Category : Banking
Banking Regulation System of India
The nature of banking business can be summarized in two words i.e. financial intermediation, which needs to be carried out efficiently for stimulating the real sectors of the economy. Another essential characteristic of banks is that they are highly leveraged and hence, need to be regulated for protecting the interest of depositors.
Banking in India, as elsewhere, takes diverse forms viz, banks formed under special statutes, companies registered under the Companies Act, 1956 or foreign companies and cooperative societies registered under the Cooperative Societies Act. Banks are classified on their ownership pattern such as Public Sector Banks, Private Sector Banks and Foreign Banks.
Indian Companies (Amendment) Act, 1936
The Indian Companies Act that was passed in 1913 introduced the institution of private companies in corporate sector in India. But the Act of 1913 did not provide the peculiar environment for Indian commerce, hence to remove these deficiencies, the Indian Companies (Amendment) Act was passed in 1936. The Amendment Act, 1936 introduced various provisions relating to functioning of directors, guaranteeing payment of provident fund to employess etc. Further in October 1942, Companies Act was amended so that any company which uses world 'bank', 'banking' or 'banker' shall be deemed to be a banking company.
Banking Regulation Act, 1949
The Banking Regulation Act, enacted in 1949, has been a milestone in the history of banking in India, This act provides a framework for regulation and supervision of commercial banking activity.
Reserve Bank of India
Reserve Bank of India is the Central Bank of our country. On the recommendation of Hilton Young Commission, it was established on 1st April, 1935 and in 1949 it was nationalised. The central office of the RBI is Bombay (now Mumbai). In terms of the preamble to the Reserve Bank of India Act, 1934, The main functions of the bank are to regulate the issuing of bank notes and keeping the 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.
Governor of RBI
Its first Governor was Sir Osborne Smith. RBI was nationalised on 1st Jan, 1949 and its first Indian Governor was CD Deshmukh. Banking crisis (during 1913-1917 and failure of 588 banks in various parts of the country underlined the need for regulating and controlling the commercial banks.
Governors of RBI and their Time –period
Governors |
Tenure |
Sir Osborne Smith |
01-04-1935 to 30-06-1937 |
Sir James Taylor |
01-07-1937 to 17-02-1943 |
CD Deshmukh |
11-08-1943 to 30-06-1949 |
Bengal Rama Rau |
01-07-1949 to 14-01-1957 |
KG Ambegaonkar |
14-01-1957 to 28-02-1957 |
HVR lyengar |
01-03-1957 to 28-02-1962 |
PC Bhattacharya |
01-03-1962 to 30-06-1967 |
LK Jha |
01-07-1967 to 03-05-1970 |
BN Adarkar |
04-05-1970 to 15-06-1970 |
S Jagannathan |
16-06-1970 to 19-05-1975 |
NC Sen Gupta |
19-05-1975 to 19-08-1975 |
KR Puri |
20-08-1975 to 02-05-1977 |
M Narasimham |
02-05-1977 to 30-11-1977 |
Dr IG Patel |
01-12-1977 to 15-09-1982 |
Dr Manmohan Singh |
16-09-1982 to 14-01-1985 |
A Ghosh |
15-01-1985 to 04-02-1985 |
RN Malhotra |
04-02-1985 to 22-12-1990 |
S Venkitaramanan |
22-12-1990 to 21-12-1992 |
Dr C Rangarajan |
22-12-1992 to 21-11-1997 |
Dr Bimal Jalan |
22-11-1997 to 06-09-2003 |
Dr YV Reddy |
06-09-2003 to 05-09-2008 |
Dr D Subbarao |
05-09-2008 to 04-09-2013 |
Dr Raghuram Govind Rajan |
04-09-2013 to 05-09-2016 |
Urjit R Patel |
06-09-2016 to till date. |
Organization and Management of RBI
Reserve Bank of India is managed by the Central Board of Directors. Presently, this board consists of 21 members. Besides, Governor and tour Deputy Governors, four directors are nominated, each by the four Local Boards for 4 yr term. Besides, ten directors and two government officer are nominated by the Government of India. These boards have been established, in Mumbai, Kolkata, Chennai and New Delhi respectively. According to the Reserve Bank of India Act, the term of nominated members is for 4 yr. Governor and Deputy Governors are appointed by the government for a period of not more than 5 yr. Bank's Head Office is located in Mumbai. The bank has 28 regional offices, most of which are in state capitals. The financial year of RBI starts from 1st July to 30th June. The annual report is released in August each year.
Central Board of RBI
RBI is wholly owned by the government in India, Central Board of directors oversees the Reserve Bank's business. It delegates specific functions through its committees and sub-committees. It includes the Governor, Deputy Governors and a few Directors (of relevant local boards).
Sub-Committees of the Central Board
It includes those on inspection and audit, staff and building. Focus of each sub-committee is on specific areas of operations, Its important subsidiary institutions are as follows
Central Banking Functions
Central banking functions of RBI are as under
(i) Issue of Paper Currency The Reserve bank is nation's sole note issuing authority except one rupee notes which are issued by ministry of finance. It issues notes of the denomination of Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500 and Rs. 2000. The bank has a separate department for note issuing. This is known as Issue Department.
(ii) Banker of the Government The RBI has to work as an agent of the Central and State Governments. It performs various banking functions such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It provides overdraft facility to the government in case of financial crunch.
(iii) Banker of Banks and Lender of the Last Resort RBI acts as a banker for all the Commercial Banks. All scheduled banks come under the direct control of RBI. All commercial as well as schedule banks have to keep a minimum reserve (3%) with the RBI. They have to submit weekly reports to RBI about their transactions. By performing 3 functions, the RBI helps the member banks significantly.
They are given below
Regulatory Functions
Control of credit is the principal function of the Reserve Bank of India. Control of credit means expansion or contraction of credit. Reserve Bank of India makes use of all those methods of credit control that are adopted by other Central Banks in the world.
The methods adopted by the Reserve Bank to control credit are studied under two parts
Quantitative Credit Control
To control the flow of quantum of credit, Reserve Bank adopts the measures which are as under
Tit-Bits
RBI Controls; Inflation and Growth
RBI can influence inflation and growth in the economy to a large extent through its instruments of control. RBI squeezes out liquidity from the economy by selling securites. Increasing repo rates, increasing CRR etc, then the demand in the economy is reduced and inflation is brought under control.
However, in case inflation is due to supply side shortages, RBI controls have less influence. Similarly increasing liquidity in economy means that households have more money to consume, Industries have more money to invest in plant and machinery etc., all of which lead to increase in economic activity
Monetary Policy In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth. The Union Government on 29th Sep. 2016 notified the constitution of the Monetary Policy Committee (MFC). As per the provisions, out of the six Members of monetary Policy Committee, three members will be from the RBI. The other three members MPC will be appointed by the Central Government.
Qualitative or Selective Credit Control
This refers to the control of specific credit meant for certain specific objectives, e.g. If the government wants to check the rising prices of wheat in India, the Reserve Bank may instruct the member banks not to give loans against the security of wheat. Traders will not get credit for the purchase of wheat and therefore, they will not be able to buy large quantities of wheat. This would bring down wheat prices as the credit squeeze is directed towards wheat alone. It is thus called selective control. These measures are as under
Other Functions of RBI
Besides the above stated specific functions, the Reserve Bank of India performs the following other functions
Limitations on RBI
It has certain limitations as the RBI cannot function as the commercial banks, cannot give loans against the fixed assets. RBI cannot give unsecured loans to others.
Foreign Exchange Management
It is an essential function of the RBI. Being the Central Bank of the Country, Reserve Bank of India also regulates exchange rate of rupee in terms of foreign currencies. It tries to maintain stability of exchange rate. In order to maintain the exchange rate stability, it has to bring demand and supply of the foreign currency close to each other. Reserve Bank deals with the currencies of only those countries which are members of IMF.
Percentage ratio of a financial institution's primary capital to its assets (loans and investment), used as a measure of its financial strength and stability.
Tier-1 and Tier-2 Capital
These are as follows
(i) Tier-1 Capital is the core measure of bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings) but may also include non-redeemable non-cumulative preferred stock.
(ii) Tier-2 Capital or supplementary capital, include a number of important and legitimate constituents of a bank's capital base.
Major Efforts of International Banking
Basel Norms
Basel norms are set by Bank of International Settlement (BIS) in Basel, Switzerland. Central Bank of 55 countries are members to the BIS.
Basel II Norms
It is a guide to capital adequacy standards for lenders. The aim of Basel II is to better align the minimum capital required by Regulators (socalled regulatory capital) with risk.
Basel III Norms
It will become operational from 1st Jan, 2013 in a phased manner. It will be fully implemented by 31st Mar, 2019.
Principles for Basel III
RBI released its guideline on Basel III capital regulation on 2nd May, 2012.
(i) Indian banks have to maintain tier 1 capital or core capital atleast 7% of their risk weightage assets or ongoing basis.
(ii) The total capital ratio including tier 1 and tier 2 must be atleast 9%.
(iii) For tousle year ending 31st Mar, 2013 bank will have to disclose capital ratio computed under existing guidelines.
Basel III Guidelines, 2015
The Reserve Bank of India (RBI) released on 28th May. 2015, the draft guidelines on the Net Stable Funding Ratio (NSFR) under Basel III framework on liquidity standards for banks. The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. The objective of the NSFR is to ensure that banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. In draft guidelines released, the Central Bank said that banks will have to maintain Net Stable Funding Ratio (NSFR) from January, 2018.
Base Rate System
Money
It plays an important role in our life. Modern form of money includes paper notes and coins. In India, the Reserve Bank of India (RBI) is authorised to issue currency notes, on behalf of the Government of India. Further, there is legal sanction behind every currency that implies that a rupee cannot be refused as a means of settling transactions in India. Thus, rupee is the universally accepted means of exchange in India.
Measures of Money Supply in India
Money supply is the stock of liquid assets held by the public which can be freely exchanged for goods and services. RBI calculates various concepts of money supply. These are known as measures of monetary aggregates or money stock measures. Various monetary and liquidity aggregates compiled in India are as follows
Reserve Money \[({{M}_{0}})\]= Currency in Circulation + Bankers' Deposits with the RBI + Other Deposits with the RBI
\[{{M}_{1}}\]= Currency with the Public + Demand Deposits with the Banking System + Other Deposits with the RBI
\[{{M}_{2}}\] = \[{{M}_{1}}\] + Post Office Savings Banks
\[{{M}_{3}}\] = \[{{M}_{1}}\]+ Time Deposits with the Banking System
\[{{M}_{4}}\] = \[{{M}_{3}}\] + Office Savings of Banks (Excluding National Savings Certificates)
The working group under the chairmanship of Dr YB Reddy then Deputy Government of RBI (Now Former Governor of RBI) has suggested four new monetary measures \[({{M}_{0}},{{M}_{1}},{{M}_{2}},{{M}_{3}}).\]Here, \[{{M}_{0}}\] is reserve money which is most liquid measure of money supply. \[{{M}_{1}}\] is termed as narrow money and \[{{M}_{3}}\] as broad money. The decreasing order of liquidity of these monetary aggregates \[{{M}_{0}}>{{M}_{1}}>{{M}_{2}}>{{M}_{3.}}\] The decline in liquidity indicates the shifting of 'medium of exchange 'to' store of value'. These monetary measures are arranged in decreasing order of liquidity, with \[{{M}_{1}}\] being the most liquid.
The Indian Currency System
The present monetary system of India is based on inconvertible paper currency and is managed by the Reserve Bank of India. The present currency system is based on minimum reserve system of note issue. It was adopted in 1957. Under the minimum reserve system, RBI has to keep a minimum reserve of Rs. 200 crore comprising of gold coins and foreign currencies. Out of the total Rs. 200 crores, Rs. 115 crore should be in form of gold.
Mints
Coins are minted by the Government of India. RBI is the agent of government for distribution, issue and handling of coins. Four mints are operation at Mumbai, Noida (UP), Kolkata and Hyderabad.
Tit-Bits
Languages in Currency
PMO has directed the coins and currency division of RBI to take appropriate steps to include Maithili as well as the remaining four languages i.e. Manipuri, Santhali, Dogri and Bodo, on the rupee note. Out of 22 languages havings been accorded official languages status as per eight schedule of the constitution of India, only 17 find a place on the Indian currency till now.
Features of New Rs. 2000 Notes
The new currency note of magenta colour 2000 rupees will have an image of the Mangalyaan celebrating success of India's Mars mission. Also, it will have the following identification marks. The size of new note is 66mmx166mm. Obverse:
Features of New Rs. 500 Notes
The size of new of stone grey colour note of Rs. 500 is 63mm \[\times \] 150mm. Obverse:
Latent image of the denomination numeral. Denomination numeral in Devanagari.
Orientation and relative position of Mahatma Gandhi portrait changed.
Number panel with numerals growing from small to big on the top left side and bottom right side.
Denomination in numerals with rupee symbol in colour changing ink (green to blue) on bottom right.
Ashoka pillar emblem on the right.
Raised printing of Mahatma Gandhi portrait, Ashok pillar emblem, based and identification mark. Five bleed lines on left and right in raised print.
Year of printing of the note on left. Swachh Bharat logo with slogon. Red Fort-an image of Indian heritage site with Indian flag.
Printing of Securities and Minting in India
Security Press |
Station |
Established Year |
Related by |
Currency Notes Press |
Nasik, Maharashtra |
1928 |
Bank notes from Rs.1 to Rs.100 |
Security, Paper |
Hoshangabad (MP) |
1967-68 |
Banks and currency notes paper |
Bank Notes Press |
Dewas (MP) |
1974 |
Bank notes of 20,50,100 and 500 |
Security Notes Printing Press |
Hyderabad |
1982 |
Union excise duty stamps |
India Security Press |
Nasik |
1992 |
Postal material, postal stamps, etc |
Modernised Currency Notes Press |
Mysore (Karnataka), Salbani (West Bengal) |
1995 |
Currency Notes. |
Coins are minted at four places viz, Mumbai, Kolkata, Hyderabad and Noida. |
Relaunched Rs. 1 Note
After 20 yrs. RBI relaunched Rs. 1 note in Mar, 2015, in Nov, 1994, printing of Rs. 1 note was stopped mainly due to higher cost and for freeing capacity to print currency notes of higher denomination. Printing of Rs. 2 and Rs. 5 notes too were discontinued in 1995.
Cheque and Draft Services of Bank Cheque
It is a bill of exchange dramon on a specified samker expressed to be payable on demand. From 1st April, 2012 cheques, drafts, pay orders and banker's cheques will be valid for only 3 months.
(i) Drawer Person who has an account in bank and who draws a cheque for making payment.
(ii) Drawee A drawee is a person by whom the cheque is drawn.
(iii) Payee A payee is the person to whom the amount stated in the cheque is payable.
Types of Cheques
The first three digits in the MICR code represent the city code that is the city in which the bank branch is located. The next three digits stand for the bank code while code three digits represent the bank branch code.
Tit-Bits
Bank Draft
It is a bill of exchange in which a bank orders its branch or another bank specified therein, as the case may be, to repay a specified sum of money to a specified person or to his order. Usually, banks charge a standard rate of service/issue charges on these drafts.
Difference between a Cheque and a Demand Draft
A cheque is issued by an individual, whereas a demand draft is issued by a bank. A cheque is drawn by an account holder of a bank whereas a draft is drawn by one branch of a bank on another branch of the same bank.
A cheque can be made payable either to a bearer or order. But a demand draft is always payable to order of certain person.
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