Page 80 - DMGT303_BANKING_AND_INSURANCE

Unit 4: Treasury Management & Banking Sector Reforms

1. Growing Volume of Bad Debts (NPAs): The volume of bad debts of the commercial banks Notes
has been rapidly increasing. These bad debts are also called non-performing assets. They
include:
(i) Debts recalled;
(ii) Suit filed accounts, i.e., where recovery proceedings have been initiated;
(iii) Debts classified as bad and doubtful; and

(iv) Decreed debts, that is, where suits have been filed and decrees obtained. Such debts
accounted for 1.5 per cent of outstanding bank credit at the end of March 1995.
2. Inadequacy of Capital: The capital base of the Indian commercial banks was neither
uniform nor adequate. There has been no increase in the capital of the 28 public sector
banks since nationalisation.

3. Non-transparent Balance Sheets: Despite necessary audit of banks many banks continue
to manipulate their balance sheets by falsely increasing their deposits in the last week of
the financial year.
4. Defective Loan Procedure: Some commercial banks have shown undue favour to certain
companies in granting loans and advances, which more often turn into bad debts. Often
these loans and advances are made due to political considerations. The extension of letters
of credit and guarantees limits without following reliable and authentic commercial
procedure has also become a routine affair.
5. Low Profitability: Irregularities in maintaining accounts, corruption in lending operations,
frauds, increasing operating costs, misappropriation, have all led to considerable decline
in profitability of commercial banks.
6. Inadequate Social Banking: Despite of a well-defined policy for priority sector lending,
commercial banks have been mainly catering to the needs of the corporate sector.
7. Dual Administrative Control System: The Indian banking system is at present being
administered by two authorities, the Ministry of Finance (MOF) and the Reserve Bank of
India (RBI). Consequently, all the investing and lending programmes and appointments
of Chief Executives and Directors are determined by orders from higher authorities
resulting in delayed decisions.

Self Assessment

Fill in the blanks:

1. ________ taken as collateral are marked to market on a daily basis and value of collateral
is required to be maintained.
2. There is no doubt that social obligations increase cost of operations and hence unfavorably
affect ________ of the bank.
3. The Indian banking system is at present being administered by two authorities, the
__________ (MOF) and the Reserve Bank of India (RBI).

4. Despite necessary audit of banks many banks continue to ________ their balance sheets by
falsely increasing their deposits in the last week of the financial year.
5. A __________ can serve society and help economy to develop only when it operates
successfully.

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