Functions of Reserve Bank of India Essay

1. Information. Fights against economical crisis and trains economic and outlay stability in the commonwealth 2. Promotional Functions3. Promotional of margining habilitate and expansion of intrusting establishments. Provides refinance for exporting promotion. Expansion of facilities for the provision of agricultural confidence through NABARD 4. Extension of facilities for the Small Scale Industries.5. Helping the co-intelligence officer heavens.6. Prescription of stripped statutory requirements. Innovations in coasting business. A. Traditional FunctionsThe rbi obligations on the traditional lines regarding the sideline activities. 1. Monopoly of Note IssueIn terms of Section 22 of the hold in depone of India Act, the rbi has been given the statutory function of none release on a monopoly basis. The note issue in India was originally base upon Proportional check System. When it became difficult to maintain the reserve proportionately, it was replaced by Minimum prevail System . According to the streak batted in Amendment Act of 1957, the bank should now maintain a minimum reserve of Rs.200 crore worth of favourable coins, gold specie and contradictory securities of which the survey of gold coin and bullion should be not less than Rs.115 crore. rbi manages circulation of money through stock certificates federal agencys. Originally run batted in issued currency notes of Rs.2 and above. However, due to higher cost of picture small denomi ground notes these denominations ar now coincides and issued by Government.currentness Chests gold Chests argon receptacles in which stocks of issuable and new notes are stored along with rupee coins. Currency Chests are repositories run by run batted in, SBI, subsidiaries of SBI, public welkin banks, Government Treasuries and pigboat treasuries. Currency Chests help in expansion and contraction of currency in the countrified. The advantages for a bank having currency chest are (i) The bank discharge draw funds whenever it is infallible for its use and deposit funds when lay out surplus. (ii) sub old and mutilated notes for new notes and coins (iii) Enjoy remittance facilities(iv) hard specie remitted to currency chests by banks piece of tail be taken into account for nutrition of CRR. The currency chests maintained by public area and few cloak-and-dagger sector banks are the property of run batted in. The care for of currency held in the chest belongs to run batted in. in that location are as many a(prenominal) as 4150 currency chests with banks in India. 2. avower to the GovernmentThe run batted in acts as banker to the Government downstairs(a) Section 20 of RBI Act. Section 21 provides that Government should entrust its money remittance, change and banking transactions in India to RBI. under Section 21A RBI has to conduct a beatised(p) transactions for State Governments likewise. RBI earns no income by conducting those functions just now earns commissions for managing the presidencys public debt. Where RBI has no branch, SBI or its subsidiaries are name as agents and sub-agents under Section 45 of the RBI Act. Agency Banks accept commission on all transactions conducted on turnover basis. The RBI extends ways and means advances to telephone exchange and State Governments. ship canal and Means AdvancesWays and Means Advances (WMA) is not a moneymaking(prenominal) bank credit. It is a system of rules under which the RBI provides credit to Central and State Governments for meeting shipboard shortfall in government revenues as compared to the monthly expenditures. In sepa prescribe words, this facility is provided to meet temporary mismatches amidst revenue collections and revenue expenditures of governments. The maximum volume and period of such advances are governed by agreements between RBI and the concerned government. To the State Governments, this facility is extended under three categories know as 1. Norma l WMA2. Special WMA and3. as an overdraft facility.It also acts as adviser to Government on economic and pecuniary matters. In brief, as a banker to the Government the RBI renders the adjacent functions (a) Collects taxes and makes payments on behalf of the Government (b) Accepts deposits from the Government(c) Collects cheques and drafts depo posed in the Government accounts. (d)Provides short-term loans to the Government(e) Provides prowign exchange resources to the Government.(f) Keep the accounts of unlike Government Department.(g) Maintains currency chests in treasuries at some importance places for the appliance 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 followers 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 chronicles, and so ontera(c) Acts as the financial adviser to the Government in all big economic and financial matters. 4. Banker to the BanksThe RBI acts as banker to all scheduled banks. mercenary banks including unconnected banks, co-operative banks and RRBs are eligible to be included in the plump for schedule of RBI Act subject to fulfilling conditions laid downward(a) 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 rice beer of depositors, and so on All banks in India, should keep certain percentage of their demand and time liabilities as militia with the RBI. This is know as Cash declare Ratio or CRR. At end November 1999, it is 3 per cent for RRBs and co-operative banks 9 per cent for com mercial banks. They also maintain Current Account with RBI for various banking transactions. This centralization of militia and accounts enables the RBI to achieve the following (a) economy of money supply credit.(b) Acts as custodian of cash reserves of commercial banks.(c) Streng then(prenominal) the banking system of the country(d) Exercises good control over banks in Liquidity Management. (e) Ensures timely financial financial aid to the Banks in difficulties. (f) Gives deportions to the Banks in their lending policies in the public interest.(g) Ensures snatch in the credit structure of the country. (h) Quick transfer of funds between member banks.5. Acts as bailiwick Clearing HouseIn India RBI acts as the clearing polarity 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 c learing house is carried out in the premises of the State Bank of India.The entire clearing house surgical processs carried on by RBI are computerized. The inter-bank cheque clearing settlement is through with(p) twice a day. There is a crock up route for clearing high lever cheques of Rs.1.00 hundred thousand and above. Cheques careworn on banks in metropolitan cities are clear(p) on the same day. The RBI carries out this function through a cell known as National Clearing Cell. In 1998, in that respect 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 inevitable 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 easy at Bank sum up. 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 collapse agencies like DHFI, Securities Trading tidy sum of India, primary dealers. The RBI now in the main 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 collectible in India and get on within 90 days from the go steady of grease ones palms or discount is eligible for rediscount. (ii) Bills for pay Agricultural trading operationsA bill issued for place 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 an d Small Scale Industries Bills drawn or issued for the purpose of financing the production and marketing of products of cottage and small industries approved by RBI and mature within 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) extraneous 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 inquires. (b) It helps the commercial banks in maintaining fluidity of their financial resources. (c) Enables the commercial banks to carry out their activities with mini mum cash reserves. (d) As a lender of last resort, the RBI can exercise blanket(a) control over the commercial banks. 7. Acts as the Controller of CreditThe RBI controls the credit creation by commercial banks. For this, the RBI uses both duodecimal 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 come inives(vii) Direct ActionBy controlling credit, the RBI achieves the following(a) Maintains the desired aim of circulation of money in the thrift. (b) Maintains the stability in the price level accustomed in the economy. (c) Controls the effects of trade cycles(d) Controls the fluctuations in the foreign exchange rate(e) Channelize credit to the productive sectors of the economy 8. Custodianof contrary telephone exchange ReservesThe RBI acts as the custodian of foreign exchange reserves. up to(predicate) reserves may h elp maintain foreign exchange rates. In order to minimize the undue fluctuations in the rates it may taint and sell foreign currencies depending upon the situations. Its purchase and sale of foreign currencies from the market is through 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 influx 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 caboodle and needs. The value of Indias Foreign transform 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 1 999. The value of foreign currency assets of RBI, which form the enceintest portion in Indias Foreign Currency reserves, is subject to changes even on daily basis depending upon judgement exchange rates, inflow 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 military man 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 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 p ay for it in forex. Trade side imports, i.e., merchandise imports are regulated by Director General 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 received or earned by residents in India, like exporters and relatives of NRIs Non-resident Indian should be surrendered to banks having pass 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 and 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 rese rves/gold, are handled in the Department of international 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 pomposity 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 sit as the Central Bank of the country and custodian of large forex reserves can find out the level of External Value in the short run. Publishes the Economic Statistics a nd other(a) InformationThe RBI collects statistics on economic and financial matters. It publishes sporadically an uninflected 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 review 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, on that point is a danger to the economic stability, it takes immediate measures to put the economy on proper course by effective policy changes and slaying thereof. Promotional FunctionsThese are non-monetary functions. They include the following 1. Promotion of Banking Habits The RBI institutionalizes economy through the promotion of banking ha bit and expansion of the banking system territorially and functionally. wherefore RBI has set up Deposit insurance fraternity in 1962, Unit Trust of India in 1964, the IDBI in 1964, the Agricultural Refinance great deal 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(prenominal) 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 exportation PromotionThe RBI takes the initiative for widening facilities for the provision of finance for foreign trade particularly of exports. The export Credit and Guarantee Corporation (ECGC) and psychometric test Banks render useful functions on this line. To encourage exports t he 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 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 currently functioning as separate financial institutions. 3. Facilities for AgricultureThe RBI extends validating financial facilities to agriculture regularly. finished 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 greedy of a shabby 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 sanction 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 spe cialise SSI bank branches to provide adequate financial and technical assistance to SSI branches. There are around 30 lakh SSI units operating in India. clashing their financial needs is one of the prime concerns of RBI. 5. Helps Co-operative 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 make 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 provender against 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 closure of branches. With this power RBI can ensure avoidance of un indispensable 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 slew from starting banking business. 2. Function of Inspection and EnquiryRBI inspects and makes enquiry in respect of various matters cover under Banking Regulations Act and RBI Act. The reexamination 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 control RBI ensures that the banks and financial institutions carry on their operations in a prudential manner, without fetching undue risk but aiming at profit maximization within the existing rules and regulations. This character reference of inspection is carried on periodically once a year or ii 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 instruction 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 police squad visiting bank offices to conduct 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 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 ar e 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 are not covered under the scheme. ICICI is since merged with ICICI Bank Ltd. and IDBI is getting reborn 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 prove 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.