Current Banking

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BANKING SECTOR REFORMS IN INDIA.
Since nationalization of banks in 1969, the banking sector had been dominated by the
public sector. There was financial repression, role of technology was limited, no risk
management etc. This resulted in low profitability and poor asset quality. The country was
caught in deep economic crisis. The Government decided to introduce comprehensive
economic reforms. Banking sector reforms were part of this package. In august 1991, the
Government appointed a committee on financial system under the chairmanship of M.
Narasimhan.

(A) FIRST PHASE OF BANKING SECTOR REFORMS / NARASIMHAN
COMMITTEE REPORT 1991:-
To promote healthy development of financial sector, the Narasimhan committee made
recommendations.
RECOMMENDATIONS OF NARASIMHAN COMMITTEE:-
Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks
(including SBI) at top and at bottom rural banks engaged in agricultural activities.
The supervisory functions over banks and financial institutions can be assigned to a
quasi-autonomous body sponsored by RBI.
Phased reduction in statutory liquidity ratio.
Phased achievement of 8% capital adequacy ratio.
Abolition of branch licensing policy.
Proper classification of assets and full disclosure of accounts of banks and financial
institutions.
Deregulation of Interest rates.
Delegation of direct lending activity of IDBI to a separate corporate body.
Competition among financial institutions on participating approach.
Setting up asset Reconstruction fund to take over a portion of loan portfolio of banks
whose recovery has become difficult.
Banking Reform Measures Of Government:-
On the recommendations of Narasimhan Committee, following measures were undertaken
by government since 1991:-
1. Lowering SLR and CRR: The high SLR and CRR reduced the profits of the banks. The
SLR has been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with
banks for allocation to agriculture, industry, trade etc. The Cash Reserve Ratio (CRR) is the
cash ratio of banks total deposits to be maintained with RBI. The CRR has been brought
down from 15% in 1991 to 4.1% in June 2003. The purpose is to release the funds locked up
with RBI.
2. Prudential Norms: Prudential norms have been started by RBI in order to impart
professionalism in commercial banks. The purpose of prudential norms include proper
disclosure of income, classification of assets and provision for Bad debts so as to ensure hat
the books of commercial banks reflect the accurate and correct picture of financial position.
Prudential norms required banks to make 100% provision for all Non-performing Assets
(NPAs). Funding for this purpose was placed at Rs. 10,000 crores phased over 2 years.
3. Capital Adequacy Norms (CAN) :- Capital Adequacy ratio is the ratio of minimum
capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public
sector banks had attained the ratio of 8%. It was also attained by foreign banks.
4. Deregulation Of Interest Rates :- The Narasimhan Committee advocated that interest
rates should be allowed to be determined by market forces. Since 1992, interest rates has
become much simpler and freer.
Scheduled Commercial banks have now the freedom to set interest rates on their
deposits subject to minimum floor rates and maximum ceiling rates.
Interest rate on domestic term deposits has been decontrolled
The prime lending rate of SBI and other banks on general advances of over Rs. 2
lakhs has been reduced.
Rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.
The interest rates on deposits and advances of all Co-operative banks have been
deregulated subject to a minimum lending rate of 13%.
5. Recovery Of Debts :- The Government of India passed the Recovery of debts due to
Banks and Financial Institutions Act 1993 in order to facilitate and speed up the recovery
of debts due to banks and financial institutions. Six Special Recovery Tribunals have been
set up. An Appellate Tribunal has also been set up in Mumbai.
6. Competition From New Private Sector Banks :- Now banking is open to private
sector. New private sector banks have already started functioning. These new private sector
banks are allowed to raise capital contribution from foreign institutional investors up to
20% and from NRIs up to 40%. This has led to increased competition.
7. Phasing Out Of Directed Credit :- The committee suggested phasing out of the
directed credit programme. It suggested that credit target for priority sector should be
reduced to 10% from 40%. It would not be easy for government as farmers, small
industrialists and transporters have powerful lobbies.
8. Access To Capital Market: - The Banking Companies (Acquisition and Transfer of
Undertakings) Act was amended to enable the banks to raise capital through public issues.
This is subject to provision that the holding of Central Government would not fall below
51% of paid-up-capital. SBI has already raised substantial amount of funds through equity
and bonds.
9. Freedom of Operation: - Scheduled Commercial Banks are given freedom to open new
branches and upgrade extension counters, after attaining capital adequacy ratio and
prudential accounting norms. The banks are also permitted to close non-viable branches
other than in rural areas.
10. Local Area banks (Labs):- In 1996, RBI issued guidelines for setting up of Local Area
Banks and it gave its approval for setting up of 7 Labs in private sector. Labs will help in
mobilizing rural savings and in channeling them in to investment in local areas.
11. Supervision of Commercial Banks: - The RBI has set up a Board of financial
Supervision with an advisory Council to strengthen the supervision of banks and financial
institutions. In 1993, RBI established a new department known as Department of
Supervision as an independent unit for supervision of commercial banks.



(B) SECOND PHASE OF REFORMS OF BANKING SECTOR (1998) / NARASIMHAN
COMMITTEE REPORT 1998:-

To make banking sector stronger the government appointed Committee on banking
sector Reforms under the Chairmanship of M. Narasimhan. It submitted its report in April
1998. The Committee placed greater importance on structural measures and improvement
in standards of disclosure and levels of transparency.
Following are the recommendations of Narasimhan Committee :-
Committee suggested a strong banking system especially in the context of capital Account
Convertibility (CAC). The committee cautioned the merger of strong banks with weak ones as
this may have negative effect on stronger banks.
It suggested that 2 or 3 large banks should be given international orientation and global
character.
There should be 8 to10 national banks and large number of local banks.
It suggested new and higher norms for capital adequacy.
To take over the bad debts of banks committee suggested setting up of Asset Reconstruction
Fund.
A board for Financial Regulation and supervision (BFRS) can be set up to supervise the
activities of banks and financial institutions.
There is urgent need to review and amend the provisions of RBI Act, Banking Regulation
Act, etc. to bring them in line with current needs of industry.
Net Non-performing Assets for all banks was to be brought down to 3% by 2002.
Rationalization of bank branches and staff was emphasized. Licensing policy for new private
banks can be continued.
Foreign banks may be allowed to set up subsidiaries and joint ventures.
Banking Reform Measures Of Government:-
On the recommendations of committee following reforms have been taken
1. New Areas: - New areas for bank financing have been opened up, such as :- Insurance,
credit cards, asset management, leasing, gold banking, investment banking etc.
2. New Instruments: - For greater flexibility and better risk management new
instruments have been introduced such as: - Interest rate swaps, cross currency forward
contracts, forward rate agreements, and liquidity adjustment facility for meeting day-to-
day liquidity mismatch.
3. Risk Management: - Banks have started specialized committees to measure and
monitor various risks. They are regularly upgrading their skills and systems.
4. Strengthening Technology: - For payment and settlement system technology
infrastructure has been strengthened with electronic funds transfer, centralized fund
management system, etc.
5. Increase Inflow of Credit: - Measures are taken to increase the flow of credit to
priority sector through focus on Micro Credit and Self Help Groups.
6. Increase in FDI Limit: - In private banks the limit for FDI has been increased from
49% to 74%.
7. Universal banking: - Universal banking refers to combination of commercial banking
and investment banking. For evolution of universal banking guidelines have been given.
8. Adoption of Global Standards: - RBI has introduced Risk Based Supervision of banks.
Best international practices in accounting systems, corporate governance, payment and
settlement systems etc. are being adopted.
9. Information Technology: - Banks have introduced online banking, E-banking,
internet banking, telephone banking etc. Measures have been taken facilitate delivery of
banking services through electronic channels.
10. Management of NPAs: - RBI and central government have taken measures for
management of non-performing assets (NPAs), such as corporate Debt Restructuring
(CDR), Debt Recovery Tribunals (DRTs) and Lok Adalts.
11. Mergers and Amalgamation:-In May 2005, RBI has issued guidelines for merger and
Amalgamation of private sector banks.
12. Guidelines For Anti-Money Laundering: - In recent times, prevention of money
laundering has been given importance in international financial relationships. In 2004,
RBI revised the guidelines on know your customer (KYC) principles.
13. Managerial Autonomy: - In February. 2005, the Government of India has issued a
managerial autonomy package for public sector banks to provide them a level playing
field with private sector banks in India.
14. Customer Service: - In recent years, to improve customer service, RBI has taken many
steps such as: - Credit Card Facilities, banking ombudsman, settlement off claims of
deceased depositors etc.
15. Base Rate System of Interest Rates: - In 2003 the system of Benchmark Prime
Lending Rate (BPLR) was introduced to serve as a benchmark rate for banks pricing of
their loan products so as to ensure that it truly reflected the actual cost. However the
BPLR system tells short of its objective. RBI introduced the system of Base Rate since
1st July, 2010. The base rate is the minimum rate for all loans. For banking system as a
whole, the base rates were in the range of 5.50% - 9.00% as on 13th October, 2010.

DEVELOPMENTS IN BANKING SECTOR:
The technological evolution of the Indian banking industry has been largely directed
by the various committees set up by the RBI and the government of India to review the
implementation of technological change.
There are so many fields in which:
1. Computerization:
The process of computerization marked the beginning of all technological initiatives
in the banking industry. Computerization of bank branches had started with installation of
simple computers to automate the functioning of branches, especially at high traffic
branches. Networking of branches are now undertaken to ensure better customer service.
Core Banking Solutions (CBS) is the networking of the branches of a bank, so as to enable
the customers to operate their accounts from any bank branch, regardless of which branch
he opened the account with. The networking of branches under CBS enables centralized
data management and aids in the implementation of internet and mobile banking.
2. Satellite Banking:
Satellite banking is also an upcoming technological innovation in the Indian banking
industry, which is expected to help in solving the problem of weak terrestrial
communication links in many parts of the country. The use of satellites for establishing
connectivity between branches will help banks to reach rural and hilly areas in a better
way, and offer better facilities, particularly in relation to electronic funds transfers.



3. Development of Distribution Channels:
The major and upcoming channels of distribution in the banking industry, besides
branches are ATMs, internet banking, mobile and telephone banking and card based
delivery systems.
4. Automatic Teller Machines:
ATMs were introduced to the Indian banking industry in the early 1990s initiated by
foreign banks. Most foreign banks and some private sector players suffered from a serious
handicap at that time- lack of a strong branch network. ATM technology was used as a
means to partially overcome this handicap by reaching out to the customers at a lower
initial and transaction costs and offering hassle free services. Since then, innovations in
ATM technology have come a long way and customer receptiveness has also increased
manifold. Public sector banks have also now entered the race for expansion of ATM
networks. Development of ATM networks is not only leveraged for lowering the transaction
costs, but also as an effective marketing channel resource.
5. Introduction of Biometrics:
Banks across the country have started the process of setting up ATMs enabled with
biometric technology to tap the potential of rural markets. A large proportion of the
population in such centers does not adopt technology as fast as the urban centers due to the
large scale illiteracy. Development of biometric technology has made the use of self service
channels like ATMs viable with respect to the illiterate population.
6. Multilingual ATMs:
Installation of multilingual ATMs has also entered pilot implementation stage for
many large banks in the country. This technological innovation is also aimed at the rural
banking business believed to have large untapped potential. The language diversity of
India has proved to be a major impediment to the active adoption of new technology,
restrained by the lack of knowledge of English.
7. Internet Banking:
Internet banking in India began taking roots only from the early 2000s. Internet
banking services are offered in three levels. The first level is of a banks informational
website, wherein only queries are handled; the second level includes Simple Transactional
Websites, which enables customers to give instructions, online applications and balance
enquiries. Under Simple Transactional Websites, no fund based transactions are allowed to
be conducted. Internet banking in India has reached level three, offering Fully
Transactional Websites, which allow for fund transfers and various value added services.
8. Phone Banking and Mobile Banking:
Phone and mobile banking are a fairly recent phenomenon for the Indian banking
industry. There exist operative guidelines and restrictions on the type and quantum of
transactions that can be undertaken via this route. Phone banking channels function
through an Interactive Voice Response System (IVRS) or tele -banking executives of the
banks. The transactions are limited to balance enquiries, transaction enquiries, stop
payment instructions on cheques and funds transfers of small amounts (per transaction
limit of Rs 2500, overall cap of Rs 5000 per day per customer).
10. Card Based Delivery Systems:
Among the card based delivery mechanisms for various banking services, are credit
cards, debit cards, smart cards etc. These have been immensely successful in India since
their launch. Penetration of these card based systems have increased manifold over the
past decade. Aided by expanding ATM networks and Point of Sale (POS) terminals, banks
have been able to increase the transition of customers towards these channels, thereby
reducing their costs too.

Payment and Settlement Systems
The innovations in technology and communication infrastructure in recent years have
impacted banks in a large way through the development of payment and settlement
systems, which are central to the major portion of the businesses of banks.
In order to strengthen the institutional framework for the payment and settlement systems
in the country, the RBI constituted, in 2005, a Board for Regulation and Supervision of
Payment and Settlement Systems (BPSS) as a Committee of its Central Board. The BPSS
now lays down policies relating to the regulation and supervision of all types of payment
and settlement systems, sets standards for existing and future systems, approves criteria
for authorization of payment and settlement systems, and determines criteria for
membership to these systems, including continuation, termination and rejection of
membership. Thereafter, the government and the RBI felt the need for a legal framework
dedicated to the efficient functioning of the payment and settlement systems. The Payment
and Settlement Systems Act was passed in December 2007, which empowered the RBI to
regulate and supervise the payment and settlement systems and provided a legal basis for
multilateral netting and settlement
1. Paper Based Clearing Systems:
Among the most important improvement in paper based clearing systems was the
introduction of MICR technology in the mid 1980s. Though improvements continued to be
made in MICR enabled instruments, the major transition is expected now, with the
implementation of the Cheques Truncation System for the processing of cheques.
2. Cheque Truncation System (CTS):
Truncation is the process of stopping the movement of the physical cheque which is to
be truncated at some point en-route to the drawee branch and an electronic image of the
cheques would be sent to the drawee branch along with the relevant information like the
MICR fields, date of presentation, presenting banks etc. Thus, the CTS reduce the
probability of frauds, reconciliation problems, logistics problems and the cost of collection.
The cheque truncation system was launched on a pilot basis in the National Capital
Region of New Delhi on February 1, 2008, with the participation of 10 banks. The main
advantage of the cheque truncation system is that it obviates the physical presentation of
the cheque to the clearing house. Instead, the electronic image of the cheque would be
required to be sent to the clearing house.
3. Electronic Clearing Service:
The Electronic Clearing Service (ECS) introduced by the RBI in 1995, is akin to the
Automated Clearing House system that is operational in certain other countries like the
US. ECS has two variants- ECS debit clearing and ECS credit clearing service. ECS credit
clearing operates on the principle of single debit multiple credits and is used for
transactions like payment of salary, dividend, pension, interest etc. ECS debit clearing
service operates on the principle of single credit multiple debits and is used by utility
service providers for collection of electricity bills, telephone bills and other charges and also
by banks for collections of principal and interest repayments. Settlement under ECS is
undertaken on T+1 basis. Any ECS user can undertake the transactions by registering
themselves with an approved clearing house.
4. Electronic Funds Transfer Systems:
The launch of the electronic funds transfer mechanisms began with the Electronic
Funds Transfer (EFT) System. The EFT System was operationalised in 1995 covering 15
centers where the Reserve Bank managed the clearing houses. Special EFT (SEFT) scheme,
a variant of the EFT system, was introduced with effect from April 1, 2003, in order to
increase the coverage of the scheme and to provide for quicker funds transfers. SEFT was
made available across branches of banks that were computerized and connected via a
network enabling transfer of electronic messages to the receiving branch in a straight
through manner (STP processing). In the case of EFT, all branches of banks in the 15
locations were part of the scheme, whether they are networked or not.
5. National Electronics Fund Transfer:
A new variant of the EFT called the National EFT (NEFT) was decided to
implemented (November 2005) so as to broad base the facilities of EFT. This was a nation
wide retail electronic funds transfer mechanism between the networked branches of banks.
NEFT provided for integration with the Structured Financial Messaging Solution (SFMS) of
the Indian Financial Network (INFINET). The NEFT uses SFMS for EFT message
creation and transmission from the branch to the banks gateway and to the NEFT Centre,
thereby considerably enhancing the security in the transfer of funds.
6. Real Time Gross Settlement:
The introduction of RTGS in 2004 was instrumental in the development of
infrastructure for Systemically Important Payment Systems (SIPS). RTGS was launched by
RBI, which enabled a real time settlement on a gross basis. To ensure that RTGS system is
used only for large value transactions and retail transactions take an alternate channel of
electronic funds transfer, a minimum threshold of one lakh rupees was prescribed for
customer transactions under RTGS on January 1, 2007.

FINANCIAL INCLUSION
Financial inclusion is the process of ensuring fair, timely and adequate access to
financial services. These services are saving, credit, payment and remittance facilities, and
insurance services at an affordable cost in a fair and transparent manner by the
mainstream institutional players.
"Financial inclusion is delivery of banking services at an affordable cost ('no frills'
accounts,) to the vast sections of disadvantaged and low income group. Unrestrained access
to public goods and services is to an open and efficient society. As banking services are in
the nature of public good, it is essential that availability of banking and payment services to
the entire population without discrimination is the prime objective of the public policy."
Financial inclusion denotes delivery of financial services at an affordable cost to the
vast sections of the disadvantaged and low-income groups. The various financial
Services include credit, savings, insurance and payments and remittance facilities.
The objective of financial inclusion is to extend the scope of activities of the organized
financial system to include within its ambit people with low incomes.
OBJECTIVE:
1. INCLUSIVE GROWTH:
The Eleventh Five Year Plan (2007-12) envisions inclusive growth as a key objective.
The Plan document notes that the economic growth has failed to be sufficiently Inclusive
particularly after the mid-1990s. The Indian economy, though achieved a High growth
momentum during 2003-04 to 2007-08, could not bring down Unemployment and poverty to
tolerable levels. Further, a vast majority of the Population remained outside the ambit of
basic health and education facilities. Thus, The Eleventh Plan Document tries to
restructure the policies in order to make the growth faster, broad-based and inclusive by
reducing the fragmentation of the society.
2. Expansion of Banking Infrastructure:
As per Census 2011, 58.7% households are availing banking services in the country.
There are 102,343 branches of Scheduled Commercial Banks (SCBs) in the country, out of
which 37,953 (37%) bank branches are in the rural areas and 27,219 (26%) in semi-urban
areas, constituting 63 per cent of the total numbers of branches in semi-urban and rural
areas of the country. However, a significant proportion of the households, especially in rural
areas, are still outside the formal fold of the banking system. To extend the reach of
banking to those outside the formal banking system, Government and Reserve Bank of
India (RBI) are taking various initiatives from time to time some of which are enumerated
below
Opening of Bank Branches: Government had issued detailed strategy and
guidelines on Financial Inclusion in October 2011, advising banks to open branches
in all habitations of 5,000 or more population in under-banked districts and 10,000
or more population in other districts
Each household to have at least one bank account: Banks have been advised to
ensure service area bank in rural areas and banks assigned the responsibility in
specific wards in urban area to ensure that every household has at least one bank
account.
Business Correspondent Model: With the objective of ensuring greater financial
inclusion and increasing the outreach of the banking sector, banks were permitted by
RBI in 2006 to use the services of intermediaries in providing financial and banking
services through the use of Business Facilitators (BF) and Business Correspondents
(BCs).
Swabhimaan Campaign: Under Swabhimaan - the Financial Inclusion Campaign
launched in February 2011, Banks had provided banking facilities by March, 2012 to
over 74,000 habitations having population in excess of 2000 using various models and
technologies including branchless banking through Business Correspondents Agents
(BCAs). 2012-13, the Swabhimaan campaign has been extended to habitations with
population of more than 1000 in North Eastern and hilly States and to habitations
which have crossed population of 1600 as per census 2001. About 40,000 such
habitations have been identified to be covered under the extended Swabhimaan
campaign.
Setting up of Ultra Small Branches (USBs): Considering the need for close
supervision and mentoring of the Business Correspondent Agents (BCAs) by the
respective banks and to ensure that a range of banking services are available to the
residents of such villages, Ultra Small Branches (USBs) are being set up in all
villages covered through BCAs under Financial Inclusion.
USSD Based Mobile Banking : The Department through National Payments
Corporation of India (NPCI) worked upon a Common USSD Platform for all Banks
and Tele-companies who wish to offer the facility of Mobile Banking using
Unstructured Supplementary Service Data (USSD) based Mobile Banking.
3. Steps taken by Reserve Bank of India (RBI): To strengthen the Banking
Infrastructure
RBI has permitted domestic Scheduled Commercial Banks (excluding RRBs) to open
branches in Tier 2 to Tier 6 Centers (with population up to 99,999 as per census
2001) without the need to take permission from RBI in each case, subject to
reporting.
Domestic SCBs have been advised that while preparing their Annual Branch
Expansion Plan (ABEP), they should allocate at least 25% of the total number of
branches proposed to be opened during the year in unbanked Tier 5 and Tier 6
centers i.e. (population up to 9999) centers.
Regional Rural Banks (RRBs) are also allowed to open branches in Tier 2 to Tier 6
centers (with population up to 99,999 as per Census 2001) without the need to take
permission from the Reserve Bank in each case, subject to reporting, provided they
fulfill the following conditions, as per the latest inspection report:
1. CRAR of at least 9%;
2. Net NPA less than 5%;
3. No default in CRR / SLR for the last year;
4. Net profit in the last financial year;
5. CBS compliant.
New private sector banks are required to ensure that at least 25% of their total
branches are in semi-urban and rural centers on an ongoing basis.
Area of concern of banks:
The banking industry has shown tremendous growth in volume and complexity
during the last few decades.
Despite making significant improvements in all the areas relating to financial
viability, profitability and competitiveness, there are concerns that banks have not
been able to reach and bring vast segment of the population, especially the
underprivileged sections of the society, into the fold of basic banking services.
Internationally also efforts are being made to study the causes of financial exclusion
and design strategies to ensure financial inclusion of the poor and disadvantaged.
The reasons may vary from country to country and so also the strategy but all out
efforts are needed as financial inclusion can truly lift the standard of life of the poor
and the disadvantaged.
RBI's Policy on 'Financial Inclusion:
When bankers do not give the desired attention to certain areas, the regulators have
to step in to remedy the situation. This is the reason why the Reserve Bank of India
places a lot of emphasis on financial inclusion.

With a view to enhancing the financial inclusion, as a proactive measure, the RBI in
its Annual Policy Statement of the year 2005-2006, while recognizing the concerns in
regard to the banking practices that tend to exclude rather than attract vast sections
of population, urged banks to review their existing practices to align them with the
objective of financial inclusion.
In the Mid Term Review of the Policy (2005-06), RBI exhorted the banks, with a view
to achieving greater financial inclusion, to make available a basic banking 'no frills'
account either with 'NIL' or very minimum balances as well as charges that would
make such accounts accessible to vast sections of the population. The nature and
number of transactions in such accounts would be restricted and made known to
customers in advance in a transparent manner. All banks are urged to give wide
publicity to the facility of such 'no frills' account, so as to ensure greater financial
inclusion.
As the Reserve Bank has been receiving several representations from public about
unreasonable service charges being levied by banks, the existing institutional
mechanism in this regard is not adequate. Accordingly, and in order to ensure fair
practices in banking services, the RBI has issued instructions to banks making it
obligatory for them to display and continue to keep updated, in their offices/branches
as also in their website, the details of various services charges in a format prescribed
by it. The Reserve Bank has also decided to place details relating to service charges of
individual banks for the most common services in its website.

BASEL NORMS:
Basel norms are the round of deliberations by central bankers from around the world,
and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland,
published a set of minimum capital requirements for banks. This is also known as the 1988
Basel Accord, and was enforced by law in the Group of Ten (G-10) countries in 1992.
Basel norms are actually a set a norms for the banks aimed at mitigating the risk
and strengthening the capital structure of the banks of member countries. Basel is a city in
Switzerland. It is the headquarters of Bureau of International Settlement (BIS), which
fosters co-operation among central banks of the world. The common goal of BIS is financial
stability and common standards of banking regulations.
Basel I Norms:
Basel I is the outcome of discussions by central bankers from around the world, and
in 1988, the Basel Committee (BCBS) in Basel, Switzerland, published a set of minimum
capital requirements for banks. The minimum capital requirement was fixed at 8% of risk
weighted assets (RWA). RWA means assets with different risk profiles. For example, an
asset backed by collateral would carry lesser risks as compared to personal loans, which
have no collateral. India adopted Basel I guidelines in 1999.
Basel II Norms:
Basel II is the second of the Basel Accords, (now extended and effectively superseded
by Basel III), which are recommendations on banking laws and regulations issued by the
Basel Committee on Banking Supervision. Basel II, initially published in June 2004 the
guidelines were based on three parameters, which the committee calls it as pillars.
Capital Adequacy Requirements: Banks should maintain a minimum capital
adequacy requirement of 8% of risk assets.
Supervisory Review: According to this, banks were needed to develop and use
better risk management techniques in monitoring and managing all the three types
of risks that a bank faces, viz. credit, market and operational risks
Market Discipline: This need increased disclosure requirements. Banks need to
mandatory disclose their CAR, risk exposure, etc to the central bank. Basel II norms
in India and overseas are yet to be fully implemented.
Basel III norms :
Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking
Supervision to enhance the banking regulatory framework under Basel I and Basel II. This
latest Accord now seeks to improve the banking sector's ability to deal with financial and
economic stress, improve risk management and strengthen the banks' transparency. Basel 3
measures aim to:
improve the banking sector's ability to absorb shocks arising from financial
and economic stress, whatever the source
improve risk management and governance
Strengthen banks' transparency and disclosure.
Major Features of Basel III:
Better Capital Quality: One of the key elements of Basel 3 is the introduction of
much stricter definition of capital. Better quality capital means the higher loss-
absorbing capacity. This in turn will mean that banks will be stronger, allowing
them to better withstand periods of stress.
Capital Conservation Buffer: Another key feature of Basel iii is that now banks
will be required to hold a capital conservation buffer of 2.5%. The aim of asking to
build conservation buffer is to ensure that banks maintain a cushion of capital that
can be used to absorb losses during periods of financial and economic stress.
Countercyclical Buffer: This is also one of the key elements of Basel III. The
countercyclical buffer has been introduced with the objective to increase capital
requirements in good times and decrease the same in bad times. The buffer will slow
banking activity when it overheats and will encourage lending when times are tough
i.e. in bad times. The buffer will range from 0% to 2.5%, consisting of common equity
or other fully loss-absorbing capital.
Minimum Common Equity and Tier 1 Capital Requirements: The minimum
requirement for common equity, the highest form of loss-absorbing capital, has been
raised under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier
1 capital requirement, consisting of not only common equity but also other qualifying
financial instruments, will also increase from the current minimum of 4% to 6%.
Although the minimum total capital requirement will remain at the current 8% level,
yet the required total capital will increase to 10.5% when combined with the
conservation buffer.
Leverage Ratio: A review of the financial crisis of 2008 has indicted that the
value of many assets fell quicker than assumed from historical experience. Thus,
now Basel III rules include a leverage ratio to serve as a safety net. A leverage ratio
is the relative amount of capital to total assets (not risk-weighted). This aims to put
a cap on swelling of leverage in the banking sector on a global basis. 3% leverage
ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in
January 2018.
Liquidity Ratios: Under Basel III, a framework for liquidity risk management will
be created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
(NSFR) are to be introduced in 2015 and 2018, respectively.
Systemically Important Financial Institutions (SIFI): As part of the macro-
prudential framework, systemically important banks will be expected to have loss-
absorbing capability beyond the Basel III requirements. Options for implementation
include capital surcharges, contingent capital and bail-in-debt.

MICRO FINANCE:
Micro-financing is regarded as a tool for socio-economic up-liftment in a developing
country like India. It is expected to play a significant role in poverty alleviation and
development. Mohammed Yunus was awarded the Noble Prize for application of the concept
of microfinance, with setting up of the Grameen Bank in Bangladesh. Micro credit and
microfinance are different. Micro credit is a small amount of money, given as a loan by a
bank or any legally registered institution, whereas, Microfinance includes multiple services
such as loans, savings, insurance, transfer services, micro credit loans etc.
Microfinance is the provision of a broad range of financial services such as deposits,
loans, payment services, money transfers and insurance to the poor and low income
households and their micro-enterprises. Microfinance is defined as Financial Services
(savings, insurance, fund, credit etc.) provided to poor and low income clients so as to help
them raise their income, thereby improving their standard of living.
FEATURES OF MICROFINANCE:
It is an essential part of rural finance.
It deals in small loans.
It basically caters to the poor households.
It is one of the most effective and warranted Poverty Alleviation Strategies.
It supports women participation in electronic activity.
It provides an incentive to grab the self employment opportunities.
It is more service-oriented and less profit oriented.
It is meant to assist small entrepreneur and producers.
Poor borrowers are rarely defaulters in repayment of loans as they are simple and
God-fearing.
India needs to establish several Microfinance Institutions.
MICROFINANCE MODELS IN INDIA:-
In India, the beginning of microfinance movement could be traced to Self Help Group
(SHG) Bank Linkage Programme (SBLP) started as a pilot project in 1992 by NABARD.
This programme proved to be very successful and has also developed as the most popular
model of microfinance in India.
In India, the institutions which provides microfinance services includes:-NABARD
Small Industries Development Bank of India (SIDBI), Rashtriya Mahila Kosh, Commercial
Banks, Regional Rural Banks, Co-operative Banks and Non Banking Financial Companies
(NBFCs).
Microfinance services are provided mainly by two models :- Self Help Group - Bank
Linkage Programme (SBLP) Model and Micro-Finance Institutions Model (MFI). These both
together have about 7 crore clients.
1. SHG - Bank Linkage Programme (SBLP)
A Self Help Group (SHG) is a small group of 10 to 20 persons of rural poor who come
together to mutually contribute to common fund for meeting their emergency needs. SHG -
Bank Linkage Programme was introduced by NABARD in 1992. Under this programme
three different models have emerged:-
Model I: - SHGs promoted, guided and financed by banks.
Model II: - SHGs promoted by NGOs / government agencies and financed by banks.
Model III: - SHGs promoted by NGOs and financed by banks under
2. Micro Finance Institutions (MFls):
MFls include NGOs, trusts, social and economic entrepreneurs; these lend small,
sized loans to individuals or SHGs. They also provide other services like capacity building,
training, marketing of products etc.
MFIs operate under following models:-
(a) Bank Partnership Model
MFI As Agent :- In this model, the MFI acts as an agent and it takes Care of all
relationships with borrower from first contact to final repayment.
MFI as Holder of Loans: - Here MFI holds the individual loans on its books for a
while, before securitizing them and selling them to bank. -
(b) Banking Facilitators:-
Banking facilitators / correspondents are intermediaries who carry out banking
functions in villages or areas where it is not possible to open a branch. In January, 2006,
RBI permitted banks to use services of NGOs, MFIs and other civil society organizations to
act as intermediaries in providing financial and banking services to poor.
ROLE AND IMPORTANCE OF MICROFINANCE:-
Microfinance institutions are those which provide credit and other financial services
and products of very small amounts to poor in rural, semi-urban and urban areas for
enabling them to raise their income and improve their standard of living.
1. Credit to Rural Poor:-
Usually rural sector depends on non-institutional agencies for their financial
requirements. Micro financing has been successful in taking institutionalized credit to the
doorstep of poor and have made them economically and socially sound.
2. Poverty Alleviation:-
Due to micro finance poor people get employment. It also helps them to improve their
entrepreneurial skills and encourage them to exploit business opportunities. Employment
increases income level which in turn reduces poverty.
3. Women Empowerment:-
Normally more than 50% of SHGs are formed by women. Now they have greater
access to financial and economical resources. It is a step towards greater security for
women. Thus microfinance empowers poor women economically and socially.
4. Economic Growth:-
Finance plays a key role in stimulating sustainable economic growth. Due to
Microfinance, production of goods and services increases which increases GDP and
contributes to economic growth of the country.
5. Mobilization of Savings:-
Microfinance develops saving habits among people. Now poor people with meager
income can also save and are bankable. The financial resources generated through savings
and micro credit obtained from banks are utilized to provide loans and advances to its
members. Thus microfinance helps in mobilization of savings.
6. Development of Skills:-
Micro financing has been a boon to potential rural entrepreneurs. SHGs encourage its
members to set up business units jointly or individually. They receive training from
supporting institutions and learn leadership qualities. Thus micro finance is indirectly
responsible for development of skills.
7. Mutual Help and Co-operation:-
Microfinance promotes mutual help and co-operation among members. The collective
efforts of group promote economic interest and helps in achieving socio-economic transition.
8. Social Welfare:-
With employment generation the level of income of people increases. They may go for
better education, health, family welfare etc. Thus micro finance leads to social welfare or
betterment of society.
PERFORMANCE OF MICROFINANCE IN INDIA
Performance of microfinance as on March 31, 2013.

Sr. No. Particulars Cumulative as on March 31,2008
1 No. of SHGs linked to banks 73.18 lakh
2 No. of women groups 59.38 lakh
3 No. of states / UTs 30 STATES
4 Bank Loans (Rs. In billion)
Average Loan / SHG Rs
8217.25 crore rupees
88455.31 per SHG
5 No. of poor Households assisted (in million)


LEAD BANK SCHEME (LBS) ::
The RBI introduced Lead Bank Scheme in 1969, based on the recommendations of
the Gadgil Study Group.
The basic idea was to have an area approach for targeted and focused banking.
Under the Scheme, each district had been assigned to different banks (public and
private) to act as a consortium leader to coordinate the efforts of banks in the district
particularly in matters like branch expansion and credit planning.
The Lead Bank was to act as a consortium leader for coordinating the efforts of all
credit institutions in each of the allotted districts for expansion of branch banking
facilities and for meeting the credit needs of the rural economy.

DIRECT BENEFIT TRANSFER (DBT) :
The objective of DBT Scheme is to ensure that money under various developmental
schemes reaches beneficiaries directly and without any delay. The scheme has been
launched in the country from January, 2013 and has been rolled out in a phased manner,
starting with 26 welfare schemes, in 43 districts. The scheme is now being extended to
additional 78 districts and additional 3 schemes from 1
st
July, 2013 and would be extended
to the entire country in a phased manner. The Government has also started the transfer of
cash subsidy for domestic LPG Cylinders to Aadhaar linked bank accounts of the customers
with effect from 1
st
June 2013, in 20 districts. About 75 lakh beneficiaries would be
benefited in these Districts. Banks play a key role in implementation of DBT and this
involves four important Steps,
Opening of accounts of all beneficiaries;
Seeding of bank accounts with Aadhaar numbers and uploading on the NPCI map;
Undertaking funds transfer using the National Automated Clearing House Aadhaar
Payment Bridge System (NACH-APBS).
Strengthening of banking infrastructure to enable beneficiary to withdraw money
Banks are ensuring that all beneficiaries have a bank account. All Public Sector Banks
(PSBs) and RRBs have made provision for Aadhaar seeding in the CBS. All PSBs have also
joined the Aadhaar Payment Bridge of National Payments Corporation of India (NPCI).
Banks are also issuing debit cards to beneficiaries. Banks have also started action for
strengthening banking infrastructure and providing business correspondents in areas,
which were so far unserved.
Banks have also been advised to provide an onsite ATM in all the branches in
identified districts and a Debit Card to all beneficiaries to enable him / her to withdraw
the money as per his ease and convenience. Issuance of a Debit Card to all beneficiaries to
enable him / her to withdraw the money as per his ease and convenience will also
strengthen the withdrawal infrastructure.