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Study Material for RBI Assistant & Grade B

Officers Exam 2013

Reserve Bank of India

The Reserve Bank of India (RBI) is India's central banking institution, which formulates

the monetary policy with regard to the Indian rupee. It was established on 1 April 1935 during

the British Raj(on the recommendation of Hilton Young Commission) in accordance with the

provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of

₹100 each fully paid, which was entirely owned by private shareholders in the

beginning.Following India's independence in 1947, the RBI was nationalized on January 1, 1949.

Some Key Points:

- RBI has 22 regional offices.

- It prints currency in 15 languages.

- Its predecessor was Imperial Bank of India.

- RBI’s central office is in Mumbai.

- RBI issues currency notes under “Minimum Reserve System 1957” with backing of

Rs. 200 crore reserve divided into Rs. 115 crore Gold and Rs. 85 crore foreign

securities.

Governors

The current Governor of RBI is Duvvuri Subbarao. The RBI extended the period of the present

governor up to 2013. There are four deputy governors, Deputy Governor K C

Chakrabarty, Urjit Patel, Shri Anand Sinha and Shri H.R. Khan . Deputy Governor K C

Chakrabarty's term has been extended further by 2 years.

Main Functions of RBI

The functions of the Reserve Bank of India are as follows:-

(1) Monopoly of note issue:

The RBI has the sole right of note issue. All currency notes except one rupee note and coins are

issued by the Issue Department of the central bank[One rupee note is issues by the Government

of India]. The RBI follows the minimum reserves system under which the bank has to maintain

a minimum reserve of Rs.200 crores of which a minimum of Rs.115 crores in gold and bullion

and the rest in foreign securities. This function helps the Central Bank to control money supply

in the economy.

(2) Banks to the Government:

The RBI is the Banker's agent and adviser to the government. It accepts deposits and make

payments on behalf of the Government. Issue of loans, management of public debt, sale of

treasury bills are undertaken by the bank. It helps the government in ensuring better co-

ordination of monetary and fiscal policies. It provides short term loans namely "ways and means

advances" to the Central Government and State Government. These loans have to be rapid

within a period of 3 months.

It represents the government in various international organizations like IMF, World Bank etc. It

sends its official as representative of the government for international seminars and

conferences. All important policy decision are taken by the government in consultation with the

RBI. It advises the government on important matters like agricultural credit, devaluation of

rupee, credit policy for the industrial and export sectors etc.

(3) Banker's Bank:

RBI acts as a banker for all the commercial banks. All scheduled banks come under the direct

control of RBI. All commercial as well as schedule bank has to keep a minimum reserve with the

RBI. They have to submit weekly reports to RBI about their transactions. By performing 3

functions, the RBI helps the member banks significantly. They are given below such as:

(a) It acts as the lender of the last resort.

(b) It is the custodian of cash reserves of commercial banks.

(c) It clears, transfers the transaction. It acts as the central clearing house.

(4) Management of foreign exchange reserves:

RBI is the custodian of the foreign exchange reserves of the country. It is the responsibility of

the RBI to stabilize external value of rupee and carry out transactions in foreign currencies. The

Foreign Exchange Regulation Act (FERA) passed by the government empowered RBI to have

full control over management of foreign exchange.

5) Use of following monetary instruments to bring stability in the Indian economy:

- CRR

- SLR

- Bank Rate

- Open Market Operations

- Repo & Reserve Repo Rate

Types of Banks in India

Schedule banks are those which are included in the Second Schedule of Banking Regulation

act 1965; others are non schedule banks.

To be included in the Second Schedule, a bank (a) must have paid up capital and reserves of not

less than Rs. 5 lakhs (b) it must also satisfy the RBI that its affairs are not conducted in a

manner detrimental to the interests of its depositors.

Schedule banks are required to maintain a certain amount of reserves with the RBI; they in

return, enjoy the facility of financial accomodation and remittance facilities at concessional rates

from RBI.

The difference between schedule and non schedule is immaterial as the number of non schedule

bank is almost nil.

Example of Non-Schedule Bank: Jammu & Kashmir Bank is the only non-schedule bank which

is not working under the provisions of RBI but the provisions of article 370 of Indian

Constitution.

Know about RTGS-NEFT-EFT-ECS Banking System

Remember those days of long queues in bank for withdrawal of money. What you do. Write a

cheque, go to bank, stand in queue and take the token, wait for your number to be announced by

ding dong bell, you numbers announced you go to withdrawal window and request for good

quality currency notes and that fellow angrily look upon you and gives you what he has. So how

are that experience and what revolutionary experience you get today? Thanks to the information

technology and the upgrades in our banking sector and thanks to Reserve bank of India (RBI)

for introducing the paperless work called electronic funds transfer (EFT) mechanism.

Many of us are using internet banking facility almost daily but are unaware of the terms so

called EFT, RTGS, NEFT and ECS words. Let us understand the meaning of each and every term

in detail here and try to adapt to this latest technology in use.

Electronic Funds Transfer

Electronics Funds Transfer (EFT) is a method in which the money is transferred from one bank

account to other bank account in without the paper cheque and paper money. The transaction is

done at bank ATM or using Credit Card or Debit card. In RBI-EFT system you authorize the

bank to transfer money from your bank account to other bank account that is called as

beneficiary account. However, this facility is restricted only to the 15 RBI defined cities such as

Mumbai, New Delhi, Chennai, etc. Funds transfers using this service can be made from any

branch of a bank at these centres to any other branch of any bank at these cities, both inter-city

and intra-city. RBI remains intermediary between the sender's bank called as remitting bank

and the receiving bank and effects the transfer of funds. Using this method, funds are credited

into the receiver’s account either on the same day or within a maximum period of 4 days,

depending upon the time at which the EFT instructions are given and the city in which the

beneficiary account is located. Usually the transactions done in first half of the day will get first

priority of transfer than the transaction done in second half.

National Electronic Funds Transfer (NEFT)

This is a better version of RBI-EFT system. In RBI-EFT there is a limit in location, whereas in

NEFT there is no geographical location problem and only requires both the bank to be NEFT

enabled system. Under NEFT, the transfer takes place either on the same day or on the next day,

depending on the time of instructions given. NEFT is on net settlement basis. NEFT involves

four settlement cycles a day 9.30 am, 10.30 am, 12 pm and 4 pm. Thus if a customer has given

instruction to its bank to transfer money through NEFT to another bank in the morning hours,

money would be transferrd the same day, but if the instruction is given later during the day,

money would be transferred next day.

Real Time Gross Settlement (RTGS)

RTGS is an instantaneous funds-transfer system, wherein the money is transferred on a ‘real

time’ basis and hence, happens in a real time mode. With this system you can transfer money to

other bank account with maximum 2 hours. In this system there is a limit that you have to

transfer money only above Rs 1 lakh and for money below Rs 1 Lakh transactions, banks are

instructed to offer the NEFT facility to their customers. This is because; RTGS is mainly used for

high value clearing. As of now, customers can use the RTGS facility only up to 3 pm and inter-

bank transactions are possible up to 5 pm.

Electronic Clearing Service (ECS)

This system is used mainly for credit and debits of low value transactions which are in large or

frequent transactions. ECS can be divided into two types: ECS Debit, which involves a transfer

of funds from your account and ECS Credit which takes place when money comes into your

account. If you opt for monthly interest paying fixed deposit scheme then your monthly interest

are getting credited to your account by ECS Credit instruction. Other transactions are dividend

received on your investments, your monthly salary credit, refunds from an IPO subscription, etc.

Similarly, an ECS Debit involves making utility bill payments directly from your bank account,

EMI payments on loans, undertaking investments, etc.

Know About Repo, Reverse Repo, Bank Rate, Call

Rate, CRR, PLR, CAR & SLR

Repo (Repurchase) Rate

Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the

demand they are facing for money (loans) and how much they have on hand to lend.

If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo

rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate

This is the exact opposite of repo rate.

The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is

termed the reverse repo rate. The RBI uses this tool when it feels there is too much money

floating in the banking system

If the reverse repo rate is increased, it means the RBI will borrow money from the bank and

offer them a lucrative rate of interest. As a result, banks would prefer to keep their money with

the RBI (which is absolutely risk free) instead of lending it out (this option comes with a certain

amount of risk)

Consequently, banks would have lesser funds to lend to their customers. This helps stem the

flow of excess money into the economy

Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks,

while repo signifies the rate at which liquidity is injected.

Bank Rate

This is the rate at which RBI lends money to other banks (or financial institutions .

The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate

moves up, long-term interest rates also tend to move up, and vice-versa.

Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of

interest. If the RBI hikes the bank rate (this is currently 6 per cent), the interest that a bank pays

for borrowing money (banks borrow money either from each other or from the RBI) increases.

It, in turn, hikes its own lending rates to ensure it continues to make a profit.

Call Rate

Call rate is the interest rate paid by the banks for lending and borrowing for daily fund

requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks

according to their daily or short-term requirements on a regular basis.

CRR

Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to

keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank

deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and

thereby, inflation by tying their hands in lending money

SLR

Besides the CRR, banks are required to invest a portion of their deposits in government

securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again

restrict the bank’s leverage in pumping more money into the economy.

PLR

Prime lending rate is the rate that the bank will lend to its best customers.

CAR

Capital Adequacy Ratio (CAR), also called Capital to Risk (Weighted) Assets

Ratio (CRAR)] is a ratio of a bank's capital to its risk. National regulators track a bank's CAR to

ensure that it can absorb a reasonable amount of loss and complies with statutory Capital

requirements.

Capital adequacy ratios (CARs) are a measure of the amount of a bank's core capital expressed

as a percentage of its risk-weighted asset.

Capital adequacy ratio is defined as:

What is LAF?

Liquidity adjustment facilities (LAF). Recall that one of the main task of RBI is to control money supply in the economy. RBI controls money supply via monetary policy. For this RBI uses various “tools” e.g.

SLR and CRR. Liquidity Adjustment Facilities (LAF) is also a tool used by RBI to control short-term

money supply.

What is Marginal Standing facility (MSF)?

RBI started this thing in 2011. Under MSF, Scheduled Commercial Banks can borrow money from RBI @1% higher

than the ongoing Repo rate under liquidity adjustment facility (LAF.) Although, the system of lending remains same just like under repo. = SBI sells

Government security to RBI, and promises to buy it back after sometime, at a higher rate. Difference in selling and purchase = interest rate earned by RBI.

we can memorize it like

1. Repo rate = reverse repo + 1% 2. MSF rate= repo rate + 1%

Difference between LAF and MSF

LAF MSF

Liquidity adjustment facility Marginal standing facility

Minimum bidding amount is 5 cr. 1 cr.

All clients of RBI are eligible to bid. Only scheduled commercial

banks can bid.

Bank cannot sell Government

security to RBI that is part of bank’s

SLR quota.

bank can sell the Government

security from its SLR quota to

RBI.

Bank can borrow any amount of Bank can maximum borrow upto

money as long as it has the securities

to sell.

2% of its NDTL.

Suppose repo rate is “r%” MSF lending rate is always

(r+1)%

What is ECB?

External commercial borrowing As the name suggest: ECB= when Indian company borrows money from external (non-

Indian / foreign) sources. Money is borrowed from non-resident lenders. Via bank loans, fixed rate bonds, non-convertible shares, optionally convertible or

partially convertible preference shares etc. For minimum average 3 years.

Know About Brown Label and White Label ATM mean?

White label ATM: These are ATM’s which are not owned by banks but by private ATM service providers. Customers from any bank can deposit or withdraw money from such ATM,s. Your banks pay a service fee for the usage. “Such ATMs will help take banking services to remote places,” official sources said. Besides, it will help sponsored banks to set-up ATMs without incurring capital expenses for owning money dispensing machine. The Finance Ministry has given its view to the Reserve Bank in this regard, adding that the lead bank or sponsored bank of a district would be given the responsibility of filling cash and meeting other operational requirement. Thus, the bank will be saved from making investment for setting up ATMs, and even other expenses like technical infrastructure and security would be borne by non-bank entities. State-owned IDBI Bank is considering to create a separate venture with private ATM service providers for running white-label ATMs, so called because they are not owned by any bank. Such entities should have a minimum net worth of Rs. 100 crore at the time of making the application and on a continuing basis after issue of the requisite authorization. Other guidelines for applying to the apex bank for authorisation under the PSS Act are available at the RBI official website.

Currently, only banks are being permitted to set up Automated Teller Machines (ATMs) in India. Banks have played a major role in encouraging ATM adoption and modifying behavioral strategies in the domain of personal banking. The banking space has seen considerable growth through the ATMs, which currently stands 87000 nos. and has been restricted principally to the urban/metro areas.

---------------------------------------… Brown label ATMs: The ATM is named under the brand of the sponsor bank but the ATM machine is not owned by the bank. At present, banks allow customers of other banks five free-of-charge cash withdrawals at their ATMs every month but end up paying around Rs 3,000 crore a year to settle inter-bank transaction costs. In such cases, the hardware as well as lease is under the ownership of the service provider, while connectivity and cash handling and management is the responsibility of the sponsor bank.

Know About Rupay & Cheque Truncation System

Rupay

RuPay is the Indian domestic card payment network being set up by National Payments

Corporation of India (NPCI) at the behest of banks in India.[2] This project had been conceived

by Indian Banks Association and has the approval of Reserve Bank of India. The objectives to be

fulfilled are:

1. Reduce overall transaction cost for the banks in India by introducing competition to

international card schemes.

2. Develop products appropriate for the country particularly for financial inclusion.

3. Provide card payment service option to many banks who are currently not eligible for

card issuance under the eligibility criteria of international card schemes.

4. Build environment whereby payment information of the country remains within the

country

5. Shift Personal Consumption Expenditure (PCE) from cash to electronic payments in a

growing economy with a population of 1.2 billion

Cheque Truncation System

Cheque Truncation System (CTS) or Image-based Clearing System (ICS), in India, is a

project undertaken by the Reserve Bank of India – RBI, for faster clearing of cheques. CTS is

basically an online image-based cheque clearing system where cheque images and Magnetic Ink

Character Recognition (MICR) data are captured at the collecting bank branch and transmitted

electronically.

Truncation means, stopping the flow of the physical cheques issued by a drawer to the drawee

branch. The physical instrument is truncated at some point en route to the drawee branch and

an electronic image of the cheque is sent to the drawee branch along with the relevant

information like the MICR fields, date of presentation, presenting banks etc.

Cheque truncation, would eliminate the need to move the physical instruments across branches,

except in exceptional circumstances. This would result in effective reduction in the time

required for payment of cheques, the associated cost of transit and delays in processing, etc.,

thus speeding up the process of collection or realization of cheques.

Priority Sector Lending

Priority sector plays an important role in the economic development of the country. Therefore,

the Central (Federal) Government of any country gives this sector priority (first preference) in

obtaining loans from banks at a low rate of interest. This is known as a ‘Priority Sector Lending’.

Following are the areas under Priority Sector Lending:

BANKING CONCEPTS: RAJIV GANDHI EQUITY SAVINGS

SCHEME

It was approved by The Union Finance Minister, Shri. P. Chidambaram on September 21, 2012.

Important Facts about the Scheme:

1. Who can invest under this scheme?

i. Anybody who has not invested in equities before and has a gross total annual income of Rs12

lakh or less.Which means, you have not opened a demat account in the past. You have not made

any transactions in equity and derivatives in the past (until November 23, 2012.)

ii. However, if you do have a demat account but have not done equity or futures and options

transaction in the past (until November 23, 2012), you can invest in RGESS. If you are a joint

demat account holder (2nd or 3rd account holder), you can open a new demat account as the 1st

holder and invest in RGESS.

2. How to invest?

i. To invest in RGESS, you will need to open a demat account. You will also have to fill in

declaration Form A to the Depositary Participant (DP).

3. What is the lock in period?

There is a lock-in period of total three years. This lock-in period is further divided into two –

fixed and flexible.

i. Fixed Lock-in: The first one year from the date of investment is a fixed lock-in. During this

period, you cannot sell any securities or pledge them to get loans.

ii. Flexible Lock-in: The flexible lock-in period is for next two years from the date of the end of

the fixed lock-in period. During this period, you are permitted to buy and sell eligible securities,

provided that for a cumulative period of 270 days each year, you are maintaining the value of

your initial investment. In short, the value of the investment portfolio should be equal to or

more than the amount you’ve claimed as investments for the purpose of deduction under

Section 80 CCG.

4. Expiry of period?

Once the period of holding expires, the demat account will be converted automatically into an

ordinary demat account.

5. Tax benefits?

i. To avail of tax deduction, an investor has to open a new RGESS designated demat account or

designate for this purpose his existing demat account, where no trading has taken place before

23 November.

ii. As per the Indian Income tax, a deduction is up to 50 percent of the amount invested in such

equity shares to the extent such deduction does not exceed Rs 25,000. So, if you are in the

lowest tax bracket of 10 percent your tax benefit will be Rs 2,500. And, if you are in the 20

percent tax bracket, your tax benefit will be Rs 5,000.

6. Listed securities in which investment can be made?

The eligible securities include stocks listed on the BSE-100, CNX 100 indices, Maharatna,

Navratna or Miniratna PSU companies, IPOs of PSUs with an annual turnover of more than Rs

4,000 crore and RGESS-compliant mutual fund ETFs.

ii. The investor who has opened a demat account as first holder before the notification date but

has not bought any shares or traded in the futures and options segment will also be considered

as a first-time investor.

Foreign Direct Investment (FDI) Limit in India – All Sector (Updated June 9, 2013) FDI or Foreign Direct Investment means net inflows of investment to acquire a lasting

management interest in an enterprise operating in an economy other than that of the investor.

Here is the list of FDI limit of All Sectors:

Hotels and Tourism, Roads and Highway, Education, Advertisement, Farm sector, Petro

Chemical, Pharmaceuticals, Coal and Lignite – 100%

FDI in Multi Brand retail:

Allowed FDI in Multi brand retail - 51%

FDI in Civil Aviation sector:

Allowed FDI in Civil Aviation – 49%

The Civil Aviation sector includes Airports, Scheduled and Non-Scheduled domestic passenger

airlines, Helicopter services / Seaplane services, Ground Handling Services, Maintenance and

Repair organizations; Flying training institutes; and Technical training institutions.

FDI In Insurance Sector:

Allowed FDI in Insurance Sector – 26%

FDI in the Insurance sector, as prescribed in the Insurance Act, 1999, is allowed under the

automatic route.

FDI in Defense Sector:

Allowed FDI in Defense Sector – 26%

FDI in defense industry subject to Industrial license under the Industries (Development and

Regulation) Act 1951 would be allowed up to 26% through government approval route.

FDI in Print Media:

Allowed FDI in Print Media – 26%

Publishing of Newspaper and periodicals dealing with news and current affairs

- 26%. Publication of Indian editions of foreign magazines dealing with news and current

affairs- 26% .

FDI in Broadcasting Sector:

FM Radio Stations 20%

Cable Network 49%

Direct –to-Home (d2h) Services – 49%

FDI limit in Headend-In-The-Sky (HITS) Broadcasting Service – 74% (total direct and

indirect foreign investment including portfolio and FDI) Automatic upto 49% Government

route beyond 49% and up to 74%.

Setting up hardware facilities such as up-linking, HUB etc. – 49%

FDI In Credit Information Companies:

Allowed FDI in Credit Information Companies – 49%

FDI In Banking Sector in India:

New Bank (After August, 2011) – 49%

Allowed FDI in Private Sector Banks- 74%.

FDI in private banking sector of India is allowed up to 74% where FDI up to 49% is allowed

through automatic route and FDI beyond 49% but up to 74% is allowed through government

approval route.

Allowed FDI in Public Sector Banks- 20%.

Limit for FDI in public sector banks. In the case of nationalized banks as well as SBI and its

associate banks, the overall statutory limit of 20 per cent as FDI and portfolio investment will

continue.

Difference between FDI vs FII

Chidambaram proposed in Budget speech that

We need to remove the ambiguity on what is FDI and what is FII, I propose to follow the international practice:

o if an investor has a stake of 10 per cent or less in a company, it will be treated as FII and,

o if more than 10%= FDI. Later Chindu formed a panel under Arvind Mayaram for giving clear definitions to FDI

and FII.

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