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Reserve bank of india

T.Y.B.com Sem ii chapter 1
Reseve Bank of India

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Reserve bank of india

  1. 1. Prof. ISHA JAISWAL RESERVE BANK OF INDIA
  2. 2. Introduction  In 1921, three presidency banks (Madras, Bombay and Bengal) were amalgamated to form the Imperial Bank of India. It was primarily a commercial bank but it discharged certain central banking functions specifically as the banker to the government.  The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.  The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
  3. 3. Introduction  Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.  The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and 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."
  4. 4. Objectives of RBI  To manage the monetary and credit system of the country.  To stabilizes internal and external value of rupee.  For balanced and systematic development of banking in the country.  For the development of organized money market in the country.  For proper arrangement of agriculture finance.  For proper arrangement of industrial finance.  For proper management of public debts  To establish monetary relations with other countries of the world and international financial institutions.  For centralization of cash reserves of commercial banks.  To maintain balance between the demand and supply of currency.
  5. 5. Difference between Commercial Banks and RBI:  Commercial banks prime goal is profit maximization whereas RBI’s objective is economic development with stability.  Commercial banks are directly involved with the public i.e. depositors and borrowers. RBI is directly related to the commercial banks of the country.  Commercial banks are many in a country. RBI is only one in the country.  A commercial bank has many branches spread throughout the country and even aboard. RBI does not have branches, though it has a few offices at important metropolitan cities.
  6. 6. Difference between Commercial Banks and RBI:  A commercial bank can collect savings from the general public in the form of various types of deposits and lend most of them to investors with a view of making profit. They are thus ‘financial intermediaries’ between savers and investors. RBI is not allowed to accept deposits from the public.  RBI supervises and controls the activities of commercial banks in the overall interest of the country at large. The commercial banks are subjected to rules and regulations prescribed by RBI from time to time.  RBI is the banker to the government and also a financial advisor. The commercial banks do not
  7. 7. Organization Central Board  The Reserve Bank affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.  Appointed/nominated for a period of four years  Constitution:  Official Directors  Full-time : Governor and not more than four Deputy Governors  Non-Official Directors  Nominated by Government: Ten Directors from various fields and two government Officials  Others: four Directors - One each from four local boards
  8. 8. Official Directors  Dr. Raghuram Rajan Governor  Shri Harun R. Khan Deputy Governor  Dr. Urjit R. Patel Deputy Governor  Shri R. Gandhi Deputy Governor  Shri S. S. Mundra Deputy Governor
  9. 9. Organization Local Boards  One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi  Membership:  Consist of five members each  Appointed by the Central Government  For a term of four years  Functions : To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time.
  10. 10. Functions of the Central Bank in India: 1. Traditional Functions: A. Issuer of currency notes B. Banker and Debt Manager To Government C. Banker to Banks D. Credit control 2. Promotional Functions: 3. Supervisory Functions:
  11. 11. 1. Issuer of currency:  The RBI has monopoly of issuing currency notes except one rupee note and coins of smaller denomination. Currently it is in denominations of Rs. 5, 10, 20, 50, 100, 500, and 1,000.  It issues these notes against the security of gold bar, foreign securities, exchange bills and promissory notes and Government of India bonds.  The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations.  RBI has special issue department.  Bank notes are printed at four notes presses at Nasik, Dewas, Mysore and Salboni.  This is done to give the public adequate quantity of supplies of currency notes and coins and in good quality.
  12. 12. 2. Banker to the Government: The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government.  It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government.  It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch.
  13. 13. 3. Banker’s Bank:  The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country.  Every commercial bank has to maintain a part of their reserves with the RBI. 4% of their total deposits (both demand and time deposits) as cash reserves. Besides this every bank is required to maintain 21.5% of its total deposits as SLR and must submit weekly statements of their transactions to RBI. The RBI controls the credit created by commercial banks by varying the proportion of reserves.  It facilitates the clearing & rediscounting of promissory notes, bills of exchange and cheques and also helps in inter bank transfer of funds.  Similarly in need or in urgency these banks approach the RBI for funds. Thus it is called as the lender of the last resort.
  14. 14. 4. Credit Control:  The RBI controls the credit creation by commercial banks. For this, the RBI uses both quantitative and qualitative methods.  By controlling credit, the RBI achieves the following: Maintains the desired level of circulation of money in the economy. Maintains the stability in the price level prevailing in the economy. Controls the effects of trade cycles. Controls the fluctuations in the foreign exchange rate. Channelizes credit to the productive sectors of the economy.
  15. 15. Promotional Functions:  Along with the routine traditional functions, central banks especially in the developing country like India have to perform numerous functions. These functions are country specific functions and can change according to the requirements of that country.  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 : In an agrarian economy like ours, the RBI has to provide special attention for the credit need of agriculture and allied activities. It has successfully rendered service in this direction by increasing the flow of credit to this sector.
  16. 16. Promotional Functions:  Provision of Industrial Finance : In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc for the adequate and timely availability of credit to small, medium and large industry is very significant.  Collection of Data : Being the apex monetary authority of the country, the RBI collects process and disseminates statistical data on several topics..This data proves to be quite useful for researchers and policy makers.  Publication of the Reports : This RBI collects and 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 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.
  17. 17. Supervisory Functions:  The reserve bank also performs many supervisory functions. It has authority to regulate and administer the entire banking and financial system. Some of its supervisory functions are given below.  Granting license to banks : The 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.  Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities.  Control over NBFIs : The Non-Bank Financial Institutions are not 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.
  18. 18. Limitations of the working of RBI 1. Lack of a well organized and well integrated money market. 2. Stability in the internal and external value of the rupee has not been maintained. 3. The Reserve Bank of India is not as yet a Completely Autonomous Institution. 4. The unorganized money market of India is still out of the control of RBI

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T.Y.B.com Sem ii chapter 1 Reseve Bank of India

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