Functions of Reserve Bank of India

Questions and Answers

When was the Reserve Bank of India officially established?

March 6, 1934

December 31, 1926

January 1, 1949

April 1, 1935 (correct)

Who was the first Indian Governor of the Reserve Bank of India?

John Hilton Young

Shri C.D. Deshmukh (correct)

Sir Osborne Smith

Shri Shaktikanta Das

Which city was the original location of the Reserve Bank of India's Central Office?

Mumbai

Calcutta (correct)

Delhi

Chennai

What is the maximum term for which the Governor of the Reserve Bank can hold office?

Five years Signup and view all the answers

How many Deputy Governors can the Reserve Bank of India have at most?

Four Signup and view all the answers

What was the recommended establishment year for the Reserve Bank of India by the Hilton Young Commission?

1926 Signup and view all the answers

Which type of board oversees the Reserve Bank of India's affairs?

Central Board of Directors Signup and view all the answers

When did the nationalization of the Reserve Bank of India take place?

1949 Signup and view all the answers

How many members are there in each local board appointed by the Central Government?

Five members Signup and view all the answers

Which section of the RBI Act states that the paid-up capital of RBI is Rs.5.00 crores?

Section 4 Signup and view all the answers

What is the maximum denomination of coins that can be issued in India?

Rs.1000 Signup and view all the answers

What is one of the primary functions of the Reserve Bank of India as described in its Preamble?

To regulate the issue of Bank notes Signup and view all the answers

Under which act does RBI have the authority to be the regulator of the banking system in India?

Banking Regulation Act 1949 Signup and view all the answers

Which authority does the Monetary Policy Committee (MPC) report to?

Central Government Signup and view all the answers

What is the term used for the framework that includes monetary policy and credit policy?

Monetary Policy Framework Signup and view all the answers

Which denomination of banknotes can the RBI issue?

From Rs.2/- to Rs.10000/- Signup and view all the answers

What is the obligation of the RBI regarding government business as described in the RBI Act?

RBI is obligated to transact government business Signup and view all the answers

Which of the following states that the RBI has the sole right to issue bank notes?

Section 22 Signup and view all the answers

How long can the RBI extend Ways and Means advances to the Government of India?

Three months Signup and view all the answers

Where are the currency note printing presses located in India?

Nasik, Dewas, Mysore, Salboni Signup and view all the answers

What is the minimum denomination of coins currently in circulation in India?

50 paise Signup and view all the answers

Which of the following sections mentions RBI's exemption from income tax?

Section 48 Signup and view all the answers

What is the primary function of the Monetary Policy Committee (MPC)?

To determine the policy repo rate to achieve the inflation target Signup and view all the answers

What is the quorum required for a meeting of the Monetary Policy Committee?

Four members Signup and view all the answers

What inflation target has the Central Government set for the period from April 1, 2021 to March 31, 2026?

4 percent with a tolerance band of 2 to 6 percent Signup and view all the answers

What is the function of Open Market Operations (OMOs)?

To manage inflation through government securities transactions Signup and view all the answers

How often is the Monetary Policy Report published by the Reserve Bank?

Every six months Signup and view all the answers

What is the effect of the Standing Deposit Facility (SDF) introduced in April 2022?

It replaced the fixed reverse repo rate Signup and view all the answers

What is the Bank Rate as per the Reserve Bank of India Act?

The rate at which the Reserve Bank buys commercial papers Signup and view all the answers

What is the required Cash Reserve Ratio (CRR) currently maintained by banks with the RBI?

4.50% Signup and view all the answers

Which facility allows the Reserve Bank to inject or absorb liquidity from the banking system on an overnight basis?

Liquidity Adjustment Facility Signup and view all the answers

Under which section of the RBI Act is the Cash Reserve Ratio (CRR) defined?

Section 42(1) Signup and view all the answers

What is the upper bound of the LAF corridor?

Marginal Standing Facility rate Signup and view all the answers

What is the purpose of the Market Stabilization Scheme (MSS)?

To absorb surplus liquidity due to large capital inflows Signup and view all the answers

When must the minutes of the MPC meetings be published?

On the 14th day after the meeting Signup and view all the answers

What is the nature of deposits accepted under the Standing Deposit Facility (SDF)?

Unsecured deposits Signup and view all the answers

What is treated as 'liabilities to others' by banks in India?

Loans/borrowings from abroad Signup and view all the answers

Which of the following liabilities is excluded from NDTL computation for CRR/SLR?

Paid up capital and reserves Signup and view all the answers

What penalty is imposed for shortfall in maintenance of prescribed CRR for a day?

Penal interest at the rate of 3% above the Bank Rate Signup and view all the answers

Which of the following instruments is considered liabilities for NDTL computation?

Upper Tier II instruments Signup and view all the answers

What happens if there is a continued default in CRR during subsequent fortnights?

Penal interest increases to 5% above the Bank Rate Signup and view all the answers

Which type of loans taken by a non-scheduled co-operative bank is excluded from NDTL computation?

Loans from NaBFID Signup and view all the answers

Which entities are required to report CRR status to the RBI?

All banking institutions including cooperative banks Signup and view all the answers

What is the reporting frequency for banks to submit CRR provisional reports to RBI?

Every alternate Friday Signup and view all the answers

Which of the following liabilities can be netted off from inter-bank liabilities?

Sums placed for issuing drafts Signup and view all the answers

Which of the following deposits were exempt from CRR and SLR maintenance for a specific period?

Incremental FCNR (B) deposits and NRE Term deposits Signup and view all the answers

How is the balance amount from drafts issued by the accepting bank accounted for?

As a liability to others in India Signup and view all the answers

What is the current Statutory Liquidity Ratio (SLR) percentage that banks are required to maintain?

18% Signup and view all the answers

What action can be taken against directors knowingly involved in CRR defaults?

Imposition of fines Signup and view all the answers

Which of the following is NOT considered eligible for SLR maintenance?

Corporate bonds Signup and view all the answers

What is the penalty for a bank's SLR securities falling below the prescribed minimum on an alternate Friday?

3% above bank rate Signup and view all the answers

What must banks provide if there is a wide variation in reports exceeding 20 percent?

Explanatory reasons in the return Signup and view all the answers

What does Marginal Standing Facility (MSF) allow banks to do?

Borrow up to 2% of NDTL Signup and view all the answers

Which type of liabilities related to international financial services are exempt from NDTL?

Both A and B Signup and view all the answers

What is one of the purposes of the MSF facility?

To provide liquidity during shocks Signup and view all the answers

What type of interest is accrued for continued CRR shortfalls on a fortnightly average basis?

A rate of 3% above the Bank Rate Signup and view all the answers

Which of the following best describes 'Call Money' in the money market?

Borrowing or lending for one day Signup and view all the answers

How often must banks submit their SLR returns to the Reserve Bank?

Monthly Signup and view all the answers

What types of instruments can be included in the SLR computation?

Government securities and Treasury Bills Signup and view all the answers

Which of the following statements about repo borrowing is correct?

Repo securities are eligible for SLR if they meet specific criteria. Signup and view all the answers

What is the definition of 'Term Money' in the context of money market instruments?

Borrowing for more than 14 days but less than one year Signup and view all the answers

Which of the following accounts are used to maintain investments in Government securities?

SGL Accounts and CSGL Accounts Signup and view all the answers

What happens if a bank fails to maintain the minimum SLR for two succeeding alternate Fridays?

Penal interest increases to 5%. Signup and view all the answers

What is included in the computation of NDTL for SLR purposes?

Inter-bank term borrowing liabilities of all maturities Signup and view all the answers

How does the Reserve Bank define 'High Quality Liquid Assets' (HQLAs) for banks?

Only government securities that satisfy MSF criteria are HQLAs. Signup and view all the answers

What is the minimum credit rating required for the issuance of Commercial Papers (CPs) and Non-Convertible Debentures (NCDs)?

A3 Signup and view all the answers

What type of investments must banks hold in dematerialized form according to the new guidelines?

Investments in securities, privately placed or otherwise Signup and view all the answers

When can the buyback of Commercial Papers (CPs) occur after issuance?

After 7 days Signup and view all the answers

How are Fair Value through Profit and Loss (FVTPL) securities valued?

Fair valued daily for HFT sub-category Signup and view all the answers

Which category must investments that do not meet the SPPI criterion be classified under?

Not eligible for classification as HTM or AFS Signup and view all the answers

What should the investment policy adopted by banks include?

Investment criteria and objectives Signup and view all the answers

What trading platforms are permissible for CPs and NCDs in the secondary market?

OTC markets and recognized stock exchanges Signup and view all the answers

What is the minimum holding period for the buyback of Non-Convertible Debentures (NCDs)?

90 days Signup and view all the answers

What must banks do regarding their investment portfolio before acquiring securities?

Document categorization decisions Signup and view all the answers

How often must securities classified under FVTPL be fair valued?

Daily Signup and view all the answers

What is a key change in the master direction released by RBI regarding investment classification?

Removal of the 90-day ceiling on HFT holding period Signup and view all the answers

What happens to the net gain or loss from fair valuation of FVTPL securities?

Directly credited or debited to the Profit and Loss Account Signup and view all the answers

What type of securities is classed under Held to Maturity (HTM)?

Securities acquired with intent to hold till maturity meeting SPPI criteria Signup and view all the answers

Which entities are eligible to issue Certificate of Deposits (CDs)?

Scheduled Commercial Banks, Regional Rural Banks, Small Finance Banks Signup and view all the answers

What is the minimum denomination for issuing a Certificate of Deposit?

₹5 lakh Signup and view all the answers

What is the prudential limit for borrowing transactions for Small Finance Banks in Call and Notice Money Markets?

100% of capital funds on a daily average basis Signup and view all the answers

Which of the following is true about the trading of Certificates of Deposits?

CDs can be traded in Over-the-Counter markets or stock exchanges. Signup and view all the answers

What is the maximum tenor for a Certificate of Deposit at issuance?

1 year Signup and view all the answers

Which financial instruments can be deemed as unsecured money market instruments?

Certificates of Deposit and Commercial Paper Signup and view all the answers

What must entities do before they can decide on prudential limits regarding lending transactions?

Have their limits approved by their Board. Signup and view all the answers

What is the allowable tenor for a Commercial Paper (CP)?

Between 7 days and 1 year Signup and view all the answers

What is the settlement cycle for Over-the-Counter trades in CDs?

T+0 or T+1 Signup and view all the answers

Under which condition can banks grant loans against Certificates of Deposit?

Only if specifically permitted by the Reserve Bank. Signup and view all the answers

Which type of investors are allowed to invest in Commercial Papers?

All Resident Indians and Non-residents as permitted under FEMA Signup and view all the answers

What is the purpose of a buyback of Certificates of Deposit?

To enable investors to sell CDs back at market price. Signup and view all the answers

Which participant category has the highest prudential limit for Call and Notice Money transactions?

Primary Dealers Signup and view all the answers

What percentage of aggregate deposits can co-operative banks use for lending in Call, Notice and Term Money Markets?

2.0% Signup and view all the answers

What is the main characteristic of a Commercial Paper?

Negotiable and unsecured money market instrument Signup and view all the answers

What is the minimum period a customer must preserve paid cheques as per the regulations?

8 years Signup and view all the answers

Which provision is applicable to the appointment of the Chairman of a cooperative bank?

The Chairman must not be insolvent or convicted of crimes involving moral turpitude. Signup and view all the answers

What major change does the Banking Regulation (Amendment) Act, 2020 implement concerning co-operative banks?

The Act applies certain provisions of the Banking Regulation Act to co-operative banks, aligning them with commercial banks. Signup and view all the answers

What does the RBI have the power to do regarding the Board of Directors of a co-operative bank?

Remove a Chairman who does not meet 'fit and proper' criteria. Signup and view all the answers

What authority does the Central Government have in relation to banking rules?

To make rules after consultation with the Reserve Bank, which are published in the Official Gazette. Signup and view all the answers

What implication does the Banking Regulation (Amendment) Act, 2020 have on the audit processes of co-operative banks?

Audit of co-operative banks will align with that of scheduled commercial banks. Signup and view all the answers

What consequence does the amendment allow for banks placed under moratorium?

They cannot face any legal actions for up to six months. Signup and view all the answers

What is a significant requirement for the Board of Directors of co-operative banks as per the new regulations?

At least 51% must have special knowledge or experience in relevant fields. Signup and view all the answers

What does the Banking Regulation (Amendment) Act, 2020 say about reconstruction or amalgamation of banks?

It allows RBI to initiate reconstruction or amalgamation without imposing a moratorium. Signup and view all the answers

What type of banks are explicitly not covered by the Banking Regulation (Amendment) Act, 2020?

Primary agricultural credit societies and certain co-operative societies Signup and view all the answers

What is the maximum continuous period a Director of a banking company, other than its Chairman or whole-time Director, can hold office?

Eight years Signup and view all the answers

What percentage of a banking company's profits must be transferred to the reserve fund before declaring dividends?

25% Signup and view all the answers

What is the minimum paid-up capital requirement for a banking company incorporated outside India in Bombay or Calcutta?

Twenty lakhs Signup and view all the answers

What is the maximum percentage of voting rights a shareholder can exercise in a banking company without prior approval from the Reserve Bank?

10% Signup and view all the answers

What is the ratio requirement for authorized, subscribed, and paid-up capital in a banking company?

4:2:1 Signup and view all the answers

What is the maximum commission a banking company can pay on shares issued?

2.5% Signup and view all the answers

Which of the following is NOT a requirement for the Board of Directors of a banking company?

Must have at least one legal expert Signup and view all the answers

What is the time limit for a banking company to hold immovable property after its acquisition?

Seven years Signup and view all the answers

What is the minimum capital requirement for a Small Finance Bank (SFB)?

₹200 crore Signup and view all the answers

Which of the following statements regarding non-banking assets is correct?

Must be disposed of within seven years Signup and view all the answers

What is the maximum aggregate limit for a banking company to hold shares in another company?

30% of the paid-up share capital Signup and view all the answers

What must a banking company do regarding its paid-up capital and reserves after three years from the commencement of business?

Meet minimum capital requirements Signup and view all the answers

Which of the following applies to a banking company regarding voting rights?

Shareholders cannot vote beyond ten percent of total rights Signup and view all the answers

What is the requirement for a banking company that wishes to conduct business in India concerning its subscribed and paid-up capital?

Subscribed capital must be at least half of authorized capital Signup and view all the answers

What constitutes a 'Day 1 Gain'?

The difference between acquisition cost and fair value at initial recognition where fair value exceeds acquisition cost. Signup and view all the answers

How are securities held under HTM accounted after initial recognition?

They are carried at cost and not marked to market. Signup and view all the answers

What should the amortised amount on HTM securities reflect in the financial statements?

Income on Investments. Signup and view all the answers

What is the minimum frequency for fair valuation of securities held in AFS?

Quarterly. Signup and view all the answers

Under what condition can banks reclassify investments between categories?

With the approval of their Board of Directors. Signup and view all the answers

What should form the basis for determining the fair value of quoted securities?

Prices declared by the Financial Benchmarks India Private Ltd. (FBIL). Signup and view all the answers

Sales from HTM may exceed five percent of the opening carrying value of the HTM portfolio under what circumstance?

When the sales are explicitly permitted by the Reserve Bank of India. Signup and view all the answers

What is the acceptable valuation approach for unquoted debentures and bonds?

Applying the appropriate mark-up over the YTM rates for Central Government Securities. Signup and view all the answers

How are zero coupon bonds (ZCBs) valued in the absence of market value?

By the present value of future cash flows. Signup and view all the answers

What is used to determine the fair value of equity shares that are illiquid or not listed on a recognized exchange?

The break-up value as per the latest audited balance sheet. Signup and view all the answers

What should be the basis for fair valuation of unquoted Central/State Government securities?

Prices/YTM rates published by the Financial Benchmarks India Private Ltd. (FBIL). Signup and view all the answers

Which of the following statements is true regarding regulatory limits on HTM sales?

Selling above the threshold requires prior approval from the Board and DoS. Signup and view all the answers

When can investments in subsidiaries, associates, and joint ventures be reclassified?

When an investee ceases to be classified as such. Signup and view all the answers

What is the maximum allowable time frame for a balance sheet to precede the date of valuation?

18 months Signup and view all the answers

What is the valuation of shares if the latest audited balance sheet is more than 18 months old?

₹ 1 per company Signup and view all the answers

How should investment in unquoted Mutual Fund units be valued?

On the basis of latest re-purchase price Signup and view all the answers

What is the maximum percentage of a bank's investment in unlisted non-SLR securities?

10 percent Signup and view all the answers

Which of the following securities can banks invest in without being subject to the 10 percent ceiling?

Securitisation notes for infrastructure projects Signup and view all the answers

What should be the original maturity for investments classified under non-SLR securities?

Less than one year Signup and view all the answers

What does the term 'Demand Liability' mean in the context of the Banking Regulation Act?

Liabilities that must be met on demand Signup and view all the answers

How often must banks conduct a half-yearly review of their investment portfolio?

Every six months Signup and view all the answers

Which of the following is defined as 'approved security' under the Banking Regulation Act?

Securities issued by the Central or State Government Signup and view all the answers

What is the primary definition of 'Banking' as per the Banking Regulation Act?

Accepting deposits from the public repayable on demand or otherwise Signup and view all the answers

What is indicated by Section 6 of the Banking Regulation Act regarding banking companies?

Forms of business banking companies may engage in Signup and view all the answers

Which term is used to characterize a loan made on the condition of adequate security?

Secured Loan Signup and view all the answers

What can trigger the suspension of the Banking Regulation Act provisions?

Government directive during an emergency Signup and view all the answers

What requirement must a banking company fulfill before commencing business?

Obtain a license from the Reserve Bank of India Signup and view all the answers

What is the Statutory Liquidity Ratio (SLR) that banks are required to maintain?

A minimum of 75% of total demand and time liabilities Signup and view all the answers

What must a banking company do with unclaimed deposits after ten years?

Remit the deposits to the Reserve Bank of India Signup and view all the answers

Which of the following actions requires prior approval from the Reserve Bank of India?

Lending to a firm where a director is a partner Signup and view all the answers

What power does the Reserve Bank of India have to manage stressed assets?

Initiate insolvency resolution processes Signup and view all the answers

How often must banking companies submit their accounts and balance sheets to the Reserve Bank?

Annually Signup and view all the answers

Under Section 21A, which aspect of banking operations is not subject to scrutiny by courts?

Rate of interest charged by banks Signup and view all the answers

Which of the following reasons may result in the cancellation of a banking company's license by the RBI?

Failure to maintain required operational records Signup and view all the answers

Which section empowers the RBI to issue directions to banks in the public interest?

Section 35A Signup and view all the answers

What constitutes the assets in India for a banking company based on its liabilities?

No less than 75% of its demand and time liabilities Signup and view all the answers

What authority has the power to appoint additional directors in a banking company?

Reserve Bank of India Signup and view all the answers

What is the maximum period for which the Board of Directors can be superseded by the Reserve Bank?

Twelve months Signup and view all the answers

Which of the following needs to be conducted on the financial statements of a banking company?

Independent audit by a qualified person Signup and view all the answers

What is the purpose of the 'Depositor Education and Awareness Fund Scheme 2014 (DEAF)'?

To handle unclaimed deposits effectively Signup and view all the answers

Study Notes

Formation & Structure of RBI

Established on April 1, 1935, following the recommendations of the John Hilton Young Commission.
The Reserve Bank of India Act came into effect on March 6, 1934.
Initially located in Calcutta, the Central Office moved to Mumbai in 1937.
Nationalized in 1949, RBI is fully owned by the Government of India.
First Governor was Sir Osborne Smith; first Indian Governor was C.D. Deshmukh.
Current Governor is Shaktikanta Das, the 25th individual to hold the position.

Central Board Management

Governed by a central board of directors appointed by the Government of India.
Consists of a Governor, up to four Deputy Governors, four Directors from local boards, and additional directors nominated by the Central Government.
Governor and Deputy Governors serve a maximum term of five years; other directors serve four years.

Local Boards

Four regional boards located in Mumbai, Calcutta, Chennai, and New Delhi.
Composed of five members appointed for a four-year term to advise on local matters.

Important Sections of RBI Act 1934

Section 4: Paid-up capital is Rs. 5 crores.
Section 7: Central Government can issue directives for public interest.
Section 17: Accepts deposits and facilitates government funds collection.
Section 20: RBI’s obligation to handle government transactions.
Section 21: Authorized to transact government business in India and through states.
Section 22: Sole authority to issue bank notes with specified denominations.

Functions of RBI

Regulates issuance of bank notes and maintains monetary stability.
Implements modern monetary policy frameworks aimed at achieving price stability and growth.
Acts as the banker for banks and governments, manages foreign exchange reserves, and supervises financial institutions.

Currency Management

Currency notes printed by four presses; coins minted by the Government of India under the Coinage Act 2011.
Coins can be issued up to a maximum denomination of Rs. 1000, with one-rupee notes treated as coins.

Monetary Policy Framework

Contains a statutory basis for flexible inflation targeting introduced in 2016.
Monetary Policy Committee (MPC) determines policy interest rates to achieve inflation target set by the Government every five years.
Inflation target set at 4% with a tolerance band of 2% to 6%.

Open Market Operations & Tools

Open Market Operations (OMOs) involve the purchase/sale of government securities to manage liquidity.
Market Stabilization Scheme (MSS) used for absorbing surplus liquidity via government securities.
Liquidity Adjustment Facility (LAF) manages liquidity in the banking system through repo and reverse repo operations.

Key Rates

Repo Rate: Interest rate for overnight liquidity to banks.
Standing Deposit Facility (SDF) Rate: Rate for uncollateralized overnight deposits.
Cash Reserve Ratio (CRR): Currently set at 4.50%, a percentage of deposits maintained with RBI.
Statutory Liquidity Ratio (SLR): Set at 18%, must be maintained in eligible securities.

Reporting & Compliance

Banks must report CRR status bi-weekly and within specified deadlines.
Non-compliance incurs penal interest and possible prohibition on accepting new deposits.
Reporting happens electronically through the Centralised Information Management System (CIMS).

Penalties for CRR Non-Compliance

Penal interest applies for shortfalls in CRR maintenance at rates above the Bank Rate.
Directors involved in defaults may be fined; repeated non-compliance incurs additional penalties.

Non-Applicable Liabilities for NDTL

Various liabilities are excluded from computation for NDTL to ensure clarity in financial reporting and compliance.

Conclusion

The RBI plays a crucial role in maintaining economic stability, regulating the banking sector, managing monetary policy, and ensuring effective financial services in India.### CCIL and CSGL Facilities
Funds in the Constituent Subsidiary General Ledger (CSGL) can be counted for Statutory Liquidity Ratio (SLR) by banks.
Repo-borrowed funds are exempt from Cash Reserve Ratio (CRR) and SLR calculations, provided the securities involved meet legal eligibility criteria.

Borrowings and Investments

Borrowings via repo in corporate bonds count as liabilities for CRR/SLR.
Banks must maintain investments in Government Securities only through approved SGL or CSGL accounts.

Cash Management Bills

Treated as Government of India Treasury Bills and thus qualify as SLR securities.

Computation and Reporting of NDTL for SLR

Net Demand and Time Liabilities (NDTL) for SLR calculated similarly as for CRR.
Scheduled commercial banks must include inter-bank term deposits in their liabilities to the banking system.

Monthly Reporting Requirements to RBI

Banks must submit Return in Form VIII by the 20th of each month detailing SLR held on alternate Fridays.
Returns must be filed electronically using digital signatures from two authorized officials.

Penalties for SLR Defaults

SLR shortfalls incur a penal interest of 3% per annum above the bank rate for the first default; increased to 5% for subsequent defaults on alternate Fridays.
Penalty payments are due within fourteen days of RBI notification.

Marginal Standing Facility (MSF)

Provides banks a way to borrow overnight against SLR up to a 2% limit of their NDTL for liquidity support.
MSF rate set at 25 basis points above the policy repo rate, with banks having discretionary access to overnight funds against excess SLR.

Money Market Instruments

Includes Call/Notice Money, Commercial Paper, Certificates of Deposit, and Non-Convertible Debentures with ≤1-year maturity.
Call Money is for overnight borrowing/lending; Notice Money is for lending up to 14 days; Term Money exceeds 14 days but ≤1 year.

Eligible Participants in Money Markets

Participation allowed for Scheduled Commercial Banks, Payment Banks, Small Finance Banks, Regional Rural Banks, Primary Dealers, and Co-operative Banks.

Prudential Limits for Money Market

Scheduled Commercial Banks set internal limits; Small Finance Banks may borrow up to 125% of capital funds.
Primary Dealers may have up to 225% of their Net Owned Fund as borrowing limits.

Certificates of Deposit (CDs)

CDs are negotiable, unsecured instruments issued by various banks for a maturity ≤1 year with a minimum denomination of ₹5 lakh.
Issued in dematerialized form; trading allowed in secondary markets with mandatory market pricing.

Commercial Paper (CP) and Non-Convertible Debentures (NCD)

CPs are unsecured promissory notes issued by corporate entities and must have a net worth of ₹100 crore.
Minimum issuance for CPs and NCDs is ₹5 lakh; tenor ranges between seven days and one year.

Investment Portfolio Classification for Banks

Investments categorized into Held to Maturity (HTM), Available for Sale (AFS), Fair Value through Profit and Loss (FVTPL).
HTM securities held at cost, while AFS and FVTPL securities subject to fair value assessments.

Initial and Subsequent Measurement of Investments

Investments initially recognized at fair value; subsequent evaluations differ by category (HTM at cost, AFS at fair value at least quarterly).

Reclassification Restrictions

Banks cannot reclassify investments between categories without Board approval and must apply changes prospectively.

Update on RBI Guidelines

New directions effective from April 1, 2024, require banks to establish a comprehensive investment policy with specific criteria and content.
Guidelines align with global standards and emphasize the importance of equity research within banks.### Liquidity Management Operations by RBI
Sales to the RBI through Open Market Operations (OMO) and Government Securities Acquisition Programme (GSAP) facilitate liquidity management.
Government of India conducts repurchase of Government Securities from banks via buyback or switch operations.
State Development Loans can be repurchased by state governments using similar buyback or switch operations.
Non-SLR securities can be repurchased, bought back, or have call options exercised by the issuer.
Downgraded or defaulted non-SLR securities are subject to sale, as well as securities tied to resolution plans for distressed borrowers.
Additional securities sales are allowed under terms set by the Reserve Bank of India.

Fair Value of Investments

Quoted securities fair value is based on prices from Financial Benchmarks India Private Ltd. (FBIL) or recognized stock exchanges.
Unquoted Treasury Bills valued at carrying cost; Central/State Government securities valued based on FBIL published prices/Yield to Maturity (YTM) rates.
Non-SLR securities marked up 25 basis points over YTM rates of equivalent maturity Central Government securities.
Unquoted debentures and bonds valued based on appropriate mark-up above YTM rates from FBIL/FIMMDA.
Zero coupon bonds are marked to market using present value calculations if market value is absent.
Preference shares traded on exchange within 15 days cannot exceed last traded price; valued at par for specific project finance periods.
Illiquid equity shares assessed at break-up value from the latest audited balance sheet; lack of timely data results in fixed ₹1 valuation.
Unquoted Mutual Fund (MF) units are valued based on latest repurchase price; NAV applies if repurchase price is unavailable.

Operational Guidelines

Transactions in Government Securities are done through Subsidiary General Ledger (SGL) accounts under Delivery Versus Payment (DvP) System.
Maximum tolerance for a bank’s unlisted non-SLR securities investment is set at 10% of total investments.
Unlisted securities expected to list within a year do not count towards the 10% limit.
Banks can invest an additional 10% in non-SLR securities related to infrastructure projects and those from Asset Reconstruction Companies (ARCs).
Investments in non-SLR securities under one year original maturity are generally not allowed, with exceptions for Commercial Paper and Certificates of Deposits.
Unrated non-SLR securities are prohibited unless they are bonds from infrastructure-engaged companies, subject to the 10% ceiling.
Liquid/short-term mutual fund investment is limited to 10% of banks' net worth.

Banking Regulation Act Overview

The Act applies to all banking companies in India, with key exceptions.
Central Government can suspend all or any part of the Act for up to one year under special circumstances.
Defined "Banking" and "Banking Company" specifically to delineate activities and entities covered by the Act.
Regulatory framework includes provisions for minimum capital requirements, board composition, and liability definitions.
Banking companies must obtain RBI licenses; operations without them are prohibited.
Specific regulations address loans, commission, and asset handling to maintain banking integrity and accountability.
RBI maintains broad regulatory powers including inspection and issuance of directives to manage banking practices effectively.

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Description

Explore the formation, structure, and key functions of the Reserve Bank of India (RBI) through this quiz. Understand the historical context surrounding its establishment in 1935 and the implications of the RBI Act of 1934. Test your knowledge about RBI’s role in India’s economy.