Consolidation in Indian Banking Sector

BANKINGCore activitiesAcceptance of deposits: Demand deposits, Time depositsLending of fundsCredit CreationAncillary functions

DEVELOPMENT OF BANKING IN INDIA

First bank set up in 1683 in MadrasThree presidency banks amalgamated into Imperial Bank of India in 1921 now known as State Bank of IndiaIn 1969, Nationalisation of 14 banksBetween 1969 and 1992, rapid expansion of branch networkCompetition infused in 1993 by allowing setting up of private sector banks

THE STATE BANK OF INDIAInitially known as Imperial BankCame into existence on July 1, 1955Objectives: to promote agriculture, to help RBI in its credit policies, to help government pursue broad economic policiesDominates Indian banking structure in terms of :Reach, Size, Market share, Business diversity and Position in government segment. GOI transacts its business through SBI

NATIONALIZED BANKS-Nationalisation in two phases- in 1969 and in 1980 - - To widen the branch network - Now allowed access to capital market - Edge over private sector banks in terms of size, geographical reach and access to low deposits - Dominant segment is commercial banking - Responded to the new challenges of competition

PRIVATE SECTOR BANKS- In the pre- reforms period, 21 private sector banks - At preset 31 Pvt Sector Bank -Level of foreign participation enhanced - Tapped new markets, offered innovative products and services

s

FOREIGN BANKS IN INDIA

- 38 foreign banks with 5300 branches - Set up subsidiaries - Their presence benefited the financial system:a. Brought in new technologyb. Enabled Indian companies to access foreign currencyc. Active players in the money market and foreign exchange market - Now permitted to have either branches or subsdiaries but not both - Road map laid out by RBI will enable entry and provide them same treatment as PSBs.

BRANCHES OF INDIAN BANKS ABROAD24 Indian Banks have branches abroadBank of Baroda with 51 branches, followed by SBI and Bank of India PSBs foreign operations to be merged as part of the consolidation process

REGIONAL RURAL BANKS Came into existence in 1975 by an ordinance Set up to develop rural areas by providing credit and other facilities Each RRB sponsored by a public sector bank At par with scheduled commercial banks RRBs will now be merged with sponsor banks

MOBILIZATION OF FUNDSDeposits:Household sector, corporate sector, financial institutionsPublic issues; Borrowing in the call/notice market, repo, private placement; and ECBs

LENDING OF FUNDSAgriculturePriority sectorIndustryInfrastructureHouseholdSensitive sectorsNBFCs

REFORMS IN BANKING SECTOR Narasimham Committee (1991) recommendations changed the face of Indian Banking : recommended prudential norms, entry of private sector banks and gradual reduction of SLR and CRR Khan Committee (1997) recommended : universal banking, mergers and amalgamation and a risk based supervisory framework Verma Committee recommended greater use of IT, restructuring of weak banks and VRS for bank staff. The first phrase of reforms is aimed at : Improving the allocative efficiency of resources through improving policy framework , financial health and institutional infrastructure. The second phase of reforms aims at: - strengthening the banking sector - moving towards international banking practices - increased emphasis on corporate governance

TECHNOLOGY IN BANKING Computerization e-banking and e-paymentsATMS

PAYMENTS AND SETTLEMENT SYSTEM REFORMSIntroduction of : Electronic Fund Transfer (EFT)(RTGS):Real Time Gross SettlementsCFMS :Centralized Funds Management systemNDS :Negotiated Dealing System SFMS :Structured financial Messaging Services

MERGERS AND ACQUISITIONS IN BANKING Increased bank mergers Narasimhan Committee recommended formation of 3-4 large banks with international presence, 8-10 banks with national presence and local and rural banks Mergers to exploit synergies, cost cutting and acquiring new markets

EQUITY CAPITAL RAISED BY PUBLIC SECTOR BANKPSBs allowed to raise funds through equity subject to maintenance of 51% public ownership SBI was the first to tap the equity marketBoth public and private sector banks raised funds through public issues, private placement and ADRs /GDRs.

THE NEW BASEL CAPITAL ACCORDSome common rules to provide a level playing field for banks framed by Basel committee Objectives of the new accord:- Promotion of safety and soundness of the financial system.- Enhancement of competitive equality- Constitution of a more comprehensive approach to address risks Three pillars : Minimum capital requirement : Supervisory review process : Market discipline All banks expected to implement Basel II with effect from March 2007

RISK MANAGEMENT IN INDIAN BANKS Types: Credit risk, Market risk, Technological risk, Liquidity risk,and Contingent risk RBI issued detailed guidelines in Oct 1999 encompassing credit ,market and operational risk Building up risk management capabilities of banks Assignment of risk weights of various classes Limits of deployment of funds in sensitive activities :Know Your Customer and Anti- Money Laundering guidelines

FORMULA APPROACH TO 1ST PILLAR OF BASEL IIBCBS was established by BIS , a body of regulators to formulate best practice on Regulation led to Basel I in 1988 in 100 countriesIn 2000 after consultation with industry Basel II came into existence.US also modelled its US Code and Federal Regulation Code on Basel II

SUPERVISORY MEASURES - Establishment of the Board for Financial supervision as the apex supervisory body - Introduction of CAMELS supervisory rating system C- Capital Adequacy A-Asset Quality M-Management QualityE- EarningsL- Liquidity S-Sensitivity to Market Risk Score 1 to 5 (1 best 5 worst)

COOPERATIVE BANKING - Came into existence with the enactment of the Cooperative Credit Societies Act of 1904 - Supplements commercial banks - Comprises urban cooperative banks and rural cooperative credit institutions

UCBS - Mobilize savings from middle and low income urban groups -Cater to small borrowers in non agricultural sector and rural areas - Mostly engaged in retail banking - Grew in 70s and 80s - Supervised by RBI while rural cooperative credit societies by NABARD - Required to maintain CRR and extend loans to priority sector

RURAL COOPERATIVE BANKS - Form almost 70 % of the rural credit outlets - Receive refinance facility from NABARD - State Cooperative Banks (StCBs) form the upper tier, Central Cooperative Banks (CCBs) the middle tier and the Primary Agricultural Credit Societies (PACS) the lower tier of the short- term structure - StCBs apex institutions coordinating CCBs - CCBs channelize funds from StCBs to PACs - PACs deal directly with individual farmers - State Cooperative Agriculture and Rural Development Banks (SCARDBs) and Primary Cooperative Agriculture and Rural Development Banks form upper and lower tier of long- term credit cooperatives - Deterioration in financial health of rural banks

NBFCS - Supplement the role of banks - More flexible structure than banks - Provide a range of services - Types: : Hire purchase finance company : Investment company : Equipment Leasing Company : Housing Finance Companies : Insurance companies : Stock broking companies : Merchant banking companies : Primary Dealers

THANK YOU