BANK MANAGEMENT

Commercial banks and RBI

S.N.Mohapatra

DEFINITION OF BANK UNDER INDIAN LAW In India Banking is defined as per Banking Regulation Act, 1949 as follows : Accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. (Section 5b) A Banking Company is a Company which transacts the business of banking in India. (Section 5c)

Core activities of Commercial Bank

Acceptance of Deposits of money from the public Lending of the money i.e. giving loans Making Investments (Mandated/Statutory Investments for SLR Purposes known as SLR Investments and Non-SLR/Non-Mandated Investments) to repay the deposits to the customers on demand or otherwise as per the terms of the deposits

Scheduled Banks
Scheduled Banks :
included in the 2nd schedule of the RBI Act, 1934.
(1) Paid up capital = or > Rs.5 lakh (2) RBI is convinced that their affairs are Not conducted in a manner detrimental to the interest of their depositors. These Banks are required to maintain CRR and SLR. Scheduled Banks are classified as under : 1) Co-operative Banks (State and Urban Co-op Banks) 2) Commercial Banks 2.1 Foreign Scheduled Banks 2.2 Indian Scheduled Banks (a) Private Sector Scheduled Banks : Both Old and New (b) Public Sector Scheduled Banks (i) State Bank Group : SBI + its 5 subsidiaries (ii) Nationalised Banks : 19 , (iii) Regional Rural Banks (RRBs) : 82 (reduced from 196 to 82 after mergers)

Non-Scheduled Banks : Not included in the 2nd schedule of the RBI act. Their No. has progressively reduced over the years (only 4).

Ancillary Permitted Banking Activities

As per section 6 of BR act, 1949, Banks are authorized to carry out the following functions in addition to the above principal functions : Discounting of Bills Collection of Cheques and Bills Payment Function/Remittance Services (DD, BC, MT, TT, ECS, NEFT, RTGS, SWIFT, Credit/Debit Card/Smart Card etc.) Safe Custody of Articles Hiring Safe Deposit Lockers Conducting Foreign Exchange Transactions Conducting Government Transactions Issuing Letter of Credit and Guarantees Merchant Banking Functions Collection of Utility Bills/School fees Distribution of Insurance and Mutual Fund Products

PROHIBITED BANKING ACTIVITIES

Section 8 of BR act prohibits a banking company from engaging in the following activities : Directly or indirectly in trading activities and undertaking trading risks Buying or Selling or Bartering of Goods directly or indirectly Section 9 prohibits a banking company from holding immovable properties, howsoever acquired, except as is required for its own use, for a period exceeding 7 years from the acquisition of the property. RBI may extend this period by another 5 years. Banking in India is governed by the following statutes : Banking Regulation Act, 1949 RBI Act, 1934 SBI Act, 1955 & SBI (Subsidiary Banks) Act, 1959 Banking Companies (Acquisitions & Transfer of Undertakings) Act, 1970 and 1980 (more popularly known as Bank Nationalization Act)

Central Banks in the World

India UK USA Japan China Europe : RBI (Reserve Bank of India) : BOE ( Bank of England) : Fed (Federal Reserve System) : BOJ (Bank of Japan) : BOC (Bank of China) :? ecb

Reserve Bank of India

The RBI Act 1934

Q. who regulates the coins and

what are bank notes ?

1 rupee notes ?

RBI acts as : central banker regulator Promoter

Why supervise/Regulate banks?

Banks hold a major portion of public savings. Banks intermediate between savings and investments and aid in channelizing funds to the economic sectors

Banks hold a large part of the money supply and hence

become the channel of the central bank for implementing monetary policy. Banks administer the national payments and settlement system.

Regulatory Powers
Maintenance of cash reserves by scheduled commercial banks sec 42 Issues related to the collection and furnishing credit information from

the commercial banks under sections 45A to 45F.

License to commence banking business under Section 22 of B.R. Act, 1949 (AACS)

License to open branches & extension counters

Permission to deal in foreign exchange Issue of directions to maintain cash reserve and liquid assets

Power to control advances (Section 21) Purposes for which advances

are given, margins to be maintained

Regulatory Powers
Issue of prudential and operational guidelines

Directions on maximum limit on advances,

prescribe guidelines on individual / group exposure norms Interest rates on deposits and advances (Section 21) Imposition of penalty (Section 46) Cancellation / rejection of license (Section 22(4)) Prescription towards CRR / SLR Grant of scheduled status

Supervisory power of RBI

Verification of the capital adequacy and liquidity The management practices The presence of adequate systems and controls Compliance with laws and regulation

Verification process
On-site verification
On site inspection of banks is carried out on an annual basis. Besides the head office and controlling offices, certain specified branches are covered under inspection so as to ensure a minimum coverage of advances. The Annual Financial Inspection (AFI) focuses on statutorily mandated areas of solvency, liquidity and operational health of the bank. It is based on internationally adopted CAMEL model modified as CAMELS, i.e., capital adequacy, asset quality, management, earning, liquidity and system and control.

Verification process
Offsite Monitoring objective of the off site surveillance is to: monitor the financial health of banks between two on-

site inspections
identifying banks which show financial deterioration and would be a source for supervisory concerns. This acts as a trigger for timely remedial action

CONCLUSION
Financial markets are different from product markets. Hence greater the liberalization, deeper the supervision and higher the degree of regulation. Because financial institutions are more leveraged and there is more scope for speculative activities, in such assets, given their inherent volatility. Moreover there are negative externalities that can destabilize financial markets and this instability can adversely affect the real economy.