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SCORE

TARGET
Prelims
2018

Revision Notes

ECONOMY
Banking
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TYPES OF BANKS
UNIVERSAL BANK
It is financial supermarket where all financial products are sold under one roof.
• It is a system of banking where bank undertake a blanket of financial services like investment banking,
commercial banking, development banking, insurance and other financial services including functions of
merchant banking, mutual funds, factoring, housing finance etc.
• As per the World Bank, the definition of the Universal Bank is as follows: In Universal banking, the large
banks operate extensive network of branches, provide many different services, hold several claims on
firms (including equity and debt) and participate directly in the Corporate Governance of firms that rely

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on the banks for funding or as insurance underwriters. 
• The second Narasimham committee of 1998 gave an introductory remark on the concept of the Universal
OR
banking, as a different concept than the Narrow Banking. Narsimham Committee II suggested that
Development Financial Institutions (DFIs) should convert ultimately into either commercial banks or non-
bank finance companies.
• However, the concept of Universal Banking conceptualized in India after the RH Khan
Committee recommended it as a different concept. The Khan Working Group held the view that DFIs
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(Development Finance Institutions) should beallowed to become banks at the earliest.

Advantages of Universal Banking
• Increased diversions and increased profitability.
• Better Resource Utilization.
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• Brand name leverage.

• Existing clientele leverage.
• Value added services.
• ‘One-stop shopping’ saves a lot of transaction costs.
• Easy Marketing
• Profit Diversification
DEVELOPMENT BANK
• Development bank is essentially a multi-purpose financial institution with a broad development outlook.
• A development bank may, thus, be defined as a financial institution concerned with providing all types
of financial assistance (medium as well as long term) to business units, in the form of loans, underwriting,
investment and guarantee operations, and promotional activities — economic development in general, and
industrial development, in particular.
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Development banks in India are classified into following four groups:

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Industrial Development Banks: It includes, for example, Industrial Finance Corporation of India (IFCI), Industrial
Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI).
Agricultural Development Banks: It includes, for example, National Bank for Agriculture & Rural Development
(NABARD).
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Export-Import Development Banks: It includes, for example, Export-Import Bank of India (EXIM Bank).
Housing Development Banks: It includes, for example, National Housing Bank (NHB).
NABARD
National Bank for Agriculture and Rural Development (NABARD) is an apex development bank with a
mandate for:
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• Facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage
and village industries, handicrafts and other rural crafts.
• Supporting all other allied economic activities in rural areas, promote integrated and sustainable rural
development and secure prosperity of rural areas.
• NABARD acts as a regulator for co-operative banks and Regional Rural Banks (RRBs).
• NABARD also helps incapacity building of partner agencies and development institutions.
• NABARD provide facilities for training, for dissemination of information and the promotion of research
including the undertaking of studies, researches, techno-economic and other surveys in the field of rural
banking, agriculture and rural development.
• It provides technical, legal, financial, marketing and administrative assistance to any person engaged
in agriculture and rural development activities.
LEAD BANK
Introduced in 1969, based on the recommendations of the Gadgil Study Group on the organizational framework
for the implementation of social objectives.
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Objectives of Lead Bank Scheme:

• Eradication of unemployment and under employment
• Appreciable rise in the standard of living for the poorest of the poor
• Provision of some of the basic needs of the people who belong to poor sections of the society.
Area Approach
• The basic idea was to have an “area approach” for targeted and focused banking.
• The banker’s committee, headed by S. Nariman, concluded that districts would be the units for area
approach and each district could be allotted to a particular bank which will perform the role of a Lead
Bank.
• The Lead bank Scheme was not fully able to achieve its targets due to shift in policies, complexities in
operations, lack of cooperation among various financial institutions and issues shifting to the Financial
Inclusion.

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• There was a strong need felt to revitalize the scheme with clear guidelines on respecting the bankers’
commercial judgements even as they fulfill their sectoral targets.
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• The Government of India constituted a High-Power Committee headed byMrs. UshaThorat, Deputy
Governor of the RBI, to suggest reforms in the LBS. The task of this penal was to recommend how to
revitalize the LBS, given the challenges facing the banking sector, especially in an era of increasing
privatization and autonomy.
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The following were the recommendation of Usha Thorat Committee on Lead Banks
• LBS should be continued to accelerate financial inclusion in the unbanked areas of the country.
• Private sector banks should be given a greater role in LBS action plans, particularly in areas of their
presence.
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• Enhance the business correspondent model, making banking services available in all villages having a
population of above 2,000 and relaxation in KYC (know your customer) norms for small value accounts.
• There is a strong need to revamp and revitalise the Lead Bank Scheme so as to make it an effective
instrument for bringing about meaningful co-ordination among banks operating in various part of the
country.
PAYMENT BANK
• A payments bank is like any other bank, but operating on a smaller scale without involving any credit risk.
• In simple words, it can carry out most banking operations but can’t advance loans or issue credit cards.
• It can accept demand deposits (up to Rs 1 Lakh), offer remittance services, mobile payments/transfers/
purchases and other banking services like ATM/debit cards, net banking and third party fund transfers. 
• The NachiketMor committee appointed by RBI to propose measures for achieving financial inclusion and
increased access to financial services in 2013.The committee submitted its report suggesting creation of
specialized bank or Payment Bank to cater the lower income groups and small businesses so that by Jan
2016, each Indian resident can have a global bank account.
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Objectives of Payment Bank

• To widen the spread of payment and financial services to small businesses, low income households,
migrant labour workforce in secured technology driven environment.
• With payments banks, RBI seeks to increase the penetration level of financial services to the remote areas
of the country.
SMALL FINANCE BANK
Small finance banks are a type of niche banks in India. The main purpose of the small banks will be to provide
a whole suite of basic banking products such as bank deposits and supply of credit, but in a limited area of
operation. The objective for these Small Banks is to increase financial inclusion by provision of savings vehicles
to under-served and unserved sections of the population, supply of credit to small farmers, micro and small
industries, and other unorganized sector entities through high technology-low cost operations.
RBI guidelines about small bank includes:

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• The firms must have a capital of Indian Rupees 100 crore. Existing Non-Banking Financial Companies
(NBFC), Micro-Finance Institutions (MFI) and Local Area Banks (LAB) are allowed to set up small
finance banks.
•
•
OR
The Corporate Promoter should have 10 years experience in banking and finance.
The promoters stake in the paid-up equity capital will be 40% initially which must be brought down to
26% in 12 years. Joint ventures are not permitted.
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• Foreign share holding will be allowed in these banks as per the rules for Foreign Direct Investment in
private banks in India.
• The banks will not be restricted to any region. 75% of its net credits should be in priority sector lending
and 50% of the loans in its portfolio must in 25 lakh range.
• The bank shall primarily undertake basic banking activities of accepting deposits and lending to small
farmers, small businesses, micro and small industries, and unorganized sector entities. It cannot set up
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subsidiaries to undertake non-banking financial services activities. After the initial stabilization period of
5 years, and after a review, the RBI may liberalize the scope of activities for Small Banks.
• Small Banks have to meet RBI’s norms and regulations regarding risk management. They have to meet
CRR, SLR, Repo rate and reverse repo rate requirements, like any other commercial bank.
• The maximum loan size and investment limit exposure to single/group borrowers/issuers would be restricted
to 15% of capital funds.
• For the first 3 years, 25% of branches should be in unbanked rural areas.
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CLASSIFICATION OF BANKS IN INDIA

BANKS
• Banks are the financial institutions that are licensed to deal with money and its substitutes by accepting
time and demand deposits, making loans, and investing in securities. The bank generates profits from the
difference in the interest rates charged and paid.
• Banks are connecting link between the people, who have surplus money and the people who are in need
of money. In addition to this, banks undertake the risk arising out of the possible default of the ultimate
borrower.
• In other words, bank is an institution which accepts deposits from the public and in turn advances loans

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by creating credit. The following functions of the bank explain the need of the bank and its importance.
a. To provide the security to the savings of customers.
OR
b. To control the supply of money and credit.
c. To encourage public confidence in the working of the financial system, increase savings speedily and
efficiently.
d. To avoid focus of financial powers in the hands of a few individuals and institutions.
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e. To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of
customers.
BANKING SYSTEM IN INDIA
• Banks are classified into Organized and Unorganized banking.
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• Un-organized Banking: The part of Indian Banking System which does not fall under the control of our
central bank (i.e. Reserve Bank of India) is called as un-organized banking. For example: Indigenous banks.
• Organized Banking: The scheduled banks are those which are entered in the second schedule of RBI Act,
1939. Scheduled banks are those banks which have a paid up capital and reserves of aggregate value of
not less than Rs 5 lakhs and which satisfy RBI guidelines.
• The Organized (Scheduled) Banking Sector can be categorized into three major categories:
a) Central Bank of the Country (RBI)
b) Commercial Banks
c) Cooperative Banks
CENTRAL BANK – RBI
RBI is an apex institution in the banking and financial structure of the country which plays a crucial role in
organizing, running, supervising, regulating and developing the banking and financial structure of the economy.
India’s Central Bank is known as the Reserve Bank of India.
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Historical Background of RBI

• In 1926, the Royal Commission on Indian Currency and Finance which is also known as the Hilton-Young
Commission recommended the creation of a central bank.
• The idea was twofold
– To separate the control of currency and credit from the government.
– To augment banking facilities throughout the country.
• The Reserve Bank of India Act of 1934 established the Reserve Bank as the banker to the central
government and set in motion a series of actions culminating in the start of operations on April 1, 1935.
• RBI was nationalizedin 1949.
• It has four Zonal offices at Delhi, Kolkata, Chennai and Mumbai for four regions: Northern, Eastern,
Southern and Western regions respectively. RBI has 19 offices, which are located in state capitals and a
few major cities in India. In addition, there are 9 sub-offices of RBI.

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Functions of Central Bank (RBI)
•

•
OR
Bank of Issue: It has a sole authority to issue currency notes and coins through the issue department,
which is solely responsible for the issue of notes and coins.
Banker to Banks and Government: As the Banker’s bank, RBI acts as the custodian of cash reserves of
commercial and other Banks.
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• Commercial banks are under statutory obligation to keep a part of their deposits as reserves with the
central bank.
• The central bank provides credit, mainly short-term credit, to the commercial banks. It provides them
guidance and direction and regulates their activities.
• Commercial banks are required to shape their policy in accordance with these directions and guidance of
the central bank.
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• As the banker and financial adviser to the government the central bank receives the deposits of cash,
cheques, drafts etc. from the government.
• It provides cash to the government for paying salaries and wages and other cash disbursements. It makes
payments on behalf of the government.
• It gives short-period loans to the government. It buys and sells foreign currencies on behalf of the government.
• Lender to Last Resort: RBI helps commercial banks when they have exhausted their resources and are
in financial need. In its capacity as the lender of the last resort, the central bank provides, directly or
indirectly all reasonable financial assistance to commercial banks.
• Controller of Credit: RBI controls the credit creation by the commercial banks which are regarded as the
most important function of Central Bank.
• At present, Credit Money or Bank Money is the dominant form of money and essentially requires the
supply of credit to be regulated so as to ensure the smooth functioning of the economy.
• For this, the central bank adopts quantitative and qualitative methods of credit control. Quantitative
methods aim at controlling the cost and availability of credit, while the qualitative method influences the
use and direction of credit.
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How is Central Bank different from Commercial Banks?

• On the basis of Profit: A central bank does not aim at making profits like a commercial bank and hence
is not a profit making institution. It acts in the public interest so as to control and regulate the banking
and financial system of the country.
• On the basis of functions performed: A central bank does not perform ordinary commercial banking
functions such as accepting deposits from the general public of the country.
• Ownership: A central bank is an organ of the government and, therefore, is owned by the government
and managed by the government officials. But a commercial bank is generally maybe owned by both,
private individuals as shareholders and by the government.
• Issuer of Currency: A central bank has sole monopoly of note issue, but commercial banks cannot issue
notes.
COMMERCIAL BANKS
• Commercial Banks are created for profit motive.

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• Scheduled Commercial Banks (SCBs) are grouped under following categories:
– Nationalized Banks
OR
– Foreign Banks
– Regional Rural Banks
• Nationalized Banks
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– State Bank of India and its associates along with the nationalized banks such as the IDBI Banks,
Indian Bank, Dena Bank etc. are all public sector banks.
– Other scheduled commercial banks include private banks such as ICICI, Axis, HDFC bank etc.
operating in the country.
• Foreign Banks
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– Operating in the country include Deustche Bank, Bank of America, Citibank, HSBC, and Royal Bank
of Scotland etc.
• Regional Rural Banks
– Regional rural banks came into being in the 1970s with the objective of providing deposit and credit
facilities to the people in rural areas especially the small and marginal farmers, agricultural labourers,
and small entrepreneurs.
– Even though these banks count as the scheduled commercial banks but their focus and reach is
generally limited to a district or two.
– Some of the examples of Regional Rural Banks are Assam GraminVikash Bank, Allahabad UP
Gramin Bank, Baroda Gujarat Gramin Bank etc.
– At present there are 91 RRBs functioning in India.
CO-OPERATIVE BANKS
• It is an institution established on the basis of cooperative principles and dealing in ordinary banking
business with ‘No Profit No Loss Basis’.
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• These banks are controlled, owned, managed and operated by cooperative societies and came into existence
under the Cooperative Societies Act in 1912.
• These banks are located in the urban as well in the rural areas. Although these banks have the same
functions as the commercial banks, but their rate of interest is low in comparison to other banks.
• At present, there are 170 scheduled commercial banks in the country, which includes 91 Regional Rural
Banks (RRBs), 19 Nationalized Banks, 8 Banks in State Bank of India Group and the Industrial Development
Bank of India Limited (IDBI Ltd).
There are three types of cooperative banks in India, namely
• Primary Credit Societies: These are formed in small locality like a small town or a village. The members
using this bank usually know each other and the chances of committing fraud are minimal.
• Central Cooperative Banks: These banks have their members who belong to the same district. They
function as other commercial banks and provide loans to their members. They act as a link between the
state cooperative banks and the primary credit societies.

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• State Cooperative Banks: these banks have a presence in all the states of the country and have their
presence throughout the state.

•
NON-SCHEDULED BANKS
OR
Banks not under 2nd Schedule of the Reserve Bank of India Act, 1934. These are also known as Local
Area Bank.
• Non-scheduled banks are also subject to the statutory cash reserve requirement. But they are not required
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to keep them with the RBI; they may keep these balances with themselves.
• They are not entitled to borrow from the RBI for normal banking purposes, though they may approach
the RBI for accommodation under abnormal circumstances.
There are 5 Non-Scheduled Urban Cooperative Banks in India
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• AkhandAnand Co-Operative Bank Ltd.

• Alavi Co-Op Bank Ltd.
• Amarnath Co-operative Bank Ltd.
• AmodNagrikSahakari Bank Ltd.
• AmreliNagrikSahakari Bank Ltd.
Along with this 4 local area banks in India which, forms under non-scheduled list of Banking as per RBI
• Coastal Local Area Bank Ltd.
• Capital Local Area Bank Ltd.
• Krishna BhimaSamruddhi Local Area Bank Ltd.
• Subhadra Local Area Bank Ltd.
FUNCTIONS OF SCHEDULED COMMERCIAL BANKS
The primary business of any commercial bank is to accept deposits and give short term loans. Apart from this,
a scheduled commercial bank performs a number of other useful functions to the society such as:
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a. Collection of Deposits
b. Advancing Loans
c. Utility Services
d. Agency Services
Collection of Deposits: Most important function of commercial bank. These deposits can be of various
forms:
• Fixed Deposits: These are the deposits for a fixed period to earn interest by the customers of a bank. Such
deposits have high interest rate than the other types of deposits. In case the customer withdraws money
before the end of stipulated term of deposit, s/he has to pay penalty.
• Saving Bank Deposit: These are deposits made by persons out of their expenditure. These banks function
with the intention to culminate saving habits among people, especially those who belong to low income
groups or those who are salaried.
• The money these people deposit in the banks are invested in securities, bonds etc. These days, many

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commercial banks perform the dual functions of savings bank. The postal department is also in a way a
saving bank.
OR
• Current Account Deposits: Also known as demand deposit. The bank opens this account on an initial
deposit of Rs. 100 but certain conditions have to be met to prove credit worthiness of the customer. There
are no limitations on the amount of deposit and number of withdrawals. Generally, no interest is paid on
current deposits.
Advancing loans: Commercial banks also play an important role in the economy by providing loans to
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industries, individuals, businesses, agriculture etc. They also provide loans for export and import trade.
Utility services: Commercial banks perform various services useful to the customer. Some of them have been
listed below:
• Locker facility: Banks provide locker facility to customers to keep their valuables, such as securities,
jewellery, documents etc.
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• Draft facilities: Banks issue drafts to customers and enable them to transfer funds from place to place.
• Letters of credit: Banks issue letters of credit to their customers. These are useful to traders to buy goods
from foreign countries on credit.
Agency Services: Commercial banks also perform several activities on behalf of their customers.
• Collections: Commercial banks take up collection of promissory notes, cheques, bills, dividends,
subscriptions, rents, etc., on behalf of their customers as agents. The bank charges ‘service charges’ for
rendering these services to its customers.
• Payments: Banks also accept the responsibility to pay insurance premium, rents, taxes, electricity bills, etc.
periodically on behalf of its customers for whom they charge commission.
• Sale and purchase of securities: Customers sometimes approach the bankers for sale and purchase of
their securities. For these services the banks charge commission.
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TERMS RELATED TO BANKING SYSTEM

MONETARY POLICY
Planned Economic Development adopted by India required an active monetary policy. The two stated aims
of this policy were:
• Boost economic development
• Control inflationary pressures
The RBI is the main agency for implementing the monetary policy. RBI has defined its monetary policy in
terms of ‘adequate financing of economic growth and at the same time ensuring reasonable price stability’. The

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instruments which RBI employs to achieve a stable monetary policy include:

OR
BANK RATE
• Rate at which the central bank lends to commercial banks. In other words, it is the rate at which RBI
rediscounts the bill of exchange.
• It thus acts as a signal to the economy on the direction of the monetary policy. RBI uses changes in Bank
Rate to regulate fluctuations in exchange rate and domestic inflation.
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• Each bank is free to decide the Base Rate below which it will not lend to borrowers. Banks should declare
the benchmark based on which such Base Rates are decided. One bank can have only one Base Rate.
• At present it is 6.75%.
CASH RESERVE RATIO (CRR)
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• Every Commercial Bank is required to keep a certain percentage of its demand and time liabilities
(deposits) with the RBI (either as cash or book balance).
• The RBI varies this ratio as and when it perceives the need to increase or decrease money supply. RBI
is empowered to fix the CRR at a rate ranging between 3 per cent and 15 per cent.
• RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.
• At present the CRR is 4%.
STATUTORY LIQUIDITY RATIO (SLR)
• Commercial Banks are also required to keep (in addition to CRR) a certain percentage of their net demand
and time liabilities (NDTL) as liquid assets in the shape of cash, gold or approved securities.
• As most of the SLR money is kept in treasury bills, government had, in the past, been using SLR as a means
to mobilize low cost resources. This abuse of SLR leads to distortion in the interest rate and credit supply.
• In order to overcome this, Narasimhan Committee recommended that SLR should be brought down to
25 per cent, which is the current rate since 1993-94.
• At present the SLR is 20.50%.
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OPEN MARKET OPERATION

• This refers to the RBI buying and selling eligible securities to regulate money supply.
• Traditionally, RBI was not resorting to this method. However, after the large inflow of foreign funds since
1991, RBI has had to step in to sterilize the flow to avoid excess liquidity.
LIQUIDITY ADJUSTMENT FACILITY (LAF)
• Liquid Adjustment Facility is a monetary policy tool which allows banks to borrow money through
repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF
consists of repo and reverse repo operations.
REPO RATE
• Repurchase Option (REPO) is the rate at which RBI lends to commercial banks. In other words, it is the
rate at which our banks borrow rupees from RBI.
• Whenever, the banks have any shortage of funds they can borrow it from RBI. A reduction in the Repo
Rate will help banks to get money at a cheaper rate.

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• When the Repo Rate increases, borrowing from RBI becomes more expensive.
OR
• At present the Repo Rate is 6.25%.
REVERSE REPO RATE
• The rate at which Reserve Bank of India (RBI) borrows money from banks and hence exact opposite of
Repo Rate.
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• RBI uses this tool when it feels there too much money floating in the banking system. Banks are always
happy to lend money to RBI since their money is in safe hands with a good interest.
• An increase in Reverse Repo Rate can cause the banks to transfer more funds to RBI due its attractive
interest.
• RBI resorts to the Repo Route to fine tune the liquidity position, without resorting to major policy
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instruments such as changes in CRR and Bank Rate. However, markets are bound to react to frequent
changes in the Repo Rates and this will be reflected in corresponding changes in the deposit and lending
rates of commercial banks.
• At present the Reverse Repo Rate is 5.75%
PRIME LENDING RATE
• It is the interest rate charged by banks to their most creditworthy customers (usually the most prominent
and stable business customers).
• The rate is almost always the same amongst major banks.
• Some banks use the name “Reference Rate” or “Base Lending Rate” to refer to their Prime Lending Rate.
MARGINAL STANDING FACILITY (MSF)
• Rates at which the Scheduled banks can borrow funds overnight from RBI against government securities.
• It is a short term borrowing scheme for scheduled commercial banks in case the banks are in severe cash
shortage or acute shortage of liquidity.
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• MSF has been introduced by RBI to reduce volatility in the overnight lending rates in the inter-bank
market and to enable smooth monetary transmission in the financial system.
• At present the MSF rate is 6.75%.
SPECIAL DRAWING RIGHTS (SDR)
• It is an artificial currency created by the IMF in 1969. SDRs are allocated to member countries and can
be fully converted into international currencies so they serve as a supplement to the official foreign
reserves of member countries.
• Its value is based on a basket of key international currencies (U.S. dollar, euro, yen and pound sterling).
NON-BANKING FINANCIAL COMPANY (NBFC)
• It is a company registered under the Companies Act, 1956 and is engaged in the business of loans and
advances; acquisition of shares/stock/bonds/debentures/securities issued by government, but does not
include any institution whose principal business is that of agriculture activity, industrial activity, sale/
purchase/construction of immovable property.

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NBFCs are doing functions akin to that of banks; however there are a few differences:
•

•
OR
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 current or savings accounts).
It is not a part of the payment and settlement system and as such cannot issue cheques to its customers.
• Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not
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available for NBFC depositors unlike in case of banks.
WHITE LABEL ATMS
• Concepts of White label ATMs is adopted from Canada. Since 2006, some banks have been pressing with
RBI to introduce white label ATMs in India too.
• White Label ATM or White Label Automated Teller Machines in India will be owned and operated by
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Non-Bank entities.
• From such White Label ATM customer from any bank will be able to withdraw money, but will need to
pay a fee for the services. These white label automated teller machines (ATMs) will not display logo of
any particular bank and are likely to be located in non-traditional places.
• The white label automated teller machines are likely to benefit customers as well as banks. With the
expansion of ATM network, customers will be able to withdraw funds at more locations, located near their
home or place of work.
SHADOW BANKS
• After the subprime crisis of the US, the term Shadow Banks came into use in 2007.
• Shadow Banks refer to those organizations that function like banks but are outside the banking regulation.
• They help in providing quick source of credit to the public but have been criticized because they lead to
a creation of a bubble and on the defaulting on loans by the borrowers it leads to a crisis at one witnessed
in the US.
• Economists express concern over the functioning of shadow banks for several reasons. Shadow banks
don’t enjoy powers under SARFAESI Act and therefore it is difficult for them to recover money in case
of loan defaults. There are also concerns over their transparency and methods of functioning.
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BHARTIYA MAHILA BANK

• Bharatiya Mahila Bank Ltd. is the first of its kind in the Banking Industry in India.
• One of the key objectives of the bank is to focus on the banking needs of women and promote economic
empowerment.
• It is being looked upon as the beginning of a unique new institution that will provide financial services
predominantly to women and women self-help groups to the small businesswomen and from the working
women to the high net worth individual.
• It has been merged with SBI.
Some salient features of the bank are:
• Bank will offer 4.5% interest on saving deposits.
• It will not insist on collateral since most title deeds are in name of male family members.
• It will lend to micro businesses like catering, crèches & for upgrading kitchens in households.

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• The bank aims to have Rs. 60,000 crore business and 775 branches by 2020.
OR
• It will provide loans primarily to women, and will give low-cost education loans for girls.
• Key positions, including treasury head and security head, held by women.
BANKING OMBUDSMAN
• Banking Ombudsman is a quasi-judicial authority functioning under India’s Banking Ombudsman Scheme
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2006, and the authority was created pursuant to a decision by the Government of India to enable
resolution of complaints of customers of banks relating to certain services rendered by the banks.
• The Reserve Bank of India in 2006 announced the revised Banking Ombudsman Scheme with enlarged
scope to include customer complaints on certain new areas, such as, credit card complaints, deficiencies
in providing the promised services even by banks’ sales agents, levying service charges without prior notice
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to the customer and non-adherence to the fair practices code as adopted by individual banks.
• Applicable to all commercial banks, regional rural banks and scheduled primary cooperative banks having
business in India, the revised scheme came into effect from January 1, 2006.
PRIORITY SECTOR LENDING (PSL)
• Introduced by Dr. K S KrishnaswamyCommitteein 1972, aimed to provide institutional credit to those
sectors and segments for whom it is difficult to get credit.
• According to this, SCB have to give 40% of loans (measured in terms of Adjusted Net Bank Credit or
ANBC) to the identified priority sectors in accordance with the RBI Regulations.
Objective of Priority Sector Targets
• The overall objective of priority sector lending programme is to ensure that adequate institutional credit
flows into some of the vulnerable sectors of the economy, which may not be attractive for the banks from
the point of view of profitability.
• If these targets are not realized, banks have to finance the development programme implemented by the
government for the concerned sectors.
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New PSL Norms:

New PSL rules have been laid down by the RBI following the recommendations of internal working group in 2015.
Categories under PSL
• Agriculture 18%: Within the 18 percent target for agriculture, a target of 8 percent of ANBC is prescribed
for Small and Marginal Farmers.
• Micro, Small and Medium Enterprises 7.5 percent.
• Export Credit: Incremental export credit up to 2 percent for domestic banks and foreign banks with 20
branches and above.
• Education: Loans to individuals for educational purposes including vocational courses upto Rs  10 lakh.
• Housing: Loans to individuals up to Rs 28 lakh in metropolitan centres (with population of ten lakh and
above) and loans up to Rs 20 lakh in other centres for purchase/construction of a dwelling unit per family. 

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• Social Infrastructure: Bank loans up to a limit of Rs 5 crore per borrower for building social infrastructure
for activities namely schools, health care facilities, drinking water facilities and sanitation facilities in Tier
II to Tier VI centres.
•

•
OR
Renewable Energy: Bank loans up to a limit of Rs 15 crore to borrowers (individual households- Rs 10
lakh) including for public utilities viz. street lighting systems, and remote village electrification.
Others: SHG, JLG etc.
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The new regulation also stipulates that banks should give 10% of their loans to the
• Weaker sections which include Small Marginal Farmers, Artisans, village and cottage industries with a
credit limit uptoRs 1 lakh
• Beneficiary of certain govt. sponsored schemes,
• SCs/STs,
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• SHGs,
• Person with disabilities etc.
Foreign Banks with 20 branches and above already have priority sector targets of 40% and sub-targets for
Agriculture and Weaker Sections. These targets are to be achieved by March 31, 2018 as per the action plans
approved by RBI.
Foreign banks with less than 20 branches will move to total Priority Sector target of 40 percent by 2019-20.
The sub-target for MSME sector will be made in 2018.
NON-PERFORMING ASSETS (NPAs)
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank
and is overdue for a period of 90 days.Banks are required to classify NPAs further into
Substandard, Doubtful and Loss Assets.
• Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
• Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category
for a period of 12 months.
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• Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance
as a bankable asset is not warranted, although there may be some salvage or recovery value.” 
Status of NPAs in India
Banks have been asked by the RBI to clean up their account statement and their asset book by March 2017
following the huge NPAs pending with these banks.
Resultantly this led to 29 public sector banks writing off Rs1.14 Lakh Crore of bad debts between 2013 -2015,
much more than what they had done in the preceding 9 years.
• The gross bad loans of 39 listed Indian banks, in absolute term, rose 92% in fiscal year 2016 to Rs.5.79
trillion even as after provisioning, the net bad loans more than doubled to Rs.3.38 trillion.
• In percentage terms, the average gross non-performing assets (NPAs) of this group of banks rose from
4.41% of loans in 2015 to 7.91% in 2016; net NPAs in the past one year rose from 2.45% to 4.63%.
• Public sector banks, which have close to 70% market share of loans, are more affected than their private
sector peers. Two of them have over 15% gross NPAs and an additional eight close to 10% and more.

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Impact of NPAs on Banks:
• Rising of NPAs will lead to a crisis of confidence in the market.
OR
• The price of loans, i.e. the interest rates will shoot up.
• Shooting of interest rates will directly impact the investors who wish to take loans for setting up
infrastructural, industrial projects etc. 
• It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan. 
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• This will hurt the overall demand in the Indian economy which will lead to lower growth rates and of
course higher inflation because of the higher cost of capital.
• The trend may continue in a vicious circle and deepen the crisis.
Laws related to NPAs and Bankruptcy
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• SARFAESI Act – It empowers Banks/Financial Institutions to recover their NPAs without the intervention
of the court, through acquiring and disposing secured assets in case of outstanding amounts greater than
1 lakh. SARFAESI has been used only against the small borrowers primarily from MSME sectors.
• Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides setting up
of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for expeditious and
exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA accounts with outstanding
amount of Rs. 10 lac and above. DRTs are overburdened leading to slow disposal of cases.
• Lok Adalats:  Section 89 of the Civil Procedure Code provides resolution of disputes through ADR
methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalats mechanism offers
expeditious, in-expensive and mutually acceptable way of settlement of dispute.
• Under banking regulation act 1949, RBI is empowered to monitor the asset quality of banks by inspecting
record books.
BASEL NORMS: PRUDENTIAL NORMS AND CAPITAL ADEQUACY
• Implementing the Narsimham Committee recommendations, RBI prescribed that banks should make 100
per cent provision for all loss assets or non-performing assets (NPAs) over a period of 2 years, as
prudential norms.
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• Capital Adequacy Norms required the banks to achieve a capital to risk weighted asset ratio of 8 per cent.
A bank’s real capital is assessed after taking into account the riskiness of its assets. Providing a cushion
for the riskiness of the asset is necessary to guarantee against insolvency.
• The international norm for Capital Adequacy Ratio was set by Basel Committee on Banking Supervision
under the aegis of the Bank of International Settlements (BIS) Basle, Switzerland, after the failure of the
German Bank Herstatt in 1974.
• It is a committee of Bank Supervisors consisting of members from each of the G10 countries. The
committee is a forum for discussion of the handling of specific supervisory problems.
• It came up with the first set of recommendations which are called Basel I. These included a minimum
capital adequacy of 8 per cent of the total risk weighted assets of a bank.
• Many Indian Banks had to go in for public issues to satisfy capital adequacy norms. It was later realized
that Basel I norms addressed only financial risk.
• Accordingly, a revised set of norms called Basel II was brought out in June 2004. These are more complex

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norms and are based on the three pillars of Capital Requirement, Supervisory Review and Market Discipline.
• Despite Basel II norms, the financial market crisis of 2008 revealed the need for further stringency.
•

•
arising from financial and economic stress. OR
Basel III was proposed in Dec 2010 in order to improve the banking sector’s ability to absorb shocks

RBI has issued instructions for the adoption of Basel III norms from Jan 2013 in a phased manner to be
completed by March 31, 2018.
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• This will require fresh infusion of capital for which dilution of PSU bank capital has been decided without
diluting govt. control.
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BANKING SECTOR REFORMS

BANKING SECTOR DEVELOPMENT IN INDIA
• In 1921, all presidency banks were amalgamated to form the Imperial Bank of India which was run by
European Shareholders.
• After that the Reserve Bank of India was established in April 1935. At the time of first phase the growth
of banking sector was very slow.
• Between 1913 and 1948 there were approximately 1100 small banks in India. 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).

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• Reserve Bank of India was vested with extensive powers for the supervision of banking in India as a
Central Banking Authority.
OR
• After Independence, in 1955, the Imperial Bank of India was nationalized (under State Bank of India Act
– 1955) and was given the name “State Bank of India”, to act as the principal agent of RBI and to handle
banking transactions all over the country.
• Seven banks forming subsidiary of State Bank of India was nationalized in 1960.
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• On 19th July, 1969, major process of nationalization was carried out. At the same time 14 major Indian
commercial banks of the country were nationalized.
• In 1980, another six banks were nationalized, and thus raising the number of nationalized banks to 20.
• Seven more banks were nationalized with deposits over 200 Crores. Till the year 1980 approximately 80%
of the banking segment in India was under government’s ownership.
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• On the suggestions of Narsimham Committee, the Banking Regulation Act was amended in 1993 and
thus the gates for the new private sector banks were opened.
The following are the major steps taken by the Government of India to Regulate Banking institutions in the
country:
• 1949: Enactment of Banking Regulation Act.
• 1955: Nationalisation of State Bank of India.
• 1959: Nationalisation of SBI subsidiaries.
• 1961: Insurance cover extended to deposits.
• 1969: Nationalisation of 14 major Banks.
• 1971: Creation of credit guarantee corporation.
• 1975: Creation of regional rural banks.
• 1980: Nationalisation of seven banks with deposits over 200 Crores.
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NATIONALIZATION OF BANKS IN INDIA

• It was observed that certain sectors of the economy such as the agriculture, small-scale industries and
weaker sections of the society were relatively ignored by the banking system of the country. For example,
the agricultural sector only received 2.1% of the total credit as it stood in March 1967 compared to a
humungous 64% for the industry.
• It was though by Government of India that it should impose some control over banks with a view to
preventing monopolistic trends, concentration of economic power and misuse of economic resources.
• National Credit Control Council was set up on December 22, 1967 to assess periodically the available
resources of credit and to ensure its equitable and purposeful distribution among the several sectors.
• Such a mechanism didn’t work out and eventually nationalization was brought about through promulgation
of an ordinance in 1969, which nationalized 14 leading commercial bank of the country. Some of them
were the Punjab National Bank, IOB, Dena Bank, Syndicate Bank etc. In 1980 six more banks were
nationalized.

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Objectives of Bank Nationalisation
• To mobilize savings of people to the maximum possible and to utilize them for productive purpose;
•

•
regulations; OR
To ensure that the banking operations are guided by a larger social purpose and are subject to close public

To ensure that the legitimate credit needs of private sector industry and trade, big and small, are met;
• To ensure the needs of the productive sector and in particular, agriculture, small scale industry, self-
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employed professionals are met;
• To actively foster the growth of the new and progressive class of entrepreneurs and create fresh opportunities
for hitherto neglected and backward areas in different parts of the country;
• To curb the use of bank credit for speculative and for other unproductive purposes.
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Reforms
• One of the sectors that has been subjected to reform as a part of the new economic policy since 1991
consistently is the banking sector.
• Commercial Banks and their weaknesses by 1991: The major factors that contributed to deteriorating
bank performance upto the ends of eighties were:
• High SLR and CRR locking up funds
• Low interest rates charged on government bonds
• Directed and concessional lending for populist reasons
• Administered interest rates
• Lack of competition
Thus, the reforms were needed to set the above problems right such as:
• Floor and cap on SLR and CRR removed in 2006.
• Interest rates were deregulated to make banks respond dynamically to the market conditions. Even
Scheduled Banks rates were deregulated in 2011.
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• Near level playing field for public, private and foreign banks in entry
• Adoption of prudential norms – Reserve Bank of India issued guidelines for income recognition, asset
classification and provisioning to make banks safer
• Basel Norms adopted for safe banking
• VRS for better work culture and productivity
• FDI up to 74% is permitted in private banks
The objectives of Banking Sector Reforms have been
• To make them competitive and profitable
• To strengthen the sector to face global challenges
• To make banking Sound and safe
• To help them technologically modernize for customer benefit

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• To make available global expertise and capital by relaxing FDI norms
NARASIMHAM COMMITTEE
OR
Banking Sector reforms in India were conducted on the basis of Narasimham Committee reports I and II
(1991 and 1998 respectively). This committee was appointed against the backdrop of the Balance of Payment
Crisis. It was set up to analyze all factors related to financial system and give recommendation to improve its
efficiency and productivity.
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In 1991, the Narasimhan Committee recommended for:

• Creating a level playing field between the public sector, private sector and foreign sector banks
• Selection of few banks like SBI for global operations
• Reducing Statutory Liquidity Ratio (SLR) as that will leave more resources with banks for lending
• Reducing Cash Reserve Ratio (CRR) to increase lendable resource of banks
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• Rationalizing and better targeting priority sector lending as a sizeable portion of it is wasted and also much
of it turning into non-performing asset
• Introducing prudential norms for better risk management and transparency in operations
• Deregulating interest rates
• Set up Asset Reconstruction Company (ARC) that can take over some of the bad debts of the banks and
financial institutions and collect them for a commission.
Again in 1998, Finance Ministry of the GoI appointed a committee under the chairmanship of Mr. M
Narasimham to review the progress of the implementation of the banking reforms since 1992 and further
strengthening the financial institutions of India.
In 1998, the committee recommended for:
• Need for stronger banking system by merging some banks which will have a multiplier effect on industry.
• Stricter norms for NPAs and the concept of narrow banking which allows the banks to place their funds
only in short term and risk free assets.
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• Greater autonomy for the PSBs in order to make them function in accordance with their international
counterparts.
• Government of India equity in nationalized banks be reduced to 33% for increased autonomy
• Review of functions of banks boards with a view to make them responsible for enhancing shareholder
value through formulation of corporate strategy and reduction of government equity.
• Increasing Capital Adequacy norms to improve the risk absorption capacity of banks.
• The committee targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002. The Committee
recommended penal provisions for banks that fail to meet these requirements.
Implementations of Recommendations:
• In order to implement these (Narsimham Committee II) recommendations, The RBI in Oct 1998, initiated
the second phase of Financial Sector Reforms raising capital adequacy ratio by 1% and tightened the
prudential norms for provisioning and asset classification in a phased manner.

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• It also targeted to bring the capital adequacy ratio to 9% by March 2001.
• In October 1999 criteria for “autonomous status” was identified by March 1999 and 17 banks were

•
considered eligible for autonomy.
OR
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(SARAFESI Act 2002) was introduced to curb NPAs like problems.
• During the 2008 economic crisis, performance of Indian banking sector was far better than their international
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counterparts.
• This was credited to the successful implementation of the recommendations of the Narasimham Committee-
II with particular reference to the capital adequacy norms and the recapitalization of the public sector
banks.
• Impact of the two committees has been so significant that the financial-economic sector professionals
have been applauding there positive contribution.
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NEW BANK LICENCE CRITERIA

The Reserve Bank of India (RBI) granted two preliminary licences to set up new banks in a country where
only one household in two has access to formal banking services.
The approval of licences for IDFC Ltd (IDFC.NS) and Bandhan Financial Services marks the start of a
cautious experiment for a sector dominated by lethargic state lenders, many of which are reluctant to expand
into rural areas or towns where banking penetration is low. No new Indian bank has been formed since Yes
Bank (YESB.NS) in 2004.
RBI has come up with guidelines for issuing new bank license.
Key features of the guidelines are:
(i) Eligible Promoters: Entities / groups in the private sector, entities in public sector and Non-Banking
Financial Companies (NBFCs) shall be eligible to set up a bank through a wholly-owned Non-Operative
Financial Holding Company (NOFHC).
(ii) ‘Fit and Proper’ criteria: Entities / groups should have a past record of sound credentials and integrity,
be financially sound with a successful track record of 10 years. For this purpose, RBI may seek feedback
from other regulators and enforcement and investigative agencies.
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(iii) Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the Promoter / Promoter
Group. The NOFHC shall hold the bank as well as all the other financial services entities of the group.
(iv) Minimum voting equity capital requirements for banks and shareholding by NOFHC: The initial minimum
paid-up voting equity capital for a bank shall be ‘5 billion. The NOFHC shall initially hold a minimum of
40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five
years and which shall be brought down to 15 per cent within 12 years. The bank shall get its shares listed on
the stock exchanges within three years of the commencement of business by the bank.
(v) Regulatory framework: The bank will be governed by the provisions of the relevant Acts, relevant
Statutes and the Directives, Prudential regulations and other Guidelines/Instructions issued by RBI and
other regulators. The NOFHC shall be registered as a non-banking finance company (NBFC) with the
RBI and will be governed by a separate set of directions issued by RBI.
(vi) Foreign shareholding in the bank: The aggregate non-resident shareholding in the new bank shall not
exceed 49% for the first 5 years after which it will be as per the extant policy.
(vii) Corporate governance of NOFHC: At least 50% of the Directors of the NOFHC should be independent
directors. The corporate structure should not impede effective supervision of the bank and the NOFHC

E
on a consolidated basis by RBI.
(viii) Prudential norms for the NOFHC: The prudential norms will be applied to NOFHC both on stand-
OR
alone as well as on a consolidated basis and the norms would be on similar lines as that of the bank.
(ix) Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter Group. The bank
shall not invest in the equity / debt capital instruments of any financial entities held by the NOFHC.
(x) Business Plan for the bank: The business plan should be realistic and viable and should address how the
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bank proposes to achieve financial inclusion.

(xi) Other conditions for the bank:
– The Board of the bank should have a majority of independent Directors.
– The bank shall open at least 25 per cent of its branches in unbanked rural centres (population upto
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9,999 as per the latest census)

– The bank shall comply with the priority sector lending targets and sub-targets as applicable to the
existing domestic banks.
– Banks promoted by groups having 40 per cent or more assets/income from non-financial business
will require RBI’s prior approval for raising paid-up voting equity capital beyond ‘10 billion for every
block of ‘5 billion.
– Any non-compliance of terms and conditions will attract penal measures including cancellation of
licence of the bank.
(xii) Additional conditions for NBFCs promoting / converting into a bank: Existing NBFCs, if considered
eligible, may be permitted to promote a new bank or convert themselves into banks.
OTHER RECENT COMMITTEES
A. Nachiket Mor Committee
The “Committee on Comprehensive Financial Services for Small Businesses and Low Income Households”
was set up by the RBI under the chairmanship of Nachiket Mor.
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In its final report, the Committee has outlined six vision statements for full financial inclusion and financial
deepening in India:
1. Universal Electronic Bank Account (UEBA): Each Indian resident, above the age of eighteen years, would
have an individual, full-service, safe, and secure electronic bank account.
2. Ubiquitous Access to Payment Services and Deposit Products at Reasonable Charges: The Committee
envisions that every resident in India would be within a fifteen minute walking distance of a payment
access point.
3. Sufficient Access to Affordable Formal Credit: Each low-income household and small-business would have
access to a formally regulated lender that is capable of assessing and meeting their credit needs. Such a
lender must also be able to offer them a full-range of suitable credit products at an affordable price.
4. Universal Access to a Range of Deposit and Investment Products at Reasonable Charges: Each low-
income household and small-business would have access to providers that can offer them suitable investment
and deposit products. Such services must be available to them at reasonable charges.

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5. Universal Access to a Range of Insurance and Risk Management Products at Reasonable Charges: Each
low-income household and small business would have access to providers that have the ability to offer

OR
them suitable insurance and risk management products. These products must at minimum allow them to
manage risks related to: (a) commodity price movements; (b) longevity, disability, and death of human
beings; (c) death of livestock; (d) rainfall; and (e) damage to property.
6. Right to Suitability: Each low-income household and small-business would have a legally protected right
to be offered only suitable financial services. She will have the right to seek legal redress if she feels that
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due process to establish Suitability was not followed or that there was gross negligence.
The key recommendations are:
• Providing a universal bank account to all Indians above the age of 18 years by January 1, 2016. To achieve
this, a vertically differentiated banking system with payments banks for deposits and payments and
wholesale banks for credit outreach. These banks need to have Rs.50 crore by way of capital, which is
a tenth of what is applicable for new banks that are to be licensed.
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• Aadhaar will be the prime driver towards rapid expansion in the number of bank accounts.
• Monitoring at the district level such as deposits and advances as a percentage of gross domestic product
(GDP).
• Adjusted 50 per cent priority sector lending target with adjustments for sectors and regions based on
difficulty in lending.
B. P. J. Nayak Committee
It was constituted by the RBI for making recommendations regarding corporate governance in PSU banks.
Recommendations of the Nayak Committee are:
• Scrapping and removal of Bank Nationalisation Acts, SBI Act and SBI(Subsidiary Banks) Act.
• Conversion of PSBs into Companies as per the Companies Act.
• Formation of a Bank Investment Company/BIC under the Companies Act; transfer of shares by the
central government in PSBs to the BIC.
• BIC in turn would have over the controlling power to boards of PSBs.
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• Government will only control earning return on investment.

• Fair return on investment to the Central government would be the responsibility of BIC.
• Appointments of CEOs, Inside Directors and top Executives of PSBs would be the responsibility of the
Bank Boards Bureau constituting three serving or retired bank chairmans and the government would not
be involved in this decision in any way.
• Nayak committee also recommends proportionate voting rights to all shareholders and reduction of
governmental shareholding to 40%.
Mission Indradhanush for revamping Public Sector Banks
The mission includes the seven key reforms of appointments, board of bureau, capitalisation, de-stressing,
empowerment, framework of accountability and governance reforms.
The mission includes:
1. Appointments : Executives from the private sector have been hired to run state-owned banks with the
government.

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2. Bank Board Bureau : The Bank Board Bureau will start functioning from the next financial year and
is the first step toward a full-fledged bank holding company, an entity that will house the government’s
OR
stake in state run banks struggling with mounting non-performing loans that have touched 6 per cent
of gross advances.
3. Capitalization : The government will inject a total of Rs 25,000 crore of capital into debt-laden state
banks in this fiscal; Rs 20,000 crore would be injected in a month. Over the next four years, the
government plans to inject Rs 70,000 crore.
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4. De-stressing : The government will concentrate on distressing the banks’ bad loans.
5. Empowerment : The government will strive to make it easier for PSBs to hire. The government is
looking at introducing Employee Stock Ownership Plan (ESOPs) for the PSU bank managements.
6. Framework of Accountability : The government also announced a new framework of key performance
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indicators for state-run lenders to boost efficiency in functioning while assuring them of independence
in decision making on purely commercial considerations.
7. Governance Reforms: The process of governance reforms started with “Gyan Sangam” - a conclave
of PSBs and FIs organized at the beginning of 2015 in Pune which was attended by all stake-holders
including Prime Minister, Finance Minister, MoS (Finance), Governor, RBI and CMDs of all PSBs and
FIs. There was focus group discussion on six different topics which resulted in specific decisions on
optimizing capital, digitizing processes, strengthening risk management, improving managerial
performance and financial inclusion.
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