FINANCIAL INSTITUTIONS AND MARKETS

Initiatives taken by the RBI to reform

the banking Sector in India

Executive summary:

The Reserve Bank of India is the Central Bank of India, which means it is at the apex of the banking
structure of the economy. It is one of the main governing body and regulatory body in India and
helps the government in its role as a business facilitator.

The current state of Indian banking sector:

Source: www.IBEF.com

Contemporary relevance relating to the evolving role of RBI

RBI has been evolving in recent years according to the changing environment and
technological advances. Some of the evolving role of RBI are:

• Adaptation of central banking - changes in legislative measures and operating

procedures

• Autonomy to the central bank particularly in the areas of monetary management and
financial regulation

• Transparent communications policy and a broad based consultative approach to policy

making is seen in governors’ speeches and appearances on the electronic media and the
press.
 • Financial and external sectors in India have become more efficient and resilient

• Effectiveness of monetary policy has improved in recent years.

The 4 R’s approach

• To strengthen banks and foster a culture of clean and responsible banking, the
Government has followed a comprehensive 4 R’s approach -

• Recognition,

• Resolution,

• Recapitalization and

• Reforms

This approach is used in the following way-

• Recognition of restructured standard assets as NPAs

• Resolution process has been strengthened by changing the creditor-debtor relationship

through the Insolvency and Bankruptcy Code and debarment of wilful defaulters and
connected persons,

• Recapitalisation, total mobilisation of capital in PSBs

• Reforms have accompanied recapitalisation in the form of a comprehensive PSB

Reforms Agenda that addresses the root causes of poor asset quality and commits banks
to clean lending and rolling out of next-generation banking services by leveraging
benefits of technology and formalisation of the economy.

Some of the reforms that were established by RBI are:

• Increasing access to banking services from home and mobile through digital banking
and enhanced customer ease,

• Enabling easy accessibility to senior citizens and the differently-abled, through online
update of pension life certificates, etc.

• Instituting efficient practices for effective coordination in large consortium loans by

restricting number of lenders in consortium and by adoption of standard operating
procedures
• Strict segregation of pre- and post-sanction roles and responsibilities for enhanced
accountability,

• Ring-fencing of cash flows and use of technology and analytics for comprehensive
diligence across data sources for prudent lending

• Institution of transparent and robust one-time settlement mechanism with automated

escalation and monitoring,

• Monitoring of loans above ₹250 crores through specialised agencies for effective vigil,

• Establishment of stressed asset management verticals in banks for focused recovery and
timely and effective management of stressed accounts

• Institution and implementation of a risk appetite framework

• A structured approach to manage, measure and control risk and check aggressive and
imprudent lending,

• Monetisation of non-core assets for strengthening x. capital base,

• Enabling faster bill realisation for MSMEs through discounting by banks on the Trade
Receivables electronic Discounting System (TReDS),

• Enabling proactive reach-out to borrowers and stepping-up cluster-based financing to

MSMEs, and

• Developing human resources by rewarding top performers and enabling specialisation

through job-families, and role based learning for executives.

Some recent initiatives of RBI in banking sector are:

RBI revised exposure limits for urban cooperative banks (UCBs) ( w.e.f 13.03.2020)

• The exposure limits are revised by RBI as 15% for single borrower and 25% for a group
of borrowers of Tier-I capital.

• Previously the exposure levels were up to 15% and 40% of their capital funds to a single
borrower and a group of borrowers, respectively.

• This initiative is expected to reduce credit concentration risk of the UCBs and promote
financial inclusion.
• A concentration of credit consists of direct, indirect, or contingent obligations
exceeding 25 percent of a bank's capital structure.

The Reserve Bank of India (RBI) unveiled a National Strategy for

Financial Inclusion 2019-24. (w.e.f Feb 22,2020)

• This strategic initiative is aimed at providing access to formal financial services in an

affordable manner.

• It aims to promote financial literacy among customers.

• Every adult registered under Pradhan Mantri Jan Dhan Yojana (PMJDY) should be
enrolled in insurance, pension schemes.

• This approaches to provide access to financial service provides in every village within
a range of 5 km.

• The public credit registry should be made fully operational by March 2022 to strengthen
the digital financial services to facilitate less-cash society.

Amalgamation of PSUs ( w.e.f. 01.04.2020)

• This amalgamation is undertaken to increase their ability to support larger lending and
greater financial capacity.

• Consolidation of ten Public Sector Banks (PSBs) into four-

• amalgamation of Oriental Bank of Commerce (OBC) and United Bank of India

into Punjab National Bank (PNB)

• amalgamation of Syndicate Bank into Canara Bank

• amalgamation of Andhra Bank and Corporation Bank into Union Bank of India

• amalgamation of Allahabad Bank into Indian Bank

• aimed to create seven large PSBs with scale and national reach, with each amalgamated
entity having a business of over Rs.8 lakh crore.

Significant benefits of this amalgamation are -

• Leads to cost benefits due to centralization

• To enable the PSBs to enhance their competitiveness and positively impact the Indian
banking system.

• increasing their ability to support larger lending and greater financial capacity.

• Enables the banks to improve their cost efficiency and risk management, and thus,
boosting the goal of financial inclusion through wider reach.

• It will lead to adopting technologies across the amalgamating banks, access to a wider
talent pool, and a larger database.

RBI's new moto (Feb 2020)

“cash is king, but digital is divine”

◉ RBI’s endeavour will be to make digital payments a divine experience for the users
after being buoyed by over ₹3.5 lakh crore reduction in the notes in circulation (NIC)
post demonetisation.

◉ although cash is deeply embedded in the payment systems in India, planned efforts
post-demonetisation have shown a marked shift from cash to digital payments.

◉ NIC (notes in circulation), however, was ₹22,31,090 crore, indicating that digitalisation
and reduction in cash usage helped reduce NIC by over ₹ 3.5 lakh crore.

◉ To create a digital payment index (DPI) by July 2020. This index will indicate the level
of digitalization prevailing in the country.

◉ DPI will help the regulator and government to understand the adoption of digital
payments in the country.

◉ The DPI by RBI will be based on multiple parameters. It will reflect the penetration
and deepening of various digital payment modes

◉ It is expected that DPI's benchmark will reflect the progress of digitization in the
country.

◉ DPI data will have a classification of urban, semi-urban and rural geographies to
analyse the kind of digital payments that are gaining acceptance.
 ◉ The government and central bank have been working on enabling the adoption of
cashless payment modes that include, digital mobile wallets, debit and credit cards,
internet banking and the Unified Payments Interface (UPI) system.

CONCLUSION

RBI has continuously taken several steps to improve the banking system in India. There has
been a significant improvement in the functioning of RBI and the monetory policy from the
last decade. However, RBI must make sure that these initiatives are visible to everyone and is
sustainable for a long time.