Finance Adda Paid Lecture
Indian Financial System
What is a bank?
Wilful defaulter default money equal to or over 25 lacs.
Large defaulters default money equal to or over 1 lac.
|
Basis |
Central
Bank |
Commercial
Bank |
|
Meaning |
Central
Bank is the banker of all the banks. It is an apex body. |
Commercial
Banks operate under the control of the central bank. It is an individual
unit. |
|
Control
on money supply |
Central bank controls the flow of credit
within the economy. |
Commercial banks create credit within the
economy. |
|
Objective |
The
objective of Central Bank is social welfare. |
The
objective of commercial banks are profit maximizations. |
|
Function |
It is the banker to the government. |
Commercial banks are bankers of the common
public. |
|
Custody of foreign exchange |
Central
Bank is the custodian of nation’s foreign exchange reserve. |
A
commercial bank is not the custodian of foreign exchange reserves. |
|
Currency
issue |
Central bank has the authority to issue
currency. |
A commercial bank does not have such
rights. |
Evolution
of Central Bank
The
evolution of central banks can be traced back to the seventeenth century when
Sveriges Riksbank, the Swedish Central Bank was set up in 1668.
The
Bank of England was founded in 1694. The Central Bank of the United States, the
Federal Reserve established in 1914, was relatively a late entrant to the
Central Banking arena.
The
RBI, India’s central bank operations in 1935.
Origins
of RBI
1926:
The Royal Commission on Indian Currency and Finance recommended creation of a
central bank for India.
1927:
A bill to give effect to the above recommendation was introduced in the
Legislative Assembly, but was later withdrawn due to lack of agreement among various
sections of people.
1933:
The White Paper on Indian Constitutional Reforms recommended the creation of a
Reserve Bank. A fresh bill was introduced in the Legislative Assembly.
1934:
The Bill was passed and received the Governor General’s assent.
1935:
The Reserve Bank commenced operations as India’s central bank on April 1 as a
private shareholders’ bank with a paid up capital of rupees five crore (rupees
fifty million).
1942:
The Reserve Bank ceased to be the
currency issuing authority of Burma (now Myanmar).
1947:
The RBI stopped acting as banker to Govt of Burma.
1948:
The RBI stopped rendering central banking services to Pakistan.
1949:
The GoI nationalized the RBI under the Reserve Bank (Transfer of Public Ownership)
Act, 1948.
Central
Board is assisted by three Committees
1. Committee of Central Board (CCB)
2. Board for Financial Supervision
(BFS)
3. Board for Regulation and
Supervision of Payment and Settlement Systems (BPSS)
These
committees are headed by the Governor.
In
addition, the Central Board also has five Sub-Committees: the Audit and Risk
Management Sub-Committee (ARMS); the Human Resource Management Sub-Committee (HRM-SC);
the Building Sub-Committee (BSC); the Information Technology Sub-Committee (IT-SC)
and the Strategy Sub-Committee. These sub-committees are typically headed by an
external Director.
Board for
Financial Supervision
In terms of regulations formulated by the Central Board under Section 58 of the RBI Act, the Board for Financial Supervision (BFS) was constituted in November 1994, as a committee of the Central Board, to undertake integrated supervision of different sectors of the financial system.
The Reserve Bank Governor is the Chairman of the BFS and the
Deputy Governors are the ex officio members. One Deputy Governor, usually the Deputy
Governor incharge of banking regulation and supervision, is nominated as the
Vice-Chairperson and four directors from the Reserve Bank’s Central Board are
nominated as members of the Board by Governors.
Board for
Regulation and Supervision of Payment and Settlement Systems (BPSS)
The
Board for Regulation and Supervision of Payment and Settlement Systems provides
an oversight and direction for policy initiatives on payment and settlement
systems within the country.
The
Reserve Bank Governor is the Chairman of the BPSS, while two Deputy Governors,
three Directors of the Central Board and some permanent invitees with domain
expertise are its members.
Subsidiaries
of RBI
1. Deposit Insurance and Credit
Guarantee Corporation (DICGC)
·
The DICGC insures all deposits (such as savings, fixed,
current, and recurring deposits) with eligible banks except the following:
·
Deposits of foreign govt
·
Deposits of Central / State govt
·
Inter bank deposits
·
Deposits of the State Land Development Banks with the State
Cooperative bank
·
Any amount due on account of any deposit received outside
India
·
Any amount due to account of any deposit received outside
India
·
Any amount, which has been specifically exempted by the corporation
with the previous approval of Reserve Bank of India.
·
Every eligible bank depositor is insured upto a maximum of
Rs. 5,00,000 (Rupees Five Lakh) for both principal and interest amount held by
him.
2. Bharatiya Reserve Bank Note
Mudran Private Limited (BRBNMPL)
·
The Reserve Bank established BRBNMPL in Feb 1995 as a wholly
owned subsidiary to augment the production of bank notes in India and to enable
bridging of the gap between supply and demand for bank notes in the country.
The BRBNMPL has been registered as a Public Limited Company under the Companies
Act, 1956 with Registered and Corporate Office situated in Bengaluru.
·
The company manages two Presses, one at Mysore in Karnataka
and the other at Salboni West Bengal.
·
Apart from this, RBI has two more printing presses both owned
by the GoI:
Nasik (Maharashtra)
Dewas (Madhya
Pradesh)
·
Coins are minted in four mints owned by the GoI. The mints
are located in Mumbai, Hyderabad, Calcutta, and Noida.
3. Reserve Bank Information
Technology Private Limited (ReBIT)
Estd: 2016
ReBIT delivers and manages
IT projects of RBI.
4. Indian Financial
Technology and Allied Services (IFTAS)
v Wholly owned subsidiary of
RBI.
v The IFTAS has taken over the
o Indian Financial Network
(INFINITE),
o Structured Financial
Messaging System (SFMS)
o Indian Banking Community
Cloud (IBCC)
From IDRBT.
Reserve Bank Innovation Hub
The Reserve Bank Innovation
Hub is a wholly owned subsidiary of the RBI set-up to promote and facilitate an
environment that accelerates innovation across the financial sector.
HQ- Bengaluru
The Hub has an independent
Board with Sri Senapathy (Kris) Gopalkrishnan as the Chairman and other eminent
persons from industry and academia as members.
Functions of RBI
1. Regulatory and Supervisory
Function of RBI
Regulatory
functions
Regulation of
Commercial banks
a. Prudential norms: Prudential
norms are the guidelines issued by the banking regulator to ensure safety and soundness
of banks.
b. Income recognition and asset
classification and provisioning (IRAC) norms: Asset Quality-
In the course of
their business, banks lend and invest in various classes of assets, some of
which may turn non-performing either due to the systemic factors such as economic
downturn or idiosyncratic factors specific to the borrower.
c. Basel guidelines on Capital
and Liquidity
Under the Basel
Capital Adequacy framework, banks’ capital requirements have been linked to the
risk profile of their asset classes, requiring riskier banks to keep larger
buffers.
d. Exposure norms: As a
prudential measure aimed at better risk management and avoidance of
concentration of the credit risks, the RBI has fixed on bank’s exposures to an
individual business concern and to business concerns of a group.
e. Investment Guidelines
The RBI of issues
guidelines for the investment portfolio of banks. In terms of these guidelines,
the entire investment portfolio of the banks should be classified under three
categories-
Held to maturity
(HTM)
Available for
sales (AFS)
Held for Trading
(HFT)
f.
Resolution of stressed assets
The Banking Regulation
(Amendment) Act, 2017, empowered the RBI to issue directions to the banks for
resolution of stressed assets, including referring assets to the insolvency and
Bankruptcy Code 2016 (IBC).
g. Regulation of interest rates
h. Know Your Customer norms
i.
Corporate governance
Regulation of All India
Financial Institutions:
AIFIs have been constituted
under their own statutes which, along with the provisions of the RBI Act, 1934,
provide the legal framework for their regulation.
Credit Information
Companies:
Governed by the provisions
of Credit Information Companies (Regulation) Act, 2005, Credit Information
Companies Rules 2006 and Credit Information Companies Regulation, 2006.
2. Supervision of Commercial
Banks
Enforcement
of rules and regulations that are formulated by the regulator to govern the
behaviours of regulated institutions.
RBI
undertakes supervision of the commercial banks located in India as well as branches
of Indian banks located outside India under various provisions of the BR Act,
1949. The Department of Supervision (DoS) is responsible for supervision of all
RBI regulated entities.
Approach
used for supervision
·
RBI of India constituted a high level steering Committee
under the Chairmanship of former Deputy Governor, Shri K C Chakraborty, in Aug
2011, to review the supervisory processes for commercial banks.
·
The Committee, inter alia, recommended a shift to a risk
based approach to supervision from the existing compliance-based approach.
·
Based on the recommendations of the committee, a risk-based
approach to supervision was implemented from 2013 onwards in a phased manner.
·
All the scheduled commercial banks in India are now under the
Risk Based Supervisory (RBS) framework and erstwhile CAMELS framework is no
longer in vogue.
Tools
for Supervision
Onsite
supervision
Offsite
supervision
Para-supervisory
activities
Para
supervisory activities
Central
Fraud Registry
Cyber
Security Framework
Early
warning system and framework
Prompt
corrective action
Stress
testing
Red
flagged accounts
Regulation
and Supervision of Co-operative Banks
The
Co-operative structure is designed on the principles of cooperation, mutual
help, democratic decision making and open membership. It follows the principle
of ‘one shareholder, one vote’ and ‘no profit, no loss’. Cooperatives Banks are
registered under the Cooperative Societies Act, 1912.
Characteristics
of Cooperative Banks
Some
of the main features or characteristics of cooperative banks are:
·
Customer owned entities
·
Democratic member control
·
Profit allocation
·
Inclusion of rural masses
Different
between Co-operative Credit Societies and Co-operative Banks
Cooperative
societies appear at Entry 32 in the State List, whereas ‘Banking’ appears at
Entry 45 in the Union List under the 7th Schedule to the
Constitution of India.
Hence,
Co-operative societies in India are a state subject and they do not fall under
the regulatory purview of RBI.
Co-operative
Credit Societies, which are licensed to carry out banking activities function
as a co-operative bank and are eligible to accept deposits from the public.
Structure
of Cooperative Credit Institutions in India
Supervisory Action Framework
·
RBI has put a Supervisory
Action Framework (SAF) under BR Act, 1949 for UCBs experiencing
financial stress.
·
Financial triggers are based on the required level of Net NPA
(Asset Quality), Profitability and Capital to Risk-Weighted Assets Ratio (CRAR).
·
Depending on area and extent of weakness and financial
triggers, actions may include restriction on opening new branches, capital
expenses, declaring/disbursing dividend, reducing exposure norms for loans or freezing
the limit of total advances to the level
existing on a particular day, etc.
·
The banks whose financial conditions continue to severely
deteriorate are brought under the All Inclusive Directions (AID) under
Section 35A of the Act, which entails, inter-alia complete prohibition on
accepting fresh deposits and grant of fresh loans, besides restricting repayment
of deposits to a specified ceiling.
·
The banks under AID are monitored closely with an advise to
either have robust revival plan or explore possibilities of merger/conversion to
a society.
Pg 24- Banker to banks and govt
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