INTRODUCTION:
Reserve Bank of India as a central bank of the country occupies an important place in Indian
Banking and Financial system. As an apex institution, it acts as a guide, regulator, controller and
promoter of financial system.RBI was established I 1935, under the Reserve Bank of India Act,
1934 with the objective as stated in the Preamble of the RBI Act, “to regulate the issue of bank
notes and for 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.”
Till 1949, it was a private shareholders’ institution but became a state owned institution after
nationalization. Reserve Bank of India has been constituted as a corporate body having perpetual
succession and a common seal.
FUNCTIONS OF RBI
The Reserve bank of India is the central authority of the country.RBI plays an important role in
the inter-dependence of international trade and national economic growth and well-being. The
main functions performed by RBI are:
1. AS CENTRAL AUTHORITY: The Reserve Bank is the sole authority for the issue of
currency in India other than one rupee notes/coins the magnitude of which is relatively small.
Currency constitutes the base for expansion of money supply, regulation of currency is an
important element of monetary control. One rupee coins and notes are issued by the Government
of India. In terms of RBI Act, the affairs of banks relating to note issue and its general banking
business are conducted through two separate departments: viz., the Issue and the Banking
departments. The assets of the Issue Department, which form the backing for the note issue, are
kept totally distinct from the Banking Department.
2. BANKER TO THE GOVERNMENT: The Reserve bank of India is a banker to the central
government as well as state government. It makes receipts and payments on behalf of the
government and performs other banking operations for it. As banker it makes short term credit to
the government. Under law the Central government can borrow any amount from RBI. But State
governments do not enjoy unlimited borrowing powers. They can borrow only upto sanctioned
limits. The short term advances to the state government are called ways and means advances.
It advices it on all the banking & financial matters which include matters relating to international
finance , mobilization of resources , change in the banking laws, merger and consolidation of
banks.
3. ADVISOR TO THE GOVERNMENT: Like all the central banks, the Reserve bank acts
as advisor to the government not only on the banking and financial matters but also on a wide
range of economic issues those in the flied of planning an resource mobilization. It has of
course a special responsibility in respect of the financial policies and measures concerning new
loan, agricultural finance, co-operative organization, industrial finance and legislation affecting
banking and credit. The bank has also the render advice to government on various matters of
international finance.
4. BANKERS’ BANK: The Reserve Bank of India acts as a bank for commercial banks. In this
capacity it holds their cash reserves, lends them funds for short terms and provides economical
and expeditious central clearing and remittance facilities. Thus it performs all banking operations
for them.
The RBI rediscounts the bills of the commercial banks. It provides leadership, guidance
and guidance in regulating their practices. The centralization of cash reserves with RBI is a
source of strength for the system and can be employed most effectively during the periods of
seasonal strain and financial crisis. It is for this reason that it is called “Reserve Bank”. As
Banker’s bank the RBI can implement its monetary policy more effectively.
5. LENDER OF THE LAST RESORT: It is lender of the last resort for the scheduled
commercial banks in India .It provides credit to these banks through rediscounting facility. It is
called lender of the last resort as normally the banks are expected to meet there requirements
from sources other than the Reserve Bank of India .Commercial banks can approach RBI if they
are not able to meet their funds requirements from any other source. That is why it is called
lender of last resort.
6. SUPERVISION OF BANKS: The Reserve Bank’s responsibilities include, in addition to the
traditional central banking functions, the development of an adequate and sound banking system
for catering to the needs of the trade, commerce, industry and agriculture. Under the reserve
Bank of India Act, 1934 and the Banking (Companies) Regulation Act, 1949, The Bank has been
vested with extensive powers of supervision and control over commercial and co-operative
banks. The Bank’s powers extend to calling of information from and giving directions. The
Banks send their periodic reports to the Reserve Bank of India. The RBI conducts periodic
inspection of the banks. The regulation and control are required for the proper growth of sound
banking.
7. CONTROLLER OF MONEY SUPPLY AND CREDIT: One of the most important
functions of the Reserve Bank of India is to control the Money supply and credit in the economy.
This becomes all the more important as India is following the managed paper currency system
which has inherent inflationary tendency. The RBI has to control the money supply and credit in
such a way as to ensure the reasonable achievements of all the objectives of credit control e.g
price stability, economic growth etc. for performing this function, it has various techniques of
credit control available with it. It has wide powers to influence the volume of money supply
directly or indirectly.
8. FOREIGN EXCHANGE CONTROL AND MANAGEMENT: The Reserve Bank of India
is the custodian of country’s foreign exchange reserves. It manages the exchange control. The
purpose of the control is to regulate the demand for foreign exchange according to available
supplies, which is very important in the view of foreign exchange reserves.
9. MONETARY DATA AND PUBLICATIONS: The Reserve Bank of India is the main
source of monetary data and also of the data relating to banking. The data is very important for
framing the economic policies and banking policies. The bank collects and publishes the data
regularly through weekly statements, monthly bulletins, annual report, report on trend and
progress of banking in India etc. the availability of this data is very useful to all those who are
interested in the various aspects of the Indian economy.
10. BANKING OMBUDSMAN SCHEME: With a view to providing an expeditious and
inexpensive forum to bank customers for resolution of their grievances regarding banking
services, the RBI introduced the banking Ombudsman scheme way back in 1995. The scheme
was revised in 2002 and then in 2006 to cover several new areas of customer complaints. Under
the revised scheme, the complainants can file their complaints in any form, including online and
can also appeal to the RBI against the awards and other decisions of the Banking Ombudsman.
11. PROMOTIONAL FUNCTIONS: In addition to the usual central banking functions, the
Reserve Bank of India has been performing variety of promotional functions. Its promotional
functions and activities have been mainly directed towards building up and strengthening up
financial infrastructure and filling the institutional gap by setting up new financial institutions;
and by ensuring the allocation of credit in the socially desired directions. Its promotional
activities are:
(a) Promotion of commercial banking: Under the powers vested in it under the RBI Act, 1934
and the Banking Regulation Act, 1949, it has taken number of steps from time to time for the
growth of commercial banks and putting the Indian banking system on sound footing.
(b) Promotion of co-operative banking: In India’s rural based economy, co-operative banks have
an important role to play. The credit for expansion of co-operative banking goes to the Reserve
bank of India, which is directly or indirectly source of funds for these co-operative banks.
(c) Promotion of agriculture and rural credit: In the Reserve Bank of India Act itself, it is
recognized that it has special responsibility for providing institutional credit to agriculture and
allied activities. A major step in this direction was setting up of the Agriculture Refinance and
development corporation. Nationalization of banks gave further push to institutional credit in
rural areas. Establishing Regional Rural Banks and inclusion of agriculture in the priority sector
are other major steps. Another development in this direction was the establishing of the National
Bank for Agriculture and rural development (NABARD) in 1982, which took over the
Agriculture Refinance and development corporation.
(d) Promotion of industrial finance: The commercial bank can take care of the working capital
requirements of the industrial units. However, industrial growth cannot take place in the absence
of medium to long term finance. Moreover, small scale industries need special attention. Setting
up of IDBI, IFCI, SIDBI etc. are notable steps in this direction.