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EVOLUTION OF BANKING STRUCTURE IN INDIA At the time of Independence - banking structure dominated by domestic scheduled commercial banks. Non-scheduled banks, constituted a small share First task before RBI after independence develop sound structure on contemporary lines Safety nets to depositors from RBI Need for separate banking structure Commercial banks not tuned to needs and requirements of SME and marginal farmers, co-operatives lacked resources. Need of combining local feel and familiarity of rural problems characteristic of co-operatives and professionalism and large resource base of 2 commercial banks.
SBI & ITS OLD PVT. NEW PVT. ASSOCIATES BANKS BANKS
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Established - April 1, 1935 Ownership- originally privately, Nationalized 1949 Central Office Governor sits and policies are formulated initially established in Calcutta; permanently moved to Mumbai in 1937 Preamble "... to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of 4 the country to its advantage
MAIN FUNCTIONS
Regulator and supervisor of financial system Monetary Authority Banker to the Government Monopoly of Note Issue (other than Rupee One notes and coins and subsidiary coins) Manager of Foreign Exchange Developmental role Related Functions
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FINANCIAL SUPERVISION
Performed by RBI under guidance of Board for Financial Supervision (BFS) Constituted in November 1994; Committee of the Central Board of Directors Objective consolidated supervision of financial sector - commercial banks, FIs, and NBFCs Constitution Chairman - Governor Vice-Chairman - Dy Governor in charge of banking regulation and supervision Co-opted Directors from Central Board - 4 Term 2 years and is. Ex-officio members - Dy Governors
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MAJOR RECOMMENDATIONS
NARISHIMAM COMMITTEE REPORT I Four-tier hierarchy for banking structure - three to
banks
Disinvest in PS banks Each public sector bank - set up at least one RBS and treated at par with RRBs
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Major Recommendations (Contd.) Narasimham Committee Report II Merger of strong PS banks and closure of
MEASURES UNDERTAKEN
Competition Enhancing Measures Operational autonomy and reduction of public ownership in PS Banks Transparent entry norms Banks allowed to diversify product portfolio and business activities Roadmap for foreign banks for M &A of private sector banks and NBFCs Instructions and guidelines on ownership and governance in private sector banks
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Measures enhancing role of market forces Disbanding administered interest rates and enhanced transparency and disclosure norms Facilitation of improved payments and settlement mechanism Dematerialization and securitization of assets developed Prudential measures Introduction of international best practices norms on Capital to Risk Asset Ratio (CRAR), Accounting Strengthening Risk management mechanisms Higher graded provisioning for NPAs 14 Implementation of Basel II
Supervisory measures
Establishment of Board of Financial Supervision as apex supervisory authority Strengthening CG, Audit, enhance due diligence, fit and proper test for directors. Strengthening of
PLR or prime lending rate - rate of interest at which banks lend to their credit-worthy or favoured customers.
BANKING CONCEPTS
Repo Rate - rate at which banks borrow from RBI. A reduction in repo rate will help banks to get money at a cheaper rate. Reverse Repo rate - rate at which RBI borrows money from banks. An increase in Reverse repo rate can cause banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man. Difference between Bank Rate and Repo Rate While repo rate - applicable to short-term loans and used for controlling amount of money in market, bank rate - a long-term measure and governed by 17 long-term monetary policies
OBJECTIVE 1) To restrict expansion of bank credit. 2) To augment investment of the banks in Government securities. 3) To ensure solvency of banks. Commonly used to contain inflation and fuel
growth, by increasing or decreasing it respectively
a) b) c)
MAINTAINED IN THE FORM OF : Cash Gold marked to market Unencumbered approved securities or Gilts valued at a price as specified by RBI CURRENT SLR 24% SLR RATE = Total Demand/Time Liabilities 18 x 100%
OBJECTIVE
Banks required to hold a certain proportion of their deposits in the form of cash, deposited with RBI/currency chests, 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 PURPOSE Higher the ratio (i.e. CRR), lower is amount that banks will be able to use for lending and investment. EXISTING CRR 19 nd 5% (w.e.f. 2 Jan 2009)
RBI - CRR or Cash Reserve Ratio Also known as - Cash Asset Ratio or Liquidity Ratio