Topic

Banking System in India

Presented by

1.Tahniyat Sultana Prova 16-017 2.Tanvir Ahmed 16-009

3.Morium Akhter 16-0024.Sanjida Islam Khan 16-0185.Md.Farhadul Islam 16-066

Since Independence at 1947Since Independence at 1947

• In 1969 the 14 largest commercial banks were nationalized to ensure that

• In 1975 Regional and Rural Banks were established to increase the amount of agriculture loans

Effects if first golf war in 1990-91Effects if first golf war in 1990-91

• Severe balance of payments problems emerged

• Rapidly growing fiscal deficit

• Severe balance of payments problems emerged

• Rapidly growing fiscal deficit

Steps Taken By the Government:Steps Taken By the Government:

After the ReformsAfter the Reforms

• India became one of the fastest growing emerging markets in the 1990’s

• The growth of India’s service sector was due to rapid growth of communications, IT, financial service and community services

Nonetheless between 1997 and 2002 this growth rate slowed down to an average

• India became one of the fastest growing emerging markets in the 1990’s

• The growth of India’s service sector was due to rapid growth of communications, IT, financial service and community services

Nonetheless between 1997 and 2002 this growth rate slowed down to an average

“pancha sutra” or five principal“pancha sutra” or five principal

• Reforms of financial sector were based on five principal:

Establishment of National Stock Exchange(1992)Establishment of National Stock Exchange(1992)

• India’s no screen based exchange-the introduction of an auction system for govt. securities (1992) , and improved regulatory for the Securities and Exchange Board of India . In banking , the objectives were to keep banks financially sound while encouraging competition, and reducing govt. ownership of state banks.

• India’s no screen based exchange-the introduction of an auction system for govt. securities (1992) , and improved regulatory for the Securities and Exchange Board of India . In banking , the objectives were to keep banks financially sound while encouraging competition, and reducing govt. ownership of state banks.

Changes in banking sector

• Commitment to adopt the Basel 1 supervisory standards.

• Increased supervision of banks by establishing the Board for financial Supervision and being Bank of India autonomous.

• Commitment to adopt the Basel 1 supervisory standards.

• Increased supervision of banks by establishing the Board for financial Supervision and being Bank of India autonomous.

• Freeing up controls on interest rates .

• A reduction in the cash reserve ratio were further deregulated over time.

• A plan toi reduce govt. ownership of banks.

• Freeing up controls on interest rates .

• A reduction in the cash reserve ratio were further deregulated over time.

• A plan toi reduce govt. ownership of banks.

• Removal of the requirement that large loans had to be approved by the Reserve Bank of India.

• Granting new bank licenses, and easing restrictions on the operations of foreign banks.

• Removal of the requirement that large loans had to be approved by the Reserve Bank of India.

• Granting new bank licenses, and easing restrictions on the operations of foreign banks.

• Free entry of private firms into the mutual fund business.

• A commitment to reduce govt. shareholdings of the state owned banks from a minimum of 51% to one of 33%

• Free entry of private firms into the mutual fund business.

• A commitment to reduce govt. shareholdings of the state owned banks from a minimum of 51% to one of 33%

The current structure of the Indian Banking system-

Development financial institutions (DFIs): Includes

development institutions Industrial Development Bank of India

Specialized institutions Export Import Bank

Investment institutions Unit Trust of India(UTI), Life Insurance Corporation of India (LIC)

Refinance firms National Housing Bank

Liberalization Policy-

Major Problems With Indian Banking Sector

Major Problems With Indian Banking Sector

Poor Asset QualityPoor Asset Quality

Risk management System and Committee

Risk management System and Committee

Priority Sector LendingPriority Sector Lending

Government has identified certain sectors to distribute the total loans

Commercial banks have to allocate 40% of total loans The state banks require & allocate more than 40% of loans to

these groups

Government has identified certain sectors to distribute the total loans

Commercial banks have to allocate 40% of total loans The state banks require & allocate more than 40% of loans to

these groups

Area of Loan DistributionArea of Loan Distribution

Weak Financial Institutions and Destructive Unambiguity

Weak Financial Institutions and Destructive Unambiguity

Indication of weakness among state owned banks

Indication of weakness among state owned banks

Reserve Requirements & Lending RestrictionsReserve Requirements & Lending Restrictions

The traditional intermediary function of banks has been largely curtailed because of:

• Interest rate have declined• Increased prudential standards have made govt.

securities attractive because they carry a lower risk weight than most loans

• Employees of state banks are considered to be civil servants, they can be prosecuted under the anti-corruption law.

The traditional intermediary function of banks has been largely curtailed because of:

• Interest rate have declined• Increased prudential standards have made govt.

securities attractive because they carry a lower risk weight than most loans

• Employees of state banks are considered to be civil servants, they can be prosecuted under the anti-corruption law.

Bank SupervisionBank Supervision

Counter directives responsibility

• To conclude, India’s economic “miracle” was largely the results of reforms.

• Currency convertibility and capital controls were reformed at early stages

• External finance in the form of foreign direct & portfolio investment is being encouraged

• The currency has moved gradually over the years from a sterling peg to its current regime of a managed float.

• To conclude, India’s economic “miracle” was largely the results of reforms.

• Currency convertibility and capital controls were reformed at early stages

• External finance in the form of foreign direct & portfolio investment is being encouraged

• The currency has moved gradually over the years from a sterling peg to its current regime of a managed float.

Ongoing features of financial repression