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The giuding principle for a Central Bank, whatever function or group of functions, it performs at any particular moment, is that

it should act only in public interest and without regard to profit as a primary consideration.
Establishment !

The Reserve Bank of India (RBI) is the central bank of India, and was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 193 ! The "entral #ffice is located at $%&bai since inception! Tho%'h ori'inall( privatel( owned, since nationalisation in 19 9, RBI is f%ll( owned b( the )overn&ent of India! It was ina%'%rated with a share capital of Rs! 5 "rore divided into shares of Rs! 1** each f%ll( paid %p! The entire share was firstl( owned b( private shareholders! The 'overn&ent of India held shares of no&inal val%e of Rs! +,++,***! RBI is 'overned b( a central board (board headed b( a 'overnor) appointed b( the "entral )overn&ent of India! The c%rrent 'overnor of RBI is ,r!-!.en%'opal Redd( (who s%cceeded ,r! Bi&al /alan on 0epte&ber 1, +**3)! RBI has ++ re'ional offices across India! The reserve bank of India was nationalised int the (ear 19 9!

"reamble !

The 2rea&ble prescribes the ob3ective as4

"to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

RBI Tower

#$%CT&'%( "E)#')*E+ B, )B& ! Main Functions:1. Monetary Authority:The Reserve Bank of India 5or&%lates, i&ple&ents and &onitors the &onetar( polic(! Its &ain ob3ective is &aintainin' price stabilit( and ens%rin' ade6%ate flow of credit to prod%ctive sectors!

2. Regulator and supervisor of the financial system:2rescribes broad para&eters of bankin' operations within which the co%ntr(7s bankin' and financial s(ste& f%nctions! Their &ain ob3ective is to &aintain p%blic confidence in the s(ste&, protect depositors7 interest and provide cost8effective bankin' services to the p%blic!

3. Manager of Exchange ontrol:The &ana'er of the e9chan'e control depart&ent &ana'es the 5orei'n :9chan'e $ana'e&ent Act, 1999! ;is &ain ob3ective is to facilitate e9ternal trade and pa(&ent and pro&ote orderl( develop&ent and &aintenance of forei'n e9chan'e &arket in India!

4. !ssuer of currency:The person who is iss%er iss%es and e9chan'es or destro(s c%rrenc( and coins not fit for circ%lation! ;is &ain ob3ective is to 'ive the p%blic ade6%ate 6%antit( of s%pplies of c%rrenc( notes and coins and in 'ood 6%alit(!

". #evelopmental role:-

The reserve bank of India perfor&s a wide ran'e of pro&otional f%nctions to s%pport national ob3ectives! The pro&otional f%nctions are s%ch as contests, co%pons, &aintainin' 'ood p%blic relations, and &an( &ore<!!

.$ Related %unctions:There are also so&e of the relatin' f%nctions to the above &entioned &ain f%nctions! The( are s%ch as Banker to the )overn&ent, Banker to banks etc<!

Banker to the Government4 perfor&s &erchant


bankin' f%nction for the central and the state 'overn&ents= also acts as their banker! Banker to banks4 &aintains bankin' acco%nts of all sched%led banks!

Supervisory functions:The Reserve Bank act, 193 and the Bankin' Re'%lation act, 19 9 have 'iven the RBI wide powers of s%pervision and control over co&&ercial and co8operative banks, relatin' to licensin' and establish&ents, branch e9pansion, li6%idit( of their asset, &ana'e&ent and &ethods of workin', a&al'a&ation, reconstr%ction, and li6%idation! The RBI is a%thori>ed to carr( o%t periodical inspections of banks and to call for ret%rns and necessar( infor&ation fro& the&! The s%pervisor( f%nctions of the RBI have helped a 'reat deal in i&provin' the standard of bankin' in India to develop on so%nd lines and to i&prove
the &ethods of their operation!

Promotional functions:?ith econo&ic 'rowth ass%&in' a new %r'enc( since Independence, the ran'e of the Reserve Bank7s f%nctions has steadil( widened! The bank now perfor&s a variet( of

develop&ental and pro&otional f%nctions, which, at one ti&e were re'arded as o%tside the nor&al scope of central bankin'! The RBI was asked to pro&ote bankin' habit, e9tend bankin' facilities to r%ral and se&i8%rban areas, and establish and pro&ote new speciali>ed financin' a'encies!

Major Functions:1! The ,epart&ent attends to the core (central part) stat%tor( f%nction of note and coin iss%e and c%rrenc( &ana'e&ent! This involves forecastin' the de&and for fresh notes and coins, placin' the indent with fo%r printin' presses and &ints, receivin' s%pplies a'ainst those indents and distrib%tin' the& thro%'h the 1@ offices (15 Iss%e #ffices A 3 0%b8#ffices) of the Bank, a wide network of c%rrenc( chests, repositor( (where the reports are stored) and s&all coin depots! The ,epart&ent also keeps an acco%nt of notes in circ%lation and also the stocks at RBI offices and c%rrenc( bo9! -. currency bo/ is an e/tended arm of the &ssue +epartment maintained with a commercial bank where the )B& stores fresh and re!issuable notes and allows the commercial banks to withdraw cash for its re0uirements and deposit its e/cess cash. . repository is an e/tension of the currency bo/ wherein a portion of the currency chest balance is permitted to be held at one or more other local branches of the same bank1 . 0oiled (tornBdirt() notes are also stocked in the bo9es pendin' transportation to RBI! +! The ,epart&ent ad&inisters the Reserve Bank of India R%les! The r%les la( down the circ%&stances in which val%e of torn and &%tilated notes can be ref%nded! 0oiled notes which are %nfit for circ%lation are &opped (cleaned) %p fro& circ%lation for destr%ction! 3! The ,epart&ent reviews vario%s sec%rit( feat%res of the c%rrenc( notes for incorporation in the notes fro& ti&e to ti&e!

It st%dies the feat%res of the for'ed (artificial) notes detected and sei>ed with a view to deter&inin' the steps needed to be taken to stren'then the inte'rit( of the notes! The ,epart&ent also acts as a nodal ,epart&ent for the Bharati(a Reserve Bank Cote $%dran Dtd!

urrent !ssues:-

1! The ,epart&ent aims at putting clean notes in circulation in


adequate quantity. +! Reviewin' the present s(ste& of distrib%tion of notes and coins in the li'ht of the reco&&endations of e9ternal cons%ltants!

3! :nhancin' the capacit( at Re'ional #ffices for e9a&ination and


disposal of notes thro%'h installation of "%rrenc( .erification and 2rocessin' 0(ste&s!

! Introd%cin' a pol(&er note in the lowest deno&ination, vi>!,


Rs!1* so as to increase the circ%lation life of the note!

There are several departments in the )B&. They are as follows !


$)B.% B.%2( +E".)T*E%T !
The Erban Banks ,epart&ent looks after the re'%lation and s%pervision of pri&ar( co8operative banks! The banks are o%tside the federal r%ral credit str%ct%re s%pervised b( CABAR, and f%nction pri&aril( in the %rban areas! The activities

of the ,epart&ent can be broadl( divided into fo%r areas, vi>!, re'%lator(, s%pervisor(, operational and develop&ental! The re'%lation and s%pervision of pri&ar( co8 operative banks, pop%larl( known as F%rban co8operative banksF, is perfor&ed b( the Erban Banks ,epart&ent in co8ordination with the Re'istrars of "o8operative 0ocieties of the 0tate )overn&ents! The Reserve Bank of India re'%lates the interest rates on deposits and advances onl( to the e9tent of prescribin' interest rate on savin' acco%nts and a &ini&%& lendin' rate on advances! It prescribes &ini&%& cash reserve and li6%id assets to be &aintained as a ratio of net de&and and ti&e liabilities, and also la(s down nor&s for invest&ents in other assets b( pri&ar( co8 operative banks! The ,epart&ent coordinates the refinance facilities 'ranted b( the Reserve Bank of India to 0tate "o8 operative Banks on behalf of %rban co8operative banks for financin' ++ broad 'ro%ps of approved cotta'e and tin( ind%stries as an incentive for financin' ind%strial activities! As a part of develop&ental activit(, the Reserve Bank of India cond%cts special co%rses for senior personnel of %rban co8operative banks at its "olle'e of A'ric%lt%ral Bankin', 2%ne! The Reserve Bank has recentl( reviewed the new bank licensin' polic( for cooperative banks and the branch licensin' polic( for the& in p%rs%ance of the reco&&endations of a ;i'h 2ower "o&&ittee %nder the "hair&anship of 0hri G! $adhava Rao, $e&ber, "entral Board, Reserve Bank of India!

)$).3 "3.%%&%4 .%+ C)E+&T +E".)T*E%T ! &a' (road )or* Areas:-

In r%ral plannin' and credit depart&ent there is $onitorin' and facilitatin' flow of credit to r%ral, a'ric%lt%ral and s&all scale ind%striesH sectors! Ender this the policies are fra&ed on basis of priorit( sector lendin'! This depart&ent &akes allocations for contrib%tion to R%ral Infrastr%ct%re ,evelop&ent 5%nd (RI,5) a&on'st sched%led co&&ercial banks! There is also i&ple&entin' and &onitorin' Dead Bank 0che&e which ai&s at for'in' (cop(in') a coordinated approach for providin' bank credit to achieve overall r%ral develop&ent ! R%ral plannin' and credit depart&ent also s%pervises and sets %p the local banks which can be set %p with initial capital of Rs! 5 crores for servin' two or three conti'%o%s districts! It is actin' as re'%lators for Re'ional R%ral Banks, 0tateB"entral "o8operative Banks and Docal Area Banks! It is a &onitorin' i&ple&entation of )overn&ent8sponsored povert( alleviation sche&es! There is also an i&ple&entation a new sche&e set %p b( the Reserve Bank of India to 'ive &e&bers of p%blic an eas( and ine9pensive for%& for redressal of their 'rievances a'ainst banks known as Banking Ombudsman Scheme:

(b !hrust "reas:# "redit deliver( innovations! $icro finance initiatives! Gisan credit cards! Restr%ct%rin' co8operatives! 5ra&in' '%idelines for rehabilitation of sick 00I7s! #')E&4% E5C6.%4E +E".)T*E%T !

?ith the introd%ction of the $oreign %&change 'anagement "ct ()))* ($%'" with effect fro& /%ne 1, +***, the ob3ective of the $oreign %&change +epartment has shifted fro& conservation of forei'n e9chan'e to Ffacilitatin' e9ternal trade and pa(&ent and pro&otin' the orderl( develop&ent and &aintenance of forei'n e9chan'e &arket in IndiaF! The new Act has bro%'ht abo%t str%ct%ral chan'es in the e9chan'e control ad&inistration! Re'%lations have been fra&ed for dealin' with vario%s t(pes of transactions! These re'%lations are transparent and have eli&inated case8b(8case approvals! All c%rrent acco%nt transactions are free fro& restrictions e9cept @ transactions prohibited b( the )overn&ent of India! There are total 11 transactions which re6%ire prior per&ission of the )overn&ent of India and 11 transactions on which indicative li&its are fi9ed b( the )overn&ent and release of forei'n e9chan'e be(ond those li&its re6%ires per&ission fro& the Reserve Bank! All Re'ional #ffices of the ,epart&ent have in t%rn been a%thori>ed to release e9chan'e for s%ch transactions! 5or capital acco%nt transactions, the Reserve Bank re'%lations provide for 'eneral per&issionsBa%to&atic ro%tes for invest&ents in India b( non8residents, invest&ents overseas b( residents and borrowin's abroad, etc! This depart&ent ens%res ti&el( reali>ation of e9port proceeds and reviews, on a contin%o%s basis, the e9istin' r%les in the li'ht of s%''estions received fro& vario%s trade bodies and e9portersH fora! This depart&ent also collects data relatin' to fore9 transactions fro& a%thori>ed dealers on a dail( basis for e9chan'e rate &ana'e&ent and on a fortni'htl( basis for &onthl( 6%ick esti&ates of balance of pa(&ents and 6%arterl( balance of pa(&ents co&pilation! It la(s down polic( '%idelines for risk &ana'e&ent relatin' to fore9 transactions in banks! The ,epart&ent is also entr%sted with the responsibilit( of licensin' banksB&one( chan'ers to deal in forei'n e9chan'e and inspectin' the&!

There is a 7(tanding Consultative Committee on E/change Control7 consistin' of representatives fro& vario%s trade bodies and a%thori>ed dealers which &eets twice a (ear and &akes reco&&endations for polic( for&%lation! ?ith a view of f%rther i&provin' facilities available to CRI7s and re&ovin' irritants, the ,epart&ent is also en'a'ed, on an on'oin' basis, in reviewin' and si&plif(in' the proced%res and r%les!

&%+$(T)&.3 .%+ E5"')T C)E+&T


+E".)T*E%T !
;istoricall(, Ind%strial and :9port "redit ,epart&ent (I:",) laid down detailed polic( prescriptions for lendin' operations of banks! This involved for&%latin' inventor( and receivable nor&s for vario%s ind%stries, iss%ance of '%idelines on &atters s%ch as $a9i&%& 2er&issible Bank 5inance ($2B5), consorti%& ('ro%p) arran'e&ent and scr%tin( of credit proposals %nder the "redit A%thori>ation 0che&e ("A0)B"redit $onitorin' Arran'e&ent ("$A)! The stance (position) of the Reserve BankHs polic( now is to &ove awa( fro& &icro re'%lation and to %ndertake onl( &acro &onitorin'! I:", th%s withdrew fro& prescribin' detailed lendin' nor&s for banks! It now4

5or&%lates &acro level policies in re'ard to credit to non8


00I ind%stries, e9port, ho%sin' and infrastr%ct%re develop&ent, desi'ned to speed %p the credit deliver( s(ste& of banks! 5or&%lates polic( re'ardin' bank credit for rehabilitation of sickBweak non800I %nits!

A%thori>es food credit li&its for 5ood "orporation of


India and vario%s 0tate )overn&ents and li&its for proc%re&ent of oilseeds and p%lses to Cational A'ric%lt%ral "o8operative $arketin' 5ederation of India Di&ited and proc%re&ent of 3%te to /%te "orporation of India Dtd!, for drawin' credit fro& a consorti%& of banks!

Acts as a nodal depart&ent for &onitorin' the activities of


Cational ;o%sin' Bank and Infrastr%ct%re ,evelop&ent 5inance "o&pan( Dtd!

$onitors the flow of credit to ind%stries, ho%sin' and


e9port sectors thro%'h a reportin' s(ste&!

;olds &eetin's of the :9port Advisor( "o&&ittee where


&e&bers are banks and e9port pro&otion or'ani>ations, to deliberate on finance related and e9chan'e control related iss%es affectin' e9porters!

+epartment of Banking (upervision !


The Reserve Bank of India has been entr%sted with the responsibilit( of s%pervisin' the Indian bankin' s(ste& %nder vario%s provisions of the Bankin' Re'%lation Act, 19 9 and RBI Act, 193 ! As re'ards co&&ercial banks and 5I7s, this responsibilit( is dischar'ed thro%'h the ,epart&ent of Bankin' 0%pervision (,B0), which s%pervises 9+ co&&ercial banks and 9 select financial instit%tions (5I7s), thro%'h its 11 Re'ional #ffices!

,ore $unctions
The ,epart&ent of Bankin' 0%pervision at present e9ercises the s%pervisor( role relatin' to co&&ercial banks and select 5I7s in the followin' for&s4

(a) Endertakin' sched%led and special on8site inspections of banks, their off8site s%rveillance as also post inspection follow8 %p of co&pliance! (b) 0ervin' as the secretariat for the Board for 5inancial 0%pervision (B50)! (c) ,eter&inin' the criteria for the appoint&ent of stat%tor( a%ditors and special a%ditors and assessin' a%dit perfor&ance and disclos%re standards! (d) ,ealin' with financial sector fra%ds and attendin' to the co&plaints received a'ainst the banks and 5I7s fro& p%blic, banks, )overn&ent, etc! (e) :9ercisin' s%pervisor( intervention in the i&ple&entation of re'%lations which incl%des I reco&&endation for re&oval of &ana'erial and other persons, s%spension of b%siness, a&al'a&ation, &er'erBwindin' %p, iss%ance of directives and i&position of penalties! -n .//4* the work relating to inspection of .uthori8ed +ealers has also been transferred from the #oreign E/change +epartment to Banking (upervision +epartment.

Supervisory 0rocess
A hi'h powered Board for 5inancial 0%pervision (B50), co&prisin' the )overnor of RBI as "hair&an, one ,ep%t( )overnor as .ice "hair&an, other ,ep%t( )overnors and fo%r ,irectors of the "entral Board of RBI as $e&bers was constit%ted in Cove&ber 199 with the &andate to e9ercise the powers of s%pervision and inspection in relation to the bankin' co&panies, financial instit%tions and non8bankin' financial co&panies! 2resentl(, B50 e9ercises s%pervision not onl( over banks b%t also over select ,evelop&ental 5inance Instit%tions (,5I7s), Con8 bankin' 5inancial "o&panies (CB5"7s), 2ri&ar( ,ealers (2,7s) and Erban "ooperative Banks (E"Bs)!!!!!!!!!!!!

Supervisory Strategy
The ,epart&ent of Bankin' 0%pervision has for&%lated and p%t in place a s%pervisor( strate'( which, besides retainin' the i&portance of on8site inspections which has been the &ain plank of bankin' s%pervision, also foc%ses on three other areas4

off8site &onitorin' thro%'h introd%ction of a set of


Ret%rns= stren'thenin' of the internal control s(ste&s in banks and Increased %se of e9ternal a%ditors in bankin' s%pervision!

,urrent $ocus

(a) An #n8site Ann%al 5inancial Inspection s(ste& which foc%ses on stat%toril( &andated areas of solvenc(, li6%idit( and operational health of the banks! It is based on internationall( adopted "A$:D &odel ("apital Ade6%ac(, Asset J%alit(, $ana'e&ent, :arnin's, Di6%idit(), &odified as "A$:D0 (0 for 0(ste&s K "ontrol) to s%it the needs of Indian bankin' s(ste&! (b) A s%pervisor( ratin' &odel based on "A$:D0 concept ("AD"0 for forei'n banks), co&binin' both 6%alitative and 6%antitative ele&ents to s%&&ari>e the perfor&ance of individ%al banks and also to assess the a''re'ate stren'th and so%ndness of the bankin' s(ste&! (c) An #ff8site $onitorin' and 0%rveillance (#0$#0) s(ste& has been set %p in 1995 with the pri&ar( ob3ective of anal(>in' the financial position of the banks in between on8site inspections! The ret%rns received fro& the banks cover a wide ra'e of data pertainin' to assets, liabilities and off8balance sheet e9pos%res, e9pos%re to sensitive sectors, e9pos%re of banks to interest rate and li6%idit( risks (both in do&estic and forei'n c%rrencies), operations of s%bsidiaries etc ! This helps the polic( &akers to refine their re'%lator( as well as &onetar( polic( stance so as

(d)

(e)

(f)

(')

to achieve a fine balance between 'rowth and financial stabilit(! $acro8pr%dential indicators ($2I7s) are bein' co&piled since $arch +***, as a part of the Reserve Bank of IndiaHs initiatives in adoptin' best international practices for &onitorin' the stabilit( of the financial s(ste& in India! The $2I7s co&prise both a''re'ated &icro8pr%dential indicators (A$2I7s) of the health of individ%al financial instit%tions and &acro8econo&ic indicators ($:Is) associated with financial s(ste& so%ndness! A Risk Based 0%pervision (RB0) approach to inspection, envisa'es the &onitorin' of banks b( allocatin' s%pervisor( reso%rces and foc%sin' s%pervisor( attention accordin' to the risk profile of each instit%tion! The process also involves the contin%o%s &onitorin' and eval%ation of the appropriateness of the risk &ana'e&ent s(ste&s and control environ&ent of the s%pervised instit%tion in relation to its b%siness strate'( and e9pos%res, with a view to assessin' its riskiness! A s(ste& of 2ro&pt "orrective Action (2"A), based on a pre8 deter&ined r%le8based str%ct%red earl( intervention is in place to enhance the e9istin' s%pervisor( fra&ework! Ender the 2"A, certain str%ct%red actions will be initiated b( the RBI in respect of banks which hit certain defined tri''er points in ter&s of three para&eters i!e! "apital f%nds to Risk ?ei'hted Assets Ratio ("RAR), Cet Con 2erfor&in' Assets (C2A7s) and Ret%rn on Assets (RoA)! Banks are bein' advised fro& ti&e to ti&e abo%t the &a3or fra%d prone areas and the safe'%ards necessar( for prevention of fra%ds, in order to prevent fra%ds in the bankin' sector! In /%ne +** a 5ra%d $onitorin' "ell was set %p in the depart&ent to (i) review s(ste&s and controls in financial sector (ii) discern the e&er'in' trends in fra%ds and circ%late the& to banks thro%'h electronic &edia (iii) e9a&ine international best practices so as to s(ner'i>e the& with the local re6%ire&ents wherever necessar( (iv) act as a nodal a'enc( for interaction with vario%s e9ternal a'encies

(h)

(i)

(3)

(k)

connected with prevention and investi'ation of fra%ds s%ch as ".", "BI etc (v) act as a central repositor( of infor&ation on fra%ds in financial sector and act as a think tank for fra%d prevention! ?ith a view to enable s%pervisor( assess&ent of risks and adherence to certain pr%dential re'%lations on 'ro%p basis, '%idelines on consolidated acco%ntin' and s%pervision have been iss%ed to banks for co&pliance co&&encin' fro& the (ear ended $arch 31, +**3! Banks were advised to prepare and s%b&it consolidated pr%dential reports ("2R) in this re'ard and these reports are bein' reviewed b( RBI on a half8 (earl( basis! A ?orkin' )ro%p on 5inancial "on'lo&erates constit%ted with one &e&ber each fro& the financial re'%lators 8 RBI, 0:BI and IR,A had s%''ested certain criteria for identif(in' financial con'lo&erates, a &onitorin' s(ste& for capt%rin' intra8'ro%p transactions and e9pos%res a&on'st s%ch con'lo&erates and a &echanis& for inter8re'%lator( e9chan'e of infor&ation in respect of con'lo&erates! The dataB infor&ation received fro& the ++ con'lo&erates identified b( the )ro%p are anal(>ed b( the respective re'%lators! In view of the added e&phasis on the role of &arket discipline %nder Basel II and with a view to enhancin' transparenc(, banks have been advised that all cases of penalt( i&posed b( the Reserve Bank of India as also strict%resBdirections on specific &atters incl%din' those arisin' o%t of inspection wo%ld be placed in the p%blic do&ain! The s%pervisor( strate'( of the ,epart&ent of Bankin' 0%pervision also incl%des48

0tren'thenin' the internal controls of banks based on the


reco&&endations of the /ilani "o&&ittee and the i&ple&entation of Risk based Internal A%dit (RBIA) Increasin' %se of 0tat%tor( A%ditors for verification and certification of certain aspects like adherence b( banks to

stat%tor( li6%idit( re6%ire&ents, pr%dential nor&s relatin' to inco&e reco'nition, classification of assets and provisionin', a%thentication of bank7s assess&ent of capital ade6%ac( ratio and other ratios to be disclosed in the Cotes on Acco%nts, co&&ents on certain aspects of bank7s f%nctionin' in the for& of Don' 5or& A%dit Reports (D5AR) etc! A s(ste& of conc%rrent a%dit of b%siness transactions of banks intended to cover at least 5* percent of the b%siness of the bank, besides 1**L a%dit of risk sensitive portfolios s%ch as fore9, invest&ents etc is in place! A s(ste& of 6%arterl( &eetin's between senior officials of RBI and ":#s B "$,s of banks revolvin' aro%nd the &a3or concerns as revealed in the latest inspection findin's, the pro'ress &ade therein etc has been p%t in place since the (ear +***! Banks7 strate'ic plans on 'eneral i&prove&ent in their financial stren'th, steps taken to i&ple&ent s%ch plans and res%lts achieved therein are also disc%ssed! These &eetin's provide a for%& for bankers to raise iss%es relatin' to polic( &atters that the bankers feel need clarification!

+epartment of %on!Banking (upervision -+%B(1 !


Mission:,evelopin' CB5"s sector as an inte'rated and health( part of the 5inancial 0(ste&= and thereb(, affordin' indirect protection to the interests of their depositors

Regulatory and +upervisory %rame,or*:The RBI Act as a&ended in /an%ar( 199M provides for, a&on' other thin's,

:ntr( nor&s for Con8Bankin' 5inancial "o&panies (CB5"s)


and prohibition of deposit acceptance b( %nincorporated bodies with so&e e9ceptions!

2owers of the Bank to iss%e asset side re'%lations! "o&p%lsor( re'istration, &aintenance of li6%id assets and
reserve f%nd!

,irections on acceptance of deposits and pr%dential


re'%lation!

"o&prehensive re'%lation of deposit takin' CB5"s! 2%nitive


action like cancellation of "ertificate of Re'istration, prohibition fro& acceptance of deposits and alienation of assets, filin' cri&inal co&plaints and windin' %p petitions in e9tre&e cases, appoint&ent of RBI observers in certain cases!

#evelopmental activities "o8ordination with 0tate )overn&ents for 0tate De'islations to


c%rb %na%thori>ed and fra%d%lent activities in this sector!

2%blicit(

for depositors7 ed%cation and awareness, workshopsBse&inars of trade and ind%str( or'ani>ations, depositors associations!

Infor&al Advisor( )ro%p as an aid to decision &akin'! 2ro&otion of 0elf8Re'%lator( #r'ani>ation (0R#) of CB5"s! Trainin' pro'ra&&es for personnel of CB5"s, 0tate
)overn&ents and 2olice #fficials!

,urrent $ocus Cew le'islation for CB5"s to &ake %na%thori>ed deposit takin'
activit( a co'ni>able offence

5%rther the ca%se of p%blic awareness thro%'h ed%cation


ca&pai'ns and workshopsBse&inars for vario%s t(pes of p%blic, incl%din' a%ditors of CB5"s

2%t in place an asset liabilit( and risk &ana'e&ent s(ste& for


CB5"s

*'%ET.), "'3&C, '# T6E )B& !

?ith the introd%ction of the 5ive (ear plans, the need for appropriate ad3%st&ent in &onetar( and fiscal policies to s%it the pace and pattern of planned develop&ent beca&e i&perative! The monetary policy since 195+ e&phasi>ed the twin ai&s of the econo&ic polic( of the 'overn&ent4 (a) spread %p econo&ic develop&ent in the co%ntr( to raise national inco&e and standard of livin', and (b) to control and red%ce inflationar( press%re in the econo&(! This polic( of RBI since the 5irst plan period was ter&ed broadl( as one of controlled e9pansion, i!e= a polic( of Nade6%ate financin' of econo&ic 'rowth and at the sa&e ti&e the ti&e ens%rin' reasonable price stabilit(O! :9pansion of c%rrenc( and credit was essential to &eet the increased de&and for invest&ent f%nds in an econo&( like India which had e&barked on rapid econo&ic develop&ent! Accordin'l(, RBI helped the econo&( to e9pand via e9pansion of &one( and credit and atte&pted to check in rise in prices b( the %se of selective controls!

R(!-s Anti-inflationary Monetary .olicy since 1/021..


0ince 19M+, the Indian econo&( has been workin' with considerable inflationar( potential 888888 rapid increase in &one( with the p%blic and with the bankin' s(ste&! There was also e9pansion of bank credit to finance trade and ind%str(! RBI

was forced to abandon Pcontrolled e9pansion7 and adopt the polic( of credit restraint or ti'ht &onetar( polic(! RBI has 'enerall( followed this kind of &onetar( polic( with var(in' de'rees of s%ccess till toda(!

.% E9.3$.T&'% '# T6E *'%ET), "'3&C, !


The ob3ective of &onetar( polic( was at one ti&e characteri>ed b( RBI itself as Pcontrolled e9pansion!7 #n the one hand, RBI was thinkin' steps s%ch as the bill &arket sche&e to e9pand bank credit to ind%str( and trade and th%s help in econo&ic develop&ent! #n the either hand, RBI was %sin' both 6%antative ('eneral credit restraint) and selective credit controls so that the deplo(&ent of loans and advances b( the co&&ercial banks for spec%lative p%rposes was %nder control! Their was necessar( to keep the risin' prices %nder check! Th%s, the &onetar( polic( had twin ai&s8 e9pansion of the econo&( and control of inflationar( press%re! $onetar( polic( RBI has certain inherent constraints and obvio%sl( li&ited in its %sef%lness! 5inall(, the weapons and the powers available to RBI are s%ch that the( cover onl( or'ani>ed bankin' sector vi>, co&&ercial banks and cooperative banks! To the e9tent inflationar( press%re is the res%lt of bank finance, Reserve Banks 'eneral and selective controls will have positive effect! B%t if inflationar( press%re is reall( bro%'ht abo%t b( deficit financin' and shorta'e of 'oods, RBI7s control &a( not have effect at all! This is what is probabl( happenin' in Indian in recent (ears! Besides, it sho%ld alwa(s be kept in &ind that RBI has no power over non8bankin' financial instit%tions as well as indi'eno%s bankers who pla( s%ch &a3or role in financin' trade and ind%str(!

'B:ECT&9E( '# *'%ET.), "'3&C, !

1. .rice sta2ility:The chakravart( co&&ittee ar'%ed that, in the conte9t of planned econo&ic develop&ent, &onetar( a%thorities sho%ld ai& at Nprice stabilit(O in the broadest sense! 2rice stabilit( here does not &ean constant price level b%t it is consistent with an ann%al rise of L in the wholesale price inde9! To achieve this ob3ective, the 'overn&ent sho%ld ai& at raisin' o%tp%t levels, while RBI sho%ld control the e9pansion in reserve &one( and the &one( s%ppl(! 2. M34E5AR6 5AR7E5!47::&phasi>in' the inter8relation between &one(, o%tp%t and prices, the chakravart( co&&ittee has reco&&ended the for&ation of a &onetar( polic( based on &onetar( tar'etin'! Accordin' to the co&&ittee, tar'et for 'rowth in &one( s%ppl( in a broad sense d%rin' a 'iven (ear sho%ld be in ter&s of a ran'e! (a)based on anticipated 'rowth in o%tp%t, and (b) in the li'ht of the price sit%ation! The tar'et ran'e sho%ld be anno%nced in advance, the tar'et for &one( s%ppl( sho%ld be reviewed in the co%rse of the (ear to acco&&odate revisions, if an(, in the anticipated 'rowth in o%tp%t and an( chan'e in the price sit%ation! 3. hange in the definition of 2udgetary deficit:Till now the b%d'etar( deficit of the central 'overn&ent essentiall( took fro& increase in treas%r( bills o%tstandin'! Cot all the treas%r( bills were held b( RBI b%t part of treas%r( bills were absorbed b( the p%blic! 0ince the present

concept of b%d'et deficit did not distin'%ish between the a&o%nts held b( RBI, it overstated the e9tent of &onetar( i&pact of fiscal operation! Accordin'l(, the chakravart( co&&ittee s%''ested a chan'e in the definition of b%d'etar( deficit, so that there co%ld be clear distinction between reven%e deficit, fiscal deficit and overall b%d'etar( deficit! 8. !nterest rate policy:At present the interest rate str%ct%re is co&pletel( ad&inistered b( the &onetar( a%thorities %nder the 'eneral direction of the 'overn&ent! Accordin' to the chakravart( co&&ittee, the present s(ste& of ad&inistered interest rates has beco&e %nd%l( co&ple9 and needs to be &odified the co&&ittee has &entioned so&e of the i&portant aspects of interest rate polic( which need to be taken into acco%nt, while &odif(in' the ad&inistered interest rate str%ct%re as for e9a&ple increasin' the pool of financial savin's, providin' a reasonable ret%rn on savin' of s&all savers, reinforcin' anti8inflationar( policies the need to provide credit at concessional rate of interest to the priorit( sector and the profitabilit( of banks , etc! Th%s, the chakravart( co&&ittee envisa'ed a stron' s%pportive role for interest rate polic( in &onetar( re'%latin' based on &onetar( tar'etin'! ". Restructuring of the money mar*et in !ndia:The co&&ittee envisa'e (predicted) an i&portant role in treas%r( bill &arket, the call &one( &arket, the co&&ercial bills &arket and the inter8corporate f%nds &arket in the allocation of sort ter& reso%rces, with &ini&%& of cost and &ini&%& of dela(, f%rther, accordin' to the co&&ittee, a well8or'ani>ed &one( &arket provided an efficient &echanis& for the trans&ission of the &onetar( re'%lation to the rest of econo&(! Accordin'l(, the

co&&ittee has reco&&ended that RBI sho%ld take &eas%res to develop an efficient!

Other o jectives of Monetary Policy:In certain periods, RBI &a( be serio%sl( concerned with other short#term ob1ectives and proble&s! $or instance* d%rin' in two (ears 199 891, RBI had to enter the forei'n e9chan'e &arket in a bi' wa( to prevent heav( depreciation of the r%pee! This was also done d%rin' /an%ar( 199@ and later to prevent the r%pee followin' the e9perience of 0o%th Asian c%rrencies! Bi&al /alan, the )overnor of RBI ca&e o%t stron'l( with a series of &eas%res to check the rapid slidin' of his r%pee a'ainst the dollar! These ob3ectives can be taken as short8ter& ob3ectives of &onetar( polic( of RBI! The long#term policies of RBI, however reflects the banks fir& co&&it&ent to p%rs%e a low and stable order of inflation88888the ass%&ption is that real 'rowth
wo%ld be in 3eopard( (dan'er), if inflation 'oes be(ond the &ar'in of tolerance!

2%S%23% B"45 O$ -4+-"


;eapons of *onetary "olicy ! !re"it control:

(. General credit controls:# 0ince 1955851 and partic%larl( after 19M38M the inflationar( rise in prices has been steadil( &o%ntin'! Increased 'overn&ent e9pendit%re financed thro%'h deficit spendin' has the direct effect of p%shin' %p the prices, wa'es and inco&es! RBI has vario%s weapons of control and, tro%'h %sin' the&= it hopes to achieve its &onitor( polic(!

These weapons of control are broadl( two4 quantitative and qualitative controls. 6uantitative controls are %sed to control vol%&e of credit and, indirectl(, to control the inflationar( and deflationar( press%res ca%sed b( e9pansion and contraction of credit! 6ualitative controls are also known as 'eneral credit controls and consist of bank rate polic(, open &arket operation and cash reserve ratio! (a)Bank 2ate 4 In accordance with the 'eneral tradition of the 193*s, RBI started with the cheap &one( polic( and has fi9ed a low bank rate (3L) and did not chan'e it till Cov 1953 when it raised the bank rate to 3!5L! the bank rate 'rad%all( rose to 1*L in /%l( 19@1 I these were onl( chan'es d%rin' this period! The bank rate re&ained %nchan'ed at 1*L for another 1*(ears (19@181991)! It was revised %pwards to 11L in /%l( 1991 and f%rther to 1+L in #ctober 1991! ;owever, the role of bank rate as an instr%&ent of &onetar( polic( has been ver( li&ited in India beca%se of these basic factors, The str%ct%res of interest rates are ad&inistered b( RBI I the( are not a%to&aticall( linked to the bank rates! "o&&erciall( banks en3o( specific refinance facilities, and not necessaril( redisco%nt their eli'ible sec%rities with RBI at bank rates! The bill &arket is %nderdeveloped and the different s%b &arkets or the &one( &arkets are not infl%enced b( the bank rate! 0ince the later part of 1955, India passed thro%'h a severe li6%idit( cr%nch and as a res%lt the pri&e lendin' rates were r%lin' hi'h! Ind%strial prod%ction was affected adversel(! #ne step which RBI took was to red%ce the bank rate fro& 1+ to11 percent in April 199M, And 'rad%all( to 1!5L! The red%ction of the

bank rate was to help in red%ction of the other interest rates and th%s sti&%late borrowin' fro& banks! (b ,ash reserve requirements (,22 :# Another weapon available to RBI for credit control is the %se of variable cash reserve re6%ire&ents! Ender the RBI act, 193 , ever( co&&ercial bank has to keep certain &ini&%& cash reserves with RBI8 initiall(, it was 5L a'ainst de&and deposits and +L a'ainst ti&e deposits8these are known as the stat%tor( cash reserves! 0ince 191+, RBI was e&powered to var( the cash reserves re6%ire&ent between 3L and 15L of the total de&and and ti&e deposits! ,%rin' 19M3, RBI e9ercised the power twice, as a for& of cred@it s6%ee>e8 the stat%tor( reserves were raised fro& 3 to 5L in /%ne 19M3 and to ML in 0epte&ber 19M3! 0ince then, RBI has raised or red%ce "!R!R! a n%&ber of ti&es (and %lti&atel( raised to the &a9i&%& li&it of 15L of net de&and and ti&e liabilities) to infl%ence the vol%&e of cash with the co&&ercial bankin' s(ste& and th%s infl%ence there vol%&e of credit!

.. Selective and direct credit control:#


Ender the bankin' Re'%lation Act 19 9 section +1 e&powers RBI to iss%e directives to the bankin' co&panies re'ardin' their advances! These directives &a( relate to4 The p%rpose for which advances &a( or &a( not be &ade= The &ar'ins to be &aintained in respect of sec%red advances= The &a9i&%& a&o%nt of advanta'es to an( borrower= The &a9i&%& a&o%nt %p to which '%arantees &a( be 'iven b( the co&pan( on behalf of an( fir&, co&pan( etc!= and The rate of interest and other ter&s and conditions for 'rantin' advances!

)enerall( RBI %ses three kinds of selective credit controls4 1! &ini&%& &ar'ins for lendin' a'ainst specific sec%rities= +! ceilin' on the a&o%nts of credit for certain p%rposes= and 3! discri&inator( rate of interest char'ed on certain t(pes of advances! ?hile i&posin' selective controls! RBI 'enerall( takes 'reat care that bank credit for prod%ction and transportation of co&&odities and e9ports is not affected! 0elective controls are foc%sed &ainl( on credit to traders for financin' inventories (for p%rposes of hoardin' and spec%lation)!

Open mar#et operations of RBI:


In econo&ies with well developed &one( &arkets, central &arket %se open &arket operations8 i!e! b%(in' and sellin' eli'ible sec%rities b( the central bank in the &one( &arket8 to infl%ence the vol%&e of cash reserves with co&&ercial banks and th%s infl%ence the vol%&e of loans and advances the( can &ake to the ind%strial and co&&ercial sectors! RBI has not %sed this weapon for &an( (ears! 0ince 1991, the enor&o%s inflow of forei'n f%nds into India created the proble& of e9cess li6%idit( with the bankin' sector and RBI %ndertook lar'e scale open &arket operations! ?hen RBI sells 'overn&ent sec%rities in the &arket, it withdraws the part of the cash reserves of co&&ercial banks and, thereb(, red%ces the abilit( of bank to lend to the ind%strial and co&&ercial sectors! The co&&ercial banks will find that the( have s%rpl%s cash8 the( will create &ore credit and &ore banks deposits! The s%ppl( of &one( will e9pand! 0%ch a polic( of b%(in' 'overn&ent sec%rities will be adopted to reserve econo&ic recession in the co%ntr(! It appears that RBI will activel( %se open &arket operations as an instr%&ent of &onetar( polic( and not si&pl( to s%pport the &arket for 'overn&ent bonds!

,onclusion:# RBI is the ape9 bankin' instit%tion in India! RBI is an a%tono&o%s bod( pro&oted b( the 'overn&ent of India and is head6%artered at $%&bai! The RBI pla(s a ke( role in the &ana'e&ent of the treas%r( forei'n e9chan'e &ove&ents and is also the pri&ar( re'%lator for bankin' and non8bankin' financial instit%tions! The RBI operates a n%&ber of 'overn&ent &ints that prod%ce c%rrenc( and coins!

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