Functions of RBI (Reserve Bank of India)

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.

A. Leadership and Supervisory 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.

1. India’s Representative in World Financial Institutions

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.

2. Regulator and Supervisor of Indian Banking System

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.

3. Monetary Authority

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.

4. Closely Monitoring Economic Parameters

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.

5. Promptly Responding to New Challenges

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

B. Traditional Functions

1. Banker and Financial Advisor to the Government

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.

2. Monopoly of Note Issue

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).

3. Banker’s Bank

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.

4. Controller of Credit and Liquidity

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.

i. Quantitative Methods of Credit Control

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.

ii. Qualitative Credit Control Measures:

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.

5. Lender of the Last Resort

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.

6. Clearing House Services

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).

7. Custodian of Foreign Exchange Reserves

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.

8. Maintenance of Foreign Exchange Rate

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.

9. Collection and Publication of Authentic Data

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.

C. Promotional Functions

The RBI performs a wide range of promotional functions to support national objectives.

1. Nurturing Banking Habits among the Public

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.

2. Grievance Settlement Measures

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.

3. Agricultural Development

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.

4. Promotion of Small Scale Industries

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.

5. Facilitates Foreign Trade

The RBI has simplified the rules for credit to exporters, through which they can now get long term advance from banks.

6. Supports Cooperative Sector

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.