Banking Banking Awareness Banking System Para Banking Services

Para Banking Services

Category : Banking

Para Banking Services

Para banking activities refer to those activities carried out by the bank which are other than their normal day-to-day activities (deposits withdrawals, giving credit/ etc.). The Para Banking activities include insurance business, portfolio management services, pension fund management, mutual funds business, money market mutual funds underwriting of bonds of PSUs, investment in venture capital funds, etc. The para Banking activities which can be performed by bank have been permitted by KBI. Banks can do these activities either departmentally or by setting up subsidiaries to undertake the type of business.



Banks are allowed to form subsidiaries as per Section 19(1) of the Banking Regulation Act, 1949. Banks can invest up to 10 percent of their capital in the subsidiaries.


Banks may form a subsidiary company tor undertaking the types of businesses which a banking company is otherwise permitted to undertake, with prior approval of Reserve Bank of India


Most well-known banks today have subsidiaries, which offer numerous financial services, such as dealing with mutual funds leasing equipment, or investing in venture capital funds (VCF).


Some well-known subsidiaries of major banks m India that offer para-banking services include SBI Pension Funds Private Ltd, SBI Mutual Fund, ICICI Ventures, ICICI Prudentials, HDFC Securities (HS), and more. Not only individuals, but companies too, avail these services. These financial services help people or companies to manage their assets, invest funds profitably, etc.


Activities of Indian Banks which come under Para Banking are as follows -

  • Banks' investment in Venture Capital Funds (VCFs)
  • Banks as sponsors to Infrastructure Debt Funds
  • Equipment leasing. Hire purchase business and Factoring services
  • Primary Dealership business
  • Underwriting of Corporate Shares and Debentures
  • Underwriting of bonds of Public Sector Undertakings
  • Retailing of Government Securities
  • Mutual Fund Business
  • Money Market Mutual Funds (MMMFs)
  • Cheque biting Facility for Investors of MMMFs
  • Insurance business
  • Pension Fund Management (PFM) by banks
  • Referral Services
  • Membership of SEBI approved Stock exchanges
  • Portfolio Management Services
  • Safety Net' Schemes
  • Disclosure of commissions/ remunerations


Relationship with Subsidiaries

A sponsor bank is required to maintain an arm’s length" relationship with the subsidiary/ mutual fund sponsored by it in regard to business parameters such as, taking undue advantage in borrowing/lending funds, transferring/selling/ buying of securities at rates other than market rates, giving special consideration for securities transactions, overindulgence in supporting/ financing the subsidiary, financing the bank's clients through them when the bank itself is not able or is not permitted to do so, etc. Supervision by the parent bank should not, however, result in interference in the day-to-day management of the affairs of the subsidiary/mutual fund.


Relationship with Systemically Important Non-Banking Financial Companies

The regulatory gaps in the area of bank and NBFC operations contribute to creating the possibility of regulatory arbitrage and hence may give rise to an uneven playing field and systemic risk. As such banks are advised to follow the regulatory framework mentioned below as regards their relationship with systemically important NBFCs:

(a) NBFCs promoted by the parent/group, of a foreign bank having presence in India, which is a subsidiary of the foreign bank's parent/group or where the parent/group is having management control would be treated as part of that foreign bank's operations in India and brought under the ambit of consolidated supervision as applicable to Indian banks.

(b) Where a foreign bank is holding between 10% and 50% (both included) of the issued and paid up equity of an NBFC, it will be required to demonstrate that it does not have management control in case the NBFC is to be kept outside the ambit of consolidated prudential regulations.

(c) Banks in India, including foreign banks operating in India, shall not hold more than 10% of the paid up equity capital of a deposit taking NBFC. This restriction would, however, not apply to investment in housing finance companies.


Banks' Investment in Venture Capital Funds

In view of the need for banks' involvement in financing of Venture Capital Funds (VCFs), it is important to address the relatively higher risks inherent in such exposures. Accordingly, as part of compliance with the provisions of Section 19(2) of the Banking Regulation Act, 1949, banks should obtain prior approval of RBI for making strategic investment in VCFs, i.e., investments equivalent to more than 10 per cent of the equity/unit.


Banks as Sponsors to Infrastructure Debt Funds

In order to accelerate and enhance the flow of long term funds to infrastructure projects for undertaking the Government's ambitious programme of infrastructure development, scheduled commercial banks have been allowed to act as sponsors to Infrastructure Debt Funds (IDFs) which can be set up either as Mutual Funds (MFs) or as Non-Banking Finance Companies (NBFCs).

IDF-MFs will be regulated by Securities & Exchange Board of India (SEBI).

  • IDF-NBFCs will be regulated by Reserve Bank of India (RBI).
  • Banks can sponsor IDF-MFs and IDF- NBFCs with prior approval from RBI.


Equipment Leasing, Hire Purchase Business and Factoring Services

Banks can form subsidiary companies for undertaking equipment leasing, hire purchase and factoring businesses, with prior approval of Reserve Bank of India. Equipment leasing/hire purchase subsidiaries of banks should not take up issue management functions for other companies engaged in hire purchase and leasing business. They should not engage themselves in financing of other companies or concerns engaged in equipment leasing, hire purchase business, and factoring services, underwriting of public issues of shares and debentures of those companies.


Underwriting Activities

While underwriting of issues as a part of merchant banking activities, banks should ensure  the prudential exposure norms prescribed by RBI from time to time, as well as the statutory limits contained in Section 19(2) & (3) of the Banking Regulation Act, 1949 are strictly adhered to. Further, while undertaking such activities, banks as well as their merchant banking subsidiaries would also be required to comply with relevant SEBI regulations.


Retailing of Government Securities

Banks are permitted to undertake the business of retailing of Government Securities with non- bank clients in terms of the guidelines issued by RBI from time to time, as applicable, as well as subject to the following conditions:

(i) Banks are free to buy and sell Government Securities on an outright basis at prevailing market prices without any restriction on the period between sale and purchase.

(ii) Banks shall not undertake ready forward transactions in Government Securities with nonbank clients.

(iii) The retailing of Government Securities should be on the basis of ongoing market rates/yields emerging out of secondary market transactions.

(iv) Immediately on sale, the corresponding amount should be deducted by the bank from its investment account and also from its SLR assets.

Mutual Fund Business

Banks desirous of undertaking mutual fund business should obtain prior approval of Reserve Bank of India for setting up such funds subject to the following:

(i) Bank-sponsored mutual funds should comply with the guidelines issued by SEBI from time to time.

(ii) The bank-sponsored mutual funds should not use the name of the sponsoring bank as part of their name, except where a suitable disclaimer clause is inserted while publicizing new schemes that the bank is not liable or responsible for any loss or shortfall resulting from the operations of the scheme.

(iii) Banks may enter into agreements with mutual funds for marketing the mutual fund units subject to terms and conditions.

(iv) Money Market Mutual Funds (MMMFs) come under the purview of SEBI regulations. However, banks desirous of setting up MMMFs would have to seek necessary clearance from RBI for undertaking this additional activity before approaching SEBI for registration.


Entry of Banks into Insurance Business

Banks may undertake insurance business by setting up a subsidiary/joint venture, as well as undertake insurance broking/ insurance agency, either departmentally or through a subsidiary, subject to fulfilling the eligibility criteria. However, it may be noted that the group as a whole can undertake insurance distribution through either broking or corporate agency mode i.e. within the group, the model of insurance distribution decided upon can be adopted by any number of group entities.

  • Banks are not allowed to undertake insurance business with risk participation departmentally and may do so only through a subsidiary/Joint Venture set up for the purpose.
  • Banks require prior approval of RBI for setting up a subsidiary/JV. Accordingly, banks desirous of setting up a subsidiary for undertaking insurance broking/corporate agencies which satisfy the eligibility criteria may approach Reserve Bank of India for approval to set up such subsidiary/JV.


Pension Fund Management by Banks

Consequent upon the issue of Government of India Notification dated May 24,2007 specifying "acting as Pension Fund Manager" as a form of business in which it would be lawful for a banking company to engage in, under Section 6 of the Banking Regulation Act, 1949, banks have been advised that they may undertake Pension Fund Management (PFM) through subsidiaries set up for the purpose with the prior approval of RBI, and subject to satisfying the eligibility criteria prescribed by Pension Fund Regulatory and Development Authority (PFRDA) for Pension Fund Managers.

  • Pension Fund Management should not be undertaken departmentally.
  • Banks intending to undertake pension fund management should furnish full details in respect of the various eligibility criteria as specified along with the details of the equity contribution proposed to be made in the subsidiary.


Eligibility Criteria

(a) Net worth of the bank should be not less than Rs 500 crore. (b) CRAR should be not less than 11 per cent during the last three years, (c) The bank should have made net profit for the last three consecutive years, (d) Return on Assets (ROA) should be at least 0.6 per cent or more. (e) Level of net non-performing assets (NPAs) should be less than 3 per cent (f) Performance of the bank's subsidiary(ies), if any, should be satisfactory, (g) Management of the bank's investment portfolio should be good as per the API Report of the Reserve Bank and there should not be any adverse remark(s) in the Report involving supervisory concerns.


Trading on/Membership of SEBI approved Stock Exchanges

Banks in India as well as the overseas branches of Indian banks are permitted to transact in Interest Rate Futures (IRFs) for the purpose of hedging the risk in their underlying investment portfolio as well as trading positions in IRFs. It is, however, clarified that banks are not allowed to undertake transactions in IRFs on behalf of clients. In this context, banks are advised to ensure adherence to instructions as regards setting of limits for non-option derivatives contracts as amended form time to time.


Scheduled commercial banks (AD Category I) have been permitted to become trading/ clearing members of the currency derivatives segment to be set up by the stock exchanges recognized by SEBI, subject to their fulfilling the following prudential requirements:

(a) Minimum net worth of '500 crore;

(b) Minimum CRAR of 10 per cent;

(c) Net NPA not exceeding 3 per cent

(d) Net profit for last 3 years.


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