BANKING SYSTEM

The Indian money market is classified into: the organised sector (comprising private, public and foreign owned commercial banks and cooperative banks, together known as scheduled banks); and the unorganised sector (comprising individual or family owned indigenous bankers or money lenders and non-banking financial companies (NBFCs)). The unorganised sector and microcredit are still preferred over traditional banks in rural and suburban areas, especially for non-productive purposes, like ceremonies and short duration loans.

Non-Performing Assets (NPAs)

Non Performing Assets, according to the Reserve Bank of India, are those loans advanced by the bank that have not yielded interest for 180 days and the amount of principal that needs to be repaid is also defaulted. They are also called bad debts. To any reason as irrational deployment of capital borrowed; agricultural disasters; willful default etc. The Narasimham Committee reports I and II recommended the establishment of an Asset Reconstruction Fund (ARF) to take up the task of recovery. ARCs for some banks have already been set up.

NPAs are of three types:
• Substandard ones are those that are bad' for less than two years
• Doubtful ones are those that are 'bad loans' for more than two years
• Loss making ones is those that are non-collectible.
 

Non-performing assets (NPAs) of the banking sector
 

Improved industrial climate and new options available to banks for dealing with bad loans helped in recovering a substantial amount of NPAs in 2005-06. Such recoveries during 2005-06 were more than fresh accruals. Gross NPAs of SCBs, which had declined by Rs.5, 414 crore in 2004-05, fell by a further amount of Rs. 7.558 crore in 2005-06. Aggregate amount recovered and written-off increased to Rs. 28,717 crore during 2005-06 from Rs. 25,007 crore in the previous year. NPAs of SCBs, at 1.9 per cent of total assets al end-March 2006, were substantially lower than the 2.5 per cent observed a year ago. The operations of the Assets Reconstruction Company (India) Limited (ARC1L) during 2005-06 helped in NPA recovery.
 

Monetary and Credit Policy

It is the policy with the help of which the Government through its Central Bank regulates money supply and achieves price stability. The broader objectives of the monetary and credit policy are to promote investment to bring about greater rate of economic growth with the result that the accompanying benefits of employment generation; inflation management, exchange rate stabilization etc also accrue. The RBI announced the credit policy traditionally twice a year— the lean season
policy in April and busy season policy in October. In 1998, it became once a year, the October
intervention being a review. From 1999, it is being announced only in April.

Monetary and Credit Policy 2007-08

• Greater emphasis on price stability and well-anchored inflation expectations while
ensuring a monetary and interest rate environment that supports growth momentum.

• Swift response with all appropriate measures to all situations impinging on inflation
expectations and the growth momentum
• Renewed focus on credit quality and orderly financial markets conditions in
securing macroeconomic, in particular, financial stability.
• Bank Rate, Reverse Repo Rate and Repo Rate kept unchanged.
• Scheduled banks required to maintain CRR of 6.5 per cent with effect from the fortnight
beginning April 28, 2007.
• GDP growth projection for 2007-08 at around 8.5 per cent.
• Inflation to be contained close to 5.0 per cent during 2007-08. Going forward, the resolve
is to condition policy and perceptions for inflation in the range of 4.0-4.5 per cent over
the medium term.
• M3 expansion to be contained at around 17.0-17.5 per cent during 2007-08.
• Deposits projected to increase by around Rs.4, 90,000 crore during 2007-08.
• Adjusted non-food credit projected to increase by around 24.0-25.0 per cent during 2007-
08, implying a graduated deceleration from the average of 29.8 per cent over 2004- 07.
• Appropriate liquidity to be maintained to meet legitimate credit requirements, consistent
with price and financial stability.
• Overseas investment limit (total financial commitments) for Indian companies enhanced
to 300 per cent of their net worth.
• Aggregate ceiling on overseas investment by mutual funds enhanced to US $ 4 billion.
• Prepayment of external commercial borrowings (ECBs) without prior Reseve Bank
approval increased to US $400 million.
• Introduction of a credit guarantee scheme for distressed farmers