04-06-2012, 11:40 AM
The Indian Banking Sector On the Road to Progress
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The Banking Sector
The banking system in India is significantly different
from that of other Asian nations because of the
country’s unique geographic, social, and economic
characteristics. India has a large population and land
size, a diverse culture, and extreme disparities in income,
which are marked among its regions. There are
high levels of illiteracy among a large percentage of
its population but, at the same time, the country has a
large reservoir of managerial and technologically advanced
talents. Between about 30 and 35 percent of
the population resides in metro and urban cities and the
rest is spread in several semi-urban and rural centers.
The country’s economic policy framework combines
socialistic and capitalistic features with a heavy bias
towards public sector investment. India has followed
the path of growth-led exports rather than the “exportled
growth” of other Asian economies, with emphasis
on self-reliance through import substitution.
Financial Structure
The Indian financial system comprises the following
institutions:
1. Commercial banks
a. Public sector
b. Private sector
c. Foreign banks
d. Cooperative institutions
(i) Urban cooperative banks
(ii) State cooperative banks
(iii) Central cooperative banks
2. Financial institutions
a. All-India financial institutions (AIFIs)
b. State financial corporations (SFCs)
c. State industrial development corporations
(SIDCs)
3. Nonbanking financial companies (NBFCs)
4. Capital market intermediaries
About 92 percent of the country’s banking segment
is under State control while the balance comprises
private sector and foreign banks. The public sector
commercial banks are divided into three categories.
Regional Rural Banks (RRBs):
In 1975, the
state bank group and nationalized banks were required
to sponsor and set up RRBs in partnership
with individual states to provide low-cost financing
and credit facilities to the rural masses.
Table 3 presents the relative scale of these public
sector commercial banks in terms of total assets.
The table clearly shows the importance of PSBs.
Reserve Bank of India and Banking and Financial Institutions
RBI is the banker to banks—whether commercial,
cooperative, or rural. The relationship is established
once the name of a bank is included in the Second
Schedule to the Reserve Bank of India Act, 1934.
Such bank, called a scheduled bank, is entitled to
facilities of refinance from RBI, subject to fulfillment
of the following conditions laid down in Section 42
(6) of the Act, as follows:
• it must have paid-up capital and reserves of an
aggregate value of not less than an amount specified
from time to time; and
• it must satisfy RBI that its affairs are not being
conducted in a manner detrimental to the interests
of its depositors.
MAIN CAUSES OF NONPERFORMING ASSETS
One of the main causes of NPAs in the banking sector
is the directed loans system under which commercial
banks are required to supply a prescribed
percentage of their credit (40 percent) to priority
sectors. Table 12 shows that credit supply of PSBs
to the priority sectors has increased gradually to a
little more than 40 percent of total advances as of
March 1998. Loans to weaker sections of society
under state subsidy schemes have led borrowers to
expect that like a nonrefundable state subsidy, bank
loans need not be repaid.