Rbi and commercial banking in India

1. RESERVE BANK OF INDIA (RBI)
& COMMERCIAL BANKS IN
INDIA
BY :
KOMAL
KESHAV

2. Contents
 Introduction
 Brief History
 Organizational Structure
 Objective and reasons for establishment of RBI
 Functions of RBI
 Banks in India
 Commercial Banks
 Functions of Commercial banks
 Types of Commercial banks

3. Introduction
 The Reserve Bank of India is India's central
banking institution, which controls the monetary
policy of the Indian Rupee.
 The Reserve Bank of India was established on
April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934.

4. Brief History
 It was set up on the recommendations of the
HILTON YOUNG COMMISSION.
 It was started as Share-Holders Bank with a paid
up capital of 5 Cr.
 It was established on 1st of April 1935
 Initially it was located in Kolkata
 It moved to Mumbai in the year 1937
 Initially it was privately owned
 It was the 1st bank to be Nationalized in 1949 . It
has 22 regional offices, most of them in state
capitals.

5.  Since nationalization in 1949, the Reserve Bank is
fully owned by the Government of India
 Its First governor was Sir Osborne A.Smith(1st
April 1935 to 30th June 1937)
 The First Indian Governor was “Sir Chintaman
D.Deshmukh”(11th August 1943 to 30th June
1949)
 On 27th June 2006, the Union Government of
India reconstituted the Central Board of Directors
of the Reserve Bank of India(RBI) with 13
Members, including Azim Premji and Kumar
Mangalam Birla

6. Organizational Structure
 Governor
 Deputy Governor
 Executive Directors
 Chief General Manager
 General Managers
 Deputy General Managers
 Assistant General Managers
 Managers
 Assistant Managers
 Support staff

7. Governors of RBI
 The Governor of the Reserve Bank of
India (RBI) is the chief executive of
India's central bank and the ex-officio chairperson
of its Central Board of Directors. Indian
Rupee currency notes, issued by the RBI, bear the
governor's signature. Since its establishment in
1935 by the British colonial government, the RBI
has been headed by 23 governors. The term of
office typically runs for 3 years.
 The position is currently held by Urjit Patel, who
took over from Raghuram Rajan on 4 September
2016.

8. OBJECTIVE AND REASONS
FOR ESTABLISHMENT OF RBI
 To manage the Monetary and credit system of the country
 To stabilize internal and external value of rupee
 For balanced and systematic development of banking in the
country
 For the development of organized money market in the country
 For proper arrangement of agriculture and industrial finance
 For proper management of public debt
 To establish monetary relations with other countries of the world
and international financial institutions
 For centralization of cash reserves of commercial banks
 To maintain balance between demand and supply of currency

9. Functions of RBI
Monetary
Policy
Banker to
Banks
Issue of
Currency
Foreign
Exchange
Banker to
Government
Regulation
of Banking
system

10. Monetary Policy
 Monetary policy is the macroeconomic policy laid down
by the central bank. It involves management of money
supply and interest rate and is the demand side economic
policy used by the government of a country to achieve
macroeconomic objectives like inflation, consumption,
growth and liquidity.
 The Reserve Bank of India (RBI) is vested with the
responsibility of conducting monetary policy with the
primary objective of maintaining price stability while
keeping in mind the objective of growth. This
responsibility is explicitly mandated under the Reserve
Bank of India Act, as amended in 2016 and notified in the
official Gazette on May 14, 2016.

11. Instruments of Monetary Policy
 Repo Rate: Repo rate is the rate at which the central bank
of a country lends money to commercial banks in the event
of any shortfall of funds. Repo rate is used by monetary
authorities to control inflation.
 Reverse Repo Rate: It is the rate at which the central
bank of a country borrows money from commercial banks
within the country. It is a monetary policy instrument
which can be used to control the money supply in the
country.

12. Continued..
 Marginal Standing Facility (MSF): It is a window
for banks to borrow from the Reserve Bank of India in
an emergency situation when inter-bank liquidity dries
up completely.
 Bank Rate: It is the rate at which the Reserve Bank is
ready to buy or rediscount bills of exchange or other
commercial papers. This rate has been aligned to the
MSF rate and, therefore, changes automatically as and
when the MSF rate changes alongside policy repo rate
changes.

13.  Cash Reserve Ratio (CRR): It is a specified minimum
fraction of the total deposits of customers, which commercial
banks have to hold as reserves either in cash or as deposits
with the central bank. CRR is set according to the guidelines
of the central bank.
 Statutory Liquidity Ratio (SLR): It is the Indian government
term for reserve requirement that the commercial banks in
India require to maintain in the form of gold, government
approved securities before providing credit to the customers.
 Market Stabilisation Scheme (MSS): These securities are
issued with the objective of providing the RBI with a stock of
securities with which it can intervene in the market for
managing liquidity. These are not issued to meet the
government expenditure.

14. CURRENT RATES
Repo Rate 6.25%
Reverse Repo Rate 5.75%
Marginal Standing Facility Rate 6.75%
Bank Rate 6.75%
Cash Reserve Ratio 4%
Statutory Liquidity Ratio 20.75%

15. Banker to Banks
 Banks are required to maintain a portion of their demand and
time liabilities as cash reserves with the Reserve Bank. They also
need to keep accounts with the Reserve Bank for settling inter-
bank obligations. In order to facilitate a smooth inter-bank
transfer of funds, or to make payments and to receive funds on
their behalf, banks need a common banker. By providing the
facility of opening accounts for banks, the Reserve Bank
becomes this common banker, known as ‘Banker to Banks’
function.
 The Reserve Bank also acts as the ‘lender of the last resort’. It
can come to the rescue of a bank that is solvent but faces
temporary liquidity problems by supplying it with much needed
liquidity when no one else is willing to extend credit to that
bank.

16. Issue Of Currency
 Like any other central bank, the RBI acts as a sole currency
authority of the country. It issues notes of every denomination
except one-rupee note and coins and small coins—through the
Issue Department of the Bank.
 One-rupee notes and coins and small coins are issued by the
Government of India. In actuality, the RBI also issues these coins
on behalf of the Government of India.
 It not only issues currency but also exchanges or destroys
currency and coins not fit for circulation. The objective of
currency issue is merely to give the public adequate quantities of
currency notes and coins and that too of good quality.

17. Foreign Exchange
 One of the essential central banking functions performed by the
RBI is that of maintaining the external value of rupee. The RBI
has the authority to enter into foreign exchange transactions
both on its own account and on behalf of the Government. The
official external reserve of the country consists of monetary gold
and foreign assets of the Reserve Bank.
 The Reserve Bank, as the custodian of the country’s foreign
exchange reserves, is vested with the duty of managing the
investment and utilization of the reserves in the most
advantageous manner. Being a manager of foreign exchange, it
manages the Foreign Exchange Management Act, (FEMA)
1999. As a manager of foreign exchange, the RBI helps in
facilitating trade (external) and payment and aims at promoting
orderly development and maintenance of the foreign exchange
market in India.

18. RBI reference exchange rates
Currency Rate (as on 21th november,2016)
INR / 1 USD : 68.07
INR / 1 Euro : 72.34
INR / 100 Jap. YEN : 61.47
INR / 1 Pound Sterling : 85.14

19. Banker and Debt Management to
Government
 The Reserve Bank of India Act, 1934 requires the Central
Government to entrust the Reserve Bank with all its
money, remittance, exchange and banking transactions in
India and the management of its public debt. The
Government also deposits its cash balances with the
Reserve Bank. The Reserve Bank may also, by
agreement, act as the banker and debt manager to State
Governments. Currently, the Reserve Bank acts as banker
to all the State Governments in India (including Union
Territory of Puducherry), except Sikkim. For Sikkim, it
has limited agreement for management of its public debt.

20. Regulation of Banking System
 One of the most important functions of RBI is to work
as regulator and supervisor of financial system. The
financial system in India includes Commercial Banks,
Regional Rural Banks, Local Area Banks, Cooperative
Banks, Financial Institutions including Development
Financial Institutions (DFIs) and Non-Banking
Financial Companies.
 RBI derives its regulating powers for Indian Banking
System from the provisions of the Banking Regulation
Act 1949. For other entities, it derives power from the
RBI act 1934. The objectives of this function are to
protect the interest of the depositors and maintain the
safety and soundness of the banking and Financial
System of the country.

21. Latest In RBI
 RBI has appointed M Rajeshwar Rao as Executive
Director following retirement of G Mahalingam.
 RBI has issued new series of notes for 500 rupees
& 2000 rupees denomination with improved
features & newer sizes on order of Prime Minister.
 Finance Minister has asked RBI to form special
cell to monitor fake notes.

22. Continued…
 RBI is unlikely to cut rate despite easing inflation
 Banks has started using indelible ink to avoid
repeated money exchange
 RBI asks banks to waive ATM charges till
December 30
 RBI has set March 2017 deadline for banks to
clean up books ‘stands’

23. Banks In India
 Commercial Banks: According to the RBI,
“Commercial Banks refer to both scheduled and non-
scheduled commercial banks which are regulated
under Banking Regulation Act, 1949.” Commercial
banks operate on a ‘for-profit’ basis. They primarily
engage in the acceptance of deposit and extend loans
to the general public, businesses and the government.
 Scheduled Banks: By definition, any bank which is
listed in the 2nd schedule of the Reserve Bank of India
Act, 1934 is considered a scheduled bank. To qualify
as a scheduled bank, the paid up capital and collected
funds of the bank must not be less than Rs5 lakh.

24. Continued…
 Non-Scheduled Banks: Non-scheduled banks by definition are
those which are not listed in the 2nd schedule of the RBI act,
1934. Banks with a reserve capital of less than 5 lakh rupees
qualify as non-scheduled banks. Unlike scheduled banks, they
are not entitled to borrow from the RBI for normal banking
purposes, except, in emergency or “abnormal circumstances.”
Jammu & Kashmir Bank is an example of a non-scheduled
commercial bank.
 Cooperative Banks: Unlike commercial banks, who are driven
by profit, co-operative banks work on a “no profit, no loss”
basis. These are regulated by the Reserve Bank of India under
the Banking Regulation Act, 1949 and Banking Laws
(Application to Co-operative Societies) Act, 1965.

25. Continued…
 Regional Rural Banks: Regional Rural Banks or
RRBs, simply put, serve the rural areas and
agricultural sectors with basic banking and
adequate financial services. The RRBs are owned
by the central government (50%), the state
government (15%) and the sponsor bank (35%).
Several commercial banks have sponsored RRBs.
RRBs were set up to eliminate other unorganized
financial institutions like money lenders and
supplement the efforts of co-operative banks.

26. Commercial Banks
 A commercial bank is a financial institution which performs the
functions of accepting deposits from the general public and
giving loans for investment with the aim of earning profit.
 In fact, commercial banks, as their name suggests, axe profit-
seeking institutions, i.e., they do banking business to earn profit.
 They generally finance trade and commerce with short-term
loans. They charge high rate of interest from the borrowers but
pay much less rate of Interest to their depositors with the result
that the difference between the two rates of interest becomes the
main source of profit of the banks. Most of the Indian joint stock
Banks are Commercial Banks such as Punjab National Bank,
Allahabad Bank, Canara Bank, Andhra Bank, Bank of Baroda,
etc.

27. Core functions and services
 Accepting money on various types of Deposit
accounts
 Lending money in the form of Cash: by overdraft,
instalment loan etc.
 Inter- Financial Institutions relationship
 Cash management
 Treasury management
 Private Equity financing
 Issuing Bank drafts and Bank cheques
 Processing payments via telegraphic transfer, internet
banking, or other payment methods.

28. Agency Functions
 To collect and clear cheques, dividends and interest
warrant.
 To make payments of rent, insurance premium, etc.
 To deal in foreign exchange transactions.
 To purchase and sell securities.
 To act as trustee, attorney, correspondent and
executor.
 To accept tax proceeds and tax returns.

29. Utility Functions
 To provide safety locker facility to customers.
 To provide money transfer facility.
 To issue traveller's cheque.
 To act as referees.
 To accept various bills for payment: phone bills,
gas bills, water bills, etc.
 To provide merchant banking facility.
 To provide various cards: credit cards, debit cards,
smart cards, etc.

30. Types of Commercial banks
 Public Sector Banks: Refer to a type of
commercial banks that are nationalized by the
government of a country. In public sector banks,
the major stake is held by the government. In
India, public sector banks operate under the
guidelines of Reserve Bank of India (RBI), which
is the central bank. Some of the Indian public
sector banks are State Bank of India (SBI),
Corporation Bank, Bank of Baroda, Dena Bank,
and Punjab National Bank.

31. Continued..
 Private Sector Bank: Refer to a kind of
commercial banks in which major part of share
capital is held by private businesses and
individuals. These banks are registered as
companies with limited liability. Some of the
Indian private sector banks are Vysya Bank,
Industrial Credit and Investment Corporation of
India (ICICI) Bank, and Housing Development
Finance Corporation (HDFC) Bank.

32. Continued…
 Foreign Banks: Refer to commercial banks that are
headquartered in a foreign country, but operate branches
in different countries. Some of the foreign banks operating
in India are Hong Kong and Shanghai Banking
Corporation (HSBC), Citibank, American Express Bank,
Standard & Chartered Bank, and Grindlay’s Bank. In
India, since financial reforms of 1991, there is a rapid
increase in the number of foreign banks. Commercial
banks mark significant importance in the economic
development of a country as well as serving the financial
requirements of the general public.

33. References
 www.rbi.org
 www.wikipedia.org
 www.investopedia.com
 www.economictimes.indiatimes.com
 www.dnaindia.com
 www.livemint.com