Rbi No To Universal Banking Concept

The Reserve Bank of India has rejected the Khan committee's recommendations to remove the walls between banks and financial institutions to create universal banks in the country. The Khan committee was set up by the RBI to harmonise the role of banks and financial institution.

The concept has not found favour with the Reserve Bank of India due to the lack of collateralisation of the deposit base and the relatively poor asset-liability management practices in financial institutions, sources said.

The RBI will conduct a study on the implications of the implementation of universal banking in the Indian scenario, under prevalent conditions, officials said. The public deposit base of banks is partially collateralised as deposits up to Rs 1 lakh are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).

 

But the funds mopped up by financial institutions and financial services firms from the public are not secured. The DICGC is a public sector organisation and its liabilities, when they arise, will be borne by the government.

Sources said the central bank felt it was not feasible to extend deposit insurance to financial institutions on account of the increased burden to the exchequer, in a crisis situation. This view gained significance because of the deteriorating asset quality of the Indian financial system. Non-performing assets in the sector are increasing as a whole and the situation is not expected to improve in the short run, industry sources said.

Apart from the possibility of increased bad debts, universal banking would mean a breakdown of the demarcations between short term and long term lending functions involving banks and FIs in both working capital lending and term lending. This, however, was not feasible as the asset-liability management practices of Indian banks and FIs were not highly developed even among the better players who typically adopt a conservative approach, bankers said.