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Definition of 'Monetary Policy

• Monetary policy is the macroeconomic policy

• laid down by the central bank of a country.
• It involves management of money supply
• and interest rate
• This accounts for the demand side of the
economic policy used by
• the government of a country to achieve
• macroeconomic objectives like
• inflation, consumption, growth and liquidity.
• The objectives of monetary policy in India have
evolved as those of maintaining
• price stability and ensuring
• an adequate flow of credit to
• The productive sectors of the economy.
• These twin objectives are clearly spelt out from
time to time
• in monetary and credit policy announcements by
• the Reserve Bank. .
• RBI implements the monetary policy through
• open market operations, bank rate policy,
• reserve system, credit control policy,
• moral persuasion and through many other
instruments.
• Usage of any of these instruments will lead to
• changes in the interest rate, or
• the money supply in the economy.
• Monetary policy can be
• expansionary and contractionary in nature.
• Increasing money supply and reducing interest rates indicate an
expansionary policy.
• The reverse of this is a contractionary monetary policy.
• For instance, liquidity is important for an economy to spur growth.
• To maintain liquidity, the RBI is dependent on the monetary
policy.
• By purchasing bonds through open market operations, the
• RBI introduces money in the system and reduces the interest
rate.
 TOOLS FOR MONETORY CONTROL
• Direct Instruments;---
• 1.Cash Reserve Ratio
• Cash Reserve Ratio (CRR) is the mandatory reserves to be
maintained with Reserve Bank of India.
• Every scheduled Bank is required to keep certain percentage of
their demand and time liabilities, as cash balances
• with Reserve Bank of India from time to time as per Section 42 of
the Reserve Bank of India Act,.
• There is no maximum ceiling or floor rate in respect of CRR.
• The non-scheduled banks are also required to maintain the cash
reserve as per Section 18 of the Banking Regulation Act.
• 2.Statutory Liquidity Ratio (SLR):
• SLR is also the mandatory reserves to be maintained by banks
held in the form of prescribed securities.
• This is also based on certain percentage of their demand and time
liabilities of a bank.
• As per Section 24 of the Banking Regulation Act, every banking
company in India is required to maintain in India,
• in cash, gold or unencumbered approved securities, an amount
• which should not at close of business on any day be less than
• the percentage prescribed by RBI of the total of its demand and
time liabilities in India.
• This is known as “Statutory Liquidity Ratio
 POWERS TO CONTROL ADVANCES
• The core business of a banking company is to lend money in the
form of loans and advances.
• Lending may be for
• short term or medium term or long term.
• Lending money can be on secured or unsecured basis to
different kinds of borrowers for various purposes.
• RBI has to facilitate the flow of an adequate volume of bank
credit to industry, agriculture and trade
• to meet their genuine needs.
• At the same time, to keep inflationary pressures under check,
• it has to restrain undue credit expansion and also ensure that
credit is not diverted for undesirable purposes
• As the Reserve Bank of India is the controller of credit
i.e. it has the power to
• influence the volume of credit created by banks in
India,
• It does so through changing the Bank rate/Repo rate
or through open market operations.
• According to the Banking Regulation Act of 1949,
• the Reserve Bank of India can ask any particular bank
or the whole banking system
• not to lend to particular groups or persons on the
• The instruments of credit control are of two types as under:
• (a) General or Quantitative
• (b) Selective or Qualitative
• Quantitative/General Credit Control
• Under the General Credit Control, the instruments often employed by
RBI are :-----
• 1. Bank Rate Policy
• The Bank rate has been defined in Section 49 of RBI Act as “ the
standard rate at which it (RBI) is prepared to buy
• or rediscount bills of exchange or other commercial paper eligible to
purchase under this Act.
• By varying the rate,the RBI can to a certain extent regulate the
commercial bank credit and the general credit situation of the
country ..
• 2.Through Reserve Requirements
• The Reserve Bank of India is vested with the powers to
vary
• the CRR and SLR.
• By varying reserve requirements,
• the RBI restricts/frees the flow of funds by way of credit
to different sectors of the economy.
• When SLR or CRR is increased by RBI,
• It reduces commercial banks’ capacity to create credit
and thus helps to check inflationary pressures
• 3.Repo Rate and Reverse Repo Rate:
• Repos: The RBI introduced repurchase auctions (Repos)
since December,1992 with regards to
• dated Central Government securities.
• When banking systems experiences liquidity shortages
and the rate of interest is increasing,
• the RBI will purchase Government securities from
Banks, payment is made to banks and it improves
liquidity and
• expands credit.
• Reverse Repos : Since November, 1996 RBI
introduced Reverse Repos to
• sell Govt. securities through auction at fixed cut-off
rates of interest.
• It provides short term avenues to banks to park
their surplus funds, where there is considerable
liquidity and call rate has a tendency to decline.
• These two rates are, now-a- days, commonly
applied for reducing money supply or increasing it.
 Selective Credit Control

• Under the Selective Credit Control, the authority of the Reserve Bank
is exercised by virtue of the provisions of Section 21 and 35 A of
Banking Regulation Act.
• The Reserve Bank may give directions to banks generally or to any
bank or a group of banks in particular on different aspects of granting
credit, namely, –
• (a) the purposes for which advances may or may not be made
• (b) the margins to be maintained in respect of secured advances
• (c) the maximum amount of advances or other financial
accommodation which may be made by a bank to or
• the maximum amount of guarantees which may be given by a bank
on behalf of any one company etc.
• Some of the main restrictions on loans and advances are:
• (i) As per the provisions of the Banking Regulation Act, no banking
company in India can grant loans or
• advances against the security of its own shares
• (ii) No banking company can hold shares in a company (a) as
pledge or mortgagee in excess of the limit of
• 30 per cent of the Paid up capital of that company or 30 percent of
the Bank’s Paid-up capital andReserves, whichever is less.
• No banking company can commit to grant or grant loans or
advances to or
• on behalf of any of its directors
• (iii) Further restrictions on the loans and advance to
the director as a partner, guarantor of any loans
and advances
• (iv) No banking company can grant loans against (a)
Fixed Deposits of other Banks (b) Certificate of
Deposits
• The restrictions on different types of loans and
advance may be imposed from time to time by the
Reserve Bank of India according to the requirement
of the situation as well.
 MONETARY AND CREDIT POLICY
• As part of the Monetary Management, the Reserve Bank of
India announces their policies on a regular basis,
• which is called as Monetary and Credit Policy
• Monetary Policy statement consists of two parts. Part A cover
Monetary Policy and is divided into four sections
• 1. Overview of global and domestic macroeconomic
developments
• 2. Outlook and projections for growth, inflation and monetary
aggregates
• 3. Stance of monetary policy and
• 4.monetary measures.
•Part B deals with the developmental and
regulatory policies consisting five sections
viz.,
•(a) Financial Stability
•(b) Financial Markets
•(c) Credit Delivery and Financial Inclusion
•(d) Regulatory and Supervisory Measures and
•(e) Institutional Developments
• The various aspects of global economy and
domestic economy and the significant events
which took place in the past year, are covered.
• Further the outlook for the future in respect of
global and domestic economies are discussed.
• The policy also highlights the important risks like
inflation risk, current account deficit and the
monetary measures to manage such and other
risks are covered
• Added to these, the issues and policy measures relating to
financial stability, financial markets, control measures
through regulations and supervision are also covered.
• Various initiatives taken by the Reserve Bank of India as
Regulator and Supervisor in the Indian Banking Scenario
are also highlighted.
• It also includes the credit delivery and other issues
relating to priority sector lending.
• The Monetary policy outlines the various measures taken
and expected to be taken by the Reserve Bank of India in
their role as the Monetary Management
• Market discipline has been given due importance under Basel II
framework on capital adequacy by recognizing it as one of its three
Pillars.
• To cover the full and complete disclosure, some very useful
information is better provided, or can only be provided, by notes to
the financial statements.
• Hence notes become an integral part of the financials of banks.
• The users can make use of these notes and supplementary
information to arrive at a meaningful decision
• Summary of Significant Accounting Policies’ and ‘Notes to Accounts’
may be shown under Schedule 17 and
• Schedule 18 respectively, to maintain uniformity.
 Disclosure Requirements

• In order to encourage market discipline,

• Reserve Bank has over the years developed a set of
disclosure requirements which allow the market
participants to assess key pieces of information on
• capital adequacy, risk exposures, risk assessment
processes and key business parameters
• which provide a consistent and understandable
disclosure framework that enhances comparability.
 DISCLOSURE OF ACCOUNTS AND BALANCE SHEETS
OF BANKS
• There are various types of users of the financial
statements of banks like
• shareholders, investors, creditors
• credit rating agencies who need information about
the financial position and performance of the banks.
• The financial statements are required to provide the
information about the financial position and
• Performance of the bank in making economic
decisions by the users.
• The important information sought by these users
are, about bank’s Liquidity and solvency and the
risks related to the assets and liabilities recognized
• on its balance sheet and to its
• off balance sheet items
• This useful information can be provided by way
• of ‘Notes’ to the financial statements, being
supplementary information for market discipline..
 CORPORATE GOVERNANCE
• Corporate Governance is an integral part of the management
control system which reflects the corporate’s strategy in
maintaining the image and reputation of the company.
• In today’s global competition, banks have to be careful in
ensuring their integrity in dealing with the financial aspects of
their clients.
• In this respect, a dynamic corporate governance practices are
needed..
• Corporate Governance means to ensure that the transparency,
accountability in the interests of the stakeholders such as
• the shareholders, employees, clients and others.
 Need for Corporate Governence in Banks and FI.

•Banking and financial institutions are the

strong backbone of any economy and results
in healthy economic condition of a country.
• This requires sound functioning of its
Banking sector.
•Thus, corporate governance has great
importance in Banks and financial institutions
• In Indian market, the concept of corporate
governance is emphasized considering the
liberalization, privatization and globalization
phase, resulting in institutionalization of
financial markets.
• Thus, in this way, corporate essentially requires
to adhere with the honest, fair and transparent
corporate procedures and practices.
 Corporate Governance in Banks

• Over the years, the Reserve Bank of India as Supervisor

of Banking companies in India has been playing
significant role in ensuring the sound corporate
governance practices which are followed by the
banking companies.
• RBI’s various guidelines in mergers and acquisitions,
pattern of shareholding, restrictions on various issues,
are some of the examples of RBI’s role in the corporate
governance practices of banks in India.
• Considering the global corporate governance experience,
• RBI has undertaken several measures to strengthen the
corporate governance in the Indian banking sector.
• Various areas, which were potentially important and
needed attention, were emphasized.
• It included defined role of supervisors,
• ensuring an environment supportive to the sound
corporate governance,
• effective organizational structure to have responsible
board of directors, etc.
• Another reason for corporate governance in the
banking sector was the fact that
• Indian banking sector is dominated by the
government-managed banks (including rural banks,
)
• And In this phenomenon,
• corporate governance issue was important for
public sector banks, especially because they
constitute major share of business in the banking
• The Reserve Bank of India (RBI) enacted in 1934
and the Securities and Exchange Board of India
(SEBI) established in 1992 are two
• important statutory bodies empowered to
regulate and maintain the
• standard required for the effective corporate
governance.
• Another global initiative in 1999 of the Basel
Committee also brought important principles on
• Additionally, Banking Regulation Act, 1949,
• Foreign Exchange Management Act (FEMA), 1999,
• Payment and Settlement Systems Act, 2007,
• New Companies Act, 2013 and other directives/
regulations/ guidelines/ issued by RBI and SEBI from
time to time have created a positive environment for
corporate governance.
• This evolution phase of corporate governance in
banking industry has set global standards for
corporate governance.

Another aspect of corporate governance need in
the banking is influenced by the fact that
• boards of directors and senior management
• govern the business and affairs of individual
banks,
• and at any point of time,
• any imbalance within the effective corporate
governance framework will led to corporate
failure.
• In the light of above
• the need of corporate governance in banking sector is
essentially required to establish
• a capable, effective and reliable board of directors and their
composition to have an
• effective and operating audit committee, compensation
committee and nominating/ corporate governance committee
• to establish corporate governance procedures in order to
enhance shareholder’s value
• to establish a corporate code of ethics
• to disclose the information in an transparent manner
RBI’S ROLE IN ENSURING CORPORATE GOVERNANCE
IN BANKS
• RBI, being the central bank and banking sector
regulator in India
• has major role in formulating,
• implementing and promoting
• the standards of corporate governance for India’s
banking sector.
• Originally, RBI had task to regulate issue of currency,
maintaining forex reserve, , establishing specialized
institutions
• to promote saving and to fulfill needs of priority sector.
• Afterwards post librelisation phase,
• it also started focusing on facilitation of
• efficient functioning of capital and money market,
fixing interest rates,providing necessary operational
framework to banks
• for setting various transparency and disclosures
norms.
• It also focuses on safeguarding and maximizing the
shareholder’s value and stabilizing the financial
system
• Apart from main functions of RBI, it also has
supervisory and regulatory powers for public sector
banks, private sector banks, regional rural banks,
foreign banks, non-banking financing companies
(NBFC), Small Industries Development Bank of India
(SIDBI), cooperative banks and various institutions
formed under special acts (including SBI Act, IDBI Act,
Industrial Finance Corporation, NABARD Act, Deposit
Insurance and Credit Guarantee Corporation Act and
National Housing Bank Act).
• RBI also follows the important functions guided
by theBoard of Financial Supervision (BFS),
• which inspects and monitor the banks through its
• CAMELS approach (capital adequacy, asset
quality, management, earnings, liquidity, and
systems & control).
• Here primary objective of BFS is to undertake
consolidated supervision of the financial sector .
• Within the supervision and regulatory powers,
• RBI has description over bank licensing, asset
liquidity, branch expansion and
• methods of amalgamation and liquidation, etc.
• All these regulations empower RBI to
• play leading role of formulating and
• implementation of effective corporate governance
mechanism in banking sector.
 Regulator of the Banking System
• As the regulator and supervisor of the banking system,
the Reserve Bank protects the interests of depositors,
ensures a framework for orderly development and
conduct of banking operations conducive to customer
interests and maintains overall financial stability
through preventive and corrective measures.
• The Reserve Bank makes use of several supervisory
tools:
• On-site inspections-- Off-site surveillance,
• making use of required reporting by the regulated
• As the nation’s financial regulator, the Reserve Bank handles a
range of activities, including:
• Setting prudential regulations to ensure solvency and
liquidity of the banks
• Prescribing lending to certain priority sectors of the economy
• Regulating interest rates in specific areas
• Setting appropriate regulatory norms related to income
recognition, asset classification,
• provisioning, investment valuation, exposure limits
• Initiating new regulations
•
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