Banking General Awareness Financial Reforms in Banking Sector Financial Reforms in Banking Sector

 

Financial Reforms in Banking Sector

 

A new era of banking industry in India was started after independence. In this era, efforts were made to improve banks's methodology and responsibilities and various committees were formed in this regard. Apart from this, banks also took various steps to improve their working procedure.

 

Important Acts Related to Banking Regulation

 

Banking Regulation Act, 1949

The Banking Regulation Act, 1949 came into force on 16th Mar, 1949. It contained various aspects related to Banking Companies in India.

Its purpose is to

• provide safety in the interest of depositors;
• prevent misuse of powers by managers of banks;
• see that the act does not supersede, but supplements to the Companies Act, 1956.

 

State Bank of India Act, 1955

Imperical Bank of India was transformed into SBI through SBI Act, 1955 passed by Indian Parliament. As a result of it banking services were expanded to rural as well as semi-urban areas.

 

The State Bank of India

(Subsidiary Banks) Act, 1959

This Act provides the formation of Certain Government or Government Associated Banks as subsidiary of the State Bank of India.

 

Banking Laws

(Miscellaneous Provisions) Act, 1963

With a view to restraining the control exercised by particular group of persons over the affairs of banks and to providing for stricter Control Over Bank by the Reserve Bank, the banking laws (miscellaneous provisions) Act was passed in 1963.

 

Banking Law (Amendment) Act, 1968

In this act, it was decided as to which businesses banks are allowed to give loans. The role of banks in the areas of economic and social development was also specified.

 

The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970

As per this act, no shareholder of the Corresponding New Bank, other than the Central Government shall be entitled to exercise voting rights in respect of any shares held by him. Under this provision, 14 banks were nationalised in 1970.

 

Regional Rural Banks Act, 1976

Regional Rural Banks were established under the provisions of an Ordinance passed on 26th Sep, 1975 and the RRB Act, 1976 to provide sufficient banking and credit facility for agriculture and other rural sectors. These were setup on the recommendations of the Narasimham working group.

 

SARFAESI Act, 2002

The full form of Sarfaesi Act is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilise this act as an effective tool for bad loans (NPA) recovery. It is possible that non-performing assets are backed by securities charged to the bank by way of hypothecation or mortgage or assignment.

Upon loan default, banks can seize the securities (except agricultural land) without intervention of the court. Sarfaesi is effective only for secured loans where bank can enforce the underlying security e.g. hypothecation, pledge and mortgages.

The Sarfaesi Act, 2002 gives powers of 'seize and desist' to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days.

 

 

Amendments to Sarfaesi Act (in 2016)

It allows District Magistrate (DM) to take possession over collateral within 30 days for securing the creditors. It empowers District Magistrate (DM) to assist banks to take over the management of a company, in case the company is unable to repay loans. It creates a central database to integrate records of property registered under various registration systems with central registry meant for maintaining records of transactions related to secured assets.

 

RBI Amendment Act, 2006

In 2006, Government amended the RBI Act, 1974 and the Banking Regulation Act. Under the act, Government removed the floor and CAR on CRR and floor on statutory liquidity ratio to provide flexibility to the RBI to manage liquidity. After this, RBI was not required to pay any interest on the CRR deposits of banks. The amendments also established RBI as regulator of the bond market and the currency market.

 

The Banking Laws (Amendment) Bill 2011

This Bill would strengthen the regulatory powers of Reserve Bank of India (RBI) and to further develop the banking sector in India. It will also enable the nationalised banks to raise capital by issue of preference shares or rights issue or issue of bonus shares.

The salient features of the bill are as follows

1. To increase the cap on restrictions on voting rights.
2. To provide for special audit of co-operative banks at instance of RBI.
3. To enable the nationalised banks to raise capital through 'bonus' and 'rights' issue and also enable them to increase or decrease the authorised capital with approval from the Government and RBI without being limited by the ceiling of a maximum of Rs. 3000 crore.
4. Voting rights in banks may be restricted up to 26%.

 

Committees Related to Banking Sector Reform

Various committees related to Banking Sector Reform are as follows

 

Narsimham Committee I, 1991

This committee was setup on August, 1991 in order to study the problems of the Indian financial system and to suggest recommendations for improvement in the efficiency and productivity of financial institutions under following areas.

• The committee recommended their gradual reduction of SLR to 25% and CRR to 3.5%.
• The committee recommended that the actual number of public sector banks need to be reduced.
• Regarding the Regional Rural Banks (RRBs), it recommended that they should focus on agriculture and rural financing.
• The committee recommended the establishment of an Asset Reconstruction Fund (ARF). This fund would take over the proportion of the bad and doubtful debts from the banks and financial institutes. It would help banks to get rid of bad debts.
• It considered and recommended that the RBI should be the only main agency to regulate banking in India.

The committee recommended that the public sector banks should be free and autonomous.

Some of these recommendations were later accepted by the Government of India and became banking reforms.

 

Narsimham Committee II, 1998

This committee was setup on 26th Dec, 1997.

It submitted its report to the government in April, 1998 with the following recommendations

• The committee considered the stronger banking system in the context of the Current Account Convertibility (CAC).
• It recommended 'Narrow Banking concept' where weak banks would be allowed to place their funds only in short term and risk free assets.
• The committee recommended that the government should raise the prescribed capital adequacy norms.
• The committee considered that there was an urgent need for reviewing and amending main laws governing Indian banking industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc.

 

Damodaran Committee, 2011

The committee, headed by former SEBI Chairman M Damodaran, was setup by the Central Bank to look into the issues of customer services and evaluate the existing system of grievance redressal mechanism prevalent in banks, its structure and efficacy and recommend measures for expeditious resolution of complaints.

 

Recommendations of the Committees

• Bank should offer No Frill Saving Accounts with certain basic facilities such as cheque book and ATM card without prescribing any minimum balance.
• All fixed deposit receipts should prominently indicate the annualised interest rate to help customers take more informed decisions.
• The Indian Banks Association should standardize the account opening form for all banks, similar to the one used for loans. Title deeds of property should be returned to customers within 15 days of the full settlement of home loans.

 

MV Nair Committee, 2011

The Reserve Bank had constituted the Committee under the chairmanship of Shri M V Nair on 25^th Aug, 2011 pursuant to the announcement made in the Monetary Policy Statement 2011-12. The Committee was to re-examine the existing classification and suggest revised guidelines with regard to priority sector lending and related issues.

 

Nachiket Mor Committee, 2013

The RBI appointed a committee on comprehensive financial services for small businesses and low income under the Chairmanship of Sri Nachiket Mor member of the Central Board of Directors, RBI in the month of September, 2013. Motive of the panel is to frame a clear and detailed vision for financial inclusion and financial depending in India.

 

Recommendations of Nachiket Mor Committee

Recommendations of the Committee are as follows

• Every adult (above 18 yr) of our country should have a bank account by 1st Jan, 2016. This account will be known as Universal Electronic Bank Account (UEBA).
• Every resident should be issued an account at the time of receiving Aadhaar number (UIDAI) by a bank itself.
• It recommends abolition of interest subsidies and loan waivers. It suggested that government should transfer benefits directly to farmers.
• It recommends for payment Bank.
• Permission to banks for pricing farm loans below base rate should be withdrawn.
• Statutory Liquidity Ratio has outlived its utility for both banks NBFCs.
• It recommends raising priority sector lending cap ioi bank to 50% from the current 40%.

 

Bimal Jalan Committee/New Bank Licences, 2014

A committee, under the chairmanship of former RBI Governor Bimal Jalan, was constituted to scrutinise the application for new banks in India. The committee submitted it's report in February 2014, recommending for the ‘in-principle’ approval of banking licenses to Bandhan Microfinance and IDFC (Infrastructure Development and Finance

Corporation),

 

Within a period of 18 months these two entities are required to

• get a net worth of ? 1000 crore or more;
• open at least 25% branches in unbanked rural areas.
• These new banks will be provided licence under the Banking Regulation Act, 1949 (Section 22(1)), only after the fulfillment of these two conditions.

 

Bandhan Finance

It is a microfinance company, based in West Bengal (Kolkata). It is headed by Shri Chandra Sekhar Ghosh and has a net worth of ` 1100 crore. About 45% of its branches are in the rural areas. "Bandhan Bank' received 'in-principle' approval of the RBI in April 2014, the banking regulator gave its final nod in June 2015. Bandhan Bank started operating banking services on 24 August, 2015.

 

IDFC

The Infrastructure Development and Finance Corporation (IDFC) is based in Mumbai. It is originally an investment finance company, headed by Shri Rajiv Lal. IDFC has the net worth of Rs. 21000 crore, but with a lower rural presence. IDFC started operating banking services on 1st Oct, 2015 under RBI Banking licence.

 

Deepak Mohanty Committee, 2015

The Reserve Bank of India (RBI) has constituted a committee on 15th July, 2015 to prepare five year action plan to spread the reach of financial services across country to unbanked population.

The Committee will be headed by RBI Executive Director Deepak Mohanty and comprise total of 14 members. Deepak Mohanty is an economist at India's Central Bank, the Reserve Bank of India (RBI). He holds the post of Executive Director at the Head Office of RBI in Mumbai.

 

Various other Committees of Banking Reform

 

Year	Chairman	Area Covered
2001	YV Reddy	Small Savings Reforms
2005	VS Vyas	Credit Flow to Agriculture and Relative Activities
2007	SC Gupta	Money Lending and Enforcement Machinery
2008	Dr C Rangarajan	Financial Inclusion.
2010	Deepak Mohanty	Base Rate
2010	AK Khandelwal	HR Issues of Public Sector Banks
2011	YH Malegam	issues on Microfinance Institutions
2013	Deepak Mohanty	Data and. Information management in the RBI.
2014	Justice MB Shah	On Black Money.
2014	G Gopalakrishna	On capacity building in banks and non-banks.
2014	P J Nayak	Committee to review Governance of Boards of Banks in India.
2014	Anand Sinha	Working group on Resolution Regime for financial Institutions.
2015	LP Parthasarathi	Urban Co-operative Banks Committee on data standardization.
2015	Jasbir Singh	Committee on differential Premium System for Banks in India,
2015	Deepak Mohanty	Committee on Medium term path on financial inclusion,
2016	Sudarshan Sen	To study regulatory issues relating to financial technology and digital banking in India.
2016	NK Singh	Review and recommendations on FRBM Act.
2016	Shankar Acharya	To Examine the desirability and feasibility of having a new financial year.
2016	Amitabh Kant	To push cashless transaction

 

Innovative Banking

In India, public sector banks have also started to boost Innovative activities related to banking sector. A concise description of these activities is given below

 

Know Your Customer (KYC) Norms

The Reserve Bank of India advised banks to make the Know Your Customer (KYC) procedures mandatory while opening and operating the accounts. At the time of opening an account, bank has to ensure that the prospective customer is the person who he/she claims to be. This is to prevent fraudsters using the name, address and forged signature of others for doing fraudulent transactions, benami transactions, encashment of stolen cheques, drafts, dividend, warrants, etc.

 

Relaxed KYC Procedure

The relaxation in KYC procedures is applicable for low income group customers. Individuals falling under the 'No Frill Accounts'. Low income group customers are those who keep balances not exceeding ` 50000 in all their accounts (FDR/CA/SB) taken together and total credit summation in all the accounts taken together is not exceed ` 1 lakh in a year

The documents required by bank under KYC

'Proof of identity' under KYC	These six documents are Passport, Driving Licence, Voter's Identity Card, PAN Card, Aadhaar Card issued by UIDAI and MNREGA Job Card. Customer need to submit any one of these documents as proof of identity.
'Proof of Address’ for bank	Bank statement, electricity/telephone bill, credit card statement (should be not more than 3 months old). Or, any officially valid document which contains address details.

 

New Guideline for KYC

These are as follows

• RBI has rectified the criteria of KYC for dealing with the problems coming in the completion of KYC process of identification of bank customers. The guidelines related to this were issued on 23rd July, 2013.
• As per revised laws of RBI, the KYC formalities must be fulfilled in the following format

- High risk customers-once in two years.

- Medium risk customers - once in 8 years.

- Low risk customers - once in 10 years

• As per the RBI's new rules, banks are allowed to adopt system of current identification for making strong relation with their customers.

 

Mutual Banking

It is a financial institution chartered by a central or regional government, without capital stock, that is owned by its members who subscribe to a common fund. From this fund claims, loans etc., are paid. Profits after deductions are shared among the members.

The institution is intended to provide a safe place for individual members to save and to invest those savings in mortgages, loans, stocks, bonds and other securities and to share in any profits or losses that result. The members own the business.

 

Factoring

It is a financial transaction in which a business sells its accounts receivable (i.e. invoices) to a third party (called a factor) at a discount.

Factoring is a process of fulfilling the credit requirement by lending of material or asset to another person. This process is very popular in manufacturing industries.

 

Venture Capital (VC)

It is financial capital provided to early stage, high potential, high risk, growth startup companies. The venture capital fund earns money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology. IT and software.

 

Microfinance

It is a source of financial services for entrepreneurs and small businesses lacking access to banking and related services.

The two main mechanisms for the delivery of financial services to such clients are as follows

• Relationship-based banking for individual entrepreneurs and small businesses.
• Group-based models, where several entrepreneurs as a group come together to apply for loans and other services.

 

Islamic Banking

A banking system that is based on the principles of Islamic law (also known Shariah) and is guided by Islamic economics, is known as Islamic Banking.

Two basic principles behind Islamic banking are the sharing of profit and loss and is significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law. The Dubai Islamic Bank has the distinction of being the world's first full-fledged Islamic bank founded in 1975. Saudi Arabia's Islamic Development Bank has decided to open its first branch in India at Ahmedabad, Gujarat.

 

Electronic Banking

Electronic banking, also known as Electronic Funds Transfer (EFT), is simply the use of electronic means to transfer funds directly from one account to another, rather than by cheque or cash. Some important electronic banking services.

• Direct Deposit and Withdrawal Services It allows consumers to authorise specific deposits, such as paycheques or social security cheques, to their accounts on a regular basis.
• Payment by Phone Systems Let consumers phone their financial institutions with instructions to pay certain bills or to transfer funds between accounts.
• Point-of-Sale (POS) Transfer Terminals It allows consumers to pay for retail purchase with a cheque card, a new name for debit card, This card looks like a credit card, but with a significant difference- the money for the purchase is transferred immediately from your account to the store's account.
• Personal Computer Banking Services It offers consumers the convenience of conducting many banking transactions electronically using a personal computer (PC).
• Internet Banking Such of system allows setting up of various access levels for specific user groups and controlling the authorisation levels and transaction limits, as assigned to various employees of your company.
• Home Banking The practice of conducting banking transactions from home rather than at branch locations is known as Home Banking. Home banking generally refers to either banking over the telephone or on the internet,
• Smart Cards It is sometimes called stored-value cards, have a specific amount of credit embedded electronically in the card.
• Direct Deposit System It is also known as direct credit. It is a banking term that describes a deposit of money straight from the source into a bank account, by electronic funds transfer or other means where the payment is initiated by the payer not the payee. The money is transferred directly to the recipient bank through a payment system.
• Mobile Banking It is a system that allows customers of a financial institution to conduct a number of financial transactions through a mobile device such as a mobile phone or personal digital assistant.
• The Indian Financial Network [INFINET] It is the communication backbone for the Indian Banking and Financial Sector. All banks in the public sector, private sector, co-operative etc., and the premier financial institutions in the country are eligible to become members of the INFINET.

 

Banking Ombudsman

• Banking Ombudsman Scheme was introduced by the RBI in 14 June, 1995 under the Banking Regulation Act, 1949, It is a senior official appointed by RBI to redress customer complaints against deficiency in certain banking services.
• Decision of Banking Ombudsman can be appealed against to the appellate authority (vested in a Deputy Governor of RBI).
• Banking Ombudsman can award compensation to the complainant. In this, it takes into account the loss of the complainant's time, expenses incurred and the harassment and mental anguish suffered.
• It has jurisdiction over all Commercial Banks, RRBs, Scheduled primary co-operative banks, NBFCs, etc. It deals with matters less than or equal to Rs. 10 lakh.

 

Board of Financial Supervision

It was constituted in November 1994, as a committee of the Central Board of Directors of the Reserve Bank of India with an objective to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.

 

 

Central Board of Banking Frandulence

It was established by Finance Minister in year 1997. It was established to enquiry about CBI cases pertaining to officers of rank of chief managers.

 

Debts Recovery Tribunal

The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993. The original aim of the Debts Recovery Tribunal was to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. The Debts Recovery tribunal of India have become model institutions for many a country to follow

 

Tribunal Headquarter	Establishment	Jurisdiction of Tribunals
Debt Recovery	Appellate Tribunal
Mumbai	12 July, 1994	All Debt recovery tribunals of India
Debt Recovery Tribunals
Kolkata	27 Apr,1994	West Bengal, Andaman and Nicobar islands
Delhi	5 July, 1994	Delhi
Jaipur	30 Aug, 1994	Rajasthan, Himachal Pradesh, Punjab, Haryana and Chandigarh
Ahmedabad	21 Oct, 1994	Gujarat, Dadar and Nagar Haweli, Daman and Diu
Bengaluru	30 Nov. 1994	Karnataka and Andhra Pradesh
Chennai	4 Nov. 1995	Tamil Nadu, Kerala, Pondicherry
Guwahati	7 Jan,1997	Assam and entire North-Eastern states
Patna	24 Jan,1997	Bihar, Odisha
Jabalpur	7 Apr. 1998	Madhya Pradesh and Uttar Pradesh

 

Electronics Reforms of Banks

These are as follows

 

National Electronic Funds Transfer (NEFT)

• It is a nationwide system that facilitates individuals, firms and corporates to electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country.
• Even such individuals, firms or corporates who do not have a Bank account can also deposit cash at the NEFT. Enabled branch with instructions to transfer funds using NEFT.
• There is not limit either minimum or maximum on the amount of funds that could be transferred using NEFT.

 

Electronic Clearing Service (ECS)

• The Reserve Bank of India has introduced Electronic Clearing Service (ECS).
• This uses a series of electronic payment instructions for transfer of funds instead of paper instruments.
• The 'ECS-Credit5 enables companies to pay interest or dividend to large number of beneficiaries by direct credit of the amount to their Bank accounts.
• ECS-Debit' facilitates payment of charges to utility services, such as electricity, telephone companies, payment of insurance premium and loan instalments, directly to the customer's account with a bank.

 

Magnetic Ink Character Recognition (MICR)

• MICR is a technology which allows machines to read and process cheques enabling thousands of cheque transactions in a short time.
• The MICR encoding, called the MICR line, is at the bottom of cheques and other vouchers and typically includes the documents-type indicator, bank code, bank account number, cheque number, cheque amount, and a control indicator.
• MICR code is usually a nine digit code comprising of some important information about the transaction and the bank. The first three digits in the MICR code represent the city code that is the city in which the bank branch is located.

In most cases it is in line with the PIN code of the postal addresses in India. The next three digits stand for the bank code while the last three digits represent the bank branch code.

 

Cheque Truncation System (CTS)

• CTS or Image-based Clearing System (ICS), in India, is a project undertaken by the Reserve Bank of India (RBI) in 2008, for faster clearing of cheques.
• CTS is based on a cheque truncation or online image-based cheque clearing system where cheque images and magnetic ink character recognition (MICR) data are captured at the collecting bank branch and transmit led electronically.

 

Real Time Gross Settlement System

• RTGS system is a funds transfer mechanism for transfer of money from one bank to another on a 'real time' and on 'gross basis'.
• This is the fastest possible money transfer system through the banking channel.
• Settlement in 'real time’ means payment transaction is not subject to any waiting period. The transactions are settled as soon as they are processed. ‘Gross settlement' means the transaction is settled on one to one basis without bunching with any other transactions,
• The RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is Rs. 2 lakh. There is no upper ceiling for RTGS transactions.

 

Indian Financial System Code (IFSC)

• IFSC or Indian Financial System Code is an alphanumeric code that identifies a bank branch participating in the NEFT.
• This is a 11 digit code with the first 4 alpha characters representing the bank and last 6 numeric characters representing the branch.
• IFSC is used by NEFT (RTGS) to route the messages to the destination Banks/ Branches. RBI directs the Bank to print IFSC code on passbooks and statement of accounts

 

International Financial Reporting Standards (IFRS)

IFRS are set of International Accounting Standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board. IFRS are sometimes confused with International Accounting Standards (IAS), which are the older standards that IFRS replaced. (IAS were issued in 1973 and lasted till 2000.) IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC).

 

Tit-Bits

• The first experiments, with internet banking started in the early 1980s, but it did not become popular until the mid 1990s, when home internet access was widespread.
• In 1999 Gujarat was the first Indian state to introduce a smart card license system.
• Reserve Bank of India has stated that financial statements of banks need to be International Financial Reporting Standards (IFRS) compliant for periods beginning on after 1st April, 2011.

 

RBI Guidelines for Banks

These are as follows

 

RBI Guidelines for New Private Banks

RBI released the Guidelines for "Licensing of New Banks in the Private Sector" in February, 2013. As a part of the guidelines, RBI provided several parameters.

• Should have a past record of sound credentials and integrity, be financially sound with a successful track record of 10 yr.
• At the start of banking operations non-operative financial holding company (NOFGC) should hold a minimum of 40% of the equity capital of the bank with a lock-in period of five years. Later, it has to be brought down to 15 percent within 12 yr from that onwards.
• Separate set of RBI norms Condition of to launch 25% of branches in unbanked rural areas with population upto 9,999. New bank should also achieve priority sector lending target of 40%.
• FDI is capped at 49% fcr first five year, later as per extent norms.
• The initial minimum paid-up voting equity capital for the bank shall be 5 billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years and which shall be brought down to 15 per cent within 12 yr.

 

RBI allowed Banks to Merge, Shift or Close Branches in Urban Areas

RBI has taken decision to allow banks to merge, shift or close branches in urban areas on their own discretion. In this regard, RBI has issued a notification that mention detailed provisions of above decisions. This move will give banks greater operational freedom but it would not be valid for rural areas. As per RBI notification - Merger, shifting or closure of any rural branch as well as a sole semi-urban branch will require prior approval of the District Level Review7 Committee (DLRC) or District Consultative Committee (DCC), Banks making changes should inform customers of its branch time before actual merger, shifting or closure of the office.

 

RBI Guidelines for Merger NBFCs

According to Reserve Bank of India (RBI), Non-Banking Financial Companies (NBFCs) will take its prior approval before buying shares of other NBFCs or for merger and acquisition with another entity. This rule will be applicable to both deposit taking and non-deposit accepting companies and any infringement of it may cost the company its registration. Prior written clearance of RBI would also be mandatory before approaching the Court or Tribunal seeking order for mergers or amalgamations with other companies or NBFCs.

 

RBI Guidelines for Minors' Bank Accounts

• As per the guidelines issued by the RBI, minors above 10 yrs of age have been allowed to open and operate independently savings bank account and use other facilities like ATM and cheque books. As per the modified guidelines by RBI:
• All minors can now open a savings/fixed/recurring bank deposit account through either his/her natural guardian or legally appointed guardian.
• The minors, who have attained 10 yrs of age, will be permitted to open and operate savings bank accounts independently.
• The banks can also decide on the minimum documents which are required for opening of accounts by minors.