Para Banking
Para Banking Activities
Para banking activities are services offered by banks beyond their traditional day-to-day operations like deposits and withdrawals. These activities can include portfolio management, insurance business, underwriting of bonds, and more. However, banks cannot perform any activity they want; they must first obtain permission from the Reserve Bank of India (RBI).
Many well-known banks have subsidiaries that offer various financial services, such as dealing with mutual funds, investing in venture capital funds, and leasing equipment. These services are collectively known as para banking services.
Under Section 19 (1) of the Banking Regulation Act, 1949, banks are allowed to form subsidiaries. Banks can invest up to 10% of their capital in these subsidiaries.
Some examples of well-known subsidiaries of major banks in India that offer para banking services include SBI Pension Funds Private Ltd., SBI Mutual Fund, ICICI Ventures, ICICI Prudentials, and HDFC Securities.
Important Para Banking Activities
Para banking services differ from normal banking activities. Some examples of para banking services include global debit cards, global credit cards, life insurance products, cash management, Bancassurance, and more.
Here are some important para banking activities undertaken by banks:
- Sponsorship of infrastructure debt funds
- Portfolio management services
- Mutual funds business
- Insurance business
Para Banking Services
Para banking services refer to financial services offered by banks beyond traditional banking activities. These services include:
Venture Capital Funds (VCF)
- Financial entities partner with banks to provide capital to businesses in need.
- VCF is a common strategy for startups and businesses to grow and expand.
- In India, three important groups managed by the central government include:
- Central government promoted firms like ICFI Venture Capital Funds Ltd. (IVCF) and SIDBI Venture Capital Ltd (SVCL).
- State government promoted firms like Gujarat Venture Finance Ltd. (GVFL) and Kerala Venture Capital Fund Pvt. Ltd.
- Public banks promoted firms like Canbank Venture Capital Fund and SBI Capital Market Ltd.
Equipment Leasing, Hire-Purchase, & Factoring
- Banks can offer these services through subsidiaries without RBI permission but must comply with certain conditions.
Primary Dealership
- Banks can buy government securities from the government and resell them to customers.
- SBI DFHI (State Bank of India – Discount & Finance House of India) is a popular SBI subsidiary involved in primary dealership.
- The objective is to strengthen and enhance the competitiveness of the securities market.
Smart & Debit Card Business
- Banks issue credit, debit, and smart cards to customers for purchasing products and services.
- Prior approval from the RBI is required, and banks must have a net worth of at least INR 100 crore.
Money Market Mutual Funds (MMMF) and Cheque-writing for MMMF Investors
- Assured SLR Investments provide lower interest compared to mutual funds.
- RBI allows banks to enter the MMMF trade by partnering with a mutual fund provider.
- The bank opens a sub-account for the investor, who is issued a checkbook for withdrawals under specific conditions set by the MMMF provider.
Pension Fund Management
- As per a 2007 Indian government notification, banks can operate as pension fund managers through subsidiaries.
- RBI approval is required based on factors like the bank’s net worth (minimum INR 500 crore) and consistent profitability over the past three years.
- Under the New Pension System, employees in the Central/State governments and the private sector can voluntarily contribute funds during their working tenure.
Insurance Business
- Banks can act as insurance agents or brokers to sell insurance products.
- They can also set up subsidiaries to provide insurance services.
- Prior approval from the Insurance Regulatory and Development Authority of India (IRDAI) is mandatory.
Bancassurance and Para Banking Services
- Bancassurance refers to the entry of banks into the insurance business.
- Banks can undertake insurance business through a subsidiary or joint venture or engage in insurance broking or agency through a subsidiary.
Guidelines for Banks:
- Banks cannot undertake insurance business with risk participation departmentally.
- Prior approval from the Reserve Bank of India (RBI) is required for setting up a subsidiary or joint venture for insurance business.
- Banks that meet the eligibility criteria can approach the RBI for approval to set up a subsidiary for insurance broking.
Eligibility Criteria for Banks to Undertake Para Banking:
- Net worth of the bank should be more than or equal to INR 500 crore.
- CRAR (Capital Adequacy Ratio) should not be less than 11% during the last three years.
- The bank should have made a net profit for the last 03 consecutive years.
- ROA (Return on Assets) should be at least 0.6% or more.
- The level of net non-performing assets (NPAs) should not be more than 3%.
- Performance of the bank’s subsidiaries should be satisfactory.
- Management of the bank’s investment portfolio should be good as per the API report of the RBI, and there should not be any adverse remarks regarding supervisory concerns.
Importance of Para Banking Services:
- Para banking services provide convenience to customers by offering a wide range of financial services under one roof.
- They help banks diversify their revenue streams and reduce their dependence on traditional banking activities.
- Para banking services can also help banks attract new customers and retain existing ones.
Para Banking Services by Scheduled Commercial Banks
The Reserve Bank of India (RBI) has established a framework of rules and regulations for Scheduled Commercial Banks to undertake certain para banking services. These services exclude the issuance of credit, debit, and prepaid cards, which are covered under a separate Master Circular.
Guidelines for Banks
Banks must adopt adequate measures and implement all the guidelines provided by the RBI to ensure the smooth operation of their para banking services. These guidelines include:
- Establishing a separate department or unit to handle para banking activities.
- Appointing a senior officer as the head of the para banking department.
- Developing and implementing internal policies and procedures for para banking services.
- Conducting regular audits and reviews of para banking operations.
- Ensuring compliance with all applicable laws and regulations.
Benefits of Para Banking Services
Para banking services offer several benefits to banks and their customers, including:
- Increased revenue streams for banks.
- Improved customer service and convenience.
- Access to a wider range of financial products and services.
- Reduced costs for customers.
Para banking services play a vital role in the financial system by providing a convenient and efficient way for customers to access a variety of financial products and services. By following the guidelines set by the RBI, banks can ensure the smooth operation of their para banking services and provide their customers with the best possible experience.
Normal Banking Vs Para Banking
The main difference between para banking and normal banking is that para banking does not offer current account facilities for day-to-day transactions. Additionally, depositors cannot issue checks against their para banking savings scheme amounts, and there is no check system in para banking services.
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