CENTRAL BANK-EVOLUTION AND FUNCTIONS

Evolution

• India's central bank : RBI

• Established in 1935 with the provision of

Reserve Bank of India Act

• 1949 it was nationalized and since then fully

owned by GoI.
 Main Functions of RBI

• Monetary Authority : to maintain pricing stability, low &

stable inflation well as promoting economic growth of
country
• Issuer of Currency: RBI works as an agent of GoI for
distributing and handling of coins. For printing
currency, RBI has four facilities at Dewas, Nasik,
Mysore and Salboni.
• Banker and Debt Manager to Government : As a
banker to the GoI, RBI maintains its accounts, receive
payments into & make payments out of these
accounts. RBI also helps GoI to raise money from
public via issuing bonds and government approved
securities
 Contd.,
• Banker's bank and supervisor : works as banker to all the
scheduled commercial banks. RBI helps them in clearing
& settling inter-bank transactions and customer
transactions smoothly
• Regulator of the Banking System : ensures financial
stability & public confidence in the banking system. RBI
uses methods like On-site inspections, off-site
surveillance, scrutiny & periodic meetings to supervise
new bank licenses, setting capital requirements and
regulating interest rates in specific areas
 Contd.,
• Manager of Foreign Exchange : RBI manages forex and
gold reserves of the nation. On a given day, the FOREX
rate reflects the demand for and supply of foreign
exchange arising from trade and capital transactions

• Regulator and Supervisor of the Payment and

Settlement Systems : NEFT and RTGS

• Developmental Role : Most critical role played by RBI.

Key tools in this effort include Priority Sector Lending
such as agriculture, micro and small enterprises
(MSE), housing and education.
 Other functions are

1. Quantitative tools & 2. Qualitative tools.

 I. Quantitative Tools
1. Reserve Ratios : to ensure that they have sufficient cash
to cover customer withdrawals
Statutory Liquidity Ratio (SLR): Bank should maintain as
government securities, and gold. 19.5 %
Cash Reserve Ratio (CRR): Banks must maintain cash with
RBI for that no interest is paid. 4%
2. Open Market Operation (OMO): Open market operation
is the activity of buying and selling of government
securities in open market to control the supply of money
in banking system.
 Contd.,

3. Policy Rates : Policy rates are various interest rate which

RBI uses to control money supply in India. Repo Rate is
often called as key policy rate in India as all the other
rates can be derived from repo rate.

Liquidity Adjustment Facility (LAF) : to avail of liquidity in

case of need or to park excess funds with the RBI on an
overnight basis (mini Rs.5 crore) against the collateral of
Government securities. It is given in two rates.
I. Rebo rate and 2. Reverse Rebo rate
 Contd.,
• Repo rate: Rate at which RBI lends money to scheduled
banks. The government securities which are provided by
banks as collateral cannot come from SLR quota. 6 %
• Reverse Repo Rate: Rate at which RBI borrows money from
scheduled banks. 5.75 %
• Marginal Standing Facility (MSF):
-This scheme was introduced in May, 2011
- Banks can borrow up to 2 % of their respective Net Demand
and Time Liabilities (mini. of 1 cr & multiples of 1 cr)
- bank can pledge government securities from SLR quota (up
to one percent).
- MSF rate is set to above repo rate and currently is at 6.25%
 II. Qualitative Tools
1. Margin Requirements or LTV:
• Loan to Value is the ratio of loan amount to the actual
value of asset purchased.
• For example, if an individual wants to buy a car from
borrowed money and the car value is Rs. 10 Lac, he can
only avail a loan amount of Rs. 7 Lac if the LTV is set to 70%.
• RBI can decrease or increase to curb inflation or deflation
respectively.
2. Selective credit control: RBI can specifically instruct
banks not to give loans to traders of certain
commodities e.g. sugar, edible oil etc to prevent
speculation
 Contd.,
3. Moral Suasion
• Under this measure RBI try to persuade bank through
meetings, conferences, media statements to do specific
things under certain economic trends.
• For example, when RBI reduces repo rate, it asks banks
to reduce their base rate as well.
• Another example of this measure is to ask banks to
reduce their Non-performing assets.
NABARD
 NABARD
• National Bank for Agricultural and Rural Development
(NABARD) was established in July 1982 on basis of the
recommendations of the Sivaraman Committee (1978).

• facilitating credit flow for promotion and development

of agriculture, small-scale industries, cottage and village
industries, handicrafts and other rural crafts
 Objectives of NABARD

• More than 50% of the rural credit is disbursed by the

Co-operative Banks and Regional Rural Banks.
• NABARD is responsible for regulating and supervising
the functions of Co-operative banks and RRBs.
• providing a strong and efficient rural credit delivery
system,
• capable of taking care of the expanding and diverse
credit needs of agriculture and rural development.
 Functions of NABARD
• apex body for meeting the credit needs of all types of
agricultural and rural development.
• provides refinancing facilities to State Co-operative
Banks (SCBs), Land Development Bank (LDBs), Regional
Rural Banks (RRBs) and other approved financial
institutions for financing rural economic activities.
• It co-ordinates all agricultural and rural development
activities with the objective of tying them up with
planned development activities in the rural sector.
 Contd.,
• provides long-term assistance (not exceeding 20 years)
to State Governments.
• has the responsibility of inspecting co-operative banks
and RRBs.
• maintains a research and development fund to promote
research in agriculture and rural development.