Banking Topics of interest


NARROW BANKING

In India, the concept of narrow banking came into discussion after submission of the report by the Committee on Capital Account Convertibility (Tarapore Committee). It was suggested as a solution to the problem of high NPAs and related matters. The Committee proposed that incremental resources of these narrow banks should be restricted only to investments in govt. securities.
What is narrow banking ?
A ‘Narrow Bank’ in its narrow sense, can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets.
What are advantages :
Such an approach can ensure the regular deployment of funds in low risk liquid assets. With such pattern of deployment of funds, these banks are expected to remove the problems of bank failures and the consequent systemic risks and loss to depositors.
What is status of narrow banking in India ?
The concept is practically being implemented by the Indian banking system partly, as a large part of the deposits mobilised (i.e. more than 46%) by the banks, has been deployed in Govt. securities (against a prescription of 25% in the form of SLR) as it provides a safe avenue of investment but at a very low return. This keeps the level of non-performing assets (rather than advances) low and the requirement of capital adequacy ratio also low, as the risk weight allotted to such securities is only 2.5% compared to 100% in loan assets.

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