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8/18/2019 Banking Law 1

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Q-NATIONALIZATION OF BANK AS A PART OF SOCIAL CONTROL

Social Welfare

It was the need of the hour to direct the funds for the needy and required sectors of the indian

economy. Sector such as agriculture, small and village industries were in need of funds for their

expansion and further economic development.

Controlling Private Monopolies

Prior to nationalisation many banks were controlled by private business houses and corporate

families. It was necessary to check these monopolies in order to ensure a smooth supply of credit to

socially desirable sections.

Expansion of Banking

In a large country like India the numbers of banks existing those days were certainly inadequate. Itwas necessary to spread banking across the country. It could be done through expanding banking

network (by opening new bank branches) in the un-banked areas.

Reducing Regional Imbalance

In a country like India where we have a urban-rural divide; it was necessary for banks to go in the

rural areas where the banking facilities were not available. In order to reduce this regional

imbalance nationalisation was justified:

Priority Sector Lending

In India, the agriculture sector and its allied activities were the largest contributor to the national

income. Thus these were labelled as the priority sectors. But unfortunately they were deprived of

their due share in the credit. Nationalisation was urgently needed for catering funds to them.

Developing Banking Habits

In India more than 70% population used to stay in rural areas. It was necessary to develop the

banking habit among such a large population.

Preventing concentration of economic power

Initially, a few leading industrial and "business houses had close association with commercial

banks. The directors of these banks happened to be the same industrialists who established

monopoly control on the bank finance.

They exploited the bank resources in such a way that the new business units cannot enter in any

line of business in competition with these business houses. Nationalisation of banks, thus, prevents

the spread of the monopoly enterprise.


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Social control was not adequate

The 'social control' measures of the government did not work well. Some banks did not follow the

regulations given under social control. Thus, the nationalisation was necessitated by the failure of

social control.

Channel the bank finance to plan - priority sectors

Banks collect savings from the general public. If it is in the hand of private sector, the national

interests may be neglected, besides, in Five-Year Plans, the government gives priority to some

specified sectors like agriculture, small-industries etc. Thus, nationalisation of banks ensures the

availability of resources to the plan-priority sectors.

Greater mobilisation of deposits

The public sector banks open branches in rural areas where the private sector has failed. Because of

such rapid branch expansion there is possibility to mobilise rural savings.

Help to agriculture

If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country

like India where more than 70% of the population depends upon agriculture. Thus, for providing

increased finance to agriculture banks have to be nationalised.

Balanced Regional development

In a country, certain areas remained backward for lack of financial resource and credit facilities.

Private Banks neglected the backward areas because of poor business potential and profit

opportunities. Nationalisation helps to provide bank finance in such a way as to achieve balancedinter-regional development and remove regional disparities.

Greater control by the Reserve Bank

In a developing country like India there is need for exercising strict control over credit created by

banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring

about co-ordinated credit control. This necessitated the nationalisation of banks.

Small stake of shareholders

The nationalised banks had deposits totalling Rs. 2742 crore at the end of December 1968. But thecapital contributed by their shareholders was only Rs. 28.5 crore, which was just 1% of deposits.

Even if we include the reserves, the amount comes to only 2.4% of the banks deposits with such a

small and insignificant stake, it is unjustifiable to allow the private shareholders to exercise control

over such vital credit machinery with large resources.

Greater Stability of banking structure

Nationalised banks are sure to command more confidence with the customers about the safety of

their deposits. Besides this, the planned development of nationalised banks will impart greater

stability for the banking structure.


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March Forward towards Socialism

India aims at socialism. This requires the financial institutions to run under the government's

control and only through nationalisation, this objective can be effectively achieved.

Better service conditions to staff

Nationalisation ensures the staff of banks to enjoy greater job security and higher emoluments. It

can provide other benefits as well. In this way the banks can motivate their staff and thereby the

operational efficiency of banks will be increased.

New schemes

Through nationalised banks, new schemes like village adoption scheme, Lead Bank Scheme can be

formulated and implemented. Besides, different types of financial facilities can be extended to

persons like Doctors, Engineers, Self-employed persons like artisans etc.

Nationalisation of banks creates great interest among various sections of the public. Many hopes

were raised in the middle class and poor people with regard to the financial assistance. Thenationalised banks drew up a number of schemes to assist new types of customers and are plans to

make each of these banks to adopt a few select districts and concentrate on their intensive

development.


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SUMMARY OF Y. H. MALEGAM COMMITTEE REPORT 2011

The RBI appointed Mr. Y. H. Malegam Committee (the Sub-Committee of the Central Board of

Directors of Reserve Bank of India to Study Issues and Concerns in the MFI Sector related to the

entities regulated by the Bank) has submitted its report to the RBI in January 2011.

The Sub-Committee composed of Shri Y.H. Malegam as Chairman, Shri Kumar Mangalam Birla,

Dr. K. C. Chakrabarty, Smt. Shashi Rajagopalan and Prof. U.R. Rao as Members and Shri V. K.Sharma (Executive Director) – Member Secretary

The terms of reference of the Sub-Committee were

1. To review the definition of ‘microfinance’ and ‘Micro Finance Institutions (MFIs)’ for the

purpose of regulation of non-banking finance companies (NBFCs) undertaking microfinance

by the Reserve Bank of India and make appropriate recommendations.

2. To examine the prevalent practices of MFIs in regard to interest rates, lending and recovery

practices to identify trends that impinge on borrowers’ interests.

3. To delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the

Reserve Bank and the regulatory framework needed to achieve those objectives.

4. To examine and make appropriate recommendations in regard to applicability of money

lending legislation of the States and other relevant laws to NBFCs/MFIs.

5. To examine the role that associations and bodies of MFIs could play in enhancing

transparency disclosure and best practices

6. To recommend a grievance redressal machinery that could be put in place for ensuringadherence to the regulations recommended at 3 above.

7. To examine the conditions under which loans to MFIs can be classified as priority sector

lending and make appropriate recommendations.

8. To consider any other item that is relevant to the terms of reference.

Key recommendations:

1. A separate category be created for NBFCs operating in the Microfinance sector, such NBFCs

being designated as NBFC-MFI.

2. A NBFC-MFI is defined as “A company (other than a company licensed under Section 25 of the

Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers

with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating

activities, with repayment schedules which are more frequent than those normally stipulated by

commercial banks and which further conforms to the regulations specified in that behalf”. It is

suggested to define each component of this definition in the regulation.

3. The suggested conditions to be followed to classify a NBFC as a NBFC-MFI a). Not less than 90%

of MFI’s total assets (other than cash and bank balances and money market instruments) are in the

“ ” “ ” -


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does not exceed Rs. 50,000; ii)the amount of the loan does not exceed Rs. 25,000 and the total

outstanding indebtedness of the borrower including this loan also does not exceed Rs. 25,000; iii)

the tenure of the loan is not less than 12 months where the loan amount does not exceed Rs. 15,000

and 24 months in other cases with a right to the borrower of prepayment without penalty in all

cases; iv) the loan is without collateral; v) the aggregate amount of loans given for income

generation purposes is not less than 75% of the total loans given by the MFIs; vi) the loan is

repayable by weekly, fortnightly or monthly installments at the choice of the borrower. c) The

income it derives from other services is in accordance with the regulation specified in that behalf.

4. A NBFC which does not qualify as a NBFC-MFI should not be permitted to give loans to the

microfinance sector, which in the aggregate exceed 10% of its total assets.

5. The Committee recommended a “margin cap” of 10% in respect of MFIs which have an

outstanding loan portfolio at the beginning of the year of Rs. 100 crores and a “margin cap” of 12%

in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of an

amount not exceeding Rs. 100 crores. It also recommended an interest cap of 24% on individual

loans.

In respect of transparency in Interest Charges, the committee has suggested the following

recommendations:

a) There should be only three components in the pricing of the loan, namely (i) a processing fee,

not exceeding 1% of the gross loan amount (ii) the interest charge and (iii) the insurance

premium.

b) Only the actual cost of insurance should be recovered and no administrative charges should

be levied.

c) Every MFI should provide to the borrower a loan card which (i) shows the effective rate of

interest (ii) the other terms and conditions attached to the loan (iii) information which

adequately identifies the borrower and (iv) acknowledgements by the MFI of payments of

installments received and the final discharge. The Card should show this information in the

local language understood by the borrower.

d) The effective rate of interest charged by the MFI should be prominently displayed in all its

offices and in the literature issued by it and on its website.

e) There should be adequate regulations regarding the manner in which insurance premium is

computed and collected and policy proceeds disposed off.

f) There should not be any recovery of security deposit. Security deposits already collected if

any should be returned.

g) There should be a standard form of loan agreement.

7. In order to minimize the adverse features of Multiple-lending, Over-borrowing and Ghost- borrowers, the committee has made the following recommendations.

a) MFIs should lend to an individual borrower only as a member of a JLG and should have the


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b) a borrower cannot be a member of more than one SHG/JLG.

c) not more than two MFIs should lend to the same borrower.

d) there must be a minimum period of moratorium between the grant of the loan and the

commencement of its repayment.

e) recovery of loan given in violation of the regulations should be deferred till all prior existing

loans are fully repaid.

8. All sanctioning and disbursement of loans should be done only at a central location and more

than one individual should be involved in this function. In addition, there should be close

supervision of the disbursement function.

9. It is recommended to establish one or more Credit Information Bureaus (CIB) and all MFIs are

required to become members of such bureau. Till the operation of CIB, the responsibility to obtain

information from potential borrowers regarding existing borrowings should be on the MFI.

10. In case of coercive methods used in recovery, the MFIs and their managements should be

subject to severe penalties. b) The regulator should monitor whether MFIs have a proper Code of

Conduct and proper systems for recruitment, training and supervision of field staff to ensure the

prevention of coercive methods of recovery. Field staff should not be allowed to make recovery at

the place of residence or work of the borrower and all individual loans.

11. The minimum net worth recommended for NBFC-MFI is Rs.15 crore.

12. Every MFI should be required to have a system of Corporate Governance in accordance withrules to be specified by the Regulator.

13. Provisioning for loans should not be maintained for individual loans but an MFI should be

required to maintain at all times an aggregate provision for loan losses which shall be the higher of:

(i) 1% of the outstanding loan portfolio or (ii) 50% of the aggregate loan installments which are

overdue for more than 90 days and less than 180 days and 100% of the aggregate loan installments

which are overdue for 180 days or more.

14. NBFC-MFIs should be required to maintain Capital Adequacy Ratio of 15% and all of the Net

Owned Funds should be in the form of Tier I Capital.15. Bank lending to the Microfinance sector both through the SHG-Bank Linkage programme and

directly should be significantly increased and this should result in a reduction in the lending

interest rates.

16. Bank advances to MFIs shall continue to enjoy “priority sector lending” status. However,

advances to MFIs which do not comply with the regulation should be denied priority sector

lending” status. It may also be necessary for the Reserve Bank to revisit its existing guidelines for

lending to the priority sector in the context of the Committee’s recommendations.

17. In respect of assignment and securitization, MFI portfolio, the following are the

recommendations:


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a) Disclosure is made in the financial statements of MFIs of the outstanding loan portfolio

which has been assigned or securitised and the MFI continues as an agent for collection. The

amounts assigned and securitised must be shown separately.

b) Where the assignment or securitisation is with recourse, the full value of the outstanding

loan portfolio assigned or securitised should be considered as risk-based assets for calculation of

Capital Adequacy.

c) Where the assignment or securitisation is without recourse but credit enhancement has

been given, the value of the credit enhancement should be deducted from the Net Owned Funds

for the purpose of calculation of Capital Adequacy.

d) Before acquiring assigned or securitised loans, banks should ensure that the loans have

been made in accordance with the terms of the specified regulations.

18. It is recommended to examine the creation of one or more "Domestic Social Capital Funds" in

consultation with SEBI to fund MFIs. Further, MFIs should be encouraged to issue preference

capital with a ceiling on the coupon rate and this can be treated as part of Tier II capital subject to

capital adequacy norms.

19. In order to monitor the Compliance, the following recommendations are made

a) The primary responsibility for ensuring compliance with the regulations should rest with

the MFI itself and it and its management must be penalized in the event of non-compliance

b) Industry associations must ensure compliance through the implementation of the Code of

Conduct with penalties for non-compliance.

c) Banks also must play a part in compliance by surveillance of MFIs through their branches.

d) The Reserve Bank should have the responsibility for off-site and on-site supervision of

MFIs but the on-site supervision may be confined to the larger MFIs and be restricted to the

functioning of the organizational arrangements and systems with some supervision of branches. It

should also include supervision of the industry associations in so far as their compliance

mechanism is concerned. Reserve Bank should also explore the use of outside agencies forinspection.

e) The Reserve Bank should have the power to remove from office the CEO and / or a

director in the event of persistent violation of the regulations quite apart from the power to

deregister an MFI and prevent it from operating in the microfinance sector.

f) The Reserve Bank should considerably enhance its existing supervisory organisation

dealing with NBFC-MFIs.

20. The exemption from the provisions of State Money Lending Acts was recommended on account

of interest margin caps and increased regulation suggested by the Committee


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21. In respect of The Micro Finance (Development and Regulation) Bill 2010, the committee subject

to Smt.Rajagopalan's reservations above, recommend the following:

a) The proposed Act should provide for all entities covered by the Act to be registered with the

Regulator. However, entities where aggregate loan portfolio (including the portfolio of associated

entities) does not exceed Rs. 10 crores may be exempted from registration.

b) If NABARD is designated as the regulator under the proposed Act, there must be close co-ordination between NABARD and Reserve Bank in the formulation of the regulations applicable to

the regulated entities.

c) The micro finance entities governed by the proposed Act should not be allowed to do the

business of providing thrift services.

22. The Committee also felt that the need for a separate Andhra Pradesh Micro Finance

Institutions (Regulation of Money Lending) Act will not survive if the Committee’s

recommendations are accepted,

23. The cut-off date suggested for implementation of the recommendations is April 1st , 2011. In

particular, the recommendations as to the rate of interest, it is recommended that it should be made

effective to all loans given by an MFI after March 31st 2011.

Nariman Committee

A study group on “Organisational Framework for the Implementation of Social Objective” hadrecommended an “Area Approach” to be followed by commercial banks to promote economic

development of backward areas in the country. The Committee of Bankers (Known as the Nariman

Committee) appointed by the Reserve Bank of India in 1969 accepted the “area approach” and

gave a practical shape to it under the title “Lead Bank Scheme”.

PARTICIPANTS

Participants of Lead bank Scheme in every district is Commercial Banks, RRBs, Co-operative Banks

and Other Financial Institutions such as RBI, NABARD and Development Agencies of theGovernment.

A Committee of Bankers on Branch Expansion Programme of public sector banks appointed by

Reserve Bank of India under the Chairmanship of Shri F. K. F.Nariman (Nariman Committee)

endorsed the idea in November 1969. It also recommended that each bank can concentrate on

certain districts where it should act as a 'Lead Bank'.

NECESSITIES OF LEAD BANKS

The development of rural economy has been accepted as an integral part of the main strategy in the

Seventh Five Year Plan. The basic importance of Lead Bank Scheme is that individual banks should


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the efforts of all credit institutions in the allotted districts to increase the flow of credit to

agriculture, small-scale industries and other economic activities.

REFORMS OF LEAD BANKS

In the changed context of financial sector reforms, the validity of the LBS is being questioned in

some quarters of the banking circle. RBI in consultation with NABARD devised the Lead Bank

Returns (LBRs) in the year 1991 which replaced the Lead Bank Statements (LBS) prescribed forBanks under the Lead Bank Scheme.

Service Area Approach (SAA) was introduced in 1989 under which villages were identified and

assigned to bank branches based on their proximity and contiguity. Credit plans were prepared on

an annual basis for the service area of each branch which involved co-ordination between the

various developmental agencies and credit institutions.

SLBC facilitates effective implementation of development programmes in the areas of poverty

alleviation, employment to un-employed, providing banking outlet in un-banked areas, training,financial literacy etc. The role of SLBC is reinforced by the High Level Committee constituted by

RBI to review Lead Bank Scheme.

State Level Bankers’ Committee (SLBC) came into existence under Lead Bank Scheme as per RBI

guidelines. SLBC is an inter-institutional forum at State level ensuring co-ordination between

Government and Banks on matters pertaining to banking development.

High Level Committee on Lead Bank Scheme

In 2007 a High Level Committee was constituted under the chairpersonship of Smt. Usha Thorat,

Deputy Governor, Reserve Bank of India to review the Lead Bank Scheme which was initially

introduced in December 1969.

The High Level Committee, which submitted its final recommendations in August 2009,

announced that “The overarching objective of Lead Bank Scheme shall be to enable banks and

State Governments to work together for inclusive growth.” The Committee also advised Banks to

focus attention on the urgent need for achieving 100% financial inclusion through penetration of

banking services in the rural areas. RBI has accepted the recommendations of the High LevelCommittee and advised action areas to SLBC Convenors and Banks for implementation.

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