The stimulus package that passed the House last week now goes to the Senate, where Republican leader Mitch McConnell said Sunday the bill backed by President Barack Obama and congressional Democrats could be defeated if it’s not stripped of what Republicans deem unnecessary spending.

Investors are also worried that a “bad bank” plan has not yet emerged from the White House. Such a plan would allow the government to take the riskiest assets off of banks’ books and put them into a government-controlled entity.

The Dow Jones industrial average and the Standard & Poor’s 500 index are coming off their worst January ever, each dropping more than 8 percent during the month.

Investors have had little reason to buy back into the market, with corporate earnings and economic data coming in poor. On Monday, Wall Street will be focusing on data on personal income and spending; construction spending; and the manufacturing sector.

Ahead of the market’s open, Dow futures fell 96, or 1.21 percent, to 7,859. S&P 500 futures fell 11.40, or 1.39 percent, to 811.10, while Nasdaq 100 index futures fell 17.25, or 1.46 percent, to 1,162.00.

Trading is likely to be fractious this week as investors await the government’s January jobs report, due Friday morning.

The indexes have fallen for four straight weeks. The Dow closed last week down 0.90 percent, the S&P fell 0.70 percent, and the Nasdaq composite index lost 0.10 percent.more

Changes in the CRR and SLR also affect bank credit. These two measures lead to impounding or pre-emption of the resources (in the from of DTL) of commercial banks. An upward variation leads to pre-emption of a larger portion of the DTL of banks; a downward revision releases the resources of banks for credit expansion. People are expecting that changes in CRR going to help instant life insurance rates company. There are many companies who are providing life insurance quotes online. They are going to get benefit of such changes.

Within the policy prescription of the Reserve Bank of India framed in accordance with the requirements of the Banking Regulation Act and the Reserve Bank of India Act, individual banks define their own policies, strategies and directions for the flow of credit to the various sectors.

Section 24(2A) of the Banking Regulation Act imposes an obligation on scheduled commercial banks to maintain a minimum holding of liquid assets as a Statutory Liquidity Ratio equal to a specified percentage of their DTL, exclusive of the balances maintained under the CRR with the RBI. The investments made by banks in Central Government and State Government securities comprise the bulk of the liquid assets under the SLR. Currently, the SLR has been fixed at 38%. 

The RBI on the basis of an ongoing study of the trends in economic growth, monetary developments, prices, and credit expansion, decides from time to time, the levels (in terms of percentages) of the Bank Rate, CRR and SLR. An upward revision of the Bank Rare raises the cost of refinance in the form of rediscounting of bills of exchange etc. from the RBI.

The three major instruments of credit control available with the RBI are the Bank Rate, Open Market Operations and Variable Reserve Requirements or Ratios. The first two instruments can be operated by the RBI under the Reserve Bank of India Act. Of the two variable reserve ratios, the Cash Reserve Ratio (CRR) is subject to the Reserve Bank of Regulation Act, 1949.

Section 49 of the Reserve Bank of India Act defines the Bank Rate as the standard rate at which the RBI is prepared to buy or rediscount bills exchange or other commercial paper eligible for purchase under the Act. 

Section 17 of the Reserve Bank of India Act authorize the Reserve Bank of India to engage in the purchase and sale of securities of the Central Government or a State Government of any maturity or of such securities of a local authority as may be approved by the Central Government on the recommendations of the Central Board of the Bank (currently, the RBI deals with Central Government securities only).

a)      The purpose for which advances may or may not be made;

b)      The margins to be margins to be maintained in respect of secured advances;

c)      The maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company to any other relevant considerations, may be given by a banking company to any one company, firm, association of persons or individual;

d)      The maximum amount upto which, having regard to the considerations reterred at c) above, guarantees may be given by a banking company on behalf of any one company, firm, association or persons or individual; and

e)      The rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.

The credit control measures are framed by the Reserve Bank of India (RBI) in line with the monetary policy of the country. The objectives of the monetary policy are two-fold: 

1.      To facilitate flow of adequate volume of bank credit to the various sectors with specific reference to the weaker sectors, and

2.      To keep a control on inflationary pressures by ensuring restraint on credit expansion and proper end-use of bank credit.

All the functions of scheduled commercial banks are governed by the Banking Regulation Act, 1949 as amended from time to time. The Banking Regulation Act defines “banking”, “banking company” and “banking policy”. In terms of the Act “Banking” means accepting, for the purpose of lending or investment, of deposits of money form the public, repayable on demand or otherwise, and withdrawals by cheque, draft, order or otherwise.

“Banking Company” means any company which transacts the business of banking in India. “Banking policy” means any policy which is specified from time to time by the Reserve Bank in the interest of the banking system or in the interest of monetary stability or sound economic growth, having due regards to the interests of the depositors, the volume of deposits and other resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources.

The Banking Regulation Act, 1979 has provide vast powers to the Reserve Bank of India to control the patters, direction and extent of bank credit. We will discuss on the specific authority vested in the Reserve Bank of India includes the powers to issue directions either generally to all banks or to a bank in particular in our next post.

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In view of the state of Indian money and capital markets as described in unit 5, it is no wonder that bank credit constitutes one of the major sources of working capital finance for trade and industry. Equally, it should be a matter of no wonder that bank credit has been highly regulated in India. We shall, therefore, in this unit first of all like to acquaint ourselves with the framework of credit control operating in India. We shall then discuss the principles of bank lending, the forms of credit extended and the types of security required by banks. This unit also covers credit investigation and post-lending control aspects of bank credit. Let us now discuss credit control. 

CREDIT CONTROL 

All the functions of scheduled commercial banks are governed by the Banking Regulation Act, 1949 as amended from time to time. The Banking Regulation Act defines “banking”, “banking company” and “banking policy”. In terms of the Act “Banking” means accepting, for the purpose of lending or investment, of deposits of money form the public, repayable on demand or otherwise, and withdrawals by cheque, draft, order or otherwise.

As banks are required to subscribe under the SLR and CRR statutorily and also extend credit at concessional rates to various sectors, they often face a shortfall of resources in financing the residual sectors. In order to ensure that they are in a position to meet the requirements of the residual sectors and also to maintain their working funds and profitability, various schemes of refinance have been evolved from time to time. Refinance implies that against certain outstanding credit (especially usance bills financed by banks), certain agencies refinance the banks. These agencies include the Reserve Bank of India, Industrial Development Bank of India, National Bank for Agriculture and Rural Development and The Export-Import Bank of India (EXIM Bank). The refinance or rediscounting is mainly available on eligible bills finance by banks, export credit, term loans to selected industries, credit to selected priority sector activities and a discretionary refinance quota with the Reserve Bank of India. Depending upon the conditions on which the rediscounting ore refinance is allowed, the banks are able to reinvest the funds, so made available, to generate additional income.

As per the detailed guidelines issued by the Reserve Bank in June 1989, CDs can be issued only by Scheduled Commercial banks excluding Regional Rural Banks. CDs issued by a bank and outstanding at any point of time should not exceed two per cent of the fortnightly average outstanding aggregate deposits of the bank during the financial year 1989-90. 

The minimum amount of CDs issued to a single subscriber should not be less than Rs.50 lakhs and CDs above Rs.50 lakhs should be in multiples of Rs.10 lakhs. CDs can be issued individuals, Corporations, Companies, Trusts, Funds, and Associations etc. Non-Resident Indians (NRIs) may subscribe to CDs only on a non-repairable basis and such CDs cannot be endorsed to another NRI in the secondary market. The maturity period of CDs should not be less than 3 months and not more than one year. CDs should be issued at a discount on face value and the issuing bank is free to fix the discount rate. Banks will have to maintain, Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) on the total issue price of CDs. CDs are freely transferable by endorsement and delivery only after 45 days of the date of issue. Furthermore, banks cannot grant loans against CDs nor buy back their own CDs before maturity.

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