Functions and Role of RBI

1. Regulator of Currency:

The central bank is the bank of issue. It has the monopoly of note issue. Notes issued by it
circulate as legal tender money. It has its issue department, which issues notes and coins to
commercial banks. Coins are manufactured in the government mint, but they are put into
circulation through the central bank.

Central banks have been following different methods of note issue in different countries. The
central bank is required by law to keep a certain amount of gold and foreign securities against
the issue of notes. In some countries, the amount of gold and foreign securities bears a fixed
proportion, between 25 to 40 per cent of the total notes issued.

2. Banker, Fiscal Agent and Adviser to the Government:

Central banks everywhere act as bankers, fiscal agents and advisers to their respective
governments. As banker to the government, the central bank keeps the deposits of the central
and state governments and makes payments on behalf of governments. But it does not pay
interest on government deposits. It buys and sells foreign currencies on behalf of the
government.

It keeps the stock of gold of the government. Thus, it is the custodian of government money
and wealth. As a fiscal agent, the central bank makes short-term loans to the government for a
period not exceeding 90 days. It floats loans, pays interest on them, and finally repays them on
behalf of the government. Thus it manages the entire public debt. The central bank also advises
the government on such economic and money matters as controlling inflation or deflation,
devaluation or revaluation of the currency, deficit financing, balance of payments, etc. As
pointed out by De Kock, “Central banks everywhere operate as bankers in the state not only
because it may be more convenient and economical to the state, but also because of the
intimate connection between public finance and monetary affairs.”

3. Custodian of Cash Reserves of Commercial Banks:

Commercial banks are required by law to keep reserves equal to a certain percentage of both
time and demand deposit liabilities of the central banks. It is on the basis of these reserves that
the central bank transfers funds from one bank to another to facilitate the clearing of cheques.

Thus the central bank acts as the custodian of the cash reserves of commercial banks and helps
in facilitating their transactions. There are many advantages of keeping the cash reserves of the
commercial banks with the central bank, according to De Kock.
In the first place, the centralization of cash reserves in the central bank is a source of great
strength to the banking system of a country. Secondly, centralized cash reserves can serve as
the basis of a large and more elastic credit structure than if the same amount were scattered
among the individual banks.

Thirdly, centralized cash reserves can be utilized fully and most effectively during periods of
seasonal strains and in financial crises or emergencies. Fourthly, by varying these cash reserves,
the central bank can control the credit creation by commercial banks. Lastly, the central bank
can provide additional funds on a temporary and short term basis to commercial banks to
overcome their financial difficulties.

3. Management of Foreign Exchange:

The central bank keeps and manages the foreign exchange reserves of the country. It is an
official reservoir of gold and foreign currencies. It sells gold at fixed prices to the monetary
authorities of other countries. It also buys and sells foreign currencies at international prices.
Further, it fixes the exchange rates of the domestic currency in terms of foreign currencies.

It holds these rates within narrow limits in keeping with its obligations as a member of the
International Monetary Fund and tries to bring stability in foreign exchange rates. Further, it
manages exchange control operations by supplying foreign currencies importers and persons
visiting foreign countries on business, studies, etc., in keeping with the rules laid down by the
government.

5. Lender of the Last Resort:

'De Kock' regards this function as a sine qua non of central banking. By granting
accommodation in the form of re-discounts and collateral advances to commercial banks, bill
brokers and dealers, or other financial institutions, the central bank acts as the lender of the
last resort.

The central bank lends to such institutions in order to help them in times of stress so as to save
the financial structure of the country from collapse. It acts as lender of the last resort through a
discount house on the basis of treasury bills, government securities and bonds at “the front
door”.

6. Clearing House for Transfer and Settlement:

Act like a bankers’ bank, the central bank acts as a clearing house for transfer and settlement of
mutual claims of commercial banks. Since the central bank holds reserves of commercial banks,
it transfers funds from one bank to other banks to facilitate clearing of cheques. This is done by
making transfer entries in their accounts on the principle of book-keeping. To transfer and
settle claims of one bank upon others, the central bank operates a separate department in big
cities and trade centers. This department is known as the “clearing house” and it renders the
service free to commercial banks.

When the central bank acts as a clearing agency, it is time-saving and convenient for the
commercial banks to settle their claims at one place. It also economizes the use of money. “It is
not only a means of economizing cash and capital but is also a means of testing at any time the
degree of liquidity which the community is maintained.”

7. Controller of Credit:

The most important function of the central bank is to control the credit creation power of
commercial bank in order to control Inflationary and deflationary pressures within this
economy. For this purpose, it adopts quantitative methods and qualitative methods.
Quantitative methods aim at controlling the cost and quantity of credit by adopting bank rate
policy, open market operations, and variations in reserve ratios of commercial banks.

FUNCTIONS OF RBI

According to the RBI Act,1934 it performs 3 kinds of functions as that of some other central
bank. So, here we will read in detail about these three types of functions.

1.    Banking Functions

·        Bank of Issue- The Reserve Bank has a different Issue Department, which is empowered
with the issue of currency notes. Under Section 22 of the RBI Act, it has the exclusive right to
issue currency notes of numerous groups except one rupee note as it is issued by the Ministry
of Finance. The assets and liabilities of the Issue Department are kept separate from those
other Banking Departments.

 
·        Banker to Government- Now, coming towards the second significant function of the
Reserve Bank of India, which is to work as a Government banker, agent, and adviser. It fulfills all
the banking processes of the State and Central Government. It also tenders valuable
suggestions to the government on topics related to economic and financial policy and even
governs the public debt of the government.

·        Bankers’ Bank- The Reserve Bank of India acts as the banker's bank and it lends money to
the Government's banker to all the commercial banks of the country. As indicated by the outlay
of the Banking Companies Act of 1949, each scheduled bank was needed to keep up with the
Reserve Bank a money balance equal to 5 % of its demand liabilities and 2 % of its time
liabilities in India. In simple words, we can say that RBI fulfills the same functions for the other
commercial banks as the other banks fulfil their clients.

·        Controller of Credit- We can say that the RBI is the controller of credit as it can impact the
volume of credit made by banks in India. It can do such by changing the Bank rate or through
open market tasks. RBI uses two techniques to prevent the extra flow of wealth in the economy
that is quantitative and qualitative techniques.

·        Custodian of Foreign Reserve- The Reserve bank must balance out the outer estimation
of the public cash. The Reserve Bank keeps gold and foreign currencies as reserves against note
issues and also meets the unfavorable offset of instalments with different regions. Also, it
oversees foreign currencies by the controls forced by the administration.

2.    Supervisory Functions

The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI vast
powers of supervision and command over the business and co-operative banks, connecting to
licensing and foundations, liquidity of their assets, recreation, and liquidation. The supervisory
functions of the RBI have assisted a lot in expanding the standard of banking in India.

 
 3.    Promotional Functions

With monetary development accepting a new urgency since freedom, the scope of the Reserve
Bank's functions has consistently broadened. The Bank now plays out an assortment of
improvement and promotional functions, which, at once, were regarded as out of the typical
scope of central banking.

Important Functions Of Bank

There are two types of functions of banks:

1. Primary functions – being primary are also called banking functions.

2. Secondary Functions

Both the types of functions of bank are explained below in detail:

Primary Functions of Bank

All banks have to perform two major primary functions namely:

1. Accepting of deposits
2. Granting of loans and advances

Accepting of Deposits

A very basic yet important function of all the commercial banks is mobilising public funds, providing safe
custody of savings and interest on the savings to depositors. Bank accepts different types of deposits from the
public such as:

1. Saving Deposits: encourages saving habits among the public. It is suitable for salary and wage
earners. The rate of interest is low. There is no restriction on the number and amount of withdrawals. The
account for saving deposits can be opened in a single name or in joint names. The depositors just need to
maintain minimum balance which varies across different banks. Also, Bank provides ATM cum debit card,
cheque book, and Internet banking facility. Candidates can know about the Types of Cheques in the linked
page.
2. Fixed Deposits: Also known as Term Deposits. Money is deposited for a fixed tenure. No withdrawal
money during this period allowed. In case depositors withdraw before maturity, banks levy a penalty for
premature withdrawal. As a lump-sum amount is paid at one time for a specific period, the rate of interest is
high but varies with the period of deposit.
3. Current Deposits: are opened by businessmen. The account holders get overdraft facility on this
account. These deposits act as a short term loan to meet urgent needs. Bank charges a high-interest rate along
with the charges for overdraft facility in order to maintain a reserve for unknown demands for the overdraft.
4. Recurring Deposits: A certain sum of money is deposited in the bank at a regular interval.
Money can be withdrawn only after the expiry of a certain period. A higher rate of interest is paid on
recurring deposits as it provides a benefit of compounded rate of interest and enables depositors to
collect a big sum of money. This type of account is operated by salaried persons and petty traders.
 Granting of Loans & Advances

The deposits accepted from the public are utilised by the banks to advance loans to the businesses and
individuals to meet their uncertainties. Bank charges a higher rate of interest on loans and advances than what
it pays on deposits. The difference between the lending interest rate and interest rate for deposits is bank profit.

Bank offers the following types of Loans and Advances:

1. Bank Overdraft: This facility is for current account holders. It allows holders to withdraw money
anytime more than available in bank balance but up to the provided limit. An overdraft facility is granted
against collateral security. The interest for overdraft is paid only on the borrowed amount for the period for
which the loan is taken.
2. Cash Credits: a short term loan facility up to a specific limit fixed in advance. Banks allow the
customer to take a loan against a mortgage of certain property (tangible assets and / guarantees). Cash credit is
given to any type of account holders and also to those who do not have an account with a bank. Interest is
charged on the amount withdrawn in excess of the limit. Through cash credit, a larger amount of loan is
sanctioned than that of overdraft for a longer period.
3. Loans: Banks lend money to the customer for short term or medium periods of say 1 to 5
years against tangible assets. Nowadays, banks do lend money for the long term. The borrower repays the
money either in a lump-sum amount or in the form of instalments spread over a pre-decided time period. Bank
charges interest on the actual amount of loan sanctioned, whether withdrawn or not. The interest rate is lower
than overdrafts and cash credits facilities.
4. Discounting the Bill of Exchange: It is a type of short term loan, where the seller discounts the bill
from the bank for some fees. The bank advances money by discounting or purchasing the bills of exchange. It
pays the bill amount to the drawer(seller) on behalf of the drawee (buyer) by deducting usual discount charges.
On maturity, the bank presents the bill to the drawee or acceptor to collect the bill amount.
Secondary Functions of Bank

Like Primary Functions of Bank, the secondary functions are also classified into two parts:

1. Agency functions
2. Utility Functions

Agency Functions of Bank

Banks are the agents for its customers, hence it has to perform various agency functions as mentioned below:

Transfer of Funds: Transfering of funds from one branch/place to another. 

Periodic Collections: collecting dividend, salary, pension, and similar periodic collections on the clients’
behalf. 

Periodic Payments: making periodic payments of rents, electricity bills, etc on behalf of the client.

Collection of Cheques: Like collecting money from the bills of exchanges, the bank collects the money of the
cheques through the clearing section of its customers.

Portfolio Management: banks manage the portfolio of their clients. It undertakes the activity to purchase and
sell the shares and debentures of the clients and debits or credits the account.
 Other Agency Functions: under this bank act as a representative of its clients for other institutions. It acts as
an executor, trustee, administrators, advisers etc. of the client.

Utility Functions of Bank

 Issuing letters of credit, traveller’s cheque, etc.

 Undertaking safe custody of valuables, important documents and securities by providing safe deposit
vaults or lockers.
 Providing customers with facilities of foreign exchange dealings
 Underwriting of shares and debentures
 Dealing in foreign exchanges
 Social Welfare programmes
 Project reports
 Standing guarantee on behalf of its customers, etc.

REFERENCES

• Economicdiscussion.net

• Onlinecourses.swayam.ac.in

• Khan M Y, “INDIAN FINANCIAL SYSTEM, Tata Mc Graw-Hill, New Delhi, 2001.

• Santhanam, B., BANKING AND FINANCIAL SYSTEM, Margham Publiations, Chennai.

• Swami, H. R, GUPTA, INDIAN BANKING AND FINANCIAL SYSTEM, Indus Valley Publication,
2009.

Bhole L.M., (1998), Financial Institutions and Markets Structure, Growth and Innovations, 2nd
Ed.

• Thorn, Richard S., (1976), Introduction to Money and Banking, New York, Harper & Row. 2.
3)Luckett, D.G., (1976), Money and Banking, McGraw Hill, New York.

• Ritter, L.S., and Sibler, W.L., (1977), Principles of Money, Banking and Markets, Basic Books,
New York, 3rd Ed.

•https://www.pdfdrive.com/indian-financial-system-and-management-of-financial-institutions-
d42675152.html

•https://www.pdfdrive.com/money-banking-and-financial-system-d39561701.html