PARA BANKING ACTIVITIES | ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | JAIIB 2024 MAY EXAM

PARA BANKING ACTIVITIES | ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | AFM JAIIB 2024 MAY EXAM

In this article, we will cover the Para Banking activities which are offered by the banks to their customers other than the primary banking services. These activities are covered in the syllabus of JAIIB’s AFM (accounts paper) paper.

PARA BANKING ACTIVITIES: 

A bank conducts/offers para-banking activities in addition to its ordinary day-to-day operations (such as deposits, withdrawals, etc.) Candidates that wish to crack the bank exams must cover a wide range of topics in the banking awareness section. Topics covered include the history of banking, types of accounts, kinds of cards, banking regulations, and the law on banking. One of the important topics of para-banking is financial literacy. For candidates to achieve maximum marks in the banking awareness section, they should devote time and effort to all topics.

Banks can perform the following Para Banking Activities:

• Equipment Leasing, Hire Purchase Business & Factoring Services
• Banks as sponsors of Infrastructure Debt Funds
• Trading on/Membership of SEBI-approved Stock Exchanges
• Banks’ investment in VCFs (Venture Capital Funds)
• Sponsors to Infrastructure Debt Funds
• Insurance business
• Primary Dealership business
• Underwriting of bonds of Public Sector Undertakings
• Underwriting of Corporate Shares and Debentures
• Mutual Fund Business
• MMMFs – Money Market Mutual Funds
• Retailing of Government Securities
• Membership of SEBI approved Stock exchanges
• Cheque biting Facility for Investors of MMMFs
• PFM – Pension Fund Management by banks
• Referral Services
• Portfolio Management Services
• Disclosure of commissions/ remunerations 
• Safety Net’ Schemes

Some of the important para banking services which are offered by the banks are explained in the below paras:

BANKS’ INVESTMENT IN VCFs

Given that banks must participate in the funding of Venture Capital Funds (VCFs), it is important to be aware of the significantly higher risks posed by such exposures. Thus, banks are required to obtain prior approval from the Reserve Bank of India for strategic investments in VCFs, i.e., investments greater than 10 percent of an equity unit or equity capital.

RELATIONSHIP WITH SUBSIDIARIES

An institutional sponsor bank is required to maintain an arm’s length relationship with subsidiaries and mutual funds it sponsors in respect of certain business characteristics such as, transferring or selling, or buying securities at rates other than market rates, taking undue advantage in borrowing/lending funds, giving special consideration to transactions related to securities, overindulgence in supporting or financing the subsidiaries, etc. Nonetheless, parent bank supervision should not interfere with the subsidiary’s or mutual fund’s daily operations.

RELATIONSHIP WITH SYSTEMICALLY IMPORTANT NBFCs

Banks and NBFCs are subject to regulatory gaps that may push for regulatory arbitrage, leading to an unfair playing field and systemic risks. As such banks are always advised to follow the regulations discussed below when it comes to NBFCs: 

1. In exchange for consolidated supervision of Indian banks, NBFCs with a parent/group who is a subsidiary of the foreign bank’s parent/group or with management control over the foreign bank would also be treated as part of the foreign bank’s operations in India.
2. If an NBFC is to avoid the scope of the consolidated prudential regulations, a foreign bank holding ten percent or more of the issued and paid-up equity of the NBFC will be required to demonstrate that it does not have management control.
3. NBFCs that accept deposits, including foreign banks based in India, are not allowed to hold more than 10% of the NBFC’s paid-up equity capital. Investments in housing finance companies are not subject to this restriction. 

EQUIPMENT LEASING, HIRE PURCHASE BUSINESS, AND FACTORING SERVICES

The Reserve Bank of India can approve the formation of subsidiaries for the purposes of equipment leasing, hire purchase, and factoring. It should not be the responsibility of leasing/hire purchase subsidiaries to manage issues for other lease and hire purchase companies. Although they should not engage in activities of financing other companies or concerns which are involved in hire purchase business, equipment leasing, factoring services, underwriting of shares & debentures, etc.

UNDERWRITING ACTIVITIES

Merchant banks underwriting issues need to ensure they adhere strictly to the prudential exposure standards prescribed by the RBI from time to time, as well as the statutory limits outlined in Section 19(2) and (3) of the Banking Regulation Act, 1949. To the extent banks and their merchant banking subsidiaries engage in such activities, they should also adhere to relevant SEBI regulations.

BANKS AS SPONSORS OF INFRASTRUCTURE DEBT FUNDS

Scheduled commercial banks have been permitted to sponsor the Infrastructure Debt Funds (IDFs). These IDFs can be set up either as NBFCs (Non-Banking Finance Companies) or MFs (Mutual Funds) to accelerate & enhance the flow of long-term funds to infrastructure projects. The regulation of different Mutual Funds is as follows:

• IDF-MFs – regulated by SEBI
• IDF-NBFCs – regulated by RBI.
• Banks can sponsor, after prior approval from RBI, IDF-MFs & IDF- NBFCs. 

RETAILING OF GOVERNMENT SECURITIES

Banks are permitted to undertake the business of retailing Government Securities with non-bank clients in terms of the guidelines issued by RBI from time to time, as applicable, as well as subject to the following conditions:

• Government Securities may be sold and bought outright by banks at prevailing market prices without any restrictions about the time between the sale and purchase.

• Banks are not permitted to undertake forward transactions in Government Securities with clients who are not banks.

• The retailing of shares is required based on ongoing market rates or yields which emerge out of secondary market transactions.
• On immediate sale, the corresponding amount is required to be deducted by the bank from its investment a/c & also from its SLR assets.

PENSION FUND MANAGEMENT BY BANKS

As per the GOI’s notification dated May 24, 2007, which has specified “acting as Pension Fund Manager” as a form of business & making it lawful for a banking company to engage in it under Section 6 of the BR Act. Banks have also been allowed to undertake Pension Fund Management (PFM) via subsidiaries which have been set up after taking approval of RBI, & if the eligibility criteria have been satisfied as prescribed by Pension Fund Regulatory and Development Authority (PFRDA) for Pension Fund Managers.

Pension fund management should not be undertaken departmentally.

Banks intending to undertake pension fund management should furnish full details in respect of the various eligibility criteria as specified along with the details of the equity contribution proposed to be made in the subsidiary.

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So, above are some of the important para-banking activities/businesses conducted by the banks in addition to their regular banking operations.

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