Analysis of Role of Reserve Bank of India and the Banking Sector in India

8/10/2019 Analysis of Role of Reserve Bank of India and the Banking Sector in India

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Analysis of Role of

Reserve Bank of

India and the

banking sector in

India

Submitted by:

Ankit Bohra 13069

Davis N 13079Kunal Bhagat 13089

Nirmal Kumar J 13099

Shrabani Som 13109

Varun Sharma 13119



Table of ContentsBanking Sector ........................................................................................................................................ 2

Role of Banks in the Economy ................................................................................................................. 3

Capital Formation: .............................................................................................................................. 3

Support to the Capital Market: ........................................................................................................... 3

Rupee Loans: ....................................................................................................................................... 3

Foreign Currency Loans: ..................................................................................................................... 4

Subscription to Debentures and Guarantees ..................................................................................... 4

Assistance to Backward Areas: ........................................................................................................... 4

Promotion of New Entrepreneurs: ..................................................................................................... 4

Impact on Corporate Culture: ............................................................................................................. 5

Reserve Bank of India .......................................................................................................................... 6

The main functions of the Reserve Bank of India are: ........................................................................ 6

Issuer of currency ................................................................................................................................ 6

Banker to the Government ................................................................................................................. 7

Managing Government Securities ...................................................................................................... 7

Banker to Other Banks ........................................................................................................................ 7

Controller of Money Supply and Credit .............................................................................................. 8

Exchange Manager and Controller ..................................................................................................... 8

Publisher of Monetary Data and Other Data ...................................................................................... 8

Developmental and Promotional role of RBI ...................................................................................... 9

Development of the Financial System ............................................................................................ 9

Development of Agriculture ........................................................................................................... 9

Provision of Industrial Finance ........................................................................................................ 9

Provisions of Training ...................................................................................................................... 9

Collection of Data ............................................................................................................................ 9

Publication of the Reports .............................................................................................................. 9

Promotion of Banking Habits .......................................................................................................... 9

Promotion of Export through Refinance ....................................................................................... 10

Conclusion: ............................................................................................................................................ 10

References ............................................................................................................................................ 12



Banking Sectori

The Indian banking industry plays an important role in the economic development of the

country and is the most dominant segment of the financial sector. Banks help channel savings

to investments and encourage economic growth by allocating savings to investments that

have potential to yield higher returns. India’s banking system is a robust one and is classified

into commercial banks and co-operative credit institutions. Commercial banks include

Scheduled commercial banks (SCBs) and non-scheduled commercial banks. SCBs are further

classified into public sector banks (PSBs), private banks, foreign banks and regional rural

banks (RRBs). Co-operative credit institutions include the various co-operative banks.

ii



Role of Banks in the Economy iii

Capital Formation:

The significance of DFIs lies in their making available the means to utilize savings generated

in the economy, thus helping in capital formation. Capital formation implies the diversion of

the productive capacity of the economy to the making of capital goods which increases future

productive capacity. The process of Capital Formation involves three distinct but

interdependent activities, viz., saving financial intermediation and investment.

However, poor country/economy may be, there will be a need for institutions which allow

such savings, as are currently forthcoming, to be invested conveniently and safely and which

ensure that they are channelled into the most useful purposes.

A well-developed financial structure will therefore aid in the collections and disbursements of

investible funds and thereby contribute to the capital formation of the economy. Indian

capital market although still considered to be underdeveloped has been recording impressive

progress during the post-interdependence period.

Support to the Capital Market:

The basic purpose of DFIs particularly in the context of a developing economy, is to

accelerate the pace of economic development by increasing capital formation, inducing

investors and entrepreneurs, sealing the leakages of material and human resources by careful

allocation thereof, undertaking development activities, including promotion of industrial units

to fill the gaps in the industrial structure and by ensuring that no healthy projects suffer forwant of finance and/or technical services. Hence, the DFIs have to perform financial and

development functions on finance functions, there is a provision of adequate term finance and

in development functions there include providing of foreign currency loans, underwriting of

shares and debentures of industrial concerns, direct subscription to equity and preference

share capital, guaranteeing of deferred payments, conducting techno-economic surveys,

market and investment research and rendering of technical and administrative guidance to the

entrepreneurs.

Rupee Loans:

Rupee loans constitute more than 90 per cent of the total assistance sanctioned and disbursed.

This speaks eloquently on DFI’s obsession with term loans to the neglect of other forms of

assistance which are equally important. Term loans unsupplemented by other forms of

assistance had naturally put the borrowers, most of whom are small entrepreneurs, on to a

heavy burden of debt-servicing. Since term finance is just one of the inputs but not everything

for the entrepreneurs, they had to search for other sources and their abortive efforts to secure

other forms of assistance led to sickness in industrial units in many cases.





industrialization and effective utilization of industrial finance by industry. IDBI has created a

special technical assistance fund to support its various promotional activities. Over the years,

the scope of promotional activities has expanded to include programmes for up gradation of

skill of State level development banks and other industrial promotion agencies, conducting

special studies on important issues concerning industrial development, encouraging voluntaryagencies in implementing their programmes for the uplift of rural areas, village an cottage

industries, artisans and other weaker sections of the society.

Impact on Corporate Culture:

The project appraisal and follow-up of assisted projects by institutions through various

instruments, such as project monitoring and report of nominee directors on the Boards of

directors of assisted units, have been mutually rewarding. Through monitoring of assisted

projects, the institutions have been able to better appreciate the problems faced by industrial

units. It also has been possible for the corporate managements to recognize the fact that

interests of the assisted units and those of institutions do not conflict but coincide. Over theyears, institutions have succeeded in infusing a sense of constructive partnership with the

corporate sector. Institutions have been going through a continuous process of learning by

doing and are effecting improvements in their systems and procedures on the basis of their

cumulative experience.

The promoters of industrial projects now develop ideas into specific projects more carefully

and prepare project reports more systematically. Institutions insist on more critical evaluation

of technical feasibility demand factors, marketing strategies and project location and on

application of modern techniques of discounted cash flow, internal rate of return, economic

rate of return etc., in assessing the prospects of a project. This has produced a favorable

impact on the process of decision-making in the corporate seeking financial assistance from

institutions. In fact, such impact is not continued to projects assisted by them but also spreads

over to projects financed by the corporate sector on its own.

The association of institutions in the management of corporate bodies has considerably

facilitated the process of progressive professionalism of the corporate management.

Institutions have been able to convince the corporate managements to appropriately re-orient

their organizational structure, personal policies and planning and control systems. In many

cases, institutions have successfully inducted experts on the Boards of assisted companies. As

part of their project follow-up work and through their nominee directors, institutions have

also been able to bring about progressive adoption of modern management techniques, such

as corporate planning and performance budgeting in the assisted units. The progressive

professionalism of industrial management in India reflects one of the major qualitative

changes brought about by the institutions.



Reserve Bank of Indiaivv

Reserve Bank of India (RBI) is India's central bank - it formulates, implements and monitors

India's monetary policy. Reserve bank of India was established in 1935 and nationalized in

1949. It is fully owned by the Government of India and its headquarters are located in

Mumbai. RBI has 22 regional offices in the various state capitals of India. It has a majority

stake in the State Bank of India.

vi

The main functions of the Reserve Bank of India are:

As a central bank, the Reserve Bank has significant powers and duties to perform. For

smooth and speedy progress of the Indian Financial System, it has to perform some important

tasks. Among others it includes maintaining monetary and financial stability, to develop and

maintain stable payment system, to promote and develop financial infrastructure and to

regulate or control the financial institutions.

Issuer of currency

Except for issuing one rupee notes and coins, RBI is the sole authority for the issue of

currency in India. The Indian government issues one rupee notes and coins. Major currency is

in the form of RBI notes, such as notes in the denominations of two, five, ten, twenty, fifty,

one hundred, five hundred, and one thousand. Earlier, notes of higher denominations were

http://www.rbi.org.in/

http://www.money-transfer.in/statebankofindia.html

http://www.money-transfer.in/statebankofindia.html

http://www.rbi.org.in/





Holds some of the cash reserves of banks

Lends funds for short period

Provides centralized clearing and quick remittance facilities

RBI has the authority to statutorily ensure that the scheduled commercial banks deposit astipulated ratio of their total net liabilities. This ratio is known as cash reserve ratio [CRR].

However, banks can use these deposits to meet their temporary requirements for interbank

clearing as the maintenance of CRR is calculated based on the average balance over a period.

Controller of Money Supply and Credit

In a planned economy, the central bank plays an important role in controlling the paper

currency system and inflationary tendency. RBI has to regulate the claims of competing

banks on money supply and credit. RBI also needs to meet the credit requirements of the rest

of the banking system.

RBI needs to ensure promotion of maximum output, and maintain price stability and a high

rate of economic growth. To perform these functions effectively, RBI uses several control

instruments such as -

Open Market Operations

Changes in statutory reserve requirements for banks

Lending policies towards banks

Control over interest rate structure

Statutory liquidity ration of banks

Exchange Manager and Controller

RBI manages exchange control, and represents India as a member of the international

Monetary Fund [IMF]. Exchange control was first imposed on India in September 1939 when

World War II started and continues till date. Exchange control was imposed on both receipts

and payments of foreign exchange.

According to foreign exchange regulations, all foreign exchange receipts, whether on account

of export earnings, investment earnings, or capital receipts, whether of private or government

accounts, must be sold to RBI either directly or through authorized dealers. Most commercial

banks are authorized dealers of RBI.

Publisher of Monetary Data and Other Data

RBI maintains and provides all essential banking and other economic data, formulating and

critically evaluating the economic policies in India. In order to perform this function, RBI

collects, collates and publishes data regularly. Users can avail this data in the weekly

statements, the RBI monthly bulletin, annual report on currency and finance, and other

periodic publications.



Developmental and Promotional role 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 majordevelopment 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 BANKetc.

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, IDBI-1964, 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

Other major roles of RBI in the Indian Economy are:

Development of banking system

Development of financial institutions

Development of backward areas

Economic stability

Economic growth

Proper interest rate structure

Conclusion:India’s financial system has undergone development as part of the economic reform process

that began in 1990. This has resulted in the expansion of both the banking sector and the

stock market. However, India’s banking sector remains relatively small compared with those

of most East Asian economies, and there appears to be scope for further expansion.

Individual banks are also small by international standards. Furthermore, the corporate bond

market is still immature and has not yet started to develop on a significant scale.

India’s rapid growth since 2000 has been accompanied by a rise in the savings and

investment rates. Procurement of external financial resources by businesses has risen sharply,

and bank borrowing has played a significant role. This suggests that external financing can be

expected to remain a significant factor in the maintenance of high economic growth, and that

the continuing development of the banking sec-tor, including the improvement of financial

intermediation capabilities and efficiency with which funds are distributed, will be a priority.

There is also likely to be further growth in the demand for finance for infrastructure

development. In addition to the expansion of bank credit, there is also a need for steps to

maintain soundness, including the improvement of risk management capabilities, and the

reinforcement of regulation and supervision.

Banking reforms introduced since the 1990s have included the easing regulations that

restricted competition, and the introduction of prudential regulations. These changes have



resulted in the entry of private sector banks and foreign banks into the market, leading to

increased competition. To some extent, the reforms have also brought improvements in the

efficiency and soundness of banks and led to the expansion of bank credit. The banking

reform process can be seen as a positive factor that is steadily yielding benefits.

However, many issues remain. Factors affecting the size of the banking sector and the

expansion of credit include the fact that financial savings still account for only a small

percentage of household savings. Furthermore, while there has been an upward trend in the

percentage of credit provided to individuals, there has been a decline in the share going to the

industrial sector. Of particular concern is the stagnation of credit to small and medium

enterprises (SMEs). Improvement in these areas will require action to deal with a number of

structural problems. First, the government should review the statutory liquidity ratio (SLR),

which stipulates the percent-age of deposits that must be invested in government bonds.

Second, improvements are needed in priority sector lending, which are designed to expand

credit to agriculture and SMEs, since banks are unable to secure adequate returns. Third,India has implemented a financial inclusion policy with the aim of expanding the use of

formal finance, primarily through the expansion of a network of bank branches in the rural

areas. The effectiveness of this policy needs to be improved through diversification.

To increase the size of individual banks, the government should consider measures that will

encourage bank mergers while maintaining a competitive environment. A longer-term

priority will be a review of bank ownership by the government in order to improve the

competitiveness of public sector banks.

Some observers see the fact that the Indian banking sector has never experienced a majorfinancial crisis as evidence that there are no serious problems. However, the ratio of domestic

credit to GDP is not high by international standards, and the scale of individual banks is

relatively small. There are also characteristic systems, including priority sector lending and

government ownership of banks. India’s rapid growth since 2000 has been ac-companied by

increases in both savings and in-vestment rates. This process has also brought an increase in

external procurement of financial resources. This suggests that external financing plays an

important role in the achievement of high economic growth. Priorities in this context include

the structural expansion of bank credit through the expansion of financial savings, and the

improvement of the efficiency of financial intermediation and the allocation of financial

resources.

These goals will require further improvements in the efficiency of the banking sector, and the

setting of loan and deposit interest rates at levels that reflect market realities. Other essential

steps include a review of the statutory liquidity ratio (SLR) system and priority sector

lending, and the promotion of financial inclusion. When designing financial inclusion

systems, including priority sector lending, greater emphasis will need to be placed on

economic rationality. To expand financial savings, it will also be necessary to focus on

measures to reduce the number of informal sector enterprises, including the expansion of

rural employment. By further developing its banking sector and building a strong financialsystem, India should be able to look forward to sustained high growth over many years.



References

i rbidocs.rbi.org.in/rdocs/Speeches/PDFs/FIBACS130813.pdf ii http://en.wikipedia.org/wiki/Banking_in_India

iii www.herald.co.zw/role-of-banks-in-the-economy/

iv http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIB140520012.pdf

v http://rbidocs.rbi.org.in/rdocs/Content/PDFs/FUNCWWE080910.pdf

vi http://www.rbi.org.in/scripts/AboutUsDisplay.aspx?pg=OrganizationStructure.htm

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Analysis of Role of Reserve Bank of India and the Banking Sector in India