Banking System Day 1

Contents Banking System Day 1 ...... What is ? ...... 2 Assets of ...... 2 Liabilities of Banks: ...... 2 Types of Banks: ...... 3 Scheduled Banks ...... 3 Non-Scheduled Banks ...... 4 Difference between scheduled and non scheduled banks ...... 4 Cooperative Banks ...... 5 Commercial Banks ...... 7 Regional Rural Banks (RRB) ...... 8 Local Area Banks (LAB) ...... 8 Small Finance Banks ...... 9 Payments Banks ...... 10 Post (IPPB)...... 12 Wholesale Banks ...... 13 Bank & Non-Bank financial Institutions ...... 13 About NBFCs ...... 14 Non-Banking Financial Company-Micro Finance Institution ...... 16 Merchant Bank ...... 16 Development Finance Institution ( DFI ) ...... 16 All India Development Finance Institutions & Banks ...... 17 ( NHB ) ...... 18

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What is bank ?

• A bank is a type of financial intermediary as it mediates between the savers and borrowers. It does so by accepting deposits from the public and lending money to businesses and consumers. Its primary liabilities are deposits and primary assets are loans. Assets of Banks

• Cash-in-Hand:It represents a bank’s holding of notes and coins to meet the immediate requirements of its customers.

• Cash at the

• Money at Call and Short Notice:This consists mainly of day-to-day loans to the money market but also includes some seven-day and fourteen- day loans to the same body and to the stock exchange.

• Bills Discounted:Another link between the banks and the money market lies in the way in which the banks acquire their own portfolios of bills.

• Government Securities with One Year or Less to Maturity:These securities consist of central government stocks and nationalised industries’ stocks guaranteed by the government.

• Certificates of Deposit:These are receipts for specified sums deposited with an institution in the banking sector for a stated period of up to five years. They earn a fixed rate of interest and can be bought and sold freely.

• Investments:They are investments in securities usually classified under three heads of (a) government securities, (b) other approved securities and (c) other securities. These consist mainly of government stock which is always marketable at the stock exchange, even though a loss may be involved by a sale at an inopportune moment.

• Loans and Advances:They composed mainly of customers’ overdrafts whereby in return for interest being paid on the amount actually drawn, banks agree to customers over-drawing their accounts, i.e., running into debt, up to stated amounts.They are the principal component of bank assets and the main source of income of banks.

• Physical asset : Land , Furniture , Building owned by Bank Liabilities of Banks:

• Capital and Reserves: Together they constitute owned funds of banks. Capital represents paid-up capital, i.e., the amount of share capital actually contributed by owners (shareholders) banks. Reserves are retained earnings or undistributed profits of banks accumulated over their working lives.

• Deposits: The deposit is a liability owed by the bank to the depositor.Customer deposit in the saving account & current account

• Borrowings: Banks as a whole borrow from the RBI, the IDBI, the NABARD, and from the nonbank financial institutions

• Other Liabilities: They are miscellaneous items of various descriptions such as bills payable etc.

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Types of Banks:

Scheduled Banks

• Scheduled banks are come under the 2nd Schedule of the Reserve Act, 1934.

• Banks need to satisfy the criteria in the section 42(6)(a) of the RBI Act 1934 to be in 2nd schedule. o Bank has a minimum paid-up capital of Rs. 5 Lac. o Bank must not carried out any business that causes harm o to the interest of the depositors. o Scheduled banks in India should be a corporation, not a sole-proprietorship or partnership firm.

• There are some more obligations that a Scheduled bank need to fulfill o Scheduled Banks in India need to maintain Cash Reserves with RBI. o They must submit the periodic returns to the RBI.

• Scheduled banks in India enjoy certain rights o Scheduled banks can receive refinance facility from the Central Bank o They have access to the repo market of RBI. o They entitled for currency chest facility o Right to become members of clearing house

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• Scheduled banks are two types, commercial banks and cooperative banks

• Scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}

• Public deposits in Scheduled Banks in India are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC)

• DICGC insured bank deposits of up to Rs.5 lac per depositor per bank in the situation of bank failure. Non-Scheduled Banks

• Non-Scheduled Banks are not listed in the 2nd Schedule of .

• They do not comply with the provisions of the Reserve Bank of India Act, 1934.

• RBI, are not able to protect the depositor’s interest in the case of Non-Scheduled Banks in India.

• This banks are need to maintain the cash reserve ratio with themselves, but not with the RBI.

• Non-Scheduled Banks can be two types, commercial and cooperative

• Non-Scheduled Commercial Banks o Local Area Banks are non-scheduled banks

• Non-Scheduled Cooperative Banks o Non-Scheduled State Cooperative Banks o Primary Agricultural Credit Societies Difference between scheduled and non scheduled banks

BASIS FOR NON-SCHEDULED SCHEDULED BANKS COMPARISON BANKS

Meaning Scheduled banks is a banking corporation Non-scheduled banks are whose minimum paid up capital is Rs. 5 the banks which do not lakhs and does not harm the interest of the comply with the rules depositors. specified by the Reserve Bank of India, or say the banks which do not come under the category of scheduled banks.

Second Schedule Listed in the second schedule. Not-listed in the second schedule.

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BASIS FOR NON-SCHEDULED SCHEDULED BANKS COMPARISON BANKS

Cash Reserve Maintained with RBI. Maintained with Ratio themselves.

Borrowing Scheduled banks are allowed to borrow Non-Scheduled banks are money from RBI for regular banking not allowed to borrow purposes. money from RBI for regular banking purposes.

Returns To be submitted periodically. No such provision of submitting periodic returns.

Members of It can become a member of clearing house. It cannot become member clearing house of clearing house.

Cooperative Banks

• Co-operative banks are financial entities established on a co-operative basis and belonging to their members. This means that the customers of a co-operative bank are also its owners. Features:

• They give short term loans to the agriculture sector and other allied activities.

• The main goal of Cooperative Banks is to promote social welfare by providing concessional loans.

• Providing easy and accessible loans and credit benefits in the rural areas with scarce banking facilities Regulation Of Cooperative Banks

• Cooperative banks are regulated byRBI.

• They are registered under the Co-operative Societies Act of the State concerned or under the Multi-State Co-operative Societies Act, 2002.

• The Co-operative banks are also governed by the o Banking Regulations Act, 1949. o Banking Laws (Co-operative Societies) Act, 1955.

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• Urban Co-operative Banks are regulated and supervised by State Registrars of Co- operative Societies (RCS) in case of single-State co-operative banks and Central Registrar of Co-operative Societies (CRCS) in case of multi-State co-operative banks and by the RBI.

• Recently, in June 2020 the Central government approved an Ordinance to bring all urban and multi-state co-operative banks under the direct supervision of the Reserve Bank of India (RBI). Structure:

• They are organised in the 3 tier structure o Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD) ▪ Funded by RBI, government, NABARD. Money is then distributed to the public ▪ Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%) ▪ Owned by the state government and top management is elected by members o Tier 2 (District Level) – Central/District Cooperative Banks o Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

• Divided into two types, which can further be subdivided: o Urban Co-operative Banks ▪ Non-Scheduled UCBs ▪ Scheduled UCBs o Rural Co-operative Banks ▪ State Cooperative Banks ▪ District Central Cooperative Banks ▪ Primary Agricultural Credit Societies

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Commercial Banks

• Organised under the Banking Companies Act, 1956

• They operate on a commercial basis and its main objective is profit.

• They have a unified structure and are owned by the government, state, or any private entity.

• They tend to all sectors ranging from rural to urban

• These banks do not charge concessional interest rates unless instructed by the RBI

• All the commercial banks are need to maintain CRR and SLR

• Minimum Priority Sector Lending (PSL) is 40% of their total

• Commercial banks in India can access repo market.

• Reserve money of the commercial banks includes o Government securities held by banks o Cash held by banks in their vaults o Money deposited with RBI

• Commercial banks are largest holder of Government securities.

• The commercial banks can be further divided into three categories: o Public sector Banks – A bank where the majority stakes are owned by the Government or the central bank of the country.

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o Private sector Banks – A bank where the majority stakes are owned by a private organization or an individual or a group of people o Foreign Banks – The banks with their headquarters in foreign countries and branches in our country, fall under this type of bank Regional Rural Banks (RRB)

• These are special types of commercial Banks that provide concessional credit to agriculture and rural sector.

• Regional Rural Banks were set up on the basis of the recommendations of the Narasimham Working Group (1975).

• RRBs were established in 1975 and are registered under a Act, 1976.

• The main objectives of RRBs are o To provide credit and other facilities to the small and marginal farmers, agricultural labourers, artisans and small entrepreneurs in rural areas. o To check the outflow of rural deposits to urban areas and reduce regional imbalances and increase rural employment generation.

• Joint Venture:RRBs are joint ventures between the Central government (50%), State government (15%), and a Commercial Bank (35%).

• Priority Sector Lendingis 75% of net bank credit.

• Area of operation:Operating area is restricted within the state or some districts.

• Regional Rural Banks can’t use MSF facility of RBI.

• 1st Regional Rural Bank in India was the Prathama Bank sponsored by in Uttar Pradesh

• 196 RRBs have been established from 1987 to 2005.

• From 2005 onwards government started merger of RRBs thus reducing the number of RRBs to 82

• One RRB cannot open its branches in more than 3 geographically connected districts.

• RRBs performs various functions in following heads: o Providing banking facilities to rural and semi-urban areas. o Carrying out government operations like disbursement of wages of MGNREGA workers , distribution of pensions etc o Providing Para-Banking facilities like locker facilities, debit and credit cards Local Area Banks (LAB)

• Introduced in India in the year 1996

• Local area banks are non-scheduled commercial banks.

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• The objective of establishing the local area banks was to enable to mobilization of the rural savings by local institutions and make them available for investments in local areas. o It was expected to bridge the gaps in credit availability and strengthen the institutional credit framework in the rural and semi-urban areas.

• Eligibility: o The promoters could be individuals, firms or societies. The family of the individual promoters was not allowed to keep more than 40% of the equity capital of the banks. The NRI promoters could not exceed more than 20% of total number of promoters.

• Registration and Licensing: o Registered as a public limited company under the Companies Act, 1956. o Licensed under the Banking Regulation Act, 1949.

• Min start-up capital of a LAB was fixed at Rs.5 cr.

• Jurisdiction over a maximum of three contiguous districtsMinimum PSL is 40%

• PSL condition:25% of their PSL (10% of NBC) must lend to the weaker sections of society.

• CRR & SRR requirement:Local area banks in India need to maintain CRR and SLR

• Branches: o 1st LAB in India is Coastal Local Area Bank, in Andhra Pradesh, established in 1999. o At present, there are only 4 Local Area Banks all which are located in South India

Small Finance Banks

• Objectives of setting up of small finance banks financial inclusion to the unserved sections of the society by o Providing savings vehicles o Supply of credit to small and micro business units, small and marginal farmers o Providing through high technology-low cost operations.

• Committee:Small finance banks set up on the recommendations of Nachiket Mor Committee 2014

• Registration and Licensing: o Registered under Companies Act, 2013 o Licensed under Banking Regulation Act, 1949

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• Eligibility criteriato set up small finance banks are o Resident individuals with 10 years of experience in banking and finance o Companies and societies owned and controlled by residents o Existing NBFCs, Micro Finance Institutions, Local Area Banks

• Minimum paid up capital requirement:for small finance banks is Rs.100 cr.

• FDI limitsallowed up to 74% .

• Small finance banks can be converted into a private sector bank after 5 years, as per performance.

• The area of operations of small finance banks is not restricted.

• Loan facility:At least 50% of its loan should not be more than Rs. 25 lakh. o not allowed to lend to big businesses or industries

• Deposit facility: No restriction on deposits.Small Finance Banks can accept all kinds of deposits (like Universal Banks) such as FD, RD, Savings, and Current, etc.

• Other Facilities: o Bank can issue both Debit & Credit card o Sell forex to customers. o Sell mutual funds, insurance and pensions. o Can convert into a full-fledged bank.

• PSL Norms:Minimum PSL is 75% in which 40% is as per RBI guide and 35% is for preferred sector as per bank.

• CSR and SLR and other rules for commercial private banks is applicable on small finance banks too.

• BASEL Norms:CRAR is 15% for small finance banks in India.

• 1st in India is Capital Small Finance Bank started in 2016.

• Example:Now, there are 10 small finance banks in India. o The Ujjivan Small Finance Bank in Bangalore, AU Small Finance Bank in Jaipur, Equitas Small Finance Bank in Chennai, Utkarsh Micro Finance Private Limited, Varanasi. Suryoday Micro Finance Private Limited, Navi Mumbaietc.

• As the name suggests, this type of bank looks after the micro industries, small farmers, and the unorganized sector of the society by providing them loans and financial assistance. These banks are governed by the central bank of the country. Payments Banks

• Objective:The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, migrant labour workforce in secured technology-driven environment.

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• Committee:Payment Bank was set up in 2015 on the recommendations of Nachiket Mor Committee 2014

• Regulation & Licencing: o Registered as a public limited company under the Companies Act, 2013. o Governed by the provisions of the Banking Regulation Act, 1949; RBI Act, 1934; Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007, other relevant Statutes and Directives.

• Eligibility criteria to set up small finance banks are: o Pre-paid Payment Instrument (PPI) Providers, o Resident individuals; o NBFCs; o Corporate Business Correspondents (BCs), Telecom Companies, o super-market chains, real sector cooperatives; o public sector entities etc.

• Min capital requirement:It must be aRs.100 Cr. Capital.

• FDI limits: FDI allowed up to 74% .

• Loan facility :not allowed to give loans, so not applicable for PSL restrictions

• Deposit facility: o Only Demand Deposits. No Fixed Deposits, NRI Deposits &cross border remittance. o Deposit limit: increased to 2 Lac in Apr 2021 (Earlier 1 Lac only )

• Other Facilities: o , , the issue of ATM and o PB can open new branch & ATM o They need to open 25% access point must be in rural area. o Payment Banks can sell Mutual Fund, Pension, Insurance etc o They cannot issue credit card o only allowed to invest the money received from customers' deposits into government securities.

• CRR & SLR applicable: yes . Maintain CRR. SLR : 75% of deposits o Need to hold maximum 25% in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.

• BASEL Norms:Min CRAR is 15% for payment banks.

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• Example:, Payments Banks, NSDL Payments Bank, India Post Payment Bank, Fino Payment Bank etc.

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India Post Payments Bank (IPPB).

• (IPPB) was setup under the Department of Post, Ministry of Communication with 100% equity owned by Government of India.

• Launched as a pilot project on 30 January 2017 in Ranchi (Jharkhand) and Raipur (Chhattisgarh), with the objective of being present across India by the FY 2018-2019.

• Expansion:IPPB has expanded its strength across India covering post offices, through a network of 650 IPPB branches/controlling offices, working on a hub and spoke model.

• The payments bank will be governed by Reserve Bank of India.

• India Post has 1.55 lakh offices across the country, nearly 2.5 times the bank network. It already has 17 crore post office savings bank accounts, some of which it hopes will move to the payments bank What IPPB banks offer ?:

• IPPB will offer a range of products such as savings and current accounts, money transfer, direct benefit transfers, bill and utility payments, and enterprise and merchant payments.

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• These products, and related services, will be offered across multiple channels (counter services, micro-ATM, mobile banking app, SMS and IVR), using the bank's state-of-the-art technology platform.

• It will focus on providing banking and financial services to people in rural areas,

• It will not offer any ATM Debit card. Wholesale Banks

• Based upon recommendations of Nachiket More committee, the RBI had proposed setting up of Wholesale and Long term (WLTF) Banks in 2017.

• Facilities & Restrictions: o Would accept only Current and Term Deposits of more than Rs 10 crores. o Minimum Paid-up Capital : Rs 1000 crores. o Cater to the funding needs of certain sectors of the economy with long gestation period such as infrastructure and core industries. Bank & Non-Bank financial Institutions

• A financial institution which accepts different forms of deposits and lends them to the prospective borrowers as well as allows the depositors to withdraw their money from the accounts by cheque is a bank.

• If the financial institution has all the same functions but does not allow depositors to issue cheque and withdraw their money from deposits then it is a non-bank institution.

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• About NBFCs

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 .

• It is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business.

• NBFCs can commence its operations only after obtaining a “Certificate of Registration” from the RBI

• The company must be registered as a public limited company or private limited company in India.

• Minimum net owned fund of Rs.2 Crore.

• For a minimum period of 12 months and a maximum period of 60 months, NBFCs are allowed to accept/renew public deposits.

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Features of NBFCs

• NBFC cannot accept demand deposits.

• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.

• The RBI does not guarantee repayment of deposits by NBFC’s

• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs. Deposits are not insured.

• RBI requires banks NBFCs minimum level of Capital Adequacy Ratio or capital-to- risk weighted assets ratio (CRAR)

• NBFC’s cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time.

• NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

• NBFCs should have minimum investment grade credit rating. Types of Non- Banking Financial Institutions

• Mutual Funds

• Insurance Companies

• Hedge Fund

• Venture Capital Firms

• Merchant Banks

• Finance Companies

• Micro Finance Institutions (MFI)

• Vulture Funds

• Leasing Companies

• companies

• Nidhi Companies Systemically important NBFCs

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

• The term ‘shadow bank’ was coined by Paul McCulley in 2007.

• Shadow banks comprise entities which conduct financial intermediation directly, such as finance companies or NBFCs, and entities which provide finance to such entities, such as mutual funds.

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• Shadow banking is a term used to describe bank-like activities (mainly lending) that take place outside the traditional banking sector.

• The Shadow banking institutions function as intermediaries between the investors and the borrowers, providing credit and generating liquidity in the system.

• It is not regulated in the same way as traditional bank lending.

• Examples of shadow lenders include Special Purpose Entities, Non Banking Financial Companies (NBFCs), Hedge Funds, Money Market Funds, Credit investment Fund, Finance Companies accepting deposits or deposit like funding, Securitization vehicles etc Non-Banking Financial Company-Micro Finance Institution

● The NBFC-MFI is a non-deposit taking financial company. ● Ultimate goal of microfinance is to give low income people an opportunity to become self-sufficient by providing a means of saving money, borrowing money and insurance. ● Registration:Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial Companies (NBFCs). ● Conditions to qualify as NBFC-MFI: ○ Minimum Net Owned Funds (NOF) of Rs. 5 crore. ○ At least 85% of its Net Assets in the nature of Qualifying Assets. ○ The Qualifying Assets are those assets which have a substantial period of time to be ready for its intended use or sale. ● The difference between an NBFC-MFI and other NBFC is that while other NBFCs can operate at a very high level but MFIs cater to only the smaller level of social strata, with need of smaller amounts as loans.

Merchant Bank

• The term merchant bank refers to a financial institution that conducts underwriting, loan services, financial advising, and fundraising services for large corporations and high-net-worth individuals (HWNIs). • Merchant banks are experts in international trade, which makes them specialists in dealing with multinational corporations. • Unlike retail or commercial banks, merchant banks do not provide financial services to the general public. • Some of the largest merchant banks in the world include J.P. Morgan Chase, Goldman Sachs, and Citigroup Development Finance Institution ( DFI )

• What is it ?: These are specialized institutions set up primarily to provide development/ Project finance especially in developing countries. • These DFIs are usually majority-owned by national governments. • The source of capital of these banks is national or international development funds. • This ensures their credit worthiness and their ability to provide project finance in a very competitive rate.

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• The prime objective of DFI is the economic development of the country • These banks provide financial as well as the technical support to various sectors

#Target_shots Addition

How is it different from commercial banks? • It strikes a balance between commercial operational norms as followed by commercial banks on the one hand, and developmental responsibilities on the other. • DFIs are not just plain lenders like commercial banks but they act as companions in the development of significant sectors of the economy. • DFIs do not accept deposits from people • They raise funds by borrowing funds from governments and by selling their bonds to the general public • It also provides a guarantee to banks on behalf of companies and subscriptions to shares, debentures, etc. • Wages include salary, allowance, or any other component expressed in monetary terms. This does not include bonus payable to employees or any travelling allowance, among others. • The minimum wages decided by the central or state governments must be higher than the floor wage.

Classification of DFI • Sector specific financial institutions: These financial Institutions focusses on a particular sector to provide project finance. Ex: NHB is solely related to Housing projects, EXIM bank is oriented towards import export operations. • Investment Institutions: These are specialized in providing services designed to facilitate business operations, such as capital expenditure financing and equity offerings, including initial public offerings (IPOs). Ex: LIC, GIC and UTI.

All India Development Finance Institutions & Banks

IFCI ICICI IDBI SIDBI

ICICI : Industrial SIDBI: Small IFCI: Industrial Credit and IDBI: Industrial Industries Finance Investment Development development bank of Corporation Corporation of Bank of India India India Limited

The IDBI was initially set up as a IFCI was the first Subsidiary of the SIDBI was setup as It was setup in DFI to be setup in RBI. In February a subsidiary of IDBI January 1995. 1948. 1976, IDBI was in 1989. made fully autonomous.

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The IDBI was The SIDBI was designated as designated as apex apex organisation With Effect from 1 With effect from organisation in the in the field of July 1993, IFCI has April 2002, ICICI field of Small Scale Development been converted has been Finance.The Union Financing. into Public Limited converted into a Budget of 1998-99 However, it was Company. Bank. proposed the converted in a delinking of SIDBI bank wef Oct from IDBI. 2004.

The key function of The key function of The key functions The key functions SIDBI was; to IFCI was; granting of IDBI were; it of ICICI were; to provide assistance long-term loans(25 provides refinance provide long term to small scale units; years and above); against loans or medium term initiating steps for Guaranteeing granted to loans or equity technological up rupee loans floated industries; it participation; gradation and in open markets by subscribed to the Guaranteeing modernization of industries; share capital and loans from other SSIs; expanding the Underwriting of bond issues of private sources; marketing channel shares and other DFIs; it also providing for the Small Scale debentures; acted as the consultancy Industries product; Providing coordinator of services to promotion of guarantees for DFIs at all India industry. employment creating industries. level. SSIs.

The ICICI differed from IFCI and IDBI with respect to ownership, IFCI was a public It was a Public management and sector DFI. sector DFI. lending operation. ICICI was a Private sector DFI.

National Housing Bank ( NHB )

• Established under the National Housing Bank Act, 1987 • Ownership:National Housing Bank was a wholly owned (100%) subsidiary of RBI. But in 2019, Govt. of India took over the entire stake of NHB from RBI. • The goal of facilitating as a positive influence to support regional and local housing finance agencies as well as provide additional financial support to certain entities and for related matters. • It is an apex agency established to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.

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