1. Regulatory Framework for Financial Services in India

2. Financial services
“Financial services refers to various functions and services which are provided to individuals and business firms by financial institutions in a system”
Financial services provided by organisations like banks, credit card companies, insurance company, stock brokerage & mutual fund

3. Regulatory Framework for Financial Services
Regulation refers to the control of commercial & corporate activities through system of rules & norms
Direct involvement of government is not necessary
Basic function of a regulator is to protect the interests of different categories of stakeholders with a class of financial institutions or services

4. Need for strong financial regulatory system
To ensure financial market & financial services function properly
Supervise & regulate the different financial institution in various financial market

5. Regulators in the Indian financial system
The ministry of finance (MOF)
The Reserve Bank of India (RBI)
SEBI
Insurance Regulatory Development Authority (IRDA)

6. Regulatory framework of financial service
Institutional regulation
Prudential regulations
Investor’s regulations
Legislative regulations

7. Institutional regulation
It is also known as structural regulations
Each institution’s activities are regulated by one regulator
These regulation call for a clear demarcation of activities of financial institution
Apex agencies are SEBI & RBI
SEBI- regulates the functioning of mutual funds, stock exchanges & stock brokering companies
RBI -regulates the activities of commercial banks & non- banking finance companies

8. Prudential regulations
Regulations associated with the internal management of the financial institution & financial services
Regulation relates capital adequacy, liquidity & solvency
Aim of regulation is to prevent the entry of firms without adequate resources into the market & ensure the proper functioning of firms within the market
Eg: SEBI fixes the minimum net worth requirement for various financial services, while RBI’s regulations relate to the non-banking finance companies

9. Legislative regulations
Investors regulation
They ensure protection for investors
Eg:- SEBI issues guidelines to protect the interest of investors from time to time.
Legislative regulations
Govt enacted such regulation for overall development of financial service industry
Banking regulation act, security contract act

10. Regulation of Capital Market
The SEBI Act, 1992, which established the SEBI, has four objectives: protecting the interests of investors in securities market: the securities market & other incidental matters connected there with.
The companies act 2012, deals with the issue, allotment & transfer securities, disclosures to be made in public issue, underwriting, borrowing powers, payment of dividend & winding up of companies
The securities contract regulation act,1956, provides for the regulation of securities trading and the management of stock exchanges
The Depository act, 1996, provides for the establishment of depositories for the electronic maintenance of Demit securities & transfer ownership

11. Reserve bank of India RBI is apex/central bank of the country
It is entrusted with the control, supervision, promotion & development & planning of financial system
The RBI’s main functions is to control the monetary base & through this route influence the supply of money depending on the conditions of the nation
Its objectives are to maintain price stability & ensure an adequate flow of credit to the productive sectors
It derives power from two different Act. RBI Act,1934 & Banking Regulations Act

12. Traditional Functions of RBI
Regulatory function of RBI
Developmental/Promotional Functions of RBI
Supervisory Functions of RBI
Regulatory Functions of RBI

13. Regulatory function of RBI
Monetary control
Banker to the govt.
Issuer of note
Banker’s Bank
Controller of credit
Custodian of foreign reserves
Regulators of banking services

14. Developmental/Promotional Functions of RBI
Developmental of the financial system
Developmental of agriculture
Provision of industrial finance
Provision of training
Collection of data
Publication of reports
Promotion of banking habits
Housing needs
Promotion of export through refinance

15. Supervisory Functions of RBI
Granting licences to banks
Bank inspection
Control over NBFIs
NPA norms of commercial banks

16. RBI’s credit control tools
Bank Rate
Repo Rate
Difference between Bank Rate & Repo Rate
Reverse repo Rate
How does an Increase in Repo Rate Contain Inflation
Deregulation of Interest Rate
Cash Reserve Ratio
Open Market Operations

17. Bank rate-Rate at which RBI lends money to other banks without any securities
Repo rate- Rate at which commercial bank have to sell securities to RBI with an agreement to repurchase them in future date at a predetermined price
When bank experience a gap between the demand from borrower & supply of funds they borrow from RBI at the repo rate
If RBI wants to make the funds more expensive for the banks to borrow, it increases the repo rate, if it wants to make it cheaper to borrow they decrease the repo rate
When the demand for loan is higher & banks do not have adequate funds to lend, banks borrow from RBI & lend customer at higher rate to maintain earlier profit level
Current Repo rate 7.75%

18. Difference between Bank Rate & Repo Rate
Both rates are the rate at which RBI makes funds available to the commercial banks
Reverse Repo Rate- The rate at which RBI borrows money from bank.
RBI use this tool when it feels there is too much money in the banking system
If reverse repo is high, banks get higher intrest rate on the funds they have given the RBI.As a result, banks prefer to keep their money with RBI, which absolutly risk-free
Bank rate
Repo rate
Collateral
Not collateralized. Commercial banks have to lend money at fixed rate
Commercial banks have to sell the securities to the RBI with an agreement to a Repurchase
Impact
Long-term
Short-term

19. RESULTS :- REDUCED DEMAND
If RBI increases repo rate, the commercial banks have to pay a high cost for borrowing money.
The commercial banks then pass on this increase in their own customer in the form of higher interest loan
higher interest rates makes more expensive to borrow money
RESULTS :- REDUCED DEMAND
Reduction of demand lead to reduce production & increase unemployment

20. Investment decreases. This is the impact in commercial point of veiw
Impact of Repo rate
As interest rate increase, market rates for securities fall
Banks prefer to invest funds with RBI at as the reverse Repo rate also increases
There is little money available for lending. Firms & households have problems getting loans
Companies that are unable to pay higher interest rates postpone their investments.
Investment decreases. This is the impact in commercial point of veiw

21. Cash Reserve Ratio
Amount of money that scheduled by commercial banks must maintain with the RBI
CRR does not earn any interest for banks.
RBI uses this tool to control the liquidity in the system by increasing or decreasing CRR

22. Marginal standing facility
RBI has introduced a new mechanism MSF
Under this mechanism banks are permitted to borrow short term funds (overnight) up to 2% of their respective demand& time liabilities outstanding at the end of the second preceding fortnight
Banks can borrow for an overnight period from RBI through this emergency funding window under exceptional circumstances when all other avenues are exhausted

23. Banks can access MSF only when all avenues(like repo and CBLO) are exhausted for overnight money. That is why it is meant for exceptional
MSF allows banks to borrow money from central bank at a higher rate
This instrument is likely to reduce volatility in overnight rates & improve monetary transmission
The purpose of MSF is to is to provide an additional window to bridge gaps in overnight liquidity, always above the repo rate

24. Regulatory Functions of RBI
On- site inspection
Off- site surveillance
Corporate governance
Appointment of statutory auditors
Core principle
RBI,s role in the capital market

25. Difference between MSF & Repo rate
Banks can borrow money from the RBI by pledging govt. securities over and above the statutory liquidity requirement
Banks can borrow money from the RBI within the statutory liquidity ratio.
They do not need to pledge securities under MSF
MSF can be used only when all other avenues are exhausted, at an extra cost of 3% above repo rate