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Economics 

 

 

GST continued – E way bill

 

  • E-way bill is kind of a permit under the GST regime for movement of goods>INR 50k (including taxes)
  • Contains details of:

– Items being transported

– Vehicle

– Where they are headed

  • Applicable for both Inter-state and Intra-state movements
  •  Who can generate?

– Every registered person who is a:

  •  Consignor
  • Consignee
  • Transporter
  • Time Validity of E-way bill based on distance to be travelled

 

E way bill – Why?

 

  • Enables government to track movement of goods and check tax evasion
  • Replaces earlier state specific road permits, way bills with a standardized format
  • Reduce tax evasion with proper invoicing of the goods
  • Tracking of goods with mechanism such as Radio Frequency Identification (RFID)
  • Root out transit delays by reducing the time taken in multiple check posts and make the movement of goods efficient
  • Save tons of paperwork
  • Bypass numerous inter-state clearances for sellers and transporters

 

Ideas to cover

 

  • Basics of Financial Institutions
  •  Banking Sector in India

– What are banks?

– Functions of Banks

– Types of Banks

  • Current Issues related to banking sector

 

Financial Institutions/intermediaries

 

Banking sector

 

 

Banking sector

 

What are Banks?

 

  • Section 5(1)(b) of Banking Regulations Act, a Bank has certain characteristics:

–Acceptance of deposits from the public

– For the purpose of lending or investment

– Repayable on demand or otherwise

– Withdrawable by means of any instrument whether a cheque or otherwise

 

Banking sector

 

Major Functions of Banks:

1. Primary Functions:

– Accepting Deposits in the form of demand and time(term) deposits

– It gives loans and advances

– Credit creation -> money expansion

2. Other functions:

– Discounting of bills of exchange

– Overdraft facility

 

Banking sector

 

Major Functions of Banks:

  1. Agency Functions of Banks:

– Transfer of funds [e.g. DD, telegraphic transfers etc.]

– Collection of funds on behalf of the customer [e.g. bills, cheques, DDs, etc.]

– Payments of various items [e.g. taxes, bills, insurance premium etc. as per directions of customer]

– Purchase and sale of securities for customers and managing them

  1. Other general services such as underwriting, locker facility, traveller’s cheque etc.

 

Banking sector

 

Deposits and its types:

  • Demand deposits -> deposits which are payable on demand. It includes:

– Current account deposits

– Demand portion of savings account deposits

  • Time(Term Deposits) -> Not payable on demand

– FD – RD

– Time portion of savings account deposits

 

Banking sector

 

Scheduled v/s Non-Scheduled Banks

  • Scheduled Banks are recognized banks and are mentioned in Schedule 2 of the RBI Act, 1934
  • Such Banks:

– The total minimum value of paid up capital and reserve must be of Rs. 5 lacs

– The bank requires to satisfy the central bank that its affairs are not carried out in a way that causes harm to the interest of the depositors [Regulation of RBI]

– The bank needs to be a corporation rather than a sole-proprietorship or partnership firm

 

Banking sector

 

Scheduled v/s Non-Scheduled Banks

  • Non-Scheduled Banks are Banks under Banking Regulation Act, 1949, but can not comply with the conditions as prescribed by RBI

 

Scheduled Non Scheduled
2nd Schedule of RBI Act Not listed in 2nd schedule
Certain conditions  
Need to keep CRR with RBI Need to keep CRR but with themselves
Access to refinancing facilities from RBI No access to refinancing facility, but can take some help under extreme emergency
Submit periodic returns to RBI No such compulsion

 

Banking sector

 

Commercial banks:

  • Banks with a “profit motive”, i.e. they are “for-profit” entities
  • A commercial bank is a financial institution which performs the functions of accepting deposits from the general public and giving loans for investment with the aim of earning profit
  • So, they are banking for earning profits
  • Generally finance trade and commerce with short-term loans
  • Charge high rate of interest from the borrowers but pay much less rate of Interest to their depositors [have usually higher spread for higher profit]
  • E.g. SBI, PNB, BOB, HDFC etc.

 

Banking sector

 

In India SCBs are of different kinds

  • Public sector banks
  • Private banks
  • Foreign banks
  •  RRBs

 

Banking sector

 

Regional Rural Banks

  • Came into existence in 1975 through RRB ordinance 1975
  • Later the ordinance made permanent law under RRB Act 1976
  • Why RRB:

– vast gap in disbursement of rural credit

– Formation of a banks with understanding of rural issues like cooperative banks, but managerial capacity like commercial banks

  • Major objectives:

– develop rural economy by providing for development of agri, trade, commerce, industry etc. in rural areas

– Credit and other facilities, particularly to SMF, Agri labour, artisans, and small entrepreneurs

 

Banking sector

 

Regional Rural Banks

  • Shareholding status:

– 50% central government

– 15% state government

– 35% sponsor bank

  • Each RRB is sponsored by a “Public sector Bank” which provides assistance in form of:

– subscription to share capital

– Managerial and financial assistance

– Other help in recruitment and training of officials

 

Banking sector

 

Regional Rural Banks

  • Can RRBs have only rural presence?

– No, they are permitted to open branches in urban areas too.

– This was done to improve financial viability of RRBs

  • The area of operation of RRBs is limited to the area as notified by Government of India covering one or more districts in the State.
  • RRBs perform various functions in following heads:

– Providing banking facilities to rural and semi-urban areas.

– Carrying out government operations like disbursement of wages of MGNREGA workers, distribution of pensions etc.

– Providing Para-Banking facilities like locker facilities, debit and credit, UPI etc.

 

Banking sector

 

Regional Rural Banks [Problems]

  • Limited scope of investments – as they were primarily envisaged to serve to low creditworthy borrowers
  • Low recovery of loans [about 55% recovery rate] • High overhead expenses
  • Limited ability to attract deposits
  • Delay in decision making with various stakeholders and regulatory bodies -> state govt., central govt., sponsor bank, RBI, NABARD etc.
  • Overall creates -> problems with financial viability [i.e. loss making RRBs] -> in 2001, RRB loss was around 2700 crore

 

Banking sector

 

Regional Rural Banks [Steps to solve problems]

K C Chakrabarty Committee ->

– Increase CRAR of RRBs from 7% to 9%

– Through recapitalization support of 2200cr

  • RRB consolidation: consolidation of RRB with their sponsor banks

– The number of RRBs came down to 133 in 2006 from 196 at the end of March 2005

– It further came down to 105 and subsequently to 82 at the end of March 2012

– Further consolidation = 56

– Current plant = 56 to 36

 

Banking sector

 

Local Area Banks (1996)

  • Scheme launched in 1996, to establishing the local area banks was to enable to mobilization of the rural savings by local institutions and make them available for investments in local areas
  • Local Area Banks have jurisdiction over a maximum of three contiguous districts, and their basic function is to mobilise funds in rural and semi-urban areas
  • Subject to all prudential norms and PSL norms

 

Banking sector

 

Co-operative banks:

  • Financial entity which:

– Belongs to its members i.e. members are shareholders

– Who are at the same time its owners and the customers of their bank

  • Often created by persons belonging to the same local or professional community
  • Offer wide range of banking and financial services
  • Differ from commercial banks by their organization, goals, values and their governance
  • Some sections of Banking regulations Act 1949 apply to co-operative banks

 

Banking sector

 

Co-operative banks:

  • Thus, these supplement the efforts of the commercial banks in mobilizing savings and meeting credit needs of local population
  • Registered by state based registrar of cooperative societies
  • Functions with rule of “one member one vote” and on “no profit, no loss basis”

 

Banking sector

Co-operative banks v/s commercial banks

Commercial Banks Cooperative banks
Registered under Banking Act 1949 Registered under “Cooperative Societies Act” of the concerned state
Accept deposits from Public and lend to industry etc. Accept deposits from members as well as public
Huge funds Limited funds
Spread across the country, and even foreign presence Limited and restricted to state level (although some banks have multi state permissions) etc.

 

Banking sector

 

Differentiated Banks:

  • Under normal scheme of things, banks provide various services to various sectors under a single license (This is called universal banks)
  • However, this does not translate into overall financial inclusion in all areas, and credit availability in all sectors
  • “Nachiket Mor committee on financial inclusion, 2013” proposed the idea of differentiated banks – which will be given licenses to provide banking services in specific sectors, conditions

 

Banking sector

 

Differentiated Banks:

  • Small Finance Banks:

– one of the recommendations in the 2009 Report -A Hundred Small Steps – of the Committee on Financial Sector Reforms headed by Dr. Raghu Ram Rajan

– Financial institution intended to further the objective of financial inclusion by primarily undertaking basic banking activities of acceptance of deposits and lending to un-served and underserved sections

 

Banking sector

 

 

 

Differentiated Banks:

  • Small Finance Banks:
  • Scope of activities:

– 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

– There will not be any restriction in the area of operations of small finance banks

 

Banking sector

 

Differentiated Banks:

  • Small Finance Banks:

– Subject to CRR and SLR requirements by RBI

– 75% of ANBC to PSL

– At least 50 per cent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh

 

Banking sector

Differentiated Banks:

  • Payment Banks:

– A bank providing small deposit account with certain limitations

  • They can provide:

– small savings/ current accounts below Rs. 1 lakh

– distribution of mutual funds, insurance products on a non risk sharing basis

– offering payment/remittance service, mobile payments, ATM/debit card facility and third-party fund transfer

  • However, these banks can not undertake any lending activity or issue credit cards

 

Banking sector

 

Differentiated Banks:

  • Payment Banks:
  • CRR ratio limits apply
  • If can not lend then where to keep money?

– 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

– Other part can be invested

  • E.g. India Post Payments Bank

 

Banking sector

 

Differentiated Banks:

  • Wholesale and long term finance banks:

– very large institutions to take on large exposure to industrial, commercial and infrastructure sector right from their beginning

– may also offer services in the area of foreign exchange and trade finance

– act as market makers in instruments like corporate bonds and credit derivatives

– raise funds through issuance of debt and equity. They may also be allowed to accept term deposits above a threshold

 

Banking sector

 

Differentiated Banks:

  • Wholesale and long term finance banks:
  •  Benefits:

– Specialized -> better assess and fund long term projects

– NPA risks can be avoided in the future

– Enhanced competition -> more efficient use of resources

– Long term corporate finance in wake of weak corporate bond market

 

Banking sector

 

Differentiated Banks:

  • Wholesale and long term finance banks:
  •  Benefits:

– Specialized -> better assess and fund long term projects

– NPA risks can be avoided in the future

– Enhanced competition -> more efficient use of resources

– Long term corporate finance in wake of weak corporate bond market