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The year 2014-15 could well go as one of long-pending financial sector reforms, expected to have a lasting impact.
From governance issues of the banking sector to higher foreign direct investment and overhaul of the monetary policy framework, with inflation targeting as the aim, these would shape the banking and financial sector for a long while.
"Some of the initiatives taken or announced were thematically in continuation of the post liberalisation banking reforms. This would include improving of governance, strengthening stressed assets resolution and recovery mechanism, etc. New initiatives, too, like getting started on differentiated bank licensing. Also in FY15, we saw financial institutions taking concrete steps to deal with digital technologies and their potential for disruption. The macro framework itself looks poised for major shifts, with announcements relating to implementation of a new Indian Financial Code or realignment of regulatory responsibilities,” said Shinjini Kumar, leader, banking & capital markets, PricewaterhouseCoopers India.
New banks, new types
As early as in April last year, the Reserve Bank of India (RBI) awarded universal bank licences to two entities , infra financier IDFC and micro lender Bandhan Financial Services. These were issued aftermore than a decade. The process, completed in April, was started in February 2010.
Also for the first time, RBI opened the sector for differentiated bank licences. Over 100 applications were received, from those who wanted to set up payments banks and small finance banks. Big corporate entities like Reliance, Bharti Airtel and the Aditya Birla Group had applied for payment banks. RBI is in the process of vetting the bids and is expected to award licences in the next few months.
Governance
Recommendations of the P J Nayak committee to review governance issues in banks hasn't been accepted fully but the government has shown an intention to start the reform process. The Narendra Modi-led government has already split the chairman and managing director’s post in public sector banks and invited applications from those in private banks to head the state-run ones, at market-linked pay.
Capital infusion in govt banks
Public sector banks (PSBs) reeling under the pressure of stressed assets have seen their capital position worsening due to higher provisioning. Their capital raising ability from the market is also constrained due to poor valuations. However, breaking the tradition of infusing capital in banks that need it most, the government decided to do so in banks which are more efficiently run, sending a signal that banks must be run efficiently to survive.
Infra financing
Following an announcement in the Union Budget, the central bank has allowed banks to raise funds via long-term bonds for financing to the infrastructure sector. For these, they don’t have to meet the cash reserve ratio, statutory liquidity ratio or priority sector norms. This will help lenders to boost infrastructure and affordable housing financing. In addition, banks are now allowed to refinance core sector projects every five years for four times, the '5/25 rule', helping lenders to address their asset liability issues.
Growth
Amid a slowing economy, when interest rates are high (RBI has reduced the policy rate by 50 basis points only since January), bank loan growth was the slowest in more than a decade. According to RBI data, loan growth till March 6 was 10.2 per cent (year on year) as compared to 14.3 per cent in the same period of the previous year. Deposit growth also slowed in the year, at 11.6 per cent as compared to 15.1 per cent the previous year.
Monetary policy
The year also saw the central bank shifting to an inflation targeting framework, with the mandate to keep inflation below six per cent by January 2016 and four per cent, with a variation of two per cent on both sides, in the years after. However, a monetary policy committee, as suggested by the Urjit Patel panel is yet to be set up and the government and central bank are in talks on this.
RBI, however, stands to lose some of its functions, like managing the government’s debt. The Union Budget has proposed setting up of a Public Debt Management Office, independent of RBI.
FDI in insurance
A new pro-business government at the Centre also ensured the long-pending proposal of higher foreign direct investment in the insurance sector getting lawmakers’ approval. Many foreign insurers which have 24 per cent in their insurance venture in India said they'd raise it to 49 per cent, as regulations permit now.
FLASHBACK 2014-15: FINANCIAL SECTOR MILESTONES
APRIL
- After a gap for more than a decade, new bank licences were awarded by the Reserve Bank of India (RBI) to two applicants, IDFC & Bandhan Financial Services
- A new monetary framework kicks in, with 6 reviews per year as compared to 8 earlier
- To boost infra financing CRR/SLR exemption announced for banks for funds raised via infra bonds
- RBI issues draft norms for payments and small banks; for the first time a process to issue differentiated licences initiated
- CBI arrests Syndicate Bank Chairman and Managing Director (CMD) S K Jain over alleged bribery charges. Jain later sacked by the government, which, in an unprecedented move, cancels all CMD appointment decisions taken by the previous government
- Prime Minister Narendra Modi launches Pradhan mantri Jan Dhan Yojana – a scheme for opening bank accounts to foster financial inclusion. More than 130 million accounts opened in a matter of five months
- Kotak Mahindra Bank accounces it will acquire ING Vysya Bank to become the fourth largest private bank in the country
- Goverment splits chairman and managing director’s post in public sector banks, signalling its intention to initiate long-pending reforms in the banking sector
- Government issues ordinance to allow foreign firms to have 49 per cent stake in insurance companies, a decision that was stuck for several years
- In a first, government calls bankers for a brainstorming session, christened as Gyan Sangam, to chart the road ahead for the banking sector
- RBI brings out final guidelines on banks becoming insurance brokers
- RBI gets 41 applications for payments bank licence, 72 for small finance bank licence
- Government allocates capital to public sector banks based on their efficiency, clearly indicating its stance — perform or perish
- CEO position in government banks opened for private sector players with market-linked remuneration
- Union budget starts implementing proposals of the Financial Sector Legislative Reforms Commission, which takes away some important functions of the central bank like government debt management
- Insurance Bill passed by both Houses of the Parliament
- SBI, the country’s largest lender, says it will dilute its stake in its general insurance venture
