Indian Banking Institutions and Their Functions

Questions and Answers

What is the minimum paid-up voting equity capital requirement for Small Finance Banks?

₹ 300 crore

₹ 200 crore (correct)

₹ 150 crore

₹ 100 crore

How long must promoters hold a minimum of 40% of the paid-up voting equity capital after the bank's commencement of business?

Ten years

Three years

Two years

Five years (correct)

What is the maximum shareholding percentage allowed for promoters within ten years from the date of commencement of business?

15%

30% (correct)

40%

20%

What is the minimum net worth requirement for Primary Urban Co-operative Banks (UCBs) transitioning to Small Finance Banks?

₹ 100 crore Signup and view all the answers

Within how many years must the net worth of UCBs increase to ₹ 200 crore after transitioning to Small Finance Banks?

Five years Signup and view all the answers

What percentage of paid-up voting equity capital must promoters maintain during the first five years from the commencement of business for banks transitioned from UCBs?

26% Signup and view all the answers

What happens to a promoter's shareholding if it exceeds 40% at the outset?

It must be brought down to 40% within five years Signup and view all the answers

What determines whether a promoter can cease to be a promoter after the lock-in period of five years?

RBI's regulatory and supervisory comfort Signup and view all the answers

What year was the Export-Import Bank of India established?

1981 Signup and view all the answers

Which bank was later renamed to Axis Bank?

UTI Bank Signup and view all the answers

What is a primary function of NABARD?

Promoting agriculture and rural development Signup and view all the answers

In which city is the headquarters of Exim Bank located?

Mumbai Signup and view all the answers

What type of activities does NABARD provide refinance for?

Marketing and procurement in agriculture Signup and view all the answers

Which of the following is a scheme introduced by NABARD?

Kisan Credit Card Signup and view all the answers

Which aspect of financial support does Exim Bank NOT provide?

Loan facilities for personal use Signup and view all the answers

What is the ownership structure of NABARD?

Wholly owned by the Government of India Signup and view all the answers

What is the minimum issued capital required for a Regional Rural Bank (RRB)?

Rs 1 crore Signup and view all the answers

Which statement accurately describes the shareholding structure of Regional Rural Banks (RRBs)?

The state government holds 15% of the capital. Signup and view all the answers

According to the guidelines for Small Finance Banks, which of the following is a requirement for eligible promoters?

Promoters must be resident individuals with 5 years of banking experience. Signup and view all the answers

How many Regional Rural Banks (RRBs) were reported to exist in India as of March 2022?

43 Signup and view all the answers

What is the maximum authorized capital of a Regional Rural Bank (RRB)?

Rs 2,000 crore Signup and view all the answers

What is the primary objective behind the guidelines issued by RBI for Small Finance Banks?

To provide savings vehicles and credit supply for financial inclusion. Signup and view all the answers

Which of the following states in India does not have any Regional Rural Banks?

Goa Signup and view all the answers

What percentage of capital in Regional Rural Banks is held by the sponsor bank?

35% Signup and view all the answers

What is the primary characteristic of investment banking?

Creating capital for various entities Signup and view all the answers

Which of the following best describes narrow banking?

Banks that invest solely in risk-free government securities Signup and view all the answers

What is a key feature of Islamic banking?

Sharing of profit and loss Signup and view all the answers

How does differentiated banking primarily function?

By focusing on specific segments such as retail lending Signup and view all the answers

Which type of banking is primarily focused on consumers rather than businesses?

Retail banking Signup and view all the answers

Which banking approach specifically aims to avoid asset-liability mismatch?

Narrow banking Signup and view all the answers

Which of the following is NOT a function of investment banking?

Providing housing loans to individual borrowers Signup and view all the answers

What distinguishes retail banking from other banking types?

It caters to individual consumers instead of businesses Signup and view all the answers

What are the three key areas monitored in the PCA Framework for banks operating in India?

Capital, Asset Quality, and Leverage Signup and view all the answers

Which risk threshold indicates a breach of the minimum regulatory Capital Adequacy Ratio (CRAR)?

Upto 250 bps below the prescribed value Signup and view all the answers

What happens if a bank exceeds the risk threshold of 400 bps for Capital under the PCA Framework?

It may result in invocation of PCA Signup and view all the answers

How is the Net NPA Ratio classified within the PCA risk thresholds?

As part of asset quality monitoring only Signup and view all the answers

What does a Tier I Leverage Ratio represent in the context of the PCA Framework?

The percentage of core capital to total assets Signup and view all the answers

What is indicated by a CRAR of more than 250 bps but not exceeding 400 bps below the prescribed indicator?

A serious capital concern that may invoke PCA Signup and view all the answers

Which of the following parameters is NOT included under the PCA Framework?

Liquidity Coverage Ratio Signup and view all the answers

What does exceeding the risk threshold of 312.50 bps for the Capital to Risk Weighted Assets Ratio indicate?

Increased risk exposure Signup and view all the answers

Which banks are included in the G-SIB classification based on their global size?

Banks that meet specific leverage ratio exposure criteria Signup and view all the answers

How much additional CET1 capital is required for banks placed in the third bucket of G-SIBs?

2.0% Signup and view all the answers

What is the purpose of the empty fifth bucket in the G-SIB framework?

To manage potential future increases in systemic importance Signup and view all the answers

According to the latest Financial Stability Board release, how many banks are currently identified as G-SIBs?

29 Signup and view all the answers

What systemic score cutoff must a bank exceed to be classified as a G-SIB?

A predetermined cutoff set by BCBS Signup and view all the answers

What is the CET1 capital requirement for banks placed in bucket 4?

2.5% Signup and view all the answers

What is the primary function of the Prompt Corrective Action (PCA) framework revised by RBI?

To enforce minimum capital and risk management requirements Signup and view all the answers

What additional capital percentage is required under the lowest bucket for G-SIBs?

0.5% Signup and view all the answers

What percentage of the funding for stressed loan assets acquisition is intended to be financed through Security Receipts (SRs)?

85% Signup and view all the answers

Which act replaced the ordinance that nationalized 14 private sector banks in India?

Banking Companies (Acquisition and Transfer of Undertaking) Act 1970 Signup and view all the answers

Which bank was the oldest public sector bank established in India?

Allahabad Bank Signup and view all the answers

What year was the State Bank of India formed as a result of the SBI Act?

1955 Signup and view all the answers

Which of the following banks was NOT one of the 14 banks nationalized in July 1969?

Bank of America Signup and view all the answers

What was the original name of the State Bank of India before its transformation?

Imperial Bank of India Signup and view all the answers

Which schedule of the RBI Act includes scheduled banks?

Second Schedule Signup and view all the answers

What defines a public sector bank in India?

Minimum 51% government ownership Signup and view all the answers

Which of the following statements about the transition of Small Finance Banks to Universal Banks is accurate?

Promoters must adhere to an approved shareholding dilution plan. Signup and view all the answers

What is a restriction placed on Payment Banks regarding their banking activities?

They cannot undertake lending activities. Signup and view all the answers

Who is eligible to become a promoter of a Payments Bank?

Existing non-bank PPI issuers and public sector entities. Signup and view all the answers

What is the maximum balance an individual customer can hold in a Payments Bank?

Rs. 200,000 Signup and view all the answers

Which of the following is NOT included in the scope of activities for Payments Banks?

Issuance of credit cards. Signup and view all the answers

What is crucial for a promoter or promoter group to be considered 'fit and proper' for setting up a Payments Bank?

They should have professional experience running businesses for at least five years. Signup and view all the answers

What preference is given to eligible Small Finance Banks transitioning to Universal Banks?

Those with diversified loan portfolios. Signup and view all the answers

Which entity is NOT directly eligible to promote a Payments Bank?

Individuals without any business experience. Signup and view all the answers

What is the primary regulatory body overseeing Urban Co-operative Banks?

RBI Signup and view all the answers

Which tier acts as the apex Bank in the structure of Rural Co-operative Banks for short term credit?

State Co-operative Banks (SCBs) Signup and view all the answers

Which of the following statements accurately represents a feature of Rural Co-operative Banks?

They function at state, district, and village levels Signup and view all the answers

What assistance does NABARD primarily provide to Rural Co-operative Banks?

Refinance and annual inspections Signup and view all the answers

Which type of co-operative banks can accept deposits and provide loans for commercial purposes?

Urban Co-operative Banks (UCBs) Signup and view all the answers

Which two tiers constitute the structure of Rural Co-operative Banks focused on long-term credit?

State Co-operative Agriculture and Rural Development Banks (SCARDB) and Primary Co-operative Agriculture and Rural Development Banks (PCARDB) Signup and view all the answers

What is the role of the Banking Regulation Act in relation to Co-operative Banks?

Applies to all Co-operative Banks except Primary Agricultural Credit Societies (PACs) Signup and view all the answers

What distinguishes Urban Co-operative Banks from Rural Co-operative Banks?

Urban Co-operative Banks operate primarily in urban areas Signup and view all the answers

Which of the following parameters is primarily monitored under the PCA Framework?

Capital Adequacy Ratio Signup and view all the answers

What does a CRAR that breaches 250 bps but not exceeding 400 bps indicate in the PCA Framework?

Moderate capital deficiency Signup and view all the answers

Which risk threshold under the PCA Framework is associated with a CRAR completely below the regulatory minimum?

Risk Threshold 3 Signup and view all the answers

What is indicated by a leverage ratio below the regulatory threshold set in the PCA Framework?

Excessive asset leverage Signup and view all the answers

Which breaching indicator signals a significant risk to banks as per PCA guidelines?

Breach of minimum common equity ratio Signup and view all the answers

In the PCA framework, a net NPA ratio exceeding the prescribed threshold also indicates what risk?

High credit risk exposure Signup and view all the answers

Which scenario reflects the most critical state for capital management under the PCA Framework?

Capital falls below the regulatory minimum required by 100 bps Signup and view all the answers

What does exceeding the risk threshold of 162.50 bps for the capital to risk-weighted assets ratio predominantly signify?

Increased likelihood of regulatory intervention Signup and view all the answers

Study Notes

Unit Trust of India (UTI)

Established in 1964, first mutual fund in India.
Later formed UTI Bank, which changed its name to Axis Bank.

Export-Import Bank of India (Exim Bank)

Founded under the Export-Import Bank of India Act, 1981.
Functions as a provider of export credit, similar to global Export Credit Agencies.
Offers refinance against export/import finance handled by banks.
Provides directed credit for export financing.
Extends lines of credit to countries and Central Banks for financing imports from India.
Assists exporters in attending international exhibitions and trade fairs.
Headquarters located in Mumbai.

National Bank for Agriculture and Rural Development (NABARD)

Established on 12 July 1982 by NABARD Act 1981.
Fully owned by the Government of India.
Serves as a development bank focused on agriculture and rural development.
Regulates credit for agriculture, small-scale industries, handicrafts, and rural crafts.
Provides refinance to Scheduled Commercial Banks, RRBs, and Cooperative Banks for long and short-term credits.
Promotes financial inclusion through schemes like Kisan Credit Card and Self Help Groups.

Regional Rural Banks (RRBs)

Authorised capital maximum: ₹2,000 crore; minimum issued capital: ₹1 crore.
Central Government holds 50%, State Government 15%, and Sponsor Bank 35% of capital.
RRBs can raise capital from other sources, but central and sponsor holdings must not drop below 51%.
As of March 2022, 43 RRBs operate across 525 districts; Goa and Sikkim lack RRBs.

Small Finance Banks

Launched following the Nachiket Mor committee recommendations in 2014 by RBI.
Aims to enhance financial inclusion offering savings and credit to small businesses, marginal farmers, and unorganised sectors.
Eligible promoters include residents with banking experience or entities controlled by residents.
New and existing financial institutions can transform into Small Finance Banks (SFBs).
Minimum paid-up equity capital: ₹200 crore; ₹100 crore for existing urban cooperative banks transitioning to SFBs.

Capital and Shareholding Requirements

Promoters must hold at least 40% of paid-up voting equity capital for the first five years.
If initial ownership is over 40%, it must reduce to this threshold within five years.
Maximum promoter shareholding must decrease to 30% within 10 years and 15% within 15 years post-business commencement.

Retail Banking

Focuses on providing financial services to individual consumers, not businesses.
Includes deposit products, loans (housing, vehicle), banking services, and lockers.

Differentiated Banking

Targets specific banking areas such as remittances and retail lending.
Includes Small Finance Banks and Payment Banks.

Narrow Banking

Invests exclusively in risk-free assets like government securities.
Avoids lending or investing in non-government securities to mitigate asset-liability mismatch risks.

Investment Banking

Specialized banking division for capital creation for corporations, governments, and other entities.
Involves underwriting securities, facilitating mergers/acquisitions, and managing financial aspects of projects.

Islamic Banking

Adheres to Shariah law principles, focusing on profit-loss sharing.
Prohibits collection and payment of interest.

Prompt Corrective Action (PCA) Framework

Applicable to all banks in India, including foreign ones.
Key monitoring areas: Capital adequacy, asset quality, and leverage.
Breach of specified risk thresholds could activate PCA measures.

PCA Matrix

Capital: CRAR thresholds include 250 bps and 400 bps below the prescribed indicators.
Asset Quality and Leverage monitored through Net NPA Ratio and Tier I Leverage Ratio, respectively.

Global Systemically Important Banks (G-SIBs)

Inclusion criteria for banks as G-SIBs:
- 75 largest global banks based on Basel III leverage ratio exposure.
- Designated G-SIBs from the previous year unless exempted.
- Additional banks included by national supervisors' discretion.
G-SIBs categorized into four buckets based on systemic importance scores, requiring additional capital of 1% to 2.5% of risk-weighted assets.
Common Equity Tier 1 (CET1) capital needed for meeting additional capital requirements.
An empty fifth bucket exists for banks needing 3.5% CET1 capital, should systemic importance scores rise, with the potential for new buckets to be added.
As of November 2023, 29 banks designated as G-SIBs. JP Morgan Chase is in bucket 4 requiring an additional 2.5% CET1, while Bank of America, Citigroup, and HSBC are in bucket 3 requiring 2.0%.

Prompt Corrective Action (PCA) Framework

Revised PCA framework for Scheduled Commercial Banks effective from January 1, 2022.
Aims to acquire 15% in cash and 85% in Security Receipts (SRs).
Central Government guarantees Rs.30,600 crore for Security Receipts managed by the National Asset Reconstruction Company Limited (NARCL) for stressed loan assets.

Banking System in India

Commercial banking in India began with the Bank of Hindustan, established in 1770.
Indian banking comprises scheduled and non-scheduled banks; scheduled banks are listed in the second schedule of the RBI Act.

Public Sector Banks

Owned by the Government of India with at least 51% shareholding.
Includes State Bank of India (SBI) and nationalized banks; Allahabad Bank, established in 1866, is the oldest public sector bank.

State Bank of India (SBI)

Formed in 1955 by amalgamating the Imperial Bank of India, created from three presidency banks.
First bank established in the public sector, merging six associate banks in recent years.

Nationalized Banks

On July 19, 1969, 14 major private sector banks were nationalized under the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970.
Notable nationalized banks include Allahabad Bank, United Bank of India, and Punjab National Bank.

Payments Banks

Established following the 2014 Nachiket Mor committee's recommendations to enhance financial inclusion.
Eligible promoters include non-bank PPI issuers, corporations, and cooperatives, requiring a minimum five-year business history.
Payment banks can accept demand deposits, issue ATM/debit cards, and provide remittances but cannot engage in lending.
Maximum balance limit per customer set at Rs. 200,000.

Cooperative Banks

Defined into two main categories: Urban Co-operative Banks (UCBs) and Rural Co-operative Banks (RCBs).
UCBs operate in urban areas, regulated by the RBI, allowing them to accept deposits and extend loans.
RCBs for short-term credit involve a three-tier structure: SCBs, DCCBs, and PACs.
RCBs for long-term credit consist of SCARDBs and PCARDBs.
NABARD oversees RCBs, providing refinancing and conducting inspections.

Recommendations for Private Bank Promoters' Stake

PCA framework applies to all banks, including foreign branches operating in India.
Key focus areas for monitoring include capital adequacy, asset quality, and leverage.
Breach of specific risk thresholds may trigger PCA measures.
PCA matrix outlines risk thresholds across capital minimums and CET1 ratios, defining various criteria for corrective action.

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Description

Explore the foundational aspects and roles of major banking institutions in India, including the Unit Trust of India, Exim Bank, and NABARD. This quiz delves into their establishment, functions, and contributions to the financial landscape of the country.