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ARTICLE
To meet the needs of a dynamic real economy, the
banking system needs to grow. Increasing the number
of banks will promote financial inclusion, foster
competition and thereby reduce costs and improve the
quality of services. Accordingly, the Reserve Bank invited
applications for "Licensing of New Banks in the Private
Sector" & issued new bank licenses.
b. Subsidiarisation of banks more focus and importance on quality, consistency and
Reserve Bank has already taken steps in the direction transparency of the capital base. The Reserve Bank has
of encouraging foreign bank presence in subsidiary form estimated the additional capital requirements of
making the subsidiary route more attractive by domestic PSBs for full Basel III implementation till
providing near national treatment to the wholly owned March 2018. These estimates are based on two broad
subsidiaries of foreign banks. assumptions:
i. Increase in the risk weighted assets of 20 per cent
Presence of foreign banks in subsidiary form will
generate greater competition for the Indian banks as per annum; and
this route will open up nearly equal opportunity to
foreign banks in business expansion within India. ii. Internal accrual of the order of 1 per cent of risk
weighted assets.
2. Mergers & Consolidation
The present level of Government share holding in these
Mergers and Acquisitions (M&A) as a means of inorganic banks ranges from 55 per cent to 82 per cent. Thus,
growth are increasingly being used around the world there is sufficient headroom available to the
to undertake restructuring of leading business Government for dilution of its stake in a number of
enterprises. It is followed as a part of the strategy to public sector banks.
achieve a larger size and faster growth in market share
and reach, and to become more competitive through
economies of scale and scope.
The structure of the banking system as recommended The large equity needs, though over an extended time
by the Narasimham Committee II consisting, along with frame, would put downward pressure on the banks'
medium sized and smaller banks, of a few large ROE. While the higher capital requirements would bring
international banks, would not only meet the financing down risks in the banking sector and eventually investors
needs of infrastructure and large projects and provide would recognize the lower risks and be willing to settle
the economies of scale and scope but also leverage the for a lower ROE, in the short term, the only answer is
country's image as a financial destination and enable raising productivity.
Indian banks to compete globally in terms of fund
mobilization, credit disbursal, investment and rendering Other areas that need strengthening include
of financial services. This could be attained through securitization related regulation, market risk
consolidation. management tools and improvement to the Supervisory
3. Regulatory Measures Review and Evaluation Process of Pillar II of Basel II as
a) Capital infusion in public sector banks to enhance per the Basel III enhancements.
capital adequacy
The Basel III capital regulation has been implemented b. Liquidity Management
in India from April 1, 2013 in phases and will fully be Concerns have been expressed over growing reliance
implemented as on March 31, 2018. These norms lay of banks on wholesale funding market borrowing to
BANKING FINANCE | NOVEMBER | 2015 | 39
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