Central Banking

By ITM E-MBA XIII-B Manish Bhat (Roll No-77) Pawan Jadhav (Roll No-85) Sandeep Shirsekar (Roll No-93)

Points covered

Central bank- Meaning, Definitions Origin, History & Structure Functions Monetary policies & objectives Qualitative & Quantitative Policies Conclusion

Central Bank
A central bank is a lender of last resort
-- Prof.Hawtry It is a bank of banker -- Samuelson Bank which has monopoly over note issue -- Vera Smith Central bank is the governments bank -- Sayers

Central banking
An institution charged with the responsibility of managing the expansion and contraction of the volume of money in the interest of general public welfare Prof.Kent One which constitute the apex of the monetary and banking structure of its country Prof.M.H.De Kock

RBI and its origin

Commenced Operations on 1st April 1935 as per The Reserve Bank of India Act, 1934 (II of 1934) and Nationalise on 1st Jan 1949.

To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

Structure of Banking in India Reserve Bank

Commercial Bank -Public Sector Bank -Private Sector bank -Regional Rural Bank

Co-operative Bank -State Co-op bank -Central Co-op Bank -Primary Co-op Soc

Functional Chart

Organisational Structure

Functions of RBI

Bank of Note issue The Governments Bank Bankers Bank Custodian Foreign Exchange Reserves for country Lender of last resort and bank of rediscounting. Controller of credit

Monetary Policy
Monetary policy is essentially a programme of action undertaken by central bank,to control and regulate the supply of money with the public and flow of credit with a view of achieving predetermined macroeconomic goals.
-Macroeconomics-Theory & policy-D.N.Dwivedi-Tata Magraw Hill comp,

Instruments of Monetary Policy (Economic variables)

Weapons of Monetary controls Nuts & Bolts of Monetary policy -- Samuelson & Nordhaus Quantitative credit control (General credit control) Control of quantity or volume of money Qualitative credit control ( Selective credit control) Quality /Purpose/Direction of credit control

Objectives of Credit Control

To stabilise internal price level To stabilise the rate of foreign exchange To protect the outflow of gold To control business cycles To meet business needs To have growth & stability

Credit Control Measures

Quantitative
-Bank Rate -Open Mkt. Operations -Variation in C R R -S L R -P L R

Qualitative
-Marginal Requirement -Rationing of Credit -Cost. Credit Regulation -Issue of Directives -Moral Suasion -Publicity -Direct Action

Terms

CRR Cash Reserve Ratio is the percentage of bank deposits (reserves and surplus) which are statutorily parked with the RBI as reserve. SLR Statutory Liquidity Ratio it is the proportion of total deposits which banks are required to maintained in liquid form of cash reserve, gold and government bond in addition to CRR to prevent commercial banks from liquidating assets when CRR is raised.

Terms

Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers. Repo Rate is the rate at which the RBI buys government securities from the market to infuse liquidity in the system Reverse Repo rateis the rate at which the RBI absorbs excess bank funds by selling government securities in the market.

As on date prevailing Rates of Quantitative Measures

CRR- 8.50% SLR 25% PLR 12.75 -13.25%

Source- RBI website

Cash Reserve Ratio and Interest Rates Item / Week Ended C R R (per cent) S L R (per cent) P L R (per cent) 2007 Jul. 13 6.50 25.00

(per cent per annum)

2008 Jul. 11

8.50 25.00

12.75-13.25 12.75-13.25

(1) CRR & SLR relates to Scheduled Commercial Banks (excluding Regional Rural Banks). (2) Prime Lending Rate relates to five major Banks. (3) Data cover 90-95 per cent of total transactions reported by participants. Source- RBI website

Prime Lending Rates as on 9th July 2008 for different loans

Personal Loan Home Loan Short Term Edu. Loan Doctor Loan Two Wheelers Loan Car Loan General Credit Card 15.00% / 17.50% 11.00% / 11.50% 12.00% / 12.50% 13.00% / 14.00% / 11.50% / 12.50% / 13.00% 13.50% 16.00% / 17.00%
Source- RBI website

Credit Control Measures

Quantitative
-Bank Rate -Open Mkt. Operations -Variation in C R R -S L R -P L R

Qualitative
-Marginal Requirement -Rationing of Credit -Cost. Credit Regulation -Issue of Directives -Moral Suasion -Publicity -Direct Action

Difference Between Qualitative & Quantitative.

Quantitative
Total Volume or Quantity of Money It controls credit indirectly Lenders are controlled not the borrowers It is known as general credit control Instruments used are bank rate, open mkt. oprt., CRR etc

Qualitative
Quality or use or purpose of credit It controls credit directly Lenders and borrowers both are influenced It is known as selective credit control Instruments are variations in marg req, Consumer credit regl, direct action etc

Difference between Central and Commercial Bank

Central Bank It is apex institution of monetary systems It is owned by government It is non profit org. It is banker and agent to government It controls credit created by commercial banks It has monopoly to note issue It has no competition There is only one central bank in economy

Commercial Bank It is operating as per guideline of central bank It owned by private sector or government It is a profit seeking org. It is banker and agent to public It creates credit It has no power to issue credit There is a competition among themselves. Commercial banks are many in number

Current Focus

Supervision of financial institutions Consolidated accounting Legal issues in bank frauds Divergence in assessments of nonperforming assets and Supervisory rating model for banks.

Source- RBI website

Conclusion

Central bank plays important role in achieving economic growth of a developing country. It promotes economic growth with stability. It helps in attaining full employment of resources, in overcoming balance of payment disequilibrium & in stabilizing exchange rates.

Bibliography

Website : Reserve bank of India Macro-economics TheoryM.L.Jhingan,11 edition, Vrinda Publication pg 317-344 Macroeconomics- Theory & Policy D. N. Dwivedi, Tata McGraw-Hill
th

comp. pg 527-542

Economics Naik & Swaminathan