CU-BBA-SEM-III-Banking- Second Draft-converted

c) Land development banks, which provide long-term agricultural credit. Such a banking framework is necessary and ideally suited to effectively meeting the financial needs of the country's large rural areas. Given the importance of cooperative banks, particularly in rural areas, it is unsurprising that every committee or commission that has looked into the cooperative banking system in India has come to the conclusion that “cooperation remains the best hope of rural India.” 2.12 WEAKNESS OF COOPERATIVE BANKING Various boards, commissions, and individual studies that have looked into the workings of India's cooperative banking system have identified a variety of flaws and made recommendations to strengthen the system. The following are the major flaws: General Weaknesses of Primary Credit Societies: The ability of primary credit societies to provide sufficient credit to the rural population is severely limited due to organizational and financial constraints. The All India Rural Credit Review Committee identified the following primary credit societies' flaws: (a) Cooperative credit only accounts for a small portion of farmers' overall borrowings. (b) Tenants' and small-scale farmers' needs are not completely met. (c) A growing number of primary credit societies are financially distressed and unable to meet production-oriented credit requirements. (d) At all stages, overdues are rising alarmingly. (e) Primary credit societies have failed to provide sufficient and timely credit to borrowing farmers. Inadequate Coverage: Despite the fact that the cooperatives now cover almost all of the country's rural areas, only about 45 percent of rural households are members. As a result, the cooperative credit scheme also does not cover 55% of rural households. In reality, primary credit societies' borrowing membership is extremely restricted, confined to a few states such as Maharashtra, Gujarat, Punjab, Haryana, and Tamil Nadu, as well as relatively wealthy landowners. The following are some of the criteria used to determine borrowing membership: 51 CU IDOL SELF LEARNING MATERIAL (SLM)

(a) The proportion of rural households with borrowing members, (b) The average amount of money borrowed by each borrower, and (c) The percentage of loans that go to the poorer parts of the population. The following are the reasons for the low borrowing membership cooperative societies, according to the Banking Commission of 1972: a) People's inability to provide the required security; b) A lack of current land records; c) Loan ineligibility for some purposes; d) Inadequacy of credit limits prescribed; e) Onerous loan terms, such as share capital contributions of 10% or 20% of unpaid loans and mandatory savings deposits; and (f) Members' failure to repay loans. Inefficient Societies: Despite the fact that most states' primary agricultural credit societies have been reorganized into viable units, their loaning sector has remained stagnant. According to the Seventh Plan, only 66000 of the country's 94089 primary agricultural credit societies had full-time paid secretaries in 1982-83. Around 34000 communities were losing money. Problem of Overdues: The unpaid loans of cooperative institutions, which have been steadily growing over the years, are a serious problem in cooperative credit. In 1991-92, land development banks had a percentage of overdues to demand of 57 percent, central cooperative banks had a percentage of 41 percent, and primary agricultural credit societies had a percentage of 39 percent. In the North-Eastern States, overdues in the short-term credit structure are particularly concerning. Overdues have nearly crippled land development banks in nine states, including Maharashtra, Gujarat, Madhya Pradesh, Bihar, Karnataka, Assam, West Bengal, Orissa, and Tamil Nadu, in the long-term lending market. Large amounts of past dues obstruct the redistribution of funds and have a negative impact on cooperative societies' lending and borrowing ability. The Banking Commission of 1972 identified the following factors as contributing to past-due loans: (a) Poor or indifferent control of primary societies 52 CU IDOL SELF LEARNING MATERIAL (SLM)

(b) Inadequate lending practices that result in excessive lending or lending that is unrelated to real needs, as well as loan diversions for other purposes. c) In society, vested interests and party dynamics, as well as willful defaulters (d) Inadequate loan oversight and ineffective rehabilitation efforts e) Inadequate supervision of primary societies by central cooperative banks f) Inadequate communication between credit and marketing institutions g) The failure to act quickly against willful defaulters and (h) Farm prices that are uncertain. Regional Disparities: There have been significant geographical differences in cooperative credit distribution. The eight states of Andhra Pradesh, Gujarat, Haryana, Kerala, Madhya Pradesh, Maharashtra, Punjab, and Rajasthan account for around 80% of the total credit disbursed under the Seventh Plan. Short-term credit per hectare disbursed ranged from Rs. 4 in Assam to Rs. 718 in Kerala. Benefits to Big Land Owners: Because of their strong socioeconomic status, the large landowners have covered the majority of the cooperative benefits. In 1984-85, for example, farmers with holdings of less than two hectares received just 38.8% of total loans from primary agricultural credit societies, whereas landowners with holdings of more than two hectares received 55%. The poorest rural population (tenants, sharecroppers, and landless labourers) accounted for just 6.2 percent of the total. Lack of Other Facilities: Small and marginal farmers need additional resources such as input supply (better seeds, fertilizers, pesticides, etc.), extension, and marketing services in addition to sufficient and timely credit. They will be able to properly use the borrowed credit with the help of these facilities. Credit unions should be reorganized into multi-purpose cooperatives as a result. 2.13 RESERVE BANK AND COOPERATIVE BANKING Since its inception in 1935, the Reserve Bank of India has had a special obligation to strengthen the cooperative credit movement. 53 CU IDOL SELF LEARNING MATERIAL (SLM)

The Reserve Bank has taken the following steps to improve the cooperative banking system and promote cooperative finance in the country: Agricultural Credit Department: The Reserve Bank has its own Agricultural Credit Department, which has the following responsibilities: (i) To have an expert team on hand to research all aspects of agricultural credit and to be available for consultation by the federal and state governments, state cooperative banks, and other banking institutions; and (ii) To coordinate the Reserve Bank's activities in relation to agricultural credit, as well as ties with state cooperative banks and other agricultural credit-related institutions. All-India Rural Credit Survey: The appointment of the All-India Rural Credit Survey Committee by the Reserve Bank in 1951 marked the beginning of the Reserve Bank's real involvement in the cooperative credit movement. The aim of this committee was to research rural credit issues and look into the possibility of extending agricultural credit through a cooperative credit system. In December 1954, the committee issued a report emphasizing the critical value of cooperative rural credit. While private credit institutions, such as money lenders and traders, provide 70% of rural credit, cooperative societies only provide 3% of the total borrowed volume, according to the Committee. The Committee found that rural credit in India was insufficient in quantity, was of poor quality, did not serve the intended purpose, and often did not reach the intended recipients. “Cooperation had failed, but cooperation would succeed,” the committee said of the future of cooperative credit. Integrated Scheme of Rural Credit: The Survey Committee recommended an integrated scheme of rural credit based on the following fundamental principles for the success of the cooperative credit movement: (a) State partnership in cooperative credit institutions; (b) Full coordination between credit and other agricultural activities, especially marketing and processing; and (c) Administration through adequately trained and efficient personnel. Provision of Finance: The Reserve Bank has been involved in assisting the cooperative system to expand rural credit in response to the recommendations of the Survey Committee and later committees 54 CU IDOL SELF LEARNING MATERIAL (SLM)

such as the Committee on Cooperative Credit (1960). Agriculturists are not directly financed by the Reserve Bank; instead, they are financed by the cooperative sector. The Reserve Bank of Australia lends money to meet short-, medium-, and long-term rural needs. The requirements are as follows: (i) Short-Term Finance: The Reserve Bank provides state cooperative banks with short-term financing in two ways: (a) With the aid of loans and advances (b) Using a rediscounting service. Financial assistance is given for seasonal agricultural operations as well as crop marketing. The Reserve Bank approved Rs. 7.6 crore in short-term credit in 1950-51. In 1960-61, the number was Rs. 147 crores, and in 1981-82, it was Rs. 1090 crores. (ii) Medium-Term Finance: The Reserve Bank lends state cooperative banks medium-term loans, usually for 3 to 5 years. These loans are for: (a) Land improvements such as bunding, well drilling, and water channel building; (b) Well repair and other irrigational schemes; (c) Livestock, equipment, and machinery purchases; and (d) Farmhouse and cattle shed construction. In areas where there is a lack of resources, the Reserve Bank also offers medium-term loans. The Reserve Bank's medium-term loan portfolio has grown significantly over the years, from Rs. 27 lakhs in 1954-55 to Rs. 24 crores in 1970-71 and Rs. 110 crores in 1981-82. (iii) Long-Term Finance: Agriculture receives long-term financial assistance from the Reserve Bank in three forms for a duration of 20 years: (a) It purchases a part of the land development banks' debentures. (b) It provides those banks with long-term loans. (c) It provides loans to state governments for the purpose of subscribing to cooperative credit institutions' share capital. In 1981-82, the Reserve Bank approved a total of Rs. 212 crores in long-term loans. Setting Up of Funds: 55 CU IDOL SELF LEARNING MATERIAL (SLM)

The Reserve Bank established two national funds in 1956 to fulfil its financial obligations: the National Agricultural Credit (Long-Term Operations) Funds and the National Agricultural Credit (Stabilization) Fund. The Long-Term Operations Funds were created with the following goals in mind: (a) To make long-term loans available to state governments in order for them to contribute to cooperative credit institutions' share capital; b) To provide state cooperative banks with medium-term loans for agricultural purposes; c) To make long-term loans to central land mortgage banks with the state government as a guarantee; and (d) To buy debentures issued by central land mortgage banks with the state government as a guarantee. In the event of a draught, drought, or other disaster, the Stabilization Fund assists state cooperative banks in converting short-term loans into medium-term loans. Strengthening of Cooperative Banking Structure: The Reserve Bank is taking the following steps to improve the cooperative banking system and foster cooperative credit: (i) It focuses on rehabilitating and revitalizing the cooperative units that are in need. (ii) It decides to keep cooperative credit flowing by involving commercial banks in the financing of primary agricultural societies. (iii) It works to improve cooperative credit institutions' lending practices and operational performance. (iv) It helps mutual lending unions with their finances. (v) It offers special training courses for employees of federal, local, and urban banks at the Cooperative Bankers' Training Colleges. 2.14 ADVANTAGES OF COOPERATIVE BANKING • Cooperative Banking is a viable alternative to the village money lender's conventional flawed credit scheme. • It offers low-cost loans to rural residents. • Cooperative banks have developed a culture of productive borrowing by discouraging unproductive borrowing for personal consumption. • The cooperative credit movement has enabled rural citizens to save and spend rather than hoard money. Instead of hoarding money, they deposit their savings in cooperatives or other financial institutions. 56 CU IDOL SELF LEARNING MATERIAL (SLM)

• Cooperative societies have also aided in the adoption of more efficient farming practices. Improved seeds, chemical fertilizers, new implements, and other items may be purchased with cooperative credit. • Deposits at cooperative banks earn a higher rate of interest. 2.15 PROBLEMS WITH COOPERATIVE BANKING IN INDIA • The primary credit societies' organizational and financial constraints severely restrict their ability to offer sufficient credit to the rural population. • Tenants' and small-scale farmers' needs are not completely served. • Primary credit societies are cash-strapped and unable to meet production- oriented credit demands. • At all stages, overdues are rising alarmingly. • Borrowing farmers have been unable to obtain sufficient and timely credit from primary credit societies. • Cooperatives face resource limitations because their own assets only make up a small portion of their working capital portfolio. Raising working capital has been a big stumbling block to their efficient operation. • The delinquent loans of cooperative banks, which have been steadily rising over the years, are a serious problem in cooperative credit. • Large quantities of past dues obstruct the redistribution of funds and have a negative impact on the cooperative's lending and borrowing ability. • Because of their strong socioeconomic status, the large landowners have covered the majority of the cooperative benefits. • Owing to the growth of Scheduled Commercial Banks and the introduction of technology, cooperative banks are losing their lustre. Payment banks and small- finance banks are now putting them up against each other. • The amount of long-term credit they offer is decreasing. • Regional Disparities: Northeastern states, as well as West Bengal, Bihar, and Odisha, have less organized cooperatives than Maharashtra and Gujarat. There is a lot of tension between states due to rivalry, and this friction affects cooperatives' operations. • Politicians use them to raise their vote bank, and they normally have their members elected to the board of directors in order to achieve unfair advantages. 2.16 DUAL REGULATION OF URBAN COOPERATIVE BANK ▪ State Registrars of Co-operative Societies (RCS) in single-State co-operative banks and Central Registrars of Co-operative Societies (CRCS) in multi-State co-operative banks, as well as the RBI, oversee and supervise urban cooperative banks. 57 CU IDOL SELF LEARNING MATERIAL (SLM)

▪ The RCS has powers over incorporation, registration, administration, amalgamation, restoration, and liquidation under the respective Co-operative Societies Acts of the States, and the CRCS has powers over UCBs with multi-State involvement. ▪ The Reserve Bank regulates and supervises banking-related functions such as the issuance of licenses to start new banks/branches, interest rates, loan policies, deposits, and prudential exposure norms under the Banking Regulation Act, 1949. Case of Punjab and Maharashtra Cooperative (PMC) Bank • RBI restrictions on money withdrawals from PMC bank illustrated a serious case of dual regulatory structure failure in the urban cooperative banking system. • Financial irregularities, lack of internal control and system, and underreporting of exposures are the three major issues in the PMC event. • PMC Bank has extended 73 percent of its assets to HDIL, causing depositors to be concerned. • Since PMC has deposits from other smaller cooperative banks, financial irregularities, such as governance and transparency issues, are likely to have a multi-faceted effect. Countering Dual Regulation Problem • A high-powered committee chaired by former RBI Deputy Governor R. Gandhi suggested combining and converting some cooperative banks to small finance banks, which RBI has introduced in the form of a voluntary transfer scheme for urban cooperative banks to small finance banks. • Establishment of a self-regulatory organization for urban cooperative banks. • Rather than elected Directors, the H Malegam committee proposed a board of management made up of eligible and proper people. Way Forward To adequately address capital concerns, the banks should support an umbrella entity to collect capital as a joint stock company from the market. Under cooperative societies' rules, RBI should be able to use resolution strategies such as winding up and liquidating banks without involving other regulators. Although auditing plays a significant supervisory function in ensuring cooperatives' best results, it has been found that there is a lot of irregularity and negligence when performing audits. As a result, an effective check-and-balance system could be established and made mandatory for all cooperative banks. 58 CU IDOL SELF LEARNING MATERIAL (SLM)

2.17 SUMMARY • Banking promotes business activities by supplying funds and some services that aid in the trade of products and services by accepting deposits and lending or investing money. It not only provides funds for the manufacture of products and services, but also makes it easier for buyers and sellers to trade them. • A bank has two primary functions: it receives deposits and then lends money based on those deposits. A central bank is a bank charged with the tasks of directing and overseeing a country's financial system. Moneylenders, on the other hand, advance money from their own personal capital and rarely accept deposits from others. Such a bank does not deal with the general public, but rather serves as the government's banker, maintaining all other banks' deposit accounts and advancing money to other banks as required. Our country's central bank is the Reserve Bank of India. • Commercial banks are financial institutions that accept deposits and provide consumers with short-term loans and advances. It also provides short- and long-term loans to businesses. Public sector banks, private sector banks, and foreign banks are the three types of banks. • Development banks lend to businesses that need medium and long-term financing for the procurement of machinery and equipment, the implementation of cutting-edge technology, or expansion and modernization. Development banks in India include the Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs). • Cooperative Banks are those that are established by a co-operative society and engage in banking activities while adhering to the Reserve Bank of India's guidelines. Primary credit societies, central co-operative banks, and state co-operative banks are the three types of cooperative banks. • Agricultural and non-agricultural cooperative credit institutions are the two types of cooperative credit institutions. Short-term agricultural credit institutions and long- term agricultural credit institutions are the two types of agricultural credit institutions. The land development banks provide long-term agricultural credit. • State cooperative banks, which operate at the state level, are the apex institutions in the three-tier cooperative credit system. Every state has a state cooperative bank, and they play a unique role in the cooperative credit system because of three key functions: • Specialized banks are those that respond to particular needs and offer all-around help for starting a company in a specific field. Such banks include EXIM Bank, SIDBI, and NABARD. • The Export-Import Bank of India (EXIM Bank) may provide the necessary support and assistance in order to start a business exporting or importing goods from other countries for sale in India. 59 CU IDOL SELF LEARNING MATERIAL (SLM)

• The Small Industries Development Bank of India (SIDBI) provides financial assistance in the form of a low-interest loan to start a small-scale business unit or industry. SIDBI offers low-interest loans. 2.18 KEY WORDS ▪ SCARDBS- State cooperative agricultural and rural development banks ▪ SRC - State Registrar of Cooperative Societies ▪ IFCI - Industrial Finance Corporation of India ▪ EXIM -Export Import Policy ▪ NABARD - National Bank for Agricultural &Rural Development. 2.19 LEARNING ACTIVITY 1. Make a detailed note highlighting the significant contributions done by Commercial Banks & Cooperative Banks to the Indian Economy. ___________________________________________________________________________ ___________________________________________________________________________ 2.20 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is meant by commercial banks? 2. List the various classifications of banks 3. List out the various problems faced by Cooperative Banks. 4. Describe the role played by Reserve Bank of India 5. Mention the functions of Commercial Banks along with their key role played. 6. Explain the significance of commercial banks. Long Questions 1. Explain the role of foreign banks in India. 2. Enumerate the advantages and problems of cooperative banking. 3. Elaborate the dual regulations of urban cooperative banks. 4. What are the factors that are hindering Land Development Banks? 5. Explain the weakness of Cooperative Banking? B. Multiple Choice Questions 60 CU IDOL SELF LEARNING MATERIAL (SLM)

1. ‘Banking’ as an activity which involves acceptance of ________and lending. a. Deposits b. Loans c. Credit notes d. None of these. 2. Strengthening the __________ movement has been the Reserve Bank of India’s special responsibility ever since its establishment in 1935. a. Cooperative credit b. Forex reserves c. Balance of payments d. All of these 3. The land development banks or SCARDBs provide long-term loans to the agriculturists_____________ a. For redemption of old debt b. For improvement of land c. Purchasing costly machinery d. All of these 4. State cooperative banks obtain their working capital from own funds, deposits, borrowings and other sources a. Own funds b. Deposits c. Borrowings d. All of these 5. The factors responsible for the unsatisfactory performance of land development banks are____________. a. Uneven Growth: b. Lack of Trained Staff: c. Problem of Overdues: d. All of these Answers 1 – a, 2- a, 3 – d, 4 – d, 5 –d. 61 CU IDOL SELF LEARNING MATERIAL (SLM)

2.21 REFERENCES Text Books • T1, J.N. Jain & R.K. Jain, Modern Banking and Insurance: Principles and Techniques, Regal Publications, New Delhi, 2016 • T2, A. Ranga Reddy, C. Rangarajan: Rural Banking and Overdues Management, Mittal Publication Reference Books • R1, Muraleedharan, D, Modern Banking: Theory and Practice, PHI Learning, New Delhi, 2009. • R2, P Kandasamy , S Natarajan & R Parameswaran, Banking Law and Practice, Revised edition , S.Chand publication, New Delhi, 2012. 62 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 3: INTRODUCTION TO REGIONAL RURAL BANKS Structure 3.0 Learning Objectives 3.1 Introduction 3.2 Role of Regional rural banking for Rural development 3.3 Regional rural banks in India 3.4 Progress of Regional rural banks in India 3.5 Evaluation of Regional rural banks 3.6 Functional superiority of Regional rural banks 3.7 Unsatisfactory performance of Regional rural banks 3.8 Restructuring of regional rural banks 3.9 Recapitalization of regional rural banks to improve their CRAR 3.10 Suggestions to raise the degree of viability of regional rural banks 3.11 Reforms of regional rural banks 3.12 Consolidation of regional rural banks 3.13 Amalgamation of regional rural banks 3.14 Difference between RRB and commercial banks 3.15 Commercial banks VS cooperative banks 3.16 Summary 3.17 Key words 3.18 Learning activity 3.19 Unit end questions 3.20 References 3.0 LEARNING OBJECTIVES After studying this unit, students will be able to • Discuss the role of regional rural banks in rural development • Explain the functionality of regional rural banks • Identify the differences between RRB and commercial banks • Identify the differences between Commercial banks VS cooperative banks • Interpret the reforms of regional rural banks 3.1 INTRODUCTION The RRBs were created \"with a view to developing the rural economy by providing credit and other facilities, especially to small and marginal farmers, agricultural labourers, artisans, 63 CU IDOL SELF LEARNING MATERIAL (SLM)

and small entrepreneurs, for the purpose of developing agriculture, trade, commerce, industry, and other productive activities in rural areas, and for matters connected with and incidental thereto.\" Regional Rural Banks (RRBs) were established to meet the high demand for institutional credit in rural areas, particularly among the economically and socially disadvantaged. The Narasimhan Working Group (1975) proposed the creation of a new set of banks to provide low-cost banking services to the poor. These banks would \"combine the local feel and familiarity with rural problems that cooperatives possess with the degree of business organization, ability to mobilize deposits, access to central money markets, and modernized outlook that cooperatives possess.\" The multi-agency approach to rural credit was also intended to supplement the input- intensive agricultural strategy (Green Revolution), which had initially concentrated on “betting on the strong” but was ready to spread more broadly across the Indian countryside by the mid-seventies. Furthermore, the opportunity and need for economic diversification in rural areas had begun to be recognized, and this was a field in which RRBs could play a significant role. We will address the position of regional rural banks and their roles in rural development. In a country like India, where the majority of the population lives in rural areas, rural development must play a huge role in overall socioeconomic development. The rural sector has a direct or indirect impact on almost all economic activities in the country and employs the greatest number of people. The rural generates a significant portion of the government's revenue. Rural finance was seen as essential to provide security and dependence to rural people such as moneylenders, landlords, and traders, but they exploit farmers and small entrepreneurs by charging exorbitant interest rates and forcing farmers to sell their products at a low price to them. Due to the high reliance on the monsoon, rural people also face the danger of erratic crop production. In addition to financial difficulties, they face a shortage of seeds, fertilizers, water supply, and other necessities, all of which contribute to rural inefficiency. On October 2nd, 1975, the Regional Rural Banks were created. These banks' key goals are to provide credit and other services to small and marginal farmers, agricultural workers, rural artisans, and small entrepreneurs in rural areas in order to expand agriculture, trade, commerce, industry, and other productive activities. Rural banks are expected to be successful instruments of economic growth in rural India because their aim is to bridge credit gaps in rural areas. They will provide productive credit to the rural community and will have a strictly rural focus in their activities and how they expand their operations. 64 CU IDOL SELF LEARNING MATERIAL (SLM)

The first regional rural banks in India were founded in 1975. The Narasimhan committee is responsible for the establishment of regional rural banks in India. The committee saw a need for \"regionally focused rural banks\" that would solve rural people's concerns and needs with a local touch while maintaining the same degree of professionalism as commercial banks. On October 2nd, five regional rural banks were created, each with a Rs. 1 crore approved capital, which was later increased to Rs. 5 crore. The regional rural banks were funded by five commercial banks: Punjab National Bank, State Bank of India, Syndicate Bank, United Bank of India, and United Commercial Bank. The equities of rural banks were split 50:35:15 between the Central Government, the Sponsor bank, and the concerned State Government. 3.2 ROLE OF REGIONAL RURAL BANKING FOR RURAL DEVELOPMENT The following roles were formed with Regional Rural Banks in mind: 1) Bringing banking services to the doorsteps of rural people, particularly in previously unbanked areas. 2) Determine the financial requirement, especially in rural areas. 3) Making institutional credit available to the poorer members of society who had little or no access to cheaper loans and were forced to rely on private money lenders. 4) To improve banking and lending services in underserved or unbanked regions. 5) Mobilize rural savings and direct them toward promoting rural productive activities. 6) To provide financial assistance to the economically disadvantaged, such as small farmers, rural artisans, small producers, and rural labourers. 7) Using refinances, create a supplementary outlet for the central money market's flow to rural areas. 8) To provide co-operative societies, primary credit societies, and agricultural marketing societies with financial assistance. 9) Increasing rural job opportunities and lowering the cost of providing credit to rural areas. 10) Develop and expand banking services to semi-urban, rural, and other underserved markets. Awareness of the local language by the workers is an essential qualification function of RRB with these objectives in mind. Every RRB has the authority to conduct banking business as defined in the Banking Regulation Act, as well as other business as defined in Section 6 (1) of the same Act. A RRB must, in particular, engage in the following activities: 65 CU IDOL SELF LEARNING MATERIAL (SLM)

1) Providing loans and advances to small and marginal farmers and agricultural labourers, whether individually or in groups, as well as cooperative societies such as agricultural marketing societies, agricultural processing societies, cooperative farming societies, primary agricultural credit societies, or farmers' service societies for primary agricultural purposes or agricultural operations or other revolving credit. 2) Making loans and advances to artisans, small business owners, and people of modest means who are involved in trade, commerce, industry, or other profitable activities in its service field. The Reserve Bank of India has put RRBs on par with commercial banks in terms of priority sector lending. They must ensure that the priority sector receives forty percent of their advances. Under the 40% priority target, 25% should go to the weaker section, or 10% of total advances should go to the weaker section. 3.3 REGIONAL RURAL BANKS IN INDIA One of the largest commercial banks in India, the State Bank of India, has regional rural banks. The State Bank of India oversees 30 Regional Rural Banks in India, which are spread across 13 states. More than 2000 branches make up the SBI Regional Rural Banks. Apart from the State Bank of India, a number of other banks play a role in promoting rural development in India. The following are India's other Regional Rural Banks: Haryana State Cooperative Apex Bank Limited: The key goal of Haryana State Cooperative Apex Bank Limited is to provide financial assistance to rural artisans, farmers, and agrarian unskilled labourers, as well as small rural entrepreneurs. The Haryana State Cooperative Apex Bank Limited, also known as HARCOBANK, is one of the state's apex organizations. In the state of Haryana, the HARCOBANK occupies a unique economic role. Individuals can get financial help from the Haryana State Cooperative Apex Bank Limited in a variety of ways. Credit for agricultural growth, non-agrarian credit, and bank deposit facilities are among the financial aids available. For more than three decades, the HARCOBANK has served as an investor. The National Bank for Agriculture and Rural Development (NABARD primary)'s goal is to provide credit for the development and promotion of small-scale manufacturing, handicrafts, rural crafts, village industries, cottage industries, agriculture, and other related activities. The NABARD also supports all other related economic operations in the rural sector, as well as the promotion of long-term rural development. The NABARD also contributes to rural development by supporting institutional development, facilitating loan refinancing for rural loan providers, and inspecting, tracking, and evaluating client financial corporations. As the 66 CU IDOL SELF LEARNING MATERIAL (SLM)

premier rural development bank, the National Bank for Agriculture and Rural Development (NABARD) was created. The Sindhanur Urban Cooperative Bank's key goal is to provide financial assistance to the rural sector. The Sindhanur Urban Co-operative Bank, or SUCO Bank, is a co-operative bank based in Sindhanur, India. United Bank of India: The United Bank of India (UBI) has played a pivotal role as one of the country's regional rural banks. The UBI has developed a network of branches in order to actively participate in rural development and change. Syndicate Bank: The rural sector is where the Syndicate Bank got its start. The growth of the Syndicate Bank corresponded to the growth of India's banking sector. The Syndicate Bank has contributed significantly to India's rural growth. The growth of the rural sector in India has been aided by the Regional Rural Banks. The creation of rural industries in India, as well as rural industry and economy, has been largely reliant on investment and financial aid given by India's Regional Rural Banks. Regional Rural Banks in Tamil Nadu: Saptagiri Grameena Bank and Pallavan Grama Bank are two Regional Rural Banks (RRBs) that Indian Bank has supported in Tamil Nadu. Salem, Namakkal, Krishnagiri, Dharmapuri, Villupuram, Cuddalore, Coimbatore, Karur, Erode, Nilgiris, Vellore, Tiruvannamalai, Kancheepuram, and Tiruvallur are among the 14 districts of Tamilnadu where Pallavan Grama Bank has its headquarters. Puduvai Bharathiar Grama Bank, the third RRB funded by Indian Bank, is based in the Union Territory of Puducherry and has its headquarters in Puducherry. Banks can support the agricultural sector by increasing the amount of term loans available. In general, the nonagricultural sector benefits the rural economy in a variety of ways. With this in mind, RRBs could increase the percentage of loans given to this sector. Since RRBs are an important part of India's rural credit system, this finding could be very useful to rural banking institutions and policymakers in developing and shaping the required credit structure. The role of rural banking in a country's economic growth cannot be overstated. The “real India” is, as Gandhiji put it, “in villages,” and the village economy is the backbone of the Indian economy. The goals of economic planning cannot be met without the growth of the rural economy. As a result, banks and other financial institutions play a critical role in the growth of India's rural economy. The main goal of setting up Regional Rural Banks in India is to provide credit to rural people who are not financially secure, especially small and marginal farmers, artisans, agricultural labourers, and even small entrepreneurs. 67 CU IDOL SELF LEARNING MATERIAL (SLM)

3.4 PROGRESS OF REGIONAL RURAL BANKS IN INDIA In the meantime, the regional rural banks have significantly expanded their network across the country. Initially, there were 196 regional rural banks with approximately 14,700 branches operating in 28 states. Until June 1996, these RRBs had been lending nearly Rs 1500 crore to rural people per year, with more than 90% of the loans going to the weaker sections. The RRBs had advanced a total of Rs 3,560 crore in short-term crop loans, term loans for agricultural operations, rural artisans, cottage and village industries, retail trade, self- employment projects, and consumption loans as of September 1990. Uttar Pradesh is the state with the most RRB divisions, out of all the states. The number of RRBs has recently been reduced to 92 after amalgamation. RRBs have been actively involved in numerous programmes designed to provide credit assistance to designated beneficiaries, including the recent 20 Point Initiative, IRDP, and other programmes designed for scheduled castes and tribes, for the past 30 years. Under differential rate of industrial (DIR) schemes, RRBs are also advancing loans to the poor and physically handicapped. There were 92 amalgamated RRBs at the end of June 2014, with a network of 18,291 branches serving 518 districts across the country. As of June 30, 2014, 4,042 of these RRB branches were rural, accounting for around 21.4 percent of the total number of RRB branches. At the end of September 1996, the loans and advances totaled Rs 7,852.7 crore. RRBs again mobilized Rs 15,423 crore in deposits at the end of September 1996. Since the Reserve Bank of India granted them the authority to set their own lending rates on August 26, 1996, most RRBs have charged interest rates on their loans ranging from 13.5 to 19.5 percent per annum. Interest rates on loans advanced by RRBs have also decreased significantly in recent years as a result of the softer interest regime. From Rs 6,069.79 crore in 2002-03 to Rs 43,968 crore in 2010-11, the total amount of credit advanced to agriculture by RRBs increased significantly. RRBs had total outstanding deposits of Rs 44,327.81 crore and total outstanding advances of Rs 18,586.97 crore as of March 31, 2002. Out of the 196 RRBs, 170 have made a profit in recent years as a result of banking reform initiatives. The Chalapathi Rao Committee on Regional Rural Banks also proposed the gradual privatisation of profit-making RRBs. Regional rural banks (RRBs) devised a branch expansion plan for 2011-12 and 2012-13, with a 10% rise over the previous year, in order to make the government's Financial Inclusion Plan successful and to broaden the banking network's penetration in unbanked and under-banked rural areas. 68 CU IDOL SELF LEARNING MATERIAL (SLM)

As a result, RRBs could open 913 branches in 2011-12, compared to a goal of 1247. This number compares favorably to the 521 branches that opened in 2010-11 and the 299 branches that opened in 2009-10. A target of opening 1845 new branches has been set for 2012-13. 3.5 EVALUATION OF REGIONAL RURAL BANKS Regional Rural Banks have made significant progress in advancing different forms of loans to rural society's poorer and underprivileged segments. “The RRBs have fared well in achieving the goal of providing access to institutional credit to weaker sections of the society,” according to a recent RBI survey, “but the recovery situation on the whole is not satisfactory.” The Narasimhan Committee on the Financial System assessed the effectiveness of RRBs. RRBs were established to provide a low-cost alternative to the operation of commercial bank branches, especially in rural areas, but their performance fell short of expectations. RRBs have three major issues, according to the Committee: • RRBs have a limited earning potential due to the numerous constraints imposed on their operations. • With the latest decision of a tribunal, RRBs' salaries and pay rates would be comparable to those of commercial banks, effectively eliminating the concept of a low-cost alternative to commercial bank operations; and • By operating their own rural branches, sponsoring banks are using the same area of operations as RRBs, resulting in inconsistencies such as duplication of resources and control and administration costs. As a result, the Narasimhan Committee believes that RRB viability should be strengthened without compromising the primary goal. The government should also work to develop a rural banking system and base of RRBs with sufficient financial strength and commercial bank management and organizational skills. However, there are certain intrinsic variables that play a significant role in RRBs' non- viability. There are some of them: • RRBs will open branches in areas that are unbalanced and under banked. • RRBs' lending operations are largely restricted to a target community of small borrowers in rural and semi-urban areas; and • RRBs charge a lower rate of interest on their loans than other lenders. The Committee to Review Arrangements for Institutional Credit for Agriculture and Rural Development (CRAF1CARD) has identified the same reasons for RRBs' increasing non- viability as those listed above. 69 CU IDOL SELF LEARNING MATERIAL (SLM)

3.6 FUNCTIONAL SUPERIORITY OF REGIONAL RURAL BANKS Regional Rural Banks have also gained a functional advantage over the country's other commercial banks. RRBs' dominance has been demonstrated by the share of deposits contributed by RRB branch offices in various states. In a state like Uttar Pradesh, these RRB branches had a deposit share of 25.7 percent in December 1991, compared to just 12.4 percent for other Scheduled Commercial Banks. When we remember that the number of RRB branches (1,193) was even smaller than that of other scheduled commercial banks, this achievement is remarkable (1,361). Furthermore, RRBs had a higher share of deposits in Haryana than other scheduled commercial banks, which had a similar number of branches. Another important point to note is that the majority of RRB branches are located in unbanked areas, implying that the deposits mobilized by them are fresh deposits that have not been diverted from the deposits per branch of RRBs formed prior to 1980 is uniformly higher in almost all of the country's states. RRBs were effective in defining target groups and meeting their credit criteria when it came to credit operations. 3.7 UNSATISFACTORY PERFORMANCE OF REGIONAL RURAL BANKS Since the last few years, the Regional Rural Banks (RRBs) have had an unsatisfactory result. As a result, RRBs have become a major issue for the Indian banking sector. They are no longer serving the mission for which they were founded nearly two decades ago. Year after year, these RRBs have been losing a lot of money. The RRBs lost a total of Rs 92.87 crore in 1990-91, followed by Rs 258.66 crore in 1991-92. In the fiscal year 1993-94, 173 of the country's 196 RRBs suffered losses totaling Rs 310 crore. According to the most recent data available from the National Bank for Agriculture and Rural Development (NABARD), the cumulative aggregate losses of all Regional Rural Banks in the country as of March 31, 1996 were estimated to be Rs 2,176 crore. As a result, it's not shocking that these banks, which were created to spur rural development, have utterly failed to stimulate the agro-based rural economy. Very high overheads, of which wages are a significant portion, have been one of the major contributory factors in the RRBs' mounting losses. Previously, RRB employees were paid lower pay rates than their counterparts in scheduled nationalized banks. However, in 1990, when the National Industrial Tribunal (NIT) Award was implemented in the case of RRB workers, their emoluments were brought in line with those of scheduled commercial bank employees. 70 CU IDOL SELF LEARNING MATERIAL (SLM)

RRBs' salary-allowance bill has increased by 35% in the last three years as a result of the NIT grant, in addition to other concomitant expenditures. Furthermore, the banks were burdened with a Rs 225 crore arrears load. Although the RRBs' annual wage liability has risen significantly, their income has been steadily decreasing due to low loan recoveries and earnings. Just 23 of the 196 RRBs were profitable, with the rest all losing money. At the end of March 1994, the total loss stood at Rs 906 crore. The credit-deposit ratio of RRBs has also fallen in the last three years, from 85.6 in 1989-90 to 68.7 in 1991-92. In addition, the growing number of defaulters has hindered cash recycling. The loan overdues totaled Rs 1,314 crore in 1992. Due to ongoing attempts to recapitalize RRBs, 158 RRBs is running profitably at the end of March 2000. Out of these, 48 RRBs have been able to fully eliminate their losses. Since RRBs are so important in rural finance, the government has decided to keep this programme of RRB strengthening going in the coming years. 3.8 RESTRUCTURING OF REGIONAL RURAL BANKS The current situation has forced the bank to take corrective action in order to get them back on track. The RRBs have been restructured by the Indian government. To that end, their issue capital has been increased in 140 banks from Rs 25 lakh to Rs one crore, and in the remaining cases from Rs 50 lakh to Rs one crore. During the fiscal year 1993-94, the government set aside Rs 5 crore for this reason. The Central Government, all state governments, and various sponsoring banks all contribute to the RRBs' issue money. The total credit support provided to banks at the end of March 1992 was Rs 4090.86 crore. Banks had mobilized Rs 5868 crore from 345 lakh accounts as of the same year. During the 1991-92 fiscal year, the RRBs distributed only Rs 1,107 crore to 23 lakh rural people drawn from the poorest sections of society. The state-owned National Bank for Agriculture and Rural Development issued Rs 402 crore in 1991-92 to help revive the banks (NABARD). The poor state of RRBs is reflected in the fact that many have fully depleted their equity and savings, with losses also eating into deposits in some cases. This is an unsustainable situation, and if these banks are to be rehabilitated, long-term systemic changes are needed. The RBI had taken steps to allow RRBs to diversify their operations, citing high establishment and operational costs, a low level of business, and a limited operating area as the key causes of the loss. According to the government's based strategy for improving the profitability of the country's Regional Rural Banks, 136 RRBs have received financial support worth Rs 573 crore for 71 CU IDOL SELF LEARNING MATERIAL (SLM)

comprehensive revamping. It is anticipated that by prioritizing the revival of viable RRBs rather than addressing the issue in a broad way, RRB losses will be reduced significantly and RRBs will be able to stand on their own. RRBs have been encouraged to prepare bank-specific growth action plans in order to take a structured approach to turning around their operations. Furthermore, the RBI has allowed RRBs to invest a portion of their excess non-statutory liquidity Ratio fund in the credit portfolios of their sponsor banks. The interest rates that RRBs will charge to ultimate borrowers have been fully deregulated by the RBI. There is now also talk of merging all 92 RRBs to create a National Rural Bank of India, with NABARD contributing 76% of the equity. 3.9 RECAPITALIZATION OF REGIONAL RURAL BANKS TO IMPROVE THEIR CRAR In rural areas, RRBs have played an important role in credit distribution. Dr. K.C. Chakraborty Committee recommended recapitalization funding of Rs 2,200 crore to 40 RRBs in 21 states in order to put the capital to risk-weighted assets ratio (CRAR) or RRBs up to at least 9%. The recapitalization sum is to be shared by stakeholders in proportion to their shareholding in RRBs, i.e., 50% by the central government, 15% by the concerned state government, and 35% by the concerned sponsor banks, according to the committee's recommendation. As a result, the central government's share equals Rs 1,100 crore. The recapitalization process, which began in 2010-11 and was set to end in 2011-12, was supposed to be completed by then. While the central government provided Rs 468.9 crore to 21 RRBs in 2010-11 and 2011-12, the recapitalization process could not be completed in 2011-12 because all of the relevant state governments were unable to release their share. As a result, the recapitalization plan has been extended until the end of March 2014. In the meantime, Rs 200 crore was set aside in the 2012-13 budget for this reason, and it was released on time. Thus, the government had allocated a total of Rs 668.9 crore to 27 RRBs for recapitalization as of December 31, 2012. 3.10 SUGGESTIONS TO RAISE THE DEGREE OF VIABILITY OF REGIONAL RURAL BANKS Some ideas for improving the profitability of regional rural banks may be as follows: 1. According to CRAFICARD, the areas of service of an RRB branch never provide enough room for business, so in order for these branches to be viable, they must reach neighboring districts. However, due to the implementation of the Service Area Approach policy, the chances of expanding this area of operation are extremely slim. 72 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Within the service region, RRBs must be authorized to fund non-target group projects after meeting target group credit needs. Although the CRAFICARD and Kelkar Committees were opposed to RRBs lending to non-target classes, they did recommend lending to public bodies formed for the benefit and welfare of the poor. 3. To broaden their resource base, RRBs may be allowed to open branches in semi-urban and urban areas with greater market potential. Such branches will assist RRBs in mobilizing the resources necessary to fulfil their rural obligations. 4. RRBs may be allowed to tap NRI deposits in those areas where they have such capacity in order to diversify their deposit base. 5. The district administration can assist RRBs in recovering unpaid loan amounts, as the current recovery rate is just 23%. 3.11 REFORMS OF REGIONAL RURAL BANKS Expert Groups were established in accordance with the banking system reform to analyze the major issue of managerial and financial restructuring of Regional Rural Banks (RRBs) in order to formulate a future course of action in their further reorganization, as well as to investigate the role that self-help groups and NGOs could play in improving the rural credit delivery system. Prudential norms, similar to those for commercial banks, were implemented in 1996 to ensure that the restructuring of RRBs is sustainable and long-lasting. RRBs would be expected to follow new income recognition standards and borrowers' exposure limits. Provisioning standards were implemented in 1996-97. 3.12 CONSOLIDATION OF REGIONAL RURAL BANKS Within each province, the government has taken the initiative to consolidate Regional Rural Banks (RRBs) funded by the same bank. This will broaden the scope and area of banks' operations, as well as improve their operations, with the aim of increasing credit flow in rural areas. The sponsor bank, NABARD, and the state governments concerned have already given their approval for the proposed merger of 14 RRBs under Section 23 of the Regional Rural Banks Act, 1976. Thus, the process of merging 196 RRBs with 14,496 branches in 518 districts across India has started quietly. Several PSBs have decided to combine some of their RRBs on a state-by- state basis. The government implemented a state-by-state merger programme, and one RRB began operations in each state province on August 31, 2005. As a result of the amalgamation of RRBs funded by the same bank in a state, the number of Regional Rural Banks (RRBs) was reduced to 92 from 196. 73 CU IDOL SELF LEARNING MATERIAL (SLM)

There were 15 loss-making RRBs in 2006-07, down from 22 in 2005-06. Seven of them made a profit in the first half of 2007-08, and the other four did so by the end of the year. RRBs' output has improved significantly as the ratio of gross and net NPAs has decreased. RRBs' net worth increased from Rs 3,466.25 crore on March 31, 2005 to Rs 4,545.86 crore on March 31, 2007. 3.13 AMALGAMATION OF REGIONAL RURAL BANKS The government has begun amalgamation of geographically contiguous RRBs in a State in order to boost the condition of RRBs, reduce overhead expenses, and maximize the use of technology in RRBs. As a result of this move, the capital base and operating area of amalgamated RRBs will be expanded, allowing them to better serve their areas through technology adoption and improved management. 22 RRBs had already been merged into 9 RRBs as of January 1, 2013. 3.14 DIFFERENCE BETWEEN RRBS AND COMMERCIAL BANKS RRBs, also known as Regional Rural Banks, and commercial banks both serve similar roles, although there are some distinctions. Consider the distinction between RRBs and commercial banks – 1. The primary reason for the existence of RRBs is to promote the growth of rural and backward areas by providing banking services to the rural population, while the primary reason for the existence of commercial banks is to benefit from their operations. 2. The RRB's reach is limited to agriculture finance, small sector loans, handicrafts, and other small sector loans, while commercial banks' scope is wide and includes not only agriculture finance but also housing loans, car loans, letter of credit, and credit to large companies, among other things. 3. RRBs only operate in rural and semi-urban areas, while commercial banks operate in rural, semi-urban, and urban areas throughout the country. 4. While RRBs concentrate on accepting deposits and issuing loans to individuals, commercial banks focus on a variety of other services in addition to lending and borrowing, such as stock broking, asset management, insurance, merchant banking, venture capital funding, foreign exchange related industry, and so on. Government of India, state governments, and commercial banks are RRB stakeholders, while public, central government, and commercial banks are commercial bank stakeholders. 74 CU IDOL SELF LEARNING MATERIAL (SLM)

3.15 COMMERCIAL BANK VS COOPERATIVE BANK The following are the main distinctions between commercial and cooperative banks: 1. A commercial bank is a bank that was founded to provide banking services to individuals and businesses. A cooperative bank is a financial institution that lends to farmers, rural businesses, and urban trade and industry (but up to a limited extent) 2. The Banking Regulation Act of 1949 establishes a commercial bank. A cooperative bank, on the other hand, is governed by the Cooperative Societies Act of 1965. 3. A commercial bank's operating area is greater than that of a cooperative bank, whereas cooperative banks are limited to a small geographic area, while commercial banks have branches all over the world. 4. Commercial banks are profit-driven joint stock companies that are incorporated as a banking corporation. Cooperative banks, on the other hand, are cooperative associations that operate for a service motive. 5. Commercial bank creditors are just account holders and do not have voting rights. Unlike cooperative banks, creditors are stakeholders who have voting control over credit policy. 6. The primary role of a commercial bank is to accept public deposits and to make loans to individuals and businesses. The cooperative bank, on the other hand, accepts deposits from members and the general public and makes loans to farmers and small business owners. 7. Industrial banks provide a wide range of products to their clients, while commercial banks only provide a small number of products to their members and the general public. 8. The commercial bank pays a lower interest rate on deposits than the cooperative bank. 3.16 SUMMARY • The Regional Rural Banks were developed to help small and marginal farmers, agricultural labourers, artisans, and small business owners grow their rural economies by providing credit and other services. • In a country like India, where the majority of the population lives in rural areas, rural development must play a huge role in overall socioeconomic development. • Rural finance was deemed necessary to provide security and reliance to rural people such as moneylenders, landlords, and traders, among others. • The Narasimhan committee saw a need for \"regionally focused rural banks\" to resolve the problems and needs of rural people in a localized manner while maintaining the same degree of professionalism as commercial banks. • The Regional Rural Banks, which were established in 1975 with the primary goal of providing credit and other services to small and marginal farmers, agricultural labourers, 75 CU IDOL SELF LEARNING MATERIAL (SLM)

rural artisans, and small business owners in order to grow agriculture, trade, commerce, industry, and other productive activities in rural areas. • The aim of rural banks is to close credit gaps in rural areas, and they are expected to be successful economic growth instruments in rural India. • One of the largest commercial banks in India, the State Bank of India, has regional rural banks. The State Bank of India oversees 30 Regional Rural Banks in India, which are spread across 13 states. More than 2000 branches make up the SBI Regional Rural Banks. • For the past 30 years, RRBs have actively participated in a variety of credit assistance programmes for designated beneficiaries, including the recent 20 Point Initiative, IRDP, and other programmes for scheduled castes and tribes. 3.17 KEY WORDS ▪ SUCO Bank - The Sindhanur Urban Co-operative Bank. ▪ NIT -National Industrial Tribunal ▪ HARCOBANK - Haryana State Cooperative Apex Bank Limited ▪ CRAR -Capital to risk-weighted assets ratio ▪ RRB -Regional Rural Bank 3.18 LEARNING ACTIVITY 1. Prepare a comprehensive note on Rural Banking; the progress it has brought in &suggestions to improve its performance. ___________________________________________________________________________ ___________________________________________________________________________ 3.19 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is Regional Rural Banking? 2. Explain the progress of Regional Rural Banking in India 3. What are the three basic problems encountered by RRBs & how was it resolved? 4. Give your suggestions to improve the viability of RRBs. 5. Write a brief note on restructuring of RRBs Long Questions 76 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Differences between RRBs & Cooperative Banks. 2. Differences between Commercial vs Cooperative banks 3. Explain the reforms that were done to improve the performance of RRBs? 4. Discuss the role of United Bank of India & Syndicate Bank in Rural Banking? 5. Interpret the functional superiority of RRBs B. Multiple Choice Questions 1. The Regional Rural banks were established on October 2nd, _______ a. 1975 b. 1978 c. 1980 d. None of these. 2. The main purpose of the National Bank for Agriculture and Rural Development (NABARD) is to provide __________ for the development of small scale industries, a. Guidance b. Credit c. Support d. All of these 3. By 2014, there were ________ amalgamated RRBs, covering 518 districts of the country with a network of 18,291 branches. a. 100 b. 105 c. 92 d. 90 4. As per NABARD the total accumulated losses of all Regional Rural Banks, operating in the country are estimated at Rs _______ crore as on 31st March 1996. a. 2250 Crores b. 2176 Crores c. 3000 Crores d. 2500 Crores 5. The ________ is one of the major commercial banks having regional rural banks. 77 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Indian Overseas Bank b. Punjab National Bank c. State Bank of India d. All of these Answers 1 – a, 2- b, 3 – c, 4 – b, 5 – c. 3.20 REFERENCES Text Books • T1, J.N. Jain & R.K. Jain, Modern Banking and Insurance: Principles and Techniques, Regal Publications, New Delhi, 2016 • T2, A. Ranga Reddy, C. Rangarajan: Rural Banking and Overdues Management, Mittal Publication Reference Books • R1, Muraleedharan, D, Modern Banking: Theory and Practice, PHI Learning, New Delhi, 2009. • R2, P Kandasamy , S Natarajan & R Parameswaran, Banking Law and Practice, Revised edition , S.Chand publication, New Delhi, 2012. 78 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 4: BANKING, MONETARY POLICY AND REGULATION Structure 4.0 Learning Objectives 4.1 Introduction 4.2 Foreign exchange regimes and policies 4.3 IMF supports effective central bank frameworks 4.4 Monetary Policy in India 4.5 Fiscal and Monetary Policy 4.6 Functions of the Central Banks/RBI 4.7 Organizational and Management structure of Reserve Bank of India 4.7.1 Role and Functions of RBI 4.8 Promotional and developmental Role of RBI 4.9 RBI and Supervisory Role 4.10 Prohibitory Role by RBI 4.11 Acts and Reforms in Banking Sector 4.12 Banking Sector Reforms: Ensuring Regulation 4.13 Protagonist To Economic Transformation 4.14 RBI along with Indian banks 4.15 Government Initiatives 4.16 Innovation in Extending Credit 4.17 Issues and Suggestions 4.18 Summary 4.19 Keywords 4.20 Learning activity 4.21 Unit End Questions 4.22 References 4.0 LEARNING OBJECTIVES After studying this unit, students will be able to, • Explain about foreign exchange regimes and policies • Interpret the monetary policy in India • Infer the functions of Central banks • Describe the role of RBI in Indian banks • Explain the acts and reforms in banking sector 79 CU IDOL SELF LEARNING MATERIAL (SLM)

4.1 INTRODUCTION Financial and banking services are provided by central banks, which are autonomous national entities. Monetary policy, or the management of money supply within a country's economy, is one of their key areas of focus. To keep inflation under control and the financial system stable, monetary policy is needed. As a result, central banks like the Federal Reserve, the European Central Bank, the Bank of England, and the Reserve Bank of India, India, play an important role on a national and global scale. One of the primary responsibilities of all central banks is monetary policy. They are expected to either raise or decrease the amount of currency in circulation, depending on the economy's needs. To put it another way, they have the ability to create new money or accumulate existing money and store it in their vaults. This is possible because most economies today depend on fiat currency, which the government has allowed central banks to distribute and absorb. A rise in the money supply (expansionary monetary policy) increases economic growth, while a fall in the money supply (contractionary monetary policy) slows it down. The three key instruments of monetary regulation used by central banks are: (1) Open market operations, (2) the interest rate, and (3) commercial bank reserve conditions The method of purchasing and selling government bonds on the open market is referred to as open-market operations. The interest rate and reserve criteria, on the other hand, determine the terms in which commercial banks can borrow money from central banks. It's important to remember that, despite their influence, central banks just have a sliver of control over the overall money supply. This is due to the fact that commercial banks generate the majority of the total money supply through so-called fractional reserve banking. A scheme that encourages commercial banks to lend more money than they have, increasing the money supply. Example: The Federal Reserve System The Federal Reserve is the United States' central bank system. It was founded in 1913 and is made up of 12 regional Federal Reserve Banks located throughout the United States. Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Luis, Minneapolis, Kansas City, Dallas, and San Francisco each have their own regional bank. The Federal Reserve Board of Governors supervises these districts, which run separately. The President appoints the seven members of this board. They will be in prison for up to 14 years 80 CU IDOL SELF LEARNING MATERIAL (SLM)

(i.e. one term). This is much longer than the majority of other public meetings. The aim here is to reduce members' susceptibility to political pressure. In the United States, the Federal Reserve serves five general purposes: (1) conducts monetary policy, (2) promotes financial system stability, (3) promotes financial institution safety and soundness, (4) fosters payment and settlement system safety and quality, and (5) promotes consumer security and community growth. Financial and banking services are provided by central banks, which are autonomous national entities. When it comes to monetary policy, they play a significant role. They may increase or decrease the money supply using a variety of tools to expand or contract economic activity. However, they only have indirect influence because commercial banks generate the majority of the money in the economy through fractional reserve banking. Central banks play an important role in monetary policy, which helps to maintain market stability and control economic volatility. Over the last few decades, the policy mechanisms under which central banks function have undergone significant changes. Inflation targeting has been the dominant mechanism for monetary policy since the late 1980s. In Canada, the eurozone, the United Kingdom, New Zealand, and other countries, central banks have set an explicit inflation target. Many low-income countries are also moving away from monetary aggregate targeting and toward an inflation targeting system. Central banks change the supply of money, usually through open market operations, to implement monetary policy. For example, a central bank could reduce its money supply by selling government bonds under a \"sale and repurchase\" arrangement and receiving funds from commercial banks. The aim of open market operations like these is to affect short-term interest rates, which influence longer-term rates and overall economic activity. The monetary transmission mechanism in many countries, especially low-income countries, is not as successful as it is in advanced economies. Countries should establish a mechanism to allow the central bank to target short-term interest rates before switching from monetary to inflation targeting. Following the global financial crisis, central banks in industrialized economies loosened monetary policy by lowering interest rates before short-term rates approached zero, limiting the ability to lower policy rates any further (i.e., limited conventional monetary options). With the risk of deflation increasing, central banks adopted unorthodox monetary policies, such as buying long-term bonds (particularly in the United States, the United Kingdom, the eurozone, and Japan) in order to lower long-term rates and loosen monetary conditions. Short-term rates were also lowered below zero by some central banks. 81 CU IDOL SELF LEARNING MATERIAL (SLM)

4.2 FOREIGN EXCHANGE REGIMES AND POLICIES The option of a monetary system and an exchange rate regime are inextricably related. In comparison to a country with a more flexible exchange rate, a country with a fixed exchange rate would have less space for independent monetary policy. Despite the fact that some countries do not fix the exchange rate, they also attempt to control its amount, which could necessitate a trade-off with the goal of price stability. A successful inflation targeting system benefits from a completely flexible exchange rate regime. The global financial crisis demonstrated that countries must use dedicated financial policies to contain financial system risks. Many central banks with a financial stability mandate have improved their financial stability functions, including by developing macroprudential policy frameworks. To work effectively, macroprudential policy requires a solid institutional base. Since they have the ability to assess systemic risk, central banks are well positioned to conduct macroprudential policy. Furthermore, they are frequently self-sufficient and autonomous. The macroprudential mandate has been delegated to the central bank or a special committee within the central bank in many countries. Regardless of the model used to enforce macroprudential policy, the institutional framework must be robust enough to withstand financial industry and political opposition, as well as to develop macroprudential policy's credibility and accountability. It must ensure that policymakers are given specific goals and the legal authority they need, as well as promote collaboration among other supervisory and regulatory agencies. By mapping an analysis of structural vulnerabilities into macroprudential policy intervention, a dedicated policy mechanism is required to operationalize this new policy feature. 4.3 IMF SUPPORTS EFFECTIVE CENTRAL BANK FRAMEWORKS The IMF promotes effective central bank frameworks through multilateral surveillance, policy papers and research, bilateral dialogue with its member countries, and the collection of data for policy analysis and research. Global results can be improved through multilateral monitoring, policy analysis, and research: • The IMF has provided policy advice on how to avoid negative consequences of exiting unconventional monetary policy and established principles for evolving monetary policy regimes in low-income countries. • The Fund has also looked at the interactions between monetary and macroprudential policy and established principles for the establishment of well-functioning macroprudential policy in low-income countries. The IMF is in regular dialogue with member country central banks through bilateral surveillance, FSAPs and technical assistance: 82 CU IDOL SELF LEARNING MATERIAL (SLM)

• The IMF provides advice on monetary policy action to achieve low and stable inflation, as well as on establishing effective monetary policy and macroprudential policy frameworks, during consultations. • The Financial Sector Assessment Program (FSAP) evaluates member countries' financial systems and provides in-depth advice on policy frameworks to contain and manage financial stability. • Interventions to improve monetary policy and central bank governance are often included in IMF-supported country programmes. • Technical assistance aids in the development of more functional institutions, legal systems, and capability in developing countries. Monetary policy structures, exchange rate regimes, shifting from monetary aggregate to inflation targeting, strengthening central bank operations (such as open market operations and foreign exchange management), and macroprudential policy implementation are only a few of the topics covered.. The IMF collaborates with its members to create and maintain databases to aid policy formulation and research: • The IMF has been tracking countries' monetary policy structures (AREAER), as well as central banks' legal frameworks (CBLD) and monetary operations and instruments, for quite some time (MOID). • The International Monetary Fund (IMF) has just released a new annual survey of macroprudential policies and institutions. By providing information on the nature of macroprudential interventions and allowing comparisons across countries and over time, this survey will aid IMF advice and policymakers around the world. The IMF has also created a detailed historical database of macroprudential measures (iMaPP), which incorporates the most up-to-date survey data and allows for a comparative evaluation of macroprudential instruments. IMF economists are now using this database to calculate policy impact, and it is also open to researchers all over the world. 4.4 MONETARY POLICY IN INDIA In India, monetary policy is an effective instrument for managing the country's economy. The Reserve Bank of India (RBI) is the monetary authority of India's central bank. It has complete power over the money supply and bank credit. It is in charge of ensuring that the banking system meets legitimate credit conditions rather than being used for speculative or unproductive purposes. The backbone of India's monetary policy is \"Development with Stability,\" which is one of the country's goals. The policy aids in the control of money's supply, expense, and usage. The primary goals of India's monetary policy are as follows: Stability and Growth 83 CU IDOL SELF LEARNING MATERIAL (SLM)

In the past, India's monetary policy was primarily concerned with keeping inflation under check. This was accomplished by reducing the money supply and credit. However, the economy grew slowly as a result of this. As a result, the RBI introduced a new growth-with-stability strategy. In layman's terms, this means that the RBI can provide enough credit to meet the growing demands of various sectors of the economy. It will also keep inflation under check within a certain range. Financial Stability Regulation, Supervision, and Development Financial stability refers to an economy's ability to withstand shocks while maintaining public confidence in the country's financial system. External and internal shocks can jeopardize a country's financial stability and destabilize its financial system. As a result, the RBI places a high priority on preserving trust in the country's financial system through proper supervision and oversight. It also means that the development target is not jeopardized. As a result, we may conclude that the RBI focuses on financial stability control, supervision, and growth. Promoting Priority Sector Agriculture, export, small-scale industries, and the poorer segment of the population are all priority sectors in India. The Reserve Bank of India (RBI) regularly ensures that the banking system provides timely and sufficient credit to these groups at reasonable rates. Employment Generation The rate of investment and its distribution among the various economic activities of the country with varying labor intensities can be influenced by a country's monetary policy. As a result, it aids in the development of jobs. External Stability India's links to the global economy are becoming stronger as its imports and exports increase. Historically, the Reserve Bank of India (RBI) set the exchange rate and controlled the foreign exchange market. However, by controlled flexibility, the RBI now only has indirect control over external stability. The RBI affects the exchange rate through this process by buying and selling foreign currencies on the open market. Encouraging Savings and Investments 84 CU IDOL SELF LEARNING MATERIAL (SLM)

The RBI provides competitive interest rates to motivate people to invest. In addition, a high saving rate encourages savings. As a result, monetary policy will mobilize savings and therefore investments in the country by manipulating interest rates. Redistribution of Income and Wealth The RBI will redistribute income and resources to the poorer parts of the economy because it reduces inflation and provides affordable credit to the poor. Regulation of NBFIs NBFIs, or Non-Banking Financial Institutions, such as IDBI, UTI, and IFCI, play a significant role in the Indian economy. They assist with credit deployment and savings mobilization. The RBI does not have direct influence over the operations of these agencies. It can, however, influence the policies and functions of NBFIs indirectly through monetary policy. 4.5 FISCAL AND MONETARY POLICY The use of government spending and tax collection to control the economy is known as fiscal policy. The mechanism by which a country's monetary authority regulates the supply of money, often by targeting an interest rate, in order to achieve a set of goals geared toward the economy's growth and stability is known as monetary policy. Economic policymakers are said to have two types of resources at their disposal when it comes to influencing a country's economy: ▪ Fiscal Policy ▪ Monetary Policy The term \"fiscal policy\" refers to how much money the government spends and how much money it collects. When demand is poor in the economy, for example, the government will intervene and raise spending to boost demand. It could also reduce taxes to increase people's and businesses' disposable income. The supply of money is governed by monetary policy, which is influenced by factors such as interest rates and bank reserve requirements (CRR). For example, policymakers (usually an independent central bank) will increase interest rates, reducing the money supply, in order to combat high inflation. Expansionary or contractionary fiscal and monetary policy are also possible. Expansionary policies are those that aim to boost GDP and economic growth. Contractionary steps are those taken to cool down an \"overheated\" economy (usually when inflation is too high). 85 CU IDOL SELF LEARNING MATERIAL (SLM)

Fiscal policy is governed by the legislative and executive branches of government. In the United States, laws are passed by the President's office (primarily the Treasury Secretary) and Congress. Fiscal instruments are used by policymakers to manipulate demand in the economy. Consider the following scenario: • Taxation: The government will lower taxes if demand is poor. As a result, disposable income rises, boosting demand. • Spending: If inflation is high, the government will cut spending to avoid fighting for money in the market (both goods and services). This is a price-lowering, contractionary tactic. Increased government spending on infrastructure projects, on the other hand, would boost demand and jobs during a recession when aggregate demand is slackening. Both instruments have an effect on the government's fiscal situation, i.e., if the government spends more or cuts taxes, the budget deficit rises. The government borrows money to fund the budget gap, so the deficit is funded by debt. The following are some examples of monetary policy tools: • Interest Rates: The cost of borrowing, or the price of money, is the interest rate. The central bank can make it easier or harder to borrow money by manipulating interest rates. There is more borrowing and economic activity when capital is cheap. Businesses, for example, discover that ventures that would be unviable if they had to borrow money at 5% are feasible when the cost is just 2%. Since people get such a low return on their savings, lower rates disincentivize saving and encourage people to spend rather than save. • Reserve requirement: Banks are required to keep a certain proportion of their deposits in reserve (the cash reserve ratio, or CRR) to ensure that they still have enough cash to satisfy depositor withdrawal requests. It is unlikely that all depositors will withdraw their funds at the same time. As a result, the CRR is usually about 10%, leaving banks free to lend the remaining 90%. The Fed can regulate the amount of lending in the economy, and thus the money supply, by adjusting the CRR requirement for banks. • Currency peg: Weaker economies may choose to peg their currency to a stronger one. This technique is typically used in cases of out-of-control inflation when other methods aren't effective. Open market operations: By purchasing government bonds, the Fed can generate capital out of thin air and pump it into the economy (e.g. treasuries). This increases government debt, expands the money supply, and devalues the currency, all of which leads to inflation. The resulting inflation, on the other hand, boosts asset prices like real estate and stocks. The Reserve Bank of India is the central bank of India (RBI) • The central bank is the most powerful institution in a country's monetary system. 86 CU IDOL SELF LEARNING MATERIAL (SLM)

The Central Bank is the monetary system's apex agency, regulating the operations of a country's commercial banks. • The Reserve Bank of India is the country's central bank. • The primary goal of a central bank is to ensure the country's financial and economic stability. • A country's central bank encourages economic growth and stability while also keeping inflation under check. 4.6 FUNCTIONS OF THE CENTRAL BANKS/RBI Figure: 4.1 Functions of RBI 87 CU IDOL SELF LEARNING MATERIAL (SLM)

The Reserve Bank of India (RBI) is India's central bank, with a multifaceted position that includes monetary policy implementation and maintaining monetary stability in the country. The Reserve Bank of India (RBI) was created on April 1, 1935, under the Reserve Bank of India Act, 1934. The RBI was founded in response to the recommendations of the Hilton Young Commission, which issued its report in 1926. The Indian Central Banking Enquiry Committee recommended the establishment of a central bank in India later in 1931. The Reserve Bank of India was established as a private shareholder's bank, but after independence in 1949, it was nationalized under the Reserve Bank (Transfer of Public Ownership) Act, 1948. According to the Reserve Bank of India's Preamble, the RBI's role and functions are to \"regulate the issue of bank notes and the keeping of reserves with a view to securing monetary stability in India, and generally to operate the country's currency and credit system to its advantage to provide a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth. 4.7 ORGANIZATIONAL AND MANAGEMENT STRUCTURE OF RESERVE BANK OF INDIA The central board of directors is in charge of the RBI's management and general operations. The central board of directors is appointed by the Indian government for a four-year term. • The Central Board of Directors is made up of full-time officials, including the Governor and no more than four Deputy Governors, as well as ten directors from various fields and two government officials who are appointed by the government. Four additional directors are named, one from each of the local boards. • The new governor of the Reserve Bank of India is Shakti kantha Das; however, the Deputy Governor and Director are not allowed to vote at Central Board meetings. 4.7.1 Role and Functions of RBI The RBI's traditional position and functions relate to the functions that every country's central bank must perform all over the world. The RBI's traditional functions are primarily its essential and fundamental functions. 1. Issue currency notes: The Reserve Bank of India (RBI) is the sole authority in India to issue currency notes. Previously, the Reserve Bank of India (RBI) issued all currency notes and coins of smaller denominations, with the exception of the one rupee note. The Reserve Bank of India, on the other hand, has issued notes in the New Mahatma Gandhi series in denominations of Rs 10 and above. Section 22 of the Reserve Bank of India Act, 1934 conferred these exclusive powers on the Reserve Bank of India. The minimum reserve scheme is a method of issuing currency notes. The currency notes issued by the RBI are legal tender throughout India, with no 88 CU IDOL SELF LEARNING MATERIAL (SLM)

restrictions. It issues currency notes in exchange for gold bullion, gold coins, promissory notes, exchange bills, and government of India bonds, among other things. 2. Banker to other banks: The Reserve Bank of India is the country's apex monetary body, and it regulates the amount of bank reserves. It aids and regulates other banks in their efforts to establish credit in the appropriate proportions. It has the legal authority to control, advise, assist, and direct other banks in the country, and thus serves as the guardian of India's commercial banks. Any commercial bank is required to keep a portion of its reserves with the RBI. The Reserve Bank of India serves as a lender of last resort, and banks may turn to it for assistance when they need funds. The RBI has broad powers to supervise and regulate the country's banking system under the Banking Regulation Act of 1949. 3. Government banker, agent, and financial advisor: The Reserve Bank of India serves as the government's banker and agent under Section 20 of the Reserve Bank of India Act. Sections 21 and 21A empower the Reserve Bank of India to perform transactions on behalf of the federal and state governments. It is responsible for making fees, taxes, and deposits on the government's behalf. It is the government of India's international representative. It advises the government on financial matters and manages government accounts. It is in charge of managing the public debt and maintaining foreign exchange reserves. It offers overdraft services to both the federal and state governments . 4. Exchange rate management and foreign exchange reserve custodianship: The Reserve Bank of India is responsible for maintaining the external value of Indian currency. It is responsible for meeting the adverse balance of trade with other countries by holding gold bullions and foreign currency reserves, among other things, as a hedge against currency note issues. The Reserve Bank of India (RBI) is responsible for maintaining exchange rate stability, which requires it to bring foreign currency demand and supply (usually the US Dollar) to similar levels. It achieves this stability by buying and selling foreign currency, among other things. 5. RBI as the bank of Central clearance, settlement, and transfer: The RBI acts as a clearing house for the settlement of banking transactions. This enables other banks to resolve their interbank claims in a timely and cost-effective manner. This work is carried out in the premises of the State Bank of India in areas where the RBI does not have its own office. The Reserve Bank of India provides this service through a cell known as the National Clearing Cell. 89 CU IDOL SELF LEARNING MATERIAL (SLM)

6. Credit control function: The RBI strives to preserve price stability in the country, which is critical for economic growth. It controls the amount of money in circulation in the economy in response to changing economic conditions. To control credit in the economy, it employs a variety of techniques, including qualitative and quantitative techniques. Quantitative controls like bank rate strategy, cash reserve ratio, open market operations, and so on are used. Selective credit management, credit rationing, and other qualitative controls are examples of qualitative controls. 7. Collection and Publication of Data • The RBI collects and compiles statistical/data information on the economy's banking and financial activities, rates, FDIs, FPIs, BOP, Exchange Rate, and industries, among other things. • For this, the Reserve Bank of India issues a monthly Bulletin/publication. • It not only provides data, but it also highlights significant RBI studies and investigations. 8. Regulator and Supervisor of Commercial Banks: The RBI has broad powers to supervise and regulate commercial and cooperative banks in India, including issuing licenses, managing liquidity and assets, commercial bank management and methods of operation, and bank amalgamation, reconstruction, and liquidation. 4.8 PROMOTIONAL AND DEVELOPMENTAL ROLE OF RBI Every Central Bank is responsible for a variety of promotional and development functions, which differ by country. This is especially true in a developing country like India, where the RBI serves as the promoter of the financial system as well as other special and non-monetary functions. • Promotion of Banking habits and expansion of banking system: It serves a number of purposes, including promoting banking habits among various segments of society and promoting the territorial and functional expansion of the banking system. The Reserve Bank of India has established several institutions for this function, including the Deposit and Insurance Corporation of India in 1962, the Agricultural Refinance Corporation of India in 1963, the IDBI in 1964, the UTI in 1964, the Investment Corporation of India in 1972, the NABARD in 1982, and the National Housing Bank of India in 1988. • Export promotion through refinance facility: The Export Credit and Guarantee Corporation (ECGC) and the EXIM Bank are two institutions that help the RBI promote exports. It offers a refinancing facility for scheduled commercial banks' export credit. In comparison, the interest rate paid for this reason is lower. The ECGC insures export receivables, while EXIM banks provide long-term financing to project exporters and other businesses. 90 CU IDOL SELF LEARNING MATERIAL (SLM)

• Development of financial system: The RBI supports and encourages the development of financial institutions, financial markets, and financial instruments, all of which are important for the country's faster economic development. It encourages both banking and non-banking financial institutions to keep the financial system sound and stable. • Support for Industrial finance: The RBI encourages industrial growth and has taken a number of steps to promote it. It was instrumental in the formation of industrial finance institutions such as ICICI Limited, IDBI, and SIDBI, among others. It helps small businesses by maintaining a steady supply of credit. Via specialized Small- Scale Industries (SSI) branches, the Reserve Bank of India has directed commercial banks to provide adequate financial and technical assistance. • Support to the Cooperative sector: The RBI assists the cooperative sector by providing indirect financing to state cooperative banks. This money is mainly routed via the NABARD. • Support for the agricultural sector: Through NABARD and regional rural banks, the RBI provides financial assistance to the agricultural sector. The agricultural sector is served by NABARD's short and long-term credit facilities. NABARD receives indirect financial assistance from RBI, which offers a large sum of money through a General Line of Credit at a lower rate. • Training provision to banking staff: The Reserve Bank of India (RBI) provides banking staff training by establishing banker s training colleges across the country, such as the National Institute of Bank Management (NIBM), Bank Staff College (BSC), and others. • Data collection and publication of reports: The RBI gathers information on interest rates, inflation, deflation, savings, and expenditure, among other things, which is useful to researchers and policymakers. Its Publication division publishes data on various sectors of the economy. It issues weekly reports, annual reports, and reports on the trend and performance of commercial banks, among other things. 4.9 RBI AND SUPERVISORY ROLE The Reserve Bank of India (RBI) performs such non-monetary roles in order to supervise banks and promote a sound banking system in India. Supervisory roles ensure that the methods of banking in India are improved. Through these functions, it manages and regulates India's entire financial and banking system. • Granting licenses to banks: The RBI has the power to issue licenses to banks in order for them to conduct business. It authorizes the opening of new branches, the opening of extension counters, and the closure of existing branches. The Reserve Bank of India uses this power to prevent unnecessary rivalry between banks at any 91 CU IDOL SELF LEARNING MATERIAL (SLM)

given venue. It assists the RBI in preventing undesirable individuals from joining the banking industry. • Bank inspection and enquiry: Under the Banking Regulation Act and the Reserve Bank of India Act, the RBI has the authority to inspect and enquire into banks on a variety of issues. It will audit loans and advances, deposits, investment functions, and other aspects of financial institutions and banks' operations, ensuring that they are carried out properly. It conducts periodic inspections once or twice a year, and banks are required to take corrective action as a result of the inspection. It also requests periodic reports on some bank assets and liabilities. • Implementation of the Deposit Insurance Scheme: The RBI is responsible for implementing the Deposit Insurance Scheme to ensure that small depositors' deposits are covered. Deposits of less than Rs 1 lakh are guaranteed under this scheme by the Reserve Bank of India's Deposit Insurance Guarantee Corporation. In the event that a bank fails, it applies the Deposit Insurance Scheme. This system covers deposits made in commercial banks, cooperative banks, and RRBs' accounts. This system does not cover fixed deposits with institutions such as ICICI, IDBI, and others. • Non-Banking Financial Institutions: The RBI's monetary policy has no bearing on non-banking financial institutions. It does, however, issue directives to non-banking financial institutions and conducts investigations and inspections to maintain control over them. For example, deposit-taking operations by Non-Banking Financial Institutions require permission from the Reserve Bank of India. • Periodic review of commercial bank operations: The RBI's supervisory role also involves periodic reviews of commercial bank operations. It takes the required measures to boost the performance of commercial banks and to introduce policy changes and schemes for the banking system's improvement. 4.10 PROHIBITORY ROLE BY RBI 1. The RBI is unable to purchase any industrial undertaking's stock, including its own. 2. It is unable to offer direct financial or monetary support to any commercial enterprise or trade. 3. The RBI does not have the authority to purchase any movable property. 4. The RBI does not have the authority to grant loans secured by real estate or stock. Reserve Bank of India's Monetary Policy Instruments (RBI) The RBI's monetary policy committee is in charge of setting the benchmark policy interest rate, also known as a repo rate, for managing inflation. One of the most important goals of monetary policy is to keep inflation below 4%, with a maximum standard deviation of 2%. Quantitative measures: 92 CU IDOL SELF LEARNING MATERIAL (SLM)

It refers to the Reserve Bank of India's (RBI) policies that have an effect on the economy's overall money supply. The following are some examples of quantitative measurement instruments: • Bank rate: This is the interest rate at which the Reserve Bank of India (RBI) lends to commercial banks for long-term loans. Currently, the bank rate is 6.5 percent. This instrument is used to regulate the money supply in long-term lending. When the RBI raises the bank rate, commercial banks' interest rates rise as well. As a result, there is less demand for credit in the economy. When the RBI lowers the bank rate, the opposite happens. • Liquidity adjustment facility: this facility helps banks to correct daily liquidity mismatches. It involves operations such as repo and reverse repo. • Repo rate: The repo rate is the interest rate at which the Reserve Bank provides commercial banks with short-term loans secured by securities. The repo rate is currently 6.25 percent. • Reverse repo rate: It is the polar opposite of repo, in which banks lend money to the RBI in exchange for government securities and receive interest. The reverse repo rate is currently at 6%. • MSF (Marginal Standing Facility): It was implemented in 2011-12, and it allows commercial banks to borrow money from the RBI by pledging government securities that are below the statutory liquidity ratio limits (SLR). The Marginal Standing Facility rate is currently 6.5 percent. Varying reserve ratios: The Reserve Bank of India employs a variety of methods to change the reserve criteria that banks must meet with the RBI. • Cash reserve ratio (CRR): This is the minimum amount of cash that commercial banks must keep in the form of deposits with the Reserve Bank of India. A rise in the CRR reduces the money supply in the economy, while a reduction in the CRR raises it. The CRR rate is currently at 4%. • Statutory liquidity ratio (SLR): This is the amount of non-cash assets that must be held at the RBI. It includes government securities, shares, gold, and other precious metals. A rise in the SLR limits banks' ability to lend to their customers. When SLR is decreased, the opposite occurs. SLR is currently at 19.5 percent. Open market operations (OMOs): OMOs are the selling and acquisition of government securities for the purpose of adding or absorbing liquidity into the economy. Market stabilization scheme (MSS): The market stabilization scheme (MSS) is a tool for absorbing excess liquidity from the economy by selling short-term government securities. The Reserve Bank keeps the money raised from this instrument in a separate account. It was 93 CU IDOL SELF LEARNING MATERIAL (SLM)

released in 2004. After demonetization in 2016, the RBI increased the market stabilization scheme's ceiling. 4.11 ACTS AND REFORMS IN BANKING SECTOR Various banking reforms and acts have been implemented in India as part of the increasing movement toward globalization and economic liberalization in order to improve the health and financial soundness of banks and improve operational efficiency so that Indian banks can meet internationally agreed performance standards. The implementation of banking reforms was based on the recommendations of various committees. The following are the committees that recommended banking sector reforms: • The first Narasimhan Committee- 1991 • The Verma Committee – 1996 • The Khan Committee – 1997 • The Second Narasimhan Committee – 1998 The banking sector reforms were carried out in two stages. The first phase of reform aimed to improve the policy structure, institutional framework, and financial health of the nation. • Policy Framework Improvement: Improvements to the policy framework included interest rate deregulation, lowering the Cash Reserve Ratio to the initial level, phasing out the Statutory Liquidity Ratio, and expanding the reach of priority sector lending by linking lending rates to advance scale. • Institutional Framework Improvement: this emphasized recapitalization, improving the supervisory structure, and fostering a competitive climate. Certain prudent norms were recommended to improve the financial soundness of the banking sector, and measures were taken to reduce the proportion of nonperforming assets (NPAs). The Second Phase of the banking sector reforms focuses on rehabilitating the banking industry's structure, human resource growth, and technical advancements in order to strengthen the banking system's very core. The following are some of the banking acts and reforms: S.No. Names of the Banking Acts and Reforms Years 1 Societies Registration Act 1860 CU IDOL SELF LEARNING MATERIAL (SLM) 94

2 Negotiable Instrument Act 1881 3 Indian Trusts Act 1882 4 The Bankers’ Books Evidence Act 1891 5 Indian Stamp Act 1899 6 Co-operative Societies Act 1912 7 Provident Funds Act 1925 8 Indian Partnership Act 1934 9 The Reserve Bank of India Act 1934 10 Insurance Act 1938 11 Central Excise Act 1944 12 Public Debt Act 1944 13 International Monetary Fund and Bank Act 1945 14 Employees’ State Insurance Act 1948 15 The Industrial Finance Corporation of India Act 1948 16 The Banking Companies (Legal Practitioner Clients’ Accounts) Act 1949 17 The Industrial Disputes (Banking and Insurance Companies) Act 1949 18 The Banking Regulation (Companies) Rules 1949 19 The Banking Regulation Act 1949 20 Chartered Accountants Act 1949 21 Contingency Fund of India Act 1950 22 The State Financial Corporations Act 1951 23 Employees Provident Fund and Miscellaneous Provisions Act 1952 24 The Reserve Bank of India (Amendment and Misc. Provisions) Act 1953 25 The Industrial Disputes (Banking Companies) Decision Act 1955 26 The State Bank of India Act 1955 CU IDOL SELF LEARNING MATERIAL (SLM) 95

27 Life Insurance Corporation Act 1956 28 Companies Act 1956 29 Central Sales Tax Act 1956 30 The State Bank of India (Subsidiary Banks) Act 1959 31 The Subsidiary Banks General Regulation 1959 32 The Deposit Insurance and Credit Guarantee Corporation Act 1961 33 Customs Act 1962 34 Unit Trust of India Act 1963 35 Limitation Act 1963 36 Nationalization of Banks Act (However, the government decided to 1964 nationalize 14 major commercial banks on 19th July 1969) 37 Banking Laws (Application to Co-operative Societies) Act 1965 38 Banking Companies (Acquisition and Transfer of Undertaking) Act 1969 39 The Nationalized Banks (Management and Miscellaneous Provisions) 1970 Scheme 40 The Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 41 The Regional Rural Banks Act 1976 42 Foreign Contribution (Regulation) Act 1976 43 The Banking Companies (Acquisition and Transfer of Undertakings) Act 1980 44 The Export-Import Bank of India Act 1981 45 The National Bank for Agriculture and Rural Development Act 1981 46 Chit Fund Act 1982 47 Sick Industrial Companies (Special Provisions) Act 1985 48 Shipping Development Fund Committee (Abolition) Act 1985 49 Banking Companies (Regulation)Rules 1985 50 The National Housing Bank Act 1987 CU IDOL SELF LEARNING MATERIAL (SLM) 96

51 SIDBI Act 1989 52 SIDBI General Regulations 1990 53 Securities and Exchange Board of India Act 1992 54 The Special Court (trial of Offences relating to Transactions in Securities) 1992 Act 55 The Industrial Finance Corporation (Transfer of Undertakings and 1993 Repeal) Act 56 Recovery of Debts due to Banks and Financial Institutions Act 1993 57 Debts Recovery Appellate Tribunal (Procedure) Rules 1994 58 Industrial Reconstruction Bank (Transfer of Undertaking & Appeal) Act 1997 59 Foreign Exchange Management Act 1999 60 Insurance Regulatory and Development Authority Act 1999 61 Prevention of Money Laundering Act 2002 62 Fiscal Responsibility and Budget Management Act 2002 63 The Securitization and Reconstruction of Financial Assets and 2002 Enforcement of Security Interest Act 64 Industrial Development Bank (Transfer of Undertaking & Repeal) Act 2003 65 Credit Information Companies (Rules & Regulation) Act 2005 66 Government Securities Act 2006 67 The Banking Ombudsman Scheme 2006 68 Factoring Act Rules 2011 69 SARFAESI (Central registry) Rules 2011 70 Securities Law (Amendment) Act 2014 71 The Regional Rural Banks (Amendment) Act – Diluted the sharing 2014 pattern by limiting the composite share of Central Government and sponsor bank to 51% 72 The Insurance Laws (Amendment) Act- pushed FDI limit to 49% 2015 97 CU IDOL SELF LEARNING MATERIAL (SLM)

73 The Companies Act (Amended) (legislated in 1956) 2015 4.12 BANKING SECTOR REFORMS: ENSURING REGULATION In India, the banking system is one of the most significant sources of credit for both businesses and individuals. Bank scale, durability, and capitalization are all important factors in the smooth operation of financial markets. The banking sector in India is distinguished by a high proportion of government-owned banks. Low financial depth, a high share of non-performing assets (NPAs), and a high concentration of public sector banks are all major challenges for the banking system (PSBs). Industrial credit and banks' ability to meet international capital requirements are also hampered by these problems. Existing interventions have proven insufficient to address these issues. Improving bank governance, increasing competition in the sector, and developing corporate bond markets to ease pressure on banks as lending sources are the focus areas for stimulating the banking sector. History of bank reforms of India • Prior to 1991, India had nationalized a significant portion of its banking sector. • Banks with deposits of more than Rs. 50 crores were nationalized by the government in 1969. More than 80% of bank branches were under its jurisdiction. • In 1980, the government nationalized banks with deposits totaling more than Rs. 200 crores across the country, bringing an additional number of banks under its jurisdiction. The government owned about 90% of all banks at the time, and this percentage remained constant. • Regional penetration, coverage rate, and the number of bank branches all increased dramatically between 1969 and 1991. Banks have also seen significant increases in deposit and credit growth. Priority sector lending increased from 14% to 41%. By 1991, however, bank efficiency and productivity had plummeted, customer service had deteriorated, and profitability had plummeted. When the government liberalized the economy in 1991, it also implemented a number of banking reforms. • In 1991, the Committee on Financial Systems, chaired by Mr. Narasimhan, recommended: • Reducing the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) to free up bank resources; • Relying on market forces to decide interest rates; making it easier for private and international banks to join to increase competition; and 98 CU IDOL SELF LEARNING MATERIAL (SLM)

• Reducing the number of public sector banks substantially (PSBs).Many of the committee’s recommendations were implemented, including the reduction in SLR and CRR, having a market-determined interest rate and opening of the new private sector and foreign banks. • Mr. Narasimhan also chaired the Committee on Banking Sector Reforms in 1998, which recommended a new set of steps to improve the banking sector. It looked at how well existing policies were working and introduced new ones in the areas of regulation, capital adequacy, and bank mergers. Aside from these, the 1998 Committee also suggested measures to improve technological use, skills training, and bank management. Many of the reforms implemented since 1991 have strengthened India's banking sector's efficiency and power. The current situation: • India's banking system is marked by a high proportion of Public Sector Banks (PSBs), which account for over 70% of total assets. Since PSBs are the main contributors to the vast and growing stock of non-performing assets, their output ultimately reflects that of the entire banking system (NPAs). • Public sector banks (PSBs) have approximately 16% stressed assets, more than three times that of private banks. • Rising nonperforming assets (NPAs) have placed pressure on PSBs' health, as evidenced by their declining Return on Assets (ROA) and Return on Equity (ROE) ratios, which turned negative for the first time in a decade in 2016. In March 2016, the gross non-performing assets of all scheduled commercial banks totaled Rs. 6.1 trillion. • Over time, asset quality and profitability have deteriorated. • Higher risk provisions, loan write-offs, and a drop in net interest income are all contributing to the bank's profit decline. • The banking sector's stress has resulted in a downturn in industrial credit. They also make it more difficult for banks to meet foreign capital requirements. • Credit growth to the manufacturing sector contracted by 5.1 percent in January 2017, compared to 5.6 percent in January 2016. • High NPAs are also likely to stymie banks' ability to meet Basel III's higher capital requirements. These regulations will take effect in January 2019. To fix the issue, the government has injected funds. The government's appreciation of high NPA ratios and their negative impact on the economy is reflected in the recapitalization steps included in the Indra Dhanush Plan for 2015-16. • Further declines in bank credit, poor bank profitability, and weakening capital adequacy ratios are among the negative consequences. To combat this, the Ministry of 99 CU IDOL SELF LEARNING MATERIAL (SLM)

Finance announced on October 24 a Rs. 2.1 lakh crore programme to recapitalize banks. Not only will these funds assist PSBs in meeting their minimum capital requirements, but they will also assist banks in cleaning up their balance sheets and covering bad loans in the future. • Aside from recapitalization, the Indra Dhanush Plan involves broader banking reforms to improve institutional governance and align incentives in the banking system. • Among its seven points are the establishment of an accountability system, the separation of the positions of CFO and Chairman in PSBs, the establishment of a Bank Board Bureau (BBB) for nomination, and Governance Reforms. However, its implementation is still lacking. In addition, the Insolvency and Bankruptcy Code (IBC) provides a mechanism for dealing with nonperforming assets (NPAs). Banks and promoters must reach an agreement on a resolution plan within 270 days or face asset liquidation. Global Competition: • In terms of financial depth, or the size of banks, other financial institutions, and markets in relation to economic output, India's banks lag behind their global counterparts. Financial deepening has helped to alleviate poverty in rural areas, according to a report based on state-level data from India. • In comparison to other emerging economies, India has low levels of private credit to GDP and credit to deposit ratios. • India's private credit to GDP ratio in 2015 was 50.2 percent, compared to 140 percent in China and 71% in Brazil. • In 2015, India's bank credit as a percentage of bank deposits was 77 percent, compared to 119 percent in Brazil and 312 percent in China. • The financial system is dominated by large banks, with few new entrants. The top ten banks (ranked by assets) owned 58 percent of the total assets in the system as of March 2016. Just 14 universal bank licenses have been issued since 1991. In comparison, between 1976 and 2009, over 130 new banks were chartered annually in the United States. • The number of foreign banks in India continues to be restricted. International banks accounted for 6% of total banking assets as of March 2016. Way forward: • India should aim for a more stable and well-capitalized banking system, with increased credit-extension potential and an incentive framework that encourages resource allocation that is efficient. 100 CU IDOL SELF LEARNING MATERIAL (SLM)