India: Banking & Finance

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This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in India including national authorities, regulation, licenses, organisational requirements, supervision and assets.

This Q&A is part of the global guide to Banking & Finance.

For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/

  1. What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?

    In India, the Ministry of Finance acting through the Department of Financial Services, prescribes laws and regulations applicable to banking entities. The Reserve Bank of India (RBI) (India’s central bank) established under the Reserve Bank of India Act, 1934 supervises and is responsible for management and operation of the financial system including banking operations. RBI also administers the provisions of Foreign Exchange Management Act, 1999 (FEMA) which regulates cross-border exchange transactions by Indian entities, including banks.

    Additionally, there are certain other financial sector regulators such as the Securities and Exchange Board of India (SEBI) which closely liaise with the RBI to monitor the interaction of banking activities with various other financial services.

  2. Which type of activities trigger the requirement of a banking licence?

    Under the Indian banking regulatory framework, the provision of banking services such as lending, accepting deposits, opening accounts, providing credit facilities, treasury and wholesale banking and dealing in foreign exchange (typically referred to as universal banking services) are regulated activities that requires a banking license.

    In addition, certain other services require additional licenses that are issued by the RBI separately and in some cases, in conjunction with SEBI and other financial regulators (see question 4). For example, in case a bank proposes to deal in foreign exchange, the bank will also be required to obtain registration as an authorized dealer bank (AD Bank).

  3. Does the regulatory regime know different licenses for different banking services?

    Under the Indian banking regime, a banking license allows a banking entity to undertake universal banking services (examples of which are described in response 2 above).

    In a marked shift from its earlier policy, the RBI recently recognised the need to broaden the base of banking services and is taking several measures and introduced a differential licensing regime for ‘small financial banks’ and ‘payments banks’. A small finance bank is permitted to undertake basic banking activities of acceptance of deposits and lending to unserved and underserved sections of the Indian market, including small business units, small and marginal farmers, micro and small industries and entities in the unorganised sector. A payments bank can undertake all banking functions for transactions not exceeding INR 1,00,000 per customer (such as holding small savings accounts and payments/remittance services to migrant labour workforce, low income households etc.), other than those involving credit risk such as lending and issuing credit cards.

  4. Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?

    No, activities of the nature described above do not form part of the definition of banking services and trigger the requirement for additional regulatory licenses. For example, stock broking, merchant banking, portfolio management and other such services relating to the Indian securities market can only be undertaken after seeking the relevant registration with SEBI. Similarly, a separate license or registration is required under the Payment and Settlements Act, 2007 for undertaking payment services and for issuance of e-money or conducting activities relating to payment wallets and e-wallets.

  5. What is the general application process for bank licenses and what is the average timing?

    All banks in India, whether domestic or foreign, need to obtain a banking license from the RBI in order to commence operations. The RBI grants the license pursuant to the BR Act and the guidelines issued for ‘on tap’ licensing (On Tap Guidelines). The On Tap Guidelines mark a shift from the previously adopted ‘stop and go’ licensing approach (under which the RBI would notify a window during which an entity could apply for a license).

    The form of application to be made is set out in the BR Act and requires the company to submit a copy of its constitutional documents, a business plan, a project report setting out details such as the business potential and viability, composition of loan portfolio, proposal to meet priority sector requirements and likewise.

    For further information on the eligibility for ownership and control over banks please see our responses to question 16 below.

    The process of obtaining a fresh banking license takes a significant amount of time, possibly between 2 to 4 years, although it is hoped that recent activity in this sector and stringent guidelines for resolving applications set by the RBI itself will result in this time frame reducing considerably.

  6. Is mere cross-border activity permissible? If yes, what are the requirements?

    As mentioned in our response in question 2, the provision of banking services in India is a regulated activity and cannot be undertaken without obtaining registration from the RBI. Once registered as a bank in India, cross border activities can be undertaken subject to compliance with the FEMA.

  7. What legal entities can operate as banks? What legal forms are generally used to operate as banks?

    A foreign company can carry out banking activity through:

    • a branch;
    • a wholly owned subsidiary (WOS); or
    • a subsidiary with aggregate foreign investment of up to a maximum of 74% in a private bank (49% through the automatic route and up to 74% on approval by the government) (see question 17).

    An Indian private bank is typically operated as a company incorporated under company laws.

    While a foreign bank is allowed to carry out banking activities through a branch, the RBI encourages banks to follow the WOS structure and provides near national treatment in respect of branch expansion. Foreign banks, which commenced operations in India after 2010 and which fulfil the prescribed criteria laid down by the RBI are required to mandatorily adopt the WOS structure. Such criteria, among others, include banks declared as being systematically important by the RBI, banks with complex structures, banks that are not widely held, banks not providing adequate disclosures in their home country and likewise. Foreign banks in India operating prior to 2010 have the option to continue their banking business through the branch mode or convert into a WOS. To date, most have remained branches.

  8. What are the organisational requirements for banks, including with respect to corporate governance?

    The RBI supervises the Indian banking system and is making continuous efforts to see that the banks maintain the highest standard of corporate governance. The measures taken by the RBI include:

    • establishing standards of conduct for directors and senior management by prescribing qualification requirements and other such requirements under the BR Act;
    • regulating the terms of appointment of key managerial personnel;
    • conducting regular checks to evaluate the effectiveness of the management and operation of the banks and issues direction as appropriate;
    • engaging with the banks executives (including service executive) on issues emerging from analysis of off-site surveillance and annual inspection;
    • allowing the RBI to supervise and oversee the risk management and capital adequacy requirement by prescribing appropriate procedures and compliance requirement for banks.

    The guidelines issued for the purpose of setting up and identifying the nature of activities that can be undertaken by the small finance banks and payments banks also put in place similar corporate governance measures to give certain degree of supervision and control to the RBI to identify potential issues with the management of the banks at an earlier stage.

    In addition to the above, the corporate governance structures put in place under the new company law regime are also applicable to a bank as company laws in India which treats both financial and non financial entities at par. Once the bank is listed, the corporate governance standards set out in the SEBI (Listing Obligations and Disclosure Requirements), 2015 become applicable.

  9. Do any restrictions on remuneration policies apply?

    The BR Act generally mandates that the remuneration of the management personnel of a bank be governed by the board of the bank but gives the RBI the power to oversee and approve such remuneration. It further caps the payment of any brokerage, commission or remuneration (of any nature) to its shareholders with respect to their shares at two percent of the value of such shares.

    More specifically, the remuneration of the management in banking entities is governed by the Guidelines on Compensation of Whole Time Directors/ Chief Executive officers/ Risk takers and Control Function staff etc. (Compensation Guidelines) issued in 2012 which has adopted the Principles for Sound Compensation Practices as issued by the Financial Stability Board in 2009.

    In practice, these Compensation Guidelines require a bank to: (i) formulate a compensation policy covering all its employees; (ii) operate under the guidance of a board and remuneration committee; (iii) have a standard fixed pay system; and (iv) require the approval of the RBI for change in remuneration of any key managerial personnel (including the managing director, whole time director/ chairman etc.), with the aim to promote effective governance of compensation, effective alignment of compensation with prudential risk taking and effective supervisory oversight and engagement of stakeholders.

    In case of foreign banks operating under a banking license in India, the Compensation Guidelines, in addition to the above, also require the foreign bank (through its head office) to submit to the RBI, on an annual basis a declaration stating that their compensation policies are in line with the guidelines and principles prescribed in India.

  10. Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?

    Yes. The capital adequacy norms prescribed by the Basel III framework (with minor deviations) have been implemented in India with effect from 1 April 2013, however, the implementation has been proposed in a phased manner. Full compliance is targeted to be achieved by 31 March 2019. These norms apply to all scheduled commercial banks in India including public sector banks (but excluding regional rural banks). Banks are required to comply with these requirements on a ‘solo and consolidated’ basis. There has been some speculation that India might defer some of the implementation deadlines as the banking sector has been under some stress in recent times due various macroeconomic factors.

  11. Are there any requirements with respect to the leverage ratio?

    Indian banks have been required to publicly disclose their Basel III leverage ratio on a consolidated basis since 1 April 2015. Guidelines on calculation of capital measure and exposure measure (including on-balance sheet items, derivatives, treatment of collateral, etc.) have been provided. However, this was based on the definition published under the Basel III framework in 2014 and the RBI had noted that the final rules regarding leverage ratio would be published by end-2017. Therefore this requirement was deemed to be a ‘parallel run’ for the time being. As of January 2015, the Indian banking system was reported to be operating at a leverage ratio of more than 4.5%. The BCBS has now published its final rules on leverage ratio (in December 2017) and it is expected that the RBI will accordingly finalise the Indian requirements and set an implementation date for the Indian banks soon.

  12. What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?

    Pursuant to the Basel III reforms, the historical Indian banking regulatory approach to proper liquidity management (using tools like the statutory liquidity ratio (SLR) requirements and the asset-liability management guidelines prescribed by the RBI) has been enhanced by the incorporation of the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) minimum standard concepts.

    The LCR requirement has been binding on all banks since 1 January 2015. The current prescribed LCR level since 1 January 2018 is 90% and will be at the prescribed level of 100% by 1 January 2019. In line with the Basel III recommendations, the LCR has been defined as the total stock of high-quality assets (HQLA) divided by the total net cash outflow projected for the next 30 calendar days. The target therefore is that by 2019 the stock of HQLA should at least equal the total net cash outflows for the following month. HQLA has been defined to comprise of ‘Level 1 assets’ like cash, government securities, etc. and ‘Level 2 assets’ that includes assets like bonds, commercial papers, shares, etc. (the latter level of assets would be subject to haircut and allocation requirements).

    The RBI issued draft guidelines on NSFR in May 2015 and it is expected that the final guidelines on the subject will be issued by March 2018. The draft NSFR guidelines provide guidance on the calculation of the available stable funding and the required stable funding. The time frame to be considered was one year. It is possible that the final rules may prescribe the required NSFR ratio to be more than 100% to ensure greater resilience in the system.

  13. Do banks have to publish their financial statements?

    Banks in India are required to publish their balance sheet and profit and loss account along with an auditor’s report. The format and the requirements are prescribed under the BR Act. Further, the RBI or relevant national bank have the power (under section 28 of the BR Act) to publish information if they consider it in the public interest to do so.

    More generally, under the provisions of the Companies Act, financial statements are required to be filed with the Ministry of Corporate Affairs, which are available as public records.

  14. Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?

    The RBI has issued guidelines for consolidated accounting and consolidated supervision in 2003. Consolidated supervision as implemented by the RBI includes:

    • consolidated financial statements (CFSs);
    • consolidated prudential returns (CPRs); and
    • application of certain prudential regulations such as capital adequacy, large exposures and liquidity gaps on a group basis.

    The RBI has provided guidelines in relation to the compilation of CFSs and CPRs. CFSs are public documents to be prepared and published annually. This is in addition to the standalone annual reports of financial institutions and their subsidiaries. CPRs aim to capture data on a group level from the consolidated balance sheet, consolidated profit and loss account, operations of subsidiaries / related entities and select data on the financial / risk profile of the group. CPRs are to be filed with the RBI on a half yearly basis.

  15. What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?

    Every entity contemplating acquisition of major shareholding in a bank must make an application to the RBI along with RBI prescribed declarations. The RBI will then seek recommendations from the board of directors of the concerned bank.

    Generally, any acquisition of 5 per cent or more of the shareholding/ voting rights of a bank is subject to prior approval of the RBI. On obtaining such approval, the stake can subsequently be increased to 10 per cent (without obtaining an additional approval). While the general rule is that no shareholder of a bank can exercise more than 10 per cent of the total voting rights in a bank irrespective of its actual shareholding, this limit can be extended up to 26 per cent by the RBI. The RBI also assesses whether the shareholder is ‘fit and proper’ to be a major shareholder and these vary depending on the percentage of stake acquired.

    In relation to the acquisition of 5 per cent or more of shares or the voting rights of the bank, the RBI will evaluate, among other things:

    • the applicant’s integrity, reputation and track record in financial matters (including any financial misconduct);
    • the applicant’s source of making such acquisition;
    • the applicant’s compliance with tax laws; and
    • the entity’s financial strength and consistency with standards of good corporate governance, in cases where such an applicant is a body corporate.

    Additional factors are considered for acquisition in excess of 10 per cent of shares of the bank.
    There are additional caps imposed on the holding depending on the type of bank. For instance, for private sector banks the BR Act and the RBI impose shareholding limits on certain types of shareholders:

    • Promoters or promoter group: 15%
    • Natural persons (individuals): 10%
    • Legal persons:
      • non-financial institutions: 10%
      • non-regulated or non-diversified and non-listed financial institutions: 15%; and
      • regulated, well diversified, listed, supranational and/or public sector financial institutions or the government: 40%.

    The RBI is able to permit an entity to acquire shares in a domestic private bank in excess of the above limits. In some cases, such as new banks set up under a holding company, promoters have been provided a time limit in which they must dilute or divest their shareholding to meet the above limits.

    In relation to FDI filings, the inward remittance for subscription to shares must be reported to the authorised dealer by the issuing company within 30 days of the receipt of remittance in the Advance Reporting Form along with the Foreign Inward Remittance Certificate. Upon the issuance of shares, the same must be reported by the issuing company within 30 days of issuance as per the form FC-GPR. Sale of such securities held by a non-resident to an Indian resident must be reported by the Indian resident as per the form FC-TRS within 60 days of the receipt of remittance.

  16. Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?

    All banks in India, whether domestic or foreign, need to obtain a banking licence from the RBI in order to commence operations (see questions 2 and 5).

    While the BR Act lists the requirements of a universal banking company to obtain a banking licence, the On Tap Guidelines, in addition to other procedural requirements for eligible promoters to promote a bank through a non-operative financial holding company (NOFHC) model state that eligible promoters (defined as persons having a successful record in banking and finance for at least 10 years), are:

    • individuals resident in India;
    • entities in the private sector that are owned and controlled by residents of India provided that if such entity has total assets of INR 50 billion or more, its non-financial business should not account for 40 per cent or more of assets or gross income; or
    • existing non-banking financial companies (NBFCs) that are ‘controlled by residents’ and compliant with specified income and asset tests.

    It is not mandatory for the bank to be set up through a NOHFC in case the promoters are individuals or standalone promoters who do not have other group entities.

    This NOFHC is to be registered with the RBI as an NBFC, and is required to hold the bank as well as other financial service companies of the promoter group. The capital structure of the NOFHC is required to consist of:

    • voting equity shares of 51 per cent held by promoters or companies forming part of the promoter group. If such shareholding is held by various individuals of the promoter group, each individual, together with his relatives and entities in which they collectively hold 50 per cent voting equity shares, can hold only up to 15 per cent of the voting equity shares of the NOFHC;
    • voting equity shares of 49 per cent must be held by public shareholders, where each individual, together with his relatives and entities in which they collectively hold 50 per cent voting equity shares, can hold only up to 10 per cent of the voting equity shares of the NOHFC; and
    • shareholding of the promoter group in the NOFHC should be only by individuals, non-financial service and core investment companies or investment companies in the promoter group (i.e., no financial services entity is an eligible shareholder in the NOFHC).

    The bank is mandatorily required to be listed on a stock exchange within six years of commencement of business. Financial service entities whose shares are held by the NOFHC are not permitted to hold shares in the NOFHC.

    The promoter and the promoter group/NOFHC is also required to hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of five years. Any shareholding beyond this limit is required to be bought down to 40 per cent within five years of the date of commencement of business of the bank.

    Additionally, no shareholder of a bank can exercise more than 10 per cent of the total voting rights in a bank irrespective of its actual shareholding. This may be raised at a later date to 26 per cent by the RBI. The 10 per cent voting limit applies to each person holding shares of the bank and affiliates, related parties and persons belonging to a common group are considered separate persons for this purpose.

  17. Are there specific restrictions on foreign shareholdings in banks?

    The modes of operation of a foreign bank in India are discussed in question 7 above.
    Indian residents are required to hold at least 26 per cent of the paid-up capital of the bank at all times (except in case of a WOS). However, the aggregate non-resident shareholding from FDI, non-resident Indians and foreign institutional investors in the new banks cannot exceed 49 per cent for the first five years from the date of licensing of the new bank.

    The RBI is at present, in discussions with various stakeholders for liberalizing the sector and permitting 100% foreign direct investment in private banks.

    Foreign investment of up to 20 per cent of the paid-up capital of a public sector bank is permitted on obtaining government approval.

    Separately, any investment by a foreign banking entity above 5 per cent requires approval. The RBI can permit higher holding for a single entity under exceptional circumstances such as restructuring of problem or weak banks or in the interest of consolidation of the banking sector.

  18. Is there a special regime for domestic and/or globally systemically important banks?

    In 2014, the RBI has implemented a framework on domestic systemically important banks (D-SIBs). The Indian framework (which is broadly similar to the BCBS framework) also uses size, interconnectedness, substitutability and complexity and as the broad indicators and the outstanding notional amount of OTC derivatives, tradable securities inventory, etc. as sub-indicators for determining systemic importance. D-SIBs may be placed in one of four buckets depending upon their systemic importance scores (SISs) and are subject to loss absorbency capital surcharge in a graded manner depending on the buckets in which they are placed. A D-SIB in lower bucket will attract lower capital charge and a D-SIB in higher bucket will attract higher capital charge. The additional common equity tier 1 (CET1) capital requirement will be in addition to the capital conservation buffer that is required in under the Indian regulations.

    The identification of D-SIBs is a two-step process. In the first step, sample of banks to be assessed for their systemic importance are identified. Smaller banks are typically exclude at this stage. The second step is the detailed exercise to compute the banks’ systemic importance based on a range of indicators. The banks having SISs above a particular threshold are designated as D-SIBs. The additional capital requirements for the D-SIBs became applicable in a phased manner since 1 April, 2016 with 1 April, 2019 as the final deadline.

    Foreign global systemically important banks (G-SIBs) having branches in India need to maintain additional CET1 capital surcharge in India as applicable to it as a G-SIB, but proportionate to its risk-weighted assets (RWA) in India.

    At present, three banks, namely, State Bank of India, ICICI Bank Limited and HDFC Bank Limited have been declared as D-SIBs. The RBI requires the D-SIBs to maintain an additional CET1 capital ratio ranging from 0.2 per cent to 0.8 per cent.

  19. What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?

    The RBI issues direction from time to time to ensure compliance with the banking statutes and rectify non-compliance, if any. In the case of non-compliance with regulatory requirements, the RBI may impose a variety of sanctions, including fines, orders for the suspension of a bank’s business and cancellation of a bank’s business license.

    Where a contravention or default has been committed by a company, every person who, at the time the contravention or default was committed, was in charge of, and was responsible to, the company, for the conduct of the business of the company, as well as the company, will be deemed to be guilty of the contravention or default and will be liable to be proceeded against and punished accordingly. The quantum of the fine varies from INR 50,000 (approx. USD 750) to INR 1,00,00,000 (approx. USD 1,50,000) depending on the nature of violations.

  20. What is the resolution regime for banks?

    Insolvency laws in India are presently going through a period of transition. As a result, while the insolvency resolution regime for banks is still reliant on the BR Act and regulations thereunder, there is an uncertainty in relation to the availability of a competent forum that is empowered to take up such matters.

    If the RBI is concerned about the financial health of a bank (including a government bank), it may make a recommendation to the central government in relation to its reconstruction and amalgamation with another bank (typically a government bank). The RBI has wide powers in this respect. In the past few decades, the RBI has been reconstructing or amalgamating weaker banks with stronger counterparts to avoid winding-up situations. Since 2002, the RBI also has a prompt corrective action (PCA) framework under which banks (including government banks) that breach certain triggers relating to capital, asset quality, etc. are subjected to certain mandatory corrective measures to restore financial health. The RBI closely engages with the management of such banks to ensure time-bound results.

    The Insolvency and Bankruptcy Code, 2016 (IBC) which has been recently notified is a consolidated framework governing corporate insolvency and personal bankruptcy in India. However, the IBC does not currently apply to financial services companies (including banks).

    Further, the Financial Resolution and Deposit Insurance Bill, 2017 (FRDI Bill) is pending in the Indian parliament. The FRDI Bill proposed to set up a comprehensive recovery and resolution regime for the financial sector companies including all banks and NBFCs. There is no visibility on the timeline for passing of the FRDI Bill and it being brought into force.

  21. How are client’s assets and cash deposits protected?

    The deposits placed with various banks are insured by the Deposit Insurance Credit and Guarantee Corporation (DICGC), which is a subsidiary of the RBI and is governed by the Deposits Insurance and Credit Guarantee Corporation Act 1961. The DICGC insures all deposits such as savings, fixed, current, recurring, etc, except the following:

    • deposits of foreign governments;
    • deposits of central and state governments;
    • inter-bank deposits;
    • deposits of the state land development banks with state cooperative banks;
    • any amount due on account of any deposit received outside India; and
    • any amount that is specifically exempted with prior RBI approval.

    Each depositor of a bank is insured up to a maximum amount of INR 100,000. The premium for such deposit insurance is borne by the relevant bank.

    The pending FRDI Bill propose to replace the current standalone DICGC framework with an integrated deposit insurance mechanism.

  22. Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?

    The concept of bail-in is not a part of the current Indian regulatory framework. Presently, no bank liabilities are subject to a bail-in.

    The pending FRDI Bill, however, has detailed provisions for bail-in as a bank resolution tool including a list of liabilities that would be eligible to be bailed-in.

  23. Is there a requirement for banks to hold gone concern capital (TLAC)?

    TLAC requirements have been a part of the regulatory capital norms for banks since the Basel III norms were implemented in 2013. Gone concern capital is typically included in the Tier 2 capital requirements which, should generally be at least 2% of RWA. The RBI has issued guidelines to categorize capital that can be recognised as bank’s Tier 2 capital. However, in the Indian policy discourse, the term “TLAC” is usually associated with special subordinated capital requirements for systematically important banks. There are no additional TLAC requirements for Indian banks outside of the usual bank capitalization guidelines, including for those banks that are identified as D-SIBs.

  24. In your view, what are the recent trends in bank regulation?

    Treatment of distressed assets
    Recently, the RBI along with the Ministry of Finance and other financial regulators have been taken serious steps towards resolving the increasing volume of distressed assets. These measures include identification and categorisation of sustainable and unsustainable distressed assets, setting up of mechanisms that allow creditors to restructure the debt in an effective manner, faster and more efficient insolvency resolution process under the IBC framework, and more accurate and streamlined measures to monitor the financial health and soundness of banks at an earlier stage.

    The year 2018 is likely to see further regulatory steps being taken to tackle the issue. The proposed FRDI Bill will also support this endeavour and harmonise to the extent possible insolvency proceedings for financial firms, banks and insurance firms.

    Merger of public sector banks
    The RBI is also at present, considering the merger of various public sector banks into a few global sized banks. Emboldened by the success of the merger of various state bank entities into the State Bank of India, news reports suggest that the RBI is currently identifying potential banks that could be amalgamated in order to tackle the issue of distressed assets.

    100% FDI in private banks
    RBI is also considering the opening up of the banking sector to FDI from 74 per cent to 100 per cent. It however, remains to be seen, the regulatory changes that will need to made in case there is a change in the ratio of public and private sector banks in India with the added value of increased foreign investment.

    Recognition of peer to peer lending
    The RBI has also recently accorded recognition to non-banking institutions that operate peer to peer lending business as non-banking financial companies (NBFC-P2P) and has issued directions for governing the establishment and operation of NBFC-P2P. Each NBFC-P2P is required to obtain a fresh certificate of registration from the RBI and maintain a net owned fund requirement of INR 20 million.

    Shift towards a cashless economy
    A shift towards a cashless economy has been observed post the demonetisation measures undertaken in late 2016 and an increase in use of e-wallets, electronic payment gateways and other such internet based payment systems has been noted. The Ministry of Finance and the RBI are gearing towards amending existing procedures to accommodate such electronic mediums of payment and exchange in the regulatory fold.

  25. What do you believe to be the biggest threat to the success of the financial sector ?

    The key regulatory challenges are as follows:

    Basel III implementation
    Indian banks are required to fully comply with the Basel III Capital Regulations (Basel Regulations) by 31 March 2019. Most of the public sector banks will need additional capital infusion to meet the higher capital requirements, which will consequently reduce the return on equity. As a result, government support will be required, which may exert significant pressure on the government’s fiscal position.

    Specialised banking
    The RBI has currently granted approximately 10 small finance bank licenses and approximately 7 payments bank licenses. While the RBI has set up the mechanism for the use of these licenses, the current provision of these services seems to be falling short of catering to the unbanked sectors that include rural areas and other underdeveloped and unorganised sectors. Further reorientation of regulatory and supervisory resources is likely needed to widen access to these systems, in light of the wider objective of financial inclusion.

    Asset quality
    The quantity of net non-performing assets (NPAs) of Indian banks has been increasing significantly. The RBI has over the years taken tremendous measures both regulatory and structural in order to tackle this issue. However, the rise in NPAs continues to be one of the most fundamental threats to the banking sector (see question 24 above for a brief on the measures being taken).

    Priority sector lending and NPAs
    The RBI requires banks to provide mandatory credit to certain weaker sections of society and sets out targets for the same. In the past, banks have struggled to meet these targets. These sectors often yield low profits, and heavy lending to such sectors adversely affects profitability of banks.

    Separately, the agricultural sector (one of the main sectors for priority lending) has a high amount of NPAs. The new measures introduced by the RBI to reduce stressed assets, as mentioned above, do not take into account agricultural NPAs.

    Challenges due to the shift to a cashless economy
    The shift to a cashless economy has brought with it a specific set of issues, which primarily include the question of access. While the RBI has taken concerted measures such as setting up an e-wallet linked to the unique identification number system (AADHAAR) set up (akin to the social security number structure in the USA) and encouraging retailers as well as other local businesses to provide discounts and cash-back schemes for use of electronic means of payment. There is a severe lack of infrastructure in most parts of the country for such payment systems to be used regularly, ranging from a functional internet connection to the sophistication of its users. Recently, privacy concerns, and legal challenges on this basis, have been raised. While these issues are currently being grappled with, there is a long way to go for a genuine move to a cashless economy.

    Enforcement of the new insolvency regime
    The IBC which was brought into effect in December 2016 has been in operation for a year and a notable shift has been seen in the approach of the RBI as well as creditors in bringing action against defaulters. The National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) have provided judgments which have helped clarify some points which were unclear in the IBC itself. While the jurisprudence is gradually developing, the Ministry of Finance has been quick to identify the challenges and update the IBC with regulations that aim to make the process more efficient. It remains to be seen, if the IBC process actually keeps pace with the increasing NPAs and therefore improve the status of banks as creditors within the Indian financial system.