Banking Structure in India

The banking structure in India is diverse and well-established, comprising various types of banks, both public and private, as well as cooperative banks. The Reserve Bank of India (RBI) serves as the central banking authority and regulator overseeing the functioning of these institutions

Scheduled Commercial Banks

In India, scheduled commercial banks are a category of banks that are regulated and supervised by the Reserve Bank of India (RBI) and are listed in the Second Schedule of the Reserve Bank of India Act, 1934. These banks are authorized to operate as banking institutions and carry out a full range of banking activities. Scheduled commercial banks can be further classified into two main categories:

Public Sector Banks (PSBs):
- Public sector banks are owned and operated by the government of India.
- They play a significant role in the Indian banking system and are known for their extensive branch network and widespread reach, particularly in rural and semi-urban areas.
- Some prominent public sector banks include State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB), and Canara Bank.
Private Sector Banks:
- Private sector banks are owned and operated by private individuals, organizations, or corporations.
- They operate under the guidelines and regulations set forth by the RBI.
- Private sector banks are known for their innovation, customer-centric approach, and technology adoption.
- Leading private sector banks in India include HDFC Bank, ICICI Bank, Axis Bank, and Kotak Mahindra Bank.

Scheduled commercial banks, both public and private, provide a wide array of financial services, including deposit accounts (savings accounts, current accounts, fixed deposits), loans and advances (personal loans, home loans, business loans), trade finance, wealth management, and electronic banking services.

Nationalised banks

Nationalized banks in India refer to a group of banks that were previously privately owned and were brought under government ownership and control through a process of nationalization. This significant step was taken to promote financial inclusion, enhance the reach of banking services, and ensure that banking operations align with national priorities. The process of nationalization in India occurred in two phases:

First Phase of Nationalization (1969): In this phase, 14 major private banks were nationalized by the Indian government. The primary objective was to reduce the concentration of economic power and promote social welfare. The banks that were nationalized during this phase included:
- Allahabad Bank
- Bank of Baroda
- Bank of India
- Bank of Maharashtra
- Central Bank of India
- Canara Bank
- Dena Bank (merged with Bank of Baroda in 2019)
- Indian Bank
- Indian Overseas Bank
- Punjab National Bank
- Syndicate Bank (merged with Canara Bank in 2020)
- UCO Bank
- Union Bank of India
- United Bank of India (merged with Punjab National Bank in 2020)
Second Phase of Nationalization (1980): In this phase, six more private banks were nationalized, further expanding the government’s control over the banking sector. The banks nationalized during this phase were:
- Andhra Bank (merged with Union Bank of India in 2020)
- Corporation Bank (merged with Union Bank of India in 2020)
- New Bank of India (merged with Punjab National Bank in 1993)
- Oriental Bank of Commerce (merged with Punjab National Bank in 2020)
- Punjab and Sind Bank
- Vijaya Bank (merged with Bank of Baroda in 2019)

These nationalized banks became instrumental in driving financial inclusion, rural development, and the expansion of banking services across the country. They played a crucial role in supporting the government’s socioeconomic policies and promoting economic growth.

Public Sector Banks

Public sector banks (PSBs) in India are a subset of scheduled commercial banks that are primarily owned and operated by the government of India. These banks serve a crucial role in the Indian banking system and play a significant part in promoting financial inclusion, economic development, and the implementation of government policies. Here are some key features and characteristics of public sector banks in India:

Government Ownership: Public sector banks are government-owned, and the majority of their shares are held by the central government. This ownership ensures government control and influence over the operations and policies of these banks.
Extensive Branch Network: Public sector banks have a vast branch network across the country, making them accessible to people in urban, semi-urban, and rural areas. This extensive reach is instrumental in financial inclusion efforts.
Priority Sector Lending: Public sector banks are mandated to allocate a certain percentage of their lending to priority sectors such as agriculture, small and medium enterprises (SMEs), and disadvantaged sections of the population. This promotes inclusive growth and rural development.
Government Banking: Public sector banks often serve as the banker to the government, conducting various financial transactions on behalf of the government, including handling public debt, tax collections, and government payments.
Government Support: During times of financial stress or economic challenges, the government can provide capital infusion to public sector banks to strengthen their financial positions and ensure stability.

Private Banks

Private sector banks in India are financial institutions that are owned and operated by private individuals, corporations, or entities rather than the government. These banks play a crucial role in the Indian banking system and have gained prominence for their customer-centric approach, innovation, and technological advancements. Here are some key features and characteristics of private sector banks in India:

Ownership: Private sector banks are owned by private shareholders, which can include individuals, corporate entities, and foreign investors. The government does not have a significant ownership stake in these banks.
Competitive Environment: Private sector banks operate in a competitive environment, alongside public sector banks and foreign banks. This competition has driven these banks to focus on customer service, efficiency, and technological innovation.
Customer-Centric Approach: Private banks often emphasize personalized and customer-centric services. They aim to provide a superior banking experience to their customers through tailored solutions and quick decision-making.
Innovation and Technology: Private sector banks are known for their adoption of modern technology and digital banking solutions. They offer online banking, mobile banking, and innovative financial products and services.

Regional Rural Banks (RRBs)

Regional Rural Banks (RRBs) are specialized financial institutions in India that were established to serve the rural and semi-urban areas of the country. These banks were created with the aim of providing credit and financial services to small and marginal farmers, agricultural laborers, rural artisans, and other economically disadvantaged groups in rural India. Here are some key features and characteristics of Regional Rural Banks in India:

Cooperative Structure: RRBs have a cooperative structure, meaning they are owned by a combination of the central government, the state government, and sponsor banks (typically public sector banks or private sector banks).
Service Area: Each RRB is designated a specific service area, typically comprising one or more districts within a state. The primary focus of RRBs is to serve the rural and semi-urban population within their designated service area.
Financial Inclusion: RRBs play a pivotal role in promoting financial inclusion in rural India by providing banking services to unbanked and underbanked areas. They aim to bring rural residents into the formal banking system.
Credit to Agriculture and Allied Activities: RRBs are mandated to provide credit to agriculture and allied activities, which includes crop cultivation, animal husbandry, fisheries, and rural-based industries. They offer various agricultural loan products to farmers.
Microfinance: RRBs often engage in microfinance activities, providing small loans to individuals and self-help groups (SHGs) to support income-generating activities and entrepreneurship in rural areas.

Methods of Credit Control

Credit control refers to the strategies and techniques used by financial institutions, central banks, and businesses to manage and regulate the extension of credit to customers and borrowers. Effective credit control helps ensure that credit is extended to individuals and entities who are creditworthy and capable of repaying their debts. Here are some common methods of credit control:

Credit Application and Screening: Before extending credit, businesses and financial institutions typically require customers or borrowers to fill out credit applications. These applications collect important financial information that can be used to assess the creditworthiness of the applicant. Screening involves checking credit reports, income statements, and other relevant financial documents to determine the applicant’s ability to repay debt.
Credit Scoring: Credit scoring is a quantitative method of assessing credit risk. Credit scores are generated based on an individual’s or entity’s credit history, payment history, outstanding debts, and other factors. Lenders use these scores to quickly evaluate the creditworthiness of applicants and determine the terms and interest rates for loans or credit lines.
Credit Limits: Financial institutions and businesses often set credit limits for customers or borrowers. These limits specify the maximum amount of credit that can be extended to an individual or entity. Monitoring credit limits helps prevent overextension of credit and minimizes the risk of default.
Interest Rates: Adjusting interest rates can be an effective method of credit control. Increasing interest rates on loans or credit cards can discourage borrowing, while lowering rates can stimulate borrowing and spending.
Collateral Requirements: Lenders may require borrowers to provide collateral, such as real estate, vehicles, or valuable assets, as security for the loan. If the borrower defaults, the lender can seize and sell the collateral to recover the debt.
Credit Reviews: Regularly reviewing the creditworthiness of borrowers is essential. Businesses and financial institutions may conduct periodic credit reviews to assess changes in borrowers’ financial situations and adjust credit terms accordingly.
Payment Terms: Establishing clear payment terms, including due dates and penalties for late payments, can incentivize borrowers to make timely payments. Offering discounts for early payments is another way to encourage prompt repayment.
Debt Collection: Effective debt collection practices are essential for recovering overdue payments. This may involve contacting delinquent borrowers, sending reminders, and, if necessary, pursuing legal action.
Credit Insurance: Credit insurance can protect lenders against defaults. Lenders pay premiums to insurance companies to cover potential losses in case borrowers default on their loans.
Central Bank Policies: Central banks use various tools to control credit within the broader economy. This includes setting interest rates, reserve requirements for banks, and open market operations to influence the overall availability of credit in the economy.

Cash Reserve Ratio (CRR)

The Cash Reserve Ratio (CRR) is a monetary policy tool used by central banks, such as the Reserve Bank of India (RBI) and other similar institutions, to regulate the money supply in an economy. CRR is one of the methods by which a central bank can control inflation, stabilize the financial system, and influence the overall economic activity in a country

1.Overview of CRR:

CRR is the portion of a bank’s total deposits that it must hold as reserves in the form of cash or with the central bank. It is expressed as a percentage of the bank’s total deposits. In essence, it is a mandatory reserve requirement that banks need to maintain with the central bank.
The primary objective of imposing a CRR is to control the amount of money that banks have available for lending and investment. By changing the CRR, a central bank can either increase or decrease the amount of money that banks can lend to borrowers. This, in turn, affects the money supply in the economy
When the central bank raises the CRR, banks are required to hold a larger portion of their deposits as reserves, leaving them with less money available for lending. This reduces the money supply in the economy, which can help control inflation. Conversely, when the central bank lowers the CRR, banks have more funds to lend, which can stimulate economic activity and investment.
CRR also serves as a tool for managing the liquidity in the banking system. By adjusting the CRR, a central bank can influence the amount of funds available to banks for their daily operations and payments
CRR helps maintain the stability of the financial system by ensuring that banks have a certain level of liquidity to meet their obligations and unexpected withdrawals by depositors. It also allows central banks to exert a degree of control over the banking sector.

2. Advantages Of CRR

The Cash Reserve Ratio (CRR) has several advantages for a central bank and the overall economy:

CRR provides the central bank with a direct and effective tool to control the money supply in the economy.
By adjusting the CRR, the central bank can influence the liquidity available to commercial banks, which in turn affects lending and spending levels.
This allows the central bank to implement monetary policy measures to achieve macroeconomic objectives such as controlling inflation and stimulating economic growth.
One of the primary advantages of CRR is its role in controlling inflation. When the central bank raises the CRR, it reduces the funds available for lending by commercial banks, which can lead to higher interest rates and reduced borrowing and spending. This, in turn, helps control demand-pull inflation by curbing excessive spending in the economy.
CRR contributes to the stability of the financial system by ensuring that banks maintain a minimum level of reserves. This helps banks meet their liquidity needs and handle unexpected withdrawals by depositors or short-term financial crises more effectively, reducing the risk of bank failures
CRR gives the central bank a degree of control over the banking sector. It allows the central bank to manage the liquidity position of banks and prevent excessive lending or borrowing, which can lead to financial instability.
CRR serves as a tool for effective liquidity management within the banking system. By adjusting the CRR, the central bank can ensure that banks have an appropriate level of liquid assets to meet their daily operational needs and maintain the stability of payment systems.
CRR can be adjusted relatively quickly by the central bank, making it a flexible tool for responding to changing economic conditions and financial stability concerns.

Statutory Liquidity Ratio (SLR)

The Statutory Liquidity Ratio (SLR) is a regulatory requirement that mandates banks to maintain a certain percentage of their deposits and time liabilities in the form of specified liquid assets. SLR is used as a prudential measure by central banks, including the Reserve Bank of India (RBI), to ensure the liquidity and solvency of banks while promoting the government’s social and economic objectives

1. Overview of SLR

SLR is the portion of a bank’s total deposits that it must invest in government-approved securities, primarily government bonds and other high-quality, low-risk securities. It is expressed as a percentage of a bank’s total demand and time liabilities
The primary objective of SLR is to ensure the liquidity and solvency of banks. By mandating banks to hold a certain portion of their deposits in safe and liquid assets, SLR aims to protect the interests of depositors and maintain the stability of the financial system
Banks can meet their SLR requirements by holding various types of assets, including government securities, bonds issued by state and central governments, approved bonds and debentures of specific public sector undertakings (PSUs), and other assets as prescribed by the central bank
SLR regulations ensure that banks maintain a certain level of liquidity in their portfolio. This helps banks meet their short-term obligations and handle unexpected liquidity needs
SLR also serves as a tool for implementing monetary policy. Central banks can influence the money supply by altering the SLR requirements. Reducing SLR requirements allows banks to have more funds available for lending and can stimulate economic activity, while increasing SLR requirements can have the opposite effect by reducing lending capacity.

2. Why is the SLR fixed?

The Statutory Liquidity Ratio (SLR) is typically fixed by a central bank or regulatory authority for several reasons:

One of the primary objectives of SLR is to ensure the stability and safety of the banking system.
By fixing the SLR, regulatory authorities establish a minimum level of liquidity that banks must maintain.
This helps banks mitigate liquidity risk and ensures that they have adequate resources to meet their short-term obligations and handle unexpected withdrawals by depositors.
A fixed SLR provides a baseline level of protection for banks and their depositors.
SLR serves as a tool for implementing monetary policy. When the central bank changes the SLR requirement, it can influence the amount of funds banks have available for lending and investment.
By fixing the SLR, central banks can provide a stable and predictable environment for monetary policy implementation.
Frequent changes in SLR requirements could lead to uncertainty and disrupt monetary policy transmission mechanisms.

Repo Rate

The Repo Rate, short for “Repurchase Rate,” is a key monetary policy tool used by central banks, including the Reserve Bank of India (RBI), to control the money supply in the economy and influence overall economic conditions. It is an interest rate at which commercial banks can borrow money from the central bank by selling government securities (usually short-term) with an agreement to repurchase them at a later date, usually within a short period, often overnight

1. Overview

When the central bank lowers the Repo Rate, it becomes cheaper for commercial banks to borrow money from the central bank. This encourages banks to borrow more funds, increasing the liquidity in the banking system
The central bank uses the Repo Rate to influence the money supply in the economy. Lowering the Repo Rate injects more money into the banking system, which can stimulate economic activity by making loans cheaper and more accessible. Conversely, raising the Repo Rate reduces the money supply, which can help control inflation by making borrowing more expensive and slowing down economic activity
The Repo Rate is a critical tool of monetary policy. Central banks adjust it periodically to achieve specific policy objectives such as controlling inflation, promoting economic growth, or maintaining financial stability.
By increasing the Repo Rate, the central bank can reduce the money supply and increase the cost of borrowing for banks. This can help control demand-pull inflation, which occurs when excessive demand in the economy drives up prices.

Reverse repo rate

The Reverse Repo Rate is a key interest rate used by central banks, including the Reserve Bank of India (RBI), to manage monetary policy and control the money supply in the economy. It represents the rate at which commercial banks and other financial institutions can park their excess funds with the central bank by purchasing government securities and earning interest.

When the central bank increases the Reverse Repo Rate, it becomes more attractive for banks to lend money to the central bank by purchasing government securities. This provides banks with an alternative avenue to earn interest on their surplus funds.

The Reverse Repo Rate plays a role in managing liquidity in the banking system. By offering a competitive interest rate, the central bank can influence banks to deposit excess funds with it rather than lending those funds to other banks or investing them in other assets.

1. Reverse Repo Rate and Money Flow

The Reverse Repo Rate, set by a central bank, affects the money flow within an economy, specifically in the banking system.
When the central bank increases the Reverse Repo Rate, it makes it more attractive for banks to park their excess funds with the central bank instead of lending them out in the interbank market or to businesses and consumers.
This can lead to a decrease in lending by banks, as they opt to earn interest on their excess funds through the Reverse Repo facility. As a result, less money flows from banks to borrowers, potentially reducing economic activity.
Banks use the Reverse Repo facility to manage their short-term liquidity needs. A higher Reverse Repo Rate encourages banks to deposit more funds with the central bank, which reduces the liquidity available in the interbank market. Conversely, a lower Reverse Repo Rate can incentivize banks to lend more to other banks, increasing liquidity in the interbank market.

Impact of Reverse Repo Rate on Economy

An increase in the Reverse Repo Rate encourages banks to park more funds with the central bank, as they can earn a higher return. This reduces the amount of money available for lending in the banking system, leading to a contraction in the money supply. Conversely, a decrease in the Reverse Repo Rate can stimulate the money supply by encouraging banks to lend more funds to borrowers.
Changes in the Reverse Repo Rate can influence short-term interest rates in the banking system. When the central bank raises the Reverse Repo Rate, it can put upward pressure on other short-term interest rates, including interbank lending rates and yields on money market instruments. Higher interest rates can increase the cost of borrowing for banks and businesses, potentially leading to reduced borrowing and spending.
An increase in the Reverse Repo Rate can make it more attractive for banks to deposit excess funds with the central bank instead of lending them out. This can lead to a decrease in bank lending, including loans to businesses and consumers. Conversely, a decrease in the Reverse Repo Rate can incentivize banks to lend more to other banks and borrowers, stimulating economic activity.

Call Rates

Call rates refer to the interest rates at which banks and financial institutions borrow and lend short-term funds among themselves in the interbank money market. These rates are typically for very short periods, often overnight, and play a crucial role in the overall liquidity and stability of the financial system.

1. Overview of Call rates

Call rates are the interest rates at which one bank borrows money from another bank, usually on an unsecured basis, meaning there is no collateral involved. Banks engage in these transactions to manage their daily liquidity needs
Call rates are typically quoted for overnight lending, which means that the borrowed funds are expected to be repaid on the next business day
Call rates serve as an essential benchmark for short-term interest rates in the money market. They are a reflection of the overall demand and supply dynamics for liquidity in the banking system
Call rates can provide insights into the liquidity conditions within the banking system. When call rates rise, it may indicate a shortage of liquidity, while falling call rates may suggest excess liquidity
Call rates typically operate within an interest rate corridor defined by the central bank’s policy rates. For example, in many countries, the central bank sets a Repo Rate (the rate at which banks can borrow from the central bank) and a Reverse Repo Rate (the rate at which banks can lend to the central bank). Call rates often fall within this corridor.

Marginal Standing Facility (MSF)

The Marginal Standing Facility (MSF) is a monetary policy tool used by central banks, including the Reserve Bank of India (RBI), to provide a safety valve for banks facing acute liquidity shortages.

It operates as a special window for banks to borrow funds from the central bank, typically overnight, at a penalty rate above the regular policy rates

1.Key Points of MSF:

MSF is designed to provide a source of emergency liquidity for banks that face temporary and unanticipated liquidity shortages. Banks can approach the central bank to borrow funds through the MSF when they are unable to meet their short-term liquidity needs from other sources
The MSF interest rate is typically higher than the central bank’s main policy rates, such as the Repo Rate. The difference between the MSF rate and the Repo Rate is referred to as the “penalty rate.” Banks must pay this penalty rate when they access funds through the MSF
Banks are required to provide collateral to the central bank when borrowing through the MSF. The collateral can include government securities or other approved assets, and it serves as security for the borrowed funds. The value of the collateral should generally exceed the amount borrowed.
MSF loans are typically short-term and are provided for overnight borrowing. Banks are expected to repay the borrowed funds on the following business day
While MSF is primarily a liquidity management tool, central banks also use it as a monetary policy instrument. By setting the MSF rate higher than the Repo Rate, the central bank can influence short-term interest rates in the economy, affecting the overall cost of borrowing

2. Difference between MSF and Repo Rate

The Marginal Standing Facility (MSF) and the Repo Rate are two different interest rates used by central banks to manage liquidity and influence monetary policy

Subject	Marginal Standing Facility (MSF)	Repo rate
Purpose	MSF is primarily a facility designed to provide emergency overnight funds to banks facing sudden and acute liquidity shortages. It acts as a safety valve for banks in crisis situations.	The Repo Rate is a standard policy rate used for banks to borrow money from the central bank against collateral, typically for short-term periods. It serves as a tool for regular liquidity management and is used as a policy instrument to influence overall economic conditions
Interest Rate Level	The interest rate for MSF is higher than the central bank’s main policy rate (e.g., the Repo Rate). The difference between the MSF rate and the Repo Rate is referred to as the “penalty rate.” Banks accessing the MSF have to pay this penalty rate	The Repo Rate is typically lower than the MSF rate and serves as the benchmark rate for short-term interest rates in the economy
Collateral Requirement:	Banks must provide collateral when borrowing through the MSF. The collateral can include government securities or other approved assets, and its value should generally exceed the amount borrowed.	Collateral is also required for transactions under the Repo Rate, where banks sell securities to the central bank with an agreement to repurchase them. However, the collateral requirements for the Repo Rate are typically more lenient than those for MSF
Role in Monetary Policy	While primarily a liquidity management tool, MSF also plays a role in monetary policy by influencing short-term interest rates. The central bank sets the MSF rate higher than the Repo Rate to guide short-term rates in the desired direction	The Repo Rate is a key monetary policy tool that central banks use to implement their monetary policy objectives, such as controlling inflation, stimulating economic growth, or maintaining financial stability

Bank Rate

The bank rate, often referred to as the “official bank rate” or the “policy rate,” is the interest rate at which a country’s central bank lends money to commercial banks and financial institutions. It is a key tool used by central banks to influence monetary policy and manage the overall economy. Here are some important points to understand about the bank rate:

Central Bank Role: The bank rate is determined and controlled by a country’s central bank, such as the Federal Reserve in the United States, the European Central Bank (ECB) in the Eurozone, or the Reserve Bank of India (RBI) in India. These central banks use the bank rate as one of their primary monetary policy instruments.
Lending to Commercial Banks: When a central bank lowers its bank rate, it effectively makes it cheaper for commercial banks to borrow money from the central bank. Conversely, when the central bank raises the bank rate, it becomes more expensive for commercial banks to borrow from the central bank.
Impact on Commercial Banks: Changes in the bank rate have a ripple effect on interest rates throughout the economy. When the central bank lowers the bank rate, commercial banks can borrow at lower costs, which typically leads to a reduction in the interest rates they offer to their customers, including borrowers and depositors. Conversely, when the central bank raises the bank rate, it becomes more expensive for banks to borrow, and this may result in higher interest rates for consumers and businesses.
Influencing Economic Activity: The central bank uses changes in the bank rate to influence economic activity. Lowering the bank rate is typically used to stimulate economic growth by encouraging borrowing, spending, and investment. Raising the bank rate is employed to combat inflation, as higher interest rates can reduce borrowing and spending, slowing down economic growth.
Inflation Control: One of the primary objectives of a central bank is to maintain price stability and control inflation. By adjusting the bank rate, central banks aim to keep inflation within a target range. Higher bank rates can help curb inflation by reducing borrowing and spending, while lower bank rates can stimulate economic activity when inflation is too low

Banking Sector Reforms in India

The banking sector in India has undergone significant reforms over the years to enhance its efficiency, stability, and competitiveness. These reforms have been initiated by the Reserve Bank of India (RBI), the central bank of the country, and the government. Here are some of the key banking sector reforms in India:

Nationalization of Banks (1969 and 1980): One of the landmark banking reforms in India was the nationalization of major banks. In 1969, 14 major banks were nationalized to extend banking services to rural and semi-urban areas, promote economic growth, and reduce regional disparities. In 1980, six more banks were nationalized for similar reasons. This helped in expanding the reach of banking services across the country.
Liberalization and Deregulation (1990s): In the early 1990s, India initiated economic liberalization, and the banking sector underwent significant deregulation. This included measures like interest rate deregulation, allowing private sector banks, and introducing competition in the sector. It led to the establishment of several private and foreign banks in India.
Banking Sector Reforms Committee (1991): The Narasimham Committee, formed in 1991, recommended a series of reforms to strengthen the banking sector. These recommendations included capital adequacy norms, improved asset quality, enhanced transparency and disclosure, and restructuring of the financial sector.
Asset Quality Review (AQR): The RBI conducted an AQR in 2015 to assess the quality of assets in the banking sector. This exercise helped in identifying and recognizing non-performing assets (NPAs) more accurately, leading to better provisioning by banks and improved transparency.
Basel III Implementation: India has been implementing the Basel III norms, which are international banking standards developed by the Basel Committee on Banking Supervision. These norms aim to strengthen the banking sector by improving risk management, increasing capital adequacy, and enhancing liquidity standards.
Consolidation of Public Sector Banks (2019): The government announced a plan to merge several public sector banks to create larger and more resilient institutions. The objective is to improve efficiency, reduce duplication of functions, and enhance the capacity of banks to handle higher lending volumes.
Digital Banking and Financial Inclusion: The Indian banking sector has embraced digital technology to improve access to financial services. Initiatives like the Jan Dhan Yojana and Aadhaar-based services have promoted financial inclusion. The adoption of digital payments and mobile banking has also grown significantly.
Prompt Corrective Action (PCA) Framework: The RBI introduced the PCA framework to monitor and address the financial health of banks. Under this framework, banks with weak financial indicators are subject to corrective measures to improve their performance and financial stability.
Insolvency and Bankruptcy Code (IBC): The introduction of the IBC in 2016 has had a significant impact on the resolution of bad loans and stressed assets in the banking sector. It provides a structured framework for the resolution of insolvency cases and the recovery of dues.

Differentiated Banks

“Differentiated Banks” refer to a concept in the banking sector where certain banks are categorized or structured differently from traditional banks based on their specialized functions, operations, or customer focus. These specialized banks cater to specific market segments or offer unique financial services. Differentiated banks can take various forms, and their classification often depends on the regulatory framework of the country. Here are some examples of differentiated banks:

Payment Banks: Payment banks are a type of differentiated bank that primarily focus on providing payment and remittance services to customers. They are not allowed to undertake lending activities like traditional banks. Payment banks in India, for instance, are limited to holding customer deposits up to a certain limit and cannot offer credit products. Instead, they provide services like fund transfers, mobile banking, and bill payments.
Small Finance Banks: Small Finance Banks are differentiated banks that primarily serve the financial needs of underbanked and unbanked populations, especially in rural and semi-urban areas. They are required to extend a specified percentage of their credit to priority sectors. These banks offer basic banking services, including savings accounts, small loans, and payment services, to promote financial inclusion.

Marginal Cost of Funds Based Lending Rate (MCLR)

The Marginal Cost of Funds Based Lending Rate (MCLR) is a benchmark interest rate used by banks in India to determine the lending rates for various loans, including home loans, personal loans, and business loans. It was introduced by the Reserve Bank of India (RBI) in April 2016 as a way to bring more transparency and efficiency to the interest rate-setting process.

Key features of the MCLR system include:

1. MCLR Calculation: Banks calculate the MCLR based on their marginal cost of funds, which includes the cost of borrowing from various sources, such as deposits, short-term borrowing, and long-term borrowing.

The MCLR is calculated on a monthly basis and is different for different loan tenors. For example, a bank may have a lower MCLR for short-term loans than for long-term loans.

2. Tenor-Linked Rates: MCLR rates are tenor-linked, meaning they vary based on the tenor (or term) of the loan. Banks typically offer MCLR rates for various tenors, such as overnight, one month, three months, six months, and one year.

3.Transmission of Policy Rates: The MCLR system is intended to improve the transmission of changes in the RBI’s policy rates (such as the repo rate) to lending rates offered by banks. When the RBI lowers its policy rates, banks are expected to reduce their MCLR rates, making borrowing cheaper for consumers and businesses

Basel Norms

The Basel Norms, also known as the Basel Accords, are international banking standards and recommendations developed by the Basel Committee on Banking Supervision (BCBS). The BCBS is a committee of banking supervisory authorities from various countries and is hosted by the Bank for International Settlements (BIS) in Basel, Switzerland. The Basel Norms are aimed at promoting stability and soundness in the global banking system. There are three main iterations of the Basel Norms:

Basel I: Basel I, introduced in 1988, primarily focused on credit risk and set minimum capital adequacy ratios for banks. It introduced the concept of risk-weighted assets, where different types of assets received different risk weights.
Basel II: Basel II, introduced in 2004 and revised in 2006 and 2009, expanded the framework to include operational risk and market risk in addition to credit risk. It introduced more sophisticated risk assessment models and emphasized risk management practices within banks.
Basel III: Basel III, introduced in response to the 2007-2008 global financial crisis, aimed to strengthen the global banking system further. It introduced higher capital requirements, liquidity standards, and stress testing requirements for banks. Basel III also introduced the concept of a capital conservation buffer and a countercyclical capital buffer to help banks withstand economic downturns.

Banking Ombudsman

A Banking Ombudsman is a designated authority or office established by a country’s central bank or financial regulatory authority to resolve complaints and grievances of customers related to banking services. The role of a Banking Ombudsman is to provide an accessible and impartial platform for customers to seek resolution when they are dissatisfied with a bank’s services or feel they have been treated unfairly.

Key functions and features of a Banking Ombudsman include:

Handling Customer Complaints: The primary responsibility of the Banking Ombudsman is to receive, investigate, and resolve complaints from bank customers. These complaints can pertain to various issues, including but not limited to, unauthorized transactions, account disputes, loan-related problems, and issues related to ATM and electronic banking services.
Impartiality: The Banking Ombudsman is expected to be impartial and neutral in resolving disputes. They do not represent either the customer or the bank and aim to provide a fair resolution.
Free Service: Access to the services of a Banking Ombudsman is typically free of charge for customers. This ensures that even customers with limited financial resources can seek assistance.
Alternative Dispute Resolution (ADR): Banking Ombudsman offices often use alternative dispute resolution mechanisms to facilitate negotiations between customers and banks. This can involve mediation or conciliation to reach a mutually acceptable resolution.
Legal Authority: The Banking Ombudsman operates within the legal framework established by the central bank or relevant regulatory authority. They have the authority to summon bank officials, examine documents, and make binding recommendations or decisions.
Transparency: The process of resolving complaints is typically transparent, with clear procedures and timelines for resolution. The Ombudsman provides written decisions and explanations to both parties.
Educational Role: Banking Ombudsman offices often engage in customer education and awareness programs to inform customers about their rights and responsibilities and how to avoid common banking problems.
Annual Reports: The Ombudsman usually publishes annual reports summarizing the types of complaints received and their outcomes. These reports can help identify systemic issues in the banking sector.
Jurisdiction: The jurisdiction of a Banking Ombudsman is usually limited to banking-related matters and is specific to the country or region where they operate.

Development Financial Institutions (DFI)

Development Financial Institutions (DFIs) are specialized financial institutions that are primarily established by governments or multilateral organizations with the specific goal of providing long-term financial support and funding for various developmental projects and sectors of the economy. DFIs play a critical role in facilitating economic growth and development, especially in emerging economies. Here are key characteristics and functions of DFIs:

Long-Term Financing: DFIs are designed to offer long-term financing, which may not be readily available from commercial banks or other financial institutions. They provide patient capital for projects that have extended gestation periods, such as infrastructure, housing, and industrial development.
Risk Mitigation: DFIs often take on higher levels of risk compared to traditional banks. They may provide loans at concessional rates, offer guarantees, or take equity stakes in projects to attract private sector investment and reduce risk for other investors.
Sectoral Focus: DFIs typically specialize in specific sectors like infrastructure, agriculture, energy, housing, or small and medium-sized enterprises (SMEs). This specialization allows them to have a deeper understanding of the unique challenges and opportunities in these sectors.
Policy Implementation: DFIs often play a role in implementing government policies and developmental plans. They align their lending strategies with national development goals, focusing on areas that require targeted support.
Capacity Building: DFIs may offer technical assistance and capacity-building programs to help borrowers and projects succeed. This can include training, advisory services, and knowledge sharing.
Wholesale Lending: DFIs often provide funding to other financial institutions, such as commercial banks and microfinance institutions, to extend credit to a wider range of borrowers. This approach is known as wholesale lending.
Government Ownership: Many DFIs are government-owned or have significant government ownership, which allows them to pursue developmental objectives that may not align with purely profit-driven motives.
Sustainability and Social Impact: DFIs often prioritize investments that have a positive social and environmental impact. They may incorporate environmental and social safeguards into their lending practices.
Monitoring and Evaluation: DFIs engage in rigorous monitoring and evaluation of projects to ensure that they are on track and delivering the intended developmental benefits.
International Cooperation: DFIs may collaborate with international financial institutions and donor agencies to mobilize additional resources for development projects. They often participate in joint ventures and co-financing arrangements.

Recent Developments in Economic Sector

The International Monetary Fund (IMF) forecasts that global GDP growth will reach 3.6% in 2023, up from 3.2% in 2022

The IMF forecasts that global inflation will reach 8.7% in 2023, up from 5.9% in 2022. This is due to a number of factors, including the war in Ukraine, supply chain disruptions, and strong demand

The US Federal Reserve has raised interest rates by 3 percentage points since March 2022, and other central banks around the world have followed suit. This is likely to slow economic growth in the short term

I.Government to recapitalize the PSB’s

The recapitalization of Public Sector Banks (PSBs) refers to the process by which the government injects additional capital or funds into these banks to strengthen their financial position and improve their ability to absorb losses, support lending activities, and meet regulatory capital requirements. Recapitalization is a common practice in the banking industry and is often undertaken to address various issues that PSBs may face. Here are some key points related to government recapitalization of PSBs:

Purpose: Recapitalization is typically undertaken for several reasons, including:
- Addressing Capital Shortfalls: To ensure that PSBs maintain adequate capital levels, especially during times of financial stress or when they incur losses.
- Supporting Growth: To enable PSBs to expand their lending activities and promote economic growth.
- Meeting Regulatory Requirements: To comply with regulatory capital adequacy ratios prescribed by the central bank or financial regulatory authority.
- Resolving Non-Performing Assets (NPAs): To help PSBs cover losses arising from NPAs (bad loans) and strengthen their balance sheets.
Government Intervention: In many countries, including India, the government plays a significant role in recapitalizing PSBs. The government may provide funds directly or indirectly through various means, such as issuing recapitalization bonds, injecting capital from the national budget, or leveraging surplus funds from other state-owned enterprises.
Recapitalization Bonds: One common method used by the government is the issuance of recapitalization bonds. These bonds are typically subscribed to by the government and have a long-term maturity. The funds raised through the issuance of these bonds are then infused into PSBs as equity capital.
Impact on Ownership: Recapitalization often results in an increase in the government’s ownership stake in the PSBs. This can lead to greater government influence in the governance and management of these banks.
Improved Lending Capacity: Recapitalization allows PSBs to enhance their lending capacity, as they have a stronger capital base to support loans and credit expansion to various sectors of the economy.
Resolution of NPAs: Recapitalization can be used in conjunction with measures to address NPAs. By providing additional capital, the government helps PSBs absorb losses from NPAs and gradually clean up their balance sheets.
Accountability and Governance: Governments may attach certain conditions to recapitalization, such as improving governance, implementing risk management practices, and undertaking reforms to prevent the recurrence of NPA issues.
Market Perception: Recapitalization can positively influence investor and depositor confidence in PSBs, leading to improved access to capital markets and reduced funding costs.
Challenges: Recapitalization is not a long-term solution to banking problems. Sustainable improvements in the operational efficiency and risk management practices of PSBs are essential to prevent future capital shortfalls.

II.RBI rule and regulation for peer-to-peer (P2P) lending

The Reserve Bank of India (RBI) has established a regulatory framework for Peer-to-Peer (P2P) lending platforms to ensure the orderly growth of this industry while safeguarding the interests of investors and borrowers. The regulatory guidelines for P2P lending platforms in India include:

Registration as NBFC-P2P: P2P lending platforms must register as Non-Banking Financial Companies (NBFCs) and obtain the specific category of NBFC-P2P registration from the RBI.
Eligibility Criteria: To be eligible for registration, P2P lending platforms must meet certain criteria, including minimum capital requirements, fit and proper criteria for promoters and directors, and adherence to a specific business model.
Risk Assessment: P2P platforms are required to conduct a risk assessment of the borrowers and classify them based on their creditworthiness. They are also mandated to display this information on their platform for lenders to make informed decisions.
Fund Transfer: P2P platforms should have proper escrow accounts to facilitate the transfer of funds between lenders and borrowers. They are not permitted to hold or handle customer funds directly.
Prudential Norms: RBI has established prudential norms for P2P lending platforms, including exposure limits for lenders, leverage restrictions, and guidelines for the recovery of loans.

Domestic Systematically Important Banks (SIBs) of India

Domestic Systemically Important Banks (D-SIBs) in India are banks that are considered of systemic importance to the Indian financial system due to their size, interconnectedness, complexity, and importance to the economy. The Reserve Bank of India (RBI) identifies and designates D-SIBs based on specific criteria and assigns them higher capital requirements to ensure their stability and resilience. The D-SIB framework is part of the broader regulatory efforts to enhance the stability of the banking sector. As of my last knowledge update in September 2021, the following banks had been designated as D-SIBs in India:

State Bank of India (SBI): SBI is the largest and oldest commercial bank in India and holds a significant market share in various banking segments. Its extensive branch network and diverse operations make it a systemically important institution.
ICICI Bank: ICICI Bank is one of India’s leading private sector banks with a substantial presence in retail and corporate banking, as well as international operations. Its size and interconnectedness with other financial entities make it a D-SIB.
HDFC Bank: HDFC Bank is another prominent private sector bank known for its extensive retail banking operations and technological innovations. It plays a crucial role in the payment and settlement systems.
Punjab National Bank (PNB): PNB is one of India’s oldest public sector banks and has a significant presence in various banking segments. It was designated as a D-SIB due to its size and importance to the Indian economy.
Axis Bank: Axis Bank is a private sector bank with a substantial customer base and a wide range of financial products and services. Its interconnectedness with other financial entities contributes to its systemic importance.

Bad Bank

The concept of a “bad bank” refers to a financial institution or a specialized entity created to address and manage the non-performing assets (NPAs) or distressed assets of other banks. The primary objective of a bad bank is to help banks clean up their balance sheets, improve their financial health, and promote lending to support economic growth.

Here are key points to understand about bad banks:

Non-Performing Assets (NPAs): NPAs are loans and advances that have stopped generating income for a bank, typically because the borrowers have defaulted on their payments. These assets can become a burden for banks as they tie up capital and resources.
Creation of a Bad Bank: When a bank has a significant amount of NPAs, it may decide to transfer these distressed assets to a bad bank. This transfer can involve the sale or transfer of these assets at a discount or a negotiated value.
Isolation of Distressed Assets: By transferring NPAs to a bad bank, the parent bank can isolate these troubled assets, allowing it to focus on its core banking activities and resume lending to healthier borrowers.
Asset Reconstruction and Resolution: Bad banks often have the expertise to work on resolving distressed assets. They may employ strategies such as loan restructuring, recovery efforts, and, in some cases, the sale of assets to third parties.
Government or Private Entity: Bad banks can be government-owned or operated by private entities, depending on the country’s regulatory framework and the specific circumstances

Employee Provident Fund of India

The Employee Provident Fund (EPF) of India is a government-mandated retirement savings scheme for employees. It is a social security program designed to provide financial security and stability to employees during their retirement years. The EPF in India is governed by the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. Here are key features and details about the Employee Provident Fund (EPF) of India:

Mandatory for Eligible Employees: The EPF is mandatory for all establishments with 20 or more employees. Certain eligible establishments with fewer than 20 employees can also voluntarily opt for EPF coverage.
Contributions: Both the employee and the employer make monthly contributions to the EPF. The employee’s contribution is 12% of their basic salary and dearness allowance, while the employer’s contribution is also 12%. The entire 12% employer’s contribution goes into the EPF, while out of the 12% employee’s contribution, 3.67% goes into the EPF, and the remaining 8.33% is deposited in the Employee Pension Scheme (EPS).
Interest Rate: The EPF interest rate is determined by the Employees’ Provident Fund Organisation (EPFO) and is subject to change from time to time. The interest rate is usually higher than the average bank fixed deposit rate.
Tax Benefits: Contributions made to the EPF are eligible for tax benefits under Section 80C of the Income Tax Act. The interest earned on EPF deposits is generally tax-free, and withdrawals made after five years of continuous service are also tax-exempt

Enforcement Department In RBI

The Enforcement Department (EFD) of the Reserve Bank of India (RBI) is responsible for enforcing the regulatory and supervisory framework governing banks and financial institutions in India. It plays a crucial role in maintaining the stability, integrity, and transparency of the financial system. Here are the key functions and responsibilities of the Enforcement Department in RBI:

Regulatory Compliance: The EFD ensures that banks and financial institutions operating in India comply with the various regulations, guidelines, and directives issued by the RBI. These regulations cover areas such as banking operations, risk management, anti-money laundering (AML) measures, customer protection, and more.
Investigations: The department conducts investigations into alleged violations of banking regulations and norms. This includes probing cases related to fraud, mismanagement, insider trading, money laundering, and other financial irregularities.
Enforcement Actions: Based on the findings of investigations, the EFD can take enforcement actions against banks and financial institutions. These actions may include imposing fines, penalties, or other punitive measures on the entities found to be in violation of regulations.
Collaboration: The EFD collaborates with other regulatory and law enforcement agencies, both within India and internationally, to combat financial crimes and maintain the integrity of the financial system. This includes sharing information and intelligence related to financial irregularities.
Risk Assessment: The department assesses the financial health and risk profile of banks and financial institutions to identify potential vulnerabilities and areas of concern. This helps in early intervention to prevent financial crises.

Gold Monetization Scheme (GMS)

The Gold Monetization Scheme (GMS) is a government initiative in India aimed at mobilizing the idle gold reserves held by households and institutions and putting them to productive use. It was launched to encourage people to deposit their physical gold with banks and earn interest on it, rather than letting it sit idle in the form of jewelry or ornaments. The GMS was introduced to reduce India’s reliance on importing gold, which has significant implications for the country’s current account deficit. Key features and details of the Gold Monetization Scheme (GMS) include:

Types of Deposits: The scheme allows individuals, Hindu Undivided Families (HUFs), trusts, and institutions to deposit their physical gold in various forms, including jewelry, bars, coins, etc.
Tenure: Depositors can choose from various tenure options, typically ranging from 1 to 15 years. Short-term deposits (1-3 years) are known as the Short Term Bank Deposit (STBD), medium-term deposits (5-7 years) are known as the Medium-Term Government Deposit (MTGD), and long-term deposits (12-15 years) are known as the Long Term Government Deposit (LTGD).
Interest Rates: The interest rates on GMS deposits are determined by the government and are typically lower than regular fixed deposit rates. However, the interest earned is exempt from income tax.
Safety and Security: The deposited gold is securely stored in designated vaults and is insured against theft or loss. The depositor receives a certificate of deposit (Gold Deposit Receipt or GDR) as proof of the deposit.

Indian Post Payment Bank (IPPB)

The Indian Post Payments Bank (IPPB) is a government-owned financial institution in India that operates as a payments bank. It was established with the primary objective of expanding financial inclusion and providing basic banking and financial services to the unbanked and underbanked population of the country. IPPB leverages the extensive network of India Post, the country’s postal department, to reach remote and rural areas. Here are key features and details about the Indian Post Payments Bank (IPPB):

Ownership: IPPB is fully owned by the Government of India and operates under the jurisdiction of the Department of Posts, Ministry of Communications.
Payments Bank: IPPB is classified as a payments bank, which means it can offer a range of banking and financial services but cannot engage in lending activities like traditional banks. Payments banks focus on facilitating digital transactions and providing banking services to the masses.
Network: One of the unique strengths of IPPB is its extensive network of post offices and postmen across India. It utilizes this vast physical infrastructure to provide banking services, including opening accounts, accepting deposits, and facilitating withdrawals.
Financial Services: IPPB offers various financial services, including savings accounts, current accounts, recurring deposit accounts, and basic financial products such as debit cards, mobile banking, and bill payment services.
Digital Banking: IPPB places a strong emphasis on digital banking. Customers can access their accounts and conduct transactions through mobile banking apps, ATMs, and IPPB’s network of access points.

Download Our App Now!

Discover a world of learning with our app, available now on the Play Store and App Store! Download it today to explore a wide range of study materials, interactive quizzes, and personalized learning plans tailored just for you. Enhance your preparation and stay ahead with all the resources you need at your fingertips.

Banking Structure in India

Banking Structure in India

Leave a Reply Cancel reply

Never Miss an Update!

Quick Links

Popular Pages