Banking industry intro

Report on Trend and Progress of Banking in India for the year ended
June 30, 2011 submitted to the Central Government in terms of
Section 36(2) of the Banking Regulation Act, 1949

REPORT ON TREND AND PROGRESS
OF BANKING IN INDIA 2010-11

RESERVE BANK OF INDIA

Sale Price:
In India – ` 200 (Normal)
– ` 240 (Inclusive of Postal Charges)
– ` 150 (Concessional – at Counter)
– ` 190 (Concessional – Including Postage)
Abroad – US$ 22 (Inclusive of Air Mail Courier Charges)

© Reserve Bank of India 2011
All rights reserved. Reproduction is permitted provided an acknowledgement of the source is made.

Published by Mohua Roy for the Reserve Bank of India, Mumbai 400 001 and designed and printed by her
at Jayant Printery, 352/54, Murlidhar Compound, Girgaum Road, Mumbai - 400 002.

Contents
Sr.No. Particulars Page No.

Chapter I : Perspectives on the Indian Banking Sector ...............................................
1. Introduction ................................................................................................... 1
2. Forces Shaping the Environment ..................................................................... 2
3. Strategic and Operational Responses ............................................................... 3
4. Challenges ..................................................................................................... 5
5. The Way Forward ........................................................................................... 8

Chapter II : Global Banking Developments .................................................................
1. Introduction ................................................................................................... 10
2. Global Banking Trends ................................................................................... 11
3. Banking Trends in Select Regions and Countries .............................................. 19
4. An Analysis of the Performance of Top 100 Global Banks .................................. 22
5. Global Policy Reforms ..................................................................................... 25
6. Conclusions ................................................................................................... 29

Chapter III : Policy Environment ..............................................................................
1. Introduction ................................................................................................... 31
2. Monetary Policy .............................................................................................. 32
3. Credit Delivery ................................................................................................ 33
4. Financial Inclusion ......................................................................................... 36
5. Prudential Regulatory Policy ............................................................................ 38
6. Supervisory Policy .......................................................................................... 42
7. Regional Rural Banks ..................................................................................... 45
8. Cooperative Banks .......................................................................................... 46
9. Non-Banking Financial Companies .................................................................. 49
10. Customer Service in Banks ............................................................................. 51
11. Financial Markets ........................................................................................... 52
12. Payment and Settlement System ..................................................................... 54
13. Technological Developments ............................................................................ 55
14. Banking Sector Legislation .............................................................................. 56
15. Conclusions ................................................................................................... 57

Chapter IV: Operations and Performance of Commercial Banks ...................................
1. Introduction ................................................................................................... 59
2. Balance Sheet Operations of Scheduled Commercial Banks .............................. 60
3. Financial Performance of Scheduled Commercial Banks ................................... 69
4. Soundness Indicators ..................................................................................... 73

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Sr.No. Particulars Page No.

5. Sectoral Deployment of Bank Credit ................................................................. 83
6. Operations of Scheduled Commercial Banks in Capital Market .......................... 87
7. Shareholding Pattern in Scheduled Commercial Banks ..................................... 88
8. Foreign Banks’ Operations in India and Overseas Operations of Indian Banks ... 90
9. Technological Developments in Scheduled Commercial Banks ........................... 90
10. Customer Service ............................................................................................ 92
11. Financial Inclusion ......................................................................................... 93
12. Regional Rural Banks ..................................................................................... 100
13. Local Area Banks ............................................................................................ 100
14. Conclusions ................................................................................................... 101

Chapter V - Developments in Cooperative Banking
1. Introduction ................................................................................................... 105
2. Urban Cooperative Banks ............................................................................... 107
3. Rural Cooperatives ......................................................................................... 116
4. Role of NABARD in Reviving the Rural Cooperatives ......................................... 125
5. Conclusions ................................................................................................... 130

Chapter VI: Non-Banking Financial Institutions
1. Introduction ................................................................................................... 131
2. Financial Institutions ...................................................................................... 132
3. Non-Banking Financial Companies .................................................................. 136
4. Primary Dealers .............................................................................................. 150
5. Conclusions ................................................................................................... 153

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List of Boxes
Box No. Particulars Page No.

II.1 European Banks’ Exposure to Euro Area Sovereign Debt ................................ 22

II.2 Key Objectives and Features of the Basel III Framework ................................. 27

II.3 Counter-Cyclical Capital Buffer: Concept and Working ................................... 28

III.1 Monitoring Interest Rate Sensitivity based on Duration Gap Analysis ............. 46

III.2 Report of the Committee on Customer Service in Banks ................................. 52

III.3 Recommendations of the Working Group on Securing Card Present
Transactions .................................................................................................. 55

IV.1 Asset Liability Mismatches (ALM) in the Indian Banking Sector: The Extent and
Persistence .................................................................................................... 68

IV.2 Profitability versus Risks: An Analysis of Off-Balance Sheet Exposures in the
Indian Banking Sector ................................................................................... 70

IV.3 Net Interest Margin of the Indian Banking Sector: Efficiency versus
Profitability .................................................................................................... 73

IV.4 Impact of Restructuring of Advances on the Asset Quality of the
Banking Sector .............................................................................................. 79

IV.5 Robust Credit Growth and Credit Booms – An Analysis of the
Indian Banking Sector ................................................................................... 82

V.1 Merger and Amalgamation of Urban Cooperative Banks ................................. 108

V.2 Soundness of StCBs ....................................................................................... 121

V.3 Role of Rural Cooperatives in Financial Inclusion – Some Emerging Issues ..... 126

VI.1 Inter-connectedness of NBFCs and Banks in India ......................................... 138

VI.2 Credit Rating of NBFCs – Practices and Prospects .......................................... 140

VI.3 Recommandations of the Working Group on the Issues and
Concerns in the NBFC Sector ......................................................................... 151

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List of Tables

Table No. Particulars Page No.
II.1 Return on Assets of Banks for Select Economies ............................................ 12
II.2 Growth in International Assets and Liabilities of Banks .................................. 14
II.3 Capital to Risk-Weighted Assets Ratio of Banks in Select Economies .............. 15
II.4 Rank Correlation Coefficients for Top Global Banks between 2009 and 2010 .. 23
III.1 Compensation under Agriculture Debt Waiver and Debt Relief Scheme ........... 36
IV.1 Consolidated Balance Sheet of Scheduled Commercial Banks ......................... 61
IV.2 Growth in Balance Sheet of Scheduled Commercial Banks ............................. 62
IV.3 Non-SLR Investments of Scheduled Commercial Banks .................................. 64
IV.4 International Liabilities of Banks – By Type .................................................... 65
IV.5 International Assets of Banks – By Type ......................................................... 65
IV.6 Classification of Consolidated International Claims of Banks on Countries
Other than India – By Maturity and Sector ..................................................... 66
IV.7 Consolidated International Claims of Banks on Countries other than India .... 66
IV.8 Bank Group-wise Maturity Profile of Select Liabilities/Assets ......................... 67
IV.9 Asset Liability Mismatches in the Indian Banking Sector ................................ 69
IV.10 Trends in Income and Expenditure of Scheduled Commercial Banks .............. 71
IV.11 Return on Assets and Return on Equity of SCBs – Bank Group-wise .............. 71
IV.12 Cost of Funds and Return on Funds – Bank Group-wise ................................ 72
IV.13 Capital to Risk-Weighted Assets Ratio under Basel I and II – Bank Group-wise 74
IV.14 Component-wise Capital Adequacy of SCBs .................................................... 74
IV.15 Trends in Non-Performing Assets – Bank Group-wise ..................................... 76
IV.16 NPAs of SCBs Recovered through Various Channels ....................................... 78
IV.17 Details of Financial Assets Securitised by SCs/RCs ........................................ 78
IV.18 Sector-wise NPAs of Domestic Banks .............................................................. 80
IV.19 Trends in Provisions for Non-Performing Assets – Bank Group-wise ............... 81
IV.20 Classification of Loan Assets – Bank Group-wise ............................................ 81
IV.21 Sectoral Deployment of Gross Bank Credit ..................................................... 84
IV.22 Priority Sector Lending by Public and Private Sector Banks ............................ 85
IV.23 Priority Sector Lending by Foreign Banks ....................................................... 87
IV.24 Retail Portfolio of Banks ................................................................................. 87
IV.25 Public Issues from the Banking Sector ........................................................... 87
IV.26 Resources Raised by Banks through Private Placements ................................. 88
IV.27 Resource Mobilisation through Euro Issues by the Banking Sector ................. 88
IV.28 Risk-Return Performance, Turnover and Capitalisation of Bank Stocks .......... 89

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IV.29 Number of Public Sector Banks Classified by Percentage of Private
Shareholding ................................................................................................. 89
IV.30 Overseas Operations of Indian Banks ............................................................. 91
IV.31 ATMs of Scheduled Commercial Banks ........................................................... 91
IV.32 Debit Cards Issued by Scheduled Commercial Banks ..................................... 92
IV.33 Credit Cards Issued by Scheduled Commercial Banks .................................... 92
IV.34 Volume and Value of Electronic Transactions by
Scheduled Commercial Banks ........................................................................ 93
IV.35 Region-wise Complaints received at Banking Ombudsman Offices .................. 93
IV.36 Bank-Group-wise Complaints received at Banking Ombudsman Offices ......... 94
IV.37 Progress of Financial Inclusion ....................................................................... 94
IV.38 Distribution of New Bank Branches Across Regions and
Population Groups ......................................................................................... 95
IV.39 Number of ATMs of SCBs Located at Various Locations .................................. 96
IV.40 Progress Made Under Financial Inclusion Plans ............................................. 98
IV.41 Progress of Micro-Finance Programmes .......................................................... 99
IV.42 Consolidated Balance Sheet of Regional Rural Banks ..................................... 100
IV.43 Financial Performance of Regional Rural Banks ............................................. 101
IV.44 Purpose-wise Distribution of Credit from Regional Rural Banks ...................... 101
IV.45 Profile of Local Area Banks ............................................................................. 102
IV.46 Financial Performance of Local Area Banks .................................................... 102
V.1 Grade-wise Distribution of Deposits and Advances of Urban Cooperative Banks 107
V.2 Distribution of Urban Cooperative Banks by Size of Deposits and Advances ... 110
V.3 Tier wise Distribution of Urban Cooperative Banks ......................................... 110
V.4 Liabilities and Assets of Urban Cooperative Banks ......................................... 111
V.5 Investments by Urban Cooperative Banks ...................................................... 112
V.6 Financial Performance of Scheduled and Non-Scheduled Urban Cooperative
Banks ............................................................................................................ 113
V.7 Select Financial Indicators of UCBs ................................................................ 113
V.8 Non-Performing Assets of UCBs ..................................................................... 114
V.9 Advances to Weaker Sections by Urban Cooperative Banks ............................ 115
V.10 A Profile of Rural Cooperative Banks .............................................................. 117
V.11 Elected Boards under Supersession ............................................................... 117
V.12 Liabilities and Assets of State Cooperative Banks, end-March 2010 ................ 118
V.13 Financial Performance of State Cooperative Banks ......................................... 119
V.14 Soundness Indicators of State Cooperative Banks .......................................... 119

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V.15 Liabilities and Assets of District Central Cooperative Banks ........................... 120
V.16 Financial Performance of District Central Cooperative Banks ......................... 120
V.17 Soundness Indicators of District Central Cooperative Banks .......................... 122
V.18 Primary Agricultural Credit Societies – Select Balance Sheet Indicators .......... 122
V.19 Liabilities and Assets of State Cooperative Agriculture and Rural
Development Banks ....................................................................................... 123
V.20 Financial Performance of State Cooperative Agriculture and Rural
V.21 Soundness Indicators of State Cooperative Agriculture and Rural
V.22 Liabilities and Assets of Primary Cooperative Agriculture and Rural
V.23 Financial Performance of Primary Cooperative Agriculture and Rural
V.24 Asset Quality of Primary Cooperative Agriculture and Rural
V.25 NABARD’s Credit to StCBs, State Governments and RRBs .............................. 127
V.26 Tranche-wise Details of RIDF (As at end-March 2011) .................................... 128
V.27 Progress under Kisan Credit Card Scheme ..................................................... 128
VI.1 Ownership Pattern of Financial Institutions ................................................... 132
VI.2 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 133
VI.3 Liabilities and Assets of Financial Institutions ................................................ 134
VI.4 Resources Mobilised by Financial Institutions ................................................ 134
VI.5 Resources Raised by Financial Institutions from Money Market ...................... 134
VI.6 Pattern of Sources and Deployment of Funds of Financial Institutions ........... 135
VI.7 Weighted Average Cost and Maturity of Rupee Resources Raised by
Select Financial Institutions ........................................................................... 135
VI.8 Long-term PLR Structure of Select Financial Institutions ............................... 135
VI.9 Financial Performance of Select All-India Financial Institutions ...................... 136
VI.10 Select Financial Parameters of Financial Institutions ..................................... 136
VI.11 Net Non-Performing Assets of Financial Institutions ....................................... 136
VI.12 Asset Classification of Financial Institutions .................................................. 137
VI.13 Capital to Risk (weighted) Assets Ratio of Select Financial Institutions ........... 137
VI.14 Ownership Pattern of NBFCs .......................................................................... 139
VI.15 Profile of NBFCs ............................................................................................. 139
VI.16 Consolidated Balance Sheet of NBFCs-D ........................................................ 141
VI.17 Major Components of Liabilities of NBFCs-D by Classification of NBFCs ......... 142

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VI.18 Public Deposits held by NBFCs-D by Deposit Ranges ...................................... 142
VI.19 Public Deposits held by NBFCs-D Region-wise ................................................ 143
VI.20 Public Deposits held by NBFCs-D - Deposit Interest Rate Range-wise ............. 143
VI.21 Maturity Pattern of Public Deposits held by NBFCs-D ..................................... 144
VI.22 Sources of Borrowings by NBFCs-D by Classification of NBFCs ...................... 144
VI.23 Major Components of Assets of NBFCs-D by Classification of NBFCs .............. 145
VI.24 Assets of NBFCs-D by Asset-Size Ranges ........................................................ 145
VI.25 Distribution of Assets of NBFCs-D by Activity ................................................. 145
VI.26 Financial Performance of NBFCs-D ................................................................ 146
VI.27 NPA Ratios of NBFCs-D .................................................................................. 146
VI.28 NPAs of NBFCs-D by Category of NBFCs ........................................................ 146
VI.29 Classification of Assets of NBFCs-D by Category of NBFCs ............................. 147
VI.30 Capital Adequacy Ratio of NBFCs-D ............................................................... 147
VI.31 Net Owned Fund vis-à-vis Public Deposits of NBFCs-D by Category ................ 147
VI.32 Range of Net Owned Fund vis-à-vis Public Deposits of NBFCs-D ..................... 148
VI.33 Profile of RNBCs ............................................................................................ 148
VI.34 Public Deposits held by RNBCs - Region-wise ................................................. 149
VI.35 Investment Pattern of RNBCs ......................................................................... 149
VI.36 Consolidated Balance Sheet of NBFCs-ND-SI .................................................. 149
VI.37 Borrowings of NBFCs-ND-SI-By Region .......................................................... 150
VI.38 Financial Performance of NBFCs-ND-SI .......................................................... 150
VI.39 NPA Ratios of NBFCs-ND-SI ........................................................................... 150
VI.40 Dependence on Public Funds ......................................................................... 152
VI.41 Capital Adequacy Ratio of NBFCs-ND-SI ........................................................ 152
VI.42 Bank Exposure of NBFCs-ND-SI ..................................................................... 152
VI.43 Performance of the PDs in the Primary Market ............................................... 153
VI.44 Performance of Standalone PDs in the Secondary Market ............................... 153
VI.45 Sources and Applications of Funds of Standalone Primary Dealers ................. 154
VI.46 Financial Performance of Standalone Primary Dealers .................................... 154
VI.47 Financial Indicators of Primary Dealers .......................................................... 154
VI.48 CRAR of the Standalone PDs .......................................................................... 155
VI.49 Select Indicators of Primary Dealers ............................................................... 155

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List of Charts

Chart No. Particulars Page No.
II.1 Global Macro-economic Trends ........................................................................ 11
II.2 Three-year Moving Average of Bank Credit Growth, in per cent ......................... 13
II.3 Bank Stock Indices in Select Economies/Economy Groups ............................... 14
II.4 International Assets/Liabilities of Advanced and Emerging Economies .............. 15
II.5 Leverage in the Banking Systems of Select Economies ...................................... 16
II.6 Asset Quality of Banks in Select Economies ..................................................... 16
II.7 CDS Spread of Global Banks ........................................................................... 17
II.8 Sovereign and Bank CDS Spreads in Select Economies ..................................... 17
II.9 Demographic Access to Banking Services across Select Economies .................... 18
II.10 Usage of Banking Services across Select Economies – Deposits ......................... 18
II.11 Usage of Banking Services across Select Economies – Credit ............................. 19
II.12 Asset Growth in the US Banking Sector ........................................................... 19
II.13 Sectoral Rates of Growth of Credit of US Banks ................................................ 20
II.14 Sectoral Delinquency Rates of US Banks .......................................................... 20
II.15 Balance Sheet Indicators of Banks in the Euro zone ......................................... 20
II.16 Expectations about Credit Conditions for SME Sector in the Euro zone .............. 20
II.17 Movements in Euro Inter-Bank Offered Rate .................................................... 21
II.18 Interest Rates on Bank Deposits from Non-financial Corporations
(with Less than One Year Maturity), Select Euro zone Economies ...................... 21
II.19 Expectations about Bank Credit Availability to SMEs in the UK ......................... 22
II.20 Write-off Rates of UK Banks ............................................................................ 23
II.21 Growth in Balance Sheets of Chinese Banks .................................................... 23
II.22 Location of Global Banking Business ............................................................... 24
II.23 Share of Countries in Total Assets of Top 100 Global Banks .............................. 24
II.24 Percentage Distribution of Top 100 Global Banks by Return on Assets ............... 24
II.25 Percentage Distribution of Top 100 Global Banks by CRAR ............................... 25
II.26 Percentage Distribution of Top 100 Global Banks by Capital Adequacy (Leverage)
Ratio .............................................................................................................. 25
II.27 Percentage Distribution of Top Global Banks by NPLs Ratio .............................. 25
II.28 Changes in Soundness Indicators of Top 20 Global Banks ................................ 26
IV.1 Composition of Deposits 2010-11 .................................................................... 62
IV.2 Deposits and Borrowings 2010-11 ................................................................... 63
IV.3 Credit as per cent of Deposits plus Borrowings 2010-11 .................................... 66
IV.4 Incremental Credit- and Investment-Deposit Ratios of SCBs ............................. 67
IV.5 Composition of Off-Balance Sheet Exposures of the Banking Sector 2010-11 ..... 69
IV.6 Net Profits of SCBs ......................................................................................... 72

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IV.7 Cost of Funds and Return on Funds – Bank Group-wise 2010-11 ...................... 74
IV.8 Tier I Ratio of Public Sector Banks ................................................................... 75
IV.9 Trends in Gross Non-Performing Assets ........................................................... 75
IV.10A NPAs Written Off as per cent of Previous Year’s Gross NPAs .............................. 76
IV.10B Written Off Ratio – Bank Group-wise 2010-11 .................................................. 76
IV.11A Slippage Ratio ................................................................................................ 77
IV.11B Slippage Ratio - Bank Group-wise 2010-11 ...................................................... 77
IV.12A NPAs Recovered as per cent of Previous Year’s Gross NPAs ................................ 77
IV.12B Recovery Ratio - Bank Group-wise 2010-11 ...................................................... 77
IV.13 Ratio of NPAs to Advances ............................................................................... 78
IV.14 Composition of Incremental NPAs of Domestic Banks 2010-11 .......................... 80
IV.15 Shares of Population Groups in Agricultural and Industrial Credit ..................... 84
IV.16A Priority Sector Lending: Target and Achievement 2010-11 ................................. 86
IV.16B Agricultural Advances: Target and Achievement 2010-11 .................................. 86
IV.17A Priority Sector Advances - Target and Achievement 2010-11 ............................. 86
IV.17B Export Credit – Target and Achievement 2010-11 ............................................. 86
IV.18 Relative Performance of BSE Bankex and BSE Sensex - 2010-11 ....................... 88
IV.19 Government Shareholding in PSBs .................................................................. 89
IV.20 Foreign Shareholding in Domestic Banks ......................................................... 89
IV.21 Shares of Bank Groups in Outstanding Debit Cards ......................................... 91
IV.22 Shares of Bank Groups in Outstanding Credit Cards ........................................ 92
IV.23 Major Complaints against Bank Groups 2010-11 .............................................. 94
IV.24 Bank Branches Opened in Hitherto Unbanked Centres (April-March) ................ 95
IV.25 Region-wise Population per Bank Branch (end-March 2011) .............................. 96
IV.26 Population Group-wise Distribution of ATMs (end-March 2011) ......................... 96
IV.27 Share of Regions in Total Net Increase in ATMs 2010-11 ................................... 97
IV.28 Distribution of Deposit and Credit According to Banking Centres – March 2011 . 97
IV.29A Region-wise Share in Credit – March 2011 ....................................................... 98
IV.29B Population Group-wise Share in Credit – March 2011 ....................................... 98
V.1 Structure of Cooperative Credit Institutions in India ......................................... 106
V.2 Grade-wise Distribution of Number of UCBs and Share in Total Advances and
Deposits ......................................................................................................... 108
V.3 Changing Profile of UCBs ................................................................................ 109
V.4 Asset Size-wise Distribution of UCBs ............................................................... 109
V.5 Composition of Investments of UCBs ............................................................... 112
V.6 Distribution of UCBs according to CRAR .......................................................... 113
V.7 CRAR and RoA of UCBs .................................................................................. 114

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V.8 Composition of Advances to Priority Sectors by UCBs ....................................... 114
V.9 Region-wise and State-wise Profile of UCBs ...................................................... 115
V.10 Percentage Share of Top and Bottom Five States in Total Number of UCBs......... 116
V.11 Select Balance Sheet Indicators of Scheduled StCBs ......................................... 118
V.12 Percentage Share of Different Categories of NPAs of StCBs ................................ 119
V.13 Purpose-wise Details of Projects and Loans Sanctioned under RIDF ................... 127
VI.1 Net Non-Performing Assets/Net Loans ............................................................. 137
VI.2 Number of NBFCs Registered with Reserve Bank of India .................................. 139
VI.3 Ratio of Public Deposits of NBFCs to Broad Liquidity (L3) andAggregate
Deposits of SCBs ............................................................................................ 141
VI.4 Share of Public Deposits held by NBFCs-D-by Deposits Ranges ......................... 142
VI.5 Share of Public Deposits held by NBFCs-D Region-wise .................................... 143
VI.6 Public Deposits held by NBFCs-D-Deposit Interest Rate Range-wise .................. 143
VI.7 Maturity Pattern of Public Deposits held by NBFCs-D ....................................... 144
VI.8 Financial Performance of NBFCs-D .................................................................. 146

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List of Appendix Tables

IV.1 Off-Balance Sheet Exposures of Scheduled Commercial Banks in India .......... 156
IV.2(A) Non-Performing Assets of Public Sector Banks - Sector-wise ........................... 157
IV.2(B) Non-Performing Assets of Private Sector Banks - Sector-wise .......................... 158
IV.2(C) Non-Performing Assets of Foreign Banks - Sector-wise ................................... 159
IV.3(A) Non-Performing Assets in Advances to Weaker Sections - Public Sector Banks 160
IV.3(B) Non-Performing Assets in Advances to Weaker Sections - Private Sector Banks 161
IV.4(A) Advances of Public Sector Banks to Agriculture and Weaker Sections ............. 162
IV.4(B) Advances of Private Sector Banks to Agriculture and Weaker Sections ............ 163
IV.4(C) Advances of Foreign Banks to Micro and Small Enterprises (MSE) and
Export sectors ................................................................................................ 164
IV.5(A) Targets Achieved by Public Sector Banks under the Priority Sector ................. 165
IV.5(B) Targets Achieved by Private Sector Banks under the Priority Sector ................ 166
IV.5(C) Targets Achieved by Foreign Banks under the Priority Sector ......................... 167
IV.6 Bank Group-wise Lending to the Sensitive Sectors ......................................... 168
IV.7 Share Prices and Price/Earning Ratios of Bank Stocks at BSE ....................... 169
IV.8 Shareholding Pattern of Domestic Scheduled Commercial Banks .................... 170
IV.9 Branches and ATMs of Scheduled Commercial Banks .................................... 172
IV.10 Statement of Complaints Received at Banking Ombudsman Office ................. 175
IV.11 Credit-Deposit Ratio and Investment plus Credit-Deposit Ratio of Scheduled
Commercial Banks - Region/State-wise .......................................................... 178
V.1 Select Financial Parameters of Scheduled UCBs ............................................ 179
V.2 Major Indicators of Financial Performance of Scheduled UCBs ....................... 180
V.3 State-wise Distribution of UCBs ..................................................................... 182
V.4 Working Results of State Cooperative Banks - Region and State-wise ............. 183
V.5 Working Results of District Central Cooperative Banks - Region and State wise 184
V.6 Select Indicators of Primary Agricultural Credit Societies-State wise ............... 185
V.7 Working Results of State Cooperative Agriculture and
Rural Development Banks - State-wise ........................................................... 187
V.8 Working Results of Primary Cooperative Agriculture and
Rural Development Banks -State-wise ............................................................ 188
V.9 Sanctions and Disbursements Under RIDF - State-wise ................................. 189
V.10 Kisan Credit Card Scheme: State-wise Progress .............................................. 192
VI.1 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 193
VI.2 Financial Performance of Primary Dealers ...................................................... 194
VI.3 Select Financial Indicators of Primary Dealers ................................................ 195

xv

List of Select Abbreviations

AD Authorised Dealer CCF Credit Conversion Factors
ADR American Depository Receipt CCP Central Counter Party
ADWDR Agricultural Debt Waiver and Debt CDs Certificates of Deposit
Relief Scheme CDS Credit Default Swaps
AFC Asset Finance Companies CE Common Equity
AFI Annual Financial Inspection CEO Chief Executive Officer
AIFIs All India Financial Institutions CEOBSE Credit Equivalent Amount Off-Balance
ALM Asset-Liability Mismatch Sheet Exposure
AMA Advanced Measurement Approach CFSA Committee on Financial Sector
Assessment
AML Anti-Money Laundering
CFT Combating Financing of Terrorism
ANBC Adjusted Net Bank Credit
CGFS Committee on Global Financial
ASA Alternate Standardised Approach Stability
ATM Automated Teller Machine CGS Credit Guarantee Scheme
BC Business Correspondent CGTMSE Credit Guarantee Fund Trust for Micro
BCBS Basel Committee on Banking and Small Enterprises
Supervision CIC Credit Information Company
BCP-DR Business Continuity Management and CICs-ND-SI Systemically Important Non-deposit
Disaster Recovery taking Core Investment Companies
BCSBI Banking Codes and Standards Boards CMB Cash Management Bills
of India
CME Capital Market Exposure
BFS Board for Financial Supervision
CNP Card Not Present
BIS Bank for International Settlements
CoR Certificate of Registration
BO Banking Ombudsman
CPs Commercial Papers
BoD Board of Directors
CP Card Present
BoM Board of Management
CPSS Committee on Payment and
BPR Business Process Re-engineering Settlement System
BSE Bombay Stock Exchange Ltd. CRAR Capital to Risk-Weighted Assets Ratio
CAR Capacity Adequacy Ratio CRAs Credit Rating Agencies
CAS Common Accounting System CRCS Central Registrar of Cooperative
CASA Current Account and Savings Account Societies
CRE Commercial Real Estate
CBI Central Board of Investigation
CRR Cash Reserve Ratio
CBLO Collateralised Borrowing and Lending
Obligation DCCB District Central Cooperative Banks
CBS Core Banking Solutions DGA Duration Gap Analysis
CCAR Comprehensive Capital Assessment DICGC Deposit Insurance and Credit
Review Guarantee Corporation

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DIN Director Identification Number FI Financial Institution
DLIC District Level Implementation FII Foreign Institutional Investments
Committee
FIP Financial Inclusion Plan
DR Disaster Recovery
FLCC Financial Literacy and Credit
DRT Debt Recovery Tribunal Counselling Centres
DSA Direct Selling Agents FMI Financial Market Infrastructure
EaR Earnings at Risk FMU Financial Market Utilities
EBA European Banking Authority FPC Financial Policy Committee
ECCS Express Cheque Clearing System FSA Financial Services Authority
ECS Electronic Clearing Service FSAP Financial Sector Assessment
Programme
EFSF European Financial Stability Facility
FSB Financial Stability Board
EFSM European Financial Stabilisation
Mechanism FSDC Financial Stability and Development
Council
EIOPA European Insurance and Occupational
Pensions Authority FSLRC Financial Sector Legislative Reforms
Commission
EL Expected Loss
FSOC Financial Stability Oversight Council
EME Emerging Market Economy
FSR Financial Stability Report
EMV Euro pay MasterCard Visa
G Sec Government Securities
ESA European Supervisory Authorities
GCC General Credit Card
ESFS European System of Financial
Supervisions GDP Gross Domestic Product
ESM European Stability Mechanism GDR Global Depository Receipt
ESMA European Securities and Markets GFSR Global Financial Stability Report
Authority
GHOS Governors and Heads of Supervision
ESRB European Systemic Risk Board
GIC General Insurance Corporation of
EU European Union India
EURIBOR Euro Inter-Bank Offered Rate GNPA Gross Non-Performing Assets
EXIM Bank Export Import Bank of India GoI Government of India
FASB Financial Accounting Standards Board GSIB Global Systemically Important Bank
FATF Financial Action Task Force HRM Human Resource Management
FB Foreign Banks HSBC Hong Kong and Shanghai Banking
Corporation
FCA Financial Conduct Authority
HTM Held to Maturity
FCCB Foreign Currency Convertible Bonds
IAS International Accounting Standard
FCMD Financial Conglomerate Monitoring
Division IASB International Accounting Standards
Board
FCNR (B) Foreign Currency Non-Resident
(Banks) IBA Indian Banks’ Association
FEMA Foreign Exchange Management Act ICs Investment Companies
FHC Financial Holding Company ICB Independent Commission on Banking

xvii

ICDs Inter Corporate Deposits MAG Macro-economic Assessment Group
ICICI Industrial Credit and Investment MCA Ministry of Corporate Affairs
Corporation of India
MDG Modified Duration Gap
ICT Information and Communications
MENA Middle East and North African
Technology
MFI Micro Finance Institution
IDBI Industrial Development Bank of India
MICR Magnetic Ink Character Recognition
IDRBT Institute for Development and
Research in Banking Technology MIS Management Information System
IFC Infrastructure Finance Company MoU Memorandum of Understanding
IFRS International Financial Reporting MSE Micro and Small Enterprise
Standards MSF Marginal Standing Facility
IIBI Industrial Investment Bank of India
MSME Micro, Small and Medium Enterprises
IL Incurred Loss
MVE Market Value of Equity
IMA Internal Models Approach
NABARD National Bank for Agriculture and
IMF International Monetary Fund Rural Development
Ind ASs Indian Accounting Standards NAFSCOB National Federation of State
INFINET Indian Financial NETwork Cooperative Banks

IOSCO International Organisation of NBFC Non-Banking Financial Company
Securities Commission NBFC-D Non-Banking Financial Company-
IRB Internal Rating Based Deposit taking

IRC Incremental Risk Charge NBFC-ND Non-Deposit taking Non-Banking
Financial Company
IRDA Insurance Regulatory and
Development Authority NBFC-ND-SI Systemically Important Non-Deposit
taking Non-Banking Financial
IRSD Interest Rate Sensitivity under
Company
Duration Gap Analysis
NBFIs Non-Banking Financial Institutions
IT Information Technology
NDS Negotiated Dealing System
IVR Interactive Voice Response
NDTL Net Demand and Time Liability
JLGs Joint Liability Groups
NECS National Electronic Clearing Service
KCC Kisan Credit Card
NEFT National Electronic Fund Transfer
KYC Know Your Customer
NGO Non-Government Organisation
LAB Local Area Bank
NHB National Housing Bank
LAF Liquidity Adjustment Facility
LCBG Large and Complex Banking Group NII Net Interest Income

LCR Liquidity Coverage Ratio NIM Net Interest Margin

LCs Loan Companies NIMC National Implementing and Monitoring
Committee
LEI Long-term Economic Impact
NOC No Objection Certificate
LGD Loss Given Default
NOF Net Owned Fund
LIBOR London Inter-Bank Offered Rate
NOHC Non-Operative Holding Company
LIC Life Insurance Corporation of India
NPA Non-Performing Asset
LTCCS Long-Term Cooperative Credit
Structure NRE Non-Resident External

xviii

NREGA National Rural Employment SAO Seasonal Agricultural Operations
Guarantee Act SARFAESI Securitisation and Reconstruction of
NRRDA National Rural Roads Development Financial Assets and Enforcement of
Agency Security Interest
NRO Non-Resident Ordinary SBLP SHG-Bank Linkage Programme
NSFR Net Stable Funding Ratio SC Scheduled Caste
OBS Off-balance Sheet SCAP Supervisory Capital Assessment
Programme
OECD Organisation for Economic
Corporation and Development SCARDB State Cooperative Agriculture and
Rural Development Bank
OSMOS Off-Site Monitoring and Surveillance
System SCB Scheduled Commercial Bank
OTC Over the Counter SCs/RCs Securitisation Companies/
Reconstruction Companies
PACS Primary Agricultural Credit Society
SEBI Securities and Exchange Board of India
PAT Profit After Tax
SHG Self-Help Group
PBT Profit Before Tax
SIDBI Small Industries' Development Bank of
PCARDB Primary Cooperative Agriculture and
India
Rural Development Bank
SIFI Systemically Important Financial
PD Primary Dealer
Institution
PDO – NDS Public Debt Office – Negotiated Dealing
SLIMC State Level Implementing and
System
Monitoring Committee
PE Price Earning
SLR Statutory Liquidity Ratio
PFRDA Pension Fund Regulatory and SME Small and Medium Enterprises
Development Authority
SPV Special Purpose Vehicle
PIN Personal Identification Number
SSI Small Scale Industry
POS Point of Sale
ST Scheduled Tribe
PRA Prudential Regulation Authority
StCB State Cooperative Bank
PRBs Private Sector Banks
STCCS Short-Term Cooperative Credit
PSB Public Sector Bank Structure
RCS Registrar of Cooperative Societies T/B Treasury Bills
RIDF Rural Infrastructural Development TAFCUB Task Force for Urban Cooperative Bank
Fund
TGA Traditional Gap Analysis
RNBC Residuary Non-Banking Company
TLE Terminal Line Encryption
RoA Return on Assets
UBD Urban Banks Department
ROE Return on Equity
UCB Urban Cooperative Bank
RORWA Return on Risk Weighted Assets
UKPT Unique Key Per Terminal
RRB Regional Rural Bank
UO Umbrella Organisations
RSA Rate-Sensitive Assets
VAPT Vulnerability Analysis and Penetration
RSL Rate-Sensitive Liabilities Test
RTGS Real Time Gross Settlement System VaR Value at Risk

xix

Chapter I

Perspectives on the Indian Banking Sector

Domestic banks continued to manage growth with resilience during 2010-11 with ample reserves
of capital and liquidity, improved performance in profitability and asset quality. With high growth
potential of the Indian economy and favourable demographics, banks have immense opportunities to
further expand their business both with traditional and innovative products and through financial
inclusion using technology enabled sustainable business models. However, the prevailing interest rate
environment and slowing growth in the near-term amidst somewhat skewed exposures to interest
sensitive sectors will require adept management of such exposures going forward. Further, it will be
challenging for banks to raise additional capital and liquidity to support higher growth and to comply
with Basel III stipulations. This would require banks to use innovative and attractive market based
funding channels, especially when capital continues to remain expensive and the Government support
may be constrained by fiscal considerations. The challenge to converge with the International Financial
Reporting System would require banks to upgrade infrastructure including information technology and
human resources. Given the focus on inclusive growth, banks are also expected to renew efforts to broaden
the scope of financial inclusion and use viable business models to achieve their targets. Finally, sustained
pursuit of forward looking strategies aimed at mitigating risks, diversifying revenue sources, containing
asset-liability mismatches, providing effective response to changing global market environment and
improving customer relationships should strengthen the overall growth of the banking sector in the
medium term.

1. Introduction of higher growth in India will depend crucially
on the ability of the banking sector to mobilise
1.1 The banking sector in India emerged
the savings and meet the credit needs of the
largely unscathed from the global financial crisis
growing economy through innovative financial
of 2007-08, but faced a slowdown in the
instruments and services that foster financial
momentum of growth due to the weakening of
inclusion and provide efficient and transparent
trade, finance and confidence channels.
delivery of credit.
However, post crisis, the economic growth in
most emerging market economies (EMEs) 1.2 Despite the challenging headwinds from
including India recovered, while growth remains domestic and international developments, the
anemic in advanced economies. Instability of performance of Indian banks remained robust
sovereign debt markets in the Euro zone, during 2010-11. The resilience of the banking
political turmoil in the Middle East and North sector was marked by improvement in the
African (MENA) region, calamities in Japan, capital base, asset quality and profitability. The
sovereign debt downgrade of the United States profitability of scheduled commercial banks
in August this year and the persistently elevated (SCBs) improved both in terms of return on
levels of commodity prices have together led to assets (RoA) and return on equity (RoE).
an accentuation of downside risks to global Simultaneously, both gross and net NPA ratios
growth. While these risks are expected to recede declined in comparison with the previous year.
gradually over time, the long-term sustainability Since the Indian financial system is bank

Report on Trend and Progress of Banking in India 2010-11

dominated, banks’ ability to withstand stress is 1.5 One point to note though is that the
critical to overall financial stability. A series of comparative position is at the aggregate level; a
stress tests conducted by the Reserve Bank in few individual banks may fall short of the Basel
respect of credit, liquidity and interest rate risks III norms and will have to augment their capital.
showed that banks remained reasonably There will be challenges of upgrading risk
resilient. However, under extreme shocks, some management systems and meeting the credit
banks could face moderate liquidity problems needs of a rapidly growing economy even while
and their profitability could be affected. adjusting to a more demanding regulatory
regime. In addition to countercyclical capital
1.3 A detailed description of perspectives on
buffers, Basel III also envisages countercyclical
global developments is covered in Chapter II on
provisions.
Global Banking Developments. Against this
background, some relevant perspectives about 1.6 In India, banks have a stock of floating
the Indian banking sector are outlined. provisions which the Reserve Bank has not
permitted to be used, except under a situation
2. Forces Shaping the Environment of systemic stress. While the floating provisions
may serve the purpose of countercyclical
Are Indian banks adequately prepared for
provision, a framework is necessary for allowing
migration to Basel III regime?
its use. As an interim measure, the Reserve
1.4 Commercial banks in India have already Bank has been trying to develop a methodology
adopted standardised approaches under Basel based on the Spanish dynamic provisioning
II. It is time for larger banks to seriously consider system. This, however, has not been easy given
upgrading their systems and migrating to the lack of required data and analytics with the
advanced approaches. Adoption of advanced banks. Migration to Basel III requires a high level
approaches requires simultaneous use of the of liquidity to be maintained through a pool of
underlying processes in the day-to-day risk liquid assets. The definition of liquid assets is
management of banks. In the background of the very stringent including the requirement that
recent global regulatory developments, a they should be freely available.
question often discussed is whether the Indian
banks are prepared for Basel III. The building Are the Indian banks geared up for
blocks of Basel III are by now quite well known: transition to the International Financial
higher and better quality capital; an Reporting System (IFRS)?
internationally harmonised leverage ratio to 1.7 Converging to global accounting
constrain excessive risk taking; capital buffers standards, i.e., IFRS facilitates comparability
which would be built up in good times so that between enterprises operating in different
they can be drawn down in times of stress; jurisdictions. Convergence would help to reduce
minimum global liquidity standards; and both the cost of capital and cost of compliance
stronger standards for supervision, public for industry. Training, education and skill
disclosure and risk management. Quick development are cornerstones of a successful
assessments show that at the aggregate level IFRS implementation. All the stakeholders
Indian banks will not have any problem in including investors, accountants, auditors,
adjusting to the new capital rules both in terms customers, software and hardware vendors,
of quantum and quality. Indian banks are rating agencies, analysts, audit committees,
comfortably placed in terms of compliance with actuaries, valuation experts and other
the new capital rules. specialists will need to develop an understanding

2


of IFRS provisions to varying degrees and what impact may be more significant if other entities
they need to do. It is not only the accounting like other banks, NBFCs, and mutual funds are
issues but how to address the non-accounting included for analysis.
issues that will determine how successfully
banks make a transition to IFRS. Additionally, Current and emerging environment offers
banks will need to upgrade their infrastructure, sound business opportunities to the banks
including IT and human resources to face the 1.9 The emerging economic environment
complexities and challenges of IFRS. Some major provides a number of opportunities for the
technical issues arising for Indian banks Indian banking sector. Factors like expected
during the convergence process are the positive economic performance, strong savings
differences between the IFRS and current growth spurred by the favourable demographic
regulatory guidelines, in particular, those within dividend, emphasis on expansion of physical
the ambit of International Accounting Standard infrastructure and the extent of financial
(IAS) 39 replacement project relating to exclusion to be bridged will ensure growth of
classification and measurement of financial the banking sector in medium term. To exploit
assets and liabilities. emerging opportunities and to benefit from their
strengths, Indian banks need to be globally
Interconnectedness in the banking sector
competitive. From a strategic perspective,
and vulnerability of financial system
competitiveness can be achieved by balancing
1.8 Post-crisis, macro-prudential policy has factors such as scale, scope, prudence and
emerged as an important tool for addressing knowledge.
systemic risk, highlighting its time and the cross
sectional dimensions. While the time dimension 3. Strategic and Operational Responses
refers to pro-cyclical elements that give rise to
Migration of financial conglomerates in
the evolution of aggregate risk over time, the
India to holding company structure
cross section dimension is concerned with
distribution of risks which can be exacerbated 1.10 At present, most of the financial groups in
owing to the interconnectedness in the financial India are led by banks and organised under the
system. Financial interconnectedness as a part Bank Subsidiary model. This model puts
of macro-financial surveillance is the key issue the onus on the parent bank for corporate
in discussions on prudential regulation policies governance, performance and capital
as it can magnify idiosyncratic shocks across requirement of subsidiaries. Besides, the parent
the financial system. To put in place an effective carries very substantial reputational risk. The
system of macro-prudential surveillance of the Working Group on ‘Introduction of Holding
financial system, the Reserve Bank has started Company structure in India for banks’ has
using network analysis techniques to model recommended migration of major financial
inter-bank exposures. The analysis revealed that conglomerates to the holding company structure
the banking sector in India is deeply connected. to address these limitations to some extent. The
Further, the contagion analysis made on the main challenges in implementing the
basis of network analysis underlined that recommendations include, formulating a new
interconnectedness in the banking sector gives law governing functioning of financial holding
rise to vulnerability of financial system in the companies, providing right incentives to the
event of failure of one or more banks depending existing financial conglomerates through
on the degree of interaction. The contagion appropriate tax treatment and resolution
impact is relatively contained due to regulatory of strategic and public policy issues by the
limits on interbank exposures. However, the Government in the case of public sector banks.

3


Introducing innovative financial products as March 2008 to 2.21 per cent at end March 2010,
an efficient way to manage risks followed by a slight moderation to 2.01 per cent
in 2011. The concern is that the recoveries have
1.11 Introducing innovative financial products
not kept pace with slippages since 2007-08.
is an efficient way to manage risks involved in
the banking business. From this point of view, Rising interest rates and substantial amount of
the decision to introduce credit default swaps restructuring done during the crisis period, if
(CDS) with effect from October 24, 2011 is a not done with due care, are likely to put further
welcome development. However, given their pressure on asset quality of banks. Further,
complex nature, CDS shall be permitted on asset quality of banks needs to be closely
listed corporate bonds, unlisted but rated bonds watched in the changing interest rate
of infrastructure companies and unlisted/ environment as the sticky loan portfolio of small
unrated bonds issued by the Special Purpose and medium enterprises might rise. Therefore,
Vehicles (SPVs) set up by infrastructure there is a need for banks to step up efforts to
companies as reference obligations, and the resolve their existing NPAs and tighten their
reference entities shall be single legal resident credit risk management systems.
entities. The guidelines also require market
Robust business continuity management and
participants to build robust and appropriate risk
disaster recovery
management systems. Newer skill sets for
managing newer areas and unfamiliar elements 1.13 The extensive use of technology systems
of risks would continue to pose questions even in transaction processing and settlement in
to the most advanced banks. The retail as well as inter-institution and interbank
implementation of innovative financial products markets requires adequate availability and
requires diligent assessment of counterparty capacity to handle the increasing load on these
and related risks. Banks will have to adopt an systems for smooth functioning of financial
approach to re-evaluate their risk management markets and banking industry in India. Data
acumen in a manner that calls for higher levels centres managed by the Reserve Bank, and
of transparency, structural integrity and Indian Financial Network (INFINET), the
operational control. While expanding market is communication backbone for the financial sector
a matter of survival, a further challenge for the managed by the Institute for Development and
banks would be to ring-fence their operations Research in Banking Technology (IDRBT),
by establishing a sound risk management continued to provide robust support during the
system that is not only protective but also year. Software changes were made in Real Time
inclusive and acts as a business enabler. Gross Settlement (RTGS) and Public Debt Office-
Negotiated Dealing System (PDO-NDS)
Management of asset quality applications to enhance performance and
1.12 While gross NPAs, in percentage terms, introduce new functionalities. The next
have declined steadily from 15.70 per cent at generation RTGS with advanced technology and
end March 1997 to 2.25 per cent at end March new functionalities is also in the pipeline, which
2011, this does not fully reveal the underlying would have features such as advanced liquidity
realities and some trends are a matter of management facility, extensible markup
concern, which could put pressure on asset language based messaging system conforming
quality of banks in future. Aggressive lending to ISO 2002, and real time information and
during the high credit growth phase followed transaction monitoring and control system.
by the crisis resulted in slippage with gross NPA Periodic drills were conducted to get feedback
ratio steadily rising from 1.81 per cent at end and assurance on the effectiveness of the

4


Business Continuity management and Disaster inclusion will provide banks access to sizeable
Recovery (BCP-DR) arrangements for shared low cost funds as also opportunities for lending
infrastructure and Payment and Settlement in the small volume segment. The latter should
Systems. A quarterly report on the BCP-DR and be possible since the Reserve Bank has
Vulnerability Analysis and Penetration Testing deregulated the interest rate that can be charged
(VAPT) exercise conducted by commercial banks on small value loans. To gainfully pursue
at their end was also obtained and significant financial inclusion, banks will need to constantly
points emerging out of the same are included in reinvent their business models and design
the inputs for analysis and suitable incorporation products and services demanded by a growing
in the periodical Financial Stability Report. economy with rapid structural transformation.

4. Challenges Challenges to further strengthening
inclusive growth
Need for further improving the efficiency
1.16 The banking sector is a key driver of
parameters of the Indian Banks
inclusive growth. There are supply side and
1.14 The Indian banking sector has recorded demand side factors driving inclusive growth.
an impressive improvement in productivity over Banks and other financial services players
the last 15 years; many of the productivity/ largely are expected to mitigate the supply side
efficiency indicators have moved closer to the processes that prevent poor and disadvantaged
global levels. There has been a particularly social groups from gaining access to the financial
discernible improvement in banks’ operating system. Banks were advised to ensure close
efficiency in recent years owing to technology and continuous monitoring of Business
up-gradation and staff restructuring. However, Correspondents (BCs). They were also advised
to sustain high and inclusive growth, there is a to focus, in future, on opening of some form of
need to raise the level of domestic savings and low cost brick and mortar branches between the
channel those savings into investment. This base branch and BC locations. Further, banks
implies that banks need to offer attractive were required to make efforts to increase the
interest rates to depositors and reduce the number of transactions in no-frill accounts.
lending rates charged on borrowers - in other There should be seamless integration of the
words, reduce the net interest margin (NIM). The financial inclusion server with their internal core
NIM of the Indian banking system is higher than banking solution (CBS) systems and in the case
that in some of the other emerging market of end-to-end solution, there should be a clear
economies even after accounting for mandated demarcation of the technology related activities
social sector obligations such as priority sector and BC related activities of their service
lending and credit support for the Government’s providers. However, banks must bear in mind
anti-poverty initiatives. that apart from the supply side factors, demand
side factors, such as lower income and /or asset
1.15 By far the most important task is to further
holdings also have a significant bearing on
improve operating efficiency on top of what has
inclusive growth.
already been achieved by optimising operating
costs, i.e., non-interest expenses including 1.17 Banks also need to take into account
wages and salaries, transaction costs and various behavioural and motivational attributes
provisioning expenses. This will enable banks of potential consumers for a financial inclusion
to lower lending rates while preserving their strategy to succeed. Today, access to financial
profitability. If pursued effectively, financial products is constrained by several factors, which

5


include: lack of awareness about the financial Need to review laws governing the Indian
products, unaffordable products, high banking sector
transaction costs, and products which are not 1.19 The extant statutory arrangement is
convenient, inflexible, not customised and of low complex with different laws governing different
quality. A major challenge of the next decade is segments of the banking industry. The
financing the millions in the unorganised sector, nationalised banks are governed by the Banking
self-employed in the micro and small business Companies (Acquisition and Transfer of
sector, the small and marginal farmers as also Undertaking) Acts of 1970 and 1980. State Bank
rural share-croppers in the agricultural sector. of India and its subsidiaries are governed by
Other challenges include financing affordable their respective statutes. Private sector banks
housing and education needs of low income come under the purview of the Companies Act,
households. 1956 and the Banking Regulation Act, 1949.
Foreign banks which have registered their
Need for effective corporate governance in
documents with the registrar under Section 592
banks
of the Companies Act are also banking
1.18 Banks are different from other corporates companies under the Banking Regulation Act.
in important respects and that makes corporate Certain provisions of the Banking Regulation Act
governance of banks not only different but also have been made applicable to public sector
more critical. Banks facilitate economic growth, banks. Similarly, some provisions of the RBI Act
are the conduits of monetary policy transmission too are applicable to nationalised banks, SBI
and constitute the economy’s payment and and its subsidiaries, private sector banks and
settlement system. By the very nature of their foreign banks. Notwithstanding this wide array
business, banks are highly leveraged. They of legislations of varying vintage, the statutory
accept large amounts of uncollateralised public arrangement has served the system well by
funds as deposits in a fiduciary capacity and helping maintain an orderly banking system.
further leverage those funds through credit Needless to say, each of the statutes was crafted
creation. Banks are interconnected in diverse, in a setting reflecting the needs and concerns
complex and opaque ways underscoring their of the time. Almost all the statutes have had to
‘contagion’ potential. If a corporate fails, the be amended from time to time to reflect changes
fallout can be restricted to the stakeholders. If in circumstances and context. There is a strong
a bank fails, the impact can spread rapidly case for reviewing all the various legislations and
through to other banks with potentially serious recasting them for a number of reasons. There
consequences for the entire financial system and is also a need to iron out inconsistencies between
the macro economy. While regulation has a role the primary laws governing the banking sector
to play in ensuring robust corporate standards and other laws applicable to the banking sector.
in banks, the point to recognise is that effective The decision of the Government to set up a
regulation is a necessary, but not a sufficient Financial Sector Legislative Reforms
condition for good corporate governance. In this Commission “to rewrite and clean up the
context, the relevant issues pertaining to financial sector laws to bring them in line with
corporate governance of banks in India are bank the requirements of the sector” is very timely
ownership, accountability, transparency, ethics, and very vital. It is important, however, to
compensation, splitting the posts of chairman recognise that changes in policy or in the
and CEO of banks and corporate governance regulatory architecture cannot be the remit of a
under financial holding company structure, Legislative Reforms Commission. Rather, they
which should engage adequate attention. should be debated and decided upon as a

6


prelude to the work of the Commission so that Costs and risks in using technology to
the Commission has a clear mandate on the change the face of banking
policy directions.
1.21 Technology adoption has changed the face
of banking in India. Wide spread technology
Can the Indian banks aim to become global
deployment in the banking business has also
in stature?
brought to the fore some new issues and
1.20 Of late, there is a debate on whether the challenges. These can be broadly divided into
Indian banks should aim to become global? In two categories - costs and risks. Costs, in terms
this context, there is a need to view the related of increasing expenditure on IT deployment and
costs and benefits analytically and also view this risks that are resulting from reliance on IT
as an aspiration consistent with India’s growing systems without necessary safeguards. Cost
international profile. Two specific questions that aspects can be addressed by synergising IT
need clarity in this context are: (i) can Indian deployment objectives with the broader,
banks aspire to achieve global size? and (ii) strategic business objectives to ensure adequate
should Indian banks aspire to attain global size? operational and management controls over
On the first question, it is unlikely that any of purchase as well as maintenance of appropriate
the Indian banks will come in the top ten of the technology solutions. The second aspect relating
global league even after reasonable to IT risks is a very critical issue. With the
consolidation. On the next question, those who increased use of IT, there are attendant risks
argue that banks must go global contend that posed to the banks as well as their customers
the issue is not so much the size of our banks in terms of monetary loss, data theft, breach of
in global rankings but of Indian banks having a privacy and banks need to be extremely
strong enough global presence. The main cognizant of such risks. Another significant
argument is that the increasing global size and aspect of banking business is regulatory and
influence of Indian corporates warrant a supervisory compliance. With the growth and
corresponding increase in the global footprint globalisation of markets in general and in the
of Indian banks. The opposing view is that Indian aftermath of recent crisis in particular, number
banks should look inwards rather than
of such compliance requirements is increasing.
outwards, focus their efforts on financial
Basel II and III implementation brings in huge
deepening at home rather than aspiring to global
challenges. Banks have adopted technology, but
size. It is possible to take a middle path and
the benefit of technology has not fully percolated
argue that looking outwards towards increased
in terms of cost, speed and convenience.
global presence and looking inwards towards
Empowering customers with technology-driven
deeper financial penetration are not mutually
benefits is a big challenge.
exclusive; it should be possible to aim for both.
In the wake of the global financial crisis, there Emerging trends in payment systems and
has definitely been a pause to the rapid related challenges
expansion overseas of our banks.
Notwithstanding the risks involved, it will be 1.22 The smooth functioning of the market
opportune for some of the larger banks to be infrastructure for enabling payment and
looking out for opportunities for consolidation. settlement systems is essential for market and
The surmise, therefore, is that Indian banks financial stability, as also for economic efficiency,
should increase their global presence. In the and for the smooth functioning of financial
rapidly changing global financial landscape, it markets. The financial sector and the payment
is imperative for the Indian banks to think global and settlement system infrastructure have to
but act local. be subservient to the real sector. The evolving

7

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