Banking History• In the first half of the nineteenth century, three

Presidency Banks were started in Madras, Bombay and Bengal with the financial participation of the government for conducting banking business and issue currency notes.

• Towards the end of the 19th Century the cash balances of the government were kept in the government treasuries and the government shed its connections with the Presidency Banks.

Contd …

• The Imperial Bank came into existence on the 27th January, 1921 by the Imperial Bank of India Act of 1920.

• It was established by the amalgamation of the three Presidency Banks.

• The Imperial Bank was the biggest bank until 1935.• Until the establishment of the Reserve Bank of India in

1935, the Imperial Bank performed certain central banking functions, although it was purely a commercial bank.

• It acted as the sole-banker to the Government.

Banking History

Introduction• It is the Central Bank of India Established in

1934 under the RESERVE BANK OF INDIA ACT 1934.

• Its head quarters is in Mumbai (Maharashtra). Its present governor is Duvvuri Subbarao.

• It has 26 offices in which four are regional offices located in metropolitan cities.

Brief History of RBI• It was set up on the recommendations of the Hilton

Young Commission.• It was started as share-holders bank with a paid up

capital of INR 5 crore.• Initially it was located in Kolkata. It moved to

Mumbai in 1937. • Initially it was privately owned. The govt. had a

nominal value of shares of INR 2,20,000. Later on in 1949, the bank was nationalised and is fully owned by the Govt. of India.

Preamble• The Preamble of the Reserve Bank of India

describes the basic objectives of the Reserve Bank as

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Subsidiaries

The Reserve Bank of India has fully-owned four subsidiaries which include National Housing Bank(NHB). Deposit Insurance and Credit Guarantee Corporation of

India(DICGC). Bharatiya Reserve Bank Note Mudran Private

Limited(BRBNMPL). National Bank for Agriculture and Rural Development

(NABARD, 12 July, 1982). The Reserve Bank of India has recently divested its stake in

State Bank of India to the Government of India. RBI has also set up some trainning institutions.

Functions of RBI Monetary functions

Note issue (except one rupee note all other notes are issued)

Banker to the government Banker’s bank Custodian of foreign reserves Controller of credit

Bank Rate Open market operations Variable reserve requirements (Cash Reserve Requirement &

Statutory Liquidity Requirements)

 Non-Monetary FunctionsSupervisory functionsPromotional functions

Banker to the Government Keeping the cash balances of the Government as deposits free of

interest.

Receiving and making payments on behalf of the Govt.

Carrying out the Govts’ exchange remittances and other banking operations.

Helping both Central and State Govts float new loans and mange public debt.

Making ways and means advances to the state and local authorities.

Acting as advisor to the Govt. on all monetary and banking matters.

Banker’s Bank

• Apex banking institution• Controls the banking activities and credit

system in India• It provides financial assistance to scheduled

banks by rediscounting eligible securities

Custodian of Foreign Reserves• Most of the countries, central bank is with the

task of managing their foreign reserves.• In India, RBI has maintain the rate of

exchange.• According to RBI Act, 1934 the bank was

required to buy and sell at fixed rates.• The bank has licensed several banks as

authorized dealers in foreign exchange.

Controller of Credit• Bank Rate– Sec.49 of RBI Act, empowers the Reserve Bank to

publish the bank rate from time to time.– Standard rate which is prepared to buy or rediscount

bills of exchange or other commercial papers eligible for purchase under this act.

– RBI is able to regulate commercial bank credit and the general credit situation in the country to a certain extent.

– 9.00% (w.e.f. close of business of 17/04/2012)– Decreased from 9.50% to 9.00% which was

continuing since 13/02/2012Contd …

Controller of Credit• Open market operations– The purchase and sale of Govt. securities by the

RBI from/to the public and bank on its own account.

– Section 17(8) provides this right to RBI.– To provide seasonal finance to commercial banks

by purchase of securities from them.

Variable Reserve Requirements• Sec 42 of RBI Act, every bank included in the second

schedule shall maintain with the bank an average daily balance, the amount of which shall not be less than 3% of the total demand and time liabilities in India of such bank.

• The reserve maintained is called Cash Reserve Requirement/Ratio (CRR).

• According to Sec 24 of Banking Regulation Act, every banking company shall maintain Cash, Gold and Approved securities which shall be less than 25% of business on any day.

Cash Reserve Requirement (CRR)• Every scheduled bank should maintain a minimum balance

with RBI.• It was 5% on demand deposits and 2% on time deposits.• The reserve between 5 and 20% in respect of demand

liabilities and 2 and 8% in respect of time liabilities.• RBI (amendment) Act 1962 removed the distinction between

time and demand liabilities.• Then the ratio changed to 3 and 15% for time and demand

liabilities.• 4.75% (w.e.f. 10/03/2012) -announced on 24/01/2012• Decreased from 5.50% which was continuing since 24/01/2012

Statutory Liquidity Requirement (SLR)

• It is another method of influencing the lending policies of commercial banks.

• RBI is given the power to change the minimum liquidity ratio.

• Narasimham Committee recommended it was from 25 to 38%.

• RBI gradually reduced the SLR.• 23%(w.e.f. 11/08/2012) announced on

31/07/2012

Non-Monetary Functions• Supervisory Function– RBI Act 1934 & than Banking Regulations Act 1949 have

given wide range of powers to RBI to control over commercial banks.

– The Section 22 of Banking Regulations Act 1949, every bank has to obtain a license from RBI carrying on banking business.

– Sanction of new branch or a new place of business. • Promotional Functions– It promotes banking habits– Extend banking facilities to rural and semi urban areas– Establish and promote new specialized financing agencies

Indian Organized Money Market

Central Bank

Introduction• It regulates and makes policy relating to

monetary management in the country.• It is an organ of the government which

participates in financial markets in different ways.

• By issuing of currency notes which is directly and solely under the purview of the Central Bank.

• By working as the agent and adviser of the Government specifically concerning to the financial matters, such as loans, advances, servicing of debts, etc.

• By acting as bankers’ bank in the financial market and it regulates the banking operations in the country.

• By maintaining adequate foreign exchange reserve for meeting the requirements of foreign trade and servicing of foreign debts.

Introduction

Functions• Note issue• Government’s banker, agent and adviser• Banker’s bank and lender of last resort• Custodian of foreign balances of the country• Central clearance, settlement and transfer• Credit control