CHAPTER I INTRODUCTION

1.1 INTRODUCTION TO RESERVE BANK OF INDIA (RBI)

The reserve bank of India is a central bank and was established in April 1, 1935 in accordance
with the provisions of reserve bank of India act 1934. The central office of RBI is located at
Mumbai since inception. Though originally the reserve bank of India was privately owned, since
nationalization in 1949, RBI is fully owned by the Government of India. It was inaugurated with
share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up.
RBI is governed by a central board (headed by a governor) appointed by the central government
of India. RBI has 22 regional offices across India. The reserve bank of India was nationalized in
the year 1949. The general superintendence and direction of the bank is entrusted to central
board of directors of 20 members, the Governor and four deputy Governors, one Governmental
official from the ministry of Finance, ten nominated directors by the government to give
representation to important elements in the economic life of the country, and the four nominated
director by the Central Government to represent the four local boards with the headquarters at
Mumbai, Kolkata, Chennai and 29 New Delhi. Local Board consists of five members each
central government appointed for a term of four years to represent territorial and economic
interests and the interests of cooperative and indigenous banks.
The Reserve Bank regulates and supervises the nations financial system. Different departments
of the Reserve Bank oversee the various entities that comprise Indias financial infrastructure.
They oversee:
Commercial banks and all-India development financial institutions: Regulated by the
Department of Banking Operations and Development, supervised by the Department of
Banking Supervision
Urban co-operative banks: Regulated and supervised by the Urban Banks Department
Regional Rural Banks (RRB), District Central Cooperative Banks and State Cooperative Banks: Regulated by the Rural Planning and Credit Department and supervised by
NABARD
Non-Banking Financial Companies (NBFC): Regulated and supervised by the Department
of Non-Banking Supervision
1

1.2 OBJECTIVES OF RBI

To regulate the financial policy and develop banking facilities through the country.

To remain free from political influence and be in successful operation for maintaining
financial stability and credit.

To act as the note issuing authority, bankers bank and banker to government and to promote
the growth of the economy within the framework of the general economic policy of the
government, consistent with the need of maintenance of price stability.

To assist the planned process of development of the Indian economy.

RESERVE BANK OF INDIA

Headquarters

, Mumbai, Maharashtra

Established

1 April 1935; 81 years ago

Governor

Urjit Patel

Currency

Indian Rupee ()

Reserves

US$363.00 billion

Bank rate

7.00%

Interest

on 4.00%(market determined)

reserves
Website

https://rbi.org.in/

1.3 LITERATURE REVIEW

(Pallavi Ingale) Volume 2, Issue 2 (February, 2012) this paper is on a study of impact of
RBI policy rates on inflation The Reserve Bank of India (RBI) is the Indian central bank. The
RBIs most important goal is to maintain monetary stability - moderate and stable inflation in
India. The RBI uses monetary policy to maintain price stability and an adequate flow of credit.
Rates which the Indian central bank uses for this are the bank rate, repo rate, reverse repo rate
and the cash reserve ratio. Despite RBIs desperate attempt to bring the monster of inflation
under control, it showing good sign in controlling inflation. The average inflation of India in
2011: 9.08%. Now Food inflation shrank by 2.9% in the week ended December 31 after
shrinking by 3.36% in the preceding week as per the Commerce & Industry Ministry.
(Priyanka Saini1, Jyoti Sindhu)Volume-4, Issue-1, February-2014 Research is based upon
the secondary date which provides the findings on commercial banks and how it helpful in
economic development and how Commercial banks increase the credit flow in agriculture sector.
According to the Confederation of Indian Industry, Indian agriculture suffers mainly because of
expensive credit, a distorted market, intermediaries (who increase cost rather than add value),
controlled prices and poor infrastructure. Commercial Banks are providing 43.1% of total
Agriculture credit (Economic Survey 2011).
(Prof. Minakshi Dattatraya Bhosale) Volume: 02 Issue: 01 | Apr-2015 This research paper
focused on growth of Indian banking Industry. It mainly focused on Private and Public banks in
India. According to the author The role of banks is not only directly important, but also it is
enormously needful in the precise conduct of the programs projected by the government. So that
it may revolutionize in the provision of loans from time to time along with their views and
behavior also to the people of weaker sections of the society. In order to change the social and
economic structure of the country, the bank shall have to adopt the advanced technologies with
innovative services to increase the customers of the bank.
(B M Misra and Sarat Dhal) This study provides an analysis of pro-cyclicality of bank
indicators with a focus on the non-performing loans (NPAs) of Indias public sector banks. the
study found that the terms of credit variables such as interest rate, maturity and collateral and
bank specific variables had significant effect on the banks' non-performing loans in the presence
3

of macroeconomic shocks. The empirical findings support the policy approach to the banking in
the Indian context. The credit culture as reflected in the terms of credit variables could play an
important role in the banks management of business cycle impact on loans and credit risk.
(Ankita Birla) Vol no.5 issue no.04, April 2016 This paper discuss about the roles of
commercial banks in financial inclusion and initiatives taken by the Government of India and
R.B.I. The government initiative aims to facilitate financial services to every part of country
including the bottom of Pyramid with the purpose of inclusive economic growth. The number of
branches of banks is increasing in both urban and rural areas. The conceptual framework
explains the impact of financial inclusion initiatives and efforts on Indian economy on the basis
of financial parameters. Thus the paper concludes the initiatives, Schemes and efforts of banks,
Reserve bank of India, NABARD and Government of India to enhance financial inclusion to
achieve Inclusive Growth objective in India

CHAPTER II- RESEARCH DESIGN

2.1 BACKGROUND OF THE STUDY

The RBI regulates the Indian banking and financial system by issuing broad guidelines and
instructions. The Reserve Bank makes use of a variety of tools and techniques to assess the
buildup of systemic risks in the economy and to provide critical inputs in this respect to its policy
making departments. The study mainly focuses on the overview of the banking financial system
and the role played by reserve bank of India in banking sector to improve and maintain banking
sector, thus growth in Indian economy. The study is conducted using secondary data i.e. internet.
2.2 OBJECTIVES OF THE STUDY

To study the overview of banking sector in India.

To study the structure of banking system.

To study role and functions of reserve bank of India in banking sector.

2.3 SCOPE OF THE STUDY

The scope of study is confined to role of reserve bank of India in banking sector.
2.4 SOURCES OF DATA COLLECTION
The data is collected through secondary methods of data collection i.e. from internet, articles,
journals, magazines etc.
2.5 LIMITATIONS OF THE STUDY

Time was an important limiting factor in deciding the scope of the study

The study is purely based on the secondary data. Any inaccuracy in the data may affect the
interpretation.

CHAPTER III - DATA ANALYSIS

3.1 AN OVERVIEW OF THE BANKING SECTOR
3.1.1 INTRODUCTION
A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also nonbanking institutions
that provide certain banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers cash management
services for customers, reporting the transactions of their accounts and portfolios, throughout the
day. The banking system in India should not only be hassle free but it should be able to meet the
new challenges posed by the technology and any other external and internal factors. For the past
three decades, Indias banking system has several outstanding achievements to its credit. The
Banks are the main participants of the financial system in India. The Banking sector offers
several facilities and opportunities to their customers. All the banks safeguards the money and
valuables and provide loans, credit, and payment services, such as checking accounts, money
orders, and cashiers cheques. The banks also offer investment and insurance products. As a
variety of models for cooperation and integration among finance industries have emerged, some
of the traditional distinctions between banks, insurance companies, and securities firms have
diminished. In spite of these changes, banks continue to maintain and perform their primary
roleaccepting deposits and lending funds from these deposits.
3.1.2 NEED OF THE BANKS
Before the establishment of banks, the financial activities were handled by money lenders and
individuals. At that time the interest rates were very high. Again there were no security of public
savings and no uniformity regarding loans. So as to overcome such problems the organized
banking sector was established, which was fully regulated by the government. The organized
banking sector works within the financial system to provide loans, accept deposits and provide

other services to their customers. The following functions of the bank explain the need of the
bank and its importance:

To provide the security to the savings of customers.

To control the supply of money and credit

To encourage public confidence in the working of the financial system, increase savings
speedily and efficiently.

To avoid focus of financial powers in the hands of a few individuals and institutions.

To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of
customers

3.1.3 HISTORY OF BANKING SECTOR

The traces of the banking system can be noticed from the last decades of 18th century when

the Bank of Hindustan was established in 1770.

The largest and the oldest bank which is still in existence is State Bank of India. It was
originated as Bank of Calcutta in 1806 and later renamed as Bank of Bengal in 1809. It
became Imperial Bank of India when it was merged with two other banks Bank of Madras
and Bank of Bombay in 1921. After independence it was again renamed and became State
Bank of India in 1955.

In 1960, the State Banks of India was given control of eight state-associated banks under the
State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks.

British Era

During the British Rule, the merchants started Union Bank of Calcutta in 1869. It was
initially started as joint stock association but later it came into partnership with others.

The Allahabad Bank was established in 1865 and still functioning today, is the oldest Joint
Stock bank in India but it was not the first though. That honour goes to the Bank of Upper
India, which was established in 1863, and which survived until 1913, when it failed, with
some of its assets and liabilities being transferred to the Alliance Bank of Simla.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in
7

Lahore in 1894, which has survived to the present and is now one of the largest banks in
India.

In early years of 20th century, the Indian banking system was in nascent phase and was quite
immature to compete with the presidency banks and foreign exchange banks which were
well equipped with the technology and capital resources.

The period between 1906 and 1911, saw the establishment of banks inspired by the
Swadeshi movement. The Swadeshi movement inspired local businessmen and political
figures to found banks of and for the Indian community. A number of banks established then
have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India.

The undivided Dakshina Kannada district is known as Cradle of Indian Banking.

Post-Independence Period

The partition of India in 1947 adversely impacted the economies of various states especially
Punjab and West Bengal, paralysing banking activities for months. Indias independence
marked the end of a regime of the Laissez-faire for the Indian banking. The Government of
India initiated measures to play an active role in the economic life of the nation, and the
Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed
economy.

Nationalisation of Banks in 1960s

In early years of 60s , except SBI all other banks were owned and operated by private
persons.

The Government of India issued an ordinance (Banking Companies (Acquisition and

Transfer of Undertakings) Ordinance, 1969) and nationalised the 14 largest commercial
banks with effect from the midnight of 19 July 1969. These banks contained 85 percent of
bank deposits in the country.

Second round of nationalisation of 6 more commercial banks followed in 1980. The stated
reason for the nationalisation was to give the government more control of credit delivery.
With the second round of nationalisation, the Government of India controlled around 91%
of the banking business of India.
8

Later on, in the year 1993, the government merged New Bank of India with Punjab National
Bank.[18] It was the only merger between nationalised banks and resulted in the reduction of
the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised
banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalisation and Globalisation of Indian Banking System

In the early 1990s, the government embarked on a policy of liberalization, licensing a

small number of private banks.

These came to be known as New Generation tech-savvy banks, and included Global Trust
Bank (the first of such new generation banks to be set up), which later amalgamated with
Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and
HDFC Bank.

This move, along with the rapid growth in the economy of India, revitalised the banking
sector in India, which has seen rapid growth with strong contribution from all the three
sectors of banks, namely, government banks, private banks and foreign banks.

3.2 STRUCTURE OF INDIAN BANKING SYSTEM IN INDIA

Indian banking industry has been divided into two parts, organized and unorganized sectors. The
organized sector consists of Reserve Bank of India, Commercial Banks and Co-operative Banks,
and Specialized Financial Institutions (IDBI, ICICI, IFC etc.). The unorganized sector, which is
not homogeneous, is largely made up of money lenders and indigenous bankers.

Indian Scheduled Commercial Banks

The commercial banking structure in India consists of scheduled and unscheduled banks.
Scheduled Banks
A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In
order to be included under this schedule of the RBI Act, banks have to fulfill certain conditions
10

such as having a paid up capital and reserves of at least 0.5 million and satisfying the Reserve
Bank that its affairs are not being conducted in a manner prejudicial to the interests of its
depositors. Scheduled banks are further classified into commercial and cooperative banks. The
basic difference between scheduled commercial banks and scheduled cooperative banks is in
their holding pattern. Scheduled cooperative banks are cooperative credit institutions that are
registered under the Cooperative Societies Act. These banks work according to the cooperative
principles of mutual assistance.
Scheduled Commercial Banks (SCBs):
Scheduled commercial banks (SCBs) account for a major proportion of the business of the
scheduled banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India are
categorized into the five groups based on their ownership and/or their nature of operations. State
Bank of India and its six associates (excluding State Bank of Saurashtra, which has been merged
with the SBI with effect from August 13, 2008) are recognised as a separate category of SCBs,
because of the distinct statutes (SBI Act, 1955 and SBI Subsidiary Banks Act, 1959) that govern
them. Nationalised banks (10) and SBI and associates (7), together form the public sector banks
group and control around 70% of the total credit and deposits businesses in India. IDBI ltd. has
been included in the nationalised banks group since December 2004. Private sector banks include
the old private sector banks and the new generation private sector banks- which were
incorporated according to the revised guidelines issued by the RBI regarding the entry of private
sector banks in 1993. As at end-March 2009, there were 15 old and 7 new generation private
sector banks operating in India.
Foreign banks are present in the country either through complete branch/subsidiary route
presence or through their representative offices. At end-June 2009, 32 foreign banks were
operating in India with 293 branches. Besides, 43 foreign banks were also operating in India
through representative offices.
Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural
economy by providing banking services in such areas by combining the cooperative specialty of
local orientation and the sound resource base which is the characteristic of commercial banks.
RRBs have a unique structure, in the sense that their equity holding is jointly held by the central
11

government, the concerned state government and the sponsor bank (in the ratio 50:15:35), which
is responsible for assisting the RRB by providing financial, managerial and training aid and also
subscribing to its share capital.
Scheduled Cooperative Banks:
Scheduled cooperative banks in India can be broadly classified into urban credit cooperative
institutions and rural cooperative credit institutions. Rural cooperative banks undertake long term
as well as short term lending. Credit cooperatives in most states have a three tier structure
(primary, district and state level).
Non-Scheduled Banks:
Non-scheduled banks also function in the Indian banking space, in the form of Local Area Banks
(LAB). As at end-March 2009 there were only 4 LABs operating in India. Local area banks are
banks that are set up under the scheme announced by the government of India in 1996, for the
establishment of new private banks of a local nature; with jurisdiction over a maximum of three
contiguous districts. LABs aid in the mobilisation of funds of rural and semi urban districts. Six
LABs were originally licensed, but the license of one of them was cancelled due to irregularities
in operations, and the other was amalgamated with Bank of Baroda in 2004 due to its weak
financial position.

12

3.3 ROLE AND FUNCTIONS OF RESERVE BANK OF INDIA IN BANKING SECTOR

OR SYSTEM
3.3.1 INTRODUCTION
The central bank of the country is the Reserve Bank of India (RBI). It was established in April
1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton
Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which
was entirely owned by private shareholders in the begining. The Government held shares of
nominal value of Rs. 2,20,000.
Reserve Bank of India was nationalised in the year 1949. The general superintendence and
direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor
and four Deputy Governors, one Government official from the Ministry of Finance, ten
nominated Directors by the Government to give representation to important elements in the
economic life of the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consist of five members each Central Government appointed for a term of
four years to represent territorial and economic interests and the interests of co-operative and
indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of
1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and

To operate the credit and currency system of the country to its advantage.

13

3.3.2 FUNCTIONS OF RBI AS A CENTRAL BANK OF INDIA

TRADITIONAL FUNCTIONS OF RBI
1. Issue of Currency Notes
As per the provisions of the Section 22 of the Reserve Bank of India Act 1934 the RBI has sole
right or authority to issue currency notes except one rupee note and coins of smaller
denomination. RBI can exchange these currency notes for other denominations. RBI issues these
currency notes (2, 5, 10, 20, 50, 100, 500, 1000) against the security of gold bullion, foreign
securities, rupee coins, exchange bills, promissory notes and government of India bonds etc.
2. Banker to other Banks
RBI also guides, help and direct other commercial banks in the country. RBI can control the
volume of bank reserves. Every commercial bank has to maintain a part of their reserves with Its
parent (RBI). If bank need fund they approach to RBI for fund that is called Lender of the Last
Resort.
3. Banter to the Government
RBI works as an agent of the central and state governments. On the behalf of government it
makes payments, taxes and deposits etc. It also represent the government at international level
also. It maintains government accounts and provide financial advice to the government. It also
manages government public debts and maintains foreign exchange reserves on behalf of the
government. RBI also provides overdraft facility to the government in case of financial shortage.
4. Exchange Rate Management
For maintenance of the external value of rupee, RBI prepares domestic policies. Also it need to
prepare and implement the foreign exchange rate policy which will help in attaining the
exchange rate stability. For maintenance of exchange rate stability it has to bring demand and
supply of foreign currency (U.S.) dollar close to each other.
5. Credit Control Function

14

Commercial banks creates credit according to demand in the economy. But if this credit creation
is unchecked or unregulated then it leads the economy into inflationary cycles. If credit creation
is below the required limit then it harms the growth of the economy. As a central bank of India,
RBI has to look for growth with price stability. Thus it creates the credit creation capacity of
commercial banks by using various credit control tools.
6. Supervisory Function
RBI supervises the banking system in India. RBI has power to issue licence for setting up new
banks, to open new branches, to decide minimum reserves. RBI inspects functioning of
commercial banks in India and abroad. RBI also guide and direct the commercial banks in India.
RBI can conduct audit any of the bank.
DEVELOPMENT FUNCTIONS OF RBI
The Reserve Bank is one of the few central banks that has taken an active and direct role in
supporting developmental activities in their country. The Reserve Banks developmental role
includes ensuring credit to productive sectors of the economy, creating institutions to build
financial infrastructure, and expanding access to affordable financial services. Over the years, its
developmental role has extended to institution building for facilitating the availability of
diversified financial services within the country. The Reserve Bank today also plays an active
role in encouraging efficient customer service throughout the banking industry, as well as
extension of banking service to all, through the thrust on financial inclusion.
Developmental functions are described as under:
1. Development of the Financial System
The financial systems include - financial institutions, financial markets and financial instruments.
The sound and efficient financial system is necessary for rapid economic development of the
nation. RBI encourages the banking and non - banking institution for maintenance of sound and
healthy financial system.
2. Development of Agriculture

15

As we know, India is an agrarian economy so RBI always give attention to agriculture sector by
assessing credit needs of this sector. Regional Rural Banks (RRB), National Bank for
Agriculture and Rural Development (NABARD) which are only for agriculture finance comes
under the control of the RBI.
3. Industrial Finance
For economic development of country, Industrial development is necessary. As we know
industries includes small industries, middle industries, large scale industries etc all these
industries development is necessary for overall economic development of country. For this
purpose RBI supports the industrial sector also. RBI had played the vital role for setting up of
such industrial finance institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.
4. Training Provision
RBI always tried to provide essential training to the staff of the banking industry. RBI has set up
banker's training college at several places. The training institute namely National Institute of
Bank Management (NIBM), Bankers Staff College (BSC), College of Agriculture Banking
(CAB) etc.
5. Data Collection
RBI always collects important statistical data on several topics such as interest rates, inflation,
savings, investment, deflation etc. This data is very much useful for policy makers and
researchers.
6. Publication of the Reports
RBI has its separate publication division. This division collect and publish data on different
sector of the economy. The reports and bulletins are regularly published by the RBI. It includes
RBI weekly reports, RBI annual reports, Report on Trend and Progress of commercial banks.
This information is made available to the public also at cheaper rates.
7. Promotion of Banking Habits

16

RBI always takes necessary steps to promote the banking habits among people for economic
development of country. RBI has set up many institutions such as Deposit Insurance Corporation
1962, UTI 1964, IDBI 1964, NABARD 1982, NHB 1988 etc. These organizations develop and
promote the banking habits among the people.
8. Export Promotion
RBI always tries to encourage the facilities for providing finance for foreign trade especially
exports from India. The Export - Import Bank of India (EXIM), and the Export Credit Guarantee
Corporation of India (ECGC) are supported by refinancing their lending for export purpose.
SUPERVISORY FUNCTIONS OF RBI
The supervisory functions of RBI are discussed as under:
1. Granting License to Banks
RBI grants license to banks for carrying its business. RBI also provide licence for opening
extension counters, new branches even to close down existing branches.
2. Bank Inspection
RBI has power to ask for periodical information from banks on various components of assets and
liabilities.
3. Control over NBFIs
The non - bank financial institutions are not influenced by the working of a monitory policy. RBI
has a right to issue directives to the NBFIs from time to time regarding their functioning.
Through periodic inspection, it can control the NBFIs.
4. Implementation of Deposit Insurance Scheme
The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposit
of small depositors. All bank deposits below Rs. 1 Lakh are insured with this corporation. The
RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

17

3.3.3 POLICY RATES AND RESERVE RATIOS

Policy Rates, Reserve Ratios, Lending and Deposit Rates as of 17 June 2016
Bank Rate

7.00%

Repo Rate

6.50%

Reverse Repo Rate

6.00%

Cash Reserve Ratio (CRR) 4%

Statutory Liquidity Ratio 21.00%
(SLR)
Base Rate

9.30%9.70%

Savings Deposit Rate

4%

Term Deposit Rate for > 1 7.00%7.50%

year
BANK RATE
RBI lends to the commercial banks through its discount window to help the banks meet
depositors' demands and reserve requirements for long term. The interest rate the RBI charges
the banks for this purpose is called bank rate or repo rate. If the RBI wants to increase the
liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to
reduce the liquidity and money supply in the system, it will increase the bank rate. The bank rate
has lost its significance as a monetary policy tool as the central bank signals stance through
changes in repo, the rate at which banks borrow short-term funds from RBI. The bank rate,
which is the standard rate at which the RBI buys or re-discounts bills of exchange or other
commercial paper, is presently used in the country.
RESERVE REQUIREMENT CASH RESERVE RATIO (CRR)
Every commercial bank has to keep certain minimum cash reserves with Reserve Bank of India.
Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs
of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR)
for scheduled banks without any floor rate or ceiling rate. Before the enactment of this
18

amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for
scheduled banks between 3% and 20[48]% of total of their demand and time liabilities. RBI uses
this tool to increase or decrease the reserve requirement depending on whether it wants to effect
a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will
make it mandatory on the part of the banks to hold a large proportion of their deposits in the form
of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This
will in turn decrease the money supply.
STATUTORY LIQUIDITY RATIO (SLR)
Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and
approved securities. Higher liquidity ratio forces commercial banks to maintain a larger
proportion of their resources in liquid form and thus reduces their capacity to grant loans and
advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds
from loans and advances to investment in government and approved securities. In welldeveloped economies, central banks use open market operationsbuying and selling of eligible
securities by central bank in the money marketto influence the volume of cash reserves with
commercial banks and thus influence the volume of loans and advances they can make to the
commercial and industrial sectors. In the open money market, government securities are traded at
market-related rates of interest. The RBI is resorting more to open market operations in the more
recent years. Generally RBI uses

Minimum margins for lending against specific securities.

Ceiling on the amounts of credit for certain purposes.

Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

Part of the interest rate structure, i.e., on small savings and provident funds, is
administratively set. Banks are mandatory required to keep 21.50% of their deposits in the
form of government securities. Banks are required to lend to the priority sectors to the extent
of 40% of their advances.

19

CHAPTER IV- CONCLUSION & SUGGESTIONS

4.1 CONCLUSION
Indias financial system has undergone development as part of the economic reform process that
began in 1990. This has resulted in the expansion of both the banking sector and the stock
market. However, Indias banking sector remains relatively small compared with those of most
East Asian economies, and there appears to be scope for further expansion. Individual banks are
also small by international standards. Furthermore, the corporate bond market is still immature
and has not yet started to develop on a significant scale.
The main role of RBI is related to the Indian economy, and the banks are an instrument to help
RBI make changes according to different macroeconomic facets of the Indian economy.
There are 3 ultimate goals of a central bank, including RBI

Growth - higher the better, but should be sustainable

Inflation - under

Unemployment - at the natural rate of unemployment

To achieve these 'Ultimate Goals', RBI changes/adjusts its intermediate goals according to
current levels of growth, inflation, unemployment and fiscal policies (i.e. the policy of the ruling
government). These intermediate goals are

Money Supply

Interest Rate

Credit

Exchange Rate

All of these intermediate goals, which contribute to achieve the ultimate goals, are to be
controlled by the central bank. Now, to control these 'Intermediate Goals', RBI has some short
term ways which can lead to achieving the intermediate goals of RBI. These ways are called
'Instruments of Monetary Policy. Hence RBI is a FACILITATOR of the Indian banking system
& not a REGULATOR

20

4.2 SUGGESTIONS
These suggestions discuss improving the financial performance of banks, and also improving
their performance in terms of improved customer service, contribution to the growth of our
economy and enhancing the trust and confidence of the public in the banking institutions of our
country.

In order to improve the performance of banks, there is a case for improving the norms for
priority sector lending by banks, which needs changes with changing times. In order to serve
the twin objectives of serving social good with equity and justice for banks, the priority
sector lending norms be modified to provide incentives to banks which perform well in this
area of lending activity. The best way to incentivize banks is to offer to those banks, which
achieve higher level of lending to this sector, relaxations in regulatory prescriptions like
reduced SLR and CRR requirements etc.

Use of technology must be increased to make banking easier and improve efficiency of the
banks

The RBI conducts an annual financial review of all banks, but their reports are kept
confidential and their findings are never published. Those banks who continue to be rated
poor must be pulled up and made answerable for their poor performance. The banks
performance under all parameters must be made known to the customers of banks to keep the
managements of banks on their toes.

It is a well-known fact that window dressing of balance sheet of banks is most common in
our country. Now that the appointment of auditors is proposed to be delegated to individual
banks, the chances of such financial jugglery taking place will be much higher, unless drastic
steps are taken to ensure that the auditors are made accountable for large variations in key
parameters every quarter and shown the door if found to be hand in glove with the
management.

21

Improving corporate governance: In order to improve the performance of public sector

banks, it is necessary to bring all public sector banks under the Companies Act, 2013 and
make them accountable to public shareholders.

Improving NPA management: In the words of RBI Governor, Dr Raghuram Rajan the most
obvious reason is that the system protects the large borrower and his divine right to stay in
control. A special insolvency law should be immediately enacted by which all those who
borrow from banks beyond a certain amount should be subject to a legal stipulation that
mandatorily declares the promoters and those in management unfit to continue in
management, if the company they own and manage goes into negative net worth in any
financial year due to whatever reasons. Such companies should be considered bankrupt and
the promoters should not be allowed to continue in management. This single banking reform
will be the biggest game changer for the entire banking industry in our country.

22

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