KPB HINDUJA COLLEGE OF COMMERCE

TYBcom

BUSINESS ECONOMICS

PAPER - 3

ASSIGNMENT: COMMERCIAL BANK

NAME: Jain Bhavana Suresh DIV: A ROLL NO: 76

ACADEMIC YEAR 2011-12

CONTENTS

SERIAL NO. 1.

INDEX INTRODUCTION

PAGE NO. 1

2.

EVOLUTION OF COMMERCIAL BANKS

3.

PROMOTING RURAL ENTTREPRENEURSHIP

4.

BUSINESS FACILITATORS

5.

BUSINESS CORRESPONDENTS

6.

ROLE OF COMMERCIAL BANK

12

7.

DEVELOPED BY CORPORATE BANK

13

RESERVE BANK OF INDIA AS AN APEX BANK

INTRODUCTION TO RBI
The Reserve Bank of India (RBI, Hindi ) is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010) of curreny reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. Reserve bank of India plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union.Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.

STRUCTURE
Central Board of Directors The Central Board of Directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The Board consists of a governor, four deputy governors, four directors to represent the regional boards, and ten other directors from various fields. Governors The central bank till now was governed by 21 governers. The 22nd, Current Governor of Reserve Bank of India is Dr Subbarao Supportive bodies The Reserve Bank of India has four regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and serve - beside the advice of the Central Board of Directors - as a forum for regional banks and to deal with delegated tasks from the central board.The institution has 22 regional offices. The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring and internal controlling systems. The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S S Tarapore to "lay the road map" to capital account convertibility. The fivemember committee recommended a three-year time frame for complete convertibility by 19992000. On 1 July 2006, in an attempt to enhance the quality of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of India constituted a new department Customer Service Department (CSD). Offices and branches The Reserve Bank of India has 4 regional offices,15 branches and 5 sub-offices. It has 22 branch offices at most state capitals and at a few major cities in India. The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai and College of Agricultural Banking at Pune.

FUNCTIONS OF THE RESERVE BANK OF INDIA

The Reserve Bank of India performs all the typical functions of a good Central Bank. In addition, it carries out a variety of developmental and promotional functions attuned to the course of economic planning in the country: Issuing currency notes, Le., to act as a currency authority. Serving as banker to the Government. Acting as bankers bank and supervisor. Monetary regulation and management. Exchange management and control. Collection of data and their publication. Miscellaneous developmental and promotional functions and activities. Agricultural Finance. Industrial Finance Export Finance. Institutional promotion.

OBJECTIVES OF THE RESERVE BANK OF INDIA

The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve Bank as: to regulate the issue of Bank notes and the 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.

Prior to the establishment of the Reserve Bank, the Indian financial system was totally inadequate on account of the inherent weakness of the dual control of currency by the Central Government and of credit by the Imperial Bank of India. The Hilton-Young Commission, therefore, recommended that the dichotomy of functions and division of responsibility for control of currency and credit and the divergent policies in this respect must be ended by setting-up of a central bank called the Reserve Bank of India which would regulate the financial policy and develop banking facilities throughout the country. Hence, the Bank was established with this primary object in view. Another objective of the Reserve Bank has been to remain free from political influence and be in successful operation for maintaining financial stability and credit. The fundamental object of the Reserve Bank of India is to discharge purely central banking functions in the Indian money market, i.e., to act as the note- issuing authority, bankers bank and banker to government, and to promote the growth of the economy within the framework of the general economic policy of the Government, consistent with the need of maintenance of price stability. A significant object of the Reserve -Bank of India has also been to assist the planned process of development of the Indian economy. Besides the traditional central banking functions, with the launching of the five-year plans in the country, the Reserve Bank of India has been moving ahead in performing a host of developmental and promotional functions, which are normally beyond the purview of a traditional Central Bank.

HOW RBI CONTROLS OTHER BANKS ?

RBI is Bankers Bank
The Reserve Bank of India acts as the bankers bank. Every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2% of its time liabilities in India, according to the provisions of the Banking Companies Act of 1949. The distinction between demand and time liabilities was abolished by an amendment of 1962, and cash reserves equal to 3% of their aggregate deposit liabilities have to be kept by the banks as has been asked for by the RBI. The Reserve Bank of India can change the minimum cash requirements of other banks. On the basis of eligible securities the scheduled banks can borrow money from the Reserve Bank of India. At times of need or stringency by re-discounting bills of exchange, the banks can get financial accommodation from the RBI. Reserve Bank becomes not only the bankers bank but also the lender of the last resort since in times of banking crisis the Reserve Bank of India is expected to come to the help of commercial banks.

Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors. The national economy depends on the public sector and the central bank promotes an expansive monetary policy to push the private sector since the financial market reforms of the 1990s. The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the GDP and has to decide the design of the rupee banknotes as well as coins.

Manager of exchange control

The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency
The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.

Minimum Reserve System - Principle of Currency Note Issue

RBI can issue currency notes as much as the country requires, provided it has to make a security deposit of Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores must be FOREX Reserves. This principle of currency notes issue is known as the 'Minimum Reserve System'.

Developmental role
The central bank has to perform a wide range of promotional functions to support national objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of this problems are results of the dominant part of the public sector.

Related functions
The RBI is also a banker to the government and performs merchant banking function for the central and the state governments. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition. The institution maintains banking accounts of all scheduled banks, too. There is now an international consensus about the need to focus the tasks of a central bank upon central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate described above. The recent financial turmoil world-over, has however, vindicated the Reserve Bank's role in maintaining financial stability in India.

Bank Rate

Policy rates, Reserve ratios, lending, and deposit rates as on 26 July, 2011 RBI lends to the commercial banks through its Bank Rate 6.0% discount window to help the banks meet Repo Rate 8% depositors demands and reserve requirements. Reverse Repo Rate 7% The interest rate the RBI charges the banks for Cash Reserve Ratio (CRR) 6.0% Statutory Liquidity Ratio (SLR) 24.0% this purpose is called bank rate. If the RBI Base Rate 9.50%10.75% wants to increase the liquidity and money Savings Bank Rate 4% supply in the market, it will decrease the bank Deposit Rate 8.50%9.50% rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 5 May, 2011 the bank rate was 6%.

Cash Reserve Ratio (CRR) Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 6%.

Statutory Liquidity Ratio (SLR) Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities. In well-developed economies, central banks use open market operations--buying and selling of eligible securities by central bank in the money market--to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market related rates of interest. The RBI is resorting more to open market operations in the more recent years.

RBI is Controller of Credit

The Reserve Bank of India has the power to influence the volume of credit created by banks in India which means that it is the controller of credit. This is being done through open market operation or by changing the Bank rate. Reserve Bank of India can ask any particular bank or the whole banking system not to lend financial support to a particular groups or persons on the basis of certain types of securities according to the Banking Regulation Act of 1949. Selective controls of credit are increasingly being used by the Reserve Bank since 1956. Indian money market is controlled by the many more powers of the Reserve Bank of India. A license from the Reserve Bank of India to do banking business within India has to be obtained by every bank. On stipulated conditions not being fulfilled, the RBI has powers to cancel the licenses also. Before a new branch of any bank be opened. it has to get the permission of the Reserve Bank. A weekly return showing in detail its assets and liabilities must be sent to the Reserve Bank by every scheduled bank. This power of the RBI to call for information is also intended to give it effective control of the credit system. Another power of the Reserve Bank is the power to inspect the accounts of any commercial bank. Reserve Bank of India, as the supreme banking authority in the country, therefore, has the following powers: a) The cash reserves of all the scheduled banks are in the hands of the RBI. b) Through quantitative and qualitative operations, it controls the credit operations of other banks. c) Through the system of licensing, inspection and calling for information, the RBI controls the banking system in the country. d) By providing rediscount facilities to scheduled banks, it acts as the lender of the last resort to other banks. Generally RBI uses three kinds of selective credit controls: 1. Minimum margins for lending against specific securities. 2. Ceiling on the amounts of credit for certain purposes. 3. Discriminatory rate of interest charged on certain types of advances. Direct credit controls in India are of three types: 1. Part of the interest rate structure i.e. on small savings and provident funds, are administratively set. 2. Banks are mandatorily required to keep 24% of their deposits in the form of government securities. 3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

Bank Issue:
Under Section 22 of the Reserve Bank of India Act, the bank has the sole sight to issue bank notes of all denominations. The notice issued by the Reserve bank has the following advantages: It brings uniformity to note issue. It is easier to control credit when there is a single agency of note issue. It keeps the public faith in the paper currency alive. It helps in the stabilization of the internal and external value of the currency and Credit can be regulated according to the needs of the business. The system of note issue as it exists today is known as the minimum reserve system. The currency notes issued by the Bank arid legal tender everywhere in India without any limit. At present, the Bank issues notes in the following denominations: Rs. 2, 5, 10, 20, 50 100, and 500. The responsibility of the Bank is not only to put currency into, or withdraw it from, the circulation but also to exchange notes and coins of one denomination into those of other denominations as demanded by the public. All affairs of the Bank relating to note issue are conducted through its Issue department.

Banker, Agent and Financial Advisor to the State:

As a banker agent and financial advisor to the State, the Reserve Bank performs the following functions: It keeps the banking accounts of the government. It advances short-term loans to the government and raises loans from the public. It purchases and sells through bills and currencies on behalf to the government. It receives and makes payment on behalf of the government. It manages public debt and It advises the government on economic matters like deficit financing price stability, management of public debts. etc

Lender of the Last Resort:

At one time, it was supposed to be the most important function of the Reserve Bank. When Commercial banks fail to meet obligations of their depositors the Reserve Bank comes to their rescue as the lender of the last resort, the Reserve Bank assumes the responsibility of meeting directly or indirectly all legitimate demands for accommodation by the Commercial Banks under emergency conditions.

Banks of Central Clearance, Settlement and Transfer:

The commercial banks are not required to settle the payments of their mutual transactions in cash, It is easier to effect clearance and settlement of claims among them by making entries in their accounts maintained with the Reserve Bank, The Reserve Bank also provides the facility for transfer to money free of charge to member banks.

Supervisory Functions:
In addition to its traditional central banking functions, the Reserve Bank has certain non- monetary functions of the nature of supervision of banks and promotion of sound banking in India. The supervisory functions of the RBI have helped a great deal in improving the methods of their operation. The Reserve Bank Act, 1934, and Banking Regulation Act, 1949 have given the RBI wide powers of: Supervision and control over commercial and cooperative banks, relating to licensing and establishments. Branch expansion. Liquidity of their assets. Management and methods of working, amalgamation reconstruction and liquidations. The RBI is authorized to carry out periodical inspections off the banks and to call for returns and necessary information from them.

Promotional Role
A striking feature of the Reserve Bank of India Act was that it made agricultural credit the Banks special responsibility. This reflected the realisation that the countrys central bank should make special efforts to develop, under its direction and guidance, a system of institutional credit for a major sector of the economy, namely, agriculture, which then accounted for more than 50 per cent of the national income. However, major advances in agricultural finance materialised only after Indias independence. Over the years, the Reserve Bank has helped to evolve a suitable institutional infrastructure for providing credit in rural areas. Another important function of the Bank is the regulation of banking. All the scheduled banks are required to keep with the Reserve Bank a consolidated 3 per cent of their total deposits, and the Reserve Bank has power to increase this percentage up to 15. These banks must have capital and reserves of not less than Rs.5 lakhs. The accumulation of these balances with the Reserve Bank places it in a position to use them freely in emergencies to support the scheduled banks themselves in times of need as the lender of last resort. To a certain extent, it is also possible for the Reserve Bank to influence the credit policy of scheduled banks by means of an open market operations policy, that is, by the purchase and sale of securities or bills in the market. The Reserve bank has another instrument of control in the form of the bank rate, which it publishes from time to time. Further, the Bank has been given the following special powers to control banking companies under the Banking Companies Act, 1949: The power to issue licenses to banks operating in India. The power to have supervision and inspection of banks. The power to control the opening of new branches. The power to examine and sanction schemes of arrangement and amalgamation. The power to recommend the liquidation of weak banking companies. The power to receive and scrutinize prescribed returns, and to call for any other information relating to the banking business. The power to caution or prohibit banking companies generally or any banking company in particular from entering into any particular transaction or transactions. The power to control the lending policy of, and advances by banking companies or any particular bank in the public interest and to give directions as to the purpose for which advances mayor may not be made, the margins to be maintained in respect of secured advances and the interest to be charged on advances.

CONCLUSION
The Reserve Bank of India (RBI) is the apex financial institution of the countrys financial system entrusted with the task of control, supervision, promotion, development and planning. RBI is the queen bee of the Indian financial system which influences the commercial banks management in more than one way. The RBI influences the management of commercial banks through its various policies, directions and regulations. Its role in bank management is quite unique. In fact, the RBI performs the four basic functions of management, viz., planning, organising, directing and controlling in laying a strong foundation for the functioning of commercial banks.

BIBLIOGRAPHY
Money and banking by A.Vasudevan
A policy reading of RBI by K. Kanagasabapathy

WIBLIOGRAPHY
en.wikipedia.org/wiki www.rbi.org.in