Reserve Bank of India (RBI) – Its Functions & Working

The Reserve Bank of India (RBI), the nation’s central bank, started work on April 01, 1935, by the Reserve Bank of India Act, 1934. Since 1937, the Reserve Bank has been permanently established in Mumbai. It was established to ensure monetary stability and operate the currency and credit system of the country to its advantage. And its functions combine monetary management, foreign exchange, and reserves management, government debt management, financial regulation, and supervision.

Apart from currency management and working as a banker to the banks and the Government. Also, from the beginning, the Reserve Bank has played an active developmental role, particularly for the agriculture and rural sectors. Over the years, certain functions have evolved in tandem with national and global developments.

Origins of Reserve Bank of India (RBI)

• 1926: The Royal Commission on Indian Currency and Finance prescribed the creation of a central bank for India.
• 1927: A bill to grant the effect to the above recommendation was introduced in the Legislative Assembly, but was later withdrawn due to lack of agreement with different sections of people.
• 1933: The White Paper on Indian Constitutional Reforms promoted the creation of a Reserve Bank. A fresh bill was proposed in the Legislative Assembly.
• 1934: The Bill was passed and got the Governor General’s assent
• 1935: The RBI started acting as India’s central bank on 1st April as a private shareholders’ bank with a paid-up capital of rupees 5 crores.
• 1942: The Reserve Bank was restricted to be the currency-issuing authority of Burma(Myanmar).
• 1947: The Reserve Bank stopped acting as a banker to the Government of Burma.
• 1948: The Reserve Bank stopped providing central banking services to Pakistan.
• 1949: The Government of India Nationalized the RBI under the Reserve Bank (Transfer of Public Ownership) Act, 1948.

Structure of RBI

The main structure of RBI are:

Central Board

The RBI’s operations are governed by a central board of directors. The Central Board of Directors is the top body in the governance structure of the Reserve Bank. There are also four Local Boards for the Northern, Southern, Eastern, and Western areas of the country which take responsibility for local interests. The central government appoints/nominates directors to the Central Board and members to the Local Boards by the Reserve Bank of India (RBI) Act. The composition of the Central Board is consecrated under Section 8(1) of the RBI Act, 1934.

The Central Board consists of:

The Governor

• 4 Deputy Governors of the Reserve Bank
• 4 Directors nominated by the central government, one from each of the four Local
• Boards as composed under Section 9 of the Act
• 10 Directors nominated by the central government
• 2 government officials nominated through the central government

The Central Board is assisted by three committees:

• The Committee of the Central Board (CCB)
• The Board to Financial Supervision (BFS)
• The Board to Regulation & Supervision of Payment and Settlement Systems (BPSS)

Major Role and Functions of RBI

According to the RBI Act 1934, it performs three types of functions as that of any other central bank. They are:

• Banking Functions
• Supervisory Functions and
• Promotional Functions.

The chief functions of the RBI are to control the money supply in the country. Further, it has been guided to take care of agriculture, industry, export promotion, etc. The RBI is also responsible for the maintenance of the external value of the rupee.

Banking Functions

Monetary Authority: The chief function of RBI is formulating and implementing the monetary policies of India. Planning and balance between ‘Price stability’ and ‘future economic growth’ is the main challenge of RBI as a monetary authority.

Issue of Bank Notes: The Reserve Bank of India has the individual right to issue currency notes except one rupee note which is issued by the Ministry of Finance. Currency notes issued by the RBI are stated as unlimited legal tender throughout the country.

This concentration of notes issue function with the Reserve Bank has several advantages:

1. It brings uniformity in notes issue;
2. It makes possible effective state supervision;
3. It is easier to control and regulate credit by the requirements in the economy; and
4. It keeps the trust of the public in the paper currency.

Regulator and Supervisor of the Financial system:

RBI sets the rules and regulations under which Indian banks and the financial system need to operate. The idea is to run the banks and financial system so efficiently that public trust in the system is maintained. When people feel positive about the financial system, it’s a win for RBI. Reserve Bank assures public confidence by assuring that the depositor’s money is safe with the banks and all banking and financial functions are working seamlessly as per rules.

Banker to Government:

As a banker to the government, RBI regulates the banking needs of the government. It has to manage and operate the government’s deposit accounts. It receives receipts of funds and makes payments on behalf of the government. It represents the Government of India as a member of the IMF and the World Bank.

Custodian of Cash Reserves of Commercial Banks:

The commercial banks operate deposits in the RBI. The latter has the custody of the cash reserves of the commercial banks.

Custodian of Country’s Foreign Currency Reserves:

The RBI has the custody of the country’s reserves of international currency, which allows the RBI to deal with a dilemma connected with an adverse balance of payments position.

Lender of Last Resort:

The commercial banks approach the RBI in times of emergency to tide over financial dilemmas. And the RBI comes to their rescue though it might charge a higher rate of interest.

Central Clearance and Accounts Settlement:

As commercial banks hold their surplus cash reserves deposited in the RBI. It is simpler to deal with each other and settle the claim of each other by bookkeeping entries in the books of the RBI. The clearing of accounts has now become a vital function of the RBI.

Controller of Credit:

Since credit money forms the most important part of the supply of money, and since the supply of money has important implications for economic stability, the importance of the control of credit becomes obvious. Credit is controlled by the Reserve Bank by the economic priorities of the government.

Regulator and Supervisor of Payment and Settlement Systems:

In India, all payments must be settled as per the PSS Act, 2007 (Payment and Settlement Systems Act). It is the RBI that ensures that transactions happen as per PSS. In India, there are several payment systems like ECS, Credit Card, Debit Card, RTGS, NEFT, IMPS, and UPI. All these payment systems are covered by the PSS Act, 2007. The overall objective of RBI is to provide a fast, safe, and efficient payment system for the public. Efficient payment flows are one of the main confidence boosters of the public in the Indian financial system.

Supervisory Functions

The Reserve Bank of India has certain non-monetary functions of the nature of administration of banks and the advancement of reliable banking in India, in addition to its traditional central banking functions.

Relating to authorizing and establishments, branch expansion, the liquidity of their assets, management and ways of working, amalgamation, reorganization, and liquidation, The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given RBI the broad powers of guidance and authority over commercial and co-operative banks

The RBI is commissioned to carry out the periodical inventory of the banks and to call for returns and basic information from them. In July 1969 with the nationalization of 14 major Indian banks new responsibilities were imposed on RBI for directing the growth of banking and credit policies towards the more accelerated expansion of the economy and achievement of certain coveted social objectives.

Promotional and Development Functions

The RBI has been taking a primary and vital function, in creating or helping to create the institutions needed for financing development activities and ensuring that the finance available flows in socially desired directions all over the country. So, to achieve these two objectives, the RBI has been financing agriculture, industry, and the sports sector.

• Agricultural finance: Since its foundation in 1935, RBI has been extending advice and financial support to the co-operative credit organizations for the development of agriculture and kindred rural activities. Thus, an Agricultural Credit Department and separate funds had been set up for providing medium-term and long-term finance. The functions of this department have been passed on to NABARD (National Bank for Agriculture and Rural Development) since 1982.

• Industrial Finance: In 1957 an Industrial Credit Department was set up by RBI to advise and help the banks in providing financial assistance to industries by setting up the financial institutions. E.g. IFCI, ICICI, IDBI, State Financial Institutions. And to provide financial assistance to large-scale industries it also established The National Industrial Credit Fund for long-term operations in 1964.
• Bill Market Scheme: To provide rediscounting means to commercial banks from the bank and other financial institutions, the RBI has been instrumental in developing a well-organized bill market scheme.
• Development and Regulation of Banking System: For the development and Promotion of Banking in the country RBI has played an important role. By spreading banking to the remotest corners of India through its SAA, Regional Rural Bank, and Lead Bank Schemes. Further, by establishing financial institutions such as IDBI, ICICI, SIDBI, IFCI, etc it also helped in promoting development banking. Thus, RBI has strengthened the banking system in India through its judicious policy of regulation and control of banks.

Objectives of Reserve Bank of India (RBI)

The general objective of RBI as stated in the preamble of the RBI Act are to regulate the issue of Banknotes and keeping of reserves to secure monetary stability in India and ordinarily to determine the currency and credit system of the country to its advantage; to have a present monetary policy framework to meet the hurdle of an increasingly complex economy, to manage price stability while keeping in mind the purpose of growth.” Thus the other principal objectives of RBI are:

1. To improve monetization and monetary integration of the economy.
2. To handle currency and govern foreign exchange.
3. To make a sound and adequate banking and credit structure.
4. To regulate savings through the advancement of banking habits.
5. To develop a well-differentiated formation of institutions providing credit for agriculture and related activities.
6. To grant support to planning officials and governments in their efforts to accelerate the pace of economic development with balance and social justice.
7. To set-up or promote various functional financial institutions at an all-India level and regional levels to extend facilities for term finance to industry.

Importance of RBI

The importances of RBI are as follows:

• It is the principal monetary authority of India.
• RBI manages the economic wagon of the nation.
• It is the central currency-issuing officials.
• It acts as a banker for the government.
• The intact structure within which banks operate and function smoothly is provided out by the RBI.
• RBI looks into the financial framework of the country and owes it to strengthen the economic policies of the country.

Achievements of RBI

Some of the basic achievements of RBI are as follows:

• Development of Sound Banking System: It has developed and promoted a sound banking system in the country. Through its banking Regulation Act, it has been keeping a constant eye over the banks, and trying to remove their defects. Which consequently has inspired public confidence in the banking system of the country.

• Change in the pattern of lending: It has been successfully changing the pattern of lending by banks. By making banks to follow major changes like Banks have been directed to lend 40 percent of their total advances to the priority sectors, they have been asked to ensure that 60 percent of their deposits that are raised from rural and semi-urban centers are deployed as a credit in those areas and lastly under the DRI scheme the public sector banks have to ensure that the allotted previous year’s advance is earmarked each year to be lent to certain specified weaker sections at a low rate of interest.

• Exchange Management and Control: Another achievement of RBI has been its admirable management and control over the foreign exchange. As it has gradually and successfully led the Indian economy to the current account convertibility of the rupee.

• Representation at International forum: The bank has been successfully representing the country at international monetary forums such as The World Bank and IMF (International Monetary Fund).

• Development of Human Resource: One of the major achievements of RBI has been the setting up of different training centers and colleges for the training of the staff of commercial banks, co-operative banks, RRBs, NABARD, etc.

• In the field of Export finance: Another major achievement of the bank has been in providing credit facilities to exporters. Thus, it has been providing concessional credit, refinance facilities, and guarantees to commercial banks to exporters. Further, to provide credit and other facilities to exporters it has been instrumental by establishing the Export-Import bank.

Conclusion

The Reserve Bank of India was established to foster the banking business and not for preventing the growth of such business. Consequently, it has received a new era of social banking in the country and has provided stability in the banking system. It has also carried banking in the remotest area of the country and all this is possible due to RBI only.

Further, in keeping with the development efforts of the country, it has created credit and monetary policies. By being instrumental in providing credit facilities to industrialists, agriculturalists, exporters, and a common man engaged in different vocations. Thus, it is not wrong to say that it is one of the prime movers in the development process.

Frequently Asked Questions

Q1. When and why was the Central Bank of India, the Reserve Bank established?

Ans. On the recommendation of the Hilton Young Commission, The Reserve Bank of India was established in 1934 by the Reserve Bank of India Act, 1934.

Q2. What are the Chief Functions of the Reserve Bank?

Ans. Its main functions are – to control the issue and the flow of the Indian Currency; to manage and monitor the financial institutions like Banks or NBFCs; to formulate the Monetary Policy of the country; and to function as the Banker for the Central and State Governments.

Q3. The Reserve Bank of India is headed by whom and what is its Organizational Structure?

Ans. The Reserve Bank is headed by the Governor who is part of the Central Board of Directors consisting of 21 members along with other operating staff of the bank.

Q4. Name some subsidiaries of RBI?

Ans. The subsidiaries of RBI are Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), Deposit Insurance and Credit Guarantee Corporation of India (DICGC), Indian Financial Technology and Allied Services (IFTAS) Reserve Bank Information Technology Private Limited (ReBIT).

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