ICAI Notes- Non-Funding Institutions for Business Facilitation in India- 1 | Business and Commercial Knowledge (Old Scheme) - CA Foundation PDF Download

NON-FUNDING INSTITUTIONS FOR BUSINESS FACILITATION IN INDIA (INDIAN REGULATORY BODIES)

The institutions such as the Reserve Bank of India which is the central bank of the country, the Securities and Exchange Board of India which is the apex body of securities exchanges and the Competition Commission of India which is the rule setter for fair play in business provide the supra context of business facilitation. Then there are industry specific business facilitators too such as the Insurance Regulatory and Development

Authority, Telecom Regulatory Authority of India and the like. These institutions do not invest in businesses and as such are called non funding institutions. In addition to a broad, general description of their roles and functions, our emphasis here would be on their respective roles as business facilitators. Here it would be pertinent to mention that there are several other non funding institutions that facilitate businesses right from pre-formation to product and process testing, training of manpower and a host of business extension services. For example, the National Institute of Entrepreneurship and Small Business Development (NIESBUD) focuses on training the trainers in entrepreneurship development; Entrepreneurship Development Institute (EDI) is the national level apex organisation for entrepreneurship development. Then there are 30 Micro, Small

and Medium Enterprises Development Institutes and 28 Branch MSME-DIs (formerly SISIs) set up in State capitals and other industrial cities all over the country for providing a host of services to the entrepreneurs / small businesses. These institutes render consultancy services, prepare state industrial profiles and conduct district level industrial potential surveys. Besides, these institutes prepare project profiles and facilitate quality control and upgradation in these enterprises.

There are several commodity boards and export promotion councils that assist businesses in their international forays. Institutes like India Trade Promotion Organisation and India Brand Equity Foundation aim to enhance India’s image as a sourcing partner and investment destination. We should not forget the facilitative role of government’s such schemes as Make in India and Startup India for furthering and facilitating Indian businesses.
Reserve Bank of India (RBI)
I. Introduction

The Reserve Bank of India (RBI) was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Reserve Bank’s affairs are governed by a central board of directors. The board is appointed by the Government of India

in keeping with the RBI Act.

II. Role of RBI

The Reserve Bank of India is the Central Bank of our country. It occupies a pivotal position in the Indian economy. Its role is summarised in the following points:

The RBI is the apex monetary institution of the highest authority in India. Consequently, it plays an important role in strengthening, developing and diversifying the country’s economic and financial structure.

• It is responsible for the maintenance of economic stability and assisting the growth of the economy.
• It is India’s eminent public financial institution given the responsibility for controlling the country’s monetary policy.
• It acts as an advisor to the government in its economic and financial policies, and it also represents the country in the international economic forums.
• It also acts as a friend, philosopher and guide to commercial banks. In fact, it is responsible for the development of an adequate and sound banking system in the country and for the growth of organised money and capital markets.
• India being an emerging economy, the RBI has to keep inflationary trends under control and to see that main priority sectors like agriculture, exports and small scale industry get credit at cheap rates.
• It has also to protect the market for government securities and channelise credit in desired directions.

III. Functions of RBI

The Preamble of the Reserve Bank of India describes its basic functions as:

“...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”

The Reserve Bank of India, being the Central Bank of India performs all the central banking functions.

These are:

(i) Issue of currency: The RBI is the sole authority for the issue of currency in India other than one rupee coins and notes and subsidiary coins, the magnitude of which is relatively small.

(ii) Banker to the government: As a banker to the government, the RBI performs the following functions:

 (a) It transacts all the general banking business of the Central and State Governments. It accepts money on account of these governments and makes payment on their behalf and carries out other banking operations such as their exchange and remittances.

 (b) It manages public debt and is responsible for issue of new loans. For ensuring the successes of the loan operations, it actively operates in the gilt-edged market and advises the government on the quantum, timing and terms of new loans.

(c) It also sells Treasury Bills on behalf of the Central Government in order to wipe away excess liquidity in the economy.

(d) The RBI also makes advances to the Central and State Governments which are repayable within 90 days from the date of advance.

(e) The RBI also acts as an adviser to the government not only on policies concerning banking and financial matters but also on a wider range of economic issues including those in the field of planning and resource mobilisation. It has a special responsibility in respect of financial policies and measures concerning new loans, agricultural finance and legislation affecting banking and credit and international finance.

(iii) Banker’s Bank: The RBI has been vested with extensive power to control and supervise commercial banking system under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. All the scheduled banks are required to maintain a certain minimum cash reserve ratio with the RBI against their demand and time liabilities. This provision enables the RBI to control the credit position of the country.

The RBI provides financial assistance to scheduled banks and state cooperative banks in the form of discounting of eligible bills and loans and advances against approved securities.

The RBI also conducts inspection of the commercial banks and calls for returns and other necessary information from banks.

(iv) Custodian of Foreign Exchange Reserves : The RBI is required to maintain the external value of the rupee. For this purpose it functions as the custodian of nation’s foreign exchange reserves. It has to ensure that normal short-term fluctuations in trade do not affect the exchange rate. When foreign exchange reserves are inadequate for meeting balance of payments problem, it borrows from the IMF.

The RBI has the authority to enter into exchange transactions on its own account and on account of government. It also administers exchange control of the country and enforces the provisions of Foreign Exchange Management Act.

(v) Controller of Credit : Credit plays an important role in the settlement of business transactions and affects the purchasing power of people. The social and economic consequences of changes in the purchasing power are serious, therefore, it is necessary to control credit. Controlling credit operations of banks is generally considered to be the principal function of a central bank. The RBI, like any other Central Bank, possesses power to use almost all qualitative and quantitative methods of credit controls.

(vi) Promotional Functions: Apart from the traditional functions of a Central Bank, the RBI also performs a variety of developmental and promotional functions. It is responsible for promoting banking habits among people and mobilising savings from every corner of the country. It has also taken up the responsibility of extending the banking system territorially and functionally. Initially, it had also taken up the responsibility for the provision of finance for agriculture, trade and small industries.

But now these functions have been handed over to NABARD, EXIM Bank and SIDBI respectively. The Reserve Bank is responsible for over all credit and monetary policy of the economy.

(vii) Collection and publication of Data: It has also been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy.
IV. RBI’s Role in Business Facilitation

Currency Policy: The RBI is responsible for the monetisation of the economy (and in the recent context of demonetisation or remonetisation too). Adequate money supply is critical for the functioning of the economy. All the factor incomes in a modern economy are in fact money incomes. Business’s revenue too is monetised. Moreover, the RBI also overseas the vaialbility of foreging currency to facilitate overseas business transactions. It plays an important, albeit an indirect role in the determination of exchange rates i.e. the rates at which the domestic currency is exchanged with foreign currencies and vice versa.
 ⇒ Credit Policy: The RBI does not fund the business or for that matter any activity. However, its policies have a major impact on channelisation of the banking resources for business, generally as well as specifically for certain sectors. A small reduction in the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR) or Bank Rate can put huge funds at the disposal of the commercial banks for lending to the business and other sectors. Let us introduce ourselves to the measure of magnitude of financial

parameters such as interest rates. It is called basis points. One per cent is equivalent to 100 basis points. To illustrate if current bank rate is 7.75% and RBI decreases it by 25 basis point, then new rate will be 7.50% as 25 basis point will be equal to 0.25%).

SLR and CRR are quantitative measures of credit policy; these affect funds availability to all the sectors. RBI has in its armour qualitative measures of credit control too through which it influences the credit availability to a particular sector. As an instance in sector specific impact of the RBI’s credit policy, let us consider the provision of Priority Sector Lending (PSL). Every bank is required to comply with this requirement by lending a specified percentage of its resources to the industries/ activities included in PSL. For example, loans to Micro, Small and Medium Enterprises (MSME) qualify as PSL. This policy of the RBI has tremendously benefited the MSME Sector in India.

An inevitable part of the credit policy is the interest rate. Reserve Bank of India influences the interest rates through such policy instruments as bank rate. Since RBI provides loans to the banks either by direct lending or by rediscounting (buying back) the bills of commercial banks and treasury bills, it is also known as discount rate. Bank rate is the rate of interest at which the RBI lends to banks, It reflects the cost of funds to the banks who in turn adjust their lending rates accordingly. To illustrate, higher bank rate will translate

to higher lending rates by the banks. The concept of bank rate is often compared with repo rate and reverse repo rate (See Concept Elaboration #2).
Concept Elaboration #2: Bank Rate Related Concepts

Repo Rate. The rate at which banks borrow money from the RBI against pledging or sale of government securities to RBI is known as “Repo Rate.” Repo rate is a short form of Repurchase Rate. Generally, these loans are for short durations up to 2 weeks. Repo Rate differs from Bank Rate with respect to the time horizon. Repo Rate is a short-term measure and it refers to short-term loans. On the other hand, Bank Rate is a longterm measure and is governed by the long-term monetary policies of the RBI. Reverse Repo Rate. It is the rate of interest offered by RBI, when banks deposit their surplus funds with the RBI for short periods.

• Development of the Financial System: Finance is said to be the life blood of business. And a well developed financial system is regarded as the sine qua non (an absolute imperative) for economic development. The financial system typically comprises financial institutions, financial instruments and financial markets. RBI may be regarded as the heart of the financial system. It overseas the functioning and outreach of the commercial banks as well as non banking finance companies. The funds that RBI usrups via stipulating SLR and CRR are channelised to development finance institutions, called Development Banks in India. We shall be elaborating this in the section on development banks in this chapter.
• Funds Transfer and Payments Mechanism: Making and receiving payments is an integral part of any economic transaction. In a modern economy one may envisage paper based and digital payments and funds transfer mechanisms. Paper based mechanisms would include for example currency, cheques and bills of exchange. Digital payments would include Card Swiping,Internet Banking and so on. Reserve bank of India presides over the system and sets the rules of the game. Can we imagine a thriving business sector without an effcient payments and funds transfer system?