Finance –RBI Grade B ( Notes by GS )

Table of Contents
Finance –RBI Grade B ( Notes by GS ).........................................................................................................1
Regulatory Bodies....................................................................................................................................2
Reserve Bank Of India ( RBI )..............................................................................................................2
Origins of RBI.......................................................................................................................................2
Organization structure.........................................................................................................................2
Board for Financial Supervision ( BFS )................................................................................................2
Approach/Models used for supervision...............................................................................................2
Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)............................3
Subsidiaries of RBI...............................................................................................................................3
Functions of RBI...................................................................................................................................4
Payment Systems.................................................................................................................................7
Regulatory Bodies
Reserve Bank Of India ( RBI )
Origins of RBI
1926  1927  1933 1934  1935  1949

 1926 ( Hilton Young Commission recommended creation of Central bank )

 1927 (Bill to establish the RBI introduced in Legislative Assembly)
 1933 ( White paper on Indian constitutional reforms proposed the establishment of RBI,
accordingly new bill introduced in LA )
 1934 ( Bill passed and RBI Act enacted )
 1935 ( Jan 1, RBI Act came into force, April 1 commenced it’s operation )
 1949 ( RBI Nationalised )

Organization structure
CBD( 14 )  Governor  Deputy Governors  ED Principal Chief GM  Chief GM  Deputy GM 
Asstt. GM  Managers  Asst. Managers  Support Staff

Current Governor: Shaktikanta Das. 4 Deputy Governors are: M Rajeshwar Rao, T Rabi Sankar,
Swaminathan Janakiraman, MD Patra.

RBI has 4 zonal offices ( Mumbai, Kolkata, Chennai, Delhi ) and 28 regional offices

Board for Financial Supervision ( BFS )

 1993  DBOD ( Department of banking operations and development ) did regulatory +
supervisory. Later DBS ( Department of Banking supervision ) setup for dedicated supervisory
functions for commercial banks.
 1994  BFS for dedicated and integrated supervision over all credit institution was setup.
 1997  BFS  ( DBS + DNBS )
 2019 BFS  ( Department of supervision ( DoS))

Approach/Models used for supervision

 The supervisory approach adopted by a country is a function of the stage of development of its
financial system and the size and complexity of the banking system.
 The Core Principles for Effective Banking Supervision issued by the Basel Committee on Banking
Supervision(BCBS) provides the broad framework for supervision.
  On-Site inspection based on CAMELS ( Capital Adequacy, Asset quality, Management, Earnings,
Liquidity, and Sensitivity to market risk )
 Domestic banks rated based on CAMELS, foreign banks rated on CALCS (Capital Adequacy, Asset
quality, Liquidity, Compliance, and Systems)
 After 2008 financial crisis, Risk Based Supervisory ( RBS ) was adopted under the chairmanship of
former Deputy Governor K.C. Chakrabarty, called SPARC ( Supervisory Program for Assessment
of Risk and Capital)

Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)
 The Board for Regulation and Supervision of Payment and Settlement Systems provides an
oversight and direction for policy initiatives on payment and settlement systems within the
country.
 The Reserve Bank Governor is the Chairman of the BPSS.

Subsidiaries of RBI
Deposit Insurance and credit Guarantee Corporation (DICGC)

 Concept for insuring deposits with banks came in 1948 after the banking crisis in Bengal.
 Deposit Insurance Act, 1961 came into force on January 1, 1962
 1968  Deposit Insurance Corporation ( DIC )(Amendment) Act was enacted.
 RBI promoted a public limited company on Jan 14, 1971, named the Credit Guarantee
Corporation of India Ltd. ( CGCI ).
 Integrated DIC and CGCI, were merged to create DICGC, 1978.
 It is wholly owned subsidiaries of RBI
 Banks covered by Deposit Insurance Scheme  All commercial banks including foreign banks
functioning in India, Eligible Co-operative banks as defined in section 2 (gg) of the DICGC Act.
 Insurance coverage :
o Initially 1500 per depositor
o 5000 – 1 Jan 1968
o 10000 – 1 April 1970
o 20000 – 1 Jan 1976
o 30000 – 1 July 1980
o 1 lakhs – 1 May 1993
o 5 lakhs – budget 2020-21

Bharatiya Reserve Bank Note Mudran Private Limited ( BRBNMPL - 1995)

 Registered as private limited company under Companies Act, 1956

 It manages two presses : Mysore in Karnataka and Salboni in WB.

Reserve Bank Information Technology Private Limited (ReBIT - 2016)

 Deliver and manages IT projects of RBI, Assist RBI for RBS through security audits and incident
analysis. Improve cyber resilience and build innovative technology solutions through
collaboration with the stakeholders.
  Safeguard RBI assets by detecting and responding to cyber-threats through architecting and
operating state-of the art security infrastructure and services

Indian Financial Technology and Allied Services ( IFTAS – Wholly owned subsidiary of RBI )

 It’s core competencies are :

o Manage and operate financial messaging platform ( SFMS )
 Structured financial messaging system
 Real Time Gross Settlement ( RTGS )
 National Electronic Funds Transfer ( NEFT )
o Indian Financial Network ( INFINET ) : membership only closed user group comprising of
RBI, Member banks and Financial institutions.
o Indian Banking Community Cloud ( IBCC ) - a unique Community Cloud Computing
ecosystem that is fully dedicated to the banking and financial services community. This
subscription model allows newer and emerging banks to save on setting up IT
infrastructure costs and use only the services that they immediately require
o GOLD STORE : cloud for storage, retrieval and sharing of files.
o Global interchange for financial transaction ( GIFT ) – Integrated payment and
settlement system for inter-bank transactions.

Reserve Bank Innovation Hub ( RBIH )

 Setup as a section 8 company under Companies Act, 2013 with initial contribution of 100 crore
to promote and facilitate an environment that accelerates innovation across the financial sector.
 Governor of RBI inaugurated RBIH on 24 March, 2022 in Bengaluru.
 RBIH has independent board with Shri. Senapathy “Kris” Gopalakrishnan as Chairman.
 RBIH motto : Innovation, Inclusion, Impact

Functions of RBI
Monetary Policy

It is the action of RBI that determines the size and rate of growth of money supply, which in turn affects
interest rates. It’s objective is to maintain equilibrium of supply and demand of Money.

Monetary Policy Types( MP ):

 Expansionary ( Easy MP) Increase money supply lower unemployment boost consumer
spending.
 Contractionary decreases the money supply to control inflation.

Factors affecting success of monetary policy:

 Operating target ( Shifted from broad money (M3) to multiple indicator to inflation indicator )
 Monetary policy instruments
o CRR, SLR
 o 1990 : RBI restructured operating framework to rely more on OMO ( Open market
operations )

2000 : RBI instituted LAF ( Liquidity Adjustment facility) to manage day-to-day liquidity.
o
 Repo rate and reverse repo rate
o 2004: MSS ( Market stabilization scheme )  Manage excess liquidity due to foreign
capital.
 Monetary policy transmission
o Interest rate channel
o Credit channel
o Exchange rate channel
o Asset price channel

Monetary Policy Instruments:

Quantitative: Repo rate, reverse Repo rate, LAF, Marginal standing facility ( MSF ), Policy Corridor,
Standing deposit facility, Bank rate, CRR, SLR, OMO, MSS.

Qualitative:

 Margin requirement: difference of collateral value and Loan granted.

 Regulation of consumer credit control ( EMI, down payment, installment and loan period all are
pre-determined)
 Moral suasion
 Direct Action ( Against non-compliance of any rules and regulations)
 Credit Rationing ( limit maximum amount of loans and advances )

Unconventional Monetary Policy measures

Usually happens to deal with adversities like corona outbreak.

 Quantitative Easing : asset purchase program of central bank

 Forward Guidance: influence future financial decisions of households
 Operation Twist
 Targeted long term repo Operations ( LTRO )

Monetary Policy Committee ( MPC )

Six- Member, 3-internal and 3 external, constituted on Sep 29, 2016 to determine the policy rate to
achieve inflation target. It’s headed by Governor.

Functions:

 Contain inflation target 4 +/- 2 %

 Central govt. decide inflation target in terms of Consumer price index (CPI) every 5 years in
consultation with the RBI.
 RBI is mandated to publish Monetary policy statement every 2 months explaining the sources of
inflation and forecast of inflation for the coming 6-18 months.
Currency Management

Demonetization: 1946, 1978, 2016

Currency chest : total 3054 all over the country.

Payment Systems
Payment and Settlement Systems Act, 2007 (came into force 12 August 2008)

 PSS Act, 2007 regulates and supervises the payment systems in India. RBI is designated as the
authority for that purpose.
 Board for Regulation and supervision of Payment and settlement Systems (BPSS) is constituted
by RBI.
 The Act provides legal basis for “netting” and “settlement finality”. In India other than RTGS, all
other payment system functions on net settlement basis.
 Netting and Settlement
o Netting:
 Netting offsets values of multiple positions/payments between parties.
 Used to determine owed remuneration in multiparty agreements.
o Settlement Finality:
 Protects payments "in transit" from insolvency of financial institutions.
 Governed by relevant Settlement Finality Regulations.

Financial Market Infrastructure (FMI)

 Financial Market Infrastructure (FMI) is defined as a multilateral system among participating

institutions, including the operator of the system, used for the purposes of clearing, settling, or
recording payments, securities, derivatives, or other financial transactions.
 Foreign FMI can also start operations in India as per PSS Act 2007.

Other guidelines under PSS Act 2007

 Section 24 settlement of dispute between system participants

 Section 25discourage dishonor of electronic payment instructions

Oversight of Payment and Settlement systems

 It is a central bank function. It helps to maintain systemic stability and reduce systemic risk, and
to maintain public confidence in payment and settlement systems.

Pre-Paid Payment Instruments:

Any company incorporated and registered under companies Act 2013 can issue PPIs with permission
from RBI.

PPIs of two types:

 Small PPIs
o Used only for purchase of goods and services
o Max debit 10000 per month, Max outstanding 10000 at any point of time
o Fund transfer not permitted
 Full-KYC PPIs
 o Purchase goods and services + cash withdrawal + fund transfer
o Max outstanding 2 lakhs at any point of time
o No monthly cap for debit and credit.
o Fund transfer: Max 10000 per month per holder but if the beneficiary is pre-registered
by PPI holder Max limit is 2 lakhs.
 Other types of PPIs:
o GIFT PPIs (Max limit 10000)
o PPIs for Mass Transit Systems (PPI-MTS)
 Interoperability in PPIs
o Allowed only for full-KYC PPIs
o It has been allowed since 2018 and it has been mandatory since 2021
 Cross-border transactions [ Need to Revisit ]

Retail Payment Systems

 Paper-based payments
o Accounts for 60% of the volume of total non-cash transactions in the country
o In value terms it is 11%
o Magnetic Ink Character Recognition (MICR) introduce for fast processing of cheques.
 Electronic systems
o RTGS
 Implemented by RBI in 2004
 RBI implemented Next Generation RTGS (NG-RTGS) in 2013 with advance
features.
o NEFT
 Implemented in 2005 as more secure and facilitating 1-to-1 fund transfer
 From 16-December, 2019 NEFT has become 24x7 system
 From 1st Jan, 2020 processing charges not applicable in NEFT and RTGS
o Immediate Payment System (IMS)
 Launched in 2010, 24x7, designed for mobile users, use MMID(Mobile
money identifier, 7 digit) for transfers
 Card-based systems
o RuPay Card Network (launched by NPCI)
o National Common Mobility Card (NCMC)
 By Ministry of housing and urban affairs of Govt. of India
 Mobile based systems
o Operating guidelines for Mobile banking for banks by RBI in October 2008.
o Unified Payments Interface (UPI-BHIM app by NPCI)
o USSD(*99#)[NPCI launched NUUP(National unified USSD Platform)]
 Bulk Clearing
o Electronic clearing service (ECS) : 1990s, for Salary ,Interest, repetitive payments
o National Electronic clearing service (NECS) : Sep 2008
o National Automated Clearing House (NACH)
 Other Payment and settlement systems
 o ATMs/Point of Sale (POS) Terminals
o White label ATMs (non-Bank ATMs)
o Bharat Bill Payment Systems (BBPS)
o Trade receivables Discounting System (TReDS)
 The objective of the TReDS is to facilitate financing of invoices / bills of
MSMEs adrawn on corporate buyers by way of discounting by financiers

Clearing Corporation of India (CCIL)