money and banking system mba ppt

7/31/2019 Money and Banking System MBA PPT

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MODULE-7

MONEY AND BANKING


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THE RESERVE BANK OF INDIA AND MONETARY

MANAGEMENT.

The reserve bank of India was inaugurated in April 1935 with a

share capital of Rs. 5 crores divided into shares of Rs. 100each fully paid up.

The entire share capital was, in the beginning , owned byprivate shareholder. The government of India held normal

value of Rs. 2,20,000 cr.

Act-1934 provided for the appointment by the centralgovernment of the Governor and two Deputy Governors (whowere also the director of central board),

the act also contained provisions governing the holding of theshares and the rate of dividend to be paid to share holder. Thereserve bank was nationalized in 1949.


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FUNCTIONS OF RBI

1935 - Inception as a private share holder bank.

1949 Nationalisation.

RBI engaged in building and improving thefinancial infrastructure for development.

Since its inception as a private share holder bank

and its nationalisation in 1949, functions and theworking of RBI have been expanded.


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FUNCTIONS OF RBI

ISSUE OF CURRENCY

2.BANKER TO GOVERNMENT

3. BANKERS BANK AND LEADER

OF

THE LAST RESORT

MONETARY FUNCTIONS NON-MONETARY FUNCTION

4. CONTROLLER OF CREDIT

5. CUSTODIAN OF FOREIGNEXCHANGE RESERVES

SUPERVISORY FUNCTIONS

PROMOTION FUNCTION


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FUNCTIONSOF RBI

1. Issue of Currency

2. Banker to Government

3. Controller of Credit

4. Custodian of Foreign Exchange Reserves andExchange Management

5. Development and promotional functions


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ISSUEOF CURRENCY

RBI Act of 1934, sole right of note issue.

Authority is given because RBI charged with the responsibilityof providing adequate money supply of currency for facilitatingtransactions of the Government.

Exchange and remittance requirements of banks and thepublic.

Issue of currency notes of every denomination , other thanone rupee coins and notes and subsidiary coins which areissued by the Central Government.

Indian coinage act, 1906, one rupee coins & notes issued by

the ministry of Finance.


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ISSUEOFCURRENCY

Issue of currency is backed by assets of differenttypes:

Minimum Reserve system RBI is required toensure Gold coin and bullion should not be lessthan the value of Rs. 115 crores.

Foreign securities of the minimum value of Rs. 85crores .

Finally minimum value of all these assets is Rs.200 crores.

Banker to Government:


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BANKERTO GOVERNMENT

RBI banker to Central Government.

Bank has the obligation to transact the bankingbusiness of the Government of India andaccordingly performs the following functions:

Accepts money on its behalf of the Governmentand makes payment on its behalf.

RBI financing government expenditure, done thruits several services.

The Bank provides advances to the Government for90 days.

It makes loans & advances to the States & localauthorities.

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BANKERTOTHE GOVERNMENT

RBI acts as agent of the government in respect ofIndias membership of International Monetary

Fund(IMF) and International Bank forReconstruction and world Development (worldBank)

RBI acts an advisor to the Government on bankingand financial matters.


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BANKERS BANK

RBI acts as a banker to other banks.

Acc. to the provisions of the Banking CompaniesAct of 1949. Every schedules Banks are required to

maintain a certain percentage of their deposits withRBI.

Provides finance to scheduled banks. They can

borrow on the basis of eligible securities.

RBI- always ready to come to the aid of banks.

RBI as lender of the last resort.


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CONTROLLEROF CREDIT

It regulates the quantity of credit and the rate at which it ismade available.

It controls the flow of money through general and selectivecontrols.

General quantitative control: Open Market Operations,Variable Reserve requirements and the bank rate.

Through the open market operations the RBI changes thecash or reserve with Banks, and thereby affects the creditcapacity of banks.

Through the changes in reserves to be kept under the methodof Variable Reserve Requirements, the reserve Bank directlydirectly affects the capacity of the Bank to create credit.


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RESERVESAND EXCHANGEMANAGEMENT

It holds most of the nations foreign exchange

reserves.

All dealings of the public in foreign exchange arerequired to be transacted only through authorizeddealers.


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DEVELOPMENTAND PROMOTION FUNCTIONS

RBI valuable work in aiding development, and promoting saving andbanking habits.

Example RBI helped in building up a financial infrastructure for economic growth.

This consists of such institutions as the Deposit Insurance Corporation The Agriculture Refinance and Development Corporation (now taken

over by the Bank for Agriculturral and Rural Development), The Industrial Finance Corporation of India. State Finance Corporations, Unit Trust of India. Industrial reconstruction corporation of India (1972) The Bank has developed co-operative credit movement to:

Encourage saving Eliminate money lenders from village RBIwith the help of ARDC provides long term finance to farmers.


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MONETARY SYSTEM

Composition of Indian Monetary system

Indian monetary system refers to the borrowing andlending of funds or to the demand for and supply offunds .

It consists of 1. Indian money market

2. Indian capital market

IMM- classified into organised sector & unorganisedsector.

Organised sector of the money market includes privatesector and public sector banks and also Foreign Banks.

Unorganised sector consists of indigenous bankersincluding the non-banking financial companies.


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RBI

Public sector

State Bank Group

Commercial Bank

SBI

Associates banks

Other nationalized

Private sector

Indian

Foreign

Regional rural bank

Co- operative banks

State cop

Central CoB

Primary credit societies

BANKING STRUCTURE IN INDIA


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Banking structure in India

Under the Reserve Bank of India Act 1934, banks wereclassified as scheduled and non-scheduled banks.

Scheduled banks are those which are entered in the

Second Schedule of RBI Act, 1934. which have paid upcapital and reserves of an aggregate value of not lessthat Rs. 5 lakhs and which satisfy RBI that their affairsare carried out in the interests of their depositors.

All commercial banks- Indian and foreign, regional ruralbanks and State Co-operative banks are scheduledbanks.


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BANKING STRUCUTRE IN INDIA

SCHEDULED BANKS Commercial banks are based on Profit.

Cooperative banks are based on cooperative principle

Commercial banks have been in existence for manydecades.

They mobilise savings in urban areas & make them availableto large and small industrial and trading units mainly for

working capital requirements.

After 1969 Commercial banks are broadly classified intonationalized or public sector banks and private sector banks.

State Bank of India and its associate banks along with

another 20 banks are the public sector banks.


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Nationalisation of Banks

The nationalisation of 14 major banks with deposits ofRs. 50 crores or more in July 1969 was historic andmomentous event in the history of India.

Why nationalisation?

In a free enterprise economy Commercial banks operatelike any other business and are mainly concerned withthe maximisation of their private gains without anysocial purpose.

Small industires and business units were continuouslyand consistently ignored and starved of funds eventhough Government policy was to encourage small, tiny

and cottage and village industries.


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Nationalisation of Banks

Agricultural credit was never seriously considered bybanks.Public funds were used to support anti-social and illegalactivities against the interest of the general public.It was for these reasons that the Government took over 14top commercial banks in July 1969.In 1980 again the Government took over another 6commercial banks altogether there are 20 nationalisedbanks.

Objective of Nationalisation:

PM- Indira Gandhi stated the nationalisation was meant for anearly relization of the objective of social control which were speltout as:

Removal of control of fewProvision of adequate credit for SSI and exportTo encourage entrepreneurs


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NARASIMHAN COMMITTEE RECOMMENDATIONS ON THE

BANKING SYSTEM IN INDIA.

Narasimhan Committee (1991) on the Banking System.

Indiaphenomenal expansion :geographical coverageFunctional spread of banking and financialsystem since bank nationalization in 1969.

Despite impressive quantitative achievements in :Resource mobilizationExtending the credit reach

Several distortions had, over the years, crept into thebanking and financial system.


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NARASIMHAN COMMITTEE ON THE


As a result, productivity and efficiency of the system hadsuffered:

its portfolio quality had badly deteriorated and

profitability had been eroded.

Several public sector banks and financial institutionshad become weak and incurring lose year after year,customer service was poor, their work technology

outmoded and they were unable to meet the challengesof a competitive environment.


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NARASIMHAN COMMITTEE ON THE


It was under these circumstances that the Governmentof India set up a high level committee with Mr. M.Narasimhan, a former Governor of the Reserve of Indiaas Chairman to examine all aspects relating to the

structure, organisation , functions and procedures of thefinancial system.

This committee on the Financial system submitted itsreport on November 1991.

Basic approach of this committee was primarilyinterested in improving the financial health of publicsector banks and development of financial institutions soas to make them viable and efficient to meet fully theemerging needs of the real economy.


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NARASIMHAN COMMITTEERECOMMENDATIONS-1991

A. On Directed Investment: SLR & CRR

B. On Directed Credit Programmes

C. On the Structure of Interest Rates

D. On Structural Reorganisation of the Banking structure.


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NARASIMHAN COMMITTEE RECOMMENDATIONS-1991

A. On Directed Investment: Committee gave 2important recommendations on SLR and CRR.

Statutory liquidity requirements: Govt. should give upimmediately the practice of using SLR as a majorinstrument of mobilising funds for the Govt. and thepublic sector financial institutions.

SLR returns FORM A Uneder section 42(2) of the RBIACT, 1934

Committee recommended that the Govt. should reducethe SLR from the present 38.5 % of the net demand and

time liabilities of banks to 25% over the next 5 years.

A reduction in the SLR levels would leave more fundswith banks for allocation to agriculture, industry, tradeetc.,


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CRR: Narasimhan Committee recommended thatRBI should rely on Open Market operationsincreasingly and reduce its dependence on CRR.

Committee proposed that CRR should beprogressively reduced from the present high level of15% to to 3 to 5 percent.

RBI should pay interest on impounded deposits of

banks above the basic minimum rate of interestequal to the level of banks on year deposits.

These recommendations would reduce the amountof idle cash balances kept by the banks with RBI

under CRR and release the amount for moreproductive and remunerative purposes.


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B. On Directed Credit Programmes : should bephased out.

Agriculture and small industry had already grownto a mature stage , do not require any special

support.

For another two decades of assistance with interestsubsidy were enough end.

Committee argued that the system of directed creditshould not be a regular programme.

It should be temporary and not a permanent one.


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C. On the structure of Interest Rates:

The Narasimhan Committee, 1991recommended that the level and structure ofinterest rates in country should be broadly

determined by the market forces.

The Committee, further proposed that RBIshould be the sole authority to simplify thestructure of interest rates.

The Bank rate should be the anchor rate and allother interest rates should be closely linked to it.


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D: On Structure Reorganization of the Banking structure

To bring about greater efficiency in Banking operations, NC1991 proposed a substantial reduction in the number of publicsector banks through mergers and acquisitions.

Acc. To the the committee, the broad pattern should consist of:

1. 3 or 4 large banks (including SBi) which international incharacter

2. 8 or 10 national banks with a network of branches thoughoutthe country engaged in general or universal banking

3. Local banks whose operations would be generally confined toa specific region

4. Rural banks would be confined to the rural areas whosebusiness would be predominantly engaged in financing ofagriculture & allied services


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THE END

money and banking system mba ppt

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