In Today’s News:
- Introduction of Risk-based Internal Audit (RBIA) in large UCBs and NBFCs.
1. Introduction of Risk-based Internal Audit (RBIA) in large UCBs and NBFCs
RBI announced the following measures to improve governance, supervisory focus, and encourage financial stability:
(i)Introduction of Risk-based Internal Audit (RBIA) in large UCBs and NBFCs and
(ii) harmonization of guidelines on the appointment of Statutory Auditors for commercial banks, UCBs, and NBFCs to improve the quality of financial reporting.
Prelims GS – Economic Development
NBFC and UCBs- a complete overview:
- A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of the immovable property.
Difference between NBFCs and Banks:
- NBFCs lend and make investments and hence their activities are akin to that of banks; however, there are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- the Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.
Registration of NBFCs:
- In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on the business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crores since April 1999).
- However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI
- viz. Venture Capital Fund/Merchant Banking companies/Stockbroking companies registered with SEBI,
- Insurance Company holding a valid Certificate of Registration issued by IRDA,
- Nidhi companies as notified under Section 620A of the Companies Act, 1956,
- Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,
- Housing Finance Companies regulated by the National Housing Bank,
- Stock Exchange, or a Mutual Benefit company.
Click here to know more about NBFCs in RBI FAQs.
Urban Cooperative Banks:
- Primary Cooperative Banks, popularly known as Urban Cooperative Banks (UCBs) are registered as cooperative societies under the provisions of, either the State Cooperative Societies Act of the State concerned or the Multi-State Cooperative Societies Act, 2002.
- They are regulated and supervised by the Registrar of Cooperative Societies (RCS) of State concerned or by the Central Registrar of Cooperative Societies (CRCS), as the case may be.
- Recently, Parliament has passed Banking Regulation (Amendment) Bill 2020 to ensure that all urban cooperative banks and multi-state cooperative banks will come under the supervision of the Reserve Bank of India, which is clearly aimed at signaling depositors that their money will be safe in these banks, which are often riddled with scams.
- The Bill seeks to extend RBI regulation of co-operative banks with respect to management, capital, audit and winding up.
Click here to know more about the Banking Regulation (Amendment) Act,2020.
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