The central banking system establishes a central bank that manages monetary policy by controlling the supply of money and credit. The Reserve Bank of India is the central bank of India, established in 1935. It manages monetary policy through instruments of quantitative and qualitative credit control. Quantitative controls include bank rate, open market operations, reserve requirements, and credit ceilings. Qualitative controls include changing margin requirements, regulating consumer credit, moral suasion, publishing information, and direct actions.

1. Central Banking System

2. Central Banking System
• Topics
– Introduction
– Functions of Apex Bank of the Country
– Instruments of Credit Control
– Qualitative Credit Control

3. Introduction

4. Central Bank - Introduction
• Definition – A central bank is an institution that
manages a state’s currency, money supply, and
interest rates. Central banks also usually oversee
the commercial banking system of their respective
countries. Eg. ECB, Federal Reserve of US, RBI
• Primary Functions
– Manage Nations’s money supply(monetary policy)
• Managing interest rates
• Setting reserve requirement
• Acting as the Lender of last resort to banking sector

5. Reserve Bank of India

6. Reserve Bank of India
• Establishment
– The Reserve Bank of India was established on
April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934.
– The Central Office of the Reserve Bank was
initially established in Calcutta but was
permanently moved to Mumbai in 1937. The
Central Office is where the Governor sits and
where policies are formulated.
– Though originally privately owned, since
nationalisation in 1949, the Reserve Bank is fully
owned by the Government of India.

7. Reserve Bank of India
• Organisation of Reserve Bank
– The bank is managed by a central board of
directors and four local boards of directors.

8. Reserve Bank of India
• Central Board
• The Reserve Bank's affairs are governed by a central board
of directors. The board is appointed by the Government of
India in keeping with the Reserve Bank of India Act.
• Appointed/nominated for a period of four years
– Constitution:
• Official Directors
– Full-time : Governor and not more than four Deputy Governors
• Non-Official Directors
– Nominated by Government: ten Directors from various fields and
two government Officials
– Others: four Directors - one each from four local boards
– Functions
• General superintendence and direction of the Bank's affairs

9. Reserve Bank of India
• Local Boards
– One each for the four regions of the country in
Mumbai, Calcutta, Chennai and New Delhi
– Membership:
• consist of five members each
• appointed by the Central Government
• for a term of four years
– Functions
• To advise the Central Board on local matters and to
represent territorial and economic interests of local
cooperative and indigenous banks; to perform such
other functions as delegated by Central Board from
time to time.

10. Reserve Bank of India
• Legal Framework
– Umbrella Acts
• Reserve Bank of India Act, 1934: governs the
Reserve Bank functions
• Banking Regulation Act, 1949: governs the
financial sector

11. Reserve Bank of India
– Acts governing specific functions
• Public Debt Act, 1944/Government Securities Act
(Proposed): Governs government debt market
• Securities Contract (Regulation) Act, 1956: Regulates
government securities market
• Indian Coinage Act, 1906:Governs currency and coins
• Foreign Exchange Regulation Act, 1973/ Foreign
Exchnage Management Act, 1999: Governs trade and
foreign exchange market
• Payement and Settlement Systems Act: Provides for
regulation and supervision of payment systems in
India"

12. Reserve Bank of India
– Acts governing Banking Operations
• Companies Act, 1956:Governs banks as
companies
• Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970/1980: Relates to
nationalisation of banks
• Bankers' Books Evidence Act
• Banking Secrecy Act
• Negotiable Instruments Act, 1881

13. Reserve Bank of India
– Acts governing Individual Institutions
• State Bank of India Act, 1954
• The Industrial Development Bank (Transfer of
Undertaking and Repeal) Act, 2003
• The Industrial Finance Corporation (Transfer of
Undertaking and Repeal) Act, 1993
• National Bank for Agriculture and Rural
Development Act
• National Housing Bank Act
• Deposit Insurance and Credit Guarantee
Corporation Act

14. Functions of the Apex Bank of the
Country

15. Main Functions
• Monetary Authority:
– Formulates, implements and monitors the monetary policy.
– Objective: maintaining price stability and ensuring adequate flow of
credit to productive sectors.
• Regulator and supervisor of the financial system:
– Prescribes broad parameters of banking operations within which the
country's banking and financial system functions.
– Objective: maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the public.
• Manager of Foreign Exchange
– Manages the Foreign Exchange Management Act, 1999.
– Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.

16. Main Functions• Issuer of currency:
– Issues and exchanges or destroys currency and coins not fit for circulation.
– Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.
• Developmental role
– Performs a wide range of promotional functions to support national objectives.
• Related Functions
– Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.
– Banker to banks: maintains banking accounts of all scheduled banks.

17. Instruments of Credit Control

18. Credit Control
Monetary Policy
refers to the control of credit and total Money supply. This policy is also known as the
central bank’s policy in control of credit. Control of Money supply is very
important for the economic growth of a country. If there is excess supply of money
then the result will be inflation whereas tight control over money ,ay cause
depression and unemployment. Therefore monetary policy is implemented to
achieve various objectives such as achievement of price stability, increase
employment opportunities, stimulate economic growth, achieve stable rate of the
Currency and increase in investment. Monetary policy is implemented by the
central bank and it uses different methods for this purpose.
These are classified into two types :
Quantitative Credit Control
Qualitative Credit Control

19. Quantitative Credit Control

20. Quantitative Credit Control
• Bank Rate
• Open Market Operations
• Changes in the Reserve Ratio
• Credit Rationing

21. Quantitative Credit Control
• Bank Rate:
– Bank rate refers to the rate at which central bank rediscounts bills of
exchange. In other words it is the rate of interest at which the
central bank advances loans to the commercial banks. In case of
inflation central bank increases the bank rate due to which
commercial banks have to increase the interest rate. Due to
increase in the interest rate demand for the loans of commercial
banks reduces and the Money supply in the country shrinks. In this
way the inflation in the country is controlled. On the other hand bank
rate is reduced in case of depression which results in the reduction
of the interest rate and the money supply in the country is
increased.

22. Quantitative Credit Control
• Open Market Operations:
– When the central Bank purchase or sell government securities in
the Open market such as stock exchange it is called open market
operations. If central banks want to reduce the money supply in the
country it sells government securities to the commercial bank and
the people. In this way the amount of cash with people and
commercial banks is reduced due to which commercial banks
decrease the number of loans whereas people’s demand for goods
and services shrinks. Similarly if the central bank wants to increase
the money supply it purchases the government securities due to
which the amount of cash with commercial banks and people
increases.

23. Quantitative Credit Control
• Changes in the Reserve Ratio:
– Every member bank keeps a certain percentage of its total
deposits with the central bank known as Cash Reserve Ratio.
Central bank uses reserve ratio to increase or decrease the
Money supply in the country. For example if the central bank
wants to decrease the money supply it raises the reserve ratio
due to which less amount of cash is left with the commercial
banks to lend. Due to lower lending the supply of money reduces
along with the demand for goods and services which results in
the control of inflation. Similarly central bank can increase the
money supply by lowering the reserve requirements.

24. Quantitative Credit Control
• Credit Rationing:
– Central bank uses credit rationing to fix the credit ceiling
allowed for each and every commercial bank. It means
that the central bank fixes the credit limit for each
commercial bank and does not give credit to them
beyond that limit. Whenever the central bank
desires to decrease the money supply it
decreases the limit upto which it can give loans to
the member banks. Similarly central bank can
increase the money supply by increasing the
credit limit.

25. Qualitative Credit Control

26. Qualitative Credit Control
• Change in Margin Requirements
• Regulation of Customer’s Credit
• Moral Suasion
• Publicity
• Direct Action

27. Qualitative Credit Control
• Change in Margin Requirements:
– Every commercial bank has to keep a margin whenever it
extends loans against the security. It means that the amount of
loan is lower than the actual value of security. Eg. If actual value
of security is 100 and the amount of loan is 85, therefore margin
requirement is 15%. Central bank can increase or decrease the
money supply by changing the margin requirements. For
example if central bank wants to decrease the money supply it
can do so by increasing the margin requirements. In this way
amount of loan decreases.

28. Qualitative Credit Control
• Regulation of Customer’s Credit:
– Consumer credit facility refers to the act of selling a
consumer good on credit basis to the people. The method
is used by the government or central bank to implement
certain regulations on goods sold on credit. If the central
bank wants to increase the money supply it can do so by
adopting a lenient policy about the credit for purchase of
consumer goods. Similarly central banks can reduce the
money supply by putting restrictions on consumer credit.

29. Qualitative Credit Control
• Moral Suasion:
– In some cases central bank morally persuades or
requests the commercial banks not to indulge
themselves in such economic activities which are
against the interest of the country. It regularly advices
and guides the member banks to follow a particular
policy for loans and refrain themselves from giving
loan for speculative purposes.

30. Qualitative Credit Control
• Publicity:
– Central banks also publishes details concerning its policies
and important information about assets and liabilities,
credit and business situation etc. of commercial banks.
This helps to make commercial banks as well as general
public realize the monetary needs of the country. Central
bank reveals some of the important information about the
commercial banks so that the people know about the
various activities of commercial banks and can protect
themselves from any potential loss in the future.

31. Qualitative Credit Control
• Direct Action:
– Direct action is the last resort through which central
bank takes a direct action against the bank which
does not act in accordance with the policy of the
central bank. In case of direct action, the central bank
can impose fine and penalty and can refuse to give
out loans to the commercial banks. Such type of
pressure keeps commercial banks away from
undesired credit activities.

32. Thank You
Rohit Kochhar