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3. RBI is known as Bankers Bank and Lender of Last Resort because Scheduled Banks can borrow funds from the RBI on the basis of eligible securities; Also obtain financial accommodation by rediscounting their bills of exchange.
Supervision of banks
RBI has statutory power to regulate the volume of credit generated by banks. This means, RBI can control the advances against commodities under Selective Credit Control mechanism. It can also stipulate - the purpose - margin and - rate of interest in specific category of advance.
Volume of credit is normally controlled through the regulatory instruments of - bank rate - open market operations and - variable cash reserve requirements Now, RBI has liberalized the control over the rate of interest on deposits and advances by Banks. It is totally delinked from bank rate. However, bank rate remains as a benchmark in the fluctuating interest rate regime.
Bank rate means it is the rate of interest at which the RBI rediscounts the first class bills of exchange of commercial banks or other eligible papers. RBI can impound the banks reserves to maintain the liquidity of assets in the form of Statutory Liquidity Ratio. For this purpose, The following assets are taken into account: 1. Cash in hand (in India) 2. Balance in current account with RBI 3. Balance with RBI over the minimum reserve requirement. 4. Investments in Government Securities, treasury bills, and other approved securities in India - excluding borrowings from RBI against approved securities.
RBI can impose Cash Reserve Ratio (CRR). - CRR is the minimum cash to be maintained as percentage against demand deposits and time deposits. RBI can appoint any Bank as its agent to transact the business on its behalf. [sec 45] Statutory return: It is mandatory to all banks to send Statutory return providing information on the position of - assets and liabilities and - maintenance of average daily balances of cash reserves.
[sec 42 & 43]
Statutory Reporting: RBI is authorized to call for any information pertaining to the business, it is also vested with it Supervisory powers on acceptance of Public Deposits.
RBI can prohibit - acceptance of deposits and - alienation of assets It can file an application for winding up of NBFC It can inspect any NBFC RBI can prohibit the acceptance of deposits by unincorporated bodies. [Sec-45] Thus RBI is equipped with all powers that may be needed to regulate the activities of Non-banking Financial Companies in India.
Permitted Business of Bank under Sec-6 1. Money Dealings with Public 2. Acting as Agents for any Government or Local authority or any other person (s) 3. Contracting for Public and Private Loans and negotiating and issuing the same 4. Carrying on and transacting every kind of guarantee and indemnity business 5. Undertaking and executing trusts 6. Undertaking and administration of estates as executor, trustee or otherwise.
[Sec 8]
No Banking Company shall directly or indirectly deal in the Buying Selling or bartering of goods Except in connection with the realization of security given to or held by it. No Banking Company shall directly or indirectly engage in any Trade or Buy, sell or barter goods for others Except in connection with bills of exchange received for collection or negotiation. Goods means every kind of movable property Other than: actionable claims , stocks, shares etc.
management of the company will not be prejudicial to the public interest or the interest of its depositors;
- that the company has adequate capital structure and earning prospects; - that the public interest will be served by the grant of a license to the company to carry on banking business in India; - any other condition, the fulfillment of which would, in the opinion of the RBI, be necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors.
Cancellation of License.
The RBI can cancel the License of the Bank
If the company ceases to carry on banking business in India; If the company, at any time, fails to comply with any of the conditions imposed upon it; If at any time, any of the conditions referred to in sub-section (3) 2 and sub-section 3A are not fulfilled.