5 5 15 0 5 10 15 20 25 30 0 2 4 6 8 10 12 14 16 -10.0 0 10 20 30 40 50 60 70 12-2007 12-2007 11-2006 12-2007 02-2008 02-2008 02-2007 02-2008 04-2008 04-2008 04-2008 05-2007 06-2008 06-2008 06-2008 08-2008 08-2008 08-2007 08-2008 10-2008 10-2008 11-2007 10-2008 12-2008 12-2008 02-2008 12-2008 Chart II.2: Three-year Moving Average of Bank Credit Growth, in per cent 02-2009 02-2009 05-2008 02-2009 04-2009 04-2009 04-2009 06-2009 08-2008 06-2009 06-2009 08-2009 08-2009 11-2008 08-2009 UK India 10-2009 Spain 10-2009 02-2009 10-2009 Malaysia 12-2009 12-2009 05-2009 12-2009 02-2010 02-2010 02-2010 08-2009 04-2010 04-2010 04-2010 06-2010 06-2010 11-2009 06-2010 08-2010 08-2010 02-2010 08-2010 10-2010 10-2010 05-2010 10-2010 12-2010 12-2010 12-2010 08-2010 02-2011 02-2011 02-2011 04-2011 04-2011 11-2010 04-2011 06-2011 06-2011 02-2011 06-2011 3. Credit data used for the growth calculations are as reported in the respective currency of each 2. Bank credit refers to private credit for Germany, Russia, Spain, UK, France and Portugal. In all other over-quarter. Growth rates for all other countries are month-over-month growth rates smoothened 1. Data for Spain are available with quarterly frequency. Hence, its growth rates are reported as quarter- 08-2011 08-2011 05-2011 08-2011 Global Banking Developments
  • Report on Trend and Progress of Banking in India 2010-11 Chart II.3: Bank Stock Indices in Select Economies/Economy Groups 2500 400 25000 US dollars (for China and EMEs) 350 Indian rupees (for India) 2000 20000 300 US dollars 1500 250 15000 200 1000 10000 150 100 500 5000 50 0 0 0 1-2-2011 1-4-2011 1-6-2011 1-8-2011 1-10-2011 1-2-2009 1-4-2009 1-6-2009 1-8-2009 1-10-2009 1-12-2009 1-4-2008 1-6-2008 1-8-2008 1-10-2008 1-12-2008 1-2-2010 1-4-2010 1-6-2010 1-8-2010 1-10-2010 1-12-2010 1-2-2011 1-4-2011 1-6-2011 1-8-2011 1-10-2011 1-2-2009 1-4-2009 1-6-2009 1-8-2009 1-10-2009 1-12-2009 1-4-2008 1-6-2008 1-8-2008 1-10-2008 1-12-2008 1-2-2010 1-4-2010 1-6-2010 1-8-2010 1-10-2010 1-12-2010 Asia (excl Japan) EMU (excl Portugal, Greece, Italy, Ireland and Spain) Portugal, Ireland, Italy, Greece and Spain US China EMEs India Note: EMU refers to European Monetary Union. Source: Compiled from Thomson Reuters, DataStreambeginning of 2011. A similar downtrend could 2.10 In most advanced countries, the quantumalso be seen in bank stocks of the fiscally of international assets and liabilities (in allstrained economies. In EMEs as a whole, and in currencies vis-à-vis all sectors) also showed aChina, bank stock indices moved upwards very similar trend of increase between end-Marchslowly since the beginning of 2009. Among 2010 and end-March 2011 (Chart II.4). AmongEMEs, the upward movement in bank stocks advanced countries, the increase insince the beginning of 2009 was significant for international business was most striking forIndia, resulting in the index overshooting its pre- banks located in the US and UK. Even in thecrisis mark by the end of 2010. emerging economies, the increase inRevival in international banking business international banking business gained2.9 In 2010-11 (March), there was considerable momentum by the first quarter ofconsiderable revival in international banking 2011. Latin American banks increasinglybusiness (by location of reporting banks) resorted to the issuance of securities, leading tocontinuing with the trend in 2009-10. During a sharp growth in the international liabilities of2008-09, international assets and liabilities of these banks.banks had contracted significantly in theaftermath of the financial crisis (Table II.2). Financial soundness of banks Table II.2: Growth in International Assets and 1. Increase in levels of capital adequacy Liabilities of Banks 2.11 The level of capital adequacy across banksItem 2007-08 2008-09 2009-10 2010-11 in most advanced economies was on a steadyTotal assets 26.1 -17.5 0.2 5.41. External assets 26.6 -17.5 0.1 5.3 rise between 2008 and 2010 (Table II.3). By Loans and deposits 28.2 -19.0 -1.0 6.7 2010, in the UK, US, Japan and Germany, Holdings of securities and other assets 22.1 -13.2 3.0 1.9 Capital to Risk-weighted Assets Ratio (CRAR)2. Local assets in foreign currency 22.4 -17.5 0.7 5.7 was placed above 15 per cent. The ratio showedTotal liabilities 26.5 -18.0 -0.7 7.1 a further increase for US and German banks in1. External liabilities 27.4 -18.6 0.2 6.6 the first quarter of 2011. Among the major Loans and deposits 26.5 -21.2 -1.3 6.0 Own issues of securities emerging economies, however, the level of and other liabilities 33.7 -2.0 7.4 9.52. Local liabilities in foreign capital adequacy showed a moderate decline currency 20.8 -14.4 -6.1 10.5 between 2009 and 2010, with the exceptions ofSource: Calculated from BIS, Locational Banking Statistics. China, India and Mexico. Both Mexican and 14
  • Global Banking Developments Chart II.4: International Assets/Liabilities of Advanced and Emerging Economies International asset position of banks in all International liability position of banks in all 8000 currencies - Advanced economies 9000 currencies - Advanced economies 7000 8000 6000 7000 6000 US $ billion US $ billion 5000 5000 4000 4000 3000 3000 2000 2000 1000 1000 0 0 France Germany Greece Italy Japan Spain United United France Germany Greece Italy Japan Spain United United Kingdom States Kingdom States End-March 2007 End-March 2008 End-March 2009 End-March 2007 End-March 2008 End-March 2009 End-March 2010 End-March 2011 End-March 2010 End-March 2011 International asset position of banks in all currencies - International liability position of banks in all currencies- 100 Emerging and developing economies 140 Emerging and developing economies 90 120 80 70 100 US $ billion US $ billion 60 80 50 60 40 30 40 20 20 10 0 0 Brazil India Malaysia Mexico Brazil India Malaysia Mexico End-March 2007 End-March 2008 End-March 2009 End-March 2007 End-March 2008 End-March 2009 End-March 2010 End-March 2011 End-March 2010 End-March 2011 Note: Data for 2007 for Malaysia are not available. Source: Compiled from BIS Locational Banking Statistics Table II.3: Capital to Risk-Weighted Assets Chinese banks showed a moderate decline in Ratio of Banks in Select Economies their capital positions by March 2011.Country 2007 2008 2009 2010 2011* 2. Uneven decline in leverage Advanced economiesFrance 10.2 10.5 12.4 12.3 ... 2.12 There was unevenness in the decline inGermany 12.9 13.6 14.8 16.1 16.6Greece 11.2 9.4 11.7 11.4 12.3 banking sector leverage across countries afterItaly 10.4 10.8 12.1 12.3 ... the crisis; here, the percentage of total capitalJapan 12.3 12.4 15.8 16.7 ...Portugal 10.4 9.4 10.5 10.2 10.5 (and reserves) to total assets has been taken asSpain 11.4 11.3 12.2 11.8 ... an indicator of leverage in the banking system2.United Kingdom 12.6 12.9 14.8 15.9 ...United States 12.8 12.8 14.3 15.3 15.5 In the US, leverage in the banking system Emerging and developing economies showed some moderation between 2008 andBrazil 18.7 18.2 18.9 17.6 18.2 2010 (Chart II.5). This trend for US banksChina 8.4 12.0 11.4 12.2 11.8India 12.3 13.0 13.2 13.6 ... continued further in the first quarter of 2011. AMalaysia 14.4 15.5 18.2 17.5 16.4 moderation in leverage could also be seen for UKMexico 15.9 15.3 16.5 16.9 16.5Russia 15.5 16.8 20.9 18.1 17.2 banks between 2008 and 2010. NotwithstandingSource: Compiled from Financial Soundness Indicators, IMF this moderation, the extent of leverage for UK… Not available banks continued to be at relatively high levels.* Up to the period ending March/May2 As per the baseline proposal for leverage ratio put forward by the BCBS under its Basel III rules text, (i) the capital measure should include Tier 1 capital and the predominant form of Tier 1 capital, while (ii) total exposure should include exposure net of provisions and other valuation adjustments. Hence, the measure of leverage used for the present analysis has been referred to as preliminary. It directly follows the measure provided by the IMF in its Financial Soundness Indicators (FSI) database. It is noteworthy, however, that the IMF while discussing this measure, refers to it as a “leverage ratio”; see “Concepts and Definitions” of FSI, <>. 15
  • Report on Trend and Progress of Banking in India 2010-11 Chart II.5: Leverage in the Banking Systems of Select Economies Leverage in the banking system - Advanced economies Leverage in the banking system-Emerging and developing economies 13 16 11 14 12 Per cent Per cent 9 10 7 8 5 6 3 4 2007 2008 2009 2010 2011* 2007 2008 2009 2010 2011* France Germany Greece Portugal Spain Russia Brazil Mexico Malaysia India China Japan Italy United Kingdom United States Green : Consistent decline in leverage since 2008 Green : Consistent decline in leverage since 2008 Red : Lack of consistency in the decline in leverage since 2008 Red : Lack of consistency in the decline in leverage since 2008 Source: Compiled from Financial Soundness Indicators, IMF * Up to the period ending MarchDeleveraging had not gained any significant 3. Weakening asset qualitymomentum in the banking systems of other 2.14 Globally, there was little improvement inadvanced European economies, viz., France, the asset quality of banks since the onset of theGermany, Portugal, Greece and Spain, treating financial crisis. According to the GFSR2008 as the reference point. (September 2011), credit risks have risen and2.13 In major emerging economies, banking continue to be the key potential risk to globalsystems were generally less leveraged than most financial stability. The Report went on to addadvanced economies. Moreover, the banking that improvements in credit risks had laggedsystems in these economies did not show signs behind improvements in the real economy.of any perceptible increase in leverage during the There was a trend of increasing Non-Performingcrisis period. However, treating 2008 as the Loans (NPLs) ratio across most advancedreference point, in many emerging economies, economies between 2008 and 2010 with thethere was an increase in the leverage of their exception of the US. In the US, there was abanking systems in the post-crisis period. The moderate improvement in asset quality betweenGlobal Financial Stability Report (GFSR) 2009 and 2010, which continued in the first(September 2011) has in fact highlighted quarter of 2011 (Chart II.6). In complete contrastreleveraging as a major concern for banking to advanced economies, many of the majorsystems in emerging economies. emerging economies showed considerable Chart II.6: Asset Quality of Banks in Select Economies Ratio of NPLs to total loans - Advanced economies Ratio of NPLs to total loans- Emerging and developing economies 12 12 11 11 10 10 9 9 8 8 Per cent Per cent 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2007 2008 2009 2010 2011* 2007 2008 2009 2010 2011* Greece Italy Japan Portugal Spain Russia China India Malaysia Brazil Mexico United Kingdom United States France Germany Note: Ratio of NPLs is not available for 2010 for Germany and hence has not been reported. * Up to the period ending March Source: Compiled from Financial Soundness Indicators, IMF 16
  • Global Banking Developmentsimprovement in asset quality in the years Chart II.7: CDS Spread of Global Banksfollowing the crisis. Asset quality remained 450particularly robust in China. 400Rising CDS spreads indicating hardeningrisk perceptions 350 Basis points2.15 CDS spreads of global banks during 2010- 30011 have been, in general, on the rise with 250intermittent periods of fall (Chart II.7). During2011, CDS spreads fell till mid-April and rose 200subsequently. With solvency of sovereignscoming into serious question in the recent 150months, particularly for some Euro zone 100countries, CDS spreads of global banks have 1-1-2011 1-2-2011 1-3-2011 1-4-2011 1-5-2011 1-6-2011 1-7-2011 1-8-2011 1-9-2011 1-10-2011 1-5-2009 1-6-2009 1-7-2009 1-8-2009 1-9-2009 1-10-2009 1-11-2009 1-12-2009 1-1-2010 1-2-2010 1-3-2010 1-4-2010 1-5-2010 1-6-2010 1-7-2010 1-8-2010 1-9-2010 1-10-2010 1-11-2010 1-12-2010been on a rise with the increase in risksassociated with sovereign debt. In the case of Source: BloombergGreece, the sovereign CDS spreads had shot upto very high levels up to September 15, 2011, 2008 (Chart II.8). The spreads softened in thereflecting the severe elevation in sovereign risks following months and continued to be low in(Chart II.8). 2010 and first half of 2011 across most2.16 Across countries, bank CDS spreads had advanced and emerging economies, except in thehardened significantly during September Euro zone. However, not just in the Euro zone Chart II.8: Sovereign and Bank CDS Spreads in Select Economies 6000 Sovereign CDS spreads for select economies 5000 4000 Basis points 3000 2000 1000 0 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 Greece Ireland Portugal Spain Italy Belgium Germany Japan United Kingdom United States France 700 Bank CDS spreads in select advanced 1600 Bank CDS spreads for select Indian and economies/economy groups 1400 Chinese banks 600 500 1200 Basis points Basis points 1000 400 800 300 600 200 400 100 200 0 0 6-Mar-2011 6-Jun-2011 6-Sep-2011 6-Mar-2009 6-Jun-2009 6-Sep-2009 6-Dec-2009 6-Mar-2008 6-Jun-2008 6-Sep-2008 6-Dec-2008 6-Mar-2010 6-Jun-2010 6-Sep-2010 6-Dec-2010 1-Jan-2011 1-Apr-2011 1-Jul-2011 1-Oct-2011 1-Jan-2009 1-Apr-2009 1-Jul-2009 1-Oct-2009 1-Jul-2008 1-Oct-2008 1-Jan-2010 1-Apr-2010 1-Jul-2010 1-Oct-2010 US EU UK ICICI Bank Bank of India Bank of China Note: The sovereign spreads are for 5-year senior CDS, while banks spreads are for 5-year CDS. Source: Bloomberg for Sovereign spreads and Thomson Reuters, DataStream for Banks spreads 17
  • Report on Trend and Progress of Banking in India 2010-11 Chart II.9: Demographic Access to Banking Services across Select Economies Number of branches per 100,000 adults- Number of branches per 100,000 adults- 50 Advanced economies 15 Emerging and developing economies 45 13 Number of bank branches Number of bank branches 40 11 35 30 9 25 7 20 5 15 3 10 5 1 0 -1 Brazil India Malaysia France Spain United Japan United Germany States Kingdom 2007 2008 2009 2010 2007 2008 2009 2010 Note: Data are not available for UK and Spain for 2010 and hence, are not reported in the chart. Source: Compiled from Financial Access Survey, IMFbut also in other parts of the world, CDS spreads the access and usage of banking servicesfor banks have been on a rise in the third quarter suggest that these concerns have not beenof 2011. misplaced. There was a contraction in the access to banking services in many of the advancedTrends in access and usage of banking economies affected by the crisis, resulting from aservices closure of bank branches (Chart II.9). As noted in the report on “Financial Access” by the WorldPossibility of an increase in financial Bank, slowing down of economic growth madeexclusion following the crisis an impact on the retail infrastructure in many2.17 Financial inclusion has become an advanced economies and bank branchesimportant part of the banking policy in both were one of the causalities of this impact3. Thereadvanced and emerging economies in the recent was also a decline in usage of banking services.years. Moreover, it has attained centre stage The decline in the usage of banking services wasparticularly after the financial crisis. This is more striking in the advanced economies. Thebecause there have been concerns about the decline was more pronounced and widespreadpossibility of an increase in financial exclusion with regard to usage of credit services asfollowing the crisis, particularly in the advanced compared to deposit services (Charts II.10 andeconomies. Recent data from the World Bank on II.11). Chart II.10: Usage of Banking Services across Select Economies – Deposits Bank deposits as per cent of GDP- Bank deposits as per cent of GDP- 450 Advanced economies 160 Emerging and developing economies 400 140 350 120 300 100 Per cent Per cent 250 80 200 60 150 100 40 50 20 0 0 United Japan Portugal Italy United France Germany Spain Malaysia China India Brazil Kingdom States 2007 2008 2009 2010 2007 2008 2009 2010 Note: Data are not available for UK, Spain, India and China for 2010 and hence, are not reported in the chart. Source: Compiled from Financial Access Survey, IMF 3 Financial Access 2010 – The State of Financial Inclusion through the Crisis, CGAP, World Bank. 18
  • Global Banking Developments Chart II.11: Usage of Banking Services across Select Economies – Credit Bank credit as per cent of GDP- Bank credit as per cent of GDP- 500 Advanced economies Emerging and developing economies 110 450 400 90 350 300 70 Per cent Per cent 250 50 200 150 30 100 50 10 0 United Portugal Japan Italy Spain France United Germany -10 China Malaysia India Brazil Kingdom States 2007 2008 2009 2010 2007 2008 2009 2010 Note: Data are not available for UK, Spain, India and China for 2010 and hence, are not reported in the chart. Source: Compiled from Financial Access Survey, IMF3. Banking Trends in Select Regions and constituted about 90 per cent of the total assetsCountries of the US banking sector (Chart II.12).US banking system – Signs of a weak recovery Credit continued to remain restricted to industrial sector2.18 In 2010, the performance of the USbanking system showed signs of recovery since 2.19 Among the major components of balance sheets of US banks, it was credit which was hitthe time of the financial crisis but by historical the hardest on account of the crisis. As alreadystandards, this recovery continued to be weak. noted in earlier section, growth in credit of USThe assets of the US banking sector showed an banks turned negative since September 2009,overall growth of 2.1 per cent in 2009-10 from a and entered the positive zone only after a year innegative growth of 3.9 per cent in 2008-09. This August 2010 but showed signs of slowing downrecovery was largely driven by the US banks with again in 2011 (see Chart II.2 earlier). The sectoran asset size of more than US$ 1 billion, which that received the largest setback with the slowing down of both credit and economic Chart II.12: Asset Growth in the US Banking Sector growth as fallout of the crisis was the commercial 14 and industrial sector in the US. For both 12 commercial/industrial and real estate sectors, bank credit continued to remain restricted even 10 in 2009-10, as personal credit, particularly 8 credit cards, showed a significant revival on the back of low base and with some improvement in 6 the confidence of US consumers about a better Per cent 4 economic outlook (Chart II.13). 2 High levels of non-performing loans 0 2.20 High levels of non-performing loans, -2 particularly in the real estate sector, remained -4 the weakest spot in the US banking system, as 2006-07 2007-08 2008-09 2009-10 noted in the Annual Report of the Federal -6 All US banks Banks with assets of more than 1 billion USD Reserve (2010). The delinquency rate for real Banks with assets between 100 million and 1 billion USD estate loans hit a high of 10 per cent in the Source: Calculated using data from FDIC database second quarter of 2010 (Chart II.14)4. In the 4 Delinquency rates are defined as loans past due for thirty days or more and still accruing interest as well as those in non-accrual status. They are seasonally adjusted. Hence, these rates do not compare with the NPL ratios given in Chart II.6 earlier. 19
  • Report on Trend and Progress of Banking in India 2010-11 Chart II.13: Sectoral Rates of Growth of Credit of US Banks Chart II.15: Balance Sheet Indicators of Banks in the Euro zone 60 55 50 45 40 35 Per cent per annum 30 Per cent 25 20 15 10 5 0 -5 -10 Sep-2007 Sep-2008 Sep-2009 Sep-2010 Jun-2007 Jun-2008 Jun-2009 Jun-2010 Jun-2011 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Mar-2007 Mar-2008 Mar-2009 Mar-2010 Mar-2011 -15 -25 2006-07 2007-08 2008-09 2009-10 Loans to non-financial private sector Real estate loans Agricultural loans Securities of non-financial private sector Commercial and Industrial loans Individual loans Total assets Credit cards Note: The rates of growth are three yearly moving averages. Source: Calculated using data from FDIC database Source: Calculated from ECB databasesubsequent quarters, this rate tapered off and banks’ investment in securities of themoderately but still remained at a stubbornly private sector in 2010 (Chart II.15). However, atelevated level. the disaggregated level, concerns about credit revival continued to plague banks in the fiscallyEuro zone banking system - Concerns strained economies (Chart II.2 earlier). Also,remain with regard to revival in credit concerns remained about revival in credit to2.21 At the aggregate level, banking conditions small and medium enterprises (SMEs) in thein the Euro zone showed signs of improvement Euro zone, a sector largely dependent on bankin terms of revival in growth in private credit finance (Chart II.16). Chart II.14: Sectoral Delinquency Rates of US Banks Chart II.16: Expectations about Credit Conditions for SME Sector in the Euro zone 12 10 20 Credit conditions have improved 18 and will improve 15 8 16 Per cent 6 17 Credit conditions have deteriorated 19 and will 22 4 deteriorate 22 2 Credit conditions 59 have remained 60 unchanged and 0 will remain 57 unchanged 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2006 Q2 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 55 0 10 20 30 40 50 60 70 Real estate loans Agricultural loans Per cent Commercial and Industrial loans Individual loans 2009H1 2009H2 2010H1 2010H2 Credit cards Note: The figures refer to weighted percentage of responses. Source: Calculated using data from Federal Reserve database Source: Compiled from ECBs Survey on Access to Finance of SMEs in the Euro area 20
  • Global Banking DevelopmentsImpact of sovereign debt crisis on Euro zone Chart II.18: Interest Rates on Bank Deposits frombanking system Non-financial Corporations (with Less than One Year Maturity), Select Euro zone Economies2.22 Sovereigns, especially home sovereigns, 6are generally an important part of banks’ 5balance sheets. With downgrading of sovereignsand the resulting losses, banks’ balance sheets 4in the Euro zone countries, particularly in the Per cent 3countries which are fiscally challenged, haveweakened significantly. Further, rising sovereign 2risks have also increased funding risks for Euro 1zone banks. This is evident from a rising trend inEuribor (Euro Inter-bank Offered Rate) since 0mid-2010 (Chart II.17). It is noteworthy that 1-2011 5-2011 1-2009 5-2009 9-2009 1-2008 5-2008 9-2008 1-2010 5-2010 9-2010deposit rates in Spain, Italy and Greece –economies severely afflicted by the sovereign Greece Italy Spain France Germanydebt crisis – are at higher levels than the rates Source: Compiled from Eurostat databaseprevailing in other Euro zone countries, viz., emerged over stability of banks having exposureFrance and Germany, again reflecting funding to sovereign debt of Euro area countries,strains for banks in these economies particularly on account of cross-border exposure(Chart II.18). of sovereign debt (Box II.1).Risks related to cross-border exposure of UK banking system – Leverage and creditsovereign debt risks at elevated levels2.23 With sovereign debt concerns coming to 2.24 In 2010-11, the UK banking systemthe fore in the Euro area, concerns have showed moderate de-leveraging and reduced its reliance on wholesale funding, unlike its Chart II.17: Movements in Euro Inter-Bank Offered Rate counterparts in the Euro zone. However, 6 the UK banking system continued to be besieged by some concerns: First, despite de-leveraging, 5 the level of leverage still remained high for UK 4 banks. Secondly, private credit growth remained considerably weak, as already shown in Per cent 3 Chart II.2. Moreover, the near to medium-term expectations about an improvement in credit 2 availability have been on wane, particularly for 1 medium term enterprises, as per the Bank of England Credit Conditions Survey 0 (Chart II.19). Thirdly, credit risks continued to be 1/1/2011 1/3/2011 1/5/2011 1/7/2011 1/9/2011 1/1/2009 1/3/2009 1/5/2009 1/7/2009 1/9/2009 1/11/2009 1/1/2008 1/3/2008 1/5/2008 1/7/2008 1/9/2008 1/11/2008 1/1/2010 1/3/2010 1/5/2010 1/7/2010 1/9/2010 1/11/2010 at elevated levels, as illustrated earlier in Chart II.6. At the sectoral level, credit risks grew for the Euribor 1-month Euribor 1-yearNote: The rates are monthly averages. unsecured component of bank loans, namely, credit card loans (Chart II.20).Source: Compiled from ECB database 21
  • Report on Trend and Progress of Banking in India 2010-11 Box II.1: European Banks’ Exposure to Euro Area Sovereign Debt Apart from their exposure to sovereign debt of their own relatively high. German and French banks are more exposed country, cross-border exposure to sovereign debt is also to the sovereign debt of Italy than other nations. high for banks in some of the Euro area nations (Table below). Due to the high cross-border exposure to sovereign debt of Illustratively, despite Germany’s sound fiscal position, banks, any haircut/restructuring could adversely affect the its exposure to sovereign debt of other Euro area nations, banks of countries with otherwise sound fiscal some of which have debt sustainability issues, is positions. Table : Exposure to Sovereign Debt of Banks (in Euro Million) Exposure to Sovereign Debt of Greece Ireland Portugal Italy Spain Greece 56,148 - - - - Banking Exposure of Ireland - 5,322 257 - - Portugal 1,739 839 13,707 1,179 345 Italy 1,778 239 304 1,44,856 1,383 Spain 1,016 - 6,807 6,017 2,03,310 France 11,624 2,476 4,864 48,185 6,592 Germany 18,718 12,922 10,888 72,717 31,854 UK 4,131 5,580 2,571 10,029 5,916 Netherlands 3,160 559 2,272 10,313 1,685 Note: The listing of select countries in the Euro area covers the major sources and destination of sovereign debt and is not exhaustive. Source: Blundell-Wignall, A. and P. Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 4.Chinese banking system - concerns about high level in 2010. With the high growth inweakening of asset quality credit, there are concerns being raised about a2.25 Among the emerging economies, China weakening of asset quality of Chinese banks inexhibited a rapid expansion in the asset size of the near future.its banking system in 2009, at a time when 4. An Analysis of the Performance ofbanking sector assets in most advanced Top 100 Global Bankseconomies were in a phase of contraction Considerable repositioning of banks at thefollowing the financial crisis. The growth in bank top end of the asset spectrumassets and credit, however, peaked by the end of2009 and posted a decline thereafter (Chart 2.26 The rank correlation coefficient of the top-II.21). Yet, credit growth in China remained at a 20 global banks between 2009 and 2010 worked Chart II.19: Expectations about Bank Credit Availability to SMEs in the UK Bank credit availability for small enterprises in the UK Bank credit availability for medium enterprises in the UK 30 30 Increase in credit Increase in credit 20 20 availability availability 10 10 0 0 -10 -10 Decrease in credit Decrease in credit 2010 Q1 2011 Q1 2010 Q1 2011 Q1 2010 Q2 2011 Q2 2010 Q2 2011 Q2 2010 Q3 2010 Q3 2009 Q4 2010 Q4 2009 Q4 2010 Q4 availability availability -20 -20 -30 -30 Observations during previous three months Observations during previous three months Expectations during the next three months Expectations during the next three months Note: The figures are net percentage balances calculated by weighing the responses of those lenders who answered the question by their market shares. Source: Bank of England, Credit Conditions Survey 22
  • Global Banking Developments Chart II.20: Write-off Rates of UK Banks Table II.4: Rank Correlation Coefficients for 3.5 0.4 Top Global Banks between 2009 and 2010 Per cent for Private non-financial corporations Item Top-20 Top-50 Top-100 Per cent for consumer credit and credit cards 0.35 3 banks banks banks 0.3 Rank correlation coefficient 0.83 0.96 0.98 2.5 Note: The coefficients were worked out assuming that the sample 0.25 2 of top banks remained the same between the two years. In 0.2 other words, the ranking was re-worked by removing the new additions/deletions of banks during this period. 1.5 0.15 Source: Calculated from Banker Database 1 0.1 Moderate shift of the global banking 0.5 0.05 business to emerging economies 0 0 2.27 An analysis of the location of incorporation 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2007 Q3 2008 Q3 2009 Q3 2010 Q3 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 of top 100 global banks (ranked by the strength of their Tier 1 capital) suggested a moderate shift Consumer credit Credit cards of the global banking business from advanced Private non-financial corporations economies to emerging economies in the Source: Calculated from Bank of England database aftermath of the crisis. This shift was attributable to bank failures as well as a weakout to 0.83. The correlation coefficient increased growth in asset base of banks from the advancedsteadily, as the sample of banks was economies. In terms of both number and totalexpanded to top-50 and then to top-100 banks. assets of the top 100 global banks, there was aThe rise in the rank correlation coefficients with fall in the share of advanced economies betweenthe increase in the sample size suggested 2009 and 2010 (Chart II.22). The decline in thethat there was considerable repositioning of asset share of advanced economies betweenbanks at the top end of the asset spectrum 2009 and 2010 was concentrated in the US, UK,(Table II.4). and more prominently, in the Euro zone economies (Chart II.23). Chart II.21: Growth in Balance Sheets of Chinese Banks Improvement in the profitability of global 40 banks 2.28 There was a distinct improvement in the 35 profitability of global banks between 2009 and 2010 as evident from an increase in RoA. The 30 percentage of loss making global banks (reporting negative RoA) was down from 25 per cent in 2009 Per cent to only 5 per cent in 2010. Further, about 89 per cent of the global banks had a positive RoA of less 25 than 2 per cent in 2010 as against a share of 70 20 per cent in 2009 (Chart II.24). Strengthening of capital adequacy of global 15 banks Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 2.29 Apart from a turnaround in profitability of Assets Deposits Credit global banks, there was also strengthening of Note: Series have been smoothened using three-year moving average method. Source: Calculated from Peoples Bank of China database capital adequacy positions of these institutions 23
  • Report on Trend and Progress of Banking in India 2010-11 Chart II.22: Location of Global Banking Business Composition of number of top 100 global banks Composition of assets of top 100 global banks 2010 2010 18.0 14.9 15.0 11.8 2009 2009 85.0 88.2 82.0 84.9 Advanced economies Emerging and developing economies Advanced economies Emerging and developing economies Source: Calculated using Banker Databasebetween 2009 and 2010. There was an about 24 per cent of the top-100 global banksincreasing concentration of banks between 2009 were highly leveraged with a Capital Adequacyand 2010 in higher size classes based on CRAR. Ratio (CAR) – a measure of financial leverage – ofAt end-December 2010, 47 per cent of the top less than four per cent; the percentage had come100 global banks had a CRAR ranging between down moderately by 5 percentage points to 19 per13 per cent and 17 per cent, far above the BCBS cent at the end of 2010 (Chart II.26). As againstnorm of 8 per cent under the Basel II framework this, the percentage of global banks with CAR(Chart II.25). ranging between 4 and 6 per cent had increased exactly by the same magnitude from 41 per centSlow process of deleveraging of global banks to 46 per cent.2.30 Notwithstanding the improvement in CRAR, Weakening asset quality of global bankssoundness of global banks remained a concernon account of a slow process of deleveraging and 2.31 Between 2009 and 2010, there was aincreasing levels of NPAs. At the end of 2009, decline in the proportion of banks reporting very Chart II.23: Share of Countries in Total Assets of Chart II.24: Percentage Distribution of Top 100 Top 100 Global Banks Global Banks by Return on Assets 35 56 30 48 25 Per cent 20 33 15 22 10 17 5 6 5 5 0 2 3 1 1 0 0 US Eurozone Singapore Switzerland Japan Sweden Brazil Australia Canada Denmark UK South Korea South Africa China Russia India Norway Turkey -3<=RoA<-1 0<=RoA<1 1<=RoA<2 RoA<-3 2<=RoA<3 -1<=RoA<0 3<=RoA<4 Advanced economies Emerging and 2009 2010 developing economies Note: On account of non-availability of data on certain banks from the top-100 2009 2010 sample, the percentages may not add up to 100. Source: Calculated using Banker Database Source: Calculated using Banker Database 24
  • Global Banking Developments Chart II.25: Percentage Distribution of Top 100 Chart II.27: Percentage Distribution of Top Global Banks Global Banks by CRAR by NPLs Ratio 47 45 18 17 16 16 15 10 19 8 7 13 14 14 14 12 6 11 5 3 2 1 10<CRAR<=11 11<CRAR<=12 12<CRAR<=13 0<CRAR<=10 13<CRAR<=17 17<CRAR 0<NPL<=1 1<NPL<=2 2<NPL<=3 3<NPL<=5 5<NPL 2009 2010 Note: On account of non-availability of data on certain banks from the top-100 2009 2010 sample, the percentages may not add up to 100. Source: Calculated using Banker Database Source: Calculated using Banker Databasehigh levels of NPLs ratio, suggesting some 2.32 The scatter plots of top 20 global bankstemperance of the acute credit strain on banks5. taking three indicators of CRAR, leverage andHowever, except this change at the extreme end NPLs ratio, revealed that while banks wereof the spectrum, there was a general weakening in the process of stepping up their CRARof the asset quality of top global banks between 2009 and 2010, there seemed to be(Chart II.27). little improvement in the leverage and NPLs ratios of banks during this period (Chart II.28). Chart II.26: Percentage Distribution of Top 100 Global Banks by Capital Adequacy (Leverage) Ratio 5. Global Policy Reforms 46 Significant increase in regulatory reforms 41 2.33 Various authoritative reports on the crisis so far, including that of the latest Financial Crisis Inquiry Commission of the US (2011), 24 have attributed the eruption of a financial 19 19 19 crisis of such vast magnitude and impact, to serious lacunae in the financial regulatory and 10 supervisory framework6. Further, owing to the 9 6 7 globalisation of finance, these reports have also underscored the need to increase inter- regulatory coordination both at the national and 6<CAR<=8 4<CAR<=6 8<CAR<=10 2<CAR<=4 10<CAR international level. A number of banking policy 2009 2010 reforms are since then being contemplated; Note: On account of non-availability of data on certain banks from the top-100 sample, the percentages may not add up to 100. some of these, have even reached the stage of Source: Calculated using Banker Database implementation. 5 On account of non-reporting of data by many banks, the present analysis of NPLs is based on a sample of only 59 banks instead of 100 banks. 6 For instance, see Turner Review (2009) and Larosiere Report (2009). 25
  • Report on Trend and Progress of Banking in India 2010-11 Chart II.28: Changes in Soundness Indicators of Top 20 Global Banks Top 20 global banks positioned by their CAR and CRAR Top 20 global banks positioned by their NPLs ratio and CRAR 10 12 NPLs ratio in per cent Direction of 10 improving Direction of soundness CAR in per cent 7 improving 8 soundness 6 4 4 1 2 0 0 15 30 0 10 20 30 -2 CRAR in per cent CRAR in per cent 2009 2010 2009 2010 Note: The top 20 banks are as per the list of 2010. The same banks have been chosen for 2009 for these scatter plots. Source: Compiled from Banker databaseReforms in Capital and Liquidity Standards of non-viability in January 2011 as a measure to enhance the quality of regulatory capital.2.34 The most significant development during According to this recommendation, allthe year was the announcement by the Basel regulatory capital instruments should be ableCommittee on Banking Supervision (BCBS) in to absorb losses in the event when a bank isDecember 2010 (followed by minor modifications unable to support itself in private market,with regard to capital treatment for counterparty including situations where recapitalisation bycredit risk in bilateral trades in June 2011) of the public sector is necessary to save the bank.reform framework to strengthen the capital and 2.36 In December 2010, the Final Report of theliquidity standards. The framework provides Macro-economic Assessment Group (MAG)details of the regulatory standards agreed to by formed by Financial Stability Board (FSB) andthe Governors and Heads of Supervision (GHOS) BCBS concluded that the impact of higherin September 2010, and endorsed by the G-20 capital standards on economic growth would beLeaders in November 2010. This framework modest and would be much less in magnitudeincorporates both micro-prudential and macro- and spread over a longer time horizon than whatprudential approaches to regulation and was estimated by the MAG Interim Report insupervision. It is much more comprehensive and August 2010. Taking a median of nationalcounter-cyclical in approach as compared estimates, the MAG observed a decline in annualto Basel II7. It provides a set of collective minimum GDP growth rate of about 3 basis points from itsrequirements, and is expected to be baseline level for 35 quarters from the start ofimplemented in totality and not in parts8. The implementation of the standards. The Long-termkey objectives and features of the reform Economic Impact (LEI) Group studied the costsmeasures suggested in the Basel III framework and benefits of the new standards over the longare summarised in Box II.2. run. The LEI noted that, while the costs in terms2.35 In addition to the December 2010 capital of permanent GDP foregone were expected to berules, the BCBS also recommended the loss small, the benefits of reducing crisis-relatedabsorption by capital instruments at the point risks would be substantial9. 7 See Report on Trend and Progress of Banking in India – 2008-09 for a comparison of Basel III and Basel II norms of capital requirement and schedule for phase-in arrangements of Basel III. 8 See “Regulatory Reform: Remaining Challenges”, Speech by Jaime Caruana, BIS, July 2011. 9 “An Assessment of the Long-term Economic Impact of Stronger Capital and Liquidity Requirements”, BIS, August 2010. 26
  • Global Banking Developments Box II.2: Key Objectives and Features of the Basel III Framework Capital Standards IV. Reduce pro-cyclicality through counter-cyclical buffers I Raising capital base Objective - Dampening pro-cyclical movements within the banking system by making it a “shock absorber” rather than a Objective - Ensuring quality, consistency in definition across transmitter of risk to the real economy. jurisdictions and transparency in disclosure of capital base. Measures - IV.1. Movement to a relatively less pro-cyclical Measures - I.1 Tier 1 capital predominantly held as common Expected Loss (EL) approach as against existing Incurred Loss shares and retained earnings; I.2 Remainder of Tier 1 capital (IL) and updation of supervisory guidance consistent with the comprising of subordinated instruments with fully EL approach; IV.2. Creation of capital conservation buffers discretionary non-cumulative dividends and with no maturity above the minimum capital and adjust the buffer range during date or incentive to redeem; I.3. Innovative hybrid instruments periods of excess credit growth. with an incentive to redeem would be phased out. Liquidity Standards II Enhancing risk coverage I. Minimum liquidity standards Objective - Strengthening risk coverage of capital framework Objective - Introducing internationally harmonised and especially for on- and off-balance sheet items and derivative robust liquidity standards since stronger capital requirements exposures. may be necessary but not a sufficient condition for banking Measures - II.1. Introduction of stressed Value-at-Risk (VAR) sector stability. capital requirement based on a continuous 12-month period Measures - I.1. Introduction of liquidity coverage ratio to of significant financial stress; II.2. Higher capital requirements ensure sufficient high quality liquid resources to cope with an for re-securitisation in banking and trading book; II.3. acute stress scenario lasting one month; I.2. Introduction of Introduction of capital charge for potential mark-to-market net stable funding ratio, which has a longer time horizon of one losses related to credit valuation adjustment risks associated year to provide sustainable maturity structure of assets and with deterioration in creditworthiness of counterparty; II.4. liabilities. Strengthening standards for collateral management. Banks with large illiquid derivative position to a counterparty would II. Quantitative liquidity metrics have to apply longer margining periods for determining Objective - Imparting consistency in quantitative metrics regulatory capital requirements. used by supervisors to capture liquidity risks. III. Supplement risk-based capital requirements with leverage Measures - II.1. Introduction of metrics, which include among measure others, contractual maturity mismatch, concentration of Objective - Containing leverage in the banking sector thereby funding, available unencumbered assets and liquidity mitigating risk related to deleveraging. coverage ratio by currency. Reference: Measures - III.1. Introduction of a simple, transparent and independent measure of leverage, comparable across “Basel III: A Global Regulatory Framework for More Resilient jurisdictions by adjusting for differences in accounting Banks and Banking Systems”, Bank for International standards. Settlements, June 2011.Reforms for Systemic Risk Management regulation, calling on international bodies to develop such a framework 10. The Basel III1. Reforms related to Macro-Prudential framework designed by the BCBS includes aRegulatory Framework number of provisions to dampen pro-cyclicality2.37 The crisis showed that while most financial and increase the resilience of financial system.entities can be regulated at an individual level, The most important macro-prudential measurethe lack of an arrangement to supervise the under Basel III framework is the counter-cyclicalsystem as a whole can create financial capital buffer, which can address the timeinstability. Since the crisis, there has been an dimension of systemic risks; the details of theexplicit focus on developing a macro-prudential concept and working of this buffer are illustratedframework for dealing with system-wide risks. in Box II.3.2.38 The G-20 regulatory reform agenda has 2.39 There are other provisions of Basel III,turned its attention to macro-prudential which can also address time dimension of 10 See “The Basel Committee’s Response to the Financial Crisis: Report to the G-20", BIS, October 2010. 27
  • Report on Trend and Progress of Banking in India 2010-11 Box II.3: Counter-Cyclical Capital Buffer: Concept and Working The introduction of a counter-cyclical capital buffer in Basel III As per the BCBS guidance, any increase in the buffer should framework is an important step towards improving the quality be pre-announced by up to 12 months to give banks time to of regulatory capital as well as addressing its pro-cyclicality, meet the additional capital requirements before they take thereby facilitating an improved macro-prudential effect. The reductions, however, would take effect immediately surveillance of the banking system. to reduce the risk of credit supply being constrained by regulatory capital requirements. Moreover, it is necessary for In December 2010, the BCBS issued the guidance for national authorities to review the information at their disposal and authorities for operating the counter-cyclical capital buffer. As accordingly, review the counter-cyclical capital buffer per this guidance, national jurisdictions would determine how decisions on a quarterly or more frequent basis. the buffer should vary within the range of 0-2.5 per cent of risk-weighted assets and also be ready to remove this As the decision about setting the buffer needs to be taken by requirement in a timely manner if the systemic risk national jurisdictions, in India, a Working Group has been set crystallises. The common reference guide for calibrating the up within the Reserve Bank. In the Indian context, one of the buffer, as given in the BCBS principles, is private sector credit- major issues for calibrating the buffer relates to the choice of to-GDP gap (deviations of credit-to-GDP ratio from its long- the reference guide. The Indian economy has undergone term trend). However, the BCBS notes that as this guide may structural changes and growth has not been even across all not always work well in all jurisdictions at all times, judgment sectors. As a result, sectoral credit requirements tend to vary coupled with proper communications is an integral part of substantially making it difficult to assess the build-up of risk calibrating the buffer instead of relying mechanically on the based on the credit/GDP guide alone. The Group is currently guide. The BCBS has also suggested using other variables and examining this and various issues involved in the qualitative information, such as asset prices, funding spreads, operationalisation of the counter-cyclical capital buffer. Credit Default Swap (CDS) spreads, credit condition surveys Reference: and real GDP growth, among others. These indicators can be Bank for International Settlements (2010), “Guidance to useful in assessing the sustainability of credit growth and the National Authorities for Operating the Counter-Cyclical level of system-wide risk. Capital Buffer”, December.systemic risks, though they are not exclusively These measures included the methodology fordesigned to address the same. These include assessing systemic importance, and thepermanent capital conservation buffer; additional required capital and their phase-inminimum leverage ratio; and new liquidity arrangements. The assessment methodology forstandards. As regards dealing with cross- G-SIBs is indicator-based and comprises fivesectional dimension of systemic risks, the Basel broad categories viz., their size, inter-III standards with increased bank capital and connectedness, lack of substitutability in termsliquidity are expected to enhance the resilience of the services they provide, global (cross-of each individual institution to adverse shocks. jurisdictional) activity and complexity11.2. Reforms related to Systemically 3. Reforms for regulating Shadow BankingImportant Financial Institutions (SIFIs) and extending the Regulatory Perimeter2.40 A major development during the year with 2.41 As the framework for regulation,regard to containing systemic risks was the supervision and resolution of SIFIs isagreement reached by the GHOS on a strengthened, there is a potential for increase inconsultative document setting out regulatory incentive for businesses to migrate to themeasures for Global Systemically Important shadow banking system. Shadow banking isBanks (G-SIBs) in June 2011. The regulation of described as “credit intermediation involvingG-SIBs is instrumental in dealing with the cross- entities and activities outside the regularsectional dimension of systemic risk by banking system”12. This segment is of concernmitigating inter-connection and contagion risk. because credit intermediation in this segment 11 See “Global Systemically Important Banks: Assessment Methodology and Additional Loss Absorbency Requirement”, Consultative Document, BIS, July 2011. 12 See "Shadow Banking: Scoping the Issues", FSB, April 2011. 28
  • Global Banking Developmentstakes place in an environment where prudential Marginal improvement in capital adequacyregulatory/supervisory oversight is either not and profitability of the global banking systemapplied or applied in lesser degree than for 2.44 The growth and soundness of the globalbanks engaged in similar activities. In an banking system, as discussed, standsattempt to close regulatory gaps, the FSB has marginally improved on two major counts sinceformed a Task Force, which has drafted a 2008. First, there are indications of modestscoping paper entitled “Shadow Banking: improvements in profitability of banks in the USScoping the Issues”, on the basis of which it and UK in 2010. Second, there has been amade recommendations for the consideration of steady effort by global banks to strengthen theirG-20 in autumn 2011. The G-20, in its October capital base, which can prepare them to absorb2011 meeting, agreed on the initial future losses more effectively.recommendations on oversight of shadowbanking. The FSB has suggested surveillance of Vulnerabilities persistshadow banking system through (i) improved 2.45 The global banking system, however,two-step monitoring from micro and macro- stands weak on many counts after the crisis.perspectives and (ii) direct regulation of shadow First, the system as a whole and most advancedbanking entities and indirect regulation by economies, especially the fiscally strainedregulating banks’ interactions with these entities. economies in the Euro zone, still show very weak2.42 Apart from these global reforms, there credit growth. There are concerns about thehave been significant policy reforms across revival in credit growth in many advancedvarious advanced countries in the post-crisis economies to sectors that rely heavily on bankperiod. There have been attempts to financing and are crucial for revival in employment and growth, namely, small andinstitutionalise collegial arrangements in the US, medium enterprises.UK and EU, involving the Governments, centralbanks and other regulators with the primary 2.46 Secondly, the onset of sovereign debtresponsibility to identify, monitor and address pressures since the early 2010 have given rise tothreats of systemic risk. renewed credit, market and funding risks in the Euro zone economies with troubled sovereigns,6. Conclusions as well as the peripheral economies of Germany, France and the UK, whose banks are eitherGlobal banks are confronting multiple risks directly or indirectly exposed to these sovereigns.2.43 Global banking system today stands at a Recapitalisation of banks in the Euro zone is alsojuncture, where downside risks and challenges a major concern at the present juncture. Many ofoutweigh the positive efforts made by the the Euro zone banks may require substantialbanking system towards regaining growth and pumping of capital given the capital shortfall inhealth since the outbreak of the financial crisis. the event of a high Greek haircut.The downside risks are manifold and arise notjust from within the banking system but also from 2.47 Thirdly, despite attempts at de-leveraging, global banks in most advanced economies,the financial system in general, fiscal conditions especially in the Euro zone and UK, continue toand state of the global economy. The risks arising be highly leveraged with dependence onfrom other segments impact the banking wholesale funding markets. Fourthly, creditsegment through an “adverse feedback” effect, to risks also continue to be at high levels, not justborrow the term used by the European Central attributable to sovereign credit risks but alsoBank (ECB). risks emanating from the unsecured 29
  • Report on Trend and Progress of Banking in India 2010-11component of bank credit in many advanced advanced economies to step up macro-economiceconomies. Fifthly, the crisis has dampened the action, especially for improving the fiscalextent of financial inclusion in most advanced situation. Further, both advanced economies andeconomies pushing people out of the ambit of emerging economies need to work individuallyfinancial system on account of both supply and collectively towards strengthening andand demand side factors. Supply of banking reviving the global banking system. There has tofacilities has been eroded with bank be greater commitment from countries towardsfailures and decline in banking activity in consistently implementing the bankingadvanced economies. Demand for banking regulatory reforms that have been alreadyservices too has been affected with a dent on agreed upon while strengthening their macro-employment and income generation in these prudential oversight. There is a need, however,economies. to rightly calibrate the transition to this system2.48 Finally, there has been a growing in order to avoid any adverse impact on thedivergence between the performance of banking global economy, particularly since the globalsystems in advanced and emerging economies. economic recovery remains weak. The moreWhile growth and soundness of banks in recent intense formal consultations amongadvanced economies are at low, the credit European nations to finalise a Euro deal willgrowth in major emerging economies has been have significant implications for Europeanhigh leading to concerns about overheating of banks in terms of stiff haircuts to be acceptedthese economies. In China, there are and to strengthen the capital bases of banksconcerns about high credit growth leading to through recapitalisation. European banks, thus,burgeoning of bad assets for banks. The high need to brace for some such difficult exerciseslevels of inflation coupled with increasing before they eventually stabilise. All in all, theshort-term capital flows into these economies near-term outlook for the global banking systemhave further raised concerns about financial is fraught with many uncertainties, some ofstability. which are beyond its direct control. In theNear-term outlook for the global banking present situation, Government agencies, centralsystem is fraught with many uncertainties banks and banking institutions should2.49 Given that global risks outweigh collectively tread the risky path to enduringimprovements, there is an urgent need for recovery and stability. 30
  • Chapter III Policy Environment Macroeconomic policy in India during 2010-11 was aimed at achieving the twin objectives of sustaining economic growth and controlling inflation. Banking sector policy needs to be consistent with the broader objectives of macroeconomic policy through the provision of productive credit to bolster economic growth within the broad contours of monetary management. As the developed world was still battling low economic growth and deterioration in public finances, and repairing its financial regulatory architecture in the aftermath of the financial crisis, India successfully reverted back to its pre-crisis growth path in 2010-11. However, the inflationary pressures, which emerged partly on account of high global commodity prices and partly due to internal structural imbalances in demand and supply, remained above the comfort zone in 2010-11. These pressures called for repeated monetary policy responses, in order to ensure that economic growth, which was in the process of consolidation, was not sacrificed in the long-run. Indian banking sector policy with regard to financial liberalisation and innovation has always been calibrated, cautious and yet, consistent. The fact that the Indian banking system was not adversely affected during the recent crisis is a proof of the success of this policy. Treading on the same path, the Reserve Bank initiated important policy discussions with regard to providing new bank licenses, designing the road ahead for the presence of foreign banks, holding company structure for banks, and introduced credit default swaps for corporate bonds, while migrating to advanced approaches under the Basel II framework and facilitating the movement towards the Basel III framework. Financial Inclusion continued to remain high on the agenda of the Reserve Bank with the rolling out of Board-Approved Financial Inclusion Plans by banks.1. Introduction banking entities into the ambit of regulation.3.1 With the onslaught of the global financial This chapter presents major developments incrisis, banking sector policy across the world various realms of banking sector policy, withhas received a newer meaning and relevance. special thrust on regulatory and supervisoryThere is a growing realisation that regulatory policies adopted during 2010-111. The otherand supervisory policy needs to be major aspects of the banking policy covered,strengthened to adopt a system-wide approach include monetary policy, credit delivery,to counteract pro-cyclical movements in the financial inclusion, technologicalbanking sector. The perimeter of regulation also developments, payment and settlement system,needs to be expanded to cover the unregulated customer service and legal provisions forsegments in order to minimise regulatory banking. Apart from the commercial bankingarbitrage. India has been lauded as one of the sector, major policy measures relating tofew countries that has followed a vigilant and Regional Rural Banks (RRBs), Cooperativecounter-cyclical policy approach to banking Banks, Non-Banking Financial Companiessector developments. It has also widened the (NBFCs) and Financial Markets are alsoregulatory perimeter steadily to bring non- discussed in the chapter. 1 The period covered in this chapter stretches from April 2010 to October 2011.
  • Report on Trend and Progress of Banking in India 2010-112. Monetary Policy2 Bank made a number of changes in the operating procedure of monetary policy withMonetary Policy Stance and Measures effect from May 2011. As per these changes, the3.2 Monetary policy stance in 2010-11 was weighted average overnight call money rate wasattuned to the growth-inflation dynamics made the operating target of monetary policy.prevailing in the economy in the broader context Further, the repo rate was made the single policyof global uncertainties. In the first half of 2010- rate to more accurately signal the monetary11, the thrust of monetary policy was on policy stance with the reverse repo rate pegged atavoiding policy impediments to the recovery a fixed 100 basis points below the repo rate. Aamidst global uncertainties, while also new Marginal Standing Facility (MSF) was alsocontaining inflationary pressures. instituted under which Scheduled Commercial3.3 In the second half of 2010-11, while growth Banks (SCBs) could borrow overnight up to onecontinued to consolidate, the moderating path of per cent of their respective Net Demand andinflation reversed beginning December 2010 due Time Liabilities (NDTL), carved out of theto a series of supply side shocks, both domestic required Statutory Liquidity Ratio (SLR)and global. Non-food manufacturing inflation portfolio. The MSF rate is 100 basis points aboveremained much above the trend growth of 4 per the repo rate and provides an upper bound tocent during the second half of 2010-11. the policy rate corridor with reverse repo rate asTherefore, policy rates were raised to contain the lower bound. These changes were deemedinflation and anchor inflationary expectations. necessary for improved liquidity managementThis was warranted to ensure that the long-term and effective monetary transmission.growth prospects were not harmed, even if it Deregulation of Savings Bank Deposit Ratemeant sacrificing some growth in the short-term. 3.6 With the steady process of deregulation3.4 As the inflation remained above the since the early 1990s, the only rupee interestcomfort level of the Reserve Bank even in 2011- rate that continued to remain regulated was the12, the anti-inflationary stance was continued savings deposit interest rate. In order toduring this period. Since the exit from its crisis- delineate the advantages and disadvantages ofdriven expansionary monetary policy stance, the deregulating the savings deposit rate, theReserve Bank has raised the policy rate (the repo Reserve Bank prepared a discussion paperrate) 13 times by 375 basis points. Till March which was placed on the RBI website for2011, the policy rate was raised eight times by suggestions from general public in April 2011.200 bps. In 2011-12 so far (up to October 25, The Discussion Paper evoked wide ranging2011), it was further raised five times by 175 responses from a cross-section of stakeholders.bps. The effective tightening since October 2009 The Reserve Bank after weighing both pros andhas been of 525 bps as liquidity in the system cons, decided to deregulate the savings banktransited from surplus to deficit. The CRR was deposit rate in its Second Quarter Review ofalso raised by 100 bps. Monetary Policy 2011-12 released on OctoberChanges in the Operating Procedure of 25, 2011. Accordingly, banks can freelyMonetary Policy determine their savings bank deposit interest rates subject to the following two conditions:3.5 Based on the Report of the Working Groupon Operating Procedure of Monetary Policy • Each bank will have to offer a uniform(Chairman: Shri Deepak Mohanty), the Reserve interest rate on savings bank deposits up to 2 This section deals with monetary policy developments in brief, as they have been covered in the RBI Annual Report 2010-11 in detail. 32
  • Policy Environment `1 lakh, irrespective of the amount in the prompt-paying farmers has been increased to 2 account within this limit. per cent. Further, in the Union Budget for 2011- 12, the Finance Minister has proposed an• For savings bank deposits over `1 lakh, a enhancement of the additional interest bank may provide differential rates of subvention for prompt-paying farmers to 3 per interest, if it so chooses. However, there cent making the effective rate for such farmers to should not be any discrimination from be 4 per cent per annum. customer to customer on interest rates for similar amount of deposit. Loans to Micro, Small and Medium Enterprises (MSME) - Credit Target for Micro-3. Credit Delivery EnterprisesPriority Sector Lending Policy - Loans to 3.9 Pursuant to the recommendations of theNBFCs High Level Task Force constituted by the3.7 The Reserve Bank advised all SCBs in Government of India (Chairman: Shri T K A Nair),February 2011 that loans sanctioned to NBFCs SCBs have been advised on June 29, 2010 tofor on-lending to individuals or other entities allocate 60 per cent of the MSE advances toagainst gold jewellery will not be eligible for micro-enterprises. This target is to be achievedclassification under priority sector as agricultural in three stages viz., 50 per cent in 2010-11, 55credit. Similarly, investments made by banks in per cent in 2011-12 and 60 per cent in 2012-13securitised assets originated by NBFCs, where with an annual growth of 10 per cent in thethe underlying assets are loans against gold number of micro-enterprises accounts and anjewellery and purchase/assignment of gold loan annual growth of 20 per cent in lending to microportfolio from NBFCs are also not eligible for and small enterprises. A suitable format has alsoclassification under the agricultural sector. been devised by the Reserve Bank to capture and closely monitor the achievement of thesePriority Sector Lending Policy - Loans to targets by banks on a half-yearly basis (MarchAgriculture and September). From the quarter ending June3.8 The scheme of interest subvention has 2011, the monitoring is being done on abeen in existence since 2006-07 with regard to quarterly basis. The Reserve Bank has alsoprovision of short-term agricultural credit to taken up the matter with banks that have failedfarmers by public sector banks, RRBs and to achieve the targets prescribed by the Taskcooperative banks. In 2009-10, an interest Force.subvention of 2 per cent was provided on short- Credit Guarantee for Credit to Micro andterm production credit of up to `3 lakh, which Small Enterpriseswould ensure that credit was made available tofarmers at the ground level at 7 per cent per 3.10 Based on the recommendations of theannum. Further, an additional interest Working Group (Chairman: Shri V.K. Sharma)subvention of 1 per cent was also provided to constituted by the Reserve Bank in March 2010public sector banks in respect of those farmers to review the Credit Guarantee Scheme (CGS) ofwho were prompt in repaying their loans within the Credit Guarantee Fund Trust for Micro andone year of disbursement of such loans, Small Enterprises (CGTMSE), the limit forreducing the effective rate for such farmers collateral free loans to the MSE sector has beenfurther to 6 per cent per annum. In 2010-11, the increased to `10 lakh and has been madeinterest subvention was reduced to 1.5 per cent mandatory for banks. SCBs are advised to followand the additional interest subvention for the guidelines on collateral free lending, 33
  • Report on Trend and Progress of Banking in India 2010-11encourage branch level functionaries to avail the felt for a more rigorous regulation of NBFCscredit guarantee cover and making performance functioning as Micro-Finance Institutionsin this regard a criterion in their appraisal. (MFIs). Accordingly, a sub-Committee of theThe Working Group has also made Central Board of the Reserve Bank (Chairman:recommendations regarding an increase in the Shri Y. H. Malegam) was constituted to studyextent of guarantee cover, absorption of issues and concerns in the MFI sector. Theguarantee fees for the collateral free loans up to Committee has submitted its report in January`10 lakh by CGTMSE, subject to certain 2011, which has been placed in public domain.conditions, simplification of procedure for filing The Committee, inter alia, has recommended:claims with CGTMSE and increasing awareness (i) creation of a separate category of NBFC-MFIs;about the scheme. The recommendations have (ii) a margin cap and an interest rate cap onbeen forwarded to CGTMSE for implementation. individual loans; (iii) transparency in interest charges; (iv) lending by not more than two MFIsHousing Loans to individual borrowers; (v) creation of one3.11 With the objective of improving or more credit information bureaus;affordability of housing for middle and lower (vi) establishment of a proper system ofincome groups, the Union Budget of 2009-10 grievance redressal procedure by MFIs;had announced a scheme of 1 per cent interest (vii) creation of one or more “social capital funds”;subvention in respect of individual housing and (viii) continuation of categorisation ofloans of up to `10 lakh provided that the cost of bank loans to MFIs complying with theunit did not exceed `20 lakh. The scheme was regulation laid down for NBFC-MFIs, under theapplicable initially for a period of one year priority sector.effective from October 1, 2009 to September 30, 3.13 The recommendations of the Committee2010. An initial allocation of `1,000 crore was were discussed with all stakeholders, and inannounced for this purpose. The Union Budget light of the feedback received, it has beenfor 2010-11 had announced an extension of the decided to accept the broad framework ofscheme and also made a provision of `700 crore regulations recommended by the Committee.under the scheme for 2010-11. As per the Union Accordingly, all SCBs have been advised on MayBudget for 2011-12, the existing scheme has 3, 2011 that:been further liberalised to housing loans of up to`15 lakh, where the cost of the house does not 1. Bank credit to MFIs extended on, or after,exceed `25 lakh as against the earlier limits of April 1, 2011 for on-lending to individuals and`10 lakh and `20 lakh, respectively. The scheme also to members of Self-Help Groups (SHGs)/is being implemented through SCBs and Joint Liability Groups (JLGs) will be eligible forhousing finance companies. The Reserve Bank categorisation as priority sector advances underacts as the nodal agency in respect of SCBs. respective categories viz., agriculture, micro andAfter sanctioning and disbursing the eligible small enterprises, and micro credit (for otherloans, SCBs claim reimbursement of subsidy purposes), as indirect finance, provided thatfrom the Reserve Bank on a monthly basis. The (a) Not less than 75 per cent of thenecessary instructions with regard to the aggregate loans given by MFIs areliberalisation of the scheme have been issued to extended for income generatingall SCBs by the Reserve Bank on April 21, 2011. activities;Loans to MFIs (b) Not less than 85 per cent of the total3.12 Following concerns about the micro assets of MFI (other than cash,finance sector in Andhra Pradesh, a need was balances with banks and financial 34
  • Policy Environment institutions, Government securities for borrower and spouse can be and money market instruments) are in recovered and administrative charges the nature of “qualifying assets”. A must be recovered as per IRDA “qualifying asset” has to satisfy the guidelines; (vii) There should not be any following criteria: (i) The loan is to be penalty for delayed payment; (viii) No extended to a borrower whose Security Deposit/Margin is to be household annual income in rural collected from borrowers. areas does not exceed `60,000, while (d) The banks should obtain, at the end of for non-rural areas, it should not each quarter, a Chartered Accountant’s exceed `1,20,000; (ii) Loan does not Certificate from the MFI stating, inter exceed `35,000 in the first cycle and alia, that all three conditions given `50,000 in the subsequent cycles; (iii) above have been followed. Total indebtedness of the borrower does not exceed `50,000; (iv) Tenure of 2. Bank loans to MFIs, which do not comply loan is not less than 24 months when with above conditions and bank loans to other loan amount exceeds `15,000 with NBFCs, will not be reckoned as priority right to borrower of prepayment sector loans with effect from April 1, 2011. Bank without penalty; (v) The loan is without loans extended prior to April 1, 2011 classified collateral; (vi) Loan is repayable by under priority sector will continue to be weekly, fortnightly or monthly reckoned as priority sector till the maturity of installments at the choice of the such loans. borrower. Progress under the Agriculture Debt Waiver and Debt Relief Scheme, 2008(c) Banks have to ensure that MFIs comply with the following caps on margin and 3.14 As per the schedule of reimbursement interest rate as also other ‘pricing provided by the Government of India in respect guidelines’: (i) Margin cap at 12 per cent of the Agriculture Debt Waiver and Debt Relief for all MFIs; (ii) The interest cost is to be Scheme, 2008, the lending institutions were calculated on average fortnightly compensated in a staggered manner as given in balances of outstanding borrowings Table III.1. The Government of India has and interest income is to be calculated sanctioned `40,000 crore as the first and second on average fortnightly balances of instalments. Out of this, `28,000 crore was outstanding loan portfolio of qualifying transferred to National Bank for Agriculture and assets; (iii) Interest cap on individual Rural Development (NABARD) for reimbursement loans at 26 per cent per annum to be to RRBs and cooperatives. The remaining calculated on a reducing balance basis; amount of `12,000 crore has been earmarked for (iv) Only three components are to be reimbursing SCBs, Local Area Banks and Urban included in pricing of loans viz., a Cooperative Banks. The third instalment of processing fee not exceeding 1 per cent `11,340.47 crore was released by the of the gross loan amount, interest Government of India in January 2011 of which charge, and insurance premium; (v) `1,240.12 crore has been transferred to The processing fee is not to be included NABARD for reimbursement of RRBs and in the margin cap or the interest cap of cooperatives and the remaining amount of 26 per cent; (vi) Only the actual cost of `10,100.35 crore has been utilised for insurance i.e. actual cost of group reimbursing SCBs, Local Area Banks and Urban insurance for life, health and livestock Cooperative Banks. 35
  • Report on Trend and Progress of Banking in India 2010-114. Financial Inclusion permission of the Reserve Bank. While issuing such authorisation, the Reserve Bank will3.15 Financial inclusion has been made an continue to factor in, among others, whether atintegral part of the banking sector policy in least 25 per cent of the total number of branchesIndia. Reserve Bank is furthering financial to be opened during a year are proposed to beinclusion in a mission mode through a opened in unbanked rural centres.combination of strategies ranging fromrelaxation of regulatory guidelines, provision of Relaxation of KYC normsinnovative products, encouraging use of 3.17 Know Your Customer (KYC) requirementstechnology and other supportive measures for for opening bank accounts were relaxed forachieving sustainable and scalable financial small accounts in August 2005, simplifyinginclusion. During 2010-11 too, the Reserve procedure by stipulating that introduction by anBank continued with policy initiatives aimed at account holder who has been subjected to fullexpanding the outreach of banking services to KYC drill and any evidence of the identity andremote parts of the country. address of the customer to the satisfaction of the bank, would suffice for opening such accounts.Mandating Opening of Branches in Rural In 2010-11, KYC norms have been furtherUnbanked Centres relaxed vide circular dated January 27, 2011 to3.16 To further step up penetration of banking include job cards issued by/under Nationalservices in the rural areas, there is a need for Rural Employment Guarantee Act (NREGA)opening of more brick and mortar branches, (duly signed by an officer of the Statebesides the use of Business Correspondents Government) or the letters issued by the Unique(BCs). Accordingly, banks have been mandated Identification Authority of India containingto allocate at least 25 per cent of their total details of name, address and Aadhaar numbernumber of branches to be opened during a year can also be taken as the basis for opening smallto unbanked rural centres. Further, in October bank accounts. It was further relaxed vide2011, to provide enhanced banking services in circular dated September 28, 2011, making itTier 2 centres (with population of 50,000 to applicable to all accounts.99,999 as per Census 2001), it has beenproposed to permit domestic SCBs (other than Widening the Definition of BusinessRRBs) to open branches in these centres without Correspondentthe need to take permission from the Reserve 3.18 Since 2006, the Reserve Bank hasBank in each case, subject to reporting. The permitted banks to engage Business Facilitatorsopening of branches in Tier 1 centres (centres and Business Correspondents (BFs/BCs) aswith population of 1,00,000 and above as per intermediaries for providing banking services.Census 2001) will continue to require prior The list of eligible individuals/entities who can Table III.1: Compensation under Agriculture Debt Waiver and Debt Relief Scheme (Amount in `crore)Lending Institutions Proposed reimbursement** First instalment Second instalment Third instalment Fourth instalment Sept 2008 July 2009 July 2010 July 2011RRBs and Cooperatives 17,500 10,500 2,800 Balance amount, if anySCBs, UCBs and LABs 7,500 4,500 9,200 Balance amount, if anyTotal 25,000 15,000 12,000 Balance amount, if any** Based on the current provisional estimates 36
  • Policy Environmentbe engaged as BCs has been widened from time unbanked villages with population above 2,000to time. During 2010-11, in order to harness the as also other unbanked villages with populationlarge and widespread retail network of corporate below 2,000 through branches/BCs/otherfor providing financial and banking services, ‘for- modes; no-frill accounts opened includingprofit’ companies were also allowed to be through BC-ICT; Kisan Credit Cards (KCC) andengaged as intermediaries to work as BCs for General Credit Cards (GCC) and other specificbanks in addition to entities permitted earlier. products designed by them to cater to the financially excluded segments. Banks wereIntroduction of Innovative and Simple advised to integrate Board-approved FIPs withProducts their business plans and to include the criterion3.19 Timely and hassle-free credit being the on financial inclusion as a parameter in themost important requirement of poor people, performance evaluation of their staff. Thebanks have been advised to provide in-built implementation of these plans is being closelyoverdraft of small amount in no-frill accounts so monitored by the Reserve Bank.that customers can avail of credit of small 3.22 In order to review the progress of banks inamount without any further documentation, for the implementation of FIPs during the yearmeeting emergency requirements. 2010-11 and making way for accelerated progress in future, the Reserve Bank has beenRoadmap for Banking Services conducting one-to-one meetings with Chairman3.20 With an objective to ensure uniform and Managing Director (CMD)/Chief Executiveprogress in provision of banking services in all Officer (CEO) of banks. Few of the importantparts of the country, banks were advised to draw action points which emanated out of theup a roadmap for opening banking outlets in discussions held during May-June 2011 are asevery unbanked village having a population of follows:more than 2,000, through a brick and mortar • Banks shall review their delivery models sobranch or any of the various forms of ICT-based that Financial Inclusion results in amodels, including through BCs. In alignment profitable business for them.with the budget announcements, the timelinesfor completing the roadmap was extended to • In addition to providing banking services inMarch 2012 vide circular dated September 16, villages with more than 2,000 population,2010. About 72,800 such unbanked villages they will also focus on providing bankinghave been identified and allotted to various banks services in peripheral villages withthrough State-level Bankers’ Committee (SLBC). population of less than 2,000. • In future, banks need to focus more onProgress on Financial Inclusion Plans opening of brick and mortar branches in3.21 In January 2010, all public and private unbanked villages. It may be a low cost andsector banks were advised to put in place a simple intermediary structure comprising ofBoard-approved three-year Financial Inclusion minimum infrastructure for operating smallPlan (FIP) and submit the same to the Reserve customer transactions and supporting uptoBank by March 2010. These banks prepared 10 BCs at a reasonable distance of 2-3 km.and submitted their FIPs containing targets for Such an approach will help banks in havingMarch 2011, 2012 and 2013. These plans a better customer redressal mechanism andbroadly include self-determined targets in at the same time, help in developing a betterrespect of rural brick and mortar branches to be BC-monitoring mechanism. This will leadopened; BCs to be employed; coverage of to efficiency in cash management, 37
  • Report on Trend and Progress of Banking in India 2010-11 documentation and redressal of customer implementation of advanced risk management grievances. framework particularly in the form of adequate• Banks shall expand financial inclusion incentive and compensation schemes for staff. initiatives in urban and semi-urban Thirdly, banks need availability of quality data, areas by targeting pockets of migrant understanding of economic cycles, capability to workers and small vendors and leveraging use quantitative techniques and skilled staff for Aadhaar enrolment for opening bank validation of risk models. Hence, it is advisable accounts. that relatively large banks having adequate risk management systems migrate to advanced• Banks shall formulate financial inclusion approaches first with other banks focusing on plans for RRBs sponsored by them and improving the risk management systems and develop an effective monitoring mechanism MIS in a way that is consistent with their present so that targets assigned to the RRBs are also operations and simultaneously build up the achieved meticulously. requisite organisational skills for the advanced approaches.5. Prudential Regulatory Policy 3.25 Further, there are specific challenges inMigration to Advanced Approaches under relation to implementation of individualBasel II approaches. First, as regards modelling credit3.23 In March 2009, all commercial banks risk under the Internal Rating Based (IRB)in India completed migration to the Approach, there is a need for modellingbasic approaches of Basel II. While the Probability of Default and Loss Given Defaultimplementation of the standardised approaches (LGD) based on bank’s own historical credit data.and Pillar 2 would continue to be improved, the Lack of adequate historical data poses a problemfocus has recently shifted to the implementation in such an exercise. Further, the relevant data isof the advanced approaches for computation of often kept in disparate systems and units, andcapital adequacy requirement under the Basel II the traditional asset classes used by banks areframework. These advanced approaches would different from those required under IRBhelp in aligning individual banks’ regulatory approach. The utility of credit risk models basedcapital with their risk profiles and also improve on market data have only limited scope fortheir risk management practices. As banking application in India as most of the corporateproducts and business models become borrowers are unlisted and do not have listedincreasingly complex, the risks inherent in these corporate bonds.products can be measured and managed betterunder the advanced approaches. Thus, 3.26 Secondly, modelling operational risk undermigration to advanced approaches would also the Advanced Measurement Approach (AMA) ishelp in pricing of financial products and challenging due to the absence of external lossperformance measurement. data and quality internal loss data. Further, it requires considerable subjective judgement3.24 Adoption of advanced approaches is more in incorporation of the effect of businesschallenging than the standardised approaches. environment, internal control factors and use ofFirst, unlike in the advanced economies, banks scenario analysis in computing the operationalin India are not quite familiar with the use of the risk capital charge.advanced quantitative techniques in riskmanagement which are essential for computing 3.27 Thirdly, while Internal Models Approachrisk measures under Basel II. Secondly, banks (IMA) for market risk is relatively less demandinghave to build institutional capabilities for in terms of data requirements and modelling, the 38
  • Policy Environmentmethodologies for computation of Incremental promote banks. Entities/groups havingRisk Charge (IRC) are still in the early stage of significant (10 per cent or more) income or assetsdevelopment. or both from real estate construction and/ or broking activities individually or taken together3.28 The Reserve Bank has laid down the time in the last three years will not be eligible.line for banks to migrate to advancedapproaches. Guidelines have been issued for (ii) Corporate structure: New banks will be setStandardised Approach (TSA)/Alternate up only through a wholly owned Non-OperativeStandardised Approach (ASA) for operational Holding Company (NOHC) to be registered withrisk in March 2010 and IMA for market risk in the Reserve Bank as NBFC, which will hold theApril 2010. Guidelines on AMA for operational bank as well as all the other financial companiesrisk have also been issued in April 2011. Draft in the promoter group.guidelines on Foundation IRB as well asAdvanced IRB Approach for calculating credit (iii) Minimum capital requirement: Minimumrisk capital charge have been placed on the RBI capital requirement will be `500 crore. Subject towebsite on August 10, 2011 inviting comments this, actual capital to be brought in will dependfrom banks and other stakeholders. As indicated on the business plan of the promoters. Thein the Second Quarter Review of Monetary Policy NOHC shall hold minimum 40 per cent of theof 2011-12, it is proposed to issue the final paid-up capital of the bank for a period of fiveguidelines on IRB approach by end-December years from the date of licensing of the bank.2011. Shareholding by NOHC in excess of 40 per cent shall be brought down to 20 per cent within 10Licensing of New Banks in Private Sector years and to 15 per cent within 12 years from the date of licensing of the bank.3.29 Pursuant to the announcement made bythe Union Finance Minister in his budget speech (iv) Foreign shareholding: The aggregateand the Reserve Banks Annual Policy Statement non-resident shareholding in the new bank shallfor the year 2010-11, a Discussion Paper on not exceed 49 per cent for the first 5 years after"Entry of New Banks in the Private Sector" was which it will be as per the extant policy.placed on RBI website on August 11, 2010. (v) Corporate governance: At least 50 per centBased on the responses received from various of the directors of the NOHC should bestakeholders and extensive internal discussions independent directors. The corporate structureand consultations with the Government of India, should be such that it does not impede effectivethe Draft Guidelines were prepared and released supervision of the bank and the NOHC on aon August 29, 2011 on the RBI website, again consolidated basis by the Reserve Bank.seeking comments from various stakeholders.Suggestions and comments on the draft (vi) Business model: The model should beguidelines were to be sent by October 31, realistic and viable and should address how the2011. bank proposes to achieve financial inclusion.Key features of the draft guidelines are as (vii) Other conditions:follows: • The exposure of the bank to any entity in the(i) Eligible promoters: Entities/groups in the promoter group shall not exceed 10 per centprivate sector, owned and controlled by and the aggregate exposure to all theresidents, with diversified ownership, sound entities in the group shall not exceed 20 percredentials and integrity and having successful cent of the paid-up capital and reserves oftrack record of at least 10 years will be eligible to the bank. 39
  • Report on Trend and Progress of Banking in India 2010-11• The bank shall get its shares listed on the Holding Companies Structure for Indian stock exchanges within two years of Banks licensing. 3.31 Pursuant to the announcement made in• The bank shall open at least 25 per cent of the Monetary Policy Statement for the year its branches in unbanked rural centres. 2010-11, a working group was constituted in June 2010 (Chairperson: Smt. Shyamala• Existing NBFCs, if considered eligible, may Gopinath) to examine the introduction of a be permitted to either promote a new bank holding company structure for banks and other or convert themselves into banks. financial entities and the required changes in(viii) In respect of promoter groups having 40 legislative and regulatory framework. The Groupper cent or more assets / income from non- had representatives from the Government offinancial business, certain additional India, the Reserve Bank, Securities andrequirements have been stipulated. Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA),It is pertinent to mention that certain Indian Banks’ Association (IBA) and a few banks.amendments to the Banking Regulation Act, The Report of the Working Group was placed on1949 are under consideration of the Government the RBI website in May 2011 for publicof India, a few which, are vital for finalisation and comments. The Report has been forwarded toimplementation of the policy for licensing of new the Government of India for consideration.banks in the private sector. These vitalamendments are the removal of restriction of 3.32 The Working Group has recommendedvoting rights and concurrently empowering the Financial Holding Company (FHC) model as aReserve Bank to approve acquisition of shares preferred model for banks and all large financialand /or voting rights of 5 per cent or more in a groups irrespective of whether they contain abank to persons who are fit and proper, bank or not. The FHC would primarily be a non-empowering the Reserve Bank to supersede the operating entity and would carry out all financialBoard of Directors of a bank so as to protect activities through subsidiaries. The FHCdepositors interest, and facilitating consolidated would be well diversified and subject tosupervision. strict ownership and governance norms. The ownership restrictions would be appliedFinal guidelines will be issued and the process of either at the level of the FHCs or at the entityinviting applications for setting up of new banks level, depending upon whether the promotersin the private sector will be initiated after intend to maintain majority control in thereceiving feedback/comments on the Draft subsidiaries, wherever it is permissible as perGuidelines, and after the amendments to law.Banking Regulation Act, 1949 are in place. 3.33 The Working Group observed that the FHCPresence of Foreign Banks in India model would enable better oversight of financial3.30 The Reserve Bank also released a groups from a systemic perspective and allowDiscussion Paper on the presence of foreign better resolution of different entities asbanks in India in January 2011 seeking compared to Bank Subsidiary Model wherefeedback and suggestions from stakeholders liquidation of the parent bank may make theand general public. After receiving feedback on liquidation of subsidiaries inevitable.the Discussion Paper, comprehensive guidelines 3.34 To address the systemic concerns, theon the mode of presence of foreign banks in India Working Group has envisaged consolidatedwould be issued. supervision at FHC level that would be 40
  • Policy Environmentformalised through Memorandum of subsidiary model to FHC model as thisUnderstanding between financial sector involves both strategic and public policyregulators. The function of FHC regulation would issues for the Government. Irrespective ofbe undertaken by a separate unit within the whether the Government chooses toReserve Bank with staff drawn from both the maintain its control at the FHC level or atReserve Bank as well as other regulators. To fully the bank level it would have to sort outoperationalise the FHC model, it has been implementation, administrative andrecommended that a separate legislation for management issues.regulation of FHC be enacted and amendmentsbe simultaneously made to other statutes Compensation Policygoverning public sector banks, Companies Act 3.36 Compensation of Board of Directors,and Banking Regulation Act, 1949, wherever including that of the Chief Executive Officernecessary. In addition, suitable amendments to (CEO) of banks in private sector and foreignvarious taxation provisions will have to be made banks has always been under RBI regulation into make the transition from bank subsidiary terms of the provisions of Banking Regulationmodel to FHC model, tax and stamp duty Act, 1949, unlike the situation in many otherneutral. jurisdictions. In terms of provisions of the Act,3.35 However, there are numerous challenges banking companies in India obtain approvalin implementing the FHC model in India due to from the Reserve Bank for conferring anylegacy issues and multiplicity of regulatory and benefit, amenity or perquisite in whatever formlegal provisions that govern various sectors. to their directors/CEOs whether during or afterSome of the major challenges can be identified as termination of their term of office.follows: 3.37 Based on the Financial Stability Board• Though enactment of a separate law for (FSB) Principles for Sound Compensation regulating FHCs has been recommended, it Practices, the Reserve Bank placed draft may take a while before this can be guidelines on compensation in July 2010 on its achieved. This is because the website inviting public comments. In October recommendations need to be accepted by all 2010, the Basel Committee on Banking stakeholders including Government of India Supervision (BCBS) brought out a consultative and also a simultaneous amendment to paper titled “Range of Methodologies for Risk and various other acts is made. Performance Alignment of Remuneration” and• There exist various policy issues in the issued the final paper in May 2011. financial sector including the differential 3.38 Pursuant to the announcement made in Government ownership in financial entities, the Monetary Policy Statement of May 2011 and differential ownership and governance taking into account the feedback received on standards prescribed by various regulators draft guidelines, the impact analysis carried out and differential ceilings for foreign with the help of external consultants and ownership prescribed for various sectors. methodologies prescribed by BCBS on risk Bringing all financial activities of a group alignment, the Reserve Bank is in the process of within a single FHC would presuppose finalising its guidelines on compensation. harmonisation among different sector policies. Credit Information Companies• The most challenging task would be 3.39 In 2010-11, a Certificate of Registration reorganising public sector banks from bank (CoR) was issued by the Reserve Bank to 41
  • Report on Trend and Progress of Banking in India 2010-11Highmark Credit Information Services Private that the commitments arising out of the wageLimited to commence business of credit settlement can be absorbed by them keeping ininformation after issuing CoR to Experian Credit view their financial position. As witnessed duringInformation Company of India Private Limited the last wage revision, public sector banks andand Equifax Credit Information Services Private 10 old private sector banks, under the 9 thLimited earlier in 2009-10. The Reserve Bank bipartite settlement, signed in April 2010, wereissued a circular in September 2010 to banks/ apparently not able to absorb the impact of thefinancial institutions advising them to include additional burden arising on account of above.the Director Identification Number (DIN) as one The IBA approached the Reserve Bank on behalfof the fields in the data submitted by them to of the member banks, seeking approval tocredit information companies and Reserve Bank. amortise the additional liability. SpecialThis will ensure that names of directors of these regulatory dispensation of amortisation wascredit information companies are correctly granted to these banks by the Reserve Bank for aidentified and in no case, persons whose names period of five years subject to certain conditions3.appear to be similar to the names of directors The laxity in building up adequate provisions forappearing in the list of Wilful Defaulters of `25 such liabilities is a matter of regulatory concern.lakh and above or Defaulting borrowers of `1 This also has systemic stability issues arisingcrore and above are wrongfully denied credit from under-provisioning and non-compliancefacilities on such grounds. with extant accounting standards. It is, therefore, necessary that banks make properProvisioning Coverage Ratio (PCR) for assessment of their superannuation liabilitiesAdvances and provide for the same from the year in which3.40 As a macro-prudential measure, banks the wage settlements fall due and not from thewere required to maintain PCR of 70 per cent of year in which such settlements are made.gross NPAs with reference to the position as on Road Map for Basel IIIend-September 2010. The surplus of theprovision over and above the prescribed 3.42 The Basel Committee has prescribed aprudential norms should be segregated into a detailed roadmap for smooth transition to Baselseparate account styled as “counter-cyclical III standards between January 1, 2013 andprovisioning buffer” which will be allowed to be January 1, 2019. In this regard, the assessmentused during periods of system-wide downturn shows that Indian Banks are well positioned towith the prior approval of the Reserve Bank. This adjust to the Basel III norms well within thewas intended to be an interim measure till such phase-in period. However, there exist manytime the Reserve Bank introduces a more challenges, such as upgrading risk managementcomprehensive methodology of counter-cyclical systems and meeting the credit needs of aprovisioning taking into account the evolving rapidly growing economy even while adjusting tointernational standards. a more demanding regulatory regime.Provision for Pension Liabilities 6. Supervisory Policy3.41 Banks provide various types of employee Close and Continuous Supervision of Largebenefits such as pension, gratuity in accordance and Systemically Important Banking Groupswith the extant accounting standard AS 15, 3.43 For optimising the supervisory resourceswhich is based on the International Accounting and also to have a more focused attention onStandard IAS 19. Banks are expected to ensure banks, which are systemically important, it was 3 For details, see RBI Annual Report - 2010-11. 42
  • Policy Environmentdecided to reorganise the supervisory processes been redefined. The revised guidelinesand the organisational structure of the pertaining to AFI coverage and method ofDepartment of Banking Supervision (DBS). The drafting AFI reports are designed to sharpen thereorganisation of the Department was made focus and bring out precision in analysis andeffective from April 1, 2011, whereby a new arrive at clear conclusions for enabling thedivision named Financial Conglomerate Reserve Bank to take definitive supervisoryMonitoring Division (FCMD) was created to have actions based on the findings. The guidelinesa system of “close and continuous supervision” have been put in place in the current AFI cycleof 12 large and systemically important banking 2011-12.groups, which account for 52.7 per cent of thetotal assets of the banking system. Under the Initiatives taken by Board for Financialreorganised set up, the supervisory responsibility Supervisionof FCMD would include exercising on-site and 3.46 The Board for Financial Supervision (BFS),off-site supervision, and a more meaningful constituted in November 1994, remains the chiefconsolidated/conglomerate supervision of guiding force behind Reserve Bank’s supervisorybanking groups with a focus on group wide and regulatory initiatives. During July 2010 tocapital adequacy assessment, among others. July 2011, the BFS held 13 meetings. It reviewed 98 inspection reports (25 reports of public sectorSteering Committee to Review Supervisory banks, 30 of private sector banks, 31 of foreignProcesses for Commercial Banks banks, 4 of local area banks, and 8 of financial3.44 A High Level Steering Committee institutions). During the period, the BFS also(Chairman: Dr. K. C. Chakrabarty) has been reviewed 15 summaries of inspection reportsconstituted to assess the adequacy of Reserve and 43 summaries of financial highlightsBank’s supervisory policies, procedures and pertaining to scheduled UCBs classified inprocesses and suggest enhancements for Grade I/II. Some of the important issuesmaking the supervisory policies comparable with deliberated upon by the BFS during the periodglobal standards. Shri B. Mahapatra, Executive are as follows:Director, RBI, Dr. J. R. Varma, Professor, IIM, • Continuing to exercise keen interest in fineAhmedabad, Shri Diwakar Gupta, MD and CFO, tuning of supervisory rating, the BFS soughtState Bank of India, Smt. Chanda Kochhar, MD a complete review of the rating methodology.and CEO, ICICI Bank Ltd., Shri. Basant Seth, The suggestions included: (i) review ofCMD, Syndicate Bank, and Shri M. B. N. Rao, weightages given to sub-parameters; (ii) theRetired CMD, Canara Bank are the members adjustment in composite rating to reflect theand Shri G. Jaganmohan Rao, Chief General deterioration or improvement in the bank’sManager-in-Charge of the Department of performance in various parameters. TheBanking Supervision is the Member Secretary of supervisory rating framework is currentlythe Committee. The Committee is mandated to under review.submit its report by July 31, 2012. • During the period under review, the BFS hadReview of the Format for Annual Financial observed that in order to take advantage ofInspection of Banks favourable market conditions and book3.45 Keeping in view the changes in the banking profits, many banks were resorting to sale ofsystem, the way banks do business and the need securities held under Held to Maturity (HTM)for supervisors to keep pace with the fast category on more than one occasion duringchanging business practices, the process of the the year. In response, as directed by BFS, aAnnual Financial Inspection (AFI) of banks has circular was issued in August 2010 advising 43
  • Report on Trend and Progress of Banking in India 2010-11 banks to disclose market value of shocks. The Whole Firm Liquidity Modification investments held in HTM category and regime which encompasses Indian banks indicate the excess of book value over operating through branches/subsidiaries in the market value for which provision is not UK would enable the UK branch of an Indian made, if the value of sales and transfers of bank to place reliance on unlimited liquidity securities to/from HTM category exceeds 5 resources from anywhere within the whole firm per cent of the book value of investment in (bank). Six Indian banks having presence in the HTM. This disclosure is required to be made UK have applied for “Whole Firm Modification” in “Notes to Accounts” in banks’ audited after obtaining prior approval of the Reserve Annual Financial Statements. In November Bank. Subsequently, agreements were entered 2010, it was clarified that one-time transfer into by the Reserve Bank with FSA in October of securities to/from HTM category with the 2010 to monitor the liquidity of the parent bank approval of Board of Directors permitted at on an ongoing basis in respect of the six banks. the beginning of the accounting year and As per the agreement, the specifications and sales to the Reserve Bank under pre- monitoring of triggers for liquidity insufficiency announced OMO auctions would be in respect of UK branches of Indian banks would excluded from the 5 per cent cap prescribed rest with the parent bank. in August 2010.• The BFS approved a proposal to subject only Reporting of Frauds by Public Sector Banks those foreign banks to Annual Financial 3.48 The Reserve Bank issued a circular in Inspection, which have a business share of October 2010 advising public sector banks more than 0.1 per cent of the market share about the increase in the upper limit for (assets plus off-balance sheet business). reporting of frauds to Central Bureau of Those foreign banks which have a market Investigation (CBI) from `5 crore to `7.5 crore share of less than 0.1 per cent will be and accordingly, all fraud cases involving an inspected once in two years provided their amount of `1 crore and above going up to `7.5 rating is ‘B’ and above. Those foreign banks crore, where staff involvement is prima facie with a market share of less than 0.1 per cent evident must be reported to Anti Corruption and with rating of ‘C’ and less will be Branch of CBI. However, in case where the staff inspected annually. involvement is prima facie not evident, it would• Based on the suggestions of the BFS, it was be advised to CBI’s Economic Offences Wing. decided that as supervisors, the Inspecting Further, all cases involving more than `7.5 crore Officers (IOs) should have access to all the would have to be reported to respective centres reports/review notes prepared by the of Banking Security and Fraud Cell, a Inspection/Audit teams of the bank, some of specialised cell of the Economic Offences Wing which may be from overseas and may not be for major bank fraud cases. available locally. Internal Vigilance in Private Sector/ForeignWhole Firm Liquidity Modification Regime Banksin the UK: Implications for Indian Banks 3.49 In order to align the vigilance function in3.47 A new liquidity regime through increased private and foreign banks to that of the publicinternational cooperation in financial sector banks, the existing vigilance functions of asupervision arrangements was proposed by few private sector and foreign banks wereFinancial Services Authority (FSA), UK to make mapped with the existing guidelines in thethe banking system more robust to withstand matter and it was observed that the practices 44
  • Policy Environmentvary widely among the banks. Accordingly, 46(4)(i) of the Banking Regulation Act, 1949. Thedetailed guidelines aimed at bringing about penalties have been imposed for contravention ofuniformity and rationalisation in the function of various directions and instructions issued by theinternal vigilance were issued for private sector Reserve Bank in respect of derivativeand foreign banks in May 2011 to address all transactions. The contraventions relate toissues arising out of lapses with regard to failure to carry out proper due diligence on usercorruption, malpractices and frauds for timely appropriateness and suitability of products, andand appropriate action. Private sector banks and selling derivative products to users not havingforeign banks operating in India were advised, proper risk management policies, among others.inter alia: (i) to appoint Chief of Internal Vigilance(CIV) whose role has also been defined in the Return to Monitor Interest Rate Sensitivityguidelines; (ii) to identify sensitive positions and 3.52 The Reserve Bank has introduced a newhave board-approved guidelines regarding return to monitor interest rate sensitivity basedrotation of staff and mandatory leave by staff on duration gap and has issued a circular inhandling sensitive desks. November 2010 for details on computing the duration gap. The details about the return andGuidelines for Forensic Scrutiny procedure for calculation are illustrated in3.50 Forensic scrutinies at certain identified Box III.1.banks were conducted by the Reserve Bank dueto occurrence of large value frauds and sharp 7. Regional Rural Banksincrease in number of frauds at such banks toprimarily identify the policy gaps, if any, and 3.53 Regional Rural Banks (RRBs) are region-adequacy of controls. Based on the findings of based and rural-oriented banks, which havethe scrutinies, the operating framework for been set up to correct the regional imbalancestracking frauds and dealing with them was and functional deficiencies in the institutionaladvised to be structured along the lines credit structure vis-à-vis the weaker sections ofof “Detection and Reporting of Frauds, the populace. New credit delivery modelsCorrective Action and Preventive and Punitive like business correspondents, businessAction” circular, issued earlier in this regard. facilitators as well as new technologies areThe banks were advised to evolve suitable being experimented with, so as to reach thecontrols and disincentives in their HR process unreached customers. In this regard, RRBs areand internal inspection/audit process, which well placed to carry forward the movement ofshould focus on ‘fit and proper criteria’ financial inclusion due to their local characterfor posting of staff in specialised branches and and familiarity with the local a database at offices about staff havingaptitude for investigation/data analysis and Amalgamation of RRBsprovide them training in investigation and 3.54 On account of the consolidation andforensic audit. amalgamation process which had started in September 2005, the number of RRBs has comePenal Actions for Violations of RBI’s down to 82. As on date, out of 82 RRBs, 80 RRBsGuidelines on Derivative Transactions have been included in the 2nd Schedule of the3.51 Penalties have been imposed on 19 RBI Act, 1934. At present, two RRBs viz.,commercial banks by the Reserve Bank in Paschim-Banga Gramin Bank, West Bengal andexercise of the powers vested with it under the Kalinga Gramin Bank, Orissa are ineligible forprovisions of Section 47A(1)(b) read with Section scheduling. 45
  • Report on Trend and Progress of Banking in India 2010-11 Box III.1: Monitoring Interest Rate Sensitivity based on Duration Gap Analysis Interest rate risk is the risk where changes in market interest computing the Modified Duration Gap (MDG). The RSA and rates affect a bank’s financial position. Changes in interest RSL include the rate-sensitive off-balance sheet assets and rates impact a bank’s earnings through changes in its Net liabilities as well. MDG can be used to evaluate the impact on Interest Income (NII). Changes in interest rates also impact a the MVE of the bank under different interest rate scenarios. bank’s Market Value of Equity (MVE) or Net Worth through The past few years have seen banks’ foray into financing long- changes in the economic value of its rate-sensitive assets, term assets, such as home loans and infrastructure projects. liabilities and off-balance sheet positions. The interest rate risk Banks have been allowed to raise funds through long-term can thus be viewed from two perspectives, viz., ‘earnings bonds with a minimum maturity of five years to the extent of perspective’ and ‘economic value perspective’. Generally, the their exposure of residual maturity of more than five years to former is measured using the Traditional Gap Analysis (TGA) the infrastructural sector. Hence, the time buckets viz; ‘over 5 and the latter is measured using more sophisticated Duration years and up to 7 years’, ‘above 7 years and up to 10 years’ and Gap Analysis (DGA). ‘over 10 years and up to 15 years’ and ‘over 15 years’, have been incorporated in the new return. Presently, the Reserve Bank monitors the interest rate risk of banks through a monthly return on interest rate sensitivity The step-by-step approach for computing modified duration using the TGA. The focus of the TGA is to measure the level of gap has been detailed in the Reserve Bank circular a bank’s exposure to interest rate risk in terms of sensitivity (DBOD.No.BP.BC.59/21.04.098/2010-11) dated November of its NII to interest rate movements over usually a one-year 4, 2010. Banks will be required to compute their interest rate time horizon. It involves bucketing of all Rate-Sensitive risk position, in each currency (including Rupees) by applying Assets (RSA) and Rate-Sensitive Liabilities (RSL) and off- DGA to RSA and RSL items in that currency, where either the balance sheet items as per residual maturity/re-pricing date assets/liabilities are 5 per cent or more of the bank’s total in various time bands and computing Earnings at Risk (EaR) global assets/liabilities. The interest rate risk position in all or the loss of income under different interest rate scenarios other residual currencies has to be computed separately on an over one year. aggregate basis. The framework prescribed is aimed at determining the impact on the MVE arising from changes in In addition to the existing return on Interest Rate Sensitivity the value of interest rate sensitive positions across the whole under Traditional Gap Analysis, a new return is being bank i.e., both in the banking and trading books. Banks shall introduced to monitor the interest rate risk using DGA, called submit the report on interest rate sensitivity as per DGA in the Interest Rate Sensitivity under Duration Gap Analysis (IRSD). stipulated format with effect from June 30, 2011 on a quarterly The DGA involves bucketing of all RSA and RSL as per residual basis till March 31, 2012, and on a monthly basis with effect maturity/re-pricing dates in various time bands and from April 30, 2012.Branch Licensing Policy for RRBs Amortisation of Gratuity3.55 The Reserve Bank has recently liberalised 3.57 Owing to enhancement of maximum limitbranch authorisation policy considerably for for payment of gratuity from `3.50 lakh to `10.00RRBs and allowed them to open branches in lakh, RRBs liability towards payment ofTier 3 to Tier 6 centres (with population of up to additional premium to LIC has increased49,999 as per 2001 Census) without considerably. Hence, they have been permitted toprior authorisation from the Reserve Bank, amortise the enhanced expenditure over a periodsubject to reporting to respective Regional of five years beginning with the financial yearOffices of the Reserve Bank, provided they fulfill ending March 31, 2011 subject to a minimum ofcertain conditions as specified in the relevant 1/5th of the total amount involved every year.circular. 8. Cooperative BanksCBS Implementation Urban Cooperative Banks (UCBs)3.56 As on September 30, 2011, 65 out of 82 3.58 Cooperative banks assume importance inRRBs have migrated fully to core banking the Indian financial system under the inclusivesolutions (CBS), and implementation of CBS is in growth agenda, which has laid emphasis onprogress in the remaining RRBs. All sponsor financial inclusion. During 2010-11, a numberbanks have committed to implement CBS in of policy initiatives have been taken toRRBs by the prescribed time line i.e., September strengthen cooperative banking in India, details2011. of which are as follows: 46
  • Policy EnvironmentOpening of off-site ATMs by UCBs - banked centres. Some of the recommendationsLiberalisation by the Expert Committee are as follows:3.59 According to the liberalised policy, • UCBs which want to operate in the North-Financially Sound and Well-Managed (FSWM) east or only in one State would need aUCBs can open off-site ATMs over and above minimum capital of `50 lakh. The UCBstheir annual business plan provided they meet which want to operate in other States butthe following criteria: (i) maintenance of a keeping majority of branches in ‘C’ and ‘D’minimum CRAR of 10 per cent; (ii) net NPAs category population centres would needbeing less than 5 per cent; (iii) no default in the minimum capital of `100 lakh. For UCBsmaintenance of CRR/SLR during the preceding which want to operate in other Statesfinancial year; (iv) continuous net profit for the without any requirement in ‘C’ and ‘D’last 3 years; (v) sound internal control system categories should have a minimum capitalwith at least two professional directors on the of `300 lakh. The UCBs which want toBoard; and (vi) regulatory comfort based on track operate in more than one State after fiverecord of compliance with the provisions of years of successful operations would need aBR Act, 1949 (AACS), RBI Act, 1934 and minimum capital of `500 lakh.instructions/directions issued by the • There should be segregation of theReserve Bank from time to time. In addition, the ownership of the UCB as a cooperativeminimum owned funds of the FSWM society from its functioning as a bank. TheUCBs should be commensurate with entry new organisation structure shall consist of apoint capital norms for the centre where the off- Board of Management (BoM) in addition tosite ATM is proposed/where the UCB is the Board of Directors (BoD).registered. • The BoD will establish a BoM, consisting ofNew Bank Licenses persons with professional skills, which shall3.60 As announced in the Annual Policy be entrusted with the responsibility for theStatement 2010-11, the Reserve Bank set up an control and direction of the affairs of theexpert committee (Chairman: Shri Y.H. bank assisted by a CEO who shall have theMalegam) comprising all stakeholders for responsibility of the management of thestudying the advisability of granting licenses to Bank. The appointment of the CEO shall beset up new UCBs. The expert committee subject to the prior approval of the Reservesubmitted its report on August 18, 2011. Bank.The Committee is of the view that, there is need Guidelines on Trading of Currency Optionsfor a greater presence of UCBs, especially in by UCBsunbanked districts and in centres havingpopulation of less than 5 lakh. In this regard, it is 3.61 UCBs licensed as Authorised Dealersnecessary to encourage new entrants to open (Category I) were allowed to participate in thebanks and branches in States and districts exchange traded currency option marketwhich are unbanked or inadequately of a designated exchange, recognised bybanked. The existing well-managed cooperative SEBI as clients only, subject to RBI (Foreigncredit societies with sound track record should Exchange Department) guidelines only for thebe given priority for granting licenses as purpose of hedging underlying forex exposureUCBs particularly in unbanked or inadequately arising from customer transactions. 47
  • Report on Trend and Progress of Banking in India 2010-11Exposure to Housing, Real Estate and Payment of Gratuity Act, 1972, UCBs wereCommercial Real Estate Sectors allowed to defer the expenditure related to enhancement of gratuity, if not fully charged to3.62 As announced in the Second Quarter the Profit and Loss Account during the financialReview of Monetary Policy 2010-11, it was year 2010-11, over a period of five yearsdecided that UCBs’ exposures to housing, real beginning with the financial year ended Marchestate and commercial real estate loans would be 31, 2011 subject to charging to the Profit andlimited to 10 per cent of their total assets, Loss Account a minimum of 1/5th of the totalinstead of 15 per cent of deposits, which can be amount involved every year. UCBs have toexceeded by an additional limit of 5 per cent of disclose the expenditure so deferred in theirassets in case of dwelling units costing upto `10 Annual Financial Statements.lakh, subsequently increased to `15 lakh forhousing loans granted to individuals. Further, it Financing of Self-Help Groups (SHGs) andwas also decided that UCBs would not be Joint Liability Groups (JLGs)allowed to exceed the aggregate ceiling for realestate, commercial real estate and housing loans 3.67 With a view to further expanding theto the extent of refinance availed from higher outreach of UCBs and opening an additionalfinancing agencies and National Housing Bank channel for promoting financial inclusion, which(NHB). would also help them in achieving the sub-target of lending to weaker sections, UCBs werePrudential Norms on Investment in Zero allowed to lend to SHGs/JLGs. Loans to SHGs/Coupon Bonds (ZCBs) JLGs for agricultural and allied activities would be considered as priority sector advances.3.63 UCBs were advised not to invest in ZCBs Further, other loans to SHGs/JLGs up tounless the issuer builds up a sinking fund for all `50,000 would be considered as Micro Creditaccrued interest and keeps it invested in liquid and hence treated as priority sector (Government Bonds). Lending to SHGs, which qualify as loans toLimit for Housing Loans under Priority priority sector, would also be treated as part ofSector Advances lending to weaker sections.3.64 The limit for housing loans considered Internet Banking for Customers of UCBsas a priority sector was increased from `20 lakhto `25 lakh for housing loans sanctioned by 3.68 Scheduled UCBs having a minimum netUCBs on or after April 1, 2011. worth of `100 crore, CRAR of at least 10 per cent, net NPAs less than 5 per cent and have earnedAccounting Procedure for Investment: net profit continuously in the last three yearsSettlement Date Accounting were allowed to provide internet banking facility3.65 UCBs were advised that to bring in to their customers subject to obtaining prioruniformity in the practice adopted by banks approval of the Reserve Bank.while accounting for investing in Governmentsecurities, they should follow "Settlement Date" Rural Cooperative Banksaccounting for recording both outright and ready Status of Licensing of Cooperative Banksforward purchase and sale transactions inGovernment securities. 3.69 There are 31 State Cooperative Banks (StCBs) and 371 District Central CooperativeEnhancement of Gratuity Limits - Prudential Banks (DCCBs) in the country. ConsequentRegulatory Treatment to the issuance of revised guidelines on3.66 Consequent to the increase in the gratuity licensing of StCBs and DCCBs, ten StCBs andpayment on account of the Amendment to 160 DCCBs were licensed. As on June 30, 2011, 48
  • Policy Environmentseven StCBs and 136 DCCBs were still Introduction of Provision of 0.25 per centunlicensed. for Standard Assets of NBFCs 3.73 In the interest of counter-cyclicality andLimit imposed on Housing Finance for State also to ensure that NBFCs create a financialand Central Cooperative Banks buffer to protect themselves from the adverse3.70 State and Central Cooperative Banks were effects of economic downturns, provisioning ofadvised to limit the exposure to housing finance 0.25 per cent of the outstanding standard assetsto 5 per cent of their total assets as against 10 has been introduced.per cent of their total loans and advances. Participation in Currency Options9. Non-Banking Financial Companies 3.74 NBFCs (excluding RNBCs) have beenAmendment to Definition of Infrastructure permitted to participate in the designatedLoan currency options exchanges recognised by SEBI, subject to RBI (Foreign Exchange3.71 The term “Infrastructure Loan” which had Department) guidelines, only for the purpose ofbeen defined in Para 2(viii) of Non-Banking hedging their underlying forex exposuresFinancial (Deposit Accepting or Holding) with an appropriate disclosure in their balanceCompanies Prudential Norms (Reserve sheets.Bank) Directions, 2007 and Non-BankingFinancial (Non-Deposit Accepting or Holding) Submission of Data to Credit InformationCompanies Prudential Norms (Reserve Bank) CompaniesDirections, 2007, respectively, were amended.Consequently, NBFCs have been advised to 3.75 NBFCs are required to become a memberinclude “Telecom Towers” under infrastructure. of at least one credit information company. TheyFurther NBFCs have been advised that only are required to provide the credit information toCredit Rating Agencies (CRAs) approved by the the credit information companies in theReserve Bank can give the rating to prescribed format. NBFCs are also required toInfrastructure Finance Companies (IFCs). provide historical data in order to enable the new credit information companies to develop a robustRegulatory Framework for Core Investment database.Companies (CICs) Balance Sheet and Profit and Loss Account3.72 Under the extant regulatory framework, InformationCore Investment Companies (CICs) with an assetsize of less than `100 crore are exempt from the 3.76 NBFCs are advised to prepare theirrequirements of registration with the Reserve balance sheet and profit and loss account as onBank. However, CICs with an asset size of `100 March 31 every year. Any extension of date ofcrore or more and accessing public funds would balance sheet would require prior approval ofbe considered as Systemically Important Core the Reserve Bank. Further, NBFCs are requiredInvestment Companies (CICs-ND-SI) and would to submit a certificate from Statutorybe required to obtain Certificate of Registration Auditor with respect to the position of the(CoR) from the Reserve Bank under Section 45- company as on March 31 every year within oneIA of the Reserve Bank of India Act, 1934 even if month from the date of finalisation of the balancethey have been advised in the past that sheet and in any case not later than December 30registration would not be required. of that year. 49
  • Report on Trend and Progress of Banking in India 2010-11NBFCs not to be Partners in Partnership Setting up of Central Electronic RegistryFirms under the SARFAESI Act, 20023.77 On account of the risks involved in NBFCs 3.81 To prevent frauds in loan cases involvingassociating themselves with partnership firms, multiple lending from different banks on theNBFCs are prohibited from contributing capital same immovable property, a central electronicto any partnership firm or to be partners in registry has been established under thepartnership firms. In cases of existing Securitisation and Reconstruction of Financialpartnerships, NBFCs have been advised that Assets and Enforcement of Security Interestthey may seek early retirement from the (SARFAESI) Act.partnership firms. Opening of Branch/Subsidiary/Joint Venture/Representative Office orReady Forward Contracts in Corporate Debt Undertaking Investment Abroad by NBFCsSecurities 3.82 NBFCs desirous of making any overseas3.78 NBFCs registered with the Reserve Bank investment must obtain ‘No Objection’ (NoC)(other than Government companies as defined in under the terms of Regulation of the ForeignSection 617 of the Companies Act, 1956) are Exchange Management (Transfer or Issue of Anyeligible to participate in repo transactions in Foreign Security) (Amendment) Regulations,corporate debt securities. NBFCs participating in 2004 and the Non-Banking Financialsuch repo transactions have been advised to Companies (opening of Branch/Subsidiary/comply with the Directions and accounting Joint Venture/Representative Office orguidelines issued by the Reserve Bank. All Undertaking Investment Abroad by NBFCs)Systemically Important Non-Deposit taking Non- Directions, 2011 issued by the Reserve BankBanking Financial Companies (NBFCs-ND-SI) before making such investment, from theare eligible to participate in the repo transactions. Regional Office of the Reserve Bank in whose jurisdiction the head office of the company isLoan Facilities by NBFCs to the Physically/ registered.Visually Challenged Entry of NBFCs into Insurance Business3.79 NBFCs have been advised that there shallbe no discrimination in extending products and 3.83 NBFCs registered with the Reserve Bankfacilities including loan facilities to the physically would be permitted to set up a joint venture (JV)/visually challenged applicants on grounds of company for undertaking insurance businessdisability. with risk participation, subject to certain safeguards: (i) the maximum equity contributionEnhancing CRAR to 15 Per cent such an NBFC can hold in a JV company is 50 per cent of the paid-up capital of the insurance3.80 It was decided to align the minimum company; (ii) subsidiary or company in the samecapital ratio of all deposit-taking NBFCs with group of an NBFC or of another NBFC engaged inthat of NBFCs-ND-SI at 15 per cent. Accordingly, the business of a non-banking financialall deposit taking NBFCs have been advised to institution or banking business shall not bemaintain a minimum capital ratio consisting of allowed to join the insurance company on riskTier I and Tier II capital, which shall not be less participation basis. In this regard, it was clarifiedthan 15 per cent of its aggregate risk weighted that in case, if more than one company in theassets on balance sheet and risk adjusted value same group of the NBFC wishes to take a stakeof off-balance sheet items with effect from March in the insurance company, the contribution by31, 2012. all companies in the same group shall be 50
  • Policy Environmentcounted for the limit of 50 per cent prescribed for provide complaint templates at all ATM sites forthe NBFC in such an insurance JV. lodging ATM-related complaints.Returns to be Submitted by NBFCs – Revised Real Time Gross Settlement (RTGS) andFormats National Electronic Fund Transfer System (NEFT) Services3.84 In terms of extant instructions, all NBFCs(excluding RNBCs) are required to file various 3.88 To ensure prompt redressal of customerreturns related to deposit acceptance, prudential complaints regarding RTGS transactions, banksnorms and capital market exposure, among have been advised to use existing Customerothers. It has been decided to rationalise the Facilitation Centres set up for NEFT andreturns to streamline the reporting system and RTGS customer complaints. To facilitateto improve the present method of collecting data. easy reconciliation of RTGS/NEFT returnThe Reserve Bank has since hosted the format of transactions, banks have been advised tothe revised returns on the Bank’s website, viz., provide necessary information to customers on<>. NBFCs shall return transactions in the account statement.submit all the returns online in the revised Further, banks have also been advised to furnishformats. remitter details to customers in their pass book or account statement for credits received through10. Customer Service in Banks NEFT/National Electronic Clearing Service3.85 The Reserve Bank focuses on customer (NECS) / Electronic Clearing System (ECS).empowerment through enhanced dissemination Cheque Drop-Box Servicesof information. Towards providing more efficientand transparent services to customers, a 3.89 In view of complaints about refusal bynumber of initiatives were taken in 2010-11. banks to give acknowledgements to customers for cheques tendered at the counter, compellingCredit Card Services them to drop them in the drop-box, banks have3.86 As there have been numerous complaints been advised to ensure stricter compliance withabout credit card operations of banks, the the extant instructions regarding cheque drop-Reserve Bank advised banks to strictly adhere to box facility. Banks have been further advised thatthe guidelines issued in the Master Circular on no branch should refuse to accept cheques overCredit Card Operations of July 1, 2011, both in the counter and give proper acknowledgement.letter and spirit. A failure to observe these Loan Servicesguidelines could lead to suitable penal action,including levy of monetary penalties under the 3.90 With a view to bring fairness andrelevant statutory provisions. transparency, banks have been advised to disclose all in cost , inclusive of all chargesOnline Alerts for ATM Services involved in the processing and sanction of loans3.87 The Reserve Bank has advised banks to to enable the customer to compare the chargesput in place a system of online alerts latest by with other sources of finance. Banks needJune 30, 2011 to cardholders, for all types of to ensure that these charges are non-transactions, irrespective of the amount involved discriminatory.through various channels due to the increased Committee on Customer Service in Banksinstances of fraudulent withdrawals at ATMs.Further, banks have been also advised to 3.91 The Reserve Bank has constituted a 51
  • Report on Trend and Progress of Banking in India 2010-11Committee to study various aspects of customer The theme for celebration, proposed by theservice in banks. The major observations made Ministry of Consumer Affairs, was “Consumersby the Committee are given in Box III.2. Discharge Your Responsibilities: Assert Your Rights”. To commemorate the occasion, theCustomer Satisfaction Survey: ATM Department of Consumer Affairs proposes toTransactions bring out a book titled “Consumer Protection in3.92 The Reserve Bank commissioned a survey India” containing papers written by experts,to assess customer satisfaction in the usage of which would be released in December 2011.ATMs across the country. The Survey covered600 ATMs distributed proportionately over Exclusive Board Meetings on Customermetro, urban, semi-urban and rural regions, Serviceconstituting 1 per cent of the total number of 3.94 To increase Board oversight on customer60,000 ATMs in the country. The interim report service-related issues in banks, the Annualwas presented to the Board for Payment and Monetary Policy - 2010-11 had announced thatSettlement Systems in June 2011. The major banks should devote exclusive time in a Boardfindings of the Survey inter alia were as follows: meeting once every six months to deliberate on(i) cards were mainly used for withdrawing cash these issues. All banks would submit a detailedor shopping purposes; (ii) the use of debit cards memorandum regarding customer service to thefor bills payment/ticket purchase was still low; Board of Directors, once every six months and(iii) the use of debit cards for shopping was the initiate prompt corrective action, whereverhighest in Maharashtra and Andhra Pradesh; (iv) quality and skill gaps were observed.the use of cards for shopping was more amongthe youth; (v) females used cards with less 11. Financial Marketsfrequency. Adherence to Foreign Exchange ManagementSilver Jubilee Year of Consumer Protection Act (FEMA) Guidelines for Online PaymentAct Transactions3.93 The year 2010-11 was the Silver Jubilee 3.95 The Online Payment Gateways haveYear of the Consumer Protection Act, 1986. emerged as popular modes of e-commerce and Box III.2: Report of the Committee on Customer Service in Banks The Reserve Bank constituted a Committee (through a Board The Committee submitted its report to the Bank in July 2011. Memorandum dated May 26, 2010) under the chairmanship According to the Committee, the major expectations of of Shri M. Damodaran, former Chairman, SEBI to examine consumers are that banks should: (i) have a customer-centric banking services rendered to retail and small customers, approach; (ii) render fair and non-exploitative treatment and including pensioners. The Committee also had a adhere to full disclosure of information; (iii) put in place an mandate to look into the grievance redressal mechanism expeditious grievance redressal; (iv) provide a simple deposit prevalent in banks, its structure and efficacy, and account instead of suo moto offering bouquet services without suggest measures for expeditious resolution of customer demand and charging for the same. complaints. The recommendations of the Committee are based on the The Committee had interactions with various stakeholders above customers expectations. They include inter alia: (i) on all aspects of customer service fair treatment, creation of a toll free Common Bank Call Number; (ii) improvement in services to pensioners, attitude of the providing plain vanilla savings account without prescription bank staff towards the small and rural customers, service of minimum balance; (iii) setting up of a trusted third party charges and fees, transparency in operations, grievance KYC data bank, which can be relied upon for KYC purposes; redressal, promptness in service, education and information (iv) providing small remittances at reasonable price; (v) zero on new products, and customer rights and expectations, liability against loss in ATM and online transactions; (vi) among others. The Committee also called for public enhancement of Deposit Insurance and Credit Guarantee suggestions. Corporation (DICGC) cover to `5,00,000. 52
  • Policy Environmenthave facilitated exports, particularly in small- stakeholders on the draft guidelines prepared byvalue goods and services. The Reserve Bank has the Group, final guidelines have been issued inissued guidelines in November 2010 May 2011. The salient features of the guidelines,to Authorised Dealer (AD) banks allowing them among others, are as follows:to offer the facility of repatriation of export- i. The CDS shall be permitted on listedrelated remittances (up to US$ 500 per corporate bonds, unlisted but rated bondstransaction) by entering into standing of infrastructure companies and unlisted/arrangements with Online Payment Gateway unrated bonds issued by the SpecialService Providers subject to certain conditions. Purpose Vehicles (SPVs) set up byEnhancing the existing limit per transaction of infrastructure companies as referenceUS$ 500 is under consideration. obligations.Over-the-Counter (OTC) Foreign Exchange ii. The reference entities shall be single legalDerivatives resident entities.3.96 The comprehensive guidelines on OTC iii. The permitted participants have beenforeign exchange derivatives and overseas categorised into:hedging of commodity price and freight risks a) Market Makers: Participants, such aswere issued on December 28, 2010. The commercial banks, NBFCs and stand-important elements of the revised guidelines, alone PDs are permitted to undertakewhich became effective in February 2011, are both protection buying and protectioninter alia: (i) AD category banks can only offer selling subject to satisfying certainplain vanilla European Cross Currency Options; eligibility norms. Insurance companies(ii) allowing embedded cross currency option in and mutual funds can act as market-the case of foreign currency-rupee swaps; (iii) makers subject to the approval of theirpermitting the use of cost reduction structures, respective regulators.both under the contracted exposures and past b) Users: Participants, among others,performance routes, subject to certain include commercial banks, PDs,safeguards; (iv) undertaking swaps to move from NBFCs, mutual funds, insuranceRupee liability to forex liability is allowed, subject companies and listed corporates, whoto certain safeguards. can hedge only their underlyingIntroduction of Credit Default Swaps (CDS) exposures. Users cannot purchasefor Corporate Bonds CDS without having the underlying exposure and the protection can be3.97 The Reserve Bank had issued draft bought only to the extent (both in termsguidelines on introduction of CDS in 2003 and of quantum and tenor) of such2007. However, taking into account the adverse underlying risk.developments in the international financialmarkets, the issuance of final guidelines was iv. For users, physical settlement isdeferred. Following the proposal of introducing mandatory. Market makers can opt for anyplain vanilla over-the-counter (OTC) single-name of the three settlement methods (physical,CDS for corporate bonds made in the Second cash or auction settlement), provided theQuarter Review of Monetary Policy of 2009-10, CDS documentation includes suchan internal Working Group (Convener: Shri R. N. settlement method.Kar) was constituted to finalise the operational v. Reporting requirements: It is mandatory forframework. Based on the feedback received from market makers to report their CDS trades 53
  • Report on Trend and Progress of Banking in India 2010-11 within 30 minutes from the deal time, on customers’ preference for electronic modes of CDS trade reporting platform. As CDS markets are exposed to various Prepaid Payment Instruments risks, market participants are required to 3.101 Keeping in view the increasing popularity take these risks into account and build of prepaid payment instruments, the guidelines appropriate risk management systems. The issued in April 2009 were revisited in November guidelines prescribe counterparty credit 2010 and the following amendments inter alia exposure limits, PV01 limit (Change in price were effected: (a) Extension of the use of semi- of `100 nominal bond for one basis point closed prepaid payment instruments used for change in yield) and an independent risk payment of utility bills for the purchase of travel management framework for monitoring and tickets; (b) Permission to banks to issue semi- controlling of all aspects of risks. closed prepaid payment instruments through agents and BCs. Further, the maximum value of12. Payment and Settlement System prepaid instruments that can be used in the3.98 The Reserve Bank has set up a robust form of mobile-wallets (m-wallets) has beentechnology-based payment and settlement increased from `5,000 to `50, infrastructure with enhancedassurance of uninterrupted and efficient Mobile Banking Transactionsprovision of services. Major policy initiatives 3.102 Recognising the true potential of usingtaken during the year to further strengthen the mobile phones as a banking tool towardspayment and settlement system were as follows: furthering financial inclusion, the bank-led model of mobile banking has been adopted,Paper Clearing: Express Cheque Clearing which would extend all banking facilities,System including money transfer facility, through the3.99 To impart more efficiency to clearing mobile channel. The Reserve Bank has so farprocess in non-MICR clearing houses, an approved proposals of 50 banks to commenceadvanced clearing house automation package mobile banking services. The Bank has alsoExpress Cheque Clearing System (ECCS) has authorised the NPCI to provide a seamless,been introduced. The ECCS would accept multi- instant, 24X7, mobile-based inter-bank funduser inputs in a networked environment, core- transfer system through mobile phones, calledbanking integration and graphic interface Inter-Bank Mobile Payment Service.compatibility. The National PaymentsCorporation of India (NPCI) has been entrusted Card-based Transactionswith the task of operationalising this package. 3.103 Given the increasing usage of cards (credit/debit/prepaid) issued by banks, there isElectronic Payment Systems a definite need to make both Card Present (CP),3.100 To provide near-to-real-time funds where card is swiped at ATMs and Points of Saletransfer facility to retail customers, as also to (PoS), and Card Not Present (CNP) transactions,cater to the stock market timings, 11-hourly safe and secure. An important step taken by thesettlements on week days and five-hourly Reserve Bank, which is unique globally, is thesettlements on Saturdays in National Electronic mandate given to banks to provide additionalFund Transfer (NEFT) was introduced in March authentication for all CNP transactions based on2010, which has now been extended to over information not available on the card. The banks79,000 branches. This is expected to enhance introduced additional authentication for CNP 54
  • Policy Environmenttransactions except the Interactive Voice compensation between the issuing andResponse (IVR) transactions in April 2009, and acquiring banks.extended the same to all IVR transactions inFebruary 2011. The mandate presently applies Oversight of Payment Systemsto all transactions using cards issued in India for 3.105 To ensure that the payment systemspayments on merchant sites where no outflow of operate in a safe and efficient manner and in lineforeign exchange is contemplated. This initiative with extant policy prescriptions, the Reservehas increased the confidence of customers in Bank has initiated a process of assessment,this channel leading to a steep fall in the frauds comprising both off-site surveillance and on-sitein e-commerce transactions. The Reserve Bank inspections complimented by markethas recently constituted a Working Group to intelligence. As part of the off-site surveillance, alook into the issue of security of all CP database on the various payment instruments,transactions; the major recommendations of the their volume and value has been created andGroup are discussed in Box III.3. placed on the RBI website. An assessment template has been devised to aid authorisedEfficiency in the ATM Delivery Channel entities to carry out a self-assessment of their3.104 To improve the operational efficiency of operations, risk management and businessATMs for customers, the Reserve Bank in May continuity arrangement.2011 has inter alia advised banks: (a) To reducethe time limit for resolution of customer 13. Technological Developmentscomplaints from 12 working days to seven 3.106 Technology is central to the design andworking days from the date of receipt of the delivery of banking services. The modern-daycustomer complaint; (b) The customer is entitled banking services are critically dependent onto receive compensation for delay at the rate of technological innovation and improvement.`100 per day, provided the complaint is lodged During 2010-11, several new initiatives werewith the issuing bank within 30 days from the taken by the Reserve Bank towards improvingdate of the transaction; (c) All disputes regarding the banking sector technology.ATM-failed transactions should to be settled by Business Continuity Management andthe issuing bank and acquiring bank only Disaster Recoverythrough the ATM system provider leaving noscope of bilateral settlement arrangement 3.107 During the year, periodical drills wereoutside the dispute resolution mechanism of the conducted in order to ensure effectiveness of thesystem provider. This measure would bring Business Continuity Management and Disasterdown the instances of disputes in payment of Recovery (DR) arrangements for shared Box III.3: Recommendations of the Working Group on Securing Card Present Transactions A Working Group was constituted by the Reserve Bank on biometric finger-print capture in lieu of PIN at the ATM and March 31, 2011 for recommending measures to secure all PoS for 18 months; (d) Based on the above recommendations, Card Present (CP) transactions. The Group, which submitted a decision should be taken to introduce Euro pay Master its report on May 31, 2011, made inter alia the following Card Visa (EMV) Chip and PIN for credit cards and debit recommendations: (a) The technology and payment cards for all domestic transactions within five and seven infrastructure like implementation of Unique Key Per years, respectively; (e) EMV Chip Card and PIN should be Terminal (UKPT) and Terminal Line Encryption (TLE) should issued in lieu of Magstripe cards when at least one purchase be strengthened within 18-24 months; (b) An additional is evidenced at an overseas location. The Report was placed factor (Personal Identification Number (PIN) or Biometric) for on the RBI website for public comments. The all domestic debit card transactions should be introduced recommendations of the Group have been accepted by the within 24 months; (c) After monitoring the progress made in Bank and appropriate directions have been issued in the roll-out of Aadhaar UID, it may be considered to use the September 2011. 55
  • Report on Trend and Progress of Banking in India 2010-11infrastructure, and payment and settlement NG-RTGS project is expected to be implementedsystems. A quarterly report on the Business by December 2012.Continuity Planning (BCP)-DR and VulnerabilityAssessment and Penetration Testing (VAPT) 14. Banking Sector Legislationexercise conducted by commercial banks at their 3.111 A number of important legislativeend was obtained. The major points emerging changes have either been initiated or effectedfrom these exercises have been included as during the year, which pave way for re-inputs for analysis in the Financial Stability examination of banking laws, creation of theReport brought out by the Reserve Bank. inter-regulatory mechanism in the form of Financial Stability and Development CouncilIT Vision Document - 2011-17 (FSDC) and strengthening of Reserve Bank’s3.108 A High Level Committee (Chairman: Dr. powers with respect to commercial banks.K. C. Chakrabarty) and members from IIT, IIM,IDRBT, Banks, and the Reserve Bank prepared Constitution of the Financial Sectorthe “IT Vision Document – 2011-17”, for the Legislative Reforms Commission (FSLRC)Reserve Bank and banks, which provides an 3.112 The FSLRC has been constituted underindicative road map for enhanced usage of IT in the Chairmanship of Justice B.N. Srikrishna bythe banking sector. the Central Government in March 2011, with a view to rewriting, streamlining and harmonisingAutomated Data Flow (ADF) and New financial sector laws, rules and regulations withGeneration RTGS (NG-RTGS) the requirements of India’s growing financial3.109 In order to improve the quality and sector. The Terms of Reference of theefficiency of regulatory reporting, a project on Commission inter alia include the following: (i)straight through flow of data (ADF) from banks to examining the architecture of the legislative andthe Reserve Bank has been taken up. Banks regulatory system governing the Indian financialhave been advised to submit a roadmap sector; (ii) examining if public feedback for draftindicating returns which can be sourced directly subordinate legislation should be madefrom their systems to a centralised repository for mandatory, with exception for emergencysubmission to the Reserve Bank. The project is measures and; (iii) examining the mostexpected to be completed by December 2012. appropriate means of oversight over regulators3.110 As indicated in the Annual Monetary and their autonomy from the Government.Policy Statement for 2010-11, a Working Group The Securities and Insurance Lawscomprising representatives from the Reserve (Amendment and Validation) Act, 2010Bank and select commercial banks wasconstituted for preparing an approach for 3.113 The Act, effective from June 18, 2010,implementation of next generation RTGS. The has amended the Reserve Bank of India Act,Group submitted its report in August 2010, 1934, the Insurance Act, 1938, the Securitieswhich has since been accepted. The Group has Contracts (Regulation) Act, 1956 and thesuggested several new features in the new Securities and Exchange Board of India Act,generation RTGS (NG-RTGS), such as advanced 1992. As noted in the RBI Annual Report 2010-liquidity management facility, extensible mark- 11, a new chapter on “Joint Mechanism” hasup language-based messaging system and real been inserted in the Reserve Bank of India Act,time information and transaction monitoring. 1934. The Chapter provides for a JointThe implementation of the Group’s Mechanism, consisting of Union Financerecommendations has been initiated and the Minister as its ex-officio Chairperson, Governor, 56
  • Policy EnvironmentReserve Bank, as its ex-officio Vice-Chairman, policy developments have been broadly in-syncFinance Secretary and Chairpersons of SEBI, with the major policy objectives of maintainingIRDA and Pension Fund Regulatory and price stability, while supporting economicDevelopment Authority (PFRDA), as its members recovery, financial stability, financial inclusionto resolve any difference of opinion among the and financial sector development.regulators. The Act provides for a reference being 3.116 During the year, the Reserve Bank tookmade to the Joint Committee only by the important policy decisions with regard toregulators and not by the Central Government. forming draft guidelines about granting newThe decision of the Joint Committee would be licenses to private sector banks and release ofbinding on the Reserve Bank, SEBI, IRDA and two major discussion papers regarding thePFRDA. presence of foreign banks and promoting holding company structure for banks. Each of theseThe Banking Laws (Amendment) Bill, 2011 initiatives was aimed at financial sector3.114 The Bill, introduced in Lok Sabha in development, while keeping in view the concernMarch 2011, seeks to amend the Banking of financial stability. In the field of financialRegulation Act, 1949, the Banking Companies inclusion, the most noteworthy development was(Acquisition and Transfer of Undertakings) Act, the formation of Board-approved Financial1970 and the Banking Companies (Acquisition Inclusion Plans by banks for a time horizon ofand Transfer of Undertakings) Act, 1980 to make next three years. The other salient policythe regulatory powers of the Reserve Bank more developments, which would pave way towardseffective and to increase the access of the further reforms in the banking sector, includednationalised banks to capital market to raise changes in major banking sector statutescapital required for expansion of banking including the Banking Regulation Act, 1949 andbusiness. The Bill seeks to inter alia: (i) enable constitution of the Financial Sector Legislativethe nationalised banks to increase or decrease Reforms Commission.the authorised capital with approval from the 3.117 With a view to improving the use ofCentral Government and the Reserve Bank technology and customer services in the bankingwithout being limited by the ceiling of `3,000 sector, the Reserve Bank undertook a variety ofcrore; (ii) make provisions to ensure that control measures during the year, including theof banking companies is in the hands of fit and initiation of new generation RTGS andproper persons; (iii) allow nationalised banks to constitution of a committee to analyseissue two additional instruments (bonus shares expectations of customers from banks. Anotherand rights issue) for accessing the capital market salient policy development that would impactto raise capital required for expansion of banking financial sector development in a major way inbusiness; (iv) substantially increase the the years to come, with specific relevance forpenalties and fine for some violations of the banks - as market makers and users - was theBanking Regulation Act, 1949; and (v) confer introduction of CDS for corporate bonds. Finally,power upon the Reserve Bank to levy penal for both RRBs and UCBs, a number of regulatoryinterest in case of non-maintenance of required and developmental measures towardscash reserve ratio. strengthening the health and physical outreach of these institutions were taken during the year.15. Conclusions 3.118 During the year, the inflationary3.115 This chapter discussed the major pressures, which kept re-surfacing partly as adevelopments in the area of banking sector fallout of external developments and partly onpolicy in 2010-11 and 2011-12, so far. These account of domestic structural imbalances, 57
  • Report on Trend and Progress of Banking in India 2010-11necessitated continuous monetary policy 3.119 Going forward, a continued andresponses. However, while containing consistent momentum of the banking sectorinflation, it was necessary that economic policy, with focused attention on financialrecovery, which had been delicate in the stability and financial inclusion, wouldaftermath of the crisis, was also not thwarted. ensure a healthier and more inclusiveThe Reserve Bank dealt with the inflationary banking sector, which can contribute towardspressures with a view of not to sacrifice the long- sustained and inclusive growth of the Indianterm growth prospects. economy. 58
  • Chapter IV Operations and Performance of Commercial Banks The Indian banking sector performed better in 2010-11 over the previous year despite the challenging operational environment. The banking business of Scheduled Commercial Banks (SCBs) recorded higher growth in 2010-11 as compared with their performance during the last few years. Credit grew at 22.9 per cent and deposits grew at 18.3 per cent in 2010-11 over the previous year. Accordingly, the outstanding credit-deposit ratio of SCBs increased to 76.5 per cent in 2010-11 as compared with 73.6 per cent in the previous year. Despite the growing pressures on margins owing to higher interest rate environment, the return on assets (RoA) of SCBs improved to 1.10 per cent in 2010- 11 from 1.05 per cent in 2009-10. The capital to risk weighted assets ratio under both Basel I and II frameworks at 13.0 per cent and 14.2 per cent, respectively in 2010-11 remained well above the required minimum of 9 per cent. The gross NPAs to gross advances ratio declined to 2.25 per cent in 2010-11 from 2.39 per cent in 2009-10, displaying improvement in asset quality of the banking sector. Though there was improvement in the penetration of banking services in 2010-11 over the previous year, the extent of financial exclusion continued to be staggering. The number of complaints received at the Banking Ombudsman offices witnessed decline in 2010-11 over the previous year.1. Introduction Reserve Bank has also undertaken monetary tightening during 2010-11. Accordingly, thePerformance of banks was conditioned by operations and performance of commercialthe dynamics of growth-inflation trade-off banks during 2010-11 was conditioned to a4.1 The Indian banking sector, which is the great extent by the dynamics of growth-inflationedifice of the Indian financial sector, though trade-off experienced by the Indian economy.weathered the worst consequences of the global Banks operated in a challenging operationalfinancial turmoil to a large extent, had to environmenttraverse through a challenging macroeconomicenvironment during the post crisis period. 4.2 During 2010-11, higher interest rateFollowed by the financial turmoil, the global environment not only caused concerns aboutfinancial sector was generally turbulent mainly slowdown in credit growth, but also increasedbecause of the European sovereign debt crisis, the possibility of deterioration in asset quality onand sluggish growth recovery in the Euro zone as the back of the possible weakening of thealso in the US. In contrast, the banking sectors repayment capacities of borrowers in the emerging market economies displayed The tight interest rate environment also affectedbetter performance in 2010-11 as compared the profit prospects of commercial banks due towith their western counterparts. However, the possibility of lower margins in 2010-11.improving economic growth while keeping During the year, the large credit intake by someinflation at tolerable levels was a policy challenge of the crucial sectors such as NBFCs andfaced by many of the emerging market infrastructure, also raised concerns abouteconomies including India during the post crisis financial soundness through the potential buildperiod. To keep inflation at tolerable levels, the up of sectoral credit booms. Large borrowings by
  • Report on Trend and Progress of Banking in India 2010-11the telecommunication companies to participate marginal deceleration in growth. The highestin the auction of 3G spectrum, reduction in growth was recorded by new private sectorGovernment spending as also the large currency banks (NPRBs) followed by public sector banksholdings by the public due to high inflation made (PSBs). Yet, as at end-March 2011, almost threethe liquidity conditions more stringent in 2010- fourths of the total assets of the banking sector11. Further, the need to migrate towards belonged to PSBs followed by NPRBs (15 peradvanced approaches of capital calibration cent). Old private sector banks had the lowestunder Basel II was also a challenge that loomed share (around four per cent) followed by foreignlarge in the Indian banking sector. Alongside, banks (FBs) (around seven per cent).there was also a pressing need to become moreinnovative to transform unbanked villages into Liability side of the balance sheet was drivenprofitable business locations thereby by capital, borrowings and, other liabilitiesstrengthening the financial inclusion process, to 4.5 On the liability side of the balance sheet,keep up with the latest technological the growth was driven mainly by borrowings,developments and to improve the quality of capital, and other liabilities and provisions. Thecustomer service. recapitalisation of public sector banks by the Central Government, and the mobilisation of4.3 Against this backdrop, the present chapter funds from the stock market through publicanalyses the operations and performance of issues by PSBs were the main factors behind thecommercial banks in India during the year growth of capital of SCBs in 2010-11. An2010-11 in terms of deployment of credit, interesting development about the consolidatedprofitability, soundness indicators and regional balance sheet of SCBs in 2010-11 was thepenetration, among others. The chapter deceleration in the growth of savings bankanalyses the audited annual accounts of 83 deposits and demand deposits with aSCBs1, 82 Regional Rural Banks (RRBs) and four corresponding acceleration in the growth of termlocal area banks (LABs) for the financial year deposits. This could be due to the prevailing2010-11 to highlight the emerging issues in the higher interest rate environment, making termIndian banking sector. deposits more attractive as compared with demand and savings deposits.2. Balance Sheet Operations ofScheduled Commercial Banks Asset side of the balance sheet was drivenConsolidated balance sheet of SCBs by loans and advancesregistered higher growth 4.6 On the asset side of the balance sheet, the4.4 The consolidated balance sheet of SCBs growth was primarily driven by loans andrecorded higher growth in 2010-11 as compared advances. There was a revival in credit growthwith the previous year. This is in contrast to the across all the bank groups except old privatetrend observed during the last two years and sector banks in 2010-11 as compared with thesignals a revival from the peripheral effects of previous year despite the tight interest rateglobal financial turmoil. The higher growth in the environment. Credit growth in 2010-11 of newconsolidated balance sheet of SCBs was private sector banks and foreign banks wascontributed by all the bank groups except old particularly noteworthy when compared withprivate sector banks (OPRBs), which recorded their performance during the last year. Notably, 1 These include 26 public sector banks (State Bank of India and its five associates, 19 nationalised banks and IDBI Bank Ltd.), 7 new private sector banks, 14 old private sector banks and 36 foreign banks. The number of SCBs increased to 83 in 2010-11 from 81 in 2009-10. 60
  • Operations and Performance of Commercial Banks Table IV.1: Consolidated Balance Sheet of Scheduled Commercial Banks (in ` crore)Item As at end-March 2011 Public sector Private sector Old private New private Foreign banks All scheduled banks banks sector banks sector banks commercial banks1 2 3 4 5 6 71. Capital 19,055 4,805 1,396 3,409 35,383 59,2432. Reserves and Surplus 2,71,196 1,33,784 22,425 1,11,359 45,668 4,50,6483. Deposits 43,72,985 10,02,759 2,64,157 7,38,602 2,40,689 56,16,432 3.1. Demand Deposits 4,10,109 1,58,929 24,222 1,34,707 72,900 6,41,939 3.2. Savings Bank Deposits 10,83,001 2,29,130 49,667 1,79,463 39,650 13,51,782 3.3. Term Deposits 28,79,874 6,14,699 1,90,268 4,24,432 1,28,138 36,22,7124. Borrowings 3,95,144 1,85,984 10,967 1,75,017 92,797 6,73,9255. Other Liabilities and Provisions 2,35,438 70,844 10,066 60,778 76,992 3,83,273 Total Liabilities/Assets 52,93,817 13,98,176 3,09,011 10,89,166 4,91,528 71,83,5221. Cash and Balances with RBI 3,52,379 86,111 18,173 67,938 20,293 4,58,7832. Balances with Banks and Money at Call and Short Notice 1,32,225 31,616 3,908 27,708 27,365 1,91,2063. Investments 13,28,534 4,22,020 92,617 3,29,403 1,65,499 19,16,053 3.1 Government Securities (a+b) 10,82,515 2,63,181 64,603 1,98,578 1,11,960 14,57,657 a) In India 10,74,411 2,62,252 64,603 1,97,649 1,11,960 14,48,624 b) Outside India 8,103 929 - 929 - 9,033 3.2 Other Approved Securities 3,098 89 51 38 2 3,189 3.3 Non-Approved Securities 2,42,920 1,58,750 27,962 1,30,787 53,537 4,55,2074. Loans and Advances 33,05,632 7,97,534 1,84,647 6,12,886 1,95,539 42,98,704 4.1 Bills purchased and Discounted 1,83,405 33,013 9,875 23,138 25,182 2,41,600 4.2 Cash Credits, Overdrafts, etc. 13,97,114 2,03,756 84,039 1,19,717 91,172 16,92,042 4.3 Term Loans 17,25,113 5,60,765 90,733 4,70,032 79,185 23,65,0635. Fixed Assets 36,156 12,980 2,509 10,470 4,958 54,0936. Other Assets 1,38,892 47,915 7,156 40,760 77,874 2,64,681-: Negligible/NilSource: Balance sheets of respective banks.the growth of investments of the banking sector to an increase in term deposit rates. Whilewitnessed deceleration in 2010-11 in accelerated growth rate of term deposits is acomparison with the previous year. The only welcome development from the point of view ofexception to this general trend was the new stability of balance sheet as it strengthens theprivate sector banks, which recorded higher retail deposit base and reduces asset liabilitygrowth in investments in 2010-11 as compared mismatches; it may increase the interestwith the previous year (Tables IV.1 and IV.2). expenses of the banking sector, thus, adversely impacting profitability.Major Liabilities of SCBs Share of CASA deposits in total incrementalDeposits deposits declinedDeposits registered higher growth 4.8 In contrast, current account and savings4.7 Deposits, which constitute 78 per cent of account (CASA) deposits, which are least costtotal liabilities of the banking sector registered sources, recorded deceleration in 2010-11. It ishigher growth in 2010-11 in contrast to the pertinent to note that despite the increasedtrend observed in the recent years. This was remuneration on savings deposits based on amainly because of the accelerated deposit daily product basis with effect from April 1,mobilisation of new private sector banks in 2010, the savings deposit mobilisation2010-11 over the previous year. The higher decelerated in 2010-11 across all the bankgrowth in deposits emanated mainly from term groups as compared with the previous year. Shiftdeposits. As alluded to earlier, this could be due of funds to term deposits due to higher interestto the higher interest rate environment leading rates is one of the reasons for this trend. 61
  • Report on Trend and Progress of Banking in India 2010-11 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 banks1 2 3 4 5 6 7 8 9 10 11 12 13 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-111. Capital 0.1 40.7 7.3 5.6 8.7 9.7 6.7 4.1 19.7 15.9 12.3 21.92. Reserves and Surplus 16.8 19.2 21.0 15.9 15.9 18.7 22.0 15.4 12.3 18.2 17.5 18.13. Deposits 18.6 18.4 11.7 21.9 15.4 14.9 10.4 24.6 8.4 3.7 16.8 18.3 3.1. Demand Deposits 18.4 11.3 33.5 18.1 22.5 12.2 35.9 19.2 12.7 6.8 20.9 12.4 3.2. Savings Bank Deposits 25.8 22.1 32.8 23.0 26.2 14.0 34.9 25.8 26.5 8.8 26.9 21.8 3.3. Term Deposits 16.2 18.2 1.3 22.5 12.0 15.5 -3.1 25.8 2.2 0.6 12.9 18.24. Borrowings 21.4 25.9 8.5 24.5 40.6 26.4 6.9 24.4 -11.9 36.0 12.2 26.85. Other Liabilities and Provisions 4.2 21.4 8.5 20.9 8.4 -1.0 8.5 25.5 -29.7 16.9 -4.6 20.4Total Liabilities/Assets 17.9 19.2 12.0 21.5 15.8 14.9 10.9 23.5 -2.2 12.9 15.0 19.21. Cash and Balances with RBI 20.8 30.1 32.0 13.5 27.7 7.4 33.3 15.2 22.1 6.3 23.1 25.42. Balances with Banks and Money at Call and Short Notice -12.9 15.6 13.9 -18.2 -43.3 -31.3 38.0 -16.0 -34.2 33.1 -11.6 10.13. Investments 20.0 9.3 15.5 19.2 15.3 10.9 15.6 21.7 22.2 3.9 19.3 10.8 3.1 Government Securities (a+b) 19.0 7.4 10.6 9.1 13.4 6.2 9.7 10.1 17.5 -4.7 17.3 6.6 a) In India 18.8 7.4 10.6 8.8 13.4 6.2 9.7 9.7 17.5 -4.7 17.2 6.6 b) Outside India 48.2 -3.0 72.6 464.8 - - 72.6 464.8 - - 48.6 6.1 3.2 Other Approved Securities -36.8 -38.2 43.4 -71.4 56.2 -82.2 -31.7 74.8 -41.7 -57.1 -34.6 -40.2 3.3 Non-Approved Securities 28.4 20.1 27.6 41.0 20.5 24.9 29.5 45.0 37.7 28.1 29.2 27.64. Loans and Advances 19.6 22.4 9.9 26.1 19.9 19.8 7.1 28.1 -1.3 19.8 16.6 22.9 4.1 Bills purchased and Discounted 10.4 30.3 30.7 20.2 19.1 10.3 37.2 25.0 46.9 18.2 16.3 27.5 4.2 Cash Credits, Overdrafts, etc. 22.9 26.9 9.6 28.4 20.8 23.4 2.5 32.1 2.5 24.8 19.9 27.0 4.3 Term Loans 18.1 18.2 9.0 25.7 19.2 17.8 7.0 27.3 -13.4 14.9 14.4 19.85. Fixed Assets 2.2 4.9 3.6 26.8 8.0 6.5 2.4 32.8 2.6 2.0 2.5 9.16. Other Assets -0.2 32.9 -11.6 21.6 7.4 12.6 -14.5 23.3 -30.1 14.0 -14.1 24.7-: Negligible/NilSource: Balance sheets of respective banks.However, the upward revision in the savings 2008 to become pro-active in finding out thedeposit rate from 3.5 per cent to 4.0 per cent in whereabouts of these customers. Resultantly,April 2011 and deregulation of interest rate on since 2008 the growth rate of unclaimedsavings deposits in October 2011, may improvethe savings deposit mobilisation going forward. Chart IV.1: Composition of Deposits 2010-11However, in a competitive environment, with the 100deregulation of interest rates, savings deposits 90will no longer be as less expensive as they werein the past. In tune with the growth deceleration, 80 53.2the share of CASA deposits in total incremental 70 65.9 57.5 64.5 Percentage sharedeposits declined to 36 per cent in 2010-11 as 60 72.0compared with 48 per cent in the previous year. 50An analysis at the bank group level indicated 40that foreign banks had the highest share ofCASA deposits followed by NPRBs and PSBs 30(Chart IV.1). 20 42.5 46.8 35.5 34.1 28.0 10Growth of unclaimed deposits decelerated 04.9 The Reserve Bank raised concerns with PSBs OPRBs NPRBs FBs SCBsregard to the growing unclaimed deposits with CASA Term depositsthe banking sector and advised SCBs in August 62
  • Operations and Performance of Commercial Banksdeposits witnessed deceleration. The growth Major Assets of Scheduled Commercialrate of unclaimed deposits came down to 5 Banksper cent in December 2010 as compared with Bank Creditthe growth rates of 15 per cent in December2009 and 18 per cent in December 2008. Growth of loans and advances witnessedImportantly, unclaimed deposits in the current accelerationaccounts and fixed deposit accounts declined as 4.11 It is interesting to note that despite theat end-December 2010 over the previous year. widespread concerns with regard to slowdown inThe share of unclaimed deposits in total credit off-take in the context of tight monetarydeposits, however, remained more or less same policy, on a y-o-y basis, the loans and advancesat 0.02 per cent in 2010-11 as in the previous of the banking sector recorded higher growth inyear 2. 2010-11 as compared with the previous year. While the economic recovery from the recentBorrowings financial turmoil increased the demand forBorrowings recorded higher growth credit; from the supply side, higher growth in deposits as well as growth in capital facilitated4.10 Borrowings, which constitute nine per cent higher credit growth. In contrast to the previousof the total liabilities of the banking year’s trend, term loans grew at a higher rate insector recorded accelerated growth in 2010-11 2010-11 as compared with the previous year. Inas compared with the previous year. At the 2010-11, new private sector banks recordedbank group level, the share of borrowings in significantly higher growth in term loans astotal liabilities exhibited wide variation. compared with the previous year, on the back ofThe dependence of foreign banks and new corresponding high growth in term depositsprivate sector banks on borrowings was mobilisation.relatively high as compared with other bankgroups (Chart IV.2). Investments Chart IV.2: Deposits and Borrowings 2010-11 Growth of investments decelerated 90 85.5 4.12 Due to the accommodation of higher 82.6 78.2 credit growth, there was an overall deceleration 80 in the growth of investments in securities in 70 67.8 2010-11 as compared with the previous year. In As per cent of total liabilities 60 2010-11, almost three fourths of the total 49.0 investments of the banking sector were in 50 Government securities held in India, mainly to 40 meet the SLR requirements prescribed by the 30 Reserve Bank and to raise funds from the short- 18.9 term money market. However, investments of 20 the banking sector in Government securities 16.1 9.4 10 7.5 3.5 held in India recorded lower growth in 2010-11 0 as compared with the previous year in tune with PSBs OPRBs NPRBs FBs SCBs the reduction in SLR requirements from 25 Deposits Borrowings per cent to 24 per cent with effect from December 18, 2010. 2 Data on deposits were taken from Quarterly Statistics on Deposits and Credit of SCBs. 63
  • Report on Trend and Progress of Banking in India 2010-11Non-SLR investments declined with the growth in international assets. Yet, the4.13 The non-SLR investments of SCBs international liabilities of the banking sectorwitnessed a decline in March 2011 as compared continued to be almost double of the internationalwith those during the corresponding period of assets of the banking sector in 2010-11 as in thethe previous year. This was primarily due to a recent past. The growth in internationaldecline in the investments in commercial paper liabilities was mainly led by growth in equities ofin 2010-11 over those during the previous year. banks held by non-residents, Non-ResidentInvestments in commercial paper are short-term Ordinary (NRO) deposits and foreign currencyinvestments of the banking sector to reap borrowings (Table IV.4).economic gain out of short-term surplus funds. International assets recorded higher growthThe decline in such investments reflected tightliquidity conditions during 2010-11. On the 4.15 The growth in international assets wasother hand, banks’ investments in shares mainly led by foreign currency loans towitnessed increase in 2010-11 over the previous residents, outstanding export bills drawn onyear. Alongside, banks’ investments in bonds/ non-residents by residents and Nostro balancesdebentures also witnessed a marginal increase (Table IV.5).during 2010-11 as compared with theprevious year (Table IV.3). Consolidated International Claims4 Consolidated international claims recordedInternational Liabilities and Assets of higher growthScheduled Commercial Banks3 4.16 The consolidated international claims ofInternational liabilities registered the banking sector registered higher growthmoderated growth in 2010-11 as compared with the previous year.4.14 In 2010-11, international liabilities of the The sector-wise composition of internationalbanking sector grew at a lower rate as compared claims showed that it was mainly claims on Table IV.3: Non-SLR Investments of Scheduled Commercial Banks (Amount in ` crore)Instrument As on March Per cent As on October Per cent 25, 2011 to total 07, 2011 to total1 2 3 4 51. Commercial Paper 12,310 5.4 21,244 8.1 (-51.1) (-50.2)2. Shares 41,316 18.2 38,941 14.8 (37.2) (15.0) a) Of which, Public sector undertakings 8,965 4.0 8,377 3.2 b) Of which, Private corporate sector 32,351 14.3 30,564 11.63. Bonds/Debentures 93,975 41.5 1,09,089 41.4 (49.7) (47.0) a) Of which, Public sector undertakings 27,946 12.3 35,013 9.2 b) Of which, Private corporate sector 66,029 29.2 74,077 28.14. Units of MFs 47,603 21.0 61,806 23.5 (-10.0) (2.3)5. Instruments issued by FIs 31,296 13.8 32,326 12.3 (-4.0) (12.3)Total Investments (1 to 5) 2,26,500 100.0 2,63,406 100.0 (11.3) (9.8)Note: Figures in parentheses indicate percentage variation over the corresponding period in the previous year.Source: Section 42(2) returns submitted by SCBs. 3 Refers to international liabilities and assets of branches of all commercial banks geographically located in India. 4 Refers to international assets of all branches (both located in India and abroad) of domestic commercial banks. 64
  • Operations and Performance of Commercial Banks Table IV.4: International Liabilities of Banks – By Type (As at end-March) (Amount in ` crore) Percentage VariationItem 2010 2011 2010 20111 2 3 4 51. Deposits and Borrowings 3,38,574 3,78,221 4.8 11.7 of which: (74.9) (74.9) Foreign Currency Non Resident Deposits (Bank) 72,234 77,413 -0.8 7.2 [FCNR (B)] scheme (16.0) (14.8) Foreign Currency Borrowings * 74,354 95,419 -1.4 28.3 (16.4) (18.3) Non-resident External Rupee (NRE) Deposits 1,22,380 1,21,229 -1.7 -0.9 (27.1) (23.2) Non-Resident Ordinary (NRO) Rupee Deposits 30,824 41,072 49.0 33.2 (6.8) (7.9)2. Own Issues of Securities/Bonds 5,439 4,575 -20.8 -15.9 (1.2) (0.9)3. Other Liabilities 1,08,166 1,38,658 91.3 28.2 of which: (23.9) (26.6) ADRs/GDRs 30,391 34,699 193.4 14.2 (6.7) (6.7) Equities of banks held by non-residents 50,313 73,159 165.8 45.4 (11.1) (14.0) Capital/remittable Profits of Foreign Banks in India 27,462 30,799 0.8 12.2 and other unclassified International Liabilities (6.1) (5.9)Total International Liabilities 4,52,179 5,21,454 17.0 15.3* : Include inter-bank borrowings in India and from abroad, and external commercial borrowings of banks.Note: Figures in parentheses are percentages to total International liabilities.Source: Locational Banking Statistics.banks, which led the growth in total was mainly led by claims of banks on Germany,international claims of banks (Table IV.6). UAE and USA. In contrast, claims of banks on UK4.17 The growth in the consolidated international and Hong Kong registered a decline in 2010-11claims of banks on countries other than India as compared with the previous year (Table IV.7). Table IV.5: International Assets of Banks - By Type (As at end-March) (Amount in ` crore) Percentage VariationItem 2010 2011 2010 20111 2 3 4 51. Loans and Investments 2,37,181 2,78,741 8.0 17.5 (96.3) (96.8) of which : a) Loans to Non-Residents* 10,196 14,414 22.2 41.4 (4.1) (5.0) b) Foreign Currency Loans to Residents** 1,23,476 1,40,083 23.5 13.4 (50.1) (48.6) c) Outstanding Export Bills drawn on 50,496 61,321 13.3 21.4 Non-Residents by Residents (20.5) (21.3) d) Nostro Balances @ 52,135 62,343 -21.6 19.6 (21.2) (21.6)2. Holdings of Debt Securities 39 179 -48.7 359.0 (0.0) (0.1) @@3. Other Assets 9,139 9,147 -6.1 0.1 (3.7) (3.2)Total International Assets 2,46,359 2,88,067 7.4 16.9 (100.0) (100.0)* : Include rupee loans and Foreign Currency (FC) loans out of non-residents (NR) deposits;** : Include loans out of FCNR (B) deposits, Packing Credit in Foreign Currency (PCFC), FC lending to and FC deposits with banks in India.@ : Include placements made abroad and balances in term deposits with non-resident banks.@@ : Include capital supplied to and receivable profits from foreign branches/subsidiaries of Indian banks and other unclassified international assets.Note : Figures in parentheses are percentages to total international assets.Source: Locational Banking Statistics. 65
  • Report on Trend and Progress of Banking in India 2010-11 Table IV.6: Classification of Consolidated Table IV.7: Consolidated International Claims International Claims of Banks on Countries of Banks on Countries other than India other than India - By Maturity and Sector (As at end-March) (As at end-March) (Amount in ` crore) (Amount in ` crore) Item 2010 2011Residual Maturity/Sector 2010 2011 1 2 31 2 3 Total Consolidated 2,33,071 2,46,413 International Claims (100.0) (100.0)Total Consolidated International Claims 2,33,071 2,46,413 of which:a) Maturity-wise a) United States of America 53,394 54,818 1) Short-term (residual 1,44,638 1,53,893 (22.9) (22.2) maturity less than one year) (62.1) (62.5) b) United Kingdom 36,141 34,370 2) Long-term (residual 81,939 87,247 (15.5) (13.9) maturity of one year and above) (35.2) (35.4) c) Singapore 18,437 18,546 3) Unallocated 6,494 5,273 (7.9) (7.5) (2.8) (2.1) d) Germany 12,179 14,164 (5.2) (5.7)b) Sector-wise e) Hong Kong 18,978 18,376 1) Bank 98,191 1,09,142 (8.1) (7.5) (42.1) (44.3) f) United Arab Emirates 13,536 15,498 2) Non-Bank Public 1,442 870 (5.8) (6.3) (0.6) (0.4) 3) Non-Bank Private 1,33,438 1,36,401 Note: Figures in parentheses are percentage shares in total international claims. (57.3) (55.4) Source: Consolidated Banking Statistics - Immediate Country RiskNote: 1) Figures in parentheses are percentages to total International Basis. claims. 2) Unallocated residual maturity comprises maturity not applicable (e.g., for equities) and maturity information not available from reporting bank branches. dependence of these bank groups on deposits for 3) Bank sector includes official monetary institutions (IFC, ECB, funds is relatively lower as compared with other etc.) and central banks. 4) Prior to the quarter ended March 2005, ‘Non-bank public sector’ bank groups. These bank groups raise a comprised of companies/institutions other than banks in which shareholding of State/Central Governments was at least substantial amount of funds through borrowings 51 per cent, including State/Central Governments and its departments. From March 2005 quarter, ‘Non-bank public (see Chart IV.2) and hence, a more meaningful sector’ comprises only State/Central Governments and its ratio for a bank group comparison would be departments.Source: Consolidated Banking Statistics - Immediate Country Risk credit as a percentage of deposits plus Basis. borrowings. Public sector banks ranked first inCredit-Deposit and Investment-Deposit terms of this ratio followed by private sectorRatios of Scheduled Commercial Banks banks and foreign banks (Chart IV.3).Banks reported higher outstanding credit- Chart IV.3: Credit as per cent of Deposits plusdeposit ratio Borrowings 2010-114.18 Trends in credit-deposit ratio as well as 80investment-deposit ratio manifested banks’preference for credit over investments in 2010-11. The outstanding credit-deposit ratio washigher at 77 per cent in 2010-11 as compared 70 69.3 68.3with 74 per cent in the previous year. In 67.1 67.1 Per centcontrast, the outstanding investment-depositratio was lower at 34 per cent in 2010-11 ascompared with 36 per cent in the previous year. 60 58.6Among the bank groups, new private sectorbanks recorded the highest credit-deposit ratiofollowed by foreign banks in 2010-11. However,the higher credit-deposit ratio reported by new 50private sector banks as well as foreign banks PSBs OPRBs NPRBs FBs SCBsneeds to be interpreted with a caveat as the 66
  • Operations and Performance of Commercial Banks4.19 The incremental C-D ratio above 100 per Chart IV.4: Incremental Credit- and Investment-cent is a rough indicator of overheating in the Deposit Ratios of SCBseconomy. Owing to the robust credit growth in 120.02010-11, the incremental C-D ratio went above 100.0100 per cent during the third quarter of 2010-11. However, subsequently incremental C-D 80.0ratio witnessed moderation. Accordingly, the Per centincremental I-D ratio improved during the later 60.0part of the year (Chart IV.4). 40.0Maturity Profile of Assets and Liabilities of 20.0BanksNo significant shift in the maturity profile- 0.0 22 April 11 1 July 2011 2 Jan 09 13-Mar-09 22-May-09 31-Jul-09 9 Oct 09 18 Dec 09 18 Jan 08 28 Mar 08 6 June 08 15 Aug 08 24 Oct 08 26 Feb,2010 7-May-10 16 July 2010 24 Sep 2010 3 Dec. 2010 13 Apr-07 22 June 07 31 Aug 07 9 Nov 07 9 Sep, 2011* 11 Februarywise composition of assets and liabilities4.20 The mismatches in the maturity profile of 100 per centassets and liabilities of the banking sector are a Incremental C-D ratio *: Provisional data. Incremental I-D Ratiocause for concern as it leads to the financing oflong-term assets by short-term liabilities. The advances, and more than half of the totalmaturity profile-wise composition of assets and investments were long-term during the sameliabilities indicated that almost half of the total period. There was no significant shift in thedeposits and borrowings of the banking sector maturity profile-wise composition of assets andwere short-term as at end-March 2011. liabilities of the banking sector in 2010-11 overHowever, almost one fourth of the total loans and the previous year indicating the persistence of 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 Private Old private New private Foreign banks All SCBs sector banks sector banks sector banks sector banks1 2 3 4 5 6 7 8 9 10 11 12 13 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011I. Deposits a) Up to 1 year 48.9 48.2 47.7 46.1 47.6 45.3 47.7 46.4 63.7 64.2 49.4 48.5 b) Over 1 year and up to 3 years 27.5 28.6 38.4 38.6 36.8 40.6 39.0 37.9 26.8 26.9 29.4 30.3 c) Over 3 years 23.6 23.2 13.9 15.2 15.6 14.1 13.3 15.6 9.5 9.0 21.2 21.1II. Borrowings a) Up to 1 year 42.0 40.1 34.7 42.4 49.0 54.5 33.9 41.7 74.6 78.7 44.2 46.2 b) Over 1 year and up to 3 years 11.0 12.5 23.9 16.2 15.6 12.5 24.4 16.4 14.7 14.8 15.3 13.9 c) Over 3 years 46.9 47.4 41.4 41.4 35.3 33.0 41.7 41.9 10.7 6.5 40.5 40.0III.Loans and Advances a) Up to 1 year 38.0 36.0 37.1 37.6 40.5 41.9 36.0 36.3 61.1 68.1 38.9 37.8 b) Over 1 year and up to 3 years 33.8 36.2 34.2 36.4 36.8 38.4 33.4 35.8 20.1 17.0 33.3 35.4 c) Over 3 years 28.2 27.7 28.7 26.0 22.7 19.7 30.6 27.8 18.8 15.0 27.8 26.8IV. Investments a) Up to 1 year 18.8 18.1 38.1 37.3 24.4 28.7 42.4 39.7 76.4 79.0 28.1 27.6 b) Over 1 year and up to 3 years 12.2 12.7 21.6 22.4 8.8 12.2 25.6 25.3 15.2 14.6 14.4 15.0 c) Over 3 years 69.0 69.2 40.2 40.2 66.8 59.1 32.0 35.0 8.4 6.4 57.5 57.3Source: Balance Sheets of respective banks. 67
  • Report on Trend and Progress of Banking in India 2010-11 Box IV.1: Asset Liability Mismatches (ALM) in the Indian Banking Sector: The Extent and Persistence The analysis of the maturity profile of long-term assets and is used for testing the statistical significance of the measure of liabilities indicates that at the aggregate level, the long-term persistence γ. assets are financed by short-term liabilities. The ALM calculated as long-term assets minus long-term liabilities Table: Measure of Persistence of ALM Positive never turned out to be negative during the recent years Gap – Bucket-wise implying that the higher growth observed in the long-term loan Time Buckets γ Persistence (γ) Significance segment is leading to asset liability mismatches in the banking sector. Bucket-wise break-up of ALM positive gap shows that γ √ (γ – 0.5)/(0.5/√T) the banking sector has the highest ALM positive gap in the One to Three Years 0.60 1.483b (0.0606) bucket more than five years followed by 3-5 years and 1-3 Three to Five Years 0.47 -0.404b (0.3264) years. As at end-September 2010, ALM positive gap in the more than five years bucket constituted 42 per cent of the total More than Five Years 0.47 -0.404b (0.3264) ALM positive gap, followed by 3-5 years bucket (31 per cent) Total 0.47 0.405b (0.3264) and 1-3 years bucket (27 per cent). b Acceptance of the null hypothesis of zero persistence at 5 per An analysis of persistence of the positive ALM gap is carried cent level. out following the methodology developed by Marques (2004). Note: Number of Observations used for the analysis is 55. Accordingly, the persistence of ALM positive gap is estimated on the basis of absence of mean reversion, that is The value of γ for the ALM positive gap during the entire sample period, i.e., March 2006 to September 2010 for all ⎛n⎞ γ = 1− ⎜ ⎟ SCBs is 0.47, which is slightly lower than 0.5. This indicates ⎝T ⎠ that there is no significant persistence in the ALM positive gap Where n stands for the number of times the series crosses the during the period under study at the aggregate level. The mean during a time interval with T+1 observations. It is bucket-wise analysis of persistence shows that in none of the theoretically proved that for a symmetric zero mean time buckets, the persistence is significant at five per cent white noise process E (γ) = 0.5. Thus, if the value of γ is close to level. However, at ten per cent level, it is persistent in the ‘one 0.5, it means that there is no significant persistence. On the to three years’ time bucket. Thus, in sum, though at the other hand, if the value of γ is significantly above 0.5 it signals aggregate level, the ALM positive gap is not significant, in the the existence of significant persistence. Under the assumption ‘one to three years’ bucket it is significant and calls for careful of a symmetric white noise process (zero persistence), the monitoring (Table). statistic ⎡ ⎤ Reference: ⎢ γ − 0.5 ⎥ Marques, Carlos Robalo (2004), ‘Inflation Persistence: Facts or ⎢ ⎥ ∩ N (0;1) ⎢ 0.5 ⎥ Artefacts?’, Working Paper No. 371, June, European Central ⎢ T ⎥ ⎣ ⎦ Bank.asset-liability mismatches. An analysis of the Off-Balance Sheet Operations of Scheduledextent and persistence of asset liability Commercial Banksmismatches in the Indian banking sector isprovided in Box IV.1 (Table IV.8). Off-balance sheet operations of banks continued to increase4.21 Almost 20 per cent of the long-term assetsof the Indian banking sector were financed by 4.23 The recent global financial turmoilshort-term liabilities in 2010-11. The percentage demonstrated the risk involved in accumulatingof long-term assets financed by short-term large amount of off-balance sheet exposuresliabilities witnessed a marginal decline over the (OBS). Recognising the risky and uncertainprevious year (Table IV.9). nature of OBS, the Reserve Bank tightened the prudential norms on OBS in August 2008.4.22 On the financing side, almost 23 per centof short-term liabilities were used to finance 4.24 The off-balance sheet exposures of thealmost 20 per cent of long-term assets in the banking sector, which declined in the previousbanking sector. The percentage share of short- two years, witnessed a growth of 31 per cent interm liabilities used to finance long-term assets 2010-11. The forward exchange contractsalso witnessed a marginal decline in 2010-11 constituted more than three fourths of total off-over the previous year (Table IV.9). balance sheet exposures in 2010-11. The off- 68
  • Operations and Performance of Commercial Banks Table IV.9: Asset Liability Mismatches in the Chart IV.5: Composition of Off-Balance Sheet Indian Banking Sector Exposures of the Banking Sector 2010-11 (Per cent)Sr. Bank group/year Long-term Assets Percentage ofno. Financed by short-term Short-term liabilities used to Liabilities* finance long- OPRBs, 1.0 term assets**1 2 3 4 5 Forward 2009-10 2010-11 2009-10 2010-11 Exchange NPRBs, 16.0 Contracts, 86.81 Public sector banks 22.6 22.0 28.5 27.9 1.1 Nationalised banks # 24.1 22.3 27.3 24.6 SBI FBs, 67.2 1.2 SBI Group 19.7 21.4 31.8 38.2 Group, 6.22 Private sector banks 14.4 15.7 19.6 21.0 NBs, 9.6 2.1 Old private sector banks 18.9 13.4 23.8 17.0 2.2 New private sector banks 13.1 16.3 18.2 22.13 Foreign banks -16.2 -25.0 -6.4 -9.0 All SCBs 19.7 19.5 23.4 23.3 Acceptance, 12.5 Guarantees,*: Calculated as (long-term assets minus long-term liabilities)/long- 0.7 term assets*100**: Calculated as (long-term assets minus long-term liabilities)/short- term liabilities*100#: Include IDBI Bank Ltd.balance sheet exposures of foreign banks prohibited sub-prime lending to the corporateconstituted more than two thirds of the total off- sector might have contributed to the higherbalance sheet exposures of the banking sector in interest income in 2010-11 apart from robust2010-11. A detailed analysis of OBS of the Indian credit growth. Although, interest expenses alsobanking sector is provided in Box IV.2 (Appendix witnessed accelerated growth in 2010-11 owingTable IV.1 and Chart IV.5). to the higher interest rate environment, it was considerably lower than the growth in interest3. Financial Performance of Scheduled income. Accordingly, the net interest marginCommercial Banks (NIM) of SCBs improved in 2010-11 over theProfitability previous year.Consolidated net profits recorded higher Growth of ‘other income’ deceleratedgrowth 4.27 ‘Other income’ recorded a lower growth in4.25 Despite widespread concerns with regard 2010-11 over the previous year. The decline into profitability on account of higher interest trading income of the banking sector in 2010-11expenses on the one hand and, higher non- over the previous year was one of the reasons forperforming assets and the consequent higher this trend. However, despite the overallprovisioning requirements, and lower interest deceleration in ‘other income’, one of the majorincome on the other, the financial performance components of ‘other income’, viz., commissionof SCBs improved in 2010-11 as compared with and brokerage recorded higher growth in 2010-the previous year. 11 over the previous year.4.26 The consolidated net profits of the bankingsector recorded higher growth in 2010-11, in Operating expenses grew at a higher ratecontrast to the deceleration experienced in 4.28 In contrast, the operating expenses of the2009-10, primarily because of higher growth in banking sector grew at a higher rate in 2010-11interest income. The implementation of the Base as compared with the previous year mainly onrate system with effect from July 1, 2010, which account of pay hikes implemented in the 69
  • Report on Trend and Progress of Banking in India 2010-11 Box IV.2: Profitability versus Risks: An Analysis of Off-Balance Sheet Exposures in the Indian Banking Sector Off-balance sheet exposures (OBS) raise concern as its exact πit is the ‘other income’ of bank group i at time t, with i = impact on the soundness of the banking sector is uncertain. 1,…,N; t = 1,…, T, c is a constant term, Xits are k explanatory In the event of a default, the off-balance sheet exposures variables and ε it is the disturbance with vi the unobserved can seriously damage the soundness of the banking sector bank-specific effect and u it the idiosyncratic error. The as demonstrated by the recent global financial turmoil. Hausman test statistic was not significant. Hence, results During the last ten years, the OBS of the banking sector of the random effects model are reported. The regression witnessed substantial growth, especially that of new private results are presented below (Table). sector banks and foreign banks. With the onset of the global Table: Impact of OBS on ‘Other Income’ financial turmoil, the policy on OBS was tightened in August Sample Period : 2002 to 2010 across five bank groups 2008. Resultantly, there was a decline in OBS of the banking Number of pooled observations - 50 sector in 2008-09 and 2009-10. However, with the onset of Dependent Variable: ‘Other Income’ recovery, OBS of the banking sector again witnessed a positive growth in 2010-11 (Chart A). Explanatory Variables Coefficients t-value Ipso facto, fluctuations in the exchange rate and also the Intercept -1.188 -1.750* higher interest rate environment increase the demand for Balance Sheet Assets 0.365 3.715*** forward contracts from the customers of banks, which is Off-Balance Sheet Exposures 0.085 2.189** the biggest component of the off-balance sheet exposure of the banking sector. As the economy grows, the demand for First Lag of ‘Other Income’ 0.480 4.172*** such risk management services from the banking sector also R-Squared : 0.89 increases. On the other side, from the point of view of banks, Adjusted R-Squared: 0.88 off-balance sheet exposures, which are basically fee-based DW Statistic: 1.44 services, increase the gross income although at a higher level of risk. Thus, if the risk appetite of a particular bank is *: Significant at ten per cent level. high, it has an incentive to accumulate off-balance sheet **: Significant at five per cent level. exposures to reap more fee income. ***: Significant at one per cent level. The role of OBS in generating ‘other income’ was examined Results indicated that one per cent increase in off-balance using panel data regression analysis. The panel data sheet exposures increases ‘other income’ of the banking regression was done at the bank group level. The bank group- sector by 0.08 per cent. Thus, ceteris paribus, banks have wise data used have been taken from the previous issues of an incentive to accumulate off-balance sheet exposures in the Report on Trend and Progress of Banking in India. the interest of garnering better ‘other income’ and profits. The log of ‘other income’ was taken as the dependant On the other hand, the risk associated with these off-balance variable. The independent variables were off-balance sheet sheet exposures is difficult to quantify. However, it may be exposures, on-balance sheet assets and first lag of ‘other noted that as at end-March 2011, the size of the total off- income’. Thus, symbolically, the model used in the study balance sheet exposures of the Indian banking sector was can be written as: larger than the total balance sheet assets of the banking K sector. This was mainly due to foreign banks and new private π it = c + ∑ β k X it + ε it k sector banks. Public sector banks and old private sector k =1 banks had relatively low level of off-balance sheet exposures as compared with other bank groups. Thus, in the event of Where a default, these exposures can seriously damage the financial ε it = vi + uit soundness of the banking sector, especially those of foreign banks and new private sector banks (Chart B). Chart A: Movements in OBS Chart B: Off-Balance Sheet Exposures (OBS) and Balance Sheet Assets (BA) - 2010-11 Amount of OBS rebased to 100 3000 10000000 2500 9000000 2000 8000000 7000000 1500 6000000 ` crore 1000 5000000 4000000 500 3000000 2000000 0 2011 1000000 2002 2003 2009 2005 2008 2010 2004 2007 2006 0 SBI Group NBs NPRBs OPRBs FBs SBI Group Nationalised banks New private sector banks Old private sector banks Foreign banks OBS BA 70
  • Operations and Performance of Commercial BanksTable IV.10: Trends in Income and Expenditure Marginal improvement in return on assets of Scheduled Commercial Banks (Amount in ` crore) 4.30 Resultantly, the consolidated net profits of Item 2009-10 2010-11 the banking sector registered higher growth in Amount Percentage Amount Percentage 2010-11 as compared with the decelerating variation variation trend observed during the recent past. The1 2 3 4 5 return on assets of SCBs also marginally1. Income 4,94,446 6.63 5,71,230 15.53 a) Interest Income 4,15,179 6.87 4,91,667 18.42 increased to 1.10 per cent in 2010-11 from 1.05 b) Other Income 79,267 5.38 79,564 0.37 per cent in 2009-10, mainly owing to higher NIM.2. Expenditure 4,37,337 6.42 5,00,899 14.53 a) Interest Expended 2,72,083 3.37 2,98,891 9.85 The return on equity also witnessed an b) Operating Expenses 1,00,028 11.66 1,23,129 23.09 improvement over the same period. However, the of which : Wage Bill 55,248 15.16 71,950 30.23 c) Provisions and SBI group was an exception to this general Contingencies 65,226 12.17 78,879 20.93 trend. The marginal decline in both RoA and RoE3. Operating Profits 1,22,335 10.31 1,49,210 21.974. Net Profits for the year 57,109 8.26 70,331 23.15 recorded by the SBI group was partly on account5. Net Interest Income of the provisioning requirements (1a-2a) 1,43,096 14.24 1,92,776 34.72 for housing loans extended at teaser interest Memo Item: rates. The Reserve Bank had increased1. Net Interest Margin 2.17 2.92 provisioning requirements for such loansSource: Profit and loss accounts of respective banks. (classified as standard assets) in December 2010banking sector during the last one year. Further, due to the risk of delinquencies upon repricing ofprovisions and contingencies also witnessed such loans going forward (Table IV.11 andhigher growth in 2010-11 as compared with the Chart IV.6).previous year, mainly on account of increase in Efficiencygross non-performing assets (GNPAs) (inabsolute terms). The depreciation in the value of 4.31 On the one hand, while a higher NIMinvestments owing to the higher interest rate contributes to profitability, on the other it alsoenvironment also increased the provisioning Table IV.11: Return on Assets and Return onrequirements of the banking sector. As the Equity of SCBs – Bank Group-wiseprovisioning requirements for various categories (Per cent)of NPAs were increased in May 2011, it is Sr. Bank group/year Return on Return onexpected to increase further in future (Table no. assets equity 2009-10 2010-11 2009-10 2010-11IV.10). 1 2 3 4 5 64.29 A factor, which helped the banking sector 1 Public sector banks 0.97 0.96 17.47 16.90to maintain profitability in 2010-11 was the 1.1 Nationalised banks* 1.00 1.03 18.30 18.20 1.2 SBI Group 0.91 0.79 15.92 14.11regulatory treatment extended to liabilities 2 Private sector banks 1.28 1.43 11.94 13.70arising out of re-opening of pension option to 2.1 Old privateemployees of PSBs and the enhancement in sector banks 0.95 1.12 12.29 14.10 2.2 New privategratuity limits in February 2011. The Reserve sector banks 1.38 1.51 11.87 13.62Bank allowed banks to amortise the total 3 Foreign banks 1.26 1.74 7.34 10.28 All SCBs 1.05 1.10 14.31 14.96liabilities arising out of this development over a *: Nationalised banks include IDBI Bank Ltd.period of five years and as such only one fifth of Note: 1) Return on Assets = Net profits/Average total assetsthe total liabilities was charged to the profit and 2) Return on Equity = Net profits/Average total equity Source: Calculated from balance sheets of respective banks.loss account of the current year 5. 5 The opening balance of reserves of banks will be reduced to the extent of the unamortised carry forward expenditure. In view of the exceptional nature of the event, the unamortised expenditure would not be reduced from Tier I capital. 71
  • Report on Trend and Progress of Banking in India 2010-11 Chart IV.6: Net Profits of SCBs NIM to improve the efficiency of financial intermediation along with increasing the non- 40.0 80000 36.9 interest income to maintain profitability. A 35.0 70000 detailed analysis of efficiency of the banking sector during the last one decade is provided in Return on Assets, Growth in Net Profits 30.0 60000 Box IV.3. Absolute Net Profits (` crore) 25.0 23.5 50000 23.2 Cost of funds declined 20.0 40000 4.32 In contrast to the general expectation, cost 15.0 30000 of funds of SCBs witnessed a decline in 2010-11 10.0 20000 as compared with the previous year, primarily 8.3 owing to a decline in the cost of deposits 5.0 10000 (Table IV.12). 1.00 1.13 1.05 1.10 0.0 0 2008 2009 2010 2011 Return on funds improved Absolute Net Profits Return on Assets 4.33 In contrast, the return on funds increased Growth in Net Profits in 2010-11 as compared with the previous year,implies higher cost of financial intermediation in mainly due to an increase in return onthe economy, which is considered as a sign of investments. However, return on advancesinefficiency. Thus, there is a need to bring down declined in 2010-11 over the previous year. One Table IV.12: Cost of Funds and Return 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 2009-10 5.68 1.50 5.35 9.10 6.65 8.34 2.99 2010-11 5.12 2.31 4.89 9.09 6.80 8.41 3.52 1.1 Nationalised banks* 2009-10 5.64 1.65 5.37 9.18 6.81 8.46 3.09 2010-11 5.13 2.36 4.93 9.20 6.85 8.50 3.57 1.2 SBI Group 2009-10 5.75 1.28 5.32 8.93 6.33 8.10 2.78 2010-11 5.09 2.22 4.80 8.84 6.67 8.21 3.412 Private sector banks 2009-10 5.36 1.95 4.83 9.89 6.23 8.60 3.77 2010-11 4.97 2.31 4.56 9.67 6.53 8.56 4.00 2.1 Old private sector banks 2009-10 6.28 1.87 6.13 10.95 6.09 9.22 3.10 2010-11 5.63 2.24 5.50 10.42 6.20 8.98 3.48 2.2 New private sector banks 2009-10 5.01 1.96 4.42 9.56 6.28 8.40 3.99 2010-11 4.73 2.31 4.27 9.43 6.62 8.44 4.173 Foreign banks 2009-10 3.10 2.01 2.83 9.99 6.39 8.30 5.47 2010-11 3.30 2.56 3.11 8.75 7.39 8.11 5.00 All SCBs 2009-10 5.49 1.70 5.10 9.29 6.54 8.39 3.29 2010-11 5.01 2.34 4.73 9.18 6.79 8.42 3.69*: Include IDBI Bank Ltd.Note: 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).Source: Calculated from balance sheets of respective banks. 72
  • Operations and Performance of Commercial Banks Box IV.3: Net Interest Margin of the Indian Banking Sector: Efficiency versus Profitability While maintaining profitability is a sine qua non for the others (i.e., mainly the difference between all other interest financial soundness of the banking sector, efficient financial income and interest expenses) showed that NIM from core intermediation is important from the point of view of economic banking business witnessed substantial increase during the growth. The net interest margin (NIM), operating expenses and last one decade. In contrast, NIM from others witnessed a ‘other income’ are crucial in determining profitability of the decline, leaving the total NIM more or less stable during the banking sector. On the other side, one of the indicators, which same period. The increase in the NIM from core banking is used to assess efficiency of the banking sector is NIM. NIM business indicates that the cost of financial intermediation indicates the margin taken by the banking sector while doing increased in the economy during the last one decade. Thus, banking business. In this context, there is a need to bring there is a need to bring down NIM from core banking business down NIM from an efficiency point of view, nevertheless, from a to bring the overall NIM down (Chart A). profitability point of view; there is a need to increase it. A As alluded to earlier, it is important to increase ‘other income’ balanced approach would be to bring down NIM, which will and reduce operating expenses as ratio of assets in the interest improve efficiency of financial intermediation, along with an of profitability. The operating expenses to total average assets increase in income from other sources and reduction in witnessed a declining trend during the last one decade mainly operating expenses to maintain profitability (Subbarao, 2010). owing to the cost effective technological advancements. In India, during the last one decade, NIM was in the range 2.5 However, ‘other income’ to total average assets also witnessed per cent to 3.1 per cent. The NIM, which witnessed a declining a declining trend during the last one decade. Thus, it may be trend during the period 2004 to 2010, improved during 2010- important for the Indian banking sector to improve ‘other 11. The NIM of the Indian banking sector continues to be income’ along with a reduction in NIM from core banking higher than some of the emerging market economies of the business to maintain profitability and to improve efficiency of financial intermediation (Chart B). world. The decomposition of NIM into NIM from core banking business, (i.e., calculated as the difference between interest Reference: D Subbarao (2010), ‘Five Frontier Issues in Indian income from loans and advances minus interest expenses on Banking’, Speech delivered at ‘BANCON 2010’, Mumbai, deposits as a per cent of average total assets), and NIM from December. Chart A: Movements in NIM Chart B: Movements in Operating Expenses and 2.5 Other Income Operating expenses, other income as 5.0 4.0 2.0 per cent of assets 3.0 1.5 Per cent 2.0 1.0 1.0 0.0 0.5 -1.0 -2.0 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 NIM from Core Banking Business NIM from others NIM Operating Expenses to Total Assets Other Income to Total Assetsreason for this trend could be the increase in 4. Soundness Indicatorsgross non-performing loans in absolute terms. Insum, the increase in return on funds along with Soundness indicators point to a comfortablethe decline in cost of funds lead to an increase in positionspread. At the bank group level, while the returnon funds was largely comparable, there was 4.34 Financial soundness of the bankingsubstantial variation in cost of funds. The lowest sector is a sine qua non for the financialcost of funds recorded by foreign banks helped system’s stability in a bank dominated countrythem to register the highest spread in 2010-11. like India. Accordingly, different aspects ofThe high share of less expensive CASA deposits financial soundness of the banking sector, viz.,enabled foreign banks to register lower cost of capital adequacy, asset quality, leverage, creditdeposits and, in turn, lower cost of funds during booms and liquidity are analysed in thisthe recent years (see Chart IV.1) (Chart IV.7). section. 73
  • Report on Trend and Progress of Banking in India 2010-11 Chart IV.7: Cost of Funds and Return on Funds - Bank 4.36 The CRAR, however, declined in 2010-11 Group-wise 2010-11 over the previous year mainly owing to a decline 10 in Tier II CRAR ratio. Among the bank groups, 9 8.4 8.5 9.0 foreign banks registered the highest CRAR, followed by private sector banks and PSBs in 8.1 8.2 8 2010-11. Under Basel II also, the CRAR of SCBs 7 remained well above the required minimum in 6 5.5 2010-11. This implies that, in the short to Per cent medium term, SCBs are not constrained by 4.9 5.0 5 4.8 4.3 capital in extending credit (Table IV.14). 4.2 4 3.6 3.5 3.4 3.1 3 4.37 While implementing Basel II, the Reserve 2 Bank had specified the per cent of minimum capital under Basel II as per cent of minimum 1 capital under Basel I as a prudential floor. Under this dispensation, the minimum capital under 0 Cost of Funds Return on Funds Spread SBI Group Basel II should be 100 per cent in the first year, FBs NPRBs NBs OPRBs 90 per cent in the second year and 80 per cent in the third year of the minimum capital underCapital to Risk Weighted Assets Ratio Basel I to limit any risk arising from the quality of(CRAR) compliance with the Basel II framework. InCRAR under both Basel I and II remained December 2010, banks were advised to continuewell above the stipulated norm with the parallel run till March 31, 2013 and the prudential floor was fixed at 80 per cent.4.35 Though all SCBs excluding RRBs and Notably, in 2009-10, the third year of Basel IILABs migrated to Basel II framework, the implementation (for all foreign banks andparallel run of Basel I is also continuing as a domestic banks with international presence), thebackstop measure. The CRAR of all bank groups ratio was 99.1 per cent, well above the targetunder Basel I remained well above the stipulated prescribed by the Reserve Bank. In 2010-11, itregulatory norm of 9 per cent in 2010-11 (Table further increased to 99.4 per cent. Further, inIV.13). case of PSBs, Government plans to increase the Table IV.13: Capital to Risk Weighted Assets Tier I ratio above 8 per cent to ensure the Ratio under Basel I and II – Bank Group-wise (As at end-March) Table IV.14: Component-wise (Per cent) Capital Adequacy of SCBsBank group Basel I Basel II (As at end-March) (Amount in ` crore) 2010 2011 2010 2011 Item Basel I Basel II1 2 3 4 5 2010 2011 2010 2011Public sector banks 12.1 11.8 13.3 13.1Nationalised banks* 12.1 12.2 13.2 13.5 1 2 3 4 5SBI group 12.1 11.0 13.5 12.3 A. Capital funds (i+ii) 5,72,582 6,74,662 5,67,381 6,70,389Private sector banks 16.7 15.1 17.4 16.5 i) Tier I capital 3,97,666 4,76,615 3,95,100 4,74,581Old private sector banks 13.8 13.3 14.9 14.6 ii) Tier II capital 1,74,916 1,98,047 1,72,281 1,95,808New private sector banks 17.3 15.5 18.0 16.9 B. Risk-weightedForeign banks 18.1 17.7 17.3 17.0 assets 42,16,565 51,81,583 39,01,395 47,24,933Scheduled commercial C. CRAR (A as % of B) 13.6 13.0 14.5 14.2banks 13.6 13.0 14.5 14.2 of which: Tier I 9.4 9.2 10.1 10.0 Tier II 4.1 3.8 4.4 4.1* : Include IDBI Bank Ltd.Source: Based on off-site returns submitted by banks. Source: Based on off-site returns submitted by banks. 74
  • Operations and Performance of Commercial Banks Chart IV.8: Tier I Ratio of Public Sector Banks improvement in asset quality was visible in both private sector banks and foreign banks. Public 12 sector banks, however, witnessed deterioration in asset quality in 2010-11 over the previous 11 year. This was mainly due to deterioration in asset quality of the SBI group. Among the bank 10 groups, SBI group reported the highest GNPA ratio followed by foreign banks in 2010-11. per cent 9 Foreign banks, however, registered a decline in gross non-performing loans in 2010-11 over the 8 previous year (Chart IV.9 and Table IV.15). Banking sector has written off ten per cent 7 of the previous year’s outstanding GNPAs 6 4.40 During the year 2010-11, the banking Public Sector Banks sector has written off almost ten per cent of the Target 8 per cent 2009-10 2010-11 outstanding gross non-performing loans (as at end-March 2010), which helped in limiting thefinancial soundness of these banks. In 2010-11, growth of gross non-performing loans. Theonly three banks had a Tier I ratio of below 8 per extent of write off was lower in 2010-11 ascent (Chart IV.8). compared with the previous year, however, inIndian banks can comfortably cope with the comparison with 2008 and 2009, the ratio wasproposed Basel III framework on the higher side. This indicated that during the last two years, writting off of NPAs was an4.38 Even with the proposed Basel III important factor in maintaining the asset qualityframework, which will become operational from of the banking sector at tolerable levels. TheJanuary 1, 2013 in a phased manner, Indian percentage of outstanding GNPAs written off tobanks will not have any problem in adjusting to total outstanding GNPAs (as at end-March 2010)the new capital rules both in terms of quantumand quality. Quick estimates based on the data Chart IV.9: Trends in Gross Non-Performing Assetsfurnished by banks in their off-site returns,showed that the CRAR of Indian banks under 25 120000 22.8Basel III will be 11.7 per cent (as on June 30, 22.22010) as compared with the required CRAR 20 100000under proposed Basel III at 10.5 per cent. GNPA Ratio, Growth in GNPAs Absolute GNPAs (` crore) 80000 15.6Non-Performing Assets 15 60000 11.8GNPAs to gross advances ratio improved 104.39 The asset quality of the banking sector 40000improved in 2010-11 over the previous year. The 5gross NPAs to gross advances ratio declined to 2.25 2.25 2.39 2.25 200002.25 per cent in 2010-11 from 2.39 per cent inthe previous year. The GNPAs, however, 0 2008 2009 2010 2011 0increased in absolute terms in 2010-11 over the Absolute GNPAs GNPA Ratio Growth in GNPAsprevious year, though at a lower rate. The 75
  • Report on Trend and Progress of Banking in India 2010-11 Table IV.15: Trends in Non-Performing Assets - Bank Group-wise (Amount in ` crore)Item Public Nationalised SBI Private Old private New private Foreign Scheduled sector banks* Group sector sector sector banks commercial banks banks banks banks banks1 2 3 4 5 6 7 8 9 Gross NPAsClosing balance for 2009-10 59,926 36,394 23,532 17,639 3,622 14,017 7,133 84,698Opening balance for 2010-11 59,433 36,394 23,039 17,340 3,323 14,017 7,133 83,906Addition during 2010-11 58,226 35,514 22,712 8,657 2,412 6,245 3,527 70,410Recovered during 2010-11 37,160 25,974 11,186 5,417 1,804 3,613 5,514 48,091Written off during 2010-11 5,884 1,712 4,172 2,338 231 2,107 77 8,299Closing balance for 2010-11 74,614 44,222 30,392 18,240 3,699 14,541 5,068 97,922 Gross NPAs as per cent of Gross Advances2009-10 2.19 1.95 2.70 2.74 2.32 2.87 4.26 2.392010-11 2.23 1.89 3.00 2.25 1.97 2.33 2.54 2.25 Net NPAsClosing balance for 2009-10 29,375 16,813 12,562 6,371 1,137 5,234 2,977 38,723Closing balance for 2010-11 36,071 21,281 14,790 4,430 982 3,448 1,312 41,813 Net NPAs as per cent of Net Advances2009-10 1.09 0.91 1.46 1.01 0.78 1.08 1.82 1.112010-11 1.09 0.92 1.49 0.56 0.53 0.56 0.67 0.97* : Include IDBI Bank Ltd.Note: Difference between closing balance of gross NPAs in 2009-10 and opening balance of gross NPAs in 2010-11 in the State Bank group is due to the merger of State Bank of Indore with the State Bank of India. In case of old private sector banks, the difference is due to two reasons: first, the merger of Bank of Rajasthan and second, due to the inclusion of interest reserve of `5.27 crore in the closing balance of gross NPAs in 2009- 10 and exclusion of the same from the opening balance of gross NPAs in 2010-11 by the City Union Bank.Source: Balance Sheets of respective banks.was particularly high for SBI group and new 4.42 Recovery of GNPAs is another importantprivate sector banks (Charts IV.10A and IV.10B). component of asset quality management in the banking sector. During the year 2010-11, the4.41 Slippage ratio calculated as addition of banking sector recovered 57 per cent of thegross NPAs during the year as a per cent of outstanding GNPAs (as at end-March 2010)outstanding standard assets of the previous year through various recovery channels. Foreignis another important indicator of asset quality. banks reported the highest recovery percentageThe slippage ratio, which increased consistently followed by nationalised banks (Charts IV.12Asince 2008, witnessed an improvement in 2010- and IV.12B).11, broadly reflecting the recovery of growth. Atthe bank group level, new private sector banks 4.43 SARFAESI Act, Debt Recovery Tribunalsrecorded the lowest slippage ratio in 2010-11 (DRT) and Lok Adalats are different channels(Charts IV.11A and IV.11B). available for the banking sector to recover their Chart IV.10A: NPAs Written off as per cent of Previous Chart IV.10B: Written Off Ratio - Bank Years Gross NPAs Group-wise 2010-11 16 14.9 20 18 17.7 14 16 15.0 12 14 9.8 10 12 Per cent Per cent 8 10 6 8 6.4 6 4 4.7 2.7 4 2 2 0.4 1.1 0 0 2008 2009 2010 2011 NBs SBI Group OPRBs NPRBs FBs 76
  • Operations and Performance of Commercial Banks Chart IV.11A: Slippage Ratio Chart IV.11B: Slippage Ratio - Bank Group-wise 2010-11 2.5 3.00 2.2 2.7 2.1 2.0 2.50 2.0 2.2 1.8 1.9 2.00 1.5 Per cent Per cent 1.6 1.50 1.3 1.0 1.00 0.5 0.50 0 0.00 2008 2009 2010 2011 NBs SBI Group OPRBs NPRBs FBsNPAs. In 2010-11, there was 51 per cent 4.44 The Reserve Bank issued Certificate ofincrease in the number of cases referred to Registration (CoR) to fourteen securitisationunder the SARFAESI Act. Further, out of the companies/reconstruction companiestotal amount involved, more than one third was (SCs/RCs) as at end June, 2011. Of these,recovered in 2010-11. In 2010-11, the number thirteen SC/RCs, registered with the Reserveof cases referred to DRT registered a whopping Bank, had commenced operations. In 2010-11,growth of 114 per cent over the previous year. the book value of assets acquired by SCs/RCsDue to the speedy recovery in Lok Adalats, the grew at 19 per cent over the previous year. Out ofnumber of cases referred to Lok Adalats is the total security receipts issued by SCs/RCs inmuch more as compared with other channels of 2010-11, 71 per cent were subscribed by therecovery. However, in 2010-11, the number of banking sector (Table IV.17).cases referred to Lok Adalats witnessed adecline over the previous year. Moreover, the Restructuring of standard advances helpedpercentage of amount recovered to amount in limiting the growth of gross non-involved was comparatively lower in Lok performing loansAdalats as compared with DRT in 2010-11, 4.45 The restructuring of advances undertakenthough there was an improvement over the by the banking sector during the recent yearsprevious year (Table IV.16). also helped in reducing the GNPA ratio of the Chart IV.12A: NPAs Recovered as per cent of Previous Chart IV.12B: Recovery Ratio - Bank Years Gross NPAs Group-wise 2010-11 90 68 66.1 80 77.3 66 71.4 70 64 60 62 49.8 47.5 Per cent Per cent 60 50 58 40 56.5 56.8 55.6 30 56 25.8 54 20 52 10 50 0 2008 2009 2010 2011 NBs SBI Group OPRBs NPRBs FBs 77
  • Report on Trend and Progress of Banking in India 2010-11 Table IV.16: NPAs of SCBs Recovered through Various Channels (Amount in ` crore)Recovery channel 2009-10 2010-11 No. of cases Amount Amout 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 778,833 7,235 112 1.55 616,018 5,254 151 2.87ii) DRTs 6,019 9,797 3,133 32.00 12,872 14,092 3,930 27.89iii) SARFAESI Act 78,366# 14,249 4,269 30.00 118,642# 30,604 11,561 37.78*: 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.#: Number of notices issued.DRTs- Debt Recovery Tribunals.banking sector. The impact of restructuring of 2009-10) might have contributed to the growthadvances on the asset quality of the banking in agricultural NPAs in 2010-11 owing to thesector is provided in Box IV.4. deterioration in credit quality. The agricultural NPAs to agricultural advances of domestic4.46 The share of priority sector NPAs in gross banks, which declined in 2008-09 due to theNPAs of domestic banks witnessed an increase implementation of the Agriculture Debt Waiverin 2010-11 over the previous year. While the and Relief Scheme, 2008, witnessed anratio of priority sector gross NPAs to priority increasing trend thereafter. In 2010-11, PSBssector advances increased in public sector registered higher increase in agricultural NPAbanks in 2010-11 over the previous year, it ratio as compared with private sector banksdeclined in private sector banks during the same (Charts IV.13 and IV.14, and Appendix Tablesperiod (Table IV.18 and Chart IV.13). IV.2 (A), IV.2 (B) and IV.2 (C)).Agricultural sector contributed 44 per cent 4.48 Similarly, weaker sections NPAs to weakerof total incremental NPAs of domestic banks sections advances also witnessed an increase in4.47 Agricultural sector contributed 44 per cent PSBs and private sector banks. Despite theof the total incremental NPAs of domestic banks increase in the limit of collateral free loansin 2010-11. Higher growth registered in thecredit to agricultural sector (more than 20 per Chart IV.13: Ratio of NPAs to Advancescent) during the last four years (2006-07 to 4.5 4.0 4 Table IV.17: Details of Financial Assets 3.6 3.5 Securitised by SCs/RCs 3.5 3.4 (` crore) 3.0 3Item End-June End-June 2010 2011 Per cent 2.5 2.4 2.2 2.2 2.21 2 3 1.9 21 Book Value of assets acquired 62,217 74,0882 Security Receipts issued by SCs/RCs 14,051 15,859 1.53 Security Receipts subscribed by 1.0 (a) Banks 10,314 11,233 1 (b) SCs/RCs 2,940 3,384 0.5 (c) FIIs - 39 0.5 (d) Others (Qualified Institutional Buyers) 797 1,2034 Amount of Security Receipts completely 0 Public Private Public Private Public Private Sector Sector Sector Sector Sector Sector redeemed 4,556 6,704 Banks Banks Banks Banks Banks Banks Priority sector Agriculture NPAs Weaker Sections-: Nil/negligible. NPAs to Priority to Agriculture NPAs to WeakerSource: Quarterly Statement submitted by Securitisation Companies/ Sector Advances Advances Section Advances Reconstruction Companies (SCs/RCs). 2010 2011 78
  • Operations and Performance of Commercial Banks Box IV.4: Impact of Restructuring of Advances on the Asset Quality of the Banking Sector In the aftermath of the global financial turmoil in 2007, the wake of the global financial turmoil. Thus, the impact of Reserve Bank had proactively taken many steps to arrest the restructuring of advances on the asset quality of the banking downward spiral, if any, in the economy and the banking sector will be shaped by the per cent of restructured standard sector. Amongst those steps, one important measure was accounts falling back into the NPA category. allowing banks to restructure their advances, as a one-time Data on restructuring of advances by bank groups since measure. Accordingly, the Reserve Bank issued guidelines on restructuring of advances by banks in August 2008 by September 2008 indicate that public sector banks account which banks were allowed to restructure accounts of viable for major portion of the restructuring of standard advances. entities classified as standard, sub-standard and doubtful. At the system level, the restructured standard advances as a Though it was prescribed in August 2008 that accounts percentage of gross advances increased from 2.16 per cent classified as standard assets should be immediately re- as at end-March 2009 to 2.66 per cent as at end-March 2011. classified as sub-standard assets upon restructuring, in To assess the impact of restructuring of standard advances January 2009, an exceptional/special regulatory treatment on the asset quality of the banking sector, different scenarios was granted to all accounts, which were standard as on have been developed assuming different values for the September 1, 2008. The exceptional/special regulatory percentage of restructured standard advances falling back treatment permits treating standard accounts as standard into the NPA category. Results are provided in the Table below. after restructuring, provided certain conditions are met. The special regulatory treatment allowed to the standard accounts Under the extreme assumption that the entire restructured helped the banking sector to limit the growth of gross non- standard advances would have become NPAs if these were performing advances. However, there was always a concern not restructured, the gross NPA ratio would have been as how many of these restructured standard accounts will fall high as 5.01 per cent as at end-March 2011 as against the back into the NPA category over a period of time as these reported GNPA ratio of 2.35 per cent (Table). borrowers were facing temporary cash flow problems in the Table: Impact of Restructuring on Asset Quality of SCBs (Amount in ` crore) Item All SCBs Y-on-Y Growth rate March March March 2009 2010 2011 2009 2010 2011 over over over 2008 2009 2010 1 2 3 4 5 6 7 Total Gross Advances 27,93,572 32,71,896 40,12,079 19.79 17.12 22.62 Standard Advances 27,25,350 31,90,080 39,17,991 19.73 17.05 22.82 Of which Restructured 60,379 97,834 1,06,859 192.98 60.19 10.53 Total Gross NPAs 68,222 81,816 94,088 22.17 19.93 14.84 Total Gross NPAs to Total Gross Advances 2.44 2.50 2.35 Restructured standard advances as % of gross advances 2.16 2.99 2.66 Scenario-I – 15 per cent of Restructured Standard Advances turning NPAs Scenario-I NPAs 77,279 96,491 1,10,116 31.13 24.64 14.19 Scenario-I NPA Ratio 2.77 2.94 2.74 Scenario-II – 25 per cent of Restructured Standard Advances turning NPAs Scenario-II NPAs 83,317 1,05,996 1,20,684 36.59 27.22 13.86 Scenario-II NPA Ratio 2.98 3.24 3.01 Scenario-III – 100 per cent of Restructured Standard Advances turning NPAs Scenario-III NPAs 1,28,601 1,78,537 2,00,860 68.21 38.83 12.50 Scenario-III NPA Ratio 4.60 5.46 5.01extended to the SME sector from `5 lakhs to `10 priority sector advances was generally high inlakhs in May 2010, the NPA ratio of the SME PSBs as compared with private sector bankssector witnessed a decline in 2010-11 over the (Table IV.18, Chart IV.13, and Appendix Tablesprevious year. In sum, the priority sector NPAs to IV.3 (A) and IV.3 (B)). 79
  • Report on Trend and Progress of Banking in India 2010-11 Chart IV.14: Composition of Incremental NPAs of per cent in 2010-11 as compared with the Domestic Banks 2010-11 previous year’s growth of 22 per cent. Reflecting the increase in provisions, the ratio of 27.2 outstanding provisions to gross NPAs improved in 2010-11 over the previous year (Table IV.19). 44.0 Net NPAs registered lower growth 4.50 Net NPAs registered a lower growth of 8 per cent in 2010-11 as compared with the previous year’s growth of 23 per cent, reflecting increase 8.1 in provisioning for NPAs. Resultantly, net NPAs to net advances ratio declined in 2010-11 over 20.7 2009-10. Agriculture Other Priority Sector Small Scale Industries Non-Priority Sectors Standard assets to gross advances ratio Note: Under the item ‘small scale industries’, for the year 2011 data pertain improved to ‘micro and small enterprises’ and for the year 2010 data pertain to ‘small scale industries’. 4.51 In accordance with the decline in the gross NPA ratio in 2010-11 over the previous year, theProvisioning for GNPAs witnessed higher growth standard assets to gross advances ratio4.49 In sync with the growth in GNPAs, the witnessed an improvement during the sameprovisioning for NPAs registered a growth of 25 period. However, there was an increase in the Table IV.18: Sector-wise NPAs of Domestic Banks* (Amount in ` crore)Year Priority sector Of which Non-Priority Of which Total NPAs Agriculture Small scale industries# Others sector Public Sector Amt. Per cent Amt. Per cent Amt. Per cent Amt. Per cent Amt Per cent Amt. Per cent Amt. Per cent1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Public sector banks2010 30,848 53.8 8,330 14.5 11,537 20.1 10,981 19.2 26,453 46.2 524 0.9 57,301 100.02011 41,245 58.1 14,487 20.4 14,340 20.2 12,417 17.5 29,802 41.9 278 0.4 71,047 100.0 Nationalised banks**2010 19,908 56.1 5,741 16.2 8,668 24.4 5,499 15.5 15,562 43.9 280 0.8 35,470 100.02011 25,678 59.8 9,220 21.5 10,424 24.3 6,034 14.1 17,229 40.2 273 0.6 42,907 100.0 SBI group2010 10,940 50.1 2,589 11.9 2,869 13.1 5,482 25.1 10,890 49.9 244 1.1 21,830 100.02011 15,567 55.3 5,268 18.7 3,916 13.9 6,383 22.7 12,573 44.7 6 0.02 28,140 100.0 Private sector banks2010 4,792 27.6 2,023 11.6 1,139 6.6 1,630 9.4 12,592 72.4 - - 17,384 100.02011 4,823 26.8 2,172 12.1 1,298 7.2 1,353 7.5 13,147 73.2 153 0.9 17,971 100.0 Old private sector banks2010 1,613 44.7 269 7.4 475 13.2 869 24.1 1,999 55.3 - - 3,612 100.02011 1,599 43.3 417 11.3 551 14.9 631 17.1 2,095 56.7 153 4.1 3,694 100.0 New private sector banks2010 3,179 23.1 1,754 12.7 664 4.8 760 5.5 10,594 76.9 - - 13,773 100.02011 3,224 22.6 1,755 12.3 746 5.2 722 5.1 11,053 77.4 - - 14,277 100.0 All SCBs2010 35,640 47.7 10,353 13.9 12,676 17.0 12,611 16.9 39,045 52.3 524 0.7 74,685 100.02011 46,068 51.8 16,660 18.7 15,638 17.6 13,370 15.5 42,950 48.2 431 0.5 89,017 100.0#: Data for 2011 pertains to ‘micro and small enterprises’ and, hence, not strictly comparable with 2010.* : Excluding foreign banks.- : Nil/negligible.Amt. – Amount; Per cent – Per cent of total NPAs.**- include IDBI Bank Ltd.Source: Based on off-site returns (domestic) submitted by banks. 80
  • Operations and Performance of Commercial Banks Table IV.19: Trends in Provisions for Non-Performing Assets – Bank Group-wise (Amount in ` crore)Item Public Nationa- SBI Private Old New Foreign Scheduled sector lised group sector private private banks commercial banks banks* banks sector sector banks banks banks1 2 3 4 5 6 7 8 9Provisions for NPAsAs at end-March 2010 28,187 17,818 10,369 10,848 2,066 8,782 4,178 43,213Add : Provisions made during the year 29,133 15,720 13,413 6,854 1,149 5,705 2,755 38,742Less : Write-off, write- back of excess during the year 20,641 12,348 8,293 4,150 749 3,401 3,126 27,917As at end-March 2011 36,680 21,190 15,490 13,552 2,466 11,086 3,808 54,040Memo:Gross NPAs 74,614 44,222 30,392 18,240 3,699 14,541 5,068 97,922Ratio of outstanding provisions to gross NPAs (per cent)End-March 2010 47.4 48.9 45.0 62.4 61.3 62.7 58.7 51.5End-March 2011 49.2 47.9 51.0 74.3 66.7 76.2 75.1 55.2* : Include IDBI Bank Ltd.Source: Balance sheets of respective banks.ratio of doubtful assets to gross advances ratio in in 2010-11 owing to the corresponding growth in2010-11 over the previous year. The sub- the capital base of the banking sector.standard assets as a ratio of gross advancesdeclined in 2010-11 over the previous year Credit Boom(Table IV.20). Despite higher credit growth, there is no evidence of credit boomLeverage Ratio 4.53 From the point of view of banking sectorLeverage ratio remained unchanged stability, it is important to monitor the4.52 Despite the higher growth in balance sheet development of credit bubbles in the economy.during 2010-11, the leverage ratio, as in the The analysis provided in Box IV.5 indicated thatprevious year, remained constant at 6.6 per cent the robust credit growth during 2010-11 did not Table IV.20: Classification of Loan Assets - Bank Group-wise (As at end-March) (Amount in ` crore)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 2010 26,73,534 97.81 28,791 1.05 25,383 0.93 5,750 0.21 2011 32,72,914 97.77 34,973 1.04 33,180 0.99 6,463 0.19 1.1 Nationalised banks** 2010 18,27,061 98.05 18,520 0.99 15,034 0.81 2,841 0.15 2011 22,91,111 98.11 21,758 0.93 19,282 0.83 3,183 0.14 1.2 SBI Group 2010 8,46,473 97.30 10,271 1.18 10,349 1.19 2,909 0.33 2011 9,81,803 97.00 13,215 1.31 13,898 1.37 3,280 0.322 Private sector banks 2010 6,26,472 97.27 8,842 1.37 6,590 1.02 2,166 0.34 2011 7,93,590 97.76 4,530 0.56 10,795 1.33 2,864 0.35 2.1 Old private sector banks 2010 1,52,745 97.69 1,395 0.89 1,637 1.05 580 0.37 2011 1,83,601 98.03 1,253 0.67 1,815 0.97 626 0.33 2.2 New private sector banks 2010 4,73,727 97.13 7,447 1.53 4,953 1.02 1,586 0.33 2011 6,09,989 97.68 3,277 0.52 8,980 1.44 2,238 0.363 Foreign banks 2010 1,60,311 95.74 4,929 2.94 1,440 0.86 758 0.45 2011 1,94,256 97.46 1,865 0.94 2,110 1.06 1,087 0.55 Scheduled commercial banks 2010 34,60,317 97.61 42,562 1.20 33,413 0.94 8,674 0.24 2011 42,60,760 97.75 41,368 0.95 46,085 1.06 10,415 0.24* : As per cent to gross advances.**: Include IDBI Bank Ltd.Note: Constituent items may not add up to the total due to rounding off.Source: DSB Returns (BSA) submitted by respective banks. 81
  • Report on Trend and Progress of Banking in India 2010-11lead to development of any credit boom in the Bank, which had remained in surplus mode foreconomy both at the aggregate and sub-sectoral nearly 18 months, switched into deficit mode atlevel (Box IV.5). end-May 2010 and largely remained in deficit for rest of the financial year 2010-11. AutonomousLiquidity factors like the centre’s surplus balance with theDue to autonomous factors banks operated Reserve Bank and currency in circulation wereunder tight liquidity conditions key drivers of liquidity conditions in 2010-11. The liquidity conditions have continued to4.54 During 2010-11, banks were operating remain in deficit mode during 2011-12 so far.under tight liquidity conditions. The Liquidity Reflecting the tight liquidity conditions andAdjustment Facility (LAF) window of the Reserve regular hikes in the policy rates by the Reserve Box IV.5: Robust Credit Growth and Credit Booms – An Analysis of the Indian Banking Sector The robust credit growth experienced by the Indian economy The results indicated that at the aggregate level there was during 2010-11 raised concerns with regard to the no credit boom in the economy during 2010-11, despite development of credit booms in the economy. Credit booms the higher credit growth. However, the cyclical component can seriously undermine the financial soundness of the of credit to the infrastructure sector crossed the ceiling of banking sector owing to deterioration in credit quality. To 1.5 times of standard deviation of cyclical credit in the analyse credit booms, the methodology developed by Coricelli early 2010-11, though moderated thereafter. Further, the et. al. (2006) is used here. As per the said methodology, a credit to NBFCs was in an upturn during 2010-11, which credit bubble or boom is present when the cyclical deserves careful monitoring going forward (Charts A, B, C component of credit exceeds 1.5 times the standard deviation and D). of the cyclical credit. The cyclical component of credit was obtained from Hodrick-Presscott filter. As along with the Reference: robust growth of aggregate non-food credit, some of the sectors such as credit to NBFCs and credit to infrastructure Coricelli, Fabrizio, Fabio Mucci, and Debora Revoltella sector also witnessed high growth in 2010-11, the analysis (2006), ‘Household Credit in the New Europe: Lending Boom was also undertaken at the sub-sectoral level. The results or Sustainable Growth?’, Discussion Paper No. 5520, Centre are provided in Charts A, B, C and D. for Economic Policy Research, London, UK. Chart A: Credit Boom in Aggregate Non-Food Credit Chart B: Credit Boom in Infrastructure Credit 20 4 15 3 10 2 5 1 Per cent Per cent 0 0 -5 -1 -10 -15 -2 -20 -3 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2006Q2 2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2006Q2 2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2006Q3 2007Q3 2008Q3 2009Q3 2010Q3 2011Q3 2006Q3 2007Q3 2008Q3 2009Q3 2010Q3 2011Q3 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 Ceiling (12.664) Cyclical Credit Ceiling (1.877) Cyclical Infrastructure Credit Chart C: Credit Boom in Housing Credit Chart D: Credit Boom in Credit to NBFCs 4 1 3 0.5 2 1 0 Per cent Per cent 0 -1 -0.5 -2 -1 -3 -4 -1.5 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2006Q2 2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2006Q2 2007Q2 2008Q2 2009Q2 2010Q2 2011Q2 2006Q3 2007Q3 2008Q3 2009Q3 2010Q3 2011Q3 2006Q3 2007Q3 2008Q3 2009Q3 2010Q3 2011Q3 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 2006Q4 2007Q4 2008Q4 2009Q4 2010Q4 2011Q4 Ceiling (1.901) Cyclical Housing Credit Ceiling (0.728) Cyclical Component of Credit to NBFCs 82
  • Operations and Performance of Commercial BanksBank, the call rate, after hovering around the Credit growth to agriculture and industrylower bound of the informal LAF corridor for a moderatedlong period, firmed up since end-May 2010 and 4.56 The growth of credit to agriculture sectormostly remained above the upper bound of the and industrial sector witnessed moderationinformal corridor in the second-half of 2010-11. during 2010-11 in comparison with those in theThe rates in the collateralised segments (i.e., previous year. The sharp decline in the growth ofCBLO and Market Repo) moved in tandem with agricultural credit was partly on account ofthe call rate, but generally remained below it definitional changes effected during February-during this period. Banks and primary dealers March 2011. It is pertinent to note that despitewere the major groups of borrowers in the the enhancement of limit (from `50,000 tocollateralised segments. The average issuance of `1,00,000), for the waiver of margin/securitycertificates of deposit (CDs) remained high requirements for agricultural loans in Juneduring 2010-11. The average issuance during 2010, the credit flow to the agricultural sector2010-11 was higher at around `33,000 crore as decelerated in 2010-11 over the previous year.compared to around `17,000 crore during 2009- In tune with the overall moderation in the growth10. In line with the rise in rates in other money of industrial credit, the credit to infrastructuremarket segments, the effective interest rate in sector also reported lower growth in 2010-11 asrespect of aggregate CD issuances increased to compared with that in the previous year.9.96 per cent at end-March 2011 from 6.07 per However, in comparison with the growth in totalcent as at end-March 2010. non-food credit and growth in industrial credit, credit growth to infrastructure sector was5. Sectoral Deployment of Bank Credit substantially high. The telecommunications sector was the major contributor of this higherGrowth of aggregate non-food credit credit growth, which was mainly due to creditimproved extended for participation in the 3G spectrum4.55 On a y-o-y basis, there was an auctions. As this was a one-time event, credit toimprovement in the growth of aggregate non- infrastructure sector may moderate goingfood credit in 2010-11 as compared with that in forward. However, empirical estimation suggeststhe previous year. This was in contrast to the that these long-term loans increase the assettrend observed during the last four years. The liability mismatches in the banking sector (Tablemajor drivers of this overall credit growth during IV.21)6.2010-11 were credit to services sectors andpersonal loans. Within the services sector, credit Shares of services sector and personal loansto non-banking financial companies (NBFCs) in total non-food credit increasedreported the highest growth rate followed by 4.57 In sync with the higher growth rates, thetourism, hotels and restaurants, and shares of services sector credit and personalprofessional services. Within personal loans, the loans increased in the total outstanding non-highest credit growth was observed in advances food credit as at end-March 2011 in comparisonagainst shares followed by advances against with the previous year. In contrast, the share ofFCNR(B)/NRNR deposits and vehicle loans. agricultural credit in the total outstanding non- 6 Null Hypothesis F-Statistic p- value Infrastructure Loans does not granger cause ALM 2.524*** 0.09 Infrastructure Loans does not granger cause ALM gap in the ‘more than five years’ 4.096** 0.02 ***: significant at ten per cent level. **: significant at five per cent level. 83
  • Report on Trend and Progress of Banking in India 2010-11 Table IV.21: Sectoral Deployment of Chart IV.15: Shares of Population Groups in Agricultural Gross Bank Credit and Industrial Credit 80 (Amount in ` crore) 71.1Sector 2009-10 2010-11 67.0 70 Amount Percentage Amount Percentage Variation Variation 601 2 3 4 51. Agriculture and 50 Allied Activities 4,16,133 22.9 4,60,333 10.6 Per cent 38.5 37.12. Industry 13,11,451 24.4 16,20,849 23.6 40 Of which: Infrastructure 27.9 25.3 30 23.8 Loans 3,79,888 40.7 5,26,655 38.63. Personal Loans 5,85,633 4.1 6,85,372 17.0 17.3 17.0 16.4 16.2 Of which: Housing 3,00,929 7.7 3,46,110 15.0 20 13.8 Credit Card 9.4 Outstanding 20,145 -28.1 18,098 -10.2 6.5 6.7 5.9 10 Education 36,863 29.0 43,710 18.64. Services 7,26,790 12.5 9,00,801 23.9 0 Of which: Agriculture Agriculture Agriculture Agriculture Industry Industry Industry Industry Tourism, hotels and restaurant 19,410 42.5 27,729 42.9 Commercial Real Metropolitan Rural Semi-Urban Urban Estate Loans 92,128 -0.3 1,11,836 21.4 2005-06 2009-10 Non-Banking Financial Companies 1,13,441 14.8 1,75,577 54.8 Total Non-Food sector in 2010-11. Out of the total industrial Gross Bank Credit (1 to 4) 30,40,007 16.8 36,67,355 20.6 credit, the share of infrastructure increased fromNote: 1) Data are provisional and relate to select banks. 29 per cent in 2009-10 to 33 per cent in 2010- 2) The slowdown in credit to agriculture was largely on account of definitional changes effected during February-March 2011. 11. Further, the credit to telecommunicationsSource: Sectoral and Industrial Deployment of Bank Credit Return sector, which recorded a growth of 69 per cent in (Monthly). 2010-11 over the previous year, also witnessedfood credit recorded a decline. Agricultural an increase in its share in the totalsector, which offers employment to large infrastructure credit.sections of population received only 13 per cent 4.60 As at end-March 2010, more than 70 perof total non-food credit as at end-March 2011. cent of the total industrial credit was disbursed4.58 Rural areas accounted for almost 39 per in metropolitan areas, leaving a small share forcent of total agricultural credit and another 28 other population groups (Chart IV.15)8.per cent was disbursed in semi-urban areas asat end-March 2010. The shares of rural, semi- Despite policy tightening, housing crediturban and urban areas in total agricultural witnessed higher growthcredit witnessed an increase during the period 4.61 Personal loans witnessed a growth of 172005-06 to 2009-10, while that of metropolitan per cent in 2010-11 over the previous year. Itareas witnessed a decline during the same may be recalled that growth in personal loansperiod (Chart IV.15)7. was one of the major factors behind the high4.59 The share of industrial credit also credit growth phase of the mid-2000s. It maywitnessed a decline in the outstanding non-food require careful monitoring at the presentcredit in 2010-11 as compared with the previous juncture also owing to a number of reasons.year. However, even with the decline, almost half First, housing loans being sensitive to interestof the total non-food credit went to the industrial rate increases might increase the possible 7 Based on data taken from Basic Statistical Returns, various issues. 8 Based on data taken from Basic Statistical Returns 2009-10. 84
  • Operations and Performance of Commercial Banksdefaults by borrowers. In fact, in December Table IV.22: Priority Sector Lending by Public2010, the Reserve Bank had strengthened the and Private Sector Banks (As on the last reporting Friday of March)prudential norms relating to housing loans to (Amount in ` crore)prevent excessive leverage. However, despite Item Public Sector Private Sectorpolicy tightening, housing credit witnessed Banks Bankshigher growth in 2010-11 over the previous year. 2010 2011P 2010 2011PSince the tightening was towards the end of the 1 2 3 4 5financial year, its impact may be felt Priority Sector Advances# 8,63,777 10,28,615 2,14,669 2,48,828subsequently. Second, a sizable portion of (41.6) (41.3) (45.8) (46.6) Of which, Agriculture 3,72,463 4,14,991 90,737 92,136personal loans (except housing and vehicle (17.9) (16.5) (19.4) (15.7)loans) are unsecured loans, and may have a Of which, Micro and Small Enterprises 2,76,319 3,76,625 64,825 87,857significant impact on GNPAs of the banking (13.3) (15.1) (13.8) (16.4)sector. Third, majority of personal loans are P: Provisional.long-term loans and empirical analysis indicated #: In terms of revised guidelines on lending to priority sector lending, broad categories include small enterprise sector, retail trade,that it causes asset liability mismatches in the microcredit, education and housing.long-term buckets9. Note: Figures in parentheses represent percentages to Net Bank Credit/ Adjusted Net Bank Credit (ANBC)/Credit equivalent amount of Off- Balance Sheet Exposures (CEOBSE), whichever is higher.Credit to Priority Sectors indicated that seven out of 26 public sectorAt the aggregate level, priority sector lending banks were not able to meet the priority sectortarget was met by the banking sector lending target of 40 per cent of ANBC in 2010-4.62 The priority sector lending10 witnessed a 11. Further, it is a concern that 18 out of 26growth of 18 per cent in 2010-11 over the public sector banks could not meet the target setprevious year. However, the growth of for agricultural advances in 2010-11. Among theagricultural advances decelerated to 9 per cent private sector banks, only one bank could notin 2010-11 as compared with the growth of 23 meet the priority sector lending target in 2010-per cent in the previous year. As in the previous 11. However, ten private sector banks did notyear, in 2010-11 also, at the aggregate level, meet the target set for agricultural advances inbanks have lent more than 40 per cent of their 2010-11 (Charts IV.16A and IV.16B, andANBC to priority sectors. The sub-target Appendix Tables IV.4A, IV.4B, IV.5A and IV.5B).prescribed for agriculture at 18 per cent of ANBC 4.64 Foreign banks have a slightly differentwas also achieved by banks in 2010-11 (Table norm for priority sector lending as the target forIV.22). them is set at 32 per cent of ANBC. Further, export credit is a part of priority sector lending ofSome public sector banks could not meet the foreign banks. In 2010-11, at the aggregate level,priority sector lending target foreign banks achieved the target of priority4.63 The bank-wise data on priority sector sector lending. However, at the bank-level, a fewadvances as per cent of ANBC, however, banks could not meet the priority sector lending 9 Null Hypothesis F-Statistic p- value Personal Loans does not granger cause ALM 2.841** 0.04 Personal Loans does not granger cause ALM gap in the ‘three to five years’ 4.340** 0.02 **: Significant at five per cent level. 10 As per the extant norms, public sector banks and private sector banks have to lend 40 per cent of their adjusted net bank credit (ANBC) or credit equivalent amount of off balance sheet exposures, whichever is higher as on March 31st of the previous year to priority sectors. 85
  • Report on Trend and Progress of Banking in India 2010-11 Chart IV.16A: Priority Sector Lending: Target and Chart IV.16B: Agricultural Advances: Target and Achievement 2010-11 Achievement 2010-11 70 30 65 25 60 55 20 50 Per cent Per cent 45 15 40 10 35 30 5 25 20 0 Banks Banks Target (40 per cent) Public sector banks Private sector banks Target (18 per cent) Public sector banks Private sector bankstarget in 2010-11. Further, at the aggregate total retail portfolio of the banking sector. Thelevel, though foreign banks achieved the target of only sub-segment, which reported negativeexport credit at 12 per cent, at the bank level, growth rate in 2010-11 over the previous yearsome banks could not meet the target (Table was credit card receivables (Table IV.24).IV.23, Charts IV.17A and IV.17B, and AppendixTables IV.4C and IV.5C). Credit to Sensitive Sectors Credit to sensitive sectors registered higherRetail Credit growthRetail loan segment registered higher 4.66 Credit to sensitive sectors, viz., exposure togrowth capital market, direct and indirect lending to real4.65 The retail loan segment of the banking estate sector and credit to commodities sectorsector, which decelerated during the recent past presumes significance in the context of financialregistered higher growth in 2010-11. The stability as these are the sectors, which arehighest growth was reported by consumer subject to fluctuations in prices, and as suchdurables followed by auto loans in 2010-11 over leads to booms in loans and advances. In 2010-the previous year. The housing loans witnessed 11, credit to sensitive sectors recorded highera moderate growth of 16 per cent in 2010-11 growth as compared with the previous year. Theover the previous year. Importantly, housing sensitive sector credit growth reported by theloans continued to constitute almost half of the SBI group is particularly noteworthy at 41 per Chart IV.17A: Priority Sector Advances- Chart IV.17B: Export Credit - Target and Target and Achievement 2010-11 Achievement 2010-11 120 80 100 70 60 80 50 Per cent Per cent 60 40 30 40 20 20 10 0 0 Banks Banks Target (32 per cent) Foreign Banks Target (12 per cent) Foreign Banks Note: Priority sector lending target will only be applicable from 2011-12 onwards to banks, which have started their operations in 2010-11. This is one of the reasons for zero values. 86
  • Operations and Performance of Commercial Banks Table IV.23: Priority Sector Lending by Table IV.24: Retail Portfolio of Banks Foreign Banks (Amount in ` crore) (As on the last reporting Friday of March) Item Outstanding as Percentage (Amount in ` crore) at end-March variationSector 2010 2011P 2010 2011 2009- 2010- Amount Percentage Amount Percentage 10 11 to ANBC/ to ANBC/ 1 2 3 4 5 CEOBSE CEOBSE 1. Housing Loans 3,15,862 3,67,364 20.0 16.31 2 3 4 5 2. Consumer Durables 3,032 4,555 -44.2 50.2Priority Sector Advances # 59,960 36.0 66,527 40.0 3. Credit Card Receivables 21,565 18,655 -28.0 -13.5Of which: Export credit 33,396 20.1 42,487 25.5 4. Auto Loans 78,346 1,00,155 -6.6 27.8Of which: Micro and Small 5. Other Personal Loans 2,03,947 2,53,243 -3.5 24.2Enterprises* 21,147 12.7 21,501 12.9 Total Retail Loans 6,22,752 7,43,972 4.9 19.5P : Provisional. (1 to 5) (19.0) (18.5)#: In terms of revised guidelines on lending to priority sector, broad categories include agriculture, small enterprises sector, retail trade, micro Note: Figures in parentheses represent percentage share of retail loans credit, education and housing. in total loans and advances. The amount of total loans and*: The new guidelines on priority sector advances take into account the advances are as provided in the off-site returns (domestic) of revised definition of small and micro enterprises as per the Micro, Small SCBs. and Medium Enterprises Development Act, 2006. Source: Based on Off-site returns (domestic).Note: ANBC/CEOBSE – Adjusted Net Bank Credit/Credit equivalent amount of Off-Balance Sheet Exposures, whichever is higher.cent as compared with the industry average of through public issues witnessed substantial22 per cent in 2010-11. This was mainly due to increase in 2010-11, particularly during Marchthe growth in real estate credit. 2011 when 70 per cent of the total resources were raised. Resumption of FII inflows and a4.67 Despite higher growth, the share of credit moderate recovery in the secondary marketto sensitive sectors in total loans and advances enabled banks to raise resources. The capitalwitnessed a decline in 2010-11 as compared raised by banks was through rights issue, withwith the previous year due to the offsetting jump public sector banks accounting for the bulk ofin the growth of total loans and advances. The the increase (Table IV.25).share of sensitive sector credit as well as realestate sector credit to total loans and advances 4.69 Resources raised by banks through privatewas the highest in foreign banks followed by new placements declined by 40 per cent in 2010-11private sector banks in 2010-11 (Appendix Table over the previous year, mainly on account ofIV.6). private sector banks, which registered a decline of over 64 per cent (Table IV.26).6. Operations of Scheduled CommercialBanks in Capital Market 4.70 During 2010-11, banks did not raise any resources from the global capital markets. TheResources raised by banks through public environment of sluggish growth recovery in theissues increased advanced economies, persistence of Euro zone4.68 In contrast to the trend observed during sovereign debt problems and political tensions inthe last two years, resources raised by banks the MENA region have negatively affected overall Table IV.25: Public Issues from the Banking Sector (` crore)Year Public Sector Banks Private Sector Banks Total Grand Total Equity Debt Equity Debt Equity Debt1 2 3 4 5 6 7 8=(6+7)2009-10 325 - 313 - 638 - 6382010-11 4,332 - 915 - 5,247 - 5,247-: Nil/Negligible. 87
  • Report on Trend and Progress of Banking in India 2010-11 Table IV.26: Resources Raised by Banks Volatility of BSE Bankex was higher than through Private Placements that of BSE Sensex (Amount in ` crore)Category 2009-10 2010-11 4.72 Out of 38 listed banks, four banks No. of Amount No. of Amount registered decline in their stock prices over the Issues raised Issues raised previous year. The volatility of BSE Bankex was1 2 3 4 5 higher than that of BSE Sensex in 2010-11 as inPrivate Sector Banks 18 17,101 5 6,063 the previous year, reflecting the risk in trading inPublic Sector Banks 63 23,762 25 20,916 these stocks (Table IV.27).Total 81 40,863 30 26,979Note: Data for 2010-11 are provisional. 4.73 In 2010-11, the price earning (P/E) ratio ofSource: Merchant Bankers and Financial Institutions. nine out of the 38 banks was lower as comparedresource mobilisation through Euro issues with the previous year. Bank stocks witnessed(Table IV.27). an increase in their share in total turnover in 2010-11 over 2009-10. This share furtherPerformance of Banking Stocks in the increased in 2011-12 (during April and June).Secondary Market Similarly, the share of bank stocks in totalDespite concerns, BSE Bankex outperformed market capitalisation also increased in 2010-11BSE Sensex over the previous year. However, share of bank stocks in total market capitalisation witnessed a4.71 The domestic stock market, which had decline at end June 2011 over end March 2011recorded significant gains in 2009-10 continued (Table IV.28 and Appendix Table IV.7).to grow in 2010-11, albeit at a slower pace.Despite concerns over the net interest margins 7. Shareholding Pattern in Scheduledand rising provisions, the BSE Bankex Commercial Banksoutperformed BSE Sensex during 2010-11 as inthe previous year, reflecting positive market Government shareholding in PSBs was wellsentiments given the healthy growth in credit above the statutory requirementdemand (Chart IV.18). 4.74 In 2010-11, Government shareholding in public sector banks ranged roughly between 57 Chart IV.18: Relative Performance of BSE Bankex per cent and 85 per cent in 2010-11, though the and BSE Sensex - 2010-11 minimum statutory requirement is 51 per cent 140 (Table IV.29 and Chart IV.19). 130 Table IV.27: Resource Mobilisation through Value of Index rebased to 100 Euro Issues by the Banking Sector (` crore) 120 Item 2009-10 2010-11 110 1 2 3 Euro Issues 843 - 100 (i) ADRs - - a) Private - - b) Public - - 90 (ii) GDRs 843 - a) Private 843 - 20-January-11 10-February-11 3-March-11 31-March-11 1-April-10 22-April-10 13-May-10 3-June-10 24-June-10 15-July-10 5-August-10 26-August-10 16-September-10 7-October-10 28-October-10 18-November-10 9-December-10 30-December-10 b) Public - - (iii) FCCBs N.A. N.A. N.A.: Not available. -: Nil/Negligible. FCCBs – Foreign Currency Convertible Bonds. BSE Bankex BSE Sensex ADRs/GDRs- American/Global Depository Receipts. 88
  • Operations and Performance of Commercial Banks Table IV.28: Risk-Return Performance, Table IV.29: Number of Public Sector Banks* Turnover and Capitalisation of Bank Stocks Classified by Percentage of Private ShareholdingItem 2008- 2009- 2010- 2011- (end-March 2011) 09 10 11 12# Class of shareholding Private Private Total1 2 3 4 5 resident non-resident private shareholding shareholding shareholding1. Return* BSE Bankex -41.8 137.2 24.9 -3.6 1 2 3 4 BSE Sensex -37.9 80.5 10.9 -2.3 Up to 10 per cent 1 12 -2. Volatility@ More than 10 and upto BSE Bankex 23.0 16.5 10.3 4.3 20 per cent 6 9 4 BSE Sensex 24.2 11.9 6.3 3.3 More than 20 and upto3. Share of turnover of bank stocks in total turnover 9.61 8.28 9.48 9.96 30 per cent 9 - 14. Share of capitalisation of More than 30 and upto bank stocks in total 40 per cent 2 - 6 market capitalisation** 8.41 10.03 11.91 11.55 More than 40 and upto 43 per cent 3 - 10*: Percentage variations in indices on a point-to-point basis.@: Defined as coefficient of variation. –: Nil/neglegible.**: As at end-period. *: Including 19 nationalised banks, SBI and IDBI Bank Ltd.#: April-June 30, 2011.Source: BSE. shareholding in all private sector banks was less4.75 The foreign shareholding in public sector than 74 per cent, the regulatory maximumbanks continued to be at a lower level in 2010-11 prescribed by the Reserve Bank. Notably, onlyas in the previous year. Twelve out of 21 public four banks, viz., three new private sector bankssector banks had only less than ten per cent and one old private sector bank, had foreignforeign shareholding in 2010-11, while rest of shareholding of more than 49 per cent in 2010-the public sector banks had less than 20 per 11, the ceiling put forward by the Reserve Bankcent foreign shareholding. All the new private for new banks for the first five years of theirsector banks had a foreign shareholding of more operations in the draft guidelines issued inthan 30 per cent. In nine out of 14 old privatesector banks, the foreign shareholding was more August 2011 (Chart IV.20 and Appendixthan 20 per cent in 2010-11. However, foreign Table IV.8). Chart IV.19: Government Shareholding in PSBs Chart IV.20: Foreign Shareholding in Domestic Banks (end-March 2011) (end-March 2011) 90.0 80 85.0 70 80.0 60 75.0 50 Per cent 70.0 40 Per cent 30 65.0 20 60.0 10 55.0 0 50.0 Banks 45.0 Banks 49 per cent PSBs NPRBs Ceiling 51 per cent PSBs OPRBs 74 per cent 89
  • Report on Trend and Progress of Banking in India 2010-118. Foreign Banks’ Operations in India presence as at end-August 2011. In 2010-11,and Overseas Operations of Indian State Bank of India undertook the largestBanks expansion of foreign operations through opening five new offices abroad (Table IV.30).Operations of foreign banks in Indiawitnessed an increase 9. Technological Developments in4.76 At end-August 2011, 38 foreign banks Scheduled Commercial Banks(from 24 countries) were operating in India as Technological upgradation continuedcompared to 34 banks at end September 2010.The total number of branches too increased to 4.79 During the recent years, the pace and321 in August 2011 from 315 in September quality of banking was changed by the2010. In addition, 47 foreign banks operated in technological advancements made in this area.India through representative offices as at end Computerisation as well as the adoption of coreAugust 2011 as against 45 as at end September banking solutions was one of the major steps in2010. The largest branch network of foreign improving the efficiency of banking services. Thebanks in India was that of Standard Chartered new private sector banks and most of the foreignBank followed by HSBC Ltd., Citibank and the banks, which started their operations in the midRoyal Bank of Scotland N.V. nineties followed by liberalisation, were the front runners in adopting technology. For old private4.77 Between September 2010 and August sector banks and public sector banks adoption2011, permission was granted to four new of technology was an arduous job because of theforeign banks, viz., National Australia Bank, historical records and practices. However, it isIndustrial and Commercial Bank of China, important to note that presently almost 98 perRabobank International and Woori Bank to open cent of the branches of public sector banks areone branch each in India. Permission was also fully computerised, and within which almost 90granted to one foreign bank viz., Sumitomo per cent of the branches are on core bankingMitsui Banking Corporation to open a platform.representative office in India. 4.80 Further, introduction of automated tellerForeign operations of Indian banks machines (ATMs) enabled customers to doexpanded banking without visiting the bank branch. In 2010-11 the number of ATMs witnessed a4.78 Between September 2010 and August growth of 24 per cent over the previous year.2011, Indian Banks opened nine more branches However, the percentage of off-site ATMs to totalabroad apart from opening one subsidiary and ATMs witnessed a marginal decline to 45.3 perone representative office. Thus, the foreign cent in 2010-11 from 45.7 per cent in 2009-10.operations of Indian banks (16 public sector More than 65 per cent of the total ATMs belongedbanks and six private sector banks) expanded in2010-11 with a network of 244 offices as to the public sector banks as at end March 2011compared with 233 offices in the previous year. (Table IV.31 and Appendix Table IV.9).The largest Indian bank, viz., State Bank of India 4.81 During 2010-11, the number of debithad the largest network of foreign offices as at cards grew at the rate of 25 per cent over theend August 2011 followed by Bank of Baroda. previous year. In sync with the trend observed inThese two banks together accounted for 51 per case of ATMs, nearly three fourths of the totalcent of the total foreign offices of Indian banks as debit cards were issued by PSBs as at end Marchat end August 2011. Among private sector 2011. The share of PSBs in outstanding debitbanks, ICICI Bank Ltd. had the largest foreign cards witnessed an increase during the recent 90
  • Operations and Performance of Commercial Banks Table IV.30: Overseas Operations of Indian Banks (Actually operational)Name of the Bank Branch Subsidiary Representative Office Joint Venture Bank Total 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 1 2 3 4 5 6 7 8 9 10 11I. Public Sector Banks 137 144 20 21 39 39 7 7 203 211 1. Allahabad Bank 1 1 - - 1 1 - - 2 2 2. Andhra Bank - - - - 2 2 - - 2 2 3. Bank of Baroda 46 47 9 9 3 3 1 1 59 60 4. Bank of India 24 24 3 3 5 5 1 1 33 33 5. Canara Bank 4 4 - - 1 1 - - 5 5 6. Corporation Bank - - - - 2 2 - - 2 2 7. Indian Bank 3 4 - - - - - - 3 4 8. Indian Overseas Bank 6 6 1 1 4 4 - - 11 11 9. IDBI Bank Ltd. 1 1 - - - - - - 1 1 10. Punjab National Bank 4 4 2 3 4 4 1 1 11 12 11. State Bank of India 42 47 5 5 8 8 4 4 59 64 12. Syndicate Bank 1 1 - - - - - - 1 1 13. UCO Bank 4 4 - - 2 2 - - 6 6 14. Union Bank 1 1 - - 5 5 - - 6 6 15. United Bank of India - - - - 1 1 - - 1 1 16. Oriental Bank of Commerce - - - - 1 1 - - 1 1II. New Private Sector Banks 11 13 3 3 16 17 - - 30 33 17. Axis Bank 3 3 - - 2 3 - - 5 6 18. HDFC Bank Ltd. 1 2 - - 2 2 - - 3 4 19. ICICI Bank Ltd. 7 8 3 3 8 8 - - 18 19 20. IndusInd Bank Ltd. - - - - 2 2 - - 2 2 21. Federal Bank Ltd. - - - - 1 1 - - 1 1 22. Kotak Mahindra Bank Ltd. - - - - 1 1 - - 1 1 Total 148 157 23 24 55 56 7 7 233 244-: NilNote: 1) Data for 2010 relate to end-September. 2) Data for 2011 relate to end-August.years, while that of new private sector banks and Outstanding number of credit cards declinedforeign banks witnessed a decline over the same 4.82 The issuance of credit cards facilitatesperiod. However, in absolute terms, the number transactions without having to carry paperof outstanding debit cards witnessed an increasefor new private sector banks during the recent Chart IV.21: Shares of Bank Groups in Outstanding Debit Cardsyears (Table IV.32 and Chart IV.21). 45 Table IV.31: ATMs of Scheduled 40 Commercial Banks (As at end-March 2011) 35Sr. Bank group On-site Off-site Total Off-site 30No. ATMs ATMs number ATMs as Percentage Share of ATMs per cent 25 of total ATMs 201 2 3 4 5I Public sector banks 29,795 19,692 49,487 39.8 15 1.1 Nationalised banks* 15,691 9,145 24,836 36.8 1.2 SBI group 14,104 10,547 24,651 42.8 10II Private sector banks 10,648 13,003 23,651 55.0 2.1 Old private sector banks 2,641 1,485 4,126 36.0 5 2.2 New private sector banks 8,007 11,518 19,525 59.0III Foreign banks 286 1,081 1,367 79.1 0 NBs SBI Group OPRBs NPRBs FBs All SCBs (I+II+III) 40,729 33,776 74,505 45.3 2006-07 2007-08 2008-09 2009-10 2010-11*: Include IDBI Bank Ltd. 91
  • Report on Trend and Progress of Banking in India 2010-11 Table IV.32: Debit Cards Issued by Chart IV.22: Shares of Bank Groups in Outstanding Scheduled Commercial Banks Credit Cards (As at end-March 2011) 60 (In Millions)Sr. Bank group Outstanding Number of Debit Cards 50No. 2006- 2007- 2008- 2009- 2010- 07 08 09 10 111 2 3 4 5 6 40 Percentage ShareI Public sector banks 44.09 64.33 91.7 129.69 170.34 1.1 Nationalised banks 19.24 28.29 40.71 58.82 80.27 1.2 SBI group 24.85 36.04 50.99 70.87 90.07 30II Private sector banks 27.19 34.1 41.34 47.85 53.58 2.1 Old private sector banks 3.94 5.34 7.09 9.81 12.44 20 2.2 New private sector banks 23.25 28.76 34.25 38.04 41.14III Foreign banks 3.70 4.02 4.39 4.43 3.92 10 All SCBs (I+II+III) 74.98 102.44 137.43 181.97 227.84money. Despite the decline in the number of 0 NBs SBI Group OPRBs NPRBs FBsoutstanding number of credit cards, the volume 2006-07 2007-08 2008-09 2009-10 2010-11and value of transactions with credit cardrecorded a growth of 13 per cent and 22 per cent, for retail transactions and Real Time Grossrespectively in 2010-11. New private sector Settlement (RTGS) for large value, improved thebanks and foreign banks accounted for more speed of financial transactions, across thethan 80 per cent of the total outstanding credit as at end March 2011 (Table IV.33 andChart IV.22). Volume of transactions through NEFT registered a steep growthElectronic banking transactions have been 4.84 Both retail and large value systems ofon steady increase electronic payment transactions registered a4.83 The electronic payment systems such as growth out of which NEFT registered a steepElectronic Clearing Service (ECS) credit and growth in 2010-11 over the previous year (Tabledebit, National Electronic Fund Transfer (NEFT) IV.34). Table IV.33: Credit Cards Issued by 10. Customer Service Scheduled Commercial Banks (As at end-March 2011) Number of complaints against banks (In Millions) declinedSr. Bank group Outstanding Number of Credit Cards 4.85 Customer satisfaction is an integralNo 2006- 2007- 2008- 2009- 2010- 07 08 09 10 11 element in inculcating trust among the common1 2 3 4 5 6 people on the banking sector, which may alsoI Public sector banks 4.14 3.93 3.44 3.26 3.08 facilitate financial inclusion in the medium to 1.1 Nationalised banks 0.75 0.72 0.72 0.73 0.78 long-term. Understanding the importance of 1.2 SBI group 3.39 3.21 2.72 2.53 2.30II Private sector banks 10.68 13.29 12.18 9.5 9.32 customer service in banking, the Reserve Bank 2.1 Old private sector set up a separate Customer Service Department banks 0.03 0.04 0.06 0.06 0.04 2.2 New private sector in 2006 and also Banking Ombudsman (BO) banks 10.65 13.25 12.12 9.44 9.28 offices in 15 major banking centres. Since itsIII Foreign banks 8.31 10.33 9.08 5.57 5.64 inception, BO has been an effective forum for All SCBs (I+II+III) 23.12 27.55 24.70 18.33 18.04 redressing complaints received from customers. 92
  • Operations and Performance of Commercial Banks Table IV.34: Volume and Value of Electronic Transactions* by Scheduled Commercial Banks (As at end-March 2011) (Volume in million, Value in ` crore)Year 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 Volume Percentage Variation Value Percentage Variation1 2 3 4 5 6 7 8 9ECS Credit 98.1 117.3 11.0 19.5 1,17,613 1,81,686 20.6 54.5ECS Debit 149.3 156.7 -6.7 5.0 69,524 73,646 3.8 5.9NEFT 66.3 132.3 106.3 99.5 4,09,507 9,39,149 62.5 129.3RTGS 33.2 49.3 148.5 48.2 3,94,53,359 4,84,87,234 22.2 22.9*: Excluding transactions carried out through cards4.86 In 2010-11, there was a decline in the foreign banks witnessed a decline over the samenumber of complaints received by the BO offices period. Number of complaints per branch wasacross the country. The decline was particularly particularly high for foreign banks at 22.34 invisible in metropolitan regions, viz., New Delhi, 2010-11. In 2010-11, almost one fourth of theMumbai and Chennai. However, in the midst of total complaints were received against credit/general declining trend, there were some debit/ATM cards. The second largest number ofcentres, viz., Bhopal, Patna, Ahmedabad, complaints were received against pension (8 perChandigarh and Guwahati, which reported an cent) followed by loans and advances (6 perincrease in the number of complaints cent). Complaints against pension and direct(Table IV.35). selling agents (DSA) increased in 2010-11 over the previous year (Table IV.36 and AppendixComplaints against public sector banks Table IV.10).increased 4.88 A point to be noted at this juncture is the4.87 There was, however, an increase in concentration of complaints with regard to DSAcomplaints against public sector banks in 2010- against new private sector banks and foreign11 over the previous year, whereas the number banks. In 2010-11, more than 90 per cent ofof complaints against private sector banks and total complaints relating to DSA were received against foreign banks and new private sectorTable IV.35: Region-wise Complaints Received at Banking Ombudsman Offices banks. Further, more than 50 per cent of the complaints relating to hidden charges wereBO office Number of complaints received against private sector banks and foreign 2009-10 2010-111 2 3 banks. Such complaints were relatively less inAhmedabad 4,149 5,190 case of public sector banks. However, more thanBangalore 3,854 3,470 95 per cent of the complaints regarding pensionBhopal 3,873 5,210Bhubaneswar 1,219 1,124 were received against public sector banks (ChartChandigarh 3,234 3,559Chennai 12,727 7,668 IV.23).Guwahati 528 584Hyderabad 5,622 5,012Jaipur 4,560 3,512 11. Financial InclusionKanpur 7,832 8,319Kolkata 5,326 5,192 Financial inclusion further progressedMumbai 10,058 7,566New Delhi 12,045 10,508 4.89 Financial inclusion has been one of the topPatna 1,707 2,283Thiruvananthapuram 2,532 2,077 priorities of the Reserve Bank during the recentTotal 79,266 71,274 years. Accordingly, the Reserve Bank has beenSource: Various Regional Offices of Banking Ombudsman. encouraging the banking sector to expand the 93
  • Report on Trend and Progress of Banking in India 2010-11 Table IV.36: Bank Group-wise Complaints Received at Banking Ombudsman Offices –2010-11Nature of Public Nationa- SB