Basic Norms Of Indian Banking System

The Indian Banking system remains very structured and well oiled machinery with deep seated roots dating back to the 1700s. The Bank of Hindustan was among the first banks along with banks like General Bank of India. However, a stalwart of the old times which even today stands tall is the SBI or State Bank of India which was essentially formed in 1806 as Bank of Calcutta.

An economy can grow at a fast clip only when it is ably supported by a financial system largely comprised of the banking system and one which is stable and fast growing. There are a number of factors which are analysed to comprehend the health of the banking system such as NPA and CAR. NPA or Non Performing Assets are not providing the desired returns for a designated period as per the applicable banking norms.

CAR or CRAR is Capital Adequacy Ratio or Capital to Risk Weighted Assets is the extent of loss absorbing capacity determined by the ratio of a bank’s risk and capital equation. India is part of the 27 member global banking committee known as BCBS or the “Basel Committee on Banking Supervision”. The idea is to have a common set of standard banking practices such that financial entities have enough funds to even face unexpected losses.

Mechanisms such as SLR and CRR requirements
along with “financial stability and development council” – all under RBI directives constantly endeavour to improve the economy’s stability. India in 1988 first saw the implementation of Basel I norms with capital to risk weighted assets being 8%. Uniform standards are necessary since the global financial system is interconnected proved by the last recession.

These norms also engender investor confidence. The Basel II 2004 requirements kept the CAR at 8% with additional needs for banks to employ better risk management techniques and more extensive disclosure requirements. They were also required to report to the Apex bank the extent of risk exposure bi-annually.

 The Banking system needed resurgence after the last global crisis and thus Basel III was released around 2010. The quantity as well as capital quality needed a relook and hence more capital intensive was made the goal to spawn higher resilience as a resultant effect.

The RBI postponed the implementation of these norms to 2019 since Basel II itself wasn’t fully functional apart from other necessities. The RBI constantly monitors the economy through rate modification for lending such as REPO and reverse REPO rates. It also launched and is constantly improving KYC norms as well. NECS. NEFT, RTGS and many other initiatives have succeeded in recent times.

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