The stability of banking systems has become one of the
biggest concerns of all stakeholders and most policy-makers¡Xin
both developing and developed nations¡Xin the last
few decades. Banking sector reforms, which were initiated
in India in 1992, were basically aimed at achieving improved
safety and soundness of financial institutions, simultaneously
gearing them for a top banking system that is stronger,
more efficient, proactive, capable and competitive. The
motive for these changes was inclusive of considerations
of productivity, efficiency and profitability of the banking
sector. Furthermore, it was recognized that the Indian banking
system should be in tune with international standards of
capital adequacy, prudential regulations, and accounting
and disclosure standards.
Financial soundness and consistent
supervisory practices, as evident in our level of compliance
with the Basel Committee¡¦s Core Principles
for Effective Banking Supervision, have made our banking
system much more resilient to global shocks. Simultaneously,
market forces have pushed banks to expand into a variety
of universal banking activities, including some that appear
to involve higher risks than traditional banking operations.
In the past two decades, banks have been increasingly diversifying
their portfolios, venturing into areas such as housing finance;
their own insurance business; asset management, mostly in
alliance with foreign companies; and establishing investment-banking
arms; as well as involvement in securities markets in a
variety of ways. These offer new challenges that are very
different from traditional banking activities of borrowing
and lending. The emergence of these conglomerates in financial
services sector in India is the driving factor behind formation
of holding companies that offer solution to the twin issues
of diversification in business lines and controlling the
enterprise-wide risk.
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