Topic Banking System in India

Presented by 1.Tahniyat Sultana Prova Tanvir Ahmed Morium Akhter Sanjida Islam Khan Md.Farhadul Islam16-066

Since Independence at 1947 This country has never operated a centralized economic system Private sectors were well established in some areas of economy The financial systems was quite unrestricted

In 1956, the economy was characterized by rigid state control Designed to meet the objective of national 5 year economy plan

To raise savings and investment rates The state effectively assumed control over financial sector Channel funds to priority sectors, agriculture and heavy industry

In 1969 the 14 largest commercial banks were nationalized to ensure that In 1975 Regional and Rural Banks were established to increase the amount of agriculture loans Funds were allocated in line with economic planTo create branches in rural and semi-urban areas

Another sin commercial banks were nationalized Specialized development financial intuitions were created 1980 National Bank for Agriculture and Rural Development was established To coordinate and supervise the rural credit cooperative 1982

Effects if first golf war in Severe balance of payments problems emerged Rapidly growing fiscal deficit Severe balance of payments problems emerged Rapidly growing fiscal deficit

Steps Taken By the Government: New measures to improve fiscal policy fiscal discipline Sweeping changes in industrial, trade,foreign direct investment and agricultural policy

After the Reforms India became one of the fastest growing emerging markets in the 1990’s The growth of India’s service sector was due to rapid growth of communications, IT, financial service and community services Nonetheless between 1997 and 2002 this growth rate slowed down to an average India became one of the fastest growing emerging markets in the 1990’s The growth of India’s service sector was due to rapid growth of communications, IT, financial service and community services Nonetheless between 1997 and 2002 this growth rate slowed down to an average

“ pancha sutra” or five principal Reforms of financial sector were based on five principal: gradual process of sequential changes. Measures to reinforce each other Changes in banking sector to complete macroeconomic policy Financial markets to operate on market principles ;and Development of the financial infrastructure

Establishment of National Stock Exchange(1992) India’s no screen based exchange-the introduction of an auction system for govt. securities (1992), and improved regulatory for the Securities and Exchange Board of India. In banking, the objectives were to keep banks financially sound while encouraging competition, and reducing govt. ownership of state banks.

Changes in banking sector Commitment to adopt the Basel 1 supervisory standards. Increased supervision of banks by establishing the Board for financial Supervision and being Bank of India autonomous. Commitment to adopt the Basel 1 supervisory standards. Increased supervision of banks by establishing the Board for financial Supervision and being Bank of India autonomous. Freeing up controls on interest rates. A reduction in the cash reserve ratio were further deregulated over time. A plan toi reduce govt. ownership of banks. Freeing up controls on interest rates. A reduction in the cash reserve ratio were further deregulated over time. A plan toi reduce govt. ownership of banks.

Removal of the requirement that large loans had to be approved by the Reserve Bank of India. Granting new bank licenses, and easing restrictions on the operations of foreign banks. Removal of the requirement that large loans had to be approved by the Reserve Bank of India. Granting new bank licenses, and easing restrictions on the operations of foreign banks. Free entry of private firms into the mutual fund business. A commitment to reduce govt. shareholdings of the state owned banks from a minimum of 51% to one of 33% Free entry of private firms into the mutual fund business. A commitment to reduce govt. shareholdings of the state owned banks from a minimum of 51% to one of 33%

The current structure of the Indian Banking system- Scheduled commercial banks : 9 2 Regional rural commercial banks: 200 (operating in rural areas not covered by the commercial banks Development financial institutions (DFIs)

Development financial institutions (DFIs): Includes  development institutions Industrial Development Bank of India  Specialized institutions Export Import Bank  Investment institutions Unit Trust of India(UTI), Life Insurance Corporation of India (LIC)  Refinance firms National Housing Bank  development institutions Industrial Development Bank of India  Specialized institutions Export Import Bank  Investment institutions Unit Trust of India(UTI), Life Insurance Corporation of India (LIC)  Refinance firms National Housing Bank

Rural banks and credit cooperatives Cooperatives banks Non-bank financial institutions (NBFIs)

Liberalization Policy- The government allowed the entry of nine new private banks The Reserve Bank has permitted the new entrants to concentrate up to 70% of their business in the more profitable urban areas Superior technology and greater productivity have, apparently, allowed them to capture a 4% share of the deposit market

Major Problems With Indian Banking Sector

Poor Asset Quality Bad debt can be traced back to traditional heavy industries In 2001 NPL are estimated to range between 14% and 17% Though the NPL percentage are low compared to China & Russia they are high by International standards To meet up capital adequacy standards banks have rolled over the interest due on doubtful loans They need not classified as bad debt – known as evergreening

Risk management System and Committee Some banks have been unwilling to force corporate borrowers to repay their loans A securitization bill was passed in 2002and allows secured creditors without judicial interference A set of clear guidelines on recovery of assets has been issued In several Banks established asset reconstructuring companies & debt recovery tribunals

Priority Sector Lending  Government has identified certain sectors to distribute the total loans  Commercial banks have to allocate 40% of total loans  The state banks require & allocate more than 40% of loans to these groups  Government has identified certain sectors to distribute the total loans  Commercial banks have to allocate 40% of total loans  The state banks require & allocate more than 40% of loans to these groups

Area of Loan Distribution Agricultur e Textile steel SME Transport operators Export firms Informatio n technology sector

Weak Financial Institutions and Destructive Unambiguity Lower productivity and high operating cost compared to other developing countries Supervision of state banks by a working party Reviewing indication of three parties- performance, earning capacity and solvency

Indication of weakness among state owned banks Three failed to meet any of the criteria Two met all the criteria The rest met some criteria

Reserve Requirements & Lending Restrictions The govt. has high statutory liquidity ratio (SLR 25%) and cash reserve ratio (4.5%), though controls on interest rates have been liberalized They have been reduced from the 1991 pre- reform requirements which were 63.5% The average SLR for banks was 45% in late 2003, because of choosing the high level of savings to purchase govt. securities

The traditional intermediary function of banks has been largely curtailed because of: Interest rate have declined Increased prudential standards have made govt. securities attractive because they carry a lower risk weight than most loans Employees of state banks are considered to be civil servants, they can be prosecuted under the anti- corruption law. The traditional intermediary function of banks has been largely curtailed because of: Interest rate have declined Increased prudential standards have made govt. securities attractive because they carry a lower risk weight than most loans Employees of state banks are considered to be civil servants, they can be prosecuted under the anti- corruption law.

Bank Supervision India suffers from excessive numbers of supervisions Fraud on the stock market The problems of multiple regulators and jurisdiction overlap Ineffective bank supervision The RBI & the supervisors of cooperative societies often issued counter directives

Counter directives responsibility Supervision of banks Monetary policy & price stability Monitor the balance of payments & undertake to keep currency stable Assisting with the promotion of national objectives

To conclude, India’s economic “miracle” was largely the results of reforms. Currency convertibility and capital controls were reformed at early stages External finance in the form of foreign direct & portfolio investment is being encouraged The currency has moved gradually over the years from a sterling peg to its current regime of a managed float. To conclude, India’s economic “miracle” was largely the results of reforms. Currency convertibility and capital controls were reformed at early stages External finance in the form of foreign direct & portfolio investment is being encouraged The currency has moved gradually over the years from a sterling peg to its current regime of a managed float.

Ongoing features of financial repression The continuation of state ownership Control in banking sector To many rules on lending The absence of laws in bankruptcy