» Banks in India was introduced by the British rulers, way back in the 17th century.
» Today Indian banks are considered among the best banks in the developing world and its attempts to emerge among the best in the world and is going on.
BANK & NON BANK INSTITUTIONS
A financial institution which accepts different forms of deposits and lends them to the prospective borrowers as well as allows the depositors to withdraw their money from the accounts by cheque is a bank.
Non - Banking financial Institution
If the financial institution has all the same functions but does not allow depositors to issue cheque and withdraw their money from deposits then it is a Non - bank institution.
NON - BANKING FINANCIAL COMPANIES (NBFCS)
A Non - banking institution which is a company and which has its Principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a Non - banking financial company.
Functions of NBFC
i) An NBFC can not accept demand deposits (Which are payable on demand), like the savings and current accounts.
ii) It is not a part of the payment and settlement system and as such cannot issue cheque to its customers, and
iii) Deposit insurance facility is not available for NBFC depositors unlike in case of banks.
» Under the RBI Act, 1934, the NBFCs have to get registered with the RBI
» The requirement of registration with RBI such as
i) Venture Capital Fund, merchant banking companies, stock broking companies register with SEBI.
ii) Insurance company holding a valid certificate of registration issued by IRDA.
iii) Nidhi Companies under the companies Act, 1956.
iv) Chit Companies under the Chit Funds Act, 1982
v) Housing Finance Companies regulated by National Housing Bank of the RBI
A company incorporated under the companies Act, 1956 and desirous of commencing business of the NBFC should have a minimum net owned fund (NOF) of Rs. 25 lakhs NBFCs registered with RBI have been reclassified (since 2006) as - The Asset Finance Company (AFC)
» Investment Company (IC) and the loan company (LC) Provisions for accepting deposits.
RESERVE BANK OF INDIA
The Reserve Bank of India (RBI) was setup in 1935 as a private bank with two extra functions, regulation and control of the banks in India and being the banker of the government.
* After nationalisation in 1949, it emerged as the central banking body of India.
* The governments have been handing over different function to the RBI which stand today as given below.
i) It is the issuing agency of the currency and coins other than rupee one currency and coin.
ii) Distributing agent for currency and coins issued by the government of India.
iii) Banker of the government.
iv) Bank of the banks/ Bank of last resort.
v) Announces the credit and monetary policy for the economy.
vi) Stabilising the rate of inflation.
vii) Stabilising the exchange rate of rupee.
viii) Keeper of the foreign currency reserves.
ix) Agent of the Government of India in the IMF.
x) Performing a variety of developmental and promotional functions under which it did set up institutions like IDBI, SIDBI, NABARD, NHB, etc.,
CREDIT AND MONETARY POLICY
The policy by which the desired level of money flow and its demand is regulated is known as the credit and monetary policy.
* All over the world it is announced by the central banking body of the country.
* As the RBI announces it in India.
* In India there has been a tradition of announcing it twice in a financial year.
* Before the starting of the busy and the slack seasons.
* There are many tools by which the RBI regulates the desired/ Required kind of the credit and monetary policy.
* CRR, SLR, Bank Rate, Repo Rate, Reverse Repo, PLR, Exim interest rate, small saving scheme's interest rates (SSS's), interest changes for the instruments of the money market, etc.,
The cash reserve ratio (CRR) is the ratio (fixed by the RBI) of the total deposits of a bank in India which is kept with the RBI in the form of cash.
» This was fixed to be in the range of 3 to 15 percent.
» At present it is 4 percent.
» Following the recommendations of the Narasimham Committee on the Financial System (1991) the government started two major changes concerning the CRR.
i) Reducing the CRR was set as the medium term objective and it was reduced gradually from its peak of 15 percent in 1992 to 4.5 percent by June 2003.
ii) Payment of interest by the RBI on the CRR money to the scheduled banks started in financial year 1999 - 2000.
» Though the RBI discontinued interest payments from mid - 2007.
SLR - Present SLR is 20.5%
The Statutory Liquidity Ratio (SLR) is the ratio fixed by the RBI of the total deposits of a bank which is to be maintained by the bank with itself in non - cash form prescribed by the government to be in the range of 25 to 40 percent.
The interest rate which the RBI charges on its long - term lending is known as the Bank Rate.
* The rate has direct impact on the long - term lending activities of the concerned lending bodies operating in the Indian Financial System.
The rate of interest the RBI charges from its clients on their short - term borrowing is the Repo rate in India, which at present 6.50 percent.
* In western economies it is known as the rate of discount.
* It is not called an interest rate but considered a discount on the dated government securities which are deposited by institution to borrow for the short term.
* The value of the securities is lost by the amount of the current repo rate.
* This rate functions as the benchmark rate for the inter-bank short-term market (i.e., call money market) in India.
* The repo rate was introduced in December 1992.
Reverse Repo Rate
It is the rate of interest the RBI pays to its clients who offer short-term loan to it.
* At present the rate is at 6.00 percent.
* It is reverse of the repo rate and this was started in November 1996 as part of Liquidity Adjustment Facility (LAF) by the RBI.
* It has a direct bearing on the interest rates charged by the banks and the financial institutions on their different forms of loans.
* This tool was utilised by the RBI in the wake of over money supply with the Indian banks and lower loan disbursal to serve twin purposes of cutting down banks losses and the prevailing interest rate.
MARGINAL STANDING FACILITY (MSF)
MSF is a new scheme announced by the RBI in its Monetary Policy, 2011-12 which came into effect from May, 2011.
* Under this scheme, banks can borrow over night upto 1 percent of their net demand and time liabilities (NDTL) from the RBI, at the interest rate 1 percent
* Now it stands at 6.75 percent
* The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate (i.e, reporate) of interest in comparison with the MSF.
* Banks can borrow through MSF on all working days except saturdays, between 3 : 30 and 4 : 30 pm in mumbai where RBI has it's headquarters.
* The minimum amount which can be accessed through MSF is Rs. 1 crore and in multiple of Rs. 1 crore.
* MSF represents the upper band of the interest corridor
Base rate is the interest rate below which scheduled commercial banks (SCBS) will lend no loans to its customers.
* It means it is like prime lending rate (PLR) and the benchmark prime lending rate (BPLR) of the past and is basically a floor rate of interest.
* It replaced the existing idea of BPLR on july 1, 2010.
* The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates.
* Now, all categories of loans are priced with reference to the base rate only, except
a) Differential rate of interest (DRI) loans
b) Loans to bank's own employees, and
c) Loans to bank's depositors against their own deposit
DEVELOPMENT OF BANKING IN INDIA
The development of banking industry in India has been intertwined with the story of its Nationalisation
* Once the Reserve Bank of India (RBI) was nationalised in 1949 and a central banking was in place, the government considered the nationalising of selected private banks in the country.
1. EMERGENCE OF THE SBI
The government of india, with the enactment of the SBI Act, 1955 partially nationalised the three imperial banks and named them the State Bank of India.
* The first public sector bank emerged in India.
* The RBI had purchased 92 percent of the share in this partial nationalisation.
* The government in a related move partially nationalised eight more private banks Act, 1959 and named them as the associates of the SBI.
* After merging of the State Bank of Bikaner and the state bank of jaipur as well.
* The RBI came up with the state bank of bikaner and jaipur.
* Now the SBI group has a total number of six banks.
* SBI being one and five of its associates.
2. EMERGENCE OF NATIONALISED BANKS
* With the help of the banking nationalisation Act, 1969, the government nationalised a total number of 20 private banks.
i) 14 banks with deposits were more than Rs. 50 crore of nationalised in July 1969, and
ii) 6 banks with deposits were more than Rs.200 crore of nationalised in April 1980.
* After the merger of the loss - making new bank of India with the Punjab National Bank (PNB) in september 1993.
* The total number of nationalised banks came down to 19.
* Today there are 27 public sector banks in India out of which 19 are nationalised.
* Three related developments allowed the further expansion of banking industry in the country.
i) In 1993 the SBI was allowed access to be the capital market with permission given to sell its share to the tune of 33 percent through SBI ( Amendment) Act, 1933.
* At present the government of India has 59.73 percent shares in the SBI.
ii) In 1994 the government allowed the nationalised banks to have access to the capital market with a ceiling of 33 percent sale of share through the banking companies (Amendment) Act, 1994.
iii) In 1994 itself the government allowed the opening of private banks in the country.
* The first private bank of the reform era was the UTI bank.
* Since then a few dozens Indian and foreign private banks have been opened in the country.
3. EMERGENCE OF THE RRBs
The Regional Rural Banks (RRBs) were first setup on October 2, 1975 with main aim to take banking services to the doorsteps of the rural masses specially in the remote areas with no access to banking services with twin duties to fulfill.
i) To provide credit to the weaker sections of the society at concessional rate of interest who previously depended on private money lending and
ii) To mobilise rural savings and channelise them for supporting productive activities in the rural areas.
Banking Sector Reforms
The government commenced a comprehensive reform process in the financial system in (1992 - 93).
* In December 1997 the Government did set up another committee on the banking sector reform under the chairmanship of M. Narasimham.
* The Narasimham Committee - II (popularly called by the Government of India) handed over its reports in April 1998 which included the following major suggestions.
i) Need for a stronger banking system for which merges of the PSBs and the Financial Institutions (AIFIs) were suggested
* Stronger banks and DFIs (Development Financial Institutions, i.e. AIFIs) to be merged while weaker and unviable ones to be closed.
ii) A - 3 tier banking structure was suggested after mergers
a) Tier - I to have 2 to 3 banks of international orientation.
b) Tier - II to have 8 to 10 banks of national orientation and
c) Tier - III to have large number of local banks.
iii) Higher norms of Capital - to - Risk - weighted Adequacy Ratio (CRAR) suggested - increased 10 percent.
iv) Budgetary recapitalisation of the PSBs is not viable and should be abandoned.
v) Legal Framework of loan recovery should be strengthened.
vi) Net NPAs for all banks suggested to be cut down to below 5 percent by 2000 and 3 percent by 2002.
vii) Rationalisation of branches and staffs of the PSBs suggested.
viii) Licensing to new Private Banks was suggested to continue with
ix) Banks board should be depoliticised under RBI supervision.
x) Board for Financial Regulation and Supervisions (BRFS) should be setup for the whole banking, financial and the NBFCs in India.
The Basel Accords (i.e. Basel I, II and now III) are set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to Capital Risk, Market Risk and Operational Risk.
* The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
* They are of paramount importance to the banking world and are presently implemented by over 100 countries across the world.
* The BIS accords were the outcome of a long - drawn - out initiative to strive for greater International uniformity in Prudential Capital Standards for bank's credit risk.
The objectives are
i) To strengthen the international banking system
ii) To promote convergence of national capital standards
iii) And to iron out competitive inequalities among banks across countries of the world.
* The first Basel Accord, known as Basel I was issued in 1988 and focuses on the capital adequacy of financial institutions.
* The second Basel Accord, known as Basel - II is to be fully implemented by 2015. it focuses on three main areas, including minimum capital requirements supervisory review and market discipline, which are known as the three pillars.
* The third Basel Accord, known as Basel III is a comprehensive set of reform measures aimed to strengthen the regulation, supervision and risk management of the banking sector, these measures aim to
i) Improve the banking sector's ability to absorb stocks arising from financial and economic stress, whatever the source be
ii) Improve risk management and governance and
iii) strengthen banks transparency and disclosures.
LIQUIDITY OF MONEY
As we move from M1 to M4 the liquidity of the money goes on decreasing and in the opposite direction, the liquidity increases.
In banking terminology, M1 is called narrow money as it is highly liquid and banks cannot run their lending programmes with this money.
The money component M3 is called broad money in the banking terminology. With this money (which lies with banks for a known period) banks run their lending programmes.
The level and supply of M3 is known as money supply.
* The growth rate of broad money (M3) i.e., money supply was not only lower than the indicative growth set by the Reserve Bank of India but it also witnessed continuous and sequential deceleration in the last 7 quarters.
* The source of broad money are net bank credit to the government and to the commercial sector.
The RBI is required to maintain a reserve equivalent of Rs. 200 crores in gold and foreign currency with itself, of which Rs. 115 crores should be in gold.
* This is being followed since 1957 and is known as the Minimum Reserve System (MRS).
The gross amount of the following six segments of money at any point of time is known as Reserve Money (RM) for the economy or the government.
i) RBI's net credit to the Government
ii) RBI's net credit to the Banks
iii) RBI's net credit to the commercial banks
iv) net forex reserve with the RBI
v) Government's currency liabilities to the public
vi) Net non - monetary liabilities of the RBI
RM = 1 + 2 + 3 + 4 + 5 + 6
NON - RESIDENT INDIAN DEPOSITS
Foreign Exchange Management (Deposit) Regulations, 2000 Permits Non - Resident Indian's (NRIs) to have deposit accounts with authorised dealers and with banks authorised by the Reserve Bank of India (RBI) which include
i) Foreign currency Non - Resident (Bank) Account [FCNR(B) Account]
ii) Non - Resident External Account (NRE Account)
iii) Non - Resident Ordinary Rupee Account (NRO Account)
FCNR(B) Accounts can be opened by NRIs and overseas corporate Bodies (OCBs) with an authorised dealer.
* The accounts can be opened in the form of term deposits.
* Deposits of funds are allowed in pound, sterling, US Dollar, Japanese Yen and Euro NRE accounts can be opened by NRIs and OCBs with authorised dealers and with banks authorised by RBI
* These can be in the form of savings, current, recurring or fixed deposit accounts.
NRO accounts can be opened by any person resident outside India with an authorised dealer or an authorised bank for collecting their funds from local bonafide transactions in Indian Rupees.
* These accounts can be in the form of current, saving, recurring or fixed deposit accounts.
* Repatriation of funds in FCNR(B) and NRE accounts is permitted. Hence, deposits in these accounts are included in India's external department outstanding
* Deposits in NRO accounts too are included in India's external debt.
GUIDELINES FOR LICENSING OF NEW BANKS
The RBI, released the Guideline for Licensing of New Banks in the Private sector key features of the guidelines are
i) Eligible Promoters: A private sector/ public sector/ NBFCs/ Entity/ group eligible to set up a bank through a wholly - owned non - operative Financial Holding company (NOFHC).
ii) Fit and proper criteria: A past record of sound credential, integrity and sound financial background with a successful track record of 10 year will be required.
iii) Corporate structure of the NOFHC: The NOFHC to be wholly - owned by the promoter/ promoter group Which shall hold the bank as well as all the other financial services entities of the group
iv) Minimum voting equity capital requirements for banks and share holding by NOFHC minimum paid - up voting equity capital for a bank shall be Rs. 5 billion
» The NOFHC shall initially hold a minimum of 40 percent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years.
v) Regulatory framework: the bank to be regulated by the relevant Acts/ Statutes/ Directives, issued by the RBI and other regulators.
vi) Foreign share holding in the bank: Foreign share holding upto 49 percent for the first 5 years after which it will be as per the extant policy
vii) Corporate governance of NOFHC: At least 50 percent of the Directors of the NOFHC should be independent directors.
viii) The prudential norms will be applied to NOFHC on similar lines as that of the bank.
ix) The bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC
x) The business plan should be realistic and viable and should address how the bank proposes to achieve financial inclusion.
xi) Existing NBFCs if considered eligible, may be permitted to promote a new bank or convert themselves into banks.
TWO NEW BANKS GET LICENSE
The RBI by early April, 2014 granted in - principle approval to two applicants, IDFC limited and Bandhan Financial services private limited, to set up banks.
* In principle approval granted will be valid for 18 months during which the applicants have to comply with the requirements and fulfill other conditions.
* Both are leading non - banking finance companies while IDFC deals in infrastructure finance, Bandhan is in micro finance business.
Chit fund (also known by their other names such as chitty, kuri, miscellaneous Non - Banking company) are essentially saving institutions.
* They are of various forms and lack any standardised form.
* Chit funds have regular members who make periodical subscriptions to the fund.
* The periodical collection is given to some member of the chit funds selected on the basis of previously agreed criterion.
* The beneficiary is selected usually on the basis of bids or by draw of lots or in same cases by auction or by tender.
* Chit funds are the Indian version of Rotating savings and credit Associations Found across the globe.
* Chit fund business is regulated under the central chit fund Act, 1982 and the Rules Framed under this Act by the various state government for this purpose.