Financial Reforms in India - Important Acts related to Banking Regulation:
The following are the Banking Regulation Acts
Banking Regulation Act, 1949:
The
Banking Regulation Act, 1949 was came into force on 16th March 1949. Its purpose is to
- Provide Safety in the interest of depositors.
- Prevent misuse of powers by managers by Banks.
- Initially named Banking Companies Act, 1949, but from 1st March 1966 the name of the act was changed to Banking Regulation Act, 1949.
State Bank of India Act, 1955:
Pursuant to the provisions of the
State Bank of India Act of 1955, The Reserve Bank of India, which is India's Central Bank, obtained a controlling interest in the Imperial Bank of India.
The State Bank of India(Subsidiary Banks) Act, 1959:
An Act to provide for the formation of Certain Government Associated Banks as subsidiary of the
State Bank of India and for the constitution and management and control of the Subsidiary Banks.
Banking Laws (Miscellaneous Provisions) Act, 1970:
With a view to restraining the control exercised by particular group of person over the affairs of Banks and to providing for stricter control over Bank by
Reserve Bank.
The Banking Companies(Acquisition and Transfer of Undertakings)Act, 1970:
No shareholder of the corresponding New Bank, other than the
Central government shall be entitled to exercise voting rights in respect of any shares held by him in excess of 10% of the total voting rights of all the shareholders of the corresponding Bank.
Regional Rural Banks Act, 1976:
Regional Rural Bank were established under the provisions of an Ordinance passed on 26th September, 1975 and the
RRB Act, 1976 to provide sufficient banking and credit facility for agriculture and other rural sectors.
Sarfaesi Act, 2002:
The full form of Sarfaesi Act as we know is Securitisation of financial Assets and Reconstruction of financial assets and
Enforcement of Security Act, 2002. Banks utilise this act as an effective tool for bad loans(NPA) recovery.
RBI Amendment Act, 2006:
In 2006, Government amended the
RBI Act, 1974 and the Banking Regulation Act, Under the act, Government removed the floor and CAR on CRR and floor on statutory liquidity ratio to provide the flexibility to the RBI to manage liquidity.
The Banking Laws (Amendment) Bill, 2011:
This Bill would strengthen the regulatory powers of Reserve Bank of India and to further develop the banking sector in India.
Committees related to Banking Sector Reform:
The following are the committees related to Banking Sector Reform
Narsimham Committee I(1991):
This committee was set up in order to study the problems of the
Indian financial system and to suggest recommendations for improvement in the efficiency and productivity of financial institutions in following areas.
- Reduction in the SLR and CLR
- Phasing out of Directed Credit Programme
- Interest Rate Determination
- Establishment of the ARF Tribunal
- Removal of Dual Control
Narsimham Committee II (1998):
It submitted its reports to the
Government in April, 1998 with the following recommendations.
Strengthening the Banks in India:
The committee considered the stronger banking system in the context of the Current Account Convertibility.
Narrow Banking:
Many public sector banks were facing the problem of the
Non-Performing Assets(NPAs). Some of them had NPAs that were as high as 20% of their Assets. For the successful rehabilitation of these banks , It recommended that "
Narrow Banking Concept" where weak banks would be allowed to place their funds only in short-term and risk free assets.
Capital Adequacy Ratio:
To improve the strength of the Indian Banking system, the committee recommended that the government should raise the prescribed capital adequacy norms. Currently the
capital adequacy ratio for Indian Banks is at 9%.
Review of Banking Laws:
The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act,
Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act. This upgradation will bring them in line with the present needs of the
Banking Sector in India.
Damodaran Committee, 2011:
The committee, headed by former
SEBI chairman M Damodaran, was set up the Central Bank to look into the issues of customer service, evaluate the existing system of grievance redressal mechanism prevalent in banks, its structure and efficacy and recommend measures for expenditious resolution of complaints.
Innovative Banking:
The following are the activities of Innovative Banking
Know Your Customer (KYC) Norms:
The Reserve Bank of India prompted banks to make the
know your customer (KYC) procedures while opening and working the accounts. At the season of opening a record bank needs to guarantee that the prospective customer is the individual who claims to be. This is to keep the fraudsters utilizing the name, address and forged signatures of others for doing fraudulent transactions, benami transactions, encasement of stolen cheques, drafts, dividend, warrants.
RBI has issued the
KYC rules under the
section 35(A) of the
Banking Regulation Act, 1949 and contradiction of the same will attract penalties under the relevant provisions of the Act.
Mutual Bank:
It is a monetary establishment sanctioned by a
central bank or regional government, without capital stock, that is possessed by its individuals who subscribe to a common fund. From this reserve claims, advances and so forth are paid. benefits after deduction are shared between the members.
Factoring:
It is
financial transaction in which a business sells its accounts receivable to a third party at a discount. Factoring is a process of fulfilling the credit requirement by lending of material or asset to another person. This process is very popular in manufacturing industries.
Micro finance:
It is a source of
financial services for entrepreneurs and small businesses lacking access to banking and related services.
The two main mechanisms for the delivery of financial services to such customers are
- Relationship-based banking for individual entrepreneurs and small businesses.
- Group-based models, where several entrepreneurs come together to apply for loans and other services as a group.
Islamic Banking:
A Banking System that is based on the principles of
Islamic Law and guided by Islamic Economics. The two basic principles behind the Islamic Banking are the sharing of profit and loss and significantly, the prohibition of collection and payment of Interest. Collecting interest is permitted under Islamic Law.
Electronic Banking:
Electronic Banking also known as
Electronic funds transfer(EFT), is simply the use of electronic means to transfer funds directly from one account to another, rather than by check or cash.
Payment by Phone System:
Consumers use their
financial services through phone to pay certain bills or to transfer funds between the accounts.
Internet Banking:
It such system allows setting various access levels for specific user groups and controlling the authorisation levels and transaction limits as assigned to various employees of your company.
Smart Cards:
It some times called
stored-value cards, have a specific amount of credit embedded electrically in the card.
Mobile Banking:
It is a system that allows customers of a financial institution to conduct a number of financial transactions through a
mobile device such as mobile phone or personal digital assistance.
The Popular services covered under E-Banking:
The following are the services provided under
E-Banking
- Automated Teller Machine
- Credit Card
- Debit Card
- Smart Card
- Electronic funds transfer machine(EFT)
- Cheque Truncation System
- Mobile Banking
- Internet Banking
- Telephone Banking
Automated Teller Machine(ATM):
It is used to perform the most important function of the Bank.
ATM itself can provide information about
customers account and also receive instructions from customers ATM cardholders. An ATM is an
Electronic fund transfer terminal capable of handling cash deposits, Transfer between accounts, Balance enquiries cash withdrawals and pay bills.
Board of Financial Supervision:
It was constituted in
November 1994, as a committee of the
Central Board of Directors of the Reserve Bank of India with an objective to undertake consolidated supervision of the financial sector comprising commercial Banks, financial institutions and non-banking finance companies.
Central Board of Banking Fraudulence:
It was established by
Finance Minister in the year 1997. it was established to inquiry about the CBI cases pertaining to the officers of rank of Chief Managers.
Services of Banks:
The following are the services of Banks
National Electronic Funds Transfer(NEFT):
It is a nation wide system that facilitates
individuals, firms and corporates to electrically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country.
Electronic Clearing Service(ECS):
The Reserve Bank of India has introduced
Electronic Clearing Service(ECS). This uses a series of electronic payments instructions for transfer of funds instead of paper instructions.
- The 'ECS-Credit' enables companies to pay interest to large number of beneficiaries by direct card of the amount to their Bank accounts.
- 'ECS-Debit' facilitates payment of charges to utility services, such as electricity, telephone companies, payment of insurance premiun and loan instalments, directly to the customer's account with a bank.
RTGS System(Real Time and on Gross Basis System):
RTGS System is a funds transfer mechanism for transfer of money from one bank to another on a 'real time' and on '
gross basis'. This is the fastest money transfer system through channel.
The RTGS System is primarily meant for large value transactions. The minimum amount to be remitted through
RTGs is 2 lakh. There is no upper ceiling for RTGS transactions.
Indian Financial System Code(IFSC):
- IFSC is an alpha-numeric code that identifies a bank-branch participating in the NEFT.
- IFSC code is a 11 digit code with the first 4 alpha characters representing the bank and the last 6 numeric characters representing the branch.
International Financial Reporting Standards(IFRS):
A set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements.
IFRS are issued by the
international accounting standards Board.
IAS were issued from
1973 to 2000 by the Board of the
International Accounting Standards Committee(IASC).
Major Efforts of International Banking:
Base Rate System:
- Base Rate System introduced in Banking sector by the RBI with effects 1st July, 2010.
- Base Rate System will replace Benchmark Prime lending Rate introduced in 2003.
- Base Rate System introduced on the recommendations of the Deepak Mohanty committee-aims at enhancing transparency in lending rate of banks and enabling better transmission of monetary policy.
Basel Norms:
Basel Norms are set by the
Bank of International Settlement (BIS) in basel, Switzerland. 55 countries Central Bank are members to BIS.
Basel II Norms:
The aim of
Basel II is to better align the minimum capital required by Regulators with Risk.
Basel III Norms:
It will become operational from
1st January, 2013 in a Phased manner.
- Banks to increase their core tier-one capital ratio to 4.5%.
- Provisions for a counter-cyclical capital buffer of 2.5% by 2019.
- The total CRAR required Basel III is proposed at 10.5%.
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