TABLE OF CONTENTS

1. RESEARCH METHODOLOGY
2. INTRODUCTION
3. HISTORY
4. BACKGROUND STORY
5. ORGANISATIONAL STRUCTURE OF RBI
6. DEPARTMENTS OF RBI
7. FUCTIONS OF RBI
8. MAJOR BANKING SECTOR REFORMS SINCE 1991
9. CONCLUSION








RESEARCH METHODOLOGY:
Secondary data has been used. The study is descriptive and analytical in nature.
Books and other reference as guided by Faculty of Law of Banking have been
primarily helpful in giving this project a firm structure. Websites, dictionaries and
articles have also been referred.















INTRODUCTION

A bank is a financial institution that provides banking and other financial services
to their customers. A bank is generally understood as an institution which provides
fundamental banking services such as accepting deposits and providing loans.
There are also nonbanking institutions that provide certain banking services
without meeting the legal definition of a bank. Banks are a subset of the financial
services industry.
Indian Banking Sector has gone through a series of reforms after the liberalization
of the economy and introduction of financial sector reforms. In the last two
decades of changes happening in the Indian Economy, the Banking Sector has
played a pivotal role in giving a new direction to economy. The changes in the
banking sector can be summed up in two aspects first
it is moving towards the global standards and norms and second the system of
banking has become more customers oriented now. A host of new financial
products have been introduced and the overall financial environment in the country
is getting a lot more mature with people
taking interest in the new products. The apex court of India has played an
important role in molding the face of Indian Banking Sector.
The reserve bank of India is a central bank and was established in April 1, 1935 in
accordance with the provisions of reserve bank of India act 1934. The central
office of RBI is located at Mumbai since inception. Though originally the reserve
bank of India was privately owned, since nationalization in 1949, RBI is fully
owned by the Government of India. It was inaugurated with share capital of Rs. 5
Crores divided into shares of Rs. 100 each fully paid up. The Central Bank is the
apex body of the money market of every nation. In India, central bank is known as
Reserve Bank of India, in Bangladesh, it is referred as Bangladesh Bank, in USA it
is called as Federal Bank, in Europe it is known as European Central Bank.
Irrespective of the name and the nation, previously the roles and responsibilities of
the central banks were confined to certain stereotype activities such as controller of
credit in the economy, lending the fund to the commercial banks as the lender of
the last resort, providing the loan and advances to the Government of the nation in
the form of deficit financing, controller of the foreign exchanges by devaluating
and revaluating the home currency to ensure that the value of the currency remains
within a particular predefined range as a policy resolution. In this respect, the
RBIs role in banking supervision has changed significantly from 1992 which
should be considered as milestone year in the history of Indian banking sector. RBI
is governed by a central board (headed by a governor) appointed by the central
government of India. RBI has 22 regional offices across India. The reserve bank of
India was nationalized in the year 1949. The general superintendence and direction
of the bank is entrusted to central board of directors of 20 members, the Governor
and four deputy Governors, one Governmental official from the ministry of
Finance, ten nominated directors by the government to give representation to
important elements in the economic life of the country, and the four nominated
director by the Central Government to represent the four local boards with the
headquarters at Mumbai, kolkata, Chennai and New Delhi. Local Board consists of
five members each central government appointed for a term of four years to
represent territorial and economic interests and the interests of cooperative and
indigenous banks.
1







HISTORY
19351950

The Reserve Bank of India was founded on 1 April 1935 to respond to economic
troubles after the First World War. RBI was conceptualized as per the guidelines,
working style and outlook presented by Dr B. R. Ambedkar as written in his book
The Problem of the Rupee Its origin and its solution. in front of the Hilton
Young Commission.The bank was set up based on the recommendations of the
1926 Royal Commission on Indian Currency and Finance, also known as the
HiltonYoung Commission.The original choice for the seal of RBI was The East
India Company Double Mohur, with the sketch of the Lion and Palm Tree.
However it was decided to replace the lion with the tiger, the national animal of
India. The Preamble of the RBI describes its basic functions to regulate the issue of
bank notes, keep reserves to secure monetary stability in India, and generally to
operate the currency and credit system in the best interests of the country. The
Central Office of the RBI was established in Calcutta (now Kolkata), but was
moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's central
bank, except during the years of the Japanese occupation of Burma (194245),
until April 1947, even though Burma seceded from the Indian Union in 1937. After
the Partition of India in 1947, the bank served as the central bank for Pakistan until
June 1948 when the State Bank of Pakistan commenced operations. Though set up
as a shareholders bank, the RBI has been fully owned by the Government of
India since its nationalization in 1949.
19501960
In the 1950s the Indian government, under its first Prime Minister Jawaharlal
Nehru, developed a centrally planned economic policy that focused on the
agricultural sector. The administration nationalized commercial banks
[9]
and
established, based on the Banking Companies Act of 1949 (later called the
Banking Regulation Act), a central bank regulation as part of the RBI.
Furthermore, the central bank was ordered to support the economic plan with
loans.
19601969
As a result of bank crashes, the RBI was requested to establish and monitor a
deposit insurance system. It should restore the trust in the national bank system and
was initialized on 7 December 1961. The Indian government found funds to
promote the economy and used the slogan "Developing Banking". The government
of India restructured the national bank market and nationalized a lot of institutes.
As a result, the RBI had to play the central part of control and support of this
public banking sector.
19691985
In 1969, the Indira Gandhi-headed government nationalized 14 major commercial
banks. Upon Gandhi's return to power in 1980, a further six banks were
nationalized.
[7]
The regulation of the economy and especially the financial sector
was reinforced by the Government of India in the 1970s and 1980s.
[11]
The central
bank became the central player and increased its policies for a lot of tasks like
interests, reserve ratio and visible deposits. These measures aimed at better
economic development and had a huge effect on the company policy of the
institutes. The banks lent money in selected sectors, like agri-business and small
trade companies.
The branch was forced to establish two new offices in the country for every newly
established office in a town. The oil crises in 1973 resulted in increasing inflation,
and the RBI restricted monetary policy to reduce the effects.
19851991
A lot of committees analysed the Indian economy between 1985 and 1991. Their
results had an effect on the RBI. The Board for Industrial and Financial
Reconstruction, the Indira Gandhi Institute of Development Research and
the Security & Exchange Board of Indiainvestigated the national economy as a
whole, and the security and exchange board proposed better methods for more
effective markets and the protection of investor interests. The Indian financial
market was a leading example for so-called "financial repression" (Mackinnon and
Shaw). The Discount and Finance House of India began its operations on the
monetary market in April 1988; the National Housing Bank, founded in July 1988,
was forced to invest in the property market and a new financial law improved the
versatility of direct deposit by more security measures and liberalisation.
19912000
The national economy came down in July 1991 and the Indian rupee was
devalued. The currency lost 18% relative to the US dollar, and the Narsimham
Committee advised restructuring the financial sector by a temporal reduced reserve
ratio as well as the statutory liquidity ratio. New guidelines were published in 1993
to establish a private banking sector. This turning point should reinforce the market
and was often called neo-liberal.

The central bank deregulated bank interests and
some sectors of the financial market like the trust and property markets. This first
phase was a success and the central government forced a diversity liberalisation to
diversify owner structures in 1998.
The National Stock Exchange of India took the trade on in June 1994 and the RBI
allowed nationalized banks in July to interact with the capital market to reinforce
their capital base. The central bank founded a subsidiary companythe Bharatiya
Reserve Bank Note Mudran Private Limitedin February 1995 to produce
banknotes.
Since 2000
The Foreign Exchange Management Act from 1999 came into force in June 2000.
It should improve the item in 20042005 (National Electronic Fund
Transfer).The Security Printing & Minting Corporation of India Ltd., a merger of
nine institutions, was founded in 2006 and produces banknotes and coins.
The national economy's growth rate came down to 5.8% in the last quarter of
20082009 and the central bank promotes the economic development.

BACKGROUND STORY

The great depression in USA during 1930 created a knee jerking effect in the
global economy. All on a sudden almost all the major banks in USA went for
bankruptcy. The top management of these banks siphoned their fund into European
market and parked the fund into Swiss banks. It was a bolt from the blue for all
USA citizens who suddenly realized in one fine morning that there was hardly any
money in their bank accounts. As a result their purchasing power decreased to a
significant extent and all the macro economic variables such as income,
employment, output and price started to move to the downward direction in a
vicious 6
circle. On the other hand, exorbitant amount of cash piled up in different banks of
Switzerland due to money laundering. Germany started to borrow fund on a
continuous basis from the banks of Switzerland to purchase the arms which would
be used in war. This was considered as sovereign debt of Germany. The fascist
leader Hitler financed the entire expense of World War II by borrowing the money
from Swiss banks. At the end of World War II, German economy crashed down
and German was unable to repay their debts which created an adverse impact on
the fundamental of all the banks which were operating in Switzerland as huge bad
debt was accumulated in their books of account. The Basel Committee of Banking
Supervision was formed in 1945 to create a framework which can save the
economy of the member nations. Initially the G-7 nations and oil rich nations were
the members of this committee. Basel committee met in 1945, 1954, 1961, 1966
and 1972. The sudden collapse of Soviet Russia and emergence of BRIC nations
compelled Basel committee to include India as a member nation in 1984.
Implementation of Basel accord took place in 1992 when waves of privatization,
liberalization and globalization entered in India.
2





















ORGANISATIONAL STRUCTURE OF RESERVE BANK OF INDIA

RBI or Federal Reserve Bank of India is understood to be the central banking
institution in India that has the duty of controlling the financial policy of the Indian
government. The organizational Structure of Reserve bank of India can be studied
in three different parts.
1. The central board of directors: It is the main committee of the central
bank. The directors here are being appointed by the government of India for
the term of four years. The central board of directors are vested with the
organization and the management of reserve bank of India. There are twenty
members that constitute the central board of directors. The twenty members
are as follows:
One governor, who is appointed by the government of India and is the
highest authority of Reserve bank of India, The duration of his term, is of
five years. The governor can also be re-appointed.
Four governors deputy, also nominated by the central government for the
term of five years.
Fifteen directors, who are also appointed by the central government. Out of
these fifteen directors four directors are from four local boards each are
nominated by the central government.
Ten administrators nominated by the Central Government are among the
consultants of commerce, industries, finance, political economy and
cooperation. The finance secretary of the govt. of Republic of India is
additionally nominated as Govt. officer within the board. 10 administrators
are nominated for a term of four years. The Governor acts as the Chairman
of the Central Board of administrators. In his absence a deputy Governor
nominative by the Governor, acts because the Chairman of the Central
Board. The
Governor and 4 deputy Governors are full time officers of the Bank.

2. Local Boards or the Supportive Bodies: There are 4 local boards from the
regional areas of the four metros of the country namely, new Delhi, Kolkata,
Mumbai and Chennai. The local board is consisting of each 5 members, who
are appointed by the central government for the term of four years. They
represent economic and territorial interests as well as the interests of the
indigenous banks.
3. Offices and Branches of Reserve Bank of India: The Federal Reserve
Bank of India has four zonal offices. Nineteen of its regional offices are at
the most state capitals and at many major cities in India. Few of them are
settled in Ahmadabad, Bhopal Bangalore, Chandigarh, Delhi, Chennai,
Guwahati, Jaipur, Hyderabad, Patna Kolkata, Mumbai Lucknow, and
Thiruvananthapuram. Besides, nine of its sub-offices are at Agartala,
Dehradun, Gangtok, Panaji Kochi, Ranchi, Raipur Shimla Shillong, and
Srinagar.

The bank has additionally 2 coaching faculties for its officers, viz. Federal Reserve
Bank workers school at metropolis and school of Agricultural Banking at Pune.
There are four Zonal coaching Centres at Bombay, Chennai, metropolis and New
Delhi.
3






Departments of RBI
The various departments of RBI are given below:
1. Department of Information Technology
2. Department of Economic Analysis and Policy
3. Department of Statistical Analysis and Computer Services
4. Monetary Policy Department
5. Premises Department
6. Secretary's Department
7. Press Relations Division
8. Exchange Control Department
9. Rural Planning and Credit Department
10. Financial Institutions Division
11. Department of Banking Supervision
12. Department of Banking Operations and Development
13. Department of Financial Companies
14. Department of Non-Banking Supervision
15. Department of Administration and Personnel Management
16. Human Resources Development Department
17. Deposit Insurance and Credit Guarantee Corporation
18. Inspection Department
19. Urban Banks Department
20. Department of Currency Management
21. Department of External Investments and Operations
22. Department of Expenditure and Budgetary Control
23. Department of Government and Bank Accounts the local
24. Internal Debt Management Cell
25. Industrial and Export Credit Department
26. Legal Department
4















FUNCTIONS

The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the
statutory basis of the functioning of the bank. The bank was constituted for the
need of following:
- To regulate the issues of banknotes.
- To maintain reserves with a view to securing monetary stability
- To operate the credit and currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows:
Bank of Issue: The RBI formulates, implements, and monitors the monitory
policy. Its main objective is maintaining price stability and ensuring
adequate flow of credit to productive sector.
Regulator-Supervisor of the financial system: RBI prescribes broad
parameters of banking operations within which the countrys banking and
financial system functions. Their main objective is to maintain public
confidence in the system, protect depositors interest and provide cost
effective banking services to the public.
Manager of exchange control: The manager of exchange control
department manages the foreign exchange, according to the foreign
exchange management act, 1999. The managers main objective is to
facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
Issuer of currency: A person who works as an issuer, issues and exchanges
or destroys the currency and coins that are not fit for circulation. His main
objective is to give the public adequate quantity of supplies of currency
notes and coins and in good quality.
Developmental role: The RBI performs the wide range of promotional
functions to support national objectives such as contests, coupons
maintaining good public relations and many more.
Related functions: There are also some of the related functions to the above
mentioned main functions. They are such as, banker to the government,
banker to banks etc.
Banker to government performs merchant banking function for the central
and the state governments; also acts as their banker.
Banker to banks maintains banking accounts to all scheduled banks.

Controller of Credit: RBI performs the following tasks:
It holds the cash reserves of all the scheduled banks.
It controls the credit operations of banks through quantitative and
qualitative controls.
It controls the banking system through the system of licensing, inspection
and calling for information.
It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
5


Supervisory Functions: In addition to its traditional central banking
functions, the Reserve bank performs certain non-monetary functions of the
nature of supervision of banks and promotion of sound banking in India. The
Reserve Bank Act 1934 and the banking regulation act 1949 have given the



RBI wide powers of supervision and control over commercial and co-
operative banks, relating to licensing and establishments, branch expansion,
liquidity of their assets, management and methods of working,
amalgamation, reconstruction and liquidation. The RBI is authorized to carry
out periodical inspections of the banks and to call for returns and necessary
information from them. The nationalisation of 14 major Indian scheduled
banks in July 1969 has imposed new responsibilities on the RBI for directing
the growth of banking and credit policies towards more rapid development
of the economy and realisation of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the
standard of banking in India to develop on sound lines and to improve the
methods of their operation.

Promotional Functions: With economic growth assuming a new urgency
since independence, the range of the Reserve Banks functions has steadily
widened. The bank now performs a variety of developmental and
promotional functions, which, at one time, were regarded as outside the
normal scope of central banking. The Reserve bank was asked to promote
banking habit, extend banking facilities to rural and semi-urban areas, and
establish and promote new specialized financing agencies.


Supervisory role of the Central Bank: Trust in policymaking institutions is
an essential aspect of good governance in democracy. Institutional trust,
which implies ones prediction that everybody can rely on benevolent and
competent policies of a given institution is important to a policy making
body because its legitimacy and policy efficacy depend on it. If the common
perception of the citizens of the nation is that an institution is not enough
trustworthy, they may not adhere to its policy decisions or they may act with
the purpose of undermining the authority of the institution. In India, private
banks are participating in para banking activities by creating subsidiary. For
instance, ICICI bank is doing the core banking activities where its subsidiary
ICICI Direct is dealing with the brokerage business and its other subsidiaries
such as ICICI Prudential and ICICI Lombard are offering insurance services.
Kotak Mahindra Bank is offering core banking services, its subsidiary Kotak
Mahindra Asset Management Company is selling the mutual fund, Kotak
securities is providing the brokerage service. On the other hand HDFC is a
holding company which is NBFC and providing finance for housing
development purpose. It is offering banking services by its subsidiary HDFC
bank; it is dealing the mutual fund by its subsidiary HDFC Asset
Management Company, it is offering insurance service by its subsidiaries
HDFC Standard Life Insurance Limited and HDFC Ergo General Insurance
Company Limited. PSU banks are dealing with para-banking activities by
creating separate division. The State bank of India is offering core banking
activities, SBI Mutual fund is dealing with the business of asset management
company, SBI life is playing in Life insurance market. Still Indian banking
sector is more or less quite conservative by nature as it did not allow the
banking company to do any other non- banking business. Similarly players
of any other sector except banking are not yet provided the banking licenses
by RBI. As a result the risk of money laundering as well as fund siphoning
can be reduced to a significant extent. The Parliament of India has approved
the Banking Law bill on 18th December 2012 which could eventually see
many of Indias largest business houses return to banking sector from where
they were compelled to exit after the ex-Prime Minister of India , Mrs Indira
Gandhi nationalized the banks. The bill has created the provision that voting
right in Private Banks will be confined to the shareholders who have the
ownership of at least 26% and voting right in Public Sector Undertaking
Banks will be restricted to the shareholders who have the ownership of at
least 10%. The minority shareholders can exercise their franchise only by
referendum where opinions of the shareholders are taken either in favour or
against of any motion. Apart from these, according to this new bill, RBI will
have the power to supersede the boards of the bank to inspect the books of
accounts of the associate companies of the bank and RBI will have the
power to inspect the books of other subsidiaries of the bank with the
concerned regulator. The bill allowed the State owned banks to raise capital
through right issue and the competitive commission of India will regulate
anti competitive practices and would also have power to approve the
corporate restructuring such as merger and acquisition (ETIG Database).

Earlier RBI used to follow the CAMEL model for supervising the banks.
According to this approach, emphasis was provided to the few parameters such as
capital, asset quality of the bank, management quality, earning quality or net
interest margin of the bank, liquidity position of the bank as well as sensitivity of
the banks toward the market risk. Apart from CAMEL, offsite monitory and
surveillance system, consolidated financial statement and consolidated prudential
report, revised long form audit report were used as the tools of supervision by the
RBI. A gradual slow but steady and silent shift took place from CAMEL based
supervision to risk based supervision. The basic purpose of risk based supervision
is to develop a risk profiling for each bank. A typical risk profile document as
mentioned by RBI incorporates CAMELs rating with trends, detail description of
key risk features captured under each CAMEL component, summary of key
business risks, SWOT analysis as well as sensitivity analysis (Yamanandra,
2003).The risk based supervision provides major emphasis on risk where risk
arises from the asset liability mismatch in banking sector. A vital issue in the
strategic bank planning is asset and Liability Management (ALM).It is the
assessment and management of financial, operational, business functions which are
endogenous by nature and management as well as mitigate different types of risks
which are exogenous by nature. The objective of ALM is to maximize returns
through efficient fund allocation given an acceptable risk structure. ALM is a
multidimensional process, requiring simultaneous interactions among different
dimensions. If the simultaneous nature of ALM is discarded, decreasing risk in one
dimension may result in unexpected increases in other risks (Tektas, 2009). The
excessive off balance sheet exposure is another area of risk faced by the banks.
6


Performance Measurement of the Bank: RBI has to supervise the
performance of different PSU banks, the old generation private banks, the
new generation private banks as well the foreign banks. There are
multifaceted approaches for the performance evaluation of the different
banks, but hardly any standardized approach is prevalent. The performance
of a bank can be analyzed by the four prolonged approach which is
composed of growth, size, sustainability of operations and risk management.
Growth incorporates growth rate in demand deposit, growth rate in loan and
advances, growth rate in core fee income, growth rate in operating profit,
growth rate in total deposit and growth rate in net interest income. Size



incorporates volume and value of demand deposit, loans and advances,
Balance Sheet size of the bank, total number of branches operating, total
number of ATMs as well as total number of employees of the bank both in
the national and international level. Sustainability of the operation includes
asset quality, productivity and efficiency of the bank. Asset quality
incorporates growth rate of Non Performing Asset, NPA provision coverage
and the ratio of net NPA to net advances. Productivity is measured by cost to
average assets ratio, operating profit per branch, operating profit per
employee. Efficiency is judged by cost to income ratio, ratio of operating
profit to total income, return on average assets, non interest income to total
income, return on average net worth, net interest income to average working
funds, net interest income , the ratio of net interest income to total average
assets and cost of fund. Risk is measured by the capital adequacy ratio and
the ratio of Tier 1 capital to total shareholders capital (Roy, 2012). A new
conceptual dimension is identified to measure the risk of the bank which is
known as Knock out ratio. The knock out ratio is computed by the ratio of
gross NPA to Tier 1 capital of the bank. A bank with high knockout ratio
indicates banks credit appraisal procedure is faulty for which non
performing loans are accumulated.

Credit Control Policies of the Central Bank: The Central bank has the
supreme authority to decide about the monetary policy of a nation. The
liquidity control mechanism followed by the RBI consists of both qualitative
and quantitative policy. Usually the quantitative controls are alternatively
termed as direct control which is equally applicable to the all sectors. The
instruments of the quantitative control includes Bank Rate, Open Market
Operations (OMO), Cash Reserve Ratio (CRR), Statutory Liquidity Ratio
(SLR), Repurchase Offer (REPO) and Reverse Repurchase Offer(Reverse
REPO). When the purchasing power of the citizen of the nation is suffering
from high inflation, the RBI will raise Bank Rate, CRR, SLR, Repo and
Reverse Repo rate to reduce the credit creating capacity of the commercial
banks. Simultaneously the RBI will prefer to sell their securities to the
commercial bank so that excess liquidity of the bank can be reduced which
will automatically curb the lending power of the banks. When the
Government of India smells the rat of recession, RBI reduces the bank rate,
CRR, SLR, repo and reverse repo rate to boost the credit creating ability of
the banks. Similarly RBI prefers to buy the securities from commercial
banks to enhance the liquidity position of the commercial banks. The
qualitative control or indirect control implies selective control as it is not
applied to all the sectors. Selective control includes regulation of margin
requirement, moral suasion and regulations of consumer credit. If the
inflation rate is quite high, RBI will raise the margin requirement which will
automatically reduce the lending power of the bank. Similarly RBI will
make an appeal to all the commercial banks not to accept those collaterals
which were accepted earlier. Enhancing the standard of collaterals, by
default RBI will be able to reduce the circulation of money within the
economy. Another stringent action RBI can take by reducing the loan ceiling
for each listed items and decreasing the number of installments within which
debtors have to repay the entire loan. On the contrary, in the anticipation of
recession, depression or liquidity crunch in the coming future, RBI reduces
the margin requirement, increases the credit ceiling as well as make a moral
appeal to the commercial banks to accept comparatively inferior quality
collateral just to ensure enough liquidity flow in the economy.



Sterilization Policy of the Central Bank: RBI plays the crucial role of
sterilization mechanism. In the era of globalization, India is following flexible
exchange rate policy where the exchange rate is market determined but the
government reserves the provision to intervene in extreme cases. It is known as
dirty float mechanism. When there is an excess inflow of the foreign fund in the
economy as Foreign Institutional Investors (FIIs) are penetrating into Indian
Market in order to enjoy the interest rate arbitrage, as an immediate effect, there
will be an appreciation of the home currency. If the home currency appreciates
beyond a certain level due to continuous buying pressure, exporting sectors are
likely to suffer a huge jolt. RBI usually intervenes in the process by buying the
dollar and selling rupee. Technically it is injection of the liquidity in the body of
the economy by RBI to stop further appreciation of home currency. To hedge
the risk of inflation, RBI issues the Government securities such as treasury bills
which are known as Market Stabilization Schemes. These T bills are held to
maturity in nature as they are not traded in the secondary market. These bills are
issued to take away the excess liquidity from the economy. On the other hand,
once there is doom and gloom situation in the economy, FIIs are pulling out
their funds from the domestic market. Due to excessive selling pressure, home
currency depreciates with respect to foreign currency which creates a
devastating effect in the importing sector. If the foreign currency depreciates
beyond a certain level, current account deficit of the nation will be wider. Under
these circumstances, RBI comes as rescuer by selling the dollar and buying the
rupee. This process is known as absorption of the liquidity from the economy.
The injection and absorption of the liquidity to the economy by RBI is known
as sterilization process which actually immunes the nation against the volatility
of exchange rate to a significant extent.
7

MAJOR BANKING SECTOR REFORMS SINCE 1991

The economic reforms initiated in 1991 also embraced the banking system.
Following are the
major reforms aimed at improving efficiency, productivity and profitability of
banks.
New banks licenced in private sector to inject competition in the system.10 in
1993 and 2 more in 2003. Another lot of new banks will be licenced in the next
few months.
FDI+FII up to 74% allowed in private sector banks.
Listing of PSBs on stock exchanges and allowing them to access capital markets
for augmenting their equity, subject to maintaining Government shareholding at
a minimum of 51%. Private shareholders represented on the Board of PSBs.
Progressive reduction in statutory pre-emption (SLR and CRR) to improve the
resource base of banks so as to expand credit available to private sector.SLR
currently at 23% (38.5% in 1991) and CRR at 4% (15% in 1991).
Adoption of international best practices in banking regulation. Introduction of
prudential norms on capital adequacy, IRAC (income recognition, asset
classification, provisioning), exposure norms etc.
Phased liberalisation of branch licensing. Banks can now open branches in Tier 2
to
Tier 6 centres without prior approval from the Reserve Bank.



Deregulation of a complex structure of deposit and lending interest rates to
strengthen competitive impluses, improve allocative efficiency and strengthen
the transmission of monetary policy.
Base rate (floor rate for lending) introduced (July 2010). Prescription of an
interest rate floor on savings deposit rate withdrawn (October 2011).
Functional autonomy to PSBs.
Use of information technology to improve the efficiency and productivity,
enhance the payment and settlement systems and deepen financial inclusion
Strengthening of Know Your Customer (KYC) and Anti-money Laundering
(AML) norms; making banking less prone to financial abuse.
Improvements in the risk management culture of banks.
8


















CONCLUSION

It is a universal saying that change is the only constant in every sphere of life.
Same is applicable for RBI also. Majority of the Indian banks have more or less
successfully implemented Basel II norms. One of the pillars of Basel II is
emphasizing on minimum capital requirement which implies if the credit rating of
bank is outstanding, they can maintain lesser capital than the stipulated norms.
Earlier credit ratings of the banks are being done by the external credit rating
agencies such as CRISIL, ICRA etc. According to the modern IRB based
approach, banks are asked to develop its own internal credit rating system. Few
Indian banks have already developed their own internal credit rating framework
such as SBI, ICICI bank and HDFC bank. But the majority of Indian banks are
striving to implement this IRB approach. More over Indian banks are passing
through a critical phase as this is the conversion phase from Basel II to Basel III.
The implementation of Basel III requires huge amount of capital. Simultaneously
maintaining an extraordinarily higher capital adequacy ratio is also not the proper
solution. Nobody can deny the fact that maintenance of certain amount of capital
adequacy ratio is required as it hedges the risk against liquidity crisis. Similarly it
is equally true that an extremely high capital adequacy ratio reduces the credit
creating capacity of the bank which creates an adverse impact on the profit margin
of the bank. Another tendency has been observed that in order to clean their
balance sheets, banks are transferring their non performing asset to its Corporate
Debt Restructuring (CDR) cell and CDRs are restructuring the loan by lowering
the interest rate and enhancing the loan repayment schedule without addressing the
28
fundamental problems. In order to stimulate capital market, the RBI is ultimately
compelled to reduce CRR, Repo and Reverse Repo rate by 25 basis points on 29th
January 2012 which will be effective from the fortnight beginning February 9,
2013(source: Economic Times on line database as on 29.1.2013) The Repo rate has
been reduced to 7.75%, Reverse Repo rate has been reduced to 6.75% and CRR
has been reduced to 4% which enhances the probability that inflation rate may go
up in near future. Therefore the RBI has to simultaneously discharge various roles
such as role of supervisor, monitor, liquidity controller as well as policy maker in
such a way so that maximum benefit can be provided to all stakeholders of the
nation.












BIBLIOGRAPHY

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