Banking Summary

8/3/2019 Banking Summary

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Accounting Methods

Sales-bill discounting, letter of credit

Less Variable cost-Credit arrangement

Contribution

Less Fixed Cost-Restructuring and

management decision,PBIT

Less Interest-Loan optimization, risk cover

PBT

Less Tax- advice

PAT

Agencies Providing FS

´ Commercial banks ± fund based activities

´Merchant Bankers ± Management activities related to capital raising exercise

´ Leasing and hire purchase of assets

´ Mutual funds

´ Venture capital

´ rating agencies

´ NBFC

´ Stock Exchanges



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HISTORY OF BANKING

Without a sound and effective banking system in India it cannot have a healthy economy. The banking systemof India should not only be hassle free but it should be able to meet new challenges posed by the technologyand any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements to its credit. The

most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. Infact, Indian banking system has reached even to the remote corners of the country. This is one of the mainreasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawinghis own money. Today, he has a choice. Gone are days when the most efficient bank transferred money fromone branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become theorder of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

y Early phase from 1786 to 1969 of Indian Banksy Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.y New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms

after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The

East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843)as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 andImperial Bank of India was established which started as private shareholders banks, mostly Europeansshareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. wasset up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India,Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in1935.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of

commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority

During those day¶s public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover,funds were largely given to traders.

y The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powersfor the supervision of banking in India as the Central Banking Authority.



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Phase IIGovernment took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalizedImperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urbanareas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. IndiraGandhi. 14 major commercial banks in the country was nationalized.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banksThis step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: y 1949 : Enactment of Banking Regulation Act.y 1955 : Nationalisation of State Bank of India.y 1959 : Nationalisation of SBI subsidiaries.y 1961 : Insurance cover extended to deposits.y 1969 : Nationalisation of 14 major banks.y 1971 : Creation of credit guarantee corporation.y 1975 : Creation of regional rural banks.y 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% indeposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gavethe public implicit faith and immense confidence about the sustainability of these institutions.

Phase IIIThis phase has introduced many more products and facilities in the banking sector in its reforms measure. In1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for theliberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactoryservice to customers. Phone banking and net banking is introduced. The entire system became moreconvenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered byany external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexibleexchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banksand their customers have limited foreign exchange exposure.

Nationalization of banks

The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi, the then prime minister. 14banks which were mostly owned by businessmen and even managed by them, were natoinalized.

y Central Bank of Indiay Bank of Maharashtray Dena Banky Punjab National Banky Syndicate Banky Canara Banky Indian Banky Indian Overseas Bank



y Bank of Baroday Union Banky Allahabad Banky United Bank of Indiay UCO Banky Bank of India

Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was nationalised. It tookplace in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary

took place on 19th July, 1960. The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of banking services.

The second phase of nationalisation of Indian banks took place in the year 1980. Seven more banks werenationalised with deposits over 200 crores. Till this year, approximately 80% of the banking segments in Indiawere under Government ownership.

After the nationalisation of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%.

y 1955 : Nationalisation of State Bank of India.y 1959 : Nationalisation of SBI subsidiaries.y 1969 : Nationalisation of 14 major banks.y 1980 : Nationalisation of seven banks with deposits over 200 crores.



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TYPES OF BANKS

Types of banks

I. Scheduled Banks and

A . Commercial Banks

1. Foreign Banks - 38

2. Indian Scheduled Banks = 254a) Private Sector Banks ± 31 (Old & New)b) Public Sector Banks ± 223

i. State Bank & its 7 subsidiaries = 8 ii. Nationalized Banks = 19 iii. Regional Rural Banks = 196

B. Cooperative banks - Rural & Urban Co-op Banks

II. Non Scheduled Banks(Mentioned in II schedule of RBI Act 1934, Paid up capital not less than 5 lac)

Banking Structure of India consists of :

y Scheduled Commercial Banks in Indiay Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy thecriteria laid down vide section 42 (6) (a) of the Act.

As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches.The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalisedbanks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks.

"Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer ofUndertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to theReserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of theBanking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

The following are the Scheduled Banks in India (Public Sector):

y State Bank of Indiay State Bank of Bikaner and Jaipur y State Bank of Hyderabady State Bank of Indorey State Bank of Mysorey State Bank of Saurashtray State Bank of Travancorey Andhra Banky Allahabad Banky Bank of Baroday Bank of India



y Bank of Maharashtray Canara Banky Central Bank of Indiay Corporation Banky Dena Banky Indian Overseas Banky Indian Banky Oriental Bank of Commercey Punjab National Banky Punjab and Sind Banky Syndicate Banky Union Bank of Indiay United Bank of Indiay UCO Banky Vijaya Bank

The following are the Scheduled Banks in India (Private Sector): y ING Vysya Bank Ltdy Axis Bank Ltdy Indusind Bank Ltdy ICICI Bank Ltdy South Indian Banky HDFC Bank Ltdy Centurion Bank Ltdy Bank of Punjab Ltdy IDBI Bank Ltdy Jammu & Kashmir Bank Ltd.

The following are the Scheduled Foreign Banks in India: y American Express Bank Ltd.y ANZ Gridlays Bank Plc.y Bank of America NT & SAy Bank of Tokyo Ltd.y Banquc Nationale de Parisy Barclays Bank Plcy Citi Bank N.C.y Deutsche Bank A.G.y Hongkong and Shanghai Banking Corporationy Standard Chartered Bank.y The Chase Manhattan Bank Ltd.y Dresdner Bank AG.



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OVERVIEW OF BANKING

Banky Bank is a lawful organization, which accepts deposits that can be withdrawn on demand. It also lends

money to individuals and business houses that need it.y Banks give two assurances to the depositors ±

Safety of deposit, and Withdrawal of deposit, whenever needed

y Only a firm or company are permitted to act as banky An individual is not allowed to act as a banky A firm consisting of not more than 10 partners or a company incorporated under Indian Companies Act

1956 can be a banky Money lenders are not bankersy Accept deposits from publicy Acceptance for the purpose of lending or investmentsy Deposit repayable to depositors on demand or otherwisey Under section 5 C of the Banking Regulation Act µbanking company means any company that transacts

the business of banking in indiay Sec 7(1) prohibits the word banker, banking by any company other than a banky Sec 7(2) prohibits such words by any individual

Meaning According to Banking regulation act 1949 section 5(b) the term banking means accepting for the purpose of lending or investment of deposits of money received from public, repayable on demand or otherwise andwithdraw able by cheque, draft, order or otherwise. According to the definition the banker is engaged in thebusiness of accepting deposits from the public and utilizing such deposits either for the purpose of lending or for the purpose of investment.

Scopey Acceptance of deposit for the purpose of lending and investmenty The deposit should be accepted from the publicy Acceptance of deposit should be in form of cash

Functions according to section 6

y Discounting of Billy Remittancesy Hiring safe deposits lockersy Conducting foreign exchange transactionsy Conducting government transactionsy Issue letter of credit and guaranteesy Collection of cheques and bill

Functions of banks

1. Traditional function Accepting deposits Lending fund remittance Miscellaneous

2. Modern Functions Cross border fund raising Cross border banking services



Merchant Banking

3. Emerging trends in banking Universal banking Electronic banking Globalization of banking

Role of a Banky It encourages savings habit amongst people and thereby makes funds available for productive use.y It acts as an intermediary between people having surplus money and those requiring money for various

business activities.y It facilitates business transactions through receipts and payments by cheques instead of currency.y It provides loans and advances to businessmen for short term and long-term purposes.y It also facilitates import export transactions.y It helps in national development by providing credit to farmers, small-scale industries and self-employed

people as well as to large business houses which lead to balanced economic development in thecountry.

y It helps in raising the standard of living of people in general by providing loans for purchase of consumer durable goods, houses, automobiles, etc.



RESERVE BANK OF INDIA

RBI was constituted under reserve bank of India act 1934 and started functioning with effect from 1st April1935.RBI is a state owned institution, the governor and 4 deputy governors & 15 directors of RBI are appointed bythe union government.

The RBI is internal functioning is coordinated by 20 specialized departments with headquarters at Mumbai.The main objectives of RBI are contained in preamble of RBI act 1934.

Reserve Bank of India Act -1934Banking regulation Act-1949

Rationale` To generate, maintain and promote confidence and trust of the public in the financial / banking systems` To promote investors interest through adequate / timely disclosure by the institutions and access to

revenue information by the investor.` To ensure that the financial markets are both fair and efficient` To ensure that the participants measure up to the rules of the market place

Objective` Promote growth and price stability` Maintain monetary stability` Maintain Financial Stability` Stable payment system` Credit allocation by the FS reflect national eco priority and social concern` Regulation of the overall volume of money and credit in the economy to ensure price stability` Promotion of the developed FM & FS` Ensure orderly conditions in exchange markets

Function`

Issuing notes` Governments Banker ` Bankers bank` Banks supervision` Development of Financial Systems

Industrial Finance- SIDBI-1964,IDBI-1989 Agricultural Credit-NABARD -1981 EXIM-1981 DICGC-1961

` Exchange Control (FERA -47& FEMA-99)` Monetary Policy

Tools for Monetary Policy` CRR((3%-15%) 6%

` SLR(25%-40%)25%

` Bank Rate -9.5%

` Open Market Operations

` Selective Credit Control

` Priority Sector Advances -40%



MERGERS OF BANKS

MergersMeaning - When on company takes over other company

Types -1) Horizontal- between 2 firms in the same line of business

2) Vertical- expanding forward or backward in the chain of distribution , towards the source of rawmaterial or towards the ultimate consumer 3) Conglomerate ± combination of unrelated business

a) Friendly- when the target firm agrees to be acquiredb) Unfriendly ±When target firm is not in agreement

4) Consolidation ±A entirely new firm is created and the two previous entities cease to exist

Legal Frame worky Banking regulation act 1949 Section 36(b) the RBI on request by the companies concerned and subject

to the provision of section 44A of the act assist as intermediations.

y Section 44 lays down procedure for amalgamation .RBI sanction scheme for amalgamation

y Nationalized banks the Act authorize the central government after consultation with RBI

y SBI act 1955 empower the SBI with the consent of bank management to take over with consent fromRBI and central gov

y RRBAct1976 in consultation with NABARD

Reason for Merger ` Achieving size` Achieving economies of scale` Greater geographical penetration` Growth` Financial capability` Customer base` Diversification

` Technological Edge` Synergy` Managerial Efficiency` Strategies` Increased bargaining power ` Focus on priority sector ` Market entry` Tax advantage

Challenges` Increased geographical location , rural and semi urban branches` Managing client base and customer relation

` Managing systems and software` Managing Human Resource` Dissimilarities in structure` Problem of evaluation` Time factor ` Implementation issue

Challenges for regulator ` RBI needs to devise suitable tools/norms for financial institutions` Problems of large size` Consolidated accounting and supervision techniques need to be adopted



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Consolidation` I Narashimham committee reforms recommended consolidation` Mergers should be based on

1. Synergies2. Location3. Business specific concerns4. Sound commercial sense

Aspects to consolidation` Clear cut legal regulatory regime` Governing consolidation` Enabling policy frame work` Market conditions

Concern raised coz of consolidation` Abuse of market` Large bank are often too difficult to discipline` Reduction in competition may lead to disincentive to improve

Features of consolidationMature Markets Emerging Markets

Co is adopted to overcome excesscapacity

Co as a means of overcoming financialdistress

Market forces play major role Government authority have to play major role

Cross border mergers are rarer inmarket

Foreign ownership is significant

Ownership structure and concern about job losses have restricted consolidation

Principles of consolidation` Strong and clear reasons for merger ` Merger should be in public interest` Consolidation should lead to efficiency in banking process` Market driven consolidation and government regulated` Consolidation should not lead to monopoly` Consolidation should not only lead to strong domestic but international markets also

Advantages of Consolidation` Reduces cost` Increases efficiency` Increase in number of products to banks` Convenient for government and regulators for on site and off site surveillance` More employee welfare schemes can be introduces



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TECHNOLOGY IN BANKING

Electronic Payment Systems` ATM-1990 Rangarajan Committee Benefits of ATM to Customers

1. 24* 7 accessibility2. Less time

3. Privacy4. Anywhere banking5. Accessibility of cards across multiple banks6. Other services like clearing of cheque deposit , balance enquire , cheque book requisition , details

of recent transactions Benefits of ATM to Bank

1. Cost of setting ATM is less2. Bank employees free from routine transaction can be employed in productive manner 3. Less hassle in handling cash4. Provide more publicity

Network of ATM

Indian Bank Association was first to set up a shared payment network systems or SWADHAN network of ATMS for its member banks in Mumbai for any where banking for its customers.

ATM Customer Interface

` Video Display Monitor

` Keyboard

` Touch Screen

` Slots

1. Card Reader

2. Cash Dispenser

3. Envelope Dispenser

4. Deposit Slots

Electronic Banking

` Anytime Banking

` Anywhere Banking

` Home Banking

` Corporate Banking

` Personal Banking

` Telebanking

Update Facilities

Online Batch

Future of ATM` Increase Number of transaction per day` Establish connectivity with point of sale(POS) terminals at merchant establishment` E Ticketing in railways, road ways and airways` Providing international payment network such as VISA & Master card

Personnel Identification Number



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Electromagnetic Card` Credit Card1. 8.5 cm by 5.5 cm card2. Name, Account number , issue date and expiry date embossed on the card3. Card Limit4. Allows cash withdrawals

Benefits to Cardholder 1. Convenient to carry a card2. Inculcate sense of financial disciple3. Provides proof of purchase4. Exposure to banking5. Delegate spending power by adding members6. Extend additional facility like insurance

Types of Credit Cards` Charge Card (Debit Card)` Credit Card` Smart Card`

Member Cards

Internet Banking

` Basic Level Service

` Simple Transactional Website

` Fully Transactional Website

Other Technology in Banking

` Mobile Banking

` E Commerce (B2B)

` Signature Storage & Retrieval System

Benefits to Merchant establishment1. Increase sales2. Less credit facility to customers3. Systematic accounting4. Advertisement on national scale5. Assured and immediate payment and settlement6. Avoid security problems in handling cash

Benefits to Bank1. Scope and potential for better profitability from trade turnover 2. Help in better and new establishment with customers

3. Savings of expenses

Cheque Truncation ` Electronic Image of cheque` Only bank involved or clearing house can TC` Electronic image will substitute the physical image` TC is only to be done during the course of a clearing cycle` Paper image is to be kept with clearing house



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Ways` MICR` Image Processing` Notes and coin counting machine

` Microfilms

Data Communication Network & EFT Systems ` Component of Data Communication Network` Transmission device and interface equipment-Modem` Transmission Medium` Transmission Processors` Mode of Transmission

Major Networks in India ` INET-1991 ` NICNET ± was set up by National Information Centre.

Allows access to about 50 networks in more than 30 countries` INDONET ± 1980 ` BANKNET` RBI Net

Emerging Trend In Communications Network for Banking` RBI¶s VSAT network` Internet` EFT Systems` TELEX Communication for message transfer

SWIFT - Society for Worldwide Inter Bank Financial Telecommunications` 1973 by 239 Banks` Paperless message transfer system

Automated Clearing Systems`

Clearing House Inter Bank Payment Systems (CHIPS)-1970

by USA` Clearing House Automated Payment Systems (CHAPS)-By UK` Clearing House Automated Transfer Systems (CHATS) Hong Kong

Two Level Fund Transfer ` Fedwire - Fedral Reserve Wire System-USA 800 banks world over are member ` Bankwire-Owned by associations of banks in the USA` Point of Sale (POS) Systems

Developments In India` Electronic Clearing Systems In India ± (ECS)

1. Electronic Credit Clearance2. Electronic Debit Clearance3. Floppy Input Clearance

` National Electronic Fund Transfer (NEFT)` Real Time Gross Settlement (RTGS)



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NON-BANKING FINANCIAL CORPORATIONS (NBFC)

NBFCFinancial services is concerned with the design and delivery of advice and financial products.

A wide variety of fund/asset-based and non-fund-based/advisory services are provided mainly by non-bankingcompanies (NBFCs).

An NBFC is a company engaged in the business of loans and advances, investments, asset finance,insurance business, venture capital, merchant banking, broking, factoring and forfeiting, credit ratingand housing finance.

NBFC is a financial institution that is a company whose principal business is the receiving of deposit under any scheme/arrangement /in any other

manner or lending in any manner such other NBI/class of institutions as the RBI may specify with the prior approval of the government

and by notification in the official gazette

A wide variety of funds/assets based and non fund based advisory services are provided by non bankingfinancial services.

1. Assets finance, consumer finance, investment and loan companies2. Housing finance companies3. Merchant Banking , Stock broking firms, credit rating and venture capital funds

Housing finance is regulated by National Housing Bank Capital Market Operation- SEBI Working and operation of asset finance, loan and investment category of NBFC are regulated

by RBI

Registration of NBFCsIt is mandatory that every NBFC should be registered with the RBI to commence/carry on any business.It should have a minimum net owned fund of Rs 25 ± Rs 200 lakhs.

The NBFCs registered with the RBI are(i) asset finance,(ii) loan and(iii) Investment companies.

The other types of NBFCs are regulated by other regulators. They could be further classified into thoseaccepting deposits and those not accepting deposits.The registered NBFCs are required to invest in unencumbered approved securities worth at least 5 per cent of their outstanding deposits.Every NBFC must create a reserve fund by transferring at least 20 per cent of its net profits before declaringany dividend.The RBI can regulate/prohibit solicitation of deposits from public.It can give directions to NBFCs relating to

(a) Prudential norms for income recognition, accounting standards, provisioning on capital adequacy and(b) Deployment of funds.It can also issue directions for providing information relating to deposits/for conduct of business. For contraventions/ defaults by an NBFC, the RBI can impose penalty. It can also cancel the registration of anNBFC.

RBI ACT FRAMEWORKThe RBI regulates and supervises the NBFCs under Chapter III-B and chapter II C of the RBI Act.



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The regulatory and supervisory objective is toa) Ensures the healthy growth of the NBFCs,b) Ensures that they function as part of the financial system within the policy framework in such a manner

that their existence and functioning do not lead to any systematic irregularity andc) Ensures that the quality of surveillance and supervision is sustained by keeping pace with the

developments that take place in this sector of the financial system.

RBI NBFCs DIRECTIONS

The RBI has issued three directions to the NBFCs:(1) Acceptance of Public Deposits Directions,(2) Prudential Norms Directions for NBFCs-D and NBFCs-ND-SI, and(3) Auditors Reports Directions.

In terms of the RB1 Act, 1934, registration of NBFCs with the RBI is mandatory, irrespectiveof whether they hold public deposits or not. The amended Act (1997) provides an entry point norm of Rs. 25 lakhs as the minimum net owned fund (NOF), which has been revised upwards to Rs.2 crore for new NBFCs seeking grant of CoR on or after April 21, 1999.

Financial companies like insurance companies, housing finance companies, stock broking companies, chitfund companies, companies notified as µnidhis¶ under Section 620 A of the Companies Act, 1956 and

companies engaged in merchant banking activities (subject to certain conditions), however, have beenexempted from the requirement of registration under the RBI Act, as they are regulated by other agencies.

DepositIncludes any receipt of money by way of deposit or loan or in any other form . Excluding

Amount received from banks Amount received from Development financial corporations Amount received in ordinary course of business Loan from Mutual Funds

SupervisionFocus of the RBI is on prudential supervision so as to ensure that NBFCs function on sound and healthy lines

and avoid excessive risk taking. On-site inspection; Off-site monitoring supported by state-of the art technology; Market intelligence Exception reports of statutory auditors of NBFCs.

The thrust of supervision is based on the asset size of the NBFC whether it accepts/ holds deposits from the public. CAMELS (Capital, Assets, Management, Earnings, Liquidity, and Systems and Procedures) approach Market intelligence system

The companies not holding public deposits arc supervised in a limited manner with companies with asset sizeof Rs.100 crore and above being subjected to annual inspection and other non-public deposit companies byrotation once in every 5 years.

Policy DevelopmentRegulatory measures adopted during the year aim at

Aligning the interest rates in this sector with the rates prevalent in the rest of the economy, Tightening prudential norms, Standardizing operating procedures and aligning the RBI¶s regulations with the requirements of the

amended Companies Act.



Alignment of the RBI regulations with companies Act 20000 All NBFCs were advised to report to the Company Law Board the defaults, if any, in repayment of matureddeposits or payment of interest to small depositors within 60 days of such default. In addition to NBFCs withasset size of Rs.50 crore and more, those with paid up capital of not less than Rs.5 crore have to constitute

Audit Committees. Such committees would have the same powers, functions and duties as laid down inCompanies Act, 1956.

Liquid Asset Securities of NBFCs All NBFCs should necessarily hold their investments in government securities either in

Constituent¶s Subsidiary General Ledger Account (CSGL) with a scheduled commercial bank or Stock Holding Corporation in a dematerialized of India Ltd. (SHCIL) or Account with depositories [National Securities Depository Ltd. (NSDL) / Central Depository Services

(India) Ltd. (CDSL)] through a depository participant registered with SEBI.

Statutory AuditorsNBFCs have to reiterate in their letter of appointment to statutory auditors their statutory responsibility to reportdirectly to the RBI the violations, if any, of the provisions of the RBI Act or Directions issued there under,noticed by them in the course of their audit.

Difference between Bank & NBFC A NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository

institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)

It is not a part of the payment and settlement system and as such cannot issue cheques to itscustomers; and

Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

Banking Summary

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