Question on RBI and NBFC

Question on RBI and NBFC

1. What is the Functions of RBI?
   The Reserve Bank of India is the central bank of India, was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
“…to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”

1. Monetary Authority:
   Formulates, implements and monitors the monetary policy.
   Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

2. Regulator and supervisor of the financial system:
   Prescribes broad parameters of banking operations within which the country’s banking and financial system functions.
   Objective: maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public.

3. Manager of Foreign Exchange:Manages the Foreign Exchange Management Act, 1999.
   Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

4. Issuer of currency:Issues and exchanges or destroys currency and coins not fit for circulation.
   Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

5. Developmental role: Performs a wide range of promotional functions to support national objectives.

6. Related Functions: Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
   Banker to banks: maintains banking accounts of all scheduled banks.

2. What is monetary policy?
   Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve economic growth and stability, to lower unemployment, and to maintain predictable exchange rates with other currencies.

3. What is a Non-Banking Financial Company (NBFC)?
   Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations. 

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by 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 deposits 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).

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

1. NBFC cannot accept demand deposits;
   2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself 
   3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Question on Some Banking Terminology

1. What is Sub-prime crisis?
   Borrowers are classified into two categories Prime and Sub-prime
   Prime borrowers are those with a good credit score
   Sub-prime borrowers are those with a less credit score 
   Credit score is calculated based on number of factors like timely loan repayments (if previously taken),credit card limit.
   Lenders lend loans to sub-prime borrowers typically at the higher interest rates since the probability of defaults is high in such a case.

2. What is KYC?
   KYC means “Know Your Customer”. It is a process by which banks obtain information about the identity and address of the customers. This process helps to ensure that banks’ services are not misused. The KYC procedure is to be completed by the banks while opening accounts. Banks are also required to periodically update their customers’ KYC details. 
   The KYC guidelines of RBI mandate banks to collect proofs from their customers. They are-
   1. Proof of identity
   2. Proof of address

3. What is SWIFT?
   The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.
   SWIFT does not facilitate funds transfer, rather it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other. Each financial institution, to exchange banking transactions, must have a banking relationship by either being a bank or affiliating itself with one (or more) so as to enjoy those particular business features.
   India was 74th Nation to join SWIFT Network.
   A majority of FOREX related message are sent to correspondent banks abroad through SWIFT.
   SWIFT Code consist 8 or 11 character when code is 8 digit, It is referred to primary office
   First 4 – bank code
   Than 2 – country code
   Than 2 – location code 
   Last 3 – branch code (optional).

4. What is NOSTRO and VOSTRO account?
   A nostro is our account of our money, held by the other bank where as a vostro is our account of other bank money, held by us.
   NOSTROaccount is maintained by an Indian bank in the foreign countries.
   VOSTROaccount is maintained by a foreign bank in India with their corresponding bank.

5. What is RuPay Card?
   RuPay is the Indian domestic card payment network set up by National Payments Corporation of India (NPCI) at the behest of banks in India. The RuPay project had been conceived by Indian Banks Association (IBA) and had the approval of Reserve Bank of India (RBI).
   RuPay Logo National Payments Corporation of India (NPCI) has a plan to provide a full range of card payment services including the RuPay ATM, RuPay Micro ATM, Debit, Prepaid and Credit Cards which will be accepted in India and abroad, across various channels like POS, Internet, IVR and mobile etc.
   The initial focus of NPCI would be to approach those banks who have not been issuing any payment card at all more specifically – Regional Rural Banks (RRBs) and urban co-operative banks.
   All Public Sector Undertakings (PSU) banks set to join RuPay system by the end of year 2012. RuPay-based debit cards can be used by the consumers on the Internet from September, 2012.
   The government of India had launched India’s first domestic payment card network, RuPay, to compete with Visa Inc and MasterCard Inc.

6. What is foreign exchange reserve?
   Foreign exchange reserves (also called Forex reserves) are the foreign currencies held by a country’s central bank and its member banks. They are also referred to as foreign currency reserves or foreign reserves.
   The reserves are labeled as reserve assets under assets by functional category. In terms of financial assets classifications, the reserve assets can be classified as Gold bullion, Unallocated gold accounts, Special drawing rights, currency, Reserve position in the IMF, interbank position, other transferable deposits, other deposits, debt securities, loans, equity (listed and unlisted), investment fund shares and financial derivatives, such as forward contracts and options.

7. What is Bancassurance?
   Bancassurance also sometimes known as the bank insurance model (BIM) or allfinanz, is the partnership or relationship between a bank and an insurance company, or a single integrated organization arrangement which allow insurance company can sell its products to the bank’s client base. This partnership arrangement can be profitable for both companies. Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer bases without having to expand their sales forces or pay commissions to insurance agents or brokers.

8. What is Money Laundering ?
   Money laundering is the processes of concealing the source of obtain money. Money or funds obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.

9. What are NPA?
   A nonperforming asset (NPA) refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. Once the borrower has failed to make schedule principal or interest payments for 90 days the loan is considered to be a NPA.

Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”