4372 0 Banking Module Updated

Pratik
Gupta 1
Indian Economy for IAS by Pratik Gupta

BANKING AND FINANCE IN INDIA

It is well-recognized that the financial sector plays a critical role in the development process of a country.
Financial institutions, instruments and markets that constitute the financial sector act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than they earn to
those who spend more than they earn.
The financial sector performs this economic function of intermediation through four transformation
mechanism:
1. Liability-asset transformation (that is accepting deposits as a liability and converting them into assets
such as loans)
2. Size transformation (that is, providing large loans on the basis of numerous small deposits)
3. Maturity transformation (that is, offering savers alternatives forms of deposits according to their
liquidity preferences while providing borrowers with loans of desired maturities)
4. Risk transformation (that is, distributing risk through verification which substantially reduces risks for
savers that would prevail while lending directly in the absence of financial intermediation).
The process of financial intermediation supports increasing capital accumulations through the
institutionalization of savings and investments. The gains to the real sector of the economy, therefore,
depend on how efficiently the financial sector performs this basic function of financial intermediation.

NEED FOR FINANCIAL STABILITY
Financial stability covers a number of interrelated components, which includes infrastructure
(payment and settlement system, legal framework and accounting practices), institutions (banks, securities
firms and institutional investors) and markets (stock, bond, currency, money and derivatives). A stable
financial system has the ability to resolve imbalances through self-corrective mechanism before they
precipitate a crisis.
In terms of policy, the quest for financial stability has a couple of implications. First, central banks
need to use macro-prudential norms (things like getting banks to build capital buffers during a business
upswing) to ensure that the financial system is in good fettle. Second, they need to have a set of tools at
their disposal to smooth out the impact of a server jolt to the financial system. Mere rate cuts, for instance,
turned out to be far from adequate in restoring some degree of order to the American and European inter-
bank markets. The Fed and the European Central Bank had to resort to the untested quantitative easing,
which has now become part of central banks’ standard toolkit. The use of some of these tools (massive
liquidity infusion, for instance) could seem to work against the objective of price stability and confuse the
markets. It is the job of a central bank to make sure that its policy actions are interpreted correctly.
The need for concerted efforts for ensuring financial stability has been reinforced in recent times
because of increased degree of globalization and integration of financial markets coupled with emerging
signs of volatility in these markets.
Although globalization has expanded the potential output of several economies, the ability of a
developing economy to derive benefits from financial globalization in the presence of volatility in
international capital flows can be significantly improved by the quality of its macroeconomic framework and
institutions.

INDIAN FINANCIAL SYSTEM
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The financial structure comprises not only commercial and cooperative banks but also a wide array
of specialized development banks in the areas of agriculture, industry, external trade, housing, tourism, and
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social security institutions like mutual funds or unit trusts. The structure of financial institutions is thus quite
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well-diversified. The diversification away from the banking system is greater than in the advanced
developing countries or even some developed countries.
Currently, the diversification trend has gained further momentum as the institutions are entering
new fields like leasing, factoring, merchant banking, venture capital financing and technology development.
The introduction of financial innovations—new products and processes-has resulted in financial instruments
that are better tailored to the preference patterns of households, farmers and business firms. The money
market is being developed with the introduction of new instruments like inter-bank participations,
certificates of deposits, commercial paper and 182 days treasury bills (T-Bills).
Apart from the institutions that come within the purview of the regulatory framework of the
government or the RBI, there is an unregulated segment of the financial structure or an informal market,
comprising as lenders: friends and relatives, moneylenders, traders and commission agents, indigenous
bankers and cooperative or semi-cooperative institutions. This segment still finances about 40 per cent of
the credit needs of farm and non-farm enterprises, and households. Its transactions costs are not as high, as
not much paper work is involved. Creditworthiness of borrowers is judged largely on the basis of familiarity
and personal knowledge. The borrowers’ transaction costs are also low as this market does not insist on
security and is attuned to the preference pattern of the borrowers. Interest rates are higher than in the
formal market but the low transaction costs of the borrowers partly compensate for this high interest cost.
The market is quite innovative and introduces such products and processes that the formal market does not
provide and thus improves the profitability of the borrowers.
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Evaluation of the System Despite rapid growth of the banking sector and stock markets, the size of the
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financial sector in India is among the smallest in Asia. Financial sector, the sum of domestic credit extended
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to the private sector, equity market capitalization and domestic debt securities outstanding as a percentage
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of GDP in India is 170% against China's 202%. Hong Kong's financial sector is one of the highest at 1084%.
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Singapore has the second-largest financial sector at 451% of its GDP.
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The efficiency of the financial system has to be judged on the basis of its effectiveness in increasing
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the financial saving of the household sector. On the basis of this criterion, the financial system has
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performed well. The gross savings of the household sector in the form of financial assets increased from
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Financial Sector (% of GDP)

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299 350 358 451

202 207
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about 10.0 per cent of NDP in 1965-66 but subsequently declined to 10.0 percent in 2010-12. Seventy-five
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per cent of its net surplus is made available through the financial system to finance the government sector's
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overall deficit while 25 per cent is absorbed by the private corporate sector. The net financial surplus of the
household sector mobilized by the financial system is higher as a proportion of GDP than in the advanced
developing countries like South Korea or even in several developed countries.
However, the financial system has not been able to improve its own efficiency or reduce the
transaction costs of the deposits and borrowers to any significant extent nor has it been able to perform
adequately the function of progressively improving the investment and productive efficiency of the
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enterprises it finances.
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Financial technology is still underdeveloped as compared to many advanced countries of the world.

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With the information technology industry set to be a major vehicle for productivity growth, India must be
prepared to withstand the increased possibility of output volatility through upswings and recessions. And as
it increasingly meshes with the globalized trading and financial system, India's own financial system must be
strengthened to withstand asset price shocks with policies geared to take quick remedial measures.
India has been ranked 31st in the World Economic Forum's first Financial Development Index. The
Index provides a comprehensive analysis of financial systems and capital markets in 52 countries and the
rankings are based on over 120 variables spanning institutional and business environments, financial
stability, and size and depth of capital markets.
Strategy for Restructuring In view of its weaknesses, it is necessary to formulate and implement a strategy of
restructuring the financial system as a part of the on-going structural adjustment Programme. The basic
elements of such a strategy appear to be as follows:
• correction of macro-economic imbalances to establish macro-economic stability;
• generation of competitive impulses in the financial system;
• an institutional and policy framework that ensures operational autonomy to the constituent units of
the financial system;
• formulation of sound criteria for appraisal, selection and monitoring of enterprises and projects that
seek financial assistance from the system; and
• effective legal and regulatory framework to ensure sound and healthy functioning of the financial
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system.
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MONEY
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Money can be defined as anything that is generally accepted as a means of payment. Hartley
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Withers has defined money as "the stuff with which we buy and sell things".
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FUNCTIONS OF MONEY
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Money performs four basic functions as follows:

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• Medium of exchange: Money acts as an intermediary for the goods and services in an exchange
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transaction.
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• Unit of Account or measure of value: The value of all goods and services are expressed in terms of
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money.
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Standard for Deferred Payments: Money serves as the unit in terms of which deferred or future
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payments are stated.

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• Store of value: Wealth can be stored in the form of money, as it possesses generalized purchasing
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power.
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INDIAN MONETARY SYSTEM

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Monetary system refers to the type and forms of standard money used in the economy. Indian monetary
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system is described as Paper currency standard or managed currency standard.

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The system governing note issue in India is the Minimum Reserve System. The Reserve Bank of India
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(RBI) is required to hold a minimum reserve of Rs.200 Cr in the form of gold and foreign securities, of which
not less than Rs.115 Cr must be in the form of gold. Subject to the maintenance of such reserves the RBI is
empowered to print unlimited currency by keeping the reserve.
RBI has the sole right to issue currency notes, other than one rupee note/coin and lower denomination
coins, which are issued by the government of India, under the Indian Coinage Act, 2011. However, the
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circulation of the entire currency (including notes and coins) is conducted only by the RBI.
The minimum reserve is a token of confidence and doesn’t have any practical connection with amount
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new currencies issued by the RBI. Under the Minimum Reserve System, RBI can issue unlimited amount of

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currency by keeping the reserve. But RBI follows some principle or rule for issuing new currencies based
upon economic growth and transaction needs of the people.
MONEY SUPPLY
Money supply refers to the total stock of money (of all types) held by the people of a country at
a point of time. It does not include the money held by the producers and suppliers of money i.e.
government and the banking system. It has two components i.e. currency component and deposit
component.

MEASURES OF MONEY SUPPLY
Key monetary and liquidity measures compiled in India and their definitions are set out in the
following Table.
Measures of Monetary and Liquidity Aggregates*
1. Reserve Money (M0) = Currency in Circulation + Bankers’ Deposits with the RBI +’Other’ Deposits
with the RBI (Compiled on Weekly Basis)
2. M1 = Currency with the public + Demand deposits with the banking system + ‘Other’ deposits with
the RBI. (It is known as Narrow Money)
3. M2 = M1 + Time Liabilities Portion of Savings Deposits with the Banking System + Certificates of
Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and
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including one year with the Banking System (excluding CDs)
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Currency with the Public + Current Deposits with the Banking System + Savings Deposits with the
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Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a
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contractual maturity up to and including one year with the Banking System (excluding CDs) +
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'Other ‘Deposits with the RBI

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4. M3 = M2 + Term Deposits of residents with a contractual maturity of over one year with the
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Banking System + Call/Term borrowings from 'Non-depository' Financial Corporations by the

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Banking System (known as Broad Money)

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*Note: M0 is compiled on Weekly Basis and the other three on fortnightly basis
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RESERVE BANK OF INDIA (RBI)

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RBI is the central bank of the country i.e. an apex institution of Indian monetary system. It was
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established on 1st April 1935 under the RBI Act 1934. RBI was set up as the private shareholders bank with
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paid up capital of Rs. 5 crore. It was nationalized on 1st January 1949. The Reserve Bank follows an
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accounting year from July to June, which enables it to take into account the performance of banks, which
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follow an April-March financial year. The executive head of the Bank is called the Governor, who is assisted
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by Deputy Governors and other executive officers. For general direction the Bank has a central board of
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directors, supplemented by four local boards at Delhi, Calcutta, Madras and Bombay. The head office of RBI
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is at Mumbai.
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1. Dr. Urjit R Patel, Governor of RBI

2. Shri R. Gandhi, Deputy Governor
3. Shri S. S. Mundra, Deputy Governor
4. Shri N. S. Vishwanathan, Deputy Governor
5. Dr. Viral V. Acharya, Deputy Governor (appointed on 23rd Jan, 2017)
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Functions of RBI
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i. Bank of Issue: RBI has the sole right to issue bank notes of all denominations. The issuing and
distribution of rupee one notes and coins and small coins all over the country is undertaken by the
RBI as an agent of the Government.

ii. Banker to Governments: Since its inception, the Reserve Bank of India has undertaken the
traditional central banking function of managing the government’s banking transactions. The
Reserve Bank of India Act, 1934 requires the Central Government to entrust the Reserve Bank with
all its money, remittance, exchange and banking transactions in India and the management of its
public debt. The Government also deposits its cash balances with the Reserve Bank. The Reserve
Bank may also, by agreement, act as the banker and debt manager to State Governments. Currently,
the Reserve Bank acts as banker to all the State Governments in India (including Union Territory of
Puducherry), except Sikkim. For Sikkim, it has limited agreement for management of its public debt.

iii. Banker's Bank: All commercial banks maintain current accounts with the RBI. The RBI provides
central clearinghouse facility to the banks in order to settle their mutual claims on each other. It also
provides financial assistance to the banks in the time of need so it is also called as the lender of the
last resort.

iv. Controller of money and Credit: The RBI regulates the supply of money and credit in the economy
through various instruments of monetary policy like CRR, SLR, Bank rate etc. It controls the financial
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institutions through the system of licensing, inspection and by providing guidelines.
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v. Exchange management and control: RBI manages foreign exchange rate of rupee through
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regulating norms of convertibility in respect of various foreign exchange transactions.
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vi. Custodian of Foreign Exchange Reserves: RBI maintains the reserve of foreign exchange. It acts as an
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agent of government in respect of Indian membership in the IMF.

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vii. Supervisory Functions: The RBI Act 1934 and the Banking Regulation Act 1949 have given RBI wide
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powers of supervision and control of commercial and cooperative banks.

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viii. Promotional Functions: RBI promotes banking habits, extend banking facilities to rural and semi-
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urban areas. Thus RBI has helped in setting up of various developments finance institutions like IDBI,
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ICICI, IFCI, etc.

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ix. Publication of Monetary Data: RBI collects a variety of statistical information and publishes the
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same periodically. Its important publications include 'Report on currency and finance', an annual
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publication and the 'RBI-Bulletin', a monthly magazine.

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MONETARY POLICY
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Monetary Policy is an instrument of economic policy, which acts by influencing the cost and availability
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of money and credit in economy to various sectors. To achieve balance between economic growth and
control over inflation, RBI has followed the policy of 'Controlled monetary expansion'.

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RESERVE BANK OF INDIA

Scheduled Banks None-scheduled Banks

State Coop. Commercial Central Coop. Banks Commercial
Banks Banks and Primary Credit Banks
Societies

Indian Foreign

Public Sector Private Sector Banks
Banks (Old and New)

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State Banks of India Other Nationalized Regional Rural
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And its Subsidiaries Banks Banks
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INSTRUMENTS OF MONETARY POLICY 09
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There are two broad instruments of the monetary policy of the RBI i.e. quantitative methods and
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qualitative methods as follows:

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I. Quantitative Methods or General Methods

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Such-measures regulate the volume of money and credit in the economy as a whole. Such
measures include CRR, SLR, Bank Rate and open market operation as follows:
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A. Cash Reserve Ratio (CRR) or Variable Reserve Ratio (VRR) As per RBI Act 1934, banks
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have to keep a certain proportion or percentage of their total deposits (time and demand
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liabilities) with RBI in cash. RBI can vary CRR in the range of 3 to 15%.
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*(Incremental CRR, refer class notes)

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B. Statutory Liquidity Ratio (SLR) The share of net demand and time liabilities (deposits)
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that banks must maintain in safe and liquid assets, such as, government securities, cash
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and gold. Changes in SLR often influence the availability of resources in the banking
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system for lending to the private sector. It can be varied in the range of .25 to 40%.
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C. Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount bills
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of exchange or other commercial papers. This rate has been aligned to the MSF rate
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and, therefore, changes automatically as and when the MSF rate changes alongside
policy repo rate changes.
D. Marginal Standing Facility: A facility under which scheduled commercial banks can borrow
additional amount of overnight money from the Reserve Bank by dipping into their SLR
portfolio up to a limit (currently two per cent of their net demand and time liabilities
deposits) at a penal rate of interest (currently 100 basis points above the repo rate).
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This provides a safety valve against unanticipated liquidity shocks to the banking
system. MSF rate and reverse repo rate determine the corridor for the daily movement
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in short-term money market interest rates.
*For Standing Deposit Facility- refer class notes
E. Open Market Operations (OMO) or Liquidity Adjustment Facility (LAF): It refers to buying
and selling of Government securities by the RBI in open market by or from public and banks.
The open market operations in the short-term government securities are called repos and
reverse repos.
(i) Repo: Repurchase operations or repurchase agreement. It is carried out under
the Liquidity Adjustment Facility (LAF) to stabilize short terms liquidity in the
economy. Under this RBI buys government securities for a short period (usually a
fortnight) with an agreement to sell it later.
(ii) Reverse Repos: Under this RBI sells governments short-term securities with an
agreement to buy them later.
Since October 2013, the Reserve Bank has introduced term repos (of different tenors,
such as, 7/14/28/56 days), to inject liquidity over a period that is longer than
overnight. The aim of term repo is to help develop inter-bank money market, which in
turn can set Market based benchmarks for pricing of loans and deposits, and through
that improve transmission of monetary policy.
RBI announces timetable reduction in SLR (11th Dec, 2015)
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The RBI has said that the bank's investment in government securities also known as statutory
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liquidity ratio (SLR) would be lowered to 20.5% by January 2017. As of now, banks are mandated to
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invest 21.5% of their deposits in government securities.
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According to the new timetable SLR would be reduced to by 25 basis points to 21.25% as on April 2,
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2016. It would fall to 21% by July 9, 2016. It would further be lowered from October 1, 2016 to
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20.75%. The RBI said that the last round of reduction in the SLR would be one 20.50% by January 1,
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2017.
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Latest Credit Control Rates*

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1. CRR - 04.00%
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2. SLR - 20.00%
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3. Bank Rate - 06.25%

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4. Policy Repo Rate - 06.00%

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5. Reverse Repo Rate - 05.75%

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6. MSF - 06.25%
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*As updated on 24th July, 2017

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II. Qualitative or Selective Methods

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Such measures are used to control the availability and cost of money and credit for certain
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sector of the economy. They regulate both the volume of loans and purpose for which loans are given.
They can be used for channeling, greater flow of credit into particular sectors and to restrict flow
of credit they have to keep or maintain in the form of specified liquid assets with themselves. It
can be varied in the range of 25 to 40% to certain sectors. Such measures include the following:
(a) Changing Margin requirements—Margin requirement refers to the excess of the value of
securit
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Dear Money Policy: It is associated with high bank rate and other rates of interest it is pursued to squeeze the
y liquidity from the economy through making the cost at borrowing money higher.
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require Cheap Money Policy: It is reverse of Dear Money Policy where by the bank rate and other rates of interest
are reduced In order to augment liquidity in the economy, thus making the; borrowing of money easier.

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d for a loan over the amount of loan sanctioned.
(b) Fixation of Ceilings of credit for different sector—RBI many fix maximum limit of credit for
various sectors.
(c) Discriminatory rate of interest- i.e. fixing different rates of interest for various sectors.
(d) Prohibition of discounting of Bills covering the sale of sensitive commodities i.e.
restricting the flow of credit to various sectors.
(e) Credit rationing:—i.e. fixing of quota of credit in respect of various sectors.

III. Other Measures
(a) Moral Suasion: It refers to the persuasive methods used by RBI through the letter,
conferences, periodicals, etc. to influence the operations of banking, sector.
(b) Direct Action: RBI may initiate disciplinary action against the banks in case these do not comply
with its directives. It may include imposition of monetary penalty, derecognizing of banks etc.

TYPES OF MONETARY POLICY
Contractionary Monetary Policy
It seeks to reduce the liquidity in the economy by reducing the availability of credit to commercial
sector; by reducing credit creation capacity of commercial banks and by increasing the cost of
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credit. In pursuing contraction monetary policy, bank rate, CRR, SLR is increased and under open
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market operations, RBI sells government securities. Margin requirements are also increased.
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Expansionary Monetary Policy
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Under this, it seeks to increase liquidity and consequently bank rate, SLR, CRR are decreased and
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RBI purchase government securities and margin requirements are also decreased.
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MONETARY POLICY COMMITTEE CONSTITUTION UNDER THE RESERVE BANK OF INDIA ACT, 1934
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The Reserve Bank of India Act, 1934 (RBI Act) has been amended by the Finance Act, 2016, to provide for a
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statutory and institutionalized framework for a Monetary Policy Committee, for maintaining price stability,
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while keeping in mind the objective of growth. The Monetary Policy Committee would be entrusted with the
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task of fixing the benchmark policy rate (repo rate) required to contain inflation within the specified target
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level. A Committee-based approach for determining the Monetary Policy will add lot of value and
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transparency to monetary policy decisions. The meetings of the Monetary Policy Committee shall be held at
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least 4 times a year and it shall publish its decisions after each such meeting.
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The provisions of the RBI Act relating to Monetary Policy have been brought into force through a Notification
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in the Gazette of India Extraordinary on 27.6.2016. The factors constituting failure to meet inflation target
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under the Monetary Policy Committee Framework have also been notified in the Gazette on 27.6.2016. The
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Government, in consultation with RBI, has notified the inflation target in the Gazette of India Extraordinary
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dated 5th August 2016 for the period beginning from the date of publication of this notification and ending
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on the March 31, 2021, as under:-

Inflation Target: Four per cent.
Upper tolerance level: Six per cent.
Lower tolerance level: Two per cent.

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As per the provisions of the RBI Act, out of the six Members of Monetary Policy Committee, three Members
will be from the RBI and the other three Members of MPC will be appointed by the Central Government. In
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exercise of the powers conferred by section 45ZB of the Reserve Bank of India Act, 1934, the Central
Government has accordingly constituted, through a Gazette Notification dated 29th Sept 2016, the Monetary
Policy Committee of RBI, with the following composition, namely:-

1. The Governor of the Bank—Chairperson, ex officio;
2. Deputy Governor of the Bank, in charge of Monetary Policy—Member, ex officio;
3. One officer of the Bank to be nominated by the Central Board—Member, ex officio;
4. Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) —Member
5. Professor Pami Dua, Director, Delhi School of Economics (DSE) — Member
6. Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management (IIM), Ahmedabad— Member

The Members of the Monetary Policy Committee appointed by the Central Government shall hold office for
a period of four years, with immediate effect or until further orders, whichever is earlier.

MONETARY POLICY FRAMEWORK AGREEMENT
The Government of India and Reserve Bank of India (RBI) signed a Monetary Policy Framework Agreement
on 20th February 2015. The objective of monetary policy framework is to primarily maintain price stability,
while keeping in mind the objective of growth. As per the agreement, RBI would set the policy interest rates
and would aim to bring inflation below 6 per cent by January 2016 and within 4 per cent with a band of (+/-)
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2 per cent for 2016-17 and all subsequent years. The proposed reduction in fiscal deficit to 3.9 per cent of
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GDP in Budget Estimates 2015-16 is designed with a mix of reduction in total expenditure as percentage of
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GDP and improvement in gross tax revenue as percentage of GDP.
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CURRENT BANKING PATTERN IN INDIA 09
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Scheduled Bank
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All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are scheduled
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banks.
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These banks comprise Scheduled Commercial Banks and Scheduled Cooperative Banks. The type of
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banks comes under these Scheduled Commercial Banks and Scheduled Cooperative Banks can be seen in the
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above figure. Almost all banks are Scheduled banks in India.

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Commercial Banks
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Commercial banks may be defined as, any banking organization that deals with the deposits and loans of
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business organizations.
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Commercial banks issue bank checks and drafts, as well as accept money on term
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deposits. Commercial banks also act as moneylenders, by way of installment loans and overdrafts.
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Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time
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deposit. These institutions are run to make a profit and owned by a group of individuals.

Public Sector Banks

These are banks where majority stake is held by the Government of India. Examples of public sector banks
are: SBI, Bank of India, Canara Bank, Vijaya Bank, Allahabad Bank, Bank of Baroda, Bank of Maharashtra,
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Corporation Bank, etc.

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Private Sector Banks

These are banks majority of share capital of the bank is held by private individuals. These banks are
registered as companies with limited liability. Examples of private sector banks are: ICICI Bank, Axis bank,
HDFC, etc.

Foreign Banks
These banks are registered and have their headquarters in a foreign country but operate their
branches in our country. Examples of foreign banks in India are: HSBC, Citibank, Standard Chartered Bank,
etc.

Regional Rural Banks

Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th
September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for
agriculture and other rural sectors. The area of operation of RRBs is limited to the area as notified by
Government of India (GoI) covering one or more districts in the State.

RRBs are jointly owned by GoI, the concerned State Government and Sponsor Banks (all scheduled
commercial banks and one State Cooperative Bank); the issued capital of a RRB is shared by the owners in the
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proportion of 50%, 15% and 35% respectively.
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Prathama Bank is the first Regional Rural Bank in India located in the city Moradabad in Uttar
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Currently, RRB's are going through a process of amalgamation and consolidation. 25 RRBs have been
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amalgamated in January 2013 into 10 RRBs. This counts 67 RRBs till the first week of June 2013. This counts
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56 as of March 2015. On 31 March 2006, there were 133 RRBs (post-merger) covering 525 districts with a
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network of 14,494 branches. All RRBs were originally conceived as low cost institutions having a rural ethos,
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local feel and pro poor focus. However, within a very short time, most banks were making losses. The
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original assumptions as to the low cost nature of these institutions were belied. This may be again
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amalgamated in near future. At present there are 56 RRBs in India.

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Recapitalization of Regional Rural Banks

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Subsequent to review of the financial status of RRBs by the Union Finance Minister in August, 2009, it was
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felt that a large number of RRBs had a low Capital to Risk weighted Assets Ratio (CRAR). A committee was
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therefore constituted in September, 2009 under the Chairmanship of K C Chakrabarty, Deputy Governor, RBI
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to analyze the financials of the RRBs and to suggest measures including re-capitalisation to bring the CRAR of
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RRBs to at least 9% in a sustainable manner by 2012.

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The Committee submitted its report in May, 2010. The following points were recommended by the
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committee:
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• RRBs to have CRAR of at least 7% as of 31 March 2011 and at least 9% from 31 March 2012 onwards.
recapitalization requirement of Rs. 2,200.00 crore for 40 of the 82 RRBs. This amount is to be
released in’ two installments in 2010-11 and 2011-12. .
• The remaining 42 RRBs will not require any capital and will be able to maintain CRAR of at least 9%
ifs on 31 st March 2012 and thereafter on their own.
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• A fund of Rs. 100 crore to be set up for training and capacity building of the RRB staff.

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The Government of India recently approved the recapitalization of Regional Rural Banks (RRBs) to improve

Pratik Gupta 11

their Capital to Risk Weighted Assets Ratio CRAR) in the following manner:

• Share of Central Government i.e. Rs.1, 100 crore will be released as per provisions made by the
Department of Expenditure in 2010-11 and 2011-12. However, release of Government of India share
will be contingent on proportionate release of State Government and Sponsor Bank share.
• A capacity building fund with a corpus of Rs.100 crore to be set up by Central Government with
NABARD for training and capacity building of the RRB staff in the institution of NABARD and other
reputed institutions. The functioning of the Fund will be periodically reviewed by the Central
Government. An Action Plan will be prepared by NABARD in this regard and sent to Government for
approval.
• Additional amount of Rs. 700 crore as contingency fund to meet the requirement of the weak RRBs,
particularly those in the North Eastern and Eastern Region, the necessary provision will be made in
the Budget as and when the need arises.

Cooperative Banks

A co-operative bank is a financial entity, which belongs to its members, who are at the same time the
owners and the customers of their bank. Co-operative banks are often created by persons belonging to the
same local or professional community or sharing a common interest. Co-operative banks generally provide
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their members with a wide range of banking and financial services (loans, deposits, banking accounts, etc).
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They provide limited banking products and are specialists in agriculture-related products.
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Cooperative banks are the primary financiers of agricultural activities, some small-scale industries
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and self-employed workers.
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Co-operative banks function on the basis of "no-profit no-loss". Anyonya Co-operative Bank Limited
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(ACBL) is the first co-operative bank in India located in the city of Vadodara in Gujarat.
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STATE BANK OF INDIA AND ITS SUBSIDIARIES

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State Bank of India (SBI) is an Indian multinational, public sector banking and financial services
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company. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As of 2014-

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15, it had assets of INR 20,480 billion (USD 310 billion) and more than 14,000 branches, including 191 foreign
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offices spread across 36 countries, making it the largest banking and financial services company in India by
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assets. The company is ranked 232nd on the Fortune Global 500 list of the world's biggest corporations as of
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2016.
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State Bank of India is one of the Big Four banks of India, along with ICICI Bank, Bank of Baroda and
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Punjab National Bank.

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The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding, in
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1806, of the Bank of Calcutta (later renamed as Bank of Bengal), making it the oldest commercial bank in the
Indian Subcontinent. Bank of Madras merged into the other two "presidency banks" in British India, Bank of
Calcutta and Bank of Bombay, to form the Imperial Bank of India, which in turn became the State Bank of
India in 1956. Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve Bank of India,
which is India's central bank, acquired a controlling interest in the Imperial Bank of India. On 1 July 1955, the
11
imperial Bank of India became the State Bank of India. In 2008, the Government of India acquired the
Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the RBI is the country's
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banking regulatory authority.

Pratik Gupta 12

State Bank of India is a banking behemoth and has 20% market share in deposits and loans among
Indian commercial banks. SBI provides a range of banking products through its vast network of branches in
India and overseas, including products aimed at non-resident Indians (NRIs). The State Bank Group, with over
18,324 branches, has the largest banking branch network in India. SBI has 14 local head offices situated at
Chandigarh, Delhi, Lucknow, Patna, Kolkata, Guwahati (North East Circle), Bhuwaneshwar, Hyderabad,
Chennai, Trivandram, Bangalore, Mumbai, Bhopal & Ahmadabad and 57 Zonal Offices that are located at
important cities throughout the country. It also has 157 branches overseas.

Associate Banks of SBI

SBI has five associate banks; all use the same logo of a blue circle and all the associates use the "State Bank
of" name, followed by the regional headquarters' name:
§ State Bank of Bikaner & Jaipur
§ State Bank of Hyderabad
§ State Bank of Mysore
§ State Bank of Patiala
§ State Bank of Travancore

Earlier SBI had only seven associate banks that constituted the State Bank Group. Originally, the then
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seven banks that became the associate banks belonged to princely states until the government nationalized
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them between October 1959 and May 1960. In tune with the first Five Year Plan, emphasizing the
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development of rural India, the government integrated these banks into the State Bank of India system to
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expand its rural outreach. There has been a proposal to merge all the associate banks into SBI to create a
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"mega bank" and streamline operations.
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The first step towards unification occurred on 13 August 2008 when State Bank of Saurashtra merged
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with SBI, reducing the number of state banks from seven to six. Then on 19 June 2009 the SBI board
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approved the merger of its subsidiary, State Bank of Indore, with itself. SBI holds 98.3% in State Bank of
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Indore. (Individuals who held the shares prior to its takeover by the government hold the balance of 1.77 %.)
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The acquisition of State Bank of Indore added 470 branches to SBI's existing network of 12,448 and over
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21,000 ATMs. Also, following the acquisition, SBI's total assets will inch very close to the 10 trillion mark.
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The total assets of SBI and the State Bank of Indore stood at 9,981,190 million as of March 2009. The
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process of merging of State Bank of Indore was completed by April 2010, and the SBI Indore branches
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started functioning as SBI branches on 26 August 2010.

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The negotiations for merging of 5 associate banks State Bank of Bikaner and Jaipur, State Bank of
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Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore and Bharatiya Mahila
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Bank by acquire their businesses including assets and liabilities with SBI started in 2016. The merger of these
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six subsidiaries was approved by Union Cabinet on 15 June 2016. The State Bank of India and all its associate
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banks are identified by the same blue keyhole logo. The State Bank of India wordmark usually has one
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standard typeface, but also utilizes other typefaces.

As of 31 March 2016, SBI has 49,577 ATMs & SBI group (including associate banks) has 58,541 ATMs.

From April 1, 2017 the country’s banking behemoth State Bank of India (SBI) will grow even bigger in size
12
to become a Rs 44-lakh crore entity after the merger of five associate banks — State Bank of Bikaner and
Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore
— with SBI, making it the world’s 45th largest banking entity.
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Pratik Gupta 13

NON-BANKING SUBSIDIARIES OF SBI
Apart from its five associate banks, SBI also has the following non-banking subsidiaries:

§ SBI Capital Markets Ltd
§ SBI Funds Management Pvt. Ltd
§ SBI Factors & Commercial Services Pvt. Ltd
§ SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
§ SBI DFHI Ltd
§ SBI Life Insurance Company Ltd.
§ SBI General Insurance.

After the end of Pratip Chaudhuri reign as SBI chairman on 07 Oct, 2013, the post was taken over
by Arundhati Bhattacharya, who was the former managing director (MD) and chief financial officer (CFO) at
SBI.

Bharatiya Mahila Bank

Bharatiya Mahila Bank Ltd is the first of its kind in the Banking Industry in India formed with a vision of
economic empowerment for women. Incorporated under the Companies Act 1956 on 5 August 2013, the
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Bank received the certificate of commencement of Business on 22 August 2013 and the Banking License
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from RBI on 25 September 2013. The Bank’s Corporate Office is at the IFCI Towers, 9th floor, Nehru Place,
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New Delhi.
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Inaugurated on 19 November 2013, the Bank, at present has 23 branches across the country and
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aims to add 55 - 60 branches in the current financial year.
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While the Bank will be focussing on the entire pyramid of Indian women, special attention will be
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given to economically neglected, deprived, discriminated, underbanked, unbanked, rural and urban women
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to ensure inclusive and sustainable growth. The Bank with a team of professionals with rich experience and
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expertise has designed and developed new products and services to suit the needs of women of all segments
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including Self Help Groups, women entrepreneurs, salaried women, HNIs and Corporates.
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The Savings Bank rate of interest for Rupees One lakh and above is 5% and for amount less than Rs.
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One lakh, the interest rate is 4.5%. The Bank has designed many women centric products keeping in mind
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the core strengths of women so as to enable them to unleash their hidden potentials, engage in economic
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activities and contribute to the economic growth of the country. Most of the products are offered with a
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concession in the rate of interest for women customers.

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The Bank also conducts programmes on financial literacy, skill development, training for women of
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all segments of the society so that women in turn generate more income, more jobs and growth
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opportunities and contribute significantly for the economic growth of the nation.
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The Bank with an all women Board of Directors is headed by Mrs. Usha Ananthasubramanian as
Chairman and Managing Director of the Bank. The Bank has been allocated with an initial capital of Rs. 1000
Crores.

State Bank of India has kick-started the formal process of merging associate banks and Bharatiya
13
Mahila Bank, which would create a banking entity with total assets worth about Rs 29 lakh crore. The bank
has appointed merchant bankers, valuation consultants and law firms to complete the process.

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Pratik Gupta 14

Banking License to new Banks by RBI

The Reserve Bank of India (RBI) on 2nd April, 2014 granted two preliminary licenses to set up new banks in a
country where only one household in two has access to formal banking services.

The approval of licenses for IDFC Ltd and Bandhan Financial Services marks the start of a cautious
experiment for a sector dominated by lethargic state lenders, many of which are reluctant to expand into
rural areas or towns where banking penetration is low. No new Indian bank has been formed since Yes Bank
in 2004.

P J NAYAK COMMITTEE
On 20th January 2014, Reserve Bank of India (RBI) constituted an Expert Committee, under the
Chairmanship of Shri P.J.Nayak, Ex-Chairman of Axis Bank, to review “Governance of the Boards of Banks in
India”.
The Committee has submitted its Report on 12th May 2014 recommending, inter alia,
(i) scrapping of Bank Nationalisation Acts, SBI Act and SBI (Subsidiary Banks) Act,
(ii) Converting all PSBs into Companies under the Companies Act,
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(iii) Formation of a “Bank Investment Company” (BIC) under the Companies Act and transfer of all Shares
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held by the Central Government in PSBs to the newly formed BIC
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(iv) Controlling authority/power of the Central Government over PSBs to the transferred to
BIC which would, in turn, hand over the same to respective Boards of the PSBs, 09
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(v) Government’s concern about PSBs would be limited only to earning “return on investment” and BIC’s
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ultimate responsibility would be limited only to ensuring a fair “return on investment” to the Central
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Government,
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(vi) appointment of CEOs, other “inside Directors” and top Executives of PSBs would be vested in “Bank
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Boards Bureau” (BBB) comprising of three serving or retired Chairmen of Banks and the Government
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would have no say in the matter,

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(vii) proportionate voting right to all shareholders,

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(viii) reduction of Government’s share-holding to 40%,

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AND LAST, BUT THE MOST SERIOUS OF IT ALL,

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(ix) “Cases of vigilance enforcement against whole-time directors and other bank employees for decisions
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taken by them must be based on evidence that the director or employee personally made a wrongful gain.
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For levelling criminal charges, fraud must manifest itself through evidence of self-benefit. In loan and
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expenditure cases, deviations from procedure must not constitute the sole basis for initiating criminal
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action.”
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The “Recommendations” of the Committee is a step forward to Privatisation of

Public Sector Banks in tune with the neo-liberal reforms agenda being pursued by the Central
Government since early 1990s.
What is more alarming is that it would also open up flood gates for more liberalized loot of Banks’ Funds
14
(that is people’s savings); as per the recommendation (point - ix hereinabove), criminal intent and/or
criminal breach of trust and/or flouting of rules & regulations, etc,
would not be enough to warrant criminal charge unless and until “self-benefit” is established against the
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Pratik Gupta 15

culprit.
But the recommendations of this committee was never implemented because UFBU had given a call for
holding demonstrations in all centres all over the country after the recommendations of this committee was
made public by the government.

SMALL AND PAYMENT BANKS

Within a week of the budget 2014-15 in July 2014, RBI issued draft guidelines for setting up small banks and
payment banks. RBI in its guidelines said that both payment banks and small banks are ‘niche’ or
differentiated banks, with the common objective of furthering financial inclusion.

Common Points for both Small and Payment Bank

• The minimum capital requirement would be Rs 100 crore.
• Promoter contribution would be at least 40 per cent for the first five years. Excess shareholding should
be brought down to 40 per cent by the end of fifth year, to 30 per cent by the end of 10th year and to 26
per cent in 12 years from the date of commencement of business
• Foreign shareholding in these banks will be as per current FDI policy
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• Voting rights to be line with the existing guideline for private banks
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• Entities other than promoters will not be permitted to have shareholding in excess of 10 per cent.
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• The bank should comply with the corporate governance guidelines, including ‘fit and proper’ criteria for
Directors as issued by RBI 09
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• Operations of the bank should be fully networked and technology driven from the beginning
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Small Banks
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• The purpose of the small banks will be to provide a whole suite of basic banking products such as
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deposits and supply of credit, but in a limited area of operation.

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• The objective for these Small Banks is to increase financial inclusion by provision of savings vehicles to
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under-served and unserved sections of the population, supply of credit to small farmers, micro and small
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industries, and other unorganised sector entities through high technology-low cost operations.
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• Resident individuals with 10 years of experience in banking and finance, companies and Societies will be
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eligible as promoters to set up small banks. NFBCs, micro finance institutions (MFIs), and Local Area
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Banks (LABs) can convert their operations into those of a small bank. Local focus and ability to serve
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smaller customers will be a key criterion in licensing such banks.

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• Branch expansion: For the initial three years, prior approval will be required.
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• The area of operations would normally be restricted to contiguous districts in a homogenous cluster of
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states of union territories so that the Small Bank has a ‘local feel’ and culture. However, if necessary, it
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would be allowed to expand its area of operations beyond contiguous districts in one or more states
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with reasonable geographical proximity.

• The bank shall primarily undertake basic banking activities of accepting deposits and lending to small
farmers, small businesses, micro and small industries, and unorganised sector entities. It cannot set up
subsidiaries to undertake non-banking financial services activities. After the initial stabilisation period of
five years, and after a review, the RBI may liberalise the scope of activities for Small Banks.
15
• The promoters’ other financial and non-financial services activities, if any, should be distinctly ring-
fenced and not co-mingled with banking business.
• A robust risk management framework is required and the banks would be subject to all prudential norms
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and RBI regulations that apply to existing commercial banks, including maintenance of CRR and SLR.

Pratik Gupta 16

• In view of concentration of area of operations, the Small Bank would need a diversified portfolio of
loans, spread over it area of operations.
• The maximum loan size and investment limit exposure to single/group borrowers/issuers would be
restricted to 15 per cent of capital funds.
• Loans and advances of up to Rs 25 lakhs, primarily to micro enterprises, should constitute at least 50 per
cent of the loan portfolio.
• For the first three years, 25 per cent of branches should be in unbanked rural areas.

Payments Banks

• Objective of payments banks is to increase financial inclusion by providing small savings accounts,
payment/remittance services to migrant labour, low income households, small businesses, other
unorganized sector entities and other users by enabling high volume-low value transactions in deposits
and payments/remittance services in a secured technology-driven environment.
• Those who can promote payments banks can be a non-bank PPIs, NBFCs, corporate’s, mobile telephone
companies, super market chains, real sector cooperatives companies and public sector entities. Even
banks can take equity in Payments Banks.
• Payments Banks can accept demand deposits (only current account and savings accounts). They would
initially be restricted to holding a maximum balance of Rs 100,000 per customer. Based on performance,
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the RBI could enhance this limit.
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• The banks can offer payments and remittance services, issuance of prepaid payment instruments,
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internet banking, functioning as business correspondent for other banks.
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• Payments Banks cannot set up subsidiaries to undertake NBFC business.
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• As in the case of Small Banks, other financial and non-financial services activities of the promoters
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should be ring-fenced.
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• The Payments Banks would be required to use the word ‘Payments’ in its name to differentiate it from
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other banks.
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• No credit lending is allowed for Payments Banks.

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• The float funds can be parked only in less than one year G-Secs
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RBI grants “In-principle” Approval to 10 Applicants for Small Finance Banks

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The Reserve Bank of India (RBI) has today decided to grant “in-principle” approval to the following 10
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applicants to set up small finance banks under the “Guidelines for Licensing of Small Finance Banks in the
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private sector” (Guidelines) issued on November 27, 2014.

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Names of selected applicants

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1. Au Financiers (India) Ltd., Jaipur

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2. Capital Local Area Bank Ltd., Jalandhar

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3. Disha Microfin Private Ltd., Ahmedabad

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4. Equitas Holdings P Limited, Chennai

5. ESAF Microfinance and Investments Private Ltd., Chennai
6. Janalakshmi Financial Services Private Limited, Bengaluru
7. RGVN (North East) Microfinance Limited, Guwahati
8. Suryoday Micro Finance Private Ltd., Navi Mumbai
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9. Ujjivan Financial Services Private Ltd., Bengaluru

10. Utkarsh Micro Finance Private Ltd., Varanasi
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Pratik Gupta 17

The “in-principle” approval granted will be valid for 18 months to enable the applicants to comply with the
requirements under the Guidelines and fulfil other conditions as may be stipulated by the RBI. On being
satisfied that the applicants have complied with the requisite conditions laid down by it as part of “in-
principle” approval, the RBI would consider granting them a licence for commencement of banking business
under Section 22(1) of the Banking Regulation Act, 1949.
Until a regular licence is issued, the applicants cannot undertake any banking business.
Selection process
The RBI has selected these applicants after three different committees contributing to the final decision,
backed by detailed case study for each applicant. The selection process involved the following steps:
A preliminary scrutiny of all the applications involving prima facie eligibility including the ability to raise the
minimum initial capital and the status of ownership and control by residents as per the Guidelines was
carried out by the RBI team. The findings of the preliminary scrutiny were presented to an External Advisory
Committee (EAC) constituted under the Chairmanship of Smt. Usha Thorat, former Deputy Governor of the
RBI. The EAC recommended applications to be taken up for detailed examination based on prima
facie eligibility vis-à-vis the Guidelines.
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The detailed scrutiny involved assessment of financial soundness, proposed business plan, fit and proper
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status based on due diligence reports received from the regulators, investigative agencies, banks, etc. An
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important factor was proposed reach into unbanked areas and underserved sections of the population. The
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EAC held detailed discussions in multiple sittings on the applications based on the information presented to
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it. The EAC then submitted its recommendations to the RBI.

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An Internal Screening Committee (ISC), consisting of the Governor and the four Deputy Governors of the RBI
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thereafter examined the applications. The ISC also deliberated on the rationale of the recommendations
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made by the EAC. After scrutinising all the applications, the ISC made its independent recommendations to
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the Committee of the Central Board (CCB) of the RBI. In the meeting of the CCB held on September 16, 2015,
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the external members of the CCB went through the notes, recommendations of EAC and ISC and decided the
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list of applicants for granting in-principle approval. The Chairman of the EAC was also invited to explain the
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rationale for the Committee’s recommendations.

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Going forward, the Reserve Bank intends to use the learning from this licensing round to appropriately revise
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the Guidelines and move to giving licences more regularly, that is, virtually “on tap”.
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Background
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It may be recalled that the Committee on Financial Sector Reforms (Chairman: Dr. Raghuram G. Rajan), 2009
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had examined the relevance of small banks in the Indian context. The Committee had opined that there was
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sufficient change in the environment to warrant experimentation with licensing of small banks. It
recommended allowing more entry to private well-governed deposit-taking small finance banks (SFBs)
offsetting their higher risk from being geographically focussed by requiring higher capital, a strict prohibition
on related party transactions, and lower allowable concentration norms. This was reiterated in the
policy discussion paper on Banking Structure in India – The Way Forward that was placed by the Reserve
17
Bank of India on its website on August 27, 2013.

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In the Union Budget 2014-2015 presented on July 10, 2014, the Hon’ble Finance Minister announced that:

Pratik Gupta 18

“After making suitable changes to current framework, a structure will be put in place for continuous
authorisation of universal banks in the private sector in the current financial year. RBI will create a
framework for licensing small banks and other differentiated banks. Differentiated banks serving niche
interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of
small businesses, unorganised sector, low income households, farmers and migrant work force”.
Draft guidelines for licensing of small finance banks were released for public comments on July 17, 2014.
Based on the comments and suggestions received on the draft guidelines, final guidelines for licensing of
small finance banks were issued on November 27, 2014. The Reserve Bank also issued clarifications to the
queries (numbering 176) on the guidelines on January 1, 2015. The Reserve Bank received 72 applications for
small finance banks. Subsequently, Microsec Resources Private Limited, Kolkata withdrew its application. In
respect of another application made by Shri Ajay Singh Bimbhet and others, two of the co-promoters
withdrew their candidature and thereby the application was deemed to have been withdrawn.
Additional Details
The guidelines provided that after initial screening for prima facie eligibility, the applications would be
referred to an External Advisory Committee (EAC) constituted for the purpose. Accordingly, to screen the
applications, and to recommend licences only to those applicants who comply with the Guidelines, the
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Reserve Bank, on February 4, 2015, set up an EAC chaired by Smt. Usha Thorat, former Deputy Governor,
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Reserve Bank of India. EAC had three members: Shri M. S. Sahoo, former member SEBI; Shri M. S. Sriram,
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Professor at Indian Institute of Management (IIM) Bangalore and Shri M. Balachandran, Chairman, National
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Payments Corporation of India. Later, as Shri M. S. Sahoo, recused himself from the Committee on account
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of his appointment as a member of Competition Commission of India, the Reserve Bank, in April 2015,
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appointed Shri Ravi Narain, Vice Chairman, National Stock Exchange of India Limited to the Committee.
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UJJIVAN BANK
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Ujjivan received the final license from the Reserve Bank of India on 11th November 2016, which allowed it to
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set up Small Finance Bank business in India.

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“A license authorizing the bank to carry on small finance bank business has been obtained from the RBI in
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terms of section 22 of the Banking (Regulation) Act, 1949. It must be distinctly understood, however, that in
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issuing the license, the Reserve Bank of India does not undertake any responsibility for the financial
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soundness of the bank or for the correctness of any of the statements made or opinion expressed in this
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connection.“
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Pratik Gupta 19

DOMESTIC SYSTEMICALLY IMPORTANT BANKS (D-SIBS)
The Reserve Bank of India announced the designation of State Bank of India and ICICI Bank Ltd. as Domestic
Systemically Important Banks (D-SIBs).
The Reserve Bank had issued the Framework for dealing with Domestic Systemically Important Banks (D-
SIBs) on July 22, 2014. The D-SIB Framework requires the Reserve Bank to disclose the names of banks
designated as D-SIBs every year in August starting from August 2015. The Framework also requires that D-
SIBs may be placed in four buckets depending upon their Systemic Importance Scores (SISs). Based on the
bucket in which a D-SIB is placed, an additional common equity requirement has to be applied to it, as
mentioned in the D-SIB Framework.
The D-SIB Framework specifies a two-step process of identification of D-SIBs. In the first step, the sample of
banks to be assessed for systemic importance has to be decided. The selection of banks in the sample for
computation of SIS is based on analysis of their size as a percentage of annual GDP.
Based on the methodology provided in the D-SIB Framework and data collected from banks as on March 31,
2015, the banks identified as D-SIBs and associated bucket structure are as under:
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Additional Common Equity Tier 1 requirement
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Bucket Banks as a percentage of Risk Weighted Assets
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(RWAs)
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5 - 1.0%
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3 State Bank of India 0.6%

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2 - 0.4%
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1 ICICI Bank 0.2%

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The additional Common Equity Tier 1 (CET1) requirements applicable to D-SIBs will be applicable from April
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1, 2016 in a phased manner and would become fully effective from April 1, 2019. The additional CET1
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requirement will be in addition to the capital conservation buffer.

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Further, as mentioned in the D-SIB Framework, in case a foreign bank having branch presence in India is
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a Global Systemically Important Bank (G-SIB), it has to maintain additional CET1 capital surcharge in India as
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applicable to it as a G-SIB, proportionate to its Risk Weighted Assets (RWAs) in India.

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Sample of Banks
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The banks having size as a percentage of GDP beyond, 2% will be selected in the sample of banks.
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Weightage
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S. Indicator Sub-indicator Indicator

No. weight
1 Size ( total exposure as defined -- 40%
for use in Basel III Leverage Ratio)
Intra-financial system assets 6.67%
19
2 Interconnectedness Intra-financial system liabilities 6.67%

Securities outstanding 6.67%
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3 Substitutability Assets Under Custody 6.67%

Pratik Gupta 20

Payments made in INR using RTGS and NEFT systems 6.67%
Underwritten transactions in debt and equity markets 6.67%
Notional amount of OTC Derivatives 6.67%
Cross Jurisdictional Liabilities 6.67%
4 Complexity
Securities in Held For Trading and Available for Sale 6.67%
categories

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Pratik Gupta 21

NON-BANKING FINANCIAL INSTITUTIONS OR COMPANY (NBFCS)

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authority or other marketable securities of a like nature, leasing, hire-
purchase, insurance business, chit business but does not include any institution whose principal business is
that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or
providing any services and sale/purchase/construction of immovable property. A non-banking institution
which is a company and has principal business of receiving deposits under any scheme or arrangement in
one lump sum or in installments by way of contributions or in any other manner, is also a non-banking
financial company (Residuary non-banking company).

What does conducting financial activity as “principal business” mean?

Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent
of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A
company which fulfils both these criteria will be registered as NBFC by RBI. The term 'principal business' is
not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only
companies predominantly engaged in financial activity get registered with it and are regulated and
supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity,
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purchase and sale of goods, providing services or purchase, sale or construction of immovable property as
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their principal business and are doing some financial business in a small way, they will not be regulated by
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the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine
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NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?
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NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a
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few differences as given below:

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• NBFC cannot accept demand deposits;

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• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on
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itself;
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• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to
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depositors of NBFCs, unlike in case of banks.

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Is it necessary that every NBFC should be registered with RBI?

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In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on
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business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank
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and without having a Net Owned Funds of 25 lakhs ( Two crore since April 1999). However, in terms of
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the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by
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other regulators are exempted from the requirement of registration with RBI viz. Venture Capital
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Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company
holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of
the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act,
1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit
company.
21

What are the requirements for registration with RBI?
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Pratik Gupta 22

A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-
banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the
following:
• it should be a company registered under Section 3 of the companies Act, 1956
• It should have a minimum net owned fund of 200 lakh. (The minimum net owned fund (NOF)
required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated separately in the FAQs
on specialized NBFCs)
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NABARD
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National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India having
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headquarters based in Mumbai (Maharashtra) and other branches are all over the country. The Committee
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to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAFICARD), set up
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by the Reserve Bank of India (RBI) under the Chairmanship of Shri B. Sivaraman, conceived and
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recommended the establishment of the National Bank for Agriculture and Rural Development (NABARD). It
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was established on 12 July 1982 by a special act by the parliament and its main focus was to uplift rural India
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by increasing the credit flow for elevation of agriculture & rural non-farm sector and completed its 25 years
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on 12 July 2007. It has been accredited with "matters concerning policy, planning and operations in the field
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of credit for agriculture and other economic activities in rural areas in India". RBI sold its stake in NABARD to
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the Government of India, which now holds 99% stake. NABARD is active in developing financial inclusion
policy and is a member of the Alliance for Financial Inclusion.

NABARD is the apex institution in the country which looks after the development of the cottage industry,
small industry and village industry, and other rural industries. NABARD also reaches out to allied economies
22
and supports and promotes integrated development. And to help NABARD discharge its duty, it has been
given certain roles as follows:

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§ Serves as an apex financing agency for the institutions providing investment and production credit

Pratik Gupta 23

for promoting the various developmental activities in rural areas
§ Takes measures towards institution building for improving absorptive capacity of the credit delivery
system, including monitoring, formulation of rehabilitation schemes, restructuring of credit
institutions, training of personnel, etc.
§ Co-ordinates the rural financing activities of all institutions engaged in developmental work at the
field level and maintains liaison with Government of India, State Governments, Reserve Bank of India
(RBI) and other national level institutions concerned with policy formulation
§ Undertakes monitoring and evaluation of projects refinanced by it.
§ NABARD refinances the financial institutions which finances the rural sector.
§ The institutions which help the rural economy, NABARD helps develop.
§ NABARD also keeps a check on its client institutes.
§ It regulates the institution which provides financial help to the rural economy.
§ It provides training facilities to the institutions working the field of rural upliftment.
§ It regulates the cooperative banks and the RRB’s, and manages talent acquisition through IBPS CWE.

NABARD's refinance is available to State Co-operative Agriculture and Rural Development Banks
(SCARDBs), State Co-operative Banks (SCBs), Regional Rural Banks (RRBs), Commercial Banks (CBs) and other
financial institutions approved by RBI. While the ultimate beneficiaries of investment credit can be
individuals, partnership concerns, companies, State-owned corporations or co-operative societies,
production credit is generally given to individuals. NABARD has its head office at Mumbai, India.
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NABARD operates throughout the country through its 28 Regional Offices and one Sub-office, located in
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the capitals of all the states/union territories. Each Regional Office [RO] has a Chief General Manager [CGMs]
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as its head, and the Head office has several Top executives like the Executive Directors [ED], Managing
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Directors[MD], and the Chairperson. It has 336 District Offices across the country, one Sub-office at Port Blair
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and one special cell at Srinagar. It also has 6 training establishments.

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NABARD is also known for its 'SHG Bank Linkage Programme' which encourages India's banks to lend to
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self-help groups (SHGs). Because SHGs are composed mainly of poor women, this has evolved into an
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important Indian tool for microfinance.

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NABARD also has a portfolio of Natural Resource Management Programmes involving diverse fields like
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Watershed Development, Tribal Development and Farm Innovation through dedicated funds set up for the
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purpose.
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The initial corpus of NABARD was Rs.100 crores. Consequent to the revision in the composition of share
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capital between Government of India and RBI, the paid up capital as on 31 March 2015, stood at Rs.5000
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crore with Government of India holding Rs.4,980 crore (99.60%) and Reserve Bank of India Rs.20.00 crore
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(0.40%). RBI sold its stake in NABARD to the Government of India, which now holds 99% stake.
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MICRO-FINANCE
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“Microfinance is the provision of financial services to low-income clients or solidarity lending groups
including consumers and the self-employed, who traditionally lack access to banking and related services.”
Microfinance is not just about giving micro credit to the poor rather it is an economic development
tool whose objective is to assist poor to work their way out of poverty. It covers a wide range of services like
credit, savings, insurance, remittance and also non-financial services like training, counseling etc.
23

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Pratik Gupta 24

Salient features of Microfinance:

• Borrowers are from the low income group
• Loans are of small amount – micro loans
• Short duration loans
• Loans are offered without collaterals
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• High frequency of repayment
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• Loans are generally taken for income generation purpose
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Micro-Finance in India
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Muhammad Yunus a Nobel Prize winner introduced the concept of Microfinance in Bangladesh in the form
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of the "Grameen Bank". Later on, in India NABARD took this idea and started concept of Micro Finance. In
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this concept, there exists a link between SHGs (Self-help group), NGOs and Banks. The SHGs are formed and
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nurtured by NGOs and only after accomplishing a certain level of maturity in terms of their internal thrift and
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credit operations are they entitled to seek credit from the banks. There is an involvement of the concerned
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NGO before and even after the SHG-Bank linkage. The SHG-Bank linkage programme, which was undertaken
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since 1992 in India, had financed about 22.4 lakh SHGs by 2006. It involved commercial banks, Regional Rural
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Banks (RRBs) and cooperative banks in its operations.

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NACHIKET MOR COMMITTEE ON FINANCIAL INCLUSION

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The Reserve Bank of India (RBI) appointment a Committee on Comprehensive Financial Services for Small
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Businesses and Low-Income Households under the Chairmanship of Shri Nachiket Mor, member on the
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Central Board of Directors, RBI in the month of Sep 2013.

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What was the motive of the panel?

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(a) To frame a clear and detailed vision for financial inclusion and financial deepening in India.
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(b) Designing principles for achievement of financial inclusion and financial deepening across the country.
(c) Development of comprehensive framework to monitor the progress of financial inclusion.

What are the recommendations of the Panel?

24
1. Every adult (Above 18 years) of our country should have a bank account by January 1, 2016. This
account will be known as Universal Electronic Bank Account (UEBA).
2. Every resident should be issued an account at the time of receiving Aadhaar number (UIDAI) by a
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bank itself.

Pratik Gupta 25

3. It recommends unified Financial Redress Agency (FRA) under Finance Ministry for customer
grievances.
4. It recommends abolition of interest subsidies and loan waivers. It suggested that government should
transfer benefits directly to farmers.
5. Permission to banks for pricing farm loans below base rate should be withdrawn.
6. Statutory liquidity ratio (SLR) has outlived its utility for both Banks and NBFCs. So, it needs to be
scrapped.
7. It recommends raising priority sector lending cap for banks to 50 per cent from the current 40 per
cent.
8. It also proposed for creation of a Payment Bank (PB) to provide payments services including credit,
insurance and risk management products.
9. Panel also suggested for the creation of State finance regulatory commission (SFRC). All existing
regulators at state level should be merged into SFRC.
10. Each district should have a total term life insurance sum assured to GDP ratio of at least 30%.

Some bare facts brought by Panel
• 90% of small businesses have no links with formal financial institutions.
• About 60% of the rural and urban population does not even have a functional bank account.
• Bank-credit to GDP ratio in the country, as a whole, is a modest 70%.
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• In Bihar, Bank-credit to GDP ratio is even lower, at 16%.
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• Savings as a proportion to GDP has fallen from 36.8% in 2007-08 to 30.8% in 2011-12
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RBI CONSTITUTES A COMMITTEE ON MEDIUM-TERM PATH ON FINANCIAL INCLUSION
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The Reserve Bank of India on 15th July, 2015 announced the constitution of a Committee with the objective
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of working out a medium-term (five year) measurable action plan for financial inclusion. This committee od
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headed by Shri Deepak Mohanty, Executive Director, Reserve Bank of India.

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It may be recalled that on the occasion of the Reserve Bank’s 80th anniversary, Hon’ble Prime Minister in his
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address urged the Bank to take the lead in encouraging financial institutions and to set a medium-to-long
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term target for sustainable financial inclusion.

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The terms of reference of the Committee are as under:

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1. To review the existing policy of financial inclusion including supportive payment system and customer
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protection framework taking into account the recommendations made by various committees set up
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earlier.
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2. To study cross country experiences in financial inclusion to identify key learnings, particularly in the area
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of technology-based delivery models, that could inform our policies and practices.
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3. To articulate the underlying policy and institutional framework, also covering consumer protection and
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financial literacy, as well as delivery mechanism of financial inclusion encompassing both households and
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small businesses, with particular emphasis on rural inclusion including group-based credit delivery
mechanisms.
4. To suggest a monitorable medium-term action plan for financial inclusion in terms of its various
components like payments, deposit, credit, social security transfers, pension and insurance.
25
5. To examine any other related issues.

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Pratik Gupta 26

FIRST NARASIMHAM COMMITTEE- 1991 FOR BANKING REFORMS IN INDIA
It was one of the most important committee set up on Banking Sector Reforms and was set up in 1991.

Please note that there were two Narasimham Committees: Narasimham Committee-1st was formed in 1991
and Narasimham Committee –2nd was formed in 1998 and both were related to Banking Sector Reforms.

First Narasimham committee submitted its report in Nov, 1991. Some important recommended are as
follows:

• Reduction in the Statutory Liquidity Ratio
• Reduction in the Cash Reserve Ratio
• Interest rate in CRR Balances
• Redefining the priority sector
• Deregulation of the Interest Rates.
• Asset Classification and defining the Non-Performing Assets.
• Improve transparency in the banking system
• Tribunals for recovery of Loans.
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• Tackling doubtful debts
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• Allow entry of the new private and foreign banks
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• No further nationalization of banks.

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• Credit information bureau should be set up.

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• A board for financial supervision should be set up.

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• To set up ARF.
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Please note these important Points:

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1. The Committee recommended that the SLR should be reduced to 25% over the period of time.
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(from38.5%)
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2. It also recommended that CRR should be reduced to 10% over the period of time. (From 15%)
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3. The impact of reducing the CRR and SLR was that now more funds of the banks could be deployed to
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some more remunerative loan assets.

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4. The Committee recommended that the Priority sector should be redefined and it should include the
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following:
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• Marginal farmers
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• Tiny sector
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• Small business and transport operators

• Village and Cottage Industries

The result of the Narasimham committee led to some milestones in the banking sector reforms in India.
26
MAJOR RECOMMENDATIONS OF NARASIMHAM COMMITTEE 1998

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• Need for stronger banking system

Pratik Gupta 27

• Experiment with concept of narrow banking.
• Small local banks
• Capital Adequacy Ratio
• Review and update banking laws.

Need for stronger banking system
• The committee has made clear the need of a stronger banking system, which would involve large
inflows and outflows of large capital and consequent complications for exchange management and
domestic liquidity.
• So committee recommended the merger of strong banks which would have a ‘multiplier effect’ on
industry.
• But has rejected the merger of weak banks with strong banks, as it may have a negative impact on
the asset quality of the stronger bank.
• The committee has also supported that two or three Indian banks be given international or global
character.
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Small Local Banks
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• The committee has suggested setting up of small, local banks which would be confined to states
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or local banks which would be confined to states or clusters of districts in order to serve local trade,
industry, and agriculture. 09
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• At the same time, these banks should have corresponding relationship with the larger and
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international bank.
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Experiment with concept of narrow banking

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Serious concern for rehabilitation of weak PSBs which have accumulated a high percentage of NPAs
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in some cases as high as 20% of the total assets.

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• Committee suggested the concept of narrow banking to rehabilitate weak banks.

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• Narrow banking means that the weak banks place their funds only in the short term in risk-free
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assets- these banks try to match their demand deposits with safe liquid.
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The committee has also suggested that the government should consider raising the prescribed capital
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adequacy ratio to improve inherent strength of banks and to improve their risk absorption capacity.
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Review and update banking laws.

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Committee has suggested an urgent need to review and amend the provisions of RBI Act, Banks
and Nationalization Act, etc so as to bring them in line with the current needs of the banking industry.
Other recommendations
27
Other recommendations relate to the need for automation of PSBs; professionalizing and automation of
PSBs; professionalizing and depoliticizing bank boards; review of recruitment procedures; training and
remuneration policies; real autonomy etc.
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Pratik Gupta 28

RBI PANEL SUGGESTIONS FOR MONETARY POLICY
COMMITTEE
An expert Committee to revise and strengthen the monetary policy framework submitted its report to the
Governor of RBI on 21 January 2014. The committee was headed by Dr. Urjit R Patel, the Deputy Governor
of RBI and was constituted on 12 September 2013 by the Governor Dr. Raghuram G Rajan. It has been done
to make it transparent and predictable.
Member of the committee apart from its chairman Dr. Urjit R Patel were: Dr. P.J. Nayak, Professor Chetan
Ghate, Professor Peter J. Montiel, Dr. Sajjid Z. Chinoy, Dr. Rupa Nitsure, Dr. Gangadhar Darbha, Deepak
Mohanty,
Dr. Michael Debabrata Patra was the Member Secretary of the panel.
The terms of reference of the Committee were:
1. To review the objectives and conduct of monetary policy in a globalised and highly inter-connected
environment.
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2. To recommend an appropriate nominal anchor for the conduct of monetary policy.
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3. To review the organisational structure, operating framework and instruments of monetary policy,
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particularly the multiple indicator approach and the liquidity management framework, with a view to
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ensuring compatibility with macroeconomic and financial stability, as well as market development.
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4. To identify regulatory, fiscal and other impediments to monetary policy transmission, and recommend
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measures and institutional pre-conditions to improve transmission across financial market segments and to
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the broader economy.

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5. To carefully consider the recommendations of previous Committees/Groups in respect of all of the above.
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SUGGESTIONS
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The committee in its suggestion has recommended that a new Consumer Price Index (CPI) should be
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adopted by Reserve Bank of India (RBI) to anchor the monetary policy has been recommended on 21 January
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2014 by an expert panel set by the central bank. The committee has also set an inflation target at 4 percent
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with a band of plus/minus 2 percent around it.

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The panel in its recommendation has also suggested that the monetary policy decision should be vested in
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the hands of the Monetary Policy Committee (MPC) that will be headed by the Governor. These suggestions
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as recommendation is intended to better ground inflation expectations by making it clear that inflation is the
RBI’s primary objective. It also expects to be held accountable for its performance in this regard.
As per the suggestions the government also needs to ensure the fiscal deficit as a ratio of GDP should be
brought down to 3 percent by 2016-17 which should be consistent with the Fiscal Responsibility and Budget
28
Management (Amendment) Rules 2013. In its suggestion it has suggested two schemes namely Market
Stabilisation Scheme (MSS) and Cash Management Bills (CMBs) may be phased out and the government debt
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and cash management should be taken over by the Debt Management Office of the government. It has also

Pratik Gupta 29

suggested that all fixed income financial products should be treated on par with the bank deposits for the
purposes of taxation and TDS.
The committee has suggested detachment of Open Market Operations (OMOs) from the fiscal operations
and instead linked solely to the liquidity management. OMOs should not be used for managing yields on
government on government securities.
In recent years, inflation in India has been amongst the highest within the G-20. Household Inflation
expectations have risen sharply and have remained at elevated levels, unhinged from the low inflation
experience of 2000-07 as also from the global inflation record. Professional forecasters’ surveys show that
the long-term inflation expectations have risen by about 150 basis points during this period.
WHAT IS CONSUMER PRICE INDEX?
It is a measure of change in retail prices of goods and services consumed by defined population group in a
given area with reference to a base year. This basket of goods and services represents the level of living or
the utility derived by the consumers at given levels of their income, prices and tastes.
The consumer price index number measures changes only in one of the factors; price. This index is an
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important economic indicator and is widely considered as a barometer of inflation, a tool for monitoring
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price stability and as a deflator in national accounts. Consumer price index is used as a measure of inflation
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in around 157 countries. The dearness allowance of Government employees and wage contracts between
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labour and employer is based on this index. 09
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The formula for calculating Consumer Price Index is Laspeyre’s index which is measured as follows-
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= [Total cost of a fixed basket of goods and services in the current period * 100] divided by Total cost
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of the same basket in the base period

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PRESENT SITUATION
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Presently the consumer price indices compiled in India are CPI for Industrial workers CPI (IW), CPI for
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Agricultural Labourers CPI (AL) & Rural Labourers CPI (RL) and CPI (Urban) and CPI (Rural). Consumer Price
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Index for Urban Non Manual Employees was earlier computed by Central Statistical Organisation. However
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this index has been discontinued since April 2008.The CPI (IW) and CPI (AL& RL) compiled are occupation
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specific and centre specific and are compiled by Labour Bureau.

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This means that these index numbers measure changes in the retail price of the basket of goods and
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services consumed by the specific occupational groups in the specific centres. CPI (Urban) and CPI (Rural) are
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new indices in the group of Consumer price index and has a wider coverage of population. This index
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compiled by Central Statistical Organisation tries to encompass the entire population and is likely to replace
all the other indices presently compiled.
WHAT IS MONETARY POLICY?

29
Monetary policy is the process by which the monetary authority of a country controls the supply of money,
often targeting a rate of interest for the purpose of promoting economic growth and stability. The official
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Pratik Gupta 30

goals usually include relatively stable prices and low unemployment. Monetary economics provides insight
into how to craft optimal monetary policy.
Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy
increases the total supply of money in the economy more rapidly than usual, and contractionary policy
expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally
used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit
will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the
resulting distortions and deterioration of asset values.
Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated
borrowing.
GET RID OF SLR, END LOAN WAIVERS: RBI COMMITTEE
A high-level panel of the Reserve Bank of India (RBI) has suggested that the central bank should gradually
abolish the Statutory Liquidity Ratio (SLR), the portion of deposits that banks must compulsorily keep in
government securities.
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At present, SLR is at 23% while most banks keep it around 27% as state-backed bonds often provide
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attractive rates at low risk.
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As per the Committee on Comprehensive Financial Services for Small Businesses and Low-Income
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Households, headed by Nachiket Mor (former executive director ICICI Bank):

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• SLR should be gradually abolished

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A Separate category of banks should be created to cater to low-income households with a minimum
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entry capital requirement of Rs. 50 crore — 1/10th of the currently mandatory Rs. 500 crore.
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Banks should provide facilities for withdrawal, payment and deposit within 15 minutes walking distance
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anywhere in the country.

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• All Indians above 18 to have a “full-service, safe, and secure electronic bank account” by 2016.
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• The priority sector lending cap should be increased from the current 40% to 50%.
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• Interest subsidies and loan waivers should be abolished.

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Apart from keeping a portion of deposits with the RBI as cash (CRR), banks are also required to maintain a
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minimum percentage of their net demand and time liabilities with them at the end of every business day, in
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the form of gold, cash, government bonds or other approved securities. This minimum percentage is called
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Statutory Liquidity Ratio. The Narasimham Committee – I (1991) had recommended scaling down SLR from a
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high of 38.5 per cent to 25 per cent and the RBI moved in a calibrated fashion in that direction. SLR is at 23
per cent with effect from August 11, 2012.
Purpose/ Objective of SLR

30
SLR is aimed at serving three purposes:

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• it is an instrument of credit control;

Pratik Gupta 31

• it works as a cushion against the possibility of bank failures; and
• it is a conduit for financing government deficits. Out of these, SLR has been serving overwhelmingly
the third purpose.
Abolition of SLR would dramatically free up nearly a quarter of deposits for industrial and consumer loans —
and possibly lower interest rates. As per some experts, reducing SLR on a gradual basis would be healthy for
the financial sector and this would allow banks to direct their resources to a more productive use.
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31
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Pratik

BANKING AND FINANCE IN INDIA

Financial Sector (% of GDP)

299 350 358 451

Money performs four basic functions as follows:

payments are stated.

INDIAN MONETARY SYSTEM

system is described as Paper currency standard or managed currency standard.

'Other ‘Deposits with the RBI

Banking System + Call/Term borrowings from 'Non-depository' Financial Corporations by the

Banking System (known as Broad Money)

RESERVE BANK OF INDIA (RBI)

1. Dr. Urjit R Patel, Governor of RBI

agent of government in respect of Indian membership in the IMF.

powers of supervision and control of commercial and cooperative banks.

ICICI, IFCI, etc.

publication and the 'RBI-Bulletin', a monthly magazine.

qualitative methods as follows:

I. Quantitative Methods or General Methods

*(Incremental CRR, refer class notes)

RBI announces timetable reduction in SLR (11th Dec, 2015)

Latest Credit Control Rates*

3. Bank Rate - 06.25%

4. Policy Repo Rate - 06.00%

5. Reverse Repo Rate - 05.75%

*As updated on 24th July, 2017

II. Qualitative or Selective Methods

on the March 31, 2021, as under:-

above figure. Almost all banks are Scheduled banks in India.

Corporation Bank, etc.

amalgamated in near future. At present there are 56 RRBs in India.

Recapitalization of Regional Rural Banks

RRBs to at least 9% in a sustainable manner by 2012.

STATE BANK OF INDIA AND ITS SUBSIDIARIES

company. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As of 2014-

Punjab National Bank.

banking regulatory authority.

started functioning as SBI branches on 26 August 2010.

standard typeface, but also utilizes other typefaces.

concession in the rate of interest for women customers.

would have no say in the matter,

(vii) proportionate voting right to all shareholders,

(viii) reduction of Government’s share-holding to 40%,

AND LAST, BUT THE MOST SERIOUS OF IT ALL,

The “Recommendations” of the Committee is a step forward to Privatisation of

deposits and supply of credit, but in a limited area of operation.

smaller customers will be a key criterion in licensing such banks.

with reasonable geographical proximity.

• No credit lending is allowed for Payments Banks.

RBI grants “In-principle” Approval to 10 Applicants for Small Finance Banks

private sector” (Guidelines) issued on November 27, 2014.

Names of selected applicants

1. Au Financiers (India) Ltd., Jaipur

2. Capital Local Area Bank Ltd., Jalandhar

3. Disha Microfin Private Ltd., Ahmedabad

4. Equitas Holdings P Limited, Chennai

9. Ujjivan Financial Services Private Ltd., Bengaluru

it. The EAC then submitted its recommendations to the RBI.

rationale for the Committee’s recommendations.

Bank of India on its website on August 27, 2013.

set up Small Finance Bank business in India.

3 State Bank of India 0.6%

1 ICICI Bank 0.2%

requirement will be in addition to the capital conservation buffer.