Reserve Bank of India

Central Bank

It is an apex institution of the monetary and banking structure of a country. A central bank has the authority to regulate and control the banking business and monetary system of a country. Its main function are

•Bank of issue•Financial advisor to the state( banker also)•Banker to bank•Custodian of foreign exchange reserves•Lender of the last resort•Bank of central clearance and transfer•Controller of credit

RBI was set up in 1935 under the RBI act of 1934. It was nationalized in 1949.

Quantitative Methods

•Bank rate policy•Open market operation•Variable reserve ratio

Qualitative Method

• Margin requirement•Credit Rationing•Regulation of consumer credit•Direct action

Quantitative Method Bank rate policy

It is also known as discount rate. Bank rate extend credit to commercial bank. It will be more proper to say rediscount the–Bills of exchange.

As bank rate increases credit creation by banks reduces and as it reduces the credit creation by bank increases.

Open Market Operations• It refers broadly to the purchase and

sale by central bank of variety of assets such as foreign exchange, gold, government securities and even companies shares

• Securities are brought results in increase in money supply and when securities are sold the money supply decreases.

Variable reserve ratio• CRR ( Cash reserve ratio) All

commercial bank required to keep a certain portion of their demand and time liabilities.

• As percentage of CRR increases credit creation by banks reduces and percentage

of CRR reduces the credit creation by bank increases.

Qualitative control These are selective credit control

designed specially to curb excess flow of credit in selected area without affecting other type of credit.

Margin requirement• If aperson A wants a loan of Rs 10,000

to stock rice& margin requirement is 10% then A will get only Rs 9000/. If MR is 25%,A will get Rs7500/.

Thus high margin not only restricts the credit creating power of banks but also restricts unnecessary hoarding of essential commodities.

Regulation of consumer credit• During inflation condition the RBI

may ask the commercial bank not to grant loans and advances to the consumers. During depression limited credit policy is adopted.

S.L.R.

: Commercial Bank are required to maintain with themselves a certain proportion of their total deposit in near money form. SLR may be increased or decreasedAs when required.

Credit Rationing• The central bank can fix maximum

limit or ceiling on loans and advances.

Direct Actions• Refuse rediscounting of bills of

commercial banks• To refuse loans• To impose monetary penalties• Alter the condition of rediscounting• To disallow banks to conduct

banking business

Commercial banks are the oldest, biggest and fastest growing financial intermediaries They are important depositories of public saving and most

important disburser of finance.

Management of Reserve

Creation of Credit

Origin of commercial bank can be traced back in vedic period( use of hundi)

Middle of 19th century Indigenous banking

First bank Bank of Hindustan (1770)

Later we had Presidency Bank in Calcutta Bombay & Madras

1919 Imperial Bank of India

Growth and Structure of commercial bankImportance of Indian commercial Banks in National Economy

Year Deposit/N.I. Deposit / Saving

Share in financial asset

1951-56 10 16.6

1960-61 13 14.2

1975-76 24 41.8

1980-81 35.9 45.8 73.81990-91 48.1 31.8 65.5

1994-95 52 40.2 64.8

1995-96 44.82 28.2 64.7

2001-02 61.5 37.83 72.2

Indian Banking system

RBI

Schedule Banks Non Scheduled Bank

State Coop. Commercial Bank

BanksIndian Foreign

PSU Pvt. Sector Bank

Banks

SBI & itssubsidaries

Other nationalizedbank

Regional ruralbank

Central Coop. bankBank and Primary CreditSocieties

CommercialBank

Apart from usual function, foreign bank are now playing a special role in shaping the attitude ,perceptions and policies of foreign government, corporate, and other clients towards India

(a)Structuring and syndicating project finance for crucial sector(b)Advising and introducing overseas companies in joint venture

and collaboration with Indian Companies©Helping to bring the FII and Indian companies(d) Managing and syndicating the euro issue of debt and equity(e) Introducing new technology in data management and

information system

The Indian Banks include 27 PSU banks ,196 RRB,30 private sector bank and 44 Foreign banks in 2001-02

Liabilities of Banks

Deposits

Demand deposit Current deposit Call deposit Term deposit

Factors affecting composition of Bank deposit

(a)Increase in national income(b)Expansion of banking facilities(c)Increase in banking habits(d)Increase in the relative rate of return on deposit(e)Increase in deficit financing(f) Increase in bank credit(g)Inflow of deposit from NRI’s (h)Growth in substitutes

Banking Assets

1. Cash in hand and balance with RBI2. Asset with banking system3. Investment in government and other approved securities4. Bank credit among these assets, and is influence by the RBI policy,quantitatively, bank credit and investment in government securities.

Banking InnovationsRetail BankingBank as authorized dealerCustomer serviceLead Bank schemeService area approachMicro financeConsortium approachCredit cards Local Area Banks