The Reserve Bank of India has released today its Report on Trend and Progress of Banking in India, 2003-04. The Report gives a detailed account of the performance of and policy developments relating to commercial banks, co-operative banks, financial institutions and non-banking financial companies during 2003-04. A chapter on financial stability covering various emerging issues has been introduced. The Report is divided into eight Chapters and contains detailed statistical tables on various parameters for banks and other types of financial institutions.

Overview

The first chapter titled ‘Overview’ provides a synoptic view of the macroeconomic developments and the performance of various types of financial intermediaries during 2003-04. It is found that the Indian banking system posted a strong performance during 2003-04. The financial performance of the other segments of the financial sector, viz., co-operative banks, financial institutions, and non-banking financial companies (NBFCs) also registered improvement in various areas induced by the supporting regulatory and supervisory process.

Policy Developments in Commercial Banking

The second chapter on 'Policy Developments in Commercial Banking' provides an overview of the policy initiatives undertaken in the banking sector during 2003-04. Regulatory and supervisory changes including technological developments and legal reforms have been covered in this chapter. The Reserve Bank continued to strengthen the supervisory framework consistent with the increasing market orientation of the economy and with a view to achieving financial stability. The policy measures have been primarily guided by the objectives of increasing operational efficiency of monetary policy, redefining the role of the Reserve Bank, strengthening prudential norms and risk management, enhancing credit delivery mechanism and developing technological and institutional infrastructure. This was buttressed by several initiatives to enhance accounting standards and reinforce corporate governance.

Developments in Commercial Banking

The third chapter on ‘Developments in Commercial Banking' provides an analysis of the balance sheet and financial performance of scheduled commercial banks in the aggregate and separately for the major banking groups, viz., public sector banks, new and old private sector banks and foreign banks. The analysis covers important financial indicators, such as, income, expenditure, profits, spread, non-performing assets and capital to risk-weighted assets ratio. In addition, the chapter details a disaggregated picture of balance sheet and income-expenditure statement of commercial banks. The empirical analysis highlights the continued stronger performance of banks in terms of higher profitability, improvement in capital adequacy and lower non-performing assets. The credit delivery mechanism is analysed in terms of banks’ lending to various sectors/industries including the priority sector. Besides the balance sheet and income expenditure analyses, the chapter provides analysis of banks’ money market operations pertaining to certificates of deposits, commercial papers, the role of banks as authorised dealers etc. Keeping in view the increasing openness of financial sector, the chapter analyses the composition of international assets and liabilities of banks. The chapter also provides an analysis of the performance of regional rural banks, and local area banks.

Developments in Co-operative Banking

Major developments and the regulatory initiatives relating to co-operative credit institutions undertaken during 2003-04 are discussed in the fourth chapter on 'Developments in Co-operative Banking'. The performance and issues relating to urban co-operative banks and the short-term and long-term structure of the rural co-operative banks are discussed separately. Emphasis is laid on the role of NABARD and issues of credit delivery under Rural Infrastructure Development Fund, Kisan Credit Card, etc. Issues relating to micro credit are also discussed separately. The policy induced changes in the composition of assets of Urban Co-operative Banks (UCBs), especially, the growth in the investment of Government securities, led to a significant improvement in both the asset quality and profitability of scheduled UCBs.

Financial Institutions

The Chapter V on ‘Financial Institutions’ discusses the reversal of the declining trend in sanctions and disbursements by the financial institutions (FIs). This was on account of substantial improvement shown by investment institutions and to an extent, by specialised FIs. The focus of the policy initiatives by the Reserve Bank and the Government of India has been on financial as well as organisational restructuring to facilitate their transition into universal banks. The Reserve Bank has been harmonising its various policy measures for banks and FIs in such a manner that FIs, on becoming banks, are in a position to fully integrate themselves into the banking system. Policy initiatives for select all-India financial institutions laid emphasis on asset classification and provisioning, disclosures, consolidated accounting and supervision, and measures to facilitate market developments. As far as financial performance is concerned, the assets side has shown a compositional shift from loans and advances to investments and holding of more liquid assets. As at the end of March 2004, most of the FIs, barring IFCI and IIBI had CRAR much above the stipulated norm of 9 per cent.

Non-Banking Financial Companies

The sixth chapter on 'Non-Banking Financial Companies' discusses current initiatives in the field of regulation and supervision including introduction of reporting framework for non-deposit accepting/holding NBFCs of asset size of Rs.500 crore and above. The balance sheet of the NBFCs are discussed with particular focus on their deposit taking activities in terms of their various attributes, such as, size, region, type of NBFCs, maturity and interest rate offered, etc. Besides, the financial soundness indicators such as CRAR, NPAs, etc. are reported alongside indicators of financial performance which witnessed a marked improvement. The developments related to RNBCs with special emphasis on their investment norms and primary dealers are discussed separately. The emerging structure of the NBFC sector as envisaged in various policy initiatives of the Reserve Bank including phasing out of public deposits of NBFCs, a roadmap for RNBCs and the role of primary dealers in the context of Fiscal Responsibility and Budget Management Act, etc. are also discussed.

Financial Stability

Financial stability has evolved as an increasingly important goal of policy across countries. In India, ensuring stability of the financial system has been the central plank of financial sector reforms. The Chapter on Financial Stability is introduced for the first time in the Report. This chapter primarily focuses on the role of the Reserve Bank pertaining to instruments, institutions, and markets, and the regulatory and supervisory framework instituted for detecting, preventing and managing financial instability.

Perspectives

A medium-term forward looking outlook encompassing the strengthening of prudential norms and the structural changes underway in the banking system with a view to achieving financial stability is provided in the final chapter on ‘Perspectives’.

The Report is available on the RBI website (www.rbi.org.in).

Ajit Prasad
Manager

Press Release: 2004-2005/560