Functions of Reserve Bank of India Essay

1. Information. Fights against scotch crisis and check up ons economicalal and price stability in the farming 2. Promotional Functions3. Promotional of banking habit and intricacy of banking constitutions. Provides refinance for export promotion. en self-aggrandisingment of facilities for the provision of bucolic credit through NABARD 4. Extension of facilities for the Small carapace Industries.5. Helping the co-operative sector.6. Prescription of minimum statutory requirements. Innovations in banking business. A. Traditional FunctionsThe rbi functions on the traditional lines regarding the pursuit activities. 1. Monopoly of Note IssueIn cost of break opening 22 of the declargon Bank of India make, the rbi has been given the statutory function of note payoff on a monopoly basis. The note issue in India was earlier based upon Pro shell outal Reserve System. When it became unwieldy to hold in the reserve proportionately, it was replaced by Minimum Reserve System . tally to the run batted in Amendment map of 1957, the bank should immediately maintain a minimum reserve of Rs.200 crore worth of metallic coins, gold bullion and step to the foreside(prenominal) securities of which the economic re nurture of gold coin and bullion should be not less than Rs.115 crore. rbi manages circulation of money through currency dressers. Originally run batted in issued currency notes of Rs.2 and above. However, collectable to higher cost of printing small denomination notes these denominations be now coincides and issued by regime. funds Chests Currency Chests be receptacles in which demarcations of issuable and vernal notes are stored along with rupee coins. Currency Chests are repositories run by rbi, SBI, subsidiaries of SBI, familiar sector banks, presidential term Treasuries and Sub treasuries. Currency Chests help in intricacy and contraction of currency in the country. The advantages for a bank having currency chest are (i) The ban k lowstructure draw funds whenever it is required for its hire and deposit funds when found surplus. (ii) transfer old and mutilated notes for tonic notes and coins (iii) Enjoy remittance facilities(iv) Cash remitted to currency chests by banks can be taken into account for maintenance of CRR. The currency chests maintained by world sector and few private sector banks are the property of rbi. The value of currency held in the chest belongs to run batted in. There are as many a(prenominal) as 4150 currency chests with banks in India. 2. Banker to the judicatureThe rbi acts as banker to the regimen down the stairs Section 20 of run batted in Act. Section 21 provides that Goernment should entrust its money remittance, metamorphose and banking transactions in India to run batted in. Under Section 21A RBI has to conduct similar transactions for call forth G overnments similarly. RBI earns no income by conducting those functions except earns commissions for managing the g overnments macrocosm debt. Where RBI has no branch, SBI or its subsidiaries are appointed as agents and sub-agents under Section 45 of the RBI Act. Agency Banks receive commission on all transactions conducted on turnover basis. The RBI extends ways and means advances to underlying and State Governments. Ways and Means AdvancesWays and Means Advances (WMA) is not a technical bank credit. It is a system under which the RBI provides credit to Central and State Governments for meeting temporary shortfall in government revenues as compared to the monthly expenditures. In other words, this facility is provided to meet temporary mismatches mingled with revenue collections and revenue expenditures of governments. The maximum volume and period of much(prenominal) advances are governed by agreements between RBI and the pertain government. To the State Governments, this facility is panoptic under three categories bashn as 1. Normal WMA2. Special WMA and3. as an overdraft facility.It also acts as adviser to Government on economic and fiscal matters. In brief, as a banker to the Government the RBI renders the following functions (a) Collects taxes and makes 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 hostile vary 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 monetary 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 g reenbacks, and so forth(c) Acts as the pecuniary adviser to the Government in all important economic and fiscal matters. 4. Banker to the BanksThe RBI acts as banker to all scheduled banks. commercial-gradeisedizedisedised banks including foreign banks, co-operative banks and RRBs are in line to be acceptd in the second schedule of RBI Act root 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 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 certain percentage of their enquire and time liabilities as militia with the RBI. This is known as Cash Reserve Ratio or CRR. At end November 1999, it is 3 per cent for RRBs and co-operative banks 9 per cent for commercial message banks. They also maintain Current Account with RBI for various banking transactions. This centralization of reserves and accounts enables the RBI to achieve the following (a) regularisation of money bestow credit.(b) Acts as flight attendant of cash reserves of commercial banks.(c) Strengthen the banking system of the country(d) Exercises effective control over banks in Liquidity Management. (e) Ensures timely financial supporter to the Banks in difficulties. (f) Gives directions to the Banks in their lend policies in the public interest.(g) Ensures elasticity in the credit structure of the country. (h) speedy transfer of funds between member banks.5. Acts as national clarification HouseIn India RBI acts as the clearing house for resolve of banking transactions. This function of clearing house enables the other banks to settle their interbank claims easily. Further it facilitates the stoppage economically. Where the RBI has no offices of its own, the function of clearing house is carried let on in the premises of the State Bank of India.The entire clearing house mental processs carried on by RBI are computerized. The inter-bank cheque clearing result is done twice a day. There is a assure 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 regress or emergency fund provider to the other member banks. As such, if the commercial banks are not able to get financial financial aid 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 shafts which are usually made available at Bank Rate. RBI rediscounts bills under Section 17 (2) and 17 (3) and grants advances against securities under Section 17 (4) of RBI Act. However, many of these transactions are practically carried out through separate agencies care DHFI, Securities Trading mess of India, primary dealers. The RBI now chiefly 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 at bottom 90 long time from the take in of purchase or discount is eligible for rediscount. (ii) Bills for Financing Agricultural effectsA bill issued for purpose of pay 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 surpass Industries Bills drawn or issued for the purpose of financing the production and marketing of products of bungalow and small industries approved by RBI and mature within 12 months from the date of discount. Refinance under agricultural and small exceed industries activities are now provided by NABARD by obtaining financial assistance from RBI. Bill for memory 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 180 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 needs. (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 Controller of trustThe RBI controls the credit 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) chaste Suasion(vi) Issue of Directives(vii) Direct ActionBy controlling credit, the RBI achieves the following(a) Maintains the desired level of circulation of money in the sparing. (b) Maintains the stability in the price level prevailing in the economy. (c) Controls the effects of trade cycles(d) Controls the fluctuations in the foreign commute rate(e) Channelize credit to the productive sectors of the economy 8. Custodianof Foreign veer 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 demoralise and sell foreign currencies depending upon the situations. Its purchase and bargain of foreign currencies from the market is done wish well commercial banks. However, the objective of the RBI will not be profit booking. It may buy the foreign currency to build up equal reserves or to mark off 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 investments denominated in different international currencies depending upon circumstances and needs. The value of Indias Foreign qualify 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 change magnitude 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 legal opinion exchange rates, inflow and outflow of currencies, noise form _or_ system of government of the RBI, etc. 9. Exchange ControlWhen a country faces equalizer 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. forever since the beginning of Second World War in 1939 India faced dearth 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 1st 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. take side imports, i.e., merchandise imports are regulated by Director freque nt Foreign Trade in the Ministry of Commerce. Payment for invisible transactions like tourism, foreign visit, dividend/interest payment, etc. is regulated by RBI. Similarly, all forex acquire or earned by residents in India, like exporters and relatives of NRIs Non-resident Indian should be surrendered to banks having clear from RBI to deal in forex. However, since 1992, the receivers of forex are permitted to retain certain 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 presently 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 internal currency and ensures its stability External Value of RupeeIn harm of preamble to RBI Act, the Bank is also required to maintain external, value of the Rupee. It, however, depends upon many factors like inflation levels, interest rates Balance of payments situation, etc., ruling in different countries on which RBI does not have control. Earlier, process 1993 the RBI uses to prescribe the Exchange Rate of Rupee. The external value of rupee is now determined by market forces. RBI by rectitude 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. I t 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 polish of co-operative movement present a critical account and a equilibrate 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 saving through the promotion of banking habit and expansion of the banking system territorially and functionally. Accordingly RBI h as set up pose Insurance kitty in 1962, Unit Trust of India in 1964, the IDBI in 1964, the Agricultural 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 book of facts 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 output 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 instigate exports the RBI is providing refinance facilities for export credit given by commercial banks. Further the rate of interest on ex port credits continues to be prescribed by RBI at a lower rate. The ECGC provides an amends cover on Export 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 shortly functioning as separate financial institutions. 3. Facilities for AgricultureThe RBI extends corroboratory financial facilities to agribusiness 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 ma kes 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 commercial enterprise 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 ad under priority sector advances. SSI sector contributes to a very coarse extent to employment opportunities and for Indian Exports. Keeping this in view, RBI has say commercial banks to open specialized SSI bank branches to provide adequate financial and technical assistance to SSI branches. There ar e around 30 lakh SSI units operating in India. Meeting their financial needs is one of the immemorial concerns of RBI. 5. Helps Co-operative SectorRBI extends indirect financing to State Co-operative Banks thereby connects the joint 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 ethical drug is done to ensure liquidity position of the bank. CRR prescription is done to have effective monetary control and money supply. Statutory Reserves Appropriation is done to ensure sound banking system, etc. It also asksbanks to set aside provisions again st possible bad loans. With these functions, it exercises control over the monetary and banking systems of the country to ensure growth, 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 cloture of branches. With this power RBI can ensure avoidance 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 wad out undesirable people from starting banking business. 2. Function of Inspection and interrogativeRBI inspects and makes enquiry in respect of various matters covered under Banking Regulations A ct and RBI Act. The inspection of commercial banks and financial institutions are conducted in terms of the provisions contained in Banking 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 pickings undue risk but aiming at profit maximization within the existing rules and regulations. This type of inspection is carried on periodically once a year or two covering all branches of banks.Banks are induce 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 appease in good health. This type of inspection / tick is known as off- site inspection. The RBI team visiting bank offices to conduc t verification of books and records is known as on- site inspection. RBI inspects banks under RBI Act only when there is a threat to close down a bank for mismanagement and there is a need to verify the fulfilment 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 dodgingRBI 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 structure 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 a nd RRBs. Fixed Deposits with other financial institutions like ICICI, IDBI, etc. and those with financial companies are 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 running(a) 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.