INDIAN BANKING

SYSTEM
Constituents of Banking System in India
A. Reserve Bank of India

B. Public and Private Sector Banks

 A. RESERVE BANK OF INDIA
• RBI Act was resolved in 1934
• Bank started its functions on 1st April 1935
• In 1949, in accordance with Reserve Bank (Transfer to Public Ownership) Act, 1948,
RBI was nationalized and all shares were purchased by Government of India.
• RBI is managed by Central Board of Directors consisting of 20 Directors.
• Functions of RBI:
1. Issue of currency notes
2. Banker to the Government and Banks
3. Agent and advisor to Government and Banks
4. Credit controller
5. Managing Foreign Exchange
6. Promoting Agricultural and Industrial Development
 ORGANISATION STRUCTURE
 The Reserve Bank's afairs are governed by a
central board of directors.
The board is appointed by the Government of India
 Central Boardwith
in keeping of Directors
the 20 member It is constitut a
Reserve
consist of Bank of India Act. s. ed s
follows
a)One Governor
b)Four Deputy
Governors
 One each for the four
c)Fifteen Directors the country Mumbai,
 Local
regionsBoards:
of in Calcutta,
 of fiv membe eac & appoint b th Centra
Chennai and New Delhi
Government for a term of four
consist
1.Issue of currency notes
• Reserve Bank has the monopoly for printing the
currency
• Except one rupee note (which is issued by the Ministry
of Finance).
• The Reserve Bank has adopted the Minimum
Reserve System for issuing/printing the currency
notes.
• Since 1957, it maintains gold and foreign exchange
reserves of Rs. 200 Cr. of which at least Rs. 115 cr.
should be in gold and remaining in the foreign
currencies.
>-Banker to the Government: performs merchant banking function
for the central and the state governments; also acts as their
banker.
Act as the Banker, Agent and Adviser to the Government of
India and states.
Advice to the government on matters related to economic and
monetary policy.
The Reserve Bank performs the same functions for the
other commercial banks as the other banks ordinarily
perform for their customers. RBI lends money to all the
commercial banks of the country.
 =

Custodia
n of
> It acts as a custodian and
Foreign
Manages the Foreign
Reserves
Exchange
Management Act,(FEMA)
1999.

RBI buys and sells foreign

currency to maintain the
exchange rate of Indian
Rupee v/s foreign currencies
like the US Dollar, Euro,
Pound and Japanese yen.
Credit control is a major weapon of the RBI
used to control Demand & Supply of money
in the economy.
 Promoting Agricultural and
Industrial Development

The RBI has been aiding development & promoting

saving & banking habits. Development of the
institutional agriculture & other rural activities has
been an area of focus right from its inception.
2. Public and Private Sector Banks:
• Public Banks:
• These banks are government undertaking banks.
• Public banks came into existence with the Nationalization of banks in
India in 1st July 1955.
• On 19th July 1969 14 banks were Nationalized.
• On 15th April 1980 six more banks were Nationalized.
• Regional Rural banks are also sponsored by Nationalized banks.
• Public banks occupy a large portion of public deposits (75%) and Loans
(71%).
• After nationalization in 1969 and 1980, no banks were allowed to be
established in private sector. But afterwards, Narsimha Committed
recommended the requirement of Private banks to increase the level of
competition.
Continue….

• In 1993, government allowed establishment of Private banks provided they

confirm to minimum start-up capital and other requirements.
• Foreign investment up to 74% of paid up capital is also permitted now.
• As the result of foreign participation there has been a remarkable
improvement in corporate governance, risk management and administrative
efficiency of these banks.
• They have introduced innovative products and have provided superior
services.
• Due to declining profits of the public banks affected by private banks,
Banking companies (Acquisition and Transfer of Undertakings) Amendment
Act 1994 was passed to allow public banks to increase capital by selling
shares to public and NRIs up to 49%.
Current Figures

• Number of Public Sector Banks :17

• Number of Private sector Banks :21

• CRR
• SLR
• Bank Rate
• Repo Rate
• Reverse Repo Rate
• Open Market Operations
RBI Monetary Policy

Quantitative, general or indirect

CRR, SLR, Open market operations, bank rate, repo rate, reverse
repo rate

Qualitative, selective or direct (change in the margin money, direct

action, moral suasion)
RBI Monetary Policy

Bank Rate:
Bank rate is the rate charged by the central bank for lending funds to
commercial banks.
Bank Rate is a tool, which central bank uses for short-term purposes.
Any upward revision in Bank Rate by central bank is an indication
that banks should also increase deposit rates as well as Base Rate /
Benchmark Prime Lending Rate.

Cash Reserve Ratio (CRR):

In India, banks are required to retain a certain percentage of their
deposits as liquid cash. However, banks prefer to deposit this liquid
cash with the Reserve Bank of India, which is equivalent to having
cash in hand. The percentage of the deposits that should be kept
RBI Monetary Policy

Statutory Liquidity Ratio (SLR):

Under SLR, banks have to invest a certain percentage of its time and
demand liabilities in govt. approved securities. The maximum SLR
that The Reserve Bank of India can set is 40% p.a. However, the
current SLR is set at 19.00% p.a.
Repo Rate:
We all approach banks when we face a financial shortfall. Likewise,
banks approach the Central Bank, which is the Reserve Bank of India
in our country, if they face a financial crisis. Repo Rate or repurchase
rate is the rate at which the RBI lends funds to commercial banks and
other financial institutions within the country.
RBI Monetary Policy

Reserve repo rate:

The rate at which RBI borrows from commercial banks.

Open market operations (OMO)

refer to a central bank's buying and selling of government securities
in the open market in order to expand or contract the amount of
money in the banking system.
Qualitative Method

Marginal Requirements: Changes in margin requirement for the

purpose of lending
A borrower pledged goods worth Rs. 1000 as security with a bank
and gets a loan amounting to Rs. 800.
Thus marginal requirement is Rs. 200 or 20 percent.

If this margin is raised, the borrower will have to pledge goods of

greater value to secure loan of a given amount. (Ex 30% - then will
get 700 as loan on security of 100)

Publicity is also another qualitative technique. It means to force

them to follow only that credit policy which is in the interest of the
economy
Regulation of Consumer Credit
During inflation, this method is followed to control excess spending of the
consumers. Generally the hire purchase facilities or installment methods
are used to reduce to the minimum to curb the expenditure on
consumption.
Direct Action:
This method is adopted when some commercial banks do not co-operate
with the central bank in controlling the credit.
(i) It may refuse rediscount facilities to those banks who are not following
its directions.
(ii) It may follow similar policy with the bank seeking accommodation in
excess of its capital and reserves.
(iii) It may change rates over and above the bank rate.
(iv) Any other strict restrictions on the defaulter institution.
Regulation of Consumer Credit
During inflation, this method is followed to control excess spending of the
consumers. Generally the hire purchase facilities or installment methods
are used to reduce to the minimum to curb the expenditure on
consumption.
Direct Action:
This method is adopted when some commercial banks do not co-operate
with the central bank in controlling the credit.
(i) It may refuse rediscount facilities to those banks who are not following
its directions.
(ii) It may follow similar policy with the bank seeking accommodation in
excess of its capital and reserves.
(iii) It may change rates over and above the bank rate.
(iv) Any other strict restrictions on the defaulter institution.
Rationing of the credit:
Under this method, the central bank fixes a limit for the credit facilities to
commercial banks. Being the lender of the last resort, central bank
rations the available credit among the applicants.
(i) Central bank can refuse loan to any bank.
(ii) Central bank can reduce the amount of loans given to the banks.
(iii) Central bank can fix quota of the credit.
(iv) Central bank can determine the limit of the credit granted to a
particular industry or trade.
Moral Persuasion or Advice:
the central bank has used moral suasion also as a tool of credit control.
Moral suasion is a general term describing a variety of informal methods
used by the central bank to persuade commercial banks to behave in a
particular manner