Government gives boost to cashless payments and NPA

The Union Government has approved measures to promote payments through cards and other electronic means to check tax evasion and transition towards a cashless economy.

The essential steps for promotion of electronic payments include withdrawal of surcharge, service charge, convenience fee on cards and digital payments currently imposed by various departments. The steps also include rationalization of merchant discount rate (MDR) on card transactions and a differentiated framework for some key transaction segments.

The government, however, did not specify the reduction in MDR. At present, MDR levied on debit card transactions is 0.75% and 1% on credit card transactions. The charges are being rationalized at a time when more than 800 million card transactions are recorded each month. Other measures include mandating payments beyond a prescribed threshold only in card/digital mode, the statement said, without specifying the threshold.

Base Rate System of Lending by Commercial Banks

RBI introduced the Base Rate system with effect from July 1, 2010, which replaced the Benchmark Prime Lending Rate (BPLR) system. The Base Rate includes all those elements of the lending rate that are common across all categories of borrowers.

While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are:

(i) cost of deposits;

(ii) adjustment for the negative carry in respect of CRR and SLR;

(iii) un-allocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate o, directors� and auditors� fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and

(iv) profit margin. All categories of loans are required to be priced only with reference to the Base Rate. The Base Rate system is applicable for all new loans and for those old loans that come up for renewal. Since the Base Rate is the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Banks are required to review the Base Rate at least once in a quarter.

In the earlier system of Benchmark Prime Lending Rate (BPLR), banks were free to their PLRs. Most of the variable rate loans, like home loan and some of the term loans are pegged against PLR. s means, if the PLR is not changed, the loan rates remain the same. Banks had taken advantage of earlier PLR system at the cost of their borrowers. When interest rates increased, banks used to hike their PLRs immediately, leading to rise in the home loan rates. But, when interest rates fell, they didn�t reduce PLRs. Because of this, the existing customers were not benefited by the lowering of the interest rates. However, banks used to pass on the benefit to new customers by increasing the discount against PLRs.

Under the new system, home loans and other variable loans will be pegged against a base rate. As the new base rate is feed on the basis of cost of funds, any change in the interest rate will reflect in the base rate, and therefore, it will be automatically, passed on to the existing customers also. At the same time, RBI has clearly said that the base rate will be minimum rate for all commercial loans and banks will not be permitted to resort to any rate below it.

Non-Performing Asset (NPA)

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) is a loan or an advance where interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.

Subsidiaries of the RBI

The Reserve Bank has the following fully-owned subsidiaries

Deposit Insurance and Credit Guarantee Corporation (DICGC)

With a view to integrating the functions of deposit insurance and credit guarantee, the Deposit Insurance Corporation and Credit Guarantee Corporation of India were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978.

Deposit Insurance and Credit Guarantee Corporation (DICGC), established under the DICGC Act 1961, is one of the wholly owned subsidiaries of the Reserve Bank. The DICGC insures all deposits (such as savings, fixed, current, and recurring deposits) with eligible banks except the following:

Deposits of foreign Governments; (ii) Deposits of Central/ State Governments; (iii) Inter-bank deposits; (iv) Deposits of the State Land Development Banks with the State cooperative bank; (v) Any amount due on account of any deposit received outside India; (vi) Any amount, which has been specially exempted by the corporation with the previous approval of Reserve Bank of India.

Every eligible bank depositor is insured up to a maximum of Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him.

National Housing Bank (NHB)

National Housing Bank was set up on July 9, 1988 under the National Housing Bank Act, 1987 as a wholly-owned subsidiary of the Reserve Bank to act as an apex level institution for housing. NHB has been established to achieve, among other things, the following objectives:

  • To promote a sound, healthy, viable and cost-effective housing finance system to all segments of the population and to integrate the housing finance system with the overall financial system.
  • To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups.
  • To augment resources for the sector and channelize them for housing.
  • To make housing credit more affordable.
  • To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act.
  • To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country.
  • To encourage public agencies to emerge as facilitators and suppliers of serviced land for housing.

Written by princy

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