eco group 6

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Group 6 Abhishek Jha 10PGHR04

Sravya Arekatla 10PGHR09

Manoj Guptha 10PGHR19

Rohan Pai 10PGHR29

Ria Ghosh 10PGHR42

Tanu Mehta 10PGHR51

Financial Sector Reforms in India &

Further Reforms



The Pre- Reform Era

Era from the mid-1960s to the early 1990s, IndiasGovernments in effect treated the financial system asan instrument of public finance

Complex web of regulations fixed the details of deposit and lending rates and loan amounts,channelling credit to the government and prioritysectors at below-market rates

Positives:

India had a relatively deep financial system for alow income country

The stock market was large in terms of number of listings and market capitalization



The Pre- Reform Era

Setting of bank deposit rates that roughly

matched inflation

For example, the one year rate on termdeposits was kept around the rate of

inflation, particularly from 1982-1989



The Post - Liberalization Era

Indias reforms of the early 1990s began in

response to the balance of payments crisis of

1991-92, a response that also included a

stabilization program

financial reforms sought to improve resource

mobilization and allocate credit to its most

efficient uses

Deposit rates were liberalized by first setting anoverall ceiling for term deposit rates. Rates on

individual types of deposits were then gradually

freed, starting with the longer maturities



1991 -RBI proposed the committee chaired by M.Narasimham, former RBI Governor to review theFinancial System.

Review- aspects relating to the Structure,

Organization, Procedures and Functioning of thefinancial system.

Constituted in 1991, the Committee submitted two

reports, in 1992 and 1998, which laid significant

thrust on enhancing the efficiency and viability of the

banking sector.

The Narasimham Committee laid the foundation for

the reformation of the Indian banking sector.

NarasimhamCommittee



Problem Areas

Higher rates of CRR(15%) and

SLR(38.5%)

Directed creditprogrammes

Political andAdministrative

interference

Subsidizingof credit

Mountingexpenditures

of banks



Recommendations of the Committee in 1991

Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent and Cash

Reserve Ratio (CRR) to 3-5%

Adoption of uniform accounting practices for income recognition,asset classification and provisioning against bad and doubtful debts

Setting up of special tribunals to speed up the recovery process of loans

Setting up of Asset Reconstruction Funds (ARFs) to take over frombanks a portion of their bad and doubtful advances at a discount

Liberalizing the policy with regard to allowing foreign banks toopen offices in India

Separate legislation providing legal framework for mutual funds

and laying down prudential norms for such institutions, etc.



Recommendations of Narasimham Committee 1998

Need for stronger banking system

Experiment with concept of narrow banking

Small local banks

Capital Adequacy Ratio

Review and update banking laws.



Need for stronger banking system

The committee has made clear the need of astronger banking system , which would involve largeinflows and outflows of large capital and consequentcomplications for exchange rate management anddomestic liquidity.

So committee recommended the merger of strongbanks which would have a multiplier effect onindustry.

But has rejected the merger of weak banks with

strong banks as it may have a negative impact on theasset quality of the stronger bank.

The committee has also supported that two or threelarge Indian banks be given international or global

character.



Experiment with concept of narrow

banking Serious concern for rehabilitation of weak PSBs

which have accumulated a high percentage of NPAsin some cases as high as 20% of the total assets.

Committee suggested the concept of narrow bankingto rehabilitate weak banks.

Narrow banking means that the weak banks placetheir funds only in the short term in risk-free assets-these banks try to match their demand deposits withsafe liquid assets



Reforms in Financial Sector

FinancialMarkets

What do they comprise of?

Rapid growth in some businesses

Impact of Financial Intermediaries

TheBanking

System

80% banks controlled by PSUs

Licenses to private sector banks

Efficiency

DFI

Access to SLR funds reduced DFIs entered into other segments

Universal Banking



Reforms in Financial Market

NBFC

Net owned funds raised to Rs 2 crores

Setting up DFHIs Long term debt market

The

Capital

Market

25 million shareholders, 2 lakh active Improvement during the last five years

MutualFunds

Under the SEBI regulations, 1996 Both Indian and foreign players




Deregulation

of Banking

Capital provided by the Government to PSBs

New private sector banks allowed to compete

Bank lending norms liberalized

Capital

Market

The initial share pricing were decontrolled

FIIs were allowed to invest in Indian capitalmarkets

The NSE

Private

MF

allowed

Depositories Act had given a legalframework

Dematerialization of stocks

SEBIs control action




Buy Back of

Shares Allowed

Greater corporate disclosures

Detailed employee stock option

scheme

Standard denomination for equity

shares were abolished

Derivatives trading

Consolidation

Imperative

Merger of Banks



Financial Sector Reforms- India 2010

First phase of post-liberalization financial

reforms almost complete

-Liberalization of interest rates and

directed credit

Concerns about pace and direction of change

-Minimize financial distress-Financial institutions allocating resources

based on evaluation of risk and return

-Minimize macro-instability of economies



Incentive framework for FinancialNeed for further Reforms

Poor availability and use of info on usage of funds is a

major factor in bad credit and risk management

Information problems lead to systemic financial

crises:

± macroeconomic instability

± excesses of directed credit to favoured borrowers

± unproductive projects, poor regulation andsupervision

Therefore, an incentive framework for prudent

gathering and use of information is a key to financial

reform



Need for further Reforms

Incentives are especially important in Indias financial

reforms, given the current importance of public

sector financial institutions

Moral hazard exists because depositors and lenders

count on explicit and implicit Govt guarantees

The Government typically lacks both the incentive

and the means to ensure an adequate ROI

Political decisions, as opposed to informed

calculations, are often determine resource allocation

Lenders, Investors not of how their funds are used



Need for further Reforms

For Indian Banks, its the need of the hour to buckle-up and practice banking business at par with globalstandards and make the banking system in Indiamore reliable, transparent and safe.

Basel Accord I- Established in 1988 and implementedby 1992. Was the very first attempt to introduce theconcept of minimum standards of capital adequacy.

Basel Accord II- Introduced to overcome thedrawbacks of Basel I Accord.



Features of Basel I

Assets of banks were classified and grouped in

five categories according to credit risk

Risk weights of zero, ten, twenty, fifty, and upto one hundred percent

Banks with international presence are

required to hold capital equal to 8 % of the

risk-weighted assets



Limitations of Basel I

As Technological, financial and institutional

changes happened, many weaknesses started

appearing in Basel I accord.

Because of a flat 8% charge for claims on the

private sector, banks have an incentive to

move high quality assets off the balance sheet

Also, the 1988 Accord does not sufficiently

recognize credit risk mitigation techniques,

such as collateral and guarantees.



Limitations of Basel I- Continued

It was concentrating on only on credit risk.

It does not take into consideration the

operational risks of banks, which becomeincreasingly important with the increase in the

complexity of banks.



Features of Basel II

The Basel II Committee : Three Pillars to manage risks





Limitations of Basel II

Requires strategizing risk management for the

entire enterprise, building huge data

warehouses, crunching numbers and

performing complex calculations and poses

great challenges of compliance for banks and

financial institutions.



Features of Basel III

Tighter definitions of Common Equity; banks

must hold 4.5% by January 2015

Introduction of a leverage ratio

A framework for capital buffers

Measures to limit counterparty credit risk

Short and medium-term quantitative liquidityratios



Further Reforms in India Basel III

First, the quality, consistency, and transparency

the capital base will be raised

Tier 1 capital: the predominant form of Tier 1capital must be common shares and retained

earnings

Tier 2 capital instruments will be harmonised

Tier 3 capital will be eliminated




The risk coverage of the capital framework will

be strengthened

Strengthen the capital requirements for

counterparty credit exposures

Conserve capital to build buffers at individual

banks and the banking sector that can be used

in stress

Introducing a leverage ratio requirement to

control build-up of leverage in the banking

sector.




Requirement to use long term data horizons

to estimate probabilities of default

Improved calibration of the risk functions,which convert loss estimates into regulatory

capital requirement



Thank You

Group 6

Abhishek Jha 10PGHR04

Sravya Arekatla 10PGHR09

Manoj Guptha 10PGHR19

Rohan Pai 10PGHR29

Ria Ghosh 10PGHR42 Tanu Mehta 10PGHR51

eco group 6

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