Report on Trend and Progress of Banking in India for the year endedJune 30, 2011 submitted to the Central Government in te...
Sale Price:In India   –     ` 200     (Normal)           –     ` 240     (Inclusive of Postal Charges)           –     ` 1...
ContentsSr.No.                                                          Particulars                                       ...
Sr.No.                                                          Particulars                                               ...
List of BoxesBox No.                                                        Particulars                                   ...
List of TablesTable No.                                                   Particulars                                     ...
Table No.                                                      Particulars                                                ...
Table No.                                                    Particulars                                                  ...
Table No.                                                   Particulars                                                   ...
List of ChartsChart No.                                                      Particulars                                  ...
Chart No.                                                      Particulars                                                ...
Chart No.                                                    Particulars                                                  ...
List of Appendix TablesTable No.                                                    Particulars                           ...
List of Select AbbreviationsAD       Authorised Dealer                            CCF         Credit Conversion FactorsADR...
DIN        Director Identification Number                 FI      Financial InstitutionDLIC       District Level Implement...
ICDs      Inter Corporate Deposits                   MAG         Macro-economic Assessment GroupICICI     Industrial Credi...
NREGA       National Rural Employment                     SAO        Seasonal Agricultural Operations            Guarantee...
Chapter I                  Perspectives on the Indian Banking Sector           Domestic banks continued to manage growth w...
Report on Trend and Progress of Banking in India 2010-11dominated, banks’ ability to withstand stress is               1.5...
Perspectives on the Indian Banking Sectorof IFRS provisions to varying degrees and what           impact may be more signi...
Report on Trend and Progress of Banking in India 2010-11Introducing innovative financial products as                   Mar...
Perspectives on the Indian Banking SectorBusiness Continuity management and Disaster              inclusion will provide b...
Report on Trend and Progress of Banking in India 2010-11include: lack of awareness about the financial                 Nee...
Perspectives on the Indian Banking Sectorprelude to the work of the Commission so that            Costs and risks in using...
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  1. 1. 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
  2. 2. 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.
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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 2007-08.is 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 system.by 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
  22. 22. 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 growth.an 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
  23. 23. 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 Act.in 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 sector.in 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
  24. 24. 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 convenience.global 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

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