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General Studies 3 >> Economy

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BANKING SECTOR REFORMS

REFORMS IN PUBLIC SECTOR BANK 


Why in News?

Finance Ministry Asks Banks To Strengthen Balance Sheet, Raise Capital From Market


1. Historical background of Banking reforms

  • One of the objectives of the nationalization of the banks in 1969 was to extend the reach of organized banking services to rural areas and the neglected sections/sectors of society. 
  • Since 1969, there has been a significant spread of the banking habit and a large mobilization of savings by banks. 
  • Banking system also played a major role in widening the entrepreneurial base of the country. However, by ‘the eighties, it was clear that the operational efficiency was unsatisfactory. 
  • Banks were characterized by low profitability with high and growing non-performing assets. 
  • There was a problem of low capital base and also a belief that with Government ownership, there was little to worry about a low capital base. 
  • More important, the lack of proper disclosure norms led to many problems being kept under cover.
  • Poor internal controls raised serious doubts about the integrity of the system itself. 
  • The quality of customer service did not keep pace with increasing expectations. There was a feeling that the inefficiency of the banking system was encouraging the diversion of domestic financial savings away from banks. 
  • No doubt, a series of reform measures were undertaken in 1985 but the first phase of comprehensive reforms in the banking sector can be traced to the 1991 Report of the Committee on the Financial System, i.e., Narasimham Committee I. 
  • These reforms were undertaken in parallel with and as an important element of the overall economic reforms of the ‘nineties.

What is Manthan 2022 all about

  • Manthan 2022 was held to brainstorm with the top leadership of public sector banks and unlock next-generation reforms.

 

 

 

2. Innovative banking reforms undertaken

    • Dial-a-loan: Digitally-enabled doorstep facilitation for initiation of retail and MSME loans. Customers will have the facility to register loan requests through digitally-enabled channels
  •  Partnerships with FinTechs and E-commerce companies for customer-need-driven credit
    •  Credit@click: End-to-end digitalised, time-bound retail and MSME lending by larger PSBs, leveraging Account Aggregators, FinTechs and PSBloansin59minutes.com etc.
  •  Tech-enabled agriculture lending
  •  Palm banking: End-to-end digitized delivery of a full bouquet of financial services in regional languages and with industry-best service quality
  •  EASE Banking Outlets: On-the-spot banking at frequently visited places such as train stations, bus stands, malls, hospitals, etc. through paperless and digitally-enabled banking outlets and kiosks

 

Major initiatives in the banking sector leading to financial inclusion

  • Bank Board Bureau

      • To improve the Governance of Public Sector Banks (PSBs), the Government had decided to set up an autonomous Banks Board Bureau. 
      • The Bureau will recommend for selection of heads of Public Sector Banks and help Banks in developing strategies and capital raising plans. 
      • The Banks Board Bureau has three ex-officio members and three expert members in addition to Chairman. Except for ex-officio members, all the Members and Chairman are part-time. 
  • Capital for Public Sector Banks (PSBs)

  • Under the Indradhanush Plan, action related to (i) Appointment (ii) Bank Board Bureau (iii) Capitalization (iv) De-stressing PSBs (v) Empowerment (vi) Framework of Accountability (vii) Governance Reforms has been initiated by the Government.
      • Further, the Government of India had proposed to make available Rs.70,000 crore out of budgetary allocations for four years.
      • Further, the Government has allowed all PSBs to raise capital from Public markets through Follow-on Public offers (FPO) based on specific criteria.
  • BRICS Interbank Co-operation Mechanism

      • EXIM Bank is the nominated member development bank from India under the BRICS Interbank Cooperation Mechanism. 
      • The Bank entered into a multilateral general cooperation agreement with the New Development Bank, along with other development banks of the BRICS nations. 
  • Conversion of Kisan Credit Card (KCC) into RuPay KCCs

      • The Government has been closely monitoring the progress of conversion of Kisan Credit Cards (LCCs) to RuPay ATM cum Debit Kisan Credit Cards (RKCCs). 
      • NABARD will coordinate the conversion of the operative/live KCCs into RKCCs by Cooperative Banks and Regional Rural Banks (RRBs) in a mission mode.
  • The Negotiable Instruments (Amendment) Act, 2015

      • The Negotiable Instruments (Amendment) Act, 2015 has been notified in the Gazette of India, Extraordinary.
      • The Amendment Act is focused on clarifying the jurisdiction-related issues for filing cases for offences committed under section 138 of the Negotiable Instruments Act (NI Act). (Cheque bounce cases)
  • The Payment and Settlement Systems (Amendment) Act, 2015

      • The Amendment Act, inter-alia, sought to introduce reforms to increase transparency and stability of Indian financial markets in line with globally accepted norms. 
      • The Payment and Settlement Systems Act, 2007 was enacted to provide a sound legal basis for the regulation and supervision of payment systems in India by the Reserve Bank of India.
  • Regional Rural Banks (Amendments) Act, 2015

      • Regional Rural Banks (RRBs) were established under Regional Rural Banks Act, 1976 (the RRB Act) to create an alternative channel to the cooperative credit structure and to ensure sufficient institutional credit for the rural and agriculture sector. 
      • RRBs are jointly owned by the Government of India, the concerned State Government and Sponsor Banks. Given the growing role of RRBs in extending banking services in rural areas, a need to amend the Regional Rural Banks Act, 1976 was felt.
  • Card acceptance infrastructure

      • To augment card acceptance infrastructure for use of debit cards, a major drive was undertaken and  PoS terminals have been sanctioned from the Financial Inclusion Fund by NABARD.
  • Debt Recovery Tribunals

    • The Recovery of Debts Due to Banks and Financial Institutions (RDDB & FI) Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002 were amended by the Enforcement of Security Interest and Recovery of Debts Laws & Miscellaneous Provisions (Amendment) Act, 2016 to rationalize the procedures and timelines followed by these Tribunals for expeditious adjudication and speedier resolution of defaulted loans in time bound manner.

 

  1. What shall capitalisation means to banks
  • The prudential requirements imposed on banks to protect the deposits and ensure systemic stability do imply a cost to the banks. 
  • In a way, this additional cost may give a relative advantage to financial intermediaries other than banks and capital markets. 
  • We should recognise that banks continue to be special in terms of distinct functions they perform as the core payments mechanism and as repositories of the economy’s immediate liquidity. 
  • Thus, the policy has to ensure a balance between banks and non-banks - in terms of regulatory impact. 
  • Additional Capital Requirements The additional capital adequacy requirements announced in line with the recommendations of Narasimham Committee II and the normal expansion of banks’ business will require banks to explore various sources for enhancing their capital. Their efforts could impact the mix of public-private ownership of banks.

Need of the Hour

  • First, the internal control systems should be reformed in the banks, especially Public Sector Banks. 
  • Second, the placement, work practices etc., which inhibit incentives for efficiency and improved customer service. 
  • Third, flexibility in obtaining and enhancing highly skilled or talented people. 
  • Fourth, introduction and effective use of technology in banks, especially public sector banks.

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