PART B - BANKING REGULATION (In Continuation)
ROLE AND FUNCTIONS OF RBI
To highlight, they are as under :
i. Monetary Authority
ii. Issuer of Currency
iii. Banker and Debt Manager to Government
iv. Banker to Banks
v. Regulator of the Banking System
vi. Manager of Foreign Exchange
vii. Maintaining Financial Stability
viii. Regulator and Supervisor of the Payment and Settlement Systems
ix. Developmental Role
Monetary Authority
Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The goal of a monetary policy is to achieve specific economic objectives, such as low and stable inflation and promoting growth.
The main objectives of monetary policy in India are :
(a) Maintaining price stability
(b) Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth
(c) Financial stability
In order to achieve these objectives RBI’s framework is based on a multiple indicator approach. This means that RBI monitors and analyses the movement of a number of indicators including interest rates, inflation rate, money supply, credit, exchange rate, trade, capital flows and fiscal position, along with trends in output based on policy perspectives. RBI uses several direct and indirect instruments in the formulation and implementation of monetary policy.
Direct Instruments
Cash Reserve Ratio (CRR) : The Reserve Bank traditionally relied on direct instrument of monetary control such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Cash Reserve Ratio indicates the quantum of cash that banks are required to keep with the Reserve Bank as a proportion of their net demand and time liabilities. In terms of Section 42 (1) of the Reserve Bank of India Act, 1934, the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate. Reserve Bank does not pay any interest on the CRR balances maintained by SCBs with effect from the fortnight beginning March 31, 2007.
Penalty for non maintenance of CRR
In case of default in maintenance of CRR by SCBs penal interest is charged as under :
i. In case of default in maintenance of CRR requirement on a daily basis which is presently 95 percent of the total CRR requirement, penal interest will be levied for that day at the rate of three percent per annum above the Bank Rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at the rate of five percent per annum above the Bank Rate.
ii. In case of default in maintenance of CRR on average basis during a fortnight, penal interest will be levied as envisaged in sub-section (3) of Section 42 of Reserve Bank of India Act, 1934.
SCBs are required to furnish the particulars such as date, amount, percentage, reason for default in maintenance of requisite CRR and also action taken to avoid recurrence of such default.
Statutory Liquidity Ratio (SLR) : It is share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash and gold. SLR prescribes the amount of money that banks must invest in securities issued by the government. The value of such assets of a SCB shall not be less than a fixed percentage of its total Demand and Time Liabilities in India as on the last Friday of the second preceding fortnight as the Reserve Bank may specify from time to time.
Following are the assets in which Banks are investing for maintaining SLR :
(a) Cash or
(b) Gold valued at a price not exceeding the current market price, or
(c) Investment in the specified instruments which will be referred to as “Statutory Liquidity Ratio (SLR) securities”.
Penalties
If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect of that default, the penal interest for that day at the rate of three per cent annum above the Bank Rate on the shortfall and if the default continues on the next succeeding working day, the penal interest may be increased to a rate of five percent annum above the Bank Rate for the number of days of default on the shortfall.
Indirect Instruments
Liquidity Adjustment Facility (LAF) : Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral. Under LAF-Repo rate, Banks can borrow from RBI at the Repo-rate by pledging government securities over and above the statutory liquidity requirements.
Repo/Reverse Repo Rate : These rate under the Liquidity Adjustment Facility (LAF) determine the corridor for short-term money market interest rates. In turn, this is expected to trigger movement in rates in other segments of the financial market and the real economy.
Open Market Operations (OMO) : Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term. Since 2012, RBI has been using this instrument as a pure LAF, liquidity instrument.
Marginal Standing Facility (MSF) : MSF was instituted under which scheduled commercial banks can borrow (even by dipping into SLR portfolio) over night at their discretion up to 2% (wef 17/4/2012) of their respective NDTL at 100 basis points above the repo rate, against approved government securities, to provide a safety valve against unanticipated liquidity shocks.
Minimum request size : Request will be received for a minimum amount of Rs. One Crore and in multiples of Rs. One Crore thereafter.
Bank Rate : It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy.
Market Stabilisation Scheme (MSS)
In 2004, a Market Stabilisation Scheme (MSS) was introduced for issuing of treasury bills and dated securities over and above the normal market borrowing programme of the Central Government for absorbing excess liquidity. The Reserve Bank maintains a separate MSS cash balance of the Government, which is not part of the Consolidated Fund of India. A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter. The rate of interest on WMA is linked to the Repo Rate. Surplus balances of State Governments are invested in Government of India 14-day Intermediate Treasury bills in accordance with the instructions of the State Governments.
Issuer of Currency
The Reserve Bank is the nation’s sole note issuing authority. Along with the Government of India, RBI is also responsible for the design and production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine noes. The Reserve Bank also makes sure that there is an adequate supply of coins, produced by the government. The Reserve Bank has the authority to issue notes up to value of Rupees Ten Thousand. As an anti-counterfeiting measure, the RBI takes initiative in upgrading the security features of bank notes. Coins is circulation at present are in denominations of 50 paise, 1, 2, 5 and 10 Rupee, and Notes in circulation are in denominations or Rs. 5, 10, 20, 50, 100, 500 and 1000. As per Indian Coinage Act – Rupee coin (1 and above) can be used to pay/settle for any sum where as Paise 50 coin can be used to pay/settle any sum not exceeding Ten Rupees.
ROLE AND FUNCTIONS OF RBI
To highlight, they are as under :
i. Monetary Authority
ii. Issuer of Currency
iii. Banker and Debt Manager to Government
iv. Banker to Banks
v. Regulator of the Banking System
vi. Manager of Foreign Exchange
vii. Maintaining Financial Stability
viii. Regulator and Supervisor of the Payment and Settlement Systems
ix. Developmental Role
Monetary Authority
Monetary policy refers to the use of instruments under the control of the central bank to regulate the availability, cost and use of money and credit. The goal of a monetary policy is to achieve specific economic objectives, such as low and stable inflation and promoting growth.
The main objectives of monetary policy in India are :
(a) Maintaining price stability
(b) Ensuring adequate flow of credit to the productive sectors of the economy to support economic growth
(c) Financial stability
In order to achieve these objectives RBI’s framework is based on a multiple indicator approach. This means that RBI monitors and analyses the movement of a number of indicators including interest rates, inflation rate, money supply, credit, exchange rate, trade, capital flows and fiscal position, along with trends in output based on policy perspectives. RBI uses several direct and indirect instruments in the formulation and implementation of monetary policy.
Direct Instruments
Cash Reserve Ratio (CRR) : The Reserve Bank traditionally relied on direct instrument of monetary control such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Cash Reserve Ratio indicates the quantum of cash that banks are required to keep with the Reserve Bank as a proportion of their net demand and time liabilities. In terms of Section 42 (1) of the Reserve Bank of India Act, 1934, the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate. Reserve Bank does not pay any interest on the CRR balances maintained by SCBs with effect from the fortnight beginning March 31, 2007.
Penalty for non maintenance of CRR
In case of default in maintenance of CRR by SCBs penal interest is charged as under :
i. In case of default in maintenance of CRR requirement on a daily basis which is presently 95 percent of the total CRR requirement, penal interest will be levied for that day at the rate of three percent per annum above the Bank Rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day and if the shortfall continues on the next succeeding day/s, penal interest will be recovered at the rate of five percent per annum above the Bank Rate.
ii. In case of default in maintenance of CRR on average basis during a fortnight, penal interest will be levied as envisaged in sub-section (3) of Section 42 of Reserve Bank of India Act, 1934.
SCBs are required to furnish the particulars such as date, amount, percentage, reason for default in maintenance of requisite CRR and also action taken to avoid recurrence of such default.
Statutory Liquidity Ratio (SLR) : It is share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash and gold. SLR prescribes the amount of money that banks must invest in securities issued by the government. The value of such assets of a SCB shall not be less than a fixed percentage of its total Demand and Time Liabilities in India as on the last Friday of the second preceding fortnight as the Reserve Bank may specify from time to time.
Following are the assets in which Banks are investing for maintaining SLR :
(a) Cash or
(b) Gold valued at a price not exceeding the current market price, or
(c) Investment in the specified instruments which will be referred to as “Statutory Liquidity Ratio (SLR) securities”.
Penalties
If a banking company fails to maintain the required amount of SLR, it shall be liable to pay to RBI in respect of that default, the penal interest for that day at the rate of three per cent annum above the Bank Rate on the shortfall and if the default continues on the next succeeding working day, the penal interest may be increased to a rate of five percent annum above the Bank Rate for the number of days of default on the shortfall.
Indirect Instruments
Liquidity Adjustment Facility (LAF) : Consists of daily infusion or absorption of liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo (liquidity absorption) auction operations, using government securities as collateral. Under LAF-Repo rate, Banks can borrow from RBI at the Repo-rate by pledging government securities over and above the statutory liquidity requirements.
Repo/Reverse Repo Rate : These rate under the Liquidity Adjustment Facility (LAF) determine the corridor for short-term money market interest rates. In turn, this is expected to trigger movement in rates in other segments of the financial market and the real economy.
Open Market Operations (OMO) : Outright sales/purchases of government securities, in addition to LAF, as a tool to determine the level of liquidity over the medium term. Since 2012, RBI has been using this instrument as a pure LAF, liquidity instrument.
Marginal Standing Facility (MSF) : MSF was instituted under which scheduled commercial banks can borrow (even by dipping into SLR portfolio) over night at their discretion up to 2% (wef 17/4/2012) of their respective NDTL at 100 basis points above the repo rate, against approved government securities, to provide a safety valve against unanticipated liquidity shocks.
Minimum request size : Request will be received for a minimum amount of Rs. One Crore and in multiples of Rs. One Crore thereafter.
Bank Rate : It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. It also signals the medium-term stance of monetary policy.
Market Stabilisation Scheme (MSS)
In 2004, a Market Stabilisation Scheme (MSS) was introduced for issuing of treasury bills and dated securities over and above the normal market borrowing programme of the Central Government for absorbing excess liquidity. The Reserve Bank maintains a separate MSS cash balance of the Government, which is not part of the Consolidated Fund of India. A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter. The rate of interest on WMA is linked to the Repo Rate. Surplus balances of State Governments are invested in Government of India 14-day Intermediate Treasury bills in accordance with the instructions of the State Governments.
Issuer of Currency
The Reserve Bank is the nation’s sole note issuing authority. Along with the Government of India, RBI is also responsible for the design and production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine noes. The Reserve Bank also makes sure that there is an adequate supply of coins, produced by the government. The Reserve Bank has the authority to issue notes up to value of Rupees Ten Thousand. As an anti-counterfeiting measure, the RBI takes initiative in upgrading the security features of bank notes. Coins is circulation at present are in denominations of 50 paise, 1, 2, 5 and 10 Rupee, and Notes in circulation are in denominations or Rs. 5, 10, 20, 50, 100, 500 and 1000. As per Indian Coinage Act – Rupee coin (1 and above) can be used to pay/settle for any sum where as Paise 50 coin can be used to pay/settle any sum not exceeding Ten Rupees.
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