Banker to Central Government

Banker to government is one of the two oldest functions of the central bank, the other being
issuing banknotes.

After World War I, in 1922, three presidency banks in India faced financial issues and were
merged to create one single entity – Imperial Bank of India. This bank functioned as the
banker to the government as well as a commercial entity at the same time. When the RBI was
set up in 1934, this conflict was resolved by assigning the role of banker to the government to
the RBI and the Imperial Bank of India retained its commercial activity. Later in 1955,
Imperial Bank of India was renamed as State Bank of India.

At present, the RBI handles Central Government’s day to day transactions through designated
commercial banks called agency banks. The government pays agency commission to these
banks for handling its business.

The RBI maintains seven accounts for the central government – civil, railway fund, post
fund, telecommunication fund, defense fund, departmentalized ministries and agency
transaction account. The principal account of these seven accounts is maintained at Central
Accounts Section (CAS), RBI, Nagpur and the operational accounts are with the regional
office of the RBI of particular states.

Various central and state Government systems are integrated with RBI’s e-kuber system for
e-receipts and e-payments. E-Kuber is a core banking solution developed by RBI which also
enables processing of government banking transactions on near real time basis.

Banker to State Governments

The principal account of all state governments, except Sikkim, is maintained at the Central
Accounts Section, Nagpur, under an account titled ‘Government Deposit Account – State’.
The minimum balance required to be maintained by each state in this account varies
depending upon the size of the state budget and its economic activity.
Using e-kuber, all Govt. electronic payment instructions are processed on “just in time” basis
and e-receipts received through direct NEFT/RTGS framework are credited in government
accounts on the same day.

Ways and means advances

An important function performed by the RBI as banker to the central and state governments
is granting ways and means advances. These short-term advances are extended to help the
governments to tide over temporary mismatches in government receipts and payments.
These advances are almost automatically given once the balance in the government account
falls below the prescribed minimum level. The limit and period of WMA advances for central
government are decided by the government in consultation with the RBI. Limit of WMA for
states vary and is based on the recommendations of Advisory committee on Ways and
Means Advances to State Governments.

Portfolio and Advisory Services

The RBI acts as the portfolio manager for the government where it makes arrangements for
investing the surplus cash balances of government on a daily basis.

Banker to Banks

Banks are fundamental to the nation’s financial systems. The RBI has a critical role to play in
ensuring the safety and soundness of the banking system while maintaining the financial
stability and public confidence in the system. All banks licensed by the RBI, All India
Financial Institutions and Credit Information Companies maintain a current account with the
RBI. The RBI provides efficient means of funds transfer to them and enables smooth, swift
and seamless clearing and settlement of interbank transactions.

Banker to Banks

Banks are fundamental to the nation’s financial systems. The RBI has a critical role to play in
ensuring the safety and soundness of the banking system while maintaining the financial
stability and public confidence in the system. All banks licensed by the RBI, All India
Financial Institutions and Credit Information Companies maintain a current account with the
RBI. The RBI provides efficient means of funds transfer to them and enables smooth, swift
and seamless clearing and settlement of interbank transactions.
The banks maintain their statutory Cash Reserve Ratio (CRR) in their current accounts with
the RBI, which is a percentage of their deposits with the RBI. Further, banks can avail
liquidity facility from the RBI against government securities as collateral. Financial institutions
can also take loans from the RBI.

Lender of Last Resort

The RBI comes to the rescue of a bank that is solvent (having sufficient asset to repay its
debt) but facing temporary liquidity problems (shortage of cash). By supplying with much
needed liquidity, against the collateral of government securities, the RBI protects the interest
of the depositors of the bank and prevent possible failure of the bank. Such failures may
affect other banks and financial institutions and can have an adverse impact on financial
stability and thus on the economy.

Public Debt Management

Debt/ liability of the government is known as public debt. Public borrowing, as we know
today, is said to have evolved in the 18th century to finance the East India Company’s
campaign in South India. Financing of public works was first undertaken in 1867. Today, the
RBI manages the public debt and issues new loans on behalf of the central and state
governments. The governments usually borrow money from the market to fill the resources
gap, that is, the gap between its income and the expenditure. The RBI helps the
governments to raise the required funds at a reasonable rate of interest. Just like a merchant
banker, the RBI advises the government on the timing of raising fund, the rate of interest and
even on the structure of the bond through which to raise the funds. Once the government
announces the amount it wants to raise from the market in its budget, the RBI conducts
auctions of dated government securities to raise these resources. Auctions are also
conducted for treasury bills to raise short term resources of upto 364 days from market. The
RBI holds these securities in demat form, in Subsidiary General Ledger (SGL) accounts and
periodically pays interest and maturity amounts to the holders.