Reserve Bank of India

The RBI was established by passing "transfer of public ownership Act" in Sep-1948 . The bank was passed into the hands of the Government of India with effect from 1st January 1949.

Prior to 1993, the supervision and regulation of commercial banks was handled by the Department of Banking Operations & Development (DBOD). In December 1993 the Department of Supervision was carved out of the DBOD with the objective of segregating the supervisory role from the regulatory functions of RBI.

FUNCTIONS OF RBI The functions are classified into three heads,viz. A) Traditional functions B) Promotional functions and C) Supervisory functions.

A) Traditional functions 1.Monopoly of currency notes issue 2.Banker to the Government(both the central and state) 3.Agent and advisor to the Government 4.Banker to the bankers 5.Acts as the clearing house of the country 6.Lender of the last resort 7.Custodian of the foreign exchange reserves 8.Maintaining the external value of domestic currency 9.Controller of forex and credit 10.Ensures the internal value of the currency 11.Publishes the Economic statistical data 12.Fight against economic crisis and ensures stability of Indian economy.

B) Promotional functions
1.Promotion of banking habit and expansion of banking systems. 2.Provides refinance for export promotion 3.Expansion of the facilities for the provision of the agricultural credit through NABARD 4.Extension of the facilities for the small scale industries 5.Helping the Co-operative sectors. 6.Prescribe the minimum statutory requirement. 7.Innovating the new banking business transactions.

C) Supervisory functions 1.Granting license to Banks. 2.Inspects and makes enquiry or determine position in respect of matters under various sections of RBI and Banking regulations 3.Implements Deposit insurance scheme 4.Periodical review of the work of the commercial banks 5.Giving directives to commercial banks 6.Control the non-banking finance corporation 7.Ensuring the health of financial system through on-site and off-site verification. These are all the functions which are protective to the Indian Economy, that is why RBI is considered as the head of all banks. regards

Some important aspects of RBI Supervisory Process The major instrument of supervision of the financial sector is inspection. The inspection process focuses mainly on aspects crucial to the banks financial soundness with a recent shift in focus towards risk management. Areas relating to internal control, credit management, overseas branch operations, profitability, compliance with prudential regulations, developmental aspects, proper valuation of asset/ liability portfolio investment portfolio, and the banks role in social lending are covered in the course of the inspection. The Department undertakes statutory inspections of banks on the basis of an annual programme, which is co-terminus with the financial year for public sector banks.

After the inspection report is released to the bank, followed by a supervisory letter based on the inspection findings to the bank, the concerns of the inspections are discussed with the CEO of the bank and a Monitorable Action Plan is given to the bank for rectification of those deficiencies. The Department submits a memorandum covering supervisory concerns brought out by the inspection to the Board for Financial Supervision (BFS). Specific corrective directions of the BFS are conveyed to the banks concerned for immediate compliance. The Memoranda submitted by the departments for supervisory scrutiny and consideration of BFS generally cover matters relating to supervisory strategy and operational supervision of individual banks, financial institutions and non-banking financial companies as also industry-wide issues and sectoral performance reviews.

Closer supervision on the asset quality and fixing responsibility on the board and accountability on top management of banks has had a perceptible impact on the Non Performing Assets (NPAs) of public sector banks. The banks have shown a declining trend in terms of percentage of NPAs to total advances during the last four years. The percentage of gross NPAs to gross advances of public sector banks declined from a high level of 19.45 at the end of March 1995 to 13.86 as on 31 March 2000. The net NPAs formed 8.07% of the net advances as on 31st March 2000. The Capital to Risk-weighted Assets Ratio (CRAR) for banks initially fixed at 8% was increased to 9% from March 2000. The position of banks not achieving the prescribed CRAR level since 1995 has come down from 42 banks (14 public sector) as on 31 March 1995 to 4 banks (1 public sector) as on 31 March 2000 due to constant monitoring and directions for improvement in this area at quarterly intervals.

Board for Financial Supervision: Constitution

The Committee on Financial System set up by the Government of India had suggested that the supervisory functions of RBI should be separated from the more traditional central banking functions and that a separate agency, which could pay undivided attention to supervision, should be set up under the aegis of RBI. A complete severance of supervision from central banking was not considered necessary or desirable in the Indian context. So, based on this recommendation, the first Board for Financial Supervision (BFS) was constituted on November 16, 1994 by the Governor as a committee of the Central Board of Directors of the Reserve Bank of India (RBI). It functions under the RBI (BFS) Regulations, 1994 exclusively framed for the purpose in consultation with the Government of India. The Board is chaired by the Governor and is constituted by co-opting four non-official Directors from the Central Board as Members for a term of two years. The Deputy Governors of the Bank are ex-officio Members. One of the Deputy Governors is nominated as Vice-Chairman.

Supervision serves as the Secretariat for the BFS. Shri S P Talwar, Deputy Governor holding charge of the Bank's regulation and supervision function has been the Vice-Chairman of the BFS since its inception. Dr. Y. Venugopal Reddy and Shri Jagdish Capoor, Deputy Governors, are other ex-officio Members as on date. Shri Y H Malegam, Shri E A Reddy, Dr. S S Johl, and Dr. (Ms) Amrita Patel, who were members on the Central Board of Directors of the Reserve Bank, were the non-official members of the first Board. The Board has since been reconstituted for a term of two years in consultation with the Central Board in its meeting held on 21 December 2000, with Dr. Ashok S. Ganguly and Shri K. Madhava Rao nominated in the place of Dr. S. S. Johl and Shri E. A. Reddy, who ceased to be members of the reconstituted

Central Board. Shri Y H Malegam and Dr. (Ms) Amrita Patel have been nominated to continue as Members of the reconstituted BFS. Executive Directors in-charge of Department of Banking Operations & Development, Department of Banking Supervision and Department of NonBanking Supervision participate in the BFS meetings by invitation. In-charges of these departments are also to be in attendance for the meetings. The Chairman, Vice-Chairman and Members of the Board jointly and severally exercise the powers of the Board. The Board is at present required to meet ordinarily at least once a month. Three Members, of whom one shall be Chairman or the Vice-Chairman, form the quorum for the meeting.

Corporate Governance and Management Guidance

The requirements of the corporate governance framework differ across institutions because of the different ownership structures of the commercial banks. Public Sector banks are largely owned by the Government. The majority holding in State Bank of India is held by RBI and State Bank of India holds majority shareholding in its seven associate banks. (These holdings are gradually being divested). The old private sector banks have traditionally been owned and controlled by communities, groups or regional interests. The new private sector banks are owned and managed by financial institutions or major corporate though the shareholding pattern is increasingly diversified with fresh issues of capital as part of start up covenants. The foreign banks are in essence branches of overseas entities though a Local Advisory Board provides general guidance. Even amongst financial institutions, there are both state owned and private sector entities.

Transparency and Disclosure

RBI has always been committed to enhancing the element of transparency and adequate disclosures in the financial statements of banks. The formats of balance sheet and profit & loss account have been prescribed in the Banking Regulation Act, 1949, and banks have to strictly comply with this. The accounts and balance sheets are required to be duly audited by statutory auditors (including branch auditors) appointed with the approval of RBI. While international accounting standards are broadly followed, specific valuation standards have been prescribed in respect of investments and foreign exchange positions.

Internal controls and housekeeping in banks

(i) Internal Control Systems Reconciliation of inter-branch accounts Reconciliation of inter-bank accounts Reconciliation of accounts, and Status of balancing of books of accounts Reconciliation of clearing differences (ii) Reconciliation of inter-branch accounts (iii) Balancing of books

Presented by: Ms. Megha Mathur

e-banking
E-Banking E-banking and electronically providing financial services are branches of electronic commerce. A significant development has been achieved in offering a variety of new and innovative E-banking services to customers to-day which were not thought of before. Corporate Internet Banking (CIB) It facilitates banking from your desk. At the click of a mouse, we can access your accounts at any branch of the bank and also keep track of your accounts at its numerous branches.

How e-banking can ease your life: Bill payment service Each bank has tie-ups with various utility companies, service providers and insurance companies, across the country. You can facilitate payment of electricity and telephone bills, mobile phone, credit card and insurance premium bills. To pay your bills, all you need to do is complete a simple one-time registration for each biller. You can also set up standing instructions online to pay your recurring bills, automatically. One-time standing instruction will ensure that you don't miss out on your bill payments due to lack of time. Most interestingly, the bank does not charge customers for online bill payment.

Fund transfer You can transfer any amount from one account to another of the same or any another bank. Customers can send money anywhere in India. Once you login to your account, you need to mention the payees's account number, his bank and the branch. The transfer will take place in a day or so, whereas in a traditional method, it takes about three working days. ICICI Bank says that online bill payment service and fund transfer facility have been their most popular online services.

Credit card customers Credit card users have a lot in store. With Internet banking, customers can not only pay their credit card bills online but also get a loan on their cards. Not just this, they can also apply for an additional card, request a credit line increase and God forbid if you lose your credit card, you can report lost card online.

Railway pass This is something that would interest all the aam janta. Indian Railways has tied up with ICICI bank and you can now make your railway pass for local trains online. The pass will be delivered to you at your doorstep. But the facility is limited to Mumbai, Thane, Nashik, Surat and Pune. The bank would just charge Rs 10 + 12.24 per cent of service tax.

Investing through Internet banking Opening a fixed deposit account cannot get easier than this. You can now open an FD online through funds transfer. Online banking can also be a great friend for lazy investors. Now investors with interlinked demat account and bank account can easily trade in the stock market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their demat account.

Recharging your prepaid phone

Now you no longer need to rush to the vendor to recharge your prepaid phone, every time your talk time runs out. Just top-up your prepaid mobile cards by logging in to Internet banking. By just selecting your operator's name, entering your mobile number and the amount for recharge, your phone is again back in action within few minutes.

Shopping at your fingertips Leading banks have tie ups with various shopping websites. With a range of all kind of products, you can shop online and the payment is also made conveniently through your account. You can also buy railway and air tickets through Internet banking.

Trends in e-banking
Constraints in Internet banking

Although there are obvious benefits in Internet Banking , there are some hurdles in the smooth implementation of Internet-banking.

(i) Start-up cost : The initial start-up cost for venturing into Internet banking is on the higher side and it includes the following: * connection cost to the Internet or any other mode of electronic communication * cost of sophisticated hardware, software and other related components like Modem, Router, Bridges, network management system * cost of maintenance of all equipment, web sites, skill level of employees

* cost of setting up organizational activities

(ii) Training and Maintenance: The introduction of Internet banking involves 24 hours support environment, quality service to end users and other partners which would necessitate a well qualified and robust group of skilled people to meet external and internal commitments. Hence the bank has to spend a lot on training. (iii). Lack of skilled personnel: It is a well known fact that there is an acute scarcity of web developers, content providers and knowledgeable professionals to route banking transactions through internet.

(iv). Security: In paperless banking transactions, many problems of security are involved. A security threat is defined as a circumstansive decision or event with potential to cause economic hardship to data or network resources in the form of destruction, disclosure, modification of data, denial of services, fraud, waste and abuse. There are chances that the documents such as cheque, passbook etc., can be modified without leaving any visible trace. Distortions of information are also possible. Providing appropriate security may require a major initial investments in the form of application encryption require a major investments in the form of application encryption techniques, implementation of firewalls etc., In spite of implementation of several security measures the possibility of a security breach cannot be ruled out.

(v). Legal Issues: Legal framework for recognizing the validity of banking transactions conducted through the ' NET' is still being put in place. Though initial legal framework has been devised for E-banking activities, it is uncertain as to what possible legal issues may pop up in future as banking on Internet progresses. (vi). Restricted clientele and technical problems: The user of E-Banking needs a computer and time to log on to the site, which means that the target clientele is restricted to those who have a home PC or can access the 'Net' through the office or cyber caf. Moreover technical constraints due to telephone connectivity, modem connections etc., may cause constraints.

Security measures
Most of the problems mentioned above are in the nature of teething problems and hence they can be eliminated over a period of time. However, for venturing into EBanking, the following major controls must be ensured. * Authenticity controls: To verify identity to individuals like password, PIN etc.,
* Accuracy control: To ensure the correctness of the data, flowing across the network. * Completeness control: To make sure that no data is missing

* Redundancy controls: To see that data is traveled and processed only once

and there is no repetitive sending of data. * Privacy controls: To protect the data from inadvertent or unauthorized access * Audit Trail Controls: To ensure keeping chronological role of events that are occurred in the system.

* Existence controls: To make sure that on going availability of all the system resources with the same throughout
* Efficient: To ensure that the system uses minimum resources, to achieve the desired goal. * Fire wall controls: To prevent unauthorized users accessing the private network, which are connected to Internet. * Encryption controls: To enable only those who possess secret key to decrypt the cyber text.

Conclusion E Banking is becoming immensely popular globally, and India is no exception to it. The declining Internet rates, falling PC prices, broad bandwidth access through cable and digital subscriber lines, accessing the NET through cable TV etc., would definitely encourage the boom in E Banking in India. With the globalization of business and services, our country cannot lag behind in niche areas of Electronic Banking. In the new global era of multi currency, multi-legal and multi regulatory systems, with the freedom of E-Commerce, banks have to operate like multinational corporations to grow and survive by adopting E banking.

Recent Technological Developments in Indian banking

ATM Card Sometimes called cash cards, they allow the cardholder to withdraw cash from an ATM machine after entering a PIN that is specific to the card. Some cards may only be used in an ATM but most are combination debit, ATM and cheque guarantee cards.

DEBIT CARDS Debit card is a multifaceted, power packed globally accepted plastic debit card which enables one to access ones account from anywhere. The ATM debit card may have either the Visa or the MasterCard logo embossed on it. The ATM debit card is linked to an account from where the fees or charges are deducted as the transaction demands. The ATM debit card has the name of the debit card holder embossed on the debit card.

CREDIT CARD
It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user

Difference between Debit card & Credit card.

debit card = decrease in credit balance of bank a/c of a account holder. credit card = increase in debit balance of bank a/c of a account holder. these cards are used in the same way, but in the case of debit card we would have amount in the account and in the case of credit card no need to maintain amount in the account but we have to pay after bill payment to the banker.

To use a debit card a person must have sufficient amount in his/her account and shopping is limited to the amount avail in the account, it cannot be exceeded. From debit card the amount is transacted/debited at the very moment as and when it is utilized.

To use credit card one need not have to have money/amount in his/her account. They are the special type of customers because banks issued credit cards to them based on some attributions or features. When the credit card is being swapped by the shopkeeper, the amount does not get transacted at the very moment infact it is being transacted approximately after 5 or 7 days

Electronic funds transfer or EFT Refers to the computer-based systems used to perform financial transactions electronically. The term is used for a number of different concepts: Cardholder-initiated transactions, where a cardholder makes use of a payment card.

Direct deposit payroll payments for a business to its employees. Direct debit payments from customer to business, where the transaction is initiated by the business with customer permission.
Electronic bill payment in online banking, which may be delivered by EFT or paper check. Transactions involving of electronic money, possibly in a private currency .
Wire transfer via an international banking network (generally carries a

Email Money Transfer (EMT)

It is a funds transfer service between personal accounts at participating Canadian financial institutions. The provider of this service is CertaPay, a division of Acxsys Corporation. If your bank is in Canada you will be able to send the world's first, interbank - based Interac Email Money Transfers.
Presented by : Ms. Megha Mathur

Banking Structural Reforms Narasimham Committee (II) recommendations.

Structural Issues :
The Committee has taken note of the twin phenomena of consolidation and convergence which the financial system is now experiencing globally. In India also banks and DFIs are moving closer to each other in the scope of their activities. The Committee is of the view that with such convergence of activities between banks and DFIs, the DFIs should, over a period of time, convert themselves to banks. There would then be only two forms of intermediaries, viz. banking companies and non-banking finance companies .

If a DFI
(Depository Financial Institution)

(a financial institution that accepts

deposits and channels the money into lending activities) does

not acquire a banking license within a stipulated time it would be categorised as a non-banking finance company. A DFI which converts to a bank can be given some time to phase in reserve requirements in respect of its liabilities to bring it on par with the requirements relating to commercial banks. Similarly, as long as a system of directed credit is in vogue a formula should be worked out to extend this to DFIs which have become banks

Mergers between banks and between banks and DFIs and NBFCs need to be based on synergies and business specific complementarities of the concerned institutions and must obviously make sound commercial sense. Mergers of public sector banks should emanate from management of banks with Govt. as the common shareholder playing a supportive role. Such mergers, however, can be worthwhile if they lead to rationalization of workforce and branch network; otherwise the mergers of public sector banks would tie down the managements with operational issues and distract attention from the real issue.

It would be necessary to evolve policies aimed at "rightsizing" and redeployment of the surplus staff either by way of retraining them and giving them appropriate alternate employment or by introducing a VRS with appropriate incentives. This would necessitate the cooperation and understanding of the employees and towards this direction, managements should initiate discussions with the representatives of staff and would need to convince their employees about the intrinsic soundness of the idea.

Mergers should not be seen as a means of bailing out weak banks. Mergers between strong banks/FIs would make for greater economic and commercial sense and would be a case where the whole is greater than the sum of its parts and have a "force The recommendation has been noted. A nonbanking finance company has since been permitted to merge with a bank. Two banks in the private sector have also merged based on synergies and business specific complementarities.

A weak bank should be one whose accumulated losses and net NPAs exceed its net worth or one whose operating profits less its income on recapitalization bonds is negative for three consecutive years. A case by case examination of the weak banks should be undertaken to identify those which are potentially revivable with a programme of financial and operational restructuring. Such banks could be nurtured into healthy units by slowing down on expansion, eschewing high cost funds/borrowings, judicious manpower deployment, recovery initiatives, containment of expenditure etc.

The policy of licensing new private banks (other than local area banks) may continue. The start up capital requirements of Rs.100 crore were set in 1993 and these may be reviewed. The Committee would recommend that there should be well defined criteria and a transparent mechanism for deciding the ability of promoters to professionally manage the banks and no category should be excluded on a priori grounds.

There must be clearly defined prudent limits beyond which banks should not be allowed to rely on the call money market. This would reduce the problem of vulnerability of chronic borrowers. Access to the call market should be essentially for meeting unforeseen swings and not as a regular means of financing banks lending operations RBI has advised banks to put in place comprehensive ALM System (strategic management of Balance Sheet by giving more weightage to market risks) with effect from 1.4.1999.

The minimum period of FD be reduced to 15 days and all money market instruments should likewise have a similar reduced minimum duration.

Foreign institutional investors should be given access to the Treasury Bill market. Broadening the market by increasing the participants would provide depth to the market.

With the progressive expansion of the forward exchange market, there should be an endeavor to integrate the forward exchange market with the spot forex market by allowing all participants in the spot forex market to participate in the forward market up to their exposures. Furthermore, the forex market, the money market and the securities should be allowed to integrate.

Presented by: Ms. Megha Mathur.