question_answer

                  In what ways does the Reserve Bank of India (RBI) supervise the functioning of banks? Why is this necessary?   Or Which government body supervises the functioning of formal sources of loans in India? Explain.           

Answer:

                  The RBI supervises the functioning of banks as follows (i) The RBI checks that the banks actually maintain a minimum cash balance out of the deposits they receive (currently this is 15%). (ii) The  banks  have  to  periodically  submit information to the RBI on how much they are lending, to whom, at what interest rate, etc. Thus, the RBI ensures that the banks give loans not just to profit-making businesses and traders, but also to small cultivators and other small borrowers. This supervision is necessary to ensure that small businesses also grow, besides others. Further, this monitoring ensures that banks do not loan more money than they are supposed to, as such an action can create a crisis situation.