Economy PCB 10.pdf

Pillar #1-A1) Money: Barter to Bitcoin 10.3 BARTER SYSTEM : - introduced by Mesopotamian tribes; - Challenges:-double coincidence of wants; High search costs and transactions cost ;Storage of perishable commodities difficult-loss of value; Doesn’t enc...

Pillar #1-A1) Money: Barter to Bitcoin 10.3 BARTER SYSTEM : - introduced by Mesopotamian tribes; - Challenges:-double coincidence of wants; High search costs and transactions cost ;Storage of perishable commodities difficult-loss of value; Doesn’t encourage specialization & division of labour 10.4 MONEY: FUNCTIONS - Primary-Measure of value; Medium of exchange - Secondary-store & transfer of value; deferred payments - Contingent- basis of credit system, financial markets; Employing factor of production; creation & redistribution of national income via taxation 10.5 MONEY:EVOLUTION & TYPES 10.5.1 Commodity Money (Intrinsic value? Yes) - Iron Nails, Bear Pelts, Cocoa Beans, Whale Teeth, Gold Nuggets - Problems? Perishable, not uniform, not pure, foreigners may not accept. 10.5.2 Metallic Money (Intrinsic value? Yes) - Traders & Kings stamped their marks on gold nuggets for uniformity & trust. - Indo Greek kings & Kushana kings issued gold coins, but Gupta Gold coins most spectacular king is playing Veena, shooting animals, standing with wife - Delhi Sultanate Kings: Silver Tanka. Sher Shah Suri Rupiyah silver coin. Akbar: Muhr 10.5.3 Metallic Money → Full Bodied vs Token Coins - Full bodied coins - Intrinsic Value >= than its Face Value - Challenge? Debasement: decreasing the amount of metal in coins. - Token coins - Intrinsic Value < than its Face Value - Modern Indian coins are token coins; Cupronickel metal used to discourage melting; Coinage Act 2011 prohibits melting of coins 10.5.4 Intrinsic value of a coin? - Precious metal coins- intrinsic value(of metal) ; Paper currency- no intrinsic value 10.5.5 Paper Money ( No intrinsic value) - Fiat money : MUST fulfill two conditions Simultaneously - (Must be in form of Physical Currency Coin / Notes / VirtualCoin/ DigitalCoin); can measure value ; - Must be issued by the order of a King / Queen / Government / Central Bank. - Govt issues all coins upto ₹ 1,000, → Coinage Act 2011;Presently, govt issues Rs.50 paisa to Rs.20 coins; Rs.20 coin: 12-sided Polygon shape-Dodecagon - ₹1 Note signed by Finance Secretary; it doesn't contain “I promise to pay the bearer…” - RBI issues notes other than ₹ 1 Note →RBI Act 1934; have “I promise to pay bearer…” 10.5.6 Legal Tender - a given coin/currency MUST fulfill two conditions SIMULTANEOUSLY: - It must be a FIAT MONEY - must be legally valid for debts & transactions in the country; Other parties can’t refuse to accept. - Indian Rupee(coins, notes),CBDC- { fiat money legally valid for transaction ) - NOT legal tenders - ₹500,₹1000 (demonetised) - fiat money but NOT legally valid  - $, Yuan, Yen, Euro etc- fiat money but NOT legally valid in India - G-Sec, T-Bill- NOT fiat money NOT legally valid for transaction - Shares, Bonds, DD, Cheque, ATM, Cards, Kirana coin, Casino coin, Filmstar-Notes NOT fiat (cannot measure value;not issued by rbi/govt) ; NOT legally valid for transaction - Marshall Island: SOV Venezuela: Petro coin- NOT fiat money ;NOT legally valid in India - Bitcoins- digital coin(yes) but not issued by govt/rbi { NOT fiat money;NOT legally valid for transaction;Bitcoin is not a Fiat money, yet it is legal tender in El-Salvador nation. (exception) - Commemorative Coins = Fiat money but not legal tender unless notified by RBI/Government 10.5.7 Legal Tender - Limited and Unlimited - Limited-Recipient can refuse accepting payment beyond a limit; {Coinage Act 2011} - Paper Note: Rs. 1 ; Coins Rs. 1/above → upto Rs.1000 ; - Coins 50 paisa x 20 coins → upto Rs.10; Below 50 paise coins are withdrawn (in 2011) - Unlimited- can’t refuse; RBI Act 1934: Every bank note is legal tender in India. - Finance Act 2017: “Cash transactions for less than Rs.2 lakh only. Beyond that use Cheque, DD, NEFT etc. else penalty.(to discourage tax-evasion / black money) 10.5.8 RBI’s App to help the blind identify currency notes - MANI (Mobile Aided Note Identifier) - Mobile camera scans & identifies the note (Even if it’s half folded), gives audio notification , in Hindi/English, also works offline;vibrations (for deaf) but can’t validate whether note is genuine or fake 10.5.9 Currency related General Knowledge - New rupee symbol ₹: selected through a competition by Dept of Economic Affairs in 2010. Designed by D.Udaya Kumar, a Professor @IIT Guwahati. - Lion Emblem: Sarnath Pillar, Uttar Pradesh; “Satyamev Jayate”: slogan from Mundaka Upanishad - Languages: The Constitution’s 8th Schedule has 22 languages, but currency notes have only 17. - Budget-2020: a museum on numismatics and trade will be built at the historic ‘Old Mint Building’ in Kolkata. 10.5.10 “I promise to pay the bearer…”: ? - Colonial era: Promised to convert into full bodied gold or silver bars / coins worth the equal value in weight - Modern era: Conversion into other Bank notes and “token coins” of equal face value. - Not inflation adjusted value; Not linked with weight of gold or silver.; Currency note is zero interest, anonymous bearer bond / Promissory Note. 10.6 DEMONETIZATION OF FIAT MONEY (PREVIOUSLY 1946, 1978) - Demonetisation:removal of legal tender status of currency notes. - 2016: Finance Ministry → Dept of Economic Affairs → notification to ban the “Specified Bank Notes” (SBN) of Mahatma Gandhi series ₹ 500 and 1000. - Specified Bank Notes (Cessation of Liabilities) Act 2017= RBI not required to honor “I promise to pay…”. 10.7 ₹2000 WITHDRAWN BUT CONTINUED AS LEGAL TENDER - 2018–19: printing of ₹2000 stopped; 2023: RBI asked people to deposit it in bank/ exchange it with others - ₹2000 NOT DEMONETIZED but WITHDRAWN from circulation 10.7.2: ₹2000 withdrawal reason (by RBI): - issued temporarily as a measure to address shortage of currency, - not commonly used for transactions - clean note policy, 4-5 year lifespan of Indian note - no mention of black money 10.9 BANK MONEY / DEPOSIT MONEY 10.9.1 Paper orders: Cheque, Demand Draft (DD) - Law: Viceroy Ripon’s Negotiable Instruments Act, 1881: - Primary Objective: Cheque dishonor & forgery - Cheque: - 3 Parties: Drawer, Drawee, Payee - Types: Stale, Post Dates, Ante Dated, Open / bearer Cheque - IFSC: Indian Financial System Code, 11 characters unique to each bank branch - MICR: Magnetic Ink Character Recognition. 9 digits code written in Iron Oxide ink for automated clearance of cheque 10.9.2: DD and Overdraft - Overdraft: - When a person has insufficient bank balance, he may still withdraw money from his account (as a loan). - Pradhan Mantri Jan-Dhan account has Overdraft upto Rs 10,000/- with certain conditions - Overdraft: Short Term, Loan: Long Term 10.9.3 Cheque → NPCi’s Cheque Truncation System (CTS) & Positive Pay Mechanism - Cheque Truncation System (CTS): Bank sending scanned image online. - Positive Pay Mechanism: Sender and Recipient both send images to bank 10.10 ELECTRONIC ORDERS / DIGITAL PAYMENT - Payment & Settlement System Act 2007: for RBI to regulate card + e-payment services 10.10.1 CBS (Core Banking Solution): banking software with web-platform for centralizing data management branch-less banking. RBI's centralized payment systems (CPS) NPCi’s IMPS Type RTGS: Real Time Gross NEFT: National Electronic Immediate Payment Settlement Funds Transfer Service Amount Limit 2L to 20k Crore x - But, since the introduction of the Repo rate in the 2000s, the Bank rate has become a dormant tool - **Bank rate accepts collateral which can be both GSec/T-bill as well as private companies securities. 12.17.8 Quant. Tools → SDF - SDF is Reverse Repo walla game Without Collaterals - 2013: Urjit Patel Committee on Monetary policy proposed standing deposit facility (SDF) - SDF = Clients park/deposit their extra money in RBI. RBI pays them interest. RBI doesn’t give any collateral (unlike in REVERSE REPO). - Benefit of SDF: To combat inflation → RBI can suck extra money supply via SDF window. RBI will not have to pledge G-Sec as collateral to clients. - 2018: RBI Act amended to include Standing Deposit Facility (SDF) facility - April 2022: RBI started/launched the SDF. RBI also made changes to the policy corridor. 12.17.9 MSF Repo vs Reverse Repo vs SDF Tool MSF Repo Reverse Repo SDF Present rate 6.75% 6.50 3.35% Fixed 6.25 (2023-Feb) Reverse Repo Rate (FRRR) Lender RBI RBI Banks+some Banks+some NBFCs NBFCs Borrower ONLY (SCB) & RRB Banks+some RBI RBI NBFCs Borrower need to Yes Yes Yes Not required. give Collateral? ** Facility available Client (SCB) RBI RBI Client at Discretion of (Banks+Some NBFC) - ** suppose a client (Bank/NBFC) comes for Reverse Repo= It's not compulsory for RBI to entertain him - But, If client (Banker) comes for MSF = RBI will not say "NO" to him 12.17.10 Policy Corridor / LAF Corridor - BEFORE 2022-April: Policy Corridor = total width between: MSF REPO Reverse Repo. - After 2022-April: Policy Corridor = MSF (Repo+0.25%) REPO SDF (Repo-0.25%) - Thus total width is 0.25+0.25= 0.50% - SDF has replaced the Reverse Repo Rate as the floor of the Policy corridor post corona - However, Reverse Repo was not discontinued, it will remain as part of RBI’s toolkit - it will be used as per the mood/discretions of the RBI from time to time 12.17.11 Tri-Party Repo //Outdated topic, just know the name 12.17.12 BPLR, MCLR //Terms related to how individual banks decide their loan rates 12.18 OPEN MARKET OPERATIONS- TWO TYPES OMO Types Meaning Repo - OMO RBI buys/sells G-Sec with promise of repurchase. (e.g. Repo and Reverse Repo) Outright - OMO RBI buys/sells G-Sec WITHOUT any promise to buy them back. - Does it mean Repo is a sub-type of OMO? Theoretically yes 12.18.1 Market Operations (OMO): (Inflation → Sell G-Sec, Deflation → Buy) - Open Market Operations: RBI buys and sells Union & State Govts’ securities to control money supply. - RBI buying= Money supply increased / liquidity injected in the market. - RBI selling = Money supply decreased / liquidity absorbed from the market. - Market Stabilization Scheme: RBI sells special types of G-sec, T-Bill & Cash Management Bills (CMB) to suck excess liquidity. - Sterilization / Forex Swap: Their primary objective is to control the currency exchange rate volatility - Operation Twist (2019): a special type of OMO. Explained in next segment 12.19 MON POLICY: QUANT TOOLS: OMO → OPERATION TWIST - Security → Debt → G-Sec & Bonds - A ‘Security’ means a certificate/document indicating that its holder is eligible to receive a certain amount of money at a particular time. Borrower Govt Corporate Short term Treasury bills, Cash Bill of Exchange, Commercial Papers, (less than 1 year) Management bills Promissory Notes. Long term G-Sec, Sovereign Bonds Bonds / Debentures (1 year/>) Usually lower than Corporates’ Depends on following factors → Interest rate because risk is low 12.19.2 Deepening of G-Sec market- Retail investors’ RDAG @RBI - RBI launched “Retail Direct Scheme” in 2021. - What? Retail Direct Gilt (RDG) accounts for retail investors on its E-Kuber online platform. - Both Resident & Non-resident Indians can open this account. - Then Retail investors can directly buy T-Bill, G-Secs (of the Union Government), State Development Loans (SDL are ‘G-secs’ of State Govts) and Sovereign Gold Bonds, from RBI directly. - Application fees to open the account is 0 - Benefit? - Earlier retail investors bought G-sec “indirectly” through mutual funds wherein mutual fund managers charged commission/fees. Now retail investors can buy directly so they do not have to pay such commission/fees to MF managers. 12.19.3 Corporate Bonds: factors that determine its interest rate Factor (कारक) How does it determine corporate bond interest rate? (Risk) Credit rating Lower credit rating (e.g. CCC or D) → higher interest rate needs to be of company offered because the risk of default is high. Inflation If Bond is not offering more % than the level of inflation% then investors may not come. Bank deposit interest Higher the (Bank) deposit interest rate, higher bond interest rate needs to rates be offered to attract households to shift money from bank savings/FD to corporate bonds. Yield on G-Sec If G-Sec yield , then corporate will have to offer even higher bond interest rate to attract the investors from G-Sec investment towards Corporate/company-Bond investment. 12.19.4 Bond Yield - Bond yield is the profit an investor earns on a bond investment. - Bond yield is inversely related to the current selling price of the bond in the secondary market. - If a bond’s demand → its selling price will → bond yield - If the economy is booming - companies are making great profit, investors may sell bonds at lower prices in a hurry to unlock their money to invest it in shares of companies, because they think it’ll get them more dividends. - Then bond’s current selling price in the secondary market → yield. - If the economy is facing recession - companies will NOT make great profit → investors sell shares, and prefer to buy bonds hoping they’ll get secured fixed interest. - Then bond’s demand in the secondary market → selling price → yield. 12.19.7 Operation Twist: why? - Commercial banks were reluctant to lend money to private sector companies because of the problem of Bad Loans /Non-Performing asset - If such companies could borrow money by issuing corporate bonds (at cheaper interest rate) → more factories, more jobs, more production, more GDP. - RBI decided to attack the third factor: If the yield on long term G-Sec decreased, then automatically Corporate Bond interest rates could also decrease 12.19.8 RBI’s Operation Twist: methodology (2019-Dec) - Since RBI’s existing monetary policy tools had failed to make loans cheaper for corporations / boost the economy. - So in 2019-Dec, RBI started a “special OMO” wherein. - RBI started buying long-term G-Sec, their demand will → price will → yield is. - The 10 Year GSec’s yield lowered from 6.75% to 6.60% - Corporate bonds are priced (benchmarked) keeping G-sec yields in mind. - So, Op Twist → Lower G-Sec yield means - Cheaper borrowing for Private sector Companies. Because: - They can borrow money by issuing their (long term) Corporate-Bonds at much cheaper interest rates than before. - When a private company meets a bank manager to borrow money, it can negotiate the loan price - Cheaper borrowing for the Government. For reasons similar to above. - Investor of long term G-Sec will feel discouraged to hold the G-Sec till maturity (10-14 years), He will try to sell it to another party/RBI and pull out his money, then he may park ₹₹ it a Corporate Bond / Bungalow / car / Goa-vacation etc.  12.20MONPOLICY:QUANTI TOOLS:OMO →G-SAP - (Secondary Market) G-sec acquisition programme; Mechanism: RBI to buy G-Sec from Secondary market on specified timetable 12.20.1 OMO → G-SAP : Benefit? - Money supply in economy; Investors, who sold G-Sec to RBI- get ₹₹ → investment→economy growth 12.21 MONETARY POLICY:QUALITATIVE TOOLS - Quantitative tools control ‘volume’ of loans; Whereas, qualitative tools (PSL,LTV etc.) control “distribution” of loans to a particular sector of the economy. - how much loan to a particular sector e.g. agriculture, renewable energy. - how much loan to a particular segment of society (e.g. farmers, women, SC/ST). - So, qualitative tools also known as SELECTIVE or DIRECT Tools 12.21.1 Moral Suasion & Publicity - Moral suasion meaning applying “Persuasion” without applying punitive measures. RBI governor tries this tactic via conferences, informal meetings, letters, seminars - Publicity: RBI governor could give media statement, speech ; create an effective public opinion 12.21.2 Direct Action - RBI can punish banks (and even non-banks) for not complying with its directives under RBI Act, Banking Regulation Act, Payment and Settlement Systems Act, t (PMLA), (FEMA) 12.21.3 Margin Requirements / Loan to Value (LTV) - RBI can mandate (LTV) for home loan, auto loan or business loan etc. so a Bank/NBFC can’t lend more than x% of the value of the collaterals. RBI can change this x% to boost / curb demand. - LTV reforms 2020-Aug→Gold Loan:90% value of gold/gold jewelry 12.21.4 Selective Credit Control - Credit Rationing System: –central bank does not give more than “X” amount as loan to individual banks. And an individual can’t get more than the prescribed amount of loans for each category - 1960s: Credit Authorization Scheme (CAS) in India: all commercial banks had to obtain prior approval of the RBI before loaning ₹ 1 crore/> to a single borrower. - 1970s: RBI imposed quantitative ceiling on non-food loans to boost green revolution, food inflation - Consumer credit control e.g. During deflation / recession, RBI can relax the down payment / EMI installment norms for durables like Vehicles, TV, Fridge etc. to boost consumption and demand. - Priority Sector Lending 12.22 PRIORITY SECTOR LENDING Weaker section 12% Agri (all farmers) 8% Agri (small and marginal) 10% Micro Enterprises, khadi-village industries 7.5% Misc (SMEs, Renewables, Food processing, vermicompost and biofertilizer, Exports, Education, Social infra) 2.5% - PSL quotas are minimum requirements, not maximum limit. - Indirect loans/co-lending through NBFCs also counted - Norms not applicable to NBFCs, only banks - For SCB and foreign banks - 40%. For RRBs, UCB, Small finance banks - 75%. For Rural Coop Bank -N/A - RBIs weightage system to encourage loans to backward districts - Overachieving banks can sell excess PSL in form of certificates to underachiever banks - PSL shortfall money to be deposited in NABARD’s (RIDF), or other funds under SIDBI, National Housing Bank (NHB), UIDF, MUDRA.etc as per RBI norms  RIDF UIDF When? 1995-96 2023 Budget Where? Under NABARD Under NHB For? Agri, social service, rural connectivity Urban infra projects in tier2 and 3 cities 12.23 Monetary Policy Tools Quantitative tools CPI2% = fight inflation Easy, cheap, dovish, expansionary Tight, dear, hawkish, contractionary CRR, SLR ↓ ↑ Repo, MSF, Bank rate ↓ ↑ Reverse repo, SDF ↓ ↑ Market operations OMO RBI buys GSec RBI sells GSec Qualitative tools CPI2% = fight inflation Moral suasion/direct action enforce Dovish Policy Enforce the Hawkish policy Loan to Value(LTV) ↑ e.g. Gold LTV-60%--> 90% ↓ Selective credit ↑ loan-flow to sectors that can ↓ the loan-flow to sectors causing demand-side control/PSL generate employment e.g. textile inflation e.g. real estate & housing. ↑ loan-flow to sectors where loans can ↑ supply 12.24 MONETARY POLICY IN PRESENT-DAY INDIA - 3 strategies - Exchange rate stability - by singapore and other export oriented countries - Multiple indicators - RBI followed this strategy upto 2016. - Flexible Inflation Targeting (FIT) / Price Stability (2-6%) - currently followed by RBI 12.24.1 Monetary Policy Making under RBI Act since 2016 RBI side (3 members) Govt. Side (3 members) 1. RBI Governor, as the Ex-officio Chairman. 1. Dr. Shashanka Bhide from (NCAER, Delhi) 2. Dy. Governor responsible for Monetary Policy. 2. Dr. Ashima Goyal from IGIDR (Mumbai) 3. One person nominated by RBI Central Board: 3. Dr. Jayanth R Varma from IIM-A Tenure tied with their ex-officio job tenure Tenure: 4 years, no re-appointment. RBI Governor & Dy.Gov - selected (FSRASC) headed by Cabinet Selected by Search-cum-Selection Committee Secretary (IAS) headed by Cabinet Secretary (IAS) - Quorum -4 persons. Legally required to hold a minimum of four meetings in a year. - Rates decided by majority vote. RBI governor votes in the first instance and also in case of tie - Must publish minutes of meeting every 14th day and Monetary Policy Report every 6 months - Inflation target decided by Union Govt after consulting RBI governor - if inflation not kept in this 2-6% zone for 3 consecutive quarters (=9 months), then Committee must send report to Govt with reasons and remedies; MPC decides only the repo rate. Other decisions, such as CRR-SLR, PSL norms etc are decided separately by the RBI Governor. 12.25.1 Stance: Calibrated Tightening / Neutral / Accommodative Stance Will they increase repo? Will they cut repo? Will they keep the repo unchanged? Calibrated Tightening Possible No they’ll not cut Possible Neutral Possible Possible Possible Accommodative No they’ll not hike Possible Possible - RBI MPC is not legally bound to follow the stance 12.29MONETARY POLICY:GOVERNORS OTHER REGULATORY ANNOUNCEMENTS - MPC decides only Repo rate. Other decisions( CRR-SLR cut, PSL norms, banning magnetic-chip cards) are decided separately alone by the RBI Governor. 12.30BANKS’ LENDING RATES % - 1969 Govt began nationalization of private banks, and ‘administered interest rates - 2003 RBI introduced Benchmark Prime Lending Rate (BPLR) system - 2010 RBI introduced formula “BASE Rate + formula = bank’s loan interest rate” - 2016 ⇒ RBI introduced formula “Marginal Cost of Funds based Lending Rate (MCLR) + Spread” system 12.31 BANK’S LOAN INTEREST RATE: EXTERNAL BENCHMARK - Failure of MCLR forced RBI to order an external benchmark formula from 1st of October 2019. - External Benchmark + Spread(Profit) + Risk premium = Bank’s Loan interest rate. - Individual bank free to pick any one External Benchmark such as - RBI repo rate or - 91-day T-bill yield or - 182-day T-bill yield or - any other benchmarks by an organization named Financial Benchmarks India Ltd. - Banks must feed the latest data of external benchmarking at least once every 3 months. so that both fresh and old war hours will benefit for example in case the repo rate is decreased. 12.31.2 External Benchmark system: Which borrowers are eligible? - Personal loan, retail loan, loans to micro and small enterprises, loans to medium enterprises, applicable to old/ previous loans in above categories. - benefits of external benchmarking- Transparency and accountability to bore hours. better / faster transmission of monetary policy. 12.31.4 Interest Rate Reset of EMI based Floating Interest Loans - RBI gives option of ability to reset in case if the bore hours opted for floating rate of interest rate and due to change in repo rate EMI has increased. - So there is also an option in case someone wants to get rid of EMIS they can do the four closure of loan by paying the full amount at once. 12.32 LIMITATIONS OF MONETARY POLICY IN INDIA - Due to saving habits of Indians, change in repo rate does not drastically affect banking processes - Before external benchmarking the changes in repo rate as per economic survey used to take almost 24 months to impact inflation due to banks citing various reasons and not reducing interest rates. - Poor management in PSBs and scams and PVBs, level of NPAs impacts the monetary policy. - supply side issues like El Nino were NGO political issues leading to increase in raw material Global crude oil prices, competitive markets denting our exports. RBI cannot control all of this.  - Hawkish policy in previous governments due to fear of monsoon and oil price led to high repo rate as well as high interest but reduced inflation. - Govt issues -fiscal deficit, subsidy leakage, populism/loan waivers etc.;Structural issues in economy. - lack of ease of doing business, electricity- Road Infrastructure= production/ supply - informal money lenders; poor penetration of banking sector, lack of fin institutions, cash intensive economy. 12.32.2 Monetary policy limitations: Cheap loans causing inflation? - can't continue to keep cheap loans (4% repo) for so long, else it'll cause asset price inflation. (e.g. suppose rich men buying 3-3 bungalows using cheap loans for 'investment' → demand for bungalows increased → home prices increased = inflation in asset prices. - This could also result in Stagflation= Persistent high inflation, high unemployment and low growth. 12.32.3 USA Quantitative Easing (QE) & Fed Tapering : Impact on India - QE→ US Central Bank reduces the interest rate on loans to boost the economy which leads to borrowers taking money from USA and investing in India ; in 2022 to combat inflation, USA did fed tapering which led to expensive loans→ borrowers are taking their money from Indian markets and returning to USA→-leads to drastic effect on Indian share market→ Increase in price of dollar and imported inflation. 12.32.4 Monetary policy limitations: Black Swan Events - Unprecedented unexpected extreme risk event example 2007 financial crisis and 2020 Corona. - According to the RBI, FPI may pull out 100 billion dollars from the Indian market and that will be Black Swan event.Fed tapering was not black swan event because it was expected by economists. 12.33MONETARY POLICY OBSERVATIONS BY ES23 - January to November in 2022 for more than 9 months inflation was more than 6%, the RBI Centre reported to the government and also managed to control inflation from November-December 2022. 12.33.1 Rate hikes: RBI vs Other Central banks Nation / Central Bank Repo Hike since 2022-April to Dec US Federal Reserve 4.25% European Central Bank (ECB) 3% Bank of England 2.50% India’s RBI 2.25% - All countries are going towards Tight money policy. RBI has not increased loan rates drastically like the USA because it wants to do soft landing and not hard landing. 12.33.3 Monetary policy limitations: Cantillon Effect - When the money supply is increased, the purchasing power of people who first receive the freshly created money is increased at the cost of the rest of the people. - When money is introduced in the market it does not get divided equally among rich/ middle class/ poor but mostly taken up by Rich people which they use for their benefit and in the end poor people are devoid due to further inflation at expense of introduction of money. 12.33.4 Liquidity Trap- John Maynard Keynes - RBI reduces repo rate but banks citing fake reasons do not reduce the interest rates, at the same time banks are also not giving good saving interest rate since the demand of money is being taken care of by RBI which leads to people not investing in banks rather going for gold, land, bonds. This process leads to less money multiplied in banks since they are neither taking money from people nor giving loans which leads to a stagnant effect again so even in decrease of repo rate, recession/ slow down of the economy is unavoidable and even the added liquidity is being trapped. 13 FINANCIAL INTERMEDIARIES →BANKS - Financial Intermediary is an entity that acts as the middleman between two parties in a financial transaction - Types:- Formal & Informal; Formal FI further divides into:- - Banks - Commercial banks→ public sector, pvt sector, foreign banks - Cooperative banks - Non Banks - AIFI→ EXIM, NABARD, NHB, SIDBI, NaBFID - NBFCs→ primary dealers, mutual fund, insurance fund, pension fund, mudra etc 13.11BANKS →RESERVE BANK OF INDIA (RBI) - 1913 Commercial banks were required to register under the Companies Act,No CRR, SLR, BASEL Norms - 1926 Royal Commission on Indian Currency (Hilton Young Commission) recommends setting up RBI - 1934 RBI Act enacted; 1935 -becomes operational, 1st RBI Gov: Osborne Smith - Commercial Banks fulfilling certain conditions were listed in the 2nd Schedule of RBI Act, & such “Scheduled Banks” were required to keep CRR with RBI - 1948- 49 All private investors’ shares transferred to Govt of India under the RBI transfer of ownership act 1948., RBI governor answerable to Parliament, has to pay dividend to Govt from its profits. - 1949 Banking Regulation Act empowered the RBI to - Give license to companies to open banks - Give permission to banks to open new branches. - Prescribe auditing norms, liquidity norms for Banks such as SLR - Protect interest of depositors. Force elimination / merger of weak bank - RBI Central Board Composition - Official Directors → RBI Governor ,4 Dy. Governors - Non-Official →2 govt officials,10 directors nominated by govt, 4 directors from RBI’s local boards 13.11.1 RBI Governor & Dy Governor - RBI Act provides for “NOT MORE than 4” Dy. Governors. - They’re selected by the Financial sector regulatory appointment search committee (FSRASC) headed by the Cabinet Secretary (IAS) → successful candidates’ names sent to the Appointments Committee of the Cabinet headed by the PM for final approval. - Governor and Dy.Govs’ tenure→ usually 3 years. Re-appointment possible 13.11.2 RBI Offices & Departments - RBI 4 regions: Northern: Delhi, Eastern: Kolkata, Southern: Chennai, Western: Mumbai - - RBI has various dept after Banks, NBFCs, Payment Systems, Foreign Exchange Management etc 13.11.3 RBI: Functions of - Controller of Money Supply: Issues M0 under RBI Act, Makes Monetary Policy. - Controller of Foreign Exchange: through FEMA Act. - Banker to Union & State Governments & Public Debt Manager - Banker’s Bank: Lender of Last resort, Advises in monetary matters. - Regulator of all “BANKS”: through BR Act’49, Payment Systems - Regulator of AIFI, NBFC-D (Deposit Taking NBFC) & others - Promotional Roles : Customer protection through Ombudsman , Financial Inclusion through PSL norms. - Data Publication & awareness e.g. Annual Financial Stability Report - International Cooperation e.g. BASEL, IMF, G20’s Financial Stability Board etc. 13.12 AGENCY BANKS OF RBI - Can be private or public sector banks; to perform functions on RBI’s behalf 13.13 RBI’S NOTABLE PORTALS 13.13.1 UDGAM Portal: Unclaimed Bank Deposits (2023) - If deposits remain unclaimed for 10 years in bank → bankers need to transfer it to “Depositor Education and Awareness FUND” OF RBI.Beneficiary can search unclaimed deposits across multiple banks at one place 13.13.2 PRAVAH Portal for license from RBI (2023) - Banks/NBFC/ Digital payment related companies need to obtain license from RBI; can apply for such licenses using PRAVAH Portal (Platform for Regulatory Application, Validation And AutHorisation 13.13.3 Daksh Web Portal for supervision (2022) - Banks, NBFC send their reports to RBI - Then RBI can monitor them more effectively 13.13.4 E-Kuber Portal - Core banking solution (CBS) portal of RBI. - All bankers have current accounts here. - RBI handles NEFT/RTGS, Repo, OMO & other instruments from here. - Retail Investors can buy G-Secs from here 13.14 SCHEDULED BANKS - When RBI is satisfied with TWO conditions simultaneously - a public sector or pvt sector bank has (Paid Up Capital + Reserves) = Min ₹5 Lakhs - Bank is not conducting business in a manner harmful to its depositors. - Then such a bank is listed in the 2nd Schedule of RBI Act → & is known as a Scheduled Bank. Scheduled Bank Non-Scheduled Bank Can be subdivided Many cooperative banks are non-Schedule - 1) Scheduled Commercial Banks - 2) Schedule Cooperative Banks Need to deposit CRR money to RBI’s office Can maintain the CRR money with themselves Eligible to borrow/deposit funds in RBI’s window operations Depends on RBI’s discretion eligible to partner in govt’s financial inclusion scheme Usually not eligible. Must protect depositors’ interest and abide by RBI norms Yes & yes 13.15 FI→COMMERCIAL BANK→PRE-INDEPENDENCE - 1770 Bank of Hindustan, Calcutta ;1865 Allahabad Bank (both Europeans owned ) - 1806-42 - Three Presidency Banks at Bengal then Bombay and Madras. - - 1861: all three were given the right to issue currency - 1921: They were combined into Imperial Bank of India⇒ SBI (1955) - 1913-30s: State Bank of Mysore, State Bank of Patiala, rise and collapse of Banking industry, Birth of RBI - 1940s State bank of Bikaner, Jaipur, Hyderabad, Travancore by the respective princely states / Nawabs. Post-Independence, these banks became ‘Associated Banks of SBI’, and ultimately, merged in SBI (2017) 13.15.1 Nationalization of Banks After Independence - 1950s to 60: only 188 elite people controlled the economy by being on board of top 20 banks, 1452 companies. → reckless lending to directors and their firms;Banks failed,RBI had to close them; - Private Banks unwilling to open in rural areas → no financial inclusion; no achievement of FYP targets  1948 - RBI Transfer of Ownership Act 1948 - 1948: Op. Polo, Hyd. → 1951:1st FYP, → 1953: Air India nationalized from Tata 1955 - Imperial Bank nationalized and became SBI 1955-56 - LIC Act took over private life insurance cos. 57: 1st Communist Govt in Kerala 61: Operation Vijay for liberation of Goa, Daman and Diu. 1963 - State Bank of Jaipur and Bikaner merged together 1969 - 'Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969: 14 Private banks with ₹ 50 cr/> deposits were nationalized e.g. Bank of Baroda, PNB, Dena, Canara etc - Catholic Syrian Bank (1920, Kerala), Dhanlaxmi Bank→ no large deposits; not nationalized; they are called “Old Private Banks 1972-73 - GIC Act- took over privateGeneral insurance cos. Later GIC was reorganized with 4 subsidiaries: National Insurance, New India Assurance, Oriental Insurance and United India Insurance 1980 - 6 banks with ₹ 200 cr/> deposits were nationalized e.g. Corporation Bank, Vijaya Bank 2019 - State Government of J&K owned 60% shares in J&K bank → Article 370 removal → Union Government took-over this shareholding Reform - M Narasimham-I (1991), M Narasimham-I (1997), Dr. Raghuram Rajan Committee Committee s (2007) and P J Nayak Committee (2014) → for reforms in banking sector 13.16 CONSOLIDATION OF PSBS - PSB consolidation = made up of two types of reforms: A) Merger B) Privatization 13.16.1 Consolidation of PSBs → A) Merger 2008-10 - State Bank of Saurashtra and State Bank of Indore merged into SBI 2013 - Bharatiya Mahila Bank setup as PSB, HQ Delhi, 100% ownership by Union Government; - Board of Directors: All women. Loans given predominantly to women & without collateral 2017 - BMB & 5 Associate Banks of SBI( Bikaner-Jaipur, Hyderabad, Mysore, Patiala, Travancore)merged with SBI 2017 - Alternative Mechanism Panel setup under the Finance Minister’s chairmanship. - examine the proposals for consolidation of PSBs and forward them to Cabinet for approval. 2019 - Vijaya & Dena to be merged into Bank of Baroda. 13.16.2 Consolidation of PSBs → B) Privatization - Govt selling 51% or more shareholding to private parties →such PSBs will convert into a PVB..Eg:-Axis 13.17COMMERCIAL BANKS → PVT. SECTOR BANKS (PVB) - Govt administered loan interest rates= Low profitability; Political Interference= loan recovery difficult - 1991: Balance of Payment Crisis; Banking Sector Reforms committee under M.Narasimham suggested: - Govt should ↓ its shareholding in Public Sector Banks. - RBI should ↓ CRR and SLR - The Government should not dictate interest rates to Banks. Liberalize the branch expansion policy - Allow entry of New Private Banks and New Foreign Banks. 13.17.1 On-Tap’ License to open Private Sector Banks - A private entity can apply for license under Banking Regulation Act,to RBI whenever he wishes - must meet the eligibility requirements e.g. min10 years’ experience in banking finance, min 500 crore capital - License given to run a non scheduled bank→ becomes scheduled when (min 5 lakh paid up capital & reserves + protecting depositors) 13.19 COMMERCIAL BANKS →FOREIGN BANKS Foreign Bank in - They’re Incorporated abroad & opening branch in India e.g. Citibank India - CRR, SLR & other norms applicable; PSL norms vary depending on the number of branches. - RBI gives them ‘on-tap’ license on reciprocal basis;. I.e if foreign nation allows Indian banks to operate in their country - 2023: Axis bought Citibank’s India branches Indian PSB - Foreigners can invest max. 20% in its shareholding. India Private Sector - Foreigners can invest upto 49% (automatic) and upto 74% by approval of Bank Government 13.20 COMMERCIAL BANKS ⇒ DIFFERENTIAL BANKS Difference Universal Bank Differential Bank Open Branches Anywhere but after opening 25% of Geographical Restrictions on branch opening branches in unbanked rural areas for Local Area Bank (LAB), Regional Rural Banks (RRB) Both Time & Demand Deposits of Payment Bank: Accept Max. 1 lakh deposit Accept any amount. only. In 2021- Limit increased to ₹2 lakh. Give Loans to Anyone [After 40% PSL] SFB, RRB: 75% to PSL Payment Bank can’t give loans; - Chronology of differential banks: RRB(1976) → Local Area Bank (1996) → Small Finance Bank & Payments bank(2015) → Wholesale banks (proposed) 13.20.1 Commercial Banks ⇒ Differential Banks⇒ RRB and LAB Regional Rural Banks Local Area Bank - Based on M.Narasimham’s Committee on Financial - Based on Budget - 1996 Inclusion (1970) - Setup by pvt entities under RBI Banking - Setup under the provisions of RRB act e.g. Uttar Regulation Act. Bihar Gramin Bank (Sponsor bank- Central Bank of - Can open branches in Max. 3 districts India) sharing borders with each other. - Subject to CRR, SLR norms but RBI could - only 1 urban center per district allowed. prescribe separate norms. Remaining branches need to be opened - PSL: 75% in rural areas of that district. - Their loan interest rates can’t be more than - They’re Non-Sch. Banks so while CRR, prevailing lending rates of Cooperative Banks in SLR, PSL etc very apply but every norm the area. may be different, decided by RBI. - Restricted to a few districts. - Ultimate regulator: RBI - Immediate regulator NABARD. 13.20.2 RRB’s Shareholding pattern / IPO RBI act Amendment in 2015 - Shareholding: - Shareholding: - Union 50% - Union + State + Bank 51% - State 15% - Others (Pvt investors) 49%. - Sponsor Bank - Benefit? RRB can issue newshares in the market 35% to acquire more capital from private investors. 13.20.3 Commercial Banks ⇒ Differential Banks ⇒ SFB & PB Parameters Small Finance Banks Payment banks Examples Capital Small Finance Bank Airtel, India Post, FINO, Paytm, Jio, NSDL. (Total 11, (Total 10) presently 6) Eligibility during Min.100cr. capital-walla Min.100cr. capital-walla resident 1st round of Resident Indian, Local Area Indians, NBFCs, PPI-wallets (prepaid payment licensing Bank, NBFC, Micro-finance, instrument), mobile telephone companies, with 10 years exp. in supermarket chains, banking / finance cooperatives & companies controlled by resident Indians Area RBI Committee gave selection Anywhere preference North East & Central India clusters where Universal Banks’ penetration is poor CRR, SLR, Repo, Same as Indian private banks Same as Indian Private Banks, butspecial terms & FDI? conditions in SLR. Rural Must have 25% branches in No need but 25% access points must be in rural areas Penetration unbanked rural areas like Kirana Stores Target Unserved Underserved Promoting Small savings Consumers Farmers, Remittance of migrant laborers, low income Micro, Small industries: households, unorganized sector, small business Accept Deposits Yes, without any restrictions - No NRI deposits, No Fixed deposit - Can accept only Demand Deposits and Max. balance Rs.2 lakh per customer. Debit cards Yes Yes Credit cards Yes No Loans - Yes, but 75% in PSL, - Can’t loan, So no PSL. - 50% of loan portfolio - They’re required to invest all deposits in G-sec, of Rs. 25 lakhs/< T-Bill and in other SCBs. Evolve/ future After 5 years can become a After 5 years they can become a Small Finance Bank, If growth? Universal Commercial Bank, If RBI is satisfied with their record. RBI is satisfied. BASEL-III norms applicable on both SFB & PB. SFB & PB can sell MF, Pension, Insurance policies with approvals of respective regulators i.e. SEBI, IRDAI, PFRDA. 13.20.4 On-Tap Licenses for starting SFB - RBI reviewed & found SFBs have achieved their priority sector targets and helped in financial inclusion. - More competition and new players will help. - 2019, RBI announced it’ll allow ‘On-Tap’ license for SFB soon 13.20.5 Commercial Banks → India Post Payment Bank (IPPB) - Registered as a Public Limited Company under Companies Act - 100% owned by the Department of Posts (Ministry of Communication and Information Technology. - Obtained RBI’s License under Banking Regulation Act to start working as a Payment Bank. - Doorstep banking through Postmen. - Bank Account Types: Safal, Sugam, Saral - IPPB is not SFB yet 13.20.8 Digital Payments - Digital Banks (Proposed) by NITI Aayog in 2021 under the Banking Regulation Act, 1949 and will not have physical branches, only the internet for delivering banking services. - Budget-2022 announced to setup 75 DBUs (Digital Banking Units), different than Digital Banks of Niti Aayog - Neo-banks/full-stack digital banks are completely online-based digital banking platforms. They don’t have physical branches. 13.21 FI ⇒ BANKS ⇒ COOPERATIVE BANKS Type Commercial Banks Cooperative Banks Banking Reg. Act Applicable since 1949 Applicable since 1966. Regulator RBI Under RBI’s supervision: - Multi State Cooperative Banks - Urban Cooperative Banks Under Dual supervision - Other types of cooperative banks are under dual supervision of RBI + respective State govt’s registrar for cooperative society. CRR, SLR, Yes Yes, but, RBI could keep different slabs/ norms. BASEL-III Repo, MSF Eligible to borrow Yes, but only selected category of Cooperative Banks PSL Lending Yes 40-75% Only urban cooperative banks Who canborrow Anyone First preference to members Vote power Based on Shareholding, like According to Cooperative Society norms,1 member = 1 a Commercial Company vote irrespective of how much capital contributed. Profit Motive purely profit motive, so Desire to help the community. So, lending rates little lending rates may be higher lower than commercial bank Presence All India & overseas Mainly in Gujarat, Maharashtra, Andhra,Tamil Nadu.. - Challenges: Politicization, casteism, poor recovery of loans, scams, money laundering. - Classification of Cooperative Banks - Urban Cooperative Banks - Further subcategories depending on Scheduled / Non-Scheduled; OR Single State / Multi State.  - From 2018, RBI allowed them to voluntarily upgrade to Small Finance Banks, with certain conditions. - - Rural Cooperative Banks - Notable State Cooperative Bank: District Central Cooperative Bank (DCCB) → Primary Agricultural Credit Societies (PACS) - PACS are not ‘banks’. They can’t issue cheque books. RBI doesn’t regulate them. Only the State registrar regulates them. - Misc Types: Land Banks, Cooperative Agriculture & Rural Development Banks. 13.21.2 Banking Regulation (Amendment) Ordinance/Act, 2020 Type of Bank BEFORE: Regulator After: Regulator Commercial (SBI Axis) RBI RBI Coop (Single State: rural) RBI + State Govt RBI + State Govt Coop (Single State: urban) RBI + State Govt RBI ONLY Coop (Multi State Cooperative) RBI + Union Govt RBI ONLY Coop: PACS State Govt State Govt 13.22 FORMAL FI ⇒ NON-BANKING FINANCIAL INSTITUTIONS 13.22.1 Development Finance Institutions (DFI) - meant for Medium to long term loans to industries - They don't accept DEPOSITs from ordinary people. - Previously the financial intermediaries were classified into three categories 1) Bank, 2) Non-Bank 3) DFI - But the M.Narasimham-II Committee on Banking sector reforms (1998): recommended only two categories: Bank or non-bank. DFI were required to join either one category. Industrial Finance Corporation of India (IFCI) owned by the Finance Ministry's Department of 1948 Financial Services. National Small Industries Corporation (NSIC) under the Ministry of Micro, Small and Medium 1955 Enterprises (MSME). ICICI: Industrial credit and Investment Corporation of India Ltd was set up by GoI, World Bank etc. 1955 Later became a Private Sector Bank. Industrial Development Bank Of India (IDBI) Act. 2004: Transformed into a Public Sector Bank. 2018: 1964 Government sold its majority shareholding to LIC. India Infrastructure Finance Company Ltd (IIFCL) owned by the Finance Ministry's Department of 2006 Financial Services. National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021 2021 13.22.3 Non Bank ⇒ All India Financial Institutions (AIFI): EXIM (Jan 1982) NABARD (Jul 1982) NHB (1988) SIDBI (1990) Export-Import Bank of National Bank for National Housing Small Industries Development India Agriculture and Rural Bank Bank of India Development  Boss: Government Original boss: Originally 100% owned by of India (100%) 100% Govt owned. RBI (100%). But, IDBI. 2019: RBI sold Later on shareholding transferred 100% to Govt. → SBI, LIC etc Promotes cross - Regulatory - Finance to - Operates Credit border trade and supervision: Coop + banks and Guarantee fund, Small investment, helps RRB NBFCs for Enterprises Development importers-exports - + Indirect housing Fund (SEDF). with loans and refinance to projects. - Operates udyamimitra.in for foreign currency. farmers, artisans - RESIDEX loans to small entrepreneurs - Operates Rural index to via schemes like Mudra, Infra. monitor Stand-up- Development residential India. fund (RIDF) real estate prices. - AIFIs are not ‘banks’ because they can't accept direct deposits from the public. - RBI is the regulator over WIFI. - BASEL norms applicable but RBI can prescribe different / slabs norms / deadlines. 13.22.4 NABBED, the 5th AIFI (2022-Mar) - 2021: NaBFID: National Bank for Financing Infrastructure and Development was set up by a law/act of Parliament, with an initial capital of ₹20,000cr capital. - NaBFID will get funding from RBI, Govt, Financial institutions, etc. It’ll also issuing bonds in market etc - NaBFID will give loans of ₹5 lakh crore in 3 years. It’ll help with the National Infrastructure Pipeline (NIP) project. - Regulator? RBI; 2022: RBI ordered that NaBFID will be treated as All India Financial Institution (AIFI). - Thus, NABFID is the fifth AIFI after EXIM Bank, NABARD, NHB and SIDBI. 13.22.5 FI ⇒ Non-Bank ⇒ Primary Dealers (PD) - They deal in the "primary" market i.e. directly buy fresh G-sec from RBI’s E-Kuber platform and sell it in the secondary market. E.g: Standard Chartered Bank, HSBC (HongKong), SBI, Kotak etc. 13.22.6 FI ⇒ NBFCs Parameter Commercial Banks Non-Banking Financial Companies (NBFCs) Registration Banking Regulation Act Companies Act Supervision RBI Depends.Mutual funds-SEBI, Insurance Co: IRDA etc. Entry Capital 500 Cr. Different-different norm depends on organization Numbers - 13 Public Sector - Total 10,190. - 56 RRBs - Out of them 108 deposit Taking, - 39 private sectors - Remaining are non-deposit-taking. - 44 Foreign Banks. Can accept - Can accept Time & Demand - Only NBFC-Deposit-Taking (NBFC-D) & even Deposits? deposits they can accept only Time Deposits. - Payment banks- can’t accept - Deposits are not insured under DICGC Act. time deposits e.g. Fixed Deposits. - Their deposits are insured under DICGC Act.  Can issue - Yes, Banker can issue these - Can’t issue their chequebook, debit/credit Chequebook, instruments. card. Credit Card, Debit Card? Prudential CRR, SLR, applicable - SLR applicable ONLY on NBFC-D. but RBI Norms can prescribe different slabs / formulas than banks. - CRR not applicable on any type of NBFC. BASEL Yes, Applicable. - Applicable on 108 NBFC-D and norms - Applicable on 276 NBFCs – ND – SI - But RBI can prescribe different slabs / norms /deadlines. Investment They can keep depositor’s money Can invest clients’ money in share market. E.g. in RBI approved securities. But Mutual Funds, Insurance Companies. can’t invest in share market, directly. Loan Interest Decided as per RBI’s methodology Varies & depends on nature of biz. Rate from time to time (BPLR, MCLR, External Benchmark etc.) Recovery Loan recovery powers under - Housing Finance Companies have SARFAESI SARFAESI Act. powers. But, all types of NBFCs don’t have it. Consumer RBI’s Ombudsman, Bank’s RBI’s separate Ombudsman for NBFCs starting Complaints Internal Ombudsman the NBFC-D since 2018. 13.23 NBFCS REGULATED BY RBI Investment and They mainly help buying ‘assets/machinery’ like tractor, bulldozer, etc Credit Company E.g. SREI Equipment Finance, Limited Consumer Durable - Help buying TV, Fridge, Mobile, AC etc. with Buy now Pay later Loan Finance /BNPL (BNPL) / Equated Monthly Instalment (EMI) model. Eg. Bajaj Finserv, Core Investment - They do long term investment in Companies. E.g. Tata Capital, Company (CIC) Reliance Capital, Infrastructure Leasing & Financial Services Limited (IL&FS) Infrastructure Basically, they give loan for infra, Projects like highway, airport, powerplants. Finance Company - E.g. Rural Electrification Company ltd. (REC) (IFC) - L&T IDF, Kotak IDF, IDFC IDF (“IDFC First” has separate license for Infrastructure Debt Private Sector Bank). Fund (IDF) Asset Reconstruction They buy bad loans / NPA from Banks & other NBFCs, and try to salvage Companies (ARC) value from the underlying assets. E.g Anil Ambani’s Reliance ARC. Factoring They lend short term money to client against his invoices / accounts Companies receivable. E.g. IFCI Factors, Siemens Factoring. Gold LoanCompanies e.g. Muthoot gold loan, RBI decides their Loan to Value ratio (LTV) · Home Loan - such as DHFL, Muthoot Housing finance etc. Housing Finance Companies Companies.RBI regulates them since 2019. MUDRA (2015) - A non-deposit taking NBFC owned by SIDBI. It gives indirect loans to Micro enterprises through PM Mudra Yojana.  Residuary (अ वश ट) - Any NBFC not regulated by any other regulator (e.g. SEBI, IRDAI, PFRDA)- falls under RBI’s purview. Micro Finance - 2010: RBI’s Y. H. Malegam Committee → RBI created a new NBFC Institutions category called Micro Finance Institution (MFI) (MFI: सू म ि◌व सं - They give small loans to poor without collateral, flexible EMI. थान) - eg:Bandhan (W.Bengal, separately got PvB license), Disha (A'Bad: separately got SFB license), SKS (Andhra), Cashpor (UP), Ujjivan (Karnataka). - Who regulates them? RBI. Plus some regulation also done by Ministry of Corporate Affairs. - Who can borrow from MFI? Ans. Household whose annual income is not more than ₹ 1.25 lakh (rural) or ₹ 2 lakhs (urban). - one person can borrow Not More than ₹ 1.25 lakh. Money Changers/ - They help the clients buy/sell foreign currencies e.g. Rupee to Dollars Authorised dealers - They have to obtain license from RBI under FEMA (Foreign (AD) for foreign Exchange Management Act, 1999) currency - Both banks & NBFC can get this license from RBI. 13.24 FINTECH COMPANIES 13.24.1 Fintech regulated by RBI P2P Lenders - It is like Olx-Quickr connecting sellers of second hand goods with buyers, the P2P lending websites connect borrowers and lenders. E.g. Faircent.com, Cashkumar.com, CRED Mint etc. Account - They manage information of a customer’s financial assets & display it to him or to Aggrega third party (like loan giver, credit rating company & Apps). tors (AA) - 2018: RBI gave license to 5 cos- NeSL,Cookiejar etc. Loan E.g. Loanadda.com, Moneytap.com, Loanbazaar, Paisabazaar etc. portals Aggrega - Challenges? Often these digital platforms that act as outsourced agents of tors (ऋण banks/NBFCs to sell loans. समहू न) - But, customers face difficulty in complaint/grievance redressal. - Now even Google Pay app developing features for loans. So RBI has expressed its displeasure and is presently working on rules to fix this. Payment - help sellers to accept payment from buyer by providing technological solutions Aggregators - E.g. Razerpay. Seller opens account on Razerpay website-> embeds the code/link in his own website-> can accept payment through credit card, debit card, netbanking, UPI JioMoney, Mobikwik, Airtel Money - Further subtypes: Online Payment Aggregators Vs Offline Payment Aggregators. Mobile Wallet - PhonePe, MobiKwik, Paytm etc many apps/services. App - Learned enough about them in Pillar1A1 subtopic digital payments. 13.24.2 Fintech regulated by NON-RBI org (e.g SEBI, IRDAI) Type Examples Regulator Discount brokers e.g.Zerodha, Upstox, 5paisa, Groww. They help the clients SEBI buy/sell shares/bonds etc online via mobile apps / webportals.  Insurance Web e.g Policybazaar.com. Help client find & compare the insurance IRDAI Aggregator policies of various companies. 13.24.3 Digital Lenders Organization Examples Regulator Giving loans online Banks, P2P lenders RBI itself Giving loans online but NOT regulated RBI Venture Capital Funds (VCF) SEBI Giving loans online but not regulated by anyone = unauthorized digital lenders Nobody / illegal. their App will be shut down;Legal action will be taken. 13.24.4 Credit Information Companies (CIC) versus Credit Rating Agencies (CRA) Credit Information Credit Rating Agencies (CRA) Companies (CIC) Regulator RBI SEBI EXAMPLES CIBIL TransUnion, CRIF - Standards and Poor's, Moody’s CRISIL, High Mark, Equifax CARE, ICRA, FITCH Ratings India Pvt. and Experian. Ltd, SMERA. - Brickwork Ratings India = SEBI ordered it to shut office due to malpractices. check the credit Individual Persons companies, NBFCs, governments, local worthiness / loan bodies, non-profit organizations. repayment capacity of They do not check it for individual persons. Rating numerical scores. e.g. alphabetical symbols e.g. AAA, AA-, D- CIBIL Score between etc. 300- 900. Utility? Better the score → similar to the left cell. 1) loan application will be passed easily 2) You'll have to pay lower interest rate. 13.25 NBFCS REGULATED BY SEBI Stock Broker - They help clients buy-sell Shares/Bonds depending on his instructions - They help the clients buy/sellshares/bonds etc online through mobile Discount Broker apps. - Discount-brokers’operational costs are lowers, as they do not keep large number of sales-agents or physical offices. - They pool clients’ money and MF-manager invests it in shares/bonds Mutual Funds (MF) using his own discretion & expertise. - Pool & invest money in real estate / infra projects REITs / InvITs Investment Banks: - Underwriting, Merger & Acquisition, Wealth Management of rich people: (USA term) & Merchant - E.g. Kotak Mahindra, Citigroup, Bank of America, DSP Merrill Lynch, Banking Companies: Morgan Stanley, SBI capital (UK term) - 2021: SEBI allowed payments banks to act as investment bankers (after fulfilling the rules/regulations of SEBI).  Venture CapitalFund VCF Help startup companies to arrange capital e.g. IFCI-VCF, IDG-VCF 3 sub-types - 1) Stock exchanges (BSE/NSE etc) - help buyer/seller connect in Market Infrastructure secondary market Institutions (MII) - 2) Depositories (NSDL/CDSL etc): help clients store shares, bonds etc DIGITALLY in the demat account. - 3) Clearing houses/Central Counter-Parties (e.g. CCIL): help settling the trade by transferring money to seller and transferring shares to buyer. 13.26 NBFCS REGULATED BY OTHERS Regulator Example NBFC Companies IRDAI Insurance Regulatory and Development Authority regulates: - Life Insurance companies e.g. LIC, HDFC Standard Life Insurance - Non-Life (=General) insurance e.g. IFFCO-Tokyo General Insurance. - Policy aggregator web-platforms such Policybazaar.com PFRDA Pension Fund Regulatory and Development Authority regulates all Pension Funds, except EPFO & other statutory funds. 1. NIDHI Companies: Mutual benefit club, only members can borrow. e.g. Ministry of South Madras Benefit Fund ltd, Maben Nidhi Ltd (of Mannapuram group) Corporate 2. Microfinance Companies: Microfinance Companies’ some regulation by Affairs RBI. and some of the regulation done by Corporate Affairs Ministry. It regulates ‘Chit funds’. It is a type of collectiveinvestment scheme with monthly State Registrar of contributions & borrowing by contributingmembers Chits. Chit Funds 13.27 NBFC: SHADOW BANKING - ES20 observed: Shadow banking is a set of activities and institutions. They operate partially (or fully) outside the traditional commercial banking sector. They are not fully regulated by the RBI. - They mobilize funds by borrowing from banks, issuing Commercial Papers (CP) and Bonds (=Non-convertible debentures) - HFCs: Housing Finance Companies. E.g. Dewan Housing Finance Limited (DHFL) - LDMFs: Liquid Debt Mutual Funds invest clients money into short term debt instruments such as T-bill (of Govt) and Commercial Papers (of companies). - Retail NBFCs: such As Gold Loan Companies, Asset Finance Companies etc. - Shadow banking system’s assets are risky. It results into severe crisis, as seen in the ILFS crisis (2019). 13.28 NBFC-NOT ALLOWED IN INDIA: ISLAMIC BANKING - Interest (Riba) is prohibited (Haram) in Islam. So, Islamic Banking operates through Ijara, Murbaha, Musharaka mechanisms- in which depositors’ money is invested in borrower’s property / business and returns are shared in form of rent / profit but not in the form of Interest. - 2017: Kerala Govt allowed opening of a Islamic Bank by registering it as “co-operative society”, so as to avoid the RBI’s ban. - Pro-Arguments? Financial inclusion of Minorities/Muslims. - Anti-Arguments against allowing Islamic Banking in India? - Specialized Manpower required;Secular India’s PM-Jan-Dhan Yojana & Post Office Payment bank efforts are sufficient;USA Govt alleges their involvement in terror finance & money laundering 13.29 INFORMAL FINANCIAL INTERMEDIARIES - provide loans without formal application procedure, etc but require Property/Vehicle/Home/Goods/Crop/Gold etc. as collaterals/pawn. - They charge very high compound interest rates & use muscle power for recovery - For every Rs.100 borrowed by a rural household, 33% from informal money lenders, remaining from banks, friends-family etc. (2012 data) - They don’t fall under RBI purview, but State Govts have individual laws to regulate them e.g. Bombay Moneylenders Act 1947, Kerala (1958), Gujarat (2011). - These laws require such informal lenders to register, impose ceiling on the interest rate & prohibit strong-arm tactics. 14 BAD LOANS & OTHER BURNING ISSUES IN BANKING 14.11 Types of Loans - LOAN TYPES DEPENDING ON GUARANTEE / COLLATERAL - Secured - Unsecured - BASED ON INTEREST RATE - Fixed Interest Loan - Floating Interest Loan - BASED ON BORROWERS - Prime Borrower: He has the capacity to repay loans. - Subprime Borrower (Individual): Such person doesn’t have the capacity to repay loan. - Overleveraged Borrower (Company): An Overleveraged company has high ratio of Debt (Bonds/loans) to Equity (Shares). - Zombie Lending: When a weak bank keeps giving new loans to a subprime / overleveraged borrower. 14.13.1 NPA / TBS Problem: Three Stages of - Till mid-2000s: Boom period in global economy. Indian Corporates were taking large amount of loans & became overleveraged. - From 2007-08: Subprime & Global Financial Crisis, Indian exports down. UPA govt’s policy paralysis & judicial activism, environment activism, so projects delayed. Companies began facing difficulties finishing projects & repaying loans. - By 2013: ~1/3rd of the bank loans were owned by “IC1 companies” i.e. companies with interest coverage ratio less than 1, meaning they were not generating enough revenue even to repay the loan interest. (IC>1 is good and IC When a bank, its auditor or RBI declares that given doubtful asset has little / no Loss Asset salvageable value. - Banker removes a loan amount from the ‘asset-side’ of the bank balance sheet, to save corporation tax - It doesn’t waive bank’s right to recover that bad loan, it’s merely an accounting exercise for tax-benefits. Loan write-off - Loan write-off reduces the NPA% of the Bank (Because amount is written-off/cancelled from balance sheet) Restructured loan When principal / interest rate / tenure of the loan is modified. Banks may do it when borrower facing difficulty in repaying loans. Stressed Asset NPA + Loans Written-Off + Restructured Loans = Stressed Assets For example, If bank allows the borrower to pay 60% of dues & forgoes 40% as OTS with Haircut loss, then bank has offered “One time Settlement (OTS) with 40% haircut” Evergreening of When a borrower taking a new loan to pay off his old loan. loans 14.15 ATMANIRABHAR → LOAN/EMI/NPA RELIEF / MORATORIUM - So, If a borrower’s income due to Corona, he gets relief from Equated Monthly Instalments (EMIs) for “X” months. - It WAS NOT compulsory to skip EMI. Borrower MAY repay loan regularly, if his financial situation was strong. - Loan was not ‘removed/waived’. It was only temporarily suspended. 14.16.2 Resolution Framework 1.0 and 2.0 (2020-21) - Based on the recommendations of the KV Kamath committee, RBI issued a set of guidelines for Bank/NBFCs for dealing with the bad loans after Corona. - Frameworks details: - Giving extra loans to genuine cases; Extending the loan tenure ; reducing loan interest rate etc. - 1.0: Large companies, 2.0: Individual persons and small companies 14.17 SARFAESI ACT 2002: ORIGIN, OBJECTIVE & LIMITATIONS - 1991: Narsimham-I Committee on banking sector reforms observed that borrowers obtain stay orders  from ordinary courts = banks have difficulty recovering NPA. So, Debt Recovery Tribunals were set up (1993)= ordinary courts can’t interfere in the loan recovery process. - 1998: Narsimhan-II Committee observed that DRTs need to be strengthened with a law, so, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act enacted in 2002. - Under SARFAESI act, lenders can attach the mortgaged assets when loan is not repaid. They can change board of directors in such companies, can auction such assets, can also sell such assets to Asset Reconstruction Companies - Sudarshan Sen Committee to suggest reforms for ARCs] - SARFAESI not applicable on farm loans. - If loan-defaulter wants to obtain a stay order, they will have to approach only to DRT. If DRT doesn’t help then ⇒ higher appeal to Debt Recovery Appellate Tribunal, but DRAT will require him to deposit minimum 50% of the loan dues (to discourage frivolous appeals). ⇒ higher appeal to high court. Which lenders have SARFAESI powers? - All types of Banks- commercial and cooperative - Housing Finance Companies (HFCs) - If an NBFC fulfills two conditions SIMULTANEOUSLY: - The NBFC having asset size of ₹100 cr or more, AND - loan given is at least ₹20 lakhs. - Legal Rights of Loan Defaulter in SARFAESI Act - Right to amplenotice - Right to be heard - Right to ensure fair value - Right to balance proceeds - Right to humane treatment - Limitations of SARFAESI Act - The DRTs & DRATs are understaffed. 1 lakh+ cases pending (2016) - erosion of asset-value when DRT allows auction at a later time. - Auction or liquidation may not yield the best returns for the banks e.g. hotel resort in remote area, - , if the loans were restructured, then banks could salvage more value. - But, SARFAESI act doesn’t facilitate such arbitration So, Govt. came up with a new law: INSOLVENCY AND BANKRUPTCY (I&B) CODE 2016 14.18 INSOLVENCY AND BANKRUPTCY (I&B) CODE 2016 - IBC code classifies creditors into two categories - Financial Creditors: banks, NBFC, bond & other debt security holders, + Home buyers. - Operational Creditors: Suppliers, contractors, salaried employees, they cant sit in the committee of creditors (CoC) for IBC proceedings. 14.18.1 IBC Code: Appeal Structure Borrower individual person or partnership firm Company Their Biz is various laws like Shops and Companies Act, 2013 registered under Establishments Act, Indian Partnership Act, 1932 etc. Adjudicating Debt Recovery Tribunal (DRT) dealing National Company Law Authority (AA) / with SARFAESI Act Tribunal (NCLT) from first level ki courts Companies Act  Appellate National Company Law Appellate National Company Law Authority Tribunal (NCLAT) from Companies Act Appellate Tribunal (NCLAT) from Companies Act NEXT Appeal Supreme Court (SC) SC 14.18.2 IBC: Process for Resolution - An Insolvency Professional will make a resolution plan - IP will present the plan to Committee of Creditors madeup of the Financial Creditors (FC). In this Committee. FCs’ voting power is based on amt of loans given by lender. - If x% of the FCs agree with such resolution plan, then it will be set in motion, otherwise, IP will liquidate the assets to recover the loan. 14.18.3 Statutory bodies related to IBC Org Founded under Law HQ National Company Law Tribunal (NCLT) Companies Act, 2013 Delhi. With benches in many cities. National Company Law Appellate Companies Act, 2013 Delhi Tribunal (NCLAT) Insolvency and Bankruptcy Board of India Insolvency and Delhi (IBBI) Bankruptcy Code, 2016 14.19 INSOLVENT VS WILFUL DEFAULTER Criteria Insolvent /incapable defaulter Wilful Defaulter Definition A person /company incapable to pay off capacity to repay the loans due to shortage of money. loans BUT not repaying Eligible for Loan If his loan account is in NPA for > a NOT eligible. His assets Restructuring? year, &he has no capacity to repay will beauctioned under even partial loan amount-no resolution SARFAESI Act. will be done; assets will be auctioned under SARFAESI. Can contest election / get Govt job/ Not allowed. Constitution silent about become a judge? this. 14.19.6 IBC Pre-Packs - Pre-Pack System is found in United Kingdom and the United States - IBC 2021 Ordinance (and later Amendment Bill) aim to enable this in India for MSMEs. Corporate Insolvency Pre-packaged Insolvency Resolution Process (PIRP) Resolution Process (CIRP) IBC's Formal process: lenders - Pre-packaging = Borrower company informally file complaint to NCLT → Insolvency (discreetly) negotiates a resolution plan with its professional appointed → Loan lenders / buyer-parties who may be interested in its restructuring proposal → If NOT action, before approaching IBC/NCLT process. approved by lenders → Auctioning. - If this is agreeable to lenders, they’ll send letter to NCLT Time limit: upto 330 days Time limit = 120 days = faster than CIRP  More number of days = more - Benefit? a quick (speedy) and discreet (confidential) negative headlines in newspaper way of completing the insolvency resolution process. = confidence of customers & investors ि वरत और गु त प से मसले को समेट ि◌लया जाए - Prevents the stigma/bad publicity/damage to brand image associated with formal IBC proceedings. else in future difficult to get investors/customers/clients. - Least disruptive to the businesses. Cost-effective. Helps in workers’ job preservation (compared to a scenario where company is shut down) CIRP applicable to all small and Only available to micro, small and medium enterprises big enterprises. (MSMEs) as per 2021’s IBC Ordinance / Amendment Bill. 14.19.9 Insolvency and Bankruptcy Board of India (IBBI) - IBBI is the statutory body that monitors and implements I&B Code 2016. - IBBI’s administrative control rests with Ministry of Corporate Affairs - It has 1 Chairman, 1 nominated member from RBI, 8 from Govt’s side = total 10 people. - Chairman has 5 years / 65 age tenure. Also eligible for reappointment - IBBI selects Insolvency Professionals Agencies (IPAs). These IPAs enroll and supervise the members practicing as Insolvency Professionals (IPs). - Presently, 3 organizations given “IPA” status viz. - 1) ICAI (Chartered Accounts) 2) ICSI (Company Secretaries) and 3) Institute of Cost Accountants. 14.19.10 IBBI → Information Utility - IBBI also selects Information Utility organization to maintain database of borrowers. - In 2017, NeSL: National E-Governance Services Ltd (owned by consortium of SBI, LIC etc.) was the first to get the IU status from IBBI. It is compulsory for lenders to share data with IU. - IU helps lenders in two ways: - By looking @borrowers’ credit history, lenders can make informed decisions - This database helps establishing documentary proofs during NCLT / DRT / judicial / liquidation proceedings. 14.19.11 Insolvency → Misc. Org: Indian Institute of Corporate Affairs - IICA an autonomous body under Ministry of Corporate Affairs. - It has launched a two-year Graduate Insolvency Programme (GIP). - The student passing this program can register as IP, without the mandatory 10 years' experience. 14.19.12 Project Sashakt by Finance Ministry (2018) - 2018-Jul: Finmin’s Project Sashakt for PSB-NPA on report by Sunil Mehta (PNB CEO). - Gave guidelines to resolve the NPA problem in a timebound manner in Public Sector Banks. 14.20 VOLUNTARY LIQUIDATION OF COMPANIES - Involuntary liquidation through - 1)IBC, 2)SARFAESI - Voluntary liquidation through 1)Application to registrar of companies 2)application under IBC - Budget-2022: Centre for Processing Accelerated Corporate Exit (C-PACE)-for faster voluntary liquidation / winding-up of the companies. 14.22CREDIT RATING / MONITORING- VARIOUS ORG/INITIATIVES Portal Description CIC and CRA previous section Information Utility (IU). Created by Insolvency and bankruptcy board of India (IBBI) with National e-governance services Ltd (NeSL) CRILC RBI has setup “Central Repository of Information on Large Credits (CRILC)” for Loans above Rs 5 cr. Banks & NBFCs have to submit weekly updates in this portal. Public Credit Registry (PCR) Proposed by RBI’s Yeshwant M. Deosthalee Committee. RBI yet to set it up. NFIR Budget 2023 - designed with help of RBI. Will contain info on both individual borrowers and company borrowers. 360 degree information about a loan applicant’s creditworthiness 14.22.2 RBI’s Public-Tech Platform for Frictionless Credit (2023) - Will collect data from Central and State governments, account aggregators, CRA-CICs and other organisations - Faster Loan application approval/rejection 14.22.3 Legal Entity Identifier (LEI) Number - Global “Aadhar card” type number for companies (20 digit alphanumeric). To be quoted for every transaction - G20 and its Financial Stability Board (FSB) came up with it; To track vijay maliya, nirav modi types - RBI has power to issue such directives under: Payment and Settlement Systems Act, 2007 & Banking Regulation Act 1949 14.23 FUGITIVE ECONOMIC OFFENDERS ACT, 2018 - Special courts under the PMLA. If charges worth >100cr and does not appear in court within 6 weeks, then declared “Fugitive Economic Offender” - Indian & Overseas & Benami properties will be attached - No ordinary civil court / tribunal can give stay order. Appeal only in High Court and Supreme Court 14.24 DICGC ACT: OBJECTIVE & LIMITATIONS - 1961: Deposit Insurance and Credit Guarantee Corporation Act - mandates that all types of banks to buy insurance on their deposit accounts from DICGC - DICGC - 100% owned by RBI. Dy. Governor acts as chairman - Deposits upto 5 lakh covered RBI - 90 day period to pay depositors; provides credit guarantee for PSL loans - NBFCs and PACS not covered 14.25 BAD BANK (NARCL, IDRCL-2021) - To buy bad loans from banks, and get the maximum value from loan-restructuring / liquidation-auction and absorb the losses - Budget-2021 announced set up an Asset Reconstruction Company (ARC) and Asset Management Company (AMC) to take over the bad loans from banks - Govt will not have any shareholding in ARC/AMC. Banks will set these organization(s) up with their own funds - Security receipts (SR) - issued by BadBank promising to pay the remaining dues/amount to banks in 5 years. - (SR) is a legally valid instrument under the Sarfaesi Act. - If Bad Bank faces problems in honoring the SR payment deadlines→ then, Union Govt has given sovereign guarantee of Rs.30,600 cr for 5 yrs  NARCL-ARC (founded in 2021) IDRCL-AMC (founded in 2021) Type Asset Reconstruction Company (ARC) Asset Management Company (AMC) Full Form National Asset Reconstruction Company India Debt Resolution Company Ltd. Limited (NARCL) (IDRCL) Type Registered company under companies Registered company under companies Act. act. (So not a statutory/constitutional body) Given license by RBI for ARC. Function To purchase bad loan assets from banks. To manage/value addition/ auction those bad loan assets which were purchased by NARCL. (e.g. factory, airplanes, bulldozer). Ownership/ ⇒ 51% PSBs like SBI, BoB, PNB ⇒ 49% (Public Sector Banks, NBFCs) Shareholding ⇒ 49% by Pvt banks and NBFCs ⇒ 51% (private sector bank, NBFCs). Tenure This organization will exist for five years. Same as left cell 14.26 PROMPT CORRECTIVE ACTION (PCA) FRAMEWORK - RBI classifies the scheduled commercial banks (SCB) into Risk threshold #1, #2, #3 based on its capital, loan-asset quality etc. Higher the number, higher the risk. Then, accordingly, RBI will take corrective actions like restricting salaries and dividends, expansion, forced merger or liquidation etc - If PCA-listed bank wants to get ‘whitelisted’, it’ll have to its NPA, obtain additional capital, its profitability. - From 1/10/2022- RBI to monitor NBFCs using 3 indicators/parameters: - 1) Non-Performing Assets, - 2) BASEL-capital adequacy ratio - 3) BASEL- Tier 1 capital. - NBFC-PCA-norms applicable on deposit-taking-NBFCs But Not Applicable on govt owned NBFCs, primary dealers, housing finance companies (HFC), non-deposit taking NBFCs 14.26.3 RBI’4-tiered regulatory framework for urban cooperative banks (2022-Dec) - Tier 1 - upto 100cr, Tier 2 - 100cr - 1000 cr, Tier 3 - 1000cr - 10000cr. Tier 4 - above 10000cr 14.26.4 Regulations Review Authority (RRA 2.0)- for Ease of implementing RBI rules(2021) -1yr tenure 14.26.5 RBI: “Utkarsh-2022” roadmap and Daksh web system - for better regulation and monitoring 14.26.6 Digital lending norms by RBI (2022-Nov) - Exact guidelines are not important. 14.26.7 Digital lending → FIRST LOSS DEFAULT GUARANTEE (FLDG) norm by RBI - Basically requires FinTech companies to cover some of the loss of the banker, If borrower defaults on the loan. 14.27 FINTECH- SELF-REGULATORY ORGANISATION (SRO) - 2023: RBI governor has suggested the Fintech companies to create an (SRO) for themselves 14.28 BASEL-III NORMS - Bank for International Settlements (BIS) made up of 60 countries’ central Banks. HQ @ BASEL, Switzerland. - First, a bank needs to calculate its Risk-Weighted Assets (RWA); Against these RWA, (SCB) must keep: - “Minimum Capital to Risk Weighted Assets Ratio” (CRAR) at 9% or higher - “a%” Capital Conversation Buffer (CCB) from XX date.. - “b%” Counter Cyclic Capital Buffer (CCCB): whenever RBI notifies - “c%” Leverage ratio (LR), “d”% Net Stable Funding Ratio (NSFR), “e%” High quality liquid assets (HQLA), f%” Liquidity Coverage Ratio (LCR), and so on…many things. - Each member country’s Central Bank can prescribe different %, ratios depending on their country’s situation. - If a bank can’t comply with BASEL norms → RBI puts it in PCA list - BASEL Norms also apply on Differential Commercial Banks (LAB, RRB, SFB, PyB), Cooperative Banks, AIFI (EXIM, NABARD, NHB, SIDBI) and certain category of NBFCs 14.28.1 BASEL-III norms: Capital Tiers 14.28.4 D-SIB: Domestic Systematic Important Banks - Introduced by G-20’s Financial Stability board (HQ: BASEL) - RBI identifies banks that are ‘too big to fail’ and labels them as Domestic Systematic Important Banks (D-SIB) - Presently, 3 D-SIBs in India: SBI, ICICI, HDFC 14.29 BASEL NORMS DEFERRED / SUSPENDED IN CORONA 14.30 IndAS Accounting Norms deferred - Ministry of Corporate Affairs (MCA) ordered all the companies to keep their balance sheet as per Indian Accounting Standards (IndAS); 2020- Critics demanded RBI should implement it for banks too 14.31 RECAPITALIZATION OF PSBS - If a bank doesn’t have enough capital to comply with BASEL-III norms it can issue debt (bonds) and equities (shares) to gather new capital - 2015 - FinMin’s Indradhanush plan for phase recapitalization of PSBs with ₹ 70,000 crores from 2015-18 - 2017 - ₹70,000 crores was insufficient for BASEL-III compliance. So Govt. announced more amount. - To arrange ₹₹ for this, Govt began to issue Bank Recapitalization Bonds (RcB) in the market - Budget-2020:and Budget-2021 - more money given - Budget-2022: No money given for this. Govt’s rationale is that PSBs profitability improving, so PSBs can take care of their capitalization problems by themselves 14.32.2 Personnel Selection → Bank Board Bureau (BBB), 2016 - It is a non-constitutional, non-statutory body. Interviews & selects top officials for PSBs, public sector insurance companies, and other institutions (e.g. NABARD, SIDBI etc.). - Actual appointment done by FinMin’s Department of Financial Services - BBB has 1 Chairman (usually a retired IAS) and some members 14.32.3 Personnel Selection → FSIB replaces BBB (2022) - 2022: Delhi High Court ruled, “BBB cannot select public sector insurance companies because of conflict with the other laws related to public sector insurance companies. - 2022: Govt replaced BBB with new body named “Financial Services Institutions Bureau(FSIB)” to comply with court order; Everything else, same as BBB 14.32.5 Customer Service: Enhanced Access and Service Excellence (EASE) Agenda 2018 - Fin