Management on Banking & Insurance Essay Example

the RBI as their banker.

The Reserve Bank of India (RBI) is responsible for maintaining banking accounts of all scheduled banks in India. Deposits up to Rs 1 lakh in these banks are insured, and cash withdrawal tax is only applicable for withdrawals from them. Smaller co-operative banks usually do not fall under the category of scheduled banks. Furthermore, bank interest rates are adjusted based on the RBI lending rates 7. The RBI also regulates gold trade and currently has 17 Indian banks participating in domestic gold trade. To combat illegal trade and encourage market competition, the RBI has invited applications from more banks for direct import of gold 8.The RBI implemented "Know Your Customer" guidelines for NBFCs in March 2006. Customers with deposit balances below Rs 50,000 or outstanding credit above Rs 1 lakh are exempt from providing all necessary documents. These customers are classified as low risk, medium risk, or high risk. Sahara India is one of the top NBFCs in India. Additionally, the RBI carries out foreign currency transactions to stabilize the exchange rate between the Indian Rupee and currencies such as the US Dollar, Euro, Pound sterling, and Japanese yen. Exchange rate trends for these currencies can be found on the RBI's website.The Reserve Bank of India (RBI) determines the maximum interest rate for NRI dollar deposits offered by Indian banks based on liquidity in the money markets. As of March 2006, banks are allowed to offer an interest rate equivalent to the London Interbank Offered Rate (LIBOR) for dollar deposits.
Additionally, RBI sets the cash reserve ratio (CRR), which is the percentage of deposits that Indian banks must keep with RBI. The

CRR requirement is influenced by liquidity in the money markets and currently stands at 5%.
RBI also establishes the reverse repo rate, which indicates the rate at which it absorbs funds from banks. Furthermore, RBI regulates ATM (Automatic Teller Machines) opening and installation.

The objective is to increase the number of ATMs in rural areas. RBI supplies fresh currency notes for ATMs 13. Approximately 1050 clearing houses handle transactions involving cheques, drafts, and pay orders. The State Bank of India operates 567 clearing houses primarily in smaller cities and towns 14. The annual monetary policy is announced in April each year 15. Clearing an outstation cheque from metro cities (Mumbai, Delhi, Chennai, Kolkata) costs banks only 50 paise through the RBI clearing system while ICICI Bank charges Rs 100 for the same service.

The Reserve Bank of India (RBI) has instructed banks to display their service charges on their website, but only 5 banks have complied. RBI also regulates the establishment of bank branches and ensures compliance with Know Your Customer guidelines. Established in April 1935, RBI is the central bank of India with a share capital of Rs. 5 crores as per the recommendations of the Hilton Young Commission. Initially, private shareholders fully owned the share capital, which was divided into Rs. 100 shares that were paid in full.

The Reserve Bank of India was nationalized in 1949, with the Government holding shares worth Rs. 2,20,000. The Central Board of Directors is comprised of twenty members including the Governor, four Deputy Governors, a Government official from the Ministry of Finance, ten Government-nominated Directors representing various economic sectors in the country, and four Central Government-nominated Directors representing local Boards

in Mumbai, Kolkata, Chennai, and New Delhi. Their responsibility is to supervise and provide direction for the operations of the Bank.

The Local Boards, composed of five members appointed by the Central Government, represent various interests such as territorial and economic concerns, co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was implemented on April 1, 1935 to provide a legal framework for the Bank's operations. Its main responsibilities include managing banknote issuance, maintaining reserves for monetary stability, and overseeing the credit and currency system to benefit the nation.

The Reserve Bank of India, as established by the Reserve Bank of India Act of 1934, has a range of important functions. One of these is the Bank of Issue, which gives the Reserve Bank exclusive power to issue bank notes in different denominations. Additionally, serving as a government agent, the Reserve Bank manages the distribution of one rupee notes and coins, as well as small coins throughout India. To carry out this responsibility, there is a separate Issue Department within the Reserve Bank that is responsible for issuing currency notes.

The assets and liabilities of the Issue Department and Banking Department are kept separate. Initially, the Issue Department had to have at least 40% gold coin, gold bullion, or sterling securities worth a minimum of Rs. 40 crores. The remaining 60% could be held in rupee coins, Government of India rupee securities, eligible bills of exchange, and promissory notes payable in India. However, these requirements were changed significantly due to the impact of the Second World War and the post-war period.

The Reserve Bank of India, established in 1957, is responsible for maintaining gold and foreign exchange

reserves. These reserves must have a minimum value of Rs.200 crores, with at least Rs.115 crores in gold. This system is known as the minimum reserve system. The Reserve Bank also serves as the government's banker, agent, and advisor. It acts on behalf of both the Central Government and all State Governments in India (excluding Jammu and Kashmir). The Reserve Bank handles government transactions, maintains interest-free cash balances as deposits, makes payments for the government, and conducts various banking operations such as exchange remittances.

In addition to these responsibilities, the Reserve Bank assists both Union and State Governments in managing public debt and facilitating new loans issuance. It provides ways and means advances to governments for 90 days while also extending loans and advances to states and local authorities. Furthermore, the Reserve Bank advises the government on matters related to monetary policy and banking.

Another important role of the Reserve Bank of India is acting as banks' bank. As per the Banking Companies Act of 1949, scheduled banks are required to maintain a cash balance equivalent to 5% of their demand liabilities along with 2% of their time liabilities held with the Reserve Bank. In 1962, the Reserve Bank unified demand and time liabilities by eliminating any distinction between them.
The Reserve Bank of India has set a requirement for banks to maintain cash reserves equal to 3% of their total deposit liabilities. It is important to mention that these minimum cash requirements may be subject to change in the future.

The Reserve Bank of India acts as a financial aid provider for scheduled banks, enabling them to borrow by using eligible securities or rediscounting bills of exchange in

times of necessity. This assistance establishes the Reserve Bank as both the bank for bankers and the ultimate lender, offering help during banking emergencies. Furthermore, as the regulator of credit, the Reserve Bank possesses the power to impact the quantity of credit generated by Indian banks. This authority is exerted through modifications to the Bank rate or via open market operations.

The Reserve Bank of India has the authority, as per the Banking Regulation Act of 1949, to instruct specific banks or the entire banking system to refrain from lending money to certain individuals or groups based on specific types of collateral. Since 1956, the Reserve Bank has been implementing selective credit controls more frequently. It possesses additional powers to regulate the Indian money market effectively. Any bank operating within India must obtain a license from the Reserve Bank; failure to meet certain conditions can lead to license cancellation.

The Reserve Bank of India is the supreme banking authority in India. Before opening a new branch, banks must obtain permission from the Reserve Bank. Each scheduled bank is required to submit a weekly report to the Reserve Bank, providing detailed information about its assets and liabilities. This allows the Reserve Bank to effectively control the credit system by gathering necessary information.

Furthermore, the Reserve Bank has the power to inspect any commercial bank's accounts. It possesses several powers: (a) holding cash reserves of all scheduled banks, (b) regulating banks' credit operations through quantitative and qualitative controls, (c) overseeing the banking system through licensing, inspection, and information gathering, and (d) serving as a lender of last resort by offering rediscount facilities to scheduled banks.

In addition to these responsibilities, managing

foreign reserves also falls under the jurisdiction of the Reserve Bank of India. This includes maintaining the official exchange rate according to The Reserve Bank of India Act of 1934 with minimum amounts set at Rs. 10,000.

Since 1935, the Bank had successfully kept the exchange rate fixed at lsh. 6d, even during times of intense pressure for or against the rupee. Upon joining the International Monetary Fund in 1946, India entrusted the Reserve Bank with the task of maintaining fixed exchange rates with other member countries. In addition to managing the rupee's exchange rate, the Reserve Bank also acted as the guardian of India's reserve of international currencies, including the vast sterling balances.

Another responsibility of the RBI is to administer the country's exchange controls. Additionally, the Reserve Bank also has supervisory functions, which include the supervision and promotion of sound banking in India. The RBI is equipped with wide powers of supervision and control over commercial and co-operative banks, which are outlined in the Reserve Bank Act, 1934, and the Banking Regulation Act, 1949. These powers cover areas such as licensing and establishments, branch expansion, asset liquidity, management and working methods, amalgamation, reconstruction, and liquidation.

The Reserve Bank of India (RBI) is empowered to conduct regular inspections of banks and request reports and information. The nationalization of 14 prominent Indian scheduled banks in July 1969 has placed additional obligations on the RBI to guide banking and credit policies aimed at accelerating economic growth and achieving specific social goals. The supervisory role of the RBI has greatly contributed to enhancing the quality of banking in India, ensuring a strong foundation for operations and improving their efficiency.

With the

increased importance of economic growth after Independence, the Reserve Bank's functions have expanded. It now performs various developmental and promotional functions that were once considered beyond the regular duties of central banking. The Reserve Bank was tasked with encouraging banking habits, expanding banking services to rural and semi-urban areas, and establishing and promoting new specialized financing institutions.

The Reserve Bank has been involved in the establishment of several institutions, including IFCI and SFC. It also established the Deposit Insurance Corporation, Unit Trust of India, Industrial Development Bank of India, Agricultural Refinance Corporation of India, and Industrial Reconstruction Corporation of India. These institutions were created by the Reserve Bank to promote saving, mobilize savings, and provide funding for industries and agriculture.

Since 1935, the Reserve Bank of India has been involved in providing agricultural credit through its Agricultural Credit Department. However, its role in this area became even more crucial in 1951. The bank has played a key role in promoting the co-operative credit movement to stimulate savings, remove moneylenders from rural areas, and provide short-term credit for agriculture. In order to offer long-term finance to farmers, the RBI established the Agricultural Refinance and Development Corporation. In addition to its monetary functions such as currency issuance and bank credit control, the RBI also plays a significant part in India's economic development through non-monetary functions. Some consider these non-monetary functions as supervision and regulation while others classify them as monetary functions.

The Reserve Bank of India (RBI) has a vital role in promoting sound banking in the country. It holds extensive powers granted under the Banking Regulation Act of 1949, which encompass bank licensing, branch expansion, asset liquidity, management practices,

inspection procedures, amalgamation, reconstruction, and liquidation. By closely overseeing and inspecting banks, the RBI has significantly enhanced their operations. Consequently, commercial banks have emerged as financially and operationally robust institutions. Additionally, the RBI also supervises non-banking financial intermediaries.

Since its independence, particularly after its nationalisation in 1949, the RBI has actively pursued promotional functions, offering significant financial support to industrial and agricultural development in the country. Commercial banks, on the other hand, are institutions that typically undertake various financial transactions. They perform two key tasks: accepting deposits from the public and providing loans to deserving individuals within society. When banks accept deposits, their liabilities increase, making them debtors; however, when they provide loans, their assets increase, turning them into creditors.

Banking transactions are socially and legally approved. Their purpose is to maintain the deposits of account holders. The term "banks" is defined based on the tasks performed by them. One well-known definition, as given by Prof. Sayers, states that a bank is an institution whose debts are widely accepted as the settlement of other people's debts to each other. This definition highlights transactions involving debts raised by a financial institution.

As per the Indian Banking Company Act 1949, a banking company is categorized as any corporation that conducts banking activities. Banking, on the other hand, involves receiving money deposits from the public with the intention of lending or investing. These deposits can be withdrawn upon request through methods including cheques, drafts, and other means.

Commercial banks serve as financial institutions and carry out diverse functions. They cater to the financial requirements of sectors like agriculture, industry, trade, communication, etc. Henceforth, they play a vital role in meeting economic and

social demands.

The roles of banks are changing and they are now placing more emphasis on customers and broadening their functions. Generally, the functions of commercial banks are categorized into primary and secondary functions. The chart provided below presents a simplified breakdown of these functions. Primary Functions of Commercial Banks involve accepting deposits from the public, especially from its clients.

Commercial banks perform several functions, including accepting deposits such as saving account deposits, recurring account deposits, and fixed deposits, which are payable after a certain time period. They also offer various forms of loans and advances, such as an overdraft facility, cash credit, and bill discounting. Additionally, commercial banks create credit by sanctioning loans to customers, where instead of providing cash, they open a deposit account for the borrower to withdraw from.

When a bank approves a loan, it automatically creates deposits, which is known as credit creation by commercial banks. Commercial banks also perform various secondary functions, including agency functions and utility functions. Agency functions involve tasks such as collecting cheques, dividends, and interest warrants; making payments for rent and insurance premiums; conducting foreign exchange transactions; buying and selling securities; acting as trustees, attorneys, correspondents, and executors; as well as accepting tax proceeds and returns. General utility functions of commercial banks include providing safety locker facilities, money transfer services, issuing traveler's cheques, acting as referees; accepting bills for payment (e.g., phone bills, gas bills, water bills); offering merchant banking services; and providing various cards like credit cards, debit cards,and smart cards.

Co-operative banks are financial institutions owned and operated by members who are both the owners and customers of the bank. These banks are typically established by individuals

belonging to the same local or professional community or sharing a common interest. Co-operative banks differ from traditional stockholder banks in their organizational structure,g oals , values ,and governance.Typically they provide a wide range of banking and financial services to their members encompassing loans deposits ,and banking accounts.

Co-operative banks in most countries are subject to supervision and control by banking authorities, following prudential banking regulations, which puts them on par with stockholder banks. The supervision and control of co-operative banks can be performed by state entities or delegated to a co-operative federation or central body, depending on the country. Although their organizational rules may differ based on national laws, co-operative banks possess shared characteristics. They are owned by customers who also serve as members of the co-operative bank, ensuring that the needs of both align.

Co-operative banks prioritize providing the best products and services to their members rather than focusing on maximizing profit. While some co-operative banks exclusively serve their members, others also cater to non-member clients for banking and financial services. The democratic principle of "one person, one vote" enables members to elect the board of directors and have equal voting rights. A significant portion of the annual profit in co-operative banks is usually allocated to reserves, with a portion distributed to members within legal or statutory limits. Members can receive profit through a patronage dividend based on product and service usage or through interest/dividends depending on the number of shares subscribed. Co-operative banks maintain strong connections within local communities.

Co-operative banks play a crucial role in local development and contribute to the sustainable development of their communities. This is because their members and management board

typically belong to the communities where they operate. These banks are able to increase banking access in areas or markets that have limited presence from other banks, such as SMEs, farmers in rural areas, or middle and low income households in urban areas. By doing so, they reduce banking exclusion and promote economic empowerment for millions of people. Additionally, co-operative banks have a significant impact on the economic growth of the countries they operate in and contribute to the overall efficiency of the international financial system.

NABARD, established by the Indian Government, is a development bank that promotes credit flow for agriculture and rural development. Their successful enterprise model, based on the principles mentioned above, has been effective in both developed and developing countries. NABARD's mandate includes supporting allied economic activities in rural areas, fostering sustainable rural development, and bringing prosperity to these regions.

With a capital base of Rs 2,000 crore, which was provided by the Government of India and Reserve Bank of India, NABARD operates through its head office located in Mumbai. It also has 28 regional offices in state capitals and 391 district offices in districts. NABARD serves as an apex institution and deals with policy, planning, and operations related to credit for agriculture, as well as other economic and developmental activities in rural areas. Essentially, it functions as a refinancing agency for financial institutions that provide production credit and investment credit to promote agriculture and developmental activities in rural areas.

NABARD today takes measures to build institutions to improve the capacity of the credit delivery system. This includes monitoring, creating rehabilitation plans, restructuring credit institutions, and training personnel. NABARD also coordinates the rural financing

activities of all institutions involved in development work at the field level. It maintains communication with the government of India, State governments, the Reserve Bank of India, and other national level institutions involved in policy formulation. Additionally, NABARD prepares annual rural credit plans for all districts in the country.

These plans serve as the foundation for the yearly credit plans of all rural financial institutions. Furthermore, NABARD also conducts the monitoring and evaluation of projects that have been re-financed by them. Additionally, they actively promote research in the areas of rural banking, agriculture, and rural development. Moreover, NABARD functions as a regulatory body by supervising, monitoring, and offering guidance to cooperative banks and regional rural banks. The roles and functions of NABARD can be summarized as follows: NABARD's credit functions encompass the planning, dispensation, and monitoring of credit.

This activity includes: • Creating policies and guidelines for rural financial institutions • Offering credit services to issuing organizations • Developing annual potential-linked credit plans for all districts to identify credit potential • Monitoring the flow of rural credit at the ground level

Developmental and Promotional Functions: Credit plays a crucial role in the development of agriculture and the rural sector, as it facilitates investment in capital formation and technological advancement.

NABARD has identified strengthening rural financial institutions as a priority in order to provide credit to the sector. They have undertaken several initiatives to strengthen cooperative credit structures and regional rural banks to ensure that timely credit is available to those in need. These initiatives include assisting banks in developing action plans, entering into agreements with governments and banks to improve their operations within a set timeframe, monitoring the implementation

of action plans and agreements, providing financial assistance for the establishment of technical cells, and offering organization development intervention through reputable training institutes such as BIRD, Lucknow, NBS College, Lucknow, and College of Agriculture Banking, Pune.- Provide financial support to cooperative bank training institutes.
- Offer training for executives of commercial banks, Regional Rural Banks, and cooperative banks.
- Create awareness about repayment ethics through Vikas Volunteer Vahini and Farmer’s clubs.
- Provide financial assistance for improved management information systems, computerization of operations, and human resource development in cooperative banks.
- Share supervisory functions with the Reserve Bank of India for cooperative banks and Regional Rural Banks.
- Conduct inspections of Regional Rural Banks and Cooperative Banks (excluding urban/primary cooperative banks) under the Banking Regulation Act, 1949.NABARD is responsible for conducting inspections of various cooperative banks and institutions. These inspections include State Cooperative Banks, District Central Cooperative Banks, Regional Rural Banks, and other state-level institutions like State Cooperative Agriculture and Rural Development Banks, Apex Weavers Societies, and Marketing Federations. NABARD conducts inspections voluntarily for certain institutions and on a statutory basis for others. The purpose of these inspections is to protect depositors' interests, ensure compliance with relevant laws and regulations, and promote adherence to rules and guidelines. NABARD also advises the Reserve Bank of India on matters such as issuing licenses for cooperative banks and approving new branches for state cooperative banks and regional rural banks. Additionally, NABARD administers Credit Monitoring Arrangements in certain cooperative banks.NABARD/RBI/Government formulated and issued a set of guidelines to examine the financial soundness of banks and suggest ways to strengthen them for a more efficient role in rural credit. The instruments of supervision include periodic

on-site inspections of SCBs, DCCBs, SCARDBs, RRBs, and other Apex level Cooperative institutions, supplementary appraisal, off-site surveillance system (OSS), portfolio inspection/system study, monitoring through returns including CMA and Frauds, and attending to complaints for Cooperative Banks (excluding Urban Cooperative Banks) and RRBs. In light of banking sector reforms, new international norms/practices have been applied to Commercial Banks (CBs) to enhance competitiveness and sustainability in the changing scenario.

The co-operative banks and Regional Rural Banks (RRBs) were also required to operate within the general banking environment that emerged from the financial sector reforms implemented by the Government of India (GOI) and the Reserve Bank of India (RBI). As a result, they were gradually subjected to prudential norms. While these banks have not yet been required to meet the capital adequacy norm, other prudential norms such as income recognition, asset classification, and provisioning, which were introduced by RBI for commercial banks, were extended to RRBs in 1995-96, State Co-operative Banks (SCBs) and District Central Co-operative Banks (DCCBs) in 1996-97, and State Cooperative Agriculture and Rural Development Banks (SCARDBs) by NABARD in 1997-98.

NABARD supports banks in adapting to new financial regulations by implementing a concrete and time-bound supervision strategy. This strategy aims to internalize prudential norms. As part of this revised approach, NABARD places a greater emphasis on key aspects of bank functioning such as Capital Adequacy, Asset Quality, Management, Earnings, Liquidity, Systems, and Compliance (CAMELSC). During their statutory 'on-site' inspections, NABARD focuses on these core assessments, leaving collateral appraisals to the banks themselves.

Banks are responsible for overseeing the micro level aspects either through internal inspections or by hiring external agencies like auditors. NABARD has been

organizing workshops and meetings with the Chief Executives and Chief Auditors of cooperative banks to address areas such as internal checks and controls, revenue and income realization from interest on loans and advances, investments, and other routine operations.