Page 155 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes
The period of 90 days allowed for restructuring may not be adequate in view of the large
number of accounts potentially requiring restructuring.
Also drawing power has been affected due to decline in inventory prices necessitating
conversion of irregular portions of working capital limits into Working Capital Term
Loan (WCTL) on restructuring.
However, as the borrowers may be unable to provide further tangible security in the
current context, accounts even after restructuring will be classified as NPAs. The condition
of WCTL being fully secured by tangible security may, therefore, be relaxed, said RBI.
Meanwhile RBI has asked all non- banking finance companies (NBFCs) that the rates of
interest beyond a certain level may be seen to be excessive and can neither be sustainable
nor be conforming to normal financial practice. Boards of NBFCs were, therefore, advised
to lay out appropriate internal principles and procedures in determining interest rates.

Note: The detail discussion on NPA management is given in Unit 15.
During the year the RBI operationalised the corporate debt restructuring forum, which has a
made significant progress in building lender consensus on restructuring. The next major initiative
would be the operationalisation of an asset reconstruction company, and the development of a
market for distressed credit similar to those in other countries.

The increasing disintermediation in the corporate credit market, slowdown in creation of new
capital assets as companies focus on improving existing capacity utilisation and improving
working capital efficiency of Indian corporates has led to lower demand for credit from the
corporate sector in the past two years. This has been replaced by the huge retail finance
opportunity. Existing low penetration levels, increasing affordability of credit and rising income
levels have led to a growing demand for retail credit. This has been strengthened by the tax
incentives for acquiring residential property, leading to a particularly high growth in housing
finance. Going forward, the infrastructure, retail and small and medium enterprise segments
would provide large growth opportunities, while the manufacturing sector is expected to continue
its consolidation phase, with selective additions to capacity. However, success in these segments
presents several challenges. Retail and SME banking requires extremely effective distribution
systems that are capable of offering flexibility and convenience to the customer, while maintaining
cost-efficiency for banks. At the same time, banks need to put in place high-quality credit
modelling and data mining systems. This is essential to appropriately assess and price risk and
allocate capital in a manner that would optimise risk-adjusted returns. The Indian financial
system would also witness greater activity in the debt markets, as originators of credit
increasingly seek to proactively manage their portfolios by structuring and selling down loan
portfolios to entities that have capital to deploy but lack the origination and structuring
capabilities.
India has made considerable progress in the post-1991 period. The country's macroeconomic
fundamentals have improved and external vulnerability has been sharply reduced. Reforms in
the financial sector have appropriately addressed the pre-1991weaknesses in the sector and
improved its competitive strength domestically as well as globally. Individual players now
need to adopt proactive competitive strategies that will enable them to capture the emerging
opportunities. Exposure to global practices has made the Indian customer more discerning and
demanding.

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