PREPARED BY CHAINEET KAUR KANIKA SAREEN JAYA BISHT

MONETARY POLICY AND PHASES OF BANKING INDUSTRY

WHAT IS MONETARY POLICY ?

Monetary policy guides the Central Banks supply of money in order to achieve the objectives of price stability (or low inflation rate), full employment, and growth in aggregate. Monetary Policy is the policy concerning money supply and availability of credit in an economy.
It is administered by the Central Bank of a country.

Objectives of Monetary Policy

Maintenance of Price Stability. Rapid Economic growth. Exchange Rate stability. Balance of Payments equilibrium. Full employment. Equal income distribution.

A Brief History
Modern central banking dates back to the aftermath of great depression of the 1930s. Governments realized that collapsing money supply and credit availability greatly contributed to the savagery of the depression. This realization that money supply affected economic activity led to active government attempts to influence money supply through "monetary policy". At this time, nations created central banks to establish a "monetary authority". Thus, rather than accepting whatever happened to money supply, they actively tried to influence the amount of money available. This would influence credit creation and the overall level of economic activity.

Monetary Policy Tools

There are 2 main tools of Monetary policy:

Quantitative Instruments Qualitative or Selective Instruments

Quantitative Instruments
Reserve requirements The Commercial Banks have to keep a certain proportion of their total assets in the form of Cash Reserves, named as Cash Reserve Ratio (CRR) and a Statutory Liquidity Ratio (SLR). Any change in the VRR (i.e. CRR + SLR) brings out a change in commercial banks reserve positions.

Bank Rate Policy Bank Rate is defined as the rate at which the Central Bank provides loans and advances to the Commercial Banks. When the Central bank wishes to control credit and inflation in the economy, it raises the Bank rate, and vice versa.

Open Market Operations It refers to the purchase and/or sale of short term and long term securities by the central bank in the open market. If the Central Bank were to buy bonds, the effect would be to expand the money supply and hence lower interest rates, the opposite is true if bonds are sold.

Liquidity Adjustment Facility A tool that allows banks to borrow money through repurchase agreements. Repos and Reverse repos in transferable Central government dated securities and treasury bills are used for this adjustment of liquidity.

QUALITATIVE CONTROLS
Consumer Credit Regulation- The regulation of consumer credit consists of laying down rules regarding down payments and maximum maturities of installment credit for purchase of specified durable consumer goods. Raising the required down payment limits and shortening of maximum period tend to reduce the demand for such loans and thus, check consumer credit. Issue of Directives- The Central Bank also uses directives to various commercial banks, in the form of oral or written statements, appeals, or warnings, particularly to curb individual credit structure and to restrain the aggregate volume of loans.

 Rationing of Credit This method is adopted by the Central bank for controlling and regulating the purpose for which credit is granted or allocated by commercial banks. Moral Suasion It implies persuasion and request made by the Central bank to the commercial banks to cooperate with the general monetary policy of the former. It is a psychological means of controlling credit, a purely informal and milder form of selective credit control. Direct Action- The Central bank may take direct action against the erring commercial banks. It may refuse to rediscount their papers, and give excess credit, or it may charge a penal rate of interest over and above the bank rate, for the credit demanded beyond a prescribed limit.

PHASES OF BANKING INDUSTRY

PHASES OF BANKING INDUSTRY IN INDIA

Private control Social control Nationalization Deregulation

PRIVATE CONTROL
Under private control Indian banking industry was efficient one. There was no NPA. But later on certain problems were pointed out: -ownership and control were in few hands leading to concentration of wealth. -misuse of funds by BOD.

Continued
-discrimination against agricultural and small scale industries. -no savings and investments. -no funding was available for planning process.
Hence it was decided to change the pattern of banking industry. Socialist wanted complete socialization. Therefore in 1968 social control was adopted.

SOCIAL CONTROL
Under social control following steps were taken: 1.BOD was reorganized. 2.Permanent chairman was to be appointed for 5 years. 3.RBI was empowered to control commercial banks credit and lending. 4.RBI was also allowed to check BOD.

This model worked for 1 year only. Ultimately it was decided to go for nationalization.

NATIONALISATION
The Government of India issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. In 1980 6 more banks were nationalized. In this way now we have 20 commercial banks plus 1 SBI as major bank in India.

PERFORMANCE OF BANKS UNDER NATIONALISATION

1 Bank deposits have increased .credit deposit have increased However cash deposit ratio remains low. 2 Branch expansion has taken place immensely. 3 Public sector still has monopoly in terms of branches and number of deposits .

Even after impressive performance of nationalization in terms of branch expansion, public deposits etc, ultimately in late 80's banking industry had a question mark that why banks are there if they are showing high level of non performing assets (NPA).On an average 27% of total advances comprised of NPA.It was 35% in case of Bank of Maharashtra.

PROBLEMS POINTED OUT BY NCR

UNDER NEW ECONOMIC POLICY 1991 NARSIMHAM COMMITTEE RECOMMENDTION LISTED FOLLOWING DEFECTS : Productivity per employee declined. NPA increased at an alarming stage Allocative and operational efficiency declined Inefficiency in banking industry increased

REASONS FOR LOW PROFITABILITY

1. LOW INCOME 2. HIGH EXPENDITURE
BECAUSE OF THESE TWO MAJOR REASONS NCR OPTED FOR DEREGULATION.UNDER IT FEW STEPS WERE TAKEN.

Under it, It was suggested to reduce CRR and SLR To reduce NPA ,establishment of ARF was recommended. Free entry for foreign banks it they follow banking sector norms. Introduction of new technology. M&A for unviable, sick economic branches . Government banking should be market oriented. There should not be double control of RBI & Banking dept of finance ministry.

THANK YOU..

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