Professional Documents
Culture Documents
03 Mrunal Economy Handout 2020
03 Mrunal Economy Handout 2020
- A Financial
Intermediary (FI:
वित्तीय मध्यस्थ) is an
entity that acts as
the middleman
between two parties
in a financial
transaction- between
lenders vs.
borrowers, investors
vs. entrepreneurs,
households vs
business firms.
- Such FI can be
subdivided into (1)
Formal (2) Informal.
❓ In context of independent India's economy, which one of the following was the
earlier event to take place? (Asked in UPSC Prelims-2009)
A) Nationalization of insurance companies B) Nationalization of State Bank of India
C) Enactment of Banking Regulation Act D) Introduction of first Five year plan
Sidenote: Article 371-F of Constitution gives special status to Sikkim, as a result their
State Bank of Sikkim is outside RBI’s regulatory powers, but that KBC-GK/obscure GK =
poor cost benefit.
❓ RBI acts as a bankers’ bank. What does it mean? (UPSC-Pre-2012)
1) Other banks retain their deposits with the RBI.
2) The RBI lends funds to the commercial banks in times of need.
3) The RBI advises the commercial banks on monetary matters.
Answer codes: (a) 2 & 3 only (b) 1 and 2 only (c) 1 and 3 only (d) 1, 2 and 3
❓ RBI regulates the commercial banks in matters of (Asked in UPSC-Pre-2013)
1) Liquidity of assets 2) Branch expansion
3) Merger of banks 4) Winding-up of banks
Answer Codes: (a) 1 & 4 only (b) 2, 3 & 4 only (c) 1, 2 & 3 only (d) 1, 2, 3 & 4
13.2 🏦 👨⚖ SCHEDULED BANKS (अिुसूचित बैंक)
When RBI is satisfied that a public sector or private sector bank has (Paid Up Capital +
Reserves) = Min _ _ Lakhs AND it is not conducting business in a manner harmful to its
depositors, then such bank is listed in the _ _ _ Schedule of RBI Act, and known as a
Scheduled Bank.
Scheduled Bank Non-Scheduled Bank
Required to deposit CRR money to RBI Can maintain the CRR money with
themselves.
Eligible to borrow / deposit funds in RBI’s Depends on RBI’s discretion.
window operations.
are required to protect the interests of Ofcourse, they also have to do it, else RBI
depositors and abide to RBI norms. can shut them down under BR Act.
Can be subdivided into two parts Hundreds of cooperative banks are non-
1) Scheduled Commercial Banks (SCB) e.g. Schedule. But we need not see their list at
_______ Rbi.org.in/CommonPerson/English
2) Schedule Cooperative Banks like /scripts/banksinindia.aspx
Haryana Rajya Sahakari Bank, Tamil
Nadu State Apex Cooperative Bank
moral outrage not required “Why it is only 5 lakh!!!??”. Send your suggestion to PM
Modi to amend the RBI Act, until it’s implemented remember the figure.
After 2013, PSBs’ credit growth has declined → GDP growth is affected.
2019: PSBs’ total loss > 66,000 crore which is even double than India’s budget
allocation for education. And so on..
Indicators : PSBs =losers : PvBs= winners
Total NPA in Majority of NPA here less
Indian Banks
Total Bank >90% occur in PSBs Hardly 7%
frauds in India
Return on For every ₹1 that the government They make 9.6 paise profit
Equity invests as share capital in PSBs → against every ₹1 share
they lose 23 paise. capital.
Even in other technical indicators such as Return on assets, Market-to- book ratio, growth
of new loans, Capital adequacy norms for BASEL, etc: (new) Private sector banks (PvB)s
outperform PSBs. Thus, PSBs are clearly not efficient today. If they become efficient = ₹11
lakh+ crore profit for the Government.
1) Usually the persons favored by the present-day ruling party become the Board of
directors, irrespective of merit or qualification. Thus, political considerations have
significant control/influence over bank’s business operations.
2) : PSBs are subjected to Right to Information (RTI) act, Central Vigilance
Commission (CVC), Comptroller Auditor General (CAG), Central Bureau of Investigation
(CBI), Courts and media in a more stringent manner. (बैंकर खौफ में रहते है की ईमािदार
निणवय की भी शक की निगाहो से जांि होगी)
3) Consequently, PSB officials fear harassment under the veil of vigilance investigations &
media-trials. They prefer safety and conservatism over risk-taking and innovation.
(रूढ़ििाद पसंद, ििािार िापसंद)
2008-10 State Bank of Saurashtra and State Bank of Indore merged into SBI.
2013 - Bharatiya Mahila Bank was setup as PSB, HQ Delhi, 100% ownership by
Union Government.
- BMB’s Board of Directors: All women. Staff & Deposit Holders: both men
and women, Loans given predominantly to women- and that too without
collaterals upto Rs.1 crore.
2017, BMB & 5 Associated Banks of SBI viz. State Bank of Bikaner and Jaipur (SBBJ),
1st April State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of
Patiala (SBP) and State Bank of Travancore (SBT), merged with SBI from 1st
April by swapping of shares.
2017, - Alternative Mechanism Panel setup under the FM Jaitley’s chairmanship
Nov (other members: Piyush Goyal, Nirmala Sitharaman).
- They examine the proposals for merger/consolidation of the Public Sector
Banks (PSBs) and forward to Cabinet for approval.
- Department of Financial Services coordinates the filework.
2019, ___________________________________ to be merged into Bank of Baroda,
1st April by swapping of shares (शेयरों की अदला-बदली).
- Among these three oldest: BoB (1908) > Vijaya (1931)> Dena (1938)
- BoB & Dena nationalized in ’69, HQ: Mumbai
- Vijaya: nationalized in ‘80, HQ. Bengaluru
2019: Global top-100 banks: China (18 banks), USA (12 Banks), Japan > France >
…..India (only 1 bank: SBI at Rank#55).
Budget-2020: Government of India will sell its remaining shares from IDBI Bank to
private investors through the stock exchange
Chronology of differential banks: RRB(1976) → Local Area Bank (1996) → Small Finance
Bank & Payments bank(2015) → Wholesale banks (proposed)
❓ Which of the following statements about the India Post Payments Bank (IPPB)
is/are correct? [Asked in UPSC-CDS-2018-1]
1) It has been incorporated as a Public Limited Company.
2) It started its operation by establishing two pilot branches at Hyderabad and Varanasi.
Answer codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
EXIM (Jan 1982) NABARD (Jul 1982) NHB (1988) SIDBI (1990)
Export-Import ____ National Housing _____
Bank of India Bank
Boss: Government Previously RBI had Original boss: RBI BOSS: SBI, LIC, IDBI
of India (100%) minority-stakes in (100%). But, 2019- other public sector
NABARD but 2018: Apr: RBI sold 100% banks, insurance
100% Govt owned. to Govt. companies etc.
Promotes cross - Regulatory - Finance to - Operates Credit
border trade and authority: Coop banks and Guarantee fund,
investment, helps + RRB NBFCs for Small Enterprises
importers-exports - + Indirect housing Development Fund
with loans and refinance to projects. (SEDF).
foreign currency. farmers, artisans - Regulator of - Operates _ _ _ _ _ _
- Operates Rural Housing for loans to small
Infra. Finance Cos entrepreneurs &
Development (NBFC) SME via schemes
fund (RIDF) from - _ _ _ _ _ index like Mudra, Stand-
PSL shortfalls to monitor up-India.
from SCBs. residential real
estate prices.**
- 5th AIFI = Industrial Investment Bank of India (IIBI) closed in 2012.
- ** (Full) Budget-2019: shifted NHB’s regulatory powers to RBI.
- NABARD Amendment Act 2017: 1) increased capital 2) facilitated transfer of RBI shares
to Govt 3) MSME definitions updated.
- AIFIs are not ‘banks’ because can’t accept direct deposits from the public at large.
Shadow banking is a set of activities and institutions. They operate partially (or fully)
outside the traditional commercial banking sector. They are not fully regulated by the
RBI. ये संस्थाए पारंपररक बैंककं ग नियमो के दायरे से बाहर काम करती है .
A shadow banking system can be composed of a single institution or multiple entities
forming a chain. They mobilize funds by borrowing from banks, issuing Commercial
Papers (CP) and Bonds (Non-convertible debentures)
Table 8: Three important segments of the shadow banking system in India
HFCs Housing Finance Companies. E.g. Dewan Housing Finance Limited (DHFL)
LDMFs - Liquid Debt Mutual Funds invest clients money into short term debt
instruments such as T-bill (of Govt) and Commercial Papers (of
companies).
- e.g. certain schemes by UTI, Kotak, L&T, Tata mutual funds
- 2019: Some of these LDMFs had invested clients money in IL&FS and
DHFL, but failed to get the money back. Nearly ₹4000 crore of investors’
money is stuck, triggering the NBFC crisis in India.
Retail- Retail Non-Banking Financial Companies such as Gold loan companies, asset
NBFCs finance companies etc.
Shadow banking system’s assets are risky and illiquid. If there is a ‘bank run’ like situation
(depositors / investors demanding the money bank) these shadow banks can’t honour the
obligations. As seen in the ILFS crisis (2019) →
❓In September 2019, which one of the following travel giants declared itself
bankrupt? (UPSC-CDS-i-2020)
(a) Expedia (b) Cox & Kings (c) SOTC (d) Thomas Cook
❓What is/are the purpose/purposes of the 'Marginal Cost of Funds based Lending
Rate (MCLR)' announced by RBI? (Asked in UPSC-Pre-2016)
1. These guidelines help improve the transparency in the methodology followed by
banks for determining the interest rates on advances.
2. These guidelines help ensure availability of bank credit at interest rates which are
fair to the borrowers as well as the banks.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
ES20: NPA had reached its peak in 2018 but now it appears to be declining because of
various measures taken by Government and RBI.
❓‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ is related to: (UPSC-
Prelim-2017)
a) procedure for ecological costs of developmental schemes.
b) scheme of RBI for reworking the financial structure of big corporates with genuine
difficulties.
c) disinvestment plan for Central Public Sector Undertakings.
d) Provision in ‘The Insolvency and Bankruptcy Code’.
14.5.1 ⚖️🔪 Insolvency and Bankruptcy Code Amendment (2018: संहहता संशोर्ि)
- Permits Govt to modify norms when applying IBC for MSME.
- RERA registered building (home & office) buyers are classified as ‘financial creditors’.
So, if builder unable to finish project, unable to repay the loans to banks →
homebuyers will have voting power in the I&B resolution process. (More RERA in Pill#6)
- It reduced the voting requirements for faster resolution:
Lenders’ Voting requirements (ऋणदाताओ का प्रस्ताि के समथवि में मतदाि) Before After
14.5.2 ⚖️🔪 IBC Code (first) Amendment Act (2019: संहहता संशोर्ि)
2019-Aug: it was passed by Parliament, with following features
- Must finish entire process within 330 days, instead of earlier 180-270 days walli limit.
- If too many FCs (e.g. homebuyers): they may appoint a representative (प्रनतनिचध) for to
attend the Committee of Creditors on their behalf, for smoother & systematic conduct
of meeting.
IBC complaints can be made only if the loan amount is minimum “x” or minimum
lenders are “y”. This is to discourage frivolous complaints by borrowers. (मामल
ू ी
बकाया ऋणों की शशकायतों को रोकिा)
If the government had given any license, permit, registration etc. then it’ll not be
cancelled while IBC proceedings are going on. (e.g. if a liquor company’s license was
❓What was the purpose of the Inter-Creditor Agreement signed by Indian banks and
financial institutions recently? (Pre19-SetA-Q72)
a) To lessen the Government of India’s perennial burden of fiscal deficit and current
account deficit
b) To support the infrastructure projects of Central and State Governments
c) To act as independent regulator in case of applications for loans of ₹ 50 crore or
more
d) To aim at faster resolution of stressed assets of ₹ 50 crore or more which are under
consortium lending.
Willful defaulters usually create fictitious companies (फजी कम्पिी) to transfer their
assets / shares / money just before they stop paying loan installments.
Artificial Intelligence (AI) can alert the authorities through real time surveillance &
data analytics of the borrower’s NEFT/RTGS/DEMAT account transaction.
Geo-tagging of assets (संपवत्त की श्जयो-टैगगंग) i.e. adding longitude and latitude data
with the photos & videos of the Factory building, machinery, vehicles, aeroplanes,
helicopter etc. Then, →
o Scamster can’t pledge fictitious assets as collaterals for loans (फजी संपवत्त
च्जसका अच्स्तत्ि ही िहीं)
o Scamster can’t pledge the same asset as collateral to multiple banks/NBFCs.
(एक ही संपवत्त को एकाचधक लोगों के पास चगरती रखकर लोि में धांधली करिा)
GPS chips may be embedded in the factory-machines and vehicle to track their real
time location →
o If scamsters move the machinery out of the factory, the banker will be alerted.
o Bankers can remotely disable machines/vehicles, if loans are unpaid.
Blockchain Technology can used for storing and verifying the authenticity of the data.
AI can monitor Social media activities e.g. Borrower is not paying the loan and yet
sharing the Switzerland vacation photos on Instagram = He is a wilful defaulter →
Attach his assets under the SARFAESI Act.
Caution? borrower’s privacy and dignity should also be respected while doing such
computerized surveillance. (उधारकताव की निजता का भी सम्माि रखिा िाढहए)
Benefit? fraud prevention, reduced the burden of NPAs, quicker decision making,
process loan applications faster, cost saving for individual banks as all of them can use a
single hub instead of spending on separate servers/technology.
But, not all of these databases are under the direct control of RBI. Each has their own
methodology for data collection & tabulation. Not all of these databases are covering all
individual and corporate borrowers of India.
Q. How exactly do CCB, CCCB, LR etc work? Ans. Not important for
exam beyond that fact that they’re related to BASEL Norms.
- Each member country’s Central Bank can prescribe different ratios depending on their
country’s situation.
- As NPA ↑ = bank’s asset quality degrades = its Risk-weighted assets (RWA) will ↑; then
bank must arrange more capital to comply with these ratios, norms and buffers.
- If a bank can’t comply with BASEL norms, then RBI puts it in _ _ _ list. In worst case,
bank will have to merge/ sell off its business to another bank or shut down.
- BASEL Norms also apply on Differential Commercial Banks (_ _ _ _ _ _ _ _ _ _ _ _ _ _
_ ), Cooperative Banks, AIFI (_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ) and
certain category of NBFCs, but RBI can prescribe separate norms / limits / deadlines
for them.
14.13.1 🌐🕵🏻♀ Liquidity Coverage Ratio & High-Quality Liquid Assets (HQLA)
Figure 3: SLR cuts as proposed by Urjit, though Shakti may/may not follow the timeline
- BASEL-III norms require the banks to keep enough in High Quality Liquid Assets (HQLA)
so that bank can survive a 30 days high stress scenario of cash outflow / bank run. If a
Bank has enough HQLA assets to survive this test, we say this Bank has Liquidity
Coverage Ratio (LCR) of 1 (or 100%).
- RBI implemented deadline came gradually Jan 2015: 60%, ..+ 10% each year…. Jan’19:
100% or more.
- To help banks comply with these norms RBI has 1) gradually cut down SLR requirement
2) launched Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) window
from 1/10/2018. It basically allows banks to pledge their G-Sec (subjected to certain
ceilings) with RBI to borrow money, so on one hand they comply with LCR norms and at
the same time get cash for their biz requirements.
Note: Certain categories of NBFCs also have to keep LCR-HQLA but RBI prescribed
different % and deadlines for them.
Hindi term not given for CCCB, HQLA etc. as very little utility in Mains.
❓With reference to the governance of public sector banking in India, Find Correct
Statement(s):(Asked in UPSC-Pre-2018)
1. Capital infusion into public sector banks by the Government of India has steadily
increased in the last decade.
2. To put the public sector banks in order, the merger of associate banks with the
parent State Bank of India has been affected.
Answer Codes: (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2.
14.14.3 🤦🏻♂PSB Banking Personnel Reforms→ 📔📔ES20 Vol1Ch7 (50 years anni.)
ES20 suggested
ESOP is a type of benefit plan wherein employees are given some shares of the company
(Apart from their regular monthly salary).
When/if company makes How does employee benefit from ESOP?
more profit →
1) Market price of its shares He can sell his shares to a third party for a large gain.
will increase.
2) the dividend to the He can keep the shares with himself, and will get large
shareholders will increase. dividend from the company (in addition of his regular
salary)
- As shareholders, some of these employees may even join as board members → help
designing more realistic business policies at the apex level. Thus, ESOP changes mind-
set from an “employee” to that of an “owner”.
- It was setup to review RBI’s economic capital framework (आचथवक पूंजी संरििा) & decide
the guiding principles for dividend transfer to Government.
- 2019- August: RBI board approved its report.
- It updated / reduced buffer related technical norms in such manner that RBI will be
able to transfer more dividend / surplus to the Government.
- Accordingly for 2018-19: (1.23L dividend+52k extra)= ₹ 1.76 crore to be transferred to
government. This will help the government to meet its fiscal deficit target.
This topic is not very important because UPSC usually avoids “Controversy in News”. Urjit
Patel was unhappy with Government interfering / criticizing his work. Such as:
1) Higher Dividend: Govt. demanded higher dividend from RBI to finance the
recapitalization of PSBs for BASEL-III, and to finance its own fiscal deficit & populist
welfare programs. Urjit Patel felt RBI’s higher reserves are necessary to check any
financial crisis. Excessive dividend could increase inflation. He did not oblige.
2) BASEL-III-relaxation: These norms will become fully effective on 31/3/2019 but PSBs
don’t have enough capital to comply so they requested Finance Minister to tell Urjit
Patel to extend the deadline, Urjit Patel did not oblige.
3) PCA-relaxation: Urjit Patel vigorously implemented Prompt Corrective Action
framework, so Public Sector Banks’ branch expansion, lending operations were
restricted, they came running to FM. FM asked Urjit to relax PCA. He did not oblige.
4) Tight Money Policy: CEA Arvind Subramanian & BJP-Ministers were criticizing RBI’s
“Tight” Monetary Policy depriving MSMEs of cheap loans and thus harming India’s
growth rate. Whereas Urjit Patel deemed tight policy necessary to keep inflation @2-
6%CPI (All India) on durable basis so he did not oblige.
5) PNB Scam: Jaitley expressed displeasure that RBI couldn’t detect PNB-Nirav Modi
fraud, whereas Urjit Patel defended that he lacks effective powers under Banking
Regulation Act to take punitive actions against Public Sector Banks.
All these forced Govt. to issue Section -7 Directive to RBI.