Open Access Research Article
"RECASTING INDIAN BANKING LAW FOR THE 21ST CENTURY TO PAVE A PATH TOWARD GLOBAL FINANCIAL LEADERSHIP"
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Article Details
"RECASTING INDIAN BANKING LAW FOR THE 21ST CENTURY TO
PAVE A PATH TOWARD GLOBAL FINANCIAL LEADERSHIP"
AUTHORED BY
- S.KOPPERUNDEVI
Abstract
Recasting the indian banking law
system for the growth of global challenges. Banking system is one of the most
important financial institutions.By introducing creative solutions and
customised goods, new and developing technology have completely changed the
financial services sector. In order to provide a seamless customer experience,
supply-side elements like governmental backing and the rise of Fintechs have
combined with demand-side factors like growing customer expectations for
digital services.
Keywords
BaFin, ECB, AAA, BBB
Introduction
Indian banks have demonstrated
robustness during the recent upheaval in the global banking sector.
Nonetheless, the future remains unpredictable—financial institutions need to
focus on building comprehensive resilience strategies to succeed moving
forward.
Bank Safety
Determining Factors
Enormous factors determine the
banking safety system.
1.
Regulation and supervision
In the banking industry, regulation
and supervision are essential. By ensuring that banks follow stringent
guidelines, regulatory agencies such as the Federal Financial Supervisory
Authority (BaFin) reduce the likelihood of misconduct and bank failure. It is
now well known that banks have to comply with a complicated set of rules
intended to preserve system integrity and protect depositor interests. For
example, top-notch security can be maintained through national monitoring even
in cases of large supervision transfers, such as when a bank is no longer
directly supervised by the European Central Bank (ECB). Without being directly
supervised by a central authority, these safeguards enable a bank to rank among
the top 10 safest institutions globally.
2.
Capital Reserve
In general, banks that prioritise
keeping strong capital reserves are better able to withstand financial strain.
Capital ratios, which compare a bank's capital to its assets, are markers of
long-term viability. A high capital ratio indicates a sizable financial
cushion, putting the bank in a strong position to withstand possible losses and
carry on with business as usual. Like the much-lauded international banks, your
preferred financial institution should have outstanding capital reserves. This
is crucial for protecting depositor cash and providing a buffer against market
downturns. Banks can mitigate risks and avoid instability that could endanger
your financial security by maintaining sizable reserves.
3.
Asset Quality
Finally, a bank's stability and
safety are greatly influenced by the calibre of its assets. A bank is in a
stronger position if it has high-quality assets, which are low-risk and produce
consistent returns. A bank's ability to manage risk and make wise investments
is directly reflected in its asset quality. Another area where asset quality is
important is liquidity management. In order to prevent future liquidity crises,
banks with a diverse portfolio of liquid assets ensure that large withdrawal
demands may be satisfied quickly. Finding the ideal balance between long-term
and short-term assets is essential for banks in the highest echelon of safety
in order to maintain their stability even under erratic market conditions[1].
Best safest
bank in the world
A specific credit agency's assessment
of a government, corporation, or individual's capacity and willingness to meet
its financial commitments in full and by the deadlines is known as its credit
rating. Additionally, a debtor's credit rating indicates the probability of
default. It also reflects the credit risk that a debt instrument, such as a loan
or bond issue, carries. It plays a vital
role in determining the safety of the bank.
|
Moody's
|
S and P
|
Fitch
|
DBRS
|
|
Aaa
|
AAA
|
AAA
|
AAA
|
|
Aa1
|
AA+
|
AA+
|
AA( high)
|
|
Aa2
|
AA
|
AA
|
AA
|
|
Aa3
|
AA-
|
AA-
|
AA(low)
|
|
A1
|
A+
|
A+
|
A( high)
|
|
A2
|
A
|
A
|
A
|
|
A3
|
A-
|
A-
|
A(low)
|
|
Baa1
|
BBB+
|
BBB+
|
BBB(high)
|
|
Baa2
|
BBB
|
BBB
|
BBB
|
|
Baa3
|
BBB-
|
BBB-
|
BBB( low)
|
|
Ba1
|
BB+
|
BB+
|
BB(high)
|
|
B1
|
B+
|
B+
|
B(high)
|
|
B2
|
B
|
B
|
B
|
|
Caa1
|
CCC+
|
CCC+
|
CCC(high)
|
|
Caa2
|
CCC
|
CCC
|
CCC(low)
|
|
Caa3
|
CCC-
|
CCC-
|
CCC(Low)
|
|
-
|
D
|
D
|
D
|
letter-based scale is used to convey
credit ratings, with higher scores denoting greater creditworthiness and lower
risk. As a result, AAA, or AA, denotes strong banking scrunity, which reassures
investors and customers by indicating that the bank is financially healthy and
unlikely to default.
AAA: The highest rating means
extremely safe, with a very low risk of defaul
AA, A: Higher credit quality but
slightly more risk than AAA.
BBB: Medium credit quality;
considered "investment grade".
BB, B: Higher risk known as
'speculative' or junk bonds.
CCC, CC, C: Very high risk of default
D: Default [2].
Kfw(kreditanstalt für wieseraufbau)
bank - Germany
Credit ratings: AAA(S&P),Aaa(Moody's),AAA(Fitch)
The federal government of Germany
owns Kfw, a development bank.It is well known for its outstanding credit
ratings and sound financial standing, which are reinforced by government
support.Because it finances initiatives pertaining to social welfare,
environmental preservation, and economic development, it is regarded as one of
the safest banks in the world. Its robust capital-based and cautious risk
management make it one of the safest banks in the world.
Indian
banking system
Detailed Justification Regarding
Indian Bank's debt instruments, CRISIL Ratings has reaffirmed its "CRISIL
AAA/CRISIL AA+/Stable/CRISIL A1+" ratings. The overall ratings continue to
take into account the considerable scope of operations as well as the
significant support that Indian Bank is anticipated to get from its principal
owner, the Government of India. It also takes into account a sound resource
profile, which includes sufficient capitalisation and a high percentage of
current and savings account (CASA) deposits. The modest but growing asset
quality and earnings profile somewhat counteract these strengths. Due to Indian
Bank's enhanced ability to make future coupon payments, which was bolstered by
the adjustment of accrued losses with the share premium account, CRISIL Ratings
upgraded the rating of Tier I bonds (under Basel III) on October 1, 2021.
The bank's eligible reserves to total
assets ratio has improved as a result of the adjustment. Additionally, as per
the Nationalised Banks (Management and Miscellaneous Provisions) Amendment
Scheme, 2020, as announced in the Department of Financial Services Gazette
notification no. CG-DL-E-23032020-218862 (S.O. 1200 E) dated 23.03.2020, the
bank still has share premium reserves that can be used to offset any future
losses. This enhances the credit profile of the Tier I (under Basel III)
instruments.This provision has also been used by other public sector banks
(PSBs). Nonetheless, it is important to keep an eye on any significant
depletion of the share premium account or any regulatory modifications to its
allocation related to the adjustment of accrued losses.
RBI
releases 2018 list of Domestic Systemically Important Banks (D-SIBs)
SBI, ICICI Bank, and HDFC Bank
continue to be identified as Domestic Systemically Important Banks (D-SIBs),
under the same bucketing structure as last year. The additional Common Equity
Tier 1 (CET1) requirement for D-SIBs has already been phased-in from April 1,
2016 and will become fully effective from April 1, 2019. The additional CET1
requirement will be in addition to the capital conservation buffer[3].
The updated list of D-SIBs is as
follows:
|
Bucket
|
Banks
|
Additional common equity tier 1
requirement as a percentage of risk weighted assets( RWAs) for FY 2018-19
|
Additional common equity tier 1
requirement applicable from April 1,2029 as per phase in engagement
|
|
5
|
-
|
0.75%
|
1%
|
|
4
|
-
|
0.60%
|
0.80%
|
|
3
|
State Bank of India
|
0.45%
|
0.60%
|
|
2
|
-
|
0.30%
|
0.40%
|
|
1
|
ICICI, HDFC BANK
|
0.15%
|
0.20%
|
Background:
The Reserve Bank had issued the
Framework for dealing with Domestic Systemically Important Banks (D-SIBs) on
July 22, 2014. The D-SIB framework requires the Reserve Bank to disclose the
names of banks designated as D-SIBs starting from 2015 and place these banks in
appropriate buckets depending upon their Systemic Importance Scores (SISs).
Based on the bucket in which a D-SIB is placed, an additional common equity requirement
has to be applied to it. In case a foreign bank having branch presence in India
is a Global Systemically Important Bank (G-SIB), it has to maintain additional
CET1 capital surcharge in India as applicable to it as a G-SIB, proportionate
to its Risk Weighted Assets (RWAs) in India i.e. additional CET1 buffer
prescribed by the home regulator (amount) multiplied by India RWA as per
consolidated global Group books divided by Total consolidated global Group RWA.
The higher capital requirements are
applicable from April 1, 2016 in a phased manner and will become fully
effective from April 1, 2019. The additional common equity requirement for
different buckets over the four year phase-in period is as under:
|
Bucket
|
April 1,2016
|
April 1,2017
|
April 1,2018
|
April 1,2019
|
|
5
|
0.25%
|
0.50%
|
0.75%
|
1.00%
|
|
4
|
0.20%
|
0.40%
|
0.60%
|
0.80%
|
|
3
|
0.15%
|
0.30%
|
0.45%
|
0.60%
|
|
2
|
0.10%
|
0.20%
|
0.30%
|
0.40%
|
|
1
|
0.05%
|
0.10%
|
0.15%
|
0.20%4
|
Based on the methodology provided in
the D-SIB framework and data collected from banks as on March 31, 2015 and
March 31, 2016, the Reserve Bank had announced State Bank of India and ICICI
Bank Ltd. as D-SIBs on August 31, 2015 and August 25, 2016, respectively. Based
on data collected from banks as on March 31, 2017, the Reserve Bank had
announced State Bank of India, ICICI Bank Ltd. and HDFC Bank Ltd. as D-SIBs on
September 04, 2017. Current update is based on the data collected from banks as
on March 31, 2018.
Further the D-SIB framework requires
that “The assessment methodology for assessing the systemic importance of banks
and identifying D-SIBs will be reviewed on a regular basis. However, this
review will be at least once in three years.” Current review and analysis of
cross country practices do not warrant any change in the extant framework at
present.
Amendments in Indian banking laws in
order to cope up with the global challenges
Finance Minister Nirmala Sitharaman
tabled the Banking Laws (Amendment) Bill (2024) in the Lok Sabha, the lower
house of India's bicameral Parliament, marking a significant step towards
modernising the country's banking industry. The Reserve Bank of India Act
(1934), the Banking Regulation Act (1949), and the State Bank of India Act
(1955) are among the important banking laws that the Bill seeks to modify.
Important
clauses and modifications in the proposed bill
1.
Number of nominees permitted:
Important clauses and modifications
The Bill's proposal to raise the number of nominees permitted per bank account
is among its most noteworthy amendments. In order to give depositors more
freedom and security, the new Bill aims to raise the current limit of one
person in the account to four. It is anticipated that this modification will
streamline the asset transfer procedure in the case of the account holder's
passing, guaranteeing that the money is disbursed in accordance with their
desires.
2.
Substantial interest:
Redefining what constitutes
"substantial interest" in relation to bank directorships is another
goal of the bill. In order to reflect the economic shifts over the past few
decades, including inflation, the threshold for what qualifies as substantial
interest will be raised from the current INR 500,000 (GBP 4,675) to INR 20
million (GBP 187,000). This will guarantee that only those with substantial
financial stakes can influence bank policies.
3.
improved autonomy and governance:
Giving banks greater discretion over
the compensation of statutory auditors is another important change that aims to
improve the independence and efficacy of audits as well as the general control
of the banking industry. The Bill intends to attract higher quality auditing
services by enabling banks to determine auditor fees, which is essential for
preserving financial system openness and confidence.
Impact on
global challenges
The Bill's introduction is a clear
and thorough attempt to modernise and enhance the legal framework that oversees
the banking industry in India. To help India's financial sector compete with
the traditional hotspots of Frankfurt, London, and New York, it is important to
address important issues like nominee limits, significant interest thresholds,
auditor compensation, and reporting schedules. Additionally, governance,
flexibility, and efficiency within the sector should all be improved[4].
Conclusion
By bringing out the enormous amount
of efforts, Indian Banking system could be possibly make a notable changes in
its functioning and makes the broad competition in the banking systems existed
globally. The banking industry urgently needs reforms to improve governance and
protect investors' interests. It is being emphasised that the proposed changes
are a part of a larger initiative to modernise the banking industry and
increase its resilience to future challenges.
[4] https://www.globallegalinsights.com/news/india-moves-towards-a-comprehensive-overhaul-of-banking-laws/
Article Information
"RECASTING INDIAN BANKING LAW FOR THE 21ST CENTURY TO PAVE A PATH TOWARD GLOBAL FINANCIAL LEADERSHIP"
Authors: S.KOPPERUNDEVI
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/11/21
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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