The banking system in India is managed through certain regulations devised by the Reserve Bank of India. The Act through which banks are regulated is known as Banking Regulations Act. It is a legislation that facilitates smooth functioning of the banking system; controlling the activities of banks, devising policies for effective regulation of bank credit and safeguarding the interest of the depositors. Given below are some aspects of the Banking Regulations Act that govern the banking system in India:
As prescribed by the Banking Regulations Act, the banks can only lend 15% of funds to a single borrower. This increases to 20% for infrastructure or construction projects.
For group borrowers, the capital funds allocated for lending is up to 30% of the bank funds and increases to 40% for group borrowers for projects related to infrastructure or construction. The banks have a provision to increase the lending limits by 5%. However, this needs to be approved by the bank’s board of directors.
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Cash Reserve Ratio (CRR) is the amount of cash that commercial banks must have with them, in the form of reserves in the current account maintained with Reserve Bank of India. Banks deposit 4% of their net demand and time liabilities (NDTL), with RBI in the form of cash. Cash reserve ratio or CRR is maintained with RBI on a fortnightly basis. The Cash Reserve Ratio is used as a tool in monetary policy, to influence the country’s borrowing and interest rates by regulating the amount of cash available with banks to sanction loans to customers.
Statutory Liquidity Ratio (SLR) is the amount that the commercial banks maintain with the RBI in the form of cash, gold or Government security, before providing credit to customers. SLR can be in a range of 22% to 40%. Statutory Liquidity Ratio (SLR) is basically used to control inflation and maintain growth in India, by increasing or decreasing the Statutory Liquidity Ratio. SLR is currently 19.25%.
Banks collect deposits from the public and lend. So banks operate on Public deposits. When a loan is not being repaid, the Bank has to compensate this money from other sources like profit. Setting aside of money from profits to compensate a probable loss caused by lending is Provisioning.
Provisioning is generally done for Non-Performing Assets or NPAs. Non Performing Assets refer to loans that are not being repaid on scheduled payment dates. Generally, when banks do not receive a payment for 90 days, (This is principal or interest on the loan), then the loan becomes an NPA. NPA can be categorised as substandard, doubtful and written-off.
For substandard assets, the banks makes a provision of 15% of the outstanding loans, in case of secured loans and 25% provisioning of the outstanding amount for unsecured loans. The substandard assets get converted into doubtful assets, when repayment is not made for a year. For doubtful assets the bank requires a provisioning of 100% for unsecured loans. However for secured loans, the provisioning is done based on the time period. For the first year a provision of 25% of the outstanding amount is made. For doubtful NPAs that exist from 1 to 3 years, provisioning is 40% of the outstanding amount. For NPA’s that exists for more than 3 years provisioning mandated is 100% of the outstanding amount.
The banking regulations act also states that provisioning must be done in case of standard assets as well. For agriculture and SMEs provisioning it is 0.25%. For commercial or real estate provisioning it is 1% and 0.75% for housing. For the remaining sectors provisioning is 0.4%.
Priority sectors refer to those sectors which the government of India and the Reserve Bank of India consider important for the development and fulfilment of the basic needs of India. These sectors are given more focus and the banks are mandated to support and motivate the growth of these sectors with adequate loans and timely credit. The sectors that are grouped as priority sectors include agriculture, small and medium enterprises, export credit, education and housing, social infrastructure and renewal energy.
The RBI has certain guidelines for priority sector lending which states that 40% of the total net bank credit must go to priority sector advances. Around 10% of the priority sector advances or 10% of the total net bank’s credit must go to the weaker sections. Around 18% of the total net bank credit must go to the agricultural sector and 7.5% of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher must go to Micro enterprises.
The Reserve Bank of India follows certain guidelines for providing licences to new banks. The Banking regulations act maintains that any entity or group applying for banking licenses must have a past record of good credentials with a track record of 10 years and must be operated through Non operative financial holding company (NOFHC), fully owned by promoters.
The NOFHC shall initially hold a minimum of 40% of the paid-up voting equity capital of the bank, which shall be locked in for a period of five years and which shall be brought down to 15% within 12 years. The bank will be governed by the provisions of the relevant Acts, relevant Statutes and the Directives, Prudential regulations and other Guidelines and Instructions issued by RBI.
SEE ALSO: New Bank License Norms
A wilful defaulter can be a person or a group who have borrowed money from the bank and has not repaid the principal and interest even though resources are available. If a default takes place in case of a company, then the entire group goes under willful default. Any willful defaulter cannot get further loans from any bank and the bank can file a case against the defaulter.
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