Banking Reforms in India

Modernisation of India’s Banking Sector;

1. Banks must undertake better risk-based pricing of their loan assets and for this, banks need to rely on processes and frameworks that reveal the true costs incurred in originating loans for various borrower profiles and asset classes. These frameworks include Matched Fund Transfer Pricing (MFTP) to understand cost of funds, Activity Based Costing (ABC) to understand transaction costs, and Risk-Adjusted Performance Measurement (RAPM) for measuring the cost of equity.

2. In its risk-based supervisory process, the RBI must move away from detailed instructions in its Monitorable Action Plan (MAP) and shift towards an approach of specifying targeted risk scores for each bank based on its unique risk position. As a prudent target to place on banks, RBI can focus on ensuring that Systemically Important Financial Institutions (SIFIs) consistently meet low risk scores, while non-SIFIs have more leeway to take on risker endeavours and therefore are to meet higher capital norms commensurate with their riskiness.

3. RBI must provide differential provisioning (both standard and impaired assets) and asset classification norms that reflect the underlying riskiness of each asset class.