Banking System In India
Banking System In India
Section titled “Banking System In India”2020-06-09 18:55:52
- Banking System In India
- Reserve Bank of India
- Different Types of Banks
- Commercial Banks
- Small Finance Bank
- Payment Banks
- Cooperative Banks
- NBFCs
- Other Definitions and Concepts
- Insurance in India
- Other Bodies, Challenges and Reforms
Reserve Bank of India
Section titled “Reserve Bank of India”- RBI act 1934 on recom of Hilton Young commission, nationalised in 1949
- superintendence given to Central board of Directors consists of 20mem.
- Official Directors are the Governor and not more than 4 deputy governors
- Non Official directors include 10 nominated from various fields and 2 govt officials. Including 4 directors each from 4 local boards/ sub offices from Chennai, Kolkata, Mumbai and New Delhi)
- RBI has 4 fully owned subsidiaries DICGC, Bharatiya Reserve Bank Note Mudran Private Limited BRBNMPL, Reserve Bank Information Technology Private Limited ReBIT and Indian Financial Technology and Allied Services IFTAS.
- Jalan Committee on ECF recommended April-March financial year cycle.
Functions of RBI
Section titled “Functions of RBI”- As per the preamble of RBI it seeks to regulate issue of Bank notes and keep reserves to secure monetary stability in general operate the currency and credit system. To have a monetary policy framework to meet challenges of increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.
- Bank of Issue or Currency Authority : sole right to issue bank notes or destroy them except Rs 1 coins and notes that is made by the Mo FInance. It includes the responsibility for its distribution.
- Banker to Govt : ex to receive and make payments on behalf of GOI, [[003 Fiscal System or Public Finance in India#Ways and Means Advance WMA|WMA]]. It includes 3 categories of functions ie Mechant Banking to Central and State Govt, 2nd is acting as their banker and 3rd is maintaining banking accounts of SCBs..
- Bankers Bank and Lender of Last resort. Lender of last resort means that whoever you turn to when you urgently need funds and you’ve exhausted all your options. As a lender of last resort it provides short terma and long term liquidity to the Banks.
- As a Monetary authority it is the Controller of credit in India through [[005 Monetary and Credit Policy#Monetary policy |Monetary Policy]] with the objective to stabilise the wholesale price index WPI and target the CPI
- Agent and Adviser to the Gov
- Manage of Forex : Manages Foreign exchange through the FEMA Act 1999 , stabilising exchange rate of rupee, representing GOI in IMF and WB. To facilitate external trade and external payment.
- Regulator and Supervisor of Payments and settlements in India .
- Development functions : under this it set up various developmental banks such as IDBI, SIDBI, NABARD, NEDB(North Eastern Development Bank, EXIM, NHB etc. Gradually their ownership is being transferred to GOI.
Different Types of Banks
Section titled “Different Types of Banks”![[Pasted image 20220220180711.png]]
![[Pasted image 20220220180506.png]]
- Commercial banks are ones that take demand deposits (savings and current) financial intermediary takes money from public and lends to businesses
- Cooperative banks do the same but are owned by customers reg under the Cooperative Societies Act 1912 and regulated by Banking Regulation Act 1949 and Banking Laws Act 1965.
- Investment banks deals with firms and are called merchant banks.
- Land Development Banks aka State Co-operative Agriculture and Rural Dev Banks SCARDBs provide long term finance to agriculturists.
- Development banks provide long term finance to those where risks could be higher viz SIDBI, MUDRA
Commercial Banks
Section titled “Commercial Banks”- Scheduled Commercial - included in 2nd schedule of RBI act 1934, regulated by BRA 1949
- Paid up capital value 5 lakh
- Affairs conducted are not detrimental to consumers
- Non Scheduled Commercial - are only 3 in number, Local Area Banks, Cooperative Banks, are an ex
- Bank of Bengal (1806), Bombay and Madras merged together to form the Imperial Bank of India in 1922 it was nationalised in 1955 and named as SBI
Narsimhan Committee I Report 1991 :
Section titled “Narsimhan Committee I Report 1991 :”- No Nationalisation
- Level playing field b/w public, private and foreign sector
- Select few banks for global operations
- Reduce SLR, CRR to increase lending
- Improve priority sector lending
- Better risk mgt, deregulate interest rates
Narsimhan Committee II 1998 Report
Section titled “Narsimhan Committee II 1998 Report”- Strengthening banks through mergers
- Narrow Banking where banks with high NPA allowed to place their funds in short term risk free assets
- Gov should raise CAR
- review banking laws
- Introduced [[005 Monetary and Credit Policy#7 Liquidity Adjustment Facility LAF|Liquidity Adjustment Facility LAF]].
Types of Assets
Section titled “Types of Assets”- Standard assets are the ones that are paying the principal and interest as per agreed
- Stressed asset is when loan is likely to become NPA measures are taken by RBI like restructuring etc.
- Non Standard assets are NPAs - Various stages that a loan undergoes under this are
- Special Mention Account when dues are not paid for 90 days
- Sub Standard Asset when it remains SMA till 12 months
- After 12 months it is called as a Doubtful asset DA1 it becomes DA2 1-3 years from 3 yr onwards it is classified as DA3.
Various Steps that Could Be taken/were Taken to Clear NPAs Are :
Section titled “Various Steps that Could Be taken/were Taken to Clear NPAs Are :”- Provisioning
- Capital adequacy norms of Basel 3 ^1daf5f
- SARFAESI Act : Securitisation means the selling of securities that were basis of loans.
- [[#ARCs]] ^3828d8
- Foreclosure - taking over the mortgage
- One Time settlement
- Interest waiver
- 5/25 refinancing
- Strategic Debt Restructuring SDR
- Asset Quality Review AQR
- S4A
SARFAESI Act
Section titled “SARFAESI Act”- Securitisation and Reconstruction of Financial assets and Enforcement of Security Interest Act 2002
- allows banks to auction residential and commercial properties to recover loans without permission of courts
- Banks/FIs that have 75% of loan due can issue notice of default to borrowers asking to clear it and on failure can
- take possession of security
- take over management of borrowing concern
- appt manage the concern
- Can also sell security to ARC
- under the act can buy NPAs from banks and turn them around to become productive.
- RBI gives licenses to them and regulates them.
- They clean up the balance sheet of banks, monetise assets etc.
- can also reschedule debts, change or takeover Management.
- Asset quality review AQR : a small sample of loan is inspected to see if it was in line with norms. Done to check NPA status.
- SARFAESI Act 2002 provides legal basis for setting up ARC.
- Should have min net owned fund of Rs 100cr and [[#^1303a6 |Capital Adequacy Ratio]] of 15%.
Prompt Corrective Action PCA
Section titled “Prompt Corrective Action PCA”- PCA is taken when the risk thresh hold is breached it is related to asset quality, profitability, capital levels etc. Banks are then put under watch by RBI.
- Introduced in 2002 as structured early intervention mechanism aims to check NPAs.
- There are 2 types of actions that are undertaken they are Mandatory and Discretionary. Mandatory actions taken are halting branch expansion, stop dividend payment, restrict directors compensation etc. Discretionary ones could include curbs on lending and deposit.
- Banks are not allowed to access costly deposits or inc their fee based income.
- They have to launch special drives to reduce stock of NPAs and contain generation of new NPAs.
- They will also not be allowed into new lines of Business. Restrictions on borrowings from interbankmarket is also imposed.
- PCA is limited to commercial banks and not extended to Co-operative banks and NBFCs -> This was changed
- Revised PCA framework :- effective from Jan 1, 2022. Capital, Asset Quality and leverage will be key areas ot monitoring revised framework.
- Stress Test is when certain scenarios are simulated like stock market plunges, rupee swings and the performance of banks is measured
- Prudential norms relate to income recognition, asset classification, provisioning of NPA, CRAR
- PCA is applicable to all deposit taking NBFCs, all non deposit taking NBFCs, investment and credit companies, Core Investment Companies, Infrastructure debt funds, Infrastructure Finance Companies, Microfinance Institutions.
- Excluding NBFCs that dod not accept/ not intending to accept public funds, Primary Dealers and Housing Finance Companies (including govt owned ones)
- Credit risk is when borrowers are not able to repay loans
- Market risk is when the SLR that is invested in gold, Bonds, currency etc fluctuate in prices
- Operational risk includes fraud, cyber-attacks, infra shutdowns etc
Capital Adequacy Ratio
Section titled “Capital Adequacy Ratio”-
Banks want to minimise risk and maximise their credit creation. Thus there are tools to act as shock absorbers/ cushion to banks :
- Cash Reserve Ratio CRR
- Statutory Liquidity Ratio SLR
- Capital Adequacy Ratio CAR
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Capital Adequacy Ratio CAR aka CRAR is % of a banks risk weighted credit exposures. Every borrower has a certain risk associated with them. Gov securities and Cash have zero risk. Basel III says it should be 8% and RBI 9% , decided by Central Bank and regulators ^1303a6
- It means that if loans of Rs 100 is being forwarded a free capital of Rs 8 is to be maintained at that particular time.
- RBI introduced it in 1992.
- Risk-weighted assets are the loans and other assets of a bank, weighted (that is, multiplied by a percentage factor) to reflect their respective level of risk of loss to the bank.
CAR = (Tier 1 + Tier 2 capital) / Risk Weighted Assets
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Tier 1 capital : which can absorb losses without bank being required to cease trading. They are most reliable and liquid ex equity capital and disclosed reserves of bank.
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Tier 2 capital : which can absorb losses in event bank has to cease trading. Consists of accumulated after tax surplus of retained earnings, revaluation reserves of fixed assets, long term holding of equity securities, general loan loss reserves, hybrid capital instruments, subordinate debts and undisclosed reserves.
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Tier 3 capital : Considered tertiary capital and includes greater number of subordinated issues, undisclosed reserves, general loss reserves not included in Tier 2 capital.
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Maintaining CAR is a challenge in India due to NPAs, dwindling profits to listed companies, low infusion of capital of GOI
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Hair cut is when the value of an asset is brought down when it cannot be realised fully - 2 types a write down where it is decrease and a write off dec to 0.
Basel Norms
Section titled “Basel Norms”- Basel I 1998 focus entirely on credit risk and on on capital adequacy of financial institution.
- Basel II 2004 focused on more risks and remedies and on minimum capital requirements, supervisory review and market discipline.
- Basel III 2010-2011 - improve quantity and quality of capital, strong supervision, risk management and disclosure standards. - Basel III on banking sectors ability to absorb shock from financial & economic reserves, improve risk mgt and governance, strengthen banks.
- Under this capital adequacy was inc to 11.5% against 9
- covers 3 risks credit risk, market risk and operational risk
- 3 pillars :
- Pillar I is risks
- 2 enlarges the role of banking supervisors
- 3 deals with higher disclosure by banks on capital adequacy, asset quality etc ![[Pasted image 20230113080951.png]]
Stock of Money
Section titled “Stock of Money”- Second working group of Monetary Supply SWG in 1977 published 4 monetary aggregates viz M1, M2, M3 and M4 besides the reserve money.
- M1 = currency and coins with people + Demand deposits of Banks(Current & Saving Accounts) + Other deposits of RBI
- M2 = M1 + Demand deposits of the post offices (i.e. savings schemes money)
- M3 = M1 + Time/Term deposits of the banks (ie money lying in Recurring deposits and fixed deposits)
- M4 = M3 + total deposits of the post offices (both, Demand and Term/Time Deposits)
RBI has now published set of new monetary aggregates after recom from YV Reddy report 1998. That recom 4 monetary aggregates M0 (monetary base), M1 (narrow money), M2 and M3 (broad money). It also recommended 3 liquidity aggregates namely L1, L2 and L3.
New Monetary Aggregates are 5. Reserve Money M0 = Currency in circulation + Bankers deposit with RBI + Other deposits with RBI - Data on this is available on weekly basis. For M1 and M3 on fortnightly. - aka High Powered Money 6. Narrow Money M1 = Currency with Public + Demand deposits with Banking system + Other deposits with RBI - Other deposits constitute the ones that come from Foreing National banks, or Sundry deposits of IMF. 7. M2 = M1 + Savings deposits of Post office savings banks (Saving Certificates, Social security schemes, Recurring deposits etc) 8. Broad Money M3 = M1 + Time Deposits with the Banking system 9. M4 = M3 + All deposits with post office savings banks excluding National Savings certificate.
Intermediate Monetary Aggregates
- NM1 = Currency with Public + Demand Deposits with Banking system + Other Deposits with RBI
- Same as M1
- NM2 = NM1 + Short term Time Deposits of Residents (Certificate of deposit)
- NM3 = NM2 + Long term Time deposits of Residents + Call/ Term Funding from Financial Institutions.
Liquidity Aggregates:
- L1 = NM3 + All deposits with Post office Savings Banks (excluding National Savings Certificate)
- Data on L1 and L2 are published monthly and L3 quarterly.
- L2 = L1 + Term deposits with Term Lending Institutions and Refinancing Institutions FI’s + Term Borrowing by FIs + Certificates of Deposit issued by FIs
- L3 = L2 + Public Deposit of Non banking Financial companies.
Insolvency and Bankruptcy Code IBC
Section titled “Insolvency and Bankruptcy Code IBC”- aims to counter debt default and consolidate insolvency related laws. IBC has created various institutions to deal with it :
- Insolvency Professional - they administer the insolvency process, manage assets etc
- Insolvency Professional Agencies - it certified professionals
- Information Utilities - database to track serial defaulters, provides info on them to creditors.
- Adjudicating authorities - National Companies Law Tribunal NCLT for companies and Debt Recovery Tribunal DRT for small firms and individuals. They approve the resolution process, appoint professionals.
- Insolvency and Bankruptcy Board - it regulates professionals, agencies. Board has members from RBI, Mo Finance etc.
- IBC can also be be initiated against personal guarantors #important
Process of Insolvency
Section titled “Process of Insolvency”- Initiation - the responsibility lies on the creditor to start insolvency any employees, shareholders etc can start insolvency
- Professional starts managing his assets, provide info to creditors etc this lasts for 180 days and legal proceeding is prohibited during this time
- A committee is formed =of the creditors to either revive the debt or sell assets and get paid. Time frame is 180 days and 1 time extension of 90 days.
- Liquidation is when assets are sold. Proceeds are distributed through a waterfall which is an order of precedence.
Amendments Ot IBC
Section titled “Amendments Ot IBC”- Banking Regulation Amendment Act 2017 allowed RBI to issue directions to banks for initiating recoveries against defaulters.
- 2019-20 : Section 29A bars promoters from bidding for their own company preventing defaulters to regaint their companies at a cheaper value.
- Section 12A : Creditors had option to withdraw insolvency options within 30 days of filing.
- Gives 14 day timeline to NCLT for admission or rejection of resolution application to be strictly followed.
Twin Balance Sheet TBS Problem
Section titled “Twin Balance Sheet TBS Problem”- where the companies that borrowed and the banks that lent show stress for not being able to pay back and receive.
- S4A scheme to resolve TBS problem by converting large portion of loan into equity shares
PJ Nayak Committee
Section titled “PJ Nayak Committee”- set up by RBI to suggest on governance issue of Banks :
- Reduce gov holding in PSB below 50%
- Professionalise board appointments
- Fixed 5 yr term for Chairman/Managing Director
Indradhanush
Section titled “Indradhanush”- was a 7 point plan to revive NPAs
- Appointments in professional manner in PSBs
- Banks Board Bureau
- Capitalisation
- De stressing PSBs by consolidation
- Framework accountability etc
Regional Rural Banks
Section titled “Regional Rural Banks”- RRBs set up in 1975 to provide credit to weaker sections of society at concessional rates and to mobilise rural savings and channelise them for supporting productive activities in rural areas.
- Kelkar Committee recom stopped opening new RRBs in 1987. Bhandari Committee and Basu Committee was set up for its restructuring -> recommended abolishing concessional loans and target clientele was free to lend to any body.
Small Finance Bank
Section titled “Small Finance Bank”- RBI in 2014 issued guidelines for setting up small banks and payment banks for furthering financial inclusion.
- SCBs that focuses on lending to small business units, marginal farmers, MSME etc.
Guidelines for setting up both Small Banks and Payment Banks are
- Min capital is Rs. 100cr
- Promoter contribution to be at least 40% for first 5 years which is to be gradually brought down.
- Foreign Investment permitted
Small Banks : Objective is to provide basic banking products ex deposits and supply of credit but in a limited area of operation.
- For 3 years prior approval required for branch expansion.
- Required to give 75% of credit to PSL
- 50% loan portfolio should be up to Rs. 25 lakh
- Can undertake non risk sharing financial services like distributing Mutual Funds, Insurance products etc
- Cannot set up subsidiaries for NBFCs. After 5 years RBI may liberalise scope of activities for small banks.
- Promoters need to have 10 years of minimum experience in banking and finance.
- All Risk management norms such as CRR, SLR that apply to Commercial Banks would apply to them as well.
- 25% branches for first 3 years have to be in unbanked rural areas.
- Take small deposits and disburse loans.
- Distribute mutual funds, insurance products and other simple third-party financial products
- Maximum loan size would be 10% of capital funds to single borrower, 15% to a group
- They cannot Lend to big corporates
- Cannot set up subsidiaries to undertake NBFC activities.
- Cannot be a business correspondent of other bank
Payment Banks
Section titled “Payment Banks”- Objective is to increase financial inclusion by providing savings account, payment/ remittance services to migrant labour etc and enable high volume low value transactions.
- Recom by Nachiket Mor committee
- Promoters can be NBFCs, Corporates, Mobile Telephone Companies, Super Market Chanis, PSEs etc.
- Accept current and savings bank deposits ie demand deposits.
- Can accept limited amount as deposit upto Rs 1 lakh
- can set up outlets, ATMs, Business correspondents provide mutual funds and other financial products, net banking and mobile banking
- No NRI deposit to be accepted
- Covered under the DICGC scheme
- Cannot Accept Fixed Deposits and Recurring deposits
- Cannot undertake lending
- Cannot issue Credit Cards
- Min 75% deposits must be in Government securities/T-bills
- 25% of branches should be in unbanked areas, min capital is 100cr
India Post Payments Banks was formed for financial literacy, streamlining payments, financial inclusion, easy access
MUDRA Bank under PM Mudra Yojana
Section titled “MUDRA Bank under PM Mudra Yojana”- was formed to extend collateral free loans to NBFCs and Micro Finance Institutions in non-agriculture sector
- envisioned as a regulator to Micro Fins institutions it can accredit them, register them, lay down policy guidelines etc.
Cooperative Banks
Section titled “Cooperative Banks”![[84321431.jpg]]
- Commercial banks are of 2 types Schedule commercial and Cooperative banks.
- Have a 3 tier structure :
- Primary Credit Societies PCSs (agriculture or urban) : PSCs in urban areas can apply to RBI for banking license to operate as Urban Cooperative Banks UCBs.
- Registered and governed by RBI under Banking Regulations Act 1949. The Urban Cooperative Banks and Multi State Cooperative banks have come under direct supervision of the RBI.
- District Central Cooperative Banks DCCBs
- State Cooperative Banks SCBs (at apex level)
- Primary Credit Societies PCSs (agriculture or urban) : PSCs in urban areas can apply to RBI for banking license to operate as Urban Cooperative Banks UCBs.
- Cooperative banks are registered under States Cooperative Societies act
- PACS are outside the purview of Banking regulation Act and thus not supervised by RBI.
- StCBs and DCCBs are registered under State Cooperative Societies Act and regulated by RBI.
- NABARD has powers of inspection a StCB and Central Cooperative Bank.
- Each district can have only 1 DCCB.
Banking Regulation Amendment Act 20201
Section titled “Banking Regulation Amendment Act 20201”- Act does not apply to certain cooperatives ie PACS, Cooperative Societies whose principal business is long term financing for agricultural development. They should not use the word bank, banker or banking in their name and must not clear cheques.
- Cooperative Banks may issue equity shares, preference shares, or special shares on face value at a premium to its members with approval from RBI.
- Supersession of Board of Directors by RBI of cooperative bank registered with Registrar of Cooperative Societies of a state after consultation with the concerned state govt.
- Are another catergory of financial institution is the non bank it is similar in functions to a bank but does not allow depositors to withdraw money from their accounts.
- Are heterogenous groups of institutions other than commercial and co-operative banks performing financial intermediation in ways such as accepting deposits, making loans and advances, leasing, hire purchase etc.
- They can not have certain activities as their principal business ex agricultural, industrial and sale-purchase or construction of immovable property.
- They raise funds from the public directly or indirectly and lend them to ultimate spenders.
- Advance loans to various wholesale and retail traders, small scale industries and self-employed persons.
- Are contemporaries to banking sector due to customer oriented services, simplified procedures, good rate of returns etc.
2 types of NBFCs are
Deposit Taking
Section titled “Deposit Taking”- ==They only take Time deposits not Demand Deposits==
- Mandatory for them to get them registered by RBI.
- Mandatory to be incorporated under Companies Act 1956.
- Minimum Net Owned Fund of 2 crore.
- Allowed to accept and/or renew public deposits for a min period of 12 months and max 60 months.
- Cannot accept demand deposits.
- Cannot offer interest rates higher than ceiling rate prescribed by RBI.
- Cannot offer gifts, incentives etc to depositors.
- Minimum investment grade credit rating.
- ==Deposits are not insured by DICGC==. #important
- repayment of deposits by NBFCs not guaranteed by RBI.
- Need to maintain Capital Adequacy Ration CAR norm as prescribed by RBI.
Non Deposit Taking
Section titled “Non Deposit Taking”- aka NBFC Factor is engaged in principle business of factoring that is providing cash immediately to a particular amt that is due for the invoice.
Other Details about NBFCs
Section titled “Other Details about NBFCs”- Certain categories of NBFCs are regulated by other financial regulators Ex.
- Venture capital fund, merchant bank, stock broking firms are regulated by SEBI.
- Insurance companies by IRDAI
- Housing finance company by NHB
- Nidhi Company by Mo Corporate Affairs under the Companies Act 1956.
- Chit fund companies by state govt
3 categories of NBFC ie Asset Finance companies, Investment companies and loan companies were merged to form NBFC Investment and Credit Companies NBFC ICCs
- They will be regulated by their activity rather than activity
- Deposit taking NBFC ICC will invest upto 20% of its net asset in unquoted shares of other company.
![[1.3 Infrastructure, Liberalisation, Land Reforms in India#^62bb47]]
NIDHI Companies
Section titled “NIDHI Companies”- Refers to any mutual benefit society notified by Central Govt. Formed to cultivate the habit of thrift and savings amongst members.
- They borrow and lend to their members only and operate by names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds, Mutual Benefit Company.
- Registered under Companies Act 1956 regulated by Mo Corporate Affairs. They are also exempted from certain provision of the Act.
- They are being increasingly being brought under the ambit of RBI. RBI is empowered to issue directions to them in matters relating to their deposit acceptance activities.
- P Sabanayagam Committee was formed to prevent unscrupulous use of word Nidhi in their names
Chit Funds
Section titled “Chit Funds”- aka Chitty, Kuri, Miscellaneous Non banking Company are savings institutions lacking any standardised forms.
- Have regular members who make periodical subscriptions to the fund. Beneficiary is selected usually on basis of bids or by draw of lots.
- Each member is assured of his turn before second round.
- Regulated by Chit Funds Act 1982. Registration and regulation of Chit funds are carried by state govt under rules framed by them.
- RBI has included them in definition of Miscellaneous Non banking Company MNBC
Other Definitions and Concepts
Section titled “Other Definitions and Concepts”Minimum Reserve : For RBI min reserve is 200cr in gold and foreign currency of which 115cr should be in Gold.
Money Multiplier : is an approach used to demonstrate maximum amt of broad money that could be created by commercial banks for a given amt of base money and reserve ratio.
M (Money multiplier) = 1/R , where R is the reserve requirement For eg. 20% ratio of 1/5 them 1/(1/5) = 5 which would be the money multiplier
Money Supply : Money supply is the total money available in an economy at any point of time.
Credit Counselling : Advising borrowers to overcome their debt burden and improve mgt skills is called credit counselling.
Credit Rating : Assess the credit worthiness (integrity, capability) of a prospective borrower to meet debt obligation. Major credit agencies are
- CRISIL by ICCI and UTI
- ICRA (Investment Information and Credit Rating Agency of India Ltd) by IFCI, LIC, SBI and other banks
- CARE (Credit Analyses and Research Ltd)
NRI Deposits : FEMA 2000 regulations allowed NRIs to have deposit accounts with authorised dealers the include
- Foreign Exchange Non Resident Bank Account FCNR(B) : can be opened by NRIs and Overseas Corporate Bodies OCBs. Deposits are allowed in Pound, USD, Euro and Japanese Yen. Interest is determined by RBI.
- Non Resident External Account (NRE Account) : NRE accounts can be opened by NRIs and OCBs. Deposits can be in any currency.
- Non Resident Ordinary Ruppee Account (NRO) : When resident becomes NRI his Rupee accounts become NRO Deposit in these accounts are considered as external debts outstanding.
Insurance in India
Section titled “Insurance in India”- Anything that is used to cut down risk is called insurance. LIC (public sector life insurer) formed in 1956 and GIC (Reinsurance) in 1971 are 2 PSUs that undertake insurance business in India. Both come under the Mo Finance.
- Agriculture Insurance of Company of India Ltd AICIL was et up by GOI is a dedicated agri insurance company and aims to serve needs of farmers better. It looks after [[Mo Agriculture and Farmers Welfare#Pradhan Mantri Fasal Bima Yojana PMFBY |PMFBY]]. AICIL is jointly owned by GIC, NABARD and below mentioned 4 companies.
- GOI also owns 4 general insurers companies such as National Insurance Company, New India Assurance Company, Oriental Fire and Insurance Company and United India Insurance Company.
- Insurance Reforms taken were allowing foreign private sector coys to enter,
- IRDAI set up in 200 with 1 chairman and 5 members responsible for regulation, development and supervision of Insurance industry.
- Reinsurance is when business that provides insurance itself seeks insurance for its business since they themselves are exposed to risks. It is regulated by IRDAI
DICGC #body under RBI.
Section titled “DICGC #body under RBI.”- Objective is to avert panics, reduce systemic risk and ensure financial stability.
- Insured bank pays 0.001% of its deposit to RBI as premium limit is Rs.5lk. Depositor does not pay this premium.
- Covers (fixed, savings, current etc),
- liquidator appointed by the RBI gives a list of beneficiaries to it within 3 months.
- Does not include deposits of foreign gov, state/central gov, inter-bank deposit, etc
- Banks that are covered by this are private sector banks, Cooperative banks and branches of foreign banks in India.
Other Bodies, Challenges and Reforms
Section titled “Other Bodies, Challenges and Reforms”- ECGC : Exporters face political and commercial risks in importing countries to reduce this ECGC was established under Mo Commerce and Industry for medium to long term exports.
- National Export Insurance Account NEIA : to provide credit where ECGC was not able to provide credit because of purely commercial reasons. It supports projects that are commercially viable and strategically important.
- Estd as a trust under Mo Commerce and administered by ECGC. Provides additional support to insurance cover provided by ECGC.
Challenges of Insurance sector
- Very low penetration of insurance penetration is 4.2% and life insurance penetration is 3.2%.2
- Health insurance could emerge as most importatn factors in improving human development in the country.
- Most of Indias population lives in rural areas and have financial difficulties. Micro Insurance could be a solution to these.
- Dominance of Govt owned insurance agencies.
- Complex and delayed claim settlement procedures
- Vague and Incomprehensible rule and regulations of insurance companies.
- Lack of education and awareness.
New reforms undertaken
- Insurance Laws Amendment Act 2015 aimed to reduce archaic and redundant provisions.
- It also increased foreign investment to 49%.
- Increased the scope to raise capital.
- Enabled consumer welfare through high penalties and empowered IRDAI to regulate employment of insurance agents.
- Act defines health insurance business to promote it as a separate vertical.
- Enables foreign reinsureres to set up branches in India.
- Third party insurance : provided by non-life insurance companies on vehicles that covers the risk other than the 2 parties ie the car and the owner. It covers the insured legal liability ie death/ disability of third party loss or damage to the 3rd party.