Reserve Bank of India

The RBI was established by passing "transfer of public

ownership Act" in Sep-1948 .

The bank was passed into the hands of the Government of

India with effect from 1st January 1949.

Prior to 1993, the supervision and regulation of commercial banks was

handled by the Department of Banking Operations & Development (DBOD). In

December 1993 the Department of Supervision was carved out of the

DBOD with the objective of segregating the supervisory role from the regulatory

functions of RBI.

FUNCTIONS OF RBI

The functions are classified into three heads,viz.

A) Traditional functions B) Promotional functions

and C) Supervisory functions.

A) Traditional functions

1.Monopoly of currency notes issue2.Banker to the Government(both the central and state)

3.Agent and advisor to the Government4.Banker to the bankers

5.Acts as the clearing house of the country6.Lender of the last resort

7.Custodian of the foreign exchange reserves8.Maintaining the external value of domestic currency

9.Controller of forex and credit10.Ensures the internal value of the currency

11.Publishes the Economic statistical data12.Fight against economic crisis and ensures stability of Indian

economy.

B) Promotional functions

1.Promotion of banking habit and expansion of banking systems.

2.Provides refinance for export promotion3.Expansion of the facilities for the provision of the

agricultural credit through NABARD4.Extension of the facilities for the small scale

industries5.Helping the Co-operative sectors.

6.Prescribe the minimum statutory requirement.7.Innovating the new banking business

transactions.

C) Supervisory functions1.Granting license to Banks.

2.Inspects and makes enquiry or determine position in respect of matters under various sections of RBI

and Banking regulations3.Implements Deposit insurance scheme

4.Periodical review of the work of the commercial banks

5.Giving directives to commercial banks6.Control the non-banking finance corporation

7.Ensuring the health of financial system through on-site and off-site verification.

These are all the functions which are protective to the Indian Economy, that is why RBI is considered

as the head of all banks.regards

Some important aspects of RBI

Supervisory Process

The major instrument of supervision of the financial sector is inspection. The inspection process focuses mainly on aspects crucial to the bank’s financial soundness with a recent shift in focus towards risk management. Areas

relating to internal control, credit management, overseas branch operations, profitability, compliance with prudential

regulations, developmental aspects, proper valuation of asset/ liability portfolio investment portfolio, and the bank’s

role in social lending are covered in the course of the inspection. The Department undertakes statutory

inspections of banks on the basis of an annual programme, which is co-terminus with the financial year for public sector

banks.

After the inspection report is released to the bank, followed by a ‘supervisory letter’ based on the inspection findings to the bank, the concerns of the inspections are discussed with the CEO of the bank and a Monitorable Action Plan is given to the bank for rectification of

those deficiencies. The Department submits a memorandum covering supervisory concerns brought out by the inspection to the Board for

Financial Supervision (BFS). Specific corrective directions of the BFS are conveyed to the banks concerned for immediate compliance. The

Memoranda submitted by the departments for supervisory scrutiny and consideration of BFS generally cover matters relating to supervisory

strategy and operational supervision of individual banks, financial institutions and non-banking financial companies as also industry-wide

issues and sectoral performance reviews.

Closer supervision on the asset quality and fixing responsibility on the board and accountability on top management of banks has had a perceptible impact on the Non Performing Assets (NPAs) of public sector banks. The banks have shown a declining trend in terms of

percentage of NPAs to total advances during the last four years. The percentage of gross NPAs to gross advances of public sector banks declined from a high level of 19.45 at the end of March 1995 to 13.86

as on 31 March 2000. The net NPAs formed 8.07% of the net advances as on 31st March 2000.

The Capital to Risk-weighted Assets Ratio (CRAR) for banks initially fixed at 8% was increased to 9% from March 2000. The position of

banks not achieving the prescribed CRAR level since 1995 has come down from 42 banks (14 public sector) as on 31 March 1995 to 4 banks (1 public sector) as on 31 March 2000 due to constant monitoring and

directions for improvement in this area at quarterly intervals.

Board for Financial Supervision: Constitution

The Committee on Financial System set up by the Government of India had suggested that the supervisory functions of RBI should be separated from the more traditional central banking functions and that a separate agency, which

could pay undivided attention to supervision, should be set up under the aegis of RBI. A complete severance of supervision from central banking was not considered necessary or desirable in the Indian context. So, based on this

recommendation, the first Board for Financial Supervision (BFS) was constituted on November 16, 1994 by the Governor as a committee of the Central Board of Directors of the Reserve Bank of India (RBI). It functions

under the RBI (BFS) Regulations, 1994 exclusively framed for the purpose in consultation with the Government of India. The Board is chaired by the

Governor and is constituted by co-opting four non-official Directors from the Central Board as Members for a term of two years. The Deputy Governors of the Bank are ex-officio Members. One of the Deputy Governors is nominated

as Vice-Chairman.

Supervision serves as the Secretariat for the BFS.Shri S P Talwar, Deputy Governor holding charge of the Bank's regulation and supervision function has been the Vice-Chairman of the BFS since its inception. Dr. Y. Venugopal Reddy and Shri

Jagdish Capoor, Deputy Governors, are other ex-officio Members as on date. Shri Y H Malegam, Shri E A Reddy, Dr. S S Johl, and Dr. (Ms) Amrita Patel, who were members on the Central Board of Directors of the Reserve Bank, were the non-official members of

the first Board. The Board has since been reconstituted for a term of two years in

consultation with the Central Board in its meeting held on 21 December 2000, with Dr. Ashok S. Ganguly and Shri K. Madhava Rao nominated in the place of Dr. S. S. Johl and Shri E. A. Reddy,

who ceased to be members of the reconstituted

Central Board. Shri Y H Malegam and Dr. (Ms) Amrita Patel have been nominated to continue as Members of the

reconstituted BFS. Executive Directors in-charge of Department of Banking Operations & Development,

Department of Banking Supervision and Department of Non-Banking Supervision participate in the BFS meetings by

invitation. In-charges of these departments are also to be in attendance for the meetings.

The Chairman, Vice-Chairman and Members of the Board jointly and severally exercise the powers of the Board. The Board is at present required to meet ordinarily at least once a month. Three Members, of whom one shall be Chairman or the Vice-Chairman, form the quorum for the meeting.

Corporate Governance and Management Guidance

The requirements of the corporate governance framework differ across institutions because of the different ownership structures of the commercial banks.

• Public Sector banks are largely owned by the Government. The majority holding in State Bank of India is held by RBI and State Bank of India holds majority shareholding in its seven associate banks. (These holdings are gradually being divested).

• The old private sector banks have traditionally been owned and controlled by communities, groups or regional interests.

• The new private sector banks are owned and managed by financial institutions or major corporate though the shareholding pattern is increasingly diversified with fresh issues of capital as part of start up covenants.

• The foreign banks are in essence branches of overseas entities though a Local Advisory Board provides general guidance.

• Even amongst financial institutions, there are both state owned and private sector entities.

Transparency and Disclosure

RBI has always been committed to enhancing the element of transparency and adequate disclosures in the

financial statements of banks. The formats of balance sheet and profit & loss account have been prescribed in the Banking Regulation Act, 1949, and banks have to

strictly comply with this. The accounts and balance sheets are required to be duly audited by statutory

auditors (including branch auditors) appointed with the approval of RBI. While international accounting

standards are broadly followed, specific valuation standards have been prescribed in respect of investments and foreign exchange positions.

Internal controls and housekeeping in banks

(i) Internal Control SystemsReconciliation of inter-branch accounts Reconciliation of inter-bank accounts

Reconciliation of accounts, and Status of balancing of books of accounts

Reconciliation of clearing differences

(ii) Reconciliation of inter-branch accounts

(iii) Balancing of books

Presented by:Ms. Megha Mathur

e-banking

E-Banking

E-banking and electronically providing financial services are branches of electronic

commerce. A significant development has been achieved in offering a variety of new and

innovative E-banking services to customers to-day which were not thought of before.

Corporate Internet Banking (CIB)

It facilitates banking from your desk. At the click of a mouse, we can access your

accounts at any branch of the bank and also keep track of your accounts at its numerous

branches.

How e-banking can ease your life:

Bill payment service

Each bank has tie-ups with various utility companies, service providers and insurance companies, across the

country. You can facilitate payment of electricity and telephone bills, mobile phone, credit card and

insurance premium bills. To pay your bills, all you need to do is complete a

simple one-time registration for each biller. You can also set up standing instructions online to pay your

recurring bills, automatically. One-time standing instruction will ensure that you don't miss out on your bill payments due to lack of time. Most interestingly, the bank does not charge customers for online bill

payment.

Fund transfer

You can transfer any amount from one account to another of the same or any another bank. Customers can send money anywhere in India. Once you login to your account, you need to mention the payees's

account number, his bank and the branch. The transfer will take place in a day or so, whereas in a

traditional method, it takes about three working days. ICICI Bank says that online bill payment

service and fund transfer facility have been their most popular online services.

Credit card customers Credit card users have a lot in store. With Internet banking, customers can

not only pay their credit card bills online but also get a loan on their cards. Not

just this, they can also apply for an additional card, request a credit line increase and God forbid if you lose your credit card, you can report lost

card online.

Railway passThis is something that would interest all the aam janta. Indian Railways has tied

up with ICICI bank and you can now make your railway pass for local trains online. The pass will be delivered to

you at your doorstep. But the facility is limited to Mumbai, Thane, Nashik,

Surat and Pune. The bank would just charge Rs 10 + 12.24 per cent of

service tax.

Investing through Internet banking

Opening a fixed deposit account cannot get easier than this. You can now open an FD

online through funds transfer. Online banking can also be a great friend for lazy investors.

Now investors with interlinked demat account and bank account can easily trade in the stock

market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their demat

account.

Recharging your prepaid phone

Now you no longer need to rush to the vendor to recharge your prepaid phone, every time

your talk time runs out. Just top-up your prepaid mobile cards by logging in to Internet

banking. By just selecting your operator's name, entering your mobile number and the

amount for recharge, your phone is again back in action within few minutes.

Shopping at your fingertips

Leading banks have tie ups with various shopping websites. With a range of all kind of products, you

can shop online and the payment is also made conveniently through your account. You can also buy railway and air tickets through

Internet banking.

Trends in e-banking

• Constraints in Internet banking

•

Although there are obvious benefits in Internet Banking , there are some hurdles in the smooth implementation of Internet-banking.

(i) Start-up cost : The initial start-up cost for venturing into Internet banking is on the higher side and it includes the following:

* connection cost to the Internet or any other mode of electronic communication

* cost of sophisticated hardware, software and other related components like Modem, Router, Bridges, network management system

* cost of maintenance of all equipment, web sites, skill level of employees

* cost of setting up organizational activities

(ii) Training and Maintenance: The introduction of Internet banking involves 24 hours support environment, quality service to end users and other partners

which would necessitate a well qualified and robust group of skilled people to meet external and internal commitments. Hence the bank has to spend a lot on

training.

(iii). Lack of skilled personnel: It is a well known fact that there is an acute scarcity of web developers, content providers and knowledgeable professionals

to route banking transactions through internet.

(iv). Security: In paperless banking transactions, many problems of security are involved. A security threat is defined as a

circumstansive decision or event with potential to cause economic hardship to data or network resources in the form of destruction, disclosure, modification of data, denial of services, fraud, waste

and abuse. There are chances that the documents such as cheque, passbook etc., can be modified without leaving any

visible trace. Distortions of information are also possible. Providing appropriate security may require a major initial investments in the form of application encryption require a major investments in the

form of application encryption techniques, implementation of firewalls etc., In spite of implementation of several security

measures the possibility of a security breach cannot be ruled out.

(v). Legal Issues: Legal framework for recognizing the validity of banking transactions conducted through the '

NET' is still being put in place. Though initial legal framework has been devised for E-banking activities, it is uncertain as to what possible legal issues may pop up in

future as banking on Internet progresses.

(vi). Restricted clientele and technical problems: The user of E-Banking needs a computer and time to log on to the site, which means that the target clientele is restricted to

those who have a home PC or can access the 'Net' through the office or cyber café. Moreover technical constraints due

to telephone connectivity, modem connections etc., may cause constraints.

Security measures

• Most of the problems mentioned above are in the nature of teething problems and hence they can be eliminated over a period of time. However, for venturing into E-Banking, the following major controls must be ensured.

* Authenticity controls: To verify identity to individuals like password, PIN etc.,

* Accuracy control: To ensure the correctness of the data, flowing across the network.

* Completeness control: To make sure that no data is missing

* Redundancy controls: To see that data is traveled and processed only once and there is no repetitive sending of data.

* Privacy controls: To protect the data from inadvertent or unauthorized access

* Audit Trail Controls: To ensure keeping chronological role of events that are occurred in the system.

* Existence controls: To make sure that on going availability of all the system resources with the same throughout

* Efficient: To ensure that the system uses minimum resources, to achieve the desired goal.

* Fire wall controls: To prevent unauthorized users accessing the private network, which are connected to Internet.

* Encryption controls: To enable only those who possess secret key to decrypt the cyber text.

Conclusion

E Banking is becoming immensely popular globally, and India is no exception to it. The declining Internet

rates, falling PC prices, broad bandwidth access through cable and digital subscriber lines, accessing

the NET through cable TV etc., would definitely encourage the boom in E Banking in India. With the globalization of business and services, our country

cannot lag behind in niche areas of Electronic Banking. In the new global era of multi currency, multi-legal and multi regulatory systems, with the

freedom of E-Commerce, banks have to operate like multinational corporations to grow and survive by

adopting E banking.

Recent Technological Developments in Indian banking

ATM Card

Sometimes called cash cards, they allow the cardholder to withdraw cash from an ATM machine after

entering a PIN that is specific to the card. Some cards may only be used in an ATM but most are combination debit, ATM and

cheque guarantee cards.

DEBIT CARDS

Debit card is a multifaceted, power packed globally accepted plastic debit card which enables one to access ones account from anywhere. The ATM debit card may have either the Visa or the

MasterCard logo embossed on it.

The ATM debit card is linked to an account from where the fees or charges are deducted as the transaction demands. The ATM debit card has the name of the debit card holder embossed on

the debit card.

CREDIT CARD

• It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user

Difference between Debit card & Credit card.

• debit card = decrease in credit balance of bank a/c of a account holder.

• credit card = increase in debit balance of bank a/c of a account holder. these cards are used in the same way, but in the case of debit card we would have amount in the account and in the case of credit card no need to maintain amount in the account but we have to pay after bill payment to the banker.

To use a debit card a person must have sufficient amount in his/her account and shopping is limited to the amount avail in the

account, it cannot be exceeded. From debit card the amount is transacted/debited at the very moment as and when it is utilized.

To use credit card one need not have to have money/amount in his/her account. They are the special type of customers because banks issued credit cards to them based on some attributions or

features. When the credit card is being swapped by the shopkeeper, the amount does not get transacted at the very

moment infact it is being transacted approximately after 5 or 7 days

Electronic funds transfer or EFT Refers to the computer-based systems used to perform

financial transactions electronically.The term is used for a number of different concepts:Cardholder-initiated transactions, where a cardholder

makes use of a payment card.

Direct deposit payroll payments for a business to its employees.

Direct debit payments from customer to business, where the transaction is initiated by the business with customer

permission.

Electronic bill payment in online banking, which may be delivered by EFT or paper check.

Transactions involving of electronic money, possibly in a private currency .

Wire transfer via an international banking network (generally carries a higher fee) .

Email Money Transfer (EMT)

It is a funds transfer service between personal accounts at participating Canadian financial institutions. The provider of this service is CertaPay, a division of Acxsys Corporation. If your bank is in Canada you will be able to send the world's

first, interbank - based Interac Email Money Transfers.

Presented by :

Ms. Megha Mathur

Banking Structural Reforms

Narasimham Committee (II) recommendations.

Structural Issues :The Committee has taken note of the twin

phenomena of consolidation and convergence which the financial system is

now experiencing globally. In India alsobanks and DFIs are moving closer to eachother in the scope of their activities. TheCommittee is of the view that with such

convergence of activities between banks andDFIs, the DFIs should, over a period of

time, convert themselves to banks. Therewould then be only two forms of

intermediaries, viz. banking companies andnon-banking finance companies .

If a DFI

(Depository Financial Institution) (a financial institution that accepts

deposits and channels the money into lending activities) does not acquire a banking license within a

stipulated time it would be categorised as anon-banking finance company.

A DFI whichconverts to a bank can be given some time tophase in reserve requirements in respect of

its liabilities to bring it on par with therequirements relating to commercial banks.

Similarly, as long as a system of directedcredit is in vogue a formula should be

worked out to extend this to DFIs whichhave become banks

Mergers between banks and betweenbanks and DFIs and NBFCs need to be

based on synergies andbusiness specific complementarities of theconcerned institutions and must obviously

make sound commercial sense. Mergers ofpublic sector banks should emanate frommanagement of banks with Govt. as the

common shareholder playing a supportiverole. Such mergers, however, can be

worthwhile if they lead to rationalization ofworkforce and branch network; otherwise

the mergers of public sector banks would tiedown the managements with operationalissues and distract attention from the real

issue.

It would be necessary to evolvepolicies aimed at "rightsizing" and

redeployment of the surplus staff either byway of retraining them and giving themappropriate alternate employment or by

introducing a VRS with appropriateincentives. This would necessitate the cooperation

and understanding of theemployees and towards this direction,

managements should initiate discussionswith the representatives of staff and would

need to convince their employees about theintrinsic soundness of the idea.

Mergers should not be seen as ameans of bailing out weak banks. Mergersbetween strong banks/FIs would make for

greater economic and commercial sense andwould be a case where the whole is greaterthan the sum of its parts and have a "force

The recommendation has been noted. A nonbankingfinance company has since been

permitted to merge with a bank. Two banksin the private sector have also merged based

on synergies and business specificcomplementarities.

A ‘weak bank’ should be one whoseaccumulated losses and net NPAs exceed itsnet worth or one whose operating profits less

its income on recapitalization bonds isnegative for three consecutive years. A case

by case examination of the weak banksshould be undertaken to identify those which

are potentially revivable with a programmeof financial and operational restructuring.

Such banks could be nurtured into healthyunits by slowing down on expansion,

eschewing high cost funds/borrowings,judicious manpower deployment, recoveryinitiatives, containment of expenditure etc.

The policy of licensing new privatebanks (other than local area banks) may

continue. The start up capital requirementsof Rs.100 crore were set in 1993 and these

may be reviewed. The Committee wouldrecommend that there should be well defined

criteria and a transparent mechanism fordeciding the ability of promoters to

professionally manage the banks and nocategory should be excluded on a priori

grounds.

There must be clearly defined prudentlimits beyond which banks should not beallowed to rely on the call money market.

This would reduce the problem ofvulnerability of chronic borrowers. Access to

the call market should be essentially formeeting unforeseen swings and not as a

regular means of financing banks’ lendingoperations RBI has advised banks to put in place

comprehensive ALM System “(strategic management of Balance Sheet by giving more weightage to market risks) with effect from

1.4.1999.

The minimum period of FD be reduced to

15 days and all money market instruments

should likewise have a similar reduced

minimum duration.

Foreign institutional investors should begiven access to the Treasury Bill market.Broadening the market by increasing theparticipants would provide depth to the

market.

With the progressive expansion of theforward exchange market, there should be anendeavor to integrate the forward exchange

market with the spot forex market byallowing all participants in the spot forex

market to participate in the forward marketup to their exposures. Furthermore, theforex market, the money market and the

securities should be allowed to integrate.

Presented by:

Ms. Megha Mathur.