Functions of Reserve Bank of India Essay

1. Information. Fights against economic crisis and sees economic and price perceptual constancy in the countrified 2. promotional Functions3. Promotional of bordering habit and expansion of tilling establishments. Provides refinance for export promotion. Expansion of facilities for the provision of unsophisticated credit through NABARD 4. Extension of facilities for the Small Scale Industries.5. Helping the co- functional field.6. prescription(prenominal) of minimum statutory requirements. Innovations in vernacularing business. A. Traditional FunctionsThe run batted in functions on the traditional lines regarding the following activities. 1. Monopoly of Note IssueIn terms of Section 22 of the keep back commit of India Act, the run batted in has been given the statutory function of note issue on a monopoly basis. The note issue in India was primarily based upon comparative Reserve System. When it became difficult to prolong the reserve proportionately, it was replaced b y Minimum Reserve System . According to the run batted in Amendment Act of 1957, the bank should at one clip maintain a minimum reserve of Rs.200 crore worth of gold coins, gold bullion and foreign securities of which the measure of gold coin and bullion should be not little than Rs.115 crore. rbi manages circulation of money through gold chests. Originally run batted in issued currency notes of Rs.2 and above. However, delinquent to higher cost of printing depressed denomination notes these denominations argon now coincides and issued by authorities. cash Chests Currency Chests are receptacles in which stocks of issuable and new notes are stored along with rupee coins. Currency Chests are repositories run by rbi, SBI, subsidiaries of SBI, public heavens banks, establishment Treasuries and Sub treasuries. Currency Chests help in expansion and contraction of currency in the country. The advantages for a bank having currency chest are (i) The bank can draw property whene ver it is required for its use and deposit funds when found surplus. (ii) diversify old and mutilated notes for new notes and coins (iii) Enjoy remittance facilities(iv) property remitted to currency chests by banks can be taken into account for maintenance of CRR. The currency chests maintained by public sphere and few private sector banks are the property of run batted in. The value of currency held in the chest belongs to run batted in. There are as many as 4150 currency chests with banks in India. 2. Banker to the political relationThe RBI acts as banker to the Government to a lower place Section 20 of RBI Act. Section 21 provides that Government should entrust its money remittance, shift and banking transactions in India to RBI. beneath Section 21A RBI has to conduct similar transactions for State Governments also. RBI earns no income by conducting those functions but earns commissions for managing the governments public debt. Where RBI has no branch, SBI or its subsidiar ies are appointed as agents and sub-agents chthonic Section 45 of the RBI Act. Agency Banks receive commission on all transactions conducted on turnover basis. The RBI extends styles and means advances to Central and State Governments. Ways and Means AdvancesWays and Means Advances (WMA) is not a commercial message-grade bank credit. It is a system beneath which the RBI provides credit to Central and State Governments for meeting temporary shortfall in government revenues as compared to the monthly expenditures. In new(prenominal) words, this facility is provided to meet temporary mismatches between revenue collections and revenue expenditures of governments. The maximum volume and period of much(prenominal) advances are governed by agreements between RBI and the relate government. To the State Governments, this facility is extended under three categories known as 1. Normal WMA2. Special WMA and3. as an overdraft facility.It also acts as adviser to Government on economic a nd financial matters. In brief, as a banker to the Government the RBI renders the following functions (a) Collects taxes and imbibes payments on behalf of the Government (b) Accepts deposits from the Government(c) Collects cheques and drafts deposited in the Government accounts. (d)Provides short-term loans to the Government(e) Provides foreign exchange resources to the Government.(f) Keep the accounts of various Government Department.(g) Maintains currency chests in treasuries at some importance places for the convenience of the government. (h) Advises governments on their borrowing programmes.(i) Maintains and operates Central Governments IMF accounts. 3. Agent and Adviser of the GovernmentThe RBI acts, as the financial agent and adviser to the Government. It renders the following functions (a) As an agent to the Government, it accepts loans and manages public debts on behalf of the Government. (b) It issues Government bonds, treasury bills, and so forth(c) Acts as the financia l adviser to the Government in all important economic and financial matters. 4. Banker to the BanksThe RBI acts as banker to all schedule banks. Commercial banks including foreign banks, co-operative banks and RRBs are suitable to be included in the second schedule of RBI Act subject to fulfilling conditions laid down under Section 42 (6) of RBI Act.RBI has powers to delete a bank from the second schedule if the bank concerned fails to fulfill the laid down conditions such(prenominal) as erosion in paid up capital below the prescribed limits and the banks activities became detrimental to the interest of depositors, etc. All banks in India, should keep authentic per centage of their demand and time liabilities as reserves with the RBI. This is known as money Reserve Ratio or CRR. At end November 1999, it is 3 per cent for RRBs and co-operative banks 9 per cent for commercial banks. They also maintain Current Account with RBI for various banking transactions. This centralization o f reserves and accounts enables the RBI to achieve the following (a) normal of money supply credit.(b) Acts as custodian of cash reserves of commercial banks.(c) Strengthen the banking system of the country(d) Exercises effective mark over banks in liquid state Management. (e) Ensures timely financial assistance to the Banks in difficulties. (f) Gives directions to the Banks in their lending policies in the public interest.(g) Ensures elasticity in the credit structure of the country. (h) Quick transfer of funds between member banks.5. Acts as National Clearing HouseIn India RBI acts as the clearing kin for settlement of banking transactions. This function of clearing house enables the other(a) banks to settle their interbank claims easily. Further it facilitates the settlement economically. Where the RBI has no offices of its own, the function of clearing house is carried out in the premises of the State Bank of India.The absolute clearing house operations carried on by RBI a re com consecrateerized. The inter-bank cheque clearing settlement is done twice a day. There is a separate route for clearing high value cheques of Rs.1.00 lakh and above. Cheques drawn on banks in metropolitan cities are cleared on the same day. The RBI carries out this function through a cell known as National Clearing Cell. In 1998, there were in all 860 clearing houses in operation of which 14 were run by RBI, 578 by SBI and others by public sector banks.The RBI acts as a lender of last resort or emergency fund provider to the other member banks. As such, if the commercial banks are not able to get financial assistance from any other sources, then as a last resort, they can approach the RBI for the necessary financial assistance. In such situations, the RBI provides credit facilities to the commercial banks on eligible securities including genuine trade bills which are usually made available at Bank treasure. RBI rediscounts bills under Section 17 (2) and 17 (3) and grants adv ances against securities under Section 17 (4) of RBI Act. However, many of these transactions are practically carried out through separate agencies the like DHFI, Securities Trading Corporation of India, primary dealers. The RBI now mainly provides refinance facilities as direct assistance. Rediscounting of bills fall under the following categories (i) Commercial BillA bill arising out of bonfire commercial or trade transaction drawn and payable in India and mature within 90 geezerhood from the pick up of obtain or discount is eligible for rediscount. (ii) Bills for Financing Agricultural OperationsA bill issued for purpose of financing seasonal agricultural operations or the marketing of crops and maturing within 15 months from the date of purchase or rediscount. (iii) Bills for Financing Cottage and Small Scale Industries Bills drawn or issued for the purpose of financing the production and marketing of products of cottage and small industries canonical by RBI and mature with in 12 months from the date of discount. Refinance under agricultural and small scale industries activities are now provided by NABARD by obtaining financial assistance from RBI. Bill for holding or trading in Government securities Such a bill should mature within 90 days from the date of purchase or rediscounting and be drawn and payable in India, (iv) Foreign billsBonfire bill arising out of export of goods from India and which mature within clxxx days from the date of shipment of goods are eligible. As lender of last resort the RBI facilitates the following (a) Provides financial assistance to commercial banks at the time of financial necessarily. (b) It helps the commercial banks in maintaining liquidity of their financial resources. (c) Enables the commercial banks to carry out their activities with minimum cash reserves. (d) As a lender of last resort, the RBI can exercise full control over the commercial banks. 7. Acts as the mark offler of doctrineThe RBI controls the cre dit creation by commercial banks. For this, the RBI uses both quantitative and qualitative methods. The important methods used by RBI are, (i) Bank Rate Policy(ii) Open Market Operation(iii) Variation of Cash Reserve Ratio(iv) Fixing Margin Requirements(v) Moral Suasion(vi) Issue of Directives(vii) Direct ActionBy controlling credit, the RBI achieves the following(a) Maintains the desired direct of circulation of money in the economy. (b) Maintains the stability in the price take aim prevailing in the economy. (c) Controls the effects of trade cycles(d) Controls the fluctuations in the foreign exchange rate(e) indicate credit to the productive sectors of the economy 8. Custodianof Foreign Exchange ReservesThe RBI acts as the custodian of foreign exchange reserves. Adequate reserves may help maintain foreign exchange rates. In order to minimize the undue fluctuations in the rates it may buy and sell foreign currencies depending upon the situations. Its purchase and sale of foreig n currencies from the market is done like commercial banks. However, the objective of the RBI will not be profit booking. It may buy the foreign currency to build up adequate reserves or to arrest unwarranted rise in the value of rupee which may be due to sudden inflow of foreign currencies into India. It may also buy and sell foreign currencies in international market to switch the portfolio of investings denominated in unlike international currencies depending upon circumstances and needs. The value of Indias Foreign Exchange reserves held by RBI as on June 1998 amounted to Rs.115001 crore.This amount comprises of gold Rs.12826 crore, foreign currency assets and value of IMF currency, viz., SDR (Special Drawing Rights). These reserves are increased to Rs. 1, 38,005 crore in March 1999. The value of foreign currency assets of RBI, which form the largest portion in Indias Foreign Currency reserves, is subject to changes even on daily basis depending upon ruling exchange rates, inf low and outflow of currencies, intervention policy of the RBI, etc. 9. Exchange ControlWhen a country faces Balance of Payment of problems usually when its foreign exchange payments exceed foreign exchange receipts it controls the whole gamut of fore (foreign exchange) transactions and regulates payment system for its advantage. Ever since the beginning of Second World War in 1939 India faced shortage of forex for its development and growth. A Foreign Exchange Regulation Act was originally put in operation from March 1947 and later a new act known as Foreign Exchange Regulation Act (FERA) 1973 was introduced from foremost January 1974.Under this Act, RBI is empowered to regulate foreign exchange outgo and inflow, for example, we cannot buy everything we need from abroad and pay for it in forex. Trade side imports, i.e., intersection imports are regulated by Director General Foreign Trade in the Ministry of Commerce. Payment for invisible transactions like tourism, foreign visit, di vidend/interest payment, etc. is regulated by RBI. Similarly, all forex received or earned by residents in India, like exporters and relatives of NRIs Non-resident Indian should be surrendered to banks having license from RBI to deal in forex. However, since 1992, the receivers of forex are permitted to retain genuine part of this forex in a separate foreign currency account if they so desire. Such account is known as Exchange Earners Foreign Currency Account or EEFC Account. Further, since 1994 many controls exercised by RBI on forex payments were relaxed.These days the RBI regulates forex transactions only to a minimum level and soon the Act, FERA may be replaced by a new Foreign Exchange Management Act. While the purchase and sale of forex, maintenance of foreign exchange reserves/gold, are handled in the Department of External investment and operations the control and regulations of various other forex transactions are handled in the Exchange Control Department of Reserve Bank of India. The RBI by its operation of credit control and price stability maintains the internal value of domestic currency and ensures its stability External Value of RupeeIn terms of preamble to RBI Act, the Bank is also required to maintain external, value of the Rupee. It, however, depends upon many factors like rising prices levels, interest rates Balance of payments situation, etc., ruling in different countries on which RBI does not have control. Earlier, till 1993 the RBI uses to prescribe the Exchange Rate of Rupee. The external value of rupee is now determined by market forces. RBI by virtue of its position as the Central Bank of the country and custodian of large forex reserves can influence the level of External Value in the short run. Publishes the Economic Statistics and Other InformationThe RBI collects statistics on economic and financial matters. It publishes periodically an analytical account of the operations of joint stock and co-operative banks. It presents the genuine financial position of the government and companies. The publications like the report on currency and finance, the report on the trend and progress of banking in India, the brush up of co-operative movement present a critical account and a balanced review of banking developments commercial, economic and financial conditions of the country. Fights against Economic CrisisThe RBI aims at economic stability in the country whenever, there is a danger to the economic stability, it takes immediate measures to put the economy on proper course by effective policy changes and implementation thereof. Promotional FunctionsThese are non-monetary functions. They include the following 1. Promotion of Banking Habits The RBI institutionalizes economic system through the promotion of banking habit and expansion of the banking system territorially and functionally. Accordingly RBI has set up Deposit Insurance Corporation in 1962, social unit Trust of India in 1964, the IDBI in 1964, the Agr icultural Refinance Corporation in 1963, Industrial Reconstruction Corporation of India in 1972, NABARD in 1982 and the National Housing Bank in 1988, etc. It has helped to bring into existence several industrial finance corporations such as Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India for industrialization of the country. Similarly sector specific corporations took care of development in their respective spheres of activity. 2. Provides Refinance for Export PromotionThe RBI takes the initiative for siding facilities for the provision of finance for foreign trade particularly of exports. The Export Credit and Guarantee Corporation (ECGC) and Exam Banks render useful functions on this line. To encourage exports the RBI is providing refinance facilities for export credit given by commercial banks. Further the rate of interest on export credits continues to be prescribed by RBI at a lower rate. The ECGC provides an insurance cover on E xport receivables. EXIM Bank extends long term finance to project exporters and foreign currency credit for promotion of Indian exports. Students should know that many of these institutions were part of Reserve Bank earlier although they are currently functioning as separate financial institutions. 3. Facilities for AgricultureThe RBI extends indirect financial facilities to agriculture regularly. Through NABARD it provides short-term and long-term financial facilities to agriculture and allied activities. It established NABARD for the overall administration of agricultural and rural credit. Indian agriculture would have starved of a cheap credit but for the institutionalization of rural credit by RBI. The Reserve Bank was extending financial assistance to the rural sector mainly through contributions to the National Rural Credit Funds being operated by NABARD.RBI presently makes only a symbolic contribution of Rs.1.00 crore. It, however, extends cheap indirect financial assistance to the agricultural sector by providing large sums of money through General Line of Credit to NABARD. The loans and advances extended to NABARD by RBI and outstanding as on June 1999 amounted to Rs.5073 crore. 4. Facilities to Small Scale IndustriesThe RBI takes active steps to increase the supply of credit to small industries. It gives directives to the commercial banks regarding the extension of credit facilities to small scale industries. It encourages commercial banks to provide guarantee services to SSI sector. Banks advances to SSI sector are classified under priority sector advances. SSI sector contributes to a very great extent to employment opportunities and for Indian Exports. Keeping this in view, RBI has directed commercial banks to open specialized SSI bank branches to provide adequate financial and technical assistance to SSI branches. There are around 30 lakh SSI units operating in India. Meeting their financial needs is one of the prime concerns of RBI. 5. Helps Co-o perative SectorRBI extends indirect financing to State Co-operative Banks thereby connects the cooperative sector with the main banking system of the country. The finance is mostly, is routed through NABARD. This way the financial needs of agricultural sector are taken care of by RBI. 6. Prescription of Minimum Statutory Requirements for BanksThe RBI prescribes the minimum statutory requirements such as, paid up capital, reserves, cash reserves, liquid assets, etc. RBI prescribes reserves requirements both under Banking Regulation Act and RBI Act to ensure different objectives. For example, SLR prescription is done to ensure liquidity position of the bank. CRR prescription is done to have effective monetary control and money supply. Statutory Reserves annexation is done to ensure sound banking system, etc. It also asksbanks to set aside provisions against possible bad loans. With these functions, it exercises control over the monetary and banking systems of the country to ensure gro wth, price stability and sound banking practices. C. Supervisory FunctionsThe Reserve Bank of India performs the following supervisory functions. By these functions it controls and administers the entire financial and banking systems of the country. 1. Granting License to BanksThe RBI grants license to the banks, which like to commence their business in India. Licenses are also required to open new branches or closure of branches. With this power RBI can ensure turning away of unnecessary competitions among banks in particular location evenly growth of banks in different regions, adequate banking facility to various regions, etc. This power also helps RBI to weed out undesirable people from starting banking business. 2. Function of Inspection and EnquiryRBI inspects and makes enquiry in respect of various matters covered under Banking Regulations Act and RBI Act. The inspection of commercial banks and financial institutions are conducted in terms of the provisions contained in Bank ing Regulation Act. These refer to their banking operations like loans and advances, deposits, investment functions and other banking services. Under such inspection RBI ensures that the banks and financial institutions carry on their operations in a prudential manner, without taking undue lay on the line but aiming at profit maximization within the existing rules and regulations. This type of inspection is carried on periodically once a year or cardinal covering all branches of banks.Banks are obliged to take remedial measures on the lapses / deficiencies pointed out during inspection. In addition RBI also calls for periodical information concerning certain assets and liabilities of the banks to verify that the banks continue to remain in good health. This type of inspection / verification is known as off- site inspection. The RBI team visiting bank offices to conduct verification of books and records is known as on- site inspection. RBI inspects banks under RBI Act only when the re is a threat to close down a bank for mismanagement and there is a need to verify the fulfillment of conditions for the status of scheduled bank. RBI presently conducts inspection of commercial banks, Development Financial Institutions like IDBI, NABARD, etc. Urban Co- operative Banks and non banking financial companies like Lease Financing Companies, Loan Companies. 3. Implementing the Deposit Insurance SchemeRBI Implements the Deposit Insurance Scheme for the benefit of bank depositors. This supervisory function has improved the standard of banking in India due to this confidence building exercise. Under this system, deposits up to Rs.1.00 lakh with the bank branch are guaranteed for payment. Deposits with the banking system alone are covered under the scheme. For this purpose banking system include accounts maintained with commercial banks, co- operative banks and RRBs. Fixed Deposits with other financial institutions like ICICI, IDBI, etc. and those with financial companies ar e not covered under the scheme. ICICI is since merged with ICICI Bank Ltd. and IDBI is getting converted into a bank. 4. Periodical Review of the Working of the Commercial BanksThe RBI periodically reviews the work done by commercial banks. It takes suitable steps to enhance the efficiency of the banks and make various policy changes and implement programmes for the well-being of the nation and for improving the banking system as a whole. 5. Controls the Non-Banking Financial CorporationsRBI issues necessary directions to the Non-Banking financial corporations and conducts inspections through which it exercises control over such institutions. Deposit taking NBFCs require permission from RBI for their operations.