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October 15, 2016

Banking Awareness 2016 in Simple Language - Lesson 5

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Banking Awareness 2016 Lesson 5

Dear Gr8 Ambitionists, here is the 5th lesson of our Banking Awareness 2016 series. With this lesson, the 4 lesson series on the Reserve Bank of India (RBI) will be completed. This lesson deals with important Banking Awareness topics, RBI 4 Tier structure, PLR (Prime Lending Rate), Base Rate, Marginal Cost of Funds Based Lending Rate (MCLR), RBI policy on Fake Notes, Clean Note Policy and the list of RBI Governors till now. Happy Reading :)

RBI Structure 4-tier

The Reserve Bank of India (RBI) has proposed a four-tier banking structure as opposed to the existing 2-tier model in order to enhance competition & finance higher growth in country.
  • First Tier : The first tier may consist of three or four large Indian banks with domestic and international presence along with branches of foreign banks in India. 
  • Second Tier : Mid sized banks including niche banks with economy-wide presence may form the second tier. These are capable of offering a broad range of banking products and services to the domestic economy such as investment banking, wholesale banking and funding large infrastructure projects.
  • Third Tier : The third tier would have old private sector banks, regional-rural banks and multi state urban co-operative banks (UCBs). 
  • Fourth Tier The fourth tier may consist of many small privately owned local banks and co-operative banks. These would specifically cater to the credit requirements of small borrowers in the organized sector in un-banked and under-banked areas. 

Prime Lending Rate (PLR)

The interest rate charged by banks to their largest, most secure and most credit worthy customers or short term loans.

Note : The RBI introduced the Base Rate system with effect from 1st July 2010 which replaced the Bench Mark Prime Lending Rate (BPLR) system.

Base Rate

Base Rate is the minimum interest rate of a bank below which it cannot lend, except in case allowed by RBI. Each individual bank has its own base rate.

As per RBI guidelines (as in July 2012) the following categories of loans could be priced without reference to Base Rate.
  • DRI advances
  • Loans to bank's own employees including retired employees. 
  • Loan to banks depositors against their own deposits. 

MCLR (Marginal Cost of funds based Lending Rate)

The RBI has released "guidelines" on computing interest rates on advances based on marginal cost of funds. The guidelines come into effect from 1st April 2016. These measures are expected to improve transparency in methodology followed by banks to determine interest on advances with improved transmission of policy rates into lending rates of banks. Further, MCLR will help banks to be more competitive and enhance their long run value and contribution to economic growth.

Key Features
  • All rupees loans sanctioned and credit limits renewed w.e.f 1st April 2016, will be priced with reference to MCLR which will be internal benchmark for this purpose. 
  • Actual lending rates will be determined by adding the components of spread to MCLR. 
  • MCLR will be a tenure linked internal benchmark. 
  • Bank may specify interest reset dates on their floating rate loans, they wil have the option loans with reset dates link either to date of sanction of loan / credit limits or to date of review of MCLR and the periodicity of reset shall be one year or lower. 
  • Bank will review & publish their MCLR of different maturities every month on a pre-announce date. 
  • Existing loans & credit limits linked to base rate may continue till repayment or renewal, as case may be. Existing borrowers will have the option to move to (MCLR) linked loan at mutually accepted terms. 
  • The MCLR prevailing on the day the loan is sanctioned will be applicable till next reset date, irrespective of charges in benchmark during the interim period. 
  • Banks will continue to review & publish base rate as hitherto. 

RBI Policy on Fake Notes

  • RBI compensate "The Bank" to the extent of 25% of the national value of the counterfeit notes or Rs. 100 denomination & above, detected and reported to RBi and police authorities. 
  • Claims for compensation should be made through forged note vigilance cell of the banks in prescribed format on a monthly basis through e-mail within 15 days of the succeeding month. 
  • Reimbursement will be done by RBI, department of currency management, to begin with, on a quarterly basis. 
  • A review of above system will be conducted after one year. 

Clean Note Policy

  • Banks should do away with stapling of any note packet and instead secure note packets with paper bands. 
  • Banks should sort notes into re-issuable and non-issuable & issue only clear notes to public.
  • Banks should forthwith stop writing of any kind on watermark window of bank notes.

Governors of RBI till now (2016)

  • Sir Osborne Smith - Tenure (01-04-1935 to 30-06-1937)
  • Sir James Taylor - Tenure (01-07-1937 to 17-02-1943)
  • Sir C D Deshmukh - Tenure (11-08-1943 to 30-06-1949)
  • Sir Benegal Rama Rau - Tenure (01-07-1949 to 14-01-1957)
  • K G Ambegaonka - Tenure (14-01-1957 to 28-02-1957)
  • H V R Iengar - Tenure (01-03-1957 to 28-02-1962)
  • P C Bhattacharya - Tenure (01-03-1962 to 30-06-1967)
  • L K Jha - Tenure (01-07-1967 to 03-05-1970)
  • B N Adarkar - Tenure (04-05-1970 to 15-06-1970)
  • S Jagannathan - Tenure (16-06-1970 to 19-05-1975)
  • N C Sen Gupta - Tenure (19-05-1975 to 19-08-1975)
  • K R Puri - Tenure (20-08-1975 to 02-05-1977)
  • M Narasimham - Tenure (02-05-1977 to 30-11-1977)
  • Dr. I G Patel - Tenure (01-12-1977 to 15-09-1982)
  • Dr. Manmohan Singh - Tenure (16-09-1982 to 14-01-1985)
  • A Ghosh - Tenure (15-01-1985 to 04-02-1985)
  • R N Malhotra - Tenure (04-02-1985 to 22-12-1990)
  • Venkitaramanan - Tenure (22-12-1990 to 21-12-1992)
  • Dr. C Rangarajan - Tenure (22-12-1992 to 21-11-1997)
  • Dr. Bimal Jalan - Tenure (22-11-1997 to 06-09-2003)
  • Dr. Y V Reddy - Tenure (06-09-2003 to 05-09-2008)
  • Dr. D. Subbarao - Tenure (05-09-2008 to 04-09-13)
  • Dr. Raghuram Rajan - Tenure (04-09-2013 to 04-09-2016)
  • Dr. Urjit R. Patel - Tenure (04-09-2016 to date)
That's all for now friends. In our next lesson we shall learn another important banking awareness topic 2016, types of banks, their head quarters and useful tricks to remember them. Good Day :)
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