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New Banking System

Category : Banking

 

New Banking System

 

Over the years, banks in India have taken a new turn to avail their services to its customers in more easy and friendly manner. RBI is the sole organisation for providing a platform to fulfill the services offered by various bank. The Government's objective of achieving 100% financial inclusion in India got a shot in the arm with the new banking system.

 

Indradhanush Scheme for Public Sector Banks

Union Government has launched a seven pronged plan called Indradhanush Mission to revamp functioning of Public Sector Banks (PSBs).

Mission Indradhanush is aimed to revamp the functioning of public sector banks so that PSBs can compete with the Private Sector Banks. The mission is a brainchild of PJ Nayak committee.

The mission includes the seven key reforms of appointments, board of bureau, capitalisation, de-stressing, empowerment, framework of accountability and governance reforms.

 

  1. Appointments Government had already announced that the post of Chairman and Managing Director in Public Sector Banks are to be split into (a) MD and CEO; and (b) Non-Executive Chairman. Under the new process of selection for MD and CEO, even private sector candidates are also allowed to apply for the position of MD and CEO.
  2. Banks Board Bureau BBB is a body of eminent professionals and officials, which replaced the Appointments Board for appointment of Whole-time Directors as well as Non-Executive Chairman of PSBs.
  3. Capitalisation Government of India has made an exercise to estimate the capital requirements (Rs. 70000 cr) based on credit growth rate of 12% for the current year and 12 to 15% for the next three years depending on the size of the bank and their growth ability.
  4. De-Stressing PSBs The government will concentrate on de-stressing the bank's bad loans.
  5. Empowerment It provides greater flexibility in hiring the manpower to banks,
  6. Framework of Accountability The government announced a new framework of key performance indicators for state-run lenders to boost efficiency in functioning while assuring them of independence in decision making on purely commercial considerations.
  7. Governance Reforms Specific decision will be taken on optimising capital, digitizing process, strengthening, risk management, improving managerial performance and financial inclusion.

 

Banks Board Bureau

Banks Board Bureau (BBB) is an autonomous body of Union Government of India, with a view to improve Governance of Public Sector Banks (PSBs). The BBB started the function from 1st April, 2016.

The Bureau will recommend for selection of heads-Public Sector Banks and Financial Institutions and help Banks in developing strategies and capital raising plans. Former Comptroller and Auditor General (CAG) Vinod Rai has been appointed as the first Chairman of Banks Board Bureau (BBB). It is a part of a seven-pronged revamp plan for PSBs dubbed as Indradhanush (rainbow) plan.

 

Composition of BBB

BBB comprises of a Chairman and six more members with at least 3 former bankers, 2 professionals and secretary, department of financial services representing government.

 

Major Functions of BBB

  • Give recommendations for appointment of full-time Directors as well as Non-Executive Chairman of PSBs.
  • Give advice to PSBs in developing differentiated strategies for raising funds through innovative financial methods and instruments and to deal with issues of stressed assets.
  • Guide banks on mergers and consolidations.

 

New Banks Format Payments Bank

Reserve Bank of India (RBI) released guidelines for Licensing of Payments Banks on 27th Nov, 2014. These guidelines will allow mobile firms and supermarket chains, among others, to enter the banking arena to cater to individuals and small businesses. The objectives of payments banks is to push financial inclusion by providing small savings accounts and payments or remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users.

 

Guidelines of RBI for Payments bank

According to guidelines

  • The payments banks will be able to take deposits and remittances, internet banking and other specified services but cannot undertake lending services.
  • Their holding are restricted to a maximum balance of Rs. 1 lakh per individual customer.
  • They can issue ATM/debit cards but not credit cards and can also issue other prepaid payment instruments.
  • Payment bank cannot undertake lending activities but can distribute the non-risk sharing simple financial products such as mutual fund units and insurance products, etc.
  • Non-resident Indians will not be allowed to open accounts in payment banks.
  • It is mandatory for payment banks to hold minimum capital of Rs. 100 crore. FDI of 74% is allowed in payment banks.
  • They can enable transfers and remittances through a mobile phone.
  • They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a phone.

 

Licence Holding Companies

  • In August 2015, RBI gave nod to 11 entities to start Payment Bank. These are
  • Aditya Biria Nuvo Ltd.
  • Airtel M Commerce Services Ltd.
  • Cholamandalam Distribution Services Ltd.
  • Department of Posts.
  • Fino PayTech Ltd.
  • National Securities Depository Ltd.
  • Reliance Industries Ltd.
  • Dilip Shantilal Shanghvi (Sun Pharmaceuticals)
  • Vijay Shekhar Sharma (Paytm)
  • Tech Mahindra Ltd, and
  • Vodafone m-pesa Ltd.
  • In September 2015, Vijay Shekhar Sharma, Paytm founder announced to open country's first Payment Bank.

 

India’s First Payment’s Bank

Airtel Payments Bank Limited launched India’s first live payments. Bank in Rajasthan on 23rd November, 2016. Customers in towns and villages across Rajasthan will be able to open bank accounts saving. Airtel retail outlets. The customers will also be able to avail extra benefits. Like money transfer to any bank account in India and personal accidental insurance of Rs. 1 Lakh with every saving account.

 

Small Finance Banks

RBI had released the guidelines on Small Finance Banks along with the Payment Banks on 27th Nov, 2014. The objective of small finance banks is to further financial inclusion by providing

  • Basic banking facilities to the unbanked and thereby boosting saving habits.
  • Supply of credit to small business units, small and marginal farmers, micro and small industries and other unorganised sector entities, through high technology-low cost operations.

 

Conditions for Setting up Small Bank

  • Minimum paid-up equity capital requirement of Rs. 100 crore.
  • Every small finance bank must have the words "small finance bank" in its name.
  • They cannot setup subsidiaries to undertake non-banking financial service activities.
  • 75% of its Adjusted Net Bank Credit (ANBC) should be advanced to the priority sector as categorized by RBI.
  • Maximum loan size to a single person cannot exceed 10% of total capital funds; cannot exceed 15% in the case of a group.
  • At least 50% of its loans should constitute loans and advances of up to Rs. 25 lakh,
  • Small banks can undertake financial services like distribution of mutual fund units, insurance products, pension products, and so on, but not without prior approval from the RBI.
  • A small bank can transform into a full-fledged bank, but only after RBFs approval,
  • A fundamental requirement is that it must. Have 25% of its branches setup in unbanked areas.

 

Important Features of Small Banks

  • They can accept any deposit (savings, current, fixed deposits, recurring deposits) like commercial banks.
  • Unlike payment banks, small finance banks will be allowed to lend money also.
  • For the initial 3 yr, prior approval will be required for branch expansion.
  • To give the feel of local bank, their area of operation will be restricted.
  • NBFC's, any individual with 10 yr of experience in banking can apply for licenses
  • Their targets are small businesses and MSMEs.
  • They are not allowed to lend the deposited money to big businesses or industries

 

Difference between Payment Banks and Small Finance Banks

 

Difference

Small Bank

Payments Bank

Eligibility

Professionals with 10 yr in financial services or promoter group with 5 yr track record

Card Issuers, Finance Companies, Business, Correspondents, Telecom Companies, Retailers, etc.

Capital Requirement

Rs. 100 crore Equity Capital

 Rs. 100 crore Equity Capital

 

Providing basic banking facilities to poor and small businessmen

Accept Deposits, Issue Debit Cards, Remittance services. Cannot issue credit cards.

Scope of Activity

Providing basic banking facilities to poor and small businessman

Accept Deposits, Issues Debit Cards, Remittance services cannot issue credit cards.

Promoter Contribution

Promoter's initial contribution should be 40% lowered to 26% in 12 yr.

Promoters should retain a 40% stake for first. 5 yr.

 

Jalandhar (punjab)-headquartered 'Capital Local Area Bank' lanched the India's first small finance bank. The small bank launched operations under a new name- Capital Small Finace Bank Limited on April 13, 2016.

 

India Post Payments Bank

The Union Cabinet has given its approval for setting up of the India Post Payments Bank (IPPB) as a Public Limited Company under the Department of Posts. It will have 100% Government of India (Gol) equity and shall be established with total expenditure of Rs. 800 crore. Now, the IPPB has to obtain banking licence from RBI by September, 2017.

The India Post Payments Bank Limited (IPPBL) has received the Certificate of Incorporation from the Registrar of Companies, Ministry of Corporate Affairs under the Companies Act, 2013. It will generate employment opportunities for about 3500 skilled banking professionals, will setup 650 branches and 5000 ATM across the country.

 

Important facts related to IPPB

  • IPPB will start operations in March, 2017 in about 50 districts and will cover the entire country by the end of FY 2018-19.
  • Its services will be linked to post offices and alternative channels riding on modern technology including ATMs, mobiles, simple digital payments and point of sale PoS/m-PoS devices etc.
  • It will also generate opportunities for propagating financial literacy across the country and help furthering the cause of financial inclusion.

 

Anywhere Banking

It is a highly secure and convenient system for online, real-time inter branch transactions across the bank. Anywhere banking (AWB) offers you greater flexibility, transaction power, convenience and ease in banking. It is considered as 24 x 7 services.

 

Features of Anywhere Banking

  • Withdraw or remit cash through AWB cheque from any branch of bank.
  • Transfer funds from one account to another in less than 10s to anywhere in India.
  • Cash withdrawal facility is extended to savings, current, loan and overdrafts Accounts.

 

National Payments Corporation of India (NPCI)

NPCI is the umbrella organisation for all retail payments system in India. It is being promoted by the Reserve Bank of India. It was founded in 2008 as a not for profit organisation registered under section 25 of the Companies Act, 2013. It has successfully played pioneering role in the development of a domestic card payment network called RuPay, reducing the dependency on international card schemes.

Services included in NPCI are

  • National Financial Switch (NFS)
  • Interbank Mobile Payment Service (IMPS)
  • Rupay Card
  • Cheque Truncation System (CTS)
  • Aadhaar Enabled Payment System (AEPS)
  • Unified Payments Interface (UPI)

 

MUDRA Bank (SIDBI) Ltd.

Micro Units Development and Refinance Agency Bank (MUDRA Bank), is a new institution setup by the Government of India for development of micro units and refinance of MFIs to encourage entrepreneurship in India and provide the funding to the non-corporate small business sector. It was launched by Prime Minister Narendra Modi on 8th April, 2015. Mudra Bank has been setup with only one goal in mind – to fulfill all the Funding needs of Non-Corporate Small Business. Mudra Ltd. was setup as a corporate subsidiary of Small Industries Development Bank of India (SIDBI) in March, 2015 prior to the launch of the Pradhan Mantri Mudra Yojana (PMMY) in April, 2015. The Union Cabinet has approved the conversion of Mudra Ltd. into Mudra (SIDBI) Bank as, a wholly owned subsidiary of SIDBI. Mudra Ltd. has been functional since 8th April, 2015.

 

MUDRA Scheme/Yojana

Under the guideline of Pradhan Mantri Mudra Scheme, MUDRA Bank has launched its three initiative product and its name is Shishu, Kishor and Tarun to signify the stage of growth and funding needs of the micro units or entrepreneur. Mudra Bank is refinancing through State level institutions. Mudra will deliver the loan through NBFC.s, MFIs, Rural Banks, District Banks. Nationalise Banks, Private Banks, Primary Lending Institutions and other intermediaries.

 

Categories are given below

  • Shishu Category All those businesses that have been just started and looking for loan will fall in this category. A loan cover of Rs. 50000 will be given to all micro units falling in this category.
  • Kishor Category This one is for those who have started their business but it has not been established yet. A loan cover from Rs. 50000 to Rs.5 lakhs will be given to units falling into this category.
  • Tarun Category All small businesses which have been setup and established will fall into this category. There may be some financial requirements for the betterment of business. That's why all small businesses or units falling into this category will be eligible for a loan cover of upto Rs. 10 lakh.

 

Tit -Bits

  • UPI provided a mobile personal identification number MP which will be a standardised 4 or 6 digit number similar to ATM PIN.
  • Private Sector Banks with 3 yr of continuous profit track record and net NPA within 3% are eligible under Pradhan Mantri Mudra Scheme.

 

New Banking Platform for Payment

 

Unified Payments Interface

UPI system has been developed for all retail payments in the country by National Payments Corporation of India (NPCI) to make the transfer of money easy and simple. It was launched on 11th April, 2016 in Mumbai. It is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing and merchant payments into one hood. At the start, ten major banks-SBI, Canara Bank, BOI, ICICI Bank, HDFC Bank, Punjab National Bank, Bank of Baroda, HSBC, and Citi Bank integrated the interface with their mobile apps. 29 banks have agreed to join the platform. Some important features of UPL

 

Features of UPI

  • Both the sender and the receiver should have enabled UPI platform for the transaction to take place.
  • All UPI enabled banks will allow their apps to be consolidated. So, one can perform all payment transactions.
  • The limit on transaction through UPI system is Rs. 1 lakh.
  • Charges can be applied depending on the amount of money transferred.
  • The Service is available 24 x 7.
  • No need to carry the debit or credit cards which also sometimes lead to security problems.
  • Merchant will not be able to track even the account number.
  • UPI system will not at all include the wallets.
  • The transaction will be shown as IMPS Bank transfer in the bank account statement.

 

National Unified NUUP Platform

National Unified USSD Platform (NUUP) is a Unstructured Supplementary Service Data (USSD) based mobile banking service from NPCI that brings together all the Banks and Telecom Service Providers. In NUUP, a customer can access banking service by just pressing *99# from his/her mobile phones. This service works across all GSM mobile handsets. According to the Reserve Bank of India (RBI), the USSD payment method can be used for sending money as low as Rs. 1, and as much as Rs. 5,000 per transaction.

 

Prepaid Payment Instruments

Prepaid payment instruments are payment instruments that facilitate purchase of goods and services, including funds transfer, against the value stored on such instruments. The value stored on such instruments represents the value paid for by the holders by cash, by debit to a bank account, or by credit card. The prepaid instruments can be issued as smart cards, magnetic stripe cards, internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers and any such instrument which can be used to access the prepaid amount (collectively called Prepaid Payment Instruments hereafter). The prepaid payment instruments that can be issued in the country are classified under three categories viz

(i) Closed system payment instruments

(ii) Semi-closed system payment instruments and

(iii) Open system payment instruments

Banks, NBFCs and other persons are permitted to issue prepaid gift instruments subject to the following conditions:

(i) The maximum validity of the prepaid gift instruments shall be three years.

(ii) Maxim-urn value of each such payment instrument shall not exceed Rs. 50000.

(iii) Cash withdrawal shall not be permitted for such instruments.

(iv) Full KYC of the purchasers of such instruments shall be maintained.

(v) The issuer shall maintain the details of the persons to whom such instruments have been issued and made available on demand.

(vi) Entities may adopt a risk based approach, duly approved by their Board, in deciding the number of such instruments which can be issued to a customer, transaction limits, etc.

 

Core Banking System

Core banking is type of banking in which a person who opens a bank account in a branch of a bank, will become a customer not only of that branch, but he becomes a customer of all branches of bank and can conduct banking transactions anywhere and at any time. Thus, he can deposit and withdraw cash from anywhere with the branches of same bank. Core banking is a general term used to describe the services provided by a group of networked bank branches. Core banking is basically depositing and lending of money. Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet banking, and branches.

 

Elements of Core Banking Include

  • Making and servicing loans.
  • Opening new accounts.
  • Processing cash deposits and withdrawals.
  • Processing payments and cheques.
  • Calculating interest.
  • Customer Relationship Management (CRM) activities.
  • Managing customer accounts,
  • Establishing criteria for minimum balances, interest rates, number of withdrawals allowed and so on.
  • Establishing interest rates.
  • Maintaining records for all the bank's transactions.

 

National Automated Clearing House (NACH)

From 1st May, 2016 NACH replaced Electronic Clearing Service (ECS). The National Payments Corporation of India (NPCI) has implemented an electronic payment service termed as National Automated Clearing House (NACH) for banks, financial institutions, Corporates and Government Departments. NACH is a funds clearing platform similar to the existing ECS of RBI.

(i) NACH has both Debit and Credit variants and it aims at facilitating interbank, high volume, debit/credit transactions, which are bulk and repetitive in nature. The primary motive of NACH is to handle low value, high volume transactions based on electronic files.

(ii) Ideally implementing this mandate will allow transactions to be cleared in real-time mode rather than batch mode.

(iii) The NACH platform will have national footprint which will cover 82000 + bank branches.



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