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 nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
Management: The act provided for the setting up of a Central Board of Directors to be entrusted with the general superintendence and direction of the affairs and business of the bank (S.7). The board was to consist of 16 directors-a Governor and Deputy Governor to be appointed by the Governor General in Council after consideration of the recommendations made by the Board in that behalf, four Directors to be nominated by the Governor General in Council, eight Directors to be elected on the behalf of the shareholders on the various registers on the basis of a specified number for each resister and one Government official to be nominated by the Governor General in Council (S.8).A board of 24 members, including 5 Directors elected by commercial and agricultural interests. The Board should be as small as practicable and that the majority of the Directors should derive their mandate from the shareholders. The committee did not consider it necessary that provision should be made for the representation of commercial bodies as such.
Share capital: The Bank was to have, at its commencement, a share capital of Rs.5 crores, the shares of Rs.100 each being fully paid up [S.4 (1)]. Provisions were made for its increase or decrease, by the Banks shareholders, on the recommendation of the Central Board, with the previous sanction of the Governor General in Council and with the approval of the central Legislature (S.5). There were in some quarters the feelings that the Reserve Bank did not need any capital at all as it was itself going to be the manufacturer of money. It was, of course, necessary to guard against its being loaded with an excess of capital. As the Hilton Young Commission put it, a central bank need not, and should not, be provided with any very great amount of capital for both the reasons that the bank might be lured into unsound business activities in order to earn sufficient profits and it would be more difficult to reduce the share capital than to raise it later if found necessary. This figure was incorporated in the 1927, 1928, and 1933 Bill. The proposal of a member (Mr. Vidya Sagar Pandya) to raise the capital to Rs. 7.5 criers did not find favour with the Legislature. The capital has remained unchanged at Rs.5 crores to this day.
Norms: Banks are now required to assign capital for market risk. A risk weight of 2.5% for market risk has been introduced on investments in Government and other approved securities with effect from the year ending 31 st march 2000. For investments in securities outside SLR, a risk weight of 2.5% for market risk has been introduced with effect from the year ending 31 st march, 2001. The percentage of banks portfolio of government and approved securities, which is required to be marked to market, has progressively been increased. For the year ending 31 st march, 2000, banks were required to mark to market 75% of their investments. In order to align the Indian accounting standards with the international best practises and taking into consideration the evolving international developments, the norms for classification and valuation of investments have been modified with effect from September 30, 2000. The entire investment portfolio of banks is required to be classified under three categories, viz., Held to Maturity, Available for Sale and Held for Trading. While the securities Held for Trading and Available for Sale should be marked to market periodically, the securities Held to Maturity, which should be exceed 25% of total investments are carried at acquisition cost unless it is more than the face value, in which case, the premium should be amortized over a period of time. In case of Government guaranteed advances, where the guarantee has been invoked and the concerned State Government has remained in defaults as on March 31, 2000, a risk weight of 20% on such advances, has been introduced. State Governments who continue to be in default in respect of such invoked guarantees even after March 31, 2001, a risk weight of 100% is being assigned. Risk weight of 100% has been introduced for foreign exchange open position limits with effect from March 31, 1999. The minimum capital to risk asset ratio (CRAR) for banks has been enhanced to 9% with effect from the year ending March 31, 2000. Banks are permitted to access the capital market. Till today, 12 banks have already accessed capital market. Banks have been advised that an asset will be classified as doubtful if it has remained in the substandard category for 18 months instead of 24 months as at present, by March 31, 2001. Banks have been permitted to achieve these norms for additional provisioning in phases, as under: As on 31.3.2001: Provisioning of not less than 50% on the assets which have become doubtful on account of the new norm. As on 31.3.2002: Balance of the provisions not made during the previous year, in addition to the provisions needed as on 31.3.2002. In the Monetary and Credit Policy announced in April 2001, the banks have been advised to chalk out an appropriate transition path for smoothly moving over to 90 days norm. As a facilitating measure, banks should move over to charging of interest at monthly rests by April 1, 2002. Banks should commence in making additional provisions for such loans, starting from the year ending March 31, 2002, which would strengthen their balance sheets and ensure smooth transaction to the 90 days norm by March 31, 2004. Prudential norms in respect of advances guaranteed by State Governments where guarantee has been invoked and has remained in default for more than two quarters has been introduced in respect of advances sanctioned against State Government guarantee with effect from April 1, 2000. Banks have been advised to make provisions for advances guaranteed by State Governments which stood invoked as on March 31, 2000, in phases, during the financial years ending March 31, 2000 to march 31, 2003 with a minimum of 25% each year. The RBI has reiterated that banks and financial institutions should adhere to the prudential norms on asset classification, provisioning, etc. and avoid the practise of evergreening. This is the long-term objective with RBI wants to pursue. Towards this direction, a number of measures have been taken to arrest the growth of NAPs: banks have been advised to tone up their credit risk management system; put in place a loan review mechanism to ensure that advances, particularly large advances are monitored on an on-going basis so that signals of weakness are detected and corrective action taken early; enhance credit appraisal skills of their staff, etc. In order to ensure recovery of the stock of NAPs, guidelines for one-time settlement have been issued in July, 2000. Banks have been advised to take effective steps for reduction of NAPs and also put in place risk management systems and practises to prevent re-emergence of fresh NP As. The proposal to set-up an Asset Reconstruction Company (ARC) on a pilot basis to take over the NAPs of the three weak public sector banks has been announced in the Union Budget for 1999- 2000. The modalities for setting up the ARC are being examined. Banks are permitted to issue bonds for augmenting their Tier II capital. Guarantee of the Government for these bonds is not considered necessary. The recommendation of the committee that we should move towards international practices in regard to income recognition is accepted in principle. However, tightening of the prudential norms should be made keeping in view the existing legal framework, production and payment cycles, business practices, the predominant share of agriculture in the country generally involve a period of not less than from 4 to 6 months. A large number of SSIs also have difficulties in timely realization of their bills drawn on the suppliers. These have to be taken into account while contemplating any change in the norm. To start with, a general provision on standard assets of a minimum of 0.25% from the year ended March 31, 2000, introduced.
Functions: Bankers bank and lender of last resort: The reserve bank of India acts as the bankers bank. According to the provisions of the banking companies act of 1949 every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5 percent of its demand liabilities and 2 percent of its time liabilities in India. The minimum cash requirements can be changed by the Reserve Bank of India. Since commercial banks can always expert the Reserve Bank of India to come to their help in times of banking crisis the reserve bank becomes not only the bankers bank but also the lender of last resort. Controller of credit: The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank, showing in detail, its assets and liabilities. This power of the bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any Commercial Bank. As Supreme Banking Authority in the country, the Reserve Bank of India, therefore, has the following powers: It holds the cash reserves of all the schedule banks. It controls the credit operations of the 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 last resort by providing rediscount facilities to scheduled banks. Custodian of foreign reserves: The Reserve Bank of India has the responsibility to maintain the official rate of exchange. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of Indias reserve of international currencies. The vast Sterling balances were acquired and managed by banks. Further, the RBI has the responsibility of administering the exchange controls of the country. Supervisory functions: The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 haven given the RBI wide powers of supervision and control over commercial and cooperative 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 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 bank has developed the co-operative credit movement to encourage savings, to eliminate money lenders from the villages and to route its short-term credit to agriculture. The RBI has set-up the agricultural Refinance and Development Corporation to provide long-term finance to farmers.
Reforms: During the reform period, the policy environment enhanced competition and provided greater opportunity for exercise of what may be called genuine corporate element in each bank to replace the elements of coordinated actions of all entities as a joint family to fulfil predetermined Plan priorities. The measures taken so far can be summarized as follows: Looking at the greater competition in banking system the 1 st
measure was taken by permitting private sector banks and licensing of branches of foreign banks and entry of new foreign banks. The 2 nd measure was taken for the flexibility in banking system to manage pricing and quantity of resources. The 3 rd measure was taken to replace the individual guideline with general guidelines on credit decision. The 4 th measure was taken to cope up with the changing environment. Banks are free to take their own decision on credit decision, capital adequacy norms, asset classification, etc, The 5 th measure was taken for appropriate legal, technological and regulatory framework for the development of financial markets. Transparency has been brought in the primary and secondary operations.
RBI Monetary Management: RBI uses its monetary policy for controlling inflationary or deflationary situations in the economy by using one or more of the following tools of monetary control. These are discussed below: 1. Cash Reserve Ratio (CRR): It refers to cash to be kept as a reserve by all banks with RBI at a certain percentage of their demand and time liabilities. Demand liabilities is referred as deposit payable on demand by depositors and time liabilities is referred as deposit payable on maturity. At present CRR is 5%. 2. Statutory liquidity ratio(SLR): It refers to supplementary liquid reserve requirements of banks, in addition to CRR. SLR is maintained by all the banks in the form of cash in hand, current account balance with SBI and other public sector commercial banks, unencumbered. SLR has 3 objectives: To restrict on expansion of banks credit. To increase investment in government securities and To ensure the solvency of banks. At present SLR is 25%. 3. Bank rate: Bank rate is a standard rate at which RBI is prepared to buy or rediscount bills of exchange or other eligible papers from banks. RBI uses bank rate to affect the cost and availability of refinance and to change the loanable resources of banks and other financial institutions. RBI can affect the interest rate by changing the rate whenever the situation of economy warrants it. At present bank rate is 6%. 4. Open market operation: This refers to the sale or purchase of government securities by RBI in the open market to increase or decrease the liquidity banking system and thereby affect the loanable funds with banks. RBI can also alter the interest rate structure through its pricing policy for open market sale/purchase. 5. Selective credit control: RBI objectives in issuing SCC directives are to prevent speculative holdings of commodities and the resultant of rise in prices. RBI guidelines on SCC are:- Bank should not allow customers dealing in SCC commodities any facilities that would directly or indirectly defect the purpose of SCC directives. The credit limit against each commodity in SCC directives should be segregated.
In Times Recession: The RBI adopted soft monetary policy since the start of the global recession and reduced the short term lending rate (repo rate) by 4.25%, short term borrowing rate (reverse repo rate) by 2.75%, and cash reserve ratio (CRR) by 4% over the last one year. A wide spread expectation in the market is that the RBI will keep its monetary policy stance unchanged in the fourth coming quarterly policy review at the end of October 2009. Here are some factors that analysts will be watching for cues on which direction the RBI will take with regard to the monetary policy in next few quarters:- 1. Fiscal deficit: The central government projected a large fiscal deficit in October 2009. The centre is expected to borrow about rupees 4.5 lacs crores from the money market from the current fiscal. Last year, the centre borrowed rupees 3.1 lacs crores. This is one of the main factors that will work in favour of keeping the monetary policy soft in the short medium terms so that the overall liquidity conditions remains in a comfortable zone. 2. Global economic condition: The current soft policy regime was started to protect the domestic economy from the recession. The global economic conditions have improved in the last quarters. However, there are pockets of concern still and hence analysts believe the RBI will not change the policy stance till the economic recovery is on a strong footing. However, once the RBI is sure that the economic recovery is secure, it will start tightening the monetary policy as there would be inflationary pressures in the economy. 3. Credit off-take: The credit off take has emailed quite subdued during the last few quarters and has not picked up as expected. Usually, a pick-up in the credit off take sends signals to the central bank that the economy could be overheating, thus promoting it to tighten the monetary policy (interest rate ratio as well as reserve rate ratio). A lower credit off take prompts it to keep the interest rate in the short term. 4. Inflation: The inflation rate is another factor that influences the monetary policy stance. A high inflation rate gives the indication of higher liquidity chasing lesser resources in the economy, and hence, calls for tightening in the monetary policy. There has been negative inflation based on the WPI(wholesale price index) for the last three months. The main reason for the negative inflation is the higher base effect from last year (mainly due to higher fuel and metal prices during the corresponding period last year). The situation in the economy was not like a negative inflation rate then deflation. The inflation rate has come into positive territory since the last couple of weeks due to the reduced base effect of last year. Analysts believe it will rise quickly and reach higher level by the end of this fiscal. 5. Need for timely action: The RBI is expected to continue its soft monetary policy in the coming quarterly review. However, analysts believe the RBI will give indication of changing its stances in the medium term as some significant factors like economic recovery, high liquidity and inflation has started picking up. Timely action would be required to be maintaining the overall balance in the economy and prevent the situation from getting out of control.
MEASURES TAKEN BY RBI TO COPE UP WITH GLOBAL RECESSION. In order to cope up with global recession all the country are doing this all most every month and India which was not really into recession is trying to take all the measures to keep away from it, but its kind of deeper than expected, out of the various cuts that RBI has did this is latest: Repo rate cut: To reduce the repo rate under the liquidity adjustment facility (LAF) by 100 basis points from 6.5% to 5.5% with immediate effect.
Reverse repo rate: To reduce the rate under the LAF by 100 basis points from 5.0% to 4.0% with immediate effect. Cash reserve ratio(CRR): To reduce the CRR of scheduled banks by 50 basis points from 5.5% to 5.0% from the fortnight beginning January 17, 2009. The CRR cut is not immediate at least its happening is this the only factor that will put some money in banks hand which in turn can be used by banks for various purpose so this cut will release 20000 crores. We can expect more rate cuts in lending loans from various banks.
Index 1. Establishment of RBI 2. Management of RBI 3. Share Capital of RBI 4. Functions of RBI 5. Norms of RBI 6. Reforms of RBI 7. Monetary Policy of RBI 8. In Times of Recession