A PROJECT REPORT OF INDIAN FINANCIAL SYSTEM ON

ROLE OF RBI IN INDIAN ECONOMY

IN PARTIAL FULFILLMENT OF THE REQUIREMENT IN SEMISTER III MASTER OF BUSINESS ADMINISTRATION

SUBMITTED BY: Hitesh Soni (0854) Suresh Chaudhary (0805)

SUBMITTED TO: MS. Khushbu Shah

S.P.B.PATEL ENGG.COLLEGE,LINCH(MEHSANA)

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

Preamble
The Preamble of the Reser e Ba!" of #!$%a $es&r%bes the bas%& f'!&t%o!s of the Reser e Ba!" as( )...to re*'late the %ss'e of Ba!" Notes a!$ "ee+%!* of reser es ,%th a %e, to se&'r%!* mo!etar- stab%l%t- %! #!$%a a!$ *e!erall- to o+erate the &'rre!&- a!$ &re$%t s-stem of the &o'!tr- to %ts a$ a!ta*e.)

OVERVIEW OF RBI
The Reserve Bank of India %s the &e!tral ba!" of #!$%a, a!$ ,as establ%she$ o! A+r%l 1, 1./0 %! a&&or$a!&e ,%th the +ro %s%o!s of the Reser e Ba!" of #!$%a A&t, 1./1. The Ce!tral Off%&e of the Reser e Ba!" ,as %!%t%all- establ%she$ %! 2ol"ata b't ,as +erma!e!tl- mo e$ to M'mba% %! 1./3. Tho'*h or%*%!all- +r% atel- o,!e$, the RB# has bee! f'll- o,!e$ b- the Go er!me!t of #!$%a s%!&e !at%o!al%4at%o! %! 1.1.. 5' 'r% S'bbarao ,ho s'&&ee$e$ 6a*a 7e!'*o+al Re$$- o! Se+tember 8, 899: %s the &'rre!t Go er!or of RB#. The Reser e Ba!" of #!$%a ,as set '+ o! the re&omme!$at%o!s of the Hilton Young Commission. The &omm%ss%o! s'bm%tte$ %ts re+ort %! the -ear 1.8;, tho'*h the ba!" ,as !ot set '+ for !%!e -ears. The Preamble of the Reser e Ba!" of #!$%a $es&r%bes the bas%& f'!&t%o!s of the Reser e Ba!" as to re*'late the %ss'e of Ba!" Notes a!$ "ee+%!* of reser es ,%th a %e, to se&'r%!* mo!etar- stab%l%t- %! #!$%a a!$ *e!erall- to o+erate the &'rre!&- a!$ &re$%t s-stem of the &o'!tr- to %ts a$ a!ta*e. #t has 88 re*%o!al off%&es, most of them %! state &a+%tals. RB# ,as starte$ ,%th a +a%$ '+ share &a+%tal of 0 &rore.o! establ%she$ %t too" o er the f'!&t%o! of ma!a*eme!t of &'rre!&- from *o er!me!t of #!$%a a!$ +o,er of &re$%t &o!trol from %m+er%al ba!" of %!$%a.

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

Nationali ation of RBI!

? <%th a %e, to ha e a &or$%!ate$ re*'lat%o! of #!$%a! ba!"%!* #!$%a! Ba!"%!* A&t ,as +asse$ %! mar&h 1.1.. To ma"e RB# more +o,erf'l the Go t. of #!$%a !at%o!al%se$ RB# o! =a!'ar- 1, 1.1.. The *e!eral s'+er%!te!$e!&e a!$ $%re&t%o! of the Ba!" %s e!tr'ste$ to Ce!tral Boar$ of 5%re&tors of 89 members, the Go er!or a!$ fo'r 5e+'t- Go er!ors, o!e Go er!me!t off%&%al from the M%!%str- of >%!a!&e, te! !om%!ate$ 5%re&tors b- the Go er!me!t to *% e re+rese!tat%o! to %m+orta!t eleme!ts %! the e&o!om%& l%fe of the &o'!tr-, a!$ fo'r !om%!ate$ 5%re&tors b- the Ce!tral Go er!me!t to re+rese!t the fo'r lo&al Boar$s ,%th the hea$?'arters at M'mba%, 2ol"ata, Che!!a% a!$ Ne, 5elh%. Lo&al Boar$s &o!s%st of f% e members ea&h Ce!tral Go er!me!t a++o%!te$ for a term of fo'r -ears to re+rese!t terr%tor%al a!$ e&o!om%& %!terests a!$ the %!terests of &o@o+erat% e a!$ %!$%*e!o's ba!"s.

The Reser e Ba!" of #!$%a ,as !at%o!al%4e$ ,%th effe&t from 1st =a!'ar-, 1.1. o! the bas%s of the Reser e Ba!" of #!$%a (Tra!sfer to P'bl%& O,!ersh%+) A&t, 1.1:. All shares %! the &a+%tal of the Ba!" ,ere $eeme$ tra!sferre$ to the Ce!tral Go er!me!t o! +a-me!t of a s'%table &om+e!sat%o!. The %ma*e %s a !e,s+a+er &l%++%!* *% %!* the %e,s of Go er!or C5 5eshm'"h, +r%or to !at%o!al%4at%o!

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

OR"#NI$#%ION & '#N#"E'EN% BO(Y

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

RO)E OF RE*ERVE B#N+ OF IN(I# Bank of Issue A!$er Se&t%o! 88 of the Reser e Ba!" of #!$%a A&t, the Ba!" has the sole r%*ht to %ss'e ba!" !otes of all $e!om%!at%o!s. The $%str%b't%o! of o!e r'+ee !otes a!$ &o%!s a!$ small &o%!s all o er the &o'!tr- %s '!$erta"e! b- the Reser e Ba!" as a*e!t of the Go er!me!t. The Reser e Ba!" has a se+arate #ss'e 5e+artme!t ,h%&h %s e!tr'ste$ ,%th the %ss'e of &'rre!&- !otes. The assets a!$ l%ab%l%t%es of the #ss'e 5e+artme!t are "e+t se+arate from those of the Ba!"%!* 5e+artme!t. Or%*%!all-, the assets of the #ss'e 5e+artme!t ,ere to &o!s%st of !ot less tha! t,o@f%fths of *ol$ &o%!, *ol$ b'll%o! or sterl%!* se&'r%t%es +ro %$e$ the amo'!t of *ol$ ,as !ot less tha! Rs. 19 &rores %! al'e. The rema%!%!* three@f%fths of the assets m%*ht be hel$ %! r'+ee &o%!s, Go er!me!t of #!$%a r'+ee se&'r%t%es, el%*%ble b%lls of eB&ha!*e a!$ +rom%ssor- !otes +a-able %! #!$%a. 5'e to the eB%*e!&%es of the Se&o!$ <orl$ <ar a!$ the +ost@,as +er%o$, these +ro %s%o!s ,ere &o!s%$erabl- mo$%f%e$. S%!&e 1.03, the Reser e Ba!" of #!$%a %s re?'%re$ to ma%!ta%! *ol$ a!$ fore%*! eB&ha!*e reser es of Ra. 899 &rores, of ,h%&h at least Rs. 110 &rores sho'l$ be %! *ol$. The s-stem as %t eB%sts to$a- %s "!o,! as the m%!%m'm reser e s-stem. Banker to "overnment The se&o!$ %m+orta!t f'!&t%o! of the Reser e Ba!" of #!$%a %s to a&t as Go er!me!t ba!"er, a*e!t a!$ a$ %ser. The Reser e Ba!" %s a*e!t of Ce!tral Go er!me!t a!$ of all State Go er!me!ts %! #!$%a eB&e+t%!* that of =amm' a!$ 2ashm%r. The Reser e Ba!" has the obl%*at%o! to tra!sa&t Go er!me!t b's%!ess, %a. to "ee+ the &ash bala!&es as $e+os%ts free of %!terest, to re&e% e a!$ to ma"e +a-me eB&ha!*e rem%tta!&es a!$ other ba!"%!* o+erat%o!s. The Reser e Ba!" of #!$%a hel+s the Go er!me!t @ both the A!%o! a!$ the States to float !e, loans a!$ to ma!a*e +'bl%& $ebt. The Ba!" ma"es ,a-s a!$ mea!s a$ a!&es to the Go er!me!ts for .9 $a-s. #t ma"es loa!s a!$ a$ a!&es to the States a!$ lo&al a'thor%t%es. #t a&ts as a$ %ser to the Go er!me!t o! all mo!etar- a!$ ba!"%!* matters. Bankers, Bank and )ender of t-e )ast Resort The Reser e Ba!" of #!$%a a&ts as the ba!"ersC ba!". A&&or$%!* to the +ro %s%o!s of the Ba!"%!* Com+a!%es A&t of 1.1., e er- s&he$'le$ ba!" ,as re?'%re$ to ma%!ta%! ,%th the Reser e Ba!" a &ash bala!&e e?'% ale!t to 0D of %ts $ema!$ l%ab%l%tes a!$ 8 +er &e!t of %ts t%me l%ab%l%t%es %! #!$%a. B- a! ame!$me!t of 1.;8, the $%st%!&t%o! bet,ee! $ema!$ a!$ t%me l%ab%l%t%es ,as abol%she$ a!$ ba!"s ha e bee! as"e$ to "ee+ &ash reser es e?'al to / +er &e!t of the%r a**re*ate $e+os%t l%ab%l%t%es. The m%!%m'm &ash re?'%reme!ts &a! be &ha!*e$ b- the Reser e Ba!" of #!$%a.

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

The s&he$'le$ ba!"s &a! borro, from the Reser e Ba!" of #!$%a o! the bas%s of el%*%ble se&'r%t%es or *et financial a&&ommo$at%o! %! t%mes of !ee$ or str%!*e!&- b- re$%s&o'!t%!* b%lls of eB&ha!*e. S%!&e &ommer&%al ba!"s &a! al,a-s eB+e&t the Reser e Ba!" of #!$%a to &ome to the%r hel+ %! t%mes of ba!"%!* &r%s%s the Reser e Ba!" be&omes !ot o!l- the ba!"erCs ba!" b't also the le!$er of the last resort. Controller of Credit The Reser e Ba!" of #!$%a %s the &o!troller of &re$%t %.e. %t has the +o,er to %!fl'e!&e the ol'me of &re$%t &reate$ b- ba!"s %! #!$%a. #t &a! $o so thro'*h &ha!*%!* the Ba!" rate or thro'*h o+e! mar"et o+erat%o!s. A&&or$%!* to the Ba!"%!* Re*'lat%o! A&t of 1.1., the Reser e Ba!" of #!$%a &a! as" a!- +art%&'lar ba!" or the ,hole ba!"%!* s-stem !ot to le!$ to +art%&'lar *ro'+s or +erso!s o! the bas%s of &erta%! t-+es of se&'r%t%es. S%!&e 1.0;, sele&t% e &o!trols of &re$%t are %!&reas%!*l- be%!* 'se$ b- the Reser e Ba!". The Reser e Ba!" of #!$%a %s arme$ ,%th ma!- more +o,ers to &o!trol the #!$%a! mo!e- mar"et. E erba!" has to *et a l%&e!&e from the Reser e Ba!" of #!$%a to $o ba!"%!* b's%!ess ,%th%! #!$%a, the l%&e!&e &a! be &a!&elle$ b- the Reser e Ba!" of &erta%! st%+'late$ &o!$%t%o!s are !ot f'lf%lle$. E er- ba!" ,%ll ha e to *et the +erm%ss%o! of the Reser e Ba!" before %t &a! o+e! a !e, bra!&h. Ea&h s&he$'le$ ba!" m'st se!$ a ,ee"l- ret'r! to the Reser e Ba!" sho,%!*, %! $eta%l, %ts assets a!$ l%ab%l%t%es. Th%s +o,er of the Ba!" to &all for %!format%o! %s also %!te!$e$ to *% e %t effe&t% e &o!trol of the &re$%t s-stem. The Reser e Ba!" has also the +o,er to %!s+e&t the a&&o'!ts of a!- &ommer&%al ba!". As s'+ereme ba!"%!* a'thor%t- %! the &o'!tr-, the Reser e Ba!" of #!$%a, therefore, has the follo,%!* +o,ers( (a) #t hol$s the &ash reser es of all the s&he$'le$ ba!"s. (b) #t &o!trols the &re$%t o+erat%o!s of ba!"s thro'*h ?'a!t%tat% e a!$ ?'al%tat% e &o!trols. (&) #t &o!trols the ba!"%!* s-stem thro'*h the s-stem of l%&e!s%!*, %!s+e&t%o! a!$ &all%!* for %!format%o!. ($) #t a&ts as the le!$er of the last resort b- +ro %$%!* re$%s&o'!t fa&%l%t%es to s&he$'le$ ba!"s. Custodian of Foreign Reserves The Reser e Ba!" of #!$%a has the res+o!s%b%l%t- to ma%!ta%! the off%&%al rate of eB&ha!*e. A&&or$%!* to the Reser e Ba!" of #!$%a A&t of 1./1, the Ba!" ,as re?'%re$ to b'- a!$ sell at f%Be$ rates a!- amo'!t of sterl%!* %! lots of !ot less tha! Rs. 19,999. The rate of eB&ha!*e f%Be$ ,as Re. 1 E sh. ;$. S%!&e 1./0 the Ba!" ,as able to ma%!ta%! the exchange rate f%Be$ at lsh.;$. tho'*h there ,ere +er%o$s of eBtreme +ress're %! fa o'r of or a*a%!st

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

the r'+ee. After #!$%a be&ame a member of the #!ter!at%o!al Mo!etar- >'!$ %! 1.1;, the Reser e Ba!" has the res+o!s%b%l%t- of ma%!ta%!%!* f%Be$ eB&ha!*e rates ,%th all other member &o'!tr%es of the #.M.>. Bes%$es ma%!ta%!%!* the rate of eB&ha!*e of the r'+ee, the Reser e Ba!" has to a&t as the &'sto$%a! of #!$%aCs reser e of %!ter!at%o!al &'rre!&%es. The ast sterl%!* bala!&es ,ere a&?'%re$ a!$ ma!a*e$ b- the Ba!". >'rther, the RB# has the res+o!s%b%l%t- of a$m%!%ster%!* the eB&ha!*e &o!trols of the &o'!tr-. *u.ervisor/ fun0tions #! a$$%t%o! to %ts tra$%t%o!al &e!tral ba!"%!* f'!&t%o!s, the Reser e ba!" has &erta%! !o!@ mo!etarf'!&t%o!s of the !at're of s'+er %s%o! of ba!"s a!$ +romot%o! of so'!$ ba!"%!* %! #!$%a. The Reser e Ba!" A&t, 1./1, a!$ the Ba!"%!* Re*'lat%o! A&t, 1.1. ha e *% e! the RB# ,%$e +o,ers of s'+er %s%o! a!$ &o!trol o er &ommer&%al a!$ &o@o+erat% e ba!"s, relat%!* to l%&e!s%!* a!$ establ%shme!ts, bra!&h eB+a!s%o!, l%?'%$%t- of the%r assets, ma!a*eme!t a!$ metho$s of ,or"%!*, amal*amat%o!, re&o!str'&t%o!, a!$ l%?'%$at%o!. The RB# %s a'thor%se$ to &arr- o't +er%o$%&al %!s+e&t%o!s of the ba!"s a!$ to &all for ret'r!s a!$ !e&essar- %!format%o! from them. The !at%o!al%sat%o! of 11 maFor #!$%a! s&he$'le$ ba!"s %! ='l- 1.;. has %m+ose$ !e, res+o!s%b%l%t%es o! the RB# for $%re&t%!* the *ro,th of ba!"%!* a!$ &re$%t +ol%&%es to,ar$s more ra+%$ $e elo+me!t of the e&o!om- a!$ real%sat%o! of &erta%! $es%re$ so&%al obFe&t% es. The s'+er %sor- f'!&t%o!s of the RB# ha e hel+e$ a *reat $eal %! %m+ro %!* the sta!$ar$ of ba!"%!* %! #!$%a to $e elo+ o! so'!$ l%!es a!$ to %m+ro e the metho$s of the%r o+erat%o!. Promotional fun0tions <%th e&o!om%& *ro,th ass'm%!* a !e, 'r*e!&- s%!&e #!$e+e!$e!&e, the ra!*e of the Reser e Ba!"Cs f'!&t%o!s has stea$%l- ,%$e!e$. The Ba!" !o, +erforms a ar%et-of $e elo+me!tal a!$ +romot%o!al f'!&t%o!s, ,h%&h, at o!e t%me, ,ere re*ar$e$ as o'ts%$e the !ormal s&o+e of &e!tral ba!"%!*. The Reser e Ba!" ,as as"e$ to +romote ba!"%!* hab%t, eBte!$ ba!"%!* fa&%l%t%es to r'ral a!$ sem%@'rba! areas, a!$ establ%sh a!$ +romote !e, s+e&%al%se$ financing a*e!&%es. A&&or$%!*l-, the Reser e Ba!" has hel+e$ %! the sett%!* '+ of the #>C# a!$ the S>CG %t set '+ the 5e+os%t #!s'ra!&e Cor+orat%o! %! 1.;8, the A!%t Tr'st of #!$%a %! 1.;1, the #!$'str%al 5e elo+me!t Ba!" of #!$%a also %! 1.;1, the A*r%&'lt'ral Ref%!a!&e Cor+orat%o! of #!$%a %! 1.;/ a!$ the #!$'str%al Re&o!str'&t%o! Cor+orat%o! of #!$%a %! 1.38. These %!st%t't%o!s ,ere set '+ $%re&tl- or %!$%re&tl- b- the Reser e Ba!" to +romote sa %!* hab%t a!$ to mob%l%se sa %!*s, a!$ to +ro %$e %!$'str%al f%!a!&e as ,ell as a*r%&'lt'ral f%!a!&e. As far ba&" as 1./0, the Reser e Ba!" of #!$%a set '+ the A*r%&'lt'ral Cre$%t 5e+artme!t to +ro %$e a*r%&'lt'ral &re$%t. B't o!l- s%!&e 1.01 the Ba!"Cs role %! th%s f%el$ has be&ome eBtremel- %m+orta!t. The Ba!" has $e elo+e$ the &o@o+erat% e &re$%t mo eme!t to e!&o'ra*e sa %!*, to el%m%!ate mo!e-le!$ers from the %lla*es a!$ to ro'te %ts short term &re$%t to a*r%&'lt're. The RB# has set '+ the A*r%&'lt'ral Ref%!a!&e a!$ 5e elo+me!t Cor+orat%o! to +ro %$e lo!*@term f%!a!&e to farmers.

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

Classifi0ation of RBIs fun0tions

The mo!etar- f'!&t%o!s also "!o,! as the &e!tral ba!"%!* f'!&t%o!s of the RB# are relate$ to &o!trol a!$ re*'lat%o! of mo!e- a!$ &re$%t, %.e., %ss'e of &'rre!&-, &o!trol of ba!" &re$%t, &o!trol of fore%*! eB&ha!*e o+erat%o!s, ba!"er to the Go er!me!t a!$ to the mo!e- mar"et. Mo!etar- f'!&t%o!s of the RB# are s%*!%f%&a!t as the- &o!trol a!$ re*'late the ol'me of mo!e- a!$ &re$%t %! the &o'!tr-. E?'all- %m+orta!t, ho,e er, are the !o!@mo!etar- f'!&t%o!s of the RB# %! the &o!teBt of #!$%aCs e&o!om%& ba&",ar$!ess. The s'+er %sor- f'!&t%o! of the RB# ma- be re*ar$e$ as a !o!@ mo!etar- f'!&t%o! (tho'*h ma!- &o!s%$er th%s a mo!etar- f'!&t%o!). The +romot%o! of so'!$ ba!"%!* %! #!$%a %s a! %m+orta!t *oal of the RB#, the RB# has bee! *% e! ,%$e a!$ $rast%& +o,ers, '!$er the Ba!"%!* Re*'lat%o! A&t of 1.1. @ these +o,ers relate to l%&e!&%!* of ba!"s, bra!&h eB+a!s%o!, l%?'%$%t- of the%r assets, ma!a*eme!t a!$ metho$s of ,or"%!*, %!s+e&t%o!, amal*amat%o!, re&o!str'&t%o! a!$ l%?'%$at%o!. A!$er the RB#Cs s'+er %s%o! a!$ %!s+e&t%o!, the ,or"%!* of ba!"s has *reatl- %m+ro e$. Commer&%al ba!"s ha e $e elo+e$ %!to f%!a!&%all- a!$ o+erat%o!all- so'!$ a!$ %able '!%ts. The RB#Cs +o,ers of s'+er %s%o! ha e !o, bee! eBte!$e$ to !o!@ba!"%!* f%!a!&%al %!terme$%ar%es. S%!&e %!$e+e!$e!&e, +art%&'larl- after %ts !at%o!al%sat%o! 1.1., the RB# has follo,e$ the +romot%o!al f'!&t%o!s %*oro'sl- a!$ has bee! res+o!s%ble for stro!* f%!a!&%al s'++ort to %!$'str%al a!$ a*r%&'lt'ral $e elo+me!t %! the &o'!tr-.

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

RE"1)#%ION OF B#N+IN" *Y*%E'

? Ob2e0tive
The obFe&t% es of ba!" re*'lat%o!, a!$ the em+has%s, ar%es bet,ee! F'r%s$%&t%o!. The most &ommo! obFe&t% es are( 1. Pr'$e!t%al @@ to re$'&e the le el of r%s" ba!" &re$%tors are eB+ose$ to (%.e. to +rote&t $e+os%tors) 8. S-stem%& r%s" re$'&t%o! @@ to re$'&e the r%s" of $%sr'+t%o! res'lt%!* from a$ erse tra$%!* &o!$%t%o!s for ba!"s &a's%!* m'lt%+le or maFor ba!" fa%l'res /. A o%$ m%s'se of ba!"s @@ to re$'&e the r%s" of ba!"s be%!* 'se$ for &r%m%!al +'r+oses, e.*. la'!$er%!* the +ro&ee$s of &r%me 1. To +rote&t ba!"%!* &o!f%$e!t%al%t0. Cre$%t allo&at%o! @@ to $%re&t &re$%t to fa ore$ se&tors "eneral .rin0i.les of bank regulation Ba!"%!* re*'lat%o!s &a! ar- ,%$el- a&ross !at%o!s a!$ F'r%s$%&t%o!s. Th%s se&t%o! of the art%&le $es&r%bes *e!eral +r%!&%+les of ba!" re*'lat%o! thro'*ho't the ,orl$. Minimum requirements Re?'%reme!ts are %m+ose$ o! ba!"s %! or$er to +romote the obFe&t% es of the re*'lator. The most %m+orta!t m%!%m'm re?'%reme!t %! ba!"%!* re*'lat%o! %s ma%!ta%!%!* m%!%m'm &a+%tal rat%os. Supervisory review Ba!"s are re?'%re$ to be %ss'e$ ,%th a ba!" l%&e!se b- the re*'lator %! or$er to &arr- o! b's%!ess as a ba!", a!$ the re*'lator s'+er %ses l%&e!&e$ ba!"s for &om+l%a!&e ,%th the re?'%reme!ts a!$ res+o!$s to brea&hes of the re?'%reme!ts thro'*h obta%!%!* '!$erta"%!*s, *% %!* $%re&t%o!s, %m+os%!* +e!alt%es or re o"%!* the ba!"Cs l%&e!&e.

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

Market discipline
The re*'lator re?'%res ba!"s to +'bl%&l- $%s&lose f%!a!&%al a!$ other %!format%o!, a!$ $e+os%tors a!$ other &re$%tors are able to 'se th%s %!format%o! to assess the le el of r%s" a!$ to ma"e %! estme!t $e&%s%o!s. As a res'lt of th%s, the ba!" %s s'bFe&t to mar"et $%s&%+l%!e a!$ the re*'lator &a! also 'se mar"et +r%&%!* %!format%o! as a! %!$%&ator of the ba!"Cs f%!a!&%al health.

Instruments and re3uirements of bank regulation Capital requirement The &a+%tal re?'%reme!t sets a frame,or" o! ho, ba!"s m'st ha!$le the%r &a+%tal %! relat%o! to the%r assets. #!ter!at%o!all-, the Ba!" for #!ter!at%o!al Settleme!tsC Basel Comm%ttee o! Ba!"%!* S'+er %s%o! %!fl'e!&es ea&h &o'!tr-Cs &a+%tal re?'%reme!ts. #! 1.::, the Comm%ttee $e&%$e$ to %!tro$'&e a &a+%tal meas'reme!t s-stem &ommo!lreferre$ to as the Basel Ca+%tal A&&or$s. The latest &a+%tal a$e?'a&- frame,or" %s &ommo!l- "!o,! as Basel ##. Th%s '+$ate$ frame,or" %s %!te!$e$ to be more r%s" se!s%t% e tha! the or%*%!al o!e, b't %s also a lot more &om+leB. Reserve requirement The reser e re?'%reme!t sets the m%!%m'm reser es ea&h ba!" m'st hol$ to $ema!$ $e+os%ts a!$ ba!"!otes. Th%s t-+e of re*'lat%o! has lost the role %t o!&e ha$, as the em+has%s has mo e$ to,ar$ &a+%tal a$e?'a&-, a!$ %! ma!- &o'!tr%es there %s !o m%!%m'm reser e rat%o. The +'r+ose of m%!%m'm reser e rat%os %s l%?'%$%t- rather tha! safet-. A! eBam+le of a &o'!tr- ,%th a &o!tem+orar- m%!%m'm reser e rat%o %s Ho!* 2o!*, ,here ba!"s are re?'%re$ to ma%!ta%! 80D of the%r l%ab%l%t%es that are $'e o! $ema!$ or ,%th%! 1 mo!th as ?'al%f-%!* l%?'ef%able assets. Reser e re?'%reme!ts ha e also bee! 'se$ %! the +ast to &o!trol the sto&" of ba!"!otes a!$Hor ba!" $e+os%ts. Re?'%re$ reser es ha e at t%mes bee! *ol$ &o%!, &e!tral ba!" ba!"!otes or $e+os%ts, a!$ fore%*! &'rre!&-. Corporate governance Cor+orate *o er!a!&e re?'%reme!ts are %!te!$e$ to e!&o'ra*e the ba!" to be ,ell ma!a*e$, a!$ %s a! %!$%re&t ,a- of a&h%e %!* other obFe&t% es. Re?'%reme!ts ma%!&l'$e(

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1. To be a bo$- &or+orate (%.e. !ot a! %!$% %$'al, a +art!ersh%+, tr'st or other '!%!&or+orate$ e!t%t-) 8. To be %!&or+orate$ lo&all-, a!$Hor to be %!&or+orate$ '!$er as a +art%&'lar t-+e of bo$&or+orate, rather tha! be%!* %!&or+orate$ %! a fore%*! F'r%s$%&t%o!. /. To ha e a m%!%m'm !'mber of $%re&tors 1. To ha e a! or*a!%4at%o!al str'&t're that %!&l'$es ar%o's off%&es a!$ off%&ers, e.*. &or+orate se&retar-, treas'rerHC>O, a'$%tor, Asset L%ab%l%t- Ma!a*eme!t Comm%ttee, Pr% a&- Off%&er et&. Also the off%&ers for those off%&es ma- !ee$ to be a++ro e$ +erso!s, or from a! a++ro e$ &lass of +erso!s. 0. To ha e a &o!st%t't%o! or art%&les of asso&%at%o! that %s a++ro e$, or &o!ta%!s or $oes !ot &o!ta%! +art%&'lar &la'ses, e.*. &la'ses that e!able $%re&tors to a&t other tha! %! the best %!terests of the &om+a!- (e.*. %! the %!terests of a +are!t &om+a!-) ma- !ot be allo,e$. Financial reporting and disclosure requirements 1. Pre+are a!!'al f%!a!&%al stateme!ts a&&or$%!* to a f%!a!&%al re+ort%!* sta!$ar$, ha e them a'$%te$, a!$ to re*%ster or +'bl%sh them 8. Pre+are more fre?'e!t f%!a!&%al $%s&los'res, e.*. I'arterl- 5%s&los're Stateme!ts /. Ha e $%re&tors of the ba!" attest to the a&&'ra&- of s'&h f%!a!&%al $%s&los'res 1. Pre+are a!$ ha e re*%stere$ +ros+e&t'ses $eta%l%!* the terms of se&'r%t%es %t %ss'es (e.*. $e+os%ts), a!$ the rele a!t fa&ts that ,%ll e!able %! estors to better assess the le el a!$ t-+e of f%!a!&%al r%s"s %! %! est%!* %! those se&'r%t%es. Credit rating requirement Ba!"s ma- be re?'%re$ to obta%! a!$ ma%!ta%! a &'rre!t &re$%t rat%!* from a! a++ro e$ &re$%t rat%!* a*e!&-, a!$ to $%s&lose %t to %! estors a!$ +ros+e&t% e %! estors. Also, ba!"s ma- be re?'%re$ to ma%!ta%! a m%!%m'm &re$%t rat%!*. Large exposures restrictions Ba!"s ma- be restr%&te$ from ha %!* %m+r'$e!tl- lar*e eB+os'res to %!$% %$'al &o'!ter+art%es or *ro'+s of &o!!e&te$ &o'!ter+art%es. Th%s ma- be eB+resse$ as a +ro+ort%o! of the ba!"Cs assets or e?'%t-, a!$ $%ffere!t l%m%ts ma- a++l- $e+e!$%!* o! the se&'r%t- hel$ a!$Hor the &re$%t rat%!* of the &o'!ter+art-. Related party exposure restrictions Ba!"s ma- be restr%&te$ from %!&'rr%!* eB+os'res to relate$ +art%es s'&h as the ba!"Cs +are!t &om+a!- or $%re&tors. T-+%&all- the restr%&t%o!s ma- %!&l'$e( ? EB+os'res to relate$ +art%es m'st be %! the !ormal &o'rse of b's%!ess a!$ o! !ormal terms a!$ &o!$%t%o!s 11

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? ?

EB+os'res to relate$ +art%es m'st be %! the best %!terests of the ba!" EB+os'res to relate$ +art%es m'st be !ot more tha! l%m%te$ amo'!ts or +ro+ort%o!s of the ba!"Cs assets or e?'%t-.

CRE(I% CON%RO) O!e of the more +leasa!t as+e&ts of the latest ?'arterl- Mo!etar- Pol%&- Re %e, %s the attem+t b- the Reser e Ba!" of #!$%a to be as +re$%&table as +oss%ble, or at least less $%sr'+t% e tha! %t has bee! before. The !ot%o! that some eleme!ts of a t%*hter mo!e- +ol%&- ,o'l$ be a!!o'!&e$ ,as +rett- m'&h to be eB+e&te$. <h%le ra%s%!* re+o rates b80 bas%s +o%!ts a!$ lea %!* other %!$%&ators of l%?'%$%t- '!&ha!*e$, the RB# Go er!or, 5r 6. 7. Re$$-, has tr%e$ to +la- both +ol%&ema! a!$ +'r e-or of o+t%m%sm, the former b- ra%s%!* mar*%!all- the &ost of &a+%tal for ba!"s thro'*h the re+o rate h%"e, a!$ the latter b- sele&t% el- +'sh%!* '+ the +ro %s%o!%!* !orms for &erta%! &ate*or%es of borro,ers ho+%!* thereb- to &at&h %!flat%o! b- the s&r'ff a!$ +'ll %t ba&" ,%th%! the 0.0 +er &e!t l%m%t. Lest the mar"ets th%!" the RB# %s a "%llFo-, %! %ts &ombat a*a%!st %!flat%o!, the Go er!or has ra%se$ the bar o! *ro,th eB+e&tat%o!s Fett%so!%!* h%s earl%er fore&ast a!$ the +ro*!os%s of North Blo&" for a . +er &e!t G5P tar*et for th%s ,a!%!* f%s&al. He has tr%e$ therefore to be all th%!*s to all me!, %! the bar*a%! &reat%!* a $%lemma that ma- !ot a'*'r ,ell for the e&o!om- %! the me$%'m to lo!* term. The bas%& +roblem %s that the RB# &a!!ot ho+e to both f%*ht %!flat%o! a!$ +ro+el *ro,th to the le els %t ,a!ts ,%th the meas'res %t has so far set %! mot%o!. Co!trols o! &re$%t eB+a!s%o! for sele&t &ate*or%es ,%th %!flat%o! +ote!t%al J &a+%tal mar"ets a!$ &ommer&%al real@estate J thro'*h h%*her +ro %s%o!%!* ma- &ho"e $ema!$ o!l- %f %t %s se!s%t% e to the &ost of &re$%t. B't %! a boom%!* e&o!om-, h%*her &osts &a! be tra!sm%tte$ $o,! the l%!eG ,%t!ess the r%s%!* ho's%!* loa! rates. #! ma!- a h%*h@fl-%!* se&tor ba!"s ma-, therefore, st%ll f%!$ ta"ers for eB+e!s% e &re$%t. Re*ar$less of the RB#Cs mar*%!al %!&rease %! re+o rates, the +er&e+t%o! of a t%*hter mo!e- re*%me ,%ll +'sh '+ %!terest rates all aro'!$, th's &o!tr%b't%!* to the +r%&e r%se %!stea$ of &ombat%!* %t. G% e! the !at're of %!flat%o!, &'rre!tl- at a t,o@-ear h%*h, the tas" of f%*ht%!* %t l%es ,%th Ne, 5elh%. The Go er!me!t m'st +'t to*ether a *am't of meas'res to remo e the s'++l- bottle!e&"s that are &a's%!* the +r%&e r%se. The RB# a$m%ts that the *ro,th %! a*r%&'lt're has )!ot bee! sa!*'%!e) ,%th the $e&l%!%!* o't+'t %! maFor &ereals +'sh%!* '+ +r%&es. >o&'s%!* %ts Mo!etar- Pol%&- ,ea+o!s o! )&re$%t ?'al%t-) a!$, therefore, the health of the ba!"%!* s-stem, the RB# has +r'$e!tl- left th%s %!%t%at% e to Ne, 5elh%.

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OB4EC%IVE OF CRE(I% CON%RO)

The &e!tral ba!" ma"es efforts to &o!trol the eB+a!s%o! or &o!tra&t%o! of &re$%t %! or$er to "ee+ %t at the re?'%re$ le el ,%th a %e, to a&h%e %!* the follo,%!* e!$s. 1. To sa e Gol$ Reser es( The &e!tral ba!" a$o+ts ar%o's meas'res of &re$%t &o!trol to safe *'ar$ the *ol$ reser es a*a%!st %!ter!al a!$ eBter!al $ra%!s. 8. To a&h%e e stab%l%t- %! the Pr%&e le el( >re?'e!tl- &ha!*es %! +r%&es a$ ersel- affe&t the e&o!om-. #!flat%o!ar- a!$ $eflat%o!ar- tre!$s !ee$ to be +re e!te$. Th%s &a! be a&h%e e$ ba$o+t%!* a F'$%&%o's of &re$%t &o!trol. /. To a&h%e e stab%l%t- %! the >ore%*! EB&ha!*e Rate( A!other obFe&t% e of &re$%t &o!trol %s to a&h%e e the stab%l%t- of fore%*! eB&ha!*e rate. #f the fore%*! eB&ha!*e rate %s stab%l%4e$, %t %!$%&ates the stable e&o!om%& &o!$%t%o!s of the &o'!tr-. 1. To meet B's%!ess Nee$s( A&&or$%!* to B'r*ess, o!e of the %m+orta!t obFe&t% es of &re$%t &o!trol %s the KA$F'stme!t of the ol'me of &re$%t to the ol'me of B's%!essL &re$%t %s !ee$e$ to meet the re?'%reme!ts of tra$e a! %!$'str-. So b- &o!troll%!* &re$%t &e!tral ba!" &a! meet the re?'%reme!ts of b's%!ess.

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'E%HO( OF CRE(I% CON%RO)

There are t,o metho$ of &re$%t &o!trol(@ ? 5uantitative met-od 67 Bank Rate Poli0/ 87 O.en 'arket O.erations 97 C-ange in Reserve Ratios :7 Credit Rationing

? 5ualitative met-od 67 (ire0t #0tion 87 'oral .ersuasion 97 )egislation :7 Publi0it/

5uantitative met-od
67 Bank Rate Poli0/! Ba!" rate %s the rate of %!terest ,h%&h %s &har*e$ b- the &e!tral ba!" o! re$%s&o'!t%!* the f%rst &lass b%lls of eB&ha!*e a!$ a$ a!&%!* loa!s a*a%!st a++ro e$ se&'r%t%es. Th%s fa&%l%t- %s +ro %$e$ to other ba!"s. #t %s also "!o,! as 5%s&o'!t Rate Pol%&-. 87 O.en 'arket O.erations! The term KO+e! Mar"et O+erat%o!sL %! the ,%$er se!se mea!s +'r&hase or sale b- a &e!tral ba!" of a!- "%!$ of +a+er %! ,h%&h %t $eals, l%"e *o er!me!t se&'r%t%es or a!- other +'bl%& se&'r%t%es or tra$e b%lls et&. %! +ra&t%&e, S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA 11

ho,e er the term %s a++l%e$ to +'r&hase or sale of *o er!me!t se&'r%t%es, short@term as ,ell as lo!*@term, at the %!%t%at% e of the &e!tral ba!", as a $el%berate &re$%t +ol%&-. 97 C-ange in Reserve Ratios! E er- &ommer&%al ba!" %s re?'%re$ to $e+os%t ,%th the &e!tral ba!" a &erta%! +art of %ts total $e+os%ts. <he! the &e!tral ba!" ,a!ts to eB+a!$ &re$%t %t $e&reases the reser e rat%o as re?'%re$ for the &ommer&%al ba!"s. A!$ ,he! the &e!tral ba!" ,a!ts to &o!tra&t &re$%t the reser e rat%o re?'%reme!t %s %!&rease$. :7 Credit Rationing! Cre$%t rat%o!%!* mea!s restr%&t%o!s +la&e$ b- the &e!tral ba!" o! $ema!$s for a&&ommo$at%o! ma$e '+o! %t $'r%!* t%mes of mo!etar- str%!*e!&- a!$ $e&l%!%!* *ol$ reser es. Th%s metho$ of &o!troll%!* &re$%t &a! be F'st%f%e$ o!l- as a meas're to meet eB&e+t%o!al emer*e!&%es be&a'se %t %s o+e! to ser%o's ab'se. ;7 CRR<Cas- Reserve Ratio=!Cash reser e Rat%o (CRR) %s the amo'!t of Cash(l%?'%$ &ash l%"e *ol$)that the ba!"s ha e to "ee+ ,%th RB#. Th%s Rat%o %s bas%&all- to se&'re sol e!&- of the ba!" a!$ to $ra%! o't the eB&ess% e mo!e- from the ba!"s. #f RB# $e&%$es to %!&rease the +er&e!t of th%s, the a a%lable amo'!t ,%th the ba!"s &omes $o,! a!$ %f RB# re$'&e the CRR the! a a%lable amo'!t ,%th Ba!"s %!&rease$ a!$ the- are able to le!$ more.RB# has re$'&e$ th%s rat%o three t%mes a!$ re$'&e$ %t from . D to 0.0D %! last o!e mo!th or so. ;. Re.o Rate!Re+o rate %s the rate at ,h%&h o'r ba!"s borro, r'+ees from RB#. Th%s fa&%l%t- %s for short term meas're a!$ to f%ll *a+s bet,ee! $ema!$ a!$ s'++l- of mo!e- %! a ba!" .,he! a ba!" %s short of f'!$s the- the- borro, from ba!" at re+o rate a!$ %f ba!" has a s'r+l's f'!$ the! the $e+os%t the f'!$s ,%th RB# a!$ ear! at Re erse re+o rate .So re erse Re+o rate %s the rate ,h%&h %s +a%$ b- RB# to ba!"s o! 5e+os%t of f'!$s ,%th RB#.A re$'&t%o! %! the re+o rate ,%ll hel+ ba!"s to *et mo!e- at a &hea+er rate. <he! the re+o rate %!&reases borro,%!* from RB# be&omes more eB+e!s% e.To borro, from RB% ba!" ha e to s'bm%t l%?'%$ bo!$s HGo t Bo!$s as &ollateral se&'r%t,so th%s fa&%l%t- %s a short term *a+ f%ll%!* fa&%l%t- a!$ ba!" $oes !ot 'se th%s fa&%l%t- to Le!$ more to the%r &'stomers.+rese!t rate %s 3.0D a!$ re erse re+o rate %s ;D. >. *)R<<*tatutor/ )i3uidit/ Ratio= %s the amo'!t a &ommer&%al ba!" !ee$s to ma%!ta%! %! the form of &ash, or *ol$ or *o t. a++ro e$ se&'r%t%es (Bo!$s) before +ro %$%!* &re$%t to %ts &'stomers. SLR rate %s $eterm%!e$ a!$ ma%!ta%!e$ b- the RB# (Reser e Ba!" of #!$%a) %! or$er to &o!trol the eB+a!s%o! of ba!" &re$%t.Ge!erall- th%s ma!$ator- rat%o! %s &om+l%e$ b- %! est%!* %! Go t bo!$s.+rese!t rate of SLR %s 81 D.B't Ba!"s a era*e %s 83.0 D ,the reaso! beh%!$ %t %s that %! $ef%&%t b'$*et%!* Go t la!$%!* %s more so theborro, mo!e- from ba!"s b- sell%!* the%r bo!$s to ba!"s.so ba!"s ha e %! este$ more tha! re?'%re$ +er&e!ta*e a!$ 'se these eB&ess bo!$s as &ollateral se&'r%t- ( o er a!$ abo e SLR )to a a%l short term >'!$s from the RB# at Re+o rate.

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5ualitative met-od
67 (ire0t #0tion! The &e!tral ba!" ma- ta"e $%re&t a&t%o! a*a%!st &ommer&%al ba!"s that %olate the r'les, or$ers or a$ %&e of the &e!tral ba!". Th%s +'!%shme!t %s er- se ere of a &ommer&%al ba!". 87 'oral .ersuasion! #t %s a!other metho$ b- ,h%&h &e!tral ba!" ma- *et &re$%t s'++l- eB+a!$e$ or &o!tra&te$. B- moral +ress're %t ma- +roh%b%t or $%ss'a$e &ommer&%al ba!"s to $eal %! s+e&'lat% e b's%!ess. 97 )egislation! The &e!tral ba!" ma- also a$o+t !e&essar- le*%slat%o! for eB+a!$%!* or &o!tra&t%!* &re$%t mo!e- %! the mar"et. :7 Publi0it/! The &e!tral ba!" ma- resort to mass% e a$ ert%s%!* &am+a%*! %! the !e,s +a+ers, ma*a4%!es a!$ Fo'r!als $e+%&t%!* the +oor e&o!om%& &o!$%t%o!s of the &o'!tr- s'**est%!* &ommer&%al ba!"s a!$ other f%!a!&%al %!st%t't%o!s to &o!trol &re$%t e%ther b- eB+a!s%o! or b- &o!tra&t%o!.

S.P.B.PATEL ENGG. COLLEGE(MBA PROGRAMME),MEHSANA

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Bibliogra.-/!? BOO+* ? ? '7Y7 +-an @Indian finan0ial s/stem *ud-ir s-a-?Indian e0onom/

Website AAA7rbi7org7in

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