Unit 2: RBI & banking reforms

• Established on 1 April 1935 under the RBI Act, 1934; nationalised on 1 January 1949; headquarters Mumbai.
• Central Board of Directors: Governor, up to four Deputy Governors, ten directors nominated by the Central Government, two government officials and four directors from the local boards; appointed by the Central Government for four years.
• Local boards: Mumbai, Kolkata, Chennai, New Delhi.
• Departments: Monetary Policy, Regulation, Supervision, Currency Management, Foreign Exchange, Payment and Settlement Systems, etc.
• Subsidiaries: DICGC, Bharatiya Reserve Bank Note Mudran, ReBIT, Reserve Bank Innovation Hub.

Monetary policy tools

• Monetary Policy Committee: six members (three RBI, three external); inflation target 4% ± 2% (CPI) under the amended RBI Act (2016).

• To control inflation: raise repo, CRR, SLR; sell securities (OMO); raise margins. To boost growth: opposite measures.

Narasimham Committee I (1991)

• Reduce SLR (from 38.5% to 25%) and CRR (from 15% to 3–5%) gradually.
• Deregulate interest rates.
• Introduce prudential norms — income recognition, asset classification, provisioning, capital adequacy (8%).
• Set up Asset Reconstruction Fund and Debt Recovery Tribunals.
• Allow new private and foreign banks; reduce directed credit (priority sector to 10%).
• Four-tier structure of banks.

Narasimham Committee II (1998)

• Raise capital adequacy to 10%; risk weight on government securities.
• Tighten NPA norms (90-day rule); reduce net NPAs to 3% by 2002.
• Merge strong banks; close or restructure weak banks ("narrow banking" for weak banks).
• Reduce government stake in PSBs to 33%; professional boards.
• Legal reforms — led to the SARFAESI Act, 2002.

Verma Panel (1999) — weak public sector banks

• Identified Indian Bank, UCO Bank and United Bank of India as weak, using seven parameters in three areas — solvency (capital adequacy, coverage), earning capacity (return on assets, net interest margin) and profitability (operating profit to working funds, cost-income ratio, staff cost to operating income).
• Recommended restructuring rather than merger or closure, a VRS for staff, freeze on recruitment and wages, branch rationalisation, technology upgrade, and a Financial Restructuring Authority.

Basel Accords (Basel Committee on Banking Supervision, BIS):

• Capital Adequacy Ratio (CRAR) = (Tier I + Tier II capital) ÷ Risk-weighted assets × 100. RBI requires 9% (stricter than Basel's 8%) + capital conservation buffer 2.5% = 11.5% total; CET1 at least 5.5%.
• Tier I: equity, reserves (core). Tier II: revaluation reserves (discounted), general provisions, subordinated debt.

• NPA: a loan where interest or principal remains overdue for more than 90 days; classified as sub-standard (up to 12 months), doubtful (D1, D2, D3) and loss assets, with provisioning from 15% to 100%.
• Gross NPA ratio of scheduled commercial banks fell from a peak above 11% (2018) to about 2.5% (2025).
• Recovery channels: Lok Adalats, DRTs, SARFAESI, IBC, ARCs, NARCL (bad bank).

Banking ombudsman

• Banking Ombudsman Scheme (1995) — merged into the Reserve Bank – Integrated Ombudsman Scheme, 2021 (one nation, one ombudsman) covering banks, NBFCs, payment system participants and credit information companies.
• Process: complain to the bank first; if not resolved in 30 days or unsatisfactory, complain online (cms.rbi.org.in) within one year; ombudsman can award compensation up to ₹20 lakh plus up to ₹1 lakh for harassment; appeal to the Appellate Authority (RBI Executive Director).
• Grounds: deficiency in service — delays, non-adherence to fair practices, charges without notice, ATM and digital transaction failures, mis-selling.