Institutional Reforms for Transformation, Inclusion and Sustainability

- Indian Experience

Anand Sinha, India

Importance of Financial System Intermediation Between savers and borrowers Promoting saving and facilitating entrepreneurship

Allocation of resources To the most efficient use More efficient the financial system, greater will be the allocative

efficiency Risk Management Transferring, pooling and mitigation of risk

Liquidity Provision of information - disclosures Overall economic growth

Indian Financial System

Banks

Commercial Banks (173)

Public Sector (26)

SBI Group

(6)

Nat Banks (19)

IDBI

Private Sector (20)

Old Gen (13)

New Gen (7)

Foreign (41)

RRBs (82)

LABs (4)

Credit Cooperative

s (95156)

Rural Co-ops

(93550)

Urban Co-ops

(1606)

Non-Banks

NBFCs (12225)

DepTaking NBFCs (254)

Non-Dep

Taking NBFCs

(11963)

NBFC-ND-SI(418)

PDs (8)

FIs (4)

Others(Ins

+ MFs)

Institutional Structure

FSDC

Sub-Committee of FSDC

RBI

BFS

BPSS

SEBI IRDA PFRDA

Pre-liberalisation (1991) Features Pre-liberalisation period was termed as Financial Repression Administered interest rates Large pre-emption of resources (53.5% of banks’ liabilities) Extensive micro regulations Relatively opaque accounting norms and limited disclosure Dominant public ownership Compartmentalisation of activities Strong entry barriers

Consequence Thwarted competition Low levels of efficiency and productivity Low capitalisation levels- banking sector – high NPAs Credit shortage for Private sector Stunted growth

Banking Sector Reforms Sequenced measures Deregulation of interest rates Reduction in pre-emptions Diversification of ownership

Reduction in Government stake Enhancing productivity and efficiency through competition

New private sector banks and liberalised entry of foreign banks Consolidation

Mergers and reverse mergers Institutional and legal reforms

Board for Financial Supervision (BFS), Board for Payment and Settlement Systems (BPSS)

Convergence with international prudential norms Strengthening governance framework

Fit and proper criteria

Process of Banking Reforms in India Financial Sector Reforms were undertaken early in the

reform-cycle Reforms not driven by any crisis and not an outcome of

multilateral aid Design and detail of the reform process evolved by

domestic expertise, keeping the international experience in view

Twin principles Non-disruptive progress & consultative process

Financial Market Reforms Widening of investor base Introduction of new products/risk mitigants Leveraging technology Reporting platforms Order matching systems Central Counterparty Clearing Information dissemination

Gradual, cautious and consultative process

Financial Inclusion initiatives Nationalisation of banks in 1969 and 1980 Service Area Approach Lead Bank Scheme Liberalised branch authorisation Incentives to open in remote areas

Leveraging technology Business Correspondent (BC) model

Rationalisation of KYC norms Increasing the demand by enhancing financial awareness Outreach programs

India’s approach to Financial Stability (1) More a matter of regulatory approach and orientation

than explicit mandates and institutional arrangements Approach evolved from past experiences and constant

interactions between micro-level supervisory process and macroeconomic assessments

Market developments measures undertaken in the context of given macro economic imperatives of large fiscal deficit, capital account management framework and dominance of banking system

India’s approach to Financial Stability (2) Approach to financial stability comprised Monetary measures

Multiple objectives – Price stability, growth and financial stability Multiple indicators

Capital Account Management Well defined and calibrated approach Active management through CRR and MSS

Compliance with International Standards Finetuning the migration process keeping in view the underlying

structural, institutional and operational considerations

Regulatory and Infrastructure and systemic interconnectedness Well defined and developed institutional structure - Multiple roles of

Reserve Bank – regulator of financial institutions and markets – holistic assessment of interconnectedness

India’s approach to Financial Stability (3) Prudential Framework Administration of macro and micro prudential norms from

systemic perspective Exposure norms Liquidity management Counter-cyclical measures

Finetuning risk weights and provisioning norms to contain exuberance

Coordination between Monetary and Prudential policies

14

-20

0

20

40

60

80

100

120

140

160

180

200

220

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00Ja

n-05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Trend in CRE Credit vis-à-vis Provisioning and risk weights

Credit Growth (year-on-year) Risk Weight Requirements (RHS)

Provisioning Requirement RHS) 6 per. Mov. Avg. (Credit Growth (year-on-year))

For aligning both provisioningand risk weights on secondary Y-axis (RHS), the provisioning ratios have been inflated by 100

0

50

100

150

200

250

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00Ja

n-05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Trend in Housing Credit vis-à-vis Provisioning and risk weights

Credit Growth (year-on-year) Risk Weight Requirements (RHS)

Provisioning Requirement (RHS) 6 per. Mov. Avg. (Credit Growth (year-on-year))

For aligning both provisioningand risk weights on secondary Y-axis (RHS), the provisioning ratios have been inflated by 100

-20

0

20

40

60

80

100

120

140

160

180

200

220

-20.00

0.00

20.00

40.00

60.00

80.00

100.00Ja

n-05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Trend in NBFC Credit vis-à-vis Provisioning and risk weights

Credit Growth (year-on-year) Risk Weight Requirements (RHS)

Provisioning Requirement (RHS) 6 per. Mov. Avg. (Credit Growth (year-on-year))

For aligning both provisioning and risk weights on secondary Y-axis (RHS), the provisioning ratios have been inflated by 100

Indian response to crisis Reduction in policy rates

Repo rate reduced by 425 bps and reverse repo reduced by 275 bps (during Oct ‘08 to Apr ‘09) Infusion of rupee liquidity

Reduction in Cash Reserve Ratio (400 bps) and Statutory Liquidity Requirement (150 bps) Increase in quantum of export credit refinance Open Market Operations Special refinance facilities for banks, apex FIs Special liquidity facilities for the benefit of NBFCs, MFs, HFCs, etc. Setting up of SPV for meeting the liquidity needs of NBFC-ND-SI Coordinated strategies to facilitate increased government borrowings arising due to fiscal

stimulus Infusion of foreign currency liquidity

Relaxation of External Commercial Borrowings (ECB) guidelines Upward revision on rate ceiling for foreign deposits Setting up USD swap lines Special Market Operations for Public Sector Oil companies Direct selling of USD to augment supply

Countercyclical Measures Relaxation in risk weights and provisioning requirements

Indian response to crisis (2) Fiscal Stimulus by Government amounting to 3% of GDP Additional public spending, particularly capital expenditure Government guaranteed funds for infrastructure spending Cuts in indirect taxes Expanded guaranteed cover for credit to micro and small

enterprises Additional support to exporters

Cumulative amount of primary liquidity infused –

INR 5,85,000 cr ( Sep ‘08 to Oct ‘09) – USD 117 bn

Key Parameters of Banks in India

0

2

4

6

8

10

12

14

16

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

CRAR (%)

0

2

4

6

8

10

12

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

GNPA (%) - RHS

0

2

4

6

8

10

12

0

500

1000

1500

2000

2500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

GNPA (Rs. bn) - LHS

GNPA (%) - RHS

Trends in GNPA

Year GNPA (Rs. bn) GNPA (%) 2002 565 10.42003 688 9.12004 649 7.22005 587 4.92006 512 3.32007 505 2.52008 565 2.32009 693 2.252010 847 2.392011 979 2.252012 1421 3.12013 1932 3.6

0

0.5

1

1.5

2

2.5

3

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

NIM (%)

Current Concerns Macroeconomic situation Inflation – subdued growth

Deteriorating asset quality of banks Capital Adequacy Basel III – Capital raising issues Financial Inclusion Despite the efforts, a large segment of the population is still

excluded Only 58.7% of the households are availing banking services 73% of the farmer households do not have access to formal sources

of credit

7.5

9.5 9.6 9.3

6.7

8.6 8.9

6.7

4.5 4.9

GDP growth(%)

India’ s GDP recent deceleration

3.9 43.3

2.5

66.5

4.8

5.84.9 4.6

GFD of the Centre (% to GDP)

Five Pillar approach Strengthening Monetary Policy Framework Strengthening Banking structure through new entry, branch

expansion, encouraging new varieties of banks, and moving foreign banks into better regulated organisational forms

Broadening and deepening financial markets and increasing their liquidity and resilience so that they can help allocate and absorb the risks entailed in financing India’s growth

Expanding access to finance to small and medium enterprises, the unorganised sector, the poor, and remote and underserved areas of the country through technology, new business practices, and new organisational structures

Improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery

Thank you

Institutional Reforms for Transformation, Inclusion and Sustainability�- Indian ExperienceImportance of Financial SystemSlide Number 3Institutional StructurePre-liberalisation (1991) FeaturesBanking Sector ReformsProcess of Banking Reforms in IndiaFinancial Market ReformsFinancial Inclusion initiativesIndia’s approach to Financial Stability (1)India’s approach to Financial Stability (2)India’s approach to Financial Stability (3)Slide Number 13Coordination between Monetary and Prudential policies Slide Number 15Slide Number 16Slide Number 17Indian response to crisisIndian response to crisis (2)Key Parameters of Banks in IndiaSlide Number 21Slide Number 22Trends in GNPASlide Number 24Slide Number 25Current ConcernsSlide Number 27India’ s GDP recent decelerationSlide Number 29Five Pillar approachThank you