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RBI – Organization and Functions

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RBI – Organization and Functions

shape Introduction

A Bank is a Financial Institution that accepts deposits (in the form of cash/ online transfers), creates credit on the deposits and lends money to the borrowers at a specified rate of interest. Indian Public Sector Banks are those banks whose majority stake (>50%) is held by the Government of India. The shares of these Indian Public Sector Banks are listed on stock exchanges. A Bank is primarily noted as a financial institution to provide services to the customers. Banking system is a system which offers money management services to the customers. RBI, the central bank of India is responsible for maintaining economic stability and growth of an economy.

Banking Systems Highlights

  • The bank provides financial security to the customers.
  • The bank can control the credit and the supply of money.
  • The bank can set conditions for the customers. The conditions and equality norms are like the rate of interest, a period of lending etc.
  • The First Banking companies Act passed in 1913 by the East Indian company could not match the requirements of Indian audience and hence the Indian Companies Act was passed in 1936.
  • The Banking Regulation Act: Banking regulations are a form of government regulations which subject banks to particular requirements, restrictions and rules.
  • The Banking Regulation Act, provides a structure for regulation and supervision of the commercial banks.

The General Principles of the Bank Regulation are:

Minimum Requirements: The main minimum requirement is maintaining minimum capital ratios. In this, the requirements are forced on the bank to prompt the objectives of the regulator.

Supervisory Review: This is process of identifies the responsibilities of the bank to increase benefits and setting targets. It is the processed of the structure to protect the banks that can have sufficient capital to support all risks.

Market Discipline: Market discipline is a market – based advertisement of the transparency and declaration of the risk. It is used to increase the safety and soundness of the market.

shape Concept

Banking System – Reserve Bank of India

The Reserve Bank of India is the central bank of India, and was established on 1 April 1935 and nationalized in 1949. This bank was founded with the guidance of Hilton Young Commission. The Reserve Bank of India uses monetary policy to maintain financial security in India, and it is responsible for regulating supply. Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Reserve Bank of India is managed by the central board directors, who are nominated by the Indian National Government. RBI is organized with the 21-member Central Board of Directors: The Governor, 4 Deputy Governors, 2 Finance Ministry representatives, 10 government-nominated directors to represent important elements of India’s economy, and 4 directors to represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards consists of 5 members who represent regional interests, the interests of co-operative and indigenous banks. Highlights of the RBI Structure is as follows:

  • The RBI board consists of 21 members, including Governor and four Deputy Governors for a period of four years.

  • In this board four directors are appointed by the four local boards, except the ten directors, and two government officers are appointed by the Government of India.

  • The RBI has 4 zonal and 19 regional offices. The four zonal offices are located in : Chennai, Delhi, Kolkata & Mumbai. The Governor and Deputy Governors are nominated for a period of 5 years. The Central Office of the Reserve Bank was initially located in Calcutta, now permanently moved to Mumbai in 1937.

  • The RBI has four regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and with the advice of the Central Board of Directors serve as a forum for regional banks and to deal with delegated tasks from the Central Board.

  • The Board Directors must conduct minimum six meetings in a year and at least one meeting in three months.

  • The Central Office of the RBI was established in Calcutta (now Kolkata) but was moved to Bombay (now Mumbai) in 1937 and RBI also consists 28 regional offices, especially in capital cities of states.

  • Two of the four Deputy Governors are traditionally from RBI ranks and are selected from the Bank’s Executive Directors. One is nominated from among the Chairpersons of public sector banks and the other is an economist. An Indian Administrative Service officer can also be appointed as Deputy Governor of RBI and later as the Governor of RBI.

  • The RBI also acted as Burma’s (now Myanmar) central bank until April 1947 (except during the years of Japanese occupation (1942–45)), even though Burma seceded from the Indian Union in 1937.

  • Post the Partition of India in 1947, the bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though set up as a shareholders’ bank, the RBI has been fully owned by the Government of India since its nationalization in 1949.

The Reserve bank of India is owned by the Indian Government.

  • The Central Board has the essential power for the oversight of the RBI. It can assign certain functions through committees and sub-committees. The Present Governor of the Central Board of RBI as on March 1, 2019 Shaktikanta Das as 25th RBI Governor.

  • The committee usually meets on every Wednesday of a week, and the main program on current operations, including a weekly statement of accounts related to the issue and banking departments.

  • The board of RBI controls and handles commercial banks as well as Non-Banking Finance Companies, development finance institutions, urban cooperative banks and initial dealers.

  • The board manages the payment systems.

  • The Central Board includes subcommittee that can focus on certain areas of operations.
  • The Local board members related to four regions such as Chennai, Kolkata, Mumbai and New Delhi. These are appointed by the Government for 4 years and provide regional and economic interests.

  • The RBI officers and staff need training centers which include colleges offering training courses.. The Reserve bank staff collage located at Chennai for train RBI officers and to The collage of agriculture banking located at Pune for train staff of commercial, cooperative banks and Regional Rural banks. The zonal training centers located at regional offices to train non-executive staff.

  • RBI has introduced institutions to research on banking concerns, economic growth, and banking technology. The famous institutions are National Institute of Bank Management at Pune, Indira Gandhi Institute of Development Research at Mumbai and Institute for Development and Research in Banking Technology at Hyderabad.

  • The RBI includes National Housing Board(NHB), Deposit Insurance and Credit Guarantee Corporation (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), The Reserve Bank of Agriculture and Rural Development (NABARD).

S.No Governors Tenure
1 Sir Osborne Smith 01.04.1935 to 30.06.1937
2 Sir James Taylor 01.07.1937 to 17.02.1943
3 Sir CD Deshmukh 11.08.1943 to 30.06.1949
4 Sir Benegal Rama Rau 01.07.1949 to 14.01.1957
5 KG Ambegaonkar 14.01.1957 to 28.02.1957
6 HVR Lengar 01.03.1957 to 28.02.1957
7 PC Bhattacharya 01.03.1962 to 30.06.1967
8 LK Jha 01.07.1967 to 03.05.1970
9 BN Adarkhar 04.05.1970 to 05.06.1970
10 S Jagannathan 16.06.1970 to 19.05.1975
11 NC Sen Gupta 20.05.1975 to 19.08.1975
12 KR Puri 20.08.1975 to 02.05.1977
13 M.Narsimham 02.05.1977 to 30.11.1977
14 Dr IG Patel 01.12.1977 to 15.09.1982
15 Dr.Manoharan Singh 16.09.1982 to 14.01.1985
16 A Ghosh 15.01.1985 to 04.02.1985
17 RN Malhotra 04.02.1985 to 22.12.1990
18 S Venkatramanan 22.12.1990 to 21.12.1992
19 Dr C Rangarajan 22.12.1992 to 21.11.1997
20 Dr Bimal Rajan 22.11.1997 to 06.09.2003
21 Dr YV Reddy 06.09.2003 to 05.09.2008
22 Dr D Subbarao 05.09.2008 to 04.09.2013
23 Dr Raghuram Rajan 04.09.2013 till date
24 Urjit Patel 04.09.2016 till 10.12.2018
25 Shaktikanta Das December 2018 till date

The primary functions of RBI are as follows:

1. Issuer of Currency Notes : RBI is responsible for issuing currency notes. It brings uniformity in notes issue thus making it easier to control and regulate credit in accordance with the requirements in the economy. RBI always strives to restore the faith of the public in the paper currency.

  • The Reserve Bank of India has the right to issue currency notes except one rupee notes which are issued by the Ministry of Finance.

  • The Reserve Bank of India brings uniformity in notes issue.

  • The Reserve Bank of India assists in effective state supervision.

  • The Reserve Bank of India makes it easy to control and regulate with requirements in the economy

  • 2. Banker to the Government : RBI, the banker to the government manages the banking needs of the government. It maintains and operates the government’s deposit accounts. It collects receipts of funds and makes payments on behalf of the government. It represents the Government of India as the member of the IMF and the World Bank.

    3. Custodian of Cash Reserves of Commercial Banks : The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash reserves of the commercial banks. RBI is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country’s banking and financial system functions. The primary objectives of RBI are to maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services to the public. Reserve Bank of India decides policy rates and reserve ratios.

    4. Custodian of country’s Foreign Currency Reserves : RBI has the custody of the country’s reserves of international currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments position. The custody of the India’s reserves of international currency, enables the Reserve Bank to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

    5. Lender of Last Resort : RBI is the final resort for the commercial banks in times of emergency to tide over financial difficulties. Though RBI is always available to handle the emergencies and financial hurdles, it charges a higher rate of interest.

    6. Controller of Credit : Credit money forms the most important part of supply of money, and since the supply of money has important implications for economic stability, the importance of control of credit is vital for the financial stability of the nation. Credit is controlled by the Reserve Bank of India in accordance with the economic priorities of the government.

    7. Central Clearance and Accounts Settlement : Commercial banks have their surplus cash reserves deposited in the Reserve Bank. Thus, it is easier to deal with each other and settle the claim of each on the other through book keeping entries in the books of the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank.

    8. Detection of Fake Currency : Reserve Bank is expected to unearth black money held in cash. As the new currency notes (demonetization) have added security features, they would help in curbing the menace of fake currency.

    RBI has been performing as a sponsor of the financial system.

    • The Reserve Bank of India has an agriculture credit Department to conduct research about the various problems of agricultural credit.

    • RBI has been instrumental in certain financial institutions such as ICICI, IDBI, SIDBI and Exim bank etc.

    • RBI can provide significant financial service for the Industrial development of the country.

    • RBI encourages the facilities to contribute finance for foreign trade, especially exports from India.

    • RBI coordinates efforts for the development of bill market. This is applicable for the scheduled banks from 1954. Export bills were included in this plan since 1958.

    • In 1970 RBI started a new bill market program to make possible to make the monetary policy.

    • RBI can perform general banking functions.

    • RBI Accepts deposits of the Central Governments, State Governments without Interest.

    • RBI can buy and sell the bills and promissory notes. These bills should not be exceeded within 90 days duration.

    • RBI as a central bank gives loans to the central and state governments and these loans should not be exceeded within 90 days duration. These loans can give without securities, credit notes and gold or silver of the banks.

    • RBI also buys and sells agricultural bills and these should not exceed 15 months.

    • RBI deals with foreign securities which incapable within 10 years from the date of purchase.

    The benefit of the issue department to consist of not less than Rs.40 crore.The remaining can service rupee coins. This is called a proportional reserve system.

    • This change occurred in 1985 and the RBI is required to maintain a gold and foreign exchange reserve of Rs.200 crore out of which at least Rs.115 crore should be in gold. The maintenance of this is called Minimum reserve system.

    • The Reserve Bank of India can perform the function like control of credit. This defined as the expansion of credit to acquire the stable growth. The Control credit follows the methods which adopted by the Reserve Bank.

    • The Reserve Bank of India charges the rate of interest from scheduled banks on the loans is called bank rate.

    • In October 1960 the RBI started various rates of interest program. This program explains that if the bank borrows from the RBI, then it has to pay higher interest rate than the other bank rate.

    • The Bank can control the flow of credits through the sale and purchase of government securities in the market.

    • The Cash Reserve ratio is the amount of funds that the bank has to carry with RBI.

    • Statutory Liquidity Ratio: It is the Ratio of the liquid asset, which all commercial banks have to keep in the form of cash.

    • Liquidity adjustment is the primary instrument of the Reserve Bank of India for modulating liquidity and transmitting interest rate.

    Every Nation has a Central Bank which is vital for the economy and financial stability of the nation. The primary objectives of the central bank of a country is to control and monitor the banking and financial system of the country. The Indian Central bank is the Reserve Bank of India (RBI).

    RBI is the Regulator of Financial System. The primary and essential objectives of RBI:
    • Controlling money supply in the system, monitoring different key indicators.
    • Maintaining people’s confidence in banking and financial system.

    RBI is the Controller and Supervisor of Banking systems. The banks are as follows:
    • Public Sector Banks
    • Private Sector Banks
    • Foreign Banks
    • Co-operative Banks, or
    • Regional Rural Banks

    shape Questions

    1. The Central Office of the Reserve Bank of India is located in_____

      A. Mumbai
      B. Hyderabad
      C. New Delhi
      D. None of These
      E. None of these

    Answer: Option A

    2. The Central Office of the Reserve Bank was permanently moved to Mumbai in ____.

      A. 1934
      B. 1937
      C. 1935
      D. 1936
      E. None of these

    Answer: Option B

    3. When RBI came into existence on 1st July 1935, it was ___.

      A. People
      B. Governmental Owned
      C. Privately + Governmental Owned
      D. Privately Owned
      E. None of these

    Answer: Option C

    4. Reserve Bank is fully owned by the Government of India since nationalization in ____.

      A. 1950
      B. 1949
      C. 1965
      D. 1966
      E. None of these

    Answer: Option B

    5. The Governor of RBI as on March 1, 2019 is ______.

      A. Arundhati Bhattacharya
      B. Shaktikanta Das
      C. U.K.Sinha
      D. Prathibha patel
      E. None of these

    Answer: Option B