[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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MORE MARKETS, LESS GOVERNMENT<br />
in 2004. <strong>The</strong> general perception is that<br />
if the government reduces SLR the reduced<br />
demand for government bonds<br />
will lead to a rise in interest rates the<br />
government has to pay bond holders.<br />
This may adversely affect the fiscal<br />
deficit. However, banks have continued<br />
to invest around 40 percent of their deposits<br />
in government securities in spite<br />
of the reduction in SLR. This is essentially<br />
because government bonds are<br />
considered to be a risk-free investment<br />
for banks.<br />
Interest rates were deregulated in<br />
1992 leading to complete liberalization<br />
of all term deposit and lending rates,<br />
except for savings deposit rates which<br />
remain controlled. <strong>The</strong> RBI has also<br />
begun using the bank rate (the rate at<br />
which RBI lends to commercial banks<br />
Table 4: Regulatory Framework Of Indian Banking Sector<br />
Variable 1992-93 2000-01 2001-02 2002-03<br />
Capital to Risk-weighted Assets<br />
Ratio (%)<br />
Domestic banks with international<br />
4 9 9 9<br />
business<br />
Foreign banks 8 9 9 9<br />
Non-performing assets<br />
(period overdue)<br />
Sub-standard assets 4 Q 2 Q 180 days 180<br />
days*<br />
Doubtful Assets<br />
period for which remained substandard<br />
24 M 18 M 18 M 18 M@<br />
Provisioning requirements (%)<br />
Standard Assets - 0.25 0.25 0.25<br />
Sub-standard assets 10 10 10 10<br />
Doubtful Assets (unsecured portion)<br />
100 100 100 100<br />
Loss assets 100 100 100 100<br />
Source: RBI (2003d)<br />
M: Month ; Q: Quarter<br />
by rediscounting bills or eligible paper)<br />
as a reference rate for influencing the<br />
direction of interest rates in the economy<br />
(Bhide et al., 2001). <strong>The</strong> flexibility<br />
to set lending rates led the banks to use<br />
this measure to offset the cost involved<br />
in concessional lending to priority<br />
sectors. During the reform period the<br />
ceiling of 40 percent on domestic banks<br />
and 33 percent on foreign banks for priority<br />
sector lending remained but banks<br />
were allowed to set the lending rates<br />
and more profitable sectors like the<br />
software industry and venture capital<br />
were included in the definition of priority<br />
sectors. <strong>The</strong> government relaxed the<br />
norms for entry in the banking sector in<br />
<strong>The</strong> deregulation of interest rates is also incomplete. Interest<br />
rates on saving deposits and other saving schemes<br />
such as National Savings Certifi cates, public provident<br />
funds etc. remain regulated. Such rigidities reduce the<br />
effectiveness of the transmission of monetary policy<br />
order to increase competitiveness. For<br />
example the ceiling of voting rights of<br />
an individual shareholder was increased<br />
from 1 to 10 percent in 1994. <strong>The</strong> relaxed<br />
guidelines led to the entry of 8<br />
private sector banks and 26 new foreign<br />
banks in the Indian banking sector.<br />
In response to the Narsimhan Committee<br />
recommendations, the government<br />
gradually started to privatize PSB.<br />
<strong>The</strong>se banks were accumulating large<br />
amounts of NPA due to the pre-reform<br />
regulated regime. <strong>The</strong>y made an aggregate<br />
loss of Rs.35 billion and almost<br />
half of the public sector banks had negative<br />
net worth. Realizing the importance<br />
of recapitalization, the government<br />
spent in the range of 0.02 to 0.7<br />
percent of GDP each year to wipe off<br />
accumulated NPA (Table 2). This<br />
helped the banks clean up their balance<br />
sheets and make public issues of equity.<br />
As Table 3 shows, the central government<br />
still continues to hold a large<br />
share of holdings in major state-owned<br />
banks. 6 Adoption of regulatory and supervision<br />
norms: Strengthening of the<br />
regulatory and supervisory framework<br />
of the banking sector remains a key element<br />
of financial sector reform. <strong>The</strong><br />
THE INDIA ECONOMY REVIEW<br />
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