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From opening the gates for new type of banks to new banks taking roots, the year 2015 was characterised by long pending financial sector reforms but it’s still a long way to go.

From opening the gates for new type of banks to new banks taking roots, the year 2015 was characterised by long pending financial sector reforms but it’s still a long way to go, writes Manojit Saha
The seeds of reform that were sowed by Reserve Bank of India (RBI) Governor Raghuram Rajan in September 2013 when he entered Mint Road, started yielding results this year. The Bhartiya Janata Party government which came into power in May 2014, made it intentions clear about banking sector reforms by the beginning of this year, as it organized Gyan Sangam — the bankers’ retreat — in January, where the board contours of banking sector reforms were chalked out.
Banking reforms

On the eve of the Independence Day this year, the government launched a host of reforms, christened as Indradanush, aimed to improve governance in public sector banks like separating the post of Chairman and Managing Directors, proposed the formation of Bank Board Bureau for top level appointments and announced Rs.70,000 crore capital infusion in public sector bank over four years.
The government also opened up the position of public sector bank CEOs to private sector candidates – a first in the history of Indian banking.
More needs to be done

It is just a start and many more steps are required to make public sector banks more efficient.
The government has to withdraw itself from the board of the bank which should be run by professionals, the board appointing the CEOs in public sector banks rather than the government, bring down its stake below 51 per cent, are some of things that are required to make reforms more meaningful.
New banks, new type of banks

Two new full service banks, IDFC Bank and Bandhan Bank started operation during the second half of the year. These banks received in-principle licences from RBI in 2014 — which is the first universal bank licence granted in more than a decade. RBI took more than four years to complete the licensing process which was announced by former finance minister, Pranab Mukherjee ,during his budget speech in 2010.
The RBI, under Raghuram Rajan, wanted to speed up things. As a result, 21 new niche bank licences were issued in 2015. This time around, the licencing process took less than two years.
Eleven new banks were licenced to start operations as payments banks where the main objective is to provide remittance services, apart from distribution of simple financial products like insurance and mutual funds. This was also the first time business houses are allowed in banking, albeit, the scope of activities was restricted. Reliance Industries, Aditya Birla Group, Vodafone, Bharti Airtel, were some of the players that were awarded payments bank licence.
Ten new small finance bank licences were also granted, of which eight of them are micro-finance institutions. Small finance banks are mandated to extend small loans mainly to customers who are not covered by formal banking system.
Long-term marker

“Entry of twenty three new banks, two universal and twenty one differentiated, will be the long-term marker of 2015 as far as banking in India is concerned,” said Sinjhini Kumar, leader, banking and capital markets for PwC India.
“During the year, however, news on banking was largely bad debts and institutional reforms to deal with bad debt and wilful defaulters. As new measures to tackle this problem were rolled out in right earnest, success in implementation has been limited. No one is sure if we have seen the worst yet, but as we enter the new year, we hope for the best,” she added.
Strategic debt restructuring

In June this year, the banking regulator allowed banks to acquire 51 per cent or more stake in companies defaulting even after restructuring of their loans. The norm, known as Strategic debt restructuring, was aimed to ensure promoter’s have ‘skin the game’. The move is expected to improve repayment culture of the borrowers.
“Lenders have been requesting for certain enablers and the RBI unveiling Strategic Debt Restructuring norms is one of them. SDR holds the potential to speed the recovery process and is a positive for the banking sector,” said Vibha Batra, Group head, Financial Sector Ratings, ICRA.
“In addition, the government is keen for a bankruptcy code though it was not passed in the winter session of the Parliament.
“A bankruptcy code could also have a positive impact on recoverability from weak assets,” she added.
New Monetary policy framework

The central bank entered into a historical agreement with the government in March this year over how to tackle price rise which has pinched the consumers for many years. According to the framework, RBI has the explicit mandate to have an inflation target, for which it is accountable.
According to the agreement, the central bank will aim to bring retail inflation below 6 percent by January 2016 -- and to four percent by fiscal 2016-17 and thereafter, with a band of +/- 2 per cent.
Sharp interest rate cuts

January 2015 also saw first interest rate reduction by RBI since May 2013 – and during the year, repo rate were reduced by 125 bps to 6.75 per cent – a four and half year low level.
Banks also started to bring down their base rate – the benchmark lending rate to which all loan rates are linked. However, the banks were reluctant to cut rates as evident from the fact that base rates were reduced by only about 70 bps during the year.
Moving ahead there is good news for the borrowers as the banking regulator has now changed the norms on how banks calculate lending rate.
The RBI on December 17, 2015 issued guidelines for the computation of the benchmark lending rate using the marginal cost of funds method. Banks will have to implement the new Marginal Cost of Funds based Lending Rate (MCLR) with effect from April 1, 2016.
“The latest norms hold the potential of improving the efficiency of monetary policy transmission for new borrowings, and will impact new borrowers immediately. They will benefit in a declining interest rate scenario and take a dent when interest rates are rising; existing borrowers with floating-rate liabilities will bear the impact at a lag of up to one year,” according to a statement from the rating agency, ICRA.

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