26 October 2024 – The Indian Express

Viksit Bharat’s Banking Sector

• The Reserve Bank of India just celebrated a noteworthy 90-year journey. The central bank has had several triumphs and setbacks during the course of its existence, exhibiting an impressive track record of achievements.

• However, the central bank needs to continue to be ready to guarantee efficient regulation and supervision in light of evolving payment methods, the introduction of digital currency issued by the central bank, and the appearance of new threats.

The Reserve Bank of India (RBI): what is it?

• India’s central bank is called the RBI.
• In compliance with the terms of the Reserve Bank of India Act, 1934, it was founded on April 1, 1935.
• It was nationalised in 1949 after being founded as a private company in 1935.
• Goals: The Reserve Bank’s fundamental duties are outlined in the Preamble of the RBI as follows:
• to control reserve holdings and bank note issuance in order to maintain monetary stability in India and, more generally, to manipulate the nation’s credit and currency systems for personal gain.
• Having a contemporary framework for monetary policy to address the issue of an ever-more complex economy,
• to preserve price stability while preserving growth as the main goal.

RBI’s organisational structure:

• A central board of directors oversees the Reserve Bank’s operations.
• In accordance with the Reserve Bank of India Act, the board is appointed by the Indian government.
• The directors are nominated or appointed for a four-year term.

The 2011 Factoring Regulation Act:

• What are the Reserve Bank of India’s (RBI) key accomplishments?
• Sustaining Economic Stability:
• The Reserve Bank of India Act of 1934 gives the RBI the legal authority to implement a cutting-edge framework for monetary policy. As a result, the RBI’s monetary policy framework is called flexible inflation targeting, or FIT.
• Every five years, the RBI and the Indian government collaborate to determine the inflation target in terms of the Consumer Price Index (CPI).

Regulation of the Financial Sector:

• In order to improve financial stability and fortify the banking industry, the RBI has put in place a number of initiatives.
• To guarantee the stability of financial institutions, it continuously examines and changes banking rules.
• The Prompt Corrective Action (PCA) framework was established by the RBI, for instance, to address non-performing assets (NPAs) in banks and preserve their solvency.
• Effective Handling of Public Debt:
• The national debt has been effectively controlled by the Reserve Bank. It has arranged low-interest loans for the government.
• It has aided in obtaining money for the economy’s public sector expansion. It has also given the government short-term advances.

Inclusion of Finances:

• In order to encourage financial inclusion and access to banking services, particularly in rural and remote areas, the RBI has launched a number of initiatives.
• A number of initiatives, including lending standards for the priority sector, branch licencing criteria, payment banks, and small financing banks, have made formal banking services more accessible to groups of people who were previously underprivileged.

• As per the Foreign Exchange Management Act of 1999, the RBI is responsible for overseeing all foreign exchange.
• To avoid excessive currency rate volatility and preserve the stability of the external sector, the RBI intervenes in the foreign exchange market. India’s healthy foreign exchange reserves are evidence of the RBI’s efficient handling of this issue.

• To enable quick and safe transactions, the RBI has taken the initiative to update payment and settlement systems.
• With the introduction of programmes like Real-Time Gross Settlement (RTGS), National Electronic Funds Transfer (NEFT), and Unified Payments Interface (UPI), which enable quicker and more efficient transactions, the RBI has been in charge of modernising the payment systems.
• Technological Progress:
• In order to improve efficiency and inclusivity in the financial sector, the RBI has embraced technology developments in banking and finance and is actively pushing digital banking, electronic payments, and fintech innovation.
• Non-Banking Financial Companies (NBFCs) are subject to regulation.
• In order to improve NBFC resilience and reduce systemic risks, the RBI has tightened restrictions in response to the growing significance of NBFCs in India’s financial system.
• To guarantee the stability of the NBFC industry, it established criteria for capital sufficiency, corporate governance, and asset-liability management.

• The RBI has aided in the creation of jobs, economic growth, and general economic development through its monetary policy actions and development projects.
• It has aided in the establishment of Development Banking’s sturdy framework. Numerous specialty financial organisations, including those related to agriculture, industry, and exports, have been founded.

• The Reserve Bank has taken the necessary actions to raise the level of public trust in the banking industry. It closely monitors the Scheduled Commercial banks’ operations to prevent bank failures.
• To safeguard depositor interests, the Deposit Insurance and Credit Guarantee System was also implemented. It has shown to be a significant element in fostering depositor trust in banks.

Which Approaches Should Be Taken to Enhance the Reserve Bank of India’s (RBI) Operational Efficiency?

Enhancing the Regulatory Structure:

• Improve regulatory structures to provide strong oversight and control over banks and other financial organisations. This should include regular evaluations and adjustments to accommodate shifting market conditions and new dangers.
• The establishment of the Financial Stability and Development Council (FSDC) was initially suggested by the Raghuram Rajan committee on financial sector reforms in 2008 as a means of enhancing financial stability and regulator coordination.

Improving Access to Finances:

• Put policies in place to encourage greater financial inclusion, such as increasing the availability of banking services, encouraging digital payments, and lending assistance to programmes aimed at reaching underprivileged groups and areas.
• The Nachiket Mor Committee (2014) suggested a phased strategy for attaining universal financial inclusion through creative delivery methods for comprehensive financial services for small businesses and low-income households.

Increasing the Transmission of Monetary Policy:

• In order to ensure that changes in policy rates have an effective impact on lending and borrowing rates throughout the financial system and encourage credit flow to the productive sectors of the economy, it is necessary to address bottlenecks in the mechanisms that transmit monetary policy.
• To enhance the transmission of policy rate changes to bank lending rates, the RBI has implemented tools like the Marginal Cost of Funds based Lending Rate (MCLR).

Improving Risk Control Procedures:

• Boost risk management systems in banks and other financial organisations to recognise, evaluate, and reduce a range of risks, including as operational, credit, liquidity, and cyber risks.
• Healthy credit development has been made possible by initiatives like the Insolvency and Bankruptcy Code (IBC) framework, which have helped to resolve problems like bad loans.

Encouragement of Technological Innovation

• While guaranteeing data security and consumer protection, promote technological innovation and acceptance in the financial sector, including fintech solutions, digital banking services, and blockchain technology.
• The Reserve Bank of India became one of the few nations with a structure like this in place to facilitate the gradual and controlled growth of the FinTech industry in the nation when it launched its own Regulatory Sandbox (RS) environment in August 2019.

Boosting Communication and Transparency:

• To improve public knowledge of monetary policy decisions, regulatory changes, and the central bank’s overall operations, increase openness and communication channels between the RBI, financial institutions, and the general public.
• Clarity on policy actions and perspective is provided by the bimonthly monetary policy announcement and news conferences of the RBI Governor.

• For the purpose of improving staff and stakeholder skills, knowledge, and expertise in areas including financial regulation, supervision, monetary policy, and emerging technologies, invest in capacity building and training programmes.
• In order to increase customer service and satisfaction, the Damodaran Committee on Customer Service (2011) in Banks proposed improving training programmes for bank personnel.
• Enhancing Accountability and Governance:
• Take steps to improve the RBI’s internal controls, accountability systems, and governance frameworks to guarantee honesty, openness, and efficient decision-making.
• To increase the effectiveness and accountability of public sector banks, the P.J. Nayak Committee on Governance in Banks (2014) suggested strengthening the autonomy and governance of these institutions.

• Encourage cooperation and coordination among regulatory bodies, governmental departments, global organisations, and interested parties to tackle intersecting concerns, advance economic stability, and accomplish shared goals.
• To exchange information and coordinate policy initiatives, the RBI regularly engages in international forums including the Financial Stability Board (FSB) and the Bank for International Settlements (BIS).

• The RBI goes above and beyond its function as a central bank to become a symbol of brilliance and creativity. Through the use of cutting-edge risk management techniques and the promotion of a prudent and forward-thinking culture, it protects stability and resilience in the face of worldwide uncertainty. By working together and being motivated by a common goal of prosperity and advancement, RBI can realise its greatest potential as a catalyst for building a “Viksit Bharat.”