Chapter 1 Overview of Indian Banking System – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Overview of Indian Banking System – CS Professional Banking Law and Practice Study Material
Question 1.
Write short note on the following:
Specialised development financing institutions (June 2009, 3 marks)
Answer :
Specialised development financing institutions: Specialised Development Finance Institutions are financial institutions set up by the government to provide long-term financial and technical assistance to economic sectors of the country that other providers of capital do not necessarily go into.
The specialised development financing institutions both at National level and state level are as under:
For Industry : IDBI, SIDBI, IIBI, IFCI, ICICI, SIDCO
For Agriculture : NABARD
For Exports : Export – Import Bank
For Housing : National Housing Bank of India
For Infrastructure : IDFC
Question 2.
Describe the main functions of the Small Industries Development Bank of India (SIDBI). (Dec 2008, 5 marks)
Answer:
Functions of Small Industries Development Bank of India (SIDBI):
Over the years, the scope of promotional and developmental activities of SIDBI has been enlarged to encompass several new activities. It performs a series of functions in collaboration with voluntary organisations, non¬governmental organisations, consultancy firms and multinational agencies to enhance the overall performance of the small scale sector. The important functions of SIDBI are discussed as follows:
- Initiates steps for technology adoption, technology exchange, transfer and up gradation and modernisation of existing units.
- SIDBI participates in the equity type of loans on soft terms, term loan, working capital both in rupee and foreign currencies, venture capital support, and different forms of resource support to banks and other institutions.
- SIDBI facilitates timely flow of credit for both term loans and working capital to MSMEs in collaboration with commercial banks.
- SIDBI enlarges marketing capabilities of the products of MSMEs in both domestic and international markets.
- SIDB1 directly discounts and rediscounts bills with a view to encourage bills culture and helping the SSI units to realise their sale proceeds of capital goods / equipments and components etc.
- SIDBI promotes employment oriented industries especially in semi-urban areas to create more employment opportunities so that rural-urban migration of people can be checked.
Question 3.
Attempt the following:
List down some of the strengths of the Indian banking system. (June 2009, 5 marks)
Answer :
Strengths of the Indian Banking System :
According to a recent survey conducted by the Federation of Indian Chamber of Commerce and Industry (FICCI) over 95% of the respondents were of the view that the Indian Financial Sector is robust and sound.
According to the survey, some of the strengths of the banking system are :
- Regulatory system
- Economic growth
- Technological advancement
- Risk assessment system
- Credit quality
- Overall health of these banks has improved.
Asset quality has improved. Almost all Public Sector Banks are earning net profits.
NPA level has come down drastically. Capital adequacy ratio has improved substantially. Latest technology has been adopted. Supervisory and monitoring systems have been adopted which have stood the test of time.
Question 4.
Comment on the following:
RBI is a banker to the government. (Dec 2016, 2 marks)
Answer:
True: In terms of Sections 20 and 21 of the RBI Act 1934, the RBI has the obligation to transact the banking business of the Central Government.
Question 5.
Read the following case study and answer the questions that follow : (June 2022)
Non-Banking Financial Companies (NBFCs)
The Non-Banking Finance Companies (NBFCs) ecosystem in our country is a place of immense diversity and complexity as well. There are more than 9,000 NBFCs across different categories focussed on a diverse set of products, customer segments, and geographies. As of March 31, 2021, the NBFC sector (including HFCs) has assets worth more than ₹ 54 lakh crore, equivalent to about 25% of the asset size of the banking sector. Therefore, there can be no doubt regarding its significance and role within the financial system in meeting the credit needs of a large segment of society. Over the last five years the assets of the NBFC sector have grown at a cumulative average growth rate of 17.91 percent. Demand-side pull or supply-side push which is contributing to the growth of the NBFC sector.
This distinction becomes important as it has significant implications for the efficiency of the sector. Conventional wisdom tells that growth consequential to demand-side pull factors translates into increased efficiency and better services to the customers. Supply-driven growth could, on the other hand, arise out of entry by entrepreneurs who would like to enter financial services industries but are unable to meet the scale and stringent norms meant for banks.
The preamble to the Reserve Bank of India Act, 1934, enjoins on the Bank, to operate the currency and the credit system of the country to its advantage. Thus, the promotion of an efficient financial intermediation system, which facilitates adequate credit flow to every segment of the society, more so to the financially disadvantaged population is an embedded goal for the Reserve Bank.
The non-banking financial sector assumes an important role in the process as it is a valuable source of financing for many firms, micro, and small units as well as individuals and small business, facilitating competition and diversity among credit providers. Further, niche NFBCs fulfill the unmet and exclusive credit needs of various segments such as infrastructure, factoring, leasing, etc. NBFC-MFIs reach out to the underprivileged sections of society. Along with banking, which is the primary channel of financial intermediation, NBFCs have been increasingly playing a significant complementary role in financial intermediation and provision of last-mile delivery of financial services.
Non-banking financial entities, by their regulatory design, enjoy the freedom to undertake a wider spectrum of activities as compared to banks for which the permissible activities are enshrined in the statute itself. This freedom, coupled with a light touch regulatory prescription, gives them a greater risk-taking capacity to engage in financial intermediation in the segments which are often underserved by other players. Hence, even with large universal banking’s reach across the country, the NBFC sector can create a space for itself with customized services with a local feel.
Apart from furthering the financial inclusion agenda, the added advantage of a well-functioning NBFC sector is that it can promote resilience in the financial system by being innovative and agile in offering tailored financial products and solutions as a supplemental source of credit alongside banks. It has to be noted that many recent financial sector credit delivery innovations, for example, micro-credit, were popularised by non-banking financial entities. This capability and freedom to innovate spurs a competitive advantage in the financial services sector with the ultimate beneficiary in the process being the customer.
However, the reputation of the non-banking financial sector has been dented in recent times by the failure of certain entities due to idiosyncratic factors. The challenge, therefore, is to restore trust in the sector by ensuring that few entities or activities do not generate vulnerabilities that go undetected and create shocks and give rise to systemic risk through their interlinkages with the financial system. Forestalling and where necessary, decisively resolving such episodes becomes a key focus of our regulatory and supervisory efforts.
The Global monitoring report on Non-banking Financial Institution (NBFI) by Financial Stability Board (FSB) classifies non-banking financial activities into five economic functions, (i) collective investment vehicles, (ii) loan companies which depend on short-term funding, (iii) market intermediaries, (iv) entities which engage in the facilitation of credit creation (such as credit insurance companies, financial guarantors) and (v) entities undertaking securitization- based credit intermediation.
Globally, the collective investment vehicles are the most dominant category of non-banking financial activity and account for 73 percent of the global NBFI sector. In the global context, the second function of NBFIs i.e., loan companies depending on short-term funding is a small segment constituting just around 7 percent of the total NBFI sector, but in India, the non-banking sector is largely into direct credit intermediation. The regulatory challenge in India is thus different with the focus on designing prudential regulations specifically meant for lending activities of NBFCs without compromising on their operational flexibility.
Over the years, the NBFC sector has evolved in terms of its size, operations, technological sophistication with entry into newer areas of financial services and products. To keep pace with the same, regulations have also evolved to address various accompanying risks and concerns. Reserve Bank had introduced an element of the differential regulation way back in 2006 when the regulatory framework for systematically important NBFCs was strengthened. Further in 2014, a revised regulatory framework was announced and many of the regulatory parameters with regard to net owned fund, prudential requirements, and corporate governance standards were strengthened.
The regulatory framerwork for NBFCs has remained a work in progress and it continues to be so. The fundamental premise has, however, been to allow operational flexibility to NBFCs and help them grow and develop expertise.
Based on the above information, answer the following questions :
(a) What is a Non-Banking Financial Company (NBFC)? (4 marks)
(b) Flow does NBFCs differ from Banks ? (4 marks)
(c) Is it necessary that every NBFC should be registered with RBI? (4 marks)
(d) Why are certain NBFCs classified as systemically important NBFCs? (4 marks)
(e) Give an example of Flarmonisation of different categories of NBFCs. (4 marks)
(f) Flow are Core Investment Companies (CICs) different from other NBFCs in terms of regulations? (4 marks)
(g) What action can be taken against persons/financial companies making a false claim of being regulated by the Reserve Bank? (4 marks)
(h) Explain the terms ‘owned fund’ and ‘net owned fund’ about NBFCs. (4 marks)
(i) NBFCs are charging high-interest rates from their borrowers. Is there any ceiling on the interest rate charged by the NBFCs to their borrowers? (4 marks)
(j) Whether NBFCs can accept deposits from NRIs? (4 marks)
Question 6.
Write a short note on National Flousing Bank (NFIB)
Answer:
National Housing Bank (NHB):
National Housing Bank was set up in July, 1988 as the apex financing institution for the housing sector with the mandate to promote efficient, viable and sound Housing Finance Companies (HFCs). Its functions aim at to augment the flow of institutional credit for the housing sector and regulate HFCs. NHB mobilizes resources and channelizes them to various schemes of housing infrastructure development.
It provides refinance for direct housing loans given by commercial banks and non-banking financial institutions. The NHB also provides refinance to Housing Finance Institutions for direct lending for construction/purchase of new housing/dwelling units, public agencies for land development and shelter projects, primary cooperative housing societies, property developers.
At present, it is a wholly owned subsidiary of Reserve Bank of India which contributed the entire paid-up capital. RBI has proposed to transfer its entire shareholding to Government of India to avoid conflict of ownership and regulatory role. For this transfer, the central bank will pay RBI, in cash, an amount equal to the face value of the subscribed capital issued by the RBI. The outstanding portfolio of NHB at ₹ 33,083 crores as on 31st December 2012 is almost equally divided between the commercial banks and the HFCs.
Question 7.
State the types of activities undertaken by NABARD.
Answer:
NABARD undertakes a number of inter-related activities/services which fall under three broad categories
(a) Credit Dispensation:
NABARD prepares for each district annually a potential linked credit plan which forms the basis for district credit plans. It participates in finalization of Annual Action Plan at block, district and state levels and monitors implementation of credit plans at above levels. It also provides guidance in evolving the credit discipline to be followed by the credit institutions in financing production, marketing and investment activities of rural farm and non- farm sectors.
(b) Developmental & Promotional:
The developmental role of NABARD can be broadly classified as:-
- Nurturing and strengthening of – the Rural Financial Institutions (RFIs) like SCBs/SCARDBs, CCBs, RRBs etc. by various institutional strengthening initiatives.
- Fostering the growth of the SHG Bank linkage programme and extending essential support to SHPIs NGOsA/As/ Development Agencies and client banks.
- Development and promotional initiatives in farm and non-farm sector.
- Extending assistance for Research and Development.
- Acting as a catalyst for Agriculture and rural development in rural areas.
(c) A Supervisory Activities:
As the Apex Development Bank, NABARD shares with the Central Bank of the country (Reserve Bank of India) some of the supervisory functions in respect of Cooperative Banks and RRBs.