Page 188 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 11: Banking Sector Reforms

“But in the medium term it could create interesting opportunities for future joint ventures, Notes
by bringing together the expertise of international banks with local banks’ ability to reach
a wide customer base,” she said.
On Tuesday evening India’s lower house of parliament also passed a bill which includes
measures to improve corporate governance and auditing practices, and encourage corporate
social responsibility.
Source:http://www.ft.com/cms/s/0/5b4f2cfc-49c2-11e2-a625-00144feab49a.html#axzz2M6DgoOL7

Before granting license to foreign branch under the provisions of Section 22 of the Banking
Regulation Act, 1949, RBI may satisfy itself that the government or the law of the country in
which it is incorporated does not discriminate against banks from India in any way. Foreign
banks’ track record of compliance and functioning in the global market may also be considered.
Further, diplomatic and bilateral relations between India and the foreign country in which the
bank is incorporated may also be considered.
RBI issues a single class of banking license to all banks and thereby does not place any restriction
in the operations of foreign banks.

Notes Foreign banks can conduct both wholesale and retail banking.
In addition, the norms for foreign banks’ capital adequacy, asset classification and income
recognition vis-à-vis Indian banks are by and large similar.

11.3.1 Three Features of Liberalization

Financial liberalization has involved three major sets of initiatives in the banking sector which
dominates the financial system of the country.

First, Those aimed at increasing the credit creating capacity of banks through reductions in the
statutory liquidity and cash reserve ratio, while offering them greater leeway in using the
resulting liquidity by drastically cutting priority sector lending targets.
The second was to increase competition through structural changes in the financial sector. While
the existing nationalized banks, including the state bank of India, were permitted to sell equity
to the private sector, private investors were permitted to enter the banking sector. In addition,
foreign banks were given greater access to the domestic market, both as branches and subsidiaries,
subject to the maintenance of a minimum assigned capital and being subject to the same rule as
domestic banks.

Notes With the development of finance institutions, a degree of “broad-banding” of
financial services was permitted and these institutions were allowed to set up mutual
funds and commercial banks.

Banks themselves permitted to diversify their activity into a host of related areas. The wider
trend is towards a form of universal banking.
Thirdly, to keep this competition effective and efficient in influencing the functioning of banks,
they have been provided with greater freedom in determining their asset portfolios. They were
permitted to cross the firewall that differentiated the banking sector from the stock market and
invest in equities, provide advances against equity provided as collateral, and offer guarantees
to the broking community.

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