MONETARY POLICY( BANKING, SHARE MARKET,INFLATION)

Banking:

• 1770 AD - Bank of Hindustan: The first bank established in India.
• 1881 AD - Oudh Commercial Bank: The first bank operated by Indians.
• 1894 AD - Punjab National Bank (PNB): The first purely Indian bank / Swadeshi bank

History Of SBI (State Bank of India):

• 1840 AD - Bank of Bombay
• 1843 AD - Bank of Madras

Note: These three banks were established by the Presidency governments of that time, hence they are called Presidential Banks.

• 1921 AD - These Presidential banks were merged to form the Imperial Bank of India.
• 1955 AD - The Imperial Bank of India was partially nationalized and renamed the State Bank of India (SBI). Its ownership lay with the RBI.
• 2008 AD - The Government of India acquired SBI from the RBI.
• 1959 AD - The banks of the princely states were made subsidiary banks of SBI.

At that time, SBI had 8 subsidiary banks.

• 1961 AD - State Bank of Bikaner and State Bank of Jaipur were merged, and the new name was kept SBBJ.
• 2008 AD - State Bank of Saurashtra was merged into SBI.
• 2010 AD - State Bank of Indore was merged into SBI.
• 2017 AD - All the remaining 5 banks were merged into SBI (SBBJ, State Bank of Patiala, State Bank of Hyderabad, Bank of Mysore, State Bank of Travancore).

• 1976 - The Government of India purchased IDBI.
• 2008 - SBI (Purchased by Govt from RBI).
• 2010 - NABARD, NHB (Purchased by Govt).
• DICGC (Subsidiary of RBI).

Scheduled Banks:

1. Those banks which are mentioned in the Second Schedule of the RBI Act, 1934.
2. For a Scheduled Bank, there must be a capital of 500 Crores.
3. All rules and regulations of RBI apply to them.
4. It can obtain all types of financial services [assistance] from RBI.

Nationalized Banks:

• 1969 AD - The Indira Gandhi government nationalized 14 big banks whose capital was 50 crores or more.
• 1980 AD - The Indira Gandhi government nationalized 6 other banks.
• 1993 AD - New Bank of India was merged into Punjab National Bank.
• At present, there are a total of 19 Nationalized Banks.

Regional Rural Bank (RRB):

2 Oct, 1975 - 5 Regional Rural Banks were established.

• Later, the number of RRBs increased to 196.
• Objective: To provide banking facilities in rural areas.
• Sikkim and Goa did not have RRBs.
• Most RRBs were running in losses, therefore now they are being merged into other commercial banks.
• RBI has made a rule that 25% of new branches of schedule banks must be in rural areas.
• RRB is a joint venture of the Central Government, State Government, and Commercial Bank (Sponsor Bank).
• Central Government's Share = 50%
• State Government's Share = 15%
• Commercial Banks' Share = 35%

Comparison: Cooperative Bank vs Commercial Bank

Cooperative Bank	Commercial Bank
1. These are established by the State Legislature Act.	1. These are established by the Parliamentary Act.
2. This is a three-tier structure: • Apex Bank - State • Central Bank - District • Primary Cooperative Society - Village Panchayat	2. This is a single-tier structure.
3. Their working area is limited.	3. Their working area is not limited.
4. These do not come under the category of Scheduled Banks.	4. These are Scheduled Banks.
5. They receive financial assistance from NABARD.	5. They receive financial assistance from RBI.
6. RBI makes rules and regulations for them. [Since 2005]	6. RBI makes rules and regulations for them.

RESERVE BANK OF INDIA:

• Establishment: 1 April, 1935
• It was established on the recommendation of the Hilton Young Committee.
• It was established under the RBI Act, 1934.
• There was also a provision for the establishment of a central bank in the Government of India Act, 1935.
• It was a central bank from the time of its establishment.
• At the time of establishment, it was a private sector bank.
• It was nationalized on 1 Jan, 1949.
• For some time, it also issued currency for Pakistan and Burma.

Functions Of RBI:

• Issuance of Notes:
  • Notes of ₹2 and above are issued by the RBI.
  • ₹1 note and coins are issued by the Ministry of Finance.
  • The ₹1 note bears the signature of the Finance Secretary.
  • The work of bringing the ₹1 note and coins into the market belongs to the RBI.
• Systems of Note Issue:
  • Gold Reserve System
  • Proportional Reserve System
  • Minimum Reserve System
• RBI issues notes under the Minimum Reserve System (since 1957).
• Under this, RBI has to keep a minimum reserve of 200 Crore Rupees.
• 200 Crore Rs Breakdown:
  • 115 Crore Rs = Gold
  • 85 Crore Rs = Foreign Assets (Other Assets)

Regulatory Body of Banks: It makes rules and regulations for the banking sector. It gets them implemented.

• If a bank does not follow these rules, it takes action against them.
• It gives recognition (Licenses) to banks.
• The development of banks / banking sector is the responsibility of RBI.

Banker to the Government:

• It is the Banker of the Government of India.
• It arranges all types of domestic loans for the government.
• In 2016, the government constituted the Public Debt Management Cell (PDMC) under the Ministry of Finance, which is a temporary body.
• In due course, it will be replaced by the Public Debt Management Agency (PDMA), which will arrange all types of loan for the Government of India.

Custodian of Forex Reserves:

• RBI preserves the foreign exchange reserves.
• At present, RBI has foreign exchange reserves of 425 Billion Dollars. [As per notes]

Foreign Exchange Reserves include the following:

1. Foreign Assets ($, Euro, etc.)
2. Gold
3. Reserve Tranche (Our deposits in IMF)
4. SDR (Special Drawing Rights)

It manages the Exchange Rate of the Rupee.

RBI provides Clearing House facility to banks.

Controls Market Liquidity:

To control market liquidity, it uses two types of measures:

1. Quantitative Measures
2. Qualitative Measures

1. Quantitative Measures:

(i) Bank Rate
(ii) CRR (Cash Reserve Ratio)
(iii) SLR (Statutory Liquidity Ratio)
(iv) Repo Rate
(v) Reverse Repo Rate
(vi) MSF Rate (Marginal Standing Facility Rate)
(vii) Open Market Operation (OMO)

(i) Bank Rate:

• The interest rate at which RBI provides long-term loans to banks.
• It is also called Penal Rate because RBI charges this interest rate from banks that do not follow RBI's rules.

(ii) Cash Reserve Ratio (CRR):

• All banks have to deposit a certain percentage of their Total Deposits (Net Demand and Time Liabilities - NDTL) with the RBI, on which RBI pays no interest.
• This is for emergency situations.

(iii) Statutory Liquidity Ratio (SLR):

• All banks have to keep a certain percentage of their total liabilities in the form of liquid assets.
• At present, it is 19.5%.
• All banks are required to invest a certain percentage of their total liabilities in Government Securities.

Liquidity Adjustment Facility (L.A.F.):

1. This facility was started by RBI in 2000.
2. Under this, the Repo Market was developed.

Full form of Repo: Repurchase Option.

Repo Market:

• If the seller of funds keeps the option to buy back his funds after a certain time safely with himself, then it is called Repo Market.
• In India, short-term transactions between RBI and banks are called Repo Market.
• During this transaction, Securities are kept as collateral (Mortgage).
• Its interest rates are called Reverse Repo Rate and Repo Rate.

(iv) Repo Rate:

• The interest rate at which RBI provides short-term loans to banks.
• Under the Repo market, a bank can take at least 5 Crore Rupees from RBI.

(v) Reverse Repo Rate:

• The interest rate at which banks deposit their funds with the RBI.

(vi) M.S.F. Rate (Marginal Standing Facility):

• RBI started this facility in 2011.
• This facility is available only in Mumbai.
• Under this facility, RBI provides loans to banks for one day or one night.
• The bank has to take a loan of at least 1 Crore.
• Above this, it can be in multiples of 1 Crore.
• It can be a maximum of 1% of the bank's total deposits (Demand Deposit and Time Deposit).
• It is also called Penal Rate.
• This is higher than the Repo Rate [0.25% higher].
• In the M.S.F. facility, banks can use securities kept under S.L.R., whereas in the Repo Market they cannot use them.

(vii) Open Market Operation (OMO):

• This is an additional tool of RBI to control market liquidity.
• Under this, RBI buys or sells securities.
• If liquidity in the market is high, then RBI sells securities.
• If liquidity in the market is low or there is a situation of Deflation, then RBI buys securities.
• In the Repo market, securities are kept as collateral (pledged). Whereas in Open Market Operation, securities are bought or sold.
• This is a long-term measure compared to the Repo market. Because in Repo market securities are pledged, whereas in this securities are sold.
• If there is a situation of Inflation, then to control it RBI increases Bank Rate, CRR, SLR, Repo Rate, Reverse Repo Rate, M.S.F. Rate.
• If there is a situation of Recession / Deflation in the market, then RBI decreases Bank Rate, CRR, SLR, Repo Rate, Reverse Repo Rate, M.S.F. Rate.

QUALITATIVE MEASURES:

(i) Margin Requirement:

• Under this, Margin Money is increased or decreased.
• If the inflation rate is high, then to control it, Margin Money is increased.
• If there is a situation of recession, then Margin Money is decreased.

(ii) Consumer Credit Regulation:

• Under this, the amount of Down Payment is increased or decreased.
• In a situation of high inflation, the amount of down payment is increased.
• In a situation of recession, the amount of down payment is decreased.

(iii) Rationing Of Credit:

(Diagram Description: Bank -> Consumer / Investors. Demand / Market / Invest = Supply / Production)

• In a situation of high inflation, less loan is given to consumers and more loan is given to investors.
• In a situation of economic recession, more loan is given to consumers and less loan is given to investors.

(iv) Moral Suasion:

• RBI creates moral pressure on banks.
• At the time of inflation, pressure is made to give less loans, whereas in the situation of recession, pressure is made on banks to give more loans.

(v) Direct Action:

• In this, RBI gives instructions to banks and takes action against those banks that do not follow the instructions.

Priority Sector Lending (PSL):

• All banks are required to give 40% of their loanable amount (18% Agriculture {direct/indirect}, 22% Others {Home loans, ST/SC, Micro Industries}) to the Priority Sector.
• The following are included in the Priority Lending Sector:
  1. Agriculture (18%)
  2. Small and Marginal Farmers
  3. Small and Micro Industries
  4. SC & ST
  5. House Loans (Housing Loan):
     • In Metros - Loans up to 35 Lakh
     • In other cities - Loans up to 25 Lakh
  6. Education Loan:
     • In India - 10 Lakh
     • Abroad - 20 Lakh
  7. People living in slums
  8. NBFC - MFI (Non-banking Finance Company - Micro Finance Institution)
• 22% can be given in others.

PSL Certificate:

• In 2016, RBI allowed banks to issue PSL certificates.
• Banks that give loans more than their target in the priority sector can issue PSL certificates.
• Those banks which are unable to achieve their PSL target can buy these PSL certificates and achieve their target by buying them.
• PSL Certificates are of 4 types:
  1. PSL Certificate for Agriculture
  2. PSL Certificate for Marginal Farmer
  3. PSL Certificate for Micro-Industries
  4. PSL Certificate General

Capital Adequacy Ratio (CAR):

• All banks have to maintain their capital up to a certain percentage of risk-weighted assets.
• This is around 9-10%.
• The Concept of CAR is taken from Basel Norms.

Bank for International Settlement (BIS):

• Establishment: 1930 AD
• Headquarters: BASEL (Switzerland)
• This is an organization of Central Banks.
• RBI became its member in 1996 AD.
• It gives encouragement to research for the development of the banking sector.
• It makes policies and rules for the development of the banking sector which are known as Basel Norms.
• So far BASEL I (1998 AD), BASEL II (2004 AD), BASEL III (2010-11 AD) have been issued.
• In India, currently BASEL III standards are being implemented.
• These are being implemented between 2013-19.

Call Money Market:

• During daily transactions, some banks have a shortage of money while some other banks have excess / surplus money, in this situation the transaction that takes place between banks is called Call Money Market.
• All terms of its transaction are determined on phone calls, that's why it is called Call Money Market.
• Its interest rate is called Call Rate.
• Call Rate is also called Reference Rate because the Central Bank makes its monetary policy keeping the Call Rate in mind.
• There are excessive fluctuations in the Call Rate.
• In this, money can be taken for a maximum of 14 days.
• But generally, money is taken for only 1 day.
• London has the world's largest Call Money Market.
• Its call rate is called LIBOR (London Inter Bank Offer Rate).
• India's Call Money Market is Mumbai. Its call rate is called MIBOR (Mumbai Inter Bank Offer Rate).

Urjit Patel Committee - 2014:

• Constitution: Dec. 2013
• Gave its following Recommendation in 2014 -
  • RBI should have only one objective - To control inflation.
  • RBI should not pay attention to other things.
  • e.g. Employment Generation, Export Promotion, Exchange rate of Rupee etc.
• CPI should be made the main index in place of WPI.
• Targeting Inflation should be 4%. It can be +/- 2%.
• Monetary policy review should be done at an interval of 60 days instead of 45 days.
• Monetary Policy Committee should be constituted for the determination of monetary policy.
• Monetary Policy Committee should have 5 members [ 3 members of RBI + 2 representatives of Government of India ].
• Government cooperation is necessary to control inflation. [ Government's expenditure = Public's income ]
• Government should cut (control) public welfare works.
  • e.g. MGNREGA, Food Security Program etc.
• Government should achieve the targets of FRBM Act, 2003.

Monetary Policy Committee:

• Monetary Policy Committee was constituted by a Parliamentary Act.
• Constitution: 2016
• There are 6 members in it [ 3 members RBI { Governor (Chairman) + Deputy Governor + Executive Director } + 3 Government representatives { who are not on the office of profit } ].
• This committee takes decisions by majority.
• If there is equal voting then the Governor can give a casting vote.
• Governor will not have Veto.
• There is complete transparency in the proceedings of the committee.
• It is necessary for the committee to meet at least once in 2 months.
• Monetary policy review is done at an interval of 2 months.
• Targeting Inflation is 4% which can be +/- 2%.
• If inflation is not controlled for 9 consecutive months, then the committee will have to give an explanation. Why it did not happen, by when it will happen, how it will happen.
• For Quorum there must be 4 members.

Narasimham Committee - I (1991):

• Nationalization of banks should not be done.
• Private sector banks should be encouraged.
• Foreign banks should also be encouraged in India.
• No discrimination should be done between foreign banks and domestic banks.
• CRR and SLR should be reduced [ Earlier CRR=15%, SLR=38.5% ].
• Government shareholding in public sector banks should be made 51%.
• Three levels of banks should be encouraged in India :-
  • International level banks
  • National level banks
  • Regional level banks
• Credit Information Bureau should be established.
• Debt Recovery Tribunals should be established.
• Asset Reconstruction Company (ARC) should be established.

Narasimham Committee II - 1998 AD:

• Mutual merger of banks should be encouraged.
• Weak banks should not be merged into strong / robust banks.
• They should be encouraged for Narrow Banking.
  • Narrow Bank: Those banks which give loans only in safe sectors, not in risky sectors.
• Government shareholding in public sector banks should be reduced from 51% to 33%.
• Banks should be given more autonomy.
• And Basel norms should be adopted.
• NBFC should be brought under the jurisdiction of RBI.
• Computerization of banks should be encouraged.

Pradhan Mantri Jan-Dhan Yojana:

• This scheme was announced on 15 Aug, 2014.
• This scheme was implemented on 28 Aug, 2014.
• More than one crore bank accounts were opened in the first week.
• Objective: Financial Inclusion.
• In this, bank accounts of people aged 10 years or more are opened.
• Any one ID Proof is sufficient to open this bank account.
• If there is not even a single identity card, then this account can be opened even if certified by a Gazetted Officer.
• If KYC rules are not fulfilled, then in this situation a maximum transaction of 50000 rupees can be done in the account.
• So far more than 30 crore Jan-Dhan accounts have been opened.
• People who opened this account before 26 Jan, 2015 have been provided life insurance facility of 30 thousand rupees.
• Accidental insurance facility up to one lakh has been provided to all account holders. But there is a condition for this that at least one transaction of any kind must take place in 90 days.
• RuPay Debit Card is provided in this.
• Over Draft facility up to 5000 can be given to account holders [ by bank after 6 months ].
• Mobile banking facility is provided in this [ Smartphone not required ].

• Slogan - "Mera Khata, Bhagya Vidhata" (My Account, My Destiny Maker).

• There is no need to maintain minimum balance.