Central Banking (RBI)

Central BankingCentral Banking

ByBy

ITM E-MBA XIII-BITM E-MBA XIII-B

Manish Bhat (Roll No-77)Manish Bhat (Roll No-77)

Pawan Jadhav (Roll No-85)Pawan Jadhav (Roll No-85)

Sandeep Shirsekar (Roll No-93)Sandeep Shirsekar (Roll No-93)

Points coveredPoints covered

Central bank- Meaning, Central bank- Meaning, DefinitionsDefinitions

Origin, History & StructureOrigin, History & Structure FunctionsFunctions Monetary policies & objectivesMonetary policies & objectives Qualitative & Quantitative Qualitative & Quantitative

PoliciesPolicies ConclusionConclusion

Central BankCentral Bank

““A central bank is a lender of last resort”A central bank is a lender of last resort” -- Prof.Hawtry-- Prof.Hawtry

““It is a bank of banker”It is a bank of banker” -- Samuelson-- Samuelson

““Bank which has monopoly over note Bank which has monopoly over note issue” issue”

-- Vera Smith-- Vera Smith

““Central bank is the government’s bank”Central bank is the government’s bank” -- Sayers-- Sayers

Central bankingCentral banking

““An institution charged with the An institution charged with the responsibility of managing the responsibility of managing the expansion and contraction of the expansion and contraction of the volume of money in the interest of volume of money in the interest of general public welfare”general public welfare”

Prof.Kent Prof.Kent

““One which constitute the apex of One which constitute the apex of the monetary and banking structure the monetary and banking structure of its country”of its country”

Prof.M.H.De KockProf.M.H.De Kock

RBI and its originRBI and its origin

Commenced Operations on 1Commenced Operations on 1stst April 1935 as per The Reserve April 1935 as per The Reserve Bank of India Act, 1934 (II of 1934) Bank of India Act, 1934 (II of 1934) and Nationalise on 1and Nationalise on 1stst Jan 1949. Jan 1949.

To regulate the issue of banknotesTo regulate the issue of banknotes To maintain reserves with a view to To maintain reserves with a view to

securing monetary stability andsecuring monetary stability and To operate the credit and currency To operate the credit and currency

system of the country to its system of the country to its advantage. advantage.

Structure of Banking in IndiaStructure of Banking in India

Reserve Bank

Commercial Bank Co-operative Bank

-Public Sector Bank -State Co-op bank

-Private Sector bank -Central Co-op Bank

-Regional Rural Bank -Primary Co-op Soc

Functional ChartFunctional Chart

Organisational StructureOrganisational Structure

Functions of RBIFunctions of RBI

Bank of Note issueBank of Note issue The Government’s BankThe Government’s Bank Banker’s BankBanker’s Bank Custodian Foreign Exchange Custodian Foreign Exchange

Reserves for countryReserves for country Lender of last resort and bank of Lender of last resort and bank of

rediscounting.rediscounting. Controller of creditController of credit

Monetary PolicyMonetary Policy

“ “Monetary policy is essentially a Monetary policy is essentially a programme of action undertaken programme of action undertaken by central bank,by central bank,to control and to control and regulate the supply of moneyregulate the supply of money with the public and flow of credit with the public and flow of credit with a view of with a view of achieving achieving predetermined macroeconomic predetermined macroeconomic goals.”goals.”

-Macroeconomics-Theory & policy-D.N.Dwivedi-Tata Magraw Hill comp,-Macroeconomics-Theory & policy-D.N.Dwivedi-Tata Magraw Hill comp,

Instruments of Monetary Instruments of Monetary Policy (Economic variables)Policy (Economic variables)

Weapons of Monetary controls Nuts & Bolts of Monetary policy

-- Samuelson & Nordhaus

Quantitative credit control (General credit control) – Control of quantity or volume of money

Qualitative credit control ( Selective credit control) – Quality /Purpose/Direction of credit control

Objectives of Credit ControlObjectives of Credit Control

To stabilise internal price levelTo stabilise internal price level To stabilise the rate of foreign To stabilise the rate of foreign

exchangeexchange To protect the outflow of goldTo protect the outflow of gold To control business cyclesTo control business cycles To meet business needsTo meet business needs To have growth & stability To have growth & stability

Credit Control MeasuresCredit Control Measures

Quantitative Qualitative

-Bank Rate -Marginal Requirement

-Open Mkt. Operations -Rationing of Credit

-Variation in C R R -Cost. Credit Regulation

-S L R -Issue of Directives

-P L R -Moral Suasion

-Publicity

-Direct Action

TermsTerms

CRR  Cash Reserve Ratio is the percentage of bank deposits (reserves and surplus) which are statutorily parked with the RBI as reserve.

SLR Statutory Liquidity Ratio it is the proportion of total deposits which banks are required to maintained in liquid form of cash reserve, gold and government bond in addition to CRR to prevent commercial banks from liquidating assets when CRR is raised.

TermsTerms

Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers.

Repo Rate  is the rate at which the RBI buys government securities from the market to infuse liquidity in the system

Reverse Repo rate is the rate at which the RBI absorbs excess bank funds by selling government securities in the market.

As on date prevailing Rates As on date prevailing Rates of Quantitative Measures of Quantitative Measures

CRR- 8.50%CRR- 8.50%

SLR – 25%SLR – 25%

PLR – 12.75 -13.25%PLR – 12.75 -13.25%

Source- RBI websiteSource- RBI website

Cash Reserve Ratio and Interest RatesCash Reserve Ratio and Interest Rates

(per cent per annum)

Item / Week Ended 2007 2008

  Jul. 13 Jul. 11

C R R (per cent)S L R (per cent)

6.5025.00

8.5025.00

P L R (per cent) 12.75-13.25 12.75-13.25

(1) CRR & SLR relates to Scheduled Commercial Banks (excluding Regional Rural Banks).

(2) Prime Lending Rate relates to five major Banks.

(3) Data cover 90-95 per cent of total transactions reported by participants. Source- RBI website

Prime Lending Rates as on 9Prime Lending Rates as on 9thth July 2008 for different loansJuly 2008 for different loans

Personal Loan 15.00% / 17.50%

Home Loan 11.00% / 11.50% 12.00% / 12.50%

Short Term Edu. Loan 13.00% /

Doctor Loan 14.00% /

Two Wheelers Loan 11.50% /

Car Loan 12.50% / 13.00% 13.50%

General Credit Card 16.00% / 17.00%

Source- RBI website

Credit Control MeasuresCredit Control Measures

Quantitative Qualitative

-Bank Rate -Marginal Requirement

-Open Mkt. Operations -Rationing of Credit

-Variation in C R R -Cost. Credit Regulation

-S L R -Issue of Directives

-P L R -Moral Suasion

-Publicity

-Direct Action

Difference Between Difference Between Qualitative & Quantitative.Qualitative & Quantitative. QuantitativeQuantitative Total Volume or Total Volume or

Quantity of MoneyQuantity of Money It controls credit It controls credit

indirectlyindirectly Lenders are controlled Lenders are controlled

not the borrowersnot the borrowers It is known as general It is known as general

credit controlcredit control Instruments used are Instruments used are

bank rate, open mkt. bank rate, open mkt. oprt., CRR etcoprt., CRR etc

QualitativeQualitative Quality or use or Quality or use or

purpose of creditpurpose of credit It controls credit It controls credit

directlydirectly Lenders and Lenders and

borrowers both are borrowers both are influencedinfluenced

It is known as It is known as selective credit controlselective credit control

Instruments are Instruments are variations in marg req,variations in marg req,

Consumer credit regl, Consumer credit regl, direct action etcdirect action etc

Difference between Central Difference between Central and Commercial Bankand Commercial Bank Central BankCentral Bank It is apex institution of It is apex institution of

monetary systemsmonetary systems It is owned by It is owned by

governmentgovernment It is non profit org.It is non profit org. It is banker and agent to It is banker and agent to

government government It controls credit created It controls credit created

by commercial banksby commercial banks It has monopoly to note It has monopoly to note

issueissue It has no competitionIt has no competition

There is only one central There is only one central bank in economybank in economy

Commercial BankCommercial Bank It is operating as per It is operating as per

guideline of central bankguideline of central bank It owned by private It owned by private

sector or governmentsector or government It is a profit seeking org.It is a profit seeking org. It is banker and agent to It is banker and agent to

publicpublic It creates creditIt creates credit

It has no power to issue It has no power to issue creditcredit

There is a competition There is a competition among themselves.among themselves.

Commercial banks are Commercial banks are many in numbermany in number

Current FocusCurrent Focus

Supervision of financial institutions Supervision of financial institutions Consolidated accounting Consolidated accounting Legal issues in bank frauds Legal issues in bank frauds Divergence in assessments of non-Divergence in assessments of non-

performing assets and performing assets and Supervisory rating model for banks. Supervisory rating model for banks.

Source- RBI websiteSource- RBI website

ConclusionConclusion

Central bank plays important Central bank plays important role in achieving economic role in achieving economic growth of a developing country.growth of a developing country.

It promotes economic growth It promotes economic growth with stability.with stability.

It helps in attaining full It helps in attaining full employment of resources, in employment of resources, in overcoming balance of payment overcoming balance of payment disequilibrium & in stabilizing disequilibrium & in stabilizing exchange rates.exchange rates.

BibliographyBibliography

Website : Reserve bank of Website : Reserve bank of IndiaIndia

Macro-economics Theory- Macro-economics Theory- M.L.JhinganM.L.Jhingan,,1111th th edition, Vrinda Publication pg 317-344edition, Vrinda Publication pg 317-344

Macroeconomics- Theory & Macroeconomics- Theory & Policy –Policy –D. N. DwivediD. N. Dwivedi, , Tata McGraw-Hill Tata McGraw-Hill comp. pg 527-542 comp. pg 527-542

Economics – Economics – Naik & SwaminathanNaik & Swaminathan