Banking Sector

Types of Banking

• Retail banks deal with individual consumers, offering services like savings accounts, loans, and mortgages.
• Commercial or corporate banks provide services to businesses, including credit services, cash management, and trade finance.
• Investment banks focus on complex financial transactions such as underwriting and mergers & acquisitions (M&A).

Reserve Bank of India (RBI)

• The RBI is India's central bank, established on April 1, 1935, under the Reserve Bank of India Act.
• Its primary objective is to maintain price stability and ensure credit flow for economic growth.
• RBI manages all foreign exchange under the Foreign Exchange Management Act of 1999.
• It acts as a regulator and supervisor of the overall financial system.
• RBI injects public confidence into the national financial system and is the issuer of national currency.
• The main purpose of the RBI is to conduct consolidated supervision of the financial sector in India.
• In 2018, RBI banned the use of virtual currencies by the financial regulators.

Non-Banking Financial Companies (NBFCs)

• NBFCs are financial institutions offering various banking services but do not hold a banking license.
• They cannot accept demand deposits, cannot form part of the payment and settlement system, and deposit insurance is not available to their depositors.
• NBFCs can offer various services including loans, credit facilities, and investment banking.
• Types/Categories of NBFCs Registered with RBI:
  • Asset Finance Company (AFC)
  • Investment Company (IC)
  • Loan Company (LC)
  • Infrastructure Finance Company (IFC)
  • Systemically Important Core Investment Company (CIC-ND–SI)
  • Infrastructure Debt Fund: Non-Banking Financial Company (IDF-NBFC)
  • Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)
  • Non-Banking Financial Company – Factors (NBFC-Factors)
  • Mortgage Guarantee Companies (MGC)
  • NBFC–Non-Operative Financial Holding Company (NOFHC)

NABARD (National Bank for Agriculture and Rural Development)

• NABARD is an apex Development Bank with a mandate for facilitating credit flow for agriculture, small-scale industries, and rural development.
• It also supports other allied economic activities, promotes integrated rural development, and ensures prosperity of rural areas.
• NABARD acts as a regulator for co-operative banks and Regional Rural Banks (RRBs).
• It provides facilities for training, dissemination of information, and promotion of research.

National Housing Bank (NHB)

• A wholly owned subsidiary of RBI, set up on July 9, 1988, under the National Housing Bank Act, 1987.
• NHB is an apex financial institution for housing, promoting housing finance institutions and providing financial support.
• It registers, regulates, and supervises Housing Finance Companies (HFCs).

Small Industries Development Bank of India (SIDBI)

• SIDBI is a development financial institution headquartered in Lucknow.
• Its purpose is to provide refinance facilities and short-term lending to industries in the Micro, Small and Medium Enterprises (MSME) sector.
• SIDBI coordinates the functions of other institutions engaged in similar activities and operates under the Department of Financial Services, Government of India.
• It is one of the four All India Financial Institutions regulated and supervised by the RBI.

Micro Units Development and Refinance Agency (MUDRA) Bank

• A public sector financial institution providing loans at low rates to micro-finance institutions and non-banking financial institutions that provide credit to MSMEs.

Industrial Financial Corporation of India (IFCI)

• Previously Industrial Finance Corporation of India, it is a Non-Banking Finance Company in the public sector.
• Established in 1948 as a statutory corporation.
• It provides financial support for diversified growth of industries across the spectrum, including airports, roads, telecom, power, real estate, manufacturing, and services.

Export-Import Bank of India (EXIM Bank)

• India's premier export finance institution, established in 1982.
• It acts as a catalyst and key player in promoting cross-border trade and investment.
• EXIM Bank supports Indian industries in their globalization efforts and provides products and services from import of technology to export product development.

Co-operative Banks

• Small-sized units organized in co-operative sector, operating in both urban and non-urban centers.
• They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
• Indian cooperative structures have over 200 million members, with about 67% penetration in villages.
• The structure of cooperative banking is divided into Urban Cooperative Banks and Rural Cooperatives.

Urban Cooperatives

• Can be scheduled or non-scheduled.
• Majority fall in the non-scheduled and single-state category.
• Banking activities of Urban Cooperative Banks are monitored by RBI.
• Registration and management are managed by Registrar of Cooperative Societies (RCS).

Rural Cooperatives

• Have three tiered operating structures: State Cooperative Banks, District Central Cooperative Banks, and Primary Agricultural Credit Societies.
• Long-term structures include State Cooperative Agriculture and Rural Development Banks (SCARDBs) and Primary Cooperative Agriculture and Rural Development Banks (PCARDBs).
• Rural banking cooperatives have complex monitoring, and a forum called State Level Task Force on Cooperative Urban Banks (TAFCUB) helps resolve duality in control.
• All banking activities are regulated by RBI and RCS.

Public Sector Bank Recapitalization

• The Government approved additional funds to ensure Tier I CRAR (Capital to Risk Weighted Assets) of Public Sector Banks (PSBs).
• The proposed capital infusion aims to enhance lending capacity and accelerate economic growth.
• During the global financial crisis, PSBs played a pivotal role in extending credit.
• Many PSBs have government holding close to 51%, with scope for capital increase in others.
• Recapitalization is a process of changing a firm's capital structure without changing the total amount of capital.

Differential Banks (Small Finance Banks and Payment Banks)

• RBI issues licenses to entities for two new categories: Small Finance Banks and Payment Banks.

Small Finance Banks

• Objectives: Further financial inclusion by providing savings vehicles and supplying credit to small businesses, marginal farmers, MSMEs, and unorganized entities.
• Eligible Promoters: Resident individuals/professionals with 10 years experience in banking and finance.

Payment Banks

• Primary objective: Financial inclusion by providing small savings accounts and payments/remittance services to migrant labor, low-income households, and small businesses.
• Initially restricted to holding a maximum balance of Rs. 100,000 per customer.
• Can accept demand deposits and savings bank deposits.
• Can offer remittance services through various channels including branches, business correspondents (BCs), and ATMs.
• Expected to leverage technology to offer low-cost banking solutions.