BANKING IN INDIA

Currency note - Genuine note/fake note

1. Paper quality - substrate cotton and cotton rage with special water mark/two
ordinary papers pasted together.

2. Number panels will be printed with flourescent ink and it will glow under uv lamp/
no flourescent ink only bluish ink and it will not glow.

3. Number series will be equally and evenly distributed and it will be of a special
font/number will be small in size and no even spacing

4. Optically variable ink when seen flat - green, titled angle - blue/no colour shift

5. Security thread - partially exposed and partially embedded, when held against light
it will look like a continuous line, the thread contains bharat in hindi, and rbi in
English, the value of the currency will be mentioned in the thread/ only colour thread
will be pasted.

6. Water mark of gandhi in the empty space and water mark of the denomination in
numbers in empty space / not available

 Banking system is considered as the backbone of a nation's economy

 Indian banking system is divided into commercial banks (Both Public Private
Banks, schedules and non-scheduled), Regional Rural Banks. Cooperative Banks
etc.

Phases of Indian Banking System

1. The Pre-Independence Phase i.e. before 1947

2. Second Phase from 1947 to 1991

3. Third Phase 1991 and beyond

The Pre-Independence Phase i.e.

before 1947

 Banking system commenced in India with the foundation of Bank of Hindustan in

Calcutta (now Kolkata) in 1770 which ceased to operate in 1832.
 After that many banks came but were not successful like

(1) General Bank of India 1786 - 1791

(2) Oudh Commercial Bank 1881- 1958 the first commercial bank of India.

 Whereas some are successful and continue to lead even now like

(1) Allahabad Bank (est 1865)

(2) Punjab National Bank est 1894, with HQ in Lahore (that time)

(3) Bank of India (est. 1906)

(4) Bank of Baroda (est. 1908)

(5) Central Bank of India (est 1911)

THE STATE BANK OF INDIA

 While some others like Bank of Bengal (est. 1806), Bank of Bombay (est. 1840).
Bank of Madras (est. 1843) merged into a single entity in 1921 which came to be
known as Imperial Bank of India
 Imperial Bank of India was later renamed in 1955 as the State Bank of India
 In April 1935, Reserve Bank of India was formed based on the recommendation of
Hilton Young Commission (set up in 1926).
 bank were small in size and suffered from a high rate of failures
 People continued to rely on the unorganized sector (moneylenders)

The second phase from 1947 to 1991

 Broadly the main characteristic feature of this phase is the Nationalization of the
bank
 With the view of economic planning, nationalization emerged as an effective
measure.
 Need for nationalization in India:

(a) The banks mostly catered to the needs of large industries, big business houses.

(b) Sectors such as agriculture, small-scale industries and exports were lagging behind

(C) The poor masses continued to be exploited by the moneylenders

 Following this, in the year 1949, 1st January the Reserve Bank of India was
nationalized
 Six more commercial banks were nationalized in April 1980

RRB

 Meanwhile, on the recommendation of the Narasimham committee. Regional Rural

Banks (RRBs) were formed on Oct 2, 1975
 The objective behind the formation of RRBs was to serve the large unserved
population of rural areas and promoting financial inclusion.
 With a view to meet the specific requirement from the different sector (in
agriculture. housing, foreign trade, industry) some apex level banking institutions
were also set up like:

(a) NABARD (est. 1982)

(b) EXIM (est. 1982)

(C) NHB (est. 1988)

(d) SIDBI (est. 1990)

Third phase 1991 and beyond

 Even after nationalization and the subsequent regulations that followed, a large
portion of masses is untouched by the banking services
 1991, the Narasimham committee
 1998, the Narasimham committee
 2013-14. the third round of bank licensing took place
 In 2015. RBI gave in-principle licence to 11 entities to launch Payments Bank and
granted 'in-principle' approval to the 10 applicants to set up Small Finance Banks.

THE DIFFERENT KINDS OF BANKS TODAY

 Central Bank - The Reserve Bank of India is the central bank of our country. Each
country has a central bank which regulates all the other banks in that particular
country
 Cooperative Banks - These banks are organised under the state government's act.
They give short term loans to the agriculture sector and other allied activities
 The main goal of Cooperative Banks is to promote social welfare by providing
concessional loans
 Commercial Banks -Organised under the Banking Companies Act. 1956
 They operate on a commercial basis and its main objective is profit
 They have a unified structure and are owned by the government, state, or any
private entity
 They tend to all sectors ranging from rural to urban
 These banks do not charge concessional interest rates unless instructed by the RBI
 Public deposits are the main source of funds for these banks
 The commercial banks can be further divided into three categories
 Public sector Banks - A bank where the majority stakes are owned by the
Government or the central bank of the country
 Private sector Banks - A bank where the majority stakes are owned by a private
organisation or an individual or a group of people
 Foreign Banks - The banks with their headquarters in foreign countries and
branches in our country fall under this type of bank
 Regional Rural Banks (RRB) -These are special type of commercial Banks that
provide concessional credit to agriculture and rural sector
 RRB's are established in 1975 and are registered under a Regional Rural Bank Act,
1976.
 RRB's are joint venture between Central government (50%). State government
(15%) and a Commercial Bank (35%)
 196 RRBs have been established from 1987 to 2005
 From 2005 onwards government started merger of RRBs thus reducing the number
of RRBs to 82
 One RRB cannot open its branches in more than 3 geographically connected
districts
 Local Area Banks (LAB) - Introduced in India in the year 1996
 These are organized by the private sector
 Earning profit is the main objective of Local Area Banks
 Local Area Banks are registered under companies Act, 1956
 At present, there are only 4 Local Area Banks all which are located in South India
 Specialised Banks -There are certain banks which are introduced for specific
purposes only. Such banks are called the specialised banks. These include:
 Small Industries Development Bank of India (SIDBI) - Loan for a small scale
industry or business can be taken from SIDBI Financing small industries with
modern technology and equipments is done with the help of this bank
 EXIM Bank -EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be
done through this type of bank
 National Bank for Agricultural & Rural Development (NABARD)- To get any
kind of financial assistance for rural, handicraft, village and agricultural
development, people can tum to NABARD.
 Small Finance Banks - As the name suggests, this type of banks look after the
micro industries, small farmers and the unorganised sector of the society by
providing them loans and financial assistance. These banks are governed by the
central bank of the country
 Payments Banks - A newly introduced form of banking, the payments bank have
been conceptualised by the Reserve Bank of India
 People with an account in the payments bank can only deposit an amount of upto
Rs.1,00.000 - and cannot apply for loans or credit cards under this account
 Options for online banking, mobile banking, issue of ATM and debit card can be
done through payments bank
 Given below is a list of the few payments bank in our country:
 Airtel Payments Bank
 India Post Payments Bank
 Fino Payments Bank
 Jio Payments Bank
 Paytm Payments Bank
 NSDL Payments Bank

RESERVE BANK OF INDIA

 RBI was established on 1st April 1935 under the Reserve Bank of India Act, 1934
 RBI was set up after the recommendations of Hilton young Commission which had
submitted its report in the year 1926.
 Later on, in 1931 the Indian Central banking enquiry committee had also
recommended for the establishment of the central bank in India.
 RBI is entrusted with a multidimensional role which includes implementation of
monetary policy and maintaining monetary stability in the country
 RBI was established as a private shareholders bank, but it was nationalised after
independence in the year 1949 through the Reserve Bank (Transfer of public
ownership) act, 1948

PREAMBLE OF RBI

 To regulate the issue of Bank notes and keeping of 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
 To have a modern monetary policy framework to meet the challenge of an
increasingly complex economy.
 To maintain price stability while keeping in mind the objective of growth.

STRUCTURE OF RESERVE BANK OF INDIA

 Governed by the central board of directors.

 Government of India appoints the central board of directors for a tenure of 4 years
 The Central Board of directors consists of full time officials which include the
Governor and not more than four Deputy Governors.
 The current Reserve Bank of India governor is Dr. Urjit R Patel

ROLE AND FUNCTIONS OF RBI

 Traditional functions.
 Promotional and developmental Role
 Supervisory Role
 Prohibitory Role
 Traditional functions – Traditional functions are mainly the basic and fundamental
functions of RBI
 Every Central Bank of a country has to perform all over the world.
 Issue currency notes: All currency notes except one rupee note and coins of smaller
denomination were issued by RBI
 This system of issuing currency notes is known as minimum reserve system
 It issues these currency notes against the security of gold bullion, gold coins.
promissory notes, exchange bills and government of India bonds etc.,
 Banker to other banks: It has obligatory powers to regulate guide, help and direct
other banks of the country, and hence it acts as the guardian of commercial banks
in India
 Every commercial bank has to maintain a certain part of the Reserves with RBI
 Reserve Bank of India acts as the lender of last resort and banks can approach RBI
when they need funds
 Under the Banking Regulation Act. 1949 RBI has extensive powers to supervise
and control the banking System of the country
 Banker, agent and financial advisor of the government: It has the duty to make
payments, taxes, and deposits on behalf of the government
 It represents Government of India at International levels.
 It gives financial advice to the government and maintains government accounts
 It has a responsibility to manage public debt and maintain the foreign exchange
reserves.
 RBI as the bank of Central clearing, settlement, and transfer - RBI provides the
facility of clearing house for settling banking transactions
 This allows other banks to settle their interbank claims smoothly and economically
 At places where RBI does not have its own office this function is carried out in the
premises of State Bank of India
 This facility is provided by Reserve Bank of India through a cell called as the
National Clearing Cell.
 Credit control function - RBI tries to maintain price stability in the country which
is essential for economic development.
 It regulates money supply in the economy according to the changing circumstances
of the economy
 It uses quantitative controls such as bank rate policy, cash reserve ratio, open
market operations etc.
 Qualitative controls include selective credit control, rationing of credit etc.
 Promotional and developmental Role - Promotion of Banking habits and expansion
of banking system
 Export promotion through refinance facility -RBI promotes export through the
Export Credit and Guarantee Corporation (ECGC) and EXIM Bank
 Support for Industrial finance: It has played an important role in the establishment
of industrial finance institutions such as ICICI Limited. IDBI, SIDBI etc
 It supports small scale industries by ensuring increased credit supply
 Reserve Bank of India directed the commercial banks to provide adequate financial
and technical assistance through specialised Small Scale Industries (SSI) branches.
 Support to the Cooperative sector & Support for the agricultural sector - RBI
provides financial facilities through regional rural banks
 Training provision to banking staff: RBI provides training to the staff of banking
industry by setting up bankers training college at many places
 Institutes like National Institute of Bank management (NIBM), Bank Staff College
(BSC) etc. provide training to the Banking staff
 Supervisory Role
 Giving licence to banks
 Bank inspection and enquiry
 Implementation of deposit Insurance Scheme
 Periodic review of the working of commercial banks
 PROHIBITORY ROLE AND FUNCTIONS OF RBI
 RBI cannot purchase the shares of any industrial undertaking or even its own share.
 It cannot provide direct monetary or financial assistance to any commercial
undertaking or trade etc
 RBI does not have the power to buy any immovable property
 RBI does not have the authority to give loans on the security of property or shares

MONETARY POLICY OF RESERVE BANK OF INDIA

 Monetary policy refers to the policy of the central bank - ie Reserve Bank of India -
in matters of interest rates, money supply and availability of credit
 It is through the monetary policy, RBI controls inflation in the country
 The primary objective of monetary policy is to maintain price stability while
keeping in mind the objective of growth.
 Price stability is a necessary precondition for sustainable growth.
 To maintain price stability, inflation needs to be controlled.
 The government of India sets an inflation target for every five years
 RBI has an important role in the consultation process regarding inflation targeting.
 Monetary policy is announced every year in the month of April by RBI, which is
followed by three quarterly reviews in the month of July, October and January.
 However, RBI can announce the monetary policy measures at any point of time

MONETARY POLICY QUANTITATIVE MEASURES

 Bank rate: It is the interest rate at which RBI provides long term loan to
commercial banks.
 1 % higher than REPO rate
 The present bank rate is 5.4%
 It controls the money supply in long term lending through this instrument
 When RBI increases bank rate the interest rate charged by commercial banks also
increases
 Repo rate: Repo repurchase agreement rate is the interest rate at which the Reserve
Bank provides short term loans to commercial banks against securities.
 At present, the repo rate is 1.4%
 Reverse repo rate: It is the opposite of Repo, in which banks lend money to RBI by
purchasing government securities and cam interest on that amount. Presently the
reverse repo rate is now 4%
 REPO and Reverse Repo are two major options under LAF (Liquidity Adjustment
Facility)
 Marginal Standing Facility (MSF): It was introduced in 2011-12 through which the
commercial banks can borrow money from RBI by pledging government securities
which are within the limits of the statutory liquidity ratio (SLR)
 Statutory liquidity ratio (SLR): It is the minimum percentage of non-cash assets to
be kept with RBL It includes government securities, bonds, gold etc. An increase in
SLR reduces the capacity of banks to give loans to its customers. The reverse
happens when SLR is reduced. The current SLR rate is 19.5%
 VARYING THE RESERVE REQUIREMENTS THAT BANKS HAVE TO
MAINTAIN WITH RBI
 Cash reserve ratio (CRR): It is the minimum amount of cash that commercial banks
have to maintain with the Reserve Bank of India in the form of deposits. An
increase in CRR decreases money supply in the economy whereas a decrease in
CRR increases the money supply. The current CRR rate is 4%
 Open market operations (OMOs):
 open market operations include the sale and purchase of government securities for
either injecting or absorbing liquidity from the economy
 Market stabilisation scheme (MSS):
 This instrument is used to absorb the surplus liquidity from the economy through
the sale of short-dated government securities.
 The cash collected through this instrument is held in a separate account with the
Reserve Bank. It was introduced in 2004.

Flexible Inflation Targeting Framework (FITF)

 Inflation refers to the sustained increase in the level of prices of the basket of goods
and services which is generally measured as an annual percentage change.
 The prices of goods and services rise under inflationary conditions.
 This rise in prices leads to fall in the value of money

Inflation Targeting

 Inflation targeting refers to the monetary policy used by central banks (RBI in case
of India) to maintain the prices within a certain range.
 The primary objective of inflation targeting is price stability as rising prices can
create uncertainties in the decision making which can adversely affect savings and
can encourage speculations in Investments.
 In India, inflation targeting was introduced as the country has experienced a high
level of inflation
 Flexible inflation targeting framework was introduced in India in 2016 after
amending the Reserve Bank of India RBI act. 1934.
 After this amendment in the RBI act, the inflation target is to be set by the
government in consultation with RBL
 This target is to be usually revised once in 5 years.
 As per the August 2016 notification of government, the inflation target is 4% with
a tolerance level of 2%
 The upper and lower tolerance levels are 6% and 2% respectively for a period up to
March 31. 2021.
 If the average inflation rate is greater than the upper tolerance level of the target for
any three consecutive quarters, or if the average inflation rate is below the lower
tolerance level for any three consecutive quarters, it constitutes a failure in
achieving the inflation target.
 Now there is a flexible inflation targeting framework in India (after the 2016
amendment to the Reserve Bank of India (RBI) Act, 1934).
 Who sets the inflation target in India?
 The amended RBI Act provides for the inflation target to be set by the Government
of India. in consultation with the Reserve Bank, once every five years.
 Current Inflation Target: The Central Government has notified 4 per cent
Consumer Price Index (CPI) inflation as the target for the period from August 5,
2016, to March 31, 2021, with the upper tolerance limit of 6 per cent and the lower
tolerance limit of 2 per cent
 The objective of this Framework is to set repo rate based on the current and
evolving liquidity conditions in the economy
 Repo rate changes affect the entire financial system and aggregate demand which
in turn affects the inflation rate and economic growth.

Monetary Policy Committee (MPC)

 Now in India, the policy interest rate required to achieve the inflation target is
decided by the Monetary Policy Committee (MPC).
 MPC is a six-member committee constituted by the Central Government
 The MPC is required to meet at least four times a year
 The resolution adopted by the MPC is published after the conclusion of every
meeting of the MPC.
 Once in every six months, the Reserve Bank is required to publish a document
called the Monetary Policy Report to explain
 (1) the sources of inflation and
 (2) the forecast of inflation for 6-18 months ahead

The Monetary Policy Process (MPP)

 The Monetary Policy Committee (MPC) determines the policy interest rate
required to achieve the inflation target.
 The Reserve Bank's Monetary Policy Department (MPD) assists the MPC in
formulating the monetary policy
 Views of key stakeholders in the economy and analytical work of the Reserve
Bank contribute to the process of arriving at the decision on the policy repo rate.
 The Financial Markets Operations Department (FMOD) operationalises the
monetary policy mainly through day-to-day liquidity management operations.
 The Financial Market Committee (FOMC) meets daily to review the liquidity
conditions so as to ensure that the operating target of monetary policy (weighted
average lending rate) is kept close to the policy repo rate.
 This parameter is also known as the weighted average call money rate (WACR).

Monetary Policy Instruments (MPI)

 Repo Rate
 Reverse Repo Rate
 Liquidity Adjustment Facility (LAF)
 Bank Rate
 Cash Reserve Ratio (CRR)
 Statutory Liquidity Ratio (SLR)

MONETARY POLICY QUALITATIVE INSTRUMENTS

 Qualitative instruments are used by RBI for discriminating between different uses
of credit
- Marginal requirement: It refers to the proportion of loan which the borrower
has to raise in order to get finance for his purpose RBI can increase the
 marginal requirements for those activities for which credit supply is to be
restricted
- Rationing of credit- RBI can put a maximum limit on loans and advances
that can be made by banks for specific categories. This method of rationing
is used for checking credit flow, particularly for speculative activities
- Direct action- RBI has the authority to take direct strict action against any
bank if it refuses to obey the directions given by RBL RBI can put
restrictions on advancing loans on such banks
- Moral suasion- it refers to the request and suggestions of Reserve Bank of
India to the banks to take certain actions as per the emerging trends of the
economy. It is mainly an informal and psychological means of credit control
RBI can ask the commercial banks not to give certain kinds of loans and
advances
- RBI guidelines- RBI can issue some directives and guidelines for the
commercial banks in framing their lending policy RBI can influence credit
structures and supply of credit for some specific purposes For example, RBI
can issue directives to banks for not giving loans to the speculative sector
such as securities ete beyond a limit
- Consumer credit regulation- it refers to the rules issued by RBI regarding
down payments, maximum maturities, installment amount etc of the loan
installments for the purchase of some goods etc