Bank Privatisation

• Need-
• PSBs delivering negatively on profitability, productivity,
assets quality and financial management.
• High NPAs- need for recapitalisation and lack a il . co of
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• No governance reforms- huge interference ha
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• Loss of business to private players. Both in terms of
deposits and in terms of loans given.
• Government- to focus on core areas and move out of
commercial activities.
• Raising resources for the government.
• Low level of technology adoption and poor efficiency in
operations.
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Prompt Corrective Action
• Prompt Corrective Action or PCA is a framework
under which banks with weak financial metrics are
put under watch by the RBI.
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remedial measures in a timely manner so as to restore its
financial health.
• The PCA framework is also intended to act as a tool for
effective market discipline.
Indicators
• Capital-The capital adequacy ratio governs the capital that a
bank ought to hold as a percentage of its total assets. If the
ratio is prescribed as 11.5%, a bank must bring its own capital
of ₹11.50 for every ₹100 it intends to lend.
• The adequacy measure includes buffers such as themcapital
conservation buffer (2.5%), which may be usedmto co
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• Asset quality tells us what portion of the loans is unlikely to be
paid back, reflected in the net non-performing asset ratio —
i.e., the portion of total advances tagged ‘non-performing’,
after the provisioning for bad loans.

• The leverage ratio shows how much a lender has stretched

itself in borrowing funds to generate income. The more the
leverage, the riskier the turf on which the lender stands.
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• Capital adequacy ratio-The capital adequacy ratio (CAR) is a
measurement of a bank's available capital expressed as a
percentage of a bank's risk-weighted credit exposures. The
capital adequacy ratio, also known as capital-to-risk weighted
assets ratio (CRAR). It is Tier1 Capital+ Tier2 Capital/ Risk
weighted assets.

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• NNPA ratio – the percentage of net NPAs to net advances

• Tier 1 Leverage ratio – the percentage of the capital measure

to the exposure measure as defined in RBI guidelines on
Leverage ratio.
• The leverage ratio measures a bank's core capital to its total assets.
The ratio uses tier 1 capital to judge how leveraged a bank is in
relation to its consolidated assets.
• TIER 1 Capital : It is the core capital of the bank and
majorly consist of paid up capital, statutory reserves and
other disclosed free reserves as reduced by equity
investments in subsidiary, intangible assets, current &
brought-forward losses.
• Tier 1 is subdivided into Common Equity Tier 1 and additional
Tier 1 capital.
• Common Equity Tier 1 capital includes equity instruments o m that have
discretionary dividends and no maturity, while mail . c
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• The higher the tier 1 leverage
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likelihood of the bank withstanding negative shocks to its

balance sheet.

• TIER 2 Capital : It is supplementary capital of the bank

and it includes undisclosed Reserves, General Loss
reserves ,hybrid debt capital instruments and
subordinated debts with an original maturity of at least
five years.
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Changes
• The notification has removed return on assets as an indicator
to qualify for PCA.

• Further, the 2017 notification applied to scheduled commercial

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• In the latest set of rules, the RBI has clearly spelt out that exit
from the PCA would be based on four continuous quarterly
results, with one being Audited Annual Financial Statement as
per the new framework apart from Supervisory Comfort of RBI,
assessment on sustainability of profitability.

• The risk threshold 3 has been further refined for capital

adequacy conditions
NBFC
• Non-Banking Financial Company (NBFC) is a company registered
under the Companies Act, 1956 engaged in the
• business of loans and advances,
• acquisition of shares/stocks/bonds/debentures/securities il . co
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• leasing, hire-purchase, insurance business,
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• but does not include any institution whose principal business is that
of agriculture activity, industrial activity, purchase or sale of any
goods (other than securities) or providing any services and
sale/purchase/construction of immovable property.
• Financial activity as principal business is when
• a company’s financial assets constitute more than 50 per cent of the total
assets and
• income from financial assets constitute more than 50 per cent of the gross
income.
• A company which fulfils both these criteria willaibe l.co registered as NBFC
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by RBI. h9
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• The term 'principal business' is not defined by the Reserve Bank of
India Act.
• NBFCs lend and make investments and hence their activities are akin
to that of banks; however there are a few differences as given below:

• NBFC cannot accept demand deposits;

• NBFCs do not form part of the payment and settlement il . co

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Corporation is not available to depositors of NBFCs, unlike in case of banks.
• Regulation-
• In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial
company can commence or carry on business of a non-banking financial
institution without a) obtaining a certificate of registration from the RBI and
without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crore since April
1999).
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• Banks are regulated under Banking Regulation Act, gm
a1949, whereas NBFCs are
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• However, in terms of the powers given pto r a s hathe Bank, to obviate dual
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regulation, certain categories of NBFCs
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which are regulated by other
regulators are exempted from the requirement of registration with RBI viz.
• Venture Capital Fund/Merchant Banking companies/Stock broking companies registered
with SEBI,
• Insurance Company holding a valid Certificate of Registration issued by IRDA,
• Nidhi companies as notified under Section 620A of the Companies Act, 1956,
• Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982
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PCA-NBFC
• The PCA Framework is applicable to the following category of NBFCs:
• All Deposit Taking NBFCs [Excluding Government Companies] (NBFCs- D)

• All Non-Deposit Taking NBFCs in Middle, Upper and

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Layers 3 (NBFCs-ND);
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and Factors]; but

• [Excluding – (i) NBFCs not accepting/not intending to accept public funds4; (ii)
Government Companies, (iii) Primary Dealers and (iv) Housing Finance Companie
• For NBFCs-D and NBFCs-ND, Capital and Asset Quality would be the
key areas for monitoring in PCA Framework.

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• For CICs, Capital, Leverage and Asset Quality would be the key areas
for monitoring in PCA Framework.

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Supervisory Action Framework-UCBs
• Threshold-
1. Asset quality: A UCB may be placed under SAF when its Net NPAs exceed
6% of its net advances. Depending on the severity of stress, Reserve Bank
may take one or more of the following actions: il.com
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• Advising the UCB to submit a Board-approved Action tsin
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• Advising the Board of Directors of the UCBr pto ras review the progress under the Action Plan on
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quarterly/monthly basis n ly f
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• Advising the UCB to submit the post-review progress report to Reserve Bank
• Restriction on declaration/payment of dividend/donation without prior approval of RBI
• Curtailment of sanction/renewal of credit facilities to sectors/segments having high
proportion of NPAs/defaults
• Reduction in exposure limits for fresh loans and advances
• Restriction on fresh loans and advances carrying risk-weights more than 100%
• Profitability: A UCB may be placed under SAF when it incurs losses for two
consecutive financial years or has accumulated losses on its balance
sheet. Depending on the severity of stress, Reserve Bank may take one or
more of the following actions:

• Advising the UCB to submit a Board-approved Action Planomfor restoring the

profitability and/or wiping out the accumulated lossesgmail.c
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• Advising the Board of Directors of the UCB to a n
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Plan on quarterly (or more frequent) basis.
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• Prohibition on declaration/payment of dividend/donation

• Restriction on incurring capital expenditure beyond a specified limit, without prior

approval of the Reserve Bank

• Measures for reduction in interest and operating/administrative expenses

• Capital to Risk-weighted Assets ratio (CRAR): A UCB may be placed under SAF
when its CRAR falls below 9%. Depending on the severity of stress, Reserve Bank
may take one or more of the following actions:
• Advising the UCB to submit a Board-approved Action Plan for increasing the CRAR to 9% or
above within 12 months
• Advising the Board of Directors of the UCB to review the progress under the Action Plan on
quarterly/monthly basis and submit the post-review progress report to Reserve Bank
• Seeking a Board-approved proposal for merging the UCB with another o m
bank or converting
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• Prohibition on declaration/payment of dividend/donation h 9 80

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• Restriction on incurring capital expenditure beyond s ha
n a specified limit, without prior approval
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• Measures for reduction in interest and operating/administrative
On expenses
• Reduction in exposure limits for fresh loans and advances
• Restriction on fresh loans and advances carrying risk-weights beyond the specified limit
• Restriction on expansion of size of the balance sheet
• Restriction on fresh borrowings, except for meeting temporary liquidity mismatches
• Prohibition on sanction/disbursal of fresh loans and advances other than loans against
collateral security of term deposits / NSCs / KVPs / insurance policies
• Prohibition on expansion of size of the deposits
Payment and Settlement Systems
• The Board for Regulation and Supervision of Payment and
Settlement Systems (BPSS), a sub-committee of the Central Board of
the Reserve Bank of India is the highest policy making body on
payment systems in the country. om c
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• The BPSS is empowered for authorising, a n tsin
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setting standards for regulating and
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settlement systems in the country.

• The Department of Payment and Settlement Systems of the Reserve

Bank of India serves as the Secretariat to the Board and executes its
directions.
• In India, the payment and settlement systems are regulated by the
Payment and Settlement Systems Act, 2007 (PSS Act) which was
legislated in December 2007.

• The PSS Act as well as the Payment and Settlement c o m

System
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• In terms of Section 4 of the PSS Act, no person other than the

Reserve Bank of India (RBI) can commence or operate a payment
system in India unless authorised by RBI.
• Reserve Bank had introduced Magnetic Ink Character Recognition (MICR)
technology for speeding up and bringing in efficiency in processing of
cheques.

• The Bank introduced the ECS (Credit) scheme during the 1990s to handle
bulk and repetitive payment requirements (like salary, interest, dividend
payments) of corporates and other institutions. ECS o(Credit) m
facilitates
customer accounts to be credited on the specified gm
ail value date and is
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presently available at all major cities in the country.

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• During September 2008, the Bank launched a new service known as
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National Electronic Clearing Service (NECS) that facilitates multiple credits

to beneficiary accounts with destination branches across the country
against a single debit of the account of the sponsor bank. The system has a
pan-India characteristic and leverages on Core Banking Solutions (CBS) of
member banks, facilitating all CBS bank branches to participate in the
system, irrespective of their location across the country.
• RECS, a miniature of the NECS is confined to the bank branches
within the jurisdiction of a Regional office of RBI. Under the system,
the sponsor bank will upload the validated data through the Secured
Web Server of RBI containing credit/debit instructions to the
customers of CBS enabled bank branches spread across the
Jurisdiction of the Regional office of RBI. Presently . c o m RECS is available in
ail
Ahmedabad, Bengaluru, Chennai and Kolkata. 80
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• The ECS (Debit) Scheme was introduced by RBI to provide a faster
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method of effecting periodic and repetitive collections of utility

companies. ECS (Debit) facilitates consumers / subscribers of utility
companies to make routine and repetitive payments by ‘mandating’
bank branches to debit their accounts and pass on the money to the
companies.
• NEFT- In November 2005, a more secure system(over EFT) was
introduced for facilitating one-to-one funds transfer requirements of
individuals / corporates. Available across a longer time window, the
NEFT system provides for batch settlements at hourly intervals, thus
enabling near real-time transfer of funds.
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from one bank to another on a "real ly for
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Settlement in "real time" means payment transaction is not subjected
to any waiting period. "Gross settlement" means the transaction is
settled on one to one basis without bunching or netting with any
other transaction. This was introduced in in 2004 and settles all inter-
bank payments and customer transactions above `2 lakh.
• Clearing Corporation of India Limited (CCIL)

• CCIL was set up in April 2001 by banks, financial institutions and primary dealers, to
function as an industry service organisation for clearing and settlement of trades in
money market, government securities and foreign exchange markets.

• The Clearing Corporation plays the crucial role of a Central m

Counter Party (CCP) in
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the government securities, USD –INR forex exchange g mail.
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segments) and Collaterised Borrowing and Lending980Obligation

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• CCIL plays the role of a central counterparty
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and seller gets replaced by two new contracts
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parties. This process is known as ‘Novation’. Through novation, the counterparty
credit risk between the buyer and seller is eliminated with CCIL subsuming all
counterparty and credit risks.

• In addition to the guaranteed settlement, CCIL also provides non guaranteed

settlement services for National Financial Switch (Inter bank ATM transactions) and
for rupee derivatives such as Interest Rate Swaps.
• Pre-paid instruments are payment instruments that facilitate
purchase of goods and services against the value stored on these
instruments. The value stored on such instruments represents the
value paid for by the holders by cash, by debit to a bank account, or
by credit card. The pre-paid payment instruments can be issued in
the form of smart cards, magnetic stripe cards,ail.cinternet om accounts,
internet wallets, mobile accounts, mobileh9wallets, 80
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• The use of pre-paid payment instruments for cross border

transactions has not been permitted, except for the payment
instruments approved under Foreign Exchange Management
Act,1999 (FEMA).
• National Payments Corporation of India (NPCI), an umbrella organisation
for operating retail payments and settlement systems in India, is an
initiative of Reserve Bank of India (RBI) and Indian Banks’ Association
(IBA) under the provisions of the Payment and Settlement Systems Act,
2007, for creating a robust Payment & Settlement Infrastructure in India.

• It has been incorporated as a “Not for Profit” Company ma il . co

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under the
provisions of Section 25 of Companies Act 1956 h9
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• In 2016 the shareholding was broad-based to 56 member banks to include

more banks representing all sectors. In 2020, new entities regulated by RBI
were inducted, consisting of Payment Service Operators, payment banks,
Small Finance Banks, etc. The shares were allotted pursuant to issuance of
equity shares on private placement basis in compliance to the applicable
provisions of the Companies Act, 2013.
Instruments
• IMPS- IMPS provides robust & real time fund transfer which offers an
instant, 24X7, interbank electronic fund transfer service that could be
accessed on multiple channels like Mobile, Internet, ATM, SMS. Currently
on IMPS, 706 members are live which includes banks & PPIs.
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• RuPay is the first-of-its-kind domestic Card tpayment
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network of India, with
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• National Financial Switch- is the largest network of shared Automated

Teller Machines (ATMs) in India facilitating interoperable cash withdrawal,
card to card funds transfer and interoperable cash deposit transactions
among other value added services in the country.
• National Automated Clearing House (NACH)- for Banks, Financial
Institutions, Corporates and Government a web based solution to
facilitate interbank, high volume, electronic transactions which are
repetitive and periodic in nature. NACH System can be used for
making bulk transactions towards distribution of subsidies,
dividends, interest, salary, pension etc. and also gm
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pertaining to
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telephone, electricity, water, loans, investments
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insurance premium etc. On

• National Automated Clearing House (NACH) is a centralised system,

launched with an aim to consolidate multiple ECS systems running
across the country and provides a framework for the harmonization
of standard & practices and removes local barriers/inhibitors.
• National Electronic Toll Collection (NETC) program to meet the
electronic tolling requirements of the Indian market. It offers an
interoperable nationwide toll payment solution including clearing
house services for settlement and dispute management.

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• AePS is a bank led model which allows online
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interoperable financial
inclusion transaction at PoS (MicroATM) ha
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correspondent of any bank using the
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• AePS allows you to do six types of transactions. Cash Deposit ,Cash
Withdrawal,Balance Enquiry, Mini Statement,Aadhaar to Aadhaar Fund
Transfer,Authentication,BHIM Aadhaar Pay
• The only inputs required for a customer to do a transaction under this
scenario are:-
• Bank Name,Aadhaar Number, Fingerprint captured during enrollment.
• Cheque Truncation System- Prior to CTS clearing, instruments used to
get settled in MICR clearing. There were total 66 MICR centers across
India. These MICR centers used to undertake clearing & settlement in
their local geography. The intra MICR clearing was considered
outstation clearing.
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• In CTS scenario, the physical instrument ish98truncated9@
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bank end (either at branch level or service ha
n tsin branch level). The images
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& data of collected instrument captured
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at presenting bank would
travel electronically to drawee bankO
for processing same day. The
return cycle would be completed next day. The return cycle would be
completed next day & settlement is completed on completion of
return cycle. The customer would get funds on completion of
settlement process. Further all clearing locations are divided in 3
regional grids. All Clearing locations are of a grid are settled together
on T+1 basis.
• BHIM Aadhaar Pay enables Merchants to receive digital payments from
customers over the counter through Aadhaar Authentication. It allows for
any Merchant associated with any acquiring bank live on BHIM Aadhaar
Pay , to accept payment from customer of any bank by authenticating
customer’s biometrics.
• To be able to effect the same, merchant should have an Android mobile with BHIM
Aadhaar app and certified biometric scanner attached with . co
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phone/Kiosk/Tablet on USB Port or Micro-ATM/POS,@gmPOS. ma Both Customer and
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Merchant should have their Aadhaar linked to their
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• National Payments Corporation of India (NPCI) in association with
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Department of Financial Services (DFS), National Health Authority (NHA),

Ministry of Health and Family Welfare (MoHFW), and partner banks, has
launched an innovative digital solution – ‘e-RUPI’.
• The users of this seamless one-time payment mechanism will be able to redeem the
voucher without a card, digital payments app or internet banking access, at the
merchants accepting e-RUPI. e-RUPI would be shared with the beneficiaries for a
specific purpose or activity by organizations or Government via SMS or QR code.
• Bharat Bill Payment Systems- The Bharat Bill payment system is a
Reserve Bank of India (RBI) conceptualised system driven by National
Payments Corporation of India (NPCI). It is a one-stop ecosystem for
payment of all bills providing an interoperable and accessible
“Anytime Anywhere” Bill payment service to all customers across
India with certainty, reliability and safety of transactions.
• Bharat BillPay has multiple modes of payment and gm
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categories like electricity, telecom, DTH, gas, ha

n t singwater bills, etc. and also other

repetitive payments like insurance premium, f or

pr a s
mutual funds, school fees,
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institution fees, credit cards, fastag Orecharge, local taxes, housing society
payments, etc. at one single window.

• APBS- Aadhaar Payment Bridge (APB) System is helping the

Government and Government agencies in making the Direct Benefit
Transfers for various Central as well as State sponsored schemes.
• UPI- Unified Payments Interface (UPI) is a system that powers multiple bank
accounts into a single mobile application (of any participating bank), merging
several banking features, seamless fund routing & merchant payments into one
hood. It also caters to the “Peer to Peer” collect request which can be scheduled
and paid as per requirement and convenience.

• How is it unique? om
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• Immediate money transfer through mobile device round the clock 24*7 and 365 days.
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• Single mobile application for accessing different bank 98
accounts.
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• Single Click 2 Factor Authentication – Aligned with p
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for
a very strong feature of seamless single clicknly payment.
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• Virtual address of the customer for Pull & Push provides for incremental security with the
customer not required to enter the details such as Card no, Account number; IFSC etc.
• QR Code
• Merchant Payment with Single Application or In-App Payments.
• Utility Bill Payments, Over the Counter Payments, QR Code (Scan and Pay) based payments.
• Donations, Collections, Disbursements Scalable.
• Raising Complaint from Mobile App directly.
• UPI 123PAY is an instant payment system for feature phone user.
Through UPI 123PAY, feature phone users will now be able to
undertake a host of transactions based on four technology
alternatives. They include calling an
• IVR (interactive voice response) number,
• app functionality in feature phones, om
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• also proximity sound-based payments. a n tsin
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• UPI One World is a slice of the UPI experience crafted for inbound
travellers. It is the Prepaid payment instrument linked to UPI
provided to foreign nationals/ NRIs coming from G20 countries.
• The PPI on UPI wallet can be used for merchant transactions across
the country.
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• *99# service -Banking customers can avail this service by dialing *99#
on their mobile phone and transact through an interactive menu
displayed on the mobile screen (available only for live TSPs).
• *99# service is currently offered by 83 leading banks & all GSM
service providers and can be accessed in 13 different languages
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Why CBDC?
• Reduction in cost associated with physical cash management.

• To further the cause of digitisation to achieve a less m

cash
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economy.(Support financial inclusion) g mail.
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• Supporting competition, efficiency lyand
fo innovation in payments.
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• To explore the use of CBDC for improvement in cross-border

transactions.

• Safeguard the trust of the common man in the national currency vis-
à-vis proliferation of crypto assets.
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Urban Cooperative Banks
• Banking Regulation Act(Amendment),2020-

• The Act allows the central bank to initiate a scheme for reconstruction or
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amalgamation of a bank without placing it under moratorium.
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• If the central bank imposes moratorium onrasaha bank, the lender can not grant any
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• The co-operative banks will be allowed to issue equity, preference, or special

shares on face value or at a premium to its members, or to any other person
residing within their area of operations. The banks may also issue unsecured
debentures or bonds or similar securities with maturity of ten or more years to such
persons. However, a prior approval from RBI is mandatory for such issuance.
• No person will be entitled to demand payment towards surrender of
shares issued to him by a co-operative bank, the Bill states.

• The Act mentions that RBI may exempt a cooperative bank or a class of
cooperative banks from certain provisions of the Act through notification.
These provisions are related to employment, the qualification of the board
of directors and, the appointment of a chairman. om
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• RBI may supersede the board of directorsanof tsin a multi-state co-operative
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bank for up to five years under certainfor pconditions.

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These conditions
include cases where it is in the publicOnlyinterest for RBI to supersede the
Board, and to protect depositors.

• The Act discards the provision of Banking Regulation Act, 1949 that
cooperative banks cannot open a new place of business or change the
location of the banks outside of the village, town, or city in which it is
currently located without permission from RBI.
• The changes will not affect the existing powers of the state registrars
of co-operative societies under state laws.

• Exclusion: The Banking Regulation Amendment Bill, 2020 will not be

applicable to a) Primary agricultural credit societies, b) Cooperative
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