RBI and banks

Commercial Banks: Commercial Bank may be defined as the financial institutions that deals with deposit and advances of a business organization [RBI is not a commercial bank]. These are of three type:

A)    Public Sector Bank ( 19 GoI undertaking + 1 IDBI + 1 SBI + 5 SBI Associate)

B)    Private Sector Bank (ICICI,YES,AXIS etc whose head office is in India)

C)    Foreign Banks (HSBC,BANK OF AMERICA etc whose head office is overseas)

Assets and Liabilities: for a bank asset is advances (loans) and liabilities is deposits.

Types of deposit: Term Deposit (That is open for a particular time period e.g. FD)

       Demand Deposit (Current Account Saving Account)

Repo Rate: Repo rate is a measure to control the flow of money supply in the market. It is a rate at which Central Bank (RBI) lends funds to commercial banks. Regulated by RBI. (Currently 7.25%)

Reverse Repo Rate: it is a rate at which banks parks their access money with RBI. Regulated by RBI.  (Repo Rate -1) % currently 6.25%)

CRR( Cash Reserve Ration): The portion of the bank’s net time and demand liabilitiesthat is to be maintained with RBI is CRR. Regulated by RBI. (Currently 4.00%)

SLR (Statuary Liquidity Ration): The portion of the bank’s net time and demand liabilities that is to be maintained with Bank in the form of liquid (that is easily encashable like gold or government bond or securities) is SLR. Regulated by RBI. (Currently 23.00%)

How much a bank can lend for advances: Suppose total income =100. Than SLR =23 CRR =4 to be reserved. Rest 73 can be given as advances.

Note1: Reducing any rate means flowing the money in the market. Increasing any is vice versa.

Note2: Repo and Reverse repo are also called as liquidity adjustment facility (absorption and infusion of money; repo is infusion and reverse repo is absorption) If repo is increased bank will borrow money at high rate and also bank will lend the money to customer at higher rate and vice versa.

Supply of money:

RBI  --à<----Banks--àß--Customer---àß--Market

RBI lends money to banks banks lends to customer, customer invests in market.

If supply of money is in access àpurchasing power will increase for customer (Because if you have money you will invest it somewhere or you will purchase any goods). Purchasing power increases means inflation increases. So RBI increases the rate. And vice versa.

Priority Sector Lending: (Source : RBI http://rbi.org.in/scripts/FAQView.aspx?Id=87)

Priority sector refers to those sectors of the economy which may not get timely and adequate credit in the absence of this special dispensation. Typically, these are small value loans to farmers for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low income groups and weaker sections.

Priority Sector includes the following categories:

(i) Agriculture

(ii) Micro and Small Enterprises

(iii) Education

(iv) Housing

(v) Export Credit

Categories

Domestic commercial banks / Foreign banks with 20 and above branches 

(As percent of ANBC or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher)

Foreign banks with less than 20 branches 

(As percent of ANBC or Credit Equivalent of Off-Balance Sheet Exposure, whichever is higher)

Total Priority Sector

40

32

Total agriculture

18

No specific target.

Advances to Weaker Sections

10

No specific target.

Nostro and Vostro Account: Nostro account is account maintained in a foreign bank by domestic bank. Vostro account is account maintained in domestic bank of a foreign bank.

Non Performing Assets (NPA):  Any bank asset(advance or loans) of which principal and interest amount is not repaid for a certain period of time is called Non Performing Assets. Generally if principal of an asset is not repaid in 90 days or interest is not repaid in 180 days the asset is classified as non performing asset (NPA).

Real time Gross Settlement(RTGS): The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the continuous (real-time) settlement of funds transfers individually on an order by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later time; 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis). Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable. (Source: RBI http://rbi.org.in/scripts/FAQView.aspx?Id=65)

National Electronic Fund Transfer: National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme,  individuals, firms and corporates can electronically transfer funds from any bank branch to any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. (source RBI http://rbi.org.in/scripts/FAQView.aspx?Id=60)

Note: For transferring the funds through RTGS and NEFT the bank branches should be RTGS and NEFT enabled as the case may be.

Note2: Limit for NEFT: no minimum or maximum limit however PAN card is mendatory for NEFT remittance for more than 50,000). For RTGS minimum limit is 2,00,000 but there is no upper limit.

Base Rate: It is a minimum interest rate below which bank can not lend [advances/loans] to customer. It is determined by banks themselves.

SWIFT: Society for Worldwide Inter-bank Financial Telecommunication is a messaging system through which financial messages pass from one financial institute to other financial institute. It is a internationally acceptable financial messaging system. For ant messaging through SWIFT a bank must have a SWIFT code. It is helpful in forex transaction.

IFSC :IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system. This is an 11 digit code with the first 4 alpha characters representing the bank, and the last 6 characters representing the branch. The 5th character is 0 (zero). IFSC is used by the NEFT system to identify the originating / destination banks / branches and also to route the messages appropriately to the concerned banks / branches. (source RBI http://rbi.org.in/scripts/FAQView.aspx?Id=60). It is used for domestic transaction in India.

Electronic Clearing System (ECS): ECS is an electronic mode of payment / receipt for transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc. Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank accounts or vice versa.

ECS Credit is used by an institution for affording credit to a large number of beneficiaries (for instance, employees, investors etc.) having accounts with bank branches at various locations within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user institution. ECS Credit enables payment of amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.

ECS Debit is used by an institution for raising debits to a large number of accounts (for instance, consumers of utility services, borrowers, investors in mutual funds etc.) maintained with bank branches at various locations within the jurisdiction of a ECS Centre for single credit to the bank account of the user institution. ECS Debit is useful for payment of telephone / electricity / water bills, cess / tax collections, loan installment repayments, periodic investments in mutual funds, insurance premium etc., that are periodic or repetitive in nature and payable to the user institution by large number of customers etc.

Functions of RBI(source RBIhttp://www.rbi.org.in/commonman /English/scripts/organisation.aspx#MF):

Monetary Authority:

Formulates, implements and monitors the monetary policy.

Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which the country''s banking and financial system functions.

Objective: maintain public confidence in the system, protect depositors'' interest and provide cost-effective banking services to the public.

Regulator and supervisor of the payment systems

Authorises setting up of payment systems

Lays down standards for operation of the payment system

Issues direction, calls for returns/information from payment system operators.

Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

Issues and exchanges or destroys currency and coins not fit for circulation.

Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role

Performs a wide range of promotional functions to support national objectives.

Related Functions

Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.

Banker to banks: maintains banking accounts of all scheduled banks.

Other Name of RBI:

1.      Banker’s Bank

2.      Government’s bank

3.      Lender of the last Resort

4.      Central Bank

5.      Manager of foreign exchange

RBI Guidelines for Issuing Licence to Nw banks in private sectors:

Following are the highlights of the Reserve Bank of India's guidelines for licensing of new banks in the private sector:

Corporates, PSUs and NBFCs can set up a bank.

No bar on entities in sectors like brokerage, realty Minimum paid-up equity capital to be Rs. 500 crore.

New banks to get listed within 3 years of business.

Foreign shareholding limited to per cent for first 5 years.

RBI to seek feedback on applicants' background from other regulators, Income Tax, CBI and ED.

Licence seeker should have 10 years of successful financial track record, sound credentials and integrity.

To comply with priority sector lending targets; open at least 25 per cent branches in unbanked rural areas.

Boards to have majority of independent directors.

·         Business plan should be realistic, viable and address financial inclusion.

Name: Bipin Chandra Upadhyay

List of references: http://www.rbi.org.in

                        http://www.rbi.org.in/commonman /English/scripts/organisation.aspx#MF

                        http://rbi.org.in/scripts/FAQView.aspx?Id=60

                        http://rbi.org.in/scripts/FAQView.aspx?Id=65

http://profit.ndtv.com/news/industries/article-rbi-issues-guidelines-for-new-banking-licences-highlights-318426

http://www.thehindu.com/business/Economy/new-panel-rbi-shortlists-5-people-for-application-screening/article5085825.ece

http://www.thehindu.com/business/Industry/bank-aspirants-get-more-time-to-set-up-holding-company/article4778314.ece

http://mrunal.org/economy

different sources of news papers regarding the definitions.