The Reserve Bank is playing an important role in reinforcing the reform measures in the financial sector undertaken in accordance with the New Economic Policy. The Bank also took initiative to support the revival of the economy price stability.
The Janakiraman committee appointed after the security scam submitted its report in 1993. In the light of the findings of Janakiraman committee and its recommendation the Bank undertook several corrective measures to restore financial credibility, and to plug existing loopholes and to bring about overall qualitative improvement in the entire financial sector.
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1. Strengthening of Market Intelligence:
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The committee recommended that the Reserve Bank should strengthen its market intelligence to supplement its own information. The Reserve Bank has set up recently a Market Intelligence Cell (MIC) within the bank. Banking intelligence in the supervisory wing is also being strengthened.
2. Mechanisation and Computerization:
The other recommendation of the committee is in respect of mechanisation and computerization of the entire financial system. The Reserve Bank has a major role to play in implementing this recommendation. The Janakiraman Committee has commented that the major lacuna for not detecting sufficiently early the irregularities in securities transaction by banks was the absence of Electronic Data Processing (EDP) system in the operations that deal with recording clearing settlement and finally related securities. In November 1992, the Bank introduced a system of Electronic Clearance Settlement and Depository (ECSD) for the purpose.
3. Establishment of Internal Debt Management Cell (IDMC):
A beginning has been made to move from direct to indirect instrument of monetary control, with the launching of an active internal debt management policy. For strengthening the internal debt management policies the Bank has created an Internal Debt Management Cell (I.D.M.C) as an independent unit with effect from October 1,1992.
A decision has been taken to set up a new institution to be called Securities Trading Corporation of India, dedicated to the development of a separate market for Government Securities.
4. Gold Management Division:
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The Reserve Bank has set up a Gold Management Division. The main function of this division is to explore the possible use of gold in economic adjustment and growth by mobilizing gold from the public and strengthening the international reserve position of the country.
5. Establishment of Committees:
The Reserve Bank has set up two committees viz,.
(i) Sundaraman Committee:
This committee has been set up under the chairmanship of Dr. G. Sundaraman to examine the structure of export credit and
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(ii) Nayar Committee:
This committee was set up under the chairmanship of Shri P. R. Nayar to examine the Adequacy of Institutional credit to the small scale industries sector and related aspects.
These committees have submitted reports and the bank has already started action on their recommendations.
6. Inspection of Commercial Banks:
Inspection of the banks by the Reserve Bank has assumed a critical role in the light of the large scale irregularities of banks in the securities transaction. A committee was appointed under the chairmanship of Shri S. Padmanabhan to suggest measures in this regard. The main recommendations of this committee are concerned with on j site supervisory process of the Reserve Bank. These comprise of:
(i) Annual Financial Inspection (AFI)
(ii) Audit of Select items by statutory auditors
(iii) Management Audit to be conducted by the Reserve Bank’s senior and experienced executives once in two years.
(iv) Scrutiny of social lending and development aspects by the Reserve Bank’s staff independent of the main annual financial inspection and
(v) Special Inspections and investigations as and when needed.
7. More Control over Frauds in Banks:
The Reserve Bank appointed a committee on Frauds and Malpractices in Banks under the Chairmanship of Shri A. Ghosh. The committee recommended that all bank should review their instruction manuals and evolve adequate systems and procedures to strengthen internal control, monitoring and vigilance mechanism, particularly in the area of preventive vigilance with a view to ensuring strict compliance of the various systems.
In short, Reserve Banks has started strict inspection of the banks to avoid further fraud and malpractices.
8. Control of Non-Banking Financial Companies:
On the basis of the recommendations of Shah Commission regarding control of the functions of NBFC, Reserve Bank Act, was amended in 1997. As per the amended Act, registration of non-banking financial companies with the RBI has been made obligatory. Reserve Bank has been authorised to prevent these companies from accepting deposits from public. The RBI has also been conferred with statutory power to control the working of these companies.