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THE ROLE OF THE RBI IN THE INDIAN BANKING SYSTEM
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THE ROLE OF
THE RBI IN THE INDIAN BANKING SYSTEM
AUTHORED BY - PRACHI
JOSHI
ABSTRACT
The
Reserve Bank of India (RBI) plays a crucial role in maintaining financial
stability and promoting the efficient
functioning of the Indian banking system. This research paper aims to explore
and analyze the multifaceted role of the RBI in regulating, supervising, and developing the banking sector in India. The study examines the RBI's responsibilities, policies, and initiatives to ensure the stability, integrity,
and soundness of the Indian banking system. It also investigates the RBI's role in promoting financial inclusion, maintaining monetary stability, and implementing effective regulatory
frameworks. The research draws upon
various sources, including academic literature, RBI reports, and relevant
government publications, to provide a
comprehensive overview of the RBI's role in the Indian banking system.
INTRODUCTION
The
Reserve Bank of India (RBI) plays a crucial role in maintaining financial
stability and promoting the efficient
functioning of the Indian banking system. This research paper aims to explore
and analyse the multifaceted role of the RBI in regulating, supervising, and developing the banking sector in India. The study examines the RBI's responsibilities, policies, and initiatives to ensure the stability, integrity,
and soundness of the Indian banking system. It also investigates the RBI's role in promoting financial inclusion, maintaining monetary stability, and implementing effective regulatory frameworks. The research draws upon various sources, including
academic literature, RBI reports, and relevant government publications, to provide a comprehensive
overview of the RBI's role in the Indian banking system.[1]
HISTORY OF RBI
The Reserve Bank of India
was established[2] following the Reserve
Bank of India Act of 1934.[3]Though privately owned
initially, it was nationalised in 1949 and since then fully owned by the
Ministry of Finance, Government of India (GoI).
1935–1949
Reserve Bank of India-10
Rupees (1938), the first year of banknote
issue.
The
Reserve Bank of India was founded on 1 April 1935 to respond to economic
troubles after the First World War.
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. Eventually, the Central
Legislative Assembly passed
these guidelines as the RBI Act 1934. 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. The Preamble
of the RBI describes its basic functions
to regulate the issue of banknotes, 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 though Burma seceded from the Indian
Union in 1937. After the Partition of India in
August 1947, 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
India since its nationalisation in 1949. RBI
has a monopoly of note issue.
1950–1960
In the 1950s, the Indian government, under its first Prime Minister
Jawaharlal Nehru, developed a centrally planned economic
policy that focused on the agricultural sector. The administration nationalised commercial banks and established, based on the Banking Companies Act, 1949 (later called the
Banking Regulation Act), a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to
support economic plan with loans.[4]
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 initialised on 7 December 1961.
The Indian government founded the funds to promote the economy and used the slogan "Developing
Banking". The government of India restructured the national bank market and nationalised a lot of
institutes. As a result, the RBI had to play the central part in controlling and supporting this public banking sector.
1969–1984
In
1969, the Indira Gandhi-headed government nationalised 14 major commercial
banks. Upon Indira Gandhi's return to
power in 1980, a further six banks were nationalised. 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 lend money in selected sectors, like agricultural business and small trade companies. The Banking
Commission was established on Wednesday, 29 January 1969, to analyse
banking costs, effects
of legislations and banking procedures, including non-banking financial intermediaries and indigenous
banking on Government of India economy;
with 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.
1985–1990
A
lot of committees analysed the Indian economy between 1985 and 1989. 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 investor 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 liberalisation.
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 liberalisation to diversify owner structures in 1998.
The
National Stock Exchange of India took the trade on in June 1994 and the RBI
allowed nationalised 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.
2000
- 2009
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.
Since 2010
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.
In
April 2018, the RBI announced that "entities regulated by RBI shall not
deal with or provide services
to any individual or business
entities dealing with or settling
virtual currencies," including
Bitcoin. While the RBI later clarified
that it "has not prohibited" virtual currencies, a three-judge panel of the Supreme Court
of India issued a ruling on 4 March
2020 that the RBI had failed to show "at least some semblance of any
damage suffered by its regulated entities" through
the handling of virtual currencies to justify its decision. The court challenge was filed by the Internet
and Mobile Association of India, whose members
include some cryptocurrency exchanges whose businesses suffered
following the RBI's 2018 order.
COMPOSITION OF CENTRAL BOARD
The
Central Board consists of Governor, deputy Governor, Ten Director nominated by
the Central Government and two Government official
nominated by the Central Government. The deputy Governor and Director are eligible to attend
meeting of the Central Board but are not
entitled to vote. The Governor and deputy Governor hold office for term of five
years and are entitled for a re-
appointment. The Directors are appointed for a term of four and hold office during the pleasure of the
president. The meeting of the Central Board is convened at least six
times in a year.
COMPOSITION OF LOCAL BOARD
A local board is formed in each four zones consisting of five members
which are appointed
by the Central Government. There
is Chairperson of the Board who is elected among
the member. The members of the Board have a hold office for a term of
four years and eligible for
reappointment. The Local Board advice on matters referred to it by the Central
Board and performs duties delegated to it by the Central Board.
ORGANISATIONAL STRUCTURE OF THE
RBI
The
central board of directors is the main committee of the central bank. The
Government of India appoints the
directors for a four-year term. The board consists of a governor, and not more than four deputy governors; four directors to represent the regional boards two – usually
the Economic Affairs Secretary and the Financial Services Secretary – from the Ministry of Finance and ten other
directors from various fields. The Reserve Bank – under Raghuram Rajan's governorship – wanted to create a post of a
chief operating officer (COO), in the
rank of deputy governor and wanted to re-allocate work between the five of them
(four deputy governor and COO).[5]
Two
of the four deputy governors are traditionally from RBI ranks and are selected
from the bank's executive directors.
One is nominated from among the chairpersons of public sector banks and the other is an economist. An
Indian Administrative Service officer can also be appointed as deputy governor of RBI and later as the governor of
RBI as with the case of Y. Venugopal
Reddy and Duvvuri Subbarao. Other persons forming part of the central board of directors of the RBI are Nachiket Mor, Y.
C. Deveshwar, Prof Damodar Acharya, Ajay Tyagi
and Anjuly Duggal.
Executive Directors (ED) consist of M. Rajeshwar Rao,
Lily Vadera, Rabi N. Mishra, Smt. Nanda
S. Dave, Anil K. Sharma, S. C. Murmu, T. Rabi Sankar, Janak Raj, P Vijayakumar, Indrani
Banerjee, O.P. Mall and Sudha
Balakrishnan (Chief Financial Officer).[6]
Sudha Balakrishnan, a former vice-president at National Securities Depository Limited, assumed charge as the first chief
financial officer (CFO) of the Reserve Bank on 15 May 2018; she was given
the rank of an executive director.
The
bank's current governor is Shaktikanta Das. There are currently four deputy
governors Mahesh Kumar Jain, M.
Rajeshwar Rao, Michael Patra
and T. Rabi Shankar.
OBJECTIVE OF RBI
RBI
was nationalised in 1949 and since come under the full ambit of the Ministry of
Finance, Government of India.
The
purpose of the RBI is to regulate the issuance of banknotes and the maintenance
of reserves in order to ensure
monetary stability in India and, more generally, to operate the nation’s
currency and credit system to its advantage.
ROLE OF RESERVE BANK OF INDIA[7]
1. Monetary Management - The
development and implementation of monetary policy and ensuring monetary stability in India are two of the RBI's most
crucial responsibilities. It makes use of
the credit and monetary systems for its benefit.
2. Supervision and Regulation of Banking and Non-Banking
Financial Institutions - The RBI
serves to protect the interests of depositors through an effective regulatory
framework. keeping a close check on
how banking operations are being conducted and the bank's solvency,
as well as preserving overall
financial stability through
a variety of policy actions.
3. Regulation
of Foreign Exchange Market, Government Securities Market, and Money Market
? The RBI is in charge of regulating the
Indian foreign exchange market. Through the provisions
of the FEMA Act 1999, RBI monitors and controls the foreign exchange market.
? The central and state governments'
trade securities are governed by the RBI. The RBI Act of 1934 gives
it the authority to regulate
this.
? The
RBI has the authority to regulate short-term and highly liquid debt securities under the terms of the RBI Act of 1934.
4. Foreign Exchange
Reserve Management
The RBI is in charge of looking after India's
foreign exchange reserves.
The RBI Act of 1934 contains legal
provisions relating to the administration of foreign exchange reserves.
The RBI is allowed
to invest these
foreign exchange reserves
in the following instruments under
the RBI Act of 1934:
? Place
a deposit with international banks.
? With
overseas commercial banks,
make a deposit.
? Instruments of Debt
5. Bankers to the Central and State Governments - The RBI
serves as the government's banker.
The RBI is in charge of receiving and disbursing funds on behalf of the various government agencies. The Central
and State Governments' Consolidated Funds, Contingency Funds, and Public Accounts are
all maintained by the RBI. As a lender to the
government, the RBI also
extends loans to the union and
federal governments.
6. Advisor to the Government - The RBI
provides financial and banking-related advice to the government as and when requested.
7. Central and State Governments' Debt Manager - The primary
goals of the debt management strategy are to reduce borrowing costs and even out the debt's maturity
structure. On behalf
of the federal government and state governments, the RBI manages
the nation's debt and issues fresh loans.
8. Banker to Bank - In order to maintain their
SLR and CRR, banks open current accounts with
the RBI. The RBI serves as a central banker for all of the individual banks and facilitates the settlement of money transfers
between banks. The RBI gives banks emergency
loans and short-term credit for certain needs.
9. Issuer of Currency - The RBI is
in charge of the printing and overall administration of the national currency, with the aim of
releasing a sufficient quantity of authentic notes and maintaining the flow of
the economy.
10.
Developmental
Role - The RBI's role in economic development includes setting up organisations to construct financial
infrastructure, ensuring credit to the economy's productive sector, and increasing access to accessible financial
systems.
KEY FEATURES
RELATED TO THE
FUNCTIONS OF RBI[8]
• RBI is
authorised to issue various guidelines for bank directors and has the power to appoint
additional directors to the board
of a banking company.
• Prior
approval of RBI is important for the appointment, reappointment, and
termination of the Chairman, Managing
Director, and CEO of Commercial Banks (except PSBs).
• If the situation arises then RBI with the approval of the Central
Government can take the place of
the Board of Directors of Commercial Banks.
• Public
Sector Banks (PSBs) come under dual regulation of the Central Government and RBI so the RBI’s power regarding the PSBs is curtailed as it cannot
remove the directors and management and cannot
supersede the board of Banks also cannot enforce mergers.
• RBI
regulates the interest rate on NRI deposits, export credits (loans), and a few
other categories. However, the
interest rate on most of the categories of deposit and lending have been deregulated so the banks are responsible for determining
such rates.
• RBI set up Deposit
Insurance and Credit
Guarantee Corporation (DICGC)
for the protection of the interest of small
depositors in case of bank failure or bankruptcy (100% subsidy). It provides insurance cover to all eligible bank
depositors up to 5 lakhs per depositor
per bank. To provide
insurance coverage, it charges premiums
from banks. DICGC covers all
commercial banks including foreign bank branches as well along with UCBs/StCBs/DCCBs. But it is important to note that it
does not cover deposits of foreign governments, deposits of Central
and State governments, and interbank deposits.
• RBI has
permitted the banks to undertake some non-traditional banking activities such as venture capital, insurance, mutual fund business, etc.
• Cooperative
Banks- Cooperative Banks come under the dual regulation of RBI and the Government. Both the authorities have
different fields to work on as RBI manages the
banking-related functions and Central Government or State Government
manages the management-related functions.
• Financial
Institutions, NBFCs, Primary Dealers, and Credit Information Companies (CIC)- The four all-India financial
institutions named NABARD, NHB, EXIM Bank, and SIDBI are under full-fledged
regulation and supervision of RBI.
• NBFCs,
Primary Dealers and CICs also come under the regulation and supervision of RBI.
CONCLUSION
The
research paper delves into the comprehensive role of the Reserve Bank of India
(RBI) in the Indian banking system.
It explores the RBI's regulatory responsibilities, monetary policy formulation, financial inclusion
initiatives, development of the banking sector, consumer protection measures, and the challenges faced by the RBI. By
analysing these aspects, the paper
provides valuable insights into the functioning of the RBI and its impact on
the stability and growth of the Indian banking system.
[1] Wikipedia.
Reserve Bank of India. Last Updated on:26 May 2023, at 18.06. Available at:
https://en.wikipedia.org/wiki/Reserve_Bank_of_India.
[2] "Reserve
Bank of India". www.rbi.org.in. Archived
from the original on 16 July 2020. Retrieved 16 July 2020.
[3] The
Reserve Bank of India Act, 1934 Archived 25 February 2017 at the Wayback
Machine. rbi.org.in
[4] Jadhav,
Narenda; Ray, Partha; Bose, Dhritidyuti; Gupta, Indranil Sen (2003). "The
Reserve Bank of India's Balance Sheet: Analytics and Dynamics of
Evolution" (PDF). Reserve Bank of India Occasional Papers. 24 (3): 16.
Archived (PDF) from the original on 9 February 2022.
Retrieved 26 December 2018.
[5] "RBI
Proposes COO Post in Rank of Deputy Governor". NDTV. 14 August 2014.
Archived from the original on 3 August 2018. Retrieved 7 April 2021.
[6] "Reserve
Bank of India". m.rbi.org.in. Archived from the original on 6 August 2020.
Retrieved 25 June 2020.
[7] Role
and Functions of Reserve Bank of India. Last Updated on May 17, 2023. Available
on: https://testbook.com/banking-awareness/functions-of-rbi
[8] Functions
of RBI. Clear IAS. Last Updated on October 31, 2022 by Clearias Team. Available
on: https://www.clearias.com/functions-of-rbi/
Article Information
THE ROLE OF THE RBI IN THE INDIAN BANKING SYSTEM
Authors: PRACHI JOSHI
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/06/14
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
- Access Open Access
- License CC 4.0
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