RBI and Functions of Central Bank
RBI and Functions of Central Bank
OF CENTRA L B A NK
B Y- T U S H A R D H I M A N
OF CLASS XII-D
INTRODUCTION
• A central bank is an institution that manages a country’s currency and monetary policy. They also oversee
the commercial banking system of their country. Central banks originated in 1694 when the Bank of
England was founded to manage the national debt of Great Britain. The US Federal Reserve System is
considered to be one of the most influential central banks, along with the European Central Bank. A
central bank is a financial institution that controls a country’s monetary policy and usually issues the
national currency, which serves as the State’s legal tender. Central banks are known as “lender of last
resort,” as they can provide liquidity to commercial banks during times of crisis or economic recession.
• A central bank is a bank that acts as a bridge between the government and the public. It has a variety of
responsibilities, such as controlling the money supply by setting interest rates, regulating banks to prevent
financial crises from happening, and acting as lender of last resort to banks in times of financial crisis. A
central bank is usually responsible for setting the interest rate that banks charge each other for loans, also
referred to as the discount rate. The higher this rate is set, the more expensive it becomes for commercial
banks to borrow money from one another.
BRIEF HISTORY
• It was set up on the recommendation of the HILTON YOUNG COMMISSION.
• It was started as a Share-holders Bank with a paid-up capital of Rs.5 Crores.
• It was established on April 1, 1935.
• Initially, it was located in Kolkata.
• It moved to Mumbai in the year 1937.
• Initially, it was privately owned.
• It was the first bank to be nationalized in 1949.
• It has 22 Regional offices, most of these in-state Capitals.
• Since its nationalization in 1949, Reserve Bank is fully owned by the Government of India.
PREAMBLE
• The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
“To regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in
India and generally to operate the currency and credit systems of the country to its advantage; to have a
modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain
price stability while keeping in mind the objective of growth.”
OBJECTIVES OF RBI
This discourages lenders from borrowing and reduces the ability of commercial banks to generate credit.
Reverse repo rate is the exact opposite of repo rate. This is the rate at which RBI borrows from commercial
banks. RBI uses this tool when it feels that the banking system has an excess money supply. The rise in
reverse repo rates is causing banks to send more money to RBI due to attractive interest rates.
3. Open market operations: "Open market operations (OMOs) are the buying and selling of government
bonds by central banks to public and commercial banks." In the end, the amount is deposited or remitted
by the bank, so the securities It doesn't matter if it is bought or sold by the general public or sold to a
bank.
• • The sale of securities by the central bank reduces the reserves of commercial banks. This affects a
bank's ability to create credit and thus reduces the money supply in the economy.
• • Purchasing securities by a central bank increases reserves and enhances a bank's ability to provide
credit.
THE CONTROLLER OF MONEY SUPPLY AND
CREDIT (CONTINUATION)
4. Legal reserve requirements (variable reserve requirement method): Commercial banks must keep
reserves in two accounts.
a) Cash Reserve Ratio (CRR) The minimum percentage of net demand and time commitment that a
commercial bank must maintain at a central bank. Increasing CRR reduces the excess reserves of
commercial banks and limits their ability to create credit.
b) Statutory Liquidity Ratio (SLR) 'The minimum percentage of net demand and one-time debt that a
commercial bank must maintain. SLRs are held in the form of designated current assets, such as excess
reserves and other securities, or current account balances with other banks. As the SLR increases, the
bank's ability to grant credits diminishes and vice versa.
THE CONTROLLER OF MONEY SUPPLY AND
CREDIT (CONTINUATION)
5. Margin requirements: "Margin is the difference between the amount of a loan and the market value of
the securities the borrower provides for the loan." Increasing the margin reduces the borrowing capacity
and money supply. Lower margins encourage people to borrow more. The RBI can provide differentiated
margins for different types of lenders compared to other credit management measures such as moral
crime and selective credit management. RBI uses the above methods to manage credit in the economy.
Safety of the same product. If a bank takes out a loan equivalent to the full amount of the security, the
bank will suffer a loss if the price of the security drops, so a margin is required.
CUSTODIAN OF FOREIGN EXCHANGE
RESERVES
The central bank also acts as a manager of national gold stocks and foreign exchange reserves. This feature
allows central banks to manage their currencies reasonably. According to Forex regulations, all Forex
transactions must be submitted by RBI. Centralizing foreign exchange transactions with RBI has two
purposes.
i. Help banks stabilize the external value of their currency.
ii. Support the pursuit of coordinated policies on the country's balance of payments situation.
PROMOTIONAL FUNCTIONS OF RBI
The Reserve Bank of India performs various promotional functions as shown below.
1. Promote banking habits: RBI helps mobilize people's savings for investment. We have expanded our
banking system through institutions such as UTI, IDBI, IRCI and NABARD. In this way, he promotes
banking habits among people.
2. Provide export refinancing: RBI provides refinancing for export promotion. The Export Guarantee
Credit Corporation [ECGC] and the Export-Import Bank were initially established by RBI to fund
India's foreign trade.
3. Give credit to agriculture: RBI makes institutional arrangements for local or agricultural financing.
Example: A bank has created a special cell for agricultural credit. It promoted local regional banks with
the help of commercial banks. He also promoted NABARD.
4. Loans to Small Industry Units: Commercial banks will lend to Small Industry Units according to the
instructions issued by RBI from time to time. The RBI encourages commercial banks to provide
warranty services to the small industry sector as well. The RBI has instructed commercial banks to open
specialized branches to provide adequate financial and technical assistance to the small industrial sector.
PROMOTIONAL FUNCTIONS OF RBI (CONTINUATION)
5. Providing Indirect Financing to the Co-operative Sector: The RBI orders NABARD to lend to the state
co-operative banks, which the state co-operative banks lend to the co-operative sector. Therefore, the
Reserve Bank of India provides indirect financing to the Indian co-operative sector.
6. Management of the national financial and banking system: RBI has enormous and broad authority over
the supervision and management of commercial banks, co-operative banks, and non-bank institutions
that receive deposits. Banking regulations set out a wide range of requirements for reserves, cash
reserves and current assets. Each upcoming bank must submit a weekly financial statement to the
Reserve Bank stating the most important items of debt and assets in India.
ACHIEVEMENTS OF RBI
1. Flexible monetary policy: RBI adopts flexible monetary policy. This has changed the financial regulation
of India's money markets. The pressure of seasonal demand is well achieved.
2. Stable interest rate structure: _ RBI's interest rate policy has resulted in a relatively stable interest rate
structure in the economy. Bank interest rates remained low at 3% until 1951.
3. Modern Banks and Credit Structures: Reserve banks have succeeded in building modern and sound
banks and credit structures. We had broad oversight that allowed us to guide the development of banks in
a fixed order. Training of bank staff has improved their efficiency. Bank geographic and basic coverage
has also increased significantly.
4. Cheap payment facilities: Reserve Bank has introduced very cheap payment facilities. Widely used in
commercial banks, government agencies and co-operative banks.
FAILURES OF RBI
1. Lack of Coordination in Money Markets: The RBI has virtually no control over or control over the
activities of money lenders and other indigenous bankers. These bankers are not simply included in the
reserve banking territory.
2. Lack of interest rate uniformity: Due to lack of control in different sectors of money markets, different
interest rates are still prevalent outside the organized sectors of money markets, with ROI higher than
bank rates. Is also overly high.
3. Lack of building market: RBI created a development plan for the building market in 1952. But so far,
India does not have an independent, organized and extensive billing market.
4. Inadequate availability of agricultural credit: The RBI has taken many steps to provide adequate
agricultural credit, but it is still dominated by local money lenders and other indigenous bankers.
5. Inadequate banking facilities: Most banking activities are concentrated in urban areas. People in small
towns and suburbs are still deprived of banking services.
CONCLUSION
The banking system has been with us since people spent money. Banks and financial institutions
provide security to individuals, businesses and governments. In general, it's pretty easy to
understand what a bank is doing. For the average person, a bank accepts deposits, lends, provides
a safe place for money and valuables, and acts as a payment agent between the merchant and the
bank. History has made power banks vulnerable to many risks, including credit, liquidity,
markets, corporate interest rates and legal risks, and many global crises are the result of such
vulnerabilities, a country. And led to strict regulation by national banks. .. However, the central
bank is the backbone of the entire banking sector, without which the banking sector would not be
involved at all. Central banks are an integral part of the economy and help increase the resources
of the economy.