Banking Banking Awareness Banking Regulation System of India Banking Regulation System of India

Banking Regulation System of India

Category : Banking


Banking Regulation System of India


The nature of banking business can be summarized in two words i.e. financial intermediation, which needs to be carried out efficiently for stimulating the real sectors of the economy. Another essential characteristic of banks is that they are highly leveraged and hence, need to be regulated for protecting the interest of depositors.


Banking in India, as elsewhere, takes diverse forms viz, banks formed under special statutes, companies registered under the Companies Act, 1956 or foreign companies and cooperative societies registered under the Cooperative Societies Act. Banks are classified on their ownership pattern such as Public Sector Banks, Private Sector Banks and Foreign Banks.


Indian Companies (Amendment) Act, 1936

The Indian Companies Act that was passed in 1913 introduced the institution of private companies in corporate sector in India. But the Act of 1913 did not provide the peculiar environment for Indian commerce, hence to remove these deficiencies, the Indian Companies (Amendment) Act was passed in 1936. The Amendment Act, 1936 introduced various provisions relating to functioning of directors, guaranteeing payment of provident fund to employess etc. Further in October 1942, Companies Act was amended so that any company which uses world 'bank', 'banking' or 'banker' shall be deemed to be a banking company.      


Banking Regulation Act, 1949

The Banking Regulation Act, enacted in 1949, has been a milestone in the history of banking in India, This act provides a framework for regulation and supervision of commercial banking activity.


Reserve Bank of India

Reserve Bank of India is the Central Bank of our country. On the recommendation of Hilton Young Commission, it was established on 1st April, 1935 and in 1949 it was nationalised. The central office of the RBI is Bombay (now Mumbai). In terms of the preamble to the Reserve Bank of India Act, 1934, The main functions of the bank are to regulate the issuing of bank notes and keeping the reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.


Governor of RBI

Its first Governor was Sir Osborne Smith. RBI was nationalised on 1st Jan, 1949 and its first Indian Governor was CD Deshmukh. Banking crisis (during 1913-1917 and failure of 588 banks in various parts of the country underlined the need for regulating and controlling the commercial banks.


Governors of RBI and their Time –period



Sir Osborne Smith

01-04-1935 to 30-06-1937

Sir James Taylor

01-07-1937 to 17-02-1943

CD Deshmukh

11-08-1943 to 30-06-1949

Bengal Rama Rau

01-07-1949 to 14-01-1957

KG Ambegaonkar

14-01-1957 to 28-02-1957

HVR lyengar

01-03-1957 to 28-02-1962

PC Bhattacharya

01-03-1962 to 30-06-1967

LK Jha

01-07-1967 to 03-05-1970

BN Adarkar

04-05-1970 to 15-06-1970

S Jagannathan

16-06-1970 to 19-05-1975

NC Sen Gupta

19-05-1975 to 19-08-1975

KR Puri

20-08-1975 to 02-05-1977

M Narasimham

02-05-1977 to 30-11-1977

Dr IG Patel

01-12-1977 to 15-09-1982

Dr Manmohan Singh

16-09-1982 to 14-01-1985

A Ghosh

15-01-1985 to 04-02-1985

RN Malhotra

04-02-1985 to 22-12-1990

S Venkitaramanan

22-12-1990 to 21-12-1992

Dr C Rangarajan

22-12-1992 to 21-11-1997

Dr Bimal Jalan

22-11-1997 to 06-09-2003

Dr YV Reddy

06-09-2003 to 05-09-2008

Dr D Subbarao

05-09-2008 to 04-09-2013

Dr Raghuram Govind Rajan

04-09-2013 to 05-09-2016

Urjit R Patel

06-09-2016 to till date.


Organization and Management of RBI

Reserve Bank of India is managed by the Central Board of Directors. Presently, this board consists of 21 members. Besides, Governor and tour Deputy Governors, four directors are nominated, each by the four Local Boards for 4 yr term. Besides, ten directors and two government officer are nominated by the Government of India. These boards have been established, in Mumbai, Kolkata, Chennai and New Delhi respectively. According to the Reserve Bank of India Act, the term of nominated members is for 4 yr. Governor and Deputy Governors are appointed by the government for a period of not more than 5 yr. Bank's Head Office is located in Mumbai. The bank has 28 regional offices, most of which are in state capitals. The financial year of RBI starts from 1st July to 30th June. The annual report is released in August each year.


Central Board of RBI

RBI is wholly owned by the government in India, Central Board of directors oversees the Reserve Bank's business. It delegates specific functions through its committees and sub-committees. It includes the Governor, Deputy Governors and a few Directors (of relevant local boards).


Sub-Committees of the Central Board

It includes those on inspection and audit, staff and building. Focus of each sub-committee is on specific areas of operations, Its important subsidiary institutions are as follows


  • Board for Financial Supervision It regulates and supervises Commercial Banks, Non-Banking Finance Companies (NBFCs), development finance institutions, urban Co-operative Banks and primary dealers.
  • Board for Payment and Settlement Systems Regulates and supervises the payment and settlement systems.
  • Research Institutes There are various RBI funded institutions to advance training and research on banking issues, economic growth and banking technology, such as, National Institute of Bank Management (NIBM) at Pune, Indira Gandhi Institute of Development Research (IGIDR) at Mumbai and Institute for Development and Research in Banking Technology (IDRBT) at Hyderabad.
  • Subsidiaries Fully-owned subsidiaries include National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL). The Reserve Bank also has a majority stake in the National Bank of Agriculture and Rural Development (NABARD).


Central Banking Functions

Central banking functions of RBI are as under

(i) Issue of Paper Currency The Reserve bank is nation's sole note issuing authority except one rupee notes which are issued by ministry of finance. It issues notes of the denomination of Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500 and Rs. 2000. The bank has a separate department for note issuing. This is known as Issue Department.

(ii) Banker of the Government The RBI has to work as an agent of the Central and State Governments. It performs various banking functions such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It provides overdraft facility to the government in case of financial crunch.

(iii) Banker of Banks and Lender of the Last Resort RBI acts as a banker for all the Commercial Banks. All scheduled banks come under the direct control of RBI. All commercial as well as schedule banks have to keep a minimum reserve (3%) with the RBI. They have to submit weekly reports to RBI about their transactions. By performing 3 functions, the RBI helps the member banks significantly.

They are given below

  • It acts as the lender of the last resort.
  • It is the custodian of cash reserves of Commercial Banks.
  • It clears and transfers the transaction. It acts as the central clearing house.


Regulatory Functions

Control of credit is the principal function of the Reserve Bank of India. Control of credit means expansion or contraction of credit. Reserve Bank of India makes use of all those methods of credit control that are adopted by other Central Banks in the world.

The methods adopted by the Reserve Bank to control credit are studied under two parts


Quantitative Credit Control

To control the flow of quantum of credit, Reserve Bank adopts the measures which are as under

  • Bank Rate Rate of interest that the Reserve Bank charges from other scheduled banks on the loans given to them is called bank rate.
  • Open Market Operations It means that the bank controls the flow of credit through the sale and purchase of government securities in the open market.
  • Cash Reserve Ratio (CRR) It is the amount of funds that the banks have to keep with RBI. If RBI decides to increase this rate the available amount with the banks comes down. RBI uses this method (increase of CRR rate), to drain out the excessive money from the banks.
  • Statutory Liquidity Ratio (SLR) It is the ratio of liquid asset, which all Commercial Banks have to keep in the form of cash, gold and unencumbered approved securities equal to not more than 40% of their total demand and time deposits liabilities.
  • Base Rate It is the minimum rate set by the RBI below which banks are not allowed to lend to its customers. Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of fund to their customers.
  • Marginal Cost of Funds based Lender Rate The RBI has issued new guidelines for setting lending rate by commercial banks under the name Marginal Cost of Funds based Lending Rate (MCLR). It has replaced the Base Rate system from April. 2016, onwards. The MCLR regime is applicable on floating rate home loans and term loans to small and medium sized enterprises and middle level corporates.
  • Marginal Standing Facility MSF was announced by Reserve Bank of India (RBI) in its Monetary Policy (2011-12) and refers to the penal rare at which banks can borrow money from the Central Bank. MSF is always 1% greater than RRR. MSF came into effect from 9th May, 2014.
  • Priority Sector Lending RBI introduced the system of Priority Sector lending to ensure that banks increase their involvement in the financing n| 'priority sectors like agriculture, small industries, etc.
  • Liquidity Adjustment Facility LAF is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF is used to aid banks in adjusting the day-to-day mismatches in liquidity. LAF was introduced for the first time in June, 2000 inwards. LAP consists of repo and reverse repo operations.
  • Repo Rate The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds, they can borrow from the RBI. Reduction in repo rate helps the commercial banks to get money at a cheaper rate and increase in repo rate discourages the commercial banks to get money as the rate increases and becomes expensive. Repo operations inject liquidity into the system.
  • Reverse Repo Rate Reverse repo rate operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI in this case is called the reverse repo rate. Reverse repo operations absorb the liquidity in the system. the reverse repo will be 100 basis points below repo rate.


  • RBI continued to serve as the Central Bank to Burma (Myanmar). until Japanese occupation of Myanmar in April, 1947.
  • RBI continued to serve as Central Bank to Pakistan, until June, 1948.
  • The reverse repo rate will be kept 100 basis points lower than the repo rate. On the other hand. Marginal Standing Facility [MSF) will be kept 100 basis points, higher than the repo rate.


RBI Controls; Inflation and Growth

RBI can influence inflation and growth in the economy to a large extent through its instruments of control. RBI squeezes out liquidity from the economy by selling securites. Increasing repo rates, increasing CRR etc, then the demand in the economy is reduced and inflation is brought under control.

However, in case inflation is due to supply side shortages, RBI controls have less influence. Similarly increasing liquidity in economy means that households have more money to consume, Industries have more money to invest in plant and machinery etc., all of which lead to increase in economic activity


Monetary Policy In India, monetary policy of the Reserve Bank of India is aimed at managing the quantity of money in order to meet the requirements of different sectors of the economy and to increase the pace of economic growth. The Union Government on 29th Sep. 2016 notified the constitution of the Monetary Policy Committee (MFC). As per the provisions, out of the six Members of monetary Policy Committee, three members will be from the RBI. The other three members MPC will be appointed by the Central Government.


Qualitative or Selective Credit Control

This refers to the control of specific credit meant for certain specific objectives, e.g. If the government wants to check the rising prices of wheat in India, the Reserve Bank may instruct the member banks not to give loans against the security of wheat. Traders will not get credit for the purchase of wheat and therefore, they will not be able to buy large quantities of wheat. This would bring down wheat prices as the credit squeeze is directed towards wheat alone. It is thus called selective control. These measures are as under


  • Change in Margin Requirements on Loans Reserve Bank directs the member banks to change their margin requirement from time to time. First such direction was given by the Preserve Bank in May and September, 1956 regarding rice trade.
  • Maximum Limit of the Loans With a view to checking speculation, Reserve Bank has fixed maximum limits of loans by the Commercial Banks. No scheduled bank is allowed to grant, loan exceeding Rs. 1 crore to any single party without the prior permission of Reserve Bank of India, according to its 20th Nov, 1965 Credit Policy. This restriction has since been withdrawn.
  • Rationing of Credit It is yet another technique of selective credit control. Under this programme, the Reserve Bank fixed credit quota for member banks as well as their limits for the payment of bills. Quota system was introduced in 1960.
  • Moral Persuasion From time to time, Reserve Bank holds meetings with the member banks to seek their cooperation in effectively controlling the monetary system of the country. It advises against the expansion of credit, except to priority sector i.e. agriculture, small industries, etc.


Other Functions of RBI

Besides the above stated specific functions, the Reserve Bank of India performs the following other functions

  • Export Assistance Reserve Bank gives loans to the export industries. These loans are given indirectly by refinancing the loans given by Export Import Bank and other banks.
  • Clearing House Functions Being Central Bank of the country, the Reserve Bank also functions as clearing house. Interbanking obligations are conveniently settled through this house.
  • Change of Currency The bank changes big notes into small ones and small notes into coins.
  • Transfer of Currency The bank also facilitates the transfer of currency. It also issues demand Hundies on its branches.


Limitations on RBI

It has certain limitations as the RBI cannot function as the commercial banks, cannot give loans against the fixed assets. RBI cannot give unsecured loans to others.


Foreign Exchange Management

It is an essential function of the RBI. Being the Central Bank of the Country, Reserve Bank of India also regulates exchange rate of rupee in terms of foreign currencies. It tries to maintain stability of exchange rate. In order to maintain the exchange rate stability, it has to bring demand and supply of the foreign currency close to each other. Reserve Bank deals with the currencies of only those countries which are members of IMF.


Percentage ratio of a financial institution's primary capital to its assets (loans and investment), used as a measure of its financial strength and stability.


Tier-1 and Tier-2 Capital

These are as follows

(i) Tier-1 Capital is the core measure of bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings) but may also include non-redeemable non-cumulative preferred stock.

(ii) Tier-2 Capital or supplementary capital, include a number of important and legitimate constituents of a bank's capital base.     


Major Efforts of International Banking   

Basel Norms

Basel norms are set by Bank of International Settlement (BIS) in Basel, Switzerland. Central Bank of 55 countries are members to the BIS.


Basel II Norms

It is a guide to capital adequacy standards for lenders. The aim of Basel II is to better align the minimum capital required by Regulators (socalled regulatory capital) with risk.


Basel III Norms

It will become operational from 1st Jan, 2013 in a phased manner. It will be fully implemented by 31st Mar, 2019.

  • Banks to increase their core tier 1 capital ratio to 4.5%.
  • Provision for a counter-cyclical capital conservation buffer of 2.5% by 2019.
  • The total Capital to Risk Assets Ratio (CRAR) required Basel III is proposed at 10.5%.



Principles for Basel III

RBI released its guideline on Basel III capital regulation on 2nd May, 2012.

(i) Indian banks have to maintain tier 1 capital or core capital atleast 7% of their risk weightage assets or ongoing basis.

(ii) The total capital ratio including tier 1 and tier 2 must be atleast 9%.

(iii) For tousle year ending 31st Mar, 2013 bank will have to disclose capital ratio computed under existing guidelines.


Basel III Guidelines, 2015

The Reserve Bank of India (RBI) released on 28th May. 2015, the draft guidelines on the Net Stable Funding Ratio (NSFR) under Basel III framework on liquidity standards for banks. The NSFR is defined as the amount of available stable funding relative to the amount of required stable funding. The objective of the NSFR is to ensure that banks maintain a stable funding profile in relation to the composition of their assets and off-balance sheet activities. In draft guidelines released, the Central Bank said that banks will have to maintain Net Stable Funding Ratio (NSFR) from January, 2018.


Base Rate System

  • Base Rate system introduced in banking sector by the RBI with effect 1st July, 2010.
  • Base Rate system replaced by Benchmark Prime Lending Rate (BPLR) m 2003.
  • Base Rate System introduced on recommendation of Deepak Mohanty Committee-aims at enhancing transparency in lending rate of banks and enabling better transmission of monetary policy,


It plays an important role in our life. Modern form of money includes paper notes and coins. In India, the Reserve Bank of India (RBI) is authorised to issue currency notes, on behalf of the Government of India. Further, there is legal sanction behind every currency that implies that a rupee cannot be refused as a means of settling transactions in India. Thus, rupee is the universally accepted means of exchange in India.


Measures of Money Supply in India

Money supply is the stock of liquid assets held by the public which can be freely exchanged for goods and services. RBI calculates various concepts of money supply. These are known as measures of monetary aggregates or money stock measures. Various monetary and liquidity aggregates compiled in India are as follows

Reserve Money \[({{M}_{0}})\]= Currency in Circulation + Bankers' Deposits with the RBI + Other Deposits with the RBI

\[{{M}_{1}}\]= Currency with the Public + Demand Deposits with the Banking System + Other Deposits with the RBI

\[{{M}_{2}}\] = \[{{M}_{1}}\] + Post Office Savings Banks

\[{{M}_{3}}\] = \[{{M}_{1}}\]+ Time Deposits with the Banking System

\[{{M}_{4}}\] = \[{{M}_{3}}\] + Office Savings of Banks (Excluding National Savings Certificates)

The working group under the chairmanship of Dr YB Reddy then Deputy Government of RBI (Now Former Governor of RBI) has suggested four new monetary measures \[({{M}_{0}},{{M}_{1}},{{M}_{2}},{{M}_{3}}).\]Here, \[{{M}_{0}}\] is reserve money which is most liquid measure of money supply. \[{{M}_{1}}\] is termed as narrow money and \[{{M}_{3}}\] as broad money. The decreasing order of liquidity of these monetary aggregates \[{{M}_{0}}>{{M}_{1}}>{{M}_{2}}>{{M}_{3.}}\] The decline in liquidity indicates the shifting of 'medium of exchange 'to' store of value'. These monetary measures are arranged in decreasing order of liquidity, with \[{{M}_{1}}\] being the most liquid.


The Indian Currency System

The present monetary system of India is based on inconvertible paper currency and is managed by the Reserve Bank of India. The present currency system is based on minimum reserve system of note issue. It was adopted in 1957. Under the minimum reserve system, RBI has to keep a minimum reserve of Rs. 200 crore comprising of gold coins and foreign currencies. Out of the total Rs. 200 crores, Rs. 115 crore should be in form of gold.



Coins are minted by the Government of India. RBI is the agent of government for distribution, issue and handling of coins. Four mints are operation at Mumbai, Noida (UP), Kolkata and Hyderabad.



  • The symbol of Indian rupee (Rs.) came into use on 15th July, 2010.
  • The new symbol was designed by D Udaya Kumar. This symbol is an amalgamation of Devenagri 'Ra' and the Roman 'R' without the stem


Languages in Currency

PMO has directed the coins and currency division of RBI to take appropriate steps to include Maithili as well as the remaining four languages i.e. Manipuri, Santhali, Dogri and Bodo, on the rupee note. Out of 22 languages havings been accorded official languages status as per eight schedule of the constitution of India, only 17 find a place on the Indian currency till now.


Features of New Rs. 2000 Notes

The new currency note of magenta colour 2000 rupees will have an image of the Mangalyaan celebrating success of India's Mars mission. Also, it will have the following identification marks. The size of new note is 66mmx166mm. Obverse:

  • See through register with denominational numeral 2000 can be seen when the note is held against light.
  • Portrait of Mahatma Gandhi in the centre. Micro letters 'RBF and '2000'.
  • Colour shift windowed security thread with inscriptions 'Bharat', RBI and 2000. Colour of the thread changes from green to blue when the note is tited
  • Number panel with numerals growing from small to big on the top left side and bottom right side.
  • Ashoka Pillar emblem on the right.
  • Raised printing ofMahatma Gandhi portrait, Ashoka Pillar emblem, based and identification mark.
  • Horizontal rectangle with Rs. 2000 in raised print on the right.
  • Seven angular bleed lines on left and right side in raised print.
  • Swachh Bharat logo with slogan.

Features of New Rs. 500 Notes        

The size of new of stone grey colour note of   Rs. 500 is 63mm \[\times \] 150mm. Obverse:            

Latent image of the denomination numeral. Denomination numeral in Devanagari.

Orientation and relative position of Mahatma Gandhi portrait changed.

Number panel with numerals growing from small to big on the top left side and bottom right side.

Denomination in numerals with rupee symbol in colour changing ink (green to blue) on bottom right.

Ashoka pillar emblem on the right.

Raised printing of Mahatma Gandhi portrait, Ashok pillar emblem, based and identification mark. Five bleed lines on left and right in raised print.

Year of printing of the note on left. Swachh Bharat logo with slogon. Red Fort-an image of Indian heritage site with Indian flag.


Printing of Securities and Minting in India


Security Press


Established  Year

Related by

Currency Notes Press

Nasik, Maharashtra


Bank notes from Rs.1 to Rs.100

Security, Paper

Hoshangabad    (MP)


Banks and currency notes paper

Bank Notes Press

Dewas   (MP)


Bank notes of 20,50,100 and 500

Security Notes Printing Press



Union excise duty stamps

India Security Press



Postal material, postal stamps, etc

Modernised Currency Notes Press

Mysore (Karnataka),  Salbani   (West Bengal)


Currency Notes.

Coins are minted at four places viz, Mumbai, Kolkata, Hyderabad and Noida.


Relaunched Rs. 1 Note

After 20 yrs. RBI relaunched Rs. 1 note in Mar, 2015, in Nov, 1994, printing of Rs. 1 note was stopped mainly due to higher cost and for freeing capacity to print currency notes of higher denomination. Printing of Rs. 2 and Rs. 5 notes too were discontinued in 1995.


Cheque and Draft Services of Bank Cheque

It is a bill of exchange dramon on a specified samker expressed to be payable on demand. From 1st April, 2012 cheques, drafts, pay orders and banker's cheques will be valid for only 3 months.

(i) Drawer Person who has an account in bank and who draws a cheque for making payment.

(ii) Drawee A drawee is a person by whom the cheque is drawn.

(iii) Payee A payee is the person to whom the amount stated in the cheque is payable.


Types of Cheques

  • Order Cheque A cheque payable to particular person or his order is called an order cheque.
  • Bearer Cheque A cheque which is payable to a person, whosoever bears, is called a bearer cheque.
  • Blank Cheque A cheque on which the drawer puts his signature and leaves all other columns blank, is called a blank cheque.
  • Stale Cheque The cheque which is more than 3 months old is a stale cheque.
  • Multilated Cheque If a cheque is torn into two or more pieces, it is termed as multilated cheque.
  • Post-Dated Cheque If a cheque bears a date later than the date of issue, it is termed as post-dated cheque.
  • Open Cheque A cheque which has not been crossed, is called an open cheque. Even if a cheque is crossed and subsequently the drawer has cancelled the crossing at the request of the payee and affixes his full signature with words 'crossing cancelled pay cash', it becomes an open cheque.
  • Crossed Cheque A cheque which carries too parallel transverse lines across the face of cheque with/without words 'and co', is said to be crossed.
  • Account Payee Cheque Account Payee cheque simply means drawing two parallel lines on the left corner of the cheque and write the words 'Account Payee5 or 'A/c payee' between those lines.
  • Gift Cheque Gift cheques are used for offering presentations on occasions like birthday, weddings and such other situations. It is available in various denominations.
  • Travellers' Cheque It is an instrument issued by a bank for remittance of money from one place to another.
  • MICR Cheques The Reserve Bank of India (RBI) has introduced mechanised cheque processing system using MICR (Magnetic Ink Character Recognition) technology initially in the four metropolitan cities of Bombay, Calcutta, Madras and New Delhi in 1987. The MICR code has nine digits.


The first three digits in the MICR code represent the city code that is the city in which the bank branch is located. The next three digits stand for the bank code while code three digits represent the bank branch code.



  • Now, in our country the cheque is valid for payment till 3 months only from the date of issuance.
  • The most important documents for opening a bank account is the domicile certificate.
  • 'Piggy Bank' which is popular among the poor or the children is a form of small saving bank,


Bank Draft

It is a bill of exchange in which a bank orders its branch or another bank specified therein, as the case may be, to repay a specified sum of money to a specified person or to his order. Usually, banks charge a standard rate of service/issue charges on these drafts.


Difference between a Cheque and a Demand Draft

A cheque is issued by an individual, whereas a demand draft is issued by a bank. A cheque is drawn by an account holder of a bank whereas a draft is drawn by one branch of a bank on another branch of the same bank.

A cheque can be made payable either to a bearer or order. But a demand draft is always payable to order of certain person.


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