Board of Financial Supervision.
- 1. Presentation On Board Of Financial Supervision Presented To: Amol Mahajan Sir By: Somnath Pagar Abhishek Mahale Sneha Mahale Snehal Aher Manoj Narwade Swati Karande
- 2. Origin Of RBI 1926- Hilton young commission recommends establishment of central bank of India. 1934- RBI act pass. 1935- RBI commences operation at calcutta as a shareholder’s bank 1937- RBI’s central office moves to bombay 1942- The Reserve Bank ceased to be the currency issuing authority of Burma (now Myanmar). 1947: The Reserve Bank stopped acting as banker to the Government of Burma 1948: The Reserve Bank stopped rendering central banking services to Pakistan. 1949: The Government of India nationalised the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948. MET,IOM, Nashik.
- 3. Core Functions of RBI Banking Supervision Currency Management Financial & Monetary Stability MET,IOM, Nashik.
- 4. Structured of Financial Supervision System MET,IOM, Nashik.
- 5. RBI Departments 1) Market Department of eternal investments and operation Financial Markets Department Financial Stability Unit Internal Debt Management Department Monetary Policy Department 2) Regulation and supervision Department of Banking Operations and Development Department of Banking Supervision Department of Non-Banking Supervision Foreign Exchange Department Rural Planning and Credit Department Urban Banks Department MET,IOM, Nashik.
- 6. 3) Research Department of Economic Analysis and Policy Department of Statistics and Information Management 4) Services Customer Service Department Department of Currency Management Department of Government and Bank Accounts Department of Payment and Settlement Systems MET,IOM, Nashik.
- 7. 5) Support Department of Administration and Personnel Management Department of Communication Department of Expenditure and Budgetary Control Department of Information Technology Human Resources Development Department Inspection Department Legal Department MET,IOM, Nashik.
- 8. Board of Financial Supervision Under Section 58 of the RBI Act, the Board for Financial Supervision (BFS) was constituted in November 1994, as a committee of the Central Board. The Reserve Bank of India performs its supervision functions under the guidance of the Board for Financial Supervision (BFS). Formation 1949- Banking regulation act comes into force 1966- cooperative banks come under RBI Regulation 1992- Basel Norms made applicable to Indian banking system 1994- Board of financial supervision constituted 1997- Regulation of non-banking finance companies strengthened. MET,IOM, Nashik.
- 9. Objective Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies. Constitution The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board. MET,IOM, Nashik.
- 10. The Board for Financial Supervision constituted – The sub-committees main focus is up gradation of the quality of the statutory audit and concurrent internal audit functions in banks and development financial institutions. Guidelines, norms , rules and regulation for growth development of banking sector , nonbanking sector, financial institution etc focuses on statutorily mandated areas of solvency, liquidity and operational health of the bank. It is based on internationally adopted CAMEL model modified as CAMELS, i.e., capital adequacy, asset quality, management, earning, liquidity and system control. MET,IOM, Nashik.
- 11. Structure of BFS Governor of RBI (Head) Deputy Governor (Vice Chairman) Deputy Governor (Ex Office Member) MET,IOM, Nashik.
- 12. BFS meetings The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments. BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members. The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues. MET,IOM, Nashik.
- 13. Current Focus Supervision of financial institutions Consolidated accounting Legal issues in bank frauds Divergence in assessments of non-performing assets and Supervisory rating model for banks. MET,IOM, Nashik.
- 14. Legal Framework Umbrella Acts Reserve Bank of India Act, 1934 : governs the Reserve Bank functions Banking Regulation Act, 1949: governs the financial sector Acts governing specific functions Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market. Securities Contract (Regulation) Act, 1956: Regulates government securities market. Indian Coinage Act, 1906:Governs currency and coins. Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market. "Payment and Settlement Systems Act, 2007: Provides for regulation and supervision of payment systems in India“. MET,IOM, Nashik.
- 15. Acts governing Banking Operations Companies Act, 1956:Governs banks as companies. Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalization of banks. Bankers' Books Evidence Act. Banking Secrecy Act. Negotiable Instruments Act, 1881. Acts governing Individual Institutions State Bank of India Act, 1954. The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003. The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993. National Bank for Agriculture and Rural Development Act. National Housing Bank Act. Deposit Insurance and Credit Guarantee Corporation Act. MET,IOM, Nashik.
- 16. Basel Norms Set by Global Bank Basel Committee on Banking Supervision (BCBS). Basel – I (1988) In 1988, BCBS introduced capital measurement system called Basel capital accord, also called as Basel 1. It focused almost entirely on credit risk. It defined capital and structure of risk weights for banks. The minimum capital requirement was fixed at 8% of risk weighted assets (RWA). RWA means assets with different risk profiles. For example, an asset backed by collateral would carry lesser risks as compared to personal loans, which have no collateral. India adopted Basel 1 guidelines in 1992. MET,IOM, Nashik.
- 17. Basel – II (2004) In 2004, Basel II guidelines were published by BCBS, which were considered to be the refined and reformed versions of Basel I accord. The guidelines were based on three parameters. Banks should maintain a minimum capital adequacy requirement of 8% of risk assets, banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements. Banks need to mandatorily disclose their risk exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully implemented. Basel – III (2010) These guidelines were introduced in response to the financial crisis of 2008. A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding. Also the quantity and quality of capital under Basel II were deemed insufficient to contain any further risk. Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive. The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity. MET,IOM, Nashik.
- 18. Banking Operations MET,IOM, Nashik.
- 19. Cash Reserve Ratio – 4% It is the % of Bank deposit that has to be kept with the RBI If RBI increases this rate, the amount available with banks comes down. RBI increases the CRR to pull out excess money from the banks It is also known as cash asset ratio or Liquidity ratio Used as a tool of monetary policy that influences country’s economy, Borrowings and interest rates across the country MET,IOM, Nashik.
- 20. Statutory Liquidity Reserve/Ratio – 22% SLR is the percentage of deposits the bank has to maintain in form of Gold, Cash or other securities. It regulates the credit growth in India. Restricts the expansion of bank credit Augments the investment of the banks in Government securities Ensures solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India MET,IOM, Nashik.
- 21. Prime lending Rate PLR is the rate that banks charge to their most credit worthy customers It is the minimum lending rate at which credit line is offered to prime borrowers MET,IOM, Nashik.
- 22. Sub-prime Lending Lending at a higher rate than the Prime rate These are the loans offered to the individuals who do not qualify for Prime lending It includes – Subprime Mortgages, Subprime Car loans, Subprime credit cards, etc. MET,IOM, Nashik.
- 23. Base Rate 10% to 10.25% It is the minimum rate of interest that a bank is allowed to charge from its customers. Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a rate lower than BR to any of its customers. Factors like the cost of deposits, administrative costs, a bank’s profitability in the previous financial year and a few other parameters, with stipulated weights, are considered while calculating a lender’s BR. MET,IOM, Nashik.
- 24. Repo Rate – 8% The rate at which RBI lends to the commercial Banks Low repo rate implies that banks are getting cheaper loans from RBI When Repo rates increase, borrowings from RBI becomes more expensive MET,IOM, Nashik.
- 25. Reverse Repo Rate – 7% Rate at which RBI borrows money from Banks Safeguarding the money and earn good interest Increase in Reverse repo rates can lead to banks to transfer more money to RBI, reducing money in the banking system MET,IOM, Nashik.
- 26. Bank Rate 9% Also referred to as the discount rate The rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. MET,IOM, Nashik.
- 27. Major function of BFS 1) Commercial Banks Licensing For commencing banking operations in India, whether by an Indian or a foreign bank, a license from the Reserve Bank is required. The opening of new branches by banks and change in the location of existing branches are also regulated as per the Branch Authorisation Policy. MET,IOM, Nashik.
- 28. 2) Corporate Governance The Reserve Bank’s policy objective is to ensure high-quality corporate governance in banks. It has issued guidelines stipulating ‘fit and proper’ criteria for directors of banks. In terms of the- special knowledge or practical experience in various relevant areas The Reserve Bank also has powers to appoint additional directors on the board of a banking company. MET,IOM, Nashik.
- 29. 3) Statutory Pre-emptions Commercial banks are required to maintain a certain portion of their Net Demand and Time Liabilities (NDTL) in the form of cash with the Reserve Bank, called Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR). MET,IOM, Nashik.
- 30. 4) Interest Rate The interest rates on most of the categories of deposits and lending transactions have been deregulated and are largely determined by banks. However, the Reserve Bank regulates- Interest rates on savings bank accounts and deposits of non-resident Indians (NRI),,export credits MET,IOM, Nashik.
- 31. 5) Prudential Norms In order to strengthen the balance sheets of banks, the Reserve Bank has been prescribing appropriate prudential norms for them in regard to income recognition, asset classification and provisioning, capital adequacy, investments portfolio and capital market exposures, to name a few. A brief description of these norms is furnished below: Capital Adequacy Loans and Advances Investments MET,IOM, Nashik.
- 32. 6) Rural Financial Banks Rural cooperative banks Short-term (3tier structure) State cooperative bank(StCBs) -State level District central cooperative bank(DCCBs)-District Level Primary Agriculture Credit Societies(PACS)-Village Level Long-term State Cooperative Agriculture and Rural Development Banks (SCARDBs)- State level. Primary Cooperative Agriculture and Rural Development Banks (PCARDBs)-District level. Regional Rural Banks Register under regional rural banks act 1976 MET,IOM, Nashik.
- 33. 7) Urban cooperative Bank Providing banking services to the middle and lower income groups of society in urban and semi urban areas. 8) Non-Banking financial companies (NBFCs) An NBFC is defined as a company engaged in the business of lending, investment in shares and securities, hire purchase, chit fund, insurance or collection of monies. 9) Primary Dealers In 1995, the Reserve Bank introduced the system of Primary Dealers in the Government Securities Market, which comprised independent entities undertaking Primary Dealer activity. MET,IOM, Nashik.
- 34. 10) Credit Information Companies Credit Information Companies (Regulation) Act 2005 empowers the Reserve Bank to regulate CICs. Credit Information Companies (CIC) play an important role in facilitating credit to various borrowers on the basis of their track record. 11) Financial Market Realising the growth potential of an economy. MET,IOM, Nashik.
- 35. MET,IOM, Nashik.
- 36. Thank You..! MET,IOM, Nashik.