1.

Discuss the critical importance of the ‘Need for Regulations (both Internal as well as
External)’ in the Banking industry. Express your views with reference to the recent
turmoil in the Banking industry, which in turn adversely affects other sectors/ markets
as well.

Answer: Banking regulations aim at improving the safety of banking industry, providing
common benchmarks for all banks and promoting sound business and supervisory practices.
Regulation leads to pre-emptive action against bank failures, by imposing capital
requirements in line with banks’ risks. Banking regulation originates from micro-economic
concerns over the ability of bank creditors (depositors) to monitor the risks originating on the
lending side and from micro and macroeconomic concerns over the stability of the banking
system in the case of a bank crisis. In addition to statutory and administrative regulatory
provisions, the banking sector has been subject to widespread “informal” regulation, i.e., the
government’s use of its discretion, outside formalized legislation, to influence banking sector
outcomes

Bank regulations come under the control of government regulations wherein certain
guidelines, restrictions and requirements are levied. RBI, SEBI and IRDA are the regulators
for banking, investments and insurance respectively and all financial institutions have to
comply with the rules and regulations laid down by them. The rationale behind creating this
structure is to foster transparency between banking institutions, individuals as well as
organizations with which banks have banking relations. Given the nexus between global
economy and the banking industry, it is believed that without the help of financial
institutions, ‘crippled’ banks would not only collapse but might create ‘ripple effects’
throughout the economy.

What the banking sector needs right now is effective regulation and supervision and not
increased privatisation. “The scale of the recent bank scams and the potential losses faced by
banks holding non-performing loans given to some large companies and individuals, has
shocked all of us. While it was true that the Punjab National Bank scam involved the second
largest public sector bank, “the basic cause is very clearly the inadequate and faulty
regulation and monitoring of the banking sector.

The Indian banking industry has been witnessing the case of rising NPAs in last couple of
years across various scheduled commercial banks, as well as public sector banks. It won’t
prove to be a herculean task to find out ways for minimizing the future occurrence of frauds
in the industry. No agency related to the sector should be left untouched. The credit rating
agencies, as well as the auditing firms, should also come up with the credibility made un-
questionable procedure. Undoubtedly these poles often have silly corners causing the mishap
viz. inadequate diligence with a little careless-overlook. Though these are not the only
contributors, there are end numbers of accident-prone nooks and corners.

As per a survey in banking sector recently last five years starting from 2013 till the date has
been very painful for the sector since it has been witnessing the growing number bank frauds
but also the frauds with a high level of technical execution utilization robbing the banks. And
the worst part is this that the retail banking has been the prime avenue for these frauds. This
vulnerability kills the trust people have in the banking system.

Financial frauds have been inevitable phenomena in the sector lately with many such
incidences. No matter how insignificant the after-effects of such frauds are shown, the trust
on the banking system in general or faith in the entire system, in particular, is shaking inch by
inch. The banking scams in India are usually treated as the cost of doing business and from
the day one of the liberalizations the frequency, complexity, and cost of such banking scams
have gone up shockingly. It results in a very grave cause of concern for all the regulatory
authorities including the chief regulator – Reserve Bank.

Being the regulator of banks in India, RBI has its own well-built supreme parlance of
understanding on and about the banking system in India. The RBI considers fraud in its
parlance as – An act of deliberation or omission or commission by any person, carried out in
the course of a banking transaction or in the books of accounts maintained manually or under
computer system in banks, resulting into wrongful gain to any person for a temporary period
or otherwise, with or without any monetary loss to the bank- these lines is just an epitome of
its in-depth and organized way of thinking about the matter.

The details and dimensions of the Punjab National Bank scam are difficult to discern. These
might be hard to figure out even over the next several months or years. India’s investigative
agencies will struggle to make sense of this. These kind of frauds adds additional stress to
the banking system at a point when it is in pretty bad shape. In its last Financial Stability
Report released in December, the Reserve Bank reckoned that about 11% of all advances
would have turned into non-performing assets (loans for which the principal or interest
payment is overdue for 90 days or more) by September. That is about Rs 11 trillion – about
100 times the size of the Punjab National Bank scam. In terms of gross domestic product, that
is about 7.5%-8%. That Reserve Bank assessment came before the Punjab National Bank
scam was revealed.

Diamond sector impacted a lot after PNB scam as Most banks are trying to cut exposure to
the diamond sector and hundreds of diamond dealers are depressed with this decision. PNB
scam impacted mutual funds industry as well. A lot of mutual fund houses invested in PNB.
So, the mutual fund schemes offered by these fund houses especially equity oriented mutual
fund hit due to PNB fraud case.

2. With reference to the rural areas and the Agricultural sector, discuss the guidelines
given by the RBI on ‘Priority Sector Lending’. Also explain what options the Banks
have as ‘Channel Partners’ to reach rural customers

Answer: The commercial banks are required to provide credit for productive purposes so as
to support the growth of the national economy. Before nationalisation, bank's credit was
concentrated on large business houses as it was controlled by them. The bank funds were
locked in big houses, and they suffered from high credit risk. There were no proper credit
policy and when big houses failed, banks became non-viable and collapsed. In order to fine
tune commercial bank lending to achieve the welfare of the society, 14 commercial banks
were nationalised in 1969 and 6 commercial banks in1980. The main focus was to extend
credit to large mass of people to increase production under agriculture and manufacturing
industries. RBI introduced the concept of 'priority sector' lending and laid down broad
guidelines to commercial banks to extend credit to important sectors of Indian economy. The
commercial banks were compelled to extend a minimum level of credit to these sectors.

RBI advised commercial banks to have a loan policy of their own, based on the guidelines
laid down by them (RBI). The loan policy should contain:
 Ceiling level for each category of advances
 Method of appraisal of loan proposals
 Powers to sanction loan proposal at different level of management
 Standard documentation procedures

Priority Sector includes the following categories:

(i) Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy
(viii) Others

Banks are required not to exceed the ceiling targets for every category of advances every year
as per their credit policy. The exposure ceiling is linked to the capital funds of the lending
bank, and the capital funds constitutes the sum of total of Tier I and Tier II capital recognised
for the purpose of computation of capital adequacy. The exposure ceiling is 15% of capital
funds in case of single borrower and 40% in case of group borrower. As per RBI directives,
commercial banks are required to sanction 40% of the net bank advance under priority sector.
Agriculture, small scale industries, small road transport operators, education, housing, etc are
all classified under priority sector.

RBI guidelines for priority sector lending

Priority sector loans to the following borrowers are eligible to be considered under Weaker
Sections category:-
 Small and Marginal Farmers
 Artisans, village and cottage industries where individual credit limits do not exceed ₹ 1
lakh
 Beneficiaries under Government Sponsored Schemes such as National Rural Livelihoods
Mission (NRLM), National Urban Livelihood Mission (NULM) and Self Employment
Scheme for Rehabilitation of Manual Scavengers (SRMS)
 Scheduled Castes and Scheduled Tribes
 Beneficiaries of Differential Rate of Interest (DRI) scheme
 Self Help Groups
 Distressed farmers indebted to non-institutional lenders
 Distressed persons other than farmers, with loan amount not exceeding ₹ 1 lakh per
borrower to prepay their debt to non-institutional lenders
 Individual women beneficiaries up to ₹ 1 lakh per borrower
 Persons with disabilities
 Overdrafts upto ₹ 5,000/- under Pradhan Mantri Jan-DhanYojana (PMJDY) accounts,
provided the borrowers’ household annual income does not exceed ₹ 100,000/- for rural
areas and ₹ 1,60,000/- for non-rural areas
 Minority communities as may be notified by Government of India from time to time

The rate of interest on bank loans will be as per directives issued by the Department of
Banking Regulation of RBI, from time to time. Priority sector guidelines do not lay down any
preferential rate of interest for priority sector loans.
Channel partners to reach rural customers
A bank’s major distribution outlets are its branches. As the roles and functions of banking
services are increasing in diversity, pressures are building up for more efficient distribution
systems. Automated teller machines provide service to customers just like a teller at the
branch counter. The difference is, the service at the ATM is provided 24/7. The cost of
service through ATM is cheaper when compared to the service provided by the teller at the
counter. There is no holiday for the ATM, and it works nonstop, as long as connectivity is
established and sufficient cash is available in the cash dispenser drawer of the ATM.

Extension counters are part and parcel of the branch of a bank, which extends limited services
to the customers. The extension counters are provided at the request of the corporate,
colleges, hospitals, etc. The following services are offered at an extension counter:
 Cash receipts and payments
 Collection of cheques
 Issue of demand drafts
 Passbook entries

Mobile banking is just like Internet banking; however, customers willing to avail of mobile
banking are required to permit SMS (short messages service), GPRS (general packet radio
service) and USSD (unstructured supplementary service data) into their mobile phones, so as
to encrypt message and communicate with the bank's mobile banking system. Initially, the
customer is required to apply to the bank, to download the platforms into their mobile phone
for which no fee is charged by the bank.

Payment Banks are a partnership between Banks and telecom companies. Since the rural and
remote areas lack the infrastructure for the institutional development of Banks and financing
systems, Payment banks which operate through the medium of mobile phones are best suited
for such a situation. These banks are likely to aid the disadvantaged groups to carry out
transactions electronically eliminating the role of middlemen, while at the same time
facilitating organized finances throughout the country. Payment Banks will rid the semi-
literate population to carry out all banking services at one stop including paying bills,
transfers to others, making deposits and the like. They will empower the users to carry out
end to end transactions.

3. The Banking industry being a ‘service industry’, customer service is an important

aspect of the Retail Banking setup. This is true for commercial/retail banks as well
central banks and the regulators/government. Discuss the following questions that
affects the customers to a large scale in the retail banking setup
a. With the process of Demonetization implemented over a year ago, discuss the issue of
change of currency notes (money product) in retail banking. Have the banks provided
proper customer service for the same issue?
b. With emphasis on Digital/ E-payments, with incentives/concessions provided to make
non-cash transactions through digital modes, highlight the various benefits and risks
the customers may face during these modes of financial transactions.

Answer: a) On November 8, 2016, the Government of India announced the demonetisation

of all Rs 500 and Rs 1,000 banknotes of the Mahatma Gandhi Series. When demonetisation
commenced, not much information was available to people beyond the core group. It was
sudden and totally unexpected. Nor was the introduction of new series of banknotes, which
were a complete departure from the past, be it size, look, colour, design and orientation. So,
the critics were quick to conclude it was an unplanned and a whimsical one. The Reserve
Bank of India stipulated that the demonetised notes could be deposited with banks over a
period of fifty days until 30 December 2016. The banknotes could also be exchanged for
legal tender over the counter at all banks.

The note ban resulted in manifold increase in CASA (Current Account and Saving Account)
deposit ratio of the banks, giving enough funds to make provisioning for the rising non-
performing assets (NPAs). But it took a heavy toll of the banking employees, especially
women and officers, as they had to work for 12-18 hours a day initially without even a
weekly off, leave or holiday.

"Besides facing angry and impatient customers for days and weeks, bank employees were
overburdened with paper work and computing. They were under pressure to meet the needs
of business and regular customers as their transactions were mostly in cash. They had to
ration cash to meet the needs of all customers and avoid accusations of being partial to some
at the expense of others." As 86 per cent of the currency in Rs 500 and Rs 1,000 notes went
out of circulation, it not only disrupted banking operations but also put undue pressure on
bank employees who were not trained or prepared to deal with such a chaotic situation.

"It was a double whammy for us as they were under severe pressure from the management to
handle the volatile situation with patience and serve the customers with limited staff and
resources.

No one can deny that all banks did the fantastic job to handle the demonetization issue and
helped all the people at the time of crisis. They assured the smooth and gradual phasing out at
that time like they worked even after working hours late night, they handled lots of customers
on daily basis. They are not only working overtime but are sacrificing their weekends and
holidays, family time and sleep. Ensuring the comfort of the general public had become the
centre of their lives. Bank officials across the nation had given their best to ensure a smooth
transition. Right from the day after the announcement, the bank officials had been putting in
extra hours every day to try and conduct as many transactions as possible.

b) Cashless economy means more and more use of digital mode and less use of cash in
transactions. Larger size of digital economies is in the developed economies is one of the
factors of less corruption in these countries as compared to developing countries. Therefore,
in order to escape from adversaries of corruption and black money and to have more
transparent and cleaner economic growth with social Justice, less use of cash is one of the
suggested measures.

Advantages
Convenient and time saving: This is the most basic and important advantage of making
payments digitally. It saves our time and effort and very convenient too. You do not have to
visit any office or shop for random payments as you can do it in minutes using your laptop or
mobile phone.
Waiver, Discounts and cashbacks: Government is encouraging the people to go cashless. It
wants us to make digital payments as much as possible whether we pay any bill, pay at petrol
pumps, pay at restaurants, making any payments to any merchant etc. To promote this,
government offers various offers and discounts like 0.75% discount on card payments at
petrol pumps or Discounts and cashback when you pay through BHIM app etc.
Tracking spends: “If all transactions are on record, it will be very easy for people to keep
track of their spending. It will also help while filing income tax returns and, in case of a
scrutiny, people will find it easy to explain their spends.”
Economical and less transaction fee: There are many payment apps and mobile wallets that
do not charge any kind of service fee or processing fee for the service provided. The UPI
interface is one such example, where services can be utilized by the customer free of cost.
Various digital payments systems are bringing down costs.

Risks in digital payments

Identity theft risk: This is the most common risk we all feel while we make any digital
payment. With the rising incidence of online fraud, the risk of hacking will only grow as
more people hop on to the digital platform.
Difficult for older people who are not tech savvy: India has a low Internet penetration of
34.8%(2016), according to the Internet Live Stats, and only 26.3% of all mobile phone users
have a smartphone (2015), as per Statista figures. So we can say that there are millions of
people not only in rural areas but in urban areas as well who are not comfortable in using
digital services or making digital payments, they still use basic phone not smartphone so in
this scenario, its difficult to make our society cashless.