I INTRODUCTION

The banking business in India is supervised and regulated by the Reserve Bank of India (RBI), the apex banking authority and banker to the government (GoI). Among other things, the RBI acts as a banker and treasurer to the GoI, and is the lender of the last resort. The RBI is responsible for regulation of currency issuance and circulation, foreign exchange control management, public debt management and safeguarding the overall financial health of the country.

i Categories of banks

Historically, the three main categories of banks in India have been public sector banks (PSBs),2 private sector banks3 and foreign banks.4 Recent entrants in the banking space include holders of limited banking licences known as small finance banks (SFBs) and payments banks.

All categories of banks are further sub-divided into two types: scheduled5 or non-scheduled.6 The RBI grants the status of a ‘scheduled commercial bank’ (SCB) to eligible banks, which typically include PSBs, private sector banks, foreign banks and regional rural banks (RRBs),7 and even SFBs on a case-by-case basis.8 SCBs are generally permitted to

undertake universal banking, i.e., full-fledged banking business including both core banking9 and para banking.10

In the past, the banking sector in India has been a state-owned, controlled and supervised sector. Until 1993, PSBs dominated the traditional banking space in India. The largest PSB, State Bank of India (SBI) and other government-owned banks, still account for the largest market share in the banking industry with over 72.9 per cent and 71.6 per cent shares respectively in the total deposits and credits in India as of March 2015.11

In 1993, the RBI issued guidelines for licensing of private sector banks (i.e., non-state-owned banks incorporated in India) and granted licences to 10 new private sector banks. Over the years, the RBI has continued to update the licensing regime for private sector banks, and issued less than four banking licences during limited windows that were opened up periodically, between 1993 and 2013. However, on 1 August 2016, in an unprecedented move, the RBI introduced an ‘at will’ licensing regime for private sector banks, permitting them to apply for a universal banking (or full-fledged banking business) licence at any point in time. As of March 2015, private sector banks accounted for over 19.7 per cent and 20.8 per cent respectively of the deposits and credits in India.12

The third category of banks that are primary players in the banking industry in India are foreign banks, which are large global banks that operate in India through branches or representative offices, and have also been permitted to set up wholly owned subsidiaries (WOSs). As of March 2015, foreign banks such as Standard Chartered, HSBC and Citibank accounted for over 4.4 per cent and 4.9 per cent respectively of the deposits and credits in India.13

While there is parity of regulation between the above-mentioned categories of banks, the regulatory regime and ownership guidelines vary for each category of bank. This chapter aims to set out the applicable legal regime for all major categories of banks in India.

ii New developments

The RBI and the GoI have undertaken various measures to move towards a cashless economy by digitisation of payment services. To provide an impetus to digital payments in India, the GoI has also announced setting up an independent Payment Regulatory Board for the regulation and supervision of payments and settlement systems in India.

Following the global financial crisis and recommendations of the Financial Stability Board (FSB),14 the RBI has also adopted a framework for designating certain domestic and foreign banks in India that are ‘too big to fail’ as ‘domestic systemically important banks’ (D-SIBs) and ‘global systemically important banks’ (G-SIBs), respectively. The RBI has declared ICICI Bank Ltd and SBI as D-SIBs, as their continued functioning is critical for the uninterrupted availability of essential banking services to the Indian economy. The RBI has prescribed additional capital requirements and increased supervision for such banks.

As a separate measure, the GoI announced the consolidation and merger of six banks with SBI, which became effective from 1 April 2017. SBI is now one of the top 50 largest banks in the world on the basis of its balance sheet, and is expected to qualify as a G-SIB.

ii THE REGULATORY REGIME APPLICABLE TO BANKS

The RBI is the key regulator for all banks, and it regulates all public deposit taking and lending business in India. Any entity accepting demand deposits from the public and lending to the public must necessarily be licensed with the RBI as a bank.

i Licensing of banks
Licensing for PSBs

All banks in India (including foreign banks operating through RBI licensed branches in India) are governed by the RBI Act, 1934 (RBI Act) and the Banking Regulation Act, 1949 (BR Act). In addition, most PSBs are incorporated, governed and licensed by and under their specific legislative enactments. Most of the PSBs are listed on the stock exchanges in India, with the GoI holding and controlling a majority stake in them.

Licensing for private sector banks

Private sector banks are primarily governed by the BR Act and the RBI Act, and are licensed to undertake banking activities by the RBI.

To encourage competition and innovation in the banking sector, last year the RBI issued ‘at will’ banking licensing regulations for grant of universal banking licences to eligible entities. Moving away from the previous ‘stop and go’ licensing policy, the RBI now permits resident individuals and professionals, entities and groups in the private sector that are owned and controlled by residents, and existing non-banking financial companies that are controlled by residents, to apply to the RBI to set up a universal bank.15

Licensing for foreign banks

Typically, all foreign banks (i.e., banks incorporated and registered as banks outside India) operating in India are licensed by the RBI to set up branches in India to engage in banking business in India. Pursuant to the Foreign Bank Wholly Owned Subsidiaries Scheme, for the setting up of WOSs by foreign banks in India issued in November 2013, the RBI has now mandated certain foreign banks to incorporate WOSs in India.16

Licensing for payment banks

Payment banks are a new category of bank with a limited banking licence, and are not permitted to undertake lending activities. They are expected to provide small savings account and digital payments and remittance services to migrant labour workforces, low-income households, small businesses, other unorganised sector entities and other retail users.

Unlike universal banks, payment banks are permitted to undertake only limited activities, including acceptance of demand deposits, issue debit cards, internet banking and acting as business correspondents17 for other banks. So far, the RBI has issued final licences to only three payment banks.

Licensing for SFBs

SFBs are expected to cater to the banking requirements of micro and small enterprises, agriculture and banking services in unbanked and under-banked regions of the country.

These banks are permitted to undertake basic banking activities of acceptance of deposits (both demand and term deposits) and lending to non-served and underserved sections. Many entities have shown interest in the SFB space, with seven entities having already received a final licence from the RBI.

Licensing for RRBs

The RBI has also issued banking licences to RRBs to further its goal of financial inclusion and agricultural financing. RRBs are established under specific legislative enactments and are regulated by the National Bank for Agriculture and Rural Development, an independent financial institution focused on agricultural lending.

ii Other activities permitted to be undertaken by banks

SCBs in India are generally permitted to undertake core banking and para banking activities. Certain para banking activities such as investment advisory, stock broking and asset management are permitted to be undertaken by an SCB only through a separate entity, such as a subsidiary (and not departmentally), whereas certain other businesses such as insurance distribution may be undertaken either departmentally or through a separate entity.

The RBI has mandated all banks, both Indian and foreign (including those not having an operational presence in India), to obtain prior approval from the RBI for any schemes marketed by them in India to residents either for soliciting foreign currency deposits for their foreign or overseas branches, or for acting as agents for overseas mutual funds or any other foreign financial services company.

iii Priority sector lending (PSL)

The RBI has mandated separate PSL targets for all SCBs (including foreign banks and SFBs). Agriculture, micro, small and medium-sized enterprises, export credit, education, housing, social infrastructure and renewable energy are a few PSL sectors identified by the RBI. Typically, SCBs must allocate 40 per cent of their adjusted net bank credit18 or credit equivalent amount of off-balance sheet exposure, whichever is higher, to PSL sectors. SFBs however, must allocate 75 per cent of their adjusted net bank credit to PSL sectors.

iii PRUDENTIAL REGULATION

i Relationship with the prudential regulator
General powers of the RBI

The RBI was constituted under and derives its statutory powers to regulate market segments from specific provisions of the RBI Act. The RBI exercises a fairly tight reign over banks, quasi-financial institutions and non-banking financial institutions and has wide powers of inspection and audit under law, over all banks in India (including foreign banks operating through branches in India). To strengthen the balance sheets of banks, the RBI prescribes and monitors prudential norms for them with regard to income recognition, asset classification and provisioning, capital adequacy, investment portfolios and capital market exposures. The major market segments under the regulatory ambit of the RBI are interest rate markets, including the government securities market and money markets, foreign exchange markets, derivatives on interest rates and prices, repo, foreign exchange rates and credit derivatives.

In terms of the BR Act, a bank must submit monthly returns setting out its assets and liabilities in India to the RBI and provide all other information in relation to its banking business as may be requested by the RBI. The RBI also prescribes standards for the quality of the statutory audit and internal audit functions in banks and financial institutions.

ii Management of banks
Private sector banks

The RBI closely controls the appointment and removal of directors of private sector banks, and its prior approval is required before appointment of the chairman, managing director and other full-time directors of a private sector bank. At least half the board of a private sector bank must consist of independent directors.19

The directors on the boards of private sector banks must also comply with the ‘fit and proper’ criteria20 prescribed by the RBI and the board composition must meet the specified qualifications as set out above. Further, no two private sector banks are permitted to have common directors. The RBI also has the power (in the public interest or in the interest of depositors, or to secure the proper management of a bank) to supersede the board of directors of a private sector bank, and to appoint an administrator to undertake its management and to reshuffle and reconstitute the board of directors of a private sector bank.

Specific provisions governing PSBs

In addition to the conditions mentioned above for private sector banks that are applicable to PSBs, the GoI has set up the Banks Board Bureau21 as an autonomous body for the appointment of heads of PSBs. With effect from 1 April 2016, the Banks Board Bureau is tasked with the responsibility of appointing full-time directors and the non-executive chairman of the board of directors of PSBs in a transparent manner using a merit-based selection approach.

SFBs and payment banks

The regulations applicable to private sector banks in respect of board composition and management are also applicable to SFBs and payment banks.

Board constitution norms for foreign banks

Currently, all foreign banks undertake operations in India through their branches and are therefore not subject to corporate governance norms issued by the RBI. Having said that, the appointment of the chairman, managing director and other full-time directors of any branch of a foreign bank in India (if appointed) will require prior approval of the RBI. However, in terms of the RBI guidelines applicable to WOSs (once incorporated by foreign banks in India), such WOSs will be required to ensure that at least 50 per cent of the board of directors comprises Indian residents, at least one-third of the directors are Indian nationals and resident in India, the chief executive officer is an Indian resident and at least two-thirds of the directors of the WOS are non-executive directors, and the same regulations that govern appointment of the board of director of private sector banks will apply to WOSs of foreign banks in India.

iii Restrictions on remuneration and the payment of bonuses

Generally, employees of all banks in India (including foreign banks operating through branches in India) are not permitted to be paid remuneration in the form of commission or a share in the profits of the bank. No Indian bank or branch of a foreign bank is permitted to approve or amend the terms of remuneration of its full-time directors or chief executive officer without the prior approval of the RBI. In consonance with the principles of the FSB, the RBI discourages banks in India (including foreign banks operating through branches in India) from adopting any remuneration structures that encourage or reward an excessive risk-taking approach by the management.

Private sector banks

In private sector banks, the variable component of the compensation payable to full-time directors and chief executive officers is not permitted to exceed 70 per cent of the fixed component in a year. However, where the variable pay constitutes a substantial portion of the fixed pay, an appropriate portion of the variable pay must be deferred over a period. Notwithstanding the general provisions of the BR Act, the RBI has granted general permission to private sector banks to pay compensation (not exceeding 1 million rupees) to non-executive directors in the form of profit-related commission if the bank in question has declared profits.

PSBs

The RBI in consultation with the GoI fixes the rate of sitting fees payable to directors on the boards of PSBs. Any performance-based compensation structures for the management of PSBs are also devised by the RBI in consultation with the Ministry of Finance.

Foreign banks

The compensation policy of all foreign banks operating through branch offices in India is governed by their head office policies. However, foreign banks must submit a declaration to the RBI annually from their respective head office that their compensation structure in India, including that of the chief executive officer, is in conformity with the FSB principles and standards.

iv Regulatory capital and liquidity

In May 2012, the RBI issued guidelines on the implementation of the Basel III capital regulations that were brought into effect from 1 April 2013. The Basel III norms are being implemented in a phased manner, and are anticipated to be fully implemented by 31 March 2019. Typically, all SCBs are permitted to issue ordinary equity shares with voting rights as part of the common equity Tier 1 capital. However, if such SCBs issue non-voting ordinary equity shares as part of common equity Tier 1 capital, they must be identical to voting ordinary shares of the issuing bank in all respects except the absence of voting rights.

Typically, SCBs are required to maintain a total capital of 9 per cent of total risk-weighted assets. The RBI has prescribed a minimum capital requirement of 15 per cent for payment banks and SFBs. Universal banks proposed to be licensed under the new ‘at will’ licensing guidelines are required to maintain a capital adequacy ratio of 13 per cent of risk-weighted assets for a minimum period of three years after the commencement of operation.

To enable the banking industry to sustain the advantage of healthy financial profiles, the RBI has generally prescribed higher capital adequacy norms than those proposed under the Basel III regulations prescribed by the Basel Committee on Banking Supervision (BCBS). For instance, SCBs are generally required to maintain common equity Tier 1 capital of at least 5.5 per cent of risk-weighted assets as opposed to the 4.5 per cent prescribed by the BCBS. Similarly, in terms of the Basel III regulations issued by BCBS, the total capital required to be maintained is 8 per cent as opposed to the RBI threshold of 9 per cent prescribed for SCBs.

For universal banks proposed to be licensed under the new ‘at will’ licensing guidelines, as well as any foreign banks setting up a WOS, the initial minimum paid-up voting equity capital of the bank must be 5 billion rupees.

v Recovery and resolution

Under Indian law, no separate guidelines or procedures have been prescribed on bankruptcy of a bank or a financial institution. Typically, a weaker bank is merged with a stronger and financially sound bank in the event of the bankruptcy of the weaker bank.

Under the BR Act, the RBI has wide powers to manage the financial health of a bank, including the power to supersede the board of directors of the bank, impose a moratorium on the functions of a bank, prepare a scheme for amalgamation or restructuring of a bank, and apply for the winding up of a bank. No court in India can approve a winding up petition against a bank unless the RBI certifies its inability to pay its debt in writing. The RBI is also entitled to apply to the courts to suspend banking business in the event the business of a bank is being conducted in a manner detrimental to the interests of depositors. In the event of the winding up of a bank, the RBI may even be appointed as the liquidator.

While there is no separate bankruptcy resolution regime, in terms of the Deposit Insurance and Credit Guarantee Corporation Act, 1961, the GoI has established the Deposit Insurance and Credit Guarantee Corporation, which automatically insures the customer deposits with all commercial banks, up to a limit of 100,000 rupees per depositor.

The Insolvency and Bankruptcy Code, 2016 (Insolvency Code) was recently notified by the GoI, and seeks to consolidate the laws relating to the reorganisation and insolvency of companies. However, the Insolvency Code is not applicable to the corporate insolvency, winding up, or both, of any bank in India (including foreign banks operating through branches in India).

iv CONDUCT OF BUSINESS

i Banking confidentiality

The principles of banker–customer confidentiality recognised in Tournier v. National Provincial and Union Bank of England 22 are recognised in India.23 Banks in India (including foreign banks operating through branches in India) are required to maintain the secrecy of their customer’s accounts and all information collected by them as a part of the ‘know your customer’ (KYC) norms, at all times, unless the disclosure is required under law or is made with the express consent of the customer.

Banks are required to maintain confidentiality of any sensitive personal data or information24 and personal information of a customer as per the data protection rules issued under the Information Technology Act, 2000. Typically, any sensitive personal data or information or personal information with a bank in India (including foreign banks operating through branches in India) may only be disclosed with the prior specific consent of the customer.

ii Liability of banks

The RBI may also impose stringent penalties on banks in India (including foreign banks operating through branches in India) for violation of the BR Act or any instructions of the RBI, and has the power to cancel banking licences issued by the RBI. The provisions of the Indian Penal Code, 1860 are also applicable to the full-time chairman, managing director, auditor, liquidator, manager and other employees of banks in India (including foreign banks operating through branches in India) and, in certain cases, the ‘officers in charge’ are even liable to imprisonment.

The RBI is known to adopt a proactive approach towards ensuring banks’ compliance with KYC norms, including rules for customer identification, acceptance and monitoring transactions, and anti-money laundering (AML) norms. In several instances, the RBI has levied stringent monetary penalties on banks for violating KYC/AML norms and disclosure requirements prescribed under the extant foreign exchange laws and instructions of the RBI.25

The RBI is also empowered to cancel the licences of banks in India (including foreign banks undertaking banking activities in India) in certain instances such as non-compliance by the bank with licensing guidelines issued by the RBI as applicable to such bank.

v FUNDING

Broadly, the elements of total regulatory capital of SCBs26 include Tier I capital27 (comprising two elements: common equity Tier I capital28 and additional Tier I capital) and Tier 2 capital.29 SCBs are generally permitted to issue perpetual non-cumulative preference shares, perpetual cumulative preference shares, redeemable non-cumulative preference shares and redeemable cumulative preference shares as part of Tier 1 and Tier 2 capital. SCBs are also generally permitted to issue perpetual debt instruments as part of additional Tier 1 capital and debt instruments with a minimum maturity of five years for inclusion in Tier 2 capital. Recently, the RBI granted general permission to SCBs to issue Indian rupee-denominated bonds to eligible persons overseas for inclusion as additional Tier 1 capital and Tier 2 capital, respectively.

Banks are permitted to obtain funding from the money market through instruments such as government bonds, treasury bills, commercial paper, certificates of deposit and ready forward purchases. Since the money market is a source for short-term funds, banks rely on the money market for short-term liquidity requirements, including for meeting cash reserve ratios and statutory liquidity ratio requirements.30

vi CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

i Ownership and voting limits
PSBs

The ownership and control requirements for PSBs are prescribed in their respective governing legislation. The GoI is required to own and control at least a 51 per cent shareholding in PSBs at all times.

Private sector banks

To meet the additional capital requirements under the Basel III regulations, the RBI overhauled the regulations governing the shareholding structure of private sector banks in May 2016, and issued a new set of regulations for ownership in private sector banks (Private Sector Banks Ownership Guidelines). The RBI has prescribed different limits for shareholding in private sector banks by a single entity, corporate entity or group of related entities, and has prescribed different thresholds for different categories of shareholders based on their organisation, constitution and ownership.

Further, in terms of the Private Sector Banks Ownership Guidelines, there is a requirement of a minimum shareholding by promoters, a promoter group or a non-operating holding financial company (NOHFC) of the private sector bank (currently 40 per cent of the paid up capital of the bank), which is subject to a lock-in for a period of five years. The RBI introduced the NOHFC model to ring fence the banking and financial businesses of new bank applicants.

Prior approval of the RBI is required by persons seeking to acquire or agreeing to acquire shares or voting rights of a private sector bank by themselves or with persons acting in concert, wherein such acquisition results in the aggregate shareholding of the acquirer to be 5 per cent or more of the paid up share capital of that bank, or entitles the acquirer to exercise 5 per cent or more of the voting rights in that bank.

No person holding shares in a private sector bank is permitted to exercise voting rights on a poll in excess of 15 per cent of the total voting rights of all shareholders of the bank. The RBI may, however, increase the ceiling on voting rights to up to 26 per cent in a phased manner on an application made in this regard to the RBI.

Payment banks and SFBs

The Private Sector Banks Ownership Guidelines are also applicable to SFBs and payment banks in relation to their respective constitution and ownership.

No person holding shares in SFBs or a payment bank is permitted to exercise voting rights on a poll in excess of 10 per cent of the total voting rights of all shareholders of the bank. The RBI may, however, increase the ceiling on voting rights to up to 26 per cent in a phased manner on an application made in this regard to the RBI.

ii Foreign investment
Foreign investment in PSBs

Foreign investment (including by way of foreign direct investment and by registered portfolio investors under the portfolio investment scheme) in PSBs is permitted up to 20 per cent, with the prior approval of the GoI.

Foreign investment in private sector banks

Foreign investment in private sector banks is not permitted to exceed 74 per cent of the paid up share capital of the bank. Foreign investment in private sector banks is permitted up to 49 per cent under the automatic route (i.e., without any approval of the GoI). Further investments between 49 and 74 per cent require prior approval of the GoI.

This limit does not apply to foreign banks intending to establish a WOS in India.

Foreign investment in SFBs and payment banks

The foreign investment limits applicable to private sector banks are also applicable to SFBs and payment banks.

iii Financial assistance by banks to purchase their securities

Under the Companies Act, 2013, public companies are not permitted to directly or indirectly provide financial assistance (by means of a loan, guarantee or other security) for the purpose of or in connection with a purchase or subscription of shares made or to be made in that company or in its holding company.

Under Indian law, banks are prohibited from securing their assets for the purpose of or in connection with a purchase or subscription of shares made or to be made in that bank, or in connection with any financial assistance granted to the bank or its associate company.

iv Transfer of banking business

The procedure for the merger and amalgamation of PSBs is different from that applicable to private sector banks, and is specifically set out in the statutes governing them.

For private sector banks licensed under the BR Act, the RBI requires that the draft scheme of amalgamation must be approved by a resolution of at least two-thirds of the total board members (and not just of those present and voting), and a two-third majority of the shareholders of both the merging banks. Such a scheme of amalgamation must then be approved and sanctioned by the RBI.

The merger or amalgamation of SFBs and payment banks is governed by the provisions of the BR Act in terms of which the draft scheme of amalgamation must be approved by a resolution of at least a two-third majority of the shareholders of both the merging banks. The draft scheme must thereafter be approved and sanctioned by the RBI.

Banking companies are also required to notify the Competition Commission of India regarding any proposed merger.

vii THE YEAR IN REVIEW

The key focus of the RBI and the GoI in recent times has been on easing the stress on the balance sheets of Indian banks on account of bad loans, and on the consolidation and reorganisation of PSBs. The RBI has also been keenly focusing on the digitisation of payment systems as a medium to increase access to banking services and promote financial inclusion. On 20 March 2017, the RBI issued draft regulations with an aim to overhaul the regulatory regime applicable to digital and prepaid instruments in India. On 7 April 2017, the RBI issued a discussion paper on ‘wholesale and long-term finance banks’ pursuant to which it proposes to set up wholesale and long-term finance baks as differentiated banks that will focus primarily on lending to infrastructure, medium-sized and corporate businesses. The discussion paper is open for public comments, and no formal decision has been made by the RBI so far.

i Demonetisation and digitisation of payment services

Pursuant to the withdrawal of the legal tender of 500 rupee and 1,000 rupee notes by the GoI on 8 November 2016, the RBI and the GoI took active measures to promote digital payment transactions. Inter alia, the GoI has permitted access to centralised payment systems (including a real time gross settlement system and national electronic fund transfers) to all SCBs and authorised payment system providers, issued guidelines for digitisation of KYC norms (e-KYC), and is currently considering proposals for a reduction in transaction costs for digital payments and enhanced cyber security measures for such transactions.

ii Merger of associate banks with SBI

The GoI announced the merger of five of SBI’s subsidiaries and associate banks with SBI in 2016. The merger took effect from 1 April 2017, and has resulted in SBI ranking among the top 50 banks in the world with an estimated consolidated balance sheet of 32 trillion rupees and nearly 18.76 trillion rupees’ worth of advances on its books.31

iii Large exposures framework (LEF)

In December 2016, the RBI prescribed norms for a LEF for SCBs (excluding RRBs).32 Banks are required to comply with the LEF on both a consolidated and standalone basis. The sum of all the exposure values of a bank to a single counterparty is not permitted to be higher than 20 per cent, and to a group of connected counterparties33 is not permitted to be higher than 25 per cent, of the bank’s available eligible capital base at all times.

viii OUTLOOK and CONCLUSIONS

An insistence of financial inclusion and a move away from a cash-based economy are the two pillars of the various banking sector reforms being undertaken by the RBI and the GoI. The implementation of various schemes proposed by the GoI and the RBI to achieve these ends, however, continues to be a challenge, and it remains to be seen whether the developments proposed by the GoI and the RBI are effectively implemented to benefit marginalised sections of society.

With an increase in the number of banks, digitisation of payment services and greater access to banking services, the GoI must take steps towards addressing potential cyber security challenges and strengthening the current data protection laws. There is an urgent need for reforms regarding liquidation and bankruptcy of banks and financial institutions to protect depositor interests and secure the financial sector from potential global and domestic systemic failures.

1 Gunjan Shah is a partner, Shubhangi Garg is a principal associate and Akshita Agrawal is an associate at Shardul Amarchand Mangaldas & Co.

2 PSBs are banks in which a majority stake is owned by the GoI.

3 Private sector banks are banks that are incorporated as companies in India and have been granted a banking licence by the RBI.

4 Foreign banks are incorporated as banks outside India and generally operate in India through branch offices by obtaining a banking licence from the RBI.

5 SCBs are those banks that are required to maintain an average minimum daily balance with the RBI in a prescribed form of cash and securities to meet their net demand and time liabilities.

6 Unlike SCBs, non-scheduled banks are not entitled to borrow from the RBI for normal banking purposes, except in emergency or ‘abnormal circumstances’. Non-scheduled banks are not permitted to deal in a foreign exchange or be licensed as authorised dealer banks in India.

7 RRBs are specialised banks with a focus on agricultural and rural lending in a specified region.

8 While typically all ‘scheduled commercial banks’ are subject to the same regulations, the RBI sometimes prescribes a different set of regulations for RRBs and SFBs and excludes them from the scope of certain general permissions granted to scheduled commercial banks.

9 Banking Regulation Act, 1949, Section 5(b): ‘Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.’

10 Para banking activities include activities such as equipment leasing, hire purchase and factoring, underwriting, credit card, insurance distribution, mutual fund businesses, portfolio management and other financial services.

11 Basic Statistical Returns of Scheduled Commercial Banks in India, Volume 44, published by the RBI annually.

12 Ibid.

13 Ibid.

14 The FSB is an international body based in Basel, Switzerland, that coordinates and monitors the work of national financial authorities and international standard setting bodies to develop, promote and monitor the implementation of effective regulatory, supervisory and other financial sector policies across all member countries.

15 New private sector banks that are granted a ‘universal banking’ licence must be designated by the RBI as ‘scheduled commercial banks’ for commencement of operations. Such new private sector banks will then have to comply with the net demand time liabilities and other requirements as applicable to ‘scheduled commercial banks’.

16 Foreign banks that have been in operation in India before August 2010 have been exempted from this requirement. A few foreign banks are reported to have applied for a WOS conversion, but the applications are under review with the RBI, and no foreign bank has so far set up a WOS in India.

17 Business correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch or ATM.

18 ‘Adjusted net bank credit’ to be calculated in accordance with the Master Direction – Priority Sector Lending – Targets and Classification dated 7 July 2016 issued by the RBI.

19 An independent director is a non-executive director of a company who does not have any material or pecuniary relationship with the firm, its directors or promoters. Independent directors cannot be managing directors, full-time directors or promoters of the company, its holding company or subsidiaries.

20 Educational qualification, experience and field of expertise, track record and integrity are some of the factors considered by the RBI to assess the ‘fit and proper’ status of the directors on the board of private sector banks. The ‘fit and proper’ criteria for PSBs is broadly similar to the criteria prescribed by the RBI for private sector banks.

21 The Banks Board Bureau comprises seven members and includes representatives from the RBI, the GoI and recognised experts in the field of banking.

22 Tournier v. National Provincial and Union Bank of England, (1924) 1 KB 461.

23 Working Group on Information Security, Electronic Banking, Technology Risk Management and Cyber Frauds, 21 January 2011, available at rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=609.

24 ‘Sensitive personal data or information’ is defined to include bank accounts, credit card and debit card details, etc.

25 ‘RBI slaps fine on 5 foreign banks for violating FEMA rules’, The Hindu, 21 December 2016. ‘RBI fines three govt-run banks for violating KYC norms’, Business Standard, 30 April 2015; ‘RBI slaps Rs. 27 cr penalty on 13 banks’, The Hindu, 25 July 2016; ‘RBI imposes penalty of Rs. 2 crore on IndusInd Bank’, Business Standard, 28 July 20.

26 The RBI has also prescribed certain regulatory norms for non-scheduled banks such as non-scheduled state co-operative banks and non-scheduled urban co-operative banks. The source of capital fundraising of non-scheduled banks is restricted as compared to SCBs.

27 Tier I capital is ‘going concern’ capital, i.e., capital that can absorb losses without triggering bankruptcy of the bank.

28 Typically, for SCBs, ordinary equity shares (paid up equity capital issued by the bank), stock surplus and capital reserves are a few components of the common equity Tier I capital.

29 Tier 2 capital is classified as ‘gone concern’ capital.

30 The cash reserve ratio is a percentage of the total demand and time liabilities in India of the bank required to be maintained in cash with the RBI. The statutory liquidity ratio is the percentage of the total demand and time liabilities in India of the bank required to be maintained in the form of prescribed assets such as cash, gold or approved unencumbered securities in India.

31 Vishwanath Nair, ‘SBI merger with five associate banks from April 1’, Live Mint, 23 February 2017.

32 The RBI guidelines prescribe limits on large exposures of banks to a single borrower or a closely related group of borrowers.

33 ‘Connected counterparties’ is defined in the ‘Large Exposures Framework’ issued by the RBI on 1 December 2016.