Page 82 - DMGT303_BANKING_AND_INSURANCE

Unit 4: Treasury Management & Banking Sector Reforms

2. Further, interest rate on government securities, in which substantially large amount of Notes
funds of the banks is presently invested, should also be raised.
3. Upward revision should be made in the limit fixed for the rate of interest chargeable by
the nationalised banks on the loans granted to medium and large industries and whole
trade sectors. This will improve the profitability of the nationalised banks without
disturbing the social objectives.
4. The current policy of cross subsidization by the nationalised banks to the weaker sections
should be reviewed in the light of the range of beneficiaries and the extent of subsidization
enjoyed by various sectors and sub-sectors of the economy and unwarranted subsidization
should be minimized.
5. Interest subsidy through the banking system is not the rational way of assisting the
priority sectors. There is a need to examine the whole problem of financing the weaker
sections objectively.
Recognizing the need for improving the profitability of commercial banks the GOI as well as
the RBI undertook several measures.

Measures taken by the Government

1. For banks engaged in operations outside India, deductions are allowed on amounts
transferred to special reserves up to 40% of the total income. This relief is, of course, for the
notified banks only.
2. The banks, other than those which are notified above, are entitled to deduction for bad and
doubtful debts up to 2% of the advances granted from rural branches or 10% of the total
income; whichever is higher.
3. Interest tax under the Interest Tax Act has already been totally abolished from March, 31,
1985.
4. Interest rate on Government securities has also been increased.

!
Caution The RBI's decision to revise banks' investments limit from 1.5% (see latest figures
too) of annual incremental deposit to 5% has opened up a new avenue of profitability for
the banks. With the raised limit, banks will now be able to avail of the opportunities of
investing in privately placed shares and debentures of large and profitable corporate
bodies, which are under the financial institutions.
Self Assessment

State whether the following statements are true or false:
6. For banks engaged in operations outside India, deductions are not allowed on amounts
transferred to special reserves up to 40% of the total income.

7. Banks should not develop efficient methods of appraisal of the applicants.
8. The RBI's permission to commercial banks to undertake leasing factoring and hire purchase
business to get additional business and earnings.

9. The RBI should lower down the cash reserve ratio and statutory liquidity ratio so as to
increase the lendable funds of the nationalised banks and improve their profitability.

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