[Banking] RRB Amendment Bill, Small Banks-Payment Banks, Kotak-ING Vysya Merger, NBFC Guidelines

1. Prologue
2. BO1: RRB act
3. BO2: Small banks and Payment Banks
4. BO3: Kotak-ING Vyasa Merger
   1. Banking consolidation in past
   2. Kotak ING Vyasa Merger
   3. Bank merger/consolidation: good or bad?
5. BO4: NBFC regulation guidelines
6. BO6: SBI Share splitting
7. Mock Questions for Banks Exams

Prologue

• In this article, we’ll checkout a few current developments in Banking sector at “Organizational” level.
• In the next article, we’ll see developments at “operation / product” level e.g. Bharatiya Bill Payment system, SBI’s Shariya fund, E-mandate etc.
• Utility: Mainly for bank interviews and MCQs.

BO1: RRB act

Background theory

• 1976: Regional Rural banks Act, based on Narsimhan Committee’s recommendations for greater financial inclusion.
• RRBs aim to combine efficiency of a commercial bank with grassroot networking of a cooperative society.
• RRB is one type of Commercial bank. Therefore, it has to comply with RBI’s SLR, CRR and PSL requirements (Priority sector lending).
• Sponsor bank helps the RRB in HRM-training, account keeping services.

Anyways, RRB is an old theory topic, why has it resurfaced again?

Salient features of RRB Amendment Bill 2014

RRB Act 1976	RRB Amendment Bill 2014
5 lakh shares x Rs.100 each Total authorized capital: Rs.5 crore	200 crore shaers x Rs.10 each Total authorized capital: Rs.2000 crores
Shareholding Union: 50% State: 15% Sponsor Bank: 35%	RRB can issue shares in capital market to get more funds from private investors. But one condition that combined shareholding of Union+State+Sponser bank should not fall below 51%
State government’s shareholding was fixed to 15%	States can buy more shares, to increase their shareholding above 15%
—	RRB can appoint Board of directors from outside union-state and sponsor bank nominated people.
—	One person cannot become director in 2 RRBs.
Director’s tenure limit: 2 years	3 years
—	Person cannot remain director for more than 6 years. (Meaning one individual can be an RRB director for only two terms 3 + 3.)

BO2: Small banks and Payment Banks

Timeline of Events leading to Small / Payment Banks

1998	Narsimhan-II Committee recommends small banks in India.
2009	Raghuram Rajan Committee says the same.
2013-14	For greater financial inclusion, RBI’s Nachiket Mor Committee had recommend new types of banks such as payment banks and wholesale banks.
2014, Feb-March	Bimal Jalan Committee approved Bandhan Microfinance and IDFC for opening private commercial banks. Bimal too recommended RBI to permit ‘differentiated’ banks in India.
2014, Nov	Rajanbhai invites applications for Small banks and payment banks.

Common Features of Small bank and Payment banks

1. Deadline to apply for License: 16/01/2015. After that, an external screening Committee will decide the winners, probably in July 2015.
2. Minimum capital requirement to apply for license: 100 crores. (For commercial bank license, it was Rs.500 crores)
3. They’ll have to comply with the FDI norms like regular commercial banks i.e. 74% FDI only.

What’s the difference?

Small banks	Payment banks
Can accept all types of deposits like a commercial bank (CASA, FDRD etc.)	Take deposit only on current account, saving account. (CASA) Cannot accept fixed deposits (FD) Can issue Credit card? Nope. Can issue debit card? Yes. Can open NRI accounts? Nope
They can give out depositor’s money as loans to other customers, but small area of operation. They’ll be opened under “Companies Act 2013”.	They can’t give loans. They can invest depositor’s money in Government securities (G-sec) only. Although they’re allowed to sell mutual funds, insurance and pension products, accept utility bill payments etc. to keep branch operations profitable.
Target customers: MSME businessmen, unorganized workers, small and marginal farmers.	Target customers: poor, migrants, unorganized workers wanting to send remittances home.
Focus: Deposit and loans	Focus: Payment/remittances only. Including cross-border remittances.
Who can apply? MFI, NBFC can convert their organization into small banks Even individual with 10 years’ experience in bank/cooperative sector can apply for license. Large companies can’t apply.	Who can apply? Indian Post Corporate houses Telecom companies Retail chains. Above people can even launch payment banks with Joint venture from commercial banks.
Conditions: 25% branches in rural area 50% of the loans be given to MSME sector.	Condition: Maximum balance per customer: Rs.1 lakh Minimum Leverage ratio 3% i.e. liabilities should not exceed 33 times of its networth.

• Remaining differences are of technical nature like tier-1 capital etc. not worth the effort for MCQs.
• Public sector bank employee union has opposed this move, saying existing public sector banks are capable of delivering these services and last mile financial inclusion.

BO3: Kotak-ING Vyasa Merger

Banking consolidation in past

2000	TIMES Bank merged in HDFC
2001	Bank of Madura merged in ICICI
2002	Benares State bank (Public sector bank) merged with BoB (Bank of Baroda)
2003	Nedungadi bank (Kozhikode) merged with PNB (Punjab National Bank)
2004	Global Trust Bank merged with OBC (Oriental bank of Commerce) after media reports that Global trust bank had financed Ketan Parekh’s sharemarket scam.
2005	Bank of Punjab merged with Centurion bank
2008	Centurion bank itself merged with HDFC
2014	Latest: ING Vysya merges with Kotak Mahindra bank.

Kotak ING Vyasa Merger

RBI, CCI and other financial regulators have approved the ING-Vysya Bank to merge with Kotak Mahindra bank (2014, November).

Kotak Mahindra	ING Vysya bank
Got Banking license in 2003	1930s: Vysya bank born to cater Banglore, Mysore, Karnataka region. 1958: Got license from RBI to open all India branches. 2002: Vysya bank (Indian) merged with Dutch ING (a Foreign bank). Thus ING Vysya Bank born 2014: now ING-Vysya to merge with Kotak Mahindra.
4th Largest private bank	7th
Founder: Uday Kotak	Shailendra Bhandari (CEO) Uday Sareen (Dy.CEO) he will be inducted in Kotak’s board after merger
After Merger Kotak’s total asset ~2.1 lakh crore rupees Total branches ~1,215	After merger, ING Vysya shareholders will get 725 shares of Kotak for every 1000 shares of ING-Vysya. ING Vysya’s staff and branches will become part of Kotak-Mahindra bank.

• Ranking of private Indian banks after this merger: (1) HDFC (2) ICICI (3) Axis (4) Kotak.
• Kotak group also got “in-principal” approval to takeover general insurance business from ING-Vysya.

Bank merger/consolidation: good or bad?

Pro arguments	Anti-arguments
Bank consolidation will reduce cost of operation and increase efficiency of services. Therefore, small-sized public sector banks should be merged with SBI. This will help meeting capital requirements under BASEL-III norms Will help Indian banks get in top-5 world banks list with large asset size.	May create oligopoly and shadow banks. American Sub-prime crisis was a result of shoddy practices by such Banking oligopolies.

BO4: NBFC regulation guidelines

Background

• Non-banking financial companies serve as an important tool for financial inclusion and turning savings into investment.
• But, in the 90s, Harshad Mehta and other scams put all Non-banking financial companies into bad light.
• As a result, RBI and Government always adopted precautionary and sometimes ‘step-motherly’ regulations on NBFCs. For example- they’re not allowed to get tax-benefits on NPA, mosto f them forbidden from external commercial borrowing (ECB), they are not given loan recovery powers under SARFAESI Act and so on.
• 2014, November: Finally, Rajanbhai decided to empower NBFCs, on par with Commercial Banks.

RBI’s new guidelines for NBFCs:

[no *that* important for MCQs, just memorize a few points for interview]

• Fair practice code (FPC) and Know your customer norms (KYC) will not apply to an NBFC IF
  1. Its asset size is less than Rs.500 crore AND
  2. It doesn’t accept deposits from public AND
  3. It doesn’t have any customer interface.

RBI’s Roadmap for NBFCs

2014	Each NBFC has to keep minimum Rs.25 lakh as Net Owned funds. Stringent norms for keeping capital in Tier-1 and Tier-2 Assets.
2016	NBFC will have to keep minimum Rs.1 crore in Net owned funds. NBFC will have to compulsory undergo “credit-rating” before accepting public deposits.
2017	Keep minimum Rs.2 crores as net owned funds ELSE RBI will cancel that NBFC’s registration.
2018	For commercial banks, if client doesn’t pay loan installments for 90 days, its classified as Non-performing-asset. (NPA) NBFCs will have the same asset-classifications by 2018. Benefit? NBFCS will get tax-exemption from NPA-related income, just like regular banks. Right now only 1 category of NBFC gets this benefit- Housing finance companies.
Not done	Allowing NBFCs to use SARFAESI Act powers to teach lessons to loan-defaulters. [Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act]

BO6: SBI Share splitting

• Earlier: ICICI and PNB announced share splits- One share divided into five.
• SBI announced 1:10 share split in 2014, November. Meaning, you’ll get 10 shares of SBI, for every exiting 1 share owned by you.

Before	1 share with Face value of Rs.10
After	10 shares with face value of Rs.1

Benefits of share-splitting?

• Increases in share-quantity, thereby increases the participation of Retail investors- like cutting one banana and selling five of its pieces.
• Provides liquidity to investor. Example, if you had 1 share of infosys worth Rs.1 lakh, it’ll be difficult to find a buyer.
• But if you had 1000 shares of infosys worth 100 rupees, easier to find a few buyers interested for purchasing 20-30 shares individually.
• Thus share-splitting increases “demand” and new investors. Hence P/E Ratio also improves. [Share Price to earnings ratio.]
• Share splitting or stock splitting, doesn’t change following
  • Company’s value. because Total face-value wise, 1 share x Rs.1 lakh = 1000 share x 100 rupees.
  • Company’s market capitalization. For the same reason given above.

Mock Questions for Banks Exams

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Q1. Consider following statements about RRBs

1. RRBs are jointly owned by Government of India, the concerned State Government and Sponsor Banks
2. In RRB, the sponsor bank is the majority shareholder.
3. Both A and B
4. Neither A nor B

Q2. The RRB Amendment Bill 2014

1. Provides flexibility to shareholding pattern of Union, states and sponsor banks.
2. Increases authorized capital of RRBs.
3. Permits Individual to hold board directorship in multiple RRBs

Correct statements are

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. None of them

Q3. If an RRB has failed to fulfill its PSL quota for the given year, then it’ll be required to submit money to ____.

1. NABARD’s RIDF
2. SIDBI’s RIDF
3. NABARD’s SEDF
4. None of above.

Q4. Which of the following is/are example(s) of Differentiated banks in India?

1. Small banks
2. RRBs
3. Payment Banks

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. All of them

Q5. Minimum capital required to apply for license of small bank / payment bank is ____.?

1. 100 crores
2. 200 crores
3. 500 crores
4. 1000 crores

Q6. Who among the following is/are eligible for applying small bank license?

1. An individual with experience in cooperative or banking sector
2. Corporate houses
3. Non-Banking financial companies

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. All of them

Q7. Which of the following features are not available at a Payment Bank?

1. Getting housing loans
2. Getting a Credit card
3. Opening a current account.

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. All of them

Q8. Who among the following, can open an account in Small bank?

1. NRI
2. High net worth individual
3. Migrant laborer

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. only 3
4. All of them

Q9. A Payment bank will have to fulfill which of the following condition?

1. 40% of the loans must be given under priority sector lending (PSL)
2. 25% of the NDTL must be invested in G-sec.
3. Maximum balance per client cannot exceed Rs.50,000
4. None of above.

Q10. Which of the following mergers took place in 2014-15?

1. Benares State bank with BoB
2. Bank of Madura with ICICI
3. ING Vysya with Kotak-Mahindra

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. only 3
4. All of them

Q11. Arrange the following banks in descending order of their total-assets?

1. Kotak-Mahindra
2. Axis
3. ICICI
4. HDFC

Answer choices

1. 1234
2. 4321
3. 1243
4. 2134

Q12. How does an investor benefit from Stock-splitting?

1. It increases market capitalization of the said company.
2. It decreases the liquidity of stocks held by him
3. It increases the dividend earned by him

Answer choices

1. Only 1 and 2
2. Only 2 and 3
3. Only 1 and 3
4. None of them.

Interview

1. What do you know about RRB Amendment bill? How will it benefit Indian economy?
2. What are your views on consolidation of Public sector banks in India?

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