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Economy
Banking Series (Lecture-1 to 6)
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Plz Read Carefully and do not make laugh …
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 If you are a new aspirants or like a kid in UPSC journey boss we will say u should watch our
lectures First and read our notes
 after that read Ramesh singh (bulky and written language is Mind blowing (aspirants cannot
understand in first reading what’s the author wants to make understand via this book
directly) hehehe) ( just joking)
 Ramesh singh would be your primary resource, ( those coaching wala saying like Mere hi
Notes padho ..they are going to make u fool.. u cannot ignore books in upsc )
 you can keep Desire IAS notes like a Revision notes or in desi style we can say Jugadu notes)
 Just follow these 4 simple steps
 Step-1 just watch our lectures on YouTube ( link Below) ( for countering the concept)
 Step-2 read Economy Desire IAS notes ( for better understanding)
 Step-3 Plz Avoid Grammar error becz we typed each and every word ( just joking) ( becz we
tried to write in HINGLISH language ) so even hindi medium aspirants can enjoy our notes (
offer limited only hehehhe)
 Step -4 Read Any Economic Book ( Ramesh singh is good book .but read selective reading) on
Banking section (Serious Reading)
 Ok apart of jokes let’s start it
 for Lecture Playlist click this link -
https://www.youtube.com/watch?v=dWN88cvt4Xo&list=PLX2uHvzBJxOjdXovb49cMfYPPVY
LBkBGJ
TOPICS TO BE COVERED
 RESERVE BANK OF INDIA
 MINIMUM RESERVE SYSTEM
 HISTORY OF BANKING IN INDIA
 SCHEDULE AND NON SCHEDULE BANKS
 REGIONAL RURAL BANKS
 COOPERATIVE BANKS
 NARASIMHAM COMMITTEE REPORT
 PRIORITY SECTOR LENDING
 NON BANKING FINANCIAL INSTITUTIONS
 NON PERFORMING ASSETS
 CIBIL
 WILFULL DEFAULTER
 TWIN BALANCESHEET PROBLEM
 ARCS
 CDR
 S4A SCHEME

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 MISSION INDRADHANUSH
 PROMPT CORRECTIVE ACTION
 BANKING GUIDELINES
 CORE BANKING SOLUTION
 RTGS NEFT AND IMPS
 UPI BHIM
 BROWN AND WHITE LABEL ATMS
 INSOLVENCY AND BANKRUPTCY CODE

Notes ( let’s start it ) .. (we assumed that u have already watched our economic lectures )( if not plz
watched it otherwise u r going to feel get bored here)

Reserve bank of India

 In India RBI is the apex authority in the banking system.
 RBI act 1934 and was setup on 1st April 1935
 Earlier imperial bank of India used to perform its role.
 In 1949 RBI (transfer to public ownership) act was passed and on 1 st Jan 1950 it was brought
under the control of GOI
Structure of RBI
 RBI governor
 4 deputy governors
 1st RBI governor – sir Osborne smith
 1st Indian rbi governor – cd deshmukh
 At present – urjit patel

Functions of RBI

 Traditional functions
 Nontraditional functions
Traditional functions
 Banker to the govt
 The rbi is banker to the banks – lander of last resort
 Control the entire banking system and some categories of nbfcs – scheduled banks have to
follow the guidelines given by rbi – 1/4th branch in rural areas etc.
 Formulates monetary policy
 Custodian of forex
 Issues the currency above the denomination of Rs 1 that’s why Rs 1 note signed by finance
secretary. it can only issue notes.
 Coins issued by goi but circulated by rbi.
 Rbi can issue highest note of 10,000 and financial yearly 10000cr
 For this minimum reserve system is used.

Minimum reserve system

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 In different countries different systems are used like proportional reserve system.
 India uses MRS – 200cr(115 cr gold and 85 cr hard currency )
History of banking in india

• 1st – bank of hindustan – 1770 – alexander and company

• 3 banks by east india company at 3 presidencies –
1) 1806 – bank of bengal
2) 1840 – bank of bombay
3) 1843 – bank of madras
4) 1865 – allahabad bank – oldest bank surviving with same name – headquarter in calcutta
5) 1881 – oudh commercial bank – india’s 1st joint sector bank
6) 1894 - pnb – 1st bank with indian capital only
Imperial bank of india
 Resulted into imperial bank of india in 1921.
 Performed the functions of central bank till 1934
 Sbi act was passed and it was brought under the goi in the year 1955
 7 associates were also made.
• State bank of india
• Hyderabad
• Travancore
• Patiala
• Bikaner and jaipur
• Mysore
• Saurashtra
• Indore

 In 2008 and in 2010 bank of saurashtra and indore were merged. On 1 st april 2017 even rest of
the 5 associates were merged. (narsimham committee recom.)
 Bhartiya mahila bank is also merged which was setup in 2013

Nationalized banks
 Meaning of Nationalization – converting a private sector company into a public sector
company.
 Several acts were passed
 1969 – banks with min deposit of 50cr – 14
 1980 – banks with min deposit of 200cr – 6
Problems in banks
 Private owned banks
 Fraudlent activities
 Most in urban areas
 Reach to upper class only
Govt wish
 To safeguard the interest of depositor

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 For benefits of masses

 Government banks in india

CLASSIFICATION OF BANKS
• 2 categories
• Scheduled – registered under 2nd schedule of rbi act ,1934 – list is dynamic – banks are
compelled to follow guidelines and in return they get monetary support of rbi.(guidelines to be
a bank will be covered later on)
• Non scheduled – opens and close everyday
•

Regional rural bank

 Can be setup in rural part of a country only .
 Responsibility – loan to agricultural farmers + small business
 Earlier not established as a profit motive banks but now placed under it.
How they are opened –

 Sponsored by psb’s only but work with different name

 50% by central govt+35% by sponsored bank + 15% by state govt.
Problems
• Gradually number rose to 196 with 1000 of branches and most of them were running in losses
• Impacting sponsored banks
• Govt decided to merge them and number fall to 56
• Rrbs were opened in 1975 but act was passed in 1976

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Cooperative Banks
• Based on mutual cooperation and no profit.
2 types –
1. State cooperative
2. Urban cooperative
• They have a dual regulation – banking part by rbi and management by state
State cooperative
• Registered under state cooperatives socities act
• Can operate in single state only
At 2 levels –
 District – central cooperative
 Village – primary agricultural credit socities (pacs)
Urban cooperative
 Registered under multi state cooperative act
 Can operate in more then 1 state
Narasimham committee report on banking sector reforms
 No more nationalisation
 Private and public sector to be treated equally
 Complete computerisation
 Weaker banks should’t be merged with big banks
 Some banks to be promoted globally
 Rationalisation of interest rates
 Lower crr and slr
 Profit banks to be listed
 Asset reconstruction companies
 Priority sector lending
Priority sector lending
 Some sectors by rbi are considered most important for overall socio economic devn of the
country
 Loans to them should be provided therefore put under priority sector.
 But these sectors contribute highly to the npa therefore banks are reluctant
 Therefore rbi has mandated the same and even there is subcategorisation for more focus.
E.g. 18% - agriculture and allied activities out of 40%
Rules for banks
 40 % - banks with 20 or more branches – foreign + indian
 Foreign banks with less then 20 branches – 32% with no sub category.
 No action as by narasimham

Non banking financial companies

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 They are financial banks but not a complete bank – engaged in financial activities – known
as shadow bank
 Nbfcs can be of several types including insurance companies even mutual funds but all not
regulated by rbi.
Nbfcs regulated by RBI
Non deposit taking
 They cant take deposit , they have to work with their on capital.
 Net owned fund – 100 cr
Deposit taking
 Can accept deposit but it is termed
 10 to 60 months
 Cant issue debit and cheq book
 Net owned fund – 200 cr

Deposit taking nbfcs

Rated
• Registered with credit rating agencies
• 4 times of net owned
Non rated

• Not registered with credit rating agencies

• 1.5 times only
Cant give interest rates Less then 3.5% and not More then 12.5%

NPA
THERE IS NO RECOVERY OF PRINCIPAL AND INTEREST FOR 90 DAYS

Procedure under NPA

• Against a type of npa – some amount has to be kept out of profit known as provision

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CIBIL
 It was constituted in aug 2000
 It is an agency which maintains the database of all borrowers
 These informations are provided by lender
 On it a website is been made which gives a score to all borrower
 It is out of 900
 If anyone has lower 750 – cant get loan
 Can be accesed by anyone
 No borrowing - -1

Twin balance sheet problem

• Balance sheet refers to a document of a company which shows financial health of a company.

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• If blnc sheet of company goes bad so it will impact the blnc sheet of other compnay as well
known as twin balance sheet problem.

How it happened in india

Solutions

 Writing of the loan

 Asset reconstruction companies
 Corporate debt restructuring
 Recapitalisation
 Mission indradhanush
 Prompt corrective action
Writing of the loan
 Under this central banks can instruct the banks to clean their balance sheet by counting npas
as lost asset
 Against them provision will be released and it could be used .
 Meanwhile process of recovery can continue .
Asset reconstruction company
 Sarfesi act 2002
 can sell the secured assets
 can sell to arcs
Accordingly 1st arc was established by sbi pnb idbi and icici known as arcil

Problems and solutions

 Arcs but the npas of the banks at discounted price and recover them with the help of their
trained workers.
 But problem kept on increasing as their npa have gone beyond a range e.g. pnb – 400000 cr
and even many were politically complex.
 Solution by govt – bad bank
Bad bank and para

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 Bad bank was to be a bank backed by govt but came under tough resistance by
raguramrajan – transfering the problem , fiscal deficit problem in monetary policy
 Govt came with new solution – para (public sector asset rehabilitation agency) raise fund
from public.
Corporate debt restructurring
 Several loans defaulted were genuine due to market conditions hence rbi decided to give
chance to these corporates
 Some guidelines were formed.
 So they can pay back their loan
Guidelines
 Cdr is not possible without permission of rbi
 Possible iff borrowing is from more then 1 bank
 Iff total borrowing is more then 10 cr
 Banks and co both can apply for it.
 Corporate can apply iff supported by 20 % loan and same goes with bank
 Once application is accepted – joint lender forum
 50% loan giver should get ready for further process – scheme will be decide
 Plan should be certified by 75%

Schemes
 5/25
 Strategic debt restructuring
 S4a
5/25
 The loan of the company is restructured
 Usually it was for infra comp and loan for them was 12-15 yrs
 It was made to 25 yrs so the installments can be brought to low and as payment starts after
completion of project
 Comp can borrow after 5 yrs of successful payment

Strategic debt restructurring

• If 5/25 fails
• Banks may forcefully acquire the ownership of the company (51%)
• Then banks are given time of 18 months to find a suitable buyer for it.
• If it finds a buyer who can start the repayment then loan wont be counted as a npa
• Banks still found a problem to get a buyer then it was done to 26% but he should be made a
single largest investor.

S4A
 Loan should not be less then 500 cr

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 Even after a cash flow starts full payment is not possible due to low return
 Therefore loan be divided into 2 including interest
 Sustainable – to be paid
 Non sustainable – to be converted into shares
Mission INDRADHANUSH
 Also known as A TO G mission
 A – APPOINTMENTS
 B – BOARD OF DIRECTORS
 C – CAPITALIZATION
 D – DESTRESSING
 E – EMPOWERMENT
 F – FRAMEWORK OF ACCOUNTABILITY
 G – GOVERNANCE – GYAN SANGAM – PM, FM , GOVERNOR (RBI), CMDS
PROMPT CORRECTIVE ACTION

 Rbi keeps a close look on the health of banks as it violates rbi psychological range , it takes a
preventive action and puts them under the following 3 categories.

Rules to foreign investment in banking sector

 In psbs – majority by govt – 51% , rbi asked it to go for 49% . Single buyer not more then 10%
and foreign investment not more then 20 %
 Private sector indian banks – fdi – 74% but single not more then 10%
 Foreign banks – 100%
On tap banking license guidelines
 An interested investor with an experince of atleast 10 yrs in banking may apply

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 even an indian corporate owned by resident indian with a neat and clean history of atleast
10 yrs can apply and
 even an existing nbfc can apply.
 Group companies cant apply
 License is valid for 18 months only if not worked it has to be surrender
 Paid up capital – 500 cr
 In 1st 5 yrs promoter to bring his sharing to 40% other investors cant take more then 10% ,
in these 5 yrs fdi cant be more then 49% ( indian in nature)
 By the end of 15 yrs – promoter – 15% , fdi – 74% single buyer – 10%
 25% branches in rural areas
 6th year should be listed .
Core banking solution
 It provides anywhere banking facility to the customers of the banks.
 It connects each and every branch of the bank from the central server.
 Money can be withdrawn and deposited at any branch of the bank with its customers.
 E-kuber – rbi
Online fund transfer
 RTGS – REAL TIME GROSS SETTLEMENT
 NEFT – NATIONAL ELECTRONIC FUND TRANSFER
 IMPS – IMMEDIATE PAYMENT SERVICES

UPI AND BHIM

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INSOLVENCY AND BANKRUPCY CODE

 It is considered to be a economic reform for ease of doing of business.
 It will allow easy exit of business firms(why)
 Bcuz of complex laws it is easy to enter but even it is more difficult to come out due to same
complex laws.
 Insolvency refers to a financial condition in which person is not able to clear its debt and when
through legal procedure he allows himself to be declared as being called as bankrupt.
Procedure
 Earlier complain could be filed in any tribunal or court like company law tribunal , h.c. etc but
now it is to be filed in nlt and it could be filed by banks also.
 There is a proper mechanism to challenge like nclt – nclat – s.c.
 Min amt – 1cr
 Process wont be initiated at a point it will be evaluated by insolvency professionals under nclt
and to check over it there is a insolvency and bankruptcy board of india.
 Fixed time limit – 180 days + 90 days ext
 Msme – 90days + 45 days ext
 After completion of bankruptcy liquidation will start and even liabilities order is fixed
 Workers and secured lenders
 Unsecured lenders
 Dues of state
 Preferential shareholders
 Equity shareholders

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