Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Objectives of Monetary Policies are:-

•  Accelerated growth of the economy
• Balancing saving and investments
• Exchange rate stabilization
• Price stability
• Employment generation

Monetary Policy could be expansionary or contractionary;  Expansionary policy would increase the total money supply in the economy while contractionary policy would decrease the money supply in the economy.

RBI issues the Bi-Monthly monetary policy statement. The tools available with RBI to achieve the targets of monetary policy are:-

• Bank rates
• Reserve Ratios
• Open Market Operations
• Intervention in forex market
• Moral suasion

 

 

Repo Rate- Repo rate is the rate at which the central bank of a country (RBI in case of India) lends money to commercial banks in the event of any shortfall of funds. In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Reverse Repo Rate is the rate at which RBI borrows money from the commercial banks.An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank. CRR is set according to the guidelines of the central bank of a country.The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool and is used for controlling money supply in an economy.

CRR specifications give greater control to the central bank over money supply. Commercial banks have to hold only some specified part of the total deposits as reserves. This is called fractional reserve banking.

Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the commercial banks in India require to maintain in the form of gold, government approved securities before providing credit to the customers.its the ratio of liquid assets to net demand and time liabilities.Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR. Banks have to report to the RBI every alternate Friday their SLR maintenance, and pay penalties for failing to maintain SLR as mandated.

Role of RBI

	Pre-reform	Post-reform
Developmental Role: the developmental role has increased in view of the changing structure of the economy with a focus on SMEs and financial inclusion	Priority Sector Lending: Introduced from 1974 with public sector banks. Extended to all commercial banks by 1992	In the revised guidelines for PSL the thrust is on ensuring adequate flow of bank credit to those sectors that impact large segments of the population and weaker sections, and to the sectors which are employment intensive such as agriculture and small enterprises
	Lead Bank Scheme	Special Agricultural Credit Plan introduced.
		Kisan Credit Card scheme (1998-99)
		Focus on credit flow to micro, small and  medium enterprises development
		Financial Inclusion
Monetary Policy: the role of RBI has changed from regulating credit and money flow directly to using market mechanisms for achieving policy targets. MP framework has changed to promote financial deregulations and market development. Role as a facilitator rather than as principal actor.	M3 as an intermediary target	Multiple Indicator Approach
	Regulation of foreign exchange	Management of foreign exchange
	Direct credit control	Open Market Operations, MSS, LAF
	Rupee convertability highly managed	Full current ac convertability and some capital account convertability
Banker to the government	Monetary policy was linked to the fiscal policy due to automatic monetisation of the deficit	Delinking of monetary policy from the fiscal policy. From 2006, under FRBM, RBI ceased to participate in the primary market auctions of the central government’s securities.
As regulator of financial sector: As regulator of the financial sector, RBI has faced the challenge of regulating the increasing financial sector in India. Credit flows have increased. RBI had to make sure that financial institutions are regulated in a way to protect the consumers while not impeding economic growth.	Reduction in SLR
Custodian of FOREX reserves		Forex reserves have increased drastically. Need to manage it adequately and avoid inflationary impact
Inflation	Direct instruments were used	Multiple indicators
Financial Stability	Closed economy	Increased FDI and FII has made financial stability one of the policy objectives.
Money Market		Narsimhan Committee (1998) recommended reforms in the money market

 

 

The global macroeconomic landscape is currently chartering a rough and uncertain terrain characterized by weak growth of world output. The situation has been exacerbated by;
(i) declining prices of a number of commodities, with reduction in crude oil prices being the most visible of them,
(ii) turbulent fnancial markets (more so equity markets), and
(iii) volatile exchange rates.

These conditions refect extreme risk-aversion behaviour of global investors, thus putting many, and in particular, commodities exporting economies under considerable stress.

Even in these trying and uncertain circumstances, India’s growth story has largely remained positive on the strength of domestic absorption, and the country has registered a robust and steady pace of economic growth in 2015-16 as it did in 2014-15. Additionally, its other macroeconomic parameters like infation, fscal defcit and current account balance have exhibited distinct signs of improvement. Wholesale price infation has been in negative territory for more than a year and the all-important consumer prices infation has declined to nearly half of what it was a few years ago.

However, weak growth in advanced and emerging economies has taken its toll on India’s exports. As imports have also declined, principally on account of reduced prices of crude oil for which the country is heavily dependent on imports, trade and current account defcits continue to be moderate. Growth in agriculture has slackened due to two successive years of less-than-normal monsoon rains. Saving and investment rates are showing hardly any signs of revival. The rupee has depreciated vis-à-vis the US dollar, like most other currencies in the world, although less so in magnitude. At the same time, it has appreciated against a number of other major currencies. Given the fact that the government is committed to carrying the reform process forward, aided by the prevailing macroeconomic stability, it appears that conditions do exist for raising the economy’s growth momentum and achieving growth rates of 8 per cent or higher in the next couple of years.

Table of Content:-

1. Role of Commercial Banks
2. Issue of NPA
3. Financial Inclusion

A Commercial bank is a type of financial institution that provides services such as accepting deposits, making business loans, and offering basic investment products

There is acute shortage of capital. People lack initiative and enterprise. Means of transport are undeveloped. Industry is depressed. The commercial banks help in overcoming these obstacles and promoting economic development. The role of a commercial bank in a developing country is discussed as under.

1. Mobilising Saving for Capital Formation:

The commercial banks help in mobilising savings through network of branch banking. People in developing countries have low incomes but the banks induce them to save by introducing variety of deposit schemes to suit the needs of individual depositors. They also mobilise idle savings of the few rich. By mobilising savings, the banks channelize them into productive investments. Thus they help in the capital formation of a developing country.

2. Financing Industry:

The commercial banks finance the industrial sector in a number of ways. They provide short-term, medium-term and long-term loans to industry.

3. Financing Trade:

The commercial banks help in financing both internal and external trade. The banks provide loans to retailers and wholesalers to stock goods in which they deal. They also help in the movement of goods from one place to another by providing all types of facilities such as discounting and accepting bills of exchange, providing overdraft facilities, issuing drafts, etc. Moreover, they finance both exports and imports of developing countries by providing foreign exchange facilities to importers and exporters of goods.

4. Financing Agriculture:

The commercial banks help the large agricultural sector in developing countries in a number of ways. They provide loans to traders in agricultural commodities. They open a network of branches in rural areas to provide agricultural credit. They provide finance directly to agriculturists for the marketing of their produce, for the modernisation and mechanisation of their farms, for providing irrigation facilities, for developing land, etc.

They also provide financial assistance for animal husbandry, dairy farming, sheep breeding, poultry farming, pisciculture and horticulture. The small and marginal farmers and landless agricultural workers, artisans and petty shopkeepers in rural areas are provided financial assistance through the regional rural banks in India. These regional rural banks operate under a commercial bank. Thus the commercial banks meet the credit requirements of all types of rural people. In India agricultural loans are kept in priority sector landing.

5. Financing Consumer Activities:

People in underdeveloped countries being poor and having low incomes do not possess sufficient financial resources to buy durable consumer goods. The commercial banks advance loans to consumers for the purchase of such items as houses, scooters, fans, refrigerators, etc. In this way, they also help in raising the standard of living of the people in developing countries by providing loans for consumptive activities and also increase the demand in the economy.

6. Financing Employment Generating Activities:

The commercial banks finance employment generating activities in developing countries. They provide loans for the education of young person’s studying in engineering, medical and other vocational institutes of higher learning. They advance loans to young entrepreneurs, medical and engineering graduates, and other technically trained persons in establishing their own business. Such loan facilities are being provided by a number of commercial banks in India. Thus the banks not only help inhuman capital formation but also in increasing entrepreneurial activities in developing countries.

7. Help in Monetary Policy:

The commercial banks help the economic development of a country by faithfully following the monetary policy of the central bank. In fact, the central bank depends upon the commercial banks for the success of its policy of monetary management in keeping with requirements of a developing economy.

---

 

 

A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.According to RBI, terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset.

However, in terms of Agriculture / Farm Loans; the NPA is defined as under:

• For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.
• For Long Duration Crops, the above would be 1 Crop season from the due date.

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues. When a borrower makes any default in repayment and his account is classified as NPA; the secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it; as per provisions of the SAFAESI Act.

Reselling of NPAs :- If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).  These sales are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15 months before it sells to other bank. They purchase such loans on low amounts and try to recover as much as possible from the defaulters. Their revenue is difference between the purchased amount and recovered amount.

---

 

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low-income segments of society, in contrast to financial exclusion where those services are not available or affordable.

Government of India has launched an innovative scheme of Jan Dhan Yojna for Financial Inclusion to provide the financial services to millions out of the regulated banking sector.

 

 

 

 

Various program’s for financial inclusion are:-

• Swabhimaan Scheme: under the Swabhimaan campaign, the Banks were advised to provide appropriate banking facilities to habitations having a population in excess of 2000 (as per 2001 census) by March 2012.
• Extention of  the banking network in unbanked areas,
• Expansion of Business Correspondent Agent (BCA) Network
• Direct Benefit Transfer (DBT) and Direct Benefit Transfer for LPG (DBTL)
• RuPay, a new card payment scheme has been conceived by NPCI to offer a domestic, open-loop, multilateral card payment system which will allow all Indian banks and financial Institutions in India to participate in electronic payments.
• Pradhan Mantri Jan-Dhan Yojana (PMJDY) was formally launched on 28th August, 2014. The Yojana envisages universal access to banking facilities with at least one basic banking account for every household, financial literacy, access to credit, insurance and pension. The beneficiaries would get a RuPay Debit Card having inbuilt accident insurance cover of Rs.1.00 lakh. In addition there is a life insurance cover of Rs.30000/- to those people who opened their bank accounts for the first time between 15.08.2014 to 26.01.2015 and meet other eligibility conditions of the Yojana.

---

 

Export Import Policy or  Exim Policy or Foreign Trade Policy is a set of guidelines and instructions related to the import and export of goods.

Various Objectives of Exim Policy are :-

• To facilitate sustained growth in exports from India and import in India.
• To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumables and capital goods scheme required for augmenting production and providing services.
• To enhance the technological strength and efficiency of Industry Agriculture industry and services, thereby improving their competitive strength while generating new employment opportunities, and to encourage the attainment of internationally accepted standards of quality.
• To provide clients with high-quality goods and services at globally competitive rates. Canalization is an important feature of Exim Policy under which certain goods can be imported only by designated agencies. For an example, an item like gold, in bulk, can be imported only by specified banks like SBI and some foreign banks or designated agencies.

The new five year Foreign Trade Policy, 2015-2020 provides a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, in keeping with the “Make in India” vision of our Hon’blc Prime Minister. The focus of the government is to support both the manufacturing and services sectors, with a special emphasis on improving the ‘ease of doing business’.

Merchandise Exports from India Scheme (MEIS):-To offset infrastructural inefficiencies and the associated costs of exporting products produced in India giving special emphasis on those which are of India’s export interest and have the capability to generate employment and enhance India’s competitiveness in the world market.With the aim in making India’s products more competitive in the global markets, the scheme provides incentive in the form of duty credit scrip to the exporter to compensate for his loss on payment of duties.

Service Exports from India Scheme (SEIS) :-Service Provider of eligible services shall be entitled to Duty Credit Scrips at notified rates.

Export Promotion Capital Goods (EPCG) scheme allows import of capital goods including spares for pre production, production and post production at zero duty.

Other Specific steps taken for the developement of international trade are:-

 

• Trade Facilitation & Ease Of Doing Business
• DGFT as a facilitator of exports/imports
• Niryat Bandhu – Hand Holding Scheme for new export / import entrepreneurs
• Online Complaint Registration and Citizen’s Charter
• Monitoring System
• Issue of e-IEC (Electronic-Importer Exporter Code)
• e-BRC
• MoU with State Governments for sharing of e-BRC data
• Exporter Importer Profile
• Reduction in mandatory documents required for Export and Import
• Online Inter-ministerial consultation
• Facility of online filing of applications
• Facility to upload documents by Chartered Accountant / Company Secretary / Cost Accountant
• Electronic Data Interchange (EDI)
• Message Exchange with Community partners
  (a) Message Exchange with Customs
  (b) Message Exchange with eBiz
  (c) Message Exchange with Banks
  (d) Message Exchange with EPCs
• Encouraging development of Third Party API
• Forthcoming e-Governance Initiatives
• Free passage of Export consignment
•  No seizure of export related Stock
• 24 X 7 Customs clearance
• Single Window in Customs
• Self-Assessment of Customs Duty
• Authorised Economic Operator (AEO) Programme
• Prior filing facility for Shipping Bills
• Cutting down delay in filing of Export General Manifest (EGM) for duty drawback
• Facility of Common Bond / LUT against authorizations issued under different EP Schemes
• Exemption from Service Tax on Services received abroad
• Export of perishable agricultural Products
• Time Release Study (TRS)
• Towns of Export Excellence (TEE)