Let’s make things simple! Not all but the most relevant and exam specific Banking and Financial Awareness in a nutshell. Read, Read again, Try to recall, Write, Repeat!! Important Data has been added wherever necessary.
Reforms in the Banking Sector (Phase-I):
1. RBI on recommendations of Hilton Young Committee→ 22 regional offices at present
2. The Narsimham Committee→ to study the problems of the Indian Financial System
Report- I (1991-1998):
a) Reduction in SLR (Statutory Liquidity Ratio)→ 38.5% to 25%
b) Reduction in CRR (Cash Reserve Ratio)→ 15% to 3.5%
c) Created the ARF Tribunal→ (Asset Reconstruction Fund) Tribunal
d) Recommended to end the GoI intervention in the regulation of Banks and gave more teeth to the RBI
Report- II (1998): Also known as the (Banking Sector Committee)
a) More focus on CAC (Current Account Convertibility: the ability to conduct transactions of local financial assets into foreign financial assets freely and at country determined exchange rates)
b) Introduced Narrow Banking→ a practice where weak banks can place their funds only in short-term and risk-free assets
c) CAR→ Capital Adequacy Ratio became the prime focus→ (The CAR is a measure of a bank’s capital. It is expressed as a percentage of a bank’s risk weighted credit exposures. Also known as capital-to-risk weighted assets ratio (CRAR), it is used to protect depositors and promote the stability and efficiency of financial systems around the world)
d) 4 Important Acts→ RBI Act, Banking Regulations Act, SBI Act, Bank Nationalization Act→ amended
Impacts of the Narsimham Committee Recommendations on the Banking Sector Today:
1. CRR→ 3-15% of the NDTL (Net Demand and Time Liabilities)
2. SLR→ minimum requirement was 25% of the NDTL→ now removed as per the amendment
3. Deregulation of Interest Rates→ Earlier the banks could fix the interest rates by themselves on loans only above Rs. 20 Lac→ Today, this has been reduced to Rs. 2 lac.
4. Fixing of Prudential Norms→ are followed while investing in funds→ prescribed by the BIS Bank of International Settlement, Basel, Switzerland
Basel Accords (I, II and III)→ (The Basel Accords are a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk)
Basel Accord I: (1988) the banks that function internationally must maintain a CAR of 8% or less
Basel Accord II: (2004-2015) focus on minimum capital requirements, supervisory review and market discipline
Basel Accord III: (2019) Prime focus would be on:
a) Financial and Economic stress
b) Improvement in Risk Management
c) Strengthen the Bank’s Transparency
5. Operational Autonomy→ If the banks satisfy the CAR requirements, they can open new branches with the permission of the RBI
6. Diversification in Banking and New Generation Banks→ provide financial services like venture capital, factoring, merchant banking, securitization etc…
7. Improved profitability and Efficiency→ as a result of the recommendations
Reforms in the Banking Sector (Phase-II):
After the 1st phase of banking reforms, let’s now understand how the 2nd phase of banking reforms modernized the Indian Banking!
1. Financial inclusion→ delivery of financial services at affordable costs to sections of disadvantaged and low income segments of the society.
2. Important Committees→ Rangarajans Committee on FI→ Khan Commission 2004 (RBI set up)
3. No Frills Accounts→ The central bank had introduced ‘no-frills’ accounts in 2005 to provide basic banking facilities to poor and promote financial inclusion. The accounts could be maintained with Zero or with very low minimum balance→ (BSBDA: Basic savings bank deposit account)
4. BC System→ Banking Correspondents→ go from village to village to provide easy banking services
5. Swabhimaan Campaign→ Banking facilities like Savings Bank, Recurring Deposits, Fixed deposits, Remittances, Overdraft facility, Kisan Credit Card (KCCs), General Credit Cards (GCC) and collection of cheques will be provided
6. PMJDY→ Pradhan Mantri Jan Dhan Yojna→ launched by Narendra Modi on 28 August 2014
MCLR (Marginal Cost based Lending Rate)→ It replaced the existing base rate system from April 2016 onwards. The following loans are exempted from this:
a) Loans under the schemes of the GoI
b) Loans to Bank employees, CEOs and Whole-Time Directors
KYC (Know Your Customer)→ a process by which banks obtains information about the identity and address of the customers. This process helps to ensure that banks’ services are not misused. The KYC procedure is to be completed by the banks while opening accounts and also periodically update the same.
1. When is KYC required?
- While opening an account in a bank
- While applying for a credit card or loan
- While opening a subsequent account
- Opening a locker facility
- When there are not enough documents with the bank in existing account
- When there are changes in signatories, beneficial owners, etc
- When the bank feels it necessary to obtain additional information from existing customers
- based on conduct of the account
- While investing in a mutual fund
- Financial institutes may ask for a mandatory KYC process in other instances too
- Scheme was introduced under Section 35 A of the banking Regulations Act, 1949 will full effect from 1995
- Senior official appointed by the RBI→ 15 Ombudsmen at present→ mostly in state capitals
- Does not charge any fee for filing or resolving customers’ complaints
CBS (Core Banking Solutions)→ is networking of branches, which enables Customers to operate their accounts, and avail banking services from any branch of the Bank on CBS network, regardless of where he maintains his account. The customer is no more the customer of a Branch. He becomes the Bank’s Customer
E-Banking/Online Banking/ Internet banking→ electronic, virtual or online banking
Services covered under E-banking:
ATMs→ Total Number of ATMs in India (101959)→ SBI ATMs (49,724)→ 147 overseas by SBI
Automated Teller Machine is a computerized machine that provides the customers of banks the facility of accessing their account for dispensing cash and to carry out other financial & non-financial transactions without the need to actually visit their bank branch.
WLA (White Label ATM’s)
- ATMs set up, owned and operated by non-banks are called White Label ATM’s. Traditionally, Bank ATMs have their respective Bank logo, like SBI ATM and all. But WLA’s don’t have this logo, as they are set up by non-banking entities.
- Any non-bank entity with net worth of Rs.100 crore, can apply for White Label ATM’s.
- Recently, GOI allowed 100% FDI in WLA’s.
- ‘Indicash’ was the first White label ATM set up in India by the Tata Communication Payment Solutions Limited
Some Important Points:
- First Bank to introduce ATM in India: HSBC, in 1987 (Mumbai).
- First non-banking entity to introduce WLA in India: Tata Communications Payment Solutions Limited (Indicash).
- ICICI was the first Bank to provide Mobile ATM.
- India’s first “talking” ATM launched by Union Bank of India (UBI) for visually impaired was launched in Ahmedabad (Gujarat).
- The National Payments Corporation of India (NPCI) launches India’s first rural bank ATM card with a regional rural bank in Varanasi. The card is called RuPay Gramin Card, first Gramin ATM card with the Kashi Gomti Samyut Gramin Bank in association with Union Bank of India.
- India’s first non-bank owned ATM opens in Maharashtra: Tata Communication Payments Solutions Ltd, a wholly owned subsidiary of Tata Communications Ltd, which unveiled the ATM at Chandrapada in Thane district, plans to roll out 15,000 such ATM’s by 2016.
- Private sector lender Federal Bank announced its tie-up with Tata Communications Payment Solutions Ltd as the sponsor bank to deploy White Label ATM’s (WLA).
Credit/ Debit/ Smart Cards:
- Total number of Debit card holders at present in India→ 644 million
- Total number of Credit Card holders at present in India→ 22.75 million
PoS Terminals→ Point of Sale Terminal
- To use smart cards, debit/ credit cards to swipe and pay to the merchant when buying something
- Is an integrated PC based device
- The Acquirer bank levies a charge of 1% of the transaction value
- Total number of PoS terminals in India is 1.2 lakh
EFT (Electronic Funds Transfer)
By RBI→ to enable money transfer from any bank to any other bank account
RTGS→ Real Time Gross Settlement→ minimum limit of money transfer 2 lacs→ no upper limit→ Only 26000 bank branches are RTGS enabled at present
NEFT→ National Electronic Funds Transfer→ No limit for individual transactions
IFSC (Indian Financial System Code) and MICR needed for above