Ramesh Singh Test : Banking in India

RBI, the regulator of the NBFCs, has given a very wide definition of such companies (a kind of 'umbrella' definition)—“a financial institution formed as a company involved in receiving deposits or lending in any manner. their liability structure, they have been classified into two broad categories:

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  (i) deposit-taking NBFCs (NBFC-D), and

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  (ii) non-deposit taking NBFCs (NBFC. ND).

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  An NBFC must get itself registered with the RBI as a deposit-taking company. For registration, they need to be a company (incorporated under the Companies Act, 1956) and should have a minimum NOF (net owned fund) Rs. 2 crores.

Company is an association of person who takes their meals together. The term is derived from the Latin word (“com” meaning “with” or “together”; “panis” that is “bread”) Section 2(20) of Companies Act, 2013 states that a company means any association of person registered under the present or the previous companies act.

(i) venture capital fund, merchant bank, stockbroking firms (SEBI registers and regulates them);

(ii) insurance company (registered and regulated by the IRDA);

(iii) housing finance company (regulated by the RBI); [ The Finance (No. 2) Act, 2019 has amended the National Housing Bank Act, 1987 conferring certain powers for the regulation of Housing Finance Companies (HFCs) with Reserve Bank of India ]

(iv) Nidhi company (regulated by the Ministry of Corporate Affairs under the Companies Act, 1956); (e) chit fund company (by respective state governments under Chit Funds Act, 1982).

Some of the important regulations relating to acceptance of deposits by the NBFCs are:

• allowed to accept and/or renew public deposits for a minimum period of 12 months and a maximum period of 60 months.

• cannot accept demand deposits (i.e., the saving and current accounts). • cannot offer interest rates higher than the ceiling rate prescribed by the RBI.

• cannot offer gifts, incentives or any other additional benefit to the depositors.

• should have a minimum investment-grade credit rating.

• their deposits are not insured.

• The repayment of deposits by NBFCs is not guaranteed by RBI.

• need to maintain Capital Adequacy Ratio (CAR) norms prescribed by the RBI.

After nationalisation in 1949, it emerged as the central banking body of India and it did not remain a 'bank' in the technical sense. Since then, the governments have been handing over different functions to the RBI, which stand today as given below:

(i) It is the issuing agency of the currency and coins other than rupee one currency and coin (which are issued by the Ministry of Finance itself with the signature of the Finance Secretary on the note).

(ii) Distributing agent for currency and coins issued by the Government of India.

(iii) Banker of the government.

(iv) Bank of the banks/Bank of last resort.

(v) Announces the credit and monetary policy for the economy.

(vi) Stabilising and targeting (CPI-C) the rate of inflation.

• The cash reserve ratio (CRR) is the ratio (fixed by the RBI) of the total deposits of a bank in India which is kept with the RBI in the form of cash.

• This was fixed to be in the range of 3 to 15 per cent. A recent Amendment (2017) has removed the 3 per cent floor and provided a free hand to the RBI in fixing the CRR.

The statutory liquidity ratio (SLR) is the ratio (fixed by the RBI) of the total deposits of a bank which is to be maintained by the bank with itself in cash or non-cash form prescribed by the government to be in the range of 18 to 40 per cent.

Repo Rate: The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF). In other words, the rate of interest the RBI charges from its clients on their short-term borrowing is the repo rate in India. Basically, this is an abbreviated form of the ‘rate of repurchase’ and in western economies it is known as the ‘rate of discount’. In practice it is not called an interest rate but considered a discount on the dated government securities, which are deposited with RBI by institution to borrow for the short term. When they get their securities released from the RBI, the value of the securities is lost by the amount of the current repo rate. 

• MSF is a new scheme announced by the RBI in its Monetary Policy, 2011-12 which came into effect from May 2011.

• Under this scheme, banks can borrow overnight up to 1 percent of their net demand and time liabilities (NDTL) from the RBI, at the interest rate 1 per cent (100 basis points) higher than the current repo rate.

• In an attempt to strengthen the rupee and check its falling exchange rate, the RBI increased the gap between ‘repo' and MSF to 3 per cent (late July 2013).

Call Money Market:

• The call money market is an important segment of the money market where borrowing and lending of funds take place on an overnight basis.

• Participants in the call money market in India currently include scheduled commercial banks (SCBs)—excluding regional rural banks), cooperative banks (other than land development banks), insurance.

• Prudential limits, in respect of both outstanding borrowing and lending transactions in the call money market for each of these entities, are specified by the RBI.

The main features of the MCLR are-

• it will be a tenor linked internal benchmark, to be reset on an annual basis.

• actual lending rates will be fixed by adding a spread to the MCLR

• to be reviewed every month on a pre-announced date.

• existing borrowers will have the option to move to it.

• banks will continue to review and publish ‘Base Rate' as hitherto