The Foreign Exchange Management (Deposit) Regulations, 2000 allow NRIs to open deposit accounts with authorized dealers and institutions regulated by the Reserve Bank of India (RBI), including:
- Foreign Currency Non-Resident (Bank) Account [FCNR(B) Account]
- Non-Resident External Account (NRE Account)
- Non-Resident Ordinary Rupee Account (NRO Account)
NRIs and OCBs can open FCNR
NRIs and Overseas Corporate Bodies (OCBs) can open FCNR(B) accounts with an authorized dealer. Term deposits can be used to fund these accounts. Pound Sterling, US Dollar, Japanese Yen, and Euro deposits are all accepted. The rate of interest charged on these accounts is determined by RBI directions given from time to time.
NRIs and OCBs can open NRE accounts with licensed dealers and banks that have been approved by the RBI. Savings, current, recurring, and fixed deposit accounts are all options. Deposits can be made in any supported currency. The interest rate on these accounts is set in accordance with RBI directives given from time to time.
Any person residing outside of India can open an NRO account with an authorized dealer or a bank to receive funds from local bona fide transactions in Indian rupees. Existing Rupee accounts are categorized as NRO when a resident becomes an NRI. Current, savings, recurring, and fixed deposit accounts are all possibilities.
There were two more NRI deposit accounts in operation, namely the Non-Resident (Non-Repatriable) Rupee Deposit Account and the Non-Resident (Special) Rupee Account; however, in April 2002, an amendment to the Foreign Exchange Management (Deposit) Regulations prohibited deposits in these two accounts.
It is possible to repatriate funds held in FCNR(B) and NRE accounts. As a result, deposits in these accounts are included in India’s outstanding external debt. While the principal of NRO deposits cannot be withdrawn, the current income and interest earned can. NRO account holders are able to remit up to $1 million per year from their account balances. As a result, deposits in NRO accounts are counted as part of India’s external debt.
In Indian culture, the word ‘Nidhi’ denotes ‘treasure.’ However, in the Indian financial industry, it refers to any mutual benefit society65 that has been designated as a Nidhi Company by the Central/Union Government. They are primarily designed to encourage members to practice thrift and save money. Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds, and Mutual Benefit Company are all names for companies that do Nidhi business, i.e. borrowing from members and lending to members alone.
Nidhis are highly localized single office institutions that are particularly popular in South India. They are mutual benefit societies since only members can deal with them, and membership is limited to individuals. The members’ contributions are the primary source of funds. The loans are often secured and are granted to members at relatively low rates for reasons such as house development or maintenance. When compared to the organized banking sector, Nidhis’ deposits are insignificant.
The Ministry of Corporate Affairs regulates Nidhis, which are corporations registered under the Companies Act, 1956. (MCA). Despite the fact that Nidhis are governed by the Companies Act of 1956, they are excluded from certain provisions of the Act that apply to other businesses because they limit their operations to their members.
NBFCs, who mostly operate in the unorganized money market, include Nidhis in their definition. Since 1997, however, NBFCs have been gradually brought under the RBI’s regulatory umbrella. The RBI regulates non-banking financial entities in part or entirely:
- NBFCs comprising equipment leasing (EL), hire purchase finance (HP), loan (LC), investment (IC) [including primary dealers (PDs) and residuary non-banking companies (RNBCs);
- Mutual benefit financial company (MBFC), i.e., Nidhi company;
- Mutual benefit company (MBC), i.e., a potential Nidhi company; i.e., a company that is operating on the lines of a Nidhi company but has not yet been declared as such by the Central Government; has a minimum net owned fund (NOF) of Rs.10 lakh, has applied to the RBI for a certificate of registration and to the Department of Company Affairs (DCA) for notification as a Nidhi company and has not violated RBI/DCA.
- Miscellaneous non-banking company (MNBC), i.e., chit fund company.
Because Nidhis are classified as NBFCs, the RBI has the authority to give them instructions on deposit acceptance. However, because these Nidhis only deal with their shareholders, the RBI has exempted them from the RBI Act’s core provisions and other NBFC-related directives. The RBI does not have a regulatory framework for Nidhis in place as of February 2013.
In March 2000, the Central Government formed a committee to investigate various aspects of Nidhi Companies’ operations. There was no official government definition of the term ‘Nidhi.’ The committee proposed the following definition for Nidhis (a part of which appears in the new Companies Bill 2012 (Section 406)), taking into account the way Nidhis work and the recommendations made by the P. Sabanayagam Committee in its report, as well as to prevent unscrupulous people using the word ‘Nidhi’ in their name without being incorporated by the Department of Company Affairs (DCA) and doing Nidhi business.
“Nidhi is a company formed with the sole purpose of cultivating the habit of thrift, saving, and functioning for the mutual benefit of members by accepting deposits only from individuals enrolled as members and lending only to individuals enrolled as members, and that operates in accordance with the DCA’s Notification and Guidelines. Without DCA’s approval, the word Nidhi may not be used in the name of any company, firm, or individual engaged in borrowing and lending money, and any violation will result in criminal charges.”
The Kolkata-based Saradha Chit Fund scam recently brought Chit Fund to the forefront of the news. Most journalists were unfamiliar with the “finer points” of the Indian concept of “chits,” but they continued to emphasize chits because they needed to report on the scam. Let us attempt to comprehend what ‘chits’ and other similar concepts in India are:
Chit funds (also referred to as Chitty, Kuri, and Miscellaneous Non-Banking Company) are essentially savings institutions. They come in a variety of shapes and sizes and have no standard format. Chit funds have regular members who contribute to the fund on a regular basis. The periodic collection is given to a member of the chit funds who have been chosen based on pre-determined criteria.
The beneficiary is usually chosen through a bidding process, lotteries, or, in some cases, an auction or a tender. In any case, each chit fund member is guaranteed a turn before the second round begins, and any member becomes eligible for periodic collection once more. Chit funds are the Indian equivalents of the global ‘Rotating Savings and Credit Associations.’
The Central Chit Funds Act, 1982, and the rules enacted under this Act by the various state governments regulate the chit fund business. The central government has not established any operating rules for them. As a result, state governments register and regulate chit funds according to their own set of rules. Chit funds are included in the RBI’s definition of NBFCs under the heading miscellaneous non-banking company (MNBC). The RBI, however, has not established a separate regulatory framework for them.
Official Terminology: According to the Chit Funds Act of 1982, a chit is “a transaction, whether called chit, chit fund, chitty, Kuri, or by any other name by or under which a person enters into an agreement with a specified number of persons that each of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical installments over a definite period, and that each such subscriber shall, in turn, as determined A transaction is not a chit if the following conditions are met:
- Some alone, but not all, of the subscribers get the prize amount without any liability to pay future subscriptions; or
- All the subscribers get the chit amount by turns with a liability to pay future subscriptions.
Small & Payment Banks
The RBI released draught guidelines for establishing small banks and payment banks in mid-July 2014. Both are ‘niche’ or differentiated banks, according to the guidelines, with the same goal of increasing financial inclusion. It is in accordance with the Union Budget 2014-15 announcement. The provisions for establishing such banks, as well as their operational criteria, are detailed below:
- The minimum capital requirement would be Rs. 100 crore.
- Promoter contribution would be at least 40 percent for the first five years. Excess shareholding should be brought down to 40 percent by the end of the fifth year, to 30 percent by the end of the 10th year, and to 26 percent in 12 years from the date of commencement of business.
- Foreign shareholding in these banks will be as per the current FDI policy.
- Voting rights to be in line with the existing guideline for private banks.
- Entities other than promoters will not be permitted to have a shareholding in excess of 10 percent.
- The bank should comply with the corporate governance guidelines, including ‘fit and proper criteria for Directors as issued by RBI.
- Operations of the bank should be fully networked and technology-driven from the beginning.
The goal of small banks will be to offer a full range of basic banking products, such as deposits and credit, but in a limited geographic area. The goal of Small Banks is to increase financial inclusion by providing savings vehicles to underserved and unserved populations, as well as credit to small farmers, micro and small businesses, and other unorganized sector entities through high-tech, low-cost operations. Other characteristics of small banks include the following:
- Residents with ten years of experience in banking and finance, as well as companies and societies, will be eligible to become promoters of small banks. NBFCs, MFIs, and LABs can all transform into small banks. Licensing of such banks will be based on their local focus and ability to serve smaller customers.
- For the initial three years, prior approval will be required for branch expansion.
- In order for the Small Bank to have a ‘local feel’ and culture, its operations would normally be limited to contiguous districts in a homogeneous cluster of states or union territories. It would, however, be permitted to expand its operational area beyond contiguous districts in one or more states with reasonable geographical proximity if necessary.
- Accepting deposits and lending to small farmers, small businesses, micro, and small industries, and unorganized sector entities will be the bank’s primary activities. It cannot establish subsidiaries to provide non-banking financial services. The RBI may liberalize the scope of activities for small banks after a five-year period of stabilization and a review.
- The promoters’ other financial and non-financial services activities, if any, should be distinctly ring-fenced and not co-mingled with the banking business.
- (vi) A robust risk management framework is required, and banks must comply with all prudential norms and RBI regulations applicable to existing commercial banks, including the maintenance of CRR and SLR.
- In view of the concentration of the area of operations, the Small Bank would need a diversified portfolio of loans, spread over its area of operations.
- The maximum loan size and investment limit exposure to single/group borrowers/issuers would be restricted to 15 percent of capital funds.
- Loans and advances of up to Rs.25 lakhs, primarily to micro-enterprises, should constitute at least 50 percent of the loan portfolio.
- For the first three years, 25 percent of branches should be in unbanked rural areas. By April 2020, a total of 10 Small Banks were operating in the country.
Payments banks aim to increase financial inclusion by providing small savings accounts, and payment/remittance services to migrant labor, low-income households, small businesses, and other unorganized sector entities, as well as by enabling high volume-low value transactions in deposits and payment/remittance services in a technology-driven environment.
- Payments banks can be promoted by non-bank PPIs, NBFCs, corporations, mobile telephone companies, supermarket chains, cooperatives in the real sector, and public sector entities. Even banks are able to invest in Payments Banks.
- Payments Banks can accept demand deposits (only current accounts and savings accounts). Initially, they would be limited to a maximum balance of Rs. 100,000 per customer. Depending on performance, the RBI may increase this limit.
- The banks can offer payments and remittance services, issuance of prepaid payment instruments, internet banking, functioning as business correspondent for other banks.
- Payments Banks cannot set up subsidiaries to undertake NBFC business.
- As in the case of small banks, other financial and non-financial services activities of the promoters should be ring-fenced.
- The Payments Banks would be required to use the word ‘Payments’ in its name to differentiate it from other banks.
- No credit lending is allowed for Payments Banks.
- The float funds can be parked only in less than one year G-Secs.
By April 2020, a total of 6 Payment Banks were operating in the country.