It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers. The Bank Rate is published under Section 49 of the Reserve Bank of India Act, 1934. This rate has been aligned to the MSF rate and, therefore, changes automatically as and when the MSF rate changes alongside policy repo rate changes.
Note: The Reverse Repo Rate (RRR) will be kept 100 basis points lower than the Repo Rate (RR), on the other hand, Marginal Standing Facility (MSF) will be kept 100 basis points, higher than the repo rate.
Cash Reserve Ratio (CRR) :
The average daily balance that a bank is required to maintain with the Reserve Bank as a share of such per cent of its Net Demand and Time Liabilities (NDTL) that the Reserve Bank may notify from time to time in the Gazette of India. Banks can’t lend the money to corporates or individual borrowers, banks can’t use that money for investment purposes. So, that CRR remains in current account and banks don’t earn anything on that. In terms of Section 42(1) of the RBI Act, 1934, all Scheduled Banks are required to maintain with Reserve Bank of India a Cash Reserve Ratio (CRR) of 4% of Net Demand and Time Liabilities (NDTL).
If RBI increases CRR, the available amount with banks comes down, RBI uses it to drain out excessive money from the banks and vice versa.
Demand Liabilities: -
Demand liabilities are such deposits of the customers which are payable on demand. An example of demand liability is a deposit maintained in a saving account or current account that is payable on demand through a withdrawal form such as a cheque.
Time Liabilities: -
Time liabilities refer to the liabilities which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon. An example of time liability is a six-month fixed deposit which is not payable on demand but only after six months.
Net Demand and Time Liabilities (NDTL) :
The Net Demand and Time Liabilities or NDTL shows the difference between the sum of demand and time liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of assets held by the other bank.
Example: Suppose a bank has deposited 5000 with the other bank and its total demand and time liabilities (including the other bank deposit) is 10,000. Then the net demand and time liabilities will be 5,000 (10,000-5,000). Liabilities of a bank may be in the form of demand or time deposits or borrowings or other miscellaneous items of liabilities. As defined under Section 42 of RBI Act, 1934, liabilities of a bank may be towards banking system or towards others. "Demand Liabilities" include all liabilities which are payable on demand. "Time Liabilities" are those which are payable otherwise than on demand.
Statutory Liquidity Ratio (SLR) :
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 influence the availability of resources in the banking system for lending to the private sector. Statutory liquidity ratio is determined by Reserve Bank of India maintained by banks in order to control the expansion of bank credit.
It is determined by a percentage of total demand and time liabilities. The SLR is commonly used to control inflation and fuel growth, by increasing or decreasing it respectively. The present SLR is 19.5% (June 2018), but RBI has the power to increase it up to 40%, if it so deems fit in the interest of the economy.
Difference between CRR & SLR:
- Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of banks that they can pump in economy ➢ CRR is cash reserve ratio that stipulates the percentage of money or cash that banks are required to keep with RBI
- SLR is statutory liquidity ratio and specifies the percentage of money a bank has to maintain in the form of cash, gold, and other approved securities ➢ CRR controls liquidity in economy while SLR regulates credit growth in the country
- While banks themselves maintain SLR in liquid form, CRR is with RBI maintained as cash.
Open Market Operations (OMOs) :
OMOs are the market operations conducted by the RBI by way of sale/ purchase of G-Secs (Govt Securities) to/ from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.
Market Stabilisation Scheme (MSS) :
The Reserve Bank under Governor YV Reddy initiated the MSS scheme in 2004. Market Stabilisation Scheme or MSS is a tool used by the Reserve Bank of India to suck out excess liquidity from the market through issue of securities like Treasury Bills, Dated Securities etc. on behalf of the government.
The money raised under MSS is kept in a separate account called MSS Account and not parked in the government account or utilised to fund its expenditures. The Reserve Bank sharply raised the Market Stabilisation Scheme (MSS) ceiling to Rs 6 lakh crore from Rs 30,000 crore.
Qualitative Credit Controls
The marginal requirement of a loan is the current value of security offered for a loan or the value in totality of the loans granted. The marginal requirement is increased for those business activities, whose flow of credit is to be restricted in the economy. The Reserve Bank of India has been using this method since 1956. If margin percent is more, then fewer loans will be given for a certain value of security. If margin percent is less, more loans will be given.
Example: A person mortgages his property worth Rs. 5,00,000 against loan. The bank will give loan of Rs. 2,50,000 only. The marginal requirement here is 20%. In case the flow of credit has to be increased, the marginal requirement will be lowered.
Rationing of credit:
Under this method there is a maximum limit to loans and advances that can be made, which the commercial banks cannot exceed. RBI fixes ceiling for specific categories. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. This is all fake Minimum of "capital: total assets" (ratio between capital and total asset) can also be prescribed by Reserve Bank of India.
Under the banking regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuses to obey the directions given by Reserve Bank of India. There can be a restriction on advancing of loans imposed by Reserve Bank of India on such banks. e.g. – RBI had put up certain restrictions on the working of the Metropolitan cooperative banks.
This method is also known as "moral persuasion" as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit. It is part of meetings between RBI and Commercial Banks. RBI persuade the commercial bank to follow their policies. RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal in lending during deflation.
RBI (Reserve Bank of India)
- Headquarters: Mumbai, Maharashtra, India
- Governor: Dr. Urjit R. Patel
- Deputy Governors: Shri N. S. Vishwanathan, Dr. Viral V. Acharya, Shri B.P. Kanungo, Shri M K Jain (June 2018).
Legal Framework of RBI:
I. Acts administered by Reserve Bank of India
- Reserve Bank of India Act, 1934
- Public Debt Act, 1944/Government Securities Act, 2006
- Government Securities Regulations, 2007 • Banking Regulation Act, 1949
- Foreign Exchange Management Act, 1999
- Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (Chapter II)
- Credit Information Companies (Regulation) Act, 2005
- Payment and Settlement Systems Act, 2007
- Payment and Settlement Systems Regulations, 2008 and Amended up to 2011 and BPSS Regulations, 2008
- The Payment and Settlement Systems (Amendment) Act, 2015 - No. 18 of
- Factoring Regulation Act, 2011
II. Other relevant Acts
- Negotiable Instruments Act, 1881
- Bankers' Books Evidence Act, 1891
- State Bank of India Act, 1955
- Companies Act, 1956/ Companies Act, 2013
- Securities Contract (Regulation) Act, 1956
- State Bank of India Subsidiary Banks) Act, 1959
- Deposit Insurance and Credit Guarantee Corporation Act, 1961
- Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
- Regional Rural Banks Act, 1976
- Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
- National Bank for Agriculture and Rural Development Act, 1981
- National Housing Bank Act, 1987
- Recovery of Debts Due to Banks and Financial Institutions Act, 1993
- Competition Act, 2002
- Indian Coinage Act, 2011: Governs currency and coins
- Banking Secrecy Act
- The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
- The Industrial Finance Corporation (Transfer of Undertaking and Repeal)
Some Important Acts under RBI
Reserve Bank of India Act, 1934
Reserve Bank of India Act, 1934 is the legislative act under which the Reserve Bank of India was formed. This act along with the Companies Act, which was amended in 1936, were meant to provide a framework for the supervision of banking firms in India.
The First schedule of the RBI Act 1934 defines the 4 areas under which the Indian states should come. The 4 areas are Western Area, Eastern Area, Northern Area, and Southern Area.
The Second schedule of the Act lists all the Scheduled Banks in India (Sections 2(e) and 42).
Important Section under RBI Act, 1934:
Section 3: Establishment and incorporation of Reserve Bank.
Section 4: Capital of the Bank.
Section 5: Increase and reduction of share capital.
Section 6: Offices, branches and agencies.
Section 7: Management.
Section 8: Composition of the Central Board, and term of office of Directors Section 17: The Act defines manner in which the RBI can conduct business. The RBI can accept deposits from the central and state governments without interest. It can purchase and discount bills of exchange from commercial banks. It can purchase foreign exchange from banks and sell it to them.
Section 18: Deals with emergency loans to banks.
Section 20: Obligation of the Bank to transact Government business. Section 21: States that RBI must conduct the banking affairs for the central government and manage public debt.
Section 22: Says that only RBI has the exclusive rights to issue currency notes in India.
Section 24: States that the maximum denomination a note can be Rs.10,000 (US$150).
Section 26: Describes the legal tender character of Indian bank notes.
Section 27: Re -issue of notes.
Section 28: Allows the RBI to form rules regarding the exchange of damaged and imperfect notes.
Section 31: Says that in India only the RBI or the central government can issue and accept promissory notes that are payable on demand. However, cheque, that are payable on demand, can be issued by anyone.
Section 42(1) : Says that every scheduled bank must have an average daily balance with the RBI. The amount of the deposit shall be more that a certain percentage of its net time and demand liabilities in India.
Banking Regulation Act, 1949
The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and changed to Banking Regulation Act 1949 from 1st March 1966. Initially, the law was applicable only to banking companies. But, 1965 it was amended to make it applicable to cooperative banks and to introduce other changes. It is applicable only in Jammu and Kashmir in 1956 but now applicable throughout India.
The Act provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act, 1956. Primary Agricultural Credit Society and cooperative land mortgage banks are excluded from the Act.
In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56. Cooperative banks, which operate only in one state, are formed and run by the state government. But, RBI controls the licensing and regulates the business operations.
Important Section under Banking Regulation Act, 1949:
Section 6: Form and business in which banking companies may engage
Section 7: Use of words “bank”, “banker”, “banking” or “banking company”
Section 8: Prohibition of Trading Section
Section 9: Disposal of non-banking assets
Section 11: Requirement as to minimum paid- up capital and reserves Section 12: Regulation of paid-up capital, subscribed capital and authorised capital and voting rights of shareholders
Section 13: Restriction on commission, brokerage, discount, etc. on sale of shares
Section 14: Prohibition of charge on unpaid capital
Section 17: Reserve Fund
Section 18: Cash reserve
Section 20: Restrictions on loans and advances
Section 21: Power of Reserve Bank to control advances by banking companies
Section 22: Licensing of banking companies
Section 26: Return of unclaimed deposits
Section 26 A: Establishment of Depositor Education and Awareness Fund
Section 29: Accounts and balance -sheet
Section 29A: Power in respect of associate enterprises
Section 30: Audit
Section 33: Display of audited balance-sheet by companies incorporated outside India
Section 35AB: Power of Reserve Bank to issue directions in respect of stressed assets
Section 45 - Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstitution or amalgamation
Section 46 - Penalties
Section 56 - Act to apply to co-operative societies subject to modifications