RBI AS CENTRAL

BANK
Constitution, Management and functions
Introduction

■ It is the Central Bank of India .

■ It was set up on the recommendations of the Hilton Young
Commission.
■ The RBI was established on 1st April 1935 under the RBI Act 1934 in
Kolkata(later shifted to Mumbai in 1937 )
■ Its head quarters is in Mumbai (Maharashtra).
■ The present governor of RBI is Shri Shaktkanta Das.
■ The Indian Banking System is headed by the Reserve Banks of India
which is the monetary authority of India.
■ It performs role of central banking in the country.
■ It was originally started as a shareholders bank and its paid-up capital
was Rs. 5 crore.
■ The bank was nationalised in 1949 and is fully owned by the Govt. of
India .
Preamble

■ The Preamble of the Reserve Bank of India describes the basic

objectives 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."
Functions:
■ The RBI is authorised to carry on and transact several kinds of
business as provided in Sec 17 of the RBI Act 1934
■ Functions of RBI:
■ Monetary functions :
■ Note issue (except one rupee note all other notes are issued)
■ Banker to the government
■ Banker’s bank and lender of the last resort
■ Custodian of foreign reserves
■ Controller of credit
■ Non-Monetary Functions :
■ Supervisory functions
■ Promotional functions
Note Issue:
■ According to sec 22 of the RBI Act 1934, RBI shall have the sole right
to issue bank notes in India.
■ According to sec 38 of the RBI Act , 1934 the Central Government
shall put into circulation rupee coins and one Rupee currency notes
through RBI only.
■ One rupee notes bear the signature of the Finance Secretary, Ministry
of Finance, GOI.
■ According to Sec 24 of the RBI Act 1934 the bank notes shall be of
the denomination value of Rs. 2, 5, 10, 20, 50, 1000, 5000, 10,000
and of such other denominational values, not exceeding Rs. 10,000
as the Central Government may specify on the recommendation of the
Central Board of RBI.
■ Notes issued by the RBI are known as bank notes while one Rupee
notes issued by the Central Govt. are called currency Notes.
■ All bank notes are legal tender throughout the country and are
guaranteed by the central govt.
■ At present the highest bank note issued is the bank note of
denomination of Rs. 2000.
■ The work of note issue is done by the Issue Department of the Bank.
Banker to the Government

■ The RBI is the banker to the Central Government statutorily and to

state Government by virtue of agreements entered into with them.
■ Under sec 20 of the RBI Act the Central Govt. conducts all its
transactions through the RBI.
■ Sec 21 requires the Central Government to entrust RBI all its money,
exchanges and banking transactions in India and in particular deposit
free of interest all its cash balances with the RBI.
■ It performs similar functions for the state govt. also under sec 21- A of
the RBI Act.
■ The RBI conducts banking business of the Govt. of India free of charge
viz. accepting money on govt. acc., making payment on its behalf ,
managing public debt , treasury bills etc.
■ It advises the Government on all monetary and banking matters e.
industrial and agricultural finance , legislation affecting banking and
credit , financial aspects of planning and international finance.
Banker’s Bank and lender of the last
resort:
■ It is the apex banking institution.
■ Controls the banking activities and credit system in India
■ It provides financial assistance to scheduled banks when required.
■ All Scheduled Commercial Banks keep their accounts with the RBI for
the purpose of maintaining cash reserves as also for settlement of
transactions.
■ The Act also empowers the RBI to make loans and advances to
Scheduled banks against the security of stocks, funds and other
eligible securities repayable on demand or on the expiry of fixed
periods not exceeding 180 days
■ The RBI holds Cash Reserve of commercial and other banks and thus
acts as custodian of the ultimate reserves of the country which
support its credit and banking system.
■ The RBI acts a clearing house for member banks for settling their
mutual transactions.
Control of banks:

■ The RBI acts as supervisor and controller of banks in India.

■ As per the Banking Regulation Act 1949 :
■ Each bank in India is required to obtain license from the RBI before
conducting banking business in India.
■ Each bank desirous of opening branch or change in the location of
any existing branch is required to obtain prior permission from the RBI
■ It has power to inspect books and accounts of Commercial banks
■ It may issue directions to commercial banks and may prohibit banks to
enter into particular transactions.
■ RBI may remove any top executive of a bank
■ RBI may appoint additional directors of the banking company .
Custodian of Foreign Reserves
■ In most of the countries, central bank is with the task of managing
their foreign reserves. In India, RBI has to maintain the rate of
exchange.
■ It is obligatory for the RBI to sell and buy currencies of all member
countries of the IMF to ensure smooth and orderly exchange
arrangements and to promote a stable system of exchange rates
■ In India exchange control was introduced under the Defence of India
Rules in Sept 1939.
■ It was, however statutorily laid down by the FERA Act 1973
■ Now FEMA Act 1999 has been enacted to develop and maintain
foreign exchange market in India.
■ The bank has licensed several banks as authorized dealers in foreign
exchange.
Controller of Credit:
■ The RBI exercises its control over the volume of credit created by the
Commercial banks.
■ The measures of credit control may be classified into 2 categories :
■ 1. Quantitative methods
■ Eg. Bank rates, reserve requirements and statutory liquid
requirements
■ 2. Qualitative Methods:
■ Eg. Credit Control, credit authorisation, credit monitorization and
moral suasion.
■ Meaning of suasion : persuade the banks and other financial
institutions to keep to rules and act in the best interests of the
economy.
■ Moreover , – Sec.49 of RBI Act, empowers the Reserve Bank to
publish the bank rate from time to time.
■ Open market operations:
■ The purchase and sale of Govt. securities by the RBI from/to the
public and bank on its own account.
■ Section 17(8) provides this right to RBI. – To provide seasonal finance
to commercial banks by purchase of securities from them.
■ Open market operations (OMO) refer to a central bank's buying and
selling of government securities in the open market in order to expand
or contract the amount of money in the banking system.
■ Securities' purchases inject money into the banking system and
stimulate growth, while sales of securities do the opposite and
contract the economy.
■ Every scheduled bank should maintain a minimum balance with RBI.
■ Sec 42 of RBI Act, every bank included in the second schedule shall
maintain with the bank a fixed amount.
■ The reserve maintained is called Cash Reserve Requirement/Ratio
(CRR).
Non-Monetary Functions

■ Supervisory Function – RBI Act 1934 & than Banking Regulations Act
1949 have given wide range of powers to RBI to control over
commercial banks.
■ The Section 22 of Banking Regulations Act 1949, every bank has to
obtain a license from RBI carrying on banking business.
■ Sanction of new branch or a new place of business.
Promotional Functions

■ It promotes banking habits

■ Extend banking facilities to rural and semi urban areas
■ Establish and promote new specialized financing agencies
List of promotional and developmental
functions:
■ 1. By encouraging the Commercial banks to extend their branches in
semi urban and rural areas to reduce dependence of people on
indigenous bankers and money lenders, and to develop the banking
habit of the people.
■ 2. by establishing the Deposit Insurance Corporation, the RBI helps to
develop the banking system of the country , instils confidence of the
depositors and avoids bank failures.
■ Through the institutions like UTI, the RBI helps to mobilise saving in
the country.
■ The RBI appoints various ad hoc committees/expert groups such as
Chakravarthy Committee from time to time to enquire banking
problems and make recommendations to solve them.
■ Banking training college has also been set up to extend training
facilities to supervisory staff of commercial banks.
■ Since its inception RBI has been making efforts to promote
institutional agricultural credit by developing cooperative credit
institutions.
■ The RBI helps to promote the process of Indutrialization in the country
by setting up specialised institutions for industrial finance.
■ It issues directives to security market for its proper functioning.
Management/ Constitution:
■ The management of the RBI is under the control of the Central Board
of Directors consisting of 20 members.
■ They are ;
1. Governor and not more than 4 deputy governors to be appointed by
the Central Govt. for a period of 5 years.The executive head of the bank
is the Governor.
2. four Directors to be nominated by the Central Govt. , one from each of
the four Local Boards as constituted by Section 9
3. 10 Directors to be nominated by the Central Govt.
4. One Government Official to be nominated by the Central Govt.
■ The RBI Act 1934 requires that there must be atleast six meetings in
a year and the gap between 2 meetings must not exceed 3 months .
■ The Governor of the RBI can call a meeting of the Central Board
whenever he feels necessary.
■ The Governor and Deputy Governors are full time officials of the RBI
and are paid prescribed salaries and allowances.
■ Other directors are pat time officials and are given fare and allowance
to participate in the meetings.
Organisation:

■ Organisationally, the RBI operates through various departments:

1. Issue dept.
2. Banking dept.
3. Dept. of banking organisation
4. Agricultural Credit Organisation
5. Industrial Finance Dept.
6. Non Banking Companies Dept.
7. Exchange Control Dept.
8. Legal Dept.
9. Dept. of planning and reorganisation
10. Economic Dept.
11. Inspection dept.
12. Dept. of Accounts and Expenditure
13. RBI services Board.