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@Smile Presently, banking licences have a universal outlook. They are like one-stop-shop for everything. But for that one must fulfill many big criteria, 500 crore entry capital being one. So, the argument is to differentiate and allow lower criteria for specific purpose banks.
Now that differentiated banking can be of two types: you can open specific banks for specific customers or you can differentiate according to their structure. RRBs are a rough example of first kind differentiation, catering specially for rural agricultural sector. But since these banks focus on one sector only, a downturn in that sector can push the differentiated bank of that sector into a mess. Example again, how Kelkar committee in 1987 recommended to stop opening new RRBs.
Of the second type of differentiation i.e. structural differentiation, Nachiket Mor committee gave two examples: Payment Banks and Wholesale banks.
Prepaid instruments (PPIs) : the classic example is Airtel Money. You deposit some money there, then they give you an electronic wallet from which you can buy things electronically. Their licences are presently given under Payments and Settlements System Act, 2007.
Problem is that PPIs do not give you any interest for saving. So, effectively financial inclusion is not much through PPIs.
Nachiket committee recommended that PPI licences should not be given any more. Rather we should give licence for Payment Banks. Difference from PPIs: PBs can accept retail deposits as well and give interest on them, along with prepaid functions. And with more criteria like 50 crore entry capital, CRR etc, these PBs will be more stable than PPIs.
Hope it is clear to you now @Smile .. If still any doubt, please ask.
Q. When we talk about the compliance of Basel norms, does the CRAR for Indian banks include CRR and SLR, or the banks need to maintain CRAR + CRR+ SLR?
Bro basel norms were basically for risk associated with bank books due to their huge trading and off balance sheet derivative positions.
So it works in or around risks basel 1 for credit basel 2 for market/operational risk etc. and basel 3 for liquidity,leaverage etc.
CRR and SLR give indian banks better hand when it comes to maintaining the liquidity - Consider both these as an instrument to offset CRAR which is nothing but a part of banks asset however independent to CRAR.
CRAR is Capital to Risk Weighted Assets Ratio and SLR and CRR is component of banks asset.
Arbitrage is essentially taking advantage of difference in prices to make a profit.
Regulatory arbitrage: imagine a bank or a financial institution handing out a loan that carries far less risk than the level prescribed by a norm the bank runs under. Say the Capital Adequacy Norms of the Basel accord, which have prescribed a minimum level of capital to protect against the loan defaulting. Since the actual risk of the loan going bad is low, the bank may choose to use the loan as an asset, and sell bonds with this asset as underlying security on the capital market. They thus make a profit by doing so.
Just to put things more clearly: Please consider a hypothetical example-
Three managers of Yes Bank are discussing about basel-2 norms compliance by their bank. Manager 1: Hey, we have 100 crore rupees asset. Basel 2 requires 12% capital to be put aside. So, we must put 12 crores aside.
Manager 2: No, we just need to put 8 crore rupees aside. We already have given given 4 crores to RBI as CRR. And that's our liquid capital in reserve.
Manager 3: Actually, I think we don't need to put even a single rupee aside. Don't forget we have complied with SRR provisions and thus have 23%+4%=27% as reserve capital. Basel requires only 12%. We are much above Basel's thought level.
What is the difference between functioning of ECGC and NEIA? I mean, which project can be cleared by former and which by later? Don't the two functionally overlap? ECGC = Export Credit Guarantee Corporation NEIA = National Export Insurance Account.
NEIA, although operated by ECGC overcomes the underwriting limitation of ECGC in not being able to provide adequate insurance covers to exporters in case of longer term exposures where a political or commercial risk may interfere during the currency of transaction. There comes NEIA. The most important thing to be kept in mind for a project to qualify for NEIA cover is that it should be of strategic importance to India besides being a commercially viable project under normal circumstances and be run by someone with excellent track record.
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Comments
Presently, banking licences have a universal outlook. They are like one-stop-shop for everything. But for that one must fulfill many big criteria, 500 crore entry capital being one.
So, the argument is to differentiate and allow lower criteria for specific purpose banks.
Now that differentiated banking can be of two types: you can open specific banks for specific customers or you can differentiate according to their structure.
RRBs are a rough example of first kind differentiation, catering specially for rural agricultural sector. But since these banks focus on one sector only, a downturn in that sector can push the differentiated bank of that sector into a mess. Example again, how Kelkar committee in 1987 recommended to stop opening new RRBs.
Prepaid instruments (PPIs) : the classic example is Airtel Money. You deposit some money there, then they give you an electronic wallet from which you can buy things electronically.
Their licences are presently given under Payments and Settlements System Act, 2007.
Problem is that PPIs do not give you any interest for saving. So, effectively financial inclusion is not much through PPIs.
Nachiket committee recommended that PPI licences should not be given any more. Rather we should give licence for Payment Banks.
Difference from PPIs:
PBs can accept retail deposits as well and give interest on them, along with prepaid functions. And with more criteria like 50 crore entry capital, CRR etc, these PBs will be more stable than PPIs.
Hope it is clear to you now @Smile .. If still any doubt, please ask.
Regards,
Chandan
Q. When we talk about the compliance of Basel norms, does the CRAR for Indian banks include CRR and SLR, or the banks need to maintain CRAR + CRR+ SLR?
@Smile and all others.
So it works in or around risks
basel 1 for credit basel 2 for market/operational risk etc. and basel 3 for liquidity,leaverage etc.
CRR and SLR give indian banks better hand when it comes to maintaining the liquidity - Consider both these as an instrument to offset CRAR which is nothing but a part of banks asset however independent to CRAR.
CRAR is Capital to Risk Weighted Assets Ratio and SLR and CRR is component of banks asset.
Hope I am clear - everything revolve around risk.
@ck10203
Regulatory arbitrage: imagine a bank or a financial institution handing out a loan that carries far less risk than the level prescribed by a norm the bank runs under. Say the Capital Adequacy Norms of the Basel accord, which have prescribed a minimum level of capital to protect against the loan defaulting. Since the actual risk of the loan going bad is low, the bank may choose to use the loan as an asset, and sell bonds with this asset as underlying security on the capital market. They thus make a profit by doing so.
Just to put things more clearly:
Please consider a hypothetical example-
Three managers of Yes Bank are discussing about basel-2 norms compliance by their bank.
Manager 1: Hey, we have 100 crore rupees asset. Basel 2 requires 12% capital to be put aside. So, we must put 12 crores aside.
Manager 2: No, we just need to put 8 crore rupees aside. We already have given given 4 crores to RBI as CRR. And that's our liquid capital in reserve.
Manager 3: Actually, I think we don't need to put even a single rupee aside. Don't forget we have complied with SRR provisions and thus have 23%+4%=27% as reserve capital. Basel requires only 12%. We are much above Basel's thought level.
Which of these three managers is correct?
Interesting example of regulatory arbitrage.
What is the difference between functioning of ECGC and NEIA? I mean, which project can be cleared by former and which by later? Don't the two functionally overlap?
ECGC = Export Credit Guarantee Corporation
NEIA = National Export Insurance Account.
NEIA, although operated by ECGC overcomes the underwriting limitation of ECGC in not being able to provide adequate insurance covers to exporters in case of longer term exposures where a political or commercial risk may interfere during the currency of transaction. There comes NEIA. The most important thing to be kept in mind for a project to qualify for NEIA cover is that it should be of strategic importance to India besides being a commercially viable project under normal circumstances and be run by someone with excellent track record.
Hope this helps.