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BBA 302
Banking and Business Environment
UNIT 5 & 6 Notes
Reserve Bank of India
➢ RBI is the Central Bank of the Country
➢ RBI was Established in 1 April 1935 under (RBI ACT 1934)
➢ Government Established RBI under Recommendation of Hilton Young
Committee
➢ RBI was Nationalized on 1 January 1949
➢ Governor is the Head of RBI
➢ Financial year of RBI is from 1st July to 30th June
Functions of RBI
➢ It is the only currency authority in India.
➢ It is the Government’s Bank
➢ All financial transactions of the government are undertaken through the RBI
➢ It is Bankers Bank – Commercial banks have to keep reserves in RBI and RBI
lends money to banks
➢ RBI is known as lender of the Last Resort
➢ It provides clearing house facility to banks – settlements of claims of one
bank on other banks is done by RBI by the means of following facilities: -
o NEFT (National Electronic Funds Transfer)
o RTGS (Real Time Gross Settlement System)
➢ Supervisor of Banks and Non-banking finance institutions
➢ Custodian of Foreign Exchange reserves
Organizational Structure of RBI

RBI has a central board of directors. It is the main governing body of RBI. It
consists of: -

➢ One governor which is appointed by the government of India.

➢ Four deputy governor comes under the governor.
➢ One is the chairperson of public sector bank.
 ➢ Second is the chairperson of RBI
➢ Third is economists.
➢ Last is a banker of repute.
➢ It has four more directors representing the regional boards at Mumbai,
Chennai, Kolkata, and Delhi.
➢ One representative from the finance ministry. It has 10 government-
nominated directors representing various fields of economy.

Thus, there are twenty persons in the central board. The organizational
structure of the Reserve Bank of India is as under:

Monetary Policy
➢ It is a set of actions taken by a country's central bank to manage the
money supply and control interest rates.
➢ The goal of monetary policy is to achieve price stability, full employment,
and stable economic growth.
Instruments of Monetary Policy
➢ Also known as Credit Control measures or Monetary Policy Measures
➢ Broadly classified into two types: -
o Quantitative or General Measures
o Qualitative or Selective Measures

Quantitative Measures
1. Cash Reserve Ratio (CRR)
• Percentage of bank deposits which the bank has to keep with RBI
2. Statutory Liquidity Ratio (SLR)
• Percentage of bank deposits which the bank has to keep with itself
• Cash
• Government Securities
• Gold
3. Bank Rate
• Rate of interest at which RBI provides rediscounting facilities to Banks
against their first-class security
• Commercial Paper is a First-Class Security
4. Open Market Operations (OMO)
• It is done by buying and selling Government Securities
• This is done by an auction process
• Another component of OMO is Liquidity Adjustment Facility.
• This is used to regulate the money supply in the country
• LAF is done by – Repo and Reverse Repo Rate
 ✓ Repo Rate – RBI lends money to Banks by buying government securities
• RBI only fixes Repo rate, Reverse Repo is automatically adjusted to 1%
point below the Repo rate.
• E.g. – If Repo Rate is changed to 8% Reverse Repo Rate will be
automatically adjusted to 7%
✓ Reverse Repo Rate – At this rate banks buy government securities from RBI

5. Marginal Standing Facility (MSF)

o Banks can borrow loan up to 1% on their deposits.
o Interests will be 1% point above Repo Rate and it will be based on day-
to-day basis.
o This facility is created to facilitate borrowing from RBI by banks who do
not haven extra government securities and pledging the existing
securities will affect their SLR requirements of 23%.
o Objective was to overcome liquidity crunch with banks i.e., shortage of
funds.
Qualitative Measures
1. Credit Rationing
o Quota of credit, i.e., priority sector to get 40% of total credit.
o Priority sector includes: -
• Agricultural Sector (18% of total credit)
• Weaker Sections
• Small Scale Industry
o For Foreign banks priority sector cap is 32% of total credit
• Priority sector includes Exports, Small Scale Industries, Housing Sector,
Education Loan
2. Margin Requirements - Difference between the market value of a collateral
security and the maximum
amount of loan sanctioned against that security by a bank in a particular sector
3. Differential Rate of Interest - Different rate of interest for different sectors to
increase the flow of credit to those sectors like agriculture sector, small scale
industries
4. Other Measures
o Moral Suasion - It is a method of persuasion that uses verbal arguments and
appeals to morality to convince people to act in a certain way. It's often used
by governments, non-profits, and environmental campaigns to address
global challenges.
o Direct Action like Penalty or Sanctions

Commercial Banks
Commercial Banks (CBs), as a significant part of the Banking System in India, play
a pivotal role in the Indian financial sector. They are the backbone of the
economy, providing the financial resources necessary for growth and
development.
What are Commercial Banks?

• Commercial Banks (CBs) refer to those banks under the Banking System in
India that run on a commercial basis. It means that they operate and offer
services to earn a profit.
• They are regulated under the Banking Regulation Act, 1949.

Structure of Commercial Banks in India

As per the current structure of Commercial Banks in India, they are divided into
two categories:
Scheduled Commercial Banks (SCBs)
SCBs refer to those Commercial Banks under the Banking System in India that
are listed in the 2nd Schedule of the Reserve Bank of India Act, 1934 (RBI Act,
1934).

Non-Scheduled Commercial Banks (NSCBs)

NSCBs refer to those that don’t meet the criteria to be included in the 2nd
Schedule of the Reserve Bank of India Act, 1934 (RBI Act, 1934). Being excluded
from the schedule means they operate under a different set of regulations as
compared to SCBs.

Difference between Scheduled Commercial Banks and Non-Scheduled

Commercial Banks
Basis of Scheduled Commercial Banks Non-Scheduled Commercial Banks
Difference (SCBs) (NSBCs)

Listed in the second schedule of the Not mentioned in the second

Meaning
RBI Act 1934. schedule of the RBI Act 1934.
– Should have a paid-up capital of
`5 lakhs or more.
– Have to ensure that its affairs are
Criteria – No fixed criteria as such.
not conducted in a manner
detrimental to the interest of its
depositors.
Regulatory – Have to keep CRR deposits with – Have to maintain CRR deposits with
Requirements the Reserve Bank of India. themselves.
 Basis of Scheduled Commercial Banks Non-Scheduled Commercial Banks
Difference (SCBs) (NSBCs)
– Required to file their returns on a – No requirements for filing
periodic basis. returns as such.

– Usually, not authorized to borrow

– Authorized to borrow funds from funds from the RBI. However, they
the RBI. can borrow from the RBI under
– Can apply to join the emergency conditions.
Rights Available clearinghouse. – Not eligible for membership in the
– Can avail of the facility of clearinghouse.
rediscount of first-class exchange – Facility of rediscounting exchange
bills from RBI. bills from RBI is not available for
them.

– They are financially stable and are

– These banks are riskier to do
Risk unlikely to hurt the rights of the
business.
depositors.

– Most of the Commercial Banks

under the Banking System in India – As of now, there are no NSCB under
Examples
are SCBs. For example, State Bank the Banking System in India.
of India (SBI), HDFC Bank, etc.
Types of Scheduled Commercial Banks (SCBs)

There are various types of SCBs in India, as can be seen as follows.

 Types of Scheduled
Commercial Banks Majority Shareholder(s) Example(s)
(SCBs)
Public Sector Banks SBI, PNB, Canara Bank, Bank of
Government of India
(PSBs) Baroda, Bank of India, etc.
ICICI Bank, HDFC Bank, Axis
Private Sector Banks Private Individuals Bank, Kotak Mahindra Bank,
Yes Bank etc.

Standard Chartered Bank, Citi

Foreign Banks Foreign Entities Bank, HSBC, Deutsche Bank,
BNP Paribas, etc.
Central Government, Concerned Andhra Pradesh Grameen Vikas
Regional Rural Banks
State Government, and Sponsor Bank, Uttaranchal Gramin Bank,
(RRBs)
Bank in the ratio of 50:15:35 Prathama Bank, etc.

Importance of Commercial Banks in India

Commercial Banks in India perform several critical functions in the Indian

Financial System, which makes them significant for the Indian economy. Some of
their crucial functions and significance can be seen as follows:

• Accepting Deposits: They accept various types of deposits from the public
which form the main source of funds.
• Providing Loans and Advances: Banks are the primary source of funds for
personal finance, agriculture, industrial sectors, and other economic
activities through loans and credit facilities.
• Financial Intermediation: They facilitate financial mobility by mobilizing
savings from depositors to borrowers, thereby enhancing economic
efficiency.
• Financial Inclusion: As the largest category of banking networks in India,
they cater to the maximum number of banking customers in India. This aids
the cause of Financial Inclusion in India.
 • Promotion of Digital Economy: They also provide sophisticated digital
banking services that include mobile banking, internet banking, etc. This
helps in the promotion of the Digital Economy and makes financial
transactions seamless and more accessible to the general public.

Various types of Commercial Banks in India not only support economic growth but
also play a significant role in social transformation by promoting financial
inclusion. As they continue to evolve, these institutions will remain central to the
economic narrative of India, driving future development and fostering a more
inclusive economic environment.

Causes of Commercial Bank failures in India

Commercial bank failures in India stem from various factors, often intertwined,
which can impact their stability and profitability. Here are some key causes:

1. Poor Asset Quality and Non-Performing Assets (NPAs) - Non-performing assets

are a major cause of bank failure in India. When loans are not repaid, banks face
heavy losses. Sectors such as infrastructure, telecom, and steel often contribute
heavily to NPAs, especially when they encounter downturns.

2. Lack of Effective Risk Management - Inefficient risk management practices, such

as inadequate credit assessments or failure to diversify risk, increase the likelihood
of default. Some banks may grant loans to high-risk borrowers without sufficient
due diligence.

3. Governance Issues and Fraud - Weak internal governance, lack of transparency,

and even fraudulent activities are prevalent issues. Frauds such as loan scams and
manipulation of bank records significantly impact the financial health of banks.

4. Weak Capital Base - Banks with low capital adequacy ratios may face solvency
issues. This occurs when banks cannot maintain a sufficient capital buffer to absorb
losses, making them more vulnerable to financial distress.

5. Excessive Exposure to Certain Sectors - Overexposure to certain high-risk

sectors, such as real estate or infrastructure, without adequate safeguards, can
increase banks' vulnerability. Sector-specific downturns can lead to increased NPAs
and financial instability.
6. Macroeconomic Conditions - Economic slowdowns, global financial crises, or
events like COVID-19 can affect the banking sector by reducing loan repayments,
diminishing demand for loans, and affecting overall profitability.

7. Interest Rate Volatility - Fluctuations in interest rates affect a bank’s margins.

Sudden hikes or reductions can impact the repayment capacity of borrowers,
especially in cases of floating interest rates, further affecting the banks' liquidity
and profitability.

8. Lack of Innovation and Digital Adaptation - In an increasingly digital world,

banks that fail to innovate or adopt new technology may fall behind. Fintech
companies and digital wallets pose stiff competition, especially for banks that rely
on traditional methods and fail to keep up with digital advancements.

9. Political and Policy Interference - Government mandates, such as lending to

priority sectors or other policy-directed loans, can increase the risk profile of banks,
especially when political motives take precedence over financial prudence.

10. Inadequate Regulatory Oversight - Sometimes regulatory authorities may not

have stringent oversight, especially in cases of large-scale fraud or
mismanagement. The lack of robust supervision can enable unchecked risk-taking
behaviors within banks.

To address these challenges, Indian banks need stronger regulatory frameworks,

better governance, effective risk management, and a shift towards digital
transformation to remain resilient and competitive.

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Unnati Agarwal
(Assistant Professor)