ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

Reserve Bank of India

The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of 100 each fully paid which was entirely owned by private shareholders in the beginning. Following India's independence in 1947, the RBI was nationalized in the year 1949. The RBI plays an important part in the development strategy of the Government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 20-member-strong Central Board of Directors the Governor(currently Duvvuri Subbarao), four Deputy Governors, one Finance Ministry representative, ten Government-nominated Directors to represent important elements from India's economy, and four Directors to represent Local Boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these Local Boards consist of five members who represent regional interests, as well as the interests of co-operative and indigenous banks. Establishment The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. Preamble The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Anees Ahmad

ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

Structure & Organisation Central Board The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

Appointed/nominated for a period of four years Constitution: o Official Directors Full-time : Governor and not more than four Deputy Governors o Non-Official Directors Nominated by Government: ten Directors from various fields and two government Officials Others: four Directors - one each from four local boards

Governors

The current Governor of RBI is Duvvuri Subbarao. The RBI extended the period of the present governor up to 2013. There are four deputy governors, currently K. C. Chakrabarty, Subir Gokarn, Anand Sinha and Harun Rashid Khan.Deputy Governor K C Chakrabarty's term has been exteded further by 2 years.

Local Boards

One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi Membership: consist of five members each appointed by the Central Government for a term of four years

Functions: To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time. Financial Supervision The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.

Anees Ahmad

ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

Objective Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. Constitution The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board. BFS meetings The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments. BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members. The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues. Functions Some of the initiatives taken by BFS include: i. ii. iii. iv. restructuring of the system of bank inspections introduction of off-site surveillance, strengthening of the role of statutory auditors and strengthening of the internal defences of supervised institutions.

The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions. Current Focus

supervision of financial institutions consolidated accounting legal issues in bank frauds divergence in assessments of non-performing assets and
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ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

supervisory rating model for banks.

Main Functions Monetary Authority:

Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role

Performs a wide range of promotional functions to support national objectives.

Related Functions

Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.

Offices

Has 19 regional offices, most of them in state capitals and 9 Sub-offices.

Training Establishments

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ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

Has five training establishments

Two, namely, College of Agricultural Banking and Reserve Bank of India Staff College are part of the Reserve Bank Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT)

Subsidiaries Fully owned: National Housing Bank(NHB), Deposit Insurance and Credit Guarantee Corporation of India(DICGC), Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL) Majority stake: National Bank for Agriculture and Rural Development (NABARD) The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India. Monitory Policy Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth.[1] In India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are: Price Stability Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability. Controlled Expansion of Bank Credit One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output. Promotion of Fixed Investment The aim here is to increase the productivity of investment by restraining non essential fixed investment. Restriction of Inventories Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization
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ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

Promotion of Exports and Food Procurement Operations Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy. Desired Distribution of Credit Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers. Equitable Distribution of Credit The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people To Promote Efficiency It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc. Reducing the Rigidity RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system. Credit Control Measures of RBI Credit Control is an important tool used by the Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy. Central Bank administers control over the credit that the commercial banks grant. Such a method is used by RBI to bring Economic Development with Stability. It means that banks will not only control inflationary trends in the economy but also boost economic growth which would ultimately lead to increase in real national income with stability. In view of its functions such as issuing notes and custodian of cash reserves, credit not being controlled by RBI would lead to Social and Economic instability in the country. Quantitative Methods 1. Bank Rate Policy: The standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under the provisions of the Act of RBI. Thus the RBI,
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ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

rediscounts the first class bills in the hands of commercial banks to provide them with liquidity in case of need. This rate is subjected to change from time to time in accordance with the economic stability and its credibility of the nation. The bank rate signals the central banks longterm outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa. Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit. 2. Open Market Operation: It means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities. 3. Adjusting with CRR and SLR: By adjusting the CRR(Cash Reserve Ratio) and SLR(Statutory Liquidity Ratio) which are short term tools to be used to shortly regulate the cash and fund flows in the hands of the People, banks and Government, the RBI regularly make necessary adjustments in these rates. These variations in the rates will easily have a greater control over the cash flow of the country.

i) CRR(Cash Reserve Ratio): All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money

ii) SLR(Statutory Liquidity Ratio): Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. What SLR does is again restrict the banks leverage in pumping more money into the economy by investing a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.

Anees Ahmad

ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

4. Lending Rate: Lending rates are the ratios fixed by RBI to lend the money to the customers on the basis of those rates. The higher the rate means the credit to the customers is costlier. The lower the rate means the credit to the customers is less which will encourage the customers to borrow money from the banks more that will facilitate the more money flow in the hands of the public. 5. Repo Rate: Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demands they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate. 6. Reverse Repo Rate: The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk) Qualitative Methods: Qualitative Method controls the manner of channelizing of cash and credit in the economy. It is a selective method of control as it restricts credit for certain section where as expands for the other known as the priority sector depending on the situation. Tools used under this method areMarginal Requirement Marginal Requirement of loan = current value of security offered for loan-value of loans granted. The marginal requirement is increased for those business activities, the flow of whose credit is to be restricted in the economy. e.g.- a person mortgages his property worth Rs. 1,00,000 against loan. The bank will give loan of Rs. 80,000 only. The marginal requirement here is 20%. In case the flow of credit has to be increased, the marginal requirement will be lowered. RBI has been using this method since 1956.
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ANAND ENGINEERING COLLEGE, AGRA

IBS BBA PROGRAM (UNIT-5) INDIAN BANKING SYSTEM

Rationing of credit Under this method there is a maximum limit to loans and advances that can be made, which the commercial banks cannot exceed. RBI fixes ceiling for specific categories. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. Minimum ofCapital:Total Assets" (ratio between capital and total asset) can also be prescribed by Reserve Bank of India. Publicity RBI uses media for the publicity of its views on the current market condition and its directions that will be required to be implemented by the commercial banks to control the unrest. Though this method is not very successful in developing nations due to high illiteracy existing making it difficult for people to understand such policies and its implications. Direct Action Under the banking regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuses to obey the directions given by Reserve Bank of India. There can be a restriction on advancing of loans imposed by Reserve Bank of India on such banks. e.g. - RBI had put up certain restrictions on the working of the Metropolitan Co-operative Banks. Also the Bank of Karad had to come to an end in 1992. Moral Suasion This method is also known as Moral Persuasion as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit. RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal in lending during deflation.

Anees Ahmad