Home > Topics > Indian Financial System > Regulations for Banking Industry – RBI & Acts
← PreviousNext →

Regulations for Banking Industry – RBI & Acts

Introduction

Banking is a risky business involving public money. Hence, it is heavily regulated.

1. Key Acts

A. Reserve Bank of India Act, 1934

  • Established RBI.
  • Gives powers to issue currency and manage monetary policy.

B. Banking Regulation Act, 1949

  • Governs the licensing, management, and operations of banks.
  • Sec 22: License requirement.
  • Sec 35A: Power of RBI to give directions (used for NPA resolution).
Note

Basel Norms: Apart from CRR/SLR, banks must follow global Basel III norms, which mandate a certain Capital Adequacy Ratio (CAR) to absorb shock losses.

2. Key Regulatory Ratios (Reserve Ratios)

Banks cannot lend all the money they receive. They must maintain reserves.

A. Cash Reserve Ratio (CRR)

  • Definition: % of Net Demand & Time Liabilities (NDTL) kept as Cash with RBI.
  • Interest: No interest paid by RBI.
  • Current Rate: Approx 4.5% (Variable).
  • Purpose: Safety valve + Liquidity control.

B. Statutory Liquidity Ratio (SLR)

  • Definition: % of NDTL kept by bank with itself in liquid assets (Gold, Cash, Govt Securities).
  • Current Rate: Approx 18% (Variable).
  • Purpose: Solvency + Govt borrowing (banks buy Govt bonds).

3. Policy Rates (Monetary Policy)

  1. Repo Rate: Rate at which RBI lends to banks (Short term). used to control inflation.
  2. Reverse Repo Rate: Rate at which RBI borrows from banks (Absorb liquidity).

Summary

  • Acts: RBI Act 1934 & BR Act 1949.
  • CRR: Cash with RBI.
  • SLR: Liquid assets with Self.
  • Repo: Lending rate of RBI.

Quiz Time! 🎯

Loading quiz…

← PreviousNext →