Slide 1

LEGAL & REGULATORY ASPECTS OF BANKING & NON BANKING COMPANIES

Group Members

Harsh Raval - (130)

Saurabh Salot - (137)

Toshish Sarode - (140)

Foram Sarvaiya - (141)

Anusha Shetty - (156)

Tanmay Talvelkar -(167)

the acceptance of deposits of money from public for the purpose of lending or investment. Such deposits may be repayable on demand or otherwise and withdraw able by check, draft order, or otherwise

Bank must perform two essential functions: Acceptance of public deposits, and Lending or investment of such deposits

Banking Defination

Legal Framework of Regulation of Banks

Reserve Bank of India Act, 1934Powers of GovernmentBanking Regulation Act, 1949RBI as Central Bank & Regulator

Control Over Organization of Banking Business

Licensing of Banking CompaniesBranch Licensing

Capital Structure

Regulation of Banking business

Power to issue directions

Acceptance of Deposit

Regulation of Interest rate

Maintenance of Cash Reserve

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Basel II Summary

Improve the banking sectors ability to absorb shocks arising from financial and economic stress

Improve Risk Management and governance

Strengthen banks transparency and disclosuresBASEL III

Capital Conservation BufferCounter-Cyclic BufferMinimum capital requirementsLeverage RatioLiquidity Ratios

FEATURES

CAPITALBASEL II (% of RWAs)BASEL IIIAMinimum Total Capital8.08.0BMinimum Tier 1 Capital4.06.0CMinimum Common Equity2.04.5DMinimum Tier 2 Capital4.02.0ECapital Conservation Buffer-2.5F= (C+E)Minimum CET1 + CCB2.07.0G= (A+E)Minimum total Capital + CCB8.010.5

BASEL II v/s BASEL III

BASEL III implemented in India from April 2013Fully implemented by March 2019CET 1 must be 5.5% of RWAs (BASEL- 4.5%)Capital Conservation buffer- 2.5% of RWAsMinimum Tier 1 Capital- 7%

Guidelines of RBI

Capital (SBI needs 2,30,000 crore to meet BASEL III Requirement till 2018)Growth barrierProfitabilityImplementing counter cyclic bufferRisk ManagementSystematic RiskChallenges for Banks

CountryBasel III ImplementationJapan, Singapore, Switzerland China Brazil, Australia, CanadaCompletedEuropean Union & United StatesTechnical Work CompletedHong Kong, Mexico, India, South AfricaUnderwaySaudi Arabia, Russia, Argentina, Turkey , KoreaPlanned

Global Scenario

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Small banks have not implemented Basel 2Chinas small commercial banks asked to boost capital for first timeCBRC is pushing all of China's commercial banks to fall in line this timeThe majority of the personnel in the small banks lack knowledge and expertise of assessing risks

Chinese Case

Cheques, DraftsAccounts for nearly 60% of the volume of total non-cash transactionsMagnetic Ink Character Recognition (MICR) technology for speeding up and bringing in efficiency in processing of chequesRecent developmentscheque truncation systemPaper Based Systems

Electronic Clearing Service

ELECTRONIC CLEARING SERVICE (CREDIT)ELECTRONIC CLERING SERVICE (DEBIT)

Introduced in November 2005Enables customers to transfer funds easily and securely on a one-to-one basisRBI acts as a service providerOperates on DNS basis and makes settlements in batchesNot restricted to any geographical areaNEFT

NEFT WorkingFill NEFT application form (Name, acc no etc)Remitting branch prepares SFMS & sends it to service centerBank credits it to customer accountsNCC sends it to receiving banksService center forwards it to NCC

Example: Ram makes Payment to Sham after 7 pm using NEFT via Net Banking

Introduced in 2004Transfer of money takes place on a "real time" and on "gross" basisSettles all inter-bank payments and customer transactions above 2 lakh.Typically used for high-value transactions that require and receive immediate clearingRTGSExample: Ajay Makes payment to Vijay but Vijays Account is frozen. Payment not completed

Number of transactions (NEFT- 2015)Amount (Rs)106 Million7173.09 Billion

StatisticsNumber of Transactions (RTGS)Amount (Rs)96,72,73987421.48 Billion

Source: RBI

It is an instant real-time inter-bank electronic funds transfer system of IndiaOffers an inter bank electronic fund transfer through mobile phonesAvailable 24/7 throughout the year including bank holidaysIt is managed by the National Payments Corporation of India (NPCI)Maximum limit is 2,00,000 per day

Others

Introduced in March 2012It is an Indian domestic card scheme conceived and launched by the NPCI It was created to have a domestic, open loop, and multilateral system of payments in IndiaRuPay facilitates electronic payment at all Indian banks and financial institutionsCompetes with MasterCard and Visa in IndiaRupay

Payment Gateways

Governing BodiesNational Clearing Cell

Lay down policies relating to the regulation and supervision of all types of payment and settlement systems Set standards for existing and future systems Approve criteria for authorization of payment and settlement systems Determine criteria for membership to these systems, including continuation, termination and rejection of membership.creating necessary administrative structure within the existing rules

Board for Payment & Settlement

ObjectivesEligible promotersScope of activitiesDeployment of fundsCapital requirementPromoters ContributionGuidelines for Licensing of Payment Banks

Payment Banks

Aditya Birla Nuvo

Airtel M Commerce Services

National Security Depository

Reliance Industries

Payment & Settlement Act 2007

Not allowed to operate without authorizationNeed RBI permissionExample: Citrus Payment Solution Pvt Ltd

Application For Authorization Any person desirous of carrying on a payment system may apply to the Reserve Bank An application shall be made and shall be accompanied by fees Authorization for service providers

Application ProcedureSend An application for Authorization to RBIInquiry by RBIIssue or Refusal of ApplicationAppeal to central Government

Revocation of ApplicationIf a system provider,Contravenes any provisions of this ActDoes Not comply with the regulationsFails to comply with the ordres of designated authorityOperates the payment system contrary to the conditions subject to which the authorization was issuedExample: Kaizen Automation Private Limited

Power to enter and inspect

Access to information

Confidentiality of information

Powers to carry out audit & inspection

Power to issue fines

Powers of RBI

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Disclose all terms & conditions to customersMaintain standards determined by actConfidentiality of documentsThe payment obligations and settlement instructions shall be determined in accordance with the gross or netting procedureA settlement effected under such procedure shall be final and irrevocableDuties of system provider

System provider should create a panelWhen disputes arises between system participants, it should be referred to panelParticipants and system provider- not satisfied by panel- refer to RBIDisputes between Reserve Bank & system provider- Central GovernmentSettlement of Disputes

Failure to comply with terms of authorization- Imprisonment up to 10 years or fine 1 croreFake documents in application- Up to 3years or fine up to 50 lakhsFailure to produce statements, returns on demand by inspecting officer- Fine 10 lakhsDisclosure of confidential information- Fine of 5 lakhs or twice the amount of damages incurredContravening the provisions of this act- fine up to 10 Lakhs

Offences & Penalties

Protection of Funds of Customer Settlement and netting in relation to central counterparties Amendment -2015

Online Credit Card fraud

ASSET CLASSIFICATIONSubstandard AssetsDoubtful AssetsLoss Assets

Income RecognitionIncome Recognition Policy Reversal of income Interest ApplicationPrudential Norms

Asset ClassificationPeriod as NPAEarlier provisioning (%)Revised accelerated provisioning (%)Sub- standard (secured)Up to 6 months15No change6 months to 1 year1525Sub-standard(unsecured ab-initio)Up to 6 months25 (other than infrastructure loans)2520 (infrastructure loans)6 months to 1 year25 (other than infrastructure loans)4020 (infrastructure loans)Doubtful I2nd year25 (secured portion)40 (secured portion)100 (unsecured portion)100 (unsecured portion)Doubtful II3rd & 4th year40 (secured portion)100 for both secured and unsecured portions100 (unsecured portion)Doubtful III5th year onwards100100

Provisioning Norms 2015

Banking Ombudsman Scheme

It enables a forum to bank customers for resolution of complaints relating to certain services rendered by banks.

Banking Ombudsman Scheme

Grounds of complaintsProcedure for filing the complaintAfter receiving the complaintRejection of complaint

with effect from July 1, 2005 extend to whole of India except J&K PMLA 2002 forms the core of the legal framework put in place by India to combat money laundering imposes obligation on banking companies, financial institutions and intermediariesPREVENTION OF MONEY LAUNDERING ACT,2002

whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering

What is Money Laundering?

Maintain a record of all transactions

Furnish information of the transactions to the director within the prescribed time

Verify and maintain records of the identity of all its clients

Obligation Of Banking Companies, Financial Institute And Intermediaries

Composition of TribunalQualifications for appointment as Presiding OfficerTerm of officeEstablishment of Appellate TribunalQualifications for appointment asChairperson of the Appellate TribunalDeposit of amount of debt due, on filing appeal

DEBT RECOVERY TRIBUNAL

Modes of RecoveryValidity of CertificateOther modes of RecoveryTransfer of pending casesElectronic Form

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THE LEGAL SERVICES AUTHORITIES ACT, 1987: LOK ADALATS

Act extends to whole of India except Jammu & Kashmireffective from 21 June, 2002The Act has retrospective application

REGULATION OF SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS OF BANKS AND FINANCIAL INSTITUTIONS

The debt is secured The debt has been classified as an NPA by the banks The outstanding dues are >1 lakh and >20% of the principal loan amount and interestThe security is not an Agricultural land.

Pre-conditions

Registration of Securitisation Companies or Reconstruction Companies

Take over Sale or lease Rescheduling of paymentEnforcement of security interest ActSettlement of duesPossession of secured assetsMeasures for assets reconstruction

Other functions

ENFORCEMENT OF SECURITY INTEREST

NO intervention of any Court

If borrower defaults account = NPA

SECURED CREDITORBORROWER

NOTICEDischarge in 60 days ORMake representation

Management of the companyCentral RegistryOffences and PenaltiesRs 5000 everyday Rs 5 lakh and Rs 10000 each day1 year imprisonment or fine or both

The borrowers can at any time before the sale is concluded, remit the dues and avoid losing the security

Appeal in DRT and DRAT Rights Of BorrowersSignals Appearls Pvt Ltd v/s Canara bank (2010)

Difference between Bank & NBFC

NBFCs are classified as

Asset finance companyInvestment CompanyLoan company

Formation ProcedureObtain checklist of requirements from RBI websiteFill up prescribed form available on RBI website Fill Fill up the eform provided in excel formatGet the required certifications of the statutory auditors/chartered accountantsSubmit softcopy on RBI website before submission of the hard copy.Submit the hardcopy application in duplicate to regional office of RBI

must commence within 6 months from the date of CoR

No change in control prior to commence- ment of its businessCommencement of Business

If not commenced in 6 months, CoR will stand withdrawn

Framework Of NBFCs

NBFCs taking Public DepositsNet Owned FundsRs 2 croreCapital Adequacy RatioMinimum of 15%Nonperforming assetsNeed to make provisionsagainst non performingassetsCredit RatingMinimum investment gradeor other specified creditratingPeriod of Public DepositBetween 1 year and 5 yearsInterest Rate on DepositsInterest rate ceiling specified(now 12.5% per annum)Transfer to Reserve Fund20% of profitsInvestment in Approved SecuritiesMinimum 10% of liquidasset in approved securitiesand 5% in unencumberedterm deposits with anyscheduled commercial bank

Key Prudential Norms

Acceptance of deposit

Rate of Interest & PeriodProhi. from accepting demand depositDeposit from NRINomination FacilityCeiling on acceptance of public deposit

No NBFC having Net Owned Fund > 2 Cr. shall accept public deposit unless it has obtained minimum investment grade

Credit Rating

Downgrading of Rating

Default by NBFC

Role of Official Liquidators

Min period of 12 months and max period of 60 monthscannot offer interest rates higher than prescribed by RBIcannot offer gifts/incentives to the depositors

repayment of deposits by NBFCs is not guaranteed by RBI

Features of NBFC regulations

cannot grant any loan against a public deposit or make premature repayment of a public deposit within a period of three months (lock-in period) from the date of its acceptance

in the event of death of a depositor

Pre- payment of public deposits

74% FDI is allowed from all sources on the automatic route

Minimum Capitalisation norms for fund based NBFCsfor FDI upto 51%, US $ 0.5 million to be brought in upfrontIf the FDI is above 51 % and upto 75 %, US $ 5 million to be brought upfrontIf the FDI is above75 % and upto 100 %, US $ 50 million out of which $ 7.5 million to be brought in upfront and the balance in 24 monthsFDI In NBFCs

Merchant banking Credit Reference Agencies

Underwriting Credit rating Agencies Portfolio Management ServicesLeasing & Finance Investment Advisory Services Housing Finance Financial Consultancy Foreign Exchange BrokeringStock Broking Credit card business Asset Management Money changing Business Venture CapitalMicro Credit FactoringRural Credit Custodial Services

FDI investments allowed in the following 19 NBFC activities

The Reserve Bank of India (RBI) has suspended the licences of seven non-banking finance companies (NBFC) Religare FinanceEden Trade & CommerceArtisans Micro FinanceNott InvestmentsRCS Parivar FinanceSwetasree FinanceDewra Stocks & Securities

RBI Cancels license

Key features

Eligible PromotersFit and ProperCorporate structureMinimum capital requirementForeign shareholding in the bankBusiness plan for the bank

RBI releases Draft Guidelines for on tap licensing of Universal Banks in the Private Sector

Application procedureThe licensing window will be open on-tap, and the applications could be submitted to the Reserve Bank ) The applications will be referred to a Standing External Advisory CommitteeThe Committee will submit its recommendations to the RBIThe decision for setting up of a bank will be taken by the Reserve Bank.The validity will be 18 months from the date of grantingThe Reserve Banks decision in this regard will be finalThe names of applicants that are found suitable for approval will be placed on the RBIs website

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