Final Copy of Rbi-1

Reserve Bank of India 1
Reserve Bank of India
Introduction
The Reserve Bank of India (RBI, Hindi: भारतीय रिज़र्व बैंक) is the central bank of
India and controls the monetary policy of the rupee as well as 287.37 billion US-
Dollar (2009) currency reserves. The institution was established on 1 April 1935
during the British-Raj in accordance with the provisions of the Reserve Bank of
India Act, 1934 [1] and plays an important part in the development strategy of the
government.
It was inaugurated as a private

shareholders institution under the
Reserve Bank of India Act 1934. It was
nationalized in January 1949, under the
Reserve Bank (Transfer to Public
Ownership) of India Act, 1948. This act
empowers the central government, in
consultation with the Governor of the
Bank, to issue such directions to RBI as
might be considered necessary in the
public interest.
RBI is governed by a Central Board of

Directors with 20 members consisting of
the Governor and the Deputy Governors.
The Governor and the deputy Governors
K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester
VI)
of the Bank are Government of India appointees. The preamble to the Reserve
Bank of India Act lays down the purpose of establishing RBI as “to regulate issue
of Bank notes, to keep the 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”.
RBI took a leading role in designing and implementing policies for agricultural
and industrial development and for laying the foundations for financial markets.
Some of today’s premier development and market institutions such as the
National Bank for Agriculture and Rural Development (NABARD), the
Industrial Development Bank of India (IDBI) and the Unit Trust of India (UTI)
had their beginnings as specialized departments and divisions within the RBI.
When RBI started in 1935, there were just three departments, namely the
Banking Department, the Issue Department and the Agricultural Credit
Department. Today, RBI has 26 departments in the Central Office, have 26
regional and field offices across the country, four subsidiaries (BRB Note
Mudran Press Ltd., DICGC, NABARD and NHB,) and a staff of over 20,000
employees.
Today, RBI is the monetary authority, and regulator and supervisor for banks and
non-banking financial companies. RBI is the issuer of currency and the debt
manager for the central and state governments. Besides, RBI manages the
country’s foreign exchange reserves, manage the capital account of the Balance
of payments, and design and operate payment systems. RBI also operates a
grievance redressed scheme for bank customers through the Banking
Ombudsmen and formulates policies for treating customers fairly.

VI)
Objectives and Reasons for the Establishment of R.B.I.
The main objectives for establishment of RBI as the Central Bank of India were
as follows:
 To manage the monetary and credit system of the country.
 To stabilizes internal and external value of rupee.
 For balanced and systematic development of banking in the country.
 For the development of organized money market in the country.
 For proper arrangement of agriculture finance.
 For proper arrangement of industrial finance.
 For proper management of public debts.
 To establish monetary relations with other countries of the world and
international financial institutions.
 For centralization of cash reserves of commercial banks.
 To maintain balance between the demand and supply of currency.
According to the Reserve Bank of India Act, the aim of RBI is, “to regulate the
issue of bank notes and keeping of reserve with a view to secure system of the
country to its advantage.”

VI)
Nationalization of Reserve Bank of India:
Initially, the RBI was established as shareholder’s bank. Its share capital was Rs.
5 crores, divided into 5 lakh fully paid up share of Rs. 100 each. Our of this,
share of the nominal value of Rs. 2,20,000 (2200 shares) were allotted to the
Central Government for disposal at par to the Directors of the Central Board of
the Bank seeking to obtain the minimum share qualification. The remaining share
capital was owned by the private individuals. Thus, the control on the policy of
the RBI remained with the Government.
The RBI is governed by the Central Board of Directors. The Governor and two
deputy-Governors are appointed by the Government and other members of the
Governing Board are appointed by individual shareholders. In order to regulate
and control monetary and credit policy of the country, the Government is
empowered to supersede the central Board of Directors of the RBI if the Board
fails to discharge its obligations cast upon it by the RBI Act.
The demand for nationalization of RBI was started with the setting up of RBI. It
was felt that RBI should be nationalized in tune with the changing national and
international political and economical scenario. The objective of its
nationalization was stated, “To implement the Government’s policy that the Bank
should function as state-owned institution and to meet the general desire that
control of the government over the bank’s activities should be extended to ensure
greater co-ordination in the monetary economic and financial policies.” In
February, 1947, it was decided to nationalize RBI. Thus, the RBI was
nationalized with the passing of the Reserve Bank of India (transfer to public
ownership) Act in 1948. in terms of the Act, the entire share were transferred to
the central Government on payment of compensation to the shareholders @ Rs.
118 and 62 paisa per share of Rs. 100. Thus since January 1, 1949, the the
reserve bank of India is functioning as a state owned and state controlled
(nationalized) bank.
VI)
Organization Structure
of
Reserve Bank of India
Introduction
Central Board of Directors
Governor
Deputy Governors
Executive Directors
Principal Chief General Manager
Chief General Managers
General Managers
Deputy General Managers
Asstt. General Manager
Manager
Asstt.Manager
Support Staff

VI)
Organization & management of RBI :

Central Board of Directors- (20 Directors)
Dr. D. Subbarao
Dr. Rakesh Mohan
Shri V. Leeladhar
Smt. Shyamala Gopinath
Smt. Usha Thorat
Dr. Ashok
S. Ganguly
Shri Azim Premji
Shri Kumar Mangalam Birla
Smt. Shashi Rekha Rajagopalan
shri Suresh Neotia
Dr. A. Vaidyanathan
Prof. Man Mohan Sharma
Dr. D. Jayavarthanavelu
Shri Sanjay Labroo
Shri H. P. Ranina
VI)
Shri Y.H. Malegam

Shri Suresh D. Tendulkar
Prof. U. R. Rao
Shri Lakshmi Chand
Governor (one)
(Chairman and full-time officer)
Dr. D. Subbarao
Deputy Governors (Four)

(All full-time officers)
Dr. Rakesh Mohan
Shri V. Leeladhar
Smt. Shyamala Gopinath
Smt. Usha Thorat
Directors (Fifteen)
(All part-time officers)
10 nominated by Central Govt.
Dr. Ashok S. Ganguly
Shri Azim Premji
Shri Kumar Mangalam Birla
Smt. Shashi Rekha Rajagopalan
shri Suresh Neotia
Dr. A. Vaidyanathan
Prof. Man Mohan Sharma
Dr. D. Jayavarthanavelu
Shri Sanjay Labroo
Shri H. P. Ranina
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4 Nominated by Local Boards

Shri Y.H. Malegam
Shri Suresh D. Tendulkar
Prof. U. R. Rao
Shri Lakshmi Chand
1 Nominated by Central Govt. as Govt. officer
Local Boards
Eastern Region Western Region Northern Region Northern Region

(Kolkata) (Mumbai) (New Delhi) (New Delhi)
The organization of RBI can be divided into three parts:
1) Central Board of Directors
2) Local Boards
3) Offices of RBI
1. Central Board of Directors: The organization and management of RBI is

vested on the Central Board of Directors. It is responsible for the management of
RBI. Central Board of Directors consists of 20 members. It is constituted as
follows.
a) One Governor: It is the highest authority of RBI. He is appointed by the

Government of India for a term of 5 years. He can be re-appointed for another
term.
b) Four Deputy Governors: Four deputy Governors are nominated by Central

Govt. for a term of 5 years
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c) Fifteen Directors: Other fifteen members of the Central Board are appointed
by the Central Government. Out of these, four directors, one each from the four
local Boards is nominated by the Government separately by the Central
Government.
Ten directors nominated by the Central Government are among the experts of
commerce, industries, finance, economics and cooperation. The finance secretary
of the Government of India is also nominated as Govt. officer in the board. Ten
directors are nominated for a period of 4 years. The Governor acts as the Chief
Executive officer and Chirman of the Central Board of Directors. In his absence a
deputy Governor nominated by the Governor, acts as the Chirman of the Central
Board.
2. Local Boards: Besides the central board, there are local boards for four
regional areas of the country with their head-quarters at Mumbai, Kolkata,
Chennai, and New Delhi. Local Boards consist of five members each, appointed
by the central Government for a term of 4 years to represent territorial and
economic interests and the interests of co-operatives and indigenous banks. The
function of the local boards is to advise the central board on general and specific
issues referred to them and to perform duties which the central board delegates.
3. Offices of RBI: The Head office of the bank is situated in Mumbai and the
offices of local boards are situated in Delhi, Kolkata and Chennai. In order to
maintain the smooth working of banking system, RBI has opened local offices or
branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh,
Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna,
Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open
its offices with the permission of the Government of India. In places where there
are no offices of the bank, it is represented by the state Bank of India and its
associate banks as the agents of RBI.
VI)
Administrative department of RBI
In order to maintain smooth functioning, RBI has established different

administrative departments which are the part of its internal organization. These
are as follows:
 Department of currency management.

 Department of banking supervision.
 Rural planning and credit department.
 Department of banking operations and development.
 Exchange control department.
 Secretary’s department
 Industrial and export credit department
 Department of administration and personnel management
 Department of Government and Bank accounts.
 Department of non-Banking supervision.
 Internal debt management cell.
 Inspection department.
 Department of information and technology.
Other department: Besides these above departments RBI has other departments
such as premises department, press relation department, personnel policy
department etc.

VI)
Functions of Reserve Bank of India
Functions of R.B.I
The Reserve Bank of India Act of 1934 entrust all the important functions of a
central bank the Reserve Bank of India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to
issue bank notes of all denominations. The distribution of one rupee notes and
coins and small coins all over the country is undertaken by the Reserve Bank as
agent of the Government. The Reserve Bank has a separate Issue Department
which is entrusted with the issue of currency notes. The assets and liabilities of
the Issue Department are kept separate from those of the Banking Department.
Originally, the assets of the Issue Department were to consist of not less than
two-fifths of gold coin, gold bullion or sterling securities provided the amount of
gold was not less than Rs. 40 crores in value. The remaining three-fifths of the
assets might be held in rupee coins, Government of India rupee securities,
eligible bills of exchange and promissory notes payable in India. Due to the
exigencies of the Second World War and the post-war period, these provisions
were considerably modified. Since 1957, the Reserve Bank of India is required to
maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least
Rs. 115 crores should be in gold. The system as it exists today is known as the
minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as

Government banker, agent and adviser. The Reserve Bank is agent of Central
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Government and of all State Governments in India excepting that of Jammu and
Kashmir. The Reserve Bank has the obligation to transact Government business,
via. To keep the cash balances as deposits free of interest, to receive and to make
payments on behalf of the Government and to carry out their exchange
remittances and other banking operations. The Reserve Bank of India helps the
Government - both the Union and the States to float new loans and to manage
public debt. The Bank makes ways and means advances to the Governments for
90 days. It makes loans and advances to the States and local authorities. It acts as
adviser to the Government on all monetary and banking matters.
Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions
of the Banking Companies Act of 1949, every scheduled bank was required to
maintain with the Reserve Bank a cash balance equivalent to 5% of its demand
liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962,
the distinction between demand and time liabilities was abolished and banks have
been asked to keep cash reserves equal to 3 per cent of their aggregate deposit
liabilities. The minimum cash requirements can be changed by the Reserve Bank
of India.
The scheduled banks can borrow from the Reserve Bank of India on the basis of
eligible securities or get financial accommodation in times of need or stringency
by rediscounting bills of exchange. Since commercial banks can always expect
the Reserve Bank of India to come to their help in times of banking crisis the
Reserve Bank becomes not only the banker's bank but also the lender of the last
resort.
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to
influence the volume of credit created by banks in India. It can do so through

VI)
changing the Bank rate or through open market operations. According to the
Banking Regulation Act of 1949, the Reserve Bank of India can ask any
particular bank or the whole banking system not to lend to particular groups or
persons on the basis of certain types of securities. Since 1956, selective controls
of credit are increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the
Indian money market. Every bank has to get a license from the Reserve Bank of
India to do banking business within India, the license can be cancelled by the
Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will
have to get the permission of the Reserve Bank before it can open a new branch.
Each scheduled bank must send a weekly return to the Reserve Bank showing, in
detail, its assets and liabilities. This power of the Bank to call for information is
also intended to give it effective control of the credit system. The Reserve Bank
has also the power to inspect the accounts of any commercial bank.
As supereme banking authority in the country, the Reserve Bank of India,

therefore, has the following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and

qualitative controls.
(c) It controls the banking system through the system of licensing, inspection
and calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
Custodian of Foreign Reserve
The Reserve Bank of India has the responsibility to maintain the official rate of
exchange. According to the Reserve Bank of India Act of 1934, the Bank was
VI)
required to buy and sell at fixed rates any amount of sterling in lots of not less
than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the
Bank was able to maintain the exchange rate fixed at lsh.6d. Though there were
periods of extreme pressure in favor of or against the rupee. After India became a
member of the International Monetary Fund in 1946, the Reserve Bank has the
responsibility of maintaining fixed exchange rates with all other member
countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the
Reserve Bank has to act as the custodian of India's reserve of international
currencies. The vast sterling balances were acquired and managed by the Bank.
Further, the RBI has the responsibility of administering the exchange controls of
the country.
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has
certain non-monetary functions of the nature of supervision of banks and
promotion of sound banking in India. The Reserve Bank Act, 1934, and the
Banking Regulation Act, 1949 have given the RBI wide powers of supervision
and control over commercial and co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction, and liquidation. The RBI is
authorized to carry out periodical inspections of the banks and to call for returns
and necessary information from them. The nationalization of 14 major Indian
scheduled banks in July 1969 has imposed new responsibilities on the RBI for
directing the growth of banking and credit policies towards more rapid
development of the economy and realization of certain desired social objectives.
The supervisory functions of the RBI have helped a great deal in improving the
standard of banking in India to develop on sound lines and to improve the
methods of their operation.

VI)
Promotional functions
With economic growth assuming a new urgency since Independence, the range of
the Reserve Bank's functions has steadily widened. The Bank now performs a
variety of developmental and promotional functions, which, at one time, were
regarded as outside the normal scope of central banking. The Reserve Bank was
asked to promote banking habit, extend banking facilities to rural and semi-urban
areas, and establish and promote new specialized financing agencies.
Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the
SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India
in 1964, the Industrial Development Bank of India also in 1964, the Agricultural
Refinance Corporation of India in 1963 and the Industrial Reconstruction
Corporation of India in 1972. These institutions were set up directly or indirectly
by the Reserve Bank to promote saving habit and to mobilize savings, and to
provide industrial finance as well as agricultural finance. As far back as 1935, the
Reserve Bank of India set up the Agricultural Credit Department to provide
agricultural credit. But only since 1951 the Bank's role in this field has become
extremely important. The Bank has developed the co-operative credit movement
to encourage saving, to eliminate moneylenders from the villages and to route its
short term credit to agriculture. The RBI has set up the Agricultural Refinance
and Development Corporation to provide long-term finance to farmers.
Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI
are related to control and regulation of money and credit, i.e., issue of currency,
control of bank credit, control of foreign exchange operations, banker to the
Government and to the money market. Monetary functions of the RBI are
significant as they control and regulate the volume of money and credit in the
country.
Equally important, however, are the non-monetary functions of the RBI in the
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context of India's economic backwardness. The supervisory function of the RBI

may be regarded as a non-monetary function (though many consider this a
monetary function). The promotion of sound banking in India is an important
goal of the RBI, the RBI has been given wide and drastic powers, under the
Banking Regulation Act of 1949 - these powers relate to licensing of banks,
branch expansion, liquidity of their assets, management and methods of working,
inspection, amalgamation, reconstruction and liquidation. Under the RBI's
supervision and inspection, the working of banks has greatly improved.
Commercial banks have developed into financially and operationally sound and
viable units. The RBI's powers of supervision have now been extended to non-
banking financial intermediaries. Since independence, particularly after its
nationalization 1949, the RBI has followed the promotional functions vigorously
and has been responsible for strong financial support to industrial and agricultural
development in the country.

VI)
Role of RBI in Indian

Financial System
Role of RBI in Indian Financial System
The reserve Bank of India is the central bank of India. Therefore, it performs all
those functions which are essentially being performed by the central bank of a
country. The important functions of the reserve Bank of India are as follows:
Issue of Notes
The reserve Bank of India enjoys monopoly in the issue of currency notes as
central Bank of the country. All the
currency notes except one rupee note
are issued by RBI. One rupee note
and all coins of small magnitude are
issued by the Government of India
and are circulated through the Reserve
Bank of India. The RBI Act permits
RBI to issue notes in the denominations of rupees 2, 5, 10, 20,50,100,500,1000.
Although the RBI had issued all these denominations, but at present notes of all
denominations except 5,000 and 10,000 are being issued in circulation.
The RBI has established a separate department for this purpose known as issuing
department. The basis of note issue is minimum Reserve system. The RBI has
been issuing currency notes on the principle of banking system, in which cent per
gold/precious metals reserves are not required. In this system RBI have to
maintain a minimum reserve of Rs. 200 crore as security against note issue. In

VI)
which a minimum reserve of Rs. 115 crore has been maintain in gold and
remaining Rs. 85 crore reserve in foreign securities. The value of gold reserve
held by the issue department has not been less than Rs. 85 crore at the time of an
emergency.
Banker, Agent and advisor to the Government
The reserve bank of India acts as the banker, agent and advisor to the
Government of India.
RBI as banker:
It accepts payments for the account of the union and state governments and also
makes payments on behalf of the Government. On behalf of the Government,
RBI carries remittances, managing foreign exchange reserves and public debts
and other banking operation. It also makes way and means advances to the
central and state Government repayable within three months. The reserve bank of
India carries out agency functions of the Government as the commercial banks
carries out on behalf of their customers.
RBI as Agent:
The state Bank of India works as an agent of the RBI where its offices do not
exist. The RBI does not charge any fee for its operation from the Central and
state Governments. It also does not pay any interest on the deposits of the central
and state Government accounts. The reserve Bank, as the agent of the
Government, issues Government securities to the public and collects money on
behalf of the Government.
It also manages public debts to the central and state Governments. The RBI pays
interest on the securities and redeemed at the time of maturity and also maintains
accounts of this effect. The RBI also issues treasury bills of Government for three
months.

VI)
RBI as advisor:
The RBI is also authorized to make to the central and state Government, ways
and means advances which are repayable in three months. It not only advises
Govt. on all monetary and banking issues but also on a wide range of economic
issues including those in the field of planning and resource mobilization.
It also manages foreign exchange reserves to meet the important requirement.

Thus, RBI acts as the custodian public debts. It also advises Govt. in the matters
of agriculture credit, cooperation, banking and credit and investment of funds.
WAMA (Ways and Means Advances)
The issue, management and administration of the public debt of the Government
are a major function of the RBI for which it charges a commission. The objective
of the debt management policy is to raise resources from the market at the
minimum cost, while containing the refinance risk and maintaining consistency
with the monetary policy objectives, to bridge temporary mismatches in the cash
flows (i.e. temporary gaps between receipts and payments), the RBI provides
Ways and Means Advances (WAMAs). The maximum maturity period of these
advances is three months.
The WAMAs to the state Governments are of three types:
 Normal advances, that is advances without any collateral security;
 Secured advances, which are secured against the pledge of central

Governments securities and
 Special advances granted by the RBI at its discretion.
In addition to WAMAs, the state government make heavy use of overdrafts from
the RBI, in excess of the credit limits (WAMAs) granted by the RBI. Overdrafts
are, in a way, unauthorized WAMAs drawn by the state governments, on the
RBI.
VI)
In fact, the management of these overdrafts is one of the major responsibilities of

the RBI these days. The interest charged by the RBI on the WAMAs is related to
a graduated scale of interest based on its duration. Overdrafts up to 7 days are
charged at the bank rate and an interest of 3 per cent above the bank rate is
charged from the 8th day onwards.
Banker’s Bank
As an apex bank the RBI acts as banker of the banks and lender of the last resort.
Under the RBI Act, the bank has been vested with extensive powers of
supervision and control over all scheduled commercial and cooperative banks.
Once the name of a bank is incorporated in the second schedule of the RBI Act, it
becomes entitled to refinance facility from the RBI. Under the act, every
schedule bank is required to keep with the RBI a cash balance of 5% of its total
demand and time liabilities as cash reserve ratio. Now, CRR has reduced from
5% to 4.75 with effect from 16 November, 2002.
The cash reserve ratio may be between 3 to 15% as decided by the Reserve
Bank. This provision is also applicable on non-scheduled banks. This provision
of cash reserve enables the Reserve Bank to control credit which is created by
commercial banks. In case of need of funds, commercial banks can borrow funds
from Reserve Bank on the basis of eligible securities or get financial
accommodation in times of need or stringency by rediscounting their bills of
exchange. Therefore, commercial banks always look upon the Reserve Bank at
the Time of financial crisis
Custodian of Foreign Exchange Reserves
One of the important functions performed by the Reserve Bank is that of external
value of the rupee. Apart from adopting appropriate monetary polices for the
economic stability in the country and thereby exchange stability in the long-term,
the Reserve Bank has to ensure that the normal short-term fluctuations in trade do
not affect the exchange rate.
VI)
This is secures by the

centralization of the entire
foreign exchange reserves
of the country with the
Reserve Bank of India. In
order to maintain stability
in exchange rates, the
Reserve Bank enter into foreign exchange transactions. It also administers
foreign currency for the central Government, state Govt. and Indian embassies in
foreign countries. There is a separate department for this purpose in RBI known
as “Exchange control currencies and tries to maintain balance between the
demand and supply of foreign exchange. The Reserve Bank is also authorized to
buy and sell foreign exchange from and to scheduled banks.
Regulation of Banking System
The prime duty of the reserve Bank is to regulate the banking system of our
country in such a way that the people of the country can trust in the banking Up
to perform its duty.
The Reserve Bank has following powers in this regard:
 Licensing:
According to the section 22 of the Banking Regulation Act, every bank has to
obtain license from the Reserve Bank. The Reserve Bank issues such license only
to those banks which fulfill condition of the bank should be strong. The RBI is
also empowered to cancel the license granted to a bank works against the
interests of the depositors.

VI)
 Management:
Section 10 of the Banking Regulation Act embowered the Reserve Bank to

change manager or director of any bank if it considers it necessary or desirable.
 Branch Expansion:
Section 23 requires every bank to take prior permission from Reserve Bank to
open new places of business in India or ro change the location of an existing
place of business in India or abroad.
 Power of inspection of Bank:
Under Section 35, the Reserve Bank may inspect any bank and its books and its
books and accounts either at its own initiative or at the instance of the Central
Government. If, on the basis of the inspection report submitted by the Reserve
Bank Central Government is of the opinion that the affairs of the bank are being
conducted to the detriment of the interests of depositors, it may direct to the
Reserve Bank to apply for the winding up of such bank.
 Power to issue Directions:
Section 35(A) of IBR Act confers powers to RBI to issue direction or to prevent
the affairs of the being conducted in manner detriment to the interests of the
depositors or in a manner prejudicial to the interests of the bank or to secure
proper management of the bank.
Section 36 confers powers on the RBI to caution or prohibit banks against

entering into any particular transaction and generally give advice to any bank. It
may pass orders requiring the bank to carry out the specified instructions. In
order to develop a strong banking structure in the country the RBI promotes
amalgamation or merger of weak banks so that they can develop as a strong bank.

VI)
Section 38 of the Act empowered RBI to request to High Court to windup the
bank which has no hopes of improvement.
Clearing House
The RBI operates clearing houses to settle banking transactions. The RBI
manages 14 major clearing houses of the country situated in different major
cities. The State Bank of India and its associates look after clearing houses
function in other parts of the country as an agent of RBI.
Clearing House
Credit Control
Credit control is a very important function of RBI as the Central Bank of India.
For smooth functioning of the economy RBI control credit through quantitative
and qualitative methods. Thus, the RBI exercise control over the credit granted
by the commercial bank. The reserve Bank is the most appropriate body to
control the creation of credit in view if its functions as the bank of note issue and
the custodian of cash reserves of the member banks.

VI)
Unwarranted fluctuations in the volume of credit by causing wide fluctuations in

the value of money cause great social & economic unrest in the country. Thus,
RBI controls credit in such a manner, so as to bring ‘Economic Development
with stability’. It means, bank will accelerate economic growth on one side and
on other side it will control inflationary trends in the economy. It leads to
increase in real national income of the country and desirable stability in the
economy.
Other Roles
The RBI performs following other functions:
 Agriculture Credit:
All matters relating to agriculture credit are looked after by RBI before the
establishment of NABARD in 1982. Now all functions relating to agriculture and
rural development are performed by NABARD.
 Industrial Finance:
The RBI has contributed in the share capital of industrial finance institutions such
as Industrial Finance Corporation of India, Industrial Development Bank of
India, State Finance Corporations etc. Thus RBI indirectly contributes in the field
of industrial finance.
 Publication of Data:
The RBI publishes statistics regarding money, price, finance etc, in its
periodicals. This provides valuable information for Govt., business and
industries. This information is helpful to take decisions. The important
publications of RBI are the Reserve Bank of India Annual Report, currency and
finance, trends and progress of Banking etc. At present, there are more than 100
publications of RBI.
VI)
 Banking Education and Training:
The RBI has been organizing various educations and training programs for bank
employees and officers. ‘Banker Training College’ Mumbai has been setup by
RBI for the training of Bank officers. Other important training institutes such as
“College of Agriculture Banking (Pune), Reserve Bank staff Training College
(Chennai) etc. had been setup by the RBI. RBI had also setup regional training
centers at Mumbai, Kolkata, Chennai and Delhi.
 Remitting Facility:
Reserve Bank provides remitting facilities to the central Government, state

Government and semi-Government institutions free of cost. It also provides this
facility to cooperative banks free of cost.
 Conversion of currency:
The RBI converts spoiled currency in to fresh currency. It also provides facilities
to convert currency notes into small denominating coins.
 To accept Deposits:
The RBI accept deposits from Central and state Government’s institution and
individual persons without paying interest.
 Transactions with international institutions:
All international economic transactions are being made through RBI. RBI opens
its accounts in the central bank of member countries of IMF. It also deals with
IMF, World Bank and other international financial institutions.

VI)
 Transactions in precious metals:
In order to fulfill its obligations, RBI buys and sells precious metals, gold coins
etc. RBI can borrow funds by mortgaging these precious metals.
 Expansion of banking facilities:
RBI has played an important role in expansion of banking facilities in the rural
areas of the country. At the end of June, 2001, there are 65,931 bank branches are
situated in country, out of which more than half of the branches are situated in
rural areas. At the end of 2000, on an average there were only one bank branches
at a population of 5,000 in the country.
 Supply of Development Finance:
The RBI provides development finance for the different parts of the economy. It
leads economic development of the country as a whole.

VI)
Credit Control by RBI
Introduction
Credit control is a very important function of RBI as the Central Bank of India.
For smooth functioning of the economy RBI control credit through quantitative
and qualitative methods. Thus, the RBI exercise control over the credit granted
by the commercial bank.
The reserve Bank is the most appropriate body to control the creation of credit
in view if its functions as the bank of note
issue and the custodian of cash reserves of
the member banks. Unwarranted
fluctuations in the volume of credit by
causing wide fluctuations in the value of
money cause great social & economic unrest
in the country. Thus, RBI controls credit in
such a manner, so as to bring ‘Economic
Development with stability’. It means, bank
will accelerate economic growth on one side
and on other side it will control inflationary
trends in the economy. It leads to increase in
real national income of the country and
desirable stability in the economy.
Objectives of credit control

Credit Control
VI)
 To obtain stability in the internal price level.

 To attain stability in exchange rate.
 To stabilize money market of a country.
 To eliminate business cycles-inflation and depression-by controlling supply
of credit.
 To maximize income, employment and output in a country.
 To meet the financial requirements of an economy not only during normal
times but also during emergency or war.
 To help the economic growth of a country within specified period of time.
This objective has become particularly necessary for the less developed
countries of present day world.
Methods and instruments of credit control
There are many methods of credit control. These methods can be broadly divided
into two categories.
I. Quantitative or General Methods. II. Qualitative or selective methods.
The quantitative methods of credit control aim at influencing the quantity or total
volume of credit in an economy during a particular period of time. The
qualitative methods of credit control aim at influencing the quality of use of
credit with respect to a particular area or field of activity. Quantitative system of
credit control includes following instruments:
1) Bank Rate
2) Open Market Operation (OMO)
3) Change in Cash Reserve Ratio (CRR) 4) Statutory Liquidity Ratio (SLR) 5)
Repo and Reverse repo rate
Qualitative system consists of the following instruments:

VI)
1) Selective credit control 2) Rationing of Credit

3) Moral Persuasion 4) Direct Action
With the inflation rate based on wholesale price index hardening since the
Annual Policy Statement was announced, an adjustment of overall aggregate
demand on an economy-wide basis was warranted to ensure that generalized
instability did not develop and eroded the hard-earned gains in terms of both
outcomes of and positive sentiments on India’s growth momentum. In this
regard, monetary policy had to urgently address aggregate demand pressures,
which appeared to be strongly in evidence. Apart from the build-up in
inflationary expectations, this was reflected in…
i. Strong investment demand;

ii. Sustained high growth in domestic capital goods production albeit with some
moderation in 2008-09 so far;
iii. Revival in the production of consumer goods with a turnaround in the
production of durables;
iv. Widening trade deficit and some tightening of external financing conditions
in the ongoing global financial turmoil; and

VI)
v. Emergence of fiscal pressures due to the possibility of enhanced subsidies on

account of food, fertilizer and POL as well as for financing deferred
liabilities relating to farm loan waivers.
Keeping in view the liquidity conditions and inflationary pressures in the
economy, the cash reserve ratio was raised by 75 basis points to 8.25 per cent
during April-May 2008 in three stages of 25 basis points each effective from
April 26, May 10, and May 24, 2008. On May 30, 2008, special market
operations were announced to alleviate the binding financing constraints face by
public sector oil companies in importing POL as also to minimize the potential
adverse consequences for financial markets in which these oil companies are
important participants. On a review of the current macroeconomic and overall
monetary conditions and with a view to containing inflation expectations, the
repo rate under the Liquidity Adjustment Facility (LAF) was raised by 25 basis
points to 8.0 per cent with effect from June 12, 2008. Consistent with the overall
stance of monetary policy set out for 2008-09 in April 2008 in terms of ensuring
a monetary and interest rate environment that accords high priority to price
stability, well anchored inflation expectations and orderly conditions in financial
markets and on the basis of incoming information and domestic and global
macroeconomic and financial developments, it was decided on June 24, 2008 to
increase the repo rate under the LAF by 50 basis points to 8.50 per cent with
effect from June 25, 2008 and the CRR by 50 basis points to 8.75 per cent in two
stages of 25 basis points each with effect from July 5, 2008 and July 19, 2008
(Table 35).

VI)
{A} Qualitative Methods of Credit Control
1) Bank Rate:
Bank Rate is the rate at which central bank grant loans to the commercial banks
against the security of government and other approved first class securities.
According to section 49 of RBI Act, “Bank Rate is the standard rate on which
RBI purchase or discount such exchange bills or commercial papers which can be
purchased under this act.”
Reserve Bank of India controls credit by affecting quantity and cost of credit
money through its bank rate policy. But this method of credit control would be
effective only when there is organized money market and commercial banks
depend on reserve bank for their credit.
Reserve Bank adopts cheap or Dear Monetary Policy according to the economic
conditions of the country. RBI decreases bank rate to increase the quantity of the
credit. This is called cheap monetary policy. Decease in bank rate decreases cost
of credit i.e. decreases in interest rate. As a result of this quantity of credit
increases. According to dear monetary policy of RBI increases bank rate to
decrease quantity of credit in the country. Increase in bank rate increases cost of
credit i.e. increase interest rate and this will result in decrease in quantity of
credit.
Operation of Bank Rate Policy in India:
At the time of establishment of RBI the bank rate was 3.5% which had changed
time to time. Till 1951, the bank rate was constant at 3% as Reserve Bank
followed Cheap Money Policy during this period.
Since 1951 till now bank rate has continuously changing. In 1991 at the time of
higher inflation, bank rate has changed twice and increased from 10% to 11%.
On 29 April, 1998, it has reduced from 11% to 9%. It was further reduced to 8%
in March, 1999 and 7% in April, 2000. It was further reduced to 8% in March,
VI)
1999 and 7% in April, 2000. It was further changed several times and on 23
October, 2001 it reduced to 6.5%.
The bank rate policy of credit control has not been succeeding in India. As it is
failed to control inflationary trend in the economy. It has failed to influence
interest rate in the money market.
The bank rate policy proves inefficient due to following reasons:
 Major part of the credit in the market is made available by non-banking

institutions. The interest charged by these institutions has no direct relation
with the bank rate.
 Most of the changes in bank rate have been made effective for combating
inflationary trends.
 Speculative tendencies in the economy carry large premiums in the form of
huge margins of profit. A small change in bank rate does not significantly
affect the profit margin.
 Priority sector leading has almost become immense to the effect of
changes in the bank rate.
 Increasing non-dependence of commercial banks on the central bank for
rediscounting facilities is one of the ineffective bank rates in India.
Though the bank rate policy has not been effective in India. Yet the Reserve
Bank has been using it more and more as a weapon to control deflationary
pressure in the economy. During the last few years, the bank rate has been
reduced several times to combat the deflationary pressures in the economy. But
this year it is currently stipulated at 6%.

VI)
2) Open Market Operations:
The term ‘Open market operation’ implies the purchase and sale by the Central
Bank not only the Govt. securities but also of other eligible papers. Like bills and
securities of private concerns section 17(8) of RBI Act. Empowers Reserve Bank
to purchase the securities of central Govt. state Govt. and other autonomous
institutions. Apart from this section 17(2) (A) empower Reserve Bank to
purchase or sell of short term bills.
Open market operations are used as supporting instrument of bank rate. This
method is used to influence the flow of credit. Sale and purchase of Govt.
securities influence the cash reserve ratio with the commercial banks and hence
these operations control their credit creation power. These operations will have
both anti-inflationary and anti-deflationary effects. When the economy is faced
with the inflationary pressures, the central bank would like the commercial banks
to contract the supply of credit. To achieve this objective the central bank would
sell the Govt. securities to the commercial banks. The banks would transfer a part
of their cash reserve to the central bank towards the payment for these securities.
Consequently the cash reserve with the commercial banks will be reduced. It
would lead to a contraction in the credit creation power of the commercial banks.
Similarly, open market operations can also be used as anti-deflationary measures.
In this situation, the central bank will purchase securities from the commercial
banks. In this situation, the central bank will purchase securities from the
commercial banks. In the process. The cash reserves with the commercial banks
will increase and they would be enabled to create more credit.
The open market operations in India are limited by Reserve Bank. The bank has
used this policy only to make successful government debt policy and to maintain
price stability of Govt. securities. It is used to fulfill seasonal credit requirements
of commercial banks.

VI)
3) Cash Reserve Ratio (CRR):
The RBI controls credit through change in Cash Reserve Ratio of commercial
banks. According to section 42(1) of RBI Act every schedule bank has to
maintain a certain percentage reserve of its time and demand deposits. This ratio
can be varied from 3% to 15% as directed by the Reserve Bank. Reserve Bank
itself changed this ratio according to the credit requirement of the economy. It
has been changed several times in the history of Reserve Bank of India. The cash
reserve ratio affects on the lend able funds of commercial banks. If this ratio
increases the credit creation capacity of commercial banks decreases. On the
other hand if this ratio decreases the credit creation capacity of commercial banks
increases.
On 17 April 2008, the Reserve Bank of India hiked the cash reserve ratio of
scheduled commercial banks, regional rural banks, scheduled state co-operative
banks and scheduled primary (urban) co-operative banks by 50 basis points to 8
per cent in two stages effective 26 April 2008 and 10 May 2008. The monetary
authority stated that as a result of the above increase in CRR on liabilities of the
banking system, an amount of about Rs.18,500 crore of resources of banks would
be absorbed. In this context, it may be noted that surplus liquidity in the banking
system amounted to Rs.2, 43,566 crore as on 4 April 2008. The Reserve Bank's
move comes at a time when there are only 12 days left for its monetary policy.
The monetary policy is due to be announced on 29 April 2008.The hike in the
cash reserve ratio of banks is a measure aimed at reducing liquidity in the
banking system thereby reducing the money supply which in turn is expected to
help curb inflation. The CRR hike will put margins of banks under a bit of a
pressure since they won’t be earning anything on the money that they park with
the RBI as cash reserve. The CRR hike will put margins of banks under a bit of a
pressure since they won’t be earning anything on the money that they park with
the RBI as cash reserve.

VI)
On 29 April 2008, the Reserve Bank of India released its annual monetary policy
statement for the year 2008-09. It increased the cash reserve ratio for scheduled
commercial banks by 25 basis points to 8.25 per cent with effect from 24 May
2008. It was only less than a fortnight ago that the bank had raised the cash
reserve ratio. On 17 April, the monetary authority had announced that the CRR
would be raised by 25 basis points with effect from 26 April 2008 and by another
25 basis points with effect from 10 May 2008. The two increases announced on
17 April were expected to suck out Rs.18, 500 crore from the banking system.
Recently, RBI has hiked the cash reserve ratio (CRR) by 25 basis points to 9 per
cent beginning 30 August 2008. The 25 basis points hike in the cash reserve ratio
will suck out about Rs.8, 000-8,500 crore of liquidity from the banking system.
4) Statutory Liquidity Ratio (SLR):
According to the section 24 of the Banking Regulation Act, every schedule Bank
has to maintain a minimum of 25% as cash of its total deposits. The Reserve
Bank of India is empowered to change this ratio. As on 21, 1997, it was fixed to
25% of the total deposits of Banks. It also influences the credit creation capacity
of the banks. The effect of bi\both cash reserve ratio and statutory liquidity ratio
on credit expansion is similar. Penalties are levied by RBI for not maintaining
these ratios from scheduled banks.
5) Repo rate and Reverse repo rate:
There is two kind of repo and are as under:
I. Interbank repo:
Such repos are now permitted only under regulated conditions. Repos are
misused by banks/brokers during the 1992 securities scam. They were banned
subsequently. With the lifting of the ban in 1995, repos were permitted for
restricted, eligible participants and instruments. Initially, repo deals were allowed

VI)
in T-bills and five dated securities on the NSE. With gradual liberalization over
the years, all central govt. dated securities, state Govt. security and T-bills of all
maturities have been made eligible for repo. Banks and PDs can undertake repo
deals if they are routed through the SGL, accounts maintained by the RBI. Repos
are allowed to develop a secondary market in PSU bonds, FIs bonds, corporate
bonds and private debt securities if they are held in demat form and the deals are
done through recognized stock exchange(s). There are no restrictions regarding a
minimum period for inter-bank repo deals. Non-bank participants (i.e., FIs and
other specified participants) are allowed to participate only in the reverse repo
that is they can only lend money to other eligible participants. The non-bank
entities holding SGL accounts with the RBI can enter into reverse repo
transactions with banks/PDs, in all Government securities.
II. RBI Repos:
The RBI undertakes repo/reverse repo operations with banks and PDs as part of
its OMOs, to absorb/inject liquidity. With the introduction of the LAF, the RBI
has been injecting liquidity into the system through repo on a daily basis. The
repo auctions are conducted on all working days except Saturdays and are
restricted to banks and PDs. This is in addition to the liquidity support given by
the RBI to the PDs through refinance/reverse repo facility at a fixed price.
Auctions under LAF were earlier conducted on a uniform price basis, that is,
there was a single repo rate for all successful bidders. Multiple price auction was
introduces subsequently. The weighted average cut-off yield in case of a multiple
price auction is released top the public. This, along with the cut-off price,
provides a band for call money to operate.
The RBI conducts repo auctions to provide banks with an outlet for managing
short-term liquidity; even out short-term liquidity fluctuations in the money
market; and optimize returns on short-term surplus liquid funds. The RBI has
switched over from discriminatory price auction repo to the daily fixed rate repos

VI)
auction system. Fixed rate repos are single money market rates, bring about
orderly conditions in the forex market and impart stability to short-term interest
rates by setting a floor for call money rates. The RBI participants actively in the
call money market with LAF repos operations conducted through the year to
modulate the surplus liquidity in three markets. It also conducts reverse repo
operations under the LAF to prevent sudden spurts in the call rates. Both repos
and reverse repo operations play an effective role in imparting stability to the
market.
The repo rate has become akin to a singling rate, together with the B/R. the repo
rate serve the purpose of a floor and the B/R that of a cap for the money market
to operate within an interest corrodor. With the introduction of variable repo rates
and daily repo auctions, a market-determined benchmark is expected to emerge
for the call (overnight) rate. As a result of the conversion of the call/money
market into a pure inter-bank call/notice money market, the repo rate, along with
the B/R and CRR, emerged as an important tool of liquidity and monetary
management.
To sum up, the RBI’s regulation of money and credit now comprises of (1) the
reactivation of OMOs and introduction of repos, (2) the introduction of LAF and
its emergence as one of the significant operating instruments, (3) the reactivation
of B/R and the use of repo rate, (4) the continuation of the use of the CRR. The
B/R changes, combined with changes in the CRR and LAF repo rates have
emerged as active and important tools of liquidity and monetary management.
The LAF has developed as an effective tool for absorbing/injecting liquidity on a
day to day basis in a flexible manner and for providing a corridor for the call
money and other money markets.
On 29 July 2008, the Reserve Bank of India increased the repo rate by 50 basis
points to 9 per cent. Banks are aggressively using the repo facility of the RBI
since the beginning of July. They borrowed almost Rs.38, 900 crore per day from

VI)
the RBI through its liquidity adjustment facility. Therefore the hike in the repo
rate by the RBI will surely put some pressure on the cost of funds of banks.
As in the year of 2004 CRR was 4.50% and Repo stands at 6% and reverse repo
was 4.50% but at that time inflation was around 4.6%, on September 18, inflation
rate zoom past to 7.9% but Repo and Reverse repo rate remained unchanged and
CRR increases by 0.25 basis point to 4.75% consecutively on October 2,
increase in CRR by 0.25 point following high inflation rate then from October,
2004 to july, 2006 there is continuous increase of 0.25 point each level in
Reverse repo rate against which CRR stands unchanged at 5% and inflation was
decreasing at that time, again from December, 2006 following high inflation rate
CRR was hiked to 0.25 point and Repo rate was at 7.25% while Reverse repo rate
remains unchanged to 6%.on January 2007 inflation rose to 6.4 and CRR again
increased to 5.50 %.
On a review of the current macroeconomic and overall monetary conditions and

with a view to containing inflation expectations, the repo rate under the Liquidity
Adjustment Facility (LAF) was raised by 25 basis points to 8.0 per cent with
effect from June 12, 2008. Consistent with the overall stance of monetary policy
set out for 2008-09 in April 2008 in terms of ensuring a monetary and interest
rate environment that accords high priority to price stability, well anchored
inflation expectations and orderly conditions in financial markets and on the basis
of incoming information and domestic and global macroeconomic and financial
developments, it was decided on June 24, 2008 to increase the repo rate under the
LAF by 50 basis points to 8.50 per cent with effect from June 25, 2008 and the
CRR by 50 basis points to 8.75 per cent in two stages of 25 basis points each
with effect from July 5, 2008 and July 19, 2008.

VI)
{B} Qualitative Methods of Credit Control
Under section 21 of RBI Act, Reserve Bank is empowered to regulate control and
direct the commercial banks regarding their loans and advances. Qualitative
methods are used to affect the use, distribution and direction of credit. It is used
to encourage such economic authorities as desirable and to discourage those
which are injurious for the economy. Reserve Bank of India from time to time
adopted the following qualitative methods of credit control.
1) Selective Credit Control:
Section 36(1) (a) of the Banking Regulation Act, empowers the RBI to contain or
prohibit banking companies generally or any banking company. The objective of
these controls is to discourage some forms of activities while encouraging others.
Such controls are used in respect of agriculture commodities, which are subject to
speculative hoarding and wide price fluctuation. Under section 21 of the banking
regulation Act, 1949, the Reserve Bank is empowered to issue directives to
banking companies regarding making of advances. These directions may be as
follows:
 The purpose for which advances may or may not be made.

 Fixing the margin requirements for advances against each commodity.
 Fixing of maximum limit to be advanced by banks to a particular
borrower.
 Fixing of rate of interest and other terms for making advances.
 Fixing of maximum guarantees may be given by the banks on behalf of
any firm or company.
Prohibition on grant of credit against book debts and clean credits. Some of the
elative credit controls are as follows:

VI)
(a) Differential Discount Rates:
The reserve Bank fixes different discounting rates for the bills of different
sectors. The sector for which more credit is to be made available the exchange
bills rediscounted at a lower rate. On the other hand, if RBI wants to discourage
credit for a particular sector, it increases the discount rate for bills or the facility
for rediscounting is postponed.
(b) Credit Authorization Scheme:
This scheme was introduced with the objectives of enforce financial discipline on
the larger borrowers and ensure that they did not pre-empt scare bank resources.
Through this scheme, the RBI regulates not only the quantum but also the term of
credit flows. Under this scheme, commercial banks are required to obtain RBI’s
permission before sanctioning any fresh credit of Rs. Six crore or more to any
single borrower. This limit may be changed time by time.
(c) Fixation of Margin:
The commercial banks generally advance loans to their customers against some
security or securities offered by the borrowers and acceptable to the banks. The
commercial banks do not lend up to the full amount of the value of a security but
lend an amount less than its value. The margin requirements against specific
securities are determined by the Reserve Bank. RBI changed the margin
frequently according to the credit policy. Changes in margin requirements are
designed to influence the flow of credit against specific commodities. A rise in
the margin requirements results in contraction in the borrowing value of the
security and similarly, a fall in the margin requirement results in expansion in the
borrowing value of the security. If RBI desires that more loans should be
advanced against particular securities, it can lower the margin requirement.
Similarly, if RBI desires to check the expansion of credit against particular
securities it can raise the margin requirement.

VI)
(d) Reserve Bank can also instruct commercial banks charging discriminating
rates of interest on certain types of advances
(e)Reserve Bank from time to time fixes ceiling n amount of credit for certain
purposes.
(f) Reserve Bank can ban on advances to specific sector to check inflationary
pressures.
2) Rationing of Credit:
In this method the RBI seeks to limit the maximum or ceiling of loans and
advances and also in certain cases, fixes ceiling for specific categories of loans
and advances. If the rationing of credit is done with reference to the total amount,
it is a quantitative control, but if it is done with reference to specific types of
credit, it assumes a qualitative control. Reserve Bank can also prescribe the
minimum ratio between capital and total assets.
3) Moral Persuasion:
Moral persuasion refers to those cases where the Reserve Bank endeavors to
achieve its object by making suitable representations to the banking institutions
concerned and relying on its moral influence and power of persuasion. Being an
apex institution and lender of the last resort, the RBI can use its more pressure
and persuade the commercial bank to follow its policy. During inflationary
conditions it may request the commercial banks not to press for frequent loans, to
refuse loans to the customers and to refrain from investing funds in the
unproductive or less productive occupations.
4) Publicity:
The RBI may also follow the policy of publicity in order to make known to the
public its views about the credit expansion or contraction. It may issue warning
to the people and commercial banks, substantiating its views by facts, figures and
VI)
statements, through the media of publicity. This method, however, is ineffective

in the developing economies where mass illiteracy exists and people do not
understand the implications of the policy.
5) Direct Action:
Under Banking Regulations Act, the RBI is empowered to initiate direction

action against those commercial banks which ignore its advice. In such cases RBI
can impose restriction on sanctioning of loans and advances of concerned banks.
Winding up of Bank of Karad in 1992 because of financial irregularities and
putting up of certain restrictions on the working of Metropolitan Co-operative
Bank are the examples of direct action initiated by RBI. The RBI may refuse
rediscounting facilities to the banks who do not cooperative with the policies of
the Bank.

VI)

VI)
(8) Other Functions
The RBI performs following other functions:
(i) Agriculture Credit
: All matters relating to agriculture credit are looked after by RBI before the
establishment of NABARD in 1982. Now all functions relating to agriculture and
rural development are performed by NABARD.
(ii) Industrial Finance
: The RBI has contributed in the share capital of industrial finance institutions
such as Industrial Finance Corporation of India, Industrial Development Bank of
India, State Finance Corporations etc. Thus RBI indirectly contributes in the field
of industrial finance.
(iii) Publication of Data :
The RBI publishes statistics regarding money, price, finance etc, in its
periodicals. This provides valuable information for Govt., business and
industries. These information are helpful to take decisions. The important
publications of RBI are the Reserve Bank of India Annual Report, currency and
finance, trends and progress of Banking etc. At present, there are more than 100
publications of RBI.
(iv) Banking Education and Training :
The RBI has been organizing various education and training programmes for
bank employees and officers. ‘Banker Training College’ Mumbai has been setup
by RBI for the training of Bank officers. Other important training institutes such
as “College of Agriculture Banking (Pune), Reserve Bank staff Training College
(Chennai) etc. had been setup by the RBI. RBI had also setup regional training
centers at Mumbai, Kolkata, Chennai and Delhi.

VI)
(v) Remitting Facility :
Reserve Bank Provides remitting facilities to the central Government, state

Government and semi-Government institutions free of cost. It also provides this
facility to cooperative banks free of cost.
(vi) Conversion of currency :
The RBI converts spoiled currency in to fresh currency. It also provides facilities
to convert currency notes into small denominating coins.
(vii) To accept Deposits :
The RBI accept deposits from Central and state Government’s institution and
individual persons without paying interest.
(viii) Transactions with international institutions :
All international economic transactions are being made through RBI. RBI opens
its accounts in the central bank of member countries of IMF. It also deals with
IMF, World Bank and other international financial institutions.
(ix) Transactions in precious metals :
In order to fulfill its obligations, RBI buys and sells precious metals, gold coins
etc. RBI can borrow funds by mortgaging these precious metals.
(x) Expansion of Banking facilities :
RBI has played an important role in expansion of banking facilities in the rural
areas of the country. At the end of June, 2001, there are 65,931 bank branches are
situated in country, out of which more than half of the branches are situated in
rural areas. At the end of 2000, on an average there was only one bank branches
at a population of 5,000 in the country.
(xi) Supply of Development Finance :

VI)
The RBI provides development finance for the different parts of the economy. It
leads economic development of the country as a whole.

VI)

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Reserve Bank of India 1

Reserve Bank of India

It was inaugurated as a private

RBI is governed by a Central Board of

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

Objectives and Reasons for the Establishment of R.B.I.

 To manage the monetary and credit system of the country.

 To stabilizes internal and external value of rupee.

 For balanced and systematic development of banking in the country.

 For the development of organized money market in the country.

 For proper arrangement of agriculture finance.

 For proper arrangement of industrial finance.

 For proper management of public debts.

 To establish monetary relations with other countries of the world and

international financial institutions.

 For centralization of cash reserves of commercial banks.

 To maintain balance between the demand and supply of currency.

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

Nationalization of Reserve Bank of India:

Central Board of Directors

Principal Chief General Manager

Chief General Managers

Deputy General Managers

Asstt. General Manager

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

Organization & management of RBI :

Shri Y.H. Malegam

Deputy Governors (Four)

4 Nominated by Local Boards

1 Nominated by Central Govt. as Govt. officer

Eastern Region Western Region Northern Region Northern Region

The organization of RBI can be divided into three parts:

1) Central Board of Directors

1. Central Board of Directors: The organization and management of RBI is

a) One Governor: It is the highest authority of RBI. He is appointed by the

b) Four Deputy Governors: Four deputy Governors are nominated by Central

Administrative department of RBI

In order to maintain smooth functioning, RBI has established different

 Department of currency management.

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

Functions of Reserve Bank of India

The second important function of the Reserve Bank of India is to act as

Bankers' Bank and Lender of the Last Resort

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

As supereme banking authority in the country, the Reserve Bank of India,

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and

Custodian of Foreign Reserve

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

Classification of RBIs functions

context of India's economic backwardness. The supervisory function of the RBI

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

Role of RBI in Indian

Role of RBI in Indian Financial System

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

Banker, Agent and advisor to the Government

K.E.S. SHROFF COLLEGE OF ART’S & COMMERCE T.Y.BBI (Semester

It also manages foreign exchange reserves to meet the important requirement.

WAMA (Ways and Means Advances)

The WAMAs to the state Governments are of three types:

 Normal advances, that is advances without any collateral security;

 Secured advances, which are secured against the pledge of central