Chapter 2-Central banking :RBI

1.ConceptAcentral bank,reserve bank,

ormonetary authorityis an institution that
manages astate'scurrency,money supply,
andinterest rates.
Central banks also usually oversee
thecommercial banking systemof their
respective countries.
A central bank possesses amonopolyon
increasing theamount of money in the nation,
and usually also prints the national currency.
Examples include theEuropean Central
Bank(ECB) ,theFederal Reserveof the United
States,RBI of India.

 Reserve Bank of India TheReserve Bank of India(RBI) is India'scentral

bankinginstitution, which controls themonetary
policyof theIndian rupee.
It was established on 1 April 1935 during theBritish
Rajin accordance with the provisions of the Reserve
Bank of India Act, 1934.
The share capital was divided into shares of 100
each fully paid, which were initially owned entirely by
private shareholders.
Following India's independence in 1947, the RBI was
nationalised in the year 1949.
The RBI plays an important part in the development
strategy of theGovernment of India.

Banking terms
Bank rateis the rate at which RBI lends to
commercial banks.
Thecash reserve ratiostipulates the
minimum proportion of deposits that banks
must hold with the central bank.
Statutory liquidity ratiodefines the minimum
proportion of their deposits that banks have to
maintain at the close of business every day as
liquid assets, such as cash or gold.
Repo rateis the rate the central bank
charges to lend to banks against securities.

2.Fuctions and role of RBI1.Money CreatorThe bank issues and exchanges or destroys currency
notes and coins that are not fit for circulation.
RBI maintains the economic structure of the country
so that it can achieve the objective of price stability
as well as economic development.
There are four printing presses for printing of notes
at Nashik in Maharashtra ,Dewas in Madhya Pradesh,
Mysore in Karnataka and Salboni in West Bengal.
For minting of coins, SPMCIL has four mints at
Mumbai, Noida (UP), Kolkata and Hyderabad for coin
production.

2.Credit RegulatorThe RBI controls the monetary supply,

monitors economic indicators like thegross
domestic productand has to decide the
design of the rupee banknotes as well as
coins.
RBI also works as a central bank where
commercial banks are account holders and
can depositmoney.
RBI maintains banking accounts of all
scheduled banks.
Commercial banks create credit. It is the
duty of the RBI to control the credit through
the CRR(cash reserve ratio)

3.Supervision of banking sectorThe 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.

3.Reforms in Indian banking Indian banking sector has undergone major changes
and reforms during economic reforms.
Though it was a part of overall economic reforms, it
has changed the very functioning of Indian banks.
This reform have not only influenced the productivity
and efficiency of many of the Indian Banks, but has left
everlasting footprints on the working of the banking
sector in India.

Narsimham committee -

The most important committee was Narasimham

Committee on banking Sector Reforms.

 Narasimham Committee I was formed in 1991

and Narasimham Committee II was formed in
1998 and both were related to Banking Sector
Reforms.
First Narasimham committee submitted its report
in November 1991,recommended the following:
1.Reduction in the Statutory Liquidity
Ratio
2.Reduction in the Cash
Reserve Ratio
3. Interest rate in CRR Balances
4.Redefining the priority sector

5. Deregulation of the Interest Rate-according

to

market condition but will be regulated by RBI

6.Target for priority Sector
7.Restructuring the banking system-four tier
international, national, local and rural

banks

per region
8.Enhancement of capital base bank-bank

should be allowed to raise fresh capital from

the

public
9.Freedom to financial institutes-for approvals
10.Transparency in accounts and assets of
banks

Second Narasimham committee submitted its

report in November 1991,recommended the
following:
1.Merger of strong banks and closure of
weak
banks
2.Higher capital adequacy norms
3.Narrow banking-helping the weak banks
4.Integrated system of regulation and
supervision
5.Depoliticisation of bank board-making
appointments free from political influence
6.Strenghthening of recovery systemDebts

4.Fundamental of Investment
Banking
A specific division of banking related to the
creation of capital for other companies.
Investment banks suggests new debt and
equity securities for all types of
corporations.
Investment banks also provide guidance to
issuers regarding the issue and investments.
Investment banks also aid in the sale of
securities in right time.
They also help to facilitate mergers and
acquisitions, reorganizations and broker
trades for both institutions and private

A fully operating investment bank is usually

referred to a financial and banking organization,
which provides both financial as well as advisory
banking services to their clients.
Apart from that, an investment bank even deals
with research, marketing and sales of a range of
financial products like commodities, currency,
credit, equities etc.
Eg-SBI Capital market, Yes Bank Limited, Kotak
Investment Banking, Citi Bank India,Bajaj
Capital, UTI Securities Ltd.,IDFC,ICICI Securities,
Tata Investment Corp.Ltd.

 Investment Banks Services1.

 2.

5.Innovation in Banking-E banking

Banks have traditionally been in the forefront for using
technology to improve their products, services and
efficiency.
They have, over a long time, been using electronic and
telecommunication networks for delivering a wide
range of value added products and services.
The delivery channels include direct dial up
connections, private networks, public networks etc and
the devices include telephone, Personal Computers
including the Automated Teller Machines ,mobiles etc.
Electronic banking is an umbrella term for the
process by which customer may perform banking
transactions electronically without visiting banks
physically .

 Therefore transactions related to bank activities via

Electronic Mean and medium is called electronic
Banking.
E BANKING CLASSIFICATION1.Telephone bankingis a service provided by
afinancial institution, that enablescustomersof the
financial institution to performfinancial transactions
over the telephone, without the need to visit a bank
branch orautomated teller machine.
2.Online banking(orInternet banking) allows
customers of afinancial institutionto conduct
financial transactions on a secure website operated
by the institution, which can be
aretailorvirtualbank,credit unionor society. It may
include of any transactions related to online usage.

3.Mobile banking(also known as MBanking, m banking) is a term used for

performing balance checks, account
transactions, payments, credit applications
and other banking transactions through a
mobile device such as a mobile
phoneorPersonal Digital Assistant(PDA).
4. Automated Teller Machine (ATM) means
computerized machine that permits bank
customers to gain access to their accounts
and permit them to conduct some limited
scale banking transactions with a
magnetically encoded plastic card and a code
number.
5. Electronic Funds Transfer (EFT) is a

Advantages and Disadvantages1.Advantages It's generally secure.

It gives twenty-four-hour access.
You can access your account from virtually anywhere.
It is generally faster than going to the bank and
standing in long lines is time-consuming.
Quick communication between banker and customer.
Serves to large group of customers.
Database developing is easy and accurate for banks.
Efficient services
Non interest services like credit cards, debit
cards,ATMS etc.

2.Disadvantages-

Online banking is generally secure, but it

certainly isn'talwayssecure.
Startup costs of devices like Computer
Inadequate knowledge of computer
Legal Issues
Training is required for employees
Restricted business-some bank services
required postal services like deposits, pin
number etc.
Lack of skilled personnel

6.Introduction to NBFCs

Non-bank financial companies(NBFCs)

arefinancial institutionsthat
providebankingservices without meeting the
legal definition of abank, i.e. one that does
not hold abanking license.
These institutions typically are restricted from
taking deposits from the public depending on
the jurisdiction.
Operations of these institutions are often still
covered under a countriesbanking
regulations.
The specific banking products that can be
offered by NBFCs depends on the jurisdiction,
and may include services such asloansand
credit facilities, savings products, investments
andmoney transfer services.
Eg. BAJAJ AUTO FINANCE LTD., CHADHA
FINANCE PV MUTHOOT LEASING & FINANCE
LTD T LTD, DHANALAXMI MOTORS FINANCE
PVT LTD ect.