Banking Sector Reforms | Crash Course for UPSC Aspirants PDF Download

 Page 1


Lecture 6 
Banking Sector Reforms
Prelims 2020 Crash Course 
Capstone IAS Learning
Page 2


Lecture 6 
Banking Sector Reforms
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Problems faced by Banking Sector 
Government’s response and various reforms 
Insolvency and Bankruptcy Code 
Recapitalisation of Banks 
Merger and Acquisition 
Page 3


Lecture 6 
Banking Sector Reforms
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Problems faced by Banking Sector 
Government’s response and various reforms 
Insolvency and Bankruptcy Code 
Recapitalisation of Banks 
Merger and Acquisition 
Crisis in Banking Sector
Deteriorating Asset Quality -  
Due to economic slowdown, the income of big corporate houses 
is not enough to service their debt. 
Declining “Interest Coverage Ratio” is one of the reasons for 
Asset Stress. 
Interest Coverage ratio(ICR) = 
When ICR < 1, then chances of default on debt increases. 
Another reason for Asset Stress is “Wilful Default” and frauds in 
the banking system. 
To fight against frauds and wilful default, regulatory agencies 
need to pull their sleeves up, so that these things do not repeat 
themselves in future.
Earnings before taxes and interest 
Interest payments 
Page 4


Lecture 6 
Banking Sector Reforms
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Problems faced by Banking Sector 
Government’s response and various reforms 
Insolvency and Bankruptcy Code 
Recapitalisation of Banks 
Merger and Acquisition 
Crisis in Banking Sector
Deteriorating Asset Quality -  
Due to economic slowdown, the income of big corporate houses 
is not enough to service their debt. 
Declining “Interest Coverage Ratio” is one of the reasons for 
Asset Stress. 
Interest Coverage ratio(ICR) = 
When ICR < 1, then chances of default on debt increases. 
Another reason for Asset Stress is “Wilful Default” and frauds in 
the banking system. 
To fight against frauds and wilful default, regulatory agencies 
need to pull their sleeves up, so that these things do not repeat 
themselves in future.
Earnings before taxes and interest 
Interest payments 
Twin Balance Sheet Syndrome(TBS) -  
It is a situation under which balance sheets of both 
banks and corporate houses are challenged. 
The balance sheet of corporate houses is problematic 
as these businesses were “over-leveraged”(high 
proportion of debt accumulated as a proportion of 
their assets). 
Balance sheet of banks are problematic because of 
rising NPAs. 
TBS is a challenge not just for the banking system 
but for the entire economy as it impedes the 
progress of Credit Creation, which is crucial for 
economic growth.
Page 5


Lecture 6 
Banking Sector Reforms
Prelims 2020 Crash Course 
Capstone IAS Learning
What will we cover
Problems faced by Banking Sector 
Government’s response and various reforms 
Insolvency and Bankruptcy Code 
Recapitalisation of Banks 
Merger and Acquisition 
Crisis in Banking Sector
Deteriorating Asset Quality -  
Due to economic slowdown, the income of big corporate houses 
is not enough to service their debt. 
Declining “Interest Coverage Ratio” is one of the reasons for 
Asset Stress. 
Interest Coverage ratio(ICR) = 
When ICR < 1, then chances of default on debt increases. 
Another reason for Asset Stress is “Wilful Default” and frauds in 
the banking system. 
To fight against frauds and wilful default, regulatory agencies 
need to pull their sleeves up, so that these things do not repeat 
themselves in future.
Earnings before taxes and interest 
Interest payments 
Twin Balance Sheet Syndrome(TBS) -  
It is a situation under which balance sheets of both 
banks and corporate houses are challenged. 
The balance sheet of corporate houses is problematic 
as these businesses were “over-leveraged”(high 
proportion of debt accumulated as a proportion of 
their assets). 
Balance sheet of banks are problematic because of 
rising NPAs. 
TBS is a challenge not just for the banking system 
but for the entire economy as it impedes the 
progress of Credit Creation, which is crucial for 
economic growth.
Lack of Adequate Capital with Banks -  
Bank require enough capital to cushion their losses due to poor 
asset quality. 
Without adequate capital, banks won’t be able to improve their 
asset quality. This will impede credit creation in the country, 
which is crucial for our economy. 
Banks also require sufficient capital to allow them to graduate 
to Basel 3 norms. 
Asset - Liability Mismatch  
Generally, PSBs are utilised for infrastructure financing, which 
have long gestation periods. 
But PSBs, like other commercial banks have short-term liability. 
This leads to asset-liability mismatch which increases the risk 
for banks.