Reserve Bank of India (RBI) is the central banking and monetary authority in India. RBI manages the country’s money supply and foreign exchange and also serves as a bank for the Government of India and for the country’s commercial banks. Banks can be broadly categorized into commercial banks, public sector banks, regional rural banks, private sector banks, f...more

Reserve Bank of India (RBI) is the central banking and monetary authority in India. RBI manages the country’s money supply and foreign exchange and also serves as a bank for the Government of India and for the country’s commercial banks. Banks can be broadly categorized into commercial banks, public sector banks, regional rural banks, private sector banks, foreign banks, co-operative banks, and term lending institutions, non-banking finance companies / housing finance companies. Public sector banks make up the largest category of banks in the Indian banking system. There are 28 public sector banks in India. After bank nationalization was completed in 1969 and 1980, the majority of Indian banks were public sector banks. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBI permitted entry by the private sector into the banking system. This resulted in the introduction of nine private sector banks. The Government of India permits foreign banks to operate through branches; a wholly owned subsidiary; or a subsidiary with aggregate foreign investment of up to 74% in a private bank. Banks have to maintain certain percentage of deposit with Reserve bank of India (RBI) as CRR (Cash Reserve Ratio) on which they earn lower interest. The Second part of regulatory requirement is to invest in G-Securities, which is called as statutory liquidity ratio (SLR). The bank’s revenue is basically derived from the interest it earns from the loans it gives out as well as from the fixed income investments. Liquidity Adjustment Facility- Repo and Reverse Repo rates. It is a tool used in monetary policy that allows banks to borrow money through repurchase agreements. It is used in resolving any short term cash shortages during period of economic instability or from any other form of stress caused by forces beyond their control. Repo is a form of short term borrowing for dealers in government securities. For the party selling the security (and agreeing to repurchase it in the future) it is repo; for the party on other end of transaction (buying the security and agreeing to sell in future) it is reverse repo. Prime lending rate is the interest rate charged by banks to their most credit worthy customers. Adequate capital helps financial intermediaries to survive even during substantial losses. It gives time to re-establish the business and avoid any break in operations. This requirement is called Capital Adequacy, and is specified for banks and Non Banking Financial Corporations (NBFCs). Two types of capital are measured: tier one capital is core capital; this includes equity capital and disclosed reserves. Tier two capital is secondary bank capital that includes item such as undisclosed reserves, general loss reserve and subordinated term debt. According to the present norm, and with the Basel II deadline fast approaching, banks have to maintain Capital Adequacy Ratio of at least 10%. The net interest income (NII) is the revenue on the assets and the cost of servicing the liabilities. In other words, the NII is the difference between the interest payments to the bank on loans and the interest payments by the bank to the customers on the deposits.  hide