Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and borrowings. Apart from this, banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. These disclosures were to be made for the year ending March 2000. In fact, the banks must be forced to make public the nature of NPAs being written off. This should be done to ensure that the taxpayer’s money given to the banks as capital is not used to write off private loans without adequate efforts and punishment of defaulters. A Close look: For the future, the banks will have to tighten their credit evaluation process to prevent this scale of sub-standard and loss assets. The present evaluation process in several banks is burdened with a bureaucratic exercise, sometimes involving up to 18 different officials, most of whom do not Continue reading
Indian Banking System
Narasimham Committee on Banking Sector Reforms (1998)
In spite of the optimistic views about the growth of banking industry in terms of branch expansion, deposit mobilization etc, several distortions such as increasing NPAs and obsolete technology crept into the system, mainly due to the global changes occurring in the world economy. In this context, the finance ministry of Government of India appointed Mr. M. Narasimham as chairman of one more committee, this time it was called as the committee on banking sector reforms. The committee was asked to “review the progress of banking sector reforms to the date and chart a programme on financial sector reforms necessary to strengthen India’s financial system and make it internationally competitive”. The Narasimham committee on banking sector reforms submitted this report to the government in April 1998. This report covers the entire issues relating to capital adequacy, bank mergers, the condition of global sized banks, recasting of banks boards etc. The Continue reading
Foreign Direct Investment in Indian Banking Sector
Foreign direct investment (FDI) is defined as “investment made to acquire lasting interest in enterprises operating outside of the economy of the investor.” The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment. Indian federal government has opened up the banking sector for foreign investors raising the ceiling of foreign direct investment in the Indian private sector banks to 49 percent. However, the ceiling of FDI in the country’s public sector banks remains unchanged at 20 percent. Foreign banks having branches in India are also Continue reading
Promotional Role of Development Banks in India
The pace of development cannot be accelerated by providing financial assistance alone. There are factors which inhibit industrialization of an underdeveloped country. It is essential to make a correct diagnosis of those factors and plan things accordingly. The growth potential of different areas, the availability of natural resources, demand conditions, infrastructure facilities, etc. should be taken into account before deciding the pattern of industrialization of various places. The task of identification of growth potentialities and preparation of feasibility studies is not an easy task. It requires huge finances and technical expertise which is beyond the competence of entrepreneurs of under-developed countries. It is in this area where development banks can play crucial role. In addition to providing the traditional role of providing financial assistance, development banks in India are undertaking promotional role also. Some of the areas where these banks are participating are: (1) Surveys of Backward Areas Under the Continue reading
Guidelines for Preparing a Proper Strategy for Debt Recovery
Devising a strategy helps in achieving a set goal or objective. Recovery agents should therefore devise a strategy for debt recovery. The following guidelines would help in preparing proper strategy for debt recovery. The collection process should be compliant to the bank-specific recovery norms and also regulatory guidelines. The collection timing should be synchronized to the cash inflow pattern of the debtors: For example, recovery from salaried employees should be timed when salary is received by or credited to the debtor’s account, normally at the moth-end. In case of SME borrowers the effort should coincide with cash flow on account of sales. In case a collection from agriculturist should be made, then it should be soon after the crops are sold. This will call for knowledge of bank products on the part of agents. It should be the endeavour of the agent that collection Continue reading
Indian Banking Sector Reforms in 1991
In 1991, the country was caught into a deep crisis. The government at this juncture decided to introduce comprehensive economic reforms. The banking sector reforms were part of this package. The main objective of Indian banking sector reforms was to promote a diversified, efficient and competitive financial system with the ultimate goal of improving the allocative efficiency of resources through operational flexibility, improved financial viability and institutional strengthening. Many of the regulatory and supervisory norms were initiated first for the commercial banks and were later extended to other types of financial intermediaries. While nudging the Indian banking system to better health through the introduction of international best practices in prudential regulation and supervision early in the reform process, the main idea was to increase competition in the system gradually. The reforms have focused on removing financial repression through reductions in statutory preemptions, while stepping up prudential regulations at the same Continue reading