Banking

A Scheduled Commercial Bank (SCB) is a commercialbank which has been included in the Second Schedule of the Reserve Bank of India Act, 1934 (RBI Act). Conditions for inclusion in the Second Schedule of the RBI Act are as stated in section 42(6)(a) of the RBI Act.

Every Scheduled Commercial Bank enjoys two types of principal facilities: -

• It becomes eligible for debts/loans at the bank rate from the RBI
• It automatically acquires the membership of clearing house. SCBs include Public Sector Banks, Private Sector Banks, Foreign Banks, Regional Rural Banks, Scheduled Payments Banks, Scheduled Small Finance Banks and Scheduled Co-operative Banks.

Different types of banks functioning in India includes, inter alia, the following—

Public Sector Banks (PSBs) means banks constituted under the State Bank of India Act, 1955 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

Foreign Bank is a bank that has its headquarters outside the India but runs its offices as a private entity at any other location in India. Such banks are under an obligation to operate under the regulations provided by the Reserve Bank of India as well as the rule prescribed by the parent organization located outside India.

Private Sector Banks are banking companies licensed to operate in India under Banking Regulation Act, 1949.

Regional Rural Banks (RRB) are the banks established under the Regional Rural Banks Act, 1976 with the aim of ensuring sufficient institutional credit for agriculture and other rural sectors. The area of operation of RRBs is limited to the area notified by the Central Government. RRBs are owned jointly by the Government of India, the State Government and Sponsor Banks.

Small Finance Banks (SFB) licensed under Banking Regulation Act, 1949 and created with an objective of furthering financial inclusion by primarily undertaking basic banking activities to un-served and underserved sections including small business units, small and marginal farmers, micro and small enterprises and other underserved sections.

Payment Banks are public limited companies licensed under Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to acceptance of demand deposits and provision of payments and remittance services

Local Area Banks (LAB) introduced in 1996 as new private local banks with jurisdiction over 2 or 3 contiguous districts to enable the mobilization of rural savings and make them available for investments in the local areas and to bridge the gaps in credit availability & enhance the institutional credit framework.

Cooperative Banks are financial entities established on a co-operative basis and belonging to their members with objective to provide rural financing and micro-financing. Cooperatives Banks are registered under the Cooperative Societies Act, 1912. These are regulated by the Reserve Bank of India and National Bank for Agriculture and Rural Development (NABARD) under the Banking Regulation Act, 1949 and Banking Laws (Application to Cooperative Societies) Act, 1965.

There are 12 Public Sector Banks functioning in India.

The Reserve Bank of India (RBI) is the regulator and supervisor of banks functioning in India.

Details of Public Sector Banks amalgamated/merged are as under ─

• New Bank of India with Punjab National Bank, w.e.f 4.9.1993;
• State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore and Bhartiya Mahila Bank with State Bank of India, w.e.f 1.4.2017;
• Vijaya Bank and Dena Bank with Bank of Baroda, w.e.f 1.4.2019; and
• Oriental Bank of Commerce and United Bank of India with Punjab National Bank, Andhra Bank and Corporation Bank with Union Bank of India, Syndicate Bank with Canara Bank, and Allahabad Bank with Indian Bank, w.e.f 1.4.2020.

A Reform Agenda of Public Sector Banks based on recommendations of Whole Time Directors and senior executives of Public Sector Banks has been pursued, since March 2018, through a unique Enhanced Access & Service Excellence (EASE) Reforms Index that has enabled objective and benchmarked progress on all key areas in Public Sector Banks— viz., governance, prudential lending, risk management, technology- and data-driven banking, and outcome-centric HR.

To measure public perception about improvements in EASE, it envisages survey by an independent agency and public reporting. Reforms in the agenda include increasing lending to MSMEs, making it easier for MSMEs and retail customers to transact, significantly increasing access to banking services, near-home banking services, time-bound refund on unauthorised electronic transactions, and mobile ATMs in underserved districts.

Products/services being offered by banks functioning in India include, inter alia, the following— Savings Bank Deposit, Current Account, Fixed Deposit, Recurring Deposit, Education Loans, Vehicle Loans, Home Loans, MSME Loans, Corporate Loans, Agriculture Loans and Safe Deposit Lockers.

Different types of deposit accounts being offered by banks in India include, inter alia, the following—

• Savings Bank Deposit— Interest-bearing accounts where the rate of interest depends on the bank where it is deposited. Further, there are restrictions in terms of the number of times money can be withdrawn from this account.
• Current Account— Generally operated by companies and firms. These are the noninterest-bearing deposit and serve the purpose of providing liquidity.
• Fixed Deposits— It has fixed tenure and earns higher interest for the customer. Generally, the more the money resides in the bank of a term deposit the more interest it earns. Banks pay higher interest in longer-term deposits than on shorter ones.
• Recurring Deposits— A fixed amount, as decided by the depositor, is deposited at regular intervals till the end of the tenure. The accumulated interest and the principal are given back to the depositor at the end of the tenure.
• Capital Gain Account— For re-investment of sales proceeds of plot of land or a flat or any such property in a residential property or any other specified asset within the stipulated time frame. Proceeds can be parked under the Capital Gains Account Scheme, 1988 and be eligible to claim exemption of Long-Term Capital Gains Tax on sale of Capital Assets.
• Senior Citizens’ Saving Scheme Account—Retirement benefit program by the Government of India. Individuals above the age of 60 years or 55 years for those who have retired on superannuation or under a voluntary or special voluntary scheme or 50 years for the retired personnel of defence services (excluding civil defence employees). Depositors are allowed to open multiple account under this scheme with combined maximum limit of ₹15 lakhs in all accounts. In addition, this scheme provides tax benefits.
• Public Provident Fund Account— PPF refers to the government issued, long-term savings scheme and provides the depositor the twin benefits of attractive return and tax benefit.
• Sukanya Samriddhi Account— The Government launched the Sukanaya Samriddhi Yojana scheme, a savings-cum-investment scheme, in 2015 under the 'Beti Bachao Beti Padhao' campaign to improve the prospects available to the girl child and inspire parents to save money for their daughter's education and, later, marriage. etc.

Yes. Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to financial services, namely, a basic savings & deposit accounts, remittance, credit, insurance, pension in an affordable manner. Under the scheme, a basic savings bank deposit (BSBD) account can be opened in any bank branch or Business Correspondent (Bank Mitra) outlet, by persons not having any other account. Benefits under PMJDY are as under—

• One basic savings bank account is opened for unbanked person.
• There is no requirement to maintain any minimum balance in PMJDY accounts.
• Interest is earned on the deposit in PMJDY accounts.
• Rupay Debit card is provided to PMJDY account holder.
• Accident Insurance Cover of ₹1 lakh (enhanced to ₹2 lakh to new PMJDY accounts opened after 28.8.2018) is available with RuPay card issued to the PMJDY account holders.
• An overdraft (OD) facility up to ₹10,000 to eligible account holders is available.
• PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension Yojana (APY), Micro Units Development & Refinance Agency Bank (MUDRA) scheme.

Deposit Insurance and Credit Guarantee Corporation (DICGC) (Wholly owned subsidiary of RBI) insures bank deposits, such as savings, fixed, current, recurring taken together up to a deposit insurance limit of ₹5 lakh for both principal and interest amount held by depositor. As a result of amendment by government, w.e.f. 1.9.2021, amount is to be paid within 90 days. All commercial banks including branches of foreign banks functioning in India, local area banks and regional rural banks are insured by DICGC.

The Reserve Bank of India, in exercise of the powers conferred by sub-sections (1) and (5) of Section 26A of the Banking Regulation Act, 1949, established the Depositor Education and Awareness Fund Scheme, 2014. As per scheme, the amount to the credit of any account in India with any bank which has not been operated upon for a period of ten years or any deposit or any amount remaining unclaimed for more than ten years is credited to the Fund, within a period of three months from the expiry of the said period of ten years. The Fund is utilised for promotion of depositors’ interest and for such other purposes which may be necessary for the promotion of depositors’ interests as specified by RBI from time to time. The depositor, however, is entitled to claim from the bank her deposit or any other unclaimed amount or operate her account after the expiry of ten years, even after such amount has been transferred to the Fund. The bank is liable to pay the amount to the depositor/claimant and claim refund of such amount from the Fund.

The widely used modes of payments and settlements in Indian banking include, inter alia—

• Real Time Gross Settlement (RTGS) is a system where there is continuous and real-time settlement of fund-transfers, individually on a transaction by transaction basis (without netting). 'Real Time' means the processing of instructions at the time they are received; 'Gross Settlement' means that the settlement of funds transfer instructions occurs individually;
• National Electronic Funds Transfer (NEFT) is a nation-wide centralised payment system with Round the clock availability on all days of the year and near-real-time funds transfer to the beneficiary account and settlement in a secure manner. Individuals, firms and corporates maintaining accounts with any member bank, participating in the NEFT system, can electronically transfer funds to any individual, firm or corporate having an account with any other bank in the country participating in the NEFT system;
• Immediate Payment Service (IMPS) provides robust & real time fund transfer which offers an instant, 24X7, interbank electronic fund transfer service that could be accessed on multiple channels like Mobile, Internet, ATM, SMS. IMPS is an emphatic service which allow transferring of funds instantly within banks across India which is not only safe but also economical; and
• Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood. It also caters to the “Peer to Peer” collect request which can be scheduled and paid as per requirement and convenience.

Reserve Bank, as part of the “Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” has defined a non-performing asset as under:

A. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

B. A non-performing asset (NPA) is a loan or an advance where;

• Interest and/ or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan,
• The account remains ‘out of order’ as indicated below, in respect of an Overdraft/Cash Credit (OD/CC)-

The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

The instalment of principal or interest thereon remains overdue for one crop season for long duration crops,

The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.

In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

In case of interest payments, banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter.

Further, the classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, nonsubmission of stock statements and non-renewal of the limits on the due date, etc.

Lenders identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as Special Mention Accounts (SMA) as per the following categories:

As per RBI Master Circular, updated 1.7.2015, a wilful default would be deemed to have occurred if any of the following events is noted, viz., the unit has defaulted in meeting its payment / repayment obligations to the lender—

• Even when it has the capacity to honour the said obligations;
• Has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes;
• Has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets; and
• Has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank / lender.The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions / incidents. The default to be categorised as wilful must be intentional, deliberate and calculated. Banks / Financial Institutions submit the list of suit-filed accounts and non-suit filed accounts of wilful defaulters of ₹25 lakh and above on a monthly or more frequent basis to Credit Information Companies (CICs). CICs have to disseminate the information pertaining to suit filed accounts of wilful defaulters on their respective websites.

As per RBI guidelines and policy approved by bank Boards, non-performing loans, including, inter-alia, those in respect of which full provisioning has been made on completion of four years, are removed from the balance-sheet of the bank concerned by way of write-off. Banks evaluate/consider the impact of write-offs as part of their regular exercise to clean up their balance-sheet, avail of tax benefit and optimise capital, in accordance with RBI guidelines and policy approved by their Boards.

The borrowers of written-off loans continue to be liable for repayment and the process of recovery of dues from the borrower in written-off loan accounts continues. Banks continue to pursue recovery actions initiated in written-off accounts through various recovery mechanisms available, which include, inter alia, filing of a suit in civil courts or in Debts Recovery Tribunals, action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, filing of cases in the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016, through sale of non-performing assets, etc.

Previously interest rate system viz. Prime Lending Rate (PLR), Benchmark Prime Lending Rate (BPLR), Base Rate and Marginal Cost of Funds Based Lending Rate (MCLR) were used by banks. Now, for effective transition of change of policy rates by RBI, it has introduced a new method—external benchmark-based lending rates. All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 are benchmarked to one of the following:

RBI policy repo rate

Government of India’s (GoI’s) 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)

GoI’s 6-Months Treasury Bill yield published by the FBIL

Any other benchmark market interest rate published by the FBIL.

Banks are free to offer such external benchmark linked loans to other types of borrowers as well.

Yes. As per RBI guidelines, banks cannot charge foreclosure charges/ pre-payment penalties on any floating rate term loan sanctioned, for purposes other than business, to individual borrowers with or without co-obligant(s).

Yes. RBI has formulated the Integrated Ombudsman Scheme, 2021 for redressal of customers’ grievances. The Scheme integrates the existing three Ombudsman schemes of RBI namely, (i) the Banking Ombudsman Scheme, 2006; (ii) the Ombudsman Scheme for NonBanking Financial Companies, 2018; and (iii) the Ombudsman Scheme for Digital Transactions, 2019. The Scheme provides cost-free redress of customer complaints involving deficiency in services rendered by entities regulated by RBI, if not resolved to the satisfaction of the customers or not replied within a period of 30 days by the regulated entity. The Scheme adopts ‘One Nation One Ombudsman’ approach by making the RBI Ombudsman mechanism jurisdiction neutral.

Some of the salient features of the Scheme are:

• It will no longer be necessary for a complainant to identify under which scheme he/she should file complaint with the Ombudsman.
• The Scheme defines ‘deficiency in service’ as the ground for filing a complaint, with a specified list of exclusions. Therefore, the complaints would no longer be rejected simply on account of “not covered under the grounds listed in the scheme”.
• The Scheme has done away with the jurisdiction of each ombudsman office.
• A Centralised Receipt and Processing Centre has been set up at RBI, Chandigarh for receipt and initial processing of physical and email complaints in any language.
• The responsibility of representing the Regulated Entity and furnishing information in respect of complaints filed by customers against the Regulated Entity would be that of the Principal Nodal Officer in the rank of a General Manager in a Public Sector Bank or equivalent.
• The Regulated Entity will not have the right to appeal in cases where an Award is issued by the ombudsman against it for not furnishing satisfactory and timely information/documents.

Repo Rate, or repurchase rate, is the key monetary policy rate of interest at which the Reserve Bank of India (RBI) lends short term money to banks. Reverse repo rate is the rate at which banks park money with the RBI for short term at the prevailing Reverse Repo Rate.

Basel III reforms are the response of Basel Committee on Banking Supervision to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy. Basel III reforms strengthen the bank-level i.e. micro prudential regulation, with the intention to raise the resilience of individual banking institutions in periods of stress. Besides, the reforms have a macro prudential focus also, addressing system wide risks, which can build up across the banking sector. The macro prudential aspects of Basel III are largely enshrined in the capital buffers. Both the buffers i.e. the capital conservation buffer and the countercyclical buffer are intended to protect the banking sector from periods of excess credit growth.

The Basel III norms stipulated a capital to risk-weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain capital to risk-weighted assets of 9%.

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, etc. and regulated by the Reserve Bank of India.

NBFCs lend and make investments and hence their activities are akin to that of banks. However, there are a few differences as given below:

• 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 is not available to depositors of NBFCs, unlike in case of banks. NBFCs are classified on the basis of asset/liability structures, systemic importance and the activities they undertake. However, w.e.f 1.10.2022, regulatory structure for NBFCs comprises of four layers based on their size, activity, and perceived riskiness.

National Asset Reconstruction Company Limited (NARCL) has been set up by banks, with the aim and objective to aggregate and takeover the existing legacy stressed assets from various banks/ financial institutions and resolve/dispose-off the assets to alternate investment funds and/or other potential investors in a time bound manner or seek any other resolution as it may deem appropriate.

Public Sector Banks are not covered by the Companies Act and hence the Corporate Social Responsibility policy related provisions of the Companies Act are not applicable to these banks. However, RBI has issued guidelines for Scheduled Commercial Banks, including PSBs, on Corporate Social Responsibility, Sustainable Development and Non-Financial Reporting – Role of Banks.

Yes. Section 5(b) of the Banking Regulation Act, 1949 (B R Act) defines the business of banking and Section 6 (1) lays down the various forms of business which the banking companies can engage in. These Sections are also applicable to the public sector banks by virtue of a specific mention thereof in their respective statutes. Further, in terms of Section 19(1) of the B R Act, a bank can form a subsidiary company only for (i) undertaking an activity which is permitted to the parent bank itself under Section 6(1), ibid; (ii) carrying out the business of banking exclusively outside India; and (iii) undertaking such other business, considered conducive to the spread of banking in India, that the RBI may permit in public interest. This Section too is applicable to the public sector banks by virtues of the provisions of Section 51 of the B R Act. As on 30th June 2022, Indian banks are operating in overseas locations through their 123 branches and 24 subsidiaries as well as under 7 joint-ventures with other entities. These banks are providing a host of services at overseas locations including, inter alia deposits, advances, investments, trade finance and foreign exchange services.

Yes. Foreign banks can either operate through branch presence or through 100% wholly owned subsidiary (WOS).

Yes. Foreign Direct Investment in private sector banks is permitted up to 49% through automatic route, and beyond that up to 74% though government approval route. FDI in public sector banks is permitted up to 20% through government approval route.