Banking Sector Schemes

Banking Sector Schemes

Lead Bank Scheme

 The Lead Bank Scheme was introduced by the Reserve Bank of India in December 1969. In this scheme, under area approach, every bank discharges their social responsibilities. Each bank concentrates on certain districts where it acts as a lead bank. The Scheme aims at coordinating the activities of banks and other developmental agencies to avoid duplication of banking work, achieve the objective of enhancing the flow of bank finance to priority sector and other sectors and to promote the banks' role in overall development of the rural sector. 

Service Area Approach

 Under the lead bank scheme, the service area approach was introduced in 1989 for planned and orderly development of rural and semi-urban areas. Each bank branch in rural and semi-urban area was designated to serve an area of 15 to 25 villages and the branch was responsible for meeting the needs of bank credit of its service area. 

Differential Rate of Interest (DRI) Scheme                           

This scheme was formulated in 1972 for extending financial assistance at concessional rate of interest @ 4% to selected low income groups for productive endeavors initially by public sector banks and then by private sector banks also. It is now being implemented by all Scheduled Commercial Banks. 

Introduction of Capital Adequacy Norms 

Hitherto, the ability of the banks to lend was determined by the amount of deposit mobilized by them and was not linked to any minimum capital requirements. This had the effect of building assets beyond the sustainable level jeopardizing the depositors interests in the event of a major default in lending portfolio, In line with the global banking practices, Capital Adequacy Norms (as suggested by the Base Committee on banking supervision) were introduced for Indian banks, thereby linking their ability to expand credit/build up assets to the amount of individual Bank's capital.

 In calculating the capital requirements for meeting adequacy ratio, the banks were required to factor the market risks faced in the balance sheet portfolio, Taking this initiative forward, the capital adequacy norms were further tightened on the basis of the recommendations of the Narasimham Committee by apply ing the Basel II requirements. With effect from 2013, Banks in India were required to move to capital requirements under Basel III in a phased manner over a specified time frame. 

Basel I 

Basel I focused almost entirely on credit risk. It defined capital requirement and structure of risk weights for banks under these norms assets of banks were classified and grouped in five categories according to credit risk. One of the major roles of Basel norm was to standardize the banking practice across all countries.

Basel II

 Basel II introduced in 2004, laid down guidelines for capital adequacy, risk management (Market Risk and Operational Risk) and disclosure requirements. Operational risk has been defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputation risk, whereby legal risk includes exposures to fines, penalties, or punitive damages resulting from supervisory actions, as well as private settlements. Disclosure requirements allow market participants to assess the capital adequacy of the institution based on information on the scope of application, capital, risk exposures, risk assessment processes, etc. 

Basel III 

It is widely felt that the shortcoming in Basel II norms led to the global financial crisis of 2008. That is because Basel II did not have any explicit regulation on the debt that banks could take on their books, and focused more on individual financial institutions, while ignoring systemic risk. To ensure that banks don't take on excessive debt, and that they don't rely too much on short term funds, Basel III norms were proposed in 2010. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.

 Requirements for common equity and Tier 1 capital will be 4,5% and 6%, respectively. The liquidity coverage ratio (LCR) will require banks to hold a buffer of high quality liquid assets sufficient to deal with the cash outflows encountered in an acute short term stress scenario as specified by supervisors. The minimum LCR requirement will be to reach 100% on April 2024. This is to prevent situations like "Bank Run".

Merchant Banker

Merchant banker means any person who is engaged in the business of issue management (e.g. issue of equity shares, preference shares and debentures or bonds) either by making arrangements regarding selling, buying or subscribing to securities or acting as manager, consultant, adviser or rendering corporate advisory service in relation to such issue management. Registration with SEBI is required for working as Merchant Banker.

A Committee has been formed under the Chairmanship of Shri Sunil Mehta, non-executive chairman of Punjab National Bank to examine the setting up of an Asset Reconstruction Company (ARC) and/or Asset Management Company (AMC) for faster resolution of stressed assets involving multiple Public Sector Banks (PSBs).

Committee will consider whether such an arrangement will be good for the banking system. If it is considered advisable, the Committee will also consider the modalities by which such an ARC / AMC should be set up.

Sunil Mehta Committee recommendations- 

Sunil Mehta panel presented project 'Sashakt' and has recommended a five-pronged strategy to deal with stressed assets.

1. For loans up to Rs 50 crore, the panel has suggested a steering committee within the bank to resolve it within 90 days.
2. For loans of Rs 50-500 crore, the panel has suggested another bank-led resolution within 180 days.
3. For loans above Rs 500 crore, the committee has suggested setting up an asset management company with private participation.
4. The panel's other suggestion is to set up an Alternative Investment Fund that will raise resources from banks and institutional investors so that it can bid for the insolvent assets under insolvency and bankruptcy.
5. The fifth suggestion is an asset trading platform for stressed assets.

Sunil Mehta said an Asset Management Company (AMC) for resolving large bad loans has been formed and will be called as Sashakt India Asset Management. He also said that the panel is now working towards identifying potential investors for an Alternative Investment Fund (AIF) which will fund the AMC. (15-11-2018)

Inter-creditor agreement for resolution of stressed assets

The Reserve Bank of India (RBI), vide its circular dated February 12, 2018 has issued a revised framework for resolution of stressed assets (“RBI Circular”). The RBI Circular inter alia requires each bank to have board approved policies for dealing with stressed assets/accounts.

Pursuant to the recommendations of Sunil Mehta Committee and under the aegis of Indian Banks’ Association (IBA), an Inter-creditor Agreement (ICA) has been prepared which shall serve as a platform for the banks and financial institutions to come together and take joint and concerted actions towards resolution of stressed accounts.

The salient features of the ICA are summarized below:

1. The ICA will be applicable to all corporate borrowers that have availed loans and financial assistance for an amount of Rs. 50 crore or more under consortium lending / multiple banking arrangements;
2. The lead lender (i.e. the lender with the highest exposure) shall be authorized to formulate the resolution plan, which shall be presented to the lenders for their approval;
3. The decision making shall be by way of approval of ‘majority lenders’ (i.e. the lenders with 66% share in the aggregate exposure). Once a resolution plan is approved by the majority lenders, it shall be binding on all the lenders that are a party to the ICA; and
4. Each resolution plan that is formulated in terms of the ICA shall be in compliance with the RBI circular and all other applicable laws and guidelines.