1.Indian Financial System and RBI
Economic activities of any country encompass all
business, trade, industry and commerce. This is further topped up by
international transactions a country has to deal with. Normally it is advocated
that free forces of market and economy should be left to play and determine the
course and outcome of economic activities. However this approach is not
warranted as the stakes are too high and irreversible damage can unleashed.
This is because a country has varied social obligations.
In India, the RBI is the central banking authority
constituted under the Reserve Bank of India Act, 1934 ('RBI Act'), and its
duties and responsibilities flow from that statute. With the passage of the
statute, RBI came into existence and it
commenced its operations as the central bank of the country on 1st April 1935
as a private shareholders' bank with a paid up capital of rupees fifty million.
Regulatory structure in India
The
regulation and supervision of the financial system in India is carried out by
different regulatory authorities. The Reserve Bank regulates and supervises the
major part of the financial system. The supervisory role of the Reserve Bank
covers commercial banks, Urban Co-operative Banks (UCBs), certain Financial
Institutions (FIs) and Non-Banking Financial Companies (NBFCs). Some of the
FIs, in turn, regulate and/or supervise other institutions in the financial
sector. Regional Rural Banks (RRBs), State Co-operative Banks
(StCBs)
and District Central Co-operative Banks (DCCBs) are supervised by National Bank
for Agriculture and Rural Development (NABARD); and Housing Finance Companies
(HFCs) by National Housing Bank (NHB). Ministry of Company Affairs (MCA),
Government of India regulates deposit taking activities
of
companies, other than NBFCs, registered under the Companies Act, but not those
which are under separate statutes. While RBI/NABARD is concerned with the
banking function of the co-operatives, the management control rests with the State/Central Governments. The Registrar of Co-operative
Societies (RCS) ofrespective states in case of single state co-operative banks
and the Central Registrar of Co-operative Societies (CRCS) in the case of
multi-state co-operative banks are joint regulators with the RBI for UCBs and
with the NABARD for rural co-operatives. The Insurance Regulatory and
Development Authority (IRDA)
regulates the insurance sector and the capital market,
credit rating agencies, etc., are regulated by Securities and Exchange Board of
India (SEBI).
Evolution of Central Banking in India
Legal Framework vis-à-vis RBI and its functions
Functions:
The Reserve Bank of India is performing
various functions related to monetary management, banking operations, foreign
exchange, developmental works and research on problems of economy.
The
following are some of the major functions normally performed by the Reserve
Bank of India:
1. Note Issue:
Being the
Central Bank of the country, the RBI is entrusted with the sole authority to
issue currency notes after keeping certain minimum reserve consisting of gold
reserve worth Rs. 115 crore and foreign exchange worth Rs. 85 crore. This
provision was later amended and simplified.
2. Banker
to the Government:
The
RBI is working as banker of the government and therefore all funds of both
Central and State Governments are kept with it. It acts as an agent of the
government and manages its public debt. RBI also offering “ways and means
advance” to the government for short periods.
3. Banker’s
Bank:
The
RBI is also working as the banker of other banks working in the country. It
regulates the whole banking system of the country, keep certain percentage of
their deposits as minimum reserve, works as the lender of the last resort to
its scheduled banks and operates clearing houses for all other banks.
4. Credit
Control:
The
RBI is entrusted with the sole authority to control credit created by the
commercial banks by applying both quantitative and qualitative credit control
measures like variation in bank rate, open market operation, selective credit
controls etc.
5. Custodian
of Foreign Exchange Reserves:
The RBI is
entrusted with sole authority to determine the exchange rate between rupee and
other foreign currencies and also to maintain the reserve of foreign exchange
earned by the Government. The RBI also maintains its relation with
International Monetary Fund (IMF).
6. Developmental
Functions:
The
RBI is also working as a development agency by developing various sister
organisations like Agricultural Refinance Development Corporation. Industrial
Development Bank of India etc. for rendering agricultural credit and industrial
credit in the country.
On
July 12, 1986, NABARD was established and has taken over the entire
responsibility of ARDC. Half of the share capital of NABARD (Rs. 100 crore) has
been provided by the Reserve Bank of India. Thus, the Reserve Bank is
performing a useful function for controlling and managing the entire banking,
monetary and financial system of the country.
Regulatory and Promotional Roles of Reserve Bank of India:
The
Reserve Bank of India (RBI) has been playing an important role in the economy
of the country both in its regulatory and promotional aspects. Since the
inception of planning in 1951, the developmental activities are gaining
momentum in the country. Accordingly, more and more responsibilities have been
entrusted with the RBI both in the regulatory and promotional area. Now-a-days,
the RBI has been performing a wide range of regulatory and promotional
functions in the country.
The following are some of the regulatory and promotional functions
performed by the RBI:
1. Regulating
the Volume of Currency:
The
RBI is performing the regulatory role in issuing and controlling the entire
volume of currency in the country through its Issue Department. While regulating
the volume of currency the RBI is giving priority on the demand for currency
and the stability of the economy equally.
2. Regulating
Credit:
The
RBI is also performing the role to control the credit money created by the
commercial banks through its qualitative and quantitative methods of credit
control and thereby maintains a balance in the money supply of the country.
3. Control
over Commercial Banks:
Another
regulatory role performed by the RBI is to have control over the functioning of
the commercial banks. It also enforces certain prudential norms and rational
banking principles to be followed by the commercial banks.
4. Determining
the Monetary and Credit Policy:
The RBI
has been formulating the monetary and credit policy of the country every year
and thereby it controls the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio
(CRR), bank rate, interest rate, credit to priority sectors etc.
5.
Mobilizing Savings:
The
RBI is playing a vital promotional role to mobilize savings through its member
commercial banks and other financial institutions. RBI is also guiding the
commercial banks to extend their banking network in the unbanked rural and
semi-urban areas and also to develop banking habits among the people. All these
have led to the attainment of greater degree of monetization of the economy and
has been able to reduce the activities of indigenous bankers and private moneylenders.
6.
Institutional Credit to Agriculture:
The
RBI has been trying to increase the flow of institutional credit to agriculture
from the very beginning. Keeping this objective in mind, the RBI set up ARDC in
1963 for meeting the long term credit requirement of rural areas. Later on in
July 1982, the RBI set up NABARD and merged ARDC with it to look after its
agricultural credit functions.
7. Specialized
Financial Institutions:
The
RBI has also been playing an important promotional role for setting specialized
financial institutions for meeting the long term credit needs of large and
small scale industries and other sectors. Accordingly, the RBI has promoted the
development of various financial institutions like, WCI, 1DBI, ICICI, SIDBI,
SFCs, Exim Bank etc. which are making a significant contribution to industry
and trade of the country.
8. Security
to Depositors:
In order
to remove the major hindrance to the deposit mobilization arising out of
frequent bank failures, the RBI took major initiative to set up the Deposit
Insurance Corporation of India in 1962. The most important objective of this
corporation is to provide security to the depositors against such failures.
9. Advisory
Functions:
The
RBI is also providing advisory functions to both the Central and State
Governments on both financial matters and also on general economic problems.
10. Policy
Support:
The
RBI is also providing active policy support to the government through its
investigation research on serious economic problems and issues of the country
and thereby helps the Government to formulate its economic policies in a most
rational manner. Thus, it is observed that the RBI has been playing a dynamic
role in the economic development process of the country through its regulatory
and promotional framework.
Functions of RBI (governmental perspective):
I Price Stability through Monetary Policy. Monetary Policy refers to the use of monetary
instruments under the control of the central bank to influence variables, such
as interest rates, money supply and availability of credit, with a view to
achieving the objectives of the policy. There are various direct and indirect
instruments used for implementing monetary policy briefly described as :
Repo Rate : The (fixed) interest
rate at which the Reserve Bank provides overnight liquidity to banks against
the collateral of government and other approved securities under the Liquidity
Adjustment Facility (LAF).
Reverse Repo Rate : The (fixed) interest
rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from
banks against the collateral of eligible government securities under the LAF.
Liquidity Adjustment Facility (LAF)
: The LAF consists of overnight as well as term repo
auctions. Progressively, the Reserve Bank has increased the proportion of
liquidity injected under variable rate repo auctions across the range of
tenors. The aim of term-repo is to help develop the inter-bank term-money
market, which in
turn can set market-based benchmarks for pricing of loans and deposits, and
hence improve transmission of monetary policy. The RBI also conducts variable
interest-rate reverse-repo auctions, as necessitated under market conditions.
Marginal Standing Facility (MSF) : A facility under
which scheduled commercial banks can borrow additional amount of overnight
money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR)
portfolio up to a limit at a penal rate of interest. This provides a safety
valve against unanticipated liquidity shocks to the banking system.
Bank Rate : It is the rate at
which the Reserve Bank is ready to buy or rediscount bills of exchange or other
commercial papers. The Bank Rate is published under Section 49 of the Reserve
Bank of India Act, 1934. This rate has been aligned to the MSF rate and,
therefore, changes automatically as and when the MSF rate
changes alongside
policy repo rate changes.
Cash Reserve Ratio (CRR) : The average daily
balance that a bank is required to maintain with the Reserve Bank as a share of
such per cent of its Net demand and time liabilities (NDTL) that the Reserve
Bank may notify from time to time in the Gazette of India.
Statutory Liquidity Ratio (SLR) : The share of NDTL
that a bank is required to maintain in safe and liquid assets, such as,
unencumbered government securities, cash and gold. Changes in SLR often
influence the availability of resources in the banking system for lending to
the private sector.
Open Market Operations (OMOs): These include both,
outright purchase and sale of government securities, for injection and
absorption of durable liquidity, respectively.
Market Operations The Reserve Bank of India conducts market operations in
the money, government
securities and
foreign exchange markets. These operations are primarily motivated by the twin
objectives of monetary policy implementation and financial stability.
II Financial Stability: A financial system typically comprises of institutions
(banks, non-banking financial companies, insurance companies, mutual funds
etc.), financial markets (money, Government securities, foreign exchange
markets, equity, corporate debt, etc.) and financial market infrastructure ably
supported by the legal and institutional framework.
III Agent of Government for developmental programmes
Structure of Commercial Banks:
(i)
Public Sector Banks
: SBI, Nationalized Banks and IDBI
(ii)
Private Sector Banks
: Domestic and Foreign
The organizational structure of the Reserve
Bank of India is as under:
I Central Board of Directors
(iii)
Governor
(iv)
Deputy
Governors
(v)
Executive
Directors
(vi)
Principle
Chief General Manager
(vii)
Chief
General Manager
(viii)
General
Manager
(ix)
Deputy
General Manager
(x)
Assistant
General Manager
(xi)
Manager
(xii)
Assistant
Manager
(xiii)
Support
staff
The Central Board of Directors
The
Central Board of Directors is the apex body in the governance structure of the Reserve
Bank. There are also four Local Boards for the Northern, Southern, Eastern and
Western areas of the country which take care of local interests. The central government
appoints/nominates directors to the Central Board and members to the Local
Boards in accordance with the Reserve Bank of India (RBI) Act. The composition
of the Central Board is enshrined under Section 8(1) of the RBI Act,1934. The
Central Board consists of :
n The Governor, who is the Chair
n Four Deputy Governors of the Reserve Bank
n Four Directors nominated by the central
government, one from each of the four
n Local Boards as constituted under Section 9
of the Act
n Ten Directors nominated by the central
government and two government ofcials nominated by the central government.
The Central Board is assisted by three committees:
§ the Committee of the Central
§ Board (CCB), the Board for Financial Supervision (BFS)
and the Board for
§ Regulation and Supervision of Payment and Settlement
Systems (BPSS).
These committees are chaired by the Governor. In
addition, the Central Board has four Sub committees, viz., the Audit and Risk
Management Sub-Committee (ARMS); the Human Resource Management Sub-Committee
(HRM-SC); the Building Sub-Committee (BSC) and the Information Technology
Sub-Committee (IT-SC). These sub-committees are headed by an external director.
Subsidiaries of the RBI
The
Reserve Bank has the following fully owned subsidiaries:
Deposit Insurance and
Credit Guarantee Corporation (DICGC)
With a
view to integrating the functions of deposit insurance and credit guarantee,
the Deposit Insurance Corporation and Credit Guarantee Corporation of India
were merged and the present Deposit Insurance and
Credit
Guarantee Corporation (DICGC) came into existence on July 15, 1978. DICGC,
established under the DICGC Act 1961, is one of the wholly owned subsidiaries
of the Reserve Bank. The DICGC insures all deposits (such as savings, xed,
current, and recurring deposits) with eligible banks excepting a few categories
such as Deposits of foreign Governments, Deposits of Central/State Governments,
Inter-bank
deposits,
etc. Every eligible bank depositor is insured up to a maximum of ` 0.1
million for both principal and interest amount held by him.
National Housing Bank
(NHB)
National
Housing Bank was set up on July 9, 1988 under the National Housing Bank Act,
1987 as a wholly-owned subsidiary of the Reserve Bank to act as an apex level
institution for housing. NHB has been
established
to achieve, among other things, the following objectives:
n To
promote a sound, healthy, viable and cost effective housing nance system to
all segments of the population and to integrate the housing nance system with
the overall nancial system.
n To
promote a network of dedicated housing nance institutions to adequately serve
various regions and different income groups.
n To
augment resources for the sector and channelise them for housing.
n To make
housing credit more affordable.
n To
regulate the activities of housing nance companies based on regulatory and
supervisory authority derived under the Act.
n To
encourage augmentation of supply of buildable land and also building materials
for housing and to upgrade the housing stock in the country.
n To
encourage public agencies to emerge as facilitators and suppliers of serviced
land for housing.
Bharatiya Reserve Bank
Note Mudran Private Limited (BRBNMPL)
The
Reserve Bank established BRBNMPL in February 1995 as a whollyowned subsidiary
to augment the production of bank notes in India and to enable bridging of the
gap between supply and demand for bank notes in the country. The BRBNMPL has been registered as a
Public Limited Company under the Companies Act, 1956 with its Registered and
Corporate Ofce situated at Bengaluru. The company manages two Presses, one at
Mysore in Karnataka and the other at Salboni in West Bengal.
(ReBIT) has been set up by the Reserve Bank
of India (RBI), to take care of the IT requirements, including the cyber
security needs of the Reserve Bank and its regulated entities. ReBIT will focus
on IT and cyber security (including related research) of the nancial sector
and assist in IT systems audit and assessment
of the RBI regulated entities; advise,
implement and manage internal or system wide IT projects (both the existing
& the new) of the Reserve Bank as mutually decided between the Reserve Bank
and ReBIT. It will also act as a catalyst for innovation, big systems and new
ideas apart from having the capability to guide
the regulated entities in the IT areas of
their operations as also for the RBI's IT related functions and initiatives.
Given the need for inter-operability and cross institutional cooperation, ReBIT
will effectively participate in setting up of standards to strengthen Reserve
Bank's role as regulator.
National Bank for
Agriculture and Rural Development (NABARD)
National Bank of Agriculture and Rural
Development (NABARD) is an apex Development Bank with a mandate for
facilitating credit ow for promotion and development of agriculture,
small-scale industries, cottage and village industries, handicrafts and other
rural crafts. It also has the mandate to support
all other allied economic activities in rural
areas, promote integrated and sustainable rural development and secure
prosperity of rural areas. NABARD came into existence on July 12, 1982, by
transferring the agricultural credit functions of RBI and renance functions of
the then Agricultural Renance and Development Corporation (ARDC). Set up with
an initial capital of ` 1 billion, its' paid up capital stood at ` 50 billion as on 31 March 2016. Consequent to
the revision in the composition of share capital between Government of India
and RBI, the Government of India holds ` 49.8 billion (99.60%) while Reserve Bank of India
holds ` 0.2 billion (0.40%).
Academic Institutions
set up by the Reserve Bank
The Reserve Bank has set up autonomous
institutions, such as, National Institute of Bank Management (NIBM), Pune;
Indira Gandhi Institute for Development Research (IGIDR), Mumbai; and the
Institute for Development and Research in Banking Technology (IDRBT),
Hyderabad, to disseminate knowledge
and conduct research in the areas of banking,
nance, economics and information technology.
Departments of RBI:
Depart
Monetary Policy
and Research
|
Monetary Policy Department (MPD)
Department of Economic and Policy Research (DEPR)
Department of Statistics and Information Management (DSIM)
Financial Markets Operation Department (FMOD)
International Department (ID)
Department of Communication (DoC)
|
Regulation
and Risk
Management
|
Department of Banking Regulation (DBR)
Department of Non-Banking Regulation (DNBR)
Department of Co-operative Bank Regulation (DCBR)
Enforcement Department (ED)
Financial Stability Unit (FSU)
|
Supervision &
Inclusion
|
Department of Banking Supervision (DBS)
Department of Non-Banking Supervision (DNBS)
Department of Cooperative Bank Supervision (DCBS)
Financial Inclusion and Development Department (FIDD)
Customer Education and Protection Department (CEPD)
|
Financial
Markets and
Infrastructure
|
Department of External Investments and Operations (DEIO)
Financial Markets Regulation Department (FMRD)
Internal Debt Management Department (IDMD)
Foreign Exchange Department (FED)
Department of Payment and Settlement Systems (DPSS)
Department of Government and Bank Accounts (DGBA)
|
Operations and
Human
Resources
|
Department of Currency Management (DCM)
Department of Information Technology (DIT)
Corporate Strategy and Budget Department (CSBD)
Department of Corporate Services (DCS)
Human Resource Development Department (HRMD)
Risk Monitoring Department (RMD)
Inspection Department (ID)
Legal Department (LD)
Secretary's Department
Central Vigilance Cell
Rajbhasha Department
Premises Department (PD)tors
|
ments of RBI and their functions
245
Governor
Deputy Governors
Executive Directors
Principal Chief General
Managers
Chief General Managers
General Managers
Deputy General Managers
Assistant General Managers
Managers
Assistant Managers
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