Bank rate

The rate of interest payable by commercial banks to RBI if they borrow money from the
latter in case of a shortage of reserves.

Bonds

A paper bearing the promise of a stream of future monetary returns over a specified

period of time.
Issued by firms or governments for borrowing money from the public.

Broad money

Narrow money + time deposits held by commercial banks and post office savings
organisation.

Capital

Factor of production which has itself been produced and which is not generally entirely
consumed in the production process.

Capital gain/loss

Increase or decrease in the value of wealth of a bondholder due to an appreciation or

reduction in the price of her bonds in the bond market.

Capital goods

Good that are purchased to be used in production rather than for consumption.
Goods which are bought not for meeting immediate need of the consumer but for
producing other goods.

Cash Reserve Ratio (CRR)

The fraction of their deposits which the commercial banks are required to keep with RBI.

Currency deposit ratio

The ratio of money held by the public in currency to that held as deposits in commercial
banks.

Deficit financing through central bank borrowing

Financing of budget deficit by the government through borrowing money from the central

bank.
Leads to increase in money supply in an economy and may result in inflation.

Devaluation

The decrease in the price of domestic currency under pegged exchange rates through
official action.

High powered money

Money injected by the monetary authority in the economy. Consists mainly of currency.

Liquidity trap

A situation of very low rate of interest in the economy where every economic agent
expects the interest rate to rise in future and consequently bond prices to fall, causing
capital loss. Everybody holds her wealth in money and speculative demand for money is

infinite.
https://www.youtube.com/watch?v=rKEzxKkdwkM

Managed floating

A system in which the central bank allows the exchange rate to be determined by market
forces but intervene at times to influence the rate.

Money multiplier

The ratio of total money supply to the stock of high powered money in an economy.

Narrow money

Currency notes, coins and demand deposits held by the public in commercial banks.

Open market operation

Purchase or sales of government securities by the central bank from the general public in
the bond market in a bid to increase or decrease the money supply in the economy.

Real exchange rate

The relative price of foreign goods in terms of domestic goods.

Reserve deposit ratio

The fraction of their total deposits which commercial banks keep as reserves.

Revaluation

A decrease in the exchange rate in a pegged exchange rate system which makes the

foreign currency cheaper in terms of the domestic currency.

For example, suppose a government has set 10 units of its currency equal to one U.S.
dollar. To revalue, the government might change the rate to five units per dollar. This
would result in that currency being twice as expensive to people buying that currency with
U.S. dollars than previously and the U.S. dollar costing half as much to those buying it
with foreign currency.

Solvency

The ability of a company to meet its long-term financial obligations. Solvency is essential
to staying in business, but a company also needs liquidity to thrive. Liquidity is a
company's ability to meet its short-term obligations. A company that is insolvent must
enter bankruptcy; a company that lacks liquidity can also be forced to enter bankruptcy
even if it is solvent.

Statutory Liquidity Ratio (SLR)

The fraction of their total demand and time deposits which the commercial banks are
required by RBI to invest in specified liquid assets.

Sterilisation

Intervention by the monetary authority of a country in the money market to keep the
money supply stable against exogenous or sometimes external shocks such as an increase

in foreign exchange inflow.

A form of monetary action in which a central bank seeks to limit the effect of inflows and
outflows of capital on the money supply. Sterilization most frequently involves the
purchase or sale of financial assets by a central bank, and is designed to offset the effect
of foreign exchange intervention.

Banking System of India

Bank of Hindustan (1770) was the first bank to be established in India (Alexander and Co.) at Kolkata
under European management. Other banks set-up was Bank of Bengal (1806), Bank of Bombay (1840)
and the Bank of Madras (1843) - these were called Presidency Banks.

First bank with limited liability managed by an Indian board was Oudh Commercial Bank, founded in
1881. The first purely Indian bank was the Punjab National Bank (1894).

RESERVE BANK OF INDIA

It is the Central Bank of the country.

It was established on Apr 1, 1935 with a capital of Rs.5 crore. This capital of Rs.5 crore was divided into
5 lakh equity shares of Rs.100 each. In the beginning, the ownership of almost all the share capital was
with the non-government share-holders.

It was nationalized on Jan 1, 1949 as govt., acquired the private share holdings.

Administration: 14 directors in Central Board of Directors besides the Governor, 4 Deputy Governors
and one Government official. The Governor is the Chairman of the board and Chief Executive of the
Bank.

Governors:
o

1st Governor-Sir Smith (1935-37)

1st Indian Governor : CD Deshmukh (1948-49)

RESERVE BANK OF INDIA AND ITS FUNCTIONS

Issue of Notes: Regulates issue of bank notes above 1 rupee. It acts as the only source of legal tender
money because the one rupee notes issued by Ministry of Finance are also circulated through it.

The Reserve Bank has adopted the Minimum Reserve System for the note issue. Since 1957, it maintains gold
and foreign exchange reserve of Rs.200 crore, of which at least 115 crore should be in gold.

Banker to the Government: Acts as the banker, agent and advisor the Govt., of India. It also manages
the public debt for the Government.

Banker's Bank: The Reserve Bank performs the same function for other banks as the other banks
ordinarily perform for their customers.

Controller of Credit: The Reserve Bank undertakes the responsibility of controlling credits created by
the commercial banks. To achieve this objective, it makes extensive use of quantitative and qualitative
techniques to control and regulate the credit effectively in the country.

Custodian of Foreign Reserves: For the purpose of keeping the foreign exchange rates stable, the
Reserve Banks buys and sells the foreign currencies and also protects the country's foreign exchange
funds.

It formulates and administers the monetary policy.

Acts as the agent of the Government of Indian in respect to India's membership of the IMF and the
World Bank.

No personal accounts are maintained and operated in RBI.

RESERVE BANK OF INDIA AMENDMENT BILL 2005 APPROVED

The Reserve Bank of India (Amendment) Bill 2005 has been approved. This bill amends the Reserve Bank Act
for providing flexibility to the Central Bank in fixing the cash reserve ratio (CRR) and statutory liquidity ratio
(SLR). CRR is the cash that banks deposit with RBI and is one of the key instruments used by the Central
Bank to inject or suck out liquidity from the market.
SLR specifies the minimum amount that banks must invest in government securities. This bill is to arm RBI
with greater autonomy and authority to deal with subjects (mainly CRR and SLR) under the Act. This bill also
allows the Central Bank to regulate derivatives, repo instruments (overnight rates used to regulate liquidity)
andsecurities.
The amendments also seek to end the ambiguity about the legal validity of derivatives as it was seen to inhibit
the growth of the market.

IMPERIAL BANK OF INDIA

It was created in Jan 1921 by amalgamation of 3 presidency banks, viz., Bank of Bengal, Bank of
Bombay and Bank of Madras.

After nationalization in 1955, its name was changed to State Bank of India (SBI).

It is the biggest commercial bank in the public sector of India.

It has the largest number of branches in the world.

State Bank of India - SBI

SBI has 7 subsidiaries. These are:

State Bank of Bikaner and Jaipur

State Bank of Hyderabad

State Bank of Indore

State Bank of Mysore

State Bank of Patiala

State Bank of Saurashtra

State Bank of Travancore

NATIONALIZATION OF BANKS IN INDIA

In order to have more control over the banks, 14 large commercial banks, the reserves of
which were more than Rs.50 crore each, were nationalized on July 19, 1969.
The banks were:

1. The Central Bank of India

2. Bank of India
3. Punjab National Bank
4. Canara Bank
5. United Commercial Bank
6. Syndicate Bank
7. Bank of Baroda
8. United Bank of India
9. Union Bank of India
10. Dena Bank
11. Allahabad Bank
12. Indian Bank
13. Indian Overseas Bank
14. Bank of Maharashtra
On April 15, 1980, those 6 private sector banks whose reserves were more than Rs.200 crore each were
nationalized.
These banks were:
1. Andhra Bank
2. Punjab and Sindh Bank
3. New Bank of India
4. Vijaya Bank

5. Corporation Bank
6. Oriental Bank of Commerce
In Sept 1993, the New Bank of India was merged with the Punjab National Bank.
These nationalized banks, together with Regional Rural Banks (RRBs), come under the category of PSBs.
The
other
kind
of
commercial
banks
are
private
Sector
Commercial
Banks.
At present there are 20 nationalized banks besides the RBI.

REGIONAL RURAL BANKS IN INDIA

Set up in 1975. Their main objective is to develop the rural economy by providing credit and
encouraging other productive activities in the rural areas.

The paid-up capital of each rural bank is Rs.25 lakh, fifty percent of which is contributed by the Central
Government, 15 percent by the State Governments and 35 percent by the sponsoring public sector
commercial banks which are responsible for the actual setting up of the RRBs.

The Reserve Bank of India Act, 1934 has classified the banks as Scheduled Banks and non-Scheduled
Banks.

Note:

The Scheduled banks are those which have a paid-up capital and reserves of an aggregate value of not
less than Rs.5 lakh and which satisfy RBI that their affairs are carried out in the interests of their
depositors.

These banks have been entered in the Second Schedule of the RBI Act, 1934. All commercial banksIndian and foreign, RRBs and State Co-Operative Banks are Scheduled banks.

MONETARY AND CREDIT POLICY

It is the policy with the help of which the Government through its Central Bank regulates money supply and
achieves price stability. The broader objectives of the monetary and credit policy are to promote investment to
bring about greater rate of economic growth with the result that the accompanying benefits of employment
generation; inflation management, exchange rate stabilization etc also accrue.
The RBI announced the credit policy traditionally twice a year the lean season policy in April and busy
season policy in October. In 1998, it became once a year, the October intervention being a review. From 1999,
it is being announced only in April.
Bank and Other Financial Institutions
Industrial Credit and Investment Corporation of India Bank (ICICI Bank)
Established in 1955 as a public limited company to encourage and assist industrial units of the nation. It has
been converted into a bank with effect from May 3, 2002.

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

Established in 1990; promotes small scale sector.

NATIONAL BANK OF AGRICULTURE AND RURAL DEVELOPMENT (NABARD)

Established on Now 5, 1982; gives credit facilities to farmers.

EXPORT-IMPORT BANK OF INDIA (EXIM)

Set-up on Jan 1, 1982; grants deferred credit to Indian exporters in order to operate in the international market.

INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI)

The IDBI which was established as Development Finance Institution under IDBI Act, 1964 has been converted
as a banking company. Parliament passed the Act so as to cancel out IDBI Act 1964 and to open the way for
the registration of this new banking company.
IDBI got the certificate of commencement of business on Sept 28, 2004 and the IDBI was transformed into
IDBI Ltd. on Oct 1, 2004, a company under the Companies Act, 1956 and a Scheduled Bank (on Oct 11, 2004)
under the RBI Act, 1934.

INDUSTRIAL FINANCE CORPORATION OF INDIA LTD. (IFCI)

Industrial Finance Corporation of India Ltd. was established in 1948 under a special Act on the
recommendations of Central Banking Enquiry Committee.
The basic aim of IFCI is to arrange medium and long term credit for various industrial enterprises of the
country. Since July 1, 1993 this corporation has been converted into a company and it has been given the
status of a Ltd. company with the name Industrial Finance Corporation of India Ltd.

INDUSTRIAL INVESTMENT BANK OF INDIA LTD. (IIBIL)

Formerly known as IRBI
IRBI was established on Mar 20, 1985 under Indian Industrial Reconstruction Bank Act, 1984 as a result of
reconstituting Indian Industrial Reconstruction Corporation Ltd.
The basic aim of establishing IRBI was to revive sick and closed industrial units and to act as a prime loan and
reconstruction agency. IRBI grants loans and advances to industrial institutions. It accepts stocks, shares,
bonds and debentures and also provides guarantee on deferred payments.

NATIONAL HOUSING BANK (NHB)

National Housing Bank was established in July 1988 as wholly owned subsidiary of RBI. NHB is the apex
banking institution providing finances for houses.

A major" activity of NHB includes extending financial assistance to eligible institutions in the housing sector by
way of refinance and direct finance.

NON-BANKING FINANCIAL COMPANIES (NBFCS)

Non-Banking Financial entities comprise NBFCs, mutual benefit financial companies (Nidhi Companies), and
mutual benefit companies (potential nidhi companies). Department of Company Affairs regulates the mutual
benefit financial companies and mutual benefit companies leaving the regulation of NBFCs with the RBI.
Narasimhan Committee
NARASIMHAN COMMITTEE (1991)
Recommendations on Financial Reforms

The Government of India constituted a 9-member committee under the chairmanship of Mr M Narasimhan,
retired RBI Governor, on 14lh August 1991 for making recommendation on the existing financial system and to
give suggestions for improving structure. Its recommendations were as follows:

There should be no bar to new banks being set up in the private sector, provided they conformed to the
start-up capital and other requirements prescribed by the RBI.

The Government should indicate that there would not be further nationalisation of banks and there
should not be any difference in treatment between public sector banks and private sector banks.

The banking should evolve towards a broad pattern consisting of three or four large banks, including
the. SBI which would become international in character; eight to ten national banks with the network of
branches throughout the country engaged in universal banking; local bank whose operations would be
generally confined to a specified region and lastly rural banks to cater to rural areas.

There should be an Assets Reconstruction Fund (ARF) which could take over, from the banks and
financial institution (FIs), a portion of their bad debts at a discount. The level of discount being
determined by independent auditors on the basis of clearly defined guidelines. The ARF, according to
committee should be provided with special powers for recovery, somewhat broader than those
contained in sections 29 to 32 of the state financial act 1951. The capital of ARF should be subscribed
by the public sector banks and financial institutions.

The banks and the financial institutions should be authorised to recover bad debts through special
tribunals and based on the valuation given in respect of each asset by a panel of at lest two
independent auditors.

The public sector banks with profitable operations should be allowed to tap the capital market for
enhancement of their share capital. Subscribers to such issues could be mutual funds, profitable public
sector undertakings and the employees of the institutions beside the general public.

Licensing should be abolished and the option of opening of branches for the present should be left to
the commercial judgement of individual banks. Further, the internal organisation of banks is best left to
judgement of the management of the individual bank.

There should be phased reduction Of CRR and SLR.

A liberal view should be adopted for allowing foreign banks in the country. Both foreign and domestic
banks should be treated at par.

Primary targets for credits should be redefined and such credit should not be more than 10% of total
credit.

Computerisation of banks should be promoted.

The dual control of RBI and Finance Ministry on banks should be abolished and RBI should function
only as regulatory authority for banking system in the Economy.

RBI representatives should not be included in the management boards of banks, only government
representative should be there.

Granting resources to developmental financial institutions on concessional rates of interest should be

abolished in phase within next 3 years. These institutions should be allowed to mobilize resources from
open market on competitive rates.

Review of recruitment procedures, training and remuneration policies in public Sector Banks.

Threat of action by vigilance and other investigative authorities, even in the case of commercial
decisions create low morale. The committee wants this issue to be addressed.

Need for professionalising and depoliticising the bank boards.

NARASIMHAN COMMITTEE-II (1998)

Banking Sector Reforms

The major recommendations of the committee are:

Merger of strong banks which have a multiplier effect on industry. It has cautioned against merger of
strong banks with weak banks as this will adversely affect the asset quality of strong banks.

Concept of narrow banking should be tried out to rehabilitate weak banks. If this was not successful the
issue of closure should be examined.

Two or three large Indian banks should be given international character.

Small and local banks should be combined to states or clusters of districts in order to serve local trade,
small industry and agriculture.

The committee has also commented on the governments role in Public Sector Banks by observing that
government ownership has become an instrument of management. Such micro-management of banks
is not calculated to enhance autonomy and flexibility.

Functions of the board and management need to be reviewed so that boards remain responsible for
enhancing shareholders value through corporation or corporate strategy.

Need to review minimum prescriptions for capital adequacy. RBI Act, Bank Nationalisation Act, Banking
regulation Act and State Bank of India Act are in urgent need of review.

Integration of NBFCs lending activities into the financial system.

Review of recruitment procedures, training and remuneration policies in public Sector Banks.

Threat of action by vigilance and other investigative authorities, mishandling the case of commercial
decision screate low morale. The committee wants this issue to be addressed.

Need for professionalising and depoliticising the bank boards.