Description
The report describes the Financial Regulation, Supervision and the Evolution of Commercial Banking in India.
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
The East India Company set up the Bank of Bombay in 1720 with the objective of increasing trade for the Company. In 1773, Warren Hastings floated the General Bank of Bengal and Bihar which was a private establishment under the patronage of the East India Company. The General Bank of Bengal and Bihar bank was closed in 1775 due to internal opposition in the Governor General’s council. In 1786 the General Bank of India was floated which claimed limited liability on the shareholders. But neither the British Law nor the Indian Law was in existence to confer the right of limited liability on the shareholders. Subsequently the Carnatic Bank (1788), Madras Bank (1795), British Bank (1795) and Asiatic Bank were established as private institutions. On February 1 1806, the Government Bank started functioning in Madras by passing of a resolution by Bentinck in his council. The Government Bank was empowered to issue notes subject to some conditions. The Commercial Bank (1819) and the Bank of Calcutta (1824) were floated based upon a need to grow revenues for the East India Company. The Union Bank was born by the merger of the Calcutta Bank and the Commercial Bank. The main business of these Presidency banks was to keep cash accounts, receive cash deposits, issue and circulate bank notes. The major innovation in banking organization came in with the establishment of the Bank of Bengal (1809). This included: ? ? ? ? ? Conferring limited liability on its shareholders Provision for acceptance of deposits from the general public Provision for the note issue which could be accepted for public payments Imposition on the limit and the type of securities that could be accepted Provision for regulatory changes in the Board of Directors
The Royal Charter (aka East India Company) governed the three Presidency Banks (Bengal Bank, Bank of Bombay and the Bank of Madras). The East India Company reserved the right to regulate the monetary and credit system. With the passing of the Paper Currency Act 1861, the right to issue currency notes by the Presidency banks was abolished and the same was entrusted to the Government. With the collapse of the Bank of Bombay (Its collapse in 1866 was caused largely by an uncontrolled lending mania in 1864-65 following the authorization in 1863 of advances, previously prohibited, on the shares of private companies) a new bank called New Bank of Bombay was established in January 1868. In 1876 the Presidency Act came into existence which brought the three Presidency Banks under a common statute. In 1921 the three Presidency Banks and their branches were merged to form the Imperial Bank of India. This new entity acquired the triple role of a commercial bank, a banker’s bank and a banker to the government. In 1951 when the first Five Year Plan was launched, the development of Rural India was accorded the highest priority. The All India Rural Credit Survey Committee recommended the creation of a State owned bank by taking over the Imperial Bank of India and integrating it with other State owned banks. Accordingly the SBI was constituted on July 1 1955.Later the SBI (Subsidiary Banks) Act was passed in 1959 enabling the SBI to take over eight former State associated banks as its subsidiaries. The Indian financial system consists of the following entities: Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India ?
?
? ?
Commercial Banks o PSU Banks ( nationalized banks, SBI and its associates and the Regional Rural Banks are constituted under a special act of Parliament o Private Sector Banks ( considered as banking companies under the banking Regulation Act) o Foreign Banks (considered as banking companies under the banking Regulation Act) Cooperative banks o Urban Co-operatives(UCB’s) o Rural Co-operatives ? Short-term cooperatives ? Long term cooperatives Financial Institutions NBFC’s.
The regulation and supervision of the financial system in India is carried out by various regulatory authorities. The RBI dominates the regulation of the banking sector. The supervisory role of the RBI covers commercial banks, Urban Cooperative Banks some FI’s and NBFC’s. Some FI’s in turn regulate other institutions in the financial sector viz Regional Rural Banks (RRB’s) and central and state cooperatives are supervised by the National Bank for Agriculture and Rural Development ( NABARD).Housing companies are regulated by the National Housing Bank(NHB). The Registrar of Cooperatives (ROC) of different states in case of single state cooperatives and the Central Government for multi-state cooperatives is a joint regulator with the RBI for UCB and with NABARD for rural cooperatives. While the RBI/NABARD focuses on the banking aspect of the cooperatives, the management control rests with the State/Central Governments. The Insurance Regulatory and Development Authority (IRDA) regulate the insurance sector and the capital markets are regulated by SEBI. In the past five decades, the Indian banking has traversed a long and trying road of having to balance the changing needs of the economy, its customers and also adhere to the statutory regulations. From the lack of freedom and total control the banking system has withstood various shocks. The RBI and the regulations have changed over time to step up to the needs of an atmosphere where the fate of Indian banks and business are closely entwined with their western counterparts. The blurring of the distinction among financial intermediaries under the impact of domestic and cross border integration ,innovations in instruments and processes, advances in technology and the increasing volumes of capital intermediated by the financial system have necessitated a very robust framework. During the formative stages of banking developments the banks were regulated by the East India Company’s Government, Royal Charter and the Government of India. A banking crisis occurred during 1913 that highlighted the weakness of the banking system such as the maintenance of unduly low proportion of cash and other liquid assets, unsecured grants to the directors of the banks and companies in which they had a vested interest. In West Bengal four Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
scheduled banks failed. The amount of money lost, mostly the savings of the middle class was over Rs 26 crores. When the Reserve Bank of India Act 1934 came into effect an important function of the RBI was to hold the cash reserves of the banks, granting them accommodation in a discretionary way and regulating their operations through instruments of credit control. The RBI was established in1935 (which means that it completed 70 years of existence in 2005!).The primary role of the RBI was also conceived as being the lender-of-last- resort for the purpose of ensuring liquidity of the banks. The failure of the Travancore National and Quilon Bank (TNQ Bank) in the middle of 1938 created a public scare which was mostly localized to South India. Between 1939 and 1949 as many as 588 banks had failed in various states and the lack of adherence by majority of the non scheduled banks to the RBI norms. In 1940, the Government vested the RBI with powers to inspect banking companies on a restricted scale in consultation with the Government of India. The purpose of these inspections was to satisfy the RBI regarding the eligibility for a license, opening of branches. The RBI assessed them to see whether they were capable of being included in the Second Schedule of the RBI Act. The RBI under the Banking Regulation Act 1949 is required to satisfy itself by inspecting the books of accounts, methods of operation etc before granting a license. This long banking journey in the Indian context can be described as under: 1. The Foundation Phase ( 1950-1968):The main importance was given to the creation of a structure of a banking system to cater to a new economy on the path to development. The RBI commenced systematic and periodic inspections of all banks in March 1950.These inspections threw up deficiencies in the lending systems, lack of management control, poor MIS, inadequate branch supervision, low reserves especially in the case of unscheduled banks. In 1953, the RBI agreed for the amalgamation of some banks especially if the RBI felt that it was in the interest of the depositors. The administration of the Banking Regulation Act 1949 brought forth certain loopholes in the law dealing with managerial irregularities of banking companies particularly in respect of the appointment of senior managerial positions such as directorships etc. The Act was amended in 1957 to overcome these shortcomings. Between 1960 and 1968, the thrust continued to be on ensuring the soundness in the operations of banks, consolidation and protection of the small depositors through liquidations and compulsory amalgamations. The deposit insurance scheme was also introduced during this period. Through the branch licensing policy, the RBI started correcting the lop-sided branch distribution of branches with its concentration in towns and big cities.
2. The Strengthening and Consolidation Phase (1969-1991): The nationalization of 14 major commercial banks on July 19 1969 was a landmark phase in the Indian banking system .The public sector as a concept made its entry during this period. The main objectives of the nationalized banks were to implement the agenda of national growth. The first Board of Directors for each of the nationalized banks was constituted on July 18 Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
1970.The main objective of this exercise was to place at the helm a responsible team of people who would keep the depositors at the very apex level. The National Credit Council (NCC) was set-up arising out of a policy of “social control”. During the 1970’s the RBI also dealt with the issue of strengthening the boards of private sector banks through the reconstitution of their boards. Attention was also given to the foreign branches of the PSU banks. Issues related to the accounting in the banking sector, provision of refinance and inspection of systems and procedures for inspection were also introduced. During the 1980’s six more banks were nationalized and the PSU banks were also asked to raise the proportion of their advances to the priority sector to 40%by the 1985. The massive expansion resulted in a stress on the entire banking system and with effect from January 1985 a system of Annual Financial Review was introduced to be conducted subsequent to the annual audit of banks.
3. The Liberalization Phase (1991 onwards): The 1990’s was a watershed decade in the history of the Indian financial system. Factors such as huge inflows, thrust on socially relevant credit programmes affected the operational efficiency of the banking system. Overstaffing, poor technology and lack of proper internal organization affected the performance and the working of banks. Accordingly a Committee on the Financial System Reforms under the leadership of Shri M Narasimhan was constituted in 1991 to look into and suggest reforms. The recommendations of the Narasimhan Committee led to the adoption and overhauling of the banking sector. The Department of Banking Supervision was set-up within the RBI to strengthen the institutional framework. A high powered BFS (Board for Financial Supervision) was setup comprising the Governor as the Chairman, one of the Deputy Governor’s as Vice-Chairman and four Directors of the central Board of the RBI as members was constituted in November 1994.Major steps such as deregulation of interest rates, reduction of the SLR/CRR, provision of operational autonomy to the banks were taken to strengthen the banks. Guidelines to facilitate the entry of foreign banks were introduced. This increased competition was done in a way to facilitate productivity and efficiency of the banking system. A review of the RBI’s inspection system was undertaken by a Working Group to review the system of On-site supervision over banks under the chairmanship of Shri S Padmanabhan in Feb 1995.This group recommended switching to a system of ongoing supervision. It recommended a strategy of periodical full scope “on-site” examinations supplemented by an in-house “off-site” monitoring system. The Working Group recommended that the periodic examinations should concentrate on : a. Financial Condition and Performance b. Management and Operating Condition c. Compliance d. Assessment in line with CAMELS rating model with systems and controls added to it for Indian and foreign banks on CACS ( capital adequacy, asset quality, compliance, systems and controls) Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
The OSMOS (The Off-site Monitoring and Surveillance) System was made operational in 1995 as a part of crisis management for early warning system and to trigger for on-site inspections. Banks were asked to increase the usage of INFINET for regular reporting: The INdian FInancial NETwork [INFINET] is the communication backbone for the Indian Banking and Financial Sector. All Banks, Public Sector, Private Sector, Cooperative, etc., and the premier Financial Institutions in the country are eligible to become members of the INFINET. The INFINET is a Closed User Group [CUG] Network for the exclusive use of member banks and financial institutions. The communication backbone is based on IP VPN Layer 3 Network with full mesh VPN network. Presently, the network is spread across 300 cities in our country. The INFINET is primarily based on Multi-Protocol Label Switching network, where the packet and label switching takes place at service providers’ level. A detailed IP addressing scheme has been devised by IDRBT for all CUG members, which has to be followed by all CUG members, while accessing RBI, CCIL and IDRBT applications. INFINET MPLS Architecture
A Consolidated Prudential Reporting (CPR) system was introduced in 2003. Taking into account the complexities of the banking business, the RBI initiated measures to implement Risk Based Supervision (RBS) based upon a risk. rating framework. The RBI evaluates the risk profiles of the banks through an analysis of various risks faced by the banks. The RBI has already conducted two rounds of pilot runs of the RBS for 23 banks. Smooth implementation of the RBS is being considered as a precursor for the implementation of the Capital Accord (Basel II) and is Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
expected to strengthen the risk management practices of Indian banks. In the recent years, a lot of emphasis has been placed on KYC norms to combat money laundering. To tackle the issue of high level of non performing assets (NPA’s) Debt Recovery Tribunals were established post the passing of the Recovery of Debts Due to Banks and Financial Institutions Act 1993. With a view to put into place a timely and transparent restructuring of corporate debts in 2001 a Scheme of Corporate Debt Restructuring (CDR) was started outside the purview of BIFR, DRT and other legal proceedings. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was passed in 2002.This was done to increase the options available to banks to deal with NPA’s. In order to strengthen the banking system, it was decide to introduce capital adequacy norms to ensure uniform standards of capital structure and progress towards Basel norms. The Basel II framework was designed to overcome some of the shortcomings of the Basel 1 such as non recognition of operational risk or having broad based credit risk approach. The Basel II framework was designed to provide operations to the banking system for determining capital requirements for various risk parameters such as credit risk, market risk, operational risk etc. it aims at aligning the banks capital closely with the underlying risks in the bank’s Balance Sheet. Banks have also been asked to focus on technology and especially for PSU banks; the objective of full computerization has received a lot of importance
Commercial Banking November 1 2009 Raji Ajwani
doc_750416660.pdf
The report describes the Financial Regulation, Supervision and the Evolution of Commercial Banking in India.
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
The East India Company set up the Bank of Bombay in 1720 with the objective of increasing trade for the Company. In 1773, Warren Hastings floated the General Bank of Bengal and Bihar which was a private establishment under the patronage of the East India Company. The General Bank of Bengal and Bihar bank was closed in 1775 due to internal opposition in the Governor General’s council. In 1786 the General Bank of India was floated which claimed limited liability on the shareholders. But neither the British Law nor the Indian Law was in existence to confer the right of limited liability on the shareholders. Subsequently the Carnatic Bank (1788), Madras Bank (1795), British Bank (1795) and Asiatic Bank were established as private institutions. On February 1 1806, the Government Bank started functioning in Madras by passing of a resolution by Bentinck in his council. The Government Bank was empowered to issue notes subject to some conditions. The Commercial Bank (1819) and the Bank of Calcutta (1824) were floated based upon a need to grow revenues for the East India Company. The Union Bank was born by the merger of the Calcutta Bank and the Commercial Bank. The main business of these Presidency banks was to keep cash accounts, receive cash deposits, issue and circulate bank notes. The major innovation in banking organization came in with the establishment of the Bank of Bengal (1809). This included: ? ? ? ? ? Conferring limited liability on its shareholders Provision for acceptance of deposits from the general public Provision for the note issue which could be accepted for public payments Imposition on the limit and the type of securities that could be accepted Provision for regulatory changes in the Board of Directors
The Royal Charter (aka East India Company) governed the three Presidency Banks (Bengal Bank, Bank of Bombay and the Bank of Madras). The East India Company reserved the right to regulate the monetary and credit system. With the passing of the Paper Currency Act 1861, the right to issue currency notes by the Presidency banks was abolished and the same was entrusted to the Government. With the collapse of the Bank of Bombay (Its collapse in 1866 was caused largely by an uncontrolled lending mania in 1864-65 following the authorization in 1863 of advances, previously prohibited, on the shares of private companies) a new bank called New Bank of Bombay was established in January 1868. In 1876 the Presidency Act came into existence which brought the three Presidency Banks under a common statute. In 1921 the three Presidency Banks and their branches were merged to form the Imperial Bank of India. This new entity acquired the triple role of a commercial bank, a banker’s bank and a banker to the government. In 1951 when the first Five Year Plan was launched, the development of Rural India was accorded the highest priority. The All India Rural Credit Survey Committee recommended the creation of a State owned bank by taking over the Imperial Bank of India and integrating it with other State owned banks. Accordingly the SBI was constituted on July 1 1955.Later the SBI (Subsidiary Banks) Act was passed in 1959 enabling the SBI to take over eight former State associated banks as its subsidiaries. The Indian financial system consists of the following entities: Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India ?
?
? ?
Commercial Banks o PSU Banks ( nationalized banks, SBI and its associates and the Regional Rural Banks are constituted under a special act of Parliament o Private Sector Banks ( considered as banking companies under the banking Regulation Act) o Foreign Banks (considered as banking companies under the banking Regulation Act) Cooperative banks o Urban Co-operatives(UCB’s) o Rural Co-operatives ? Short-term cooperatives ? Long term cooperatives Financial Institutions NBFC’s.
The regulation and supervision of the financial system in India is carried out by various regulatory authorities. The RBI dominates the regulation of the banking sector. The supervisory role of the RBI covers commercial banks, Urban Cooperative Banks some FI’s and NBFC’s. Some FI’s in turn regulate other institutions in the financial sector viz Regional Rural Banks (RRB’s) and central and state cooperatives are supervised by the National Bank for Agriculture and Rural Development ( NABARD).Housing companies are regulated by the National Housing Bank(NHB). The Registrar of Cooperatives (ROC) of different states in case of single state cooperatives and the Central Government for multi-state cooperatives is a joint regulator with the RBI for UCB and with NABARD for rural cooperatives. While the RBI/NABARD focuses on the banking aspect of the cooperatives, the management control rests with the State/Central Governments. The Insurance Regulatory and Development Authority (IRDA) regulate the insurance sector and the capital markets are regulated by SEBI. In the past five decades, the Indian banking has traversed a long and trying road of having to balance the changing needs of the economy, its customers and also adhere to the statutory regulations. From the lack of freedom and total control the banking system has withstood various shocks. The RBI and the regulations have changed over time to step up to the needs of an atmosphere where the fate of Indian banks and business are closely entwined with their western counterparts. The blurring of the distinction among financial intermediaries under the impact of domestic and cross border integration ,innovations in instruments and processes, advances in technology and the increasing volumes of capital intermediated by the financial system have necessitated a very robust framework. During the formative stages of banking developments the banks were regulated by the East India Company’s Government, Royal Charter and the Government of India. A banking crisis occurred during 1913 that highlighted the weakness of the banking system such as the maintenance of unduly low proportion of cash and other liquid assets, unsecured grants to the directors of the banks and companies in which they had a vested interest. In West Bengal four Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
scheduled banks failed. The amount of money lost, mostly the savings of the middle class was over Rs 26 crores. When the Reserve Bank of India Act 1934 came into effect an important function of the RBI was to hold the cash reserves of the banks, granting them accommodation in a discretionary way and regulating their operations through instruments of credit control. The RBI was established in1935 (which means that it completed 70 years of existence in 2005!).The primary role of the RBI was also conceived as being the lender-of-last- resort for the purpose of ensuring liquidity of the banks. The failure of the Travancore National and Quilon Bank (TNQ Bank) in the middle of 1938 created a public scare which was mostly localized to South India. Between 1939 and 1949 as many as 588 banks had failed in various states and the lack of adherence by majority of the non scheduled banks to the RBI norms. In 1940, the Government vested the RBI with powers to inspect banking companies on a restricted scale in consultation with the Government of India. The purpose of these inspections was to satisfy the RBI regarding the eligibility for a license, opening of branches. The RBI assessed them to see whether they were capable of being included in the Second Schedule of the RBI Act. The RBI under the Banking Regulation Act 1949 is required to satisfy itself by inspecting the books of accounts, methods of operation etc before granting a license. This long banking journey in the Indian context can be described as under: 1. The Foundation Phase ( 1950-1968):The main importance was given to the creation of a structure of a banking system to cater to a new economy on the path to development. The RBI commenced systematic and periodic inspections of all banks in March 1950.These inspections threw up deficiencies in the lending systems, lack of management control, poor MIS, inadequate branch supervision, low reserves especially in the case of unscheduled banks. In 1953, the RBI agreed for the amalgamation of some banks especially if the RBI felt that it was in the interest of the depositors. The administration of the Banking Regulation Act 1949 brought forth certain loopholes in the law dealing with managerial irregularities of banking companies particularly in respect of the appointment of senior managerial positions such as directorships etc. The Act was amended in 1957 to overcome these shortcomings. Between 1960 and 1968, the thrust continued to be on ensuring the soundness in the operations of banks, consolidation and protection of the small depositors through liquidations and compulsory amalgamations. The deposit insurance scheme was also introduced during this period. Through the branch licensing policy, the RBI started correcting the lop-sided branch distribution of branches with its concentration in towns and big cities.
2. The Strengthening and Consolidation Phase (1969-1991): The nationalization of 14 major commercial banks on July 19 1969 was a landmark phase in the Indian banking system .The public sector as a concept made its entry during this period. The main objectives of the nationalized banks were to implement the agenda of national growth. The first Board of Directors for each of the nationalized banks was constituted on July 18 Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
1970.The main objective of this exercise was to place at the helm a responsible team of people who would keep the depositors at the very apex level. The National Credit Council (NCC) was set-up arising out of a policy of “social control”. During the 1970’s the RBI also dealt with the issue of strengthening the boards of private sector banks through the reconstitution of their boards. Attention was also given to the foreign branches of the PSU banks. Issues related to the accounting in the banking sector, provision of refinance and inspection of systems and procedures for inspection were also introduced. During the 1980’s six more banks were nationalized and the PSU banks were also asked to raise the proportion of their advances to the priority sector to 40%by the 1985. The massive expansion resulted in a stress on the entire banking system and with effect from January 1985 a system of Annual Financial Review was introduced to be conducted subsequent to the annual audit of banks.
3. The Liberalization Phase (1991 onwards): The 1990’s was a watershed decade in the history of the Indian financial system. Factors such as huge inflows, thrust on socially relevant credit programmes affected the operational efficiency of the banking system. Overstaffing, poor technology and lack of proper internal organization affected the performance and the working of banks. Accordingly a Committee on the Financial System Reforms under the leadership of Shri M Narasimhan was constituted in 1991 to look into and suggest reforms. The recommendations of the Narasimhan Committee led to the adoption and overhauling of the banking sector. The Department of Banking Supervision was set-up within the RBI to strengthen the institutional framework. A high powered BFS (Board for Financial Supervision) was setup comprising the Governor as the Chairman, one of the Deputy Governor’s as Vice-Chairman and four Directors of the central Board of the RBI as members was constituted in November 1994.Major steps such as deregulation of interest rates, reduction of the SLR/CRR, provision of operational autonomy to the banks were taken to strengthen the banks. Guidelines to facilitate the entry of foreign banks were introduced. This increased competition was done in a way to facilitate productivity and efficiency of the banking system. A review of the RBI’s inspection system was undertaken by a Working Group to review the system of On-site supervision over banks under the chairmanship of Shri S Padmanabhan in Feb 1995.This group recommended switching to a system of ongoing supervision. It recommended a strategy of periodical full scope “on-site” examinations supplemented by an in-house “off-site” monitoring system. The Working Group recommended that the periodic examinations should concentrate on : a. Financial Condition and Performance b. Management and Operating Condition c. Compliance d. Assessment in line with CAMELS rating model with systems and controls added to it for Indian and foreign banks on CACS ( capital adequacy, asset quality, compliance, systems and controls) Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
The OSMOS (The Off-site Monitoring and Surveillance) System was made operational in 1995 as a part of crisis management for early warning system and to trigger for on-site inspections. Banks were asked to increase the usage of INFINET for regular reporting: The INdian FInancial NETwork [INFINET] is the communication backbone for the Indian Banking and Financial Sector. All Banks, Public Sector, Private Sector, Cooperative, etc., and the premier Financial Institutions in the country are eligible to become members of the INFINET. The INFINET is a Closed User Group [CUG] Network for the exclusive use of member banks and financial institutions. The communication backbone is based on IP VPN Layer 3 Network with full mesh VPN network. Presently, the network is spread across 300 cities in our country. The INFINET is primarily based on Multi-Protocol Label Switching network, where the packet and label switching takes place at service providers’ level. A detailed IP addressing scheme has been devised by IDRBT for all CUG members, which has to be followed by all CUG members, while accessing RBI, CCIL and IDRBT applications. INFINET MPLS Architecture
A Consolidated Prudential Reporting (CPR) system was introduced in 2003. Taking into account the complexities of the banking business, the RBI initiated measures to implement Risk Based Supervision (RBS) based upon a risk. rating framework. The RBI evaluates the risk profiles of the banks through an analysis of various risks faced by the banks. The RBI has already conducted two rounds of pilot runs of the RBS for 23 banks. Smooth implementation of the RBS is being considered as a precursor for the implementation of the Capital Accord (Basel II) and is Commercial Banking November 1 2009 Raji Ajwani
Financial Regulation, Supervision and the Evolution of Commercial Banking in India
expected to strengthen the risk management practices of Indian banks. In the recent years, a lot of emphasis has been placed on KYC norms to combat money laundering. To tackle the issue of high level of non performing assets (NPA’s) Debt Recovery Tribunals were established post the passing of the Recovery of Debts Due to Banks and Financial Institutions Act 1993. With a view to put into place a timely and transparent restructuring of corporate debts in 2001 a Scheme of Corporate Debt Restructuring (CDR) was started outside the purview of BIFR, DRT and other legal proceedings. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was passed in 2002.This was done to increase the options available to banks to deal with NPA’s. In order to strengthen the banking system, it was decide to introduce capital adequacy norms to ensure uniform standards of capital structure and progress towards Basel norms. The Basel II framework was designed to overcome some of the shortcomings of the Basel 1 such as non recognition of operational risk or having broad based credit risk approach. The Basel II framework was designed to provide operations to the banking system for determining capital requirements for various risk parameters such as credit risk, market risk, operational risk etc. it aims at aligning the banks capital closely with the underlying risks in the bank’s Balance Sheet. Banks have also been asked to focus on technology and especially for PSU banks; the objective of full computerization has received a lot of importance
Commercial Banking November 1 2009 Raji Ajwani
doc_750416660.pdf