BANKING AWARENESS

RESERVE BANK OF INDIA

Reserve Bank of India was established on 01.04.1935 under RBI Act 1934 on the recommendations of John Hilton Young commission 1926 (Royal Commission on Indian Currency and Finance). RBI is Central Bank of our country and it is nationalised w.e.f 1st January, 1949. Initially it was a shareholders bank which was taken over by the Central Government under Reserve Bank(Transfer of Public Ownership) Act 1948 with a paid up capital of Rs 5 Cr. RBIs Central Office is in Mumbai. FUNCTIONS OF RBI: a. Issuance of currency: RBI is the sole agency/authority in India to issue bank notes under signature of Governor, RBI. Bank Note means Rs.2 and above. (One rupee note and all coins will be issued by Central Government. One rupee note will be signed by Finance Secretary) Coins will be minted at four stations i.e. Mumbai, Kolkata, Hyderabad and Noida b. Banker to the Government: Manages public debt and transacts government business. c. Bankers bank: Controls the banks and acts as a lender of last resort by providing financial assistance in various ways d. Controller of credit to control inflation and money supply e. It ensures liquidity position of banks requirements. through maintenance of CRR/SLR

Nationalization of Banks
A significant milestone in Indian Banking happened in the late 1960s when the government nationalized, on 19th July, 1969 14 major commercial Indian Banks, followed by nationalization of 6 more commercial Indian banks in 1980. The stated reason for the nationalization was more control of credit delivery. After this, until the 1990s, the nationalized banks grew at a leisurely pace of around 4%. New Bank of India was amalgamated with Punjab National Bank in 1993.

During 1990 and 2000 Liberalisation, Privatisation and Globalisation took place and banking industry picked up a lot in its business. Technological advancement started by migrating from manual to computerisation of records. Narasimhans Commitee recommendations on prudential norms for Non Performing Assets were adopted which resulted in healthy growth of banks asset portfolio. After 2000 till date banks growth started galloping through Online Banking, development of Alternate delivery channels like ATM, Net BANKING, Mobile Banking, etc.

What is a repo rate?

Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

What is a reverse repo rate?

This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain amount of risk) Consequently, banks would have lesser funds to lend to their customers. This helps stem the flow of excess money into the economy

Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks, while repo signifies the rate at which liquidity is injected.

What is bank rate?

This is the rate at which RBI lends money to other banks (or financial institutions The bank rate signals the central banks long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa. Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate (this is currently 9 per cent), the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.

What is call rate?

Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.

What is CRR?
Cash Reserve Ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money.

What is SLR?
Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the banks leverage in pumping more money into the economy.

What is selective credit control?

Also known as qualitative control is used to regulate Cost and quantum of credit to selected sectors, by stipulating

Minimum margin for lending against selected commodities Ceiling on level of credit Minimum rate of interest to be charged on advances against particular commodities.

Practice Bits
1. Functions of Reserve Bank are: a) Bankers bank b) Banker to Government c) Lender of last resort d) Controlling financial requirements of banks through Repo/Reverse Repo e) All the above 2. How many Deputy Governors will be there in RBI: a) 3 b) 5 c) 7 d) 4

e) No Deputy Governor will be appointed 3. Reverse Repo Rate has the following characteristic: a) Borrowing by RBI from banks b) Borrowing with government security as collateral c) Short Term Borrowing d) All the above e) None of the above 4. Indian commercial banks are categorised into: a) Public Sector banks d) All the above b) Foreign Banks e) None of the above c) Private Sector Banks

5. Regional Rural Banks have been set up with the basic objective of: a) Providing credit to semi-urban and urban population b) Providing deposits facilities to farmers c) Providing credit and deposit facilities to rural areas d) Providing credit, deposit and other banking facilities to people in rural areas e) None of the above 6. The following is a mechanism for injecting liquidity by RBI to the financial system: a) Reverse Repo d) Repo b) Hike in CRR e) None of the above c) Hike in interest rate

7. ____________ are Local Institutions functioning like Banks a) Local Area Banks d) Financial Institutions b) Indigenous Banks e) All the above c) Private Banks

8. The first nationalisation of banks exercise was done on: a) 19.07.1969 d) 15.08.1967 b) 19.07.1970 e) None of the above c) 19.07.1967

9. How many banks were nationalised In the second phase in 1980: a) 5 b) 6 c) 7 d) 4 e) 1

10. The Basic criteria that was considered while nationalisation of banks in 1969 was the liability base of banks is more than: a) 30 crores or more d) 60 crores or more
a) Fixed Deposits d) Call Deposits

b) 40 crores or more e) None of the above

b) Deposit Reinvestment Deposits e) Recurring Deposits

c) 50 crores or more

11. Which of the following deposits do not attract TDS? c) Flexi Deposits

12. At present the rate of interest paid by RBI to Commercial Banks on CRR is : a) 3% b) 4% c) 5% d) No interest

d) Only for above Rs. 1000 crore CRR balance. 13. The Cash Reserve Ratio is to be maintained by Commercial Banks in the form of: a)Cash in hand at branches c)Balance in a special account with RBI e) Any of the above options. 14. Increasing Cash Reserve Ratio from time to time by Reserve Bank of India leads to: a) Decrease in deposit b) Increase in lendable resources c) Any of the above b) Increasing in deposit d) Decrease in lendable resources. b) Balance with other banks d) Funds in the currency chest

15. The interest on Marginal Standing Facility sanctioned by RBI to banks is: a) Repo rate plus 1% b) Repo Rate plus 2% c) Repo Rate plus 3% e) None of the above
c) C.Desh Mukh

d) One percent less than reverse repo rate

16. Who was the first governor of RBI? a) Osborne Smith d) B.R.Rao b) James Taylor e) None of the above

17. RBI was established in 1935 pursuant to recommendation of: a) The Hilton Young Commission b) b) All India Rural Credit Survey Committee c) Gorawala Committee d) Talwar Committee e) None of the above 18. One rupee note and all coins will be issued by: a) Reserve Bank of India c) Central and State Governments collectively d) None of the above 19. Who will sign One Rupee Note? a) Governor- RBI b) Governors of concerned state governments c) Finance Secretary, Ministry of Finance d) Finance Minister e) None of the above 20. What is MSF? a) Marginal Standing Facility b) Micro and Small Finance c) Medium Size finance d) Mid Term Sanction facility e) None of the above e) All the above b) Central Government

Answers
Q Ans 1 e 2 d 3 d 4 d 5 d 6 d 7 b 8 a 9 b 10 c

Q Ans

11 e

12 d

13 c

14 d

15 a

16 a

17 a

18 b

19 c

20 a