Back to Basics-Day-02

Banking Correspondent (BC)

Banking Correspondents (BCs) are individuals/entities engaged by a bank in India (commercial banks, Regional Rural Banks (RRBs) and Local Area Banks (LABs)) for providing banking services in unbanked / under-banked geographical territories. A banking correspondent works as an agent of the bank and substitutes for the brick and mortar branch of the bank.
BCs engage in:
  • identification of borrowers;
  • collection and preliminary processing of loan applications including verification of primary information/data;
  • creating awareness about savings and other products and education and advice on managing money and debt counselling;
  • processing and submission of applications to banks;
  • promoting, nurturing and monitoring of Self Help Groups/ Joint Liability Groups/Credit Groups/others;
  • post-sanction monitoring;
  • follow-up for recovery,
  • disbursal of small value credit,
  • recovery of principal / collection of interest
  • collection of small value deposits
  • sale of micro insurance/ mutual fund products/ pension products/ other third party products and
  • receipt and delivery of small value remittances/ other payment instruments.
The banks in India may engage the following individuals/entities as BCs.
  • Individuals like retired bank employees, retired teachers, retired government employees and ex-servicemen, individual owners of kirana (small shops) / medical /Fair Price shops, individual Public Call Office (PCO) operators, agents of Small Savings schemes of Government of India/Insurance Companies, individuals who own petrol pumps, authorized functionaries of well-run Self Help Groups (SHGs) which are linked to banks, any other individual including those operating Common Service Centres (CSCs);
  • NGOs/ Micro Finance Institutions set up under Societies/ Trust Acts or as Section 25 Companies ;
  • Cooperative Societies registered under Mutually Aided Cooperative Societies Acts/ Cooperative Societies Acts of States/Multi State Cooperative Societies Act;
  • Post Offices;
  • Companies registered under the Indian Companies Act, 2013 with large and widespread retail outlets
  • Non-banking Finance Companies (NBFCs) were not allowed to be appointed as Business Correspondents (BCs) by banks. However, since June 2014 banks have been permitted to engage non-deposit taking NBFCs (NBFCs-ND) as BCs, subject to certain conditions:

‘Back-to-Back’ Loans

  • State Governments in India cannot access external sources of finance directly. The 12th Finance Commission recommended the transfer of external assistance to State Governments in India by the Union Government on a ‘Back-to-Back’ basis. This recommendation was accepted by the Government of India for general category states and the arrangement came into effect from April 1, 2005. For special category states ( Northeastern states, Uttarakhand, Himachal and J&K), external borrowings are in the form of 90 per cent grant and 10 per cent loan from the Union Government.
  • Passing loans on ‘Back-to-Back’ basis to State Governments implies that States would face identical terms and conditions (including concessional interest rates, grace period and maturity profile, commitment charges and amortization schedules) on account of their access to finance from bilateral and multilateral sources, as is faced by the Union Government.

Contingency Fund of India

  • This term derives its origin from the Constitution of India.
  • The Contingency Fund of India established under Article 267 (1) of the Constitution is in the nature of an imprest (money maintained for a specific purpose) which is placed at the disposal of the President to enable him/her to make advances to meet urgent unforeseen expenditure, pending authorization by the Parliament. Approval of the legislature for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained to ensure that the corpus of the Contingency Fund remains intact. The corpus for Union Government at present is Rs 500 crore (Rs 5 billion) and is enhanced from time to time by the Union Legislature. The Ministry of Finance operates this Fund on behalf of the President of India.
  • Similarly, Contingency Fund of each State Government is established under Article 267(2) of the Constitution – this is in the nature of an imprest placed at the disposal of the Governor to enable him/her to make advances to meet urgent unforeseen expenditure, pending authorization by the State Legislature. Approval of the Legislature for such expenditure and for withdrawal of an equivalent amount from the Consolidated Fund is subsequently obtained, whereupon the advances from the Contingency Fund are recouped to the Fund. The corpus varies across states and the quantum is decided by the State legislatures.

Capital Budget

  • Under Article 112 of the Constitution of India, the Annual Financial Statement has to distinguish expenditure of the Government on revenue account from other expenditures. Government Budget, therefore, comprises of Revenue Budget and Capital Budget.
  • Capital Budget consists of capital receipts and capital payments.
  • The capital receipts are loans raised by Government from public, called market loans, borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies, disinvestment receipts and recoveries of loans from State and Union Territory Governments and other parties.
  • Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc., and loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties.

Cash Reserve Ratio (CRR)

  • Cash Reserve Ratio refers to the fraction of the total Net Demand and Time Liabilities (NDTL) of a Scheduled Commercial Bank held in India, that it has to maintain as cash deposit with the Reserve Bank of India (RBI). The requirement applies uniformly to all banks in the country irrespective of an individual bank’s financial situation or size. In contrast, certain countries e.g. China stipulates separate reserve requirements for ‘large’ and ‘small’ banks.
  • As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement. Non Bank Financial Corporations (NBFCs) are outside the purview of this reserve requirement. Act also authorizes RBI to stipulate an additional or incremental CRR, which, however, has not been put in place by RBI.
  • Banks have to maintain 100 percent CRR on an average basis during the fortnight. That is, it is not necessary that on all days CRR has to be at 100%. With effect from December 28, 2002 all banks were required to maintain a minimum of 70 per cent of the required average daily CRR on all days of the fortnight. Later, with effect from the fortnight beginning September 21, 2013 entities were required to maintain minimum CRR balances up to 95 per cent of the average daily required reserves for a reporting fortnight on all days of the fortnight. This was later reduced to 90 per cent with effect from the fortnight beginning April 16, 2016.
  • Traditionally, the amount held to cater to the CRR requirement was stipulated to be no lower than 3 percent and no higher than 20 percent of the total NDTL held in India. However, the RBI (amendment) Act, 2006 provides for removal of the floor and ceiling with respect to setting the CRR and authorizes the RBI to set the ratio in keeping with the broad objective of maintaining monetary stability in the economy.

Consolidated Fund of India

  • This term derives its origin from the Constitution of India.
  • Under Article 266 (1) of the Constitution of India, all revenues ( example tax revenue from personal income tax, corporate income tax, customs and excise duties as well as non-tax revenue such as licence fees, dividends and profits from public sector undertakings etc. ) received by the Union government as well as all loans raised by issue of treasury bills, internal and external loans and all moneys received by the Union Government in repayment of loans shall form a consolidated fund entitled the ‘Consolidated Fund of India‘ for the Union Government.
  • Similarly, under Article 266 (1) of the Constitution of India, a Consolidated Fund Of State ( a separate fund for each state) has been established where all revenues ( both tax revenues such as Sales tax/VAT, stamp duty etc..and non-tax revenues such as user charges levied by State governments ) received by the State government as well as all loans raised by issue of treasury bills, internal and external loans and all moneys received by the State Government in repayment of loans shall form part of the fund.
  • The Comptroller and Auditor General of India audits these Funds and reports to the Union/State legislatures when proper accounting procedures have not been followed.

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