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ANAND ENGINEERING COLLEGE, AGRA BBA PROGRAMINDIAN BANKING SYSTEM

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Reserve Bank of India

The Reserve Bank of India (RBI) is India's central banking institution, which controlsthe monetary policy of the Indian rupee. It was established on 1 April 1935 during the BritishRaj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capitalwas divided into shares of 100 each fully paid which was entirely owned by privateshareholders in the beginning. Following India's independence in 1947, the RBI was nationalizedin the year 1949.

The RBI plays an important part in the development strategy of the Government of India. It is amember bank of the Asian Clearing Union. The general superintendence and direction of theRBI is entrusted with the 20-member-strong Central Board of Directors the Governor( currently Duvvuri Subbarao) , four Deputy Governors, one FinanceMinistry 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 whorepresent 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 permanentlymoved 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 fullyowned 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 securingmonetary stability in India and generally to operate the currency and credit system of the

country to its advantage."
http://en.wikipedia.org/wiki/Central_bankhttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Indian_rupeehttp://en.wikipedia.org/wiki/British_Rajhttp://en.wikipedia.org/wiki/British_Rajhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Asian_Clearing_Unionhttp://en.wikipedia.org/wiki/Governor_of_Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Duvvuri_Subbaraohttp://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Acthttp://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Acthttp://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Acthttp://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Acthttp://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://en.wikipedia.org/wiki/Ministry_of_Finance_(India)http://en.wikipedia.org/wiki/Duvvuri_Subbaraohttp://en.wikipedia.org/wiki/Governor_of_Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Asian_Clearing_Unionhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/British_Rajhttp://en.wikipedia.org/wiki/British_Rajhttp://en.wikipedia.org/wiki/Indian_rupeehttp://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Central_bank

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Structure & Organisation

Central Board

The Reserve Bank's affairs are governed by a central board of directors. The board is appointedby 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 CChakrabarty'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 NewDelhi

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 andeconomic interests of local cooperative and indigenous banks; to perform such other functions asdelegated by Central Board from time to time.

Financial Supervision

The Reserve Bank of India performs this function under the guidance of the Board for FinancialSupervision (BFS). The Board was constituted in November 1994 as a committee of the CentralBoard of Directors of the Reserve Bank of India.
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Objective

Primary objective of BFS is to undertake consolidated supervision of the financial sectorcomprising 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 aterm 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 auditand internal audit functions in banks and financial institutions. The audit sub-committee includesDeputy 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 directionson the regulatory and supervisory issues.

Functions

Some of the initiatives taken by BFS include:

i. restructuring of the system of bank inspectionsii. introduction of off-site surveillance,

iii. strengthening of the role of statutory auditors andiv. 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 auditreports, 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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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 bankingand 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 coinsand 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 thestate 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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Has five training establishments

Two, namely, College of Agricultural Banking and Reserve Bank of India Staff Collegeare part of the Reserve Bank

Others are autonomous, such as, National Institute for Bank Management, Indira GandhiInstitute for Development Research (IGIDR), Institute for Development and Research inBanking Technology (IDRBT)

Subsidiaries

Fully owned : National Housing Bank(NHB) , Deposit Insurance and Credit GuaranteeCorporation of India(DICGC) , Bharatiya Reserve Bank Note Mudran PrivateLimited(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 theGovernment of India.

Monitory Policy

Monetary policy is the process by which monetary authority of a country, generally a centralbank controls the supply of money in the economy by exercising its control over interest rates inorder to maintain price stability and achieve high economic growth .[1] In India, the centralmonetary authority is the Reserve Bank of India (RBI). is so designed as to maintain the pricestability 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 pricestability. 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
http://www.nhb.org.in/http://www.nhb.org.in/http://www.nhb.org.in/http://www.dicgc.org.in/http://www.dicgc.org.in/http://www.dicgc.org.in/http://www.dicgc.org.in/http://www.brbnmpl.co.in/http://www.brbnmpl.co.in/http://www.brbnmpl.co.in/http://www.brbnmpl.co.in/http://www.nabard.org/http://www.nabard.org/http://www.nabard.org/http://en.wikipedia.org/wiki/Monetary_policyhttp://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-0http://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-0http://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-0http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Monetary_policy_of_India#cite_note-0http://en.wikipedia.org/wiki/Monetary_policyhttp://www.nabard.org/http://www.brbnmpl.co.in/http://www.brbnmpl.co.in/http://www.dicgc.org.in/http://www.dicgc.org.in/http://www.nhb.org.in/

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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 peopleTo 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 deregulatinginterest 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 methodis used by RBI to bring Economic Development with Stability. It means that banks will notonly control inflationary trends in the economy but also boost economic growth which wouldultimately lead to increase in real national income with stability. In view of its functions such asissuing 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 othercommercial papers eligible for purchase under the provisions of the Act of RBI. Thus the RBI,
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rediscounts the first class bills in the hands of commercial banks to provide them with liquidityin case of need. This rate is subjected to change from time to time in accordance with theeconomic stability and its credibility of the nation. The bank rate signals the central banks long -term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend tomove 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 paysfor 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 terminterest rate and the supply of base money in an economy, and thus indirectly the total moneysupply. 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 shortterm 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. Thesevariations 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 itsdeposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRRrequirement is 8 per cent. This serves two purposes. It ensures that a portion of bank deposits istotally 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 theirdemand and time liabilities in government securities and certain approved securities. What SLRdoes is again restrict the banks leverage in pumping more money into the economy by investinga portion of their deposits in government securities as a part of their statutory liquidity ratio(SLR) requirements.

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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 ratemeans the credit to the customers is less which will encourage the customers to borrow moneyfrom 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 thedemands 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 reporate; 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) istermed the reverse repo rate. The RBI uses this tool when it feels there is too much moneyfloating in the banking system

If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offerthem a lucrative rate of interest. As a result, banks would prefer to keep their money with theRBI (which is absolutely risk free) instead of lending it out (this option comes with a certainamount of risk)

Qualitative Methods:

Qualitative Method controls the manner of channelizing of cash and credit in the economy. It is aselective method of control as it restricts credit for certain section where as expands for theother known as the priority sector depending on the situation.

Tools used under this method are-

Marginal 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 tobe 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 hasbeen using this method since 1956.
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Rationing of credit

Under this method there is a maximum limit to loans and advances that can be made, whichthe commercial banks cannot exceed. RBI fixes ceiling for specific categories. Such rationing isused for situations when credit flow is to be checked, particularly for speculative activities.Minimum of Capital: Total Assets" (ratio between capital and total asset) can also be prescribedby Reserve Bank of India.

Publicity

RBI uses media for the publicity of its views on the current market condition and its directionsthat will be required to be implemented by the commercial banks to control the unrest. Thoughthis method is not very successful in developing nations due to high illiteracy existing making itdifficult 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 suchbanks. e.g. - RBI had put up certain restrictions on the working of the Metropolitan Co-operativeBanks . 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 itsdirections/orders on the flow of credit. RBI puts a pressure on the commercial banks to put aceiling on credit flow during inflation and be liberal in lending during deflation .
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