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STANDING EXTERNAL ADVISORY COMMITTEE (SEAC)

Context:

The Reserve Bank of India (RBI) has set up a five-member committee – called the Standing External Advisory Committee (SEAC) – for evaluating applications for universal banks and small finance banks.

Relevance:

GS-III: Indian Economy (Economic Development of India, Macroeconomics, Banking and NBFCs)

Dimensions of the Article:

  1. About the Standing External Advisory Committee (SEAC)
  2. Background on Setting up of SEAC
  3. What are Universal Banks?
  4. What are Small Finance Banks (SFBs)?

About the Standing External Advisory Committee (SEAC)

  • The Standing External Advisory Committee (SEAC) comprising eminent persons with experience in banking, financial sector and other relevant areas, will evaluate the applications thereafter.
  • The SEAC has a three-year tenure.
  • The SEAC will evaluate the applications for universal banks and SFBs after the RBI evaluates them first to ensure prima facie eligibility of the applicants.
  • The secretarial support to the committee would be provided by RBI’s Department of Regulation.

Background on Setting up of SEAC

  • An internal working group of the RBI, proposed an overhaul of the licensing policy for private banks in 2020 and suggested allowing large corporate and industrial houses to float banks in India after suitable amendments to the Banking Regulation Act.
  • Although several large corporate houses had applied for a banking license in the past, the regulator had rejected these proposals.
  • Eminent economists have criticised the proposal to allow corporate houses to float banking entities, saying it will lead to “connected lending” which, according to them, is “invariably disastrous”.

What are Universal Banks?

  • Universal Banks are those banks which undertake multiple financial activities under one roof, thereby creating a financial supermarket (like: commercial banks, Financial Institutions, Non-Banking Financial Companies (NBFCs)).
  • Universal Banks focus on leveraging their large branch network and offer a wide range of services under a single brand name/Bank’s name.
  • According to the guidelines on on-tap licensing of universal banks issued in August 2016, resident individuals and professionals having 10 years of experience in banking and finance at a senior level are eligible to promote universal banks.
  • However, large industrial houses are excluded as eligible entities but are permitted to invest in the banks up to 10%.
  • A non-operative financial holding company (NOFHC) has been made non-mandatory in case of promoters being individuals or standalone promoting/converting entities who/which do not have other group entities. NOFHC means a non-deposit taking NBFC.

What are Small Finance Banks (SFBs)?

  • Small Finance Banks (SFBs) are the financial institutions which provide financial services to the unserved and unbanked region of the country.
  • SFBs primarily undertake basic banking activities of acceptance of deposits and lending to small business units, small and marginal farmers, micro and small industries and unorganised sector entities.
  • It can also undertake other non-risk sharing simple financial services activities, not requiring any commitment of own funds, such as the distribution of mutual fund units, insurance products, pension products, etc.
  • The small finance bank can also become an Authorised Dealer in foreign exchange business for its clients’ requirements.

-Source: Indian Express

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