Banking Regulation
Banking regulation is the system of rules that ensures the safety and stability of the financial sector. In India, the Reserve Bank of India (RBI) acts as the primary regulator for all banks. This regulation starts before a bank even opens its doors through a process called licensing. Every bank needs a license from the RBI under the Banking Regulation Act of 1949. The main goal of these rules is to protect the money deposited by the general public.
Concepts (3)
This is the ratio of a bank's capital to its risk-weighted assets. It shows if a bank can absorb a reasonable amount of loss. It acts as a safety cushion for depositors.
This is the ratio of a bank's capital to its risk-weighted assets. It shows if a bank can absorb a reasonable amount of loss. It acts as a safety cushion for depositors. For example, if a bank has 100 rupees in loans and the CAR is 9%, it must keep 9 rupees of its own capital aside. This prevents the bank from becoming bankrupt if some borrowers do not pay back.
PCA is a framework where the RBI steps in when a bank's financial health falls below certain levels. It is like a 'watch list' for weak banks. When a bank is under PCA, the RBI can stop it from opening new branches.
PCA is a framework where the RBI steps in when a bank's financial health falls below certain levels. It is like a 'watch list' for weak banks. When a bank is under PCA, the RBI can stop it from opening new branches. It can also limit the bank's lending to risky sectors. For example, if a bank's bad loans (NPAs) become too high, it enters PCA until its health improves.
An NPA is a loan or advance where the borrower has stopped making interest or principal payments for 90 days. High NPAs are a sign of poor bank health and weak regulation. They reduce the profit of the bank.
An NPA is a loan or advance where the borrower has stopped making interest or principal payments for 90 days. High NPAs are a sign of poor bank health and weak regulation. They reduce the profit of the bank. For example, if a company takes a loan of 1 crore but fails to pay any installment for three months, that loan is classified as an NPA.
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Start Lesson: Capital Adequacy Ratio (CAR)