BANKING: HISTORY and CENTRAL BANKING

1. BANKING: HISTORY and CENTRAL BANKING PRESENTATION BY SANJU THAKUR

2. BANKING IN NORMAL PARLANCE • An institution that offers various financial services, such as the safe keeping, lending and exchange( deposits and withdrawals) of money.

3. HISTORY • As old as authentic history. • As early as 2000 BC, Babylonians has developed a system of bank. • In ancient Greece and Rome , the practice of granting credit was widely prevalent. • Traces of credit by compensation and by transfer order were prevalent in Assyria, Phoenicia and Egypt.

4. ANCIENT INDIAN PRESPECTIVE • India has a long tradition of money lending. • Money lending was restricted to rich and influential people .There was no collection of deposits for safe keeping. • Vedic times literature refers to existence of money lending operations. • Literature of the Buddhist period , the jatakas and archeological contain evidence of sresthis or bankers

5. ANCIENT INDIAN PRESPECTIVE (contd) • Extensive reference in the laws of Manu on money lending. • Rate of interest at around 15%. • Differential rate of interests were charged basis caste (Brahmin:2%;Kshatriya:3%,Vaish:4% and Shudra:5% PER MONTH)

6. ANCIENT INDIAN PRESPECTIVE (contd) • Chanakya however devised the interest rate structure which was risk weighed. 15% p.a for general advances. 60% p.a for trading . 240% p.a for export import business • Money lending business could be taken only by Vaishyas according to Dharmashastras.

7. TOWARDS THE REFINED FORM OF BANKING IN INDIA • The first joint stock bank was the Bank of Hindustan which was set up in 19th century under European management. • Commercial banking in India was introduced with the Presidency banks in Bengal, Bombay and Madras in the year 1806. • The 3 presidency banks were later amalgamated to form the Imperial Bank of India .A quasi public institution it was performing the central banking functions until RBI was formed.

8. TOWARDS THE REFINED FORM OF BANKING IN INDIA • In the year 1920 , Government planned rigorous expansion of 100 offices in 5 years • Offshore offices at London, Colombo and Rangoon. • The Imperial bank is today known as SBI, The state bank of India.

9. CENTRAL BANKING • Central bank ,normally a supreme bank controls all the bank in a country and normally formulates the monetary policy by using different tools. • Monetary policy refers to the policy of the central bank to control money supply, credit and inflation in any economy. It also has influence on the pace and overall direction economic activity, including not only the aggregate output and employment but also the general rate at which the prices will fall.

10. OBJECTIVES OF CENTRAL BANKS • Maintain stability of country’s general price level( preventing inflation and deflation) • Maintaining the exchange rates, preserving stability in financial markets and fostering increased capital investment to enhance growth. • Managing the monetary policy to avoid inflationary “boom and bust” cycles that lead to painful recessions

11. CENTRAL BANKING: TOOLS AND INSTRUMENTS OPEN MARKET OPERATIONS AND SHORT TERM INTEREST RATE • Open market operations is the buying and selling of securities ,normally government securities by a central bank in the market in order to increase the outstanding supply of bank reserves and thereby the total money circulation in the economy.

12. CENTRAL BANKING: TOOLS AND INSTRUMENTS CASH RESERVE RATIO AND SATUTORY LIQUIDITY RATIO(CRR AND SLR) Commercial banks are required to maintain reserves in the form of CRR and SLR. CRR is the rate at which banks are required to maintain their reserves with the central bank on fortnightly basis. SLR refers to the rate at which the banks are required to maintain their reserves in government securities A reserve requirement is a percentage indicating how much in reserves a bank needs to hold in relation to outstanding deposits Lowering the reserve has downward pressure on interest rates and increasing the reserve impacts the banks credit creation capacity.

13. CENTRAL BANKING: TOOLS AND INSTRUMENTS • REPO CONTRACTS Central bank uses repo to manage the aggregate reserves of the banking system. Repos( repurchase agreements) are contracts for the sale and future repurchase of the financial asset ,most often the treasury securities. On the termination date the seller repurchases the asset at the same price at which he sold it and pays interest for the using of funds. Repo is a short term interest bearing loan against collateral.

14. CENTRAL BANKING: TOOLS AND INSTRUMENTS • Lending by Central bank at the bank rate • Bank rate is the rate at which the central banks lend money to other banks by discounting the bill brought to it. • Countries with no reserve requirements lending directly to banks is an important part of how the central bank supplies reserves and this provides mechanism to control interest rates.

15. CENTRAL BANKING: TOOLS AND INSTRUMENTS • Countries that have no reserve requirements such direct lending is on small scale. • Setting the interest rate at which the central bank lends money to the banks effectively establishes a benchmark for short term market rates.

16. VARIOUS RATES: RBI OVERVIEW

17. CENTRAL BANKING INDIAN PRESPECTIVE:RESERVE BANK OF INDIA • Apex bank of India. • Set up in year 1934 ,with the sole objective of monetary stability and operations on currency and credit system in India. • It was nationalized shortly independence , RBI was involved in promoting credit to agriculture and industry in pursuant to 5 year plans.

18. EVOLUTION OF RBI • PERIOD 1948 TO 1969 Maturing stage of the RBI into full fledged professionally managed bank • Fifties Serious erosion of autonomy in monetary policy function due to the system of government intervention

19. EVOLUTION OF RBI • 1969 onwards Nationalization of major banks. Government became the owner of the number of banks with overall supervision from RBI. Administration of interest rates and periodic hiking of SLR requirements

20. EVOLUTION OF RBI • 1980’S RBI was ranked marginally below the median level of a list of about 70 central banks on the basis of autonomy • 1990-1991 Reform phase with major changes in the monetary policy framework Relationship between central bank and government took new turn resulting in the genesis of inflation targeting framework.

21. RBI AND MONETARY POLICY • Policy of RBI ,known as monetary policy is guided by the objective of provision of adequate liquidity to meet the credit growth and support investment demand in economy while maintaining the price levels. • Ensuring macro economic stability has been a concurrent objective with monitoring of price movements.

22. RBI AND MONETARY POLICY • RBI took parallel initiatives the credit to improve the credit delivery systems specially in respect of agriculture and SME’S.

23. TOOLS OF RBI: • The bank rate is the rate at which the banks borrow from RBI. Any revision in the bank rate by RBI is signal to banks to increase deposit rates as well as prime lending rate • Repo rate is the rate at which RBI borrows from other banks. It is also floor rate at which the deals are struck • CRR is the percentage of net funds that they need to park fortnightly with RBI to do business.

24. CENTRAL BANKING IN OTHER COUNTRIES • CANADA Bank of Canada is the central bank. Inflation control is primary objective and hence it uses its influence on short term interest rates. It carries out monetary policy mainly through changes to its target for overnight rate. It informs major financial institutions the average rate of interest that BOC wants to see in the marketplace where they lend each other money for one day or overnight.

25. CENTRAL BANKING IN OTHER COUNTRIES • CHINA PEOPLES BANK OF CHINA Aims to apply flexibly quantitative instruments to appropriately adjust e liquidity in the financial system. Aims to speed up development of financial markets to improve efficiencies of monetary policy transmission and to promote reform of financial institutions to enhance sustainable development of financial sector.

26. CENTRAL BANKING IN OTHER COUNTRIES • USA • Apex bank : Federal reserve bank • Monetary policy is conducted by FED and it influences demand mainly by raising and lowering short term interest rates. • Two basic goals : to promote maximum sustainable output and employment and to promote stable prices.

27. CENTRAL BANKING IN OTHER COUNTRIES Fed uses open market operations where it buys and sells G-secs in open markets. Fed controls the statutory reserve requirements which is the amount of funds a commercial bank must hold in reserve against the specified deposit liabilities. fed offers 3 discount window programs to banks-primary credit ,secondary credit and seasonal credit – each with its own interest rates.

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