NAME: JINAL M.

MISTRY

STD: TYBBI

ROLL NO: 527

SUBJECT: CENTRAL BANKING
ASSIGNMENT

SUBMITTED TO: PROF. PRATIK VORA




Q.1. BASEL NORMS
The Basel Committee on Banking Supervision, after a world-
wide consultative process and several impact assessment
studies, evolved a new capital regulation framework, called
International Convergence of capital measurement and capital
standards. A revised framework, released in 2004, has came to
be commonly known as Basel II framework and seeks to foster
better risk management practices in the banking industry.
The objective of Basel II are broadly to maintain the aggregate
level of minimum capital requirements while providing
incentive to adopt more advanced risk-sensitive approaches of
the revised framework. The major objective also includes
creating a better linkage between the minimum regulatory
capital and risk enhancing market discipline, supporting level
playing field in an increasingly integrated global financial
system.
The unique aspect of Basel II is its comprehensive approach to
risk measurements in the banking entities. It adopted a three
pillar structure as follows:
Pillar 1- The minimum capital ratio.
Pillar 2- The supervisory review process.
Pillar 3- The market discipline.

Pillar 1 provides a menu of alternative approaches, for
determining the regulatory capital towards credit risk and
operational risk, to cater to the wide diversity in the banking
system across the world.
Pillar 2 requires the banks to establish an Internal Capital
Adequacy Assessment Process (ICAAP) to capture all the
material risks, including those that are partly covered under the
other two pillars.
Pillar 3 prescribes public disclosures of information on the
affairs of the banks to enable effective market discipline on the
banks operations.
Q.2. CREDIT CREATION BY COMMERCIAL BANKS
Central bank is the first source of money supply in the form of
currency in circulation. The Reserve Bank of Indian is the note issuing
authority of the country. The RBI ensures availability of currency to
meet the transaction needs of the economy. The Total Volume of
money in the economy should be adequate to facilitate the various
types of economic activities such as production, distribution and
consumption.

The commercial banks are the second most important sources of
money supply. The money that commercial banks supply is called
credit money.

The process of 'Credit Creation' begins with banks lending money out
of primary deposits. Primary deposits are those deposits which are
deposited in banks. In fact banks cannot lend the entire primary
deposits as they are required to maintain a certain proportion of
primary deposits in the form of reserves with the RBI under RBI &
Banking Regulation Act. After maintaining the required reserves, the
bank can lend the remaining portion of primary deposits. Here bank's
lend the money and the process of credit creation starts.

Suppose there are a number of Commercial Banks in the Banking
System Bank 1, Bank 2, Bank 3, & So on.

To begin with let us suppose that an individual "A" makes a deposit
of Rs. 100 in bank 1. Bank "1" is required to maintain a Cash Reserve
Requirement of 5% (Prevailing Rate) which is decided by the RBI's
Monetary Policy from the deposits made by 'A'. Bank "1" is required
to maintain a cash reserve of Rs. 5 (5% of 100). The bank has now
lendable funds of Rs. 95(100 5). Let the Bank "1" lend Rs. 95 to a
borrower; say B. the method of lending is the same that is bank 1
opens an account in the name of the borrower cheque for the loan
amount. At the end of the process of deposits & lending, the balance
sheet of bank reads as given below:-

Balance Sheet of Bank "1"
Liabilities Amount Assets Amount
A's deposits 100 Cash Reserve 5
Loan to "B" 95
Total 100 Total 100

Now suppose that money that borrowed from bank "1" is paid to
individual "C" in settlement of his past debts. The individual "C"
deposits the money in his bank say, bank 2. Now bank 2 carries out
its banking transaction. It keeps a cash reserve to the extend of 5%,
that is Rs. 4.75 (5% of 95) and lend Rs. 90.5 to a borrower D. at the
end of the process the balance sheet of Bank 2 will be look like:-

Balance Sheet of Bank "2"
Liabilities Amount Assets Amount
B's deposits 95 Cash Reserve 4.75
Loan to "C" 90.5
Total 95 Total 95

The amount advanced to D will return ultimately to the banking
system, as described in case of B and the process of deposits and
credit creation will continue until the reserve with the banks is
reduced to zero. The final picture that would emerge at the end of
the process of deposit & credit creation by the banking system is
presented in the consolidated balance sheet of all banks are as
under:-

The combined Balance sheet of Banks
Bank Liabilities Deposits Assets
Credits
Reserve Total Assets
Bank 1 100 95 5 100
Bank 2 95 90.5 4.75 95
Bank 3 90.5 85.98 4.52 90.5
- - - - -
- - - - -
Bank n 00 00 00 00
Total 2,000 1,900 100 2,000

It can be seen from the combined balance sheet that a primary
deposits of Rs. 100 in a bank 1 leads to the creation of the total
deposit of Rs. 2,000. The combined balance sheet also shows that
the banks have created a total credit of Rs. 2,000. And maintained a
total cash reserve of Rs.100.Which equals the primary deposits. The
total deposit created by the commercial banks constitutes the
money supply by the banks.

CONCLUSION:-
To conclude, we can say that credit creation by banks is one of the
important & only sources to generate income. And when the reserve
requirement increased by the central bank it would directly affect on
the credit creation by bank because then the lendable funds with the
bank decreases and vice versa.








Q.3. PARTICIPATORY NOTES
Participatory Notes -- or P-Notes or PNs -- are instruments issued by
registered foreign institutional investors to overseas investors, who
wish to invest in the Indian stock markets without registering
themselves with the market regulator, the Securities and Exchange
Board of India.
Financial instruments used by hedge funds that are not registered
with SEBI to invest in Indian securities. Indian-based brokerages to
buy India-based securities / stocks and then issue participatory notes
to foreign investors. Any dividends or capital gains collected from the
underlying securities go back to the investors.
Who gets P-Notes?
P-Notes are issued to the real investors on the basis of stocks
purchased by the FII. The registered FII looks after all the
transactions, which appear as proprietary trades in its books. It is not
obligatory for the FIIs to disclose their client details to the SEBI,
unless asked specifically.
The following entities proposing to invest on behalf of broad based
funds are also eligible to be registered as FIIs:
Asset Management Companies
Investment Manager/Advisor
Institutional Portfolio Managers
Trustees
How does SEBI regulate FIIs?
FIIs who issue/renew/cancel/redeem P-Notes, are required to report
on a monthly basis. The report should reach the SEBI by the 7th day
of the following month.
The FII merely investing/subscribing in/to the Participatory Notes --
or any such type of instruments/securities -- with underlying Indian
market securities are required to report on quarterly basis (Jan-Mar,
Apr-Jun, Jul-Sep and Oct-Dec).
FIIs who do not issue PNs but have trades/holds Indian securities
during the reporting quarter (Jan-Mar, Apr-Jun, Jul-Sep and Oct-Dec)
require to submit 'Nil' undertaking on a quarterly basis.
FIIs that do not issue PNs and do not have trades/ holdings in Indian
securities during the reporting quarter. (Jan-Mar, Apr-Jun, Jul-Sep
and Oct-Dec): No reports required for that reporting quarter.















Q.4.STERILISATION
Sterilisation in macroeconomics refers to the actions taken by a
countrys central bank to counter the effects on the money supply
caused by a balance of payments surplus or deficit. This can involve
open market operations undertaken by the central bank whose aim
is to neutralise the impact of associated foreign exchange
operations.
Most often sterilisation is used in the context of a central bank which
takes actions to negate potentially harmful impacts of capital
inflows- such as currency appreciation and inflation- both of which
can cause loss of export competitiveness. More generally, it may
refer to any form of monetary policy which seeks to leave the
domestic money supply unchanged in the face of external shocks or
other changes, including capital outflows.
In the second half of the 20
th
century, sterilisation was sometimes
associated with efforts by monetary authorities to defend the value
of their currency. In the 1930s and in the 21
st
century, sterilisation
has most commonly been associated with efforts by nations with a
balance of payments surplus to prevent currency appreciation.








Q.5.BANK RATE, CASH RESERVE RATIO (CRR) AND STATUTORY
LIQUIDITY RATIO (SLR)
BANK RATE
Bank rate is the standard rate at which Reserve Bank of India is
prepared to buy or re-discount bills of exchange or other
commercial paper eligible for purchase under that Act. Section
49 of the Reserve Bank of India Act, 1934 requires the Reserve
Bank to make the Bank Rate public (from time to time).
RBI uses Bank Rate as a tool for short term purposes to control
money supply in India. Bank Rate is at present being used as a
penal rate which the banks have to pay for their failure to meet
the mandatory Cash Reserve Ratio (CRR) and Statutory Liquidity
Ratio (SLR).
The Reserve Bank of India has recently decided to increase the
Bank Rate from 6.00% to 9.50% w.e.f. 13-02-2012.
CASH RESERVE RATIO (CRR)
Cash Reserve Ratio (CRR) is the amount of funds that all
Scheduled Commercial Banks (SCB) excluding Regional Rural
Banks (RRB) are required to maintain without any floor or
ceiling rate with RBI with reference to their total net Demand
and Time Liabilities (DTL) to ensure the liquidity and solvency of
Banks (Section 42 (1) of RBI Act 1934). The current CRR is 4.75%
and at present no incremental CRR is required to be maintained
by the banks.
STATUTORY LIQUIDITY RATIO (SLR)
SLR stands for Statutory Liquidity Ratio. Apart from CRR, every
bank is required to maintain in India 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 and un-
encumbered approved securities. The ratio of liquid assets to
demand and time liabilities is known as Statutory Liquidity
Ratio (SLR). Present SLR is 23%. (Reduced w.e.f. 11/08/2012
from earlier 24%). RBI is empowered to increase this ratio up
to 40%. An increase in SLR also restricts the banks leverage
position to pump more money into the economy.