Reserve Bank of India

Subject – Economy

Context – Making the banking sector more vibrant

Concept –

The Reserve Bank of India is the central bank of the country.
The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission.
The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.
It draws its powers and responsibilities through other legislations also such as theBanking Regulation Act, 1949.
The Bank was constituted to
Regulate the issue of banknotes
Maintain reserves with a view to securing monetary stability and
To operate the credit and currency system of the country to its advantage.
The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt.
With liberalisation, the Bank’s focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.

Regulations Review Authority (RRA)

In 1999, the RBI set up a Regulations Review Authority (RRA) for reviewing regulations, circulars and reporting systems, based on feedback from the public, banks and financial institutions.
- This process, besides streamlining and increasing the effectiveness of several procedures and simplifying regulatory prescriptions, paved the way for issuance of Master Circulars (MCs) and reduced reporting burden on regulated entities.
- MCs significantly improved general understanding of central bank rules and procedures, and increased transparency.
- The transition from MCs to Master Directions became effective from January 2016, heralding availability of central bank rules and regulations for each subject matter on real-time basis.
The RBI set up the Second Regulations Review Authority in May 2021 to streamline regulations and reduce the compliance burden on regulated entities.

‘Priority sector’

The year 1972 witnessed crystallisation of a formal definition for‘priority sector’.
The current PSL guidelines require domestic commercial banks (excluding regional rural banks and small finance banks ) to achieve, in a fiscal year, a target of 40 per cent of adjusted net bank credit or credit equivalent of off-balance sheet exposures as on the corresponding date of the preceding year, whichever is higher.
Narasimham Committee-I had recommended reducing the scope of directed credit under the priority sector from 40 per cent to 10 per cent, which couldn’t be accepted, and Narasimham Committee-II had taken note of this.

Contingent Convertible Capital Instruments

CoCos are nontraditional hybrid capital instruments.
Their twin objectives are (a) loss absorption and (b) recapitalisation, when a bank ‘is’ in trouble, or when it is a ‘going concern’.
CoCos can absorb losses either by converting into common equity or writing down the principal, subject to activation of “triggers”.