question_answer

In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Answer:

RBI supervises the functioning of banks.  

(a) It ensures that the banks actually keep a certain percentage of their deposits as cash balance/cashreserve with the Central bank.

(b) It observes that banks give loans to small activators, small scale industries, small borrowers also and not become a profit-making business.

(c) Report has to be submitted periodically by the banks to RBI containing details such as how much they have lent, to whom and at what rate of interest, etc.

(d) Central Bank is the lender of last resort. Whenever banks are short of funds, they can take loans from the Central Bank. Thus it is source of great strength to the banking system.

(e)It acts as a bank of central clearance, settlements and transfers.

It is necessary for Central Bank to supervise the working of banks. The paper currency standard which is in operation in every country now has to be directed by some central authority (i.e., RBI). There are hundreds of banks in a country. Sometimes banks due to profit motive and competition do not follow a common policy according to national requirements. Therefore, RBI, which will compel them to follow the appropriate policy under economic situation is necessary.