Central Bank

In 1921, the three Presidency banks were amalgamated to form Imperial Bank of India viz. Bank of Calcutta, Bank of Bengal and Bank of Madras. J.M.Keynes was the first economist who recommended formation of central bank in India as a whole. Accordingly, Hilton Young Commission was recommended for setting up of a central bank known as RBI . Govt had Central Banking Committee in 1931. After submission of the report of Central Banking Committee , RBI Act was passed in 1934. As a result, RBI was set up in 1935 with an initial capital of Rs. 5 crores.

Central Bank
RBI was designed on the lines of Bank of England popularly known as Mother of Central Bank . The Executive Head of RBI is known as Governor and the day to day working of RBI is governed by Board of Directors. RBI performs traditional & non-traditional (promotional) functions. The Traditional functions include: 1. Issue of Currency 2. Agent, Banker & an advisor to the Govt. 3. Banker s Bank 4. Control of Credit 5. Clearing House Function 6. Foreign Exchange Management & Control 7. Source of Monetary & Banking data

Traditional Functions of RBI

1. Issue of Currency:  Currency notes of Rs. 2,5,10,20,50, are issued by the RBI while Re.1 note & coins are issued by the Govt. of India.  Merely, 93% of the currencies are in the form of RBI notes.  Two departments are involved in issue of currency viz. Issue Dept & Bank Dept.  Issue Dept. issues currency notes on basis of order placed by the banking dept.  Bank Dept. places the order by giving securities to the issue dept.  In 1935, RBI was issuing currency notes under the system called Proportional Reserve System which continues till 1956.

Traditional Functions of RBI

1. Issue of Currency:  Under Proportional Reserve System 40% of the total reserves should in Gold coins & Bullions & the remaining 60% in Foreign Exchange Assets/ foreign Securities.  At any time, Gold Securities should not be less than rs. 40 crores.  However, this system was unable to strike the balance between the ratio 40:60 & thus in 1956 it was replaced by the Minimum Reserve system .  Under Minimum Reserve system , Issue Dept. has to maintain minimum assets of Rs. 515 crores of which share of Gold should not be less than Rs. 115 crores & remaining is backed by Foreign Securities.

Traditional Functions of RBI

1. Issue of Currency:  Under Proportional Reserve System 40% of the total reserves should in Gold coins & Bullions & the remaining 60% in Foreign Exchange Assets/ foreign Securities.  At any time, Gold Securities should not be less than Rs. 40 crores.  However, this system was unable to strike the balance between the ratio 40:60 & thus in 1956 it was replaced by the Minimum Reserve system .  Under Minimum Reserve system , Issue Dept. has to maintain minimum assets of Rs. 515 crores of which share of Gold should not be less than Rs. 115 crores & remaining is backed by Foreign Securities.

Traditional Functions of RBI

2. RBI as an Agent, Banker & Advisor to the Govt.:  RBI as a Banker is making the payments for & accept receipt on behalf of the Govt. of India.  As an Agent , RBI provides short-term as well as long-term loans to the Govt.  As an Agent of the Govt, it represents Govt on various International Financial Conferences & International Financial Institutions such as World Bank, IMF & so on.  As an Advisor , it advises Govt on various Banking & Financial matters such as financing the Five Year Plan, raising the resources through various sources & in managing public borrowing or public debt.  It advises the Govt regarding the quantity, timing, terms & conditions of public borrowing  It also co-ordinates borrowing Programmes of Central Govt. & various State Govts.

Traditional Functions of RBI

4. Controller of Credit:  RBI has got the power to control the Credit Creation Capacity of the Commercial banks & thereby it controls the Money Supply in the economy.  To control the credit, RBI deploys quantitative as well as qualitative instruments.  Quantitative instruments are used to control the money supply in the economy as a whole & Qualitative instruments are employed to control the money supply to certain selected sectors/ activities or commodities.  Quantitative instruments consists of Bank Rate, Open Market Operations & Reserve requirements like CRR & SLR.

Traditional Functions of RBI

4. Controller of Credit:  Qualitative instruments, on the other hand, consists of fixing the amount of minimum margin, charging differential interest rates(cross subsidization) & imposing the ceiling on bank loan.  In addition to these instruments, RBI also deploys one more instrument known as Moral Suasion .

Traditional Functions of RBI

3. Banker s Bank:  As a Banker s Bank, RBI acts as a Lender of Last Resort to Commercial Banks i.e. if Commercial Bank is unable to get funds from regular channels then finally it can approach RBI & RBI provides financial accommodation to the commercial banks.  RBI has got extensive powers to control banking system under RBI Act, 1934 & Banking Regulation Act, 1949.  RBI rediscounts eligible securities as well as Commercial Bills for providing finance to the Commercial bank.  RBI also supervises the working of the Commercial banks through periodic & unnoticed inspections.  The banks who do not maintain the standard set forth by the RBI may be denied a Licence or that bank may face Govt. take over or nationalisation or its officers or directors are removed.

Traditional Functions of RBI

5. Clearing House Function:  It means settlement of cheque transactions among the banks.  It is the arrangement made by the RBI to clear or to settle cheque transactions among the banks.  Prior to establishment of RBI, this function was performed by the Imperial Bank of India.  That time there were 4 clearing houses in the country one each at Delhi, Bombay, Madras & Calcutta.  At present, there are more than 200 clearing houses in India of which very few are managed by the RBI & the rest are managed by the State Bank of India.

Traditional Functions of RBI

6. Foreign Exchange Management & Control:  As a manager of Foreign Exchange of a country, RBI acts as a Custodian of the Country s Foreign exchange Reserves.  RBI manages the external value of a Rupee.  It performs Foreign Exchange Control function under the Foreign Exchange Regulation Act (FERA), which was replaced by Foreign Exchange Management Act (FEMA) in 1998.  Under FERA, various controls were imposed on the use of Foreign Exchange.  The Act requires that all Foreign Exchange receipts must be sold to the RBI either directly or through unauthorized dealers (mostly leading Commercial Banks).

Traditional Functions of RBI

6. Foreign Exchange Management & Control:  RBI enjoys the power to determine the exchange rate.  When India became the member of IMF in 1946, RBI was maintaining exchange value of Rupee in terms of US Dollar or Gold as accepted by the IMF.  Since 1975, RBI decided to link the exchange value of the Rupee to a basket of currencies of the countries which are India s major Trading partners.

Traditional Functions of RBI

7. RBI as a Source of Monetary & Banking Data:  RBI is acting as a source of all monetary & banking data which are essential for the formulation of economic policies.  Among other things RBI collects, compares & publishes these data regularly through its weekly statements, periodic publications, RBI Bulleteries, its monthly & annual reports i.e. report on currency & finance etc.  Recently, RBI has been providing Time Series Data through its Annual Publication known as Basic Statistics on Indian Economy .

Promotional Functions of RBI

1. Promotion of Commercial Banks:  Banking Regulation Act 1949 has given vast powers to RBI of supervision & control of Commercial Banks.  RBI has tried to use these powers: i. to strengthen the commercial banking structure in country through a) compulsory liquidation of weak commercial banks b) amalgamation of weak commercial banks into stronger banks c) improvement in operational standard of banks by regular inspection & supervision ii. To extend banking facilities throughout the country particularly in small towns & rural areas.

Promotional Functions of RBI

1. Promotion of Commercial Banks: iii. To extend functional coverage of banks in order to improve the distribution of bank credit to prority sectors.

Promotional Functions of RBI

2. Promotion of Rural Credit or Agricultural Credit:  In mid 1950 s, on the recommendation of All India Rural Credit Survey Committee(1954), the govt had set up SBI & its associated banks by nationalising the then leading Commercial Bank viz. Imperial Bank of India & other State Associated Banks.  This group was made responsible for branch expansion programme in rural areas to provide rural credit as well as mobilise rural savings.

Promotional Functions of RBI

2. Promotion of Rural Credit or Agricultural Credit:
 In 1967, to involve commercial banks actively in socioeconomic development of the country, Govt. brought a Social Control on Commercial Banks.  Under Social Control , Govt defined What is priority sector? i.e. which sectors or activities would be given priority in country s economic development? .  These sectors are Agriculture, Small Scale Industries, Tiny Units, Exports, Marginal Farmers & so on.  Banks were issued the guidelines to provide credit to the priority sector on preferential terms & conditions.  Despite Social Control on Commercial Banks, they were reluctant to provide credit to weaker sections of the society, thus, drastic measure of nationalisation was taken in 1969.

Promotional Functions of RBI

2. Promotion of Rural Credit or Agricultural Credit:  14 leading Commercial Banks were nationalised in 1969 & 6 more Commercial Banks were nationalised in 1980.  To achieve objectives of nationalisation, various measures were taken such as Branch Licensing Policy, Lead Bank Schemes, RRBs & so on.  To provide credit to the agricultural sector, RBI had set up Agricultural Refinance & Development Corporation (ARDC), a wholly owned subsidiary of RBI.  ARDC was providing refinance facilities to Co-operative Credit Organisations, which continued its operations from 1963 to 1982.

Promotional Functions of RBI

2. Promotion of Rural Credit or Agricultural Credit:  In 1982, RBI had set up NABARD to look after entire credit system & also to take over ARDC.  With the setting up of NABARD, RBI s functions relating to agricultural finance as well as Co-operative Banking have been taken over by the NABARD.

Promotional Functions of RBI

3. Promotion of Industrial Finance:
 To provide long-term & medium-term fund & also to develop Indian Capital Market, RBI had set up network of Specialized Financial Institutions such as: a. Industrial Finance Corporation of India (1948) b. Industrial Credit & Investment Corporation of India (1955) c. Industrial Development Bank of India (1964) d. Small Industries Development Bank of India (1989) e. State Financial Corporations (1950 s & 1960 s) f. State Industrial Development Corporations (1960 s & 1970 s) Of these, ICICI is in the private sector & rest of the institutions are in the public sector.

Promotional Functions of RBI

3. Promotion of Industrial Finance:  For effective utilisation of the savings of small people, RBI has set up network of Investment Financial Institutions such as: a. Life Insurance Corporation of India b. General Insurance Corporation of India c. Unit Trust of India

Organisational Structure of RBI

 The affairs of RBI are managed by the Central Board of Directors consisting of 20 members. The Board consist of the following: a) Governor & 4 Deputy Governors appointed by the Central Govt. b) 04 Directors nominated by the Central Govt. one from each of the local board. c) 10 Directors nominated by the Central Govt. d) 1 Govt. official nominated by the Central Govt.  All the powers of the bank are exercised by the Central Board which must meet at least 6 times each year& at least once in 3 months.  RBI has 4 local boards with Headquarters each at Mumbai, Delhi, Chennai & Calcutta.  The Governor is the Chief Authority of the bank & the Chairman of the Board of Directors.

Role of RBI in economic development of India

 It is the apex monetary institution of the highest authority in India. Consequently it plays an important role in strengthening, developing & diversifying the country s economic & financial structure.  It is responsible for the maintenance of economic stability & assisting the growth of the economy.  It is India s eminent public financial institution given the responsibility for controlling the country s monetary policy.  It acts as an advisor to the govt. in its economic & financial policies & it also represents the country in the international economic forums.  It also acts as a friend, philosopher & guide to the commercial banks.

Role of RBI in economic development of India

 It is responsible for the development of an adequate & sound banking system in the country & for the growth of the organised money & capital markets.  India being a developing country, the RBI has to keep inflationary trends under control & to see that main priority sectors like agriculture, exports & small scale industry get credit at cheaper rates.  It has also to protect the market for govt. securities & channelize credit in desired directions.