Banking General Awareness Reserve Bank of India Reserve Bank of India - Structure and Functions

RESERVE BANK OF INDIA

RBI was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act/1934.

• The Central bank was formed under the recommendations from John Hilton Young Commission 1926, also called Royal Commission of Indian Currency and Finance.
• The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937.

Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

CONSTITUTION

The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

• Appointed/nominated for a period of four years.
• Present Governor

Dr. Urjit R. Patel (24th Governor)

• Deputy Governors

Shri BP Kanungo

Shri S. S. Mundra

Shri N. S. Vishwanathan

Dr. Viral V. Acharya

Functions of Reserve Bank of India

Monetary Authority:

Formulates, implements and monitors the monetary policy.

Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange:

Manages the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

Issues and exchanges or destroys currency and coins not fit for circulation.

Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role:

Performs a wide range of promotional functions to support national objectives.

Banker to the Government:

Performs merchant banking functions for the central and the state governments; also acts as their banker.

Banker to banks:

Maintains banking accounts of all scheduled banks.

INSTRUMENTS OF MONETARY POLICY - QUANTITATIVE & QUALITATIVE TOOLS

The instruments of monetary policy are tools or devices which are used by the monetary authority in order to attain some predetermined objectives.

ELEMENTS OF MONETARY POLICY

REPO AND REVERSE REPO RATE

Repo is a transaction wherein securities are sold by the RBI and simultaneously repurchased at a fixed price. This fixed price is determined in context of an interest rate called the repo rate. The higher the repo rate, more costly are the funds for banks and hence, higher will be the rate that banks pass on to customers. A high rate signals that access to money is expensive for banks; lesser credit will flow into the system that helps bring down liquidity in the economy. The reverse is the reverse repo rate, which banks use to park excess money with RBI.

CASH RESERVE RATIO (CRR)

This is the percentage of a bank's total deposit that needs to be kept as cash with the RBI. The central bank can change the ratio to a limit. A high percentage means banks have less to lend, which curbs liquidity; a low CRR does the opposite. The RBI can reduce or raise CRR to tighten or ease liquidity as the situation demands.

OPEN MARKET OPERATIONS

This refers to buying and selling of government securities by RBI to regulate short-term money supply. If RBI wants to induce liquidity or more funds into the system, it will buy government securities and inject funds, and if it wants to curb the amount of money out there, it will sell these to banks, thereby reducing the amount of cash that banks have. RBI uses this tool actively even outside of its monetary policy review to manage liquidity on a regular basis.

STATUTORY LIQUIDITY RATIO

This is the percentage of banks' total deposits that they are needed to invest in government approved securities. The lesser the amount of SLR, the more banks have to lend outside. The SLR has been brought down from 22% to 21.5% in this policy and the endeavour will be to reduce it by 0.25% every quarter till 31 March 2017.

BANK RATE

This is the re-discounting rate that RBI extends to banks against securities such as bills of exchange, commercial papers and any other approved securities. In recent years, it has been the repo rather than the bank rate that has acted as a guideline for banks to set their interest rates. It is currently at 8.25%. Directionally, bank rate follows repo.

In addition to these measures, RBI also uses many qualitative tools to regulate credit flow and cost of credit to the economy and specific sectors within it.

Demonetisation and RBI

• The government had "advised" the Reserve Bank to junk `500/1000 notes on November 7, 2016.
• The RBFs Central Board met the very next day to consider the government's advice.
• After "deliberations," RBI decided to "recommend that the legal tender status of the banknotes in the high denominations of ` 500 and ` 1000 be withdrawn.

RBI under the Section 20 of the RBI Act 1934 has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Union.

State Government transactions are carried out by RBI in terms of the agreement entered into with the State Governments in terms of section 21 A of the Act. As of now, such agreements exist between RBI and all the State Governments except Government of Sikkim.

Fully Owned RBI Subsidiaries:

1. National Housing Bank (NHB)
2. Deposit Insurance and Credit Guarantee Corporation of India (DICGC).
3. Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

Offices

Has 19 regional offices, most of them in state capitals and 9 Sub-offices.

Governors of Reserve Bank of India

Acts administered by Reserve Bank of India

• Reserve Bank of India Act, 1934
• Public Debt Act, 1944/Government Securities Act, 2006
• Government Securities Regulations, 2007
• Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
• Credit Information     Companies (Regulation) Act, 2005
• Payment and Settlement Systems Act, 2007
• Payment and Settlement Systems Regulations, 2008 and Amended up to 2011 and BPSS Regulations, 2008
• The Payment and Settlement Systems (Amendment) Act, 2015 - No. 18 of 2015
• Factoring Regulation Act, 2011

Other relevant Acts

• Negotiable Instruments Act, 1881
• Bankers' Books Evidence Act, 1891
• State Bank of India Act, 1955
• Companies Act, 1956/ Companies Act, 2013
• Securities Contract (Regulation) Act, 1956
• State Bank of India Subsidiary Banks) Act, 1959
• Deposit Insurance and Credit Guarantee Corporation Act, 1961
• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
• Regional Rural Banks Act, 1976
• Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
• National Bank for Agriculture and Rural Development Act, 1981
• National Housing Bank Act, 1987
• Recovery of Debts Due to Banks and Financial Institutions Act, 1993
• Competition Act, 2002
• Indian Coinage Act, 2011 : Governs currency and coins
• Banking Secrecy Act
• The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
• The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993