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Central Bank A central bank is an institution which is responsible for safeguarding the financial stability of the country.
Central banks world view Today almost all nations in the globe have their Central Banks The idea of having central bank attained popularity during 20th century (although some central banks in existence earlier as well) International Monetary Conference held in Brussels (1929) strongly emphasized the need of central banking unit
Currency Principle
Currency principle is concerned with the belief that the money supply or currency in circulation should be strictly related to the amount of gold deposited with the Bank
Collect taxes on behalf of govt, pay pensions and salaries to employees Advisor in financial matters to the government Agent to the govt in international banking and financial markets.
4:Controller of credit
The most important function of central bank in modern times is that of controlling the credit operations of commercial banks by regulating their credit volume
For controlling credit C.B use. 1:Bank rate policy 2:Change in reserve ratio 3:Credit rationing. 4: Direct action
* CRR is used as a tool in monetary policy, influencing the countrys economy, borrowing and interest rates
CRR works like brakes on the economys money supply * CRR requirements affect the potential of the banking system to create higher or lower money supply
SLR
Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR
REPO Rate
The rate at which central bank repurchases government securities fro commercial banks Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI
Credit Rationing
credit rationing describes the situation when a bank limits the supply of loans, although it has enough funds to loan out, and the supply of loans has not yet equaled the demand of prospective borrowers. Changing the price of the loans (interest rate) does not equilibrate the demand and supply of the loans. The bank finds that raising the interest rate beyond a certain level actually reduces its profitability.
Quantitative Methods:
Changes in Bank Rate Policy or Re discount Rate: ,. By changing the rate of interest, the central bank can influence the supply of money in the country. To control inflation the central bank increases the rate of interest. The commercial banks will also increase their rate of interest. Accordingly, the loans will decrease, investment, output and prices will fall. In this way, inflation will be controlled. .
2) Qualitative Methods
* Moral Suasion: It is concerned with just as a
moral request by central bank to commercial banks that loans should not be given for unproductive fields which create inflation. Loans should not be given for speculative purposes and hoarding. But such like requests could be effective in the developed countries. Consumers Credit Control: This instrument is applied during inflation. If the central bank wants to control the supply of money, it will issue directions to commercial banks that loans should not be advanced for consumption purposes or for consumer durables
* Direct Action: The instrument of direct action is concerned with the policy of central bank against commercial banks. It can refuse to give loans to commercial banks. The central bank will not advance loan to commercial banks for the sectors which create inflation. Moreover, if commercial banks do not follow the instructions of the central bank, It will refuse to lend commercial banks
RBI: An Introduction
Established on 1st April 1935 under the reserve bank of India act. Headquarters in Mumbai It has 22 regional offices mostly state capitals Current governor is Dr. D. Subbarao
Brief History
It was established on the recommendations of the young commission The RBI was initially a shareholders bank with a Paid up capital of 5 cror Initially it was privately owned Was nationalized in 1948 [vide Reserve Bank (Amendment) Act, 1948] The first Indian Governor was Sree D Dheshmukh
Organization
The reserve bank of India's affairs are governed by a central board of directors appointed by the government of India They are appointed for a period of four years One each for the four regions of the country is the local board which is appointed for four years by the central government The local board advices the central board on local matters
Organisation
Governor Central Board 4 Deputy Governors 10 Directors (nominated by the Central Government) 4 Directors from Local Boards 1 Government Representative (nominated by the Central Government)
Local Boards
Delhi
Mumbai Calcutta Madras
Functions of RBI
Bank of issue (of currency) Banker to the government (including management of public debt) Banker to commercial banks (lender of last resort) Controller of volume of credit in India
FunctionsofRBI
Organization of sound and healthy commercial banking system Concerned with the development of Rural banking; Promotion of financial institutions; Development of money and capital markets
RBI in its promotional role The establishment of BILL MARKET scheme (1952) Establishments of financial corporations For agricultural sector; and Industrial sector Promotion of Regional Rural Banks (with the able assistance of commercial banks) Assistance (to commercial banks) to open foreign branches Establishment of Export-Import bank
Quantitative Measure
Bank rate , Repo rate Open market operations Variation in cash reserve ratio
Qualitative Mesures
Moral Suation Rationing of credit Marginal requirements Direct Action
RBI & Commercial Banks Controller to commercial banks By virtue of Banking Regulation Act, 1949; and
India Act, 1934
Reserve Bank of
General control over commercial banks License to commence banking business Licensing the commercial banks to open branches Revoke the license if the banking company is operating improperly Power to inspect Power to appoint additional directors on the Board of Directors
Issue of currency
Objective To ensure adequate supply of currency Issue of new currency and destruction of currency no longer fit for circulation Maintain minimum reserve for note issue
Devlopmental Rol
Objective To develop the quality of banking system in India To establish financial institutions of national importance like IDBI, NABRAD, Exim Bank, ICICI
Bankers bank Lender of last resort for Commercial banks Commercial co-operative banks Regional rural banks RBI offers refinancing facility to its scheduled banks Before admitting the banking company in to the schedule RBI satisfies itself that such banking company is worth it RBI also has the power to remove the bankiing company from the schedule