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CENTRAL BANKING

CENTRAL BANKING. Central Bank. It is an apex institution of the monetary and banking structure of a country. A central bank has the authority to regulate and control the banking business and monetary system of a country. Its main function are Bank of issue

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CENTRAL BANKING

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  1. CENTRAL BANKING

  2. Central Bank It is an apex institution of the monetary and banking structure of a country. A central bank has the authority to regulate and control the banking business and monetary system of a country. Its main function are • Bank of issue • Financial advisor to the state( banker also) • Banker to bank • Custodian of foreign exchange reserves • Lender of the last resort • Bank of central clearance and transfer • Controller of credit

  3. Reserve Bank of India - India’s Central Bank R B I

  4. Reserve Bank of India - India’s Central Bank • Set up on the basis of the recommendations of the Hilton Young Commission. • The Reserve Bank of India Act, 1934 provides the • statutory basis of the functioning of the Bank. • Commenced operations on April 1, 1935. • It was nationalized in 1949.

  5. Constituted to • Regulate the issue of banknotes • Maintain reserves with a view to securing monetary stability and • Generally to operate the credit and currency system of the country to its advantage.

  6. Central Board • The Reserve Bank's affairs are governed by a central board of directors. • The board is appointed by the Government of India . • Appointed/nominated for a period of four years • Functions : General superintendence and direction of the Bank's affairs. Official Directors • Full-time : Governor and not more than four Deputy Governors Non-Official Directors • Nominated by Government: ten Directors from various fields and one government Official • Others: four Directors – one each from four local boards

  7. RBI’s First Governor Dr. Y. V. Reddy (6 September 2003 – 5 September 2008) Dr. D. Subbarao (6 September 2008 – present) RBI has 22 Regional offices located mostly in state capitals. Management of the Bank • Central Govt. from time to time can give directions to the Bank • Governor shall also have powers of general superintendence and direction of the affairs of the Bank

  8. Organization Structure

  9. Developmental Role • To support national objectives such as ensuring orderly growth • Development of financial markets and institutions. • Creating institutions to serve specialised financial needs • Extending the organised financial sector to all parts of the economy. • Service to common man

  10. Monetary Authority • Formulates, implements and monitors the monetary policy. • Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

  11. Manager of Foreign Exchange • Manages the Foreign Exchange Management Act, 1999. Objective: • to facilitate external trade and payment • to promote orderly development and maintenance of foreign exchange market in India.

  12. Issuer of currency • Issues and exchanges or destroys currency and coins not fit for circulation. • Objective: togive the public adequate quantity of supplies of currency notes and coins and in good quality.

  13. Regulator and Supervisor of theFinancial System • Prescribes broad parameters of banking operations within which the country's banking and financial system functions. • Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

  14. Departments • Department of Currency Management • Department of Banking Supervision • Department of Non Banking Supervision • Department of Banking Operations and Development • Rural Planning and Credit Department. • Urban Banks Department. • Foreign Exchange Department • Department of Information Technology • Internal Debt Management Department • Monetary policy Department • Department of External Investment and operations. • Department for payment and settlement Systems. • Customer Service Department • Human Resource Development Department. • Department of Administration and Personnel Management.

  15. Core functions • Issue and Management of currency. • Monetary Authority • Banker to the Government. • Banker to Bank • Lender of the last resort. • Supervision of the Financial system. • Management of Foreign Exchange.

  16. Reserve Bank of India Quantitative Methods • Bank rate policy • Open market operation • Variable reserve ratio Qualitative Method • Margin requirement • Credit Rationing • Regulation of consumer credit • Direct action

  17. Quantitative Method Bank rate policy • It is also known as discount rate. Bank rate extend credit to commercial bank. It will be more proper to say rediscount the - Bills of exchange. • As bank rate increases, credit creation by banks reduces and as it reduces, the credit creation by bank increases. Open Market Operations • It refers broadly to the purchase and sale by central bank of variety of assets such as foreign exchange, gold, government securities and even companies shares. • Securities bought results in increase in money supply and when securities are sold the money supply decreases.

  18. Quantitative Method Variable reserve ratio • CRR ( Cash reserve ratio) All commercial bank required to keep a certain portion of their demand and time liabilities. • As percentage of CRR increases, credit creation by banks reduces and percentage of CRR reduces, the credit creation by bank increases.

  19. Qualitative control These are selective credit control designed specially to curb excess flow of credit in selected area without affecting other type of credit. Margin requirement • If a person A wants a loan of Rs10,000 to stock rice & margin requirement is 10% then A will get only Rs 9000/. If MR is 25%, A will getRs7500/. • Thus high margin not only restricts the credit creating power of banks but also restricts unnecessary hoarding of essential commodities.

  20. Qualitative control Regulation of consumer credit • During inflation condition, the RBI may ask the commercial bank not to grant loans and advances to the consumers. During depression limited credit policy is adopted. • Credit Rationing : The central bank can fix maximum limit or ceiling on loans and advances.

  21. Qualitative control Direct Actions • Refuse rediscounting of bills of commercial banks • To refuse loans • To impose monetary penalties • Alter the condition of rediscounting • To disallow banks to conduct banking business

  22. CRR & SLR • The minimum and maximum levels of CRR are prescribed at 3% and 20% of demand and term liabilities (DTL) of the bank, respectively, under Reserve Bank of India Act of 1934. • The minimum and maximum SLR are prescribed at 25% and 40% of DTL respectively, under Banking Regulation Act of 1949. The CRR and SLR are to be maintained on fortnightly basis. The RBI is authorized to increase or decrease the CRR and SLR at its discretion.

  23. Demand and Time Liabilities Main components of DTL are: • Demand deposits (held in current and savings accounts, margin money for LCs, overdue fixed deposits etc.) • Time deposits (in fixed deposits, recurring deposits, reinvestment deposits etc.) • Overseas borrowings • Foreign outward remittances in transit (FC liabilities net of FC assets) • Other demand and time liabilities (accrued interest, credit balances in suspense account etc. )

  24. SLR SLR is to be maintained in the form of the following assets: • Cash balances (excluding balances maintained for CRR) • Gold (valued at price not exceeding current market price) • Approved securities valued as per norms prescribed by RBI.

  25. THANK YOU

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