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“Role of Reserve Bank of India as Regulator”

A Presentation

on

Compiled By,

Anil Mishra 2012MB06

Ayush Vaish 2012MB73

Durgesh Kumar 2012MB88

Sanatan Srivastava 2012MB30

Ujjwal Mishra 2012MB01

School of Management StudiesMotilal Nehru National Institute of Technology, Allahabad

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Table of Contents

• Introduction to RBI

• Main Activities of RBI

• Monetary Authority

• Regulator of the Banking System

• Regulator of Payment and Settlement System

• Regulator of the Credit

• Regulator of the Foreign Exchange

• Regulator of the Financial System

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Introduction to RBI

• The central bank of the country is the Reserve Bank of India (RBI).

• It was established in April 1935 with a share capital of Rs. 5 crores on the

basis of the recommendations of the Hilton Young Commission.

• The share capital was divided into shares of Rs. 100 each fully paid

which was entirely owned by private shareholders in the beginning.

• The Government held shares of nominal value of Rs. 2,20,000.

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Introduction to RBI

The Bank was constituted for the need of following:

• To regulate the issue of banknotes.

• To maintain reserves with a view to securing monetary stability and,

• To operate the credit and currency system of the country to its advantage.

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Main Functions of the RBI

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Monetary Authority

•Maintaining price stability

•Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth

•Financial stability

•The relative emphasis among the objectives varies from time to time, depending on evolving macroeconomic developments.

•Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks must maintain as cash balance with the Reserve Bank.

•Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash and gold.

• Refinance facilities: Sector-specific refinance facilities

Objectives Instruments

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Indirect Instruments

• Liquidity Adjustment Facility (LAF): Consists of daily infusion or absorption of

liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo

(liquidity absorption) auction operations, using government securities as collateral.

• Repo/Reverse Repo Rate: These rates under the Liquidity Adjustment Facility

(LAF) determine the corridor for short-term money market interest rates. In turn,

this is expected to trigger movement in other segments of the financial market and

the real economy.

• Open Market Operations (OMO): Outright sales/purchases of government

securities, in addition to LAF, as a tool to determine the level of liquidity over the

medium term.

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• Marginal Standing Facility (MSF): was instituted under which scheduled

commercial banks can borrow over night at their discretion up to one per cent of

their respective NDTL at 100 basis points above the repo rate to provide a safety

valve against unanticipated liquidity shocks

• Bank Rate: It is the rate at which the Reserve Bank is ready to buy or rediscount

bills of exchange or other commercial papers. It also signals the medium-term

stance of monetary policy.

Indirect Instruments

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Regulator ofthe Banking System

Commercial banks and all-India development financial institutions:

Regulated by theDepartment of Banking Operations and Development.

Urban cooperative banks:

Regulated and supervised by the Urban Banks Department

Regional Rural Banks (RRB), District CentralCooperative Banks and State Co-operative Banks:

Regulated by the Rural Planning and CreditDepartment and supervised by NABARD

Non-Banking Financial Companies (NBFC):

Regulated and supervised by the Department ofNon-Banking Supervision

The Reserve Bank regulates and supervises the nation’s financial system. Different departments of the Reserve Bank oversee the various entities that comprise India’s financial infrastructure. They oversee:

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Tools of RBI

• On-site inspections

• Off-site surveillance, making use of required reporting by the regulated

entities

• Thematic inspections, scrutiny and periodic meetings

• The Board for Financial Supervision oversees the Reserve Bank’s

regulatory and supervisory responsibilities.

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The RBI’s Regulatory Role

• Licensing

• Prescribing capital requirements

• Monitoring governance

• Setting prudential regulations to ensure solvency and liquidity of the banks

• Prescribing lending to certain priority sectors of the economy

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The RBI’s Regulatory Role

• Regulating interest rates in specific areas

• Setting appropriate regulatory norms related to income recognition, asset

classification, provisioning, investment valuation, exposure limits .

• Initiating new regulation

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Challenges

• For commercial banks: Focus is on implementing Basel III norms, which will require improved capital planning and risk management skills.

 • For urban cooperative banks: Focus is on profitability, professional management

and technology enhancement.

 • For NBFCs: Focus is on identifying the interconnections and the roles these

institutions should play as the financial system deepens.

 • For regional rural banks: Focus is on enhancing capability through IT and HR for

serving the rural areas.

• For rural cooperative banks: Focus is on ensuring that they meet minimum prudential standards.

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RBI as Regulator and Supervisor of Payment and Settlement Systems

• The Payment and Settlement Systems Act of 2007 (PSS Act) gives the Reserve

Bank oversight authority, including regulation and supervision, for the payment

and settlement systems in the country.

• In this role, RBI focus on the development and functioning of safe, secure and

efficient payment and settlement mechanisms.

• The Reserve Bank has a two-tiered structure. The first tier provides the basic

framework for our payment systems. The second tier focuses on supervision of this

framework.

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RBI as a Regulator of Credit

• The Reserve Bank of India is the controller of credit i.e. it has the power to

influence the volume of credit created by banks in India.

• It holds the cash reserves of all the scheduled banks. 

• It controls the credit operations of banks through quantitative and qualitative

controls. 

• It controls the banking system through the system of licensing, inspection and

calling for information. 

• It acts as the lender of the last resort by providing rediscount facilities to scheduled

banks.

• It can do so through changing the Bank rate or through open market operations.

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RBI as a Regulator of Foreign Exchange

• The RBI is responsible for administration of the Foreign Exchange Management

Act,1999 and regulates the market by issuing licences to banks and other select

institutions to act as Authorized Dealers in foreign exchange. The Foreign

Exchange Department (FED) is responsible for the regulation and development of

the market.

• Regulating transactions related to the external sector and facilitating the

development of the foreign exchange market.

• Ensuring smooth conduct and orderly conditions in the domestic foreign exchange

market

• Managing the foreign currency assets and gold reserves of the country

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Regulator and Supervisor of the Financial System

• The institution is also the regulator and supervisor of the financial system and

prescribes broad parameters of banking operations within which the country's

banking and financial system functions.

• Its objectives are to maintain public confidence in the system, protect depositors'

interest and provide cost-effective banking services to the public.

• The Banking Ombudsman Scheme has been formulated by the Reserve Bank of

India (RBI) for effective redress of complaints by bank customers.

• The RBI controls the monetary supply, monitors economic indicators like the gross

domestic product and has to decide the design of the rupee banknotes as well as

coins.

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References

• http://www.rbi.org.in/scripts/AboutusDisplay.aspx” , as accessed on 17 –

August 2013

• “http://finance.indiamart.com/investment_in_india/rbi.html”, as accessed

on 17 – August 2013

• “http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIB140520012.pdf” ,

as accessed on 17 – August 2013

• “http://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf” , as

accessed on 17 – August 2013

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Thank you