The RBI shifted its policy focus gradually from crisis management to recovery management

The Reserve Bank of India's statutory Report on Trend and Progress of Banking in India, 2009-10, like its predecessors, is a mine of information on the financial sector. It covers policy developments as well as the performance of commercial banks, cooperative banks and non-banking financial institutions.

Although the title of the report suggests a fixed timeframe (2009-10), it includes developments in the current financial year as well. Bearing the central bank stamp of authenticity, the report will be the single point reference for all matters concerning commercial banking and the rest of the financial sector.

Banks' performance

The performance of commercial banks in 2009-10 was subdued when compared with the previous year. Their profits declined for the second successive year. Also, on some other important parameters such as return on assets, return on equity, net interest margin and spread, they reported lower ratios. The growth of their consolidated balance sheet slowed down when compared with the previous year, primarily due to slower deposit growth. The latter, according to the RBI, was also responsible for the slowdown in banks' credit disbursements.

Along with the decline in profitability parameters, the non-performing assets (NPAs) of banks increased to 2.39 per cent in 2009-10 from 2.25 per cent a year earlier. There was also an increase in the proportion of doubtful and loan assets in 2009-10. However, even against the backdrop of an increase in the NPA ratio, banks remained adequately capitalised. The capital to risk weighted assets ratio (CRAR) stood at 14.5 per cent as at the end of March, 2010, far above the minimum 9 per cent stipulated under the Basel II framework.

Technology adoption

Two pieces of good news are: (a) technological advancement with all public sector banks adopting or about to adopt computerisation. The number of PSBs adopting core banking solutions has been on the rise. (b) From the point of view of financial inclusion, there has been a steady increase in the penetration of bank branches and ATMs, especially in rural areas.

There was a decline in the number of urban co-operative banks (UCBs) mainly due to the ongoing consolidation. However, there has been an increase in their share of banking business in the larger asset-size and business-size categories. Unlike commercial banks, the consolidated balance sheet of UCBs expanded at a higher rate, attributable to a higher growth of deposits and advances. However, there are concerns over possible declines in their profitability. On the other hand, the asset quality of the UCBs improved and their capital adequacy ‘reasonable'. More than 86 per cent of the UCBs complied with the minimum capital adequacy norm of 9 per cent as on March 31, 2010. While State co-operative banks, district central co-operative banks and State co-operative agriculture and rural development banks earned net profits, the ground level institutions, primary agricultural credit societies and primary co-operative agriculture and rural development banks reported net losses.

Other than analysing the performance of banks, co-operative credit institutions and non-banking institutions, the report sets out the perspectives, global banking developments and the policy environment.

Global crisis

There are many lessons learnt from the global financial crisis. (a) Regulation should stay ahead of innovation; (b) there should be a thrust on inter-agency co-operation to ensure financial stability; ( c) an in-depth understanding of the implications of large scale bailouts on financial and fiscal health; and (d) a closer examination of derivative products.

The performance of the global banking industry showed an improvement in 2009-10 after witnessing a tumultuous period of large income losses and write downs in the wake of the global crisis in 2008-09.

Although, thanks to strong fiscal and monetary measures, there has been an economic recovery across the globe, albeit at an uneven pace, concerns of various downside risks to the banking system remain. Global banks face the daunting task of having to refinance a large portion of their liabilities and ending their dependence on emergency support systems from the public sector. In some regions such as the euro area, banks face even greater challenges in the wake of the higher capital charge proposed in the enhanced Basel II norms. In many instances, private sector funding of these banks will mature at the time the extraordinary public support is withdrawn.

The report lists out the important policy measures implemented in 2009-10. The RBI shifted its policy focus gradually from crisis management to recovery management. On the credit delivery front, new developments included the introduction of the base rate mechanism and waiver of security/margin norms for agricultural loans. Financial literacy and financial inclusion have been the thrust areas. Among the important financial measures unveiled has been the Securities and Insurance Laws (Amendment and Validation) Bill, 2010, passed by Parliament to provide a joint mechanism to resolve inter-regulatory differences.

The RBI examined the supervisory practices in respect of concerns relating to banking frauds, overseas operations, financial conglomerates, electronic-banking and technology risks. Emphasis was laid on improving customer service and efficiency of the payments and settlement system.

Also in 2009-10, the RBI took a number of steps to improve IT infrastructure facilities and initiated steps for further absorption of technology.

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