rbi in times of global recession

8/12/2019 RBI in Times of Global Recession

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Establishment:The Reserve Bank of India was established on April 1, 1935 in

accordance with the provisions of the Reserve Bank of India Act,

1934.

The Central Office of the Reserve Bank was initially established

in Calcutta but was permanently moved to Mumbai in 1937. The

Central Office is where the Governor sits and where policies are

formulated.

Though originally privately owned, since nationalization in

1949, the Reserve Bank is fully owned by the Government of India.


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Management:

The act provided for the setting up of a Central Board of

Directors to be entrusted with the general superintendence and

direction of the affairs and business of the bank (S.7). The board was

to consist of 16 directors-a Governor and Deputy Governor to be

appointed by the Governor General in Council after consideration of

the recommendations made by the Board in that behalf, four

Directors to be nominated by the Governor General in Council, eight

Directors to be elected on the behalf of the shareholders on the

various registers on the basis of a specified number for each resister

and one Government official to be nominated by the Governor

General in Council (S.8).A board of 24 members, including 5 Directors

elected by commercial and agricultural interests. The Board should

be as small as practicable and that the majority of the Directors


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should derive their mandate from the shareholders. The committee

did not consider it necessary that provision should be made for the

representation of commercial bodies as such.

Share capital:The Bank was to have, at its commencement, a share capital

of Rs.5 crores, the shares of Rs.100 each being fully paid up [S.4 (1)].

Provisions were made for its increase or decrease, by the Banks

shareholders, on the recommendation of the Central Board, with the

previous sanction of the Governor General in Council and with the

approval of the central Legislature (S.5).

There were in some quarters the feelings that the ReserveBank did not need any capital at all as it was itself going to be the

manufacturer of money. It was, of course, necessary to guard

against its being loaded with an excess of capital. As the Hilton Young

Commission put it, a central bank need not, and should not, be

provided with any very great amount of capital for both the reasons


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that the bank might be lured into unsound business activities in order

to earn sufficient profits and it would be more difficult to reduce the

share capital than to raise it later if found necessary.

This figure was incorporated in the 1927, 1928, and 1933 Bill.

The proposal of a member (Mr. Vidya Sagar Pandya) to raise the

capital to Rs. 7.5 criers did not find favour with the Legislature. The

capital has remained unchanged at Rs.5 crores to this day.

Norms:

Banks are now required to assign capital for market risk. A riskweight of 2.5% for market risk has been introduced on

investments in Government and other approved securities with

effect from the year ending 31st

march 2000. For investments in

securities outside SLR, a risk weight of 2.5% for market risk has

been introduced with effect from the year ending 31st

march,

2001.

The percentage of banks portfolio of government and approvedsecurities, which is required to be marked to market, has

progressively been increased. For the year ending 31st

march,

2000, banks were required to mark to market 75% of their

investments. In order to align the Indian accounting standards

with the international best practises and taking into


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consideration the evolving international developments, the

norms for classification and valuation of investments have been

modified with effect from September 30, 2000. The entire

investment portfolio of banks is required to be classified under

three categories, viz., Held to Maturity, Available for Sale and

Held for Trading. While the securities Held for Trading and

Available for Sale should be marked to market periodically, the

securities Held to Maturity, which should be exceed 25% of

total investments are carried at acquisition cost unless it is more

than the face value, in which case, the premium should be

amortized over a period of time.

In case of Government guaranteed advances, where theguarantee has been invoked and the concerned State

Government has remained in defaults as on March 31, 2000, a

risk weight of 20% on such advances, has been introduced. State

Governments who continue to be in default in respect of such

invoked guarantees even after March 31, 2001, a risk weight of

100% is being assigned.

Risk weight of 100% has been introduced for foreign exchangeopen position limits with effect from March 31, 1999.

The minimum capital to risk asset ratio (CRAR) for banks hasbeen enhanced to 9% with effect from the year ending March

31, 2000.


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Banks are permitted to access the capital market. Till today, 12banks have already accessed capital market.

Banks have been advised that an asset will be classified asdoubtful if it has remained in the substandard category for 18

months instead of 24 months as at present, by March 31, 2001.

Banks have been permitted to achieve these norms for

additional provisioning in phases, as under:

As on 31.3.2001:

Provisioning of not less than 50% on the assets which have

become doubtful on account of the new norm.

As on 31.3.2002:

Balance of the provisions not made during the previous year,

in addition to the provisions needed as on 31.3.2002.

In the Monetary and Credit Policy announced in April 2001, thebanks have been advised to chalk out an appropriate transition

path for smoothly moving over to 90 days norm. As a facilitating

measure, banks should move over to charging of interest at

monthly rests by April 1, 2002. Banks should commence in

making additional provisions for such loans, starting from the

year ending March 31, 2002, which would strengthen their

balance sheets and ensure smooth transaction to the 90 days

norm by March 31, 2004.


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Prudential norms in respect of advances guaranteed by StateGovernments where guarantee has been invoked and has

remained in default for more than two quarters has beenintroduced in respect of advances sanctioned against State

Government guarantee with effect from April 1, 2000. Banks

have been advised to make provisions for advances guaranteed

by State Governments which stood invoked as on March 31,

2000, in phases, during the financial years ending March 31,

2000 to march 31, 2003 with a minimum of 25% each year.

The RBI has reiterated that banks and financial institutionsshould adhere to the prudential norms on asset classification,

provisioning, etc. and avoid the practise of evergreening.

This is the long-term objective with RBI wants to pursue.Towards this direction, a number of measures have been taken

to arrest the growth of NAPs: banks have been advised to tone

up their credit risk management system; put in place a loan

review mechanism to ensure that advances, particularly large

advances are monitored on an on-going basis so that signals of

weakness are detected and corrective action taken early;

enhance credit appraisal skills of their staff, etc. In order to

ensure recovery of the stock of NAPs, guidelines for one-time

settlement have been issued in July, 2000.


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Banks have been advised to take effective steps for reduction ofNAPs and also put in place risk management systems and

practises to prevent re-emergence of fresh NP As.The proposal to set-up an Asset Reconstruction Company (ARC)

on a pilot basis to take over the NAPs of the three weak public

sector banks has been announced in the Union Budget for 1999-

2000. The modalities for setting up the ARC are being examined.

Banks are permitted to issue bonds for augmenting their Tier IIcapital. Guarantee of the Government for these bonds is not

considered necessary.

The recommendation of the committee that we should movetowards international practices in regard to income recognition

is accepted in principle. However, tightening of the prudential

norms should be made keeping in view the existing legal

framework, production and payment cycles, business practices,

the predominant share of agriculture in the country generally

involve a period of not less than from 4 to 6 months. A large

number of SSIs also have difficulties in timely realization of their

bills drawn on the suppliers. These have to be taken into account

while contemplating any change in the norm.

To start with, a general provision on standard assets of aminimum of 0.25% from the year ended March 31, 2000,

introduced.


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Functions:

Bankers bank and lender of last resort:

The reserve bank of India acts as the bankers bank. According tothe provisions of the banking companies act of 1949 every

scheduled bank was required to maintain with the Reserve Bank

a cash balance equivalent to 5 percent of its demand liabilities

and 2 percent of its time liabilities in India.

The minimum cash requirements can be changed by the ReserveBank of India.

Since commercial banks can always expert the Reserve Bank ofIndia to come to their help in times of banking crisis the reserve

bank becomes not only the bankers bank but also the lender of

last resort.

Controller of credit:


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The Reserve Bank of India is the controller of credit i.e. it has thepower to influence the volume of credit created by banks in

India.Every bank will have to get the permission of the Reserve Bank

before it can open a new branch.

Each scheduled bank must send a weekly return to the ReserveBank, showing in detail, its assets and liabilities. This power of

the bank to call for information is also intended to give iteffective control of the credit system.

The Reserve Bank has also the power to inspect the accounts ofany Commercial Bank.

As Supreme Banking Authority in the country, the Reserve Bankof India, therefore, has the following powers:

It holds the cash reserves of all the schedule banks.

It controls the credit operations of the banks through

quantitative and qualitative controls.

It controls the banking system through the system of

licensing, inspection and calling for information.

It acts as the lender of last resort by providing rediscount

facilities to scheduled banks.

Custodian of foreign reserves:

The Reserve Bank of India has the responsibility to maintain theofficial rate of exchange.


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Besides maintaining the rate of exchange of the rupee, theReserve Bank has to act as the custodian of Indias reserve of

international currencies.The vast Sterling balances were acquired and managed by banks.

Further, the RBI has the responsibility of administering the

exchange controls of the country.

Supervisory functions:

The Reserve Bank Act, 1934, and the Banking Regulation Act,1949 haven 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 liquidation.

The RBI is authorized to carry out periodical inspections of thebanks and to call for returns and necessary information from

them.

The supervisory functions of the RBI have helped a great deal inimproving the standard of banking in India to develop on sound

lines and to improve the methods of their operation.

Promotional functions:


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With economic growth assuming a new urgency sinceIndependence, the range of the Reserve Banks functions has

steadily widened.The bank now performs a variety of developmental and

promotional functions, which, at one time, were regarded as

outside the normal scope of central banking.

The bank has developed the co-operative credit movement toencourage savings, to eliminate money lenders from the villagesand to route its short-term credit to agriculture.

The RBI has set-up the agricultural Refinance and DevelopmentCorporation to provide long-term finance to farmers.

Reforms:During the reform period, the policy environment enhanced

competition and provided greater opportunity for exercise of what

may be called genuine corporate element in each bank to replace the

elements of coordinated actions of all entities as a joint family to

fulfil predetermined Plan priorities. The measures taken so far can besummarized as follows:

Looking at the greater competition in banking system the 1stmeasure was taken by permitting private sector banks and

licensing of branches of foreign banks and entry of new foreign

banks.


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The 2ndmeasure was taken for the flexibility in banking systemto manage pricing and quantity of resources.

The 3

rd

measure was taken to replace the individual guidelinewith general guidelines on credit decision.

The 4th measure was taken to cope up with the changingenvironment. Banks are free to take their own decision on credit

decision, capital adequacy norms, asset classification, etc,

The 5

th

measure was taken for appropriate legal, technologicaland regulatory framework for the development of financial

markets. Transparency has been brought in the primary and

secondary operations.

RBI Monetary Management:RBI uses its monetary policy for controlling inflationary or

deflationary situations in the economy by using one or more of the

following tools of monetary control. These are discussed below:

1. Cash Reserve Ratio (CRR):It refers to cash to be kept as a reserve by all banks with RBI at acertain percentage of their demand and time liabilities. Demand

liabilities is referred as deposit payable on demand by depositors and

time liabilities is referred as deposit payable on maturity. At present

CRR is 5%.

2. Statutory liquidity ratio(SLR):


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It refers to supplementary liquid reserve requirements of banks, in

addition to CRR. SLR is maintained by all the banks in the form of

cash in hand, current account balance with SBI and other public

sector commercial banks, unencumbered. SLR has 3 objectives:

To restrict on expansion of banks credit.

To increase investment in government securities and

To ensure the solvency of banks.

At present SLR is 25%.

3. Bank rate:Bank rate is a standard rate at which RBI is prepared to buy or

rediscount bills of exchange or other eligible papers from banks. RBI

uses bank rate to affect the cost and availability of refinance and to

change the loanable resources of banks and other financial

institutions. RBI can affect the interest rate by changing the rate

whenever the situation of economy warrants it. At present bank rate

is 6%.

4. Open market operation:This refers to the sale or purchase of government securities by RBI in

the open market to increase or decrease the liquidity banking system

and thereby affect the loanable funds with banks. RBI can also alter

the interest rate structure through its pricing policy for open market

sale/purchase.

5. Selective credit control:


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RBI objectives in issuing SCC directives are to prevent speculative

holdings of commodities and the resultant of rise in prices. RBI

guidelines on SCC are:-

Bank should not allow customers dealing in SCC commodities

any facilities that would directly or indirectly defect the

purpose of SCC directives.

The credit limit against each commodity in SCC directives

should be segregated.

In Times Recession:

The RBI adopted soft monetary policy since the start of the global

recession and reduced the short term lending rate (repo rate) by

4.25%, short term borrowing rate (reverse repo rate) by 2.75%, and

cash reserve ratio (CRR) by 4% over the last one year. A wide spreadexpectation in the market is that the RBI will keep its monetary policy

stance unchanged in the fourth coming quarterly policy review at the

end of October 2009. Here are some factors that analysts will be

watching for cues on which direction the RBI will take with regard to

the monetary policy in next few quarters:-


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1. Fiscal deficit:The central government projected a large fiscal deficit in October

2009. The centre is expected to borrow about rupees 4.5 lacs crores

from the money market from the current fiscal. Last year, the centre

borrowed rupees 3.1 lacs crores. This is one of the main factors that

will work in favour of keeping the monetary policy soft in the short

medium terms so that the overall liquidity conditions remains in a

comfortable zone.

2. Global economic condition:The current soft policy regime was started to protect the domestic

economy from the recession. The global economic conditions have

improved in the last quarters. However, there are pockets of concern

still and hence analysts believe the RBI will not change the policy

stance till the economic recovery is on a strong footing. However,

once the RBI is sure that the economic recovery is secure, it will start

tightening the monetary policy as there would be inflationary

pressures in the economy.

3. Credit off-take:The credit off take has emailed quite subdued during the last few

quarters and has not picked up as expected. Usually, a pick-up in the

credit off take sends signals to the central bank that the economy

could be overheating, thus promoting it to tighten the monetary

policy (interest rate ratio as well as reserve rate ratio). A lower credit

off take prompts it to keep the interest rate in the short term.


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4. Inflation:The inflation rate is another factor that influences the monetary

policy stance. A high inflation rate gives the indication of higher

liquidity chasing lesser resources in the economy, and hence, calls for

tightening in the monetary policy. There has been negative inflation

based on the WPI(wholesale price index) for the last three months.

The main reason for the negative inflation is the higher base effect

from last year (mainly due to higher fuel and metal prices during the

corresponding period last year). The situation in the economy was

not like a negative inflation rate then deflation. The inflation rate has

come into positive territory since the last couple of weeks due to the

reduced base effect of last year. Analysts believe it will rise quickly

and reach higher level by the end of this fiscal.

5. Need for timely action:The RBI is expected to continue its soft monetary policy in the

coming quarterly review. However, analysts believe the RBI will give

indication of changing its stances in the medium term as some

significant factors like economic recovery, high liquidity and inflation

has started picking up. Timely action would be required to be

maintaining the overall balance in the economy and prevent the

situation from getting out of control.


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MEASURES TAKEN BY RBI TO COPE UP WITH GLOBAL

RECESSION.

In order to cope up with global recession all the country are doing

this all most every month and India which was not really into

recession is trying to take all the measures to keep away from it, but

itskind of deeper than expected, out of the various cuts that RBI has

did this is latest:

Repo rate cut:To reduce the repo rate under the liquidity adjustment facility (LAF)

by 100 basis points from 6.5% to 5.5% with immediate effect.

Reverse repo rate:To reduce the rate under the LAF by 100 basis points from 5.0% to

4.0% with immediate effect.

Cash reserve ratio(CRR):To reduce the CRR of scheduled banks by 50 basis points from 5.5%to 5.0% from the fortnight beginning January 17, 2009. The CRR cut is

not immediate at least itshappening is this the only factor that will

put some money in banks hand which in turn can be used by banks

for various purpose so this cut will release 20000 crores. We can

expect more rate cuts in lending loans from various banks.


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Project submitted by:

Sheetal............................................................................58

Kiran................................................................................5819

Barkha.............................................................................5820

Varsha.............................................................................5821

Rimpy..............................................................................5850


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Index

1.Establishment of RBI2.Management of RBI3.Share Capital of RBI4.Functions of RBI5.Norms of RBI6.Reforms of RBI7.Monetary Policy of RBI8.In Times of Recession


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RBI in Times ofRecession

rbi in times of global recession

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