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MANAGEMENT OF BANKING

CURRENT ISSUES AND FUTURE CHALLENGES

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The global financial crisis of 2007 has thrown up newchallenges for the financial system. The keycontributory factors for the crisis were: Lower interest rates inducing higher risk taking, and

leading to an asset price bubble

Changing structure of the financial sector and rapid paceof innovation over the last two decades, and the failureof risk management to match up to the new demands

Failure to adequately regulate highly leveraged financialinstitutions

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NEW CHALLENGES

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There are two vital objectives of financial regulation[IMF Working paper] Mitigation of systemic risk

Consumer protection

Financial regulation typically uses tools such as

Prudential regulation Specialized tools such as LOLR or deposit insurance

Regulation of payment and settlement systems

Regulation of business entities

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FINANCIAL REGULATION

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Financial stability has to be an explicit objective ofregulation

International co-operation key to resolving systemiccrises

Indias financial sector reasonably insulated from

crisis of 2007

Financial stability has been made explicit objective ofRBI monetary policy

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FINANCIAL REGULATION AND

FINANCIAL STABILITY

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Insurance and pension funds are also marketparticipants

The regulators for these two categories are the IRDAand PERDA [proposed] respectively

There are various issues that have to be addressed in

respect of each market.

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REGULATION OF THE INDIAN

FINANCIAL SYSTEM

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Commercial banks [about 60% share]

Urban co-operative banks

Rural financial institutions

Non banking finance companies

Housing finance companies

Development finance institutions Mutual funds

Insurance companies

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FINANCIAL INTERMEDIARIES IN

INDIA

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Public sector banks [27]

Private sector banks [22]

Foreign banks [32]

Regional rural banks [84]

[Figures in brackets show number of institutions]

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COMMERCIAL BANKING SYSTEM -

2009

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All India financial institutions EXIM bank, NABARD,SIDBI, NHB

Investment institutions LIC, GIC

State level financial institutions SFC, SIDC

Other public financial institutions

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FINANCIAL INSTITUTIONS

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Deposit taking NBFC-D [336]

Non deposit taking NBFC- ND [12402]

Residuary NBFC RNBFC [2]

Housing finance companies HFC [43]

Mortgage guarantee companies[Figures in brackets indicate number of companies

June 2009]

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NON BANKING FINANCE COMPANIES

- 2009

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URBAN CO-OPERATIVE BANKS [1721]

Scheduled UCB [53] Non scheduled UCB [1668]

RURAL CO-OPERATIVE CREDIT INSTITUTIONS [96061] Short term [95344]

State co-operative banks District central co-operative banks Primary agriculture credit societies

Long term [717] SCARDB PCARDB

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CO-OPERATIVE CREDIT

INSTITUTIONS

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The evolution of Indian banking can be looked at in 4different phases

The pre Independence [pre 1947] phase

1947-1967

1967-1991-92

1991-92 [financial sector reforms] and beyond

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EVOLUTION OF INDIAN BANKING

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Challenges before regulators How do we define financial stability?

Who takes the responsibility of ensuring financial stability?

Where does risk management amount to conservativeness?

What are the reforms required to create an efficient and effectiveregulatory architecture to ensure financial stability?

How do we resolve the constant tension between fiscal andmonetary policies?

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WAY FORWARD