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NAME ADDRESS

: SNEHAL MAHESH BHAMARE :- LANE. NO.-5 HOUSE NO.2584-A NEAR CHARNI ROAD, DHULE.

REG.NO. :- WRO0369621 MOBILE NO. :- 9423496260, 9403088876 NAME & BRANCH OF I.T.T. :NAME IT CENTER DHULE CHAPTER OF WIRC OF ICAI

PROJECT REPORT

On R.B.I.
SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR 100 Hours Information Technology Training (For The Batch Dec.2010)

The Institute of Chartered

Accountants of India
Information Technology Training program
Project Report on R.B.I. Under Supervision of: Submitted By:-

KHAIRNAR BHAMARE of Computer

Mr. VITTHAL MISS. SNEHAL M. Department WROO369621

DHULE BRANCH OF WIRC, DHULE BRANCH

STUDENT DECLARATION
I hereby declare that the project work entitled E-Commerce submitted for the 100 Hours Information Technology Training under The Institute of Chartered Accountant of India is an authentic work carried out by me under supervision of Mr. Vitthal Khairnar Instructor, Department of Computer Application, DHULE BRANCH OF WIRC. Submitted by

MISS. SNEHAL M. BHAMARE


WRO0369621

ACKNOWLEDGEMENT
This project report could not have been prepared, if not for the help and encouragement from various people. I here by take this chance to express my knowledge. My sincere and grateful thanks to Sh. Raja Ram Kulkarni, Convenor of DHULE BRANCH (DHULE CPE

CHAPTER) OF WIRC OF ICAI, DHULE for providing me a chance to work in this project, the knowledge inevitably polished my skills in due course. I take this opportunity to express my sincere and grateful thanks to Mr. Vitthal Khairnar for providing all the facilities and for his timely help rendered during the project. I firmly believe that his project wouldnt have been completed if hadnt received the inspiration from my friend. I feel deficiency of words to express my thanks but my heart is full of gratitude for favors received from all of them. Last but not the least I would like to thank my beloved parents for their constant support and encouragement.

Submitted by:MISS. SNEHAL M. BHAMARE


WRO0369621

CERTIFICATE
This is to certify that the project entitled ************* is the bonafide work done by

MISS.

SNEHAL M. BHAMARE Reg. no. WRO0369621

in partial fulfillment of

100 Hours information Technology Training and has been carried under my direct supervision and guidance. This report or a similar report on the topic has been submitted for any other examination and does not form a part of any other course undergone by the candidate.

Date: **/12/2010 VITTHAL KHAIRNAR (Department of Computer) Dhule Branch of WIRC, DHULE

PREFACE

I feel huge pleasure and privilege in presenting this project report. The succeeding pages have a brief description about the R.B.I.. This has been presented in the form of report in the practical project undergone by me at the supervision of Mr. VITTHAL KHAIRNAR (Instructor) and DHULE BRANCH OF WIRC OF ICAI, DHULE. I have taken this project to fulfill the requirement of my 100 Hours Compulsory Computer Training. My main target during the project was to gain the maximum knowledge and information in the predetermined time period and to attain through understanding is familiar with the present working condition, throat-cut competition and to know the impact of different conditions prevailing in the work field. I hope this report will be worth the effort and will be favorably received by the concerned authorities.

A Project Report On RBI

Presented By:- MISS. SNEHAL M. BHAMARE Guided By:- Mr. Vitthal Khairnar

MEANING OF BANK
It is generally said that the word "BANK " has been originated in Italy. In the middle of 12th century there was a great financial crisis in Italy due to war. To meet the war expenses, the government of that period a forced subscribed loan on citizens of the country at the interest of 5% per annum. Such loans were known as 'Compare', 'minto' etc. The most common name was "Monte'. In Germany the word 'Monte was named as 'Bank' or 'Banke'. According to some writers, the word 'Bank' has been derived from the word bank. It is also said that the word 'bank' has been derived from the word 'Banco' which means a banch. The Jews money lenders in Italy used to transact their business sitting on banches at different market places. When any of them used to fail to meet his obligations, his 'Banco' or banch or banch would be broken by the angry creditors. The word 'Bankrupt' seems to be originated from broken Banco. Since, the banking system has been originated from money leading business; it is rightly argued that the word 'Bank' has been originated from the word "Banco'.

Today the word bank is used as a comprehensive term for a number of institutions carrying on certain kinds of financial business.

INTODUCTION

The RBI was established as shareholders bank. Its share capital was Rs. 5 crores, divided into 5 lakh fully paid up share of Rs. 100 each. Our of this, share of the nominal value of Rs. 2,20,000 (2200 shares) were allotted to the Central Government for disposal at par to the Directors of the Central Board of the Bank seeking to obtain the minimum share qualification. The remaining share capital was owned by the private individuals. Thus, the control on the policy of the RBI remained with the Government. The RBI is governed by the Central Board of Directors. The Governor and two deputy-Governor are appointed by the Government and other members of the Governing Board are appointed by individual shareholders. In order to regulate and control monetary and credit policy of the country, the Government is empowered to supersede the central Board of Directors of the RBI if the Board fails to discharge its obligations cast upon it by the RBI Act. The demand for nationalization of RBI was started with the setting up of RBI. It was felt that RBI should be nationalized in tune with the changing national and international political and economical scenario. The objective of its nationalization was stated, to implement the Governments policy that the Bank should function as state-owned institution and to meet the general desire that control of the government over the banks activities should be extended to ensure greater co-ordination in the monetary economic and financial policies. In February, 1947, it was decided to nationalize RBI. Thus, the RBI was nationalized with the passing of the Reserve Bank of India (transfer to public ownership) Act in 1948. in terms of the Act, the entire share were transferred to the central Government on payment of compensation to the shareholders @ Rs. 118 and 62 paisa per share of Rs. 100. Thus since January 1, 1949, the the reserve bank of India is functioning as a state owned and state controlled(nationalized) bank. The nationalization of the RBI was also justified by passing of the Banking Regulation Act.

ESTABLISHMENT
Reserve Bank Begins Business Bombay Office Functions Taken Over From Imperial Bank. In Bank Street Bombay under an ironwork verandah, recalling more than one Shaftesbury Avenue Theatre, is a new very large brassplate. Across the plate are written the words "Reserve Bank of India". To right and left of the plate are open doors, for the Bank is now open to the public and business is in full swing to the tune of much hammering. The overpowering smell of fresh paint and the rushing to and fro of new peons in new drab brown suits. The building is a famous one having housed for many years the Bombay Head Office of the Imperial Bank of India. It will become more famous now as the head office in the west of India for the Reserve Bank. It is old fashioned as banking buildings go, but has three roomy floors and ample space. Managing this new concern is Mr. W.T. Mc Callum from the Imperial Bank of India. He has a staff of 180. The Bank will have no branches but will work in mofusil through the branches of the Imperial Bank. The Reserve Bank Head Office is situated in Calcutta.

The Reserve Bank of India (RBI) is the apex financial institution of the countrys financial system entrusted with the task of control, supervision, promotion, development and planning. RBI is the queen bee of the Indian financial system which influences the commercial banks management in

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more than one way. The RBI influences the management of commercial banks through its various policies, directions and regulations. Its role in bank management is quite unique. In fact, the RBI performs the four basic functions of management, viz., planning, organising, directing and controlling in laying a strong foundation for the functioning of commercial banks.

Objectives of the Reserve Bank of India The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve Bank as: to regulate the issue of Bank notes and the 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. Prior to the establishment of the Reserve Bank, the Indian financial system was totally inadequate on account of the inherent weakness of the dual control of currency by the Central Government and of credit by the Imperial Bank of India. The Hilton-Young Commission, therefore, recommended that the dichotomy of functions and division of responsibility for control of currency and credit and the divergent policies in this respect must be ended by setting-up of a central bank called the Reserve Bank of India which would regulate the financial policy and develop banking facilities throughout the country. Hence, the Bank was established with this primary object in view.

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Another objective of the Reserve Bank has been to remain free from political influence and be in successful operation for maintaining financial stability and credit. The fundamental object of the Reserve Bank of India is to discharge purely central banking functions in the Indian money market, i.e., to act as the note- issuing authority, bankers bank and banker to government, and to promote the growth of the economy within the framework of the general economic policy of the Government, consistent with the need of maintenance of price stability. A significant object of the Reserve -Bank of India has also been to assist the planned process of development of the Indian economy. Besides the traditional central banking functions, with the launching of the five-year plans in the country, the Reserve Bank of India has been moving ahead in performing a host of developmental and promotional functions, which are normally beyond the purview of a traditional Central Bank.

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DEPARTMENTS
Customer Service Department Department of Administration & Personnel

Management
Department of Banking Operations and

Development
Department of Banking Supervision Department of Communication Department of Currency Management Department of Economic & Policy Research Department of Expenditure & Budgetary

Control
Department of External Investments and

Operations
Department of Government and Bank

Accounts
Department of Information Technology Department of Non-Banking Supervision

(DNBS)
Department of Payment and Settlement

System
Department of Statistics and Information

Management
Financial Markets Department Financial Stability Unit Foreign Exchange Department Human Resource Development Department Inspection Department Internal Debt Management Department Legal Department Monetary Policy Department Premises Department Rajbhasha Department Rural Planning and Credit Department Secretary's Department 13

Functions of Reserve Bank of India The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. 1) Bank of Issue :Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.

2) Banker to Government :The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to
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the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.

3) Bankers' Bank and Lender of the Last Resort :The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. 4) Controller of Credit :The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank.

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As supereme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

5) Custodian of Foreign Reserves :The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favour of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country. 6) Supervisory functions :In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is

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authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation.

7) Promotional functions:With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a varietyof developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.

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AN EVALUATION OF THE MONETRY POLICY:The objective of monetary policy was at one time characterized by RBI itself as controlled expansion. On the one hand, RBI was thinking steps such as the bill market scheme to expand bank credit to industry and trade and thus help in economic development. On the either hand, RBI was using both quantative (general credit restraint) and selective credit controls so that the deployment of loans and advances by the commercial banks for speculative purposes was under control. Their was necessary to keep the rising prices under check. Thus, the monetary policy had twin aims- expansion of the economy and control of inflationary pressure. Monetary policy RBI has certain inherent constraints and obviously limited in its usefulness. Finally, the weapons and the powers available to RBI are such that they cover only organized banking sector viz, commercial banks and cooperative banks. To the extent inflationary pressure is the result of bank finance, Reserve Banks general and selective controls will have positive effect. But if inflationary pressure is really brought about by deficit financing and shortage of goods, RBIs control may not have effect at all. This is what is probably happening in Indian in recent years. Besides, it should always be kept in mind that RBI has no power over non-banking financial institutions as well as indigenous bankers who play such major role in financing trade and industry.

OBJECTIVES OF MONETARY POLICY

1) Price stability:The chakravarty committee argued that, in the context of planned economic development, monetary authorities should aim at price stability in the broadest sense. Price stability here does not mean constant price level but it is consistent with an annual rise of 4% in the wholesale price index. To achieve this objective, the government should aim
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at raising output levels, while RBI should control the expansion in reserve money and the money supply. 2) MONETARY TARGETING:Emphasizing the inter-relation between money, output and prices, the chakravarty committee has recommended the formation of a monetary policy based on monetary targeting. According to the committee, target for growth in money supply in a broad sense during a given year should be in terms of a range. (a)based on anticipated growth in output, and (b)in the light of the price situation. The target range should be announced in advance, the target for money supply should be reviewed in the course of the year to accommodate revisions, if any, in the anticipated growth in output and any change in the price situation.

1) the pool of financial savings, providing a reasonable return on saving 3

Interest rate policy:At present the interest rate structure is completely administered by the monetary authorities under the general direction of the government. According to the chakravarty committee, the present system of administered interest rates has become unduly complex and needs to be modified the committee has mentioned some of the important aspects of interest rate policy which need to be taken into account, while modifying the administered interest rate structure as for example increasing of small savers, reinforcing anti-inflationary policies the need to provide credit at concessional rate of interest to the priority sector and the profitability of banks , etc. Thus, the chakravarty committee envisaged a strong supportive role for interest rate policy in monetary regulating based on monetary targeting.

Restructuring of the money market in India:-

The committee envisage (predicted) an important role in treasury bill market, the call money market, the commercial bills market and the inter-corporate funds market in the allocation of sort term resources, with minimum of cost and minimum of delay, further, according to the committee, a

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well-organized money market provided an efficient mechanism for the transmission of the monetary regulation to the rest of economy. Accordingly, the committee has recommended that RBI should take measures to develop an efficient.

Other objectives of Monetary Policy


In certain periods, RBI may be seriously concerned with other short-term objectives and problems. For instance, during in two years 1994-96, RBI had to enter the foreign exchange market in a big way to prevent heavy depreciation of the rupee. This was also done during January 1998 and later to prevent the rupee following the experience of South Asian currencies. Bimal Jalan, the Governor of RBI came out strongly with a series of measures to check the rapid sliding of his rupee against the dollar.

Credit control
The methods of credit control are usually categorized into (1) General (or quantitative) methods, and (2) Selective (or qualitative) methods. The Bank Rate Policy, variable reserve requirements, statutory liquidity requirement, and open market operations policy fall in the category of general credit control methods. The various directives issued by the Reserve Bank restricting the quantum and other terms of granting credit against certain specified commodities constitute the selective control method. The main difference between the general and selective credit control methods is that the former influence the cost and overall volume of credit granted by banks. They affect credit related to the whole economy whereas the selective controls affect the flow of credit to only specified sector of the economy, wherein speculative tendency and rising trend of prices, due to excessive bank credit, is noticed. The general credit control measures affect the (1) cost, and (2) availability (or quantum) of bank credit. The cost of credit is influenced by the Bank Rate at which the central bank provides refinance to the banks. In the past years, the Reserve bank had relied upon its powers to regulate the interest rates of bank advances and directly regulated the interest rates of

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banks rather than through the instruments of Bank Rate. Now the interest rates are largely deregulated

The RBI adopt two methods to control credit in modern times for regulating bank advances. They are as follows:-

(A) Quantitative

or

General

Credit

Control

This method aims to regulate the amount of bank advance. This method includes: (a) Bank Rate (b) Open Market Operation (c) Variables Reserves Ratio

(a) Bank Rate: It is the rate at which central bank discounts the securities of commercial banks or advance loans to commercial banks. This rate is the minimum and it affects both cost and availability of credit. Bank rate is different from market rate. Market rate is the rate of discount prevailing in the money market among other lending institutions. Generally bank rate is higher than the market rate. If the bank rate is changed all the other rates normally change at the same direction. A central bank control credit by manipulating the bank rate. If the central bank raise the bank rate to control credit, the market discount rate and other lending rates in the money will go up. The cost of credit goes up and demand for credit goes down. As a result, the volume of bank loans and advances is curtailed. Thus raise in bank rate will contract credit. (b) Open Market Operation: It refers to buying and selling of Government securities by the central bank in the open market. this method of credit control become very popular after the 1st World War. During inflation, the bank will

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securities and during depression, it will purchase securities from the public and financial institutions. The RBI is empowered to buy and sell government securities from the public and financial institutions. The RBI is empowered to buy and sell government securities, treasury bills and other approved securities. The central bank uses the weapon to overcome seasonal stringency in funds during the slack season.

When the central bank sells securities, they are purchased by the commercial banks and private individuals. So money supply is reduced in the economy and there is contraction in credit. When the securities are purchased by the central bank, money goes to the commercial banks and the customers. SO money supply is increased in the economy and there is more demand for credit. Thus open market operation is one of the superior instrument of credit control. But for achieving an ideal result both Bank Rate and Open Market Operation must be used simultaneously. (c) Variable Reserve Ratio (VRR): This is a new method of credit control adopted by central bank. Commercial banks keep cash reserves with the central bank to maintain for the purpose of liquidity and also to provide the means for credit control. The cash reserve is also called minimum legal reserve requirement. The percentage of this ratio can be changed legally by the central bank. The credit creation of commercial banks depends on the value of cash reserves. If the value of reserve ratio increase and other things remain constant, the power of credit creation by the commercial bank is decreased and vice versa. Thus by varying the reserve ratio, the lending capacity of commercial banks can be affected.

(B) Qualitative or Selective Control Method: It is also known as qualitative credit control. This method is used to control the flow of credit to particular sectors of the economy. The direction of credit is regulated by the central bank. This method is used as a complementary to

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quantitative credit control discourage the flow of credit to unproductive sectors and speculative activities and also to attain price stability. The main instruments used for this purpose are: (1) Varying margin requirements for certain bank: While lending commercial banks accept securities, deduct a certain margin from the market value of the security. This margin is fixed by the central bank and adjust according to the requirements. This method affect the demand for credit rather than the quantity and cost of credit. This method is very effective to control supply of credit for speculative dealing in the stock exchange market. It also helps for checking inflation when the margin is raised. If the margin is fixed as 30%, the commercial banks can lend up to 70% of the market value of security. This method has been used by RBI since 1956 with suitable modifications from time to time as per the demand and supply of commodities. (2) Regulation of consumer's credit: Apart from trade and industry a great amount of credit is given to the consumers for purchasing durable goods also. RBI seeks to control such credit in the following ways: (a) by regulating the minimum down payments on specific goods. (b) by fixing the coverage of selective consumers durable goods. (c) by regulating the maximum maturities on all installment credit and (d) by fixing exemption costs of installment purchase of specific goods. (3) Control through Directives: Under this system, the central bank can issue directives for the credit control. There may be a written or oral voluntary agreement between the central bank and commercial banks in this regard. Sometimes the commercial banks do not follow these directives of the RBI. (4) Rationing of credit: The amount of credit to be granted is fixed by the central bank. Credit is rationed by limiting the amount available to each commercial bank. The RBI can also restrict the discounting of bills. Credit can also be rationed by the fixation of ceiling for loans and advances. (5) Direct Action: It is an extreme step taken by the RBI. It involves refusal

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by RBI to extend credit facilities, denial of permission to open new branches etc. RBI also gives wide publicity about the erring banks to create awareness amongst the public. (6) Moral suasion: RBI uses persuasion to influence lending activities of banks. It sends letters to banks periodically, advising them to follow sound principles of banking. Discussions are held by the RBI with banks to control the flow of credit to the desired sectors.

Reserve Bank a currency notes Issuing Authority As the central bank of the country the Reserve Bank of India performs both the traditional functions of a central bank and a variety of developmental ad promotional functions. The Reserve Bank of India Act, 1934, confers upon it the powers to act as note issuing authority, bankers bank and banker to the Government. Reserve Bank as Note Issuing Authority: The currency of our Country consist of notes and coins (including subsidiary coins) issued by the Government of India and Bank notes issued by the Reserve Bank. As required by Section 38 of the Reserve Bank of India Act, Government puts into circulation one rupees coins and notes through Reserve bank only. The Reserve Bank has the sole right to issue bank notes in India. The notes issued by the Reserve Bank and the one rupee notes and coins issued by the government are unlimited legal tender. Reserve Bank also bears the responsibility of exchanging notes and coins into those of other denominations as required by the public. As required by the Reserve Bank of India Act, the issues of notes and the general banking business of the Bank are undertaken by two separate departments of the Bank. The Issue Department is responsible for the issue of new notes. It keeps its assets which form the backing for the note issue, quite separate from the assets of the Banking Department.

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The business of banking is undertaken by the banking Department which holds stock of currency with itself. Whenever necessary, the Banking department replenishes the stock of currency from the Issue department against equivalent transfer of eligible assets. Similarly, if the stock of currency with the banking department becomes surplus to its normal requirements, the excess is returned to the issue department in exchange of equivalent assets. The assets of the Issue Department against bank notes are issued consist of the following, namely: 1. Gold coins and Bullion 2. Foreign securities 3. Rupee coins 4. Government of India rupee securities, and 5. The bills of exchange and promissory notes payable in India, which are eligible or purchase by the Bank. The aggregate value of gold coins and bullion shall not at any time be less than Rs 115 crores and together with foreign securities (i.e. total of (1) and (2) above) not less than Rs 200 crores. The Reserve Bank, is also empowered to reduce its holding of foreign securities in the Issue Department to any lesser amount, with previous sanction of the Central Government. Currency Chests: The Reserve Bank has made adequate administrative arrangements for undertaking the function of distribution of currency notes and coins. The issue Department has opened its offices in 10 leading cities for this purpose. Moreover, currency chests have been maintained all over the country to facilitate the expansion and contraction of currency in the country. Currency chests are receptacles (i.e. boxes or containers) in which stocks of new or re-issuable notes are stored along wit rupee coins. The currency chests and repositories are run by the Reserve Bank, State Bank and its subsidiaries, Public sector Banks and Government Treasuries and SubTreasuries. The stock of new notes is thus held in currency chests scattered over the entire country and maintained by the public sector banks in most of

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the cases. There are several advantages to the bank or the treasury maintaining a currency chest:

Currency Management What is the role of the Reserve Bank in currency management? The Reserve Bank manages currency in India. The Government, on the advice of the Reserve Bank, decides on the various denominations. The Reserve Bank also co-ordinates with the Government in the designing of bank notes, including the security features. The Reserve Bank estimates the quantity of notes that are likely to be needed denomination-wise and places the indent with the various presses through the Government of India. The notes received from the presses are issued and a reserve stock maintained. Notes received from banks and currency chests are examined. Notes fit for circulation are reissued and the others (soiled and mutilated) are destroyed so as to maintain the quality of notes in circulation. The Reserve Bank derives its role in currency management on the basis of the Reserve Bank of India Act, 1934. What is the role of Government of India? The responsibility for coinage vests with Government of India on the basis of the Coinage Act, 1906 as amended from time to time. The designing and minting of coins in various denominations is also attended to by the Government of India. Who decides on the volume and value of bank notes to be printed and on what basis? The Reserve Bank decides upon the volume and value of bank notes to be printed. The quantum of bank notes that needs to be printed broadly depends on the annual increase in bank notes required for circulation purposes, replacement of soiled notes and reserve requirements.

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Who decides on the quantity of coins to be minted? The Government of India decides upon the quantity of coins to be minted. How does the Reserve Bank estimate the demand for bank notes? The Reserve Bank estimates the demand for bank notes on the basis of the growth rate of the economy, the replacement demand and reserve requirements by using statistical models. How does the Reserve Bank reach the currency to people? The Reserve Bank manages the currency operations through its offices located at Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Belapur(Navi Mumbai), Kolkata, Chandigarh, Chennai, Guwahati, Hyderabad, Jaipur, Kanpur, Lucknow, Mumbai (Fort), Nagpur, New Delhi, Patna and Thiruvananthapuram. These offices receive fresh notes from the note presses. Similarly, the Reserve Bank offices located at Kolkata, Hyderabad, Mumbai and New Delhi initially receive the coins from the mints. These offices then send them to the other offices of the Reserve Bank. The notes and rupee coins are stocked at the currency chests and small coins at the small coin depots. The bank branches receive the bank notes and coins from the currency chests and small coin depots for further distribution among the public. What is a currency chest? To facilitate the distribution of notes and rupee coins, the Reserve Bank has authorised selected branches of banks to establish currency chests. These are actually storehouses where bank notes and rupee coins are stocked on behalf of the Reserve Bank. At present, there are over 4422 currency chests. The currency chest branches are expected to distribute notes and rupee coins to other bank branches in their area of operation.

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What is a small coin depot? Some bank branches are also authorised to establish small coin depots to stock small coins. There are 3784 small coin depots spread throughout the country. The small coin depots also distribute small coins to other bank branches in their area of operation. What happens when the notes and coins return from circulation? Notes and coins returned from circulation are deposited at the offices of the Reserve Bank. The Reserve Bank then separates the notes that are fit for reissue and those which are not fit for reissue. The notes which are fit for reissue are sent back in circulation and those which are unfit for reissue are destroyed after processingshredded. The same is the case with coins. The coins withdrawn are sent to the Mints for melting. From where can the general public obtain bank notes and coins? Bank notes and coins can be obtained at any of the offices of the Reserve Bank and at all branches of banks maintaining currency chests and small coin depots. Current Issues Why are the coins and bank notes in short supply? This is not entirely correct. It is true that till recently the demand for currency was more than their supply. The primary reason for this is that the Indian society is still predominantly cash-driven. However, at present there are no supply constraints so far as bank notes are concerned. As regards coins, Government of India are taking various steps, including importing rupee coins. The impression of coins being in short supply is also enhanced probably due to peoples preference for notes.

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Is there a way to reduce dependence on cash? Yes, once instruments such as, cheques, credit and debit cards, electronic funds transfer gain popularity, the demand for currency is expected to go down. Meanwhile, are some steps being taken to increase the supply of bank notes and coins? Yes, several steps have been taken to augment the supply of bank notes and coins. Some of these are:

The existing note printing presses and the mints owned by the Government are being modernised. Two new currency printing presses with the state-of-the-art technology have been set up under the aegis of the Bharatiya Reserve Bank Note Mudran Ltd., a wholly owned subsidiary of the Reserve Bank.

To bridge the demand-supply gap, the Government had, as a one-time measure, even imported bank notes. The production capacity of the four India Government Mints are being augmented. Government of India has also been importing rupee coins to supplement the supply of coins from the four mints. Till date 2 billion rupee coins have been imported.

Why are Re1, Rs.2 and Rs.5 notes not being printed? Volume-wise, the share of such small denomination notes in the total notes in circulation was as high as 57 per cent but constituted only 7 per cent in terms of value. The average life of these notes was found to be around a year. The cost of printing and servicing these notes was, thus, not commensurate with their life. Printing of these notes was, therefore, discontinued. These
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denominations were, therefore, coinised. However, it has been decided that notes in the denomination of Rs.5 be re-introduced so as to meet the gap between the demand and supply of coins in this denomination. The facilities provided to the members of public for exchange of their soiled, mutilated etc. notes are as under. Soiled Notes Soiled notes are those which have become dirty and slightly cut. Notes which have numbers on two ends, i.e. notes in the denomination of Rs.10 and above which are in two pieces, are also treated as soiled note. The cut in such notes, should, however, not have passed through the number panels. All these notes can be exchanged at the counters of any public sector bank branch, any currency chest branch of a private sector bank or any Issue Office of the Reserve Bank of India. There is no need to fill any form for doing this.

Mutilated Notes Notes which are in pieces and/or of which the essential portions are missing can also be exchanged. Essential portions in a currency note are name of issuing authority, guarantee, promise clause, signature, Ashoka Pillar

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emblem/portrait of Mahatma Gandhi, water mark. Refund value of these notes is, however, paid as per RBI(Note Refund) Rules. These can also be exchanged at the counters of any public sector bank branch, any currency chest branch of a private sector bank or any Issue Office of the RBI without filling any form.

Other facilities for exchange To suit public convenience, the exchange facility for mutilated notes is also offered through TLR(Triple Lock Receptacle) covers. Members of public can obtain from the Enquiry Counter of the Reserve Bank a TLR cover and put their notes in the cover with particulars, such as, name, address, denominations of notes deposited, etc. filled in the columns provided on the cover, close it and deposit it in a box called Triple Lock Receptacle against issue of a paper token. This box is kept at the Enquiry counter at each Issue
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Office of the Reserve Bank. The admissible exchange value of the mutilated notes will be remitted by means of a bank draft or a pay order. Mutilated notes can also be sent to any of the RBI offices by registered/insured post. Excessively soiled, brittle, burnt notes :- Notes which have become excessively soiled, brittle or are burnt and, therefore, cannot withstand normal handling can be exchanged only at Issue Office of the RBI. Persons holding such notes may approach the Officer-in-charge of the Claims Section, Issue Department of the Reserve Bank for this purpose. REGULATION OF R.B.I. The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks. These powers are exercised through on-site inspection and off site surveillance.
Till 1993, regulatory as well as supervisory functions over commercial banks were performed by the Department of Banking Operations and Development (DBOD). Subsequently, a new Department of Banking Supervision (DBS) was set up to take over the supervisory functions relating to the commercial banks from DBOD. For dedicated and integrated supervision over all credit institutions, i.e., banks, development financial institutions and non-banking financial companies, the Board for Financial Supervision (BFS) was set up in November 1994 under the aegis of the Reserve Bank of India. For focussed attention in the area of supervision over non-banking finance companies, Department of Supervision was further bifurcated in August 1997 into Department of Banking Supervision (DBS) and Department of Non-Banking Supervision (DNBS). These Departments now look after supervision over commercial banks & development financial institutions and non-banking financial companies, respectively. Both these departments now function under the direction of the Board for Financial Supervision (BFS).

The Board for Financial Supervision constituted an audit sub-committee in January 1995 with the Vice-Chairman of the Board as its Chairman and two non-official members of BFS as members. The sub-committees main focus is upgradation of the quality of the statutory audit and

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concurrent / internal audit functions in banks and development financial institutions. On site Inspection On site inspection of banks is carried out on an annual basis. Besides the head office and controlling offices, certain specified branches are covered under inspection so as to ensure a minimum coverage of advances. The Annual Financial Inspection (AFI) focusses on statutorily mandated areas of solvency, liquidity and operational health of the bank. It is based on internationally adopted CAMEL model modified as CAMELS, i.e., capital adequacy, asset quality, management, earning, liquidity and system and control. While the compliance to the inspection findings is followed up in the usual course, the top management of the Reserve Bank addresses supervisory letters to the top management of the banks highlighting the major areas of supervisory concern that need immediate rectification, holds supervisory discussions and draws up an action plan, that can be monitored. All these are followed up vigorously. Indian commercial banks are rated as per supervisory rating model approved by the BFS which is based on CAMELS concept.

Off-site Monitoring As part of the new supervisory strategy, a focussed off-site surveillance function was initiated in 1995 for domestic operations of banks. The primary objective of the off site surveillance is to monitor the financial health of banks between two on-site inspections, identifying banks which show financial deterioration and would be a source for supervisory concerns. This acts as a trigger for timely remedial action. During December 1995 first tranche of off-site returns was introduced with five quarterly returns for all commercial banks operating in India and two half yearly returns one each on connected and related lending and

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profile of ownership, control and management for domestic banks. The second tranche of four quarterly returns for monitoring asset-liability management covering liquidity and interest rate risk for domestic currency and foreign currencies were introduced since June, 1999. The Reserve Bank intends to reduce this periodicity with effect from April 1,2000.

Corporate Governance With a view to strengthening the corporate governance and internal control function in the banks, several steps have been initiated. Introduction of concurrent audit system, constitution of independent audit committee of board, appointment of RBI nominees on boards of banks, creation of a post of compliance officer, such are some steps. Besides, the Reserve Bank monitors the implementation of recommendations of Jilani Committee relating to internal control systems in banks on an ongoing basis during the annual financial inspection of banks. Off-site Monitoring As part of the new supervisory strategy, a focussed off-site surveillance function was initiated in 1995 for domestic operations of banks. The primary objective of the off site surveillance is to monitor the financial health of banks between two on-site inspections, identifying banks which show financial deterioration and would be a source for supervisory concerns. This acts as a trigger for timely remedial action. During December 1995 first tranche of off-site returns was introduced with five quarterly returns for all commercial banks operating in India and two half yearly returns one each on connected and related lending and profile of ownership, control and management for domestic banks. The second tranche of four quarterly returns for monitoring asset-liability management covering liquidity and interest rate risk for domestic currency and foreign currencies were introduced since June, 1999. The Reserve Bank intends to reduce this periodicity with effect from April 1,2000.

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Initiatives and Directions


The Reserve Bank has taken several other supervisory policy initiatives. These include quarterly monitoring visits to banks displaying financial and systemic weaknesses, appointment of monitoring officers and direct monitoring of certain problem areas in house-keeping, etc. In addition the department provides secretarial support to the Board for Financial Supervision and acts as its executive arm. It is the BFS which evolves policies relating to supervision. It also attends to appointment of statutory central auditors / branch auditors for all banks and selected all India financial institutions and to complaints against banks. The department monitors cases of frauds perpetrated in banks and reported to it. The department as a one time measure, issued several guidelines to banks and all india financial institutions to enable them to become Y2K compliant.

Core Principles
Against the backdrop of banking sector reforms in India and the global focus on internal control and supervisory mechanism, the need for building a strong and efficient banking system comparable to the international standards cannot be gainsaid. A detailed study was carried out so as to ascertain gaps, if any, in implementing the 25 core principles of effective banking supervision enunciated by the Bank for International Settlements (BIS). Necessary steps have already been initiated to fill in the gaps, so as to make the regulatory as well supervisory system more sound and comparable to international standards.

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Supervision over FIs


On the basis of the recommendations made by an in-house group, the monitoring of the financial institutions first started after 1990. This was done through prescribed quarterly returns on liabilities / assets, source and deployment of funds, etc. The objective of this monitoring was to obtain a macro level perspective for evolving monetary and credit policy, to assess the quality of assets of the financial system and to improve coordination between banks and FIs. In 1994, these institutions were brought under the prudential regulation of the Reserve Bank. The Reserve Bank has adopted more or less, the CAMELS approach for regulation of Fis. Since FIs are vested with developmental role as welland with responsibility of supervision of other institutions, evaluation of their developmental, co-ordinating and supervisory role is also undertaken. The newly created division in the department at present supervises and regulates ten select all-India financial institutions viz., IDBI, ICICI, IFCI, IIBI, Exim Bank, NABARD, NHB, SIDBI, IDFC and TFCI. With a view to having a continuous monitoring and supervision of these FIs, an off-site surveillance system has also been put in place.

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Central Banking Functions: Monetary Functions


Bank as Note-Issuing Authority Government Banker Bankers' Bank and Lender of the Last Resort Contoller of Credit Custodian of Foreign Exchange Reserves Non-monetary Functions Supervisory Functions Promotional Functions

Central Banking Functions: Monetary Functions Bank as Note-Issuing Authority RBI has the sole authority to issue bank notes of all denominations The Bank has a separate Issue Department which is delegated with the issue of currency notes. From 1957 RBI is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system of note issue as it exists today is known as minimum reserve system.

Government Banker
RBI acts as Government banker, agent and adviser. The Bank has the obligation to transact Government business, viz., to keep the cash balances as deposit free of
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interest, to receive and to make payments for the Government and to carry out their exchange remittances and other banking operations. It helps the Government-both the Union and the States-to float new loans and manage public debt. RBI makes ways and means advances to the Government for 90 days. It makes loans and advances to States and local authorities. RBI advises the Government on all monetary and banking matters-on the floating of loans, on agricultural and industrial finance, on legislation affecting banking and credit, on financial aspects of planning, etc.

Bankers' Bank and Lender of the Last Resort


As per the provisions of the RBI Act, 1934, every scheduled bank was required to maintain with RBI a cash balance equivalent to 5 percent of its demand liabilities and 2 percent of its time liabilities in India. This provision helps to centralize the banking reserves of the country so as to enable RBI to regulate and control the credit position in the country. The scheduled banks can borrow from RBI on the basis of the eligible securities or get financial accommodation in times of need or stringency by rediscounting their bills of exchange. Since commercial banks can always expect RBI to come to their help, RBI is not only the bankers' bank but also the lender of the last resort. Under the Banking Regulation Act of 1949, RBI has considerable powers of supervision and control over the banking system-in issuing licenses to banks, giving permission to open branches, etc.

Contoller of Credit
RBI is the controller of credit, i.e., it has the power to influence the volume of credit created by banks in India. It can also do so through changing the Bank Rate or through open-market operations. According to the Banking Regulation Act of 1949, RBI can ask any particular bank or the whole banking system not to lend to particular groups of persons or on the basis of certain types of securities.

Custodian of Foreign Exchange Reserves


RBI has the responsibility to maintain the official rate of exchange. After India

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became a member of the International Monetary Fund (IMF), RBI has the responsibility of maintaining fixed exchange rates with all other member countries of the IMF. RBI buys and sells foreign exchange from authorized persons at rates of exchange fixed by the Government.

Non-monetary Functions

Supervisory Functions
RBI has certain non-monetary functions for the supervision of banks and promotion of sound banking in India. RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. Since the Securities Scam of 1992 and the involvement of the commercial banks and the failure of RBI to prevent it there has been considerable criticism of the supervising role of RBI.

Promotional Functions
Today, RBI performs a variety of developmental and promotional functions, which at one time were regarded as outside the normal scope of central banking. RBI was asked to promote of banking habit, extend banking facilities to rural and semi-urban areas and establish and promote new specialized financing agencies. Accordingly RBI set up many agencies like IFCI, Deposit Insurance Corporation, etc.

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Powers of R.B.I.
4.11 In designing separate formats of financial statements for NBFCs, a basic question which was considered by the Committee was whether RBI has the power to prescribe separate formats of financial statements for NBFCs, in substitution of Schedule VI to the Companies Act, 1956 or to prescribe disclosure requirements for such companies in addition to those required in Schedule VI to the Companies Act, 1956. In this context, the Committee considered the following factors:a) Presently, NBFCs prepare their financial statements in accordance with the requirements of Section 211 of the Companies Act, 1956. The said section is reproduced in full in Appendix II to this report. According to the provisos to sub-sections (1) and (2) of Section 211, the requirement to prepare the balance sheet and the profit and loss account in accordance with Schedule VI does not apply to any insurance or banking company or any company engaged in the generation or supply of electricity or to any other class of company for which formats of balance sheet or profit and loss account have been specified in or under the Act governing such class of company (emphasis added). In the case of insurance, banking and electricity companies, formats of financial statements have been prescribed under the enactments governing such companies, such as Banking Regulation Act, 1949 and Insurance Act, 1938. The Committee feels that non-banking financial companies would be exempted from the requirement of preparing their financial statements in accordance with the provisions of Schedule VI, if the formats of their financial statements are "specified in or under the Act governing" such class of companies. A critical question, therefore, is: whether it can be said that the Reserve Bank of India Act "governs" the non-banking financial companies. To answer this question, the Committee examined the provisions of the Reserve Bank of India Act, 1934. Chapter III B of the Act contains detailed provisions relating to non-banking institutions receiving deposits and financial institutions. The Committee observed from the provisions of the said chapter that it contains a large number of requirements relating to NBFCs, such as their registration with RBI, maintenance of a

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certain percentage of assets in approved securities, maintenance of reserve fund, power of RBI to regulate or prohibit issue of prospectus or advertisement soliciting deposits of money, power of RBI to determine policy and issue directions to NBFCs, power of RBI to prohibit NBFCs from accepting deposits and alienating assets in certain cases, etc. Besides, the said Chapter also empowers RBI, through Section 45MA(1A), to issue directions to any NBFC or any class of NBFCs or NBFCs generally or to the auditors of such non-banking financial company or companies relating to balance sheet, profit and loss account, disclosure of liabilities in the books of account or any matter relevant thereto. Similarly, it would be observed from Section 45JA that RBI has the power to determine the policy and issue directions to all or any of the NBFCs relating to income recognition, accounting standards, making of proper provisions for bad and doubtful debts, capital adequacy, etc. Furthermore, invoking these powers vested in it RBI has issued several sets of directions to different classes of NBFCs. Thus, Chapter III-B of the Act and the directions issued thereunder contain a large number of provisions which lay down the conditions and restrictions subject to which the operations of NBFCs can be carried out. The Committee is, therefore, of the view that the NBFCs are "governed" by the RBI Act. This being the case, it appears that separate formats of financial statements can be prescribed for such companies 'under' the RBI Act and the prescription of such formats will come under the provisos of sub-sections (1) and (2) of Section 211 of the Companies Act, 1956. b) Apart from sections 45JA and 45MA(1A) empowering RBI to issue directions to NBFCs relating to balance sheet, profit and loss account, manner of accounting, etc., Section 45Q of this legislation clearly states that "the provisions of this Chapter (i.e., Chapter III-B) shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force." Thus, Chapter III-B of the RBI Act overrides other laws. The Committee, therefore, concludes that even if there is any doubt as to whether the RBI Act can be said to "govern" NBFCs, a requirement by RBI pursuant to Section 45MA(1A) and/or Section 45JA of Chapter III-B of the RBI Act, making it mandatory for NBFCs to prepare their financial statements

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in the formats prescribed by RBI, would override the requirements of Section 211 and, therefore, NBFCs would be required to prepare their financial statements in accordance with the formats prescribed by RBI either in substitution of the formats as per Schedule VI to the Companies Act, 1956 or in addition thereto.

Formats of financial statements


4.12 The Committee is aware that some of the NBFCs are engaged in other business activities besides the business of financing. This presents special problems in designing the financial statements for NBFCs. The Committee considered the following four alternatives in this regard:(i) Such NBFCs may continue to prepare their financial statements in the formats prescribed under the Companies Act. Further, a separate set of supplementary financial statements, i.e., balance sheet, profit and loss account and cash flow statement, may be required to be attached by them as far as their financial business is concerned. A problem under this alternative would be that a number of accounting items, like share capital, reserves and surplus, part of current liabilities, etc., would have to be apportioned between the financial and non-financial segments. (ii) NBFCs may prepare their financial statements in the formats prescribed by the RBI. However, a separate set of financial statements, i.e., balance sheet and profit and loss account, may be prepared as far as the non-financial business is concerned. This alternative would also require apportionment of certain common items as mentioned in (i) above. (iii) (a) The Balance Sheet may be drawn up in accordance with the requirements of Part I of Schedule VI to the Companies Act, 1956.

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(b) The Profit and Loss Account may be drawn up in accordance with the requirements of Part II of Schedule VI to the Companies Act, 1956. (c) In addition to the Balance Sheet and Profit and Loss Account referred in (a) and (b) above, an NBFC should also annex the following:(1) A statement and various schedules thereto showing the assets and liabilities, separately aggregated, significantly pertaining to its financial business. (2) A statement and various schedules thereto showing the items of income and expenditure, separately aggregated, significantly pertaining to its financial business. This statement would also disclose the amount of profit earned/ loss incurred, so determined by the company, significantly pertaining to its financial business. (d) The statements and various schedules thereto referred to in (a) and (b) above shall be as near to the formats prescribed in the case of NBFCs engaged exclusively in financial business as the circumstances admit. The advantage of this alternative is that apportionment of various common items would be avoided. (iv) NBFCs may prepare financial statements as per the formats prescribed by RBI. With regard to non-financial business, information as not covered by the financial statements prescribed by RBI, may be disclosed in the profit and loss account and the balance sheet as per the requirements of Schedule VI to the Companies Act, 1956. Thus, the financial statements of such NBFCs would reflect a composite picture of both the financial and non-financial business with separate schedules for financial and non-financial assets, income and expenditure. 4.13 The Committee felt that preparation of separate set of financial statements for financial as well as non-financial business, as per alternatives (i) and (ii) is beset with the problems of apportionment of certain common

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items which would involve some arbitrariness in deciding about the basis of apportionment. The Committee is of the view that the results so obtained may not therefore present true picture of the activities carried on by such companies besides making the accounting procedures for such companies complicated. The Committee, therefore, decided to concentrate on alternative (iii) and (iv). 4.14 With regard to alternative (iii), the Committee noted that most of the NBFCs carry on substantially the financial business. Accordingly, the Committee felt that the focus of the financial statements should be to reflect the nature of financial operations of the NBFCs. The Committee is of the view that if this alternative is followed, the focus of the financial operations carried on by the NBFCs, particularly those which carry on substantially the financial business, would be lost. The Committee, therefore, adopted alternative (iv). In view of this, the formats of financial statements recommended by the Committee in this report are in accordance with this alternative. 4.15 In view of the above, NBFCs can be classified in two categories:1. Those, which are exclusively carrying on financial business, would prepare the financial statements in the formats prescribed by RBI.
2. Those, which are also carrying on activities other than financing, would

provide separate information pertaining to non-financial activities in their financial statements as recommended in item (iv) paragraph 4.12 above.

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Banking is the most important aid for the functioning and progress of present day world . in the context of Indian Scenario where we find highly rapid progress being made In respect of not only industrial agricultural and other Commercial activities but also international commerce And trade including import and export. RBI Moniter and look into various aspests Of functioning of banking system . RBI Play a vital Role in devolpment of Indian economy. Besides It acts as an monitary athourity for the country. It is unthinkable that these activites can Be possible without sound banking system.

CONCLUSION

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