Commercial Banking System & Role of RBI - NMIMS

 

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Commercial Banking System & Role of RBI

Dec 2020

 

 

 

1. Banking has taken a 360 degrees turn in period of 50 years starting from nationalization in 1969 of 14 private sector banks again to privatization of banks in 1990s. Year 2014 resulted in setting of small Payment Banks in different nooks & corners of the country to a diametrically opposite step of mergers and consolidation of many weak public sector banks with a few large banks in 2018/19. What has been the economic & financial compulsions/reasons for such changes in five decades? (10 Marks)

 

SOLUTION

 

Introduction

 

The Indian government has cited many reasons to support its decision to merge many of its nationalized banks. One of the reasons is after the merger; the combined banks will become bigger establishments. They will be able to lend more money, which will be conducive to reviving the slowing economy.

 

* The Indian Government also believes that credit growth must be increased for achieving the target of growing the country to ₹ 5 trillion economies within the next five years, i.e., 2025. Other than this, the government is confident that mergers the merged entities will have

 

2. Why banks are shifting gears from fund based lending to non-fund based lending? Explain different types of fund based and non-fund based lending activities. (10 Marks)

 

SOLUTION

 

Introduction

 

When sanctioned, fund-based credits create an actual outflow of funds from the bank to the borrower. Non-fund based facilities are those when approved, do not involve bank funds' flow.

 

Examples of fund-based and non-fund based loans

The typical examples cited as fund-based facilities are cash credit, term loan, overdraft, etc.  On the other side

 

 

3. The issue of Non-Performing Assets (NPAs) in the Indian Banking sector has become the subject of much discussion and scrutiny. The banks capacity to lend has been severely affected by mounting NPAs, net worth of many banks have eroded and a number of banks have reported huge losses. In recent years plethora of rules and regulations have come from different RBI, Government, IMF, BASEL recommendations, etc to keep a tab on stressed assets and timely resolution.

In light of above statements:

 

a. Write the major reasons for increase on NPAs since last 10 years (5 Marks)

 

SOLUTION

 

Introduction

 

Borrowers get loans and advances from banks. The categories of loans are based on the performances of the loans. There are mainly two types of loans: (1st) The Standard Asset, in which the borrower pays back regularly, and the (2nd) is a non-performing asset (NPA).

NPA

NPAs are such types of advances or loans, where the borrowers stop paying back either principal or

 

 

b. According to you what would be the mitigating factors/solutions for NPA management.

 

Solution

 

Introduction

 

As discussed above, the corporate started underperforming; the borrowers' capacity was miserably down to pay back to the banks.

 

Root causes of NPA

 

*  The banks started practicing "ever greening" the loan system. That meant new loans were

 

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