Dr SHAKUNTALA MISRA NATIONAL REHABILITATION

UNIVERSITY
Lucknow Faculty of Law

ASSIGNMENT ON [LAW OF BANKING AND

INSURANCE]
For
CLASS: B.Com. LL. B (Hons.) 7th Semester

Submitted by
[RAHUL TIWARI]
Academic Session: 2020-21

Under the Supervision of

Dr. Shailya Shakya Sir
Faculty of Law
Dr. Shakuntala Misra National Rehabilitation University
 ACKNOWLEGDEMENT

I would like to express my special thanks of gratitude to my Dr. Shailya Shakya, who gave me the golden
opportunity to do a assignment in this intriguing subject of Law of banking & Insurance which also helped
me in doing a lot of Research and I came to know about so many new things I am really thankful to him.

RAHUL TIWARI
 CLASS: B.com LLB 7th Semester
Subject: Law of Banking & Insurance 2020-21( By Rahul Tiwari)
Lesson 1: Bank & banking structures
Assignment 1:
Ans. The advancement is important within, because it's unclear with its approach. It provides the but doesn't
make it certain enough to which are to be performed. Neither does the law does so in regards to incidental
activities. and the inclusion of company as a bank under Banking Regulation act, 1949 gives it many
privileges so as to go in other forms of businesses under 6(1) of the act which comprises acts like borrowing,
raising & lending without security & selling in BOE, drafts etc. Also the letter of credit and bonds of every
type too. And executes duty of agent for government or persons, acting as attorney on behalf of customers, but
excluding business of( managing agent, treasurer of company) It also, under the act, Holds & transacts every
guarantee & indemnity business and also pledges for discharge of trusts.

Assignment 2:
Ans. Different actions like, Collection of Aadhaar, PMJDY and a rise in tel. & mobile communication altered
the accessement of how people connect. As per the estimate in March 2020, whole number of people who
attainted benefit under Jan Dhan scheme have exceeded more than 380 million. By changing concept of
individual's identity, Aadhaar has brought a sound-n-secure verifiable system but also simultaneously easy to
obtain as to assist in financial inclusion process. It had played a major role in village development.
Definition: It is termed as a cycle of assuring diverse activities and services in regards to finance and stellar
credit to those who are in need of it like economically backward people and is imperative for our country.
The Fragility factor: For instance, government gives benefit of PMJDY, thereby an average number of
people put amount in their banks which led to augment pressure on banks to run systematically and banks earn
no profit and there is no beneficial investment done by bank, subsequently such bank have to take subsidies
from government financial inclusion led to increase led to following increase in costs in banks because
number of people to open accounts within decreases. Also loan waiver resulted to increase pressure on banks,
null balance incurred loss to the banks.
The principle of bank separateness is very imperative assistance since opening of different branches in
different vicinities or in undeveloped areas will help in the development of villages.

Assignment 3:
Ans. There are some potent provisions in regards to prevention of concentration of economic power &
conflicts of interests in which comes the Section 21 which gives the power to Reserve Bank of India to
manage loans which are given extention by bank companies, it has the power to give guidelines in some
aspects which are mandatory like the Rate of interest & other situations pertaining to which advances are
given or sets, or confines the amount of advances made to some company etc while keeping in mind its paid-
up capital and reserves, a similar point, it also confines the amount of guarantee which is to be made on behalf
of any company or association etc, keeping in mind the paid-up capital or reserves of the banking company.
Reserve bank of India also has strength if you observe Section 35A and 36 under which they have been
empowered to supervise banks and direct them regarding for the deterrence of any dispute in such company
which might be harmful to the depositors whereas 36 is very blatant through which they can stop any banking
company related to any transactions or such.
I also think provisions of section 12 can also assist in stopping as many jurisdictions object to predominantly
commercial and industrial enterprises owing banks. A limit of 20% is put on shareholding in a bank of any
person or group of persons but allowing a financial cluster to subsidiarize as well as divestment can be another
sanction for breach of this type of shareholding limit, to deprive a person exceeding it of any rights attached to
shares.

Assignment 4:
Ans. The core manager of banks in regards to industries have a surging trouble of disputes and conflicts in the
interests, these people should be deterred from extracting excessively from deposits of the public, dividends
and other fees although stopping organizations from acquiring licenses is not justice because they will be
beneficial because IRDA's new guidelines emboldens banks and widen their horizons not just to stay agents of
corporation but brokers too and subsequently that will be good for so many people, giving them more products
from diverse companies. RBI's new regulations though in relevance to bank deposits have added a confining
factor to promoter group, excluding those beneath them.
A dimension to the nexus between banking and industry is whether a major industrial or commercial
enterprise should have a bank as part of its empire. The first concern must be with contagion risk. The bank
might be separately subsidiaries, and there might be firewalls in place. For example, bank regulators might
prohibit the parent or other members of the conglomerate from depositing with the bank, and limit severely the
extent to which the latter can assist other members of the group in times of crisis. But there is a large question
mark over the efficacy of firewalls, and the experience is that members of a corporate group find it difficult to
disavow each other when individual solvency is threatened.1IJ
Secondly, the potential conflicts of interest are patent. The parent and other members of the group must be
prevented from milking the public's deposits with the bank by means of excessive dividends and management
fees.
Obliged loans arc another threat, as are debts owed by the bank to others in the group which, if paid early,
could prejudice depositors who would continue to bear any risk of the bank's default.IM Thirdly, there is the
issue of economic concentration. Perhaps it is this which is the strongest argument of all in seeking to preserve
something of a separation of banks from commercial and industrial conglomerates.
Hence now after this, it should not be surprising that many jurisdictions object to predominantly commercial
and industrial enterprises owning banks. In some this is written into the law. A general limit such as 20 per
cent is put on the permissible shareholding in a bank of any one person or group of persons acting in
concert.115 The shareholding limit might not apply to ownership by another financial institution, thus
permitting a financial cluster to annuity. Another consequence of this exception is that foreign banks can
establish subsidiaries in these jurisdictions, provided other conditions are satisfied. As well as divestment
another possible sanction for breach of this type of shareholding limit is to deprive a person exceeding it of
any rights attached to the shares. Elsewhere the prohibition against the industrial or commercial enterprise
owning a bank may operate as a matter of policy, in accordance with a broad legislative discretion, while not
being mentioned explicitly on the face of the statute. This has been the approach in Britain. There has never
been an express limit on commercial enterprises owning shares in banks. However, the Financial Services
Authority has a power, in the FSMA 2000, to object to shareholders acquiring control or controlling
shareholders of a bank who are not fit and proper, or who would threaten the interests of consumers. At one
time the Bank of England had the policy that it might object to an industrial or commercial company acquiring
control of a bank where this created a possible conflict of interest in the conduct of a bank's business, or
exposed the bank (and thus the wider financial system) to the risk of contagion.117 As a matter of law the
FSA could not apply this approach if those behind the industrial or commercial enterprise satisfied the FSMA
2000 requirements.
At the other end of the spectrum are those jurisdictions which have no law or policy against banks being part
of a commercial or industrial group. Until 1993 German law said nothing about the shareholders of banks.
Now it has had to bring its law into line with the Credit Institutions Directive of the European Community.
Article 16 of the Directive obliges Member States to require persons to notify the home regulator if they are
proposing to acquire a qualifying holding in a bank. 'Qualifying holding' is defined in terms of a direct or
indirect holding of 10 per cent or more of the capital or voting rights, or a holding which makes it possible to
exercise significant influence. Under Article 16(1) persons must also notify the bank regulators if they propose
to increase their capital or voting rights so that their holding would cross the specified thresholds of 20 per
cent, 33 per cent or 50 per cent, or the bank would become a subsidiary. The regulators can then veto the
acquisition if, in view of the need to ensure a sound and prudent management of the bank, they are not
satisfied of the suitability of the person. Under the Directive, Member States must have a range of sanctions
against breach of these provisions. Despite the introduction of Article 16 into German law, however, German
policy—that commercial and industrial enterprises can own banks—is unaffected.
Lesson 2: Inter-bank Networks:
Assignment 5
Ans. Inter-bank networking can even become a boon for us, if systematically and accurately utilized, it will
solve issues like privity on contract, such as A in payment transfer example being able to sue any bank in our
system since its governed by chain, for a mistake of another bank, no matter how far down the descends. A
network of contracts, will minimize transactions costs & maximize flexibility.
Being an advantage to banks & their customers. Although the need of proper inclusion of inter-bank
networking is important in banking regulation act. In the unitary bank models otherwise, such as English law
in regards to customer & correspondent banking, it goes too far to suggest that as general law bank is
vicariously liable for acts of its correspondents . Even limited liability of customer's bank outlined is subject to
contract & banks invariably protect themselves with exemption clauses.
Legislation is making intrusion on some common law doctrines, European committee directive on cross
border credit transfer within European local areas imposes liability on customer's bank for credit transfers in
European currencies which are not completed. Liability is strict & banks released only in event of force
majeure. In English law, they demand precise proof of privity with correspondent . As for tort liability, US
courts have recognized it, but only in some possible case of correspondents bank error. The circumstances
would have to be very special for correspondent bank to have assumed a responsibility to customer in a
relevant sense. Were an action against correspondent possible- as suggested an unlikely event- English law has
no definite answer to whether the correspondent could take advantage of exemption clause in contract between
customer & its bank.

Assignment 6
Ans. UNCITRAL, to which India is signatory gives remedy for the losses endured through consequential
losses on part of correspondent bank's errors:
Art. 18 which depicts exclusivity of remedies, tells us that the remedies of art. 17(which provides liability for
interct) are exclusive in nature & no other compensation which emerges out of any other principles of law
shall be permitted in respect of non-compliance with Art.8 & 10, except any remedy that exists when a bank
has improperly executed, failed to, a payment order with either Intent to cause loss or carelessly with
knowledge that loss will likely happen.
Assignment 7
Ans. Infamously known as Stock market scam by one of the most notorious fraudsters in history, due to
which the recently liberalization period had faced a deterrent to it because of the scam, Harshal Mehta, the
man behind the ruckus, shoved sum of money through government securities in company and IPOs, hence
disrupting the equilibrium through manipulation, deceit.
SEBI, after this issue, was empowered with the passing of SEBI act, 1992, & this scam became a wake-up call
to everyone, Electronic & Demat trading was promoted, & there came a stimulated regulator for securities
market. It started to regulate listed, unlisted companies, enhanced it's horizons & betterment of protective &
developmental functions tightened its grip on insider trading, rigging, education to investors etc. Supported
NSE in 1993 for screen based trading.
Despite all this though, we have seen scams like Ketan parekh, Satyam scam(2009) Sahara scam of 2012
which then helped laying down more preventive measures such as KYC of investors, Demat trading's
compulsion etc.
Yes, it still is a unregulated area but is exponentially improving and stepping up to issues. We're still seeing
big no. of insider trading but things are augmenting.
Assignment 8
Ans. Bank syndicates are the number of banks which are associated to any firm and government which assists
in giving financial aid, like helps them with places where funds/money is required by them. As asked by the
question some specimen or examples are the PNB syndicate of the popular Nirav Modi case or the SBI
syndicate which is connected to Kingfisher airlines.
Lesson 3: Banking Regulation
Assignment 9:
Ans. I Concur, almost all aspects of banking regulation such as systematic risk, prevention of fraud are
administrative in nature since the systematic risk has been outlined as a major norm for prudential regulation
of banks through BASEL committee in its financial stability board, which is an administrative body, akin to
this, in regards to prevention of frauds, there are several prominent administrative bodies which regulate it like
EOW(Economic offences wing) & SFIO(Serious frauds investigation office) which are under the regime of
special police. Although the legislature has its dispersed ambit on frauds too like, Companies Act, S. 447,
Prevention of corruption act, section 7 etc.
There's areas like Deposit insurance scheme which adhere to legislation which assures insurance to the
depositors.
Regulation of competition is also under competition act, RBI regulates through banking regulation act, it has
no power of drafting & amending hence its administrative.

Assignment 10:
Ans. The mechanism of debacle or shall I say crisis management of banks are not pertaining to legislation
instead it is relevant to the Banking regulation act, 1949 which gave strength to the RBI when such situations
happen there. Merger is known as a situation when two or more than two banks collectively consolidate their
assets and liabilities to become one and RBI has can create compulsory mergers to deter contagion loss to the
system and it also uses preventive measures to deal with disasters.
There's the infamous YES bank crisis which is a contemporary specimen, here I will examine it:

THE DEBACLE:
On March 5, 2020 RBI had placed a 30 day moratorium on the bank and displaced private sector's lender
board, thereby appointing Prashant Kumar who was chief financial manager at SBI(State Bank of India) as a
administrator, the norms of moratorium deposit withdrawals were confined to 50k per person and the central
bank placed in front, a reconstruction scheme through which SBI might absorb maximum of 49% stake in
restructured capital of the bank.
The cause behind the crisis was that the bank's loan book on March , 2014 was at 53,633 cr. whereas, deposits
were at 74,192 cr. and the loan book thereby, kept augmenting, and touched an amount of 2.25 trillion in
September, 2019. Deposits grew at a much gradual rate and reached 2.10 trillion. Things were going downhill
for the bank as there was a huge disruption, their asset quality also declined and so inevitably it came under
RBI's eyes. Organizations like Anil Ambani 's reliance group, DHFL, IL&FS were afflicted. Issue went
beyond reach when a independent director named Uttam Prakash agarwal resigned in the January of 2020, due
to claimed governance issues
NPAs was just one factor the debacle, like i mentioned before about the bad asset quality and its scrutiny
under central bank, a prelude to increase in its loans ratio imperative, left out management lapses also led to
change in it, following to this bank couldn't even address its capitalization issues and the bank went through a
massive increase in its gross NPA from April to September to 17,134 cr.
Another blatant factor was the Governance issue, The YES bank faced many issues regards to it, when the
independent director quit giving bad governance issues and failure at complying at lender, in 18-19 it had not
reported NPAs of 3,277 cr. instigating RBI to dispatch R Gandhi its oldest deputy governors, to the board. Mr.
Kapoor who played a major role in bulding bank was asked to be chief executive in 2019.
NBFC was another factor, when India's shadow banking declined with revelation of Infrastructure leasing and
financial services(IL&FS) & Dewan housing Finance limited(DHFL) . The Bank's to both of them were 11.5
till Sept. 2019 whereas in April 2019 bank had opened around 10,000 cr. of all, portraying only 4.1 % of all
loans under watch list as NPAs over a year.
Another significant factor was too much withdrawals which inhibited several depositors from letting funds in
their bank and keeping them within. Bank depicted a lot of withdrawals which weighted its balance sheet and
increased its troubles.
Bank had deposited 2.09 trillion till the end of September, 2019 and subsequently RBI had taken over YES
bank and central imposed a moratorium on lender, RBI then announced a draft 'Scheme of reconstruction' that
curtails SBI investing capital to acquire 49% stake in restructured private lender.
The regulator, while recommending moratorium told a steady decline in YES bank's financial position, mainly
due to lender's non capacity to hold up proper capital to make provisions for real NPA. This thereby resulted
in downfall by credit agencies which then in turn made capital raising more tough and there were serious
lapses in corporate governance in the bank.
And in case of YES bank, RBI placed 1 month moratorium which ended in April 3.
Therefore, a customer can withdraw a max of 50k during that period from savings or current accounts. In case
depositor has more than one deposit account with YES bank, then moratorium will apply collectively on their
accounts. There's smidgeon of relief to depositors in cases of emergencies. RBI had said that one could
withdraw up to 5 lakhs for contingencies related to medical purposes higher education expenses etc.
RBI also has a draft reconstruction idea for YES bank would protect depositors funds. employees will have
similar service conditions, comprising of remuneration for least one year. Although in case of key managerial
staff, new board will have the power to take the call, SBI which received board approval to invest in YES
bank, will hold up 49% stake, acc. to scheme, at a price that is not less than Rs 10 for every share having face
value of rs 2, it also cannot decrease its holding below 26% before completion of three years from date of
infusion of capital.

Assignment 11:
Ans. Multifunctional bank is termed as consolidation of commercial banking and investment banking,
referring that it issues underwriting, investing and trading securities. It's a system of banking where banks
undergo a lot of financial services like investment banking. comm. banking, development banking insurance
and other services encompassing these functions. Basically numerous financial services. Objective of
multifunctional banking is to earn as much profit by interest, income and commission through various
diversified activities they spread their activities so as to increase their profitability through different activities.
Such multifunctional banks, through their reach can also sell diverse products like insurance etc. under the
same brand name through its already subsisting network of branches its already reputation which helps as a
booster in augmenting the sales.

Priority areas in regulation of multifunctional banks are activities which are permitted for financial
institution but not for bank would have to be halted.
Any immovable property gained by financial institution would have to be disposed of in 7 years.
Once the financial institution becomes a multifunctional bank, it would be in terms with the CRR and SLR
requirements by RBI.
Changing the structure of the board of directors might become imperative for some of financial institutions
after their change in to a multifunctional bank, to ensure that it complies with provisions of Section 10(A) of
banking regulation act which demands least 51% of total number of directors to have special knowledge and
experience.
Financial institution changing in to a multifunctional bank would be required to get a banking license from
RBI under Section 22 of banking regulation act for carrying on banking business in India, after complying
with applicable conditions.
After converting in to one, a financial institution will be required to publish its annual balance sheet and profit
and loss account in form of set out in Third schedule to Banking regulation Act.

Assignment 12

Ans. Litterateur by the Basel Committee on Banking Supervision (BCBS), the Basel Accords seek to ensure

that financial institutions have enough capital on account to meet obligations and absorb unexpected losses,

they provide recommendations on banking regulations in regard to capital risk, market risk and operational

risk, and also determine how much equity capital — known as regulatory capital — a bank must hold to buffer

unprecedented losses, for a traditional bank, loans are assets, while customer deposits are liabilities. If assets

decline in value, the equity can quickly evaporate. So, the Basel Accords require banks to have an equity

cushion in the event of asset decline, providing depositors with protection. in the year 1988, Basel I Accord set

minimum capital requirements based on two ratios: a ratio of tier one capital to risk-weighted assets of 4 per

cent; and a ratio of tier one plus tier two (undisclosed reserves, loan-loss provisions, subordinated debt) capital

of 8 per cent. Assets were risk-weighted according to the credit risk of the borrower — that is, the risk that the

borrower will default on his loan. Government bonds, had a zero per cent risk weighting, which entailed that

no capital needed to be held against them. old corporate loans, meanwhile, had a 100 per cent risk weighting,

which entailed that capital constituting the full 8 per cent of the value of the loan must be held against it. By

the late 1990s, the accord had come to be seen as ‘useless for regulators and costly for banks', with bankers

mourning the gap between the actual risk in assets and the regulatory capital assigned to them under the

accord which created perverse incentives to engage in regulatory arbitrage: exploiting the difference between

‘economic' risk and regulatory requirements to reduce capital levels, without reducing exposure to risk, the

consequence of these activities was that overall capital levels in the banking system, which had risen sharply

after Basel I came into effect in the early 1990s, were now beginning to decline.
Easy to adopt rules:
In September 1998, the Basel Committee announced that it would officially review the 1988 accord with the
aim of replacing it with more flexible rules. In June 1999, it released its first set of proposals for the new
framework and after five years of negotiations, the Committee finally announced that it had agreed on a new
capital adequacy framework, the Basel II Accord.
The new accord rested on three pillars. In addition to telling minimum capital requirements (pillar 1), the new
accord provided guidelines on regulatory intervention to national supervisors (pillar 2) and created new
information disclosure standards for banks with a view to enhancing market discipline (pillar 3).
Under the ‘advanced internal ratings based (A-IRB) approach' in pillar 1, banks were permitted to use their
own models to estimate various aspects of credit risk, this, it was thought, would more closely align regulatory
capital with underlying risk and thereby reduce the incentives for arbitrage, banks without the resources to
operate such models would adopt the proper approach in which fine-grained risk categories were linked to
external credit ratings provided by commercial rating agencies.
Finally, Basel-II focus on credit risk sought to address the previously unregulated area of market risk, ‘the risk
of losses in on and off-balance sheet positions arising from movements in market prices'.
Here, banks could use delicate mathematical models to produce estimates of ‘value-at-risk' or, the probability
that losses on a portfolio of financial assets will exceed a certain amount within a specified time time
Economists are of the view that the Basel Committee may have erred here grievously, since the market turmoil
in the late 1990s had shown models to vastly underestimate the probability of ‘extreme' events.
No surprise, a growing consensus has since emerged suggesting that Basel II may have played a key role in
precipitating the year 2008 financial crisis.

Basel II incriminated:
The financial crisis 20 years after Basel I Accord became functional would now appear to have been one of
complex financial products and greedy financiers. It is being argued that the reason for the failure of Basel II
lay in ‘regulatory capture', i.e. de facto control of the regulatory agency by some of the ‘regulated' interests.
A small group of large international banks succeeded in rewriting the Basel II rules to their own advantage, at
the expense of their smaller and emerging market competitors, basel II hence ended up reducing the capital
levels in large international banks, ignoring some of the risks most crucial to systemic financial stability, In
2006, survey of more than 300 banks by Ernst &Young had found that 75 per cent believed Basel II would
benefit the largest banks, employing the most advanced risk systems, at the expense of those unable to adopt
them, start in the subprime mortgage market in the US in the summer of 2007 and quickly spreading to Europe
and the rest of the globe, the financial crisis has passed, perhaps, the most damning verdict of all on Basel II,
critics say.
Something of a consensus has emerged in policy making circles that a new approach to capital regulation is
essential to the future stability of the global financial system. A ‘fundamental review' of Basel II was
demanded on the grounds that it ‘underestimated some significant risks and overestimated banks' ability to
regulate them.
Refinement scheme:
To its growing popularity's feedback, the Basel Committee has since put forward a set of proposals for a
revised Basel II framework — tougher than many expected, prompting controversy and resistance in many
quarters, dubbed Basel-III, the reform package has unsettled the finance industry and in some eyes heralded a
new period in the history of banking regulation.
But critics have made the point that once again it is the huge international banks that have manipulated control
of the regulatory process, closing the window of opportunity for far-reaching refinement.
Lesson 4: Central Banking :
Assignment 13:
Ans. According to section 20 of RBI act, it has the obligation to take in to account of receipts & payments of
central government, managing public debt of it. Government also submits its cash balances with RBI. & under
21 of the same act, it acts as a banker & debt manager to state government.
Some major services provided as such are:
Issue of new rupee loans, payment of interest & repayment of loans & few other functional issues like debt
certificates & their registration. Section 21 & 21A have been permitted to transact government business of
both central & state government.

Assignment 14:
Ans. As a customer, if someone has a objection against the bank, the first step would be to connect to the bank
& register a complaint, several grievances such as mis-selling of insurance, mutual fund products, loan and
deposit can be raised. But if one is not complacent with the bank's response then he can either head to banking
ombudsman or take the bank to court.
The ombudsman are appointed by RBI to resolve customers complaints regarding deficiency of banking
services, there are around 20 ombudsman centers in India and to file a complaint there you have to have proof
that you already filed the complaint with the bank also you must reach out to ombudsman within 1 year of the
action taken by the bank, its free of cost.
And if you are not complacent with ombudsman either then you have 45 days to appeal before an appellate
authority or you can head for a court against it, here too you need to have the proof that you already raised the
issue with the bank, you can file a complaint before a District Redressal Commission or National Consumer
disputes redressal commission.
You need to be sure that you have accurate and concise evidence against the bank. You can fight the case with
or without a lawyer and unlike with ombudsman, fee is charged here depending on the issue.

It is important to know that however, specific legal character was designated to RBI under Section 3(2) of RBI
Act, 1934 which identifies RBI as a body corporate having perpetual succession, common seal & being able to
sue or being sued, these are basic characteristics of a company.
There have been few cases when the apex body, so called invincible RBI has been put on the mat, in 2018,
Kotak Mahindra bank questioned RBI's directive to decrease promoter Uday kotak's stake & rather than come
in line like, Bandhan bank, choose to take RBI to court. Other companies like Essar have sued them too over
actions that affected them.
It's in everybody's democratic right to go against RBI if one feels has suffered or incurred loss or have not
been provided with sufficient support.
There have been numerous cases when one sued RBI.
A case of Transport corporation of India V Reserve Bank of India, 2014 in which plaintiff had filed a suit for
seeking declaration & injunction & recovery of 6 crore for a foreign exchange derivative transaction being
USD-CHF transaction in which the defendant had induced the plaintiff to indulge in the transaction showing it
as a saving of interest costs of 2% but in reality for only for the profit of the defendant and huge risk of loss
and a corresponding gain to the defendant which is in contrary to RBI regulations and void under 23 of ICA.
The defendant had in its defense stated that issues challenged by plaintiff have been rectified under RBI
amendment and concealed his profits to which plaintiff had responded that plaint can be rejected only on the
basis of what's in it and not outside issues hence the plaintiff's demand was correct.
Assignment 15:
Ans. RBI plays a imperative, inseparable role in maintaining the money flow in the economy: It can do it
through several major measures and implement them in accordance to economic situations.
When demand goes low and economy swerves down certain tools are regulated to control and bring
equilibrium again, like recently during peak of the Covid in may, RBI had cut the repo rate to 4.4 percent,
which was lowest in at least 15 years. Also, it lessened cash reserve ratio in seven years. CRR was slashed by
100 basis points to let out 1.237 crore across banking system.
Firstly, CRR: cash reserve ratio, by changing this ratio it can influence amount of cash for banks to lend. Thus
when demand goes low, it is lowered. So banks can hold more cash & increase its lending capacity.
Repo rate: By lowering this, commercial banks can easily avail loans at cheaper prices, expanding money
supply in case of low demand in economy.
Open Market operation: By sale/purchase of government bonds & securities to adjust money liquidity in the
market & in case of inflation, market stabilization is applied. Where central & central bank absorb liquidity
from the market by issuing treasury bills or securities etc in market.
All these effects collectively blow a massive effect on the economy, when financial markets are fragile it
requires a big dose of monetary stimulus to be injected at the earliest, like RBI has been doing since Covid
struck us, to boost the liquidity, substantial reductions in CRR,SLR Repo Rate and through all these
instruments helps banks to reduce/increase their lending rates and aid monetary transmission, by changing its
public expenditure & general reserves by bank according to the situation.

Recently, with a vision to improve credit discipline and with the most imperative objective to ensure liquidity

in the economy, the Reserve Bank stopped banks from opening current accounts for customers who have

availed cash credit or overdraft facilities, stressing that there is a “need for discipline” on this front. In a

notification, the central bank said that rather than opening a new current account, all transactions should be

routed through Cash Credit (CC) or Over-Draft (OD) account.

Although, RBI did not specify the exact reasons for initiating such a move. It can be noted that in recent

instances of fraud like the over Rs 4,000 crore PMC co-operative Bank scam, it was discovered that multiple

accounts were opened. Officials in the know said the move will avoid hoodwinking of the system and reduce

the blind spots, which will ultimately lead to protection of depositors’ money.

If a customer opens several accounts and there is no monitoring of end use of funds, there is a possibility that

the same customer could indulge in malfeasance by drawing down money from the same bank through a

different account. There is also a possibility that the money could be used to repay the first credit facility and

keep using the same modus operandi which can potentially lead to a wider concern.
Assignment 16:
Ans. Although the central bank does not deal with individuals but with commercial banks to maintain the
economic robustness of the country and is known as the lender of the last resort.
Core Banking functions:

Its government's banker, agent & advisor:

A central bank performs diverse banking functions for the government as commercial banks performs so for
the public accepting the government deposits and granting loans to the government through perilous times. As
an agent, central bank manages the public debt, undertakes the payment of interest on the this debt, and
provides all several services related to debt.
As an advisor, central banks gives assistance and advise to the government regarding economic policy matters,
money market, capital markets and government loans. Apart from this, central bank creates and extrapolates
and implements fiscal and monetary policies to regulate the supply of money in the market and control
inflation.

Custodian of international currency:

The central bank maintains a minimum reserve of international currency. The main objective of this reserve is
to meet emergency requirements of foreign exchange and overcome drastic requirements of deficit in balance
of payments.

Bank of central clearance, settlement & transfer:

Central bank also helps in settling mutual indebtness between commercial banks, depositers of banks give
cheques and demands drafts drawn on other banks. In such cases, its not possible for banks to approach each
other for clearance settlement or transfer of deposits.
Central banks help here to make this easy by setting a clearing house under it and that house acts as an
institution where mutual indebtness between banks are settled. Representatives of different banks meet in
clearing house to settle inter ban payments. Thus helps central banks to ascertain liquidity state of commercial
banks.

Lends & accepts deposits

Controller of Credit:
They regulate credit creation by commercial banks. The credit creation depends upon amount of deposits, cash
reserves and rate of interest given by commercial banks. All these are directly or indirectly controlled by
central bank.
Central bank is referred as ‘lender of last resort’ for the banking system as it offers immediate liquidity to
banks in need. Being the custodian of public money, RBI formulates ‘monetary policy’ for the banks to follow
which is published on a timely basis.