ASSIGNMENT – COMMERCIAL BANKING SYSTEM AND ROLE OF RBI

ANS. 1

INTRODUCTION

The Reserve Bank of India, the nation's central bank, is an independent organisation in charge of all
significant financial operations, including the largest loans to the government and banks as well as
financial management and regulation. The RBI Act establishes the RBI as a legally independent entity
with a set structure. The RBI performs three essential tasks as an independent organisation free
from interference from the government. Inflation must be kept low and constant, debt must be
managed, and eventually the financial system must be watched. Although it has existed for as long
as there have been central banks, the argument over the RBI's independence has only recently come
back into the spotlight. The disagreement between the federal government and the Reserve Bank of
India revolves around Section 7 of the RBI Act (RBI). Regardless of whether it is constitutional or
statutory, the 1934 Act that governs the RBI's activities grants the government the ability to direct it.
As a result, the RBI lacks constitutional autonomy. The government selects the governor of the
central bank and her four assistants. When it thinks proper and it is in the public interest, the Central
Government may occasionally direct the Bank after discussing with the President of the Bank.
Technically speaking, the legislation also gives the government the authority to choose a new central
bank should it find that the RBI has fallen short of its commitments. However, for the past 25 years,
the RBI has been a part of India. The economy has grown more independent as a result of economic
liberalization.

CONCEPT AND ANALYSIS

As a substantial financial institution (RBI), it is a distinct entity with its own legislative body, and it
performs important and challenging functions.

The following vital roles are played by a big financial institution for the nation:

 Controlling the cash flow.

 Promoting economic equilibrium.
 Controlling the financial sector and banks.
 Controlling foreign exchange and change fees.
 Controlling credit scores, establishing interest rates for borrowing and lending money, and, most
crucially,
 Keeping inflation in check

The right design of a major financial institution is critical for carrying out those sophisticated and
technological features. Significant banks may be allowed to execute their powers autonomously in
order to preserve such characteristics. A big, independent financial institution may make
macroeconomic balancing choices without considering political benefits. As a result, the
independence of a big financial institution is critical to guaranteeing a strong and long-term
economic boom.

The RBI should be separate from the federal government for the reasons listed below:

 Central banks' primary goals are long-term financial stability and expansion. Because the ruling
party or government, whether at the federal or state level, is continually up for election, short-
term growth is the major aim.
 Central banks strive to foster confidence by making a number of challenging choices that show
giving up near-term benefits for long-term benefits like financial and price stability, which
governments may not want.
 The majority of the regions under RBI management have the capacity to boost the economy in
the short term, but there is a long-term danger of financial instability.
 Excessive rate reduction may increase the production of credit and temporarily give the
appearance of growth. Although it could result in asset price bubbles and substandard bank
lending, this might have an impact on long-term financial stability.
 Central banks make choices with far wider temporal horizons than do governments. Central
banks are responsible for regulating the economy, including ensuring currency stability and
controlling the rate of inflation. This economic health paradigm was created with a medium- to
long-term outlook in mind.
 For political reasons, governments are frequently motivated to make rash judgments. Long-term
economic damage can be significant as a result of short-term, rash judgments. Therefore, it is
crucial to keep the central bank functioning independently from government oversight.
 Central banks oversee inflation, foreign exchange, inflation, and financial stability. Many of them
have the ability to instantly enhance the economy, but they may also be driven by financial
excesses and market volatility.

For example –

Some analysts are concerned about the RBI's autonomy and institutional integrity as a result of the
decision to abolish. The RBI's governmental directions in these subjects, as well as her RBI's activities
in response, are regarded as an infringement of its autonomy.

CONCLUSION

A country's rating might be reduced for deviating from the RBI's autonomy, which could hurt the
economy. Additionally, there have been conflicts between the government and the RBI. One
governor resigned in retaliation. The governor was pressured into quitting. Overall, the RBI and the
federal government have developed a mutual respect and ability to work together. Responsibility
and autonomy must be appropriately balanced.

ANS. 2

INTRODUCTION

India is the second-largest and fastest-growing fintech market in the world, behind the United
States, with over 2,100 start-ups. Peer-to-peer (P2P) transactions, financing, insurance, and mobile
point of sale are just a few of the sub-sectors in which two-thirds of start-ups established in India
over the past five years are active. The nation's economy is quickly growing (POS). India has
developed a world-class FinTech infrastructure over the past ten years that is supported by four
important technical pillars, including the Unified Payment Interface (UPI) cashless payment system
and the Aadhaar identification system. rice paddies India Due to its open APIs, Stack has played a
significant role in accelerating industrial progress.

A variety of services, including (a) insurtech, (b) wealthtech, and (c) neobanks, have seen significant
expansion in India's fintech industry, which was initially driven by digital payments and alternative
financing.
CONCEPT & ANALYSIS

Traditional banks were operating in a volatile, unpredictable, complexity, and ambiguity (vuca)
environment, where old techniques were becoming outmoded as a result of new rules, an increasing
amount of data, and a growing client base. Following the global economic crash in 2008, FinTech
arose swiftly and gained traction as a result of economic inclusion and demonetization policies.
Fintechs have exploited the following gaps in traditional banking, creating a new and interesting
sector:

1. Infrastructures Barriers:
Traditional banks were hampered by their reliance on old IT infrastructure. While many of these
institutions are still weighing options for transitioning from their legacy systems to the new era,
FinTech has quickly followed modern period technologies such as AI, ML, and IoT to cover the
current gaps.
2. Ineffective Management:
Although banks have started to improve their technology in order to achieve the
aforementioned goals, full technological integration is still needed in the standard products
offered to end users. Public Sector Unit (PSU) banks need a thorough plan for growing and
retaining long-term customer connections if they have sizable client bases. On the other side,
since 2017, private Indian banks have been more aggressive in their engagement with FinTech
start-ups, and their innovation teams have so far examined over 1,000 concepts.
3. Gap between Promise and Performance:
Traditional banks have struggled to maintain stability or a favourable credit score pattern over
time. As a result, they were unable to fill shortages in various businesses relating to credit
ratings. Furthermore, prior to the FinTech revolution, bank staff were static, and the tactics they
used were outdated.

Traditional Banks Survival strategy

Fintech firms have unquestionably impacted the whole retail banking industry. Traditional
banks, on the other hand, are actively adopting new technology into their goods and services. As
the 'India Stack' facilitates API exchange with other institutions, government banks have also
become active participants in the 'open banking' environment. In the present time some
institutions are able to swiftly build and deploy a wide range of new solutions that would have
taken considerably longer to execute in traditional banks' antiquated IT infrastructures by
sharing APIs with FinTechs. Traditional banks, on the other hand, apply innovation on several
levels. These are some examples:

 Creation of numerous digital platforms for automated financial services.

 To compete with FinTech, launch digital banking services via mobile applications.
 To compete in the "neo-bank" arena, traditional banks, notably SBI, have created "digital-
only" banking concepts through "YONO."
 To increase efficiency and productivity, leading Indian private banks such as ICICI, HDFC, and
Axis Bank are implementing Robotic Process Automation (RPA).

In terms of skills and services, India today has six key categories of fintech available. Loan and
payment providers have grown dramatically in recent years. However, the current market
situation offers potential growth opportunities for niches such as Neo Banks, which have simple
customer acquisition methods, low rates, and specialised business banking products. Neo Banks
 is expected to move its focus away from millennials and into other market segments like as
retirees, women, and small businesses.

In the following ways, fintech has aided financial service providers:

 Account and User Authentication - Indian data creation and API stack continue to grow,
allowing fintech businesses to interact with customers and provide pertinent services. Faster
client onboarding, credit and loan approval, and the KYC procedure.
 A2A Payments - direct transaction between a user's account and a merchant's account
 Account Consolidation - Use various banks' account data in a single third-party application.
 ML-Powered Insights and Recommendations - Greater understanding of past customer
transactions for the launch of new products and services.

CONCLUSION

The demand for financial services is changing dramatically and clearly as a result of the younger
generation's greater acceptance by the rest of the population. A new technology necessitates
improved, faster generation-based services. Surprisingly, his Indian FinTech company is upending
established banking systems.

Over the last 10 years, market forces have clearly established that banks and fintech startups should
collaborate rather than compete. However, it is improbable that FinTech firms in the United States
would modernise the old banking system. There are various logical causes for this, the most
important of which being that fintech businesses have had to create long-term consumer loyalty.

On the other hand, traditional banks are becoming more technologically adept and more willing to
accommodate start-ups' needs. You must, however, continue to be an active participant in the
fintech ecosystem if you want to compete with startups. This inventive competitive environment is
expected to drive up innovation within the Indian financial services sector, particularly by increasing
investment for his FinTech start-ups, which are just starting to take off. FinTechs will continue to
expand, but not only in terms of their numbers; they will also increase in terms of the depth and
scope of their offers.

ANS. 3 (a)

INTRODUCTION

The main duties of banks are to accept deposits and give loans to individuals and businesses. A
borrower who obtains a loan from a bank is required to pay back both the principle and interest. In
contrast, if the borrower fails to pay the interest, principal, or both, the bank sustains a loss. Bank
loans are thus categorised as non-performing assets. An NPA is another name for a bad debt. In
India, NPLs are rising, which is bad for the banking sector and the economy as a whole.

Any economy's lifeblood is considered to be the banking industry. The economy is negatively
impacted by banking issues. There are several serious issues facing the Indian banking industry as a
result of the surge in non-performing assets (NPA). According to the RBI, distressed assets are
borrower assets that financial institutions have judged, based on their asset categorization rules, to
be substandard, poor, or dubious assets. Liquidity, profitability, overall asset quality, and bank
sustainability are all directly impacted by NPAs. Increased defaults cause non-performing assets to
rise, which lowers profitability and asset quality in the financial statements of the banking sector.
The NPA issue doesn't simply impact banks; it impacts the whole economy.

CONCEPT AND ANALYSIS

Unreasonable lending practises, inadequate evaluation, and lax monitoring are a few of the factors
that have contributed to Indian banks making bad loans worse. Growing NPAs are causing major
problems for the Indian banking industry. However, the problems brought on by subpar loans are
more severe in public sector banks than in private sector banks. The of the most significant factors
are:

 India's economy was flourishing before the financial crisis of 2008. Banks gave firms a lot of
credit during this period in the expectation that the good times would last. The course of events
in the future, however, may differ from those in the past. The worldwide economic slump that
followed the financial crisis hurt most corporations' businesses.
 Their inability to repay debts was hampered by low incomes. This is one of the primary reasons
for the rise in NPAs at public sector banks.
 The relaxation of corporate lending rules was a significant factor in the rise in NPAs. They didn't
look closely at their credit history or financial circumstances. Banks were willing to take on more
debt and less promoter equity.
 A significant share of the credit distributed to industries is provided by public sector banks, and
this element of the credit distribution accounts for a sizable portion of NPA. SBI gave a sizable
loan to Kingfisher Airlines during its financial difficulties, which the company is unable to recoup.
 There have also been incidents of credit default by promoters, when cash were transferred by
over-invoicing imports, supplied through a promoter-owned business abroad, or exporting to
shell firms and then claiming default.

ANS.3 (b)

INTRODUCTION

The banking industry supports and contributes considerably to the growth of a country's economy.
To guarantee continued development, banks and financial institutions must be skilled at dealing with
stress particularly that caused by non-performing assets (NPAs) or bad loans.
Banks lose a significant amount of resources as a result of non-performing assets (NPAs), which are
assets and loans that are no longer recoverable. Banks are unable to collect interest on the frozen
amount of loans or recoup the initial loan amount from defaulters. As a result, banks and credit
unions must exert tremendous effort to manage and recover NPAs.

CONCEPT AND ANALYSIS

With the recent increase in the number of NPAs or bad loans, determining the fundamental
reason has become crucial. The adoption of improper lending practises at the bank's
management level is the primary cause of NPA in banks. If banks invest in the correct solutions,
they can cope with the issues of managing and recovering NPAs.

Ways to mitigate NPAS

Financial institutions must act now to stop the unavoidable rise in non-performing assets (NPAs). If
strict steps aren't taken to reduce NPA, they'll keep building up and constitute a significant risk to
the economy.

1) Tribunals for debt recovery

Financial institutions are given the authority to promptly recover debts of ten lakhs or more
according to the Act, which was approved by the Indian Parliament in 1993. Because there are
less delays in the initial procedures, DRTs may handle more cases than traditional courts.
2) Lok Adalats
The RBI regulations published in 2001 state that small debts of less than 5 lakhs can be collected
through Lok Adalats. This method of alternative conflict resolution can be used in both lawsuits
and non-suit circumstances.
3) Compromise Agreement
With such a simple non-discretionary approach, this programme helps with the recovery of NPAs
up to 10 crores.
4) Bureau of credit information
Banks get information about your financial condition from a third party organisation called CIBIL.
Banks can access the personal defaulter data that the Credit Information Bureau holds so they
can assess credit more accurately. For this function, banks might be charged a fee.
5) The 2002, Sarfaesi Act
For dealing with non-performing assets, the SARFAESI gives banks three options: asset
reconstruction, security enforcement, and securitization (NPAs). Any outstanding debt of more
than Rs. 1 lakh can be handled via SARFAESI. However, a sum that is less than 20% of the entire
principal and interest is not recognised under the Act. In accordance with the Act, banks may
also alert you and your guarantor and ask that the money be released within 60 days of receipt.

CONCLUSION

Bank capital is depleted by NPAs, which affects their ability to make payments. It has implications for
both politics and the economy. Since bad loans have a direct effect on Indian banks' profitability,
they are a severe problem. Failures of banks also have an impact on other enterprises. Banks and
other financial institutions must thus take the required actions to address the NPA situation. They
have to make sure that loans are recovered fairly and successfully for the financial system to run
smoothly. Banks must quickly put processes in place to help with NPA prevention.