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CAIIB Paper 4 BRBL Module A Unit 5 : Public Sector Banks, Private Sector Banks, Regional Rural Banks, Differentiated Banks, Co-operative Banks And Local Area Banks (New Syllabus)
IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Public Sector Banks, Private Sector Banks, Regional Rural Banks, Differentiated Banks, Co-operative Banks And Local Area Banks”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.
In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module A (REGULATIONS AND COMPLIANCE) Unit 5 : Public Sector Banks, Private Sector Banks, Regional Rural Banks, Differentiated Banks, Co-operative Banks And Local Area Banks, Aspirants must go through this article to better understand the topic, Public Sector Banks, Private Sector Banks, Regional Rural Banks, Differentiated Banks, Co-operative Banks And Local Area Banks and practice using our Online Mock Test Series to strengthen their knowledge of Public Sector Banks, Private Sector Banks, Regional Rural Banks, Differentiated Banks, Co-operative Banks And Local Area Banks. Unit 5 : Public Sector Banks, Private Sector Banks, Regional Rural Banks, Differentiated Banks, Co-operative Banks And Local Area Banks
State Bank of India
- State Bank of India was established under Section 3 of the State Bank of India Act, 1955 for taking over the undertaking of the Imperial Bank and to carry on the business of banking.
- State Bank has its corporate centre in Mumbai and local head offices at Mumbai, Kolkata, Chennai and other places as decided by Central Government in consultation with the Central Board of the State Bank. The Central Government can give directions to the bank on matters of policy involving public interest in consultation with the Governor of the Reserve Bank and the Chairman of State Bank.
- The Board shall consist of Chairman, not more than four Managing Directors appointed by the Central Government and other directors.
- The Chairman and Managing Directors are appointed for a period not exceeding five years and are eligible for reappointment. Their services can be terminated by the Central Government by giving a three months’ notice after consultation with the Reserve Bank.
- The State Bank shall act as an agent of the Reserve Bank at the places where it has a branch and where Reserve Bank has no branch, if so required, by the Reserve Bank, for transacting Government business and other business entrusted to it by the Reserve Bank.
- The State Bank has to close its books and balance accounts each year as on 31 March or such other date as may be specified by the Central Government. Within three months of the closing date, it has to furnish to the Central Government and the Reserve Bank its balance sheet and profit and loss account together with auditors’ report and a report by the Central Board on the working and activities of the bank.
- All the five subsidiaries along with Bharatiya Mahila Bank have been merged with SBI w.e.f. 1st April 2017.
Regional Rural Banks
- The Regional Rural Banks (RRBs) are public sector institutions, regionally based, rural oriented and engaged in commercial banking. They were first set up in 1975 under the Regional Rural Banks Ordinance, 1975. The ordinance was later replaced by the Regional Rural Banks Act, 1976.
- ‘Sponsor Bank’ is a bank by which a regional rural bank is sponsored and it holds 35 per cent of the issued capital of the RRB, while the Central Government holds 50 per cent and the State Government holds the remaining fifteen per cent of the issued capital.
- The board consists of a chairman appointed by the sponsor bank from among its officers in consultation with NABARD, or otherwise in consultation with the Central Government.
- Regional rural banks may transact the business of banking as defined in Section 5(b) of the Banking Regulation Act and any other business permissible for a bank to undertake under Section 6(1) of that Act.
- Every RRB has to close and balance its accounts as on 31 March or such other date as the Central Government may specify. The auditors have to be appointed with the approval of the Central Government.
- There are presently 43 RRBs and there are further plans to amalgamate RRBs, in a road map prepared in consultation with NABARD, to bring down the number of RRBs pan India. The amalgamations have been/is being carried out with a view to enable the RRBs to minimize their overhead expenses, optimize the use of technology, enhance the capital base and area of operation and increase their exposure.
Other Public Sector Banks
- The other public Sector Banks (apart from SBI) are called Nationalized Banks since they came into being consequent to the enactment of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition and Transfer of Undertakings) Act,1980 also called the “Bank Nationalization Acts”.
- As per the statute the Central Government is required to hold, at all times, not less than fifty one per cent of the equity of these banks. No equity shareholder other than the Central Government can exercise voting rights in excess of one per cent of the total voting rights of all the shareholders.
- The Board in a nationalized Bank consists of directors who could either be nominated/ appointed by the Government of India or elected from among the shareholders.
- Meetings of the Board shall ordinarily be held at least six times in a year and at least once in each quarter. The quorum of a meeting of the Board shall be one-third of the number of directors holding office as such directors of the Board on the day of the meeting.
- The Board in a nationalized Bank consists of directors who could either be nominated/ appointed by the Government of India or elected from among the shareholders. Not more than four* other whole-time directors (Executive Directors), (*increased from 3 to 4 by GOI in August 2019)
Application Of Banking Regulation Act To Public Sector Banks
Section 51 of the BR Act 1949, lists those sections of the Act which would be applicable to the SBI, Nationalized Banks (corresponding new banks) and Regional Rural Banks. The other sections are not applicable since there are sections in the SBI Act and the Nationalization Acts, which may modify or override these sections.
The applicable sections and the matters they pertain to are enumerated hereunder:
Disinvestment Of Shares By Government
Merger of Nationalized banks:
The government in August 2019 unveiled a mega plan to merge 10 public sector banks into four as part of plans to create fewer and stronger global-sized lenders as it looks to boost economic growth from a six-year low. These mergers have been driven mainly by the following factors:
- The low level of capital, which has led to frequent requests for capitalization
- The high level of NPAs prevailing
- The poor profitability for the entire sector
- The low growth rate for the entire sector
The mega merger of the following PSBs have come into force with effect from 1st April 2020
- Oriental Bank of Commerce (OBC) and United Bank of India merged into Punjab National Bank (PNB)
- Syndicate Bank merged into Canara Bank.
- Allahabad Bank merged with Indian Bank.
- Andhra Bank and Corporation Bank merged with Union Bank of India
- Vijaya Bank and Dena Bank merged with Bank of Baroda
After the merger, there are 12 PSBs. There is now a move in the Government of India, to privatize certain Public Sector Banks.
- Co-operative banks are registered either under the State laws governing co-operatives or under the multi-state Co-operative Societies Act. If a co-operative bank operates only in one state, the State law applies and in the case of co-operative banks operating in more than one state, the Central Act applies.
- The Banking Regulation Act is applicable to co-operative societies subject to the modifications stipulated in Part V (Section 56) of the Act.
- A primary cooperative bank is a co-operative society other than a primary agricultural credit society, which satisfies the following criteria
- The primary object or principal business is the transaction of banking business.
- The paid-up share capital and reserves are not less than Rs. 1 lakh.
- The byelaws do not permit admission of any other co-operative society as a member
- A state co-operative bank is the principal co-operative society in a state with the primary objective of financing other societies.
- A central co-operative bank is the principal co-operative society in a district with the primary objective of funding other co-operative societies in the district.
Loans And Advances:
Section 20 of the Banking Regulation Act lays down certain restrictions on loans and advances by co-operative banks. Co-operative bank shall not grant loans and advances as under:
- Loans and advances on the security of its own shares
- Unsecured loans or advances to any of its directors.
- Unsecured loans or advances to firms or private companies in which any of its directors are interested as partner, managing agent or guarantor
- Every co-operative society requires a licence from the Reserve Bank under Section 22 of the Banking Regulation Act (as applicable to co-operative societies) to carry on banking business in India. However, primary credit societies are exempt from the requirement.
- Co-operative banks have to maintain liquid assets as provided in Section 24(1) of the Banking Regulation Act
- In the case of state co-operative banks, which are scheduled banks, the balances required under Section 42 of the RBI Act will also be accounted.
- In the case of the Central co-operative banks, balances maintained with the state co-operative bank concerned and in the case of primary co-operative banks the balances maintained with Central co-operative banks or the state co-operative bank concerned shall be accounted.
- The co-operative banks have also to maintain as specified in Section 24(2A) liquid assets being not less than 25 per cent or such other percentage not exceeding forty per cent as the Reserve Bank may stipulate.
- Co-operative banks other than scheduled Co-operative Banks and scheduled state co-operative banks have to maintain in India by way of cash reserve with itself or by way of balance in current account with the Reserve Bank or the state co-operative bank of the state concerned or district Co-operative Bank a sum equivalent to at least three per cent of its total demand and time liabilities in India.
Accounts and Audit:
- Every co-operative bank has to prepare a balance sheet and profit and loss account of its business as on the last working day of the year. Three copies of such balance sheet and accounts, along with statutory auditor’s report have to be submitted to the Reserve Bank within six months.
- A state co-operative bank and a central co-operative bank have to submit such return to NABARD also.
- The provisions of Section 35 relating to inspection are applicable to co-operative banks with minor modifications.
- It is also open to Reserve Bank to call for inspection of a primary cooperative bank by one or more officers of the state co-operative bank in the State where the primary co-operative bank is registered.
- The Reserve Bank may supply a copy of the report of any inspection or scrutiny to the state co-operative bank or the Registrar of Co-operative Societies concerned.
Registration with DICGC:
The Deposit Insurance and Credit Guarantee Corporation Act, 1961, which provides for insuring deposits of banks, is applicable to co-operative banks also. Accordingly, under Section 13C of the Act, co-operative banks have to be registered with the corporation for this purpose. The registration of a co-operative bank may be cancelled if:
- it is prohibited from accepting deposits
- its licence is cancelled
- it has been ordered to be wound up
- it has ceased to be a co-operative bank under the sub-Section (2) of Section 36A of the BR Act
- it has converted into a non-banking co-operative society
- it has been amalgamated with any other co-operative society
The Banking Regulation (Amendment) Act 2020
The salient details of the changes brought about by this amendment were inter-alia as follows:
- It allowed the RBI to initiate a scheme for reconstruction or amalgamation of a bank (including a Cooperative Bank) (Section 45)
- Where the Central Bank imposes a moratorium on a Bank, it thereafter cannot grant any loans or make investments in any credit instruments during the tenure of the moratorium.
- Co-operative banks may issue equity, preference, or special shares on face value or at a premium to its members, or other persons residing within their area of operations. They may also issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons. However, a prior approval from RBI is mandatorily required for such issuance.
- No person will be entitled to demand payment towards surrender of shares issued to him by a cooperative bank.
- RBI has been given powers as per the amendment to supersede the board of directors of a multistate co-operative bank for up to five years under certain conditions which includes cases where it is in the public interest and to protect depositors.
Private Sector Banks
- The Private Sector Banks are those Banks where the majority stake, in all cases, is held by private entities/individuals. These Banks are mostly incorporated under the Companies Act 1956 and are also bound by the other statutes such as the Banking Regulation Act 1949, RBI Act 1934 etc.
- In India, private sector banks are classified into two categories. These are those called “Old Private Sector Banks” which came into existence before 1968 and “New Private Sector Banks that were incorporated after the 1990s.
- As of now there are 21 private sector banks in the country.
RBI, based on the recommendations of the Nachiket Mor Committee (2013) issued the key features of the Payments Banks guidelines.
- Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such as individuals/ professionals, NBFC, BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.
Scope Of Activities:
- Acceptance of demand deposits: Payments bank were initially restricted to holding a maximum balance of Rs. 100,000 per individual customer. However, this maximum balance holding limit per individual customer at the end of the day has undergone revision to Rs. 200000/-.
- Payments banks can issue debit cards but not credit cards.
- Payments and remittance services through various channels.
- Distribution of non-risk sharing simple financial products like mutual fund units and insurance products, etc.
Deployment Of Funds
- Apart from amounts maintained as Cash Reserve Ratio (CRR) with the Reserve Bank on its outside demand and time liabilities, it will be required to invest minimum 75 per cent of its “demand deposit balances” in Statutory Liquidity Ratio (SLR) eligible Government securities/treasury bills with maturity up to one year and hold maximum 25 per cent in current and time/fixed deposits with other scheduled commercial banks for operational purposes and liquidity management.
- The minimum paid-up equity capital for payments banks shall be Rs. 100 crore. The payments bank should have a leverage ratio of not less than 3 per cent, i.e., its outside liabilities should not exceed 33.33 times its net worth (paid-up capital and reserves).
- The promoter’s minimum initial contribution to the paid-up equity capital of such payments bank shall at least be 40 per cent for the first five years from the commencement of its business.
Small finance Banks
- Resident individuals/professionals with 10 years of experience in banking and finance; and companies and societies owned and controlled by residents will be eligible to set up small finance banks.
Scope of activities:
- The small finance bank shall primarily undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections including small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
- The promoter’s minimum initial contribution to the paid-up equity capital of such small finance bank shall at least be 40 per cent and gradually brought down to 26 per cent within 12 years from the date of commencement of business of the bank.
Deployment of fund:
- SFBs shall be subjected to the requirement of maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as applicable to the other SCBs.
- SFBs shall be required to extend 75 per cent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank. At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.
Further, RBI vide circular dated 8th August 2022 has permitted the Category-II SFBs to act as AD Category-I subject to conditions that a bank should have completed at least two years of operations as Authorised Dealer Category-II and should have been included in the Second Schedule to RBI Act 1934. It should have a minimum net worth of Rs. 500 crore and its CRAR should not be less than 15%. Further, the net NPAs of the bank should not exceed 6%, during previous four quarters and it should have made profit in the preceding two years.
On-Tap Licensing Policy of the RBI for SFBs
- The licensing window will be open on-tap
- Minimum paid-up voting equity capital/net worth requirement shall be Rs. 200 crore
- For Primary (Urban) Co-operative Banks (UCBs), desirous of voluntarily transiting into Small Finance Banks (SFBs) initial requirement of net worth shall be at 100 crore, which will have to be increased to Rs. 200 crore within five years from the date of commencement of business.
- SFBs will be given scheduled bank status immediately upon commencement of operations
- SFBs will have general permission to open banking outlets from the date of commencement of operations
- Payments Banks can apply for conversion into SFB after five years of operations.
Local Area Banks (LAB)
It was in the year 1996 that a decision was taken to allow the establishment of Local Area Banks in the private sector.
- Area of operation: The area of operation of an LAB is usually restricted to a maximum of three geographically contiguous districts. The activities of an LAB are also focused on local customers predominantly in rural and semi-urban areas so as to bridge the credit gap in these areas.
- Scope of activities: LABs are normally required to finance agriculture and allied activities, MSME, agro-industrial activities, trading activities and non-farm sector.
- Registration/Licensing: Such banks are registered as a public limited company under the Companies Act, 1956/ the Companies Act, 2013/partnership firms under The Partnership Act, 1932. Those are licensed under the Banking Regulation Act, 1949 and may be included in the Second Schedule of the Reserve Bank of India Act, 1934.
- Supervision over LABs: Supervision over LABs lies with the relevant department of the RBI. Thus they have accounting policies, prudential norms, and other policies as laid down by the Reserve Bank of India
- Branches: Normally, at the time of granting a license, a LAB is granted permission to open a branch in a single urban center in each district and the remaining branches are to be opened in rural and semi-urban centers.
- RBI approved established of only 10 Local Area Banks but out of them only 2 (January 2022) are in existence today functioning as Non-Scheduled Banks. They are Coastal Local Area Bank Ltd and Krishna Bhima Samruddhi Local Area Bank Ltd.