🔰 Banking Awareness Study Notes - Moral Hazard 🔰
Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.
In a financial market, there is a risk that the borrower might engage in activities that are undesirable from the lender's point of view because they make him less likely to pay back a loan.
It occurs when the borrower knows that someone else will pay for the mistake he makes. This in turn gives him the incentive to act in a riskier way. This economic concept is known as moral hazard.
Example: You have not insured your house from any future damages. It implies that a loss will be completely borne by you at the time of a mishappening like fire or burglary. Hence you will show extra care and attentiveness. You will install high tech burglar alarms and hire watchmen to avoid any unforeseen event.
But if your house is insured for its full value, then if anything happens you do not really lose anything. Therefore, you have less incentive to protect against any mishappening. In this case, the insurance firm bears the losses and the problem of moral hazard arises.
Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.
In a financial market, there is a risk that the borrower might engage in activities that are undesirable from the lender's point of view because they make him less likely to pay back a loan.
It occurs when the borrower knows that someone else will pay for the mistake he makes. This in turn gives him the incentive to act in a riskier way. This economic concept is known as moral hazard.
Example: You have not insured your house from any future damages. It implies that a loss will be completely borne by you at the time of a mishappening like fire or burglary. Hence you will show extra care and attentiveness. You will install high tech burglar alarms and hire watchmen to avoid any unforeseen event.
But if your house is insured for its full value, then if anything happens you do not really lose anything. Therefore, you have less incentive to protect against any mishappening. In this case, the insurance firm bears the losses and the problem of moral hazard arises.
✍️Banking/Financial Awareness Notes on LIBOR✍️
LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate for unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages. It is an indicator of the health of the financial system and provides an idea of the trajectory of impending policy rates of central banks.
LIBOR is administered by the Intercontinental Exchange or ICE. It is computed for five currencies with seven different maturities ranging from overnight to a year. The five currencies for which LIBOR is computed are Swiss franc, euro, pound sterling, Japanese yen and US dollar. ICE benchmark administration consists of 11 to 18 banks that contribute for each currency.
The rates received from the banks are arranged in descending order and the top and bottom quartiles are excluded to remove outliers. The arithmetic mean of the remaining data is then computed to get the LIBOR rate. The process is repeated for each of the 5 currencies and 7 maturities, thereby producing 35 reference rates. 3 month LIBOR is the most commonly used reference rate.
Suppose a corporation issued a six-month floating rate note linked to LIBOR. On each coupon date, the coupon amount will be computed as the par value of the note time one half of the 6 month coupon rate quoted 6 months earlier. Assuming that the prior six months, LIBOR rate is 4 per cent and the par value of the note is 100 pounds, the coupon amount at present will be 100time(4%/2) which is equal to 2.
Now, if the 6 month LIBOR rate of the current period changed to 3.25% then the next 6 month coupon will be 100time(3.25%/2) equal 1.625.
Before ICE, LIBOR was set by British Bankers Association (BBA) but the rigging and manipulation of LIBOR during the financial crisis of 2008 has led the financial market watchdogs to replace the BBA LIBOR with a new administrator. On the basis of Wheatley Review Recommendation, the Hogg Tendering Advisory Committee selected a new entity called the Intercontinental Exchange for the administration of LIBOR. The new administrator became operational from February, 2014.
LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate for unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages. It is an indicator of the health of the financial system and provides an idea of the trajectory of impending policy rates of central banks.
LIBOR is administered by the Intercontinental Exchange or ICE. It is computed for five currencies with seven different maturities ranging from overnight to a year. The five currencies for which LIBOR is computed are Swiss franc, euro, pound sterling, Japanese yen and US dollar. ICE benchmark administration consists of 11 to 18 banks that contribute for each currency.
The rates received from the banks are arranged in descending order and the top and bottom quartiles are excluded to remove outliers. The arithmetic mean of the remaining data is then computed to get the LIBOR rate. The process is repeated for each of the 5 currencies and 7 maturities, thereby producing 35 reference rates. 3 month LIBOR is the most commonly used reference rate.
Suppose a corporation issued a six-month floating rate note linked to LIBOR. On each coupon date, the coupon amount will be computed as the par value of the note time one half of the 6 month coupon rate quoted 6 months earlier. Assuming that the prior six months, LIBOR rate is 4 per cent and the par value of the note is 100 pounds, the coupon amount at present will be 100time(4%/2) which is equal to 2.
Now, if the 6 month LIBOR rate of the current period changed to 3.25% then the next 6 month coupon will be 100time(3.25%/2) equal 1.625.
Before ICE, LIBOR was set by British Bankers Association (BBA) but the rigging and manipulation of LIBOR during the financial crisis of 2008 has led the financial market watchdogs to replace the BBA LIBOR with a new administrator. On the basis of Wheatley Review Recommendation, the Hogg Tendering Advisory Committee selected a new entity called the Intercontinental Exchange for the administration of LIBOR. The new administrator became operational from February, 2014.
RBI ECGC SEBI NABARD Grade B GK GS:
Departments of RBI
The Reserve Bank of India influences the management of commercial banks through its various policies, directions and regulations. Its role in bank management is quite unique. It performs the four basic functions such as planning, organizing, directing and controlling in laying a strong foundation for the functioning of commercial banks..
To carry out its functions/operations smoothly and efficiently, the Reserve Bank of India has the following departments.
1. Banking Department:
The Banking Department is responsible for rendering the bank’s services as a banker to the Government and to the banks.
It consists of four sub-divisions:
(i) Public Accounts Department;
(ii) Public Debt Department;
(iii) Deposit Accounts Department; and
(iv) Securities Department.
There are 14 branches of the Banking Department, each headed by a Joint/Deputy Manager.
2. Issue Department:
The Issue Department is concerned with the proper and efficient management of the note issue. For the conduct of monetary transactions, the country has been divided into 14 circles of issue, each having an Office of Issue — the branch of the Issue Department. Each branch of the Issue Department consists of:
(i) the General Department and
(ii) the Cash Department controlled by the currency officer.
The General Department deals with resource operations, i.e., arrangement of supply of notes and coins from the presses and Government Mints. The Cash Department deals with the cash transactions.
3. Department of Currency Management:
This department is concerned with the forecasting of the long-term requirements of the currency, indenting and allocation of currency notes to various branches of the Issue Department taking into account the demand pattern, storage facilities, etc. It is headed by the Chief Officer.
4. Department of Expenditure and Budgetary Control:
This department is concerned with the preparation of the bank’s budget and monitoring of the expenditure of the different units. It is headed by the Financial Controller.
5. Department of Government and Bank Accounts:
This department is concerned with the maintenance and supervision of the bank’s accounts
in the Issue and the Banking Departments and the compilation of weekly statements of affairs and the Annual Profits & Loss Account and Balance Sheet. It is headed by the Chief Accountant.
6. Exchange Control Department:
The Exchange Control department is responsible for controlling foreign exchange transactions and maintaining exchange rate stability.
7. Department of Banking Operations and Development:
This Department was entrusted with the responsibility of the supervision, control and development of the commercial bank system in the country. Till July 1982, it was also concerned with the Lead Bank Scheme and bank credit to the priority sectors.
8. Industrial Credit Department:
The Industrial Finance Department is basically concerned with the administration of the Credit Guarantee Scheme for small scale industries or as agent of the Government of India, with the operational and organisational aspects of the State Financial Corporation’s (SFCs), work connected with the Industrial Development Bank of India (IDBI), data collection about financing of small-scale industries and other relevant problems.
It also deals with the operation and administration of the Credit Authorisation Scheme.
9. Agricultural Credit Department:
This department is mainly responsible for building up of a sound cooperative credit structure in rural financing, supplementing the financial resources of state co-operative banks, providing financial assistance to State Governments to strengthen the co-operative structure, advising Central and State Governments on agricultural and rural credit, formulating policies for taking over of PACs for financing by commercial banks, coordinating the long-term credit activities of State Land Development Banks, etc.
Departments of RBI
The Reserve Bank of India influences the management of commercial banks through its various policies, directions and regulations. Its role in bank management is quite unique. It performs the four basic functions such as planning, organizing, directing and controlling in laying a strong foundation for the functioning of commercial banks..
To carry out its functions/operations smoothly and efficiently, the Reserve Bank of India has the following departments.
1. Banking Department:
The Banking Department is responsible for rendering the bank’s services as a banker to the Government and to the banks.
It consists of four sub-divisions:
(i) Public Accounts Department;
(ii) Public Debt Department;
(iii) Deposit Accounts Department; and
(iv) Securities Department.
There are 14 branches of the Banking Department, each headed by a Joint/Deputy Manager.
2. Issue Department:
The Issue Department is concerned with the proper and efficient management of the note issue. For the conduct of monetary transactions, the country has been divided into 14 circles of issue, each having an Office of Issue — the branch of the Issue Department. Each branch of the Issue Department consists of:
(i) the General Department and
(ii) the Cash Department controlled by the currency officer.
The General Department deals with resource operations, i.e., arrangement of supply of notes and coins from the presses and Government Mints. The Cash Department deals with the cash transactions.
3. Department of Currency Management:
This department is concerned with the forecasting of the long-term requirements of the currency, indenting and allocation of currency notes to various branches of the Issue Department taking into account the demand pattern, storage facilities, etc. It is headed by the Chief Officer.
4. Department of Expenditure and Budgetary Control:
This department is concerned with the preparation of the bank’s budget and monitoring of the expenditure of the different units. It is headed by the Financial Controller.
5. Department of Government and Bank Accounts:
This department is concerned with the maintenance and supervision of the bank’s accounts
in the Issue and the Banking Departments and the compilation of weekly statements of affairs and the Annual Profits & Loss Account and Balance Sheet. It is headed by the Chief Accountant.
6. Exchange Control Department:
The Exchange Control department is responsible for controlling foreign exchange transactions and maintaining exchange rate stability.
7. Department of Banking Operations and Development:
This Department was entrusted with the responsibility of the supervision, control and development of the commercial bank system in the country. Till July 1982, it was also concerned with the Lead Bank Scheme and bank credit to the priority sectors.
8. Industrial Credit Department:
The Industrial Finance Department is basically concerned with the administration of the Credit Guarantee Scheme for small scale industries or as agent of the Government of India, with the operational and organisational aspects of the State Financial Corporation’s (SFCs), work connected with the Industrial Development Bank of India (IDBI), data collection about financing of small-scale industries and other relevant problems.
It also deals with the operation and administration of the Credit Authorisation Scheme.
9. Agricultural Credit Department:
This department is mainly responsible for building up of a sound cooperative credit structure in rural financing, supplementing the financial resources of state co-operative banks, providing financial assistance to State Governments to strengthen the co-operative structure, advising Central and State Governments on agricultural and rural credit, formulating policies for taking over of PACs for financing by commercial banks, coordinating the long-term credit activities of State Land Development Banks, etc.
The department also keeps liaison with the Agricultural Refinance and Development Corporation, the Agricultural Finance Corporation, SCBs and LDBs.
With the establishment of the NABARD now, all functions of the Agricultural Credit Department have been transferred to this new institution, except for the supervision and control over the operations of the primary (urban) co-operative banks. The responsibility of supervision and control of PCBs are now shifted to the Department of Banking Operations and Development.
10. Rural Planning and Credit Department:
This department was established in 1982. It is basically concerned with issues like District Credit Plans, Lead Bank Scheme, provision of expert guidance/assistance and processing and sanction of general lines of credit for short-term advances to the NABARD, special studies for promoting IRDP, and for framing the Reserve Bank’s policy on rural development.
11. Department of Non-Banking Companies:
This department administers and controls as well as regulates deposits of non-banking financial companies.
12. Credit Planning Cell:
The Credit Planning and Banking Development Cell have been constituted for the formulation and monitoring of credit policies as well as the developmental aspects of commercial banking.
It chalks out macro-level monetary budgets of the country.
13. Department of Economic Analysis and Policy:
This department conducts economic research and reviews financial and banking conditions in the country. The Economic Department comprises five units:
(i) the Internal Finance Unit;
(ii) International Finance Unit;
(iii) Prices, Production and General Unit;
(iv) Analysis of National Economic Parameters Unit; and
(v) General Unit.
The Economic Department prepares the Bank’s Annual Report, the Report on Trend and Progress of Banking in India, the Report on Currency and Finance, and the Reserve Bank of India Bulletins. It also undertakes ad hoc studies on emerging aspects of banking and other important issues.
14. Department of Statistical Analysis and Computer Services:
Its main function involves the generation, collection, processing and compilation of statistical data relating to the banking and financial sectors from the operational as well as research point of view.
15. Legal Department:
It tenders legal advice on various matters referred to it by the Bank.
16. Inspection Department:
It carries out internal inspections of the offices and departments of the bank.
17. Department of Administration and Personnel:
It looks after the general administration and personnel policy, such as recruitment, training, placements, promotions, transfers, discipline, appeals, service conditions, wage structure, etc.
18. Premises Department:
It is mainly concerned with the construction of buildings for the Bank’s offices, training institutions and staff quarters.
19. Management Services Department:
It is basically concerned with organisational analysis, systems research and development, work procedure studies and codification, manpower planning, costing studies, etc.
20. Reserve Bank of India Service Board:
Its functions involve conducting of examinations/interviews for the selection and promotion of staff in the Reserve Bank.
21. Central Records and Documentation Centre:
It is meant for the preservation of non-current records of the Bank. It provides arrangement for the scientific preservation of records, retrieval service to the enquirer departments, tools of reference such as catalogues, indices, etc.
22. Secretary’s Department:
It attends to the secretarial work connected with the meetings of the Central Board and its committee and of the Administrators of the RBI Employee’s Provident Fund and RBI Employees’ Co-operative Guarantee Fund.
23. Training Establishments:
The Reserve Bank has set-up three prominent training institutions for imparting training in different areas of banking.
These are:
(i) the Banker’s Training College, Bombay
(ii) the College of Agricultural Banking, Pune
(iii) the Reserve Bank Staff College, Madras
With the establishment of the NABARD now, all functions of the Agricultural Credit Department have been transferred to this new institution, except for the supervision and control over the operations of the primary (urban) co-operative banks. The responsibility of supervision and control of PCBs are now shifted to the Department of Banking Operations and Development.
10. Rural Planning and Credit Department:
This department was established in 1982. It is basically concerned with issues like District Credit Plans, Lead Bank Scheme, provision of expert guidance/assistance and processing and sanction of general lines of credit for short-term advances to the NABARD, special studies for promoting IRDP, and for framing the Reserve Bank’s policy on rural development.
11. Department of Non-Banking Companies:
This department administers and controls as well as regulates deposits of non-banking financial companies.
12. Credit Planning Cell:
The Credit Planning and Banking Development Cell have been constituted for the formulation and monitoring of credit policies as well as the developmental aspects of commercial banking.
It chalks out macro-level monetary budgets of the country.
13. Department of Economic Analysis and Policy:
This department conducts economic research and reviews financial and banking conditions in the country. The Economic Department comprises five units:
(i) the Internal Finance Unit;
(ii) International Finance Unit;
(iii) Prices, Production and General Unit;
(iv) Analysis of National Economic Parameters Unit; and
(v) General Unit.
The Economic Department prepares the Bank’s Annual Report, the Report on Trend and Progress of Banking in India, the Report on Currency and Finance, and the Reserve Bank of India Bulletins. It also undertakes ad hoc studies on emerging aspects of banking and other important issues.
14. Department of Statistical Analysis and Computer Services:
Its main function involves the generation, collection, processing and compilation of statistical data relating to the banking and financial sectors from the operational as well as research point of view.
15. Legal Department:
It tenders legal advice on various matters referred to it by the Bank.
16. Inspection Department:
It carries out internal inspections of the offices and departments of the bank.
17. Department of Administration and Personnel:
It looks after the general administration and personnel policy, such as recruitment, training, placements, promotions, transfers, discipline, appeals, service conditions, wage structure, etc.
18. Premises Department:
It is mainly concerned with the construction of buildings for the Bank’s offices, training institutions and staff quarters.
19. Management Services Department:
It is basically concerned with organisational analysis, systems research and development, work procedure studies and codification, manpower planning, costing studies, etc.
20. Reserve Bank of India Service Board:
Its functions involve conducting of examinations/interviews for the selection and promotion of staff in the Reserve Bank.
21. Central Records and Documentation Centre:
It is meant for the preservation of non-current records of the Bank. It provides arrangement for the scientific preservation of records, retrieval service to the enquirer departments, tools of reference such as catalogues, indices, etc.
22. Secretary’s Department:
It attends to the secretarial work connected with the meetings of the Central Board and its committee and of the Administrators of the RBI Employee’s Provident Fund and RBI Employees’ Co-operative Guarantee Fund.
23. Training Establishments:
The Reserve Bank has set-up three prominent training institutions for imparting training in different areas of banking.
These are:
(i) the Banker’s Training College, Bombay
(ii) the College of Agricultural Banking, Pune
(iii) the Reserve Bank Staff College, Madras
🔹Banking Awareness Study Notes - Board for Financial Supervision(BFS)🔹
The Reserve Bank of India performs the supervisory function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India under the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994.
➡️Objective
The primary objective of BFS is to undertake consolidated supervision of the financial sector comprising Scheduled Commercial and Co-operative Banks, All India Financial Institutions, Local Area Banks, Small Finance Banks, Payments Banks, Credit Information Companies, Non-Banking Finance Companies and Primary Dealers.
➡️Constitution
The Board is constituted by co-opting four Directors from the Central Board as Members and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, traditionally, the Deputy Governor in charge of supervision, is nominated as the Vice-Chairman of the Board.
In April 2018, a Sub-committee of the Board for Financial Supervision was constituted, under Para 11 & 12 of the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994. The Sub-committee performs the functions and exercises the powers of supervision and inspection under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, in relation to Payments Banks, Small Finance Banks, Local Area Banks, small Foreign Banks, select scheduled Urban Co-operative Banks, select Non-Banking Financial Companies and Credit Information Companies. The Sub-committee is chaired by the Deputy Governor in charge of supervision and includes the three Deputy Governors and two Directors of the Central Board as Members.
➡️BFS Meetings
The Board is required to meet normally once every month. It deliberates on inspection reports, periodic reviews related to banking and non-banking sectors and policy matters arising out of or having relevance to the supervisory functions of the Reserve Bank.
The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Department of Co-operative Bank Supervision (DCBS) and gives directions on regulatory and supervisory issues.
➡️Functions
➖Fine-tuning the supervisory processes adopted by the Bank for regulated entities;
➖Introduction of off-site surveillance system to complement the on-site supervision of regulated entities;
➖Strengthening the statutory audit processes of banks and enlarging the role of auditors in the supervisory process;
➖Strengthening the internal defences within supervised institutions such as corporate governance, internal control and audit functions, management information and risk control systems, review of housekeeping in banks;
➖Introduction of supervisory rating system for banks and financial institutions;
➖Supervision of overseas operations of Indian banks, consolidated supervision of banks;
➖Technical assistance programme for cooperative banks;
➖Introduction of scheme of Prompt Corrective Action Framework for weak banks;
➖Guidance regarding fraud risk management framework in banks;
➖Introduction of risk based supervision of banks;
➖Introduction of an enforcement framework in respect of banks;
➖Establishment of a credit registry in respect of large borrowers of supervised institutions; and
➖Setting up a subsidiary of RBI to take care of the IT requirements, including the cyber security needs of the Reserve Bank and its regulated entities, etc.
The Reserve Bank of India performs the supervisory function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India under the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994.
➡️Objective
The primary objective of BFS is to undertake consolidated supervision of the financial sector comprising Scheduled Commercial and Co-operative Banks, All India Financial Institutions, Local Area Banks, Small Finance Banks, Payments Banks, Credit Information Companies, Non-Banking Finance Companies and Primary Dealers.
➡️Constitution
The Board is constituted by co-opting four Directors from the Central Board as Members and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, traditionally, the Deputy Governor in charge of supervision, is nominated as the Vice-Chairman of the Board.
In April 2018, a Sub-committee of the Board for Financial Supervision was constituted, under Para 11 & 12 of the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994. The Sub-committee performs the functions and exercises the powers of supervision and inspection under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, in relation to Payments Banks, Small Finance Banks, Local Area Banks, small Foreign Banks, select scheduled Urban Co-operative Banks, select Non-Banking Financial Companies and Credit Information Companies. The Sub-committee is chaired by the Deputy Governor in charge of supervision and includes the three Deputy Governors and two Directors of the Central Board as Members.
➡️BFS Meetings
The Board is required to meet normally once every month. It deliberates on inspection reports, periodic reviews related to banking and non-banking sectors and policy matters arising out of or having relevance to the supervisory functions of the Reserve Bank.
The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Department of Co-operative Bank Supervision (DCBS) and gives directions on regulatory and supervisory issues.
➡️Functions
➖Fine-tuning the supervisory processes adopted by the Bank for regulated entities;
➖Introduction of off-site surveillance system to complement the on-site supervision of regulated entities;
➖Strengthening the statutory audit processes of banks and enlarging the role of auditors in the supervisory process;
➖Strengthening the internal defences within supervised institutions such as corporate governance, internal control and audit functions, management information and risk control systems, review of housekeeping in banks;
➖Introduction of supervisory rating system for banks and financial institutions;
➖Supervision of overseas operations of Indian banks, consolidated supervision of banks;
➖Technical assistance programme for cooperative banks;
➖Introduction of scheme of Prompt Corrective Action Framework for weak banks;
➖Guidance regarding fraud risk management framework in banks;
➖Introduction of risk based supervision of banks;
➖Introduction of an enforcement framework in respect of banks;
➖Establishment of a credit registry in respect of large borrowers of supervised institutions; and
➖Setting up a subsidiary of RBI to take care of the IT requirements, including the cyber security needs of the Reserve Bank and its regulated entities, etc.
🔹Banking Awareness Study Notes - Subsidiaries of RBI🔹
A subsidiary bank, or a subsidiary company, is a bank which is owned or controlled by any other bank or company. The subsidiary company is called the daughter company, and the company holding control over the other is known as the Parent company. i.e., the entire paid-up capital is contributed by the Parent Company.
The Reserve Bank of India has three fully owned subsidiaries:
➖National Housing Bank (NHB)
➖Deposit Insurance and Credit Guarantee Corporation of India (DICGC)
➖Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
➡️National Housing Bank (NHB)
National Housing Bank was set up on July 9, 1988 under the National Housing Bank Act, 1987 as a wholly-owned subsidiary of the Reserve Bank to act as an apex level institution for housing. NHB has been established to achieve, among other things, the following objectives:
➖To promote a sound, healthy, viable and cost effective housing finance system to all segments of the population and to integrate the housing finance system with the overall financial system.
➖To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups.
➖To augment resources for the sector and channelise them for housing.
➖To make housing credit more affordable.
➖To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act.
➖To encourage augmentation of supply of build able land and also building materials for housing and to upgrade the housing stock in the country.
➖To encourage public agencies to emerge as facilitators and suppliers of serviced land for housing.
➡️Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)
The Reserve Bank established BRBNMPL in February 1995 as a wholly-owned subsidiary to augment the production of bank notes in India and to enable bridging of the gap between supply and demand for bank notes in the country. The BRBNMPL has been registered as a Public Limited Company under the Companies Act, 1956 with its Registered and Corporate Office situated at Bengaluru. The company manages two Presses, one at Mysore in Karnataka and the other at Salboni in West Bengal.
➡️Deposit Insurance and Credit Guarantee Corporation (DICGC)
With a view to integrating the functions of deposit insurance and credit guarantee, the Deposit Insurance Corporation and Credit Guarantee Corporation of India were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978.Deposit Insurance and Credit Guarantee Corporation (DICGC), established under the DICGC Act 1961, is one of the wholly owned subsidiaries of the Reserve Bank.
A subsidiary bank, or a subsidiary company, is a bank which is owned or controlled by any other bank or company. The subsidiary company is called the daughter company, and the company holding control over the other is known as the Parent company. i.e., the entire paid-up capital is contributed by the Parent Company.
The Reserve Bank of India has three fully owned subsidiaries:
➖National Housing Bank (NHB)
➖Deposit Insurance and Credit Guarantee Corporation of India (DICGC)
➖Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
➡️National Housing Bank (NHB)
National Housing Bank was set up on July 9, 1988 under the National Housing Bank Act, 1987 as a wholly-owned subsidiary of the Reserve Bank to act as an apex level institution for housing. NHB has been established to achieve, among other things, the following objectives:
➖To promote a sound, healthy, viable and cost effective housing finance system to all segments of the population and to integrate the housing finance system with the overall financial system.
➖To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups.
➖To augment resources for the sector and channelise them for housing.
➖To make housing credit more affordable.
➖To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act.
➖To encourage augmentation of supply of build able land and also building materials for housing and to upgrade the housing stock in the country.
➖To encourage public agencies to emerge as facilitators and suppliers of serviced land for housing.
➡️Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)
The Reserve Bank established BRBNMPL in February 1995 as a wholly-owned subsidiary to augment the production of bank notes in India and to enable bridging of the gap between supply and demand for bank notes in the country. The BRBNMPL has been registered as a Public Limited Company under the Companies Act, 1956 with its Registered and Corporate Office situated at Bengaluru. The company manages two Presses, one at Mysore in Karnataka and the other at Salboni in West Bengal.
➡️Deposit Insurance and Credit Guarantee Corporation (DICGC)
With a view to integrating the functions of deposit insurance and credit guarantee, the Deposit Insurance Corporation and Credit Guarantee Corporation of India were merged and the present Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15, 1978.Deposit Insurance and Credit Guarantee Corporation (DICGC), established under the DICGC Act 1961, is one of the wholly owned subsidiaries of the Reserve Bank.
Statutory Liquidity Ratio
The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR).
Description: Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.
The ratio of liquid assets to net demand and time liabilities (NDTL) is called statutory liquidity ratio (SLR).
Description: Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.
🧰Basel Committee on Banking Supervision (Basel III)🧰
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974. The committee expanded its membership in 2009 and then again in 2014. In 2019, the BCBS has 45 members from 28 Jurisdictions, consisting of Central Banks and authorities with responsibility of banking regulation. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee frames guidelines and standards in different areas – some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. The Bank for International Settlements (BIS) hosts and supports a number of international institutions engaged in standard setting and financial stability, one of which is BCBS. Yet like the other committees, BCBS has its own governance arrangements, reporting lines and agendas, guided by the central bank governors of the Group of Ten (G10) countries.
Basel III (or the Third Basel Accord or Basel Standards) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 31 March 2019 and then again until 1 January 2022.
Overview
The Basel III standard aims to strengthen the requirements from the Basel II standard on bank's minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.
Key principles
Capital requirements
The original Basel III rule from 2010 required banks to fund themselves with 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets (RWAs). Since 2015, a minimum Common Equity Tier 1 (CET1) ratio of 4.5% must be maintained at all times by the bank.
The minimum Tier 1 capital increases from 4% in Basel II to 6%,[4] applicable in 2015, over RWAs.[5] This 6% is composed of 4.5% of CET1, plus an extra 1.5% of Additional Tier 1 (AT1).
Furthermore, Basel III introduced two additional capital buffers:
A mandatory "capital conservation buffer", equivalent to 2.5% of risk-weighted assets. Considering the 4.5% CET1 capital ratio required, banks have to hold a total of 7% CET1 capital ratio, from 2019 onwards.
A "discretionary counter-cyclical buffer", allowing national regulators to require up to an additional 2.5% of capital during periods of high credit growth. The level of this buffer ranges between 0% and 2.5% of RWA and must be met by CET1 capital.
Leverage ratio
Basel III introduced a minimum "leverage ratio". This is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the bank's average total consolidated assets (sum of the exposures of all assets and non-balance sheet items).[6][7] The banks are expected to maintain a leverage ratio in excess of 3% under Basel III.
In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies.
The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974. The committee expanded its membership in 2009 and then again in 2014. In 2019, the BCBS has 45 members from 28 Jurisdictions, consisting of Central Banks and authorities with responsibility of banking regulation. It provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The Committee frames guidelines and standards in different areas – some of the better known among them are the international standards on capital adequacy, the Core Principles for Effective Banking Supervision and the Concordat on cross-border banking supervision. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland. The Bank for International Settlements (BIS) hosts and supports a number of international institutions engaged in standard setting and financial stability, one of which is BCBS. Yet like the other committees, BCBS has its own governance arrangements, reporting lines and agendas, guided by the central bank governors of the Group of Ten (G10) countries.
Basel III (or the Third Basel Accord or Basel Standards) is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. This third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. It is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.
Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in November 2010, and was scheduled to be introduced from 2013 until 2015; however, implementation was extended repeatedly to 31 March 2019 and then again until 1 January 2022.
Overview
The Basel III standard aims to strengthen the requirements from the Basel II standard on bank's minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.
Key principles
Capital requirements
The original Basel III rule from 2010 required banks to fund themselves with 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets (RWAs). Since 2015, a minimum Common Equity Tier 1 (CET1) ratio of 4.5% must be maintained at all times by the bank.
The minimum Tier 1 capital increases from 4% in Basel II to 6%,[4] applicable in 2015, over RWAs.[5] This 6% is composed of 4.5% of CET1, plus an extra 1.5% of Additional Tier 1 (AT1).
Furthermore, Basel III introduced two additional capital buffers:
A mandatory "capital conservation buffer", equivalent to 2.5% of risk-weighted assets. Considering the 4.5% CET1 capital ratio required, banks have to hold a total of 7% CET1 capital ratio, from 2019 onwards.
A "discretionary counter-cyclical buffer", allowing national regulators to require up to an additional 2.5% of capital during periods of high credit growth. The level of this buffer ranges between 0% and 2.5% of RWA and must be met by CET1 capital.
Leverage ratio
Basel III introduced a minimum "leverage ratio". This is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the bank's average total consolidated assets (sum of the exposures of all assets and non-balance sheet items).[6][7] The banks are expected to maintain a leverage ratio in excess of 3% under Basel III.
In July 2013, the U.S. Federal Reserve announced that the minimum Basel III leverage ratio would be 6% for 8 Systemically important financial institution (SIFI) banks and 5% for their insured bank holding companies.
🔷Banking Awareness Study Notes on Moral Suasion
Moral suasion refers to an appeal to morality to change or influence behaviour. Moral suasion under economics is defined as the attempt to coerce private economic activity through government exhortation in ways not already defined or dictated by existing statute law.
The Reserve Bank of India (RBI) uses moral suasion as a qualitative instrument of monetary policy, unlike statutory liquidity ratio or cash reserve ratio.
Moral Suasion is a request by the RBI to the commercial banks to take specific measures as per the economy’s trends. For instance, RBI may direct banks not to give out certain loans. It includes psychological means and informal means of selective credit control.
The ‘moral’ element comes from the pressure for ‘moral responsibility’ to function in a way that aligns with furthering the good of the economy. Moral suasion in a narrow sense may sometimes be known as jawboning.
There are two types of moral suasion:
“Pure” moral suasion refers to an appeal for altruistic behaviour and is not used often in economic policy.
“Impure” moral suasion is often referred to as “moral suasion” in economics. It is supported by explicit or implicit threats by authorities to provide incentives to adhere to the authorities’ commands.
Features of Moral Suasion
Moral suasion has gained significance in developed countries as an efficient monetary policy instrument. To better understand this concept, let us figure out its critical elements:
➖Qualitative Tool: It is a qualitative tool used for price stability and growth of an economy through credit control.
➖Act of Persuasion: It is all about changing the mind and influencing the stakeholders such that they cooperate to the policy instruments by themselves, without any use of force or pressure.
➖Directed by Central Bank: For economic welfare and interest, the central bank directs and persuades the commercial banks to adhere to the monetary and credit policy instruments.
➖Monetary Policy Instrument: The principal intention of moral suasion is to gain cooperation from the stakeholders to adhere to specific policies and guidelines.
➖Seeks Cooperation: It is not related to enforcing the stakeholders to follow the decisions. Instead, it is an act of convincing them to cooperate and adhere to the policy instruments willingly.
Moral suasion refers to an appeal to morality to change or influence behaviour. Moral suasion under economics is defined as the attempt to coerce private economic activity through government exhortation in ways not already defined or dictated by existing statute law.
The Reserve Bank of India (RBI) uses moral suasion as a qualitative instrument of monetary policy, unlike statutory liquidity ratio or cash reserve ratio.
Moral Suasion is a request by the RBI to the commercial banks to take specific measures as per the economy’s trends. For instance, RBI may direct banks not to give out certain loans. It includes psychological means and informal means of selective credit control.
The ‘moral’ element comes from the pressure for ‘moral responsibility’ to function in a way that aligns with furthering the good of the economy. Moral suasion in a narrow sense may sometimes be known as jawboning.
There are two types of moral suasion:
“Pure” moral suasion refers to an appeal for altruistic behaviour and is not used often in economic policy.
“Impure” moral suasion is often referred to as “moral suasion” in economics. It is supported by explicit or implicit threats by authorities to provide incentives to adhere to the authorities’ commands.
Features of Moral Suasion
Moral suasion has gained significance in developed countries as an efficient monetary policy instrument. To better understand this concept, let us figure out its critical elements:
➖Qualitative Tool: It is a qualitative tool used for price stability and growth of an economy through credit control.
➖Act of Persuasion: It is all about changing the mind and influencing the stakeholders such that they cooperate to the policy instruments by themselves, without any use of force or pressure.
➖Directed by Central Bank: For economic welfare and interest, the central bank directs and persuades the commercial banks to adhere to the monetary and credit policy instruments.
➖Monetary Policy Instrument: The principal intention of moral suasion is to gain cooperation from the stakeholders to adhere to specific policies and guidelines.
➖Seeks Cooperation: It is not related to enforcing the stakeholders to follow the decisions. Instead, it is an act of convincing them to cooperate and adhere to the policy instruments willingly.
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☑️Banking Awareness Study Notes on Net Demand and Time Liabilities (NDTL)
Demand and Time Liabilities (DTL) and The Net Demand and Time Liabilities (NDTL) are two terms openly pop up in connection with monetary review policy of RBI and liquidity in market. Banks are in the business of accepting deposits and deploying these funds by way of lending and thereby earning profit in the process. The resources mobilesd by the bank for lending are its liabilities. Liabilities of a bank can be classified broadly into three categories; demand liabilities, time liabilities and other demand and time liabilities (ODTL). Demand and time deposits from public form the largest share of bank’s liabilities.
NDTL stands for Net Demand & Time Liability. It helps us to calculate CRR and SLR. We know that CRR and SLR are used by the Reserve Bank of India as tools to control inflation.
Liabilities of a bank are defined under Section 42 of the RBI Act, 1934. As per this definition, liabilities of a bank may be towards the banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities. Further, Section 42(1C) of the RBI Act, 1934, empowers Reserve Bank of India (RBI) to specify whether any transaction or class of transactions would be regarded as a liability of banks in India.
Demand Liability is a type of liability that is payable on demand. When you deposit your money in savings accounts or current accounts of a bank, it is a liability for the bank to repay it back to you whenever you demand it to do so. Therefore, Savings accounts, Current accounts, Demand Drafts, etc. fall under the ‘Demand Liabilities’ of a bank.
Then comes the term Time liability. Time liability is a type of liability that is payable after a term or time period. In other words, it has a fixed term or time period to mature. When you deposit your money in Fixed deposits, Recurring deposits, Gold deposits, etc. the bank is liable to pay it with interest at the time of its maturity. There is a fixed term for such products and they are liabilities for the bank. Therefore, Fixed deposits, Recurring deposits, Gold deposits, etc. fall under the ‘Term Liabilities’ of a bank.
Next comes the term ‘ODTL’. ODTL stands for Other Demand and Term Liabilities. Those liabilities that do not fall under the above two categories ‘Demand Liability’ and ‘Term Liability’ is called ODTL. The interest accrued on deposits, unpaid dividends to shareholders, etc. fall under Other Demand and Term Liabilities.
Demand and Time Liabilities (DTL) and The Net Demand and Time Liabilities (NDTL) are two terms openly pop up in connection with monetary review policy of RBI and liquidity in market. Banks are in the business of accepting deposits and deploying these funds by way of lending and thereby earning profit in the process. The resources mobilesd by the bank for lending are its liabilities. Liabilities of a bank can be classified broadly into three categories; demand liabilities, time liabilities and other demand and time liabilities (ODTL). Demand and time deposits from public form the largest share of bank’s liabilities.
NDTL stands for Net Demand & Time Liability. It helps us to calculate CRR and SLR. We know that CRR and SLR are used by the Reserve Bank of India as tools to control inflation.
Liabilities of a bank are defined under Section 42 of the RBI Act, 1934. As per this definition, liabilities of a bank may be towards the banking system or towards others in the form of demand and time deposits or borrowings or other miscellaneous items of liabilities. Further, Section 42(1C) of the RBI Act, 1934, empowers Reserve Bank of India (RBI) to specify whether any transaction or class of transactions would be regarded as a liability of banks in India.
Demand Liability is a type of liability that is payable on demand. When you deposit your money in savings accounts or current accounts of a bank, it is a liability for the bank to repay it back to you whenever you demand it to do so. Therefore, Savings accounts, Current accounts, Demand Drafts, etc. fall under the ‘Demand Liabilities’ of a bank.
Then comes the term Time liability. Time liability is a type of liability that is payable after a term or time period. In other words, it has a fixed term or time period to mature. When you deposit your money in Fixed deposits, Recurring deposits, Gold deposits, etc. the bank is liable to pay it with interest at the time of its maturity. There is a fixed term for such products and they are liabilities for the bank. Therefore, Fixed deposits, Recurring deposits, Gold deposits, etc. fall under the ‘Term Liabilities’ of a bank.
Next comes the term ‘ODTL’. ODTL stands for Other Demand and Term Liabilities. Those liabilities that do not fall under the above two categories ‘Demand Liability’ and ‘Term Liability’ is called ODTL. The interest accrued on deposits, unpaid dividends to shareholders, etc. fall under Other Demand and Term Liabilities.
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