Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
RBI's trend & progress report on banking - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

RBI's trend & progress report on banking
Dec 2, 2013

The Reserve Bank of India (RBI) Report on Trend and Progress (T&P) of Banking in India 2012-13 is an authentic, analytical and informative document, which is of use to policymakers who have to determine the trajectory of future reforms.

Backdrop to banking developments

With adverse global developments and loss of domestic growth momentum, the Indian banking system in 2012-13 experienced a rise in asset impairment, coupled with a dip in profitability. Over the year, non-performing assets deteriorated from 1.5 per cent to 2.0 per cent. If current macroeconomic conditions persist, the credit quality of Indian commercial banks could deteriorate further. A comforting fact is that the capital base of the Indian banking system is strong and provides resilience to face the adverse environment. While there are many suggestions for financial reforms, the merit of the T&P Report is that it provides comparator information for other countries, which then enables a well informed debate on the way forward.

Issue of new bank licences

It is commendable that the RBI has provided for a transparent system of due diligence, with exacting standards for processing new bank licences. Of the 26 applications, it is hoped, that all applicants who fully meet the standards would be given bank licenses. There is a legitimate view that the new licences should be given to those applicants who foster financial inclusion. While small is beautiful, small is also vulnerable. A bank which has a very small geographical spread could be badly affected by a local natural calamity. The Indian ethos, strangely, does not accept the death of banks. The track record after the collapse of the Palai Central Bank in 1960 has been that when a bank fails, it is merged with a public sector bank.

There is need for an explicit policy statement that there would be a break from earlier policies and public sector banks will no longer bail out failed banks. The system should no longer countenance profits being private and losses being public. If such a policy is cast in stone, new banks will have to earn the depositors' trust only by hard performance. A prerequisite would be that the regulator would put a premium on prompt corrective action, which would be made public, bearing in mind depositor protection and as such it would lead to a more effective regulatory system.

Capital infusion

With the move towards stronger international capital requirements, under Basel III of the Bank of International Settlements (BIS), the capital requirements of the public sector banks would pose a heavy burden on government finances. It is estimated that public sector banks will need an additional Rs 4,15,000 crore by way of capital during 2013-18. Of this Rs 1,50,000 crore (or Rs 30,000 crore per annum) will be required by way of equity. During the past five years, the government has injected a total of Rs 47,700 crore by way of its equity contribution to public sector banks. As such, in the next five years, a quantum jump in injection of capital by the government will be needed.

There is a pressing need to reduce the burden on the government, within the present cast in stone policy of not reducing the government's holding to less than 51 per cent in public sector banks. In this context, a number of measures could be considered:

(i)The present share of the government in public sector banks ranges between 51 per cent and 82 per cent. As a rule, all banks which have a government share above 51 per cent should be required to bring down the government share to 51 per cent.

(ii)As Dr C Rangarajan recommended, many years ago, the holdings in public sector banks by public sector units, which are not intended to be reduced below 51 per cent, (such as LIC, ONGC IOC etc.) should be treated as part of the government minimum share of 51 per cent in public sector banks.

(iii)The government should transfer the profits received from public sector banks back to the same banks, and to the extent possible, refrain from infusing more capital into these banks. The upshot of this would be that the overall growth of public sector banks will undergo a change in that the stronger banks will grow faster than the weaker banks, and as such, the overall public sector banking system would become stronger. At present, the system works perversely: the government puts in more capital into the weaker banks and thereby, the overall public sector banking system becomes weaker.

Performance of commercial banks

The T&P Report brings out that the Return on Assets (RoA) of public sector banks was 0.79 per cent; this contrasts to 1.63 per cent and 1.94 per cent for new private sector banks and foreign banks respectively. It is possible that this divergence is essentially because the new private sector banks and foreign banks operate in the elitist segment of the population.

The net interest margin (NIM) in India of 3.02, is comparable to the BRICS countries, but distinctly higher than the industrial countries, which range between 0.78 to 1.37 per cent. Among the industrial countries, the US is an outlier and has a NIM of 3.64 per cent. A long standing baffling question is why the NIM in the US so high. A wild conjecture is that the BRICS countries, as also the US, all have a large geographic spread - could this be the reason for the high NIM?

The degree of concentration (share of top three banks in total assets) in India is 29.4 per cent, as against 51.5 per cent in China and 78.1 per cent in Germany. Is it that the 'too big to fail' problem is a phenomenon of industrial countries and not really relevant to India?

Financial inclusion

The report has an in-depth analysis of the performance of financial inclusion and carries the results of an interesting survey, which should be relevant to the Nachiket Mor Committee.

Please Note: This article was first published in The Freepress Journal on December 02, 2013. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "RBI's trend & progress report on banking". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Is Your Bank Gambling With Your Money? These Banks Should be Declared Dangerous... (Profit Hunter)

Jul 17, 2018

Tanushree Banerjee bets you would not want to leave your money with these unsafe banks...

Your Rescue Plan from the Cave of Poor Quality Stocks (The 5 Minute Wrapup)

Jul 17, 2018

And there will be no getting trapped with Amtek, Vakrangee, or Manpasand like stocks.

2019 Lok Sabha Elections and the Perils of Populism (Vivek Kaul's Diary)

Jul 17, 2018

Evidence from around the world shows that populism can only lead to more populism and this is clearly not good news for the Indian economy.

More Views on News

Most Popular

The Real Truth About India's FDI, Beyond WhatsApp(Vivek Kaul's Diary)

Jul 4, 2018

The FDI numbers do not look very impressive once we adjust for repatriations as well as the overall growth in the economy.

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 17, 2018 (Close)