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Financial Regulations and Schemes in India
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Financial Regulations and Schemes in India
Financial Regulations and Schemes in India
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Question
What is the purpose of the State Level Coordination Committee (SLCC) in Indian states?
Answer
The SLCC facilitates information sharing between financial regulators and state enforcement agencies to identify and act against entities illegally accepting public deposits or disguising their schemes to bypass regulation, thereby protecting consumers from fraudulent financial schemes.
Question
What does the Banning of Unregulated Deposit Schemes (BUDS) Act, 2019 aim to achieve?
Answer
The BUDS Act targets illegal deposit schemes including those run by Multi-Level Marketing companies, aiming to protect citizens from fraudulent investments by criminalizing unauthorized deposit collection with penalties including imprisonment and fines.
Question
Who are the key members involved in SLCC?
Answer
SLCC members include financial regulators such as the RBI, SEBI, IRDAI, NHB, PFRDA, Registrar of Companies, and state enforcement agencies like the Home Department, Finance Department, Law Department, Economic Offences Wing (EOW), and other relevant state-level bodies.
Question
Why were SLCCs reconstituted in 2014, and what is their significance in combating financial fraud?
Answer
SLCCs were reconstituted with a stronger mandate to enhance tracking and curbing unauthorized deposit schemes. They address the rise of fraudulent schemes disguising deposits as 'investments' or 'advances' to avoid regulation, focusing on better inter-agency collaboration to protect consumers.
Question
What change did RBI recently make to the liquidity limit for Standalone Primary Dealers (SPDs) under the Standing Liquidity Facility (SLF)?
Answer
RBI increased the SLF borrowing limit for SPDs from ₹10,000 crore to ₹15,000 crore effective April 2, 2025, enabling easier and increased access to short-term funds to support cash requirements while the repo rate remains applicable.
Question
What role do Standalone Primary Dealers (SPDs) play in India’s financial system?
Answer
SPDs are authorized by RBI to trade government securities exclusively, supporting the government's borrowing program by underwriting and trading bonds, ensuring liquidity and stability in the government securities market.
Question
What is the Standing Liquidity Facility (SLF) and how does it aid SPDs?
Answer
SLF is a tool by RBI that allows SPDs to borrow short-term funds at the repo rate using government securities as collateral, helping SPDs maintain liquidity to effectively trade government bonds and contribute to market stability.
Question
What is the Capital to Risk Weighted Assets Ratio (CRAR) requirement for Regional Rural Banks (RRBs) as per RBI’s new master direction?
Answer
RRBs are required to maintain a minimum CRAR of 9%, which measures the bank's capital relative to its risk-weighted assets, ensuring the bank’s ability to absorb losses and protect depositors.
Question
What constitutes Tier 1 capital for a bank according to RBI’s guidelines for RRBs?
Answer
Tier 1 capital includes core capital components like paid-up share capital, share premium, statutory and free reserves, capital reserve from asset sales, revaluation reserves (up to 45% value), balance in profit & loss account, and Perpetual Debt Instruments (PDIs) that comply with regulations.
Question
What are Perpetual Debt Instruments (PDIs) and what are their key regulatory features?
Answer
PDIs are perpetual bonds issued by RRBs to boost Tier 1 capital. They must be in Indian Rupees, fully paid by the RRB, have no maturity or put/step-up options, may have a call option after 5 years with RBI approval, and interest payments can be skipped if CRAR falls below required levels without cumulative recovery later.
Question
Why can revaluation reserves be counted only 45% towards Tier 1 capital and under what conditions?
Answer
Only 45% of revaluation reserves count because 55% is discounted to ensure conservatism. Conditions include: free sale of property without legal issues, clear balance sheet presentation, valuation by two independent valuers every three years, full accounting compliance, and no auditor or RBI objections.
Question
How does the RBI ensure RRBs maintain financial stability when issuing PDIs with a call option?
Answer
RRBs can repay PDIs early after 5 years only with RBI approval. RBI checks the CRAR before and after repayment to ensure the bank remains sufficiently capitalized and financially stable.
Question
What happens if an RRB’s CRAR falls below the required level concerning interest payments on PDIs?
Answer
The bank is not allowed to pay interest on PDIs if CRAR is below or paying interest would cause it to fall below the minimum. Interest is non-cumulative, so missed interest payments are not paid later.
Question
How do SLCC meetings contribute to public awareness on financial fraud and safe banking?
Answer
SLCC meetings discuss strategies to prevent financial fraud and implement BUDS rules while promoting public awareness campaigns on digital scams and safe banking practices, thereby protecting citizens from risky schemes.