Assocham Draws Up Blueprint For Banking Sector Reforms

The Associated Chambers for Commerce and Industry (Assocham) has called for setting up an apex financial holding company to raise capital in international and domestic markets for channelling into potentially viable banks.

The company would hold a stake in all the banks and financial institutions to provide a focal point of governments interests as a shareholder.

In a comprehensive note to the Narasimhan committee to review and suggest reforms to strengthen the banking industry, Assocham has pointed out that the government-owned company should play a key role in setting up an asset recovery fund.

It has suggested that the proposed company should be made responsible for appointments and performance evaluation of key bank personnel.

 

Such an institutional mechanism would enter into MoUs with individual banks rather than the Reserve Bank of India. This arrangement, Assocham said, would allow RBI to concentrate on regulation and supervision.

It is also useful to set up a credit information bureau which would have quarterly and monthly information on the top 1,000 borrowers. The users of this information should be allowed access to this data for a fee. The bureau could also set up a information data base on all defaulters in the system, the chamber note said.

Assocham has also listed several areas for strengthening the banking system. The note has called for further raising the capital levels of the banking systems constituents. This would enable players to improve the credit appraisal process and upgrade risk management practices by inducting fresh talent and through greater automation.

Other areas pointed out by the chamber include implementing global level accounting standards in respect of provisioning for non-performing assets (NPA) and increasing the frequency and quality of disclosure.

The chamber has also called for overhauling bankruptcy laws.

On banking policy, Assocham has called for crystallising the thinking on regulatory policy towards weaker banks, regional rural banks, co-operative banks and non-banking finance companies. The market players should be aware of the pace and timing of regulatory action on this.

The chamber has mooted a unifying regulation for financial institutions on an incremental basis, with regard to their historical uniqueness.

Specifically, they need regulatory freedom for engaging in short-term intermediation critical to improve their credit-risk profile and strengthen their retail funding ability, the chamber said.

There is a need to tighten NPA recognition norms further to three months (norms for projects and agri-loans have been relaxed recently to 12 months) and increase the pace of provisioning.

Among other suggestions, Assocham has emphasised the need for raising capital adequacy requirements for all banks to 10-12 per cent over a time period of two to three years, consolidating by setting minimum capital requirements and reformulating policy towards priority sector lending.

The medium-term objective should be to take the concessional burden off the banks (and therefore the depositors), converge the numerous lending schemes and increase indirect lending options to minimise credit risks, it said.

The long-term objective should be to eliminate lending requirements, make infrastructure lending a part of priority sector lending and liquidate small banks rather than merge them with bigger banks.

This would increase the depositors risk consciousness and improve his confidence in the banking system as a whole, the chamber note said.