RESERVE BANK OF INDIA ACT, 1934

CASH RESERVED RATIO

Every scheduled bank is required to maintain with RBI an average daily balance equal to a percentage of the NDTL as stipulated by RBI from time to time. This is known as CRR (Cash Reserved Ratio).There is no minimum or maximum limit for CRR. Further RBI does not pay interest on balance held for CRR purpose.

Currently CRR is 4%.

Penalty for not paying CRR

• 1^ST day if not paid- Bank rate + 3%
• 2^nd day if not paid- Bank rate + 5%
• 3^rd day if not paid RBI can take legal action which can extend to cancellation of license of bank.

?POWER OF RBI TO COLLECT CREDIT INFORMATION (Section45A – 45F)

• The RBI can collect credit information from banking companies and Furnish such information to any banking company.
• If Banking company require any credit information it has to submit application to RBI and RBI on receipt of such application shall furnish such information by not disclosing names of banking companies.
• Secured loans- 10 lakhs and above
• Unsecured loans – 5 lakhs and above
• RBI is empowered to collect information related to borrower and suit filed accounts.

POWER TO REGULATE AND SUPERVISE NBFC (NON BANKING FINANCIAL COMPANIES)

• The regulation and supervision of non-banking financial companies is one of the critical functions that the RBI has been entrusted with.
• Every NBFC is mandatorily required to be registered with RBI under section Section 45-IA of RBI Act, 1934.
• RBI has powers to regulate or prohibit issue of prospectus or advertisements soliciting deposits of money by non-banking financial companies.
• RBI has power to determine policy and issue directions to non-banking financial companies.

Regulation of Derivatives and Money Market Instruments –

1) Definition of derivatives – Derivative is defined as an instrument to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called ‘underlying’), or a combination of more than one of them and includes interest rate,swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency rupee options or such other instruments as may be specified by the RBI from time to time.

2) Definition of money market instruments – Money market instruments have been defined to include call or notice money, term money, repo, reverse repo, certificate of deposit, commercial paper and such other debt instrument of original or initial maturity up to one year as the RBI may specify from time to time.

3) RBI may determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature.

MONETARY POLICY (Section45Z-Section 45ZO)

A) Monetary Policy Committee- Central Government should constitute a Monetary Policy Committee.

- The Monetary Policy Committee consists of –

• the Governor of the RBI;
• Deputy Governor of the RBI in charge of Monetary Policy;
• one officer of the RBI to be nominated by the Central Board; and
• 3 persons to be appointed by the Central Government

B) Key points

a) MPC have statutory duty to determine the Policy Rate required to achieve the inflation target.

b) The decision of the Monetary Policy Committee is binding on RBI and the RBI is required to publish a document explaining the steps to be taken to implement the decisions of the Monetary Policy Committee.

Meetings of Monetary Policy Committee

1) The RBI shall organize at least four meetings of the Monetary Policy Committee in a year.

2) The meeting schedule of the Monetary Policy Committee for a year shall be published by the Bank at least one week before the first meeting in that year.

3) Quorum for a meeting shall be four Members out of which at least one should be governor and in his absence, deputy governor who is the Member of the Monetary Policy Committee.

4) Each Member of the Monetary Policy Committee shall have one vote.

5) All questions which come up before any meeting of the Monetary Policy Committee shall be decided by a majority of votes by the Members present and voting, and in the event of an equality of votes, the Governor shall have a second or casting vote.

6) The proceeding of the Monetary Policy Committee shall be confidential.

Publishing of decisions/ minutes of proceeding and Monetary policy report

• RBI has to publish resolution adopted by the committee.
• RBI on the 14^th day after every meeting have to publish Minutes of the proceedings of the meeting.
• RBI have to publish Monetary police report in every six months explaining

                                                                                                a) The sources of inflation

                                                                                                 b) The forecasts of inflation for the period between six

                                                                                                  to eighteen months from the date of publication of the document.

Publication of bank rate. (Section 49)

The Bank shall make public from time to time the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under this Act.

IMPORTANT TERMS

1) Repo Rate – Repo rate refers to the rate at which commercial banks borrow money by selling their securities to Reserve Bank of India (RBI) to maintain liquidity, in case of shortage of funds.

2) Reverse Repo Rate – Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market

3) Bank Rate – It is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers

4) Cash Reserve Ratio (CRR) – Cash Reserve Ratio (CRR) is the amount of funds that banks have to maintain with the Reserve Bank of India (RBI) at all times.

5) Statutory Liquidity Ratio (SLR) -Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities.