Role of Reserve Bank of India

• The Reserve Bank of India (RBI) is the central bank of the country.
• It was established on April 1, 1935 under the Reserve Bank of India Act, 1934, which provides the statutory basis for SCARDB stands for state co-operative agricultural and rural development banks and PCARDB stands for primary co-operative agricultural and rural development banks.
• In addition, the rural areas are served by a very large number of primary agricultural credit societies (94,942 at end-March 2008).
• Financial Inclusion implies provision of financial services at affordable cost to those who are excluded from the formal financial system.
• Every country has its own central bank. The central bank of USA is called the Federal Reserve Bank, the central bank of UK is Bank of England and the central bank in China is known as the People’s Bank of China and so on.
• Most central banks were established around the early twentieth century.

Functions of RBI

When the RBI was established, it took over the functions of currency issue from the Government of India and the power of credit control from the then Imperial Bank of India. As the central bank of the country, the RBI performs a wide range of functions; particularly, it:

• Acts as the currency authority
• Controls money supply and credit
• Manages foreign exchange
• Serves as a banker to the government
• Builds up and strengthens the country’s financial infrastructure
• Acts as the banker of banks
• Supervises banks

RBI as Bankers’ Bank

• As the bankers’ bank, RBI holds a part of the cash reserves of banks,; lends the banks funds for short periods, and provides them with centralized clearing and cheap and quick remittance facilities.
• Banks are supposed to meet their shortfalls of cash from sources other than RBI and approach RBI only as a matter of last resort, because RBI as the central bank is supposed to function as only the ‘lender of last resort’.
• To ensure liquidity and solvency of individual commercial banks and of the banking system as a whole, the RBI has stipulated that banks maintain a Cash Reserve Ratio (CRR).
• The CRR refers to the share of liquid cash that banks have to maintain with RBI of their net demand and time liabilities (NDTL).
• CRR is one of the key instruments of controlling money supply. By increasing CRR, the RBI can reduce the funds available with the banks for lending and thereby tighten liquidity in the system; conversely reducing the CRR increases the funds available with the banks and thereby raises liquidity in the financial system.

RBI as supervisor

• To ensure a sound banking system in the country, the RBI exercises powers of supervision, regulation and control over commercial banks.
• The bank’s regulatory functions relating to banks cover their establishment (i.e. licensing), branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation.
• RBI controls the commercial banks through periodic inspection of banks and follow-up action and by calling for returns and other information from them, besides holding periodic meetings with the top management of the banks.
• While RBI is directly involved with commercial banks in carrying out these two roles, the commercial banks help RBI indirectly to carry out some of its other roles as well. For example, commercial banks are required by law to invest a prescribed minimum percentage of their respective net demand and time liabilities (NDTL) in prescribed securities, which are mostly government securities. This helps the RBI to perform its role as the banker to the Government, under which the RBI conducts the Government’s market borrowing program.

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Competitive Landscape of Banks in India

Banks face competition from a wide range of financial intermediaries in the public and private sectors in the areas of financial inter-mediation and financial services (although the payments system is exclusively for banks). Such intermediaries form a diverse group in terms of size and nature of their activities, and play an important role in the financial system by not only competing with banks, but also complementing them in providing a wide range of financial services.

Some of these intermediaries include Term-lending institutions, Non-banking financial companies, Insurance companies and Mutual funds

Term-Lending Institutions

Term lending institutions exist at both state and all-India levels.  They provide term loans (i.e., loans with medium to long-term maturities) to various industries, service and infrastructure sectors for setting up new projects and for the expansion of existing facilities and thereby competes with banks.  At the all-India level, these institutions are typically specialized, catering to the needs of specific sectors, which make them competitors to banks in those areas. These include

• Export Import Bank of India (EXIM Bank)
• Small Industries Development Bank of India (SIDBI)
• Tourism Finance Corporation of India Limited (TFCI)
• Power Finance Corporation Limited (PFCL)
• A notable exception is the IFCI Ltd, which lends into a variety of sectors.

At the state level, various State Financial Corporations (SFCs) have been set up to finance and promote small and medium-sized enterprises. There are also State Industrial Development Corporations (SIDCs), which provide finance primarily to medium-sized and large-sized enterprises. In addition to SFCs and SIDCs, the North Eastern Development Financial Institution Ltd. (NEDFI) has been set up to cater specifically to the needs of the north-eastern states.

Non-Banking Finance Companies (NBFCs)

• India has many thousands of non-banking financial companies, predominantly from the private sector.
• NBFCs are required to register with RBI in terms of the Reserve Bank of India (Amendment) Act, 1997.
• The principal activities of NBFCs include equipment-leasing, hire purchase, loan and investment and asset finance.
• NBFCs have been competing with and complementing the services of commercial banks for a long time.
• All NBFCs together currently account for around nine percent of assets of the total financial system.
• Housing-finance companies form a distinct sub-group of the NBFCs. As a result of some recent government incentives for investing in the housing sector, these companies’ business has grown substantially.
• Housing Development Finance Corporation Limited (HDFC), which is in the private sector and the Government-controlled Housing and Urban Development Corporation Limited (HUDCO) are the two premier housing-finance companies.
• HDFC & HUDCO are major players in the mortgage business, and provide stiff competition to commercial banks in the disbursal of housing loans.

Insurance Companies

Insurance/reinsurance companies such as Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GICI), and others provide substantial long-term financial assistance to the industrial and housing sectors and to that extent, are competitors of banks.

LIC is the biggest player in this area.

Mutual Funds

• Mutual funds offer competition to banks in the area of fund mobilization, in that they offer alternate routes of investment to households.
• Most mutual funds are standalone asset management companies.
• In addition, a number of banks, both in the private and public sectors have sponsored asset management companies to undertake mutual fund business.
• Banks have thus entered the asset management business, sometimes on their own and other times in joint venture with others.

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Definition of Banks

In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act,

 ”A banking company is a company which transacts the business of banking in India.”

Further, Section 5(b) of the BR Act defines banking as,

“accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or otherwise.”

This definition points to the primary activities of a commercial bank which distinguish it from the other financial institutions. These are:

• Maintaining deposit accounts including current accounts
• Issuing and paying cheques

Importance of Banks

Banks are special for three important reasons.

1. Banks take a primary role in developing other financial intermediaries and markets.
2. Due to the absence of well-developed equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs.
3.  Banks helps vast number of savers from the household sector, who prefer assured income and liquidity and safety of funds, because of their inadequate capacity to manage financial risks.

Commercial banks in India have traditionally focused on meeting the short-term financial needs of industry, trade and agriculture. However, given the increasing sophistication and diversification of the Indian economy, the range of services extended by commercial banks has increased significantly, leading to an overlap with the functions performed by other financial institutions. Further, the share of long-term financing (in total bank financing) to meet capital goods and project-financing needs of industry has also increased over the years. The main functions of a commercial bank can be segregated into three main areas:

• Payment System
• Financial Intermediation
• Financial Services.

 (i) Payment System

A payment refers to the means by which financial transactions are settled. A basic method by which banks help in settling the financial transaction process is by way of issuing and paying cheques issued on behalf of customers. The payments system also includes electronic banking, wire transfers, settlement of credit card transactions, etc. In all such transactions, banks play a critical role.

(ii) Financial Intermediation

• The second main function of a bank is to take different types of deposits from customers and then lend these funds to borrowers, in other words, financial intermediation.
• In financial terms, bank deposits represent the banks’ liabilities, while loans disbursed, and investments made by banks are their assets.
• Bank deposits serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as returns in the form of interest.
• Bank loans and investments made by banks play an important function in channeling funds into profitable as well as socially productive uses.

(iii) Financial Services

Banks also provide financial services such as investment banking, insurance-related services, government-related business, foreign exchange businesses, wealth management services, etc. Income from providing such services improves a bank’s profitability.

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Use of ‘An’

1. Before words beginning with vowel sounds (a,e,i,o,u are called vowels, others are called consonants) Example: an apple, an egg, an owl.
2. Before words beginning with silent ‘h’. example: an hour, an honorable man, an heir, an honest man.
3. F,H,L,M,N,R,S,X are letters that are not vowels but begin with vowel sound.Example: ‘M’ has the sound of ‘em’.So, ‘an’ is used before abbrevations beginning with vowels or these letters. Example: an MLA, an R.A.F, an S.P., an LEA school.

Use of ‘A’

1. In the sense of one. Eg: He couldn’t speak a word to save himself. a one-man show, a one-rupee note
2. Before words beginning with consonant sound. Eg: a boy, a book
3. With vowel letters having consonant sound. Eg: a university, a unique article
4. With units and rate(per) Eg: He earns six hundred a month. Give me  a metre length of cloth.
5. In exclamatory expressions before singular countable nouns. Eg: What a pretty girl!
6. When two subjects or articles are thought of as a single unit. Eg: He was ready with a cup and saucer.
7. With certain expressions of quantity. Eg: a lot of, a dozen, a great deal of, a couple.
8. With a person’s name to indicate that the person is perhaps unknown to the person addressed. Eg: A sardarji is at the door
9. With a special meal. Eg: A dinner was arranged to welcome the principal.
10. To make a common noun of a proper noun. Eg: This man is “a second Einstein”

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