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BANKING INDUSTRY IN INDIA

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INDEX

Sr no. Particulars Page no.

1 Introduction

1.1 Industry definition

1.2 History of Banking in India

1.3 Bank Definition

1.4 Banking definition

2 Types of bank

2.1 Central bank

2.2 Commercial Banks

a Public Sector Banks

b Private Sectors Banks

c Foreign Banks

d Development Banks

2.3.Co-operative Banks

2.4 Scheduled Banks

2.5 Non-scheduled bank in India

3 Banking products & services

3.1 Primary functions

a) Accepting deposits

1 Types of Bank Accounts

I Checking Account/ current a/c

II Savings Account

III Money Market Account

IV Certificate of Deposit/ fixed

V Recurring deposit a/c

b) Granting loans and advances

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I Loans

II Advances

iCash Credit

ii Overdraft

iii Discounting of Bills

3.2 Secondary functions

3.3 Online banking

3.4 Mobile Banking Services

4 Reserve Bank of India

4.1 R.B.I profile.

4.2 Major RBI Functions

5 Role of Banks

6 Role of Banks in Indian Economy

7 Growth of bank in India

8 India's GDP Growth to make the Indian Banking Industrythird largest in the World by 2025

9 Banking Sector in India: Counting on Credit Growth

10 Banking reform

11Top Banking Companies in India

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12 Top Private Banks in India

13 Punch lines of banks in India

14 CMDs & CEOs of Banks in India 2011

15 Logos of bank in India

16 Merger &Acquisition of banks in India after 1991

17 Career Opportunities in Banking

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1 Banking Industry in India

1.1Industry definition:

The Banking industry comprises of segments that provide financial assistance and advisory

services to its customers by means of varied functions such as commercial banking,

wholesale banking, personal banking, internet banking, mobile banking, credit unions,

investment banking and the like.

With years, banks are also adding services to their customers. The Indian banking industry is

passing through a phase of customers market. The customers have more choices in choosing

their banks. A competition has been established within the banks operating in India.

With stiff competition and advancement of technology, the services provided by banks have

become more easy and convenient. The past days are witness to an hour wait before

withdrawing cash from accounts or a cheque from north of the country being cleared in one

month in the south.

Banks are among the main participants of the financial system in India. Banking offers

several facilities & Opportunities. This section provides comprehensive and updated

information, guidance and assistance in all areas of banking in India.

Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern

lines started with the establishment of three presidency banks under Presidency Bank's act

1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras.

The commercial banking structure in India consists of: Scheduled Commercial Banks &

Unscheduled Banks. Banking Regulation Act of India, 1949 defines Banking as "accepting,

for the purpose of lending or investment of deposits of money from the public, repayable on

demand or otherwise and withdrawable by cheques, draft, order or otherwise."

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The arrival of foreign and private banks with their superior state-of-the-art technology-based

services pushed Indian Banks also to follow suit by going in for the latest technologies so as

to meet the threat of competition and retain customer base.

The evolution of IT services outsourcing in the Indian banks has presently moved on to the

level of Facilities Management (FM). Banks now looking at business process management

(BPM) to increase returns on investment, improve customer relationship management (CRM)

and employee productivity.

For, these entities sustaining long-term customer relationship management (CRM) has

become a challenge with almost everyone in the market with similar products

Industry Segments:

Public Sector Banks:

Almost 80% of the business is still controlled by Public Sector Banks (PSBs). PSBs are still

dominating the commercial banking system. Shares of the leading PSBs are already listed on

the stock exchanges.

The PSBs will play an important role in the industry due to its number of branches and

foreign banks facing the constraint of limited number of branches. Hence, in order to achieve

an efficient banking system, the onus is on the Government to encourage the PSBs to be run

on professional lines.

Private Sector Banks:

The RBI has given licenses to new private sector banks as part of the liberalization process.

The RBI has also been granting licenses to industrial houses. Many banks are successfully

running in the retail and consumer segments but are yet to deliver services to industrial

finance, retail trade, small business and agricultural finance.

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Foreign banks:

Foreign banks have been operating in India for decades with a few of them having operations

in India for over a century. The number of foreign bank branches in India has increased

significantly in recent years since RBI issued a number of licenses - well beyond the

commitments made to the World Trade Organization. The presence of foreign banks in India

has benefited the financial system by enhancing competition, resulting in higher efficiency.

There has also been transfer of technology and specialized skills which has had some

"demonstration effect" as Indian banks too have upgraded their skills, improved their scale of

operations and diversified into other activities. At a time when access to foreign currency

funds was a constraint for the Indian companies, the presence of foreign banks in India

enabled large Indian companies to access foreign currency resources from the overseas

branches of these banks. Also with the presence of foreign banks, as borrowers in the money

market and their operation in the foreign exchange market has resulted in the creation and

deepening of the inter-bank money market. Now, it is the challenge for the supervisors to

maximize the advantages and minimize the disadvantages of the foreign banks' local

presence.

1.2 History of Banking in India

Banking in Indiaoriginated in the last decades of the 18th century. The first banks were The

General Bank of India, which started in 1786, andBank of Hindustan,which started in 1790;

both are now defunct. The oldest bank in existence in India is theState Bank of India,which

originated in theBank of Calcuttain June 1806, which almost immediately became theBank

of Bengal. This was one of the three presidency banks, the other two being the Bank of

Bombayand theBank of Madras,all three of which were established under charters from the

British East India Company. For many years the Presidency banks acted as quasi-central

banks, as did their successors. The three banks merged in 1921 to form theImperial Bank of

India,which, upon India's independence, became theState Bank of Indiain 1955.

A bankis afinancial institutionand afinancial intermediarythat acceptsdeposits

and channels those deposits intolendingactivities, either directly or throughcapital markets.

A bank connects customers with capital deficits to customers with capital surpluses.

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1.3 Bank Definition

Definition of a bank varies from country to country. See the relevant country page (below)

for more information.

1. UnderEnglish common law,a banker is defined as a person who carries on the business of

banking, which is specified as:[6]

conductingcurrent accountsfor his customers

payingchequesdrawn on him, and

Collectingchequesfor his customers.

2. A corporation empowered to deal with cash, domestic and foreign, and to receive the

deposits of money and to loan those monies to third-parties.

3. In 1899, the United States Supreme Court (Austen) used these words to define a bank:

"A bank is an institution, usually incorporated with power to issue its promissory notes

intended to circulate as money (known as bank notes); or to receive the money of others on

general deposit, to form a joint fund that shall be used by the institution, for its own benefit,

for one or more of the purposes of making temporary loans and discounts; of dealing in notes,

foreign and domestic bills of exchange, coin, bullion, credits, and the remission of money; or

with both these powers, and with the privileges, in addition to these basic powers, of

receiving special deposits and making collections for the holders of negotiable paper, if the

institution sees fit to engage in such business."

4. Anestablishmentauthorized by agovernmentto acceptdeposits,payinterest,clearchecks,

makeloans,actas anintermediaryinfinancial transactions,andprovideotherfinancial

servicesto itscustomers.

5. Bank is a lawful organization, which accepts deposits that can be withdrawn on

Demand. It also lends money to individuals and business houses that need it.

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1.4Banking definition

In generalterms,thebusiness activityof accepting and safeguardingmoneyowned by other

individuals andentities,and thenlendingout this money inorderto earn aprofit.

Banking as an activity involves

Acceptance of deposits and lending or investment of money. It facilitates business activities

by Providing money and certain services that help in exchange of goods and services.

Therefore,Banking is an important auxiliary to trade. It not only provides money for the

production of Goods and services but also facilitates their exchange between the buyer and

seller.

2 Types of bank

There are various types of banks which operate in our country to meet the financial

requirements Of different categories of people engaged in agriculture, business, profession,

etc. On the basis of Functions, the banking institutions in India may be divided into the

following types:

2.1Central bank

A central bank, reserve bank, or monetary authorityis a publicinstitution that manages the nation's currency,money supply,andinterest rates.Central banks

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also usually oversee thecommercial banking systemof their respective countries. In contrast

to a commercial bank, a central bank possesses a monopoly on increasing the nation's

monetary base,and usually also prints the national currency, which usually serves as the

nation'slegal tender.[1][2]Examples include theEuropean Central Bank(ECB), theFederal

Reserveof the United States, and thePeople's Bank of China.[3]

The primary function of a central bank is to manage the nation's money supply (monetary

policy), through active duties such as managinginterest rates,setting thereserve requirement,

and acting as alender of last resortto thebanking sectorduring times of bank insolvency or

financial crisis.Central banks usually also have supervisory powers, intended to prevent

commercial banks and other financial institutions from reckless or fraudulent behavior.

Central banks in most developed nations are institutionally designed to be independent from

political interference.

2.2 Commercial Banks

Commercial Banks are banking institutions that accept deposits and

grant short-term loans and Advances to their customers. In addition to giving short-term

loans, commercial banks also give Medium-term and long-term loan to business enterprises.

Now-a-days some of the commercial Banks are also providing housing loan on a long-term

basis to individuals. There are also many Other functions of commercial banks, which are

discussed later in this lesson.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks,

Private sector banks and foreign banks.

(i) Public Sector Banks: These are banks where majority stake is held by the Government of

India or Reserve Bank of India. Examples of public sector banks are: State Bank of India,

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Nationalized banks

Name

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

Indian Bank

Indian Overseas Bank

Oriental Bank of Commerce

Punjab & Sind Bank

Punjab National Bank

State Bank of India

State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

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Syndicate Bank

UCO Bank

Union Bank of India

United Bank of India

Vijaya Bank

Their public sector banks

IDBI Bank

Dhanlaxmi Bank

Jammu & Kashmir Bank

Nainital Bank Lakshmi Vilas Bank

South Indian Bank

(ii) Private Sectors Banks: In case of private sector banks majority of share capital of the

Bank is held by private individuals. These banks are registered as companies with limited

Liability. For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd.,

Development Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd.,Global

Trust Bank, Vysya Bank, etc.

1. Bank of Punjab Ltd. (since merged with Centurian Bank)

2. Centurian Bank of Punjab (since merged with HDFC Bank)

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3. Development Credit Bank Ltd.

4. HDFC Bank Ltd.

5. ICICI Bank Ltd.

6. IndusInd Bank Ltd.

7. Kotak Mahindra Bank Ltd.

8. Axis Bank (earlier UTI Bank)

9. Yes Bank Ltd.

(iii) Foreign Banks: These banks are registered and have their headquarters in a foreign

country but operate their branches in our country. Some of the foreign banks operating in our

country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American

Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign

banks operating in our country has increased since the financial sector reforms of 1991.

Foreign banks operating in India

ABN AMRO Bank N.V.(Now merged with RBS)

Abu Dhabi Commercial Bank

American Express Bank

Bank Internasional Indonesia

Bank of America NA

Bank of Ceylon

Bank of Nova Scotia(Scotia Bank)

Bank of Tokyo Mitsubishi UFJ

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Barclays Bank PLC

BNP Paribas

Calyon Bank

Chinatrust Commercial Bank

Citibank N.A.

DBS Bank

Deutsche Bank AG

HSBC

JPMorgan Chase Bank

Krung Thai Bank

Mashreq Bank psc

Mizuho Corporate Bank

Royal Bank of Scotland

Shinhan Bank

SCOTIA BANK

Socit Gnrale

Sonali Bank

Standard Chartered Bank

State Bank of Mauritius

UBS

VTB[1]

iv) Development Banks

Business often requires medium and long-term capital for purchase of machinery and

equipment,

Development Banks

Industrial Development Bank of India (IDBI)

Industrial Finance Corporation of India (IFCI)

Export - Import Bank of India (Exim Bank)

Industrial Reconstruction Bank of India (IRBI) now (Industrial Investment

Bank of India)

National Bank for Agriculture and Rural Development (NABARD)

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Small Industries Development Bank of India (SIDBI)

National Housing Bank (NHB)

2.3.Co-operative Banks

People who come together to jointly serve their common interest often form

a co-operative Society under the Co-operative Societies Act. When a co-operative society

engages itself in Banking business it is called a Co-operative Bank. The society has to obtain

a license from the Reserve Bank of India before starting banking business. Any co-operative

bank as a society is to function under the overall supervision of the Registrar, Co-operative

Societies of the State.As regards banking business, the society must follow the guidelines set

and issued by the Reserve Bank of India.

Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are primary credit

societies, central co-operative banks and state co-operative banks. These banks are organized

at three levels, village or town level, district level and state level.

(i) Primary Credit Societies: These are formed at the village or town level with borrower

and non-borrower members residing in one locality. The operations of each society are

restricted to a small area so that the members know each other and are able to watch over the

activities of all members to prevent frauds.

(ii) Central Co-operative Banks: These banks operate at the district level having some of

the primary credit societies belonging to the same district as their members. These banks

provide loans to their members (i.e., primary credit societies) and function as a link between

the primary credit societies and state co-operative banks.

(iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all

The states of the country. They mobilize funds and help in its proper channelization among

Various sectors. The money reaches the individual borrowers from the state co-operative

Banks through the central co-operative banks and the primary credit societies

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2.4Scheduled Banks

Scheduled Banks inIndia are those banks which have been included in the

Second Schedule ofReserve Bank of India (RBI) Act, 1934.[1] RBI in turn includes only

those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the

Act.

2.5Non-scheduled bank in India

"Non-scheduled bank in India" means a banking company as defined in clause

(c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled

bank.

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3 Banking products/functions & services

TheBanking products/function of commercial banks are of two types.

(A) Primary functions; and

(B) Secondary functions.

Let us discuss details about these functions.

3.1 Primary functions

The primary functions of a commercial bank include:

a) Accepting deposits; and

b) Granting loans and advances.

a) Accepting deposits

The most important activity of a commercial bank is to mobilise deposits from the public.

People who have surplus income and savings find it convenient to deposit the amounts with

banks. Depending upon the nature of deposits, funds deposited with bank also earn interest.

Thus, deposits with the bank grow along with the interest earned. If the rate of interest is

higher, public are motivated to deposit more funds with the bank. There is also safety of

funds deposited with

the bank.

Types of Bank Accounts For Accepting deposits

Though, the types of accounts offered can vary from bank to bank, here are

some of the common bank accounts offered by commercial banks.

Checking Account/ current account

A checking account is also known as a current account or a transactional account.

Money deposited in this type of account can be withdrawn at any time, as there in no

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restriction on the number of withdrawals and the amount of money withdrawn. Customers are

generally given paper checks to carry out day-to-day transactions, like paying bills, making

purchases, or transferring money to another account. ATM (Automated Teller Machine)

facility is also provided to the customers. However, no interest is paid on the deposited

money and sometimes, customers have to pay a charge to the banks for rendering this service.

This type of account is generally maintained by businessmen or concerns, as they have to

make a number of financial transactions each day. A transactional account is sometimes

called a demand deposit account, as no notice is required to withdraw money, i.e. money is

available on demand.

Savings Account

Savings accountsare aimed towards mobilizing small savings from the general

public. There are certain restrictions regarding the number of withdrawals and the amount to

be withdrawn in a particular time period. However, money deposited in this account, earns a

fair rate of interest. Though the customers can't withdraw their money with checks, they can

avail the ATM facility for the same. A passbook is also provided, which keeps track of all the

financial transactions.

Money Market Account

A money market account is a type of deposit account, in which money can be

deposited to earn a higher rate of interest than the savings account. However, a minimum

balance is required to be maintained to earn interest and avoid fees. There is also a limit on

the number of transactions that can be carried out in a particular month. The customers are

usually allowed to make 6 withdrawals per month.

Certificate of Deposit/ fixed deposit account

A certificate of deposit is also known as time deposit or fixed deposit account. This type of

bank account requires the customers to deposit a certain sum of money for a fixed time

period. The money deposited in this account can't be withdrawn before the date of maturity.

However, some banks allow customers to withdraw money before maturity, by charging a

penalty. The rate of interest paid on time deposits is usually higher than the other types of

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bank accounts. In addition to this, the interest paid on this account depends on the maturity

period, i.e. longer the maturity period, the higher is the rate of interest paid.

Banking institutions offer several different types of bank accounts to satisfy the individual

needs of their customers. These bank accounts enable the public to deposit their money in

banks and thereby earn a monetary return.

The Recurring deposit

The Recurring deposit account is an account in the bank (or a Post office in some

countries) where an investor deposits a fixed amount of money every month for a fixed

tenure (mostly ranging from one year to five years). This scheme is meant for investors who

want to deposit a fixed amount every month, in order to get a lump sum after some years. The

small monthly savings in the Recurring Deposit scheme enable the depositor to accumulate a

handsome amount on maturity. Interest at term deposit rates is computable on quarterly

compounded basis.

b) Grant of loans and advances

The second important function of a commercial bank is to grant loans and advances.

Such loans and advances are given to members of the public and to the business community

at a higher rate

of interest than allowed by banks on various deposit accounts. The rate of interest charged on

loans and advances varies according to the purpose and period of loan and also the mode ofrepayment.

i)

Loans

A loan is granted for a specific time period. Generally commercial banks

provide short-term loans. But term loans, i.e., loans for more than a year

may also be granted. The borrower may be given the entire amount in

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lump sum or in installments. Loans are generally granted against the

security of certain assets. A loan is normally repaid in installments.

However, it may also be repaid in lump sum.

ii)

Advances

An advance is a credit facility provided by the bank to its customers. It

differs from loan in the sense that loans may be granted for longer period, but

advances are normally granted for a short period of time. Further the purpose

of granting advances is to meet the day-to-day requirements of business. The

rate of interest charged on advances varies from bank to bank. Interest is

charged only on the amount withdrawn and not on the sanctioned amount.

o Types of Advances

Banks grant short-term financial assistance by way of cash credit, overdraft and bill

discounting.

Let us learn about these.

a) Cash Credit

Cash credit is an arrangement whereby the bank allows the borrower to draw amount

up to a specified limit. The amount is credited to the account of the customer. The customer

can withdraw this amount as and when he requires. Interest is charged on the amount actually

withdrawn. Cash Credit is granted as per terms and conditions agreed with the customers.

b) Overdraft

Overdraft is also a credit facility granted by bank. A customer who has a current

account with the bank is allowed to withdraw more than the amount of credit balance in his

account. It is a temporary arrangement. Overdraft facility with a specified limit may be

allowed either on the security of assets, or on personal security, or both.

c) Discounting of Bills

Banks provide short-term finance by discounting bills, that is, making payment of

the amount before the due date of the bills after deducting a certain rate of discount. The

party gets the funds without waiting for the date of maturity of the bills. In case any bill is

dishonored on the due date, the bank can recover the amount from the customer.

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3.2 Secondary functions

In addition to the primary functions of accepting deposits and lending

money, banks perform a number of other functions, which are called secondary functions.

These are as follows

a. Issuing letters of credit, travelers cheque, etc.

b. Undertaking safe custody of valuables, important document and securities by providing

safe deposit vaults or lockers.

c. Providing customers with facilities of foreign exchange dealings.

d. Transferring money from one account to another; and from one branch to another branch

of the bank through cheque, pay order, demand draft.

e. Standing guarantee on behalf of its customers, for making payment for purchase of goods,

machinery, vehicles etc.

f. Collecting and supplying business information.

g. Providing reports on the credit worthiness of customers.

i. Providing consumer finance for individuals by way of loans on easy terms for purchase of

consumer durables like televisions, refrigerators, etc.

j. Educational loans to students at reasonable rate of interest for higher studies, especially for

professional courses.

3.3 Online banking

Online banking (or Internet banking) allows customers to conduct

financial transactions on a secure website operated by theirretailorvirtualbank,credit union

orbuilding society.

E-banking solutions have many features and capabilities in common, but traditionally also

have some that are application specific.

The common features fall broadly into several categories

Transactional (e.g., performing a financial transaction such as an account to account

transfer, paying a bill, wire transfer, apply for a loan, new account, etc.)

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o Payments to third parties, includingbill paymentsand telegraphic/wire transfers

o Funds transfersbetween a customer's owntransactional accountandsavings accounts

o Investmentpurchase or sale

o Loanapplications and transactions, such as repayments of enrollments

Non-transactional (e.g., online statements,chequelinks, cobrowsing, chat)

o Viewing recent transactions

o Downloadingbank statements,for example inPDFformat

o Viewing images of paidcheques

Financial Institution Administration

Management of multiple users having varying levels of authority

Transaction approval process

Features commonly unique to Internet banking include

Personal financial management support, such as importing data into personalaccounting

software. Some online banking platforms support account aggregation to allow the

customers to monitor all of their accounts in one place whether they are with their main

bank or with other institutions

3.4 Mobile Banking Services

Banks offering mobile access are mostly supporting some or all

of the following services:

Account Information

o Mini-statements and checking of account history

o Alerts on account activity or passing of set thresholds

o Monitoring of term deposits

o Access to loan statements

o Access to card statements

o

Mutual funds / equity statements

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o Insurance policy management

o Pension plan management

Payments & Transfers

o Domestic and international fund transfers

o Micro-payment handling

o Mobile recharging

o Commercial payment processing

o Bill payment processing

Investments

o Portfolio management services

o Real-time stock quotes

o Personalized alerts and notifications on security prices

Support

o Status of requests for credit, including mortgage approval, and insurance

coverage

o Check (cheque) book and card requests

o Exchange of data messages and email

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4 Reserve Bank of India

The RBI headquarters in Mumbai

4.1 R.B.I profile.

Headquarters Mumbai,MaharashtraCoordinates:

Established 1 April 1935

Governor Duvvuri Subbarao

Central bank of India

Currency Indian rupee

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Reserves US$30,210crore(US$302.1 billion)

Base borrowing rate 8.50%

Base deposit rate 6.00%

Website http://www.rbi.org.in

Structure Central Board of Directors

The Board consists of a governor, four deputy governors, four

directors to represent the regional boards, one from the

Ministry of Finance and ten other directors from various fields.

Supportive bodies

The Reserve Bank of India has four regional representations:

North in New Delhi, South in Chennai, East in Kolkata and

West in Mumbai. The representations are formed by five

members, appointed for four years by the central government

Offices and branchs

4 zonal offices.

New Delhi, Chennai, Kolkata and Mumbai.

22 regional offices

Few of them are located inAhmedabad,

Bangalore,Bhopal,Bhubaneswar,Chandigarh,

Chennai,Delhi,Guwahati,Hyderabad,Jaipur,Jammu,

Kanpur,Kolkata,Lucknow,Mumbai,Nagpur,Patna,

andThiruvananthapuram.

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4.2 Major RBI 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 theForeign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly development

and maintenance of foreign exchange market in India.

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.

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Banks to the Government:

The RBI is the Banker's agent and adviser to the government. It accepts

deposits and make payments on behalf of the Government. Issue of loans, management of

public debt, sale of treasury bills are undertaken by the bank. It helps the government in

ensuring better co-ordination of monetary and fiscal policies. It provides short term loans

namely "ways and means advances" to the Central Government and State Government. These

loans have to be rapid within a period of 3 months.

It represents the government in various international organizations like IMF,

World Bank etc. It sends its official as representative of the government for international

seminars and conferences. All important policy decision are taken by the government in

consultation with the RBI. It advises the government on important matters like agricultural

credit, devaluation of rupee, credit policy for the industrial and export sectors etc.

Banker's Bank:

RBI acts as a banker for all the commercial banks. All scheduled banks come under

the direct control of RBI. All commercial as well as schedule bank has to keep a minimum

reserve with the RBI. They have to submit weekly reports to RBI about their transactions. Byperforming 3 functions, the RBI helps the member banks significantly. They are given below

such as:

(a)It acts as the lender of the last resort.

(b)It is the custodian of cash reserves of commercial banks.

(c)It clears, transfers the transaction. It acts as the central clearing house.

Credit control:

The central bank uses the quantitative and qualitative tools to control credit. It

is one of the principal functions of RBI. It helps the bank to ensure exchange rate stability

and price stability. In quantitative credit control, the volume of credit is controlled and in

qualitative credit control, the direction of credit is regulated. Bank rate, open market

operations and cash reserve ratio are used under the quantitative method. In selective credit

control, the weapons used are variation in margin requirements, moral suasion, rationing of

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credit, issue of directives etc. At present selective control has been given much importance

and it is more suitable for India.

Monetary policy

Monetary policyis the process by which themonetary authorityof a country

controls thesupply of money,often targeting a rate ofinterestfor the purpose of promoting

economicgrowth and stability.[1][2]The official goals usually include relatively stable prices

and lowunemployment.Monetary theoryprovides insight into how to craft optimal monetary

policy. It is referred to as either beingexpansionaryorcontractionary,where an expansionary

policy increases the total supply of money in the economy more rapidly than usual, and

contractionary policy expands the money supply more slowly than usual or even shrinks it.

Expansionary policy is traditionally used to try to combatunemploymentin arecessionby

loweringinterest ratesin the hope that easy credit will entice businesses into expanding.

Contractionary policy is intended to slowinflationin hopes of avoiding the resulting

distortions and deterioration of asset values.

Monetary policy differs fromfiscal policy,which refers totaxation,government spending,

andassociated borrowing

Aims of Monetary policy

MP is a part of general economic policy of the govt.

Thus MP contributes to the achievement of the goals of economic policy.

Objective of MP may be:

Full employment

Stable exchange rate

Healthy Bop

Economic growth

Reasonable Price Stability

Greater equality in distribution of income & wealth

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Financial stability

Operation of Monetary

Policy

Instruments

1. Discount Rate

(Bank Rate)

2.Reserve Ratios

3. Open Market

Operations

Operating

Target

Monetary Base

Bank Credit

Interest Rates

Intermediate

Target

Monetary

Aggregates(M3)

Long term

interest rates

Ultimate

Goals

Total Spending

Price Stability

Etc.

Instruments of the Monetary Policy

The instruments at the disposal of the RBI for managing money supply,

interest rates and exchange rates are:

Cash Reserve Ratio

Statutory Liquidity ratio

Open Market Operations

Managing Credit Expansion

Repo Rate

Bank rate

Rates paid on government securities

Tweaking the basket of currencies against which rupee rate is determined

Market Intervention

Multiple rates of interest

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Cash Reserve Ratio:

Banks reserve liquidity through their power to create credit.

Presently in India, banks are required to maintain the following reserves:

o Cash Reserve ratio: 8.25% of demand and time deposits (w.e.f. 24.05.2008)

o Statutory Liquidity ratio: 25% of demand and time deposits

Just as additional cash inflows enable the banking system to create credit, any

increase in CRR will require the banking system to contract credit by a large amount.

Statutory Liquidity ratio

SLR (Statutory Liquidity ratio) is a requirement peculiar to India. In

addition to ensuring that banks can fall back on the readily saleable government

deposits in the event of a run on the bank, it was a prescription to divert bank deposits

to meet government investment expenditure.

Open Market Operations:

Banks as well as other financial institutions, such as insurance

companies, mutual funds and corporate with surplus cash are big investors in

government securities. When RBI wishes to inject liquidity into the market, it has

another option of buying government securities. When RBI offers to buy the

securities at a rate that is better than the rate prevailing in the market, some of the

investors can sell their holdings and the cash inflow would lead to credit creation of a

large magnitude.

Similarly, when RBI sells government securities at a higher rate than market rate, RBI

absorbs funds and the banking system contracts credit by a large magnitude to reduce

liquidity. This is known as open market operation.

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Managing Credit Expansion:

CRR and OMO reduce liquidity in the system and reduce the ability of

banks to create credit. RBI also controls sector specific expansion of credit by

specifying maximum amounts that can be lent, minimum margins to be maintained

and higher risk weights.

When RBI feels that banks have overextended themselves to certain sectors, the flow

of credit to certain sectors is leading to an imbalanced growth of the economy or it

wants to control the price of certain commodities by preventing hoarding by

wholesalers with borrowed funds, RBI makes sector specific or commodity specific

interventions.

Repo rate:

Repo rate or repurchase rate is a swap deal involving the immediate

sale of securities and simultaneous purchase of those securities at a future date, at a

designated price. It could also be an overnight deal with sale taking place on day one

and repurchase on day two. The repurchase price is adjusted for the interest payable

for the use of funds for the period of contract. Reverse repo involves the immediate

purchase and future sale of those same securities. RBI uses repo and reverse repo to

control liquidity on a day-to-day basis.

Bank rate:

RBI provides refinance to banks against funds deployed by banks inspecified sectors such as export finance portfolio of the banks. In the past, the bank

rate used to be the primary interest rate tool of RBI. But over a period of time the repo

rate has presently emerged as the primary interest rate tool and bank rate has lost

much of its relevance. Changes in the bank rate are a signal to the market regarding

the direction in which the RBI would like interest rates to move.

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Rates paid on government securities:

RBI, as a banker to the government, helps government to borrow

from the market by selling their securities. RBI also determines the timing, size, and

rate paid on the issues. Rates offered by RBI on government securities are both a

reflection of the market and also an indicator to the market on the direction of interest

rate movements.

Tweaking the basket of currencies:

The exchange rate of rupee is calculated by RBI based on the

exchange rates of basket of currencies of countries with which India has significant

trade transactions. RBI maintains confidentiality about the weight age given to each

currency in the basket and when RBI wishes to manage the extent of volatility in the

exchange rate of rupee, RBI adjusts the weight ages properly.

Market intervention:

Large balance of payment surpluses and build up of Forex reserves

are bound to strengthen the rupee in the exchange market. This market force cannot

be counted by RBI for long periods of time. However, by intervening in the market by

offering to buy any amount of foreign currency at a particular rate, RBI can prevent

the sudden strengthening of rupee. RBI seeks to smoothen the movement of rates in

either direction so than importers and exporters have time to adjust to the changing

exchange rate scenario and are not caught by surprise by violent rate movements,

which could cripple them.

Multiple rates of interest

Under rbi fixes the credit quotas for various commercial bank.& commercial

bank borrows funds from rbi within their quotas they are charges interest at bank

rates. But if it is borrowed more than quotas then they are charged higher interest rates

i.e. more than bank rates .

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Policy rates, Reserve ratios, lending, and deposit rates as of 14 September, 2011

Bank Rate

6.0%

Repo Rate 8.25%

Reverse Repo Rate 7.25%

Cash Reserve Ratio (CRR) 6.0%

Statutory Liquidity Ratio (SLR) 24.0%

Base Rate 9.50%10.75%

Reserve Bank Rate 4%

Deposit Rate 8.50%9.50%

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5 Role of Banks

A proper financial sector is of special importance for the economic growth of

developing and underdeveloped countries. The commercial banking sector which forms one

of the backbones of the financial sector should be well organized and efficient for the growth

dynamics of a growing economy. No underdeveloped country can progress without first

setting up a sound system of commercial banking. The importance of a sound system of

commercial banking for a developing country may be depicted as follows :

1 Capital Formation

The rate of saving is generally low in an underdeveloped economy due tothe

existence of deep-rooted poverty among the people . Even the potential savings of thecountry

cannot be realized due to lack of adequate banking facilities in the country . To

mobilizedormant savings and to make them available to the entrepreneurs for productive

purposes , thedevelopment of a sound system of commercial banking is essential for a

developing economy .

2 Monetization

An underdeveloped economy is characterized by the existence of a large

nonmonetized sector , particularly , in the backward and inaccessible areas of the country .

Theexistence of this non monetized sector is a hindrance in the economic development of

thecountry . The banks , by opening branches in rural and backward areas , can promote the

processof monetization in the economy .

3 Innovations

Innovations are an essential prerequisite for economic progress .

Theseinnovations are mostly financed by bank credit in the developed countries . But the

entrepreneursin underdeveloped countries cannot bring about these innovations for lack of

bank credit in anadequate measure . The banks should , therefore , pay s