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Banking & FIs

Banking & FIs

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Published by Ambalika Smiti

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Published by: Ambalika Smiti on Mar 29, 2011
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BANKING AND FINANCIAL INSTITUTIONSRESERVE BANK OF INDIA
RBI is the central bank of the country i.e. an apex institution of Indian monetary system. It wasestablished on 1st April 1935 under the RBI Act 1934. RBI was set up as the private shareholders bank withpaid up capital of Rs. 5 crore. It was nationalized on 1st January 1949. The Reserve Bank follows anaccounting year from 1
st
July to 30
th
June, which enables it to take into account the performance of banks,which follow an April-March financial year. The executive head of the Bank is called the governor, who isassisted by deputy governors and other executive officers. For general direction the Bank has a central boardof directors, supplemented by four local boards at Delhi, Calcutta, Madras and Bombay. The head office of theBank is at Mumbai.
Functions of RBI
 1
.
Bank of Issue
: RBI has the sole right to issue bank notes of all denominations. The issuing and distributionof rupee one notes and coins and small coins all over the country is undertaken by the RBI as an agent of theGovernment.2.
Banker to Governments
: The RBI acts as an agent of Central Government for all states in India exceptJammu and Kashmir. The RBI has the obligation to transact government business. Central government andall state governments maintain account with the RBI. It helps the centre and state governments to float newloans and to manage public debt.3
. Banker's Bank 
: All commercial banks maintain current accounts with the RBI. The RBI providescentral clearing house facility to the banks in order to settle their mutual claims on each other. It also providesfinancial assistance to the banks in the time of need so it is also called as the lender of the last resort.4.
Controller of money and Credit 
: The RBI regulates the supply of money and credit in the
economythrough various instruments of monetary policy like CRR, SLR, Bank rate etc. It controls thefinancial institutions through the system of licensing, inspection and by providing guidelines.
 
5 Exchange management and control 
: RBI manages foreign exchange rate of rupee throughregulating norms of convertibility in respect of various foreign exchange transactions.
6. Custodian of Foreign Exchange Reserves
:
 
RBI maintains the reserve of foreign exchange.It acts as an agent of government in respect of Indian membership in the IMF.
7.
Supervisory Functions
: The RBI Act 1934 and the Banking Regulation Act 1949 have givenRBI wide powers of supervision and control of commercial and cooperative banks.
8. Promotional Functions
: RBI promotes banking habits, extend banking facilities to ruraland semi-urban areas. Thus RBI has helped in setting up of various development financeinstitutions like IDBI, ICICI, IFCI etc.
9. Publication of Monetary Data
: RBI collects a variety of statistical information and publishesthe same periodically. Its important publications
include
'Report on currency and finance',
an annual
publication and the '
RBI-Bulletin
', a monthly magazine.
Monetary Policy
Monetary Policy is an instrument of economic policy which acts by influencing the cost andavailability of money and credit in economy to various sectors. To achieve balance between economicgrowth and control over inflation. RBI has followed the policy of 'Controlled monetary expansion'.
 Instruments of Monetary Policy
There are two broad instruments of the monetary policy of the RBI i.e. quantitativemethods and qualitative methods as follows:I.
Quantitative Methods or General Methods
Such-measures regulate the volume of moneyand credit in the economy as a whole. Such measures include CRR, SLR, Bank Rate and openmarket operation as follows:
 
(a)
 
Cash Reserve Ratio (CRR) or Variable Reserve Ratio (VRR)
 
As per RBI Act 1934, banks have to keep a certain proportion or percentage of their totaldeposits (time and demand liabilities) with RBI.(b)
 
Statutory Liquidity Ratio (SLR)
 
It is the ratio of total deposits of banks which they have tokeep or maintain in the form of specified liquid assets with themselves. It can be varied in the rangeof 0 to 40%.
 
 
(c)
 
Bank Rate
: It is the rate or interest charged by the RBI from commercial banks by way of rediscounting their first class (approved) securities. In other words, it is the rate of interest at whichRBI lends to the commercial banks.
 
(d)
 
Open Market Operations (OMO)
 
It refers to buying and selling of Government securities by theRBI in the financial markets. The open market operations in the short term government securitiesare called repos and reverse repos.
 
(i)
Repo
: Repurchase operations or repurchase agreement. It is carried out under theLiquidity Adjustment Facility (LAF) to stabilize short terms liquidity in the economy. Under this RBIbuys government securities for a short period (usually a fortnight) with an agreement to sell it later.
 
(ii)
Reverse Repos
: Under this RBI sells governments short term securities with anagreement to buy them later.
 
Note: RBI has switched over to the international usage of the terms 'repo' and 'reverse repo'effective from October 29, 2004. As per international usage, absorption of liquidity by the RBI istermed as 'reverse repo' and the injection as 'repo'.
 
Reverse Repo Rate it is the rate of interest given by the RBI on Government securities reverse repooperations.
Latest Credit Control Rates
1. CRR 6%2. SLR 24%3. Bank Rate 6%4. Repo Rate 6.75%
5.
Reverse Repo Rate 5.75%
II. Qualitative or Selective Methods
Such measures are used to control the availability and cost of money and credit for certainsector of the economy. They regulate both the volume of loans and purpose for which loans are given,They can be used for channeling, greater flow of credit into particular sectors and to restrict flow of credit they have to keep or maintain in the form of specified liquid assets with themselves. It can bevaried in the range of 25 to 40%
 
to certain sectors. Such measures include the following:
 
(a)
Changing Margin requirements
—Margin requirement refers to the excess of the value of security required for a loan over the amount of loan sanctioned.(b)
 
Fixation of Ceilings of credit for different sector 
—RBI many fix maximum limit of creditfor various sectors.(c)
Discriminatory rate of interest 
- i.e. fixing different rates of interest for various sectors.(d)
Prohibition of discounting of Bills covering the sale of sensitive commodities
—i.e.
 
restricting the flow of credit to various sectors.
 
(e)
Credit rationing 
:—i.e. fixing of quota of credit in respect of various sectors.
 III. Other Measures
(a)Moral Suasion
: It refers to the persuasive methods used by RBI through the letters,conferences, periodicals etc. to influence the operations of banking sector.
(b)Direct Action
: RBI may initiate disciplinary action against the banks in case these do notcomply with its directives. It may include imposition of monetary penalty, derecognizing of banks etc.
Types of Monetary PolicyDear Money Policy:
It is associated with high bank rate and other rates of interest It is pursued to squeeze theliquidity from the economy through making the cost at borrowing money higher.
Cheap Money Policy:
It is reverse of Dear Money Policy where by the bank rate and other rates of interestare reduced In order to augment liquidity in the economy, thus making the
;
borrowing .of money easier.
 
Contractionary Monetary Policy
:
It seeks to reduce the liquidity in the economy by reducing the availability of 
 
credit to commercial sector; by reducing credit creation capacity of commercial banks and by increasing thecost of credit. In pursuing contraction monetary policy, bank rate, CRR, SLR are increased and under openmarket operations, RBI sells government securities. Margin requirements are also increased.
 Expansionary Monetary Policy:
Under this, it seeks to increase liquidity and consequently bank rate,SLR, CRR are decreased and RBI purchase government securities and margin requirements are alsodecreased.
 Bank of International Settlement (BIS)
BIS was established in1930 by 10 central banks. It is situated at Basel, Switzerland. It works as abank for central banks of the member countries. India got its membership in 1996.
COMMERCIAL BANKS
According to the Indian Banking Companies Act, "Banking company is one which transacts the businessof banking which means the accepting for the purpose of lending or investment of deposits of money from thepublic repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise". Bank is afinancial institution which performs three basic functions i.e. (a) Accepting deposits from public; (b) providingcheque facility (withdrawable on demand) and; (c) lending.
 Type of bank deposits
Banks accept deposits from the public in the following three broad accounts.
 
(1)
Current Account Deposit 
:
 
This type of account is generally maintained by the businessfirms. Such deposits are regarded as demand deposits. There is no restriction on the number of withdrawals. Banks do not provide interest on such, accounts rather they impose some servicecharges on the depositors. Deposits under such accounts constitute demand liability of the banks.
(2) Fixed or Time Deposit Account 
: Cash is deposited in this account for a fixed period. This type of deposits attract high rate of interest. Deposits under such accounts constitute 'time liability' of banks.(3)
Saving Account Deposits:
This type of account is generally maintained by households.Bank may impose some restrictions on the amount and number of withdrawals. Banks payinterest on these accounts although its rate is less than the rate of interest paid on fixedaccount/such deposits are the combination of demand and time liabilities of banks.
 Balance Sheet of Banks
Balance sheet refers to the statement of assets and liabilities of an organization.
 Assets Liabilities
Cash Paid up Capital and ReservesMoney at Call DepositsInvestments BorrowingsLoans and Bills discounted Other Liabilities
Scheduled / Non Scheduled Banks
Under the Reserve Bank of India Act, 1934, banks were classified as scheduled banks and non-scheduled banks. The scheduled banks are those which are entered in the second schedule of RBI Act1934. Such banks are those which have paid-up capital and reserves of an aggregate value of not less thanRs.5 lakh and which satisfy RBI that their affairs are carried put in the interests of their depositors. Allcommercial banks Indian and Foreign, regional rural banks and state co-operative banks are scheduled banks.Non-scheduled banks are those which have not been included in the second schedule of RBI Act, 1934. Atpresent, there are only three non-scheduled banks in the country.
 
Scheduled commercial banks enjoy the following facilities.» They can borrow from RBI.
 
» They can avail the facility of central clearing house i.e. mutual transactions amongst the banks aresettled through central clearing house.
 Brief history of commercial banking in India

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