Indian Economy Quiz: Money & Banking |17 Feb, 2021

The era of economic reforms had given the same option to the PSUs to tap new capital.

· As the AIFIs had more or less fixed rate of interest as compared to the banks which could mobilise cheaper deposits to lend cheaper—the AIFIs seemed to become irrelevant.

· The AIFIs witnessed a sharp decline in recent years. At this juncture the government decided to convert them into Development Banks (suggested by the Narasimhan Committee-I) to be known as the All-India Development Banks (AIDBs).

· In 2000, the government allowed ICICI to go for a reverse merger (when an elder enterprise is merged with a younger one) with the ICICI Bank—the first AIDB emerged with no obligation of project financing—such entities in coming times will be known as the universal banks.

Source: TMH Ramesh Singh

In 1996 it was decided to allow the establishment of local banks in the private sector.

· These banks were expected to bridge the gaps in credit availability and enhance the institutional credit framework in the rural and semi-urban areas and provide efficient and competitive financial intermediation services in their area of operation.

· The minimum start-up capital of a LAB was fixed at Rs.5crore.

· The promoters of these banks were required to bring in the entire minimum share capital up-front.

· It was also decided that a family among the promoter group could hold equity not exceeding 40% of the capital.

· The NRI contributions to the equity of the bank were not to exceed 40% of the paid-up capital.

Source: TMH Ramesh Singh

Differentiated Banks (niche banks) are banks that serve the needs of a certain demographic segment of the population.

· Small Finance Banks and Payment Banks are examples of differentiated banks in India.

· Small Finance Banks was recommended by the Nachiket Mor committee on financial inclusion.

Source: Sriram’s Economy

The Banks Board Bureau owes its genesis to the recommendations in the Report of The Committee set up by the Reserve Bank of India to Review Governance of Boards of Banks in India (Chair: Dr P J Nayak; May 2014), which envisaged the Bureau as a precursor to a Company which would eventually hold the Government’s investments in PSBs.

Source: Sriram’s Economy

A CICs-ND-SI is a Non-Banking Financial Company

· with asset size of Rs 100crore and above

· carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet,

· it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;

· its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (iii) above;

· it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

· it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

· it accepts public funds.

Source: RBI

Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.

· Basel guidelines refer to broad supervisory standards formulated by this group of central banks – called the Basel Committee on Banking Supervision (BCBS).

· The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord.

· The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses. India has accepted Basel accords for the banking system.

In June 2004, Basel II guidelines were published by BCBS. The guidelines were based on three parameters, which the committee calls it as pillars.

· Capital Adequacy Requirements: Banks should maintain a minimum capital adequacy requirement of 8% of risk assets

· Supervisory Review: According to this, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that a bank faces, viz. credit, market and operational risks

· Market Discipline: This needs increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented.

Source: TMH Ramesh Singh

The Reserve Bank of India (RBI) board finalized a three- year roadmap to improve regulation and supervision, among other functions of the central bank.

This medium-term strategy — named Utkarsh 2022 — is in line with the global central banks’ plan to strengthen the regulatory and supervisory mechanism.

Source: The Hindu

The Reserve Bank of India (RBI) issued a new framework for resolution of bad loans, replacing the previous norms quashed by the Supreme Court in April, offering a 30-day gap for stress recognition instead of the one-day default earlier.

· The new norms replace all the earlier resolution plans such as the framework for revitalizing distressed assets, corporate debt restructuring scheme, flexible structuring of existing long-term project loans, strategic debt restructuring scheme (SDR), change in ownership outside SDR, and scheme for sustainable structuring of stressed assets (S4A), and the joint lenders’ forum with immediate effect.

· The central bank said lenders shall recognize incipient stress in loan accounts, immediately on default, by classifying such assets as special mention accounts (SMA).

· Since default with any lender is a lagging indicator of financial stress faced by the borrower, it is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default.

· The central bank said once a borrower is reported to be in default by any lenders, financial institutions, small finance banks or NBFCs, the lenders shall undertake a prima facie review of the borrower account within 30 days from the day of default.

Source: Sriram’s Economy

The functions of the DICGC are governed by the provisions of ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’ (DICGC Act) and ‘The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961’ framed by the Reserve Bank of India in exercise of the powers conferred by sub-section (3) of Section 50 of the said Act.

Banks covered by Deposit Insurance Scheme are:

· All commercial banks including the branches of foreign banks functioning in India, Local Area Banks and Regional Rural Banks.

· Co-operative Banks – All eligible co-operative banks as defined in Section 2(gg) of the DICGC Act are covered by the Deposit Insurance Scheme.

· All State, Central and Primary co-operative banks functioning in the States/Union Territories which have amended their Co-operative Societies Act as required under the DICGC Act, 1961, empowering RBI to order the Registrar of Co-operative Societies of the respective States/Union Territories to wind up a co-operative bank or to supersede its committee of management and requiring the Registrar not to take any action for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the RBI, are treated as eligible banks.

· At present all Co-operative banks are covered by the Scheme. The Union Territories of Lakshadweep and Dadra and Nagar Haveli do not have Co-operative Banks.

Source: TMH Ramesh Singh

Bimal Jalan Committee was set up to review the economic capital framework of the RBI.

· Its mandate was to review global best practices followed by the central banks in making assessment and provisions.

· It has suggested that the framework may be periodically reviewed after every five years.

· The panel recommended aligning the central bank’s accounting year with the financial year which could reduce the need for paying interim dividend.

· The panel also suggested a clearer distinction between the two components of economic capital — realized equity and revaluation balances — mainly because of the volatile nature of the revaluation balances.

Source: Sriram’s Economy