Banking developments&perspectives (2)

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  • 1. Banking Developments and PerspectivesChapter IBanking Developments and PerspectivesOne of the major areas of the macro-economy 1999-2000 and a perspective towardsthat has been the subject of focused attentiondeveloping a more stable, efficient, resilientin recent years is the financial sector soundness and vibrant banking system.and efficiency. Within the broad ambit of thefinancial sector, a well-functioning banking1. Policy Environmentsector is regarded as the bedrock of a stablefinancial system. The renewed focus on theMonetary and Credit Policiesbanking sector has been driven by two major 1.2 The annual Monetary and Credit Policyconsiderations.First,the growingStatements as well as Mid-term Reviews have,universalisation and internationalisation ofin recent years, elaborated on a number ofbanking operations, driven by a combination medium to long-term structural reform measuresof factors, such as, the continuing deregulation, for providing stability to the financial system,heightened competition and technologicalbesides undertaking short-term monetary policyadvancements, have altered the face of banksinitiatives, when felt necessary, to stimulate thefrom one of mere intermediator to one ofeconomy. The major short-term monetary andprovider of quick, efficient and consumer-credit policy measures announced duringcentric services. In the process, the potential 1999-2000 and 2000-01 (up to October) arefor risks has also increased. Secondly, the given in Appendix Table I.1. The table showswidespread banking problems that have that interest rates generally softened in 1999-plagued large areas of the globe have raised2000 as cash reserve requirements werea gamut of questions relating to the linkages reduced and access to liquidity supportbetween banking reforms and reforms of othermechanisms was eased. In 2000-2001 (up tosegments of the financial sector, the extentOctober), after a brief continuation of theof exposures to sectors which are trends noticed in the previous year, the interestcharacterised by asymmetric information rates and cash reserve requirements wereproblems, and the contagion effect. It has, moved up, and liquidity support was modulatedtherefore, become necessary to promote robust to suit the market conditions. The mainfinancial practices and policies, especially in objectives of structural measures have beenrespect of banks, in order to sustain financial five-fold, viz., (a) to increase operationalstability. This is all the more true in effectiveness of monetary policy by broadeningdeveloping economies where assets of theand deepening various segments of the market;banking system constitute a substantial (b) to redefine the regulatory role of theproportion of financial sector assets. In thisReserve Bank in order to make it morecontext, a number of policy measures have efficient and purposive; (c) to strengthen thebeen taken in recent years to improve the prudential and supervisory norms; (d) tohealth and efficiency of Indian commercialimprove the credit delivery system; and (e) tobanks. This chapter provides an overall viewdevelop the technological and institutionalof the policy initiatives undertaken sinceinfrastructure of the financial sector.1999-2000, the financial performance ofscheduled commercial banks during 1.3 Theimportantpolicymeasures1

2. Report on Trend and Progress of Banking in India, 1999-2000pertaining to various segments of the money thrust essentially to improve the functioningmarket during 1999-2000 and 2000-01 (up of the market. The major monetary and creditto October 2000) are given in AppendixPolicy measures announced in the Mid-termTable I.2. The table shows that liberalisationReview of October 10, 2000 are indicatedof money market has been given a majorin Box I.1. Box I.1: Major Policy Measures Announced in the Mid-termReview of Monetary and Credit Policy for the year 2000-2001 (i)In the context of improving the efficacy of thesecondary market, the restriction onLiquidity Adjustment Facility (LAF) and to transferability period for CDs issued by bothmake the money market more efficient and tobanks and financial institutions, which wasenable the development of a short-term rupee earlier fixed at 15/30 days from the date ofyield curve, as recommended by the issue, is withdrawn.Narasimham Committee II, it is necessary tomove towards the objective of pure inter-bank (iv) In order to improve the functional efficiency ofcall money market. However, considering thethe market, the rating for the term depositsfact that the repo market is yet to be broad-accepted by select all-India financial institutions,based in terms of instruments and participants which are governed by the Reserve Bankand yet to acquire enough depth, it was decidedguidelines, has been made mandatory, withto extend the permission granted to select effect from November 1, 2000.corporates, which have been given specificpermission to route call money transactions (v)As a part of tightening the prudential norms,through Primary Dealers (PDs) which is banks were advised in October 1998 to make aavailable up to December 2000, for a further general provision on standard assets of aperiod of six months, i.e., up to June 2001. Inminimum of 25 basis points from the year endedaddition to select corporates which have beenMarch 31, 2000. The guidelines were partiallypermitted to route call money transactions modified on April 24, 2000 stipulating that thethrough PDs, there are several non-bankprovision should be made on a global portfolioinstitutions such as Financial Institutions andbasis and not on domestic advances. The generalMutual Funds which are currently permitted toprovision on standard assets woud be includedlend directly in the call/notice money market. in Tier II Capital, in line with international bestIn order to make necessary transitionalpractices followed in this regard.provisions in respect of these institutions also,before the call money market is confined only (vi) The Reserve Bank issued final guidelines onto banks and PDs, it was decided to constitute categorisation and valuation of banksa Group to suggest a smooth phasing out by a investment portfolio. As per the new guidelines,planned reduction in their access to call/notice banks are required to classify the entiremoney market. The Group would also include investment portfolio (including SLR securitiesrepresentatives of non-bank institutions.and non-SLR securities) under three categories, viz., Held to Maturity, Available for Sale and (ii) The guidelines for issue of Commercial Paper Held for Trading. Out of these, the investment(CP) were finalised, after taking into account portfolio Held to Maturity will not exceed 25the views from the market participants on theper cent of the total investments, subject todraft guidelines and the Report of an Internal certain criteria.Group circulated in July 2000. The newguidelines are expected to provide considerable (vii) In order to bring more transparency to theflexibility to participants and add depth and balance sheets of public sector banks and as avibrancy to the CP market while at the same further step towards consolidated supervisiontime ensuring prudential safeguards and and to provide additional disclosures, it has beentransparency. decided that public sector banks should alsoannex the balance sheets of their subsidiaries to (iii) In order to provide flexibility and depth to the (Contd....)2 3. Banking Developments and Perspectives(....Concld.)their balance sheet beginning from the yearForeign Currency (EEFC) accounts of Exportending March 31, 2001. oriented units, units in Export Processing Zone, Software Technology Park or (viii) Owing to factors such as the improvements in Electronic Hardware technology Park, asthe payment and settlement systems, recovery prevalent prior to August 14, 2000, i.e., 70climate, and upgradation of technology in theper cent (from 35 per cent). Similarly,banking sector, the concept of past due (grace entitlement regarding inward remittances inperiod of 30 days) would be dispensed with,respect of others was restored to 50 per centeffective March 31, 2001.(from 25 per cent). It was also decided that EEFC accounts (including existing accounts) (ix) In order to facilitate quick export-relatedwould henceforth be held in the form ofpayments and to reduce transaction costs, it chequeable, current deposit accounts and nowas decided to restore fully the earlier credit facility would be provided by banksentitlements in respect of Exchange Earnersagainst EEFC balances.Liquidity Adjustment FacilityJune 5, 2000. In the next stage, collateralised1.4 In line with the recommendations of thelending facility (CLF) for banks and level I liquidity support to PDs would also be replacedCommittee on Banking Sector Reforms(Chairman: Shri M. Narasimham), popularlyby variable rate repo/reverse repo auctions. Some minimum liquidity support to PDs wouldknown as the Narasimham Committee II, theReserve Bank decided to introduce a Liquiditybe continued but at an interest rate that would be linked to a variable rate in the daily repoAdjustment Facility (LAF) to set a corridorfor money market interest rates. LAF has auctions as obtained from time to time. With full computerisation of Public Debt Officereplaced the Interim Liquidity AdjustmentFacility (ILAF) which was introduced in April(PDO) and introduction of real time gross settlement (RTGS) system expected to be in1999, pending upgradation in technology andlegal/procedural changes to facilitate place by the end of 2000-01, in the subsequent stage, repo operations through electronicelectronic transfer and settlement. The ILAFoperated through a combination of repo,transfers would be introduced. In the final stage, it would be possible to operate LAF atexport credit refinance, collateralised lendingfacilities and open market operations (OMO)different timings of the same day. The quantum of adjustment as also the rates would bea