Recent Developments in Commercial Banking in India

The Banking Industry has evolved tremendously over a period of time. Nowadays, the modern
banking sector is doing away with its traditional methods and shifting focus to a more advanced
and digitally connected network. With many new technologies, we focus on a few developments
that we could see the rise of a more innovative banking industry in 2015.

Digital Revolution

Undoubtedly, this technology surpasses most of the recent developments in banking history.
Traditional banking is becoming practically non-existent, as banks get more and more digitally
equipped. The revolution will surpass even the trouble of taking out cash through ATMs.

Growth in Automated Teller Machines (ATMs)

The banks increased their penetration further with the total number of ATMs reaching 0.18
million in 2015. However, there was a decline in growth of ATMs of both Public sector banks as
well as Public sector banks. Public sector banks recorded a growth of 16.7 per cent during 2014-
15 maintaining a share of around 70 per cent in the total number of ATMs. Foreign banks
continued to record a negative growth in a number of ATMs.

Population Group-wise Distribution of ATMs

In recent years, the shares of ATMs in rural and semi-urban area has been rising, though urban
and metropolitan centers still dominate. At 2015, about 44 percent of the ATMs were located in
rural and semi-urban centers.

Off-site ATMs

The share of off-site ATMs in total ATMs increased to 50.9 per cent as at end- March 2015 from
47.9 per cent in the previous year. The increase in share of off-site ATMs of public sector banks
played a major role, which increased to 45.7 per cent in 2015 from 40.3 per cent in 2014. The
share of private sector and foreign banks was already more than 60 per cent.

White Label ATMs

Looking at the efficiency and cost-effectiveness of off-site ATMs, non-bank entities were allowed
to own and operate ATMs called ‘White Label ATMs (WLA)’ by the Reserve Bank in 2012. As of
October 31, 2015, 10,983 WLAs were installed

Debit Cards and Credit Cards

Issuance of debit cards is much higher as compared to credit cards and they remain a preferred
mode of transactions. In 2012, there were 6.3 credit cards for every 100 debit cards, which
declined to 3.8 in 2015. Public sector banks maintained a lead over Private sector banks and
foreign banks in issuing debit cards. March 31, 2015 approximately 83 per cent of the debit
cards were issued by Public sector banks, while around 80 per cent of the credit cards were
issued by the Private sector banks (57.2 percent) and foreign banks (22.4 per cent).

Prepaid Payment Instruments

Prepaid payment instruments (PPIs) are payment instruments that facilitate the purchase of
goods and services, including funds transfer, against the value stored on such instruments. The
value stored on such instruments represents the value paid for by the holders by cash, by debit
to a bank account, or by credit card. In the past few years, PPIs has emerged as an easy
alternative to cash for performing day to day small value payment transactions. The value of
PPIs has increased from 79.2 billion in 2012-13 to 213.4 billion in 2014-15. Among the PPI
instruments, PPI card has been the most popular one, with non-bank PPIs having fueled most
of this growth.

Financial Inclusion

The Reserve Bank continued its efforts towards universal financial inclusion. Given the boost
provided by the Pradhan Mantri Jan Dhan Yojana (PMJDY) during the period, considerable
banking penetration has occurred, particularly in rural areas. However, significant numbers of
banking outlets operate in a branchless mode through business correspondents
(BCs)/facilitators.

The Indian banking sector has witnessed wide ranging changes the influence of the financial
sector reforms initiated during the early 1990s. The approach to such reforms in India has been
one of gradual and non-disruptive progress through a consultative process. The emphasis has
been on deregulation and opening up the banking sector to market forces.
The Reserve Bank has been consistently working towards the establishment of an enabling
regulatory framework with prompt and effective supervision as well as the development of
technological and institutional infrastructure. Persistent efforts have been made towards the
adoption of international benchmarks as appropriate to Indian conditions. While certain
changes in the legal infrastructure are yet to be effected, the developments so far have brought
the Indian financial system closer to global standards.

Statutory Pre-emptions

In the pre-reforms phase, the Indian banking system operated with a high level of statutory
preemptions, in the form of both the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio
(SLR), reflecting the high level of the country’s fiscal deficit and its high degree of monetization.
Efforts in the recent period have been focused on lowering both the CRR and SLR.

The statutory minimum of 25 per cent for the SLR was reached as early as 1997, and while the
Reserve Bank continues to pursue its medium-term objective of reducing the CRR to the
statutory minimum level of 3.0 per cent, the CRR of the Scheduled Commercial Banks (SCBs) is
currently placed at 5.0 per cent of NDTL (net demand and time liabilities). The legislative
changes proposed by the Government in the Union Budget, 2005-06 to remove the limits on
the SLR and CRR are expected to provide freedom to the Reserve Bank in the conduct of
monetary policy and also lend further flexibility to the banking system in the deployment of
resources.

Interest Rate Structure

Deregulation of interest rates has been one of the key features of financial sector reforms. In
recent years, it has improved the competitiveness of the financial environment and
strengthened the transmission mechanism of monetary policy. Sequencing of interest rate
deregulation has also enabled better price discovery and imparted greater efficiency to the
resource allocation process. The process has been gradual and predicated upon the institution
of prudential regulation of the banking system, market behavior, financial opening and, above
all, the underlying macroeconomic conditions. Interest rates have now been largely deregulated
except in the case of:

(i) Savings deposit accounts;

(ii) Non-resident Indian (NRI) deposits;

(iii) Small loans up to Rs.2 lakh; and (iv) export credit.

After the interest rate deregulation, banks became free to determine their own lending interest
rates. As advised by the Indian Banks’ Association (a self-regulatory organization for banks),
commercial banks determine their respective BPLRs (benchmark prime lending rates) taking
into consideration:

(i) Actual cost of funds;

(ii) Operating expenses; and

(iii) Minimum margin to cover regulatory requirements of provisioning and capital charge and
profit margin.

Prudential Regulation

Prudential norms related to risk-weighted capital adequacy requirements, accounting, income

recognition, provisioning and exposure were introduced in 1992 and gradually these norms
have been brought up to international standards. Other initiatives in the area of strengthening
prudential norms include measures to strengthen risk management through recognition of
different components of risk, assignment of risk-weights to various asset classes, norms on
connected lending and risk concentration, application of the mark-to-market principle for
investment portfolios and limits on deployment of funds in sensitive activities. 

Some of the other regulatory initiatives relevant to Basel II that have been implemented by the
Reserve Bank are:

• Ensuring that banks have a suitable risk management framework oriented towards their
requirements and dictated by the size and complexity of their business, risk philosophy, market
perceptions and expected level of capital.

• Introducing Risk-Based Supervision (RBS) in select banks on a pilot basis.

• Encouraging banks to formalize their CAAP in alignment with their business plan and
performance budgeting system. This, together with the adoption of RBS, should aid in fulfilling
the Pillar II requirements under Basel II.

• Expanding the area of disclosures (Pillar III) so as to achieve greater transparency regarding
the financial position and risk profile of banks.

• Building capacity to ensure the regulator’s ability to identify eligible banks and permit them to
adopt IRB/Advanced Measurement approaches. 
Asset-Liability Management

In view of the growing need for banks to be able to identify, measure, monitor and control risks,
appropriate risk management guidelines have been issued from time to time by the Reserve
Bank, including guidelines on Asset-Liability Management (ALM). These guidelines are intended
to serve as a benchmark for banks to establish an integrated risk management system.
However, banks can also develop their own systems compatible with type and size of
operations as well as risk perception and put in place a proper system for covering the existing
deficiencies and the requisite upgrading. Detailed guidelines on the management of credit risk,
market risk, operational risk, etc., have also been issued to banks by the Reserve Bank.  

Technological Infrastructure

In recent years, the Reserve Bank has endeavored to improve the efficiency of the financial
system by ensuring the presence of a safe, secure and effective payment and settlement
system. In the process, apart from performing regulatory and oversight functions the Reserve
Bank has also played an important role in promoting the system’s functionality and
modernization on an ongoing basis. The consolidation of the existing payment systems
revolves around strengthening computerized cheque clearing, and expanding the reach of
Electronic Clearing Services (ECS) and Electronic Funds BIS Papers No 28 241 Transfer (EFT).

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