Session 2

Dr. Sameer Salunkhe

MMS - Finance
Indian Banking System & Role of RBI
• Established 1st April, 1935.

• After Jan, 1949 it became Govt of India owned institution under RBI
(transfer to public ownership) Act, 1948 which gives powers to central
govt to take decisions.

• Governs & deputy governors appointed by central govt

• Has 27 regional offices, most of them in state capitals and 04 Sub-

offices.
Management System

Committee of central of BOD

Governor, four deputy

governors and ten
directors nominated
by central government

Four local BOD from (Mumbai, Calcutta, Chennai &

Delhi)

Tenure is 4 years for all

 Main Functions
• Maintain monetary stability

• Maintain fiscal stability

• Maintain stable payment system

• Promote development of financial infrastructure

• Regulate volume of money and credit

 Acts Administered by RBI
• Reserve Bank of India Act, 1934
• Public Debt Act, 1944/Government Securities Act, 2006
• Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (Chapter II)
• Credit Information Companies(Regulation) Act, 2005
• Payment and Settlement Systems Act, 2007 (Mobikwik case)
• Factoring Regulation Act, 2011
 Major Role
Issue of currency

15 full fledged issue offices and 2 sub offices

4127 currency chests for stock of new and reusable notes and coins
Of which 17 are with RBI, 2877 with SBI, 791 with nationalized banks,
423 with treasuries and 19 with private sector banks
 Currency Management
• Minimum Reserve System (MRS)– 200 cr (Gold + Foreign Reserves)

• Main base is economic growth and transaction needs of the people.

• High Income --- High Transaction Needs --- Economic Growth ----More
Currency Issue
In May, the RBI prepares its annul monetary policy statement.

It makes an expectation about the coming year’s economic growth (suppose

9%).

Then the RBI makes a target for increasing the money supply for the next year: 9
x 2 + 4 = 22%.

Here money supply will increase by two times the expected GDP growth plus a
safe 4 % inflation.

The value of 2 is the income elasticity of demand for money.

It says that our demand for money will be nearly double that of our increased
income
 Supervising Authority
• License issue to new banks & branches

• Prescribe min requirements for paid up capital, reserves, maintenance of cash

and other liquid assets.

• Inspect working of banks

• Investigation of complains, frauds and irregularities

• Appointment and termination of chairman and CEO of pvt banks

• Approve amalgamations
Classification of Banks
• Industrial development banks

• Agriculture banks

• Export import development bank

• Small finance bank

 Basel Guidelines

• Basel I – Min Capital Requirements

• Basel II - Minimal Capital Requirements, Regulatory Supervision and Market

Discipline

• Basel III – Risk Management

• Min common equity capital ratio – Banks core equity cap/ total risk weighted
assets

• Capital conservation buffer: Capital buffer during period of stress

• Common Equity Tier 1 (CET1) - A component of Tier 1 capital that consists

mostly of common stock held by a bank or other financial institution

• Min capital ratio – Tier 1 capital + Tier 2 capital / risk weighted assets

• Liquidity coverage ratio - How much liquid assets have to be held

• Net stable funding ratio: Total funding : composition of assets

 Assets with Weighted Risks

• Cash 0%
• Balance with Reserve Bank of India 0%
• Central/ state Government Guaranteed advances 0%
• SSI advances up to CGF guarantee 0%
• Loans against FD (0%)
• Government approved Securities 2.50%
• Balance with Banks other than RBI 20%
• Secured Loan to the Staff Members 20%
• Housing Loans 50%
• Housing Loans >Rs. 30 Lakhs 75%
• Loans against Gold and Jewellery 50%
• Retail Lending up to Rs. 5 crore 75%
• Loans Guaranteed by ECGC 50%
• Loans to PSU 100%
• Claims on unrated corporates 100%
• Commercial real estate 100%
• Consumer Credit 125%
• Credit Cards 125%
• Exposure to Capital Markets 125%
• Venture Capital inv 150%
• For example, assume Bank A has Rs.5 million in tier 1 capital and Rs.3 million
in tier 2 capital.

• Bank A loaned Rs.5 million to ABC Corporation, which has 25% riskiness, and
Rs.50 million to XYZ Corporation, which has 55% riskiness.

• Bank availed risk-weighted assets of Rs.28.75 million, i.e. (Rs.5 million * 0.25 +
Rs.50 million * 0.55).

• It also has capital of Rs.8 million, i.e. (Rs.5 million + Rs.3 million). Its resulting
capital adequacy ratio is 27.83%, or (Rs.8 million/Rs.28.75 million * 100%).
Therefore, Bank A attains the minimum capital adequacy ratio, under Basel III.