BANKING IN INDIA --- RAU’S IAS------ B K REDDY SIR

EVOLUTION IN BANKING POLICY

 Phase of Nationalisation (1969-1991): India's public sector banks (PSBs) were initially
set up as Private Banks and later on Nationalised in two waves in 1969 and 1980.
 Entry of New Private Banks (NPBs) post 1991 Reforms: Based upon the
recommendations of Narasimhan committee, the RBI issued the policy guidelines to
facilitate the entry of new private Banks (NPBs) on a large scale.
 Guidelines for Licensing of Universal Banks in the Private Sector: The minimum
initial paid-up capital for setting up new private Bank was set at Rs 500 crores. Resident
individuals and professionals having 10 years of experience in banking and finance were
also eligible to promote universal banks. However, Large corporate/industrial houses
were not allowed to set up Banks but were permitted to invest in the banks up to 10 per
cent
 Consolidation of Public Sector Banks (PSBs): Based upon the recommendations of
Narasimhan Committee (1991) and P.J. Nayak Committee (2014), the Government has
focussed on the consolidation/merger of the PSBs. The Associate Banks of SBI and
Bharatiya Mahila Bank got merged into State of Bank of India. It was followed by the
merger of Vijaya Bank, Dena Bank and Bank of Baroda in 2018. In the year 2019, 10
Public sector Banks were merged into 4 large banks. After the mergers, there are 12
public sector banks, including the SBI.
 Present Phase: Shift towards greater role of Private Sector in the Banking.
 Public Sector Banks: The Government has proposed new Public Sector Enterprise
Policy wherein sectors would be categorized into - Strategic and Non-Strategic. The
Government has designated Banking as Strategic sector, which would mean there would
be maximum 4 PSBs and the remaining PSBs would be merged into larger PSBs or
privatized.
 Proposal to issue Licenses for Large Corporate Houses: The Internal Working Group
(IWG) has proposed to allow large corporate/Industrial houses to open private sector
Banks. A large corporate/industrial/business house is defined as a group having total
assets of Rs 5000 crore or more wherein the non-financial business of the group accounts
for more than 40 per cent in terms of total assets or gross income.
 B K REDDY SIR

DEFINITION OF SCHEDULED BANKS

According to the RBI act, 1934, a scheduled Bank is one which is
 Included in the second schedule of the RBI Act
 Has a paid-up capital of not less than 5 lakhs.
 Satisfies that its affairs are not being conducted in a manner which is detrimental to the
interests of the depositors.
It includes different categories such as Scheduled commercial Banks, Public Sector Banks,
Cooperative Banks, Regional Rural Banks etc.
Note: The RBI has stipulated the minimum capital requirement of Rs 500 crores for the
issuance of new banking licenses. Further, to be eligible to get a Banking license, an entity
should have successful track record of running its business for at least 10 years. These
requirements are in addition to the requirements mentioned in the RBI Act, 1934.

CATEGORIES OF SCHEDULED BANKS

Categorized into the five groups based on their ownership and their nature of operations.
 Public Sector Banks: Majority stake is held by the Government of India.
 Private Sector Banks: Majority of share capital of the bank is held by private
individuals.
 Foreign Banks: Banks, registered and headquartered in a foreign country, and operate
their branches in India. Eg: HSBC, Citibank, Standard Chartered Bank.
 Regional Rural Banks: Established under RRB Act, 1976 to ensure institutional credit
for agriculture and other rural sectors.
o The area of operation of RRBs is limited to the area as notified by GoI covering one
or more districts in the State. Jointly owned by Central government (50%) , the
respective state government (15%) and sponsor bank (35%).
o Follow CRR and SLR norms as mandated by RBI. Priority sector lending (PSL)
norms: 75% of the loans to the priority sectors.
 Cooperative Banks: Financial institutions are owned and run by their customers.
Operate on the principle of one person one vote.
 B K REDDY SIR

STRUCTURE AND REGULATION OF COOPERATIVE BANKS

STRUCTURE OF COOPERATIVE BANKS
 Rural Areas
o Short -term: Primary Agricultural Credit Societies (PACS) at the village level,
Central Cooperative Banks (CCBs) at the district level and State Cooperative Banks
(StCBs) at the State level.
o Long-term: State Co-operative Agriculture and Rural Development Banks
(SCARDBs); Primary Co-operative Agriculture and Rural Development Banks
(PCARDBs)
 Urban Areas: Urban Cooperative Banks (UCBs)
REGULATION OF COOPERATIVE BANKS
 The PACS and long-term credit co-operatives are outside the purview of the Banking
Regulation Act, 1949 and are hence not regulated by the Reserve Bank.
 The StCBs/DCCBs are under the dual regulation by the RBI and Registrar of
Cooperative Societies. The Banking related functions are regulated by RBI, while the
Management related functions are regulated by Registrar of Cooperative Societies. Here,
the RBI has delegated its powers to NABARD under Sec 35A of the Banking Regulation
Act to conduct inspection of state and central co-operative banks.
 Even the Urban Cooperative Banks (UBCs) are under the dual regulation of RBI and
Registrar of Cooperative Societies of concerned state/ Central Registrar of Cooperative
Societies (Depending upon whether the Urban Cooperative Bank is registered under
State Cooperative Societies Act of the State concerned or the Multi State Cooperative
Societies Act, 2002).
Note: The Banking Regulation (Amendment) 2020 seeks to strengthen the RBI’s
regulation over the UCBs. However, it does not put a complete end to the dual regulation
of the Urban Cooperative Banks. The powers of Registrar of Cooperative Societies have
been substantially curtailed and the regulatory powers of the RBI has been substantially
enhanced.
 B K REDDY SIR

NON-BANKING FINANCIAL COMPANY (NBFC)

Financial institutions engaged in non-banking activities like leasing, microfinance, chit
fund, gold loan etc.
DIFFERENCE BETWEEN BANKS AND NBFCs
CHARACTERISTIC BANK NBFC
Accepts all types of
Deposits Cannot accept demand deposits
deposits
Deposit insurance of Applicable (up to
Non-Applicable
DICGC Rs.5 lakh)
Payment and Settlement Supports RTGS, Not supported. Cannot issue
system of the RBI NEFT etc., their own cheque books.
Foreign investment Up to 74% Up to 100%
Cash Reserve
Applicable Not Applicable
Requirement
Applicable only to Deposit-
taking NBFCs and
Capital Adequacy Norms Applicable
Systematically Important
NBFCs (CRAR - 15%)
Applicable only to Deposit-
SLR Applicable
taking NBFCs (SLR - 15%)
Incorporated under Companies
Banking Regulation
Incorporated under Act and regulated by various
Act, 1949
bodies depending on category.

DIFFERENTIATED BANKS
Banking institutions licensed by the RBI to provide specific banking services and
products. A differentiated license will allow a bank to offer products only in select areas.
Main aim is to promote financial inclusion and payments. Differentiated banks licensing
was launched in 2015. The differentiated banks are of two types namely payment banks
and small finance banks.
Criteria Payment Banks Small Finance Banks
Registered under Companies Act, Registered under
Registration and 2013 Companies Act, 2013
Licensing Licensed under Banking Licensed under Banking
Regulation Act, 1949 Regulation Act, 1949
 B K REDDY SIR

Pre-paid Payment Instrument

Resident Indians, Private
(PPI) Providers, Resident
Companies, Societies,
Eligibility individuals; NBFCs; Telecom
NBFCs, MFIs, Local Area
Companies, super-market chains,
Banks
public sector entities etc.
Rs 100 crores. (To be
Min. Capital
Rs 100 crores increased to Rs 200 crores
Requirements
within 5 years)
FDI allowed? Yes. Up to 74% Yes. Up to 74%
Only Demand Deposits. No Fixed
Accept Deposits Yes.
Deposits and NRI Deposits
Restrictions on
Up to Rs 1 Lakhs No Restrictions
Deposits
Deposit Insurance
Yes Yes
Available?
Yes. At least 50 per cent of
its loan portfolio should
Can Lend Loans No constitute loans and
advances of up to Rs 25
lakh
Issue Debit/Credit
Only Debit Card. No Credit Card Both can be issued
Card
Set up based upon
recommendations Nachiket Mor Committee Nachiket Mor Committee
of
Committee to
evaluate
Nachiket Mor Committee Usha Thorat Committee
applications for
License
SLR and CRR CRR Applicable; SLR: 75% of
CRR and SLR Applicable
applicable Deposits.
BASEL Norms
Yes. 15% of RWAs Yes. 15% of RWAs
applicable
PSL Norms
No. Can’t lend Loans Yes. Target: 75%.
applicable
 B K REDDY SIR

Airtel, India Posts Payment Bank, Ujjivan, Utkarsh, Jana, Au

Examples
Paytm, FINO etc. etc.

INDIA POST PAYMENTS BANK (IPPB)

 Public sector company under the department of posts, Ministry of communication with
100% equity of the government of India, and regulated by the Reserve Bank of India
(RBI). Instead of Debit cards, IPPB issues Quick Response (QR) cards.
 It provides a unique, secure and convenient way to access one’s account without the
need to remember PIN/Password.
 A transaction can be initiated by scanning the QR code followed by OTP authentication
and verification by an OVD (Officially Valid Document).

WHOLESALE BANKS
Nachiket More committee had recommended setting up of the Wholesale banks in India.
Based upon this recommendations, the RBI had proposed setting up of Wholesale and
Long term (WLTF) Banks in 2017.
Proposals:
 Would accept only Current and Term Deposits of more than Rs 10 crores.
 Minimum Paid-up Capital : Rs 1000 crores.
 Cater to the funding needs of certain sectors of the economy with long gestation period
such as infrastructure and core industries.

DEVELOPMENT BANKS IN INDIA

Financial institutions that provide medium term and long-term credit at low interest rates.
Aimed at promoting long-term investments with social benefits such as infrastructure,
irrigation, mining, heavy industry, agriculture etc.
Examples- Industrial Finance Corporation of India (first development Bank); NABARD;
NHB, SIDBI and MUDRA, EXIM etc.
 B K REDDY SIR

(Even ICICI and IDBI were initially set up as Development banks and later converted into
Universal banks)
DIFFERENCE BETWEEN COMMERCIAL BANKS AND DEVELOPMENT
BANKS
 Source of Funds: Commercial banks- Deposits; Development Banks- Govt’s funding
 Nature of Loans: Commercial banks- Short-term; Development Banks- Long-term.
 Nature of Assistance: Commercial banks- Extend Loans; Development Banks- Loans
+ Managerial Assistance + Credit Guarantee Enhancement.
 Recent development: In the Union Budget 2021-22, the Finance Minister has proposed
to set up National Bank for Financing Infrastructure and Development (NaBFID). This
Bank would act as a provider, enabler and catalyst for infrastructure financing and thus
give a boost to the National Infrastructure pipeline.

NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT

(NABARD)
NABARD is an apex development bank which provides help for agricultural and rural
development.
FUNCTIONS
 Centre of the rural credit system
 Provider of supplemental funding to rural credit institutions
 Provides refinance facilities to SLDBs, SCBs, RRBs and commercial banks for
developmental purposes
 Arranges investment credit to small industries, village and cottage industries,
handicrafts, and other rural crafts, artisans, and farmers.
RBI has divested its share in NABARD in two phases, one in 2010 and one recently in
April 2019. With this the central government now holds 100% stake in NABARD.

NATIONAL HOUSING BANK

Established under National Housing Policy, 1987. Previously, it was a wholly owned
subsidiary of RBI. In 2019, RBI divested its stake in NHB and thus currently central
government holds 100% stake in NHB.
 B K REDDY SIR

It aims at extending financial assistance to housing sector by way of both refinance and
direct finance.
Note: The NBH publishes the RESIDEX to track the movement in the housing Prices.

LAND DEVELOPMENT BANKS

Meant to provide long term agriculture needs of agriculturists for a period ranging from 5
to 25 years, for the following purposes:
 to make improvements on the land;
 to repay old debts;
 to free the mortaged land; and
 to buy new land.

MICRO UNITS DEVELOPMENT AND REFINANCE AGENCY (MUDRA)

 Set up as a refinance agency for developing and refinancing all micro-enterprises
engaged in manufacturing, trading and service activities.
 Aims to provide financial support to those banks and micro finance institutions which
are engaged in lending to the micro-enterprises.
 It has been set up as a subsidiary of SIDBI.
 Gives loans up to Rs 10 lakh while loans of higher amount is given by SIDBI.
 Mudra Loans are available for non-agricultural activities upto Rs. 10 lakh and activities
allied to agriculture such as Dairy, Poultry, Bee Keeping etc, are also covered.
 Mudra issues a Mudra Card which permits access to Working Capital through ATMs
and Card Machines.
There are three types of loans under PM Mudra Yojana:
 Shishu (up to Rs.50,000)
 Kishore (from Rs.50,001 to Rs.5 lakh)
 Tarun (from Rs.500,001 to Rs.10,00,000)
 B K REDDY SIR

MICROFINANCE SECTOR- OPPORTUNITIES AND

CHALLENGES
Microfinance is a tool to promote financial inclusion, enable the
households to come out of poverty and increase their income
levels. It can facilitate achievement of national policies such as
poverty reduction, women empowerment, improvement in the
standards of living etc.

EVOLUTION OF MICRO FINANCE SECTOR IN INDIA

1992: NABARD’s SHG-Bank Linkage program. Banks started
lending to Women-led SHGs based upon the money which
these SHGs saved in the bank accounts.
1992 to 2010: No separate RBI guidelines for the Micro finance
sector. Facilitated rapid growth of micro-finance institutions
(MFIs). These MFIs operated in regulatory vacuum and hence
led to their exponential growth. This phase saw the growth of
large sized MFIs such as SKS Microfinance, Spandana etc.
2010: Andhra Pradesh Microfinance crisis. MFIs indulged in
unethical practices such as charging higher interest rates,
adoption of forced recovery techniques, not following due
 B K REDDY SIR

diligence in giving loans etc. Led to suicide by large number of

people in the rural areas.
2011: Appointment of Malegam Committee on Regulation of
MFIs. Committee recommended creation of separate category
of MFIs called as NBFC-MFIs. Called upon RBI to lay down
comprehensive guidelines.
2011-2020
 RBI created separate category of NBFC-MFIs and has laid
down comprehensive regulatory framework.
 Some of the MFIs have been merged into Banks while some
MFIs have been issued license to operate as small finance
Bank
 Bandhan Financial services, which was an MFI earlier, has
been issued license for Universal Bank
Present Status: Total micro-finance loans stand at Rs 2.7 lakh
crores. The highest share is accounted by the SCBs (40%).
The NBFC-MFIs account for 30% of the loans.

PEER-TO-PEER LENDING
Mechanism which enables the people to borrow and lend money without the need for
financial institutions such as banks.
P2P lending platform brings together the people who are willing to lend money and the
money who wants to borrow money and enables such participants to lend and borrow
money through an online platform. Examples: Faircent, OMLP2P, Lendenclub, Finzy,
i2ifunding, Cashkumar, Rupeecircle, Lendbox, etc.
REGULATION OF P2P LENDING PLATFORMS
These platforms are categorised as NBFC-P2P and are accordingly regulated by the RBI.
These Platforms should not be involved in any direct financial activity of lending money.
The interest rate may be set by the platform or through mutual agreement between
borrowers and lenders.

ABOUT BANKS BOARD BUREAU (BBB)

 B K REDDY SIR

Mandate: Recommend for selection of heads of Public Sector Banks and Financial
Institutions. The appointment is finally approved by the Cabinet Committee on
Appointments.
Composition: 7 Members (All the Members including the Chairman are part time
members)
 Chairperson
 3 Ex-officio persons: Secretary, Department Financial Services + Secretary, Department
of Public Enterprises + Deputy Governor, Reserve Bank of India
 3 Expert Members

BANK INVESTMENT COMPANY

 Proposed by P.J. Nayak Committee.

 Bank Investment company (BIC) should be set up as holding company to hold the
Government's shares in PSBs. The Government should set up BIC as a company under
the Companies Act. The Government's shares in PSBs should be transferred to BIC.
This transfer of shares should be accompanied by an agreement under which the role of
the Government would only be to lay down the broad targets to be met by BIC.
 On the other hand, the BIC would have complete autonomy in the management of PSBs,
including making appointments to the Board of Directors. It will be professionally
managed by experts and would be responsible to meet the targets set by the Government.
FINANCIAL INCLUSION AND PAYMENT SYSTEMS

PAYMENT AND SETTLEMENT SYSTEM

System that facilitates transfer of money from a payer to the beneficiary. It includes both
paper-based payments such as cheques, drafts as well as electronic payments such as Real
Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), Immediate
payment Service (IMPS), UPI etc.

Payment systems under RBI: Real Time Gross Settlement (RTGS) and National
Electronics Fund Transfer (NEFT). The RTGS system is used for high-value transactions
wherein minimum transaction amount should be Rs 2 lakhs and above.
(In December 2019, the NEFT system was made available on a 24x7x365 basis. Recently,
RBI has been decided to make available even the RTGS system round the clock on all
days.)
Payment systems under National Payments Corporation of India (NPCI): Umbrella
organization for operating retail payments and settlement systems. It is an initiative of RBI
and Indian Banks’ Association (IBA).
 RuPay Contactless
 Unified Payments Interface: Real-time interbank payment system for sending or
receiving money.
 BHIM App: BHIM is a mobile app for Unified Payments Interface. The BHIM apps
has 3 levels of authentication.
 Bharat BillPay: One-stop ecosystem for payment of all bills
 Immediate Payment Service: Real time interbank payment system
 National Financial Switch: Network of ATMs in India.
 BharatQR: A common QR code built for ease of payments
Card Networks operated by Non-Banks: Visa, MasterCard, American Express etc.

UPI 2.0
NPCI has upgraded the UPI with enhanced features.
 Linking of overdraft account – Apart from the savings and current accounts, the UPI
users can now link their overdraft account to it.
 One-time Mandate (account blocking) – It allows customers or merchants to pre-
authorize a transaction and pay at a later date.
 B K REDDY SIR

 Security Layer in QR – The app allows the users to scan the QR code and check the
authenticity of the merchants through notification to the user to ascertain the
information.

AADHAR - ENABLED PAYMENT SYSTEM (AePS)

Developed by NPCI. Enables various transactions to be carried on PoS (Micro ATM) by
using the Aadhaar authentication. The only inputs required for a customer to do a
transaction under this scenario are:-
 IIN (Identifying the Bank to which the customer is associated)
 Aadhaar Number
 Fingerprint captured during their enrollment
People do not have to mention their bank account details to carry out these transactions.
With the help of this payment system, people can send funds from one bank account to
another simply through their Aadhaar numbers.
HOW DOES IT WORK?
The AEPS machine works like a Point of Sale (POS) machine. Instead of a debit/credit
card pin, the customer will have to enter his Aadhaar number and authenticate the
transaction using his fingerprint.

MERCHANT DISCOUNT RATE (MDR)

MDR is a fee charged paid by the merchants to the bank for accepting payments from
customers through credit/debit cards/QR Code in their establishments. Expressed in
percentage of transaction value. This charge is in turn distributed among three
stakeholders—customer's bank, merchant's bank and payment system operator (Visa,
Mastercard, NPCI- RuPay or BharatQR).
PRESENT MDR CHARGES
Government's Initiative: In December 2019, the Government decided to waive off MDR
charges on transactions done through RuPay and BHIM-UPI payments in order to push
digital payments.

TYPES OF ATMS IN INDIA

BANK OWNED BROWN LABEL WHITE LABEL ATMS
ATMS ATMS
 Set up and owned by  Work on cost-  ATMs set up and
the bank itself. sharing between managed by Non-
 Bank is responsible Bank and non-Bank Banking entity.
for their overall service provider  The entire gamut of
operation and  The Bank needs to operations including
maintenance. take care of cash ATM hardware, Cash
 Banks are given management and Management, Network
responsibility of network connectivity Connectivity, Security
Cash Management, while a service etc. is looked after by
Network provider (Non- the non-banking entity.
Connectivity, Banking Entity)
Security etc. provides for the
ATM machine.

INTERCHANGE FEE
“Interchange Fee” is the charge that Bank “A” pays to another bank ‘B” when the
customer of Bank “A” uses the ATM/PoS Machine of the Bank “B”. This charge is
recovered by the Bank “A” from the customers if the number of transactions exceed five
free transactions. The WLA operators have been demanding an increase in the Interchange
fee in order to compensate their higher operating costs.

PRADHAN MANTRI JAN DHAN YOJANA (PMJDY)

Envisages universal access to banking facilities with at least one basic banking account
for every household, financial literacy, access to credit, insurance and pension. It comes
under the Department of Financial Services, Ministry of Finance.
Benefits under PMJDY: Basic Savings bank Account (BSBA) without any minimum
balance requirement + RuPay Card+ Accident Insurance Cover of Rs 1 Lakh + Life
Insurance Cover of Rs 30,000 (applicable to only those who opened accounts between 15 th
Aug 2014 and 31st Jan 2015) + Overdraft Facility
The Government has decided to extend PMJDY program from “every household” to
“every adult”, with following modification:
 Existing Overdraft (OD) limit of Rs. 5,000 revised to Rs. 10,000.
 Age limit for availing OD facility revised from 18-60 years to 18-65 years.
 The accidental insurance cover raised from existing Rs.1 lakh to Rs. 2 lakhs to new
PMJDY accounts opened after 2018

BASIC SAVINGS BANK DEPOSIT ACCOUNT (BSBDA)

The BSBD Account is designed as a savings account which would offer certain minimum
facilities, free of charge, to the holders of such accounts. The BSBD can be opened by any
individual and is not restricted to only poor and weaker sections.
An individual is eligible to have only one Basic Savings Bank Deposit Account in one
bank. Further, following conditions are applicable to BSBD Small Accounts, which are
opened on the basis of simplified KYC norms:
 Total credits in such accounts should not exceed one lakh rupees in a year.
 Maximum balance in the account should not exceed fifty thousand rupees at any time
 The total debits by cash withdrawals and transfers in a month cannot exceed Rs 10,000.
NEW CHANGES/ MODIFICATIONS
In the interest of better customer service, it has been decided to make the following
changes:
 No limit on number and value of deposits that can be made in a month
 Minimum of four withdrawals in a month, including ATM withdrawals
 ATM Card or ATM-cum-Debit Card.
 Banks are free to provide additional value-added services, including issue of cheque
book, beyond the above minimum facilities, which may/may not be prized.
Are PMJDY accounts same as BSBD account? PMJDY accounts are BSBD accounts
in nature with additional facility of RuPay Debit card with accident insurance coverage
and overdraft facility.

NATIONAL PENSION SYSTEM

Pension cum investment scheme to provide old age security to Citizens of India. Regulated
by Pension Fund Regulatory and Development Authority (PFRDA)
Who can Join? Any individual citizen of India (both resident and Non-resident) in the
age group of 18-65 years
DIFFERENT SECTORS:
A. Government Sector
 Central Government: Introduced from Jan 1, 2004 for all Central Govt. employees
(Except for Armed Forces)
 State Government: Even State Governments have adopted this architecture.
B. Private Sector (Non-Government Sector): Corporates and All Indian Citizens

PRADHAN MANTRI SHRAM YOGI MAAN-DHAN

Voluntary and contributory pension scheme--> 50:50 contribution by subscriber and
central Government.
Eligibility: Unorganised Workers--> Less than Rs 15,000 monthly salary and in age group
18-40 years.
Minimum Assured Pension: Rs 3000/- per month after attaining the age of 60 years.
Family Pension: Death of Subscriber --> 50% of the pension to the spouse
Contribution by Subscriber: Depends upon age of entry.
Ministry: Labour and Employment

ATAL PENSION YOJANA

Guaranteed pension of Rs.1000 to Rs.5000 (depending upon contribution) receivable at
the age of 60 years.
Eligibility: Primarily focussed on Unorganised workers ( But any Indian Citizen in the
age-group 18 to 40 years can join through their savings bank account or post office savings
bank account)
Government Contribution: 50% of total prescribed contribution up to Rs 1000 per
annum. 2 Conditions:
1. Available only for a period of 5 years.
2. Subscribers should not be Income tax payers
Ministry: Ministry of Finance

PRADHAN MANTRI SURAKSHA BIMA YOJANA (PMSBY) - ACCIDENTAL

DEATH INSURANCE
 Eligibility: Available to people in age group 18 to 70 years with bank account.
 Premium: Rs.12 per annum.
 Payment Mode: The premium is auto debited by the bank from the subscriber’s
account.
 Risk Coverage: For accidental death and full disability - Rs.2 Lakh and for partial
disability – Rs.1 Lakh.
 Who implements this Scheme? The scheme is offered by all Public Sector General
Insurance Companies and all other insurers who are willing to join the scheme and tie-
up with banks for this purpose.
 Ministry: Ministry of Finance

PRADHAN MANTRI JEEVAN JYOTI BHIMA YOJANA (PMJJBY)- LIFE

INSURANCE COVER
 Eligibility: Available to people in the age group of 18 to 50 and having a bank account.
 Premium: Rs.330 per annum.
 Payment Mode: The payment of premium will be directly auto debited by the bank
from the subscriber’s account.
 Risk Coverage: Rs.2 Lakh in case of death for any reason.
 Who implements this Scheme? The scheme is offered by Life Insurance Corporation
and all other life insurers who are willing to join the scheme and tie-up with banks for
this purpose.
 Ministry: Ministry of Finance

STANDUP INDIA SCHEME

Facilitates bank loans between Rs.10 lakh and Rs.1 crore to at least one Scheduled Caste/
Scheduled Tribe borrower and at least one Woman borrower per bank branch for setting
up greenfield enterprises. This enterprise may be in manufacturing, services or the trading
sector. The scheme is being implemented through all Scheduled Commercial Banks.

PRIORITY SECTOR LENDING (PSL) NORMS

Priority Sector Min.% of Loans
Agriculture 18% (Out of 18%, 10% should be earmarked
for Small and Marginal farmers)

Micro Enterprises 7.5%

Advances to Weaker Sections 12%
Export Credit Remaining
 Education
Housing
Social Infrastructure (Schools,
Health Care Facilities etc.)
Renewable Energy
Total 40%
PRIORITY SECTOR APPLICABILITY
 Scheduled commercial banks (excluding Regional Rural Banks): 40%
 Foreign Banks with less than 20 branches: 40% (32% can be in the form of lending to
Exports and at least 8% can be to any other priority sector)
 Regional Rural banks and Small Finance Banks: 75% of total loans
 Urban Cooperative Banks: 40% of total loans.
Non-achievement of Priority Sector targets: Buy PSLCs or Transfer shortfall amount
to Rural Infrastructure development Fund (NABARD) or Transfer shortfall amount to
Small Enterprises Development Fund (SIDBI). Interest rates on such contributions by the
Banks is fixed by the RBI.
Priority Sector Lending Certificates (PSLCs): Enables Bank ‘A’ which has failed to
meet PSL target to meet the target by purchasing PSL certificate from another Bank ‘B’,
which has exceeded the target. There is no transfer of loans under PSLC mechanism.
Types: PSLC General, PSLC Small and Marginal Farmer, PSLC Agriculture & PSLC
Micro Enterprises.
NEW CHANGES INTRODUCED BY THE RBI IN PSL
Address Regional Disparities in flow of PSL Credit: A higher weight (125%) would be
assigned to priority sector credit in the identified districts where the credit flow is
comparatively lower, and a lower weight (90%) would be assigned for incremental priority
sector credit in the identified districts where the credit flow is comparatively higher.
Boost to Start-Up Ecosystem: Loans of up to Rs 5 crores to the Start-ups would be
considered as Priority sector lending.

SMALL SAVINGS SCHEMES

The Small savings instruments can be classified under three heads. These are:
 Postal deposits
 Savings certificates [(National Small Savings Certificate VIII (NSC) and Kisan Vikas
Patra (KVP)]; and
 Social security schemes [(public provident fund (PPF) and Senior Citizens ‘Savings
Scheme (SCSS)].
 All small savings collections are credited to this National Small Savings Fund (NSSF)
in the Public Account of India. The interest rates are reset every quarter based on the G-
Sec yields of the previous three months.
 A certain amount of NSSF is invested in the Central and State Government securities.
The fund is administered by Department of Economic Affairs, Ministry of Affairs.

KISAN CREDIT CARD (KCC)

 Objectives: Short-term Credit requirements to purchase inputs + Post-harvest expenses
+ marketing + consumption requirement of farmers + Investment requirement for allied
and non-farm activities.
 Categories of Farmers: Small and Marginal farmers + share croppers + oral lessee and
tenant farmers + SHGs and Joint Liability Groups (JLGs) of farmers
 Implemented by: Commercial Banks, RRBs, Small Finance Banks and Cooperatives.
 Recent developments: Extension of KCC to the fisheries and Animal Husbandry.

NATIONAL STRATEGY FOR FINANCIAL INCLUSION

This strategy has been released by RBI. Strategic Pillars of National Strategy for Financial
Inclusion:
1) Universal Access to Financial Services
2) Providing Basic Bouquet of Financial Services
3) Access to Livelihood and Skill Development
4) Financial Literacy and Education
5) Customer Protection and Grievance Redressal
6) Effective Co-ordination

FINANCIAL INCLUSION INDEX

It was launched by the Minister of Finance. Indicators used. (i) access to financial services;
(ii) usage of financial services; and (iii) the quality of the products and the service delivery.
Note: CRISIL publishes Inclusix to measure Financial Inclusion in India.
 TERMS RELATED TO BANKING AND RECENT DEVELOPMENTS

NON-PERFORMING ASSET (NPA)

A loan is categorized as NPA if it is due for a period of more than 90 days. Depending
upon the due period, the NPAs are categorized as under:
 Sub-Standard Assets: > 90 days and less than 1 year
 Doubtful Assets: greater than 1 year
 Lost Assets: loss has been identified by the bank or RBI, but the amount has not been
written off wholly.
 Stressed assets = NPAs + restructured loans + written off assets
 Restructured loans: those assets which got an extended repayment period, reduced
interest rate, converting a part of the loan into equity, providing additional financing, or
some combination of these measures.
 Written off assets: When the lender does not count that money, borrower owes to him,
then the asset is called written off assets. However, it does not mean that the borrower
is pardoned or exempted.
Note: In case of agricultural loans, the loan is classified as NPA if it satisfies the below
criteria:
 Instalment of principal or interest remains overdue for two crop seasons for short
duration crops,
 Instalment of principal or interest remains overdue for one crop season for long duration
crops.
Note: Long duration crops are the crops with crop season longer than one year and short
duration crops are the crops with crop season shorter than one year.

SPECIAL MENTION ACCOUNTS (SMA)

Special Mention Account (SMA) Category has been introduced by the RBI in order to
identify the incipient stress in the assets of the banks and NBFCs. These are the accounts
that have not-yet turned NPAs (default on the loan for more than 90 days), but rather these
accounts can potentially become NPAs in future if no suitable action is action.
 SMA-0: Principal or interest payment not overdue for more than 30 days but account
showing signs of incipient stress
 SMA-1: Principal or interest payment overdue between 31-60 days
 SMA-2: Principal or interest payment overdue between 61-90 days
Note: If the Principal or interest payment is overdue for more than 90 days, then the loan
is categorized as NPA.
PROVISIONING COVERAGE RATIO (PCR)
Under the RBI's provisioning norms, the banks are required to set aside certain percentage
of their profits in order to cover risk arising from NPAs. It is referred to as "Provisioning
Coverage ratio" (PCR). It is defined in terms of percentage of loan amount and depends
upon the asset quality. As the asset quality deteriorates, the PCR increases. The PCR for
different categories of assets is as shown below:
 Standard Assets (No Default): 0.40%
 Sub-standard Assets (> 90 days and less than 1 year): 15%
 Doubtful Assets (greater than 1 year): 25%-40%
 Loss Assets (Identified by Bank or RBI): 100%

GROSS AND NET NPA

Gross NPA refers to the total NPAs of the banks. The Net NPA is calculated as Gross
NPA -Provisioning Amount.

CAPITAL ADEQUACY RATIO (CAR)

The CAR has been laid down by the BASEL committee on banking supervision under
Bank of International Settlement located in Basel, Switzerland. It has been laid down to
ensure financial stability and to prevent failure of banks. So far, 3 BASEL Norms have
been laid down: Basel I (1998), Basel II (2004), Basel III (2009).
CAR is the ratio of a bank's capital to its risk. It is also known as the Capital to Risk
(Weighted) Assets Ratio (CRAR)
CAR= (Tier-1 Capital + Tier-2 Capital)/ RWAs * 100.
The Banks in India are required to maintain CAR of 9% (Tier-1 capital: 7% + Tier-2
Capital: 2%) along with Capital Conservation buffer (CCB) of 2.5%.
Hence, unlike the BASEL III norms, which stipulate capital adequacy of 10.5% (8%-CAR
+ 2.5% CCB) , the RBI has mandated to maintain capital adequacy of 11.5% (9%-CAR +
2.5%-CCB)

LIQUIDITY COVERAGE RATIO (LCR)

It is the minimum required high-quality liquid assets (HQLA) that the banks must hold
to allow them to survive a liquidity stress for 30 days. It was introduced under Basel III to
improve a bank’s short-term resilience to liquidity shocks.
HQLA are assets that can be converted into cash quickly with no significant loss of value.
Thus HQLAs include
 Cash outside the Cash Reserve Ratio requirement
 Gold
 G-sec outside SLR requirement
 Assets under SLR.
 High-rated corporate bonds

LEVERAGE RATIO (LR)

 The Basel Committee on Banking Supervision (BCBS) introduced Leverage ratio (LR)
in the 2010 Basel III package of reforms. The Formula for the Leverage Ratio is (Tier 1
Capital/ Total Consolidated Assets) ×100 where Tier 1 capital represents a bank's equity.
 It is to be noted that the Tier 1 capital adequacy ratio (CAR) is the ratio of a bank’s core
tier 1 capital to its total risk-weighted assets. On the other hand, leverage ratio is a
measure of the bank's core capital to its total assets.
 Thus, the Leverage ratio uses tier 1 capital to judge how leveraged a bank is in relation
to its consolidated assets whereas the tier 1 capital adequacy ratio measures the bank's
core capital against its risk-weighted assets.

BANKING STABILITY INDEX (BSI)

 It is a measure of the level of interdependence of financial institutions mainly banks. It
is “the expected number of banks that could become distressed given that at least one
bank has become distressed”.
 If more banks are expected to become distressed if one bank in the system is distressed,
then the BSI is higher
 Parameters: Efficiency of the Banks, Profitability, Soundness, Liquidity, Asset
Quality.

DOMESTIC-SYSTEMICALLY IMPORTANT BANKS (D-SIBS)

 SIBs are banks that are perceived as ‘Too Big To Fail’.
 The Basel Committee on Banking Supervision came out with a framework in 2011 for
identifying the Global Systemically Important Banks (G-SIBs).
 Similarly, the RBI has been mandated to identify the Domestic systemically Important
banks (D-SIBs).
 This is primarily done in order to stronger regulatory requirements to prevent their
failure.
 Criteria:
 Banks whose size is equal to or more than 2% of GDP

 Lack of readily available substitutes

 Interconnectedness and

 Complexity

 RBI has classified SBI, ICICI Bank, and HDFC as D-SIBs

 Higher Capital Requirements: The D-SIBs are placed under different buckets
(categories) depending upon their importance. According to the bucket in which they
are placed, the bank would be required to maintain higher Tier-I capital under the
BASEL Norms.

EASE REFORMS INDEX

Enhance Access & Service Excellence (EASE) reforms index. It measures the
performance of Public Sector Banks on 140 objective metrics across 6 themes. It is
published by Indian Banks’ Association.

LIBOR AND SOFR

London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which the global
banks lend to each other. LIBOR is also linked to interest rates at which Indian corporate
sector borrows money under external commercial borrowings. The rate is calculated and
published each day by the Intercontinental exchange (ICX).
In the aftermath of LIBOR scandal of 2011, some countries have decided to adopt
alternatives to LIBOR by the end of 2021.
Some of the alternatives to LIBOR are:
 UK: Sterling Overnight Index Average (SONIA)
 USA: Secured Overnight Financing Rate (SOFR)
 Switzerland: Swiss Average Rate Overnight (SARON)
 Japan: Tokyo Overnight Average Rate (TONAR)
 European Union: Euro Short-Term Rate (ESTER)
Note: Mumbai Interbank Offered Rate (MIBOR) is India’s domestic reference rate for
inter-bank lending. The MIBOR is calculated every day by National Stock Exchange of
India (NSEIL).
 SWIFT
The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a secure
financial message carrier that transports messages from one bank to its intended bank
recipient to facilitate cross-border payments. It does not facilitate funds transfer: rather, it
sends only payment orders. Headquartered in Brussels, Belgium.

PROMPT CORRECTIVE ACTION (PCA)

Framework under which banks with weak financial metrics are put under watch by the
RBI.
Under PCA RBI can place certain restrictions on banks such as a cap on lending limit,
halting branch expansion etc. The RBI can even supersede the Board of Directors of the
Bank.
WHEN IS PCA INVOKED?
RBI invokes PCA on those banks when three risk thresholds are breached. These are based
on:
 Asset quality (NNPA – net non-performing assets to advances ratio),
 Capital (CRAR – regulatory capital to risk weighted assets ratio and leverage ratio) and
 Profitability (ROA – return on assets).
The PCA framework is applicable only to commercial banks.

PUBLIC CREDIT REGISTRY (PCR)

In the year 2019, the RBI has proposed to set up Public Credit registry based on
recommendations of High Level Task Force headed by Yeshwant M Deosthalee.
What is PCR? : An extensive database of credit information that will capture information
pertaining to borrowers (individuals and corporate) including data about willful defaulters
and pending legal suits against them.
Need for PCR: At present, credit information is spread over multiple agencies. Current
Existing Credit registries in India is highly fragmented.
1. Credit Information Companies: Regulated by RBI under the Credit Information
Companies (Regulation) Act, 2005
Eg: Trans Union CIBIL, Equifax, Experian, CRIF High Mark Credit Information
Services
2. Central Repository of Information on Large Credits (CRILC): Database on all
borrowers’ entities with aggregate exposure of Rs 5 crore and above. Set up by RBI in
2014-15.
3. Information Utility: Stores financial information that helps to establish defaults as well
as verify claims. National e-Governance Services limited is India’s first Information
Utility.
Benefits: Help banks distinguish between a bad and a good borrower; Improve Credit
creation.

HAIRCUTS
It refers to the difference between the loan amount and actual amount recovered by the
Bank from their defaulting customer. Various steel, power, infrastructure, aviation
companies etc have defaulted on their loan repayment leading to increase in the NPAs of
banking Sector.
Under such circumstances, the Banks usually arrive at a compromise formula where the
borrower offers to pay part of loan amount as a one-time settlement. The ‘haircut’ here is
the loss made by Bank since the amount paid by the defaulting customer is lower than the
actual loan amount.

CO-ORIGINATION OF LOANS
The Co-origination framework seeks to bring the strengths of two sectors i.e.,” banks and
micro-finance institutions (MFIs)/non-banking finance companies (NBFCs) together.
Under this framework, both bank and NBFC can come together to provide loans to various
sectors wherein they decide to share the loan amount and associated risks in a
predetermined manner. It is expected that such a blending would not only increase flow
of credit to priority sectors but also bring down the cost of credit for the sector
substantially.
Recent Announcement: The Government would expedite the process of co-origination
of loans by the Banks and NBFCs.

SANDBOX POLICY
 A regulatory sandbox (RS) generally refers to live testing of new products or services in
a controlled/test regulatory environment for which regulators may extend certain
regulatory relaxations for the limited purpose of the testing.
 RBI’s sandbox policy to develop testing platform to test innovation by the Fintech
companies.
 As part of this policy, the regulator provides the appropriate regulatory support by
relaxing specific legal and regulatory requirements for specified time duration.
 The idea behind the Sandbox policy is to enable them to test their new products without
any regulatory hassles.
 PROMOTER PLEDGING
It refers to pledging of shares by promoters of a company in order to avail loans from the
Banks. RBI has set a cap on the maximum loan amount that can be availed at 50% of the
value of pledged shares.

WILFUL DEFAULTER
THE RBI DEFINES A WILFUL DEFAULTER AS
 The unit which has defaulted even when it has the capacity to repay.
 The unit which has defaulted and has not utilised the loans for the specific purposes for
which finance was availed of but has diverted the funds for other purposes.
 The unit which has defaulted and has siphoned off the funds so that the funds have not
been utilised for the specific purpose for which finance was availed and the funds are
not available with the unit in the form of other assets.
 The unit which has defaulted and has also sold off the collateral used for availing loans

FUGITIVE ECONOMIC OFFENDER

The Fugitive Economic Offenders Act, 2018 defines “fugitive economic offender” means
any individual against whom a warrant for arrest in relation to a Scheduled Offence has
been issued by any Court in India, who— (i) has left India so as to avoid criminal
prosecution; or (ii) being abroad, refuses to return to India to face criminal prosecution.
Some of the Offences listed in the act are Counterfeiting government stamps or currency,
Cheque dishonour, Money laundering, Transactions defrauding creditors.

INTEREST COVERAGE RATIO (ICR) AND ZOMBIE FIRMS

The interest coverage ratio is used to measure how well a firm can pay the interest due on
outstanding debt. The interest coverage ratio is calculated as ratio of a firm’s profit after
tax to its total Interest expenses. Firms with Interest Coverage ratio (ICR) lower than 1
would be unable to meet their interest obligations from their income and hence called as
“Zombie Firms”.

SARFAESI ACT
The SARFAESI Act empowers banks to directly auction residential or commercial
properties that have been pledged with them to recover loans from borrowers. If a
borrower defaults on a loan, the Banks can give a notice period of 60 days to the borrower
to repay the loans. If the borrower fails to repay within 60 days, the Banks can take the
following actions:
1. Take possession of the pledged assets and then lease or sell it off to recover the loan
amount.
2. Take over the management of the business of the borrower.
3. Appoint a person to manage the assets.

Note:
1. If the total money recovered through the sale of pledged assets is lower than the loan
amount, then the Bank can approach the Debt Recovery Tribunals.
2. One of the biggest drawbacks of SARFASEI Act is that it is not applicable to unsecured
loans. Further, it does enable the Banks to carry out restructuring of loans (reducing
interest rate, extending the duration of loan, reducing the principal amount etc). Hence,
in order to solve these problems, Insolvency and Bankruptcy (IBC) has been introduced.

INSOLVENCY AND BANKRUPTCY CODE

Rationale: The IBC Code was introduced to consolidate all the existing laws related to
Insolvency and Bankruptcy in India and to simplify the process of insolvency resolution.
Deals with all aspects of insolvency and bankruptcy of all kinds of companies, LLPs,
Partnerships and Individuals; however it does not deal with insolvency of banks.
INSTITUTIONAL MECHANISM:
Insolvency Professionals to administer the resolution process, manage the assets of the
debtor, and provide information for creditors to assist them in decision making.
Insolvency Professional Agencies to conduct examinations to certify the insolvency
professionals.
Information Utilities to report financial information of the debt owed to them by the
debtor.
Adjudicating authorities: National Companies Law Tribunal (NCLT) for companies;
and the Debt Recovery Tribunal (DRT) for individuals.
Committee of Creditors (CoC) may either decide to restructure the debtor’s debt by
preparing a resolution plan or liquidate the debtor’s assets. However, such a decision has
to be approved by at least 66% of the votes. (Earlier threshold- 75%).
Insolvency and Bankruptcy Board to regulate insolvency professionals, insolvency
professional agencies and information utilities set up under the Code.
PROCEDURE
 Insolvency Resolution Process (IRP): When a default occurs, the resolution process
may be initiated either by the debtor or creditor before the adjudicating authority. The
 NCLT appoints an insolvency professional to administer the IRP. The Resolution
Professional identifies the financial creditors and constitutes a Committee of Creditors
(CoC). The CoC would prepare the resolution plan for the restructuring the loans of the
defaulted borrower. However, such a resolution plan has to be approved by at least 66%
of the votes in the committee of creditors.
 Liquidation (Sale of Assets) would take place if the Committee of Creditors fail to
come up with a resolution plan within the time limit of 330 days.
 Recent Announcement: The Government has decided to increase the threshold for
invoking IBC for the Corporates from Rs 1 lakh to Rs 1 crores. ( For individuals, the
threshold is Rs 1000).

INDRADHANUSH ROADMAP
Under Indradhanush roadmap announced in 2015, the government had announced to
infuse Rs70,000 crore in state-run banks over four years to clean up their balance sheets
and ensure they fully comply with Basel-III capital adequacy norms.
The seven pronged strategy under Indradhanush is as follows:
 Appointment - A new approach to top-level appointments (allowing entry of talent from
outside)
 Bank Board Bureau- Constitution of BBB for appointment of whole-time Directors as
well as non-Executive Chairman of PSBs.
 Capitalization- Providing additional capital to 12 PSBs including State Bank of India to
keep a safe buffer over and above the minimum norms of Basel III.
 De-stressing PSBs - Effective management of NPAs
 Empowerment -More flexibility in hiring staff
 Framework of accountability -ESOPs and higher performance bonus
 Governance reforms - Focused efforts in the areas of optimizing capital, digitizing
processes, strengthening risk management, improving managerial performance and
financial inclusion.

RECAPITALISATION OF PSBs
Refers to injection of capital mainly through equity investment by the government in order
to financially strengthen the PSBs.
 Government’s Plan: Infuse capital through Recap Bonds + Budget Support + Equity
Capital from Market.
 Rationale: Improve Balance Sheets + Meet Capital requirements under PCA + promote
GDP growth.
 Recap Bonds: The government issues recapitalisation bonds which would then be
bought by the banks. This money raised by the government is then used to buy the shares
of the public sector banks leading to increase in Bank’s Capital. The money raised by
the Government through the issuance of Recap Bonds is not accounted for calculation
of Fiscal Deficit. However, it is considered for the calculation of Internal Debt of
Government.
 Trends in Recapitalisation: Over Rs 2.5 lakh crores has been infused into Public Sector
Banks (PSBs) through recapitalization bonds over the past three years - Rs 80,000 crores
in 2017-18, Rs 1 lakh crores in 2018-19 and Rs 65,000 crore in 2019-20.
 Recent Developments: The Government has issued Zero Coupon Recap Bonds for the
first time in 2020. The Zero-Coupon Recapitalization Bonds will have non-SLR status
and will be non-tradable.

CORPORATES AS BANKS: PROS, CONS AND WAY

FORWARD
In June 2020, the RBI had appointed Internal Working Group
(IMG) to review the ownership guidelines and corporate
structure of the Indian Private Banks. One of the most
contentious recommendations submitted by this committee is
to allow large corporate/Industrial houses to be the promoters
of the Indian Banks. The acceptance of this recommendation
would pave way for large corporates such as Reliance, Tata
etc. to set up private sector Banks.
SHOULD CORPORATE/ INDUSTRIAL HOUSES BE
ALLOWED TO SET UP BANKS?
A large corporate/industrial/business house is defined as a
group having total assets of Rs 5000 crore or more wherein
the non-financial business of the group accounts for more than
40 per cent in terms of total assets or gross income. The
Committee has highlighted that the private sector Banks must
be set up non-operative finance holding company (NOFHC)
 structure. This would provide for the separation of ownership
and management control over the Private sector Banks.
Arguments in Favour Arguments against
 Bring in Capital and Prone to Shocks: Indian Economy
necessary expertise in remained less affected by Global financial
Banking crisis 2017-18 due to dominance of Public
 Improve the Credit-to-GDP Sector Banks.

ratio and facilitate Conflict of Interest: Corporate houses can

Investment driven Model. involve in inter-connected lending. They
 Reduce the Government’s can easily turn banks into a source of funds

monopoly in banking for their own businesses. They can also use
sector and reap benefits banks to provide finance to customers and
(Example of Liberalisation suppliers of their businesses. Tracing inter-
of Telecom and Aviation connected lending is a challenge.
Sectors) Contagion Impact: Banks owned by
 Infuse competition in corporate houses will be exposed to the
Banking Sector leading to risks of the non-bank entities of the group.
higher efficiency. Poor Supervision and Regulatory oversight:
 Lead to development of Recent failure of Yes Bank and Laxmi Vilas
large-sized banks to cater Bank has exposed the weakness in
to credit needs of $ 5 supervision of PSBs. Failure of Banks
trillion economy. promoted by large corporate houses would
 Leverage the Private sector be disastrous.

Banks for the socio- Concentration of Political and Economic

economic development. Power: Political biasedness in giving
(Ex: Jan Dhan Yojana, DBT licenses to certain corporate houses; Anti-
etc) competitive practices; promotion of crony
 Many Countries across the Capitalism.

world have not explicitly Misallocation of Credit: Possibility of

prohibited entry of large diverting depositors’ money only towards
corporate/Industrial certain sectors and hence may affect
houses. financial inclusion.
Over-Burdened RBI leading to decrease in
quality of Regulation.
Moral Hazard: Banks in India are rarely
allowed to fail. They may have to be
rescued by the Government which poses
moral hazard.

WAY FORWARD
The issue of licences to the corporate houses should be
preceded by number of reforms:
Strengthen Banking Regulation Act, 1949: Federal Reserve Act
in USA prohibits financial transactions of Banks with their
affiliates. Hence, amendments to Banking Regulation Act,
1949 should be done to prevent Inter-connected lending.
Consolidated Supervision: RBI must be empowered to carry
out the consolidated supervision of the Banks and their non-
Banking entities to avoid any conflict of Interest.
Strengthen Supervisory Cadre: RBI has set up Specialised
Supervisory and Regulatory Cadre (SSRC) in 2019 to
strengthen and consolidate the supervision functions, which
were scattered across different departments. The SSRC needs
to be strengthened and given proper training.
Reforms in PSBs: Failure of Yes Bank and Laxmi Vilas Bank
(LVB) has highlighted that it is not the ownership structure,
rather the quality of corporate governance which determines
the efficiency of the banks. Hence, the Government must also
give due amount of emphasis on reforming PSBs as highlighted
by P.J. Nayak Committee.

FINTECH SECTOR- OPPORTUNITIES, CHALLENGES AND

STRATEGIES
Fintech can be defined as designing and provisioning of
financial services by using new technological innovations.
Basically, fintech comprises of technology-based businesses
that compete against, enable and/or collaborate with financial
institutions. Examples: Paytm, MobiKwik, Policy Bazaar,
Phonepe, Googlepay etc
Growth drivers: Rapid increase in the use of smartphones,
internet connectivity, online shopping; Younger population;
Advancements in technology such as big data, AI etc;
Improvement in Financial Inclusion; Launch of payment
systems such as UPI; Regulatory support given by RBI etc.
EXAMPLES OF INNOVATIVE PRODUCTS OF
THE FINTECH COMPANIES
 Crowd funding is a way of raising debt or equity from multiple
investors via an internet-based platform. Example:
Kickstarter, FuelAdream etc.
 Peer-to-peer (P2P) lenders connect lenders and borrowers
via an internet-based platform. Example: Faircent,
Lendenclub etc.
 E-Aggregators to compare the prices and features of a
financial products. Example: Policy Bazaar
 Account Aggregators: An individual may have investments in
fixed deposits with ABC Bank which comes under the purview
 of RBI, mutual fund investments with XYZ AMC which comes
under the purview of SEBI and life insurance cover with DEF
Insurance Corporation (which comes under the purview of
IRDAI). Gathering and consolidating all the scattered data
while applying for a loan may prove to be time-consuming.
Hence, Individuals can authorize NBFC-aggregators to do this
job and provide the information to Banks.
HOW CAN FINTECH COMPANIES BENEFIT THE INDIAN
ECONOMY?
 Increase in digital payments
 Improvement in Lending and Investment through innovative
tools such as Peer to Peer (P2P) lending, crowd funding etc.
 Provide finances to MSMEs for trading of their invoices
Example: TreDS Platform
 Provide Insurance and advisory services
 Improvement in Credit Creation through the Account
aggregator services
RECOMMENDATIONS OF SUBHASH CHANDRA GARG
COMMITTEE ON FINTECH SECTOR (2019)
Virtual banking: RBI should examine the suitability of ‘virtual
banking system’ where banks do not need to set up branches
and yet deliver the full-scale banking services ranging from
extending loans, savings accounts, issuing cards and offering
payment services through their app or website
Removing discriminatory regulatory barriers: To boost digital
payments in India, the National payment corporation of India
should provide non-discriminatory access to fintech firms on
par with Banks.
Fintech for Cyber Security: The fintech firms specialising in
field of cyber security should be encouraged to set up their
businesses in India and provided necessary regulatory
approvals for expanding their services in the country.
Flow-based lending to MSMEs: The GSTN data integrated with
TreDS exchanges should form the basis of a flow-based
lending system for MSMEs by banks and NBFCs.
Reforming P2P markets: Credit needs of MSMEs, households
and individuals can be taken care of by creating a marketplace
model of debt financing where savers, non-banks and banks
are all permitted to lend. The Ministry of Finance should
develop a marketplace model of debt financing in India.
Remote Sensing and Drone Tech for Credit and Insurance:
Insurance Companies and Lending agencies in Agri sector
should be encouraged to use drone and remote sensing
technology for crop area, damage and location assessments to
support risk reduction in insurance/lending business.
Digitisation of Land Records: Government should take up
modernisation and standardisation of land records in the
country on a war footing and complete such an exercise within
3 years.
Legal Framework for Customer Protection: A legal framework
for consumer protection should be put in place keeping in mind
rise of fintech and digital services.
Development of Regulation Technology (RegTech): Regtech is
a new field within the financial technology industry that utilizes
information technology to enhance regulatory processes. It
puts a particular emphasis on regulatory monitoring, reporting
and compliance. The financial sector regulators (RBI, SEBI,
IRDAI, and PFRDA) must develop standards for RegTech by
financial sector service providers to make compliance with
regulations easier, quicker and more automated for regulated
entities. It will enable them to meet their increasingly strict
know-your-customer (KYC), anti-money laundering (AML) and
counter-terrorist financing (CTF) requirements.
Development of Supervision Technology: Supervision
technology is the application of technology by financial
regulators so as to strengthen their regulatory and supervisory
role. The committee has recommended that financial sector
regulators (RBI, SEBI, IRDAI, and PFRDA) must focus on
developing supervision technology.

DIGITAL BANKS IN INDIA

In Union Budget 2022-23, Finance Minister had announced
setting up of 75 Digital Banking Units (DBUs) by Scheduled
Banks across 75 selected districts in India. In accordance, RBI
has recently issued guidelines related to setting up of such
DBUs in India.
PRESENT STATUS IN INDIA
Presently, only those entities which are licensed by the RBI can
undertake Banking related operations. As of now, the RBI does
not allow Banks to be 100% digital. Hence, even though Banks
can provide Banking services by leveraging technology (such
as imobile of ICICI), Banks must have mandatorily have
physical branches. Hence, there is no provision for Licensed
100% Digital Banks in India.
PROPOSAL OF 100% DIGITAL BANKS BY NITI AAYOG
 To be licensed under Banking Regulation Act, 1949 as 100%
Digital Banks.
 Provide Banking Services- Acceptance of Deposits, Giving
Loans, provide insurance etc. without the need to have
physical branches.
 No Physical Branches (No Brick and Mortar)
 Leverage Technology to provide Banking Services
 Also called as Challenger Banks- Newly created Banks which
compete with longer established Banks through use of Digital
Technology. Global Examples: Challenger Banks such as
Starling Bank, Monese Banks in UK.
UNION BUDGET 2022-23
Proposal to set up Digital Banking Units (DBUs).
However, these Digital Banking Units would not be set
up by issuing licenses to 100% Digital Banks. Only the
existing Banks in India which already have physical
presence are allowed to open DBUs.