Unit - 3

                                                                      RESERVE BANK OF INDIA

The RBI is the Central Bank of the country. It has been established as a body corporate under the Reserve Bank of India Act. which came into effect from 1st April 1935. The Reserve Bank was started as share holder bank with a paid-up capital of Rs. 5 crores. On establishment it took over the function of management of currency from the Government of India and power of credit control from the then Imperial Bank of India.

The Reserve Bank of India carries on its operations according to the provisions of the Reserve Bank of India Act, 1934. The act has been amended from time to time.

Role of Reserve Bank of India 

1- To maintain monetary stability so that the business and economic life can deliver welfare gains of a properly functioning mixed economy,

2- To maintain financial stability and ensure sound financial institutions so that monetary stability can be safely pursued and economic units can conduct their business with confidence.

3- To maintain stable payments system so that financial transactions can be safely and efficiently executed. 

4- To promote the development of financial infrastructure of markets and systems, and to enable it to operate efficiently, i.e.., to play a leading role in developing a sound financial system so that it can discharge its regulatory function efficiently.

5- To ensure that credit allocation by the financial systems broadly reflects the national economics priorities and societal concerns.

6- To regulate the overall volume of money and credit in the economy with a view to ensure a reasonable degree of price stability.

Functions of the Reserve Bank of India

The reserve bank of India is the Central Bank of India  and therefore, it performs all those functions which a central bank is required to perform in a country. The function of central banks are broadly the same all over the world, but the scope and content of policy objectives very from country to country and from period to period depending upon a number of factors like development and the structure of the economy, goals to which the government is committed and the general economic situation.

The functions performed by the Reserve Bank can be classified into three categories:-

A) Central banking functions.

B) Supervisory functions.

C) Promotional function functions.

 

                                                                                      A) Central Banking Functions

1. Issue of Banking Notes: The Reserve Bank has the sole right to issue bank notes of all denominates (except one rupee notes which are issued only by the Government of India). This has been done to give the Reserve Bank the complete and control over the currency and the credit system of the country. The Bank has a separate “Issue Department” for this purpose. The Bank follows the “Minimum Reserve System” for issue of bank notes

The Reserve Bank has made adequate arrangements for holding and distributing of currency notes and coins. The issue Department of the Reserve Bank has its office in seventeen important cities of the country. Moreover it is maintaining currency chests all over the country.

2. Banker of government: The Reserve Bank of India act as the banker to Government. It accepts money for the account of Union and State Government in India, makes payment on their behalf, carries out their exchange, remittance and other banking operations and manages the public debt. It makes ways and means advances to the government for 90 days. It advises the government on all monetary and banking matters.

3. Bankers’ Bank: The Reserve Bank of India acts as the banker’s bank. The scheduled banks are required to maintain with the Reserve Bank as cash balance a certain percentage of their time and demand liabilities. It act as a lender of the last resort to them. The scheduled banks can borrow money from the Reserve Bank on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting their bills of exchange.

4. Custodian of Foreign Exchange Reserves: The Reserve Bank has been entrusted with the responsibility of maintaining the external value of the rupee and for this purpose the bank holds most of the foreign exchange reserves. Since India  is a member of International Monetary fund, the Reserve Bank has to maintain fixed exchange rates with all other member countries of the Fund. It, therefore, sells and buys foreign exchange to/from authorized persons at rates fixed by the Government.

5. Controller of Credit: The Reserve Bank also functions as the controller of credit. It can control by various methods the creation of credit by commercial banks. Time to time Reserve Bank of India declare monetary policy to control and direct credit system. RBI revise CRR, PLR for this purpose.

 

                                                                                      B) Supervisory Functions 

In order to promote and develop a sound and efficient system of banking in India, the Reserve Bank has been given several supervisory powers over different banking institutions. These powers relate to licensing and establishment, branch expansion, liquidity of assets, management, working, amalgamation, reconstruction and co-operative banks. The Reserve Bank carries out periodical inspections of these banks and calls for such information, which it considers necessary for effective performance of its functions.

Various supervisory functions are-

1. Every bank wishing to commence banking business in India is required to obtain license from the RBI.

2. To ensure that banks are organized and conduct their business on sound financial footing of the banking. Regulation act has prescribed the minimum paid up capital, cash reserves and other liquid assets depending upon the geographical coverage of bank’s operations.

3. Every bank in country is require to obtain permission from the RBI for its branch expansion programme.

 

                                                                                            C) Promotional Functions

The Reserve Bank of India as a central bank of the country has assumed greater responsibilities as development and promotional agency as composed to a merely monetary authority.

It not only controls the credit and currency in the economy or maintains internal/external value of the rupee for ensuring price stability but also acts as a promoter of financial institutions, required for meting specific financial requirements of the developing economy.

At the time of establishment of the Reserve Bank of India in the year 1935 the country lacked a well-developed money market and a well-developed commercial banking system. Moreover, it was industrially a backward country.

The promotional steps taken by the RBI in this direction can be summarized as follows---

(i) It established Bill market Scheme in 1952.

(ii) It has promoted Regional Rural banks (RRBs) with the cooperation of the commercial banks to extend banking facilities to the rural areas.

(iii) It has helped in establishment of Export Import Bank of India (EXIM) to provide finance to exporters. It also helps the commercial banks in opening their branches in foreign countries for helping in the foreign trade of the country.

(iv) The RBI also encourages and promotes research in areas of banking.

                                                                                  COMMERCIAL BANKS

 Meaning of Commercial Banks

Since a modern bank performs a variety of function, it is difficult to give an accurate definition of it. It is on account of this reason that different economists have different definitions of bank.

Indian Companies Act, 1949, has defined the bank, “The accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque, draft,order or otherwise.’’

The commercial banks generally extend short-term loans to businessmen traders. Since their deposits are for a short period only, they cannot land money for a long period. Ordinarily, these banks extend loans for a period between 3 to 6 month. These banks are not in a position to grant long- term loans to industries because their deposits are only for a short period.

Structure of Banking System in India

The present banking system in India was evolved to meet the financial needs of trade and industry and also to satisfy the institution of the country. The constituents of the present banking system in India are of varying origin and sizes. At the apex is the Reserve Bank of India, the Central Bank of the country. It is a bankers’ bank and lender of the last resort. Besides, it acts as the fiscal agent of the government, manages the currency, and controls the credit in the national interest.

The Reserve Bank of India is followed by the State Bank of India which was created in July 1955 by nationalizing the Imperial Bank of India: the State Bank of India’s subsidiaries; 20 major nationalized scheduled banks; other joint stock banks that came into existence from the 1960’s and onward; foreign exchange banks formed in India in the later half of the 19th century; cooperative banks which had their first existence in 1904 in the garb of the 18th century. Besides, there are indigenous banks and bankers who are centuries old Recently Regional Rural Banks (RRRBs) were formed to assist particularly rural. Thus the banking sector in India comprises the commercial banks, cooperative banks and regional rural banks.

Joint stock banks can be divided into two groups scheduled and non- scheduled banks.

Scheduled Banks 

A scheduled bank is one which is registered in the second schedule of the Reserve Bank of India.

The following conditions must be fulfilled by a bank for inclusion in the schedule;

1- The banker concerned must be in business of banking in India.

2- It is either a company defined in Section 3 of the Indian Companies Act, 1956, or corporation or a company incorporated by or under any law in force in any place outside India or an institution notified by the Central Government in this behalf.

3- It must have paid-up capital and reserves of an aggregate real or exchangeable value of not less than rupees five lakhs.

4- It must satisfy the Reserve Bank of India that its affairs are not conducted in a manner detrimental to the interests of its depositors.

Scheduled banks come under the purview of the various credit control measures of the Reserve Bank of India. They are required to maintain a certain minimum balance in their accounts with the RBI, and do certain things prescribed by law. The scheduled banks are entitled to borrowings and rediscounting facilities from the RBI. These are similar to the member banks of the U.S.A.

Non-Scheduled Banks 

Banks, which are not included in the second schedule of the RBI, are known as non-scheduled banks.

Functions of Commercial Banks

Modern banks perform a large variety of functions and services:

1) Acceptance of Deposits: The bank accepts three types of deposits from the public.

i) Fixed Deposit Account: Money in this account is accepted for a fixed period, say one two or five years. The money so deposited can not be withdrawn before the expiry of the fixed period. The rate of interest on this account is higher than that on other accounts. The longer the period, the higher is the rate of interest. In technical language this type of deposit is known as time or term deposit. It mature at a definite date and entails an interest penalty if it is withdrawn earlier due to some emergency by the depositors.