crisis, the country is vulnerable to contagion from the global economy and the higher defences built under Basel III will provide the financial system with the much-needed resilience.
The solemn aim: never to see the repeat of the 2008 Crisis, the BCBS(Basel Committee on Banking Supervision), through Basel III, put forward norms aimed at strengthening both sides of balance sheets of banks viz. a) enhancing the quantum of common equity b) improving the quality of capital base b) creation of capital buffers to absorb shocks c) improving liquidity of assets c) optimising the leverage through Leverage Ratio d) creating more space for banking supervision by regulators under Pillar II and e) bringing further transparency and market discipline under Pillar III.
• Licensing new private sector banks:
The RBI has issued guidelines for licensing new private sector banks. India’s banking sector was opened to private participation in 1993 when RBI issued 10 private sector banks with banking licenses.
Two important things need to be discussed as reagrds these revised guidelines –
Comment 1 : Need for Consolidation
India has a total of 77 banks. Yet, the entire banking system has sometimes failed to cater to the needs of an emerging economy. According to experts, consolidation should be the solution to it, not new banks.
Comment 2 : Rural branches – A bottleneck?
The RBI has put a stricter condition of having 25% of its branches in unbanked rural areas with population upto 9.999. For a new banking entity, it will be stumbling block as the brick and mortar model especially in rural areas take time to turn profitable.
• FDI : Foreign direct investment in banks is allowed upto 74 percent with some restrictions.
2.5 TURNING POINTS
• Nationalisation of banks :
In 1950-51 there were 430 commercial banks. The Government of India had some social objectives of planning. These commercial banks failed helping the government in attaining these objectives. Thus, the...