Anup RBI an Overview Study

8/10/2019 Anup RBI an Overview Study

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TABLE OF CONTENTS

1.RESEARCHMETHODOLOGY

2.INTRODUCTION

3.HISTORY

4. BACKGROUNDSTORY

5.ORGANISATIONAL STRUCTUREOFRBI

6.DEPARTMENTSOFRBI

7.FUCTIONSOFRBI

8.MAJORBANKING SECTOR REFORMS SINCE 1991

9.CONCLUSION


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RESEARCH METHODOLOGY:

Secondary data has been used. The study is descriptive and analytical in nature.

Books and other reference as guided by Faculty of Law of Banking have been

primarily helpful in giving this project a firm structure. Websites, dictionaries and

articles have also been referred.


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INTRODUCTION

A bank is a financial institution that provides banking and other financial services

to their customers. A bank is generally understood as an institution which provides

fundamental banking services such as accepting deposits and providing loans.

There are also nonbanking institutions that provide certain banking services

without meeting the legal definition of a bank. Banks are a subset of the financial

services industry.

Indian Banking Sector has gone through a series of reforms after the liberalization

of the economy and introduction of financial sector reforms. In the last two

decades of changes happening in the Indian Economy, the Banking Sector has

played a pivotal role in giving a new direction to economy. The changes in the

banking sector can be summed up in two aspectsfirst

it is moving towards the global standards and norms and second the system of

banking has become more customers oriented now. A host of new financial

products have been introduced and the overall financial environment in the country

is getting a lot more mature with people

taking interest in the new products. The apex court of India has played an

important role in molding the face of Indian Banking Sector.

The reserve bank of India is a central bank and was established in April 1, 1935 in

accordance with the provisions of reserve bank of India act 1934. The central

office of RBI is located at Mumbai since inception. Though originally the reserve

bank of India was privately owned, since nationalization in 1949, RBI is fully

owned by the Government of India. It was inaugurated with share capital of Rs. 5

Crores divided into shares of Rs. 100 each fully paid up. The Central Bank is the

apex body of the money market of every nation. In India, central bank is known as


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Reserve Bank of India, in Bangladesh, it is referred as Bangladesh Bank, in USA it

is called as Federal Bank, in Europe it is known as European Central Bank.

Irrespective of the name and the nation, previously the roles and responsibilities of

the central banks were confined to certain stereotype activities such as controller of

credit in the economy, lending the fund to the commercial banks as the lender of

the last resort, providing the loan and advances to the Government of the nation in

the form of deficit financing, controller of the foreign exchanges by devaluating

and revaluating the home currency to ensure that the value of the currency remains

within a particular predefined range as a policy resolution. In this respect, the

RBIs role in banking supervision has changed significantly from 1992 which

should be considered as milestone year in the history of Indian banking sector. RBI

is governed by a central board (headed by a governor) appointed by the central

government of India. RBI has 22 regional offices across India. The reserve bank of

India was nationalized in the year 1949. The general superintendence and direction

of the bank is entrusted to central board of directors of 20 members, the Governor

and four deputy Governors, one Governmental official from the ministry of

Finance, ten nominated directors by the government to give representation to

important elements in the economic life of the country, and the four nominated

director by the Central Government to represent the four local boards with the

headquarters at Mumbai, kolkata, Chennai and New Delhi. Local Board consists of

five members each central government appointed for a term of four years to

represent territorial and economic interests and the interests of cooperative and

indigenous banks.1


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HISTORY

19351950

The Reserve Bank of India was founded on 1 April 1935 to respond to economic

troubles after theFirst World War.RBI was conceptualized as per the guidelines,

working style and outlook presented by DrB. R. Ambedkar as written in his book

The Problem of the Rupee Its origin and its solution. in front of the Hilton

Young Commission.The bank was set up based on the recommendations of the

1926 Royal Commission on Indian Currency and Finance, also known as the

HiltonYoung Commission.The original choice for the seal of RBI was The East

India CompanyDouble Mohur, with the sketch of the Lion and Palm Tree.

However it was decided to replace the lion with the tiger, the national animal of

India. The Preamble of the RBI describes its basic functions to regulate the issue of

bank notes, keep reserves to secure monetary stability in India, and generally to

operate the currency and credit system in the best interests of the country. The

Central Office of the RBI was established in Calcutta (now Kolkata), but was

moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's central

bank, except during the years of the Japanese occupation of Burma (194245),

until April 1947, even though Burma seceded from the Indian Union in 1937. After

thePartition of India in 1947, the bank served as the central bank forPakistan until

June 1948 when theState Bank of Pakistan commenced operations. Though set up

as a shareholders bank, the RBI has been fully owned by theGovernment of

India since its nationalization in 1949.

1950

1960

In the 1950s the Indian government, under its first Prime MinisterJawaharlal

Nehru, developed a centrally planned economic policy that focused on the

agricultural sector. The administration nationalized commercial banks[9]and

established, based on the Banking Companies Act of 1949 (later called the
https://en.wikipedia.org/wiki/World_War_Ihttps://en.wikipedia.org/wiki/B._R._Ambedkarhttps://en.wikipedia.org/wiki/Mohurhttps://en.wikipedia.org/wiki/Japanese_occupation_of_Burmahttps://en.wikipedia.org/wiki/Partition_of_Indiahttps://en.wikipedia.org/wiki/Pakistanhttps://en.wikipedia.org/wiki/State_Bank_of_Pakistanhttps://en.wikipedia.org/wiki/Government_of_Indiahttps://en.wikipedia.org/wiki/Government_of_Indiahttps://en.wikipedia.org/wiki/Jawaharlal_Nehruhttps://en.wikipedia.org/wiki/Jawaharlal_Nehruhttps://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-9https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-9https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-9https://en.wikipedia.org/wiki/Jawaharlal_Nehruhttps://en.wikipedia.org/wiki/Jawaharlal_Nehruhttps://en.wikipedia.org/wiki/Government_of_Indiahttps://en.wikipedia.org/wiki/Government_of_Indiahttps://en.wikipedia.org/wiki/State_Bank_of_Pakistanhttps://en.wikipedia.org/wiki/Pakistanhttps://en.wikipedia.org/wiki/Partition_of_Indiahttps://en.wikipedia.org/wiki/Japanese_occupation_of_Burmahttps://en.wikipedia.org/wiki/Mohurhttps://en.wikipedia.org/wiki/B._R._Ambedkarhttps://en.wikipedia.org/wiki/World_War_I


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Banking Regulation Act), a central bank regulation as part of the RBI.

Furthermore, the central bank was ordered to support the economic plan with

loans.

1960

1969

As a result of bank crashes, the RBI was requested to establish and monitor a

deposit insurance system. It should restore the trust in the national bank system and

was initialized on 7 December 1961. The Indian government found funds to

promote the economy and used the slogan "Developing Banking". The government

of India restructured the national bank market and nationalized a lot of institutes.

As a result, the RBI had to play the central part of control and support of this

public banking sector.

19691985

In 1969, theIndira Gandhi-headed government nationalized 14 major commercial

banks. Upon Gandhi's return to power in 1980, a further six banks were

nationalized.[7]The regulation of the economy and especially the financial sector

was reinforced by the Government of India in the 1970s and 1980s.[11]The central

bank became the central player and increased its policies for a lot of tasks like

interests, reserve ratio and visible deposits. These measures aimed at better

economic development and had a huge effect on the company policy of the

institutes. The banks lent money in selected sectors, like agri-business and small

trade companies.

The branch was forced to establish two new offices in the country for every newly

established office in a town. Theoil crises in 1973 resulted in increasinginflation,

and the RBI restricted monetary policy to reduce the effects.

1985

1991

A lot of committees analysed the Indian economy between 1985 and 1991. Their

results had an effect on the RBI. TheBoard for Industrial and Financial

Reconstruction, theIndira Gandhi Institute of Development Researchand

the Security & Exchange Board of Indiainvestigated the national economy as a
https://en.wikipedia.org/wiki/Indira_Gandhihttps://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-PDF-7https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-PDF-7https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-PDF-7https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-11https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-11https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-11https://en.wikipedia.org/wiki/1970s_energy_crisishttps://en.wikipedia.org/wiki/Inflationhttps://en.wikipedia.org/wiki/Board_for_Industrial_and_Financial_Reconstructionhttps://en.wikipedia.org/wiki/Board_for_Industrial_and_Financial_Reconstructionhttps://en.wikipedia.org/wiki/Board_for_Industrial_and_Financial_Reconstructionhttps://en.wikipedia.org/wiki/Board_for_Industrial_and_Financial_Reconstructionhttps://en.wikipedia.org/wiki/Board_for_Industrial_and_Financial_Reconstructionhttps://en.wikipedia.org/wiki/Board_for_Industrial_and_Financial_Reconstructionhttps://en.wikipedia.org/wiki/Inflationhttps://en.wikipedia.org/wiki/1970s_energy_crisishttps://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-11https://en.wikipedia.org/wiki/Reserve_Bank_of_India#cite_note-PDF-7https://en.wikipedia.org/wiki/Indira_Gandhi


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whole, and the security and exchange board proposed better methods for more

effective markets and the protection of investor interests. The Indian financial

market was a leading example for so-called "financial repression" (Mackinnon and

Shaw). TheDiscount and Finance House of Indiabegan its operations on themonetary market in April 1988; theNational Housing Bank, founded in July 1988,

was forced to invest in the property market and a new financial law improved the

versatility of direct deposit by more security measures and liberalisation.

19912000

The national economy came down in July 1991 and the Indian rupee was

devalued. The currency lost 18% relative to theUS dollar, and theNarsimham

Committeeadvised restructuring the financial sector by a temporal reduced reserve

ratio as well as the statutory liquidity ratio. New guidelines were published in 1993

to establish a private banking sector. This turning point should reinforce the market

and was often calledneo-liberal. The central bank deregulated bank interests and

some sectors of the financial market like the trust and property markets. This first

phase was a success and the central government forced a diversity liberalisation to

diversify owner structures in 1998.

TheNational Stock Exchange of India took the trade on in June 1994 and the RBI

allowed nationalized banks in July to interact with the capital market to reinforce

their capital base. The central bank founded a subsidiary companytheBharatiya

Reserve Bank Note Mudran Private Limitedin February 1995 to produce

banknotes.

Since 2000

TheForeign Exchange Management Actfrom 1999 came into force in June 2000.

It should improve the item in 20042005 (National Electronic Fund

Transfer).The Security Printing & Minting Corporation of India Ltd., a merger of

nine institutions, was founded in 2006 and produces banknotes and coins.

The national economy's growth rate came down to 5.8% in the last quarter of

20082009 and the central bank promotes the economic development.
https://en.wikipedia.org/wiki/United_States_Dollarhttps://en.wikipedia.org/wiki/Narasimham_Committee_on_Banking_Sector_Reforms_(1998)https://en.wikipedia.org/wiki/Narasimham_Committee_on_Banking_Sector_Reforms_(1998)https://en.wikipedia.org/wiki/Narasimham_Committee_on_Banking_Sector_Reforms_(1998)https://en.wikipedia.org/wiki/Narasimham_Committee_on_Banking_Sector_Reforms_(1998)https://en.wikipedia.org/wiki/Neoliberalismhttps://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttps://en.wikipedia.org/wiki/Bharatiya_Reserve_Bank_Note_Mudran_Private_Limitedhttps://en.wikipedia.org/wiki/Bharatiya_Reserve_Bank_Note_Mudran_Private_Limitedhttps://en.wikipedia.org/wiki/National_Electronic_Fund_Transferhttps://en.wikipedia.org/wiki/National_Electronic_Fund_Transferhttps://en.wikipedia.org/wiki/National_Electronic_Fund_Transferhttps://en.wikipedia.org/wiki/National_Electronic_Fund_Transferhttps://en.wikipedia.org/wiki/Bharatiya_Reserve_Bank_Note_Mudran_Private_Limitedhttps://en.wikipedia.org/wiki/Bharatiya_Reserve_Bank_Note_Mudran_Private_Limitedhttps://en.wikipedia.org/wiki/National_Stock_Exchange_of_Indiahttps://en.wikipedia.org/wiki/Neoliberalismhttps://en.wikipedia.org/wiki/Narasimham_Committee_on_Banking_Sector_Reforms_(1998)https://en.wikipedia.org/wiki/Narasimham_Committee_on_Banking_Sector_Reforms_(1998)https://en.wikipedia.org/wiki/United_States_Dollar


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BACKGROUND STORY

The great depression in USA during 1930 created a knee jerking effect in the

global economy. All on a sudden almost all the major banks in USA went for

bankruptcy. The top management of these banks siphoned their fund into European

market and parked the fund into Swiss banks. It was a bolt from the blue for all

USA citizens who suddenly realized in one fine morning that there was hardly any

money in their bank accounts. As a result their purchasing power decreased to a

significant extent and all the macro economic variables such as income,

employment, output and price started to move to the downward direction in a

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circle. On the other hand, exorbitant amount of cash piled up in different banks of

Switzerland due to money laundering. Germany started to borrow fund on a

continuous basis from the banks of Switzerland to purchase the arms which would

be used in war. This was considered as sovereign debt of Germany. The fascist

leader Hitler financed the entire expense of World War II by borrowing the money

from Swiss banks. At the end of World War II, German economy crashed down

and German was unable to repay their debts which created an adverse impact on

the fundamental of all the banks which were operating in Switzerland as huge bad

debt was accumulated in their books of account. The Basel Committee of Banking

Supervision was formed in 1945 to create a framework which can save the

economy of the member nations. Initially the G-7 nations and oil rich nations were

the members of this committee. Basel committee met in 1945, 1954, 1961, 1966

and 1972. The sudden collapse of Soviet Russia and emergence of BRIC nations

compelled Basel committee to include India as a member nation in 1984.


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Implementation of Basel accord took place in 1992 when waves of privatization,

liberalization and globalization entered in India.2


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ORGANISATIONAL STRUCTURE OF RESERVE BANK OF INDIA

RBI or Federal Reserve Bank of India is understood to be the central banking

institution in India that has the duty of controlling the financial policy of the Indian

government. The organizational Structure of Reserve bank of India can be studied

in three different parts.

1.

The central board of directors: It is the main committee of the central

bank. The directors here are being appointed by the government of India for

the term of four years. The central board of directors are vested with the

organization and the management of reserve bank of India. There are twenty

members that constitute the central board of directors. The twenty members

are as follows:

One governor, who is appointed by the government of India and is the

highest authority of Reserve bank of India, The duration of his term, is of

five years. The governor can also be re-appointed.

Four governors deputy, also nominated by the central government for the

term of five years.

Fifteen directors, who are also appointed by the central government. Out of

these fifteen directors four directors are from four local boards each are

nominated by the central government.

Ten administrators nominated by the Central Government are among theconsultants of commerce, industries, finance, political economy and

cooperation. The finance secretary of the govt. of Republic of India is

additionally nominated as Govt. officer within the board. 10 administrators

are nominated for a term of four years. The Governor acts as the Chairman


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of the Central Board of administrators. In his absence a deputy Governor

nominative by the Governor, acts because the Chairman of the Central

Board. The

Governor and 4 deputy Governors are full time officers of the Bank.

2.

Local Boards or the Supportive Bodies:There are 4 local boards from the

regional areas of the four metros of the country namely, new Delhi, Kolkata,

Mumbai and Chennai. The local board is consisting of each 5 members, who

are appointed by the central government for the term of four years. They

represent economic and territorial interests as well as the interests of the

indigenous banks.

3.

Offices and Branches of Reserve Bank of India: The Federal Reserve

Bank of India has four zonal offices. Nineteen of its regional offices are at

the most state capitals and at many major cities in India. Few of them are

settled in Ahmadabad, Bhopal Bangalore, Chandigarh, Delhi, Chennai,

Guwahati, Jaipur, Hyderabad, Patna Kolkata, Mumbai Lucknow, and

Thiruvananthapuram. Besides, nine of its sub-offices are at Agartala,

Dehradun, Gangtok, Panaji Kochi, Ranchi, Raipur Shimla Shillong, and

Srinagar.

The bank has additionally 2 coaching faculties for its officers, viz. Federal Reserve

Bank workers school at metropolis and school of Agricultural Banking at Pune.

There are four Zonal coaching Centres at Bombay, Chennai, metropolis and New

Delhi.3


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Departments of RBI

The various departments of RBI are given below:

1. Department of Information Technology

2. Department of Economic Analysis and Policy

3. Department of Statistical Analysis and Computer Services

4. Monetary Policy Department

5. Premises Department

6. Secretary's Department

7. Press Relations Division

8. Exchange Control Department

9. Rural Planning and Credit Department

10. Financial Institutions Division

11. Department of Banking Supervision

12. Department of Banking Operations and Development

13. Department of Financial Companies

14. Department of Non-Banking Supervision

15. Department of Administration and Personnel Management

16. Human Resources Development Department


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17. Deposit Insurance and Credit Guarantee Corporation

18. Inspection Department

19. Urban Banks Department

20. Department of Currency Management

21. Department of External Investments and Operations

22. Department of Expenditure and Budgetary Control

23. Department of Government and Bank Accounts the local

24. Internal Debt Management Cell

25. Industrial and Export Credit Department

26. Legal Department4


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FUNCTIONS

The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the

statutory basis of the functioning of the bank. The bank was constituted for the

need of following:

-To regulate the issues of banknotes.

- To maintain reserves with a view to securing monetary stability

- To operate the credit and currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows:

Bank of Issue: The RBI formulates, implements, and monitors the monitory

policy. Its main objective is maintaining price stability and ensuring

adequate flow of credit to productive sector.

Regulator-Supervisor of the financial system: RBI prescribes broad

parameters of banking operations within which the countrys banking and

financial system functions. Their main objective is to maintain public

confidence in the system, protect depositors interest and provide cost

effective banking services to the public.

Manager of exchange control: The manager of exchange control

department manages the foreign exchange, according to the foreign

exchange management act, 1999. The managers main objective is to

facilitate external trade and payment and promote orderly development and

maintenance of foreign exchange market in India.

Issuer of currency: A person who works as an issuer, issues and exchanges

or destroys the currency and coins that are not fit for circulation. His main


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objective is to give the public adequate quantity of supplies of currency

notes and coins and in good quality.

Developmental role: The RBI performs the wide range of promotional

functions to support national objectives such as contests, coupons

maintaining good public relations and many more.

Related functions: There are also some of the related functions to the above

mentioned main functions. They are such as, banker to the government,

banker to banks etc.

Banker to government performs merchant banking function for the central

and the state governments; also acts as their banker.

Banker to banks maintains banking accounts to all scheduled banks.

Controller of Credit: RBI performs the following tasks:

It holds the cash reserves of all the scheduled banks.

It controls the credit operations of banks through quantitative and

qualitative controls.

It controls the banking system through the system of licensing, inspection

and calling for information.

It acts as the lender of the last resort by providing rediscount facilities to

scheduled banks.5

Supervisory Functions: In addition to its traditional central banking

functions, the Reserve bank performs certain non-monetary functions of the

nature of supervision of banks and promotion of sound banking in India. The

Reserve Bank Act 1934 and the banking regulation act 1949 have given the


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RBI wide powers of supervision and control over commercial and co-

operative banks, relating to licensing and establishments, branch expansion,

liquidity of their assets, management and methods of working,

amalgamation, reconstruction and liquidation. The RBI is authorized to carry

out periodical inspections of the banks and to call for returns and necessary

information from them. The nationalisation of 14 major Indian scheduled

banks in July 1969 has imposed new responsibilities on the RBI for directing

the growth of banking and credit policies towards more rapid development

of the economy and realisation of certain desired social objectives. The

supervisory functions of the RBI have helped a great deal in improving the

standard of banking in India to develop on sound lines and to improve the

methods of their operation.

Promotional Functions: With economic growth assuming a new urgency

since independence, the range of the Reserve Banks functions has steadily

widened. The bank now performs a variety of developmental and

promotional functions, which, at one time, were regarded as outside the

normal scope of central banking. The Reserve bank was asked to promote

banking habit, extend banking facilities to rural and semi-urban areas, and

establish and promote new specialized financing agencies.

Supervisory role of the Central Bank: Trust in policymaking institutions is

an essential aspect of good governance in democracy. Institutional trust,

which implies ones prediction that everybody can rely on benevolent and

competent policies of a given institution is important to a policy making

body because its legitimacy and policy efficacy depend on it. If the common


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perception of the citizens of the nation is that an institution is not enough

trustworthy, they may not adhere to its policy decisions or they may act with

the purpose of undermining the authority of the institution. In India, private

banks are participating in para banking activities by creating subsidiary. For

instance, ICICI bank is doing the core banking activities where its subsidiary

ICICI Direct is dealing with the brokerage business and its other subsidiaries

such as ICICI Prudential and ICICI Lombard are offering insurance services.

Kotak Mahindra Bank is offering core banking services, its subsidiary Kotak

Mahindra Asset Management Company is selling the mutual fund, Kotak

securities is providing the brokerage service. On the other hand HDFC is a

holding company which is NBFC and providing finance for housing

development purpose. It is offering banking services by its subsidiary HDFC

bank; it is dealing the mutual fund by its subsidiary HDFC Asset

Management Company, it is offering insurance service by its subsidiaries

HDFC Standard Life Insurance Limited and HDFC Ergo General Insurance

Company Limited. PSU banks are dealing with para-banking activities by

creating separate division. The State bank of India is offering core banking

activities, SBI Mutual fund is dealing with the business of asset management

company, SBI life is playing in Life insurance market. Still Indian banking

sector is more or less quite conservative by nature as it did not allow the

banking company to do any other nonbanking business. Similarly players

of any other sector except banking are not yet provided the banking licenses

by RBI. As a result the risk of money laundering as well as fund siphoning

can be reduced to a significant extent. The Parliament of India has approved

the Banking Law bill on 18th December 2012 which could eventually see

many of Indias largest business houses return to banking sector from where

they were compelled to exit after the ex-Prime Minister of India , Mrs Indira


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Gandhi nationalized the banks. The bill has created the provision that voting

right in Private Banks will be confined to the shareholders who have the

ownership of at least 26% and voting right in Public Sector Undertaking

Banks will be restricted to the shareholders who have the ownership of at

least 10%. The minority shareholders can exercise their franchise only by

referendum where opinions of the shareholders are taken either in favour or

against of any motion. Apart from these, according to this new bill, RBI will

have the power to supersede the boards of the bank to inspect the books of

accounts of the associate companies of the bank and RBI will have the

power to inspect the books of other subsidiaries of the bank with the

concerned regulator. The bill allowed the State owned banks to raise capital

through right issue and the competitive commission of India will regulate

anti competitive practices and would also have power to approve the

corporate restructuring such as merger and acquisition (ETIG Database).

Earlier RBI used to follow the CAMEL model for supervising the banks.According to this approach, emphasis was provided to the few parameters such as

capital, asset quality of the bank, management quality, earning quality or net

interest margin of the bank, liquidity position of the bank as well as sensitivity of

the banks toward the market risk. Apart from CAMEL, offsite monitory and

surveillance system, consolidated financial statement and consolidated prudential

report, revised long form audit report were used as the tools of supervision by the

RBI. A gradual slow but steady and silent shift took place from CAMEL based

supervision to risk based supervision. The basic purpose of risk based supervision

is to develop a risk profiling for each bank. A typical risk profile document as

mentioned by RBI incorporates CAMELs rating with trends, detail description of


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key risk features captured under each CAMEL component, summary of key

business risks, SWOT analysis as well as sensitivity analysis (Yamanandra,

2003).The risk based supervision provides major emphasis on risk where risk

arises from the asset liability mismatch in banking sector. A vital issue in the

strategic bank planning is asset and Liability Management (ALM).It is the

assessment and management of financial, operational, business functions which are

endogenous by nature and management as well as mitigate different types of risks

which are exogenous by nature. The objective of ALM is to maximize returns

through efficient fund allocation given an acceptable risk structure. ALM is a

multidimensional process, requiring simultaneous interactions among different

dimensions. If the simultaneous nature of ALM is discarded, decreasing risk in one

dimension may result in unexpected increases in other risks (Tektas, 2009). The

excessive off balance sheet exposure is another area of risk faced by the banks.6

Performance Measurement of the Bank: RBI has to supervise the

performance of different PSU banks, the old generation private banks, the

new generation private banks as well the foreign banks. There are

multifaceted approaches for the performance evaluation of the different

banks, but hardly any standardized approach is prevalent. The performance

of a bank can be analyzed by the four prolonged approach which is

composed of growth, size, sustainability of operations and risk management.

Growth incorporates growth rate in demand deposit, growth rate in loan andadvances, growth rate in core fee income, growth rate in operating profit,

growth rate in total deposit and growth rate in net interest income. Size


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incorporates volume and value of demand deposit, loans and advances,

Balance Sheet size of the bank, total number of branches operating, total

number of ATMs as well as total number of employees of the bank both in

the national and international level. Sustainability of the operation includes

asset quality, productivity and efficiency of the bank. Asset quality

incorporates growth rate of Non Performing Asset, NPA provision coverage

and the ratio of net NPA to net advances. Productivity is measured by cost to

average assets ratio, operating profit per branch, operating profit per

employee. Efficiency is judged by cost to income ratio, ratio of operating

profit to total income, return on average assets, non interest income to total

income, return on average net worth, net interest income to average working

funds, net interest income , the ratio of net interest income to total average

assets and cost of fund. Risk is measured by the capital adequacy ratio and

the ratio of Tier 1 capital to total shareholders capital (Roy, 2012). A new

conceptual dimension is identified to measure the risk of the bank which is

known as Knock out ratio. The knock out ratio is computed by the ratio of

gross NPA to Tier 1 capital of the bank. A bank with high knockout ratio

indicates banks credit appraisal procedure is faulty for which non

performing loans are accumulated.

Credit Control Policies of the Central Bank: The Central bank has the

supreme authority to decide about the monetary policy of a nation. The

liquidity control mechanism followed by the RBI consists of both qualitative

and quantitative policy. Usually the quantitative controls are alternatively

termed as direct control which is equally applicable to the all sectors. The

instruments of the quantitative control includes Bank Rate, Open Market


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Operations (OMO), Cash Reserve Ratio (CRR), Statutory Liquidity Ratio

(SLR), Repurchase Offer (REPO) and Reverse Repurchase Offer(Reverse

REPO). When the purchasing power of the citizen of the nation is suffering

from high inflation, the RBI will raise Bank Rate, CRR, SLR, Repo and

Reverse Repo rate to reduce the credit creating capacity of the commercial

banks. Simultaneously the RBI will prefer to sell their securities to the

commercial bank so that excess liquidity of the bank can be reduced which

will automatically curb the lending power of the banks. When the

Government of India smells the rat of recession, RBI reduces the bank rate,

CRR, SLR, repo and reverse repo rate to boost the credit creating ability of

the banks. Similarly RBI prefers to buy the securities from commercial

banks to enhance the liquidity position of the commercial banks. The

qualitative control or indirect control implies selective control as it is not

applied to all the sectors. Selective control includes regulation of margin

requirement, moral suasion and regulations of consumer credit. If the

inflation rate is quite high, RBI will raise the margin requirement which will

automatically reduce the lending power of the bank. Similarly RBI will

make an appeal to all the commercial banks not to accept those collaterals

which were accepted earlier. Enhancing the standard of collaterals, by

default RBI will be able to reduce the circulation of money within the

economy. Another stringent action RBI can take by reducing the loan ceiling

for each listed items and decreasing the number of installments within which

debtors have to repay the entire loan. On the contrary, in the anticipation of

recession, depression or liquidity crunch in the coming future, RBI reduces

the margin requirement, increases the credit ceiling as well as make a moral

appeal to the commercial banks to accept comparatively inferior quality

collateral just to ensure enough liquidity flow in the economy.


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Sterilization Policy of the Central Bank: RBI plays the crucial role of

sterilization mechanism. In the era of globalization, India is following flexible

exchange rate policy where the exchange rate is market determined but the

government reserves the provision to intervene in extreme cases. It is known as

dirty float mechanism. When there is an excess inflow of the foreign fund in the

economy as Foreign Institutional Investors (FIIs) are penetrating into Indian

Market in order to enjoy the interest rate arbitrage, as an immediate effect, there

will be an appreciation of the home currency. If the home currency appreciates

beyond a certain level due to continuous buying pressure, exporting sectors are

likely to suffer a huge jolt. RBI usually intervenes in the process by buying the

dollar and selling rupee. Technically it is injection of the liquidity in the body of

the economy by RBI to stop further appreciation of home currency. To hedge

the risk of inflation, RBI issues the Government securities such as treasury bills

which are known as Market Stabilization Schemes. These T bills are held to

maturity in nature as they are not traded in the secondary market. These bills are

issued to take away the excess liquidity from the economy. On the other hand,

once there is doom and gloom situation in the economy, FIIs are pulling out

their funds from the domestic market. Due to excessive selling pressure, home

currency depreciates with respect to foreign currency which creates a

devastating effect in the importing sector. If the foreign currency depreciates

beyond a certain level, current account deficit of the nation will be wider. Under

these circumstances, RBI comes as rescuer by selling the dollar and buying the

rupee. This process is known as absorption of the liquidity from the economy.

The injection and absorption of the liquidity to the economy by RBI is known


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as sterilization process which actually immunes the nation against the volatility

of exchange rate to a significant extent.7

MAJOR BANKING SECTOR REFORMS SINCE 1991

The economic reforms initiated in 1991 also embraced the banking system.

Following are the

major reforms aimed at improving efficiency, productivity and profitability of

banks.

New banks licenced in private sector to inject competition in the system.10 in

1993 and 2 more in 2003. Another lot of new banks will be licenced in the next

few months.

FDI+FII up to 74% allowed in private sector banks.

Listing of PSBs on stock exchanges and allowing them to access capital markets

for augmenting their equity, subject to maintaining Government shareholding at

a minimum of 51%. Private shareholders represented on the Board of PSBs.

Progressive reduction in statutory pre-emption (SLR and CRR) to improve the

resource base of banks so as to expand credit available to private sector.SLR

currently at 23% (38.5% in 1991) and CRR at 4% (15% in 1991).

Adoption of international best practices in banking regulation. Introduction of

prudential norms on capital adequacy, IRAC (income recognition, asset

classification, provisioning), exposure norms etc.

Phased liberalisation of branch licensing. Banks can now open branches in Tier 2

to

Tier 6 centres without prior approval from the Reserve Bank.


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Deregulation of a complex structure of deposit and lending interest rates to

strengthen competitive impluses, improve allocative efficiency and strengthen

the transmission of monetary policy.

Base rate (floor rate for lending) introduced (July 2010). Prescription of an

interest rate floor on savings deposit rate withdrawn (October 2011).

Functional autonomy to PSBs.

Use of information technology to improve the efficiency and productivity,

enhance the payment and settlement systems and deepen financial inclusion

Strengthening of Know Your Customer (KYC) and Anti-money Laundering

(AML) norms; making banking less prone to financial abuse.

Improvements in the risk management culture of banks.8


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CONCLUSION

It is a universal saying that change is the only constant in every sphere of life.

Same is applicable for RBI also. Majority of the Indian banks have more or less

successfully implemented Basel II norms. One of the pillars of Basel II is

emphasizing on minimum capital requirement which implies if the credit rating of

bank is outstanding, they can maintain lesser capital than the stipulated norms.

Earlier credit ratings of the banks are being done by the external credit rating

agencies such as CRISIL, ICRA etc. According to the modern IRB basedapproach, banks are asked to develop its own internal credit rating system. Few

Indian banks have already developed their own internal credit rating framework

such as SBI, ICICI bank and HDFC bank. But the majority of Indian banks are

striving to implement this IRB approach. More over Indian banks are passing

through a critical phase as this is the conversion phase from Basel II to Basel III.

The implementation of Basel III requires huge amount of capital. Simultaneously

maintaining an extraordinarily higher capital adequacy ratio is also not the proper

solution. Nobody can deny the fact that maintenance of certain amount of capital

adequacy ratio is required as it hedges the risk against liquidity crisis. Similarly it

is equally true that an extremely high capital adequacy ratio reduces the credit


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creating capacity of the bank which creates an adverse impact on the profit margin

of the bank. Another tendency has been observed that in order to clean their

balance sheets, banks are transferring their non performing asset to its Corporate

Debt Restructuring (CDR) cell and CDRs are restructuring the loan by lowering

the interest rate and enhancing the loan repayment schedule without addressing the

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fundamental problems. In order to stimulate capital market, the RBI is ultimately

compelled to reduce CRR, Repo and Reverse Repo rate by 25 basis points on 29th

January 2012 which will be effective from the fortnight beginning February 9,

2013(source: Economic Times on line database as on 29.1.2013) The Repo rate has

been reduced to 7.75%, Reverse Repo rate has been reduced to 6.75% and CRR

has been reduced to 4% which enhances the probability that inflation rate may go

up in near future. Therefore the RBI has to simultaneously discharge various roles

such as role of supervisor, monitor, liquidity controller as well as policy maker in

such a way so that maximum benefit can be provided to all stakeholders of the

nation.


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BIBLIOGRAPHY

www.ask.com

www.google.com

www.wikipidea.com
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