1.Write about development banks and financial institutions in India.
2.Define the term LIC.
3.write some specialized financial institutions.
4.What is banking reform?
5.Write about NARASIMHAM-I AND NARASIMHAM-II COMMITTEE REPORT.
6.what are the major recommendations of the 1998 report.
7.Write about NAYAK COMMITTEE REPORT (2014).
8.Define INDRADHANUSH and INDRADHANUSH 2.0.
DEVELOPMENT BANKS AND FINANCIAL INSTITUTIONS IN INDIA:
Apart from commercial banks, the financial institutions in india also includes development banks,LIC,general insurance corporation of India (GIC),SFC,SIDC and specialized financial institutions like IFCI
Venture capital funds. In India the first Development Bank was the industrial Finance Corporation of India which was established on 1st July 1948 . under the industrial Finance Corporation act, 1948 .
Development Bank is very essentially a multi-purpose financial institution with the broad development how to look. A developing Bank may, be defined as a financial institution. These Financial Institutions are concerned with providing all types of financial assistance by the medium term as well as long term,to the
Business units,in the forms of loan,underwriting, investment, guarantee operations and promotional activities. Economic development in general ,industrial development, and in particular.
As per the RBI,presently (march 2016) there are some of the following financial institutions:-
1.north eastern development finance corporation.
- Export-import bank of India.
- Industrial investment bank of India.
- Small industries development bank of India.
- National bank for agriculture and rural development.
Their are some major industrial development banks in india but many of them now has been converted into universal banks.
▪︎The major industrials development banks are as follows:-
1.IFCI :- the IFCI stands for industrial finance corporation of India, which was established on 1 July 1948. It was established under the industrial finance corporation Act,1948.IFCI was set up to provide a term of finance to the large industries in india.
The main objective of IFCI is to provide medium and long-term financial assistance to a large scale industrial undertaking particularly when ordinary Bank accommodation does not suit the undertaking or finance cannot be profitable a raised by the concerned by the issues of shares.
By the early 1990 it was recognised that there was need for Greater flexibility to respond to the changing financial system it was also felt that IFCI should directly access the capital markets for its funding needs subsequently the name of the company was also changed to IFCI Limited with effect from October 1999.
2.IDBI:
The Industrial Development Bank of India was established on 1st July 1964 under and act of Parliament as a wholly owned subsidiary of The Reserve Bank of India.
The main aim was to promote and Finance the development of industries in 16 February 1976 the ownership of Industrial Development Bank of India was transferred to the Government of India and it was made the principal financial institution for coordinating the activities of Institution engaged in financing promoting and developing industry in the country.
The Industrial Development Bank of India continued to serve as a dfa for 40 years till the year 2004 when it was transformed into a bank.
3.SIDBI:
S IDBI is an independent financial institution aimed to aid the growth and development of micro small and medium scale enterprises in India it was setup on 2 April 1990 through an act of Parliament it was incorporated initially as a wholly owned subsidiary of IDBI.
Units development and Finance agency back a new initiative by government of India to support non-cooperative small business is proposed to initiate it as a unit of assigned to benefit from SIDBI initiatives and expertise.
SIDBI taken the initiative to promote several institutions credit guarantee fund trust for micro and small Enterprises as SIDBI venture capital, SME rating agency of Indian Limited and India SME Technology Services Limited for the benefit of MSME sector.
☆ IIBI:
the IIBI was a fully Government of India on financial investment institution it was established in 1971 by resolution of the Parliament of India the bank was headquartered at Kolkata of the Parliament of India. The Bank was headquartered at Kolkata.
However ,ina move towards winding up to the IIBI, its board in January 2008 decide to sell the entire loan book at one go.
In 2005 Merger of IIBI ,IDBI and IFCI was considered ,but IDBI refused and it was decided to 2006 to 2007 to close the banks. Deloitte touche was appointed to dispose the of IIBI’s non performing asset.
■ LIFE INSURANCE CORPORATION:
The Life insurance Corporation of India was founded on September 1, 1956, when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India. Over 245 insurance companies and provident societies were merged to create the state-owned Life Insurance Corporation of India. The mission was ensure and enhance the quality of life of people through financial security by providing product and services of expired attributes with competitive returns, and by rendering resources for economic development.
And the vision is a transnationally competitive financial kongolo merit of significance to societies and pride of India.
1.Objective of LIC are as follows:
Maximize mobilization of peoples savings by making insurance linked saving advocatily attractive.
- Spread message and products of life insurance widely and in particular to the ruler areas and to the socially and economically backward classes with a view to reading all insurable persons in the country and providing them adequate financial cover against Death at a reasonable cost.
- Conduct business with utmost economy and with the full realisation that the monies belong to the policyholders.
- Bear in mind in the investment of funds the primary obligation to its policyholders who is money it holds in trust without losing sight of the interest of the community as a whole the funds to be deployed to the best advantage of the investor as well as the community as a whole keeping in a view National priorities and obligations of attractive return.
- Meet the various Life Insurance needs of the community that would arise in the changing social and economic environment.
- Act as trustees of the insured public in their individual and collective capacities.
☆ GENERAL INSURANCE CORPORATION:
GIC of India is a state owned enterprise in India. It was incorporated on 22 November 1972 under Companies Act, 1956. GIC Re has its registered office and headquarters in Mumbai. It was the sole reinsurance company in the Indian insurance market until the insurance market was open to foreign reinsurance players by late 2016 including companies from Germany, Switzerland and France.
In 1972 the general insurance business act 1972 Nationalised the general insurance business in India with effective from 1st January 1973.
The India’s government through nationalisation took over the share of 55 Indian insurance companies and the undertaking for 52 insurers carrying on general insurance business.
The General Insurance Corporation was formed for the purpose of super intending controlling and carrying on the business of general insurance its vision is to be leading Global Re insurance and risk solution provider and its mission is to achieve our vision by building long term mutually beneficial relationship with business partners
• applying state-of-the-art Technology processes including Enterprises risk management and innovative solution.
• practicing fair business ethics and values.
• enhancing profitability and financial strength befitting of the Global Position.
• developing and retaining highly motivated professional team of employees.
After process of mergers among Indian insurance companies for companies where left as fully owned subsidiary company of GIC.
- The New India Assurance Company Limited.
- National Insurance Company Limited.
- United India Insurance Company Limited.
- The Oriental Insurance Company Limited.
- National Insurance Company Limited:
During 1906 the National Insurance Company Limited was established. And its registered office is in Kolkata after GIBNA was passed in 1972, 11 Indian insurance and 21 International companies were merged into it. It was wholly owned by the Indian government National Insurance Company Limited is one of the top general insurers in the public sector of India.
- New India Assurance Company Limited:
New India assurance Company Limited today is a fully government owned multinational general insurance company operating in 28 countries and its headquarter is at Mumbai, India. founded by Dorabji Tata ok 1919 , it have been in market leader in India in non life business for more than 40 years .its vision was to be the most respected, trusted and preferred non Life Insurer in the Global markets we operate.and its mission was to provide financial security to individuals, trade, commerce and all other segments of the society by offering insurance products and services of high quality at affordable cost. and to develop general insurance business in the best interest of the community. - Oriental Insurance Company Limited:
The headquarter of Oriental Insurance Company Limited is is located at New Delhi with 30 regional offices and more than 1800 active branches across all over the country the company also has their branches in nepal, Kuwait ,and Dubai.
4.united India insurance company Limited:
United India Insurance Company Limited was incorporated as a company on 18 February 1938. after the Nationalized ,United India has grown by leaps and bounds .the company has variety of insurance products to provide insurance cover from Bullock’s carts to satellites.
■ GIC Re:
As a sole reinsurer in the domestic reinsurance market, GIC Re provides reinsurance to the direct general insurance companies in the Indian market.GIC Re is a wholly owned company of the Government of India.
As GIC Re is spreading it’s to emerge an effective reinsurance solution partner for the Afro Asian region. it has started leading the reinsurance programmes of several insurance companies in SAARC countries, south east asia ,Middle East and Africa.
■ SOME SPECIALIZED FINANCIAL INSTITUTIONS:
1.IFCI venture capital funds ltd:
IFCI venture capital funds Limited was established as a risk capital foundation in 1975 by the IFCI Limited is a society to provide financial assistance to the first generation professional and technocrat entrepreneurs for setting up own venture through soft loan ,under the risk capital scheme.
- Technology development and information company of India :
Technology development and information company of india Limited is the largest and oldest country which venture capital fund in India and co-promoted by industrial credit and Investment Corporation of India and unit Trust of India. - Infrastructure leasing and financial Services Limited:
It is is one of the the India’s leading infrastructure development and Finance Companies. infrastructure leasing and financial service limited it was promoted by the CBI Housing Development Finance Corporation Limited and unit Trust of India. infrastructure leasing and financial services has distinct mandate catalysing the development of infrastructure project and creation of value added financial services. The infrastructure leasing and financial services is one of the India’s leading non Banking Finance Company which provides a wide range of financial and advisory solutions under one firm umbrella. - HDFC :
HDFC is India’s premier housing finance company and enjoy and impeccable track record in India as well as in i international markets.its headquartered is in Mumbai,Maharashtra.
It has a base of 104154 permanent employees as of 30 June 2019.HDFC Bank is India’s largest private sector bank by assets. It is the largest bank in India by market capitalisation as of March 2020.
Since its Inception in 1977 the corporation has maintained a consistent and healthy growth in its operation to remain the market leader in market mortgages.
A subsidiary of the Housing Development Finance Corporation, HDFC Bank was incorporated in 1994, with its registered office in Mumbai, Maharashtra, India. Its first corporate office and a full-service branch at Sandoz House, Worli were inaugurated by the then Union Finance Minister, Manmohan Singh. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortage loans to different market segments and also has a large corporate client base for its housing relate it credit facilities. HDFC was ideally positioned to promote a bank in the Indian environment.
■ STATE LEVEL INDUSTRIAL FINANCIAL INSTITUTIONS:
At the state-level, too, there is a combination of financing agencies and industrial development banks, mainly for the development of medium and small-scale industries in respective states, with some emphasis on the industrial development of their backward regions.
- State Finance Corporation:
The state Finance Corporation promote small and medium industry of the states.
The SFCs came to be organized in individual states after the enabling Central Act to this effect came into force in August 1952. They are state-level organizations for the provision of term finance to medium and small scale industries. The share capital has been contributed by the state governments, the RBI the IDBI, scheduled banks, insurance companies, and others.
Functions:
• The SFCs are authorized to provide financial assistance in all the four major forms, namely loans and advances, subscription to shares and debentures, underwriting of new issues, .and guarantee of loans from third parties and deferred payments.
• As in the case of all-India development banks, the bulk of the SFC finance is made available in the form of loans and advances. They have not yet developed much other forms of financial assistance.
• the SFCs grant loans mainly for acquisition of fixed assets like land, building ,plant ,and machinery.
• the SFC underwrite new stocks ,shares, debentures , etc of individual industrial concerns.
• the SFC provide financial assistance to industrial units paid-up capital and reserves do not exceed rupees 3 Crore.
• the SFC provide guarantee loans raised in the capital market by scheduled banks industrial concerns and state cooperative banks to be repayable within 20 years.
2 . State Industrial Development Corporation:
State Industrial Development Corporation came on the scene much after the SFCs.
Whereas the SFCs of the state governments and IDBI the SIDCs have been set up entirely by state governments. Besides providing finance, these institutions perform a variety of functions, such as arranging for land, power, roads, licenses for industrial units, sponsoring the establishment of such units, especially in backward areas, etc.
State Industrial Development Corporation also undertake the development of industrial areas construction of sheds and provision of infrastructural facilities and also the development of the new growth centres.SIDCs also borrow by way of bonds and from the government and accept deposit to augment their resources.
■ NORTH EASTERN DEVELOPMENT FINANCE CORPORATION:
The North Eastern Development Finance Corporation Ltd is a Public Limited Company registered under the Companies Act 1956 on 9th August, 1995. It is notified as a Public Financial Institution under Section 4A of the said Act and was registered as an NBFC in 2002 with RBI. The shareholders of the Corporation are IDBI, SBI, LICI, SIDBI, ICICI, IFCI, SUUTI, GIC and its subsidiaries. The management of NEDFi has been entrusted upon the Board of Directors comprising representatives from shareholder institutions, DoNER, State Governments and eminent persons from the NE Region and outside having wide experience in industry, economics, finance and management .NEDFi provides financial assistance micro, small, medium and large enterprises for setting up industrial, infrastructure projects in the North Eastern Region of India and also Microfinance through MFI/NGOs. Besides financing, the Corporation offers Consultancy & Advisory services to the state Governments, private sectors and other agencies.
■ BANKING REFORM:
Banking reforms in China have brought about different ownerships of financial institutions, the purpose of which was to increase the competitive condition among different groups of banks and, in so doing, contribute to improving the performance of Chinese banks. banking is now a global issue. Reform in the financial sector is a major catalyst in strengthening the fundamentals of the Indian economy.
The broad objective of the financial sector reform has thus been to create a viable and efficient banking system. The major banking sector reforms comprises of modifying the policy Framework ;improving the financial soundness and credibility of banks ;creating a competitive environment and strengthening of the institutional framework.
To Match the liberalization privatization and globalisation needs, and the Indian banking sector is being reformed since the 1990s.
■ NARASIMHAM-I COMMITTEE REPORT:
The Narasimham Committee was established under former Reserve bank of India Governor M. Narasimham in August 1991 to look into all aspects of the financial system in India. The report of this committee had comprehensive recommendations for financial sector reforms including the banking sector and capital markets. In broad acceptance to this committee, the government announced slew of reforms.
1.The committee recommended the reduction of the higher proportion of the SLR and the CRR. both of these ratios were very high at that time. SLR was recommended to reduce from 38.5 to 25 percent and CRR from 15 to 3 to 5 percent.
- The determination of the interest rate should be on the ground of market forces such as the demand for the the supply of fund.
- Phasing out directed credit program.
- Structural reorganizations of the banking sectors :
• three to four big banks including SBI should be developed as International banks.
• eight to ten banks having nationwide presence should concentrate on the national and universal banking services.
• regarding the RRB should focus on agriculture and rural financing.
• local banks should concentrate on region-specific banking .
- Those days banks were under the dual control of The Reserve Bank of India and the Government of India. the committee recommended that the Reserve Bank of India should be the only main agency to regulate bank in India.
- The committee recommended the establishment of an asset reconstruction fund this fund.this fund will take over the proportion of the bad and doubtful debts from the banks and financial institutes .that would help Bank to get rid of bad debts.
- The PSB should be free and autonomous.
■ NARASIMHAM-II COMMITTEE REPORT:
The Committee was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India. It focused on issues like size of banks and capital adequacy ratios among other things. M. Narasimham, Chairman, submitted the report of the Committee on Banking Sector Reforms Committee-II to the Finance Minister Yashwant Sinha in April 1998.
Narasimham II committee was tasked with the progress review of the implementation of the banking reforms.
It focused on the issues like bank and capital adequacy ratio among other things.
☆ Major recommendations of the 1998 report:
- autonomy in banking:
Greater autonomy was proposed for the the PSB in order for them to function with equivalent professionalism as their International counterParts. for this the panel recommended the requirement producer procedures, training and remuneration policies of psbs brought in line with the best market practice of professional Bank management. - Reform in the role of Reserve Bank of India.
- NPAs: the committee recommended that the creation of ARFs or asset reconstruction companies to take over the bad debts of banks , by allowing them to start on a clean slate.
The committee recommendations led to the introduction of a new legislation called securitization and reconstruction of financial assets and enforcement of security interest Act 2002. - Stronger banking structure:
The committee recommended for merger of a large Indian banks to make them strong enough for supporting international trade. it recommended 3 tier banking structure in India through the establishment of three large banks with international presence 8 to 10 national banks and a large number of regional and local banks. - Entry of foreign banks:
The foreign banks seeking to set up business in India they should have a minimum startup capital of $25 million as against the existing requirement of $10 million. - Capital adequacy and tightening of provisioning norms:
The committee targeted the raising the capital adequacy ratio to 9 percent by 2000 and 10 percent by 2002 and have a panel provision for banks that can fail to meet these needs.
For the Asset of the classification the committee recommended a mandatory 1% in case of standard assets and for the accrual of interest income should to be done in every 90 days instead of 180 days.
■ NAYAK COMMITTEE REPORT:
The chairman mr.P. J. Nayak Committee report was constituted by the Reserve Bank of India making recommendations regarding corporate governance in PSU banks. It reviewed issues of the governance in banks which was released on 12 May 2014.
It made the following main recommendations:
• Scrapping and removal of Bank Nationalisation Acts, SBI Act and SBIAct.
• there is a need to upgrade the quality of a board deliberation PSBs to provide greater strategic focus.
• Formation of a Bank Investment Company or BIC under the Companies Act; transfer of shares by the central government in PSBs to the BIC.
• the government should set up a Bank investment company to hold equity stakes in banks which are presently held by the government.
• the government needs to move rapidly towards establishing fully empowered boards in PSB solely entrusted with the governance and oversight of the management of the banks.
• the Reserve Bank of India should designate a specific category of investors in banks as authorised Bank investor defined to include all funds with diversified the investor’s which are discretionally managed by the fund manager and are Deemed to be fit and proper .
■ INDRADHANUSH:
The government of India, in order to resolve the issues faced by the Public Sector Banks, launched a 7 pronged plan called “Mission Indradhanush” in 2015. The Indradhanush for PSBs mission aims at revamping the functioning of the Public Sector Banks in order to enable them to compete with the Private Sector Banks. Considering all the above issues alongside Recommendation of multiple committees important being Narsimhan II and Nayak committee, is measures have been taken by the government including the launch of indradhanush in August 2015 by the minister of finance for revamp of public sector banks.
Indradhanush stands for 7 areas Mainly appointment ,Bank board bureau, capitalisation, de-stressing, PSB, empowerment ,framework of accountability and governance reforms.
- Appointments: the government decided to separate the post of Chairman and managing director by describing that in the subsequent vacancies to be filled up to see a will get the designation of MD and CEO and there would be another person who would be appointed as a non AC executive chairman of PSB .Besides induction of talent from the Private Sector into the public banks, separation of the posts of Chief Executive Officer and the Managing Director, in order to check the excessive concentration of power and smooth functioning of the banks.
2.Bank Boards Bureau: the announcement of the bank board bureau was made in budget 2015 to 2016 the bank board Bureau will be a body of eminent professionals and official appointments Board of the Public Sector Banks would be replaced by the Bank Boards Bureau . Advice would be rendered to the banks in the matters of raising funds, mergers and acquisitions etc by the BBB. It would also hold the bad assets of the Public Sector Banks. The BBB separates the functioning of the PSBs from the government by acting as a middleman. The government mainly has set up and autonomous Bank board Bureau recommended for the selection of the heads the bank board Bureau has started functioning from 1 April 2016 former comptroller and Auditor General Vinod Rai has been appointed as the first Chairman of bank board bureau.
3.Capitalisation: the Government of India has wants to adequately capitalise all the banks to keep a safe buffer over and above the minimum norms based on the Basel III Due to the high NPAs and the need to meet the provisions of the Basel III norms, capitalization of banks by inducing Rs. 70000 crore was planned.
- De-stressing: the infrastructure sector and Co sector have been the major recipient of PSB funding during the past decades which issues arising in the infrastructure sector in order to check the stressed assets in the banks by strengthening the asset reconstruction companies. Development of a vibrant debt market for PSBs. But due to several factors projects are increasingly stalled thus leading to NPA burden on banks.
Besides the recovery efforts under the DRT and SARFASI mechanism the following additional steps have been taken to address the issue of NPA:
• formation of joint lenders forum corrective action plan and sale of assets.
• Creation of a central repository of information on large credits by the Reserve Bank of India to collect store and disseminate credit data to banks on credit exposure of rupees 5 crore and above.
• Wilful default or non Cooperative borrowers.
• Flexible structuring of loan term project loans to infrastructure and core industries.
• Asset reconstruction companies government has decided to established 6 new debt recovery Tribunal to speed up the recovery of bad loans of the banking sector.
- Empowerment: Providing greater flexibility and autonomy to PSBs in hiring manpower. There will be no interference from the government and banks are encouraged to their decision independently keeping the commercial interest of the organisation in mind.
6.Framework of Accountability: a new framework of key performance indicators to be measured for performance of PSD is is being announced The assessment of the banks would be based on a few key performance indicators.
- Governance Reforms: the process of governance Reform started with Gyan Sangam a conclave of PSB and FI organised at the beginning of 2015 in Pune’s. Which Retreat or the Gyan Sangam conferences between the bankers and the government officials for resolving the banking sector issues and deciding the future course of action.
■ INDRADHANUSH 2.0
The “Mission Indradhanush 2.0” is slated to be launched by Union Health Minister Harsh Vardhan on October 31 falling on the silver jubilee of the Polio eradication campaign, but will come into implementation from December 2. Government of India has came out with indradhanush20 tablix sector lenders with a view to make sure they remain solvent and fully company with the Global capital adequacy norms ,basel III .
Under indradhanush road map announced in 2015 the government had announce that to Infuse 70000 crore in state-run banks over 4 years while they will have to raise a further rupees 1.1 lakh crore for the markets to meet their capital their needs in line with Global risk norms known as base III.
■ BASEL BANKING NORMS :
Basel is the city in Switzerland which is also the headquarter of bureau of international settlement. The fosters cooperation among Central Bank with a common goal of financial stability and common standard of Banking regulations there are totally 27 members Nation in this committee Basel guidelines refers to the board of supervisory standard formulated by the slope of Central banks which is called Basel committee on banking supervision.Basel norms are international banking regulations issued by the Basel Committee on Banking Supervision .
The Basel norms is an effort to coordinate banking regulations across the globe, with the goal of strengthening the international banking system.
The Basel Committee has issued three sets of regulations as of 2018 known as Basel-I, II, and III.
☆ Basel I:
Basel-1 was introduced in the year 1988. As a capital measurement system.
It focussed primarily on credit risk faced by the banks.As per Basel-1, all banks were required to maintain a capital adequacy ratio of 8 %.
The capital adequacy ratio is the minimum capital requirement of a bank and is defined as the ratio of capital to risk-weighted assets.
The RWA means amount of funds that a bank must hold on hands this amount of capital is determined by taking a percentage of the assets held at that Institution and then waiting it by its risk.
Base -II:
In 2004,Basel II guidelines were published by bcbs which are considered to be the refined and reformed version of Basel I Accord.
This framework is based on three parameters.
Banks should continue to maintain a minimum capital adequacy requirement of 8% of risk-weighted assets. Bank were required Tu to develop and use better risk management techniques in monitoring and managing on the three types of risk that is traded and increased disclosure requirements.
According to this, banks were required to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market, and operational risks.
Its goal is to better align the required regulatory capital with actual Bank risk.
Basel II has three pillars minimum capital supervisor review and market display.
Minimum m-cap Atal is the technical quantitative heart of the Accord banks must hold capital against 8% of their assets after adjusting their assets for Risk.
According to supervisor review is the process in which, banks were required to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market, and operational risks. If minimum capital is the rule book the second pillar is the referee system.
The Accord recognises three big risk buckets credit risk market risk and operational risk It increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. A charge for market risk was introduced in 1998.
Basel III:
Basel III guidelines were released in 2010. This guidelines were introduced in response to the financial crisis of 2008.
The financial crisis of 2007-08 revealed shortcomings in the Basel norms. Therefore, the previous accords were strengthened. The guidelines aim to promote a more Re silent banking system by focusing on for viral banking parameters viz,capital, leverage,funding and liquidity.
The basic structure of basel III remains unchanged with three mutually reinforcing pillars.
- Minimum regulatory Capital requirement based on the RWA:
Maintaining capital calculated through credit market and operational risk areas. - Supervisory review process:
Regulating tools and Framework for dealing with peripheral risk that Bank force. - Market discipline:
Increasing the disclosures that banks must provide to increase the transparency of banks.
• features of Basel III : - Capital conversation buffer : this Bank will be required to hold a capital conversation buffer of 2.5 %.
- Better capital quality.
- Counter cyclical Buffer:
It has been introduced with the objective to increase capital requirements in good times and decrease the same in bad times. - Leverage ratio:
Leverage ratio is the relative amount of a capital to total assets this same to put a cap on swelling of leverage in the banking sector on a global basis. - Minimum common equity and Tier 1 capital requirements:
The minimum requirement of common equity ,is the highest form of the loss absorbing capital has been raised under basel III form 2 percent to 4.5 percent of total RWAs.
■ FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION:
The financial sector legislative reforms Commission was constituted by the government of India on level March 2011 which was headed by BN Srikrishna to rewrite and harmonize financial sector legislations rules and regulations.
According to the FSLRC, the current regulatory architecture is fragmented and is fraught with regulatory gaps, overlaps, inconsistencies and arbitrage. To address this, the FSLRC submitted its report to the Ministry of Finance on March 22, 2013, containing an analysis of the current regulatory architecture and a draft Indian Financial Code to replace the bulk of the existing financial laws.
☆ Draft Indian financial code:
The draft Code is a non-sectoral, principles-based law bringing together laws governing different sectors of the financial system. It addresses nine components, which the FSLRC believes any financial legal framework should address.
1.Consumer protection– Regulators should ensure that financial firms are doing enough for consumer protection. The draft Code establishes certain basic rights for all financial consumers and creates a single unified Financial Redressal Agency to serve any aggrieved consumer across sectors. In addition, the FSLRC considers competition an important aspect of consumer protection and envisages a detailed mechanism for cooperation between regulators and the Competition Commission.
2.Micro-prudential regulation: Regulators should monitor and reduce the failure probability of a financial firm. The draft Code specifies five powers for micro-prudential regulation: regulation of entry, regulation of risk-taking, regulation of loss absorption, regulation of governance and management, and monitoring/supervision.
3.Resolution: In cases of financial failure, firms should be swiftly and sufficiently wound up with the interests of small customers. A unified resolution corporation, dealing with various financial firms, should be created to intervene when a firm is close to failure. The resolution corporation would charge a fee to all firms based on the probability of failure.
4.Capital controls: While the FSLRC does not hold a view on the sequencing and timing of capital account liberalisation, any capital controls should be implemented on sound footing with regards to public administration and law. The FSLRC sees the Ministry of Finance creating the ‘rules’ for inbound capital flows and the RBI creating the ‘regulations’ for outbound capital flows. All capital controls would be implemented by the RBI.
5.Systemic risk: Regulators should undertake interventions to reduce the systemic risk for the entire financial system. The FSLRC envisages establishing the Financial Stability and Development Council as a statutory agency taking a leadership role in minimizing systemic risk.
6.Development and redistribution: Developing market infrastructure and process would be the responsibility of the regulator while redistribution policies would be under the purview of the Ministry of Finance.
7.Monetary policy: The law should establish accountability mechanisms for monetary policy. The Ministry of Finance would define a quantitative target that can be monitored while the RBI will be empowered with various tools to pursue this target. An executive Monetary Policy Committee would be established to decide on how to exercise the reserve bank of Indias powers.
8.Public debt management: The draft Code establishes a specialised framework for public debt management with a strategy for long run low-cost financing. The FSLRC proposes a single agency to manage government debt.
9.Contracts, trading and market abuse: The draft Code establishes the legal foundations for contracts, property and securities markets.
