Bank Consolidation/Nationalization and Financial Stability

Question 1

Bank Consolidation

Answer 1

INTRODUCTION:

a. What? Merging public sector banks to form big and globally aspiring banks
b. Recommended by Narsimhan committee II

WHY?:

a. Financial stability is expected
b. Can take on competition effectively
c. Economies of scale
d. Suited for universal banking
e. Can raise more than small banks

WHY NOT?

a. Rationalizing the manpower and branch network after merger is a challenge
b. More bureaucratic
c. West example shows no relation between size and stability

Question 2

Banks Nationalization

Answer 2

WHY in NEWS?
50th Anniversary of Bank Nationalization

Banks were nationalized twice: In 1969 and in 1980

Question 3

Reasons for Banks Nationalization

Answer 3

Reasons: RS MP

Failure of Pvt Sector Banks: On an average 40 banks
failed per year from 1947 to 1955

For channeling bank capital in Rural sector.

Checking misuse of banking capital for Speculative use

To shift from class banking to Mass banking

To make banking integral part of Planning process of social economic development of India

Question 4

Benefits of Banks Nationalization

Answer 4

Branches in rural area: 8k to 31k

PSL: 40%

Employment generation

Balanced regional development

Effective transmission of monetary policies

Increased investment in government securities

Question 5

Issues of banks nationalization

Answer 5

Politicisation

Increased NPA

Too big to fail syndrome: Use of taxpayers money for bailout

Question 6

Financial Stability’s three dimensions

Answer 6

3 dimensions:

Financial system operates with no serious failure

Nor any undesirable impact on economy as a whole

Showing a high degree of resilience to shocks

Question 7

How RBI ensures financial stability

Answer 7

Licensing of banks

Deciding on who can setup bank, expand etc.

SLR, CRR norms

CAR norms

Lender of last resort

Prudential norms

   a. Income recognition
   b. Asset classification
   c. Provisioning of NPA
   d. Capital adequacy norms

Supervisory Functions

Disciplinary Banking through making it mandatory to disclose certain information

Allows or limit credit to certain sector

Question 8

Financila Stability Unit

Answer 8

Set up RBI post Lehman in 2009

Publishes FSR

2nd FSR introduces many new risk assessment measures

Risk to financial stability

   a. CAD
   b. Volatile inflows
   c. Persistently high inflation

Question 9

Weak Banks

Answer 9

Defined by Narsimhan com II. A bank when its total accumulated loss and Net NPA amount exceeds the net worth of banks

Question 10

Narrow Banking

Answer 10

To avoid bank run and to restore weak banks to strength. Restrict banks to hold only safe assets like govt bonds

Question 11

Bank Run

Answer 11

When a large number of bank customers fear that bank may collapse and they withdraw their deposits

Question 12

Subordinate/Junior Debt

Answer 12

In case of default people holding subordinate bonds will be paid later. More risk and hence higher returns

Question 13

Core Banking

Answer 13

Business conducted by a banking institution with its retail and small business customers. Basically, depositing and lending of money. Larger businesses are managed via corporate banking division. Don’t confuse it with core banking solution

Question 14

Bank Stress Test

Answer 14

Evaluation of balance sheet of a bank to assess whether it will be able to sustain in case of adverse situation