📒 Module 5: Changing Role of Financial
Institutions
Total Duration: 9 Hours
CLO Alignment: CLO5 – Analyze the evolving role of financial institutions in India’s economic
development.
Topic 1: Banking Sector Reforms
Overview
Banking sector reforms in India have aimed at enhancing efficiency, transparency, and stability in
response to liberalization and global integration post-1991.
Key Areas of Reform
Non-Performing Assets (NPAs)
o NPAs are loans where interest or principal is overdue for more than 90 days.
o High NPAs hurt bank profitability and credit growth.
o Reforms: Insolvency and Bankruptcy Code (IBC), Asset Reconstruction Companies (ARCs),
and aggressive NPA resolution mechanisms (e.g., NCLT).
Basel Norms
o Global regulatory framework for capital adequacy, risk management, and banking
supervision.
o Basel III mandates:
Minimum Capital Adequacy Ratio (CAR) of 8%
Capital Conservation Buffer
Leverage Ratio
o India implemented Basel III in a phased manner starting 2013.
Bank Recapitalization
o Government infuses capital into public sector banks (PSBs) to meet capital requirements.
o Example: ₹2.11 lakh crore recapitalization plan (2017–2019) for PSBs.
Key Takeaways
NPAs have prompted structural banking reforms.
Basel norms promote risk resilience.
Recapitalization strengthens public sector banking capacity.
Practice Questions
1. MCQ: What is the minimum CAR required under Basel III?
a) 6%
b) 8%
c) 9.5%
d) 7.5%
Answer: b)
2. Short Answer: What are NPAs, and why are they a concern for Indian banks?
3. Discussion Prompt: Is recapitalization a sustainable solution to the NPA crisis?
Topic 2: Roles of Financial Institutions
Financial Role
Lending and Credit Disbursement
o Provide loans to sectors like industry, agriculture, MSMEs, and retail.
o Support consumption and investment activity.
Investment
o Invest in government bonds, equity markets, and infrastructure projects.
o Help deepen financial markets and ensure capital allocation.
Risk Mitigation
o Offer insurance, credit guarantees (e.g., CGTMSE), and hedging services.
o Support financial stability during crises.
Promotional Role
Infrastructure Development
o Funding for roads, power, ports, etc., through institutions like NABARD, SIDBI, and
IIFCL.
Entrepreneurship and MSME Support
o Financial literacy programs, skill development, start-up incubation.
o Targeted lending schemes (e.g., MUDRA Yojana).
Example:
SIDBI has been instrumental in funding and mentoring MSMEs under government schemes like PMEGP
and Stand-Up India.
Key Takeaways
Financial institutions drive credit expansion, risk-sharing, and investment.
Promotional roles foster inclusive development and entrepreneurship.
Institutions are key in executing national economic priorities.
Practice Questions
1. MCQ: Which institution primarily supports MSME financing in India?
a) NABARD
b) SIDBI
c) SEBI
d) IRDAI
Answer: b)
2. Short Answer: Describe two promotional roles played by Indian financial institutions.
3. Discussion Prompt: Why is the promotional role of financial institutions vital in emerging
economies like India?
Topic 3: Universal Banking
Concept and Evolution
Universal banking refers to the provision of all financial services—commercial banking, investment
banking, insurance, and asset management—under one roof.
First recommended by the Narasimham Committee (1998) and RBI Working Group (2001).
Examples:
ICICI Bank and Axis Bank offer a wide range of services: retail banking, mutual funds, insurance,
and investment banking.
Advantages
Operational Efficiency: Economies of scale and cross-selling.
Customer Convenience: One-stop financial services.
Revenue Diversification: Non-interest income buffers risk.
Regulatory Concerns
Conflict of Interest: Risk from blending commercial and investment roles.
Too Big to Fail: Increased systemic risk due to the size and complexity.
Regulatory Gaps: Needs tight oversight by RBI, SEBI, and IRDAI.
Key Takeaways
Universal banking aligns with global financial integration.
Offers convenience and profitability but requires stringent regulation.
India is cautiously progressing toward full universal banking.
Practice Questions
1. MCQ: Universal banking was first proposed in India by which committee?
a) Malegam Committee
b) Narasimham Committee
c) Rangarajan Committee
d) Kelkar Committee
Answer: b)
2. Short Answer: Mention two benefits and two regulatory concerns of universal banking.
3. Reflection Prompt: Should RBI allow more universal banks in India? Justify with pros and cons.
Summary Box: Module 5
Element Description
Banking Reforms Address NPAs, implement Basel III, recapitalize PSBs
Financial Role Lending, investment, and risk management
Promotional Role Infrastructure funding, entrepreneurship support
Universal Banking Integration of multiple financial services under one entity
Challenges Regulatory complexity, systemic risk