Page 167 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes encompasses commercial banking and Investment banking, including investment in equities
and project finance. It refers to a bank undertaking all types of business-retail, wholesale,
merchant, private, and others under one organisational roof. It means a complete breakdown of
barriers between different categories of financial intermediaries such as commercial banks, FIs
and NBFCs. Universal banking helps the service provider to build up long-term relationships
with the client by catering his different needs. The client also benefits as he gets a whole range
of services at low cost under one roof. Globally, banks such as Deutsche Bank, Citibank, and ING
Bank, are universal banks.
In India, the trend towards universal banking began when financial institutions were allowed to
finance working capital requirements and banks started term financing. This trend got a
momentum with the report of Narasimham Committee II, suggesting that development finance
institutions should convert ultimately into commercial banks or non-bank finance companies
(NBFCs). The Khan Committee, which was set up by RBI to examine the harmonisation of
business of banks and development financial institutions, endorsed this conversion.
It was of the view that DFIs should be allowed to become banks at the earliest. The committee
recommended a gradual move towards universal banking and an enabling framework for this
purpose should be evolved. In January 1999, the Reserve Bank of India (RBI) released a "Discussion
Paper" for wider public debate on universal banking. The feedback indicated the desirability of
universal banking from the point of view of efficiency of resource use. In the mid-term review
of monetary and credit policy (1999-2000), the RBI acknowledged that the principle of universal
banking "is a desirable goal". In April 2001 it set out the operational and regulatory aspects of
conversion of DFIs into universal banks.
ICICI was the first financial institution to convert itself into a truly universal bank. The concept
of universal banking provides the financial institutions an access to the retail market wherein
high margins are involved. This concept is slowly gaining popularity among banks as the
interest spread has squeezed in the past few years and non-performing assets (NPAs) have
increased in banking activity. A foray into universal banking would help the banks to diversify
beyond the traditional portfolio of loans and investment and extend to treasury, capital market
operations, infrastructure finance, retail lending, and advisory services.
The policy measures and change in the role of DFIs, the South-East Asian crisis and the general
economic slowdown necessitated introduction of policy measures and regulation. In November
1994, the Board for Financial Supervision (BFS) was constituted under the aegis of the Reserve
Bank for comprehensive and integrated regulation and supervision over commercial banks.
Financial Institutions (FIs) and Non-Banking Finance companies have been brought under the
purview of the Board. The scope and coverage of the FIs inspection are very limited, unlike that
of NBFCs, and are not as rigorous as that of banks. Select FIs such as IDBI, ICICI Ltd., IFCI Ltd.,
IIBI Ltd., NABARD, NHB, EXIM Bank, TFCI, SIDBI and IDFC have been brought under the
supervisory purview of the Reserve Bank to enhance the transparency in their performance and
maintain systemic stability.
1. Financial institutions were permitted to include the "general provision on standard assets"
in their supplementary (tier II) capital with a stipulation that the provisions on standard
assets along with other "general provisions and loss reserves" should not exceed 1.25% of
the total risk weighted assets.

2. An asset would be treated as non-performing, if interest and/or installment of principal
remain overdue for more than 180 days with effect from the year ending March 31, 2002.
A non-performing asset is that part of a financial institution's asset that is currently yielding
no return and on which none is expected.
3. FIs have to assign a 100 percent risk weight only on those state government guaranteed
securities which were issued by the defaulting entities.

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