JAIIB & CAIIB DBF Exam Preparation - Banking regulation in India

Table of Contents

Indian Financial System – BANKING REGULATION

2.3.7 Regulator and supervisor of payment and settlement systems

The central bank of any country is usually the driving force in the development of national payment systems
The Reserve Bank of India as the central bank of India has been playing this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient, Accessible and Authorised payment systems in the country
In India, the payment and settlement systems are regulated by the Payment and Settlement Systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as well as the Payment and Settlement System Regulations, 2008 framed thereunder came into effect from August 12, 2008

Payment Systems

The Reserve Bank has taken many initiatives towards introducing and upgrading safe and efficient modes of payment systems in the country to meet the requirements of the public at large.

Various systems used are :-

Retail payment systems :- cheque clearing system, electronic fund transfer through NEFT ,settlement of card payments and bulk payments such electronic clearing system (debit and credit)
Large value systems :- real time gross settlement ,securities settlement system for the government securities market ,foreign exchange clearing : for transactions involving foreign currency

2.3.8 Maintaining financial stability

Conduct of the macro prudential surveillance of the financial system
Developing model for assessing financial stability in going forward
Preparation of half yearly financial stability reports
Development of database of key variables which could impact financial stability
Development of a time series of a core set of financial indicators
Conduct of systematic stress tests to assess resilience

Financial stability report

First was published in march 2010

What is Financial Stability and Development Council (FSDC)?

The FSDC was envisaged for performing two sets of core functions. First is to perform as an apex level forum to strengthen and institutionalize the mechanism for maintaining financial stability
Second is for enhancing inter-regulatory coordination and promoting financial sector development in the country.

Composition of FSDC

The Chairman of the Council is the Finance Minister and its members include the heads of financial sector Regulators (RBI, SEBI, PFRDA, IRDA & FMC {now with SEBI}) Finance Secretary and/or Secretary, Department of Economic Affairs, Secretary, Department of Financial Services, and Chief Economic Adviser.

Function of the FSDC:

It will focus on financial literacy and financial inclusion.
It aims strengthening and institutionalizing the mechanism of financial stability and development.
It will monitor macro-prudential supervision of the economy. It will assess the functioning of the large financial conglomerates
It will address intra regulatory coordination issues.

The FSDC Sub Committee Chaired by the Governor of the RBI

An important wing of the FSDC, in terms of functional responsibility is the Sub committee chaired by the Governor of the RBI
It meets more often than the full Council
All the members of the FSDC are also the members of the Sub-committee. Additionally, all four Deputy Governors of the RBI and Additional Secretary, DEA, in charge of FSDC, are also members of the Sub Committee

Other wings within the FSDC
 the Inter regulatory technical group, Technical Group on financial inclusion and financial literacy, Inter regulatory forum for monitoring financial conglomerates (IRF-FC), Early Warning Group, Working Group on resolution regime for financial institutions and the Macro Financial and Monitoring Group

2.3.9 Developmental role

Deposit insurance and credit guarantee corporation (1962)
Unit trust of India (1964)
Industrial development bank of India (1964)
National bank for agriculture and rural development (1982)
Discount and finance house of india(1988)National housing bank (1989)
Securities and trading corporation of india (1994)
Directed credit for lending to priority sector and weaker sections
Lead bank scheme
Sector specific refinance
Strengthening and supporting small local banks
Financial inclusion

2.4 Regulatory restrictions on lending

No advance or loan can be granted against the security of the bank’s own shares
No bank can hold shares in a company
a) As pledgee or mortgagee in excess of the limit of 30% of the paid-up capital of that company or 30% of the bank’s paid up capital and reserves ,whichever is less (sec 19 ii of BRA)
b) In the management of which MD or ,manager of the bank is interested (sec 19 iii of BRA)
Bank’s aggregate investment in shares ,CD ,bonds, etc. should not exceed the limit of 40% of bank’s net owned funds at the end of the previous year
No bank should grant loans against
a) CD & b) Indian depository receipts
Banks should desist from sanctioning loans against FD’s issued by other banks
Banks should adhere to the RBI guidelines (level of credit ,margin and interest rate etc.)
No additional facilities should be granted by any bank/FIs to the listed willful defaulters.
In addition to the entrepreneurs /promoters of companies where banks /FIs have identified siphoning /diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the SCB’s
RBI has advised the banks to fix limits on their exposure to specific industry or sectors and has prescribed regulatory limits on banks’ exposure to individual and group borrowers in India
15% of capital funds in case of single borrower
40% in case of borrower groups

2.5 Inclusion of URB’s in the 2nd schedule of RBI act 1934

Financial criteria
a)DTL of not less that Rs. 750cr on a continuous basis for one year
b)CRAR of 12%
c)Continous net profit for the previous 3 years
d)Gross NPA’s not exceeding 5% e) Compliance with CRR and SLR requirements and
f) No major regulatory and supervisory concerns\