indian financial system-rbi

8/9/2019 Indian Financial System-RBI

1/52

[G]Monetary Control[G]Monetary Control

INTRODUCTION: 1.Monetary Control is the main function of the Reserve Bank ,as it is central

bank of the country.

2.Formulating and administering monetary policy involves using ofinstruments within its control to influence the level of aggregate demand forgoods and services by regulation of the total money supply and credit.

3.The RBI exercises monetary regulation by influencing the availability andcost of credit by exercising different types of controls.

4.General or quantitative controls are the instruments of Bank rate,reserverequirements and open market operations.These methods affect the total

money supply.


2/52


3/52

The effectiveness ofThe effectiveness of

Bank RateBank Rate

The effectiveness of Bank Rate as an

instrument of monetary control depends on

the extent of operation in the money market

and also on how far the commercial banks

resort to borrowing from Reserve Bank.


4/52

Open Market OperationsOpen Market Operations [OMO].[OMO].

Section17(8) of the RBI Act authorizes the Reserve Bankto engage in the purchase and sale of securities of anymaturity of the Central Governments and StateGovernments.

OMO can be carried out by purchase and sale of a varietyof assets such as Government securities ,commercial billsof exchange ,foreign exchange,gold and even companyshares.

In actual practice they are confined to buying and sellingof Government securities.When securities are purchasedfrom the open market ,the reserves of the banks withReserve Bank increases and they can accordingly expand

credit.


5/52

Cash ReserveCash Reserve Section 42 of RBI Act & Section 18 of Banking

Regulation Act,1949 deal with cash reserves to be

kept with the Reserve Bank by scheduled banksand non-scheduled banks respectively.

Scheduled banks have to maintain an averagedaily balance of 5% of the total demand and timeliabilities in India of such banks.Further RBI isempowered to raise up to 20% of total demandand time liabilities.


6/52

Statutory Liquidity Ratio(SLR)Statutory Liquidity Ratio(SLR)

Banks are required under section [24(1)of

RBI Act,1949] to maintain in India liquid

assets in cash ,gold or unencumbered

approved securities amounting to 25% of

its total demand and time liabilities.

RBI is empowered to raise up to 40%.


7/52

Interest RateInterest Rate

Reserve Bank exercises direct control over

the lending rate of banks by influencing cost

of bank credit by increase or decrease in the

lending rates rather than the Bank rate.

RBI is empowered to issue direction to

banks in public interest or in the interest ofbanking policy.


8/52

Selective Credit ControlSelective Credit Control

Selective Credit Control refers to

regulation of distribution or direction of

bank resources to certain sectors of the

economy.This is done in terms of broad

national policies for achieving

developmental goals.


9/52

Selective credit control is exercised by R

BIby

Selective credit control is exercised by R

BIbystipulatingstipulating

a)minimum margins for lending against selecteda)minimum margins for lending against selected

commoditiescommodities

(b)ceilings on the levels of credit, and(b)ceilings on the levels of credit, and

(c) rates of interested commodities.(c) rates of interested commodities.

The first two control quantum of credit and theThe first two control quantum of credit and the

last,the cost of credit.last,the cost of credit.


10/52

Indian Financial SystemIndian Financial System

Reserve Bank of India


11/52

Introduction toIntroduction to CentralCentral BankingBanking RBI, as the central bank of the country ,is the

center of Indian financial and monetary system.

RBI was formed in 1935 as per RBI Act 1935 asshareholders bank with a share capital of Rs 5crores,divided in to 5 lakhs fully paid up shares ofRs 100/- each.

In 1948 , RBI was nationalized by Reserve Bank(Transfer to Public Ownership)Act,1948 and theentire share capital was acquired by the CentralGovernment.


12/52

Regulation of nonRegulation of non--bankingbanking

institutions:institutions: The fast growth of non-banking institutions in the

country and their accepting deposits from the

public at very high rates of interestraised question of regulating their activities.

As the credit from the banking sector was under the

control of the Reserve Bank,the non-banking

institutions had a ready market and many

unhealthy practices developed in n course of time.


13/52

[h][h] CustodianCustodian ofof ForeignForeign

ExchangeExchangeIntroduction:Regulation and conservation of foreign

exchange is a major function of the Reserve Bank

of India under FERA,1973.Regulation of foreign exchange was introduced in

India under the Defense of India Rules,1939

which was replaced by the Foreign Exchange

Regulation Act,1947 and later by the ForeignExchange Regulation Act,1973 which is currently

in force.


14/52

Restrictions on dealings inRestrictions on dealings in

foreign exchangeforeign exchange

U/s 8 of this Act,the previous general or

special permission of the RBI is necessary

for any person other an authorized dealer

in India to purchase or otherwise acquire,

borrow, sell,lend exchange with any

person not being an authorized dealer .


15/52

Foreign exchange definedForeign exchange defined

under section 2(h) RBI Act.under section 2(h) RBI Act.

Foreign exchange means foreign currency

and includes all deposits ,credits and

balances payable in any foreign currency

and any drafts,travelers checks ,letters of

credit and bills of exchange ,expressed or

drawn in foreign currency too .


16/52

Authorized Dealers &MoneyAuthorized Dealers &Money

ChangersChangers Under section 6 of the Act,Reserve Bank is

empowered to authorize any person to deal inforeign exchange .Persons so authorized are calledAuthorized dealers as defined in Section 2(b).

Such authorization may be granted subject toconditions and may be for,[i] dealings in foreigncurrencies or restricted to specified foreigncurrencies;[ii] transactions of all descriptions in

foreign currencies or restricted to specifiedtransactions;[iii]a specified period or withinspecified periods.Authorized dealers are generallyscheduled banks .However RBI has givenrestricted license IDBI and EXIM and to

undertake certain specified functions.


17/52

Money Changers definedMoney Changers defined

Section 7 of the Act.Section 7 of the Act. Act empowers the RBI to authorize any person to

deal in foreign currency.Persons so authorized are

called money changers. The authorization given to money changers may

be , [i] for all foreign currencies [ii]for alltransactions in foreign currencies or for specifiedtransactions and also may be[iii]for operating aspecified place and for a specified amounts moneychangers license have been given to certainestablished firms ,hotels and other organizations.


18/52

Blocked AccountsBlocked Accounts

Section 10 of the Act deals with blocked

accounts.[Regarding NRI Accounts:NRE,

NRO,FCNR,NRNR, etc].A blocked account

is an account opened as a blocked account

at any office or branch of bank in India

authorized by RBI


19/52

IMPORT & EXPORTOFIMPORT & EXPORTOF

CURRENCYCURRENCY Import or Export of Foreign exchange or Indian

currency to or from India is also subject to

restrictions imposed under Section 13. Generalor special permission of RBI is necessary totake or send out of India any Indian currencyor foreign exchange obtained from anauthorized dealer or a money changer.


20/52

Acquisition ofForeignAcquisition ofForeign

ExchangeExchange

Section 14 authorizes the Central Govt. to

order by by a notification in the official

gazette ,every person in or resident in India

to sell foreign exchange to the RBI or to

persons authorized by the RBI for this

purpose.


21/52

Export and Transfer ofExport and Transfer of

SecuritiesSecuritiesGeneral or special permission of

the RBI is necessary under Section 19 for

the following transactions:[i] Taking or sending any security to anyplace outside India;

[ii]Transfer of any security or creation ortransfer of any interest in a security to or infavor of any non-resident;


22/52

.[cont.[contd]d]

[iii] Issuing in India or outside India, any

security which is registered or to be

registered in India to a non resident;

[iv] Acquiring,holding or disposing of any

foreign security.


23/52

BearerSecuritiesBearerSecurities

Section 22 of the Act restricts the issue of

bearer securities without permission of RBI.


24/52

Gift and SettlementsGift and Settlements

Settlement or gift of any property to a non

resident without the general or special

permission of RBI under Section 24.


25/52


26/52

Establishment ofplace ofEstablishment ofplace of

BusinessBusiness Non residents and other persons under Section 28

require the general or special permission of the

RBI FOR VARIOU

S TRANSACTIONS ASUNDER;

[1] To establish or carry on in India a place ofbusiness for carrying bon trading ,commercial orindustrial activity

[ii] Acquiring the whole or any part of anyundertaking in India of any person or a companycarrying on trade,commerce or industry ,orpurchasing the shares of such company in India.


27/52

Duty of Persons Entitled toDuty of Persons Entitled to

Receive Foreign ExchangeReceive Foreign Exchange Under Section 16(1) of the Act,general or

special permission of the Reserve Bank is

necessary for any person having a right to

receive foreign exchange or a rupee

payment from a non-resident,to do or

refrain from doing anything which has theeffect of delaying such payment or ceasing

such payment in whole or in part.


28/52

Payment for Exported GoodsPayment for Exported Goods [Section :81]Empowers Central

Government to stipulate that before

exporting any goods from India ,the

Exporter furnishes to the prescribed

authority a declaration in the prescribed

form like GR,PP AND VP/COD forms.


29/52

Export and Transfer ofExport and Transfer of

SecuritiesSecurities General or special permission of the

Reserve Bank is necessary under Section 19

for the following transactions: 1. Taking or sending any security to any

place outside India;

2.Transfer of any security or creation ortransfer of any interest in security to or infavor of any non resident;


30/52

.[Con.[Cont ]t ] 3.Issuing in India or outside ,any security

which is registered or to be registered in

India;

4.Acquiring ,holding or disposing of any

foreign security.


31/52

Holding ofImmovableHolding ofImmovable

Property outside IndiaProperty outside India Persons resident in India are prohibited

under Section 25 from acquiring,holding or

disposing of


32/52

Organization & ManagementOrganization & Management RBI was initially designed on the pattern of Bank

of England,theoretically subordinate to treasury.

The Governor,4 Deputy Governors,all Directors ofthe Central Boards are either appointed ornominated by the Central Government.

The Governor & the Deputy Governors are wholetime officials and hold office for such term notexceeding 5 years as may be fixed by the CentralGovernment and are eligible for re-appointment[Section 8(4)].

They however may be removed from their office

b the Central Government at an time.This le al


33/52

Preamble of RBI Act 1934Preamble of RBI Act 1934 Whereasitisexpedientto constitutea

Reserve BankofIndiatoregulatetheissue

ofbank notesandthe keepingofreserveswithaview tosecuringmonetary

stability[in India]andgenerallytooperate

thec

urrenc

ya

nd

credit

syste

mof

the

countrytoitsadvantage.


34/52

1.1. Main Functions of RBIMain Functions of RBI To maintain monetary stability so that the business

and economic life can deliver welfare gains of a

properly functioning mixed economy. To maintain financial stability and ensure sound

financial institutions so that monetary stabilitycan be safely pursued and economic units canconduct their business with confidence.

To maintain stable payments system so thatfinancial transactions can be safely and efficientlyexecuted.


35/52

1.1. Main Functions of RBIMain Functions of RBI To promote the development of financial

infrastructure ,and to enable it to operate

efficiently ie.,to play a leading role indeveloping a sound financial system so that

it can discharge its regulatory function

efficiently.


36/52

1.1. Main Functions of RBIMain Functions of RBI To ensure that credit allocation by the

financial system broadly reflects the

national economic priorities and societalconcerns.


37/52

1.1. Main Functions of RBIMain Functions of RBI To regulate the overall volume of money

and credit in the economy with a view to

ensure a reasonable degree of price stability.


38/52

ROLESOF RBIROLESOF RBI [a] Note IssuingAuthority

* Sole right,authority or monopoly of issuing

currency notes[other than one rupee notes orcoins].

* The responsibility is not only to put currency in

to or with draw it from circulation but also toexchange currencies and notes.

* All affairs of Bank are related to note issue areconducted by Issue Department.


39/52

[b]Government Banker[b]Government Banker The RBI is the banker to the Central and State .

Governments

* It provides to the governments all bankingservices such as acceptance of deposits,withdrawal

of funds by cheques, making payments as well as

receipts and collection of payments on behalf of

the government ,transfer of funds,andmanagement of public debt.


40/52

[c] Banker[c] Bankers Banks Bank The RBI like all other central banks,can be called

a bankers bank because it has a very specialrelationship with commercial and co-operativebanks and major part of its business with thesebanks.

In times of need ,the banks borrow funds from theRBI.It is therefore called the bank of last resort

or the lender of last resort. On the whole,the RBI is the ultimate source of

money and credit in India.


41/52

[d]Supervising Authority[d]Supervising Authority The RBI has vast powers to supervise and

control commercial and co-operative banks

with a view to developing an adequate andsound banking system in the country.


42/52

The RBIhas the following powersThe RBIhas the following powers

as the Supervising Authority.as the Supervising Authority.

1.To issue licenses for the establishment of new

banks;

2.To issue bank licenses for setting up of bankbranches;

3.To prescribe minimum requirements regarding

paid up capital and reserves,transfer to reserve

fund,and maintenance of cash reserves and otherliquid assets;


43/52

ContContdd 4.To inspect the working of banks in India

as well as abroad in respect of their

organizational set up,branchexpansion,mobilization of

deposits,investments,and credit portfolio

management,credit appraisal,region wiseperformance,profit planning ,manpower

planning and training,and so on.


44/52

ContContdd 5.To conduct ad hoc Investigations ,from

time to time,in to complaints,

irregularities,and frauds in respect of banks. 6.To control methods of operation of banks

7.To controlappointment,reappointment,and terminationof appointment of Chairman and CEOs of

private sector banks.


45/52

[e]Exchange Control Authority[e]Exchange Control Authority One of the essential functions the RBI is to

maintain the stability of the external value of the

rupee. * To administer the foreign exchange control

* To choose the exchange rate system and fix ormanage the exchange rate between rupee and othercurrencies

* To manage exchange reserves

* To interact or negotiate with the monetaryauthorities with IMF,World Bank & ADB.


46/52

The objective of ExchangeThe objective of Exchange

ControlControl Is primarily to regulate the demand for

foreign exchange within the limits set by the

available supply.

This is sought to be achieved by conserving

foreign exchange,by using it in accordance

with the plan priorities,and by controllingflows of foreign capital.


47/52

[f]Promoter of the financial[f]Promoter of the financial

systemsystem The RBI has been rendering

developmental or promotional services

which have strengthened the countrysbanking and financial sector.The following

sectors have attracted the benefits from

RBI.


48/52

Money MarketMoney Market In the money market ,RBI has continuously

worked for the integration of its organized

and unorganized sectors by trying to bringindigenous bankers in to the main stream of

the banking business.


49/52

Agricultural sectorAgricultural sector The RBI has rendered service in directing

and increasing the flow of credit to the

agricultural sector.


50/52

Industrial

Finance

Industrial

Finance

The role of the Bank in diversifying the

institutional structure for providing industrial

finance has been equally important. All the special developmental institutions[SDIs] at

the central and state levels and many other

financial institutions were either created by by the

Bank on its own or it advised and rendered helpin setting up these institutions.


51/52

Credit DeliveryCredit Delivery The Bank has evolved and put in to practice

the consortium ,co-operative ,and

participatory approach to lending amongbanks and other financial institutions.


52/52

Regulator of Money andRegulator of Money and

CreditCredit Monetary policy refers to the use of

techniques of monetary control at the

disposal of the Central Bank for achieving

certain objectives.

indian financial system-rbi

Documents