Introduction - Financial sector overview
Indian Financial Sector is a well diversified arena experiencing high growth and development. The financial sector of India is comprised of commercial banks, insurance companies, non-banking cooperations, pension and mutual fund houses and lot more other financial institutions serving the Indian Economy. However, the financial sector is a major ly dominated by the Bankin Sector where the commercial banks comprise of 60 percent of total assets held by the financial system followed by Insurance Sector. Apart from the Banks and Insurance Companies, financial sector also comprise of Non-Banking Finance Companies also known as NBFC which in operate in specialized segments of micro finance, infrastructural finance although few of them also have licence to accept deposits. (Secreteriat)
India's central bank position (role and regulation):
The regulation of Indian banking system is performed by Reseve Bank of India. Being known as lender of last resort, RBI keeps supervision on functioning of commercial banks and performs the following function:
Banker to The Government
Supervisory powers over Commercial banks
Taking monetray steps both quantitative and qualitative to ensure economic stability
RBI has the sole authority to print currency notes and introduce them to the moentary system of the country. No other government agency has the right to print the currency and thus, RBI enjoys monopoly but in the interest of the nation.
Banker to the Government:
RBI acts as a banker both to State and Central Government. Just like the relatonship which commercial banks carries with general public, RBI performs same banking function for the government bodies. For Instance, all the foreign transaction betyween two nations will be carried out bty central bank of each nation. (Jain)
Supervisor Powers over Commercial banks:
RBI supervise the functionong of evry commercial bank in the form of mandatory regulation over cash reserves and liquidity maintenance. Evry commercial bank has to abide by these regulations. Apart from ensuring monetary satbility of each commercial bank, RBI has established Banking Ombudsman Act where customers of the bank can file complaint against any commercial bank and RBI ensures that there grievances are solved in fast and fair manner.
This, is the most imprtant role of RBI as whenever economy fears inflation or any other unfavorable economic condition, RBI has the role of ensuring economic stability through quantitative and qualitative measures:
These includes increasing or decreasing Bank Rate, Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio(SLR) so as to affect the flow of money in the economy to promote economic stability.
Apart from follwoing quantitative measures, RBI also follows some of the qualitative measures to affect flow of money in the economy considering...