Para Banking & Financial Services provided by Banks

Acceptance of deposits and maintenance of deposit accounts is the core activity in any bank. Para banking activities are the activities carried out by the bank which are apart from its normal day-to-day activities.

Banks can undertake certain eligible financial services or para-banking activities either departmentally or by setting the subsidiaries. Some examples of the para-banking services undertaken by banks include retailing Government securities, investment in venture capital funds, Insurance Broking/Corporate Agency, mutual fund business, pension fund management, portfolio management, Equipment Leasing, Hire-Purchase, & Factoring underwriting of bonds of PSUs, etc.

Retailing Government Securities:

Banks may undertake retailing of Government securities with non-banking clients on an outright basis at the prevailing market price without any restriction on the period between sale and purchase. However, they shall not undertake ready-forward transactions in Government securities with non-bank clients. The SBI DFHI (State Bank of India – Discount & Finance House of India) is a popular subsidiary of the SBI which is the primary dealership for retailing Government Securities.

Venture Capital Funds (VCF):

Many financial entities tie up with the banks to provide such funds to businesses that need capital. The following are the government-monitored venture capital Funds. (i) ICFI Venture Capital Funds Ltd. (IVCF), (ii) SIDBI Venture Capital Ltd (SVCL), (iii) Gujarat Venture Finance Ltd. (GVFL), and (iv) Kerala Venture Capital Fund Pvt. Ltd. There are also Public sector banks promoted firms like Canbank Venture Capital Fund and SBI Capital Market Ltd.

Mutual Funds business:

Banks need to take prior approval of RBI for setting up Mutual Funds Business. Bank-sponsored mutual funds should comply with guidelines issued by SEBI. They shall not use the name of the sponsoring bank as part of their name except where a suitable disclaimer clause is inserted while publicizing new schemes that the bank is not liable or responsible for any loss or shortfall resulting from the operations of the scheme.

 Banks may act as agents for marketing the mutual fund units by forwarding the investors’ applications for the purchase/sale of MF units to the mutual funds/Registrars/transfer agents. The purchase of units should be at the customers’ risk and without the bank guaranteeing any assured return.  Further, Banks should not acquire units of mutual funds from the secondary market or buy back units of mutual funds from their customers. In case a bank proposes to extend any credit facility to individuals against the security of units of Mutual Funds, sanction of such facility should be by the extant instructions of RBI on advances against shares/debentures and units of mutual funds.

Money Market Mutual Funds and checkbook writing facility:

Money Market Mutual Funds (MMMFs) come under the purview of SEBI regulations. However, banks desirous of setting up Money Market Mutual Funds (MMMFs) would have to seek necessary clearance from RBI for undertaking this additional activity before approaching SEBI for registration. The bank consequently opens a sub-account of the investor (individual). The investor or account holder is also issued a checkbook to withdraw money as per the given conditions with the MMMF provider.

Banks undertaking Insurance Broking/Corporate Agency:

Bancassurance is an arrangement between a bank and an insurance company, under which the insurer can sell its products to the bank’s customers. The insurance company benefits from increased sales and a broader client base without having to expand its sales force. Banks need not obtain prior approval of the RBI to act as corporate agents on a fee basis, without risk participation/undertake insurance broking activities departmentally, subject to IRDA Regulations.

Pension Fund Management by Banks:

In terms of Government of India notification F.No.13/6/2005-BOA dated May 24, 2007, banks have been advised that they may undertake Pension Fund Management (PFM) through subsidiaries set up for the purpose with the prior approval of RBI, and subject to satisfying the eligibility criteria prescribed by Pension Fund Regulatory and Development Authority (PFRDA) for Pension Fund Managers. Pension Fund Management should not be undertaken departmentally.

Trading on/Membership of SEBI-approved Stock Exchanges:

 Banks in India as well as the overseas branches of Indian banks are permitted to transact in Interest Rate Futures (IRFs) through stock exchanges to hedge the risk in their underlying investment portfolio as well as trading positions in IRFs. It is, however, clarified that banks are not allowed to undertake transactions in IRFs on behalf of clients. In this context, banks are advised to ensure adherence to instructions as regards setting limits for non-option derivatives contracts as amended from time to time.

Banks as sponsors of infrastructure debt funds:

IDF-MFs can be sponsored by banks and NBFCs. Only banks and Infrastructure Finance companies can sponsor IDF-NBFCs. Infrastructure Debt Funds (IDFs), can be set up either as a Trust or as a Company. A trust-based IDF would normally be a Mutual Fund (MF), regulated by SEBI, while a company-based IDF would normally be an NBFC regulated by the Reserve Bank. Domestic/offshore institutional investors, especially insurance and pension funds can invest through units and bonds issued by the IDF. IDFs would essentially act as vehicles for refinancing existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure projects. IDF-NBFCs would take over loans extended to infrastructure projects that are created through the Public Private Partnership (PPP) route and have completed one year of commercial production. Such take-over of loans from banks would be covered by a Tripartite Agreement between the IDF, Concessionaire, and the Project Authority for ensuring a compulsory buyout with termination payment in the event of default in repayment by the Concessionaire.

Equipment leasing, hire purchase, and factoring services:

Banks can also undertake equipment leasing, hire purchase, and factoring services departmentally. Prior approval of the RBI is not necessary for undertaking these activities departmentally. The banks should, however, report to the RBI about the nature of these activities together with the names of the branches from where these activities are taken up. They have to undertake prudential guidelines when they undertake these activities departmentally.

Eligibility Criteria for Banks to Undertake Para Banking:

The net worth of the bank should be more than or equal to INR 500 crore. The 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%. The 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 remark(s) in the report regarding the supervisory concerns.