Chapter 2-Central banking :RBI1.Concept-

• A central bank, reserve bank, or monetary authority is an institution that manages

a state's currency, money supply, and interest rates. •Central banks also usually oversee the commercial

banking system of their respective countries.• A central bank possesses a monopoly on

increasing the amount of money in the nation, and usually also prints the national currency. • Examples include the European Central

Bank (ECB) ,the Federal Reserve of the United States,RBI of India.

• Reserve Bank of India-• The Reserve Bank of India (RBI) is India's central

banking institution, which controls the monetary policy of the Indian rupee.

• It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act,

1934. •The share capital was divided into shares of 100 each fully paid,

which were initially owned entirely by private shareholders. • Following India's independence in 1947, the RBI was

nationalised in the year 1949.•The RBI plays an important part in the development strategy of

the Government of India.

Banking terms• Bank rate is the rate at which RBI lends to commercial

banks. • The cash reserve ratio stipulates the minimum

proportion of deposits that banks must hold with the central bank.

•Statutory liquidity ratio defines the minimum proportion of their deposits that banks have to maintain at the close

of business every day as liquid assets, such as cash or gold.

•Repo rate is the rate the central bank charges to lend to banks against securities.

2.Fuctions and role of RBI-1.Money Creator-

•The bank issues and exchanges or destroys currency notes and coins that are not fit for circulation.

•RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well

as economic development.•There are four printing presses for printing of notes at

Nashik in Maharashtra ,Dewas in Madhya Pradesh, Mysore in Karnataka and Salboni in West Bengal.

•For minting of coins, SPMCIL has four mints at Mumbai, Noida (UP), Kolkata and Hyderabad for coin production.

2.Credit Regulator-•The RBI controls the monetary supply, monitors

economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well

as coins.•RBI also works as a central bank where commercial banks are account holders and can deposit money.

•RBI maintains banking accounts of all scheduled banks.• Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR (cash reserve ratio)

bank rate and open market operations.

3.Supervision of banking sector-

•The institution is also the regulator and supervisor of the financial system and prescribes broad parameters

of banking operations within which the country's banking and financial system functions.

•Its objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-

effective banking services to the public.

3.Reforms in Indian banking-

• Indian banking sector has undergone major changes and

reforms during economic reforms.

• Though it was a part of overall economic reforms, it has

changed the very functioning of Indian banks.

• This reform have not only influenced the productivity and

efficiency of many of the Indian Banks, but has left everlasting

footprints on the working of the banking sector in India.

• Narsimham committee -

•The most important committee was Narasimham Committee

on banking Sector Reforms.

•Narasimham Committee –I was formed in 1991 and Narasimham Committee –II was formed in 1998 and

both were related to Banking Sector Reforms. •First Narasimham committee submitted its report in

November 1991,recommended the following:

1.Reduction in the Statutory Liquidity Ratio 2.Reduction in the Cash Reserve Ratio

3. Interest rate in CRR Balances

4.Redefining the priority sector

5. Deregulation of the Interest Rate-according to

market condition but will be regulated by RBI

6.Target for priority Sector

7.Restructuring the banking system-four tier

international, national, local and rural banks

per region

8.Enhancement of capital base bank-bank

should be allowed to raise fresh capital from the

public

9.Freedom to financial institutes-for approvals

10.Transparency in accounts and assets of banks

•Second Narasimham committee submitted its report in November 1991,recommended the following: 1.Merger of strong banks and closure of weak

banks 2.Higher capital adequacy norms 3.Narrow banking-helping the weak banks 4.Integrated system of regulation and

supervision 5.Depoliticisation of bank board-making

appointments free from political influence 6.Strenghthening of recovery system-Debts

4.Fundamental of Investment Banking•A specific division of banking related to the creation of capital for other companies.• Investment banks suggests new debt and equity securities for all types of corporations.• Investment banks also provide guidance to issuers regarding the issue and investments.•Investment banks also aid in the sale of securities in right time.•They also help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors.

•A fully operating investment bank is usually referred to a financial and banking organization, which provides both financial as well as advisory banking services to their clients.• Apart from that, an investment bank even deals with research, marketing and sales of a range of financial products like commodities, currency, credit, equities etc. •Eg-SBI Capital market, Yes Bank Limited, Kotak Investment Banking, Citi Bank India ,Bajaj Capital, UTI Securities Ltd.,IDFC,ICICI Securities, Tata Investment Corp.Ltd.

• Investment Banks Services- 1.

• 2.

5.Innovation in Banking-E banking• Banks have traditionally been in the forefront for using

technology to improve their products, services and efficiency.

• They have, over a long time, been using electronic and telecommunication networks for delivering a wide range of value added products and services.

• The delivery channels include direct dial – up connections, private networks, public networks etc and the devices include telephone, Personal Computers including the Automated Teller Machines ,mobiles etc.

• Electronic banking is an umbrella term for the process by which customer may perform banking transactions electronically without visiting banks physically .

• Therefore transactions related to bank activities via Electronic Mean and medium is called electronic Banking.

• E – BANKING CLASSIFICATION- 1.Telephone banking is a service provided by a financial

institution, that enables customers of the financial institution to perform financial transactions over the telephone, without the need to visit a bank branch or automated teller machine.

2.Online banking (or Internet banking) allows customers of a financial institution to conduct financial transactions on a secure website operated by the institution, which can be a retail or virtual bank, credit union or society. It may include of any transactions related to online usage.

3.Mobile banking (also known as M-Banking, m banking) is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant(PDA).

4. Automated Teller Machine (ATM) means computerized machine that permits bank customers to gain access to their accounts and permit them to conduct some limited scale banking transactions with a magnetically encoded plastic card and a code number.

5. Electronic Funds Transfer (EFT) is a system of transferring money from one bank account to another without any direct paper money transaction.

Advantages and Disadvantages-

1.Advantages-• It's generally secure. • It gives twenty-four-hour access.• You can access your account from virtually anywhere. • It is generally faster than going to the bank and standing in

long lines is time-consuming.• Quick communication between banker and customer.• Serves to large group of customers.• Database developing is easy and accurate for banks.• Efficient services• Non interest services like credit cards, debit cards,ATMS etc.

2.Disadvantages-• Online banking is generally secure, but it certainly

isn't always secure.• Startup costs of devices like Computer• Inadequate knowledge of computer• Legal Issues• Training is required for employees• Restricted business-some bank services required postal

services like deposits, pin number etc.• Lack of skilled personnel

6.Introduction to NBFCs• Non-bank financial companies (NBFCs) are financial

institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license.

• These institutions typically are restricted from taking deposits from the public depending on the jurisdiction.

• Operations of these institutions are often still covered under a countries banking regulations.

• The specific banking products that can be offered by NBFCs depends on the jurisdiction, and may include services such as loans and credit facilities, savings products, investments and money transfer services.

• Eg. BAJAJ AUTO FINANCE LTD., CHADHA FINANCE PV MUTHOOT LEASING & FINANCE LTD T LTD, DHANALAXMI MOTORS FINANCE PVT LTD ect.