UGP,IIPM. Banking and Insurance. BY Malay K Ray, Course Faculty.

Indian Banking Sector. Indian Banking Sector consists of Commercial Banks, Indian and Foreign , Cooperative Banks, Regional Rural Banks, Local Area Banks. Reserve Bank of India is the apex Bank and the Central Bank of the country. The Banks are owned by Government of India, Private Investors, both domestic and foreign, as well as Cooperative bodies. The chart on the next slide gives a snapshot view of the Indian Banking system.

Indian Banking System.

Role of Central Bank The Central Bank of a country can be stated to be an institution occupying the central position in the monetary and banking setup of a country The objectives of a modern central bank are: Achieving macroeconomic stability relating to domestic inflation and foreign exchange rate Arranging for strategic strengthening of the country’s financial sector through creation of appropriate financial infrastructure Ensuring sound financial health of the country’s financial institutions There is a trend in some countries to restrict the central bank functions to achieve the first two objectives, assigning the responsibility for the third one to another institution.

Objectives of Reserve Bank of India In India, RBI’s objectives are: Promotion of growth and price stability Maintaining monetary stability in the country Creation and maintenance of stable payment system Regulation of volume of money and credit Ensuing sound health of the financial institutions and credit allocation as per national priorities

Functions of RBI RBI’s functions are: Issuance of all currency notes and coins except Re. 1 along with management of the currency through efficient supply, withdrawal, destruction and exchange mechanisms Working as banker to the government and its agent and adviser on monetary, banking and financial matters Also maintaining central and state government accounts and granting short duration loans.

Functions of RBI- contd. 3) Forex manager: Managing the country’s foreign currency reserves, maintaining the stability of the external value of rupee, administering exchange controls as necessary for the country 4) Banker to the banks: by providing them short term credit against securities at times of need and working as lender of last resort

Functions of RBI-contd. 5) Controlling credit and money supply: A very important function as the monetary authority for ensuing price stability and achieving socioeconomic objective of growth Requires provision of appropriate liquidity, creation of suitable interest rate environment and guidance to banks from time to time regarding flow of credit Involves use of quantitative and qualitative methods viz. bank rate, repo rate, open market operations, changes in Reserve Ratio (SLR, CRR), selective credit control, moral suasion

Functions of RBI-contd. 6. Collection and publication of economic and financial data at various periodicity (weekly to annual) 7. Regulating and supervising the commercial and cooperative banks through licensing policy, various policy guidance and directives from time to time, inspection system, monitoring health of the banks.

Banking Sector Reforms Arising out of the recommendations and suggestions of NaraSimham Committee one and two, appointed in 1991 and 1998 respectively, the following important reforms have so far been introduced in the country’s banking sector. i) Reduction in SLR and CRR to reduce preemption first to 25% and 10%, and subsequently to the present levels of 24% and 6% respectively. ii) Deregulation of interest rates. iii) Allowing Private Sector Banks to enter the Banking arena to foster competition and for introduction of up to date technology and providing better customer service. iv) Direct access to capital markets for Public Sector Banks and reduction of government stake in these banks.

Banking Sector Reforms- contd. v) Liberalized branch licensing policy and operational freedom to banks in terms of opening new branches. vi) Setting up of debt recovery tribunals to ensure quick recovery of bank debts. vii) Introduction of prudential norms for income recognition, asset classification and provisioning for bad debts. viii) Bringing down gradually the NPA norm to 90 days, as is prevailing now, to fall in line with international practice. ix) Creation of Asset Reconstruction Company to take over doubtful and loss assets from the banks. x) Insistence on bringing down average level of net NPAs for all banks to below 5%.

Banking Sector Reforms-contd. xi) Introduction of Asset Liability Management practices at the banks to avoid mismatches of Asset and Liability. xii) Adoption of advanced risk management techniques at the banks for proactive management of the risks in the banks’ portfolios. xiii) Banks allowed entering new areas like Insurance, Credit Cards, Investment banking, Infrastructure financing and gold banking. xiv) Banking ombudsman scheme introduced to look into and resolve customers’ grievances. xv) Adoption of first Basle 1 norm for capital adequacy and from March 31,2007, Basle II norms encompassing credit, market and operational risks. The Basle norms created necessity for stronger risk management architecture at the Banks. xvi) Permission for FDI in banks.