205 fmbo unit4a
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The document outlines the structure and functions of the Reserve Bank of India (RBI), detailing its establishment, evolution, roles, and regulatory framework. It covers the RBI's monetary policy objectives and tools, including various regulatory requirements for banking, such as the Cash Reserve Ratio and Statutory Liquidity Ratio, as well as its efforts in priority sector lending and financial stability. Additionally, the document highlights the challenges faced by the RBI, including its autonomy and interaction with governmental policies.
205 fmbo unit4a
- 1. Unit 4 : Banks and NBFCs Banks and NBFCs: Types of Banks & NBFCs: Central Bank, Nationalized & Co Operative Banks, Regional Rural Banks, Scheduled Banks, Private Banks & Foreign Banks, Mudra Bank, Small Finance Banks, Specialized Banks, NBFCs. Types of Banking: Wholesale and Retail Banking, Investment Banking, Corporate Banking, Private Banking, Development Banking.
- 2. RBI : ORIGIN AND EVOLUTION Prior to establishment of RBI, the functions of a central bank were virtually done by the Imperial Bank of India . RBI started its operations from April 1, 1935. It was established via the RBI act 1934, so it is also known as a statutory body. Similarly, SBI is also a statutory body deriving its legality from SBI Act 1955. RBI did not start as a Government owned bank but as a privately held bank. Post-independence, the government passed Reserve Bank (Transfer to Public Ownership) Act, 1948 and took over RBI from private shareholders after paying appropriate compensation. Thus, nationalization of RBI took place in 1949 and from January 1, 1949, RBI started working as a government-owned bank.
- 3. TIMELINE 1926 The Royal Commission (Hilton Young commission) on Indian Currency and Finance recommended creation of a central bank for India. On the basis of mainly this commission, the RBI Act, 1934 was passed 1934 The RBI Bill was passed and received the Governor General’s assent. 1 April 1935 Reserve Bank commenced operations as India’s central bank as a private shareholders’ bank with a paid up capital of rupees five crore. 1949 The Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948.
- 4. • The RBI is the supreme monetary and banking authority in the country and controls the banking system in India. • It is called the ‘Reserve Bank’ as it keeps the reserves of all commercial banks. • Original headquarters of RBI was in Kolkata, but in 1937, it was shifted to Shahid Bhagat Singh Marg, Mumbai.
- 5. BANKING REGULATION ACT, 1949 Immediately after the independence, the Government of India came up with the Banking Companies Act, 1949. This act was later changed to Banking Regulation (Amendment) Act, 1949. Further, the Banking Regulation (Amendment) Act of 1965 gave extensive powers to the Reserve Bank of India as India’s central banking authority.
- 6. INSTITUTIONAL STRUCTURE OF RBI Official Directors Governor Governor(Maximum four) Non-Official Directors Nominated(10+2) Others(one each from four local boarders) Central Board of Directors is the top decision making body in the RBI. It is made up of official and non-official directors. The Governor and Deputy Governors are the official directors. There is a Governor and maximum 4 Deputy Governors (According to Section-8 of RBI Act 1934); so maximum number of Official Directors in RBI’s Central Board of Directors is five.
- 7. Governor and Deputy governors are appointed by Central Government. The tenure of service is maximum of 3 years and can be reappointed Further, there are 16 non-official directors in RBI. Out of them, four represent the local Boards located in Delhi, Chennai, Kolkata and Mumbai, thus representing 4 regions of India. Rest 12 are nominated by the Reserve Bank of India. These 12 personalities have expertise in various segments of Indian Economy. The Central Board of Directors holds minimum 6 meetings every year. Out of which, at least 1 meeting every quarter (every 3 months) is held. Though, typically the committee of the central board meets every week (Wednesday).
- 8. GOVERNOR OF RBI APPOINTMENT– Appointed after the proposal made by the Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary. TERM – According to Section 8 (4) of the RBI Act, the Governor and Deputy Governors shall hold office for such term not exceeding 3 years as the Central Government may fix when appointing them. RE-APPOINTMENT – They are eligible for re- appointment QUALIFICATION – The RBI Act does not provide for any specific qualification for the governor. REMOVAL – The governor can be removed by the central government.
- 9. SUBSIDIARIES OF RBI Deposit Insurance and Credit Guarantee Corporation (DICGC) Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) Reserve Bank Information Technology Private Ltd. (ReBIT) Indian Financial Technology And Allied Services (IFTAS)
- 10. No. of Press Four printing presses prints and supply bank notes Location 1. Dewas – Madhya Pradesh 2. Nashik – Maharashtra 3. Mysore – Karnataka 4. Salboni – West Bengal Owned by Govt. The presses in Madhya Pradesh and Maharashtra are owned by the Security Printing and Minting Corporation Of India (SPMCIL), a wholly owned company of GoI. SPMCIL is the only PSU under the Dept. of Economic Affairs (MoF) Owned by RBI The presses in Karnataka and West Bengal are owned by Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of RBI. Coins GoI is the issuing authority of coins and supplies coins to the Reserve bank on demand. The RBI puts the coins into circulation on behalf of Central Government ASSISTIVE BODIES IN RBI – Board of Financial Supervision (BFS) and Board for Payment and Settlement Systems (BPSS); Both of these are chaired by RBI Governor.
- 11. FUNCTIONS OF THE RBI Bank of Issue Issuing money is exclusive right of RBI. All notes except1 note and coins are issued by RBI. It also exchanges or destroys old damaged currencies. 1 notes and coins are issued by Ministry of Finance and circulated by RBI. Custodian and Manager of Foreign exchange RBI keeps the foreign exchange (i.e. foreign currency) which flows into the country. It also keeps the foreign exchange rate stable to certain extent.
- 12. Banker and Debt Manager to Government It acts as a banker to both central and state governments (except Jammu and Kashmir and Sikkim). It keeps deposits of governments and lends to governments. RBI carries out lending and borrowing operations by issuing government securities on behalf of the government. Though RBI is not a banker to Sikkim and Jammu and Kashmir it manages their public debt to some extent.
- 13. Banker to bank– It is the banker of all the banks. It keeps the reserve of the banks like cash reserve ratio (CRR) with it. It provides financial assistance to banks against mortgaged securities. It rediscounts bills of exchange. Usually banks borrow and lend money among themselves via call money market, regulated by RBI. RBI provides enough money to banks and so called as lender of last resort.
- 14. Monetary Management – Controller of Money Supply, Makes Monetary Policy, Credit Control etc Financial Regulator – to Commercial banks, Credit information Companies, RRBs, Local Area Banks, NBFC etc. Representative role – RBI represents govt. as a member of the IMF and World Bank. Central Clearance and Accounts Settlement – As RBI keeps cash reserves from commercial banks therefore it rediscounts their bills of exchange easily.
- 15. • Developmental role – Performing a variety of developmental and promotional functions under which it did set up institutions like IDBI, SIDBI, NABARD, NHB, etc. • Promotional Roles – Consumer protection, Ombudsman, Financial Inclusion through PSL norms, 25% rural branch requirements etc.
- 16. NEW INITIATIVE OF RBI IN CREDIT AND MONETARY POLICY REGIME Transition to bi-monthly monetary policy cycle Recognition of the glide path for disinflation (on recommendation of Urjit Patel Committee report). Under it, the CPI (C) is used by the RBI as the “Headline Inflation” for monetary management. A Monetary Policy Framework (2015) has been put in place – an agreement in this regard was signed between the Government of India and the RBI late February 2015. Under the framework, the RBI is to ‘target inflation’ at 4 per cent with a variations of +/- 2 per cent. (of the CPI-C).
- 17. • Besides the existing repo route, term repos have been introduced for three set of tenors – 7, 14 and 28 days – Move aimed at improving the transmission of policy and stability to loan market. • As per the Union Budget 2016-17, individuals will also be allowed by the RBI to participate in the government security market (similar to the developed economies like the USA). • RBI is progressively reducing banks’ access to overnight liquidity (at the fixed repo rate), and encouraging the banks to increase their dependency on the term repos.
- 18. INCOME EXPENDITURE Returns from foreign currency assetsPrinting of currency Interest on rupee-denominated government bonds Staff expenditure Interest on overnight lending to commercial banks. Commission given to commercial banks. Management commission on handling the borrowings of central and state governments. Commission to primary dealers. SOURCES OF INCOME AND EXPENDITURE OF RBI
- 19. ASSETS AND LIABILITIES OF RESERVE BANK OF INDIA LIABILITIES ASSETS Currency held by Public Foreign currency assets Vault cash held by commercial banks Bill purchases and discounts Government securities Collaterals by commercial banks Other liabilities Loan and advances Rupee securities Gold coin bullion
- 20. INDEPENDENCE OF THE RBI Under section 7 of the RBI Act 1934, the central government may from time to time give such directions to the RBI as it may, after consultation with the Governor of the Bank, considered necessary in the public interest. Moreover, there is no legal act mandating autonomy of the RBI. RBI is not only vested with the powers to formulate the monetary policy but also to monitor the functioning of all banks. To play its role effectively, autonomy in its functioning is sine qua non for RBI. However, this has been challenged many times due to a continued tug of war for wresting more power between the bank and the govt.
- 21. REASONS FOR DIMINISHING AUTONOMY OF RBI check the growth of NPAs. Reduced liquidity in the economy due to tight monetary policy followed by RBI. Corrective measures taken by RBI to clean up the banking system which are not seen very positively by the government. Impossible trinity of RBI- capital mobility, Exchange rate flexibility and monetary autonomy. Clash between short term populist agenda of the government and long term view for price stability taken by RBI. One important limitation is that the Reserve Bank is statutorily limited in undertaking the full scope of actions against public sector banks (PSBs). Erosion of statutory powers of the central bank through piece- meal legislative amendments that directly or indirectly eat away separation of the central bank from the government.
- 22. PUBLICATIONS OF RBI Report on Trend and Progress of Banking in India-Annually Financial stability report- Half yearly Monetary policy report- Half yearly Report on foreign exchange reserves- Half yearly Bi-monthly Policy Statement Industrial Outlook Survey of the Manufacturing Sector (Quarterly) Consumer Confidence Survey (Quarterly) Report on Financial Review
- 23. MINIMUM RESERVE SYSTEM OF RBI With a minimum value of government-held gold of Rs. 200 crores (Rs. 115 cr rupee should in the form of Gold or gold bullion and rest Rs. 85 cr should be in the form of foreign currencies) and the remaining is backed by the government securities issued and held by RBI. OBJECTIVES OF MINIMUM RESERVE SYSTEM (MRS) To maintain the money supply in the economy without inflationary pressure and maintain the confidence of the general public in the currency.
- 24. To ensure the confidence of the Indian currency holders that the currency held by them is a legal tender. RBI wants to ensure the appropriate supply of currency in the economy through MRS. Through the MRS, the RBI accelerate the economic growth of the country without increasing the rate of inflation in the economy.
- 25. All Indian banks have to follow the compulsory target of priority sector lending (PSL). Categories Domestic scheduled commercial banks (excluding RRB and SFB) and Foreign banks with 20 and above branches Foreign banks (less than 20 branches) Total Priority Sector 40 per cent of Adjusted Net Bank Credit or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher. 40 per cent of ANBC or Credit Equivalent Amount of Off-Balance Sheet Exposure, whichever is higher, to be achieved in a phased manner by 2020. Agriculture # 18 per cent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher. Within this 18 percent target 8 percent is prescribed for Small Not applicable
- 26. All Indian banks have to follow the compulsory target of priority sector lending (PSL). Micro Enterprises 7.5 percent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher. Not applicable Advances to Weaker Sections 10 percent of ANBC or Credit Equivalent Amount of Off- Balance Sheet Exposure, whichever is higher Not applicable # Domestic banks have been directed to ensure that their overall direct lending to non-corporate farmers does not fall below the system-wide average of the last three years achievement.
- 27. In 2007, the RBI included five minorities – Buddhists, Christians, Muslims, Parsis and Sikhs under the PSL. PRIORITY SECTOR LENDING CERTIFICATES (PSLCS) – are a mechanism to enable banks to achieve the PSL target and sub-targets by purchase of these instruments in the event of shortfall. Changes in PSL (7 Aug 2020) The changes include broadening the scope of PSL to include start-ups, increasing the limits for renewable energy, including solar power and compressed biogas plants and increasing the targets for lending to small and marginal farmers and weaker sections. “The revised guidelines also aim to encourage and support environment-friendly lending policies to help achieve Sustainable Development Goals (SDGs),”
- 28. MONETARY POLICY OF RBI Monetary Policy is an instruments under RBI aimed at regulating interest rates, money supply and availability of credit in an economy. RBI decides monetary policy cycle on bi-monthly basis. OBJECTIVES OF MONETARY POLICY Economic and financial stability – To regulate monetary expansion so as to maintain a reasonable degree of price stability. Maintaining price stability. Development – To ensure adequate financial resources for the purpose of development. flow of credit – Adequate flow of credit to productive sectors. Employment and growth – Promotion of productive investments & trade. Equitable distribution of income. Employment generation International trade and exports – Promotion of exports and economic growth. Maintaining exchange rate stability.
- 29. TOOLS OF MONETARY POLICY Quantitative Instruments ―Liquidity Adjustment Facility (Repo and Rev. Repo ―Open Market Operations ―SLR, and CRR ―Bank Rate ―Credit Ceiling ―Marginal Standing Facility Qualitative Instruments ―Credit Rationing ―Moral Suasion ―Promt Corrective Action(PCA) ―Direct action by RBI on banks ―Differential Interests Rates
- 30. RESERVE RATIO (CRR) – CRR is the certain % (fixed by the RBI) of Net Time and Demand Deposits of a Scheduled bank in India need to kept with the RBI in the form of cash only. – CRR aimed to have control over banks credit. – The ratio between 3% (floor) -15% (ceiling) removed via RBI (Amendment) Bill 2006. An increase in CRR higher proportion of deposits to be kept with RBI by banks less funds are available to be provided as credit to the economy money supply will decrease.
- 31. STATUTORY LIQUIDITY RATIO (SLR) – The schedule banks needs to also keep certain % (fixed by the RBI) of their Net Time and Demand Deposits kept with itself (i.e. not with RBI) in the form of liquid assets such as cash, gold and select government securities. – Need of SLR is to prevents bank from lending all its deposits which is too risky and it is mandatory under Banking Regulation Act 1949. – Similar to CRR, SLR aimed to have control over banks credit. – SLR includes G-Secs, thus it ensures certain amount of money is secured for govt. – There were excessively high rates (about 25-30 percent) prevalent before 1991 reforms with provision of ceiling and floor.
- 32. • BANK RATE – Rate at which RBI provides long-term borrowings to its clients. Its clients include GoI, state governments, banks, financial institutions, cooperative banks etc. – Increase in the bank rate is the symbolizes tightening of RBI monetary policy. (i.e. Dearer Monetary Policy) – An increase in bank rate will make borrowing from RBI expensive discourage banks to borrow from RBI money supply will tend to decrease. – It presently uses it as a penalty rate imposed by RBI on banks for violations of RBI directives.
- 33. REPO RATE (POLICY RATE) – It is the rate (Rate of Repurchase) at which commercial banks borrow from RBI (which provides short-term liquidity to banks) by mortgaging their dated Government securities and Treasury bills (T-Bills). – Increase in repo rate borrowing from RBI expensive banks will borrow less from RBI less credit will be provided by banks to households money supply will decrease. – Decrease in Repo Rate Borrowing from RBI is cheaper Banks will borrow more More credit is available Money supply will increase. – Reduction in Repo rate helps the banks to get money at a cheaper rate and increase in Repo rate discourages the banks to borrow from RBI. – The Call Money Market of India (inter-bank market) operates at this rate and banks use this route for overnight borrowings. – Repo rate has direct relation with the interest rates banks charge on the loans they offer (as it affects the operational cost of the banks).
- 34. • REVERSE REPO RATE – It is the rate at which RBI borrows from commercial Banks by mortgaging its dated Government securities and Treasury bills. – An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market. – A decrease in reverse repo rate means that commercial banks will get less incentive to park their funds with RBI and thus more money is available in the market increasing the money supply. – It has a direct bearing on the interest rates charged by the banks and the financial institutions on their different forms of loans.
- 35. • MARGINAL STANDING FACILITY (MSF) – Liquidity management window given by RBI under which banks can borrow additional overnight (one day) liquidity over and above LAF window. – Introduced to deal with unforeseen liquidity crunch because under LAF banks can borrow overnight liquidity only by pledging securities over and above the securities held under SLR requirement. – Under MSF, on the other hand, banks can pledge securities held for SLR purposes. – The interest rate for MSF is Repo rate plus 1%. Usually, the Reverse Repo rate is Repo rate minus 1%. Therefore, the Repo rate act as an anchor rate. The Repo rate stands in the middle of two. The MSF rate stands above and Reverse Repo rate stands below the Repo Rate.
- 36. • LIQUIDITY ADJUSTMENT FACILITIES (LAF) – Monetary policy instrument that the RBI uses in order to influence the liquidity conditions in the market in the short term. – Under the LAF window, the RBI uses various instruments to inject or absorb liquidity to or from the market respectively. – Repo and Reverse repo rates are a part of RBI’s “Liquidity Adjustment Facility (LAF)”. – The RBI introduced a LAF as a result of the Narasimham Committee on Banking Sector Reforms (1998).
- 37. • LONG TERM REPO OPERATIONS (LTRO) – New policy tool used by the RBI to inject more liquidity into the Economy. – Similar to the term repos, but with a longer maturity period of 1 year and 3 years. – Through the LTRO, the RBI seeks to inject long term liquidity into the economy at a lower interest rate. – The LTROs would be carried out through e- Kuber. • e-Kuber is the Core Banking Solution (CBS) of the RBI which enables each bank to connect their single current account across the country.
- 38. QUALITATIVE INSTRUMENTS • CREDIT RATIONING – Rationing of credit is a method by which the RBI seeks to limit the maximum amount of loans and advances and, also in certain cases, fix ceiling for specific categories of loans and advances. • MARGIN REQUIREMENTS – Qualitative tool used by the RBI in order to regulate the credit flow to a particular sector. – When a bank advances credit to its customers it does so against collateral. However there is a difference between the value of the security and the loan offered. This difference is called ‘Margin’.
- 39. • MORAL SUATION – It refers to a method adopted by the Central Bank to persuade or convince the commercial banks to advance credit in the economic interest of the country. – “Persuasion” without applying punitive measures. – Since it involves no administrative compulsion or threats of punitive action it is a psychological and informal means of selective credit control. • DIFFERENCIAL RATE OF INTEREST – The differential rate of interest (DRI) is a lending programme launched by the government in April 1972 which makes it obligatory upon all the public sector banks in India to lend 1 per cent of the total lending of the preceding year to ‘the poorest among the poor’ at an interest rate of 4 per cent per annum.
- 40. DIRECT ACTION This step is taken by the RBI against banks that don’t fulfill conditions and requirements. RBI may refuse to rediscount their papers or may give excess credits or charge a penal rate of interest over and above the Bank rate, for credit demanded beyond a limit. PROMPT CORRECTIVE ACTION (PCA) The PCA is triggered when banks breach certain regulatory requirements like minimum capital, and quantum of non-performing assets. To ensure that banks don’t go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. CONSUMER CREDIT REGULATION RBI can issue rules to set the minimum/maximum level of down-payments and periods of payments for purchase of certain goods.
- 41. UNCONVENTIONAL MONETARY POLICY INSTRUMENTS BY RBI ZERO INTEREST RATE POLICY (ZIRP) Policy also called as ‘Quantitative Easing’. This policy was adopted by USA from 2008 in the wake of financial crisis to inject money into the economy. Under this policy, the Fed Bank provides loans to the banks at low interest rates (0.25%) to spur investment level in the economy. NEGATIVE INTEREST RATE POLICY (NIRP) In NIRP, the banks would be required to pay interest to the central bank if they park their surplus reserves. This encourages the banks to provide loans to the borrowers at cheaper rates instead of parking their surplus reserves with the Central Bank. This policy is usually followed in developed economies such as Japan, Denmark, Sweden, Switzerland etc HELICOPTER MONEY This involves the central bank of the country printing currency notes and distributing it to the people free of cost. The idea is to promote demand in the economy during recession.
- 42. OTHER MONETARY TOOLS USE BY RBI CALL MONEY MARKET It is a Inter Bank money market for short-term financial assets that are close substitutes of money. The call money market is an important segment of the money market where borrowing and lending of funds take place on overnight basis (for one day) Money market also known as ‘overnight borrowing money at call’. Funds raising/borrowing maximum period 14 days (“Short notice”) Borrowing can take place against securities or without securities. Rate of Interest – ‘glides’ with ‘repo rate’. Longer the interest rate higher the interest rate. Real call rate revolves nearby current repo rate, according to the availability and demand of fund in market. Borrowers as well as lenders Schedule commercial banks, cooperative banks. Lender only LIC, GIC, mutual funds, IDBI and NABARAD.
- 43. MARKET STABILISATION SCHEME (MSS) MSS is a policy tool used by the Reserve Bank of India to suck out excess liquidity from the market through issue of securities like T-Bills, Dated Securities etc. on behalf of the government. The RBI initiated the MSS scheme in 2004, to control the surge of US dollars in the Indian market, RBI started buying US dollars while pumping in rupee MSS was introduced to deal with the excess liquidity in the market which could lead to inflation. The issued securities under the MSS are government bonds and they are called as Market Stabilisation Bonds and these securities are owned by the government though they are issued by the RBI. Post demonetization (2016) RBI has raised the ceiling for MSS 20 times to suck excess cash out of the banking system and help banks earn some return from the voluminous deposits they have garnered after the government’s demonetization move.
- 44. STANDING DEPOSIT FACILITY SCHEME Standing deposit facility is a collateral free liquidity absorption mechanism which aims to absorb liquidity from commercial banking system into RBI. Concept was first recommended by the Urjit Patel committee report in 2014. The new scheme has been proposed by the Union Budget 2018-19. The scheme is aimed at helping RBI to manage liquidity in a better way, especially when the economy is flush with excess fund (as was seen after the demonetisation 2016).
- 45. STRATEGIES OF A MONETARY POLICY MAKING Exchange rate stability – Singapore & other export-oriented economies use this. Multiple Indicators – Central Bank tries to focus on Growth, Employment, Inflation Control and Exchange rate stabilization. India’s RBI had this before 2016. Inflation targeting – here the Central Bank only aims to keep inflation under control, then other indicators (growth, employment, exchange rate) will automatically fall in line. It was successful in Western nations, adopted in India 2016, based on Urjit Patel Committee Report (2013-14), by amending RBI Act Section 45.
- 46. MONETARY POLICY COMMITTEE (MPC) MPC is a statutory body created under Monetary Policy Framework Agreement 2015 between the RBI and Government in 2016 MPC is entrusted with the responsibility of fixing the benchmark repo rate (policy rate) required to contain inflation as defined in the Monetary Policy Framework Agreement. The meetings of the MPC are held at least 4 times a year and it publishes its decisions after each such meeting. MPC is 6-member body including 3 members from RBI and 3 members to be nominated by the Central Government.
- 47. These Government of India nominees are appointed by the Central Government based on the recommendations of a search cum selection committee. Moreover, nominees of the MPC will hold office for a period of four years and will not be eligible for re- appointment. Decisions are taken by majority with the Governor having the casting vote in case of a tie. Chairperson of MPC – RBI Governor Quorum for meeting – 4 members To ensure transparency – Govt can send message only in writing. Committee must publish its proceedings of the meeting on the 14th day, and “Monetary policy report” at every 6 months. Inflation target decided by Union Government after consulting with RBI Governor. The present mandate of the committee is to maintain 4% annual inflation (until March 31, 2021) with bandwidth of ceiling 6% and a floor of 2%. If Target fail: If inflation not kept in 4% +/-2% zone for 3 consecutive quarters then Committee must send report to Govt. with reasons and remedies.
- 48. LIMITATIONS OF MONETARY POLICY Existence of black money in the economy limits the working of the monetary policy Conflicting objectives – To achieve the objective of economic development, the monetary policy is to be expansionary but to achieve the objective of price stability and curb on inflation policy is to be contractionary. Underdeveloped Indian money market – The weak money market limits the coverage, as also the efficient working of the monetary policy. Indian Banks don’t immediately pass on the RBI rate cuts to customers (monetary transmission), citing NPA/Bad loans/profitability problem.
- 49. LIMITATIONS OF MONETARY POLICY Government Side Issues – Fiscal repression, Fiscal slippage, Fiscal deficit, Subsidy leakage, Populist Loan-waivers etc. Structural Issues in Economy – Lack of electricity-road infrastructure / Ease of Doing Biz production, long pending land and labour reforms. Presence of Informal moneylenders in rural areas – circulate illegitimacy money at exorbitant interest rates. Poor penetration of banking sector and financial inclusion etc.
- 50. CHRONOLOGY OF LENDING RATES YEAR INITIATIVES 1969 Began nationalization of private banks, and ‘Administered Interest Rates’ on them. 1991 M. Narasimham suggested deregulation: Govt should not dictate / administer individual banks’ interest rates. RBI should only give methodology to banks. 2003 RBI introduced Bench march Prime lending rate(BPLR). 2010 RBI introduced BASE Rate + Spread system; update frequency on individual banks’ discretion. 2016 RBI introduced Marginal cost of lending rates(MCLR) + Spread system. 2019 The RBI has made it mandatory for all banks to link all new floating rate loans (i.e. personal/retail loans, loans to MSMEs) to an external benchmarking. The move is aimed at faster transmission of monetary policy rates.
- 51. WAYS AND MEANS OF ADVANCES (WMA) The RBI gives temporary loan facilities to the centre and state governments as a banker to the government. This temporary loan facility is called WMA. It is a mechanism to provide to States to help them tide over temporary mismatches in the cash flow of their receipts and payments. It was introduced on April 1, 1997, after putting an end to the four-decade-old system of ad-hoc (temporary) Treasury Bills to finance the Central Government deficit. Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to the central and State/UT governments.
- 52. WAYS TO AVAIL WMA This facility can be availed by the government if it needs immediate cash from the RBI. The WMA is to be vacated after 90 days. The interest rate for WMA is currently charged at the repo rate. The limits for WMA are mutually decided by the RBI and the Government of India. TYPES OF WMA Normal Special
- 53. Special WMA or Special Drawing Facility is provided against the collateral of the government securities held by the state. After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate. The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state. The RBI has raised the Ways and Means Advances, or WMA, limit by 30% for all States and UTs to enable them to tide over the crisis caused by COVID-19 outbreak.