ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Internal Credit Rating Practices of Indian Banks

The overarching goal of the second Basel accord is aligning the capital requirements of banks with risk sensitivity. The accord emphasises the quantification of capital requirements on the basis of internal rating models. The internal credit rating models of banks are expected to produce the probability of default and loss given default to estimate the capital requirements of credit risk. This paper presents an analysis of the current status of internal credit rating practices of Indian banks. The survey reveals that the components of internal rating systems, their architecture, and operation differ substantially across banks. The range of grades and risks associated with each grade vary across banks analysed. This implies that lending decisions may vary across banks. There are differences among the rating systems of various banks. This paper presents a set of actions to improve the quality of internal rating models of Indian banks.

On Liberalising Foreign Institutional Investments

This paper critiques the approach and recommendations of the 2004 government of India expert group on foreign institutional investment flows. The groupâ??s approach raise several important analytical and policy issues. The most crucial of these relate to effects of FII flows on (a) aggregate and sectoral investment; (b) behaviour of financial, including foreign currency, markets with special reference to their volatility; and (c) efficacy of fiscal and monetary instruments in attaining the objectives of macrostabilisation and growth. The article examines the macroeconomic impact of FII flows in the light of the Indian experience, and draws some policy conclusions regarding the role of such flows. It also addresses the issue of volatility in the Indian context. It finds there is no coherent macroeconomic model behind the expert groupsâ??s analysis and recommendations; no appraisal either of the optimal scale of capital inflows or the relative merit of FII vis-Ã -vis other categories of capital receipts at the current juncture of the economy; and no examination of monetary/fiscal problems associated with FII or of the quantitative impact of such flows on investment and other macro variables.

Productivity Growth in Regional Rural Banks

This paper examines total factor productivity technical and scale efficiency changes in regional rural banks by using data from 192 banks for the period 1996 to 2002. Rural banks showed significant economies of scale in terms of assets and number of branches under each bank. Total factor productivity growth of rural banks was higher in profitability than in service provision during liberalisation. Banks located in economically developed as well as low banking density regions exhibited significantly higher productivity growth. Overall there is a convergence of efficiency of rural banks during the study period. Parent public sector banks have no influence on the efficiency and productivity growth of rural banks. There is a justification for opening new banks in low banking density regions as efficiency and productivity growth of rural banks in these areas are high. There is also a case for mergers and enlargement of the asset base and the number of branches under each rural bank.

Current State of the Indian Capital Market

In the early 1990s, India figured low in the global ranking of the state of capital markets. The adoption of sophisticated IT tools in trading and settlement mechanisms has now placed India in the lead. The National Stock Exchange has played an important role in this transformation. Shorter settlement periods and dematerialisation have been other major developments. But all is not entirely positive. The introduction of individual stock futures poses a major risk; so also the large inflow of funds through participatory notes.

Foreign Banks in Historical Perspective

This article views the operations of foreign banks in historical perspective, and taking a cue therefrom, provides an analysis of contemporary policy that has promoted their aggressive expansion. The paper begins with a brief overview of the genesis and development of foreign banks in India. This is followed by an account of their operations, relative to the concurrent growth of domestic banks, during the colonial period. It then moves on to an account of developments in the post-independence period, including legislation related to prudential regulation, demarcating the pre- and post-nationalisation phases, and the pre- and post-liberalisation phases. All along, the focus is on the changing dimensions of foreign banks relative to domestic banks.

Agricultural Credit in India

Agricultural credit has played a vital role in supporting farm production in India. Though the outreach and amount of agricultural credit have increased over the years, several weaknesses have crept in which have affected the viability and sustainability of these institutions. Following the shifts in consumption and dietary patterns from cereals to non-cereal products, a silent transformation is taking place in rural areas calling for diversification in agricultural production and value addition processes in order to protect employment and incomes of the rural population. In the changed scenario, strong and viable agricultural financial institutions are needed to cater to the requirements of finance for building the necessary institutional and marketing infrastructure. What is needed in agriculture now is a new mission mode akin to what was done in the 1970s with the green revolution. The difference now is that initiatives are needed in a disaggregated manner in many different segments of agriculture and agro-industry: horticulture, aquaculture, pisciculture, dairying, sericulture, poultry, vegetables, meat, food processing, other agro-processing and the like.

An Architectural Plan for a Microfinance Institutional Network

This paper proposes an architectural design for a microfinance service delivery network. It emphasises that savings followed by credit, insurance and money transfer, in descending order of priority, are the most important financial services needed by the poor. Microfinance may be classified as primary and secondary. Whereas the primary microfinance service includes savings, credit, insurance and money transfer, the secondary service includes enterprise credit, pension, equity transaction, leasing, etc. The paper then argues that competition with compassion and right to earn profit under the lens of a rational regulatory and supervisory framework and governmentâ??s active participation in capital formation, both human and physical, are the major forces necessary to fuel the healthy, sustainable and useful growth of microfinance institutions. The paper finally proposes a layout of the MF network, defining the roles of different entities, viz, government, central bank, microfinance authority, banking partner, rating agency, deposit insurance agency, promoter, capital provider, human capital building institution and, finally, MF clients.

Commercial Bank Lending to Small-Scale Industry

It is believed that the working capital support extended by commercial banks to small-scale industry is far from adequate. Although the SSI is a part of the priority sector, its share in total priority sector advances of all scheduled commercial banks has been falling consistently from around 39 per cent in 1992 to around 24 per cent in 2004. This paper examines the trends in sectoral allocation of bank credit to the SSI vis-Ã -vis the non-SSI sector in the post-reform period. The paper also makes an attempt to understand the variations in bank credit to the SSI sector across bank groups, and also the influence of the size and performance of banks on credit to the SSI sector. The results indicate that the high incidence of bad loans arising out of SSI advances could be one of the reasons for the declining share of SSI loans of the commercial banks.

Macroeconomic Fundamentals and Exchange Rate Dynamics in India

The present study investigates the relative importance of macro (interest rates, inflation, etc) and micro (order flows, information, etc) variables in determining the short-run exchange rate movements. Empirical analysis is based on a primary survey of the Indian foreign exchange dealers. It finds from a survey that a majority of the dealers feel short-term changes in the Indian rupee/US dollar market are basically influenced by the micro variables such as information flow, market movement, speculation, central bank intervention, etc. One of the findings of this study, which has policy implications, is that the dealers feel speculation would increase volatility, liquidity and efficiency in the market and, central bank intervention reduces volatility and market efficiency.

Lender of First Resort

such finance really efficient, it would be necessary for these financing agencies to improve their appraisal capabilities and methods. If their appraisal were really competent, Government would have available to it a new source of independent assessment of public sector managements.

IMF and International Liquidity

IMF and International Liquidity THE primary component of international liquidity that a country possesses is its international reserves which are made up of gold holdings and foreign exchange assets in US dollars and pound sterling. The subsidiary resources of international liquidity are provided by IMF. It is largely the flexible operation of IMF policies that has resulted of late in a significant expansion of subsidiary liquidity. Table 1 outlines the enlargement over the years in the quantum of international liquidity of all types.

Myths Destroyed

November 8, 1969 ing the past two decades on the model of Digboi, are creating a cultural barrier between the people and the immigrant salariat bourgeoisie or commercial elements. In Namrup, at the height of the refinery agitation, the two sides, for lack of rapport and due to interference of foreign elements, came to a clash. Arson, looting and killing were indulged in by both sides. Even now the feeling of estrangement is there. Namrup is situated near the Assam- Nagaland border and adjacent to Duliajan.

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