INTRODUCTION
Para Banking is a kind of banking wherein money is accepted for the purpose of saving from an individual as in case of a normal banking function. The acceptance of money under Para Banking is scheduled daily, monthly, quarterly, half yearly, yearly and even for fixed period for more than 01 year.
Other than the above mentioned function of accepting the money for saving schemes, Para banking also provides secured loan and pre-maturity facilities against the amount in the saving scheme.
The only major differentiation between a normal banking and Para Banking is that, under Para Banking one cannot option for current account facility and carry its day-to-day transaction for accepting and withdrawal of funds. Also, a depositor can’t issue any cheque’s against the amount in its Para banking saving schemes. Rather there is no concept of cheque system in Para banking.
One connects Para Banking activities to a Fixed Deposits facility provided by bank. Though the amount deposited under Para Banking Saving schemes is for a fixed period and it fetches fix sum of interest on its deposits, the major differentiation between Para banking Saving Schemes and Fixed Deposit Schemes of banks is that, an individual has the option of depositing Daily under Para banking. Whereas the only option under Fixed Deposit Schemes for the depositor is to deposit weekly, forth nightly, monthly and so on.
Para – Banking targets all class of individuals for their depositor schemes. Their intension was to encourage all class of individuals towards saving habits since the key success of any economy is the saving structure in the country. Thus the Para Banking launched various schemes considering the daily wage earner to the businessmen.
In Para-Banking majority of population are daily wage earners (i.e.) Small shopkeepers, hawkers, Auto rickshaw and taxi drivers etc. who hardly understand the importance of savings for their future periods. Not only that, their basic earning hardly supports them to save any amount. And over and above to all such problems, they hardly have proper infrastructure and facilities to deposit in banks since there are very few banks in rural areas.
HISTORY OF PARA BANKING IN INDIA
The 1906 Swadeshi Revolution encouraged many cooperative bank to start up. With this unqualified and selfish entrepreneurs started operating such banks with unclear banking regulations of the government. This resulted into unsuccessful banking scenario and difficulties in growth of this banking sector.
The major drawback was the bankruptcy of many banks (i.e.) 108 banks during 1913 -1917, 372 banks during 1922 – 36 and 620 banks during 1937 – 48. This resulted in discomfort and insecurity amongst the general citizens and their confidence for banking sector was challenged.
In 1929 Central Banking Enquiry Committee investigate the following reasons for the
Failure for the current banking scenario:
1) Low level of Liquid Assets.
2) Unofficial business relationship between non- banking and banking officials.
3) Long term loans on short term deposits.
4) No proper guidelines from government or banking authorities.
5) Unlimited liabilities / irregular Credit policies / unqualified Directors.
After considering the above major drawbacks, government launched Banking companies’
regulation Act and Banking Branches Prohibition Act in the year 1946.
GUIDELINES ISSUED BY RBI
Banks can undertake certain eligible financial services or para-banking activities either departmentally or by setting up subsidiaries. Banks may form a subsidiary company for undertaking the types of business which a banking company is otherwise permitted to undertake, with prior approval of Reserve Bank of India. The instructions issued by Reserve Bank of India to banks for undertaking certain financial services or para-banking activities as permitted by RBI have been compiled in this Master Circular.
SUBSIDIARY COMPANIES
Under the provisions of Section 19(1) of the Banking Regulation Act, 1949, banks may form subsidiary companies for undertaking types of banking business which they are otherwise permitted to undertake [under clauses (a) to (o) of sub-section 1 of Section 6 of the Banking Regulation Act, 1949], carrying on the business of banking exclusively outside India and for such other business purposes as may be approved by the Central Government. Prior approval of the Reserve Bank of India should be taken by a bank to set up a subsidiary company.
INVESTMENT CEILING IN FINANCIAL SERVICES COMPANIES, ETC.
Under the provisions of Section 19(2) of the Banking Regulation Act, 1949, a banking company cannot hold shares in any company whether as pledgee or mortgagee or absolute owner of an amount exceeding 30 per cent of the paid-up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less. Besides, the investment by a bank in a subsidiary company, financial services company, financial institution, stock and other exchanges should not exceed 10 per cent of the bank’s paid-up share capital and reserves and the investments in all such companies, financial institutions, stock and other exchanges put together should not exceed 20 per cent of the bank’s paid-up share capital and reserves.
EQUIPMENT LEASING, HIRE PURCHASE BUSINESS AND FACTORING SERVICES THROUGH SUBSIDIARIES
With the prior approval of the Reserve Bank of India, banks can form subsidiary companies for undertaking equipment leasing, hire purchase business and factoring services. The subsidiaries formed should primarily be engaged in any of these activities and such other activities as are incidental to equipment leasing, hire purchase business and factoring services. In other words, they should not engage themselves in direct lending or carrying on of activities which are not approved by the Reserve Bank and financing of other companies or concerns engaged in equipment leasing, hire purchase business and factoring services.
GUIDELINES FOR BANKS UNDERTAKING PD BUSINESS
The permitted structure of Primary Dealership (PD) business has been expanded to include banks and banks fulfilling the following minimum eligibility criteria may apply to the Reserve Bank of India for approval for undertaking Primary Dealership (PD) business.
The following categories of banks may apply for PD licence:
(i) Banks, which do not at present, have a partly or wholly owned subsidiary and fulfill the following criteria:
a. Minimum Net Owned Funds of Rs. 1,000 crore.
b. Minimum CRAR of 9 percent
c. Net NPAs of less than 3 percent and a profit making record for the last three years.
(ii) Indian banks, undertaking PD business through a partly or wholly owned subsidiary and proposing to undertake PD business departmentally by merging/ taking over PD business from their partly/ wholly owned subsidiary should fulfill the criteria mentioned in 6.1.(i) (a) to (c) above.
(iii) Foreign banks operating in India, proposing to undertake PD business departmentally by merging the PD business being undertaken by group companies should fulfill criteria at 6.1.(i) (a) to (c).
MUTUAL FUND BUSINESS
(i) Prior approval of the RBI should be obtained by banks before undertaking mutual fund business. Bank-sponsored mutual funds should comply with guidelines issued by SEBI from time to time.
(ii) The bank-sponsored mutual funds should not use the name of the sponsoring bank as part of their name.
(iii) Banks may enter into agreements with mutual funds for marketing the mutual fund units subject to the following terms and conditions:
a) Banks should only act as an agent of the customers, forwarding the investors’ applications for purchase / sale of MF units to the Mutual Funds/ the Registrars / the transfer agents.
b) Banks should not acquire units of Mutual Funds from the secondary market.
c) Banks should not buy back units of Mutual Funds from their customers.
d) If a bank proposes to extend any credit facility to individuals against the security of units of Mutual Funds, sanction of such facility should be in accordance with the extant instructions of RBI on advances against shares / debentures and units of mutual funds.
e) Banks holding custody of MF units on behalf of their customers, should ensure that their own investments and investments made by / belonging to their customers are kept distinct from each other.
f) Banks should put in place adequate and effective control mechanisms in this regard. Besides, with a view to ensuring better control, retailing of units of mutual funds may be confined to certain select branches of a bank.
SMART / DEBIT CARD BUSINESS
Banks may introduce smart/on-line debit cards with the approval of their Boards, keeping in view the Guidelines by RBI. In the case of debit cards, where authorization and settlement are off-line or where either authorization or settlement is off-line, banks should obtain prior approval of the Reserve Bank of India for introduction of the same by submitting the details on the mode of authorization and settlement, authentication method employed, technology used, tie-ups with other agencies/service providers (if any), together with Board note/Resolution. However, only banks with networth of Rs.100 crore and above should undertake issue of off-line debit cards. Banks cannot issue smart/debit cards in tie-up with other non-bank entities. Banks should review operations of smart/debit cards and put up review notes to their Boards at half-yearly intervals, say at the end of March and September, every year. A report on the operations of smart/debit cards issued by banks should be forwarded to the Department of Payment and Settlement Systems (DPSS) with a copy to the concerned Regional Office of Department of Banking Supervision on a half yearly basis, say at the end of March and September every year.
ENTRY OF BANKS INTO INSURANCE BUSINESS
Any bank intending to undertake insurance business should obtain prior approval of Reserve Bank of India before engaging in such business. Banks may, therefore, submit necessary applications to RBI furnishing full details in respect of the parameters as specified in the above guidelines, details of equity contribution proposed in the joint venture/strategic investment, the name of the company with whom the bank would have tie-up arrangements in any manner in insurance business, etc. The relative Board note and Resolution passed thereon approving the bank’s proposal together with viability report prepared in this regard may also be forwarded to Reserve Bank. However, insurance business will not be permitted to be undertaken departmentally by the banks. Further, banks need not obtain prior approval of the RBI for engaging in insurance agency business or referral arrangement without any risk participation, subject to certain conditions by RBI.
PENSION FUNDS MANAGEMENT (PFM) BY BANKS
Banks may undertake Pension Funds Management (PFM) through their subsidiaries set up for the purpose. This would be subject to their satisfying the eligibility criteria prescribed by PFRDA for Pension Fund Managers. PFM should not be undertaken departmentally. They should obtain prior approval of Reserve Bank of India before engaging in such business. The relative Board Note and Resolution passed thereon approving the bank’s proposal together with a detailed viability report prepared in this regard may also be forwarded to Reserve Bank.
‘SAFETY NET’ SCHEMES
Reserve Bank had observed that some banks/their subsidiaries were providing buy-back facilities under the name of ‘Safety Net’ Schemes in respect of certain public issues as part of their merchant banking activities. Under such schemes, large exposures are assumed by way of commitments to buy the relative securities from the original investors at any time during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price. In some cases, such schemes were offered suo motto without any request from the company whose issues are supported under the schemes. Apparently, there was no undertaking in such cases from the issuers to buy the securities. There is also no income commensurate with the risk of loss built into these schemes, as the investor will take recourse to the facilities offered under the schemes only when the market value of the securities falls below the pre-determined price. Banks/their subsidiaries have therefore been advised that they should refrain from offering such ‘Safety Net’ facilities by whatever name called.
REFERRAL SERVICES
There is no objection to banks offering referral services to their customers for financial products subject to the following conditions:
The bank/third party issuers of the financial products should strictly adhere to the KYC/AML guidelines in respect of the customers who are being referred to the third party issuers of the products.
1.The bank should ensure that the selection of third party issuers of the financial products is done in such a manner so as to take care of the reputational risks to which the bank may be exposed in dealing with the third party issuers of the products.
2.The bank should make it explicitly clear upfront to the customer that it is purely a referral service and strictly on a non-risk participation basis.
3.The third party issuers should adhere to the relevant regulatory guidelines applicable to them.
4.While offering referral services, the bank should strictly adhere to the relevant RBI guidelines.
CONCLUSION
Para-banking has been a part of the Indian financial services sector for some time now. There is an increasing need for various financial services at low affordable costs, particularly for the vast sections of disadvantaged and low income groups.
This can truly improve the standard of living for these segments. The need for para-banking should be evaluated in the context of financial inclusion and regulatory framework for supervision.
Para-banking activities, including bancassurance, depository service, like insurance, MFs, credit and debit cards, etc, have helped increase the reach of the banks and brought a vast segment of the population into the fold of basic financial services.
Thus, direct lending by banks, use of self-help groups and MFIs for indirect lending, use of post offices, local organisations and cooperatives as agents, focus on RRBs, the revamp of the cooperative credit structure, both urban and rural, NBFCs purveying micro-finance and even the possible use of accredited loan providers under money lending legislation, all these reflect this approach.
NBFCs and banks through their para-banking activities have played a useful role in financing various sectors of the economy. Considering the current scenario of branch banking, it will take some more time to reach the wider population across the country and provide financial services in a cost-effective manner from the larger banks.
Accordingly, there is room for regional or niche players to step in and meet the customer requirements in remote areas or the requirements of small ticket size segments in a cost-effective manner. On the other hand, para-banking services have to be carefully regulated and supervised by the regulator both on financial health of the service provider as well as customer protection.
Small and regional players become more difficult to regulate and supervise. Accordingly alternative models permitting franchisees or alliances between large institutions and regional players may provide an effective way upgrading smaller players.
Whilst there is a greater need for para-banking services for the wider population and supporting greater participation in the financial services “network coverage”, it is important to evolve new workable models for appropriate supervision.
By:-
Shishir Akhouri
IVth Yr.,B.B.A LL.B
Symbiosis Law School
Pune