BANKING SECTOR

SECTORAL REPORT

S A N J E E D E E P M I S H R A
INTRODUCTION
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently
capitalised and well-regulated. The financial and economic conditions in the
country are far superior to any other country in the world. Credit, market and
liquidity risk studies suggest that Indian banks are generally resilient and have
withstood the global downturn well.

The Indian banking industry has recently witnessed the rollout of innovative
banking models like payments and small finance banks. In recent years India has
also focused on increasing its banking sector reach, through various schemes
like the Pradhan Mantri Jan Dhan Yojana and Post payment banks. Schemes like
these coupled with major banking sector reforms like digital payments, neo-
banking, a rise of Indian NBFCs and fintech have significantly enhanced India’s
financial inclusion and helped fuel the credit cycle in the country.

The digital payments system in India has evolved the most among 25 countries
with India’s Immediate Payment Service (IMPS) being the only system at level five
in the Faster Payments Innovation Index (FPII).* India’s Unified Payments
Interface (UPI) has also revolutionized real-time payments and strived to
increase its global reach in recent years.
NBFCS
The another category of financial institution—the non-bank—is almost
similar in its functions but main difference (though, highly simplified)
being that it does not allow its depositors to withdraw money from their
accounts. NBFCs (Non-Banking Financial Companies) are fast emerging
as an important segment of Indian financial system.

They raise funds from the public, directly or indirectly, and lend them to
ultimate spenders. They advance loans to the various wholesale and
retail traders, small-scale industries and selfemployed persons. Thus,
they have broadened and diversified the range of products and services
offered by a financial sector.

Based on their liability structure, they have been classified into two
broad categories:
1. deposit-taking NBFCs (NBFC-D), and
2. non-deposit taking NBFCs (NBFC-ND).

It is mandatory for a NBFC to get itself registered with the RBI as a

deposit taking company. For registration they need to be a company
(incorporated under the Companies Act, 1956) and should have a
minimum NOF (net owned fund) ₹2 crore.
NBFCS

To promote financial inclusion through direct interaction

between small lenders and small borrowers together with
addressing consumer protection, during 2017–18, RBI
introduced two new categories of the NBFC—Peer to Peer
(P2P) and Account Aggregators (AA). As per the Economic
Survey 2019–20, after growing very fast in 2017–18 sector
decelerated since late 2018–19 hit with scarcity of funds—
primarily caused by a panic after the IL&FS (a big NBFC)
defaulted in honouring the payment of its Commercial Papers
(CPs). Since then, the RBI has been trying to ease the liquidity
crunch faced by the sector in various ways. By September
2019, the sector accounted for around 18 per cent of the bank
assets with a balance sheet size of over ₹30 lakh crores
maintaining a very safe capital to risk-weighted assets ratio
(CRAR) of 19.5 per cent (against the requirement of 15 per
cent).
 In the wake of the banking crisis of early 20th century, world felt a
need of central banking body for the first time. Following the

RESERVE BANK OF INDIA global clue, in India also such a body, the Reserve Bank of India ,
was set up on April 1, 1935 in accordance with the provisions of
the RBI Act, 1934, in Calcutta (got shifted to Bombay in 1937). Set
up under private ownership like a bank it was given two extra
functions—regulating banking industry and being the banker of
the Government
 It includes formulation, implementation

FUNCTIONS OF
Monetary and monitoring of the monetary policy.
The broad objective is—maintaining
Authority price stability keeping in mind the
objective of growth.

It includes issuing of new currency

RBI
Currency notes and coins as well as exchanging
or destroying those ones which are not
Authority fit for circulation

Regulator and It includes prescribing broad

parameters of banking operations
Supervisor of the within which the banking and
financial system operates.
Financial System
 In includes broad functions like—
managing the FEMA; keeping the Forex

FUNCTIONS OF
Manager of (foreign exchange) reserves of the country;

Foreign Exchange stabilising the exchange rate of rupee; and

representing the Government of India in
the IMF and World Bank

Regulator and
It includes functions like introducing and

RBI
Supervisor of upgrad-ing safe and efficient modes of
payment systems in the country to meet
Payment and the requirements of the public at large.
Settlement Systems

It includes three category of functions—

Banker of the firstly, performing the Merchant
Banking functions for the central and
Governments state governments; secondly, acting as
and Banks their Bankers; and thirdly, maintaining
banking accounts of the SCBs
 It includes formulation, implementation

FUNCTIONS OF
Monetary and monitoring of the monetary policy.
The broad objective is—maintaining
Authority price stability keeping in mind the
objective of growth.

Unlike most of the central banks in the

RBI
Developmental world, the RBI was given some
developmental functions also. Playing
Functions this role, it did set up developmental
banks like—IDBI, SIDBI, NABARD, NEDB
RBI’S RESERVES & SURPLUS CAPITAL

In 2019-20, a lot of debate was seen on the issue of reserve

transfer of the RBI to the Government. To look into the issue, an
expert committee on Economic Capital Framework was set up by
the RBI (headed by Bimal Jalan) in 2019, which could advise the
manner in which it should share surplus capital with the
Government. On its advice, the RBI transferred an amount of ₹1.76
lakh crore to the Government

The committee based its recommendations on the consideration

of the role of central banks’ financial resilience, cross-country
practices, statutory provisions and the impact of the RBI’s public
policy mandate and operating environment on its balance sheet
and the risks involved.
MONETARY POLICY
Considered as the most dynamic and sensitive function of a In February 2020, in a first of its kind move, the RBI allowed
central bank (i.e., RBI in case of India) this macroeconomic banks to lend to— automobiles; residential housing; and
policy is related to monetary matters—chiefly aimed at micro, small and medium enterprises (MSMEs), without
regulating the size and cost of fund/money in the economic maintaining the mandatory CRR. This provision will remain
system. From being announced twice a year (before slack and open till July 31, 2020. The move is aimed at enhancing lending
busy seasons) today the policy is a bi-monthly affair activity to these sectors which have been hit hard with
announced 6 times in a financial year after the monetary policy slowdown in recent times. Simply put, the RBI allowed banks
committee (MPC) came into being in 2016. to use the CRR money which otherwise would have been
deposited by the banks with the RBI. As a result of this
Cash Reserve Ratio exemption given to banks, the RBI will lose a part of its income
Banks operating in the country are under regulatory obligation since the CRR deposits are used by the RBI in its daily business
to maintain ‘reserve ratios’ of two kinds, one of it being the operations. In March 2020, the CRR was 3 per cent of the NDTL
cash reserve ratio (the other being ‘statutory liquidity ratio’). of the banks—one per cent change in it today makes a
Under it, all scheduled commercial banks operating in the difference of around ₹1.37 lakh crore on the cash flow in the
country are supposed to maintain a part of their total deposits financial system.
with the RBI in cash form as the cash reserve ratio (CRR). The
RBI could fix it between 3 to 15 per cent of the ‘net demand
and time liabilities’ (NDTL) of the banks.
MONETARY POLICY
Statutory Liquidity Ratio Repo Rate
Under it, all scheduled commercial banks operating in the country The rate of interest the RBI charges from its clients on their
are supposed to maintain a part of their total deposits with short-term borrowing is the repo rate in India. Basically, this is
themselves in non-cash form— the ratio could be fixed by the RBI an abbreviated form of the ‘rate of repurchase’ and in western
between 25 to 40 per cent. economies it is known as the ‘rate of discount.
In March 2020, the SLR was at 18.25 per cent of the NDTL of the The rate was 4.40 per cent in March 2020. In October 2013, RBI
banks. With one per cent change in this ratio today banks either lose introduced term repos (of different tenors, such as, 7/14/28
or gain choice of investing around a fund of ₹1.37 lakh crores. days), to inject liquidity over a period that is longer than
overnight.
Bank Rate
The interest rate which the RBI charges on its long-term lending is Long Term Repo
known as the Bank Rate. The clients who borrow through this route RBI announced to offer long term repo operation (LTRO) of
are the Government of India, state governments, banks, financial ₹1.50 lakh crores at a fixed rate (i.e., at 13 14 15 16 17 the
institutions, co-operative banks, NBFCs, etc. The rate has direct Repo rate). The tenure of the LTRO will be from one to three
impact on long term lending activities of the concerned lending years. This was aimed at ensuring permanent and deeper
bodies operating in the Indian financial system. By March 2020, it liquidity in the financial system together with enhancing
was at 4.65 per cent lending by cutting cost of funds for the banks (enabling them
to lend cheaper loans).
Marginal Standing Facility (MSF)
The MSF rate has been floated as a penal rate and since mid-2015 Reverse Repo
RBI has maintained it 1 per cent higher than the prevailing repo rate. Rate It is the rate of interest the RBI pays to its clients who
By end March 2020 it is at 4.65 per cent, fully aligned with the Bank offer short-term loan to it. At present (March 2020) the rate is
rate (i.e., equal to the Bank rate). at 4.00 per cent.
BASE RATE
Base Rate is the interest rate below which Scheduled Commercial Banks
(SCBs) will lend no loans to its customers—its means it is like prime
lending rate (PLR) and the benchmark prime lending Rate (BPLR) of the
past and is basically a floor rate of interest. It replaced the existing idea
of BPLR on 1 July, 2010.

Banks were not allowed to lend any loan below their base rates. In
March 2020, the base rate of the banks was in the range of 8.15–9.40
per cent.

MCLR
From the financial year 2016–17 (i.e., from 1st April, 2016), banks in the
country have shifted to a new methodology to compute their lending
rate. The new methodology—MCLR (Marginal Cost of funds based
Lending Rate)—which was articulated by the RBI in December 2015.
By late March 2020, the MCLRs of banks were in the range of 7.40-7.90
per cent. As the idea of the MCLR did not bring in the desired results
(i.e., the healthy monetary transmission), RBI announced (in its 5th bi-
monthly monetary policy statement of December 2018)
WARDIERE INC.

MONETARY
TRANSMISSION
Monetary policy plays a very vital role in the allocation of
funds from the financial system. For this, lending rates
decided by the banks must be sensitive to the policy rates
(i.e., repo, reverse repo, MSF and bank rate) announced by
the central bank—known as ‘monetary transmission’. But in
recent years, a healthy monetary transmission has been
lacking in the system. Since 2015- 16 itself, the RBI has been
concerned about a general lack of monetary transmission in
the financial system. Till April 2020, steps like enforcing the
MCLR and external benchmarks on banks for deciding their
lending rates, have been taken by the RBI. But monetary
transmission has been weak in 2019 also—on all three
accounts
2022
Company
 ▷ MONETARY TRANSMISSION
Rate Structure Term structure Credit Growth

The Weighted Average Lending Rate Cut in the policy rate had some
(WALR) of scheduled commercial impact on the short-term interest The credit growth in the economy has
banks (SCBs) has not declined at all in rates—on 364- day Treasury Bill it fell been declining in 2019–20, despite a
2019 despite reduction of repo rate to 5.3 per cent by January 14, 2020 decrease in policy rates—by
by 1.35 per cent—for outstanding (from 6.3 per cent of April 1, 2019). December 20, 2019 it was at 7.1 per
loans it was at 10.40 per cent in But in case of long-term securities the cent in comparison to 12.9 per cent
October 2019 (in January 2019, it was interest rate decline was very small— of April 2019. The fall in credit growth
10.38 per cent). In case of fresh loans, on the 10-Year GSec it fell only to 6.6 was led by services sector and micro,
the monetary transmission has been per cent by January 14, 2020 (from small and medium enterprises
slightly better—while PSBs cut 7.2 per cent of April 1, 2019). (MSMEs). The MSMEs saw a negative
interest by 0.47 per cent, private credit growth rate during the period.
sector by 0.40 between January and
October 2019.
LIQUIDITY MANAGEMENT
FRAMEWORK
A liquidity management framework (LMF) was provisioned by the RBI in
2014 to check volatility in the inter-bank call money market (CMM) and
allow banks manage their needs of short-term capital.

In a push to bring in more ‘stability’ and better ‘interest rate signalling’ in

the loan market, the RBI has been trying to inspire banks to think in
longer term in their operations. Aimed at making banks follow
prudential norms, the Basel III norms also has put a clear check on
short-termism followed by banking industry.

NATIONALISATION AND DEVELOPMENT

OF BANKING IN INDIA
The development of banking industry in India has been intertwined with
the story of its nationalisation. Once the Reserve Bank of India (RBI) was
nationalised in 1949 and a central banking was in place, the
government considered the nationalising of selected private banks in
the country
EMERGENCE OF THE
The Government of India, with the enactment of the SBI Act, 1955
partially nationalised the three Imperial Banks (mainly operating in the
three past Presidencies with their 466 branches) and named them the

SBI
State Bank of India—the first public sector bank emerged in India. The
RBI had purchased 92 per cent of the shares in this partial
nationalisation. Satisfied with the experiment, the government in a
related move partially nationalised eight more private banks (with good
regional presence) via the SBI (Associates) Act, 1959 and named them as
the Associates of the SBI—the RBI had acquired 92 per cent stake in
them as well.
REGIONAL RURAL BANKS (RRBS) CO-OPERATIVE BANKS
The Regional Rural Banks (RRBs) were first set up on 2 October, Banks in India can be broadly classified under two heads
1975 (only 5 in numbers) with the aim to take banking services —commercial banks and co-operative banks. While
to the doorsteps of the rural masses specially in the remote commercial banks (nationalised banks, State Bank group,
areas with no access to banking services with twin duties to private sector banks, foreign banks and regional rural
fulfill. banks) account for an overwhelming share of the banking
By April 2020, as per the RBI, there were 53 RRBs operating in business, co-operative banks also play an important role.
the country (over 13 of them were under the process of Initially set up to supplant indigenous sources of rural
amalgamation with their parent PSBs)—in coming times to be credit, particularly money lenders, today they mostly
fully replaced by the Small Banks. serve the needs of agriculture and allied activities, rural-
based industries and to a lesser extent, trade and
industry in urban centres.

Co-operative banks have a three tier structure—

1. Primary Credit Societies-PCSs (agriculture or urban),

2. District Central Co-Operative Banks-DCCBs, and
3. State Co-Operative Banks-SCBc (at the apex level).
BANKING SECTOR REFORMS
The government commenced a comprehensive reform process in the financial system
in 1992–93 after the recommendations of the CFS in 1991. In December 1997 the
government did set up another committee on the banking sector reform under the
chairmanship of M. Narasimham.

DRI
The differential rate of interest (DRI) is a lending programme launched by the
government in April 1972 which makes it obligatory upon all the public sector banks in
India to lend 1 per cent of the total lending of the preceding year to ‘the poorest
among the poor’ at an interest rate of 4 per cent per annum.

Priority Sector Lending

All Indian banks have to follow the compulsory target of priority sector lending (PSL).
The priority sector in India are at present the sectors—agriculture, small and medium
enterprises (SMEs), road and water transport, retail trade, small business, small
housing loans (not more than ₹10 lakhs), software industries, self help groups (SHGs),
agro-processing, small and marginal farmers, artisans, distressed urban poor and
indebted non-institutional debtors besides the SCs, STs and other weaker sections of
society. In 2007, the RBI included five minorities— Buddhists, Christians, Muslims,
Parsis and Sikhs under the PSL. In its new guidelines of March 2015, the RBI added
‘medium enterprise, sanitation and renewable energy’ under it.
NPAS AND STRESSED ASSETS
Non-Performing Assets (NPAs) are the bad loans of the banks. The criteria to identify such
34 35 36 assets have been changing over the time. In order to follow international best
practices and to ensure greater transparency, the RBI shifted to the current policy in 2004.
Under it, a loan is considered NPA if it has not been serviced for one term (i.e., 90 days).
This is known as ‘90 day’ overdue norm.

Recent Upsurge
During 2019–20, the performance of the banking sector, Public Sector Banks (PSBs) in
particular, continued to be subdued. As per the Economic Survey 2019-20, the Gross NPA
ratio of SCBs remained unchanged at 9.1 per cent between March and September 2019.
The size of the net NPAs has remained sticky at around 12.2 per cent for the SCBs. The
public sector banks have been hit with the NPAs crisis at the maximum which has hit the
general credit expansion in the economy. However, through the insolvency proceedings,
banks have been able to recover around ₹1.58 lakh crore by December 2019, but hair cuts
in the valuation of the assets have been also very high.

Resolution of the NPAs

At one hand, while the RBI tried to check the NPAs from rising by announcing new
guidelines for the banks, on the other hand, it has also taken several steps to ‘resolve’ the
problem. By February 2017 (since 2014–15), the RBI has implemented a number of
schemes to facilitate resolution of the NPAs problem of the banks
INSOLVENCY AND
BANKRUPTCY
The lenders (banks) and borrowers (private corporate sector) both have
been paying a high financial cost of country’s complex and time-taking
process of insolvency and bankruptcy process. The new Insolvency and
Bankruptcy Code, 2016 (IBC) was amended and enforced by the
Government in November 2017. There has been a significant amount of
progress in this regard—the entire mechanism for the Corporate Insolvency
Resolution Process (CIRP) has been put in place. A number of rules and
regulations have been notified to create the institutions and professionals
necessary for the process to work. A large number of cases have entered
the insolvency process.

SARFAESI Act, 2002

GoI finally cracked down on the wilful defaulters by passing the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002.
WILFUL DEFAULTER CAPITAL ADEQUACY RATIO
There are many people and entities who borrow money from The capital adequacy ratio (CAR) norm has been the last
lending institutions but fail to repay. However, not all of them provision to emerge in the area of regulating the banks in
are called wilful defaulters. As is embedded in the name, a wilful such a way that they can sustain the probable risks and
defaulter is one who does not repay a loan or liability, but apart uncertainties of lending. It was in 1988 that the central
from this there are other things that define a wilful defaulter. banking bodies of the developed economies agreed upon
such a provision, the CAR—also known as the Basel
However, a lending institution cannot term an entity or an Accord. The accord was agreed upon at Basel,
individual a wilful defaulter for a one-off case of default and Switzerland at a meeting of the Bank for International
needs to take into account the repayment track record. The Settlements (BIS). It was at this time that the Basel-I
default should be established to be intentional and the defaulter norms of the capital adequacy ratio were agreed upon—
should be informed about the same. The defaulter should also a requirement was imposed upon the banks to maintain
be given a chance to clarify his stand on the issue. Also, the a certain amount of free capital (i.e., ratio) to their assets
default amount needs to be at least ₹25 lakh to be included in (i.e., loans and investments by the banks) as a cushion
the category of wilful defaults. against probable losses in investments and loans.
CAPITAL ADEQUACY RATIO
In 1988, this ratio capital was decided to be 8 per cent. It means that if the total
investments and loans forwarded by a bank amounts to ₹100, the bank needs to
maintain a free capital of ₹8 at that particular time. The capital adequacy ratio is the
percentage of total capital to the total risk—weighted assets .

CAR, a measure of a bank’s capital, is expressed as a percentage of a bank’s risk

weighted credit exposures: CAR= Total of the Tier 1 & Tier 2 capitals ÷ Risk Weighted
Assets Also known as ‘Capital to Risk Weighted Assets Ratio (CRAR)’ this ratio is used to
protect depositors and promote the stability and efficiency of financial systems around
the world.

Two types of capital were measured as per the Basel II norms: Tier 1 capital, which can
absorb losses without a bank being required to cease trading, and Tier 2 capital, which
can absorb losses in the event of a winding-up and so provides a lesser degree of
protection to depositors. The new norms (Basel III) has devised a third category of
capital, i.e.,Tier 3 capital. The RBI introduced the capital-to-risk weighted assets ratio
(CRAR) system for the banks operating in India in 1992 in accordance with the
standards of the BIS—as part of the financial sector reforms. In the coming years the
Basel norms were extended to term-lending institutions, primary dealers and non-
banking financial companies (NBFCs), too. Meanwhile, the BIS came up with another set
of CAR norms, popularly known as Basel-II.
HIGH POWER MONEY
The central banks of all the countries are empowered to issue the currency.
The currency issued by the central bank is called ‘high power money’
because it is generally backed by supporting ‘reserves’ and its value is
guaranteed by the government and it is the source of all other forms of
money. The currency issued by the central bank is, in fact, is a liability of the
central bank and the government. In general, therefore, this liability must be
backed by an equal value of assets consisting mainly, gold and foreign
exchange reserves. In practice, however, most countries have adopted a
‘minimum reserve system’. Under the minimum reserve system the central
bank is required to keep a certain minimum ‘reserve of gold and foreign
securities and is empowered to issue currency to any extent. India adopted
this system in October 1956. The RBI was required to hold a reserve worth of
only ₹515 crore consisting of foreign securities worth ₹400 crore and gold
worth ₹115 crore. In 1957, however, the minimum reserves were further
reduced to only gold reserve of ₹115 crore and the rest in the form of rupee
securities, mainly due to the scarcity of foreign exchange to meet essential
import bill. A gold reserve of ₹115 crore against the currency of ₹17,00,000
crore in circulation today, makes only 0.7 per cent reserve which is of no
consequence. This makes the Indian currency system a ‘managed paper
currency system’.
In India, there are two sources of high power money supply:
1. RBI; and
2. Government of India
 Money
Minimum Reserve Reserve Money
Multiplier

The RBI is required to maintain a The gross amount of the following six At end March 2014, the money
reserve equivalent of ₹200 crores in segments of money at any point of multiplier (ratio of M to M ) was 5.2,
gold and foreign currency with itself, time is known as Reserve Money (RM) higher than end-March 2015, due to
of which ₹115 crores should be in for the economy or the government: cumulative 125 basis point reduction
gold. Against this reserve, the RBI is 1. RBI’s net credit to the Government; in CRR. During 2015–16, the money
empowered to issue currency to any 2. RBI’s net credit to the Banks; multiplier generally stayed high
extent. This is being followed since 3. RBI’s net credit to the commercial reflecting again, the CRR cuts. As on
1957 and is known as the Minimum banks; 31 December, 2018, the money
Reserve System (MRS). 4. net forex reserve with the RBI; multiplier was 6.0 compared with 5.5
5. government’s currency liabilities to on the corresponding date of the
the public; previous year (as per the RBI).
6. net non-monetary liabilities of the
RBI.
RM = 1 + 2 + 3 + 4 + 5 + 6
CREDIT RATING
To assess the credit worthiness (credit record, integrity, capability) of a prospective (would be) borrower to meet debt obligations is credit rating.
Today it is done in the cases of individuals, companies and even countries. There are some world-renowned agencies such as the Moody’s, S & P.
The concept was first introduced by John Moody in the USA (1909). Usually equity share is not rated here. Primarily, ratings are an investor service.
Credit rating was introduced in India is 1988 by the ICICI and UTI, jointly.

The major credit rating agencies of India are:

(i) CRISIL (Credit Rating Information of India Ltd.) was jointly promoted by ICICI and UTI with share capital coming from SBI, LIC, United India
Insurance Company Ltd. to rate debt instrument—debenture. In April 2005 its 51 per cent equity was acquired by the US credit rating agency S & P—
a McGraw Hill Group of Companies.
(ii) ICRA (Investment Information and Credit Rating Agency of India Ltd.) was set up in 1991 by IFCI, LIC, SBI and select banks as well as financial
institutions to rate debt instruments.
(iii) CARE (Credit Analyses and Research Ltd.) was set up in 1993 by IDBI, other financial institutions, nationalised banks and private sector finance
companies to rate all types of debt instruments.
(iv) ONICRA (Onida Individual Credit Rating Agency of India Ltd.) was set up by ONIDA finance (a private sector finance company) in 1995 to rate
credit-worthiness of noncorporate consumers and their debt instruments, i.e., credit cards, hire-purchase, housing finance, rental agreements and
bank finance.
(v) SMERA (Small and Medium Enterprises Rating Agency) was set up in September 2005, to rate the overall strength of small and medium
enterprises (SMEs)—the erstwhile SSIs. It is not a credit rating agency precisely, but its ratings are used for this purpose, too. A joint venture of SIDBI
(the largest share-holder with 22 per cent stake), SBI, ICICI Bank, Dun & Bradstreet (an international credit information company), five public sector
banks (PNB, BOB, BOI, Canara Bank, UBI with 28 per cent stake together) and CIBIL (Credit Information Bureau of India Ltd.).

A general credit rating service not linked to any debt issue is also availed by companies —already offered in India by rating agencies—CRISIL calls
such ratings as Credit Assessment. International rating agencies such as Moody’s, S & P also undertake sovereign ratings, i.e., of countries—highly
instrumental in external borrowings of the countries.
NIDHI
Nidhi in the Indian context means ‘treasure’. However, in the Indian
financial sector it refers to any mutual benefit society notified by the
Central/ Union Government as a Nidhi Company. They are created
mainly for cultivating the habit of thrift and savings amongst its
members. The companies doing Nidhi business, viz., borrowing from
members and lending to members only, are known under different
names such as Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit
Funds and Mutual Benefit Company.

CHIT FUND
Chit fund business is regulated under the Central Chit Funds Act, 1982
and the rules framed under this Act by the various state governments
for this purpose. The Central Government has not framed any rules of
operation for them. Thus, registration and regulation of chit funds are
carried out by state governments under the rules framed by them.
Functionally, chit funds are included in the definition of NBFCs by the
RBI under the sub-head miscellaneous non-banking company(MNBC).
But RBI has not laid out any separate regulatory framework for them.
SMALL & PAYMENT BANKS
By mid-July 2014, the RBI issued the draft guidelines for setting up small banks and
payment banks. The guidelines said that both are ‘niche’ or ‘differentiated’ banks with
the common objective of furthering financial inclusion. It is in pursuance of the
announcement made in the Union Budget 2014–15.

Small Banks
The purpose of the small banks will be to provide a whole suite of basic banking
products such as deposits and supply of credit, but in a limited area of operation. The
objective of the Small Banks 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 unorganised sector entities
through high technology low-cost operations.

Payments Banks
The objective of payments banks is to increase financial inclusion by providing small
savings accounts, payment/remittance services to migrant labour, low income
households, small businesses, other unorganised sector entities and other users by
enabling high volume-low value transactions in deposits and payments/remittance
services in a secured technology-driven environment.

By April 2020, a total of 6 Payment Banks were operating in the country.

GOLD INVESTMENT SCHEMES
Two new gold investment schemes were launched by the Government of India by November 2015—the
Sovereign Gold Bonds and Gold Monetisation Schemes. The schemes are aimed at twin objectives:
1. Reducing the demand for physical gold; and
2. Shifting a part of the gold imported every year for investment purposes into financial savings.

Sovereign Gold Bonds

These are issued by RBI on behalf of the GoI in rupees and denominated in grams of gold and restricted for
sale to the resident Indian entities only, both in demat and paper form. The minimum and maximum
investment limits are two grams and 500 grams of gold per person per fiscal year, respectively. The rate of
interest for the year 2015–16 was 2.75 per cent per annum, payable on a half yearly basis. The tenor of the
Bond is for a period of 8 years with exit option from 5th year onwards.

Gold Monetisation Scheme

In this scheme, BIS (Bureau of Indian Standards) certified CPTCs (Collection, Purity Testing Centres) collect the
gold from the customer on behalf of the banks. The minimum quantity of gold (bullion or jewellery) which can
be deposited is 30 grams and there is no limit for maximum deposit. Gold Saving Account can be opened with
any of the designated bank and denomination in grams of gold for short-term period of 1–3 years, a medium-
term period of 5–7 years and a longterm period of 12–15 years. The CPTCs transfer the gold to the refiners.
The banks will have a tripartite/bipartite legal agreement with refiners and CPTCs. For the year 2020–21
interest rate is fixed at 2.25 per cent and 2.5 per cent for the mediumand long-term, respectively
MUDRA BANK
As per the Government of India, large industries provide employment to
only 1.25 crore people in the country while the micro units employ around
12 crore people. There is a need to focus on these 5.75 crore self-
employed people (owners of the micro units) who use funds of ₹11 lakh
crore, with an average per unit debt of merely ₹17,000. Capital is the key
to the small entrepreneurs. These entrepreneurs depend heavily on the
local money lenders for their fund requirements. Looking at the
importance of these enterprises, the Government of India launched (April
2015) the Micro Units Development and Refinance Agency Bank (MUDRA
Bank) with the aim of funding these unfunded non-corporate enterprises.
This was launched as the PMMY (Prime Minister Mudra Yojana).

As per the Government, by March 2020, a total of 22.53 crore loans were
sanctioned since launch of the scheme—total loans disbursed being to
the tune of around ₹11.51 lakh crores. Around 70 per cent of the loan
beneficiaries are women under the scheme. Meanwhile, the rise in the
non-performing assets in case of the Mudra loans have been a matter of
concern for the Government and the RBI alike. As per the Ministry of
Finance, between April-December 2019, the net NPAs under the Mudra
loans increased to 2.88 per cent (against 2.52 per cent of the same period
in 2018).
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