Functions of RBI
The functions of the RBI can be grouped under three heads.
A. Leadership and Supervisory Functions
B. Traditional Functions and
C. Promotional Functions.
India being the fastest growing economy in the world, India is expected to play a major role in the world affairs by many countries. RBI being the banking institutional head of India has to be a part of global institutions. It has to transform the quality and size of banks in India to the level of banks in developed countries. Such functions get prominence in current scenario.
In order to maintain consistency and harmony with international banking standards the RBI is associated with Basel Committee on Banking Supervision (BCBS, Switzerland) since 1997. RBI represents Government of India in International Bank for Reconstruction and Development (IBRD i.e. World Bank) and International Monetary Fund (IMF) in which India is a member since December 27, 1945.
The broad guidelines for all banking operations in the country are formulated by the RBI. The RBI has power to issue licenses, control and supervise commercial banks under the RBI Act, 1934 and the Banking Regulation Act, 1949. It conducts inspection of the commercial banks and calls for returns and other necessary information from them.
The RBI formulates, implements and monitors the monetary policy of the country in order to maintain price stability, controlling inflationary trends and economic growth. It provides advices to the Government concerning agricultural finance, resource mobilization for implementing plans and legislation affecting banking and credit and international finance.
Broad economic parameters such as employment level, price levels and production levels, trade cycles, foreign investment flows, balance of payments, financial markets, etc., are closely monitored by the RBI in order to achieve economic stability and growth. The Board of Financial Supervision (a committee of the Central Board of Directors) of the RBI meets at least once in a month (at times every day) to closely monitor all these current developments in the country.
Whenever challenges arose before Indian Banking System, RBI promptly attend them by issuing Master Circulars and by organising committees to analyse, review and strengthen Indian Banking. A wealth of information can be found in every Master Circular or committee report. Example: Gopalakrishnan Committee on “Information security, Electronic Banking”, April, 2010
The RBI accepts money into the Central and State Governments’ accounts and make payments on their behalf. It manages Government debt and is responsible for issue of new loans. It advises the government on the quantum, timing and terms of new loans. It provides ‘ways and means advances’ to the Governments to tide over temporary financial needs. It takes up the responsibility of investment of the surplus Government funds. Inter Government and inter departmental account adjustments are carried out by the RBI.
The RBI is the sole authority for the printing and issue of all currency notes in India except one rupee note. It is the duty of the RBI to ensure that sufficient number of goodquality currency notes is available to the public. It exchanges currency and coins not fit for circulation. One rupee note and all coins are issued by the Ministry of Finance. Currency notes are printed at Nasik, Dewas, Salboni, Mysore and Hoshangabad. (Currency notes are never printed outside India).
The relationship between RBI and other banks in the country is just like the relationship of a commercial bank with its customers. The RBI maintains the current accounts of all commercial banks in the country. All scheduled banks should deposit a percentage of cash reserve with RBI. All banks can receive loans from RBI by rediscounting of bills and against approved securities.
Controlling the credit money in circulation and the interest rate in the country is a major function of RBI. For this purpose, the RBI uses quantitative and qualitative methods of credit control. Ensuring the availability of sufficient cash and credit (liquidity) for business transactions and investment purposes in the economy is the responsibility of RBI.
The methods which influence the total volume of credit in Indian economy are called quantitative or general methods. An increase in the first three measures will reduce the volume of money in circulation in India and vice versa.
Bank Rate Policy: Bank rate refers to the rate at which the RBI rediscounts the bills given by the Scheduled banks.
Cash Reserve Ratio (CRR): It is the ratio of Cash reserves with the RBI kept by Scheduled banks in proportion to the total Time and Demand Liabilities with them.
Statutory Liquidity Ratio (SLR): It is the ratio of money and money equivalents kept within the bank in proportion to the total Time and Demand Liabilities with them.
Open Market Operations: The RBI directly buys or sells the securities and bills in the money market either to decrease or to increase the total volume of money.
These methods influence the volume of money in selected or particular sectors of the economy.
Rationing of credit: Maximum limit is fixed for lending to certain sectors or specific purposes.
Marginal Requirement: It refers to the percentage of the value of securities submitted before issue of loans.
Direct Action: The RBI takes corrective actions on any bank or banks that does not follow its guidelines. It is called direct action.
Moral Suasion: The RBI puts pressure on the banks towards liberal or restricted lending during certain periods.
In times of emergency any bank in India can approach RBI for financial assistance. RBI provides them credit. When other sources of getting credit are exhausted, all banks can obtain loan from RBI and hence it is called lender of last resort.
RBI acts as clearing house and maintains a clearing system for all commercial banks in India. The aggregate amount of cheques presented by a bank on other banks represents the claim by that bank on other banks. Similar claims are made by all the banks on every other bank in the clearing. A net settlement is arrived at the clearing house and accordingly the debit or credit entry is made in their current accounts. The cash reserves kept by the banks with RBI is utilised for this purpose. Clearing system saves time and eliminates paperwork and other difficult (otherwise tasks) tasks involved in inter-bank settlement. Though the RBI maintains the clearing house system only 14 clearing houses are owned by the RBI, 840 are managed by SBI and 6 by nationalised banks (total 860).
The RBI maintains a reserve of gold and foreign currencies. When foreign exchange reserves are inadequate for meeting balance of payments problem, it borrows from the International Monetary Fund (IMF). It also administers exchange control of the country and enforces the provisions of Foreign Exchange Management Act, 1999. Development and maintenance of foreign exchange market in India is also the function of RBI.
The RBI manages the exchange value of the rupee in order to facilitate India’s foreign trade and payments. It ensures that normal short-term fluctuations in trade do not affect the exchange rate.
It has also been entrusted with the task of collection and compilation of statistical information relating to banking and other financial sectors of the economy. RBI monthly bulletin, annual report and various committee reports contain treasures of authentic data.
The RBI performs a wide range of promotional functions to support national objectives.
It is the responsibility of RBI to maintain the public confidence in the banking system. It protects the depositors’ interest and aim at providing cost-effective banking services in order to include more people to avail banking services. It has also taken up the task of extending the banking system territorially and functionally to the unbanked areas.
RBI has appointed 20 (up to 2017) Banking Ombudsman in 20 state capitals. Banking Ombudsman Scheme is a speedy and inexpensive forum for resolution of customer complaints relating to certain services rendered by banks in India.
Agriculture industry is specified as priority sector by the RBI. The loans of all scheduled banks should consist of a percentage of loans to priority sector. It works in close association with NABARD to develop agriculture in India.
Micro Small and Medium Enterprises are included in the priority sector. All scheduled banks are required to open separate branches to specialise the financing of these industries.
The RBI has simplified the rules for credit to exporters, through which they can now get long term advance from banks.
It helps cooperative banks by relaxing rules and providing indirect financing.
The rupee symbol was changed from Rs. to “ ` ” by the Government of India on July 15, 2010. This became necessary since other countries Indonesia, Mauritius, Nepal, Pakistan and the Seychelles also called their currencies rupee. Among global currencies Indian rupee is given the code INR (Indian Rupee) by the International Organisation for Standardisation.