ANNUAL MONETARY AND CREDIT POLICY
The RBI announces the credit policy twice a year — generally in April and in October. While in April it announces new policy initiatives, the October pronouncement is a review of the April policy. RBI has now decided to have quarterly reviews of monetary policy.
Reserve bank of India (RBI) established in 1935 is the Central bank. RBI is regulator for ﬁnancial and banking system, and formulates monetary policy and prescribes exchange control norms. The Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 authorize the RBI to regulate the banking sector in India.
Important Legislations pertaining to Banking Sector are:
l. The Banking Regulation Act, 1949
2. The Reserve Bank of India Act, I934
Acts governing speciﬁc functions:-
1. Public Debt Act, 1944
2. Government Securities Act 2006
3. Securities Contract (Regulation) Act, 1956
4. Indian Coinage Act, 1906
5. Foreign Exchange Management Act, 1999
6. Payment and Settlement Systems Act, 2007
Acts governing Banking Operations:-
l. Companies Act, I956
2. Banking Companies (Acquisition and Transfer of Undertakings) Act, I970
3. Bankers‘ Books Evidence Act, 1891
4. The Negotiable Instruments Act, 1881
5. The Prevention of Money Laundering Act, 2002
6. Securities and Exchange Board of India Act, 1992
Acts governing Individual Institutions:-
l. The State Bank of India Act, 1954
2. The Industrial Development Bank (Transfer of Undertaking and Repeal) Act,2003
3. The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act,l 993
4. National Bank for Agriculture and Rural Development Act, 1981
5. National Housing Bank Act, 1987
6. Deposit Insurance and Credit Guarantee Corporation Act, 1961
7. Regional Rural Banks Act, 1976
Constitution of the Financial Sector Legislative Reforms Commission (FSLRC)
The FSLRC has been constituted under the Chairmanship of Justice B.N.Srikrishna by the Central Government in March 2011, with a view to rewriting, streamlining and harmonising ﬁnancial sector laws, rules and regulations with the requirements of India’s growing ﬁnancial sector.
The Terms of Reference of the Commission inter alia include the following:
I. Examining the architecture of the legislative and regulatory system governing the Indian ﬁnancial sector
II. Examining if public feedback for draft subordinate legislation should be made mandatory, with exception for emergency measures
III. Examining the most appropriate means of oversight over regulators and their autonomy from the Government.
The Securities and Insurance Laws (Amendment and Validation) Act, 2010:-
- The Act, effective from June 18, 2010, has amended the Reserve Bank of India Act, 1934, the Insurance Act, 1938, the Securities Contracts (Regulation) Act, l956and the Securities and Exchange Board of India Act, 1992.
- As noted in the RBI Annual Report 2010- ll, a new chapter on “Joint Mechanism” has been inserted in the Reserve Bank of India Act, 1934.
- The Chapter provides for a Joint Mechanism, consisting of Union Finance Minister as its ex-ofﬁcio Chairperson, Governor, Reserve Bank, as its ex-ofﬁcio Vice-Chairman, Finance Secretary and Chairpersons of SEBI, IRDA and Pension Fund Regulatory and Development Authority (PFRDA), as its members to resolve any difference of opinion among the regulators.
- The Act provides for a reference being made to the Joint Committee only by the regulators and not by the Central Government. The decision of the Joint Committee would be binding on the Reserve Bank, SEBI, IRDAI and PFRDA.
The Banking Laws (Amendment) Bill, 2011:-
- The Banking Laws (Amendment) Bill, 2011 seeks to strengthen the regulatory powers of the Reserve Bank of India.
- It aims to address the issue of capital raising capacity of banks in India. This Bill was ﬁrst introduced in 2005 but lapsed with the dissolution of the 14th Lok Sabha.
- The Bill introduced in Lok Sabha on March 22nd, 2011 seeks to amend the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 to make the regulatory powers of the Reserve Bank more effective and to increase the access of the nationalised banks to capital market to raise capital required for expansion of banking business.
- The Bill seeks to inter alia:
a. Enable the nationalised banks to increase or decrease the authorised capital with approval from the Central Government and the Reserve Bank without being limited by the ceiling of 3,000 crore
b. Make provisions to ensure that control of banking companies is in the hands of ‘ﬁt and proper‘ persons
c. Allow nationalised banks to issue two additional instruments (bonus shares and rights
issue) for accessing the capital market to raise capital required for expansion of banking
d. Substantially increase the penalties and ﬁne for some violations of the Banking Regulation Act, 1949
e. Confer power upon the Reserve Bank to levy penal interest in case of non-maintenance of required cash reserve ratio.
National Bank of Agriculture and Rural Development (NABARD):-
- NABARD is set up as an apex Development Bank with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts.
- It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity NABARD is entrusted with:-
- Providing reﬁnance to lending institutions in rural areas
2. Bringing about or promoting institutional development and
3. Evaluating, monitoring and inspecting the client banks
- Besides this pivotal role, NABARD also:
a) Acts as a coordinator in the operations of rural credit institutions
b.) Extends assistance to the Government, the Reserve Bank of India and other organizations in matters relating to rural development
c.) Offers training and research facilities for banks, cooperatives and organizations working in the ﬁeld of rural development
d.) Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development
e.) Acts as regulator for cooperative banks and RRBs
f.) Extends assistance to the government, the Reserve Bank of India and other organizations in matters relating to rural development
g.) Offers training and research facilities for banks, cooperatives and organizations working in the ﬁeld of rural development
h.) Helps the state governments in reaching their targets of providing assistance to eligible institutions in agriculture and rural development
DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION or INDIA (DICGC)
- The functions of the DICGC are governed by the provisions of ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961‘ (DICGC Act) and “The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961” framed by the Reserve Bank of India in exercise of the powers conferred by subsection(3) of Section 50 of the said Act.
- The preamble of the Deposit Insurance and Credit Guarantee Corporation Act,1961 states that it is an Act to provide for the establishment of a Corporation for the purpose of insurance of deposits and guaranteeing of credit.
- The concept of insuring deposits kept with banks received attention for the ﬁrst time in the year 1948 after the banking crises in Bengal.
- The question came up for reconsideration in the year 1949, but it Was decided to hold it in abeyance till the Reserve Bank of India ensured adequate arrangements for inspection of banks.
- Subsequently, in the year 1950, the Rural Banking Enquiry Committee also supported the
concept. Serious thought to the concept Was, however, given by the Reserve Bank of India and the Central Government after the crash of the Palai Central Bank Ltd., and the Laxmi Bank Ltd. in 1960.
- The Deposit Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961.After it was passed by the Parliament, the Bill got the assent of the President on
December 7, 1961 and the Deposit Insurance Act, 1961 came into force on Januaryl, 1962.
The Deposit Insurance Scheme was initially extended to functioning commercial banks only. This included the State Bank of India and its subsidiaries, other commercial banks and the branches of the foreign banks operating in India.
- Since 1968, with the enactment of the Deposit Insurance Corporation (Amendment) Act, 1968, the Corporation was required to register the ‘eligible cooperative banks‘ as insured banks under the provisions of Section 13A of the Act.
- An eligible co-operative bank means a co-operative bank (whether it is a State co-operative bank, a Central co-operative bank or a Primary co-operative bank) in a State which has passed the enabling legislation amending its Cooperative Societies Act, requiring the State Government to vest power in the Reserve Bank to order the Registrar of Co-operative Societies of a State to windup a co-operative bank or to supersede its Committee of Management and to require the Registrar not to take any action for winding up, amalgamation or reconstruction of a co-operative bank without prior sanction in writing from the Reserve Bank of India.
- Further, the Government of India, in consultation with the Reserve Bank of India, introduced a Credit Guarantee Scheme in July 1960. The Reserve Bank of India was entrusted with the administration of the Scheme, as an agent of the Central Government, under Section 17 (11 A)(a) of the Reserve Bank of India Act, 1934and was designated as the Credit Guarantee Organization (CGO) for guaranteeing the advances granted by banks and other Credit Institutions to small scale industries.
- The Reserve Bank of India operated the scheme up to March 31, 1981.
- The Reserve Bank of India also promoted a public limited company on January14, 1971, named the Credit Guarantee Corporation of India Ltd (CGCI).
- The main thrust of the Credit Guarantee Schemes, introduced by the Credit Guarantee Corporation of India Ltd., was aimed at encouraging the commercial banks to cater to the credit needs of the hitherto neglected sectors, particularly the weaker sections of the society engaged in non-industrial activities, by providing guarantee cover to the loans and advances granted by the credit institutions to small and needy borrowers covered under the priority sector.
- With a view to integrating the functions of deposit insurance and credit guarantee, the above two organizations (DIC & CGCI) were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978.
- Consequently, the title of Deposit Insurance Act, l96lwas changed to ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961 ‘Effective from April 1, 1981, the Corporation extended its guarantee support to credit granted to small scale industries also, after the cancellation of the Government of India’s credit guarantee scheme.
- With effect from April 1, 1989, guarantee cover was extended to the entire priority sector advances, as per the deﬁnition of the Reserve Bank of India. However, effective from April 1, 1995, all housing loans have been excluded from the purview of guarantee cover by the
Industrial Development Bank of India (IDBI):-
- Industrial Development bank of India (IDBI) was constituted under Industrial Development bank of India Act, 1964 as a Development Financial Institution and came into being as on July 01, 1964 vide GOI notiﬁcation dated June 22, 1964.
- It was regarded as a Public Financial Institution in terms of the provisions of Section 4A of the Companies Act, 1956. It continued to serve as a DFI for 40 year still the year 2004 when it was transformed into a Bank.
- In response to the felt need and on commercial prudence, it was decided to transform IDBI into a Bank. For the purpose, Industrial Development bank (transfer of undertaking and Repeal) Act, 2003 [Repeal Act] was passed repealing the Industrial Development Bank of India Act, 1964.
- In terms of the provisions of the Repeal Act, a new company under the name of Industrial
Development Bank of India Limited (IDBI Ltd.) was incorporated as a Govt. Company under the Companies Act, I956 on September 27, 2004. Thereafter, the undertaking of IDBI was transferred to and vested in IDBI Ltd.
- With the effect from the effective date of October 01, 2004. In terms of the provisions of the Repeal Act, IDBI Ltd has been functioning as a Bank in addition to its earlier role of a Financial Institution.
- Towards achieving the faster inorganic growth of the Bank, IDBI Bank Ltd., a wholly owned subsidiary of IDBI Ltd. was amalgamated with IDBI Ltd. in terms of the provisions of Section 44A of the Banking Regulation Act, 1949 providing for voluntary amalgamation of two banking companies. The merger became effective from April O2, 2005.
- The United Western bank Ltd. (UWB), a Satara based private sector bank was placed under moratorium by RBI. Upon IDBI Ltd. showing interest to take over the said bank towards its further inorganic growth, RBI and Govt. of India amalgamated UWB with IDBI Ltd. in terms of the provisions of Section 45 of the Banking Regulation Act, I949. The merger came into effect on October 03, 2006.
- In order that the name of the Bank truly reﬂects the functions it is carrying on, the name of the Bank was changed to IDBI Bank Limited and the new name became effective from May 07, 2008 upon issue of the Fresh Certiﬁcate of Incorporation by Registrar of Companies, Maharashtra. The Bank has been accordingly functioning in its present name of IDBI Bank Limited.