Part-II: Structure of Banking

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Part-II: Structure of Banking

The Indian financial system comprises a large number of commercial and cooperative banks, specialized developmental banks for industry, agriculture, external trade and housing, social security institutions, collective investment institutions, etc. The banking system is at the heart of the financial system.

The Indian banking system has the RBI at the apex. It is the central bank of the country under which there are the commercial banks including public sector and private sector banks, foreign banks and local area banks. It also includes regional rural banks as well as cooperative banks.


Scheduled Versus Non-scheduled banks

Banks are broadly classified as scheduled and non-scheduled banks in India regulated under the Banking Regulation Act, 1949, wherein scheduled banks include all the commercial banks like nationalised, foreign, development, cooperative and regional rural banks.

On the other extreme, non-scheduled banks are the banks that do not adhere to the norms prescribed by the Reserve Bank of India (RBI). In this article excerpt, you can find out all the relevant differences between scheduled and non-scheduled banks in India.

A Scheduled bank is a banking corporation whose minimum paid up capital is Rs. 25 lakhs and does not harm the interest of the depositors. Non-scheduled banks are the banks which do not comply with the rules specified by the Reserve Bank of India, or say the banks which do not come under the category of scheduled banks. Scheduled banks are allowed to borrow money from RBI for regular banking purposes. Non-Scheduled banks are not allowed to borrow money from RBI for regular banking purposes.

Scheduled Banks as the name suggest are the banks, which are accounted in the Second Schedule of the Reserve Bank of India (RBI) Act, 1934. To qualify as a scheduled bank, the bank should conform to the following conditions:

  1. The total minimum value of paid up capital and reserve must be of Rs. 25 lacs.
  2. The bank requires to satisfy the central bank that its affairs are not carried out in a way that causes harm to the interest of the depositors.
  3. The bank needs to be a corporation rather than a sole-proprietorship or partnership firm.
  4. Scheduled banks enjoy certain rights such as:
  5. Right to receive refinance facility from the apex bank
  6. Entitled for currency chest facility.
  7. Right to become members of clearing house

However, they are required to fulfil certain obligations like maintenance of an average daily balance of CRR (Cash Reserve Ratio) with the central bank at the rates specified by it. Add to that; these banks need to submit returns at regular intervals, to the central bank subject to the rules of Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949.

Non-Scheduled Bank refers to the banks which are not listed in the Second Schedule of Reserve Bank of India. In finer terms, the banks which do not comply with the provisions specified by the central bank, within the meaning of the Reserve Bank of India Act, 1934, or as per specific functions, etc. or as per the judgement of the RBI, are not able to serve and protect the depositor’s interest, are known as non-scheduled banks.

Non-Scheduled Banks are also required to maintain the cash reserve requirement, not with the RBI, but with themselves. These are local area banks.

When it comes to privileges, scheduled banks are ahead of non-scheduled banks. Scheduled banks get remittances through the offices of the Reserve Bank of India and its agents, for free or at concessional rates. =


Different types of Scheduled Commercial Banks

The Scheduled banks comprise Scheduled Commercial Banks and Scheduled Co-operative banks. The further classification of is as follows:

  1. Scheduled Commercial banks
  2. Public Sector Banks
  3. State Bank of India and its associates, and
  4. Other Nationalised banks
  5. Private Sector Indian Banks
  6. Old private-sector banks
  7. New private-sector banks
  8. Private-sector Foreign banks
  9. Regional Rural Bank (RRBs)
  10. Scheduled Co-operative banks
  11. Scheduled State Co-operative Banks
  12. Scheduled Urban Co-operative Banks



Scheduled Commercial Banks (Public Sector Banks)

Public Sector Banks (PSBs) are banks, where a majority stake (more than 50%) is held by a government. The shares of these banks are listed on stock exchanges.

There are 27 public sector banks in India. Out of these, 21 banks are nationalized and 6 banks are of State Bank Group (SBI and its 5 Associates).


State Bank of India Group

State Bank of India (SBI) is an Indian multinational, public sector banking and financial services company. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. On 1st April, 2017, State Bank of India, which is India’s largest Bank merged with five of its Associate Banks (State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore) and Bharatiya Mahila Bank with itself.

This is the first ever large scale consolidation in the Indian Banking Industry. With the merger, State Bank of India will have a balance sheet size of 33 trillion, 278,000 employees, 420 million customers, and more than 24,000 branches and 59,000 ATMs. SBI’s market share will increase to 22 percent from 17 per cent. It has 198 offices in 37 countries; 301 correspondents in 72 countries.

The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding, in 1806, of the Bank of Calcutta, making it the oldest commercial bank in the Indian subcontinent. Bank of Madras merged into the other two “presidency banks” in British India, Bank of Calcutta and Bank of Bombay, to form the Imperial Bank of India, which in turn became the State Bank of India in 1955. Government of India owned the Imperial Bank of India in 1955, with Reserve Bank of India (India’s Central Bank) taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India.

State Bank of India is a banking behemoth and has 20% market share in deposits and loans among Indian commercial banks.

SBI has five associate lenders, State Bank of Bikaner and Jaipur, State Bank of Travancore, State Bank of Patiala, State Bank of Mysore and State Bank of Hyderabad. Among the associate banks, State Bank of Bikaner and Jaipur, State Bank of Mysore and State Bank of Travancore are listed.



Is SBI a nationalized bank?

SBI is NOT a Nationalized bank. It is a Public Sector Bank. Actually, SBI draws power from the State Bank of India Act, 1955.

Nationalized banks are the banks which were nationalized in two phases – in 1969 and 1980. These banks were established under Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980. So, these banks are governed by their respective statutes.

In 1969, 14 Commercial banks were nationalized and in 1980, 6 more banks were nationalized. But, later in 1993, PNB and New India bank got merged taking the figure of nationalized banks to 19.


Why SBI is put in different category?

This is mainly because SBI group is governed by a different set of laws viz. SBI Act, 1955 and SBI Subsidiary Banks Act, 1959.


Old private 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.

Reliance Capital, India Post, Larsen & Toubro, Shriram Transport Finance are companies pending a banking license with the RBI under the new policy, while IDFC & Bandhan were given a go ahead to start banking services for 2015. Within 3 years of the starting of the operations, the bank should offer shares to public and their net worth must increased to 300 crores.



Foreign Banks and their branches in India

There are 43 foreign banks from 26 countries operating as branches in India and 46 banks from 22 countries operating as representative offices in India.


What is the share of foreign banks in the banking business in India?

Foreign Banks account for less than 1% of the total branch network in the country. However, they account for approximately 7% of the total banking sector assets and around 11% of the profits.


What is the RBI policy towards Foreign Banks in India?

The RBI has said that banks that started operations after August 2010 would have to establish wholly-owned banking subsidiaries rather than operate through branches as they have done till now.

In 2005, the RBI had prepared a road map for foreign banks that had given them the option to either operate through branches or form wholly-owned subsidiaries. None of the 43 foreign banks operating in the country have opted to form subsidiaries.

The guidelines set other criteria, which will determine which foreign banks will be required to switch over to the subsidiary route. The guidelines state that banks belonging to jurisdictions that have legislation that give a preferential claim to deposits in the home country in a winding-up proceeding would have to set up a wholly-owned subsidiary (WOS). The WOS rule would also apply to banks with a complex structure (which it didn’t clearly define), those that were not widely held and banks where the RBI was not satisfied with the supervisory arrangements.

According to the RBI’s proposed framework, foreign banks that entered India before August 2010 and do not fail the other litmus tests detailed above, will have the option to either continue their banking business through the branch mode or convert those branches into a WOS.

A banking subsidiary will create a separate legal entity, which will have its own capital base and local board of directors. It will also ensure that there is a clear delineation between the assets and liabilities of the domestic bank and those of its foreign parent, thus providing for ring-fenced capital and assets.

The RBI said the minimum paid-up voting equity capital for a wholly-owned subsidiary would be Rs 500 crore. A newly formed WOS will be required to bring in the entire initial capital upfront.

Foreign banks that already operate in the country have been given some leeway on the capital front. The WOS in this case must have a net worth of Rs 500 crore and will have to maintain a minimum capital adequacy ratio of 10 per cent on a continuous basis for an initial period of three years —which is one percentage point higher than that required under the phased implementation of Basel III capital norms.

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