Banking Sector Reforms

Introduction The banking scenario in India is undergoing fast changes in order to keep pace with international the banking, economic reforms by the government of India. One important change in the banking sector is the introduction of prudential norms for income recognition, Assets classification, provision requirements and capital adequacy based on the Narasimhan committee.

Income Recognition Income from NPAs is not recognized on accruals basis. It should be treated as income only when it is actually received or recovered. If interest debited is not recovered within180 days( two quarters) from the past due date, then the same shall not be recognized as income. The RBI permits 30 days grace period to decide PAST DUE Status.

Non Performing Assets (NPAs) The important assets such as cash credit, OD, term loans. In case of cash credit and OD, if they remain out of order for two quarters, they become NPA, other assets become NPA if interest/installments remain unpaid for two quarters.

Cash Credit and OD out of order It will be treated as out of order under following conditions- 1. Where the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. or 2. Where outstanding balance is less than the sanctioned limit/drawing power, but there is no credits continuously for 6 months. 3. When the credits are not enough to cover the interest debited during the six months as on the date of balance sheet.

Classification of Assets As per revised norm, all assets should be classified into 4 broad groups such as- Standard Assets Sub-standard Assets Doubtful Assets Loss Assets 1. Standard Assets Are those which are not NPAs. These are regular and performing and there are no adverse features. They do not disclose any credit problems.

Sub-standard Assets Are those which are NPAs for a period not exceeding two years. Doubtful Assets Are those NPAs which remain as such for a period, exceeding two years. Loss Assets Are those NPAs where 100% loss has been identified. The entire a/c has been identified as loss and it is yet not written off in books of A/cs.

BASEL II ACCORD It has been confined to the minimum requirements for banks focusing mainly on the credit risk alone. In this accord, certain risk weights were assigned to different categories of bank assets. Assets were grouped into 4 categories. First- consisting of very liquid assets like cash, gold, government securities, etc. for which very low percentage risk weightage was assigned. Second- 20% weightage .

Third-50% , all mortgage loans against residential properties. Fourth-100% , investment on real estate, office premises. Post Reform Position The following developments have been taken place by Indian banking – 1.Weak public sector banks were recapitalized through budgetary control. 2.Some banks have strengthened their capital base through public issue of shares. 3. Legal amendments have been made to induct private participation in the Board of Directors. 4. Private sector banks have been established. 5. Local area banks have been licensed to install a greater element of competition in the financial system.

6. More liberal policy of permitting branches of foreign banks in India is being followed. 7. The determination of foreign exchange rate is left to the market conditions. Impact of Reforms 1.It have started yielding good results. 2. Because of these reforms, Indian banks were able to withstand the global financial crisis and Indian Banking System continues to remain healthy. 3. The Capital Adequacy Ratio of commercial banks has always above the minimum requirement level.

BASEL-III The new Base III norms aims at strengthening the regulations regarding capital base and liquidity of banks and also improving the banking sector’s ability to absorb stock arising from financial and economic stress. Capital Reforms 1.Redefinition of both quantity and quality of capital. 2.Introduction of leverage ratio (mixture of owners equity and debt to finance their operation). 3.Introduction of capital conservation buffer (it’s a mandatory capital that financial institutions to other are required to hold in addition to other minimum requirements ). 4.Introduction of counter –cyclical capital buffer(CCyB aims to ensure that banking sector capital requirements take account of the macro-financial environment).

Liquidity Reforms 1. Introduction of long term ratio like Net Stable Funding Ratio (NSFR) (it includes customer deposits, equity) Net Stable Funding Ratio= Available amount of stable funding/required amount of stable funding. 2.Introduction of Short-term Ratio like liquidity Coverage Ratio (LCR) liquidity Coverage Ratio=Stock of high quantity liquid assets/ Net cash flows over 30 days time period.

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