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RESERVE BANK OF INDIA.

INTRODUCTION

Reserve Bank of India, as the central bank of the country occupies a significant place in the Indian banking and financial system. As an apex institution, it acts as a guide, regulator, controller and promoter of the financial system. Reserve Bank of India was established in 1935 ,under the Reserve Bank of India Act, 1934 with the objectives as stated in the Preamble of the RBI Act, "to regulate the issue of bank notes and for 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. "

Till 1949, it was private shareholders institution but became a state-owned institution after its nationalisation. The bank besides acting as a regulator of financial system also performs developmental role. It is said to be the banker to the banks and controller of activities of banking, non-banking and the financial institutions in the country. The RBI Act empowers the Central Government to issue such directions to it as they might consider necessary in the interest of general public after consulting the Governor of the Bank.

CONSTITUTION OF RBI

RBI has been constituted as a corporate body having perpetual succession and a common seal. It was established with an authorised capital of Rs 5crores divided in shares of Rs100 each. The bank was nationalised in 1949 and the shareholders were paid in securities of Government of India. The shares held by private individuals were taken over by the Government by paying compensation at the rate of Rs 118 for every share of Rs 100 held by shareholders.

ORGANISATION AND MANAGEMENT

The general affairs and business of the bank is managed by the Central Board of Directors having 20 members. The members include the following :

(1) a Governor and not more than four Deputy Governors to be appointed by the Central Government.

(2) four directors to be nominated by the Central Government, one each from the four Local Boards.

(3) ten directors to be nominated by the Central Government.

(4) one government official to be nominated by the Central Government.

Apart from Central Board of Directors, four Local Boards are constituted representing each area specified in the first schedule to the Act. Local Boards advise the Central Board on various matters referred to it. They also perform the functions delegated to them by the Central Board. However, the final control lies with the Central Board.

In order to perform various functions, the bank has been divided and sub-divided into 20 departments and three training establishment at the central office of the bank. The internal organisational structure of the Bank has undergone various changes in tune with the changes in global and Indian financial markets. The increased volume and variety of Bank's activities has led to the expansion of the bank from time to time. The concept of 'functional specialisation ' has been followed to constitute various departments. These departments perform the following functions :

The organization structure of RBI can be depicted with the help of following chart :

1.Issue Department. The main function of this department is to issue currency.

2. Banking Department.This department keeps the reserve fund of the scheduled commercial banks, provides financial assistance to the banks and functions as a clearing house. It also deals with government securities, manages public debt and makes arrangement for the transfer of government funds.

3. Banking Development Deprtment. It aims at developing banking in rural and undeveloped areas.

4.Department of Banking Operations. This department controls, supervises and regulates the working of banking institutions and grants licenses for opening new branches of the existing banks or for opening new banks.

5.Department of Non-banking Companies. It supervises the working of the non-banking companies and financial institutions in the country.

6. Department of Legal Affairs. It provide legal advice on various legal issues to various departments. It also gives legal advice with regard to the implementation of banking laws in the country.

7. Exchange Control Department. It deals in sale and purchase of foreign exchange.

8. Department of Agricultural Credit. The department looks into the problems of agricultural sector. It provides facilities of rural credit to state governments and state cooperatives.

9. Department of Industrial Finance. Its main function is to identify financial needs of small and medium scale industries and provide credit / financial assistance accordingly.

10. Economics Department. It frames banking policies for better implementation of economic policies of the government.

11. Department of Research and Statistics. This department collects detailed data pertaining to money, credit, finance production etc. after detailed research on above mentioned areas. It also publishes the data.

12. Inspection Department. It performs the function of carrying out inspection of local offices of the commercial banks.

13. Department of Planning and Re-organisation. It formulates new plans and policies or reorganise existing policies for making them more effective.

14. RBI Services Board. It deals with recruitment, selection of new employees for filling up various vacant posts in RBI.

15. Department of Accounts and Expenditure. It maintains various records relating to the receipts and expenditure of RBI.

16. Department of Supervision. It was set up in December, 1993 for the supervision of commercial banks.

17. Control Department. It controls the affairs of all the branches of Reserve Bank of India in the country.

18. External Investments and Operations. It undertakes investments into the shares or debentures of corporate sector or government securities. The principle of security, liquidity and profitability are taken into account while making investments.

20. Press Relations Division.

21. Industrial and Export Credit etc.

RBI has its local offices situated at important metropolitan cities of India. In other places where the RBI does not have it's offices, the State Bank of India and its subsidiaries act as its agents.

FUNCTIONS OF THE RESERVE BANK OF INDIA

The Reserve Bank of India is the Central Bank of the Country. The main functions of a central bank are broadly the same all over the world, namely, acting as note issuing authority, banker's bank and banker to the Government. The scope and content of policy objectives vary from country to country and from period to period. It depends on the stage of development, the structure of the economy, the goals to which the Government are committed, and the current general economic situation. Even so a broad identity of approach can be understood. It is generally agreed that a central bank's objectives should be to promote or facilitate a high growth rate, full employment, price stability and a viable external payments position. It is recognised that these objectives often clash and a working optimum has to be aimed at. According to the Preamble to the Reserve Bank of India Act, the main function of the Bank is 'to regulate the issue of Bank notes and the 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. '

The Reserve Bank has the sole right to issue notes. It also acts as banker to the commercial banks and to some of the financial institutions including state cooperative banks. It holds custody of their cash reserves and grants them accommodation in a discretionary way. For the performance of its duties as the regulator of credit, the Bank possesses not only the usual instruments of general credit control such as bank rate, open market operations and the power to vary the reserve requirements of banks, but also extensive powers of selective and direct credit regulation. Another important function of the Bank, and historically the oldest, relates to the conduct of the banking and financial operations of the Government. The Bank has also an close inter-dependence of international trade and national economic growth and well-being. This is of course an aspect of the wider responsibility of the central bank for the maintenance of economic and financial stability. For the performance of this function, the Bank is entrusted with the custody and the management of the country's international reserves, it acts also as the agent of the Government in respect of India's membership of the International Monetary Fund. It also exercises control over payments and receipts for international transactions in conformity with the trade control which is operated by Government.

1.As Currency Authority

The Reserve Bank is the sole authority for the issue of currency in India other than one rupee couns/notes and subsidiary coins, the magnitude of which is relatively small. In India, currency still forms the major part of the money supply even though its importance has declined in recent years, albeit very slowly, due to the spread of banking facilities and the banking habit. Since currency (and the deposit liabilities of the Reserve Bank, which are as good as currency) constitutes the base for the expansion of money supply, regulation of currency is an important element of monetary control. In fact, the Statue itself imposes some restrictions on note issue. One Rupee Coins and notes are issued by the Government of India. In terms of the Reserve Bank of India Act, the affairs of the Bank relating to note issue and its general banking business are conducted through two separate departments, viz., the Issue and the Banking Departments. The assets of the Issue Department, which form the backing for the note issue, are kept wholly distinct from those of the Banking Department. In practice, the distinction between the two Departments has little economic significance, since there are frequent shifts between the assets of the Issue and The Banking Departments.

Process of Notes Issue. The issue of currency into circulation and its withdrawal from circulation (that is, expansion and contraction of currency, respectively) take place through the Banking Department of the Bank. Thus, if a scheduled bank wants to withdraw Rs 1 crore from its ' deposit with the Reserve Bank, the transaction is handled by the Banking Department, which gives currency in the denominations required by the bank, debiting the bank's account. For this purpose, the Banking Department holds stocks of currency, which it replenishes as and when necessary, from the Issue Department, against equivalent transfer of eligible assets. Likewise, if a bank tenders cash to the Reserve Bank for its account, the cash is received by the Banking Department. If, as a result, the holding of currency in the Banking Department becomes surplus to the normal requirements of the Department, the surplus is returned to the Issue Department in exchange for equivalent assets. In respect of the exchange of bank notes for coins and coins for notes, and change from one denomination of notes to another, the Issue Department deals directly with the public and not through the Banking Department.

2. Banker to the Government

Now, the Reserve Bank of India is banker to the central Government as well as State Governments. It makes receipts and payments on behalf of the Government and perform other banking operations for it. All the Governments maintain their current accounts with RBI.

Before the establishment of the Reserve Bank, the more important current financial transactions of Government were handled by the Imperial Bank of India. Administration of the public debt was the direct responsibility of the Government, although the Public Debt Offices were being managed by the Imperial Bank of India.

Legal Basis of the Function : Section 20,21 and 21A of the Reserve Bank of India Act form the statutory basis for these function. In terms of the first two sections, the Bank has the obligation to transact the banking business to the Bank. The Bank accordingly undertakes to accept money on account of that Government, to make payments on their behalf and also to carry out their exchange, remittance and other banking operations including the management of the public debt. In terms of Section 21A, the Bank performs similar functions on behalf of the Governments by virtue of agreements entered into with them.

As banker it makes short term credit to the Government. Under law the Central Government can borrow any amount from Reserve Bank of India. But State Governments do not enjoy unlimited borrowing powers. They can borrow only up to sanctioned limits. However, in actual practice the State Governments have become used to borrow in excess of the limits. The short term advances to the State Governments are called ways and means advances.

As a manager of public department, it manages all issues, services and creates market for the Government securities. Further, it is responsible for smooth functioning of securities market i.e. maintaining its' stability by regulating demand and supply of the securities. As banker to the Government it advises it on all banking and financial matters which include matters which relating to international finance, mobilisation of resources, changes in banking laws, merger and consolidation of banks.

The Bank is required to maintain currency chests of its ' Issue Department at places prescribed by the Government, and to keep the chests supplied with sufficient notes and coins to provide currency for the transactions of the Government and reasonable remittances facilities to the public at such places. The Bank is also obliged under the agreement to remit, on account of Government, between India and London, such amounts as may be required from time to time at the prevailing market rate for telegraphic transfers.

3. Advisor to the Government.

Like all central banks, the Reserve Bank acts as adviser to Government not only on banking and financial matters but also on a wide range of economic issues including those in the field of planning and resources mobilisation. It has of course a special responsibility in respect of financial policies and measures concerning new loans, agricultural finance, co-operative organisation, industrial finance and legislation affecting banking and credit. The Bank's advice is sought on certain aspects of formulation of the country's Five Year Plans such as the financing pattern, mobilisation of resources and institutional arrangements with regard to banking and credit matters. The Bank has also to render advice to Government on various matters of international finance.

For the purpose, the contact between the Government and the Bank is maintained formally and informally and at various levels from the Governor downwards. The Bank also keeps the Government informed of developments in the financial markets periodically.

4. Banker's Bank

The Reserve Bank of India is statutory banker to the Government of India. It is also banker to the state Government as per agreements signed with them. In this capacity it holds their cash reserves, lends them funds for short terms and provides economical and expeditious central clearing and remittance facilities. Thus it performs all banking operations for them.

As per central banking theory cash reserves are maintained with the central bank to facilitate clearing operations. However in case of the Reserve Bank of India, the position is slightly different. It statutory requires commercial banks to deposit with it a stipulated ratio ranging between 3% to 15% of their liabilities. These deposits are neither held voluntarily nor can be used for making inter-bank clearances. For this operations cash reserves in excess of the statutory requirement have to be maintained.

The RBI rediscounts the bills of the commercial banks. It provides leadership, guidance and direction in regulating their practices. The centralisation of cash reserves with RBI is a source of strength for the system and can be employed most effectively during the periods of seasonal strain and financial crisis. It is for this reason that it is called "Reserve Bank ". As Banker's bank the RBI can implement its monetary policy more effectively.

5. Lender of the Last Resort.

It is lender of the last resort for the scheduled commercial banks in India. It provides credit to these banks through rediscounting facility. It is called lender of the last resort as normally the banks are expected to meet their requirements from sources other than the Reserve Bank of India. However, the empirical evidence shows that in difficult times scheduled commercial banks have approached the RBI, too frequently, turning it into almost a lender of the regular resort rather than that of last resort, thus forcing the R. B. I. to review the policies.

In fact, this function developed out of the unique position as central bank of the country. This function has come to be regarded as the sine qua non of the central banking. In this capacity RBI assumes the responsibility of meeting directly or indirectly all reasonable demands for financial accommodation from commercial banks, and other financial institutions.

6.Supervision of Banks

The Reserve Bank's responsibilities include, in addition to the traditional central banking functions, the development of an adequate and sound banking system for catering to the needs of trade, commerce, industry and agriculture. Under the Reserve Bank of India Act, 1934 and the Banking (Companies) Regulation Act, 1949, the Bank has been vested with extensive powers of supervision and control over commercial and co-operative banks. The Bank's powers extend to calling for information from and giving directions to even non-banking institutions receiving deposits.

The Act empowers the Bank to regulate through licencing of banks branch expansions, management of reserves and assets and regarding the amalgamations, reconstruction and liquidation. The banks send their periodic reports to the Reserve Bank of India. The RBI conducts periodic inspection of the banks. The regulation and control are required for the proper growth of sound banking.

7. Controller of Money Supply and Credit

One of the most important functions of the Reserve Bank of India is to control the money supply and credit in the economy. This becomes all the more important as India is following the managed paper currency system which has inherent inflationary tendency. The RBI has to control money supply and credit in such a way as to ensure the reasonable achievements of all the objectives of credit control e. g. price stability, full employment, economic growth, equilibrium in the balance of payments, etc. For performing this function it has various techniques of credit control available with it. It has the wide powers to influence the volume of money supply directly or indirectly.

8. Foreign Exchange Control and Management

The Reserve Bank of India is the custodian of the country's foreign exchange reserves. It manages the exchange control. Exchange control was first imposed in India in September 1939. Exchange transactions receipts and payments are controlled now under the Foreign Exchange Regulation Act 1973 which is proposed to be replaced by Foreign Exchange Management Act (FEMA). The law has centralised the foreign exchange reserves in the hands of the Reserve Bank of India. The purpose of the control is to regulate the demand for foreign exchange reserves due to growing economy.

The Reserve Bank of India acts as the agent of the Government of India in connection with membership of the International Monetary Fund (IMF). With the liberalisation of economy the regulations over foreign exchange have been removed considerably. However, despite near full convertibility of the foreign exchange the role of RBI does not come to an end, in this regard it will be required to intervene effectively to check unwarranted volatility of rupee against other currencies.

9. Monetary Data and Publications

The Reserve Bank of India is the main source of monetary data and also of the data relating to banking. Obviously, the data are very important for framing the economic policies and banking policies. The Bank collects and publishes the data regularly through weekly statements, monthly bulletins, annual report, annual report on currency and finance, report on trends and progress of banking in India, etc.

The availability of this important data is very useful to all those who are interested in the various aspects of the Indian economy.

10. Promotional Functions

In addition to the usual central banking functions, the Reserve Bank of India has been performing a variety of promotional functions. Its promotional functions and activities have been mainly directed towards building up and strengthening financial infrastructure and filling the institutional gap by setting up new financial institutions, and by ensuring the allocation of credit in the socially desired directions. Some of its promotional activities are briefly discussed below :

(a) Promotion of Commercial Banking. Under the powers vested in it under the RBI. Act of 1934 and the Banking (Companies) Regulation Act 1949, it has taken a number of steps from time to time for the growth of commercial banks and putting the Indian Banking System on a sound footing. These Acts include regulation of banks, setting up of Deposit Insurance Corporation, amalgamation and consolidation of banks.

(b) Promotion of Co-operative Banking. In India's rural-based economy co-operative banks have an important role to play.

The credit for expansion of co-operative banking goes to the Reserve Bank of India, which is directly or indirectly source of funds for these co-operative banks.

(c) Promotion of Agricultural and Rural Credit. In the Reserve Bank of India Act itself, it is recognised that it has special responsibility for providing institutional credit to agriculture and allied activities. It has a separate Agricultural Department. A major step in the direction was setting up of the Agricultural Refinance and Development corporation, a subsidiary of the RBI. Nationalisation of banks gave a further push to institutional credit in rural areas. Establishing Regional Rural Banks and inclusion of agriculture in the priority sector are other major steps. Another development in this directions was the establishing of the National Bank for Agriculture and Rural Development (NABARD) in 1982, which took over the Agricultural Refinance and Development Corporation.

(d) Promotion of Industrial Finance. The commercial banks can take care of the working capital requirements of the industrial units. However, industrial growth cannot take place in the absence of medium long term finance. Moreover, small scale industries need special attention. Setting up of Industrial Development Bank of India, Industrial Finance Corporation of India, State Financial Corporations, Small Scale industrial Development Corporations, etc. are the notable steps in direction. The R. B. I. is the main force behind these institutions. Setting up of SIDBI is another important step.

(e) Promotion of Finance for Exports. To encourage exports, the Reserve Bank of India has been playing its role through refinance to banks against export credit under various schemes

e. g. the Bill Market Scheme, Export Bills Credit Schemes, Shipment Credit Schemes, Duty Drawback Credit Scheme. Export has been recognised as a priority sector.

In 1982, the Government of India established Export Import Bank (EXIM) as an apex bank for financing the foreign trade.

The Reserve Bank of India being the central bank of the country is prohibited from indulging in certain activities. It can not carry on any business or trade or invest in real estate or buildings. However, it can purchase or construct building for the purpose of offices or residences of the employees. It cannot perform commercial banking functions as this will amount to competing with them.