Progress in Banking Sector due to Monetary Policy in

2007-08

Presented by,Paritosh Gupte P-10

Supriya Joshi P-13Rohit Mundhara P-21

Aditi Sabaria C-31Rakesh Lalwani C-19

Banking Structure in India

Reserve Bank of India

Scheduled Bank (239)

Regional Rural

Bank (91)

Scheduled Commerci

al Bank (79)Public

Sector Bank (28)

Private Sector Bank (23)

Foreign Bank (28)

Scheduled Co-

operative Bank (69)Urban

Co-operative Bank

(53)

State Co-

operative

Bank (16)

Non Scheduled Bank (4)

Reserve Bank Of

India

• Central Bank of India• Established on April 1, 1935• Owned by the Government of India• Recommended by Hilton Young Commission• To secure monetory stability• Started with a paid up share capital of 5 crore• The Central Office in Mumbai.

Functions of RBI

• Regulates the issue of currency• Exchange Management and Control• Statutory Bank of Government• Exerts Credit Control• Banker’s Bank• Action against Erring banks• Overall promotion of Commercial Banks

Monetary Policy

Monetary policy is one of the tools that a national Government uses

to influence its economy. Using its monetary authority to control the

supply and availablity of money, a government attempts to influence

the overall level of economic activity in line with its political

objectives. Usually this goal is "macroeconomic stability"

Objectives of

Monetary Policy

• Economic Growth• Full Employment• Price Stability• Exchange rate stability• Equilibrium in the BOP• Developing Banking & Financial Institutions

Instruments of

Monetary policy

Quantitative

• Open Market operations

• Bank rate policy

• Cash Reserve ratio

• Statutory Liquidity Requirement

Qualitative

• Credit Ceilings

• Provision of Minimum Margin requirement

• Discriminating interest rates

• Issue of Directives

Instruments of

Monetary policy

Major areas covered by

Monetary Policy

Monetory Policy

Economy

Monetary Measures

Financial MarketsCredit Delivery

Mechanism

Highlights

Monetary Policy

2007-08

Economy

• Price stability and well-anchored inflation expectations while

ensuring a monetary and interest rate

• Renewed focus on credit quality and orderly financial markets

conditions in securing macroeconomic conditions

• GDP growth projection for 2007-08 at around 8.5 per cent

• Inflation to be contained close to 5.0 per cent during 2007-08

• M3 expansion to be contained at around 17.0-17.5 per cent

• Deposits projected to increase by around Rs.4,90,000 crore

• Adjusted non-food credit projected to increase by around 24.0-

25.0 per cent

Economy

• Scheduled banks required to maintain CRR of 6.5 per cent with

effect from the fortnight beginning April 28, 2007.

Monetary Measures

Bank Rate Reverse Repo Rate Repo Rate6.00% 6.00% 7.75%

Financial Markets

• A ‘Non-Competitive Bidding Scheme’ in the auctions of State

Development Loans (SDLs)

• Average cut-off yield on 182-day Treasury Bills to be used as a

benchmark rate for floating rate bonds

Financial Markets

• Revised reporting framework on overseas investments for monitoring capital flows

• The limit for portfolio investment abroad in listed overseas companies by listed Indian companies enhanced from 25 per cent of net worth to 35 per cent of networth

• The aggregate ceiling on overseas investment by mutual funds to be increased from US $ 3 billion to US $ 4 billion

Credit Delivery Mechanism

• The risk weight on loans up to Rs.1 lakh against gold and silver ornaments to be reduced to 50 per cent from the existing level of 125 per cent

• RRBs to be allowed to take up corporate agency business, without risk participation, for distribution of all insurance products

• A credit guarantee scheme for distressed farmers to be introduced.

• An evaluation of the bank – self help group (SHG) linkage programme to be conducted through the regional offices of the Reserve Bank with a view to ascertaining the degree of transparency in maintaining the accounts by the SHGs and their adherence to well-accepted best practices

• The boards of banks are advised to lay down internal principles and procedures so that usurious interest, processing and other charges are not charged.

Credit Delivery Mechanism

Regional Rural Banks

“To combine the local feel and familiarity enjoyed by the co-

operatives with the degree of business organization as well as the

ability to mobilize deposits characteristic of commercial banks”

• RRB's declined from 196 in March'05 to 91 in March'08 operating in

25 states across 586 districts with a network of 14,790 branches.

• The total number of RRB's, declined to 88 as on August'08.

•RRB's credit-deposit ratio increased from 56% to 60.3% in March'08.

Recapitalization of RRB's

• In Union budget 2007-08 it was announced that RRB's with negative net worth

would be recapitalized in phased manner.

• In July'07, out of 96 RRB's 29 had negative net worth amounting to Rs.1857 cr.

• After July'07, 2 RRB's with negative net worth were merged with 2 other RRB's

of the same state and sponsored by the same banks.

• Amount required for recapitalization was at Rs.1796 crores.

269 crores - State governments (15%)

629 crores – Sponsored banks (35%)

898 crores – Government of India (50%)

Financial Performance of RRB's

Cash in Hand

Bal with RBI Other Bank Bal

Other Inv Net Loans and Ad-vances

Net Assets

2006-07(96 RRB's)

1216 4886 19314 26352 47326 6674

2007-08(91 RRB's)

1412 7164 23493 25073 57601 8798

Col-umn1

NaN NaN NaN NaN NaN NaN

5000150002500035000450005500065000

Financial Performance of RRB’s

Share Capital Reserves Share Cap deposits

Deposits Borrowings Other Liabili-ties

2006-07 (96 RRB's)

196 4902 2188 83144 9776 5562

2007-08 (91 RRB's)

196 5687 2833 99095 11649 4081

Column1 NaN NaN NaN NaN NaN NaN

10000

30000

50000

70000

90000

110000

Rs. i

n Cr

ores

2006 – 07 (96 RRB’s)2007 – 08 (90 RRB’s)

RRB's : Consolidated B/S

RRB's Income Statement as on 31st March'08

2006-07 (96 RRBs)• Net Income Rs.7663 Cr• Expenditure Rs.7038 Cr• Net Profit Rs.625 Cr• Net NPA Rs.3.46 Cr

2007-08 (90 RRBs)• Net Income Rs.9195 cr • Expenditure Rs.7766 cr• Net Profit Rs.1374 cr• Net NPA Rs.3.02 Cr

Co-Operative Banks

• Enlarges the reach of institutional credit both from geographic and socio-economic perspective.

• Important instrument for achieving greater financial inclusion • Focus on revitalising and strengthening the co-operative

banking sector in India.• The no. of UCBs declined from 1,813 at end-March 2007 to

1,770 at end-March 2008.

Some of the Developments

in Co-operative Banks

• Granting of branch licenses to be considered to well-managed and financially sound Urban Co-operative banks (UCBs)

• The existing relaxed prudential norms applicable to Tier I and Tier II UCBs to be extended by one year.

• Allow UCBs to undertake insurance business as corporate agents.

• Consolidation• Interest margins• Loans and advances moderated• Banks investment in govt. security• Deposit growth moderated

Commercial Banks

Commercial Banks

• Banks borrowing increased• International liability • Priority sector advances declined• Agricultural lending policy• Financial performance

Summary

• Affected by Macroeconomic and RBI policy• Less credit creation• Affecting all the sectors except services• Deposits growth was strong

Commercial Banks

NPANPA

• An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank.

• Banks should, classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

NPA

Substandard Rs 26730 mn Rs 12136 mnDoubtful Rs 2410 mn Rs 1725 mnLoss Asset Rs 404 mn Rs 463 mn

As on March 2009 As on March 2008

NPA

Net NPATypes of Banks 2007 2008

Scheduled Commercial Banks Rs 20101 Cr Rs 24734 Cr

Public Sector Banks Rs 15145 Cr Rs 17836 Cr

Old Pvt Sector Banks Rs 891 Cr Rs 740 Cr

New Pvt Sector Banks Rs 3137 Cr Rs 4907 Cr

Foreign Banks Rs 927 Cr Rs 1250 Cr

Total Rs 40201 Cr Rs 49467 Cr

• Reversed declining Trend• High Credit Growth• Hardening of Interest rates• More in Private Sector & Foreign Banks

NPA

NPA

Ratio of Net NPA to Net Advances 2008 2004 2% - 5% 3 Banks 29 Banks 5 % Above 1 Banks 14 Banks

Capital Adequacy Ratio

• It refers to the minimum capital to be raised in

relation to risk assets.

• Increase in CAR raises the public confidence.

Capital Adequacy Ratio

Type of Bank 2006-07 2007-08Scheduled Commercial Banks 12.3% 13.0%Public Sector Banks 12.4% 12.5%Old Pvt Sector Banks 12% 14%New Pvt Sector Banks 12% 14.4%Foreign Banks 12.4% 13.1%

Securitisation

Securitisation is the process of pooling and repackaging of

homogenous illiquid financial assets into marketable securities that

can be sold to investors.

Securitisation has emerged as an important means of financing in

recent times.

Total outstanding Exposure Securitised Rs 885 Cr Rs 1550 Cr2008-09 2007-08

Indices 2007-08 2008-09

BSE Bankex 18.0 -38.0

BSE Sensex 19.7 -41.4

Performance of Banking Sector

Performance of Banking Sector

Equity Debt Total

2007-08 29955 Cr 500 Cr 30455 Cr

2006-07 1066 Cr - 1066 Cr

Bank Amount (Including Premium)

Central Bank of India Rs 816 Cr

State Bank of India Rs 16736 Cr

ICICI Bank Ltd Rs 9956 Cr

Federal Bank Ltd Rs 2141 Cr

Dhanlakshmi Bank Ltd Rs 199 Cr

ICICI Bank Ltd Rs 500 Cr (Debt Issue)

Resources Raised through Public Issue

Capitalization

BSE Market Cap Rs 50,76,438.99 Cr

BSE Bankex Rs 423005.73 Cr

Scrip Wise Weightage in Bankex

ICICI Bank ltd 30.73%

Hdfc Bank Ltd 19.69%

SBI 18.79%

Axis Bank 7.03%

Kotak Bank 4.62 %

March 2008 March 2009 1) BROAD MONEY 701580 21.20% 740932 18.40% 2) NON-FOOD CREDIT 432846 23.00% 406287 17.50%3) CURRENCY WITH PUBLIC 85475 17.70% 97815 17.20%4) GROWTH IN LIQUIDITY 707388 20.60% 731918 17.60%5) REVERSE REPO RATE - 6.00% - 3.50%6) REPO RATE - 7.75% - 5.00%7) CRR - 7.75% - 5.00%

Comparison

Bibliography and

Webliography

• www.rbi.org.in• www.bseindia.com