Reforms in banking sector to continue
A new Bill on Banking Sector Reforms is to be introduced in Parliament to strengthen creditor rights through foreclosure and enforcement of securities by banks and financial institutions.
Union Finance Minister Yashwant Sinha today stressed in Parliament that reforms in the banking sector will be continued to enhance the efficiency and competitiveness of the sector.
The following measures have either been taken or are being taken:
Public sector banks recovered Rs 12,860 crore in 2000-01 as compared with Rs 9,883 crore in the previous year and net NPAs as percentage of net advances came down to 6.7 per cent as on March 31, 2001 as compared to 7.4 per cent in the previous year.
Debt Recovery Tribunals and 5 appellate tribunals have been set up. As on September 30, 2001 the DRTs had disposed of 18,703 cases involving Rs 14,026 crore. Recovery made was Rs 3,527 crore.
To help banks and financial institutions to make provisions for NPAs as required by the RBI, additional fiscal relief is being offered, details of which will be given in part B of my speech. This will enable banks to review their lending rates.
A new Bill on Banking Sector Reforms is proposed to be introduced in Parliament to strengthen creditor rights through foreclosure and enforcement of securities by banks and financial institutions. This Bill will also enable securitisation for money locked up in long term loans.
A pilot Asset Reconstruction Company will be set up by 30 June 2002 with the participation of public and private sector banks, financial institutions and multilateral agencies. This company will initiate measures for taking over non performing assets in the banking sector and also develop a market for securitised loans.
The Deposit Insurance Credit and Guarantee Corporation (DICGC) will be converted into the Bank Deposits Insurance Corporation (BDIC) to make it an effective instrument for dealing with depositors¡¦ risks and for dealing with distressed banks. Appropriate legislative changes will be proposed for this purpose.
Reforms in the financial sector have posed new challenges for the development finance institutions (DFIs) like IDBI. It is proposed to make legislative changes to corporatise IDBI within the coming year to provide it appropriate flexibility. Meanwhile IDBI's tier one capital is being strengthened by conversion of existing IBRD and NIC (LTO) loans in to appropriate long term instruments.
Consequent to certain amendments made in the year 2000 in the Companies Act, 1956, directors incur disqualification for election in the case of certain defaults by the company. It is proposed to exempt nominee directors of public financial institutions and banks from this provision.
Three public sector banks had been classified as weak banks on the basis of criteria suggested by the Committee on Banking Sector Reforms in 1997-98. Two of these banks namely UCO Bank and United Bank of India have turned around and have started making profits. Though the Indian Bank has also shown improvement, its capital adequacy ratio remains deficient. A provision of Rs 1300 crore is proposed for re-capitalisation support to this bank, on the basis of a commitment to Government for implementing monitorable reform measures.
In the banking sector, foreign banks are permitted to operate in India as fully owned branches with specific permission of the Reserve Bank of India. As recommended by the Committee on Banking Sector Reforms, it has now been decided to give an option to foreign banks to either operate as branches of their parent banks or to set up subsidiaries. A foreign bank will have to choose only one of the two options. Such subsidiaries will have to adhere to all banking regulations, including priority sector lending norms, applicable to other domestic banks. Necessary amendments will be proposed in the Banking Regulation Act 1949 to relax the maximum ceiling of voting rights of 10% for such subsidiaries.
The cooperative credit structure, which is critical for the agriculture sector, has low capital adequacy and high NPAs, is in urgent need of reform. A Committee under the then Deputy Governor of RBI was appointed to examine its functioning closely. The recommendations of this Committee have been discussed widely by Chief Ministers and in a joint committee of Cooperation Ministers under the chairmanship of Vikhe Patil. Reform measures such as the adoption of a Model Cooperative Act, removal of dual control between State Governments and the RBI, regular conduct of elections, larger stake of the members, professionalisation of management etc. have been recommended.
The recapitalisation formula suggested is 60:40 between the Central and State Governments along with increases in share capital of members. States will have to consider and accept their funding share and implement the suggested measures for reform.
Even though this is a state subject the government of India will go out of its way to help in the process. To start the process, Sinha said he is making a token provision of Rs 100 crore and depending on the pace of reform, provision of additional funds will be considered.
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