Structure of Indian Banking System

 Structure of Indian Banking System : 

Structure of Indian banking system can be described as follows :

The Indian Banking System is classified into four categories as follows : 

Reserve Bank of India : 

The Reserve Bank of India is the supreme monetary and banking authority in India and this bank bears the responsibility to control and regulate the functioning of the banking system in India. As the Reserve Bank keeps the reserves of all commercial banks, it is known as the “Reserve Bank”. The Reserve Bank performs all the typical functions of a Central Bank. Its main function is to regulate the monetary mechanism comprising of the currency. For this the Bank is given the monopoly of note issue and has wide powers over the commercial banks. At the same time the bank is taking active part in fostering an adequate banking structure capable of meeting the needs of trade, industry, agriculture and commerce.

A) Commercial Banks : 

Commercial banks are those banks which started mainly to earn profit as well as to render different types of services to their depositors. It enables large payments to be made over a long distances with minimum expenses. It constitutes the very life blood of an advanced economic society. Commercial banks have a long history of their existence for many decades. Mobilisation of urban savings is done by the commercial banks and they make availability of these accumulated savings for providing credits to the working capital requirements of different categories of industries and trading units. 

Due to nationalisation of big commercial banks in 1969, commercial banks are broadly classified as : 

1) Public Sector Banks : 

In 1999, Indian banking system had 27 public sector banks. The public sector banks have wider objectives of rapid economic development. They have been successful in quantitative expansion of banking through more branches, higher deposits and credit distribution. The public sector banks undertake social responsibilities in a big way. 

a) SBI and Its Associate Banks :

The State Bank of India is the founder and the flagship member of the State Bank group. The seven associate banks of SBI are : 

1) State Bank of Bikaner and Jaipur. 

2) State Bank of Hyderabad. 

3) State Bank of Indore. 

4) State Bank of Mysore. 

5) State Bank of Patiala. 

6) State Bank of Saugashtra. 

7) State Bank of Travancore.

The SBI and its seven associates as group accounts nearly 34% of aggregate banking business. 

b) Nationalised Banks : 

Under the Banking Companies (Acquisition of Undertakings) Act, 1970, the Central Government acquired the undertakings of the 14 major Indian banks. These banks are then recognised as Nationalised Banks. These are : 

1) The Central Bank of India. 

2) The Bank of India. 

3) The Punjab National Bank. 

4) The Bank of Baroda. 

5) The United Commercial bank. 

6) Canara Bank. 

7) The United Bank of India. 

8) Dena Bank. 

9) Syndicate Bank. 

10)The Union Bank of India. 

11) Allahabad Bank. 

12)The Indian Bank. 

13)Bank of Maharashtra 

14)The Indian Overseas Bank

2) Private Sector Banks : 

In a mixed economy of India, the private sector also occupies an important place and is expected to play an important role in economic development. The existence of private sector banks has enlarged consumer’s choice. These banks are giving tough competition to the public sector banks by introducing various innovation like ATM facility, 24 hours banking, home banking. Private sector banks again can be divided between : 

a) Indian Banks : 

The banks which have their head office in India and which are owned, controlled and managed by the Reserve Bank of India are known as Indian Bank. 

b) Foreign Banks : 

Banks which have their head office overseas and which are owned, controlled and managed from other countries are foreign banks. 

Nationalised or public sector banks and private sector banks. The public sector banks consist of the State Bank of India and its associate banks alongwith another 21 banks which were nationalised. 

Small number of Indian scheduled banks which have not been nationalised and branches of foreign banks operating in India belong to the private sector banks. Foreign banks are commonly known as “foreign exchange banks.”

B) Regional Rural Banks : 

Since the middle of 1970’s, the Regional Rural Banks came into existence in India. These banks were set up with the specific objective of providing credit and facilities of deposits especially to small and marginal farmers, agricultural labour and artisans and small enterprises. The rural development in respect of agriculture, trade, commerce and industry is the Prime responsibility of Regional Rural Banks (RRBs) of India. These banks are essentially commercial banks. However, their area of operation is restricted to a district. 

C) Co-operative Banks : 

Co-operative banks are an important component of the Indian banking system. It is originated with the enactment of the Cooperative Credit Societies Act of 1904. These banks are classified as Urban Co-operative Banks and Rural Co-operative Credit Institutions. 

1) Urban Co-operative Banks : 

The urban areas are served by the urban co-operative banks. These banks are registered under Co-operative Societies Act of the respective State Governments. The RBI is the regulatory and supervisory authority of these banks for their banking related operations. The RBI extends refinance to these banks at Bank Rate against their advances to tiny and cottage industrial units. These banks are required to channelise 60% of total loans and advances towards priority sectors. 

There are urban co-operative credit societies working in the urban areas to supply credit at low rate of interest to the semi-urban weaker sections of society. These are the societies registered under Co-operative Societies Act. They play an important role in providing credit in urban areas.

2) Rural Co-operative Credit Institutions : 

The rural areas are largely served by the rural co-operative credit institutions. There is a three tire structure consisting of : 

a) The State Co-operative Banks at the apex level exist at the state level. 

b) The District Co-operative banks at the intermediate level existing at District level. 

c) The Primary Co-operative credit societies at the grassroots level. 

The State Co-operative Banks and the District Central Cooperative Banks provide financial support to Primary Cooperative Credit Societies. The funds of the Reserve Bank are provided to agricultural sector through the State Cooperative Banks and the Central Co-operative Banks.

Types of bank accounts and features

Having a bank account is essential for managing personal and business finances. Whether you are a student, a working professional, a business owner, or a non-resident Indian, a bank account is tailored to meet your specific needs. This blog post explores the various banking account types available in India, highlighting their unique features and benefits.

Types of Banking Accounts

1. Current Account

A current account is designed primarily for business owners, traders, and entrepreneurs who need to make frequent transactions.

Features:

• Overdraft Facility: Allows you to withdraw more money than what is available in your account.
• Free Transactions: Free daily transactions, making it ideal for businesses with high transaction volumes.
• No Interest Earned: Unlike savings accounts, current accounts do not earn interest on deposits.
• Minimum Balance Requirement: Typically requires a higher minimum balance than other account types.
• Ideal For: Businesses and professionals who need to manage a large number of daily transactions.

2. Savings Account

A savings account is a standard deposit account where you can save money while earning interest on your deposits.

Features:

• Interest Earnings: Earns interest on the deposited amount, though the rate may vary between banks.
• Limited Transactions: Usually limited to a certain number of transactions per month.
• Types of Savings Accounts: Regular Savings Accounts, Children's Savings Accounts, Senior Citizens' Savings Accounts, Women's Savings Accounts, Institutional and Family Savings Accounts
• Additional Features: Zero-balance accounts, auto sweep facilities, debit cards, bill payments, and cross-product benefits like discounts on demat accounts.
• Ideal For: Individuals looking to save money and earn interest, with options tailored for different demographics and needs.

3. Salary Account

A salary account is a type of savings account opened by employers for their employees to facilitate the direct credit of salaries.

Features:

• No Minimum Balance: Typically, no minimum balance requirement as long as the salary is credited monthly.
• Additional Benefits: Often comes with added benefits like higher transaction limits, special offers, and lower loan interest rates.
• Reimbursement Accounts: Separate accounts for allowances and reimbursements.
• Ideal For: Employees who want a hassle-free way to receive their salary with additional banking benefits.

4. Fixed Deposit Account

A fixed deposit (FD) account allows you to earn a higher interest rate on a lump sum amount deposited for a fixed period.

Features:

• Fixed Interest Rate: Earns a fixed interest rate over the deposit tenure, which can range from seven days to ten years.
• Premature Withdrawal: Generally not allowed without a penalty, although some banks offer this feature with lower interest rates.
• Safe Investment: Provides a secure way to earn a guaranteed return on your savings.
• Ideal For: Individuals looking to invest a lump sum for a guaranteed return over a fixed period.

5. Recurring Deposit Account

A recurring deposit (RD) account allows you to invest a fixed amount regularly and earn interest on it.

Features:

• Regular Investments: Requires regular deposits (monthly or quarterly) for a fixed tenure.
• Fixed Tenure: The tenure cannot be changed once set, and premature withdrawals attract a penalty.
• Interest Earnings: Interest is earned on the cumulative deposits and is typically compounded quarterly.
• Ideal For: Individuals who want to save regularly and earn interest over a fixed period without investing a lump sum upfront.

6. DEMAT Account

A Demat Account is a digital account that holds shares, bonds and other securities. It offers ease of trading because actual physical certificates (showing ownership of the securities) are not required and transactions are quicker, safer and more convenient. Investors use it to buy, sell and transfer securities easily. In India, depository institutions like NSDL and CDSL oversee these accounts, which are necessary for stock market trading. Demat Accounts have lower risk of theft and loss since they store physical securities in an electronic form.

7. NRI Accounts

NRI accounts are designed for Indians living abroad, offering various options to manage their earnings and savings in India.

Types of NRI Accounts:

1. Non-Resident Ordinary (NRO) Account:

• Rupee Account: Allows NRIs to manage income earned in India.
• Taxable Interest: Interest earned is subject to tax in India.
• Convertibility: Funds can be repatriated after paying applicable taxes.

2. Non-Resident External (NRE) Account:

• Repatriable Funds: Both principal and interest can be repatriated without any restrictions.
• Tax-Free Interest: Interest earned is not taxed in India.
• Foreign Earnings: Only foreign earnings can be deposited.

3. Foreign Currency Non-Resident (FCNR) Account:

• Foreign Currency: Maintained in foreign currency (USD, GBP, EUR, etc.).
• Tax-Free Interest: Interest earned is not taxed in India.
• Repatriable Funds: Both principal and interest are fully repatriable.
• Ideal For: Non-resident Indians looking to manage their income in India while enjoying the benefits of repatriation and tax exemptions.

Know Your Customer (KYC)

KYC stands for “Know Your Customer”. It is a systematic process through which banks obtain information about their customers’ identities. This article provides a comprehensive overview of KYC, including its meaning, objectives, benefits, norms, and more.

KYC Guidelines

The Reserve Bank of India (RBI) introduced KYC guidelines in 2002 under the Banking Regulation Act of 1949. These guidelines aim to prevent banks from being used for money laundering or terrorist financing activities.

KYC Process

KYC is typically completed when customers open accounts with banks. It involves collecting and verifying the following information:

• Name
• Address
• Date of birth
• Occupation
• Source of income
• Identification documents (e.g., passport, driver’s license, Aadhaar card)

Benefits of KYC

KYC provides several benefits to banks and customers, including:

• Reduced risk of fraud: KYC helps banks identify and mitigate potential risks associated with customers, such as identity theft and money laundering.
• Improved customer service: KYC enables banks to better understand their customers’ needs and provide tailored products and services.
• Enhanced compliance: KYC helps banks comply with regulatory requirements and industry standards.

KYC Norms

Banks are required to follow specific KYC norms, including:

• Customer identification and verification
• Risk assessment
• Ongoing monitoring of customer accounts
• Reporting suspicious transactions

Necessity of KYC

KYC is essential for preventing finance-related frauds and ensuring the integrity of the financial system. It helps banks identify and mitigate risks associated with customers and their transactions.

KYC is a critical component of banking and financial regulations. It helps banks comply with regulatory requirements, reduce the risk of fraud, and provide better customer service.

KYC (Know Your Customer) Regulations in Banking

Objectives:

• Identify money laundering and other potentially harmful activities
• Check the opening of Benami accounts
• Scrutinize and monitor large value transactions

KYC (Know Your Customer) regulations are essential banking regulations that banks and other financial institutions must follow to identify their customers. These regulations aim to obtain relevant information about clients before engaging in financial business with them.

Money Laundering and PMLA:

Money laundering poses a significant threat to the banking industry, affecting the integrity of the economic system and the financial stability of countries. In response, India enacted the Prevention of Money Laundering Act (PMLA) in 2002, aligning with the recommendations of the Financial Action Task Force (FATF) in 2009.

Banks’ Due Diligence:

Due diligence involves verifying the customer’s background and understanding their purpose for opening an account. It includes collecting recent photographs, confirming identity, verifying addresses, and gathering information on occupation, business, and source of funds.

Customer Identification:

Valid identification documents, such as passports, driver’s licenses, or national identity cards, are required for customer identification. Banks may also request additional documents, such as utility bills or bank statements, to verify the customer’s address.

Suspicious Transaction Monitoring:

Banks are required to monitor transactions for suspicious patterns that may indicate money laundering or other illegal activities. They must report any suspicious transactions to the appropriate authorities.

KYC regulations play a crucial role in combating money laundering and other financial crimes. By following these regulations, banks can help maintain the integrity of the financial system and protect their customers from financial risks.

Proof of Identity

• PAN Card
• Election ID
• Aadhaar Card

Proof of Residence

• Personal visits
• Utility bills
• Ration cards

Requirements of KYC

A particular set of documents are used to establish the bank customers’ identity. Hence, banks are required to have two types of documents – one for the identity of the customer and the other one for their address along with a recent photograph.

Six documents have been notified by the government of India as the OVDs (Officially Valid Documents) to fulfill the need for identity verification for KYC. These documents are:

• Passport
• PAN Card
• NREGA Job Card
• Voters’ Identity Card
• Driving License
• Aadhaar Card

In case the documents submitted by the customers do not contain their address details, then they will have to submit another OVD containing their address details.

RBI KYC Norms

Know Your Customer (KYC)

Once established, this mechanism would aid the KYC implementation while allowing intermediaries to access a prospective customer’s number for KYC status. Similar to e-Aadhaar, the RBI wants banks to provide customers with the ability to create their own electronic KYC (e-KYC).

What is e-KYC?

Electronic Know Your Client (e-KYC) is a concept where customers’ identities and residential addresses are electronically verified through Aadhaar authentication.

When using eKYC, customers must authorize their UIDAI (Unique Identification Authority of India) through explicit consent to release identity and/or address details. This is done through biometric authentication at bank branches or business correspondents (BCs).

UIDAI transfers data, including customers’ names, age, gender, and photographs, to the bank online.

Accounts opened based on eKYC in non-face-to-face mode must meet the following conditions:

• Selected consent from the customer for authentication through One Time Password (OTP)
• Total balance of all deposit accounts should not exceed ₹1 lakh
• Total credits during a fiscal year, across all deposit accounts, must not exceed ₹2 lakh