Current Banking ======================================================================

BANKING SECTOR REFORMS IN INDIA.

Since nationalization of banks in 1969, the banking sector had been dominated by the

public sector. There was financial repression, role of technology was limited, no risk

management etc. This resulted in low profitability and poor asset quality. The country was

caught in deep economic crisis. The Government decided to introduce comprehensive

economic reforms. Banking sector reforms were part of this package. In august 1991, the

Government appointed a committee on financial system under the chairmanship of M.

Narasimhan.

(A) FIRST PHASE OF BANKING SECTOR REFORMS / NARASIMHAN

COMMITTEE REPORT – 1991:-

To promote healthy development of financial sector, the Narasimhan committee made

recommendations. RECOMMENDATIONS OF NARASIMHAN COMMITTEE:-

Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks

(including SBI) at top and at bottom rural banks engaged in agricultural activities.

The supervisory functions over banks and financial institutions can be assigned to a

quasi-autonomous body sponsored by RBI.

Phased reduction in statutory liquidity ratio.

Phased achievement of 8% capital adequacy ratio.

Abolition of branch licensing policy.

Proper classification of assets and full disclosure of accounts of banks and financial

institutions.

Deregulation of Interest rates.

Delegation of direct lending activity of IDBI to a separate corporate body.

Competition among financial institutions on participating approach.

Setting up asset Reconstruction fund to take over a portion of loan portfolio of banks

whose recovery has become difficult.

Banking Reform Measures Of Government:-

On the recommendations of Narasimhan Committee, following measures were undertaken

by government since 1991:-

1. Lowering SLR and CRR: The high SLR and CRR reduced the profits of the banks. The

SLR has been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with

banks for allocation to agriculture, industry, trade etc. The Cash Reserve Ratio (CRR) is the

cash ratio of banks total deposits to be maintained with RBI. The CRR has been brought

down from 15% in 1991 to 4.1% in June 2003. The purpose is to release the funds locked up

with RBI.

2. Prudential Norms: Prudential norms have been started by RBI in order to impart

professionalism in commercial banks. The purpose of prudential norms include proper

disclosure of income, classification of assets and provision for Bad debts so as to ensure hat

the books of commercial banks reflect the accurate and correct picture of financial position.

Prudential norms required banks to make 100% provision for all Non-performing Assets

(NPAs). Funding for this purpose was placed at Rs. 10,000 crores phased over 2 years.

3. Capital Adequacy Norms (CAN) :- Capital Adequacy ratio is the ratio of minimum

capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public

sector banks had attained the ratio of 8%. It was also attained by foreign banks.

4. Deregulation Of Interest Rates :- The Narasimhan Committee advocated that interest

rates should be allowed to be determined by market forces. Since 1992, interest rates has

become much simpler and freer.

Scheduled Commercial banks have now the freedom to set interest rates on their

deposits subject to minimum floor rates and maximum ceiling rates.

Interest rate on domestic term deposits has been decontrolled

The prime lending rate of SBI and other banks on general advances of over Rs. 2

lakhs has been reduced.

Rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.

The interest rates on deposits and advances of all Co-operative banks have been

deregulated subject to a minimum lending rate of 13%.

5. Recovery Of Debts :- The Government of India passed the “Recovery of debts due to

Banks and Financial Institutions Act 1993” in order to facilitate and speed up the recovery

of debts due to banks and financial institutions. Six Special Recovery Tribunals have been

set up. An Appellate Tribunal has also been set up in Mumbai.

6. Competition From New Private Sector Banks :- Now banking is open to private

sector. New private sector banks have already started functioning. These new private sector

banks are allowed to raise capital contribution from foreign institutional investors up to

20% and from NRIs up to 40%. This has led to increased competition.

7. Phasing Out Of Directed Credit :- The committee suggested phasing out of the

directed credit programme. It suggested that credit target for priority sector should be

reduced to 10% from 40%. It would not be easy for government as farmers, small

industrialists and transporters have powerful lobbies.

8. Access To Capital Market: - The Banking Companies (Acquisition and Transfer of

Undertakings) Act was amended to enable the banks to raise capital through public issues.

This is subject to provision that the holding of Central Government would not fall below

51% of paid-up-capital. SBI has already raised substantial amount of funds through equity

and bonds.

9. Freedom of Operation: - Scheduled Commercial Banks are given freedom to open new

branches and upgrade extension counters, after attaining capital adequacy ratio and

prudential accounting norms. The banks are also permitted to close non-viable branches

other than in rural areas.

10. Local Area banks (Labs):- In 1996, RBI issued guidelines for setting up of Local Area

Banks and it gave its approval for setting up of 7 Labs in private sector. Labs will help in

mobilizing rural savings and in channeling them in to investment in local areas.

11. Supervision of Commercial Banks: - The RBI has set up a Board of financial

Supervision with an advisory Council to strengthen the supervision of banks and financial

institutions. In 1993, RBI established a new department known as Department of

Supervision as an independent unit for supervision of commercial banks.

(B) SECOND PHASE OF REFORMS OF BANKING SECTOR (1998) / NARASIMHAN

COMMITTEE REPORT 1998:-

To make banking sector stronger the government appointed Committee on banking

sector Reforms under the Chairmanship of M. Narasimhan. It submitted its report in April

1998. The Committee placed greater importance on structural measures and improvement

in standards of disclosure and levels of transparency.

Following are the recommendations of Narasimhan Committee :-

Committee suggested a strong banking system especially in the context of capital Account

Convertibility (CAC). The committee cautioned the merger of strong banks with weak ones as

this may have negative effect on stronger banks.

It suggested that 2 or 3 large banks should be given international orientation and global

character.

There should be 8 to10 national banks and large number of local banks.

It suggested new and higher norms for capital adequacy.

To take over the bad debts of banks committee suggested setting up of Asset Reconstruction

Fund.

A board for Financial Regulation and supervision (BFRS) can be set up to supervise the

activities of banks and financial institutions.

There is urgent need to review and amend the provisions of RBI Act, Banking Regulation

Act, etc. to bring them in line with current needs of industry.

Net Non-performing Assets for all banks was to be brought down to 3% by 2002.

Rationalization of bank branches and staff was emphasized. Licensing policy for new private

banks can be continued.

Foreign banks may be allowed to set up subsidiaries and joint ventures.

Banking Reform Measures Of Government:-

On the recommendations of committee following reforms have been taken

1. New Areas: - New areas for bank financing have been opened up, such as :- Insurance,

credit cards, asset management, leasing, gold banking, investment banking etc.

2. New Instruments: - For greater flexibility and better risk management new

instruments have been introduced such as: - Interest rate swaps, cross currency forward

contracts, forward rate agreements, and liquidity adjustment facility for meeting day-to-

day liquidity mismatch.

3. Risk Management: - Banks have started specialized committees to measure and

monitor various risks. They are regularly upgrading their skills and systems.

4. Strengthening Technology: - For payment and settlement system technology

infrastructure has been strengthened with electronic funds transfer, centralized fund

management system, etc.

5. Increase Inflow of Credit: - Measures are taken to increase the flow of credit to

priority sector through focus on Micro Credit and Self Help Groups.

6. Increase in FDI Limit: - In private banks the limit for FDI has been increased from

49% to 74%.

7. Universal banking: - Universal banking refers to combination of commercial banking

and investment banking. For evolution of universal banking guidelines have been given.

8. Adoption of Global Standards: - RBI has introduced Risk Based Supervision of banks.

Best international practices in accounting systems, corporate governance, payment and

settlement systems etc. are being adopted.

9. Information Technology: - Banks have introduced online banking, E-banking,

internet banking, telephone banking etc. Measures have been taken facilitate delivery of

banking services through electronic channels.

10. Management of NPAs: - RBI and central government have taken measures for

management of non-performing assets (NPAs), such as corporate Debt Restructuring

(CDR), Debt Recovery Tribunals (DRTs) and Lok Adalts.

11. Mergers and Amalgamation:-In May 2005, RBI has issued guidelines for merger and

Amalgamation of private sector banks.

12. Guidelines For Anti-Money Laundering: - In recent times, prevention of money

laundering has been given importance in international financial relationships. In 2004,

RBI revised the guidelines on know your customer (KYC) principles.

13. Managerial Autonomy: - In February. 2005, the Government of India has issued a

managerial autonomy package for public sector banks to provide them a level playing

field with private sector banks in India.

14. Customer Service: - In recent years, to improve customer service, RBI has taken many

steps such as: - Credit Card Facilities, banking ombudsman, settlement off claims of

deceased depositors etc.

15. Base Rate System of Interest Rates: - In 2003 the system of Benchmark Prime

Lending Rate (BPLR) was introduced to serve as a benchmark rate for banks pricing of

their loan products so as to ensure that it truly reflected the actual cost. However the

BPLR system tells short of its objective. RBI introduced the system of Base Rate since

1st July, 2010. The base rate is the minimum rate for all loans. For banking system as a

whole, the base rates were in the range of 5.50% - 9.00% as on 13th October, 2010.

DEVELOPMENTS IN BANKING SECTOR: The technological evolution of the Indian banking industry has been largely directed

by the various committees set up by the RBI and the government of India to review the

implementation of technological change.

There are so many fields in which:

1. Computerization:

The process of computerization marked the beginning of all technological initiatives

in the banking industry. Computerization of bank branches had started with installation of

simple computers to automate the functioning of branches, especially at high traffic

branches. Networking of branches are now undertaken to ensure better customer service.

Core Banking Solutions (CBS) is the networking of the branches of a bank, so as to enable

the customers to operate their accounts from any bank branch, regardless of which branch

he opened the account with. The networking of branches under CBS enables centralized

data management and aids in the implementation of internet and mobile banking.

2. Satellite Banking:

Satellite banking is also an upcoming technological innovation in the Indian banking

industry, which is expected to help in solving the problem of weak terrestrial

communication links in many parts of the country. The use of satellites for establishing

connectivity between branches will help banks to reach rural and hilly areas in a better

way, and offer better facilities, particularly in relation to electronic funds transfers.

3. Development of Distribution Channels:

The major and upcoming channels of distribution in the banking industry, besides

branches are ATMs, internet banking, mobile and telephone banking and card based

delivery systems.

4. Automatic Teller Machines:

ATMs were introduced to the Indian banking industry in the early 1990s initiated by

foreign banks. Most foreign banks and some private sector players suffered from a serious

handicap at that time- lack of a strong branch network. ATM technology was used as a

means to partially overcome this handicap by reaching out to the customers at a lower

initial and transaction costs and offering hassle free services. Since then, innovations in

ATM technology have come a long way and customer receptiveness has also increased

manifold. Public sector banks have also now entered the race for expansion of ATM

networks. Development of ATM networks is not only leveraged for lowering the transaction

costs, but also as an effective marketing channel resource.

5. Introduction of Biometrics:

Banks across the country have started the process of setting up ATMs enabled with

biometric technology to tap the potential of rural markets. A large proportion of the

population in such centers does not adopt technology as fast as the urban centers due to the

large scale illiteracy. Development of biometric technology has made the use of self service

channels like ATMs viable with respect to the illiterate population.

6. Multilingual ATMs:

Installation of multilingual ATMs has also entered pilot implementation stage for

many large banks in the country. This technological innovation is also aimed at the rural

banking business believed to have large untapped potential. The language diversity of

India has proved to be a major impediment to the active adoption of new technology,

restrained by the lack of knowledge of English.

7. Internet Banking:

Internet banking in India began taking roots only from the early 2000s. Internet

banking services are offered in three levels. The first level is of a bank’s informational

website, wherein only queries are handled; the second level includes Simple Transactional

Websites, which enables customers to give instructions, online applications and balance

enquiries. Under Simple Transactional Websites, no fund based transactions are allowed to

be conducted. Internet banking in India has reached level three, offering Fully

Transactional Websites, which allow for fund transfers and various value added services.

8. Phone Banking and Mobile Banking:

Phone and mobile banking are a fairly recent phenomenon for the Indian banking

industry. There exist operative guidelines and restrictions on the type and quantum of

transactions that can be undertaken via this route. Phone banking channels function

through an Interactive Voice Response System (IVRS) or tele -banking executives of the

banks. The transactions are limited to balance enquiries, transaction enquiries, stop

payment instructions on cheques and funds transfers of small amounts (per transaction

limit of Rs 2500, overall cap of Rs 5000 per day per customer).

10. Card Based Delivery Systems:

Among the card based delivery mechanisms for various banking services, are credit

cards, debit cards, smart cards etc. These have been immensely successful in India since

their launch. Penetration of these card based systems have increased manifold over the

past decade. Aided by expanding ATM networks and Point of Sale (POS) terminals, banks

have been able to increase the transition of customers towards these channels, thereby

reducing their costs too.

Payment and Settlement Systems The innovations in technology and communication infrastructure in recent years have

impacted banks in a large way through the development of payment and settlement

systems, which are central to the major portion of the businesses of banks.

In order to strengthen the institutional framework for the payment and settlement systems

in the country, the RBI constituted, in 2005, a Board for Regulation and Supervision of

Payment and Settlement Systems (BPSS) as a Committee of its Central Board. The BPSS

now lays down policies relating to the regulation and supervision of all types of payment

and settlement systems, sets standards for existing and future systems, approves criteria

for authorization of payment and settlement systems, and determines criteria for

membership to these systems, including continuation, termination and rejection of

membership. Thereafter, the government and the RBI felt the need for a legal framework

dedicated to the efficient functioning of the payment and settlement systems. The Payment

and Settlement Systems Act was passed in December 2007, which empowered the RBI to

regulate and supervise the payment and settlement systems and provided a legal basis for

multilateral netting and settlement

1. Paper Based Clearing Systems:

Among the most important improvement in paper based clearing systems was the

introduction of MICR technology in the mid 1980s. Though improvements continued to be

made in MICR enabled instruments, the major transition is expected now, with the

implementation of the Cheques Truncation System for the processing of cheques.

2. Cheque Truncation System (CTS):

Truncation is the process of stopping the movement of the physical cheque which is to

be truncated at some point en-route to the drawee branch and an electronic image of the

cheques would be sent to the drawee branch along with the relevant information like the

MICR fields, date of presentation, presenting banks etc. Thus, the CTS reduce the

probability of frauds, reconciliation problems, logistics problems and the cost of collection.

The cheque truncation system was launched on a pilot basis in the National Capital

Region of New Delhi on February 1, 2008, with the participation of 10 banks. The main

advantage of the cheque truncation system is that it obviates the physical presentation of

the cheque to the clearing house. Instead, the electronic image of the cheque would be

required to be sent to the clearing house.

3. Electronic Clearing Service:

The Electronic Clearing Service (ECS) introduced by the RBI in 1995, is akin to the

Automated Clearing House system that is operational in certain other countries like the

US. ECS has two variants- ECS debit clearing and ECS credit clearing service. ECS credit

clearing operates on the principle of ‘single debit multiple credits’ and is used for

transactions like payment of salary, dividend, pension, interest etc. ECS debit clearing

service operates on the principle of ‘single credit multiple debits’ and is used by utility

service providers for collection of electricity bills, telephone bills and other charges and also

by banks for collections of principal and interest repayments. Settlement under ECS is

undertaken on T+1 basis. Any ECS user can undertake the transactions by registering

themselves with an approved clearing house.

4. Electronic Funds Transfer Systems:

The launch of the electronic funds transfer mechanisms began with the Electronic

Funds Transfer (EFT) System. The EFT System was operationalised in 1995 covering 15

centers where the Reserve Bank managed the clearing houses. Special EFT (SEFT) scheme,

a variant of the EFT system, was introduced with effect from April 1, 2003, in order to

increase the coverage of the scheme and to provide for quicker funds transfers. SEFT was

made available across branches of banks that were computerized and connected via a

network enabling transfer of electronic messages to the receiving branch in a straight

through manner (STP processing). In the case of EFT, all branches of banks in the 15

locations were part of the scheme, whether they are networked or not.

5. National Electronics Fund Transfer:

A new variant of the EFT called the National EFT (NEFT) was decided to

implemented (November 2005) so as to broad base the facilities of EFT. This was a nation

wide retail electronic funds transfer mechanism between the networked branches of banks.

NEFT provided for integration with the Structured Financial Messaging Solution (SFMS) of

the Indian Financial Network (INFINET). The NEFT uses SFMS for EFT message

creation and transmission from the branch to the bank’s gateway and to the NEFT Centre,

thereby considerably enhancing the security in the transfer of funds.

6. Real Time Gross Settlement:

The introduction of RTGS in 2004 was instrumental in the development of

infrastructure for Systemically Important Payment Systems (SIPS). RTGS was launched by

RBI, which enabled a real time settlement on a gross basis. To ensure that RTGS system is

used only for large value transactions and retail transactions take an alternate channel of

electronic funds transfer, a minimum threshold of one lakh rupees was prescribed for

customer transactions under RTGS on January 1, 2007.

FINANCIAL INCLUSION Financial inclusion is the process of ensuring fair, timely and adequate access to

financial services. These services are saving, credit, payment and remittance facilities, and

insurance services at an affordable cost in a fair and transparent manner by the

mainstream institutional players.

"Financial inclusion is delivery of banking services at an affordable cost ('no frills'

accounts,) to the vast sections of disadvantaged and low income group. Unrestrained access

to public goods and services is to an open and efficient society. As banking services are in

the nature of public good, it is essential that availability of banking and payment services to

the entire population without discrimination is the prime objective of the public policy."

Financial inclusion denotes delivery of financial services at an affordable cost to the

vast sections of the disadvantaged and low-income groups. The various financial

Services include credit, savings, insurance and payments and remittance facilities.

The objective of financial inclusion is to extend the scope of activities of the organized

financial system to include within its ambit people with low incomes.

OBJECTIVE:

1. INCLUSIVE GROWTH:

The Eleventh Five Year Plan (2007-12) envisions inclusive growth as a key objective.

The Plan document notes that the economic growth has failed to be sufficiently Inclusive

particularly after the mid-1990s. The Indian economy, though achieved a High growth

momentum during 2003-04 to 2007-08, could not bring down Unemployment and poverty to

tolerable levels. Further, a vast majority of the Population remained outside the ambit of

basic health and education facilities. Thus, The Eleventh Plan Document tries to

restructure the policies in order to make the growth faster, broad-based and inclusive by

reducing the fragmentation of the society.

2. Expansion of Banking Infrastructure:

As per Census 2011, 58.7% households are availing banking services in the country.

There are 102,343 branches of Scheduled Commercial Banks (SCBs) in the country, out of

which 37,953 (37%) bank branches are in the rural areas and 27,219 (26%) in semi-urban

areas, constituting 63 per cent of the total numbers of branches in semi-urban and rural

areas of the country. However, a significant proportion of the households, especially in rural

areas, are still outside the formal fold of the banking system. To extend the reach of

banking to those outside the formal banking system, Government and Reserve Bank of

India (RBI) are taking various initiatives from time to time some of which are enumerated

below

Opening of Bank Branches: Government had issued detailed strategy and

guidelines on Financial Inclusion in October 2011, advising banks to open branches

in all habitations of 5,000 or more population in under-banked districts and 10,000

or more population in other districts

Each household to have at least one bank account: Banks have been advised to

ensure service area bank in rural areas and banks assigned the responsibility in

specific wards in urban area to ensure that every household has at least one bank

account.

Business Correspondent Model: With the objective of ensuring greater financial

inclusion and increasing the outreach of the banking sector, banks were permitted by

RBI in 2006 to use the services of intermediaries in providing financial and banking

services through the use of Business Facilitators (BF) and Business Correspondents

(BCs).

Swabhimaan Campaign: Under “Swabhimaan” - the Financial Inclusion Campaign

launched in February 2011, Banks had provided banking facilities by March, 2012 to

over 74,000 habitations having population in excess of 2000 using various models and

technologies including branchless banking through Business Correspondents Agents

(BCAs). 2012-13, the “Swabhimaan” campaign has been extended to habitations with

population of more than 1000 in North Eastern and hilly States and to habitations

which have crossed population of 1600 as per census 2001. About 40,000 such

habitations have been identified to be covered under the extended “Swabhimaan”

campaign.

Setting up of Ultra Small Branches (USB’s): Considering the need for close

supervision and mentoring of the Business Correspondent Agents (BCAs) by the

respective banks and to ensure that a range of banking services are available to the

residents of such villages, Ultra Small Branches (USB’s) are being set up in all

villages covered through BCAs under Financial Inclusion.

USSD Based Mobile Banking : The Department through National Payments

Corporation of India (NPCI) worked upon a “Common USSD Platform” for all Banks

and Tele-companies who wish to offer the facility of Mobile Banking using

Unstructured Supplementary Service Data (USSD) based Mobile Banking.

3. Steps taken by Reserve Bank of India (RBI): To strengthen the Banking

Infrastructure –

RBI has permitted domestic Scheduled Commercial Banks (excluding RRBs) to open

branches in Tier 2 to Tier 6 Centers (with population up to 99,999 as per census

2001) without the need to take permission from RBI in each case, subject to

reporting.

Domestic SCBs have been advised that while preparing their Annual Branch

Expansion Plan (ABEP), they should allocate at least 25% of the total number of

branches proposed to be opened during the year in unbanked Tier 5 and Tier 6

centers i.e. (population up to 9999) centers.

Regional Rural Banks (RRBs) are also allowed to open branches in Tier 2 to Tier 6

centers (with population up to 99,999 as per Census 2001) without the need to take

permission from the Reserve Bank in each case, subject to reporting, provided they

fulfill the following conditions, as per the latest inspection report:

1. CRAR of at least 9%;

2. Net NPA less than 5%;

3. No default in CRR / SLR for the last year;

4. Net profit in the last financial year;

5. CBS compliant.

New private sector banks are required to ensure that at least 25% of their total

branches are in semi-urban and rural centers on an ongoing basis.

Area of concern of banks:

The banking industry has shown tremendous growth in volume and complexity

during the last few decades.

Despite making significant improvements in all the areas relating to financial

viability, profitability and competitiveness, there are concerns that banks have not

been able to reach and bring vast segment of the population, especially the

underprivileged sections of the society, into the fold of basic banking services.

Internationally also efforts are being made to study the causes of financial exclusion

and design strategies to ensure financial inclusion of the poor and disadvantaged.

The reasons may vary from country to country and so also the strategy but all out

efforts are needed as financial inclusion can truly lift the standard of life of the poor

and the disadvantaged.

RBI's Policy on 'Financial Inclusion’:

When bankers do not give the desired attention to certain areas, the regulators have

to step in to remedy the situation. This is the reason why the Reserve Bank of India

places a lot of emphasis on financial inclusion.

With a view to enhancing the financial inclusion, as a proactive measure, the RBI in

its Annual Policy Statement of the year 2005-2006, while recognizing the concerns in

regard to the banking practices that tend to exclude rather than attract vast sections

of population, urged banks to review their existing practices to align them with the

objective of financial inclusion.

In the Mid Term Review of the Policy (2005-06), RBI exhorted the banks, with a view

to achieving greater financial inclusion, to make available a basic banking 'no frills'

account either with 'NIL' or very minimum balances as well as charges that would

make such accounts accessible to vast sections of the population. The nature and

number of transactions in such accounts would be restricted and made known to

customers in advance in a transparent manner. All banks are urged to give wide

publicity to the facility of such 'no frills' account, so as to ensure greater financial

inclusion.

As the Reserve Bank has been receiving several representations from public about

unreasonable service charges being levied by banks, the existing institutional

mechanism in this regard is not adequate. Accordingly, and in order to ensure fair

practices in banking services, the RBI has issued instructions to banks making it

obligatory for them to display and continue to keep updated, in their offices/branches

as also in their website, the details of various services charges in a format prescribed

by it. The Reserve Bank has also decided to place details relating to service charges of

individual banks for the most common services in its website.

BASEL NORMS: Basel norms are the round of deliberations by central bankers from around the world,

and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland,

published a set of minimum capital requirements for banks. This is also known as the 1988

Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992.

Basel norms are actually a set a norms for the banks aimed at mitigating the risk

and strengthening the capital structure of the banks of member countries. Basel is a city in

Switzerland. It is the headquarters of Bureau of International Settlement (BIS), which

fosters co-operation among central banks of the world. The common goal of BIS is financial

stability and common standards of banking regulations.

Basel I Norms:

Basel I is the outcome of discussions by central bankers from around the world, and

in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum

capital requirements for banks. The minimum capital requirement was fixed at 8% of risk

weighted assets (RWA). RWA means assets with different risk profiles. For example, an

asset backed by collateral would carry lesser risks as compared to personal loans, which

have no collateral. India adopted Basel I guidelines in 1999.

Basel II Norms:

Basel II is the second of the Basel Accords, (now extended and effectively superseded

by Basel III), which are recommendations on banking laws and regulations issued by the

Basel Committee on Banking Supervision. Basel II, initially published in June 2004 the

guidelines were based on three parameters, which the committee calls it as pillars.

Capital Adequacy Requirements: Banks should maintain a minimum capital

adequacy requirement of 8% of risk assets.

Supervisory Review: According to this, banks were needed to develop and use

better risk management techniques in monitoring and managing all the three types

of risks that a bank faces, viz. credit, market and operational risks

Market Discipline: This need increased disclosure requirements. Banks need to

mandatory disclose their CAR, risk exposure, etc to the central bank. Basel II norms

in India and overseas are yet to be fully implemented.

Basel III norms :

Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking

Supervision to enhance the banking regulatory framework under Basel I and Basel II. This

latest Accord now seeks to improve the banking sector's ability to deal with financial and

economic stress, improve risk management and strengthen the banks' transparency. Basel 3

measures aim to:

improve the banking sector's ability to absorb shocks arising from financial

and economic stress, whatever the source

improve risk management and governance

Strengthen banks' transparency and disclosure.

Major Features of Basel III:

Better Capital Quality: One of the key elements of Basel 3 is the introduction of

much stricter definition of capital. Better quality capital means the higher loss-

absorbing capacity. This in turn will mean that banks will be stronger, allowing

them to better withstand periods of stress.

Capital Conservation Buffer: Another key feature of Basel iii is that now banks

will be required to hold a capital conservation buffer of 2.5%. The aim of asking to

build conservation buffer is to ensure that banks maintain a cushion of capital that

can be used to absorb losses during periods of financial and economic stress.

Countercyclical Buffer: This is also one of the key elements of Basel III. The

countercyclical buffer has been introduced with the objective to increase capital

requirements in good times and decrease the same in bad times. The buffer will slow

banking activity when it overheats and will encourage lending when times are tough

i.e. in bad times. The buffer will range from 0% to 2.5%, consisting of common equity

or other fully loss-absorbing capital.

Minimum Common Equity and Tier 1 Capital Requirements: The minimum

requirement for common equity, the highest form of loss-absorbing capital, has been

raised under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier

1 capital requirement, consisting of not only common equity but also other qualifying

financial instruments, will also increase from the current minimum of 4% to 6%.

Although the minimum total capital requirement will remain at the current 8% level,

yet the required total capital will increase to 10.5% when combined with the

conservation buffer.

Leverage Ratio: A review of the financial crisis of 2008 has indicted that the

value of many assets fell quicker than assumed from historical experience. Thus,

now Basel III rules include a leverage ratio to serve as a safety net. A leverage ratio

is the relative amount of capital to total assets (not risk-weighted). This aims to put

a cap on swelling of leverage in the banking sector on a global basis. 3% leverage

ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in

January 2018.

Liquidity Ratios: Under Basel III, a framework for liquidity risk management will

be created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio

(NSFR) are to be introduced in 2015 and 2018, respectively.

Systemically Important Financial Institutions (SIFI): As part of the macro-

prudential framework, systemically important banks will be expected to have loss-

absorbing capability beyond the Basel III requirements. Options for implementation

include capital surcharges, contingent capital and bail-in-debt.

MICRO – FINANCE: Micro-financing is regarded as a tool for socio-economic up-liftment in a developing

country like India. It is expected to play a significant role in poverty alleviation and

development. Mohammed Yunus was awarded the Noble Prize for application of the concept

of microfinance, with setting up of the Grameen Bank in Bangladesh. Micro credit and

microfinance are different. Micro credit is a small amount of money, given as a loan by a

bank or any legally registered institution, whereas, Microfinance includes multiple services

such as loans, savings, insurance, transfer services, micro credit loans etc.

Microfinance is the provision of a broad range of financial services such as deposits,

loans, payment services, money transfers and insurance to the poor and low income

households and their micro-enterprises. Microfinance is defined as “Financial Services

(savings, insurance, fund, credit etc.) provided to poor and low income clients so as to help

them raise their income, thereby improving their standard of living”.

FEATURES OF MICROFINANCE:

It is an essential part of rural finance.

It deals in small loans.

It basically caters to the poor households.

It is one of the most effective and warranted Poverty Alleviation Strategies.

It supports women participation in electronic activity.

It provides an incentive to grab the self employment opportunities.

It is more service-oriented and less profit oriented.

It is meant to assist small entrepreneur and producers.

Poor borrowers are rarely defaulters in repayment of loans as they are simple and

God-fearing.

India needs to establish several Microfinance Institutions.

MICROFINANCE MODELS IN INDIA:-

In India, the beginning of microfinance movement could be traced to Self Help Group

(SHG) – Bank Linkage Programme (SBLP) started as a pilot project in 1992 by NABARD.

This programme proved to be very successful and has also developed as the most popular

model of microfinance in India.

In India, the institutions which provides microfinance services includes:-NABARD

Small Industries Development Bank of India (SIDBI), Rashtriya Mahila Kosh, Commercial

Banks, Regional Rural Banks, Co-operative Banks and Non Banking Financial Companies

(NBFCs).

Microfinance services are provided mainly by two models :- Self Help Group - Bank

Linkage Programme (SBLP) Model and Micro-Finance Institutions Model (MFI). These both

together have about 7 crore clients.

1. SHG - Bank Linkage Programme (SBLP)

A Self Help Group (SHG) is a small group of 10 to 20 persons of rural poor who come

together to mutually contribute to common fund for meeting their emergency needs. SHG -

Bank Linkage Programme was introduced by NABARD in 1992. Under this programme

three different models have emerged:-

Model I: - SHGs promoted, guided and financed by banks.

Model II: - SHGs promoted by NGOs / government agencies and financed by banks.

Model III: - SHGs promoted by NGOs and financed by banks under

2. Micro Finance Institutions (MFls):

MFls include NGOs, trusts, social and economic entrepreneurs; these lend small,

sized loans to individuals or SHGs. They also provide other services like capacity building,

training, marketing of products etc.

MFIs operate under following models:-

(a) Bank Partnership Model

MFI As Agent :- In this model, the MFI acts as an agent and it takes Care of all

relationships with borrower from first contact to final repayment.

MFI as Holder of Loans: - Here MFI holds the individual loans on its books for a

while, before securitizing them and selling them to bank. -

(b) Banking Facilitators:-

Banking facilitators / correspondents are intermediaries who carry out banking

functions in villages or areas where it is not possible to open a branch. In January, 2006,

RBI permitted banks to use services of NGOs, MFIs and other civil society organizations to

act as intermediaries in providing financial and banking services to poor.

ROLE AND IMPORTANCE OF MICROFINANCE:-

Microfinance institutions are those which provide credit and other financial services

and products of very small amounts to poor in rural, semi-urban and urban areas for

enabling them to raise their income and improve their standard of living.

1. Credit to Rural Poor:-

Usually rural sector depends on non-institutional agencies for their financial

requirements. Micro financing has been successful in taking institutionalized credit to the

doorstep of poor and have made them economically and socially sound.

2. Poverty Alleviation:-

Due to micro finance poor people get employment. It also helps them to improve their

entrepreneurial skills and encourage them to exploit business opportunities. Employment

increases income level which in turn reduces poverty.

3. Women Empowerment:-

Normally more than 50% of SHGs are formed by women. Now they have greater

access to financial and economical resources. It is a step towards greater security for

women. Thus microfinance empowers poor women economically and socially.

4. Economic Growth:-

Finance plays a key role in stimulating sustainable economic growth. Due to

Microfinance, production of goods and services increases which increases GDP and

contributes to economic growth of the country.

5. Mobilization of Savings:-

Microfinance develops saving habits among people. Now poor people with meager

income can also save and are bankable. The financial resources generated through savings

and micro credit obtained from banks are utilized to provide loans and advances to its

members. Thus microfinance helps in mobilization of savings.

6. Development of Skills:-

Micro financing has been a boon to potential rural entrepreneurs. SHGs encourage its

members to set up business units jointly or individually. They receive training from

supporting institutions and learn leadership qualities. Thus micro finance is indirectly

responsible for development of skills.

7. Mutual Help and Co-operation:-

Microfinance promotes mutual help and co-operation among members. The collective

efforts of group promote economic interest and helps in achieving socio-economic transition.

8. Social Welfare:-

With employment generation the level of income of people increases. They may go for

better education, health, family welfare etc. Thus micro finance leads to social welfare or

betterment of society.

PERFORMANCE OF MICROFINANCE IN INDIA

Performance of microfinance as on March 31, 2013.

Sr. No. Particulars Cumulative as on March 31,2008

1 No. of SHGs linked to banks 73.18 lakh

2 No. of women groups 59.38 lakh

3 No. of states / UTs 30 STATES

4 Bank Loans (Rs. In billion)

Average Loan / SHG Rs

8217.25 crore rupees

88455.31 per SHG

5 No. of poor Households assisted (in million)

LEAD BANK SCHEME (LBS) ::

The RBI introduced ‘Lead Bank Scheme’ in 1969, based on the recommendations of

the Gadgil Study Group.

The basic idea was to have an “area approach” for targeted and focused banking.

Under the Scheme, each district had been assigned to different banks (public and

private) to act as a consortium leader to coordinate the efforts of banks in the district

particularly in matters like branch expansion and credit planning.

The Lead Bank was to act as a consortium leader for coordinating the efforts of all

credit institutions in each of the allotted districts for expansion of branch banking

facilities and for meeting the credit needs of the rural economy.

DIRECT BENEFIT TRANSFER (DBT) : The objective of DBT Scheme is to ensure that money under various developmental

schemes reaches beneficiaries directly and without any delay. The scheme has been

launched in the country from January, 2013 and has been rolled out in a phased manner,

starting with 26 welfare schemes, in 43 districts. The scheme is now being extended to

additional 78 districts and additional 3 schemes from 1st July, 2013 and would be extended

to the entire country in a phased manner. The Government has also started the transfer of

cash subsidy for domestic LPG Cylinders to Aadhaar linked bank accounts of the customers

with effect from 1st June 2013, in 20 districts. About 75 lakh beneficiaries would be

benefited in these Districts. Banks play a key role in implementation of DBT and this

involves four important Steps,

Opening of accounts of all beneficiaries;

Seeding of bank accounts with Aadhaar numbers and uploading on the NPCI map;

Undertaking funds transfer using the National Automated Clearing House Aadhaar

Payment Bridge System (NACH-APBS).

Strengthening of banking infrastructure to enable beneficiary to withdraw money

Banks are ensuring that all beneficiaries have a bank account. All Public Sector Banks

(PSBs) and RRBs have made provision for Aadhaar seeding in the CBS. All PSBs have also

joined the Aadhaar Payment Bridge of National Payments Corporation of India (NPCI).

Banks are also issuing debit cards to beneficiaries. Banks have also started action for

strengthening banking infrastructure and providing business correspondents in areas,

which were so far unserved.

Banks have also been advised to provide an onsite ATM in all the branches in

identified districts and a Debit Card to all beneficiaries to enable him / her to withdraw

the money as per his ease and convenience. Issuance of a Debit Card to all beneficiaries to

enable him / her to withdraw the money as per his ease and convenience will also

strengthen the withdrawal infrastructure.