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The
Reserve Bank of India |
| The Reserve Bank of India was set up in April
1935 with a share capital of Rs. 5 crores,
divided into shares of Rs. 100 each fully
paid up. The entire share capital was
in the beginning, owned by private shareholders.
The Government of India held shares of
nominal value of Rs. 2,20,000. But in
view of the public nature of the Bank's
functions, the Reserve Bank of India,
Act, 1934 provided for the appointment
by the Central Government of the Governor
and two Deputy Governors (who were also
directors of the Central Board). The Act
also contained provisions governing the
holding of the shares and rate of dividend
to be paid to shareholders. The Reserve
Bank was nationalised in 1949. The general
superintendence and direction of the Bank
is entrusted to Central Board of Directors
of 20 members, consisting of the Governor
and four Deputy Governors, one Government
official from the Ministry 0 Finance,
ten Directors nominated by the Government
of India to give representation to important
elements in the economic life of the country,
and four Directors nominated by the Central
Government to represent the four local
Boards with headquarters at Bombay, Calcutta,
Madras and New Delhi. Local Boards consist
of five members each appointed by the
Central Government for a term of four
years to represent territorial and economic
interests and the interests of co-operative
and indigenous banks. |
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| FUNCTIONS OF THE RESERVE BANK OF INDIA |
| By the Reserve Bank of India Act of 1934, all
the important functions of a central bank
have been entrusted to the Reserve Bank
of India. |
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i) |
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. |
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| ii) |
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. |
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| iii) |
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. |
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| iv) |
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. |
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| v) |
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. |
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| 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. |
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| 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. |
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| CLASSIFICATION OF RBI'S 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. |
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RESERVE BANK OF INDIA
Central Office,
Shaheed Bhagat Singh Road,
Mumbai - 400 001.
website (http://www.rbi.org.in/) |
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