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Page 1 Banking (Economy) Visit our website www.sleepyclasses.com or our YouTube channel for entire GS Course FREE of cost Also Available: Prelims Crash Course || Prelims T est Series Page 2 Banking (Economy) Visit our website www.sleepyclasses.com or our YouTube channel for entire GS Course FREE of cost Also Available: Prelims Crash Course || Prelims T est Series 1. Concept of Liquidity 1 ................................................................................................... 2. Role of RBI 1 ..................................................................................................................... 3. Powers of RBI w.r.t Banks 1 ........................................................................................ 4. CRR (Cash Reserve Ratio) 2 ........................................................................................ What is NDTL (Net Demand and Time Liability)? 2 ..................................................................... CRR 2 ........................................................................................................................................................ Incremental CRR 3 ................................................................................................................................ 5. Demonetisation 3 ........................................................................................................... 6. SLR (Statutory Liquidity Ratio) 3 .............................................................................. 7. Liquidity adjustment facility (LAF) 4 ....................................................................... 8. Repo rate 4 ........................................................................................................................ 9. Reverse Repo 4 ................................................................................................................ 10. Marginal Standing Facility (MSF) 4 .......................................................................... 11. Open Market Operations (OMOs) 5 ....................................................................... 12. Market Stabilisation Scheme 5 .................................................................................. 13. Base rate 6 ......................................................................................................................... 14. Bank Rate 6 ....................................................................................................................... 15. Marginal Cost of funds based Lending rate (MCLR) 6 ..................................... Reasons for introducing MCLR 7 ....................................................................................................... Calculation of MCLR 7 ......................................................................................................................... 16. Quantitative easing 7 .................................................................................................... Also 7 ........................................................................................................................................................ 17. Negative interest rates 7 ............................................................................................. Normal Situation 7 ................................................................................................................................ Negative Interest Rate Situation 7 .................................................................................................... Why Do This 8 ........................................................................................................................................ 18. Islamic Banking 8 ............................................................................................................ Islamic banking in India 8 .................................................................................................................... 19. Various types of money 9 ............................................................................................ Money Multiplier 9 ................................................................................................................................ www.YouTube.com/SleepyClasses www.SleepyClasses.com T able of Contents Page 3 Banking (Economy) Visit our website www.sleepyclasses.com or our YouTube channel for entire GS Course FREE of cost Also Available: Prelims Crash Course || Prelims T est Series 1. Concept of Liquidity 1 ................................................................................................... 2. Role of RBI 1 ..................................................................................................................... 3. Powers of RBI w.r.t Banks 1 ........................................................................................ 4. CRR (Cash Reserve Ratio) 2 ........................................................................................ What is NDTL (Net Demand and Time Liability)? 2 ..................................................................... CRR 2 ........................................................................................................................................................ Incremental CRR 3 ................................................................................................................................ 5. Demonetisation 3 ........................................................................................................... 6. SLR (Statutory Liquidity Ratio) 3 .............................................................................. 7. Liquidity adjustment facility (LAF) 4 ....................................................................... 8. Repo rate 4 ........................................................................................................................ 9. Reverse Repo 4 ................................................................................................................ 10. Marginal Standing Facility (MSF) 4 .......................................................................... 11. Open Market Operations (OMOs) 5 ....................................................................... 12. Market Stabilisation Scheme 5 .................................................................................. 13. Base rate 6 ......................................................................................................................... 14. Bank Rate 6 ....................................................................................................................... 15. Marginal Cost of funds based Lending rate (MCLR) 6 ..................................... Reasons for introducing MCLR 7 ....................................................................................................... Calculation of MCLR 7 ......................................................................................................................... 16. Quantitative easing 7 .................................................................................................... Also 7 ........................................................................................................................................................ 17. Negative interest rates 7 ............................................................................................. Normal Situation 7 ................................................................................................................................ Negative Interest Rate Situation 7 .................................................................................................... Why Do This 8 ........................................................................................................................................ 18. Islamic Banking 8 ............................................................................................................ Islamic banking in India 8 .................................................................................................................... 19. Various types of money 9 ............................................................................................ Money Multiplier 9 ................................................................................................................................ www.YouTube.com/SleepyClasses www.SleepyClasses.com T able of Contents 1. Concept of Liquidity • Liquidity is the term used to describe how easy it is to convert assets to cash • The most liquid asset, and what everything else is compared to, is cash. • This is because it can always be used easily and immediately • Shares of stock, bonds, options and commodities are considered fairly liquid, because they can usually be sold readily and you can receive the cash within a few days. • Each of the above can be considered as cash or cash equivalents because they can be converted to cash with little effort, although sometimes with a slight penalty. • The least liquid asset is usually considered to be real estate because that can take weeks or months to sell. 2. Role of RBI • Issue of Bank Notes. • Banker to Government: Maintains and operates the government’s deposit accounts. • It represents the Government of India as the member of the IMF and the WorldBank. • Custodian of Cash Reserves of Commercial Banks • Custodian of Country’s Foreign Currency Reserves: T o deal with crisis connected with adverse balance of payments position. • Lender of Last Resort to the commercial banks approach the Reserve Bank in times of emergency to tide over ?nancial dif?culties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest. • Central Clearance and Accounts Settlement. • Monetary Policy - Controller of Credit: Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government. 3. Powers of RBI w.r.t Banks • The Reserve Bank of India (RBI) regulates and supervises Public Sector And Private Sector Banks. Under the provisions of the Banking Regulation Act, 1949, it can, inter alia? ?Inspect The Bank And Its Books And Accounts ?Examine On Oath Any Director Or Other Of?cer Of The Bank ?Cause A Scrutiny T o Be Made Of The Affairs Of The Bank ?Give Directions T o Secure The Proper Management Of The Bank ?Call For Any Information Of Account Details ?Determine The Policy In Relation T o Advances By The Bank www.YouTube.com/SleepyClasses www.SleepyClasses.com 1 Page 4 Banking (Economy) Visit our website www.sleepyclasses.com or our YouTube channel for entire GS Course FREE of cost Also Available: Prelims Crash Course || Prelims T est Series 1. Concept of Liquidity 1 ................................................................................................... 2. Role of RBI 1 ..................................................................................................................... 3. Powers of RBI w.r.t Banks 1 ........................................................................................ 4. CRR (Cash Reserve Ratio) 2 ........................................................................................ What is NDTL (Net Demand and Time Liability)? 2 ..................................................................... CRR 2 ........................................................................................................................................................ Incremental CRR 3 ................................................................................................................................ 5. Demonetisation 3 ........................................................................................................... 6. SLR (Statutory Liquidity Ratio) 3 .............................................................................. 7. Liquidity adjustment facility (LAF) 4 ....................................................................... 8. Repo rate 4 ........................................................................................................................ 9. Reverse Repo 4 ................................................................................................................ 10. Marginal Standing Facility (MSF) 4 .......................................................................... 11. Open Market Operations (OMOs) 5 ....................................................................... 12. Market Stabilisation Scheme 5 .................................................................................. 13. Base rate 6 ......................................................................................................................... 14. Bank Rate 6 ....................................................................................................................... 15. Marginal Cost of funds based Lending rate (MCLR) 6 ..................................... Reasons for introducing MCLR 7 ....................................................................................................... Calculation of MCLR 7 ......................................................................................................................... 16. Quantitative easing 7 .................................................................................................... Also 7 ........................................................................................................................................................ 17. Negative interest rates 7 ............................................................................................. Normal Situation 7 ................................................................................................................................ Negative Interest Rate Situation 7 .................................................................................................... Why Do This 8 ........................................................................................................................................ 18. Islamic Banking 8 ............................................................................................................ Islamic banking in India 8 .................................................................................................................... 19. Various types of money 9 ............................................................................................ Money Multiplier 9 ................................................................................................................................ www.YouTube.com/SleepyClasses www.SleepyClasses.com T able of Contents 1. Concept of Liquidity • Liquidity is the term used to describe how easy it is to convert assets to cash • The most liquid asset, and what everything else is compared to, is cash. • This is because it can always be used easily and immediately • Shares of stock, bonds, options and commodities are considered fairly liquid, because they can usually be sold readily and you can receive the cash within a few days. • Each of the above can be considered as cash or cash equivalents because they can be converted to cash with little effort, although sometimes with a slight penalty. • The least liquid asset is usually considered to be real estate because that can take weeks or months to sell. 2. Role of RBI • Issue of Bank Notes. • Banker to Government: Maintains and operates the government’s deposit accounts. • It represents the Government of India as the member of the IMF and the WorldBank. • Custodian of Cash Reserves of Commercial Banks • Custodian of Country’s Foreign Currency Reserves: T o deal with crisis connected with adverse balance of payments position. • Lender of Last Resort to the commercial banks approach the Reserve Bank in times of emergency to tide over ?nancial dif?culties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest. • Central Clearance and Accounts Settlement. • Monetary Policy - Controller of Credit: Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government. 3. Powers of RBI w.r.t Banks • The Reserve Bank of India (RBI) regulates and supervises Public Sector And Private Sector Banks. Under the provisions of the Banking Regulation Act, 1949, it can, inter alia? ?Inspect The Bank And Its Books And Accounts ?Examine On Oath Any Director Or Other Of?cer Of The Bank ?Cause A Scrutiny T o Be Made Of The Affairs Of The Bank ?Give Directions T o Secure The Proper Management Of The Bank ?Call For Any Information Of Account Details ?Determine The Policy In Relation T o Advances By The Bank www.YouTube.com/SleepyClasses www.SleepyClasses.com 1 ?Direct Special Audit Of The Bank ?Direct the Bank to initiate insolvency resolution process in respect of a default, Under the provisions of Insolvency and Bankruptcy Code, 2016 in respect of nationalised banks and the SBI • Whole-time Directors of nationalised banks and State Bank of India are appointed in consultation with RBI. • Foreign Exchange Management Act • RBI has powers under other laws as well, which include, inter alia, the power under section 12 of the Foreign Exchange Management Act, 1999 to inspect for compliance with the Act and rules etc. made thereunder. • Financial Year of RBI — July 1st to June 30th 4. CRR (Cash Reserve Ratio) • Banks in India are required to hold a certain proportion of their deposits in the form of cash. • Banks don’t hold these as cash with themselves, but deposit such case with RBI currency chests. • CRR is a percentage of NDTL (net demand and time liability) of the bank, which bank has to keep with RBI and which bank cannot lend to anyone. • CRR is the amount bank has to keep with RBI in form of cash only. Bank will not have pro?t on this. What is NDTL (Net Demand and Time Liability)? • Bank has 2 types of deposits ?Demand Deposits which can be withdrawn on your demand and bank will have no obligation or objection in doing so, if you have account in bank. ?Time Deposits refer to deposits which should not be withdrawn before the mentioned period by the bank. If the money is withdrawn before the maturity period of the time deposits, there is a ?ne. Ex: Fixed Deposits, Recurring Deposits • Loans out of FCNR [B] Deposits Scheme and IBFC (InterBank Foreign Currency) Deposits should be included as part of bank credit while reporting. CRR • It is the average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its NDTL (Net demand and time liabilities) that the Reserve Bank may notify from time to time in the Gazette of India • As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement. • Non Bank Financial Corporations (NBFCs) are outside the purview of this reserve requirement. • Banks have to maintain 100 percent CRR on an average basis during the fortnight. • That is, it is not necessary that on all days CRR has to be at 100%. www.YouTube.com/SleepyClasses www.SleepyClasses.com 2 Page 5 Banking (Economy) Visit our website www.sleepyclasses.com or our YouTube channel for entire GS Course FREE of cost Also Available: Prelims Crash Course || Prelims T est Series 1. Concept of Liquidity 1 ................................................................................................... 2. Role of RBI 1 ..................................................................................................................... 3. Powers of RBI w.r.t Banks 1 ........................................................................................ 4. CRR (Cash Reserve Ratio) 2 ........................................................................................ What is NDTL (Net Demand and Time Liability)? 2 ..................................................................... CRR 2 ........................................................................................................................................................ Incremental CRR 3 ................................................................................................................................ 5. Demonetisation 3 ........................................................................................................... 6. SLR (Statutory Liquidity Ratio) 3 .............................................................................. 7. Liquidity adjustment facility (LAF) 4 ....................................................................... 8. Repo rate 4 ........................................................................................................................ 9. Reverse Repo 4 ................................................................................................................ 10. Marginal Standing Facility (MSF) 4 .......................................................................... 11. Open Market Operations (OMOs) 5 ....................................................................... 12. Market Stabilisation Scheme 5 .................................................................................. 13. Base rate 6 ......................................................................................................................... 14. Bank Rate 6 ....................................................................................................................... 15. Marginal Cost of funds based Lending rate (MCLR) 6 ..................................... Reasons for introducing MCLR 7 ....................................................................................................... Calculation of MCLR 7 ......................................................................................................................... 16. Quantitative easing 7 .................................................................................................... Also 7 ........................................................................................................................................................ 17. Negative interest rates 7 ............................................................................................. Normal Situation 7 ................................................................................................................................ Negative Interest Rate Situation 7 .................................................................................................... Why Do This 8 ........................................................................................................................................ 18. Islamic Banking 8 ............................................................................................................ Islamic banking in India 8 .................................................................................................................... 19. Various types of money 9 ............................................................................................ Money Multiplier 9 ................................................................................................................................ www.YouTube.com/SleepyClasses www.SleepyClasses.com T able of Contents 1. Concept of Liquidity • Liquidity is the term used to describe how easy it is to convert assets to cash • The most liquid asset, and what everything else is compared to, is cash. • This is because it can always be used easily and immediately • Shares of stock, bonds, options and commodities are considered fairly liquid, because they can usually be sold readily and you can receive the cash within a few days. • Each of the above can be considered as cash or cash equivalents because they can be converted to cash with little effort, although sometimes with a slight penalty. • The least liquid asset is usually considered to be real estate because that can take weeks or months to sell. 2. Role of RBI • Issue of Bank Notes. • Banker to Government: Maintains and operates the government’s deposit accounts. • It represents the Government of India as the member of the IMF and the WorldBank. • Custodian of Cash Reserves of Commercial Banks • Custodian of Country’s Foreign Currency Reserves: T o deal with crisis connected with adverse balance of payments position. • Lender of Last Resort to the commercial banks approach the Reserve Bank in times of emergency to tide over ?nancial dif?culties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest. • Central Clearance and Accounts Settlement. • Monetary Policy - Controller of Credit: Credit is controlled by the Reserve Bank in accordance with the economic priorities of the government. 3. Powers of RBI w.r.t Banks • The Reserve Bank of India (RBI) regulates and supervises Public Sector And Private Sector Banks. Under the provisions of the Banking Regulation Act, 1949, it can, inter alia? ?Inspect The Bank And Its Books And Accounts ?Examine On Oath Any Director Or Other Of?cer Of The Bank ?Cause A Scrutiny T o Be Made Of The Affairs Of The Bank ?Give Directions T o Secure The Proper Management Of The Bank ?Call For Any Information Of Account Details ?Determine The Policy In Relation T o Advances By The Bank www.YouTube.com/SleepyClasses www.SleepyClasses.com 1 ?Direct Special Audit Of The Bank ?Direct the Bank to initiate insolvency resolution process in respect of a default, Under the provisions of Insolvency and Bankruptcy Code, 2016 in respect of nationalised banks and the SBI • Whole-time Directors of nationalised banks and State Bank of India are appointed in consultation with RBI. • Foreign Exchange Management Act • RBI has powers under other laws as well, which include, inter alia, the power under section 12 of the Foreign Exchange Management Act, 1999 to inspect for compliance with the Act and rules etc. made thereunder. • Financial Year of RBI — July 1st to June 30th 4. CRR (Cash Reserve Ratio) • Banks in India are required to hold a certain proportion of their deposits in the form of cash. • Banks don’t hold these as cash with themselves, but deposit such case with RBI currency chests. • CRR is a percentage of NDTL (net demand and time liability) of the bank, which bank has to keep with RBI and which bank cannot lend to anyone. • CRR is the amount bank has to keep with RBI in form of cash only. Bank will not have pro?t on this. What is NDTL (Net Demand and Time Liability)? • Bank has 2 types of deposits ?Demand Deposits which can be withdrawn on your demand and bank will have no obligation or objection in doing so, if you have account in bank. ?Time Deposits refer to deposits which should not be withdrawn before the mentioned period by the bank. If the money is withdrawn before the maturity period of the time deposits, there is a ?ne. Ex: Fixed Deposits, Recurring Deposits • Loans out of FCNR [B] Deposits Scheme and IBFC (InterBank Foreign Currency) Deposits should be included as part of bank credit while reporting. CRR • It is the average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its NDTL (Net demand and time liabilities) that the Reserve Bank may notify from time to time in the Gazette of India • As per the RBI Act 1934, all Scheduled Commercial Banks (that includes public and private sector banks, foreign banks, regional rural banks and co-operative banks) are required to maintain a cash balance on average with the RBI on a fortnightly basis to cater to the CRR requirement. • Non Bank Financial Corporations (NBFCs) are outside the purview of this reserve requirement. • Banks have to maintain 100 percent CRR on an average basis during the fortnight. • That is, it is not necessary that on all days CRR has to be at 100%. www.YouTube.com/SleepyClasses www.SleepyClasses.com 2 Incremental CRR • T o absorb the surplus liquidity available in the banking system post demonetisation, • RBI instructed the banks to maintain incremental CRR of 100% • It was a temporary measure • And is now withdrawn 5. Demonetisation • The Indian government had demonetised bank notes on two prior occasions— once in 1946 and then again in 1978 —and in both cases, the goal was to combat tax evasion by "black money" held outside the formal economic system. • Positive impact of the Demonetisation ?More formalisation of the Economy ?More Money in the System ?Higher T ax Revenue ?Higher Expenditure ?Higher Growth after the ?rst two quarters 6. SLR (Statutory Liquidity Ratio) • It is also some % of NDTL, that bank have to maintain in terms of not only cash but in any terms. • SLR Can be kept in either in form of ?Cash ?Gold ?Govt. bonds (liquid form) • It regulates the credit growth in India. • The share of NDTL that a bank is required to maintain in safe and liquid assets, such as, unencumbered government securities, cash and gold. • Changes in SLR often in?uence the availability of resources in the banking system for lending to the private sector. • Investments in unencumbered Instruments that include ?Treasury-Bills of the Government of India. ?Dated securities including those issued by the Government of India from time to time under the market borrowings programme and the Market Stabilization Scheme (MSS). ?State Development Loans (SDLs) issued by State Governments under their market borrowings programme. www.YouTube.com/SleepyClasses www.SleepyClasses.com 3Read More
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