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Banking & Financial Services
For several decades in the past banking continued to be viewed as a conservative business and was conducted with strict adherence to traditional prudence & principles, with predefined and listed DOs and DON'Ts. Profits and profitability were indeed looked for, but this goal was preceded by greater importance to norms of security and liquidity. Speculation was considered a sin. Traditional banking services included accepting deposits from the public, lending a part of the same on short term basis, and investing another portion in gilt-edged securities, while also holding a certain percentage in cash, as balance with the Central Bank of the country, and in the call money market. Thus the definition of "Banking" as per the Banking Regulation Act, 1949 says-
The Act defined the functions that a commercial bank can undertake and restricted their sphere of activities. It prohibited banks from owning non-banking assets. No Company other than a commercial bank licensed by the RBI can include the words "Bank" or "Banking" as part of its name. Thus the boundary for banking and financial services was mutually demarcated and assigned separately between commercial banks and non-banking financial companies respectively. The one cannot encroach on the domain of the other.
By way of banking services, banks provided remittance service, collection of cheques and bills of exchange, Issue of Guarantees, Opening Letters of Credit, Leasing Safe Deposit Lockers, and accepting articles under safe custody. As distinguished from this financial services included long term lending for industrial and infrastructure projects, housing finance, financing hire-purchase and leasing transactions, providing insurance cover, selling mutual-fund products etc.
The initial move away from traditional concepts of banking took place after nationalisation of banks in 1969/70. Banks started lending on medium Term basis repayable between 3 to 7 years. After Nationalisation banks also diversified credit extension comprehensively to cater different sectors of the economy. Term Lending, lending extensively against hypothecation of securities, financing qualified and technical entrepreneurs, financing craftsmen and artisans, financing purchase of consumer durable, financing acquisition & constructions of houses, office premises, vehicles, financing agriculture & allied activities, small-scale industries and exports etc. came into vogue. It was still a mere diversification of credit-delivery functions, and a transition from commercial banking to development banking looking towards social objectives of employment generation and poverty alleviation under Government ownership covering the major segment of Indian Banking
While Indian banking was ardently pursuing social banking, since the Eighties of the last century International banking was undergoing rapid changes. These are discussed in an earlier article styled "Developments in International Financial Markets & Banking Arena". To quote the significant statement there-from-
In this context it is apt to quote portions of a speech of the Governor of RBI, Dr.Bimal Jalan at 22nd Bank Economists Conference, New Delhi,15th February, 2001 as under:-
The following is also a quotation from the speech of Dr.Bimal Jalan, Governor, RBI titled "Indian Banking and Finance: Managing New Challenges" at the Twenty-third Bank Economists' Conference at Kolkata, on January 14, 2002.
As part of the integration of financial services world over, new opportunities have emerged for banks to enter into the area of insurance. Banks' entry into insurance sector has opened up viable opportunities to enhance their non-interest income and improve their performance. With the passage of the Insurance Regulatory and Development Authority (IRDA) Act, 1999, the Insurance Regulatory and Development Authority has been set up with statutory powers to function as the sector regulator for insurance in India. The Act, while allowing private participation including foreign equity participation up to 26% of the paid-up capital, has come out with regulations on various aspects of insurance business such as, licensing of agents, solvency margin for insurers, accounting norms, investment norms and registration of Indian insurance companies. The Act has also simultaneously stipulated prudential norms for investments and service obligations in the less lucrative rural sector. With the issuance of notification specifying insurance as a permissible form of business under Section 6(1)(o) of the Banking Regulation Act, 1949, RBI has issued guidelines for entry of banks into insurance business. Accordingly, those banks which satisfy the vital parameters set therein - minimum net worth of Rs.500 crore, eligibility criteria in regard to net worth, capital adequacy, profitability, reasonable level of non-performing advances - would be allowed to set up insurance joint ventures on risk participation basis. Banks which are not eligible as joint venture participants, would be allowed to take up strategic investment up to a certain limit for providing infrastructure and services support without taking on any contingent liability provided these banks satisfy some of the criteria specified therein. With a view to providing the banks with another avenue for generating fee based income, any scheduled commercial bank or its subsidiary would be permitted to undertake insurance business as agent of an insurance company and distribute insurance products without any risk participation. Banks are required to maintain an 'arms length' relationship with insurance outfit and adopt a risk management framework where the risks of insurance business do not get transferred to the banking business.
In terms of Section 19(1)(a) of the B.R.Act, 1949, banks can form subsidiaries to undertake activities which banks themselves are allowed to engage in under Section 6(1)(a) to (o) of the Act. Section 6(1)(a) to (n) of the Act cover traditional banking activities. Under Section 6(1)(o) of the B.R.Act, 1949, Govt. of India has notified certain para-banking activities as eligible activities for banks to undertake either departmentally or by setting up subsidiaries. Further, in terms of Section 19(1)(c) of the Act, Reserve Bank may allow a bank to adopt only its subsidiary route for any activity which is considered to be in the interest of banking or in the public interest, with the approval of Govt. of India.
So far, subsidiaries have been formed by banks to undertake activities such as equipment leasing, merchant banking, hire-purchase finance, factoring venture capital, housing finance, mutual funds (asset management companies), stock broking, credit card services, primary dealership in Government securities market [under Section 19(1)(a) of the B.R.Act], assaying and hallmarking of gold, computer related services [under Section 19(1)(c) of the B.R.Act]. With the issuance of notification specifying insurance as a permissible form of business under Section 6(1)(o) of the B.R.Act, 1949, SBI has been allowed to set up a subsidiary for doing insurance business.
Banks, therefore, have now as a global development come to diversify their approach and extend many services that blur the difference between "banking service" and "financial service". They sell products like insurance cover, mutual fund investments, trading on the stock exchange on behalf of its customers etc. In short the thinking now is to develop as "Universal Banking Organizations", described as "supermarket for financial products".
The new innovative developments in information technology and telecommunication has enabled banks to successfully carry out this product diversification and enter into financial services at a rapid spree. This module carries out an analysis of this trend and describes the reforms that have taken place in the Insurance, & Mutual Fund sectors and the capital markets. Initially we start with more information on Universal Banking