What is financial system?

• A financial system is the orderly mechanism and structure in an

economy to mobilise the monetary resources from various surplus
sectors and allocate the same to the needy sectors.
• A financial system transforms ‘savings’ into ‘investments’ &
“consumption”
• Financial intermediaries like banks financial institutions, mutual
funds, etc undertake the task of this transformation.
• Organised sectors- Nationalised banks, cooperative banks, foreign
banks, insurances
• Unorganised sectors- money lenders, indigenous bankers, Pawn
brokers ,Traders
 Introduction to Banking
• Section 5 b of banking regulation act 1949
defines bank as a institution which accepts
deposits from public for the purpose of
lending & investment.
• Repayable on demand or otherwise, and
withdrawal by cheque, draft and order.
 Functions of Banks
Traditional / Core Modern functions
Trade finance
Performed by every Cross- border banking
banks- or international
banking
Accepting deposits
Merchant banking
Lending Credit cards, debit
cards, smart cards
Funds remittance
Factoring forfeiting
Miscellaneous services Leasing
Banc assurance
Universal banking
 Reserve Bank of India
• RBI was established on the recommendation of
Royal Commission on Indian currency &
Finance(1926).
• The Act was passed in 1934 and RBI was established
on 01.04.1935 as a Private Sector Bank.
• It was nationalized on 01.01.1949.
• Central Govt. owns 100% of the capital of RBI
• RBI is managed by a Governor, 4 Deputy Governors
and 15 Directors.
 Main Functions of RBI
1. Note issuing Authority
2. Banker’s to the Government
3. Banker’s Bank
4. Supervision of Banks
5. Development of Financial System
6. Exchange control
7. Monetary policy
8. Changes in monetary policy Framework
 1. NOTE ISSUING AUTHORITY:

• Sole authority to issue, circulate, withdraw and exchange the

currency notes.
• Denomination of Rs. 2, 5, 10, 20, 50, 100, 500 and 1000
are issued by RBI
• One rupee note and coins are issued by Government of India,
but put into circulation by the RBI.
• RBI has 17 Issue Offices and over 4000 currency chests, where
new and re-issuable notes are stored.
• As a cover for notes issue, RBI keeps a minimum value of gold
coins and bullion and foreign securities as part of total
approved assets.
 BANKER’S TO THE GOVERNMENT

• Acts as the banker to the Central and State Governments

• Provides banking services of deposits, withdrawal of funds,
making payments and receipts, collection and transfer of funds
and management of public debt.
• Government deposits are received free of interest and the RBI
does not receive any remuneration for the routine banking
business of the Government.
• Provides ‘ways and means of advances ’ to the central and the
State Governments, within the limits of fiscal deficit decided by
the Central Government.
• Charges commission for managing the public debt and interest
on overdrafts from the concerned Governments.
 BANKER’S BANK
• RBI, like all other central banks, act as a banker’s bank’.
• Commercial and scheduled co-operative banks are required to
maintain stipulated reserves in cash and in approved securities
as a percentage of their NDTL.
• Through this tool RBI regulates banks’ ability to create credit
and affect money supply in economy
• Has powers to change its bank rate to regulate the cost of the
bank credit and there by indirectly, its volume.
• Acts as a lender of the last resort for the banks by rediscounting
first class bills
• Provides refinance for certain kinds of credits.
 SUPERVISION OF BANKS
• From November 1993 the RBI’s supervisory function has been
separated from its traditional central banking functions.
• In 1994 , Board of Financial Supervision (BFS) has been
established to oversee the Indian Financial System.
• The BFS is chaired by the Governor of RBI and consists of a full
time Vice Chairman, and six other members.
 Functions of BFS
• To issue the license for setting up new banks, and for establishing
new branches for existing banks.
• To prescribe minimum requirements of paid up capital and reserves,
and maintaining cash reserves and other liquid assets.
• To inspect the working of the scheduled banks in India and abroad,
from all relevant angles to ensure their sounds operations.
• To conduct ad hoc investigations into complaints, irregularities,
frauds pertaining to banks.
• To control appointments, reappointments, termination of
chairpersons and CEO’s of private banks.
• To approve or compel amalgamation/ merger of two banks.
 Development of financial system

Apart from the regulatory and supervisory role, RBI also has a
developmental role to play . RBI has created specialized
financial institutions for:
• Industrial finance: Industrial Development Bank of
India(IDBI)1964, Small Industries Development Bank of
India(SIDBI),1989.
• Agricultural Credit: national Bank for Agriculture and Rural
Development(NABARD),1981.
• Export import finance: Export – import Bank of India(EXIM
Bank),1981
• Deposits Insurance Corporation of India (1961), which later
became Deposit Insurance and Credit Guarantee Corporation
of India (DICGC).
 EXCHANGE CONTROL

• The RBI is responsible for maintaining stability of the external

value of the national currency.
• Earlier it used to regulate the foreign exchange market in the
country as per the FERA,1947 which was amended and enlarged
in 1973.
• The FERA1973 has been replaced by the Foreign Exchange
Management Act, 1999(FEMA) provisions.
• RBI performs the following tasks:
a) It administers foreign exchange control through its exchange control department.
b) It authorizes banks, specified branches and other dealers, called Authorized Dealer(ADs)
to execute the prescribed kinds of foreign exchange transactions.
c) RBI issues to the Ads, series of guidelines circulars for regulating such transactions.
d) The RBI manages the exchange rate between Indian Rupee and foreign currencies, by
buying and selling foreign exchange to/from the authorised Dealers and by other means.
e) The RBI manages the foreign exchange reserves of the country and maintain reserves of
the country and maintains reserves in the form of gold and foreign securities.
What do you understand by monetary
policy?
• It deals with money .
• Basically it covers two aspects: quantum of money supply in the
economy and cost of money, say interest rates.
• Monetary policy also plays vital role in strengthening the financial
system of the country over the long term.
• Monetary policy deals with two sides i. e. demand for money and
supply side of money.
• Demand for money arises because of various reasons.
• Corporate demands money for their working capital requirements,
capacity expansion and up gradation.
• Individuals require money for their day-to-day requirements and also
for acquiring assets including property and durables.
• Government requires money- to fund expenditure in excess of its
income(the country’s fiscal deficit).