INTRODUCTION #
Central Bank: It is the apex bank in a country. It undertakes the major financial operations of the government. Through these operations and other means like credit control, it influences the behaviour of financial institutions so as to support the economic policy of the government. Reserve Bank of India (R.B.I) is the apex or central bank. In 1935, Reserve Bank of India was established as a share holders’ bank with authorized capital of Rs, 5 crores divided into shares of Rs. 100 each. It was nationalized in 1949, and the share holders were compensated by being paid in Government of India securities. The ownership and control of the bank were transferred to Government of India.
R.B.I. is managed by the Central Board of 20 members comprising 1 governor, 4 deputy governors appointed by the central government, 10 directors nominated by central government to represent agri- culture, trade, industry etc. 4 Directors nominated by central government to represent four local boards, namely Mumbai, Kolkata, Chennai and Delhi and one government official from ministry of finance.
Functions of RBI: Reserve Bank of India per- forms general banking functions. As a central bank it performs following functions
- Issue of notes
- Banker to the Government of India
- Bankers Bank: Control over commercial banks and Non Banking Financial Intermediaries
- Control of credit
- Maintenance of foreign exchange reserves
- As clearing house- for movement of cash from bank to bank.
Promotional and Developmental Functions of RBI are:
- Provision of Industrial Finance – Establishing Development Finance Institutions
- provision of foreign trade financing- Estab- lishment of Exim Bank
- Provision of housing Loans – National Hous- ing Bank (NHB), National Housing Credit to assist NHB
- Provision of agricultural credit
- Collection of statistical data.
R.B.I. also tries to control the monetary condi- tions or stabilize the financial system of a country. This is done through Monetary Policy. Monetary Policy is regarded as an important instrument for stimulating the process of economic development by ensuring sufficient credit supply, controlling infla- tion and maintaining the equilibrium of balance of payments. The major objective of monetary policy has been control of credit or credit control. The control over supply of credit in an economy is called as credit control.
Control of credit supply is achieved through various mechanisms like:
Repo Rate: The rate at which Reserve Bank lends money to banks.
Reverse Repo Rate: The rate R.B.I pays to banks for short-term funds.
Bank Rate is the rate at which central banks lend funds to commercial banks (national banks).
Cash Reserve Ratio (C.R.R): The percentage of cash of total deposits that can be kept within the bank, Or the portion (expressed as %) of deposi- tor’s balance, banks must have as cash. This affects
money supply in a country. This is determined by R.B.I.
Statutory Liquidity Ratio (S.L.R.): It is the amount which a bank has to maintain in the form of cash, gold or approved securities. The quantum is specified as some percentage of the total demand and time liabilities of a bank. This is fixed by R.B.I. The date which is taken to calculate the demand and time liabilities of the bank is the last Friday of preceding fortnight.
Discount Rate: It is the rate fixed by the central bank at which it rediscounts first class bills of exchange and government securities held by the commercial banks; The bank rate is the interest rate charged by the central bank at which it provides rediscount to banks through the discount window. The central bank controls credit by making, varia- tions in the bank rate.
Variable Reserve Ratio or Required Reserve Ratio or legal minimum requirements: Every commercial bank is required by law to maintain a minimum percentage of it deposits with the central Bank. By varying this percentage central bank tries to control credit supply in the economy.
Open Market Operations: It is another method of quantitative credit control used by a Central Bank. This method refers to the sale and purchase of securities, bills and bonds of government as well as private financial institutions by the Central Bank. In its narrow sense, it means buying or selling of only government securities.
The commercial banking structure in India con- sists of, scheduled commercial banks, unscheduled or non-scheduled banks. A Scheduled Bank is one that finds place in the second schedule of RBI. It is the list of approved commercial banks in India. All the nationalized banks and private sector banks will be listed under schedule banks. Schedule bank means State Bank of India (SBI) constituted under the SBI Act 1955 or a subsidiary bank as defined in SBI Act, 1959 (subsidiary banks) or corresponding new bank constituted under section- 3 of the bank- ing companies Act, 1970 or under section 3 of the banking companies Act 1980, or another bank being a bank included in the second schedule of the RBI Act, 1934 (2 of 1934). The scheduled commercial
banks in India comprise of SBI and its associates, nationalized banks, foreign banks, private sector banks, cooperative banks and Regional Rural Banks. Non-Scheduled Bank means a banking company as defined in clause (c) of section 5 of the banking regulation act, 1949 (10 of 1949) which is not a scheduled bank.
COOPERATIVE BANKS #
The organizational set up of the cooperative banking system in India consists of three tiers, for the short term and medium term credit. They are: Primary agricultural cooperative credit societies (PACSs) at the village level; Central cooperative banks at the district level and State cooperative bank at state level.
The main objectives of Agricultural Cooperative Societies are:
To provide short term and medium term credit, to foster the habit of saving; to distribute fertilizers and seeds; to provide help in milk production, egg or other products depending on the resource of the area and to distribute consumer goods to their members. Ten or more members of a village in a locality can form PACSs
Central Cooperative Banks (CCBs) are federa- tions of PACSs in a particular district. CCBs are also known as District Central Cooperative Banks, and there are two types of CCBs: One, whose membership is confined to PACSs and is known as banking unions: Second, who have mixed member- ship consisting both PACSs and individuals.
Functions of CCBs – They give credit to PACSs without any security; perform regular banking func- tions like accepting deposits and advancing loans to individual members; control and supervise working of PACSs; Maintain balance among member PACSs by transferring funds from surplus society to deficit society and help in utilization of the reserve fund of a member PACSs.
State Cooperative Banks (SCBs) are the federa- tion-of District Central Cooperative Banks. They are the apex cooperative banks in states with each state having one State Cooperative Bank (SCB). A SCB is managed by a general body which holds an annual meeting. It is formed by representatives of PACSs,
CCBs and individuals .. It is governed by board of directors whose number varies from 10 to 30.
Functions of SCBs are: They coordinate and control the activities of PACSs and CCBs in the state; they arrange funds for the entire cooperative credit structure of the state; they act as important link between the Indian money market and cooper- ative sectors; they maintain balance among CCBs by transferring funds from surplus CCBs to deficit CCBs Within a state; in case if there is no CCB in a district, it provides credit facilities direct to PACSs in that district and; it also functions like a commercial bank.
Land Development Banks (LDBs) meet the long term credit needs of agriculturists. The LDBs provide long term loans to agriculturists for the period ranging from 5 – 25 years for the following purposes: To make improvements on the land; to free the mortgaged land and; to buy new land.
It also lends for non-agricultural purposes like for setting up and development of rural cottage industries and small enterprises in rural areas. LDBs are both federal .and unitary (only one branch) or either federal or unitary in different states. Under the federal structure, there is Central Land Devel- opment Bank at State level, and the Primary Land Development Banks (PLDBs) at District level. The Central LDB lends to agriculturists through PLDBs.
Regional Rural Banks (RRBs) were established to develop the rural economy by providing credit and other facilities for agriculture, trade, commerce, industry, and other productive activities in rural areas at reasonable rates and with simplified procedures, particularly to the small and marginal farmers (culti- vating land less than one hectare are called small and marginal farmers), agricultural labourers, artisans and small entrepreneurs. It aimed at freeing the rural population from the clutches of money lenders.
A RRB is sponsored by a commercial bank and normally covers one district. A commercial bank has to take permission from RBI to open its branches in other districts. RRBs are locally based, rurally oriented and commercially organized.
Functions of RRBs are: They grant loans and also advances to weaker sections of rural population, to cooperative societies including marketing soci-
eties, agricultural processing societies, cooperative fanning societies, PACSs etc. for agricultural pur- poses; they take banking services to the door steps of rural population in the otherwise unbanked rural areas; mobilizes rural savings by accepting deposits and channelise them for productive activities in the rural areas; create supplementary channel for flow of credit from urban money market to rural areas through refinance; generate employment opportuni- ties in rural areas; bring down the costs of supplying credit in rural areas, pubic and private sector banks and ; provide finance to Self Help Groups (SHGs).
National Bank for Agriculture and Rural Devel- opment (NABARD) is vested with power of inspec- tion of RRBs and monitors the overall functioning of RRBs. The applications of RRBs to open new branches are routed through NABARD to Reserve Bank of India. The NABARD provides refinance at concessional interest rate to RRBs. On the establish- ment, the NABARD has taken over the entire under- taking of the Agriculture Reliance and Development Corporation, and has taken over from the Reserve Bank its refinancing functions in relation to the State Co-operative Banks and the Regional Rural Banks. The bank acts as a coordinating agency in relation to the Central Government, State Governments and institutions both at the all-India level and State-level engaged in the development of small-scale indus- tries, handicrafts, etc. for giving effect to the various policies and programmes related to rural credit.
One of the major problems of commercial banks has been Non-Performing Assets (NP A). NPA is a loan or lease that is not meeting its stated princi- pal and interest payments. NPA means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubt- ful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. From March 31, 2004 an NPA shall be a loan or advance where
- Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,
- The account remains ‘out of order’ for a period of more than 90 days, irrespective of an overdraft/cash credit (OD/CC).
- The bill remains over due for a period of more
than 90 days in the case of bills purchased and discounted.
- Any amount to be received remains overdue (any amount due to the bank under any credit facility is ‘Overdue’ if it is not paid on the due date fixed by the bank) for a period of more than 90 days in respect of other accounts, and
- Interest and/or installment of principal remains overdue for two harvest season but for a period not exceeding two and half years in the case of an advance granted for agricul- tural purpose.
Debt Recovery Tribunal (DRT) looks into the grievances of persons caused by the measures/actions of debt recovery. Any person aggrieved by any measure taken by secured creditor or his authorized officer may file an appeal to DRT within 45 days from the date on while such measure was taken. That is action of taking possession of asset, take over of management of business of borrower, appointing person to manage secured asset etc is taken by the creditor. If a person is aggrieved by DRT order, he can file an appeal to the Debt Recovery Appellate Tribunal within 30 days from the date of receipt of the DRT order.
Non-Bank Financial Institutions (NBFIs) may be used to denote investment trusts or banks, credit unions, co-operative societies, venture capitalists, and a range of other investment-management insti- tutions. They would mobilize savings through equity and deposits and make them available to prospective investors. They may also manage special funds placed with them by their clients and help individual entrepreneurs and partnerships secure equity and financing. These institutions would thus play the intermediary role of helping savers find profitable avenues for their savings and helping entrepreneurs to find funds for expanding their businesses etc.
Venture capital is capital provided by somewhat outside investors for financing of new, growing or struggling businesses. Venture capital investments generally are high risk investments but offer the potential for above average returns. A venture cap- italist is a person who makes such investments. A venture capital fund is a pooled investment vehicle that primarily invests in the financial capital of third
party investors in enterprises that are too risky for the standard capital markets or bank loans.
Indian venture capital association was set up in late 1990s with ICICI ventures being the biggest firms. Venture capital firms in India are:
Clears tone venture partners: They provide venture capital for internet, consumer, communica- tions and software industries; Sequoia capital India, Financial Technology Ventures, Oak Investment Partners, the View group, Sherpalo Ventures, Matrix partners (US based) ; Inc3, IDG ventures bank, Dia- mond head ventures, Storm ventures, Globe span capital, Outlook venture etc.
Insurance Companies provide insurance services. They mobilize savings in the economy and also provide funds for investment. Insurance companies may be classified as: Life insurance companies, who sell life insurance, annuities and pensions products and Non-life or general insurance companies.
Some of the insurance companies of India are: Life Insurance Corporation, General Insurance Corporation of India, The New India Assurance Company Ltd., United India Insurance Company Ltd., National Insurance Company Ltd., and The Oriental Insurance Company Ltd.
A Chit Fund is a kind of savings scheme prac- ticed in India. In a chit scheme, a specific number of individuals come together to pool a specific amount of money at periodic intervals. Usually the number of individuals and the number of periods will be the same. At the end of each period there will be an auction of the money. Members of the chit will participate in this auction for the pooled money during that interval. The money will be given to the lowest bidder. The bid amount will be divided by number of members, and thus determining per head contribution during that period. Usually the discount will continue to decrease over periods. The person getting money in the last period will receive the full scheme amount.
Chit funds in India are governed by various state or central laws, like Travancore Chit Act of 1945, Chit Funds Act, 1982 and Madras Chit Fund Act 1961. Organised chit fund schemes are required to register with the Registrar of Firms, Societies and Chits.
FUNCTIONING OF CHIT FUNDS #
Consider a chit fund with 20 members contrib- uting Rs.100 per week. This fund will run for 25 weeks. On the first week all members will contribute Rs.100. An auction meeting will be conducted, and the foreman of the chit fund will preside over it. The total amount will be Rs.2000. The auction will start with this amount. Bidders will start bidding by discounting this amount. Let us consider that lowest any person bid is Rs.1800 (a discount of Rs.200). This amount (Rs.1800) is given to this winning bidder. Rest of the amount is divided by 20, bringing the discount per person to Rs. 10. This discount amount is returned back to each member. Sometimes a part of this may be kept by the foreman as service charges, usually in organized chit funds.
A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short term money market instruments and other securities. The fund manager trades the fund’s underlying securities, realized capital gains or loss and collects the dividend or interest income. The investment proceeds are then passed along to individual investors. The value of a share of the mutual fund known as Net Asset Value is calculated daily, based on the total value of the fund divide by the number of shares purchased by investors.
DEVELOPMENT FINANCE INSTI- TUTIONS #
Industrial Finance Corporation of India (IFCI) was established in 1948. The Industrial Development Bank of India (IOBI), scheduled banks, insurance companies, investment trusts and cooperative banks are the share holders of IFCI.
The corporation has been authorized to issue bonds and debentures, to borrow foreign currency from World Bank and other international organiza- tions, accept deposits from the public and borrow from R.B.I. The scope of IFCI is limited as it deals with large public limited companies and cooperative societies, maximum period for which IFCI can leas or guarantee loans or subscribe to debentures is 25 years.
IFCI grants loans and advances to industrial concerns and subscribes to the debentures floated
by them. It generates loans raised by the industrial concerns in the capital market. It underwrites the issue of stocks, shares, bonds and debentures of industrial concerns.
STATE FINANCIAL CORPORATIONS #
To meet the financial requirements of small scale and medium sized industries, the state governments decided to set up SFCs, hence government of India passed SFC Act in 1951. SFCs guarantee loans raised by industrial concerns which are repayable within a period not exceeding 20 years and which are floated in the pubic market. They underwrite the issue of stocks, shares, bonds or debentures of industrial concern SFCs also grant loan or advances to industrial concern repayable within a period not exceeding 20 years and subscribe to debentures floated by industrial concerns.
Industrial Credit and Investment Corporation-of India (ICICI) was sponsored by a mission from the World Bank for the purpose of developing small and medium enterprises in the private sector. It stimu- lates the promotion of new industries to assist the expansion and modernization of existing industries and to furnish technical and managerial aid so as to increase production and employment opportunities. ICICI participate in equity capital and in debentures and underwrites new issues of shares and debentures. It grants loans both medium and long term and rupee and foreign currency loans and guarantees loans from private investment sources. Apart from direct assistance, ICICI also provides financial services such as deferred credit, leasing credit, installment sale, asset credit and venture capital.
ICICI has promoted the following companies and institutions.
- CRISIL set by ICICI in association with UTI.
- Technology development and Information Company of India limited (TDICI) to finance the transfer and upgradation of technology and provide technology information.
- Programme for the advancement of commer- cial technology (PACT) to assist market ori- ented research and development activity and
- Programme for acceleration of commercial energy research (PACER) to support selected
research and technology development pro- posals in Indian energy sector. (Underwriting of shares: When a corporation or a joint stock company issues shares (IPO), it hires an in- vestment bank, to help it sell the corporation’s stock. The underwriter (investment bank) of the stock/share acts as a middleman between the public and the corporation. In most cas- es, the underwriter will buy the stock from the corporation and sell it at a higher price to the public. The difference between the price that the underwriter pays for the stock and the price the public pays for the stock is known as underwriting spread.)
The Industrial Development Bank of India (lDBI) was set up in July 1964 mainly to provide long term finance to industrial sector. IDBI is the apex institution providing long term finance to industrial sector. Since 1976 it was a subsidiary of RBI and in 1976 it was delinked from R.B.I. and was made autonomous institution under Government of India. IDBI coordinates activities of all agencies concerned with providing finance for industrial development.
IDBI provides direct assistance through loans for projects and other activities explained under IFCI. It can refinance term loans to industrial concerns repayable within 3 to 25 years given by IFCI, SFCs and other financial institutions, which is known as indirect assistance. It can also refinance term loans repayable between 3 and 10 years given by the scheduled banks or State Cooperative Banks. It also refinances export credit given by schedule banks and state cooperative banks. Development assistance fund is used by IDBI to assist these industrial concerns which are not able to secure funds due to low rate of returns. It is supporting the cause of Develop- ment of Backward areas by providing assistance to small and medium projects in those areas on softer terms like concessional rate of interest, longer grace and repayment periods. (Refinancing is the process where the same mortgagor/borrower pays off one loan with the proceeds from another loan).
Export Import Bank of India (EXIM Dank) was set up in 1982, to take over the operations of the international finance wing of the IOBI. It provides financial assistance to exporters and importers and functions as principal financial institution coordinat- ing activities of other institutions providing finance to exporters and importers of goods and services.
Small Industries Development Bank of India (SIDBI) was set up in April 1990, as a wholly owned subsidiary of IOBI; SIDBI is the principal institution for promotion, financing and development of small scale industries in the country. It coordinates the functions of other financial institutions providing assistance to small scale industries.
Industrial Reconstruction Bank of India (IRBI) was set up by GOI under Indian Companies Act in 1971 to look after the problems of sick units, and provide assistance for their speedy reconstruction and rehabilitation. If necessary, by undertaking the management of the units and developing infrastruc- ture facilities.
The Unit Trust of India (UTI) was established in 1964. The major objectives of UTI are: To stimulate and pool savings of the middle and low income groups, through selling of its units; to enable them to share the benefits and prosperity of the rapidly growing industrialization in the country, by paying dividends to the purchasers of units of the trust; and invest the sale proceeds of the units and the initial capital fund and thereby pay dividends.
Life Insurance Corporation (LIC) and the General Insurance Corporation of India (GIC) are the two other investment institutions in the country along with the UTI. These two institutions collect large amount of funds from general public to provide insurance cover but use part of their funds to give long term loans to the export sector or to acquire industrial securities from the market. Because of their ability to, mobilise funds to greater extent, they have become powerful operators in the stock exchange.
Important Factopedia #
Establishment, Nationalization, Accounting year of RBI
| Establishment | April 1, 1935 in Calcutta but permanently moved to Mumbai in 1937. |
| Nationalization | on 1st January, 1949 on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. |
| Act which governs the RBI functions | Reserve Bank of India Act, 1934. |
| Act which governs the Financial sector | Banking Regulation Act, 1949. |
| Financial/Accounting year of RBI | July to June. |
| Financial/Accounting year of Companies | April to March. |
Objectives, Functions and Organizational structure
| Basic objectives | To regulate the issue of Bank Notes.To keeping of reserves with a view to securing monetary stability in India.To operate the currency and credit system of the country. |
| Functions | Formulation and execution of monetary policy, Foreign exchange and reserves management, Government debt management, (CG & SG) Financial regulation and supervision, Acting as banker to the banks and to the Government (CG & SG). |
| RBI Organizational structure | Central Board of Directors.Governor.Deputy Governors.Executive Directors.Principal Chief General Manager. Chief General Man- agers.General Managers. |
| Primary authority and responsibility for the oversight of the Reserve Bank | Central Board. |
| RBI Chief Executive | The Governor is the Reserve Bank’s chief executive. The Gov- ernor supervises and directs the affairs and business of the RBI. |
Monetary Policy
| Responsibility of Conduct- ing monetary policy | RBI is vested with the responsibility of conducting monetary policy. This respon- sibility is explicitly mandated under the Reserve Bank of India Act, 1934. |
| Primary objective | Maintaining price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth. |
| Announcement | Bi-monthly. |
| Inflation target | Inflation target is set by the Govt. in consultation with RBI, once in every five years. Inflation target– is measured by the consumer price index-combined (CPI-C) Inflation target is 4% (+/-) 2% for the period from August 5, 2016 to March 31, 2021. |
| 6 members Monetary pol- icy committee (MPC) | MPC will be constituted by the Central Government Following is the mem- ber of committee: RBI Governor-Chairperson, Deputy Governor of RBI, in charge of Monetary Policy.One officer of the Reserve Bank of India to be nominated by the Central Board.Other three members appointed by the CG: (will hold office for a period of four years). Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI). Professor Pami Dua, Director, Delhi School of Economics; and Dr. Ravindra H. Dholakia, Professor, IIM, Ahmedabad. |
| MPC function | The Committee will determine the policy interest rate required to achieve the inflation target. |
| Monetary policy making. | The MPC will meet at least four times in a year.The quorum for the meeting of the MPC is four members.Each member of the MPC has one vote, and in the event of an equality of votes, the Governor has a second or casting vote. The questions which come up before the MPC will be decided by majority of votes by the members present in voting.The resolution adopted by the MPC will be published after conclusion of every meeting.On the 14th day, the minutes of the proceedings of the MPC will be published. |
| Monetary Policy Report | Once in every six months, the bank will publish a document called the Mon- etary Policy Report which will explain: Source of inflation; and Forecast of inflation for 6-18 months ahead. |
Instruments of Monetary policy
| Direct Instruments | Cash Reserve Ratio (CRR) | CRR is a fixed percentage of demand and time liabilities (i.e. bank deposits) which banks must maintain as average daily balance with the RBI. Example: Suppose CRR rate is 3% and Bank has deposits of Rs. 100 crores then it has to deposit Rs. 3 crores with RBI. |
| Statutory Liquidity Ratio (SLR) | SLR is a fixed percentage of bank deposits which banks must maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold.Changes in SLR often influence the availability of resources in the banking system for lending to the private sector. Higher the CRR and SLR, lower will be the liquidity in the system as Banks will have lesser money for providing loans.Example: Suppose CRR and SLR rate is 3% and 27% respectively. Bank deposits is Rs. 100 crores then bank can sanction loans upto 70 crores. | |
| Indirect Instruments | Repo Rate (also called policy rate) | The (fixed) interest rate at which the Reserve Bank provides short-term (overnight) liquidity to banks.Reduction in Repo rate helps the banks to get money at a cheaper rate and increase in Repo rate discourages the banks. |
| Reverse Repo | The (fixed) interest rate (currently 50 bps below the repo rate) at which the Reserve Bank absorbs short-term liquid- ity, generally on an overnight basis, from banksWhen RBI increases the reverse repo rate then Banks are attracted to deposit with RBI for higher return. | |
| Bank Rate | It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers.i.e. at which the Reserve Bank lends to banks for medium term purposes).Increase in the bank rate is the symbol of tightening of RBI monetary policy. (i.e. Dearer Monetary Policy)When RBI wants to increase liquidity in the market, it reduces bank rate. When RBI wants to decrease liquidity in the market, it increases bank rate. | |
| Open Market Opera- tions (OMO) | These include both outright purchase/sale of government securities for injection/absorption of durable liquidity, respectively.In OMO, RBI purchases (or sells) government securities to the general public to control the supply of money in the economy.In case of inflation, it sells the securities to control the flow of money. |
| Marginal Standing Facility (MSF) | A facility under which banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit (currently 2% of their deposits) at a penal rate of interest, currently 50 basis points above the repo rate.This provides a safety valve against unanticipated liquidity shocks to the banking system. | |
| Market Stabilization Scheme (MSS) | The scheme envisages issue of cash management bills, treas- ury bills and/or dated securities to absorb excess liquidity arising from large capital inflows.Thus RBI sterilizes the economy against adverse external shocks.This operation of RBI is known as sterilization. |
| IF policy | Increase/Decrease | Liquidity in Market | Inflation | Monetary |
| CRR/SLR/Repo/Reverse Repo/Bank Rate Policy | Increases | Decrease | Decrease | Monetary |
| CRR/SLR/Repo/Reverse Repo/Bank Rate monetary | Decreases Accommodative | Increases | Increases | Easy policy |
Marginal Cost of Funds based Lending Rate (MCLR)
| Background | Earlier, loans were priced at a spread over the Base Rate.Base Rate is the minimum rate of interest for all loans and spread is the margin of bank based on risk associated with loans.Bank were using different cost methodology to compute base rate.When RBI cut interest rates many times, Banks were reluctant to pass on these rate cuts to borrowers giving excuse that they have old deposits for which the interest rate remains high.To counter this, RBI has introduced MCLR so that banks link their lending rates to marginal funding costs (i.e cost of fresh or incremental borrowings from public). |
| Effective from | As per RBI, All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 will be priced with reference to the Marginal.Cost of Funds based Lending Rate (MCLR). It will be a tenor linked internal benchmark rate for loans. |
| Purpose | to improve transparency in the methodology followed by banks for determining interest rates on loans. |
| Actual lending rates | Actual lending rates will be determined by adding the components of spread to the MCLR. |
| Monthly review | Banks will review and publish their MCLR of different maturities every month on a pre-announced date. |
Basis Point #
100 basis point means 1%. It is used for measuring change in interest rate.
Subsidiaries of RBI
| Fully-owned | National Housing Bank (NHB), Deposit Insurance and Credit Guarantee |
| Subsidiaries | Corporation (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBN- MPL). |
| Others | RBI also has a majority stake in the National Bank for Agriculture and Rural Development (NABARD). |
Government Security
| Definition | A Government security is a tradable instrument issued by the Central Government or the State Governments.It acknowledges the Government’s debt obligation. |
| Short term securities | Maturity period of less than one year (e.g. treasury bills). |
| Long term securities | Maturity period of one year or more (e.g. Government bonds or dated securities with original). |
| Issue by CG | Central Government issues both, treasury bills and bonds or dated Securities. |
| Issue by SG | State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). |
| Gilt-edged securities | Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged securities. |
Cash Management of Government
| Minimum balance | Central Government is required to maintain a minimum cash balance with |
| by CG. | the Reserve Bank.Currently, this amount is Rs.10 crore on a daily basis and Rs.100 crore on Fridays. |
| Minimum balance by SG | All the State Governments are required to maintain a minimum balance with the Reserve Bank, which varies from state to state depending on the relative size of the state budget and economic activity. |
| Ways and Means Advances/ Overdraft | To tide over temporary mismatches in the cash flow of receipts and payments, the Reserve Bank provides Ways and Means Advances /Overdraft to the State Governments. |
Special Drawing Rights (SDRs)
| Created by IMF | The SDR is an international reserve asset, created by the IMF in 1969 to sup- plement its member countries’ official reserves. |
| Value of the SDR | The value of the SDR is based on a basket of five major freely usable curren- cies—U.S. dollar, Euro, Chinese renminbi (RMB), Japanese yen, and Pound sterling.Effective from October 1, 2016, the Chinese renminbi (also called Yuan) was included in the SDR basket. |
| Freely usable currency. | A “freely usable” currency mean a currency that the IMF determines is widely used to make payments for international transactions, and is widely traded in the principal exchange markets. IMF lending operations are, in practice, conducted in freely usable currencies or SDRs. |
| Position of SDR | The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.SDRs can be exchanged for freely usable currencies. Holders of SDRs can obtain these currencies in exchange for their SDRs. |
RBI publishes “Payment and Settlement Systems in India: Vision-2018”
| Aims | The Vision-2018 aims at building best of class payment and settlement systems for a ‘less- cash’ India. |
| 5 Cs | The broad contours of Vision-2018 revolve around 5 Cs – coverage, convenience, confidence, convergence and cost. |
| 4 strategic initiatives | To achieve these, Vision-2018 will focus on four strategic initiatives such as responsive regulation, robust infrastructure, effective supervision and customer centricity. |
RBI Publications #
- Financial stability report- Half yearly.
- Monetary policy report- Half yearly.
- Report on foreign exchange reserves – Half yearly.
- Bi-monthly Policy Statement.
Function of Commercial Banks
| Primary | Accepting deposit and Providing loans |
| Secondary | Collection and payment of various items e.g. Cheques, Bills Purchase and sell of securities. Remittance of money.Purchase and sell of foreign exchange. Acting as executors and trustees of wills. Underwriting of shares.Lockers facility. Travelers’ cheque and letter of credit. |
Deposits in Bank
| Demand deposits | Saving account deposit and current account deposits are called demand deposits as depositor can withdraw money as and when required. |
| Term deposits | Recurring deposit and fixed deposits are called Term deposits as depositor can withdraw money after a certain period. |
Protection of Small Depositors
| DICGC | The Reserve Bank has set up Deposit Insurance and Credit Guarantee Corporation (DICGC) to protect the interest of small depositors, in case of bank failure. |
| Coverage | DICGC provides insurance cover to all bank depositors upto Rs.1 lakh per depositor per bank. |
Non-performing Assets of Banks
| Classification | In order to maintain the quality of loans and advances, Reserve Bank requires banks to classify their loans as performing and non-performing assets (NPA). |
| NPA | An asset becomes non performing when it ceases to generate income for the bank i.e. when dues are not paid within 90 days. NPAs has been growing in public sector banks over the years. |
| NPA relation with GDP | NPAs growth is inversely related to the GDP growth. Decline in GDP growth leads to rise in NPAs growth. |
Priority Sector Lending
| Definition | R Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. |
| Different categories under priority sector. | Priority Sector includes the following categories: (i) Agriculture (e.g. Farm credit, Agriculture infrastructure and Ancillary activities.) (ii) Micro, Small and Medium Enterprises (iii) Export Credit (iv) Education (v) Housing (vi) Social Infrastructure (vii) Renewable Energy (viii) Others (e.g. Weaker sections). |
| Lending target | Banks are required to lend 40% of their loan to priority sector. |
| Priority Sector Lending Certificates (PSLCs) | PSLCs are a mechanism to enable banks to achieve the priority sector lending target by purchase of these instruments in the event of shortfall. This also incen- tivizes surplus banks as it allows them to sell their excess achievement over targets thereby enhancing lending to the categories under priority sector. |
Cash credit facilities
| Purpose | Cash Credit facility is granted to the customers to bridge working capital gap.The working capital funds are generally required for purchase of raw materials, storage, Salary & Wages etc. |
| Security | Cash Credit (CC) is granted against hypothecation of stock such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares. |
| Separate account | A separate cash credit account is opened with a bank to avail cash credit facility. |
Know Your Customer guidelines
| About KYC | It is a process by which banks obtain information about the identity and address of the customers. |
| Benefit | This process helps to ensure that banks’ services are not misused. |
| When KYC required | The KYC procedure is to be completed by the banks while opening a bank account. Banks are also required to periodically update their customers’ KYC details. |
| Documents required | The Government of India has notified six documents as ‘Officially Valid Docu- ments’ (OVDs) for the purpose of producing proof ofidentity. These six documents are Passport, Driving Licence, Voters’ Identity Card, PAN Card, Aadhaar Card issued by UIDAI and NREGA Job Card.If these documents also contain your address details, then it would also be accepted as ‘proof of address’. |
Bank Overdraft facility
| Purpose | To manage short-term cash flow problems. |
| Limit | An overdraft limit is determined based on the credit worthiness of a borrower and the availability of collateral or a guarantee. |
| How it works | Bank permits an account holder to use or withdraw more than they have in their account. |
Land development banks #
They provide long term credit facilities to the farmers for agriculture development project.
Regional Rural Bank
| Established through | Regional Rural Banks (RRBs) were established in 1975 under the provisions of the Ordinance promulgated on the 26th September 1975 and followed by Regional Rural Banks Act, 1976. |
| Objective | to develop the rural economy and to create a supplementary channel to the ‘Coop- erative Credit Structure’ with a view to enlarge institutional credit for the rural and agriculture sector. |
| Sponsored by | The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively. |
| Area of operation | The area of operation of the RRBs is limited to notified few districts in a State. |
| Function | The RRBs mobilise deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers , rural artisans and other segments of priority sector. |
Monetary policy National bank for Agriculture and Rural development (NABARD)
| Establishment | NABARD was established on 12 July 1982 under THE NATIONAL BANK FOR AGRICULTURE AND RURAL DEVELOPMENT ACT, 1981. |
| Apex institution | It is a Apex institution for financing the Agriculture and Rural development. |
| Re-financing facility | It also provides re-financing facility to regional rural banks, cooperative banks, com- mercial banks etc for the promotion of activities in the rural areas. |
Small industries development bank of India (SIDBI)
| Establishment | SIDBI was established in April 1990 as a wholly owned subsidiary of Industrial Development Bank of India (IDBI) under The Small Industries Development Bank of India Act, 1989. |
| Purpose | It acts as the Principal Financial Institution for the Promotion, Financing and Development of the Micro, Small and Medium Enterprise (MSME) sector and for Co-ordination of the functions of the institutions engaged in similar activities. |
| Present shareholding | Currently shares of SIDBI are held by 34 institutions/public sector banks/insurance companies owned or controlled by the Central Govt and Govt of India. |
| India Aspiration Fund (IAF) | to boost the starts-up Fund-of-funds ecosystem in the country, SIDBI launched India Aspiration Fund with an initial corpus of Rs.2,000 crore. |
Fund of Funds for Start-ups (FFS)
| Established by | Govt. of India |
| Operated and managed by | Small Industries Development Bank of India (SIDBI) |
| Genesis | The FFS originates from the Start up India Action Plan, an initiative of Depart- ment of Industrial Policy & Promotion (DIPP). |
| Corpus | Fund size is Rs.I0,000 crore and would be built over the 14th and 15th Finance Commission cycles till 2025. |
| Investment | FFS) would not invest directly in Startups, but would participate in the capital of Alternate Investment Funds (AIF) registered with Securities and Exchange Board of India (SEBI) for investing in equity and equity linked instruments of various Startups at early stage, seed stage and growth stages. |
Micro Units Development & Refinance Agency Ltd (Mudra Bank)
| Set up by | Government of India. |
| Wholly owned subsidiary | MUDRA has been initially formed as a wholly owned subsidiary of Small Industries Development bank of India (SIDBI). |
| Goal | Funding the unfunded. |
| Micro Finance | Micro Finance is an economic development tool whose objective is to provide income generating opportunities to the people at the bottom of the pyramid (low-income groups). |
| Roles and responsibilities of MUDRA | MUDRA would be responsible for refinancing all Last Mile Financiers such as Non-Banking Finance Companies, Societies, Trusts, Section 8 Companies [for- merly Section 25], Co operative Societies, Small Banks, Scheduled Commercial Banks and Regional Rural Banks which are in the business of lending to micro/ small business entities engaged in manufacturing, trading and services activities. MUDRA would also partner with State/Regional level financial intermediaries to provide finance to Last Mile Financier of small/micro business enterprises. |
| Pradhan Mantri Mudra Yojana | MUDRA was given the responsibility of monitoring the Pradhan Mantri Mudra Yojana (PMMY) by collecting the information on regular basis. |
| MUDRA loan | MUDRA loan is available through Banks/NBFCs/MFIs for all kind of manu- facturing, trading and service sector activities.Loans are categorised into Shishu, Kishor and Tarun.Shishu : covering loans upto 50,000/-Kishor: covering loans above 50,000/- and upto 5 lakh.Tarun : covering loans above 5 lakh to 10 lakh. Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage of growth / development and funding needs of the beneficiary micro unit / entrepreneur. |
State Bank of India
| Establishment | RBI acquired a controlling interest in the Imperial Bank of India pursuant to the provisions of the State Bank of India Act 1955.On 1 July 1955, the Imperial Bank of India became the State Bank of India. |
| Associates | 1. State Bank of Bikaner and Jaipur 2. State Bank of Hyderabad 3. State Bank of Mysore 4. State Bank of Patiala 5. State Bank of Travancore. |
| Merger | SBI to be merged with associates and Bharatiya Mahila Bank. |
| Benefit of merger | Rationalization of resources, reduction of costs, better profitability,lower cost of funds leading to better rate of interests for public at large, improved productivity and customer services.Merger will also ensure that due to size and scale of economy, SBI will be able to better handle ensuing competition from new Banks. |
Export-Import Bank of India (EXIM Bank)
| Establishment | Established in 1982 under the Export-Import Bank of India Act 1981. |
| Function | It is a premier export finance institution of the country. |
| HQ | Mumbai. |
Nationalized banks in India (19 Banks at present)
| 1st nationalization | 14 major commercial Banks nationalized on 19thJuly 1969.1. Allahabad Bank 2. Bank of Baroda 3. Bank of India 4. Bank of Maharashtra 5. Canara Bank 6. Central Bank of India 7. Dena Bank 8. Indian Bank 9. Indian Overseas Bank 10. Punjab National Bank 11. Syndicate Bank 12. UCO Bank 13. Union Bank of India 14. United Bank of India. |
| 2nd nationalization | 6 more commercial Banks nationalized in 1980.1. Andhra Bank 2. Corporation Bank 3. New Bank of India* 4. Oriental Bank of Commerce 5. Punjab & Sindh Bank 6. Vijaya Bank*Punjab National Bank acquired New Bank of India in 1993. |
Non-Banking Financial Companies (NBFCs)
| Definition | A Non-Banking Financial Company (NBFC) is a company registered under the Com- panies Act, 1956 engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds /debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agri- culture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). |
| NBFC different from Banks | NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:i. NBFC cannot accept demand deposits;ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. |
The Anchor banks (Consolidation of public sector banks)
| Meaning | Government will identify six-ten public sector banks named as ‘the anchor banks’ that will take and drive the consolidation process among the public sector banks. |
| Reason for consolidation | NPA of Public sectors banks are rising.Competition from private and new Banks So it is better to have strong banks rather than having numerically large number of banks. |
| Opposition by banks | Bankers had opposed the idea of consolidation among public sector banks on the ground that the financial health of most of the banks is poor.Hence, no bank is ready to absorb a weak bank. |
| Merger of SBI | Merger of the five associate banks of State Bank of India (SBI) and Bharatiya Mahila Bank will be seen as a test case for banking consolidation. |
The Kisan Credit Card (KCC)
| Purpose | Kisan Credit Card Scheme aims at providing adequate and timely credit support from the banking system under a single window to the farmers for their cultivation & other needs. |
| Smart card | The beneficiaries under the scheme will be issued with a Smart card/ Debit card (Biometric smart card compatible for use in the ATMs/Hand held Swipe Machines and capable of storing adequate information on farmers identity, assets, land holdings and credit profile etc). |
| Monitoring agency | In case of RRBs and Cooperative banks it is monitored by NABARD and, In case of commercial banks it is monitored by RBI. |
Electronic Clearing Service (ECS)
| ECS-Debit | ‘ECS-Debit’ facilitates payment of charges to utility services, such as, electricity bill, tele- phone bill, insurance premium and loan installments, directly by debit to the customer’s account with a bank. |
| ECS–Credit | The ‘ECS–Credit’ enables companies to pay interest or dividend to a large number of beneficiaries by direct credit of the amount to their bank accounts. |
The Real Time Gross Settlement (RTGS)
| Meaning | This is the fastest possible money transfer system. Settlement in “real time” means trans- actions are settled as soon as they are processed.”Gross settlement” means the transaction is settled on one to one basis without bunching with any other transaction. |
| Transfer limit | Minimum amount to be transferred Rs. 2 lakh. No upper ceiling. |
| Meant for | Large value transactions. |
National Electronics Funds Transfer System (NEFT)
Core Banking Solution (CBS)
Core Banking Solution (CBS) is networking of branches, which enables Customers to operate their accounts, and avail banking services from any CBS branch of the Bank, regardless of where he maintains his account.The customer is no more the customer of a Branch. He becomes the Bank’s Customer.
The Banking Ombudsman Scheme
| Purpose | The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of banking complaints. |
| Appointment of BO | The Banking Ombudsman is a senior official appointed by the Reserve Bank of India. |
| Coverage | All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme. |
| Fee | The Banking Ombudsman does not charge any fee for filing and resolving customers’ complaints.One can file a complaint with the Banking Ombudsman simply by writing on a plain paper. One can also file it online or by sending an email to the Banking Ombudsman. |
| Appeal against order of BO | If one is not satisfied with the decision passed by the Banking Ombudsman, one can approach the appellate authority against the Banking Ombudsmen’s decision. Appellate Authority is vested with a Deputy Governor of the RBI.One can also explore any other recourse and/or remedies available to him/her as per the law. |
Bancassurance
Bancassurance, i.e., banc + assurance, refers to banks selling the insurance products.
Reverse Mortgage
A reverse mortgage enables a senior citizen to receive a regular/monthly income from a lender (a bank or a financial institution) against the mortgage of his home.
The borrower continues to reside in the property till the end of his life.
Letter of Credit
| About L/C | Letter of credit is an undertaking by a bank (opening / issuing bank) made to the seller (beneficiary) on behalf of the buyer (applicant) to pay a certain amount if the specified documents presented are as per terms of the letter of credit.e.g. ABC Ltd export goods to XYZ Ltd in London but want guarantee of payment.In this case XYZ Ltd direct his bank to open L/C on behalf of ABC Ltd and handover the L/C documents to ABC Ltd. After the goods are delivered to XYZ Ltd as per terms and conditions mentioned in L/C, ABC Ltd. submits the L/C documents to his bank which forward the documents to L/C issuing banks and receive the payment. |
| Benefit of L/C | Party cannot deny payment once the L/C conditions are satisfied. |
| Use | L/C is widely used in international trade (Import-Export) but now it is being used in domestic trade also. |
Bank guarantee
A Bank guarantee is a promise from a bank that if the buyer of BG does not fulfill the obligations under the contract then Bank will make payment mentioned in the BG to beneficiary. i.e. beneficiary can encash the BG.
Small Finance Banks
| Objective | RBI is vested with the responsibility. |
| Scope of activities | The small finance bank will primarily undertakebasic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganized sector entities. |
| Capital requirement | minimum paid-up equity capital for small finance banks is Rs. 100 crore |
| India’s first small finance bank | Jalandhar-based Capital Small Finance Bank Ltd. |
Payments Banks
| Objective | to promote financial inclusion by Providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, Other unorganized sector entities and other users. |
| Scope of activities | Acceptance of demand deposits. Payments bank will initially be restricted to holding a maximum balance of Rs. 100,000 per individual customer. Issuance of ATM/debit cards. Payments banks, however, cannot issue credit cards. Payments and remittance services through various channels.Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.The payments bank cannot undertake lending activities. |
| Capital requirement | Minimum paid-up equity capital for payments banks shall be Rs. 100 crore. |
| India’s first payments bank | Airtel Payments Bank. |
India Post Payments Bank
The India Post Payments Bank (IPPB) has been incorporated as a Public Limited Company under the Department of Posts (Ministry of communication) with 100% GOI equity.
New Bank License to Bandhan Bank & IDFC
| Bandhan Bank | Bandhan Bank is the first commercial bank from Eastern India to get RBI clearance since independence. |
| IDFC | RBI had also granted banking licence to the the Infrastructure Development Finance Company (IDFC) Ltd.No new Indian bank has been formed since Yes Bank in 2004. |
White Label ATM
| Objective | To promote financial inclusion. |
| Need | While, there has been year-on-year growth in the number of ATMs, yet their deployment has been predominantly in Tier I & II centres.To expand the reach of ATMs in Tier III to VI centres, non-banks entities were also allowed to set up ATMs, and such ATMs are known as White Label ATMs. |
SBI and ICICI Bank Ltd. as Domestic Systemically Important Banks (D-SIBs)
| What is D-SIBs | D-SIBs are perceived as banks which are equivalent of too-big-to-fail in other countries. |
| Requirement | A few banks assume systemic importance due to their size, crossjurisdictional activities, complexity, lack of substitutability and interconnectedness.The disor- derly failure of these banks has the propensity to cause significant disruption to the essential services provided by the banking system, and in turn, to the overall economic activity. |
| Impact | Banks falling in the D-SIB category need to set aside more capital per loan than their peers to prevent a contagion effect which can potentially weigh down other banks in the financial system if there is a crisis. |
| When RBI announces DSIBs | RBI discloses the names of banks designated as D-SIBs every year in August. |
7-Point Reform Agenda called Indradhanush for Public Sector Banks)
| Appointments | The Government has decided to separate the post of Chairman and Managing Director. |
| Setting up of Bank Board Bureau | The BBB will be a body of eminent professionals and officials. |
| Capitalization | Government of India will infuse Rs.70,000 crores out of budgetary allocations for four years as per the figures given below:Financial Year 2015 -16 – Rs. 25,000 croreFinancial Year 2016-17 – Rs. 25,000 croreFinancial Year 2017- 18 – Rs. 10,000 croreFinancial Year 2018-19 – Rs. 10,000 croreSBI will get the highest allocation. |
| De-stressing PSBs | The infrastructure sector and core sector have been the major recipient of PSBs funding during the past decades.But due to several factors such as delay in obtaining permits / approvals from various governmental and reg- ulatory agencies, land acquisition, lack of availability of fuel etc., projects are increasingly stalled/stressed thus leading to NPA burden on banks.Project Monitoring Group (Cab.Sectt.) / Respective Ministries will pursue with con- cerned agencies to facilitate issue of pending approval/permits expeditiously. |
| Empowerment Framework of Accountability | There will be no interference from Government and Banks are encouraged to take their decision independently. A new framework of Key Performance Indicators (KPIs) to be measured for performance of PSBs is being announced. It will be linked to the performance bonus. |
| Governance Reforms | The process of governance reforms started with “GyanSangam” – a conclave of PSBs and FIs. |
Banks Board Bureau (BBB)
| Purpose | With a view to improve the Governance of Public Sector Banks (PSBs), the Government decided to set up an autonomous Banks Board Bureau. |
| Function | The Bureau will recommend for selection of heads – Public Sector Banks and Financial Institutions and help Banks in developing strategies and capital raising plans. |
| Commencement | The BBB, which will start functioning from 1st April, 2016. |
| Chairman | Shri Vinod Rai, Former CAG of India, appointed as the Chairman of Banks Board Bureau. |
A non-cooperative borrower
| Definition by RBI | A non-cooperative borrower is one who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwart- ing lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed / collateral securities, obstructing sale of securities, etc.In effect, a non-cooperative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues. |
| High provisioning | Banks/FIs will therefore be required to make higher provisioning as applicable to substandard assets in respect of new loans sanctioned to such borrowers. |
National Payments Corporation of India (NPCI)
| About NPCI | It is an umbrella organization for all retail payments system in India.NPCI is a not for profit company which is charged with a responsibility of guiding India towards being a cashless society. |
| Establishment | It was set up with the guidance and support of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA). It is regulated by RBI. |
| Objective | The core objective was to consolidate and integrate the multiple systems with varying service levels into nation-wide uniform and standard business process for all retail pay- ment systems. The other objective was to facilitate an affordable payment mechanism to benefit the common man across the country and help financial inclusion. |
Products & Services of NPCI
| RuPay debit card | RuPay is India’s own domestic card with own payment gateway system.It’s objective is to offer a domestic, open-loop, multilateral system which will allow all Indian banks and financial institutions in India to participate in electronic payments.Since the transaction processing will happen domestically, it would lead to lower cost of clearing and settlement for each transaction as compared to Master and Visa card which are based outside India. |
| Aadhaar Payment | It uses Aadhaar number as a central key for electronically channelizing the |
| Bridge (APB) System | Government subsidies and benefits in the Aadhaar Enabled Bank Accounts (AEBA) of the intended beneficiaries. |
| Aadhaar Enabled Pay- ment System (AEPS) | AEPS is a bank led model which allows online interoperable financial inclusion transaction at PoS (MicroATM) through the Business correspondent of any bank using the Aadhaar authentication.The four Aadhaar enabled basic types of banking transactions are as follows:-Balance EnquiryCash WithdrawalCash DepositAadhaar to Aadhaar Funds Transfer.The only inputs required for a cus- tomer to do a transaction under this scenario are:-IIN (Identifying the Bank to which the customer is associated).Aadhaar Number.Fingerprint captured during their enrollment.Aadhar pay is a merchant version of AEPS. |
| National Unified USSD Platform (NUUP) or *99# Service | *99# is a USSD (Unstructured Supplementary Service Data) based mobile banking service that brings together diverse ecosystem partners such as Banks & TSPs (Telecom Service Providers).Using *99# service, a customer can access financial services by 36ialing *99# from his/her mobile registered with the bank.The service works across all GSM service providers and handsets.It Works without Internet – Uses voice connectivity Unstructured Supplementary Service Data (USSD) is a technology unique to GSM (Global System for Mobile Communications) handsets. |
| Query Service on Aadhaar Mapper (QSAM) or*99*99# Service | *99*99# is a USSD based value added service that facilitates the customers to check the status of his/her Aadhaar number seeding/linking in the bank account. |
| BHIM App (Bharat Inter- facefor Money) | Bharat Interface for Money is an app that lets you make easy and quick payment transactions using UPI. It is easier than Wallets!You will not have to fill-out those tedious bank account details again and again. You can easily make direct bank to bank payments and instantly collect money using just Mobile number or Payment address.All payments over Bharat Interface for Money are linked to your bank account and transaction can be completed within few seconds.There are no charges for making transaction through Bharat Interface for Money. Note – Your bank might however levy a nominal charge as UPI or IMPS transfer fee which is not under our control.Your account need to be enabled for mobile banking to use Bharat Interface for Money. Your mobile number shall have to be registered with the Bank.To enable transfers directly using your bank account, your bank needs to be live on UPI (Unified Payment Interface) platform. All the banks, which are currently live on UPI, have been listed in the Bharat Interface for Money app.Currently, Bharat Interface for Money supports linking of one Bank at a time.Unified Payment Interface (UPI) is an instant payment system developed by the National Payments Corporation of India (NPCI), anRBI regulated entity. UPI is built over the IMPS infrastructure and allows you to instantly transfer money between any two parties’ bank accounts. All payments are instant and 24/7, regardless of your bank’s working hours!Can I send money to a friend not registered on Bharat Interface for Money?Yes. Payment can be made via (IFSC, Account number) or (MMID, Mobile number) if the person is not registered on Bharat Interface for Money. |
| BharatQR code | Bharat QR Code is a Quick Response (QR) code supporting Visa, Master- Card and Rupay cards.Bharat QR code enables merchants to accept electronic payments without the need for a POS machine.Payments using Bharat QR code:Customers with Mobile app click on Bharat QR to scan the QR code at the merchant establishment.Pockets app automatically enables the camera in the phone.Customers will be presented with a payment screen displaying merchant details and amount to pay.Customers can select from any of their Visa, MasterCard or Rupay cards for payment.Transaction is completed and the customer sees a success screen. The merchant receives a notification on his phone for the transaction. |
| Immediate Payment Ser- vice (IMPS) | IMPS is an innovative real time payment service that is available round the clock (24×7) including on holidays.It empowers customers to transfer money instantly through banks.An unbanked customer can initiate IMPS transaction using the services of RBI authorized Prepaid Payment Instrument Issuers (PPI). IMPS is an immediate fund transfer service, after initiating the payment request payment cannot be stopped or cancelled a customer can do IMPS transaction:” Using Beneficiary Mobile no. and MMID or” Using Beneficiary Account no. and IFS Code or” Using Beneficiary Aadhaar Number. |
| National Financial Switch (NFS) | NFS is the largest network of shared automated teller machines (ATMs) in India. It was designed, developed and deployed with the aim of interconnecting the ATMs in the country and facilitating convenience banking. |
Mobile Money Identifier (MMID)
| Issued by | It is a 7 digit number, issued by banks. |
| Use | MMID is one of the input which when clubbed with mobile number facilitates fund transfer.Combination of Mobile no. & MMID is uniquely linked with an Account number and helps in identifying the beneficiary details. |
| One account one MMID | Every bank account has only one MMID. |
| Linking of different bank account | Different MMID’s can be linked to same Mobile Number. |
Indian Financial System Code (IFSC)
| Issued by | |
| Issued to | Bank Branch |
| Purpose | It identifies a bank-branch where online payment is to be credited in beneficiary account |
| Nature | This is an alpha-numeric 11 digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch.The 5th character is 0 (zero).e.g. IFSC code of HDFC Chandni Chowk-Delhi Branch is HDFC0000553 where 000553 is branch code. |
Loan to Value Ratio
| About LTV | LTV denotes the amount banks can finance to a borrower for a property purchase.A 90% LTV indicates that the buyer will have to pay only 10% of the property value and the rest can be financed through banks. |
| RBI guideline | RBI allowed a loan-to-value ratio (LTV) of up to 90% for home loans of Rs.30 lakh or lessFor properties above Rs 30 lakh and up to Rs 75 lakh, the LTV will be up to 80 per cent and those above Rs 75 lakh, it will be 75 per cent. |
Islamic or Sharia banking #
Islamic or Sharia banking is based on the principles of not charging interest, which is prohibited under Islam.The Reserve Bank of India (RBI) has proposed opening of “Islamic window” in conventional banks for “gradual” introduction of Sharia-compliant or interest-free banking in the country.
Bad Bank #
Public sector banks (PSBs), where the bulk of the bad loans reside, cannot raise enough capital to fund credit growth which in turn affect the Growth rate of India.
The finance ministry is considering to set up of a ‘bad bank’ that will absorb the nonperforming assets (NPAs) of public sector banks and help them clean up their books.
Merchant Discount Rate (MDR) #
The commission charged by the bank to the Merchant (Trader/Service Provider) for providing debit and credit card services through POS terminal.
It is also termed as Merchant Service Fee (MSF).
