EVOLUTION OF

RESERVE BANK
AND THE
BANKING
SYSTEM OF
INDIA
ANSHIKA BANGA

IPSA KHANNA

MANASVI SINGHAL

RASHI SACHAN

SHIPRA BARUA
HISTORY AND ORIGIN OF RBI
RBI: set up on the basis of the
recommendations of Hilton Young
commission.

Bill (for the creation of RBI) introduced Hilton Young

in 1927: not passed due to lack of
agreement.

Freshly introduced in 1933 by the White

people on Indian constitutional reforms
(John Simon): passed in 1934 in the name
of “RBI Act 1934”.
John Simon
 The RBI Act 1934 included guidelines for
the functioning of the bank.

 RBI started its operations on April 1, 1935.

 Itstarted its operations as a commercial

bank as the majority of its capital belonged
to private shareholders.

 Continued to be a privately owned bank till

Independence.
The Bank was constituted to:
* Regulate the issue of banknotes
* Maintain reserves with a view to
securing monetary stability and
* To operate the credit and currency
system of the country to its
advantage.
The Bank began its operations by
taking over from the Government
the functions so far being performed
by the Controller of Currency and
from the Imperial Bank of India, the
management of Government
accounts and public debt.
1948: GOI passed the RBI act of
1948.

Took over RBI from private

shareholders by paying them
compensation.
On Jan 1st, 1949, RBI started
working as the government-owned
central bank of India.
The government passed the Banking
Regulation Act.
 LIBERALIZATION RBI
REGULATIONS BEFORE 1992

• IMPORT WAS RISING AND WENT ON TILL 1991.

• RBI REFUSED ANY NEW CREDIT

• BOP CRISIS

• BENEFITS OF 1991 FINANCIAL REFORMS

 REASON FOR IMPLEMENTING LPG
• Various distortions like poor technologies development
shortage of foreign exchanges and imprudent borrowings
from abroad and mismanagement of foreign exchange reserve.

• Low foreign exchange reserve

• Burden of the national debt

• Inflation
 ECONOMIC LIBERALIZATION
• The industrial policy was announced on July 24, 1991.

• The key objective of industrial policy was rapid industrialization of the country.

• The new government decided to organize the sale of gold

• Liberalization refers to the relaxation of previous government restrictions, usually in

social and economic policies.

• Privatization refers to the transfer of assets or service functions from public to

private ownership Globalization means integrating the domestic economy with the
world economy.
 WHAT MADE INDIA TO LIBERALIZE
• A Balance of Payments crisis in 1991 which pushed the country to
near bankruptcy.

• The Rupee devalued and economic reforms were forced upon India.

• India central bank had refused new credit and foreign exchange
reserves had reduced to the point that India could barely finance
three weeks’ worth of imports.
 ARGUMENTS:
Arguments in the favor of
Liberalization
• Increase in rate of economic
growth
• Increase in the competitiveness
of the industrial sector ,
Reduction in poverty and
inequality, Fall in fiscal deficit
• Control on prices
• Decline in a deficit of BOP,
Increase in Efficiency.
Arguments Against
Liberalization
• Less importance to agriculture.
• Pressure by IMF and World
Bank.
• More depending on Foreign
Debt., Dependence on Foreign
technology, Problem of
Unemployment.
 SOCIAL CONTROLS,
NATIONALIZATION OF BANKS
& THE ERA OF BANK
EXPANSION 1965-1990
 CHRONOLOGY OF THE EVENTS
Fourteen banks with
Social control deposits of over Rs.50 crore
over banks were nationalized. The SLR was
A minimum Six Banks raised by 12.5
announced in
lending rate was were percentage
December 1967. The Lead Bank Scheme prescribed. nationalized points.
was introduced.

1967 1968 1969 1972 1973 1976 1980 1989 1991

Priority sector was

National Credit The CRR was
formalized. The maximum rate
Council (NCC) raised from
for bank loans &
was set up in
The Differential Rate of minimum lending 5% to 15%.
February 1968.
Interest (DRI) Scheme rates were
was instituted. prescribed.
OVERVIEW OF THE
EVENTS
 1967: Social Control on Banks
1969 & 1980: Nationalization of Banks
Strong nexus between banks
and industry due to which
agriculture was ignored.
o Break the nexus and improve the
flow of credit to agriculture.
The nationalization of banks
in 1969 & 1980:
o Brought a large segment of the
banking business under
government ownership.
Growing fiscal deficit & increased
automatic monetization, whereby the
Government could borrow from the
Reserve Bank by of ad hoc Treasury
Bills, resulted in a rise in reserve
money and money supply.
o To counter reserve money growth, the
Reserve Bank was required to raise the
cash reserve ratio.
Both resource mobilization by
the banking system & the
demands made on the
banking system increased.
o Reserve Bank was forced to
increase the SLR of banks.
 EMERGENCE OF ADMINISTERED
STRUCTURE OF INTEREST RATES &
MICRO CONTROLS
1961-67: Poor Harvest Seasons

Monetary policy had to The rising deficit &

The share of agriculture in accommodate fiscal policy accompanying inflation led
credit dispensed by that was under pressure on to an administered structure
scheduled commercial account of two wars and a of interest rates and several
banks was significantly low. drought. other micro controls.

Commercial banks were

Inflation was high and at
times shortages also
developed.
required to obtain prior
In 1966, the banking sector
permission from the
was increasingly subjected
Reserve Bank for
to selective credit controls
sanctioning any fresh
working capital limits.

Bank failures, large Commercial bank lending

concentration of resources system had little social
from deposits mobilization, content and that it aided
and agriculture was the concentration of
neglected. economic power.
 SOCIAL CONTROL OVER
BANKS - 1967 TO 1991
Nexus between banks & Continued neglect of
industry agriculture

Social control over banking was introduced in December 1967 through the
Banking Laws (Amendment) Act 1968, which came into force on February 1,
1969.
- Not less than 51% of the total members of the board of directors of a bank were
to consist of persons who had special knowledge or practical experience in one or
more matters.

The National Credit Council (NCC) was set up in February 1968 to assist the
Reserve Bank and the Government to allocate credit according to plan priorities.
It was entrusted with the task of:
-estimating the demand for bank credit from the different sectors of the
economy.
-fixing priorities for grant of loans or investment after considering the
availability of resources, and needs of the priority sectors, especially agriculture,
small-scale industries, and exports.
 NATIONALISATION OF BANKS
AND SPREAD OF BANKING
A notable feature of Indian commercial banking was the control of
the major banks by leaders of commerce and industry. The
consequence was the gradual erosion in the capital base of banks.

The Government nationalized 14 banks including - The Central Bank

of India, Bank of Maharashtra, Punjab National Bank, Syndicate
Bank, Canara Bank, Bank of India, etc.. to serve better the needs of
the development of the economy.

The LBS was launched by the Reserve Bank to mobilize deposits on

a massive scale throughout the country and for stepping up lending to
weaker sections of the economy, became the principal instrument for
branch expansion.
 INSTITUTION OF DIRECTED
CREDIT AND THE SETTING UP OF
REGIONAL RURAL BANKS

Directed credit programme were a major tool of development

policy in the 1960s. An enunciation of the need to channel
the flow of credit to certain sectors of the economy, the
priority sectors with the social objectives in mind, was first
discussed in India in July 1961.

In November 1978, private sector banks were also advised to

maintain one-third of their total advances to the priority
sectors by the end of March 1980.
.
 REGIONAL
RURAL BANKS
• Idea of starting Rural banks was first suggested by the
Banking Commission (1972).
• Regional Rural Banks (RRBs) were set up.
• In 1978, commercial banks and RRBs were directed to
charge a flat rate of 9% on all priority sector loans,
irrespective of size.
• The share of rural branches increased in 1990. The credit-
deposit ratio in rural areas increased from 37.6 per cent in
1969 to 60.6 per cent in 1981 and remained at that level in
1990.
REDUCTION IN MICRO CONTROLS, EARLY STEPS TOWARDS
LIBERALISATION AND STRENGTHENING OF BANKS

• Quota were relaxed

• The ceiling on all lending interest rates was removed, subject to a minimum rate.
• Banks were given the discretion to charge differential rates judiciously to categories
other than those being provided credit at concessional lending rates
• The consolidation measures undertaken aimed to strengthening banks’ structures,
training, housekeeping, customer services, internal procedures and systems, credit
management, loan recovery, staff productivity, and profitability.
• The Banking Regulation Act was amended in 1984 to address the decline in the role of
banks.
• To strengthen the capital base of banks, a scheme was evolved by the Reserve Bank in
consultation with the Government to augment the capital base of nationalized banks.
• To strengthen the banking system, the Health Code System was introduced in 1985,
which classified bank loans according to their performance.
ERA
OF
ELECTRONIC
MONEY
PRODUCTS & SERVICES PROVIDED
BY E-BANKING IN INDIA
NEW CHALLENGES FOR CENTRAL
BANKS
BALANCE SHEET
EFFECT
• Extensive Use of Electronic
Money
• Replaces Central bank money
• Shrink in the size of Balance
sheet
• Ineffective Open Market
Operations
THE CONDUCT OF MONETARY POLICY

OPERATIONAL PROBLEM OF
ERRORS MORAL HAZARD

DIFFICULTY IN CRISIS
PREVENTION

RELATIONSHIP BETWEEN
MONEY, OUTPUT AND PRICES
MONITOR PRIVATE
BECOMES LESS SECTOR
PREDICTABLE
CASE OF CYBER FRAUD
 Accused was running a App reflected that the
The suspect defrauded
fake firm called Amdani amount invested was
over 500 people of a sum of
Solutions in Indore who increasing but in reality,
Rs. 15 crores by opening
hired around 10 people to only the digits were rising
their Demat accounts on
call potential customers & not the amount invested
the pretext of currency
lure them on pretext of due to which people
trading.
doubling their money. invested more money.

When the customer

Initial investigation
wanted to take out their
revealed that the accused
profits, they were asked to
duped through a mobile
pay more money in form of
application called
settlement charge, GST or
METATRADE 05.
conversion charge.
 GOVERNMENT INITIATIVES :
Seven
Awarenes ‘Joint
s Helpline
Cyber number
Alerts  Coordinat
‘1930’ 
ion
Training
Teams’
Indian National
Cyber Cyber
Crime Crime
Coordinat Reporting
ion Centre Portal
RBI & COVID
pandemic
• Covid has been the pandemic which has
not only caused health issues but also
caused a global financial crisis.

• Since March 2020, the Reserve Bank of

India (RBI) has taken numerous
measures to fight the COVID-19 at the
financial front.
Various developmental and regulatory policies undertaken by the RBI to
address financial stress caused by COVID-19 include: 

LIQUIDITY MANAGEMENT

REGULATION AND
SUPERVISION

DECISIONS IN RESPECT OF
FINANCIAL MARKETS
Economic Impact of the Pandemic:
World has entered a
recession

Moody's Investor Service has

reduced its GDP growth
forecast for India to 2.5% in
2020 -

• CUT IN REPO RATE

• CUT IN REVERSE REPO RATE
Measures by RBI • MACROECONOMIC INDICATORS
• MORATORIUM ON REPAYMENTS OF LOANS
• LIQUIDITY INFUSION OF RS. 3.74 LAKH CRORE - 3.4% OF GDP
 CONCLUSION
• To conclude, the role of RBI has been redefined through
gradual evolution and adaptation, along with some
statutory changes, and not through any radical
restructuring.

• India is expected to overcome COVID-19 losses in 2034-

35, while the output losses for individual years have been
worked out to Rs 19.1 lakh crore, Rs 17.1 lakh crore and
Rs16.4 lakh crore for 2020-21, 2021-22 and 2022-23,
respectively.

• Monetary policy in 2020-21 had to deal with the twin

challenge of reviving growth from the ravages of COVID-
19 while also ensuring that inflation eased from above the
upper tolerance band to align with the target.
Do you think measures taken by RBI have been
effective in short run? EXPLAIN.