Bank of baroda

Reforms of the Non-Banking Finance Companies
The standards relating to income recognition, provisioning and capital adequacy were prescribed for non-banking finance
companies in June 1994. The registered non-banking finance companies were required to achieve a minimum capital
adequacy of 6.0% by year-end fiscal 1995 and 8.0% by year-end fiscal 1996 and to obtain a minimum credit rating. To
encourage the companies complying with the regulatory framework, RBI announced in July 1996 certain liberalization
measures under which the non-banking finance companies registered with it and complying with the prudential norms
and credit rating requirements were granted freedom from the ceiling on interest rates on deposits and amount of
deposits. Other measures introduced include requiring non-banking finance companies to maintain a certain percentage
of liquid assets and to create a reserve fund. The percentage of liquid assets to be maintained by non-banking finance
companies has been revised uniformly upwards and since April 1999, 15.0% of public deposits must be maintained.
Efforts have also been made to integrate non-banking finance companies into the mainstream financial sector.
New Initiatives in the Banking Sector
Risk Management and Basel II
With gradual deregulation, banks are now exposed to different types of risks. In view of the dynamic nature of the
financial market, banks face various market risks like interest rate risk, liquidity risk, and exchange risk. In respect of
lending, they face credit risk which includes default risk and portfolio risk. Banks also face risks like operational risk.
In preparation for the adoption of the Basel II accord, banks have already been required by RBI to take active measures
in terms of risk management systems, evaluate capital charges including for operational risk and bring about more
transparency in financial reporting as part of market discipline. RBI has also moved towards adoption of Risk Based
Supervision (RBS) of banks under which the risk profile of the banks will decide their supervisory cycles - a bank with
higher risk rating will undergo more frequent supervisory reviews than those with lower risk rating. RBI has also indicated
that it will adopt a phased approach to the implementation of the Basel II accord. Implementation of market risk systems
will be completed within two years from the year ended March 31, 2005 and the credit risk and operational risk systems
with effect from March 31, 2007.