STRUCTURE AND ORGANISATION OF RBI: AN OVERVIEW

Submitted to:

Dr. Y. D. Papa Rao

Faculty, Law of Banking

Submitted by:

Viplav Baranwal

Roll No 144

Semester VII, B. A., LL. B (Hons.)

Submitted on:

26th October, 2013

Hidayatullah National Law University Raipur, Chhattisgarh

TABLE OF CONTENTS

_____________________________________________________

S. NO. PARTICULARS PAGE NO (s).

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1. Acknowledgment 4

2. Research Methodology 5

4. Introduction 5

5. Background Story 7

6. Structural Organization of Reserve Bank of India 8

7. Functions 13

8. Major Banking Sector Reforms since 1991 20

9. Conclusion 21

10. Bibliography 22

ACKNOWLEDGEMENTS

I feel highly elated to work on the topic.

The practical realization of this project has obligated the assistance of many persons. I express

my deepest regard and gratitude for our Faculty of Law of Banking. Their consistent supervision,

constant inspiration and invaluable guidance have been of immense help in understanding and

carrying out the nuances of the project report. I take this opportunity to also thank the University

for providing extensive database resources in the Library and through Internet.

Viplav Baranwal

Semester-VII

RESEARCH METHODOLOGY:

Secondary data has been used. The study is descriptive and analytical in nature.

Books and other reference as guided by Faculty of Law of Banking have been primarily helpful

in giving this project a firm structure. Websites, dictionaries and articles have also been referred.

INTRODUCTION

A bank is a financial institution that provides banking and other financial services to their

customers. A bank is generally understood as an institution which provides fundamental banking

services such as accepting deposits and providing loans. There are also nonbanking institutions

that provide certain banking services without meeting the legal definition of a bank. Banks are a

subset of the financial services industry.

Indian Banking Sector has gone through a series of reforms after the liberalization of the

economy and introduction of financial sector reforms. In the last two decades of changes

happening in the Indian Economy, the Banking Sector has played a pivotal role in giving a new

direction to economy. The changes in the banking sector can be summed up in two aspects – first

it is moving towards the global standards and norms and second the system of banking has

become more customers oriented now. A host of new financial products have been introduced

and the overall financial environment in the country is getting a lot more mature with people

taking interest in the new products. The apex court of India has played an important role in

molding the face of Indian Banking Sector.

The reserve bank of India is a central bank and was established in April 1, 1935 in accordance

with the provisions of reserve bank of India act 1934. The central office of RBI is located at

Mumbai since inception. Though originally the reserve bank of India was privately owned, since

nationalization in 1949, RBI is fully owned by the Government of India. It was inaugurated with

share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up. The Central Bank

is the apex body of the money market of every nation. In India, central bank is known as Reserve

Bank of India, in Bangladesh, it is referred as Bangladesh Bank, in USA it is called as Federal

Bank, in Europe it is known as European Central Bank. Irrespective of the name and the nation,

previously the roles and responsibilities of the central banks were confined to certain stereotype

activities such as controller of credit in the economy, lending the fund to the commercial banks

as the lender of the last resort, providing the loan and advances to the Government of the nation

in the form of deficit financing, controller of the foreign exchanges by devaluating and

revaluating the home currency to ensure that the value of the currency remains within a

particular predefined range as a policy resolution. In this respect, the RBI‟s role in banking

supervision has changed significantly from 1992 which should be considered as milestone year

in the history of Indian banking sector. RBI is governed by a central board (headed by a

governor) appointed by the central government of India. RBI has 22 regional offices across

India. The reserve bank of India was nationalized in the year 1949. The general superintendence

and direction of the bank is entrusted to central board of directors of 20 members, the Governor

and four deputy Governors, one Governmental official from the ministry of Finance, ten

nominated directors by the government to give representation to important elements in the

economic life of the country, and the four nominated director by the Central Government to

represent the four local boards with the headquarters at Mumbai, kolkata, Chennai and New

Delhi. Local Board consists of five members each central government appointed for a term of

four years to represent territorial and economic interests and the interests of cooperative and

indigenous banks.1

BACKGROUND STORY1 Prof.(Dr.) G.S. popli & Sima Kumari, An empirical study on the concept of Universal banking from India’s perspective, (September 16, 2013), ssrn.com/abstract=2315462

The great depression in USA during 1930 created a knee jerking effect in the global economy.

All on a sudden almost all the major banks in USA went for bankruptcy. The top management of

these banks siphoned their fund into European market and parked the fund into Swiss banks. It

was a bolt from the blue for all USA citizens who suddenly realized in one fine morning that

there was hardly any money in their bank accounts. As a result their purchasing power decreased

to a significant extent and all the macro economic variables such as income, employment, output

and price started to move to the downward direction in a vicious 6

circle. On the other hand, exorbitant amount of cash piled up in different banks of Switzerland

due to money laundering. Germany started to borrow fund on a continuous basis from the banks

of Switzerland to purchase the arms which would be used in war. This was considered as

sovereign debt of Germany. The fascist leader Hitler financed the entire expense of World War II

by borrowing the money from Swiss banks. At the end of World War II, German economy

crashed down and German was unable to repay their debts which created an adverse impact on

the fundamental of all the banks which were operating in Switzerland as huge bad debt was

accumulated in their books of account. The Basel Committee of Banking Supervision was

formed in 1945 to create a framework which can save the economy of the member nations.

Initially the G-7 nations and oil rich nations were the members of this committee. Basel

committee met in 1945, 1954, 1961, 1966 and 1972. The sudden collapse of Soviet Russia and

emergence of BRIC nations compelled Basel committee to include India as a member nation in

1984. Implementation of Basel accord took place in 1992 when waves of privatization,

liberalization and globalization entered in India.2

ORGANISATIONAL STRUCTURE OF RESERVE BANK OF INDIA2 The Changing Role of RBI in Bank Supervision with the Introduction of Risk Based Parameters, (September 16, 2013), SSRN.com-id2315462

RBI or Federal Reserve Bank of India is understood to be the central banking institution in India

that has the duty of controlling the financial policy of the Indian government. The organizational

Structure of Reserve bank of India can be studied in three different parts.

1. The central board of directors: It is the main committee of the central bank. The

directors here are being appointed by the government of India for the term of four years.

The central board of directors are vested with the organization and the management of

reserve bank of India. There are twenty members that constitute the central board of

directors. The twenty members are as follows:

One governor, who is appointed by the government of India and is the highest authority

of Reserve bank of India, The duration of his term, is of five years. The governor can also

be re-appointed.

Four governor’s deputy, also nominated by the central government for the term of five

years.

Fifteen directors, who are also appointed by the central government. Out of these fifteen

directors four directors are from four local boards each are nominated by the central

government.

Ten administrators nominated by the Central Government are among the consultants of

commerce, industries, finance, political economy and cooperation. The finance secretary

of the govt. of Republic of India is additionally nominated as Govt. officer within the

board. 10 administrators are nominated for a term of four years. The Governor acts as the

Chairman of the Central Board of administrators. In his absence a deputy Governor

nominative by the Governor, acts because the Chairman of the Central Board. The

Governor and 4 deputy Governors are full time officers of the Bank.

2. Local Boards or the Supportive Bodies: There are 4 local boards from the regional

areas of the four metros of the country namely, new Delhi, Kolkata, Mumbai and

Chennai. The local board is consisting of each 5 members, who are appointed by the

central government for the term of four years. They represent economic and territorial

interests as well as the interests of the indigenous banks.

3. Offices and Branches of Reserve Bank of India: The Federal Reserve Bank of India

has four zonal offices.  Nineteen of its regional offices are at the most state capitals and at

many major cities in India. Few of them are settled in Ahmadabad, Bhopal Bangalore,

Chandigarh, Delhi, Chennai, Guwahati, Jaipur, Hyderabad, Patna Kolkata, Mumbai

Lucknow, and Thiruvananthapuram. Besides, nine of its sub-offices are at Agartala,

Dehradun, Gangtok, Panaji Kochi, Ranchi, Raipur Shimla Shillong, and Srinagar.

The bank has additionally 2 coaching faculties for its officers, viz. Federal Reserve Bank

workers school at metropolis and school of Agricultural Banking at Pune. There are four Zonal

coaching Centres at Bombay, Chennai, metropolis and New Delhi.3

Departments of RBI

The various departments of RBI are given below:

1. Department of Information Technology

2. Department of Economic Analysis and Policy

3. Department of Statistical Analysis and Computer Services

4. Monetary Policy Department

5. Premises Department

6. Secretary's Department

7. Press Relations Division

8. Exchange Control Department

9. Rural Planning and Credit Department

10. Financial Institutions Division

11. Department of Banking Supervision

3 Structure and Organization of Reserve bank of India, (September 13, 2013) http://sprinki.quinki.com/index.php/2013/07/structure-of-reserve-bank-of-india/

12. Department of Banking Operations and Development

13. Department of Financial Companies

14. Department of Non-Banking Supervision

15. Department of Administration and Personnel Management

16. Human Resources Development Department

17. Deposit Insurance and Credit Guarantee Corporation

18. Inspection Department

19. Urban Banks Department

20. Department of Currency Management

21. Department of External Investments and Operations

22. Department of Expenditure and Budgetary Control

23. Department of Government and Bank Accounts the local

24. Internal Debt Management Cell

25. Industrial and Export Credit Department

26. Legal Department4

CENTRAL BOARD OF DIRECTORS

4 Nupur Singh, Management and Administration of Reserve Bank of India, (September 12, 2013), http://www.preservearticles.com/2012033129470/management-and-administration-of-reserve-bank-of-india.html

GOVERNOR Dr. Raghuram Rajan

DEPUTY GOVERNORS

Dr. K. C. CHAKRABARTY SHRI ANAND SINHA SHRI H.R. KHAN

Dr. Urjit R. Patel

Co-ordination Work

Executive Directors

Shri G.Gopalakrishna

Secretary's Department (Shri Bazil Shaikh,

PCGM & Secretary)

Department of Banking Supervision (Shri G. Jaganmohan Rao, PCGM)

Financial Stability Unit(Smt. R.G. Warrier, CGM)

Shri D.K. Mohanty

Shri S. Karuppasamy (also First Appellate Authority under Right to Information Act)

Urban Banks Department (Shri A. K. Bera, PCGM)

Premises Department (Shri K. R. Ananda, PCGM)

Legal Department(Shri G.S. Hegde, Principal Legal

Adviser)

Shri R. Gandhi

Human Resource Management Department

(Shri U. S. Paliwal, PCGM)

Department of Currency Management

(Shri B. P. Vijayendra, PCGM)

Central Security Cell (Shri D. Sivanandan,

Security Adviser)

Internal Debt Management Department

(Shri K.K. Vohra, PCGM)

Shri P. Vijaya Bhaskar

Department of Non-Banking Supervision

(Shri N. S. Vishwanathan, PCGM)

Department of Expenditure & Budgetary Control

(Shri S. Ganesh, PCGM)

Risk Monitoring Department (Shri Rajeshwar Rao, CGM)

Shri B. MahapatraDepartment of Banking Operations

and Development(Shri Chandan Sinha, PCGM)

Department of Government & Bank Accounts

(Shri S. Ganesh Kumar, CGM-i-C)

Inspection Department (Shri M. Sebastian, PCGM)

Shri G. Padmanabhan

Department of Information Technology

(Dr. A. S. Ramasastri, CGM-in- Charge)

Department of Payment and Settlement Systems

(Shri Vijay Chugh, CGM)

Foreign Exchange Department (Shri R. N. Kar, CGM-in-Charge)

Department of External Investments& Operations

(Smt. Madumita Sarkar Deb, CGM -in– Charge)

Shri Jasbir Singh

Dr. (Smt.) Deepali Pant Joshi (also Alternate Appellate Authority under Right to

Information Act)

Customer Service Department (Smt. Supriya Pattnaik, Chief

General Manager)

Rural Planning & Credit Department

(Shri A. Udgata, PCGM)

FUNCTIONSThe RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the statutory basis

of the functioning of the bank. The bank was constituted for the need of following:

- To regulate the issues of banknotes.

- To maintain reserves with a view to securing monetary stability

- To operate the credit and currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows:

Bank of Issue: The RBI formulates, implements, and monitors the monitory policy. Its

main objective is maintaining price stability and ensuring adequate flow of credit to

productive sector.

Regulator-Supervisor of the financial system: RBI prescribes broad parameters of

banking operations within which the country’s banking and financial system functions.

Their main objective is to maintain public confidence in the system, protect depositor’s

interest and provide cost effective banking services to the public.

Manager of exchange control: The manager of exchange control department manages

the foreign exchange, according to the foreign exchange management act, 1999. The

manager’s main objective is to facilitate external trade and payment and promote orderly

development and maintenance of foreign exchange market in India.

Issuer of currency: A person who works as an issuer, issues and exchanges or destroys

the currency and coins that are not fit for circulation. His main objective is to give the

public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role: The RBI performs the wide range of promotional functions to

support national objectives such as contests, coupons maintaining good public relations

and many more.

Related functions: There are also some of the related functions to the above mentioned

main functions. They are such as, banker to the government, banker to banks etc.

Banker to government performs merchant banking function for the central and the state

governments; also acts as their banker.

Banker to banks maintains banking accounts to all scheduled banks.

Controller of Credit: RBI performs the following tasks:

It holds the cash reserves of all the scheduled banks.

It controls the credit operations of banks through quantitative and qualitative controls.

It controls the banking system through the system of licensing, inspection and calling for

information.

It acts as the lender of the last resort by providing rediscount facilities to scheduled

banks. 5

Supervisory Functions: In addition to its traditional central banking functions, the

Reserve bank performs 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 authorized 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 variety of 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 specialized financing agencies.

5 Commercial bank of India: A Beginner’s Module,(September 13, 2013) www.nseindia.com/content/ncfm/ncfm_CBBM_workbook.pdf

Supervisory role of the Central Bank: Trust in policymaking institutions is an essential

aspect of good governance in democracy. Institutional trust, which implies one‟s

prediction that everybody can rely on benevolent and competent policies of a given

institution is important to a policy making body because its legitimacy and policy

efficacy depend on it. If the common perception of the citizens of the nation is that an

institution is not enough trustworthy, they may not adhere to its policy decisions or they

may act with the purpose of undermining the authority of the institution. In India, private

banks are participating in para banking activities by creating subsidiary. For instance,

ICICI bank is doing the core banking activities where its subsidiary ICICI Direct is

dealing with the brokerage business and its other subsidiaries such as ICICI Prudential

and ICICI Lombard are offering insurance services. Kotak Mahindra Bank is offering

core banking services, its subsidiary Kotak Mahindra Asset Management Company is

selling the mutual fund, Kotak securities is providing the brokerage service. On the other

hand HDFC is a holding company which is NBFC and providing finance for housing

development purpose. It is offering banking services by its subsidiary HDFC bank; it is

dealing the mutual fund by its subsidiary HDFC Asset Management Company, it is

offering insurance service by its subsidiaries HDFC Standard Life Insurance Limited and

HDFC Ergo General Insurance Company Limited. PSU banks are dealing with para-

banking activities by creating separate division. The State bank of India is offering core

banking activities, SBI Mutual fund is dealing with the business of asset management

company, SBI life is playing in Life insurance market. Still Indian banking sector is more

or less quite conservative by nature as it did not allow the banking company to do any

other non- banking business. Similarly players of any other sector except banking are not

yet provided the banking licenses by RBI. As a result the risk of money laundering as

well as fund siphoning can be reduced to a significant extent. The Parliament of India has

approved the Banking Law bill on 18th December 2012 which could eventually see many

of India‟s largest business houses return to banking sector from where they were

compelled to exit after the ex-Prime Minister of India , Mrs Indira Gandhi nationalized

the banks. The bill has created the provision that voting right in Private Banks will be

confined to the shareholders who have the ownership of at least 26% and voting right in

Public Sector Undertaking Banks will be restricted to the shareholders who have the

ownership of at least 10%. The minority shareholders can exercise their franchise only by

referendum where opinions of the shareholders are taken either in favour or against of

any motion. Apart from these, according to this new bill, RBI will have the power to

supersede the boards of the bank to inspect the books of accounts of the associate

companies of the bank and RBI will have the power to inspect the books of other

subsidiaries of the bank with the concerned regulator. The bill allowed the State owned

banks to raise capital through right issue and the competitive commission of India will

regulate anti competitive practices and would also have power to approve the corporate

restructuring such as merger and acquisition (ETIG Database).

Earlier RBI used to follow the CAMEL model for supervising the banks. According to this

approach, emphasis was provided to the few parameters such as capital, asset quality of the bank,

management quality, earning quality or net interest margin of the bank, liquidity position of the

bank as well as sensitivity of the banks toward the market risk. Apart from CAMEL, offsite

monitory and surveillance system, consolidated financial statement and consolidated prudential

report, revised long form audit report were used as the tools of supervision by the RBI. A gradual

slow but steady and silent shift took place from CAMEL based supervision to risk based

supervision. The basic purpose of risk based supervision is to develop a risk profiling for each

bank. A typical risk profile document as mentioned by RBI incorporates CAMEL‟s rating with

trends, detail description of key risk features captured under each CAMEL component, summary

of key business risks, SWOT analysis as well as sensitivity analysis (Yamanandra, 2003).The

risk based supervision provides major emphasis on risk where risk arises from the asset liability

mismatch in banking sector. A vital issue in the strategic bank planning is asset and Liability

Management (ALM).It is the assessment and management of financial, operational, business

functions which are endogenous by nature and management as well as mitigate different types of

risks which are exogenous by nature. The objective of ALM is to maximize returns through

efficient fund allocation given an acceptable risk structure. ALM is a multidimensional process,

requiring simultaneous interactions among different dimensions. If the simultaneous nature of

ALM is discarded, decreasing risk in one dimension may result in unexpected increases in other

risks (Tektas, 2009). The excessive off balance sheet exposure is another area of risk faced by

the banks.6

Performance Measurement of the Bank: RBI has to supervise the performance of

different PSU banks, the old generation private banks, the new generation private banks

as well the foreign banks. There are multifaceted approaches for the performance

evaluation of the different banks, but hardly any standardized approach is prevalent. The

performance of a bank can be analyzed by the four prolonged approach which is

composed of growth, size, sustainability of operations and risk management. Growth

incorporates growth rate in demand deposit, growth rate in loan and advances, growth

rate in core fee income, growth rate in operating profit, growth rate in total deposit and

growth rate in net interest income. Size incorporates volume and value of demand

deposit, loans and advances, Balance Sheet size of the bank, total number of branches

operating, total number of ATMs as well as total number of employees of the bank both

in the national and international level. Sustainability of the operation includes asset

quality, productivity and efficiency of the bank. Asset quality incorporates growth rate of

Non Performing Asset, NPA provision coverage and the ratio of net NPA to net

advances. Productivity is measured by cost to average assets ratio, operating profit per

branch, operating profit per employee. Efficiency is judged by cost to income ratio, ratio

of operating profit to total income, return on average assets, non interest income to total

income, return on average net worth, net interest income to average working funds, net

interest income , the ratio of net interest income to total average assets and cost of fund.

Risk is measured by the capital adequacy ratio and the ratio of Tier 1 capital to total

shareholder„s capital (Roy, 2012). A new conceptual dimension is identified to measure

the risk of the bank which is known as Knock out ratio. The knock out ratio is computed

by the ratio of gross NPA to Tier 1 capital of the bank. A bank with high knockout ratio

indicates banks credit appraisal procedure is faulty for which non performing loans are

accumulated.

6 Functions of RBI, (September 13, 2013) http://www.technofunc.com/banking/index.php/banking-awareness/banking-in-india/item/functions-of-rbi-reserve-bank-of-india

Credit Control Policies of the Central Bank: The Central bank has the supreme

authority to decide about the monetary policy of a nation. The liquidity control

mechanism followed by the RBI consists of both qualitative and quantitative policy.

Usually the quantitative controls are alternatively termed as direct control which is

equally applicable to the all sectors. The instruments of the quantitative control includes

Bank Rate, Open Market Operations (OMO), Cash Reserve Ratio (CRR), Statutory

Liquidity Ratio (SLR), Repurchase Offer (REPO) and Reverse Repurchase Offer(Reverse

REPO). When the purchasing power of the citizen of the nation is suffering from high

inflation, the RBI will raise Bank Rate, CRR, SLR, Repo and Reverse Repo rate to

reduce the credit creating capacity of the commercial banks. Simultaneously the RBI will

prefer to sell their securities to the commercial bank so that excess liquidity of the bank

can be reduced which will automatically curb the lending power of the banks. When the

Government of India smells the rat of recession, RBI reduces the bank rate, CRR, SLR,

repo and reverse repo rate to boost the credit creating ability of the banks. Similarly RBI

prefers to buy the securities from commercial banks to enhance the liquidity position of

the commercial banks. The qualitative control or indirect control implies selective control

as it is not applied to all the sectors. Selective control includes regulation of margin

requirement, moral suasion and regulations of consumer credit. If the inflation rate is

quite high, RBI will raise the margin requirement which will automatically reduce the

lending power of the bank. Similarly RBI will make an appeal to all the commercial

banks not to accept those collaterals which were accepted earlier. Enhancing the standard

of collaterals, by default RBI will be able to reduce the circulation of money within the

economy. Another stringent action RBI can take by reducing the loan ceiling for each

listed items and decreasing the number of installments within which debtors have to

repay the entire loan. On the contrary, in the anticipation of recession, depression or

liquidity crunch in the coming future, RBI reduces the margin requirement, increases the

credit ceiling as well as make a moral appeal to the commercial banks to accept

comparatively inferior quality collateral just to ensure enough liquidity flow in the

economy.

Sterilization Policy of the Central Bank: RBI plays the crucial role of sterilization

mechanism. In the era of globalization, India is following flexible exchange rate policy

where the exchange rate is market determined but the government reserves the provision

to intervene in extreme cases. It is known as dirty float mechanism. When there is an

excess inflow of the foreign fund in the economy as Foreign Institutional Investors (FIIs)

are penetrating into Indian Market in order to enjoy the interest rate arbitrage, as an

immediate effect, there will be an appreciation of the home currency. If the home

currency appreciates beyond a certain level due to continuous buying pressure, exporting

sectors are likely to suffer a huge jolt. RBI usually intervenes in the process by buying

the dollar and selling rupee. Technically it is injection of the liquidity in the body of the

economy by RBI to stop further appreciation of home currency. To hedge the risk of

inflation, RBI issues the Government securities such as treasury bills which are known as

Market Stabilization Schemes. These T bills are held to maturity in nature as they are not

traded in the secondary market. These bills are issued to take away the excess liquidity

from the economy. On the other hand, once there is doom and gloom situation in the

economy, FIIs are pulling out their funds from the domestic market. Due to excessive

selling pressure, home currency depreciates with respect to foreign currency which

creates a devastating effect in the importing sector. If the foreign currency depreciates

beyond a certain level, current account deficit of the nation will be wider. Under these

circumstances, RBI comes as rescuer by selling the dollar and buying the rupee. This

process is known as absorption of the liquidity from the economy. The injection and

absorption of the liquidity to the economy by RBI is known as sterilization process which

actually immunes the nation against the volatility of exchange rate to a significant extent.7

MAJOR BANKING SECTOR REFORMS SINCE 1991

7 Information Portal,RBI(September 12, 2013) http://iknow.co.in/rbi.html

The economic reforms initiated in 1991 also embraced the banking system. Following are the

major reforms aimed at improving efficiency, productivity and profitability of banks.

• New banks licenced in private sector to inject competition in the system.10 in 1993 and 2 more

in 2003. Another lot of new banks will be licenced in the next few months.

• FDI+FII up to 74% allowed in private sector banks.

• Listing of PSBs on stock exchanges and allowing them to access capital markets for

augmenting their equity, subject to maintaining Government shareholding at a minimum of

51%. Private shareholders represented on the Board of PSBs.

• Progressive reduction in statutory pre-emption (SLR and CRR) to improve the resource base of

banks so as to expand credit available to private sector.SLR currently at 23% (38.5% in 1991)

and CRR at 4% (15% in 1991).

• Adoption of international best practices in banking regulation. Introduction of prudential norms

on capital adequacy, IRAC (income recognition, asset classification, provisioning), exposure

norms etc.

• Phased liberalisation of branch licensing. Banks can now open branches in Tier 2 to

Tier 6 centres without prior approval from the Reserve Bank.

• Deregulation of a complex structure of deposit and lending interest rates to strengthen

competitive impluses, improve allocative efficiency and strengthen the transmission of

monetary policy.

• Base rate (floor rate for lending) introduced (July 2010). Prescription of an interest rate floor on

savings deposit rate withdrawn (October 2011).

• Functional autonomy to PSBs.

• Use of information technology to improve the efficiency and productivity, enhance the

payment and settlement systems and deepen financial inclusion

• Strengthening of Know Your Customer (KYC) and Anti-money Laundering (AML) norms;

making banking less prone to financial abuse.

• Improvements in the risk management culture of banks.8

CONCLUSION8 DR. Duvvury Subbarao, Banking Structure in India: Looking Ahead by Looking Back (September 13, 2013), http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=828

It is a universal saying that change is the only constant in every sphere of life. Same is applicable

for RBI also. Majority of the Indian banks have more or less successfully implemented Basel II

norms. One of the pillars of Basel II is emphasizing on minimum capital requirement which

implies if the credit rating of bank is outstanding, they can maintain lesser capital than the

stipulated norms. Earlier credit ratings of the banks are being done by the external credit rating

agencies such as CRISIL, ICRA etc. According to the modern IRB based approach, banks are

asked to develop its own internal credit rating system. Few Indian banks have already developed

their own internal credit rating framework such as SBI, ICICI bank and HDFC bank. But the

majority of Indian banks are striving to implement this IRB approach. More over Indian banks

are passing through a critical phase as this is the conversion phase from Basel II to Basel III. The

implementation of Basel III requires huge amount of capital. Simultaneously maintaining an

extraordinarily higher capital adequacy ratio is also not the proper solution. Nobody can deny the

fact that maintenance of certain amount of capital adequacy ratio is required as it hedges the risk

against liquidity crisis. Similarly it is equally true that an extremely high capital adequacy ratio

reduces the credit creating capacity of the bank which creates an adverse impact on the profit

margin of the bank. Another tendency has been observed that in order to clean their balance

sheets, banks are transferring their non performing asset to its Corporate Debt Restructuring

(CDR) cell and CDRs are restructuring the loan by lowering the interest rate and enhancing the

loan repayment schedule without addressing the 28

fundamental problems. In order to stimulate capital market, the RBI is ultimately compelled to

reduce CRR, Repo and Reverse Repo rate by 25 basis points on 29th January 2012 which will be

effective from the fortnight beginning February 9, 2013(source: Economic Times on line

database as on 29.1.2013) The Repo rate has been reduced to 7.75%, Reverse Repo rate has been

reduced to 6.75% and CRR has been reduced to 4% which enhances the probability that inflation

rate may go up in near future. Therefore the RBI has to simultaneously discharge various roles

such as role of supervisor, monitor, liquidity controller as well as policy maker in such a way so

that maximum benefit can be provided to all stakeholders of the nation.

BIBLIOGRAPHY

Internet References

http://sprinki.quinki.com/index.php/2013/07/structure-of-reserve-bank-of-india/

http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=828

http://iknow.co.in/rbi.html

http://www.technofunc.com/banking/index.php/banking-awareness/banking-in-india/item/

functions-of-rbi-reserve-bank-of-india

www.nseindia.com/content/ncfm/ncfm_CBBM_workbook.pdf

http://www.preservearticles.com/2012033129470/management-and-administration-of-reserve-

bank-of-india.html