How RBI regulates Commercial Banks
To do a business of commercial banking in India, whether it is India or Foreign, a license from RBI is required.
Opening of Branches is handled by the Branch Authorization Policy. This policy was made easier in recent times and an important provision is that :
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Indian banks no longer require a license from the Reserve Bank for opening a branch at a place with population of below 50,000.
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RBI policy ensures high quality corporate governance in banks.
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CRR and SLR:
These are called Statutory Pre-emptions. Commercial banks are required to maintain a certain portion of their Net Demand and Time LiabilitiesAny claim for money against the assets of a company, such as bills of creditors, income tax payable, debenture redemption, interest on secured and unsecured ..... (NDTL) in the form of cash with the Reserve Bank, called Cash Reserve RatioThe Cash Reserve Ratio is the amount of funds that the banks are bound to keep with Reserve bank of India, with reference to the ..... (CRR) and in the form of investment in unencumbered approved securities, called Statutory Liquidity Ratio (SLR).
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The interest rates on most of the categories of deposits and lending transactions have been deregulated and are largely determined by banks. Reserve Bank regulates the interest rates on savings bank accounts and deposits of non-resident Indians (NRI), small loans up to rupees two lakh, export credits and a few other categories of advances.
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Prudential Norms:
Prudential Norms refers to ideal / responsible norms maintained by the banks. RBI issues "Prudential Norms" to be followed by the commercial banks to strengthen the balance sheets of banks. Some of them are related to income recognition, asset classification and provisioning, capital adequacy, investments portfolioA collection of securities owned by an individual or an institution (such as a mutual fund) that may include stocks, bonds and money market securities. ..... and capital market exposures. RBI has issued its guidelines under the Basel II for risk management.
Apart from that, RBI issues the public disclosureFull and material information given by a company that may allow an investor to take an informed investment decision norms to enforce the market disciplines. Now all banks are required to disclose in their annual reports about capital adequacy, asset quality, liquidity, earnings aspects and penalties, if any, imposed on them. Similarly, the KYC norms (Know Your CustomerWhat is Know your Customer? Know your customer (KYC) is a bank regulation that financial institutions and other regulated companies must perform to identify their .....) Anti-Money LaunderingProcess of converting the proceeds of illegal activities – disclosure of which would trigger financial losses or criminal prosecution – into real or financial assets ..... (AML) and Combating Financing of Terrorism (CFT) guidelines are some of the major issues on which RBI keeps issuing its norms and guidelines.
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Annual Onsite Inspection:
RBI undertakes annual on-site inspection of banks to assess their financial health and to evaluate their performance in terms of quality of management, capital adequacy, asset quality, earnings, liquidity position as well as internal control systems.
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Based on the findings of the inspection, banks are assigned supervisory ratings based on the CAMELS rating.
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OSMOS:
OSMOS refers to Off Site Surveillance and Monitoring System. The RBI requires banks to submit detailed and structured information periodically under OSMOS. On the basisIn a futures market, basis is defined as the cash price (or spot price) of whatever is being traded minus its futures price for the ..... of OSMOS, RBI analyzes the health of the banks.
