BANK MANAGEMENT Commercial banks and RBI S N

BANK MANAGEMENT Commercial banks and RBI S. N. Mohapatra

DEFINITION OF BANK UNDER INDIAN LAW • In India “Banking” is defined as per Banking Regulation Act, 1949 as follows : • “Accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”. (Section 5 b) • A Banking Company is “a Company which transacts the business of banking in India. ” (Section 5 c)

Core activities of Commercial Bank – Acceptance of Deposits of money from the public – Lending of the money i. e. giving loans – Making Investments (Mandated/Statutory Investments for SLR Purposes known as SLR Investments and Non-SLR/Non-Mandated Investments) – to repay the deposits to the customers on demand or otherwise as per the terms of the deposits

Scheduled Banks : included in the 2 nd schedule of the RBI Act, 1934. (1) Paid up capital = or > Rs. 5 lakh (2) RBI is convinced that their affairs are Not conducted in a manner detrimental to the interest of their depositors. These Banks are required to maintain CRR and SLR. Scheduled Banks are classified as under : 1) Co-operative Banks (State and Urban Co-op Banks) 2) Commercial Banks 2. 1 Foreign Scheduled Banks 2. 2 Indian Scheduled Banks (a) Private Sector Scheduled Banks : Both Old and New (b) Public Sector Scheduled Banks (i) State Bank Group : SBI + its 5 subsidiaries (ii) Nationalised Banks : 19 , (iii) Regional Rural Banks (RRBs) : 82 (reduced from 196 to 82 after mergers) Non-Scheduled Banks : Not included in the 2 nd schedule of the RBI act. Their No. has progressively reduced over the years (only 4).

Ancillary Permitted Banking Activities • As per section 6 of BR act, 1949, Banks are authorized to carry out the following functions in addition to the above principal functions : – Discounting of Bills – Collection of Cheques and Bills – Payment Function/Remittance Services (DD, BC, MT, TT, ECS, NEFT, RTGS, SWIFT, Credit/Debit Card/Smart Card etc. ) – Safe Custody of Articles – Hiring Safe Deposit Lockers – Conducting Foreign Exchange Transactions – Conducting Government Transactions – Issuing Letter of Credit and Guarantees – Merchant Banking Functions – Collection of Utility Bills/School fees – Distribution of Insurance and Mutual Fund Products

PROHIBITED BANKING ACTIVITIES • Section 8 of BR act prohibits a banking company from engaging in the following activities : – Directly or indirectly in trading activities and undertaking trading risks – Buying or Selling or Bartering of Goods directly or indirectly Section 9 prohibits a banking company from holding immovable properties, howsoever acquired, except as is required for its own use, for a period exceeding 7 years from the acquisition of the property. RBI may extend this period by another 5 years. Banking in India is governed by the following statutes : – Banking Regulation Act, 1949 – RBI Act, 1934 – SBI Act, 1955 & SBI (Subsidiary Banks) Act, 1959 – Banking Companies (Acquisitions & Transfer of Undertakings) Act, 1970 and 1980 (more popularly known as Bank Nationalization Act)

Central Banks in the World • • • India UK USA Japan China Europe : RBI (Reserve Bank of India) : BOE ( Bank of England) : Fed (Federal Reserve System) : BOJ (Bank of Japan) : BOC (Bank of China) : ? ecb

Reserve Bank of India • The Reserve Bank of India (RBI) is the Central bank of India and controls the monetary policy of the Nation. • Established on April 1, 1935 as per the Reserve Bank of India Act, 1934. • The Central Office of RBI was initially established in Kolkata and moved to Mumbai in 1937.

The RBI Act 1934 • Constituted for the following needs – To regulate the issue of banknotes – To maintain reserves with a view of securing monetary stability – To operate credit and currency system of the country to its advantage. • Q. who regulates the coins and • what are bank notes ? 1 rupee notes ?

Roles of RBI • Regulator & Supervisor of the financial 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 Provide cost effective banking services Ombudsman Scheme : For effective redressal of complaints by bank customers

Roles of RBI • Manager of exchange control – Manages to reach the goals of Foreign Exchange Management Act, 1999. • Objective: – To facilitate external trade and payment – Promote orderly development – Maintenance of foreign exchange market in India

Roles of RBI • Issuer of currency – Issues and exchanges or destroys currency and coins not fit for circulation. • Objective: – To give public adequate supply of currency of good quality – To provide loans to commercial banks to maintain or improve GDP

Functions of RBI acts as : • central banker • regulator • Promoter Its functions are classified into three heads A) Traditional functions B) Promotional functions C) Supervisory functions

Traditional Functions 1. Sole issuer of currency notes 2. Agent , Advisor and Banker to the Government(both the central and state) 3. Banker to the bank. 4. Custodian of the foreign exchange reserves 5. Maintaining the external value of domestic currency 6. Controller of forex and credit 7. Ensures the internal value of the currency 8. Publishes the Economic statistical data 9. Fight against economic crisis and ensures stability of Indian economy

Promotional Functions 1. Promotion of banking habit and expansion of banking systems. 2. Provides refinance for export promotion 3. Expansion of the facilities for the provision of the agricultural credit through NABARD 4. Extension of the facilities for the small scale industries 5. Helping the Co-operative sectors. 6. Innovating the new banking business transactions

Supervisory Functions 1. Granting license to Banks. 2. Inspects & determines position of the bank under diff. sections of RBI & Banking regulations 3. Implements Deposit insurance scheme 4. Gives directives to commercial banks 5. Controls the non-banking finance corporation 6. Ensuring the health of financial system through on-site and off-site verification

Why supervise/Regulate banks? • Banks hold a major portion of public savings. • Banks intermediate between savings and investments and aid in channelizing funds to the economic sectors • Banks hold a large part of the money supply and hence become the channel of the central bank for implementing monetary policy. • Banks administer the national payments and settlement system.

Regulatory Powers • Maintenance of cash reserves by scheduled commercial banks sec 42 • Issues related to the collection and furnishing credit information from the commercial banks under sections 45 A to 45 F. • License to commence banking business under Section 22 of B. R. Act, 1949 (AACS) • License to open branches & extension counters • Permission to deal in foreign exchange • Issue of directions to maintain cash reserve and liquid assets • Power to control advances (Section 21) – Purposes for which advances are given, margins to be maintained

Regulatory Powers • Issue of prudential and operational guidelines • Directions on maximum limit on advances, prescribe guidelines on individual / group exposure norms • Interest rates on deposits and advances (Section 21) • Imposition of penalty (Section 46) • Cancellation / rejection of license (Section 22(4)) • Prescription towards CRR / SLR • Grant of scheduled status

Supervisory power of RBI • Verification of the capital adequacy and liquidity • The management practices • The presence of adequate systems and controls • Compliance with laws and regulation

Verification process On-site verification On site inspection of banks is carried out on an annual basis. Besides the head office and controlling offices, certain specified branches are covered under inspection so as to ensure a minimum coverage of advances. • The Annual Financial Inspection (AFI) focuses on statutorily mandated areas of solvency, liquidity and operational health of the bank. It is based on internationally adopted CAMEL model modified as CAMELS, i. e. , capital adequacy, asset quality, management, earning, liquidity and system and control.

Verification process Offsite Monitoring objective of the off site surveillance is to: • monitor the financial health of banks between two onsite inspections • identifying banks which show financial deterioration and would be a source for supervisory concerns. This acts as a trigger for timely remedial action

CONCLUSION • Financial markets are different from product markets. Hence greater the liberalization, deeper the supervision and higher the degree of regulation. • Because financial institutions are more leveraged and there is more scope for speculative activities, in such assets, given their inherent volatility. • Moreover there are negative externalities that can destabilize financial markets and this instability can adversely affect the real economy.