FINANCIAL SYSTEM
Financial System means the system that allows the transfer of money between savers and borrowers.Financial System comprises a set of complex and closely interconnected financial institutions,markets, instruments, services, practices, and transactions. The financial system is crucial to theallocation of resources in a modern economy. It channelises household savings to the corporatesector and allocate investment funds among firms; they allow inter-temporal smoothing ofconsumption by households and expenditures by firms; and they enable households and firms toshare risks.
REGULATORS OF BANKS AND FINANCIAL INSTITUTIONS
Regulation of various financial entities is justified on various counts. These are as follows:-
- To prevent issuers of securities from defrauding investors by concealing relevant information
- To promote competition and fairness in the trading of financial securities.
- To promote the stability of financial institutions.
- To restrict the activities of foreign concerns in domestic markets and institutions.
- To control the level of economic activity.
Regulation has different forms, e.g., Disclosure Regulation which is the form of regulation thatrequires issuers of securities to make public a large amount of financial information to actual andpotential investors. It is believed that the cause of market failure here, if indeed it occurs, iscommonly described as asymmetric information. Disclosure regulation takes care of this aspect.
Another major form is ‘Financial Activity Regulation’ that consists of rules about traders ofsecurities and trading on financial markets. Pertinent example in this case is of Insider Trading andasymmetric information. Regulatory institutions have come up with rules regarding the structureand operations of stock exchanges. Regulators consider that there is possibility that members maybe able to collude and defraud the general investing public. So, financial activity regulation ensuresthe fair play.
In India, there are many regulators in the financial sector. The details are being given in thefollowing table.
Sector /Area | Regulator |
Capital Market | Securities and Exchange Board of India (SEBI) |
Insurance | Insurance Regulatory and Development Authority ofIndia (IRDAI) set up in 1999 |
Pensions | Pension Funds Regulatory and Development(PFRDA) set up in 2013 |
Corporate Sector | Ministry of Corporate Affairs (MCA) |
Mutual Funds | SEBI as the Regulator in Capital Market andAssociation of Mutual Funds of India (AMFI) asnon-statutory body set up in 1995. It is aSelf-Regulatory Organization (SRO) |
Insolvency andBankruptcy | Insolvency and Bankruptcy Board of India (IBBI)set up on October 1, 2016 |
Forward Markets Commission (FMC) that used to regulate CommoditiesMarket was merged with the SEBI on September 28, 2015 |
RESERVE BANK OF INDIA AS THE REGULATOR
Functions of the RBI can be inferred from the preamble of the RBI Act.
Preamble of the RBI Act:-
An Act to constitute a Reserve Bank of India.
Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notesand the keeping of reserves with a view to securing monetary stability in India and generally tooperate the currency and credit system of the country to its advantage; AND WHEREAS it isessential to have a modern monetary policy framework to meet the challenge of an increasinglycomplex economy; AND WHEREAS the primary objective of the monetary policy is to maintainprice stability while keeping in mind the objective of growth; AND WHEREAS the monetarypolicy framework in India shall be operated by the Reserve Bank of India;
From above, one can understand various functions of the RBI and conduct of the Monetary Policy.
BANKING SYSTEM IN INDIA
The RBI is the regulatory body for the banking system in India. Overall governance of the RBI is asper the RBI Act and the Central Board of the RBI exercises power as conferred under the Act.
Composition of the Central Board of the RBI:-
The Central Board shall consist of the following Directors, namely:-
- a Governor and 6[not more than four] Deputy Governors to be appointed by the CentralGovernment;
- four Directors to be nominated by the Central Government, one from each of the four LocalBoards as constituted by section 9;
- TEN Directors to be nominated by the Central Government; and
- TWO Government officials to be nominated by the Central Government;
Further, there are four local boards of the RBI.
Table 2:- About Central Board of the RBI and Directors
Central Board: Official Directors (1+4) |
---|
Full time:- Governor and not more than four Deputy Governors |
Central Board: Non-Official Directors (10+2+4 = 16) |
Nominated by Government | Ten directors from various fields andtwo government Officials |
Others | Four Directors – One each from fourlocal boards |
Total | 5+16 = 21 |
Table 3:- Local Boards of the RBI
Western Area | Mumbai |
Eastern Area | Kolkata |
Northern Area | New Delhi |
Southern Area | Chennai |
The RBI is headed by the Governor and Deputy Governors. As on September 2, 2022 Governorand Deputy Governors of the Reserve Bank of India (RBI), governor and deputy governors are:-
Table 4:- Governors and Deputy Governors as on September 2, 2022
Designation | Name |
Governor | Shaktikanta Das |
Deputy Governor | Mahesh Kumar Jain |
Deputy Governor | Dr. M. D. Patra |
Deputy Governor | M. Rajeshwar Rao |
Deputy Governor | T. Rabi Sankar |
Term:- The Governor and a Deputy Governor shall hold office for such term not exceeding fiveyears as the Central Government may fix when appointing them and shall be eligible forre-appointment.
On October 30, 2021, Shaktikanta Das (64) has been reappointed as the RBI governor for a periodof three years from December 20 or until further orders. Completion of the term would make Dasthe longest-serving governor in almost seven decades and second-longest in RBI’s history.Appointments Committee of the Cabinet issued order on reappointment of Shaktikanta Das as theRBI Governor. The appointment is likely to ensure continuity of monetary policy and vote ofconfidence. Shaktikanta Das took charge on December 12, 2018, after resignation by Urjit Patel,former RBI Governor, to become the 25th Governor of the RBI.
In the first term as the RBI governor, Shaktikanta Das had dealt with the following challenges:-
- Focus on growth:- Inflation above the tolerance band (6%) for more than three quarters in2020
- Rate cuts:- First monetary policy in Feb. 2019 and repo rate reduced by 250 basis points,reduced reverse repo rate to 3.35%
- Forex reserve accumulation:- From $455 bn to $641 bn
- Banking system liquidity:- Over Rs. 3 trn of liquidity in the banking system throughsecondary market bond purchases
- Action against Bank Chiefs, i.e., Corporate Governance issues:- Yes Bank founder MDremoved, superseding two NBFCs of the SREI group
- PMC Bank crisis:- More than 75% of the nearly Rs. 9,000 crore advances swindled away byone real estate group and resultant merger with a SFB
- strong>IL&FS and DHFL:- IL&FS collapse in August 2018 as India’s Lehman moment; liquidityfreeze for NBFCs; DHFL defaulted on bond payments; close vigil on the top 50 NBFCs
- DBS-Laxmi Vilas Bank merger:- Crisis-driven Laxmi Vilas Bank
- Covid crisis:- Infused as much as Rs. 13 trn of liquidity, special liquidity channels forNBFCs, MSMEs, and individuals, moratorium twice to stressed borrowers
- Debt manager of government and Record borrowings:- Rs. 12 trn from the market at a16-year low average cost