Money
MONEY
Money is defined as any item that is widely used as a medium of trade, a gauge and reserve of value and a standard for installment payments. Money is an acknowledged, centralized, widely used means of trade that makes it easier to transact for goods and services.
Characteristics of Money
Legal tender: Any officially recognized payment method that can be used to satisfy financial obligations or pay off debts, whether private or public, is known as legal tender. Legal tender must be accepted by a creditor in order to satisfy a debt. Only the national entity with the necessary authority may issue legal tender.
Fungible currency: To be considered fungible, a currency must have equivalent quality and interchangeability among its units. It is deemed untrustworthy to conduct transactions with a non-fungible money.
Durable: Reusable money is strong enough to be used repeatedly. It shouldn’t be able to spoil quickly. Perishable goods and articles cannot be saved for use in future transactions and should not be utilized as cash. Thus, a currency needs to be strong in order to preserve its future-oriented use-value.
Easily recognizable: It is necessary to verify the money’s legitimacy with the recipients. To put it another way, the money needs to be accepted everywhere. Disagreement over the exchange terms results from unrecognized money or currency. Both the acceptance of the money system and public confidence are guaranteed by a recognized currency.
Stability: The value of a currency needs to be stable. To put it simply, the value of money should be rising or staying the same. A currency whose value is constantly fluctuating cannot be unstable. The acceptance and legitimacy of the monetary system may be harmed by an abrupt decline in value, which is a risk associated with unstable currencies.
Portable: The ability to easily move money from one location to another is a requirement for currency. To improve its utilization, the money needs to be divided into different amounts. If money is not transportable, its transportation costs may surpass its value. To ensure smooth transactions of different quantities of goods, money should therefore be able to be further divided
into smaller pieces. So, that it can be easily portable and transportable.
Functions of Money
Three categories apply to the functions of money:
Primary Functions
Secondary Functions
Contingent Functions
Primary Functions
• Money as a medium of exchange: Apart from near-money assets, this is the most significant and distinctive function of money. The purchasing and selling of products and services has been made much easier by the widespread use of money as a means of exchange. Time and energy are not lost when using money, even though it divides transaction into two parts: selling and buying.
• Money as a measure of value: Money serves as a yardstick to measure values of all other goods and services in terms of their money price. In the absence of money, the value of one commodity could be expressed only in terms of the other goods and services.
Secondary Functions
• Store of Value or Wealth: Functioning as a store of value, money offers an optimal and efficient means to accumulate wealth and transmit purchasing power across time horizons.
• Compared to the cumbersome and impractical nature of storing wealth in perishable or high-cost goods, money presents a superior solution.
• Its durability allows for indefinite storage. Additionally, money's universal acceptance guarantees its convertibility into goods and services at any given time.
• Finally, its portability simplifies and secures the act of saving for future use, unlike the challenges associated with storing physical goods.
• Standard of Deferred Payments: The principle of deferred payments establishes money as a universally accepted measure of debt, enabling the exchange of goods and services now with settlement at a future date. Daily commerce involves countless transactions where immediate payment doesn't occur. Money fosters such activity, facilitating capital formation and driving a nation's economic development. The significance of this monetary function lies in two key aspects:
• It catalyzes the emergence of financial institutions.
• It streamlines the processes of borrowing and lending.
• Transfer of Value: The money’s ability to store value is the source of this function. Value is transferred through money from one location or person to another. When you are a traveler, carrying cash with you makes it simple to make the essential purchases both at your destination and while traveling. The bank is another option for money transfers.
Contingent Functions
Distribution of national income: Distributing the nation’s produce to those who have contributed to its production is made easier with the use of money. People collaborate to generate things in modern society in roles such as laborers, capital owners, landlords, etc. Thus, the output that is produced has to be divided among all of them in the form of income (wages and salaries, interest, rent, etc.).
Basis of credit system: Promise to pay, or credit, is the foundation of the modern economy. All that exists as modern money coins, bills, bank drafts, etc. is really an assurance that something will be paid. Still, when banks use cash deposits to support the expansion of secondary deposits, this money also helps the banks generate more credit.
Maximisation of utility and profits: Money helps consumers in maximising their satisfaction. When money is allocated between different goods and services, the consumer maximizes his utility. Likewise, producers can calculate money cost of production and then decide the price that can result in maximum profits.
Money imparts liquidity and uniformity to assets: Being the most liquid asset, money makes it convenient to hold wealth in that form. Any asset can be purchased with money and money can also be obtained from any item.
Types of Money
Fiat Money: Unlike actual goods, fiat money is solely supported by directives from the government. The government’s declaration that it is an accepted form of payment, grants it the status of a medium of exchange.
Commodity Money: This money is not only a means of commerce; it is a real commodity with intrinsic value. Precious metals, diamonds, spices and even coffee can be used as commodities.
Fiduciary Money: This is non-government backed money that is based more on faith than on the inherent worth of the currency itself. This payment method is predicated on the belief or assurance that it would be acknowledged as payment.
Bank Money: This money is present in the economy as debt that commercial banks have produced. In order
to generate interest, banks lend out money to other customers based on the fiat money that those customers have deposited.
Crypto currency: A crypto currency, often known as digital currency, is a different kind of payment made feasible by encryption methods. Crypto currencies can be utilized as a virtual accounting system in addition to a means of commerce because they use encryption technology.
Money Supply in India
What is ‘Money Supply’
The total amount of money in circulation within an economy is known as the money supply. The money that is in circulation includes cash, banknotes, money in deposit accounts and other liquid assets. The evaluation and examination of the money supply aid economists and decision-makers in formulating new policies or changing current ones that involve raising or decreasing the money supply.
Since the value eventually influences the business cycle, which in turn affects the economy, it is significant. Every nation’s central bank releases data on the money supply on a regular basis, using the monetary aggregates that are determined by them. In India, RBI uses the monetary aggregates M0, M1, M2, M3, and M4.
Demand and Supply of Money
Demand for Money
What motivates people to want a particular amount of money is revealed by the demand for money. Since people need money to perform transactions, the value of those transactions will decide how much money they want to keep: the more transactions that must be completed, the more money will be wanted.
It should be obvious that an increase in income would result in a rise in the demand for money because the amount of transactions that can be made depends on income. Furthermore, the amount of money that people save in cash as opposed to depositing it in a bank where they would earn interest is also influenced by the interest rate.
Supply of Money
Money in a modern economy is made up of bank deposits and cash. There are numerous money measurements, depending on the kinds of bank deposits that are being taken into account. The mechanism that creates these consists of the commercial banking system and the central bank of the economy.
Measures of Money Supply in India
The Indian economy’s money supply is typically expressed as Reserve Money (M0): High-Powered Money,
Financial Base, Base Money, and so on. The following formula is used to determine M0:
M0 = Money in circulation + Bankers’ deposits + other
deposits with RBI
It is the economic foundation’s currency.
Narrow Money (M1) = Money in Circulation + Demand Deposits in the Banking System (Current and Savings Accounts) + Additional deposits with the Reserve Bank of India (RBI)
Narrow Money (M2) = Post Office Savings + Bank Savings Deposits + M1
Broad Money (M3) = M1 + Time Deposits made with
banks.
Broad Money (M4) = M3 + any deposits made at post
office savings banks.
Note: ‘Other’ deposits with RBI comprise mainly: deposits made by quasi-governmental organizations and other financial institutions, such as primary dealers; balances in the accounts of foreign governments and central banks; and accounts held by international organizations like the International Monetary Fund, among others. Apart from the aforementioned, M0 is an additional metric for gauging the money supply. Other names for the M0 include “monetary base,” “central bank money,” “high- powered money,” and “reserve money.”
Reserve Money (MO) ═ Currency in circulation+ Bankers’ deposits with the RBI+ ‘Other’ deposits with the RBI ═ Net RBI credit to the Government+ RBI credit to the commercial sector+ RBI’s claims on banks+ RBI’s net foreign assets+ Government’s currency liabilities to the public- RBI’s net non-monetary liabilities.
All money in circulation, whether it is through the banking system or the general public, is included in M0. MI, on the other hand, comprises publicly held cash. The public’s money holdings are far smaller than the amount held by the banking sector. Because of this, MO is much bigger than MI.
Components of Money Stock in India
The assets that function as a medium of trade would not fall under any strict definition of money. This ought to comprise currency C, which can be used straight to pay for goods and services, as well as bank-issued chequable deposits, which are used to pay for goods and services with checks.
M = C+DD+OD
C denotes currency in terms of coin and paper note
DD denotes Demand Deposits in Commercial Banks
OD denotes Deposits in public financial institutions, International financial institutions
CURRENCY (C)
Coins and paper money notes both are used as form of payment in India. Reserve Bank of India currency notes with a denomination of two rupees or more are considered paper money.
The Reserve Bank of India is responsible for them. Together with metallic coins of lower denomination, there are also little quantities of Government of India rupee one notes and coins. They directly represent a financial obligation of the Indian government. But the RBI, acting as a representative of the federal government, distributes them. The RBI accomplishes this by keeping government currency in stock and allowing it to be fully convertible into other national currencies and vice versa. They cannot, however, be exchanged for valuables like gold or silver, nor can they be combined with cash notes.
DEPOSITS (D)
The institutions supplying these deposits can be Banks, or Post offices, or Non-Bank Financial Intermediaries.
Current account deposits: The majority of current account deposits are utilized by businesspeople for their daily transactions; that are payable on demand, transferable by cheque, and do not collect interest.
Fixed Deposits and Recurring Deposits: When you make a fixed deposit with a bank, you might earn interest at a specific rate based on how long you keep the deposit there. Their status as near money restricts their use to a narrower meaning of money; they cannot be used as a form of payment or transferred. It is also not possible to check recurring deposits that accrue compound interest on the amount deposited into the account on a regular basis.
Saving Account Deposits: Individuals keep these deposits for transactional purposes; a portion or whole of the deposit is not chequable, and a specific amount cannot be withdrawn. On the amount that is not withdrawn, they receive interest at a rate.
Post Office Deposits: Post Office Deposits include fixed and recurring deposits as well as savings components. Bank savings accounts and Post Office savings accounts are comparable, except withdrawals are made via withdrawal slips, and there are limits on the quantity and frequency of withdrawals. They are less liquid than deposits at commercial banks, although they are more liquid than bank fixed deposits.
Classification of Bank Deposits by RBI
The RBI reclassifies current saving and fixed deposits of the banks into Demand and Time deposits.
Demand deposits
Deposits that can be transferred by check and withdrawn at any time. In other words, these are deposits in
commercial banks that can be withdrawn on demand, without prior notice. According to this criterion, deposits made into current accounts are classified as demand deposits, as is the part of deposits made into savings accounts that are taken out or utilized for transactions.
Time deposits
Deposits that accrue interest but are not taken out. Because of this, time deposits can be used to categorize both fixed and recurring deposits. When it comes to savings account deposits, the amount that is really taken out is categorized as a demand deposit; the amount that is left in the account and earns interest is categorized as a time deposit.
Net Demand Deposits
In a bank, demand deposits are the combination of interbank and public deposits. Still, we deduct interbank deposits from total deposits to obtain net demand deposits with banks, since we are only concerned with deposits made by the general public.
Liabilities of a Bank
The term “net demand and time liabilities” (NDTL) describes the entire amount of public deposits held by banks with other banks. All liabilities included in demand deposits are those that the bank must pay when called upon. They consist of demand drafts, current deposits, amounts owed on past-due fixed deposits and the demand liabilities section of savings bank accounts. Time deposits are made up of deposits that are not immediately withdrawable by the depositor but are instead returned upon maturity. Rather, in order to access the cash, he or she will need to wait until the lock-in term is ended. Examples include staff security deposits fixed deposits, and the time liabilities part of savings bank deposits. A bank’s call money market borrowings, certificate of deposit and investment deposits in other banks are examples of its obligations.
Money Multiplier
A money multiplier is a phenomena where money is created in the economy through the development of credit. Put another way, a money multiplier is the power a central bank has to control the money supply by changing the minimum reserve rates that must be maintained.
The Money Multiplier, also known as the Deposit Multiplier, calculates how much money banks may make in deposits for each unit of money they have in reserve. The Money Multiplier has a significant impact on the financial system of the economy since it assists the government in determining the appropriate level and mode of economic stimulation each time it is necessary.
There is an inverse link between the Legal Reserve Ratio (LRR) and the money multiplier. The term “LRR” describes the quantity of deposits that banks must always
hold on hand as reserves in order to cover unforeseen costs and uphold public confidence. The banks are needed to have two different kinds of reserves:
The reserves that banks are required to hold with the central bank are known as the cash reserves ratio, or CRR.
The Statutory Liquidity Ratio (SLR) indicates the quantity of liquid assets that banks must have on hand as reserves.
In the monetary economy, the Central Bank can effectively regulate the creation of money through the use of the basic money multiplier formula, which serves as a comprehensive instrument for money supply calculations.
Money Multiplier Formula
Money multiplier = 1 LRR Where, LRR = Legal Reserve Ratio
Money Multiplier Equation
Money Multiplier = in Total Money Supply in the
Monetary Base
The credit multiplier formula is another name for it. A lower money multiplier results from a greater loan-to- ratio (LRR) because commercial banks must maintain larger reserves, which reduces the amount of money they can lend to the general public.
Money Creation by Banking System
Banks are able to lend because they do not anticipate that every depositor will take their entire balance out at once. Every time a bank makes a loan to an individual, a new account is created in that individual’s name. Consequently, the money supply rises to include both new and old deposits (plus currency.)
Let’s use an illustration. Let us assume that the nation is home to a single bank. For this bank, let’s create a fictitious balance sheet. Any company’s assets and liabilities are listed on its balance sheet. Traditionally, the firm’s liabilities are listed on the right side while its assets are listed on the left.
What a company has or is entitled to collect from third parties are its assets. A bank’s assets consist of loans made to the general public, in addition to buildings, furniture, etc. This is the person’s right to recoup the Rs 100 that the bank claims when it extends a loan to them. Reserves constitute yet another asset owned by a bank. The Reserve Bank of India (RBI), the nation’s central bank, accepts deposits from commercial banks in exchange for cash. The RBI issues bonds and treasury bills, among other financial instruments, to supplement cash in these reserves. The deposits we hold with banks are comparable to reserves.
We maintain deposits, which are our assets that we are free to take out. Similar to this, commercial banks like State Bank of India (SBI) maintain what are known as Reserves deposits with the RBI.
Assets = Reserves + Loans
Any company’s debts or what it owes other people are its liabilities. A bank’s primary source of liabilities are the deposits that customers make with it.
Liabilities = Deposits
According to the accounting rule, the account’s two sides must balance. Therefore, assets are listed as net worth on the right-hand side if they exceed obligations.
Net Worth = Assets – Liabilities
Balance Sheet of a Fictional Bank
Assume that our fictitious bank has liabilities (deposits) of Rs 100 at the beginning. This can be as a result of Ms. Fernandes making a Rs. 100 bank deposit. Permit this bank to deposit the same amount as reserves with the RBI.
Balance Sheet of a Bank
The entire money supply in the economy will be equal to Rs 100 if we assume that there is no money in circulation.
M1= Currency + Deposits = 0 +100 =100
Limits to Credit Creation
Let’s say Mr. Mathew visits this bank to apply for a Rs. 500 loan. The total quantity of bank deposits and, thus, the money supply will increase if the loan is approved and Mr. Mathew deposits the loan amount in the bank. It appears that the banks are able to continue printing as much money as they choose. However, the amount of money or credit that banks may create is limited. The Central Bank makes this determination (RBI). Every bank is required to maintain a specific percentage of deposits as reserves, as determined by the RBI. In order to prevent any bank from “over lending,” this is done. The banks are required by law to comply with this requirement. This is referred to as the “Reserve Ratio,” “Cash Reserve Ratio (CRR),” or “Required Reserve Ratio”.
Cash Reserve Ratio (CRR) = Percentage of deposits that a bank is required to retain on hand as cash reserves.
Banks are required to keep a portion of their reserves in liquid assets Commercial banks can maintain their SLR in the forms of gold, liquid cash or any type of securities for the foreseeable future in addition to the CRR. This ratio is known as the Statutory Liquidity Ratio (SLR).
One term for such a system is the Fractional Reserve Banking System. That is to say, just a tiny percentage of bank deposits are backed by actual cash on hand and are therefore withdrawable. The fractional reserve banking system serves as the basis for expanding credit and the money supply in the economy. Since most depositors do not take their entire balance out at once and since outflows of funds are compensated by inflows of funds, banks only need to keep a fraction of their deposits as cash. It makes credit possible for expansion.
Banking Sector in India
BANKING SECTOR IN INDIA
History of Indian Banking and Reforms
• The banking system has existed in many different forms for almost as long as civilization, and India’s financial system is no different. This business has seen many changes over the ages, from the development of technology to the diversification of financial services and goods. At the moment, Commercial Banks, Small Finance Banks, Regional Rural Banks and Cooperative Banks make up India’s banking sector. Banks that operate within the borders of India are subject to the Banking Regulation Act 1949. India’s banking history can be roughly categorized as follows:
• Pre-independence Phase (1770-1947)
• Post-independence Phase (1947-till date):
• Pre-nationalisation Phase (1947-1969)
• Post-nationalisation Phase (1969-1991)
• Liberalization Phase (1991-till date)
The Pre-independence Phase (1770-1947)
• The Bank of Hindustan, the country’s first bank, was founded in 1770 in Calcutta, the then-capital of India. This marked the beginning of the structured banking industry in India, which began more than a century before the country gained its freedom. After eventually failing, it was liquidated in 1832. Following this, a number of banks that had been founded during the pre- independence era, such as the General Bank of India (1786–1791) and the Oudh Commercial Bank (1881–1958), also failed to survive for very long.
• The East India Company founded the Bank of Bengal, Bank of Bombay, and Bank of Madras in the early to mid-1800s; these banks were together referred to as the Presidential Banks. In 1921, they amalgamated to become the Imperial Bank of India. Later, in 1955, it was nationalized and given the name State Bank of India (SBI). When the SBI assumed control of seven subsidiary banks in 1959, it became the largest Public Sector Bank (PSB) in India.
• Inspired by the Swadeshi movement, a number of prominent local politicians and merchants opened banks specifically for the Indian community between 1906 and 1911. Many of these are still in use.
• The establishment of an Indian central bank was suggested in 1926 by the Royal Commission on Indian Currency and Finance. A law to put this into effect was introduced in 1927 but was later withdrawn because of disagreements. A Reserve Bank was suggested in the 1933 White Paper on Indian Constitutional Reforms, and a bill for the same was presented in the Legislative Assembly. The bill was passed in 1934 and was endorsed by the Governor General.
• On April 1, 1935, the Reserve Bank of India opened for business. The Reserve Bank of India Act, 1934 (Section II of 1934) established the legal framework that governs the RBI’s operations.
The Post-independence Phase (1947-1991)
• It is among the most significant periods in Indian banking history. The Indian banking sector saw further development after independence when the Government of India (GOI) decided to implement a mixed economy in 1948, involving significant market intervention to boost the economy. After being nationalized in 1949, the 1935-founded Reserve Bank of India gained the authority to oversee, manage and inspect all Indian banks.
• The Indian government acknowledged that a number of communities were being financially excluded in 1975. It established banking entities with specialized roles between 1982 and 1990 to keep pace with the development of financial services in India, such as NABARD (1982), EXIM (1982), National Housing Board, and SIDBI.
Nationalisation in 1969
• By the 1960s, the RBI had grown to be a significant employer and the Indian banking sector had started to contribute significantly to the country’s economic growth. However, the majority of banks remained privately owned, with the exception being SBI.
• In 1969, the 14 biggest commercial banks in India were nationalized by the Government of India through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance.
Nationalisation in 1980
• Six additional commercial banks were included in the second wave of nationalisation that began in 1980 and went on to play a significant role in Indian banking history.
Liberalisation in 1991
• The Government of India (GOI) implemented economic liberalisation in 1991, resulting in a significant shift in its economic policies to increase the involvement of private and foreign investments. The RBI approved ten private banks in India. Among the well-known brands that have survived this liberalization are ICICI, Axis Bank and HDFC.
• During this time, there were also the following noteworthy advancements and changes:
International banks that have branches in India include Bank of America, HSBC and Citibank.
There was a halt to the nationalization of banks.
Payments banks came into existence.
Small finance banks were allowed to open branches all over India.
Banks began to digitalise transactions and various other related banking operations.
Reasons Why Banks were Nationalised in India
• To Energise Priority Sectors: The number of bank failures was rapidly increasing; from 1947 to 1955, 361 institutions failed or almost 40 banks annually. Clients lost their deposits and had no possibility of getting them back.
• A Neglected Agricultural Sector: Banks disregarded the rural area in favor of big firms and industries. Nationalization was linked with promises of support for the agricultural sector.
• Expansion of Branches: Nationalization made it easier for new branches to open, ensuring that banks were fully covered across the nation.
• Mobilisation of Savings: Nationalising the banks would allow people more access to banks and encourage them to save, injecting additional revenue into a cash-strapped economy.
• Economic and Political Factors: The economy had been severely impacted by the two conflicts in 1962 and 1965. The economy would benefit from a rise in deposits resulting from the nationalisation of Indian banks.
The Positive Effects of Nationalisation:
• The following are some of the ways that nationalization helped the economy:
• Increased Savings: With the creation of new branches, savings increased dramatically. Gross domestic savings nearly doubled throughout the 1970s as the country’s income increased.
• Improved Efficiency: More accountability increased the efficiency of banks. Additionally, it raised public trust.
• Empowering SSIs: An increase in small-scale industries (SSIs) led to a commensurate improvement in the economy.
• Financial Inclusion: The Indian economy’s and the banking industry’s overall statistics demonstrated a noticeable improvement. It was based on metrics such as the percentage of bank deposits to GDP, the gross savings rate, the percentage of advances to GDP, and the gross investment rate between 1969 and 1991.
• Better Outreach: The banking industry was no longer confined to large cities. In the most remote regions of the nation, branches were opened.
• A Surge in Public Deposits: Expanded banking networks facilitated the growth of exports, small businesses
and agriculture. An equivalent rise in public deposits coincided with this growth.
• Elevating the Green Revolution: Support for the agricultural sector from the recently nationalized banks contributed to the Green Revolution, one of the highest priorities on the government’s agenda.
Drawbacks of Nationalisation
• Socio-Economic Challenges: The banks were unable to assist the grassroots levels of society with sufficient funding or to completely eradicate poverty. In India’s rural areas, this was especially clear.
• Competition from Private Banks: Public sector banks never achieved performance levels higher than private banks, even with government support and additional stimulus from rising deposits.
• Failure to Achieve Financial Inclusion: The primary goal of nationalizing banks was financial inclusion, although it was not sufficiently facilitated.
Consolidation among Public Sector Banks
• India’s banking sector is currently developing, with a variety of bank types catering to various economic sectors. A number of new bank types and their introduction into the system in recent years have emerged, catering to specific societal segments. However, Public Sector Banks (PSBs), which still hold a market share of more than 70% of the banking system’s assets, continue to dominate the banking industry.
• There has long been a recommendation that PSBs should combine. In 1991, the Narasimhan Committee Report (NC-I) proposed a three-tier banking system in India, involving the creation of three major global banks, eight to ten national banks, and several regional and local banks.
• The suggestions on NC-I were also reaffirmed in the 1998 Narasimhan Committee Report (NC-II).
Current Imperatives
• Currently, a number of consistent criteria suggest that the Indian banking sector is ready for consolidation. Following is the order in which they are listed:
• The necessity for consolidation is particularly apparent at this time since, despite the fact that the Indian economy is the fifth largest in the world, State Bank of India, our top bank, is only ranked 55th in the world and is the only bank in the global top 100.
• Additionally, a larger bank is thought to be less dangerous than a smaller bank because its portfolio will be more diversified, resulting in less volatility in its profitability. As a result, a bigger bank could be able to get a better credit rating than a smaller one.
• The need for large-scale loans will rise as Indian businesses expand and become more global in scope.
In order to accommodate the increased demand for loans, banks must likewise expand in size. It will be necessary for the banking sector to increase its ability to lend to bigger businesses and projects.
Consolidation in the Indian banking system in past
• Bank consolidation in India has taken two forms. Banks have voluntarily merged, which is the most notable example of the desire for operational efficiency, growth, and synergy. An instance of this type of consolidation is the union of Kotak Mahindra Bank and ING Vysya Bank.
• Under Section 44A of the Banking Regulation Act of 1949, the Reserve Bank is authorized to accept these voluntary mergers.
• A weak bank’s resolution has been the focus of the other kind of bank merger.
• The Reserve Bank is authorized by Section 45 of the Banking Regulation Act 1949 to devise a plan for the merger of one bank with another, provided that it serves the interests of depositors and the banking system as a whole.
• One example of this type of merger was the 2004 combination of Global Trust Bank and Oriental Bank of Commerce.
• Vijaya and Dena banks were recently bought by Bank of Baroda, and Oriental Bank of Commerce and United Bank of India was recently acquired by Punjab National Bank. Andhra Bank and Corporation Bank were bought by and Union Bank of India.
Caveats in Consolidation of PSBs
• The banking sector and the economy as a whole do not always benefit from enormous sizes. Up to a certain threshold size, the benefits of size are evident. Any expansion above this point could be detrimental to the economy. Significant moral hazard costs for the system as a whole could also result from the existence of excessively large banks.
• PSBs have not been doing well collectively during the past few years. The amount of non-performing assets (NPAs) has increased significantly.
• It must be made sure that bank mergers are not viewed as a temporary solution to issues that particular PSBs are experiencing. Only a strategic strategy driven by synergy and producing value for both institutions may make a merger beneficial. If a weak bank and a strong bank merge, the resultant entity may become weak if the merger procedure is not managed correctly.
Consolidation beyond Mergers
Most of the time, we presume that consolidation means acquisitions and mergers. This isn’t need to be the case. The merging of enterprises is an additional form consolidation. An entity consolidation is not the same as this.
• In this kind of bank consolidation, a bank voluntarily chooses to participate in specific business ventures and exits or sells some business ventures.
• Our PSBs can learn from this model and assess if they can all decide to be unique banks in their respective markets or areas of expertise, or if they can all decide to be universal banks.
• For example, a few PSBs are primarily active, strong and knowledgeable in the agricultural and rural markets. A few PSBs primarily serve the SME market with their assets and reach. Small finance banks are an option available to these PSBs. By doing this, they may preserve capital and avoid wasting their energy in the extremely intricate and specialized corporate and project finance sector.
Reserve Bank of India
RESERVE BANK OF INDIA
The Hilton Young Commission’s recommendations served as the foundation for the establishment of RBI in 1935 On April 1, the Reserve Bank, a private shareholders’ bank with a paid-up capital of rupees five crores (rupees fifty million), officially opened for business as India’s central bank.
The purpose of the Reserve Bank of India’s establishment was to:
• Control the issuance of banknotes
• Retain reserves to ensure monetary stability and
• The Bank took over to begin its operations with the intention of using the country’s currency and credit systems for its own advantage.
• The role of the Controller of Currency in the government and government account management, public debt, and the Imperial Bank of India.
The Issue Department formally assumed the responsibilities of the currency offices that were previously located in Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore, and Cawnpore (Kanpur). Banking Department offices were established in Calcutta, Bombay, Madras, Delhi, and Rangoon.
Despite Burma’s (Myanmar) 1937 split from the Indian Union, the Reserve Bank of Burma remained the country’s central bank until the Japanese occupation of Burma and then until April 1947.
Until June 1948, when the State Bank of Pakistan began its operations, the Reserve Bank served as Pakistan's central bank after the partition of India.
After being founded in Kolkata at first, the Reserve Bank’s Central Office was permanently relocated to Mumbai in 1937. The governor sits at the Central Office, which also serves as the policy-making hub.
The Reserve Bank of India is wholly owned by the Indian government, despite having been privately owned until 1949 when it was nationalized.
Some facts about RBI
In India, it is the only authority with the power to print banknotes.
• First governor of the RBI from 1935 to 1937 was Sir
Osborne Smith.
• C.D. Deshmukh (1943–1949) was the first Indian appointed governor of the Reserve Bank of India.
• The only Prime Minister to have served as RBI Governor (1982–1985) is Man Mohan Singh.
• RBI is a part of the International Monetary Fund.
• A panther and palm tree are the emblem of RBI.
Central Board
• There is a central board of directors that oversees the Reserve Bank. Following the Reserve Bank of India Act, the Indian government appoints the board members:
• Nominated or appointed for a four-year term
• Constitution:
• Official Directors
• Full-time: The Governor and four Deputy Governors.
• Non-Official Directors
• Nominated by Government: Ten directors representing several industries and two Finance Ministry Representative
• Others: four Directors - one each from four local boards (Mumbai, Kolkata, Chennai and Delhi).
Organization & Management
• The Reserve Bank of India serves as the nation’s central bank and is the hub of the financial and monetary system in India.
• In contrast to other central banks like the Federal Reserve Board of the United States, the Bank of England, and the Riksbank of Sweden, it is relatively new. It is conceivably the most established central bank among the developing nations.
• It started operating on April 1, 1935, in accordance with the RBI Act 1934. Up until January 1949, the institution was privately held. However, in accordance with the RBI (Transfer to Public Ownership) Act of 1948, it afterwards became a State-owned institution.
• This Act gives the Central Government the authority to give the Bank any recommendations that they deem necessary in the public interest, after consulting with the Bank’s Governor. Additionally, the Central Government employs the Bank’s Governor as well as each of the Deputy Governors.
• The governor, four deputy governors and fifteen directors appointed by the central government make up the central board, which has ultimate authority over the bank.
RELATIONSHIP BETWEEN RESERVE BANK OF INDIA AND GOVERNMENT
Role of Union government
• Throughout history three levers have been used by the Union government to exert control on the RBI:
• The RBI Act, which was passed during the colonial era and gives the government broad authority, is the first lever. For example, the RBI Act’s Section 30 gives the government the authority to “supersede” the RBI central board. The central board’s authority to enact regulations is limited by Section 58 and can only be exercised with the “prior sanction” of the federal government. As per Section 7 (1), the Union government is authorized to occasionally provide the central bank with orders that it deems essential in the public interest, following consultation with the bank’s governor.
• The choice of governors and deputy governors to lead RBI is the second lever of control. According to an examination of the RBI’s annual reports, seven out of ten governors since the country’s independence have previously held positions in the finance ministry.
• The central board, the top decision-making body of the RBI, and its personnel make up the third lever of government control.
RBI and its Functions
• Both traditional central bank duties and developmental and promotional duties are carried out by the RBI.
Traditional Functions
• The Bank of England served as the blueprint for the RBI’s establishment. As such, it was given the responsibility of carrying out every task that the Bank of England had been handling. These duties are typically referred to as central bank traditional duties.
Issue of Currency Notes
• With the exception of one rupee note and coins with lower denominations, the RBI is the only entity with the exclusive right, power, and monopoly to print money.
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These banknotes, which were issued by the RBI, are legitimate money. At the moment, there are denominations of Rs. 2, 5, 10, 20, 50, 100, and 500.
• The RBI has the authority to exchange these banknotes for other denominations in addition to issuing and withdrawing them.
• It issues these notes in exchange for foreign assets, rupee coins, gold bullion, exchange bills, promissory notes, and government of India bonds.
Banker to other Banks
• The RBI, as the country's top financial organization, is required to supervise, assist, and give orders to other commercial banks.
• The RBI has the authority to regulate bank reserve volumes and to permit other banks to extend credit in that ratio.
• A portion of each commercial bank’s reserves must be kept with the RBI, the bank’s parent. Similar to this, when these banks require money urgently, they apply to the RBI. As a result, it is known as the lender of last resort.
Banker to the Government
• As the highest monitoring authority, the RBI is required to act as a representative of both the federal and state governments.
• It performs a number of banking duties, including taking deposits, filing taxes, and making payments on behalf of the government.
• Even internationally, it serves as the government’s representative.
• It keeps up government accounting and gives the government financial guidance.
• On the government’s behalf, it oversees the management of public debt and keeps foreign currency reserves. When the government is in financial trouble, it offers an overdraft facility to it.
Exchange Rate Management
• It is one of the RBI’s primary responsibilities.
• The preparation of domestic measures in that direction is necessary to ensure the stability of the rupee’s foreign value. Additionally, it needs to create and carry out a foreign exchange rate policy that will aid in achieving exchange rate stability.
• It has to bring demand and supply of the foreign currency (the US dollar) near to one another in order to preserve exchange rate stability.
Credit Control Function
• In the nation, credit is extended by commercial banks in response to economic demand. However, this credit expansion will send the economy into inflationary cycles
if it is uncontrolled or unregulated. On the other side, when credit creation falls short of the necessary level, the economy’s ability to grow is hampered.
• In its capacity as the country’s central bank, the RBI has to pursue both growth and price stability. Thus, it employs a variety of credit control instruments to limit the ability of commercial banks to create credit.
Supervisory Function
• The Reserve Bank of India (RBI) has been granted extensive authority to oversee the nation’s banking sector. The following list includes a few of its supervisory duties:
• Granting license to banks: Banks are granted licenses by the RBI to conduct business. A license is also granted to start new branches, extension counts, and even to close down already-existing branches.
• Bank Inspection: Banks that follow instructions and operate sensibly without taking unnecessary risks are granted licenses by the RBI. It may also request monthly data on certain aspects of assets and liabilities from banks.
• Control over NBFIs: The implementation of monetary policy has no effect on non-bank financial institutions. That being said, the RBI is entitled to periodically provide directives to the NBFIs concerning their operations. It can regulate the NBFIs by routine inspection.
• Implementation of the Deposit Insurance Scheme: To safeguard small depositors’ money, the RBI established the Deposit Insurance Guarantee Corporation. In the event of a bank failure, the RBI works to implement the Deposit Insurance Scheme.
Developmental / Promotional Functions of RBI
• Central banks, particularly those in developing nations like India, have a variety of duties in addition to the standard traditional ones. These are function-specific to each country and are subject to change based on national needs. Since its founding, the RBI has served as a promoter of the financial system. Below are some of the RBI’s primary development functions.
Development of the Financial System
• The financial system is made up of markets, financial instruments, and financial institutions.
• The formation of major banking and non-banking institutions has been promoted by the RBI in order to meet the credit needs of various economic sectors.
Development of Agriculture
• The RBI has to pay particular attention to the credit requirements of agriculture and related industries in an agrarian economy such as India.
• By expanding the flow of credit to this industry, it has effectively provided a service in this direction.
• Previously, the National Bank for Agriculture and Rural Development (NABARD), Regional Rural Banks (RRBs), and the Agriculture Refinance and Development Corporation (ARDC) handled the credit.
Provision of Industrial Finance
• Accelerating economic development requires rapid industrial growth. It is crucial that small, medium, and big businesses have access to sufficient and timely funding in this regard.
• The RBI has always played a key role in this area, helping to establish unique financial institutions like ICICI Ltd., IDBI, SIDBI, and EXIM BANK, among others.
Provisions of Training
• The RBI has always made an effort to give banking industry employees the necessary training.
• The RBI has established training institutions for bankers in several locations. A few to name include the College of Agriculture Banking (CAB), Bankers Staff College (BSC), and National Institute of Bank Management (NIBM).
Collection of Data
• The RBI, which is the nation’s supreme financial body, collects, compiles, and disseminates statistical data on a variety of subjects.
• Interest rates, inflation, savings, investments, and other factors are included. Researchers and policy makers find great value in this data.
Publication of the Reports
• The Reserve Bank maintains a distinct publication section. This department gathers and disseminates information on a number of economic sectors.
• The RBI releases the reports and bulletins on a regular basis. Reports on the Trend and Progress of Commercial Banks in India, RBI Annual Report, RBI Weekly Reports, and so on are included.
• Additionally, this information is provided to the public at a reduced cost.
Promotion of Banking Habits
• The RBI, as the highest authority, consistently endeavors to encourage the nation’s banking practices. It took steps to expand the banking network and institutionalized savings.
• It established numerous establishments, including the Deposit Insurance Corporation (1962), IDBI (1964), NABARD (1982), NHB (1988), and so forth.
• These groups help people form and increase their banking habits.
Promotion of Export through Refinance
• The RBI consistently works to promote the resources available for financing international trade, particularly Indian exports.
• Refinancing helps the Export Credit Guarantee Corporation of India (ECGC) and the Export-Import Bank of India (EXIM Bank India) with their export- oriented lending.
RBI’s Sources of Income
• The RBI generates revenue in a number of ways. One of the RBI’s main sources of revenue is open market operations, which involve central banks buying and selling bonds on the open market to control the amount of money in the economy.
• The RBI may benefit from favorable changes in bond prices in addition to the interest it receives from these bonds.
• The RBI’s transactions in the foreign exchange market could also boost the bank’s earnings.
• To make money, the RBI for example, may buy dollars at a discount and then sell them for a premium later on.
• It should be highlighted, nevertheless, that the RBI’s main goal is to maintain the value of the rupee rather than make money like commercial banks do. Therefore, its frequent operations to form monetary policy result in profit and loss as a byproduct.
Economic Capital Framework of the Reserve Bank of India
• The RBI Act of 1934’s Section 47 requires that the right amount of profit distribution and risk provisions be made. The economic capital framework offers a technique for calculating these amounts. This clause mandates that the central bank, after deducting bad and doubtful debts, asset depreciation and employee contributions, deliver the remaining portion of its profits to the central government.
• In November 2018, the Reserve Bank of India (RBI) established a committee headed by Dr. Bimal Jalan to examine the existing framework for economic capital, after consulting with the national government. The current framework for economic capital was created between 2014 and 2015, and it became effective in 2016 and 2017
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Monetary Policy
MONETARY POLICY
One tool for achieving the goals of macroeconomic policy is monetary policy. The central bank, such as the Reserve Bank of India in India, is in charge of implementing monetary policy. As the policy can be implemented without the consent of Parliament, it is entirely discretionary.
The market is informed about interest rates and credit availability by the central bank. The money supply and credit availability, interest rate levels and structures, and currency rates are the main instruments that the central bank monitors.
The main goal is to guarantee price stability while taking
a nation’s total economic development into consideration. It contributes to sustained economic development by fostering favorable conditions for businesses and households. Other goals can include preserving financial stability, protecting the balance of foreign payments and maintaining exchange rate stability.
• The following are the primary goals of monetary policy that appropriately considers short or medium-term economic development:
• To maintain full employment and economic stability.
• To achieve price stability
• To promote economic growth
Types of Monetary Policy
• Depending on the degree of economic growth or stagnation, monetary policies are classified as either contractionary or expansionary.
• Contractionary: Acontractionary policy increases interest rates and limits the amount of money in circulation to prevent inflation, which is the rising costs of goods and services in an economy that reduce the purchasing power of money and obstruct economic growth.
• Expansionary: Economic activity increases when there is a slowdown or recession thanks to an expansionary policy. Interest rates are lowered, which makes borrowing and spending by consumers more appealing while making saving less appealing.
Instruments of Monetary Policy
• The two categories into which it can be separated are qualitative and quantitative.
Quantitative Methods
• The Reserve Bank of India (RBI) uses what are known as general tools, which are also quantitative instruments. These instruments are associated with the amount and volume of money, as their name implies. These tools are intended to regulate the total amount of bank credit available to the economy. These are indirect tools that are used to affect the amount of credit available to the economy.
• Bank Rate Policy: The Bank Rate is the interest rate charged by the RBI on its long-term loans. Clients who borrow through this channel include the Government of India, state governments, banks, financial institutions, cooperative banks and NBFCs, among others. This rate directly influences the long-term lending activities of financial entities within the Indian financial system. In February 2012, the RBI adjusted this rate to align it with the Marginal Standing Facility (MSF). In order to prevent commercial banks from borrowing as much money and to keep inflation under control, the RBI raises bank interest rates when it detects signs of growing inflation. In order to discourage people from borrowing
money and eventually aid in the management of inflation, commercial banks also raise the interest rates they charge to the general public and commercial businesses.
• Conversely, when the RBI lowers bank rates, commercial banks will be able to borrow money more easily and at a lower cost. This will further encourage borrowers and business owners by enabling commercial banks to lend money to them at a reduced interest rate.
• Liquidity Adjustment Facility: An instrument employed in monetary policy, mainly by the Reserve Bank of India (RBI), is the liquidity adjustment facility (LAF), which permits banks to lend money to the RBI through reverse repo agreements or to borrow money through repurchase agreements (Repos). In response to the Narasimham Committee on Banking Sector Reforms (1998), the RBI implemented the LAF. This structure effectively manages the needs for liquidity while maintaining the basic market stability.
• Repo Rate: In order to ensure liquidity, commercial banks sell their securities to the RBI at a rate known as the repo rate. When there is a funding shortfall or when there are legal requirements, commercial banks sell their securities. It’s one of the RBI’s primary tools for controlling inflation.
• Reverse Repo Rate: When there is excess liquidity in the market, the RBI may borrow money from commercial banks. In that scenario, the interest that commercial banks receive on their assets held by the RBI helps them. The RBI raises the reverse repo rate in response to increased national inflation to entice banks to deposit more money with it and enhance the RBI’s earnings on excess reserves.
• The Marginal Standing Facility (MSF) is a tool used by central banks, such as the Reserve Bank of India (RBI), to facilitate overnight borrowing by scheduled commercial banks against government securities that have been approved. When banks experience a lack of liquidity, this method enables them to borrow more money typically over the minimum amounts required by law. The repo rate, which banks obtain by selling their government securities to the central bank, is marginally lower than the MSF rate. The term “spread” refers to the variation between the MSF rate and the repo rate. When banks are unable to obtain the emergency cash they require from other sources to address their short-term liquidity needs, the MSF acts as a safety valve. Banks can borrow money through the MSF window, but they have to pay back the central bank the following working day after posting appropriate government securities as collateral.
• Reserve Requirements: A minimum quantity of reserve assets, such as reserve cash, must be maintained by commercial banks. Their overall cash assets make up a percentage of these cash reserves. The RBI also maintains a fixed level of cash reserves in order to preserve liquidity and regulate credit in the economy. The terms SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio) refer to these reserve ratios.
CRR
• The Reserve Bank of India requires the maintenance of the Cash Reserve Ratio (CRR), a mandatory reserve.
• All banks are obliged to keep a certain amount of cash balance with the RBI, representing their net demand and time liabilities.
• The CRR is the proportion of total deposits that a commercial bank has to maintain with the RBI as cash reserves.
• The money held by the RBI is not permitted to be used by the banks for economic and commercial purpose.
• It is a mechanism that the central bank uses to manage the nation’s money supply and liquidity levels.
• Thus, the RBI would raise the CRR rate if it aims to lower the money supply in the market, while it will drop the CRR rate if it intends to enhance the money supply in the economy.
Open Market Operations (OMO): Open market operations are the long and short-term sales and purchases of securities by the RBI in the money market. In the money market, securities sold by the RBI are purchased by private, commercial and even individual banks. As a result, as money moves from commercial banks to the RBI, the amount of money in circulation decreases. Conversely, commercial banks that sell their securities to RBI get paid the same amount they originally placed in RBI. This is because RBI purchases securities from commercial banks.
• The Incremental Cash Reserve Ratio (Incremental CRR) allows central banks to control bank cash reserve requirements in situations where new deposits provide surplus liquidity.
• When the system was overflowing with more liquidity as a result of demonetisation in 2016, the RBI used this approach. That was the initial introduction of the Rs 2,000 banknotes that are currently being removed from circulation.
• Banks are encouraged to hold some of these cash in reserves by enforcing higher ICRRs on incremental deposits.
• For instance, after 2,000 banknotes were recently taken out of circulation, Rs 3.14 lakh crore were refunded to the banking system. In this instance, banks will only have about Rs 2.70 lakh crore from the additional deposits for lending purposes if 10% ICRR is applied to Rs 3 lakh crore. They will also need to reserve about Rs 30,000 crore with the RBI.
• To put it briefly, ICRR helps to keep financial stability, avoid inflationary pressures, and stabilize the money supply.
Note: The Reserve Bank of India (RBI) announced the discontinuation of the Incremental Cash Reserve Ratio (I-CRR) on September 8, 2023. Following an assessment, the decision was made to phase out the I-CRR
Operation Twist
The goal of the central banks’ Operation Twist monetary strategy is to lower interest rates and regulate investment in a country. In India, the RBI implemented this strategy in 2019 and 2020. In order to inject liquidity into the markets, the RBI manipulated the yield on government securities under this operation. This is accomplished by using Open Market Operations (OMOs) to simultaneously buy and sell government assets on both a short and long term basis. The US Federal Reserve implemented Operation Twist for the first time in 1961 in an effort to boost the country’s economy. Through higher short-term rates, the mechanism revived the US economy. Operation Twist was once more employed by the US Federal Reserve in 2011 to boost the nation’s economic growth following the global financial crisis
• The Statutory Liquidity Ratio (SLR), which is based on a specific proportion of net demand and time obligations, is another required reserve that banks must maintain as regulated securities.
• SLR represents the portion of Net Time and Demand Liabilities that the bank retains as liquid assets.
• It is employed to keep banks stable by restricting the amount of credit available to their clients.
• The banks store more money than is necessary for the SLR, which is maintained in order to have a specific level of liquid assets on hand to meet depositor demands as they come up.
SLR or Statutory Liquidity Ratio
In the case of SLR, banks are asked to have reserves of liquid assets which include cash, gold and securities
CRR or Cash Reserve Ratio
Banks are required by the CRR to maintain only cash reserves with the RBI.
Qualitative Methods
• Selective instruments of the RBI’s monetary policy are another term for qualitative instruments. These tools are used to distinguish between different credit purposes; for instance, they can be used to favor imports over exports or critical credit supply over non-essential credit supply. Both borrowers and lenders are impacted by this approach.
• Some specific credit control instruments that the RBI uses are as follows:
• Rationing of Credit: For commercial banks, the RBI sets a credit limit. Each commercial bank’s available
credit is restricted in order to provide credit. There are situations in which banks are required to adhere to a specified upper credit limit. The bank’s loan exposure to undesirable sectors is reduced as a result. Moreover, the bill rediscounting is managed by this device.
• Regulation of Consumer Credit: Through the installment of sales and hire purchase of consumer products, this tool regulates the supply of credit available to consumers. Here, terms like as loan length, down payment, installment amount, and so on are predetermined, which aids in monitoring the nation’s credit and inflation.
• Change in Marginal Requirement: Margin is the term used to describe the fraction of the loan amount that the bank does not offer or fund. The loan size may vary in response to changes in the marginal. With the help of this tool, the supply of credit is encouraged for the sectors that are required and prevented for the ones that are not. Reducing the marginal of other needy sectors and raising the marginal of superfluous sectors are two ways to achieve it.
• Moral Suasion: The RBI’s recommendations to commercial banks that aid in limiting lending during an inflationary time are referred to as moral suasion. The RBI suggests that the Indian banking system is under pressure, yet it is not taking strong measures to enforce rule compliance.
Monetary Policy Committee
• The Finance Act of 2016 made amendments to the Reserve Bank of India Act, 1934 (RBI Act) to provide a formalized and statutory framework for a Monetary Policy Committee. This committee’s role is to preserve price stability while taking growth into consideration.
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The responsibility of setting the benchmark policy rate, or repo rate, needed to keep inflation within the designated target range would fall to the Monetary Policy Committee. Monetary policy decisions will be far more valuable and transparent if they are made via a committee-based method.
• The Monetary Policy Committee will convene at least four times a year and will publish its decisions following each session.
Members of MPC
• According to Section 45ZB, the Monetary Policy Committee (MPC) will have six members, with the RBI Governor serving as its cash, gold and securities chairperson and the Deputy Governor overseeing monetary policy. The RBI Act of 1934 specifies that three of the MPC’s six members must be nominees of the Central Government, and three must be members of the RBI.
• A minimum of three individuals who meet the qualifications of “persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy” are required to be nominated by the central government.
• Four members make up the quorum for the MPC meeting.
• The Governor has casting vote in the event that there is a tie in the number of votes cast by the MPC members.
• The Monetary Policy Report, which explains the causes of inflation and projections for the next six to eighteen months, must be published by the Reserve Bank once every six months.
STRUCTURE OF BANKING SYSTEM IN INDIA
Commercial banks
• A commercial bank is a type of financial organization that offers its client’s services like overdraft protection, savings accounts, certificates of deposit, loans and so on. Lending money to individuals and collecting interest on such loans is how these institutions generate revenue.
• Acommercial bank offers a variety of loans, including loans for businesses, vehicles, homes, people, and education. These loans are provided by them using the funds that their clients put in various kinds of accounts. They use the deposits as their loan capital.
• A nation’s commercial banks are vital to its economy because they generate capital, credit, and market liquidity. These banks are often found in cities, although more and more of them are opening online these days.
• The Banking Regulation Act 1949 governs commercial banks. The categories for commercial banks are as follows:
Scheduled Commercial Banks
• The Reserve Bank of India Act, 1934’s Second Schedule lists the commercial banks that are considered scheduled.
• A bank must have raised funds and paid-up capital of at least Rs. 5 lakhs in order to be classified as a scheduled bank. With the RBI, they uphold a Cash Reserve Ratio (CRR). The RBI should be satisfied that their operations are not being carried out in a way that jeopardizes the interests of their depositors.
• In India, scheduled commercial banks are divided into five types based on who owns them and how they operate. The following bank groups are:
• State Bank of India
• Nationalised Banks
• Private Banks
• Foreign Banks
• Regional Rural Banks
State Bank of India
• The Bank of Calcutta was founded in 1806, and that is when the State Bank of India first emerged. It was the first British Indian joint-stock bank, supported by the Bengali government. Following in their footsteps, the Bank of Bombay and the Bank of Madras advanced
modern banking in India until joining forces to become the Imperial Bank of India in 1921. The Imperial Bank had a network of 172 branches and more than 200 sub- offices, with a capital base of INR 11.85 crores, deposits and advances of INR 275.14 crores and INR 72.94 crores, respectively.
• The All-India Rural Credit Survey Committee suggested in 1955 that the Imperial Bank of India be taken over in order to establish a state-sponsored and partnered bank. July 1, 1955, saw the founding of the State Bank of India. Subsequently, the State Bank of India was able to acquire eight previous State-associated banks as subsidiaries (later termed Associates) after the State Bank of India (Subsidiary Banks) Act of 1959 was approved.
Nationalised Banks
• The Reserve Bank of India (RBI) Act, which was passed in 1949, marked the start of bank nationalisation in India. As a result, the largest public sector bank, the State Bank of India was eventually nationalized in 1955, after the Imperial Bank of India. Fourteen significant commercial banks were nationalized in 1969, and six more were added in 1980, bringing the total to twenty. Wars with China and Pakistan, acute food shortages brought on by drought, decreased public investment, and sluggish economic growth in the 1960s and 1970s all contributed to the necessity for nationalization. Between 1951 and 1968, the proportion of credit that commercial banks disbursed to the industrial sector nearly doubled, while less than 2% of all credit went to farmers.
• On August 30, 2019, the Indian government made the merger announcement. Strengthening the banking industry and boosting shareholder value was the main goal of mergers. Due to their shared use of a CBS platform that would allow for quick gain realization, these banks were amalgamated.
• At present, there are 12 nationalized banks in India: Punjab National Bank (PNB), Bank of Baroda (BOB), Bank of India (BOI), and Central Bank of India, Canara Bank, Union Bank of India, Indian Overseas Bank (IOB), Punjab, and Sindh bank Indian Bank, UCO Bank, Bank of Maharashtra, State Bank of India (SBI).
Private Sector Banks
• In India, private individuals own and claim a larger percentage of the shares in private sector banks. In the beginning, the Indian financial system was controlled by public sector banks. But since 1990, technological advancements and modern technologies have made private sector banks the dominant force. Both Old Private Sector banks (established prior to 1968) and New Private Sector banks (established subsequent to the 1990s) can be used to describe these banks. Their sustained expansion and inventiveness serve as evidence of the significance of private sector banks within the Indian banking infrastructure.
Foreign Banks
• Private foreign banks are international banks that have branches and headquarters located in many nations. These banks must abide by the laws and guidelines set forth by their home and host nations.
• As of July 14, 2020, the Reserve Bank of India reports that there are 46 foreign banks operating in India. To meet the demands and specifications of its clients who are multinational corporations, these banks open a variety of bank branches. London-based Standard Chartered Bank is the biggest private foreign bank. There are 100 of its branches nationwide.
Regional Rural Banks
The Regional Rural Banks (RRBs) were established in 1975 under the provisions of an ordinance issued on September 26, 1975, and the Regional Rural Banks Act of 1976. RRBs are financial institutions that provide essential credit to agriculture and other rural sectors.
These banks blend the cooperative model, which is well- attuned to local rural challenges, with the professionalism and resource-mobilizing capabilities of commercial banks.
The equity of the Regional Rural Banks is held by the stakeholders in a fixed proportion. Regional rural banks are:
• 1. 50% owned by the federal government;
• 2. 35% by sponsor or scheduled banks; and
• 3. 15% by state governments.
• The Government of India’s notification area, which includes one or more State districts, is the only area in which Regional Rural Banks may operate. In the following heads, RRBs carry out a variety of tasks.
• Providing Banking services for rural and semi-urban areas;
• Performing government functions, such as paying MGNREGA employees’ salaries and distributing pensions, among other things.
• Providing para-banking services such as Internet and mobile banking, UPI, debit and credit cards, and lockers.
• After commercial and cooperative banks, the Regional Rural Banks, or RRBs, make up the third tier of the commercial banking system.
• In order to meet the demands of agricultural communities and other rural communities for rural credit, the Regional Rural Banks
• The RRBs’ primary goal is to support small and marginal farmers, agricultural laborers, and small artisans who play a crucial role in the growth of the rural economy by offering credit and other banking services.
• RRBs are a brand-new type of commercial bank that can only operate locally and are supported by banks with strong commercial positions.
Non-Scheduled Commercial Banks Local Area Banks
• Banks that are specifically designed to serve a limited area and conduct business there are known as local area banks.
• In India, Local Area Banks were established in 1996 as a union budget initiative to create small private banks for residents in underserved areas without access to banks.
• The Reserve Bank of India issues and oversees the regulations governing the licenses of these banks.
• A minimum paid-up capital of Rs.5 crores is needed for Local Area Banks, of which 25% is provided by the promoter group and the remaining amount by the general public.
Objectives of Local Area Banks
Financial Inclusion: For the people of that region where traditional banks are not established, LABs provide a formal financial structure. The aim of the organization is to provide individuals with the benefit of having their money preserved in a secure location for future usage. They facilitate financial inclusion by doing this.
Economic Development: LABs encourages the regional economy by lending to local small enterprises and making loans to them. They help established firms grow and offer financial support to aspiring business owners.
Savings Mobilisation: By encouraging people to save money for better times in the future, LAB fosters financial security.
Credit Disbursement: They make it easier for financing to flow to industries like agriculture, small businesses, and rural infrastructure that are essential to local growth.
Community Development: Community development projects are a common activity for LABs. Various initiatives have been implemented to assist the impoverished in accessing health care services, education, and other necessities.
Functions and Requirements of Local Area Banks
• They have the status of scheduled banks because they are qualified for financial inclusion in the RBI Act, 1934’s Second Schedule. Additionally, they can help their clients with financial transactions.
• They have to maintain their statutory liquidity ratio at 25%, their cash reserve ratio at 3%, and their minimum capital adequacy ratio at 15%.
• They have to provide the RBI with regular returns and reports, and they are accountable to the RBI for oversight and inspection.
• In order to give people a secure place to save their money, LABs mobilize deposits from the local community. Within their operational boundaries, they are permitted
to engage in all forms of banking activity, including receiving deposits, making loans, printing checks and drafts, and offering remittance services, among others.
• They provide credit to people, companies, and organizations in their business domain. This covers loans for homes, small companies, and agricultural endeavors. They must lend at least 40% of their net bank credit to the priority sector, with the weaker segments receiving at least 25% or 10% of this amount.
• Financial education seminars are a common activity for LABs in an effort to raise consumer financial literacy and encourage prudent financial practices.
• By addressing their financial needs and building trust, LABs actively participate in the local community through a variety of outreach projects.
Cooperative Banks
• Membership: Co-operative Societies or Individuals.
• Cooperative banks are owned and run by their members and function on the cooperative model. A village or other community’s financial needs are met by people banding together to pool resources and offer banking services including savings accounts, loans, and other financial services.
• Small financial institutions known as cooperative banks provide lending services to small businesses in both urban and non-urban areas.
• These are subject to both the Banking Laws Act of 1965
and the Banking Regulations Act of 1949, and are overseen and controlled by the Reserve Bank of India (RBI).
• The Co-Operative Banks have a huge significance for the small businesses as these have around 67% penetration in villages and account for 46% of the net funding for the rural businesses through support for processing, housing, warehousing, transport, dairy, etc.
• Businesses that meet specific eligibility criteria can become members by purchasing shares or making an initial deposit.
Features of Cooperative Banks
• The primary objective of the cooperative banking model is social benefit, which sets it apart from standard banking models.
• ‘One person, One Vote’: This is what Cooperative Banks follow. The organization’s management is within the purview of a selected Board of Directors.
• Profit Distribution: The main goal of cooperative banks, which are non-profit organizations, is to meet the financial needs of their members. Any excess the bank makes is either reinvested to increase the bank’s capital base or given as dividends to the members.
• Community Development: By encouraging financial literacy, helping out small businesses in the area, and funding community initiatives, they also significantly contribute to community development. They encourage their members to support one another and feel united.
State Cooperative Banks
• Definition: As the name implies, a state cooperative bank operates at the state level.
• Regulatory body: The Reserve Bank of India (RBI) and the corresponding state governments both regulate them.
• Segment served: Across the nation, they offer financial services to low-income and rural communities.
• Services offered:
• They frequently serve as the main source of financing for small enterprises, small-scale industries, and agriculture and related industries.
• These banks also offer banking services to agricultural, dairy, and credit union cooperatives, among other cooperatives.
• Source of capital: The state governments, deposits, funds, and borrowings from the RBI are the sources of SCB’s working capital.
Central Cooperative Banks (CCBs)
• Definition: Central Cooperative Banks (CCBs) are cooperative institutions founded and operated in accordance with the Cooperative Societies Act.
• Regulatory body: They are subject to Reserve Bank of India regulations and are overseen by the State Cooperative Department.
• Segment served: They offer financial services to those living in rural and semi-urban areas all around the nation.
• Services offered:
• They offer their members financial services like loans, deposits, and other services.
• They also support and provide funding for agricultural initiatives including input supply services and crop insurance.
• Source of capital: Most of the working capital collected by central cooperative banks comes from individual contributions, deposits, borrowings, and other sources.
Urban Cooperative Banks
• The urban cooperatives are growing into significant organizations due to the size of their operations and customers.
• The government revised the Banking Regulation Act in February 2020, granting the RBI additional authority to oversee UCBs.
• To make sure that UCBs are financially stable enough to carry out their duties, the Reserve Bank of India oversees and regulates them.
• There are regulations pertaining to UCBs that cover licensing, minimum net owned fund requirements, SLR, CRAR, and CRR maintenance, among other things.
What is an Urban Cooperative Bank?
• According to Section 56 of the Banking Regulation Act of 1949, a co-operative society that is not a primary agricultural credit society is referred to as a primary co- operative bank (also known as an Urban Co-operative Bank, or UCB).
• The transaction of banking business is the primary or principal business.
• Paid-up share capital with reserves that total at least one lakh rupees.
• The Banking Regulation (Amendment) Act, 2020: As was mentioned in the previous section, the RBI was only
able to impose prudential standards on UCBs. But the main problems that contributed to UCBs’ demise were poor governance and poor management. The amendment gave RBI significant administrative authority over UCBs. in order to address the problem of bad governance:
• The RBI may take precedence over the Cooperative Bank Board in light of state government consultations.
• RBI to rebuild the cooperative bank or combine it with another bank without putting a stop to it.
• Payments cannot be made to someone in exchange for giving up shares that a cooperative bank has issued.
• Cooperative banks cannot raise stock or issue unsecured debentures without first receiving RBI clearance.
The Banking Regulation (Amendment) Act, 2020
• In order to expand on certain of the provisions of the Banking Regulation Act, 1949 (the “BR Act”), the Banking Regulation (Amendment) Act, 2020 (the “BR Amendment Act”) was passed.
• Cooperative banks were exempt from some BR Act regulations, but thanks to the BR Amendment Act, those laws are now applied to them, bringing their regulation into compliance with that of commercial banks.
• Presently, the RBI has the authority to replace a co- operative bank’s board of directors and to use the “fit and proper” standard for appointing or dismissing a chairperson.
• Moreover, cooperative banks are allowed to raise share capital and other unsecured securities from the general public with previous RBI approval.
Highlights of Act
• The Banking Regulation Act of 1949 exempts cooperative banks from a number of its restrictions. Some of these regulations are applicable to them under the Act, therefore their regulation is comparable to that of commercial banks.
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Subject to RBI approval in advance, cooperative banks may raise capital from the public in the form of equity or unsecured loans.
• The RBI has the authority to set requirements and standards for co-operative bank chairman employment. If a chairman does not meet the “fit and proper” requirements, RBI may dismiss them and appoint a replacement. In order to guarantee there are enough qualified members on the Board of Directors, it may give instructions to rebuild the group.
• A cooperative bank’s board of directors may be replaced by the RBI following discussions with the state government.
• Without imposing a moratorium, the Act permits RBI to restructure or combine a bank.
Key Issues and Analysis
• People with little resources can access financial services through cooperative banks. The poor performance of cooperative banks has been attributed, nevertheless, to the RBI’s lack of regulatory control comparable to that of commercial banks.
• The purpose of the Act is to expand RBI regulation of cooperatives banks with relation to capital, auditing, winding up, and management.
• Constitutionally, “incorporation, regulation and winding up” of co-operative organizations is in the State List, but “banking” is a Union List issue.
• The question is whether the Act falls under Parliament’s legislative purview because it regulates co-operative bank administration, audits, capital, and winding up, all of which are crucial to controlling banking activities.
• The Act gives cooperative banks the ability to issue equity shares to residents living in their service area as well as to members.
Development Banks SIDBI
• In 1988, the Indian Parliament passed a special Act to create SIDBI, or the Small Industries Development Bank of India, which became operational on April 2, 1990. The headquarter of SIDBI is located in Lucknow, Uttar Pradesh. It is one of the four key All-India Institutions, along with NABARD, EXIM, and NHB.
• The primary goal of SIDB is to build over 55% of MSMEs in the nation’s rural areas. To support the MSME sector, the Indian government established the R.S. Gujaral’s committee of financial exports in 2013. The Department of Industrial Policy and Promotion (DIPP) of the Government of India has deployed a module named “E-biz” under the National E-governance strategy in order to reduce human interaction in the MOU process.
Functions of SIDBI
SIDBI emerged as a single window operation to meet its financial and improvement needs as well as to make the MSME sector strong, vibrant, and globally competitive.
SIDBI helps financial institutions in lending to small-scale industries so that they have a healthy financial position and also provides non-financial assistance to business owners by helping them procure raw materials.
SIDBI engages commercial banks and other financial institutions to grant credit to small-scale industries and encourage credit by small independent company business units and also provide resource assistance to them.
SIDBI also provides venture capital assistance through Venture Capital Fund, and it also co-promotes state-level venture funds.
SIDBI helps in expanding business areas for small-scale industry sector products in domestic and international markets in partnership with commercial banks.
SIDBI also aims to enhance shareholder wealth through modern technologies and innovative ideas by providing a digital platform. It also provides services like factoring and leasing to domestic independent company business units in the small-scale sector.
SIDBI also provides an additionally timely flow of credit for working capital as well as term loans to small-scale enterprises in collaboration with commercial banks.
SIDBI takes initiatives for modernization and technological upgradation of existing industrial units to become future units that generate more wealth and employment.
SIDBI also acts as a nodal agency for various ministries of the Government of India:
• Ministry of MSME.
• Ministry of commerce and industry.
• Ministry of Textiles.
• Ministry of food processing industry.
Schemes offered by SIDBI in MSME Sector
• Direct Financing: which provides term loans in foreign currencies and working capital help.
• Indirect Finance: support by offering refinancing that includes banks.
• Micro Finance: which offers small-scale credit loans on immediate bases.
• STFS (SIDBI Trader Finance Scheme): The scheme provides wholesale retailers with at least three years of company management experience.
• SEF (SMILE equipment Finance): assists MSMEs in the purchase of new equipment.
• TULIP (Top-Up Loan for Immediate Purpose): This loan will provide within 7 days.
•
SPEED: Financing for Equipment Purchase for Business Development
• Loans under a partnership with OEM (Original Equipment Manufacturer).
• Working Capital Cash Credit Scheme: which provides instant loans.
National Bank for Agriculture and Rural Development [NABARD]
• NABARD, India’s leading development bank, was established in 1982 through an Act of Parliament with the goal of fostering sustainable and inclusive agriculture and rural development. Over its more than four-decade journey, this premier financial institution has significantly improved lives in rural India by providing agri-finance, supporting infrastructure development, advancing banking technology, and promoting microfinance and rural entrepreneurship through Self-Help Groups (SHGs) and Joint Liability Groups (JLGs). NABARD continues to contribute to nation-building by driving financial and non-financial initiatives, fostering innovation, and supporting institutional development in rural areas.
Functions of NABARD
• It essentially carries out three different types of tasks, such as body, credit, and improvement capacities. In order to fulfill its primary objective, the National Agricultural and Rural Development Bank fulfills four key roles. Credit, money, checking, and growth are these four essential functions. To determine the status of each of the four NABARD components, but in doing so, we prefer to look at them individually.
• Credit Function: The National Agricultural and Rural Development Bank (NABARD) handles credit work because it is the primary provider of credit lines in rural areas. Among those responsibilities include the creation, management, and screening of credit streams in the rural areas of the nation.
• Monetary Functions: A few consumer banks and charities that promote near improvement initiatives are part of NABARD. The National Agricultural and Rural Development Bank, or NABARD, can establish plants, food parks, handling units, craftsmen, and other unique organizations, as well as lend money to consumer banks, provided it meets its financial standards.
• Oversight operates: As mentioned above, NABARD is the primary organization in charge of overseeing gardening and provincial exchange programs. It is therefore the responsibility of this organization to monitor and oversee all tasks and activities related to improvement.
EXIM Bank
• The Government of India founded the Export- Import Bank of India, or EXIM Bank, as a specialized
financial organization in 1982. Its main goal is to help Indian exporters and importers by offering financial support and other support services, hence facilitating international commerce and investment. Via its array of financial and promotional initiatives, EXIM Bank is instrumental in driving India’s economic expansion and exports.
Schemes of Financial Assistance by EXIM Bank
To support Indian companies involved in foreign investment and trade, the Export-Import Bank of India (EXIM Bank) provides a range of financial assistance programmes. These programs are intended to stimulate foreign investment, streamline imports, and boost exports. The following are some of the main financial aid programs offered by EXIM Bank:
Export Credit: Indian enterprises can finance their export activity with export credit provided by EXIM Bank. Pre-shipment credit, which finances the production of export goods, and post-shipment credit, which finances working capital requirements following shipment, are two examples of the several forms that export credit is provided. In addition to helping exporters manage cash flow, these credit facilities enable them to fulfill export orders.
Buyer’s Credit: Purchasers of Indian goods and services from abroad can apply for buyer’s credit from EXIM Bank. Foreign importers are granted credit, which allows them to buy Indian goods and services on installment plans. In order to source from Indian exporters, it encourages purchasers from other countries.
Lines of Credit (LOCs): To assist with initiatives involving the import of Indian goods and services, EXIM Bank extends credit lines to foreign governments, financial institutions, and other organizations. LOCs facilitate economic cooperation and bilateral trade between India and other nations. Usually, they are employed in transportation, power generating and building projects that include the development of infrastructure.
• Export Finance: To accommodate exporters’ unique demands, EXIM Bank provides a range of export credit programs. Export production finance, export credit insurance, and export bill discounting are a few examples of these programs. Export financing aids in the management of exporters’ cash flow and the reduction of trade-related risks.
• Overseas Investment Finance: Through its programs for financing foreign investments, EXIM Bank assists Indian businesses wishing to invest abroad. It offers financial support for establishing overseas joint ventures, subsidiaries, or acquisitions. This facilitates the expansion of Indian companies’ worldwide reach and opens up new markets.
• Export Marketing Services: Exporters in India can
get help from EXIM Bank with market research, market entrance tactics, and export possibilities identification. Exporters can flourish in foreign markets and make well-informed judgments with the aid of these services.
• Technology and Innovation Promotion: For the purpose of innovation, R&D and technology advancement, EXIM Bank offers financial support to Indian businesses. This aids companies in becoming more competitive in international marketplaces.
• Export Development Fund: A program for financial assistance that promotes exports, trade-related research, and capacity-building is the Export Development Fund (EDF). The EDF wants to make India’s export ecosystem stronger.
IFCI
• IFCI is a non-banking financial company operating in the public sector, presently listed on the NSE and BSE. It offers financial support for the growth of India’s industry. These activities are aligned to projects in the airport, road, power, telecom, real estate, and manufacturing sectors.
• In addition, IFCI is a nodal organization that promotes entrepreneurship among the less advantaged groups in society.
• In this sense, banks are protected by IFCI against loans made to young entrepreneurs who are members of Scheduled Castes.
• The main goal of IFCI is to fund public limited firms and cooperative organizations over the medium and long terms. The IFCI’s authorized share capital has been increased to Rs. 20 crores.
• The only businesses that the IFCI is permitted to provide long and medium-term financing to those, involved in manufacturing, mining, shipping and the production and distribution of electricity.
National Housing Bank
Background of National Housing Bank
In its 7th Five-Year Plan (1985–1990), the Indian government noted that individual households have limited access to long- term financing. Therefore, it was suggested that national institutions be established in order to close any gaps in the long-term funding of the housing sector. The National Housing Bank, or NHB, was then established based on the suggestions made by the Committee of Secretaries, which was presided over by Dr. C. Rangarajan.
About the National Housing Bank
• The National Housing Policy of 1988 proposed the creation of NHB as the top institution for housing. As a result, NHB was set up on July 9, 1988, under the National Housing Bank Act of 1987. The RBI provided all of the bank's paid-up capital.
Neo Banks
• Neo Banks Meaning: These are digitally operated financial institutions that strictly operate online.
• They do not have any physical branches; instead, they provide all standard bank services through a smartphone app or digital setup.
• These digital banks provide instantaneous money transfers, loans, payments, and other financial services to meet the needs of the tech-savvy generation.
• The important thing to keep in mind is that these neo banks depend on their banking partners who provide financial services and products, and they could not even have a banking license.
• These banks are all digital. They also are unable to seek for a banking license because the RBI does not permit 100 percent digital banking operations. These so-called “neo banks” are skilled at using artificial intelligence and technology to provide clients with tailored financial services. For a low price, it is provided.
How are Neo Banks Different from Digital Banks?
• Digital banks are frequently found operating as online divisions of well-known financial and banking organizations. They might have a few physical branches and be supported by bigger financial organizations. They might possess several physical branches and be supported by more established financial institutions.
• Conversely, no physical branches exist for neo banks; they only conduct business online.
How are Neo Banks Different from Payments Banks?
• Payments banks are governed by the RBI and offer all banking services to clients with the exception of lending and credit card issuance. Because of this, banks accepting payments are essentially free from credit risk.
• However, because they provide lending services in addition to credit cards, neo banks are more vulnerable to credit-related risk.
MUDRA Bank
• The government-owned Micro Units Growth and Refinance Agency Ltd. (MUDRA) is a financial organization devoted to the growth and refinancing of microenterprises.
• MUDRA Ltd. is a non-banking finance company that was established as a subsidiary of SIDBI in anticipation of the enactment of an act establishing MUDRA Bank.
• MUDRA’s aims to finance small businesses in both rural and urban areas that are not corporate (informal sector) and have financing needs up to Rs 10 lakhs. Examples of these businesses include small manufacturing units and shopkeepers.
The responsibility for refinancing all last mile financiers, which include Micro Financial Institutions, Non-Banking Finance Companies, Societies, Trusts, Companies, Co- operative Societies, Small Banks, Scheduled Commercial Banks, and Regional Rural Banks, would fall under MUDRA’s purview. These lenders provide loans to micro and small businesses involved in trading, manufacturing, and services.
Pradhan Mantri Mudra Yojana (PMMY)
• The flagship program of the Indian government is the Pradhan Mantri Mudra Yojana (PMMY). The program enables income-generating micro firms operating in the non-farm manufacturing, processing, trading, or service sectors to get microcredit or loans up to Rs. 10 lakhs.
• MUDRA assists financial intermediaries in providing loans to micro and small businesses that generate income but are not part of the corporate or agricultural sectors.
• Micro and small entities include millions of sole proprietorships and partnerships that run small businesses in both rural and urban areas. These businesses include small manufacturers, retailers, fruit and vegetable vendors, truck drivers, food service operators, repair shops, machine operators, small industries, artisans, and food processors.
• Only banks and lending institutions, such as the following, are eligible to offer loans under the MUDRA system.
• Public Sector Banks
• Private Sector Banks
• State operated cooperative banks
• Rural banks from regional sector
• Institutions offering micro finance
• Financial companies other than banks
Non-Banking Financial Company (NBFC)
• A Non-Banking Financial Company (NBFC) is a company that is registered under the Companies Act, 1956 and is involved in the following business activities: lending and advances; purchasing shares, stocks, bonds, debentures, securities issued by the government or local authority; leasing; hire-purchase; insurance; and chit business. However, an NBFC does not include any institution whose primary business is engaged in industrial activity, agriculture, the purchase or sale of any goods (other than securities); selling, buying, or building of real estate; or the rendering of any services.
• The Reserve Bank of India and the Ministry of Corporate Affairs both oversee the NBFCs’ operations.
• A non-banking financial company (also known as a residuary non-banking company) is a company whose primary business is to receive deposits under any scheme or arrangement, either all at once as a single amount, gradually through contributions, or in any other manner.
What is difference between banks & NBFCs?
• NBFCs operate similarly to banks in that they lend and invest, but there are a few key distinctions, which are listed below:
• NBFCs are not able to accept demand deposits.
• Because they are not a member of the payment and settlement system, NBFCs can’t issue cheques payable to themselves.
• Furthermore, depositors of NBFCs are not qualified for the Deposit Insurance and Credit Guarantee Corporation’s deposit insurance program, in contrast to bank depositors.
• Under minimum capitalization standards, 100% FDI is allowed in NBFCs through the automatic method, specifically in 18 activities.
Different Types of NBFCs
• The following are the many kinds of Non-Banking Financial Corporations, or NBFCs:
• On the nature of their activity
• Asset Finance Company (AFC): Financing of tangible goods, such as cars, tractors, and generators that support economic or productive activities.
• Investment Company (IC): Acquiring securities with the purpose of re-selling.
• Loan Company (LC): Provides finance by extending loans or for any activity than its own. But an asset finance company is not included in this.
• Infrastructure Finance Company (NBFC-IFC): Provides loans for projects linked to infrastructure.
• Infrastructure Debt Fund (NBFC-IDF): Facilitates the flow of long-term debt into projects that deal with infrastructure.
• Systemically Important Core Investment Company (CIC-ND-SI): Obtains securities and shares principally for the purchase of equity shares.
• Micro Finance Institution (NBFC-MFI): Extends credit to the economically disadvantaged groups. Furthermore, they extend assistance to MSMEs, or micro, small, and medium-sized enterprises.
• NBFC Non-Operative Financial Holding Company (NOFHC): enables promoters or organizations to establish a new bank.
•
Factor (NBFC-Factor): Specializes in the acquisition of assignor receivables or the repurchase of debts secured by receivables at a discount.
• Mortgage Guarantee Company (MGC): Engages in mortgage-related activities.
• Account Aggregator (NBFC-AA): Collects and offers information on a customer’s financial assets in a consolidated, organised and retrievable method to the customer or others as required by the customer.
• NBFC Peer to Peer Lending Platform (NBFC-P2P): Provides an online platform in order to bring lenders and borrowers together onto a single space to help mobilise unsecured finance.
• On the basis of deposits:
• Deposit accepting Non-Banking Financial Corporations
• Non-deposit accepting Non-Banking Financial Corporations
Liquidity Trap
• A liquidity trap is an adverse economic scenario that can happen even when interest rates are low, as investors and consumers store cash instead of using it for investments or spending, impeding the ability of policymakers to promote economic growth.
• The phrase “liquidity trap” was coined by economist John Maynard Keynes, who described it as a situation in which interest rates drop to the point where most individuals would rather hold onto their cash than invest it in bonds and other debt instruments. As a result, Keynes claimed, monetary officials are unable to further reduce interest rates or expand the money supply in order to promote growth.
• Banks struggle to find qualified borrowers for loans, which is a prominent issue in a liquidity trap. This is exacerbated by the fact that there isn’t much space for extra incentives to draw in well-qualified applicants given that interest rates are already so close to zero.
Signs of a Liquidity Trap
• Low interest rates are one indicator of a liquidity trap. Low interest rates have an impact on bondholder behavior, particularly when combined with worries about the country’s present financial situation. The sale of bonds at a price that is detrimental to the economy is the ultimate outcome.
• A liquidity trap is not defined by low interest rates alone. In addition, there must be a dearth of bondholders who want to hold onto their bonds and a restricted number of buyers in order for the scenario to be considered. Rather, investors are giving strict cash savings a higher priority than buying bonds.
• A situation does not qualify as a liquidity trap if investors are still interested in holding or buying bonds during periods when interest rates are low, even close to zero percent.
Characteristics of a Liquidity Trap
• A liquidity trap arises when businesses, investors, and consumers decide to hoard cash, which makes the economy as a whole resistant to measures taken by policymakers to promote economic activity.
• The essential features of a liquidity trap are as follows:
• Very low interest rates (at or close to 0%)
• Economic recession
• High personal savings levels
• Low inflation or deflation
• Ineffective expansionary monetary policy
Why liquidity traps occur on deflation
When prices decline and money’s purchasing power rises, this is known as deflation. When individuals decide to save their money rather than use it for investments or purchases because they think prices will keep dropping, deflation may begin. In severe circumstances, a deflationary spiral may occur in which falling prices prompt reductions in demand, production, and wages, all of which further lower prices. In this kind of feedback.
Balance Sheet Recession
• An economic downturn known as a “balance sheet recession” is mostly the result of businesses and individuals opting to settle their debts rather than increase their spending or borrowing. This happens when the amount of outstanding debt increases to the point where lenders and borrowers are worried that the loan might not be repaid in full. Debt repayment takes precedence over new loans and investment, even as interest rates decline.
Low Demand from Investors
• Companies issue stock and bonds to raise money. Lower interest rates won’t make a difference if there isn’t much demand from investors to invest in them. Furthermore, because they see the investment as dangerous during a recessionary period of generally low demand, both the companies and investors may decide to delay taking any action.
Reluctance to Lend
• If banks consider much of the credit market to be high- risk, they may become unwilling to lend. Many people and businesses found it challenging to get loans, even at extremely low interest rates, because banks tightened their underwriting standards and turned away all but the best candidates.
Curing the Liquidity Trap
• There are several methods for escaping a liquidity trap. While none of these might be completely effective on their own, they might push people to start investing and spending money rather than saving it.
• A rate increases: The Banks can raise interest rates, which may lead people to invest more of their money, rather than hoard it. Yet, this is a highly risky course of action when there is low inflation and a recession.
• A (big) drop in prices: When there are genuine deals available, individuals find it impossible to resist spending money. The allure of reduced costs grows too strong, and the savings are utilized to benefit from those reduced costs.
• An increase in government spending: Government initiatives can stimulate expenditure and employment creation when businesses pull back.
• Quantitative easing (QE): The central bank can start purchasing longer-dated government bonds along with other securities like mortgage bonds in order to artificially decrease interest rates below zero and promote expenditure in the economy.
• Negative interest rate policy (NIRP): Following the global financial crisis of 2008, Europe and Japan employed this remarkable weapon of monetary policy. Negative interest rates, which credit interest to borrowers and subtract interest from them, are imposed when nominal interest rates fall below zero.
Steps which is taken by the Reserve Bank of India are the followings
• The RBI introduced Partial Credit Enhancement (PEC) for bonds on November 2, 2018, with a minimum three-year occupancy duration. During the liquidity crisis, these were issued by NBFCs with systemically important non- deposit takings.
• RBI reduced regulations on selling or securitizing the loan books in order to lessen the burden on NBFCs. Consequently, after holding loans for six months, NBFCs are able to securitize loans with maturities longer than five years.
• For more operational flexibility, several NBFC types were consolidated into a smaller number of them. AFC- Investment and Credit Company (NBFC-ICC) was the new category created by the merger of AFC, LCs, and ICs.
Why did IL&FS default?
• The issue facing IL (Infrastructure Leasing) and FS (Financial Services) stemmed from its practice of obtaining short-term loans via commercial papers (CP) and certificates of deposits (CDs) for funding infrastructure projects, which can have protracted and unpredictable gestation periods.
• It made these lenders more susceptible to asset-liability mismatches (ALMs; these lenders have both long- and short-term assets).
• Following the demonetization in 2016, a shortage of cash caused liquidity to deteriorate for a few months, which delayed loan recoveries. When IL&FS failed, the system was just beginning to recover from the consequences of demonetization.
Measures by RBI
• After the IL&FS crisis, RBI monitored NBFCs more closely. In order to reduce industry stress, it loosened lending standards and exposure limitations and increased oversight based on NBFC size and payment patterns.
• The RBI suggested a liquidity coverage ratio for large NBFCs, however it is only currently in effect for banks.
Recent Steps
• Re-Classification of Non-Banking Financial Companies Sustaining the various categories of NBFC such as NBFC- Infrastructure Investment Company, Core Investment Company, Microfinance Institution, Systemically Important/ Non-Systemically Important, Deposit taking/ non-deposit taking etc. the re-classification of NBFCs in to three levels is done to make certain provisions universal.
• Layer Based Classification into four layers – Base Layer, Middle Layer, Upper Layer, and Top Layer
• Classification based on Asset Dimensions and Perceived Risk Factor
• Various activities carried out by NBFCs are taken into account while classifying.
• Enhanced Governance –The RBI has adjusted and standardized the governance framework, which will be applied layer by layer, to address the demand for time.
• The governance across several layers will differ and rely on NBFCs satisfying thresholds.
• Added Disclosure Specifications are provided for the Middle and Upper Layer NBFCs.
• Constitution of Internal Committees and Assessments
• Internal Capital Adequacy Assessment Process – Under the Master Circular - Basel III Capital Regulations, NBFCs must evaluate their capital in proportion to business risk, just as commercial banks do.
•
Similar to Commercial Banks
• Sufficient capital to sustain all business risks for NBFC
• Develop and use better Internal Risk Management Techniques
• Core Financial Service Solution
• Akin to Core Banking Solution adopted by Banks
• With ten or more Fixed Point Service Delivery Units, the Solution is required to be adopted by the NBFC Middle Layer and Upper Layer.
• Quarterly reports to RBI regarding the Solution’s implementation are required.
• For Seamless customer interface in digital offerings and transactions.
Shadow Banking
• In the financial system, “credit intermediation involving entities and activities remains outside the regular banking system” is referred to as “shadow banking.”
• The term “shadow banking” refers to bank-like operations (mostly lending) that happen outside of the established banking industry. These days, market- based finance or non-bank financial intermediation are the terms that are frequently used to describe it globally.
• The purpose of shadow bank financing is comparable to that of regular bank lending. It is not, however, subject to the same regulations as conventional bank lending.
A significant contributing factor to the rise in housing lending in the period leading up to the 2008 financial crisis was the shadow banking system.
Primary Dealers (PDs)
The Reserve Bank of India established the Primary Dealers (PDs) system in the Government Securities Market in 1995 with the goal of fortifying the Government Securities market infrastructure and establishing a more effective secondary market trading mechanism. This was done to promote large- scale government securities holding and increase market vigor and liquidity. The RBI offered banks the opportunity to handle Primary Dealership business departmentally in 2006–07. Subsequently only Primary Dealers, not the RBI, are permitted to underwrite primary issues of government securities the RBI has subsequently relinquished this role the Government of India refers to Primary Dealers as Merchant Bankers.
Differentiated Banking
• Differentiated banks are licensed by the Reserve Bank of India (RBI) to provide specific banking services and
products, distinct from universal banks. The primary objective of these banks is to promote financial inclusion and payments. In 2014, the Nachiket Mor Committee proposed the concept of differentiated banks to further inclusion. The RBI introduced this approach in 2014 with the introduction of small finance and payments banks.
• India offers diverse opportunities in the banking sector, which can be utilized by niche banking to facilitate specialization and optimize resource use. Each niche can be individually large, sustaining significant balance sheets, and specialized entities can play a major role in all. As the banking sector evolves, some banks and non-bank financial companies may choose to operate as specialized niche banks to derive advantages such as lower capital requirements, lower fund costs, and specialization.
Small Finance Banks (SFBs)
• The RBI has granted licenses to Small Finance Banks (SFBs), which are specialized banks that offer low-income people and underprivileged communities financial services and products. These include microfinance and micro-enterprise services, along with other fundamental banking services.
• SFBs are governed by the RBI Act of 1934, the Banking Regulations Act of 1949, and other pertinent statutes and directives from time to time. They are registered as public limited companies under the Companies Act of 2013.
• The establishment of small finance banks aims to increase financial inclusion by
• To give financial inclusion to certain population segments who are frequently left out of the standard banking system. This is one of the goals of the establishment of small finance banks.
• Small loans, savings accounts, insurance and other fundamental banking services are among the financial goods that SFBs assist individuals in obtaining.
• Scope of SFBs: The primary focus of small finance banks is required to be on fundamental banking operations, such as deposit acceptance and lending to underserved and unserved sectors, such as small businesses, marginal farmers, micro and small industries, and unorganized sector organizations, without any limitations.
• The Nachiket Mor Committee on Financial Inclusion recommended SFBs.
• The RBI released the SFBS guidelines in 2014. RBI’s recommendations for SFBs in India are:
• SFBs are granted the scheduled bank status after being operational and are deemed suitable under section 42 of the RBI Act,1934.
• SFBs are required to primarily focus on providing access to financial services to the unbanked and underbanked segments of the population.
•
They are required to maintain a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 15%.
• They are required to extend 75% of their Adjusted Net Bank Credit to Priority Sector Lending.
• SFBs are required to open at least 25% of their total branches in unbanked rural areas.
• For small finance banks, the minimum paid-up voting equity capital is Rs. 200 crore.
• SFBs are required to maintain at least 50% of their loan portfolio as microfinance and advances of up to Rs. 25,00,000.
• SFBs are required to comply with various prudential norms and regulations related to income recognition, asset classification and provisioning.
• SFBs are encouraged to adopt technology to improve their operational efficiency and reach the target segments.
Payment Banks
• Payment Bank was established to conduct business on a smaller scale with less credit risk, in accordance with the recommendations made by the Nachiket Mor Committee. A payments bank functions similarly to any other bank, however without the credit risk and on a smaller scale. Put simply, it can do the majority of banking functions but not credit card or loan issuance. The main objective is to promote financial inclusion through providing banking and financial services to underbanked and unbanked populations, including low-income households, small businesses and migrant workers among others.
• They are regulated by numerous laws, including the Payment and Settlement Systems Act of 2007, the RBI Act of 1934, the Foreign Exchange Management Act of 1999, and the Banking Regulation Act of 1949, but they are registered under the Companies Act of 2013.
• Paytm Payment Bank, Fino, India Post Payment Bank, Jio Payment Bank, Airtel Payment Bank and NSDL Payment Bank are the six payment banks that exist in India at this time.
Features of Payment Banks
• For the first five years after the Payment Bank’s founding, the promoter shall initially contribute a minimum of 40% of the paid-up equity capital.
• A minimum paid-up capital of Rs. 100 crore, is required.
• Payment banks are able to receive deposits of up to Rs. 20 lakh. Current and savings accounts are acceptable forms of demand deposits.
• Deposit funds are limited to investments in safe government securities only in the form of Statutory Liquidity Ratio (SLR). The balance of the demand
deposit must be 75% of this. A time deposit should be made with another scheduled commercial bank for the remaining 25%.
• Payments banks will be permitted to make personal payments and receive cross border remittances on the current accounts.
• It can issue debit cards.
Payment Banks Are not allowed to perform certain activities:
• Payment banks receive a ‘differentiated’ bank license from the RBI and hence cannot lend.
• Payment banks cannot issue credit cards.
• It cannot accept time deposits or NRI deposits.
• It cannot issue loans.
• It’s not allowed to establish subsidiaries for non-banking financial activities.
Difference Between Payments Bank and Small Finance Bank
The following are some significant differences between India’s Payments Banks and Small Financing Banks:
FinTech
• Fintech, a combination of the terms “financial” and “technology,” is the application of new technological advancements to products and services in the financial industry.
• The phrase refers to a rapidly growing industry that offers numerous services to meet the needs of both businesses and consumers. Fintech offers a seemingly limitless range of uses, from cryptocurrencies and investment apps to mobile banking and insurance.
• FinTech, an inventive invention of the 21st century, facilitates financial transactions for businesses and individuals by delivering financial products and services digitally.
• FinTech now assists financial companies in reaching a wide number of customers digitally and offers them quick, simple and safe transactions.
Evolution of FinTech
• 1887- 1950 is an era when we started with technologies such as telegraph, railroads and steamships that permitted for the first-time rapid transmission of financial information across borders.
• The 1950s introduced credit cards, the 1960s introduced ATMs, the 1970s brought computerized stock trading, and the 1980s saw the emergence of bank mainframe computers along with increasingly advanced data and record-keeping systems. The Internet and the e-commerce industry flourished in the 1990s.
•
In the twenty-first century, we use a plethora of financial technology services, such as cryptocurrency, Robo- advisors, mobile wallets, payment applications, equity crowdfunding, and much more, which entirely replaces banking services rather than improving them.
Bali Fintech Agenda
• The World Bank Group and the International Monetary Fund introduced the Bali Fintech Agenda, a collection of 12 policy components designed to assist member of nations in managing the risks associated with the fast advancements in financial technology while simultaneously assisting in capitalizing on the opportunities and advantages that these advancements offer in the banking services sector.
• The Agenda proposes a framework of high-level issues that countries should consider in their own domestic policy discussions and aims to guide staff from the two institutions in their own work and dialogue with national authorities.
• The Agenda will help guide the attention of IMF and World Bank staff members on fintech issues within the purview of their expertise and mandate, inform their discussions with national authorities, and help shape their contributions to the work of relevant international organizations and standard-setting bodies on fintech issues.
FinTech Categories Ranked by Adoption Rate
Current Scenario of the FinTech Industry
• Over the previous five years, more than $9 billion has been invested in digital lending, and an EY estimate predicts that the market will be worth $515 billion by 2030.
• Aside from that, 2022 witnessed an increase in cross border trade, which aided local payment systems in gaining popularity and general recognition outside of the country.
• According to the National Investment Promotion and Facilitation Agency (NIPFA), India has the highest finTech adoption rate globally at 87 percent, which is significantly higher than the global average rate of 64 percent.
• It’s not surprise, considering the circumstances, that a number of international finTech companies are looking to establish themselves in India as a result of the boom, and as a result, it’s expected that these companies will only get bigger in the future.
Factors of Growth of FinTech in India
Regulatory support: With initiatives like the Digital India project and the Unified Payment Interface (UPI) fostering digital payments and financial inclusion, the Indian government has been encouraging fintech innovation. With programs like the regulatory sandbox, which enables fintech to test their products in a controlled setting, the Reserve Bank of India (RBI) has also taken the initiative to create a favorable regulatory climate for the fintech industry.
Innovation and technology: Artificial intelligence (AI), machine learning (ML), blockchain, and other cutting- edge technologies are being used by fintech companies in India to disrupt established financial services and develop new business models. In order to provide loans to individuals and SMEs that might not have access to traditional banking services, digital lending platforms, for example, use AI and ML to evaluate creditworthiness.
Partnerships and collaborations: To increase their market share and provide fresh goods and services, fintech companies in India are collaborating with established financial institutions. Paytm and ICICI Bank have teamed to provide digital credit to their consumers, whereas PhonePe and Bajaj Finserv have joined to offer instant personal loans.
Financial inclusion: In India, fintech is essential to the advancement of financial inclusion, especially in rural areas where traditional banking services are scarce. Fintechs are assisting in closing the gap between the
unbanked and the established financial system by providing underprivileged populations with digital payment options, microlending, and other financial services.
E-commerce growth: The expansion of online shopping in India has given fintech a big chance to provide payment options and other financial services to consumers. E-commerce platforms like Amazon, Flipkart, and Myntra offer a seamless payment experience for customers buying through companies like Paytm, PhonePe, and Razorpay.
Wealth management: There’s an increasing need for wealth management services in India as the middle class grows. Fintech companies are addressing the needs of this growing industry by providing robo-advisory services, digital investing platforms, and other wealth management solutions.
Cybersecurity: Cybersecurity has emerged as a major problem as India’s financial industry witnessed the rapid growth. To safeguard the confidentiality of the information that belongs to their clients, fintech companies are investing in cutting-edge security solutions like biometric authentication, encryption, and fraud detection.
Government Initiatives Driving Fintech
• Jan Dhan Yojna
• On August 15, 2014, Prime Minister Narendra Modi unveiled the Pradhan Mantri Jan Dhan Yojana (PMJDY), a financial inclusion program for Indian nationals. Its goal is to increase the number of people who can afford financial services like bank accounts, remittances, credit, insurance, and pensions.
• Many people have benefited from the project; as of January 27, 2021, 41.75 crore accounts had been opened under PMJDY, of which 35.96 crore were active.
• Digital India
• The goal of the Digital India program was to provide all Indian residents with electronic access to government services.
• The initiative’s goals were to introduce several online services to enable greater reach and accessibility, such as the Accessible India Campaign, BHIM (Bharat Interface For Money), E-Panchayat, E-Hospital, etc., and to develop a stable and secure digital infrastructure through AADHAR, Digital Sakasharta Abhiyaan, DigiLocker, etc.
• Unified Payments Interface (UPI)
• One of the greatest achievements of the Indian payment system is UPI, which is becoming more and more popular. In under five years, UPI was able to secure a 73% market share of the total volume of digital transactions.
• The expansion of UPI has prompted a number of private companies to offer digital payment options that are radically changing the Indian economy. In June 2021 alone, Indians transacted 2.8 billion, or 280 crore, valued Rs 5,47,373 crore. This represents an increase in volume of 10.6% and an increase in value of 11.56% over May.
• Trade Receivable Discounting System (TReDS)
• In 2017, the Reserve Bank of India (RBI) launched The Trade Receivable Discounting System (TReDS), an online bill-discounting platform, in an effort to increase liquidity for small firms. Cash-strapped MSMEs can raise money using TReDS by selling corporate trade receivables.
• Corporates and MSMEs adopted TReDS at an increased rate during the COVID-19 pendemic.
• Regulatory and Policy Support
• Through innovative distribution models and regulatory sandboxes, Indian regulators have encouraged fintech innovation, and it is anticipated that they will persist in supporting the digital agenda. Innovation will be further stimulated by recently announced projects including the Open Credit Enablement Network, Public Credit Registry, GeM- SAHAY, and Regulatory Sandbox framework.
• The government’s core infrastructures, including
online identity verification, online payments, and safe online sharing of financial data through account aggregator systems, along with the introduction of new finance products that prioritize digitalization, have made the Fintech industry exceptionally effective.
• Banking Laws (Amendment) Act, 2025
• It includes multiple banking reforms to improve the audit quality and transparency of the Banks. Now depositor can manage the designate nominees as per his wish. Unclaimed funds of the depositors will now be managed under Investor Education and Protection Fund. Threshold limit now increased upto 2 crore.
Challenges in the Indian Fintech Industry
• Regulatory and Compliance Laws
• The government has imposed stringent regulatory
and compliance requirements to control the services provided by fintech companies in an effort to ensure the safety of the fintech ecosystem.
• Even if some of these rules are necessary, they unavoidably cause the fintech companies in the Indian financial markets to slow pace.
• No Bank Account
• India is a large country with a wide range of educational and socioeconomic backgrounds, therefore a sizable portion of the populace is still unbanked. Even yet, a lot of consumers choose in- person transactions over those conducted online.
• Cash-Driven Economy
• Since India has always been a cash-based economy, people have a cautious attitude regarding digital payments. Furthermore, because so many individuals lack access to banking and education, they frequently associate digital transactions with online fraud.
• Furthermore, a number of people are unable to recognize the convenience that fintechs provide through their inventive goods and services because they lack financial literacy.
• Cyberfrauds
• Due to its rapid growth, the fintech industry is vulnerable to numerous cyberfrauds and thefts. These cybersecurity problems can cause fintech companies to lose a significant amount of money while conducting online transactions since they handle sensitive client data.
Digital Banking
• According to the Reserve Bank of India (RBI), digital banking refers to the electronic banking services that a licensed bank offers now and in the future for the execution of financial, banking, and other transactions.
• It also includes the use of electronic devices or equipment for the execution of financial transactions through websites, mobile apps, and other digital channels that involve a high degree of process automation and cross-institutional service capabilities under improved technical architecture and unique business strategies.
Growth of Digital Banking in India
• In India, Covid-19 has effectively created a new angle for digital banking in the future. During that time, digital adoption in India took off like a rocket. The micro-level shift was facilitated by the introduction of new digital participation from other financial firms. Indians are the most open to adopting new digital payment methods in Asia Pacific, according to a global Mastercard survey.
• The research paper by Boston Consulting Group (BCG) also notes that favorable underlying customer demographics, mature infrastructure and a “surplus of
capital” are responsible for India’s digital growth. Indian banking is leading the way as a “model banking of the future,” laying the groundwork for QR codes and smooth UPI payments. This strategy should be applied to data management and lending as well.
• These important drivers of growth serve as the foundation for the digital transformation of Indian banking.
Digital Lending
• The process of obtaining a loan through online platforms and applying for one without needing to physically visit a bank or other financial institution is known as digital lending. Borrowers can apply for loans online, get approved, and manage loan repayments all with this method.
Digital Currency
• Digital currency is any form of money that is solely accessible online. Most countries have already switched to using electronic currency. What distinguishes digital currency from the electronic money already seen in bank accounts is that it never takes on a physical form.
e-banking
• The internet and e-commerce lead to the e-banking. A service offered by banks that allows a consumer to use the internet to complete transactions is called e-Banking. Account statements, fund transfers, account opening, financial product information and other services are all included in online banking.
• An operator who is human is not required to respond to customers. All of the banks’ operations are automated, and they have a single database. By enhancing the service, it reduces banking costs and improves the financial relationship.
• Because it is end-to-end encrypted and offers online banking services, it is totally safe and secure. Moreover, it encourages cashless and paperless financial transactions.
The RBI and banks have implemented a number of initiatives to raise awareness of and encourage the use of digital banking services.
The Digital Finance for Rural India – The creation of the Creating Awareness and Access (DFIAA) Scheme, which aims to aware rural citizens about the alternatives for digital money;
The Ministry of Electronics & Information Technology implements the Pradhan Mantri Gramin Digital Sakasharta Abhiyaan Scheme as a Central Sector Scheme through Common Service Centers (CSC) e-governance services India Ltd. with the active participation of all State governments and Union Territories (UTs);
RBI offers training courses and electronic banking awareness campaigns through its regional offices to raise public awareness of digital payments;
RBI has been carrying out multi-channel public awareness media campaigns to sensitise public about how to be vigilant while using digital banking. Additionally, RBI has carried out multilingual media campaigns with themes like “Safety of Digital Banking,” “Convenience of Digital Banking,” etc.
RBI conducts Financial Literacy week every year since 2016 to propagate financial education;
Banks conduct special camps through their Financial Literacy Centres (FLCs) on “Going Digital” through Unified Payments Interface (UPI) and *99# (USSD);
Banks’ rural branches hold camps that cover all of the topics in the Financial Awareness Messages Booklet and on UPI and *99# USSD, two digital platforms; and
Banking Correspondents also create awareness while facilitating transactions in the rural areas because of their familiarity with local population.
Different Payment System in India Unified Payments Interface (UPI)
• UPI stands for Unified Payments Interface. The adoption of the Unified Payment Interface (UPI) was India’s first significant move toward a cashless economy. This new function allows you to use your smartphone as a virtual debit card. Furthermore, UPI lets you send and receive money. By enabling several bank accounts into a single mobile application (of any participating bank), the Unified Payments Interface (UPI) technology brings together diverse banking operations, seamless fund routing, and merchant payments under one roof. It also facilitates “Peer to Peer” collection requests, which are flexible enough to be scheduled and funded based on need and convenience.
What is UPI Transaction?
• Through the use of a single smartphone app and the Unified Payments Interface (UPI) payment system, customers can link several bank accounts and transfer money without needing to supply an IFSC code or account number. Funds are credited instantaneously and in real time through this real-time payment system.
• As per the NPCI, UPI payment crossed more than 20 billion transactions worth over ₹24.85 Lakh Crore by August 2025.
• From 15th September 2025, users can make merchant transactions of up to ₹10 lakh per day for selected categories.
Features of Unified Payments Interface (UPI)
• The following characteristics of the Unified Payments Interface (UPI) make it a revolution in the digital market:
• Easy and safe money transfers between bank accounts are supported by this user-friendly system.
• Interbank transactions are made easier by this rapid payment method.
• It makes it possible for the nation to have extensive digital payment options.
• The National Payments Corporation of India created and introduced it in 2016.
• Every month, it claims more than one billion transactions.
• As of July 2022, there are 338 banks on UPI, up from 235 banks in July 2021, and 3.25 transactions have generated a volume of 6.28 billion.
• Within the next three to five years, the National Payments Corporation of India hopes to reach 1 billion daily transactions on the UPI network.
• Karthik Raghupathy, head of the strategy and investor relations, PhonePe, recently said to a magazine that the volume of UPI transactions has gone up to about 46 billion in the FY22 from 5 billion in Financial Year 2019, which accounts for more than 60% of all non- cash transaction volumes in FY22.
IMPS
• The payments can be made instantly to the beneficiary, payee, or account via the Immediate Payment Service (IMPS) electronic money transfer technique. IMPS is
available 24 hours a day, 7 days a week (including Sundays and holidays) and can be completed anytime. The RBI (Reserve Bank of India) and NPCI (National Payments Corporation of India) are responsible for managing IMPS.
• To carry out IMPS transfer via net banking, the remitter will have to register the recipient by providing all relevant information including bank account number and IFSC code, bank name, bank branch and so on. Each bank charges a different transaction fee for IMPS transfer. The fee varies from bank to bank depending on the amount of money being transferred. Generally, the fee ranges from one rupee to seven rupees.
RTGS - Real Time Gross Settlement
• The term real-time gross settlement (RTGS) refers to a funds transfer system through which you can send money and/or securities instantly. RTGS payments are final and irreversible once finished. The systems are administered and run by central banks in a majority of countries. RTGS facilitates quick and secure transactions, thereby reducing fraudulent transactions.
• With the Real-Time Gross Settlement (RTGS) cash transfer technique, funds are sent instantly and without any delays. The minimum amount that may be sent with RTGS is Rs. 2 lakh, and it is usually reserved for higher value transactions.
NEFT - National Electronics Fund Transfer
• The National Electronics Fund Transfer (NEFT) system allows for the safe transfer of funds throughout the nation from one bank account to another. Every NEFT settlement follows a batch-wise procedure. This mechanism allows money transfers on an individual basis to all Indian banks that support NEFT.
• In addition to other information like the account holder’s name, bank account number, and branch, the bank’s IFSC code is required in order to start a NEFT transfer. The National Electronic Fund Transfer (NEFT) is a payment platform which is used nationwide by many banks. This allows the easy and hassle-free transfer of money from one bank account to another bank account. With the world slowly shifting to online banking, the concept of NEFT has become very popular in the country and is an easy way of transferring funds. It eliminates the need to visit the bank to transfer funds, as you can transfer funds while at home.
Difference between RTGS and NEFT
| Category | NEFT | RTGS |
| Settlements | Transactions settled in batches | Transactions settled individually |
| RTGS Timings | Settled on an hourly basis during the bank working hours | Processed immediately in real-time |
| Transaction Amount | No minimum limit but has a maximum limit | The minimum limit is Rs.2 lakh. No upper ceiling |
| Value | Meant for lower or medium range transactions | Meant for higher value transactions |
Digital Wallets
• All that a digital wallet is is an electronic wallet that functions similarly to a physical wallet and allows for payment processing. A mobile wallet is what’s utilized when a digital wallet is used on a smartphone. E-wallets, often known as digital wallets, have revolutionized how customers pay for a range of goods and services.
• Numerous economists and academics believe that digital payments are quickly becoming the norm and will likely be the most in-demand kind of payment method in the future. India is moving toward a cashless economy and a digital future, thus the government has been implementing a number of initiatives to support and encourage the usage of this technology.
• The several government-backed digital payment apps, such the BHIM app and the Unified Payments Interface (UPI) payments app, have made this feasible.
BHIM UPI Payments App
• The BHIM, or Bharat Interface for Money, app is a feature- rich payment solution that utilizes Unified Payments Interface (UPI) technology.
• Users of BHIM can perform a range of real-time financial transactions, such as sending and receiving money, with the assistance of a Virtual Payment Address (VPA). 13 languages including Hindi, Tamil, Telugu, Malayalam, Bengali, Odia, and Marathi are supported by the app. In addition, 12 regional languages are offered.
Non-Fungible Tokens
• NFT stands for non-fungible tokens, which are typically made with the same kind of programming as cryptocurrencies. These cryptographic assets are, to put it simply, built on blockchain technology. Unlike other cryptographic assets, they cannot be traded or swapped in the same way.
• Digital Asset With a valid certificate generated by the blockchain technology that powers cryptocurrency, NFT is a digital asset that symbolizes items found on the Internet, such as art, music, and games.
• NFTs are not fungible and cannot be traded for another. Cryptocurrency
• A cryptocurrency, often known as digital currency, is a different kind of payment made feasible by encryption techniques. Cryptocurrencies can be utilized as a virtual accounting system in addition to a means of commerce because they use encryption technology.
•
Cryptocurrency is a type of digital payment that does not rely on banks to verify transactions. Money can be sent at any time and from any location via peer- to-peer technology. Unlike real money that is carried and transferred in the physical world, cryptocurrency payments are done only with digital inputs to an online database tracking individual transactions.
• Since cryptocurrencies are decentralized, no single entity is in charge of regulating them. Their foundation is the blockchain network technology, which guarantees transparency and facilitates the tracking of each transaction. Theoretically, these currencies are unaffected by manipulation or intervention by the government. Cryptocurrencies are immune to inflation as they lack an underlying economic foundation.
Difference between Cryptocurrency and NFTs
• Convertible cryptocurrencies are similar to tangible money. They can therefore be exchanged or traded with one another. For instance, the value of one Bitcoin will always be equal to that of all other Bitcoins. In the same way, one ether unit is always equivalent to another.
• Because of their fungibility, cryptocurrencies can be used in the digital economy as safe means of exchange. NFTs are not interchangeable, though. To put it another way, one NFT’s value is not the same as another’s. Every work of art is distinct, one-of-a-kind, and irreplaceable. Because NFTs make each token distinct and irreplaceable, they alter the cryptographic paradigm by preventing non- fungible tokens from looking alike.
• NFTs are digital representations of assets that are distinguished from one another by a unique, non- transferable ID. For this reason, they have been likened to digital passports.
• Moreover, NFTs can be extended. Thus, it is possible to “grow” a third NFT on its own by combining two NFTs. She is able to purchase her NFTs with any cryptocurrency wallet. The only prerequisite for acquiring an NFT is that. To purchase art, no KYC documentation is needed. A cryptocurrency wallet that runs on Meta-Mask and an NFT marketplace where NFTs can be purchased and sold are all you need.
Blockchain
• Blockchain describes a data-documentation technique that guarantees the confidentiality and integrity of the data. This makes trying to alter, falsify, or hack the system difficult or impossible. Fundamentally, a blockchain is a
digital record of transactions that is shared and duplicated throughout a network of computer systems that employ blockchain technology.
• The computers that are a part of the blockchain network copy and distribute transactions through a distributed ledger called a blockchain.
Benefits of Blockchain
• Time-saving: Settlements can be completed more quickly and affordably because no central authority verification is required.
• Cost-saving: A blockchain network reduces costs in a number of ways. No requirement for independent confirmation. Direct asset sharing is possible between participants. There are fewer middlemen. With copies of the shared ledger available to all participants, transaction efforts are minimized.
• Tighter security: Blockchain data is shared among millions of participants, making it impenetrable to tampering. Fraud and cybercrimes are unlikely to occur on this system.
• Collaboration: It eliminates the need for third-party negotiation and enables all parties to communicate directly with one another.
• Reliability: Blockchain authenticates and confirms each interested party’s identity. By doing so, duplicate records are eliminated, lowering rates and speeding up transactions.
Types of Blockchain
Blockchain technology
• Blockchain technology is a framework for storing public transactional records, or blocks, across multiple databases, or the “chain,” within a peer-to-peer network. People often refer to this kind of storage as a “digital ledger”.
• Each and every transaction in this ledger is validated and protected against manipulation by the owner’s digital signature. Because of this, the data in the digital ledger is extremely safe.
Advantages of Blockchain Technology
• Decentralization: Blockchain technology’s decentralized structure reduces costs and increases transparency by doing away with the need for intermediaries.
• Security: Transactions on a blockchain are secured through cryptography, making them virtually immune to hacking and fraud.
• Transparency: Blockchain technology increases transparency and lowers the possibility of conflicts by enabling all participants to a transaction to have access to the same information.
• Efficiency: Compared to traditional transactions, transactions on a blockchain can be completed more quickly and efficiently.
• Trust: Trust can be developed between participants to a transaction by using blockchain technology, which is transparent and safe.
Disadvantages of Blockchain Technology
• Scalability: Blockchain technology can be challenging to scale for large-scale applications because to its decentralized nature.
• Energy Consumption: Mining blockchain transactions takes a lot of processing power, which might have an adverse effect on the environment and energy usage.
• Adoption: Blockchain technology has many potential uses, but because of its technical complexity and lack of awareness, adoption has been slow.
• Regulation: Businesses and investors may experience uncertainty since the regulatory framework surrounding blockchain technology is still developing.
• Lack of Standards: Integrating blockchain technology into current systems can be challenging for organizations due to the absence of established protocols and technologies.
Central Bank Digital Currency (CBDC)
• Central bank Digital currencies or tokens are digital currency. It is a cryptocurrency that is a bit similar and is released by a central bank. The fiat currency of that nation is equal to the value of CBDCs.
• CBDCs, commonly referred to as “programmable money,” allow digital fiat or payment tokens to be created with particular attributes and functions.
• The Reserve Bank of India issues legal tender known as Central Bank Digital Currency, or CBDC. Additionally referred to as the “digital rupee” or e₹, it will provide atomicity the instantaneous settlement of transactions as well as the trust, security, and settlement finality of physical cash in a digital format.
• An explicit claim on the central bank is represented by e₹. Currency notes can be utilized in the same way as physical currency; they can be used for digital transactions or value storage.
Two types of CBDCs
• Wholesale central bank digital currencies: It would allow for more effective clearing activities between the member banks and the central bank.
• Retail central bank digital currencies: It would be equivalent to a banknote in function but would be in digital form and accessible to the general population.
e-RUPI
• National Payments Corporation of India (NPCI) has introduced an innovative digital solution called e-RUPI in collaboration with partner banks, the Department of Financial Services (DFS), the National Health Authority (NHA), and the Ministry of Health and Family Welfare (MoHFW).
• It will be possible for customers of this easy one-time payment method to redeem the voucher at participating businesses without the need for a card, digital payments app, or online banking access. Organizations or the government would send SMS or QR codes to the beneficiaries with e-RUPI for a particular purpose or activity.
• The contactless e-RUPI ensures complete confidentiality of beneficiary details, making it simple, safe, and secure. Because the necessary amount is pre-stored in the voucher, the entire transaction process using this voucher is comparatively speedier and more dependable.
75 Digital Banking Units
• According to the RBI, a DBU is “a specialised fixed point business unit/hub housing certain minimum digital infrastructure for delivering digital banking products and services as well as providing both self-service and guided digital maintenance for already-existing financial products and services.”
• DBUs will offer account users a variety of digital banking services.
• The increased digital experience and cost-effective access to products and services will be made possible for customers in an efficient, paperless, secure, and connected environment. The majority of services will be available in self-service mode at all times, year-round.
RBI- Reports
• RBI publishes two statutory reports, the Annual Report of the Bank and the Report on Trend and Progress of Banking in India. In addition to pertaining to the Bank’s operations during a specific year, these reports, along with the Report on Currency and Finance, also take into account economic developments, banking-related issues, financial sector policy and the prevailing social climate. They thus represent a significant body of material for the history of India’s economy and finance.
Financial Stability Report (FSR)
• Every two years, the Reserve Bank of India (RBI) releases the Financial Stability Report (FSR). The Financial Stability Report (FSR) is a compilation of the Sub- Committee of the Financial Stability and Development Council’s (FSDC) evaluations of the risks to financial stability and the resilience of the financial system.
RBI – Digital Payments Index
• In 2018, the RBI developed a collective Digital Payment Index (RBI-DPI) to project the growth of digital payments in the future. When compared to 217.59 in the same month, the Digital Payment Index (DPI), which was reported in September 2021, shows a 39.64% rise to 304.06 DPI. According to the index, the DPI is at 349.30 in March 2022 compared to 304.06 in September 2021.
Essential Points of the Digital Payment Index
• RBI made the decision to start publishing the Digital Payments Index (DPI) semi-annually in March 2021, with a four-month delay. As a result, the RBI began publishing the DPI for March and September in the months of January and July, respectively, starting in 2021.
• The Base period of the RBI-DPI has been set as March 2018, at a score of 100.
• The DPI index comprises five broad parameters to evaluate the penetration of digital payments in the country.
The following are the parameters and inside each of them are Sub Parameters made up of measurable indicators:
Storage of Payment System Data
• The Reserve Bank of India in its directive on ‹Storage of Payment System Data› has made it clear that entire payment data shall be stored in systems located only in India.
• All system providers need to ensure that within a period of six months, the entire data relating to payment systems operated by them is stored in a system only in India.
• Data stored in India should include end-to-end transaction details and info about payment transactions.
Depending on the nature and origin of a transaction, the RBI may give prior approval for the data to be shared with the foreign regulator
Organizations Related to Banking Sectors
ORGANIZATIONS RELATED TO BANKING SECTORS
NPCI (National Payments Corporation of India)
• The Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) established the National Payments Corporation of India (NPCI) in compliance with the Payment and Settlement Systems Act, 2007 in an effort to forge a robust payment and settlement infrastructure in India.
• In accordance with Section 25 of the Companies Act 1956 (now Section 8 of the Companies Act 2013), it was incorporated as a “Not for Profit” company with the intention of serving as the backbone of India’s electronic payment and settlement systems. Punjab National Bank, State Bank of India, Canara Bank, Union Bank of India, Bank of Baroda, ICICI Bank Limited, Bank of India, HSBC, Citibank, and HDFC Bank Limited are the 10 main promoter banks of NPCI.
Objectives of NPCI
• NPCI’s main objective is to give the general public access to a reliable and reasonably priced payment system. In addition, NPCI is in charge of combining and merging different technologies into consistent, standard business procedures that are applied countrywide and can be utilized as a retail payment system.
Services Offered by NPCI
The NPCI provides the following range of services, which are listed below:
• Bharat Bill Payment Interface: To support the retail payments sector, the NPCI created the Bharat Bill Payment Interface (BBPI). A single platform has been created for bill payers and aggregators with the launch of the BBPI.
• IMPS: With the Immediate Payment Service (IMPS), you can make an immediate money transfer. The facility is open for use at all times. To send money with IMPS, the beneficiary information needs to be supplied. To transfer money via IMPS, you can also include the account number and the IFSC code.
RuPay: RuPay was created by NPCI to empower common citizens to handle their finances. RuPay is a reasonably priced card that comes in prepaid, debit, and credit card forms. In India, there are more than 300 million RuPay cards.
USSD Services: In order to enable people to make banking decisions without the use of cellphones or the internet, the NPCI established the Unstructured Supplementary Service Date (USSD).
BHIM: UPI is used by BHIM to complete payment transfers. By entering the registered cellphone number or the Virtual Payment Address (VPA), you can use BHIM to make payments. To transfer money with BHIM, you don’t need a smartphone.
Financial Services Institutions Bureau (FSIB)
It’s a government body that was established by the Department of Financial Services. Making recommendations for the nomination of full-time directors and non-executive chairman of state-run financial services firms will fall under the purview of the board.
The Banks Board Bureau (BBB) was superseded by it.
It would also prescribe criteria for choosing general managers and directors of general insurance businesses in the public sector.
The board will assist state-run banks in their fund-raising efforts and assist in establishing and executing business strategies, in addition to its primary responsibility of acting as a headhunter for state-owned financial services organizations.
The primary role of the Financial Services Institutions Bureau (FSIB) is to ascertain the requisite workforce and guarantee the appropriate selection of talent for high- level jobs in government-owned financial institutions.
Bank Board Bureau (BBB)
Indradhanush Mission’s seven-point plan to reform Public Sector Banks saw the establishment of Bank Board Bureau in April 2016. Reserve Bank of India funding supports this non-profit, independent Central Government organization.
It was composed of the Chairman, and three ex-official members: the Deputy Governor of the Reserve Bank of India, the Secretary of the Department of Public Enterprises, and the Secretary of the Department of Financial Services. In addition, there are five industry experts, two of whom were formerly employed in the private sector.
The overall functioning of the Bank Board Bureau Involved
Aid in the restructuring of the public bank sector business strategies
Provide support to deal with issues of bad loans or stressed assets
• Build Strategies along with banks for raising capital funds
• On crucial matter to give advice to the central government such as:
• Top-level appointments in PSBs include non- executive chairmanships and full-time directors.
• Advice the government on issues pertaining to the nomination, confirmation, extension, and termination of the directorships of nationalized banks.
• Assist the Central in creating a codes of conduct and ethics code for managerial staff of nationalized banks.
• Provide appropriate programs for the training and development of managerial staff in a nationalized bank.
Banking Codes and Standards Board of India (BCSBI)
• The Banking Codes and Standards Board of India (BCSBI) is an independent industry watchdog that works in consumer rights in the banking sector.
• The former deputy general of RBI, S S Tarapore, introduced the concept of setting up a committee that can help the banking customers enjoy better financial services. And so, BCSBI was registered as a separate body under the Societies Registration Act, 1860 in 2006.
Main objectives of the BCSBI
• To create and provide detailed Codes and Standards for the banks to follow, focusing on fair practice and quality customer service.
• To increase transparency between the banks and the customers.
• To nurture the relationship between the banks and the customers.
• To research and analyze the Codes and Standards followed by the banks around the world.
• To keep a close watch on the banks across the nation to ensure they comply with the Codes and Standards provided to them.
Advisory Board for Banking Frauds (ABBF)
• The Central Vigilance Commission, in 2019, in consultation with the RBI and based on the recommendation of an expert committee of NPAs and frauds constituted an ‘Advisory Board for Banking Frauds (ABBF)’.
• It can examine the role of officials or directors (including ex-officials/ex-whole-time directors) in public sector banks (PSB), public sector insurance companies, and public sector financial institutions.
• It includes cases of fraud amounting to ₹3 crore and above.
• All PSBs and PFIs were mandatorily required to refer all the matters of suspected frauds involving money of above Rs. 50 crores, wherein officers of the rank of general managers and above are involved, for seeking advice of the board before initiating any inquiry or investigation.
Cheque
• A check is a written document that can be used in place of cash. It’s a negotiable document that tells the bank to transfer a certain amount from the drawer’s account to a prearranged recipient. Cheques offer a safe and practical means of:
• Transfer funds.
• Make payments.
• Settle debts between individuals and businesses.
Types of Cheque
• Bearer Cheque: One who holds or “bear” the cheque, the bearer cheque is payable to that person only. It is an open instrument that can be cashed by anyone in possession of it.
• Order Cheque: An order cheque is only payable to the individual or business listed as the payee on the cheque. To be cashed, the payee must endorse it.
• Crossed Cheque: Two parallel lines go across the face of a crossed check. Indicating that the cheque must be deposited straight into the payee’s bank account, these lines are drawn. Moreover, it stops cheques from being cashed at the counter.
• Open Cheque: A cheque that is not crossed or designated as a bearer or order cheque is an open check. It is cashable over the counter and payable to the individual presenting it.
• Post-Dated Cheque: The payment date on post-dated cheque is an upcoming date. That day is the only one on which it can be encashed.
• Stale Cheque: A stale check is a check that has expired. Thus, keep in mind that you will only experience disappointment if you present stale checks after the due date.
• Traveler’s Cheque: A traveler’s cheque is a fixed- amount check that has been preprinted. It is intended for usage on travels. In addition, it is a more practical and secure option than carrying cash.
• Self-Cheque: An account holder’s cheque made payable to themselves is known as a self-check. It enables you to take money out of your account.
Cheque Truncation System (CTS)
• A technologically advanced method for processing physical paper cheques more quickly and efficiently is the Cheque Truncation System (CTS).
Financial Stability and Development Council (FSDC)
• The Financial Stability and Development Council (FSDC) was established by the government as the highest level forum in December 2010 with the goals of improving inter-regulatory coordination, bolstering and institutionalizing the mechanism for preserving financial stability, and encouraging the development of the financial sector.
• The heads of the financial sector regulators (RBI, SEBI, PFRDA, IRDA, and FMC), the finance secretary and/or secretary, the department of economic affairs, the secretary of the department of financial services, and the chief economic adviser make up the Council’s membership. The finance minister serves as the council’s chairman. If necessary, the Council may invite specialists to attend its meeting.
The Council oversees the macro prudential supervision of the economy, encompassing the operations of major financial conglomerates, while also addressing matters of inter-regulatory coordination and financial sector development, all while maintaining the regulators’ autonomy. Financial inclusion and financial literacy are also key themes.
In DEA, the Secretariat for the Council is the FSDC Secretariat.
Financial Stability Board (FSB)
The Financial Stability Board (FSB) replaced the Financial Stability Forum (FSF) when it was founded in April 2009. The G20 Heads of State and Government approved the FSB’s first Charter on September 25, 2009, which outlined the organization’s goals and mandate as well as its organizational structure, during the Pittsburgh Summit.
The G7 Finance Ministers and Central Bank Governors established the FSF, the FSB’s predecessor organization, in 1999.
In addition to developing and promoting the implementation of efficient regulatory, supervisory, and other financial sector policies, the Financial Stability Board (FSB) was founded to coordinate the efforts of national financial authorities and international standard-setting bodies on a global scale.
As an active member of the FSB, India is represented by the Secretary (EA), the Deputy Governor (RBI), and the Chairman (SEBI) in its Plenary.
• To represent India’s interests with the FSB, the FSDC Secretariat in the Department of Economic Affairs works in coordination with the various regulators of the financial industry and other pertinent groups.
Development Finance Institutions
• Development financial institutions (DFIs) or development banks are the organizations that provide development financing. In order to provide development finance to one or more economic sectors or subsectors, an institution is considered a DFI if it is “an institution promoted or assisted by Government.”
• The RBI Act of 1934, the Companies Act of 1956, and other acts creating DFIs do not utilize the term “DFI” in a particular manner.
• One of a Development Finance Institution’s (DFI) responsibilities is to identify and remedy any gaps in the nation’s financial sector’s markets and institutions. They offer Large (less than five years) and Medium (1–5) year funds.
Objectives of Development Finance Institutions
• The prime objective of DFI is the economic development of the country via financing infrastructure activities. These institutions provide long-term financial as well as technical support to various sectors.
• DFIs do not accept deposits from people but they raise funds by borrowing from governments, insurance companies, pension funds and sovereign funds. On behalf of businesses and subscriptions to shares, debentures, etc., it also offers banks a guarantee.
• They also offer advisory services, viability studies, project reports, and other technical help.
• DFIs help to improve loan flows towards infrastructure projects and offer credit improvement for housing and infrastructure projects.
Resources
• The DFIs were funded by patient equity capital and preferential market access for raising medium-/long- term resources. The Reserve Bank of India (RBI) provided preferential access through the channelization of multilateral funding lines, fund flow from the National Industrial Credit-Long-term Operations (NIC LTO), the issuance of tax-saving bonds and Statutory Liquidity Ratio (SLR) bonds, and appropriate facilitators to draw in funds from capital gains and investment allowance reserves.
• There were other special provisions made in the Income Tax Act, which enabled access to medium-/long-term funds, which supplemented the other fund-raising avenues.
• DFIs were also permitted to intermediate external commercial borrowings (ECB) markets for on-lending.
Emergence of Financial Institutions in India
In Asia, establishment of the Japan Development Bank and other term-lending institutions fostered rapid industrialisation of Japan.
The success of these institutions provided strong impetus for creation of DFIs in India after independence, in the context of the felt need for raising the investment rate.
The RBI was given the responsibility of creating a suitable financial architecture through institution building in order to mobilize and allocate resources to the sectors that were prioritized in the plan.
The Industrial Finance Corporation of India (IFCI) was the first DFI to be founded in India in 1948. The SFCs Act, 1951, allowed for the establishment of SFCs at the state level.
The specialized financial institutions set up after 1974 included NABARD (1981), EXIM Bank (1982), shipping credit and investment company of India (1986), Power Finance corporation, Indian Railway Finance corporation (1986), Indian Renewable Energy Development agency (1987), Technology Development and information company of India.
National Bank for Financing Infrastructure and Development (NABFID)
NABFID was set up as an All-India Financial Institution (AIFI) in 2022 under the NABFID Act, 2021, as the principal entity for infrastructure financing in the country.
NABFID has been primarily established to support the development of long-term infrastructure financing in India including the development of the bonds and derivatives markets necessary for infrastructure financing.
The entity will be regulated and supervised as an All- India Financial Institution (AIFI) by the Reserve Bank of India (RBI), making it the fifth sector-specific AIFI in the country.
Base rate
The lowest interest rate that Indian banks could lend money at was known as the Base Rate. It made its debut in July 2010. They were not allowed to use any loans that were lower than this rate. The average cost of financing played a major role in determining the base rate. Lenders had to assess their base rate at least once every quarter in accordance with RBI regulations. The RBI replaced base rate with the Monetary Chart Layout Rate (MCLR) in April 2016.
Marginal Cost of Funds Based Lending Rate and External Benchmarks Lending Rate
The base rates used by banks to calculate loan rates varies. The Reserve Bank of India (RBI), the nation’s central bank, announces these base rates. The following rates were applied to Indian loans up till 2019.
• Internal Benchmark Lending Rate (IBLR)
• Marginal Cost of Funds Based Lending Rate (MCLR)
Marginal Cost Lending rate
MCLR is the minimum interest rate below which banks cannot lend is known as the Marginal Cost Lending rate. It’s an internal rate for floating loans that each bank sets. The cost of carrying in cash reserve ratio, tenure premium, operating costs, and marginal cost of funds are all related to the MCLR. Unlike the base rate, which is based on the average cost of funds, it is determined using the current cost of funds. Additionally, MCLR reacts to changes in policy rates more quickly.
External Benchmarks Lending Rate
The internal benchmark rates, according to the RBI, were insufficient to provide an efficient means of transmitting monetary policy. The Reserve Bank of India has opted to use an external benchmark, as advised by its Internal Study Group (ISG). We now refer to this external benchmark rate as the EBLR rate. The reason why EBLR is so important in banking is that banks are unable to give their consumers loans at rates lower than the EBLR. Banks utilize EBLR to determine the interest rates on other loans as well as home loans. The term “external benchmark” refers to banks adhering to interest rate anchoring established by a third party outside the bank. External benchmarks include the MIBOR rate from FBIL and the repo rate from RBI.
External benchmarks for banks to follow:
• Reserve Bank of India policy Repo Rate.
• The Financial Benchmarks India Private Ltd. (FBIL) reported the yield on the Government of India’s 3-month Treasury Bills.
• The FBIL has released the Government of India’s 6-Month Treasury Bill yield.
• Any further benchmark market interest rate that the FBIL releases.
• Other kinds of borrowers may also be eligible for such external benchmark connected loans from banks. The spread, which is the higher interest rate that can be charged from a borrower who poses a greater risk, is another option available to banks.
Why a Shift from IBLR to EBLR?
• The change to EBLR was brought about by a number of problems with IBLR (Internal Benchmark Lending Rate). Listed below are a few of these:
• Banks passed on only a portion of the advantages to borrowers when the RBI reduced the repo and reverse repo rates. In this instance, the borrowers suffered a loss.
• The lending rate is dependent upon multiple factors. These variables could be the spread of the bank, the
financial summary of the bank at that point in time, and the deposit and non-performing asset (NPA) list respectively.
Since the IBLR was dependent on multiple variables, the internal benchmark was unable to accommodate any active changes in the effective interest rates.
Difficulties in transmitting lending rates arise from the requirement for greater transparency in the internal benchmark rate establishment process.
Non-Performing Assets Crisis
Non-Performing Assets: A loan or advance for which the principle or interest payment was past due for more than ninety days is considered a non-performing asset (NPA). Banks must further categorize non-performing assets (NPAs) into substandard, doubtful, and loss assets.
Substandard assets: assets that have been non- performing for a duration of 12 months or less.
Doubtful assets: If an asset stays in the substandard category for a full year, it will be labeled as questionable.
Loss assets: The RBI states that, “although there may be some salvage or recovery value, loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.”
Provision for Non-Performing Assets
The term “provision for non-performing assets” refers to the amount that banks set aside in a given quarter from their profits to cover non-performing assets (NPAs).
This is because there is a chance that this asset will eventually lose money. Banks can thus use this technique to provision for faulty assets and have a healthy book of accounts. In addition, banks, as previously said, base their provisions on the NPA category.
Furthermore, the kind of bank determines the provisions. For example, the provisioning standards of Tier-I and Tier-II banks differ.
By examining the bank’s auditor’s report, one can comprehend the NPA provisions. In accordance with RBI regulations, banks are required to periodically disclose their non-performing assets (NPAs). Understanding the bank’s non-performing assets (NPA) status is aided by two measures.
Gross Non-Performing Asset (GNPA)
The entire amount of a bank’s loans that are past due within ninety days of the end of a given quarter or fiscal year is known as its gross non-performing asset.
Net Non-Performing Asset (NNPA)
After the bank makes explicit provisions for NPAs, Net Non- Performing Asset displays the precise value of such accounts. It is calculated by deducting from the gross NPA the assets that are questionable and unpaid.
During the fiscal year of 2025-26 the public sector banks of India recorded the lowest ever non-performing asset with the gross NPA ratio is 1.93% and the Net NPA ratio is 0.39% as of 31 March 2026.
From Twin Balance Sheet Problem to Four Balance Sheet Challenge
The stress on balance sheets due to NPAs (for banks) on one side and heavily indebted corporates on the other results in the twin Balance Sheet (TBS) problem. From 2016 to 2017, this word became popular in India.
Usually, TBS is followed by economic stagnation, but India’s TBS problem co-existed with the high level of aggregate domestic demand, making sure that India has a unique path of TBS. NPAs reached their peak in 2015, with loans made during the strong growth years of 2003– 2008 accounting for the majority of them. The sector with the highest NPAs was infrastructure, which includes telecom, electricity, and transportation.
From the problem of TBS, we have graduated to four balance sheet challenges. It deals with banks and Non- Banking Financial Companies on the financial side and real estate and infrastructure companies on the corporate side.
The direct lending of some state banks to NBFCs was about 10-14% of their loan books, hence widening and deepening the NPA crisis in India.
NPAs SINCE 2011
Considering the long history of NPAs in India they have been at their lowest level during the global financial crisis and the few years following it. But there is an increase in NPAs since 2011, however, till 2013-14 the growth rate of NPA was considerably slow. From 2014 onwards, NPA grew at an exponential pace, reaching the maximum levels in 2017-18. The Public Sector Banks were the main source of the increase in non-performing assets.
Reasons for NPAs in India
Over-optimism and slow growth: India was growing at a growth rate of 9-10% p.a. in the mid-2000s when huge loans were taken by all sectors but loans given to the infrastructure sector accounted for the most. Banks embraced the risk of taking on riskier projects because
they believed that India’s fast growth trend would continue. Most of the loans that became non-performing assets (NPAs) were granted between 2003 and 2008. The 2008 Great Financial Crisis caused all of the business houses’ and banks’ expectations to abruptly collapse. The Great Financial Crisis had an impact on India as well; the RBI raised interest rates, which in turn led to a rise in non-performing assets (NPA). The companies struggled to pay back their capital and interest, which resulted in an increase in non-performing assets (NPAs).
Government Permissions and Foot-Dragging: Government decision-making was dragged down by a number of governance issues, including the questionable allocation of coal mines and the associated fear of investigations. Cost overruns increased in stalled projects, and their inability to repay debts expanded. The problems of the stranded power plants show that government decision-making has not yet accelerated enough, despite India’s power shortfall.
Malfeasance: One key factor contributing to NPA in India was the bankers’ lack of due diligence. Post-original loan disbursement, the bankers’ performance was likewise subpar. Promoters were rarely held accountable for inflating their invoices to represent the true cost of capital equipment. Public sector bankers kept financing promoters even when private sector banks withdrew, indicating that their monitoring of the health of the promoter and the project was insufficient. Last but not least, an excessive number of loans were given to influential promoters who have a history of defaulting on their debts.
Fraud: The extent of frauds in the public sector banking system has grown, while they are still insignificant when compared to the total amount of NPAs. Frauds differ from typical NPAs in that they result from blatantly illegal behavior on the part of either the borrower or the banking. The investigating authorities claim that the banks are marking transactions as fraudulent long after the crime has really taken place.
Impact of NPA on the economy and profitability of the banks
Banking Sector is the powerhouse of the economy, a strong and growing economy thereby implies that the banking sector must be working well and acting as a catalyst for economic growth. Credit is provided by banks and is then used to fund successful initiatives and national growth. However, the cycle of lending, repaying, and borrowing is affected when money moves out the financial system.
Depositors and other lenders have the right to receive repayments from banks. If these repayments are not made, banks are required to secure additional loans in order to pay off their debts to creditors and depositors. As a result, banks become hesitant to issue further loans for existing or new projects.
• When credit to various sectors of the economy slows down, the economy suffers. Furthermore, non-performing assets (NPAs) compel banks to prioritize credit risk management over other areas of their operations.
• A bank possessing non-performing assets (NPAs) at a high ratio would have to bear the carrying expenses of those assets.
• Some other consequences of NPAs are- high levels of provisioning, reduction in interest income, stress on profitability and capital adequacy, gradual decline in the ability to meet the steady increase in cost, and increased pressure on Net Interest Margin (NIM) thereby reducing competitiveness, steady erosion of capital resources and increased difficulty in augmenting capital resources. Thereby rising NPAs imply an ailing economy.
Six-point strategy to solve non-performing assets problem
• Accountability: Usually, junior executives are held responsible for mistakes, while senior-level executives make big choices on the Credit Sanction Committee. Holding senior executives accountable is crucial for PSBs to tackle non-performing assets (NPAs).
• Corporate Governance: Despite the establishment of the Banks Board Bureau by the government in April 2016 with the aim of attracting talent, corporate governance has not reached the intended standard. Certain concerns still exist and require immediate resolution.
• Stricter NPA Recovery: The government needs to amend the laws and to allow banks greater authority to collect non-performing assets (NPAs). The fear of losing the asset is what prompted the Insolvency and Bankruptcy Code’s imposition of punishment. The current situation permits the RBI to examine a lender but denies them the authority to form an oversight committee due to debtor control modifications to the Banking Regulation Act. In relation to PSBs, the RBI has requested nine more powers under the Banking Regulation Act, such as the authority to appoint and dismiss CMDs, to take over the Board of Directors and apply for the winding up of noncompliant banks, to approve voluntary amalgamation schemes, and more.
• Credit Risk Management: Accurate credit evaluation of the project, clients’ creditworthiness, and their expertise and experience should be conducted. In addition to performing these studies, banks must to create safeguards against outside influences and perform sensitivity analyses. To track early warning signs regarding the projects, an efficient Management Information System (MIS) needs to be put in place. The management should ideally receive timely notifications from the MIS indicating problems so that appropriate action can be done.
• Asset Reconstruction Company: To expedite the resolution of stressed PSB assets, an ARC or asset
management company must be established. Following extensive talks on capital and pricing concerns, the government should take the required actions to investigate the feasibility.
Fraud Management: Over the past three years, the quantity and value of PSB frauds have increased.
Measures taken to reduce NPAs
Over time, the Government of India and the Reserve Bank of India have implemented various measures to decrease non-performing assets (NPAs). These measures include the establishment of Debt Recovery Tribunals (DRTs) in 1993, the Lok Adalat in 2001, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002 and the most recent one, the Insolvency and Bankruptcy Code (IBC) in 2016.
Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002)
To investigate banking sector reforms, the Central Government formed the Andhyarujina Committee and the Narasimhan Committees I and II. These committees evaluated whether these sectors’ legal frameworks needed to be changed. The SARFAESI Act, 2002, was based on the recommendations of these committees, which also suggested new laws for securitization and allowing financial institutions to store securities and sell them quickly without going through the legal system.
Important terms
Taking over the financial assets (loans) i.e., acquiring the asset from the Banks and Financial Institutions by the Securitisation Company is called “Securitisation”.
Taking over or acquiring financial assets (loans) from the Banks and Financial Institutions by the Asset Reconstruction Company is called “Reconstruction of Financial Assets”.
Important Provisions
The Act incorporates a provision for taking over the management of the borrower’s business in the manner as prescribed in the Act. This is a unique provision rarely found in any law.
The Act prohibits the borrower from delaying and defeating the secured creditor. The borrower who is liable to pay the debt can approach any court of law, not below the rank of High Court and DRT.
The Civil Courts such as Taluka Court or District Court have no jurisdiction whatsoever in respect of action taken by the secured creditor under the Act.
Debts which are time-barred cannot be recovered under the Act.
The Act supersedes all laws in India. This is also a
unique provision. The borrower is not entitled to invoke provisions of other laws in his defence to delay and deny the rightful secured creditor from exercising his rights under the Act.
• The Appeal can also be filed by the borrower or the guarantor against the decision of Debt Recovery Tribunal in Debt Recovery Appellate Tribunal (D.R.A.T.) subject to payment of 50% of the amount as claimed by the Bank or the Financial Institution or as determined by DRT whichever is less.
• The Act also contains provisions in respect of establishment of the Securitisation Company, Asset Reconstruction Company and Central Registry.
Shortcomings and lacunae in the SARFAESI Act
• Despite its many benefits, the SARFAESI Act is not without flaws. Being inapplicable to unsecured creditors is one of the Act’s major shortcomings.
• After the asset is put up for auction, the bank has no control over what happens to it. The bank cannot continue in accordance with the prior conditions if there are no bidders for the asset at the auction.
• One of the Act’s provisions allowed the bank to hold a particular asset for a maximum of seven years. However The Act does not outline what happens if the bank receives no reasonable bid within the allotted period.
The Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code (IBC) 2016
In 2016, as non-performing assets and debt defaults in India increased, and it became apparent that traditional loan recovery methods like the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), Lok Adalats, and Debt Recovery Tribunals were underperforming, the Insolvency and Bankruptcy Code (IBC) was introduced. The purpose of the IBC code was to restructure India’s corporate distress resolution framework and combine existing laws to establish a time-bound mechanism that prioritizes creditor-in-control over debtor- in-possession.
When the IBC triggers insolvency, there are two possible outcomes: resolution or liquidation. If resolution attempts are unsuccessful, the company’s assets are liquidated. Initially, efforts are made to resolve the insolvency by either developing a new ownership plan or restructuring.
What is the process followed under the IBC?
• Section 6 of the Insolvency and Bankruptcy Code (IBC) permits a bank or other entity that has lent money for operational purposes to initiate a Corporate Insolvency Resolution Process (CIRP) in the case that a firm that has borrowed money to operate its business, known as a corporate debtor (CD), defaults payments on its loans.
• Prior to the pandemic, a creditor or debtor had to file
for bankruptcy if there was a minimum amount of delinquency of ₹1 lakh. However, the government raised this level to ₹1 crore in order to alleviate the burden on businesses.
• In order to file for bankruptcy, a person has to go via a designated adjudicating authority (AA) as per the Indian Bankruptcy Code (IBC); these AAs are the several National Company Law Tribunal (NCLT) benches spread throughout India.
• The Tribunal has to provide a reason if the admission is delayed, and it has 14 days to accept or deny the application.
• After an application is accepted by the AA, the CIRP, or resolution procedure, starts. The resolution process must be completed within the revised, obligatory timeframe of 330 days.
• Following admission of the application, the AA designates an Interim Resolution Professional (IRP) who is enrolled with an insolvency professional agency (IPA). IRPs may include lawyers, corporate secretaries, experienced qualified chartered accountants, and so on.
• Following the Tribunal’s appointment, the IRP seizes control of the defaulter’s assets and business affairs, gathers data from Information Utilities (repositories that monitor the debtor’s credit history), and then arranges for the formation of a Committee of Creditors, or CoC.
• The most significant corporate decision-making body in any CIRP is the Committee of Creditors (CoC), which consists of all unrelated financial creditors of a defaulting company. Its role is to determine whether the defaulting company is viable enough to be liquidated or reformed and given a fresh start.
• Additionally, it designates an insolvency professional (IP) to oversee the company’s operations throughout the CIRP. This IP may be the same as the IRP or a different expert.
• The Intellectual Property Office (IP) invites and examines recommendations for a firm’s resolution plan, which may involve debt restructuring, mergers, or company demergers.
• It sends qualifying plans to the Committee on Continuities (CoC), which has the authority to adopt a plan provided it receives 66% of committee members’ vote share. The business goes into liquidation if the CoC rejects any settlement proposal.
• If a plan is accepted, the debtor is required to carry out the plan after it is submitted by the CoC to the Tribunal (before the maximum 330-day deadline). A plan may also be rejected by AA.
• Pre-packs, or the pre-pack insolvency resolution procedure (PIRP), were recently added to the IBC for Micro, Small, and Medium-Sized Enterprises (MSMEs).
• In a pre-pack resolution, a company’s owners and
creditors reach an out-of-court agreement to sell the company to a bidder who expresses interest. A third party or a business associate could be the buyer. The pre- pack settlement process can only be used for defaults up to Rs. 1 crore, according to the present law.
What are the challenges for the IBC? Time taken
• The IBC was touted as a time-bound mechanism in the face of the often-laggard states of older mechanisms.
• Here, timeliness is essential to prevent additional declines in the business’s viability or asset worth. The initial timeline for the resolution procedure was 180 days, with a 90-day extension allowed by the IBC.
• Following that, the IBC was amended to further extend the deadline for completion to 330 days, or nearly a year.
• In 2018, despite the 180+90 day timeline, the majority
of cases (ranging from corporations owing less than
₹50 crore to those owing more than ₹1000 core) were settled in less than 300 days. But in FY22, cases involving businesses that owed more than ₹1,000 crore took 772 days to be resolved. Over the previous five years, the average number of days required to resolve such cases increased significantly.
Haircuts
• The debt that the lender forgoes as a portion of the outstanding claim is known as a haircut.
• In 2021, the Parliamentary Standing Committee on Finance noted that over the five years of the IBC, creditors were required to pay an average of 80% in damages in over 70% of cases.
Other challenges
• There exist additional obstacles to the IBC, a few of which were identified by the Standing Committee. These had to do with how the IPs and CoCs conducted themselves. The Committee recommended for greater openness and the creation of a professional code of conduct for the Committee of Creditors, stating that the committee of creditors had substantial discretion in adopting resolution plans and selecting IPs.
• As for insolvency professionals, the Standing Committee pointed out that 61% of the 203 professionals inspected since 2016 had disciplinary action taken against them by the Insolvency Professional Agencies (IPAs) and the IBBI. It also added that, given the significant role that IPs play, there should to be a single regulator for them in order to guarantee best practices and transparency.
5:25 Rule (2014)
• Also known as, Flexible Structuring of Long-Term Project Loans to Infrastructure and Core Industries.
• Refinancing for long-term projects is necessary since the project timeframe is lengthy and the firms do not receive the money back into their books for a long time. Therefore, it was suggested to preserve the cash flow of these organizations, as loans are required every 5-7 years.
• The 5:25 scheme allows banks to extend long-term loans of 20-25 years to match the cash flow of projects.
Joint Lenders Forum – 2014
• The Joint Lender’s Forum is a dedicated body of lender banks that is formed to speed up decisions when an asset of Rs 100 crore or more turns out to be a stressed asset.
• RBI has issued guidelines for the formation of JLF in 2014 for the effective management of stressed assets.
• Instructions for the formation of JLF is mentioned in the RBI guideline titled ‘Framework for Revitalizing Distressed Economy’ (2014).
• All PSBs whose loans have experienced stress were included in its creation.
• Its purpose is to prevent loans from many banks being given to the same person or business.
• It is designed to avoid situations in which someone takes out a loan from one bank and gives out a loan from another.
Mission Indradhanush (2015)
Components of Mission Indradhanush
• A seven-point plan called Mission Indradhanush aims to solve the problems that public sector banks (PSBs) face. As mentioned, the P J Nayak Committee on Banking Sector Reforms recommended many of the actions that were implemented.
• Appointments, Banks Board Bureau, Capitalization, De- stressing, Empowerment, Framework of Accountability, and Governance Reforms are among the seven components (ABCDEFG).
• Appointments - separation of posts of CEO and MD to check excess concentration of power and smoothen the functioning of banks; also, induction of talent from private sector (recommendation of P J Nayak Committee)
• Bank Boards Bureau - will replace the appointments board of PSBs.
• It will advise the banks on how to raise funds and how to go ahead with mergers and acquisitions.
•
Capitalisation
• Capitalisation of the banks by inducing Rs 70,000 crore into the banks in the next 4 years
• Banks are in need of capitalisation due to high NPAs and due to need to meet the new BASEL- III norms
• De-stressing
• Solve issues in the infrastructure sector to check the problem of stressed assets in banks
• Empowerment
• More independence for banks and more leeway in hiring staff.
• Framework of accountability
• The new key performance indicators will serve as the foundation for the banks’ assessment. In addition to these qualitative factors, such human resource initiatives and calculated actions to enhance asset quality, these quantitative characteristics include NPA management, return on capital, company growth and diversification and financial inclusion.
• Governance Reforms
• GyanSangam conferences are held between bankers and government representatives to resolve problems in the banking industry and develop future policies.
Strategic Debt Restructuring (SDR)Scheme
• Under SDR, banks who have given loans to a corporate borrower gets the right to convert the full or part of their loans into equity shares in the loan taken company.
• The SDR scheme which was introduced by the RBI in June 2015.
• The SDR an initiative can be taken by the group of banks or JLF that have given loans to the particular defaulted entity.
• Its basic purpose is to ensure that more stake of promoters in reviving stressed accounts and providing banks with enhanced capabilities for initiating a change of ownership in appropriate cases.
Asset Quality Review – 2015
• AQR is the result of asset quality inspection by the RBI
on commercial banks.
• Main feature of AQR is that it may not be periodic and rather it is random check.
• AQR is an exercise conducted by the Reserve Bank of India (RBI) to assess the actual level of bad loans in the industry
S4A (2016)
• The RBI introduced the Scheme for Sustainable Structuring of Stressed Assets as an optional framework.
• The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi- equity instruments.
• When this borrower makes a full recovery, the lenders are expected to benefit.
Comprehensive 4R’s strategy
• The government has put in place a comprehensive plan known as the “4Rs,” which includes recapitalizing PSBs, resolving and recovering value from stressed accounts, publicly identifying non-performing assets (NPAs), and reforming PSBs and the larger financial ecosystem to create a clean and responsible system. Under the 4R’s policy, extensive measures have been implemented to lower PSB NPAs, including, among other things, the following:
• The Insolvency and Bankruptcy Code (IBC) has had a significant impact on the shift in credit culture. It has altered the relationship between creditors and borrowers, removing promoters and owners’ control over the defaulting company and prohibiting willful defaulters from participating in the resolution process or buying capital from the market.
• In order to enable PSBs to seek prompt resolution of NPAs, the government has invested Rs. 2.46 lakh crore in recapitalization of PSBs during the last four fiscal years, while PSBs have raised an additional Rs. 0.66 lakh crore on their own.
• The PSBs Reforms Agenda has resulted in the implementation of several significant reforms, such as the following:
• Board-approved PSB Loan Policies now require project finance to tie up all required permissions, approvals, and linkages prior to disbursement; to closely examine the group balance sheet and ring- fence cash flows; and to assess non-fund and tail risk.
• In order to reduce the risk of fraud and deception, the use of third-party data sources for comprehensive due diligence across data sources has been used.
• With high-value loans, monitoring has been strictly separated from sanctioning functions. To ensure effective monitoring of loans exceeding Rs. 250 crores, specialized monitoring companies that combine financial and subject knowledge have been deployed.
• Online end-to-end OTS platforms have been established in order to guarantee prompt and improved realisation of one-time settlements (OTSs).
Enhanced Access and Service Excellence (EASE) Program
• The EASE Reforms Agenda, written by the Boston Consulting Group and commissioned by the Indian Banks’ Association, was introduced by the Indian government and Public Sector Banks (PSBs).
•
With the use of more than 120 objective indicators, the EASE Reforms Index assesses each PSB’s performance and offers banks a clear grading system that helps them pinpoint their areas of strength and growth.
• By putting a strong emphasis on data analytics, automation, and digitization, the goal is to promote healthy competition among PSBs and advance modernization initiatives. Since its launch, the EASE initiative has given PSBs access to a shared set of reform goals with the goal of implementing cutting-edge changes that will improve profitability, asset quality, customer service and digital capabilities.
Phases of EASE Reforms EASE 1.0
The EASE 1.0 report states that Public Sector Banks’ (PSBs’)
performance in resolving non-performing assets (NPAs) in a transparent way has significantly improved.
EASE 2.0
• EASE 2.0, an expansion of EASE 1.0, included further changes in six areas to guarantee that PSBs undergo an irreversible transition, enhance their methods and procedures, and provide superior outcomes.
• Based on over 120 objective parameters in areas including customer service, ethical banking, and financial inclusion, the EASE index evaluates the performance of PSBs.
EASE 3.0
• It is an initiative of the Indian government to give young India access to innovative financial services.
• The objective is to enhance and elevate the client experience in public sector banks through the use of digital features including mobile banking, palm banking, and dial-a-loan.
• EASE 3.0 encompasses several themes, such as outcome- centric HR, institutionalized prudent banking, tech- enabled banking, smart lending, governance and client protection.
EASE 4.0
• EASE 4.0 is a set of reforms introduced by the Indian finance minister for Public Sector Banks (PSBs) to enable smarter banking. Co-lending with non-banking businesses, digital projects, funding for agriculture, and technological resilience are the key areas of emphasis. Data analytics, automation and digitization are highlighted in the reforms.
EASE 5.0
Each PSB will also develop a bank-specific three-year strategic roadmap that covers various topics, including business growth, profitability, risk customer service, operations and capability development
Asset Reconstruction Company
• An asset reconstruction business is a unique kind of financial institution that purchases the bank’s debtors at a mutually agreed upon price and makes independent efforts to collect the debts or related securities.
Asset Reconstruction
• It is the purchase of any bank or financial institution’s right or interest in advances, loans, bonds, debentures, guarantees, or any other credit facility that banks offer with the intention of realizing its value. The phrase “financial assistance” refers to these loans, advances, bonds, guarantees and other credit facilities collectively.
Securitisation
• The acquisition of financial assets can be accomplished by any method, including the issuance of security receipts to qualified buyers. The financial assets would be represented by such security receipts as an undivided interest.
Working of the ARC
Bad Bank
• A bad bank is an organization that deals in assets that are unstable and high risk. A collection of banks, financial institutions, or banks themselves own these assets. Its establishment was to help banks eliminate problematic debt from their balance sheets. It lets them concentrate on their primary responsibilities, which are approval of credit and deposit processing. This structure usually results in stockholders and bondholders losing money, not depositors. The procedure may lead to bank insolvency, at which point the banks may be recapitalized, liquidated, or nationalized.
• Usually, the primary objective of a bad bank is not to generate profits, but to free up banks from the weight of holding a large quantity of stressed assets and stimulate them to make more aggressive loans.
• National Asset Reconstruction Ltd. (NARCL) would be the name of India’s bad bank. This NARC will operate as a company that rebuilds assets. It will buy bank loans that
have fallen into default, freeing the banks from their non- performing asset (NPA) liabilities. Subsequently, NARC will attempt to sell the stressed loans to distressed debt buyers.
• An attempt would be made to market and sell them by India Debt Resolution Company Ltd. (IDRCL). The involved bank will get a portion of the proceeds after the stressed asset is sold. In the event that the Indian bad bank is unable to sell the stressed debt at all or for a profit, the government guarantee will be invoked.
National Asset Reconstruction Company Limited (NARCL)
• Setting up of the NARCL was announced in the Union Budget 2021-22. The objective was to construct a bad bank› which would house bad loans of US$ 62.63 million (Rs.500crores) and above.
• NARCL will have two distinct organizational structures: an asset reconstruction company (ARC) and an asset management business (AMC) will work together to manage and recover stressed assets. The partnership involves both public and private sector banks (PSBs), with PSBs keeping a 51 percent stake in NARCL.
• Equity from banks and non-banking financial corporations (NBFCs) would be used to capitalize NARCL. It will also issue fresh debt if needed. The Government of India’s guarantee will reduce the amount of upfront money required. The India Debt Resolution Company Ltd. (IDRCL) would provide support to the NARCL.
• The NARCL made an offer to purchase five companies’ impaired loan accounts in August 2022, including Future Retail.
India Debt Resolution Company Ltd. (IDRCL)
• The IDRCL is an operational entity and service firm that was created to handle the NARCL’s assets with the assistance of turnaround specialists and market experts. After NARCL’s offer is accepted, IDRCL will be included for management and value addition. By submitting an offer to the main bank, NARCL will buy assets. Private Banks will own the remaining 49% of IDRCL, with public FIs and PSBs holding the remaining 49%.
Challenges Associated with Bad Banks
• Changing the issue: A bad bank is expected to take up the debts owing by the commercial banks. The extent to which it will aid in resolving the NPA situation is unknown, though. The reason for this is that the commercial banks that exist today have tried almost every effective remedy. As such, it is only reasonable to assume that the bad bank will make matters worse rather than better.
• Losses incurred by banks: Similar to the previous argument, the banks’ haircuts would impact their profit
and loss account and profitability. This can raise questions about the bank’s management and the decisions it has made about haircuts in the past and present.
• Concern over Unethical Behaviour: Employees at the bad bank might use unethical methods to increase the recovery on a bad loan because they would be under pressure to succeed. This problem has remained in the past due to reports of harassing bank customers who were unable to make their payments.
• Not addressing the root problem: If governance reforms are not made, the public sector banks, which accounted for 86% of the total NPAs, may continue operating as they have in the past and wind up piling up bad debts once more. Furthermore, the notion of a bad bank is akin to shifting debt from one government pocket the public sector banks to another the bad bank.
Prompt Corrective Action (PCA) Framework
• According to the RBI itself, “The PCA framework’s goal is to enable supervisory intervention at the appropriate moment and mandate that the supervised entity initiate and carry out corrective measures in a timely manner in order to restore its financial health.” It is also the goal of the PCA framework to serve as an efficient instrument for market discipline. The Reserve Bank of India is free to take further steps at any moment, as long as they are appropriate, in addition to the remedial actions outlined in the PCA framework. Several banks have been placed within the framework and had their operations restricted over the course of the last nearly two decades (the PCA was first informed in December 2002).
What are banks measured on?
• In accordance with the 2017 revisions to the PCA standards, banks were to be assessed based on capital, profitability, asset quality, and leverage. The capital that a bank should retain as a percentage of its total assets is determined by the capital adequacy ratio.
• The adequacy measure contains buffers, such the 2.5% capital conservation buffer, that can be loosened to promote more lending during economic downturns but can also be utilized to shore up capital during prosperous times.
• Asset quality indicates the percentage of loans that are unlikely to be repaid. This is shown in the net non- performing asset ratio, which is the amount of all advances that are designated as “non-performing” after bad loans have been provisioned for.
• Profitability is determined by dividing net income (profit) by total assets to get return on assets (RoA).
• A lender’s level of borrowing to create income is indicated by their leverage ratio. As the leverage increases, Risk for Lender also inclreases accordingle.
What curbs do banks face under the PCA?
• If banks are unable to stop the decline, they proceed with more stringent measures.
• The first is restrictions on banks’ ability to distribute dividends and remit profits. Promoter capital is supposed to be brought in by foreign banks.
• Banks in the second group also encounter restrictions on branch expansion.
• The bank is additionally subject to capital expenditure constraints, with some exceptions, in the last category.
• Additionally, in the areas of strategy, governance, credit risk, market risk and human resources, the RBI is able to take discretionary steps.
What has changed?
• The notification no longer uses return on assets as a PCA qualifying factor. Furthermore, the 2021 notification also excludes Small Finance Banks and Payment Banks from its jurisdiction, whereas the 2017 notification only pertained to scheduled commercial banks and excluded Regional Rural Banks.
• In the most recent set of guidelines, the RBI made it very clear that leaving the PCA would depend on four ongoing quarterly results, one of which would be the audited annual financial statement in accordance with the new framework in addition to the supervisory comfort of the RBI and the profitability sustainability evaluation.
• The Reserve Bank of India (RBI) had also brought non- banking finance companies (NBFCs) under the ambit of the prompt corrective action (PCA) framework.
• It will cover all non-deposit taking NBFCs in the middle, higher, and top levels as well as all deposit-taking NBFCs, with the exception of government, primary dealer, and home finance businesses.
Basel Accords
• The Basel Committee on Bank Supervision (BCBS) established the Basel Accords, which are a collection of three consecutive accords pertaining to banking regulation. The 1980s saw the start of the multi-year development of the Basel Accords. The BCBS was established in 1974 to provide a venue for frequent cooperation on banking supervisory issues among its member nations. Since the BCBS is located at the Basel, Switzerland offices of the Bank for International Settlements (BIS), the meetings are known as the “Basel Accords”.
Basel I
• Basel I, the initial Basel Accord, was released in 1988 and addressed the sufficiency of capital for financial establishments. The five risk categories of financial institution assets are 0%, 10%, 20%, 50%, and 100%. The capital adequacy risk is the possibility that an unforeseen loss may harm a financial organization.
• Banks that conduct business overseas are required by Basel I to maintain capital (Tier 1 and Tier 2) equivalent to a minimum of 8% of their risk-weighted assets. This guarantees banks have sufficient capital to cover their responsibilities.
• In 1999, India embraced the Basel I rules. Basel I mandates that all Scheduled Commercial Banks maintain a Capital Adequacy Ratio (CAR) or Capital to Risk Assets Ratio (CRAR) of 9%. The RBI published guidelines to this effect.
Basel II
• The second Basel Accord, often known as Basel II or the Revised Capital Framework, was a modification to the first accord.
• It concentrated on three primary areas: the appropriate use of disclosure as a lever to reinforce market discipline and promote sound banking practices, including supervisory review; minimum capital requirements; and supervisory examination of an institution’s capital adequacy and internal assessment process. The three pillars refer to these areas of concentration taken together.
• The RBI used a phased strategy to implement Basel-II standards in India. As per RBI, all SCBs were bound to comply with Basel-II norms.
Basel III
• Following the 2008 financial crisis and the failure of Lehman Brothers, the BCBS made the decision to revise and reinforce the Accords. Regarding the general layout of the capital and liquidity reform package, a consensus was achieved in November 2010. Basel III is the current name for this accord.
• The three pillars are continued under Basel III, which also includes new specifications and security measures.
• The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters- Capital, Leverage, Funding and Liquidity.
• A bank’s Tier 1 and Tier 2 minimum capital adequacy ratio (including the capital conservation buffer) must be at least 10.5% of its Risk-weighted Assets (RWAs). That combines the total capital requirement of 8% with the 2.5% capital conservation buffer.
• Minimum 3% is the required leverage rate. The ratio of a bank’s tier 1 capital to its average total consolidated assets is known as its leverage rate.
• Basel III created two liquidity ratios: Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
• The Liquidity Coverage Ratio (LCR) will require banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash flows encountered in an acute short term stress scenario as specified by supervisors. This is to avoid circumstances similar to a “bank run.” The intention is to guarantee that banks have sufficient liquidity in case of a 30-day stress scenario.
•
In accordance with the Net Stable Funding Ratio (NSFR), banks have to maintain a consistent funding profile concerning the makeup of their assets and their off- balance-sheet operations. A minimum of 100% NSFR is needed. Thus, medium-term (1 year) resilience is measured by NSFR, while short-term (30 days) resilience is measured by LCR.
• Additional criteria are included in Basel III for what the Accord refers to as “systemically important banks,” or financial organizations that are deemed “too big to fail.”
• The Base III capital regulations have been implemented in India since 1st April 2013 in a phased manner.
Interest Coverage Ratio
• A debt and profitability statistic used to assess a company’s capacity to pay interest on its outstanding debt is the interest coverage ratio. It is computed by dividing the profits before interest and taxes (EBIT) of a business by the interest that it paid on loans during the specified time period. It is commonly used by lenders, investors, and creditors to assess a company’s riskiness for future borrowing.
EBIT
at 1.5 or less, it could not be able to pay its interest costs. To survive future financial hardships, companies need sufficient earnings to cover interest payments. Meeting interest obligations is an essential aspect of a company’s solvency and returns.
CAMELS RATING
• To assess the relative financial strength of a bank and to suggest necessary measures to improve weaknesses of a bank, the Padmanabham Working Group (1995) committee recommended CAMEL which RBI adopted in 1996.
• A supervisory rating system called CAMELS ratings is used to categorize banks and non-baking financial companies (NBFCs) according to their general state. A nominated supervisory regulator combines on-site inspections with ratio analysis of the financial statements to determine the ratings. The ratings are only used by the senior management to stop a bank run, which occurs when customers begin to withdraw money from a bank because they think it may soon fail. The ratings are not available to the general public.
The following are the components of CAMELS:
Interest Coverage Ratio =
Interest Expenses
•
C - Capital Adequacy
Where, EBIT=Earnings before interest and taxes
• The lower the ratio, the more debt-related expenses the corporation must pay off and the less cash it has available for other uses. If a company’s interest coverage ratio is
•
A - Asset Quality
• M - Management efficiency
• E - Earnings Quality
• L - Liquidity
• S – Systems and Controls
Systemically Important Financial Institutions
• The Financial Stability Board (FSB) defines Systemically Important Financial Institutions (SIFIs) as financial institutions “whose distress or disorderly failure, because of their size, complexity, and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.” Identification and management of SIFIs are therefore crucial to systemic risk management. The cross-sectional component of systemic risk, or SIFIs, actually shows how hazards are distributed across the financial system at any particular time.
• FSB is leading the global effort to develop a framework for evaluating and regulating SIFIs, following the lead of G-20 Leaders at the Pittsburgh summit in 2009.
SIFIs as ‘Too Big to Fail’ Institutions
• Systemically Important Financial Institutions (SIFIs) are perceived as institutions that are Too Big to Fail (TBTF).
• Based on the Basel Committee of Banking Supervision (BCBS) methodology, FSB publishes the list of Global Systemically Important Banks (G-SIBs) annually. Similarly, the FSB, in consultation with the International Association of Insurance Supervisors (IAIS) and national authorities, identifies Global Systemically Important Insurers (G-SIIs) as part of its annual identification process of global SIFIs.
• A sizable sample of banks forms the foundation of the strategy. Five elements of G-SIBs are represented by the indicators chosen: (i) scale; (ii) interconnection; (iii) substitutability; (iv) cross-jurisdictional activity; and
complexity.
• Consequently, these banks are divided into five buckets of similar size based on their aggregate rankings. Systemically, G-SIBs in bucket 5 are more significant than those in the lower bucket.
• As a result, G-SIBs placed in each of the buckets must maintain a higher level of capital, or “higher loss absorbency.” Basel III defines Common Equity Tier 1 (CET1) capital as being utilized for this purpose.
Systemically Important Financial Institution in India
• The Reserve Bank of India (RBI) has been overseeing systemically significant institutions among non-banking financial firms (NBFCs) since April 2007 even prior to creating a framework specifically for SIFIs.
• Important Systemic Non-Deposit Taking A non-banking financial corporation (NBFC) is defined as one that has total assets of at least Rs. 500 crore and does not accept or hold public deposits.
• India’s financial system, which is dominated by financial system, started with the designation of SIFIs as Domestic Systemically Important Banks (D-SIBs) based on their evaluation of the banking system.
• D-SIBs are recognized in India according to a Framework that was established by the RBI in July 2015 for dealing with domestic systemically important banks.
• With minor adjustments to accommodate domestic conditions, RBI has largely adopted the BCBS methodology.
• The evaluation sample comprised banks with a value exceeding 2 percent of the gross domestic product.
• In contrast to the BCBS methodology, D-SIBs are evaluated based on just four factors. Size is given 40% weight and the other three aspects complexity, substitutability, interconnectivity, and size receive 20% each since size is deemed to be more significant than the other three.
• Beginning in 2015, the names of the banks designated as D-SIBs are revealed annually in the month of August.
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At present, SBI, ICICI Bank, and HDFC Bank are recognized as Domestic Systemically Important Banks (D-SIBs).
Systemically Important Financial Market Infrastructures (S-FMI)
• Financial Market Infrastructures that are systemically important are a concept that is more similar to SIFI. Instead than referring to individual mutual funds, banks, or other individual service providers, like SIFIs would, the notion of S-FMIs concentrates on infrastructure service providers such as stock exchanges, depositories or clearing firms.
S-FMIs in India
• Although the Payment and Settlement Systems (PSS) Act does not define “Financial Market Infrastructure” specifically, it does define “payment systems” to include all FMI categories listed in the Principles for Financial Market Infrastructures (PFMIs) report, with the exception of the Trade Repository.
• When an authorized payment system reaches systemic importance, it is classified as a financial market infrastructure (FMI). This classification can be based on a number of factors, including:
• Transaction volume and value;
• Share in the overall payment systems;
• Operating markets;
• Degree of interdependencies and connectivity; and
• Criticality in terms of concentration of payment activities.
Financial Market Infrastructures regulated by RBI
• Real Time Gross Settlement System (RTGS): In March 2004, the RTGS system was put into place. The RBI is the one who owns and runs the RTGS system. The interbank payments settle on ‘real’ time and on a gross basis in the RBI’s accounts under this Systemically Important Payment System (SIPS).
• Securities Settlement Systems (SSS): Government securities’ securities settlement systems, including those for outright and repo transactions carried out in the secondary market, are managed and operated by the RBI’s Public Debt Office (PDO) in Mumbai.
• Clearing Corporation of India Ltd (CCIL): Established in April 2001, CCI is a Central Counterparty (CCP) that facilitates clearing and settlement of transactions involving government securities, foreign exchange and money markets within the nation.
• Negotiated Dealing System- Order Matching (NDS- OM): CCIL operates NDS-OM on behalf of the RBI, which owns the technology. Designed to facilitate trade in government securities, NDS-OM is an order-driven, electronic, screen-based, anonymous trading system from 2005.
• In a September 4, 2013, circular, SEBI made it clear that, as a member of the International Organization of Securities Commissions (IOSCO), it is dedicated to adopting and implementing the new Committee on Payment and Settlement Systems (CPSS)-IOSCO standards of Principal Financial Market Infrastructures (PFMIs) in its regulatory functions of oversight, supervision and governance of the major financial market infrastructures that fall under its jurisdiction.
• The following Depositories and Clearing Corporations under SEBI regulation have been made clear by SEBI to be FMIs, and they must abide by the PFMIs listed by CPSS-IOSCO as relevant to them.
Clearing Corporations
• Indian Clearing Corporation Ltd. (ICCL)
• MCX-SX Clearing Corporation Ltd. (MCX-SXCCL)
• National Securities Clearing Corporation Ltd. (NSCCL)
Depositories
• Central Depository Services Ltd. (CDSL)
• National Securities Depository Ltd (NSDL)
Among stock exchanges, the SEBI lists seven, including the BSE, the NSE, the Multi Commodity Exchange of India and the Metropolitan Stock Exchange of India as systemically important market infrastructure institutions
Important Committees Related to Banking Sectors
| Committee | Purpose |
| Banking and Financial Sector Reforms | |
| Basel Committee | Banking Supervision |
| Bimal Jalan | For New Bank Licenses |
| Raghuram Rajan | Committee For Financial Sector Reforms |
| For Banking Sector Reforms | |
| Sukhmoy Chakravarty | Committee to Review Working of Monetary System |
| For Reforms Relating to Non-Banking Financial Companies (NBFC) | |
| Marathe | Licensing of New Banks |
| A K Khandelwal | Problems With Public Sector Banks |
| Investigate Frauds & Malpractices | |
| Ghosh | Frauds & Malpractices in India |
| Janakiraman | To Investigate the Security Transactions of The Bank |
| Justice M B Shah Commission | Regarding Black Money |
| R. Jilani | Inspection System in Banks |
| Investment | |
| Arvind Mayaram | To Clearly Define Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI) |
| Sodhani | Foreign Exchange Markets in NRI Investment in India |
| K M Chandrasekha | For Rationalization of Foreign Investment Norms |
| M J Ferwani | Stock Exchange |
| Technology | |
| B Sambamurthy | Mobile Banking |
| Dinesh Sharma | To Introduce New Regulation Concerning Digital Or Virtual Currencies |
| Rattan P Watal | Committee to Promote India’s Digital Payment System |
| Sudharshan Sen | To Research Indian Regulatory Concerns About Digital Banking And Financial Technologies |
| W.S. Saraf Committee | Issues with technology in the banking secto |
| K S Shere | For proposing Legislation on Electronic Funds Transfer (EFT) and other Electronic Payments |
| Sectoral Financing | |
| B Sivaraman | Institutional Credit for Agricultural and Rural Development |
| Khusrau | Agricultural Credit |
| Thakka | Committee for Self-Employed Credit Plans |
| Deepak Parekh | For Financing Infrastructure Secto |
| Nachiket Mo | Comprehensive Financial Services for Small Businesses And Low-Income Households |
| K.V. Kamath | Assessing the Financial Structure for Micro, Small, and Medium Enterprises |
| K Madhav Das | Urban Cooperative Banks |
| Rural | |
| Gadgil (1969) | Lead Banking System |
| Vyas | Committee for Rural Credit |
| Godwala | Rural Finance |
| Credit | |
| Aditya Puri | Credit Information |
| Rashid Jilani | For Cash Credit System |
| Tandon | Follow Up for Bank Credit |
| Hajara | Differential Interest Rates Scheme |
| Risk Assets | |
| P Selvam | For Non-Performing Assets of Banks |
| Cook Committee | For Capital Adequacy of Banks (under Basel committee) |
| Inclusion | |
| MBN Rao | To Prepare the Blueprint of India’s First Women’s Bank |
| Lakdawala | Poverty |
| Usha Thorat | Financial Inclusion, Financial Sector Plan for North East Region. |
| Banking efficiency | |
| P J Nayak | Governance Of Boards of Bank in India |
| Pillai | For Pay Scales of Bank Officers |
| Khandelwal | On HR Issues of Public Sector Banks |
| Raja Manna | Committee on Modifications to Banking Laws, Cheques Bouncing, etc. |
| Suma Verma | To Update, and Revise the Banking Ombudsman Scheme, 2006 |
| Insurance, Pension | |
| R.N. Malhotra | Committee for Reforms in Insurance Secto |
| J Reddy | Reforms in Insurance Secto |
| Dave Committee (2000) | Regarding the Unorganized Sector Pension Scheme. |
| Restructuring | |
| S.P. Talwa | For Restructuring of Weak Public Sector Bank |
| S.N. Verma | Committee (1999) For Restructuring the Commercial Banks |
| Regional Rural Banks | |
| Thingalaya | Restructuring of RRB |
| Uk Sharma | For NABARD’s Role In RRB |
| M L Dhantwala | Regional Rural Banks |
| Monetary policy | |
| Urjit Patel | To Examine the Current Monetary Policy Framework |
| N. K Singh | To Review the Fiscal Responsibility and Budget Management Act |
| Small Saving | |
| Shyamala Gopinath | For Suggestions on Post Office Small Saving Schemes |
| R. V. Gupta | For Small Savings |
| Rakesh Mohan | Committee for Small Savings |
| YV Reddy | Reforms in Small Savings |
| Small scale Industry | |
| Karve | For Small Scale Industry |
| Tambe | For Term Loans to Small Scale Industries |
| Taxation | |
| Chelliah (1991) | For Tax Reforms |
| Kelka | For Tax Structure Reforms |
| Parthasarathi Shome | For Tax Administration Reform Commission |
| N Rangachary | To Examine Taxation Policies for It Secto |
| Wanchoo Committee (1971) | For Direct Taxes Enquiry |
| Rekhi | Committee For Indirect Taxes |
| L K Jha | For Indirect Taxation Enquiry |
| Parthasarathi Shome | For Implementation of GAAR (General Anti Avoidance Rule) |
| Othe | |
| K.U.B. Rao | For Setting Up Bullion Bank or Bullion Corporation Of India |
Core Banking Solutions
• A core banking solution (CBS) is a software system banks use to conduct and manage their primary operations. Customers are no longer restricted to the branch where they started their accounts; instead, they can conduct transactions from any branch.
• Numerous banking operations, such as deposit accounts, loans, mortgages, payments, and client data, are managed by CBS systems. Additionally, they make real-time updates possible, guaranteeing that a customer’s account balance and other data are always accurate and up to date.
• The E-kuber is the Reserve Bank of India’s (RBI) primary banking solution. It makes it possible for commercial banks to access their RBI current account from anywhere at any time.
Inter-Creditor Agreement
An intercreditor agreement, or ICA, is a contractual and legally enforceable contract between the various lenders within the same capital structure.
As there are often different creditors in a single capital structure, the lenders need to agree on the key issues of collateral, payment, lien subordination, debt caps and remedies if the debtor defaults or seeks bankruptcy protections.
An Intercreditor Agreement documents the rights and obligations of two or more creditors when working with a shared borrower; these include priority of claims on loans and collateral.
Creditors use the Agreement to reduce risks and provide certainty whenever they work with a common borrower.
It builds a foundation of creditor rights and priorities in case a borrower’s financial position erodes and the borrower triggers an event of default.
Merchant Discount Rate
• MDR (Merchant Discount Rate) is basically a fee that a merchant is charged by their issuing bank for accepting payments from their customers via credit and debit cards.
• MDR compensates the bank issuing the card, the bank which installs the PoS (Point of Sale) terminal and network providers (MasterCard and Visa) and payment gateways for their services.
• MDR charges are proportionally shared between the merchant and the bank, and the charges are expressed as a
percentage of the transaction amount.
National Pension System
• The Pension Fund Regulatory and Development Authority (PFRDA), established by the PFRDA Act of 2013, oversees and manages the National Pension System (NPS).
• NPS is a market-linked voluntary contribution program that aids with retirement savings. This plan is one of the most effective strategies to increase your retirement income since it is straightforward, methodical, portable and adaptable.
• All Indian citizens between the ages of 18 and 65 are eligible to voluntarily join the NPS under the All- Citizens Model.
• For Central Government workers recruited on or after January 1, 2004, NPS is mandatory (with the exception of the armed forces). NPS has since been implemented for staff members by every State Government, with the exception of West Bengal. In addition to the government matching employee contributions, government employees make a monthly 10% salary contribution. With effect from April 1, 2019, the employer’s contribution rate for central government employees has increased to 14%.
Business Correspondent
• Bank representatives serve as business correspondents. They assist the people with bank account opening. Business Correspondents receive commissions from banks for each new account they open, transaction they handle, loan application they complete, and so forth.
• While assisting villagers with banking transactions, the
Business Correspondent is always carrying a mobile
device. (Move money into or out of savings accounts, take out loans, etc.). After providing his thumb impression or electronic signature, the villager receives the money.
• Banks are permitted to utilize NGOs/SHGs, Micro Finance Institutions (MFIs), and other Civil Society Organizations (CSOs) as intermediaries when offering banking and financial services by utilizing the Business Correspondent Model. This approach aims to enhance financial inclusion and broaden the banking industry’s reach.
A business correspondent is a branch of a bank that serves consumers in underbanked and unbanked areas by offering banking and financial services
Currency Crisis
A currency crisis occurs when there is an abrupt and sharp decrease in the value of a country’s currency, leading to adverse consequences for the entire economy.
A currency crisis is unintentional and is to be avoided, in contrast to a currency devaluation as part of a trade war.
Governments and central banks may step in to assist in currency stabilization by buying back gold or foreign exchange reserves, or by making purchases in the foreign exchange markets.
In contemporary history, there have been numerous currency crises; the most notable ones happened in Asia and Latin America in the 1990s.