BANKING SECTOR OF INDIA

BANKING SECTOR OF INDIA

India has 12 Public sector banks, 21 private banks in India, 45 Foreign Banks in India (as of 27 November 2020), and RBI is the central authority that manages all India’s banking operations

 

MONEY FUNCTIONS

 

PRIMARY FUNCTION

  • It is a Measure of Value.
  • It is a Medium of Exchange
  •  It is a unit of account
SECONDARY FUNCTION

  • Store of Value.
  • Transfer of Value.
  • It can help in making deferred payments
CONTINGENT FUNCTION

  • Basis of Credit System.
  • Distribution of national income.
  • Liquidity of Money

 

DEMAND AND SUPPLY OF MONEY

 

 

 

DEMAND

People desire to hold money for 3 motives – (Liquidity Preference Theory of Keynes)

  •         Transaction Motive– to carry out transactions.
  •          Speculative Motive –when holding money is perceived to be less risky than lending the money or investing.
  •          Precautionary Motive – to meet the unforeseen circumstances in future. E.g. a car accident, home repairs etc.
 

 

 

 

 

 

 

SUPPLY

  •          It refers to the amount of money in circulation at a given point in the economy.
  •          The measures of money supply in India are classified into four categories M1, M2, M3 and M4 along with M0
  •         Reserve Money (M0) – Currency in circulation + Bankers’ Deposits with the RBI + ‘Other’ deposits with the RBI.
  • High – Powered Money: The total liability of the monetary authority of the country, RBI, is called the monetary base or high powered money.

M0 = Currency in Circulation + Bankers’ Deposits with RBI + Other deposits with RBI

§  Narrow Money: M1 is called narrow money as it is highly liquid and banks cannot run their lending programmes with this money.

§  M1 = Currency with the Public + Demand Deposits with the Banking System + ‘Other’ deposits with the RBI.

  •          M2 = M1 + Savings deposits of post office savings banks
  •          Broad Money (M3) = M1 + Time deposits with the banking system. It is also known as Aggregate Monetary Resources. It is the stock of total money.
  •          M4 = M3 + All deposits with post office savings banks.
  •          The liquidity in descending order is – M1>M2>M3>M4

 

MONEY CREATION

 

Fractional Banking System:

 

  •         Only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal and in the process creating money.
 

 

 

Money Multiplier:

 

  •          It measures the amount of money the banks are able to create in the form of deposits with every unit of money it keeps as reserves.
  •         It is Broad money (M3) ÷ Reserve Money (M0).
  •         When Reserve money increases, Broad money will also increase.
  •          Example – If the money multiplier is 6, it means that It signifies that for every unit of money kept as cash reserves, banks are able to create 6 units of money.

 

 

VELOCITY OF MONEY CIRCULATION
  • It is a measurement of the average rate at which money is exchanged in an economy during a given time period.
  • The velocity of Money = GDP / Money Supply.
  • It will usually rise with GDP and inflation.
  • The velocity of Money is high in the following case -In Developing countries, Low Income people, High Financial Inclusion, During Boom or Growth period.

 

MONETARY POLICY
  • It is the policy under which RBI uses monetary instruments under the RBI Act, 1934, to achieve the economic goals
  • Aim– to maintain price stability, economic growth.

 

MONETARY POLICY: QUANTITATIVE TOOLS

These tools help in channelising the volume of credit towards the economy. The aim is to control the economic indicators like inflation, money circulation etc.

 

Quantitative Tools DESCRIPTION
Bank Rate
  •          Minimum rate at which the RBI provides loan to commercial banks
 

Repo Rate

  •         Rate at which the RBI lends to the commercial banks to manage short term needs of liquidity with an agreement to repurchase the same government securities at a predetermined date and rate is called Repo Rate.
Reverse Repo Rate
  •          Interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
  •          It is lower than repo rate.
Long Term Repo Operations (LTRO)

 

  •          It is a tool under which the RBI provides 1 – 3 year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
  •        LTRO scheme will be in addition to the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations
 

Cash Reserve Ratio (CRR)

  •         CRR is decided by RBI’s Monetary Policy Committee.
  •         Banks are required to maintain with the Reserve Banka certain per cent of its Net demand and time liabilities (NDTL) as specified by RBI.
  •         Banks do not get any interest on the money that is with the RBI under the CRR requirements
 

Liquidity Adjustment Facility

  •         LAF allows commercial bank and primary dealers to borrow money through repurchasing agreement or repos/reverse repos.
  •         It is used to aid banks in adjusting the daily fluctuations in liquidity.
  •          It allows banks to park their excess money with the RBI in case of excess liquidity or to avail liquidity from the RBI at the time of deficit on an overnight basis against the collateral of government securities.
Open Market Operations
  •          It is the purchase and sale of securities by the RBI.
MONETARY POLICY RBI ACTION IN OMO EFFECT IN THE ECONOMY
EXPANSIONARY BUYS INJECTS MONEY IN
CONTRACTIONARY SELLS REMOVES MONEY OUT
Marginal Standing Facility
  •         It is a penal rate at which scheduled banks can borrow money from the RBI over and above of what they can borrow from the RBI under the LAF window.
  •         It is always fixed at a higher rate than the Repo rate.
  •         Aim– reduce volatility in the overnight lending rates in the interbank market.
Statutory Liquidity Ratio
  •          SLR is that % of the deposits which the banks have to hold with themselves in highly liquid government securities.
  •         To ensure that banks don’t lend away all their funds and always have enough liquidity.

 

DIFFERENCE BETWEEN CRR AND SLR:

 

CASH RESERVE RATIO (CRR) STATUTORY LIQUIDITY RATIO (SLR)
Banks are required to maintain with the Reserve Bank a certain per cent of its Total Demand and Time liabilities SLR is that percentage of the deposits which the banks have to hold with themselves
CRR is maintained only in cash form. SLR can be maintained in form of Gold, Cash and other securities approved by RBI.
No interest is earned on the CRR Interest is earned on SLR.
Helps regulate the liquidity in the economy. Helps regulate the Credit facility in the economy.
It is calculated on the banks Total Demand and Time liabilities It is calculated on banks Net Demand and Time Liabilities.
The range of permissible CRR is between 3 and 15 per cent. SLR has an upper limit of 40% and a lower limit of 23%.

 

MONETARY POLICY: QUALITATIVE TOOLS
  • These measures help in controlling the distribution and direction of the loans to different sectors of the economy.

 

MEASURES DESCRIPTION
 

 

 

Margin Requirements

  •        It is the difference between the current value of the security offered for a loan (called collateral) and the value of loan granted.
  •          Higher the Margin, Lesser will be the loan granted.
  •          Example, If the RBI feels that more credit should be allocated to priority sectors, then it will reduce the margin.

 

SECTOR COLLATERAL/ LOAN APPLIED MARGIN LOAN GIVEN
AGRICULTURE RS 10,000 10% RS 9,000
PERSONAL LOAN RS 10,000 25% RS 7,500
Credit Rationing
  •         Central Bank fixes a

limit on the credit amount to be granted by each commercial bank. Helps in lowering banks credit exposure to unwanted sectors.

Moral Suasion
  •         Issue Directives, meetings, Persuasion and pressure, Inspections and frequent follow ups.
Direct Action
  •        Impose fines, ban non cooperating banks, refuse rediscounting of their bills, refuse credit supply.

 

OTHER ASSOCIATED TERMS

 

Market Stabilisation Scheme
  •         MSS securities are issued to suck out excess liquidity from the market through issue of securities like Treasury Bills, Dated Securities etc. on behalf of the government.
  •         The amount raised under the MSS is maintained with the RBI.
 

 

Base Rate

  •          It is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers.
  •         The main components of base rate system are:

1.       Cost of funds (interest rates offered by banks on deposits)

2.       Cost of maintaining CRR.

3.       Profit margin.

4.       Operating expenses to run the bank.

  •          It does not consider ‘repo rate’ in their calculations. Effective Monetary Transmission was not happening.
 

 

 

MCLR – Marginal Cost Of Funds Based Lending Rates

  •          It replaced Base rate to determine the lending rates for commercial banks.
  •         It is the minimum interest rate that a bank can lend at.
  •          It is a tenor – linked internal benchmark, meaning the rate is determined internally by the bank depending on the period left for the repayment of a loan.
  •          MCLR is closely linked to the actual deposit rates and is calculated based on four components:

1.       Marginal cost of funds

2.       Tenor premium

3.       Operating costs

4.       Negative carry on account of cash reserve ratio

Net Demand and Time Liabilities (NDTL)
  •         It is the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other banks.
 

 

Government Securities (G-Sec)

  •         It is a tradable instrument issued by the central government or state governments.
  •          Short term G-secs (with original maturities of less than one year) are called Treasury Bills.
  •         Long term G-secs (with original maturities of more than one year) or long term are called Government Bonds or Dated Securities.
  •         Treasury Bills are not issued by State Governments while Government Bonds or Dated securities are issues both by State and Central Governments
Gross capital formation
  •          refers to the ‘aggregate of gross additions to fixed assets (that is fixed capital formation) plus change in stocks during the counting period.’
Cheque Truncation System
  •          It is an online image-based cheque clearing system undertaken by the RBI for faster clearing of cheques.
  •         It eliminates the associated cost of movement of physical cheques.

 

BANKS
  • Banks are Financial Intermediaries between borrowers and lenders. It accepts deposits from the public and lends money to businesses and consumers. Its primary liabilities are deposits and primary assets are loans and bonds.
  • RBI – The Reserve Bank of India was set up in 1935 by the RBI Act, 1934.

 

RESERVE BANK OF INDIA
  • Prior to establishment of RBI, the functions of a central bank were virtually done by the Imperial Bank of India . RBI started its operations from April 1, 1935.
  • It was established via the RBI act 1934, so it is also known as a statutory body. Similarly, SBI is also a statutory body deriving its legality from SBI Act 1955.
  • RBI did not start as a Government owned bank but as a privately held bank.
  • Post-independence, the government passed Reserve Bank (Transfer to Public Ownership) Act, 1948 and took over RBI from private shareholders after paying appropriate compensation.
  • Thus, nationalization of RBI took place in 1949 and from January 1, 1949, RBI started working as a government owned bank.
  • The RBI is the supreme monetary and banking authority in the country and controls the banking system in India.
  • It is called the ‘Reserve Bank’ as it keeps the reserves of all commercial banks.

 

FUNCTIONS OF RBI
  1. Monetary Authority: It implements and monitors the monetary policy and ensures price stability while keeping in mind the objective of growth.
  2. Regulator and Supervisor of the Financial System.
  3. Manager of Foreign Exchange: It facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India. It also maintains external value of rupee.
  4. Issuer of Currency: Issues and exchanges or destroys currency and coins not fit for circulation.
  5. Developmental Role: Performs a wide range of promotional functions to support national objectives such as making institutional arrangements for rural or agricultural finance.
  6. Financial Inclusion: The Reserve Bank has selected a bank led model for financial inclusion in India. RBI has undertaken a series of policy measures. Example: No Frills Accounts – account either with nil or very low minimum balance as well as charges that would make such accounts accessible to vast sections of population, Use of Technology – devices such as ATMs, hand held devices to identify user accounts through a card and biometric identifier, Deposit taking machines and Internet banking and Mobile banking facility to provide the banking services to all sections of society with more ease.
  7. Banker to banks: maintains banking accounts of all scheduled banks. It also acts as lender of last resorts by providing fund to banks.
  8. Banker to Government: performs merchant banking function for the central and the state governments. It is entrusted with central govt.’s money, remittances, exchange and manages its public debt as well.

 

TIMELINE

1926 The Royal Commission (Hilton Young commission) on Indian Currency and Finance recommended creation of a central bank for India. On the basis of mainly this commission, the RBI Act, 1934 was passed
1934 The RBI Bill was passed and received the Governor General’s assent.
11 April 1935 Reserve Bank commenced operations as
India’s central bank as a private shareholders’ bank with a paid up capital of rupees five crore
1949 The Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act,1948.

 

 

 

 

Governor Of RBI

 

  •          APPOINTMENT– Appointed after the proposal made by the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary.
  •         TERM – According to Section 8 (4) of the RBI Act, the Governor and Deputy Governors shall hold office for such term not exceeding 3 years as the Central Government may fix when appointing them.
  •          RE-APPOINTMENT – They are eligible for re-appointment
  •          QUALIFICATION – The RBI Act does not provide for any specific qualification for the governor.
  •          REMOVAL –  The governor can be removed by the central government.
Subsidiaries Of RBI:

 

  •          With a minimum value of government-held gold of

₹200 crores (₹115 cr rupee should in the form of Gold or gold bullion and rest ₹85 cr should be in the form of foreign currencies) and the remaining is backed by the government securities issued and held by RBI.

Minimum Reserve System Of RBI

 

1.       Deposit Insurance and Credit Guarantee Corporation (DICGC)

2.       Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

3.       Reserve Bank Information Technology Private Ltd. (ReBIT)

4.       Indian Financial Technology And Allied Services (IFTAS)

 

 

 

Income And Expenditure Of RBI

INCOME EXPENDITURE
  •         Returns from foreign currency assets
  •          Interest on rupee-denominated government bonds
  •         Interest on overnight lending to commercial banks
  •         Management commission on handling the borrowings of central and state governments.

 

  •          Printing of currency
  •          Staff expenditure
  •          Commission given to commercial banks
  •         Commission to primary dealers
 

 

Assets And Liabilities Of RBI

LIABILITIES ASSETS
  •         Currency held by Public
  •          Vault cash held by commercial banks
  •          Government securities
  •          Other liabilities
  •         Foreign currency assets
  •         Bill purchases and discounts
  •         Collaterals by commercial banks
  •          Loan and advances
  •         Rupee securities
  •         Gold coin bullion

 

 

 

 

PUBLICATIONS OF RBI

 

1.       Report on Trend and Progress of Banking in India-Annually

2.       Financial stability report- Half yearly

3.       Monetary policy report- Half yearly

4.       Report on foreign exchange reserves- Half yearly

5.       Bi-monthly Policy Statement

6.       Industrial Outlook Survey of the Manufacturing Sector (Quarterly)

7.       Consumer Confidence Survey (Quarterly)

8.       Report on Financial Review

 

 

TYPES OF BANKS:

 

 

Scheduled

Bank

•          Listed in the 2nd schedule of the Reserve Bank of India Act, 1934. E.g. Canara Bank.

•          SB are eligible for loans from the Reserve Bank of India at bank rate.

•          Required to deposit CRR with RBI.

•          Types are – Commercial Banks and Cooperative Banks.

 

Non – Scheduled

Bank

•          Not listed in the 2nd schedule of the RBI act, 1934.

•          Depends on RBI discretion

•          Can maintain CRR with themselves, not with RBI

•          Many co-operative banks are non – scheduled

Commercial

Banks

 

•          Public Sector Banks- more than 50% is held by the government

•          Private Sector Banks-most of the capital is in private hands.

•          Foreign Banks

Cooperative

Banks

 

•          Urban

•          State

•          Multi – State

Differential

Banks

 

•          Small Finance Banks.

•          Payments Banks.

•          Regional Rural Banks.

 

Development

Bank

 

•          NABARD

•          SIDBI

•          EXIM

•          NHB

•          IFCI

 

RESIDEX

NHB RESIDEX, India’s first official housing price index, was an initiative of the National Housing Bank (NHB).The scope has been widened under NHB RESIDEX brand, to include housing price indices (HPI), land price indices (LPI) and building materials price indices (BMPI), and also housing rental index (HRI).
BANKING SERVICE INDEX By RBI. Base year is 2011. It measures the inflation in the fees charged by the banks for NEFT/ RTGS/ card transactions/ mobile banking etc.

 

CO-OPERATIVE BANKS
  • A Co-operative bank belongs to its members, who are at the same time the owners and the customers of their bank.
  • Under dual control of the Registrar of Cooperative Societies and RBI.
  • The board of members are elected with each member has one vote.
  • Cooperative banks are the primary financiers of agricultural activities, some small- scale industries and self-employed workers.
  • These banks are cooperative credit institutions that are registered under the Cooperative Societies Act 1912. These banks work according to the cooperative principles of mutual assistance.

 

DIFFERENTIATED BANKS

 

PAYMENTS BANK SMALL FINANCE BANK
•          Payments Bank are based on Usha Thorat recommendations •          Small Finance Banks are established on recommendations of Nachiket Mor
•          Can accept deposits, but only up to RS1 lakh per individual customer •          Allowed to take deposits of any amount
•          Cant lend in any form •          Can lend but the focus will be on small lending
•          Can open small savings accounts •          Can finance small business, small and marginal farmers, MSME, un-organised sector entities.
•          Can provide remittance services •          Can provide remittances as well as credit cards
•          Allowed to issue ATM /debit cards •          Allowed to issue ATM or debit cards
•          Not allowed to issue credit cards. •          Has to ensure that 50% of loan portfolio constitutes advances of upto RS. 25 lakh
•          Can distribute products like mutual funds, insurance, third party loans •          Can distribute financial products like mutual funds, insurance, pension etc.
•          Payments banks can apply for conversion into small finance banks (SFBs) after five years of operation.

 

DEVELOPMENT BANKS

 

Industrial Finance Corporation of India (IFCI)
  •         IFCI was the first specialized financial institution set up in 1948 to provide term finance to large industries in India, under the Industrial Finance Corporation Act of 1948.

 

National Bank for Agriculture & Rural Development (NABARD)

 

•          National Bank for Agriculture and Rural Development (NABARD) is an apex development financial institution in India to provide finance for agriculture and rural development.

•          Established in 1982 on the recommendations of B. Sivaraman Committee.

•          It is a statutory body established in 1982 under Parliamentary act – NABARD Act, 1981.

•          Its headquarter is located in Mumbai.

•          NABARD today is fully owned by the Government of India. The authorized share capital is about Rs.30,000 crore.

•          It is responsible for the development of the small industries, cottage industries, and any other such village or rural projects.

•          NABARD operates Rural Infra. Development fund (RIDF) from PSL shortfalls from SCBs.

•          NABARD is also known for its “SHG Bank Linkage Programme” (1992) which encourages India’s banks to lend to SHGs.

 

FUNCTIONS: Undertakes monitoring and evaluation of projects refinanced by it + Regulates the cooperative banks and the RRBs + Refinances the financial institutions which finance the rural sector + Provides training facilities to the institutions working in the field of rural upliftment.

 

REFINANCE FACILITY BY NABARD IS AVAILABLE TO:

1.       State co-operative agriculture and rural development banks (SCARDBs),

2.       State co-operative banks (SCBs),

3.       Regional rural banks (RRBs),

4.       Commercial banks (CBs) and

5.       Other financial institutions approved by RBI.

Small Industries Development Bank of India (SIDBI) •          Small Industries Development Bank of India (SIDBI) is a statutory body set up on 2nd April 1990 under an Act of Indian Parliament, acts as the Principal Financial Institution for Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector as well as for co-ordination of functions of institutions engaged in similar activities.

•          Schemes like Pradhan Mantri MUDRA Yojana, credit linked capital subsidy scheme are implemented by it.

Export-Import Bank of India (EXIM Bank) •          It is a wholly owned Govt. of India entity established in 1982.

•          Aim– financing, facilitating and promoting foreign trade of India

National Housing Bank (NHB) •          Created on 1988 under National Housing Bank Act (1987).

•          It regulates and re-finances social housing programs and other activities like research etc.

 

 

 

Local Area Banks

•          Introduced in India in the year 1996 based on Budget-1996 by the then Finance Minister, Dr. Manmohan Singh.

•          Unlike RRBs, they’re not set up by Union or State governments or by any special act of the parliament, but by private entities, simply applying to RBI under Banking Regulation Act.

•          Each Local Area bank is registered as a public limited company under the Companies Act, 1956. However, they are licensed under the Banking Regulation Act, 1949.

•          Earning profit is the main objective of Local Area Banks

•          They are Non-Sch. Banks – CRR, SLR, PSL applicable.

 

LEAD BANK SCHEME
  • The Lead Bank Scheme was introduced in 1969 in which aims at  providing adequate banking and credit in rural areas through an ‘service area approach’, with assignment of lead roles to individual banks (both in public sector and private sector) – one bank assigned for one area
  • A bank having a relatively large network of branches in the rural areas of a given district and endowed with adequate financial and manpower resources has generally been entrusted with the lead responsibility for that district.
  • On the recommendation of the Gadgil Study Group and Banker’s Committee, the Scheme was introduced by RBI. The commercial banks did not have adequate presence in rural areas and also lacked the required rural orientation which was hindering the growth of rural areas.

 

NON-BANKING FINANCIAL INSTITUTIONS
  • It is a company registered under the Companies Act, 1956.
  • NBFCs are regulated by multiple regulators – Insurance Companies – IRDA, Merchant Banks – SEBI, Micro Finance Institutions – State Government, RBI and NABARD.
  • It engages in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature leasing, hire – purchase, insurance business, chit business, etc.
  • It does not include any institution whose principal business is that of: Agriculture Activity, Industrial Activity, Purchase or Sale of any goods (other than securities), Providing any services and sale/purchase/construction of Immovable Property.

 

 

 

Features of NBFC are:

 

•          NBFC cannot accept demand deposits;

•          Cannot issue cheques drawn on itself;

•          Deposit insurance facility of DIGCG is not available to depositors of NBFCs;

•          Norm of Public Sector Lending does not apply to NBFCs;

•          Cash Reserve Requirement also does not apply to NBFCs;

•          Regulated by multiple regulators

 

SYSTEMICALLY IMPORTANT NBFCS

NBFCs whose asset size is of ₹ 500 cr or more are considered as systemically important NBFCs. Example: Power Finance Corporation Limited (PFCL), Rural Electrification Corporation Limited (RECL), IL&FS, etc.

 

Difference between banks & NBFCs:

  • NBFCs cannot accept demand deposits (but some can accept Time deposit and such NBFCs are called Deposit taking NBFC).
  • Unlike banks, CRR does not apply on any NBFCs while a lower SLR of 15% applies only to Deposit taking NBFC.
  • NBFC do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
  • NBFCs get license under Companies Act, 1956 and Banks under Banking regulation Act.
  • Deposit insurance facility is not available to depositors of NBFCs.

 

CORE INVESTMENT COMPANY
  • Core Investment Companies (CICs) are a specializedNon-Banking Financial Companies (NBFCs).
  • A Core Investment Company registered with the RBI has an asset size of above Rs 100 crore.
  • Their main businessis acquisition of shares and securities with certain conditions.

 

NON – PERFORMING ASSETS (NPA)
  • NPA is a loan/advance for which the principal or interest payment remained overdue for a period of 90 days.
  • For Agriculture Loans the NPA is if the loan instalment/interest is not paid for:

 

Short duration crop loan 2 crop seasons
Long Duration Crops 1 Crop season from the due date

 

SPECIAL MENTION ACCOUNTS (SMA)- 2014
  • SMA are those accounts that show symptoms of bad asset quality in the first 90 days itself.
  • The identification is an effort for early stress discovery of bank loans.
  • The Special Mention Accounts are usually categorised in terms of duration as follows:

 

SMA CLASSIFICATION BASIS FOR CLASSIFICATION
Standard Accounts Loan where principal and interest payment is made timely.
SMA – NF Non – Financial (NF) signs of stress.
SMA 0 Loan principal or interest is unpaid for 1 – 30 days from its due date.
SMA 1 Loan principal or interest is unpaid for 31 – 90 days
SMA 2 Unpaid for 61–90
NPA Unpaid for more than 90 days.

 

OTHER CLASSIFICATION OF LOAN ACCOUNTS:

 

CLASSIFICATION BASIS FOR CLASSIFICATION
Substandard Asset Account remains as NPA for 12 or more months.
Doubtful Asset Account remains as substandard asset for 12 months or more.
Loss Asset When doubtful asset is uncollectable with little or no savage value.
Loan Write Off Loan is written off from asset side of bank balance sheet. Just an accounting exercise.
Restructured Loan When the principal or interest or tenure terms are modified to enable borrower to pay the loan.
Stressed Asset NPA + loans written off + restructured loans = stressed asset.

 

MEASURES FOR NPA RESOLUTION

 

 

3R FRAMEWORK FOR REVITALISING STRESSED ASSETS:

1.       RECTIFICATION – Conducting ASSET QUALITY REVIEW (AQR)

2.       RESTRUCTURING – Strategic Debt Restructuring, Scheme for Sustainable Structuring of Stressed Assets (S4A), Joint Lenders Forum.

3.       RECOVERY – SARFAESI ACT, 2002 and Insolvency and Bankruptcy Code, 2016

 

NOTE: Reserve Bank of India (RBI) has set up a committee headed by K.V. Kamath on restructuring of loans impacted by the Covid-19 pandemic.

 

SUSTAINABLE STRUCTURING OF STRESSED ASSETS (S4A)

 

  •          It is an optional framework for the resolution of largely stressed accounts and a tool for financial restructuring.
  •          PROCESS: bank hires an independent agency à it will evaluate how much of the stressed asset is sustainable and how much is unsustainable à it will convert the unsustainable debt into equity à no change of ownership of the company, unlike in strategic debt restructuring à helps in financial restructuring.
 

 

BAD BANKS

 

  •          A bad bank is a set up to buy the bad loans and other illiquid holdings of another financial institution and do the loan restructuring and absorb losses.
  •          Economic Survey 2016 – 17suggested public sector asset rehabilitation agency(PARA)to resolve the twin problems of ‘balance sheet syndrome’ (of the banks as well as the corporate sector),
  •          PARA is a proposed Bad Bank that will buy bad loans from public sector banks.
PROMPT CORRECTIVE ACTION (PCA)
  •         The PCA framework considers banks as risky if they fall below certain norms on three parameters — capital ratios, asset quality and profitability.
  •          Certain restrictions such as halting branch expansion and stopping dividend payment, restrictions in branch expansion, higher provisions etc are put in place.
ASSET RECONSTRUCTION COMPANIES
  •          Narasimham Committee (1998) recommended setting up an ARC. It is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets.
SARFAESI ACT (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002)
  •         It provides the legal basis for the setting up ARCs in India to tackle wilful defaulters.
  •          Under this, a lender can take possession of the property or mortgaged assets after giving the borrower a 60 – day notice.
  •         It is not applicable to unsecured creditors.
  •          Not applicable on Farm Loans.

 

 

 

DEBT RECOVERY TRIBUNAL

 

  •         Lenders can recover their dues by approaching a DRT and get a recovery certificate. It allows lenders to take possession of properties of borrowers anywhere in the country and sell them to recover dues.
  •         Appeals against orders passed by DRTs lie before Debts Recovery Appellate Tribunal (DRAT).
  •         It can go beyond the Civil procedure Code.
 

 

eBkry Portal

 

  •          To enable online auction by banks of attached assets transparently and cleanly for the improved realization of value, eBkry is launched.
  •          It has property search features and contains navigational links to all PSBs e – auction sites.
  •         eBkry also contains photographs and videos of the properties uploaded on the platform.
CAPITAL ADEQUACY RATIO

 

  •         CAR/Capital to Risk Weighted Assets Ratio (CRAR) is the ratio of a bank’s capital to its risk.
  •          The higher the CRAR of a bank the better capitalized it is.

 

EASE BANKING REFORMS INDEX:
  • The Index measures performance of each PSB on 120+ objective metrics.
  • It follows a fully transparent scoring methodology, which enables banks to identify their strengths as well as areas for improvement.
  • The goal is to continue driving change by encouraging healthy competition among PSBs.
  • EASE 1.0: The EASE 1.0 report showed significant improvement in PSB performance in the resolution of NPAs transparently.
  • EASE 2.0: EASE 2.0 builds on the foundation of EASE 1.0 and introduces new reform Action Points across six themes to make reforms journey irreversible, strengthen processes and systems, and drive outcomes.
  • The six themes of EASE 2.0 are Responsible Banking, Customer Responsiveness, Credit Off-take, PSBs as Udyami Mitra (SIDBI portal for credit management of MSMEs), Financial Inclusion and Digitalisation; and Governance and Human Resources.
  • EASE 3.0- A comprehensive agenda for smart, tech-enabled banking has been adopted for FY 2020-21, under which PSBs have initiated the eShishu Mudra (app based lending for instant sanction of working capital up to Rs. 50,000) for straight-through processing of loans to micro-enterprises.

 

Provision Coverage Ratio

  • The key ratio in analyzing asset quality of the bank is between the total provision balances of the bank as on a particular date to gross NPAs. It is a measure that indicates the extent to which the bank has provided for the weaker part of its loan portfolio.
  • A high ratio suggests that further provisions to be made by the bank in the coming years would be relatively low as the provision coverage is high(if gross non-performing assets do not rise at a faster rate).
  • Net Non-Performing Assets = Gross NPAs – Provisions.

 

Liquidity Coverage Ratio:

  • Liquidity coverage ratio (LCR) is a clause of Basel III norms (of the Basel based Bank for International Settlement) which aims at prudential regulation of the banking sector.
  • Under it banks are supposed to maintain enough short-term liquidity (their needs of the next 30 days) so that they can survive acute financial stress if such situations arise in the economy.

 

Currency Deposit Ratio

  • A [ratio of money held by the public in currency to that of money held in bank deposits]

 

Inter-Creditor Agreement:

  • The agreement is part of the proposed Project Sashakt.
  • “Sashakt” plan is approved by the government to address the problem of resolving bad loans.
  • The objective is to use this ICA for faster facilitation of resolution of stressed assets.
  • It is aimed at the resolution of loan accounts with a size of Rs. 50 crore and above that are under the control of a group of lenders.

 

BASEL – III NORMS
  • The Basel Accords are 3 series of banking regulations (Basel I, II, and III) set by the Basel Committee on Bank Supervision (BCBS).
  • Presently Indian banking system follows Basel II norms.
  • Under Basel III, a bank’s tier 1 and tier 2 assets must be at least 10.5% of its risk – weighted assets.
Tier 1
  •          It is the primary funding source of the bank.
  •          Tier 1 capital consists of shareholders’ equity and retained earnings.
 

Tier 2

  •         Tier 2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan – loss reserves, and undisclosed reserves.
  •         Tier 2 capital is considered less reliable than Tier 1 capital because it is more difficult to accurately calculate and more difficult to liquidate

 

SOVEREIGN GOLD BONDS
  • Introduced in 2015.
  • Aim-To help reduce India’s over dependence on gold imports.
  • Can be sold to-Resident India entities, Individuals, HUFs, trust, universities and charitable institutions.
  • Can be held in demat form,
  • The interests on the bonds are taxable, the capital gains at the time of redemption are exempt from tax.
  • Tenure- 8 years, (early redemption is allowed after the fifth year from issuance)

 

OTHER RELATED TERMS

 

Letter Of Undertaking/Letter Of Comfort
  •          It is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank’s foreign branch in the form of a short term credit.
Nostro Account
  •         Maintained by Indian banks in foreign countries where they have operations for facilitating easy clearing of their transactions.
Vostro Account
  •          The account maintained by foreign bank in India with their corresponding banks is called vostro accounts.
SWIFT- Society For Worldwide Interbank Financial Telecommunication
  •          It is a messaging network used by banks to securely send and receive information, such as money transfer instructions.
 

Shadow Banking

  •          Are part of the financial system where credit activities remains outside the regular banking system.
  •          They are those institutions that do not collect deposits but still provide loans.
  •          Liabilities of the shadow banks are uninsured.
Serious Fraud Investigation Office – (SFIO)
  •          Based on the recommendation of Naresh Chandra Committee on corporate governance
  •          SFIO is a fraud investigating agency in India under the Ministry of Corporate Affairs
  •          investigates white – collar crimes
Bail In
  •          It is the bank’s own deposits that are used to rescue the bank or reduce its liabilities.
Bail Out
  •         Involves the rescue of a financial institution by external parties, typically governments using taxpayer’s money.
Willful Defaulters
  •          A wilful defaulter is an entity or a person that has not paid the loan back despite the ability to repay it.
Time Liabilities of a Bank (FDRD)
  •         Fixed deposits, Cumulative/ recurring deposits, Staff security deposit etc.
  •       Bank legally not required to pay customer before maturity but may pay after deducting penalty/ interest.
Demand Liabilities of a Bank (CASA)
  •         Current Account, Savings Account, Demand Draft
  •         Overdue balance in Fixed Deposits
  •         Unclaimed deposits
Core Banking Solutions (CBS): eKuber

 

  •          Core Banking Solutions (CBS) or Centralised Banking Solutions is the process which is completed in a centralized environment i.e. under which the information relating to the customer’s account (i.e. financial dealings, profession, income, family members etc.) is stored in the Central Server of the bank (that is available to all the networked branches) instead of the branch server.
 

Selective Credit Control

 

  •         Selective credit control refers to qualitative method of credit control by the central bank. The method aims, unlike general or quantitative methods, at the regulation of credit taken for specific purposes or branches of economic activity.
  •         It aims at encouraging good credit, i.e., development credit while at the same time discouraging bad credit, i.e., speculative credit.

 

Usha Throat committee: to examine issues related to offshore rupee markets and recommend policy measures to ensure the stability of the external value of the domestic currency.

 

BANKING SECTOR REFORMS

 

CONSOLIDATION OF THE PUBLIC SECTOR BANKS:
  • Narasimham committee (1991 and 1998) suggested merger of strong banks both in public sector.
  • Verma committee pointed out that consolidation will lead to pooling of strengths and lead to overall reduction in cost of operations.
  • Financial performance of selected merged banks is analysed and interpreted based on CAMEL parameters: Capital adequacy, (C) + Assets quality, (A) + Management Efficiency (M) + Earning Quality (E) + Liquidity and (L)

 

Advantages Disadvantages
•          Increased efficiency of banks

•          Better Monitoring

•          Better Capital Adequacy of the Consolidated Banks.

•          Merger helps reduce Cost of operation.

•          Helps improve the professionalism and competency of banks.

•          Bad Loans of the Associate bank can drag down the good banks performance.

•          Larger Banks are more vulnerable to economic crisis

•          Difficult to manage people and different attitudes

•          Merger destroys the idea of Decentralisation

•          Many Bank Branches have been closed after mergers – affects financial inclusion.

 

MISSION INDRADHANSH
  • It is a 7 pronged plan to resolve issues faced by PSBs and improve their overall performance by ABCDEFG.
  • P J Nayak Committee on Banking sector reforms recommended many of the measures.

 

 

A

 

Appointment

In order to check the excessive concentration of power and smooth functioning of the banks – Induction of talent from the Private Sector into the public banks, separation of the posts of Chief Executive Officer and the Managing Director.
B Bank Board Bureau The appointments Board of the Public Sector Banks would be replaced by the Bank Boards Bureau (BBB). The BBB separates the functioning of the PSBs from the government by acting as a middleman.
C Capitalisation Due to the high NPAs and the need to meet the provisions of the Basel III norms, capitalization of banks by inducing Rs. 70000 crore was planned.
D De – Stressing PSBs and strengthening risk control measures and NPAs disclosure.
E Employment Providing greater flexibility and autonomy to PSBs in hiring manpower.
F Framework Of Accountability Assessment of the banks through measuring the key performance indicators (KPI).
G Governance Reforms Gyan Sangam, a conclave of PSBs and financial institutions. Bank board Bureau for transparent and meritorious appointments in PSBs.

 

NATIONAL FINANCIAL REPORTING AUTHORITY (NFRA)
  • The Ministry of Corporate Affairshas notified rules determining the jurisdiction, powers, function and duties of the National Financial Reporting Authority (NFRA).
  • The Companies Act, 2013provided for the creation of a National Financial Reporting Authority.
  • Section 132 of the Companies Act 2013gives the central government the power to set up such an authority.
  • Earlier, the Union Cabinet on March 1, 2018 approved the creation of a National Financial Reporting Authority (NFRA) as an independent regulatorfor the auditing profession, in an attempt to tighten regulatory oversight over chartered accountants and plug loopholes.
  • NFRA will oversee the quality of service and undertake investigation of the auditors oflisted entitiesunlisted entities with paid-up capital of not less than ₹500 crore or annual turnover of over ₹1,000 crore or those having aggregate loans, debentures or deposits of not less than ₹500 crore as of March 31 of the preceding financial year. While ICAI retains jurisdiction of small listed companies.

 

INSOLVENCY AND BANKRUPTCY ACT
  • To tackle the Chakravyuh Challenge (Economic Survey 2015 – 16) – the exit problem in India.
  • For reorganization and insolvency resolution of corporate persons, partnership firms and individuals .
  • Minimum default of Rs 1 crore is needed to trigger IBC. (In March this year, the government raised the threshold for invoking insolvency under the IBC to Rs 1 crore from Rs 1 lakh).
  • Time bound process180 days, some cases 270 days maximum.
  • No Deadlock – if resolution is not done, assets are to be sold to pay debtors.
  • It is not applicable for Willful Defaulters.
  • IBC proposes a new institutional set – up comprising following four critical pillars:
  1. The National Company Law Tribunal (NCLT) as the adjudicating authority.
  2. Insolvency professionals (IPs) to manage the insolvency and bankruptcy cases.
  3. Information utilities (IUs) to reduce information asymmetries.
  4. Insolvency and Bankruptcy Board of India (IBBI), a regulator.

 

DIFFERENCE BETWEEN INSOLVENCY AND BANKRUPTCY:

 

What is Insolvency?

 

  •         Insolvency is a state where the liabilities of an individual or an organization exceeds its asset and that entity is unable to raise enough cash to meet its obligations or debts as they become due for payment.
 

 

 

What is bankruptcy?

 

  •          When an individual is unable to pay off his liabilities and debts then he generally files for bankruptcy. Here is asks for help from government to pay off his debts to his creditors.
  •         Bankruptcy could of two types, namely, reorganization bankruptcy and liquidation bankruptcy. Usually people tend to restructure the repayment plans to pay them easily under reorganization bankruptcy. And under liquidation bankruptcy, the debtor tends to sell of certain of their assets to pay off their debts for their creditors.

 

SEQUENCE OF STEPS UNDER IBC:

 

On Day 1 of the default, a creditor or a borrower can approach NCLT/ DBT to initiate insolvency proceedings NCLT/DBT has to accept or reject the plea within 14 days Once the case is admitted, lenders will constitute committee of creditors (CoC), appoint an IRP which will run the borrowers company in the interim period. Within 180 days, the CoC has to decide on a debt recast plan. Lenders will be given additional 90 days to arrive at a final resolution plan. If the lenders agree (by voting), the CoC would go ahead with debt restructuring Otherwise, after 180 days, the company’s/borrower ‘s assets will be liquidated

 

PRIORITY SECTOR LENDING CERTIFICATES
  • Raghuram Rajan Committee (2009) on Financial Sector Reforms had recommended introduction of PSLCs.
  • PSLCs are a mechanism to enable banks to achieve the priority sector lending target and sub – targets by purchase of these instruments in the event of shortfall.
  • This also incentivizes surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector.

 

PRIORITY SECTOR LENDING
  • The RBI mandates banks to lend a certain portion of their funds to specified sectors, like agriculture, Micro, Small and Medium Enterprises (MSMEs), export credit, education, housing, social infrastructure, renewable energy among others.
  • The idea behind this is to ensure that adequate institutional credit reaches some of the vulnerable sectors of the economy, which otherwise may not be attractive for banks from the profitability point of view.
  • Revised PSL guidelines include following categories eligible for finance under priority sector:
  1. Start-ups (up to ₹50 crore)
  2. Loans for setting up Compressed Bio Gas (CBG) plants
  3. Loans to farmers for installation of solar power plants
  4. Higher credit limit up to Rs 5 crore for FPOs that market their produce at a pre-determined price.

 

NIDHI, CHIT FUNDS AND PONZI SCHEMES

 

 

 

Nidhi:

•          Nidhis are included in the definition of NBFCs.

•          They are companies registered under the Companies Act, 1956 and are regulated by the Ministry of Corporate Affairs.

•          Created for cultivating the habit of thrift and savings amongst its members.

•          It receives deposits from, and lends to its members only, for their mutual benefit.

•          It works on the principle of mutual benefits that are regulated by the Ministry of Corporate Affairs.

 

 

Chit Funds:

•          It is a type of saving scheme where a specified number of subscribers contribute payments in instalment over a defined period.

•          Concurrent List

•          RBI does not regulate the chit fund business and SEBI Act specifically excludes chit funds.

•          Chit fund business is regulated under the Central Chit Funds Act, 1982 and the rules framed under this Act by the various state governments for this purpose.

Ponzi Schemes:

 

•          These schemes promise high returns with little or no risk.

•          The Ponzi scheme generates returns for older investors by acquiring new investors. example – Sarada Scam.

 

ATM – AUTOMATED TELLER MACHINE
  • ATM enables withdrawal of cash and checking of balance without going to branch
  • ATM network operates on NPCI – NATIONAL FINANCIAL SWITCH.
  • National Financial Switch (NFS) is the largest network of shared Automated Teller Machines (ATMs) in India facilitating interoperable cash withdrawal, card to card funds transfer and interoperable cash deposit transactions etc.

 

TYPES OF ATM:

 

TYPES OF ATM FEATURES
Bank ATMs
  •          Owned, managed and installed by banks.
 

Brown label ATMs

  •          Owned by third party (a nonbanking firm).
  •         The concerned banks only handle part of the process that is ‘cash handling’ and ‘back – end server’ connectivity.
  •          They carry ‘logo’ of the bank which outsources their service
White label ATMs
  •          ‘Owned’ and ‘operated’ by a third party (a non – banking firm).
  •         They do not bear ‘logo’ of the banks they serve (that is why such a name).
  •          In place, they carry logo of the firm which own them.

 

DIGITAL PAYMENTS

 

 

Ratan Watal Committee recommendations for Digital Payments –

 

  •         Greater use of Aadhaar and mobile numbers for making digital payments as easy as cash.
  •          Inter – operable payments between bank and non – banks as well as within non – banks.
  •          Proposed to make digital payment regulation independent from the RBI.
 

 

 

 

 

 

 

 

 

 

 

 

NPCI – National Payment Corporation Of India

  •          NPCI, an umbrella organisation for operating retail payments and settlement systems in India,
  •          It is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.
  •         It is a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act, 2013).
  •         Various NPCL operated systems are-
  •          Bharat Interface for Money-Unified Payments Interface (BHIM-UPI):
  • BHIM is based on Unified Payment Interface (UPI) to facilitate e-payments directly through banks. It is an app. This is a system that powers multiple bank accounts into a single mobile application. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.
  •          Aadhaar enabled Payment System (AePS): It allows people to carry out financial transactions on a Micro-ATM by furnishing just their Aadhaar number and verifying it with the help of their fingerprint/iris scan.
  •          National Electronic Toll Collection (NETC): It helps in electronic toll collection at toll plazas using FASTag.
  •          National Automated Clearing House (NACH): It is a service offered by NPCI to banks which aims at facilitating interbank high volume, low value debit/credit transactions, which are repetitive and electronic in nature.
  •          Immediate Payment Service (IMPS): It offers an instant 24×7 interbank electronic fund transfer service through mobile phones.
  •          Bharat Bill Payment System (BBPS): Under BBPS, the Bharat Bill Payment Operating Units (BBPOUs) function as entities facilitating collection of repetitive payments for everyday utility services, such as, electricity, water, gas, telephone and Direct-to-Home (DTH).
  •          Rupay: The name, derived from the words ‘Rupee and ‘Payment’, emphasizes that it is India’s very own initiative for Card payments. It is an indigenously developed Payment System. It supports the issuance of debit, credit and prepaid cards by banks in India.
RUPAY
  •         It is an indigenously developed Payment System. It supports the issuance of debit, credit and prepaid cards by banks in India.

 

CRYPTO-CURRENCY IN INDIA
  • It is a digital/virtual currency that uses cryptography/decentralized technology.
  • They run on a distributed public ledger called Blockchain.
  • Examples are Bitcoin, Ethereum, Ripple, and Litecoin, Facebook-Libra.
  • Cryptocurrencies are not legal tender in India.
  • Dinesh Sharma committee recommended total ban on crypto-currencies.
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