Inquisitive Mind

Reserve Bank of India (RBI) has announced withdrawal of ₹2000 denomination banknotes from circulation. When and why was banknote of ₹2000 introduced? The ₹2000 denomination banknote was introduced in November 2016 under Section 24(1) of Reserve Bank of India (RBI) Act, 1934 . It was introduced primarily to meet the currency requirement of the economy in an expeditious manner after the withdrawal of legal tender status of all ₹500 and ₹1000 banknotes in circulation at that time.  Why and when was printing of ₹2000 banknote stopped? The objective of introducing ₹2000 banknotes was met once banknotes in other denominations became available in adequate quantities.  Therefore, printing of ₹2000 banknotes was stopped in 2018-19. What is the status of ₹2000 banknotes in circulation? The total value of ₹2000 banknotes in circulation has declined from ₹6.73 lakh crore at its peak as on March 31, 2018 (37.3% of Notes in Circulation) to ₹3.62 lakh crore constituting only 10.8% of Notes i...

Regional Rural Banks (RRBs) can be placed under Prompt Corrective Action (PCA) framework by National Bank for Agriculture and Rural Development (NABARD). What is PCA and what does it mean for RRBs placed under PCA?  What is Prompt Corrective Action (PCA) framework? The primary focus of Prompt Corrective Action (PCA) framework is to ensure early rectification of the irregularities / deficiencies by self-corrective action of Regional Rural Banks (RRBs) and supervisory action by National Bank for Agriculture and Rural Development (NABARD).  To which banks is PCA framework applicable? The PCA framework applies to all RRBs operating in India. What parameters are considered under PCA framework? For the purpose of PCA framework, the financial health of a RRBs is evaluated in terms of following 3 parameters – Capital – indicated by Capital to Risk-Weighted Asset Ratio (CRAR) – the percentage of Capital to total risk-weighted assets. Asset Quality – indicated by Non-Performing Assets (...

We may sometimes wonder, why doesn’t RBI print and distribute plenty of money so that no one has to worry about poverty or inflation. Here, we will learn about what are the constraints or implications of printing unlimited money? What are banknotes? The notes of ₹2, 5, 10, 20, 50, 100, 200, 500 and 2,000 denominations are printed and issued by the Reserve Bank of India (RBI). These notes are called the bank notes. The notes of ₹1 denomination are printed by the Government of India and put into circulation by the RBI. These notes are called the currency notes. Who can issue bank notes and currency notes? As per Section 22 of Reserve Bank of India (RBI) Act, 1934, RBI has the sole right to issue bank notes in India and currency note of Government of India. As per Section 34 of RBI Act, 1934, the bank notes in circulation are the liabilities of the Issue Department of RBI.  Which assets can be held as backing for the notes? As per Section 33 of RBI Act, 1934, the bank notes in circula...

Reserve Bank of India (RBI) has issued directions on outsourcing of information technology services by the regulated entities. What is the objective of the directions? Regulated Entities (REs) have been extensively leveraging Information Technology (IT) and IT enabled Services (ITeS) to support their business models, products and services offered to their customers. REs also outsource substantial portion of their IT activities to third parties, which expose them to various risks. The underlying principle of the directions on outsourcing of information technology services is to ensure that outsourcing arrangements neither diminish REs ability to fulfil its obligations to customers nor impede effective supervision by the Reserve Bank of India (RBI). From when are the directions effective? The directions on outsourcing of information technology services will come into effect from October 01, 2023. With respect to existing outsourcing arrangements that are already in force as on the date o...

Reserve Bank of India (RBI) has revised norms of provisioning for standard assets by Primary (Urban) Co-operative Banks (UCBs). What is standard asset? Standard asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business.  What was the earlier categorization of UCBs? Earlier, the UCBs were categorised as – Tier I UCBs – Banks having deposits below ₹100 crore operating in a single district. Banks with deposits below ₹100 crore operating in more than one district, provided the branches are in contiguous districts and deposits and advances of branches in one district separately constitute at least 95% of the total deposits and advances respectively of the bank. Banks with deposits below ₹100 crore, whose branches were originally in a single district but subsequently, became multi-district due to reorganisation of the district. Tier II UCBs – All other banks. What is the basis of revised regulatory framework for UCBs? Reserv...

Reserve Bank of India (RBI) had issued guidelines on governance, measurement and management of Interest Rate Risk in Banking Book. What is Interest Rate Risk in Banking Book (IRRBB)?  Interest Rate Risk in Banking Book (IRRBB) refers to the current or prospective risk to banks’ capital and earnings arising from adverse movements in interest rates that affect its banking book positions.  How does the change in interest rates affect banks? When interest rates change, the present value and timing of future cash flows change. These changes in turn affect the underlying value of banks’ rate sensitive assets, liabilities, and off-balance sheet items and, hence, their economic value (EV).  Changes in interest rates also affect banks’ earnings by altering interest rate-sensitive income and expenses, affecting their net interest income (NII).  What is the impact of excessive IRRBB? Excessive IRRBB can pose a significant risk to banks’ current capital base and / or future earn...

Reserve Bank of India (RBI) has issued a framework for acceptance of Green Deposits by the regulated entities, to foster and develop green finance ecosystem in the country. What is Green Deposit and Green Finance? “Green deposit” means an interest-bearing deposit, received by the regulated entities (REs) for a fixed period and the proceeds of which are earmarked for being allocated towards green finance. “Green finance” means lending to and / or investing in the activities / projects that contributes to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives - including biodiversity management and nature-based solutions. What is the purpose of framework for acceptance of green deposits? To encourage REs to offer green deposits to customers. To protect interest of the depositors and aid customers to achieve their sustainability agenda. To address greenwashing concerns and help augment the flow of credit to green activities / proj...