NBFCs and Banking License – one of the most interesting events in 2014 !! Part 1 :-Banks , NBFCs and RBI

The Banking Domain is a complex one. India has 88 scheduled commercial banks (SCBs). Of this there are 27 public sector banks (with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.


The oldest bank in India is the State Bank of India, a PSU that was initially set up in June 1806 and is currently the largest commercial bank. Central banking ,for which the Reserve Bank of India (RBI) is responsible, took over these duties from the then Imperial Bank of India. After India’s independence in 1947, RBI was nationalized and given a wider scope to exercise its powers and judgment.

According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

(Read more at :- http://www.bankbazaar.com/guide/banks-in-india/)

Over the last two decades, the Reserve Bank of India (RBI) licensed twelve banks in the private sector. This happened in two phases. Ten banks were licensed on the basis of guidelines issued in January 1993. The guidelines were revised in January 2001 based on the experience gained from the functioning of these banks, and fresh applications were invited.

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.

(Read more about the guidelines at :- http://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2651)

What does a ‘Commercial’ Bank do ?

At the most basic level, what banks do is fairly simple. It Accept Deposits and Make Loans.  Banks accept deposits from customers, raise capital from investors or lenders, and then use that money to make loans, buy securities and provide other financial services to customers. These loans are then used by people and businesses to buy goods or expand business operations, which in turn leads to more deposited funds that make their way to banks. 
If banks can lend money at a higher interest rate than they have to pay for funds and operating costs, they make money.

Can all Commercial institutions which give out loans be called a Bank ?

No .  Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. These institutions typically are restricted from taking deposits from the public depending on the jurisdiction. Operations of these institutions are often still covered under banking regulations.

NBFCs offer most sorts of banking services, such as loans and credit facilities, private education funding, retirement planning, trading in money markets, underwriting stocks and shares, TFCs(Term Finance Certificate) and other obligations. These institutions also provide wealth management such as managing portfolios of stocks and shares, discounting services e.g. discounting of instruments and advice on merger and acquisition activities. The number of non-banking financial companies has expanded greatly in the last several years as venture capital companies, retail and industrial companies have entered the lending business. Non-bank institutions also frequently support investments in property and prepare feasibility, market or industry studies for companies. (Read more on NBFCs at :- http://en.wikipedia.org/wiki/Non-banking_financial_company)

However NBFCs are typically not allowed to take deposits from the general public and have to find other means of funding their operations such as issuing debt instruments. Thus, their Cost Of Funds is usually higher than that of a bank.

To view the list of deposit taking NBFCs in India , refer to the RBI site http://www.rbi.org.in/commonman/English/Scripts/NBFCs.aspx

What Role does RBI play in the Banking industry?

Reserve Bank of India is the Central Bank and Banker to the Government of India .Its functions are

1. Monetary Authority:

  • Formulates, implements and monitors the monetary policy.
  • Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

2. Regulator and supervisor of the financial system:

  • Prescribes broad parameters of banking operations within which the country”s banking and financial system functions.
  • Objective: maintain public confidence in the system, protect depositors” interest and provide cost-effective banking services to the public.
  • Regulator and supervisor of the payment systems
    • Authorises setting up of payment systems
    • Lays down standards for operation of the payment system
    • Issues direction, calls for returns/information from payment system operators.

3. Manager of Foreign Exchange

  • Manages the Foreign Exchange Management Act, 1999.
  • Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

4. Issuer of currency:

  • Issues and exchanges or destroys currency and coins not fit for circulation.
  • Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

5. Developmental role

  • Performs a wide range of promotional functions to support national objectives.

6. Related Functions

  • Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
  • Banker to banks: maintains banking accounts of all scheduled banks.

(Read more at :- http://www.rbi.org.in/commonman/English/scripts/Organisation.aspx)

Thus , it is the primary regulator and monitor for the Financial System –  Banks and NBFCs-  in their activities .

Specific to NBFCs the Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and supervisory objective, is to:

  • ensure healthy growth of the financial companies;
  • ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations; and that
  • the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system.

(Read more at :- http://www.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=377)


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