SEBI RBI IRDA

1. Financial Institutions
GOVERNMENT-RBI-SEBI-IRDA

2. Objective
 RBI
 GOVERNMENT AND RBI RELATIONSHIP
 STRUCUTRES AND SIGNIFICANCE OF:
 G-SEC MARKET
 MONEY MARKET
 BOND/CREDIT MARKET

3. RBI-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.

4. 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 Official
 Others: four Directors - one each from four local boards
 Functions : General superintendence and direction of the Bank's affairs

5. Profile of Central Board Directors
 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.

6. Financial Supervision
The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The
Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.
 Objective
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks,
financial institutions and non-banking finance companies.
 Constitution
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is
chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor,
usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the
Board.

7.  BFS meetings
The Board is required to meet normally once every month. It considers inspection
reports and other supervisory issues placed before it by the supervisory
BFS through the Audit Sub-Committee also aims at upgrading the quality of the
statutory audit and internal audit functions in banks and financial institutions. The
audit sub-committee includes Deputy Governor as the chairman and two Directors
the Central Board as members.
 The BFS oversees the functioning of Department of Banking Supervision (DBS),
Department of Non-Banking Supervision (DNBS) and Financial Institutions
Division (FID) and gives directions on the regulatory and supervisory issues.

8. Functions
 Some of the initiatives taken by BFS include:
 restructuring of the system of bank inspections
 introduction of off-site surveillance,
 strengthening of the role of statutory auditors and
 strengthening of the internal defences of supervised institutions.
 The Audit Sub-committee of BFS has reviewed the current system of concurrent
norms of empanelment and appointment of statutory auditors, the quality and
coverage of statutory audit reports, and the important issue of greater transparency
and disclosure in the published accounts of supervised institutions.
Current Focus
 supervision of financial institutions
 consolidated accounting
 legal issues in bank frauds
 divergence in assessments of non-performing assets and
 supervisory rating model for banks.

9. Role of Central Bank (RBI)
 Firstly the central bank could do this by setting a necessary reserve ratio, which
would restrict the ability of the commercial banks to increase the money supply
by loaning out money. If this condition were above the ratio the commercial
banks would have wished to have then the banks will have to create fewer
deposits and make fewer loans then they could otherwise have profitably done.
If the central bank imposed this requirement in order to reduce the money
supply, the commercial banks will probably be unable to borrow from the
central bank in order to increase their cash reserves if they wished to make
further loans. They might try to attract further deposits from customers by
raising their interest rates but the central bank may retaliate by increasing the
necessary reserve ratio.

10.  The central bank can influence the supply of money through special deposits.
These are deposits at the central bank which the banking sector is required to
lodge. These are then frozen, thus preventing the sector from accessing them
even though interest is paid at the average Treasury bill rate. Making these
special deposits reduces the level of the commercial banks’ operational deposits
which forces them to cut back on lending.
 The supply of money can also be prohibited by the central bank by adjusting its
interest rate which it charges when the commercial banks wish to borrow money
(the discount rate). Banks generally have a ratio of cash to deposits which they
consider to be the minimum safe level. If command for cash is such that their
reserves fall below this level they will able to borrow money from the central bank
at its discount rate. If market rates were 8% and the discount rate were also 8%,
then the banks might decrease their cash reserves to their minimum ratio
knowing that if demand exceeds supply they will be able to borrow at 8%. The
central bank, even if, may raise its discount rate to a value above the market level,
in order to encourage banks not to reduce their cash reserves to the minimum
during excess loans. By raising the discount value to such a level, the commercial
banks are given an incentive to hold more reserves thus reducing the money
multiplier and the money supply.

11.  Another way the money supply can be affected by the central bank is through its
operation of the interest rate. By raising or lowering interest rates the demand for
money is respectively reduced or increased. If it sets them at a certain level it can
clear the market at level by supplying sufficient money to match the demand.
Alternatively it could fix the money supply at a convinced rate and let the market
clear the interest rates at the balance. Trying to fix the money supply is not easy
so central banks regularly set the interest rate and provide the amount of money
the market demands.
 The central bank may also involve the money supply through operating on the
open market. This allows it to influence the money supply through the financial
base. It may choose to either buy or sell securities in the marketplace which will
either inject or remove money respectively. Thus the monetary base will be
affected causing the money supply to modify.

12. Role of Government
 To increase the constancy of Financial Institutions and Markets Government
intervenes in the interest rates and money supply in the Money Markets.
Government has several ways to control income and interest rates which can be
divided into two broad groups such as,
 Fiscal policy
 Monetary policy
The government to adjust the exchange rate intervenes with the foreign exchange
markets; there may be a result on the financial base and the supply of money. When the
currency is falling, foreign currencies should be sold and the currency should be bought
to steady its price. The use of deposits of the national currency to do this suggest that
the prepared deposits of the banking sector must be reduced, causing the financial base
to fall, affecting the supply of money. Equally by selling the national currency to
decrease its rate, the monetary base will increase. Securities may be sold on the open
market in an effort to dampen the effects of inflows of the national currency, but this
would imply a raise in interest rates and cause the currency to rise further still. A
number of institutions can affect the supply of money but the greatest impact on the
money supply is had by the Reserve bank and the commercial banks.

13. Structures of
different type of
Markets in India
G-SEC – MONEY MARKET –
BOND MARKET

14. Mixed economy based planned period
 Public/Govt. ownership of financial institutions - RBI, Nationalised banks, Special
purpose financial institutions
 Investors' protection - Companies act, Securities contract act
Money Market Meaning
 Prof Sayers- money market is that area of market that deals in short term capital.
 Market for funds and assets that are close substitutes for money
 Focuses on providing means by which government and institutions are able to
rapidly adjust their actual liquidity position.

16. Instruments of Money Market
 Call money instruments- one day loan
 Treasury bills- meeting short term deficits of govt.
 Commercial papers- short term instruments issued by corporate- introduced in
Jan 1990
 Certificate of deposits- issues by banks to the depositor, introduced in June 989-
lowest period 15 days for 5 lakhs
 Repo transactions- maturity of 1 day to six months
 Money market mutual funds-introduced by RBI in April 1992 and regulated by
SEBI

17. Capital Market Meaning
 Market where long term and medium term financial instruments are traded.
This market consists of two parts:
Primary market
By prospectus
 Offer for sale
 Private placement
 Right issue
 Right issue
 Employees stock option
 Sweat equity
Secondary Market
 Located at a fixed place
 Securities of listed companies are traded
 Purpose is to transfer ownership

19. Instruments of Capital Market
 Equity shares
 Preference shares
 Debentures/ bonds
 Innovative debt instruments - Convertible debentures/bonds, Warrants, Zero
interest bond, Secured premium notes, Floating rate bond
 Forward contract - Not standardized, regulated through trading, margin is
required
 Futures - Standardized , traded at over the counter market, involves counter party
risk

20. STRUCUTRE
OF INDIAN
DEBT
MARKET

22. Reference readings
 http://economictimes.indiatimes.com/news/economy/policy/government-
appoints-monetary-policy-committee-to-help-rbi-set-interest-
rates/articleshow/54472849.cms
 https://www.ccilindia.com/CBLO/Pages/Introduction.aspx