Investment Banking and Financial Services

Course Leader:
Ms. Reshma K.J..
reshma.ms.mc@msruas.ac.in

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 Session Objectives

• At the end of session students will be able to :

 Discuss the concepts of credit creation and credit control

 Discuss the importance of Central banking policy

Faculty
Facultyof
ofManagement
Management andand
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Commerce ©M. S. Ramaiah
©M. Ramaiah University
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Sciences
Sciences
 Session Contents

 Introduction to RBI
 Credit creation and Credit creation
 Central banking policy

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 Banking Industry In India

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 Banking Industry In India (Contd…)

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 Reserve Bank of India

• The Central Bank is the

head of the banking system in the country

• It has the power of supervision and control over all other banks
• It is the symbol of financial power and stability of the country

• In India, Central bank is known as RESERVE BANK OF INDIA

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 The Reserve Bank of India

History :

• RBI was established on April 1, 1935

• RBI Nationalised in year 1949

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 Objectives of RBI (Contd..)

• Regulate the issue of the bank note

• Maintain the reserves with a view to securing monetary
security
• To operate the credit and currency of the country to its
advantage

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 Functions of Reserve Bank of India

1. Bank of Issue
2. Banker to 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

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 Bank of Issue

• RBI has the sole right to issue bank notes of all denominations
(Section 22 of the Reserve Bank of India Act)
• The distribution of one rupee notes and coins and small coins
is undertaken by the RBI as agent of the Government
• The Reserve Bank has a separate “Issue Department” which is
entrusted with the issue of currency notes

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 Bank of Issue (Contd..)

• Since 1957, the Reserve Bank of India is required to maintain gold

and foreign exchange
• Reserves of Rs. 200 crores, of which at least Rs. 115 crores should
be in gold
• The system as it exists today is known as the minimum reserve
system

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 Banker to Government
• RBI acts as Government banker, agent and adviser
• RBI is the agent of Central Government and of all State
Governments in India except that of Jammu and Kashmir
• The Reserve Bank has the obligation to transact
Government business
 Keep the cash balances as deposits free of interest
 Receive and to make payments on behalf of the
Government
 Carry out their exchange remittances and other banking
operations
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 Banker to Government (Contd..)

• It makes loans and advances to the States and local authorities.

• It acts as adviser to the Government on all monetary and banking

matters

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 Bankers' Bank and Lender of the Last Resort
• The RBI acts as the bankers' bank
• According to the provisions of the Banking Companies Act of 1949,
every scheduled bank was required to maintain with the RBI a cash
balance equivalent to 5% of its demand liabilities and 2 per cent of its
time liabilities in India
• By an amendment of 1962, the distinction between demand and time
liabilities was abolished and banks have been asked to keep cash
reserves (CRR) equal to 3 per cent
• The minimum cash requirements can be changed by RBI

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 Bankers' Bank and Lender of the Last Resort (Contd..)

• The scheduled banks can borrow from the RBI on the basis
of eligible securities
• Commercial banks can always expect RBI to come to their
help in times of banking crisis
• The Reserve Bank becomes not only the banker's bank but
also the lender of the last resort

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 Controller of Credit
• Central Bank may directly or indirectly influence the
money supply to control its growth
• In modern times the bulk of money in developed
economies consists of bank deposits rather than
currencies and coins
• Credit policy is concerned with changes in the supply of
credit
• Central Bank administers both the Credit and Monetary
policy
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 Custodian of Foreign Reserves

• The RBI has the responsibility to maintain the official rate

of exchange
• The RBI acts as the custodian of India's reserve of
international currencies
• The RBI has the responsibility of administering the
exchange controls of the country

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 Supervisory Functions
• The RBI has wide powers of supervision and control over
commercial and co-operative banks, relating to:
– Licensing and establishments

– Branch expansion
– Liquidity of their assets
– Management and methods of working

– Liquidation

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 Supervisory Functions (Contd..)

• The RBI is authorised to carry out periodical inspections of

the banks and to call for returns and necessary
information from them

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 Promotional functions (Contd..)

• The Reserve Bank is required to promote:

– banking habit

– extend banking facilities to rural and semi-urban areas

– establish and promote new specialised financing agencies

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 Promotional functions

• Reserve Bank has helped in the setting up:

– Deposit Insurance Corporation in 1962
– Unit Trust of India in 1964
– Industrial Development Bank of India (64)
– Agricultural Refinance Corporation of India (63)
– Industrial Reconstruction Corporation of India (72)

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 Promotional functions (Contd…)

• These institutions were set up directly or indirectly to promote

– Saving habit

– To mobilise savings
– To provide industrial finance
– To provide as agricultural finance

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 Controller of Credit

• The Reserve Bank of India is the controller of credit

• It has the power to influence the volume of credit created
by banks in India
• It can do so through changing the Bank rate or through
open market operations

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 Controller of Credit (Contd…)

• RBI can ask any particular bank or the whole banking system not to
lend to particular groups or persons on the basis of certain types of
securities
• Since 1956, selective controls of credit are increasingly being used
by the Reserve Bank

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 Controller of Credit (Contd..)

• The Reserve Bank of India is armed with many more powers to control
the Indian money market
• Every bank has to get a licence from the Reserve Bank of India to do
banking business within India
• the licence can be cancelled by the Reserve Bank of certain stipulated
conditions are not fulfilled
• Every bank will have to get the permission of the Reserve Bank before
it can open a new branch

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 Controller of Credit (Contd..)

• Each scheduled bank must send a weekly return to the

Reserve Bank showing, in detail, its assets and liabilities.
• This power of the Bank to call for information is also
intended to give it effective control of the credit system.
• The Reserve Bank has also the power to inspect the
accounts of any commercial bank.

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 Controller of Credit (Contd..)

• As supreme banking authority in the country RBI has the

following powers:
(a) It holds the cash reserves of all the scheduled banks
(b) It controls the credit operations of banks through
quantitative and qualitative controls
(c) It controls the banking system through the system of
licensing, inspection and calling for information

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 Methods of Credit Control

• Cash Reserve Ratio (CRR)

• Repo Rate
• Reverse Repo Rate
• Bank Rate

• Statutory Liquidity Ratio (SLR)

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 Cash Reserve Ratio (CRR)

• Cash Reserve Ratio is the amount of funds that the bank have to
keep with RBI
• If RBI decides to increase the percent of this, the available amount
with the bank comes down
• RBI uses this method to drain out excessive money from the banks
• Current CRR :4 %

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 Repo Rate

• Whenever the banks have any shortage of funds they can borrow it
from RBI
• A reduction in Repo rate will help banks to get money at cheaper
rate
• When Repo rate increases borrowing from RBI becomes expensive
• Current Repo Rate :4 %

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 Reverse Repo Rate

• Reverse Repo Rate is the rate at which Reserve Bank of

India borrows money from banks
• Banks are always happy to lend money to RBI since there
money is in safe hands with good interest
• An increase in Reverse Repo Rate can cause banks to
transfer more funds to RBI
• Current Reverse Repo Rate:3.35 %

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 Bank Rate

• Bank rate is the rate of interest which a central bank charges on the
loans and advances provided to commercial banks
• It is also called as the discount rate
• Current Bank Rate:4.25 %

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 Statutory Liquidity Ratio (SLR)

• SLR is the amount a commercial bank needs to maintain in the form

of cash, or gold or government approved securities (Bonds) before
providing credit to its customers
• SLR rate is determined and maintain by the RBI in order to control
the expansion of bank credit
• Current SLR:18 %

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 Credit Creation

• The process of 'Credit Creation' begins with banks lending money

out of primary deposits
• Primary deposits are those deposits which are deposited in banks
• Banks cannot lend the entire primary deposits

• After maintaining the required reserves, the bank can lend the
remaining portion of primary deposits
• Here bank's lend the money and the process of credit creation
starts

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 Central Banking Policy

• Monetary Policy
– By Reserve Bank of India

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 Role of RBI

• Equally important, however, are the non-monetary functions of the

RBI in the context of India's economic backwardness
• The supervisory function of the RBI may be regarded as a non-
monetary function (though many consider this a monetary
function)
• The promotion of sound banking in India is an important goal of the
RBI

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 Role of RBI (Contd..)

• The RBI has been given wide and drastic powers, under the Banking
Regulation Act of 1949
• These powers relate to licensing of banks, branch expansion,
liquidity of their assets, inspection, amalgamation, reconstruction
and liquidation
• Under the RBI's supervision and inspection, the working of banks
has greatly improved

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 Role of RBI (Contd..)

• Commercial banks have developed into financially and

operationally sound and viable units
• The RBI's powers of supervision have now been extended to non-
banking financial intermediaries
• The RBI has followed the promotional functions vigorously and has
been responsible for strong financial support to industrial and
agricultural development in the country

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 Summary

• Reserve Bank of India Controls and regulate the banking system in

the country
• Important functions of RBI Includes Issuing Currency, Acting as the
banker to the government and Banks, credit control
• CRR,SLR,Repo Rate ,Reverse Repo Rate and bank rate are the tools
used by RBI for credit control

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 Summary (Contd..)

• Monetary Policy refers to actions taken by central banks to affect

monetary magnitudes or other financial conditions
• Variations in Reserve Ratios, Bank rate, open Market Operations are
some of the instruments used by RBI in the monetary Policy

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