Reserve Bank of India (RBI)
Kindly Take Note : Reserve Bank of India (RBI) is the central bank of the country and is different from Central Bank of India.
The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on.the basis of the recommendations.of the Hilton Young Commission.The share capital was divided.into. shares of Rs. 100 each fully paid which was entirely owned by.private shareholders in the.begining. The Government held.shares of nominal value.of Rs..2,20,000..Reserve Bank of India was
nationalised in the year 1949. The.general superintendence and.direction of the Bank is entrusted.to Central Board of Directors of 20.members, the Governor and four
Deputy Governors, one Government.official from the Ministry of.Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the
need of following:
To regulate the issue of banknotes
To maintain reserves with a view to securing monetary stability and
To operate the credit and currency system of the country to its advantage.
Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has
the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the
Reserve Bank as agent of the
Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than
two-fifths of gold coin, gold bullion
or sterling securities provided the
amount of gold was not less than
Rs. 40 crores in value. The
remaining three-fifths of the
assets might be held in rupee
coins, Government of India rupee
securities, eligible bills of exchange
and promissory notes payable in
India. Due to the exigencies of the
Second World War and the post-
was period, these provisions were
considerably modified. Since 1957,
the Reserve Bank of India is
required to maintain gold and
foreign exchange reserves of Ra.
200 crores, of which at least Rs.
115 crores should be in gold. The
system as it exists today is known
as the minimum reserve system.
Banker to Government
The second important function of
the Reserve Bank of India is to act
as Government banker, agent and
adviser. The Reserve Bank is agent
of Central Government and of all
State Governments in India
excepting that of Jammu and
Kashmir. The Reserve Bank has
the obligation to transact
Government business, via. to keep
the cash balances as deposits free
of interest, to receive and to make
payments on behalf of the
Government and to carry out their
exchange remittances and other
banking operations. The Reserve
Bank of India helps the
Government - both the Union and
the States to float new loans and
to manage public debt. The Bank
makes ways and means advances
to the Governments for 90 days. It
makes loans and advances to the
States and local authorities. It
acts as adviser to the Government
on all monetary and banking
matters.
Bankers' Bank and Lender of the
Last Resort
The Reserve Bank of India acts as
the bankers' bank. According to
the provisions of the Banking
Companies Act of 1949, every
scheduled bank was required to
maintain with the Reserve Bank a
cash balance equivalent to 5% of
its demand liabilites and 2 per
cent of its time liabilities in India.
By an amendment of 1962, the
distinction between demand and
time liabilities was abolished and
banks have been asked to keep
cash reserves equal to 3 per cent
of their aggregate deposit
liabilities. The minimum cash
requirements can be changed by
the Reserve Bank of India.
The scheduled banks can borrow
from the Reserve Bank of India on
the basis of eligible securities or
get financial accommodation in
times of need or stringency by
rediscounting bills of exchange.
Since commercial banks can
always expect the Reserve Bank of
India to come to their help in times
of banking crisis the Reserve Bank
becomes not only the banker's
bank but also the lender of the
last resort.
Controller of Credit
The Reserve Bank of India is the
controller of credit i.e. it has the
power to influence the volume of
credit created by banks in India. It
can do so through changing the
Bank rate or through open market
operations. According to the
Banking Regulation Act of 1949,
the Reserve Bank of India can ask
any particular bank or the whole
banking system not to lend to
particular groups or persons on
the basis of certain types of
securities. Since 1956, selective
controls of credit are increasingly
being used by the Reserve Bank.
The Reserve Bank of India is armed
with many more powers to control
the Indian money market. Every
bank has to get a licence from the
Reserve Bank of India to do
banking business within India, the
licence can be cancelled by the
Reserve Bank of certain stipulated
conditions are not fulfilled. Every
bank will have to get the
permission of the Reserve Bank
before it can open a new branch.
Each scheduled bank must send a
weekly return to the Reserve Bank
showing, in detail, its assets and
liabilities. This power of the Bank
to call for information is also
intended to give it effective control
of the credit system. The Reserve
Bank has also the power to inspect
the accounts of any commercial
bank.
As supereme banking authority in
the country, the Reserve Bank of
India, therefore, has the following
powers:
(a) It holds the cash reserves of all
the scheduled banks.
(b) It controls the credit
operations of banks through
quantitative and qualitative
controls.
(c) It controls the banking system
through the system of licensing,
inspection and calling for
information.
(d) It acts as the lender of the last
resort by providing rediscount
facilities to scheduled banks.
Custodian of Foreign Reserves
The Reserve Bank of India has the
responsibility to maintain the
official rate of exchange. According
to the Reserve Bank of India Act of
1934, the Bank was required to
buy and sell at fixed rates any
amount of sterling in lots of not
less than Rs. 10,000. The rate of
exchange fixed was Re. 1 = sh. 6d.
Since 1935 the Bank was able to
maintain the exchange rate fixed
at lsh.6d. though there were
periods of extreme pressure in
favour of or against
the rupee. After India became a
member of the International
Monetary Fund in 1946, the
Reserve Bank has the
responsibility of maintaining fixed
exchange rates with all other
member countries of the I.M.F.
Besides maintaining the rate of
exchange of the rupee, the Reserve
Bank has to act as the custodian
of India's reserve of international
currencies. The vast sterling
balances were acquired and
managed by the Bank. Further, the
RBI has the responsibility of
administering the exchange
controls of the country.
Supervisory functions
In addition to its traditional central
banking functions, the Reserve
bank has certain non-monetary
functions of the nature of
supervision of banks and
promotion of sound banking in
India. The Reserve Bank Act, 1934,
and the Banking Regulation Act,
1949 have given the RBI wide
powers of supervision and control
over commercial and co-operative
banks, relating to licensing and
establishments, branch expansion,
liquidity of their assets,
management and methods of
working, amalgamation,
reconstruction, and liquidation.
The RBI is authorised to carry out
periodical inspections of the banks
and to call for returns and
necessary information from them.
The nationalisation of 14 major
Indian scheduled banks in July
1969 has imposed new
responsibilities on the RBI for
directing the growth of banking
and credit policies towards more
rapid development of the economy
and realisation of certain desired
social objectives. The supervisory
functions of the RBI have helped a
great deal in improving the
standard of banking in India to
develop on sound lines and to
improve the methods of their
operation.
Promotional functions
With economic growth assuming a
new urgency since Independence,
the range of the Reserve Bank's
functions has steadily widened.
The Bank now performs a varietyof
developmental and promotional
functions, which, at one time, were
regarded as outside the normal
scope of central banking. The
Reserve Bank was asked to
promote banking habit, extend
banking facilities to rural and
semi-urban areas, and establish
and promote new specialised
financing agencies. Accordingly,
the Reserve Bank has helped in the
setting up of the IFCI and the SFC;
it set up the Deposit Insurance
Corporation in 1962, the Unit Trust
of India in 1964, the Industrial
Development Bank of India also in
1964, the Agricultural Refinance
Corporation of India in 1963 and
the Industrial Reconstruction
Corporation of India in 1972.
These institutions were set up
directly or indirectly by the Reserve
Bank to promote saving habit and
to mobilise savings, and to provide
industrial finance as well as
agricultural finance. As far back as
1935, the Reserve Bank of India
set up the Agricultural Credit
Department to provide agricultural
credit. But only since 1951 the
Bank's role in this field has
become extremely important. The
Bank has developed the co-
operative credit movement to
encourage saving, to eliminate
moneylenders from the villages
and to route its short term credit
to agriculture. The RBI has set up
the Agricultural Refinance and
Development Corporation to
provide long-term finance to
farmers.
Classification of RBIs functions
The monetary functions also
known as the central banking
functions of the RBI are related to
control and regulation of money
and credit, i.e., issue of currency,
control of bank credit, control of
foreign exchange operations,
banker to the Government and to
the money market. Monetary
functions of the RBI are significant
as they control and regulate the
volume of money and credit in the
country.
Equally important, however, are
the non-monetary functions of the
RBI in the context of India's
economic backwardness. The
supervisory function of the RBI
may be regarded as a non-
monetary function (though many
consider this a monetary function).
The promotion of sound banking in
India is an important goal of the
RBI, the RBI has been given wide
and drastic powers, under the
Banking Regulation Act of 1949 -
these powers relate to licencing of
banks, branch expansion, liquidity
of their assets, management and
methods of working, inspection,
amalgamation, reconstruction and
liquidation. Under the RBI's
supervision and inspection, the
working of banks has greatly
improved. Commercial banks have
developed into financially and
operationally sound and viable
units. The RBI's powers of
supervision have now been
extended to non-banking financial
intermediaries. Since
independence, particularly after its
nationalisation 1949, the RBI has
followed the promotional functions
vigorously and has been
responsible for strong financial
support to industrial and
agricultural development in the
country.
RESERVE BANK OF INDIA ADDRESS
Reserve Bank of India,
Central Office,
Shaheed Bhagat Singh Road,
Mumbai - 400 001.
Website of Reserve Bank of India
www.rbi.org.in
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