rbi

Kutty Story

Finance is the life blood of all economic activities such as trade, commerce, agriculture and industry.

Banking sector acts as the backbone of modern business world. Bank provides fundamental financial services such as accepting deposits and lending loans.

The Ricks Banks of Sweden, which had sprung from a private bank established in 1656 is the oldest central bank in the world. It acquired the sole right of note issue in 1897.

But the fundamentals of the art of banking have been developed by the Bank of England (1864) as the first bank of issues.

A large number of central banks were established between 1921 and 1954 in compliance with the resolution passed by the International Finance Conference held at Brussels in 1920.

The South African Reserve Bank (1921), the Central Bank of China (1928), The Reserve Bank of New Zealand (1934),

The Reserve Bank of India (1935),

the Central Bank of Ceylon (1950) and the Bank of Israel (1954) were established.

History Of Indian BANKS

• The first bank of India was Bank of Hindustan (1770) {Under British Rule}
• The Banking system in India was controlled and dominated by the Presidency Banks.
  • Bank of Bengal (1809)
  • Bank of Bombay (1840)
  • Bank of Madras (1843)
• All merged in 1921 in the name of IMPERIAL BANK OF INDIA and it’s change again in 1955 as SBI

Central Bank

A central bank, reserve bank, or monetary authority is an institution that manages a state’s currency, money supply, and interest rates. Central banks also usually oversee the commercial banking system of their respective countries.

• The Reserve Bank of India (RBI) is India’s central banking institution, which controls the monetary policy of the Indian rupee.
• It commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934.
• Osborne Smith was the first Governor of RBI.
• Headquarter moved from Calcutta to Mumbai in 1937.
• RBI was established with a share capital of ₹5 crores divided into shares of ₹100 each fully paid up.
• The entire share capital was owned by private shareholders.
• Reserve Bank (Transfer to Public Ownership) Act, 1948 and took over RBI after paying appropriate compensation to the private shareholders.
• The RBI was the central bank of Burma until 1947, and the central bank of Pakistan until June 1948.
• The RBI was nationalised on 1 January 1949.

Organisational Structure of RBI

• The head office of the RBI is situated in Mumbai.
• This central office has 33 departments in 2017.
• It has four zonal offices in Mumbai, Delhi, Calcutta and Chennai functioning under local boards with deputy governors as their heads.
• It also has 19 regional offices and 11 sub-offices (2017).
• The RBI is governed by a Central Board of Directors.
• The 21 member board is appointed by the Government of India.
• It consists of
  • 1 governor and 4 deputy governors appointed for a period of four years
  • 10 directors from various fields
  • 2 Government officials
  • 4 directors - one each from local boards.

Functions

The functions of the RBI can be grouped under three heads.

1. Leadership and Supervisory Functions.
2. Traditional Functions.
3. Promotional Functions.

I. Leadership and Supervisory Functions

India’s Representative in World Financial Institutions

• In order to maintain consistency and harmony with international banking standards the RBI is associated with Basel Committee on Banking Supervision (BCBS, Switzerland) since 1997.
• RBI represents Government of India in International Bank for Reconstruction and Development (IBRD i.e. [[World Bank]]) and International Monetary Fund ([[IMF]]) in which India is a member since December 27, 1945.

Regulator and Supervisor of Indian Banking System

• The broad guidelines for all banking operations in the country are formulated by the RBI.
• The RBI has power to issue licenses, control and supervise commercial banks under the RBI Act, 1934 and the Banking Regulation Act, 1949.
• It conducts inspection of the commercial banks and calls for returns and other necessary information from them.

Monetary Authority:

• The RBI formulates, implements and monitors the monetary policy of the country in order to maintain price stability, controlling inflationary trends and economic growth.
• It provides advices to the Government concerning agricultural finance, resource mobilization for implementing plans and legislation affecting banking and credit and international finance.
• It controls the supply of money in the economy to stabilize exchange rate, maintain healthy balance of payment, attain financial stability, control inflation, strengthen banking system.

Closely Monitoring Economic Parameters

• Employment level
• Price levels
• Production levels
• Trade cycles
• Foreign investment flows
• Balance of payments
• Financial markets
• The Board of Financial Supervision (a committee of the Central Board of Directors) of the RBI meets at least once in a month (at times every day) to closely monitor all these current developments in the country.

Promptly Responding to New Challenges

• Whenever challenges arose before Indian Banking System, RBI promptly attend them by issuing Master Circulars and by organising committees to analyse, review and strengthen Indian Banking.
• A wealth of information can be found in every Master Circular or committee report.
• Example: [[Gopalakrishnan Committee]] on “Information security, Electronic Banking”, April, 2010

II. Traditional Functions

Banker and Financial Advisor to the Government

• The RBI accepts money into the Central and State Governments’ accounts and make payments on their behalf.
• It manages Government debt and is responsible for issue of new loans.
• It advises the government on the quantum, timing and terms of new loans.
• It provides ‘ways and means advances’ to the Governments to tide over temporary financial needs.
• It takes up the responsibility of investment of the surplus Government funds.
• Inter Government and inter departmental account adjustments are carried out by the RBI.

Monopoly of Note Issue

• The RBI is the sole authority for the printing and issue of all currency notes in India except one rupee note.
• It is the duty of the RBI to ensure that sufficient number of good quality currency notes is available to the public.
• It exchanges currency and coins not fit for circulation.
• One rupee note and all coins are issued by the Ministry of Finance.
• Currency notes are printed at Nasik, Dewas, Salboni, Mysore and Hoshangabad. (Currency notes are never printed outside India).

Banker’s Bank

• The relationship between RBI and other banks in the country is just like the relationship of a commercial bank with its customers.
• The RBI maintains the current accounts of all commercial banks in the country.
• All scheduled banks should deposit a percentage of cash reserve with RBI.
• All banks can receive loans from RBI by rediscounting of bills and against approved securities.

Controller of Credit and Liquidity

• Controlling the credit money in circulation and the interest rate in the country is a major function of RBI.
• For this purpose, the RBI uses quantitative and qualitative methods of credit control.
• Ensuring the availability of sufficient cash and credit (liquidity) for business transactions and investment purposes in the economy is the responsibility of RBI.

A. Quantitative Methods of Credit Control

• The methods which influence the total volume of credit in Indian economy are called quantitative or general methods.
• An increase in the first three measures will reduce the volume of money in circulation in India and vice versa.

1. Bank Rate Policy: Bank rate refers to the rate at which the RBI rediscounts the bills given by the Scheduled banks.

• Repo rate is the repurchase rate at which the RBI repurchases the Government securities (other securities also) from the Scheduled banks and gives loans.
• Reverse repo rate is the rate at which the RBI borrows money from Commercial banks by giving back those Government securities.

2. Cash Reserve Ratio (CRR): It is the ratio of Cash reserves with the RBI kept by Scheduled banks in proportion to the total Time and Demand Liabilities with them.
3. Statutory Liquidity Ratio (SLR): It is the ratio of money and money equivalents kept within the bank in proportion to the total Time and Demand Liabilities with them.
4. Open Market Operations: The RBI directly buys or sells the securities and bills in the money market either to decrease or to increase the total volume of money.

B. Qualitative Credit Control Measures

• These methods influence the volume of money in selected or particular sectors of the economy. i. Rationing of credit: Maximum limit is fixed for lending to certain sectors or specific purposes.

5. The issuer of currency: It is the sole authority to issue currency. It also takes action to control the circulation of fake currency.
6. The issuer of Banking License: As per Sec 22 of Banking Regulation Act, every bank has to obtain a banking license from RBI to conduct banking business in India.
7. Banker to the Government: It acts as banker both to the central and the state governments. It provides short term credit. It advises the government on banking and financial subjects.
8. Banker’s Bank: RBI is the bank of all banks in India as it provides loan to banks, accept the deposit of banks, and rediscount the bills of banks.
9. Lender of last resort: The banks can borrow from the RBI by keeping eligible securities as collateral at the time of need or crisis, when there is no other source.
10. Act as clearing house: For settlement of banking transactions, RBI manages clearing houses. It facilitates the exchange of instruments and processing of payment instructions.
11. Custodian of foreign exchange reserves: It acts as a custodian of FOREX. It administers and enforces the provision of Foreign Exchange Management Act (FEMA), 1999. RBI buys and sells foreign currency to maintain the exchange rate of Indian rupee v/s foreign currencies.
12. Regulator of Economy: It controls the money supply in the system, monitors different key indicators like GDP, Inflation, etc.
13. Managing Government securities: RBI administers investments in institutions when they invest specified minimum proportions of their total assets/liabilities in government securities.
14. Regulator and Supervisor of Payment and Settlement Systems: The Payment and Settlement Systems Act of 2007 (PSS Act) gives RBI oversight authority for the payment and settlement systems in the country.
15. Developmental Role: This role includes the development of the quality banking system in India and ensuring that credit is available to the productive sectors of the economy.
16. Publisher of monetary data and other data: RBI maintains and provides all essential banking and other economic data, formulating and critically evaluating the economic policies in India. RBI collects, collates and publishes data regularly.
17. Exchange manager and controller: RBI represents India as a member of the International Monetary Fund [IMF]. Most of the commercial banks are authorized dealers of RBI.
18. Banking Ombudsman Scheme: RBI introduced the Banking Ombudsman Scheme in 1995. Under this scheme, the complainants can file their complaints in any form, including online and can also appeal to the Ombudsman against the awards and the other decisions of the Banks.
19. Banking Codes and Standards Board of India: To measure the performance of banks against Codes and standards based on established global practices, the RBI has set up the Banking Codes and Standards Board of India (BCSBI).

Other Bank oriented Info

Before Independence commercial banks were in the private sector. These commercial banks failed in helping the Government to achieve social objectives of planning. Therefore, the government decided to nationalize 14 major commercial banks on 19 July 1969. In 1980, again the government took over another 6 commercial banks.

• 1969 : 14 banks with deposits above ₹. 50 crores were Nationalized.
• 1980 : 6 banks with deposits above ₹. 200 crores were Nationalized.

After New Economic Policy 1991, the Indian banking industry has been facing the new horizons of competitions, efficiency and productivity.