Money and Banking – Updates | Prelims Capsule 2021

Table of contents 

• Network for Greening the Financial System 
• New Umbrella Entity (NUE) 
• National Digital Currency 
• India on US’s ‘Currency Watch list”  
• Regulations Review Authority 2.0 
• Currency Chest 
• PCA framework 
• Domestic Systemically Important Banks (D-SIBs)   
• Jayant Kumar Dash committee 
• Payment Infrastructure Development Fund  
• Digital payments Index  
• Positive Pay Mechanism   
• DakPay 
• Better than cash alliance 
• Priority Sector Lending (PSL) 
• Report on Trend and Progress of Banking in India 2019-20  
• Non-Banking Financial Company (NBFC) 
• Depreciation of rupee 
• Corporate ownership of banks 
• FCRA Act
  

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Network for Greening the Financial System 

 What is the news?  

Reserve Bank of India (RBI) has joined the Network for Greening the Financial System (NGFS) as a Member.  

 Network for Greening the Financial System (NGFS):  

• It was launched at the Paris One Planet Summit in December 2017.  
• It is a group of Central banks and financial supervisors.  
• Aim: to accelerate the scaling up of green finance and develop recommendations for central banks’ role in climate change 
• Location: Located at the Bank of France headquartered in Paris.  
• As of April 2021, the NGFS consists of 90 members and 13 observers.  
• Significance for RBI: As Green Finance has assumed significance in the context of climate change. So, RBI expects to benefit from the membership of NGFS by learning and contributing to global efforts on Green Finance.  

Green Finance: It is a broad term that can refer to financial investments flowing into sustainable development projects and initiatives, environmental products, and policies that encourage the development of a more sustainable. economy. 

New Umbrella Entity (NUE) 

Why in news? 

RBI, in August 2020, released a framework for setting up New Umbrella Entity or entities. Recently the Reserve Bank of India said that it is not in favor of having direct and supervisory control over the New Umbrella Entities.  

• Instead, the RBI wants agencies such as the National Payments Corporation of India (NPCI) or a newly formed body to take over the role.  

What is New Umbrella Entity?  

These entities will carry out various payment services, similar to the ones being provided by the NPCI right now. 

• In February 2020, RBI proposed to create an alternative umbrella organization for retail payments. This is to prevent the monopoly of the National Payment Corporation of India (NPCI).  
• Presently NPCI is taking care of all retail payments systems in India.  
• As envisaged by the RBI, New Umbrella Entities will be a not-for-profit company 

Need for New Umbrella Entity:  

1. Enhance competition: At present, the NPCI is the only entity handling the payment system. So, it is not for sure that the transaction costs are the lowest, or they cannot be reduced further. Similarly, the competition will also provide a variety of product offerings in the payment system.  
2. The monopoly of NPCI: Private players in the payments space have expressed few concerns with the NPCI. Further, the NPCI is the only entity managing all retail payments systems in India. So, the New Umbrella Entities will enhance the competition and improve the service delivery in the retail digital payment ecosystem.  

Functions of New Umbrella Entities  

As per the RBI, the following will be the functions of these NUEs:  

• Develop new payment standards, methods, and technologies.  
• Operate clearing and settlement systems 
• Identify and manage relevant risks. This includes risks related to settlement, liquidity, credit, and operation.  
• Preserve the integrity of the retail payment system.  
• These entities will monitor the system both nationally and internationally to prevent shocks, frauds, and challenges that affect the system in general.  

RBI framework related to the New Umbrella Entities  

The RBI in its framework mentioned certain guidelines for New Umbrella Entities. These are,  

• Capital: The pan-India new umbrella entity (NUE) or entities will focus on retail payment systems with a minimum paid-up capital of Rs 500 crore.  
• Limit on investment: No single promoter or group to hold more than 40% investment in the NUE. 
• NUE should maintain a minimum net worth of Rs. 300 Crore at all times.  
• Ownership: Promoter or the promoter group of the NUE should be ‘owned and controlled by residents’ with 3 years of experience in the payments ecosystem.  
• Governance: The entity has to follow corporate governance norms set by the RBI. The RBI will retain the right to approve the appointment of directors and nominate a member on the entities’ board.  
• Foreign Investment: As long as the NUE’s comply with the other guidelines the foreign Investment is allowed. 

National Digital Currency 

Why in news? 

The draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 aims to prohibit all private cryptocurrencies. The Bill also aims to lay down the regulatory framework for the launch of an “official digital currency”. 

• The growth of cryptocurrencies such as Bitcoin, Dogecoin, Ethereum etc has raised challenges to fiat currencies. It has made the central bank of each country explore the possibility of introducing their own digital currencies.  
• The inter-ministerial committee (IMC) suggested a ban on private digital currencies, but it favors RBI-backed National Digital Currency or central bank digital currency (CBDC).  

What is the CBDC or National Digital currency?  

A Central Bank Digital Currency (CBDC), or national digital currency, is simply the digital form of a country’s fiat currency.  

• Instead of printing paper currency or minting coins, the central bank issues electronic tokens.  
• This token value is backed by the full faith and credit of the government.  

Which countries have already rolled out their digital currency?

According to the Bank for International Settlements, more than 60 countries are currently experimenting with the CBDC. There are few Countries that already rolled out their national digital currency. Such as,  

• Sweden is conducting real-world trials of their digital currency (krona)  
• The Bahamas already issued their digital currency “Sand Dollar” to all citizens  
• China started a trial run of their digital currency e- RMB amid pandemic. 
  • They plan to implement pan-china in 2022. This is the first national digital currency operated by a major economy.  

SC Garg Committee   

With the growth of digital currencies worldwide, various start-ups dealing with cryptocurrency have come up in India, such as Unocoin in 2013 and Zebpay in 2014. Further, their volatility is a cause of concern for India.  

• So, the government-appointed SC Garg Committee for suggestions 

Important recommendations of the panel:  

• The panel recommended banning anybody who mines, hold, transact or deal with cryptocurrencies in any form. Further, the panel recommend a jail term of one to 10 years for exchange or trading in digital currency.  
• The panel also proposes a monetary penalty of up to three times the loss caused to the exchequer or gains made by the cryptocurrency user whichever is higher. 
• The panel also recommended completely banning all private cryptocurrencies in India. 
• However, the panel said that the government should keep an open mind on the potential issuance of cryptocurrencies by the Reserve Bank of India.  
• Further, the committee also drafted a bill Banning of Cryptocurrency & Regulation of Official Digital Currency Bill 

Advantages of rolling out National Digital Currency  

• Improving efficiency in the financial system: As the currency in digital form, it can provide an efficient way for financial transaction. Further, digital currency also solves the challenges with Cash and coins. Cash and coins require expenses in storage and have inherent security risks like the recent heist in the RBI currency chest.  
• Reducing systemic risk:  There are about 3,000 privately issued cryptocurrencies in the world. According to IMF, the key reason for considering national digital currency is to counter the growth of private forms of digital money. There is a possibility of these companies going bankrupt without any protection. This will create a loss for both investor and creditor. But the National Digital currency has government backing in case of any financial crisis.  
• Opportunity to private players: As the state-backed digital currency can provide investor/consumer protection, the private can confidently invest in the associated infrastructure without any doubts over its regulation. This will improve the services to people.  
• Reduce volatility: The national digital currency will be regulated by the RBI. So, there will be less volatility compared to other digital currencies.  
• Helps in better macroeconomic management: Current RBI’s work on inflation targeting can be extended to national digital currency also. Since India is planning to ban other cryptocurrencies, the RBI can better regulate digital and fiat currency. Thus upgrading to digital currency and balancing the macroeconomic stability.  

India on US’s ‘Currency Watch list”  

What is the News?  

The US treasury places India along with 10 other countries on its currency watch list with potentially “questionable foreign exchange policies” and “currency manipulation”. 

What is meant by Currency Manipulaton?  

• Current Manipulators are countries engaging in “unfair currency practices” by deliberately devaluing their currency against the dollar.  
• The practice would mean that the country in question is artificially lowering the value of its currency. By that, it aims to gain an unfair advantage over others.  
  • This is because the devaluation would boost exports from that country. Thus, more exports will result in a reduction in trade deficits.  

What are the criteria for being included in the watchlist? 

US places a country on Currency Watch List if it is meeting any two of the below three criteria. This includes:  

1. A “significant” bilateral trade surplus with the US — at least USD 20 billion over a 12-month period. 
   • Trade surplus with a country means our exports to that country are more than our imports from that country 
2. A current account surplus equivalent to at least 2% of gross domestic product (GDP) over a 12-month period.  
3. “Persistent”, one-sided intervention — when net purchases of foreign currency totals at least 2% of the country’s GDP over a 12-month period. Further, it is conducted repeatedly, in at least six out of 12 months.  

Impact: The designation of a country as a currency manipulator does not immediately attract any penalties. However, it lowers the confidence about a country in the global financial markets.  

Why was India included in the Currency watch list?  

• India has met two of the three criteria — the trade surplus criterion and the “persistent, one-sided intervention” criterion.  

Regulations Review Authority 2.0 

What is the News?  

Recently, the Reserve Bank of India (RBI) announced the setting up of a new Regulations Review Authority (RRA 2.0) 

What is a Regulations Review Authority (RRA)? 

• The RBI earlier set up the first RRA for a period of one year from April 1, 1999.  
• This authority is for reviewing the regulations, circulars, reporting systems, based on the feedback from the public, banks and financial institutions.  

What is the Regulations Review Authority (RRA 2.0)? 

• It will streamline the regulatory instructions, reduce the compliance burden of the entities under regulations. The RRA 2.0 will achieve this by simplifying procedures and reduce reporting requirements wherever possible.  
• Headed by: M Rajeshwar Rao, Deputy Governor of RBI  
• Duration: One year from May 1. But, RBI can extend its tenure. 

Currency Chest 

 Why in news?  

A Private Security Guard in Chandigarh has stolen Rs 4 crore from a Currency Chest of Axis Bank.  

What is a Currency Chest?  

• A currency chest is a place where the Reserve Bank of India (RBI) stocks the money meant for banks and ATMs.  
• Place = branches of selected banks authorised by the RBI to stock rupee notes and coins. 
• RBI offices in various cities receive the notes from note presses and coins from the mints. These are sent to the currency chests and small coin depots from where they are distributed to bank branches.  
• Administered by: The RBI administers these chests.  Even though these chests are usually situated on the premises of different banks.  
• Belongs to: The money present in the currency chest belongs to the RBI. But the money kept in the strong room outside the currency chests belongs to the bank.  
• Security arrangement for the chests: The security of currency chests varies from one bank to the other where the chests are situated. The Reserve Bank of India (RBI) reimburses the security expenses to the bank as per the set norms.  
• Recovery Procedure if stolen: As per the set guidelines, the bank in which the currency chest is situated is liable to fulfil the loss of the currency chest.  

PCA framework 

Why in news? 

Reserve Bank of India (RBI) has taken out IDBI Bank from the prompt corrective action (PCA) framework subject to certain conditions and continuous monitoring.  

What is Prompt corrective action (PCA) Framework?  

• PCA is an RBI framework. Banks with weak financial metrics are put under the PCA framework by the Reserve Bank of India (RBI).  
• Aim: It aims to check the problem of Non-Performing Assets (NPAs) in the Indian banking sector.  
• Under the PCA regime, business restraints are imposed on struggling banks until they regain health 
• It is a structured early-intervention mechanism for banks that have become under-capitalized (lack of funds) due to poor asset quality, or vulnerable due to loss of profitability.  

When was the PCA framework introduced?  

• The RBI introduced the PCA framework in 2002.  

When does RBI invoke PCA?  

The PCA framework is invoked when banks breach any of the following three key regulatory trigger points namely  

• Capital to risk-weighted assets ratio  
• Net non-performing assets (NPA)  
• Return on assets (RoA) 

CAR 

• CAR is a measure of how much capital a bank has available. It is also known as Capital to Risk (Weighted) Assets Ratio (CRAR) 
• Regulatory authorities monitor this ratio to see if any banks are at risk of failure 
• A high CAR indicates that a bank has an adequate amount of capital to deal with unexpected losses.  
• A lower CAR means, a bank is at a higher risk of failure 

Net NPA (NNPA) 

• NPA defined in the ARC document 
• Net NPA = Sum total of all NPAs (Gross NPA) – Provisions 
• Provisions = It is an amount that a bank sets aside from its profits or income in a particular quarter for non-performing assets 
• NNPA gives the exact value of NPA of a bank 

Return on Assets (RoA) 

This indicates the profit being generated by a bank’s assets 

• A negative RoA implies the bank’s assets are yielding negative return. 

What are the restrictions on Banks when PCA is invoked?  

There are two types of restrictions: 

• Mandatory Restrictions: These include: 
  • Restrictions on Dividends  
  • Restrictions on Branch expansion  
  • Restrictions on Management compensation among others 

• Discretionary Restrictions: These include: 
  • Curbs on lending and deposits. 
  • Recommending the bank owner to bring new management and board among others. 

Domestic Systemically Important Banks (D-SIBs)   

 Why in News?    

Reserve Bank of India (RBI) has retained SBI, ICICI and HDFC Bank in Domestic Systemically Important Banks (D-SIBs) list or banks that are considered as “Too Big To Fail”.   

What is a D-SIB? 

• D-SIB is a bank that is Too Big To Fail (TBTF). According to RBI, banks become D-SIBs due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection.  
• Banks, whose assets exceed 2% of GDP are considered part of this group.    

Which banks are considered D-SIBs? 

As of now, only three banks are there in this category, namely, 

1. SBI 
2. HDFC 
3. ICICI 

What is the significance of D-SIBs?  

• Failure of such banks will result into significant disruption to the essential banking services to banking system and the overall economy.   
• D-SIB tag also indicates that in case of distress, the government is expected to support these banks.   
• They are also subjected to higher levels of supervision so as to prevent disruption in financial services in the event of any failure.   

What is the framework under which RBI deals with D-SIBs? 

D-SIB Framework: The Reserve Bank had issued the framework for dealing with D-SIBs in 2014.  

• It requires the RBI to disclose the names of banks designated as D-SIBs starting from 2015.  
• RBI places DSIBs in one of the 5 buckets based on their systemic importance scores (SISs).  
  • As part of this framework, these three banks have to maintain additional Common Equity Tier (CET) 1 compared to other commercial banks.    
• CET 1: It is a component of Tier 1 capital that includes ordinary shares and retained earnings.  The implementation of CET1 started in 2014 as part of Basel III regulations regarding safeguarding the local economy from a financial crisis. 

Jayant Kumar Dash committee 

Why in news? 

Reserve Bank of India (RBI) has constituted a working group on digital lending — including online platforms and mobile apps.  

• Objective: The working group will study digital lending activities in the regulated and unregulated financial sector so that an appropriate regulatory approach can be put in place.  
• Composition: The working group comprises six members–four will be from within the RBI and the remaining will be external.  
• Jayant Kumar Dash, will head the group  

Payment Infrastructure Development Fund  

Why in news? 

Reserve Bank of India (RBI) has announced operational guidelines for the Payments Infrastructure Development Fund (PIDF) scheme.  

• A High-Level Committee on Deepening of Digital Payments under the Chairmanship of Nandan Nilekani had recommended creation of this fund. 
• Initially called the Acceptance Development Fund (ADF), the initiative was announced on 4 October 2019

What is PIDF scheme? 

This scheme is aimed at encouraging deployment of more digital payment acceptance infrastructure in tier-3 to tier-6 centres with a primary focus on North Eastern states 

• Purpose: PIDF will be used to subsidize bank and non-banks for payment infrastructure deployment and would be based upon achieving specific targets. 
• Card issuing banks and Card networks (like Visa) shall also contribute to the fund per transaction 
  • It has a corpus of Rs. 345 Crore with Rs. 250 Crore contributed by the RBI and Rs. 95 Crore by the major authorized card networks in the country 
• The fund will also focus on those merchants who are yet to be terminalized (merchants who do not have any payment acceptance device). 
• Merchants engaged in services such as transport and hospitality, government payments, public distribution system (PDS) shops, healthcare may be included especially in targeted geographies. 
• Accountability: Acquirers of the subsidy shall submit quarterly reports on the achievement of targets to the RBI.  
• Duration of Fund: The fund will be operational for three years effective from 1st January, 2021 and may be extended for two more years.  
• An Advisory Council (AC) under the chairmanship of RBI deputy governor BP Kanungo has been constituted for managing the PIDF 
• Implementation of targets under PIDF shall be monitored by RBI with assistance from card networks, the Indian Banks’ Association, and the Payments Council of India.  

What is meant by payment acceptance infrastructure? 

Payment acceptance infrastructure includes physical PoS, mPoS (mobile PoS), GPRS (General Packet Radio Service), PSTN (Public Switched Telephone Network), QR code-based payments, among others. 

How are cities classified into different tiers? 

Cities are divided into various tiers as per their population, as follows 

Digital payments Index  

Why in news? 

News: Reserve Bank of India (RBI) has launched a composite Digital Payments Index (DPI) 

What is the Digital Payments Index? 

Index, comprising of five broad parameters, will measure the extent of digitization across the country 

• Parameters: The index comprises five broad parameters with varying weights to measure the penetration of digital payments. The five key parameters include:  

1. 1. Payment enablers (25%).  
   2. Payment infrastructure—demand-side factors (10%).  
   3. Payment infrastructure—supply-side factors (15%).  
   4. Payment performance (45%).  
   5. Consumer centricity (5%).  

• These factors include multiple sub-parameters that would help the regulator conduct its study into the digital payment ecosystem.  

• Duration of Releasing Index: The index shall be published on RBI’s website on a semi-annual basis from March 2021 onwards with a lag of 4 months.  
• Base Year = March 2018 i.e., DPI score for March 2018 is set at 100. 
• At a base of 100 for March 2018, RBI has measured that the index rose to 153.47 and 207.84 in 2019 and 2020 respectively indicating appreciable growth.

 Positive Pay Mechanism   

Why in news? 

From January 1, 2021, the Reserve Bank of India (RBI) introduced the ‘Positive Pay System’ for cheque transactions above Rs 50,000 in a bid to enhance safety and eliminate frauds.  

What is Positive Pay Mechanism? 

It involves a process of reconfirming key details of large-value cheques.  

• Process: Under this, the issuer of the cheque submits electronically through channels like SMS, mobile app and Internet banking, certain minimum details of cheque to the drawee bank, details of which are cross-checked with the presented cheque by Cheque Truncation System (CTS).  
• Any discrepancy is flagged by CTS to the drawee bank and presenting bank who then take redressal measures.  
• Cheque Limits: Banks will enable the new system for all account holders issuing cheques for amounts of Rs 50,000 and above. It is mandatory in case of cheques for amounts of Rs 5,00,000 and above.  
• Developed by: National Payments Corporation of India (NPCI) will develop the facility of Positive Pay in CTS and make it available to participant banks.  

NPCI 

• It is a “Not for Profit” umbrella organization for operating retail payments and settlement systems in India 
• NPCI is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.  
• It aims in bringing innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems.  
• The ten core promoter banks are State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank N. A. and HSBC.  
• RuPay, an indigenous payment card of India launched by NPCI for all banks of India.  

• Developed by National Payments Corporation of India, Unified Payments Interface (UPI) is an instant real-time payment system, facilitating inter-bank transactions. 
  • UPI: It is a payment system that allows money transfer between any two bank accounts by using a smartphone. A customer is able to pay directly from a bank account to different merchants, both online and offline, without the hassle of typing credit card details, IFSC code, or net banking/wallet passwords. 
  • It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience 

DakPay 

Why in news? 

Department of Posts (DoP) and India Post Payments Bank (IPPB) unveiled a new digital payment app ‘DakPay’ 

What is Dakpay? 

• It is a digital payment app designed to facilitate easy digital transactions and other banking services through the trusted Postal (‘Dak’) network across the nation to cater to the financial needs(‘Pay’) of various sections of the society.  
• Significance: The App is launched as part of its ongoing efforts to provide Digital Financial inclusion at the last mile across India.  

About India Post Payment Bank 

It has been established in 2018 under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India.  

Mandate: To remove barriers for the unbanked & underbanked and reach the last mile leveraging the Postal network.  

Better than cash alliance 

Why in news? 

India and UN-Based Better Than Cash Alliance organized a joint Peer learning exchange on fintech solutions for responsible digital payments at the last mile.  

What is Better than Cash Alliance? 

• It was created in 2012 as a partnership of governments, companies and international organizations to accelerate the transition from cash to digital payments in order to reduce poverty and drive inclusive growth. 
• Objectives: The Alliance Secretariat works with members on their journey to digitize payments by:  
  • Providing advisory services based on their priorities.  
  • Sharing action-oriented research and fostering peer learning on responsible practices.  
  • Conducting advocacy at national, regional and global level.  
• It is an implementing partner for the G20 Global Partnership for Financial Inclusion. 
• Launched by: United Nations Capital Development Fund, the United States Agency for International Development, the Bill & Melinda Gates Foundation, Citigroup, the Ford Foundation, the Omidyar Network and Visa Inc. 
• Members: The Alliance has 75 members which are committed to digitizing payments.  
• India became a member in 2015 

Priority Sector Lending (PSL) 

Why in news? 

Reserve Bank of India (RBI) recently released revised priority sector lending (PSL) guidelines to augment funding for COVID-19 impacted companies. 

• The PSL guidelines were last reviewed for commercial banks in April 2015 and for Urban Co-operative Banks (UCBs) in May 2018. 
• Aim: To align Priority Sector lending with emerging national priorities and bring sharper focus on inclusive development 
• Key Revised PSL Guidelines 
  • Bank finance for start-ups (up to ₹50 crore), loans to farmers for installation of solar power plants for solarisation of grid connected agriculture pumps and loans for setting up Compressed BioGas (CBG) plants have been included as fresh categories eligible for finance under the priority sector.  
  • The targets prescribed for “small and marginal farmers” and “weaker sections” are being increased in a phased manner.  
  • The loan limits for renewable energy have been doubled and for improvement of health infrastructure, credit limit for health infrastructure (including those under ‘Ayushman Bharat’) has been doubled.

What is meant by Priority Sector? 

Priority Sector means a sector which the Government of India and Reserve Bank of India consider as important for the development of the basic needs of the country and is to be given priority over other sectors 

What are the sectors covered under PSL? 

The categories under priority sector are as follows: 

1. Agriculture 
2. Micro, Small and Medium Enterprises 
3. Export Credit 
4. Education 
5. Housing 
6. Social Infrastructure 
7. Renewable Energy 
8. Others 

What are RBI guidelines for PSL? 

• All scheduled commercial banks and foreign banks (with a sizable presence in India) are mandated to set aside 40% of their Adjusted Net Bank Credit (ANDC) for lending to these sectors. 
• Regional rural banks, co-operative banks and small finance banks have to allocate 75% of ANDC to PSL. 

Report on Trend and Progress of Banking in India 2019-20  

Why in news? 

Reserve Bank of India has released the Report on Trend and Progress of Banking in India 2019-20.  

About the report 

• The report is a statutory publication in compliance with Section 36 (2) of the Banking Regulation Act, 1949.  
• Purpose: It presents the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2019-20 and 2020-21 so far.  

Key Takeaways 

• Decline in NPAs: Scheduled Commercial Banks (SCBs) gross non-performing assets (GNPA) ratio declined from 9.1% at end-March 2019 to 8.2% at end-March 2020 and further to 7.5% at end-September 2020. 
  • Scheduled Commercial Bank: Any bank included in the 2nd Schedule of the RBI Act 1934 is termed as a Scheduled Commercial Bank (SCB) 
• Strengthened CRAR Ratio: Capital to risk weighted assets (CRAR) ratio of SCBs strengthened partly aided by recapitalization of public sector banks and capital raising from the market by both public and private sector banks.  
  • Bank recapitalization: It is a method via which government infuses capital into banks so that they are able to maintain capital adequacy norms 
  • In India, scheduled commercial banks are required to maintain a Capital Adequacy Ratio (CAR) of 9% while Indian public sector banks are emphasized to maintain a CAR of 12% as per RBI norms. 

• • • The Basel III norms recommended a capital to risk weighted assets of 8% 
• Bank recapitalization can be done via various methods by the government. One of such methods is bank recapitalization bonds like, in 2017 government announced massive 1 lakh 35 crore bank recapitalization bonds.  
  • • These bonds are issued by the government and bought by the banks. 
    • The money that government receives from the banks is put back in the bank.  
    • This money strengthens the balance sheet of a bank since the money received from the government is categorized as an investment and not a liability because a loan given to the government can never be a bad loan. Government will always pay it back.  
    • This innovative method ensures that no money is actually taken out from the state coffers thereby no affect on fiscal deficit in the short term 
    • Government has to pay interest and the face value of the bonds but it will happen slowly over the years and during that time banks can improve their credit situation. 
• Policy Measures: The Reserve Bank also undertook an array of policy measures to mitigate the effects of COVID-19; its regulatory ambit was reinforced by legislative amendments giving it greater powers over co-operative banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs) 

Non-Banking Financial Company (NBFC) 

Why in news? 

The RBI has planned an important change in its regulatory approach towards India’s non-banking financial companies (NBFCs). It plans to monitor larger NBFCs almost as closely as it monitors banks. 

What is RBI’s proposed regulatory structure?  

The RBI has introduced a four-tiered regulatory structure. By this, RBI is striking a balance between the need for low regulations and less systemic risks in the sector.   

1. Base layer: This layer will include the large number of small NBFCs in the country and will subject to the least regulation. It is because they have a limited impact on systemic stability. The proposals for this set of NBFCs include:  
   • Entry-level net owned funds required to be raised to Rs 20 crore from Rs 2 crore.  
   • NPA classification norm of 180 days will be harmonized to 90 days.  
   • Disclosure requirements will be widened by including disclosures on types of exposure, related party transactions, customer complaints.  
2. Middle Layer: It will consist of NBFCs that currently fall in the ‘systemically important’ category along with deposit-taking non-bank lenders. Housing Finance Companies, Infrastructure Finance Companies, Infrastructure Debt Funds, Core Investment Companies. The proposals for this set of NBFCs include:  
   • It will be subjected to tighter corporate governance norms.  
   • No changes proposed in the capital-to-risk-assets ratio (CRAR) of 15% with a minimum Tier-I ratio of 10%.  
   • These NBFCs cannot provide loans to companies for buy-back of securities.  
   • NBFCs with 10 or more branches will be required to adopt core banking solutions. 
3. Upper Layer: It will include about 25-30 NBFCs and will be subjected to bank-like regulation.  
   • It will have to implement differential standard asset provisioning and also the large exposure framework as applicable to banks.  
   • The concept of Core Equity Tier-1 will be introduced for this category and is proposed to be set at 9%.  
   • They will also be subject to a mandatory listing requirement. 
4. Top Layer: This layer will be empty for now and will be populated with NBFCs, where the RBI may see an elevated systemic risk.  

What is a NBFC? 

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  

NBFC 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.  

Residuary non-banking company: 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. 

When a company is registered as NBFC by RBI? 

A company which fulfils these criteria will be registered as NBFC by RBI. 

• a company’s financial assets constitute more than 50% of the total assets 
• income from financial assets constitute more than 50% of the gross income 

What is difference between banks & NBFCs?  

NBFCs lend and make investments and hence their activities are similar to that of banks with few differences, 

• NBFC cannot accept demand deposits 
• NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself 
• deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of NBFCs, unlike in case of banks.

Should every NBFC be registered with RBI? 

• As per RBI Act, 1934, no NBFC can operate without being registered with RBI but there are certain exceptions 
  • Venture Capital 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 Companies Act, 1956 
  • Chit companies as defined in the Chit Funds Act, 1982 
  • Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company. 

What are systemically important NBFCs?  

• NBFCs whose asset size is >= ₹ 500 Cr or as per last audited balance sheet are considered as systemically important NBFCs.  
• The rationale for such classification is that the activities of such NBFCs will have an impact on the financial stability of the overall economy.

Depreciation of rupee 

Why in news? 

Recently, the rupee fell sharply by 105 paise. It is considered as one of the biggest single-session falls in 20 months. 

The issue of concern here is: Rupee Depreciation & its management 

What are the reasons for rupee depreciation?  

A combination of following factors, 

• Concerns over Covid-19 has created uncertainty in the market. This affected the FDI (Foreign Direct Investment) and FII (Foreign Institutional Investment). So, the rupee weakens further.  
• RBI’s Government Securities Acquisition Programme (G-SAP) that seeks to buy bonds worth Rs 1 lakh crore might be one of the reasons. It is a quantitative easing policy followed by RBI. When bonds are bought, money is infused into the economy leading to increased supply and anything under increased supply will fall in price. 
• Strengthening of the dollar against the euro also contributed to rupee depreciation.  
• RBI’s status-quo on policy rates is not helping to increase demand in the local economy. This will further impact the rupee.  
• Further, the value of the rupee will also be impacted by the high bond yields in the US and the inflow of dollars into the US.  

What are the impacts of Rupee depreciation?  

It has both positive and negative impacts. For instance,  

Positive impact:  

• Exports will be more competitive: This is a prime and major benefit of currency depreciation. Goods exported by India shall be cheaper now. This can create increased demand for exports leading to reduction in trade deficits. 
• Beneficial to Non-Resident Indians:  As they are sending money back home they will get more rupees per dollar.  

Negative impact:  

• Imports will be costly to buy like crude oil. This can lead to increased current account deficit 
  • A depreciating rupee increases the cost of crude import. A rise in cost of crude raises fuel prices and inflation. Crude import accounts for almost 20% of India’s imports.  
• Cheaper exports can also lead to their increased demand leading to demand-pull inflation 
• Education cost in abroad will be higher. For example,   
  • Higher education in the US might cost an annual fee of US$ 50,000. A 5% depreciation in the rupee (For example, from 72.5 to 76.125) will raise the cost for one year from Rs 36.26 lakh to Rs 38.06 lakh (Net loss Rs 1.8 lakh) 

How to eliminate the Rupee depreciation and currency risk?  

There are multiple options to cover the currency volatility risk. They are,  

• Investing in international funds that invest in global markets through fund of funds. While the Indian investors invest in rupees, in the fund of funds the money gets invested in dollars at the current exchange rate. In case of rupee depreciation, this fund will fully protect against the currency depreciation risk.  
• In this case, if a person planning for a quick investment (4-5 months) in foreign currency, there are two options to eliminate currency risk.  
  • One, creating a deposit account in the US and transferring the fund abroad.  
  • Two, going for a currency hedge in the exchanges by investing in future contracts (mature in future) that will mature in 4-5 months. For example,  
    • A future contract worth $50,000, maturing in July at the rate of 74.5, will pay Rs 37.25 lakh 
    • If in December, the rupee depreciates to $77, Then the contract will yield a profit of Rs 1.25 lakh.  

Corporate ownership of banks 

Why in news? 

Recently, the Internal Working Group (IWG) to the Reserve Bank of India the recommended making necessary amendments to the Banking Regulation Act, 1949 so as to allow industrial houses to enter into Indian Banking system. 

Rationale to constitute IWG by RBI:  

The IWG was constituted to “review extant ownership guidelines and corporate structure for Indian private sector banks” for important reasons like  

• The total balance sheet of banks in India still constitutes less than 70 per cent of the GDP, which is much less compared to global peers such as China, where this ratio is closer to 175%.  
• The domestic bank credit to the private sector is just 50% of GDP. But in economies such as China, Japan, the US and Korea it is upwards of 150 per cent.  
• India’s banking system has been struggling to meet the credit demands of a growing economy.  
• There is only one Indian bank in the top 100 banks globally by size. Further, Indian banks are also one of the least cost-efficient.  

So, RBI Constituted a IWG to look into the ownership guidelines and corporate structure for Indian private banks. 

Arguments against corporate ownership of banks  

• Issue of connected Lending: Business houses owning an in-house bank may lead to self-lending.  
  • Regulation of Connected lending is difficult: It is clear from the experience of Indonesia and most advanced countries that regulating connected lending is impossible and the only solution is to ban corporate-owned banks 

Connected Lending: It refers to a situation where the promoter of a bank is also a borrower. There is a possibility for the promoter to channel the depositors’ money into their own ventures. Connected lending was the key factor behind 1997 Asian Financial crisis. The recent episodes in ICICI Bank, Yes Bank, DHFL etc. were all examples of connected lending. 

Challenges associated in dealing with connected lending 

• • Multi sector cooperation required: Monitoring of transactions of corporate houses will require the cooperation of various law enforcement agencies.  
  • Crony capitalism: Corporate houses can use their political clout to thwart such cooperation.  
  • No prevention possible: The RBI can only react to interconnected lending ex-post; it will not be able to prevent such exposure.  
  • Complex process: In case, even if RBI could trace interconnected lending, any action taken on corporate will only cause a flight of deposits from the bank concerned and precipitate its failure.  

• • Regulator credibility at stake: The regulator would be under enormous pressure to compromise on regulation. Pitting the regulator against powerful corporate houses could end up damaging the regulator.  

• Issue of Credit Quality: Banks cannot make good loans when it is owned by the borrower.  
  • Indian financial sector reforms have aimed at improving both the quantity and the quality of credit. If India now starts granting banking licences to powerful, politically connected industrial houses, allowing them to determine how credit is allocated, it will effectively abandon the principle of ensuring that credit flows to the most economically efficient users.  
  • Even under the existing financial regime, RBI was unable to detect at an early stage the connected lending which felled large regulated financial entities like IL&FS, Yes Bank (Rana Kapoor and his entities held 10.6% as on end September 2018), DHFL (promoter holding 39%).  
• Growth of monopoly market: Already, The Indian economy already suffers from over-concentration. The COVID-19 crisis is aggravating this situation because those with greater resources will not only more easily survive the crisis but will be able to take over small, medium and large enterprises that have not had the resilience or resources. In this scenario, if large industrial houses get banking licences, they will become even more powerful.  
• Overburdened RBI: RBI has encountered much difficulty in dealing with banking irregularities at Punjab National Bank, Yes Bank, ILFS and Lakshmi Vilas Bank. Regulation and supervision need to be strengthened considerably to deal with the current problems in the banking system before they are burdened with new regulatory tasks.  
• Can delay exiting of inefficient firms: This makes it impossible for more efficient firms to grow and replace them. If industrial houses get direct access to financial resources, their capacity to delay or prevent exit altogether will only increase.  
• Poor governance under the present structure is the major problem of Indian banking sector. Example: Despite spotting the fault at early stage in IL&FS, RBI did not step up its governance activities and that resulted in the defaulting of the IL&FS.  

• Bank for elites: In the past, banks were nationalized because their ownership by the private sector was leading to “large concentration of resources in the hands of a few business families”. The allowing of corporate might revive that.  
• Financial crisis in India: 2008 Global Financial crisis was a proof of how risky that the private sector banks are? Trusting them to operate at large scale instead of trust worthy and financially stable government-owned banking system might create a financial crisis in long run.  
• Inadequate to track: Corporate houses are expert at routing funds through a maze of entities in India and abroad. So, they can bypass the checks and balances and flout the norms.  
• Alternative options do exist: The other powerful way to promote more good quality credit is to undertake serious reforms of the public sector banks.  

Arguments for corporate ownership of banks 

• Industry-owned banks would increase the supply of credit, which is low and growing slowly. 
• Increased competition: Privatization of banks can force public sector banks to perform due to increased competition 
• Boost to financial inclusion: It can lead to opening of more branches and subsequently bringing more people into the banking net.

Is Corporate as Banks new to India?  

• No. In February 2013, the RBI had issued guidelines that permitted corporate and industrial houses to apply for a banking licence. Some houses applied, although a few withdrew thei rapplications subsequently.  
• Only two entities qualified for a licence, IDFC and Bandhan Financial Services. No corporate was ultimately given a bank licence.  
• The RBI maintained that it was open to letting in corporate companies to open banks. However, none of the applicants had met ‘fit and proper’ criteria.  

• In 2014, the RBI restored the prohibition on the entry of corporate houses into banking 

What is the way forward?  

• The way forward should be to privatize public sector banks by allowing holding of stock by the general public.  

• • • If the government exits banking ownership, it would lead to professional management and broader distribution of wealth. The banks would come under both SEBI and stringent RBI guidelines.  
• Improve private governance and regulatory capacity: The Committee on Financial Sector Reforms (2008) headed by then RBI Governor observed that it is premature to allow industrial houses to own banks. Though necessary, the reform can wait till private governance and regulatory capacities improve.  
• Regulator side reforms:  
  • Regulator has to enhance the credibility of the system by ensuring every deposit is safe especially with better governance.  
  • RBI should ensure the checks and balances before allowing corporates to become promoters.  
  • Instead of debating with the allowing of corporate is good or bad? RBI can move ahead with the other recommendations which are really beneficial for the banking sector and economy as whole.

• Government side reforms 
  • Better Legal framework: If permitting corporates as bank promoters than the government not only need to amend the Banking Regulation Act, 1949 but also needs to amend various Acts to curb crony capitalism, liberal whistle blowing policies etc., but they all need strong political commitment.  

Conclusion 

Rather than concentration of too much economic power in the hands of corporates, it will be wise to carry out the long-pending banking reforms and strengthen the functional autonomy of RBI. 

FCRA Act 

Why in news?
Union Home Ministry has announced new guidelines for banks, under the Foreign Contribution (Regulation) Act. These guidelines are related to the donations received by non-governmental organizations (NGOs) and associations.  

New FCRA guidelines 

• The donations received in Indian rupees by the NGOs and associations from any foreign source should be treated as a foreign contribution. Even if that source is located in India at the time of such donation. 
• It will include the contributions by foreigners of Indian origin like OCI or PIO cardholders, in Indian rupees (INR).  
• As per the existing rules, Banks need to report any receipt or utilization of any foreign contribution, by any NGO, association, or person. Banks should submit these reports to the Central government within 48 hours.  
• Rules cover all NGOs, whether they are registered or granted prior permission under the FCRA. 
• Any violation by the NGO or by the bank of these rules of FCRA may invite penal provisions under the FCRA Act, 2010.  

What is Foreign Contribution (Regulation) Act, 2010? 

• FCRA was enacted in 1976 and amended in 2010. It regulates foreign donations and ensures that such contributions do not adversely affect internal security.  
• It is implemented by the Ministry of Home Affairs. 
• Coverage: It is applicable to all associations, groups, and NGOs which intend to receive foreign donations.  
• Exemption: Members of the legislature and political parties, government officials, judges, and media persons are prohibited from receiving any foreign contribution.  
  • However, in 2017 the FCRA was amended through the Finance Bill. This amendment allowed political parties to receive funds from,  
    • The Indian subsidiary of a foreign company or  
    • A foreign company, in which an Indian holds 50% or more shares.  
• Registration: It is mandatory for all such NGOs to register themselves under the FCRA. The registration is initially valid for five years, and it can be renewed subsequently if they comply with all norms.  
• Amendment of FCRA Rules: In September 2020, the FCRA Act was amended by Parliament and a new provision was added. It makes it mandatory for all NGOs to receive foreign funds in a designated bank account at the State Bank of India (SBI) New Delhi branch.