MANAGEMENT OF FINANCIAL SERVICES (S3 MBA) Study Materials - UNIT II Prepared by Prof. P.

Madhusoodanan Pillai

The Syllabus Regulatory and supervisory frame work Role of RBI, SEBI, and Ministry of Finance, Govt. of India finance bill and financial services supervision and regulation of banking companies in India Regulatory/ Institutional/ and Environmental constraints.

I. BAKING IN INDIA Introduction In the earlier societies functions of a bank were done by the corresponding institutions dealing with loans and advances. Britishers brought into India the modern concept of banking by the start of Bank of England in 1694. In 1708, the bank of England was given the monopoly for the issue of currency notes by an Act. In nineteenth century various banks started operations, which primarily were receiving money on deposits, lending money, transferring money from one place to another and bill discounting. Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III. Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of

the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. Why Banking Sector Reforms needed in India? 1. High Regulated Sector 2. Prevalence of High Reserve Requirements

3. Interest Rate Controls 4. Large Allocations to Priority Sector 5. Poor Lending Strategies 6. Lack of Internal Risk Management 7. Low Yields on Government Securities 8. Waiver of Loans on Political Grounds 9. Lack of Competition 10. High Cost of Operations 11. Poor Customer Service 12. Poor Loan Recovery 13. Weak Capital Position 14. Political Interference 15. Lack of Institutional Autonomy 16. Lack of Accountability in Banks 17. Vague Reporting Formats 18. Technology Deficiency Recent History of Indian Banking Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, Statepartnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-organisation of princely States, the associate banks came into fold of public sector banking. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal,

more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organised sectors of industry and trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. The scheme however, did not provide any remedy. Though a no. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors. On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee. Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. In the post-nationalisation period, there was substantial increase in the no. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 APPX. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. The Service Area Approach was introduced during 1989. While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating reorganisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India

into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at a low ebb. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc. Bank Nationalisation & Public Sector Banking Organised banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent. Move towards State ownership of banks started with the nationalisation of RBI and passing of Banking Companies Act 1949. On the recommendations of All India Rural Credit Survey Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. Similarly, the conversion of 8 State-owned banks (State Bank of Bikaner and State Bank of Jaipur were two separate banks earlier and merged) into subsidiaries (now associates) of SBI during 1959 took place. During 1968 the scheme of social control was introduced, which was closely followed by nationalisation of 14 major banks in 1969 and another six in 1980. Keeping in view the objectives of nationalisation, PSBs undertook expansion of reach and services. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. of people served per branch office came down from 65000 in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The expansion is significant in terms of geographical distribution. States neglected by private banks before 1969 have a vast

network of public sector banks. The PSBs including RRBs, account for 93% of bank offices and 87% of banking system deposits.

II. REFORMS IN BANKING SUPERVISION IN INDIA

The Basel Committee on Banking Supervision, which is a committee of banking supervisory authorities of G-10 countries, has been in the forefront of the international attempt in the development of standards and the establishment of a framework for bank supervision towards strengthening international financial stability. In 1997, in consultation with the supervisory authorities of a few non G-10 countries including India, it drew up the 25 Core Principles for Effective Banking Supervision which were in the nature of minimum requirements intended to guide supervisory authorities which were seeking to strengthen their current supervisory regime. Being one of the central banks which was involved in the exercise of drawing up the Core Principles, the Reserve Bank of India had assessed its own position with respect to these Principles in 1998. The assessment had shown that most of the Core Principles were already enshrined in our existing legislation or current regulations. Gaps had been identified between existing practice and principle mainly in the areas of risk management in banks, inter-agency cooperation with other domestic/international regulators and consolidated supervision. Internal working groups were set up to suggest measures to bridge these gaps and their recommendations have been accepted by the Board for Financial Supervision and are now in the process of being implemented. Given the spread and reach of the Indian banking system, with over 60,000 branches of more than 100 banks, implementation is a challenge for the supervisors. However, the Reserve Bank of India is committed to the full implementation of the Core Principles. The Bank also serves on the Core Principles Liaison Group of the BCBS, which has been formed to promote the timely and complete implementation of these principles worldwide. It gives me great pleasure to release this document which is intended to provide the reader with a framework within which one can view the developments in the Indian Banking System in a proper perspective. The document reflects the position as existing on date and will be updated to reflect future changes. As supervision is a dynamic process, readers may refer to the Reserve Bank of India for the latest position or for any clarifications. Core Principles for Banking Supervision- Status in India Section I: Preconditions for Effective Banking Supervision Principle I: Framework and Coordination An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banks. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary including provisions relating to authorisation of banking establishments and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal

protection for supervisors. Arrangements for sharing information between supervisors and protection for confidentiality of such information should be in place. 1.1 The Reserve Bank of India (RBI), an autonomous body created under an act of the Indian parliament i.e. The Reserve Bank of India Act, 1934, is entrusted, interalia, with the sole responsibility of regulation and supervision of banks under the Banking Regulation Act, 1949. Section 35 of the Banking Regulation Act vests powers in RBI for inspection of books of any banking company at any time. 1.2 Both the regulatory and supervisory functions of RBI were earlier carried out through its Department of Banking Operations and Development (DBOD) till December 1993, when a separate department entitled Department of Supervision (DOS) was formed to take over the supervisory function, leaving regulatory functions to DBOD. In November 1994, RBI constituted the Board for Financial Supervision (BFS) under RBI (BFS) Regulations 1994 to give undivided attention to the prudential supervision and regulation of banks, financial institutions and non-bank financial institutions in an integrated manner. DBOD continues to perform the regulatory function pertaining to banks. However, DOS has since been bifurcated into Department of Banking Supervision (DBS) and Department of Non-Banking Supervision (DNBS). DBS is responsible for the supervision of commercial banks and their merchant banking subsidiaries. Both regulation and supervision of the development financial institutions (DFIs) are handled by the Financial Institutions Division (FID) of the DBS. 1.3 DNBS is responsible for supervision and regulation of Non-banking Financial Companies (NBFCs). No NBFC can commence or carry on the business of a nonbanking financial institution without obtaining a certificate of registration from RBI. The NBFC with net owned funds of Rs.2.5 million and above (since enhanced to Rs.20 million effective from 20 April 1999) are mandatorily required to be registered with RBI. Maintenance of liquid assets at a specified percentage of public deposits is compulsory. RBI is empowered to give directions to NBFCs and can even prohibit NBFCs which do not adhere to a set of prudential norms from accepting deposits and impose penalties under the provisions of the RBI Act. A system of onsite examination based on CAMELS rating model and off-site surveillance of various statutory returns of NBFCs is in place. Besides, special formats for off-site surveillance of NBFCs with asset size of Rs.1 billion and above have been devised. 1.4 The BFS has been constituted under the aegis of RBI. It is an autonomous body and directs the policies and operations relating to supervision of banks, DFIs and NBFCs. The Governor of the Reserve Bank is the Chairman of the BFS while the Deputy Governor in charge of supervision is the Vice-chairman. The other two Deputy Governors of the Bank, together with four non-official directors from the Central Board of the Bank, are the members of the BFS. Since its formation in November 1994, the BFS, which meets every month, has positioned a new strategy for on-site supervision of banks and a system of off-site monitoring, based on quarterly reporting system.

1.5 RBI has been given broad powers under Section 35A of the Banking Regulation Act to issue directions to banking companies in general or to any banking company in particular, if it is satisfied that these are required a) in the public interest; or b) in the interest of banking policy; or c) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or d) to secure the proper management of any banking company generally. 1.6 The Central Government, after consultation with RBI, may acquire or amalgamate or reconstitute a banking company, which is being managed in a manner detrimental to the interest of its depositors or which has failed to comply with directions issued by RBI under the Banking Regulation Act. The RBI has powers to apply for winding up of a banking company that is unable to meet its commitments and / or its continuation is prejudicial to the interest of its depositors. The RBI can intervene in the banks management if directors / management are not found to be fit and proper in the course of operation. The RBI can cancel the licence of a banking company provided the conditions stated in Section 22(3) of the Banking Regulation Act are not fulfilled. 1.7 Section 7 of the RBI Act provides for operational independence to RBI while at the same time reserving the Central Governments right to issue directions to RBI from time to time in public interest. The management of RBI rests with the Central Board of Directors. The RBI is headed by the Governor who is appointed by the Central Government for a term not exceeding five years and is eligible for reappointment. 1.8 An annual report on the working of RBI with detailed analysis of its annual accounts and an assessment of the Indian economy is submitted to the Central Government under Section 53(2) of the RBI Act. The RBI compiles two financial statements viz. Weekly statement of its affairs and annual balance sheet as at 30 June of each year in terms of Section 53 of the RBI Act, 1934 and transmits these to the Central Government. The Central Government publishes these statements in the Gazette of India. The RBI publishes fortnightly a consolidated statement containing aggregate liabilities and assets of all the scheduled commercial banks as per Section 43 of the RBI Act. The RBI brings out certain publications at regular intervals on the financial strength and performance of banking industry and state of economy. The publications include Banking Statistics, Report on Currency and Finance, Report on Trends and Progress of Banking in India (Section 36(2) of the Banking Regulation Act), Credit Information Review, and monthly RBI bulletin containing statistics on selective economic and banking indicators and weekly statistical supplements. 1.9 The RBI equips its officers with latest techniques of supervision through ongoing training programmes organised at its own staff colleges viz. Reserve Bank Staff College, Chennai; College of Agricultural Banking, Pune; Bankers Training College, Mumbai; and Institute for Development and Research of Banking Technology, Hyderabad. Besides, the RBI regularly deputes its officers to training programmes, seminars and conferences conducted by international bodies, Central Banks of other

countries and international organisations like Bank for International Settlements and the International Financial Institutions. 1.10 On-going analysis of off-site returns is carried out in a computerised environment. The RBI has initiated steps to move from Local Area Networking (LAN) to Wide Area Networking (WAN) with a view to connect its Regional Offices and commercial banks through VSAT based connectivity by December 2000. 1.11 The banking laws are reviewed and updated from time to time considering the changing needs of the banking industry and economy. The Banking Regulation Act was last amended in 1994. An expert committee set up in February 1999 on the recommendations of the Committee on Banking Sector Reforms is engaged in the task of examining various banking laws and all relevant banking related legislations. The committee is expected to submit its recommendations by December, 1999. 1.12 The RBI has the necessary powers to issue licence to a company for carrying on the business of banking. The RBI is vested with powers to issue guidelines on any issue relating to functioning of banks. This helps the Bank in laying down prudential guidelines for sound management of banks. It has issued several mandatory guidelines on liquidity maintenance, capital adequacy, income recognition, asset classification and provisioning, connected lending and prudential norms on large exposures. The Banking Regulation Act vests powers in RBI to ensure compliance with its provisions. Noncompliance with mandatory guidelines can invite monetary and / or non-monetary penalties. 1.13 The Banking Regulation Act provides for explicit protection to the supervisors under Section 54. No suit or other legal proceeding shall lie against RBI or any of its officers for anything or any damage caused or likely to be caused by anything done in good faith or intended to be done in pursuance of the Banking Regulation Act. 1.14 RBI shares relevant information with overseas supervisors on request. Information from overseas supervisors is received with the understanding that this would remain confidential. Information needs of domestic regulatory bodies like Securities and Exchange Board of India (SEBI), National Bank for Agricultural and Rural Development (NABARD), National Housing Bank (NHB), etc, are attended to on mutual understanding. A High level Committee on Capital Markets consisting of Governor of RBI, Chairman of SEBI and Economic Affairs Secretary of the Central Government, serves as a forum for discussing common regulatory issues. III. THE BANKING REGULATION ACT IN 1949 Banking Legislation Act Aims At 1. Protecting Interest Of Depositors 2. Ensuring Control Over Credit 3. Streamlining Procedures 4. Evolving Uniform Banking Practices

5. Developing Banking On Sound Lines Main Provisions Of Act 1. Built In Safeguards 2. Powers And Consequential Functions And Responsibilities Of Rbi. 3. Section 5 B Defines Business Of Banking As Accepting, For The Purpose Of Lending Or Investment, Deposits Of Money From The Public, Repayable On Demand Or Otherwise And Withdraw able By Cheques, Drafts Or Otherwise.
IV. METHODS OF ONGOING BANKING SUPERVISION OF

BANKING COMPANIES IN INDIA Principle XVI: Instruments of Supervision An effective banking supervisory system should consist of some form of both on-site and off-site supervision. The main instrument of supervision in India is the periodical on-site inspection of banks that is supplemented by off-site monitoring and surveillance. Since 1995, onsite inspections are based on CAMELS (Capital Adequacy, Asset Quality, Management, Earning, Liquidity and Systems & Controls) model and aim at achieving the following objectives: i) Evaluation of banks safety and soundness, ii) Appraisal of the quality of Board and top management, iii) Ensuring compliance with prudential regulations, iv) Identifying the areas where corrective action is required to strengthen the bank v) Appraisal of soundness of banks assets, vi) Analysis of key financial factors such as capital, earnings, and liquidity and determine banks solvency, vii) Assessment of the quality of its management team and evaluation of the banks policies, systems of management, internal operations and control, and viii) Review of compliance with banking laws and regulations as well as supervisory guidance conveyed on specific policies. To ensure continuity in supervision, RBI also undertakes targeted appraisals of specific portfolios at control site, commissioned audits of specific areas by external auditors and monitoring visits for follow-up or review of selected areas of concern. RBI is gradually moving towards a risk-based supervisory framework that is based on both off-site and on-site inputs. Pursuant to the new supervision strategy approved by the BFS, the RBI has introduced a formal Supervisory Reporting System. The reporting is essentially prudential in content and tri-monthly in periodicity. The total package of Supervisory Returns for commercial banks (designated DSB Returns) comprises 12 Reports (9 to be filed at Quarterly intervals,

2 at half-yearly intervals and 1 at yearly interval). Analysis of the returns is done for individual bank, peer group and industry as a whole. These analysis help in detecting early warning signals. Principle XVII: Supervisory Contact Banking supervisors must have regular contact with bank management and thorough understanding of the institutions operations. 17.1 The contact between supervisors and banks is almost continuous. Senior executives at Regional office of RBI meet the bank management if serious supervisory issues crop up. Senior Executives at Central Office of RBI meet annually top management of banks to discuss matters of supervisory concerns identified during on-site inspection. The overall CAMELS rating is communicated to the bank management. Supervisory concerns emanating out of off-site supervision are also communicated to banks on an ongoing basis. 17.2 Meetings are also held with banks for various purposes like discussions on Resource Management. Banks are often consulted before introduction of major reporting changes and senior bank officers are often associated with the working groups and committees setup by the RBI to examine / deliberate on regulatory / supervisory issues. RBI Nominee Directors on the Boards of banks are also required to report bimonthly on the important policy decisions taken by the bank in particular highlighting supervisory issues, if any. Principle XX: Consolidated Supervision An essential element of bank supervision is the capability of the supervisors to supervise the banking group on a consolidated basis. The on-site inspection reports of the banks include comments on earning performance of the banks subsidiaries and joint ventures. In addition, the RBI conducts inspection of merchant banking subsidiaries of banks. The banks are required to conduct internal audit / inspection of their subsidiaries as a measure of control over them. Periodical review notes on these subsidiaries put up to the banks Board are sent to RBI. Private sector banks are required to annex the balance sheet and profit and loss accounts of their subsidiaries to the annual report of the bank. Public sector banks generally give a brief description of the performance of their subsidiaries in the Directors report that forms part of the annual accounts of the bank. The question of publishing balance sheet and profit and loss account of subsidiaries as an annexure to the annual report of the public sector banks is also being examined in connection with the introduction of a system of consolidated supervision.

Principle XXI: Adequate Records & Financial Statements Bank supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business and that the bank publishes on a regular basis financial statements that fairly reflect its condition. 21.1 RBI is committed to enhance and improve increasing the levels of transparency and disclosure in the annual accounts of banks. The formats for preparation of financial statements are prescribed under Section 29 of the Banking Regulation Act. The financial statements are prepared based on accounting standards prescribed by Institute of Chartered Accountants of India (ICAI) except those that have been specifically modified by RBI in consultation with ICAI keeping in view the nature of banking industry. The banks are mandated to disclose additional information as part of annual financial statements: 1. 2. 3. 4. Capital Adequacy Ratio; Tier I ratio; Tier II ratio; Percentage of shareholding of the Government of India in nationalised banks; 5. Net NPL ratio; 6. Amount of provision made towards NPLs and provisions for income-tax for the year; 7. Amount of subordinated debt raised as Tier II capital; 8. Gross value of investments, provision for depreciation on investments and net value of investments separately for within India and outside India; 9. Interest income as percentage to working funds; 10. Non-interest income as a percentage to working funds; 11. Operating profit as a percentage to working funds; 12. Return on assets; business (deposits and advances) per employee 13. Profit per employee; 14. Maturity pattern of certain assets and liabilities; 15. Movement in NPLs; 16. Foreign currency assets and liabilities; 17. Lending to sensitive sectors as defined from time to time. Principle XXII: Supervisory Intervention Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements such as minimum capital adequacy ratios when there are regulatory violations or where depositors are threatened in any other way. In extreme circumstances this should include the ability to revoke the banking licence or recommend its revocation.

V. CENTRAL BAKING Introduction to central banking It is often said that central bankers have more power than the President, King, Parliament or whatever nominal ruling body governs the state in question. They gain this distinction for the simply reason that they control the money supply. Origins of central banking can trace back to at least the 11th century, when the Knights Templar used their enormous treasury to form the first truly international banking system. The Templars' credibility, and ability to protect depositors' funds, were such that they won the trust of monarchs across Europe. Crusade-bound nobles could deposit savings and withdraw funds at any branch in Europe through a checking system. Central banking has evolved quite a bit in the thousand years since the Templers' heyday, but the overall design remains the same. Chief among the central banker's responsibilities is securing investor confidence. The US Federal Reserve, for instance, was created to rationalize the money supply after extreme deflationary recessions in the late 1800s, due to wild fluctuations in the price of gold. Ripples of panic would wipe out entire regions' banking industries as depositors withdrew funds, forcing banks to close, defaulting on their obligations to other banks and in turn forcing those banks to close. A lender of last resort, the "Fed," was created. The Fed's weathering of all the crises, recessions and panics of the 20th century has given it enormous credibility as a safe haven of capital from all over the world. Central banks vary in the degree to which they are insulated from short-term political winds. In the US, the Fed is mandated by Congress to have as its goals "full employment," low inflation, and steady growth of GDP, although in practice the Fed is largely autonomous. The Federal Reserve has three instruments with which to influence the money supply: open market operations, discount lending, and reserve requirements. The most frequently used of the three are open market operations. The FOMC meets 8 times a year to discuss the direction of their future operations and their funds target rate. That number has historically been very important for everyone from billionaire bankers calculating costs of leverage to blue-collar workers worried about their mortgages.

The Bank of England The Bank of England (formally the Governor and Company of the Bank of England) is the central bank of the United Kingdom and is the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world (the oldest being the Bank of Sweden established in 1668). It was established to act as the English Government's banker, and to this day it still acts as the banker for HM Government. The Bank was privately owned and operated from

its foundation in 1694. It was subordinated to the Treasury after 1931 in making policy and was nationalised in 1946. In 1997 it became an independent public organisation, wholly owned by the Treasury Solicitor on behalf of the Government, with independence in setting monetary policy.
[3][4][5]

The Bank has a monopoly on the issue of banknotes in England and Wales, although not in Scotland, Northern Ireland, the Isle of Man, or the Channel Islands. [citation needed] The Bank's Monetary Policy Committee has devolved responsibility for managing the monetary policy of the country. The Treasury has reserve powers to give orders to the committee "if they are required in the public interest and by extreme economic circumstances" but such orders must be endorsed by Parliament within 28 days.[6] The Bank's Financial Policy Committee held its first meeting in June 2011 as a macro prudential regulator to oversee regulation of the UK's financial sector. The Bank's headquarters has been located in London's main financial district, the City, on Thread needle Street, since 1734. It is sometimes known by the metonym The Old Lady of Thread needle Street or simply The Old Lady. The current Governor is Sir Mervin King, who took over on 30 June 2003 from Sir Edward George. As well as its London offices, the Bank of England also has secondary offices in Leeds.

The Peels Act of 18844 Sir Robert Peel, 2nd Baronet (5 February 1788 2 July 1850) was a British Conservative statesman who served as Prime Minister of the United Kingdom from 10 December 1834 to 8 April 1835, and again from 30 August 1841 to 29 June 1846. Peel, whilst Home Secretary, helped create the modern concept of the police force, leading to officers being known as "bobbies" (in England) and "Peelers" (in Ireland) to this day. Whilst Prime Minister, Peel repealed the Corn Laws and issued the Tamworth Manifesto, leading to the formation of the Conservative Party out of the shattered Tory Party.

THE RESERVE BANK OF INDIA The Reserve Bank of India was set up on the basis of the recommendations of the Royal Commission on Indian Currency and Finance also known as the Hilton-Young Commission.

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though initially RBI was privately owned, it was nationalized in 1949. Its central office is in Mumbai where the Governor of RBI sits. RBI has 22 regional offices and most of them are located in state capitals. The Reserve Bank of India also has three fully owned subsidiaries: National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation of India (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL). The functions of Reserve Bank are governed by central board of directors. The board is appointed by the Government of India. The directors are nominated / appointed for a period of four years. As per the Reserve Bank of India Act there are Official Directors and Non-Official Directors. The Official Directors are appointed by the government and include Governor and Deputy Governors of RBI. There cannot be more than four Deputy Governors. Non-Official Directors are nominated by the government. These include ten Directors from various fields and one government official. Apart from these, there are four other Non-Official Directors, one each from four local boards in Mumbai, Kolkata, Chennai and New Delhi. RBI Act, 1934 preamble Whereas it is expedient to constitute a RBI 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; And whereas in the present disorganization of the monetary systems of the world it is not possible to determine what will be suitable as permanent basis for the Indian monetary system; But whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures RBI was Established in 1935 Overtook Currency issue from central government of India; and Credit control from the then Imperial Bank of India RBI A Regulator to the Indian Banking System: 1. Formulate, Implement and Monitor the monetary Policy 2. Manage the foreign exchange reserves 3. Prescribe Exchange Control Norms to facilitate external trade and payment Banks in India are governed under extant guidelines viz., Banking Regulation Act, 1949

Current Thrust 1. Continuing financial reforms for induction of best practices and technological changes 2. Transparency, diversification of ownership and strong corporate governance practices to mitigate prospects of systemic risks 3. To improve efficiency parameters of SCBs Policy Trends 1. Roadmap for entry of foreign Banks 2. Implementation of Basel II framework: 3. Promoting Banking consolidation Other Operational Policies

Main Functions of RBI Reserve Bank of India is the main monetary authority of the country. It formulates, implements and monitors the monetary policy and thereby plays a key role in maintaining price stability and ensuring adequate flow of credit to productive sectors. RBI is the regulator and supervisor of the financial system in the country. It prescribes broad parameters of banking operations within which the country's banking and financial system functions. It manages the foreign exchange of the country. Performs merchant banking function for the central and the state governments; also acts as their banker. Maintains banking accounts of all scheduled banks. Issues and exchanges or destroys currency and coins not fit for circulation. 1. Bank of Issue 2. Banker of Government 3. Bankers Bank and Lender of the Last Resort 4. Controller of Credit 5. Custodian of Foreign Reserves 6. Supervisory Functions 7. Promotional Functions

Network of Currency Chests Management of Currency Currency Management essentially relates to planning, designing, issue and withdrawal of currency, ensuring its integrity, availability and the maintenance of quality. The Department of Currency Management (DCM) of the Reserve Bank located at Central Office, Mumbai, takes policy decisions on the designs of bank notes, forecasts the demand for notes and coins, ensures the smooth distribution of bank notes and coins throughout the country, arranges to withdraw unfit notes, administers the RBI Note Refund Rules and reviews/rationalizes the work system/procedures at the Issue Office on ongoing basis. The operational work is conducted by the Issue Departments of the Bank with responsibility for managing the inventory, distribution and servicing of currency in its respective issue circles. (ii) The Reserve Bank is responsible for issuing coins and notes to the public on demand and for maintaining the quality of the notes issued. Reserve Bank's responsibility thus is not only to put currency into such other denominations of notes and/or coins as may be required by the public. With a view to mitigating the hardship to the public in genuine cases, the Bank arranges to make refund of the value of mutilated notes as per the Note Refund Rules. 2. Currency Chests In order that the Bank's obligations may be satisfactorily discharged without recourse to extensive and frequent physical remittance of notes and coins between various centres, the Bank maintains currency chests of its own at treasuries and branches of the banks at all important centres. In the State of Orissa, there are 130 Currency chests, the list of which is provided in the end. These currency chests are intended to facilitate the distribution, exchange and remittance of notes, including one rupee notes and rupee coins and small coins. (ii) RBI has launched a special drive under its clean note policy to withdraw all soiled and mutilated notes from the members of public and put in its place fresh and clean notes. In order to facilitate the members of public, to exchange such notes, RBI has delegated powers to all the 130 currency chest branches in Orissa to exchange soiled, torn, damaged/ mutilated/ defective notes. Soiled and cut notes should also be accepted over bank counters in payment of Government dues and for credit of accounts of the public maintained with banks. Reserve Bank of India, Bhubaneswar has opened three special counters, two for exchange of soiled notes of all denominations and one solely for exchange of mutilated notes. Notes which have turned extremely brittle or badly burnt, charred or inseparably stuck up together and therefore can not withstand normal handling, are also accepted at RBI Bhubaneswar for adjudication under a Special Procedure. 3. Facilities/ Services at the Currency Chest Branches Salient features of genuine notes are required to be displayed at bank branches for information of public. The bank branches should have adequate number of dual display note counting machines provided at the payment counters for the benefit of

customers. Stapling of currency note packets has been done away with and information on non stapling of note packets should be displayed on the notice boards. Citizens' Charter for exchange of notes and coins should be displayed at notice board for information and benefit of common persons. All the notice boards are trilingual. (ii) Exchange value of soiled notes will be paid in coins and/or notes of denomination Rs.10/- and above, across the counter as per extant rules. While the intention of the RBI is to mop up all such soiled/mutilated Re.1/-, Rs.2/- and Rs.5/notes and above in exchange, all Re.1/-, Rs.2/- and Rs.5/- notes would continue to be legal tender. Any note with slogans and message of a political nature written across it ceases to be a legal tender and a claim on such a note will be rejected. Similarly, notes which are disfigured may also be rejected. The notes which are found to be deliberately cut or tampered with, if presented for payment of exchange value, will be rejected. (iii) The banks have been advised to direct all their branches to accept coins of all denominations tendered at their counters either for exchange or for deposit in accounts. However, as accepting coins packed in polythene sachets of 100 each would be more convenient, the banks have been advised to keep such sachets at the counters and make them available to the customers. A notice to this effect should be displayed suitably inside as also outside the branch premises for information of the public. RBI, Bhubaneswar is operating two counters for issue of coins, one for bulk issue and the other for issue in small pouches. This apart, a coin vending machine is installed in its premises which can be used by the public to get coins in exchange for notes. (iv) All the currency chest branches are required to display at their branch premises, at a prominent place, a board indicating the availability of note exchange facility with the legend, "MUTILATED NOTES ARE ACCEPTED AND EXCHANGED HERE". Banks should ensure that all their designated branches provide facilities for exchange of notes and coins and place details of designated branches in public domain. (v) RBI has devised a scheme of penalties for those banks which refuse to exchange soiled/mutilated notes tendered by any member of public. All members of public are advised to avail of the aforesaid facilities to the fullest extent. Any suggestion / complaint / grievance as regards exchange of soiled notes and nonavailability of coins/notes (denomination of Rs.10/- and above) may be addressed to RBI, Bhubaneswar. RBI is located only in 18 places for currency operations Distribution of notes and coins throughout the country is done through designated bank branches, called chests Chest is a receptacle in a commercial bank to store notes and coins on behalf of the Reserve Bank

Deposit into chest leads to credit of the commercial banks account and withdrawal, debit Regulatory and supervisory frame work of RBI over the Fis A paradigm shift in banking - Any where banking; Any time banking Governance and ownership of banks- Govt. ownership to Mixed ownership RBIs Approach - Diversified ownership in private sector; Important shareholders are fit and proper; Directors and CEOs are fit and proper; Private Sector Banks maintain minimum capital as 200 crores initially and 300 crores with in 3 years; Policy and processes are transparent and fair VI. MONETARY POLICY Monitory policy is the policy employs by the Central Bank to control credit for fulfilling the goal of monetary authority to maintain full employment and price stability. Monetary policy to encourage saving largely take the form of the development of financial intermediaries. It can encourage those with a productive surplus to save by taking the risk out of lending directly to investors, and of the development of branch banking which can tap small savings. Because of the law of large numbers, financial intermediaries are also able to borrow short and lend long, which is advantageous to lenders and borrowers alike. Monetary policy to encourage saving may also attempt to encroach on the unorganised money market, which lends mainly for consumption purposes. Paradoxically the development of the organised money market can both lower average interest rates in the economy at large and raise the level of saving because the unorganised money market charges very high interest rates and lends mainly for consumption purposes, whereas in the organised money market interest rates are lower and lending is more for investment purposes A well-developed financial system has four main requisites, each of which can contribute to the process of financial deepening and to raising the level of saving. These four requisites comprise: the monetisation of the economy and the replacement of barter as a is a by replacing barter objects, or commodity money which may be costly to produce. It also saves time, which is a resource if the marginal product of labour time is positive, by avoiding the double coincidence of wants, necessitated by barter. Money generates resources by facilitating exchange and thereby permitting the greater division of labour and specialisation. Monetary expansion to meet the increased demand for money per unit of output and to facilitate the needs of trade in a growing economy does not imply inflation. This is easily seen taking the where M is the nominal money supply, V is the income velocity of circulation of money, Kd (=1/V) is the demand to hold money per unit of money income, P is the average price of final goods and services, and Y is real income.

Historically, the growth of the money economy has also been a powerful stimulus to the development of banking and credit mechanism which themselves can act as a stimulus to saving and investment. When the range of financial assets is narrow, saving tends to take the form of the acquisition of physical assets. While in principle this should not mean that the level of saving is reduced below what it might otherwise be, in practice and it depends on how sellers of physical assets dispose of the sale proceeds. If a portion of the proceeds is consumed, the saving of one person is offset by the dissaving of another, and fewer resources are released for investment than if financial assets had been acquired, issued by financial institution with an investment function. This is a major reason why the statistical on saving and investment in developing countries understate the saving and investment capacity of these countries. The development of a national banking system, comprising a central bank, a commercial banking system and special development banks, is one of the first priorities of development planning. The function of a central bank include the following: The issue of currency and lending to government which can transfer real resources to government, the development of a fractional reserve banking system through which it can provide liquidity and control credit of other financial institutions, especially institution to provide long-term loan finance for development and to provide a market for government securities; the maintenance of a high level of demand to achieve capacity growth; and the application of selective credit control if necessary in the interest of developing particular sector of the economy. The stabilisation role of the central bank is essentially secondary to its development role. Stabilisation is particularly difficult in a developing country where credit control, the main instrument of stabilisation policy, is ill-developed.

Monetary Policy Objectives Twin Objectives maintaining price stability ensuring availability of adequate credit to productive sectors of the economy to support growth Basic Thrust 1. Ensure a monetary and interest rate environment enabling continuation of the growth momentum consistent with price stability and inflation expectations 2. Focus on credit quality and financial market conditions to support export and investment demand in the economy

3. To respond swiftly to evolving global developments. As a monetary authority, a central banks primary objective is to ensure macroeconomic financial stability in general and external stability in particular. As a custodian, the central banks main objectives are to ensure liquidity, safety and yield on deployment of reserves Direct Instruments Administered interest rates Reserve requirements Selective credit control

Indirect Instruments Open Market Operations Reserve Bank controls money supply by buying and selling government securities, or other instruments

Market Stabilization Scheme (MSS) Government of India dated securities/Treasury Bills are being issued to absorb enduring surplus liquidity. Liquidity Adjustment Facility (LAF) Repo Auctions and Reverse Repo Auctions,

Cash Reserve Ratio (CRR) Minimum amount that commercial banks must keep as cash reserves

LAF has emerged as the tool for both liquidity management and also as a signalling devise for interest rate in the overnight market. Monetary Policy Key Highlights MID TERM REVIEW Repo Rate increased to 7.25% from 7% / Bank Rate at 6% / Reverse repo rate under the LAF at 6%/ CRR at 5% unchanged (to increase by 0.5% in 2 stages) GDP growth forecast: 8.0 % (2006-07) / Inflation: 5.0-5.5 % (2006-07) AN ASSESSMENT Real GDP 9.2% during Jul-Sept 06 & 9.1% in the H1 06-07.

Y-o-Y increase in non-food bank credit up 30.1 % (Nov24,06) YoY M3 growth at 19.4 % (Nov24,06) YoY expansion in reserve money 17.5 % (Nov24,06) YoY WPI inflation - 5.3 % (Nov25,06) Liberal Policy Borrowers eligible for additional ECBs of US $ 250 million (Avg maturity > 10 years) Foreign exchange earners to retain upto 100 % of forex earnings Allow prepayment of ECB up to US $ 300 million (without prior approval) Existing limit of US $ 2 billion on investments in Government securities by FIIs enhanced to US $ 3.2 billion by March 31, 2007. Extant ceiling of overseas investment by MFs of US $ 2 billion enhanced to US $ 3 billion VII. SUPERVISION AND SUPERVISORY POLICY OF RBI

The Board for Financial Supervision (BFS)was constituted in 1994 1. Foreign exchange Banks Road Map Operate on three channels : branches; a wholly owned subsidiary; subsidiary with an aggregate foreign investment up to a maximum of 74% in a private bank
2. Payment of dividends- RBI has permitted banks to declare dividend

from 2005 as: capital to risk weighted of at least 9% for proceeding 2 completed years; net non performing assets of less than 7%- over all dividend shall not exceed 40% subject to SEBI
3. Marginal Autonomy for PSBs- In 2005: Boards of PSBs could enjoy more

freedom; revise their guidelines; Additional autonomy on their HR policies; prescription of standards for Banking business; fix accountability
4. Mergers and Amalgamation of Banks norms for buying and selling of

shares; proposal for merger; determination of SWAP ratios; disclosures; schemes for BFIs & NBFIs; RRBs State sponsorship- Ministry of Finance
5. Insurance Business- subject to IRDA- CBs to have Insurance business as a

joint venture on a risk participation basis; to undertake insurance business as agents of Insurance Companies on a fee basis; without any risk participation by banks and their subsidiaries.

The supervisory strategy of RBI involves three approaches: 1. Off-shore monitoring and surveillance 1995 FIs not accepting public deposits but have assets of Rs.500crores and above would be subject to offshore site supervision of RBI; Online connectivity has to be given to Regional Offices and HO of Banks 2. Monitoring of Frauds- 2002 to look in to the existing mechanism for vigilance management in their institutions and remove the loopholes; Technical paper on frauds in 2004; separate Fraud Monitoring Cell; Fraud Monitoring and Reporting System 3. Modification In Format of Declaration Of Indebtedness from Statutory Auditors4. RBI and the financial Systems- the role of Central bank regulatory,

promotional and financial roles- NABARD & IDBI control over money market and capital market- interest rate structure RBI as the leader- RBI and Banks Functions of RBI1. Traditional functions: as lender of last resort, as banker to banks, banker to Govt., note issue authority- Ministry of Finance - Govt. of India currency chests2. Developmental functions: to increase the volume of investment and change the pattern of financial flows to promote investment; to have balanced viable financial system- Credit control and RBI RBI as a leader of financial system RBI and Indigenous banks The Bill Market schemes: old (1952) made advance to scheduled banks against promissory notes and new (1970)- 90 days RBI on money market and capital market RBI and interest rate structure to organized & unorganized sectors : by changing Bank Rates, fixation of minimum and maximum lending rate, changes in treasury bills rate, credit policy, OMOs Monetary policy of RBI RBI and Commercial banks scheduled banks which includes cooperative banks & RRBs, Non-scheduled banks Deposit Insurance corporation in 1962, regulation regarding paid up capital as 5-10 lakh, opening new branches, control over management and inspection, deposits to RBI, voluntary and compulsory amalgamation, liquidation. VIII. FOREIGN TRADE POLICY OF RBI - PREAMBLE

For India to become a major player in world trade, an all encompassing, comprehensive view needs to be taken for the overall development of the countrys foreign trade. While increase in exports is of vital importance, we have also to facilitate those imports which are required to stimulate our economy. Coherence and consistency among trade and other economic

policies is important for maximizing the contribution of such policies to development. Thus, while incorporating the existing practice of enunciating an annual Exim Policy, it is necessary to go much beyond and take an integrated approach to the developmental requirements of Indias foreign trade. This is the context of the new Foreign Trade Policy. Objectives: Trade is not an end in itself, but a means to economic growth and national development. The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity. The Foreign Trade Policy is rooted in this belief and built around two major objectives. These are: (i) To double our percentage share of global merchandise trade within the next five years; and (ii) To act as an effective instrument of economic growth by giving a thrust to employment generation. Governed by Directorate General of Foreign Trade under Ministry of Commerce & Industry 1. Mandate for Comprehensive overall development of the Indias foreign trade. 2. GoI announced a bold Foreign Trade Policy for five years (2004-2009) a. double India's share in world trade within five years, and b. to focus on the generation of additional employment in the process 3. In spirit of WTO requirements - Annual Budget announcements by the Ministry of Finance have consistently and progressively reduced peak excise and customs duty Exports and Imports shall be free, except in cases where they are regulated by the provisions of this Policy or any other law for the time being in force. Market Access Initiative (MAI) scheme is intended to provide financial assistance for medium term export promotion efforts with a sharp focus on a country and product. Duty Exemption & Remission Schemes Special Focus Initiatives Thrust on agriculture, handlooms, handicraft, gems & jewellery, leather and Marine sectors. Funds to be earmarked under Agri Process Zone Exports Promotion Capital Goods Scheme (EPCG)

Export oriented units (EoUs), Electronics Hardware Technology Parks (EHTP), Software Technology Parks (STP) and Bio-technology parks (BTP) Special Economic Zones Free Trade & Warehousing Zones Deemed Exports

IX. COMMERCIAL BANKING SYSTEM IN INDIA

History of Banking in India Banking in India has a very old origin. It started in the Vedic period where literature shows the giving of loans to others on interest. The interest rates ranged from two to five percent per month. The payment of debt was made pious obligation on the heir of the dead person. Modern banking in India began with the rise of power of the British. To raise the resources for the attaining the power the East India Company on 2nd June 1806 promoted the Bank of Calcutta. In the mean while two other banks Bank of Bombay and Bank of Madras were started on 15 th April 1840 and 1st July, 1843 respectively. In 1862 the right to issue the notes was taken away from the presidency banks. The government also withdrew the nominee directors from these banks. The bank of Bombay collapsed in 1867 and was put under the voluntary liquidation in 1868 and was finally wound up in 1872. The bank was however able to meet the liability of public in full. A new bank called new Bank of Bombay was started in 1867. On 27th January 1921 all the three presidency banks were merged together to form the Imperial Bank by passing the Imperial Bank of India Act, 1920. The bank did not have the right to issue the notes but had the permission to manage the clearing house and hold Government balances. In 1934, Reserve Bank of India came into being which was made the Central Bank and had power to issue the notes and was also the banker to the Government. The Imperial Bank was given right to act as the agent of the Reserve Bank of India and represent the bank where it had no braches. In 1955 by passing the State Bank of India 1955, the Imperial Bank was taken over and assets were vested in a new bank, the State Bank of India. Bank Nationalization: After the independence the major historical event in banking sector was the nationalization of 14 major banks on 19th July 1969. The nationalization was deemed

as a major step in achieving the socialistic pattern of society. In 1980 six more banks were nationalized taking the total nationalized banks to twenty. Structure of schedule commercial banks: The composition of the board of directors of a scheduled commercial bank shall consist of whole time chairman. Section 10A of the Banking Regulation Act, 1949 provides that not less than fifty-one per cent, of the total number of members of the Board of directors of a banking company shall consist of persons, who shall have special knowledge or practical experience in respect of one or more of the matters including accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, or any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company. Out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-scale industry. Besides the above the board of the scheduled bank shall consist of the directors representing workmen and officer employees. The Reserve Bank of India and the Central Government also has right to appoint their nominees into the board of the banks. Present scenario of the banks in India: Banks are extremely useful and indispensable in the modern community. The banks create the purchasing power in the form of bank notes, cheques bills, drafts etc, transfers funds bring borrows and lenders together, encourage the habit of saving among people. The banks have played substantial role in the growth of Indian economy. From the meager start in 1860 the banks have come to long way. At present in India there are 20 nationalized banks, State bank of India and its seven Associate banks, 21 old private sector banks and 8 new private sector banks. Besides them there are more than 30 foreign banks either operating themselves or having their branches in India. The statistical table hereunder shows the financial position of the banks as on 31.03.2005. Structure of schedule commercial banks: The composition of the board of directors of a scheduled commercial bank shall consist of whole time chairman. Section 10A of the Banking Regulation Act, 1949 provides that not less than fifty-one per cent, of the total number of members of the Board of directors of a banking company shall consist of persons, who shall have special knowledge or practical experience in respect of one or more of the matters including accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, or any other matter the special knowledge of, and practical experience in, which would, in the opinion of the

Reserve Bank, be useful to the banking company. Out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-scale industry. Besides the above the board of the scheduled bank shall consist of the directors representing workmen and officer employees. The Reserve Bank of India and the Central Government also has right to appoint their nominees into the board of the banks. Present scenario of the banks in India: Banks are extremely useful and indispensable in the modern community. The banks create the purchasing power in the form of bank notes, cheques bills, drafts etc, transfers funds bring borrows and lenders together, encourage the habit of saving among people. The banks have played substantial role in the growth of Indian economy. From the meager start in 1860 the banks have come to long way. At present in India there are 20 nationalized banks, State bank of India and its seven Associate banks, 21 old private sector banks and 8 new private sector banks. Besides them there are more than 30 foreign banks either operating themselves or having their branches in India. The statistical table hereunder shows the financial position of the banks as on 31.03.2005. The banks in India are operating through 55530 branches. All the banks together had the net worth of Rs. 149385 crores as on 31st March, 2005. The banks also had the deposit base of Rs. 1836985 crores and the advances of Rs. 1151113 crores taking the total business to Rs. 2988098 crores. During the year 2004-05 the banks had earned the interest income of Rs. 154761 crores. The average net NPA ratio of the banks was also less 3.84% in year 2005. Classification of Banks can be Done in Many Ways Based on Functioning 1. Commercial Banks 2. Co-operative Banks 3. Development Banks Built In Safeguards Relate to : 1) Organisation 2) Management 3) Operations Of A Banking Company

1) Permitted Business 2) Holding Immovable Property 3) Formation Of Subsidiary Companies 4) Use Of Word Bank, Banking Company, Banker And Banking 5) Paid Up Capital And Reserves 6) Change Of Name Section 5 B of Act Covers Primary Functions: Section 6 Spells Out Other Types Of Banking Business, A Banking Company Can Undertake. 1) Primary Functions 2) Agency Functions 3) General Utility Functions 2. Acceptance Of Deposits 3. Lending Money 4. Borrowing Money 5. Making Investments 6. Collection And Payment Of Cheques 7. Collection And Payment Of Bills 8. Remittance Of Funds 9. Collection Of Government Taxes 10. Undertaking Administration Of Estates As Executors And Trustees. Current Number of Nationalized Banks: There are 26 Nationalized Banks in the country at present. They are as follows: 1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Bank of Maharashtra 6. Canara Bank 7. Central Bank of India

8. Corporation Bank 9. Dena Bank 10. IDBI Bank Ltd. 11. Indian Bank 12. Indian Overseas Bank 13. Oriental Bank of Commerce 14. Punjab & Sind Bank 15. Punjab National Bank 16. Syndicate Bank 17. UCO Bank 18. Union Bank of India 19. United Bank of India 20. Vijaya Bank State Bank Group 1. State Bank of Bikaner & Jaipur 2. State Bank of Hyderabad 3. State Bank of India 4. State Bank of Mysore 5. State Bank of Patiala 6. State Bank of Travancore State Bank of Indore has merged with SBI from August 26, 2010. Current Number of Old Private Banks There are 14 Old Private sector Banks in the country as follows: 1. Catholic Syrian Bank Ltd. 2. City Union Bank Ltd. 3. Dhanalakshmi Bank Ltd. 4. Federal Bank Ltd. 5. ING Vysya Bank Ltd. 6. Jammu & Kashmir Bank Ltd. 7. Karnataka Bank Ltd. 8. Karur Vysya Bank Ltd. 9. Lakshmi Vilas Bank Ltd. 10. Nainital Bank Ltd. 11. Ratnakar Bank Ltd. 12. SBI Commercial & International Bank Ltd 13. South Indian Bank Ltd. 14. Tamilnad Mercantile Bank Ltd. The number of the old Private Banks in India was 15 until recently and the latest reports from RBI (2009-10) show this 15. The Bank of Rajasthan Ltd has recently merged with ICICI Bank Ltd. Current Number of New Private Banks

There are 7 New Private sector Banks in India as follows: 1. Axis Bank Ltd. 2. Development Credit Bank Ltd 3. HDFC Bank Ltd. 4. ICICI Bank Ltd. 5. IndusInd Bank Ltd. 6. Kotak Mahindra Bank Ltd. 7. Yes Bank Ltd Current Number of Foreign Banks As of end of 2009, there were 32 Foreign Banks in India with 293 branches. 43 foreign banks were operating in India through representatives of offices. Under the WTO agreements, the Reserve bank of India has to allow a minimum of 12 Branches of all the foreign banks to be opened in a year

Various Types of banking services: The flow chart below shows the various types of banking services:

CENTRAL BANK

Commercial Banks

Specialized banks

Institutional banks

Non Banking Financial Institutions

Nationalis ed banks (20)

SBI and Associate Banks

Land Mortgage Rural Credit Indutrial Dev. Housing Finance EXIM Bank

IFCI IRBI SFCs HDFC

Mutual Funds Pvt. NBFC

SIDBI& NABARD

Private Sectors Banks

Foreign Banks

Old private sector banks

New private sector banks

Future is bright: The Information Technology (IT) is becoming an important component of the banking sector. The customers have become more demanding and they need value added services from the banks. The foreign banks have raised the expectations of the customers causing the bank to invest strongly on IT. The Indian banks have started to meet the expectations of the people by opening both onsite and offsite ATMs. Banks have also started tele-banking, anytime/anywhere banking, mobile banking and Internet banking to give the facilities to the customers. Banks have also following the RBI sponsored technology programmes like mail messaging, Electronic fund transfers (EFT), Structured Financial Messaging System (SFMS), (Real Time Gross Settlement (RTGS), Centralized Fund Management System (CFMS) and Negotiated Dealing System / Public Debt Office (NDS/PDO). Banks have been given more teeth to tackle the Non performing assets by passing the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Under this Act, the banks can take over the assets of the defaulters either by themselves or with the help of Court. The power is in addition to the power to recover through the Debt Recovery Tribunal. The Asset Reconstruction Companies have been formed which also take over the distress assets from the banks. Conclusive Remarks Banking Sector in India is likely to undergo a major change. This change will be in the form of mergers and acquisitions and takeovers. The State Bank of India may merge all its associate banks with itself to make a one bank. The banks based in South India may look for a bank in North India to have presence in North. Similarly banks in North may look for banks in South to increase its area of operations. Consolidation will be the key to the banking sector in future.

X. THE STRUCTURE OF FINANCIAL MARKET

In a closed economy there exists commodity markets and financial markets. A financial system comprise creation of money and credit through financial intermediaries and financial market. Financial market envisages all of the transactions of financial claims whether long term or short term securities. Securities represent a financial claim on the issued, which are paper assets in the hands of investors. They include commercial paper, treasury bills, certificate of deposits which are short term in character. The long- term securities are Govt promissory notes, public

sector undertakings bonds, equities of business corporations and debentures of corporate sector. Besides securities there are other financial claims such as guarantees, mortgages, and foreign currencies. Thus, the financial market include Securities Market and market for Financial Claims. The securities markets are broadly divided into Money Market and Capital Market.Following figure shows the structure of financial markets.

Financial Markets Securities Market Money Market Capital Market Market for other Financial Claims Financial Market Call Money Market. Bill Market Treasurey bill Market Primary Markets Goverment Securities Market Securities Market A financial market deals with securities and other financial claims. Securities are of two types, viz, short term securities and long term securities. Money Market facilitates short term securities and Capital Market deals long term securities. Money Market Money market is an association of brokers, commercial banks, discount houses, business men ,investors through which short term funds are transacted to meet the temporary needs of small investors .It never deals money but exchange funds such as commercial papers, treasury bills, bank calls or call loans etc.Major constituents of money market are call money markets and bills markets. Call money market Industrial Securities market Commercial Bills Market Secondary Markets Goverment Securities Market Industrial Securities market Foreign Exchange Market Mortgages Market

Guarantees

They are markets for call loans which should be repaid at call or on demand . A call represents the demand made by the lenders of the money and they are repayable form one to fourteen days. Call loans are referred as money at short notices. Usually call loans are provided by the commercial banks form their cash in hand .They are very sensitive to Central Bank policies . In many countries call loans are used for inter bank transactions, plays in bill market , stock exchanges, bullion markets and individual merchants deal with foreign trade Bill market Bill market refers to trading on short term bills of Govt and private companies. The market of such bills range from three to six months. Bill market is classified into treasury bill market and commercial bill market. Treasury bills market deals in treasury bills or promissory notes issued by the Govt. They are finance bills arising goods and represent claims in Govt with out any endorsement. The Govt guarantees on such bills make them highly liquid. In India the maturity of treasury bills has raised from 90 days to 182 days, and most probably they are called as gilt- edged securities. At the same time, commercial bills market deals with commercial papers, or bills of exchange issued by companies. A bill of exchange denotes a

negotiable self liquidating paper originated from short term accommodation. The bills of exchange are worth discounting before maturity and invites trading on them based on market rates prevailing over regions and bank rates. These bills are brought to the money market by professional bill brokers who gain commission with their deal of bills. Commercial banks are a major buyer of commercial papers. The Activities of Brokers and Dealers in Money Market Brokers and dealers of securities represent a substantial source of demand for short term funds. Dealers need funds for financing their investors of securities and brokers need funds to relent to their customers who wish to borrow money to finance stock purchases. Suppose an investor is in need of a fund will approach to a broker. The broker immediately arrange it or inform the source of a fund. After some negotiations the borrower gets a fund or bill from the possession and it is then presented to the commercial bank for discount. Since the bill is self liquidating in nature, all the parties are trusted in its use or transaction .But the activities in money market depends upon the level of business activities. It is only in advanced nations that the facilities of money market are commonly available. In the case of less developed countries the actions in money market are limited with the absence of an organised bill market. So the essential conditions of developed money market are: organised commercial banking system, presence of a central bank , availability credit instruments, the existence of sub markets, availability of funds and organised trading activities. Capital Market

Capital market is the market for long term funds. Many firms, households and Govt. save more than they invest and such surpluses are transferred to those who have deficits. The transfer of long term funds is done through a set of institutions, securities markets together with a set of financial intermediaries and specialised agencies. Collectively these markets, institutions and firms are called the capital markets . House holds, firms and Govt. operate in the capital market both as borrowers and lenders. Capital market can be classified as primary and secondary market on the basis of source of origin of the securities. Primary Market Primary market is termed as the new issue of shares and securities to the public. Securities issued for the first time are offered through the primary market. Issuers of securities such as Govt public sector undertakings or corporate sector may approach the public through primary market. A large number of intermediary institutions such as merchant bankers, under writers, brokers and commercial banks undertake intermediary between the issuer of securities and the public. The issue in primary market is called as public issue where people can buy original shares of companies. Secondary market The secondary markets are meant for trading old securities. It is usually called as stock exchanges. Once the investor purchases new issue of bonds or shares from primary market they may wish to sell it at a profit. Since trading of shares accompany with speculation in stock exchanges, investors buy and sell old shares and securities. On the basis of issues in the secondary market, industrial securities, Govt securities and financial institution's securities are exchanged. The securities in stock exchange include equity shares, preference shares and debentures or bonds . The principal objectives of stock exchanges are to provide liquidity to the existing securities and to facilitates capital requirements to joint stock enterprises. Most of the deals in secondary markets are with brokers. They include commission brokers, floor brokers, taravaniwalas and Arbitragerers. Conditions in stock exchanges are commonly classified as bullish or bearish, depending upon the general level of prices. A bull is a person on the stock exchange market who holds large number of shares and when price increases he opens the sale of shares. A bear is a person on the stock market who wish to buy shares when share prices are lower. However the most common type of stock exchange is Over the Counter Exchanges (OTC), where buying and selling of shares are held at the counter. The securities in the capital markets are Government securities and industrial securities. Government Securities Market In the Government Securities Market trading on securities issued by Central, State and local Governments are held. The short term Government securities are termed as guilt-edged securities. Apart form Government agencies issuing in

securities, other institutions such as Central Bank, leading commercial banks, cooperative banks, the LIC and the like financial intermediaries do business in Government securities market. Trusts, individual joint stock companies, local authorities etc, buy and sell Government securities. But such securities are dealing in the OTC market where the activities of brokers are limited on account of the absence of speculation and forward deals. Industrial Securities Market The industrial securities market refers to other new issue market and stock exchanges where shares and debentures issued by companies in the private sector are traded. The term industrial security denotes securities issued by companies which include equity shares, preference shares and debentures. Such securities are really issued in primary markets and in secondary markets where old shares and securities are exchanged. Role of Middle Men in Capital Market Dealers and brokers in financial claims perform the function of middlemen in capital market. A dealer buys and sells for his own account and takes risk in dealing shares to get profit. Brokers do not buy or sell shares for themselves but act as middlemen between buyers and sellers of shares and they get commission. The development of capital markets initiated small savers and investors to buy or sell shares and there by they are sure of the safety of assets. At the same time, big corporations and private companies are able to mobilize funds though capital markets. They open enormous facilities to generate investment. On the Macro Economic point, capital markets create large volume of investment and initiate the multiplier and accelerator mechanisms of investment on aggregate income. Thus, the circulation money, incomes and investment become smooth with the development of capital markets and ultimately it generates the money multiplier process. Other Financial Markets The market for financial claims other than securities includes market for financial guarantees, market for mortgage and foreign exchange market. Financial Guarantees Market In the financial guarantee market the lenders are given financial guarantee by certain authorised institutions. The Guarantee may be written or oral, whether single or joint. The guarantee should also have the means to discharge the liability of the borrower, guaranteed by him. For instance, in India, the development banks such as Industrial Development Bank of India (IDBI), the Industrial Credit and Investment Corporation of India (ICICI) and Industrial Finance Corporation of India (IFCI) and even Commercial Banks seek guarantee in providing credit. Specialized agencies such as Credit Guarantee Organization, Export Credit and Guarantee Corporation

and Deposit Insurance and Credit Guarantee corporation have been set up by the Government of India to provide guarantees to loans. Mortgage Market Mortgage markets are organized for providing loans against mortgaging of property like land and buildings. Mortgage loans are generated for a period of 15 to 25 years. They are of primary and secondary in character. In the primary mortgage markets credit is availed by mortgage of property by the borrower. In the secondary mortgage markets, sale and resale of existing mortgages at prevailing rates are facilitated.. In India, the Housing and Urban Development Corporation (HUDCO) and LIC provide housing mortgage loans. Foreign Exchange Market Foreign Exchange market refers to dealings in foreign exchange based on the exchange rates prescribed by the Central Bank.

It is a market for foreign transactions, say exporters and importers. While the exporters accept DA Bill, the importers have to deal DP Bill. DA Bill is discount against acceptance and DP Bill is discount against payments. They are all based on exchange rates. Authorized commercial banks, discount houses, exchange banks, etc enter in foreign exchange market. The dealers in foreign exchange markets act according to the foreign exchange regulations of Central Bank.. Efficiency in Financial Markets The efficiency of financial markets has profound influence on the behaviour of the real sector of the economy. It influences the macro- economic behaviour of total real output, employment and prices and also the allocation of real income. Lester. V. Chandler in his book The Monetary Financial SYSTEM has distinguished between two types of efficiency, the first is transactions efficiency and the second is allocative efficiency. Transactions efficiency refers the economy in the use of resources to produce and distribute the various services used to facilitate financial transactions. For that each of the service must be produced at minimum cost and the price charged for each service must be equal to its marginal cost. Allocative efficiency refers to the efficiency of a country to allocate and reallocate financial claims and money to get more benefits such as to generate more money incomes, employment levels together with safety of investments and liquidity in cash transactions

XI. INDIAN CAPITAL MARKETS Two national stock exchanges National Stock Exchange (NSE) accounts for almost 65-70% of turnover

Bombay Stock Exchange (BSE)-- established in 1875 Sufficient depth in market Market Capitalization> US$ 1 trillion Rolling settlement to move from current T+2 to T+1 Continual reform and innovation process - Introduction of derivative instruments and commodity futures 9000+ Companies listed large section being mid cap stocks Over 400 listed companies with revenue > Rs 5 billion (US$ 110 million) Over 1,000 listed companies with revenue > Rs 1.2 billion (US$ 25 million) EQUITY MARKETS SEBI ( the SEC of India) has implemented initiatives to enhance the functioning of the capital market by strengthening regulations and oversight as well as promoting disclosures and reducing risk Corporate governance standards steadily improving Electronic Filing of Information Under EDIFAR (Similar to EDGAR) Completely electronic exchanges NSE & BSE Connected via VSATs 100% of securities traded in electronic Form Average transaction cost down from 2% to 0.2% of trade Average settlement time down from 30 to 2 days Debt and Derivatives Markets Deep and liquid Government and Corporate bond market Regulated by Reserve Bank of India and based on international benchmarks Strong domestic credit rating agencies with international affiliations (ICRAMoodys; CRISIL-S&P) Rapidly growing swaps and CDOs market Exchange traded fundsincl. sector specific ones Futures & options market Short selling in individual stocks Rapid growth in securitization of assets

Commodities exchanges--active trading Large Foreign Flows into Stock Market Market at all-time highs Indian stock market went nowhere for 10 years; 1993-2003 : 3500 to 4500; now trading at 17,847 (10/3/07); expected to continue. FIIs (foreign institutional investors) flows have shown an increasing trend in the past 3 years in the Indian stock market. cumulative net inflows for October 2007 to date (10/5/07) of US$ 1.6 billion; for 2007 to date of US$ 15.6 billion. Venture Capital / Private Equity Market 1. Rated as the second most active market in Asia (excluding Japan) 2. Investment opportunities of every size in all sectors given broad-based market growth 3. Significant opportunity lies in mid stage / mid size transactions and cross border deals given sector growth 4. Selective late stage / PIPE investments possible leverage with other PE funds
5. After growing rapidly from around $1 billion in 2004, private equity flows into

India grew to $7 billion in 2006 6. It is already (till Sept. 07) $ 10.7 b and expected to grow to $13.5 billion this year. 7. Projected to rise to $20 billion by 2010 a thousand fold increase in 14 years 8. 366 PE firms operating in India, another 69 expected to start soon XII. CAPITAL MARKET REFORMS IN INDIA

1. The 1990s have witnessed the emergence of the securities market as a major source of finance for trade and industry in India. 2. A growing number of companies have been accessing the securities market rather than depending on loans from financial institutions / banks. 3. The corporate sector is increasingly depending on external sources for meeting its funding requirements.

4. Several measures have been taken in the last decade and half to make the securities market in India better regulated, more efficient and generally safer. 5. The regulator, SEBI, is regarded throughout the world as independent and effective. 6. The regulator has put in place a well-designed disclosure-based regulatory regime. 7. Information technology is extensively used in the securities market. 8. The most advanced and scientific risk management systems are also employed by stock exchanges. 9. Repeal Of CCI Act/SEBI Act 1992 & Amendments
10. Dematerialization of Securities-1997 11. Disclosure and Inv Protection Guidelines-2000-compliance with due skill,

diligence and care, disclose truth Trading Cycle-Uniform Rolling Settlement-2001 1. Screen Based Trading-2003-matching orders in time/price priority
2. Globalization on Raising Resources- ADR/GDR/FCCB AND ECB,MF can set

up offshore funds for investing in equities 3. STP

4. Demutualization and Corporatisation-2004

5. Derivative Trading 6. Risk Management1. Clearing Corporation 2. Settlement Guarantee Fund 3. Real Time Monitoring 4. Var Based Margining-2001 5. Automatic Disablement Etc. 6. IMSS(Exchange/Clg Corp/Dep)-2007 Regulatory and Supervisory System-IOSCO Consistent Measures Taken opn Patil Committee Recommendations on Developing Bond Market

SCRA Amendment Act 2007: The Securities Contracts (Regulation) Amendment Bill, 2007 was enacted in May, 2007 which provides for a legal framework for trading of securitized debt. FII Inv. Limit on Govt. Sec. raised phase-wise from $1.75b in 2006 to $3.2b in 31.3.2007 FII Inv. Limit on corporate debt raised from $0.5b to $1.5b Stamp Duty on Debt-Initiative- in the process Corp Bond Reporting and Trading Platform-2007 Streamlining the disclosure requirements for corporate bond issuances- in the process Other Measures RTGS: RBI introduced Real Time Gross Settlement system (RTGS) in 2004. Gold ETF-2006: Mutual Funds have been allowed, vide notification dated 12th January, 2006, to float Gold Exchange Traded Fund schemes which have been are permitted to invest primarily in Gold and Gold related instruments, which have been defined as such instruments having gold as underlying, as are specified by SEBI from time to time. Investor Protection Fund: Budget announcement 2006-07- Fund under the aegis of SEBI, funded by fines and penalties recovered - set up by SEBI in June, 2007. Delisting Framework: The Securities Laws (Amendment) Act, 2004 amended the SCRA to provide that a stock exchange may delist securities, after recording reasons therefore, on any of the grounds as may be prescribed in the rules. rules are proposed to be amended Short selling -by Institutions- settled by delivery and securities lending and borrowing to facilitate delivery, by institutions announced in 2007-08 budgetimplementation under consideration of the Government in consultation with RBI and SEBI.

Pan Mandatory: Budget announcement of 2007-08 PAN the sole identification number for all participants in the securities market - SEBI issued the necessary circular and the same came into force with effect from 2nd July, 2007. Foreign Inv in securities markets Infrastructure Companies Foreign Investment up to 49% has been allowed in infrastructure companies in the securities markets, viz. stock exchanges,

depositories and clearing corporations, with separate Foreign Direct Investment (FDI) cap of 26% and Foreign Institutional Investment (FII) cap of 23%. ADR/GDR/FCCB-Foreign Capital Mobilization 1992-93 - allowed the Indian corporate sector to have access to global capital markets through issue of Foreign Currency Convertible Bonds (FCCBs)/Equity Shares under the Global Depository Mechanism. June, 2006- Government permitted unlisted companies to sponsor an issue of ADRs / GDRs. May 2007 -A Committee has been set up by Government to review the entire ADR/GDR policy with a view to streamlining FCCB/ADR/GDR procedures to enable Indian companies to have greater and smoother access to international capital markets. Indian MF in overseas instruments: Domestic mutual funds are permitted to invest in overseas instruments subject to an overall ceiling of $3 billion, which has been recently raised to $ 5 billion. NISM: The National Institute of Securities Markets (NISM) has been set up for teaching and training intermediaries in the securities markets and promoting research. The growth in volumes in securities transactions, the reduction in transaction costs, the significant improvements in efficiency, transparency and safety, and the level of compliance with international standards have earned confidence and greater respect for the Indian securities market CHALLENGES
1. Inflow and outflow of capital would continue to pose serious problems; high

degree of volatility in the equity market, FOREX market and debt market 2. Greater uncertainty with respect to movement of international interest rates and exchange rates. 3. Likely threat to macro economic and financial stability arising out of international macro-economic imbalances, 4. If most of the economies would witness fall in the asset prices, there would be a great loss of wealth leading to slowdown of the economies. 5. BCD Nexus Why do we need a regulatory body for Investor protection in India?

India is an ` informational ' weak market Boosting capital market demands restoring the confidence of lay investors who have been beaten down by repeated scams Progressively softening interest rates and an under performing economy have eroded investment options, and require enhanced investing skills.

XIII.

SECURITIES AND EXCHANGE BOARD OF INDIA

Securities & Exchange Board of India (SEBI) formed under the SEBI Act, 1992 with the prime objective of 1. Protecting the interests of investors in securities, 2. Promoting the development of, and 3. Regulating, the securities market and for matters connected therewith or incidental thereto. Mission of SEBI Focus being the greater investor protection, SEBI has become a vigilant watchdog Legislative Framework Securities and Exchange Board of India Act, 1992 Rules made by the Government of India Regulations made by SEBI Securities Contracts (Regulation) Act, 1956 Securities Contracts (Regulation) Rules, 1957 Depositories Act, 1996 Stock Exchange Bye-Laws Depository Bye-Laws Clearing Corporation Bye-Laws Listing Agreements with Stock Exchanges Companies Act, 1956 Regulatory Legacy

Every 2-3 years there has been a new scam Each scam has led to SEBI being conferred with greater powers 1988 GOI Resolution 1992 SEBI Act 1995 New Powers Adjudication penalties Power to make regulations without GOI approval Power to prosecute without GOI approval

1999 Appeal provisions strengthened 2002 Stringent penalty powers conferred 2004 New Ordinance with even more powers Segregation of Powers SEBI Act delegates power to make regulations Central Government approval until 1995 Now, only tabling in Parliament is required Administration by SEBI officials Sentencing is also by SEBI officials Prosecution too to be done by SEBI Enquiry Proceedings May be initiated against any market intermediary Minor Penalties Warning / Censure Suspension of registration for less than three months Prohibiting operations for up to six months Debarring a partner / whole time director for up to six months Debarring a branch / office from operations for up to six months Major Penalties

 Aforesaid penalties for more than six months Cancellation of registration Suspension of registration for over three months Appeal Record On average, more than one order a day Contrary to popular belief: Only 30% orders are appealed In 63% cases, SEBI orders are upheld Judicial attitude furthers the regulators cause Higher the profile, lower the prospect of success Regulators tend to be under-staffed Law officers defend actions, but not consulted before action FUNCTIONS OF SEBI Section 11 of the Securities and Exchange Board of India Act. A) Regulation Of Business In The Stock Exchanges A review of the market operations, organizational structure and administrative control of the exchange
1. All stock exchanges are required to be Body Corporates

2. The exchange provides a fair, equitable and growing market to investors. 3. The exchanges organisation, systems and practices are in accordance with the Securities Contracts (Regulation) Act (SC(R) Act), 1956 B) Registration And Regulation Of The Working Of Intermediaries

regulates the working of the depositories [participants], custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries Registration And Regulation Of Mutual Funds, Venture Collective Investment Schemes Capital Funds &

1. AMFI-Self Regulatory Organization-'promoting and protecting the interest of mutual funds and their unit-holders, increasing public awareness of mutual funds, and serving the investors' interest by defining and maintaining high ethical and professional standards in the mutual funds industry'. 2. Every mutual fund must be registered with SEBI and registration is granted only where SEBI is satisfied with the background of the fund.
3. SEBI has the authority to inspect the books of accounts, records

and documents of a mutual fund, its trustees, AMC and custodian where it deems it necessary A company cannot come out with public issue unless Draft Prospectus is filed with SEBI. Prospectus is a document by way of which the investor gets all the information pertaining to the company in which they are going to invest. It gives the detailed information about the Company, Promoter / Directors, group companies, Capital Structure, Terms of the present issue etc. A company cannot file prospectus directly with SEBI. It has to be filed through a merchant banker. After the preparation of prospectus, the merchant banker along with the due diligence certificates and other compliances and sends the same to SEBI for Vetting. SEBI on receiving the same scrutinizes it and may suggest changes within 21 days of receipt of prospectus

The company can come out with a public issue any time within 180 days from the date of the letter from SEBI or if no letter is received from SEBI, within 180 days from the date of expiry of 21 days of submission of prospectus with SEBI If the issue size is up to Rs. 20 crores then the merchant bankers are required to file prospectus with the regional office of SEBI falling under the jurisdiction in which registered office of the company is situated. Brokers Code If the issue size is more than Rs. 20 crores, merchant bankers are required to file prospectus at SEBI, Mumbai office. The four-part model, which was recommended by the M R Maya committee The market regulator would hold the remote control on the management of the exchanges by approving nominations of 60 per cent non-broker members of an exchange board. Induction and removal of managing director would also be controlled by SEBI. Lead to increased control by the markets regulator and also impose restrictions on elected brokers without giving them any authority To impose penalties of up to Rs 25 crores or three times the amount involved in the violation of a norm, whichever is higher. In the cases of some offences, including defaults by brokers, a failure to furnish returns and information by Corporate and brokers and other lapses, the market regulator can impose a higher penalty of Rs 1 lakh a day or a maximum fine of Rs 1 crores, whichever is lower. At present, the offences carry penalties ranging between Rs 5,000 and Rs 5 lakh. Corporate Governance of SEBI The listing requirements, are ensured in two ways. Corporate are expected to submit compliance reports as per clause 49 of the listing agreement They are also required to provide details of the same in their annual reports. Delisting The exit price to be determined in accordance with the book building process (known as reverse book building) through an electronically-linked transparent facility.

The offer price shall have a floor price, which will be the average of 26 weeks traded price preceding the date of the public announcement. The final offer price shall be determined as the price at which maximum number of shares has been offered.

After the final price is determined based on the book-building process, the promoter or the acquirer will have to make a public announcement of the final price and communicate to the exchanges from which the delisting is sought to be made within two working days. Further, the number of bidding centres shall not be less than 30, including all the stock exchange centres, which should have at least one electronicallylinked computer terminal each. In case the promoter does not accept the above price, he should not make an application to the exchange for delisting of the securities, as per the guidelines. Instead, he shall ensure that the public shareholding is brought up to the minimum limits specified under the listing conditions within six months. Strict norms for compulsory delisting by stock exchanges Public Issues An unlisted company has to satisfy the following criteria to be eligible to make a public issue Pre-issue net worth of the co. should not be less than Rs.1 crore in last 3 out of last 5 years with minimum net worth to be met during immediately preceding 2 years Track record of distributable profits for at least three (3) out of immediately preceding five (5) years The issue size (i.e. offer through offer document + firm allotment + promoters contribution through the offer document) shall not exceed five (5) times its pre-issue net worth. . In case an unlisted company does not satisfy any of the above criterions, it can come out with a public issue only through the Book-Building process. In the Book Building process the company has to compulsorily allot at least sixty percent (50%) of the issue size to the Qualified Institutional Buyers (QIBs), failing which the full subscription monies shall be refunded Recommendations on Corporate Governance

If an institution wishes to appoint a director on the board of a company, it should be approved by the shareholders of the company. Such a person is not to be considered an independent director. An institutional director, so appointed, shall have the same responsibilities and shall be subject to the same liabilities as any other director. companies should lay down a code of conduct for all the board members and the senior management of company. Mandatory review by audit committees of listed companies Companies raising money through a public issue should disclose to the audit committee, the uses and applications of funds by major category on a quarterly basis. Evaluation Of SEBI s Performance 1. Enhancing disclosures In most case only the minimum information required under the Companies Act is made available The manner in which the swap ratio is fixed and what the management thinks of the same is largely taken for granted. valuation reports are made available for inspection, but access is not easy for all 2. Inability To Utilize The Existing Powers Effectively SESEBI could initiate prosecution proceedings on insider trading only in one case and seven cases on fraudulent and unfair practices. Only in seven of the 181 cases, SEBI resorted to cancellation of registration during the last four years. Though SEBI has the power to impose a penalty of Rs 1.50 lakh every time a person fails to furnish the requisite information, but rarely has this power has been exercised by it . The provision for mandatory punishment of imprisonment in addition to award for penalty has scarcely has been used. BI could initiate prosecution proceedings on insider trading only in one case and seven cases on fraudulent and unfair practices. Only in seven of the 181 cases, SEBI resorted to cancellation of registration during the last four years.

Though SEBI has the power to impose a penalty of Rs 1.50 lakh every time a person fails to furnish the requisite information, but rarely has this power has been exercised by it . The provision for mandatory punishment of imprisonment in addition to award f Quality Of Decisions What is worrying is the poor rate of conviction in major cases. Virtually every SEBI decision involving major cases such as Sterile, BPL, Videocon, Anand Rathi and Associates and Hindustan Lever has been overturned by the appeals process (or the Securities Appellate Tribunal). Accounting, audit quality The plethora of inter-corporate investments, intra-company and intra-group transactions, guarantees and contingent liabilities are areas where there is room for considerable concern. Price Manipulation Price manipulation, informed trading and insider trading with key operators/investors is now routine. This is an area that is difficult to tackle for any regulator. But over the last ten years, SEBI has taken action on such price manipulation in just two cases (Bayer ABS and Amara Raja Batteries). Here, too, the penal action has hardly been stringent Enticing ads and investor risk Advertisement sans indication of performance by mutual funds has continued regardless of the SEBI guidelines on this. The Securities and Exchange Board of India (Sebi) is being blamed for lack of alertness and poor risk-management measures with regard to the automated lending and borrowing mechanism SEBI formation in April 1988 wit a view to : to collect information and advice the Govt. relating to SEs, licensing and regulation of merchant banks & mutual funds, to prepare the legal draft, to perform other functions en trusted by Govt. objectives: investor protection, ensuring fair practices, promotion to efficient services SEBI guidelines SEBI reforms in stock exchanges SEBI and Investor protection schemes: complaints against members& companies; customers protection fund; Investor beware; balance sheet study; protection in the new issue market; protection for fixed deposits; guidelines to Investors & Credit Rating and Information Services of India Ltd ( CRISIL ), Investment Information and Credit Rating Agency (ICRA).

XIV.

REGULATORY/ INSTITUTIONAL/ ENVIRONMENTAL CONSTRAINTS

Commercial Banks are institutions which accept deposits and lend loans & advances and there by make profit. The earliest banks in India were: 1. Bank of Hindustan, set up in 1870, was the earliest Indian Bank. 2. Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. 1921 three Presidency Banks at Calcutta, Bombay and Madras were merged into the Imperial Bank (vide Imperial Bank of India Act, 1920) Reserve Bank of India was established in 1934 It was given the right of note issue; Was also to act as bankers bank; However, Imperial Bank was allowed to operate as the agent of RBI, especially in those places where RBI had no branches 1. Banking Regulations Act was passed in 1949. This regulation brought Reserve Bank of India under government control 2. In 1955, RBI acquired control of the Imperial Bank of India, which was renamed as State Bank of India. 3. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states, making them as its 100% subsidiaries. 4. RBI was empowered in 1960, to force compulsory merger of weak banks with the strong ones. The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. 5. In July 1969, government nationalised 14 banks having deposits of Rs.50 crores & above. 6. In 1980, government acquired 6 more banks with deposits of more than Rs.200 crores. The Narsimham Committee report suggested wide ranging reforms for the banking sector in 1992 to introduce internationally accepted banking practices The amendment of Banking Regulation Act in 1993 saw the entry of new private sector banks. The first wave of financial liberalization took place in the second half of the 1980s, mainly taking the form of: 1. Introduction of Treasury Bills

2. Development of money markets 3. Partial Interest Rate Deregulation 4. In 1988, the Discount and Financial House of India was established 5. In 1989, both commercial paper and certificates of deposit were introduced 6. Based on the 1985 report of the Chakravarty Committee, coupon rates on government bonds were gradually increased to reflect demand and supply conditions 7. In 1988, the maximum (or ceiling) lending rate and ranges in minimum rates were unified and switched to a minimum-lending rate (MLR) in 1988. As a result, banks were able to set interest rates more flexibly.
8. In 1989, the maximum interest rates on call money were liberalized

Second wave of Liberalization started with Narasimham Committee Recommendations: Reduction of the CRR and SLR 1. The CRR has declined gradually from 15% in 1991 to 5.75% in November 2001 and to 5.5% in December 2001. 2. The SLR was reduced gradually from 38.5% in 1991 to 25% in October 1997. The SLR has remained at this rate until today, while the legal upper limit has stayed at 40% throughout the period Interest Rate Deregulation 3. The Government started interest rate deregulation in 1992. 4. This led to a complete liberalization of all term deposit rates and lending rates on advances in excess of Rs200,000. The remaining interest rate controls are savings deposit rates and lending rates up to Rs200,000. Reform of Priority Sector Lending 1. Advances to the priority sectors should be reduced from 40% to 10%. 2. While the targets of 40% imposed on domestic banks and 32% on foreign banks have not changed during the reform period, the burden of this directed lending practice has been gradually

reduced by (1) expanding the definition of priority sector lending, and (2) liberalizing lending rates on advances in excess of Rs200,000, Reforms in Banking Sector Second wave of Liberalization started with Narasimham Committee Recommendations Reduction of the CRR and SLR 1. The CRR has declined gradually from 15% in 1991 to 5.75% in November 2001 and to 5.5% in December 2001. 2. The SLR was reduced gradually from 38.5% in 1991 to 25% in October 1997. The SLR has remained at this rate until today, while the legal upper limit has stayed at 40% throughout the period Interest Rate Deregulation 3. The Government started interest rate deregulation in 1992. 4. This led to a complete liberalization of all term deposit rates and lending rates on advances in excess of Rs200,000. 5. The remaining interest rate controls are savings deposit rates and lending rates up to Rs200,000.