BCom 3rd Year Defects Economic Reforms Indian Banking System Study Material notes in hindi

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BCom 3rd Year Defects Economic Reforms Indian Banking System Study Material notes in Hindi

BCom 3rd Year Defects Economic Reforms Indian Banking System Study Material notes in Hindi:  Defects Indian Banking System Table Second Recommendation of Narasimham Committee on banking Sector Reforms after Recommendations Basel Committee for Banks Reforms After Recommendation banking Ombudsman Scheme Recommendation of Goiporia Committee :

Defects Economic Reforms Indian
Defects Economic Reforms Indian

BCom 3rd Year Nature Importance Financial Money Study Material notes in Hindi

DEFECTS AND ECONOMIC REFORMS OF THE INDIAN BANKING SYSTEM

Many policy-related decisions were taken to establish a proper banking system in the country after independence. ‘Banking Companies Act’ was passed in 1949 to do away with the defects of Indian Banking System. According to the amendment made on 1st March, 1966, it was renamed as Banking Regulation Act, 1949. Actually, the Indian Banking System has been reformed a lot due to this act. But owing to people’s dependence on banks, we still find that there are many faults in Indian Banking System.

Defects Economic Reforms Indian

DEFECTS OF INDIAN BANKING SYSTEM

The main defects of Indian Banking System are :

(1) Inadequacy of Banking Facilities: It is true that the offices of banks have increased over the last few years, but it is not satisfactory. The number of offices of Scheduled Commercial Banks in 2004 was 69,170 which increased to become 1,01,261 in 2012. The total number of branches in rural areas in March 2004 were 32,227 which got increased to become 36,130 in March 2012. The decreasing banking facilities despite increasing branches can be understood with the help of following table :

Defects Economic Reforms Indian

Table

2004 2005 2006 2007 2008 2009 2010 2011 2012
Number of bank offices in India 69,170 70,373 72,072 74,653 78,787 82,897 88,203 94,019 1,01,261
(a)    Rural 32,227 30,790 30,251 30,409 30,927 31,598 32,529 33,868 36,130
(b)   Semi urban 15,288 15,325 15,991 16,770 18027 19,337 21,022 23,299 25,931
(c ) Urban 11,806 12,419 13,232 14,202 15,556 16,726 18,288 19,046 20,321
(d ) Metropolitan 9,750 11,839 12,598 13,272 14,267 15,236 16,364 17,806 18,879
Population per Office (in Thousand 16 16 16 15 15 15 14 13 13

 

Defects Economic Reforms Indian

Source: RBI, Population per Office is based on 1991 Census for 2004 and for March 2005 to March 2012, Classification of Bank offices is based on 2001 census.

(2) Misbehaviour with Customers. It is a general complaint these days that banks do not treat their customers properly. We know that banks are service providing commercial institutions. Still they lack the serving attitude. Considering the banks, Mahatma Gandhi, the Father of Nation had said, “We are not benevolent to serve them (customers), but they are benevolent as they provide us chances to serve.” “He is not an outsider in our business, but he is a part of our business.” “He is not an obstruction in our work, but we have work due to him.” “He doesn’t depend on us but we depend on him.”

(3) Ineffective Credit Control Policy : In India the Reserve Bank of India retains the job of Credit Control. RBI becomes successful in controlling the credit policies of bank in organised sector, but it has no control over the banks of unorganised sector. That is why the credit control policy of RBI often remains unsuccessful.

(4) Lack of Bill Market: For the proper development of money market in the country it is essential that the bill market should also be well developed. But despite many attempts the bill market has not fully developed in India. Consequently, traders are away from many facilities.

(5) Lack of Proper Training : Though banks manage to train their employees, it is limited to clerical jobs, advancing loans and getting loans repaid. There is no training as to how to satisfy customers, even though, it is very essential.

(6) Lack of Credit Deposit Ratio: The Credit Deposit Ratios of Commercial banks have not been satisfactory in India. However there has been some improvement in it in recent years. This ratio was only 55.9 percent in 2004. which increased to 74.6 percent in 2008. But it declined to 73.8 percent in 2009. After that it increased gradually and reached to 76.5 percent in 2011. On 31st March, 2012 it was 78.6 percent.

(7) Investment Deposit Ratio : There has been lack of stability in the investment-deposit ratio of Indian banks. The fluctuation in this ratio can be understood with the help of following table :

Defects Economic Reforms Indian

Table

2004 2005 2006 2007 2008 2009 2010 2011 2012
Investment Deposit Ratio (IN %) 45.0 47.3 40.0 35.3 35.5 35.7 36.4 36.3 34.6

 

Defects Economic Reforms Indian

Source : RBI

(8) Increase in Non-performing Assets: Non-performing assets are such loans distributed by banks the principal and interest of which are not repaid in time or not repaid totally. The profitability of banks has declined over the last few years. The increase in non-performing assets is a major factor responsible for it. The Gross NPA of the Scheduled Commercial banks in the end of March 2012 was 1,12,489 crores. The Gross NPA was 3.17 percent of Gross Loans and Advances given by the Scheduled Commercial banks in March 2012: while for the Public Sector banks, private banks and foreign banks it was 3.17 percent, 2.08 percent and 2.68 percent respectively.

(9) Increase in Operating Expenses : Increase in operating expenses is also a cause of decreasing profitability of banks. The employee’s federations have much pressure over Indian banks due to which they are able to get the decisions in their own favour. As a consequence, the operating expenses of banks  it, the expenditure to run non-profitable branches has also to be met by the bank. primary function of banks, but there has not been any substantial improvement

(10) Defective Loan Policy : Granting loans and advances is another in the loan policy of banks. Most of the loans are granted on the basis of the decisioush pressure over profitability of  Increase  System collateral the fixed assets. Besides, in the matters of big loans approach and not the eligibility is the prime consideration, these days the more emphasis is laid on granting loans based on governmental scheme, but there is lack of proper policy for repayment. These loans are mostly based on subsidy.

(11) Presentation of False Balance Sheet: Many banks in India present wrong particulars to the Reserve Bank of India. This way they hide their weakness, and the Reserve Bank of India faces difficulty in making proper decisions. These false particulars are prepared so wisely that it becomes difficult to find out the fault in them.

Defects Economic Reforms Indian

BANKING SYSTEM REFORMS

Many defects grew in the banking system with the development of the banking sector. There have been many attempts from time to time to eliminate the faults/defects in the working of banking system. Some of these are :

FIRST RECOMMENDATION OF NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS

A committee was set up by the Government of India in August, 1991 in the chairmanship of Shri. M. Narasimham to look into every aspect of banking and financial system. This committee presented its report in December, 1991. The main recommendations of this committee for the reform in the banking sector were as follows:

(1) Statutory Liquidity Ratio (SLR) had to reduce gradually to 25 percent. A period of 5 years was recommended for it.

(2) Similarly, the current rate of Cash Reserve Ratio (CRR) was also supposed to be the highest and a gradual reduction in it was recommended.

(3) Bringing transparency in the balance sheet of banks.

(4) Allowing regional rural banks to perform all kinds of banking functions.

(5) Liberalising the current policy of allowing the foreign banks to open their offices and/or branches.

(6) The direct loan activities of Industrial Development Bank of India (IDBI) should be handed over to another institution and the refinance functions should be left with IDBI.

(7) Making laws on the basis of international standards for the formation and management of Mutual Funds.

(8) Making such laws regarding the interest rates that may be appropriate according to the circumstances.

(9) Achieving 4 percent of Cash Reserve Ratio (CRR) with respect to risk weighted assets by March, 1993 and 8 percent by March, 1996.

(10) Setting up special tribunal for pacing up the process of loan repayment.

(11) Making proper arrangements for the resolution of complaints of the customers regarding the faults in banking services.

(12) Setting up proper standards for financial and non-financial institutions.

(13) Making the Reserve Bank of India the primary agency so that the double control over the banking system may be ended.

(14) Determining rational principles for the management functions of banks and financial institutions.

(15) Reducing the number of banks by the rearrangement of banking systems. In such a system there should be 3 or 4 banks of international level, 8 to 10 national banks, the branches of which should perform the international level of banking business all over the country. The regional banks should be Authorised to operate in specified regions only and the rural banks should operate only in rural areas etc.

Defects Economic Reforms Indian

REFORMS AFTER RECOMMENDATIONS

The reforms made after the submission of the first report of Narasimham Committee in 1991 are described here:

(1) Statutory Liquidity Ratio was gradually reduced from 38.5 percent in 1992 to 25 percent.

(2) The current Cash Reserve Ratio was reduced in 1999 from 10 percent to 9 percent.

(3) Bank rate was activated to enable it to tackle the market circumstances.

(4) To bring transparency in the balance sheet of banks it has been made mandatory from 31 March, 1992 to make profit and loss account, balance sheet in a new format. New format has been given in vertical form in which all information has been written with the help of schedules.

(5) Strong standards were determined for financial institutions and nonbanking financial companies.

(6) To improve the customer oriented services the system of Electronic Fund Transfer was started and acknowledging the importance of computers these were brought into use on proper scale.

(7) The nationalised banks were authorised to accumulate funds from the capital market by the process of Capital issue but it was confined to a certain limit. According to this limit, the share of the government’s ownership was not allowed to be less than 51 percent.

(8) Six Special Recovery Tribunals were set up to facilitate the process of loan repayment by banks and financial institution. These tributions are at Kolkata, Jaipur, New Delhi, Chennai, Ahmedabad, and Bangaluru. Besides there is also an Appellate Tribunal at Mumbai.

(9) The banks of the private sector were also allowed that they can raise capital up to 20 percent from foreign institutional investors and 40 percent from non-resident Indians.

(10) Banking Ombudsman Scheme was announced in 1995 for speedy solution of lacking in the banking services as complained by customers.

SECOND RECOMMENDATION OF NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS, 1998

For the observation of the reforms made in the banking sector according to the first report of Narasimham Committee, 1991, the Finance Ministry of the Government of India set up another committee on 26th December, 1997 under the chairmanship of Shri M. Narasimham and named it Banking Sector Reform Committee. This committee submitted its report to the Finance Ministry on 22nd April, 1998. The main recommendations of this committee are :

(1) Need of Strengthening the Banking System : The committee has given many guidelines and directions for strengthening the banking system. Some examples are :

(i) For capital to risk asset ratio should be increased from 8 percent to 9 percent by 2000 and to 10 percent by 2002 for risky assets.

(ii) The net. non-performing assets should be bought below 5 percent by 2000 and below 3 percent by 2002

(iii) The system of income determination and clarification be implemented on advances guaranteed by the government in on the other advances.

(iv) Such advances guaranteed by the government which have been blocked should be marked as non-performing assets.

(v) The committee also suggested that there should be carefulness in merging together of strong and weak banks. There should not be any negative impact on the assets of strong banks due to the effect of merging.

(vi) Two or three Indian banks should be of international standards.

(2) Narrow Banking: The committee has defined the working those banks as Narrow Banking, which invest their money in risk involving assets and the balance of its demand deposits is in safe liquid assets. The committee has recommended those banks to adopt the concept of narrow banking whose nonperforming assets have increased greatly, so that they can re-establish themselves.

(3) Capital Holding : According to the recommendations of the committee the share of the Reserve Bank of India in shareholding of the nationalised banks and State Bank of India should be brought down to 33 percent.

(4) Reforms in Banking System : With the objective of reforming the banking system, the committee recommended that:

(i) Maintaining of accounting should be developed by computers.

(ii) There should be an independent ‘Loan Monitoring System’ to recognise big credit accounts and non-performing assets.

(iii) There should be an extra full time Director for the period of 3 years in the nationalised banks.

(5) Capital Adequacy Ratio (CAR): The committee has suggested the government to provide the banks chances to strengthen themselves to bear the risks. For this the government should consider to enhance the predetermined Capital Adequacy Ratio.

(6) Evaluation of Bank Acts: The Committee has recommended to amend the Reserve Bank of India Act, Banking Regulation Act, State Bank of India Act etc. after their re-evaluation according to the needs of the present times.

REFORMS AFTER RECOMMENDATION

After the Second report of the Narasimham Committee following reforms were made in the banking sector :

(1) Minimum Capital Risk Assets Ratio (CRAR) was increased to 9 percent.

(2) Banks have been allowed to enter capital market and 12 banks have started this work.

(3) Banks have been advised that their assets would be classified as ‘Doubtful Assets’ which have been in the sub-standard form up to 18 months. Earlier this period was up to 24 months.

(4) Banks have been guidelined that they should take proper step regarding Non-Performing Assets (NPA) and they should give Risk Management System a proper place.

(5) Banks have been authorised that they can issue bonds to raise their TIER-II Capital. There won’t be need of any guarantee from the government for such bonds.

(6) The Public Sector banks have been allowed to adopt Open Market Campus Recruitment System to recruit capable persons for the Information Technology Risk Management, Treasury Operation etc.

(7) Banks have been suggested that they should make a fresh observation training in the areas of credit management, treasury management, risk

(8) The capital was classified into TIER-I, TIER-II and TIER-UL time Capital Adequacy Ratio (CAR). 47 Defects and Economic Reforms of Indian Banking System

(9) The Ombudsman Bill, which had been recommended in the first report itself, was implemented.

(10) Basel-II was implemented according to the Basel Committee Agreement.

BANKING OMBUDSMAN SCHEME

Banking Ombudsman Scheme’ has been formed for the quick redressal of Customers’ complaints. The Reserve Bank of India implemented this scheme for the whole country on 14th June, 1995, to give the benefit of this facility to the whole country 15 Ombudsman have been appointed in different regions viz New Delhi, Kolkata, Mumbai, Chennai, Patna, Cahndigarh, Hyderabad, Jaipur, Kanpur, Guwahati, Bhubaneshwar, Ahmedabad, Bangaluru, Bhopal and Trivendrum.

In this scheme there is an arrangement that if a customer feels that proper action on his complaint has not been taken by the bank management within 2 months, he can lodge his complaints with the Banking Ombudsman within 1 year. A customer can make following complaints with a ‘Banking Ombudsman’:

(i) Unnecessary delay in the payment of cheques, drafts and bills.

(ii) Not accepting small currencies without giving a proper reason.

(iii) Not issuing bank drafts.

(iv) Complaints regarding the operations of bank accounts etc.

A ‘Banking Ombudsman’first takes an initiative to bring the customer and bank to a point of agreement, but if it is not possible he can declare the award for the customer which can be equal to the loss caused to the customer. This award can be up to 10 lakh rupees. If this award is not paid by the bank, the Banking Ombudsman can make it’s complaint to the RBI.

All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under Banking ombudsman scheme. Now the area of complaints to the Ombudsman has been increased. Now the complaints regarding Credit Cards, not accepting coins demanding commission for any work have been brought under its jurisdiction. This scheme has been effective in the whole country since 1st January, 2006.

BASEL COMMITTEE FOR BANKS

Basel committee is an organisation formed by the central banks of Group 10 countries. It works in the direction of improving the observation system of Central banks. It was founded in 1974. Banking policies are formed for the member countries as well as those countries which are not its members.

Before this, bank for International Settlement-BIS was started in 1930. It is called the Central Bank for Central Banks. It is not a bank that provides financial assistance, but it is the first international financial organisation of the world that formulates international financial policies and acts to bring co-operation among the central banks of various countries. Its headquarter is in Switzerland.

What does Basel Accord Mean ? Basel agreement refers to the group of those agreements among members of Basel Committee that suggests ways to keep away risks. First Basel agreements are known by name of Basel-I. Basel-I:

Basel-I is an agreement for the minimum capital need of banks – as per the discussion of Central banks. It was announced and published in 1988. It is also called the ‘Basel Accord l’, 1988. It was also implemented legally by “G-10′ countries in 1992. The need of classification of the banks’ assets for the credit risks has been mainly emphasised in this agreement. Besides this it would be essential for banks to keep at least 8 percent of Risk Weighted Assets as Tier-I and Tier-II assets. For example if the Risk Weighted Assets of a bank is 100 dollar, it will have to maintain at least 8 dollar capital.

Tier-I Capital : Tier-I Capital is also called the core capital. This capital is in form of just available help against maximum fixed and unexpected loss. The equity share capital and declared reserve are included in it.

Tier-II Capital : It includes undeclared reserve, general loss-resource, secondary loan. In the matter of Capital Adequacy Standard determination, in any condition the Capital of Tier-II should not be more than 100 percent of Tier-I and the sub-ordinate loans should not be more than 50 percent of the capital of Tier-II.

It is also worth mentioning here that Capital Adequacy Ratio means such capital which should be kept up to a certain level for the creation of commercial assets. Capital Adequacy Ratio—CAR can be obtained with the help of following formula:

CAR= Tier-I Capital + Tier-II Capital Basel-II:

The second agreement of Basel Committee is known by the name Basel-II. Its final document was prepared in 2004 and a time period up to 2015 has been given to completely bring it is into action. It is mainly centralised on three areas which are called the three pillars.(A) Pillar-I: It is for the minimum capital requirements. This determines the following:

(i) Credit Risk

(ii) Operational Risk

(iii) Market Risk

(B) Pillar-II : It is for the supervisory review. Following four main principles come under it :

(i) Banks should adopt such process so that a complete capital adequacy can be maintained in the condition of risk.

(ii) The Supervisors should evaluate the internal capital adequacy of banks. If the banks shows negligence in this respect and the observator is not satisfied, he should take proper steps.

(iii) It should be expected by the supervisors from the bank that they are maintaining their capital above the minimum Regulatory Capital Ratio.

(iv) The Supervisor should interfere if the bank is in its capital limitation below the minimum level at the initial level.

(C) Pillar-III : It is for the market discipline. Following things are included in it:

(i) Scope of Application of Funds

(ii) Capital Structure

(iii) Capital Adequacy

Defects and Economic Reforms of Indian Banking System | 49 (iv) Credit Risk Exposure

(v) Credit Risk Mitigation

(vi) Operational Risk Exposure.

(vii) Exposure to Interest Rate risk.

RECOMMENDATION OF GOIPORIA COMMITTEE

To bring an improvement in the customer services of banks, the Reserve Bank of India set up a committee in the chairmanship of Shri M.N. Goiporia, the then Chairman of State Bank of India, in September, 1990. The Committee presented its report on 5th December, 1991. The main recommendations of the committee are as follows:

(i) The banking hours should be expanded for all other banking services excluding the cash payment.

(ii) There should be proper arrangement that the bank counter should open on proper time and customers needn’t wait unnecessarily.

(iii) Increase in the interest rates on savings accounts.

(iv) Complete utilisation of the rational (considerate) power given to bank staffs.

(v) The outside cheques up to 5,000 should be immediately deposited in the bank account.

VERMA COMMITTEE ON WEAK BANKS

The committee was constituted on 8th February, 1999 for suggesting of weak banks. The committee submitted report on 3rd October, 1999. The major recommendations are as under:

(1) Cut staff strength by 25 percent through VRS.

(2) If VRS scheme fails cut wages across the board.

(3) Reconstruct Bank Boards.

(4) Debts recovery tribunals to work on war footing.

(5) RBI to setup a special wing to supervise weak banks.

(6) Nodal body to monitor progress of weak banks.

The committee had used 7 parameters for identification of banks strength/ weakness :

(i) Capital Adequacy ratio 8% or more

(ii) Coverage ratio 0.50% or more

(iii) Return on assets Medium level

(iv) Net interest margin -do

(v) Profit/Average working fund -do

(vi) Cost/Income -do

(vii) Staff Cost/Income

SARKAR COMMITTEE ON ANTI-MONEY LAUNDERING

Indian banking association set-up a study group under the chairmanship of P.K. Sarkar to study the anti-money laundering practices and know your customer guidelines being followed in other countries. The major recommendations of the group are as under:

(1) Urgent need to adopt anti-money laundering policy

(2) Each bank must have its own anti-money laundering policy

(3) A time-bound action plan to implement the bank’s anti-m policy.

(4) Adoption of know your customer’ guidelines by banks.

(5) The Bank account forms should contain information about the financial status of the customer, his source of income etc.

(6) Banks should report suspicious transactions to the RBI.

(7) Banks should have structured training modules to impart full knowledge of anti-money laundering guidelines.

COMMITTEES ON BANKING REFORMS-AT A GLANCE

Some important committees on banking reforms are as follows:

Committee

Title
1. A. Ghosh Committee, 1993 Fraud and malpractices in banks

 

2. Goiporia Committee, 1991

 

Customer services in banks
3. Narasimham Committee Financial sector reforms

and 1998

4. Nayak Committee, 1993

 

Industrial credit to SSI sector
5. Pendarkar Committee, 1995 Review the system of inspection of

commercial and RRB and Urban

 

6. S. S. Tarapore Committee, 1997 Capital account convertibility

and 2006

7. Khan Committee, 1998

 

Development finance institute
8. Khanna Committee, 2001

 

Non-performing advance
9. Kamath Committee, 2001 Revised education loan policy
10. Verma Committee, 1999

 

Restructuring weak public sector

banks

11. Verma Committee, 2001 Banking Supervision
12. Mittal Committee 2001 Internet banking
13. Vepa Kamesam Committee, 2003 Microfinance
14. H. R. Khan Committee, 2005 Rural credit and microfinance
15. S. C. Gupta Committee, 2007 Review legislations on money lending
16. C. P. Swarnkar Committee 2007 Procedures and processes of agriculture loans
17. C. Rangrajan Committee, 2009 Estimation of saving and investment
18. M. Damodaran Committee, 2011

Customer service in banks

 

EXERCISE QUESTIONS

Long Answer Type Questions

1. Explain the defects of Indian banking system.

2. Explain the recommendations of Narasimham committee for banking reforms.

3. Explain Basel-I and Basel-II for banking reforms.

II. Short Answer Type Questions

1. What do you mean by banking ombudsman ?

2. What is Basel accord ?

3. Write note on Tier-I and Tier-II capitals.

4. Explain the three pillars in Basel-II.

5. Explain the recommendations of Goiporia committee.

III. Objective Type Questions

Choose the correct option

1 The first report of Narasimham Committee for the banking reforms was presented

in …

(b) 1991

(c) 1992

(d) 1998

(a) 1981

2. The second report of Narasimham Committee for banking reforms was presented

in …………

(a) 1997

(b) 1998

(c) 1999

(d) 2001

3. BIS was founded in …………

(a) 1930

(b) 1934

(c) 1949

(d) 1969

4. How many Banking Ombudsman have been appointed in the country?

(a) 7

(b) 11

(c) 15

(d) 21

5. The pillar-I of Basel-II determines :

(a) Credit Risk

(b) Operational Risk

(c) Market Risk

(d) All of these

(Ans.: 1. (b), 2. (b), 3. (a), 4.(c), 5. (d)].

IV. State whether the following statements are True or False :

1. Banking companies Act was passed in 1949 to do away with the defects of Indian Banking System.

2. Defective loan policy is one of the defects of Indian Banking System.

3. The first recommendation of Narasimham committee was presented in 1991.

4. Banking ombudsman scheme is the scheme of promotion of bank officials.

5. Goiporia Committee was set up in 1995.

6. Basel committee is an organisation formed by the central banks of ‘Group-10’ countries.

7. Regional Rural Banks have been kept out of Banking ombudsman law.

(Ans. : 1. True, 2. True, 3. True, 4. False, 5. False, 6. True, 7. False.]

yy

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