7278638 Commercial Banking 1

8/8/2019 7278638 Commercial Banking 1

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COMMERCIAL BANKINGCOMMERCIAL BANKINGChapter 3


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Evolution & Origin of CommercialEvolution & Origin of CommercialBankingBanking

y The word bank is used in the sense of a commercialbank.

y The word bank has a German origin though somepeople believe that it has come from a French wordBanqui and yet others believe that it has come from

the Italian word Banca. Whatever it is, it referred to abench for keeping , lending and exchanging of moneyor coins in the market place by money lenders andmoney changers.

y There was no such word as banking before 1640,although the practice of safe keeping and savings

flourished in the temples of Babylon as early as 2000BC.y In India also reference of banking system could be

found in the ancient Jain Temples and literary works likethat of Chanakya etc.


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y The first bank called the Bank of Venice was established in Venice, Italyin 1157 to finance the monarch in this wars.

y The bankers of Lombardy were famous in England, but modern banking

began with the English Goldsmiths only after 1640.y The First Bank in India was Bank of Hindustan started in 1770 by Alexender

and Co.y But the first bank in modern sense was established in the Bengal

Presidency as the Bank of Bengal in 1806.

y

It was merchant bankers who first evolved the system of banking bytrading in commodities than in money. Their trading activities required theremittance of money from one place to another. For this they issuedhundis to remit funds. In India such merchants were known as SETHS

y The next stage in the growth of banking was the goldsmith His businesswas such that he had to take special precaution against theft of gold and jewelry and if he seemed to be an honest person merchants andneighbours started leaving their bullion, money and ornaments in his care.As this practice spread the goldsmiths started charging something. As anevidence for receiving valuables he issued a receipt these acted likecheques and were used as a medium of exchange. The GSm alsolending money (Coins of G& Silver) as not all of them were demandedback at the same time.


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Meaning of BankMeaning of Bank

y A Bank is an institution which accepts depositsfrom the public and in turn advances loans by creating credit. It is different from other financial institutions in that they cannot create credit though they may be accepting deposits and making advances.

y Commercial Banks: Are those banks which perform all kinds of banking functions such as

accepting deposits, advancing loans, credit creation and agency functions. They are alsocalled joint stock banks because they areorganised in the same manner as JSCs.


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Role of Commercial Banks in aRole of Commercial Banks in a

Developing CountryDeveloping Countryy Mobilizing Sav ing f o r Cap ita l Fo rmat iony Fin a ncing Indus tryy Fin a ncing Tra d ey Fin a ncing Ag r icul tu rey Fin a ncing Consu mer A c t iv it ie sy Fin a ncing Emp loyme n t Ge n erat ing

Ac t iv it ie s. y He lp in m on etary P olic y


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F unctions of Commercial BanksF unctions of Commercial Banksy Acc ept ing D ep osi t s ( Sav ings, Cu rre n t a nd Fixe d D ep .)y Ad va ncing Lo a ns (1. Ca s h Cre di t b a nk a d va nc e s lo a ns

to busin e ss me n a g a ins t certa in s pe cif ie d s e cu r it ie s. The am oun to f lo a n is c re di te d to the cu rre n t a ccoun t o f the bo rr ow er , a nd thebo rr ow er ca n wi th d ra w m on ey thr oug h cheq u e s., 2. Ca ll loa ns

The s e are very s h ort term loa ns a d va nc e d to the bill b rok er s f o rno t m ore tha n 15 d ay s. They are a d va nc e d a g a ins t f ir s t cla ss billo r s e cu r it ie s. S uc h lo a ns c a n b e re ca lle d in very s h o rt no t ice .3 .O ver d raft A b a nk o fte n perm it s a busin e ss ma n to d ra wcheq u e s f o r a su m g reater tha n the b a la nc e ly ing in h is cu rre n ta ccoun t . 4. Discoun t ing BO E If a cre di t o r h olding a BO E wa n t s

m on ey imme di ate ly, the b a nk pr ovid e s h im the m on ey b ydiscoun t ing the BO E )

Two Ess e n t ia l Func t ions

Bo rr owing & Le nding


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y Cre di t Creat ion ( Cre di t creat ion is on e of the m os timp orta n t f unc t ions o f co mmer cia l ba nks. Lik e o ther busin e sso rg a nis at ions they a lso a im at ear ning pr o f it , f o r th is they a cc ept sd ep osi t s a nd a d va nc e lo a ns b y keep ing a s ma ll ca s h in re s erve f o rd ay t o d ay tra ns a ct ions. W he n a b a nk a d va nc e s a loa n, i t ope nsa n a ccoun t in the n ame of the cus t omer a nd do e s no t pay h im inca s h bu t a llows h im t o d ra w the m on ey b y cheq u e a cco rding t oh is n ee ds. Th us b y g ra n t ing a loa n the b a nk c reate s c re di t o f d ep osi t .)

y Fin a ncing Fo re ign Tra d e : ( Acc ept ing f o re ign billso f payme n t et c.)

y Ag e nc y Serv ice sy Misc e lla n e ous Serv ice s


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Commercial BankingCommercial Bankingin Indiain India


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Management of Commercial BanksManagement of Commercial Banks

in Indiain Indiay Commer cia l ba nking in Indi a a n o verv ie wy Opp ort uni t ie s a nd Cha lle ng e sy Ma n a g eme n t in Commer cia l ba nksy Liq uidi ty ma n a g eme n t in Commer cia l ba nksy Ma n a g eme n t o f Dep osi t sy Ma n a g eme n t o f Pr imary & Se cond ary Re s erve sy Ma n a g eme n t of Loa ns ( Pr ior ity s e ct o r Le nding a nd Wo rking

Cap ita l Fin a ncing)y ALMy Ma n a g eme n t o f NPAy Ma n a g eme n t o f I nco me in Commer cia l Ba nksy Pr of ita bili ty a nd Pr oduc t iv ity in Commer cia l Ba nksy Perf o rma nc e Eva lu at ion o f C ommer cia l Ba nks

TOPICS F o rDiscussion


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Commercial banking in IndiaCommercial banking in Indiay In o ver 5 d e ca d e s sinc e ind epe nd e nc e

b a nking s ys tem in Indi a ha s pa ss e dthr oug h certa in dis t inc t pha s e s :

Ev olu t ion ary Pha s e ( pr io r t o 1950)Found at ion Pha s e (50s to 70s)Expa nsion Pha s e ( 70s to Mid 80s)Consolid at ion Pha s e ( Mid 80 t o 90s)Ref o rmat o ry Pha s e ( S inc e Libera lis at ion)


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Evolution PhaseEvolution Phasey En a ctme n t o f the R BI A ct in 19 3 5 g ave bi rth t o a n e w c ate go ry of

b a nks c a lle d S che dul e d B a nks in Indi a bu t so me of the s e b a nks

w ere a lrea d y b ee n in e xis te nc e sinc e 1881.y Pr om in e n t S che dul e d b a nks w ere: A llaha b a d b a nk 1865 , Oud h

Co mer cia l ba nk 1881, Ajod hya Ba nk 1884, PNB 1894,Ne dung a ddi b a nk 1899

y Du ring 1901-1914 12 m ore b a nks w ere e s ta blis he d, pr o m in e n tam ong them w ere BOB 1906, Ca n ara Ba nk 1906, Indi a n B a nk in

1907, BO I in 1908, Ce n tra l Ba nk o f I ndi a 1911y Du ring the war per iod no t m uc h of a d eve lopme n t t ook p la ce ,

there wa s a heavy r us h on b a nks a nd the b a nks fa ce d s er iouscr isis ma n y succu m b e d to the pre ssu re a nd per is he d.

y Bu t after the war s a nd the ind epe nd e nc e a s ma n y a s 20sc he dul e d b a nks c ame in to e xis te nc e . UBI wa s f o rme d in 1950 b y

the mer g er o f 4 e xis t ing co mmer cia l ba nks,y In a s pa n o f 5-7 year s the f igu re r os e t o 81 bu t b y 1968 2 3 were

e ither liq uid ate d o r ama lg amate d in to n e w b a nks l eav ing 58sc he dul e d b a nks in o perat ion.


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F oundation PhaseF oundation Phasey The f ocus w a s on cl a ss b a nking a nd s e cu r ity

rather tha n on p u rp os e .y The empha sis o f the b a nking s ys tem du r ing th is

per iod w a s on l ay ing the f ound at ion f o r a soundb a nking s ys tem in the coun try

y Cons eq u e n t ly the pha s e wi tn e ss e d thed eve lo pme n t o f n e ce ss ary le gisl at ive frame wo rka nd a s a re sul t the BANKING REG ULATION ACTwa s pa ss e d in 1949 to conduc t a nd con tr olo perat ions o f the co mmer cia l ba nks in Indi a .

y Du r ing the per iod nu m b er o f C o mmer cia l ba nksd e clin e d remar ka bl y.. Fr o m 566 b a nks in 1951 t o281 in 1961.


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y The maj o r fa c to r f o r th is c ha ng e wa s theconsolid at ion a nd s tre ng the ning o f the b a nkings tr uc t u re a nd the o rg a nis at ion d r ive s tarte d b ythe R BI after the e n a c tme n t o f BRAc t 1949, wi tha v ie w to impr o v ing the q u a lity o f b a nkings erv ice s a nd wid e ning the g e og raph ica l a nd

f unc t ion a l sprea d o f the ir a c t iv ity .


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Expansion PhaseExpansion Phasey Th is pha s e wi t n e ss e d soci a lis at ion o f b a nking in 1968.

Commer cia l ba nks w ere v ie we d a s a g e n t s o f cha ng e a ndsoci a l con tr ol on b a nks

y S inc e in a d eq u a cy wa s fe lt in th is fr on t , 1 4 b a nks w eren at ion a lis e d in 1969 a nd a no ther 6 in 1980.

y Th is per iod a lso wi t n e ss e d the bi rth of RR Bs in 1975 a ndNABARD in 1982 w h ich ha d pr ior ity s e ct or a s the ir f ocus o f a ct iv ity .

y Alth oug h nu m b er of co mmer cia l ba nks d e clin e d fr om 281in 1968 t o 268 in 1984, no. o f sc he dul e d b a nks s h ot u pfr om 71 t o 264.

y As ma n y a s 50,000 b a nk b ra nc he s w ere s et u p o f wh ich3/ 4 th were in ru ra l a nd s em i urb a n area s.y In fa ct so rap id w a s the g row th in the s e area s that the

b a nking indus try ha d har dl y a n y t ime t o consid er otherissu e s a nd cons eq u e n t ly wi th g row th came in eff icie nc y a ndloss o f con tr ol. As a re sul t pr o f ita bili ty came und er s tra in.


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y Backdrop: In the ear ly d e ca d e s the b a nking s ys tem in Indi a came t o su ffer fr om the f ollowingwea kn e ss e s :

The b a nking s ys tem wa s loc a lis e d in a fe w metr op oli ta n a nd u rb a n ci t ie s, n e gl e c t ing the va s ta nd p o te n t ia l ru ra l area s a s unb a nk e d

The b a nking s ys tem rema in e d con f in e d to indus try a nd tra de , igno ring the v ita l in tere s ts o f thepr io r ity a nd n e gl e cte d s e ct or s, including a g r icul tu re a nd s ma ll sc a le indus tr ie s a nd art is a ns.

Eno rm ous conc e n trat ion o f e cono m ic p ow er e xis te d in the b a nking s e ctor. A fe w busin e ssh ous e s w ere in effe ct ive con tr ol o f p ow erf ul b a nks. Th us co mmer cia l ba nks con tr ibu te d t o thee no rm ous g row th of big busin e ss h ous e s, l ea ding t o emer g e nc e of indus tr ia l m ono p oli e s.

In vie w o f the a bo ve wea kn e ss e s i t wa s n e ce ss ary t o a lign b a nk c re di t f lows in t o b roa derarea s.

Prio r ity Se cto r Le nding b e came the pr inci p le f ocus.

The other f ocus w a s to ma ke the b a nks vib ra n t a nd pote n t ins tr u me n t of d eve lopme n t a ndma king them a ma ss ins t it u t ion. Thus the sc heme of soci a l con tr ol w a s in tr oduc e d in 1968 wi th the ma in ob je ct ive s o f a ch iev ing

a wid er sprea d o f b a nk c re di t , re ct ify ing s e cto ra l a nd re gion a l im ba la nc e s, a nd di re ct ing c re di tf lows t o pr io r ity s e cto r.

y Ob je c t ive s o f Nat ion a lis at ion o f Ba nksTo con tr ol the co mmer ica l he ig ht s o f the e cono my

To e x te nd b a nking fa cili t ie s t o unb a nk e d a nd und er b a nk e d c e n tre s, s pe ci a lly inru ra l area sTo e nsu re a n inc rea s e d f low o f a ssis ta nc e t o the n e gl e c te d s e c t o rsTo f os ter the g row th o f n e w a nd pr og re ssi ve e n trepre n e u rsTo gi ve a pr o fe ssion a l be n t t o b a nk ma n a g eme n t wi th a v ie w to rem ov ing thecon tr ol o f a fe w.


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Consolidation PhaseConsolidation Phasey Th is w a s a pha s e o f rea lis at ion a nd consolid at ion

o f loss e s.y The pha s e b e g a n in 1985 w he n a s er ie s o f p olic y

ini t iat ive s w ere ta ke n wi th the ob je c t ive s o f consolid at ing the g a ins o f b ra nc h e xpa nsionund erta ke n b y the b a nks a nd the re la xat ion o f the t ig ht re gul at ion.

y Alth oug h nu m b er o f sc he dul e d b a nks inc rea s e dfr o m 264 in 1984 to 276 in 1980 b ra nc he xpa nsion o f the b a nks slow e d down. Har dl y

7000 b ra nc he s w ere s et u p du r ing th is per iod.y Fo r the f irs t t ime s er ious atte n t ion w a s pa id t o

impr ov ing h ous e keep ing, cus to mer s erv ice s,cre di t ma n a g eme n t , s taff pr oduc t iv ity a ndpr o f ita bili ty .


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Reformatory PhaseReformatory Phase

y Con t inu e d f in a nci a l pr of lig a cy (d e ca d e nc e ) o f theGover n me n t cou p le d wi th clos e m oni t or ing a nd con tr olre nd ere d the b a nking s ys tem on the ver g e o f b a nk ru pt cy,a nd th us d ra s t ic ref o rm s w ere in ev ita bl e .

y In the s ame per iod, Indi a , f o r the f ir s t t ime fa ce d thepr obl em of d efa ul t ing on i t s in ter n at ion a l co mm itme n ts a nd

the a cc e ss t o e xter n a l co mmer cia l cre di t mar ket s w a sco mp lete ly d e ni e d, In ter n at ion a l cre di t rat ings ha d b ee ndowng ra d e d a nd the I n ter n at ion a l f in a nci a l co mm uni t ie s'con f id e nc e in Indi a s a bili ty t o ma n a g e it s e cono my ha db ee n s evere ly er od e d.

y

Th us the G ovt . ha d t o ini t iate swi ft a ct ion t o re s torein ter n at ion a l con f id e nc e .y Var ious ma cro e cono m ic s tr uc tu ra l ref ormat ory mea su re s

were und erta ke n in the f ie ld o f F ore ign tra de , ta x s ys tem ,indus tr ia l p olic y a nd f in a nci a l a nd o ther s e ct o rs


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y Ba nking Se ct o r in Indi a , ha s gon e thr oug h a metam orph osis du r ing thela s t d e ca d e . W h ile b a king s e ct o r con tr ibu te d t o a g reat e xte n t in c reat inga v ita l infra s tr uc t u re f o r n at ion a l building, g e n erat ing emp loyme n topp ort uni t ie s a nd e xpa nding busin e ss, i t a lso, su ffere d a lo t du r ing thecou rs e of e xpa nsion fr o m d ef icie nci e s wi th re g ar d t o the ir eff icie nc y a ndq u a lity of operat ions, con tr ols, me cha nis m a nd pr of ita bili ty .

y S ome e xtra n e ous fa ct ors w h ich con tr ibu te d t ow ar ds th is in eff icie nci e s are:Over re gul at ions l e d t o w ea ke ning o f the ma n a g eme n t f unc t ions

Dire ct ing l e nding l e d t o s t un t ing o f the inno vat ive skills o f the b a nk er sS oci a l con tr ol c ame t o b e s ynon ym ous wi th p oli t ica l con tr ol wi th lo a nwrit ing o ff co mp lete ly er oding the b a sic c hara cter of b a nking busin e ssTra d e unionis m a nd m uscl e p ow er lea d t o d ay t o d ay in terfere nc e inindi vidu a l cre di t d e cision ma king a nd in ter n a l ma n a g eme n t a nd p oo rwo rk cul t u re .Cus t omer Serv ice wa s yet a no ther area of conc er nToo m uc h e xpa nsion a nd t oo fa s t a pa ce , re sul te d in a n inc rea s e in thee s ta blis hme n t a nd o verhea d cos t s a nd cou p le d wi th und ereq ui ppe dma n a g eme n t pr of ita bili ty s tra in e d.


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Recommendations of Recommendations of NarsimhamNarsimham

CommitteeCommittee 1 Report1 Reporty In the lig ht o f the a bo ve me n t ion e d s h o rt co m ingsa nd d eter io rat ion in the f in a nci a l hea lth o f theb a nking s ys tem , q uick a nd co mprehe nsi vereme di a l mea su re s b e came a n imme di aten e ce ssi ty . Acco rdingl y the G OI cons t itu te d inAugus t 1991 a h ig h p ow ere d co mm ittee und erthe cha irma ns h ip o f Shr i.N.Nar si mham , the the nGover no r o r R BI t o e xam in e a ll a s pe c t s re lat ing

to the s tr uc tu re , o rg a nis at ion, f unc t ion a ndpr obl em s re lat ing to the Ba nking Sy s tem .


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MajorMajorRecommendations:Recommendations:

y Pha s e d re duc t ion in s tat u t o ry preempt ionsy In tere s t rate s on CRR b a la nc e sy Pha sing ou t o f di re cte d cre di t pr og rammey In tere s t rate d ere gul at iony Cap ita l a d eq u a cy no rm s (s h ould atta in a CAR of 8% b y 98)y Inco me re cogni t iony Ass et C la ssi f icat iony Tra ns pare nc yy Ta x treatme n t of Pr ovisionsy Loa n re co veryy Ta ckling doub tf ul d e b t sy There s h ould b e no f u rther n at ion a lis at ion o f b a nks


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y Re s tr uc tu r ing the b a nksy En try o f Pr ivate Ba nksy Bra nc h Lice nsingy Fo re ign Ba nksy S u perv ision o f Ba nksy Con tr ol o f Ba nking Sy s tem

y Pha sing o f re duc t ion o f Re s erve Req ui reme n t s S LR: 25% on the b a sis o f inc reme n ta l NDTL wef . 3 0.9.94CRR re duc e d t o 14% & the n t o 1 3 % in Cre di t p ol o f Apr il, 1996. 12%.. The n 10% f in a lly t o 8% b y J ul y 99

y In tere s t Rate on CRR Ba la nc e s : (4%)

Action on theAction on theRecommendations:Recommendations:


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y Pha sing ou t o f di re c te d c re di t pr og ramme:y In tere s t rate d ere gul at ion : Ba nks w ere gi ve n the free do m t o

have the ir own refere nc e rate ( PLR) ins tea d o f f loo r a nd c e iling rate s, a ndf ix indi vidu a l bo rr ow er s in t rate wi th in a b a nd o f P LR.

y Cap ita l Ad eq u a cy N o rm s : RBI in tr oduc e d i t a s per the re c.a nd a s o f 3 1 s t Mar ch 1997 onl y 2 b a nks (U CO a nd the I ndi a n b a nks) w ereno t a bl e t o a ch ieve the no rm of 8%

y

Ass et C la ssi f icat ion : wef 1.4.92 ha d t o imp leme n t theguid e lin e s o f R BI a nd cl a ssi f ie d the ir loa n a ss et s b a s e d on re co rd o f re co very a nd a lso s tarte d re cognising inco me b a s e d on th is. B e ca us e of th is ma ny b a nks in the per iod M ar ch 9 3 -Mar ch 97 rep o rte d h ug e loss e s.

y Tra ns pare nc y: RBI came u p wi th a di ffere n t f o rmat of b a nk B / sa nd P& L a/ c a s dis t inc t fr om the on e sugg e s te d b y the co mm ittee , inmar ch 1992. Du r ing 96-97 m ore signi f ica n t a ddi t ions suc h a s : b rea k u p o f cap ita l a d eq u a cy rat io, pr ovisions ma d e f o r the year , NPA % et c w erein tr oduc e d. In 1998 b a nks w ere di re cte d t o disclos e 7 c r it ica l rat iosre lat ing t o pr oduc t ivity a nd pr of ita bili ty .

Cap ita l Ad eq u a cy:Mini m u m cap ita l t o r isk-

w e ig hte d- a ss et rat io


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y Ta x Treatme n t o f Pr ov isions : The lim it of a d m issibl ed e duc t ions w a s e n ha nc e d t o 5% o f the inco me a nd 10% o f av . Agg re g ate

a d va nc e s o f r u ra l bra nc he s.y Loa n Re co very: As re co mme nd e d the G ovt , pa ss e d a n Act in 199 3

f o r the creat ion o f re co very tr ibun a ls f o r lo a n a ccoun t s wi th ou t s ta ndingb a la nc e s o f R s. 10 L o r m ore , it a lso e s ta blis he d 8 suc h tr ibun a ls a nd a nappe llate tr ibun a l in Mu m b a i wh ich u pt o Mar ch 1998 co vere d 20 s tate sa nd 4 U T.

y Ta ckling o f DD : No s tep s ha d yet b ee n ta ke n in re g ar d t o c reat ionof a n Ass et Re cons tr uc t ion Fund, a s re co mme nd e d b y the co mm ittee .y Re s tr uc t u r ing o f the Ba nks : No pr og re ss in th is re s pe ct wa s

ma d e e xc ept that on 4.9.9 3 a loss ma king b a nk c a lle d Ne w Ba nk o f I ndi amer g e d wi th PN B.

y Pr ivate Ba nks : BR( A) Act 1994 w a s pa ss e d t o perm it pr ivate s e ct orb a nks t o e n ter the b a nking f ie ld. RBI g ave lice nc e t o 9 pvt b a nks. B y thee nd o f 1994.


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NarsimhamNarsimham Committee II RepCommittee II Repy It wa s a g a in re cons t itu te d in the year

1997 to sugg e s t mea su re s to s tre ng the nthe b a nking s e c to r o f the coun try .

y The co mm ittee sub m itte d a rep o rt onApr il 1998

y Ma in re co mme nd at ions o f the co mm ittee

are a s f ollows :


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Major RecommendationsMajor Recommendationsy Mer g er of Str ong PS Bs & Re cap ita lis at ion sc heme f o r wea k b a nksy Gover n me n t s h ould have a le ss er r ole & g reater a u tono my s h ould b e

a llow e dy Func t ions o f bo ar ds a nd ma n a g eme n t s n ee d t o b e rev ie we dy Moving a way fr om e xc e ssi ve conc e n trat ion on a ss et m g t . t o ALM with a

vie w t o m odi fy ing the ir lia bili ty in conson a nc e wi th the ir d e si re d a ss ets tr uc t u re .

y Thee is a n ee d t o rev ie w m ini m u m pre sc r ipt ion f o r Cap ita l Ad eq u a cy. Inth is re g ar d the co mm ittee re co mme nd e d that m ini m u m CAR b e ra is e d t o10% b y 2002. B y now m os t o f the b a nks have a CAR of 11% o r h ig her .

y The co mm ittee a lso fe lt the n ee d t o lay down pr ud e n t ia l a nd disclosu reno rm s a nd sound pr oc e du re s f o r the p u rp os e of su perv ision a nddisclosu re .

y There s h ould b e g reater s pe cia lis at ion b y b a nks in var ious nic he area s lik eReta il, a g r icul t u re , SSI , Indus try et c.

y Ba nks s h ould p la ce g reater re lia nc e on non f und b a s e d busin e ss suc h a sa d viso ry a nd consul ta nc y s erv ice s, gu ara n tee a nd cus t od y s erv ice s

y There is a n ee d f o r PS Bs t o s pee d u p co mp u ter is at ion a nd f ocus onre lat ions h ip b a nking.

y Nee d f o r pr ofe ssion a lising a nd d ep oli t icising o f b a nk bo ar ds


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y Sh ould have thr us t on g reater f in a nci a l in terme di at ion wi th lar g eco mpa ni e s. Acc e ssing s e cu r it ie s d e b t do me s t ica lly a nd fr om f in a nci a lmar ket s a b roa d. ( There s h ould b e a n in te g rat ion o f N BFCs le ndinga ct ivit ie s in t o the f in a nci a l serv ice s)

y A rev ie w o f re crui tme n t pr oc e du re s, tra ining a nd rem un erat ion p olici e s inPS Bs s h ould b e carr ie d ou t . BSR B s h ould b e a bolis he d

y Sh ould conc e n trate on m g t of cre di t r isk a nd b etter m g t of NPA s.

In conformity with the committees recommendations, the RBI announced a package of measures in October 1998:

y Inc rea s e in the m in CAR fr om 8 t o 9% a nd 10% b y Mar ch 02y Re cognising o f mar ket r isk a nd there b y pre sc r ibing o f a r isk w e ig ht o f

2.5% in Govt . appr ove d s e cu r it ie s b y Mar ch 2000y The G ovt . s tarte d con temp lat ing a re duc t ion in i t s s hare h oldings in PS Bsfr om 51% t o 33 %y 100% risk w t f o r f o re ign e xc ha ng ey Moving t ow ar ds t ig hter a ss et cla ssi f icat ion, inco me re cogni t ion a nd

pr ovisioning no rm s. ( Ass et t o b e cla ssi f ie d a s doub tf ul i f it rema in e d insubs ta nd ar d c ate go ry f o r m ore tha n 18 mt s ins tea d o f 24 mt s w ef . 3 1 s tMar ch 2001)

Action on the Recommendations:Action on the Recommendations:


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y Ba nks have now to cl a ssi fy a m ini m u m 75% o f the ir in ve s tme n t sin appr ove d s e cu r it ie s ha s cu rre n t in ve s tme n t s. Th is ha s b ee ndon e wi th a v ie w to a do pt pr ud e n t a ccoun t ing s ta nd ar ds.

y Also b a nks a nd FI s in ve s tme n t I T ier II bonds issu e d b y o therb a nks o r f in a nci a l ins t it u t ions will b e sub je cte d to a ce iling o f 10% o f the b a nk s / FI s to ta l cap ita l ( th is w a s don e t o av oid c rossh oldings)

The NC - II rep . d ef in e d a wea k b a nk a s on e wh os e a ccu m ul ate d loss e s a ndNPA e xc ee ds i t s n et wo rth a nd w h os e a d j us te d o perat ing pr o f it s (o ppr of it s inco me on re cap ita lis at ion bonds) w a s n e g at ive f o r threecons e cu t ive year s.

Ba s e d on th is the Verma C omm ittee on Re s tr uc t u r ing o f Wea k Ba nks s et u pb y the R BI in Fe b, 99 id e n t if ie d 3 b a nks a s w ea k b a nks. (U CO, UB I a ndIndi a n B a nk)

V ermaV erma CommitteeCommitteeReportReport: :


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y The C omm ittee , f or th is p u rp os e id e n t if ie d 7 parameter sco ver ing 3 area s f o r cla ssi fy ing a b a nk a s w ea k. The s e are:

S ol ve nc y ( CAR & C overa g e Rat io)Ear ning Capa city ( ROA a nd Net I n t Mar gin)Pr o f ita bili ty (Rat io o f operat ing pr of it t o avera g e wo rking f unds, rat io o f cos t t o inco me a nd rat io o f s taff cos t t o n et in tere s t inco me p lus a llo ther inco me )

y Maj o r pr obl em that s t ill ha un t s the indus try is the g rowingpr op ort ion o f NPA rea ch ing a s tr ono m ica l f igu re s o f a bou t1La kh Cr ore .

y NPA consis t s o f a ss et s und er three cate go r ie s :S ub-s ta nd ar d (is on e wh ich rema ins a n NPA f o r 12 m on th s)Doub tf ul a ss et s ( are th os e wh ich rema in NPA f o r > 12 m on th s)Loss a ss et s ( are th os e , w h ich have b ee n id e n t if ie d a s loss b y the b a nkor in ter n a l /e xter n a l a udi t o rs o r b y the R BI ins pe ct ion bu t the am oun tha s no t b ee n w r itte n o ff )


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BasedBased onon thethe recommendationsrecommendations of of bothboth thethe NCNC--IIII & & thetheV ermaV erma CommitteeCommittee the the followingfollowing measuresmeasures havehave beenbeen takentakentoto addressaddress the the problemsproblems of of thethe BankingBanking IndustryIndustry: :

y More a nd m ore d e b t re co very tr ibun a ls a nd appe llate tr ibun a lsw ere t o b e s et u p , a nd emp ow ere d them t o fa cili tate e xpe di t iiousa d j udic at ion a nd re co very o f b a nks a nd FI s du e s. Acco rdingl y,co mprehe nsi ve ame nd me n t s have b ee n c arr ie d ou t in there co very of d e b t s du e t o Ba nks a nd FI s Act , 199 3 b y issu e o f a nordin a nc e . ( As ma n y a s 29D RTs & 5 ATs have b ee n s et u p so far )

y A cre di t in f o rmat ion bu rea u ha s b ee n s et u p t o cu rb the g row th of fre s h NPA s

y Cha ng e s i n l e gisl at ive pr ovisions have b ee n ma d e t o a cco rdn e ce ss ary f le xibili ty a nd a u tono my t o the bo ar ds o f b a nks t oe n a bl e them t o ta ke d e cisions on co rp orate s trate g y a nd b ere s p onsibl e t o the s hare h old er s, cus tomer s, emp loyee s a nd thep ublic at lar g e .

y In o rd er t o re duc e the s taff cos t of PS Bs Govt . ha s in tr oduc e dthe VRS sc heme


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y Tra ns pare n t guid e lin e s have b ee n f o rm ul ate d f o r b a nksin ve s tme n t in s hare s a nd f in a ncing o f eq ui t ie s

y BSR B ha s b ee n a bolis he d a nd b a nks have a cco rdingl y b ee na d v is e d t o frame the ir own re crui tme n t s trate gi e s.

y The Dep osi t I nsu ra nc e Cre di t a nd Gu ara n tee C orp orat ionha s b ee n con verte d in to the Ba nk D ep osi t I nsu ra nc eCorp orat ion t o ma ke it a n effe ct ive ins tr u me n t f or d ea lingwi th d ep osi t o rs r isk a nd f o r d ea ling wi th dis tre ss e d b a nks.

y Ba nks have s et u p s eparate re co very d epartme n ts a ndthe ir le g a l ce lls are b e ing s tre ng the n e d.

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7278638 Commercial Banking 1