Money and Banking (part – II)

Core banking is a banking service provided by a group of networked bank branches where customers may access their bank account and perform basic transactions from any of the member branch offices. Banking software and network technology allows a bank to centralize its record-keeping and allow access from any location. Statement 2 and 3 are incorrect. Hence option (a) is the correct answer.

In June 2007, the Government of India had acquired the RBI's 59.7& stake in State bank of India.

As per the question period, NABARD was under the control of the Reserve Bank of India (RBI). Divestment of RBI's shareholding in NABARD was done in two phases. The Bank held 72.5 percent of equity in NABARD amounting to Rs. 1450 crore out of which 71.5 percent amounting to Rs. 1430 crore was divested in October, 2010 based on the Government of India notification on September 16, 2010. The RBI divested its residual stake in NABARD and entire stake in NHB amounting to Rs. 20 crore and Rs. 1450 crore on February 26, 2019 and March 19, 2019 respectively. With this, the Government of India now holds 100% stake in both the financial institutions,

Divestment of RBI's stake in NABARD and NHB has its basis in the recommendation of Narasimham Committee II and the Discussion Paper prepared by RBI on Harmonizing the Role and Operations of Development Financials Institutions and Banks.

The National Housing Bank (NHB) was set up on July 9, 1988, as the apex institution for housing under the NHB Act, 1987. It was fully owned subsidiary bank of the Reserve Bank of India. On March 19, 2019 the RBI divested its entire stake amounting to 1450 crore. With this, the Government of India now holds 100% stake in NHB.

The Basel Committee initially named the Committee on The banking Regulations and Supervisors Practices -was established by the central bank Governors of the Group of Ten countries at the end of 1974 in the aftermath of serious disturbances in international currency and banking markets (notably the failure of Bankhaus Herstatt in West Germany). The Committee, headquartered at the Bank for International Settlements in Basel, was established to enhance financial stability by improving the quality of banking supervision worldwide, and to serve as a forum for regular cooperation between its member countries on banking supervisory matters. Since its inception, the Basel Committee has expanded its membership from the G10 to 45 members (Central banks and bank supervisors) from 28 jurisdictions. Starting with the Basel Concordat, first issued in 1975 and revised several times since, the Committee has established a series of international standards for bank regulation, most notably its landmark publications of the accords on capital adequacy which are commonly known as Basel I (1988), Basel II (2004) and most recently Basel III.

Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09. The measures aim to strengthen the regulation, supervision and risk management of banks.

Like all Basel Committee standards, Basel III standards are minimum requirements which apply to internationally active banks. Members are committed by implementing and applying standards in their jurisdictions within the time frame established by the Committee.

In June 1999, the Basel Committee on Banking Supervision issued a proposal for a new capital adequacy framework to replace the 1988 Accord (Basel I). This led to the release of a revised capital framework in June 2004. Generally known as 'Basel II', the revised framework comprised three pillars:

1. minimum capital requirements, which sought to develop and expand the standardized rules set out in the 1988 Accord;

2. supervisory review of an institution's capital adequacy and internal assessment process;

3. effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices.

Capital Adequacy Ratio (CAR) is the ratio of a bank's capital in relation to its risk weighted assets and current liabilities. It is also known as the Capital to Risk-weighted Assets Ratio (CRAR). The risk weighted assets take into account credit risk, market risk and operational risk. It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process. The Basel III norms stipulated a capital to risk-weighted assets of 8%. However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CRAR of 9% (11.5% including capital conservation buffer) on an ongoing basis.

Deposit Insurance and Credit Guarantee Corporation (DICCC) is a wholly owned subsidiary of Reserve Bank of India. 11 was established under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 for the purpose of providing insurance of deposits and guaranteeing of credit facilities. At present (from 4 February, 2020) DICGC insures all bank deposits, such as saving, fixed, current, recurring deposit for up to the limit of Rs. 5 lakh of each depositor in a bask (earlier this limit was Rs. 1 lakh for each depositor).

Earlier the interest rate on saving accounts in all the Nationalized Commercial Banks was fixed by the Reserve Bank of India. But in October, 2011, the interest rate on saving accounts have been deregulated by the RBI and now it is fixed by commercial banks based on market interest rate.

The 'Marginal Cost of Funds Based Lending Rate' (MCLR) is an internal reference rate for banks fixed by the RBI. It helps banks to define the minimum interest rate on different types of loans. Now banks cannot lend below the MCLR. It was implemented on April 1, 2016 by the RBI. MCLR came into effect to fulfill the following objectives:

1. Improve transparency in the system utilized by banks to fix interest rates on loans.

2. Ensure fairness in credit interest rates for both banks and borrowers.

3. It provides a competitive advantage to banks and boost their long-term value while contributing to the country's is economic growth.

4. Enhance transmission of RBI's policy rates into the country's banking system.