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Banking Regulation: Explained

The banking regulation regulated by Reserve bank of India (RBI), The central bank of India, under the provision of Banking regulation act,1949.
The Important aspects which control the banking regulation in India are described below:

Cash reserve ratio and statutory liquidity ratio:

  • According to banking regulation, all banks in India have to keep 4% of their net demand and time liabilities (NDTL) with the RBI in form of cash without any interest earned.
  •  This 4% cash is known as Cash reserve ratio (CRR). 
  • The CRR maintained on fortnightly basis. In the case of default, the penalty is 3% of bank rate applied on number of default days multiplied with the amount which is fall shortly.
  • Banks in India required to maintained, Minimum 22% and maximum 40% of NDTL in form of gold, cash and security bonds with the RBI which is known as Statutory liquidity ratio(SLR). This SLR can borrow on an overnight basis under the Marginal standing facility
  • The borrowing limit is 2% of NDTL and the interest charge on MSF is higher than repo rate.

Exposure limits:

  • There are some limits on lending which are set by RBI under banking regulation norm.
  • Single borrower Lending limit is 15% of Banks total fund. In case of infrastructure lending it may be extended to 20%
  • Group borrower lending limit is 30% which may be extended to 40% in case of infrastructure projects.
  • 5% extension on lending limits can be done with the approval of bank’s board of director.

Priority sector lending:

  • Priority sector consists of micro and small enterprises, agriculture, housing for poor and less privilege, low income groups, education for students. RBI gives an important role to banks to provide a specific portion of lending to this priority sectors.
  • Agriculture: There are two kind of finance in agriculture, one is direct and other one is indirect.
  • Direct finance included short, medium and long term loans to individual farmers or joint liability groups or Self-help groups. For individual farmers there is no limit on this lending but for groups the lending limit is 20lakh. 
  • Micro and small enterprises: For micro enterprises the limit of lending shall not exciding 50,000 rupees per borrower to the poor in rural, semi urban and urban areas. 
  • For small scale enterprises the direct finance shall include all which are used in manufacture, processing, plant and machinery.
  • Education loans: Education loans are limited to 10lakh per borrower in India and 20lakh in abroad.
  • Housing loan: In metropolitan centers where population is above 10 lakh housing loan (construction purpose) lending limit is up to 28lakh per borrower and in other centers it is 2olakh per borrower. For repair the loans to individual up to 5lakh in metropolitan and 2lak at the other centers.

Provisioning: 

There are three categories of Non-performing asset (NPA), Substandard, doubtful and loss. If there is no interest earned on lending principal for more than 90 days then the asset become a Non-performing asset in case of term loan.
 Those assets with NPA status for less than 12months are categorized as substandard assets, at the end of 12months they declare as doubtful assets.
 If the bank or the auditor expects no interest or no recovery for an asset then it is categorized as a loss asset.
  • Provision for substandard assets - 15% outstanding loan amount for secured loans and 25% outstanding loan amount for unsecured loans be made.
  • Provision for Doubtful assets–In this case the provisioning for secured part varies, 25% for a NPA which have been in existence for less than 12 months, 40% for NPA’s existing between 12months to 36months. 100% outstanding loan amount for NPAs which have been in existence more than 3years. The unsecured part is 100%.
Provision is also applied on standard assets
  • In Agriculture, small and medium industries the provisioning is 0.25%
  • For commercial real estate the provisioning is 1%
  • For other assets it is 4%

New bank liecense norms:

  • Applicants should have successful track record of at least 10 years.
  • A Non-operative financial holding company should operate the bank, which is wholly owned by promoters.
  • The minimum paid up equity capital is 500corer.
  • The NOFHC holding the 40% of the equity capital and eventually bringing down to 15% over 12yeras.
  • After start of the bank’s operation within 3years the shares have to be listed.
  • For first 5 years the foreign shareholding is 49%. After that the FDI would be increase to 74% but in that RBI approval needed.
  • The 25% of the bank’s branch should be opened in unbanked rural areas

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