[Banking] RRB Amendment Bill, Small Banks-Payment Banks, Kotak-ING Vysya Merger, NBFC Guidelines

Regional Rural Bank RRB

[Banking] RRB Amendment Bill, Small Banks-Payment Banks, Kotak-ING Vysya Merger, NBFC Guidelines

  1. Prologue
  2. BO1: RRB act
  3. BO2: Small banks and Payment Banks
  4. BO3: Kotak-ING Vyasa Merger
    1. Banking consolidation in past
    2. Kotak ING Vyasa Merger
    3. Bank merger/consolidation: good or bad?
  5. BO4: NBFC regulation guidelines
  6. BO6: SBI Share splitting
  7. Mock Questions for Banks Exams

Prologue

  • In this article, we’ll checkout a few current developments in Banking sector at “Organizational” level.
  • In the next article, we’ll see developments at “operation / product” level e.g. Bharatiya Bill Payment system, SBI’s Shariya fund, E-mandate etc.
  • Utility: Mainly for bank interviews and MCQs.

BO1: RRB act

Regional Rural Bank RRB

Background theory

  • 1976: Regional Rural banks Act, based on Narsimhan Committee’s recommendations for greater financial inclusion.
  • RRBs aim to combine efficiency of a commercial bank with grassroot networking of a cooperative society.
  • RRB is one type of Commercial bank. Therefore, it has to comply with RBI’s SLR, CRR and PSL requirements (Priority sector lending).
  • Sponsor bank helps the RRB in HRM-training, account keeping services.

Anyways, RRB is an old theory topic, why has it resurfaced again?

Salient features of RRB Amendment Bill 2014
RRB Act 1976 RRB Amendment Bill 2014
  • 5 lakh shares x Rs.100 each
  • Total authorized capital: Rs.5 crore
  • 200 crore shaers x Rs.10 each
  • Total authorized capital: Rs.2000 crores
Shareholding 

  • Union: 50%
  • State: 15%
  • Sponsor Bank: 35%
  • RRB can issue shares in capital market to get more funds from private investors.
  • But one condition that combined shareholding of Union+State+Sponser bank should not fall below 51%
State government’s shareholding was fixed to 15% States can buy more shares, to increase their shareholding above 15%
RRB can appoint Board of directors from outside union-state and sponsor bank nominated people.
One person cannot become director in 2 RRBs.
Director’s tenure limit: 2 years 3 years
Person cannot remain director for more than 6 years. (Meaning one individual can be an RRB director for only two terms 3 + 3.)
Classification of Financial Intermediaries

AIFI: All India financial institutions, PD: Primary Dealers

BO2: Small banks and Payment Banks

Timeline of Events leading to Small / Payment Banks
1998 Narsimhan-II Committee recommends small banks in India.
2009 Raghuram Rajan Committee says the same.
2013-14 For greater financial inclusion, RBI’s Nachiket Mor Committee had recommend new types of banks such as payment banks and wholesale banks.
2014, Feb-March Bimal Jalan Committee approved Bandhan Microfinance and IDFC for opening private commercial banks. Bimal too recommended RBI to permit ‘differentiated’ banks in India.
2014, Nov Rajanbhai invites applications for Small banks and payment banks.

Common Features of Small bank and Payment banks

  1. Deadline to apply for License: 16/01/2015. After that, an external screening Committee will decide the winners, probably in July 2015.
  2. Minimum capital requirement to apply for license: 100 crores. (For commercial bank license, it was Rs.500 crores)
  3. They’ll have to comply with the FDI norms like regular commercial banks i.e. 74% FDI only.
What’s the difference?
Small banks Payment banks
Can accept all types of deposits like a commercial bank (CASA, FDRD etc.)
  • Take deposit only on current account, saving account. (CASA)
  • Cannot accept fixed deposits (FD)
  • Can issue Credit card? Nope.
  • Can issue debit card? Yes.
  • Can open NRI accounts? Nope
  • They can give out depositor’s money as loans to other customers, but small area of operation.
  • They’ll be opened under “Companies Act 2013”.
  • They can’t give loans. They can invest depositor’s money in Government securities (G-sec) only.
  • Although they’re allowed to sell mutual funds, insurance and pension products, accept utility bill payments etc. to keep branch operations profitable.
Target customers: MSME businessmen, unorganized workers, small and marginal farmers. Target customers: poor, migrants, unorganized workers wanting to send remittances home.
Focus: Deposit and loans Focus: Payment/remittances only. Including cross-border remittances.
Who can apply? 

  • MFI, NBFC can convert their organization into small banks
  • Even individual with 10 years’ experience in bank/cooperative sector can apply for license.
  • Large companies can’t apply.
Who can apply? 

  • Indian Post
  • Corporate houses
  • Telecom companies
  • Retail chains.
  • Above people can even launch payment banks with Joint venture from commercial banks.
Conditions: 

  • 25% branches in rural area
  • 50% of the loans be given to MSME sector.
Condition: 

  • Maximum balance per customer: Rs.1 lakh
  • Minimum Leverage ratio 3% i.e. liabilities should not exceed 33 times of its networth.
  • Remaining differences are of technical nature like tier-1 capital etc. not worth the effort for MCQs.
  • Public sector bank employee union has opposed this move, saying existing public sector banks are capable of delivering these services and last mile financial inclusion.

BO3: Kotak-ING Vyasa Merger

Banking consolidation in past
2000 TIMES Bank merged in HDFC
2001 Bank of Madura merged in ICICI
2002 Benares State bank (Public sector bank) merged with BoB (Bank of Baroda)
2003 Nedungadi bank (Kozhikode) merged with PNB (Punjab National Bank)
2004 Global Trust Bank merged with OBC (Oriental bank of Commerce) after media reports that Global trust bank had financed Ketan Parekh’s sharemarket scam.
2005 Bank of Punjab merged with Centurion bank
2008 Centurion bank itself merged with HDFC
2014 Latest: ING Vysya merges with Kotak Mahindra bank.

Kotak ING Vyasa Merger

RBI, CCI and other financial regulators have approved the ING-Vysya Bank to merge with Kotak Mahindra bank (2014, November).

Kotak Mahindra ING Vysya bank
Got Banking license in 2003
  • 1930s: Vysya bank born to cater Banglore, Mysore, Karnataka region.
  • 1958: Got license from RBI to open all India branches.
  • 2002: Vysya bank (Indian) merged with Dutch ING (a Foreign bank). Thus ING Vysya Bank born
  • 2014: now ING-Vysya to merge with Kotak Mahindra.
4th Largest private bank 7th
Founder: Uday Kotak
  • Shailendra Bhandari (CEO)
  • Uday Sareen (Dy.CEO) he will be inducted in Kotak’s board after merger
After Merger 

  • Kotak’s total asset ~2.1 lakh crore rupees
  • Total branches ~1,215
After merger, 

  • ING Vysya shareholders will get 725 shares of Kotak for every 1000 shares of ING-Vysya.
  • ING Vysya’s staff and branches will become part of Kotak-Mahindra bank.
  • Ranking of private Indian banks after this merger: (1) HDFC (2) ICICI (3) Axis (4) Kotak.
  • Kotak group also got “in-principal” approval to takeover general insurance business from ING-Vysya.
Bank merger/consolidation: good or bad?
Pro arguments Anti-arguments
  • Bank consolidation will reduce cost of operation and increase efficiency of services.
  • Therefore, small-sized public sector banks should be merged with SBI.
  • This will help meeting capital requirements under BASEL-III norms
  • Will help Indian banks get in top-5 world banks list with large asset size.
  • May create oligopoly and shadow banks.
  • American Sub-prime crisis was a result of shoddy practices by such Banking oligopolies.

BO4: NBFC regulation guidelines

Background

  • Non-banking financial companies serve as an important tool for financial inclusion and turning savings into investment.
  • But, in the 90s, Harshad Mehta and other scams put all Non-banking financial companies into bad light.
  • As a result, RBI and Government always adopted precautionary and sometimes ‘step-motherly’ regulations on NBFCs. For example- they’re not allowed to get tax-benefits on NPA, mosto f them forbidden from external commercial borrowing (ECB), they are not given loan recovery powers under SARFAESI Act and so on.
  • 2014, November: Finally, Rajanbhai decided to empower NBFCs, on par with Commercial Banks.

RBI’s new guidelines for NBFCs:

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