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Banking in India - Part 10 (Miscellaneous)

Bankers Corner

Fiscal policy

  • Fiscal policy means the use of taxation and public expenditure by the government for stabilisation or growth.
  • Objectives of Fiscal Policy:
    1. To maintain and achieve full employment.
    2. To stabilise the price level.
    3. To stabilise the growth rate of the economy.
    4. To maintain equilibrium in the balance of payments.
    5. To promote economic development. 

Inter Bank Transfer

  • Inter Bank Transfer enables electronic transfer of funds from the account of the remitter in one Bank to the account of the beneficiary maintained with any other Bank branch. There are two systems of Inter Bank Transfer - RTGS and NEFT. Both these systems are maintained by Reserve Bank of India.
  • RTGS - Real Time Gross Settlement:- This is a system where the processing of funds transfer instructions takes place at the time they are received (real time). Also the settlement of funds transfer instructions occurs individually on an instruction by instruction basis (gross settlement). RTGS is the fastest possible interbank money transfer facility available through secure banking channels in India.
  • NEFT - National Electronic Fund Transfer:- This system of fund transfer operates on a Deferred Net Settlement basis. Fund transfer transactions are settled in batches as opposed to the continuous, individual settlement in RTGS.

Various committees Related to the Development in the field of Banking

  • Narasimham I – The purpose was to study all aspects relating to the structure. Organization, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity. It submitted its report in November 1991.
  • Narasimham II – The purpose was to review the progress of the implementation of the banking reforms, since 1992 with an aim to further strengthening the financial institutions of India. It focused on issues like size of banks and capital adequacy ratio (CAR). It submitted its report in April 1998.
  • Damodaran Committee- The purpose was to look into the issues of customer services and evaluate the existing system of grievance redressal mechanism in banks and recommend methods to improve it.
  • Khandelwal committee:- The purpose was to look into the Human Resources issues of Public Sector Banks (PSBs). It made 105 recommendations.
  • Nachiket Mor Committee:- The purpose was to look into the financial services for small businesses and low income households. The motive of the committee was to frame a clear and detailed vision for financial inclusion and financial depending in India.
  • Bimal Jalan Committee / New bank Licenses, 2014:- The purpose was to scrutinize the application for new banks in India. It submitted its report in February, 2014 and recommended ‘in-principle approval’ of banking licenses to Bandhan microfinance and IDFC (Infrastructure Development and Finance Corporation).
  • Deepak Mohanty Committee:- It was established on 15 July, 2015 to prepare five year action plan to spread the reach of financial services across country to unbanked population. It comprised 14 members.

Base Rate System

  • Base Rate System introduced in banking sector by the RBI with effect from July 1, 2010.
  • Base Rate System will replace Benchmark Prime Lending Rate BPLR introduced in 2003.
  • Base Rate System introduced on the recommendation of Deepak Mohanty Committee- aims at enhancing transparency in lending rate of banks and enabling better transmission of Monetary Policy.
  • Base Rate is the minimum lending rate that banks can charge their customers. Prior to this, all lending rates were pegged to a Benchmark Prime Lending Rate BPLR.
  • The banks were charging the customers an interest rate which was either above BPLR (the banks charged much above the BPLR from the risky and no bargaining customers like 12-13%) or below BPLR (Ex like 6-7% to the customers who have bargaining power), thus BPLR serving as an anchor rate. From July 1, 2010, the Base Rate has become the new floor rate below which no bank can lend.

Basel Norms 

  • Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations. 
  • BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
  • The Bank for International Settlements (BIS) established on 17 May 1930, is the world's oldest international financial organisation. There are two representative offices in the Hong Kong and in Mexico City. In total BIS has 60 member countries from all over the world and covers approx 95% of the world GDP.
  • The set of the agreement by the Basel Committee on Banking Supervision (BCBS), which mainly focuses on risks to banks and the financial system are called Basel accord. 
  • The purpose of the accord is to ensure that financial institutions have enough capital on account to meet the obligations and absorb unexpected losses. 
  • India has accepted Basel accords for the banking system.
  • Basel accord has given us three basel norms which are BASEL 1,2 and 3.

Basel I

  • In 1988, The Basel Committee on Banking Supervision (BCBS) introduced capital measurement system called Basel capital accord, also called as Basel 1.
  • It focused almost entirely on credit risk, It defined capital and structure of risk weights for banks.
  • The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).

 Basel II

  • Basel II takes a three pillar approach.
    1. Pillar 1 (Minimum capital requirements).
    2. Pillar 2 (Supervisory oversight).
    3. Pillar 3 (Market discipline and disclosures).
  • Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
  • Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements.
  • The three types of risk are- operational risk, market risk, capital risk.
  • Banks need to mandatory disclose their risk exposure, etc to the central bank.

Basel III

  • In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
  • In 2008, Lehman Brothers collapsed in September 2008, the need for a fundamental strengthening of the Basel II framework had become apparent.
  • Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
  • The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
  • Presently Indian banking system follows Basel II norms.
  • The Reserve Bank of India has extended the timeline for full implementation of the Basel III capital regulations by a year to March 31, 2019.

REGULATION OVER FINANCIAL INSTITUTIONS

  • The Development Financial Institutions constitute an important segment of the Indian Financial System. They provide long-term funds for the development of industries, Infrastructure projects and other major activities and thus, help in the growth of the economy.
  • They are basically governed by their own statues and charters---Industrial Development Bank of India by the provisions of IDBI Act, 1964 and the Industrial Finance Corporation of India Ltd. the Industrial Credit and Investment Corporation Ltd. (ICICI) and the Industrial Investment Bank of India (IIBI) by their respective Memorandum of Association Articles of Association, besides the Companies Act, 1956. Moreover, these financial institutions are also controlled by the regulations made by both the regulators of the Indian Financial System, namely the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Section 45 L of the Reserve Bank of India Act, 1934, extends the supervisory authority of the Reserve Bank over the financial institutions.

Some Definition

  • Bridge Loans: These are short-term loans which are granted to the borrowers of term, loans by a bank or financial institutions to enable them to meet their immediate needs for funds. These loans are adjusted/repaid when the term loan is disbursed by the financial institutions.
  • Equity Assistance Scheme: Assistance, which is provided in the form of subscribing to the equity shares of the company.
  • Refinance of Term Loans: Term loans are provided by Commercial Banks and State Financial Corporation to industrial concerns. On the basis of these loans, these institutions can get loans from Industrial, Development Bank of India or Small Industries Development Bank of India. Such loans are called Refinance of Term Loans.
  • Venture Capital: Venture Capital is that capital which is provided by Venture Capital Fund/Company to an entrepreneur to undertake a new non-traditional venture with high risk and with the prospects of earning high return. This is provided in the form of equity besides loans.

Financial Inclusion

  • Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost
  • The Government of India and the Reserve Bank of India have been making concerted efforts to promote financial inclusion as one of the important national objectives of the country. Some of the major efforts made in the last five decades include –
    1. Nationalization of banks
    2. Building up of robust branch network of scheduled commercial banks
    3. Co-operatives and regional rural banks
    4. Introduction of mandated priority sector lending targets
    5. Lead bank scheme
    6. Formation of self-help groups
    7. Permitting Business Correspondents / Business Facilitators (BCBF) to be appointed by banks to provide door step delivery of banking services
    8. Zero balance Basic Savings Bank Deposit (BSBD).
  • The fundamental objective of all these initiatives is to reach the large sections of the hitherto financially excluded Indian population.
  • The essence of financial inclusion is to ensure delivery of financial services which include - bank accounts for savings and transactional purposes, low cost credit for productive, personal and other purposes, financial advisory services, insurance facilities (life and non-life) etc.
  • Financial inclusion broadens the resource base of the financial system by developing a culture of savings among large segment of rural population and plays its own role in the process of economic development. Further, by bringing low income groups within the perimeter of formal banking sector; financial inclusion protects their financial wealth and other resources in exigent circumstances. Financial inclusion also mitigates the exploitation of vulnerable sections by the usurious money lenders by facilitating easy access to formal credit.

CRISIL Financial Inclusion Index (Inclusix)

  • CRISIL’s Inclusix is a comprehensive index for measuring the progress of financial inclusion in the country, down to the district-level. A pro bono initiative by CRISIL.
  • CRISIL’s Inclusix methodology is similar to other global indices, such as UNDP's Human Development Index, measures financial inclusion on the three critical parameters of basic banking services –
    1. Branch penetration
    2. Deposit penetration
    3. Credit penetration
  • Bank branch penetration is measured as number of bank branches per one lakh population.
  • Deposit penetration Measured as number of saving deposit accounts per one lakh population.
  • Average of three measures used for measuring credit penetration namely
    1. Number of loan accounts per one lakh population.
    2. Number of small borrower loan accounts per one lakh population.
    3. Number of agriculture advances per one lakh population.
  • In the Indian context, the term ‘financial inclusion’ was used for the first time in April 2005 in the Annual Policy Statement presented by Y.Venugopal Reddy, the then Governor,  Reserve Bank of India. Later on, this concept gained ground and came to be widely used in India and abroad. While recognizing the concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, banks were urged to review their existing practices to align them with the objective of financial inclusion.
  • In India, RBI has initiated several measures to achieve greater financial inclusion some of these steps are:
    1. Opening of no-frills accounts
    2. Relaxation on know-your-customer (KYC) norms
    3. Engaging business correspondents (BCs)
    4. Use of technology
    5. Opening of branches in unbanked rural centres

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