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Reserve Bank of India 1

K.E.S. SHROFF COLLEGE OF ARTS & COMMERCE T.Y.BBI (Semester VI)

Reserve Bank of India

Introduction

The Reserve Bank of India (RBI, Hindi: ê÷íâùì íð é Ó ) is the central bank of

India and controls the monetary policy of the rupee as well as 287.37 billion US-

Dollar (2009) currency reserves. The institution was established on 1 April 1935

during the British-Raj in accordance with the provisions of the Reserve Bank of

India Act, 1934[1]

and plays an important part in the development strategy of the

government.

It was inaugurated as a private

shareholders institution under the

Reserve Bank of India Act 1934. It was

nationalized in January 1949, under the

Reserve Bank (Transfer to Public

Ownership) of India Act, 1948. This act

empowers the central government, in

consultation with the Governor of the

Bank, to issue such directions to RBI as

might be considered necessary in the

public interest.

RBI is governed by a Central Board of

Directors with 20 members consisting of

the Governor and the Deputy Governors.

The Governor and the deputy Governors of the Bank are Government of India



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appoi t preamble to t e R eserve Bank of India Act lays down t e

purpose of establishing RBI as ³to regulate issue of Bank notes, to keep the

reserves with a view to secur ing monetary stability in India and generally to

operate the currency and credit system of the country to its advantage´.

RBI took a leading role in designing and implementing policies for agr icultural

and industr ial development and for laying the foundations for f inancial markets.

Some of today¶s premier development and market institutions such as the

National Bank for Agr iculture and R ural Development (NABAR D), the

Industr ial Development Bank of India (IDBI) and the Unit Trust of India (UTI)

had their beginnings as speciali ed depar tments and divisions withi n the RBI.

When RBI star ted in 1935, there were just three depar tments, namely the

Bank ing Depar tment, the Issue Depar tment and the Agr icultural Credit

Depar tment. Today, RBI has 26 depar tments in the Central Off ice, have 26

regional and f ield off ices across the country, four subsidiar ies (BRB Note

Mudran Press Ltd., DIC C, NABAR D and NHB,) and a staff of over 20,000

employees.

Today, RBI is the monetary author ity, and regulator and supervisor for banks andnon-bank ing f inancial companies. RBI is the issue r of currency and the debt

manager for the central and state governments. Besides, RBI manages the

country¶s foreign exchange reserves, manage the capital account of the Balance

of payments, and design and operate payment systems. RBI also operates a

gr ievance redressed scheme for bank customers through the Bank ing

Ombudsmen and formulates policies for treating customers fair ly.

Objectives and Reasons for the Est abl i shment of R.B. .



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The main ob jectives for establishment of RBI as the Central Bank of Ind ia

were as follows:

T o manage the monet ary and cred it syst em of the count ry .

T o st abi l iz es i nt ernal and ex t ernal value of rupee .

F or balanced and syst emati c development of bank i ng i n the count ry .

F or the development of organiz ed money market i n the count ry .

F or proper arrangement of agr i cul t ure f i nance .

F or proper arrangement of i ndust r i al f i nance .

F or proper management of publ i c debt s .

T o est abl i sh monet ary relati ons with other count r i es of the world and

i nt ernati onal f i nanci al i nstit uti ons .

F or cent ral iz ati on of cash reser ves of commerci al banks .

T o mai nt ai n balance bet ween the demand and supply of currency .

Accord i ng t o the Reser ve Bank of Ind i a Act the aim of RB I i s, ³ t o regulat e the

i ssue of bank not es and keepi ng of reser ve with a vi ew t o secure syst em of the

count ry t o it s ad vant age .´

N ati onal iz ati on of Reser ve Bank of Ind i a:



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Initially, the RBI was established as shareholder¶s bank. Its share capital was R s.

5 crores, divided into 5 lakh fully paid up share of R s. 100 each. Our of this,

share of the nominal value of R s. 2,20,000 (2200 shares) were allotted to the

Central Government for disposal at par to the Directors of the Central Board of

the Bank seek ing to obtain the minimum share qualif ication. The remaining share

capital was owned by the pr ivate individuals. Thus, the control on the policy of

the RBI remained with the Government.

The RBI is governed by the Central Board of Directors. The Governor and two

deputy-Governors are appointed by the Government and other members of the

Governing Board are appointed by individual shareholders. In order to regulate

and control monetary and credit policy of the country, the Government is

empowered to supersede the central Board of Directors of the RBI if the Board

fails to discharge its obligations cast upon it by the RBI Act.

The demand for nationali ation of RBI was star ted with the setting up of RBI. It

was felt that RBI should be nationali ed in tune with the changing national and

international political and economical scenar io. The ob jective of its

nationali ation was stated, ³To implement the Government¶s policy that the Bank should function as state-owned institution and to meet the general desire that

control of the government over the bank¶s activities should be extended to ensure

greater co-ordination in the monetary economic and f inancial policies.´ In

February, 1947, it was decided to nationali e RBI. Thus, the RBI was

nationali ed with the passing of the R eserve Bank of India (transfer to public

ownershi p) Act in 1948. in terms of the Act, the entire share were transferred to

the central Government on payment of compensation to the shareholders @ R s.

118 and 62 paisa per share of R s. 100. Thus since January 1, 1949, the the

reserve bank of India is functioning as a state owned and state controlled

(nationali ed) bank.





Organization Structure

of

Reserve Bank of India

Introduction

Central Board of Directors

Governor

Manager

Asstt.Manager

Deputy Governors

Executive Directors

Principal Chief General Manager

General Managers

Support Staff

Chief General Managers

Deputy General Managers

Asstt. General Manager





Organi ation & anage ent of RBI :

Central Board of Directors- (20 Directors)

Dr. D. Subbarao

Dr. Rakesh Mohan

Shri V. Leeladhar

Smt. Shyamala Gopinath

Smt. Usha Thorat

Dr. Ashok

S. Ganguly

Shri Azim Premji

Shri Kumar Mangalam Birla

Smt. Shashi Rekha Rajagopalan

shri Suresh Neotia

Dr. A. Vaidyanathan

Prof. Man Mohan Sharma

Dr. D. Jayavarthanavelu

Shri Sanjay Labroo

Shri H. P. Ranina



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Shr i Y.H. Malegam

Shr i Suresh D. Tendulkar

Prof. U. R . R ao

Shr i Lakshmi Chand

Governor (one)

( hairman and full ime off i er)

Dr. D. Subbarao

Deputy Governors (Four)

(All full time off i ers)

Dr. R akesh Mohan

Shr i V. Leeladhar

Smt. Shyamala Gopinath

Smt. Usha Thorat

Directors (Fifteen)

(All part-time off icers)

10 nominated by entral Govt.

Dr. Ashok S. Ganguly

Shr i Azim Prem ji

Shr i Kumar Mangalam Bir la

Smt. Shashi R ekha R a jagopalan

shr i Suresh Neotia

Dr. A. Vaidyanathan

Prof. Man Mohan Sharma

Dr. D. Jayavar thanavelu

Shr i San jay Labroo

Shr i H. P. R anina



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c ) F i f t een Di rect ors: Other f if teen members of the Central Board are appointed

by the Central Government. Out of these, four directors, one each from the four

local Boards is nominated by the Government separately by the Central Government.

Ten directors nominated by the Central Government are among the exper ts of

commerce, industr ies, f inance, economics and cooperation. The f inance secretary

of the Government of India is also nominated as Govt. off icer in the board. Ten

directors are nominated for a per iod of 4 years. The Governor acts as the Chief

Executive off icer and Chirman of the Central Board of Directors. In his absence a

deputy Governor nominated by the Governor, acts as the Chirman of the Central

Board.

2 . Local Boards: Besides the central board, there are local boards for four

regional areas of the country with their head-quar ters at Mumbai, Kolkata,

Chennai, and New Delhi. Local Boards consist of f ive members each, appointed

by the central Government for a term of 4 years to represent terr itor ial and

economic interests and the interests of co-operatives and indigenous banks. The

function of the local boards is to advise the central board on general and specif ic

issues referred to them and to perform duties which the central board delegates.

3 . Off i ces of RB I : The Head off ice of the bank is situated in Mumbai and the

off ices of local boards are situated in Delhi, Kolkata and Chennai. In order to

maintain the smooth work ing of bank ing system, RBI has opened local off ices or

branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh,Guwahati, Hyderabad, Jai pur, Jammu, Kanpur, Nagpur, Patna,

Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open

its off ices with the permission of the Government of India. In places where there

are no off ices of the bank, it is represented by the state Bank of India and its

associate banks as the agents of RBI.



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Ad mi ni st rative depar tment of RB I

In order to maintain smooth functioning, RBI has established different

administrative depar tments which are the par t of its internal organization. These

are as follows:

Depar tment of currency management.

Depar tment of bank ing supervision.

R ural planning and credit depar tment.

Depar tment of bank ing operations and development.

Exchange control depar tment.

Secretary¶s depar tment

Industr ial and expor t credit depar tment

Depar tment of administration and personnel management

Depar tment of Government and Bank accounts.

Depar tment of non-Bank ing supervision.

Internal debt management cell.

Inspection depar tment.

Depar tment of information and technology.

Other depar tment : Besides these above depar tments RBI has other depar tments

such as premises depar tment, press relation depar tment, personnel policy

depar tment etc.



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F uncti ons of Reser ve Bank of Ind i a

F uncti ons of R.B. I

The R eserve Bank of India Act of 1934 entrust all the impor tant functions of a

central bank the R eserve Bank of India.

Bank of Issue

Under Section 22 of the R eserve Bank of India Act, the Bank has the sole r ight to

issue bank notes of all denominations. The distr i bution of one rupee notes and

coins and small coins all over the country is under taken by the R eserve Bank as

agent of the Government. The R eserve Bank has a separate Issue Depar tment

which is entrusted with the issue of currency notes. The assets and liabilities of

the Issue Depar tment are kept separate from those of the Bank ing Depar tment.

Or iginally, the assets of the Issue Depar tment were to consist of not less than

two-f if ths of gold coin, gold bullion or ster ling secur ities provided the amount of gold was not less than R s. 40 crores in value. The remaining three-f if ths of the

assets might be held in rupee coins, Government of India rupee secur ities,

eligi ble bills of exchange and promissory notes payable in India. Due to the

exigencies of the Second Wor ld War and the post -war per iod, these provisions

were considerably modif ied. Since 1957, the R eserve Bank of India is required to

maintain gold and foreign exchange reserves of R a. 200 crores, of which at least

R s. 115 crores should be in gold. The system as it exists today is known as the

minimum reserve system.

Banker t o Government

The second impor tant function of the R eserve Bank of India is to act as

Government banker, agent and adviser. The R eserve Bank is agent of Central



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Government and of all State Governments in India excepting that of Jammu and

Kashmir. The R eserve Bank has the obligation to transact Government b usiness,

via. To keep the cash balances as deposits free of interest, to receive and to make

payments on behalf of the Government and to carry out their exchange

remittances and other bank ing operations. The R eserve Bank of India hel ps the

Government - both the Union and the States to f loat new loans and to manage

public debt. The Bank makes ways and means advances to the Governments for

90 days. It makes loans and advances to the States and local author ities. It acts as

adviser to the Government on all monetary and bank ing matters.

Bankers' Bank and Lender of the Last Resor t

The R eserve Bank of India acts as the bankers' bank. According to the provisions

of the Bank ing Companies Act of 1949, every scheduled bank was required to

maintain with the R eserve Bank a cash balance equivalent to 5% of its demand

liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962,

the distinction between demand and time liabilities was abolished and banks have

been asked to keep cash reserves equal to 3 per cent of their aggregate deposit

liabilities. The minimum cash requirements can be changed by the R eserve Bank of India.

The scheduled banks can borrow from the R eserve Bank of India on the basis of

eligi ble secur ities or get f inancial accommodation in times of need or str ingency

by rediscounting bills of exchange. Since commercial banks can always expect

the R eserve Bank of India to come to their hel p in times of bank ing cr isis the

R eserve Bank becomes not only the banker's bank but also the lender of the last

resor t.

Cont roller of Cred it

The R eserve Bank of India is the controller of credit i.e. it has the power to

inf luence the volume of credit created by banks in India. It can do so through



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changing the Bank rate or through open market operations. According to the

Bank ing R egulation Act of 1949, the R eserve Bank of India can ask any

par ticular bank or the whole bank ing system not to lend to par ticular groups or

persons on the basis of cer tain types of secur ities. Since 1956, selective controls

of credit are increasingly being used by the R eserve Bank.

The R eserve Bank of India is armed with many more powers to control the

Indian money market. Every bank has to get a license from the R eserve Bank of

India to do bank ing business within India, the license can be cancelled by the

R eserve Bank of cer tain sti pulated conditions are not fulf illed. Every bank will

have to get the permission of the R eserve Bank before it can open a new branch.

Each scheduled bank must send a week ly return to the R eserve Ba nk showing, in

detail, its assets and liabilities. This power of the Bank to call for information is

also intended to give it effective control of the credit system. The R eserve Bank

has also the power to inspect the accounts of any commercial bank.

As supereme bank ing author ity in the country, the R eserve Bank of India,

therefore, has the following powers:

(a ) I t holds the cash reser ves of all the scheduled banks .

(b ) I t cont rols the cred it operati ons of banks throug h quantit ative and

qual it ative cont rols .

(c ) I t cont rols the bank i ng syst em throug h the syst em of l i censi ng, i nspecti on

and call i ng for i nfor mati on .

(d ) I t act s as the lender of the last resor t by provi d i ng red i scount faci l iti es t o

scheduled banks .

Cust od i an of F orei gn Reser ve

The R eserve Bank of India has the responsi bility to maintain the off icial rate of

exchange. According to the R eserve Bank of India Act of 1934, the Bank was



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required to buy and sell at f ixed rates any amount of ster ling in lots of not less

than R s. 10,000. The rate of exchange f ixed was R e. 1 = sh. 6d. Since 1935 the

Bank was able to maintain the exchange rate f ixed at lsh.6d. Though there were

per iods of extreme pressure in favor of or against the rupee. Af ter India became a

member of the International Monetary Fund in 1946, the R eserve Bank has the

responsi bility of maintaining f ixed exchange rates with all other member

countr ies of the I.M.F. Besides maintaining the rate of exchange of the rupee, the

R eserve Bank has to act as the custodian of India's reserve of international

currencies. The vast ster ling balances were acquired and managed by the Bank.

Fur ther, the RBI has the responsi bility of administer ing the exchange controls of

the country.

S uper vi sory functi ons

In addition to its traditional central bank ing functions, the R eserve bank has

cer tain non-monetary functions of the nature of supervision of banks and

promotion of sound bank ing in India. The R eserve Bank Act, 1934, and the

Bank ing R egulation Act, 1949 have given the RBI wide powers of supervi sion

and control over commercial and co-operative banks, relating to licensing andestablishments, branch expansion, liquidity of their assets, management and

methods of work ing, amalgamation, reconstruction, and liquidation. The RBI is

author ized to carry out per iodical inspections of the banks and to call for returns

and necessary information from them. The nationalization of 14 ma jor Indian

scheduled banks in July 1969 has imposed new responsi bilities on the RBI for

directing the growth of bank ing and credit policies towards more rapid

development of the economy and realization of cer tain desired social ob jectives.

The supervisory functions of the RBI have hel ped a great deal in improving the

standard of bank ing in India to develop on sound lines and to i mprove the

methods of their operation.



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P romoti onal functi ons

With economic growth assuming a new urgency since Independence, the range of

the R eserve Bank's functions has steadily widened. The Bank now performs a

var iety of developmental and promotional functions, which, at one time, wereregarded as outside the normal scope of central bank ing. The R eserve Bank was

asked to promote bank ing habit, extend bank ing facilities to rural and semi -urban

areas, and establish and promote new specialized f inancing ag encies.

Accordingly, the R eserve Bank has hel ped in the setting up of the IFCI and the

SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India

in 1964, the Industr ial Development Bank of India also in 1964, the Agr icultural

R ef inance Corporation of India in 1963 and the Industr ial R econstruction

Corporation of India in 1972. These institutions were set up directly or indirectly

by the R eserve Bank to promote saving habit and to mobilize savings, and to

provide industr ial f inance as well as agr icultural f inance. As far back as 1935, the

R eserve Bank of India set up the Agr icultural Credit Depar tment to provide

agr icultural credit. But only since 1951 the Bank's role in this f ield has become

extremely impor tant. The Bank has developed the co-operative credit movement

to encourage saving, to eliminate moneylenders from the villages and to route its

shor t term credit to agr iculture. The RBI has set up the Agr icultural R ef inance

and Development Corporation to provide long-term f inance to farmers.

Classi f i cati on of RB Is functi ons

The monetary functions also known as the central bank ing functions of the RBI

are related to control and regulation of money and credit, i.e., issue of currency,

control of bank credit, control of foreign exchange operations, banker to the

Government and to the money market. Monetary functions of the RBI are

signif icant as they control and regulate the volume of money and credit in the

country.



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Equally impor tant, however, are the non-monetary functions of the RBI in the

context of India's economic backwardness. The supervisory function of the RBI

may be regarded as a non-monetary function (though many consider this a

monetary function). The promotion of sound bank ing in India is an impor tant

goal of the RBI, the RBI has been given wide and drastic powers, under the

Bank ing R egulation Act of 1949 - these powers relate to licensing of banks,

branch expansion, liquidity of their assets, management and methods of work ing,

inspection, amalgamation, reconstruction and liquidation. Under the RBI's

supervision and inspection, the work ing of banks has greatly improved.

Commercial banks have developed into f inancially and operationally sound and

viable units. The RBI's powers of supervision have now been extended to non-

bank ing f inancial intermediar ies. Since independence, par ticular ly af ter its

nationalization 1949, the RBI has followed the promotional functions vigorously

and has been responsi ble for strong f inancial suppor t to industr ial and agr icultural

development in the country.





Role of RBI in Indian

Financial System

Rol e of RBI in Indian F inancial Syste

The reserve Bank of India is the central bank of India. Therefore, it performs all

those functions which are essentially being performed by the central bank of a

country. The important functions of the reserve Bank of India are as follows:

Issue of Notes

The reserve Bank of India enjoys monopoly in the issue of currency notes as

central Bank of the country. All the

currency notes except one rupee note

are issued by RBI. One rupee note

and all coins of small magnitude are

issued by the Government of India

and are circulated through the Reserve

Bank of India. The RBI Act permits RBI to issue notes in the denominations of

rupees 2, 5, 10, 20,50,100,500,1000. Although the RBI had issued all these

denominations, but at present notes of all denominations except 5,000 and 10,000

are being issued in circulation.

The RBI has established a separate department for this purpose known as issuing

department. The basis of note issue is minimum Reserve system. The RBI has

been issuing currency notes on the principle of banking system, in which cent per

gold/precious metals reserves are not required. In this system RBI have to

maintain a minimum reserve of Rs. 200 crore as security against note issue. In



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which a minimum reserve of R s. 115 crore has been maintain in gold and

remaining R s. 85 crore reserve in foreign secur ities. The value of gold reserve

held by the issue depar tment has not been less than R s. 85 crore at the time of an

emergency.

Banker, Agent and ad vi sor t o the Government

The reserve bank of India acts as the banker, agent and advisor to the

Government of India.

RB I as banker:

It accepts payments for the account of the union and state governments and also

makes payments on behalf of the Government. On behalf of the Government,

RBI carr ies remittances, managing foreign exchange reserves and public debts

and other bank ing operation. It also makes way and means advances to the

central and state Government repayable within three months. The reserve bank of

India carr ies out agency functions of the Government as the commercial banks

carr ies out on behalf of their customers.

RB I as Agent :

The state Bank of India works as an agent of the RBI where its off ices do not

exist. The RBI does not charge any fee for its operation from the Central and

state Governments. It also does not pay any interest on the deposits of the central

and state Government accounts. The reserve Bank, as the agent of the

Government, issues Government secur ities to the public and collects money on

behalf of the Government.

It also manages public debts to the central and state Governments. The RBI pays

interest on the secur ities and redeemed at the time of matur ity and also maintains

accounts of this effect. The RBI also issues treasury bills of Government for three

months.



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RB I as ad vi sor:

The RBI is also author ized to make to the central and state Government, ways

and means advances which are repayable in three months. It not only advises

Govt. on all monetary and bank ing issues but also on a wide range of econom ic

issues including those in the f ield of planning and resource mobilization.

It also manages foreign exchange reserves to meet the impor tant requirement.

Thus, RBI acts as the custodian public debts. It also advises Govt. in the matters

of agr iculture credit, cooperation, bank ing and credit and investment of funds.

W AMA ( W ays and Means Ad vances )

The issue, management and administration of the public debt of the Government

are a ma jor function of the RBI for which it charges a commission. The ob jective

of the debt management policy is to raise resources from the market at the

minimum cost, while containing the ref inance r isk and maintaining consistency

with the monetary policy ob jectives, to br idge temporary mismatches in the cash

f lows (i.e. temporary gaps between recei pts and payments), the RBI provides

W ays and Means Ad vances (WAMAs). The maximum matur ity per iod of these

advances is three months.

T he W AMAs t o the st at e Government s are of three t ypes:

y N or mal advances, that is advances without any collateral secur ity;

y S ecured advances, which are secured against the pledge of central Governments secur ities and

y S peci al advances granted by the RBI at its discretion.

In addition to WAMAs, the state government make heavy use of overdraf ts from

the RBI, in excess of the credit limits (WAMAs) granted by the RBI. Overdraf ts

are, in a way, unauthor ized WAMAs drawn by the state governments, on the

RBI.



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In fact, the management of these overdraf ts is one of the ma jor responsi bilities of

the RBI these days. The interest charged by the RBI on the WAMAs is related to

a graduated scale of interest based on its duration. Overdraf ts up to 7 days are

charged at the bank rate and an interest of 3 per cent above the bank rate is

charged from the 8th day onwards .

Banker¶s Bank

As an apex bank the RBI acts as banker of the banks and lender of the last resor t.

Under the RBI Act, the bank has been vested with extensive powers of

supervision and control over all scheduled commercial and cooperative banks.

Once the name of a bank is incorporated in the second schedule of the RBI Act, it

becomes entitled to ref inance facility from the RBI. Under the act, every

schedule bank is required to keep with the RBI a cash balance of 5% of its total

demand and time liabilities as cash reserve ratio. Now, CRR has reduced from

5% to 4.75 with effect from 16 November, 2002.

The cash reserve ratio may be between 3 to 15% as decided by the R eserve

Bank. This provision is also applicable on non-scheduled banks. This provision

of cash reserve enables the R eserve Bank to control credit which is created by

commercial banks. In case of need of funds, commercial banks can borrow funds

from R eserve Bank on the basis of eligi ble secur ities or get f inancial

accommodation in times of need or str in gency by rediscounting their bills of

exchange. Therefore, commercial banks always look upon the R eserve Bank at

the Time of f inancial cr isis

Cust od i an of F orei gn Exchange Reser ves

One of the impor tant functions performed by the R eserve Bank is that of ext ernal

value of the rupee. Apar t from adopting appropr iate monetary polices for the

economic stability in the country and thereby exchange stability in the long -term,

the R eserve Bank has to ensure that the normal shor t -term f luctuations in trade do

not affect the exchange rate.



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This is secures by the

centralization of the entire

foreign exchange reserves

of the country with the

R eserve Bank of India. In

order to maintain stability

in exchange rates, the

R eserve Bank enter into foreign exchange transactions. It also administers

foreign currency for the central Government, state Govt. and Indian embassies in

foreign countr ies. There is a separate depar tment for this purpose in RBI known

as ³Exchange control currencies and tr ies to maintain balance between the

demand and supply of foreign exchange. The R eserve Bank is also author ized to

buy and sell foreign exchange from and to scheduled banks.

Regulati on of Bank i ng S yst em

The pr ime duty of the reserve Bank is to regulate the bank ing system of our

country in such a way that the people of the country can trust in the bank ing Up

to perform its duty.

T he Reser ve Bank has followi ng powers i n thi s regard:

Li censi ng :

Accord i ng t o the secti on 22 of the Bank i ng Regulati on Act , every bank has to

obtain license from the R eserve Bank. The R eserve Bank issues such license only

to those banks which fulf ill condition of the bank should be strong. The RBI isalso empowered to cancel the license granted to a bank works against the

interests of the depositors.



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Management :

S ecti on 10 of the Bank i ng Regulati on Act embowered the R eserve Bank to

change manager or director of any bank if it considers it necessary or desirable.

Branch Expansi on:

S ecti on 23 requires every bank to take pr ior permission from R eserve Bank to

open new places of business in India or ro change the location of an existing

place of business in India or abroad.

P ower of i nspecti on of Bank:

U nder S ecti on 35, the R eserve Bank may inspect any bank and its books and its

books and accounts either at its own initiative or at the instance of the Central

Government. If, on the basis of the inspection repor t submitted by the R eserve

Bank Central Government is of the opinion that the affairs of the bank are being

conducted to the detr iment of the interests of depositors, it may direct to the

R eserve Bank to apply for the winding up of such bank.

P ower t o i ssue Di recti ons:

S ecti on 35(A ) of IBR Act confers powers to RBI to issue direction or to prevent

the affairs of the being conducted in manner detr iment to the interests of the

depositors or in a manner pre judicial to the interests of the bank or to secure

proper management of the bank.

S ecti on 36 confers powers on the RBI to caution or proh i bit banks against enter ing into any par ticular transaction and generally give advice to any bank. It

may pass orders requir ing the bank to carry out the specif ied instructions. In

order to develop a strong bank ing structure in the country the RBI promotes

amalgamation or merger of weak banks so that they can develop as a strong bank.



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S ecti on 38 of the Act empowered RBI to request to High Cour t to windup the

bank which has no hopes of improvement.

Clear i ng House

The RBI operates clear ing houses to settle bank ing transactions. The RBI

manages 14 ma jor clear ing houses of the country situated in different ma jor

cities. The State Bank of India and its associates look af ter clear ing houses

function in other par ts of the country as an agent of RBI.

Clear i ng House

Cred it Cont rol

Credit control is a very impor tant function of RBI as the Central Bank of India.

For smooth functioning of the economy RBI control credit through quantitative

and qualitative methods. Thus, the RBI exercise control over the credit granted by the commercial bank. The reserve Bank is the most appropr iate body to

control the creation of credit in view if its functions as the bank of note issue and

the custodian of cash reserves of the member banks.



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Unwarranted f luctuations in the volume of credit by causing wide f luctuations in

the value of money cause great social & economic unrest in the country. Thus,

RBI controls credit in such a manner, so as to br ing µEconomic Development

with stability¶. It means, bank will accelerate economic growth on one side and

on other side it will control inf lationary trends in the economy. It leads to

increase in real national income of the country and desirable stability in the

economy.

Other Roles

The RBI performs following other functions:

Agr i cul t ure Cred it :

All matters relating to agr iculture credit are looked af ter by RBI before the

establishment of NABAR D in 1982. Now all functions relating to agr iculture and

rural development are performed by NABAR D.

Indust r i al F i nance:

The RBI has contr i buted in the share capital of industr ial f inance institutions such

as Industr ial Finance Corporation of India, Industr ial Development Bank of

India, State Finance Corporations etc. Thus RBI indirectly contr i butes in the f ield

of industr ial f inance.

P ubl i cati on of Dat a:

The RBI publishes statistics regarding money, pr ice, f inance etc, in its

per iodicals. This provides valuable information for Govt., business and

industr ies. This information is hel pful to take decisions. The impor tant

publications of RBI are the R eserve Bank of India Annual R epor t, currency and

f inance, trends and progress of Bank ing etc. At present, there are more than 100

publications of RBI.



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Bank i ng Educati on and T rai ni ng :

The RBI has been organizing var ious educations and training programs for bank

employees and off icers. µBanker Training College¶ Mumbai has been setup by

RBI for the training of Bank off icers. Other impor tant training institutes such as

³College of Agr i cul t ure Bank i ng ( P une ) , Reser ve Bank st aff T rai ni ng College

(C hennai) et c. had been setup by the RBI. RBI had also setup regional training

centers at Mumbai, Kolkata, Chennai and Delhi.

Remitti ng F aci l it y:

R eserve Bank provides remitting facilities to the central Government, state

Government and semi-Government institutions free of cost. It also provides this

facility to cooperative banks free of cost.

Conversi on of currency:

The RBI conver ts spoiled currency in to fresh currency. It also provides facilities

to conver t currency notes into small denominating coins.

T o accept Deposit s:

The RBI accept deposits from Central and state Government¶s institution and

individual persons without paying interest.

T ransacti ons with i nt ernati onal i nstit uti ons:

All international economic transactions are being made through RBI. RBI opens

its accounts in the central bank of member countr ies of IMF. It also deals with

IMF, Wor ld Bank and other international f inancial institutions .



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T ransacti ons i n preci ous met als:

In order to fulf ill its obligations, RBI buys and sells precious metals, gold coins

etc. RBI can borrow funds by mor tgaging these precious metals.

Expansi on of bank i ng faci l iti es:

RBI has played an impor tant role in expansion of bank ing facilities in the rural

areas of the country. At the end of June, 2001, there are 65,931 bank branches are

situated in country, out of which more than half of the branches are situated in

rural areas. At the end of 2000, on an average there were only one bank branches

at a population of 5,000 in the country.

S upply of Development F i nance:

The RBI provides development f inance for the different par ts of the economy. It

leads economic development of the country as a whole.





Introduction

Credit control is a very important function of RBI as the Central Bank of India.

For smooth functioning of the economy RBI control credit through quantitative

and qualitative methods. Thus, the RBI exercise control over the credit granted

by the commercial bank.

The reserve Bank is the most appropriate body to control the creation of credit

in view if its functions as the bank of note

issue and the custodian of cash reserves of

the member banks. Unwarranted

fluctuations in the volume of credit by

causing wide fluctuations in the value of

money cause great social & economic

unrest in the country. Thus, RBI controls

credit in such a manner, so as to bring

µEconomic Development with stability¶. It

means, bank will accelerate economic

growth on one side and on other side it will

control inflationary trends in the economy.

It leads to increase in real national income

of the country and desirable stability in the

economy.

Credit Control b RBI

Credit Control



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Objectives of cred it cont rol

To obtain stability in the internal price level.

To attain stability in exchange rate.

To stabilize money market of a country.

To eliminate business cycles-inflation and depression-by controlling supply

of credit.

To maximize income, employment and output in a country.

To meet the financial requirements of an economy not only during normal

times but also during emergency or war.

To help the economic growth of a country within specified period of time.

This objective has become particularly necessary for the less developed countries of present day world.

Methods and i nst rument s of cred it cont rol

There are many methods of credit control. These methods can be broad ly divided

into two categor ies.

I. Quantitative or General Methods. II. Qualitative or selective methods.

The quantitative methods of credit control aim at inf luencing the quantity or total

volume of credit in an economy dur ing a par ticular per iod of time. The

qualitative methods of credit control aim at inf luencing the quality of use of

credit with respect to a par ticular area or f ield of activity. Quantitative system of

credit control includes following instruments:

1 ) Bank Rat e

2 ) Open Market Operati on (OMO )

3 ) C hange i n Cash Reser ve Rati o (C RR) 4 ) S t at ut ory Li qui d it y Rati o ( S L R) 5 )

Repo and Reverse repo rat e



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Qual it ative syst em consi st s of the followi ng i nst rument s:

1 ) S elective cred it cont rol 2 ) Rati oni ng of Cred it

3 ) Moral P ersuasi on 4 ) Di rect Acti on

With the inf lation rate based on wholesale pr ice index hardening since the

Annual Policy Statement was announced, an ad justment of overall aggregate

demand on an economy-wide basis was warranted to ensure that generalized

instability did not develop and eroded the hard-earned gains in terms of both

outcomes of and positive sentiments on India¶s growth momentum. In this

regard, monetary policy had to urgently address aggregate demand pressures,

which appeared to be strongly in evidence. Apar t from the build-up in

inf lationary expectations, this was ref lected in«

i. Strong investment demand;

ii. Sustained high growth in domestic capital goods production al beit with somemoderation in 2008-09 so far ;

iii. R evival in the production of consumer goods with a turnaround in the

production of durables;

iv. Widening trade def icit and some tightening of external f inancing conditions

in the ongoing global f inancial turmoil; and



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v. Emergence of f iscal pressures due to the possi bility of enhanced subsidies on

account of food, fer tilizer and POL as well as for f inancing deferred

liabilities relating to farm loan waivers.

Keeping in view the liquidity conditions and inf lationary pressures in the

economy, the cash reserve ratio was raised by 75 basis points to 8.25 per cent

dur ing Apr il-May 2008 in three stages of 25 basis points each effective from

Apr il 26, May 10, and May 24, 2008. On May 30, 2008, special market

operations were announced to a lleviate the binding f inancing constraints face by

public sector oil companies in impor ting POL as also to minimize the potential

adverse consequences for f inancial markets in which these oil companies are

impor tant par tici pants. On a review of the current macroeconomic and overall

monetary conditions and with a view to containing inf lation expectations, the

repo rate under the Liquidity Ad justment Facility (LAF) was raised by 25 basis

points to 8.0 per cent with effect from June 12, 2008. Consistent with t he overall

stance of monetary policy set out for 2008-09 in Apr il 2008 in terms of ensur ing

a monetary and interest rate environment that accords high pr ior ity to pr ice

stability, well anchored inf lation expectations and order ly conditions in f inancial

markets and on the basis of incoming information and domestic and global macroeconomic and f inancial developments, it was decided on June 24, 2008 to

increase the repo rate under the LAF by 50 basis points to 8.50 per cent with

effect from June 25, 2008 and the CRR by 50 basis points to 8.75 per cent in two

stages of 25 basis points each with effect from July 5, 2008 and July 19, 2008

(Table 35).



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{A} Qualitative Methods of Credit Control

1 ) Bank Rat e:

Bank R ate is the rate at which central bank grant loans to the commercial banks

against the secur ity of government and other approved f irst class secur ities.

According to section 49 of RBI Act, ³Bank R ate is the standard rate on which

RBI purchase or discount such exchange bills or commercial papers which can be

purchased under this act.´

R eserve Bank of India controls credit by affecting quantity and cost of credit

money through its bank rate policy. But this method of credit control would be

effective only when there is organized money market and commercial banksdepend on reserve bank for their credit.

R eserve Bank adopts cheap or Dear Monetary Policy according to the economic

conditions of the country. RBI decreases bank rate to increase the quantity of the

credit. This is called cheap monetary policy. Decease in bank rate decreases cost

of credit i.e. decreases in interest rate. As a result of this quantity of credit

increases. According to dear monetary policy of RBI increases bank rate to

decrease quantity of credit in the country. Increase in bank rate increases cost of

credit i.e. increase interest rate and t his will result in decrease in quantity of

credit.

Operati on of Bank Rat e P ol i cy i n Ind i a:

At the time of establishment of RBI the bank rate was 3.5% which had changed

time to time. Till 1951, the bank rate was constant at 3% as R eserve Bank

followed Cheap Money Policy dur ing this per iod.

Since 1951 till now bank rate has continuously changing. In 1991 at the time of

higher inf lation, bank rate has changed twice and increased from 10% to 11%.

On 29 Apr il, 1998, it has reduced from 11% to 9%. It was fur ther reduced to 8%



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in March, 1999 and 7% in Apr il, 2000. It was fur ther reduced to 8% in March,

1999 and 7% in Apr il, 2000. It was fur ther changed several times and on 23

October, 2001 it reduced to 6.5%.

The bank rate policy of credit control has not been succeeding in India. As it isfailed to control inf lationary trend in the economy. It has failed to inf luence

interest rate in the money market.

T he bank rat e pol i cy proves i neff i ci ent due t o followi ng reasons:

y Ma jor par t of the credit in the market is made available by non-bank ing

institutions. The interest charged by these institutions has no direct relation

with the bank rate.y Most of the changes in bank rate have been made effective for combating

inf lationary trends.

y Speculative tendencies in the economy carry large premiums in the form of

huge margins of prof it. A small change in bank rate does not signif icantly

affect the prof it margin.

y Pr ior ity sector leading has almost become immense to the effect of changes

in the bank rate.

y Increasing non-dependence of commercial banks on the central bank for

rediscounting facilities is one of the ineffective bank rates in India.

Though the bank rate policy has not been effective in India. Yet the R eserve

Bank has been using it more and more as a weapon to control def lationary

pressure in the economy. Dur ing the last few years, the bank rate has been

reduced several times to combat the def lationary pressures in the economy. But this year it is currently sti pulated at 6%.



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2 ) Open Market Operati ons:

The term µOpen market operation¶ implies the purchase and sale by the Central

Bank not only the Govt. secur ities but also of other eligi ble papers. Like bills and

secur ities of pr ivate concerns section 17(8) of RBI Act. Empowers R eserve Bank to purchase the secur ities of central Govt. state Govt. and other autonomous

institutions. Apar t from this section 17(2) (A) empower R eserve Bank to

purchase or sell of shor t term bills.

Open market operations are used as suppor ting instrument of bank rate. This

method is used to inf luence the f low of credit. Sale and purchase of Govt.

secur ities inf luence the cash reserve ratio with the commercial banks and hence

these operations control their credit creation power. These operations will have

both anti-inf lationary and anti-def lationary effects. When the economy is faced

with the inf lationary pressures, the central bank would like the commercial banks

to contract the supply of credit. To achieve this ob jective the central bank would

sell the Govt. secur ities to the commercial banks. The banks would transfer a par t

of their cash reserve to the central bank towards the payment for these secur ities.

Consequently the cash reserve with the commercial banks will be reduced. It would lead to a contraction in the credit creation power of the commercial banks.

Similar ly, open market operations can also be used as anti -def lationary measures.

In this situation, the central bank will purchase secur ities from the commercial

banks. In this situation, the central bank will purchase secur ities from the

commercial banks. In the process. The cash reserves with the commercial banks

will increase and they would be enabled to create more credit.

The open market operations in India are limited by R eserve Bank. The bank has

used this policy only to make successful government debt policy and to maintain

pr ice stability of Govt. secur ities. It is used to fulf ill seasonal credit requirements

of commercial banks.



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3 ) Cash Reser ve Rati o (C RR):

The RBI controls credit through change in Cash R eserve R atio of commercial

banks. According to section 42(1) of RBI Act every schedule bank has to

maintain a cer tain percentage reserve of its time and demand deposits. This ratiocan be var ied from 3% to 15% as directed by the R eserve Bank. R eserve Bank

itself changed this ratio according to the credit requirement of the economy. It

has been changed several times in the history of R eserve Bank of India. The cash

reserve ratio affects on the lend able funds of commercial banks. If this ratio

increases the credit creation capacity of commercial banks decreases. On the

other hand if this ratio decreases the credit creation capacity of commercial banks

increases.

On 17 Apr il 2008, the R eserve Bank of India hiked the cash reserve ratio of

scheduled commercial banks, regional rural banks, scheduled state co-operative

banks and scheduled pr imary (urban) co-operative banks by 50 basis points to 8

per cent in two stages effective 26 Apr il 2008 and 10 May 2008. The monetary

author ity stated that as a result of the above increase in CRR on liabilities of the

bank ing system, an amount of about R s.18,500 crore of resources of banks would be absorbed. In this context, it may be noted that surplus liquidity in the bank ing

system amounted to R s.2, 43,566 crore as on 4 Apr il 2008. The R eserve Bank's

move comes at a time when there are only 12 days lef t for its monetary policy.

The monetary policy is due to be announced on 29 Apr il 2008.The hike in the

cash reserve ratio of banks is a measure aimed at reducing liquidity in the

bank ing system thereby reducing the money supply which in turn is expected to

hel p curb inf lation. The CRR hike will put margins of banks under a bit of a

pressure since they won¶t be earning anything on the money that they park with

the RBI as cash reserve. The CRR hike will put margins of banks under a bit of a

pressure since they won¶t be earning anything on the money that they park with

the RBI as cash reserve.



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On 29 Apr il 2008, the R eserve Bank of India released its annual monetary policy

statement for the year 2008-09. It increased the cash reserve ratio for scheduled

commercial banks by 25 basis points to 8.25 per cent with effect from 24 May

2008. It was only less than a for tnight ago that the bank had raised the cash

reserve ratio. On 17 Apr il, the monetary author ity had announced that the CRR

would be raised by 25 basis points with effect from 26 Apr il 2008 and by another

25 basis points with effect from 10 May 2008. The two increases announced on

17 Apr il were expected to suck out R s.18, 500 crore from the bank ing system.

R ecently, RBI has hiked the cash reserve ratio (CRR ) by 25 basis points to 9 per

cent beginning 30 August 2008. The 25 basis points hike in the cash reserve ratio

will suck out about R s.8, 000-8,500 crore of liquidity from the bank ing system.

4 ) S t at ut ory Li qui d it y Rati o ( S L R ):

According to the section 24 of the Bank ing R egulation Act, every schedule Bank

has to maintain a minimum of 25% as cash of its total deposits. The R eserve

Bank of India is empowered to change this ratio. As on 21, 1997, it was f ixed to

25% of the total deposits of Banks. It also inf luences the credit creation capacity

of the banks. The effect of bi\ both cash reserve ratio and statutory liquidity ratio

on credit expansion is similar. Penalties are levied by RBI for not maintaining

these ratios from scheduled banks.

5 ) Repo rat e and Reverse repo rat e:

There is two k ind of repo and are as under:

I . Int erbank repo:

Such repos are now permitted only under regulated conditions. R epos are

misused by banks/ brokers dur ing the 1992 secur ities scam. They were banned

subsequently. With the lif ting of the ban in 1995, repos were permitted for

restr icted, eligi ble par tici pants and instruments. Initially, repo deals were allowed



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in T-bills and f ive dated secur ities on the NSE. With gradual li beralization over

the years, all central govt. dated secur ities, state Govt. secur ity and T-bills of all

matur ities have been made eligi ble for repo. Banks and PDs can under take repo

deals if they are routed through the SGL, accounts maintained by the RBI. R epos

are allowed to develop a secondary market in PSU bonds, FIs bonds, corporate

bonds and pr ivate debt secur ities if they are held in demat form and the deals are

done through recognized stock exchange(s). There are no restr ictions regarding a

minimum per iod for inter-bank repo deals. Non-bank par tici pants (i.e., FIs and

other specif ied par tici pants) are allowed to par tici pate only in the reverse repo

that is they can only lend money to other eligi ble par tici pants. The non -bank

entities holding SGL accounts with the RBI can enter into reverse repo

transactions with banks/PDs, in all Government secur ities.

II . RB I Repos:

The RBI under takes repo/reverse repo operations with banks and PDs as par t of

its OMOs, to absorb/in ject liquidity. With the introduction of the LAF, the RBI

has been in jecting liquidity into the system through repo on a daily basis. The

repo auctions are conducted on all work ing days except Saturdays and arerestr icted to banks and PDs. This is in addition to the liquidity suppor t given by

the RBI to the PDs through ref inance/reverse repo facility at a f ixed pr ice.

Auctions under LAF were ear lier conducted on a uniform pr ic e basis, that is,

there was a single repo rate for all successful bidders. Multi ple pr ice auction was

introduces subsequently. The weighted average cut -off yield in case of a multi ple

pr ice auction is released top the public. This, along with the cut -off pr ice,

provides a band for call money to operate.

The RBI conducts repo auctions to provide banks with an outlet for managing

shor t-term liquidity; even out shor t-term liquidity f luctuations in the money

market; and optimize returns on shor t -term surplus liquid funds. The RBI has

switched over from discr iminatory pr ice auction repo to the daily f ixed rate repos



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auction system. Fixed rate repos are single money market rates, br ing about

order ly conditions in the forex market and impar t stability to shor t -term interest

rates by setting a f loor for call money rates. The RBI par tici pants actively in the

call money market with LAF repos operations conducted through the year to

modulate the surplus liquidity in th ree markets. It also conducts reverse repo

operations under the LAF to prevent sudden spur ts in the call rates. Both repos

and reverse repo operations play an effective role in impar ting stability to the

market.

The repo rate has become ak in to a singling rate, together with the B/R . the repo

rate serve the purpose of a f loor and the B/R that of a cap for the money market

to operate within an interest corrodor. With the introduction of var iable repo rates

and daily repo auctions, a market-determined benchmark is expected to emerge

for the call (overnight) rate. As a result of the conversion of the call/money

market into a pure inter-bank call/notice money market, the repo rate, along with

the B/R and CRR , emerged as an impor tant tool of liquidity and monetary

management.

To sum up, the RBI¶s regulation of money and credit now compr ises of (1) thereactivation of OMOs and introduction of repos, (2) the introduction of LAF and

its emergence as one of the signif icant operating instruments, (3) the reactivation

of B/R and the use of repo rate, (4) the continuat ion of the use of the CRR . The

B/R changes, combined with changes in the CRR and LAF repo rates have

emerged as active and impor tant tools of liquidity and monetary management.

The LAF has developed as an effective tool for absorbing/in jecting liquidity on a

day to day basis in a f lexi ble manner and for providing a corr idor for the call

money and other money markets.

On 29 July 2008, the R eserve Bank of India increased the repo rate by 50 basis

points to 9 per cent. Banks are aggressively using the repo facility of the RBI

since the beginning of July. They borrowed almost R s.38, 900 crore per day from



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the RBI through its liquidity ad justment facility. Therefore the hike in the repo

rate by the RBI will surely put some pressure on the cost of funds of banks.

As in the year of 2004 CRR was 4.50% and R epo stands at 6% and reverse repo

was 4.50% but at that time inf lation was around 4.6%, on September 18, inf lationrate zoom past to 7.9% but R epo and R everse repo rate remained unchanged and

CRR increases by 0.25 basis point to 4.75% consecutively on October 2,

increase in CRR by 0.25 point following high inf lation rate then from October,

2004 to july, 2006 there is continuous increase of 0.25 point each level in

R everse repo rate against which CRR stands unchanged at 5% and inf lation was

decreasing at that time, again from December, 2006 following high inf lation rate

CRR was hiked to 0.25 point and R epo rate was at 7.25% while R everse repo rate

remains unchanged to 6%.on January 2007 inf lation rose to 6.4 and CRR again

increased to 5.50 %.

On a review of the current macroeconomic and overall monetary conditions and

with a view to containing inf lation expectations, the repo rate under the Liquidity

Ad justment Facility (LAF) was raised by 25 basis points to 8.0 per cent with

effect from June 12, 2008. Consistent with the overall stance of monetary policyset out for 2008-09 in Apr il 2008 in terms of ensur ing a monetary and interest

rate environment that accords high pr ior ity to pr ice stability, well anchored

inf lation expectations and order ly conditions in f inancial markets and on the basis

of incoming information and domestic and global macroeconomic and f inancial

developments, it was decided on June 24, 2008 to increase the repo rate under the

LAF by 50 basis points to 8.50 per cent with effect from June 25, 2008 and the

CRR by 50 basis points to 8.75 per cent in two stages of 25 basis points each

with effect from July 5, 2008 and July 19, 2008.



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{B} Qualitative Methods of Credit Control

Under section 21 of RBI Act, R eserve Bank is empowered to regulate control and

direct the commercial banks regarding their loans and advances. Qualitative

methods are used to affect the use, distr i bution and direction of credit. It is usedto encourage such economic author ities as desirable and to discourage those

which are in jur ious for the economy. R eserve Bank of India from time to time

adopted the following qualitative methods of credit control.

1 ) S elective Cred it Cont rol:

Section 36(1) (a) of the Bank ing R egulation Act, empowers the RBI to contain or

prohi bit bank ing companies generally or any bank ing company. The ob jective of these controls is to discourage some forms of activities while encouraging others.

Such controls are used in respect of agr iculture commodities, which are sub ject to

speculative hoarding and wide pr ice f luctuation. Under section 21 of the bank ing

regulation Act, 1949, the R eserve Bank is empowered to issue directives to

bank ing companies regarding mak ing of advances. These dire ctions may be as

follows:

The purpose for which advances may or may not be made.

Fixing the margin requirements for advances against each commodity.

Fixing of maximum limit to be advanced by banks to a par ticular borrower.

Fixing of rate of interest and other terms for mak ing advances.

Fixing of maximum guarantees may be given by the banks on behalf of

any f irm or company.

Prohi bition on grant of credit against book debts and clean credits. Some of the

elative credit controls are as follows:



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(a ) Di fferenti al Di scount Rat es:

The reserve Bank f ixes different discounting rates for the bills of different

sectors. The sector for which more credit is to be made available the exchange

bills rediscounted at a lower rate. On the other hand, if RBI wants to discouragecredit for a par ticular sector, it increases the discount rate for bills or the facility

for rediscounting is post poned.

(b ) Cred it Author iz ati on S cheme:

This scheme was introduced with the ob jectives of enforce f inancial disci pline on

the larger borrowers and ensure that they did not pre-empt scare bank resources.

Through this scheme, the RBI regulates not only the quantum but also the term of credit f lows. Under this scheme, commercial banks are required to obtain RBI¶s

permission before sanctioning any fresh credit of R s. Six crore or more to any

single borrower. This limit may be changed time by time.

(c ) F i xati on of Marg i n:

The commercial banks generally advance loans to their customers against some

secur ity or secur ities offered by the borrowers and acceptable to the banks. The

commercial banks do not lend up to the full amount of the value of a secur ity but

lend an amount less than its value. The margin requi rements against specif ic

secur ities are determined by the R eserve Bank. RBI changed the margin

frequently according to the credit policy. Changes in margin requirements are

designed to inf luence the f low of credit against specif ic commodities. A r ise in

the margin requirements results in contraction in the borrowing value of the

secur ity and similar ly, a fall in the margin requirement results in expansion in the

borrowing value of the secur ity. If RBI desires that more loans should be

advanced against par ticular secur ities, it can lower the margin requirement.

Similar ly, if RBI desires to check the expansion of credit against par ticular

secur ities it can raise the margin requirement.



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(d) R eserve Bank can also instruct commercial banks charging discr iminating

rates of interest on cer tain types of advances

(e)R eserve Bank from time to time f ixes ceiling n amount of credit for cer tain

purposes.

(f) R eserve Bank can ban on advances to specif ic sector to check inf lationary

pressures.

2 ) Rati oni ng of Cred it :

In this method the RBI seeks to limit the maximum or ceiling of loans and

advances and also in cer tain cases, f ixes ceiling for specif ic categor ies of loans

and advances. If the rationing of credit is done with reference to the total amount,

it is a quantitative control, but if it is done with reference to specif ic types of

credit, it assumes a qualitative control. R eserve Bank can also prescr i be the

minimum ratio between capital and total assets.

3 ) Moral P ersuasi on:

Moral persuasion refers to those cases where the R eserve Bank endeavors to

achieve its ob ject by mak ing suitable representations to the bank ing institutions

concerned and relying on its moral inf luence and power of persuasion. Being an

apex institution and lender of the last resor t, the RBI can use its more pressure

and persuade the commercial bank to follow its policy. Dur ing inf lationary

conditions it may request the commercial banks not to press for frequent loans, to

refuse loans to the customers and to refrain from investing funds in the

unproductive or less productive occupations.

4 ) P ubl i cit y:

The RBI may also follow the policy of publicity in order to make known to the

public its views about the credit expansion or contraction. It may issue warning

to the people and commercial banks, sub stantiating its views by facts, f igures and



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statements, through the media of publicity. This method, however, is ineffective

in the developing economies where mass illiteracy exists and people do not

understand the implications of the policy.

5 ) Di rect Acti on:

Under Bank ing R egulations Act, the RBI is empowered to initiate direction

action against those commercial banks which ignore its advice. In such cases RBI

can impose restr iction on sanctioning of loans and advances of concerned banks.

Winding up of Bank of Karad in 1992 because of f inancial irregular ities and

putting up of cer tain restr ictions on the work ing of Metropolitan Co-operative

Bank are the examples of direct action initiated by RBI. The RBI may refuse

rediscounting facilities to the banks who do not cooperative with the policies of

the Bank.



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(8) Other Functions

The RBI performs following other functions:

(i) Agr iculture Credit

: All matters relating to agr iculture credit are looked af ter by RBI before the

establishment of NABAR D in 1982. Now all functions relating to agr iculture and

rural development are performed by NABAR D.

(ii) Industr ial Finance

: The RBI has contr i buted in the share capital of industr ial f inance institutions

such as Industr ial Finance Corporation of India, Industr ial Development Bank of

India, State Finance Corporations etc. Thus RBI indirectly contr i butes in the f ield

of industr ial f inance.

(iii) Publication of Data :

The RBI publishes statistics regarding money, pr ice, f inance etc, in its

per iodicals. This provides valuable information for Govt., business and

industr ies. These information are hel pful to take decisions. The impor tant publications of RBI are the R eserve Bank of India Annual R epor t, currency and

f inance, trends and progress of Bank ing etc. At present, there are more than 100

publications of RBI.

(iv) Bank ing Education and Training :

The RBI has been organizing var ious education and traini ng programmes for

bank employees and off icers. µBanker Training College¶ Mumbai has been setup by RBI for the training of Bank off icers. Other impor tant training institutes such

as ³College of Agr iculture Bank ing (Pune), R eserve Bank staff Training College

(Chennai) etc. had been setup by the RBI. RBI had also setup regional training

centers at Mumbai, Kolkata, Chennai and Delhi.



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(v) R emitting Facility :

R eserve Bank Provides remitting facilities to the central Government, state

Government and semi-Government institutions free of cost. It also provides this

facility to cooperative banks free of cost.

(vi) Conversion of currency :

The RBI conver ts spoiled currency in to fresh currency. It also provides facilities

to conver t currency notes into small denom inating coins.

(vii) To accept Deposits :

The RBI accept deposits from Central and state Government¶s institution and

individual persons without paying interest.

(viii) Transactions with international institutions :

All international economic transact ions are being made through RBI. RBI opens

its accounts in the central bank of member countr ies of IMF. It also deals with

IMF, Wor ld Bank and other international f inancial institutions.

(ix) Transactions in precious metals :

In order to fulf ill its obligations, RBI buys and sells precious metals, gold coins

etc. RBI can borrow funds by mor tgaging these precious metals.

(x) Expansion of Bank ing facilities :

RBI has played an impor tant role in expansion of bank ing facilities in the rural

areas of the country. At the end of June, 2001, there are 65,931 bank branches are

situated in country, out of which more than half of the branches are situated in

rural areas. At the end of 2000, on an average there was only one bank branches

at a population of 5,000 in the country.

(xi) Supply of Development Finance:



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The RBI provides development f inance for the different par ts of the economy. It

leads economic development of the country as a whole.

rbi final copy of rbi 1

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