BANKING REGULATION,

MONITORING & CONTROL

(S-2)

Dr. S.Chatterjee
 Learning Objectives
 How Indian economy and financial system is regulated by a
Central Bank for steady growth and delopment.
 Mechanism of controlling/regulating Currency & Money
supply (Monitory policy)
 Supporting to GOI, Supervision and control mechanism of
RBI over Commercial Banks
 Policy formulation & Control mechanism of RBI for Forex
and functioning /opening of foreign Bank Br. In India.
 Maintaining Financial stability , augmenting Financial
inclusion and safeguarding Public interest.
Origin Of RBI
 1934 : The bill for Creation of a Central Bank
passed on getting the recommendation of the
Royal Commission on Indian currency and Finance
called RBI act 1934.
 1935 : RBI started operation wef 1st April as
central Bank with paid up capital of Rs 5 cr.
 1949 ; GOI nationalised Reserve Bank (under the
Reserve Bank public Ownership act 1948)
Organisation Structurem of RBI
 1 Governor and 4 Dy Governors appointed by
Central government u/s 8(1)(a & b) RBI act 1934
 (At present we have 3 Dy Governors)
 15 Directors from different fields nominated by
Central Govt u/s 8(1) (C & d) of RBI act 1934 & 2
GOVT. Officials
 4 Local Boards HQs at Mumbai, Kolkata, Chennai
and New Delhi consisting of 5 board members each.
 Has 29 Deptts based on functional specialization.
Objective of Setting up of RBI
 As per RBI 1934 The objective has been stated as :
“ To regulate the issue of Bank notes and
keeping the reserves with a view to secure
monetary stability in India and generally
to regulate and operate currency and credit
system of the country to its advantage.”
Main objectives are:-

 To maintain Monetary stability

 To maintain Financial stability & ensure currency value
 To maintain Stable & efficient payment system
 To ensure rational credit allocation,
 To ensure price Stability by regulating money supply and
credit delivery
 To promote and develop financial Markets
 To promote Export/imports & Regulate Forex Market
 To encourage & develop co-operative sector.
 To ensure development & supervision of Banking Business,
 To publish economic statistical data.
Functions of RBI: [A]Issuer of Currency:(SoleNote issuing Authority)

1.Designing, Production & overall management of Currency

[ legal Tender of money]
(Re 1,2,5 &10, Cons – Govt, Re 10--2000 by RBI )
2. Ensure adequate supply of Clean Notes. (C.L.P) Keeps public faith
3. Ensure sec. measures in Notes & check circulation of
forged currency.
4. Created an app MANI (Mobile aided Note Identifier) for
identification of Bank Notes by visually impaired persons.
5.Create public awareness and take anti-counterfeiting
measures to combat forged note circulation & check
M.L (ensure implementation of AML measures)
6. Removal of unfit/soiled notes from circulation.
6.Augmentation & Maintenance of Currency Chest
(Ref RBI press release 2001-2002/1220 dt 4.5.02)
 [B]Consumer Education and Protection

 Ensuring Customers’ right based on global best

practices. The 5 basic rights are (i) Fair treatment,(ii)
Transparency and fair dealing,(iii)Right to suitability
 (iv) Right to Privacy &(v) Right to grievance redressal
 Created Customers’ service Deptt in 2006 renamed now
as Customers’ education and Protection cell.
 For promoting adherence to self-imposed codes by
banks for committed customer service has set up a
Banking codes and standard Board of India (BCSBI)
 Introduced Banking Ombudsman schem to ensure
redressal of Customers’ grievances.
[C] Banker and Debt Manager to Government

 Acts as Banker to Govt. thereby Manages receipts, payments,

transfers of all govt. transactions. E-Govt financial activities.
 Banker to State Govt. with prior agreement. Transact Govt
business and, manages Public debts.
 Provide Ways and Means Advance facilities to Govt.
 Manages liquidity miss-match by issuing S.T Debt
Instruments / T.Bills
 Arranges efficient deployment of surplus cash
 Acts as advisor to Govt. on policy issues, fiscal and budget
Management.
[D] Banker to bank :

 Ensures settlement of inter bank account

 Maintains accounts of banks to ensure required
statutory Ratios and allows inter-bank
transactions, borrowing and lending,
Buying/selling of securities and f. currencies
 Lender of last resort.
 Ensures swift, smooth, and efficient clg (ECS)
 Allows Banks to be custodian of Reserved Cash
on behalf RBI (Currency Chest). Chest Br Repots every
Friday and also on Daily basis to RBI
Some Questions
 What is a currency chest?

 What is the full form of DICGC

 I) Director of Insurance and Corporate Governance
commission.
 Ii) Directorate of Insurance and Corporate Governance
commission
 Iii) Deposit Insurance and Credit Guarantee corporation
 Iv) Deposit Insurance and Credit Guarantee commission.
cont
 What is Money Laundering. How it adversely
affects the economy?
 What are the Centre and State Govt Securities?
 What do you understand by Ways and Means
Advance Facilities?
 [E] Regulator and Supervising Authority of Banks

 Ensures smooth & efficient functioning of Banking system,

NBFCs, PDs(Participant Depositories), FIs,
 Approves merger, acquisition, amalgamation of two/more banks.
 Ensure safety of public deposits (DICGC)
 Ensure banking operation conducive to Customers’ Interest,
 Supervising operation, consolidation, expansion and liquidation of
Banks.
 Issues new Bank licenses, prescribes Capital requirements.
 Supervises compliance of prudential requirements, governance,
credit delivery in the desired sectors, solvency, liquidity
,exposure norms, provisioning requirements, maintenance of
asset quality Interest rate structure, para-banking activities , SLR
& CRR etc
contd………………

 Ensures efficient customers’ service, KYC requirements,

grievance redressal and functioning of Ombudsman.
 Supervises compliance of efficient Risk management and
mitigation.
 Monitors and sensitizes Banks in combating fraud &
forgeries, Vigilance mechanism.\
 Conducts On-site- Insp annually to assess Health and
assigns Grading to the Banks based on CAMELS models.
 Conducts Off-site Surveillance under OSSMOS on regular
intervals.
[F] Exchange Control Functions :

 Ensures Stability of value of External Currency

 Regulates & supervises Forex Mkt under provisions of
FEMA act 1999.
 Manages forex and Gold reserves.
 Facilitates greater trade and capital inflows to increase
integration of Indian Economy with global economy.
 Authorises specific persons/organisation/
banks to act as Dealer/ Money changer
 Regulates and supervises functioning of Foreign Banks
in India.
[G] Development of Financial system
( Developmental Role )

 Create Institutions(N.B) & develop mechanism

1962 DICGC Dep Ins
1964 UTI 1st M.F. *
1964 IDBI Ind finanace Now a Pvt Bank.
1969 NIBM Trg & Dev in Bankg
1981 EXIM B Export/Import Finance
1981 NABARD Agrl Credit
1989 NHB Hsg Loan
1990 SIDBI SSI/MSME CREDIT
1994 STCI On line sec trading
1996 IDRBT Institute for Development & Research in banking Tech
2001 CCIL National Clg
2008 NPCI National Payment Corporation of India for online payment
2015 MUDRA Micro Units Development & Refinance Agency Ltd.
[H] Monetary & Liquidity Measures.

 As per recommendation of Y.B Reddy committee

(1998) The Working gr on Money supply(WGMS)
started publishing Monetary aggregates wef 1999
consisting M0,M1,M2, M3 & M4.
 Mo –(Monetary base/ Reserve money)=Currency in circulation (# Public
& Banks) + Cash Reserve(Dep with RBI) + other D
 M1 – (Narrow Money)= Mo +Net Demand Dep (CASA)[Intrer-bank Dep
excluded] +other D
 M2 – (Intermediate Money) = M1+SB Deposit # PO bank
 M3 – (Broad Money)= M1 + T Dep
 M4 -- M3 Total dep # PO excluding NSCs
Solve the problem;-
Currency with Public =Rs 150,000 cr
Demand Deposit with Banking System= Rs220,000 cr
Other Dep # RBI Rs 370,000cr
SB deposit with Post office Bank=Rs130,000cr
All Deposit with PO Savings bank(Excluding NSCs)=Rs100000cr
M3 given Rs 1040,000cr
Calculate (a) M1, (b) If SB Deposit in PO savings Bank and
Time dep in Banking system increased by Rs50000cr each
Calculate value of (M2).
(c ) Time deposit # banking system. (d) M4
AnsRs740,000cr(b) Rs920,000cr (c ) Rs300000cr
(d) M4= Rs1140,000cr
[I]Regulating Financial Markets
 To ensure robustness and credibility in the and minimize
RISKs RBI has constituted (i) FIMMDA (Fixed Income
Money Market and Derivatives Association of India) &
(ii) FEDAI (Foreign Exchange Dealers’ Association of
India) for Administration of Securities Mkt, Call Money
Mkt, Derivatives mkt, Interest rate and FOREX
management in collaboration with IBA
 Implementation of OTC Derivatives reform measures
recommended by G-20
 Improving the liquidity of G-Sec Market etc.
[J] Financial Inclusion & Development

 Credit flow to priority sectors: Macro policy formulation to strengthen credit flow

to the priority sectors. Ensuring priority sector lending becomes a tool for banks for
capturing untapped business opportunities among the financially excluded sections
of society.
 Financial inclusion and financial literacy: Help expand Prime Minister’s Jan
Dhan Yojana (PMJDY) to become a sustainable and scalable financial inclusion
initiative with no frill a/c.
 Credit flow to MSME: Stepping up credit flow to micro, small and medium
enterprises (MSME) sector, rehabilitation of sick units through timely credit
support.
 Institutions: Strengthening institutional arrangements, such as, State Level Bankers
Committees (SLBCs), Lead bank scheme, etc., to facilitate achievement of above
objectives.
 A Working Group has been formed to administer and ensure timely channelization
of credit into the appropriate segment for greater Financial Inclusion.
[K] Research and Data Ware house
 Provide reliable, data-driven information for policy and decision-
making
 Supply accurate and timely data for academic research as well as to the
general public
 Provide support for collaborative research to research
institutions/universities
 To develop and maintain statistical data reporting systems
 To conduct forward-looking surveys for monetary policy
 Educate the public
 RBI has legal obligation to publish two Reports every year viz(i)
Annual Report (ii) Report on Trends & Progress in Banking.
 Research undertaken on various Economic and Financial issues and
published thro; web site, press release, periodic journals
 Preserve and maintain Data for statistical and research purposes.
[L] Monetory Policy
Decides thrust areas (annually) and prepares policy guidelines with
distinctive Road map with bi-monthly review mechanism
(1)to promote Growth(GDP) Control inflation,
by regulating cost, flow and uses of money by using
various (a) Direct Instruments and (b) Indirect
Instruments (as detailed afterwards)
(2) to manage CAD
(3) to integrate with global economy # predictable Forex
rate.
(4) To Monitor and undertake monthly/qrtly reviews.
The Policy is Formulated and decided by MPC consisting of
6members 3 from RBI and 3 from GOI each having tenure of 4 yrs
 Concept Of Money supply ()
 i.e
  Total quantity of Money in the economy.
 Ex: A Currency of Rs 100 printed by RBI () with

reserve requirement (leakage) of 20% can create

money supply of Rs 500.
 The reserve requirement is determined by the central

bank(CRR, SLR) depending upon Inflation and

Monetary conditions.
 Money multiplier = 1/Reserve rqmt= 1/0.20=5=m

 Total Money supply= m x =500

Note: This indicate With a currency of Rs100 Money

supply in the system is 5 times if m=5(decided by RBI)
Contd.. Money Multiplier
 Money supply= 100 + 100(9/10) + [100(9/10)](9/10) + {[100(9/10)](9/10)}(9/10)….=
 100/(1-9/10) =1000


 Money Supply = 100 + 100((9/10) +100 ( + 100 ( ………..= 1000 **

 Considering infinite G.P Series x.…….. = x(1/1-r)
 r = Reserve money retained by Banks = leakage = 10 is called MONEY MULTPLIER

Bank Deposit Loan Granted Reqd reserve

Recd.

A 100 90 10
B 90 81 9
C 81 71.9 8.1
D 71.9 64.71 7.19
Total Final Amt all 1000 900 100
Banks
Tools to regulate Money Supply-
 Direct Tools  Indirect Tools
 1) CRR (4%)  1) LAF
 2) SLR (18%) (a) Repo rate 4.0%
 3) Refinance Rate (b) Reverse-Repo rate
3.35%
2) Bank Rate 4.25%
 3) OMO
 4) MSS
 5) MSF 4.25%
 6) Selective Credit control
 LTRO
CRR & SLR as a tool
 CRR:- Certain % Bank’s NDTL as cash is required to be
kept /maintained with RBI/Currency Chest is called CRR.
 Now it is 3%
 Reporting Friday it must be 3% as stipulated at day end.
Other days can be upto 95% of CRR requirement
 SLR : Certain% of Bank’s NDTL as liquid reserve (such as
cash,Govt Bonds, Gold,Treasury Bills [issued by RBI in
multiple of 25000] etc) is required to be held within the
Bank
 Now SLR=18% , can be maximum upto 40%
 To be maintained on Daily Basis (Both relaxed & can be
90% of limit in between Fridays due to Covid Crisis)
Effects of CRR & SLR
 1)Both effect Lending capacity of Banks which has
inverse relationship with CRR &SLR.
 2) Effect money flow in the economy with same
inverse relationship
 3) Effect Interest rate on loans and has direct
relationship
 4) Effect profitability of Banks which is inversely
related.
 5) Huge penalty non default.
 CRR/SLR AF M.Flow C.Creation Profit Int
rate
 Case M.Sup—Lendg—Profit– GDP–Infl--

 I –CRR/SLR

 II- CRR/SLR
NDTL Calculation

DEMAND LIABILITIES TERM LIABILITIES

 CASA Deposit,
 Margins held for LC , BG, IBP/IBD,
&other Demand loans
 O/Due T.Ds

Outstanding Bills Payables,
 Unclaimed deposit
 Cr bal in C.c account
 Deposit held as sec for D. L
 Suspense a/c Payable to Banks,
public
 Intt.payable on Dep,BP, Unclaimed
dividents.
 Net Liabilities to other Banks . etc
 Term Deposits, Cert of dep,RDs,
 Staff Security Deposits
 Margin held (LT) on Lcs not
payable on demand.
 All LT sec Deposits
Excluded from NDTL are:
---Paid up Cap, Reserve, Refinance
----Recd from RBI/NABARD/SIDBI,
---Amount of Excess prov held
---Claim Reced from DICGC,ECGC,
CGTF. Insurance Co, Court Recvr
----- Interbank deposit
Problems:
(1) Calculate Demand & Term Liabilities and then find CRR & SLR
requirement at existing rate from the following data.

Current Deposit 30  
Savings Deposit 105  

 
Term Deposit 150

Claimed received from ECGC 8

Recurring Deposit 9  
Deferred Tax Liabilities 10  
Unclaimed Deposit 6  
IOI Outsatnding 30  
Credit Balance in C.C a/c 12  
Crredit Balance in SBI for Clg 15  
Provision for Arrear Payment 10  
Investment in cap Mkt 20  
Problems:
(1) Calculate Demand & Term Liabilities and then find CRR & SLR
requirement at existing rate from the following data.
Current Deposit 30  Rs in Cr
Savings Deposit 105  DL = 203
 
Term Deposit 150

Claimed received from ECGC 8

Recurring Deposit 9  T L = 179

Deferred Tax Liabilities 10  NDTL = 382
Unclaimed Deposit 6  CRR =3% = 11.46
IOI Outsatnding 30  SLR =18%= 68.76
Credit Balance in C.C a/c 12  
Crredit Balance in SBI for Clg 15  
Provision for Arrear Payment 10  
Investment in cap Mkt 20  
Liquidity Adjustment
Facility(LAF)
 This tool is used by RBI by modulating Repo &
Reverse Repo rate.
 Now Repo rate =4%,Reverse Repo rate=3.35%
 Repo--Reverse Repo= 0.65 % (called Corridor)
 Maxm Lt: Banks can borrow upto 0.5% NDTL at
Repo rate for 90days.
 Banks have to keep securities (other than SLR
securities)as collateral with RBI , which are
repurchased on payment of the loan.
Effects of Repo & Reverse Repo rates:

 Used for adjusting Liquidity in the Market (LAF)

 Banks use to adjust mis-match in liquidity on daily
basis.
 Repo-auctions are conducted for injection liquidity
 Reverse Repo auctions are meant for absorption of
liquidity.
 All transactions are made in Transferable Central
Govt Dated Securities.
 Q; To Check Inflation what steps to be taken??
Marginal Standing Facilities(MSF)
 Under this Banks can avail Over-night Loan
facilities (for overnight /1 day/24hrs) at Bank Rate
from RBI
 Against securities(May be SLR or Non-SLR)
 Loan Rs 1Cr minm and its multiple
 Maxm upto 2% of NDTL
 Interest at Bank rate ie now 4.25%
Bank Rate:
 A)It is the rate at which Banks borrow from RBI for period> 90 days.
At present 4.25% wef April’20
 B) The rate at which RBI rediscounts Bill of Exchange
 C) The rate used by RBI for charging penalty for Regulatory defaults/
violations
 Ex: If the Banks fail/ default in maintaining required level of CRR &
/or SLR , Penalty as under to be charged;-
 For failure of
 1st day Interest on shortfall amt =BR+3%
 2nd day ---do----------= BR+5%
 3rd day Legal Action .
 Before this happens Banks are bound to use MSF(Marginal Standing
Facility)
Open Market Operation (OMO)
 Market at which RBI sales and purchases Govt. securities through
open bids with an aim to inject or absorb (money/liquidity) in the
economy.
 Security: Tenor with date with certain amount as face value Issued

by RBI.
 A) When RBI purchase Sec  Money flows in Mkt

 Banks gain liquidity More Credit Creation

GDP Growth  economy grows
B) When RBI sales Sec  Money absorved 
Reverse effects.
G-Secs are sold at Discout rate and purchased at face
value. In multiple of Rs 10,000/- face value.
No limit for such sales/purchase
Example:
Market stabilization Scheme
(MSS)
 It is Similar to OMO
 When there is excess liquidity in the Market, RBI
absorves this excess liquidity by selling securities
and stabilizes the Market(Economy)
 Limit upto which Maxm securities can be sold is
Rs.6lac crores
 Tenor of Securities; Maxm 1 year.
 Ex : Excess money supply Due to FIs $ inflow
during 1st decad of this century.
Long Term Repo Operation
(LTRO)
 It is new facility to Inject liquidity in the Banking System with
long term maturity period between 1 to 3 years,
 Introduced as per Feb’06, 2020 RBI released Statement on “
Development and Regulatory policies”
 Features : i)Repayment > 90 days
 ii) A Collaterised loan like repo
 iii) Loan amt. > Repo Limit (0.5% of NDTL) & available in
multiples of Rs 1.0 cr
 iv) Available at repo rate in lieu of Bank rate
 v)RBI has created a Corpus of Rs 1.0lac Cr to begin with
 vi)To be conducted in CBS e-Kuber platform.
 vii) In case of oversubscription – Pro-rata allotment is done
Supervisory Mechanism:-
 RBI is vested with power to issue prudential guidelines for efficient function of Banks
with the following objectives:
i)Risk Management. Evaluation of Bank’s safety and soundness
ii) Ensuring Board Quality of Top Management.
iii) Ensuring compliance with prudential regulations.
iv) Identifying Gray & fraud prone areas and take
corrective steps
on regular basis.
v) On site inspection based on CAMELS model & take corrective
steps from time to time.
vi) Evaluation of Bank’s policies
vii) Review of Compliance Banking Laws, Supervisory policy
guidelines.
viii) Ensuring Maintenance of KYC norm. Check & Combat ML.
ix) Ensuring Statutory requirements
X) Protecting Customers’ Interest.
 Sample Questions
 Q1. Which of the following is indirect tool of
m.policy?
 Q2.What is full form of MSS?
 Q3. What would be the Impact of Money flow in the
market if RBI decides to G.Sec.