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ORIGIN AND DEVELOPMENT OF RESERVE BANK OF INDIA AND ITS FUNCTION
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ORIGIN AND DEVELOPMENT OF RESERVE
BANK OF INDIA AND ITS FUNCTION
AUTHORED BY - PRADNYA SAHEBRAO NIKAM
P.E.SOCIETY’S
MODERN LAW COLLEGE
GANESHKHIND UNIVERSITY CIRCLE, PUNE
Abstract:
The RBI was established on
April1-1935.under RBI act 1934on the recommendation of JHON HILTON
commission1926 called royal commission on Indian currency and finance RBI head
quarters in Mumbai. RBI had played an important role in the economic
development and financial control in the country RBI issue of currency notes to
maintain financial stability in the countries. Banking structure in India can
divided into two groups scheduled bank's and another one Non scheduled bank's.
Scheduled bank's again divided two types co-operative bank's commercial Banks.
This paper explain commercial Banks role on private Banks .RBI was merely
credibly introduces the lender and the borrower, and facilities recovery.[1]
The Reserve Bank of India or RBI is
India's central bank and regulatory body responsible for regulating the banking
system in the country. It operates under the Ministry of Finance.[2]
The Reserve Bank of India is the
central Bank of India entrusted with the multidimensional role. It performs
important monetary functions from issue of currency note to maintenance of
monetary stability in the country. Initially the Reserve Bank of India was a
private share holder?s company which was nationalized in 1949. Its affairs are
governed by the Central Board of Directors appointed by the Government of
India. Since its inception the Reserve Bank of India had played an important
role in the economic development and monetary stability in the country. This
paper is an attempt explore into the role, functions, and contribution of RBI
in Indian Economy.[3]
Introduction:
India is one of the fastest growing
economies in the world, with a population over 1.2 Billion, has become the hub
for global investment. There are various factors that influence and control
Indian economy, one such being, The RBI, one of the oldest institution behind
the success of our economy. The RBI is the backbone of Indian economy and
because of it, growth in Exports, FOREX, Capital Markets and other sectors of
the economy are all happening. It plays an important role in strengthening,
developing and diversifying the country’s economic and financial structure. It
is the apex bank in the Indian Banking System.
The Reserve Bank of India (RBI) is
India’s Central banking institution, which controls the monetary policy of the
Indian rupee. The Reserve Bank of India was established on April 1, 1935, in
accordance with the provisions of the Reserve Bank of India Act, 1934. Though
originally privately owned, since nationalisation in 1949, the Reserve Bank is
fully owned by the Government of India.[4]
A number of other financial
institutions also came under the jurisdiction of the public sector during the
period. Several other institutional mechanisms were also evolved. All this
altered the nature of the relationship between the government and the Reserve
Bank, which was left with little say in the structure of the financial system.[5]
Origin of
Reserve Bank of India:
India to set up a banking institution
with the elements of a central bank, we find that up to as late as 1920, the
functions envisaged for the proposed bank were of a mixed type, reflecting the
practices abroad. Also, it was only towards the close of the nineteenth century
and the beginning of the twentieth that the term ‘central bank’ came to be used
in India in the official despatches. It was proposed at that time to amalgamate
the three Presidency Banks into one strong institution; the central banking
functions envisaged for the new institution were not only those of note issue
and banker to Government, as in the earlier proposals, but also maintenance of
the gold standard, promoting gold circulation as well as measuring and dealing
with requirements of trade for foreign remittances. The new bank was to perform
commercial banking functions as well, as the Presidency Banks had been doing
till then. Even the ‘State Bank’ proposed by John Maynard Keynes in 1913 was to
engage in both central banking and commercial banking functions.[6]
The Reserve Bank of India was
established following the Reserve Bank of India Act of1934. Though privately
owned initially, it was nationalized in 1949 and since then fully owned by
Government of India(GoI)
1935- 1949 -
The Reserve Bank of India was founded
on 1 April 1935 to respond to economic troubles after the First World War. The Reserve Bank of India was
conceptualized based on the guidelines presented by the Central Legislative
Assembly which passed these guidelines as the RBI Act 1934. RBI was conceptualized as per the
guidelines, working style and outlook presented by Dr. B. R. Ambedkar in his book titled “The Problem of
the Rupee – Its origin and its solution” and presented to the Hilton Young
Commission. The bank was set up based on the recommendations of the 1926 Royal
Commission on Indian Currency and Finance, also known as the
Hilton – Young Commission.
The original choice for the seal of
RBI was the East India Company Double Mohur, with the sketch of the Lion and
Palm Tree. However, it was decided to replace the lion with the tiger, the
national animal of India.[7]
The Preamble of the RBI describes its basic functions to regulate the issue of
bank notes, keep reserves to secure monetary stability in India, and generally
to operate the currency and credit system in the best interests of the country.
The Central Office of the RBI was established in Calcutta (now Kolkata) but was
moved to Bombay (now Mumbai) in 1937. The RBI also acted as Burma's (now
Myanmar) central bank until April 1947 (except during the years of Japanese
occupation (1942 – 45)),
even hough Burma seceded from the Indian Union in 1937. After the Partition
of India in August1947, the bank served as the central bank
for Pakistan
until June 1948 when the State Bank
of Pakistan commenced operations. Though set up as a
shareholders’ bank, the RBI has been fully owned by the Government of Indiasince
its nationalization in1949. RBI has monopoly of note issue.
1961 – 1968 -
As a result of bank crashes,
the RBI was requested to establish and monitor a deposit insurance system.
Meant to restore the trust in the national bank system, it was initialized on 7
December 1961. The Indian government founded funds to promote the economy ,and
used the slogan "Developing Banking". The government of India
restructured the national bank market and nationalized a lot of institutes. As
a result, the RBI had to play the central part in controlling and supporting
this public banking sector.
1969 – 1985 -
In 1969, the Indira Gandhi-headed
government nationalized 14 major commercial banks.Upon Indira Gandhi's return
to power in 1980, a further six banks were nationalized. The regulation of the
economy and especially the financial sector was reinforced by the Government of
India in the 1970s and 1980s.The central bank became the central player and
increased its policies a lot for various tasks like interests, reserve ratio
and visible deposits. These measures aimed at better economic development and
had a huge effect on the company policy of the institutes. The banks lent money
in selected sectors, like agricultural business and small trade companies. The
Banking Commission was established on Wednesday, 29 January 1969, to analyze
banking costs, effects of legislations and banking procedures, including
non-banking financial intermediaries and indigenous banking on Government of
India economy; with Mr. R.G. Saraiya as the chairman.The branch was forced to
establish two new offices in the country for every newly established office in
a town. The oil crises in 1973 resulted in increasing inflation, and the RBI
restricted monetary policy to reduce the effects.[8]
1985 – 1990 -
A lot of committees analyzed the
Indian economy between 1985 and 1991. Their results had an effect on the RBI.
The Board for Industrial and Financial Reconstruction, the Indira Gandhi
Institute of Development Research and the Security & Exchange Board of
India investigated the national economy as a whole, and the security and
exchange board proposed better methods for more effective markets and the
protection of invest or interests. The Indian financial market was a leading
example for so-called "financial repression" (McKinnon and Shaw). The
Discount and Finance House of India began its operations in the monetary market
in April 1988; the National Housing Bank, founded in July 1988, was forced to
invest in the property market and a new financial law improved the versatility
of direct deposit by more security measures and liberalization.
1991 – 1999 -
the national economy contracted in
July 1991 as the Indian rupee was devalued. The currency lost 18% of its value
relative to the US dollar, and the Narsimham Committee advised restructuring
the financial sector by a temporal reduced reserve ratio as well as the
statutory liquidity ratio. New guidelines were published in 1993 to establish a
private banking sector. This turning point was meant to reinforce the market
and was often called neo-liberal. The central bank deregulated bank interests
and some sectors of the financial market like the trust and property markets.
This first phase was a success and the central government forced a diversity
liberalization to diversify owner structures in 1998.
The National Stock Exchange of India
took the trade on in June 1994 and the RBI allowed nationalized banks in July
to interact with the capital market to reinforce their capital base. The
central bank founded a subsidiary company the Bharatiya Reserve Bank Note
Mudran Private Limited-on 3 February 1995 to produce banknotes.
Since 2000 -
The Foreign Exchange Management Act,
1999 came into force in June 2000. It should improve the item in 2004-2005
(National Electronic Fund Transfer). The Security Printing & Minting
Corporation of India Ltd., a merger of nine institutions, was founded in 2006
and produces banknotes and coins.
The national economy's growth rate
came down to 5.8% in the last quarter of 2008- 2009 and the central bank
promotes the economic development.
In 2016, the Government of India
amended the RBI Act to establish the Monetary Policy Committee (MPC) to set.
This limited the role of the RBI in setting interest rates, as the MPC
membership is evenly divided between members of the RBI (including the RBI
governor) and independent members appointed by the government. However, in the
event of a tie, the vote of the RBI governor is decisive.
Development
of RBI:
The introduction of the Bill in 1927
was followed by a prolonged debate and discussion, after which the Bill was
reintroduced in 1933 as The Reserve Bank of India Bill which was passed by
Assembly in the same year and by Council of States in 1934. The Reserve Bank
was established in 1935 as a shareholders’ institution in April 1935. The
preamble to the RBI Act 1934, states the objective of RBI is to “regulate the
issue of bank notes and the keeping of 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”. The Bank’s functions included (i)
issue of currency; (ii) banker to the Government; and, (iii) banker to other
banks. After its establishment, it served as the Central Bank of Burma
(Myanmar) up to April 1947, even after it seceded from the Indian Union in
1937. After the partition of India, the Reserve Bank served as the Central Bank
of Pakistan up to June 1948 when the State Bank of Pakistan commenced
operations. The Bank was nationalized in 1949. The focus and priority attached
to various functions by the Reserve Bank have changed over time in line with
the economic and financial developments in the country. As in many other
countries, matters relating to currency and exchange, such as the question of
the monetary standard and the exchange rate, received far more attention than
the subject of banking, especially central banking (RBI, 1970). The Bank began
its operations by taking over from the Government, the functions that were thus
far, performed by the Controller of Currency and from the Imperial Bank of
India, the management of Government accounts and public debt. The existing
currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and
Cawnpore (Kanpur) became branches of the Issue Department.[9]
Soon after independence, the country
began pursuing its development aspirations and the Bank was seen playing a crucial
in the process, particularly for the agriculture sector. The developmental role
of the Bank became more pronounced in the 1960s, when finance began to be
considered as a major catalyst for development. Apart from putting in place, a
policy framework for sectoral lending such as priority sector lending norms,
the Bank also played a crucial role in establishment of development
institutions in the country which specialized in sector-specific finance needs
as well as finance infrastructure in the country.
Some of these included the Deposit
Insurance and Credit Guarantee Corporation of India, the Unit Trust of India,
the Industrial Development Bank of India, the National Bank of Agriculture and
Rural Development and the Discount and Finance House of India. Exchange rate
related issues and price stability began receiving more attention in the 1970s
and 1980s. The breakdown of Bretton Woods stable exchange rate and oil shock of
1973- 74 posed serious balance of payments problem for the country leading to
the enactment of the Foreign Exchange Regulation Act (FERA) 1973, which focused
on foreign exchange conservation rather than regulation. Thus, implementation
of the FERA and managing scarce foreign exchange reserves received greater
attention of the Bank during 1970s
Beginning the 1980s, managing
inflation in the economy emerged as a focus area and the monetary framework put
in place was an outcome of global thinking in favor of the Monetarist approach.
This period saw a significant expansion of the domestic monetary base due to a
large budgetary deficit of the Government and the Reserve Bank’s financing of
these deficits. The Committee to Review the Working of the Monetary System
(Sukhamoy Chakravarty 1985)[10]
suggested that monetary targeting should be made in a formal and secure manner
whereby the monetary targets are decided on the basis of desired growth in
output and the tolerable level of inflation (RBI, 2006). The policy framework
in the Indian economy saw a major shift beginning the 1990s with a move towards
liberalization and globalization with commensurate implications for the role of
the Reserve Bank in the economy, which warranted a change in its focus areas as
well as operational framework. In the changed scenario, the role of financial
markets became increasingly important for meeting the financing needs of the
commercial sector as well as for policy transmission. Development of the debt
market also received special attention from the Bank during the 1990s. Foreign
exchange markets received a major thrust with the replacement of FERA 1973 with
a new legislation, the Foreign Exchange Management Act (FEMA) 1999, which
focused on facilitating external trade and payments and promoted the orderly
development and maintenance of the foreign exchange market in India. The
Reserve Bank also absorbed short-term liquidity through repo operations during
the 1990s. Apart from developing the financial markets, steps were also taken
to strengthen the banking system through addressing non-performing loan
problems and taking prudential norms close to international standards.
The liquidity framework went through
a major shift in the beginning of the 2000s with the implementation of
full-fledged Liquidity Adjustment Facility (LAF) in June 2000 with the policy
rate representing the interest rate corridor for monetary policy transmission.
During the decade, the Reserve Bank discontinued buying government securities
in the primary market under the Fiscal Responsibility and Budget Management
(FRBM) Act 2003, imparting autonomy and effectiveness to its monetary and
liquidity management operations. Beginning 2005, the Reserve Bank placed a
major focus on financial inclusion with several initiatives taken to bring the
hitherto excluded population in the ambit of the formal banking and financial
sector. Financial inclusion efforts during the 2000s differed from earlier
efforts as the focus this time was on individuals, rather than an aggregative
approach aimed at sectoral and regional levels. Efforts were also made for the
promotion of financial literacy to enable the public to avail banking services
on the one hand, and to create awareness about the increasing number of
fraudulent activities on the other.
Inflation management saw a paradigm
shift beginning 2014, with a change in the anchor from WPI-based inflation to
CPI-based inflation and the adoption of a disinflation glide path to reduce the
inflation rate to below 6% January 2016. The inflation targeting framework was
formalized with the signing of an agreement between the Government and the
Reserve Bank in February 2015, to reduce the inflation rate to 4+/-2% by
2017-18 and maintain it at that level thereafter.
To incorporate the evolution of
monetary and financial developments in the country, the Reserve Bank felt the
need to rearticulate, in contemporary terms, its core purpose as given in the
preamble to the RBI Act 1934. The purpose was to delineate the Reserve Bank’s
strategic objectives and provide a framework and backdrop for the formulation
of Reserve Bank policies and the charting of its direction. Accordingly, the
Reserve Bank issued its ‘Core Purpose, Values and Vision’ Statement in April
2015. The Core Purpose is defined as fostering monetary and financial stability
conducive to sustainable economic growth and ensuring the development of an
efficient and inclusive financial system. The Statement also delineated the
shared values that guide organizational decisions and employee actions in
pursuit of the Reserve Bank’s Core Purpose. Setting a vision for itself, the
Bank is committed to pursue public interest and common good as a leading
central bank that is recognized for its credible, transparent and proactive
policies (RBI, 2015).
Functions
of RBI (India's Central Bank):
As a central bank, the Reserve Bank
has significant powers and duties to perform. For smooth and speedy progress of
the Indian Financial System, it has to perform some important tasks. Among
others it includes maintaining monetary and financial stability, to develop and
maintain stable payment system, to promote and develop financial infrastructure
and to regulate or control the financial institutions.
1. Traditional Functions of RBI
Traditional functions are those
functions which every central bank of each nation performs all over the world.
Basically these functions are in line with the objectives with which the bank
is set up. It includes fundamental functions of the Central Bank. They comprise
the following tasks.
a.
Issue of
Currency Notes
The RBI has the sole right or
authority or monopoly of issuing currency notes except one rupee note and coins
of smaller denomination. These currency notes are legal tender issued by the
RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and
1,000. The RBI has powers not only to issue and withdraw but even to exchange
these currency notes for other denominations. It issues these notes against the
security of gold bullion, foreign securities, rupee coins, exchange bills and
promissory notes and government of India bonds.
b.
Banker to
other Banks
The RBI being an apex monitory
institution has obligatory powers to guide, help and direct other commercial
banks in the country. The RBI can control the volumes of banks reserves and
allow other banks to create credit in that proportion. Every commercial bank
has to maintain a part of their reserves with its parent's viz. the RBI.
Similarly in need or in urgency these banks approach the RBI for fund. Thus it
is called as the lender of the last resort.
c.
Banker to
the Government:
The RBI being the apex monitory body
has to work as an agent of the central and state governments. It performs
various banking function 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 manages government public debts and
maintains foreign exchange reserves on behalf of the government. It provides
overdraft facility to the government when it faces financial crunch.
d.
Exchange
Rate Management:
It is an essential function of the
RBI. In order to maintain stability in the external value of rupee, it has to
prepare domestic policies in that direction. Also it needs to prepare and
implement the foreign exchange rate policy which will help in attaining the
exchange rate stability. In order to maintain the exchange rate stability it
has to bring demand and supply of the foreign currency (US Dollar) close to
each other.
e.
Credit
Control Function:
Commercial bank in the country
creates credit according to the demand in the economy. But if this credit
creation is unchecked or unregulated then it leads the economy into
inflationary cycles. On the other credit creation is below the required limit
then it harms the growth of the economy. As a central bank of the nation the
RBI has to look for growth with price stability. Thus it regulates the credit
creation capacity of commercial banks by using various credit control tools.
f.
Supervisory
Function:
The RBI has been endowed with vast
powers for supervising the banking system in the country. It has powers to
issue license for setting up new banks, to open new braches, to decide minimum
reserves, to inspect functioning of commercial banks in India and abroad, and
to guide and direct the commercial banks in India. It can have periodical
inspections an audit of the commercial banks in India.
2. Developmental / Promotional Functions
of RBI
Along with the routine
traditional functions, central banks especially in the developing country like
India have to perform numerous functions. These functions are country specific
functions and can change according to the requirements of that country. The RBI
has been performing as a promoter of the financial system since its inception.
Some of the major development functions of the RBI are maintained below.
a.
Development of the Financial System
The financial system
comprises the financial institutions, financial markets and financial
instruments. The sound and efficient financial system is a precondition of the
rapid economic development of the nation. The RBI has encouraged establishment
of main banking and non-banking institutions to cater to the credit
requirements of diverse sectors of the economy.
b.
Development of Agriculture
In an agrarian economy
like ours, the RBI has to provide special attention for the credit need of
agriculture and allied activities. It has successfully rendered service in this
direction by increasing the flow of credit to this sector. It has earlier the
Agriculture Refinance and Development Corporation (ARDC) to look after the
credit, National Bank for Agriculture and Rural Development (NABARD) and
Regional Rural Banks (RRBs).
c.
Provision of Industrial Finance
Rapid industrial growth
is the key to faster economic development. In this regard, the adequate and
timely availability of credit to small, medium and large industry is very
significant. In this regard the RBI has always been instrumental in setting up
special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK
etc.
d.
Provisions of Training
The RBI has always tried
to provide essential training to the staff of the banking industry. The RBI has
set up the bankers' training colleges at several places. National Institute of
Bank Management ie NIBM. Bankers Staff College i.e BSC and College of
Agriculture Banking i.e CAB are few to mention.
e.
Collection of Data:
Being the apex monetary
authority of the country, the RBI collects process and disseminates statistical
data on several topics. It includes interest rate, inflation, savings and
investments etc. This data proves to be quite useful for researchers and policy
makers.
f.
Publication of the Reports:
The Reserve Bank has its
separate publication division. This division collects and publishes data on
several sectors of the economy. The reports and bulletins are regularly
published by the RBI. It includes RBI weekly reports, RBI Annual Report, Report
on Trend and Progress of Commercial Banks India., etc. This information is made
available to the public also at cheaper rates.
g.
Promotion of Banking Habits
As an apex organization,
the RBI always tries to promote the banking habits in the country. It
institutionalizes savings and takes measures for an expansion of the banking
network. It has set up many institutions such as the Deposit Insurance
Corporation-1962, UTI-1964, IDBI- 1964, NABARD-1982, NHB-1988, etc. These
organizations develop and promote banking habits among the people. During
economic reforms it has taken many initiatives for encouraging and promoting banking
in India.
h.
Promotion of Export through Refinance:
The RBI always tries to
encourage the facilities for providing finance for foreign trade especially
exports from India. The Export-Import Bank of India (EXIM Bank India) and the
Export Credit Guarantee Corporation of India (ECGC) are supported by
refinancing their lending for export purpose.
3. Supervisory Functions of RBI
The reserve bank also
performs many supervisory functions. It has authority to regulate and
administer the entire banking and financial system. Some of its supervisory
functions are given below.
a.
Granting license to banks
The RBI grants license to
banks for carrying its business. License is also given for opening extension
counters, new branches, even to close down existing branches.
b.
Bank Inspection
The RBI grants license to
banks working as per the directives and in a prudent manner without undue risk.
In addition to this it can ask for periodical information from banks on various
components of assets and liabilities.
c.
Control over NBFIs
The Non-Bank Financial
Institutions are not influenced by the working of a monitory policy. However
RBI has a right to issue directives to the NBFIs from time to time regarding
their functioning. Through periodic inspection, it can control the NBFIS.
d.
Implementation of the Deposit Insurance Scheme :
The RBI has set up the
Deposit Insurance Guarantee Corporation in order to protect the deposits of
small depositors. All bank deposits below Rs. One lakh are insured with this
corporation. The RBI work to implement the Deposit Insurance Scheme in case of
a bank failure.
Conclusion:
The Reserve Bank was founded on the
pattern of European central banks; but the evolution of its functions has
undergone radical transformations from traditional central banking in the formative
years to that of building institutional infrastructure during the development
phase and ensuring financial sector soundness in the reform phase. With the
onset of economic planning and along with the structural transformation of the
Indian economy, the functions of the Reserve Bank expanded manifold.
Reserve Bank had to take a proactive
role in the nation building process in filling the resource gaps of the
Governments in Plan financing and in creating necessary financial
infrastructure. As a ‘mother-of institutions’, the Reserve Bank played a
crucial role in the development of the financial sector in India. In the
initial years, the emphasis was on putting in place the institutional machinery
to support developmental planning, whereas in the reform era, the focus has
been on developing and nurturing the financial markets.
Reference:
5. https://www.scribd.com/document/438775866/Role-Of-RBI-In-Economic-And-Social-Development-Copy-pdf
[1]
https://www.researchgate.net/publication/351599838_Role_of_Reserve_Bank_in_Indian_Banking_System
[2]
https://pwonlyias.com/reserve-bank-of-india-rbi/
[3] issn 2278-3660 volume 7, number 1
(2017)
[4]
https://blogmedia.testbook.com/blog/wp-content/uploads/2017/12/Roles-Functions-of-Reserve-Bank-of-India-GK-Notes-for-Bank-SSC-in-PDF.pdf
[5]
https://rbidocs.rbi.org.in/rdocs/content/PDFs/90060.pdf
[6]
https://rbidocs.rbi.org.in/rdocs/content/PDFs/89634.pdf
[7] https://www.scribd.com/document/438775866/Role-Of-RBI-In-Economic-And-Social-Development-Copy-pdf
[8]
https://www.seacen.org/file/file/2016/RP98/CBFR-Chapter3.pdf
Article Information
ORIGIN AND DEVELOPMENT OF RESERVE BANK OF INDIA AND ITS FUNCTION
Authors: PRADNYA SAHEBRAO NIKAM
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/11
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
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