Money & Banking- 1 Notes | Study Indian Economy for UPSC CSE - UPSC

UPSC: Money & Banking- 1 Notes | Study Indian Economy for UPSC CSE - UPSC

The document Money & Banking- 1 Notes | Study Indian Economy for UPSC CSE - UPSC is a part of the UPSC Course Indian Economy for UPSC CSE.
All you need of UPSC at this link: UPSC

Development of Indian Banking

  • In order to make the Reserve Bank of India more powerful, the Indian Government nationalised it on January 1,1949.
  • With a view to have the co-ordinated regulation of Indian banking, the Indian Banking Act was passed in March 1949.
  • According to this Act, the Reserve Bank of India was granted extended powers for the inspection of non-scheduled banks. 
  • For the development of the banking facilities in the rural areas the Imperial Bank of India was partially nationalised on July 1, 1955 and it was named as the State Bank of India. 
  • Following the banking consolidation process, by 2017–18 the SBI and its Associates (7+1) were amalgamated into one bank—the SBI.
  • They are as follows–
  1. The State Bank of Bikaner and Jaipur (In the beginning the State Bank of Bikaner and the State Bank of Jaipur were a separate identity. But they were merged and named as the State Bank of Bikaner and Jaipur)
  2. The State Bank of Hyderabad
  3. The State Bank of Indore (Merged with SBI)
  4. The State Bank of Mysore
  5. The State Bank of Saurashtra (Merged with SBI)
  6. The State Bank of Patiala
  7. The State Bank of Travancore
  • After unification of two banks- State Bank of Saurashtra and State Bank of Indore, the State Bank Group now has only five Associate Banks other than State Bank of India.
  • In order to have more control over the banks, 14 large commercial banks whose reserves were more than Rs. 50 crore each were nationalised on 19th July, 1969.

The nationalised banks are as follows–

  1.  The Central Bank of India
  2. Bank of India
  3. Punjab National Bank
  4. Canara Bank
  5. United Commercial Bank
  6. Syndicate Bank
  7. BankofBaroda
  8. United Bank of India
  9. Union Bank of India
  10. DenaBank
  11. Allahabad Bank
  12. Indian Bank
  13. Indian Overseas Bank
  14. Bank of Maharashtra
  • After one decade, on April 15, 1980, those 6 private sector banks whose reserves were more than Rs. 200 crore each were nationalised. 
  • These banks are as:
  1. Andhra Bank
  2. Punjab and Sindh Bank
  3. New Bank of India (Merged with PNB)
  4. Vijaya Bank
  5. Corporation Bank
  6. Oriental Bank of Commerce
  • On 4th September, 1993 the Government merged the New Bank of India with Punjab National Bank and as a result of this the total number of nationalised bank got reduced from 20 to 19.
  • After joining IDBI Bank in the club of public sector banks, the number of nationalised banks in the country again reached 20 from 19.
  • Aimed at streamlining their operation and size, the Government started a process of merger and amalgamation of the PSBs in 2020—after the completion of this process the number of the PSBs will be reduced to only 12.

Reserve Bank of India

  • It is the Central Bank of the country. 
  • The Reserve Bank of India was established in 1935 with a capital of Rs. 5 crore.
  • This capital of Rs. 5 crore was divided into 5 lakh equity shares of Rs. 100 each. 
  • In the beginning the ownership of almost all the share capital was with the non-government shareholders.
  • In order to prevent the centralisation of the equity shares in the hands of a few people, the Reserve Bank of India was nationalised on January 1,1949.
  • The general administration and direction of RBI is managed by a Central Board of Directors consisting of 20 members which includes one Governor, four Deputy Governors, 1 Government official appointed by the Union Government of India to give representation to important stratas in economic life of the country. 
  • Besides, four directors are nominated by the Union Government to represent local boards.
  • Apart from the central board there are four local boards also and their head offices are situated in Mumbai, Chennai, Kolkata and New Delhi. 
  • Five members of local boards are appointed by the Union Government for a period of four years.
  • The local boards work according to the instruc-tions and orders given by the Central Board of Directors, and from time to time they also tender useful advice on important matter.
  • The head office of Reserve Bank of India is in Mumbai. 

Printing of Securities and Minting in India

  1. India Security Press (Nasik Road)-Postal Material, Postal Stamps, Non-postal Stamps, Judicial and Non-judicial Stamps. 
  2. Cheques, Bonds, NSC, Kisan Vikas Patra, Securities of State Governments, Public Sector Enterprise and Financial Corporations.
  3. Security Printing Press (Hyderabad)-Established in 1982 for meeting the demand for postal material by Southern States.
  4. It also fulfils the demand for Union I Duty Stamps of the Country.
  5. Currency Notes Press (Nasik Road)- Since J991, this press prints currency notes of 11, Rs. 2, Rs. 5, Rs.10, Rs.50, and Rs.100. (Earlier printing of Rs.50 and Rs.100 currency notes was not done here).
  6. Bank Notes Press (Dewas)-Currency notes of Rs. 20, Rs. 50, Rs.100 and Rs. 500 are printed here.
  7. Modernised Currency Notes Press– Two new modernised currency notes press are under establishment at Mysore (Karnataka) and Salboni (West Bengal).
  8. Security Paper Hoshangabad (Established in 1967-68) makes production of Bank and Currency notes paper.
  9. Coins are minted at four places-Mumbai, Kolkata, Hyderabad and Noida.

Composition of Banking System in India

  • The Indian banking system consists of commercial banks both in public and private sector, Regional Rural Banks (RRBs) and cooperative banks.
  • As on December 31, 2014, Commercial Banking system in India consisted of 123184 Scheduled Commercial Bank Branches out of which SBI branches, nationalised bank branches and RRB branches were 22043,61164 and 19082 respectively. 
  • The bank branches, other than RRBs, in the public sector consist of 19 Nationalized banks, five Associate Banks in SBI group and IDBI Bank Ltd.
  • There are 314 foreign bank branches network in the country as on December 31,2014. There are 45 representative officer of Foreign Banks in India. The number of non-scheduled commercial bank branches in the country is 55.

State Bank of India

  1. After partial nationalisation of the Imperial Bank of India in 1955, its name was changed as State Bank of India. In this way, the State Bank was estahlished 1955. SBI has completed 200 years of its business in India.
  2. The State Bank of India is the biggest commercial bank in public sector of India.
  3. The maximum share capital of its associate banks is lying with the SBI conducts rearly 26.2% of the total banking transactions in the country; while 31.9% is  performed by the nationalised banks.
  4. The State Bank has established a specialised agency S.B.I. Gilts Ltd. for buying and selling the Government securities.
  5.  All the commercial public sector banks were directed by RBI to attain 9% capital adequacy ratio by 31st March, 2000. State Bank of India already adfiieved this target in March 1996 (11.6%).

Recommendations of Gupta Working Group
A working group under the Chairmanship of S. C. Gupta was constituted by the Reserve Bank of India in May 2006 to provide suggestions on regulating loans to unorganised sector. Important recommendation of the working group are as follows:

  1. Compulsory registration of all informal loan providers.
  2. Upper ceiling of interest rate to be decided by State government.
  3. A new series of Accredited Loan Providers (ALPs) to be constituted.
  4. After seeking money from banks loans to be distributed by approved loan providers at their own risks.
  5. Loans given by banks to approved loan providers should be treated as private sector loan.
  6. Registration and renewal process of loan providers   should  be simplified.
  7. Penalty provisions for unauthorised loan providers.
  8. Dispute settlement Mechanism should be developed. 

Monetary and Liquidity Measures

On the basis of an assessment of the current and evolving macro-economic situation, RBI decided to: 

  1. keep the policy repo rate under the Liquidity Adjustment Facility (LAF) unchanged at 7.5 per cent;
  2. keep the Cash Reserve Ratio (CRR) of scheduled banks un-changed at 4.0 per cent of Net Demand and Time Liability (NDTL).
  3. Continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
  4. continue with daily variable rate repos and reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF will remain unchanged at 6.5 per cent, and the Marginal Standing Facility (MSF) rate and the Bank Rate at 8.5 per cent.

Macroeconomic Parameters

  1. Consumer Price Index (CPI)-based inflation moderating to four per cent by August, 2015 firming up to reach 5.8 per cent by year-end.
  2. CPI-based inflation targeted at 6 per cent by January 2016; at four per cent by end of 2017-18.
  3. Economic growth for 2015-16 projected at 7.85 per cent.

Regulatory Measures

  1. Mandatory calendar of reviews by banks to be done away with and will be replaced with seven critical themes prescribed by P. J. Nayak Committee.
  2. Banks can invest in long-term bonds issued for infrastructure, affordable housing by other banks.
  3. Banks to move in a time-bound manner to marginal cost-of-funds-based determination of their base rate.
  4. Guidelines on non-executive directors' remuneration in private banks to be issued.
  5. Allow NBFC-IDF to provide take-out finance for infrastructure projects that have completed one year of operation in Public Private Partnership (PPP) without tri-partite agreement.
  6. Limits relating to total indebted-ness of borrower revised upwards in MFI sector.
  7. No imposition of Counter Cyclical Capital Buffers (CCCB) for now.

Corporate measures

  1. Permit Indian corporates eligible to raise ECB through issuance of rupee bonds in overseas centres.
  2. Permit Indian exporters and importers to write covered options on the basis of actual contracted forex exposure.

Financial Markets

  1. Individuals/retail investors to be provided direct access to primary and secondary market platforms for bonds. 
  2. Proposed to allow non-competitive bidding in treasury Bills to individuals.

Salient Features of Banking Laws (Amendment) Act, 2012

  • The Banking Laws (Amendment) Bill, 2011 was introduced in order to amend the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Under-takings) Act, 1970/1980.
  • The salient features of the Bill are as follows:
  1. To enable banking companies to issue preference shares subject to regulatory guidelines by the RBI.
  2. To increase the cap on restrictions on voting rights from 10 per cent to 26 per cent.
  3. To create a Depositor Education and Awareness Fund by utilizing the inoperative deposit accounts.
  4. To provide prior approval of RBI for acquisition of 5% or more of shares or voting rights in a banking company by any person and empowering RBI to impose such conditions as it deems fit in this regard.
  5. To empower RBI to collect information and inspect associate enterprises of banking companies. 

Regional Rural Banks

  • Regional Rural Banks (RRBs) were established since 1975 under the provisions of the RRB Act 1976 with a view to developing the rural economy as well as to creating an alternative channel to ‘Co-operative Credit Structure’ in order to ensure sufficient institutional credit for rural and agricultural sector. 
  • In other words, Regional Rural Banks (RRBs) were established to take the banking services to the door steps of rural masses, especially in remote rural areas with no access to banking services.
  •  By April 2020, as per the RBI, there were 53 RRBs operating in the country (over 13 of them were under the process of amalgamation with their parent PSBs)—in coming times to be fully replaced by the Small Banks.

Regional Rural Banks (Amendment) Bill, 2014

  • Lok Sabha has passed the Regional Rural Banks (Amendment) Bill, 2014 on December 23, 2014, while the Rajya Sabha passed the bill on April 28, 2015.
  • This bill amends Regional Rural Banks Act, 1976 and aims to strengthen the Regional Rural Banks and deepen their financial inclusion. 
  • The moin points of the Bill are the following:
  • The authorised capital of each Regional Rural Bank (RRB) increased from Rs. 5 crore to Rs. 2000 crore divided into 200 crore of fully paid share of Rs. 10 each.
  • As per the parent Act the Rs. 5 crore share capital of RRBs is split into 5 lakh shares of Rs. 100 each.
  • The authorised capital issued by any RRB’s shall not be reduced below Rs. 1 crore and shares in all cases to be fully paid up shares of Rs. 10 each.
  • The Bill allows RRBs to raise capital from sources other than the central and state governments, and sponsor banks,It will change the existing structure of ownership (the Centre has a 50 per cent share, the sponsor Bank 35 per cent and state government 15 per cent shareholding in the RRBs.
  • Any person who is a director of an RRB is not eligible to be on the Board of Directors of another RRB.

Banking Ombudsman Scheme

  • RBI introduceda Banking Ombudsman Scheme in the country on June 14, 1995, for giving a solution for customer's complaints. 
  • Fifteen Ombudsmen have already been appointed for different regions. 
  • These regions are-New Delhi, Bhopal, Bangalore, Chandigarh, Hyderabad, Mumbai, Patna, Jaipur, Kanpur, Guwahati and Bhubaneshwar.
  • Bank customers can send their complaints to these Ombudsman if concerned banks fail to satisfy them. 
  • These Ombudsman take necessary action and will ensure a relief to customers.
  • According to a circular issued by the RBI, all scheduled primary co-operative banks and commercial banks have been brought under purview of this banking Ombudsman scheme.
  • Regional Rural Banks (RRBs) have not been included under the scheme.
  • The matter should be reported by grieved customer to Ombudsman within the period of one month after getting final reply from concerned bank.
  • Ombudsman will not act upon the complaints having received after this time limit.
  • The Banking Ombudsman Scheme 2006 has been amended by RBI on February 3, 2009. 
  • The coverage of the scheme has been widened and included new grounds of complaint.
  • RBl fixed following mentioned Capital Adequacy ratios for banking institutions—
All Foreign Banks working in India
8% Capital Adequacy Ratio  (till March 1993)
All Indian Banks
4% Capital Adequacy Ratio  (till March 1993)
All Indian Banks having  branches in foreign countries
8% Capital Adequacy Ratio (till March 1995)
All other Indian Banks
9% Capital Adequacy Ratio (till March 2000)
The document Money & Banking- 1 Notes | Study Indian Economy for UPSC CSE - UPSC is a part of the UPSC Course Indian Economy for UPSC CSE.
All you need of UPSC at this link: UPSC
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