Required Reserves,CAPITAL RESERVES,Excess Reserve,Free Reserve,Undisclosed Reserves

 

DIFFERENT TYPE OF RESERVES:

Required Reserves:

Statutory funds that are to be kept with RBI as to meet liquidity requirements like CRR and SLR.

CAPITAL RESERVES:

• Reserves which are kept aside by the company profits to pay for the company's long-term projects/plans /investments. 
• Ex. Money kept aside by a corporation to construct a new office building.
• There is no legal need to distribute any portion of the reserve as dividends to shareholders, the whole sum may be used to construct a brand-new headquarters.

Excess Reserve: 

• Those funds available with the bank or any financial institution which are in excess of the minimum reserve that is required to be kept as per the statutory law ie CRR and SLR. 
• These reserves act as a safety fund or a buffer that protects the institution against any unforeseen contingency.

Free Reserve: 

• Funds in a company’s balance sheet that are available for distribution as dividends. 
• Essentially, these are the extra amounts, after deductions, that can be utilized to reward shareholders.

Undisclosed Reserves:

• Those reserves which are on the books of the banks but not put in public domain and not listed on the balance sheets or other financial statements.
• These often have characteristics similar to equity and disclosed reserves like profit which is unrealized.

Risk Weighted Assets, Capital Adequacy Ratio

 

Risk Weighted Assets (RWA) ----

• Assets of Banks which are weighted according to the risk.
• RWA are useful in calculating the minimum amount of capital required in compliance to the existing regulations to avoid insolvency and protecting its depositors and investors.
• RWA is used in calculating Capital adequacy Ratio (CAR).
• Riskier the asset --Greater amount of Regulatory capital is required.
• So, G-Sec has least amount of risk while loans to corporates have higher amount of risk, and other instruments lying in between. 

To Understand:

Rs.1bn in G-sec, 

Rs.2bn secured by mortgages, and 

Rs.3bn of loans to businesses. 

The Risk Weight according to Assets are:

1. 0% for G-Sec 
2. 50% for mortgages, and 
3. 100% for the corporate loans. 

The bank's risk weighted assets are:

0 × Rs.1bn + 50% × Rs.2bn + 100% × Rs.3bn = Rs. 4bn. 

So, out of total Rs 6 bn, RWA of the bank is Rs 4 bn. 

Capital Adequacy Ratio (CAR):

The CAR is the capital needed for a bank to meet any financial risk.

CAR is measured in terms of assets (mostly loans) disbursed by the banks. 

The higher the assets, the higher should be the capital retained by the bank and Mathematically:

CAR:

Tier 1 + Tier 2 capital / RWA.

To Understand:

If Banks Tier 1 capital =Rs 12bn and Tier 2 capital = Rs 20 bn. 

Then CAR =

Tier 1 Capital + Tier 2 Capital​ / Risk Weighted Assets =

32/RWA

Since CAR represents a number that shows the risk cushioning health of the bank, banks are required to maintain a safe, higher number to signify their favorability.

Regional Rural Banks , Features of RRBs

 

Regional Rural Banks (RRBs):

RRBs are Scheduled Commercial Banks backed by a strong Scheduled commercial bank, providing Banking facilities to small, marginal farmers, artisans, etc. in rural and semi-urban areas.

RRBs provide basic Banking needs for the development of Agriculture, Trade, Commerce, Industry, and other productive activities in rural areas.

Features of RRBs:

• The two prime regulators of Regional Rural Banks (RRBs) in India are the Reserve Bank of India (The Banking Regulation Act, of 1949) and the NABARD (Section 35(6) of the Banking Regulation Act, 1949).
• Each RRB is operated within a geographical limit only. 
• RRBs are involved in disbursement of wages to the workers of  MGNREGA and Pradhan Mantri Gram Sadak Yojana (PMGSY).
• RRBs provide 75% of their total credit as Priority Sector Lending to fulfill the criterion applicable to commercial banks.
• RRBs provide para-banking facilities such as locker facilities, debit and credit cards, mobile banking, internet banking, and UPI services. 
• RRBs reduce regional imbalances by checking the outflow of rural deposits to urban areas. 
• The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively. 
• Regional Rural Bank are owned by the Government of India as the maximum share capital is owned by the Central Government.

Consolidation of RRBs:

• In the year 2005, Dr. V S Vyas Committee recommended for the consolidation of RRB's.
• In 2005, the first phase of amalgamation was initiated Sponsor Bank-wise within a State, bringing down the number of RRBs from 196 to 82. 
• As a result of the second phase of amalgamation during 2011-2014, the number of RRBs was brought down to 56 from 82.

 

REFORMS IN RRB’S : 

• RRBs became financially weak because of  huge NPAs .
• Dr. K.C. Chakrabarty committee  in 2010 recommended for recapitalization of 40 out of 82 RRBs.
• Accepting the recommendations, the centre and other shareholders started to recapitalize RRBs by injecting funds into them. 
• Despite reforms, NPAs remained high and to deal with this, GOI enacted RRB Amendment Act (2015).

RRBs Amendment Act 2015 :

• The Regional Rural Banks (Amendment) Act, 2015, came into effect from 4^th February 2016. 
• The Act raises the amount of authorised capital of RRB's to Rs 2,000 crore and it cannot be reduced below Rs One crore. 
• By raising the authorized capital, the financial capabilities of RB ‘s will be increased. 
• The Act allows RRBs to raise capital from other sources (private sector )other than the existing shareholders . 
• States can increase their share beyond 15 % increasing the role of state in decision making .
• The combined shareholding of the central government and the sponsor bank cannot be less than 51%.

Cooperative Bank

Cooperative Bank:

• Financial institutions which are democratic set-ups where the Board Members are democratically elected with each member entitled to one vote each. 
• Co-operative societies are based on the principles of cooperation, mutual help, democratic decision making, and open membership. 
• Cooperative Banks cater to a services like loans, banking, deposits etc. like commercial banks but widely differ in their values and governance structures.  
• The co-operative banking system, with two broad segments of urban and rural co-operatives, forms an integral part of the Indian financial system. 
•  With a wide network and extensive coverage, these institutions have played an important developmental role in enlarging the ambit of institutional credit by way of inculcating banking habits among the poor and those in remote areas.
• They provide credit to small scale industrialists, salaried employees, and other urban and semi-urban residents.

Regulations for Cooperative Banks:

1. In India, co-operative banks are registered under the States Cooperative Societies Act. 
2. They also come under the regulatory ambit of the Reserve Bank of India (RBI) under two laws, namely, the Banking Regulations Act, 1949, and the Banking Laws (Co-operative Societies) Act, 1955.

 Broadly, co-operative banks in India are divided into two categories -

1. Urban Co-operative Banks and
2. Rural Co-operative Banks

Rural cooperative credit institutions could either be:

1. Short-Term or 
2. Long-Term in nature. 

Long Term Rural Co-operative Banks credit system:

• It take care of needs for long term funding.
• In terms of RBI regulation, Long term cooperatives and PACS are out of purview of RBI, otherwise all other Cooperatives are under RBI regulation.

The Long-term Rural Co-operative credit system comprises of :

1. State Cooperative Agriculture and Rural Development Banks (SCARDBs) or
2. Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).

Long term Rural cooperative societies:

1. These are engaged in providing long term credit needs for production purposes.
2. These   have negligible resource base of their own, and mostly raise resources through borrowings. Their poor recovery performance has affected their ability particularly at the primary level to cater to the credit needs of new and non-defaulting members. 
3. This has also resulted in low paid-up share capital, which constrains their borrowing capacity, and the consequent limited resources have inevitably led to low business levels

Short-Term Rural Co-operative Banks credit system: 

These societies are designed essentially to provide for short-term credit needs for production purposes. 

The short-term rural co-operative credit system comprises of:

1. State co-operative banks (StCBs) 
2. Central co-operative banks (CCBs) 
3. Primary agricultural co-operative Societies (PACS) 

Primary Co-operative Credit Society (PACS):

• PACS are the grassroot level arm of short term co-operative credit, mediate directly with individual borrowers and  grant short-term to medium term loans and also undertake distribution and marketing functions.
• PACS are outside the purview of the Banking Regulation Act, 1949 and hence not regulated by the Reserve Bank of India (RBI website). 
• The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks. 
• The borrowing powers of the members as well as of the society are fixed. 
• The loans are given to members for the purchase of cattle, fodder, fertilizers, pesticides, etc. 
• A large number of PACS, however, face severe financial problems primarily due to significant erosion of own funds, deposits, and low recovery rates. PACS hold more than 95 % of assets of rural cooperatives.
• These banks need not to maintain CRR and SLR.

Central co-operative banks:

• These are the federations of primary credit societies in a district and are of two types-those having a membership of primary societies only and those having a membership of societies as well as individuals. 
• The funds of the bank consist of share capital, deposits, loans and overdrafts from state co-operative banks and joint stocks. 
• These banks provide finance to member societies within the limits of the borrowing capacity of societies. 
• These banks have to maintain CRR and SLR.

State Co-operative Banks:

• The state co-operative bank is a federation of central co-operative bank and acts as a watchdog of the co-operative banking structure in the state. 
• Its funds are obtained from share capital, deposits, loans and overdrafts from the Reserve Bank of India. The state co-operative banks lend money to central co-operative banks and primary societies and not directly to the farmers. 
• These banks have to maintain CRR and SLR.
• All short term Cooperatives except PACS are regulated by RBI.

Urban Co-operative Banks (UBBs) are classified as:

1. Scheduled Urban Co-operative Banks or
2. Non-scheduled Urban Co-operative Banks

MICRO FINANCE, Issues in Micro Financing, Microfinance vs Microcredit

 

MICRO FINANCE:

• Provisioning of financial services to the marginalised who are  un-bankable. 
• National Bank for Agriculture and Rural Development (NABARD) took this idea and started the concept of microfinance in India. 
• There are two models in India that link the formal financial sector to low-income households in India, namely SHG and MFI bank linkage programme. 

SHG model:

It works on the principle of directly financing of SHG by the banks and

MFI model:

It covers financing of Micro Finance Institution (MFIs) by banking agencies for the purpose of lending the same amount to SHG’s and other small borrowers.

Concept of Microfinance Institutes in India :

• Microfinance in India finds its roots in the early 1970s’ in Gujarat when the Self Employed Women Association (SEWA) was formed to provide banking services to the poor women of unorganized sector. 
• Program linking the Self Help Group to the banking sector was initiated in India in 1989, under NABARD. 
• Various schemes introduced by the present government like Micro Units Development and Refinance Agency (MUDRA) bank and Jan Dhan Yojna has aided in the growth of the micro finance institutions. Both of them target the same poor segment of the society.

The major factors that have fuelled the growth of micro finance in India are:

·         Rapid growth in the Business Correspondent (BC) model, opportunity.

·         Introduction of differentiated bank license and opportunity.

·         Rising participation of the current central government in financial inclusion

·         Micro finance institutions in India are expanding with time due to the financial benefits provided to the unprivileged people of the country.

Issues in Micro Financing in India: 

• High interest rates, 
• No variety in the products offered to the customers and 
• Lower risk mitigation measures 
• Urban poors are not covered
• Poor credit appraisal system, 
• Lack of awareness,
• poor debt management 
• weak loan collection system
• High Non-Performing Assets (NPAs), 

Despite the disadvantages they form a very important part of the functioning of many industries due to easy loans given to those who otherwise cannot afford better facilities. 

Microfinance vs Microcredit:

In micro credit; small loans are given to the borrower but under microfinance financial services  savings accounts and insurance are also provided alongwith loans. 

Digital Banking Unit, Self-service Zone vs Digital Assistance Zone

 

What are Digital Banking Unit (DBUs): 

DBUs will be brick-and-mortar outlets that will provide a variety of digital banking facilities to people such as the opening of savings accounts, balance-check, printing passbooks, transfer of funds, investment in fixed deposits, loan applications, stop-payment instructions for cheques issued, applications for credit and debit cards, tax and bill payment and nominations.  

DBU's will have 2 distinct features – 

• Self-service Zone 
• Digital Assistance Zone

Self-service Zone:

• The customers can access ATM, a Cash Deposit Machine (CDM) and a Multi-Functional Kiosk (MFK) that offers services like printing of passbook, depositing cheque and accessing internet banking. 
• It will also provide a digital interactive screen where customers can interact with a chatbot to know about products, offers and mandatory notices.

Digital Assistance Zone:

It will have branch officials to assist customers to undertake the services including opening of savings account, current account, fixed deposit and recurring deposit etc

Shadow Banking , Non-bank financial companies (NBFCs),NBFCs vs Scheduled Commercial Banks

 

SHADOW BANKING---

• Financial Institutions that function like Banks but are not governed by  the Banking Regulations eg Hedge Funds, Non-bank financial companies, Special Investment Vehicles. 
• Some of these NBFCs do form one type of “Shadow banking” in India, because they’re outside the traditional regulatory rules for Banks.

Non-bank financial companies (NBFCs): 

1. Those Financial Institutions that provide banking services without meeting the legal definition of a bank as they do not hold a banking license.
2. The specific banking products offered by NBFCs depends on the jurisdiction,and may include services such as loans and credit facilities, savings products, investments and money transfer services. 
3. Some of the well known NFC’s are Housing Development Finance Corporation Limited, Power Finance Corporation Limited, Rural Electrification Corporation Limited, National Bank of Agricultural and Rural Development and  Infrastructure Development Finance Company Limited.

NBFCs vs Scheduled Commercial Banks:

• NBFC cannot accept demand deposits.
• NBFCs do not form part of the payment and settlement system and hence cannot issue cheques drawn on itself;
• Deposit Insurance Facility is not available to depositors of NBFCs, unlike in case of banks.
• NBFC's are under Indian Companies act 1956 while banks are regulated under The banking regulations act 1949.

Non-bank financial companies & Prompt Corrective Action (PCA) framework:

• Non-bank financial companies (NBFCs) have been brought under the ambit of the Prompt Corrective Action (PCA) framework.
• Under the framework, NBFCs will face restrictions when certain parameters like non-performing assets, Capital Adequacy Ratio and Tier 1 capital fall below the stipulated levels. 
• The PCA framework for NBFCs came into effect on October 1, 2022.
• The RBI decision has come after four big finance firms — IL&FS, DHFL, SREI and Reliance Capital — which collected public funds and collapsed despite the tight monitoring in the financial sector.

Priority Sector Lending (PSL)

 

Priority Sector Lending (PSL): 

Those sectors which the GOI and RBI consider as important for the development of the basic needs of the country and are to be given priority over other sectors. The categories of priority sector are:

1.       Agriculture

2.       Micro, Small and Medium Enterprises

3.       Export Credit

4.       Education

5.       Housing

6.       Social Infrastructure

7.       Renewable Energy 

8.    Others

Provisioning of PSL:

• Domestic Scheduled Commercial Banks and foreign banks are to provide 40% of their Adjusted Net Bank Credit (ANBC) to priority sectors. 
• Regional Rural Banks and Small Finance Banks have to provide 75 % of ANBC. 
• RBI has revised Priority Sector Lending (PSL) Targets for Urban (Primary) Cooperative Banks(UCB).
• Earlier the PSL target for UCBs was 40% of  the bank credit and now it has been increased to 75% in a phased manner: 60% by 31st March 2024 65% by 31st March 2025 75% by 31st March 2026

If in case, banks fail to provide stipulated credit, then the shortfall is transferred to RIDF.