MONEY AND BANKING (Part – I)

As per RBI guidelines for licensing of Small Finance Banks (released in November, 2014), the objectives of setting up of Small Finance Banks (SFBs) will be to further financial inclusion by (a) provision of saving vehicles, and (b) supply of credit to small business units; small and marginal farmers; micro and small industries; and others unorganized sector entities, through high technology-low cost operations. However, there is no explicit provision for SEBs to encourage young entrepreneurs to set up business particularly in rural areas. Hence, option (a) is the correct answer.

As per RBI's guidelines for licensing of Payment Banks, the payments bank will be registered as a public limited company under the Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to acceptance of demand deposits and provision of payments and remittance services.

The primary objective of setting up of payments banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments/remittance services to migrant labour workforce, low income households, small businesses, other unorganized sector entities and other users, by enabling high volume-low value transactions in deposits and payments/remittance services in a secured technology- driven environment.

The existing non-bank Pre-paid Payment Instrument (PPI) issuers authorized under the Payment and Settlement Systems Act, 2007 (PSS Act); and other entities such as individuals/ professionals; Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives; that are owned and controlled by residents; and public sector entities may apply to set up payments banks.

Payments Bank can issue. ATM/Debit card. They, however, cannot issue credit cards. They cannot undertake lending activities. Hence, option (b) is the correct answer.

Nachiket Mor Committee on 'Comprehensive Financial Services for Small Businesses and Low Income Households' had recommended the formation of a new category of banks called Payment Banks. The Committee was formed on 23rd September, 2013. It submitted its report to the RBI on 7th January, 2014.

'Shadow banking' in fact, symbolizes one of the many failings of the financial system leading up to the global financial crisis. The term 'Shadow Bank' was coined by the American economist Paul McCulley in 2007. 'Shadow banking' refers to the practice of banking-like activities (mainly lending) performed by non-banking financial intermediaries, which are not subject to strict regulation. These institutions function as intermediaries between the investors and borrowers, providing credit and generating liquidity in the system. Although these entities do not accept traditional demand deposits offered by banks, they do provides services similar to what commercial banks offer.

Banks are the financial institutions which are empowered by the government to financial activities like to accept a depos. its or grant credit, to manage withdrawals, to pay interest, to clear cheques and to provide general services to the clients, Banks also play an important role in socio-economic development of a country. While a Non-Banking Financial Institution (NBFI) is a financial institution that does not have a full banking license and is not directly under the control of the government. NBFI's are primarily concerned with the term loan requirement of large companies.

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/ stocks/bonds/debentures/securities issued by the Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving depos- its under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). Hence, Statement 1 is incorrect. NBFC cannot accept demand deposits, do not form part of the payment and settlement system and cannot issue cheques drawn on itself. Deposits insurance facility of Deposits Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. Thus, Statement 2 is correct. Hence, option (b) is the correct answer.

The Ombudsman Scheme for Non-Banking Financial Companies (NBFC), 2018, is an expeditious and cost free apex level mechanism for resolution of complaints of the customers of NBFCs, relating to certain services rendered by NBFCs. The Scheme is being introduced under Section 45 L of the Reserve Bank of India Act, 1934, with effect from February 23, 2018. The NBFC Ombudsman is a senior official appointed by the Reserve Bank of India.

Microfinance is the supply of basic financial services to poor and low-income households and their micro-enterprises. Microfinance comprises several financial tools such as savings, credit, leasing, insurance and cash transfers. These services are provided by a variety of institutions, which can be broadly divided into banks, NGOs, credit and savings cooperatives and associations, and non-financial and informal sources.

The Board of Directors of the RBI constituted a Sub-Committee of the Board to study the issues and concerns on the microfinance sector. The Sub-Committee of the Board was formed on October 15, 2010, under the chairmanship of Mr. Y.H. Malegam. The Committee submitted its report in December, 2011. The Committee recommended that a separate category be created for NBFCs operating in the microfinance sector, such NBFCs being designated as NBFC-MFI.

On the recommendations of Malegam Committee, a new category of NBFCs, viz., Non Banking Financial Company- Microfinance Institution (NBFC-MFI) was created.