A PROJECT REPORT ON

“POWER OF RBI ON BANKING COMPANIES: A

BRIEF STUDY”

SUBMITTED TO

DR. Y. PAPA RAO

(FACULTY – BANKING LAW)

SUBMITTED BY

RAHUL SHARMA

SEMESTER – IX,

ROLL NO: – 125

B.A. LL.B. (HONS)

Hidayatullah National Law University Raipur (C.G)

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 Acknowledgements

This project has been prepared in consideration within the available time and resources. On
completion of this project satisfactorily and successfully land new in the midst of elation at this
movement. On the culmination of finishing my project, I am in dept to all those who helped
me continuing my task, up till end especially to my lecturers who were the sources of constant
inspiration and encouragement for the completion of this project. I owe a deep sense of
gratitude and in debt to our lecturers for giving us opportunity to write this and help us and
guide us with throughout this project. To make subject clearer suitable details have been given.
Errors do creep of every care has been taken as it is well known fact that it is impossible to
escape the devil of errors. Words fail to express my deep sense of glee to my honourable
teacher, DR. Y. PAPA RAO who enlightened me with her guidance on this topic. I would like
to thank her for guiding me in doing all sorts of researches, suggestions and having discussions
regarding my project topic by devoting her precious time. My heartiest thanks also go to
H.N.L.U for providing Library, Computer and Internet facilities. And lastly I thank my friends,
seniors and all those around me who have helped me in the completion of this project in
collecting and locating all the required source of materials. It is my great pleasure to
acknowledgement my deep sense of gratitude to our teachers for their valuable guidance and
thanks to all my friends for their valuable contribution and help in completion of the project.

Submitted by
Rahul Sharma
Roll no. 125
Section- B
Semester- IX
BA LLB (Hons)

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 TA BLE OF CONTENTS:-

I. Introduction……………………………………………………………….…....4

II. Objectives…………………………………………………………………….....5

III. Research Methodology……………….…...……..………………………….....5

IV. History of the RBI ……………………..…………..……….............................6

V. Objective of the RBI….………………………………......................................9

VI. Functions of the RBI…………………..…………………………...……….....10

VII. Supervisory Functions of the RBI ………………….…………………...…...15

VIII. Promotional Role of the RBI ……………………………………………..….17

IX. Conclusion…………………………………………………...………………...20

X. Refernces……………………………………………………………...……21

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 INTRODUCTION

The Reserve Bank of India is India's Central Banking Institution, which controls the Monetary
Policy of the Indian Rupee. On 1 April 1935 during the British Rule in accordance with the
provisions of the Reserve Bank of India Act, 1934.1 The original share capital was divided into
shares of 100 each fully paid, which were initially owned entirely by private shareholders. 2
Following India's independence on 15 - August - 1947, the RBI was nationalised in the year of
1949.

The RBI plays an important part in the Development Strategy of the Government of India. It is
a member bank of the Asian Clearing Union. The general superintendence and direction of the
RBI is entrusted with the 20-member Central Board of Directors: the Governor, 4 Deputy
Governors, 1 Finance Ministry representatives, 10 government-nominated directors to
represent important elements from 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, and the interests of co-operative and
indigenous banks.

The bank is also active in promoting financial inclusion policy and is a leading member of the
Alliance for Financial Inclusion (AFI).

1
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.pdf
2
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf

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 OBJECTIVES
• To know about the Historical perspective of RBI;
• To know about the Objectives of RBI;
• To know about the Functions of RBI;
• To know about the Promotional Role of RBI;

RESEARCH METHODOLOGY
This research paper is descriptive and analytical – based on secondary sources have been used
for the purposes of this research paper.

Books and other references as guided by Faculty of economics have been primarily helpful in
giving this project a firm structure. Websites, dictionaries and articles have also been referred.

Footnotes have been provided wherever needed to acknowledge the source

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 HISTORY
The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles after
the First World War. 3RBI was conceptualized as per the guidelines, working style and outlook
presented by Dr B. R. Ambedkar as written in his book “The Problem of the Rupee – Its origin
and its solution.” in front of the Hilton Young Commission. The bank was set up based on the
recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known
as the Hilton–Young Commission4. The original choice for the seal of RBI was The East India
Company Double Mohur, with the sketch of the Lion and Palm Tree. However it was decided
to replace the lion with the tiger, the national animal of India. The Preamble of the RBI
describes its basic functions to regulate the issue of bank notes, keep reserves to secure
monetary stability in India, and generally to operate the currency and credit system in the best
interests of the country. The Central Office of the RBI was established in Calcutta (now
Kolkata), but was moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's
central bank, except during the years of the Japanese occupation of Burma (1942–45), until
April 1947, even though Burma seceded from the Indian Union in 1937. After 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 1949.5

In the 1950s the Indian government, under its first Prime Minister Jawaharlal Nehru, developed
a centrally planned economic policy that focused on the agricultural sector. The administration
nationalized commercial banks 6and established, based on the Banking Companies Act of 1949
(later called the Banking Regulation Act), a central bank regulation as part of the RBI.
Furthermore, the central bank was ordered to support the economic plan with loans.7

As a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance
system. It should restore the trust in the national bank system and was initialized on 7 December
1961. The Indian government found funds to promote the economy and used the slogan

3
Cecil Kisch: Review "The Monetary Policy of Reserve Bank of India" , The Economic Journal. Vol. 59, No. 235
(Sep., 1949), PP. 436–438, p. 436.
4
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBI290410BC.pdf
5
http://www.rbi.org.in/scripts/briefhistory.aspx
6
Beth Anne Wilson und Geoffrey N. Keim: India and the Global Economy in Business Economics, January 2006,
S.29.
7
Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of India’s Balance Sheet:
Analytics and Dynamics of Evolution, November 2004, S.. 16.

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"Developing Banking". The government of India restructured the national bank market and
nationalized a lot of institutes. As a result, the RBI had to play the central part of control and
support of this public banking sector.

In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks. Upon
Gandhi's return to power in 1980, a further six banks were nationalized8. The regulation of the
economy and especially the financial sector was reinforced by the Government of India in the
1970s and 1980s9. The central bank became the central player and increased its policies for a
lot of tasks like interests, reserve ratio and visible deposits.10 These measures aimed at better
economic development and had a huge effect on the company policy of the institutes. The
banks lent money in selected sectors, like agri-business and small trade companies11.

The branch was forced to establish two new offices in the country for every newly established
office in a town. 12The oil crises in 1973 resulted in increasing inflation, and the RBI restricted
monetary policy to reduce the effects.13

A lot of committees analysed the Indian economy between 1985 and 1991. Their results had
an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi
Institute of Development Research and the Security & Exchange Board of India investigated
the national economy as a whole, and the security and exchange board proposed better methods
for more effective markets and the protection of investor interests. The Indian financial market
14
was a leading example for so-called "financial repression" (Mackinnon and Shaw). The
Discount and Finance House of India began its operations on the monetary market in April
1988; the National Housing Bank, founded in July 1988, was forced to invest in the property
market and a new financial law improved the versatility of direct deposit by more security
measures and liberalisation.15

8
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBI290410BC.pdf
9
Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of Business Ethics, Volume 37,
Number 3 / May, 2002, p. 253.
10
Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in
Int Rev Econ (2009) 56:47–84, p. 47-48.
11
Panicos O. Demetriades, Kul B. Luintel: Financial Development, Economic Growth and Banking Sector
Controls: Evidence from India. in The Economic Journal. Vol. 106, No. 435 (March 1996), pp. 359–374, p. 360.
12
http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/69367.pdf
13
Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of India’s Balance Sheet:
Analytics and Dynamics of Evolution, November 2004, S. 40.
14
Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in
Int Rev Econ (2009) 56:47–84, p. 48.
15
http://www.rbi.org.in/scripts/chro_1985.aspx

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 16
The national economy came down in July 1991 and the Indian rupee was devalued. The
currency lost 18% relative to the US dollar, and the Narsimham Committee advised
restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory
liquidity ratio. New guidelines were published in 1993 to establish a private banking sector.
This turning point should reinforce the market and was often called neo-liberal.17 The central
bank deregulated bank interests and some sectors of the financial market like the trust and
property markets.18 This first phase was a success and the central government forced a diversity
liberalisation to diversify owner structures in 1998.19

The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed
nationalized banks in July to interact with the capital market to reinforce their capital base. The
central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Private
Limited—in February 1995 to produce banknotes.20

The Foreign Exchange Management Act from 1999 came into force in June 2000. It should
21
improve the item in 2004–2005 (National Electronic Fund Transfer). The Security Printing
& Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and
produces banknotes and coins.22

The national economy's growth rate came down to 5.8% in the last quarter of 2008–2009 23and
the central bank promotes the economic development24.

16
Amal Kanti Ray: India’s Social Development in a Decade of Reforms: 1990–91/1999–2000 in Social Indicators
Research, Volume 87, Number 3 / July, 2008, p. 410.
17
Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of Business Ethics, Volume 37,
Number 3 / May, 2002, p. 257.
18
Raghbendra Jha, Ibotombi S. Longjam: Structure of financial savings during Indian economic reforms in
Empirical Economics (2006) 31:861–869, p.862.
19
Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge with banking reforms? in
Int Rev Econ (2009) 56:47–84, p. 49
20
http://www.rbi.org.in/scripts/chro_1991.aspx
21
http://rbidocs.rbi.org.in/rdocs/opportunities/history.html
22
http://www.spmcil.com/aboutus.htm
23
http://rbi.org.in/scripts/NotificationUser.aspx?Id=5326&Mode=0
24
http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/MMDSQ261009.pdf

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 Objectives of the Reserve Bank of India (RBI)
The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve
Bank as: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage.”

Prior to the establishment of the Reserve Bank, the Indian financial system was totally
inadequate on account of the inherent weakness of the dual control of currency by the Central
Government and of credit by the Imperial Bank of India.

The Hilton-Young Commission, therefore, recommended that the dichotomy of functions and
division of responsibility for control of currency and credit and the divergent policies in this
respect must be ended by setting-up of a central bank – called the Reserve Bank of India –
which would regulate the financial policy and develop banking facilities throughout the
country. Hence, the Bank was established with this primary object in view.

Another objective of the Reserve Bank has been to remain free from political influence and be
in successful operation for maintaining financial stability and credit. The fundamental object
of the Reserve Bank of India is to discharge purely central banking functions in the Indian
money market, i.e., to act as the note- issuing authority, bankers’ bank and banker to
government, and to promote the growth of the economy within the framework of the general
economic policy of the Government, consistent with the need of maintenance of price stability.

A significant object of the Reserve -Bank of India has also been to assist the planned process
of development of the Indian economy. Besides the traditional central banking functions, with
the launching of the five-year plans in the country, the Reserve Bank of India has been moving
ahead in performing a host of developmental and promotional functions, which are normally
beyond the purview of a traditional Central Bank.25

25
http://www.mbaknol.com/financial-management/indias-apex-bank-the-reserve-bank-of-indiarbi-its-
objectives-and-functions/

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 FUNCTIONS
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank
as to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country to its
advantage.

The Reserve Bank of India performs various traditional central banking functions as well as
undertakes different promotional and developmental measures to meet the dynamic
requirements of the Indian economy.

TRADITIONAL FUNCTIONS

Traditional functions are those functions which every central bank of each nation performs all
over the world. Basically these functions are in line with the objectives with which the bank is
set up. It includes fundamental functions of the Reserve Bank.

1. Note Issue

The system of note issue as it exists today is known as the minimum reserve system. The
currency notes issued by the Bank arid legal tender everywhere in India without any limit. At
present, the Bank issues notes in the following denominations: Rs. 2, 5, 10, 20, 50, 100, and
500. The responsibility of the Bank is not only to put currency into, or withdraw it from, the
circulation but also to exchange notes and coins of one denomination into those of other
denominations as demanded by the public. All affairs of the Bank relating to note issue are
conducted through its Issue Department.

In terms of Section 22 of the Reserve Bank of India Act, the RBI has been given the statutory
function of note issue on a monopoly basis. The note issue in India was originally based upon
“Proportional Reserve System”. When it became difficult to maintain the re­serve
proportionately, it was replaced by “Minimum Reserve System “. According to the RBI
Amendment Act of 1957, the bank should now maintain a minimum reserve of Rs.200 crore
worth of gold coins, gold bullion and foreign securities of which the value of gold coin and
bullion should be not less than Rs.115 crore.

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The Government of India issues rupee coins in the denomination of Rs.1, 2, and 5 to public.
These coins are required to be circulated to public only through Reserve Bank un-der Section
38 of the RBI Act. The RBI presently issues notes of denominations Rs.10 and above.

RBI manages circulation of money through currency chests. Currency Chests are receptacles
in which stocks of issuable and new notes are stored along with rupee coins. Currency Chests
are repositories run by RBI, SBI, subsidiaries of SBI, public sector banks, Government
Treasuries and Sub treasuries. Currency Chests help in expansion and contraction of currency
in the country.

Originally RBI issued currency notes of Rs.2 and above. However, due to higher cost of
printing small denomination notes these denominations are now coincides and issued by
Government.

2. Banker, Agent and Financial Adviser to the State

The RBI acts as banker to the Government under Section 20 of RBI Act. Section 21 provides
that Government should entrust its money remittance, exchange and banking transactions in
India to RBI. Under Section 21A RBI has to conduct similar transactions for State
Governments also.

RBI earns no income by conducting those functions but earns com-missions for managing the
government’s public debt. Where RBI has no branch, SBI or its subsidiaries are appointed as
agents and sub-agents under Section 45 of the RBI Act. Agency Banks receive commission on
all transactions conducted on turnover basis.

The RBI extends ‘ ways and means ‘ advances to Central and State Governments. “Ways and
Means Advances” (WMA) is not a commercial bank credit. It is a system under which the RBI
provides credit to Central and State Gov-ernments for meeting temporary shortfall in
government revenues as compared to the monthly expenditures. In other words, this facility is
provided to meet temporary mismatches between revenue collections and revenue expenditures
of governments. The maximum volume and period of such advances are governed by
agreements between RBI and the concerned government.

RBI also acts as adviser to Government on economic and financial matters. In brief, as a banker
to the Government the RBI renders the following functions:

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 • Collects taxes and makes payments on behalf of the Government
• Accepts deposits from the Government
• Collects cheques and drafts deposited in the Government accounts.
• Provides short-term loans to the Government
• Provides foreign exchange resources to the Government.
• Keep the accounts of various Government Department.
• Maintains currency chests in treasuries at some importance places for the convenience
of the government.
• Advises governments on their borrowing programmes.
• Maintains and operates Central Government’s IMF accounts.

3. Banker to the Banks

Reserve Bank acts as a guardian for the commercial banks. The RBI being an apex monitory
institution has obligatory powers to guide, help and direct other commercial banks in the
country. The RBI can control the volumes of banks reserves and allow other banks to create
credit in that proportion.

The Reserve Bank acts as the banker’s bank in the following respects:

Every Bank is under the statutory obligation to keep a certain minimum of cash reserves with
the Reserve Bank. The purpose of these reserves is to enable the Reserve Bank to extend
financial assistance to the scheduled banks in times of emergency and thus to act as the lender
of the last resort. According to the Banking Regulation Act, 1949, all scheduled banks are
required to maintain with the Reserve Bank minimum cash reserves of 5% of their demand
liabilities and 2% of their time liabilities. The Reserve Bank (Amendment) Act, 1956
empowered the Reserve Bank to raise the cash reserve ratio to 20% in the case of demand
deposits and to 8% in case of time deposits. Due to the difficulty of classifying deposits into
demand and time categories, the amendment to the Banking Regulation Act in September 1972
changed the provision of reserves to 3% of aggregate deposit liabilities, which can be raised to
15% if the Reserve Bank considers it necessary,

The Reserve Bank provide financial assistance to the scheduled banks by discounting their
eligible bilk and through loans and advances against approved securities,

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Under the Banking Regulation Act,1949 and its various amendments, the Reserve Bank has
been given extensive powers of supervision and control over the banking system. These
regulatory powers relate to the licensing of banks and their branch expansion; liquidity of assets
of the banks; management and methods of working of the banks; amalgamation, reconstruction
and liquidation of banks; inspection of banks; etc.

4. Custodian of Foreign Exchange Reserves

It is the responsibility of the Reserve bank to stabilize the external value of the national
currency. The Reserve Bank keeps golds and foreign currencies as reserves against note issue
and also meets adverse balance of payments with other counties. It also manages foreign
currency in accordance with the controls imposed by the government.

As far as the external sector is concerned, the task of the RBI has the following dimensions:

• To administer the foreign exchange control;

• To choose the exchange rate system and fix or manages the exchange rate between the
rupee and other currencies;
• To manage exchange reserves;
• To interact or negotiate with the monetary authorities of the Sterling Area, Asian
Clearing Union, and other countries, and with International financial institutions such
as the IMF, World Bank, and Asian Development Bank.

The RBI is the custodian of the country’s foreign exchange reserves, and it is vested with the
responsibility of managing the investment and utilization of the reserves in the most
advantageous manner. The RBI achieves this through buying and selling of foreign exchange
market, from and to schedule banks, which, are the authorized dealers in the Indian foreign
exchange market. The Reserve Bank manages the investment of reserves in gold counts abroad
and the shares and securities issued by foreign governments and international banks or financial
institutions.

5. Bank of Central Clearance, Settlement and Transfer

In India RBI acts as the clearing house for settlement of banking transactions. This function of
clearing house enables the other banks to settle their interbank claims easily. Further it
facilitates the settlement economically. Where the RBI has no offices of its own, the function
of clearing house is carried out in the premises of the State Bank of India. The entire clearing

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house operations carried on by RBI are computerized. The inter-bank cheque clearing
settlement is done twice a day. There is a separate route for clearing high value cheques of
Rs.1.00 lakh and above. Cheques drawn on banks in metropolitan cities are cleared on the same
day.

The RBI carries out this function through a cell known as National Clearing Cell. In 1998, there
were in all 860 clearing houses in operation of which 14 were run by RBI, 578 by SBI and
others by public sector banks.

The RBI acts as a lender of last resort or emergency fund provider to the other member banks.
As such, if the commercial banks are not able to get financial assistance from any other sources,
then as a last resort, they can approach the RBI for the necessary financial assistance. In such
situations, the RBI provides credit facilities to the commercial banks on eligible securities
including genuine trade bills which are usually made available at Bank Rate. RBI rediscounts
bills under Section 17 (2) and 17 (3) and grants advances against securities under Section 17
(4) of RBI Act. However, many of these transactions are practically carried out through
separate agencies like DHFI, Securities Trading Corporation of India, primary dealers.

6. Controller of Credit

As the central bank of the country, the Reserve Bank undertakes the responsibility of
controlling credit in order to ensure internal price stability and promote economic growth.
Through this function, the Reserve Bank attempts to achieve price stability in the country and
avoids inflationary and deflationary tendencies in the country. Price stability is essential for
economic development. The Reserve Bank regulates the money supply in accordance with the
changing requirements of the economy. The Reserve Bank makes extensive use of various
quantitative and qualitative techniques to effectively control and regulate credit in the country.
Quantitative controls include the bank rate policy, the open market operations, and the variable
reserve ratio. Qualitative or selective credit control, on the other hand includes rationing of
credit, margin requirements, direct action, moral suasion publicity, etc.

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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 supervisory functions of the RBI have helped a great deal in improving the methods
of their operation. By these functions it controls and administers the entire financial and
banking systems of the country.

1. Granting License to Banks

The RBI grants license to the banks, which like to commence their business in India. Licenses
are also required to open new branches or closure of branches. With this power RBI can ensure
avoidance of unnecessary competitions among banks in particular location evenly growth of
banks in different regions, adequate banking facility to various regions, etc. This power also
helps RBI to weed out undesirable people from starting banking business.

2. Function of Inspection and Enquiry

RBI inspects and makes enquiry in respect of various matters covered under Banking
Regulations Act and RBI Act. The inspection of commercial banks and financial institu-tions
are conducted in terms of the provisions contained in Banking Regulation Act.

These refer to their banking operations like loans and advances, deposits, investment functions
and other banking services. Under such inspection RBI ensures that the banks and finan-cial
institutions carry on their operations in a prudential manner, without taking undue risk but
aiming at profit maximization within the existing rules and regulations.

This type of inspection is carried on periodically once a year or two covering all branches of
banks. Banks are obliged to take remedial measures on the lapses / deficiencies pointed out
dur-ing inspection. In addition RBI also calls for periodical information concerning certain
assets and liabilities of the banks to verify that the banks continue to remain in good health.

This type of inspection / verification is known as off- site inspection. The RBI team visiting
bank offices to conduct verification of books and records is known as on- site inspection. RBI
inspects banks under RBI Act only when there is a threat to close down a bank for
mismanagement and there is a need to verify the fulfillment of conditions for the status of
‘scheduled bank’.

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RBI presently conducts inspection of commercial banks, Development Financial Institutions
like IDBI, NABARD, etc. Urban Co- operative Banks and non banking financial companies
like Lease Financing Companies, Loan Companies.

3. Implementing the Deposit Insurance Scheme

RBI Implements the Deposit Insurance Scheme for the benefit of bank depositors. This
supervisory function has improved the standard of banking in India due to this confidence
building exercise. Under this system, deposits up to Rs.1.00 lakh with the bank branch are
guaranteed for payment. Deposits with the banking system alone are covered under the scheme.

For this purpose banking system include accounts maintained with commercial banks, co-
operative banks and RRBs. Fixed Deposits with other financial institutions like ICICI, IDBI,
etc. and those with financial companies are not covered under the scheme. ICICI is since
merged with ICICI Bank Ltd. and IDBI is getting converted into a bank.

4. Periodical Review of the Working of the Commercial Banks

The RBI periodically reviews the work done by commercial banks. It takes suitable steps to
enhance the efficiency of the banks and make various policy changes and imple-ment
programmes for the well-being of the nation and for improving the banking system as a whole.

5. Controls the Non-Banking Financial Corporations

RBI issues necessary directions to the Non-Banking financial corporations and con-ducts
inspections through which it exercises control over such institutions. Deposit taking NBFCs
require permission from RBI for their operations.

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 PROMOTIONAL ROLE
Along with the routine traditional functions, central banks especially in the developing country
like India have to perform numerous promotional functions. These functions are country
specific functions and can change according to the requirements of that country. The RBI has
been performing as a promoter of the financial system since its inception. These special
functions are non-monetary functions. They include the following:

1. Promotion of Banking Habits

The RBI institutionalizes saving through the promotion of banking habit and expan-sion of the
banking system territorially and functionally.

Accordingly RBI has set up De-posit Insurance Corporation in 1962, Unit Trust of India in
1964, the IDBI in 1964, the Agri-cultural Refinance Corporation in 1963, Industrial
Reconstruction Corporation of India in 1972, NABARD in 1982 and the National Housing
Bank in 1988, etc.

It has helped to bring into existence several industrial finance corporations such as Industrial
Finance Corpora-tion of India, Industrial Credit and Investment Corporation of India for
industrialization of the country. Similarly sector specific corporations took care of development
in their respec-tive spheres of activity.

2. Provides Refinance for Export Promotion

The RBI takes the initiative for widening facilities for the provision of finance for foreign trade
particularly of exports. The Export Credit and Guarantee Corporation (ECGC) and Exim Bank
render useful functions on this line. To encourage exports the RBI is providing refinance
facilities for export credit given by commercial banks. Further the rate of interest on export
credits con-tinues to be prescribed by RBI at a lower rate.

The ECGC provides an insurance cover on Export receivables. EXIM Bank extends long term
finance to project exporters and foreign currency credit for promotion of Indian exports.

3. Facilities for Agriculture

The RBI extends indirect financial facilities to agriculture regularly. Through NABARD it
provides short-term and long-term financial facilities to agriculture and allied activities. It

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established NABARD for the overall administration of agricultural and rural credit. Indian
agriculture would have starved of a cheap credit but for the institutionalization of rural credit
by RBI.

The Reserve Bank was extending financial assistance to the rural sector mainly through
contributions to the National Rural Credit Funds being operated by NABARD. RBI pres-ently
makes only a symbolic contribution of Rs.1.00 crore.

It, however, extends cheap indi-rect financial assistance to the agricultural sector by providing
large sums of money through General Line of Credit to NABARD. The loans and advances
extended to NABARD by RBI and outstanding as on June 1999 amounted to Rs.5073 crore.

4. Facilities to Small Scale Industries

The RBI takes active steps to increase the supply of credit to small industries. It gives directives
to the commercial banks regarding the extension of credit facilities to small scale industries. It
encourages commercial banks to provide guarantee services to SSI sector. Banks advances to
SSI sector are classified under priority sector advances.

SSI sector contributes to a very great extent to employment opportunities and for Indian
Exports. Keeping this in view, RBI has directed commercial banks to open specialized SSI
bank branches to provide adequate financial and technical assistance to SSI branches. There
are around 30 lakh SSI units operating in India. Meeting their financial needs is one of the
prime concerns of RBI.

5. Helps Co-operative Sector

RBI extends indirect financing to State Co-operative Banks thereby connects the co-operative
sector with the main banking system of the country. The finance is mostly, is routed through
NABARD. This way the financial needs of agricultural sector are taken care of by RBI.

6. Prescription of Minimum Statutory Requirements for Banks

The RBI prescribes the minimum statutory requirements such as, paid up capital, r-serves, cash
reserves, liquid assets, etc. RBI prescribes reserves requirements both under Banking
Regulation Act and RBI Act to ensure different objectives.

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For example, SLR pre-scription is done to ensure liquidity position of the bank. CRR
prescription is done to have effective monetary control and money supply. Statutory Reserves
Appropriation is done to ensure sound banking system, etc.

It also asks banks to set aside provisions against pos-sible bad loans. With these functions, it
exercises control over the monetary and banking systems of the country to ensure growth, price
stability and sound banking practices.26

26
http://www.mbaknol.com/financial-management/role-of-reserve-bank-of-india-rbi-in-indian-economy/

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 CONCLUSION

The basic purpose of the establishment of the Reserve Bank of India was the unification of the
authority for the regulation of currency and of credit. In regard to the banking system of the
country, the primary role of the Reserve Bank was conceived as that of the lender of last resort
for the purpose of ensuring the liquidity of the short-term assets of banks. Hence, the provision
of credit facilities to banks through discounts and advances was to constitute the centre of
relationship between the central banking authority and the scheduled banks. The custody of the
cash reserves of banks vested in the Bank was primarily meant to serve as a central pool to be
available for use in times of emergency for supporting scheduled banks, rather than constitute
an instrument of credit control. 27

27
http://rbidocs.rbi.org.in/rdocs/content/PDFs/89639.pdf

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 REFERENCES
• BIBLIOGRAPHY:

1) Cecil Kisch: Review "The Monetary Policy of Reserve Bank of India" , The
Economic Journal. Vol. 59, No. 235 (Sep., 1949), PP. 436–438, p. 436.
2) Beth Anne Wilson und Geoffrey N. Keim: India and the Global Economy in
Business Economics, January 2006, S.29.
3) Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve
Bank of India’s Balance Sheet: Analytics and Dynamics of Evolution, November
2004, S. 16.
4) Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of
Business Ethics, Volume 37, Number 3 / May, 2002, p. 253.
5) Sunil Kumar, Rachita Gulati: Did efficiency of Indian public sector banks converge
with banking reforms? in Int Rev Econ (2009) 56:47–84, p. 47-48.
6) Panicos O. Demetriades, Kul B. Luintel: Financial Development, Economic
Growth and Banking Sector Controls: Evidence from India. in The Economic
Journal. Vol. 106, No. 435 (March 1996), pp. 359–374, p. 360.
7) Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve
Bank of India’s Balance Sheet: Analytics and Dynamics of Evolution, November
2004, S. 40.
8) Amal Kanti Ray: India’s Social Development in a Decade of Reforms: 1990–
91/1999–2000 in Social Indicators Research, Volume 87, Number 3 / July, 2008, p.
410.
9) Ananya Mukherjee Reed: Corporate Governance Reforms in India in Journal of
Business Ethics, Volume 37, Number 3 / May, 2002, p. 257.
10) Raghbendra Jha, Ibotombi S. Longjam: Structure of financial savings during Indian
economic reforms in Empirical Economics (2006) 31:861–869, p.862.

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• WEBLIOGRAPHY:

1) http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.pdf
2) http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIAM_230609.pdf
3) http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBI290410BC.pdf
4) http://www.rbi.org.in/scripts/briefhistory.aspx
5) http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBI290410BC.pdf
6) http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/69367.pdf
7) http://www.rbi.org.in/scripts/chro_1985.aspx
8) http://www.rbi.org.in/scripts/chro_1991.aspx
9) http://rbidocs.rbi.org.in/rdocs/opportunities/history.html
10) http://www.spmcil.com/aboutus.htm
11) http://rbi.org.in/scripts/NotificationUser.aspx?Id=5326&Mode=0
12) http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/MMDSQ261009.pdf
13) http://www.mbaknol.com/financial-management/indias-apex-bank-the-reserve-
bank-of-indiarbi-its-objectives-and-functions/
14) http://www.mbaknol.com/financial-management/role-of-reserve-bank-of-india-
rbi-in-indian-economy/

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