A STUDY ON

NON PERFORMING ASSETS

With Reference to
ICICI BANK
A Project Report submitted to Andhra University, Visakhapatnam
In Partial fulfillment for the Award of the Degree of

BACHELOR OF COMMERCE
Submitted by
Y.BALAJEE
(Hall TicketNo: - 115128803263)

Under the Esteemed guidance of

Miss. Preksha
Lecturer

Department of Commerce and Management Studies

Dr. LANKAPALLI BULLAYYA COLLEGE
Andhra University
Visakhapatnam-530013
(2015 - 2018)
 DECLARATION

I hereby declare that the project work entitled “NON PERFORMING ASSETS”
with reference to “ICICI BANK”, is a bonafide work done by me for the award of the
degree of “Bachelor of Commerce”, from Andhra University has been done under the
guidance of Miss. Preksha, Lecturer, Department of Commerce and Management
Studies, during the academic years 2015 – 2018, and my work has not been submitted to
any other University or Institution for the award of any Degree or Diploma.

Y.BALAJEE

HallTicketNo:115128830?????
 CERTIFICATE

This is to certify that the project report entitled “Lending Portfolio of banks” with reference to

“State Bank of India”, is a bonafide work done by Prateek Kapoor, student of B.com, of

Department of Commerce and Management Studies, Dr. LankapalliBullayyaCollege,

Visakhapatnam, for the award of the degree of “Bachelor of Commerce”, from Andhra

University, done under my guidance, during the academic years 2015 – 2018.

Date:
Place: Visakhapatnam

Miss Preksha Dassani

Lecturer
Dept. of Commerce and ManagementStudies
Dr.LankapalliBullayyaCollege

Mr.Riaz Mohammed
Dean-UG Courses
Dept. of Commerce and Management Studies
Dr. LankapalliBullayyaCollege
Visakhapatnam
 ACKNOWLEDGEMENT

Firstly, I would like to thank Dr.Y.Poli Reddy, Principal, Dr.LankapalliBullayya

College and Mr. Riaz Mohammed, Dean-UG Courses, Dr.LankapalliBullayya
College for giving me an opportunity to take up this project work.

I would like to thank Mr.H.Ranganaikulu, Asst.Dean, Department of

Commerce and Management Studies, Dr.Lankapalli Bullayya College, for
encouraging me to do this project work .I would also like to thank my Project
Guide,Miss.Preksha Dassani of Guide, Lecturer, Department of Commerce and
Management Studies, for her/his valuable guidance, keen interest and support which
was helpful in the the completion of my project work.

I would also like to express my deep gratitude to all the teachers in the
Departmentof Commerce and Management Studies, Dr. LankapalliBullayya
College, who have helped me in various stages of the project work.

Lastly, I would like to thank my family and friends for their constant help and
support which helped me a lot in finalizing this project within the limited time frame.

Y.BALAJEE
Hall Ticket No:11528803263
SEQUENTIAL ORDER FOR PREPARATION OF PROJECT REPORT -
 Title page of the Project
 Acknowledgement
 Declaration
 Certificate
 Index

CHAPTER I
i. Introduction
ii. Objectives Of The Study
iii. Need for The Study
iv. Scope Of The Study
v. Research Methodology
vi. Limitations

CHAPTER II
i. Industry Profile
ii. Company Profile

CHAPTER III
i. Theoritical Framework

CHAPTER IV
i. Data Analysis and Interpretation

CHAPTER V
i. Findings
ii. Suggestions
iii. Conclusion
iv. Bibliography
CHAPTER-1
Introduction of central banking
Social Responsibility. The Reserve Bank of India (RBI) is
India's central banking institution, which controls the monetary policy of
the Indian rupee. It commenced its operations on 1 April 1935 during the
British Rule in accordance with the provisions of the Reserve Bank of India
Act, 1934.[6] The original share capital was divided into shares of 100 each
fully paid, which were initially owned entirely by private shareholders.
[7]
Following India's independence on 15 August 1947, the RBI was
nationalised on 1 January 1949.

The RBI plays an important part in the Development Strategy of

the Government of India. It is a member bank of the Asian Clearing Union.
The general superintendence and direction of the RBI is entrusted with the
21-member Central Board of Directors: the Governor, 4 Deputy Governors,
2 Finance Ministry representatives, 10 government-nominated directors to
represent important elements of India's economy, and 4 directors to
represent local boards headquartered at Mumbai, Kolkata, Chennai and New
Delhi. Each of these local boards consists of 5 members who represent
regional interests, the interests of co-operative and indigenous banks.

A Central Bank is an independent apex monetary authority which

regulates banks and provides important financial services like storing of
foreign exchange reserves, control of inflation, monetary policy report. A
Central Bank is known by different names in different countries. The
functions of a Central Bank vary from country to country and are
autonomous or quasi-autonomous body and perform or through another
agency vital monetary functions in the country. A central bank is a vital
financial apex institution of an economy and the key objects of central banks
may differ from country to country still they perform activitie s and
functions with the goal of maintaining economic stability and growth of an
economy.[9]

The bank is also active in promoting financial inclusion policy and is a

leading member of the Alliance for Financial Inclusion (AFI). Financial
Supervision

The primary objective of BFS is to undertake consolidated supervision of

the financial sector comprising commercial banks, financial institutions and
non-banking finance companies.

The Board is constituted by co-opting four Directors from the Central

Board as members for a term of two years and is chaired by the Governor.
The Deputy Governors of the Reserve Bank are ex-officio members. One
Deputy Governor, usually, the Deputy Governor in charge of banking
regulation and supervision, is nominated as the Vice-Chairman of the Board.
The Board is required to meet normally once every month. It considers
inspection reports and other supervisory issues placed before it by the
supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the

quality of the statutory audit and internal audit functions in banks and
financial institutions. The audit sub-committee includes Deputy Governor as
the chairman and two Directors of the Central Board as members. The BFS
oversees the functioning of Department of Banking Supervision (DBS),
Department of Non-Banking Supervision (DNBS) and Financial Institutions
Division (FID) and gives directions on the regulatory and supervisory issues.
Regulator and supervisor of the financial system

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. The Banking
Ombudsman Scheme has been formulated by the Reserve Bank of India
(RBI) for effective addressing of complaints by bank customers. 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.[44]

Managing of exchange control

The central bank manages to reach different goals of the Foreign Exchange
Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly

development and maintenance of foreign exchange market in India

Issue of currency and other Functions

The bank issues and exchanges currency notes and coins and destroys the
same when they are not fit for circulation. The objectives are to issue bank
notes and give public adequate supply of the same, to maintain the currency
and credit system of the country to utilize it in its best advantage, and to
maintain the reserves. RBI maintains the economic structure of the country
so that it can achieve the objective of price stability as well as economic
development because both objectives are diverse in themselves. For printing
of notes, the Security Printing and Minting Corporation of India
Limited (SPMCIL), a wholly owned company of the Government of India,
has set up printing presses at Nashik, Maharashtra and Dewas, Madhya
Pradesh.

The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL),

also has set up printing presses in Mysore in Karnataka and Salboni in West
Bengal. In all, there are four printing presses. [45] And for the minting of
coins, SPMCIL has four mints at Mumbai, Noida (UP), Kolkata and
Hyderabad for coin production.[46] Commercial banks create credit. It is the
duty of the RBI to control the credit through the CRR, bank rate and open
market operations. As banker's bank, the RBI facilitates the clearing of
cheques between the commercial banks and helps the inter-bank transfer of
funds. It can grant financial accommodation to schedule banks. It acts as the
lender of the last resort by providing emergency advances to the banks. It
supervises the functioning of the commercial banks and takes action against
it if the need arises. The RBI also advices the banks on various matters for
example Corporate
Objectives of central banking
The Central Bank of India is one of the most oldest Bank in India. It was
established in the year 1911 and was the first commercial bank of India that
was owned by Indians.

The objectives of the Central Bank of India are as follows:

- To help ensure the monetary stability of the country.
- To assist in regulating the financial system of the country,
- To formulate, implement and monitor the monetary policy.
- To maintain the liquidity in the country.
- To ensure adequate flow of credits.
- Prescribes parameters for banking in the country.
- Maintain public confidence in the system.
- To manage the foreign exchange Management Act.
- To facilitate external trade.
- Issue and exchange currency.
- Maintain supply of currency.
- Own and operate the depository and exchange for government bonds.
- Banker to the government
Needs of central banking

The first central banks were created in Amsterdam and Stockholm in the
early 1600s. The early central banks were largely utilized to assist in
financing government operations. The Bank of England was formed as a
private company in the late 1700s to help the government raise funds for
financing the wars that England was engaged in at the time. By the mid-19th
century, the Bank of England (misnamed because it is the central bank of the
U.K., not just England) became totally government owned and had the
monopoly on the issue of bank notes (currency).

The U.S. did not have a central bank until the Federal Reserve came
into existence in 1913. Under the gold standard, which most major nations
were using up to the advent of the WWI, there was not a necessity for
money policy. Recessions used to be called “panics,” which tended to short
in duration and self-correcting. There developed a widespread belief that
panics could be mitigated if there was a central bank to serve as the lender of
last resort for commercial banks, which would prevent a cascading series of
bank failures – which could lead to a depression – hence the Fed.

The role of central banks has been changing over the years, and
particularly in the last eight years. In addition to being a lender of last resort,
most central banks issue the currency and try to maintain its value, which is
a continuous problem once a currency is unhinged from something real, such
as gold. Most central banks also have bank regulatory functions, such as
requiring certain capital and reporting standards. In recent years, these bank
regulatory functions have grown – particularly at the Fed as a result of the
passage of the Dodd-Frank bill, stemming from the financial crisis of 2008-
09. For a number of decades, the Fed had a dual mandate which was to
insure the value of the currency and promote policies that would lead to full
employment.

The fact that these goals could be contradictory was most often conveniently
ignored. During the last half of the 20th century, the conventional wisdom
was that the Fed could achieve these goals by controlling the rate of interest
and the money supply. As those of you who took a course in
macroeconomics or money and banking may recall, the Fed had three
primary tools for achieving its goals. The first was what are known as “open
market operations” whereby the Fed buys and sells government bonds in the
secondary market often on a daily basis. The second was the “discount rate”
or the rate of interest the Fed charged banks for short-term loans. The third
was the reserve requirements whereby the Fed determined the percent of
assets that the bank had to keep in reserve.
Scope of central banking
Monetary policy is the process by which monetary authority of a country ,
generally central bank controls the supply of money in the economy by its
control over interest rates in order to maintain price stability and achieve
high economic growth.[1] In India, the central monetary authority is
the Reserve Bank of India (RBI). It is so designed as to maintain the price
stability in the economy. Other objectives of the monetary policy of India, as
stated by RBI, are:-

Price Stability
Price Stability implies promoting economic development with
considerable emphasis on price stability. The centre of focus is to
facilitate the environment which is favourable to the architecture that
enables the developmental projects to run swiftly while also
maintaining reasonable price stability.
Controlled Expansion Of Bank Credit
One of the important functions of RBI is the controlled expansion of
bank credit and money supply with special attention to seasonal
requirement for credit without affecting the output.
Promotion of Fixed Investment
The aim here is to increase the productivity of investment by
restraining non essential fixed investment.
 Restriction of Inventories and stocks
Overfilling of stocks and products becoming outdated due to excess of
stock often results in sickness of the unit. To avoid this problem the
central monetary authority carries out this essential function of
restricting the inventories. The main objective of this policy is to
avoid over-stocking and idle money in the organization.
To Promote Efficiency
It is another essential aspect where the central banks pay a lot of
attention. It tries to increase the efficiency in the financial system and
tries to incorporate structural changes such as deregulating interest
rates, ease operational constraints in the credit delivery system, to
introduce new money market instruments etc.
Reducing the Rigidity
RBI tries to bring about the flexibilities in the operations which
provide a considerable autonomy. It encourages more competitive
environment and diversification. It maintains its control over financial
system whenever and wherever necessary to maintain the discipline
and prudence in operations of the financial system.
 LIMITATIONS OF THE STUDY

It will be plausible to note condition of this study that limit the extent of
legitimate generalizations and thus limit the extent of legitimate
generalization of this study. Thus shortcoming may stated as follows:

.1 Lack of in-depth Approach Notwithstanding its comprehensive coverage,

the present study may be criticized because it misses an in-depth analysis of
the regulatory framework and segmented structure of financial services.
Further the role of government intervention and its impact has also not been
assessed.

2 Financial Services is a Growing Sector Financial services are growing

sector and it is difficult to understand the growth and development in this
sector with its full capacity. This study too is a small step in this direction
and should be treated as a small contribution to the academic world.

3 Accuracy and Dependability of Interpretative Material used as Plausible

Reasons Most of the Interpretative material used as plausible reasons for
research findings of the present study consisted of opinions of executives
and general masses from a number of banks of different nature, speculation
and hunches of researcher rather than conclusions and inferences drawn
from empirical studies. Explicitly, this study must be viewed with
circumspection and appropriate regard for human frailties.

4 SUGGESTIONS Based on the findings, following suggestions can be

made to the Financial Institutions, academicians and the future researchers,
who have keen interest in this area.
Research and methodology
The Central Bank compiles and processes statistics on the basis of Article 29 of the Act

on the Central Bank of Iceland, no. 36/2001. The statistics form the foundation for the

Bank’s assessment of important aspects of monetary policy and financial stability. In

accordance with Article 35 of the Act, the Financial Supervisory Authority and Statistics

Iceland also have access to the some of the data compiled by the Central Bank, based on

a cooperation agreement between the institutions. However, the agreement does not give

the institutions access to information on individuals. Information that can be traced to

specific firms other than supervised financial institutions are accessible only to Statistics

Iceland. The provisions of the cooperation agreement therefore apply only if there is a

genuine need for the data and pressing arguments in favour of granting access to them.

The statistics are processed in accordance with international standards on

statistical reporting, including those issued by the World Bank, International
Monetary Fund (IMF), Bank for International Settlements (BIS),
Organisation for Economic Co-operation and Development (OECD,
European Central Bank (ECB), Eurostat (the EU statistical bureau), and the
United Nations (UN). International standards define methodology,
terminology, and presentation of statistics, and they provide guidelines for
professional work habits, impartiality, and confidentiality in statistics
processing. The purpose of the standards is to ensure international
comparability of the statistics, both overall and with respect to data quality.
CHAPTER-2
 Industrial banking profile

Concept of Banking

Banks are institutions that accept various types of deposits and use those funds for
granting loans. The business of banking is that of an intermediary between the saving and
investment units of the economy. It collects the surplus funds of millions of individual
savers who are widely scattered and channelize them to the investor. According to section
5(b) of the Banking Regulation Act, 1949, “banking” means the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawable by cheque, draft, and order or otherwise.
Banking company means any company which transacts the business of banking in India.
No company can carry on the business of banking in India unless it uses as part of its
name at least one of the words bank, banker or banking. The essential characteristics of
the banking business as defined in section 5(b) of the Banking Regulation Act are:

Acceptance of deposits from the public, For the purpose of lending or investment

a) Withdraw able by means of any instrument whether a cheques or otherwise.

Development of Banking in India

The history of banking dates back to the thirteenth century when the first bill of
exchange was used as money in medieval trade. There was no such word as ‘banking’
before 1640, although the practice of safe-keeping and savings flourished in the
temple of Babylon as early as 2000 B.C. Chanakya in his Arthashastra written in
about 300 B.C. mentioned about the existence of powerful guilds of merchant bankers
who received deposits, advanced loans and issued hundis (letters of transfer). The
Jain scriptures mention the names of two bankers who built the famous Dilwara
Temples of Mount Abu during 1197 and 1247 A.D.
 The first bank called the ‘Bank of Venice’ was established in Venice, Itlay in
1157 to finance the monarch in his wars. The bankers of Lombardy were famous in
England. But modern banking began with the English goldsmith only after 1640. The
first bank in India was the ‘Bank of Hindustan’ started in 1770 by Alexander & Co.
an English agency house in Calcutta which failed in 1782 with the closure of the
agency house. But the first bank in the modern sense was established in the Bengal
Presidency as the Bank of Bengal in 1806.

History apart, it was the ‘merchant banker’ who first evolved the system of
banking by trading in commodities than money. Their trading activities required the
remittances of money from one place to another. For this, they issued ‘hundis’ to
remit funds. In India, such merchant bankers were known as ‘Seths’

The next stage in the growth of banking was the goldsmith. The business of
goldsmith was such that he had to take special precautions against theft of gold and
jewellery. If he seemed to be an honest person, merchants in the neighborhood started
leaving their bullion, money and ornaments in his care. As this practice spread, the
goldsmith started charging something for taking care of the money and bullion. As
evidence for receiving valuables, he issued a receipt. Since gold and silver coins had
no marks of the owner, the goldsmith started lending them. As the goldsmith was
prepared to give the holder of the receipt an equal amount of money on demand, the
goldsmith receipts became like cheques as a medium of exchange and a means of
payment.

The next stage in the growth of banking is the moneylender. The goldsmith
found that on an average the withdrawals of coins were much less than the deposits
with him. So he started advancing the coins on loan by charging interest. As a
safeguard, he kept some money in the reserve. Thus the goldsmith-money-lender
became a banker who started performing the two functions of modern banking that of
accepting deposits and advancing loans.
COMPANY PROFILE OF RBI

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) was established by
Reserve Bank of India (RBI) as its wholly owned subsidiary on 3rd February 1995 with a
view to augmenting the production of bank notes in India to enable the RBI to bridge the
gap between the supply and demand for bank notes in the country. The BRBNMPL has
been registered as a Private Limited Company under the Companies Act 1956 with its
Registered and Corporate Office situated at Bengaluru. The company manages 2 Presses
one at Mysore in Karnataka and the other at Salboni in West Bengal. The present
capacity for both the presses is 16 billion note pieces per year on a 2-shift basis.
The Board of Directors headed by a non Executive Chairman nominated by
Reserve Bank of India oversees the overall affairs of the Company. The Managing
Director is the whole time Chief Executive of the Company and is also a member of the
Board. The members of the Board of Directors are persons of high eminence drawn from
various professional fields. The Managing Director is assisted by a team of senior officers
in the Corporate Office and two presses at Mysore and Salboni.
Both the presses have installed the latest "state of the art" Technology in bank
note printing. The machinery at Mysore Site has been supplied by M/s. De La Rue Giori,
now KBA Giori, Switzerland and that of Salboni by M/s. Komori Corporation, Japan.
Both the presses are equipped with sophisticated Security Surveillance Systems. The
Corporate mission of the Company is to produce bank notes conforming to international
standards set by Central Banking and monetary authorities of the world and makes them
available in adequate quantities to the Reserve Bank of India at competitive prices.
BRBNMPL seeks to achieve this mission through its most valued asset, its people. It has
also gone in for extensive automation and the Enterprise Resource Planning. The
BRBNMPL has already put in place an effective Quality Management System as
embodied in the ISO 9001 - 2008 and also environmental management systems and has
also been certified as ISO 9001 : 2008 and ISO 14001: 2004 Company.
Organizational structure
 Central board

The Reserve Bank's affairs are governed by a central board of directors. The board is
appointed by the Government of India in keeping with the Reserve Bank of India Act.

 Appointed/nominated for a period of four years

 Constitution:
o Official Directors
 Full-time : Governor and not more than four Deputy Governors
o Non-Official Directors
 Nominated by Government: ten Directors from various fields and two government
Official
 Others: four Directors - one each from four local boards

Functions : General superintendence and direction of the Bank's affairs

Names and addresses of the Central Board of Directors of the Reserve Bank of
India
1. Dr. Urjit R. Patel @7. Shri Bharat Narotam Doshi
Governor
2. Shri N. S. Vishwanathan @8. Shri Sudhir Mankad
Deputy Governor
3. Dr. Viral V. Acharya @9. Dr. Ashok Gulati
Deputy Governor
4. Shri B.P. Kanungo @10. Shri Manish Sabharwal
Deputy Governor
*5. Dr. Nachiket M. Mor #11. Shri Subhash Chandra Garg
@6. Shri Natarajan
#12. Shri Rajiv Kumar
Chandrasekaran
CHAPTER-3
Theoretical frame work
Latest RBI Bank Rates in Indian Banking - 2017

SLR Rate CRR MSF Repo Rate

20% 4% 6.25% 6%

Quantitative methods of RBI

RBI Repo Rate Trend Chart
Repo rate also known as the benchmark interest rate is the rate at which the RBI lends
money to the banks for a short term. When the repo rate increases, borrowing from RBI
becomes more expensive. If RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks
to borrow money it reduces the repo rate. Current repo rate is 6%
Reverse Repo rate is the short term borrowing rate at which RBI borrows money
from banks. The Reserve bank uses this tool when it feels there is too much money
floating in the banking system. An increase in the reverse repo rate means that the banks
will get a higher rate of interest from RBI. As a result, banks prefer to lend their money
to RBI which is always safe instead of lending it others (people, companies etc) which is
always risky.
Repo Rate signifies the rate at which liquidity is injected in the banking system by
RBI, whereas Reverse Repo rate signifies the rate at which the central bank absorbs
liquidity from the banks
CRR - Cash Reserve Ratio - Banks in India are required to hold a certain proportion of
their deposits in the form of cash. However Banks don't hold these as cash with
themselves, they deposit such cash(aka currency chests) with Reserve Bank of India ,
which is considered as equivalent to holding cash with themselves. This minimum ratio
(that is the part of the total deposits to be held as cash) is stipulated by the RBI and is
known as the CRR or Cash Reserve Ratio.
When a bank's deposits increase by Rs100, and if the cash reserve ratio is 9%,
the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for
investments and lending, credit purpose. Therefore, higher the ratio, the lower is the
amount that banks will be able to use for lending and investment. This power of Reserve
bank of India to reduce the lendable amount by increasing the CRR, makes it an
instrument in the hands of a central bank through which it can control the amount that
banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.

SLR - Statutory Liquidity Ratio - Every bank is required to maintain 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).
RBI is empowered to increase this ratio up to 40%. An increase in SLR also
restricts the bank's leverage position to pump more money into the economy.

Net Demand Liabilities - Bank accounts from which you can withdraw your money at
any time like your savings accounts and current account.
Time Liabilities - Bank accounts where you cannot immediately withdraw your money
but have to wait for certain period. e.g. Fixed deposit accounts.

Call Rate - Inter bank borrowing rate - Interest Rate paid by the banks for lending and
borrowing funds with maturity period ranging from one day to 14 days. Call money
market deals with extremely short term lending between banks themselves. After Lehman
Brothers went bankrupt Call Rate sky rocketed to such an insane level that banks stopped
lending to other banks.

Qualitative Credit Control Measures of RBI

Under the selective or qualitative credit control methods, the RBI encourages flow of
credit only to certain types of industries and discourages the use of bank credit for certain
other purposes.
Under this method, extension of credit to essential purposes is encouraged and to non-
essential purposes is discouraged. Hence these methods not only prevent the flow of
credit into undesirable channels but also direct the flow of credit to useful channels.
The Banking Regulation Act, 1949 has given extensive power to the RBI to apply
selective credit control. The following are the different methods of selective credit
control methods adopted by the RBI.
1. Directiveness
Since 1956, the RBI has issued many directions to the banks. Of them, few examples are
quoted below:
1. The RBI issued its first directive on 17 May 1956 with a view to restrict advances
against paddy and rice. Later it was extended to food grain, pulses, oil seeds, vegetable
and sugar etc.
2. The RBI fixed higher minimum lending rates for loans given subject to selective credit
controls.
2. Moral Suasion
Moral suasion aims at strengthening natural confidence and understanding between the
monetary authority and the banks as well as financial institutions. It is not a statutory
obligation. It is only a persuasion of commercial banks not to apply for further
accommodation from RBI.
RBI has been sending letters periodically to the commercial banks requesting them to
cooperate with it for controlling credit. The RBI held regular meetings and discussions
with commercial banks to highlight the need for mutual cooperation cooperation to
implement the monetary policy effectively. Here there is no element of compulsion. So
the effectiveness of this method depends on the willing cooperation extended by the
commercial banks.
3. Fixation of Margin Requirements
Fixation of margin requirements was introduced for the first time in India in 1956. The
term margin denotes that part of the loan amount, which cannot be borrowed from bank.
Hence this portion of finance is to be compulsorily brought by the borrower from own
source.
The RBI has power to vary the margin requirements depending upon the business
conditions prevailing in the country.
By using this method, during the period of inflation with a view to control credit, the RBI
raises the margin and during deflation it lowers the margin to expand the credit. This
method also enables the commercial banks to direct their funds to essential activities
rather than speculative activities.
4. Rationing of Credit
Rationing of credit is another method of selective credit control. It is made by regulating
the purposes for which the loans are given among the various member banks. To ensure
overall development of a nation, development of various sectors is a must. Finance is to
be distributed to various sectors as per these requirements.
Priority sector should be given preference in lending loans. For others, minimum
attention only will be given in this respect. It paves way for the optimum utilization of
money.
5. Credit Authorization Scheme
The RBI introduced credit authorization scheme in 1965, as one of the types of selective
credit control. Under the scheme, commercial banks were asked to obtain prior.approval
of RBI for giving any fresh credit of Rs.1 crore or more to any single party. Later the
limit was gradually raised and it was Rs.6 crores in 1986.
However the scheme was discontinued in 1982. The idea behind the scheme was to watch
the flow of credit to the borrowers closely and also ensure that the commercial banks are
lending loans of large amount as per the credit appraisal as well as the actual
requirements of the borrower.
Even now, the RBI has been monitoring and scrutinizing all bank credits exceeding Rs.5
crores to any single party for working capital needs and Rs.2 crores in the form of term
loans. This scheme is also known as Credit
Monitoring Arrangement.
Limitations of Selective Credit Control Measures in India
The RBI adopted many selective credit control measures to channelize the funds to
productive sectors and restrict the financing to unproductive and speculative activities.
However, the successful operation of these measures suffers from certain limitations.
They are as follows:
1. Banks find it difficult to ensure that the borrowers utilize the amount for the purpose
for which it is borrowed.
2. Non-banking financial institutions and indigenous bankers also play a significant role
in financing trade and industry in India. But the RBI has no control over these
institutions.
3. The RBI’s selective credit controls are effective only when the inflationary pressures
are created by bank finance.
4. Banks cannot have any control over the ultimate use of bank advances.
CHAPTER-4

Data and analysis of RBI

The Reserve Bank of India (RBI) on Wednesday kept repo rate unchanged at 6% and cut
statutory liquidity ratio (SLR) requirement by 50 basis points to 19.5 per cent in
anticipation of upside risks to retail inflation. The rates like cash rate, repo rate, reverse
repo rate, etc., while managing money supply and controlling inflation, also hold a key to
interest rates on retail loans like home loan, auto and car loans. Here's an understanding
of the rates and their impact.
Statutory Liquidity Ratio (SLR)

Apart from CRR, banks have to invest certain percentage of their deposits in specified
financial securities like Central Government or State Government securities. Unlike
CRR, banks earn some amount on it.
How it impacts you: Though requirement for higher reserve make banks relatively safe
(as a certain portion of their deposits are always redeemable) but restrict their capacity to
lend simultaneously. As a result, the lending rates have to be increased by the banks to
stem the demand.

Cash Reserve Ratio (CRR)

It is the percentage of cash deposits that banks need to keep with the Reserve Bank of
India on a fortnightly basis. Presently the CRR is 4% that is, for every Rs 100 deposited
in the bank; bank will need to deposit Rs 4 with RBI. So It has Rs 96 to lend.
How it impacts you: Increasing the CRR also means banks have lesser money to lend. In
the absence of enough liquidity in the financial system, banks have to increase their
lending rates to decrease the demand for money. On the other hand, a cut in CRR infuses
more liquidity in the market and banks are pressurized to lend these funds. The lending
interest rates to increase the demand for money.
Repo rate
It is the rate at which banks borrow money from the RBI against the pledge of
government securities whenever the banks are in need of funds to meet their day-to-day
obligations.
How it impact you: A higher repo rate increases the cost of funds by the banks. Besides
liquidity with the banks, the lending rates on retail loans are also a function of the cost of
funds of the banks. When the funds are raised with high cost by the banks, they are
passed on to the customers in the form of high interest rates.
Reverse Repo Rate
Reverse repo rate is the rate of interest offered by RBI on loan taken by it for a short
period from the banks.
How it impacts you: In case the rate is high, it results in tightening of credit for borrowers
as banks make more money in interest payments when they make loans to the central
bank at higher rate than to retail borrowers.
CHAPTER-5