Regulatory Environment 1

8/9/2019 Regulatory Environment 1

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Regulatory environment

S.CLEMENT



SEBI

MOF

RBI

FIs CBs S. MKTP MKTNBFCPDs

MF

VCFMB

Underwriters

FIs

Investors

etc

Leasing

HPEtc

RRBs

CO-OPBk PSB

Pvt Bks

SEs

BrokersCustodians

Depositories

FIIs

Investors

etc

ILFS

IDFC

EXIM BK

NABARD

SIDBI

IRDA

LIFE GENERAL



Statues

RBI Act

Banking Regulation Act

Negotiable Instrument Act Foreign Exchange Management Act

Prevention Money Laundering Act

Foreign Contribution Regulation Act 1976



Primary Role of RBI

Regulate ± lays down rules for players Promote ± permission to launch new

products as per changing market

environment. E.g. Currency Futures/Mobilebanking

Protect - ultimate consumers/customers



Need for regulation Banks act as custodians of public savings.

Mismanagement may lead to damage the financialmarket and erode public confidence.

Failure of many banks ± international and national.E.g. Herstatt Bank, Frankfurt in Germany failed on 26June 74. Failure of Global Trust Bank and many

other cooperative banks in India. Birth of BASELNorms in 1988..

Failure of GTB in 2003 in India. Ultimately mergedwith OBC

International banking- Wide spread net work of branches

across the globe and wide spread risk. Integration of market due to globalization effect Volume of financial flow is on the increase as compared

to trade flows Financial support for growth ± Nationalization, Directed

lending, Concessional lending rates etc



Need for regulation

Implementation of monetary policy.

To ensure proper payment and settlement tomanage systemic risk.

To ensure banks maintain adequate liquidresources at all times. E.g. CRR/SLR etc

To ensure proper risk management.

E.g. CAR, RWA etc as per BASEL norms To ensure proper service quality and

customers are not over charged/

discrimination in treatment.



RBI ± Genesis

Established on 1.04.1935. with a paid up capitalof Re 5 crores.

Nationalized on 1.01.1949 under Reserve bank (

Transfer of Public ownership) Act 1948 Prior to its existence, SBI was looking after the

functions of central bank.

RBI is managed by a central board of directors.

It has local bad at Mumbai, Calcutta andChennai

It has 1 Governor, 4 D.Gs and 15 directors

Operating under the control of MOF



Functions of RBI Central banker to the government ± advisor/Debt management

Lender of last resort to banks.

Regulating Banks/NBFC/ PD/ AMCs/ Intermediaries/ DFIs likeNABARD etc

Money market ± liquidity management

Issuance of currency

Inspection and supervision

Regulating inflow and out flow of foreign exchange Managing exchange rates. E.g. MSS

Maintaining foreign exchange reserves.

Representing in international forums like BIS etc

* Power to collect and furnish credit information

* Power relating to moratorium, amalgamation and winding-up of

banks

* Power to levy penalties

Now G20 responsibly



Role of central banker

Promotional role of RBI ±

Proper credit allocation ± priority sector

lending/ export credit etc Development financial institutions. E.g.

IDBI, UTI,NABARD,NHB, EXIM bank etc.

Removal of imperfection in market ± E.g.Licensing policy.

Financial inclusion ± No Frill savings a/c



Regulatory Functions Issuance of currency ( Sec 22) ±

Under Sec 22 of RBI Act, sole authority toissue currency notes under signature of except Re1 note which is issues by GOI.

Sec 26 - Bank notes issued by RBI shall belegal tender and guaranteed by Central Govt.

Sec 42 ± CRR (cash reserve ratio)

CRR



Regulatory Role of RBI Sec 20 & 21 -Transacts government business,

U/s 20 ( for Central Government) and U/s 21 ( for State Government), transacts Government

business and manages public debt. It also act asadvisor on monetary matters

Management of government debt ± issuance of G-Sec and T-bills.

Buy back of securities Clearing & settlement ± manual clearing/

RTGS/EFT/ECS/G-Sec & T.Bill.



Sec 28 ± RBI can frame rules for refundingvalue of mutilated/soiled/imperfect notes as amatter of grace. Rupee coin and one rupee

note shall not be a currency note for thepurpose of these act.

Issue department takes care of issuance of fresh notes against the security of Goldcoins, rupee coins, foreign securities eligibleP/N and other approved securities.

Regulatory Functions Of RBI



Bank¶s Bank ±

Keeps deposit of commercial banks

Provides refinance for Agriculture and Exportcredit.

Provides LAF (liquidity adjustment facility) from5.06.2000. REPO and Reverse REPO.

Lender of last resort ± providing emergencyloans on liberal terms (Sec 18 of RBI Act)

Functions



Regulator of banks ± Licensing ( Sec 2(e) )

Prudential accounting norms ± CAR/ Incomerecognition/AC/Provision.

Regulator by including banks under Sch.II of the RBI Act.

Scheduled bank means a bank whose name is included inSCH IISec 42c ± empowers RBI to add or delete the nameof any bank included in Sch.II.

Issues directions

Exercises management control ± representation the board.

Supervision - On site and Off site surveillance/RBS.Transaction based supervision to RBS as per Pillar II under BASEL norms

Functions



Controller of credit U/s 21 & 35 A ± RBI can fix interest rates ± Priority

sector, Export credit, Bank rate etc Fixing Targets ±Priority sector(40%) & Export (12%) credit

Directed lending ± Agriculture/MSME/Export credit

Fixing margins ±stock lending etc

Exposure norms ± credit exposure/call money

lending and borrowing/ Capital market exposure.

Functions



Deposit ±

Interest and Non interest bearing deposits

Maturity period for NRI deposits Interest rate on S.B a/c

Interest rate cap on NRI deposits

Functions



Monetary control ± Objective Inflation control andPrice stability.

Quantitative methods ±

CRR/ SLR/Bank Rate/ Margins

MSS

REPO/Reverse REPO

Currency intervention.

Functions



Monetary policy

Objective ± liquidity/interest rates/stability Apart from the Union Budget, another µevent¶ that

has a lasting impact on the economy is the RBI¶smonetary policy.

Declared semi-annually (i.e. March and September),the monetary policy takes stock of the economy¶sliquidity and inflationary conditions and employs thenecessary tools to revive it.

In its conduct of monetary policy, the central bankresponds to the evolving economic activity within anarticulated monetary policy framework.



Monetary policy

The RBI announces the Monetary policy twice a year ²- Generally in April and inOctober. While in April it announces new

policy initiatives, the October pronouncement is a review of the April policy.

RBI has decided to have quarterly reviewsof monetary policy. Accordingly, First Quarter Review of the Annual Statement onMonetary Policy was issued in July 2005.



Monetary policy

Basic objectives of monetary policy, namely, pricestability and adequate credit flow to the productivesectors of the economy, have remained the same,

the operating environment has changedsignificantly.

There is an increasing focus on the maintenance of financial stability in the context of better linkages

between various segments of the financial marketsincluding money, Government securities and forexmarkets. Managing the capital flows has emergedas an important concern of monetary policy.



Monetary policy Instruments of monetary policy

The instruments can be broadly classified into direct andindirect ones.

Typically, direct instruments include cash reserve (CRR)and/or statutory liquidity ratios (SLR), directed credit andadministered interest rates. The indirect instruments

generally operate through repurchase (REPO & RREPO)and outright transactions in government securities (openmarket operations).

The reforms in the financial sectors have enabled RBI toexpand the array of instruments at its command.

While the prime target of monetary policy continues to begrowth with stability, the use of the same is sought to bede-emphasized and the liquidity management in thesystem is being increasingly undertaken through openmarket operations (OMO), both outright and repos.



Monetary policy CRR: Cash reserve ratio (CRR) determines the level of

cash banks need to hold against their net demand andtime liabilities. It ocnveys liquidity policy signal

SLR- Similarly, statutory liquidity ratio (SLR) requiresbanks to maintain a part of their liabilities in the form of liquid assets (e.g. government securities).

Bank rate: Bank rate is the rate at which RBI lends to the

banking entities to meet their liquidity requirements. Interest rates: Credit and interest rate directives take the

form of prescribed targets for allocation of credit topreferred sectors or industries and prescription of depositand lending rates. REPO/RREPO coveys interest rate

signal OMO and LAF: Liquidity management in the system iscarried out through open market operations (OMO) in theform of outright purchases or sales of governmentsecurities and daily repo and reverse repo operationsunder Liquidity Adjustment Facility (LAF).



Market Stabilization Scheme (MSS)

The liquidity impact of large inflows was managed till theyear FY04 largely through the day-to-day LAF and OMO.In the process, the stock of government securitiesavailable with RBI declined progressively and the burden

of sterilisation (sucking out excess liquidity) increasinglyfell on LAF operations.

In order to address these issues, the Reserve Bank inMarch 2004 signed a memorandum of understandingwith the Government of India for issuance of treasury

bills and dated government securities under the MSS.The intention of MSS was essentially to ensure liquidityabsorption of a more enduring nature by way of sterilization against the day-to-day normal liquiditymanagement operations.



Monetary policy ± Challenges? Additional complexities are likely to arise in case of an

emerging market like India, which is transiting from arelatively closed to a progressively open economy.

In an environment of increasing capital inflows, cross-border interest rate differentials (eg. Fed rates vis a vis IndianG-Sec rates) and surplus liquidity conditions, exchange rate

movement tend to have linkages with interest ratemovements. The challenge of the monetary authority (i.e. RBI) is to

balance the various choices into a coherent whole and toformulate a policy that can best facilitate the country¶seconomic objectives.

To Global melt down impact on Indian market - An importantchallenge in the macroeconomic and monetary policy makingduring 2008-09 has been to manage the volatility emerging inrespect of several key economic indicators of the Indianeconomy



Monetary policy ± Challenges? The global crisis, which created intense uncertainties for funding liquidity in

the face of tight market liquidity for financial instruments trading in almost allfinancial markets, brought to the fore the strong interactions between fundingliquidity and market liquidity.

As the global liquidity crisis started to affect the domestic money and foreignexchange markets in the last quarter of 2008, the Reserve Bank ensuredadequate provision of both domestic and foreign exchange liquidity to themarket through banks, with the aim of restoring normal functioning of the

market, and thereby facilitating adequate flow of credit to the productivesectors of the economy. The monetary policy stance of the Reserve Bank shifted from concerns

related to inflation in the first half of 2008-09 to maintaining financial stabilityand arresting the moderation of growth in the second half.

While money supply evolved consistent with indicative projections, credit toprivate sector reflected the conditions evolving in the real sector of theeconomy

In 2009, increased $ inflows/ Inflation/excess liquidity/when to with drawstimulus package



Current monetary policy - Highlights

* RBI Governor's opening remark (April 2009)±

The annual policy statement for 2009-10 is set in the context of a deepglobal economic slump and financial market turmoil. Governmentsand central banks around the world have responded to the crisisthrough both conventional and unconventional fiscal and monetary

measures. And there is unprecedented co-ordinated policy actionglobally.Current changes ±

No change ln CRR/REPO/RREPO.

SLR hiked to 25%

Loan loss provision increased to 70% from Sept,2010

RWA provision for commercial real estate ± 1%



Monetary Policy Stance

On the basis of this overall assessment, the stance of monetary policy in 2009-10 will broadly be as follows:

Ensure a policy regime that will enable credit expansionat viable rates while preserving credit quality so as tosupport the return of the economy to a high growth path.

Continuously monitor the global and domestic conditionsand respond swiftly and effectively through policyadjustments as warranted so as to minimize the impactof adverse developments and reinforce the impact of positive developments.

Maintain a monetary and interest rate regime supportiveof price stability and financial stability taking into accountthe emerging lessons of the global financial crisis.



Banking Regulation Act 1949

Phenomenal increase in banks

Banking companies operating companies Act.Quite inadequate to regulate banks.

Corporate ownership in banks

Unbridled risky advances ± shares/ immovableproperty

588 banks failed between 1939-49 and public lostmoney worth 49 crores

Birth of BR act and more powers to RBI toregulate banks.



Banking Regulation Act, 1949.

Passed as Banking Companies Act, 1949(came into force 16.03.49) & changed toBanking Regulation Act, 1949 w.e.f.

01.03.66, it was made applicable to J & Kin 1956.

Not applicable to Primary AgriculturalCredit Society, Co-operatives LandMortgage Banks, Non Agricultural PrimaryCredit Society.



Banking business and Banking company

5 (B) ± Banking means accepting depositsfrom the public for the purpose of lendingor investment, repayable on demand or

otherwise and withdrawable by cheque,drafts or otherwise.

5(c) Banking company means anycompany which transacts the business of Banking.



Permitted banking business

Section 6 (1) banking company may engage in

The borrowing, raising or taking of deposits of money;

The lending or advancing of money either upon or without security ;

The drawing, making, accepting, discounting, buying,selling, collecting and dealing in bills of exchange,hundies, promissory notes, drafts bills of lading etc

whether transferable or negotiable or not,Granting and issuing of letters of credit, TCs etc;

Providing of safe deposit vaults for custody of valuables of customers.



Section 8 - Buying, selling or dealing inGoods by bank: not except in connection withrealisation of security taken by it.

Section 9 -Immovable property :

not to hold except for own use beyond 7 years or period extended by (RBI) up to 5 years.

Permitted banking business



Powers conferred on RBI

Sec.10 BB-Power of RBI to appointChairman of a Banking company

Sec.18- Cash Reserve by non scheduledBanks

Sec.21-Power of RBI to control Advancesby banks.

Sec.22-Licensing of Banks by RBI

Sec 23 ± restrictions on opening of newand transfer of existing places of business.

Sec.24 Liquid Assets (SLR) 25% - 40%



Powers conferred on RBI

Sec.29. Accounts & Balance Sheet

Sec. 35 ±Inspection by RBI

Sec.35A-Power of RBI to give Directions

sec 45 ± to recommend to governmentsuspension of business and preparesheme of reconstitution of amalgamation.

Section 45 ZA ± ZF ± Nomination facilitieson Bank Deposits, Safe Deposit of articles& lockers.



Board for Financial Supervision

BFS established on Nov, 16,1994.

RBI governor Ex-officio chairman

Supervises banks/banking companies under RBI Act/ BR Act. Assisted by Department of Supervision,RBI.

Functions ± empanelment and selection of statutory

auditors for banks, integrated supervision for banks,FIs, and NBFCs.

Supervision ± on site and off site (DSB returns)

BASEL II ± Risk based supervision



Emerging trends

Micro level to Macro level supervision

Risk based supervision

Road map for entry of foreign banks

Universal banking Privatization/Disinvestment

Mergers and acquisitions

Basel II

Capital a/c convertibility

G20 responsibilities



Food for thought

How far RBI enjoys Monetaryindependence?

Regulation of co operative banks ? Ownership Vs regulatory role ?

Failure of banks ?

Capital inflows from overseas? Global sovereign funds ?

Consistent volatility ?



³ In an increasingly open and integrated world³ In an increasingly open and integrated world

economy, commercial banks will need to develop aneconomy, commercial banks will need to develop anability to respond to wide range of expectationsability to respond to wide range of expectations

from customers, seeking different kind of productsfrom customers, seeking different kind of products

and services. Depositors demand high level of and services. Depositors demand high level of

transaction effiency: borrowers look for prompt,transaction effiency: borrowers look for prompt,

adequate and innovative response and finallyadequate and innovative response and finally

regulators expect banks to manage growth andregulators expect banks to manage growth and

diversification in prudent manner.´diversification in prudent manner.´

DR. MANMOHAN SINGH, PM



THANK YOU

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Regulatory Environment 1

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