IBPS Bank Exam – Reserve Bank of India

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.