indian financial system-rbi
TRANSCRIPT
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[G]Monetary Control[G]Monetary Control
INTRODUCTION: 1.Monetary Control is the main function of the Reserve Bank ,as it is central
bank of the country.
2.Formulating and administering monetary policy involves using ofinstruments within its control to influence the level of aggregate demand forgoods and services by regulation of the total money supply and credit.
3.The RBI exercises monetary regulation by influencing the availability andcost of credit by exercising different types of controls.
4.General or quantitative controls are the instruments of Bank rate,reserverequirements and open market operations.These methods affect the total
money supply.
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The effectiveness ofThe effectiveness of
Bank RateBank Rate
The effectiveness of Bank Rate as an
instrument of monetary control depends on
the extent of operation in the money market
and also on how far the commercial banks
resort to borrowing from Reserve Bank.
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Open Market OperationsOpen Market Operations [OMO].[OMO].
Section17(8) of the RBI Act authorizes the Reserve Bankto engage in the purchase and sale of securities of anymaturity of the Central Governments and StateGovernments.
OMO can be carried out by purchase and sale of a varietyof assets such as Government securities ,commercial billsof exchange ,foreign exchange,gold and even companyshares.
In actual practice they are confined to buying and sellingof Government securities.When securities are purchasedfrom the open market ,the reserves of the banks withReserve Bank increases and they can accordingly expand
credit.
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Cash ReserveCash Reserve Section 42 of RBI Act & Section 18 of Banking
Regulation Act,1949 deal with cash reserves to be
kept with the Reserve Bank by scheduled banksand non-scheduled banks respectively.
Scheduled banks have to maintain an averagedaily balance of 5% of the total demand and timeliabilities in India of such banks.Further RBI isempowered to raise up to 20% of total demandand time liabilities.
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Statutory Liquidity Ratio(SLR)Statutory Liquidity Ratio(SLR)
Banks are required under section [24(1)of
RBI Act,1949] to maintain in India liquid
assets in cash ,gold or unencumbered
approved securities amounting to 25% of
its total demand and time liabilities.
RBI is empowered to raise up to 40%.
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Interest RateInterest Rate
Reserve Bank exercises direct control over
the lending rate of banks by influencing cost
of bank credit by increase or decrease in the
lending rates rather than the Bank rate.
RBI is empowered to issue direction to
banks in public interest or in the interest ofbanking policy.
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Selective Credit ControlSelective Credit Control
Selective Credit Control refers to
regulation of distribution or direction of
bank resources to certain sectors of the
economy.This is done in terms of broad
national policies for achieving
developmental goals.
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Selective credit control is exercised by R
BIby
Selective credit control is exercised by R
BIbystipulatingstipulating
a)minimum margins for lending against selecteda)minimum margins for lending against selected
commoditiescommodities
(b)ceilings on the levels of credit, and(b)ceilings on the levels of credit, and
(c) rates of interested commodities.(c) rates of interested commodities.
The first two control quantum of credit and theThe first two control quantum of credit and the
last,the cost of credit.last,the cost of credit.
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Indian Financial SystemIndian Financial System
Reserve Bank of India
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Introduction toIntroduction to CentralCentral BankingBanking RBI, as the central bank of the country ,is the
center of Indian financial and monetary system.
RBI was formed in 1935 as per RBI Act 1935 asshareholders bank with a share capital of Rs 5crores,divided in to 5 lakhs fully paid up shares ofRs 100/- each.
In 1948 , RBI was nationalized by Reserve Bank(Transfer to Public Ownership)Act,1948 and theentire share capital was acquired by the CentralGovernment.
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Regulation of nonRegulation of non--bankingbanking
institutions:institutions: The fast growth of non-banking institutions in the
country and their accepting deposits from the
public at very high rates of interestraised question of regulating their activities.
As the credit from the banking sector was under the
control of the Reserve Bank,the non-banking
institutions had a ready market and many
unhealthy practices developed in n course of time.
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[h][h] CustodianCustodian ofof ForeignForeign
ExchangeExchangeIntroduction:Regulation and conservation of foreign
exchange is a major function of the Reserve Bank
of India under FERA,1973.Regulation of foreign exchange was introduced in
India under the Defense of India Rules,1939
which was replaced by the Foreign Exchange
Regulation Act,1947 and later by the ForeignExchange Regulation Act,1973 which is currently
in force.
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Restrictions on dealings inRestrictions on dealings in
foreign exchangeforeign exchange
U/s 8 of this Act,the previous general or
special permission of the RBI is necessary
for any person other an authorized dealer
in India to purchase or otherwise acquire,
borrow, sell,lend exchange with any
person not being an authorized dealer .
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Foreign exchange definedForeign exchange defined
under section 2(h) RBI Act.under section 2(h) RBI Act.
Foreign exchange means foreign currency
and includes all deposits ,credits and
balances payable in any foreign currency
and any drafts,travelers checks ,letters of
credit and bills of exchange ,expressed or
drawn in foreign currency too .
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Authorized Dealers &MoneyAuthorized Dealers &Money
ChangersChangers Under section 6 of the Act,Reserve Bank is
empowered to authorize any person to deal inforeign exchange .Persons so authorized are calledAuthorized dealers as defined in Section 2(b).
Such authorization may be granted subject toconditions and may be for,[i] dealings in foreigncurrencies or restricted to specified foreigncurrencies;[ii] transactions of all descriptions in
foreign currencies or restricted to specifiedtransactions;[iii]a specified period or withinspecified periods.Authorized dealers are generallyscheduled banks .However RBI has givenrestricted license IDBI and EXIM and to
undertake certain specified functions.
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Money Changers definedMoney Changers defined
Section 7 of the Act.Section 7 of the Act. Act empowers the RBI to authorize any person to
deal in foreign currency.Persons so authorized are
called money changers. The authorization given to money changers may
be , [i] for all foreign currencies [ii]for alltransactions in foreign currencies or for specifiedtransactions and also may be[iii]for operating aspecified place and for a specified amounts moneychangers license have been given to certainestablished firms ,hotels and other organizations.
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Blocked AccountsBlocked Accounts
Section 10 of the Act deals with blocked
accounts.[Regarding NRI Accounts:NRE,
NRO,FCNR,NRNR, etc].A blocked account
is an account opened as a blocked account
at any office or branch of bank in India
authorized by RBI
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IMPORT & EXPORTOFIMPORT & EXPORTOF
CURRENCYCURRENCY Import or Export of Foreign exchange or Indian
currency to or from India is also subject to
restrictions imposed under Section 13. Generalor special permission of RBI is necessary totake or send out of India any Indian currencyor foreign exchange obtained from anauthorized dealer or a money changer.
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Acquisition ofForeignAcquisition ofForeign
ExchangeExchange
Section 14 authorizes the Central Govt. to
order by by a notification in the official
gazette ,every person in or resident in India
to sell foreign exchange to the RBI or to
persons authorized by the RBI for this
purpose.
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Export and Transfer ofExport and Transfer of
SecuritiesSecuritiesGeneral or special permission of
the RBI is necessary under Section 19 for
the following transactions:[i] Taking or sending any security to anyplace outside India;
[ii]Transfer of any security or creation ortransfer of any interest in a security to or infavor of any non-resident;
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.[cont.[contd]d]
[iii] Issuing in India or outside India, any
security which is registered or to be
registered in India to a non resident;
[iv] Acquiring,holding or disposing of any
foreign security.
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BearerSecuritiesBearerSecurities
Section 22 of the Act restricts the issue of
bearer securities without permission of RBI.
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Gift and SettlementsGift and Settlements
Settlement or gift of any property to a non
resident without the general or special
permission of RBI under Section 24.
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Establishment ofplace ofEstablishment ofplace of
BusinessBusiness Non residents and other persons under Section 28
require the general or special permission of the
RBI FOR VARIOU
S TRANSACTIONS ASUNDER;
[1] To establish or carry on in India a place ofbusiness for carrying bon trading ,commercial orindustrial activity
[ii] Acquiring the whole or any part of anyundertaking in India of any person or a companycarrying on trade,commerce or industry ,orpurchasing the shares of such company in India.
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Duty of Persons Entitled toDuty of Persons Entitled to
Receive Foreign ExchangeReceive Foreign Exchange Under Section 16(1) of the Act,general or
special permission of the Reserve Bank is
necessary for any person having a right to
receive foreign exchange or a rupee
payment from a non-resident,to do or
refrain from doing anything which has theeffect of delaying such payment or ceasing
such payment in whole or in part.
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Payment for Exported GoodsPayment for Exported Goods [Section :81]Empowers Central
Government to stipulate that before
exporting any goods from India ,the
Exporter furnishes to the prescribed
authority a declaration in the prescribed
form like GR,PP AND VP/COD forms.
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Export and Transfer ofExport and Transfer of
SecuritiesSecurities General or special permission of the
Reserve Bank is necessary under Section 19
for the following transactions: 1. Taking or sending any security to any
place outside India;
2.Transfer of any security or creation ortransfer of any interest in security to or infavor of any non resident;
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.[Con.[Cont ]t ] 3.Issuing in India or outside ,any security
which is registered or to be registered in
India;
4.Acquiring ,holding or disposing of any
foreign security.
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Holding ofImmovableHolding ofImmovable
Property outside IndiaProperty outside India Persons resident in India are prohibited
under Section 25 from acquiring,holding or
disposing of
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Organization & ManagementOrganization & Management RBI was initially designed on the pattern of Bank
of England,theoretically subordinate to treasury.
The Governor,4 Deputy Governors,all Directors ofthe Central Boards are either appointed ornominated by the Central Government.
The Governor & the Deputy Governors are wholetime officials and hold office for such term notexceeding 5 years as may be fixed by the CentralGovernment and are eligible for re-appointment[Section 8(4)].
They however may be removed from their office
b the Central Government at an time.This le al
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Preamble of RBI Act 1934Preamble of RBI Act 1934 Whereasitisexpedientto constitutea
Reserve BankofIndiatoregulatetheissue
ofbank notesandthe keepingofreserveswithaview tosecuringmonetary
stability[in India]andgenerallytooperate
thec
urrenc
ya
nd
credit
syste
mof
the
countrytoitsadvantage.
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1.1. Main Functions of RBIMain Functions of RBI To maintain monetary stability so that the business
and economic life can deliver welfare gains of a
properly functioning mixed economy. To maintain financial stability and ensure sound
financial institutions so that monetary stabilitycan be safely pursued and economic units canconduct their business with confidence.
To maintain stable payments system so thatfinancial transactions can be safely and efficientlyexecuted.
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1.1. Main Functions of RBIMain Functions of RBI To promote the development of financial
infrastructure ,and to enable it to operate
efficiently ie.,to play a leading role indeveloping a sound financial system so that
it can discharge its regulatory function
efficiently.
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1.1. Main Functions of RBIMain Functions of RBI To ensure that credit allocation by the
financial system broadly reflects the
national economic priorities and societalconcerns.
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1.1. Main Functions of RBIMain Functions of RBI To regulate the overall volume of money
and credit in the economy with a view to
ensure a reasonable degree of price stability.
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ROLESOF RBIROLESOF RBI [a] Note IssuingAuthority
* Sole right,authority or monopoly of issuing
currency notes[other than one rupee notes orcoins].
* The responsibility is not only to put currency in
to or with draw it from circulation but also toexchange currencies and notes.
* All affairs of Bank are related to note issue areconducted by Issue Department.
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[b]Government Banker[b]Government Banker The RBI is the banker to the Central and State .
Governments
* It provides to the governments all bankingservices such as acceptance of deposits,withdrawal
of funds by cheques, making payments as well as
receipts and collection of payments on behalf of
the government ,transfer of funds,andmanagement of public debt.
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[c] Banker[c] Bankers Banks Bank The RBI like all other central banks,can be called
a bankers bank because it has a very specialrelationship with commercial and co-operativebanks and major part of its business with thesebanks.
In times of need ,the banks borrow funds from theRBI.It is therefore called the bank of last resort
or the lender of last resort. On the whole,the RBI is the ultimate source of
money and credit in India.
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[d]Supervising Authority[d]Supervising Authority The RBI has vast powers to supervise and
control commercial and co-operative banks
with a view to developing an adequate andsound banking system in the country.
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The RBIhas the following powersThe RBIhas the following powers
as the Supervising Authority.as the Supervising Authority.
1.To issue licenses for the establishment of new
banks;
2.To issue bank licenses for setting up of bankbranches;
3.To prescribe minimum requirements regarding
paid up capital and reserves,transfer to reserve
fund,and maintenance of cash reserves and otherliquid assets;
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ContContdd 4.To inspect the working of banks in India
as well as abroad in respect of their
organizational set up,branchexpansion,mobilization of
deposits,investments,and credit portfolio
management,credit appraisal,region wiseperformance,profit planning ,manpower
planning and training,and so on.
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ContContdd 5.To conduct ad hoc Investigations ,from
time to time,in to complaints,
irregularities,and frauds in respect of banks. 6.To control methods of operation of banks
7.To controlappointment,reappointment,and terminationof appointment of Chairman and CEOs of
private sector banks.
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[e]Exchange Control Authority[e]Exchange Control Authority One of the essential functions the RBI is to
maintain the stability of the external value of the
rupee. * To administer the foreign exchange control
* To choose the exchange rate system and fix ormanage the exchange rate between rupee and othercurrencies
* To manage exchange reserves
* To interact or negotiate with the monetaryauthorities with IMF,World Bank & ADB.
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The objective of ExchangeThe objective of Exchange
ControlControl Is primarily to regulate the demand for
foreign exchange within the limits set by the
available supply.
This is sought to be achieved by conserving
foreign exchange,by using it in accordance
with the plan priorities,and by controllingflows of foreign capital.
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[f]Promoter of the financial[f]Promoter of the financial
systemsystem The RBI has been rendering
developmental or promotional services
which have strengthened the countrysbanking and financial sector.The following
sectors have attracted the benefits from
RBI.
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Money MarketMoney Market In the money market ,RBI has continuously
worked for the integration of its organized
and unorganized sectors by trying to bringindigenous bankers in to the main stream of
the banking business.
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Agricultural sectorAgricultural sector The RBI has rendered service in directing
and increasing the flow of credit to the
agricultural sector.
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Industrial
Finance
Industrial
Finance
The role of the Bank in diversifying the
institutional structure for providing industrial
finance has been equally important. All the special developmental institutions[SDIs] at
the central and state levels and many other
financial institutions were either created by by the
Bank on its own or it advised and rendered helpin setting up these institutions.
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Credit DeliveryCredit Delivery The Bank has evolved and put in to practice
the consortium ,co-operative ,and
participatory approach to lending amongbanks and other financial institutions.
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Regulator of Money andRegulator of Money and
CreditCredit Monetary policy refers to the use of
techniques of monetary control at the
disposal of the Central Bank for achieving
certain objectives.