Study on Credit Control in ThinkNEXT, Mohali

A Project Report

Submitted to

GURU NANAK DEV UNIVERSITY REGIONAL CAMPUS SATHIALA

For the

Partial Fulfillment of the Degree of

Masters of business Administration

Submitted To: Submitted By:

Ms.Navneet Kaur Arjun Singh

2016MGB1237

GURU NANAK DEV UNIVERSITY

REGIONAL CAMPUS SATHIALA
 DECLARATION

I ARJUN SINGH declare that I myself worked on the topic CREDIT

CONTROL under ThinkNEXT Technologies Pvt. Ltd. Mohali.
Submitted by me under the supervision and guidance of MR GOPAL
PANDEY , project guide, College of GNDU REGIONAL CAMPUS
SATHIALA in partial fulfillment of M.B.A 3rd semester. I further
declare that I am solely responsible for omission and commission of
errors if any.

(ARJUN SINGH)

Signature of the Student

Place: Mohali
 ACKNOWLEDGEMENT

Amongst the wide panorama of people who provided me the inspiration, guidance
and encouragement, I take this opportunity to thank those who gave me indebted
assistance and constant encouragement for completing this project.

It gives me a great pleasure to submit this project to GNDU REGIONAL

CAMPUS SATHIALA take this opportunity with great pleasure to present before
this project on CREDIT CONTROL which is result of co-operation, hard work
& good wishes of many people. The most pleasant part of any project is to express
the gratitude towards all those who have contributed to the success of my project.

I am deeply indebted to my supervisor/project guide Mr. GOPAL PANDEY

(FINANCE Executive of ThinkNEXT Technologies Pvt. Ltd. Mohali) having
permitted me to carry out this project work. I wish to express my deep sense of
gratitude to his for her guidance and useful suggestions, which helped me all the
time in completing the project work in time.

I would like to thanks Mr. Kaushal (Chartered Accountant) who has been my
mentor for this project. It was only through her excellence assistance & good
suggestions that I have been able to complete this project.

Words are inadequate in offering my thanks to all the members of ThinkNEXT

Technologies Pvt. Ltd., Mohali for their encouragement and cooperation in
carrying out the project work.

ARJUN SINGH
 CONTENTS
Sr.No. TITLE Page
No.
COMPANY CERTIFICATE
DECLARATION
ACKNOWLEDGEMENT
COMPANY PROFILE
INTRODUCTION AND HISTORY OF CENTRAL BANK
OF INDIA
MONETARY POLICY
CREDIT CONTROL BY RBI AND MEASURES
QUALITATIVE MEASURES
1)MARGINAL REQUIREMENT
2)RATIONING OF CREDIT
3)MORAL PERSUASION
4)DIRECT ACTION
5)PUBLICITY
QUANTITATIVE MEASURES
1)BANK RATE
2)OPEN MARKET OPERATIONS
3)CREDIT CONTROL RATIO
4)STATUTORY LIQUIDITY RATIO
5)REPO RATE
6)REVERSE REPO RATE
7)MARGINAL STANDING FACILITY
FINDINGS AND RECOMMENDATIONS
SUGGESTIONS GIVEN BY NARASIMHAM
COMMITTEE
 COMPANY PROFILE

THINK NEXT Technologies Private Limited (Formerly Brilliant Software

Solutions) is an ISO 9001:2008 certified software development company founded
in August 2009 and it is approved from Ministry of Corporate Affairs which deals
in University/College/School ERP Solutions, Android /iPhone Applications
development, Web designing, Web development, Discount Deals
(www.thinknextcard.com, www.tricitydeal.com), Bulk SMS, Voice SMS, Bulk
Email, Biometric Time Attendance, Access Control, SEO/SMO, Database
Solutions, Payment Gateway Integration, E-Mail Integration, Industrial Training,
Corporate Training and Placements etc. THINKNEXT Technologies provides
software solutions using latest technologies e.g. Smart Card, NFC, Biometrics,
GPS, Barcode, RFID, SMS, Auto SMS (Short code), Android, iPhone, Web,
Windows and Mobile based technologies

THINKNEXT has wide expertise in .NET, Crystal Reports, Java, PHP, Android,
iPhone, Databases (Oracle and SQL Server), Web Designing, Networking, Web
Server configurations, various RAID Levels etc.

THINKNEXT Technologies has also setup its offices in USA, Delhi, Shimla and
Bathinda for its software support. THINKNEXT has its own multiple Smart Card
printing, encoding and barcode label printing machines to provide better and
effective customer support solutions. THINKNEXT has also setup its own
placement consultancy and is having numerous placement partner companies to
provide best possible placements in IT industry.
THINKNEXT Technologies has developed for the first time in northern region
cloud computing based Cloud Campus 4.0 to facilitate knowledge and placement
centric services. It is a unique concept for effective and collaborative learning.

1. THINKNEXT deals exclusively in campus automation through Smart

Campus ERP Solutions. Therefore we have better experience in handling
large group of institutions through proper time-tested policies and
procedures.
2. First Company of India who has Launched NFC Technology (The Future)
for Smart Campuses through NFC Smart Cards.
3. First Company of India who has launched Android Version of Smart Campus
ERP Solutions for Mobiles and Tablet PCs.
4. First company of India who has developed SMS Opt-In Technology so that
Institutes/Colleges can send Transactional SMS with SMS Sender ID and
without SMS Template approval.
5. First company of Punjab, Haryana, Himachal, J&K (Northern region) who
launched Smart Cards (Contact Type), Smart Cards (Contactless) in Punjab
for campus automation.
6. First company of India which has launched its THINKNEXT Smart Card as
Discount Card in more than 120 enterprises.
7. Established own multiple Smart Card Designing, Smart Card Printing, Smart
Card Lamination and Oyster Barcode Printing Units.
8. Multiple SMS Gateway Support.

Vision:
ThinkNEXT Technologies Pvt. Ltd. is already very flexible and scalable. Still, we
always take care of specific requirements of our clients. Our highly committed
R&D team makes our software feature rich, dynamic and future tuned everyday so
that our clients always maintain the lead over their competitors. The development
of the software is being done and the purpose full customization of the package is
carried out in the ThinkNEXT lab.

Mission:

ThinkNEXT is pioneer in Smart Campus ERP Solutions for

Universities/Colleges/Schools using latest technologies and features. We provide
software solutions using .NET, PHP, Android, iPhone, Java technologies with three
tier-architecture support. We provide back-end solutions using MS SQL Server,
Oracle, and MySQL.

Quality Policy:

We have wide experience working with eminent Educationists, Managements,

Directors, Principals, Head of Departments, other Staff Members, Parents and
students. Therefore we do not sell only software Modules but an innovative system
which has more importance than just ERP software modules. Today Smart Campus
solutions are a need of hour for every University/Group of Colleges or an
Institution to make edge over others and maintain a lead over their competitors.
Our Research and Development team is committed to make your institute(s) to
maintain lead over their competitors.

MANAGEMENT OF THINKNEXT TECHNOLOGIES PVT.LTD.

BOARD OF DIRECTOR

Sunil Jindal
Manish Mittal
Ghansham Das

MANAGING DIRECTOR

Sunil Jindal

MARKETING HEAD

Suresh Chandra

IT HEAD

Mukesh Kumar

ThinkNEXT Edge:-
Industrial Training and Certificates from Software/Electronics Company not just from an
institute
Free Interview Preparation, Spoken English and Personality Development Programmers.
Opportunity to get placed in ThinkNEXT and numerous other companies.
Life-Time Validity Learning and Placement Card.
Part-Time/Full-Time Job Offer for each student during Training.
Think NEXT Cloud Campus advantage not only during training, even after completion of
training for life time.
One-to-one PC and Corporate Environment.
Learn from Developers/Industry experts rather than Trainers/Teachers.
 INTRODUCTION

CENTRAL BANK (RESERVE BANK OF INDIA)

The Reserve Bank of India (RBI) is the indias central banking institution. The RBI
plays an important part in the Development Strategy of the Government of India. A
Central Bank is an independent apex monetary authority which regulates banks and
provides important financial services like storing of foreign exchange reserves,
control of inflation, monetary policy report. The general superintendence and
direction of the RBI is entrusted with the 21-member Central Board of Directors:
the Governor, 4 Deputy Governors, 2 Finance Ministry representatives, 10
government-nominated directors to represent important elements of India's
economy, and 4 directors to represent local boards headquartered at Mumbai,
Kolkata, Chennai and New Delhi.

HISTORY
19351950
The Reserve Bank of India was founded on 1 April 1935 to respond to economic
troubles after the First World War. The Reserve Bank of India was conceptualized
based on the guidelines presented by the Central Legislative Assembly passed
these guidelines as the RBI Act 1934. The original choice for the seal of RBI was
The East India Company Double Mohur, with the sketch of the Lion and Palm
Tree. However, it was decided to replace the lion with the tiger, the national animal
of India. The Preamble of the RBI describes its basic functions to regulate the issue
of bank notes, keep reserves to secure monetary stability in India, and generally to
operate the currency and credit system in the best interests of the country.

After the Partition of India in 1947, the bank served as the central bank
for Pakistan until June 1948 when the State Bank of Pakistan commenced
operations. Though set up as a shareholders bank, the RBI has been fully owned
by the Government of India since its nationalization in 1949.

19501960
In the 1950s, the Indian government, under its first Prime Minister Jawaharlal
Nehru, developed a centrally planned economic policy that focused on the
agricultural sector. The administration nationalized commercial banks and
established, based on the Banking Companies Act of 1949 (later called the Banking
Regulation Act), a central bank regulation as part of the RBI. Furthermore, the
central bank was ordered to support economic plan with loans.

19601969
As a result of bank crashes, the RBI was requested to establish and monitor a
deposit insurance system. Meant to restore the trust in the national bank system, it
was initialized on 7 December 1961. The Indian government founded funds to
promote the economy, and used the slogan "Developing Banking". The
government of India restructured the national bank market and nationalized a lot of
institutes. As a result, the RBI had to play the central part in controlling and
supporting this public banking sector.

19691985
In 1969, the Indira Gandhi-headed government nationalized 14 major commercial
banks. Upon Gandhi's return to India in 1980, a further 6 banks were
nationalized. The regulation of the economy and especially the financial sector was
reinforced by the Government of India in the 1970s and 1980s. The central bank
became the central player and increased its policies a lot for a lot of tasks like
interests, reserve ratio and visible deposits. These measures aimed at better
economic development and had a huge effect on the company policy of the
institutes.

19912000 the new century

The national economy contracted in July 1991 as the Indian rupee was
devalued. The currency lost 18% relative to the US dollar, and the Narsimham
Committee advised restructuring the financial sector by a temporal reduced reserve
ratio as well as the statutory liquidity ratio. New guidelines were published in 1993
to establish a private banking sector. This turning point was meant to reinforce the
market and was often called neo-liberal. The central bank deregulated bank
interests and some sectors of the financial market like the trust and property
markets. This first phase was a success and the central government forced a
diversity liberalization to diversify owner structures in 1998.
The National Stock Exchange of India took the trade on in June 1994 and the RBI
allowed nationalized banks in July to interact with the capital market to reinforce
their capital base. The central bank founded a subsidiary companythe Bharatiya
Reserve Bank Note Mudran Private Limitedon 3 February 1995 to produce
banknotes.
Since 2000
The Foreign Exchange Management Act from 1999 came into force in June 2000.
It should improve the item in 20042005 (National Electronic Fund
Transfer).The Security Printing & Minting Corporation of India Ltd., a merger of
nine institutions, was founded in 2006 and produces banknotes and coins.
The national economy's growth rate came down to 5.8% in the last quarter of
20082009 and the central bank promotes the economic development.

Monetary Policy
Monetary policy is the process by which monetary authority of a country, generally
central bank controls the supply of money in the economy by its control over
interest rates in order to maintain price stability and achieve high economic
growth. In India, the central monetary authority is the Reserve Bank of
India (RBI). It is so designed as to maintain the price stability in the economy.

The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act,
2016, to provide for a statutory and institutionalised framework for a Monetary
Policy Committee, for maintaining price stability, while keeping in mind the
objective of growth. The Monetary Policy Committee is entrusted with the task of
fixing the benchmark policy rate (repo rate) required to contain inflation within the
specified target level. As per the provisions of the RBI Act, out of the six Members
of Monetary Policy Committee, three Members will be from the RBI and the other
three Members of MPC will be appointed by the Central Government.

Monetary operations involve monetary techniques which operate on monetary

magnitudes such as money supply, interest rates and availability of credit aimed to
maintain Price Stability, Stable exchange rate, Healthy Balance of Payment,
Financial stability, Economic growth. RBI, the apex institute of India which
monitors and regulates the monetary policy of the country stabilizes the price by
controlling Inflation.

Other objectives of the monetary policy of India, as stated by RBI,

are:-
Price Stability:
Price Stability implies promoting economic development with considerable
emphasis on price stability. The centre of focus is to facilitate the environment
which is favourable to the architecture that enables the developmental projects to
run swiftly while also maintaining reasonable price stability.

Controlled Expansion of Bank Credit:

One of the important functions of RBI is the controlled expansion of bank credit
and money supply with special attention to seasonal requirement for credit without
affecting the output.

Promotion of Fixed Investment:

The aim here is to increase the productivity of investment by restraining non-
essential fixed investment.

Restriction of Inventories and stocks:

Overfilling of stocks and products becoming outdated due to excess of stock often
results in sickness of the unit. To avoid this problem the central monetary authority
carries out this essential function of restricting the inventories. The main objective
of this policy is to avoid over-stocking and idle money in the organization.

To Promote Efficiency:
It is another essential aspect where the central banks pay a lot of attention. It tries
to increase the efficiency in the financial system and tries to incorporate structural
changes such as deregulating interest rates, ease operational constraints in the
credit delivery system, to introduce new money market instruments etc.

Reducing the Rigidity:

RBI tries to bring about the flexibilities in the operations which provide a
considerable autonomy. It encourages more competitive environment and
diversification. It maintains its control over financial system whenever and
wherever necessary to maintain the discipline and prudence in operations of the
financial system.

CREDIT CONTROL
Credit control is an important tool used by Reserve Bank of India, a major weapon
of the monetary policy used to control the demand and supply of money (liquidity)
in the economy. Central Bank administers control over the credit that
the commercial banks grant. Such a method is used by RBI to bring "Economic
Development with Stability". It means that banks will not only control inflationary
trends in the economy but also boost economic growth which would ultimately
lead to increase in real national income with stability. In view of its functions such
as issuing notes and custodian of cash reserves, credit not being controlled by RBI
would lead to Social and Economic instability in the country.
Controlling credit in the economy is amongst the most important functions of
the Reserve Bank of India. The basic and important needs of credit control in the
economy are-

To encourage the overall growth of the "priority sector" i.e. those sectors of
the economy which is recognized by the government as "prioritized" depending
upon their economic condition or government interest. These sectors broadly
totals to around 15 in number.

To keep a check over the channelization of credit so that credit is not

delivered for undesirable purposes.

To achieve the objective of controlling inflation as well as deflation.

To boost the economy by facilitating the flow of adequate volume of bank

credit to different sectors.

To develop the economy.

Objective
Credit control policy is just an arm of economic policy which comes under the
purview of Reserve Bank of India, hence, its main objective being the attainment
of high growth rate while maintaining the reasonable stability of the internal
purchasing power of money. The broad objectives of credit control policy in India
have been-

Ensure an adequate level of liquidity enough to attain high economic growth

rate along with maximum utilisation of resource but without generating high
inflationary pressure.

Attain stability in the exchange rate and money market of the country.

Meeting the financial requirement during a slump in the economy and in the
normal times as well.
 Control business cycle and meet business needs.

CREDIT CONTROL BY RBI

There are two methods that the RBI uses to control the money supply in the
economy-

Qualitative method

Quantitative method
During the period of inflation Reserve Bank of India tightens its policies to restrict
the money supply, whereas during deflation it allows the commercial to pump
money in the economy.

Credit Control
Quantitative Measures Qualitative Measures
Cash Reserve 1)Credit Rationing
Reserve Ratio Ratio(CRR) 2)Consumer Credit
Statutory Liquidity Control
Ratio(SLR 3)Marginal Requirements
Open Market Operations 4)Moral Suasion
5)Direct Action
Bank Rate
Repo Rate
Policies Rate Reverse Repo Rate
Marginal Standing
Facility

Qualitative Measures
By Quality we mean the uses to which bank credit is directed.
For example- the bank may feel that spectators or the big capitalists are getting a
disproportionately large share in the total credit, causing various disturbances and
inequality in the economy, while the small-scale industries, consumer goods
industries and agriculture are starved of credit.
Correcting this type of discrepancy is a matter of qualitative credit control.
Qualitative method controls the manner of channelizing of cash and credit in the
economy. It is a 'selective method' of control as it restricts credit for certain section
where as expands for the other known as the 'priority sector' depending on the
situation.

Tools used under this method are:-

Marginal Requirement
Changes in margin requirements are designed to influence the flow of credit
against specific commodities. The commercial banks generally advance loans to
their customers against some security or securities offered by the borrower and
acceptable to banks.

More generally, the commercial banks do not lend up to the full amount of the
security but lend an amount less than its value. The margin requirements against
specific securities are determined by the Central Bank. A change in margin
requirements will influence the flow of credit.

A rise in the margin requirement results in a contraction in the borrowing value of

the security and similarly, a fall in the margin requirement results in expansion in
the borrowing value of the security.

Marginal requirement of loan = current value of security offered for loan-value of

loans granted. e.g.- a person mortgages his property worth Rs. 100,000 against loan.
The bank will give loan of Rs. 80,000 only. The marginal requirement here is 20%.
In case the flow of credit has to be increased, the marginal requirement will be
lowered. Reserve Bank of India has been using this method since 1956.

Example:

Rationing Of Credit

Under this method there is a maximum limit to loans and advances that can be
made, which the commercial banks cannot exceed. RBI fixes ceiling for specific
categories. Such rationing is used for situations when credit flow is to be checked,
particularly for speculative activities. Minimum of capital: total assets" (ratio
between capital and total asset) can also be prescribed by Reserve Bank of India

Moral Persuasion
This method is also known as "moral persuasion" as the method that the Reserve
Bank of India, being the apex bank uses here, is that of persuading the commercial
banks to follow its directions/orders on the flow of credit. RBI puts a pressure on
the commercial banks to put a ceiling on credit flow during inflation and be liberal
in lending during deflation.

In India, from 1949 onwards, the Reserve Bank has been successful in using the
method of moral suasion to bring the commercial banks to fall in line with its
policies regarding credit. Publicity is another method, whereby the Reserve Bank
marks direct appeal to the public and publishes data which will have sobering
effect on other banks and the commercial circles.

Direct Action
Under the banking regulation Act, the central bank has the authority to take strict
action against any of the commercial banks that refuses to obey the directions
given by Reserve Bank of India. There can be a restriction on advancing of loans
imposed by Reserve Bank of India on such banks. e.g. RBI had put up certain
restrictions on the working of the Metropolitan co-operative banks. Also the 'Bank
of Karad' had to come to an end in 1992.

Publicity: RBI uses media for the publicity of its views on the current
market condition and its directions that will be required to be implemented by the
commercial banks to control the unrest. Though this method is not very successful
in developing nations due to high illiteracy existing making it difficult for people
to understand such policies and its implications.

Quantitative Measures
By quantitative credit control we mean the control of the total quantity of credit.
For Example- let us consider that the Central Bank, on the basis of its calculations,
considers that Rs. 50,000 is the maximum safe limit for the expansion of credit.
But the actual credit at that given point of time is Rs. 55,000(say). Thus it then
becomes necessary for the central bank to bring it down to 50,000 by tightening its
policies. Similarly if the actual credit is less, say 45,000, then the apex bank
regulates its policies in favor of pumping credit into the economy.

Different tools used under this method are:-

Bank Rate
The bank rate, also known as the discount rate, is the rate payable by commercial
banks on the loans from or rediscounts of the Central Bank. A change in bank rate
affects other market rates of interest. An increase in bank rate leads to an increase
in other rates of interest and conversely, a decrease in bank rate results in a fall in
other rates of interest.
Section 49 of the Reserve Bank of India Act 1934, defines Bank Rate as "the
standard rate at which it (RBI) is prepared to buy or re-discount bills of exchange
or other commercial paper eligible for purchase under this Act"

Example
When the commercial bank for instance, has lent or invested all its available funds
and has little or no cash over and above the prescribed minimum, it may ask
the central bank for funds. It may either re-discount some of its bills with the
central bank or it may borrow from the central bank against the collateral of its
own promissory notes.

Working of the bank rate

Changes in bank rate are introduced with a view to controlling the price levels and
business activity, by changing the demand for loans. Its working is based upon the
principle that changes in the bank rate results in changed interest rate in the market.
Suppose a country is facing inflationary pressure. The central bank, in such
situations, will increase the bank rate thereby resulting to a hiked lending rate. This
increase will discourage borrowing. It will also lead to a fall in the business
activity due to following reasons.

Employment of some factors of production will have to be reduced by the

business people.

The manufacturers and stock exchange dealers will have to liquidate their
stocks, which they held through bank loans, to pay off their loans.
The effect of Rise in bank rate by the central bank is shown in the chart.

Hence, we can conclude that hike in

Bank Rate leads to fall in price level and a fall in the Bank Rate leads to an
increase in price level i.e. they share an inverse relationship.
Open Market Operations
Open market operations refer to the sale and purchase of securities by the Central
bank to the commercial banks. A sale of securities by the Central Bank, i.e., the
purchase of securities by the commercial banks, results in a fall in the total cash
reserves of the latter.

A fall in the total cash reserves is leads to a cut in the credit creation power of the
commercial banks. With reduced cash reserves at their command the commercial
banks can only create lower volume of credit. Thus, a sale of securities by the
Central Bank serves as an anti-inflationary measure of control.

Likewise, a purchase of securities by the Central Bank results in more cash

flowing to the commercials banks. With increased cash in their hands, the
commercial banks can create more credit, and make more finance available. Thus,
purchase of securities may work as an anti-deflationary measure of control.

The Reserve Bank of India has frequently resorted to the sale of government
securities to which the commercial banks have been generously contributing. Thus,
open market operations in India have served, on the one hand as an instrument to
make available more budgetary resources and on the other as an instrument to
siphon off the excess liquidity in the system.
Cash Reserve Ratio (CRR)
Cash Reserve Ratio is a certain percentage of bank deposits which banks are
required to keep with RBI in the form of reserves or balances. Higher the CRR
with the RBI lower will be the liquidity in the system and vice versa. RBI is
empowered to vary CRR between 15 percent and 3 percent. But as per the
suggestion by the Narsimham committee Report the CRR was reduced from 15%
in the 1990 to 5 percent in 2002. As of 19 May 2017, the CRR is 4.00 percent.
Statutory Liquidity Ratio(SLR)
Statutory liquidity ratio (SLR) is the Indian government term for reserve
requirement that the commercial banks in India require to maintain in the form of
gold, government approved securities before providing credit to the customers.
Statutory Liquidity Ratio is determined by Reserve Bank of India maintained by
banks in order to control the expansion of bank credit.

There was a reduction of SLR from 38.5% to 25% because of the suggestion by
Narsimham Committee. The current SLR is 20.50%.This will be reduced to 20%
with effect from 24th June 2017 in line with the changes in RBI Credit Policy.

The SLR is determined by a percentage of total demand and time liabilities. Time
Liabilities refer to the liabilities which the commercial banks are liable to pay to
the customers after a certain period mutually agreed upon, and demand liabilities
are such deposits of the customers which are payable on demand. An example of
time liability is a six month fixed deposit which is not payable on demand but only
after six months. An example of demand liability is a deposit maintained in saving
account or current account that is payable on demand through a withdrawal form
such as a cheque.

The SLR is commonly used to control inflation and fuel growth, by increasing or
decreasing it respectively. This counter acts by decreasing or increasing the money
supply in the system respectively. Indian banks holdings of Government
securities are now close to the statutory minimum that banks are required to hold to
comply with existing regulation. When measured in rupees, such holdings
decreased for the first time in a little less than 40 years (since the nationalisation of
banks in 1969) in 200506.currently it is 21.05 percent.

The liabilities that the banks are liable to pay within one month's time, due to
completion of maturity period, are also considered as time liabilities. The
maximum limit of SLR is 40% and minimum limit of SLR is 0 In India, Reserve
Bank of India always determines the percentage of SLR.
The SLR is fixed for a number of reasons:-
Controlling the expansion of bank credit. By changing the level of SLR, the
Reserve Bank of India can increase or decrease bank credit expansion.

Ensuring the solvency of commercial banks.

By reducing the level of SLR, the RBI can increase liquidity with the
commercial banks, resulting in increased investment. This is done to fuel
growth and demand.

Compelling the commercial banks to invest in government securities like

government bonds.
If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio,
then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank
pays penal interest at the rate of 3% per annum above the Bank Rate, on the
shortfall amount for that particular day.
The RBI can increase the SLR to control inflation, suck liquidity in the market, to
tighten the measure to safeguard the customers' money. Decrease in SLR rate is
done to encourage growth. In a growing economy banks would like to invest in
stock market, not in government securities or gold as the latter would yield less
returns. One more reason is long term government securities (or any bond) are
sensitive to interest rate changes. But in an emerging economy interest rate change
is a common activity.

SLR rate = (liquid assets / (demand + time liabilities)) 100%

This percentage is fixed by the Reserve Bank Of India. The maximum and
minimum limits for the SLR were40% and 25% respectively in India.[3] Following
the amendment of the Banking regulation Act(1949) in January 2017, the floor rate
of 20.75% for SLR was removed. Presently, the SLR is 20.50%
Repo Rate
When we need money, we take loans from banks. And banks charge certain interest
rate on these loans. This is called as cost of credit (the rate at which we borrow the
money).
Similarly, when banks need money they approach RBI. The rate at which banks
borrow money from the RBI by selling their surplus government securities to RBI
is known as "Repo Rate." Repo rate is short form of Repurchase Rate. Generally,
these loans are for short durations up to 2 weeks.
It simply means Repo Rate is the rate at which RBI lends money to commercial
banks against the pledge of government securities whenever the banks are in need
of funds to meet their day-to-day obligations.
Banks enter into an agreement with the RBI to repurchase the same pledged
government securities at a future date at a pre-determined price. RBI manages this
repo rate which is the cost of credit for the bank.
As of 17 May 2017, Repo Rate is 6.00%

RBI increases repo rate:

In order to control excess money supply and inflation in the economy, central
bank increases repo rate and lends to commercial banks at a higher rate. Now,
because of increased repo rate, funds come to commercial banks at a higher
cost, so in order to cover those increased costs of acquiring funds, commercial
banks increase their lending rates for loans and advances. Since, lending rates
are increased, people abstain from borrowing and postpone their purchases
thereby decreasing demand for products and services, consequently it leads to
decrease in money supply in economy and decrease in inflation rate.
RBI decreases repo rate: In order to cure depression and lack of effective
demand, central bank decreases repo rates and lends to commercial banks at a
reduced rate. Because of reduced rates, commercial banks can acquire funds at a
lower cost and in order to acquire new consumers and markets they pass their
benefit of lower cost to consumers by decreasing their prime lending rates on loans
and advances. Since, lending rates are reduced by banks, credit is cheap and this
induces people to venture in new business activities and purchase of capital goods
leading to increased demand for capital goods and increased employment rates.

Reverse Repo Rate

Reverse repo rate is the rate of interest offered by RBI, when banks deposit their
surplus funds with the RBI for short periods. When banks have surplus funds but
have no lending (or) investment options, they deposit such funds with RBI. Banks
earn interest on such funds.

AS of 19 May 2017, Reverse Repo rate is 5.75%

Marginal Standing Facility

Marginal standing facility (MSF) is a window for banks to borrow from the
Reserve Bank of India in an emergency situation when inter-bank liquidity dries up
completely.

Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled
banks can borrow funds overnight from RBI against government securities.
 MSF is a very short term borrowing scheme for scheduled commercial banks.
Banks may borrow funds through MSF during severe cash shortage or acute
shortage of liquidity.

Banks often face liquidity shortfalls due to mismatch in their deposit and
loan portfolios. These are usually very short term and banks can borrow from
RBI for one day period by offering dated government securities.

MSF had been introduced by RBI to reduce volatility in the overnight lending
rates in the inter-bank market and to enable smooth monetary transmission in the
financial system.

Under MSF, banks can borrow funds overnight up to 1% (100 basis points) of
their net demand and time liabilities (NDTL) i.e. 1% of the aggregate deposits
and other liabilities of the banks. NDTL liabilities represent a bank's deposits
and borrowings from others.

In a move to stem the continuing fall of rupee, the RBI raised the MSF rate to
300 basis points (i.e. 3%) above the repo rate in July 2013. Thus, both rate of
borrowing and percent of borrowing allowed under MSF can be varied by RBI.

Introduction of MSF

The RBI had introduced the marginal standing facility (MSF) in its
Monetary Policy (2011-12).
MSF came into effect on from May 9, 2011.
Banks used the facility for the first time in June 2011 and borrowed Rs.1
billion via the MSF.
Does a hike in MSF rate affect us?
Hiking MSF rate makes borrowing expensive for a bank which
means loans become expensive for individual and corporate borrowers and this
in turn translates to lesser availability of the rupee. RBI uses MSF and other
measures to control money supply in the financial system.
 MSF rate hike is being done to control excess availability of the rupee and
to control its depreciation with respect to the dollar.
Borrowing under MSF

Banks can borrow through MSF on all working days except Saturdays,
between 3:30pm and 4:30pm in Mumbai where RBI has its headquarters.
The minimum amount which can be accessed through MSF is Rs. 1 crore
and in multiples of Rs. 1 crore.
The application for the facility can be submitted electronically also by the
eligible scheduled commercial banks.

Findings and Recommendations

Changes in Operating Procedure of Monetary Policy in India Consistent with the
objectives and policy framework, the operating procedure of monetary policy in
India has also witnessed significant changes. The choice of targets, instruments and
operating procedure was circumscribed to a large extent by the nature of the
financial markets and the institutional arrangements .During the monetary targeting
period (1985-1998), while expected growth provided the nominal anchor, reserve
money was used as the operating target and cash reserve ratio (CRR) was used as
the principal operating instrument. Besides CRR, in the pre-reform period prior to
1991, given the command and control nature of the economy, the Reserve Bank
had to resort to direct instruments like interest rate regulations and selective credit
control. These instruments were used intermittently to neutralize the expansionary
impact of large fiscal deficits which were partly monetized. The administered
interest rate regime kept the yield rate of the government securities artificially low.
The demand for them was created through periodic hikes in the Statutory Liquidity
Ratio (SLR) for banks. The year 1992-93 was a landmark in the sense that the
market borrowing programme of the government was put through the auction
process. This was supported by a phased deregulation of lending rates in the credit
market. The Reserve Bank also brought down the SLR and CRR drastically. All
these developments resulted in a decline in pre-emption of resources from the
banking. Therefore, it reiterated the need to transform the call money market into a
pure inter-bank market and recommended the Reserve Banks operations to be
market based. Following these recommendations, the Reserve Bank introduced the
Liquidity Adjustment Facility (LAF) in June 2000 to manage market liquidity on a
daily basis and also to transmit interest rate signals to the market. Under the LAF,
the Reserve Banks policy reverse repo and repo rates set the corridor for overnight
market interest rates. Thus, Open Market Operations (OMSs) including LAF
emerged as the dominant instrument of monetary policy, though CRR continued to
be used as an additional instrument of policy. The call money market was
transformed into a pure inter-bank market by August 2005 in a phased manner.

Suggestions Given by Narasimham

Committee
1. Cash Reserve Ratio (CRR)
Scheduled bank in India are required statutorily to hold cash reserve, called cash
reserve ratio (CRR), with the RBI. Increase/decrease in CRR is used by the RBI.
Increase/decrease in CRR is used by the RBI as an instrument of monetary control,
particularly to mop up excess increases in the supply of money. This power was
given to RBI in 1956. The committee recommended that RBI should rely on open
market operations increasingly and reduce its dependence on CRR. This would
reduce the amount of cash balance of the banks with the RBI enabling them to
increase their revenues through more investments. CRR was gradually lowered
from its peak at 15 percent during July 1989 to April 1993 to 7.50 percent in April
2007.

1. Statutory Liquidity Ratio (SLR)

Apart from the CRR banks in India are also subject to statutory liquidity
requirement. Under this requirement, commercial banks are required under law to
invest prescribed minimum proportions of their total assets/liabilities in
government securities and other approved securities. The underlying philosophy of
this provision is to allocate total bank credit between the government and the rest
of the economy. The committee asked the government to reduce the SLR from the
then existing 38.5 percent to 25 percent over the period of five years. A reduction
in the SLR levels would have more funds with the banks which would allocate
them to promote agriculture, industry and trade. SLR was reduced from its peak
38.5 percent during September 1990 to December 1992 to 25 percent in October,
1997.

2. Structure of Interest Rates

The committee recommended that the level and structure of interest rates in the
country should be broadly determined by market forces. All controls and
regulations on interest rates on lending should be removed. The country has moved
towards liberalized credit allocation mechanism and reduced direct control over
interest rates by the monetary authorities. Interest rate slabs have been gradually
reduced from 20 to 3. Similarly interest rates have been deregulated on the high
slabs of bank rates. The purpose of deregulation is to promote healthy competition
among the banks and encourage their operational efficiency scheduled banks have
now the freedom to set interest rates on their deposits subject to minimum floor
rate (4.5 percent) and maximum ceiling rate (11 percent)

2. Organization of Banking Structure

The committee proposed a substantial reduction in the number of public sector
banks through mergers and acquisitions. The broad pattern should consist of-

3 or 4 large banks which could become international in character.

8 to 10 national bank with a network of branches throughout the country.
Local banks whose operations would be generally confined to a specific
region.
Rural banks whose operations will be confirmed to the rural areas.

Significantly the committee recommended that RBI should permit the setting up of
new banks in the private sector banks. It wanted to a positive declaration from the
government that there would be no more nationalization of banks. It further
recommends that there should be not be any difference in treatment between the
public sector banks and private sector banks.

3. Duality of Control
It recommended removal of duality of control over the banking system by the
banking department of Finance Ministry on the one hand, and by the RBI on the
other hand. The committee desired the RBI to assume full responsibility of
overseeing the functioning of the banking system.