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| Banking System in India & The Functions of RBI |
Banking System in India & The Functions of Reserve Bank of India (RBI) || Read this article to understand the function of the Reserve bank of India and How RBI functions help in maintaining Indian banking system.
Reserve Bank of India (RBI) & Banking System.
It is necessary to know about RBI or Central Bank before knowing the function of Reserve Bank of India.
Central Bank: Each country has a central bank, which manages all the banks present in its country and is also involved in important activities taking place in the country.
Similarly, the Reserve Bank of India (RBI) also acts as a central bank for India.
◉ The Reserve Bank of India (RBI) was established on 1 April 1935 under RBI act 1934 on the recommendation of John Hilton Young Commission And nationalized on 1st January 1949.
◉ The Reserve Bank of India (RBI) symbol is "Tiger under a palm tree".
◉ Initially it was headquartered in Kolkata but at the end of 1937 it was shifted to Mumbai.
◉ First Governor of RBI was Sir Osborne Arkell Smith and the first Indian Governor was C.D Deshmukh.
◉ The function of the Reserve Bank of India is similar to that of the Bank of England, an additional feature agricultural finance added to the RBI over time due to India being an agricultural country.
The Functions of RBI
In order to understand the function of the Reserve Bank of India, they are divided into three parts.
- General Function
- Monetary Function
- Developmental function
General Function
The general function includes those functions of the RBI which are almost similar to the central bank function of all the countries.
Issuance of Currency
◉ The Reserve Bank of India has the rights to print from 2 rupees to 10,000 rupees, but this right is possible under the permission and decision of the government.
ex: - Demonetization was done on 8/11/2020 based on permission and decision of Narendra Modi government
◉ Cash currency is received in two forms in India, first is in the form of banknote and second in the form of coin.
◉ Banknote is produced under RBI and coin is made under government.
NOTE: - Ministry of Finance issues 1 rupee banknote.
◉ Banknote currency issued by RBI is produced at only four places in India: - Dewas (MP), Salboni (WB), Nashik (MH) and Mysore (KA).
◉ Coin currency issued by RBI is manufactured at only four places in India: - Mumbai, Kolkata, Hyderabad and Noida.
Banker to the Government
◉ The 29 branches of the Reserve Bank of India act as a bank for the government which is organized in various states of India.
◉ Central government and state government have accounts in RBI branches where they collect all the income of central and state governments, pay the expenses. Investments done by the government in the development of the activities are done in the "Public Account Department" of the RBI.
◉ The Reserve Bank of India arranges for Sort Trams and Float Type Loans for the Central and State Governments.
◉ Relief funds received to meet the social or temporary shortfall are also deposited by the Public Accounts Department of the RBI for the regular expenditure of the government.
◉ RBI also acts as a representative and consultant (advisor) in the economy situation for the government.
Banker’s Bank
◉ Banker’s Bank means the head of all types of banks operating in the country or the regulator and controller of the banking system.
◉ The Reserve Bank has the following powers of regulation and control for all banks in the country under the Indian Banking Act.
- Issuance of license for banks
- Managing banks
- Liquid fund
- Handling Branch Expansion of Banks
- Bank inspection
- Issue of guidelines to banks
◉ All banks have an account with the RBI where the bank can receive financial assistance from the RBI in times of crisis.
◉ It is mandatory for all banks to submit transaction reports to the RBI every week.
Agriculture finance
◉ The Reserve Bank of India has issued a guideline to bring growth in the sector related to agriculture.
On the basis of which all banks of India have to give a certain part of the money in the form of loans in the Priority Sector Lending (PSL) or Backward Classes and Agriculture sector.
Monetary Function
The Monetary Policy or Monetary Function is used by RBI for control and liquidity adjustment at all banks.
For this, RBI adopts two types of instruments Quantitative and Qualitative.
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| The Functions of RBI |
Quantitative instruments
Cash Reserve Ratio (CRR)
◉ A fixed proportion of the gross deposits [ Net Demand Time Liquidity (NDTL)] of all types of scheduled banks operating in India is kept in the form of cash with the RBI. The deposit amount is called Cash Reserve Ratio (CRR).
◉ This fixed ratio is currently set at 4% by the RBI.
◉ It is always in the form of cash.
◉ No interest is paid on the money deposited here, it is only for the safety of the people to maintain trust.
◉ This money is deposited by the Reserve Bank because if a bank goes bankrupt or runs away from the country, then the central bank can return the money of those who had opened an account in the bankrupt bank to keep the trust of the banking system.
Statutory Liquidity Ratio (SLR)
◉ All types of scheduled banks operating in India have to keep a fixed ratio of gross deposits [Net Demand Time Liquidity (NDTL)] with themselves, this is called statutory liquidity ratio.
◉ This amount can be in the form of cash, gold and government securities
◉ This fixed ratio is currently set at 19% by the RBI.
◉ This is also done to protect people's deposited funds or to maintain confidence in banks.
Bank Rate (BR)
◉ The interest rate at which long-term loans are given by RBI to its customers (government, government companies, corporation banks, financial institutions etc.)
◉ This has a direct impact on the interest rates of various types of loans allocated by banks in India.
◉ The RBI keeps raising and lowering the bank rate to control inflation.
Repo Rate (RR)
◉ The interest rate at which RBI provides short term loans to various banks is called repo rate.
◉ Repo rates are also low and high like bank rate.
◉ Repo rate is currently around 4%.
Reverse Repo Rate (RRR)
◉ The interest rate at which RBI borrows money from commercial banks is called reverse repo rate.
◉ The purpose of this function was to increase the income of banks and develop their economic growth so that they can promote overall economic development by making cheaper loan allocation.
◉ The reverse repo rate is currently around 3.5%.
Marginal Standing Facility Rate (MSF)
◉ Under the Marginal Standing Facility, all commercial banks operating in India can take loans directly from the Reserve Bank of India as per their liquidity requirements, but the highest amount of loan can be a fixed percentage of the banks' net deposits.
◉ The rate of interest charged here is different from the repo rate.
Open Market Operation (OMO)
◉ Open market operation is a function that RBI uses to control the money supply in the economy.
◉ It involves the purchase and sale of treasury bills in government securities by the Reserve Bank of India.
Qualitative instruments
◉ Setting a loan margin or minimum limit
◉ Determining credit criteria
◉ Direct action against banks
◉ Credit Rationing and Credit Approved Scheme
◉ Credit monitoring arrangements
Developmental Function
The Reserve Bank of India serves general function and monetary functions as well as the developmental function and promotional function. Which are as follows
Mobilization of Saving
◉ For mobilization of savings, the Reserve Bank of India gives guidelines to commercial banks to open their branches in an area where banks are not currently expanding.
◉ RBI and commercial banks opens branches in the rural areas for the uniform development of the entire country, so that people living in rural areas will also be able to deposit their money and get some of shaving, as well as people who wants loans they will also be able to get loan.
Providing security to depositors
The Reserve Bank of India issues a variety of guidelines to protect against fraud with banks, including
Deposit Insurance and Credit Guarantee Corporation Act-1961
The Unit Trust of India Act (UTI) -1963
Agricultural credit
A function has been formulated by RBI with the support of various banks to extend the agricultural credit to rural areas which includes : -
Aerospace Research And Development Center (ARDC) - 1963
National Bank for Agriculture and Rural Development (NABARD) - 1982
Industrial finance
◉ Industrial development has the most important role in the development of any country because when the industrial area develops, the GDP of the country rises and GDP increases then the country is on the path of development.
◉ Keeping this theme in mind RBI has prepared an industrial finance function for industrial development.
◉ Finance is needed to operate the industrial and for this arrangement the RBI has set various providers.
Industrial Finance Corporation of India (IFCI)
State Finance Corporation of India (SFCI)
Industrial Development Bank of India (IDBI)
Other function of RBI
Apart from these, the RBI performs lots of function to run the banking system smoothly such as
◉ Change in bank rate
◉ Changing Cash Fund Ratio
◉ Open market activities
◉ Dealing with the public
◉ Collect and publish data
◉ Currency conversion
◉ Take direct action against banks etc.
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