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.

National Bank for Agriculture and Rural development (NABARD), Rural Infrastructure Development Fund (RIDF)

 

National Bank for Agriculture and Rural development (NABARD):

• NABARD is the apex financing agency refinancing the institutions which looks after the development of the cottage industry, small industry and village industry, and other rural industries. 
• At present, NABARD is completely owned by GOI. 

Functions of NABARD are :

• It serves as an apex financing agency refinancing the institutions providing investment and production credit for promoting the various developmental activities in rural areas.
• NABARD partakes in development of institutions which help the rural economy.
• It regulates the institutions which provide financial help to the rural economy.
• It provides training facilities to the institutions working in the field of rural upliftment.
• It takes measures towards institution building of financing agencies in rural area.
• It monitors and evaluates projects refinanced by it.
• NABARD's refinance is available to state co-operative agriculture and rural development banks (SCARDBs), state co-operative banks (SCBs), regional rural banks (RRBs), commercial banks (CBs) and RBI approved financial institutions.

Rural Infrastructure Development Fund (RIDF):

• The main objective of the Fund is to provide loans to State Governments and State-owned corporations to enable them to complete ongoing rural infrastructure projects.
• The RIDF was set up by the Government in 1995-96 for financing ongoing rural Infrastructure projects. 
• The Fund is maintained by the National Bank for Agriculture and Rural Development (NABARD). 
• Domestic commercial banks contribute to the Fund to the extent of their shortfall in stipulated priority sector lending to agriculture. 

 At present, there are 39 eligible activities under RIDF as approved by GoI classified under three broad categories i.e.

·         Agriculture and related sector

·         Social sector 

·         Rural connectivity.

The eligible institutions under RIDF are: 

1- State Governments / Union Territories,

2- State Owned Corporations 

3-State Govt. Sponsored / Supported Organizations 

4- Panchayat Raj Institutions/Self Help Groups (SHGs)/ NGOs.

BANK Rate, BASE RATE, MCLR, EXTERNAL BENCHMARK RATES

 

BANK Rate:

Rate at which RBI lends money to the banks for long tenures.

After the introduction of Liquidity Adjustment Facility (LAF), Bank rate has lost its relevance.

BASE RATE:

• Introduced in July 2010, these were the minimum interest rates decided by the Reserve Bank of India (RBI) below which banks were not allowed to lend funds to their customers. 
• No bank offers loans at an interest rate lower than the Base Rate without mandate from the government for the same.

Calculation of base rate was based upon the following factors:

• Average cost of deposit rates offered by the banks to their customers,
• Cost of maintaining CRR and SLR,
• Operation cost of banks and ROI on Networth. 

In 2016, Marginal cost of lending rates (MCLR) replaced Base Rate.

What is MCLR:

On 1 april-2016, MCLR replaced the Base rate as the Benchmark lending rate .

MCLR is built on the following 4 main components:

Negative carry on account of CRR: 

Cost incurred by the banks while keeping reserves (CRR) with the RBI. 

Operating cost: 

These are the operating expenses incurred by the banks

Tenor premium:

 It denotes that higher interest can be charged from long term loans

Marginal Cost: 

The marginal cost of funds comprises of Marginal cost of borrowings and return on NetWorth .Marginal Cost comprises of following factors:

• Interest rate given for various types of deposits- savings, current, term deposit, foreign currency deposit
• Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
• Return on NetWorth – in accordance with capital adequacy norms.

EXTERNAL BENCHMARK RATES (EBLR):

Introduced in 2019 to replace MCLR, EBLR is the Interest Rate defined by the External Benchmark.

EBLR is the lending rate which the Banks can choose from one of the four external benchmarks —

• Repo Rate, 
• Three-month Treasury Bill Yield, 
• Six-month Treasury Bill Yield or 
• any other Benchmark interest rate published by Financial Benchmarks India Private Ltd.
• The external benchmark was first proposed by the former governor Urjit Patel in 2018.
• EBLR shall be reset at least once every three months. 
• EBLR is intended to plug the deficiencies in MCLR.
• EBLR is now widely used in home loans and recently banks have started adopting EBLR for other retail products such as personal loans and education loans that were based on MCLR.
• EBLR has replaced MCLR as the transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory. 

Fixed vs Floating Interest Rate:

• The fixed interest rate on loan means repayment of loans in fixed equal instalments over the entire period of the loan. 
• Floating interest rate by name implies that the rate of interest varies with market conditions. 
• The drawback with floating interest rates is the uneven nature of monthly instalments.

LEAD BANK SCHEME

 

LEAD BANK SCHEME:

• Prof. D. R. Gadgil (Gadgil Study Group) recommended for Lead Bank Scheme in order to promote Financial Inclusion.
• Lead Bank Scheme was introduced in 1969.
• In Lead Bank Scheme, district is the basic unit in terms of geographical area. 
• Lead Bank Scheme envisages assignment of lead roles to individual banks (both in public sector and private sector) for the districts allotted to them. 

Identification of Lead Bank Scheme:

Bank having relatively large network of branches in the rural areas of a given district and endowed with adequate financial and manpower resources has generally been entrusted with the lead responsibility for that district. 

Roles of Lead Bank:

The lead bank acts as a leader for coordinating the efforts of all credit institutions in the districts so as to increase the flow of credit to agriculture, small-scale industries and priority sector in the rural and semi-urban areas.

Usha Thorat committee constituted in 2009  has recommended for the revival of the scheme.

D-Systemically Important Banks (D-SIBs)

 

D-Systemically Important Banks (D-SIBs):

Systemic risk: 

Systemic risk can be defined as the risk associated with the collapse or failure of a company, financial institution or an entire economy. 

D-Systemically Important Banks (D-SIBs):

• Some Commercial Banks, due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness, become Systemically important for the Economy.
• D-SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. 
• In case of failure of D-SIB, overall economic activities are disrupted significantly  
• Because of their  TBTF nature, Government support is sought for these banks at the time of distress. 
• D-SIBs are subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them. 

Depending upon  their systemic importance scores , banks are categorised into :

• Five different Buckets and 
• Required to have additional Common Equity Tier 1 Capital (CET1) requirements ranging from 0.20% to 0.80% of Risk Weighted Assets (RWA). 

The D-SIBs banks are classified into 5 buckets. 

• Bucket 1, Bucket 2, Bucket 3, Bucket 4 and Bucket 5. 

• With Bucket 5 being the most important followed by rest in decreasing order. 
• State Bank of India is in Bucket 4, while HDFC Bank is in Bucket 2 ICICI Bank  is in Bucket  1.

CET1 is the highest quality of regulatory capital, as it absorbs losses immediately when they occur. 

It is a capital measure introduced in 2014 globally as a precautionary means to protect the economy from a financial crisis. 

Differential Banking, Payment Banks, Small Finance Banks

 

CONCEPT OF DIFFERENTIAL BANKING:

• These Banks are said to be differential as they differ with common Parlance "Universal Bank".
• Differentiation could be on account of capital requirement, target audience, scope of activities or area of operations. 
• These banks offer a limited range of services / products under a different regulatory dispensation.
• In pre-LPG periods, UCBs, the PACS, the RRBs and LABs could be considered as Differentiated Banks as they operate in localized areas. 

Post LPG Differential Banking:

• In 2013, RBI invited private entities for issuance of new banking licenses. 
• There were 26 applicants including Tata Sons, India Post and IFCI. Out of these, India Post and  Bandhan bank and IDFC Bank were given licenses for private banking. 
• Apart from Private bank licenses, RBI on November 27, 2014 granted in-principle approvals to set up 10 small finance banks and to 11 Payments Banks.  

Pre-Paid Instrument Providers (PPI): 

• PPI are payment instruments that facilitate purchase of goods and services against the value stored on such instruments. 
• The value stored on such instruments represent the value paid for by the holder, by cash, by debit to a bank account, or by credit card. 
• The Prepaid instruments can be in the form of smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers.

For eg in case of Paytm —

Pre-Paid Instrument model working:

Individual deposit  money in PPI wallet from your regular bank account

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 PPI provides for a “digital wallet” tied with your mobile 

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Digital wallet can be used to pay bills, shopping, movie tickets etc.

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PPI are regulated by RBI under Payment and Settlements Act of 2007

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PPI’s don’t give interest on your money and You cant withdraw the deposited  money.

• Nachiket Mor Committee find this helpful for financial inclusion but observed that PPI doesn’t offer interest rate on the wallet deposits.
• From financial inclusion point of view, PPI model is good, if they gave interest on your money. 
• Nachiket More recommended for a new type of banks called “payment banks” under the banking regulation Act.

The guidelines for payment banks:

(i) eligible promoters can be non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities like mobile telephone companies etc. 

(ii) shall primarily accept demand deposits upto maximum balance of Rs. 1,00,000 per individual customer. 

(iii) Issue ATM/debit cards, payments and remittance services but can not issue credit cards  

(iv) maintain CRR with the Reserve Bank on its outside demand and time liabilities and invest at least 75 per cent of its “demand deposit balances” in SLR eligible Government securities/treasury bills.  

They will not lend to customers and will have to deploy their funds in government papers and bank deposits.

Small Finance Banks (SFBs):

These banks serve the needs of a certain demographic segment of the population. 

The objectives of setting up of small finance banks :

(1) the provision of savings vehicles 

(2) supply of credit to small business units; small and marginal farmers; micro and small industries; and other unorganised sector entities, through high technology-low cost operations.

The guidelines for small finance banks :

(i) eligible promoters could be resident individuals/professionals with 10 years of banking and finance experience including companies controlled by them etc. 

(ii) shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections 

(iii) The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore and

 (iv) all prudential norms and regulations of RBI as applicable to existing commercial banks including requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).  

SFB can not extend large loans and can not float subsidiaries and deal in sophisticated products.

Now both SFB and Payment bank are scheduled bank .

Phases in the Evolution of Indian Banking

 

PHASES IN THE EVOLUTION OF BANKING:

The banking sector development can be divided into three phases:

·         Phase I: The Early Phase which lasted from 1770 to 1969

·         Phase II: The Nationalisation Phase which lasted from 1969 to 1991

·     Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and continues to flourish till date

UNDERSTANDING THE EVOLUTION:

Pre-Independence Era:

The East India Company established the Presidential Banks ie. Bank of Bengal, Bank of Bombay and Bank of Madras. 

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1921: These three banks were merged as “Imperial Bank of India.”

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1949: RBI was  nationalised under the Banking Regulation Act, 1949.

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1955: The Imperial Bank of India nationalized as The State Bank of India.

• During British Era, there were 3 types of banks: Imperial Bank of India, Joint stock banks and Foreign owned Exchange Banks (To facilitate trade).
• At independence, there were 97 scheduled private banks and 557 Non Scheduled (small ) private banks organized as joint stock companies and 395 cooperative banks.
• At the time of independence, all the major banks were owned by  private sector and there was almost negligible access to finance for rural areas.

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   1950-60: Large no of banking failures (Out of 566 commercial banks operating in 1951, only 89 survived by 1969)

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1969:     Nationalisation of 14 private banks  in 1969 

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1974: Narasimham Committee recommended for Regional Rural Banks (RRB) to promote Financial Inclusion, accordingly RRBs were established in 1975.

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  1980 : Nationalisation of 6 more banks in taking the Nationalised banks number to 20. 

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Liberalisation Period (1991-Till Date):

In 1991, Narasimham committee recommended certain reforms like entry of private sector and foreign banks in banking sector. 

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In 1993,  RBI gave license to 10 Private sector banks to establish themselves in the country. These were Global Trust Bank, ICICI Bank, HDFC Bank, Axis Bank, Bank of Punjab, IndusInd Bank, Centurion Bank, IDBI Bank, Times Bank and Development Credit Bank. 

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Kotak Mahindra Bank & Yes Bank got banking license from RBI in the year 2003 and 2004.

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2014, RBI grants in-principle approval to IDFC and Bandhan Financial Services to set up banks.

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Apart from this 11 licenses for Payment banks and 10 for Small Finance banks were also given under differential banking.