Role and Functions of RBI with special

focus on monetary policy,

NPA,Management and Supervision of Banks

Participants :
AXIS BANK Nidhi Sharma
ABYB Ram Kumar Barath
BATCH 5th 2017 Saloni Kumari
Ajinkya Joshi
Pankaj Gangwar
Preeti Singh
 Contents Covered
• RBI- Introduction, Roles and Functions.
• Tools used by RBI
• Quantitative Measures
• Qualitative Measures
• NPA-Types, Importance, Symptoms,
Preventive Measures
• Corrective measures by Government on NPA
• Effect of the measures by Government
• RBI NPA recovery Strategy
• Insolvency & Bankruptcy Code 2016
• Recent Updates
 RBI:-RESERVE BANK OF INDIA
• The RBI is India’s central banking institution, which
controls the monetry policy of the indian rupee.
• RBI was founded on 1st april 1935.
• Burma seceded from the Indian Union in 1937 but the
Reserve Bank continued to act as the Central Bank for
Burma till Japanese Occupation of Burma and later
upto April, 1947. After the partition of India, the
Reserve Bank served as the central bank of Pakistan
upto June 1948 when the State Bank of Pakistan
commenced operations.
• The RBI has been fully owned by The Government of
India since it’s nationalization in 1949.

1 –The governor 4 -Deputy

governor

RBI-21
MEMBERS

2-Finance 10-
minister 4-Directors Government
representativ to represent nominated
es local boards directors
ROLES AND FUNCTIONS OF RBI
• Monetary Authority:- Formulates, implements and monitors the
monetary policy.

• Currency Manager:- RBI issues and exchanges currency as well

as destroys currency & coins not fit for circulation to ensure that
the public has adequate quantity of supplies of currency notes and
in good quality.

• Manager of Foreign Exchange:-RBI manages forex under the

FEMA.

• Manage Banking System:-The RBI is responsible for controlling

the overall operations of all banks in India

• Banker:-RBI acts as Banker to banks and Banker to the

government.
 QUANTITATIVE MEASURES

 CASH RESERVE RATIO (CRR) (4%)

• All commercial bank are required to keep a certain amount Of its

deposits in cash with RBI. This percentage is called the Cash Reserve
Ratio.
• To prevent shortage of cash
• To control money supply
• In Contractionary policy the bank raises the CRR
• In Expansionary policy bank reduces the CRR
• A hike in CRR will lead to high interest rate, huge decline in
investment and large reduction in National Income and Employment
 Statutory Liquidity Ratio (SLR)(20%)

• Another kind of reserve, in addition to CRR.

• It’s the proportion of the total deposits which commercial banks are
required to maintain with the central bank in the form of liquid
assets
- Cash reserve, Gold, Government Bonds
• This measure was undertaken to prevent the commercial bank to
liquidate their liquid assets when CRR is raised.

 Repo Rate (6.25%)

• Whenever the banks have any shortage of funds they can borrow it
from RBI.
• Repo rate is the rate at which our banks borrow rupees from RBI.
• A reduction in the repo rate will help banks to get money at a
cheaper rate.
• When the repo rate increases borrowing from RBI becomes more
expensive.
• The repo rate transactions are for very short duration.
• It denotes injection of liquidity.

 Reverse Repo Rate (6.00%)

• A reverse repo rate is the interest rate earned by a bank for lending
money to the RBI in exchange for Government securities.
• Reverse repo is an arrangement where RBI sells the securities to the
bank for a short term on a specified date.
• RBI us his tool when there is to much liquidity in the banking
system.
• Reverse repo rate means absorption of liquidity .
 Bank Rate (6.5%)

• Bank Rate refers to the official interest rate at which RBI will
provide loans to the banking system which includes commercial /
cooperative banks, development banks etc. Such loans are given out
either by direct lending or by rediscounting (buying back) the bills
of commercial banks and treasury bills. Thus, bank rate is also
known as discount rate.
• RBI can change this rate- depending upon expansion or contraction
of credit flow.
• A fall in bank rate- Expansionary Monetary Policy.
• A rise in bank rate- Contractionary Monetary Policy.
  Open Market Operations (OMO)

• RBI sells or buys government securities in open market depend upon-

it wants to increase the liquidity or reduce it.

 RBI sells government securities

• It reduces liquidity (stock of money) in the economy. So overall it
reduces the money supply available with banks, reduces the capital
available for lending and interest rate goes up.

 RBI buys securities

• Increases the money supply available with banks, so interest rate
moves down and business activities like new investments, capacity
expansion goes up.
 QUALITATIVE MEASURES
 Credit rationing

• Shortage of funds, priority and weaker industries get starved of necessary

funds.
• Central bank does credit rationing
• Imposition of upper limits on the credit available to large industries.
• Charging higher interest rates on bank loans beyond a limit.

 Change in lending margins

• Bank provides loan up to a certain percentage of value of mortgaged

property.
• The gap between the value of the mortgaged property and amount
advanced is called as lending margin.
• Central bank has the authority to determine the lending margin with the
view to decrease and increase the bank credit.
 Moral suasion

• It’s psychological instrument of monetary policy.

• Persuading and convincing the commercial bank to advance credit
in accordance with directive of the central bank.
• The central bank uses moral pressure on the commercial bank by
going public on the unhealthy banking practices.

 Direct controls

• Where all the methods become ineffective , central bank gives

clear directives to banks to carry out their lending activity in a
specified manner.
 Introduction To NPA
• Non Performing Asset means an asset or account of borrower,
which has been classified by a bank or financial institution as sub-
standard, doubtful or loss asset, in accordance with the directions
or guidelines relating to asset classification issued by RBI.
 Accordingly, as from that date, a Non performing asset
(NPA) shall be an advance where:
• Interest or instalment of principal remain overdue for a period of
more than 180 days in respect of a Term Loan,
• The account remains 'out of order' for a period of more than 180
days, in respect of an overdraft/ cash Credit(OD/CC),
• The bill remains overdue for a period of more than 180 days in
the case of bills purchased and discounted.
 Types Of NPA
1) Gross NPA:
• It is the sum total of all loan assets that are classified as NPAs as per
RBI guidelines as on Balance Sheet date.
• Gross NPA reflects the quality of the loans made by banks. It consists
of all the nonstandard assets like as sub-standard, doubtful, and loss
assets. It can be calculated as

2) Net NPA:
• It is a type of NPA in which the bank has deducted the provision
regarding NPAs.
• Net NPA shows the actual burden of banks. That is why the
difference between gross and net NPA is quite high. It can be
calculated as
 Reasons for an account becoming NPA
1) Internal Factors:

• Project not completed in time.

• Poor recovery of receivables.
• In-ability of the corporate to raise capital through the issue of equity
or other debt instrument from capital markets.
• Business failures.
2) External Factors:

• Industrial Recession.
• Shortage of raw material, raw material / input price escalation, power
shortage, industrial recession, excess capacity, natural calamities like
floods, accidents.
• Government policies like excise duty changes, Import duty changes
etc.
 Importance of NPA
1)Profitability:

• NPA means booking of money in terms of bad asset, which occurred due
to wrong choice of client.
• Because of the money getting blocked the prodigality of bank decreases
by the amount of NPA.
• Another impact of reduction in profitability is low ROI (Return On
Investment), which adversely affect current earnings of bank.

2) Liquidity:

• Money is getting blocked, decreased profit lead to lack of enough cash at

hand which lead to borrowing money for shortest period of time which
lead to additional cost to the company.
• Difficulty in operating the functions of bank is another cause of NPA
due to lack of money, routine payments and dues.
3) Involvement of Management:

• Time and efforts of management is another indirect cost which bank has to,
bear due to NPA.
• Time and efforts of management in handling and managing NPA would
have diverted to some fruitful activities, which would have given good
returns.
• Now day s banks have special employees to deal and handle NPAs, which
is additional cost to the bank .

4) Credit Loss:

• Bank is facing problem of NPA then it adversely affect the value of bank in
terms of market credit.
• It will lose its goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks .
 Symptoms of NPA
1)Financial
• Non-payment of the very first instalment in case of term loan.
• Irregularity in instalment.
• Irregularity of operations in the accounts.
• Unpaid overdue bills

2) Operational and Physical:

• If information is received that the borrower has either initiated the
process of winding up or are not doing the business.
• External non-controllable factor like natural calamities in the city
where borrower conduct his business.

3) Attitudinal Changes:
• Use for personal comfort, stocks and shares by borrower.
• Avoidance of contact with bank.
• Problem between partners.
 Preventive Measures of NPA

1)Early Recognition of the Problem:

• Invariably, by the time banks start their efforts to get involved in a
revival process, it too late to retrieve the situation- both in terms of
rehabilitation of the project and recovery of bank s dues.

2) Identifying Borrowers with genuine intent :

• Identifying borrowers with genuine intent for those who are non-
serious with no commitment or stake in revival is a challenge
confronting bankers.
• In this regard banks may consider having of all financial transaction or
business transaction, books of account in order to ascertain real factors
that contributed to sickness of the borrower.
3) Timeliness & Adequacy of response:
• Longer the delay in response, grater the injury to the account and the
asset. Time is a crucial element in any restructuring or rehabilitation
activity.
• The response decided on the basis of techno-economic study and
promoter s commitment, has to be adequate in terms of extend of
additional funding and relaxations etc.

4) Multiple Financing:
• During the exercise for assessment of viability and restructuring, a
Pragmatic and unified approach by all the lending banks / FIs as also
sharing of all relevant information on the borrower would go a long
way toward overall success of rehabilitation exercise, given the
probability of success/failure.
 Corrective measures by Government
BUDGET SESSION
• The increased provisioning of Non-
Performing Assets (NPAs) of banks proposed
in the budget

• Increase allowable provision for Non-

Performing Asset of banks from 7.5 per cent
to 8.5 per cent.

• Interest taxable on actual receipt instead of

accrual basis in respect of NPA accounts of
all non-scheduled cooperative banks also to
be treated at par with scheduled banks.
 Corrective measures by Government
• Though the reform proposals underlying
Indradhanush for the public sector banks (PSBs)
were announced in August 2015, few tangible steps
have been taken since then.

• Board governance remains weak even though non-

performing assets (NSAs) are rising alarmingly

• The committee also proposed that the government

distance itself from several bank governance
functions by setting up a Bank Investment
Company (BIC) to transfers GoI’s holdings in
banks.
 Effect of the measures taken by GOI
• The Budget missed the opportunity to clean up the banking
sector.

• First, there was no mention of a ‘bad bank’

• The attempt to bring more capital into asset reconstruction

companies (ARCs) by allowing more foreign domestic
investment has not worked, and is unlikely to work. PSBs are
unwilling to sell their NPAs at the discounts mandated, given the
quality of such assets.

• Second, the setting up of the BIC requires legislative reform,

including the modifications of the Bank Nationalisation Act and
the Banking Regulation Act.
 Effect of the measures taken by GOI

• Third, little is known about what the BBB has done since it
was set up. The process of recruitment of PSB chairmen and
board members continues to muddle through as before. This
process of initiating the cleaning up of governance of PSBs is
a full-time job that can ill afford the distractions of batting as
a night watchman.

• Finally, historically, a large influx of deposits into the PSBs

has led to another round of indiscriminate lending and
eventual NPAs and stress in the banking system.
Five ways government, RBI trying to speed up NPA recovery

• Amendment in banking law

to give RBI more powers
• Stringent NPA recovery
rules
• RBI’s loan restructuring
schemes
• Present NPA scenario
• Banks may need to take
a “hair cut”
 Insolvency & Bankruptcy Code (IBC),2016.
• The government brought in an ordinance giving wide-ranging
legislative powers to the Reserve Bank to fight NPAs.

• The ordinance authorizes RBI to issue directions to any bank to

initiate insolvency resolution process in the event of a default
under the provisions of the Insolvency and Bankruptcy Code
(IBC), 2016.

• As per some estimates, banks are sitting on unrecognized

stressed loans worth Rs 7.7 lakh crore in corporate and SME
sectors and expect around 35 per cent of them to slip into the
NPA category in the next 12-18 months.

• There is a likelihood of Rs 2.6 lakh crore of corporate and SME

loans, which are 3.2 per cent of total bank credit to be recognized
as stressed loans by 2019.

• Stressed loans include restructured assets that carry the risk of

turning into NPAs .
 Recent Updates
• Financial Stability Report
• Gross non-performing assets (NPAs) rose from
9.2% in September 2016 to 9.6% in March 2017.
• Stress tests conducted by the Indian central bank
indicate that this number could rise to 10.2%
under the baseline scenario.
• The situation in public sector banks is especially
worrisome.
• The new strategy of focusing on large defaulters
makes good strategic sense which says 56% of the
loans given out by Indian banks have gone to large
borrowers—but they account for a massive 86%
of gross NPAs.
• The RBI has already identified 12 big accounts for
quick resolution, under the powers given to it by
the recent presidential ordinance
 Recent updates
• Lenders have approached the National
Company Law Tribunal in at least two of
the 12 accounts identified by the RBI.

• What happens in the months ahead will be

watched with interest—especially as a test
case for the new bankruptcy process, which
is as yet untested.

• The recent moves to take large defaulters

towards insolvency proceedings shows that
some firm action is finally being taken.
 Conclusion
A banking clean-up plus corporate deleveraging are
critical for a more robust economic revival led by
investment rather than just consumption.