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1. IntroductionIn the 12th Plan (2012-17), we will further accelerate investment in infrastructure. Wewill pay special attention to the remote areas of our country and to rural areas.Connecting such areas by rail and road will get the top-most priority,

Mr. Manmohan Singh, Indian Prime Minister,(Addressing the nation on Independence Day : 15th August, 2011)

The basic physical systems of a country's or community's population, including roads,utilities, water, sewage, etc. These systems are considered essential for enabling

productivity in the economy. Developing infrastructure often requires large initialinvestment, but the economies of scale tend to be significant.

(Organization for Economic Co-operation and Development)

The infrastructure sector covers a wide range of services such as transportation (railways,roads, road transportation, ports, and civil aviation), communications (postal andtelecommunications services), and other public goods (water supply and sanitation, solidwaste management, urban transport). Each of these segments possesses 'public goods"characteristics of "non-rivalry" and "non-excludability". This implies that a simple relianceon competitive markets will not produce sound outcomes in infrastructure. Demand forinfrastructure is set to continue to expand significantly in the decades ahead, driven by majorfactors of change such as global economic growth, technological progress, climate change,urbanization and growing congestion.

1.1General Definition

1.1.1 Dr. C. Rangarajan Commissions Notion of Infrastructure (2001)

While Infrastructure is recognized as a crucial input for economic development, there is noclear definition of infrastructure according to the current usage of the term in India. For

policy formulation, setting of sectoral targets and monitoring projects, a clear understandingof what is covered under the rubric of infrastructure is necessary to ensure consistency andcomparability in the data collected and reported by various agencies over time. The NationalStatistical Commission headed by Dr. C. Rangarajan, attempted to identify infrastructure

based on some characteristics.The Rangarajan Commission indicated six characteristics of

infrastructure sectors, (a) Natural monopoly, (b) High-sunk costs, (c) Non-tradability ofoutput (d) Non-rivalness (up to congestion limits) in consumption, (e) Possibility of price

exclusion and (f) Bestowing externalities on society. Based on these features (except b, d ande), the Commission recommended inclusion of following in infrastructure in the first stage:

Railway tracks, signaling system, stations Roads, bridges, runways and other airport facilities T&D of electricity Telephone lines, telecommunications network Pipelines for water, crude oil, slurry, waterways, port facilities Canal networks for irrigation, sanitation or sewerage.

The Commission further recommended that considering characteristics (b), (d) and (e) also,the above list may be extended to include the following in the second stage:

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Rolling stock on railways Vehicles, aircrafts Power generating plants Production of crude oil, purification of water Ships and other vessels.

1.1.2 Reserve Bank of India (RBI) circular on Definition of Infrastructure

As per the RBI, a credit facility is treated as infrastructure lending to a borrower companywhich is engaged in developing, operating and maintaining, or developing, operating andmaintaining any infrastructure facility that is a project in any of the following sectors, or anyinfrastructure facility of a similar nature;

A road, including toll road, a bridge or a rail system; A highway project including other activities being an integral part

of the highway project; A port, airport, inland waterway or inland port;

A water supply project, irrigation project, water treatment system,sanitation and sewerage system or solid waste managementsystem;

Telecommunication services whether basic or cellular, includingradio paging, domestic satellite service (i.e. a satellite owned andoperated by an Indian company for providing telecommunicationservice), network of trunking, broadband network and internetservices;

An industrial park or special economic zone; Generation or generation and distribution of power; Transmission or distribution of power by laying a network of new

transmission or distribution lines; Construction relating to projects involving agro-processing andsupply of inputs to agriculture;

Construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowersincluding testing facilities for quality;

Construction of educational institutions and hospitals; Any other infrastructure facility of similar nature.

For raising external commercial borrowings funds, the RBI has defined infrastructure toinclude (i)power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea

port and airport, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitationand sewage projects)

1.1.3 Income Tax Department

For an infrastructure company, Section 80-IA of the Income Tax allows deduction of 100%profit from its income during initial 5 years of operation and then 30% deduction of profitfrom income during another 5 years. For this purpose infrastructure covers electricity, watersupply, sewerage, telecom, roads & bridges, ports, airports, railways, irrigation, storage (at

ports) and industrial parks/SEZ.



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1.1.4 World Bank

The World Bank treats power, water supply, sewerage, communication, roads & bridges,ports, airports, railways, housing, urban services, oil/gas production and mining sectors as

infrastructure.

1.2 Why India is favorite destination?

The government has played a pivotal role in making Indian infrastructure sector an attractiveinvestment destination for both domestic and foreign players. Steps taken by the governmentsuch as - opening up the sector to private players, liberalising foreign investment norms andhuge spending on projects like National Highway Development Project (NHDP), NationalMaritime Development Programme (NMDP) et all- have given a stupendous impetus to thesector in the past few years.

India's infrastructure sector output grew 5.3 percent in May from a year earlier, slightly

higher than an annual growth of 5.2 percent in April, according to government data. DuringApril-May, output rose 4.9 percent from 7.9 percent a year ago.

Six core industries comprising crude oil, petroleum refinery, coal, electricity, cement andfinished steel - grew by 5.2 per cent in April 2011, according to the recent data released.Petroleum refinery and finished steel output grew by 6.6 per cent and 4.3 per centrespectively. Electricity generation expanded by 6.8 per cent in the reported month. Crude oil

production performed quite well, registering 11 per cent growth as against 5.1 per centexpansion in the previous year. Coal output registered a growth of 2.9 per cent in April 2011,a complete turnaround in comparison to the same month last year, when output hadcontracted by 2.9 per cent.

India has seen a systematic transition from being a closed to an open economy since the beginning of economic reforms in the country in 1991. These reforms have had a far-reaching impact and have unleashed its enormous growth potential. India has grown to

become a trillion dollar economy with a largely self- Sufficient agricultural sector, adiversified industrial base and a stable financial and services sector.Among the growing economies of the world, India is second only to China. The countrysGDP has been growing at an average rate of 8.5% for the last five years.

According to the Global Competitiveness Report 2009-10, India occupies the 49th placeamong 134 countries. The country ranks higher than many advanced countries in key

parameters such as domestic market (4th) and innovation (28th). It also has a sound financialmarket (16th) and a strong banking sector (25th). India ranks third among the most attractivedestinations for FDI in the world.


Figure 1.1: Line graph Showing GDP growth rate

Source : Indian BankAssociation Survey 2010

Source Indian BankAssociation 2010


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Figure 1.2: Bar graph showing FDI inflows in India

1.3 Infrastructure level in developed and developing countries

Given the different level of importance given to infrastructure development in developed anddeveloping countries, overall outcomes are very different today even though in the earlyfifties and sixties both countries had fairly similar levels of infrastructure assets and services.For example, developed countries electricity output at 7.3 billion kWh in 1952 compareswell with developing countries power output of 6.3 billion kWh in 1950-51. The developingcountries road network in 1950s was extensive at 400,000 kms compared to about one thirdthat in developed countries. In both countries, about 40% of roads were paved then.Developing countries railway network at 53,000 kms was more than double that ofdeveloped countries at 23,000 kms. Table below presents annual compound growth rates for

basic infrastructure access for three periods, 1950-1980, 1980-1990, and 1990-2005,indicating the significant growth achieved by developed countries in the last 25 years.Developing countries was not able to continue higher levels of growth achieved in earlieryears of planning.

Developed Countries Developing Countries1950-80 1980-90 1990-2005 1950-80a 1980-90 1990-2005

ElectricityGeneration

10.8 9.4 6.5 14.2 8.4 9.5

Road networklength

4.6 3.4 3.8 7.2 1.7 3.4

Railwaynetwork

0.5 0.2 0.1 2.8 0.8 1.1

Telephonesubscribers

10.2 8.9 28.7 6.6 13.8 40.9

Annual GDPGrowth

3.7 5.7 6.4 5.2 9.8 10.2

Sources: World Development Indicator (2007) and ADB (2005).

Difference between Developed, Developing and under Develop Countriesin terms of Infrastructure

Developed Countries Developing Countries Underdeveloped Countries

Developed countries haveinfrastructure in place- suchas roads, bridges, water

A developing country islargely similar, but theexisting infrastructure is

An underdeveloped countryhas lots of people, but lackssome (or all!) basic


Table 1.1: Table showing level of infrastructure development in Developed and Developing countries

Table 1.2: Table is showing comparison between Developed, Developing and UnderdevelopedCountries


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pipes, fuel lines, electricalwiring, fibre optic wiring,and septic/sewage and runoffdrainage or treatmentsystems, to name a few- and

the technical capacity to takecare of all their citizens withsuch infrastructure servicesas mechanical repair ormaintenance facilities,doctors and medicalfacilities, etc. In short, adeveloped country has threethings: It has all facilities, ithas people to take care ofthat facility (and of other

people), and it has peoplewho make money and giveup part of that money to payfor facilities.

E.g. USA, South Korea

usually either old or poorlymaintained (or both), and the

people have less money tospend on commodities and sothere are either fewer exports

or the quality of the productsthat they make or the servicesthey provide is lower than ina developed country.

E.g. India, Thailand

infrastructures for some or allof its citizens, and so the

people have no facilities andmust make money whichthey are then expected to

give to their government,who will then give themrequired facilities. Howeverthis doesn't often happen,

because governments in thesekinds of countries areinvariably inefficient so theyalways lag behind the othercountries.

E.g. Cambodia, Burma

1.4Urban and Rural Infrastructure

1.4.1 Urban InfrastructureVarying Definitions ofUrban

United States (Developed Country) : Areas with minimum population density requirementsand encompassing a population of at least 2500 inhabitants.

India (Developing Country) : All statutory places with a Municipality, Corporation,Cantonment Board, or Notified Town Area Committee, and all places satisfying thefollowing three criteria simultaneously:

(i) A minimum population of 5000;(ii) At least 75 per cent of male working population engaged in non-agricultural

pursuits; and(iii)A population density of at least 400 per sq. km (1000 per sq. mile).

The urban share of the gross domestic product (GDP) for the Indian economy is not availableon a regular and consistent basis, and the underlying data base for estimating this share isvery weak. Estimates by the Central Statistical Organization (CSO), available for a fewyears, indicate that this share increased from 37.7 per cent in 1970-71 to 52 per cent in 1999-2000. The Mid-Term Appraisal of the Eleventh Five Year Plan puts the urban share of GDP



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at 62-63 per cent in 2009-10. The document further projects this share to increase to 75 percent in 2030.

India has been slow to urbanize. As of 2010, 30 per cent of Indias population isconservatively classified as urban. This is much lower than in other major developing

countries, e.g. 45 per cent in China, 54 per cent in Indonesia, 78 per cent in Mexico, and 87per cent in Brazil. All these countries have much higher per capita incomes but differences inthe definition of urban also contribute to Indias low level of urbanization. If villages withmore than 10,000 persons in India were to be classified as urban, this would imply a levelof urbanization in India in 2010 of over 35 per cent, but it would still be much lower than inother countries.

At Indias current stage of development, the industry and services sectors are the principaldrivers of growth, with strong contribution from the private sector. Assuming that high-quality infrastructure for telecommunications, power, transport, etc. can be put in place inIndian cities, the scope for private sector participation in the growth process will furtherwiden. This will create demand for employment skilled as well as unskilled. India has theadvantage of being at a stage in its demographic transition where the proportion of working-age population is still growing. By 2035, 69 per cent of Indias population will be betweenthe ages of 15 and 65. If the educational system and vocational training are reoriented tocreate the skills in demand, and if labour laws are modernized to allow freer flow of labourin and out of firms so that labour use is not discouraged through government policies, rapidlygrowing sectors in urban areas should be generating rising employment opportunities.

As the Indian economy moves up the growth trajectory with greater trade and investment,growth should become relatively more labour absorbing. In the years to come, with thenature of non-agricultural growth a crucial determinant of both the quantum and quality ofagricultural growth, the growth in non-agricultural economic activity will entail a decline in

the dependence of population on agriculture. This would suggest that migration from rural tourban areas is likely to be an important factor contributing to the process of urbanization ofthe Indian economy.

1.4.2 Rural Infrastructure

India's economic growth and development is predicated to a large extent upon thedevelopment of its 700-million strong rural population. Majority of the population lives inabout 600,000 small villages and are engaged primarily in agriculture, directly or indirectly.A substantial portion of India's current agricultural labor force has to move ton on-agriculture sectors for incomes in all sectors to go up. The challenge is to manage the

transition of 80% of the rural population from a village-centric agricultural-basedeconomy to an industry based economy.

Grey areas of India Rural Infrastructure

A set of basic facts define the constraints within which the economic growthand development of India's rural population must be addressed. Fundamentally,they relate to resource constraints, the nature of infrastructure, and the futuretrajectory of the geographical distribution of the population.



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These services include, at a minimum market access, educational, health,financial, entertainment, transportation, and communications. Further, servicesdepend on the availability of infrastructure.

Infrastructure investment is irregular and inadequate to support 600,000 villages

and the average cost of providing infrastructure is inversely related to the scale ofthe operation.

Limitations on the financial and other resources available for providing infrastructure made it impossible to provide infrastructure at everyvillage in India. Even if they were provided at every village, it will not becommercially sustainable.

The basic geographical structure of population distribution will change once Indiashifts from being agriculture based country to industry based nation.

The Government has launched Bharat Nirman" for the development of rural infrastructure.Plans proposed for the development of India Rural Infrastructure are

Irrigation,

Roads,

Housing,

Water Supply,

Electrification,

Telecommunication Connectivity.

The task ahead for the development of India Rural Infrastructure is

To connect 66,800 habitations with population over 1000 with all weather roads.

To construct 1, 46,000Km of new rural roads.

To upgrade and modernize 1, 94,000Km of existing rural roads.

Total investment of 1, 74,000 crore envisaged under "Bharat Nirman", investmenton rural roads estimated to be at ` 48,000 crore.

To provide corpus of 8000 crore to Rural Infrastructure Development Fund(RIDF).

1.5 World level Infrastructure Development Organization

1. International Monetary Fund (IMF):-The IMF provides loans to countries thathave trouble meeting their international payments and cannot otherwise findsufficient financing on affordable terms. This financial assistance is designed to help



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countries restore macroeconomic stability by rebuilding their international reserves,stabilizing their currencies, and paying for importsall necessary conditions forrelaunching growth. The IMF also provides concessional loans to low-incomecountries to help them develop their economies and reduce poverty.

2. The World Bank: - The World Bank is a vital source of financial and technicalassistance to developing countries around the world. It is made up of two uniquedevelopment institutions owned by 185 member countriesthe International Bankfor Reconstruction and Development (IBRD) and the International DevelopmentAssociation (IDA).

3. African Development Bank Group (AFDB):-The African Development Bank is aregional multilateral development bank, engaged in promoting economic and socialdevelopment in Africa. Its mission is to help reduce poverty, improve livingconditions for Africans and mobilize resources for the continents economic andsocial development.

4. Agence Franaise de Dveloppement (AFD):-Agence Franaise de Dveloppementis a bi-lateral development finance institution established in 1941 that works on

behalf of the French government. Its mission is to finance development according toFrances Overseas Development Assistance policies.

5. Appropriate Infrastructure Development Group (AIDG):-The AppropriateInfrastructure Development Group (AIDG) helps individuals and communities getaffordable and environmentally sound access to electricity, sanitation and cleanwater.

6. Asian Development Bank (ADB):-The Asian Development Bank is an internationaldevelopment finance institution whose mission is to help its developing membercountries reduce poverty and improve the quality of life of their people. ADBs main

partners are governments, the private sector, nongovernment organizations,development agencies, community-based organizations, and foundations.

7. Centre for Global Development - "Cash on Delivery": Progress-Based Aid forEducation:-CGD staff is proposing a "cash on delivery" approach to aid, underwhich donors would pay for measurable progress on specific outcomes pre-agreedwith recipient governments. In education, donors could pilot cash on delivery aid

by offering a contract to poor countries for $100 per additional child completing aquality primary education, to be used as the country chooses. The approach is also

being explored for application by governments to their own transfers to states ordistricts.

8. Cities Alliance :-Cities Alliance is a global coalition of cities and their developmentpartners committed to scaling up successful approaches to urban poverty reduction.

http://www.worldbank.org/http://www.worldbank.org/http://www.afdb.org/http://opt/scribd/conversion/tmp/scratch6211/http://www.afd.fr)http://www.aidg.org/http://www.adb.org/http://www.cgdev.org/section/initiatives/_active/codaidhttp://www.cgdev.org/section/initiatives/_active/codaidhttp://www.citiesalliance.org/http://www.worldbank.org/http://www.afdb.org/http://www.aidg.org/http://www.adb.org/http://www.cgdev.org/section/initiatives/_active/codaidhttp://www.cgdev.org/section/initiatives/_active/codaidhttp://www.citiesalliance.org/http://opt/scribd/conversion/tmp/scratch6211/http://www.afd.fr)


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based on the principle that aid is most effective when it reinforces good governance,economic freedom and investments in people.

18. Multilateral Investment Guarantee Agency (MIGA):- The Multilateral InvestmentGuarantee Agency, a member of the World Bank Group, promotes foreign direct

investment (FDI) into developing countries to help support economic growth, reducepoverty, and improves people's lives.

19. Organisation for Economic Co-operation and Development (OECDDevelopment issues):-The Organisation for Economic Co-operation andDevelopment s work activities in development are carried about by the DevelopmentCo-operation Directorate/DAC, the Development Centre, the Sahel & West AfricaClub/SWAC and the Centre for Co-operation with Non-Members/CCNM.

20. Partnership Dialogue Facility Energy polices for development (EUEI PDF):-

The Partnership Dialogue Facility Energy Policy aims to support the development ofpolicies and strategies for the promotion of access to energy at national and regionallevel. These are based on dialogue within and between partner countries, theirregional organizations, EU member states and the European Commission.

21. Public-Private Infrastructure Advisory Facility (PPIAF):-A multi donor technicalassistance facility aimed at helping developing countries improves their infrastructurethrough private sector involvement.

22. Private Infrastructure Development Group (PIDG ):- The Private InfrastructureDevelopment Group consists of donors whose mission is to combat poverty and assist

developing countries boost their economic development.

23. Results-Based Financing for Health (RBF):-Results-Based Financing (RBF) forHealth is a tool used for increasing the quantity and quality of health services. Itcombines the use of incentives for health-related behaviours with a strong focus onresults, and can support efforts to achieve the Millennium Development Goals(MDGs).

24. United States Agency for International Development (USAID):-The United StatesAgency for International Development is the government agency providing US

economic and humanitarian assistance worldwide for more than 40 years.

25. Water Aid :- Water Aid is an international charity that promotes clean, safe waterand sanitation in Africa and Asia. Their mission is to overcome poverty by enablingthe world's poorest people to gain access to safe water, sanitation and hygieneeducation.

26. Water and Sanitation Program (WSP):-An international partnership to help thepoor gain sustained access to improved water supply and sanitation services

http://www.miga.org/http://www.oecd.org/developmenthttp://www.oecd.org/developmenthttp://opt/scribd/conversion/tmp/scratch6211/http://www.eue-pdf.org)http://www.ppiaf.org/http://www.pidg.org/http://www.rbfhealth.org/http://www.usaid.gov/http://www.wateraid.org/http://www.wsp.org/http://www.miga.org/http://www.oecd.org/developmenthttp://www.oecd.org/developmenthttp://www.ppiaf.org/http://www.pidg.org/http://www.pidg.org/http://www.rbfhealth.org/http://www.usaid.gov/http://www.wateraid.org/http://www.wsp.org/http://opt/scribd/conversion/tmp/scratch6211/http://www.eue-pdf.org)


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1.6 Conclusion

The infrastructure sector has both backward and forward linkages with the agricultural andthe industrial sectors and therefore the development of the infrastructure sector is a

prerequisite for the overall development of the economy. Infrastructure, in general, and rural

infrastructure in particular, contributes to economic development both by increasingproductivity and by providing amenities which enhance the quality of life. However, in Indiathe lack or inadequacy of basic infrastructure continues to remain a major constraint to

progress in numerous villages and their habitations and consequently in the country as awhole. According to the study findings, the rural populations not covered by basicinfrastructure facilities like telecom, power, and roads is as high as 91%, 46% and 44%respectively. As far as drinking water is concerned, while most rural inhabitants have accessto some sort of water source, the quality and maintenance of these sources leave a lot to bedesired. Even during the last decade of economic reform process, started in 1991, the dismalstate of rural infrastructure has hardly improved. This implies that five decades ofdevelopment planning in India has been unable to ensure a decent living for a large number

of people residing in rural areas. Despite many large-scale rural development schemes, theabsolute number of people in poverty has not declined substantially; abject poverty stillremains pervasive in rural regions.

The government of India has adopted the economic reform agenda that included privatizationand commercialization of infrastructure sector as a whole. Liberalization is happening butcompetition has been introduced at the top and the accompanying policy changes to allowthe new players to stay on board are not happening. Thus competition has not reached atlevels lower than state levels, conducive to small regional providers of infrastructure service.State governments need to promote small-localized providers of the services. Localgovernments will have to play a more pro-active role in promoting, monitoring and

enforcement of these new service providers.



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1. Literature Review

2.1 Introduction

India continues to grow at a rapid pace, although the government recently reduced its annual

GDP growth projection from 9% to 8% for the current fiscal year ending March 2012. Theslowdown is marked by a sharp drop in investment growth resulting from politicaluncertainties, a tightening of macroeconomic policies aimed at addressing a high fiscaldeficit and high inflation (going well beyond food and fuel prices), and from renewedconcerns about the European and US economies. Although the Government was quitesuccessful in cushioning the impact of the global financial crisis on India, it is now clear thata number of MDG targets will only be met under the Twelfth Five Year Plan (2012-17).

World Bank: India Country Overview 2011

Indias rise in recent years is a most prominent development in the world economy. India

has re-emerged as one of the fastest growing economies in the world. Indias growth,particularly in manufacturing and services, has boosted the sentiments, both within countryand abroad. With an upsurge in investment and robust macroeconomic fundamentals, thefuture outlook for India is distinctly upbeat. According to many commentators, India couldunleash its full potentials, provided it improves the infrastructure facilities, which are at

present not sufficient to meet the growing demand of the economy. Failing to improve thecountrys infrastructure will slow down Indias growth process. Therefore, Indiangovernments first priority is rising to the challenge of maintaining and managing highgrowth through investment in infrastructure sector, among others. The present chapterthrows a light on Indian Infrastructure and detailed study of Banking Sector.

2.2 Indian Infrastructure

In the past, development of infrastructure was completely in the hands of the public sectorand was plagued by slow progress, poor quality and inefficiency. India's low spending on

power, construction, transportation, telecommunications and real estate, at $31 billion or 6%of GDP in 2002 had prevented India from sustaining higher growth rates. This has promptedthe government to partially open up infrastructure to the private sector allowing foreigninvestment, and most public infrastructure, barring railways, is today constructed andmaintained by private contractors, in exchange for tax and other concessions from thegovernment.

2.2.1 Power Sector

Power sector has received utmost priority in the successive Five-Year Plans resulting inutility-based installed generation capacity rising from 1362 Mega Watt (MW) at the time ofindependence to about 1,60,000 MW today. Along with the growth in installed generationcapacity, there has also been a phenomenal increase in the transmission and distribution(T&D) capacity. Although much has been achieved, shortage of power and lack of accesscontinues to be a major constraint on the economic growth. The enactment of the Electricity



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Act in June 2003 was a major milestone which paved the way for development of the powersector within a competitive and liberal framework while protecting the interests of theconsumers as well as creating an environment that was conducive for attracting investmentsin the sector. Subsequently, National Electricity Policy and National Tariff Policy were alsoformulated to give direction to the power sector within the ambit of the Electricity Act. The

Regulatory framework has been established and has been in operation for five to ten years.However, both competition and a robust regulatory regime that supports such competitionare still to be realized.

2.2.2 RoadA. National Highways

The National Highways (NH) with aggregatelength of 70,934 km., constitute about 2 percent of the entire road network in the country

but carry 40 per cent of the total road traffic.

The main objective of development of NH isto improve mobility through augmentation ofcapacity and enhancing the riding quality ofexisting NHs. Towards this end, expanded

NH Development Programme is beingimplemented under various phases.

B. Rural Roads

Pradhan Mantri Gram Sadak Yojana (PMGSY): Goals & Objectives

The primary objective of the PMGSY (launched in December 2000 as a fully fundedCentrally Sponsored Scheme (CSS) was to provide connectivity, by way of an all-weatherroad (with necessary culverts and cross-drainage structures, which is operable throughout theyear), to the eligible unconnected habitations in the rural areas, in such a way that allunconnected habitations with a population of 1,000 persons and above were to be covered inthree years (2000-2003) and all unconnected habitations with a population of 500 personsand above by the end of the Tenth Plan Period (2007). In respect of the hill States (North-East, Sikkim, Himachal Pradesh, Jammu & Kashmir, Uttarakhand) and the desert areas (asidentified in the Desert Development Programme) as well as the tribal (Schedule V) areas,the objective was to connect habitations with a population of 250 persons and above.

The original targets set for PMGSY were found to be too ambitious. Subsequently, PMGSYwas re-phased to achieve time bound targets for rural connectivity by folding it into theBharat Nirman programme initiated in 2005-06. It aimed to provide connectivity to all thehabitations with a population of more than 1000 in the plain areas and habitation with a

population of 500 or more in hilly or tribal areas in a time bound manner by 2009.

2.2.3 Telecom Sector

World-class information and communication infrastructure is a crucial element in the rapideconomic and social development of a country. The telecom industry in India, led by the


Upgradation of National Highways by NHAI

during 2009-10 and 2010-11 (April - Sept.)

0

200

400

600

800

1000

1200

1

K

ms.

2009-10 Actual 2010-11 Target 2010-11 Actual

Figure 2.1 Bar graph showing upgradation of NationalHighways by NHAI during 2009-10 and 2010-11 (April-Sept)

Source : Indian Infrastructure Re ort 2010


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private sector has seen rapid expansion making its vast network second only to China. Theindustry is now poised to take a further leap towards better technology and service delivery.The introduction of Third Generation (3G) telecom services is expected to open newfrontiers in high speed data communications and Mobile Number Portability which is likelyto be rolled out soon will make the market more competitive. Internet users will be able to

download information in bulk quantity in a short time. Besides, the developments will lead togeneration of better revenue.

Achievements during 2009-10Nearly 14 to 18 million new connectionsare added each month. By September2009, the industry had already achievedthe Annual Plan 2009-10 targets of 500million connections. The presentteledensity is more than 53 per cent with621.25 million connections (as on April

2010), which has been propelled bywireless subscribers growing at acompound annual growth rate (CAGR) of60 per cent per annum since 2004.Provision of Village Public Telephones(VPTs) to cover the not-covered villageshas been undertaken under the UniversalService Obligatory Fund (USOF). The

performance of the public sectorundertakings (PSUs) in the telecomindustry during 2009-10 is as follows:

2.2.4 Railways

Indian Railways (IR) with its 64,015 kilometer network is the third largest railway in theworld under a single management. The Eleventh five year plan document emphasized thatThe Indian railway is at threshold of major change. The key challenges before it is to meetthe accelerated transport demand and provide high quality service. Thus, capacityenhancement, technological up gradation and service improvement of Indian Railways arethe major thrust areas of the Plan It had envisaged 51 per cent increase in freight traffic and32 per cent increase in passenger traffic during the plan period. The Plan had anticipated anexpenditure of Rs.2, 51,000 crore on various capacity enhancements and replacement

programmes. A major part of the investment is expected to come from internally generatedresources besides feasible budgetary support. Around Rs. 1, 00,000 crore is expected fromextra budgetary resources including that from Public Private Partnership (PPP), during thePlan period.

2.2.5 Agriculture

Agriculture in India is a major economic sector and it creates plenty of employmentopportunities as well. India agriculture has an extensive background which goes back to 10thousand years. At present, in terms of agricultural production, the country holds the second


Fig 2.2 Bar graph showing No. of cellphone connectionsprovided during 2009-10 and 2010 (April September)

Cell phone connections provided during

2009-10 and 2010 ( April - September )

0

200

400

600

800

1000

1200

Cell Phones

LakhNos.

2009-10 Actual 2010-11 Actual


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position all over the world. In 2007, agriculture and other associated industries such aslumbering and forestry represented around 16.6% of the Gross Domestic Product of thecountry. In addition, the sector recruited about 52% of the entire manpower.

The total arable territory in India is 1,269,219 km 2, which represents about 56.78% of the

overall land zone of the country. Arable land in India is diminishing because of continuousstrain from an ever-increasing number of inhabitants and growing urbanization.

The overall water surface area of the country is 31440 km 2 and the country experiences amean yearly precipitation of 1,100 mm. Irrigation represents 92% of the consumption ofwater and in 1974, it was 380 km2. By 2025, the capacity will probably increase to 1,050km2, with the equilibrium justifying both household and industrial usage.

India houses the biggest number of livestock in the world and the count is 281 million. In2008, the country housed the second biggest number of cattle in the world and the count was175 million livestock. The population of India is increasing at a faster pace than its capacity

to produce wheat and rice.

India holds the second position in production of wheat, rice, cotton, sugarcane, andgroundnuts. It is also the second biggest harvester of vegetables and fruit, representing 8.6%and 10.9% of the overall vegetable and fruit production in the world correspondingly.The country is the top producer of jute, milk, and pulses and holds the second rank in the

production of silk and it is the biggest consumer of silk in the world. In 2005, the countryproduced 77,000 million tons of silk.

IrrigationDuring the Annual Plan 2009-10, the target for irrigation potential creation was 1.19 m.ha.

under Major and Medium Irrigation and 0.751 m.ha. under the Minor Irrigation sector. Theapproved outlay for the year 2009-10 was Rs 38346.20 crore for state and central sectors.Keeping in line with the revised Eleventh Plan target, the proposed target for 2010-11, is2.02 m.ha. Under Bharat Nirman, in the period 2005-09, 7.316 m.ha of new and restoredirrigation potential was achieved against a target of 10 m.ha. of The balance is expected to beachieved by 2010-11.

2.2.6 Ports

Ports play a vital role in the overall economic development of the country. There are 12major ports and about 200 non-major ports along Indias coastline. The 12 major ports are

located at Kolkata/Haldia, Mumbai, Jawaharlal Nehru Port at Nhava Sheva, Chennai,Cochin, Visakhapatnam, Kandla, Mormugao, Paradip, New Mangalore, Tuticorin andEnnore. The major ports are under the direct administrative control of the CentralGovernment while the non major ports are under the jurisdiction of the respective maritimeState Governments.

Traffic at ports had been increasing at a rate of 10-12 per cent in the past. However, in 2008-09 the growth of traffic at major ports was modest (2.7 per cent). During 2009-10 there wasfurther increase in traffic and major ports handled 560.97 MT, registering an increase of 5.74

per cent over the previous year.



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The Eleventh Plan envisaged an additional capacity generation of 511.80 MT making totalcapacity of major ports at 1016.55 MT by the end of the Plan period. However, capacityaugmentation in the first three years of the Eleventh Plan was not satisfactory. While in thefirst two years generation of additional capacity was only 70 MT, in 2009-10 it was 25 MT.The Second Container Terminal at Chennai Port which became operational in 2009-10 added

a capacity of 9.6 MT.

Thirteen Public-Private Partnership projects at an estimated cost of Rs. 2653.41 crore andcapacity of 65.65 Million Metric Tonnes Per Annum (MTPA) were awarded in 2009-10.

The progress with regard to improvement in productivity has not been satisfactory. Thecomparison of average turnaround time for the period April to February 2009 and April toFebruary 2010 indicates that there has been an increase in average turnaround time of vesselsfrom 3.88 to 4.42 days. Only four ports viz Chennai, Cochin, Mumbai and Kandla haveshown some improvement. Average turnaround time on port account has also showndeterioration from 2.45 to 2.61 during the same period.

Several projects are under underway at various ports. The International Container Trans-shipment Terminal (ICTT) at Vallarpadam at Cochin Port is one such important project.Significant progress has been made with regard to construction of the Terminal in 2009-10and the project is expected to be commissioned shortly. Rail connectivity to ICTT atVallarpadam was taken up at an estimated cost of Rs. 298.17 crore. Construction work ofthis project has already been completed. The four-lane NH connectivity to ICTT, taken up atan estimated cost of Rs. 871.17 cr., is expected to be commissioned by December 2010. Inaddition, the implementation of project relating to capital dredging for deepening andwidening of the approach channel and berth basin of ICTT to provide draft of 14.5 m atVallarpadam has been initiated.

2.2.7 Airports

Aviation Sector in India has undergone a seachange in the last five years. The number of

passengers at Indian airports increased from40 million in 2000-01 to 119 million in2007-08. With a view to create world-classairport infrastructure, up gradation/modernization of a number of metro andnon-metro airports have been undertaken by

Airports Authority of India (AAI) as well asthrough joint venture companies. In addition,AAI has also initiated a project inconsultation with Indian Space ResearchOrganization (ISRO). Known as the GlobalPositioning System (GPS) aided GeoAugmented Navigation (GAGAN) project. Itis a Satellite Based Augmentation System(SBAS) aimed at providing augmented GPS


Fig 2.3 Bar graph showing No. of passengers carried atmajor airports 2009-10 and 2010-11 (AprilSeptember)

Source : Indian Infrastructure Re ort 2010

Passenge rs carried at major Airports

2009-10 and 2010-11 ( April -September )

0

70

140

210

280

International Domestic

LakhNumbers

2009-10 Actual 2010-11 Actual


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information to aircrafts, making such information more reliable and accurate. The system isexpected to improve navigation facility, enabling more efficient Air Traffic Management.

Goals, Programmes, Targets & Achievements 2009-10

The major objectives of the development of airports are to provide(i) World class infrastructure facilities,(ii) Air connectivity to remote and inaccessible areas with special reference to

north eastern part of the country.

During April - September 2010, the international terminals of the five major InternationalAirports handled 123.35 lakh passengers and registered a growth of 13.5% over the 108.70lakh passengers handled during April - September 2009. The growth rate was higher thanthe growth of 1.9% achieved in April - September 2009. The domestic terminals handled271.96 lakh passengers during this period, which was 16.6% higher than 233.19 lakh

passengers handled during the corresponding period of the previous year. The growth rate

was higher than the growth of 5.6% achieved in April - September 2009.

2.3 Banking Sector: An Overview

The first bank in India, called The General Bank of India was established in the year 1786.The East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay(1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which wasestablished in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, andBank of Madras) were called as Presidency Banks. Allahabad Bank which was established in1865, was for the first time completely run by Indians. Punjab National Bank Ltd. was set up

in 1894 with head quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bankof India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In1921, all presidency banks were amalgamated to form the Imperial Bank of India which wasrun by European Shareholders. After that the Reserve Bank of India was established in April1935. At the time of first phase the growth of banking sector was very slow. Between 1913and 1948 there were approximately 1100 small banks in India. To streamline the functioningand activities of commercial banks, the Government of India came up with the BankingCompanies Act, 1949 which was later changed to Banking Regulation Act 1949 as peramending Act of 1965 (Act No.23 of 1965). Reserve Bank of India was vested withextensive powers for the supervision of banking in India as a Central Banking Authority.

After independence, Government has taken most important steps in regard of Indian BankingSector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name"State Bank of India", to act as the principal agent of RBI and to handle banking transactionsall over the country. It was established under State Bank of India Act, 1955. Seven banksforming subsidiary of State Bank of India was nationalized in 1960. On 19th July, 1969,major process of nationalization was carried out. At the same time 14 major Indiancommercial banks of the country were nationalized. In 1980, another six banks werenationalized, and thus raising the number of nationalized banks to 20. Seven more bankswere nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% ofthe banking segment in India was under governments ownership. On the suggestions of



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Narsimhan Committee, the Banking Regulation Act was amended in 1993 and thus the gatesfor the new private sector banks were opened.The following are the major steps taken by the Government of India to Regulate Bankinginstitutions in the country:-

1949 : Enactment of Banking Regulation Act.1955 : Nationalization of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalization of 14 major Banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalization of seven banks with deposits over 200 Crores

2.4 Policy in banking sector

With the onslaught of the global financial crisis, banking sector policy across the world hasreceived a newer meaning and relevance. There is a growing realisation that regulatory andsupervisory policy needs to be strengthened to adopt a system-wide approach to counteract

pro-cyclical movements in the banking sector. The perimeter of regulation also needs to beexpanded to cover the unregulated segments in order to minimise regulatory arbitrage. Indiahas been lauded as one of the few countries that have followed a vigilant and counter-cyclical policy approach to banking sector developments. It has also widened the regulatory

perimeter steadily to bring nonbanking entities into the ambit of regulation.

2.4.1 Monetary Policy

Monetary Policy Stance and MeasuresMonetary policy stance in 2010-11 was attuned to the growth-inflation dynamics prevailing

in the economy in the broader context of global uncertainties. In the first half of 2010- 11,the thrust of monetary policy was on avoiding policy impediments to the recovery amidstglobal uncertainties, while also containing inflationary pressures. In the second half of 2010-11, while growth continued to consolidate, the moderating path of inflation reversed

beginning December 2010 due to a series of supply side shocks, both domestic and global.

Non-food manufacturing inflation remained much above the trend growth of 4 per centduring the second half of 2010-11.

Therefore, policy rates were raised to contain inflation and anchor inflationary expectations.This was warranted to ensure that the long-term growth prospects were not harmed, even if itmeant sacrificing some growth in the short-term. As the inflation remained above thecomfort level of the Reserve Bank even in 2011- 12, the anti-inflationary stance wascontinued during this period. Since the exit from its crisis driven expansionary monetary

policy stance, the Reserve Bank has raised the policy rate (the repo rate) 13 times by 375basis points. Till March 2011, the policy rate was raised eight times by 200 bps. In 2011-12so far (up to October 25, 2011), it was further raised five times by 175 bps. The effective



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tightening since October 2009 has been of 525 bps as liquidity in the system transited fromsurplus to deficit. The CRR was also raised by 100 bps.

Changes in the Operating Procedure of Monetary Policy

Based on the Report of the Working Group on Operating Procedure of Monetary Policy(Chairman: Shri Deepak Mohanty), the Reserve Bank made a number of changes in theoperating procedure of monetary policy with effect from May 2011. As per these changes,the weighted average overnight call money rate was made the operating target of monetary

policy. Further, the repo rate was made the single policy rate to more accurately signal themonetary policy stance with the reverse repo rate pegged at a fixed 100 basis points belowthe repo rate. A new Marginal Standing Facility (MSF) was also instituted under whichScheduled Commercial Banks (SCBs) could borrow overnight up to one per cent of theirrespective Net Demand and Time Liabilities (NDTL), carved out of the required StatutoryLiquidity Ratio (SLR) portfolio. The MSF rate is 100 basis points above the repo rate and

provides an upper bound to the policy rate corridor with reverse repo rate as the lower bound.

These changes were deemed necessary for improved liquidity management and effectivemonetary transmission.

Deregulation of Savings Bank Deposit RateWith the steady process of deregulation since the early 1990s, the only rupee interest ratethat continued to remain regulated was the savings deposit interest rate. In order to delineatethe advantages and disadvantages of deregulating the savings deposit rate, the Reserve Bank

prepared a discussion paper which was placed on the RBI website for suggestions fromgeneral public in April 2011. The Discussion Paper evoked wide ranging responses from across-section of stakeholders. The Reserve Bank after weighing both pros and cons, decidedto deregulate the savings bank deposit rate in its Second Quarter Review of Monetary Policy2011-12 released on October 25, 2011. Accordingly, banks can freely determine theirsavings bank deposit interest rates subject to the following two conditions:

Each bank will have to offer a uniform interest rate on savingsbank deposits up to Rs.1 lakh, irrespective of the amount in theaccount within this limit.

For savings bank deposits over Rs.1 lakh, a bank may providedifferential rates of interest, if it so chooses. However, there shouldnot be any discrimination from customer to customer on interestrates for similar amount of deposit.

2.4.2 Credit Delivery

Priority Sector Lending Policy - Loans to NBFCsThe Reserve Bank advised all SCBs in February 2011 that loans sanctioned to NBFCs foron-lending to individuals or other entities against gold jewellery will not be eligible forclassification under priority sector as agricultural credit. Similarly, investments made by

banks in securitized assets originated by NBFCs, where the underlying assets are loansagainst gold jewellery and purchase/assignment of gold loan portfolio from NBFCs are alsonot eligible for classification under the agricultural sector.

Priority Sector Lending Policy - Loans to Agriculture



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The scheme of interest subvention has been in existence since 2006-07 with regard toprovision of short-term agricultural credit to farmers by public sector banks, RRBs andcooperative banks. In 2009-10, an interest subvention of 2 per cent was provided on shortterm production credit of up to Rs.3 lakh, which would ensure that credit was made availableto farmers at the ground level at 7 per cent per annum. Further, an additional interest

subvention of 1 per cent was also provided to public sector banks in respect of those farmerswho were prompt in repaying their loans within one year of disbursement of such loans,reducing the effective rate for such farmers further to 6 per cent per annum. In 2010-11, theinterest subvention was reduced to 1.5 per cent and the additional interest subvention for

prompt-paying farmers has been increased to 2 per cent. Further, in the Union Budget for2011- 12, the Finance Minister has proposed an enhancement of the additional interestsubvention for prompt-paying farmers to 3 per cent making the effective rate for suchfarmers to be 4 per cent per annum.Loans to Micro, Small and Medium Enterprises (MSME) - Credit Target for Micro-EnterprisesPursuant to the recommendations of the High Level Task Force constituted by the

Government of India (Chairman: Shri T K A Nair), SCBs have been advised on June 29,2010 to allocate 60 per cent of the MSE advances to micro-enterprises. This target is to beachieved in three stages viz., 50 per cent in 2010-11, 55 per cent in 2011-12 and 60 per centin 2012-13 with an annual growth of 10 per cent in the number of micro-enterprises accountsand an annual growth of 20 per cent in lending to micro and small enterprises. A suitableformat has also been devised by the Reserve Bank to capture and closely monitor theachievement of these targets by banks on a half-yearly basis (March and September). Fromthe quarter ending June 2011, the monitoring is being done on a quarterly basis. The ReserveBank has also taken up the matter with banks that have failed to achieve the targets

prescribed by the Task Force.

Credit Guarantee for Credit to Micro and Small EnterprisesBased on the recommendations of the Working Group (Chairman: Shri V.K. Sharma)constituted by the Reserve Bank in March 2010 to review the Credit Guarantee Scheme(CGS) of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), thelimit for collateral free loans to the MSE sector has been increased to Rs.10 lakh and has

been made mandatory for banks. SCBs are advised to follow the guidelines on collateral freelending, encourage branch level functionaries to avail the credit guarantee cover and making

performance in this regard a criterion in their appraisal. The Working Group has also maderecommendations regarding an increase in the extent of guarantee cover, absorption ofguarantee fees for the collateral free loans up to Rs.10 lakh by CGTMSE, subject to certainconditions, simplification of procedure for filing claims with CGTMSE and increasingawareness about the scheme. The recommendations have been forwarded to CGTMSE forimplementation.

Housing LoansWith the objective of improving affordability of housing for middle and lower incomegroups, the Union Budget of 2009-10 had announced a scheme of 1 per cent interestsubvention in respect of individual housing loans of up to 10 lakh provided that the cost ofunit did not exceed 20 lakh. The scheme was applicable initially for a period of one yeareffective from October 1, 2009 to September 30, 2010. An initial allocation of 1,000 crorewas announced for this purpose. The Union Budget for 2010-11 had announced an extensionof the scheme and also made a provision of 700 crore under the scheme for 2010-11. As per



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the Union Budget for 2011-12, the existing scheme has been further liberalised to housingloans of up to 15 lakh, where the cost of the house does not exceed 25 lakh as against theearlier limits of 10 lakh and 20 lakh, respectively. The scheme is being implemented throughSCBs and housing finance companies. The Reserve Bank acts as the nodal agency in respectof SCBs. After sanctioning and disbursing the eligible loans, SCBs claim reimbursement of

subsidy from the Reserve Bank on a monthly basis. The necessary instructions with regard tothe liberalisation of the scheme have been issued to all SCBs by the Reserve Bank on April21, 2011.

Loans to MFIsFollowing concerns about the micro finance sector in Andhra Pradesh, a need was felt for amore rigorous regulation of NBFCs functioning as Micro-Finance Institutions (MFIs).Accordingly, a sub-Committee of the Central Board of the Reserve Bank (Chairman: Shri Y.H. Malegam) was constituted to study issues and concerns in the MFI sector. The Committeehas submitted its report in January 2011, which has been placed in public domain.The Committee, inter alia, has recommended:

Creation of a separate category of NBFC-MFIs; A margin cap and an interest rate cap on individual loans;

Transparency in interest charges;

Lending by not more than two MFIs to individual borrowers;

Creation of one or more credit information bureaus;

Establishment of a proper system of grievance redressal procedure by MFIs;

Creation of one or more social capital funds;

Continuation of categorization of bank loans to MFIs complying with the regulation

laid down for NBFC-MFIs, under the priority sector.

The recommendations of the Committee were discussed with all stakeholders, and in light of

the feedback received, it has been decided to accept the broad framework of regulationsrecommended by the Committee.

2.4.3 Financial Inclusion

Financial inclusion has been made an integral part of the banking sector policy in India.Reserve Bank is furthering financial inclusion in a mission mode through a combination ofstrategies ranging from relaxation of regulatory guidelines, provision of innovative products,encouraging use of technology and other supportive measures for achieving sustainable andscalable financial inclusion. During 2010-11 too, the Reserve Bank continued with policyinitiatives aimed at expanding the outreach of banking services to remote parts of the

country.

Mandating Opening of Branches in Rural Unbanked CentresTo further step up penetration of banking services in the rural areas, there is a need foropening of more brick and mortar branches, besides the use of Business Correspondents(BCs). Accordingly, banks have been mandated to allocate at least 25 per cent of their totalnumber of branches to be opened during a year to unbanked rural centres. Further, in October2011, to provide enhanced banking services in Tier 2 centres (with population of 50,000 to99,999 as per Census 2001), it has been proposed to permit domestic SCBs (other thanRRBs) to open branches in these centres without the need to take permission from theReserve Bank in each case, subject to reporting. The opening of branches in Tier 1 centres



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(centres with population of 1,00,000 and above as per Census 2001) will continue to requireprior permission of the Reserve Bank. While issuing such authorisation, the Reserve Bankwill continue to factor in, among others, whether at least 25 per cent of the total number of

branches to be opened during a year is proposed to be opened in unbanked rural centres.

Introduction of Innovative and Simple ProductsTimely and hassle-free credit being the most important requirement of poor people, bankshave been advised to provide in-built overdraft of small amount in no-frill accounts so thatcustomers can avail of credit of small amount without any further documentation, formeeting emergency requirements.

Roadmap for Banking ServicesWith an objective to ensure uniform progress in provision of banking services in all parts ofthe country, banks were advised to draw up a roadmap for opening banking outlets in everyunbanked village having a population of more than 2,000, through a brick and mortar branchor any of the various forms of ICT-based models, including through BCs. In alignment with

the budget announcements, the timelines for completing the roadmap was extended to March2012 vide circular dated September 16, 2010. About 72,800 such unbanked villages have been identified and allotted to various banks through State-level Bankers Committee(SLBC).

Progress on Financial Inclusion Plans

In January 2010, all public and private sector banks were advised to put in place a Boardapproved three-year Financial Inclusion Plan (FIP) and submit the same to the Reserve Bank

by March 2010. These banks prepared and submitted their FIPs containing targets for March2011, 2012 and 2013. These plans broadly include self-determined targets in respect of rural

brick and mortar branches to be opened; BCs to be employed; coverage of unbanked villageswith population above 2,000 as also other unbanked villages with population below 2,000through branches/BCs/other modes; no-frill accounts opened including through BC-ICT;Kisan Credit Cards (KCC) and General Credit Cards (GCC) and other specific productsdesigned by them to cater to the financially excluded segments. Banks were advised tointegrate Board-approved FIPs with their business plans and to include the criterion onfinancial inclusion as a parameter in the performance evaluation of their staff. Theimplementation of these plans is being closely monitored by the Reserve Bank.

In order to review the progress of banks in the implementation of FIPs during the year 2010-11 and making way for accelerated progress in future, the Reserve Bank has been conductingone-to-one meetings with Chairman and Managing Director (CMD)/Chief Executive Officer

(CEO) of banks. Few of the important action points which emanated out of the discussionsheld during May-June 2011 are as follows: Banks shall review their delivery models so that Financial Inclusion results in a

profitable business for them. In addition to providing banking services in villages with more than 2,000

population, they will also focus on providing banking services in peripheral villageswith population of less than 2,000.

In future, banks need to focus more on opening of brick and mortar branches inunbanked villages. It may be a low cost and simple intermediary structure comprisingof minimum infrastructure for operating small customer transactions and supporting



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upto10 BCs at a reasonable distance of 2-3 km. Such an approach will help banks inhaving a better customer redressal mechanism and at the same time, help indeveloping a better BC-monitoring mechanism. This will lead to efficiency in cashmanagement, documentation and redressal of customer grievances.

Banks shall expand financial inclusion initiatives in urban and semi-urban areas by

targeting pockets of migrant workers and small vendors and leveraging Aadhaarenrolment for opening bank accounts.

Banks shall formulate financial inclusion plans for RRBs sponsored by them anddevelop an effective monitoring mechanism so that targets assigned to the RRBs arealso achieved meticulously.

2.4.4 Prudential Regulatory Policy

Licensing of New Banks in Private SectorPursuant to the announcement made by the Union Finance Minister in his budget speech andthe Reserve Bank's Annual Policy Statement for the year 2010-11, a Discussion Paper on

"Entry of New Banks in the Private Sector" was placed on RBI website on August 11, 2010.Based on the responses received from various stakeholders and extensive internal discussionsand consultations with the Government of India, the Draft Guidelines were prepared andreleased on August 29, 2011 on the RBI website, again seeking comments from variousstakeholders. Suggestions and comments on the draft guidelines were to be sent by October31, 2011.

Key features of the draft guidelines are as follows:(i) Eligible promoters: Entities/groups in the private sector, owned and controlled byresidents, with diversified ownership, sound credentials and integrity and having successfultrack record of at least 10 years will be eligible to promote banks. Entities/groups having

significant (10 per cent or more) income or assets or both from real estate construction and/or broking activities individually or taken together in the last three years will not be eligible.

(ii) Corporate structure: New banks will be set up only through a wholly owned Non-Operative Holding Company (NOHC) to be registered with the Reserve Bank as NBFC,which will hold the bank as well as all the other financial companies in the promoter group.

(iii) Minimum capital requirement: Minimum capital requirement will be `500 crore.Subject to this, actual capital to be brought in will depend on the business plan of the

promoters. The NOHC shall hold minimum 40 per cent of the paid-up capital of the bank fora period of five years from the date of licensing of the bank. Shareholding by NOHC inexcess of 40 per cent shall be brought down to 20 per cent within 10 years and to 15 per centwithin 12 years from the date of licensing of the bank.

(iv) Foreign shareholding: The aggregate non-resident shareholding in the new bank shallnot exceed 49 per cent for the first 5 years after which it will be as per the extant policy.

(v) Corporate governance: At least 50 per cent of the directors of the NOHC should beindependent directors. The corporate structure should be such that it does not impedeeffective supervision of the bank and the NOHC on a consolidated basis by the ReserveBank.



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(vi) Business model: The model should be realistic and viable and should address how thebank proposes to achieve financial inclusion.

(vii) Other conditions:

The exposure of the bank to any entity in the promoter group shall not exceed 10 percent and the aggregate exposure to all the entities in the group shall not exceed 20 percent of the paid-up capital and reserves of the bank. The bank shall get its shareslisted on the stock exchanges within two years of licensing.

The bank shall open at least 25 per cent of its branches in unbanked rural centres. Existing NBFCs, if considered eligible, may be permitted to either promote a new

bank or convert themselves into banks.

(viii) In respect of promoter groups having 40 per cent or more assets / income fromnonfinancial business, certain additional requirements have been stipulated.It is pertinent to mention that certain amendments to the Banking Regulation Act, 1949 are

under consideration of the Government of India, a few which, are vital for finalisation andimplementation of the policy for licensing of new banks in the private sector. These vitalamendments are the removal of restriction of voting rights and concurrently empowering theReserve Bank to approve acquisition of shares and /or voting rights of 5 per cent or more in a

bank to persons who are 'fit and proper', empowering the Reserve Bank to supersede theBoard of Directors of a bank so as to protect depositors' interest, and facilitating consolidatedsupervision. Final guidelines will be issued and the process of inviting applications forsetting up of new banks in the private sector will be initiated after receivingfeedback/comments on the Draft Guidelines and after the amendments to BankingRegulation Act, 1949 are in place.

Presence of Foreign Banks in IndiaThe Reserve Bank also released a Discussion Paper on the presence of foreign banks in Indiain January 2011 seeking feedback and suggestions from stakeholders and general public.After receiving feedback on the Discussion Paper, comprehensive guidelines on the mode of

presence of foreign banks in India would be issued.

Holding Companies Structure for Indian Banks

Pursuant to the announcement made in the Monetary Policy Statement for the year 2010-11,a working group was constituted in June 2010 (Chairperson: Smt. Shyamala Gopinath) toexamine the introduction of a holding company structure for banks and other financialentities and the required changes in legislative and regulatory framework. The Group had

representatives from the Government of India, the Reserve Bank, Securities and ExchangeBoard of India (SEBI), Insurance Regulatory and Development Authority (IRDA), IndianBanks Association (IBA) and a few banks. The Report of the Working Group was placed onthe RBI website in May 2011 for public comments. The Report has been forwarded to theGovernment of India for consideration.

The Working Group has recommended Financial Holding Company (FHC) model as apreferred model for banks and all large financial groups irrespective of whether they containa bank or not. The FHC would primarily be a nonoperating entity and would carry out allfinancial activities through subsidiaries. The FHC would be well diversified and subject to



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strict ownership and governance norms. The ownership restrictions would be applied eitherat the level of the FHCs or at the entity level, depending upon whether the promoters intendto maintain majority control in the subsidiaries, wherever it is permissible as per law. TheWorking Group observed that the FHC model would enable better oversight of financialgroups from a systemic perspective and allow better resolution of different entities as

compared to Bank Subsidiary Model where liquidation of the parent bank may make theliquidation of subsidiaries inevitable. To address the systemic concerns, the Working Grouphas envisaged consolidated supervision at FHC level that would be formalised throughMemorandum of Understanding between financial sector regulators. The function of FHCregulation would be undertaken by a separate unit within the Reserve Bank with staff drawnfrom both the Reserve Bank as well as other regulators. To fully operationalise the FHCmodel, it has been recommended that a separate legislation for regulation of FHC be enactedand amendments be simultaneously made to other statutes governing public sector banks,Companies Act and Banking Regulation Act, 1949, wherever necessary. In addition, suitableamendments to various taxation provisions will have to be made to make the transition from

bank subsidiary model to FHC model, tax and stamp duty neutral. However, there are

numerous challenges in implementing the FHC model in India due to legacy issues andmultiplicity of regulatory and legal provisions that govern various sectors. Some of the majorchallenges can be identified as follows:

Though enactment of a separate law for regulating FHCs has been recommended, itmay take a while before this can be achieved. This is because the recommendationsneed to be accepted by all stakeholders including Government of India and also asimultaneous amendment to various other acts is made.

There exist various policy issues in the financial sector including the differentialGovernment ownership in financial entities, differential ownership and governancestandards prescribed by various regulators and differential ceilings for foreignownership prescribed for various sectors. Bringing all financial activities of a groupwithin a single FHC would presuppose harmonisation among different sector

policies.

The most challenging task would be reorganising public sector banks from banksubsidiary model to FHC model as this involves both strategic and public policyissues for the Government. Irrespective of whether the Government chooses tomaintain its control at the FHC level or at the bank level it would have to sort outimplementation, administrative and management issues.

Compensation PolicyCompensation of Board of Directors, including that of the Chief Executive Officer (CEO) of

banks in private sector and foreign banks has always been under RBI regulation in terms ofthe provisions of Banking Regulation Act, 1949, unlike the situation in many other

jurisdictions. In terms of provisions of the Act, banking companies in India obtain approvalfrom the Reserve Bank for conferring any benefit, amenity or perquisite in whatever form totheir directors/CEOs whether during or after termination of their term of office. Based on theFinancial Stability Board (FSB) Principles for Sound Compensation Practices, the ReserveBank placed draft guidelines on compensation in July 2010 on its website inviting publiccomments. In October 2010, the Basel Committee on Banking Supervision (BCBS) brought



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out a consultative paper titled Range of Methodologies for Risk and PerformanceAlignment of Remuneration and issued the final paper in May 2011. Pursuant to theannouncement made in the Monetary Policy Statement of May 2011 and taking into accountthe feedback received on draft guidelines, the impact analysis carried out with the help ofexternal consultants and methodologies prescribed by BCBS on risk alignment, the Reserve

Bank is in the process of finalising its guidelines on compensation.

Credit Information CompaniesIn 2010-11, a Certificate of Registration (CoR) was issued by the Reserve Bank to HighmarkCredit Information Services Private Limited to commence business of credit informationafter issuing CoR to Experian Credit Information Company of India Private Limited andEquifax Credit Information Services Private Limited earlier in 2009-10. The Reserve Bankissued a circular in September 2010 to banks/ financial institutions advising them to includethe Director Identification Number (DIN) as one of the fields in the data submitted by themto credit information companies and Reserve Bank. This will ensure that names of directorsof these credit information companies are correctly identified and in no case, persons whose

names appear to be similar to the names of directors appearing in the list of Wilful Defaultersof `25 lakh and above or Defaulting borrowers of `1 crore and above are wrongfully deniedcredit facilities on such grounds.

2.4.5 Supervisory Policy

Close and Continuous Supervision of Large and Systemically Important BankingGroupsFor optimising the supervisory resources and also to have a more focused attention on banks,

which are systemically important, it was decided to reorganise the supervisory processes andthe organisational structure of the Department of Banking Supervision (DBS). Thereorganisation of the Department was made effective from April 1, 2011, whereby a newdivision named Financial Conglomerate Monitoring Division (FCMD) was created to have asystem of close and continuous supervision of 12 large and systemically important bankinggroups, which account for 52.7 per cent of the total assets of the banking system. Under thereorganised set up, the supervisory responsibility of FCMD would include exercising on-siteand off-site supervision, and a more meaningful consolidated/conglomerate supervision of

banking groups with a focus on group wide capital adequacy assessment, among others.

Steering Committee to Review Supervisory Processes for Commercial BanksA High Level Steering Committee (Chairman: Dr. K. C. Chakrabarty) has been constitutedto assess the adequacy of Reserve Banks supervisory policies, procedures and processes andsuggest enhancements for making the supervisory policies comparable with global standards.Shri B. Mahapatra, Executive Director, RBI, Dr. J. R. Varma, Professor, IIM, Ahmedabad,Shri Diwakar Gupta, MD and CFO, State Bank of India, Smt. Chanda Kochhar, MD andCEO, ICICI Bank Ltd., Shri. Basant Seth, CMD, Syndicate Bank, and Shri M. B. N. Rao,Retired CMD, Canara Bank are the members and Shri G. Jaganmohan Rao, Chief GeneralManager-in-Charge of the Department of Banking Supervision is the Member Secretary ofthe Committee. The Committee is mandated to submit its report by July 31, 2012.

Review of the Format for Annual Financial Inspection of Banks



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Keeping in view the changes in the banking system, the way banks do business and the needfor supervisors to keep pace with the fast changing business practices, the process of theAnnual Financial Inspection (AFI) of banks has been redefined. The revised guidelines

pertaining to AFI coverage and method of drafting AFI reports are designed to sharpen thefocus and bring out precision in analysis and arrive at clear conclusions for enabling the

Reserve Bank to take definitive supervisory actions based on the findings. The guidelineshave been put in place in the current AFI cycle 2011-12.

Initiatives taken by Board for Financial SupervisionThe Board for Financial Supervision (BFS), constituted in November 1994, remains the chiefguiding force behind Reserve Banks supervisory and regulatory initiatives. During July2010 to July 2011, the BFS held 13 meetings. It reviewed 98 inspection reports (25 reports of

public sector banks, 30 of private sector banks, 31 of foreign banks, 4 of local area banks,and 8 of financial institutions). During the period, the BFS also reviewed 15 summaries ofinspection reports and 43 summaries of financial highlights pertaining to scheduled UCBsclassified in Grade I/II. Some of the important issues deliberated upon by the BFS during the

period are as follows: Continuing to exercise keen interest in fine tuning of supervisory rating, theBFS sought a complete review of the rating methodology. The suggestionsincluded: (i) review of weightages given to sub-parameters; (ii) theadjustment in composite rating to reflect the deterioration or improvement inthe banks performance in various parameters. The supervisory ratingframework is currently under review.

During the period under review, the BFS had observed that in order to takeadvantage of favorable market conditions and book profits, many banks wereresorting to sale of securities held under Held to Maturity (HTM) category onmore than one occasion during the year. In response, as directed by BFS, acircular was issued in August 2010 advising banks to disclose market value ofinvestments held in HTM category and indicate the excess of book value overmarket value for which provision is not made, if the value of sales andtransfers of securities to/from HTM category exceeds 5 per cent of the bookvalue of investment in HTM. This disclosure is required to be made in Notesto Accounts in banks audited Annual Financial Statements. In November2010, it was clarified that one-time transfer of securities to/from HTMcategory with the approval of Board of Directors permitted at the beginning ofthe accounting year and sales to the Reserve Bank under preannounced OMOauctions would be excluded from the 5 per cent cap prescribed in August2010.

The BFS approved a proposal to subject only those foreign banks to AnnualFinancial Inspection, which have a business share of more than 0.1 per cent ofthe market share (assets plus off-balance sheet business). Those foreign bankswhich have a market share of less than 0.1 per cent will be inspected once intwo years provided their rating is B and above. Those foreign banks with amarket share of less than 0.1 per cent and with rating of C and less will beinspected annually.

Based on the suggestions of the BFS, it was decided that as supervisors, theInspecting Officers (IOs) should have access to all the reports/review notes

prepared by the Inspection/Audit teams of the bank, some of which may befrom overseas and may not be available locally.



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Whole Firm Liquidity Modification Regime in the UK: Implications for Indian BanksA new liquidity regime through increased international cooperation in financial supervisionarrangements was proposed by Financial Services Authority (FSA), UK to make the bankingsystem more robust to withstand shocks. The Whole Firm Liquidity Modification regime

which encompasses Indian banks operating through branches/subsidiaries in the UK wouldenable the UK branch of an Indian bank to place reliance on unlimited liquidity resourcesfrom anywhere within the whole firm (bank). Six Indian banks having presence in the UKhave applied for Whole Firm Modification after obtaining prior approval of the ReserveBank. Subsequently, agreements were entered into by the Reserve Bank with FSA in October2010 to monitor the liquidity of the parent bank on an ongoing basis in respect of the six

banks. As per the agreement, the specifications and monitoring of triggers for liquidityinsufficiency in respect of UK branches of Indian banks would rest with the parent bank.

Reporting of Frauds by Public Sector BanksThe Reserve Bank issued a circular in October 2010 advising public sector banks about the

increase in the upper limit for reporting of frauds to Central Bureau of Investigation (CBI)from 5 crore to 7.5 crore and accordingly, all fraud cases involving an amount of 1 crore andabove going up to 7.5 crore, where staff involvement is prima facie evident must be reportedto Anti Corruption Branch of CBI. However, in case where the staff involvement is primafacie not evident, it would be advised to CBIs Economic Offences Wing. Further, all casesinvolving more than 7.5 crore would have to be reported to respective centres of BankingSecurity and Fraud Cell, a specialised cell of the Economic Offences Wing for major bankfraud cases.

Internal Vigilance in Private Sector/Foreign BanksIn order to align the vigilance function in private and foreign banks to that of the publicsector banks, the existing vigilance functions of a few private sector and foreign banks weremapped with the existing guidelines in the matter and it was observed that the practices varywidely among the banks. Accordingly, detailed guidelines aimed at bringing aboutuniformity and rationalisation in the function of internal vigilance were issued for privatesector and foreign banks in May 2011 to address all issues arising out of lapses with regardto corruption, malpractices and frauds for timely and appropriate action. Private sector banksand foreign banks operating in India were advised, inter alia: (i) to appoint Chief of InternalVigilance (CIV) whose role has also been defined in the guidelines; (ii) to identify sensitive

positions and have board-approved guidelines regarding rotation of staff and mandatoryleave by staff handling sensitive desks.

2.4.6 Regional Rural Banks

Regional Rural Banks (RRBs) are region based and rural-oriented banks, which have beenset up to correct the regional imbalances and functional deficiencies in the institutional creditstructure vis--vis the weaker sections of the populace. New credit delivery models like

business correspondents, business facilitators as well as new technologies are beingexperimented with, so as to reach the unreached customers. In this regard, RRBs are well

placed to carry forward the movement of financial inclusion due to their local character andfamiliarity with the local clientele.

Amalgamation of RRBs



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On account of the consolidation and amalgamation process which had started in September2005, the number of RRBs has come down to 82. As on date, out of 82 RRBs, 80 RRBs have

been included in the 2nd Schedule of the RBI Act, 1934. At present, two RRBs viz.,Paschim-Banga Gramin Bank, West Bengal and Kalinga Gramin Bank, Orissa are ineligiblefor scheduling.

Branch Licensing Policy for RRBsThe Reserve Bank has recently liberalized branch authorisation policy considerably forRRBs and allowed them to open branches in Tier 3 to Tier 6 centres (with population of upto 49,999 as per 2001 Census) without prior authorisation from the Reserve Bank, subject toreporting to respective Regional Offices of the Reserve Bank, provided they fulfill certainconditions as specified in the relevant circular.

CBS ImplementationAs on September 30, 2011, 65 out of 82 RRBs have migrated fully to core banking solutions(CBS), and implementation of CBS is in progress in the remaining RRBs. All sponsor banks

have committed to implement CBS in RRBs by the prescribed time line i.e., September2011.

Amortisation of GratuityOwing to enhancement of maximum limit for payment of gratuity from 3.50 lakh to 10.00lakh, RRBs' liability towards payment of additional premium to LIC has increasedconsiderably. Hence, they have been permitted to amortise the enhanced expenditure over a

period of five years beginning with the financial year ending March 31, 2011 subject to aminimum of 1/5th of the total amount involved every year.

2.4.7 Cooperative Banks

2.4.7.1 Urban Cooperative Banks (UCBs)Cooperative banks assume importance in the Indian financial system under the inclusivegrowth agenda, which has laid emphasis on financial inclusion. During 2010-11, a number of

policy initiatives have been taken to strengthen cooperative banking in India, details ofwhich are as follows:

Opening of off-site ATMs by UCBs -LiberalisationAccording to the liberalised policy, Financially Sound and Well-Managed (FSWM) UCBscan open off-site ATMs over and above their annual business plan provided they meet thefollowing criteria: (i) maintenance of a minimum CRAR of 10 per cent; (ii) net NPAs beingless than 5 per cent; (iii) no default in the maintenance of CRR/SLR during the precedingfinancial year; (iv) continuous net profit for the last 3 years; (v) sound internal control systemwith at least two professional directors on the Board; and (vi) regulatory comfort based ontrack record of compliance with the provisions of BR Act, 1949 (AACS), RBI Act, 1934 andinstructions/directions issued by the Reserve Bank from time to time. In addition, theminimum owned funds of the FSWM UCBs should be commensurate with entry pointcapital norms for the centre where the offsite ATM is proposed/where the UCB is registered.

New Bank LicensesAs announced in the Annual Policy Statement 2010-11, the Reserve Bank set up an expertcommittee (Chairman: Shri Y.H. Malegam) comprising all stakeholders for studying the


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