Banks and NBFCs: Types of Banks & NBFCs: Central Bank, Nationalized & Co Operative Banks, Regional Rural Banks, Scheduled Banks, Private Banks & Foreign Banks, Mudra Bank, Small Finance Banks, Specialized Banks, NBFCs. Types of Banking: Wholesale and Retail Banking, Investment Banking, Corporate Banking, Private Banking, Development Banking.

1. Unit 4 : Banks and NBFCs
Banks and NBFCs: Types of Banks & NBFCs:
Central Bank, Nationalized & Co Operative Banks,
Regional Rural Banks, Scheduled Banks, Private
Banks & Foreign Banks, Mudra Bank, Small Finance
Banks, Specialized Banks, NBFCs.
Types of Banking: Wholesale and Retail Banking,
Investment Banking, Corporate Banking, Private
Banking, Development Banking.

2. RBI : ORIGIN AND EVOLUTION
Prior to establishment of RBI, the functions of a central
bank were virtually done by the Imperial Bank of India
. RBI started its operations from April 1, 1935.
It was established via the RBI act 1934, so it is also
known as a statutory body. Similarly, SBI is also a
statutory body deriving its legality from SBI Act 1955.
RBI did not start as a Government owned bank but as
a privately held bank.
Post-independence, the government passed Reserve
Bank (Transfer to Public Ownership) Act, 1948 and
took over RBI from private shareholders after paying
appropriate compensation.
Thus, nationalization of RBI took place in 1949 and
from January 1, 1949, RBI started working as a
government-owned bank.

3. TIMELINE
1926
The Royal Commission (Hilton Young commission) on
Indian Currency and Finance recommended creation of a
central bank for India. On the basis of mainly this
commission, the RBI Act, 1934 was passed
1934
The RBI Bill was passed and received the Governor
General’s assent.
1 April 1935
Reserve Bank commenced operations as India’s central
bank as a private shareholders’ bank with a paid up capital
of rupees five crore.
1949
The Government of India nationalized the Reserve Bank
under the Reserve Bank (Transfer of Public Ownership)
Act, 1948.

4. • The RBI is the supreme monetary and
banking authority in the country and
controls the banking system in India.
• It is called the ‘Reserve Bank’ as it keeps
the reserves of all commercial banks.
• Original headquarters of RBI was in
Kolkata, but in 1937, it was shifted to
Shahid Bhagat Singh Marg, Mumbai.

5. BANKING REGULATION ACT, 1949
Immediately after the independence, the
Government of India came up with the
Banking Companies Act, 1949.
This act was later changed to Banking
Regulation (Amendment) Act, 1949.
Further, the Banking Regulation
(Amendment) Act of 1965 gave extensive
powers to the Reserve Bank of India as
India’s central banking authority.

6. INSTITUTIONAL STRUCTURE OF RBI
Official Directors
Governor
Governor(Maximum four)
Non-Official Directors
Nominated(10+2)
Others(one each from four local boarders)
Central Board of Directors is the top decision
making body in the RBI. It is made up of official and
non-official directors.
The Governor and Deputy Governors are the official
directors.
There is a Governor and maximum 4 Deputy
Governors (According to Section-8 of RBI Act
1934); so maximum number of Official Directors in
RBI’s Central Board of Directors is five.

7. Governor and Deputy governors are appointed by
Central Government. The tenure of service is
maximum of 3 years and can be reappointed
Further, there are 16 non-official directors in RBI.
Out of them, four represent the local Boards located
in Delhi, Chennai, Kolkata and Mumbai, thus
representing 4 regions of India.
Rest 12 are nominated by the Reserve Bank of
India. These 12 personalities have expertise in
various segments of Indian Economy.
The Central Board of Directors holds minimum 6
meetings every year. Out of which, at least 1
meeting every quarter (every 3 months) is held.
Though, typically the committee of the central board
meets every week (Wednesday).

8. GOVERNOR OF RBI
APPOINTMENT– Appointed after the proposal made
by the Financial Sector Regulatory
Appointments Search Committee (FSRASC),
headed by the Cabinet Secretary.
TERM – According to Section 8 (4) of the RBI Act,
the Governor and Deputy Governors shall hold
office for such term not exceeding 3 years as the
Central Government may fix when appointing
them.
RE-APPOINTMENT – They are eligible for re-
appointment
QUALIFICATION – The RBI Act does not provide for
any specific qualification for the governor.
REMOVAL – The governor can be removed by the
central government.

9. SUBSIDIARIES OF RBI
Deposit Insurance and Credit Guarantee
Corporation (DICGC)
Bharatiya Reserve Bank Note Mudran
Private Limited (BRBNMPL)
Reserve Bank Information Technology
Private Ltd. (ReBIT)
Indian Financial Technology And Allied
Services (IFTAS)

10. No. of Press Four printing presses prints and supply bank notes
Location
1. Dewas – Madhya Pradesh 2. Nashik – Maharashtra
3. Mysore – Karnataka 4. Salboni – West Bengal
Owned by
Govt.
The presses in Madhya Pradesh and Maharashtra are owned by
the Security Printing and Minting Corporation Of India (SPMCIL),
a wholly owned company of GoI. SPMCIL is the only PSU under
the Dept. of Economic Affairs (MoF)
Owned by
RBI
The presses in Karnataka and West Bengal are owned by
Bharatiya Reserve Bank Note Mudran Private Limited
(BRBNMPL), a wholly owned subsidiary of RBI.
Coins
GoI is the issuing authority of coins and supplies coins to the
Reserve bank on demand. The RBI puts the coins into circulation
on behalf of Central Government
ASSISTIVE BODIES IN RBI – Board of Financial
Supervision (BFS) and Board for Payment and Settlement
Systems (BPSS); Both of these are chaired by RBI
Governor.

11. FUNCTIONS OF THE RBI
Bank of Issue
Issuing money is exclusive right of RBI.
All notes except1 note and coins are issued by
RBI.
It also exchanges or destroys old damaged
currencies.
1 notes and coins are issued by Ministry of
Finance and circulated by RBI.
Custodian and Manager of Foreign
exchange
RBI keeps the foreign exchange (i.e. foreign
currency) which flows into the country.
It also keeps the foreign exchange rate stable to
certain extent.

12. Banker and Debt Manager to Government
It acts as a banker to both central and state
governments (except Jammu and Kashmir
and Sikkim).
It keeps deposits of governments and lends to
governments.
RBI carries out lending and borrowing
operations by issuing government securities
on behalf of the government.
Though RBI is not a banker to Sikkim and
Jammu and Kashmir it manages their public
debt to some extent.

13. Banker to bank–
It is the banker of all the banks.
It keeps the reserve of the banks like cash
reserve ratio (CRR) with it.
It provides financial assistance to banks against
mortgaged securities.
It rediscounts bills of exchange.
Usually banks borrow and lend money among
themselves via call money market, regulated
by RBI.
RBI provides enough money to banks and so
called as lender of last resort.

14. Monetary Management – Controller of Money
Supply, Makes Monetary Policy, Credit Control
etc
Financial Regulator – to Commercial banks,
Credit information Companies, RRBs, Local
Area Banks, NBFC etc.
Representative role – RBI represents govt. as a
member of the IMF and World Bank.
Central Clearance and Accounts Settlement –
As RBI keeps cash reserves from commercial
banks therefore it rediscounts their bills of
exchange easily.

15. • Developmental role – Performing a
variety of developmental and promotional
functions under which it did set up
institutions like IDBI, SIDBI, NABARD,
NHB, etc.
• Promotional Roles – Consumer
protection, Ombudsman, Financial
Inclusion through PSL norms, 25% rural
branch requirements etc.

16. NEW INITIATIVE OF RBI IN CREDIT AND
MONETARY POLICY REGIME
Transition to bi-monthly monetary policy cycle
Recognition of the glide path for disinflation (on
recommendation of Urjit Patel Committee report).
Under it, the CPI (C) is used by the RBI as the
“Headline Inflation” for monetary management.
A Monetary Policy Framework (2015) has been put
in place – an agreement in this regard was signed
between the Government of India and the RBI late
February 2015. Under the framework, the RBI is
to ‘target inflation’ at 4 per cent with a
variations of +/- 2 per cent. (of the CPI-C).

17. • Besides the existing repo route, term repos
have been introduced for three set of tenors
– 7, 14 and 28 days – Move aimed at
improving the transmission of policy and
stability to loan market.
• As per the Union Budget 2016-17,
individuals will also be allowed by the RBI
to participate in the government security
market (similar to the developed economies
like the USA).
• RBI is progressively reducing banks’
access to overnight liquidity (at the fixed
repo rate), and encouraging the banks to
increase their dependency on the term repos.

18. INCOME EXPENDITURE
Returns from foreign currency assetsPrinting of currency
Interest on rupee-denominated
government bonds
Staff expenditure
Interest on overnight lending to
commercial banks.
Commission given to
commercial banks.
Management commission on
handling the borrowings of central
and state governments.
Commission to primary
dealers.
SOURCES OF INCOME AND EXPENDITURE OF
RBI

19. ASSETS AND LIABILITIES OF RESERVE BANK OF
INDIA
LIABILITIES ASSETS
Currency held by Public Foreign currency assets
Vault cash held by
commercial banks
Bill purchases and discounts
Government securities Collaterals by commercial banks
Other liabilities Loan and advances
Rupee securities
Gold coin bullion

20. INDEPENDENCE OF THE RBI
Under section 7 of the RBI Act 1934, the central
government may from time to time give such
directions to the RBI as it may, after consultation
with the Governor of the Bank, considered
necessary in the public interest. Moreover, there
is no legal act mandating autonomy of the RBI.
RBI is not only vested with the powers to formulate
the monetary policy but also to monitor the
functioning of all banks.
To play its role effectively, autonomy in its
functioning is sine qua non for RBI.
However, this has been challenged many times
due to a continued tug of war for wresting more
power between the bank and the govt.

21. REASONS FOR DIMINISHING AUTONOMY OF RBI
check the growth of NPAs.
Reduced liquidity in the economy due to tight monetary policy
followed by RBI.
Corrective measures taken by RBI to clean up the banking
system which are not seen very positively by the government.
Impossible trinity of RBI- capital mobility, Exchange rate flexibility
and monetary autonomy.
Clash between short term populist agenda of the government
and long term view for price stability taken by RBI.
One important limitation is that the Reserve Bank is statutorily
limited in undertaking the full scope of actions against public
sector banks (PSBs).
Erosion of statutory powers of the central bank through piece-
meal legislative amendments that directly or indirectly eat
away separation of the central bank from the government.

22. PUBLICATIONS OF RBI
Report on Trend and Progress of Banking in
India-Annually
Financial stability report- Half yearly
Monetary policy report- Half yearly
Report on foreign exchange reserves- Half
yearly
Bi-monthly Policy Statement
Industrial Outlook Survey of the Manufacturing
Sector (Quarterly)
Consumer Confidence Survey (Quarterly)
Report on Financial Review

23. MINIMUM RESERVE SYSTEM OF RBI
With a minimum value of government-held gold of
Rs. 200 crores (Rs. 115 cr rupee should in the
form of Gold or gold bullion and rest Rs. 85 cr
should be in the form of foreign currencies) and
the remaining is backed by the government
securities issued and held by RBI.
OBJECTIVES OF MINIMUM RESERVE SYSTEM
(MRS)
To maintain the money supply in the economy
without inflationary pressure and maintain
the confidence of the general public in the
currency.

24. To ensure the confidence of the Indian
currency holders that the currency held
by them is a legal tender.
RBI wants to ensure the appropriate
supply of currency in the economy
through MRS.
Through the MRS, the RBI accelerate the
economic growth of the country without
increasing the rate of inflation in the
economy.

25. All Indian banks have to follow the compulsory target of priority
sector lending (PSL).
Categories
Domestic
scheduled commercial banks
(excluding RRB and SFB) and
Foreign banks with 20 and above
branches
Foreign banks (less than 20
branches)
Total Priority
Sector
40 per cent of Adjusted Net Bank
Credit or Credit Equivalent
Amount of Off-Balance Sheet
Exposure, whichever is higher.
40 per cent of ANBC or
Credit Equivalent Amount of
Off-Balance Sheet
Exposure, whichever is
higher, to be achieved in a
phased manner by 2020.
Agriculture #
18 per cent of ANBC or Credit
Equivalent Amount of Off-
Balance Sheet Exposure,
whichever is higher.
Within this 18 percent target 8
percent is prescribed for Small
Not applicable

26. All Indian banks have to follow the compulsory target of
priority sector lending (PSL).
Micro Enterprises
7.5 percent of ANBC or Credit
Equivalent Amount of Off-
Balance Sheet Exposure,
whichever is higher.
Not applicable
Advances to
Weaker Sections
10 percent of ANBC or Credit
Equivalent Amount of Off-
Balance Sheet Exposure,
whichever is higher
Not applicable
# Domestic banks have been directed to ensure that their overall
direct lending to non-corporate farmers does not fall below the
system-wide average of the last three years achievement.

27. In 2007, the RBI included five minorities – Buddhists,
Christians, Muslims, Parsis and Sikhs under the PSL.
PRIORITY SECTOR LENDING CERTIFICATES
(PSLCS) – are a mechanism to enable banks to
achieve the PSL target and sub-targets by purchase of
these instruments in the event of shortfall.
Changes in PSL (7 Aug 2020)
The changes include broadening the scope of PSL to
include start-ups, increasing the limits for
renewable energy, including solar power and
compressed biogas plants and increasing the targets
for lending to small and marginal farmers and
weaker sections.
“The revised guidelines also aim to encourage and
support environment-friendly lending policies to help
achieve Sustainable Development Goals (SDGs),”

28. MONETARY POLICY OF RBI
Monetary Policy is an instruments under RBI aimed at regulating
interest rates, money supply and availability of credit in an economy.
RBI decides monetary policy cycle on bi-monthly basis.
OBJECTIVES OF MONETARY POLICY
Economic and financial stability – To regulate monetary expansion
so as to maintain a reasonable degree of price stability. Maintaining
price stability.
Development – To ensure adequate financial resources for the
purpose of development.
flow of credit – Adequate flow of credit to productive sectors.
Employment and growth – Promotion of productive investments &
trade. Equitable distribution of income. Employment generation
International trade and exports – Promotion of exports and economic
growth. Maintaining exchange rate stability.

29. TOOLS OF MONETARY POLICY
Quantitative Instruments
―Liquidity Adjustment Facility (Repo and Rev.
Repo
―Open Market Operations
―SLR, and CRR
―Bank Rate
―Credit Ceiling
―Marginal Standing Facility
Qualitative Instruments
―Credit Rationing
―Moral Suasion
―Promt Corrective Action(PCA)
―Direct action by RBI on banks
―Differential Interests Rates

30. RESERVE RATIO (CRR)
– CRR is the certain % (fixed by the RBI) of Net
Time and Demand Deposits of a Scheduled bank
in India need to kept with the RBI in the form of
cash only.
– CRR aimed to have control over banks credit.
– The ratio between 3% (floor) -15% (ceiling)
removed via RBI (Amendment) Bill 2006.
An increase in CRR higher proportion of
deposits to be kept with RBI by banks less
funds are available to be provided as credit to
the economy money supply will decrease.

31. STATUTORY LIQUIDITY RATIO (SLR)
– The schedule banks needs to also keep certain %
(fixed by the RBI) of their Net Time and Demand
Deposits kept with itself (i.e. not with RBI) in
the form of liquid assets such as cash, gold and
select government securities.
– Need of SLR is to prevents bank from lending all
its deposits which is too risky and it is mandatory
under Banking Regulation Act 1949.
– Similar to CRR, SLR aimed to have control over
banks credit.
– SLR includes G-Secs, thus it ensures certain
amount of money is secured for govt.
– There were excessively high rates (about 25-30
percent) prevalent before 1991 reforms with
provision of ceiling and floor.

32. • BANK RATE
– Rate at which RBI provides long-term borrowings
to its clients. Its clients include GoI, state
governments, banks, financial institutions,
cooperative banks etc.
– Increase in the bank rate is the symbolizes
tightening of RBI monetary policy. (i.e. Dearer
Monetary Policy)
– An increase in bank rate will make borrowing
from RBI expensive discourage banks to borrow
from RBI money supply will tend to decrease.
– It presently uses it as a penalty rate imposed by
RBI on banks for violations of RBI directives.

33. REPO RATE (POLICY RATE)
– It is the rate (Rate of Repurchase) at which commercial
banks borrow from RBI (which provides short-term
liquidity to banks) by mortgaging their dated Government
securities and Treasury bills (T-Bills).
– Increase in repo rate borrowing from RBI
expensive banks will borrow less from RBI less credit will
be provided by banks to households money supply will
decrease.
– Decrease in Repo Rate Borrowing from RBI is cheaper
Banks will borrow more More credit is available Money
supply will increase.
– Reduction in Repo rate helps the banks to get money at a
cheaper rate and increase in Repo rate discourages the
banks to borrow from RBI.
– The Call Money Market of India (inter-bank market)
operates at this rate and banks use this route for
overnight borrowings.
– Repo rate has direct relation with the interest rates
banks charge on the loans they offer (as it affects the
operational cost of the banks).

34. • REVERSE REPO RATE
– It is the rate at which RBI borrows from
commercial Banks by mortgaging its dated
Government securities and Treasury bills.
– An increase in reverse repo rate means that
commercial banks will get more incentives to park
their funds with the RBI, thereby decreasing the
supply of money in the market.
– A decrease in reverse repo rate means that
commercial banks will get less incentive to park
their funds with RBI and thus more money is
available in the market increasing the money
supply.
– It has a direct bearing on the interest rates
charged by the banks and the financial
institutions on their different forms of loans.

35. • MARGINAL STANDING FACILITY (MSF)
– Liquidity management window given by RBI under
which banks can borrow additional overnight (one
day) liquidity over and above LAF window.
– Introduced to deal with unforeseen liquidity crunch
because under LAF banks can borrow overnight
liquidity only by pledging securities over and above
the securities held under SLR requirement.
– Under MSF, on the other hand, banks can pledge
securities held for SLR purposes.
– The interest rate for MSF is Repo rate plus 1%.
Usually, the Reverse Repo rate is Repo rate minus
1%. Therefore, the Repo rate act as an anchor rate.
The Repo rate stands in the middle of two. The MSF
rate stands above and Reverse Repo rate stands
below the Repo Rate.

36. • LIQUIDITY ADJUSTMENT FACILITIES
(LAF)
– Monetary policy instrument that the RBI uses
in order to influence the liquidity
conditions in the market in the short term.
– Under the LAF window, the RBI uses various
instruments to inject or absorb liquidity to
or from the market respectively.
– Repo and Reverse repo rates are a part of
RBI’s “Liquidity Adjustment Facility (LAF)”.
– The RBI introduced a LAF as a result of
the Narasimham Committee on Banking
Sector Reforms (1998).

37. • LONG TERM REPO OPERATIONS (LTRO)
– New policy tool used by the RBI to inject more
liquidity into the Economy.
– Similar to the term repos, but with a longer
maturity period of 1 year and 3 years.
– Through the LTRO, the RBI seeks to inject long
term liquidity into the economy at a lower
interest rate.
– The LTROs would be carried out through e-
Kuber.
• e-Kuber is the Core Banking Solution
(CBS) of the RBI which enables each bank
to connect their single current account across
the country.

38. QUALITATIVE INSTRUMENTS
• CREDIT RATIONING
– Rationing of credit is a method by which the RBI
seeks to limit the maximum amount of loans
and advances and, also in certain cases, fix
ceiling for specific categories of loans and
advances.
• MARGIN REQUIREMENTS
– Qualitative tool used by the RBI in order to
regulate the credit flow to a particular sector.
– When a bank advances credit to its customers it
does so against collateral. However there is a
difference between the value of the security and
the loan offered. This difference is called
‘Margin’.

39. • MORAL SUATION
– It refers to a method adopted by the Central Bank to
persuade or convince the commercial banks to
advance credit in the economic interest of the
country.
– “Persuasion” without applying punitive measures.
– Since it involves no administrative compulsion or
threats of punitive action it is a psychological and
informal means of selective credit control.
• DIFFERENCIAL RATE OF INTEREST
– The differential rate of interest (DRI) is a lending
programme launched by the government in April 1972
which makes it obligatory upon all the public sector
banks in India to lend 1 per cent of the total lending
of the preceding year to ‘the poorest among the
poor’ at an interest rate of 4 per cent per annum.

40. DIRECT ACTION
This step is taken by the RBI against banks that don’t
fulfill conditions and requirements. RBI may refuse to
rediscount their papers or may give excess credits or
charge a penal rate of interest over and above the Bank
rate, for credit demanded beyond a limit.
PROMPT CORRECTIVE ACTION (PCA)
The PCA is triggered when banks breach certain
regulatory requirements like minimum capital, and
quantum of non-performing assets.
To ensure that banks don’t go bust, RBI has put in place
some trigger points to assess, monitor, control and take
corrective actions on banks which are weak and troubled.
CONSUMER CREDIT REGULATION
RBI can issue rules to set the minimum/maximum level of
down-payments and periods of payments for purchase
of certain goods.

41. UNCONVENTIONAL MONETARY POLICY INSTRUMENTS BY
RBI
ZERO INTEREST RATE POLICY (ZIRP)
Policy also called as ‘Quantitative Easing’.
This policy was adopted by USA from 2008 in the wake of
financial crisis to inject money into the economy.
Under this policy, the Fed Bank provides loans to the banks at low
interest rates (0.25%) to spur investment level in the economy.
NEGATIVE INTEREST RATE POLICY (NIRP)
In NIRP, the banks would be required to pay interest to the
central bank if they park their surplus reserves.
This encourages the banks to provide loans to the borrowers at
cheaper rates instead of parking their surplus reserves with the
Central Bank.
This policy is usually followed in developed economies such as
Japan, Denmark, Sweden, Switzerland etc
HELICOPTER MONEY
This involves the central bank of the country printing currency notes
and distributing it to the people free of cost. The idea is to
promote demand in the economy during recession.

42. OTHER MONETARY TOOLS USE BY RBI
CALL MONEY MARKET
It is a Inter Bank money market for short-term financial assets that
are close substitutes of money.
The call money market is an important segment of the money market
where borrowing and lending of funds take place on overnight
basis (for one day)
Money market also known as ‘overnight borrowing money at call’.
Funds raising/borrowing maximum period 14 days (“Short notice”)
Borrowing can take place against securities or without securities.
Rate of Interest – ‘glides’ with ‘repo rate’.
Longer the interest rate higher the interest rate.
Real call rate revolves nearby current repo rate, according to the
availability and demand of fund in market.
Borrowers as well as lenders Schedule commercial banks,
cooperative banks.
Lender only LIC, GIC, mutual funds, IDBI and NABARAD.

43. MARKET STABILISATION SCHEME (MSS)
MSS is a policy tool used by the Reserve Bank of India to suck
out excess liquidity from the market through issue of
securities like T-Bills, Dated Securities etc. on behalf of the
government.
The RBI initiated the MSS scheme in 2004, to control the surge
of US dollars in the Indian market, RBI started buying US
dollars while pumping in rupee
MSS was introduced to deal with the excess liquidity in the
market which could lead to inflation.
The issued securities under the MSS are government bonds
and they are called as Market Stabilisation Bonds and
these securities are owned by the government though they
are issued by the RBI.
Post demonetization (2016) RBI has raised the ceiling for MSS
20 times to suck excess cash out of the banking system and
help banks earn some return from the voluminous deposits
they have garnered after the government’s demonetization
move.

44. STANDING DEPOSIT FACILITY SCHEME
Standing deposit facility is a collateral free
liquidity absorption mechanism which
aims to absorb liquidity from commercial
banking system into RBI.
Concept was first recommended by the Urjit
Patel committee report in 2014.
The new scheme has been proposed by the
Union Budget 2018-19.
The scheme is aimed at helping RBI to
manage liquidity in a better way, especially
when the economy is flush with excess fund
(as was seen after the demonetisation
2016).

45. STRATEGIES OF A MONETARY POLICY MAKING
Exchange rate stability – Singapore & other
export-oriented economies use this.
Multiple Indicators – Central Bank tries to focus on
Growth, Employment, Inflation Control and
Exchange rate stabilization. India’s RBI had this
before 2016.
Inflation targeting – here the Central Bank only
aims to keep inflation under control, then other
indicators (growth, employment, exchange rate)
will automatically fall in line. It was successful in
Western nations, adopted in India 2016, based
on Urjit Patel Committee Report (2013-14), by
amending RBI Act Section 45.

46. MONETARY POLICY COMMITTEE (MPC)
MPC is a statutory body created under Monetary
Policy Framework Agreement 2015 between the
RBI and Government in 2016
MPC is entrusted with the responsibility of fixing
the benchmark repo rate (policy rate) required
to contain inflation as defined in the Monetary
Policy Framework Agreement.
The meetings of the MPC are held at least 4 times
a year and it publishes its decisions after each
such meeting.
MPC is 6-member body including 3 members from
RBI and 3 members to be nominated by the
Central Government.

47. These Government of India nominees are appointed by the Central
Government based on the recommendations of a search cum
selection committee. Moreover, nominees of the MPC will hold
office for a period of four years and will not be eligible for re-
appointment.
Decisions are taken by majority with the Governor having the
casting vote in case of a tie.
Chairperson of MPC – RBI Governor
Quorum for meeting – 4 members
To ensure transparency – Govt can send message only in writing.
Committee must publish its proceedings of the meeting on the 14th
day, and “Monetary policy report” at every 6 months.
Inflation target decided by Union Government after consulting with
RBI Governor.
The present mandate of the committee is to maintain 4% annual
inflation (until March 31, 2021) with bandwidth of ceiling 6% and a
floor of 2%.
If Target fail: If inflation not kept in 4% +/-2% zone for 3 consecutive
quarters then Committee must send report to Govt. with reasons
and remedies.

48. LIMITATIONS OF MONETARY POLICY
Existence of black money in the economy limits
the working of the monetary policy
Conflicting objectives – To achieve the objective of
economic development, the monetary policy is to
be expansionary but to achieve the objective of
price stability and curb on inflation policy is to be
contractionary.
Underdeveloped Indian money market – The
weak money market limits the coverage, as also
the efficient working of the monetary policy.
Indian Banks don’t immediately pass on the RBI
rate cuts to customers (monetary transmission),
citing NPA/Bad loans/profitability problem.

49. LIMITATIONS OF MONETARY POLICY
Government Side Issues – Fiscal repression,
Fiscal slippage, Fiscal deficit, Subsidy
leakage, Populist Loan-waivers etc.
Structural Issues in Economy – Lack of
electricity-road infrastructure / Ease of Doing
Biz production, long pending land and labour
reforms.
Presence of Informal moneylenders in rural
areas – circulate illegitimacy money at
exorbitant interest rates.
Poor penetration of banking sector and
financial inclusion etc.

50. CHRONOLOGY OF LENDING RATES
YEAR INITIATIVES
1969
Began nationalization of private banks, and ‘Administered Interest
Rates’ on them.
1991
M. Narasimham suggested deregulation: Govt should not dictate /
administer individual banks’ interest rates. RBI should only give
methodology to banks.
2003 RBI introduced Bench march Prime lending rate(BPLR).
2010
RBI introduced BASE Rate + Spread system; update frequency on
individual banks’ discretion.
2016
RBI introduced Marginal cost of lending rates(MCLR) + Spread
system.
2019
The RBI has made it mandatory for all banks to link all new floating
rate loans (i.e. personal/retail loans, loans to MSMEs) to an external
benchmarking. The move is aimed at faster transmission of
monetary policy rates.

51. WAYS AND MEANS OF ADVANCES (WMA)
The RBI gives temporary loan facilities to the
centre and state governments as a banker to
the government. This temporary loan facility is
called WMA.
It is a mechanism to provide to States to help them
tide over temporary mismatches in the cash
flow of their receipts and payments.
It was introduced on April 1, 1997, after putting an
end to the four-decade-old system of ad-hoc
(temporary) Treasury Bills to finance the Central
Government deficit.
Under Section 17(5) of RBI Act, 1934, the RBI
provides Ways and Means Advances (WMA) to
the central and State/UT governments.

52. WAYS TO AVAIL WMA
This facility can be availed by the government if
it needs immediate cash from the RBI.
The WMA is to be vacated after 90 days.
The interest rate for WMA is currently charged
at the repo rate.
The limits for WMA are mutually decided by
the RBI and the Government of India.
TYPES OF WMA
Normal
Special

53. Special WMA or Special Drawing Facility is provided
against the collateral of the government
securities held by the state.
After the state has exhausted the limit of SDF, it gets
normal WMA. The interest rate for SDF is one
percentage point less than the repo rate.
The number of loans under normal WMA is based on
a three-year average of actual revenue and
capital expenditure of the state.
The RBI has raised the Ways and Means Advances,
or WMA, limit by 30% for all States and UTs to
enable them to tide over the crisis caused by
COVID-19 outbreak.