UPSC CSE

Foundational Course
Indian Economy
Session: 29
Banking: RBI & Subsidiaries
Adil Baig AM
Reserve Bank of India
• The Reserve Bank of India was founded on 1 April 1935 to respond to economic troubles
after the First World War.
• The Reserve Bank of India was conceptualised based on the guidelines presented by the
Central Legislative Assembly which passed these guidelines as the RBI Act 1934.
• RBI was conceptualised as per the guidelines, working style and outlook presented by Dr. B.
R. Ambedkar in his book titled “The Problem of the Rupee – Its origin and its
solution” and presented to 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 Commission.
• 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 (now Myanmar) central bank until April 1947 (except
during the years of Japanese occupation (1942–45)), even though Burma seceded from the
Indian Union in 1937.
• After the Partition of India in August 1947, the bank served as the central bank for Pakistan
until June 1948 when the State Bank of Pakistan commenced operations.
• RBI has monopoly of note issue.
Reserve Bank of India

• But, since function of the Bank was of public nature, the RBI act of 1934 had provided the
appointment of the Governor and two deputy Governors by the Central Government.
• In 1949, the Government of India nationalized the Reserve Bank under the Reserve
Bank (Transfer of Public Ownership) Act, 1948.
• RBI's business is overseen by Central Board of Directors, which delegates the functions
to its committees and sub-committees.
• Apart from Central Board RBI has four local Boards in Chennai, Mumbai, Calcutta and
New Delhi
Preamble - 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;
• to have a modern monetary policy framework to meet the challenge of an increasingly complex
economy, to maintain price stability while keeping in mind the objective of growth."
Reserve Bank of India – Central Board

Central Board
• The Reserve Bank's affairs are governed by a central board of directors. The board is
appointed by the Government of India in keeping with the Reserve Bank of India Act.
• Appointed/nominated for a period of four years
Constitution:
• Official Directors (5)
• Full-time : Governor and not more than four Deputy Governors
• Tenure of 5 years or 62 years (which ever earlier)
• Non-Official Directors (10+2 =12)
• Nominated by Government: ten Directors from various fields and two
government Official
• They are secretary of Department of Economic Affairs and Financial Services
• Others: (4)
• four Directors - one each from four local boards of Chennai, Mumbai, Kolkatta
and New Delhi
Reserve Bank of India – Central Board
• According to the RBI Act, the director of the RBI Board cannot be a salaried government
official (except for the ones specifically nominated by the government),
• be adjudicated as insolvent or have suspended payments to creditors,
• an officer or employee of any bank or, interestingly, “is found lunatic or becomes of
unsound mind”.
• The proposal for appointment to the Central Board is moved by the Department of
Financial Services under the Finance Ministry and needs to be approved by the
Appointments Committee of the Cabinet.
• Generally, the government would want the RBI to be sensitised to the views of various
stakeholders in the country’s socio-economic landscape such as businesses (within
that, manufacturing, infrastructure and services sectors), cooperatives, self-help groups,
academicians, economists, etc.
• Given that RBI plays a much larger role than just that of a banking regulator, and that it is
an apolitical institution, the government generally avoids appointing individuals with
strong ideological or political views to the Central Board.
• It basically reviews the statistics in RBI’s weekly bulletin.
Reserve Bank of India – Central Board
Voting
• The Governor has to call a Board meeting at least six times in a year, and at least once
each quarter.
• The Act specifies that the deputy governors and the government nominees (6) may
attend any or all meetings of the Central Board, but are not entitled to vote.
• This means that in the current Board, the four deputy governors and the two secretaries
from the Ministry of Finance cannot vote.
• In the event of equality of votes, the Act states that the Governor has a second or
casting vote.
• A meeting can be called if a minimum of four Directors ask the Governor to call a
meeting.
• The Governor or, if for any reason unable to attend, the Deputy Governor authorised by
the him to vote for him, presides the Board meetings. In the event of split votes, the
Governor has a second, or deciding vote.
Reserve Bank of India – Section 7
• Section 7 of the RBI Act has come into spotlight amid the war between the Central government and
the Reserve Bank of India (RBI).
• The provision in the RBI Act empowers the government to issue directions to the RBI.
• The government has invoked Section 7 which has never been used before. Exercising powers under
this section, the government has sent several letters to the RBI governor Urjit Patel
• The RBI is an entity independent of the government as it takes its own decisions. However, in certain
instances, it has to listen to the government. This provision in the RBI Act is contained in its Section 7
which says:
1. The Central Government may from time to time give such directions to the Bank as it may,
after consultation with the Governor of the Bank, consider necessary in the public interest.
2. Subject to any such directions, the general superintendence and direction of the affairs and
business of the Bank shall be entrusted to a Central Board of Directors which may exercise all
powers and do all acts and things which may be exercised or done by the Bank.
3. Save as otherwise provided in regulations made by the Central Board, the Governor and in his
absence the Deputy Governor nominated by him in this behalf, shall also have powers of
general superintendence and direction of the affairs and the business of the Bank, and may
exercise all powers and do all acts and things which may be exercised or done by the Bank.
Functions of RBI
1. Monetary Authority
2. The issuer of currency
3. The issuer of Banking License
4. Banker to the Government
5. Banker’s Bank
6. Lender of last resort
7. Act as clearing house
8. Custodian of foreign exchange reserves
9. Regulator of Financial System & Economy
[Link] Government securities
[Link] and Supervisor of Payment and Settlement Systems
[Link] Role
[Link] of monetary data
[Link] manager and controller
[Link] Ombudsman Scheme
• Deposit Insurance and Credit Guarantee Corporation (DICGC) is a subsidiary of Reserve Bank of
India.
• It was established on 1961 under DICGC Act, 1961 for the purpose of providing insurance of
deposits and guaranteeing of credit facilities.
• DICGC insures all bank deposits, such as saving, fixed, current, recurring deposits for up to
the limit of Rs. 5,00,000 of each deposits in a bank.
• Each depositor in a bank is insured up to a maximum of 5,00,000 (Rupees Five Lakh) for both
principal and interest amount held by him in the same right and same capacity as on the date of
liquidation / cancellation of bank's licence or the date on which the scheme of
amalgamation / merger / reconstruction comes into force
• DICGC charges 12 paise per ₹100 of deposits held by a bank. The premium paid by the insured
banks to the Corporation is paid by the banks and is not to be passed on to depositors.
• DICGC last revised the deposit insurance cover to ₹5 lakh in Feb, 2020, raising it from ₹ 1 lakh
since 1993.
• There are some exceptions like deposits of foreign governments, deposits of Central/ State
Governments, deposits of State Land Development Banks with State co-operative banks, and
inter-bank deposits.
Bharatiya Reserve Bank Note Mudran Private Limited
• Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) is a wholly owned
subsidiary of Reserve Bank of India which prints bank notes (Indian rupees) for the Reserve
Bank of India (RBI).
• It was established in 1995 to address the demand of bank notes.
• The BRBNMPL has been registered as a Private Limited Company under the Companies Act
1956 with its Registered and Corporate Office situated at Bangalore.
• The company operates in Indian and global markets, catering to security document needs of
Central banks and monetary authorities of the world by designing, printing and supplying
banknotes.
• BRBNMPL supplies a major portion of bank note requirement in the country with the remaining
requirements met through Security Printing and Minting Corporation of India
Limited (SPMCIL), a public sector undertaking wholly owned by Government of India.
• BRBNMPL has two presses in Mysuru and Salboni.
• The present capacity for both the presses is 16 billion note pieces per year on a two-shift basis.
Security Printing & Minting Corporation of India
• The Security Printing & Minting Corporation of India Ltd. (SPMCIL) is a Mini-Ratna
Central Public Sector Enterprise (CPSE).
• It is a wholly owned by Government of India Schedule "A" Company of the Government
of India and was incorporated on 13 January 2006 with its registered office at New Delhi.
• The Corporation is engaged in the manufacture / production of Currency and Bank Notes,
Security Paper, Non-judicial Stamp Papers, Postal Stamps & Stationery, Travel
Documents viz., Passport and Visa, Security Certificates, Cheques, Bonds, Warrants,
Special Certificates with Security Features, Security Inks, Circulation & Commemorative
Coins, Medallions, Refining of Gold, Silver and Assay of Precious Metals, etc
Indian Financial Technology & Allied Services (IFTAS)
• Indian Financial Technology & Allied Services (IFTAS) is a wholly-owned subsidiary of the
Reserve Bank of India, that designs, deploys & provides the essential IT-related
services, required by the Reserve Bank of India, banks, and financial institutions.
• It’s flagship payment products and services are a critical part of India’s financial
infrastructure, connecting banking and financial institutions across the country, reliably and
securely.
• Indian Financial Network (INFINET) is the underlying closed user group Payment System
network connecting India’s financial institutions.
• Structured Financial Messaging System (SFMS) serves as the backbone Messaging
platform and the Indian standard for inter-bank Financial Messaging for Centralized
Payment system viz. National Electronic Fund Transfer (NEFT) and Real-Time Gross
Settlement (RTGS). IFTAS is also the service provider for NEFT application.
• IFTAS has introduced its Advisory Services to consult and guide both domestic banks
and Central Banks of countries in terms of the technology, governance, process, tools,
skills, etc. on the National Payment System, the underlying financial network and various
Digital initiatives.
Reserve Bank Information Technology - REBIT
• Build a world class team of skilled professionals, motivated to contribute to the national
cause
• Deliver and manage IT projects of RBI for a productive and delightful user experience
through collaboration and excellence
• Assist RBI in performing risk-based supervision of regulated entities through security
audits and incident analysis
• Improve cyber resilience of the banking sector through collaboration with key
stakeholders to promote best practices, drive policy research and build innovative
technology solutions
• Safeguard RBI assets by detecting and responding to cyber-threats through
architecting and operating state-of-the-art security infrastructure and services