Module 7

Reserve Bank of India

The need for the formation of a central Bank for the country was felt long before. Several attempts were
made from time to time to establish, but unfortunately those attempts failed to bear fruits.

The question of establishment of a full fledge Central Bank assumed importance once again in 1933, The
Central Bank enquiry Committee recommended the establishment of Reserve Bank of India for the
purpose of developing banking facilities and bringing about rapid economic development in the country.

The Reserve Bank of India was established on 1st April 1935 after passing the Reserve Bank of India Act
1934.

Ownership and control of RBI:

Initially RBI was set up as a shareholders bank, later Government of India acquired all the shares held by
private individuals by paying compensation. Today RBI functions as a state owned and state controlled
institution.

Capital of RBI:

RBI was started with a capital of 5 crores divided into 5 lakhs shares of Rs 100 each fully paid.

Management of RBI:

The general superintendence and the direction of affairs of the RBI are vested in the Central Board of
Directors and this board consists of 20 members.

1. One Governor and 4 deputy Governors appointed by the Central Government.

2. Four Directors nominated by the central government one each from each of the four local boards.

3. Ten other directors nominated by the Central Government.

4. One Government official nominated by the Central Government.

Offices of RBI:

Head Office: Mumbai.

Branches: Bombay, New Delhi, Bangalore, Kolkata, Chennai, Kanpur, Hyderabad, Patna, Nagpur,
Jaipur, Trivandrum, Gauhati, Indore.

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Abroad: London.

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Functions of Reserve Bank of India

RBI performs all the functions of a full fledged Central Bank besides it also performs certain
development functions.

1. Issue of Currency notes: RBI is given the monopoly of note issue in the India. Notes of different
denominations are issued. Eg Rupee 10, 20, 50, 100, 500, 1000 etc. Currently minimum reserve system is
followed.

2. Banker to the Government: RBI acts as the banker, financial agent and advisor to the State and
Central Government.

As a Banker

 It holds the cash balances Of Central and state government

 It collects the taxes and makes the payment on behalf of the state and central government

 It grants temporary advances to the state and central government

 It provides foreign exchange to the central and state government

 It advices the government on all Banking and financial matters.

 It represents the government of India in the International monetary institutions like IMF and
IBRD. Etc

3. Acting as a Bankers Bank: The RBI acts as a banker to the other banks by performing following
functions

 It holds the portion of the cash reserve of the commercial bank

 It provides the advances to commercial banks either by rediscounting the bills or by granting
loans against approved securities.

 Acts as a clearing house to settle inter bank debt

 It advices the banks on their lending policies

 Acts as a Lender of the last resort

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4. Controls Credit: RBI controls credit with a view to check the price level and to direct the flow of
credit to essential activities for this purpose it uses Qualitative and Quantitative techniques/ weapons.

Quantitative methods:

✔ Bank Rate Policy

✔ Open market operations

✔ Variable cash reserve ratio

Qualitative or Selective control methods:

✔ Issuing of direction

✔ Regulation of marginal requirements

✔ Differential rate of Interest

✔ Moral suasion

Bank Rate Policy: It is the minimum rate at which the Central bank provides loans to commercial
banks.

By Manipulating (raising or lowering) RBI can control the credit and level of economic activities.

By Increasing the bank rates it can make the credit costlier and thereby cause contraction of credit in
fall in economic activities and vice versa.

Open Market Operations: It means sale and purchase of securities by the RBI with a view to control the
credit. The main objective of this weapon is to control credit and influence the economic activity in the
country.

Variable Cash Reserve Ratio: RBI is empowered to vary the cash reserve percentage which the
commercial banks are required to keep with it.

Qualitative methods/ Selective methods

Issue of Directions: Under this method RBI has the power to issue instructions to the commercial banks
in regards to the purpose for which advances are to be granted, maximum amount of advances that can be
given, and rate of interest to be charged on advances. This method has been used by the RBI a number of
times.

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Regulating marginal requirements: Under this method advances against certain commodities such as,
cotton, cotton yarn, oil seeds, vanaspathi, sugar etc are controlled by regulating the margins for advances
against these securities.

Deferential rate of Interest: RBI controls the credit by prescribing different rates of interest on the basis
of purpose for which the advances are given.

Moral Suasion: RBI persuades the commercial banks to follow a particular line of action while
advancing money. This method is used by RBI in India several times and has become very successful in
its implementation.

5. Developmental Functions: RBI apart from the performing the Central Banking functions, it extends
certain developmental functions indirectly.

• Provision Of agricultural finance.

• Provision of Industrial finance.

Banking Structure in India or Banking system in India:

Important constituents of banking structure in India includes:

 Reserve Bank of India

 State Bank of India and its subsidiaries

 Nationalized and Private sector Indian commercial Banks

 Regional Rural Banks or (RRB)

 Foreign Banks

 State Bank of India and its subsidiaries : SBI came into existence on nationalization of
“Imperial Bank of India” in 1955 on the recommendation by the Rural credit survey committee,
today SBI is the biggest (Having around 15000 branches) and most important commercial bank in
India.

Apart from Commercial Banking functions has access to capital market and also SBI acts as a agent to the
RBI and performs following functions in the areas where there are no RBI branches:

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 ✔ Acts as a Bankers Bank

✔ Acts as a Banker to State and central Governments.

 Public Sector Banks/ Nationalized Banks/ Commercial Banks: The second category of Public
sector banks is of 19 commercial banks of which 14 were nationalized in 1969 and 6 more in
1980. There are around 34355 branches as on June 2006.

Objectives for nationalization:

✔ To enable RBI to have greater control over commercial banks

✔ To channelize bank credit to priority sectors like Agriculture, Industries and Exports.

✔ To extend banking facilities to rural areas.

✔ To provide Better service and safety to the customers.

 Regional Rural Banks or (RRB): RRB’s are sponsored by commercial Banks mostly public
sector banks engaged in granting of direct loans and advances to farmers, rural artisans, landless
labourers and other weaker section in the rural areas.

Objectives:

✔ To provide cheap credit to farmers, artisans, small entrepreneurs.

✔ To contribute for the development of rural economy.

✔ To provide employment opportunities for the rural folks.

✔ To inculcate banking habit and mobilize savings and accelerate the economic growth.

 Private sector Banks: Private Sector commercial banks refers to banks owned and controlled by
Indian entrepreneurs. There are around 5794 branches which are operating in India.

There branches and business are relatively marginal compared to Nationalized and foreign banks.
In 2005-06 total Pvt Sector banks accounted for 15.1 per cent of total baking assets.

Eg: HDFC Bank Ltd, ICICI banking corporation Ltd, Axis Bank Ltd, IDBI Bank Ltd.

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  Foreign Banks: Foreign Banks refers to any bank incorporated outside India but having a place
of business in India.

These banks carry on all commercial banks functions besides their specialized functions of financing
exports, imports and foreign exchange.

On June 2006 there were around 262 branches located mostly in big cities.

Though there were many complaints about these banks most of it have been overcome by Banking
Regulation Act of 1949.

Eg: Citibank, Deutsche Bank, HSBC

Banking Sector Reforms:

1.Nationalization: 14 Commercial banks with deposit of 50 Crores or more nationalized or taken

over by Government of India on 19th July 1969, under the Banking Companies (Acquisition and
Transfer of Undertaking) Act 1970.
6 more Banks with demand and time liabilities exceeding 200 crores as on 31st March 1980 was
nationalized.
Objectives for nationalization:
 To enable RBI to have greater control over commercial banks
 To channelize bank credit to priority sectors like Agriculture, Industries and Exports.
 To extend banking facilities to rural areas.
 To provide Better service and safety to the customers.
 To give professional bent to Banking management.
 To provide security to the depositors
 To raise employment levels
 To provide better terms of service to the bank staff

2. Branch Expansion: The progress in branch expansion has been spectacular since
nationalization of banks in terms of number of branches coverage of rural and unbanked areas.
Progress in Bank expansion:
• Numerical increase in bank branches
• Branch opening in rural and unbaked areas
• Attempt to correct regional imbalances

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 3. Deposit Mobilization: These banks have been able to step up deposits mobilization. Time
deposits amounted to Rs 21, 79,172 crores while demand deposits were only Rs 4, 29,137 crores as on
March 30, 2007.

4. Bank lending: Advances granted by Commercial banks have been increased considerably, Total
advances of all the scheduled commercial banks in India amounted to Rs 1733679 crores as on December
22, 2006.

5. Finances to neglected Sector: Banks have taken a lead in extending credit to all the neglected
sectors of the society like artisans, craftsmen, self employed persons, taxi and auto rickshaw drivers,
small vegetable vendors.

6. Finance to Public Sector undertakings: The nationalized Banks have participated in the
provision of finance to public sector undertakings. They have given more fiancés to public sector
agencies engaged in food procurement. They have invested a good portion of their funds in Government
securities and thereby made more finance available to the public sector undertakings.

E Banking and recent trends in Banking Technology:

E banking is an abbreviation for electronic banking. E banking allows you to conduct bank transactions
online, instead of finding a bank and interacting with a teller.

which includes :

○ Account management
○ Bill payment
○ New account opening
○ loan applications, approval transfers
○ Investment/Brokerage services
○ Loan application and approval

Advantages Of e Banking are:

✔ Anywhere Banking

✔ Easy and hassle free ways of Banking

✔ It is easy to view recent transactions and monitor your account

✔ Provides many facilities.

Disadvantages

✔ If the bank's server is down, you can't use it

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 ✔ Some Banks will charge you for online access

✔ There's always the possibility of Internet Crime (Phishing, Hacking)

ATM- Automated Teller Machines or Any time money

A customer using a Debit/ATM card can withdraw, deposit, transfer money from his account, also check
the balance, request for cheque book, statements at his convenience i.e. day or night,24/7.

Advantages

✔ ATM Services available to the customer round the clock.

✔ Bank staff can be downsized or engage the existing staff in other banking operations as ATM
reduces the work load at branches.
✔ The cost of operation is cheaper in case of ATM.

Disadvantages

✔ Card can be misplaced or misused.

✔ Illiterate customers may find it difficult to operate.
✔ Limits the cash withdrawals

Credit card allows the card holder to purchase goods, travel, dine in a hotel etc without making a
immediate payments. The card holder can get credit up to 45 days.

Thus a credit card is a passport to safety, convenience and credit.

Advantages

✔ Meets emergency Expenditures

✔ Allows making payment in phased fashion
✔ Gives a credit period of 45/60 days
✔ Customers enjoy rewards, n loyalty points

Disadvantages:

✔ Card can be misplaced or misused.

✔ Customer may lavishly purchase due to excess credit limits.

Debit card is a card which enables the account holder to transact his account using ATM’s.

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 Card can also be uses at card at point of sale terminals where money gets debited from his account by
swiping his card.

Advantages

✔ Debit cards can be used round the clock for cash withdrawals
✔ Allows making payment in phased fashion
✔ Hassel free way of purchasing
✔ Reduces the burden of carrying cash

Disadvantages

✔ Card can be misplaced or misused.

✔ Illiterate customers may find it difficult to operate.
✔ Limits the cash withdrawals

Electronic Funds Transfer (EFT) is a system of transferring money from one bank account directly
to another without any paper money changing hands.

EFT refers to any transfer of funds initiated through an electronic terminal, including credit card,
ATM, and point-of-sale (POS) transactions.

Advantages

✔ Reduces the transaction time

✔ Easy and Hassel free method
✔ Can be used 24/7

Disadvantages

✔ If the bank's server is down, you can't use it

✔ Some Banks will charge you for online access
✔ There's always the possibility of Internet Crime (Phishing, Hacking)

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