3. Term - Lending and Investment Institutions |
| Financial Assistance |
| |
| 4.7 During the financial year 1997-98 (April-March), financial assistance (net of inter-institutional flows) sanctioned by the All-India Financial Institutions (AIFIs) amounted to Rs.79,947 crore, showing a sizeable increase of 48.7 per cent over the previous year as against a decline of 13.6 per cent in 1996-97. During the same period, disbursements amounted to Rs.51,855 crore, reflecting a significant increase of 28.5 per cent as compared with a rise of 9.8 per cent in 1996-97 (Appendix Table IV.2 and Chart IV.2). The accelerated growth in financial assistance sanctioned during 1997-98 was due largely to sharp increase in sanctions in respect of infrastructure projects. The combined financial assistance sanctioned and disbursed by the three major term-lending institutions (viz., IDBI, ICICI and IFCI) for infrastructure projects during 1997-98 increased by 217 per cent and 109.7 per cent, respectively. |
Chart IV.2 : Financial Assistance by
All-India Financial Institutions -
1995-96 to 1997-98 |
 |
| |
| 4.8 During 1997-98, financial assistance sanctioned and disbursed by the All-India Development Banks (AIDBs), viz., IDBI, ICICI, IFCI, SIDBI and IIBI stood at Rs.70,258 crore and at Rs.43,016 crore, respectively. These figures were higher by 53.9 per cent and 30.7 per cent, respectively, over the previous year (Appendix Table IV.2). During the same period, sanctions and disbursements by investment institutions (UTI, LIC and GIC and its subsidiaries) registered increases of 20 per cent and 19.3 per cent, respectively. In the case of specialised financial institutions, viz., RCTC, TDICI and TFCI, while sanctions rose by 6.6 per cent to Rs.374 crore, disbursements showed a marginal decline of 1.8 per cent to Rs.224 crore during 1997-98. |
| 4.9 Financial assistance sanctioned and disbursed by all the term-lending institutions showed sizeable increases in respect of major FIs except that of IFCI. The share of IDBI and IFCI in financial assistance disbursed has come down during the period 1995-96 to 1997-98, while that of ICICI has increased from 31.8 per cent in 1995-96 to 43.2 per cent in 1997-98. The disbursements of these three institutions constituted 70.6 per cent of the total disbursements in 1997-98 as against 68.8 per cent in 1996-97 and 60.9 per cent in 1995-96 (Table IV.1). |
| |
| Table IV.1 : Disbursements of Select Financial Institutions-1995-96 to 1997-98 |
|
| Institution |
1995-96 |
Share |
1996-97 |
Share |
1997-98# |
Share |
Percentage variation |
| |
|
|
|
|
|
|
Column |
Column |
| |
Rs.crore |
Per cent |
Rs.crore |
Percent |
Rs.crore |
Per cent |
(4) over(2) |
(6) over(4) |
|
| 1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
|
| Disbursements |
|
|
|
|
|
|
|
|
| IDBI |
10,692.8 |
47.8 |
11,439.0 |
41.1 |
15,165.4 |
41.4 |
7.0 |
32.6 |
| ICICI |
7,120.4 |
31.8 |
11,180.9 |
40.3 |
15,806.9 |
43.2 |
57.0 |
41.4 |
| IFCI |
4,563.3 |
20.4 |
5,157.1 |
18.6 |
5,650.1 |
15.4 |
13.0 |
9.6 |
| A. Total |
22,376.5 |
100.0 |
27,777.0 |
100.0 |
36,622.4 |
100.0 |
24.1 |
31.8 |
| B. AIFIs |
36,760.7 |
|
40,361.8 |
|
51,854.7 |
|
9.8 |
28.5 |
| C. A as per cent |
|
|
|
|
|
|
|
|
| |
of B |
60.9 |
|
68.8 |
|
70.6 |
|
|
|
|
| # Provisional |
|
|
|
|
|
|
|
|
| 4.10 With both banks and financial institutions making a foray into each others' areas of operations, financial institutions have started providing working capital loan. IDBI opened a new window for working capital loan and short-term loans during 1997-98, comprising assistance in the form of Rupee as well as foreign currency loans. Assistance sanctioned and disbursed under these facilities during 1997-98 aggregated Rs.2,692.7 crore (11.1 per cent of sanctions) and Rs.1,859.8 crore (12.3 per cent of disbursements) respectively. |
| |
| Sources and Deployment of Funds of FIs |
| |
| 4.11 Sources of funds of FIs fall primarily into two broad categories viz., internal and external. Internal sources of funds relate to increase in capital, sale/redemption of past investments, repayments of past borrowings, dividend and interests on investments etc. External sources, on the other hand, arise primarily from fresh borrowings (both Rupee and foreign currency) from the market, borrowings by way of bonds and debentures, etc. |
| 4.12 During the period 1997-98 (April-March), internal sources of funds accounted for 37.4 per cent (42.2 per cent in 1996-97), whereas the percentage share of external sources of funding was 41.9 per cent (44.5 per cent in 1996-97). During the same period, the share of other sources of funds has increased from 13.3 per cent to 20.7 per cent. Over the period 1996-97 (April - March) to 1997 - 98 (April - March), the share of internal sources has decreased from 57.1 per cent to 42.7 per cent. During the same period, the relative share of external sources of funds has increased from 36.7 per cent to 37.2 per cent (Appendix Table IV.3 and Chart IV.3(A)). |
| |
Chart IV.3A :
Source of Funds |
| |
 |
| |
| 4.13 Deployment of funds can be categorized under two broad heads: (i) fresh disbursements, and, (ii) repayment of past borrowings. Fresh deployments represent new loans and advances, investments etc., while repayment of past borrowings include redemption of bonds/debentures issued in the past, repayment of Rupee and foreign currency loans etc. Over the period 1996 - 97 (April - March) to 1997 - 98 (April - March), the share of fresh deployments has increased from 44.8 per cent to 60.7 per cent. During the same period, the relative share of repayments of past borrowings has decreased from 23.6 per cent to 18.7 per cent and that of other deployments' has declined from 31.6 per cent to 20.6 per cent [Appendix Table IV.3 and Chart IV.3(B)]. |
| |
Chart IV.3B :
Deployment of Funds |
| |
 |
| |
| Analysis of Income and Expenditure of Major Financial Institutions |
| |
| 4.14 Total income of the three major financial institutions (IDBI, ICICI and IFCI) witnessed a significant increase over the period 1995-96 to 1997-98 (Table IV.2). Adjusting for expenditure and tax provisions, growth in profit after tax (PAT) for ICICI was 72.5 per cent in 1996-97 and 44.4 per cent in 1997-98, for IDBI, the figures for the same period were 13.6 per cent and31.2 per cent and for IFCI, the figures were 6.7 per cent and -2.1 per cent, respectively (Chart IV.4). |
| |
Chart IV.4
Growth in Profit After Tax |
| |
 |
Table IV.2 : Income and Expenditure Statement of Select Financial
Institutions : 1995-96 to 1997-98 |
|
| |
Year / Institution |
1995-96 |
1996-97 |
1997-98 |
Percentage Variation
|
| |
|
(Rs. crore) |
(Rs. crore) |
(Rs. crore) |
column (3) |
column (4) |
| |
|
|
|
|
over (2) |
over (3) |
|
| 1 |
|
2 |
3 |
4 |
5 |
6 |
|
| 1. |
Income from Operations |
|
|
|
|
|
| |
IDBI |
4,608.0 |
5,578.4 |
6,531.0 |
23.8 |
17.1 |
| |
ICICI |
2,882.2 |
4,439.7 |
5,780.7 |
54.0 |
30.2 |
| |
IFCI |
1,936.2 |
2,568.4 |
2,717.4 |
32.7 |
5.8 |
| |
|
|
|
|
|
|
| 2. |
Other Income |
|
|
|
|
|
| |
IDBI |
355.0 |
385.4 |
400.6 |
8.6 |
3.9 |
| |
ICICI |
19.2 |
31.4 |
113.6 |
63.3 |
262.4 |
| |
IFCI |
14.4 |
13.9 |
16.6 |
-3.5 |
19.3 |
| |
|
|
|
|
|
|
| 3. |
Total Income (1+2) |
|
|
|
|
|
| |
IDBI |
4,963.0 |
5,963.8 |
6,931.6 |
20.2 |
16.2 |
| |
ICICI |
2,901.4 |
4,471.0 |
5,894.3 |
54.1 |
31.8 |
| |
IFCI |
1,950.6 |
2,582.4 |
2,734.0 |
32.4 |
5.9 |
| |
|
|
|
|
|
|
| 4. |
Interest Expenditure |
|
|
|
|
|
| |
IDBI |
3,384.6 |
4,153.3 |
4,733.5 |
22.7 |
14.0 |
| |
ICICI |
2,049.7 |
3,103.1 |
3,932.1 |
51.4 |
26.7 |
| |
IFCI |
1,163.7 |
1,775.6 |
1,956.5 |
52.6 |
10.2 |
| |
|
|
|
|
|
|
| 5. |
Other Expenditure |
|
|
|
|
|
| |
IDBI |
268.5 |
328.2 |
397.8 |
22.2 |
21.2 |
| |
ICICI* |
343.5 |
511.5 |
780.9 |
48.9 |
52.7 |
| |
IFCI* |
332.0 |
344.2 |
322.9 |
3.7 |
-6.2 |
| |
|
|
|
|
|
|
| 6. |
Profit Before Tax (3-4-5) |
|
|
|
|
|
| |
IDBI |
1,309.9 |
1,482.3 |
1,800.3 |
13.2 |
21.5 |
| |
ICICI |
508.2 |
856.5 |
1,181.3 |
68.5 |
37.9 |
| |
IFCI |
454.9 |
462.6 |
454.5 |
1.7 |
-1.8 |
| |
|
|
|
|
|
|
| 7. |
Tax Provisions |
|
|
|
|
|
| |
IDBI |
354.5 |
401.0 |
299.0 |
-- |
-- |
| |
ICICI |
72.0 |
104.3 |
95.0 |
-- |
-- |
| |
IFCI |
100.0 |
84.0 |
84.0 |
-- |
-- |
| |
|
|
|
|
|
|
| 8. |
Profit After Tax (6-7) |
|
|
|
|
|
| |
IDBI |
1,007.3 @ |
1,144.2 $$ |
1,501.3 |
13.6 |
31.2 |
| |
ICICI |
436.2 |
752.2 |
1,086.3 |
72.5 |
44.4 |
| |
IFCI |
354.9 |
378.6 |
370.5 |
6.7 |
-2.1 |
|
| * |
Including provisions for bad and doubtful debts. |
| @ |
Includes excess income tax provision of earlier years written back to the extent of Rs.51.8 crore. |
| $$ |
Includes excess income tax provision of earlier years written back to the extent of Rs.25 crore and lease equalization adjustment of Rs. 38 crore. |
| Prime Lending Rates of FIs |
| |
| 4.15 Table IV.3 sets out details of lending rate structure of select all-India financial institutions, viz., IDBI, ICICI and IFCI since October 1997. The movement of lending rates of financial institutions has been influenced primarily by two major factors, (1) the cost of funds for the institutions; and (2) overall movement in interest rates. In May 1997, ICICI, for the first time, introduced a two-tier prime lending rates viz., Medium Term Prime Lending Rate (MTPLR) and Long Term Prime Lending Rate (LTPLR). The other two major FIs viz, IDBI and IFCI also followed suit. Further, ICICI introduced a Short Term Prime Lending Rate (STPLR) in July 1997 with variable maturity of interest rate to be reset annually. As a result of the easing of the liquidity position as reflected in a reduction in Bank Rate by the Reserve Bank in April 1998, the FIs effected a downward revision in their PLRs. The STPLR of ICICI, which was 14.0 per cent in January 1998, was reduced to 13.5 per cent in April 1998. The LTPLR and MTPLR were also reduced from their earlier levels of 14.0 percent and 14.25 percent to an uniform of 13.5 per cent. IDBI's STPLR for working capital loans of less than 3 years was reduced from the range of 13.5-17.0 per cent in January 1998 to 13.0-16.5 per cent in April 1998 and the LTPLR was reduced from the range of 14.5- 18.0 per cent to 14.0 - 17.5 per cent. The STPLR for working capital loans with a maturity of upto 3 years in respect of IFCI was also reduced from 13.5-17.0 per cent in January 1998 to 13.0-16.5 per cent. The LTPLR, which was in the range of 14.5-18.0 per cent, was reduced to 14.0-17.5 per cent in April 1998. |
| |
|
| Table IV.3 : Lending Rates Structure$ of Select Financial Institutions |
| (per cent per annum) |
|
| |
IDBI |
ICICI# |
IFCI |
|
| 1 |
2 |
3 |
4 |
|
| October 1997 |
|
|
|
| LTPLR |
13.5-17.0 |
|
13.5 |
13.5-17.0 |
| MTPLR |
-- |
|
12.25 |
-- |
| STPLR |
12.5-16.0 |
|
12.0 |
12.5-16.0 |
| |
|
|
|
|
| January 1998 |
|
|
|
|
| LTPLR |
14.5-18.0 |
|
14.0 |
14.5-18.0 |
| MTPLR |
-- |
|
14.25 |
-- |
| STPLR |
13.5-17.0 |
|
14.5 |
13.5-17.0 |
| |
|
|
|
|
| April 1998 |
|
|
|
|
| LTPLR |
14.0-17.5 |
|
13.5 |
14.0-17.5 |
| MTPLR |
-- |
|
13.5 |
-- |
| STPLR |
13.0-16.5 |
|
14.0 |
13.0-16.5 |
|
| $ Interest rates indicated are the range/band which includes Prime Lending Rates also. |
| # No band is specified for the rates specified by ICICI. |
| All interest rates are exclusive of interest tax unless stated otherwise. |
| LTPLR : Long-term Prime Lending Rate (for term-loans exceeding 3 years). |
| MTPLR : Medium-term Prime Lending Rate (applicable for ICICI for loans with maturity exceeding 1 year and |
| |
upto 3 years). |
| STPLR : Short-term Prime Lending Rate (for term-loans below 3 years). In case of ICICI, the rate is of variable |
| |
maturity with interest rates reset annually. |
| Resource Raising by Financial Institutions |
| |
| Raising of Resources by Issue of Bonds/Debentures by FIs |
| |
| 4.16 To introduce level-playing field in the matter of raising resources, the All- India Financial Institutions have been permitted to issue bonds with maturity of 5 years and above without any prior approval, but with simple registration with the Reserve Bank, provided certain pre-conditions are satisfied, namely that the bonds are Vanila instruments (i.e., without options etc.); and that the interest rate on such bonds is not more than 200 basis points above the yield on Government of India securities of equal residual maturity at the time of issuing bonds. |
| |
| 4.17 Apart from these, all other bond issues are required to be referred to the Reserve Bank for approval. In either case (i.e., bonds issued with or without prior approval of Reserve Bank, as the case may be) however, approval from other regulatory authorities like the Securities and Exchange Board of India (SEBI) etc., is also required. |
| |
| Standing Committee on Bonds Issue by FIs |
| |
| 4.18 The Reserve Bank has constituted a Standing Committee on Bonds Issue by FIs headed by Shri S.P Talwar, (Deputy Governor), to expeditiously dispose the requests received from the FIs to raise resources from the market by way of issuance of bonds. |
| |
| Funds Raised by Major Financial Institutions |
| |
| 4.19 With the gradual drying up of traditional sources of funds in the form of National Industrial Credit (Long-term Operations)[NIC(LTO)], FIs have been increasingly resorting to accessing the domestic capital markets for meeting the major portion of their Rupee resource requirements. FIs are currently raising funds through the issue of various types of innovatively structured bonds and debentures both by way of public issues and private placements. During the year 1997-98 (April-March), the three major all-India financial institutions mobilised Rs.24,384.4 crore by way of bonds and debentures as against Rs.18,064.3 crore during the same period of the previous year, registering an increase of 35 per cent (Table IV.4). |
| Table IV.4 : Funds raised by major Financial Institutions -1996-97 and 1997-98 |
(Rs. crore)
|
| Institution |
IDBI |
ICICI |
IFCI |
Total |
|
| 1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
|
| |
1996-97
|
1997-98
|
1996-97
|
1997-98
|
1996-97
|
1997-98
|
1996-97
|
1997-98
|
| Public Issue of |
1,500.0 |
984.9 |
1,072.0 |
1,734.9 |
1,236.8 |
0.0 |
3,808.7 |
2,719.7 |
| Bonds/Debentures |
|
|
|
|
|
|
|
|
| Private Placement of |
8,000.6 |
12,186.5 |
3,444.2 |
6,111.1 |
2,810.8 |
3,367.1 |
14,255.5 |
21,664.7 |
| Bonds/Debentures |
|
|
|
|
|
|
|
|
|
| Total |
9,500.6 |
13,171.4 |
4,516.2 |
7,846.0 |
4,047.6 |
3,367.1 |
18,064.3 |
24,384.4 |
|
| 4.20 Among the financial institutions, ICICI mobilised Rupee resources of Rs.7,845.9 crore. The maturity period of bonds varied from 3 to 15 years. The bonds issued carried yield rates ranging from 12.11 per cent (for 1 to 3 year maturity) to 15.10 per cent per annum (for maturity of above 15 years). During the same period, IDBI mobilised Rupee resources aggregating Rs.13,171.4 crore as against Rs.9,500.6 crore during the previous year. The maturity period ranged between 1 year to 30 years and the average yield was 12.7 per cent. The funds raised by IFCI accounted for Rs.3,367.1 crore for the year ended March 1998, which waslower than the previous year's figure of Rs.4,047.6 crore. The maturity period ranged between 1 year to above 10 years and the average yield was 12.6 per cent per annum (Table IV.4). |
| |
| Policy Developments Relating to Financial Institutions |
| |
| Prudential Norms Relating to Income Recognition and Asset Classification |
| |
| 4.21 With effect from December 4, 1997, the Government guaranteed advances need not be classified by FIs as non-performing assets (NPAs) even if dues in such accounts are in arrears and are not reckoned for income recognition purposes. No provisioning is required to be made in respect of NPAs that have been guaranteed by the Government. However, if the Government repudiates its guarantee, such advances should be treated as NPAs. |
| |
| Soundness and Capital Adequacy of Financial Institutions |
| |
| 4.22 It is recognized that the quality of assets of financial institutions would be a critical factor for maintaining the existing levels of profitability. Accordingly, financial institutions have been making a proactiveeffort to keep their NPAs at manageable levels; net NPAs of most of the FIs have come down during 1997-98 (Table IV.5). At the same time, the prescriptions relating to capital adequacy standards have made it mandatory for these institutions to achieve the stipulated minimum capital adequacy ratio (CAR), if not better it. Judged from this perspective, the CAR of all financial institutions is well above the 8 per cent benchmark as brought out in Table IV.6. |
| |
| Table IV.5 : Asset Classification of Select Financial Institutions-1997 and 1998 |
| (Amount in Rs.crore) |
|
| Institution |
Standard |
Sub-standard |
Doubtfu |
Loss |
Total |
Net NPA#/Total |
| |
|
|
|
|
|
|
|
|
|
|
loans(per cent) |
|
| |
1997 |
1998 |
1997 |
1998 |
1997 |
1998 |
1997 |
1998 |
1997 |
1998 |
1997 |
1998 |
|
| 1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
13 |
|
| IDBI |
38,127 |
45,181 |
3,005 |
3,516 |
1,360 |
1,585 |
-- |
-- |
42,492 |
50,282 |
10.3 |
10.1 |
| ICICI |
26,350 |
34,167 |
1,392 |
1,813 |
851 |
1,021 |
-- |
-- |
28,593 |
37,001 |
7.8 |
7.7 |
| IFCI |
13,625 |
16,890 |
1,228 |
1,416 |
985 |
1,247 |
-- |
-- |
15,838 |
19,553 |
13.9 |
13.6 |
| SIDBI |
11,871 |
12,572 |
295 |
223 |
11 |
40 |
-- |
-- |
12,177 |
12,835 |
2.5 |
2.0 |
| NABARD |
19,859 |
22,335 |
163 |
308 |
33 |
23 |
-- |
-- |
20,055 |
22,666 |
0.9 |
1.5 |
| NHB |
NA |
2,469 |
NA |
-- |
NA |
-- |
-- |
-- |
NA |
2,469 |
- |
Nil |
| EXIM Bank |
NA |
3,025 |
NA |
97 |
NA |
416 |
-- |
-- |
NA |
3,538 |
NA |
14.5 |
| IIBI |
1,090 |
1,898 |
136 |
156 |
124 |
131 |
-- |
-- |
1,350 |
2,186 |
19.3 |
13.1 |
|
| |
# Net of provisioning and write-offs. |
| |
N.A. Not Available. |
| Table IV.6 : Capital Adequacy Ratio$ of Select Financial Institutions-1997 and 1998 |
|
| Institution |
As on March 31, 1997 |
|
As on March 31, 1998 |
|
| 1 |
2 |
|
3 |
|
| 1. IDBI |
14.7 |
|
13.7 |
| 2. ICICI |
13.3 |
|
13.0 |
| 3. IFCI |
10.0 |
|
11.6 |
| 4. SIDBI |
25.7 |
|
30.3 |
| 5. IIBI |
10.6 |
* |
12.8 |
| 6. EXIM Bank |
31.5 |
|
30.5 |
| 7. NABARD |
40.4 |
|
52.5 |
|
| |
$ As per cent of risk weighted assets. |
| |
* As on March 26, 1997. |
| Exposure Norms |
| |
| 4.23 Effective June 28, 1997, term-lending institutions (IDBI, ICICI, IFCI, IIBI, EXIM Bankand TFCI) and three refinancing institutions (SIDBI, NHB and NABARD) have been subjected to mandatory credit exposure norms. The exposure ceiling has been linked to the institution's capital fund and it should not exceed 25 per cent of the capital fund (paid-up capital plus free reserves as per published accounts) in case of individual borrowers and 50 per cent in respect of group borrowers. Exposure has been defined to include both funded and non-funded credit limits, underwritings and other commitments. Besides limiting the exposure norms, the term-lending institutions have been asked to consider fixing internal limits for aggregate commitments to specific sectors (e.g., textiles, chemicals, engineering, etc.), so that the exposures are evenly spread across various sectors. Till June 1997, such exposure norms were applicable only to commercial banks. Keeping in view the substantial resource requirements for infrastructure projects, effective September 1997, credit exposure to group borrowers have been permitted to exceed the norm of 50 per cent of the FI's capital fund by an additional 10 per cent (i.e., upto 60 per cent) provided that the additional exposure is on account of infrastructure projects only. |
| |
| Post Disbursal Supervision |
| |
| 4.24 On February 11, 1998, the All- India Financial Institutions were advised to ensure that assisted companies do not grant to their subsidiaries interest-free loans and/or loans with interest rates lower than the rate at which company had borrowed from banks/FIs without the prior approval of the Board of Directors of such assisted companies. Such a move was expected to result in prudent credit management on the part of the FIs. Further, the FIs have been directed to strengthen the existing arrangements for monitoring the proper end-use of funds disbursed by them by placing special emphasis on scrutiny of balance sheets of the assisted companies and also the agenda notes of the Board Meetings considering the Annual Accounts. The Nominee Directors of FIs on the Board of such assisted companies have been made accountable for their acts of omission and commission. |
| |
| Sanctions of Bridge Loans by FIs |
| |
| 4.25 Effective January 23, 1998, the ban on sanction of bridge loans by FIs against expected equity flows/ issues has been lifted. Accordingly, FIs have been permitted to grant bridge loan/interim finance to companies (other than NBFCs) against public issue of equity, whether in India or abroad. The guidelines for sanctioning of bridge loans would have to be laid down by each FI with the approval of its Board. The guidelines should, inter alia, include the following aspects, viz., (i) security to be obtained for the loan; (ii) compliance with individual/group exposure norms prescribed by the Reserve Bank; (iii) ensuring end-use of bridge loan; and (iv) the maximum period of the bridge loan should be of one year duration. All other instructions relating to the sanction of bridge finance continued to remain the same as hitherto. |
| Mergers and Acquisitions |
| |
| 4.26 ICICI sought to consolidate its position in the financial sector by the synergistic merger with SCICI and subsequently with ITC Classic in 1997. ICICI had also formed a wholly-owned subsidiary called ICICI Credit Corporation Ltd. (I-CREDIT) as a non-banking finance company to create a country-wide retail network to enter new areas like financing automobiles, consumer durables and vendor leasing. Effective April 1, 1998, ICICI has proposed the merger of Anagram Finance Limited. |
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| Report of the Working Group for Harmonising the Role and Operations of DFIs and Banks (Chairman: Shri S.H.Khan) |
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| 4.27 The Indian financial system has undergone a significant transformation in recent times in terms of structure, performance and participants. In the light of these changes and keeping in view the need for evolving vibrant financial system, the Reserve Bank had constituted a Working Group in December 1997 for harmonising the Role and Operations of DFIs and Banks (Chairman: Shri S.H.Khan) with the following terms of reference: |
| (i) |
To review the Role, Structure and Operations of DFIs and Commercial Banks in the emerging operating environment and suggest changes; |
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| (ii) |
To suggest measures for bringing about harmonisation in the lending and working capital finance by banks and DFIs; |
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| (iii) |
To examine whether DFIs could be given increased access to short-term funds and the regulatory framework needed for the purpose; |
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| (iv) |
To suggest measures for strengthening of organisation, human resources, risk management practices and other related issues in DFIs and commercial banks in the wake of Capital Account Convertibility; |
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| (v) |
To make such other recommendations as the Working Group may deem appropriate to the subject. |
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The Working Group, in its Report submitted in April 1998, made the following sets of recommendations: |
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Changes in Role, Structure and Operations |
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| 1. |
Progressive move towards universal banking and the development of an enabling regulatory framework for the purpose. |
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| 2. |
Granting full banking license to DFI; in the interim, they may be permitted to have a banking subsidiary with 100 per cent holding. |
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| 3. |
The appropriate corporate structure should be an internal management/shareholder decision. |
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| 4. |
Permit mergers between banks, banks and DFIs encompassing both strong and weak (but viable) entities or two strong ones. |
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| 5. |
Provide DFIs with appropriate level of financial support to enable them to fulfill their developmental obligations. |
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Changes in the Regulatory and Legal Framework |
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| 6. |
Function-specific regulatory framework must be introduced for both foreign and local entities which render identical services. |
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| 7. |
The establishment of a super-regulator' to supervise and co-ordinate the activities of the multiple regulatory agencies to ensure uniformity in regulatory treatment. |
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| 8. |
Thorough revamp of the 1993 Act on Recovery of Debts from Banks and DFIs. |
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Changes in Supervisory Practices |
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| 9. |
Supervisory Authority should undertake primarily off-site supervision based on periodic reporting by the Banks or DFIs. |
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| 10. |
Consolidated supervision of DFIs/Banks involving contact and exchange of supervisory and financial information with other supervisors. |
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| 11. |
Development of a risk-based supervisory framework' consistent with firms' risk profiles and not merely their corporate structures. |
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Statutory Obligations |
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| 12. |
Reduction in CRR in a progressive manner to international levels within a time-bound frame. |
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| 13. |
Phasing out SLR in line with the international practice. |
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Re-organisation of State-Level Institutions (SLIs) |
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| 14. |
Corporatisation of SLIs to improve their efficiency. |
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| 15. |
Encourage strong SFCs to access the market by way of Initial Public Offerings. |
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| 16. |
Transfer the present shareholding of IDBI in SLIs to SIDBI which, in turn, should be vested with the overall responsibility for enacting policy and procedural guidelines with regard to operations of SFCs. |
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Harmonising the Role, Operations and Regulatory framework of DFIs and Banks |
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| 17. |
Set up a Standing Committee on which Banks and DFIs would be represented to achieve closer co-ordination and harmonisation between these institutions. |
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| 18. |
Removal of the existing ceiling for resource mobilisation by DFIs by way of various instruments like term money borrowings, CDs, term-deposits and inter-corporate deposits (currently linked to their net owned funds) and other related terms and conditions. |
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| 19. |
Assign a uniform risk weightage of 20 per cent for investment made by commercial banks in bonds of AAA rated DFIs. |
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| 20. |
Investment by a bank in SLR securities issued by a DFI should be excluded while calculating the exposure to that DFI. |
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| 21. |
DFIs should be granted full Authorised Dealer's license. |
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Organisation Re-design |
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| 22. |
Develop best practices in the area of corporate governance such as imparting full operational autonomy and flexibility to Management and Boards of Banks and DFIs. |
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Risk Management |
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| 23. |
Clear strategies approved by the Board of Directors as to the risk management policies and procedures. |
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| 24. |
An Integrated treasury and a proactive Asset-Liability Management (ALM), encompassing both on- and off-balance sheet items. |
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Information Technology and MIS |
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| 25. |
Align the legal framework to render the system compatible with a technology-driven banking environment. |
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Human Resources Development |
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| 26. |
HRD agenda should focus on prescient management and leadership; enhance skill-building and skill up-gradation; develop market-related compensation packages. |
| 4.28 The Reserve Bank of India proposed to have a discussion paper prepared for wider public debate on the issue of universalisation of banking and eliminating the specific functional role of specialized financial institutions. The discussion paper is expected to be released soon. |
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