Page 257 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes (d) It has the power to control the appointment of Chairman and Chief Executive Officer of
the private banks and nominate members in the Board of Directors.
The central bank also effectively regulates the credit flows through monetary policy. It controls
the amount available for credit by prescribing cash reserve ratio and statutory liquidity ratio. It
also takes away cash through treasury operations by periodically issuing bonds and REPOS. It
also intervenes the credit flows by prescribing limits of credit availability to different sectors
and industries or increase the bank rate to make credit unattractive. The list of techniques used
to control the credit flows are (a) Open Market Operations, (b) Bank Rate, (c) Discretionary
control of Refinance and Rediscounting, (d) Direct Regulation of Interest Rate on Commercial
Banks Deposits and Loans (the RBI has recently allowed the banks to determine the rates on their
own), (e) Cash Reserve Ratio, (f) Statutory Liquidity Ratio, (g) Direct Credit Allocation and
Credit Rationing, (h) Selective Credit Controls and (i) Moral Suasion.
The RBI also regulates factoring, bill discounting and credit card services offered by the
commercial banks and other institutions. The Banking Regulation Act, 1949 also regulates the
activities of commercial banks. The Act was passed in 1949 to consolidate and amend the laws
relating to banking companies. The Act, as amended up-to-date, is a comprehensive piece of
legislation aimed at the development of sound and balanced growth of banking business in the
country. It has extensively enlarged the control of RBI over the entire industry. Right from the
definition of the word banking, its licensing, functioning, capital and reserve requirements,
banking operations and management structure, liquidity provisions and profit distribution and
bank inspection down to the take-overs and amalgamation of the banks and their liquidation
have all been extensively covered under the Act.

14.3.2 Non-banking Financial Companies

The non-banking financial companies (NBFC) has recorded marked growth in recent years. The
Khanna committee had estimated the total deposits of NBFCs at the end of March 94 at ` 56,559
crore and constituted 17.4 per cent of the total deposits held by the banks. There are different
types of NBFCs. The list includes loan companies, investment companies, hire-purchase finance
companies, equipment leasing companies, mutual benefit finance companies and housing finance
companies. The mushroom growth of these institutions has also caused many unhealthy
developments in this segment of the financial system. Realising the importance of these
institutions, the government instead of curbing the growth of the institutions has brought
regulations to ensure some discipline while discharging their functions. The Banking Laws
(Miscellaneous Provisions) Act, 1963 was introduced to regulate the NBFCs.
The RBI which derives powers under the Act regulates the NBFCs as follows:

(a) It requires the NBFCs of certain categories to register with it and provide periodical
statements on their working;
(b) It prescribes the types of companies which are eligible to raise funds from public and its
members;
(c) It also prescribes the extent to which the funds could be raised and the terms and condition
thereof;
(d) NBFCs are also required to invest certain percentage of the deposits in the approved
securities and maintain reserve fund.
(e) It also has the powers to determine policy and give directions relating to deployment of
funds and capital adequacy norms, accounting standards, provision for bad and doubtful
debts, etc.

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