Central Bank of India (Marathi:

[2]

), a government-owned bank, is one of the oldest and largest The bank has 3,563 branches and 270 extension counters across

commercial banks inIndia. It is based in Mumbai. 27 Indian states and three Union Territories.
[3]

Mr. M.V TANKSALE has been appointed as Chairman & Managing Director, Central Bank of India with effect from June 29, 2011. Prior to his appointment as Chairman & Managing Director, Central Bank of India Shri Tanksale was the Executive Director, Punjab National Bank since March 2009. Central Bank of India, one of the leading Public Sector Banks in the country has paid a Dividend of 192.66 crore to the Government of India for the Financial Year 2010-11. Shri M V Tanksale, Chairman & Managing Director, Central Bank of India has handed over the Dividend Cheque of 192.66 crore to (Centre) Honble Union Finance Minister Shri Pranab Mukherjee on 19/08/2011 at New Delhi. Central bank of India is one of 18 Public Sector banks in India to get recapitalisation finance from the government over the next 24 months. The infusion of funds will improve the financial health of the banks as their capital adequacy ratio (CAR) will be raised more than desired level of 12 percent. The increase in CAR of the banks will also enable them to lend more money. The CAR of Central Bank of India was less than 12 percent as on 30 June 2006. The wholly owned public sector bank, based in Mumbai, will convert an amount of 800 crore out of its 1,124.14crore total equity capital into perpetual non-cumulative preference shares.The preference shares would carry an annual floating coupon rate of eight per cent, which would be benchmarked to 100 basis points above the repo rate. It will shore up the balance-sheet of the bank and enable it to raise capital from the markets. According to an official statement, the equity capital restructuring would lead to an improvement in the bank's credit rating as also facilitate the adoption of Basel II norms. For financial year 2008-2009, Central Bank of India's Q3 standalone net profit went up at 353.26 crore from 201.01 crore (YoY). The bank's standalone net interest income, NII was up at 671.94 crore versus 544.85 crore [5] (YoY). Central Bank of India has approached the Reserve Bank of India (RBI) for permission to open representative offices in five locations - Singapore, Dubai, Doha, London and Hong Kong. This is the first time the bank is venturing an independent overseas foray after the Sethia scam in the 1970s forced the bank to close down its London office. RBI [6] had then asked the other two banks, who had operations in London, to close down. As on 31 March 2011, the bank's reserves and surplus stood at 6,868.85 crore. Its total business at the end of the last fiscal amounted to 2,09,757.33 crore.The bank had a staff strength of 37,241 as on Nov 2006. Central Bank of India partnered with TCS[ Tata Consultancy Services ] for its Core Banking Solution. The solution set to be implemented will include B@NCS from Sydney-based Financial Network Solutions (FNS), Exim Bills Trade Finance software from China Systems and eTreasury from TCS. With all of its branches in the core banking system (CBS).
[7] [4]

It was established on 21 December 1911 by Sir Sorabji Pochkhanawala with Sir Pherozesha Mehta as [8] Chairman, and claims to have been the first commercial Indian bank completely owned and managed by Indians. In 1923, it acquired the Tata Industrial Bank in the wake of the failure of the Alliance Bank of Simla. In 1969, the Indian Government nationalized the bank on 19 July, together with 13 others. Central Bank of India was one of first bank to issue credit cards in the year 1980 in collaboration with MasterCard

Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank of India as the 'property of the nation and the country's asset'. He also added that 'Central Bank of India lives on people's faith and regards itself as the people's own bank'. During the past 99 years of history the Bank has weathered many storms and faced many challenges. The Bank could successfully transform every threat into business opportunity and excelled over its peers in the Banking industry. A number of innovative and unique banking activities have been launched by Central Bank of India and a brief mention of some of its pioneering services are as under: 1921 1924 1926 1929 1932 1962 Introduction to the Home Savings Safe Deposit Scheme to build saving/thrift habits in all sections of the society. An Exclusive Ladies Department to cater to the Bank's women clientele. Safe Deposit Locker facility and Rupee Travellers' Cheques. Setting up of the Executor and Trustee Department. Deposit Insurance Benefit Scheme. Recurring Deposit Scheme.

Subsequently, even after the nationalisation of the Bank in the year 1969, Central Bank continued to introduce a number of innovative banking services as under: 1976 1980 1986 1989 1994 The Merchant Banking Cell was established. Centralcard, the credit card of the Bank was introduced. 'Platinum Jubilee Money Back Deposit Scheme' was launched. The housing subsidiary Cent Bank Home Finance Ltd. was started with its headquarters at Bhopal in Madhya Pradesh. Quick Cheque Collection Service (QCC) & Express Service was set up to enable speedy collection of outstation cheques.

Further in line with the guidelines from Reserve Bank of India as also the Government of India, Central Bank has been playing an increasingly active role in promoting the key thrust areas of agriculture, small scale industries as also medium and large industries. The Bank also introduced a number of Self Employment Schemes to promote employment among the educated youth. Among the Public Sector Banks, Central Bank of India can be truly described as an All India Bank, due to distribution of its large network in 27 out of 29 States as also in 3 out of 7 Union Territories in India. Central Bank of India holds a very prominent place among the Public Sector Banks on account of its network of 3967 branches and 27 extension counters at various centres throughout the length and breadth of the country. Customers' confidence in Central Bank of India's wide ranging services can very well be judged from the list of major corporate clients such as ICICI, IDBI, UTI, LIC, HDFC as also almost all major corporate houses in the country.

Central Bank of India is one of the oldest commercial banks of India, and reportedly is the first truly Indian bank which was totally owned and established by Indian without any foreign help. Sir Sorabji Pockhanawala was the founder of the bank, who had always dreamt of establishing a thoroughly Indian bank, who was so happy and excited about the project that he reportedly termed the Central Bank of India as proper ty of the nation and the countrys asset. The first Chairman of the bank was Sir Pherozesha Mehta, a yet another Indian enthusiast. In the year 1969 the bank was nationalized by the Government of India.

Bank Rate Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.

Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit. Cash Reserve Ratio All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 per cent. Inflation Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much money and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices are pushed up. The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can reduce the supply of money or increase interest rates to reduce inflation. Money Supply (M3) This refers to the total volume of money circulating in the economy, and conventionally comprises currency with the public and demand deposits (current account + savings account) with the public. The RBI has adopted four concepts of measuring money supply. The first one is M1, which equals the sum of currency with the public, demand deposits with the public and other deposits with the public. Simply put M1 includes all coins and notes in circulation, and personal current accounts. The second, M2, is a measure of money, supply, including M1, plus personal deposit accounts - plus government deposits and deposits in currencies other than rupee. The third concept M3 or the broad money concept, as it is also known, is quite popular. M3 includes net time deposits (fixed deposits), savings deposits with post office saving banks and all the components of M1. Statutory Liquidity Ratio Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities.

These are collectively known as SLR securities. The buying and selling of these securities laid the foundations of the 1992 Harshad Mehta scam. Repo A repurchase agreement or ready forward deal is a secured short-term (usually 15 days) loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term, it will buy back the securities at a slightly higher price, the difference in price representing the interest. Open Market Operations An important instrument of credit control, the Reserve Bank of India purchases and sells securities in open market operations. In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities
According to Prof. Harry Johnson,

According to Prof. Harry Johnson, "A policy employing the central banks control of the supply of money as an instrument for achieving the objectives of general economic policy is a monetary policy."

According to A.G. Hart, "A policy which influences the public stock of money substitute of public demand for such assets of both that is policy which influences public liquidity position is known as a monetary policy."

Objective of Monetary Policy

To control the supply of money. To control the cost of money and credit. Exchange stability Full employment
Different objectives clash with each other and there is a problem of selecting a right objective for the monetary policy of a country. The proper objective of the monetary policy is to be selected by the monetary authority

keeping in view the specific conditions and requirements of the economy. Various objectives or goals of monetary policy are: 1. 2. 3. 4. 5. Neutrality of Money Price Stability Economic growth Exchange Stability Full Employment

Instruments or technique of credit control / monetary policy:1. Bank Rate Bank rate is that rate which is charged by Central bank for issue loan to the member banks. By changing it, central bank can control the credit. If Central bank increase this bank rate, all commercial banks will increase their interest rate by this loan become costly and flow of fund in the form of credit will decrease. If central bank wants to expand credit, then Central bank will decrease bank rate, after this commercial bank can get advance and loan at cheap rate and by this way, they also decrease their interest rate. After this flow of cash in the form of loan will increases. 2. Open Market Operation Open market operation is the all action which is done by central bank for purchase and sale of member banks' security in open market. If RBI wants to contract the credit, then RBI will sell the security of member bank and member bank's flow of cash will stop. If RBI wants to expand credit in recession, then RBI will start to buy the security of member banks and member banks get cash and they can now use it for providing more loans to customers. 3. Cash Reserve Ratio / Statutory minimum reserve:Cash reserve ratio is the minimum percentage of the deposit to be kept as reserve by the banks with central bank. It can be used as the technique of monetary policy. By changing cash reserve ratio, RBI can contract or expand credit in Indian economy. If RBI wants to contract credit, and then RBI will increase this ratio. After this all banks have to keep more fund as reserve with RBI. So, they will

decrease the amount of loan due to decrease the total fund available for enterprises. If RBI wants to expand credit, then RBI will decrease this ratio, after this all banks have to keep less fund as reserve with RBI. So, they will issue more credit to public. 4. Changes in Marginal Requirement of loan:Marginal requirement is the difference between value of security and actual loan accepted by bank. Suppose a person wants to take loan of Rs. 80 , we has to give security of Rs. 100 then marginal requirement is Rs. 100 - Rs. 80 = Rs. 20 . If RBI wants to contract the credit , this rate will increase suppose , if RBI fixes it as 40 % , then customer can get loan of Rs. 60 after giving security of Rs. 100 . So , trend of getting loan will decrease . If RBI wants to expand the credit, this rate will decrease suppose, if RBI fixes it as 10% more people will take loan , if they get Rs. 90 in cash after giving security of Rs. 100 .
So , by this way RBI controls credit .

5. Moral Persuasion / Inspiration RBI as central bank of country can control credit with moral persuasion. Under this persuasion, RBI can call a meeting of all commercial bank and give advice in
discussion that they should not give loan for speculative purposes.

6. Rationing of Credit RBI has right to create ration of credit under monetary policy. It can be done by following way:

To fix the amount of loan for a particular bank. To fix Quota for all banks. To fix Quota for different traders. 7. Regulation of consumer credit

 In case inflation, prices are increased. To control prices central bank contract credit to reduce the total amount of installment for payment. In case of deflation, prices are decreased to control prices central bank expand credit to increase the amount of installment.
business environment, central bank, credit control, economic

Major Operations

Open Market Operations An open market operation is an instrument of monetary policy which involves buying or selling of government securities from or to the public and banks. This mechanism influences the reserve position of the banks, yield on government securities and cost of bank credit. The RBI sells government securities to contract the flow of credit and buys government securities to increase credit flow. Open market operation makes bank rate policy effective and maintains stability in government securities market.

CRR Graph from 1992 to 2011[2]

Cash Reserve Ratio Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with RBI in the form of reserves or balances .Higher the CRR with the RBI lower will be the liquidity in the system and vice-versa.RBI is empowered to vary CRR between 15 percent and 3 percent. But as per the suggestion by the Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5 percent in 2002. As of October 2011, the CRR is 6 percent.
[3]

SLR Graph from 1991 to 2011[4]

Statutory Liquidity Ratio Every financial institute have to maintain a certain amount of liquid assets from their time and demand liabilities with the RBI. These liquid assets can be cash, precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed as StatutoryLiquidity Ratio.There was a reduction from 38.5% to 25% because of the suggestion by Narshimam Committee. The current SLR is 24%.
[5]

Bank Rate Graph from 1991 to 2011

Bank Rate Policy

[6]

Bank rate is the rate of interest charged by the RBI for providing funds or loans to the banking system. This banking system involves commercial and co-operative banks, Industrial Development Bank of India, IFC, EXIM Bank, and other approved financial institutes. Funds are provided either through lending directly or rediscounting or buying money market instruments like commercial bills and treasury bills. Increase in Bank Rate increases the cost of borrowing by commercial banks which results into the reduction in credit volume to the banks and hence declines the supply of money. Increase in the bank rate is the symbol of tightening of RBI monetary policy. Bank rate is also known as Discount rate. The current Bank rate is 6%. Credit Ceiling

In this operation RBI issues prior information or direction that loans to the commercial banks will be given up to a certain limit. In this case commercial bank will be tight in advancing loans to the public. They will allocate loans to limited sectors. Few example of ceiling are agriculture sector advances, priority sector lending. Credit Authorization Scheme Credit Authorization Scheme was introduced in November, 1965 when P C Bhattacharya was the chairman of RBI. Under this instrument of credit regulation RBI as per the guideline authorizes the banks to advance loans to desired sectors.
[7]

Moral Suasion Moral Suasion is just as a request by the RBI to the commercial banks to take so and so action and measures in so and so trend of the economy. RBI may request commercial banks not to give loans for unproductive purpose which does not add to economic growth but increases inflation. Repo Rate and Reverse Repo Rate Repo rate is the rate at which RBI lends to commercial banks generally against government securities. Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in Repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Reverse Repo rate is the rate at which RBI borrows money from the commercial banks. The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will discourage the public to borrow money and will encourage them to deposit. As the rates are high the availability of credit and demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of the policy. As of October 2011, the repo rate is 8.25 and reverse repo rate is 7.25. [edit] olicy

Key Indicators
[8][9]

As of April 2012, the key indicators are

Indicator

Current rate

Inflation

7.23

Bank rate

9%

CRR

4.75%

SLR

23%

Repo rate

8%

Reverse repo rate 7%

Liquidity Management

Cash Reserve Ratio: Banks reserve liquidity through their power to create credit. Presently in India, banks are required to maintain the following reserves:

o o

Cash Reserve ratio: 8.25% of demand and time deposits (w.e.f. 24.05.2008) Statutory Liquidity ratio: 25% of demand and time deposits

Just as additional cash inflows enable the banking system to create credit, any increase in CRR will require the banking system to contract credit by a large amount. SLR (Statutory Liquidity ratio) is a requirement peculiar to India. In addition to ensuring that banks can fall back on the readily saleable government deposits in the event of a run on the bank, it was a prescription to divert bank deposits to meet government investment expenditure.

Open Market Operations: Banks as well as other financial institutions, such as insurance companies, mutual funds and corporate with surplus cash are big investors in government securities. When RBI wishes to inject liquidity into the market, it has another option of buying government securities. When RBI offers to buy the securities at a rate that is better than the rate prevailing in the market, some of the investors can sell their holdings and the cash inflow would lead to credit creation of a large magnitude. Similarly, when RBI sells government securities at a higher rate than market rate, RBI absorbs funds and the banking system contracts credit by a large magnitude to reduce liquidity. This is known as open market operation.

Managing Credit Expansion: CRR and OMO reduce liquidity in the system and reduce the ability of banks to create credit. RBI also controls sector specific expansion of credit by specifying maximum amounts that can be lent, minimum margins to be maintained and higher risk weights. When RBI feels that banks have overextended themselves to certain sectors, the flow of credit to certain sectors is leading to an imbalanced growth of the economy or it wants to control the price of certain commodities by preventing hoarding by wholesalers with borrowed funds, RBI makes sector specific or commodity specific interventions.

Interest Rate Management

Repo rate:

Repo rate or repurchase rate is a swap deal involving the immediate sale of securities and simultaneous purchase of those securities at a future date, at a designated price. It could also be an overnight deal with sale taking place on day one and repurchase on day two. The repurchase price is adjusted for the interest payable for the use of funds for the period of contract. Reverse repo involves the immediate purchase and future sale of those same securities. RBI uses repo and reverse repo to control liquidity on a day-to-day basis.

Bank rate: RBI provides refinance to banks against funds deployed by banks in specified sectors such as export finance portfolio of the banks. In the past, the bank rate used to be the primary interest rate tool of RBI. But over a period of time the repo rate has presently emerged as the primary interest ratetool and bank rate has lost much of its relevance. Changes in the bank rate are a signal to the market regarding the direction in which the RBI would like interest rates to move.

Rates paid on government securities: RBI, as a banker to the government, helps government to borrow from the market by selling their securities. RBI also determines the timing, size, and rate paid on the issues. Rates offered by RBI on government securities are both a reflection of the market and also an indicator to the market on the direction of interest rate movements.

Qualitative Tools of Monetary Policy

Rationing Credit
The central bank of a country typically functions as a lender of last resort. It can use this aspect of its operations to control the money supply. It could simply refuse to lend any more money to certain banks or impose a ceiling on how much it will lend per bank per fiscal quarter. In the words of T.R. Jain and O.P. Khanna in their book "Macroeconomics," this "is relatively an old method of control of money supply," that has been used recently by central banks.

Margin Requirements
Banks or other financial institutions routinely lend money to customers to buy securities. The "margin" is the portion of a security that the regulated institution's loan is not allowed to cover. In other words, if a bank were allowed to loan up to $80 to a customer eager to buy $100 of stock, the margin would be $20. By increasing or decreasing the margin requirement, the authorities can effectively tighten the money supply.

Moral Suasion
The central bank of a country typically exercises regulatory authority over all or part of the banking industry, issuing licenses or operating permits in that capacity. This gives it leverage, as Clifford Gomez wrote in "Financial Markets, Institutions, and Financial Services" (2008) to persuade banks "not to make excessive use of Central Bank's credit facilities and also not to use the accommodation already obtained" to fuel non-essential or speculative activities by its customers.

Quantitative Methods: 1) Changes in Bank Rate Policy or Rediscount Rate:

The rate at which the central bank of the country gives loans to commercial banks is known as Bank Rate or re-discount rate, In Pakistan; State Bank charges 10% as bank rate. By changing such rate of interest, the central bank can influence the supply of money in the country. To control inflation the central bank increases the rate of interest. The commercial banks will also increase their rate of interest. Accordingly, the loans will decrease, investment, output and prices will fall. In this way, inflation will be controlled. Now, we assume that the country is facing deflation. To remove deflation central bank will decrease the bank rate, the commercial banks will also decrease the rate of inl91'Cst. In this way, people will get more loans. Investment production, employment and Prices will start rising up. Accordingly, deflation will be controlled. Limitations: Commercial banks should abide by the instructions of the central bank. If the central bank brings
changes in the rate of interest, the commercial banks should also change the rate of interest. If commercial banks already have excess reserves then commercial banks will not depend upon central bank. It this way, they will not care for changes in the rate of interest from central bank.

2) Open Market Operation .. This is the second instrument of the monetary policy. Under this technique, the central bank sells or purchases 'government securities. If the central bank finds that commercial banks are providing excessive loans which are creating inflation. To remove the inflation, the central bank sells the government securities. The commercial banks will purchase these securities to earn interest against such securities. In this way, the resources of commercial banks will go down. They will advance less loans. Accordingly, the inflation will be controlled. If there is deflation in the economy. To control the deflation, the central bank purchases the government securities. Then the monetary base of the commercial banks will increase their loaning power will increase. As a result, investment will increase, income and prices will go up. LIMITATION
The funds which are collected through sale of government securities should not be spent on unproductive fields.

3) Changes in Reserve Requirements Each commercial bank has to keep a certain proportion of its deposits in the form of reserves just to meet the demands of the depositors. As in the case of Pakistan, each commercial bank has to keep 30% of its deposits to meet the needs of its depositors. The central bank can influence this reserve rate. If the central bank realizes that the commercial banks are advancing excessive loans, it will increase the reserve requirements. Accordingly, commercial banks could advance less loans. On the other hand, in deflation, if the central bank reduces the reserve requirements, the commercial banks will be able to advance' more loans. Hence, deflation could be removed. 4) Changes in Reserve Capital Each commercial bank has to keep a certain ratio of its deposit with central bank. In case of Pakistan, each commercial bank has to keep 5% of its deposit in the central bank. By changing the reserve capital, a central bank can control the supply of money by commercial banks. When there is inflation in the economy. To remove this inflation, the central bank will increase the reserve ratio. As a result, lending of commercial banks will fall. As a result the supply of money will decrease. On the other hand, if central bank decreases the 'reserve ratio, the commercial banks will be having more funds to advance. Accordingly, the deflation could be controlled. 5) Changes in Marginal Requirements Commercial banks do not give loans against leaves, rather they ask for pledges to make. How much a person will have to pledge is settled by the central bank. This is given the name of marginal requirement. The central bank can bring changes in the marginal requirements. If there is inflation in the economy, the marginal requirements will increase. In this way, people will get less loans. As a result, supply of money will decrease. During deflation the marginal requirements are decreased. Hence people will get more loans from the commercial banks. As a result supply of money will go up and deflation will be controlled. 6) Credit Ceiling/Rationing of Credit The central bank can issue directions that loans will be given to commercial banks upto a certain limit. As a result, the commercial banks-will be careful in advancing loans to the people. But this is a very strict method, hardly adopted by the central bank. Moreover, if the commercial banks are having other sources to borrow, they will not bother for this policy.

2) Qualitative Methods

Moral Suasion: It is concerned with just as a moral request by central bank to commercial banks that loans should not be given for unproductive fields which create inflation. Loans should not be given for speculative purposes and hoarding. But such like requests could be effective in the developed countries. Consumers Credit Control: This instrument is applied during inflation. If the central bank wants to control the supply of money, it will issue directions to commercial banks that loans should not be advanced for consumption purposes or for consumer durables because they create inflation. Direct Action: The instrument of direct action is concerned with the policy of central bank against commercial banks. It can refuse to give loans to commercial banks. The central bank will not advance loan to commercial banks for the sectors which create inflation. Moreover, if commercial banks do not follow the instructions of the central bank, It will refuse to lend commercial banks Publicity: The central bank of the country is the overall in charge of economic stability of the country. Its aim is to protect the economy from inflation and deflation. For this purpose, it analyses the whole economy. It keeps an eye over the activities of the commercial banks. If the commercial banks are found advancing loans which create inflation, their activities will be unhealthy for whole economy. The central bank can black list such banks. Thus to avoid such bad reputation in' future, they will be careful in advancing loans.

QUANTITATIVE MEASURES: Measures which aim to control the quantity of money supply directly such as CashReserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Open Market Operations (OMO) Cash Reserve Ratio: It is a quantitative tool of monetary and credit policy to regulate the money supply in the economy.Cash reserve ratio (CRR) is that slice of a bank's deposits, which the bank has to compulsorily deposit with RBI. A CRR of six per cent means that out of every Rs 100, bank has to deposit Rs. 6 with RBI. Interestingly, RBI does not pay any interest on this money to banks. When RBI wants to reduce liquidity from the system, like in times of high inflation, it increasesthe CRR.RBI by varying the CRR regulates the lendable funds of commercial banks. An increase in CRR would also mean that money is being sucked out of the system. This would mean that funds are hard tocome by and hence banks will have to pay more to depositors in order to induce them to keep their funds with banks. This willpush up cost of funds for banks. The banks therefore will also have to raise lending rates in or der to meet the increased cost while maintaining their margins. For exampleRBI has increased the CRR of scheduled banks by 6% of their Net Demand and Time Liabilities (NDTL). As a result of thisincrease in the CRR, about 12,500 crore of excess liquidity will be absorbed from the system. Statutory Liquidity Ratio: It is a quantitative tool of monetary and credit policy to regulate the money supply in theeconomy. Under the provision of Banking Regulation Act governing the banking operations, banks are required to hold liquidassets such as government securities, or other unencumbered approved securities, cash or gold, against their demand and timeliabilities as on the last Friday of second preceding fortnight in India. This is known as supplementary reserve requirement orsecondary reserve requirement. The main objective of this monetary policy instrument is to ensure solvency of commercial banks by compelling them to hold low risk assets up to a stipulated extent. It also helps to regulate the pace of credit expansionto commercial sector. SLR refers to the ratio of holdings of the prescribed liquid assets to total time and demand liabilities. Atpresent, SLR is 25%, means 25 out of 100 are invested in prescribed liquid assets.The objectives of SLR are:1.

To restrict the expansion of bank credit.2. To augment the investment of the banks in Government securities.3. To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India. Open Market Operations: A monetary policy instrument which is used by the Reserve Bank mainly with a view to affectthe reserve base of the banks and thereby the extent of monetary expansion. It also, in the process, helps to create and maintaina desired pattern of yield on government securities (G-Sec) and to assist the government in raising resources from the capitalmarket. Under the RBI Act, the RBI is authorized to purchase and sell the securities of the Union Government and StateGovernments of any maturity and the security specified by the Central Government on the recommendation of Bank's CentralBoard. Presently the RBI deals only in the securities issued by the Union Government. Open market operations are by way outright sale and purchase of securities through the Securities Department and repo and reverse repo transactions. When RBI buys the securities in the open market, It increases the liquidity and reserves of commercial banks, making itpossible for banks to expand their loans and investments. If RBI sells the securities, the effects are reversed. QUALITATIVE MEASURES: They aim to control the quantity of money supply indirectly through cost of credit. Thesemeasures are Bank Rate, Repo & Reverse Repo Rates, and Interest Rates etc. Bank Rate: An instrument of general credit control and represents the standard rate at which the RBI is prepared to buy orrediscount bills of exchange or other commercial paper eligible for purchase under the provisions of the Act. In short, Bank rateis the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate.Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect thelending rates through altering the cost of credit. At present Bank rate is 6%. Repo Rate: Repo and Reverse Repo Rates are Liquidity adjustment Facility (LAF) tools used by RBI. Repo is an instrumentmeant for injecting the funds required and Reverse Repo for absorbing the excess liquidity out of system.In bond markets, interest rates are the most important factor, and the RBI controls interest rates. RBI uses various rates likerepo, reverse repo and CRR to give direction to interest rates in the country. Take an exampleRepo refers to ' rep urchase o bligation'. In case of tight liquidity conditions (as you saw in 2008), when banks need funding forthe short term, they approach the RBI and ask for a temporary loan. RBI gives them a loan only after taking some collateral. This collateral is Government Securities (G-Secs). So banks give G-Secs to RBI and take money to meet their temporary requirements. The interest rate which RBI charges to banks for such short-term loan is known as the repo rate. After the short-term period is over, banks have the obligation to repay the money back to RBI, along with the interest and ' buys back ' itsG-Secs, hence the word repurchase obligation. In short, Banks borrow from RBI or RBI lends to banks at this rate.It must be understood that when RBI does not want more money to go into the economy, it will raise this rate. When repo rateincreases, the cost of money for banks also increases. Banks in turn increase the interest rates for their borrowers. This prevents borrowers from taking loans from banks and thus RBI's objective of controlling money supply is achieved.

Reverse Repo Rate: Reverse repo is that rate which RBI pays to banks. When banks have surplus liquidity and there arenot enough borrowings from banks by consumers (as is the condition now), banks park their surplus money with RBI and earnsome minimum interest. The rate at which RBI pays interest is known as reverse repo rate. When RBI wants the economy to grow, it will reduce reverse repo rate. By this By doing so, it will give a signal to banks thatinstead of deploying surplus money with RBI for a low return they should deploy the same in projects in the economy, which will help to kick-start the economy.In times of ample liquidity, repo rate is practically redundant. Hence you will observe RBI focusing more on cutting reverserepo rates in times of slowdown, as was seen in the recent past. Liquidity Adjustment Facility (LAF): LAF is a monetary policy instrument introduced in 2000 to modulate liquidity in the system in the short term and to send interest rate signals to the market. LAF operates through repo and reverse repotransactions. RBI conducts repo to inject liquidity into the system through purchase of government securities with anagreement to sell them at a predetermined date and repo rate. In the reverse repo transaction RBI sells securities with a view toabsorb excess liquidity with a commitment to repurchase them at a predetermined date and reverse repo rate. Other instruments of liquidity management are Open Market Operations (OMO) in the form of outright purchase/sale of securities and Market Stabilisation Scheme (MSS). Under the OMO, the RBI buys or sells government bonds in the secondary market. By absorbing bonds, it drives up bond yields and injects money into the market. When it sells bonds, it does so to suck money out of the system

Traditional Functions of RBI Traditional functions are those functions which every central bank of each nation performs all over the world. Basically these functions are in line with the objectives with which the bank is set up. It includes fundamental functions of the Central Bank. They comprise the following tasks. Issue of Currency Notes : The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds. Banker to other Banks : The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort. Banker to the Government : The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the

government. It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch. Exchange Rate Management : It is an essential function of the RBI. In order to maintain stability in the external value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U.S Dollar) close to each other. Credit Control Function : Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other credit creation is below the required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look for growth with price stability. Thus it regulates the credit creation capacity of commercial banks by using various credit control tools. Supervisory Function : The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue license for setting up new banks, to open new braches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India. It can have periodical inspections an audit of the commercial banks in India.

Developmental / Promotional Functions of RBI

Along with the routine traditional functions, central banks especially in the developing country like India have to perform numerous functions. These functions are country specific functions and can change according to the requirements of that country. The RBI has been performing as a promoter of the financial system since its inception. Some of the major development functions of the RBI are maintained below. Development of the Financial System : The financial system comprises the financial institutions, financial markets and financial instruments. The sound and efficient financial system is a precondition of the rapid economic development of the nation. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy. Development of Agriculture : In an agrarian economy like ours, the RBI has to provide special attention for the credit need of agriculture and allied activities. It has successfully rendered service in this direction by increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the credit, National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs).

Provision of Industrial Finance : Rapid industrial growth is the key to faster economic development. In this regard, the adequate and timely availability of credit to small, medium and large industry is very significant. In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc. Provisions of Training : The RBI has always tried to provide essential training to the staff of the banking industry. The RBI has set up the bankers' training colleges at several places. National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are few to mention. Collection of Data : Being the apex monetary authority of the country, the RBI collects process and disseminates statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This data proves to be quite useful for researchers and policy makers. Publication of the Reports : The Reserve Bank has its separate publication division. This division collects and publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This information is made available to the public also at cheaper rates. Promotion of Banking Habits : As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. It has set up many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI1964, NABARD-1982, NHB-1988, etc. These organizations develop and promote banking habits among the people. During economic reforms it has taken many initiatives for encouraging and promoting banking in India. Promotion of Export through Refinance : The RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.

Supervisory Functions of RBI

The reserve bank also performs many supervisory functions. It has authority to regulate and administer the entire banking and financial system. Some of its supervisory functions are given below. Granting license to banks : The RBI grants license to banks for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches.

Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities. Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs. Implementation of the Deposit Insurance Scheme : The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

Reserve Bank of India's Credit Policy

The Reserve Bank of India has a credit policy which aims at pursuing higher growth with price stability. Higher economic growth means to produce more quantity of goods and services in different sectors of an economy; Price stability however does not mean no change in the general price level but to control the inflation. The credit policy aims at increasing finance for the agriculture and industrial activities. When credit policy is implemented, the role of other commercial banks is very important. Commercial banks flow of credit to different sectors of the economy depends on the actual cost of credit and arability of funds in the economy.

Download E-book With Latest Functions of RBI

To read latest functions of RBI, please download official free e-book published by RBI. This free e-book is a pdf document compressed in a Rar file (8.92 MB). To extract and read this PDF document, you'll need 'Winrar' and 'Adobe Acrobat Reader' softwares (both are free) installed on your computer
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. 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.

Functions of Reserve Bank of India The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system. Banker to Government The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters. Bankers' Bank and Lender of the Last Resort The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. Controller 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 can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. As supereme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. Custodian of Foreign Reserves The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favour of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country. Supervisory functions In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. Promotional functions With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a varietyof developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964,

the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers. Classification of RBIs functions The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a non-monetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence, particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.

A) Traditional functions 1.Monopoly of currency notes issue 2.Banker to the Government(both the central and state) 3.Agent and advisor to the Government 4.Banker to the bankers 5.Acts as the clearing house of the country 6.Lender of the last resort 7.Custodian of the foreign exchange reserves 8.Maintaining the external value of domestic currency 9.Controller of forex and credit 10.Ensures the internal value of the currency 11.Publishes the Economic statistical data 12.Fight against economic crisis and ensures stability of indian economy. B) 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.Prescribe the minimum statutory requirement. 7.Innovating the new banking business transactions.

C) Supervisory functions 1.Granting licence to Banks. 2.Inspects and makes enquiry or determine position in respect of matters under various sections of RBI and Banking regulations 3.Implements Deposit insurence scheme 4.Periodical review of the work of the commercial banks 5.Giving directives to commercial banks 6.Control the non-banking finance corporation 7.Ensuring the health of financial system through on-site and off-site verification. These are all the functions which are protective to the Indian Economy, thats why RBI is considered as the head of all banks. regards sivaharimani\
The functions of the Reserve Bank of India are as follows:(1) Monopoly of note issue: The RBI has the sole right of note issue. All currency notes except one rupee note and coins are issued by the Issue Department of the central bank. The RBI follows the minimum reserves system under which the bank has to maintain a minimum reserve of Rs.200 crores of which a minimum of Rs.115 crores in gold and bullion and the rest in foreign securities. This function helps the Central Bank to control money supply in the economy. (2) Banks to the Government: The RBI is the Banker's agent and adviser to the government. It accepts deposits and make payments on behalf of the Government. Issue of loans, management of public debt, sale of treasury bills are undertaken by the bank. It helps the government in ensuring better co-ordination of monetary and fiscal policies. It provides short term loans namely "ways and means advances" to the Central Government and State Government. These loans have to be rapid within a period of 3 months. It represents the government in various international organizations like IMF, World Bank etc. It sends its official as representative of the government for international seminars and conferences. All important policy decision are taken by the government in consultation with the RBI. It advises the government on important matters like agricultural credit, devaluation of rupee, credit policy for the industrial and export sectors etc. (3) Banker's Bank: RBI acts as a banker for all the commercial banks. All scheduled banks come under the direct control of RBI. All commercial as well as schedule bank has to keep a minimum reserve with the RBI. They have to submit weekly reports to RBI about their transactions. By performing 3 functions, the RBI helps the member banks significantly. They are given below such as: (a) It acts as the lender of the last resort. (b) It is the custodian of cash reserves of commercial banks. (c) It clears, transfers the transaction. It acts as the central clearing house. (4) Management of foreign exchange reserves: RBI is the custodian of the foreign exchange reserves of the country. It is the responsibility of the RBI to stabilize external value of rupee and carry out transactions in foreign currencies. The Foreign Exchange Regulation Act (FERA) passed by the government empowered RBI to have full control over management of foreign exchange. (5) Credit control:

The central bank uses the quantitative and qualitative tools to control credit. It is one of the principal functions of RBI. It helps the bank to ensure exchange rate stability and price stability. In quantitative credit control, the volume of credit is controlled and in qualitative credit control, the direction of credit is regulated. Bank rate, open market operations and cash reserve ratio are used under the quantitative method. In selective credit control, the weapons used are variation in margin requirements, moral suasion, rationing of credit, issue of directives etc. At present selective control has been given much importance and it is more suitable for India.

R B I i s t h e a p e x b a n k i n g i n s t i t u t i o n i n India. RBI is an autonomous body pro moted by thegovernment of India and is headquartered at Mumbai.T h e R B I p l a y s a k e y r o l e i n t h e m a n a g e m e n t o f t h e treasury foreign exchange movements and is also thep r i m a r y r e g u l a t o r f o r b a n k i n g a n d n o n b a n k i n g financial institutions. The RBI operates a nu mber of government mints that produce currency and coins