REGULATORY FRAMEWORK

FOR FINANCIAL SERVICES IN

INDIA
Financial services
 “Financial services refers to various functions and
services which are provided to individuals and
business firms by financial institutions in a system”

 Financial services provided by organisations like

banks, credit card companies, insurance company,
stock brokerage & mutual fund
Regulatory Framework for Financial Services

 Regulation refers to the control of commercial &

corporate activities through system of rules & norms

 Direct involvement of government is not necessary

 Basic function of a regulator is to protect the interests

of different categories of stakeholders with a class of
financial institutions or services
Need for strong financial regulatory system

 To ensure financial market & financial services

function properly

 Supervise & regulate the different financial

institution in various financial market
Regulators in the Indian financial system

1. The ministry of finance (MOF)

2. The Reserve Bank of India (RBI)

3. SEBI

4. Insurance Regulatory Development Authority

(IRDA)
Regulatory framework of financial service

Institutional Prudential
regulation regulations

Legislative Investor’s
regulations regulations
 Institutional regulation
 It is also known as structural regulations

 Each institution’s activities are regulated by one regulator

 These regulation call for a clear demarcation of activities of

financial institution

 Apex agencies are SEBI & RBI

 SEBI- regulates the functioning of mutual funds, stock

exchanges & stock brokering companies

 RBI -regulates the activities of commercial banks & non-

banking finance companies
 Prudential regulations

 Regulations associated with the internal management of

the financial institution & financial services

 Regulation relates capital adequacy, liquidity & solvency

 Aim of regulation is to prevent the entry of firms without

adequate resources into the market & ensure the proper
functioning of firms within the market

 Eg: SEBI fixes the minimum net worth requirement for

various financial services, while RBI’s regulations relate to
the non-banking finance companies
Investors regulation
 They ensure protection for investors
Eg:- SEBI issues guidelines to protect the interest of
investors from time to time.

Legislative regulations
 Govt enacted such regulation for overall
development of financial service industry
 Banking regulation act, security contract act
 Regulation of Capital Market
 The SEBI Act, 1992, which established the SEBI, has four objectives:
protecting the interests of investors in securities market: the securities
market & other incidental matters connected there with.

 The companies act 2012, deals with the issue, allotment & transfer
securities, disclosures to be made in public issue, underwriting,
borrowing powers, payment of dividend & winding up of companies

 The securities contract regulation act,1956, provides for the regulation

of securities trading and the management of stock exchanges

 The Depository act, 1996, provides for the establishment of

depositories for the electronic maintenance of Demit securities &
transfer ownership
 Reserve bank of India
 RBI is apex/central bank of the country
 It is entrusted with the control, supervision, promotion &
development & planning of financial system
 The RBI’s main functions is to control the monetary base
& through this route influence the supply of money
depending on the conditions of the nation
 Its objectives are to maintain price stability & ensure an
adequate flow of credit to the productive sectors
 It derives power from two different Act. RBI Act,1934 &
Banking Regulations Act
 Traditional Functions of RBI
1. Regulatory function of RBI

2. Developmental/Promotional Functions of RBI

3. Supervisory Functions of RBI

4. Regulatory Functions of RBI

Regulatory function of RBI
1. Monetary control
2. Banker to the govt.
3. Issuer of note
4. Banker’s Bank
5. Controller of credit
6. Custodian of foreign reserves
7. Regulators of banking services
 Developmental/Promotional Functions of RBI

1. Developmental of the financial system

2. Developmental of agriculture
3. Provision of industrial finance
4. Provision of training
5. Collection of data
6. Publication of reports
7. Promotion of banking habits
8. Housing needs
9. Promotion of export through refinance
Supervisory Functions of RBI
1. Granting licences to banks

2. Bank inspection

3. Control over NBFIs

4. NPA norms of commercial banks

RBI’s credit control tools
1. Bank Rate
2. Repo Rate
3. Difference between Bank Rate & Repo Rate
4. Reverse repo Rate
5. How does an Increase in Repo Rate Contain
Inflation
6. Deregulation of Interest Rate
7. Cash Reserve Ratio
8. Open Market Operations
 Bank rate-Rate at which RBI lends money to other banks
without any securities
 Repo rate- Rate at which commercial bank have to sell
securities to RBI with an agreement to repurchase them in
future date at a predetermined price
 When bank experience a gap between the demand from
borrower & supply of funds they borrow from RBI at the
repo rate
 If RBI wants to make the funds more expensive for the banks
to borrow, it increases the repo rate, if it wants to make it
cheaper to borrow they decrease the repo rate
 When the demand for loan is higher & banks do not have
adequate funds to lend, banks borrow from RBI & lend
customer at higher rate to maintain earlier profit level
 Current Repo rate 7.75%
 Difference between Bank Rate & Repo Rate
 Both rates are the rate at which RBI makes funds available to
the commercial banks
Bank rate Repo rate
Collateral Not collateralized. Commercial Commercial banks have to sell the
banks have to lend money at fixed securities to the RBI with an
rate agreement to a Repurchase

Impact Long-term Short-term

 Reverse Repo Rate- The rate at which RBI borrows money

from bank.
 RBI use this tool when it feels there is too much money in the
banking system
 If reverse repo is high, banks get higher intrest rate on the
funds they have given the RBI.As a result, banks prefer to
keep their money with RBI, which absolutly risk-free
 If RBI increases repo rate, the commercial banks
have to pay a high cost for borrowing money.

 The commercial banks then pass on this increase in

their own customer in the form of higher interest loan

 higher interest rates makes more expensive to borrow

money
RESULTS :- REDUCED DEMAND
 Reduction of demand lead to reduce production &
increase unemployment
Impact of Repo rate
 As interest rate increase, market rates for securities
fall
 Banks prefer to invest funds with RBI at as the
reverse Repo rate also increases
 There is little money available for lending. Firms &
households have problems getting loans
 Companies that are unable to pay higher interest
rates postpone their investments.
Investment decreases. This is the impact in
commercial point of veiw
Cash Reserve Ratio
 Amount of money that scheduled by commercial
banks must maintain with the RBI
 CRR does not earn any interest for banks.
 RBI uses this tool to control the liquidity in the system
by increasing or decreasing CRR
Marginal standing facility
 RBI has introduced a new mechanism MSF

 Under this mechanism banks are permitted to

borrow short term funds (overnight) up to 2% of
their respective demand& time liabilities outstanding
at the end of the second preceding fortnight

 Banks can borrow for an overnight period from RBI

through this emergency funding window under
exceptional circumstances when all other avenues
are exhausted
 Banks can access MSF only when all avenues(like repo and
CBLO) are exhausted for overnight money. That is why it is
meant for exceptional

 MSF allows banks to borrow money from central bank at a

higher rate

 This instrument is likely to reduce volatility in overnight rates

& improve monetary transmission

 The purpose of MSF is to is to provide an additional window

to bridge gaps in overnight liquidity, always above the repo
rate
Regulatory Functions of RBI
 On- site inspection

 Off- site surveillance

 Corporate governance

 Appointment of statutory auditors

 Core principle

 RBI,s role in the capital market

Difference between MSF & Repo rate

Repo rate MSF

Banks can borrow money from

 Banks can borrow 
the RBI within the statutory
money from the RBI by liquidity ratio.
pledging govt.  They do not need to pledge
securities under MSF
securities over and  MSF can be used only when
above the statutory all other avenues are
exhausted, at an extra cost of
liquidity requirement 3% above repo rate