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Reserve Bank of India
Reserve Bank of India
The need for the formation of a central Bank for the country was felt long before. Several attempts were
made from time to time to establish, but unfortunately those attempts failed to bear fruits.
The question of establishment of a full fledge Central Bank assumed importance once again in 1933, The
Central Bank enquiry Committee recommended the establishment of Reserve Bank of India for the
purpose of developing banking facilities and bringing about rapid economic development in the country.
The Reserve Bank of India was established on 1st April 1935 after passing the Reserve Bank of India Act
1934.
Initially RBI was set up as a shareholders bank, later Government of India acquired all the shares held by
private individuals by paying compensation. Today RBI functions as a state owned and state controlled
institution.
Capital of RBI:
RBI was started with a capital of 5 crores divided into 5 lakhs shares of Rs 100 each fully paid.
Management of RBI:
The general superintendence and the direction of affairs of the RBI are vested in the Central Board of
Directors and this board consists of 20 members.
2. Four Directors nominated by the central government one each from each of the four local boards.
Offices of RBI:
Branches: Bombay, New Delhi, Bangalore, Kolkata, Chennai, Kanpur, Hyderabad, Patna, Nagpur,
Jaipur, Trivandrum, Gauhati, Indore.
RBI performs all the functions of a full fledged Central Bank besides it also performs certain
development functions.
1. Issue of Currency notes: RBI is given the monopoly of note issue in the India. Notes of different
denominations are issued. Eg Rupee 10, 20, 50, 100, 500, 1000 etc. Currently minimum reserve system is
followed.
2. Banker to the Government: RBI acts as the banker, financial agent and advisor to the State and
Central Government.
As a Banker
It collects the taxes and makes the payment on behalf of the state and central government
It represents the government of India in the International monetary institutions like IMF and
IBRD. Etc
3. Acting as a Bankers Bank: The RBI acts as a banker to the other banks by performing following
functions
It provides the advances to commercial banks either by rediscounting the bills or by granting
loans against approved securities.
Quantitative methods:
✔ Issuing of direction
✔ Moral suasion
Bank Rate Policy: It is the minimum rate at which the Central bank provides loans to commercial
banks.
By Manipulating (raising or lowering) RBI can control the credit and level of economic activities.
By Increasing the bank rates it can make the credit costlier and thereby cause contraction of credit in
fall in economic activities and vice versa.
Open Market Operations: It means sale and purchase of securities by the RBI with a view to control the
credit. The main objective of this weapon is to control credit and influence the economic activity in the
country.
Variable Cash Reserve Ratio: RBI is empowered to vary the cash reserve percentage which the
commercial banks are required to keep with it.
Issue of Directions: Under this method RBI has the power to issue instructions to the commercial banks
in regards to the purpose for which advances are to be granted, maximum amount of advances that can be
given, and rate of interest to be charged on advances. This method has been used by the RBI a number of
times.
Deferential rate of Interest: RBI controls the credit by prescribing different rates of interest on the basis
of purpose for which the advances are given.
Moral Suasion: RBI persuades the commercial banks to follow a particular line of action while
advancing money. This method is used by RBI in India several times and has become very successful in
its implementation.
5. Developmental Functions: RBI apart from the performing the Central Banking functions, it extends
certain developmental functions indirectly.
Foreign Banks
State Bank of India and its subsidiaries : SBI came into existence on nationalization of
“Imperial Bank of India” in 1955 on the recommendation by the Rural credit survey committee,
today SBI is the biggest (Having around 15000 branches) and most important commercial bank in
India.
Apart from Commercial Banking functions has access to capital market and also SBI acts as a agent to the
RBI and performs following functions in the areas where there are no RBI branches:
Public Sector Banks/ Nationalized Banks/ Commercial Banks: The second category of Public
sector banks is of 19 commercial banks of which 14 were nationalized in 1969 and 6 more in
1980. There are around 34355 branches as on June 2006.
✔ To channelize bank credit to priority sectors like Agriculture, Industries and Exports.
Regional Rural Banks or (RRB): RRB’s are sponsored by commercial Banks mostly public
sector banks engaged in granting of direct loans and advances to farmers, rural artisans, landless
labourers and other weaker section in the rural areas.
Objectives:
✔ To inculcate banking habit and mobilize savings and accelerate the economic growth.
Private sector Banks: Private Sector commercial banks refers to banks owned and controlled by
Indian entrepreneurs. There are around 5794 branches which are operating in India.
There branches and business are relatively marginal compared to Nationalized and foreign banks.
In 2005-06 total Pvt Sector banks accounted for 15.1 per cent of total baking assets.
Eg: HDFC Bank Ltd, ICICI banking corporation Ltd, Axis Bank Ltd, IDBI Bank Ltd.
These banks carry on all commercial banks functions besides their specialized functions of financing
exports, imports and foreign exchange.
On June 2006 there were around 262 branches located mostly in big cities.
Though there were many complaints about these banks most of it have been overcome by Banking
Regulation Act of 1949.
2. Branch Expansion: The progress in branch expansion has been spectacular since
nationalization of banks in terms of number of branches coverage of rural and unbanked areas.
Progress in Bank expansion:
• Numerical increase in bank branches
• Branch opening in rural and unbaked areas
• Attempt to correct regional imbalances
4. Bank lending: Advances granted by Commercial banks have been increased considerably, Total
advances of all the scheduled commercial banks in India amounted to Rs 1733679 crores as on December
22, 2006.
5. Finances to neglected Sector: Banks have taken a lead in extending credit to all the neglected
sectors of the society like artisans, craftsmen, self employed persons, taxi and auto rickshaw drivers,
small vegetable vendors.
6. Finance to Public Sector undertakings: The nationalized Banks have participated in the
provision of finance to public sector undertakings. They have given more fiancés to public sector
agencies engaged in food procurement. They have invested a good portion of their funds in Government
securities and thereby made more finance available to the public sector undertakings.
which includes :
○ Account management
○ Bill payment
○ New account opening
○ loan applications, approval transfers
○ Investment/Brokerage services
○ Loan application and approval
✔ Anywhere Banking
Disadvantages
A customer using a Debit/ATM card can withdraw, deposit, transfer money from his account, also check
the balance, request for cheque book, statements at his convenience i.e. day or night,24/7.
Advantages
Disadvantages
Credit card allows the card holder to purchase goods, travel, dine in a hotel etc without making a
immediate payments. The card holder can get credit up to 45 days.
Advantages
Disadvantages:
Debit card is a card which enables the account holder to transact his account using ATM’s.
Advantages
✔ Debit cards can be used round the clock for cash withdrawals
✔ Allows making payment in phased fashion
✔ Hassel free way of purchasing
✔ Reduces the burden of carrying cash
Disadvantages
Electronic Funds Transfer (EFT) is a system of transferring money from one bank account directly
to another without any paper money changing hands.
EFT refers to any transfer of funds initiated through an electronic terminal, including credit card,
ATM, and point-of-sale (POS) transactions.
Advantages
Disadvantages