Unit 5
RBI
Q1) Explain Reserve Bank of India.
A1) The Reserve Bank of India (RBI) is the Central Bank of India, established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to stabilize India's finances and is responsible for regulating the national currency and credit system.
RBI in Mumbai serves financial markets in a variety of ways. Banks set overnight interbank lending rates. The Mumbai Interbank Offer Rate (MIBOR) serves as a benchmark for interest rate related financial products in India.
The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
First and foremost, RBI develops implements and monitors India's monetary policy. The bank's business goal is to keep prices stable and ensure that credit flows into the productive economic sector. RBI also controls all foreign exchange under the Foreign Exchange Control Act of 1999. The law allows the RBI to promote foreign trade and payments and promote the development and soundness of India's foreign exchange market.
The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q2) Give the functions of exclusive note issuance of RBI?
A2) Like other central banks, the RBI acts as the country's only monetary authority. Through the issuing department of the bank, we issue 1 rupee banknote and banknotes of all denominations except coins and coins.
1-rupee banknotes and coins and coins are issued by the Government of India. In fact, RBI also issues these coins on behalf of the Government of India. Currently, RBI issues rupees 2, 5, 10, 20, 50 and 150 banknotes.
Prior to 1956, RBI's bond issuance principles were based on the proportional reserve system. This system was replaced in 1956 with a minimum reserve system that required the RBI to hold at least Rs. Gold equivalent to 115 crores as support for the issued currency.
The rest (Rs. 85crores) must be foreign securities and the minimum of these assets, along with gold and foreign exchange reserves, is Rs. 200 rolls.
Q3) Explain privatisation of banks.
A3) Recently, the government has decided to have a relook at some key aspects of Banking Laws (Amendment) Bill 2021 - which aims to Privatise Two Public Sector Banks (PSBs) - during the Winter session of Parliament.
- In the last session, the government passed a bill that will allow the privatisation of state-owned general insurance companies, through the General Insurance Business (Nationalisation) Amendment Bill, 2021.
Banking Laws (Amendment Bill 2021)
- The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
- These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
- This move will bring down the minimum government holding in the PSBs from 51% to 26%.
In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Central Bank of India is likely to be removed from the RBI’s prompt corrective action framework soon.
The Centre is also likely to infuse capital in Central Bank of India and Indian Overseas Bank, which got out of RBI’s PCA last September, to meet regulatory requirements.
Despite the pandemic, public-sector banks have reported profits in the ongoing financial year. Impressive raising of capital from the market by PSBs has made the government confident that such lenders are now self-sufficient and may not have to look to the Centre for capital in future.
PSBs recorded net profit of Rs 31,820 crore in FY21 which has been the highest in the last five financial years.
With regard to privatising one public sector insurer, the NITI Aayog has suggested privatisation of United India Insurance, the approval to which is yet to be accorded by the Cabinet. Once approved, the DIPAM would start the privatisation process of the insurer.
Besides this, the government is also looking to restructure the regional rural banking space. A panel was appointed by the Centre to suggest turning around RRBs which is learnt to have suggested segregating RRBs into categories based on the capital they require, and if infusing funds in them is feasible. The committee’s recommendations are with the government, and the finance minister may look at providing a road map to turn around regional lenders in tomorrow’s Budget.
Q4) What are the reforms in the banking sector and Narshimham committee reports?
A4) The Banking Sector is an important part of the economy. It monitors and regulates the smooth functioning of the Indian economy. The banking sector reforms and acts are to promote the efficiency and productivity of the banking system in India. They aim to increase growth and development. They also maintain stability and adequacy in the financial market.
The modern banking of India came into place in the late 18th century. The Bank of Bombay, Bank of Bengal, and Bank of Madras are the first three banks to function well in India. They later merged and became the Imperial Bank of India.
Post-independence it became the State Bank of India in 1955. The Reserve Bank of India entered the system in 1935 and became the monitor and regulator of the Banking System of India in 1949. The Banking Regulation Act of 1949 changed the functioning of the commercial banking sector.
Though RBI was regulating the banking economy, most of the banks except SBI were private banks. By the 1960s, the banking sector was contributing a good share to the Indian economy. It became important to regulate and control to maintain the balance in the economy.
This led to the introduction of the Nationalization of Banks Act 1964. This act led to the nationalization of 14 major commercial banks in India. Though this process took place in 1969 with the president’s approval.
In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Banks are considered the backbone of any economy. In the late 1980s, Indian economy was going through a series of economic crises, including the Balance of Payment crisis. From near depletion in foreign reserves in mid-1991 to becoming the 3rd largest economy in the world in 2011, India has come a long a way. One of the major contributions in that journey has come from banks.
India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
Q5) What are the major recommendations of Narshimham committee-I?
A5) The major recommendations of Narshimham committee-I are-
Narasimham Committee- I
The first Narasimhan Committee made the following recommendations for the growth of the banking sector.
1. A 4-tier hierarchy for the Indian banking system with 3 or 4 major public sector banks at the top and rural development banks for agricultural activities at the bottom
2. A quasi-autonomous body under RBI for supervising banks and financial institutions
3. Reduction in statutory liquidity ratio
4. Reaching of 8% capital adequacy ratio
5. Deregulation of Interest rates
6. Full discloser banks’ accounts and proper classification of assets
7. Setting up Asset Reconstruction fund
Q6) What are the major recommendations of Narasimham Committee- II?
A6) This Committee is also known as the Banking Sector Committee. The task of the Committee was to review the progress of the implementation of reforms and to suggest a design for further strengthening of the sector.
The major recommendations submitted by the Committee were:
1. Stronger banking system
The Committee recommended the merger of major public sector banks to boost international trade. However, the Committee warned against merging stronger banks with weaker banks.
2. Narrow Banking
Some of the public sector banks at that time had the problem of high non-performing assets (NPAs). For successful rehabilitation of such banks, the Committee recommended Narrow Banking Concept where the banks were allowed to put their funds in short-term and risk-free assets.
3. Reform in the role of RBI
The Committee also recommended reforms in the role of the RBI in the banking sector. The Committee felt that RBI being the regulator, it should not have ownership in any bank.
4. Government ownership
It also recommended that government ownership of banks should be reviewed as it hampers the autonomy of banks resulting in mismanagement.
5. NPAs
The Committee wanted the banks to reduce their NPAs to 3% by 2002. It also recommended the formation of Asset Reconstruction Funds or Asset Reconstruction Companies. The recommendations led to the introduction of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
6. Capital Adequacy Ratio
It also proposed that the government should raise the Capital Adequacy Ratio norms.
7. Foreign banks
It also proposed to raise the minimum start-up capital to $25 million for foreign banks from $10 million.
Q7) Give the functions of Banker’s bank of RBI.
A7) As a banker's bank, RBI holds part of the cash reserves of commercial banks and lends funds in a short period of time. All banks need to maintain a certain percentage of their total debt (between 3% and 15%). The main purpose of the RBI to change this reserve requirement ratio is to manage credit.
The RBI provides financial support to commercial banks and state co-operative banks through the re-discount of bills of exchange. RBI acts as a last resort bid as it meets the financial needs of commercial banks.
The RBI is authorized by law to oversee, regulate and control the activities of commercial and co-operative banks. RBI regularly inspects the bank and asks the bank for returns and required information.
Q8) Give the functions of Banker to the government of RBI.
A8) The RBI acts as a banker for the Government of India and the state governments (excluding Jammu and Kashmir). As such, it trades all banking operations of these governments.
These are:
RBI:
(I) Receive and pay money on behalf of the government.
(II) Perform exchange remittances and other banking operations.
As a government banker, RBI provides short-term credit to the Government of India. This short-term credit can be obtained through the sale of Treasury securities. Not only this, the RBI also provides state governments with a way and means of progress (repayment in 90 days). It should be noted that the central government can borrow any amount from RBI.
The RBI also acts as a government agent for membership in the IMF and the World Bank.
In addition, RBI covers a wide range of economic issues (financing patterns, resource mobilization, institutional arrangements on banking and credit issues, banking and credit issues, international finance) as well as banking and financial issues.
Q9) Give the functions of Credit admin of RBI.
A9) The RBI manages the total money supply and bank credit to cover the interests of the country. RBI manages credits to ensure price and exchange rate stability.
To achieve this, RBI uses all types of quantitative, qualitative, and selective credit management measures. The most widely used credit product at RBI is the bank interest rate. The RBI also relies heavily on selective methods of credit management. This feature is so important that it requires special treatment.
Q10) Give the functions of Exchange management and control?
A10) One of the important central banking functions we perform is to maintain the external value of the rupee. The external stability of a currency is closely related to its internal stability, the country's inherent economic power, and the way the currency conducts its economic and financial operations.
Therefore, domestic, fiscal and monetary policy plays an important role in maintaining the external value of a currency. The Reserve Bank of India has a very important role to play in this area.
RBI has the authority to trade forex on behalf of its own account and government.
The country's official foreign reserves consist of gold coins and reserve banks' foreign exchange reserves, in addition to holding SDRs. As the administrator of the country's Forex reserves, the Reserve Bank is obliged to control the investment and use of reserves in the most lucrative managers.
Q11) Give the function of promotion and development feature of RBI.
A11) Apart from these traditional features, RBI carries out various activities of the nature of promotion and development. It seeks to mobilize savings for productive purposes. This is done in a variety of ways. For example, RBI has helped build the huge financial infrastructure we are seeing today.
'This is the Deposit Insurance Corporation (to protect depositors' interests from bank failures), the Agricultural Refinancing Development Corporation (to meet the needs of farmers), IFCI, SFC, IDBI, and UTI (for long-term support). It is composed of institutions such as. And the medium-term needs of the industry) and so on.
When it comes to co-operative credit transfers, RBI's performance really deserves praise. This curtailed money lending activity in rural economies.
Therefore, as traditionally understood, it is clear that RBI is not a typical central bank. It's more than a central bank. In addition to regulating currencies and credits, we also support the development of the Indian economy by conducting various types of promotional activities. As a result, many activities are combined in one at RBI.
Q12) What is the main purpose of RBI?
A12) The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
Q13) Write in brief the role of RBI.
A13) The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q14) What are the Banking Laws (Amendment Bill 2021)?
A14) The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
This move will bring down the minimum government holding in the PSBs from 51% to 26%.
Q15) In Budget 2021, who had announced its plan to privatise two state-owned banks?
A15) In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Q16) In 1991, who introduced Liberalisation, Privatisation, and Globalisation Policy?
A16) In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
Q17) In the 1990s, who formed a high-level committee to improve the functioning of financial institutions in India?
A17) In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
Q18) From how many phases, the Banking System of India has important acts and reforms?
A18) The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Q19) Who set up Narasimham Committee to analyse India’s banking sector and recommend reforms?
A19) India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
Q20) Under whose chairmanship the Narashimham Committee was set up?
A20) The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
Unit 5
RBI
Q1) Explain Reserve Bank of India.
A1) The Reserve Bank of India (RBI) is the Central Bank of India, established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to stabilize India's finances and is responsible for regulating the national currency and credit system.
RBI in Mumbai serves financial markets in a variety of ways. Banks set overnight interbank lending rates. The Mumbai Interbank Offer Rate (MIBOR) serves as a benchmark for interest rate related financial products in India.
The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
First and foremost, RBI develops implements and monitors India's monetary policy. The bank's business goal is to keep prices stable and ensure that credit flows into the productive economic sector. RBI also controls all foreign exchange under the Foreign Exchange Control Act of 1999. The law allows the RBI to promote foreign trade and payments and promote the development and soundness of India's foreign exchange market.
The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q2) Give the functions of exclusive note issuance of RBI?
A2) Like other central banks, the RBI acts as the country's only monetary authority. Through the issuing department of the bank, we issue 1 rupee banknote and banknotes of all denominations except coins and coins.
1-rupee banknotes and coins and coins are issued by the Government of India. In fact, RBI also issues these coins on behalf of the Government of India. Currently, RBI issues rupees 2, 5, 10, 20, 50 and 150 banknotes.
Prior to 1956, RBI's bond issuance principles were based on the proportional reserve system. This system was replaced in 1956 with a minimum reserve system that required the RBI to hold at least Rs. Gold equivalent to 115 crores as support for the issued currency.
The rest (Rs. 85crores) must be foreign securities and the minimum of these assets, along with gold and foreign exchange reserves, is Rs. 200 rolls.
Q3) Explain privatisation of banks.
A3) Recently, the government has decided to have a relook at some key aspects of Banking Laws (Amendment) Bill 2021 - which aims to Privatise Two Public Sector Banks (PSBs) - during the Winter session of Parliament.
- In the last session, the government passed a bill that will allow the privatisation of state-owned general insurance companies, through the General Insurance Business (Nationalisation) Amendment Bill, 2021.
Banking Laws (Amendment Bill 2021)
- The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
- These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
- This move will bring down the minimum government holding in the PSBs from 51% to 26%.
In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Central Bank of India is likely to be removed from the RBI’s prompt corrective action framework soon.
The Centre is also likely to infuse capital in Central Bank of India and Indian Overseas Bank, which got out of RBI’s PCA last September, to meet regulatory requirements.
Despite the pandemic, public-sector banks have reported profits in the ongoing financial year. Impressive raising of capital from the market by PSBs has made the government confident that such lenders are now self-sufficient and may not have to look to the Centre for capital in future.
PSBs recorded net profit of Rs 31,820 crore in FY21 which has been the highest in the last five financial years.
With regard to privatising one public sector insurer, the NITI Aayog has suggested privatisation of United India Insurance, the approval to which is yet to be accorded by the Cabinet. Once approved, the DIPAM would start the privatisation process of the insurer.
Besides this, the government is also looking to restructure the regional rural banking space. A panel was appointed by the Centre to suggest turning around RRBs which is learnt to have suggested segregating RRBs into categories based on the capital they require, and if infusing funds in them is feasible. The committee’s recommendations are with the government, and the finance minister may look at providing a road map to turn around regional lenders in tomorrow’s Budget.
Q4) What are the reforms in the banking sector and Narshimham committee reports?
A4) The Banking Sector is an important part of the economy. It monitors and regulates the smooth functioning of the Indian economy. The banking sector reforms and acts are to promote the efficiency and productivity of the banking system in India. They aim to increase growth and development. They also maintain stability and adequacy in the financial market.
The modern banking of India came into place in the late 18th century. The Bank of Bombay, Bank of Bengal, and Bank of Madras are the first three banks to function well in India. They later merged and became the Imperial Bank of India.
Post-independence it became the State Bank of India in 1955. The Reserve Bank of India entered the system in 1935 and became the monitor and regulator of the Banking System of India in 1949. The Banking Regulation Act of 1949 changed the functioning of the commercial banking sector.
Though RBI was regulating the banking economy, most of the banks except SBI were private banks. By the 1960s, the banking sector was contributing a good share to the Indian economy. It became important to regulate and control to maintain the balance in the economy.
This led to the introduction of the Nationalization of Banks Act 1964. This act led to the nationalization of 14 major commercial banks in India. Though this process took place in 1969 with the president’s approval.
In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Banks are considered the backbone of any economy. In the late 1980s, Indian economy was going through a series of economic crises, including the Balance of Payment crisis. From near depletion in foreign reserves in mid-1991 to becoming the 3rd largest economy in the world in 2011, India has come a long a way. One of the major contributions in that journey has come from banks.
India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
Q5) What are the major recommendations of Narshimham committee-I?
A5) The major recommendations of Narshimham committee-I are-
Narasimham Committee- I
The first Narasimhan Committee made the following recommendations for the growth of the banking sector.
1. A 4-tier hierarchy for the Indian banking system with 3 or 4 major public sector banks at the top and rural development banks for agricultural activities at the bottom
2. A quasi-autonomous body under RBI for supervising banks and financial institutions
3. Reduction in statutory liquidity ratio
4. Reaching of 8% capital adequacy ratio
5. Deregulation of Interest rates
6. Full discloser banks’ accounts and proper classification of assets
7. Setting up Asset Reconstruction fund
Q6) What are the major recommendations of Narasimham Committee- II?
A6) This Committee is also known as the Banking Sector Committee. The task of the Committee was to review the progress of the implementation of reforms and to suggest a design for further strengthening of the sector.
The major recommendations submitted by the Committee were:
1. Stronger banking system
The Committee recommended the merger of major public sector banks to boost international trade. However, the Committee warned against merging stronger banks with weaker banks.
2. Narrow Banking
Some of the public sector banks at that time had the problem of high non-performing assets (NPAs). For successful rehabilitation of such banks, the Committee recommended Narrow Banking Concept where the banks were allowed to put their funds in short-term and risk-free assets.
3. Reform in the role of RBI
The Committee also recommended reforms in the role of the RBI in the banking sector. The Committee felt that RBI being the regulator, it should not have ownership in any bank.
4. Government ownership
It also recommended that government ownership of banks should be reviewed as it hampers the autonomy of banks resulting in mismanagement.
5. NPAs
The Committee wanted the banks to reduce their NPAs to 3% by 2002. It also recommended the formation of Asset Reconstruction Funds or Asset Reconstruction Companies. The recommendations led to the introduction of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
6. Capital Adequacy Ratio
It also proposed that the government should raise the Capital Adequacy Ratio norms.
7. Foreign banks
It also proposed to raise the minimum start-up capital to $25 million for foreign banks from $10 million.
Q7) Give the functions of Banker’s bank of RBI.
A7) As a banker's bank, RBI holds part of the cash reserves of commercial banks and lends funds in a short period of time. All banks need to maintain a certain percentage of their total debt (between 3% and 15%). The main purpose of the RBI to change this reserve requirement ratio is to manage credit.
The RBI provides financial support to commercial banks and state co-operative banks through the re-discount of bills of exchange. RBI acts as a last resort bid as it meets the financial needs of commercial banks.
The RBI is authorized by law to oversee, regulate and control the activities of commercial and co-operative banks. RBI regularly inspects the bank and asks the bank for returns and required information.
Q8) Give the functions of Banker to the government of RBI.
A8) The RBI acts as a banker for the Government of India and the state governments (excluding Jammu and Kashmir). As such, it trades all banking operations of these governments.
These are:
RBI:
(I) Receive and pay money on behalf of the government.
(II) Perform exchange remittances and other banking operations.
As a government banker, RBI provides short-term credit to the Government of India. This short-term credit can be obtained through the sale of Treasury securities. Not only this, the RBI also provides state governments with a way and means of progress (repayment in 90 days). It should be noted that the central government can borrow any amount from RBI.
The RBI also acts as a government agent for membership in the IMF and the World Bank.
In addition, RBI covers a wide range of economic issues (financing patterns, resource mobilization, institutional arrangements on banking and credit issues, banking and credit issues, international finance) as well as banking and financial issues.
Q9) Give the functions of Credit admin of RBI.
A9) The RBI manages the total money supply and bank credit to cover the interests of the country. RBI manages credits to ensure price and exchange rate stability.
To achieve this, RBI uses all types of quantitative, qualitative, and selective credit management measures. The most widely used credit product at RBI is the bank interest rate. The RBI also relies heavily on selective methods of credit management. This feature is so important that it requires special treatment.
Q10) Give the functions of Exchange management and control?
A10) One of the important central banking functions we perform is to maintain the external value of the rupee. The external stability of a currency is closely related to its internal stability, the country's inherent economic power, and the way the currency conducts its economic and financial operations.
Therefore, domestic, fiscal and monetary policy plays an important role in maintaining the external value of a currency. The Reserve Bank of India has a very important role to play in this area.
RBI has the authority to trade forex on behalf of its own account and government.
The country's official foreign reserves consist of gold coins and reserve banks' foreign exchange reserves, in addition to holding SDRs. As the administrator of the country's Forex reserves, the Reserve Bank is obliged to control the investment and use of reserves in the most lucrative managers.
Q11) Give the function of promotion and development feature of RBI.
A11) Apart from these traditional features, RBI carries out various activities of the nature of promotion and development. It seeks to mobilize savings for productive purposes. This is done in a variety of ways. For example, RBI has helped build the huge financial infrastructure we are seeing today.
'This is the Deposit Insurance Corporation (to protect depositors' interests from bank failures), the Agricultural Refinancing Development Corporation (to meet the needs of farmers), IFCI, SFC, IDBI, and UTI (for long-term support). It is composed of institutions such as. And the medium-term needs of the industry) and so on.
When it comes to co-operative credit transfers, RBI's performance really deserves praise. This curtailed money lending activity in rural economies.
Therefore, as traditionally understood, it is clear that RBI is not a typical central bank. It's more than a central bank. In addition to regulating currencies and credits, we also support the development of the Indian economy by conducting various types of promotional activities. As a result, many activities are combined in one at RBI.
Q12) What is the main purpose of RBI?
A12) The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
Q13) Write in brief the role of RBI.
A13) The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q14) What are the Banking Laws (Amendment Bill 2021)?
A14) The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
This move will bring down the minimum government holding in the PSBs from 51% to 26%.
Q15) In Budget 2021, who had announced its plan to privatise two state-owned banks?
A15) In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Q16) In 1991, who introduced Liberalisation, Privatisation, and Globalisation Policy?
A16) In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
Q17) In the 1990s, who formed a high-level committee to improve the functioning of financial institutions in India?
A17) In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
Q18) From how many phases, the Banking System of India has important acts and reforms?
A18) The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Q19) Who set up Narasimham Committee to analyse India’s banking sector and recommend reforms?
A19) India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
Q20) Under whose chairmanship the Narashimham Committee was set up?
A20) The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
Unit 5
RBI
Q1) Explain Reserve Bank of India.
A1) The Reserve Bank of India (RBI) is the Central Bank of India, established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to stabilize India's finances and is responsible for regulating the national currency and credit system.
RBI in Mumbai serves financial markets in a variety of ways. Banks set overnight interbank lending rates. The Mumbai Interbank Offer Rate (MIBOR) serves as a benchmark for interest rate related financial products in India.
The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
First and foremost, RBI develops implements and monitors India's monetary policy. The bank's business goal is to keep prices stable and ensure that credit flows into the productive economic sector. RBI also controls all foreign exchange under the Foreign Exchange Control Act of 1999. The law allows the RBI to promote foreign trade and payments and promote the development and soundness of India's foreign exchange market.
The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q2) Give the functions of exclusive note issuance of RBI?
A2) Like other central banks, the RBI acts as the country's only monetary authority. Through the issuing department of the bank, we issue 1 rupee banknote and banknotes of all denominations except coins and coins.
1-rupee banknotes and coins and coins are issued by the Government of India. In fact, RBI also issues these coins on behalf of the Government of India. Currently, RBI issues rupees 2, 5, 10, 20, 50 and 150 banknotes.
Prior to 1956, RBI's bond issuance principles were based on the proportional reserve system. This system was replaced in 1956 with a minimum reserve system that required the RBI to hold at least Rs. Gold equivalent to 115 crores as support for the issued currency.
The rest (Rs. 85crores) must be foreign securities and the minimum of these assets, along with gold and foreign exchange reserves, is Rs. 200 rolls.
Q3) Explain privatisation of banks.
A3) Recently, the government has decided to have a relook at some key aspects of Banking Laws (Amendment) Bill 2021 - which aims to Privatise Two Public Sector Banks (PSBs) - during the Winter session of Parliament.
- In the last session, the government passed a bill that will allow the privatisation of state-owned general insurance companies, through the General Insurance Business (Nationalisation) Amendment Bill, 2021.
Banking Laws (Amendment Bill 2021)
- The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
- These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
- This move will bring down the minimum government holding in the PSBs from 51% to 26%.
In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Central Bank of India is likely to be removed from the RBI’s prompt corrective action framework soon.
The Centre is also likely to infuse capital in Central Bank of India and Indian Overseas Bank, which got out of RBI’s PCA last September, to meet regulatory requirements.
Despite the pandemic, public-sector banks have reported profits in the ongoing financial year. Impressive raising of capital from the market by PSBs has made the government confident that such lenders are now self-sufficient and may not have to look to the Centre for capital in future.
PSBs recorded net profit of Rs 31,820 crore in FY21 which has been the highest in the last five financial years.
With regard to privatising one public sector insurer, the NITI Aayog has suggested privatisation of United India Insurance, the approval to which is yet to be accorded by the Cabinet. Once approved, the DIPAM would start the privatisation process of the insurer.
Besides this, the government is also looking to restructure the regional rural banking space. A panel was appointed by the Centre to suggest turning around RRBs which is learnt to have suggested segregating RRBs into categories based on the capital they require, and if infusing funds in them is feasible. The committee’s recommendations are with the government, and the finance minister may look at providing a road map to turn around regional lenders in tomorrow’s Budget.
Q4) What are the reforms in the banking sector and Narshimham committee reports?
A4) The Banking Sector is an important part of the economy. It monitors and regulates the smooth functioning of the Indian economy. The banking sector reforms and acts are to promote the efficiency and productivity of the banking system in India. They aim to increase growth and development. They also maintain stability and adequacy in the financial market.
The modern banking of India came into place in the late 18th century. The Bank of Bombay, Bank of Bengal, and Bank of Madras are the first three banks to function well in India. They later merged and became the Imperial Bank of India.
Post-independence it became the State Bank of India in 1955. The Reserve Bank of India entered the system in 1935 and became the monitor and regulator of the Banking System of India in 1949. The Banking Regulation Act of 1949 changed the functioning of the commercial banking sector.
Though RBI was regulating the banking economy, most of the banks except SBI were private banks. By the 1960s, the banking sector was contributing a good share to the Indian economy. It became important to regulate and control to maintain the balance in the economy.
This led to the introduction of the Nationalization of Banks Act 1964. This act led to the nationalization of 14 major commercial banks in India. Though this process took place in 1969 with the president’s approval.
In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Banks are considered the backbone of any economy. In the late 1980s, Indian economy was going through a series of economic crises, including the Balance of Payment crisis. From near depletion in foreign reserves in mid-1991 to becoming the 3rd largest economy in the world in 2011, India has come a long a way. One of the major contributions in that journey has come from banks.
India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
Q5) What are the major recommendations of Narshimham committee-I?
A5) The major recommendations of Narshimham committee-I are-
Narasimham Committee- I
The first Narasimhan Committee made the following recommendations for the growth of the banking sector.
1. A 4-tier hierarchy for the Indian banking system with 3 or 4 major public sector banks at the top and rural development banks for agricultural activities at the bottom
2. A quasi-autonomous body under RBI for supervising banks and financial institutions
3. Reduction in statutory liquidity ratio
4. Reaching of 8% capital adequacy ratio
5. Deregulation of Interest rates
6. Full discloser banks’ accounts and proper classification of assets
7. Setting up Asset Reconstruction fund
Q6) What are the major recommendations of Narasimham Committee- II?
A6) This Committee is also known as the Banking Sector Committee. The task of the Committee was to review the progress of the implementation of reforms and to suggest a design for further strengthening of the sector.
The major recommendations submitted by the Committee were:
1. Stronger banking system
The Committee recommended the merger of major public sector banks to boost international trade. However, the Committee warned against merging stronger banks with weaker banks.
2. Narrow Banking
Some of the public sector banks at that time had the problem of high non-performing assets (NPAs). For successful rehabilitation of such banks, the Committee recommended Narrow Banking Concept where the banks were allowed to put their funds in short-term and risk-free assets.
3. Reform in the role of RBI
The Committee also recommended reforms in the role of the RBI in the banking sector. The Committee felt that RBI being the regulator, it should not have ownership in any bank.
4. Government ownership
It also recommended that government ownership of banks should be reviewed as it hampers the autonomy of banks resulting in mismanagement.
5. NPAs
The Committee wanted the banks to reduce their NPAs to 3% by 2002. It also recommended the formation of Asset Reconstruction Funds or Asset Reconstruction Companies. The recommendations led to the introduction of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
6. Capital Adequacy Ratio
It also proposed that the government should raise the Capital Adequacy Ratio norms.
7. Foreign banks
It also proposed to raise the minimum start-up capital to $25 million for foreign banks from $10 million.
Q7) Give the functions of Banker’s bank of RBI.
A7) As a banker's bank, RBI holds part of the cash reserves of commercial banks and lends funds in a short period of time. All banks need to maintain a certain percentage of their total debt (between 3% and 15%). The main purpose of the RBI to change this reserve requirement ratio is to manage credit.
The RBI provides financial support to commercial banks and state co-operative banks through the re-discount of bills of exchange. RBI acts as a last resort bid as it meets the financial needs of commercial banks.
The RBI is authorized by law to oversee, regulate and control the activities of commercial and co-operative banks. RBI regularly inspects the bank and asks the bank for returns and required information.
Q8) Give the functions of Banker to the government of RBI.
A8) The RBI acts as a banker for the Government of India and the state governments (excluding Jammu and Kashmir). As such, it trades all banking operations of these governments.
These are:
RBI:
(I) Receive and pay money on behalf of the government.
(II) Perform exchange remittances and other banking operations.
As a government banker, RBI provides short-term credit to the Government of India. This short-term credit can be obtained through the sale of Treasury securities. Not only this, the RBI also provides state governments with a way and means of progress (repayment in 90 days). It should be noted that the central government can borrow any amount from RBI.
The RBI also acts as a government agent for membership in the IMF and the World Bank.
In addition, RBI covers a wide range of economic issues (financing patterns, resource mobilization, institutional arrangements on banking and credit issues, banking and credit issues, international finance) as well as banking and financial issues.
Q9) Give the functions of Credit admin of RBI.
A9) The RBI manages the total money supply and bank credit to cover the interests of the country. RBI manages credits to ensure price and exchange rate stability.
To achieve this, RBI uses all types of quantitative, qualitative, and selective credit management measures. The most widely used credit product at RBI is the bank interest rate. The RBI also relies heavily on selective methods of credit management. This feature is so important that it requires special treatment.
Q10) Give the functions of Exchange management and control?
A10) One of the important central banking functions we perform is to maintain the external value of the rupee. The external stability of a currency is closely related to its internal stability, the country's inherent economic power, and the way the currency conducts its economic and financial operations.
Therefore, domestic, fiscal and monetary policy plays an important role in maintaining the external value of a currency. The Reserve Bank of India has a very important role to play in this area.
RBI has the authority to trade forex on behalf of its own account and government.
The country's official foreign reserves consist of gold coins and reserve banks' foreign exchange reserves, in addition to holding SDRs. As the administrator of the country's Forex reserves, the Reserve Bank is obliged to control the investment and use of reserves in the most lucrative managers.
Q11) Give the function of promotion and development feature of RBI.
A11) Apart from these traditional features, RBI carries out various activities of the nature of promotion and development. It seeks to mobilize savings for productive purposes. This is done in a variety of ways. For example, RBI has helped build the huge financial infrastructure we are seeing today.
'This is the Deposit Insurance Corporation (to protect depositors' interests from bank failures), the Agricultural Refinancing Development Corporation (to meet the needs of farmers), IFCI, SFC, IDBI, and UTI (for long-term support). It is composed of institutions such as. And the medium-term needs of the industry) and so on.
When it comes to co-operative credit transfers, RBI's performance really deserves praise. This curtailed money lending activity in rural economies.
Therefore, as traditionally understood, it is clear that RBI is not a typical central bank. It's more than a central bank. In addition to regulating currencies and credits, we also support the development of the Indian economy by conducting various types of promotional activities. As a result, many activities are combined in one at RBI.
Q12) What is the main purpose of RBI?
A12) The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
Q13) Write in brief the role of RBI.
A13) The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q14) What are the Banking Laws (Amendment Bill 2021)?
A14) The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
This move will bring down the minimum government holding in the PSBs from 51% to 26%.
Q15) In Budget 2021, who had announced its plan to privatise two state-owned banks?
A15) In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Q16) In 1991, who introduced Liberalisation, Privatisation, and Globalisation Policy?
A16) In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
Q17) In the 1990s, who formed a high-level committee to improve the functioning of financial institutions in India?
A17) In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
Q18) From how many phases, the Banking System of India has important acts and reforms?
A18) The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Q19) Who set up Narasimham Committee to analyse India’s banking sector and recommend reforms?
A19) India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
Q20) Under whose chairmanship the Narashimham Committee was set up?
A20) The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
Unit 5
RBI
Q1) Explain Reserve Bank of India.
A1) The Reserve Bank of India (RBI) is the Central Bank of India, established on April 1, 1935, under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to stabilize India's finances and is responsible for regulating the national currency and credit system.
RBI in Mumbai serves financial markets in a variety of ways. Banks set overnight interbank lending rates. The Mumbai Interbank Offer Rate (MIBOR) serves as a benchmark for interest rate related financial products in India.
The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
First and foremost, RBI develops implements and monitors India's monetary policy. The bank's business goal is to keep prices stable and ensure that credit flows into the productive economic sector. RBI also controls all foreign exchange under the Foreign Exchange Control Act of 1999. The law allows the RBI to promote foreign trade and payments and promote the development and soundness of India's foreign exchange market.
The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q2) Give the functions of exclusive note issuance of RBI?
A2) Like other central banks, the RBI acts as the country's only monetary authority. Through the issuing department of the bank, we issue 1 rupee banknote and banknotes of all denominations except coins and coins.
1-rupee banknotes and coins and coins are issued by the Government of India. In fact, RBI also issues these coins on behalf of the Government of India. Currently, RBI issues rupees 2, 5, 10, 20, 50 and 150 banknotes.
Prior to 1956, RBI's bond issuance principles were based on the proportional reserve system. This system was replaced in 1956 with a minimum reserve system that required the RBI to hold at least Rs. Gold equivalent to 115 crores as support for the issued currency.
The rest (Rs. 85crores) must be foreign securities and the minimum of these assets, along with gold and foreign exchange reserves, is Rs. 200 rolls.
Q3) Explain privatisation of banks.
A3) Recently, the government has decided to have a relook at some key aspects of Banking Laws (Amendment) Bill 2021 - which aims to Privatise Two Public Sector Banks (PSBs) - during the Winter session of Parliament.
- In the last session, the government passed a bill that will allow the privatisation of state-owned general insurance companies, through the General Insurance Business (Nationalisation) Amendment Bill, 2021.
Banking Laws (Amendment Bill 2021)
- The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
- These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
- This move will bring down the minimum government holding in the PSBs from 51% to 26%.
In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Central Bank of India is likely to be removed from the RBI’s prompt corrective action framework soon.
The Centre is also likely to infuse capital in Central Bank of India and Indian Overseas Bank, which got out of RBI’s PCA last September, to meet regulatory requirements.
Despite the pandemic, public-sector banks have reported profits in the ongoing financial year. Impressive raising of capital from the market by PSBs has made the government confident that such lenders are now self-sufficient and may not have to look to the Centre for capital in future.
PSBs recorded net profit of Rs 31,820 crore in FY21 which has been the highest in the last five financial years.
With regard to privatising one public sector insurer, the NITI Aayog has suggested privatisation of United India Insurance, the approval to which is yet to be accorded by the Cabinet. Once approved, the DIPAM would start the privatisation process of the insurer.
Besides this, the government is also looking to restructure the regional rural banking space. A panel was appointed by the Centre to suggest turning around RRBs which is learnt to have suggested segregating RRBs into categories based on the capital they require, and if infusing funds in them is feasible. The committee’s recommendations are with the government, and the finance minister may look at providing a road map to turn around regional lenders in tomorrow’s Budget.
Q4) What are the reforms in the banking sector and Narshimham committee reports?
A4) The Banking Sector is an important part of the economy. It monitors and regulates the smooth functioning of the Indian economy. The banking sector reforms and acts are to promote the efficiency and productivity of the banking system in India. They aim to increase growth and development. They also maintain stability and adequacy in the financial market.
The modern banking of India came into place in the late 18th century. The Bank of Bombay, Bank of Bengal, and Bank of Madras are the first three banks to function well in India. They later merged and became the Imperial Bank of India.
Post-independence it became the State Bank of India in 1955. The Reserve Bank of India entered the system in 1935 and became the monitor and regulator of the Banking System of India in 1949. The Banking Regulation Act of 1949 changed the functioning of the commercial banking sector.
Though RBI was regulating the banking economy, most of the banks except SBI were private banks. By the 1960s, the banking sector was contributing a good share to the Indian economy. It became important to regulate and control to maintain the balance in the economy.
This led to the introduction of the Nationalization of Banks Act 1964. This act led to the nationalization of 14 major commercial banks in India. Though this process took place in 1969 with the president’s approval.
In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Banks are considered the backbone of any economy. In the late 1980s, Indian economy was going through a series of economic crises, including the Balance of Payment crisis. From near depletion in foreign reserves in mid-1991 to becoming the 3rd largest economy in the world in 2011, India has come a long a way. One of the major contributions in that journey has come from banks.
India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
Q5) What are the major recommendations of Narshimham committee-I?
A5) The major recommendations of Narshimham committee-I are-
Narasimham Committee- I
The first Narasimhan Committee made the following recommendations for the growth of the banking sector.
1. A 4-tier hierarchy for the Indian banking system with 3 or 4 major public sector banks at the top and rural development banks for agricultural activities at the bottom
2. A quasi-autonomous body under RBI for supervising banks and financial institutions
3. Reduction in statutory liquidity ratio
4. Reaching of 8% capital adequacy ratio
5. Deregulation of Interest rates
6. Full discloser banks’ accounts and proper classification of assets
7. Setting up Asset Reconstruction fund
Q6) What are the major recommendations of Narasimham Committee- II?
A6) This Committee is also known as the Banking Sector Committee. The task of the Committee was to review the progress of the implementation of reforms and to suggest a design for further strengthening of the sector.
The major recommendations submitted by the Committee were:
1. Stronger banking system
The Committee recommended the merger of major public sector banks to boost international trade. However, the Committee warned against merging stronger banks with weaker banks.
2. Narrow Banking
Some of the public sector banks at that time had the problem of high non-performing assets (NPAs). For successful rehabilitation of such banks, the Committee recommended Narrow Banking Concept where the banks were allowed to put their funds in short-term and risk-free assets.
3. Reform in the role of RBI
The Committee also recommended reforms in the role of the RBI in the banking sector. The Committee felt that RBI being the regulator, it should not have ownership in any bank.
4. Government ownership
It also recommended that government ownership of banks should be reviewed as it hampers the autonomy of banks resulting in mismanagement.
5. NPAs
The Committee wanted the banks to reduce their NPAs to 3% by 2002. It also recommended the formation of Asset Reconstruction Funds or Asset Reconstruction Companies. The recommendations led to the introduction of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
6. Capital Adequacy Ratio
It also proposed that the government should raise the Capital Adequacy Ratio norms.
7. Foreign banks
It also proposed to raise the minimum start-up capital to $25 million for foreign banks from $10 million.
Q7) Give the functions of Banker’s bank of RBI.
A7) As a banker's bank, RBI holds part of the cash reserves of commercial banks and lends funds in a short period of time. All banks need to maintain a certain percentage of their total debt (between 3% and 15%). The main purpose of the RBI to change this reserve requirement ratio is to manage credit.
The RBI provides financial support to commercial banks and state co-operative banks through the re-discount of bills of exchange. RBI acts as a last resort bid as it meets the financial needs of commercial banks.
The RBI is authorized by law to oversee, regulate and control the activities of commercial and co-operative banks. RBI regularly inspects the bank and asks the bank for returns and required information.
Q8) Give the functions of Banker to the government of RBI.
A8) The RBI acts as a banker for the Government of India and the state governments (excluding Jammu and Kashmir). As such, it trades all banking operations of these governments.
These are:
RBI:
(I) Receive and pay money on behalf of the government.
(II) Perform exchange remittances and other banking operations.
As a government banker, RBI provides short-term credit to the Government of India. This short-term credit can be obtained through the sale of Treasury securities. Not only this, the RBI also provides state governments with a way and means of progress (repayment in 90 days). It should be noted that the central government can borrow any amount from RBI.
The RBI also acts as a government agent for membership in the IMF and the World Bank.
In addition, RBI covers a wide range of economic issues (financing patterns, resource mobilization, institutional arrangements on banking and credit issues, banking and credit issues, international finance) as well as banking and financial issues.
Q9) Give the functions of Credit admin of RBI.
A9) The RBI manages the total money supply and bank credit to cover the interests of the country. RBI manages credits to ensure price and exchange rate stability.
To achieve this, RBI uses all types of quantitative, qualitative, and selective credit management measures. The most widely used credit product at RBI is the bank interest rate. The RBI also relies heavily on selective methods of credit management. This feature is so important that it requires special treatment.
Q10) Give the functions of Exchange management and control?
A10) One of the important central banking functions we perform is to maintain the external value of the rupee. The external stability of a currency is closely related to its internal stability, the country's inherent economic power, and the way the currency conducts its economic and financial operations.
Therefore, domestic, fiscal and monetary policy plays an important role in maintaining the external value of a currency. The Reserve Bank of India has a very important role to play in this area.
RBI has the authority to trade forex on behalf of its own account and government.
The country's official foreign reserves consist of gold coins and reserve banks' foreign exchange reserves, in addition to holding SDRs. As the administrator of the country's Forex reserves, the Reserve Bank is obliged to control the investment and use of reserves in the most lucrative managers.
Q11) Give the function of promotion and development feature of RBI.
A11) Apart from these traditional features, RBI carries out various activities of the nature of promotion and development. It seeks to mobilize savings for productive purposes. This is done in a variety of ways. For example, RBI has helped build the huge financial infrastructure we are seeing today.
'This is the Deposit Insurance Corporation (to protect depositors' interests from bank failures), the Agricultural Refinancing Development Corporation (to meet the needs of farmers), IFCI, SFC, IDBI, and UTI (for long-term support). It is composed of institutions such as. And the medium-term needs of the industry) and so on.
When it comes to co-operative credit transfers, RBI's performance really deserves praise. This curtailed money lending activity in rural economies.
Therefore, as traditionally understood, it is clear that RBI is not a typical central bank. It's more than a central bank. In addition to regulating currencies and credits, we also support the development of the Indian economy by conducting various types of promotional activities. As a result, many activities are combined in one at RBI.
Q12) What is the main purpose of RBI?
A12) The main purpose of the RBI is to provide integrated oversight of the Indian financial sector, which consists of commercial banks, financial institutions, and non-bank financial companies. Initiatives adopted by the RBI include rebuilding bank inspections, implementing off-site monitoring of banks and financial institutions, and strengthening the role of auditors.
Q13) Write in brief the role of RBI.
A13) The RBI acts as a regulatory and supervisory authority for the entire financial system. It injects public trust into the country's financial system, protects interest rates and provides the public with a positive banking alternative. Finally, the RBI acts as the issuer of your home currency. For India, this means that the currency will be issued or destroyed depending on its suitability for current distribution. It provides the Indian people with a supply of currency in the form of reliable banknotes and coins. This is a long-standing problem in India. In 2018, the RBI banned the use of crypto currencies by regulated financial institutions and banks.
Q14) What are the Banking Laws (Amendment Bill 2021)?
A14) The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.
These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.
This move will bring down the minimum government holding in the PSBs from 51% to 26%.
Q15) In Budget 2021, who had announced its plan to privatise two state-owned banks?
A15) In Budget 2021, the Centre had announced its plan to privatise two state-owned banks. But it made little progress to implement the plan on the ground. That was because it could not move legislative amendments to enable privatisation of public sector lenders – the first step towards privatisation – due to Covid-19 pandemic and disruptions in Parliament.
According to the proposed amendments that were to be moved in the winter session of Parliament, the government is to lower the minimum stake it holds in public-sector banks to 26 per cent from the previously mandated 51 per cent. The legislation also aimed at empowering the government to make a scheme for privatisation of PSBs in consultation with the RBI. The proposed legislation had provisions regarding the disqualification of directors, as well as terms and conditions for service of chairmen, whole-time directors, and boards of directors.
The government is also to consider changing the foreign direct investment limit in public-sector banks, which is 20 per cent at present.
The government has informed Parliament that the Cabinet has not taken any decision on privatisation of two state-owned lenders announced in Budget 2021-22. However, the NITI Aayog has reportedly recommended privatisation of Indian Overseas Bank and Central Bank of India.
Q16) In 1991, who introduced Liberalisation, Privatisation, and Globalisation Policy?
A16) In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.
The licensing, taxation, formation process, etc became more flexible for banking companies.
Q17) In the 1990s, who formed a high-level committee to improve the functioning of financial institutions in India?
A17) In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.
Q18) From how many phases, the Banking System of India has important acts and reforms?
A18) The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.
Q19) Who set up Narasimham Committee to analyse India’s banking sector and recommend reforms?
A19) India has both public and private sector banks. As India liberalised its economy in 1991, it was felt that banks were not performing efficiently. During the economic crises, it was recognised that banks have a crucial role to play in the economy and, hence, the banking sector had to be more competitive and effective. For that, Ministry of Finance under then finance minister Dr Manmohan Singh set up Narasimham Committee to analyse India’s banking sector and recommend reforms.
Q20) Under whose chairmanship the Narashimham Committee was set up?
A20) The Committee was set up under the chairmanship of Maidavolu Narasimham. He was the 13th governor of the Reserve Bank of India (RBI) from 2 May 1977 to 30 November 1977. There was another Committee, this time under P Chidambaram as the finance minister, headed by Narasimham, which was formed in 1998. The first Committee was set up in 1991 and is referred to as the Narasimham Committee- I, and the 1998 Committee is known as the Narasimham Committee – II.
