Economy 10 part-1

Pillar 1 B1: Financial Intermediaries

• A financial intermediary (FI) acts as a middleman in financial transactions.
• FIs connect lenders and borrowers, investors and entrepreneurs, and households and business firms.
• Formal FIs are regulated by authorities like RBI and SEBI.
• Informal FIs are unregulated, such as moneylenders and chit funds.
• Formal FIs include banks, Non-Banking Financial Companies (NBFCs), insurance companies, pension funds, and mutual funds & investment firms.

13.11 Banks → Reserve Bank of India (RBI)

• The evolution of RBI and banking regulation in India can be divided into pre-RBI and post-RBI eras.
• Before 1935, commercial banks operated under the Companies Act with weak monitoring and no CRR, SLR, or BASEL norms.
• The Hilton Young Commission (1926) recommended the formation of the Reserve Bank of India.
• The Great Depression (1929) led to the collapse of many banks, highlighting the need for a central bank.
• The RBI Act was enacted in 1934.
• The RBI began operations on April 1, 1935, with Osborne Smith as the first governor.
• In July 1935, the concept of Scheduled Banks was introduced, requiring them to maintain CRR with RBI.
• C.D. Deshmukh became the first Indian RBI Governor (1943-49).
• RBI was nationalized between 1948-49, giving the Government full ownership and making it accountable to Parliament.
• The Banking Regulation Act of 1949 gave RBI powers to issue licenses, approve new branches, set auditing norms, and protect depositors.
• In 2020, the Banking Regulation Ordinance was introduced for better banking control
• Governor & Deputy Governors usually serve 3 years (re-appointment possible).
• Shaktikanta Das was appointed as RBI Governor in December 2018, replacing Urjit Patel.
• Das' tenure was extended in 2021 for another 3 years (until Dec 2024).
• Shaktikanta Das is a retired IAS officer, former Finance Secretary, and member of the 15th Finance Commission.

13.11.4 Functions of RBI

• RBI functions include the Controller of Money Supply and Inflation, Foreign Exchange management, and regulation of banks, some NBFCs, AIFIs and digital payments

13.12 Agency Banks of RBI

• Agency banks help the RBI because RBI doesn't have enough staff/offices.
• RBI is the Banker to Govt, but uses agency banks.
• These banks can be private or public sector banks
• Agency banks engage in tax collection, salary/pension processing, and promotion of small savings.

13.13 RBI's Notable Portals

• RBI has launched portals for unclaimed deposits and license applications.

13.13.1 UDGAM Portal

• The UDGAM (Unclaimed Deposits Gateway to Access Information) portal was launched in 2023.
• It helps deposit beneficiaries search unclaimed deposits across multiple banks using details like Aadhaar/PAN if the original depositor is deceased.
• Deposits unclaimed for ten years are transferred to the Depositor Education and Awareness (DEA) Fund of RBI.

13.13.2 PRAVAAH Portal

• PRAVAAH (Platform for Regulatory Application, Validation And Authorization) Portal facilitates online license applications for banks, NBFCs, and digital payment companies.
• It simplifies the license application process.

13.13.3 Daksh Web Portal

• Daksh Portal, launched in 2022, is a web reporting system that allows banks & NBFCs to submit reports to RBI online.
• It enables RBI to monitor financial institutions effectively.
• Example: Tracking credit card fraud cases and issuing new preventive guidelines.

13.13.4 E-Kuber Portal

• E-Kuber is RBI's Core Banking Solution (CBS) portal.
• All banks maintain current accounts with RBI through this portal.
• It handles NEFT, RTGS, Repo, OMO, and other instruments.
• Retail Investors can buy Government Securities (G-Secs) through this portal.

13.13.5 RBI Digital Payments Intelligence Platform (2024)

• Objective: Reduce payment fraud risks using advanced technologies.
• The A.P. Hota Committee set up for this initiative.

13.14 Scheduled Banks

• A bank is classified as Scheduled Bank if two conditions are met.
• Minimum Capital Requirement: (Paid-up Capita) + Reserves ≥ 5 Lakhs.
• Safe Business Practices: Bank operations must not harm depositors' interests.
• Scheduled Banks can be Scheduled Commercial Banks (SCB) or Scheduled Cooperative Banks.
• They must maintain CRR (Cash Reserve Ratio) with RBI.
• Scheduled Banks are eligible for RBI's LAF-Repo, MSF borrowing/deposit operations.
• They must follow RBI norms to protect depositors' interests.
• Scheduled Banks are preferred by government departments and big private companies for salary accounts.
• Scheduled Banks are eligible to participate in government financial inclusion schemes (e.g., PM Jan Dhan Yojana).
• Non-Scheduled Banks include many cooperative banks.
• Non-Scheduled Banks can keep CRR money in their own vaults.
• RBI lending depends on discretion (not guaranteed).
• They must protect depositors' interests or risk shutdown.
• Non-Scheduled Banks are less preferred by government & corporate sector.
• Non-Scheduled Banks are generally not eligible for government financial inclusion schemes.

13.15 Financial Institutions: Commercial Banks Pre-Independence

• Bank of Hindustan (1770) was the first bank (European-owned).
• Three Presidency Banks (Bengal, Bombay, Madras) were established between 1806 and 1842; they gained the right to issue currency in 1861.
• In 1921, these banks merged into the Imperial Bank of India, which later became SBI in 1955.
• Allahabad Bank (1865) was another European-owned bank.
• Punjab National Bank (PNB) (1894) was Indian-owned.
• Bank of Baroda (1908) was founded by Maharaja Sayajirao Gaekwad III.
• Rise and collapse of several banks during 1913-30s led to the establishment of RBI in 1935.
• In the 1940s, several princely state banks were established, later merged into SBI in 2017.