1.

BANK AND BANKING LICENCES

1.1 MEANING AND DEFINATION OF BANKING LICENSE Definitions.

"License" shall mean the terms and conditions for use, reproduction, and distribution as defined by Sections 1 through 9 of this document. "Licensor" shall mean the copyright owner or entity authorized by the copyright owner that is granting the License. A banking license is a prerequisite for a financial institution that wants to provide banking services. Under most jurisdictions the fundamental banking activities, such as taking deposits from the general public are exclusive to holders of a banking license. A non-banking financial company is an institution that provides financial services without meeting the legal definition of a bank, such as holding a banking license Licenses are typically issued by the banking regulatory body in which the bank is established. There is a relatively long and complicated procedure that goes into the application. This procedure will also depend on the type of bank license that you wish to apply for. Licensing is generally broken down into different categories, while each category has a different specialization, and a different time frame involved in the banking license application process. MEANING OF BANK, BANKING AND BANKING COMPANY LICENSE The Reserve Bank of India (RBI) has issued final guidelines for new bank licences. It is time to reflect on what the new banks should achieve, including expectations on financial inclusion. While inclusion, articulated as the physical presence of banks in unbanked locations, is important, it glosses over exclusion in urban areas. In general, policy equates inclusion with poverty, rural areas, agriculture and small-ticket credit. As RBI examines the business plans and issues licences to new applicants, it should go beyond these generalized targets to look at some nuanced parameters. Banks perform multiple roles. The basic functions of the banks and their impact on inclusion should inform the choice of the new banks. Each of them should be expected to bring at least

one game-changing idea on inclusion to the tablean idea that addresses the issue profitably and sustainably. While examining the traditional approach, we call for a new thinking in inclusive banking. A banks basic function is to provide intermediation between the savers and borrowers, helping resources to move across time, regions and sectors. Banks aggregate savings in small ticket sizes and open an avenue for big-ticket investments in the infrastructural, industrial and manufacturing sector, in addition to providing access to small borrowers. The equity, debt and derivative markets open possibilities for disintermediation. However, the Indian banks continue to derive 85-90% of their income from intermediation. So, the primary role of the banks is intermediation.

1.2 LICENSE OF BANKING COMPANIES

Save as hereinafter provided, no company shall carry on banking business in India unless it holds a license issued in that behalf by the Reserve Bank and any such license may be issued subject to such conditions as the Reserve Bank may think fit to impose. Every banking company in existence on the commencement of this Act, before the expiry of six months from such commencement, and every other company before commencing banking business 11 [in India], shall apply in writing to the Reserve Bank for a license under this section: PROVIDED that in the case of a banking company in existence on the commencement of this Act, nothing in sub-section shall be deemed to prohibit the company from carrying on banking business until it is granted a license in pursuance of 55[this section] or is by notice in writing informed by the Reserve Bank that a license cannot be granted to it: PROVIDED FURTHER that the Reserve Bank shall not give a notice as aforesaid to be a banking company in existence on the commencement of this Act before the expiry of the three years referred to in sub-section of section 11 or of such further period as the Reserve Bank may under that sub-section think fit to allow. Before granting any license under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that 56 the following conditions are fulfilled, namely:-

(a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue; (b) that the affairs of the company are not being, or are not likely to be, conducted in a manner detrimental to the interests of its present or future depositors; (c) that the general character of the proposed management of the company will not be prejudicial to the public interest of its present or future depositors; (d) that the company has adequate capital structure and earning prospects; (e) that the public interest will be served by the grant of a license to the company to carry on banking business in India; (f) that having regard to the banking facilities available in the proposed principal area of operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors the grant of the license would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth; (g) any other condition, the fulfillment of which would, in the opinion of the Reserve Bank, be necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors. Before granting any license under this section to a company incorporated outside India, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the conditions specified in sub-section (3) are fulfilled and that the carrying on of banking business by such company in India will be in the public interest and that the government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India and that the company complies with all the provisions of this Act applicable to banking companies incorporated outside India. The Reserve Bank may cancel a license granted to a banking company under this section: (i) if the company ceases to carry on banking business in India; or (ii) if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1); or (iii) if at any time, any of the conditions referred to in sub-section (3) 15 [and subsection (3A)] is not fulfilled:

PROVIDED that before canceling a license under clause (ii) or clause (iii) of this sub-section on the ground that the banking company has failed to comply with or has failed to fulfill any of the conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interests of the companys depositors or the public, shall grant to the company on such terms as it may specify, and opportunity of taking the necessary steps for complying with or fulfilling such condition Any banking company aggrieved by the decision of the Reserve Bank canceling a license under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government. The decision of the Central Government where an appeal has been preferred to it under subsection (5) or of the Reserve Bank where no such appeal has been preferred shall be final.

1.3 MEANING AND DEFINATION OF BANK.

MEANING The term bank is derived from the French word "BANCO" which means the money charge bench or desk on which European money lenders used to exhibited. the coins of different country for the purpose of lending or exchange. DICTIONERY MEANING OF BANKING. Bank is institution for lending , borrowing or safeguarding money DEFINATION: Section 5(c) banking regulation act 1949 define banking as "ACCEPTING FOR THE PURPOSE OF LENDING OE INVESTING OF DEPOSIT OF MONEY FROM THE PUBLIC, REPAYMENT ON DEMAND OR OTHERWISE AND WITHDRAWABLE BY CHEQUE , DREFT OR ORDER.

2. BANKING REGULATIONS ACT 1949

The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into force wet 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 wet 01.03.66. Summary of some important sections is provided hereunder. The section no. is given at the end of each item. For details, kindly refer the bare Act. Banking means accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdraw able by cheque, drafts order or otherwise (5 (i) (b)). Banking company means any company which transacts the business of banking (5(i)(c) Transact banking business in India (5 (i) (e). Demand liabilities are the liabilities which must be met on demand and time liabilities means liabilities which are not demand liabilities (5(i)(f) Secured loan or advances means a loan or advance made on the security of asset the market value of which is not at any time less than the amount of such loan or advances and unsecured loan or advances means a loan or advance not secured (5(i)(h). Defines business a banking company may be engaged in like borrowing, lockers, letter of credit, traveler cheques, mortgages etc (6(1). States that no company shall engage in any form of business other than those referred in Section 6(1) (6(2). For banking companies carrying on banking business in India to use at least one word bank, banking, banking company in its name (7). Restrictions on business of certain kinds such as trading of goods etc. (8) Prohibits banks from holding any immovable property howsoever acquired except as acquired for its own use for a period exceeding 7 years from acquisition of the property. RBI may extend this period by five years (9) Prohibitions on employments like Chairman, Directors etc (10) Paid up capital, reserves and rules relating to these (11 & 12)

Banks not to pay any commission, brokerage, discount etc. more than 2.5% of paid up value of one share (13)

Prohibits a banking company from creating a charge upon any unpaid capital of the company. (14) Section 14(A) prohibits a banking company from creating a floating charge on the undertaking or any property of the company without the RBI permission.

Prohibits payment of dividend by any bank until all of its capitalized expenses have been completely written off (15)

To create reserve fund and 20% of the profits should be transferred to this fund before any dividend is declared (17 (1))

Cash reserve - Non-scheduled banks to maintain 3% of the demand and time liabilities by way of cash reserves with itself or by way of balance in a current account with RBI (18)

Permits banks to form subsidiary company for certain purposes (19) No banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owners of any amount exceeding 30% of its own paid up share capital + reserves or 30% of the paid up share capital of that company whichever is less. (19(2).

Restrictions on banks to grant loan to person interested in management of the bank (20)

Power to Reserve Bank to issue directive to banks to determine policy for advances (21)

Every bank to maintain a percentage of its demand and time liabilities by way of cash, gold, unencumbered securities 25%-40% as on last Friday of 2nd preceding fortnight (24).

Return of unclaimed deposits (10 years and above) (26) Every bank has to publish its balance sheet as on March 31st (29). Balance sheet is to be got audited from qualified auditors (30 (i)) Publish balance sheet and auditor's report within 3 months from the end of period to which they refer. RBI may extend the period by further three month (31)

Prevents banks from producing any confidential information to any authority under Indy Disputes Act. (34A)

RBI authorized to undertake inspection of banks (35). Amendment carried in the Act during 1983 empowers Central Govt to frame rules specifying the period for which a bank shall preserve its books (45-y), nomination facilities (45ZA to ZF) and return a paid instrument to a customer by keeping a true copy (45Z).

Certain returns are also required to be sent to RBI by banks such as monthly return of liquid assets and liabilities (24-3), quarterly return of assets and liabilities in India (25), return of unclaimed deposits i.e. 10 years and above (26) and monthly return of assets and liabilities (27-1).

3.Bank licences for companies : RBI

3.1 BANKING GUIDELINE

Following are the highlights of the Reserve Bank of India's guidelines for licensing of new banks in the private sector: Corporates, PSUs and NBFCs can set up a bank. No bar on entities in sectors like brokerage, realty Minimum paid-up equity capital to be Rs. 500 crore. New banks to get listed within 3 years of business. Foreign shareholding limited to per cent for first 5 years. RBI to seek feedback on applicants' background from other regulators, Income Tax, CBI and ED. Licence seeker should have 10 years of successful financial track record, sound credentials and integrity. To comply with priority sector lending targets; open at least 25 per cent branches in unbanked rural areas. Boards to have majority of independent directors. Business plan should be realistic, viable and address financial inclusion. Applications will be screened by RBI and referred to a high level advisory committee To ensure transparency, names of applicants will be placed on RBI's website. Last date for applying for the licence is July 1.

Over the last two decades, RBI licensed 12 banks in private sector. New banks were proposed in Budget speech for 2010-11

RBI floated first discussion paper on August 2010.

3.2 BANK REGULATION

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporation with whom they conduct business, among other things. Given the interconnectedness of the banking industry and the reliance that the national (and global) economy hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions. Supporters of such regulation often hinge their arguments on the "too big to fail" notion. This holds that many financial institutions (particularly investment banks with a commercial arm) hold too much control over the economy to fail without enormous consequences. This is the premise for

government bailouts, in which government financial assistance is provided to banks or other financial institutions who appear to be on the brink of collapse. The belief is that without this aid, the crippled banks would not only become bankrupt, but would create rippling effects throughout the economy leading to systemic failure. Objectives of bank regulation. The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are: Prudentialto reduce the level of risk to which bank creditors are exposed (i.e. to protect depositors) Systemic risk reductionto reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures. Avoid misuse of banksto reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds of crime. To protect banking confidentiality.

 Credit allocationto direct credit to favored sectors. It may also include rules about treating customers fairly and having corporate social responsibility (CSR). Reserve requirement. The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. This type of regulation has lost the role it once had, as the emphasis has moved toward capital adequacy, and in many countries there is no minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than safety. An example of a country with a contemporary minimum reserve ratio is Hong Kong, where banks are required to maintain 25% of their liabilities that are due on demand or within 1 month as qualifying liquefiable assets. Reserve requirements have also been used in the past to control the stock of banknotes and/or bank deposits. Required reserves have at times been gold coin, central bank banknotes or deposits, and foreign currency. Corporate governance. Corporate governance requirements are intended to encourage the bank to be well managed, and is an indirect way of achieving other objectives. As many banks are relatively large, with many divisions, it is important for management to maintain a close watch on all operations. Investors and clients will often hold higher management accountable for missteps, as these individuals are expected to be aware of all activities of the institution. Some of these requirements may include: To be a body corporate (i.e. not an individual, a partnership, trust or other unincorporated entity) To be incorporated locally, and/or to be incorporated under as a particular type of body corporate, rather than being incorporated in a foreign jurisdiction. To have a minimum number of directors. To have an organizational structure that includes various offices and officers, e.g. corporate secretary, treasurer/CFO, auditor, Asset Liability Management Committee, Privacy Officer, Compliance Officer etc. Also the officers for those offices may need to be approved persons, or from an approved class of persons.

 To have a constitution or articles of association that is approved, or contains or does not contain particular clauses, e.g. clauses that enable directors to act other than in the best interests of the company (e.g. in the interests of a parent company) may not be allowed.

Standards ISO 4217 - Standard for unique 3 digit currency code ISO 6166 - Standard for unique identifier for securities ISIN ISO 8109 - Standard for format and unique identifiers for Eurobonds ISO 9362 - Standard format of Business Identifier Codes to identify Banks also known as BIC ISO 10962 - Standard for financial instrument classification codes ISO/IEC 15944 - Standard that provides a consolidated vocabulary of e-Business concepts ISO 19092-1 - Standard for biometric security in financial applications

4.Urban Banks Department

The Urban Banks Department of the Reserve Bank of India is vested with the responsibility of regulating and supervising primary (urban) cooperative banks, which are popularly known as Urban Cooperative Banks (UCBs). While overseeing the activities of 1926 primary (urban) cooperative banks, the Urban Banks Department performs three main functions : regulatory, supervisory and developmental. The Department performs these functions through its 17 regional offices. I. Regulatory Functions (i) Licensing of New Primary (Urban) Cooperative Banks For commencing banking business, a primary (urban) cooperative bank, as in the case of commercial bank, is required to obtain a licence from the Reserve Bank of India, under the provisions of Section 22 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies). (ii) Licensing of Existing Primary (Urban) Co-operative Banks In terms of sub-section (2) of Section 22 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), the primary (urban) cooperative banks existing in the country as on March 1, 1966, (when some banking laws were applied to UCBs), were required to apply to the Reserve Bank of India. They were given three months to obtain a licence to carry on banking business. Similarly, a primary credit society which becomes a primary (urban) cooperative bank by virtue of its share capital and reserves reaching Rs. one lakh (Rs.1,00,000) and above was to apply to the Reserve Bank of India for a licence within three months from the date on which its share capital and reserves reach Rs. one lakh. The existing unlicensed primary (urban) cooperative banks can carry on banking business till they are refused a licence by the Reserve Bank of India. (iii) Branch Licensing Under the provisions of Section 23 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), primary (urban) cooperative banks are required to obtain permission from the Reserve Bank of India for opening branches.

(iv) Statutory Provisions The regulatory functions of Urban Banks Department relate to monitoring compliance with the provisions of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies) by urban cooperative banks. These provisions include : a. Minimum Share Capital Under the provisions of Section 11 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies), no primary (urban) cooperative bank can commence or carry on banking business if the real or exchangeable value of its paid-up capital and reserves is less than Rs.one lakh. b. Maintenance of CRR and SLR As in the case of commercial banks, primary (urban) cooperative banks are also required to maintain certain amount of cash reserve and liquid assets. The scheduled primary (urban) cooperative banks are required to maintain with the Reserve Bank of India an average daily balance, the amount of which should not be less than 5 per cent of their net demand and time liabilities in India in terms of Section 42 of the Reserve Bank of India Act, 1934. Nonscheduled (urban) cooperative banks, under the provision of Section 18 of Banking Regulation Act, 1949 (As Applicable to Cooperative Societies) should maintain a sum equivalent to at least 3 per cent of their total demand and time liabilities in India on day-today basis. For scheduled cooperative banks, CRR is required to be maintained in accounts with Reserve Bank of India, whereas for non-scheduled cooperative banks, it can be maintained by way of either cash with themselves or in the form of balances in a current account with the Reserve Bank of India or the state co-operative bank of the state concerned or the central cooperative bank of the district concerned or by way of net balances in current accounts with public sector banks. In addition to the cash reserve, every primary (urban) cooperative bank (scheduled/non-scheduled) is required to maintain liquid assets in the form of cash, gold or unencumbered approved securities which should not be less than 25 per cent of the total of its demand and time liabilities in accordance with the provisions of Section 24 of the Banking Regulation Act, 1949 (As Applicable to Cooperative Societies). Out of the prescribed SLR, the UCBs have been advised to maintain a certain amount in the form of SLR Securities as under :

Minimum SLR holding in Government Sr.No. Category of bank and other approved securities as

percentage of Net Demand and Time Liabilities (NDTL)

1.

Scheduled banks Non-Scheduled banks

25%

a) with NDTL of Rs.25 2. crore & above 15%

b) with NDTL of less 10% than Rs.25 crore II. Supervisory Functions To ensure that the UCBs conduct their affairs in the interests of the depositors and also comply with the regulatory framework prescribed by the Reserve Bank of India, the department undertakes on site inspection of these banks with frequency ranging from one to two years depending upon the financial condition / status of banks. The thrust of supervision is to ensure that banks' affairs are not conducted in a manner detrimental to the depositors' interest and also to assess the solvency of the bank vis- -vis its liabilities, besides examining the banks' compliance with the existing regulatory framework. The department also undertakes off-site surveillance of scheduled banks and non-scheduled banks with a deposit base of Rs 100 crore and above based on a set of quarterly and annual returns. III. Developmental Functions With a view to extending institutional credit support to tiny and cottage units, the Reserve Bank of India grants refinance facilities to urban cooperative banks under the provisions of Section 17 of the Reserve Bank of India Act, 1934. The refinance is given at the Bank Rate. Training is imparted to the middle and top management of urban cooperative banks through College of Agricultural Banking, Pune. IV. Sections / Divisions of Urban Banks Department 1. Administration This Section handles staff matters of the department.

2. New Bank Licensing and Branch Licensing This section frames policies for issue of bank licence /allots centres for opening of branches and authorizes regional offices to take action accordingly. It also deals with conversion of cooperative credit societies into urban banks. 3. Returns Returns section at each of the regional offices is responsible for monitoring receipt of various statutory returns under the provisions of Banking Regulation Act, 1949, (AACS) and Sec 42 of Reserve Bank of India Act 1934 in case of scheduled UCBs. They also verify compliance with the provisions of the Acts, ibid, and take suitable action against non-compliant UCBs. 4. Banks Supervision This division arranges inspection of urban cooperative banks through regional offices and closely monitors the action taken by the UCBs to rectify the irregularities / deficiencies pointed out in inspection reports. The division also associates itself with the RCS of respective states in rehabilitation of financially weak UCBs. 5. Banking Policy This section frames policies on prudential norms, investment policies, monitoring priority sector targets, refinancing, issue of directives on interest rates, CRR/SLR, etc. Policies relating to Para banking activities such as merchant banking, hire purchase, leasing, insurance business, etc. are also formulated by this division. Besides, the section also attends to compliance with the directions of Local Board / Central Board / BFS, furnishes requisite material for Bank's publications such as Annual Report, Report on Trend and Progress of Banking in India, Currency and Finance, etc. Further, the section interprets the provisions of Banking Regulation Act 1949 (AACS), initiates amendments, coordinates with the Government, corresponds with various State Governments on matters pertaining to amendments of State Cooperative Societies Acts, coordinates with DICGC on matters pertaining to banks under liquidation, maintains and updates the list of urban cooperative banks, monitors cooperative credit societies having paid up capital above Rs one lakh, watches compliance to Sec 9, 29 & 31 of Banking Regulation Act, attends to cooperative banks going out of the purview of Banking Regulation Act etc.

5. DIFFERENCE BETWEEN PUBLIC AND PRIVATE SECTOR BANKS

5.1 INTRODUCTION:

The economic reforms in India started in early nineties, but their outcome is visible now. Major changes took place in the functioning of Banks in India only after liberalization, globalization and privatization. It has become very mandatory to study and to make a comparative analysis of services of Public sector Banks and Private Sector banks. Increased competition, new information technologies and thereby declining processing costs, the erosion of product and geographic boundaries, and less restrictive governmental regulations have all played a major role for Public Sector Banks in India to forcefully compete with Private and Foreign Banks. this paper an attempt to analyze how efficiently Public and Private sector banks have been managing NPA. The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favorably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. Banking in India was defined under Section 5(A) as "any company which transacts banking, business" and the purpose of banking business defined under Section 5(B),"accepting deposits of money from public for the purpose of lending or investing, repayable on demand through cheque/draft or otherwise". In the process of doing the above-mentioned primary functions, they are also permitted to do other types of business referred to as Utility Services for their customers (Banking Regulation Act, 1949).

What is the difference between a public bank and a private bank? Most of the time, the biggest difference between public and private banks is that public banks typically have government ownership and private ones are businesses with strict profits in mind. Additionally, many public banks are poorly operated in comparison to their private counterparts.

How private are public banks?

5.2 Public vs. Private Though some lament the fact that public ownership stalls innovation and adversely affects customer service, Indias record relative to countries that were badly affected by tendencies that precipitated the 2008 financial crisis showed that public ownership has many other benefits. Public ownership subordinates the profit principle to other development goals, influences the behaviour of bank managers trained as public servants not to succumb to the lure of quick profit, and sets up strong forces within public banking that resist a return to corporate dominance. The result is a more stable and inclusive banking sector. Creeping privatization through new entry can alter the faade, many argue, but the foundations remain those put in place by nationalization. The difficulty with this argument is that it ignores a development that has received far less attention than it deserves, which is the dilution of public ownership in the nationalized and state-owned banking sector. Besides private entry, an important component of the transformation of banking engineered by liberalization was a restructuring of public sector bank ownership. Reasons given to justify that move were varied. One argument was that private equity ownership would introduce new monitors into the system, and the signals sent by share prices influenced by shareholder preferences would help improve corporate governance in banking. Another was that dilution of a part of equity, subject to public ownership remaining at 51 per cent or more, would help mobiliser the resources needed to recapitalize banks and meet the conditions set by prudential rules such as those implicit in the capital adequacy ratios specified under Basel norms. This meant that it was not just weak public sector banks that were made candidates for equity dilution. Early in the liberalization era, in December 1993, the State Bank of India, with paid up capital of Rs. 200 crore chose to go in for a public issue of shares worth Rs. 274 crore at par, but sold at a premium of Rs. 90 per share. In the event after the issue the shareholding of the Reserve Bank of India and the Government of India (together) came down to 66.3 per cent, with the remaining 43.7 per cent being held by other entities. That was only the beginning. As the accompanying chart shows, out of 26 public sector banks (including the 19 nationalized banks, the State bank group and IDBI Bank), as many as half that number had no private shareholding even as late as 2002, and only 2 had private shareholding in the maximum possible 40-49 per cent range. But in the decade that followed dilution has been

rapid, so much so that as many as 14 banks had private shareholding in the 40-49 per cent range by end-March 2012. Another 10 fell in the 20-40 per cent private shareholding range. Private holdings include foreign ownership of equity in 24 out of the 26, with the extent of such ownership varying from 0.1 per cent (State Bank of Mysore) to 17.4 per cent (Punjab National Bank) as at end-March 2012. As a result, public banks increasingly accommodate the interests of their private shareholders. Even chiefs of the venerable State Bank of India have uncharacteristically protested against the RBIs call for an end to risky teaser loans for housing, or against the central bank imposing (a much lowered) cash-reserve ratio on banks as a monetary policy instrument. Banks must be allowed to pursue profit at the expense of all else is the view they seem to hold. This suggests that in terms of equity ownership and business behaviour, Indias public banking system is only a short step away from coming under private control, though that would require the revision of the principle mandating at least 51 per cent government ownership of equity in public sector banks. If such a change comes about it would have a far greater transformative effect on Indian banking than would the entry of new private banks at the margin. So while the response to and after effects of the third call for bank licences from the private sector is a matter for concern, the real danger may be the creeping trend towards denationalization which would completely erode the many benefits that public banking delivered.

Scheduled Banks in India (Public Sector) Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India

Corporation Bank Dena Bank IDBI Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sindh Bank Punjab National Bank State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of India State Bank of Mysore State Bank of Patiala State Bank of Travancore Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank

Scheduled Banks in India (Private Sector) Abhyudaya Bank Axis Bank Ltd Bank of Punjab Ltd Bank of Rajasthan Catholic Syrian Bank Centurion Bank Ltd

City Union Bank Development Credit Bank Dhanlaxmi Bank Federal Bank Ltd HDFC Bank Ltd ICICI Banking Corporation Bank Ltd IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Nainital Bank, estb. 1954 Karur Vysya Bank Karnataka Bank Kotak Mahindra Bank Lakshmi Vilas Bank South Indian Bank Ltd Tamilnad Mercantile Bank Limited Yes Bank The Ratnakar Bank Ltd

5.3 Private-sector banks in India

All those banks where greater parts of stake or equity are held by the private shareholders and not by government are called "private-sector banks". These are the major players in the banking sector as well as in expansion of the business activities India. The present private-sector banks equipped with all kinds of contemporary innovations, monetary tools and techniques to handle the complexities are a result of the evolutionary process over two centuries. They have a highly developed organizational structure and are professionally managed. Thus they have grown faster and stronger since past few years.

History and evolution Private-sector banks have been functioning in India since the very beginning of the banking system. Initially, during 1921, the private banks like bank of Bengal, bank of Bombay and bank were in service, which all together formed Imperial Bank of India. Reserve Bank of India(RBI) came in picture in 1935 and became the centre of every other bank taking away all the responsibilities and functions of Imperial bank. Between 1969 and 1980 there was rapid increase in the number of branches of the private banks. In April 1980, they accounted for nearly 17.5 percent of bank branches in India. In 1980, after 6 more banks were nationalized, about 10 percent of the bank branches were those of private-sector banks. The share of the private bank branches stayed nearly same between 1980 and 2000. Then from the early 1990s, RBI's liberalization policy came in picture and with this the government gave licences to a few private banks, which came to be known as new privatesector banks. There are two categories of the private-sector banks: "old" and "new". The old private-sector banks have been operating since a long time and may be referred to those banks, which are in operation from before 1991 and all those banks that have commenced their business after 1991 are called as new private-sector banks. Housing Development Finance Corporation Limited was the first private bank in India to receive license from RBI as a part of the RBI's liberalization policy of the banking sector, to set up a bank in the private-sector banks in India.

Old private-sector banks The banks, which were not nationalized at the time of bank nationalization that took place during 1969 and 1980 are known to be the old private-sector banks. These were not nationalized, because of their small size and regional focus. Most of the old private-sector banks are closely held by certain communities their operations are mostly restricted to the areas in and around their place of origin. Their Board of directors mainly consist of locally prominent personalities from trade and business circles. One of the positive points of these banks is that, they lean heavily on service and technology and as such, they are likely to attract more business in days to come with the restructuring of the industry round the corner.

New private-sector banks The banks, which came in operation after 1991, with the introduction of economic reforms and financial sector reforms are called "new private-sector banks". Banking regulation act was then amended in 1993, which permitted the entry of new private-sector banks in the Indian banking s sector. However, there were certain criteria set for the establishment of the new private-sector banks, some of those criteria being: The bank should have a minimum net worth of Rs. 200 crores. The promoters holding should be a minimum of 25% of the paid-up capital. Within 3 years of the starting of the operations, the bank should offer shares to publican their net worth must increased to 300 crores.

5.4 PUBLIC SECTOR BANK

Public Sector Banks are as good if not better when compared to Private Sector banks like ICICI Bank, which is figuring in most of the frauds committed by tricksters on public. Most of the private sector banks employ people with no background in Banking or commerce and the level of knowledge at the counter is deplorable. Private sector banks also do not adhere to government guidelines issued to them and ignore many safety aspects which are needed to protect the depositors 'interests. They cater to only the rich high net worth depositors and unscrupulous traders and industry who have support of the political class. The private banks, especially the new generation banks have been found to be playing a major part in helping the tax evaders by opening accounts without adhering to KYC norms, again with the confidence they enjoys with the political class, especially the ruling political class.

6. LICENSE ISSUE TO PRIVATE BANKS.

The draft guidelines on Licensing of New Banks in the Private Sector were framed taking into account the experience gained from the functioning of the banks licensed under the guidelines of 1993 and 2001 and the feedback and suggestions received in response to the Discussion Paper. The draft guidelines were placed on the RBIs website on August 29, 2011 for comments. The comments received on the draft guidelines have been examined. The guidelines have been finalized taking into account the important amendments in December 2012 to the Banking Regulation Act, 1949, the suggestions/comments received on the draft guidelines and in consultation with the Government of India.

6.1 RBI to cancel licences of 26 loss-making cooperative banks

The Reserve Bank of India will shortly cancel licences of 26 loss-making cooperative banks, including 16 in Uttar Pradesh, Deputy Governor K C Chakra arty today said. A capital of Rs 2,000 crore is required for running 16 cooperatives banks in the state and RBI may not cancel the licenses of these banks if the state government supports them, Chakra arty told reporters on the sidelines of an event here.

Such cooperatives banks are not required anymore if 90 per cent of depositors' money has been lost, he added. On the new banking licences, he said RBI will consider giving permits to those who submit applications by June. On usage of fifty paisa coin, Chakra arty said that these coins are still in circulation. RBI may consider stopping its circulation if substantial complaints are received. He also said that plastic notes will be launched in four metro cities as a pilot project. Based on its success, it will be expanded to other parts of the country. To another query, Chakra arty said that the government provides subsidy to the tune of Rs 50,000 crore on cooking gas and to the tune of Rs 5,00,000 crore under other heads.

7. COMPARATIVE ANALYSIS WITH PRIVATE BANKS AND PUBLIC BANKS

7.1 COMPARATIVE WITH ICICI BANK

ICICI Bank receives license to set up a wealth management branch in the Dubai International Financial Centre (DIFC)

ICICI Bank Limited (ICICI Bank), Indias second largest Bank, has enhanced its presence in the region by setting up a wealth management branch in the Dubai International Financial Centre (DIFC). The license to open the branch was granted by the Dubai Financial Services Authority (DFSA). This is in addition to the existing Representative office in the UAE. The services are available to high net worth clients with liquid assets of US$ 1 million or more. Mr. K V Klamath Managing Director and CEO, ICICI Bank said, "The UAE itself has more than 53,000 millionaires. We are extremely pleased to set up a branch at the DIFC as it will provide the necessary platform to expand the International Private Banking operations in the region. Dr Omar Bin Suleiman, Director General, DIFC Authority, welcoming ICICI Bank Limited said, India and Indians are a very important market to the DIFC, we are looking forward to welcoming the key players from this market to engage in wholesale financial services in the

DIFC. Being based at the DIFC gives them the ideal platform for their global expansion and to reach out into a region with immense liquidity. 1 ICICI Bank Limited ICICI Bank Towers Bandra-Kurla Complex Bandra (E) Mumbai400051.

About ICICI Bank: ICICI Bank (NYSE:IBN) is India's second largest bank and largest private sector bank with over 50 years of financial experience and with assets of USD 43 billion as on September 30, 2005. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank is a leading player in the retail banking market and has over 14 million retail customer accounts. The Bank has a network of 600 branches and extension counters and 2,060 ATMs. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross-border needs of clients and leverage on its domestic banking strengths to offer products internationally. The Bank has made its presence felt across the globe with subsidiaries in the United Kingdom, Canada and Russia, off shore banking units in Singapore, Bahrain and Mumbai, a branch in Hongkong and representative offices in the United States, China, United Arab Emirates, Bangladesh and South Africa. The Bank has over 300,000 NRI clients worldwide. About the DIFC: The Dubai International Financial Centre (DIFC) is an onshore hub for global finance. It bridges the time gap between the financial centres of Hong Kong and London and services a region with the largest untapped emerging market for financial services. In just over one year, more than a hundred top international institutions have joined the DIFC as members. They operate in an open environment complemented with world-class regulations and standards. The DIFC offers its member institutions incentives such as 100 per cent foreign ownership, zero tax on income and profits and no restrictions on foreign exchange. In addition their business benefits from modern infrastructure, operational support and business continuity facilities of uncompromisingly high standards. The DIFC is made up of the following core bodies: 1. The DIFC Authority (DIFCA) - Responsible for the Companies and Security Registries and attracting financial as well as non-financial institutions to set up in the DIFC

2. The Dubai Financial Services Authority (DFSA) - An independent, unitary regulatory authority, responsible for the regulation of all DIFC operations. Its principle-based primary legislation is modeled on that used in London and New York, and its regulatory regime operates to standards that meet or exceed those in major financial centres 2 3 ICICI Bank Limited ICICI Bank Towers Bandra-Kurla Complex Bandra (E) Mumbai400051.

3. The Dubai International Financial Exchange (DIFX) A liquid and transparent electronic market trading securities, bonds and derivatives, launched in September 2005, the DIFX eases access to regional and international investment opportunities and funds 4. The DIFC Courts - An independent court system set up to uphold the provisions of DIFC laws and regulations, the courts provide comprehensive legal redress in civil and commercial matters within the DIFC. The laws, enacted by His Highness Sheikh Actium bin Rashid Al Actium, UAE Vice President and Prime Minister, and Ruler of Dubai, provide for a new court system designed especially for the DIFC and the sophisticated transactions that will be conducted within it. The law establishing the Judicial Authority at the DIFC creates and sets out the jurisdiction of the court and provides for a dispute resolution services, including arbitration and mediation, thus allowing for the independent administration of justice in the DIFC; and The DIFC Courts Law sets out the jurisdiction, powers, procedures, functions and administration of the court.

7.3 UNION BANK OF INDIA

Company Profile Union Bank of India is one of largest state-owned banks in India and is listed on the Forbes 2000. The Bank's business segments include Treasury Operations, Retail Banking Operations, Corporate Wholesale Banking and Other Banking Operations. They offer various types of deposits such as savings bank deposits, current deposits, current and savings account (CASA) deposits, and term deposits. The Bank's advances portfolio includes large corporate advances; micro, small and medium enterprises advances; agriculture advances, and retail advances. Their retail advances include home loan, vehicle loan, education and other retail loans. Their investments portfolio includes investments made in government securities, state development loans and other approved securities. Union Bank of India was originally incorporated on November 11, 1919 in Mumbai with the name The Union Bank of India Ltd. In the year 1921, the Bank shifted their registered office to Mumbai Sam char Margi, Fort, Mumbai, which was inaugurated by Mahatma Gandhi. The Bank entered a growth phase in the 1960s and they aligned their activities in line with the national priorities. In July 19, 1969,

the Bank was nationalized and the name of the Bank was changed to 'Union Bank of India'. Pursuant to nationalization, the Bank sponsored four regional rural banks in 1972. In the year 1975, Belgaum Bank Ltd, a private sector bank was amalgamated with the Bank. In the year 2001, Staff Training College, Bangalore, the Bank's staff college acquired ISO 9001 certification. In the year 2002, the Bank undertook their initial public offer of equity shares and the equity shares were subsequently listed on the BSE and NSE. They introduced a new scheme called 'Union Express Remittance scheme' for providing service to NRI in West Asia. The Bank made a tie up with New India Insurance Company for market and distributed the products of New India Insurance Company on a commission basis. Also, they made a tie up with two IT companies to develop core-banking solutions. In the year 2003, the Bank launched Core Banking Solution providing 'Anytime Anywhere Banking'. They launched 2 new schemes, namely NRI Foreign Currency Loans and Domestic Resident Foreign currency accounts for the benefit of NRI and FCNR (B) customers. The Bank signed an agreement with Corporation Bank to share their Cash Management System infrastructure. Also, they launched Union Bill Pay, a convenient utility bill payment service for their customers in association with Bill desk. During the year 2004, the Bank opened the new representative offices at Dubai (UAE) & Doha (Qatar). They made a tie up with HDFC Standard Life for providing bank depositors an insurance cover under group policy with a target to bring in 50,000 customers under risk cover. Also, they entered into a banc assurance tie-up with the Export Credit Guarantee Corporation Ltd (ECGC) for marketing the latter's export credit insurance products. In April 7, 2004, the Bank made an agreement with SBI Life Insurance Co Ltd to make available to the Bank's Home Loan borrowers' life insurance cover on group basis. They launched 'Union Miles Scheme', an exclusive two-wheeler finance scheme along with TVS Motor Company. They inaugurated their retail finance boutique at Ghatkopar (East) in Mumbai. During the year, the Bank was one of seven new Indian entrants to the Forbes 2000 list of the world's biggest and most powerful companies. In the year 2005, the Bank launched Union card, which is international credit card and international debit card in association with VISA. They commenced clearing bank operations with the NSE and BSE for settlement of funds and securities obligations under Cash and Future and Options Segments. Also, they introduced Union White Card for dairy units. During the year 2004-05, the Bank opened 23 new branches, 14 new Extension Counter and upgraded 23 Extension Counters into full-fledged branches. They made a tie up with Principal PNB Asset Management Company for distribution of their mutual fund schemes. Also, a study by ASSOCHAM Eco Pulse identified the Bank as 'number one in terms of return to investors' among banking

stocks during fiscal 2005. During the year 2005-06, the Bank opened 31 new branches, 6 extension counters and upgraded 5 extension counters into full fledged branches. The Bank jointly with Dena Bank made a tie-up with Small Farmers Agri-business Consortium (SFAC). Also, they made a tie-up with LIC to unveil group insurance. During the year 200607, the Bank opened 124 branches including up gradation of 9 extension counters, mergers of 2 branches and conversion of one branch into Satellite Office. They launched the sale of gold coins of 99.99% purity in the denominations of 5 gm, 8 gm and 10 gm at competitive rates. The Bank and Bank of India joined hands with Infrastructure Development Finance Company Ltd for loan syndication. During the year, the Bank entered into a Moue with IL&FS Ltd to establish a platform for providing banking and custodial-cum-demat services to Foreign Institutional Investors investing in the Indian capital market. Also, they entered into an Moue with Bank of India and Dai-Ichi Mutual Life Insurance Company, a leading insurance company of Japan for floating a joint venture insurance company in India. During the year 2007-08, the Bank opened 155 branches, which included up gradation of 18 extension counters. They used alternate delivery channels such as ATMs, Internet Banking, TeleBanking/ SMS banking as important tools to optimize the customer satisfaction. Also, they added 377 ATMs, taking the ATM network to 1,146 ATMs. During the year, the Bank launched SMS Banking for providing various types of account information to customers through their mobile phones. In May 18, 2007, they opened their first Representative Office at Shanghai, Peoples Republic of China. In December 1, 2007, they opened a representative office at Abu Dhabi, UAE. During the year 2008-09, the Bank opened 197 branches that included up-gradation of 48 extension counters and installed 644 ATMs. In May 7, 2008, the Bank opened their first full-fledged overseas branch in Hong Kong, which carries out normal commercial banking operations like acceptance of Deposits, Trade Finances, ECB and Syndicated loans. During the year, a State of the art 70-seater advanced call centre became operational at Technology Centre, Poway (Mumbai). They launched new transaction products such as 'Prepaid Cards' (Gift and Power Pay cards), 'Online NEFT ' for funds transfer through Internet Banking in addition to 'Online RTGS', thereby adding to the existing array of products to meet customer needs. During Financial Year 2008-2009, the Bank launched Wealth Management Services for HNI clients through two service providers. Wealth Advisors Pvt. Ltd. is the Service Provider for the clients from South & North of India and Edelweiss Securities is the service provider for HNI clients from West & East of India. Also, they made a tie up with Embay Securities for providing Online Trading Services to their valued clients. During the year 2009-10, the Bank opened 247 new branches & 536 ATMs

taking the total to 2805 branches and 2327 ATMs. As part of their global expansion initiatives, the Bank opened two representative offices at Sydney in Australia and Beijing in China. Also, they opened one Currency Chest at Azamgarh during the year. During the year, the Bank forayed into acquiring business and started merchant enrollments across the country for installation of Point of Sale (POS) terminals accepting both VISA and MasterCard cards. Their JV Mutual Fund company 'Union KBC Asset Management Company' received inprinciple approval from SEBI and their product is likely to be launched during the financial year 2010-11. In April 1, 2010, the Bank opened a representative office in London. Also, they received approval from RBI for opening of branches at Shanghai (China) and Antwerp (Belgium) and representative offices at Johannesburg (South Africa) and Toronto (Canada). During the year 2010-11, the Bank opened 211 branches, taking the total number of domestic branches to 3,015 branches. Also, they opened a branch in Hong Kong. The Bank added 307 automated teller machines to their network and issued more than 1.65 million debit cards. During the year, the Bank received approval from the Reserve Bank of India for converting the representative office at Sydney into a branch and the representative office in London (UK) into a subsidiary. Also, the bank has approvals for opening a branch in Antwerp (Belgium) and representative offices at Johannesburg (South Africa) and Toronto (Canada). India Info line Research Company | Sectors

Union Bank of India (Q1 FY14) Union Bank of India (Q4 FY13) Union Bank of India (Q3 FY13) Union Bank of India (Q1 FY13) Union Bank of India (Q4 FY12)

Company | Sector | Latest

03-Aug13 02-Aug13 20-Jul13 11-Jun13 11May-13 11May-13

Union Bank of India

Union Bank of India net profit rises 9.51% in the June 2013 quarter Union Bank of India to Hold Board Meeting

Union Bank of India to Convene AGM

Union Bank of India

Union Bank of India

Peer Comparison Company Market Cap P/E (Rs. in Cr.) (TTM) (x) St By of India Bank of Baroda Punjab Natl.Bank Canara Bank Bank of India IDBI Bank Union Bank (I) Central Bank UCO Bank IOB Oriental Bank Syndicate Bank Allahabad Bank Corporation Bank Indian Bank 3,036.33 2.11 0.29 12.64 15.7 0.0 0.00 10,432.65 10,389.52 8,149.89 6,845.18 5,337.80 4,685.12 4,449.54 4,440.59 4,276.85 4,017.74 3,841.10 3.61 3.68 4.63 3.10 7.62 6.11 9.69 3.44 2.12 3.71 2.66 0.46 0.46 0.42 0.44 0.45 0.64 0.36 0.37 0.45 0.38 0.40 11.92 14.59 12.70 13.67 13.46 13.54 13.27 12.44 14.12 12.83 12.57 13.2 13.0 10.2 15.0 8.3 9.1 4.9 11.5 22.8 11.8 16.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 113,029.12 22,055.96 16,623.69 8.31 4.84 3.48 P/BV EV/EBIDTA ROE (%) ROCE (%) D/E (x)

(TTM) (x) (x) 1.14 0.69 0.53 14.51 15.30 12.68

15.4 15.1 16.5

0.0 0.0 0.0

0.00 0.00 0.00

Union Bank of India (UBI) (BSE: 532477) is one of India's largest public sector banks
(the government owns 55.43% of its share capital remains public, private organizations and foreign companies), is listed on the Forbes 2000. It has assets of USD 13.45 billion and all the bank's branches have been networked with its 4129 ATMs. Its online Telebanking facility are available to all its Core Banking Customers - individual as well as corporate. It has representative offices in Abu Dhabi, United Arab Emirates, Beijing, Peoples Republic of China, London, Shanghai, and Sydney, and a branch in Hong Kong.

The bank is in the process of upgrading its representative offices in London and Sydney to branches. It also is working on establishing branches in Dubai (in the Dubai International Financial Centre), and in Antwerp. UBI is active in promoting financial inclusion policy and is a member of the Alliance for Financial Inclusion (AFI). View UBI on the AFI member map.

History
Union Bank of India (UBI) was registered on 11 November 1919 as a limited company in Mumbai and was inaugurated by Mahatma Gandhi. At the time of India's Independence in 1947, UBI still only had four branches - three in Mumbai and one in Saurashtra, all concentrated in key trade centres. After Independence UBI accelerated its growth and by the time the government nationalized it in 1969, it had grown to 240 branches in 28 states. Shortly after nationalization, UBI merged in Belgaum Bank, a private sector bank established in 1930 that had itself merged in a bank in 1964, the Shri Judea Shankar ling Bank. Then in 1985 UBI merged in Mira State Bank, which had been established in 1929. In 1999 the Reserve Bank of India requested that UBI acquire Sikkim Bank in a rescue after extensive irregularities had been discovered at the non-scheduled bank. Sikkim Bank had eight branches located in the North-east, which was attractive to UBI. UBI began its international expansion in 2007 with the opening of representative offices in Abu Dhabi, United Arab Emirates, and Shanghai, Peoples Republic of China. The next year, UBI established a branch in Hong Kong, its first branch outside India. In 2009, UBI opened a representative office in Sydney, Australia.

8. QUATIONS ABOUT BANKING REGULATION

What are Banking Regulations?

Banking regulations are a form of government regulation which subjects banks to certain requirements, restrictions and guidelines. Banking regulations aim to uphold the soundness and integrity of the financial system. Following is a list of banking regulations: The most common objectives of bank regulation are: Prudential to reduce the level of risk bank creditors are exposed to (i.e. to protect depositors) Systemic risk reduction to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures Avoid the misuse of banks to reduce the risk of banks being used for criminal purposes (e.g. laundering the proceeds of crime) To protect banking confidentiality Credit allocation to direct credit to favored sectors

What is Banking Law?

Banking law covers the many state and federal regulations governing financial institutions. Attorneys who practice in this area of the law handle everything from customer disputes and complaints against a bank, to complex litigation between domestic and foreign institutions, their investors, the government, and other parties. However, most banking law attorneys are hired to provide advice concerning regulatory compliance. Banks may choose to maintain inhouse counsel for this purpose, or to seek assistance from an independent law firm.

Given the vast number of regulations with which banks must comply, it is not surprising that their officers and directors seek legal counsel before making important decisions. The DoddFrank Act, a banking reform measure passed by the federal government in 2010, alone contains more than 1,500 separate provisions, including nearly 400 rule mandates. Depending

on where they were chartered and how they operate, banking institutions may be regulated by the Federal Deposit Insurance Corporation (FDIC), the Federal Res erve System (the Fed), the Office of the Comptroller of the Currency (OCC), as well as state regulatory agencies.

Why has the Reserve Bank of India (RBI) suddenly decided to issue new bank licences to companies?
New banks are required to increase banking access, reach and penetration, while expanding geographic coverage. The financial inclusion programme, which seeks to bring every Indian household under the organized banking arm, would mean more banks have to come in the fray. Besides, increased participation from the private sector will mean more competition, which will ultimately benefit customers.

How many have applied?

Twenty six companies, private and public have applied for the licences.

When was the proposal of introducing new banks made?

President Pranab Mukherjee, who was the finance minister in 2010-11, had announced in his budget speech that new banks would be required to increase banking network in the country. At present, over 40% of Indians have no access to banking services.

When was the last time that the RBI issued bank licences?
It was 10 years ago in 2003-04. Yes Bank and Kotak Mahindra Bank got licences.

 discourages companies to apply?

Besides regulating the banking industry, the RBI is also responsible for framing India's monetary policies. It has to ensure that there is no conflict of interest when a company forays into banking. Companies wishing to enter the sector should also be financially sound since they would be handling people's money. The RBI, while framing the guidelines, studies 11 other economies to assess their banking sectors. Out of these, eight, including Singapore, Korea, Indonesia do not allow companies to bank. However, countries allow Para-banking outfits with sound financials to foray into the sector. Countries such as the US, Japan and Canada that allow companies to get into banking have stringent rules on ownership. While in Japan, companies that have set up banks cannot have a stake not more than 5% in the bank, in Canada it is 10%.

Have banks in India failed in the past?

Yes, quite a few. Global Trust Bank, Times Bank are some of the examples. The RBI had to immediately intervene to merge them with other big banks to ensure that people's money was safe.

Is it the first time that private banks will be set up in India?

No. In fact, most public sector banks including the State Bank of India were private banks before being nationalized. The government nationalized the Imperial Bank of India in 1955, which later became SBI. The RBI took 60% stake in it. In April 1980, the government nationalized six more banks.

What was the reason behind nationalization?

The government wanted to break the ownership and control of banks from a few business families. The move was also meant to prevent the concentration of wealth and economic power while mobilizing savings and catering for the priority sectors.

 When did the government embark on liberalization?

In the early 1990s. Several licenses were given for setting up private banks which came to be known as the new generation tech-savvy banks. Global Trust Bank, which failed was one of the first new generation banks to be set up. However, it was later amalgamated with Oriental Bank of Commerce. Besides GTB, UTI Bank, which was later renamed Axis Bank, ICICI Bank and HDFC Bank also got licences.

Is the central bank now open to having more foreign banks as well?
Yes, it is keen that foreign banks apply to enter India. A few had placed their proposals a couple of years ago.

Why is the RBI then again giving licenses to companies?

Today, the regulatory regime is strong and the banking industry in India is modern, sophisticated and well-equipped. It is ready for players to bring in healthier competition and increase penetration.

How many banks are there in India today?

India, the second-largest populated and one of the fastest growing economies in the world, has 26 public sector banks, over 20 private sector banks and several regional .

 Regulatory Compliance

In the current regulatory environment, banks have no choice but to make compliance a priority. This can involve an expensive and labor-intensive process that will affect everyone within the organization. First, the applicable rules and regulations must be identified and ranked in order of the risk associated with noncompliance. This evaluation by itself will often require input from an attorney familiar with the banks operations. The next step will be to design and implement a compliance plan. An effective compliance plan must be comprehensive, and here too the bank will benefit from the advice of counsel. The new efforts must be integrated with existing compliance systems to produce a complete, streamlined approach. All aspects of the banks compliance activities should be subject to monitoring and oversight by management, with procedures in place to alert the appropriate personnel when the bank is in danger of violating a particular regulatory provision. That way, the bank can act proactively to remedy a concern before it becomes a true liability. Staff members must also be educated on regulations pertaining to their duties, and kept abreast of changes in the law. There is a conception that banking law attorneys spend all of their time litigating, but this is untrue. Many practitioners are employed to conduct trainings and to act as a resource for banking professionals concerned with compliance issues. Considering the severe consequences of non-compliance, managers should consider a regulatory awareness program to be money well spent.

Defending Enforcement Actions

Of course, if a bank is already the subject of a regulatory investigation or enforcement action, the objective changes. Now the goal is to defend against inaccurate allegations and to protect individuals within the organization who have been singled out. There are many examples of overzealous regulators abusing their authority to the detriment of innocent directors, officers, and employees. Imprudent enforcement actions can also harm a banks reputation and disrupt day-to-day operations.

If non-compliance has occurred, regulators have the power to impose strong sanctions on the

bank, including termination of deposit insurance, issuance of cease and desist orders, and imposition of civil fines. Monetary penalties can also be issued to individuals within the organization. In extreme cases, individuals may even be targeted for criminal prosecution. In addition to taking immediate remedial action with respect to the non-compliance issue, banks should consult with legal counsel about the possibility of settling the enforcement action informally through direct negotiations with the regulators.

Assistance with Transactional Matters

Banking law also deals with the various transactions that arise as a financial institution goes about serving its customers and growing its business. Legal documents may need to be drafted to address individual accounts, such as a workout agreement for a customer who wants to avoid the repercussions of default. On a larger scale, a bank may need to develop standardized customer agreements in conjunction with new products or lending programs. Transactional matters can also involve the establishment of a de novo charter, the sale or purchase of a branch, or the creation of a new holding company. In each instance, the bank must take steps to avoid conflicts with relevant consumer protection laws and industry regulations. For example, customer agreements for deposit accounts must comply with federal legislation such as the Truth in Savings Act (TISA), which requires the disclosure of certain interest and fee information, and the Expedited Funds Availability Act (EFAA), which regulates how long a bank can hold funds from a deposited check. Because banking laws change frequently, the assistance of an attorney in these matters is highly recommended.

Selecting a Banking Law Attorney

If your institution is looking to avoid regulatory action and the cost associated with it, you need experienced legal counsel. Many law firms have retired banking executives and government regulators on staff, providing valuable real-world experience. Contact a banking law attorney to learn more.