JAIIB IE and IFS Paper-1 Module-C Unit 8 : Indian Financial System – Regulators and Their Roles

JAIIB Paper 1 (IE and IFS) Module C Unit 8 : Indian Financial System – Regulators and Their Roles (New Syllabus) 

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 1 (Indian Economy & Indian Financial System) includes an important topic called “Indian Financial System – Regulators and Their Roles”. Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 1 (IE and IFS) Module C (INDIAN FINANCIAL ARCHITECTURE ) Unit 8 : Indian Financial System – Regulators and Their Roles, Aspirants must go through this article to better understand the topic, Indian Financial System – Regulators and Their Roles and practice using our Online Mock Test Series to strengthen their knowledge of Banker Customer Relationship. Unit 8: Indian Financial System – Regulators and Their Roles

Introduction

Regulators in the Indian Financial System consist of

  • Reserve Bank of India (RBI),
  • Securities and Exchange Board of India (SEBI),
  • Insurance Regulatory and Development Authority (IRDA) and
  • Pension Fund Regulatory and Development Authority (PFRDA).

Reserve Bank Of India (RBI)

  • Legislation to set up the Reserve Bank of India was first introduced in January 1927
  • in March 1934, that the enactment became an accomplished fact.
  • Prior to the setting up of the RBI, the central banking functions were performed by the then Imperial Bank of India and the Government of India.
  • 1st April 1935: The RBI was established in terms of the Reserve Bank of India Act, 1934.
  • The RBI was conceptualised as per the guidelines, working style and outlook presented by Dr. B. R. Ambedkar in his book titled “The Problem of the Rupee – Its origin and its solution” and
  • Recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known as the Hilton – Young Commission.
  • When set up, served as the central bank, both, for undivided India and Burma (now Myanmar).
  • It served as the central bank for Burma till April, 1947.
  • The Central Office was initially established in Kolkata but was permanently moved to Mumbai in 1937.
  • Commencing its operations as a private statutory company, RBI was nationalised on 1st January, 1949 in terms of the Reserve Bank of India. (Transfer to Public Ownership) Act, 1948. 
  • This Act empowers the Union Government, in consultation with the Governor of the RBI, to issue such directions to RBI as considered necessary in public interest.
  • The Governor and four Deputy Governors of RBI are appointed by the Union Government.

The control of the RBI vests in the Central Board of Directors, that comprises

  • Governor
  • 4 Deputy Governors
  • 10 Directors (non-official) nominated by the Union Government from various fields,
  • 2 government officials and
  • 4 others – one each from local board.
  • The RBI’s internal management is based on functional specialisation and coordination amongst about various departments, with headquarters at Mumbai. 

Organisational Structure of RBI

Objectives 

  • The main objectives of the RBI are contained in the preamble of the RBI Act, 1934, which reads as follows: ‘Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the  currency and credit system of the country to its advantage’.

The main objectives of RBI may be stated as follows in specific terms: 

  • To maintain monetary stability such that the business and economic life of the country can deliver the welfare gains of a mixed economy
  • To maintain financial stability and ensure sound financial institutions so that economic units can conduct their business with confidence.
  • To maintain stable payment systems, so that financial transactions can be safely and efficiently executed.
  • To ensure that credit allocation by the financial system broadly reflects the national economic priorities and social concerns.
  • To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of price stability.
  • To promote the development of financial markets and systems to enable itself to operate/regulate.

Role and Functions 

The Reserve Bank of India undertakes numerous activities, all related to the nation’s financial sector, encompassing and extending beyond the functions of a typical central bank. They are as follows: 

  • Monetary Authority
  • Issuer of Currency
  • Banker and Debt Manager to Government
  • Banker to Banks
  • Regulator of the Banking System
  • Manager of Foreign Exchange
  • Maintaining Financial Stability
  • Regulator and Supervisor of the Payment and Settlement Systems
  • Developmental Role

Monetary Authority 

  • Monetary policy refers to the use of instruments, under the control of the central bank, to regulate the availability, cost and use of money and credit.
  • The goal of a monetary policy:

 

The main objectives of monetary policy in India are: 

  • Maintaining price stability
  • Ensuring adequate flow of credit to the productive sectors of the economy, to support economic growth
  • Maintaining financial stability
  • In order to achieve these objectives, RBI has clearly laid a framework, based on a multiple indicator approach.
  • This means that RBI monitors and analyses the movement of a number of indicators, including interest Interest rates, inflation rate, money supply, credit, exchange rate, trade, capital flows and fiscal position, along with trends in output, based on policy perspectives.
  • RBI uses a number of direct and indirect instruments in the formulation and implementation of the monetary policy.
  • In 2016, a Monetary Policy Committee (MPC) was set up, in terms of Section 45ZB of the amended RBI Act.
  • The MPC consists of the
  • The MPC meets at least 6 times, in a year
  • The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC, in formulating the monetary policy.

Evolution of Currency Notes in India 

  • The process of issuing paper currency in India was started in the 18th century.
  • Private banks such as – the Bank of Bengal, the Bank of Bombay, and the Bank of Madras – first printed paper money
  • After the Paper Currency Act of 1861 that the Government of India was given the monopoly to print currency.
  • The Government of India printed currency until the RBI was established in 1935, which then took up this responsibility.
  • Jan 1938: The Rs 5 note was the first paper currency issued by RBI in
  • 1938: currency notes of Rs 10, Rs 100, Rs l,000 and Rs 10,000 were issued.
  • 1946, Rs 1,000 and Rs 10,000 notes were demonetized to curb unaccounted money.
  • Reintroduced in 1954 only to be withdrawn in 1978 again.
  • Currency notes of Rs 500 and Rs 1,000 were again demonetized on 6th November, 2016.
  • RBI has the powers to print currency notes of up to Rs 10,000 denomination.
  • However, an amendment to the RBI Act, 1934 is needed if any note of higher denomination has to be printed.
  • In order to determine the amount of currency to be printed, RBI factors in
    • inflation,
    • GDP growth,
    • replacement of soiled banknotes
    • reserve stock requirements.
  • Minting of coins is the responsibility of the Government, and not of the RBI.
  • Re 1 note had the signature of the Finance Secretary of the Government and not the Governor of RBI.
  • This has been so because when the Re 1 note was reintroduced as a war time measure in 1940, it was issued by the Government with the status of a coin.
  • The Government continued to issue Rupee one notes till 1994.

RBI oversees functioning of the following

  • Commercial banks (including Small Finance Banks, Payment Banks, Local Area Banks)
  • All- India development financial institutions (viz., Export-Import (EXIM) Bank of India,
  • National Bank for Agriculture and Rural Development (NABARD),
  • National Housing Bank (NHB) and
  • Small Industries Development Bank of India (SIDBI)
  • Urban co-operative banks
  • Regional Rural Banks (RRBs),
  • District Central Cooperative Banks and State Co-operative Banks (Supervisory powers for these institutions vest with NABARD without undermining the powers  of RBI for exercising such powers as per the Banking Regulation Act, 1949)
  • Non-Banking Financial Companies (NBFCs) (Only certain types of NBFCs are regulated by RBI.
  • These are Asset Finance Companies, Investment Companies, Loan Companies, Infrastructure Finance Companies, Core Investment Companies, Infrastructure Debt Funds, Micro Finance Institutions, NBFC-Factors, Mortgage Companies, and Non-Operative Financial Holding Company.)

Manager of Foreign Exchange 

  • The Reserve Bank is responsible for administration of the Foreign Exchange Management Act,1999 and it regulates the market, by issuing Authorised Dealer licenses to banks and other select institutions.
  • RBI has been playing an important role in the regulation and development of the foreign exchange market and assumes three broad roles relating to foreign exchange:
  • Regulating transactions related to the external sector and facilitating the development of the foreign exchange market
  • Ensuring smooth conduct and orderly conditions in the domestic foreign exchange market
  • Managing the foreign currency assets and gold reserves of the country

The Foreign Exchange Department (FED) is responsible for the regulation and development of the market.

The RBI’s Financial Markets Department (FMD) participates in the foreign exchange market, by undertaking sales/purchases of foreign currency to ease volatility, in periods of excess demand for/supply of foreign currency.

The Department of External Investments and Operations (DEIO) invests the country’s foreign exchange reserves, built up by purchase of foreign currency from the market.

In investing its foreign assets, the Reserve Bank is guided by three principles: safety, liquidity and return.

RBI also closely monitors the forex reserves of the country and discloses the reserves position to the market, through its Weekly Statistical Supplements (WSS).

Regulator of Payment and Settlement Systems 

  • The Payment and Settlement Systems Act, 2007 (PSS Act) gives the Reserve Bank oversight authority, including regulation and supervision, for the payment and settlement systems in the country.
  • RBI has constituted a Committee of its Central Board called the Board for Regulation and Supervision of Payment and Settlement Systems.
  • RBI focuses on the development and functioning of safe, secure and efficient payment and settlement mechanisms.
  • An efficient payment and settlement system is a pre-requisite for addressing systemic risk in banking/financial sector.
  • As part of the basic framework, the Reserve Bank’s network of secure systems handles various types of payment and settlement activities.
  • Most operate on the security platform of the Indian Financial Network (INFINET), using digital signatures for further security of transactions.

Securities And Exchange Board Of India (SEBI)

  • With the announcement of the reforms package in 1991, the volume of business in both the primary and secondary segments of the Indian capital market increased.
  • the Securities and Exchange Board of India (SEBI), was set up and conferred statutory powers, to regulate the capital market.
  • The Securities and Exchange Board of India Act, 1992, provides for the establishment of the board to protect the interest of the investors in securities, promote the development of and regulate the securities market and matters connected therewith or incidental to.
  • The SEBI functions under the Ministry of Finance.
  • Status of an independent organisation regulating every aspect of the securities market backed by a statute and accountable to the Parliament.
  • Prior to the formation of SEBI, some of the control functions were carried on by the Controller of Capital Issues and the Company Law Board.

Organisational Set Up 

  • The SEBI is headed by a chairman, who is supported by 3 full time Members and 4 part time Members. 
  • The part time Members are officials deputed by the Government and RBI and
  • Full time Members are supported by Executive Directors and other line officials.

Functions 

  • The SEBI has powers to register and regulate all market intermediaries.
  • The SEBI has powers to penalise them in case of violations of the provisions of the act, rules and regulations made thereunder.
  • It can conduct enquiries, audits, and inspection of all market intermediaries and adjudicate offences, under the SEBI Act, 1992.
  • The SEBI registers and regulates the intermediaries in the primary market. Some of the major intermediaries it regulates are merchant bankers, underwriters, bankers to an issue, registrars to an issue and share transfer agents and debenture trustees.
  • The SEBI registers and regulates various intermediaries in the secondary market such as brokers, sub-brokers, stock exchanges, foreign institutional investors (FIIs) custodians, depositories, mutual funds, and venture capital funds.

The functions of SEBI are as under

  • Protect the interests of investors in securities and to promote the development of and to regulate the securities market
  • Measures to undertake inspection of any book, or register or other document or record of any listed company
  • Same powers as are vested in a civil court, under the Code of Civil Procedure, 1908 (5 of 1908).
  • Board may, by an order, for reasons to be recorded in writing, in the interests of investors or the securities market, take measures, either pending investigation or inquiry or on completion of such investigation or inquiry

Insurance Regulatory and Development Authority (IRDA)

What is the Insurance Regulatory and Development Authority (IRDA)?

  • The Insurance Regulatory and Development Authority is the main organization or supervisory body that regulates the insurance sector in the country. It sets rules and regulations for the functioning of the insurance industry. Its sole purpose is to protect the interest of policyholders and to develop the industry on the whole.
  • The IRDA or IRDAI regularly issues advisories to insurance companies in case of changes to the rules and regulations. The regulator guides the insurance industry in promoting the efficiency in the conduct of insurance business all the while controlling the rates and other charges related to insurance. This article dwells on the functioning of the IRDA, features and benefits as well as answers to frequently asked questions at the end of this reading.

Establishment of IRDA:

  • The Government of India was the regulator for the insurance industry until 2000. However, to institute a stand-alone apex body, the IRDA was established in 2000 following the recommendation of the Malhotra Committee report in 1999. In August 2000, the IRDA began accepting applications for registrations through invites and allowed companies from other countries to invest up to 26% in the market. 
  • The IRDA has outlined several rules and regulations under Section 114A of the Insurance Act, 1938.

Objective of IRDA:

The main objective of the Insurance Regulatory and Development Authority of India is to enforce the provisions under the Insurance Act. The mission statement of the IRDA is:

  • To protect the interest and fair treatment of the policyholder.
  • To regulate the insurance industry in fairness and ensure the financial soundness of the industry.
  • To regularly frame regulations to ensure the industry operates without any ambiguity.

Important Role of IRDA in the Insurance Sector in India:

The insurance industry in India dates back to the early 1800s and has grown over the years with better transparency and focus on protecting the interest of the policyholder. The IRDA plays an integral role in emphasizing the importance of policyholders and their interest while framing rules and regulations. Here are the important roles of the IRDA:

  • To protect the policyholder’s interests.
  • To help speed up the growth of the insurance industry in an orderly fashion, for the benefit of the common man.
  • To provide long-term funds to speed up the nation’s economy.
  • To promote, set, enforce and monitor high standards of integrity, fair dealing, financial soundness and competence of the insurance providers.
  • To ensure genuine claims are settled faster and efficiently.
  • To prevent malpractices and fraud, the IRDA has set up a grievance redress forum to ensure the policyholder is protected.
  • To promote transparency, fairness and systematic conduct of insurance in the financial markets.
  • To build a dependable management system to make sure high standards of financial stability are followed by insurers.
  • To take adequate action where such high standards are not maintained.
  • To ensure the optimum amount of self-regulation of the industry.

Functions of IRDA:

Below are the important functions of the IRDAI in the insurance industry in India:

  • Grant, renew, modify, suspend, cancel or withdraw registration certificates of the insurance company.
  • Protecting the interests of the policyholder in matters concerning the grant of policies, settlement of claims, nomination by policyholders, insurable interest, surrender value of the policy and other terms and conditions of the policy.
  • Specify code of conduct, qualifications and training for intermediary or insurance agents.
  • Specify code of conduct for loss assessors and surveyors.
  • Levying fees and charges for carrying out the provisions of the Act.
  • Undertaking inspection, calling for information, and investigations including an audit of insurance companies, intermediaries, and other organizations associated with the insurance business.
  • Regulate and control insurance rates, terms and conditions, advantages that may be offered by the insurance providers.

Apart from the above-mentioned core functions of the IRDA, there are several functions that the regulator performs keeping the policyholder’s interest as its priority.

How Does IRDA Work?

The apex body of the insurance industry, the IRDA, ensures it frames rules and regulations without any ambiguity towards any particular insurance company. To ensure fairness and the financial soundness of the industry, the main work of IRDA revolves around the policyholder’s interests. Refer to the following roles that the IRDA is mainly involved in:

  • Issues certificate of registration to new insurance companies.
  • Sets rules and regulations to ensure the interests of the policyholder are taken care of.
  • Monitors all claims are settled in all fairness and that no insurer will deny any claim on their own free will.
  • Regulates the code of conduct of the insurance companies, insurance intermediaries, and others associated with the insurance industry.
  • Provides solutions in case of disputes through the IRDA ombudsman.
  • Controls and regulates the rates of insurance to prevent unwanted price hikes in the insurance premium.
  • The apex body is responsible for setting the minimum percentage limit of insurance companies for General and Life Insurance, thereby developing both urban and rural sectors.

Features & Benefits of IRDA:

Following are the salient features of the apex body, the Insurance Regulatory and Development Authority of India:

  • Acts as a regulator for the insurance industry.
  • Protects the policyholder’s interests.
  • Rules and regulations are framed by the apex body under Section 114A of the Insurance Act, 1938.
  • It is entrusted under the Insurance Act to grant the certificate of registration to new insurance companies to operate in India.
  • Oversees the insurance industry’s activities to ensure sustained development of insurers and policyholders.

Types of Insurances Regulated by the IRDAI

Insurance is mainly divided into Life and Non-Life/General Insurance. These are further classified into other types of insurance. Below are the types of insurance regulated by the IRDAI:

Life Insurance

  • Term Plans
  • Endowment Policies
  • Unit-linked Insurance Policies
  • Retirement Policies
  • Money-back Policies

General Insurance

  • Health Insurance Policies
  • Vehicle/Motor Insurance Policies
  • Car insurance
  • Bike Insurance
  • Property Insurance Policies
  • Travel Insurance Plans
  • Gadget Insurance Plans

 Pension Fund Regulatory and Development Authority (PFRADA)

The Pension Fund Regulatory and Development Authority was established in the year 2003. The body was set up with a view to promoting, regulating and developing the pension sector in the country. The National Pension Scheme (NPS) was launched by PFRDA in the year 2003 and thereafter extended to all citizens in 2009. PFRDA comes under the jurisdiction of the Ministry of Finance.

Functions of PFRDA 

The preamble of PFRDA states that the aims of the authority is “to promote old age income security by establishing, developing and regulating pension funds, to protect the interests of subscribers to schemes of pension funds and for matters connected therewith or incidental thereto.” The roles played by PFRDA are as under: 

  • To promote pension scheme in the country, by fostering mandatory as well as voluntary pension schemes, in order to serve the old age income needs of retired personnel.
  • National Pension System, both tier 1 and tier 2 are under the purview of PFRDA and are regulated by the same.
  • PFRDA performs the function of appointing various intermediate agencies like Pension Fund Managers, Central Record Keeping Agency (CRA), Point of Presence Agencies, etc.
  • Educating the general public and stakeholders about the importance of pension.
  • Training of intermediaries that perform the task of popularizing and educating people about the importance of pension.
  • Addressing grievances related to various pension schemes in the country.
  • Addressing and resolving disputes between various intermediaries like banks and between customers and intermediaries.

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