Unit – 2

Credit Control & Regulation

Prof. John Pradeep

 Reserve Bank of India

• Under which act was RBI formed?

The RBI Act, 1934
• When was RBI formed?
On April 1, 1935
• Before RBI was formed, which bank acted
as a central bank?
The Imperial Bank of India
 Reserve Bank of India

• In which bank did RBI had a stake until 2008?

The imperial bank of India, that was
converted into SBI. The shares were sold to GOI
• In which year was RBI nationalized?
1949
• Who is the present governor of RBI?
Mr. Urjit Patel
 Reserve Bank of India

• Name the website launched by RBI to educate

public about fake notes?
https://paisaboltahai.rbi.org.in/
Where is the HQ of RBI?
Mumbai
• Can you join RBI?
Yes
What are the functions of RBI?
 Issue of currency
Banker to government
Monetary
Functions Banker to bank
Manager of foreign exchange
RBI
Control of Credit
Collection and publication of data
Non-Monetary
functions Regulatory and Supervisory
Development and
promotion
 Main monetary authority of the country.
It formulates, implements and monitors
the monetary policy as well as it has to
ensure an adequate flow of credit to
productive sectors.
Design, printing and distribution.
The bank issues and exchanges or
destroys
currency and coins not fit for circulation.
The goal of ensuring an adequate supply
of clean and genuine notes.
 Reserve Bank of India

• The process of making coins is called as?

Minting
• Who is responsible for minting coins in India?
GOI
• Which act governs minting?
Coinage act, 1906
• Where coins are being minted?
Mumbai, Alipore (Kolkata), Saifabad (Hyderabad)
, Cherlapally (Hyderabad) and NOIDA (UP)
 Reserve Bank of India

• Which company does the printing of notes and minting

of coins?
Security Printing & Minting Corporation of India
Limited
• Which paper mill offers papers for currency notes?
Security Paper Mill (Unit of SPMCIL)
• Where does the printed notes are stored on behalf of
RBI?
Currency Chests of selected scheduled commercial
banks authorized by RBI
Banker to the Government: performs merchant
banking function for the central and the state
governments; also acts as their banker.
Transfer funds and settle inter-bank transactions.
All banks operating in the country have accounts with
the Reserve Bank.
Lender of the last resort
It acts as a custodian and Manages the Foreign
Exchange Management Act,(FEMA) 1999.

RBI buys and sells foreign

currency to maintain the
exchange rate of Indian
Rupee v/s foreign currencies
like the US Dollar, Euro,
Pound and Japanese yen.
Credit control is a major weapon of the RBI
used to control Demand & Supply of money in
the economy.
Besides performing the traditional
function of a central bank, the Reserve
Bank of India also perform the following
function
• The RBI has a separate Department of
Statistics for collecting, compiling and
disseminating statistical information and
conducting research related to bank and other
financial sectors of the economy including
supply of money, credit banking operation and
foreign exchange.
• The RBI Act & the Banking Act have both
conferred extensive powers of regulations
& supervisions to the RBI over commercial
& cooperative banks to check malpractices
& protect interests of the investors.
• The RBI has been aiding development &
promoting saving & banking habits.
Development of the institutional,
agriculture & other rural activities has
been an area of focus right from its
inception.
 Cash Reserve Ratio(CRR)
• Scheduled commercial Banks(SCBs) in India are
required to hold a certain proportion of their
Demand & Time Liabilities(DTL) with RBI as per
Section 42 (1) of the Reserve Bank of India Act,
1934 and as per the guidelines issued under
section 35A of Banking Regulations Act, 1949
• This minimum ratio is stipulated by the RBI and
is known as the CRR or Cash Reserve Ratio.
• Is a tool used by RBI to control liquidity in the
banking system.
 Demand Liabilities
Demand Liabilities include all liabilities which are payable on demand:
• Current deposits,
• Demand liabilities portion of savings bank deposits,
• Margins held against letters of credit/guarantees, balances in overdue
fixed deposits,
• Cash certificates and cumulative/recurring deposits,
• Outstanding telegraphic transfers (tts),
• Mail transfer (mts),
• Demand drafts (dds),
• Unclaimed deposits,
• Credit balances in the cash credit account and
• Deposits held as security for advances which are payable on demand.
 Time Liabilities

Time Liabilities are those which are payable

otherwise than on demand:
• Fixed Deposits,
• Cash Certificates,
• Cumulative And Recurring Deposits,
• Time Liabilities Portion Of Savings Bank Deposits,
• Staff Security Deposits,
• Margin Held Against Letters Of Credit,
• Gold Deposits.
 Powerful Monetary tool
RBI uses CRR to:
• Drain excess liquidity or
• Release funds needed for the growth of the economy from
time to time.
• Higher the ratio (i.e. CRR), the lower is the amount that
banks will be able to use for lending and investment.
This power of RBI to reduce the lendable amount by increasing
the CRR, makes it an instrument in the hands of a central bank
through which it can control the amount that banks lend.
Thus, it is a tool used by RBI to control liquidity in the banking
system.
 Interest rates, Inflation & CRR

Demand
customers for goods
borrow less and
to maintain and services
profit eventually thus comes
margin spend less down
Banks banks
have less increase
money lending
Increase in for rates
CRR lending

Thus, Increase in CRR increases interest rates and pulls down inflation
to some extent
 Statutory Liquidity Ratio(SLR)

• Every Scheduled commercial bank(SCB) in India is

required to maintain a minimum proportion of their
Net Demand and Time Liabilities as liquid assets in:
– Cash, or
– In gold valued at a price not exceeding the current
market price, or
– In unencumbered investment in the following
instruments: treasury bills of the government of India;
State development loans (SDLS); any other instrument
as may be notified by the Reserve Bank of India
• Maximum limit of SLR is 40%
 Reserve Bank of India

• What is the current CRR?

4% of DTL
• What is current SLR?
19.5% of NDTL
Penalty for not maintaining CRR & SLR
• 3% p.a over and above the bank rate on the amount
of shortfall
• If it continues to the next working day then the penal
interest is charged at 5% p.a over and above the
bank rate on the amount of shortfall
 Reserve Bank of India

• What is Bank Rate?

It is the rate at which RBI lends to
other banks
• What is the current Bank Rate?
6.25%
Monetary Policy
 Monetary policy- Meaning
• The part of the economic policy which regulates the
level of money in the economy in order to achieve
certain objectives
• Level of money means the Money supply
• In INDIA, RBI controls the monetary policy. It is
announced twice a year, through which RBI,
regulate the price stability for the economy.
1. Slack season policy April-September

2. Busy season policy October-March

 Objectives of Monetary Policy
1. Regulation of monetary growth and
maintenance of price stability
2. Ensuring adequate expansion of credit
3. Assist economic growth
4. Encourage flow of credit into priority &
neglected sectors
5. Strengthening of the banking system of the
country
How does RBI controls Money Supply?

Quantitative Qualitative
Measures Measures
 OMG Inflation is at high?

• What will RBI do?

 Quantitative Measures

• Reserve Ratios (CRR & SLR)

• Open Market Operation
• Bank Rate
• Policy rate or Liquidity Adjustment Facility
(Repo Rate & Reverse Repo Rate)
• Marginal Standing Facility (MSF)
 Qualitative Measures
• Margin Requirements (LTV – Loan to value)
• Consumer Credit Regulation
• Selective Credit control
• Moral Suasion
• Direct action
Quantitative Measures and Inflation

Tackling Inflation Effect on Credit Effect on loan rates

Reserve
Ratio

OMO

Bank Rate

LAF

MSF
Quantitative Measures and Inflation

Tackling Inflation Effect on Credit Effect on loan rates

Reserve Credit growth
To be increased
Ratio lowers
Credit growth
RBI sells
OMO lowers
Credit growth
To be increased Increases
Bank Rate lowers
Credit growth
To be increased Increases
LAF lowers
Credit growth
To be increased Increases
MSF lowers
 Quantitative Measures and
Deflation
Money Supply Effect on Credit Effect on loan rates

Reserve Ratio

OMO

Bank Rate

LAF

MSF
 Quantitative Measures and
Deflation
Money Supply Effect on Credit Effect on loan rates

Credit growth
Reserve Ratio To be decreased
increases
Credit growth
OMO RBI buys
increases
Credit growth
Bank Rate To be decreased Decreases
increases
Credit growth
LAF To be decreased Decreases
increases
Credit growth
MSF To be decreased Decreases
increases
 Remember

Inflation is Directly
related to Interest
rates
 Banking System in India
• Unit Banking
• Branch Banking
Advantages of Unit Banking System
• Unit banks are well aware about the local
needs of the customer, conditions,
economic problems etc.
• Unit banks are capable of offering tailor
made products to their local markets
• Unit banks find it easy to develop the right
brand image (friendly & caring) and to
develop long lasting relationship with their
customers
• Unit banks with a loyal customer base finds
easy for cross sale
Advantages of Unit Banking System
• Employees are like a close knitted society and are
loyal
• Employee participation & productivity is high
• The management has better supervision and
control
• Operating cost of unit banks are generally lower
 Disadvantages of Unit banking
• Limited area of operation limits the service
offerings of the bank
• In order to offer services in other areas, unit
banks need to tie up with correspondent
banks and loses a portion of the revenue to
the correspondent bank
• Diversification and mitigation of risk is
difficult impossible as loses in one area
cannot be setoff against earnings from other
areas
Advantages of Branch Banking System

• It increases the size and also the market share

of the bank
• It results in reduction of transaction costs
• It gives a broader customer base
• Resource mobilization and utilization becomes
easy
• Diversification of risk is possible
• Losses in one area can be setoff against
earnings from other areas
Disadvantages of Branch Banking

• Operating cost is high comparatively

• Supervision and control becomes difficult
• Effectives of control gets diluted leading to many
possibilities for bank frauds and to related risks
• More branches leads to more layers of
management leading to red-tapism and delays in
decision making
Banking Regulations Act, 1949

• The Act has 5 parts

– Part I – Preliminary
– Part II - Business of Banking Company
– Part III - Suspension of business and winding up
– Part IV - Miscellaneous
– Part V - Application of act to Co-operative banks
Banking Regulation Act,1949
 BR Act covers Banking Companies and cooperative
banks.
 BR Act is not applicable to
Primary agricultural credit societies
(PACS)
Co-Operative Land development banks
Any other Co-operative credit societies

 BR Act allows RBI (Sec 22) to issue license for banks

 Notable LDB
• Progoti Co-operative Land Development Bank Limited
• National Co-operative Agriculture & Rural
Development Banks Federation Limited
• Orissa Provincial Co-operative Land Mortgage Bank
Limited
• Delta Land Development Limited
• Land and Agricultural Development Bank of South
Africa
• Kerala State Co Operative Agricultural and Rural
Development Bank (KSCARDB)
CREDIT CO-OP. SOCIETIES IN INDIA
• State Electric Board Employee co-op Credit
Society
• Telephone Department Employee Co-op. Society
• Government Department Staff co-op. Credit
Society
• Postal Department Employees society
• Insurance Co. Employees welfare Co-op. Society
• Bank Staff Co-op Credit & consumer Society
 Sec 5(B)
• Under Section 5 (B), Banking Business means
‘Accepting for the purpose of lending or investment,
deposits of money from the public, repayable on
demand or otherwise withdrawable by cheque,
draft or otherwise.’
 Sec 5C
• Under Section 5 (C) of Banking Regulations of
1949, a banking company is defined as any
company which transacts the business of
banking.
 Sec 8
• According to Sec. 8 of the Banking Regulation Act, a
banking company cannot directly or indirectly deal
in buying or selling or bartering of goods. But it may,
however, buy, sell or barter the transactions relating
to bills of exchange received for collection or
negotiation.
 Sec 9
• According to Sec. 9 “A banking company cannot
hold any immovable property, howsoever
acquired, except for its own use, for any period
exceeding seven years from the date of
acquisition thereof. The company is permitted,
within the period of seven years, to deal or trade
in any such property for facilitating its disposal”.
• Of course, the Reserve Bank of India may, in the
interest of depositors, extend the period of
seven years by any period not exceeding five
years.
 Sec 10 (a)
• Sec. 10 (a) states that not less than 51% of the total
number of members of the Board of Directors of a
banking company shall consist of persons who have
special knowledge or practical experience in one or more
of the following fields:
 Accountancy
 Agriculture & Rural Economy
 Economics
 Finance
 Co-Operative Societies
 Law
 Small Scale Industries (SSI)
 Sec 18
• Under Sec. 18, every banking company shall, if
Indian, maintain in India, by way of a cash reserve
in Cash, with itself or in current account with the
Reserve Bank or the State Bank of India or any
other bank notified by the Central Government in
this behalf, a sum equal to at least 3% of its time
and demand liabilities in India.
• The Reserve Bank has the power to regulate the
percentage also between 3% and 15% (in case of
Scheduled Banks).
 Sec 22
• No company shall carry on banking business
in India unless it holds a licence issued in that
behalf by the Reserve Bank and any such
licence may be issued subject of such
conditions as the Reserve Bank may think fit
to impose
 Sec 24
• According to Sec. 24 of the Act, in addition to
maintaining CRR, banking companies must maintain
sufficient liquid assets in the normal course of
business. The section states that every banking
company has to maintain in cash, gold or
unencumbered (free of debt ) approved securities, an
amount not less than 25% of its demand and time
liabilities in India.
• This percentage may be changed by the RBI from
time to time according to economic circumstances of
the country. This is in addition to the average daily
balance maintained by a bank.
 Sec 29 to 34A
• The above Sections of the Banking Regulation Act deal
with the accounts and audit. Every banking company,
incorporated in India, at the end of a financial year
expiring after a period of 12 months as the Central
Government may by notification in the Official Gazette
specify, must prepare a Balance Sheet and a Profit and
Loss Account as on the last working day of that year, or,
according to the Third Schedule, or, as circumstances
permit.
• According to Sec. 30 of the Banking Regulation Act, the
Balance Sheet and Profit and Loss Account should be
prepared according to Sec. 29, and the same must be
audited by a qualified person known as auditor.
 Sec 35
• The Reserve Bank at any time may, and on being
directed so to do by the central government shall
cause an inspection to be made by one or more of
its officers of any banking company and its books
and accounts; and the Reserve bank shall supply to
the banking company a copy of its report on such
inspection