April 24, 2015

Reserve Bank of India (RBI) & Its Functions: Promotional & Supervisory Explained

Reserve Bank of India
Indian banking system has given a shape and structure by the formation of central bank in India, known as Reserve Bank of India (RBI). It was established in 1935 under RBI Act 1934 with a capital of 5 crores, divided into 100 shares of 5 lakhs each and was owned by government with limited functions. After independence to India, RBI was nationalized on 1st January, 1949. Banking Regulation Act 1949 empowered RBI and gave full-fledged functions of a central bank and as a banking and financial regulatory authority of India. By this RBI has authority to license and control banks, audit them, inspect, regulate and monitor.

RBI functions with certain objectives such as:
  • To maintain monetary stability.
  • To maintain financial stability and ensure sound financial institutions.
  • To maintain stable payment systems.
  • To ensure credit allocation by the financial system.
  • To regulate the overall volume of money and credit in the economy.
  • To promote the development of financial markets.
  • To educate and convert the general public to use organized financial and banking sector.
Promotional Functions of RBI

  • Development of the Financial System: The financial system comprises the financial institutions, financial markets and financial instruments. The sound and efficient financial system is a precondition of the rapid economic development of the nation. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy. 
  •  Development of Agriculture: Agriculture is the back bone of Indian Economy. Even today at least half of the Indian population depends on Agriculture. Banks accept deposits from the public, but may divert funds to earn more and more profits offering higher interest rates to public. RBI made it mandatory to lend at least 18% of total loans to Agriculture. It does regular auditing of the banks accounts. RBI time to time gives subvention on the rate of interest to farmers' loans. 
  •  Promotion of Small Scale Industries Finance: In order to boost the Micro, Small scale and Medium Enterprises, RBI formulated many policies and programmes. The Prime Minister's Task Force on MSME headed by T.K.A. Nair has advised banks to achieve a 20 percent year-on-year growth in credit to micro and small enterprises, a 10 percent annual growth in the number of micro enterprise accounts and 60% of total lending to MSME. 
  •  Promotion of Export through Refinance: Export credit refinancing is a scheme started by RBI to promote exports. By promoting exports RBI helps to bring more foreign currency for the country, in turn decreasing current account deficit and decreasing rupee depreciation. 
  •  Provisions of Training: RBI provides the Training facilities to bankers, customers and also to lay man through various programmes. National Institute of Bank Management (NIBM) was established in 1969 by RBI in Pune. It is engaged in Research (policy and operations), Training & Education of senior executives of banks, and provides consulting support to the banking and financial sectors. It runs various programmes on pan India basis to educate the customers and lay man to educate them in bank frauds and security features of currency notes. 
  •  Collection of Data and Publication of Reports: RBI collects, process and disseminates statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This data proves to be quite useful for researchers and policy makers. Its separate publication publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks in India., etc. This information is made available to the public also at cheaper rates. 
  •  Promotion of Banking Habits: As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. During economic reforms it has taken many initiatives for encouraging and promoting banking in India. It always order the banks not to disturb the customers by making the rigidity of banking rules. 
Supervisory Functions of RBI
  • Granting license to banks: RBI grants license to banks for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches. It also authorized to renew the license of banks. Its role is unquestionable at the time of giving licenses to foreign bank branches. 
  • Bank Inspections: RBI grants license to banks working as per the directives and in a prudent manner without undue risk. It does regular inspections of banks and bank branches. In addition to this it can ask for periodical information from banks on various components of assets and liabilities.
  • Control over NBFIs: Non-Bank Financial Institutions are not more influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs. 
  •  Implementation of the Deposit Insurance Scheme: RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. 1 lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure. 
  •  Central clearing house of payment and settlement systems: The increasing monetization in the economy, the country's large geographic expanse, people's preference for paper-based instruments and rapid changes in technology are among factors that make this task a formidable one. Recently, a provision was incorporated by the Information Technology Act, 2000 which enabled the RBI to make regulations for regulating payment systems of banks and financial institutions.

Other Important Functions of RBI:
  • Monitoring monetary policy by taking operate decision with the help of some direct and indirect tools like Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), and Refinance facilities. These are direct tools.
  • A few indirect tools: RBI also uses some indirect tools like Liquidity Adjustment Facility (LAF), Repo / Reverse Repo Rate, Open Market Operations (OMO), Marginal Standing Facility (MSF), Bank Rate, and Market Stabilisation Scheme (MSS).
  • RBI prints currency notes with the help of its subsidiaries, 'The Security Printing and Minting Corporation of India Limited (SPM-CIL)', 'The Bharatiya Reserve Bank Note Mudran Pvt. Ltd. (BRBNMPL)'.
  • On behalf of Government of India RBI mints rupee coin with the help subsidiaries, 'The Security Printing and Minting Corporation of India Limited (SPMCIL)' which are known as mints which comes under Coinage Act, 1906.
  • RBI acts as Banker and Debt Manager to Government. It maintain accounts and banking transactions of central government, it receive funds and make payments and transfer funds on behalf of government and also known as Banker to Banks.
  • RBI is the Regulator of the Indian Banking Services and System, it regulates through licensing banks, formulation of certain rules etc.,. It also known as Manager of foreign exchange and foreign reserves in India by appointing authorized dealers for exchanging foreign currency. Development of foreign currency reserves like Foreign Currency Assets (FCA), Special Drawing Rights (SDRs) and gold etc. The act that helps RBI to manage foreign exchange transactions is        Foreign Exchange Management Act (FEMA) 1999.
  • RBI is Regulator and Supervisor of the Payment and Settlement Systems in India. All the clearing and settlements activities are done through different means and established different schemes and services like National Payments Corporation of India (NPCI), The Real Time Gross Settlement (RTGS), Electronic Funds Transfer (EFT), National Electronic Clearing Service    (NECS), Electronic Clearing Service (ECS), Cheque Truncation System (CTS) etc.
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