BANKING AND FINANCIAL SERVICES

The financial sector of a country is the backbone of its economy and its policies are often defined by the political, social and economic state of the nation. The global financial crisis of 2008 has further brought to the fore the strong linkages between the financial sector and the real economy. It is in this context that a financial system and its regulatory framework should be studied.

The modern banking and financial services industry in India has developed considerably since its inception, both in terms of its reach and advancement. The history of the regulated financial sector in India so far can be broadly divided in three phases:

Phase I: 1786 till 19691

Phase II: 1969 to 1991 (Nationalization era)

Phase III: Post 1991 (Liberalized phase)

The growth of the banking and financial services industry was slow in the first phase. The second phase was marked by the nationalization of fourteen major commercial banks in 1969 and thereafter seven other banks in 1980. By the end of the second phase, almost 80% of the banking industry in India was under government ownership. Triggered by the larger macro-economic compulsions and a current account crisis, comprehensive reforms were undertaken in 1991 following the Narasimham Committee Report on the Financial System. As a result of these reforms, the financial sector was opened and the number of banks increased swiftly.

The Indian financial sector has changed considerably since the economic reforms of 1991. The financing, insurance, real estate and business services sectors together account for approximately 16.5% of India's gross domestic product ("GDP"). India remained in the top 10 list of exporters and importers of financial services in 2010, and was only third after the European Union and USA in the list of top importers.2

The financial sector of India is comprised of various sub sectors like banks, non-banking financial companies ("NBFCs"), insurance sector entities and capital market related entities like stock and commodity exchanges, brokers, mutual funds, domestic and foreign investment vehicles (including foreign institutional investors), merchant bankers etc. Besides the institutionalized sector, it is also believed that India has a sizeable unorganized financial sector.

In India, the Ministry of Finance, Government of India has the overarching mandate to govern the financial sector and is responsible for the economic and financial matters concerning the country. The Reserve Bank of India ("RBI") is the country's central bank and the primary monetary authority. Besides being the banker's bank and the banker to the Government, RBI regulates and supervises the financial system and particularly the banking and NBFC sector along with foreign exchange transactions. The securities market is regulated by the Securities and Exchange Board of India ("SEBI").

Banking and financial services exhibit different industry characteristics, risks and returns and hence could be examined independently.

BANKING

The Indian banking sector is a mix of public, private and foreign ownerships. As of March 2012, the banking sector was comprised of 86 scheduled commercial banks which included 26 public sector banks and 20 private sector banks. Besides, as on April 30, 2012, 41 foreign banks were operating in India through branches and 46 through representative offices. The State Bank of India ("SBI") has the largest branch network among all banks whereas Standard Chartered is the largest branched bank in India amongst the foreign banks.3

Main functions of a commercial bank include settling of financial transactions (payment system), financial intermediation and providing financial services. Although banks have enjoyed a monopoly in payment systems, they have begun to face stiff competition from other financial intermediaries (like term-lending institutions, NBFCs and insurers) in financial intermediation and financial services.

Structure

The structure of the Indian banking industry can be analyzed on the basis of its organized status, business as well as product segmentation.

* Banks which have a paid up capital and reserves of Rs 5 lakhs or more and meet other specific criteria, are included in the second schedule of the RBI Act, 1934, and are called scheduled banks.

Entry Norms

Besides the Government owned banks, the entry of which is completely controlled by the Government, the entry of players in the private banking space is highly regulated. Entry norms are set to become stricter, at least from a systemic risk management stand point, if many of the proposals made in RBI's Discussion Paper of 2010 ('Entry of New Banks in the Private Sector') are adopted in their current form.

The minimum statutory requirements for setting up new banks in India are stipulated in the Banking Regulation Act, 1949 (the "Act"). Presently, a license from RBI is required to carry on the business of banking in India. Section 22 of the Act lists the conditions to be fulfilled before RBI may, in its discretion, grant the license. Further in respect of foreign banks, in addition to the conditions specified in case of domestic banks, RBI may require to be satisfied that the law of the country in which the foreign bank is incorporated does not discriminate against banking companies registered in India. The RBI thoroughly examines the application for new banks as and when received before granting the banking license. The prescribed minimum capital for licensing of new banks in the private sector is Rs 200 crores which must be increased to Rs 300 crores over a period of three years from the commencement of business.4

Foreign Banks can operate in India through both a branch model as well as a subsidiary model, though recently it has been proposed that the entry of foreign banks should be through a set up of their wholly-owned subsidiaries only.5 Apart from the branch and the subsidiary route, a foreign bank can also operate in India through foreign direct investment ("FDI") of upto 49% in an Indian bank under the automatic route (i.e., without approval by the Government of India), and investments between 49% & 74% under the government approval route. The said limit of 74% is inclusive of any investment under the Portfolio Investment Scheme ("PIS") by Foreign Institutional Investors ("FIIs") and Non-Resident Indians ("NRIs").6 Further, any acquisition of 5% or more shares in a bank by a single person / entity would require a specific prior approval from the RBI. This 5% threshold is inclusive of all forms of direct and indirect ownership by an acquirer as well as its associated entities. It must also be noted that no shareholder in a private bank can exercise voting rights in excess of 10%, irrespective of the level of shareholding that such shareholder may hold in the bank. This limit is 1% in case of public sector banks.7

So far, as foreign investment in a nationalized bank is concerned, it cannot exceed 20% under the government approval route and is subject to the provisions of the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1969.

All foreign investments are freely repatriable except in cases where investment is subject to a lock-in period or is invested under non-repatriable schemes. Branch offices are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of specified documents to the satisfaction of the relevant Category 1 - Authorized Dealer through whom the remittance is affected.

Operational Norms

Branch Licensing

The branch authorization policy was liberalized in 2005 when the RBI moved from the system of granting authorizations for one branch at a time, to the system of aggregate approvals on an annual basis.8 As per India's commitment to the World Trade Organization, RBI has agreed to permit a minimum 12 branches of foreign banks every year. However, in spite of the liberalized policy, foreign banks did not gain much, as the number of branch approvals to them remained very low relative to Indian banks.

Prudential Norms and Capital Requirements

The RBI stipulates prudential norms concerning income recognition, asset classification and provisioning, to be applicable to all banks including the foreign banks operating in the country.

Presently, capital adequacy norms are in line with the Basel II framework. These requirements are considered from two perspectives – credit risk and operational risk. Further, what would constitute Tier I capital differs between Indian banks and foreign banks. If a bank becomes undercapitalized, the RBI has the power to impose penalties, cancel its banking license, acquire the bank, seeks its liquidation, or take any other action as it deems fit.

RBI has issued the "Guidelines on Implementation of Basel III Capital Regulations in India". These guidelines are scheduled to become effective starting January 1, 2013 in a phased manner. The Basel III capital ratios are expected to be fully implemented as of March 31, 2018. Basel III inter alia stipulates that all banks should attain CRAR with a buffer of 9.25% by January 1, 2017 and a Tier-I CRAR along with an add-on buffer of 4.5% by the beginning of 2015. Domestic and foreign banks have been allowed by RBI to augment their capital funds by issuing hybrid instruments.

Priority Sector Lending

Banks in India are required to meet prescribed targets for lending to the priority sector in pursuance of the overall objective of financial inclusion. The prescribed limits for lending to the priority sector is however different for foreign banks and domestic banks.

Domestic Banks: 40% of their Adjusted Net Bank Credit ("ANBC") or credit equivalent amount of off-balance sheet exposure, whichever is higher.9 In case of shortfall in the allocation of lending to the priority sector, domestic banks are required to allocate the balance amount as contribution to the Rural Infrastructure Development Fund ("RIDF") established by National Bank for Agriculture and Rural Development ("NABARD"), or funds with other financial institutions, as specified by the RBI.

Foreign Banks: The prescribed limit for the foreign banks is 32% of ANBC or credit equivalent amount of off-balance sheet exposure, whichever is higher, out of which, 10% must be provided for micro and small enterprises ("MSE/s") and 12% for export credits. In case of shortfall, foreign banks are mandated to deposit the balance amount with funds set up by Small Industries Development Bank of India ("SIDBI") or with other financial institutions, as stipulated by RBI.

It is indicated by the RBI in its discussion papers that with the establishment of the foreign banks as wholly owned subsidiaries in India, the priority sector lending limits for foreign banks should be enhanced to the same level as that of the domestic banks, i.e., 40%.

Other Key Statutory Requirements

Statutory pre-emption of resources has been mandated for all banks in the form of Cash Reserve Ratio ("CRR") and Statutory Liquidity Ratio ("SLR"), to provide for the safety of depositors and other stakeholders. CRR and SLR have been used by the RBI at different times as tools to implement the monetary policy. Otherwise, the RBI has allowed the banking industry to move towards a more market driven mechanism.

Regulation

The banking sector is mainly regulated by RBI. RBI insures bank deposits upto Rs 1 lakh of all commercial banks (including branches of foreign banks functioning in India, local area banks and regional rural banks) through its wholly owned subsidiary the Deposit Insurance and Credit Guarantee Corporation of India ("DICGC").

Key legislations that administer the banking sector are the Act, the Reserve Bank of India Act, 1934 and the Companies Act, 1956. Other important laws include the Negotiable Instruments Act, 1881, Bankers Books Evidence Act, 1891, Payment and Settlement Systems Act, 2007, Recovery of Debts due to Banks and Financial Institutions Act, 1993, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act"), Foreign Exchange Management Act ("FEMA"), Prevention of Money Laundering Act, 2002 etc. In addition, the RBI releases notifications and circulars from time to time, governing various aspects of the functioning of the sector.

Special courts in the form of Debt Recovery Tribunals ("DRT") have been set up to assist banks and financial institutions in the recovery of the debts due to them.

Taxation

Since a domestic bank can only be established as a company in India, the income tax rate applicable to a domestic company applies, which is 30% (excluding 5% surcharge if net income exceeds INR 1 crore, and 3% education cess). The tax rate for foreign banks, which currently operates in India through branches, is 40% (excluding 2% surcharge if net income exceeds INR 1 crore, and 3% education cess).

Recent Developments and Industry Outlook:

The Indian banking industry has grown considerably in the last couple of decades. According to the Economic Survey 2012, banking and insurance in 2011 were India's second fastest growing sectors after communications, and accounted for approximately 5.8% of India's GDP, at current prices.

Financial inclusion, which broadly covers access to and use of the financial sector, remains the main thrust of the Government of India and the RBI. Despite the expansion of the banking network in India, a large part of the population is still not part of the banking system. A target was set up to provide banking services in every village with a population above 2000 by March 31, 2012 and as per a recent RBI notification, banks have covered 74, 199 (99.7 %) out of 74,414 such villages.10 The Government and RBI continue to take several initiatives to expand the coverage of the financial sector.

Information Technology ("IT") remains a critical tool to achieve financial inclusion as well as to increase the efficiency of the banking industry as a whole, and continues to receive attention from all stakeholders concerned. Over the last couple of decades, Automated Teller Machines ("ATM"), core banking systems, internet and mobile banking and point of sale ("PoS") terminals are few key technological developments which have revolutionized banking in India.

The domestic banking industry is set for an exponential growth in the coming years with its asset size poised to touch US$ 28,500 billion by the turn of 2025.11 In terms of business areas, wholesale banking is set for a steep growth and whole sale banking revenues are expected to more than double from 2010 to 2015.12 In light of these observations and projections, it seems that the Indian banking industry is set to grow exponentially and will continue to remain one of the fastest growing and highest contributing sectors of the Indian economy, despite the various challenges such as financial inclusion which the industry may face in future.

FINANCIAL SERVICES

The financial services sector in India broadly comprises of the Non-Banking Financial Companies ("NBFC/s") and securities market related entities.13

NON BANKING FINANCIAL COMPANIES

NBFCs are a diverse mix of financial institutions which mainly carry out the business of receiving deposits, financing, leasing, investing in securities, chit funds and lease purchase.

Although the business of NBFCs is quite similar to banking, there are key regulatory differences: (i) an NBFC cannot accept demand deposits; (ii) an NBFC is not a part of the payment and settlement system and therefore it cannot issue cheques drawn on itself; and (iii) the deposit insurance facility of DICGC is not available for NBFC depositors.

NBFCs play a complimentary role to the banking sector and assume importance in meeting the financial void in the businesses, products, customers as well as the geographies not covered by the banks and other financial institutions. The ability of NBFCs to offer innovative products in consonance with needs of the customers is well recognized. However, banks can have their exposure to the NBFC sector through investments in NBFCs. The maximum funding of the NBFC business is done through borrowings by banks and by issuance of debentures.14

It is interesting to note that even with the high number of NBFCs in India, the sector remains highly concentrated with 575 NBFCs accounting for 80% of the total assets of the NBFC sector in FY 2010. In addition, the Residuary Non-Banking Companies ("RNBCs") account for 66% of public deposits held by the NBFC sector.15 16

Industry Structure:

NBFCs can broadly be categorized as deposit taking ("NBFC-D") or non-deposit taking ("NBFC-ND").

As of May 31, 2012, 271 NBFCs permitted to accept public deposits were registered with the RBI.17 Some of the key NBFCs in this category include Manappuram General Finance and Leasing Company, Bajaj Finance, Sriram Transport Finance, Sundaram Finance, etc.

The RBI classifies the NBFCs into seven categories based on their business:

Asset Finance Company (AFC), Investment Company (IC), Loan Company (LC), Infrastructure Finance Companies (IFC), Core Investment Companies (CIC), Infrastructure Debt Fund Non-Banking Finance Company (IDF-NBFC) and the newly introduced category of Non-Banking Finance Company-Micro Finance Institution (NBFC-MFI).

RBI also categorizes NBFC-NDs with an asset size of Rs 1 billion and above as Systematically Important NBFCs ("NBFCs-ND-SI").

Entry norms

Every NBFC should be registered with RBI before commencing business. However, to avoid dual regulation, the following categories of NBFCs are exempted from the requirement of registration with RBI subject to certain conditions, since they are regulated by other regulators:

Housing Finance Companies (regulated by National Housing Bank), Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers (regulated by Securities and Exchange Board of India) and Insurance companies (regulated by Insurance Regulatory and Development Authority). Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India.

A company desirous of commencing the business of non-banking financial institution should have a minimum net owned fund of Rs 200 lakh.18

As per the Consolidated FDI Policy dated April 10, 2012 effective from April 10, 2012 issued by the Department of Industrial Policy and Promotion, foreign direct investment in an NBFC is permitted up to 100% under the automatic route in 18 NBFC approved activities mentioned below, subject to prescribed minimum capitalization norms:

Merchant Banking, Underwriting, Portfolio Management Services, Investment Advisory Services, Financial Consultancy, Stock Broking, Asset Management, Venture Capital, Custodial Services, Factoring, Credit Rating Agencies, Leasing & Finance, Housing Finance, Forex Broking, Credit Card business, Money changing business, Micro credit and Rural credit.

Currently, investment activities are not permitted under the automatic route. Accordingly, foreign investment in an investment NBFC or an NBFC falling under the definition of Investing Company under the FDI Policy would require prior approval of Foreign Investment Promotion Board.

Operational Norms

RBI has issued detailed directions on prudential norms vide Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions inter alia prescribe guidelines on capital adequacy, income recognition, asset classification and provisioning, exposure norms, disclosure requirements, restrictions on investments etc. There are several other regulations governing NBFCs which RBI issues from time to time.

Regulatory overview

RBI mainly regulates the functioning of NBFCs in India. The scope of business for a NBFC is limited by the RBI Act, 1934 to certain areas. The comprehensive regulations governing NBFCs were introduced in 1997. The RBI takes measures to reduce the scope of regulatory arbitrage between NBFCs, banks and other financial institutions.

NBFCs are strictly monitored by the RBI. NBFCs-D are required to furnish every year audited accounts including an auditor's certificate on repayment of deposits capacity of NBFC, statutory annual return on deposits, quarterly and half yearly returns etc. NBFCs having assets of Rs 100 crores and above but not accepting public deposits are required to submit a monthly return on important financial parameters of the company. All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor would accept any public deposit during the year.

Since NBFCs are set up as companies, the tax rates applicable to companies apply to NBFCs.

Trends and Progress

The NBFC business remains a small percentage of the overall banking business. As of financial year 2011, NBFC advances and assets were nearly 13% of those of scheduled banks. However total NBFC public deposits were only 0.22% of the scheduled bank deposits.19

The RBI and Ministry of Finance through their recent working group reports have recognized the importance of NBFCs for the financial system and suggested expansion of the NBFC sector while strengthening the regulatory framework.

SECURITIES MARKETS

Securities or the capital markets are a crucial segment of the financial sector. It provides a platform to connect various stake holders and facilitates the channelizing or reallocation of funds and also of savings to investments, which spreads the risk and increases liquidity of the financial markets.

The securities market has essentially three categories of participants – the issuers, investors and the intermediaries. The regulator develops fair market practices and regulates the conduct of the issuer of securities and the intermediaries in order to protect the interests of the supplier of funds.

The banking/financial institutions and financial sector in general is the most active participant in the securities market. Out of the total Rs 48,468 crores raised through 71 issues in 2011-2012, banking/financial institutions raised Rs 35,611 crores through 20 issues and the other participants in the financial sector raised Rs 7,708 crores through 10 issues.20

Structure

The securities market can essentially be divided into the primary market and the secondary market. New issues or securities are offered in the primary market through public issues or private placement whereas the securities already issued are traded at the secondary market.

The following is a detailed list of SEBI registered market intermediaries/institutions as of August 2012 and their growth in numbers since 200912:

Market Intermediaries 2009-10 2010-11 2011-12 2012-13 (Aug)
Stock Exchanges (Cash Market) 19 19 19 19
Stock Exchanges (Derivatives Market) 2 2 2 2
Stock Exchanges (Currency Derivatives) 4 4 4 4
Brokers (Cash Segment) 9,772 10,203 10,268 10,148
Corporate Brokers (Cash Segment) 4,197 4,774 4,877 4,817
Brokers (Equity Derivatives) 1,705 2,111 2,337 2,400
Brokers (Currency Derivatives) 1,459 2,008 2,173 2,204
Sub-brokers (Cash Segment) 75,378 83,808 77,141 75,714
Foreign Institutional Investors 1,713 1,722 1,765 1,754
Sub-accounts 5,378 5,686 6,322 6,333
Custodians 17 17 19 19
Depositories 2 2 2 2
Depository Participants 758 805 854 859
Merchant Bankers 164 192 200 201
Bankers to an Issue 48 55 57 57
Underwriters 5 3 3 3
Debenture Trustees 30 29 31 31
Credit Rating Agencies 5 6 6 6
Venture Capital Funds 158 184 212 211
Foreign Venture Capital Investors 143 153 174 181
Registrars to an Issue & Share Transfer Agent 74 73 74 74
Portfolio Managers 243 267 250 254
Mutual Funds 47 51 49 49
Collective Investment Schemes 1 1 1 1
Approved Intermediaries (Stock Lending Schemes) 2 2 2 2
STP (Centralised Hub) 1 1 1 1
STP Service Providers 2 2 2 2

Stock Exchanges have broadly four market segments – Equities, Debt, Derivative and Currency Derivatives. The National Stock Exchange ("NSE") and Bombay Stock Exchange ("BSE") are the two main stock exchanges in India, NSE being the larger of the two in terms of the volumes of trades.

Entry and Operations

The entry to the securities market for all participants is highly regulated and thus requires prior approval from the market regulator, SEBI.

A license from SEBI is required to operate a stock exchange in India which can be set up only on corporatization and demutualization basis. Recently, a license was granted to the commodity exchange MCX to function as a stock exchange. SEBI has plans to set up independent regulators for stock exchanges.

Furthermore, SEBI has specific regulations for the entry and functioning of various participants of the securities market like Merchant Bankers, Mutual Funds, Portfolio Managers, Credit Rating Agencies, Stock Brokers and Sub-Brokers, Share Transfer Agents, Underwriters, Foreign Institutional Investors ("FII"), Foreign Venture Capital Investors (FVCI), Venture Capital Funds and recently Alternative Investment Funds ("AIF") which inter alia aim to cover all investment vehicles including those that are presently unregulated.

Legal & Regulatory

The securities market has four regulators – Ministry of Finance, Government of India (Department of Economic Affairs), Ministry of Company Affairs, Government of India, the RBI and SEBI.

The central Government enacted the Securities Contract (Regulation) Act, 1956 ("SCRA"), the SEBI Act, 1992 and the Depositories Act, 1996 which laid down the framework for the functioning of the securities market. SEBI, as the main market regulator, has formulated rules for the efficient and proper functioning of various market participants. Other self-regulatory participants like stock exchanges and depositories have also made rules for the functioning of other participants.

The other main regulations governing the functioning of the capital markets are the SEBI (Issue of Capital and Disclosure (ICDR) Regulations 2009, SEBI (Intermediaries) Regulations, 2008, SEBI (Prohibition of fraudulent and Unfair Trade Practices relating to securities market) Regulations, 2003, SEBI (Prohibition of Insider Trading) Regulations, 1992, the Companies Act, 1956, Indian Contract Act, 1872 and Income Tax Act, 1961.

Taxation & Other Charges

The various charges and taxes levied on a securities market transaction include Brokerage, Transaction Charge, Turnover Fees, Stamp Duty, Service Tax and Securities Transaction Tax ("STT"); brokerage and STT being the highest two charges. The cost levied differs based on whether the transaction is of cash, futures or option and whether delivery is taken or transaction is intraday. In case of options, there is a separate charge if the options are exercised.

Further, income tax in the form of capital gains is levied on the sale of securities in the following manner:

Category Status Captital Gains Dividend/Withholding
Long Term# Short Term
Listed Unlisted Listed Unlisted
Individual Resident 0*/10%** 20% 15% 30% Dividends declared by an Indian company are tax exempt in the hands of the shareholders and the company distributing dividends will be required to pay an additional dividend distribution tax at the rate of 15%.
Individual Non-Resident 0*/10%** 20% 15% 30%
Corporate Resident 0*/10%** 20% 15% 30%
Corporate Non-Resident 0*/10%** 20% 15% 40%

# Long-term means where securities have been held for more than 12 months.

* Provided the transaction takes place on the stock exchange and STT has been paid.

**For transactions outside the stock exchange.

*** 10% in the case of investments in securities of unlisted public companies.

These rates are as per the Finance Act, 2012 and are exclusive of the applicable surcharge and education cess.

The taxation of entities differs for various entities depending on their legal form and structure and is governed by the Income Tax Act, 1961.

Trend/Outlook

The market regulator SEBI continues to play an active role in the governance of the securities market and has recently accorded a stock exchange license to Multi Commodity Exchange ("MCX"). MCX is likely to become the third major stock exchange in the country after NSE and BSE.

The SEBI also introduced a comprehensive regulatory framework of AIFs for regulating private pools of capital which will transform the way the Funds Industry operates in the country.

The Indian markets continue to reel under pressure from the global financial crisis.21 However, India still remains a favoured market as compared to its global peers which can be gauged from the net inflow of FIIs into the Indian capital markets as compared to other geographies.


1 Although banking as money-lending has been in existence in India since ancient times, the first bank in India was set up in the year 1786, which was followed by the establishment of a number of other banks. The first major consolidation happened in 1920 when the three Presidency Banks amalgamated to form the Imperial Bank of India, which was later nationalized to form the State Bank of India. Several other present day banks like Allahabad Bank, Punjab National Bank, Bank of India, Canara Bank and Bank of Baroda were set up in the late 19th or early 20th century. The Reserve Bank of India, India's central bank, was founded in 1935.

2 Economic Survey of India, Government of India (2012)

3 As per RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks' (December 2011), in terms of the deposit and credit, nationalised banks, as a group, accounted for 52.1% of the aggregate deposits, while SBI and its associates' share stood at 21.9%. The deposits share of private sector banks and foreign banks in aggregate were 18.5% and 4.6%, respectively. As regards bank credit, nationalised banks hold the highest share at 51.2%, with SBI and its associates contributing 22.5%. The private sector banks and the foreign banks contribution was 18.6% and 5.2%, respectively.

4 However, RBI in its draft guidelines for "Licensing of New Banks in the Private Sector" has proposed to increase this limit to Rs 500 crores.

5 RBI's 'Discussion Paper on Presence of Foreign Banks in India' (2011)

6 Some of the major Indian banks which have a substantial foreign shareholding are ICICI Bank, HDFC Bank, Yes Bank, Axis Bank and Kotak Mahindra Bank.

7 The Banking Laws (Amendment) Bill, 2011 seeks to increase these limits to 26% and 10% for private sector and public sector banks respectively.

8 As regards the foreign banks, they were made subject to certain additional conditions such as bringing an assigned capital of US $25 million at the time of opening their first branch in India.

9 Within the prescribed limit of 40%, agriculture sector lending should be 18% of ANBC or credit equivalent, whichever is higher and 10% should be lent to the weaker sections (further sub limits have been prescribed).

10 Notification No. RBI/2011-12/606, dated 19th June, 2012

11 IBA-FICCI-BCG report titled "Being five star in productivity-Roadmap for excellence in Indian banking" (2011)

12 McKinsey Quarterly Report titled "Wholesale banking in India: The next frontier", 2012

13 Financial services may also include insurance, but the same has not been covered in this paper.

14 The reliance of deposit taking NBFCs on banks for their funds has increased from 37% in FY 2006 to 51% in FY2011. Banks' exposure to NBFCs has increased by approximately 3 times during the same period (Report of the key advisory group on the Non-banking Finance Companies (NBFCs) by the Ministry of Finance, Government of India (2012)).

15 Report of the key advisory group on the Non-banking Finance Companies (NBFCs) by the Ministry of Finance, Government of India (2012).

16 The sector has witnessed considerable growth in the past but the number of NBFCs has reduced in recent times from 13,014 in FY 2006 to 12,409 in FY 2011. However, the sector continues to grow and has grown 2.6 times between FY 2006 and FY 2011 at a compounded annual growth rate ("CAGR") of 21%.

17 Source: RBI

18 The minimum net owned fund limit was Rs 25 lakhs for NBFCs which made an application to RBI seeking certificate of registration before April 20, 1999. Such NBFCs were not required to increase their capital base.

19 As per the report of the key advisory group on the Non-banking Finance Companies (NBFCs) by the Ministry of Finance, Government of India (2012), public deposits held by NBFCs have shown a falling trend, decreasing by almost 48% in the last five years.

20 SEBI Monthly Bulletin (September 2012)

21 As per the SEBI Monthly Bulletin (September 2012), the aggregate amount mobilized for the financial year 2012-13 till August 2012, stood at nearly Rs 1,140 crores through thirteen issues as against Rs 10,371 crores raised through 30 issues during the corresponding period in 2011-12. (Primary Market – Equity, Debt & Rights Issues)

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