Indian Banks : Trends and Progress, RBI

Report on Trend and Progress of Banking in India for the year ended
June 30, 2012 submitted to the Central Government in terms of
Section 36(2) of the Banking Regulation Act, 1949

REPORT ON TREND AND PROGRESS
OF BANKING IN INDIA 2011-12

RESERVE BANK OF INDIA

Sale Price:
In India – ` 150 (Normal)
– ` 190 (Inclusive of Postal Charges)
– ` 110 (Concessional – at Counter)
– ` 150 (Concessional – Including Postage)
Abroad – US$ 12 (Inclusive of Air Mail Courier Charges)

© Reserve Bank of India 2012
All rights reserved. Reproduction is permitted provided an acknowledgement of the source is made.

Published by Sanjay Kumar Hansda for the Reserve Bank of India, Mumbai 400 001 and designed and printed
by him at Alco Corporation, A2/73, Shah and Nahar Industrial Estate, Lower Parel (W), Mumbai - 400 013

Contents

Sr. No. Particulars Page No.

Chapter I: Perspectives on the Indian Banking Sector ...............................................
1. Introduction .................................................................................................... 1
2. Forces Shaping the Environment..................................................................... 1
3. Operational and Strategic Responses ............................................................ 3
4. Challenges ....................................................................................................... 6
5. The Way Forward............................................................................................. 9
Chapter II: Global Banking Developments .................................................................
1. Introduction .................................................................................................... 10
2. Global Banking Trends ................................................................................... 11
3. Banking Trends in Select Regions and Countries ............................................ 15
4. Analysis of the Performance of Top 100 Global Banks .................................... 21
5. Global Policy Reforms ..................................................................................... 24
6. Overall Assessment ......................................................................................... 25
Chapter III: Policy Environment...............................................................................
1. Introduction .................................................................................................... 27
2. Monetary Policy ............................................................................................... 28
3. Credit Delivery ................................................................................................ 29
4. Financial Inclusion .......................................................................................... 34
5. Prudential Regulatory Policy ............................................................................ 35
6. Supervisory Policy ........................................................................................... 40
7. Regional Rural Banks ...................................................................................... 42
8. Co-operative Banks ......................................................................................... 43
9. Non-Banking Financial Companies.................................................................. 44
10. Customer Service in Banks ............................................................................. 44
11. Financial Markets............................................................................................ 46
12. Payment and Settlement Systems .................................................................... 47
13. Technological Developments............................................................................ 50
14. Banking Sector Legislation .............................................................................. 50
Chapter IV: Operations and Performance of Commercial Banks .................................
1. Introduction .................................................................................................... 54
2. Balance Sheet Operations of Scheduled Commercial Banks............................ 54
3. Financial Performance of Scheduled Commercial Banks ................................. 60
4. Soundness Indicators...................................................................................... 62


5. Sectoral Deployment of Bank Credit ............................................................... 72
6. Operations of Scheduled Commercial Banks in Capital Market ...................... 75
7. Shareholding Pattern in Scheduled Commercial Banks .................................. 78
8. Foreign Banks’ Operations in India and Overseas Operations of Indian Banks 78
9. Technological Developments in Scheduled Commercial Banks ....................... 79
10. Customer Service ............................................................................................ 82
11. Financial Inclusion .......................................................................................... 84
12. Local Area Banks ............................................................................................ 88
13. Regional Rural Banks ...................................................................................... 90

Chapter V: Developments in Co-operative Banking ....................................................
1. Introduction .................................................................................................... 93
2. Urban Co-operative Banks .............................................................................. 94
3. Rural Co-operatives ........................................................................................ 104
4. Progress on Licensing of Rural Co-operatives.................................................. 113
5. Progress relating to Revival of Rural Co-operatives ......................................... 116
6. Progress relating to Rural Credit Measures that have Specific Implications for
Co-operatives .................................................................................................. 118

Chapter VI: Non-Banking Financial Institutions ........................................................
1. Introduction .................................................................................................... 120
2. Financial Institutions ...................................................................................... 120
3. Non-Banking Financial Companies.................................................................. 124
4. Primary Dealers .............................................................................................. 138

vi

List of Boxes


I.1 Technological Innovations and Efficiency Gains in the Banking Sector ........... 4

I.2 Bilateral Memorandum of Understanding (MoU) with Reserve Bank’s
Overseas Counterparts for Improved Cross-Border Supervision and Co-
operation ........................................................................................................ 5

II.1 Issues in LIBOR Fixation and Implications for Banks .................................... 15

II.2 Eurozone Crisis and the Sovereign-Bank Nexus: Sovereign Rating
Downgrades and Implications for Global Banking System ............................. 18

III.1 Unique Customer Identification Code for Banks’ Customers in India ............. 39

III.2 White-Label ATMs (WLAs) .............................................................................. 49

IV.1 What Drives the Profitability of Indian Banks?: A Du Pont Analysis for Bank
Groups ........................................................................................................... 63

IV.2 Bank Lending to Infrastructure and Asset-Liability Mismatches: How Strong
is the Linkage? ............................................................................................... 74

IV.3 Priority Sector Lending – is there a Bias towards Bigger Credit Needs?.......... 76

IV.4 Changing Trend of the Payment Systems from Cash to Cashless .................... 81

V.1 An Analysis of Market Concentration within the UCB Sector .......................... 98

V.2 Weakening Long-Term Co-operative Credit Structure: A Comparative
Analysis of the Apex-Level Institutions............................................................ 113

V.3 Reforms for the Revival of Short-term Rural Co-operatives ............................ 117

VI.1 Micro Finance Institutions (Development and Regulation) Bill, 2012 and its
Impact on Microfinance Sector ....................................................................... 126

VI.2 Guidelines on Fair Practices Code for NBFCs ................................................. 133

vii

List of Tables

Sr.No. Particulars Page No.

II.1 Return on Assets of Banks for Select Countries ............................................. 13
II.2 Growth in International Assets and Liabilities of Banks ................................. 15
II.3 Capital to Risk-Weighted Assets Ratio of Banks in Select Countries ............... 16
III.1 Agricultural Debt Waiver and Debt Relief Scheme .......................................... 32
III.2 Phase-wise Timeline for Basel III Implementation .......................................... 36
IV.1 Consolidated Balance Sheet of Scheduled Commercial Banks ....................... 55
IV.2 Growth in Balance Sheet of Scheduled Commercial Banks ............................ 56
IV.3 Non-SLR Investments of Scheduled Commercial Banks ................................. 57
IV.4 International Liabilities of Banks - by Type .................................................... 58
IV.5 International Assets of Banks Classified by Type ............................................ 58
IV.6 Maturity (Residual) and Sectoral Classification of Consolidated International
Claims of Banks ............................................................................................. 59
IV.7 Consolidated International Claims of Banks on Countries other than India ... 59
IV.8 Bank Group-wise Maturity Profile of Select Liabilities/Assets
(As at end-March) ........................................................................................... 61
IV.9 Trends in Income and Expenditure of Scheduled Commercial Banks ............ 62
IV.10 Return on Assets and Return on Equity of SCBs – Bank Group-wise ............. 62
IV.11 Cost of Funds and Returns on Funds - Bank Group-wise ............................... 64
IV.12 Capital to Risk-Weighted Assets Ratio under Basel I and II – Bank Group-wise
(As at end-March) ........................................................................................... 65
IV.13 Component-wise Capital Adequacy of SCBs (As at end-March)....................... 65
IV.14 Trends in Non-Performing Assets - Bank Group-wise..................................... 67
IV.15 NPAs of SCBs Recovered through Various Channels ....................................... 69
IV.16 Details of Financial Assets Securitised by SCs/RCs ........................................ 69
IV.17 Trends in Provisions for Non-Performing Assets – Bank Group-wise ............. 70
IV.18 Classification of Loan Assets - Bank Group-wise ............................................ 70
IV.19 Sector-wise NPAs of Domestic Banks ............................................................. 72
IV.20 Sectoral Deployment of Gross Bank Credit .................................................... 73
IV.21 Priority Sector Lending by Banks (As on last reporting Friday of March 2012) 75
IV.22 Retail Portfolio of Banks ................................................................................. 77
IV.23 Public Issues from the Banking Sector ........................................................... 77
IV.24 Resources Raised by Banks through Private Placements ................................ 77
IV.25 Risk-Return Performance, Turnover and Capitalisation of Bank Stocks ......... 77
IV.26 Number of Public Sector Banks Classfied by Percentage of Private
Shareholding (As at end-March 2012) ............................................................ 78

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IV.27 Overseas Operations of Indian Banks (As at end-March) ................................ 79
IV.28 ATMs of Scheduled Commercial Banks (As at end-March 2012) .................... 80
IV.29 Credit and Debit Cards Issued by Scheduled Commercial Banks
(As at end-March) ........................................................................................... 80
IV.30 Volume and Value of Electronic Transactions by SCBs ................................... 82
IV.31 Region-wise Complaints Received at Banking Ombudsman Offices ................ 83
IV.32 Select Indicators of Financial Inclusion-Cross Country Comparison .............. 84
IV.33 Region-wise and Population Group-wise New Bank Branches Opened
During 2011-12 .............................................................................................. 85
IV.34 Number of ATMs of SCBs at Various Locations (At end-March 2012) ............. 86
IV.35 Progress in Road Map for Providing Banking Outlets in Villages with
Population of more than 2000 (As on March 31, 2012) .................................. 86
IV.36 Progress under Financial Inclusion Plans ....................................................... 88
IV.37 Progress of Micro-finance Programmes (As at end-March) ............................. 88
IV.38 Profile of Local Area Banks (As at end-March) ............................................... 89
IV.39 Financial Performance of Local Area Banks ................................................... 89
IV.40 Consolidated Balance Sheet of Regional Rural Banks..................................... 90
IV.41 Financial Performance of Regional Rural Banks ............................................. 90
IV.42 Purpose-wise Distribution of Credit from Regional Rural Banks .................... 91
V.I Tier-wise Distribution of Urban Co-operative Banks (As at end-March 2012) 96
V.2 Rating-wise Distribution of UCBs (As at end-March 2012) ............................. 96
V.3 Distribution of UCBs by Deposits and Advances ............................................ 97
V.4 Liabilities and Assets of Urban Co-operative Banks ....................................... 99
V.5 Investments by Urban Co-operative Banks ..................................................... 100
V.6 Financial Performance of Scheduled and Non-Scheduled Urban Co-operative
Banks (As at end-March 2012) ....................................................................... 101
V.7 Select Indicators of Profitability of UCBs ........................................................ 101
V.8 Non-Performing Assets of UCBs ..................................................................... 102
V.9 Distribution of UCBs by CRAR (At end-March 2012) ...................................... 102
V.10 Composition of Credit to Priority Sectors by UCBs (As at end-March 2012).. 103
V.11 Distribution of Districts and Banking Business of UCBs across Regions ........ 104
V.12 Volume of Banking Business per Branch for UCBs by Region ........................ 104
V.13 A Profile of Rural Co-operatives (As at end-March 2011)................................ 105
V.14 Liabilities and Assets of State Co-operative Banks (At end-March 2011) ........ 106

ix


V.15 Trends in Select Balance Sheet Indicators of Scheduled State Co-operative
Banks ............................................................................................................. 106
V.16 Financial Performance of State Co-operative Banks ....................................... 106
V.17 Soundness Indicators of State Co-operative Banks ........................................ 107
V.18 Liabilities and Assets of District Central Co-operative Banks ......................... 108
V.19 Financial Performance of District Central Co-operative Banks ....................... 108
V.20 Soundness Indicators of District Central Co-operative Banks ........................ 109
V.21 Primary Agricultural Credit Societies - Select Balance Sheet Indicators ......... 110
V.22 Liabilities and Assets of State Co-operative Agriculture and Rural
Development Banks ....................................................................................... 112
V.23 Financial Performance of State Co-operative Agriculture and Rural
V.24 Asset Quality of State Co-operative Agriculture and Rural Development
Banks ............................................................................................................. 114
V.25 Liabilities and Assets of Primary Co-operative Agriculture and Rural
V.26 Financial Performance of Primary Co-operative Agriculture and Rural
V.27 Asset Quality of Primary Co-operative Agriculture and Rural Development
Banks ............................................................................................................. 116
VI.1 Ownership Pattern of Financial Institutions (As on March 31, 2012).............. 120
VI.2 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 121
VI.3 Liabilities and Assets of Financial Institutions (As at end-March) ................... 121
VI.4 Resources Mobilised by Financial Institutions ................................................ 122
VI.5 Resources Raised by Financial Institutions from Money Market (As at end-
March 2012) .................................................................................................. 122
VI.6 Pattern of Sources and Deployment of Funds of Financial Institutions ........... 122
VI.7 Weighted Average Cost and Maturity of Rupee Resources Raised by Select
Financial Institutions ..................................................................................... 123
VI.8 Long-term PLR Structure of Select Financial Institutions ............................... 123
VI.9 Financial Performance of Select All India Financial Institutions ..................... 123
VI.10 Select Financial Parameters of Financial institutions...................................... 123
VI.11 Net Non-Performing Assets (As at end-March) ................................................ 124
VI.12 Asset Classification of Financial Institutions .................................................. 124
VI.13 Capital to Risk (Weighted) Assets Ratio of Select Financial Institutions
(As at end-March) ........................................................................................... 125
VI.14 Ownership Pattern of NBFCs (As on March 31, 2012) .................................... 127

x


VI.15 Profile of NBFCs ............................................................................................. 127
VI.16 Consolidated Balance Sheet of NBFCs-D ........................................................ 128
VI.17 Major Components of Liabilities of NBFCs-D by Classification of NBFCs ....... 128
VI.18 Public Deposits held by NBFCs-D by Deposit Ranges ..................................... 129
VI.19 Public Deposits held by NBFCs-D - Region-wise ............................................. 129
VI.20 Public Deposits held by NBFCs-D - Deposit Interest Rate Range-wise ............ 130
VI.21 Maturity Pattern of Public Deposits held by NBFCs-D .................................... 130
VI.22 Sources of Borrowings by NBFCs-D by Classification of NBFCs ..................... 131
VI.23 Major Components of Assets of NBFCs-D by Classification of NBFCs ............ 131
VI.24 Assets of NBFCs-D by Asset-Size Ranges (As at end-March) ........................... 131
VI.25 Break-Up of Assets of NBFCs-D by Activity..................................................... 132
VI.26 Financial Performance of NBFCs-D ................................................................ 132
VI.27 NPA Ratios of NBFCs-D .................................................................................. 132
VI.28 NPAs of NBFCs-D by Classification of NBFCs ................................................. 133
VI.29 Classification of Assets of NBFCs-D by Category of NBFCs............................. 134
VI.30 Capital Adequacy Ratio of NBFCs-D ............................................................... 135
VI.31 Net Owned Fund vis-à-vis Public Deposits of NBFCs-D by Classification ....... 135
VI.32 Range of Net Owned Fund vis-à-vis Public Deposits of NBFCs-D ................... 135
VI.33 Profile of RNBCs............................................................................................. 136
VI.34 Public Deposits Held by RNBCs - Region-wise ................................................ 136
VI.35 Investment Pattern of RNBCs ......................................................................... 136
VI.36 Consolidated Balance Sheet of NBFCs-ND-SI ................................................. 137
VI.37 Borrowings of NBFCs-ND-SI Sector by Region ............................................... 137
VI.38 Financial Performance of NBFCs-ND-SI Sector .............................................. 138
VI.39 NPA Ratios of NBFCs-ND-SI Sector ................................................................ 138
VI.40 Capital Adequacy Ratio of NBFCs-ND-SI - By Type of NBFC .......................... 138
VI.41 Bank Exposure of NBFCs-ND-SI Sector ......................................................... 138
VI.42 Performance of the PDs in the Primary Market (At end-March) ...................... 139
VI.43 Performance of Standalone PDs in the Secondary Market (At end-March) ...... 139
VI.44 Sources and Applications of Funds of Standalone Primary Dealers ................ 140
VI.45 Financial Performance of Standalone Primary Dealers ................................... 140
VI.46 Financial Indicators of Standalone PDs .......................................................... 140
VI.47 CRAR of the standalone PDs (At end-March) .................................................. 140

xi

List of Charts


II.1 Global Macroeconomic Trends ....................................................................... 11
II.2 Three-Month Moving Average of Bank Credit Growth, in per cent .................. 12
II.3 Sovereign and Bank CDS Spreads in Select Economies ................................. 13
II.4 Bank Stock Indices in Select Economies/Economy Groups ............................ 14
II.5 Leverage in the Banking Systems of Select Economies ................................... 16
II.6 Asset quality of Banks in Select Economies.................................................... 16
II.7 Progress in the US Banking System ............................................................... 17
II.8 Sectoral Credit and Delinquency of US Banks ................................................ 17
II.9 European Banks Funding Structure and Inter-Bank Market .......................... 19
II.10 LTRO and Loans to Private Sector in the Euro Area ....................................... 20
II.11 European Banks’ Exposure to Greece ............................................................ 20
II.12 UK Banks’ Lending to Private Non-Financial Corporations ............................. 21
II.13 Chinese Banking Indicators............................................................................ 21
II.14 Location of Global Banking Statistics ............................................................. 21
II.15 Share of Countries in Total Assets of Top 100 Global Banks .......................... 22
II.16 Percentage Distribution of Top 100 Global Banks by Return on Assets .......... 22
II.17 Percentage Distribution of Top 100 Global Banks By CRAR ........................... 22
II.18 Percentage Distribution of Top 100 Global Banks by Capital to Assets
Ratio (CR) ...................................................................................................... 23
II.19 Percentage Distribution of Top Global Banks by NPL Ratio ............................ 23
II.20 Changes in Soundness Indicators of Top Global Banks.................................. 23
IV.1 Share of Bank Groups in Total Liabilities/Assets of SCBs (end-March 2012) . 56
IV.2(A) Share of CASA Deposits in Total Deposits (end-March) .................................. 57
IV.2(B) Composition of Deposits (end-March 2012) ................................................... 57
IV.3 Incremental C-D and I-D Ratios of SCBs ........................................................ 59
IV.4 Bank Group-wise Incremental C-D and I-D Ratios (end-March 2012) ............ 60
IV.5 Trend in Maturity Profile of Assets and Liabilities (as at end-March).............. 60
IV.6 Off-balance Sheet Exposure (notional) as percentage of On-balance sheet
Liabilities (as at end-March) ........................................................................... 61
IV.7 Trend in Efficiency Indicators ........................................................................ 64
IV.8(A) Cost of Funds ................................................................................................. 65
IV.8(B) Return on Funds ............................................................................................ 65
IV.9(A) Distribution of Banks According to CRAR (end-March 2012) ......................... 66
IV.9(B) Tier I CRAR of PSBs (end-March 2012) .......................................................... 66

xii


IV.10 Trend in Capital Adequacy (end-March 2012) ................................................ 66
IV.11 Growth Rates of NPAs vis-à-vis Advances....................................................... 66
IV.12 Gross NPAs as Percentage of Gross Advances ................................................ 67
IV.13 Trend in Important Ratios Relating to NPAs ................................................... 68
IV.14 Bank Group-wise Ratios Relating to NPAs (end-March 2012) ......................... 68
IV.15 Restructured Advances as per cent of Gross Advances
of SCBs (end-March) ..................................................................................... 68
IV.16 Restructured Advances as per cent of Gross Advances:
Bank Group-wise (end-March) ....................................................................... 69
IV.17(A) Gross NPA Ratio (Priority Sector): Bank Group-wise ..................................... 71
IV.17(B) Gross NPA Ratio (Non-Priority Sector) Bank Group-wise ............................... 71
IV.18 Percentage Composition of NPAs of SCBs (end-March 2011 and 2012) .......... 71
IV.19 Trend in Infrastructure Credit........................................................................ 73
IV.20 Priority Sector Lending by Public Sector Banks (end-March 2012) ................ 75
IV.21 Relative Performance of Bankex and BSE Sensex 2011-12............................. 78
IV.22 Government Shareholding in Select Public Sector Banks
(end-March 2012)........................................................................................... 78
IV.23(A) Number of Credit / Debit Cards Outstanding .................................................. 80
IV.23(B) Share of Bank Groups in Total Credit / Debit Cards (as at end-March 2012) . 80
IV.24(A) Bank Group-wise Break-up of Major Complaint Types 2011-12 ..................... 83
IV.24(B) Share of Bank Groups in Total Complaints .................................................... 83
IV.25(A) Share of Population Groups in Increment of ATMs: 2011-12 ......................... 85
IV.25(B) Share of Regions in Total Number of New ATMs opened: 2011-12 ................. 85
IV.26(A) Share of Bank Groups in News Banking Outlets Opened in Villages with
Population >2000 (end-March 2012) ............................................................. 87
IV.26(B) Composition of Public Sector Banks having Banking Outlets in Villages with
Population >2000 (end-March 2012) ............................................................. 87
IV.27 Trend in Profitability of RRBs ........................................................................ 90
V.1 Structure of Co-operative Credit Institutions in India (As at end-March 2012) 94
V.2 Number and Composition of UCBs based on Financial Strength .................... 95
V.3 Progress of Consolidation of the UCB Sector in Each State,
At end-March 2012 ........................................................................................ 95
V.4 Tier-wise Composition of UCBs ...................................................................... 96
V.5 Distribution of UCBs by Size of Assets ........................................................... 97
V.6 Growth in Assets of UCBs .............................................................................. 99

xiii


V.7 Share of Scheduled and Non-Scheduled UCBs in Total Assets of UCB Sector 100
V.8 Credit-Deposit and Investment-Deposit Ratios for UCBs compared with SCBs 100
V.9 Gross NPA Growth and Ratio ......................................................................... 101
V.10 Provisioning Coverage Ratio of UCBs ............................................................. 102
V.11 Distribution of UCBs by CRAR, 2012 ............................................................. 102
V.12 Percentage Distribution of Credit to Select Priority Sectors by UCBs.............. 103
V.13 Percentage Distribution of Credit to Weaker Sections by UCBs....................... 103
V.14 Composition of Rural Co-operative Credit Structure by Short and Long-term
Credit Co-operatives ...................................................................................... 104
V.15 Profitability of Rural Co-operative Credit Institutions ..................................... 105
V.16 Indicators of Financial Health of StCBs .......................................................... 107
V.17 Financial Health of StCBs by Region .............................................................. 108
V.18 Indicators of Financial Health of DCCBs ........................................................ 109
V.19 Financial Health of DCCBs by Region ............................................................. 109
V.20 Comparison of Financial Health of StCBs and DCCBs ................................... 110
V.21 Growth in Credit Outstanding from PACS ...................................................... 110
V.22 Borrower-to-Member Ratio of PACS ............................................................... 111
V.23 Percentage of PACS in Profit and Loss ............................................................ 111
V.24 Comparison of NPA Ratio of SCARDBs with other Co-operative and
Commercial Banking Institutions ................................................................... 114
V.25 A Regional Comparison of Financial Health of SCARDBs ............................... 114
V.26 Profitability Indicators of PCARDBs ............................................................... 115
V.27 Financial Health of PCARDBs compared with SCARDBs ................................ 116
V.28 Shares of Rural Credit Institutions in Total KCCs issued ............................... 118
V.29 Share of Rural Credit Institutions in Direct Agricultural Credit ...................... 118
VI.1 Number of NBFCs Registered with the Reserve Bank ..................................... 127
VI.2 Ratio of Public Deposits of NBFCs to Broad Liquidity (L3) and Aggregate
Deposits of SCBs ............................................................................................ 127
VI.3 Share of Public Deposits held by NBFCs-D by deposits Ranges ...................... 129
VI.4 Share of Public Deposits held by NBFCs-D: Region-wise ................................ 129
VI.5 Public Deposits held by NBFCs-D - Deposit Interest Rate Range-wise
(Per cent) ........................................................................................................ 130
VI.6 Maturity Pattern of Public Deposits held by NBFCs-D (Per cent) .................... 130
VI.7 Financial Performance of NBFCs-D ................................................................ 132

xiv

List of Appendix Tables


IV.1 Indian Banking Sector at a Glance ................................................................. 142

IV.2 Off-Balance Sheet Exposure of Scheduled Commercial Banks in India .......... 143

IV.3 Bank Group-wise Lending to the Sensitive Sectors ........................................ 144

IV.4 Share Prices and Price/ Earning Ratios of Bank Stocks at BSE
(As on the last Reporting Friday of March) ..................................................... 145

IV.5 Shareholding Pattern of Domestic Scheduled Commercial Banks
(As at end-March 2012) .................................................................................. 146

IV.6 Branches and ATMs of Scheduled Commercial Banks
(As at end-March 2012) .................................................................................. 148

IV.7 Statement of Complaints Received at Banking Ombudsman Office ................ 151

IV.8 Credit-Deposit Ratio and Investment plus Credit-Deposit Ratio of Scheduled
Commercial Banks –Region/State-wise ........................................................... 154

V.1 Select Financial Parameters of Scheduled UCBs ............................................ 155

V.2 Major Indicators of Financial Performance of Scheduled UCBs ...................... 156

V.3 State-wise Distribution of UCBs (As at end-March 2012) ............................... 158

V.4 Salient Indicators of Financial Health of State Co-operative Banks - Region
and State-wise (As at end-March) ................................................................... 159

V.5 Salient Indicators of Financial Health of District Central Co-operative Banks -
Region and State-wise (As at end-March) ....................................................... 160

V.6 Select Indicators of Primary Agricultural Credit Societies - State-wise
(As at March 31, 2011)................................................................................... 161

V.7 Salient Indicators of Financial Health of State Co-operative Agriculture and
Rural Development Banks - State-wise (As at end-March) .............................. 163

V.8 Salient Indicators of Financial Health of Primary Co-operative Agriculture and
Rural Development Banks - State-wise (As at end-March) .............................. 164

V.9 Kisan Credit Card Scheme: State-wise Progress (As at end-March 2012) ....... 165

VI.1 Financial Assistance Sanctioned and Disbursed by Financial Institutions ...... 166

VI.2 Financial Performance of Primary Dealers ..................................................... 168

VI.3 Select Financial Indicators of Primary Dealers ............................................... 169

xv

List of Select Abbreviations

AD Authorised Dealer CAS Common Accounting System
ADR American Depository Receipt CASA Current Account and Savings
ADWDR Agricultural Debt Waiver and Account
Debt Relief Scheme CBI Central Bureau of Investigation
AEs Advanced Economies CBLO Collateralised Borrowing and
AFC Asset Finance Companies Lending Obligation
AFI Annual Financial Inspection CBS Core Banking Solutions
AIFIs All-India Financial Institutions CCAR Comprehensive Capital Analysis
and Review
ALM Asset-Liability Management
CCB Capital Conservation Buffer
AMA Advanced Measurement
Approach CCF Credit Conversion Factors
AML Anti-Money Laundering CCP Central Counter Party
ANBC Adjusted Net Bank Credit CD Certificate of Deposit
ARDB Agriculture and Rural CD Ratio Credit to Deposit Ratio
Development Bank CDS Credit Default Swaps
ASA Alternate Standardised Approach CE Common Equity
ATM Automated Teller Machine CEO Chief Executive Officer
BBA British Bankers’ Association CEOBSE Credit Equivalent Amount of
BC Business Correspondent Off-Balance Sheet Exposure
BCBS Basel Committee on Banking CFSA Committee on Financial Sector
Supervision Assessment
BCP Business Continuity Plan CFT Combating Financing of
Terrorism
BCP-DR Business Continuity Planning and
Disaster Recovery CGFS Committee on Global Financial
Stability
BCSBI Banking Codes and Standards
Board of India CGS Credit Guarantee Scheme
BF Business Facilitator CGTMSE Credit Guarantee Fund Trust for
Micro and Small Enterprises
BFS Board for Financial Supervision
BIFR Board for Industrial and CIBIL Credit Information Bureau of
Financial Reconstruction India Limited

BIS Bank for International CIC Credit Information Company
Settlements CICs-ND-SI Systemically Important Core
BO Banking Ombudsman Investment Companies

BoD Board of Directors CICs Core Investment Companies

BoM Board of Management CMB Cash Management Bills

BPR Business Process Re-engineering CMCG Compensation Monitoring
Contact Group
BSE Bombay Stock Exchange Ltd.
CME Capital Market Exposure
CAMELS Capital Adequacy, Asset Quality,
Management, Earnings, Liquidity, CNP Card Not Present
and Systems & Control CoR Certificate of Registration
CAR Capital Adequacy Ratio CP Commercial Paper

xvi

CP Card Present EL Expected Loss
CPSS Committee on Payment and EME Emerging Market Economy
Settlement System EMV Euro pay MasterCard Visa
CR Capital to Assets Ratio ESA European Supervisory
CRAR Capital to Risk-Weighted Assets Authorities
Ratio ESFS European System of Financial
CRAs Credit Rating Agencies Supervisors
CRDIV Capital Requirements Directive IV ESM European Stability Mechanism
CRR Cash Reserve Ratio ESMA European Securities and Markets
CTC Cheque Truncation System Authority

DCCB District Central Co-operative ESRB European Systemic Risk Board
Bank EU European Union
DGA Duration Gap Analysis EURIBOR Euro Inter-Bank Offered Rate
DICGC Deposit Insurance and Credit EWS Economically Weaker Sections
Guarantee Corporation EXIM Bank Export Import Bank of India
DIN Director Identification Number FASB Financial Accounting Standards
DLIC District Level Implementation Board
Committee FATF Financial Action Task Force
DMFC District Micro-Finance FB Foreign Banks
Committee
FCs Financial Conglomerates
DR Disaster Recovery
FCA Financial Conduct Authority
DRT Debt Recovery Tribunal
FCCB Foreign Currency Convertible
DSA Direct Selling Agents Bonds
D-SIB Domestic Systemically Important FCMD Financial Conglomerate
Bank Monitoring Division
EaR Earnings at Risk FCNR (B) Foreign Currency Non-Resident
EBA European Banking Authority (Banks)
EBT Electronic Benefit Transfer FCRA Foreign Contribution (Regulation)
Act
ECCS Express Cheque Clearing System
FDIC Federal Deposit Insurance
ECS Electronic Clearing Service
Corporation
EDEs Emerging and Developing
FEMA Foreign Exchange Management
Economies
Act
EEFC Exchange Earners’ Foreign
FFC Fair Practices Code
Currency
FHC Financial Holding Company
EFSF European Financial Stability
Facility FI Financial Institution
EFSM European Financial Stabilisation FII Foreign Institutional Investments
Mechanism FIP Financial Inclusion Plan
EIOPA European Insurance and FLCC Financial Literacy and Credit
Occupational Pensions Authority Counselling Centres

xvii

FMI Financial Market Infrastructure IBA Indian Banks’ Association
FMU Financial Market Utilities ICAI Institute of Chartered Accountants
FPC Financial Policy Committee of India

FSA Financial Services Authority ICB Independent Commission on
Banking
FSAP Financial Sector Assessment
ICs Investment Companies
Programme
ICICI Industrial Credit and Investment
FSB Financial Stability Board
Corporation of India
FSDC Financial Stability and
ICT Information and Communications
Development Council
Technology
FSLRC Financial Sector Legislative
IDBI Industrial Development Bank of
Reforms Commission
India
FSOC Financial Stability Oversight IDFC-NBFC Infrastructure Debt Fund-Non-
Council Banking Financial Companies
FSR Financial Stability Report ID Ratio Investment-to-Deposit Ratio
GAAP Generally Accepted Accounting IDRBT Institute for Development and
Principles Research in Banking Technology
G-Sec Government Securities IFC Infrastructure Finance Company
GCC General Credit Card
IFRS International Financial Reporting
GDP Gross Domestic Product Standards
GDR Global Depository Receipt IIBI Industrial Investment Bank of
GFSR Global Financial Stability Report India
GHOS Governors and Heads of IL Incurred Loss
Supervision IMA Internal Models Approach
GIC General Insurance Corporation of IMF International Monetary Fund
India
INFINET Indian Financial NETwork
GNPA Gross Non-Performing Assets
IOSCO International Organisation of
G-SIB Global Systemically Important
Securities Commission
Bank
IRB Internal Rating Based
HFCs Housing Finance Companies
HLSC High-Level Steering Committee IRC Incremental Risk Charge

HRM Human Resource Management IRDA Insurance Regulatory and
Development Authority
HR Human Resource
IRSD Interest Rate Sensitivity under
HSBC Hong Kong and Shanghai Duration Gap Analysis
Banking Corporation
ISO Independent Service Organisation
HTM Held to Maturity
IS Information Security
IADs Independent ATM Deployers
IT Information Technology
IAS International Accounting
Standards IVR Interactive Voice Response
IASB International Accounting IWG Internal Working Group
Standards Board JLGs Joint Liability Groups

xviii

KA Key Attributes MSME Micro, Small and Medium
KCC Kisan Credit Card Enterprises

KYC Know Your Customer MVE Market Value of Equity

LAB Local Area Bank NABARD National Bank for Agriculture
and Rural Development
LAF Liquidity Adjustment Facility
NAFSCOB National Federation of State Co-
LCBG Large and Complex Banking
operative Banks
Group
NBFC Non-Banking Financial Company
LCR Liquidity Coverage Ratio
NBFC-D Non-Banking Financial Company-
LCs Loan Companies
Deposit taking
LDB Land Development Bank
NBFC-ND Non-Deposit taking Non-Banking
LEI Long-term Economic Impact Financial Company
LGD Loss Given Default NBFC-ND- Systemically Important Non-
LIBOR London Inter-Bank Offered Rate SI Deposit taking Non-Banking
Financial Company
LIC Life Insurance Corporation of
India NBFC-MFI Non-Banking Financial
LIG Low Income Groups Companies - Micro-Finance
Institutions
LTRO Long-Term Refinancing
Operations NBFI Non-Banking Financial Institution

LTCCS Long-Term Co-operative Credit NCC National Credit Council
Structure NDS-OM Negotiated Dealing System -
LWE Left Wing Extremism Order Matching
MAG Macroeconomic Assessment NDTL Net Demand and Time Liability
Group NECS National Electronic Clearing
MAP Monitorable Action Plan Service
MCA Ministry of Corporate Affairs NEFT National Electronic Fund
Transfer
MDG Modified Duration Gap
NGO Non-Government Organisation
MENA Middle East and North African
MFDC Macro Finance Development NG-RTGS New Generation-Real Time Gross
Council Settlement System

MFDEF Micro Finance Development and NHB National Housing Bank
Equity Fund NII Net Interest Income
MFI Micro Finance Institution NIM Net Interest Margin
MHP Minimum Holding Period NIMC National Implementing and
MIS Management Information System Monitoring Committee
MNOs Mobile Network Operators NOC No Objection Certificate
MoU Memorandum of Understanding NOF Net Owned Fund
MRR Minimum Retention Requirement NOHC Non-Operative Holding Company
MSE Micro and Small Enterprise NOOPL Net Overnight Open Position Limit
MSF Marginal Standing Facility NPA Non-Performing Asset

xix

NPCI National Payments Corporation RIDF Rural Infrastructure Development
of India Fund
NPLs Non-Performing Loans RNBC Residuary Non-Banking Company
NRE Non-Resident External RoA Return on Assets
NREGA National Rural Employment RoE Return on Equity
Guarantee Act
RORWA Return on Risk Weighted Assets
NRRDA National Rural Roads
RRB Regional Rural Bank
Development Agency
NRO Non-Resident Ordinary RSA Rate Sensitive Assets

NSFR Net Stable Funding Ratio RSL Rate Sensitive Liabilities

OBS Off-Balance Sheet RTGS Real Time Gross Settlement
System
OECD Organisation for Economic
Co-operation and Development RWAs Risk-Weighted Assets
OMO Open Market Operations SAO Seasonal Agricultural Operations
OMT Outright Monetary Transactions SAR Special Administrative
Regulations
OSMOS Off-Site Monitoring and
Surveillance System SARFAESI Securitisation and Reconstruction
of Financial Assets and
OTC Over the Counter
Enforcement of Security Interest
PACS Primary Agricultural Credit
SBLP SHG-Bank Linkage Programme
Society
SC Scheduled Caste
PAT Profit After Tax
PBT Profit Before Tax SCAP Supervisory Capital Assessment
Programme
PCARDB Primary Co-operative Agriculture
and Rural Development Bank SCARDB State Co-operative Agriculture
and Rural Development Bank
PCR Provisioning Coverage Ratio
SCB Scheduled Commercial Bank
PD Primary Dealer
SCS/RCs Securitisation Companies/
PDO – NDS Public Debt Office- Negotiated Reconstruction Companies
Dealing System
SDS Special Dispensation Scheme
PE Price Earning
SEBI Securities and Exchange Board of
PFRDA Pension Fund Regulatory and
India
Development Authority
SHG Self-Help Group
PIN Personal Identification Number
SIDBI Small Industries’ Development
PoS Point of Sale
Bank of India
PPIs Pre-paid Payment Instruments
SIFCL Sahara India Financial
PRA Prudential Regulatory Authority Corporation Limited
PRB Private Sector Bank SIFI Systemically Important Financial
PSB Public Sector Bank Institution
RCS Registrar of Co-operative SLIMC State Level Implementing and
Societies Monitoring Committee
SLR Statutory Liquidity Ratio

xx

SME Small and Medium Enterprise UBD Urban Banks Department
SMFC State Micro-Finance Council UCB Urban Co-operative Bank
SPV Special Purpose Vehicle UKPT Unique Key Per Terminal
SSI Small Scale Industry UCIC Unique Customer Identification
ST Scheduled Tribe Code
StCB State Co-operative Bank UO Umbrella Organisations
STCCS Short-Term Co-operative Credit USBs Ultra Small Branches
Structure
WEO World Economic Outlook
SRR Special Resolution Regime
WLA White-Label ATM
TAG Technical Advisory Group
T/B Treasury Bills WSHG Women Self-Help Group

TAFCUB Task Force for Urban VAPT Vulnerability Analysis and
Co-operative Bank Penetration Test
TGA Traditional Gap Analysis VaR Value at Risk
TLE Terminal Line Encryption XML Extensible Mark-up Language

xxi

Chapter I

Perspectives on the Indian Banking Sector

Headwinds from international and domestic economic developments posed challenges to the banking
sector during the year 2011-12. While banks maintained their profitability, their asset quality
was impaired. As things stand, several initiatives are under way to strengthen the regulatory and
accounting frameworks aimed at increasing the resilience of the institutions. However, higher capital
standards, stricter liquidity and leverage ratios and a more cautious approach to risk is likely to
raise the funding costs of banks. Compliance with Basel III stipulations along with the credit needs
of a growing economy will require banks to tap various avenues to raise capital. Broad estimates
suggest that for public sector banks, the incremental equity requirement due to implementation of
Basel III norms by March 2018 is expected to be approximately `750-800 billion. Meeting these
capital requirements will entail the use of innovative and attractive market based funding channels
by the banks. The convergence with the International Financial Reporting Standards (IFRS) may
also place additional demands on the banks’ technical as well as human resources. Considering the
granularity of data required for effective supervisory review, efforts should be to automate data flow
from reporting entities through the adoption of straight-through processing systems. With regard to
financial inclusion, quantitative coverage has improved, but meaningful financial inclusion through
the evolution of sustainable business and delivery models needs to be achieved. Notwithstanding the
multitude of challenges, the regulatory responses and the inherent strengths underlying the Indian
economy should ensure that the banking system continues to play a positive role in supporting the
financing needs of our growing economy.

1. Introduction manifested in an improvement in the capital base
and maintenance of profitability. A series of stress
1.1 The global economy showed deeper signs
tests conducted by the Reserve Bank in respect of
of stress during the past year. With the deteriorating
credit, liquidity and interest rate risks showed
macroeconomic situation in the euro area
that banks remained reasonably resilient.
interacting with a loss of growth momentum in
However, under extreme shocks, some banks
the US and in emerging and developing economies
could face moderate liquidity problems and their
(EDEs), the risks of potentially large negative
profitability could be affected.
spillovers have increased. Domestically, the
macroeconomic situation continues to raise 1.3 While global banking developments are
concerns. Even as growth has slowed significantly, covered in Chapter II, some perspectives on the
inflation remains well beyond the comfort level of factors that are likely to shape the banking milieu
the Reserve Bank. in the period ahead and the challenges facing the
banks are outlined here.
1.2 The headwinds from domestic and
international economic developments posed
2. Forces Shaping the Environment
challenges to the banking sector during the year
2011-12. Though asset impairment increased, the 1.4 The multi-pronged regulatory initiatives
resilience of the Indian banking sector was undertaken in the area of prudential and capital

Report on Trend and Progress of Banking in India 2011-12

requirements of banks along with a move towards countercyclical capital buffer for India may require
greater convergence in banking regulation globally some changes, as the recommended metric of
are likely to have a major impact on the functioning credit-to-GDP ratio could potentially impact the
of banks in the period ahead. structural drivers underlying credit growth in
India. Thus, there may be a need for some
Move towards greater global convergence in
adjustments to capital buffer guidance. The issue
the banking regulation
is being examined by an internal group in the
1.5 The recent financial crisis has redefined Reserve Bank.
the broad contours of regulation of the banking
International capital standards for effective
sector globally. The need for convergence in
risk management
banking regulation stems from the fact that while
banking has become global, banking regulation is 1.8 In response to the need to implement Basel
national. Therefore, addressing the issue of III to strengthen the resilience of the Indian
regulatory arbitrage is at the centre-stage of policy banking sector, the Reserve Bank has announced
concern. The international standard-setting the final guidelines on Basel III capital regulations.
bodies have been attempting to achieve convergence These would be effective from January 1, 2013 in
by issuing broad principles that should shape a phased manner with the Basel III capital ratios
national regulatory frameworks. to be fully implemented by end-March 2018.
Regarding the implementation of Basel III, one
1.6 In the post-crisis period, the Financial
issue had been why an emerging economy like
Stability Board (FSB) has emerged as the most
India, should adopt onerous regulation such as
important international body to address the
Basel III norms which could, potentially, have a
vulnerabilities in the global financial system and
negative impact on output growth. The rationale
to guide the development and implementation of
for adopting these standards is two-fold. One,
strong regulatory, supervisory and other policies
India cannot remain non- compliant with
in the interest of financial stability. Besides
international standards, especially when Indian
implementation of Basel III capital requirements,
banks are venturing abroad and the markets are
the FSB is addressing the issue of Systemically
opened up for international participants. Two,
Important Financial Institutions (SIFIs), which
even while the financial system is much simpler
involves determination of global SIFIs and their
and does not have many of the features that led
loss absorbency; resolution tools and regimes for
to the crisis, the country is vulnerable to contagion
them; and supervisory intensity and effectiveness
from the global economy and the higher defences
for such SIFIs with the aim of reducing both the
built under Basel III will provide the financial
probability and impact of the failure of a SIFI.
system with the much-needed resilience.
1.7 The broader endeavour of global
1.9 The objectives of Basel III are to improve
convergence in the banking regulation will,
the banking sector’s ability to absorb shocks
however, have to account for country-specific
arising from financial and economic stress, thus
circumstances to enable customised adoption of
reducing the risk of spillover from the financial
guidance of international standard-setting bodies
sector to the real economy. Towards this end,
as already recognised in many cases by the Basel
Basel III has some micro-prudential elements
Committee on Banking Supervision (BCBS). To
along with a macro-prudential overlay that will
the extent that the systemically important
take care of issues relating to systemic risk.
jurisdictions harmonise and converge to agreed
international best practices, there are positive 1.10 Basel III guidelines stipulate a stringent
externalities from India’s stand-point. In particular, definition of regulatory capital and higher
the BCBS guidance on the conduct of the requirement of common equity than Basel II.

2


Under Basel III, common equity capital will be the regulators and positioning of banks to meet the
predominant form of regulatory capital and needs of inclusive growth, besides a review of the
innovative features such as step-up or other regulatory framework for the micro-finance sector.
incentives to redeem in non-equity capital
Steps initiated towards improved cross-
instruments are no longer acceptable. In addition,
border supervision and co-operation
Basel III has introduced two new liquidity
standards, viz., Liquidity Coverage Ratio (LCR) 1.14 The recent financial crisis has necessitated
and the Net Stable Funding Ratio (NSFR) to a re-examination of the tools used by supervisors
improve the resilience of banks to liquidity shocks. to oversee financial institutions, particularly
systemically important institutions with cross-
Need to further leverage technology in the
border operations. One major flaw in this regard
banking sector
has been the ineffective supervisory co-operation
1.11 Banks have adopted core banking solutions among national bank supervisors. As a result,
(CBS) that effectively address the transactional need has been felt for the use of supervisory
requirements of the banks. With the implementation colleges to supervise global financial institutions,
of CBS, the banking system is now seamlessly in particular, the systemically important financial
integrated. With the basic technology adoption institutions. The overarching objective of a
being complete in banks, there is, therefore, a supervisory college is to help its members develop
need to move from a transaction processing a better understanding of the risk profile of the
system to an information processing system. In banking group. Moreover, information exchange
its IT Vision Document 2011-17, the Reserve Bank and co-operation between supervisors can help
of India has highlighted the need for banks to move strengthen the supervision of the individual
forward and leverage IT in areas like Management components of a banking group. Colleges can also
Information Systems (MIS), overall risk complement wider peer review processes by
management, financial inclusion, customer promoting a coherent approach across different
relationship management (CRM) and enhancing jurisdictions to the consistent and effective
automated data flow within the banks and to the implementation of macro- and micro-prudential
Reserve Bank without manual intervention. Banks policy tools.
need to augment their innovation capabilities in 1.15 The growing global activities of some large
terms of new products, services and strategies Indian banks have necessitated putting in place a
which would enable them to maximise their formal mechanism of supervisory co-operation
efficiency gains (Box I.1). and information exchange with host supervisors
1.12 With the computerisation and adoption of for effective cross-border consolidated supervision.
CBS in banks almost reaching the final stage of In India, at present no supervisory colleges have
completion, the focus has now shifted to adoption been set up. However, the Reserve Bank has been
of more advanced technologies in banking which attending the supervisory colleges of some of the
would enhance their CRM by using appropriate major foreign banks operating in India. The High-
tools, improving internal effectiveness including Level Steering Committee on the Review of
MIS and managing risks arising out of IT Supervisory Processes for Commercial Banks
( C h a i r m a n : D r. K . C . C h a k r a b a r t y ) h a s
implementation.
recommended setting up supervisory colleges for
large globally active Indian banks with a significant
3. Operational and Strategic Responses
(around 15 per cent) share of assets from foreign
1.13 The strategic and operational responses operations as a percentage of total assets.
during the year pertained to policy initiatives with Accordingly as an initial step, supervisory colleges
regard to enhancing co - ordination among of SBI and ICICI Bank are being planned.

3

Report on Trend and Progress of Banking in India 2011-12

Box I.1 :
Technological Innovations and Efficiency Gains in the Banking Sector
With the advent of the process of liberalisation in the early Globally, the effect of IT on the banking industry has been
’nineties, the demands on banks’ resources and capabilities positive. In general, studies have concluded two positive
increased as banks had to match the challenges of being effects regarding the relation between IT and banks’
financial service providers in a globalised, competitive performance. First, IT can reduce banks’ operational costs
environment. This posed a dual challenge for the banking (the cost advantage). Second, IT can facilitate transactions
industry. The first challenge was to manage the growing needs among customers within the same network (the network
of their existing customer segments and business locations effect). Eyadat and Kozak (2005) examined the impact of the
for better and more efficient services, and the second was, progress in IT on the profit and cost efficiencies of the US
how to expand the reach of their services and business banking sector during the period 1992-2003. The research
beyond the traditional services and locations, which had showed a positive correlation between the level of implemented
large socio-economic implications because large parts of the IT and both profitability and cost savings. Berger (2003) also
population did not have access to even basic banking showed improvements in bank performance and consolidation
services. At this juncture, banks in India were looking at of the banking industry in the US during the deployment of
huge potential in business growth as well as several new technologies.
constraints, such as inadequacy of infrastructure and human In the Indian context, technological innovation and
resources, geographical, topographical and distance investment in IT during the period 2005-06 to 2009-10 led
limitations, communication inefficiencies, cost implications to efficiency gains for the scheduled commercial banks
and delivery, as well as the processing capability to manage (Rajput and Gupta, 2011). Technology is encompassing the
more business information and larger accounts. entire set of business processes in the banking industry and
technological innovations are enabling banks to cope with
Increased use of information technology emerged as the key burgeoning customer requirements, social and developmental
to meeting these challenges. Several measures were mooted expectations, strategic and competitive business needs,
at the level of the Government, the Reserve Bank and internal control and risk management needs, governance
industry, which provided an impetus to adoption of and regulatory reporting requirements.
technology in the banking sector. CBS implementation has
However, going forward, banks need to innovate appropriately
made customer account maintenance seamless and enhanced
in terms of products, services and strategies and will also
data storage and retrieval capabilities tremendously. It has
need to align their IT and business perspectives to fully
also enhanced the banks’ capacity to develop and market
leverage the benefits of technology. Predictive analytics can
new products, as technology has increased information
bring in competitive advantage in banking and help banks
availability and the capacity for analysis and communication
move from product-centric to customer-centric operations.
manifold. Such capabilities and efficiencies are poised to
rise further with the advent and adoption of evolving References :
technologies like cloud computing and virtualisation, which Rajput, N. and Gupta, M. (2011), ‘Impact of IT on Indian
have the potential to significantly bring down financial and Commercial Banking Industry: DEA Analysis’, Global Journal
management costs. of Enterprise Information System, Volume 3 Issue I.
Economic theory supported by empirical evidence suggests Subbarao D. (2009), ‘Information Technology and Banking
that, in general, increases in technology investment will raise – A Continuing Agenda’ Keynote Address delivered at the
productivity, lower costs, and allow firms to operate more Institute for Development & Research in Banking Technology,
efficiently. Information technologies and the innovations they Hyderabad.
enable are strategic tools, since they reduce the costs of Eyadat M. and Kozak, S. (2005), ‘The Role of Information
financial transactions, improve the allocation of financial Technology in the Profit and Cost Efficiency Improvements
resources and increase the competitiveness and efficiency of the Banking Sector’, Journal of Academy of Business and
of financial institutions. Technological innovation not only Economics.
enables a broader reach for consumer banking and financial Berger, A.N. (2003), ‘The Economic Effects of Technological
services, but also enhances its capacity for continued and Progress: Evidence from the Banking Industry’, Journal of
inclusive growth (Subbarao, 2009). Money, Credit and Banking, Volume 35.

1.16 In this context, Reserve Bank has initiated Strategic role for banks in ensuring inclusive
the process of setting up of a cross-border growth
supervision and supervisory co - operation 1.17 Banks play a dominant role in India’s
mechanism, which allows for signing Memorandum financial system and are, therefore, expected to
of Understanding (MoU) with overseas regulators play a key role in furthering the agenda of financial
on supervisory co-operation and exchange of inclusion with a view to achieving inclusive growth
information with them (Box I.2). and development. Accordingly, a bank-led model

4


Box I.2 :
Bilateral Memorandum of Understanding (MoU) with Reserve Bank’s Overseas Counterparts for
Improved Cross-Border Supervision and Co-operation
Genesis formal arrangements for supervisory co-operation with
overseas supervisors through an MoU, in accordance with
The concept of supervisory co-operation on cross-border
the various BCBS Principles as well as in consonance with
supervision dates back to the report released by the
the various laws/statutes of the land.
Committee on Banking Regulations and Supervisory
Practices in 1975. However, the seminal idea of having a Establishment of MOUs with Overseas Supervisory
form of MoU first found mention in the report titled “The Authorities
Supervision of Cross-Border Banking” (October, 1996) by To start with, 16 countries were identified. These were
a working group which comprised members of the BCBS. primarily countries whose bank regulators had evinced
The Group recommended that the understandings between interest in having such an arrangement with the Reserve
the supervisors might take the form of bilateral MoUs or Bank and also those jurisdictions where an MoU between
exchange of letters which may formulate what each party the Reserve Bank and the host country regulator was a
expects from the relationship. Taking forward the concept, prerequisite for Indian banks. The Reserve Bank has also
the BCBS released a document titled “Essential Elements started adopting the principle of mutual banking presence
of a Statement of Co-operation Between Banking Supervisors” to initiate a dialogue on an MoU with overseas regulators
in May 2001, listing key elements that could form part of a and supervisory jurisdictions with such a mutual banking
statement of co-operation or MoU between “Home” and footprint. In the process, the list of identified countries was
“Host” country supervisors. expanded to 38.
Need for MoU - Indian Scenario Current Status on Signing of MOUs with Overseas
Supervisors
Until recently, cross-border supervision of the overseas
operations of Indian banks has been carried out through a So far, the Reserve Bank has executed MoUs with ten
combination of need-based on-site inspection, an off-site overseas supervisors. In addition, proposals for MoUs with
reporting framework and informal exchange of supervisory 28 overseas supervisors are in various stages of finalisation.
information with overseas regulators/supervisors. However, Going forward, while the current objective of the Reserve
during the past few years the cross-border operations of Bank is to establish MoUs with the supervisors of those
Indian banks have expanded significantly. Some banks have jurisdictions where Indian banks have substantial
set up banking and other financial services subsidiaries operations or are planning to scale up their operations, the
abroad. Against this backdrop, a need was felt to enter into longer-term goal of the Reserve Bank is to first stabilise the
MoUs with bank regulators, and an Internal Working Group mechanism of the MoU through frequent interactions with
(IWG) was constituted to lay down the road-map for adopting the host country supervisors and then to leverage on the
a suitable framework. Based on the recommendations of supervisory co-operation with these domains and benefit
the IWG, a policy framework was put in place. The policy from the knowledge and views of the host country
provides, inter alia, for establishing legally non-binding supervisors for better oversight of Indian banking entities.

of financial inclusion has been adopted in the as also customer service. With respect to mobile
country. Based on the experience of countries like payment companies, the Reserve Bank does not
Kenya, and the massive growth and expansion of have similar regulatory authority. Third, entry into
mobile phones in the country, there have been the banking space has to be on open, transparent
demands for experimenting with a model of and contestable criteria. Thus, it may not be
mobile-led banking for financial inclusion. prudent to allow mobile operators privileged
However, it has been argued that mobile-led access into commercial banking through the
banking takes care of only remittance products mobile route. However, efforts have been made to
as against a bouquet of products, such as a leverage the reach of mobile network companies
variable recurring deposit product, an overdraft by allowing banks to appoint corporates to act as
and an emergency credit product in the form of Business Correspondents (BCs), but it is still early
Kisan Credit Card (KCC)/General Credit Card days and the success of these arrangements
(GCC). Second, banks are prudently regulated and between banks and the companies will be analysed
this helps address the concerns about KYC/AML in the coming years.

5

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