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Click Here For Highlights of RBI's Annual Policy Statement for 2005-06

Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2005-06

IV. Prudential Measures

91. The Reserve Bank has taken several steps to strengthen the regulatory and supervisory framework of the financial sector. Further developments in this area are as under.

(a) Policy on Merger and Amalgamation of Banks

92. In pursuance of the recommendations of the Joint Parliamentary Committee (JPC), a Working Group was constituted by RBI to evolve guidelines for voluntary merger of banking companies. Based on the recommendations of the Group and in consultation with the Government, it is proposed:

• To issue guidelines on merger and amalgamation between private sector banks and with NBFCs. The guidelines would cover: process of merger proposal, determination of swap ratios, disclosures, norms for buying/selling of shares by promoters before and during the process of merger and the Board’s involvement in the merger process. The principles underlying these guidelines would also be applicable as appropriate to public sector banks, subject to relevant legislation.

(b) Supervision of Financial Conglomerates

93. As indicated in the annual policy Statement of May 2004, the Working Group on Financial Conglomerates (FC) has identified 22 FCs. With a view to monitoring intra-group transactions and exposures, a pilot process was initiated to obtain information from the designated entities of each FC by the principal regulators. Such information was analysed and discussed amongst the principal regulators and a system for exchange of information among them has been put in place. In order to appropriately focus on monitoring of the process, in consultation with Chairman, SEBI and Chairman, IRDA, it is proposed:

• To hold a half-yearly discussion with the CEO of the designated entity, which would be convened by the lead regulator with other regulators, on the basis of available information for review and addressing concerns, if any.

(c) Interests of the Depositors

94. Depositors’ interests forms the focal point of the regulatory framework for banking in India and it has been appropriately enshrined at several places in the Banking Regulation Act, 1949. In Section 5(ca) of the Act, "Banking Policy" has been defined as "any policy which is specified from time to time by the Reserve Bank in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources".

95. Furthermore, as per the Act, some of the considerations that are required to be taken into account while granting licence for banking business, in addition to ensuring the capacity of the bank to pay present and potential depositors in full, is whether the affairs of the company are not being or are not likely to be detrimental to the interests of the depositors or prejudicial to public interest. A licence to do banking business provides the entity the ability to accept deposits and access to deposit insurance for small depositors. Similarly, regulation and supervision by RBI enables these entities to access funds from a wider investor base and the payment and settlement systems provides efficient payments and funds transfer services. All these services, which are in the nature of public good, involve significant costs and are being made available only to ensure availability of banking and payment services to the entire population without discrimination.

96. Against this background, while policies relating to credit allocation, credit pricing and credit restructuring should continue to receive attention, it is inappropriate to ignore the mandate relating to depositors’ interests. Further, in our country, the socio-economic profile for a typical depositor who seeks safe avenues for his savings deserves special attention relative to other stakeholders in the banks.

97. In the observations and recommendations of the Committee on Procedures and Performance Audit on Public Services (CPPAPS) (Chairman: S.S. Tarapore), on ‘Banking Operations: Deposit Accounts and other facilities Relating to Individuals (Non-Business)’, it was indicated: "The bank’s offerings are generally opaque – what is not charged is mentioned but what is charged is not mentioned – high hidden costs appear rampant and unjustified, thus banks enjoy undue enrichment. If a small customer goes to a bank and has a technical problem, anecdotal evidence suggests that he runs into enormous difficulties. The Committee notes with some sadness that there is substance in the widespread impression among the small depositor community that one needs to know someone higher-up for getting his/her job done. Intense depositor loyalty is the only plank on which the Indian banking systems is surviving. The banks have to understand that depositors are at the end of their tether and banks providing poor customer service will be punished by switching loyalty’’. The information suggests that in recent years banks are taking increasing recourse to non-deposit resources to fund their assets. Against this background:

• Banks are urged to refocus on deposit mobilisation and empower the depositors, by providing wider access and better quality of banking services.

• RBI will persist with its efforts to ensure quality of banking services, in particular, to small individual depositors.

(d) Financial Exclusion

98. There has been expansion, greater competition and diversification of ownership of banks leading to both enhanced efficiency and systemic resilience in the banking sector. However, there are legitimate concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, in particular pensioners, self-employed and those employed in unorganised sector. While commercial considerations are no doubt important, the banks have been bestowed with several privileges, especially of seeking public deposits on a highly leveraged basis, and consequently they should be obliged to provide banking services to all segments of the population, on equitable basis. Against this background:

• RBI will implement policies to encourage banks which provide extensive services while disincentivising those which are not responsive to the banking needs of the community, including the underprivileged.

• The nature, scope and cost of services will be monitored to assess whether there is any denial, implicit or explicit, of basic banking services to the common person.

• Banks are urged to review their existing practices to align them with the objective of financial inclusion.


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