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Hitesh Soni (0854)
Suresh Chaudhary (0805)


MS. Khushbu Shah




The Preamble of the Reserve Bank of India describes the basic functions of the Reserve
Bank as:

" regulate the issue of Bank Notes and keeping of 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 Reserve Bank of India is the central bank of India, and was established on April 1,
1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The
Central Office of the Reserve Bank was initially established in Kolkata but was
permanently moved to Mumbai in 1937. Though originally privately owned, the RBI has
been fully owned by the Government of India since nationalization in 1949.

Duvvuri Subbarao who succeeded Yaga Venugopal Reddy on September 2, 2008 is the
current Governor of RBI.

The Reserve Bank of India was set up on the recommendations of the Hilton Young
Commission. The commission submitted its report in the year 1926, though the bank was
not set up for nine years.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve
Bank as to regulate the issue of Bank Notes and keeping of 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.

It has 22 regional offices, most of them in state capitals.

RBI was started with a paid up share capital of 5 crore.on established it took over the
function of management of currency from government of India and power of credit
control from imperial bank of india.


Nationalization of RBI:
 With a view to have a cordinated regulation of Indian banking Indian Banking
Act was passed in march 1949. To make RBI more powerful the Govt. of India
nationalised RBI on January 1, 1949.

 The general superintendence and direction of the Bank is entrusted to Central

Board of Directors of 20 members, the Governor and four Deputy Governors, one
Government official from the Ministry of Finance, ten nominated Directors by the
Government to give representation to important elements in the economic life of
the country, and four nominated Directors by the Central Government to represent
the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and
New Delhi.

 Local Boards consist of five members each Central Government appointed for a
term of four years to represent territorial and economic interests and the interests
of co-operative and indigenous banks.

The Reserve Bank of India was nationalized with effect from 1st January, 1949 on the
basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All shares
in the capital of the Bank were deemed transferred to the Central Government on
payment of a suitable compensation. The image is a newspaper clipping giving the views
of Governor CD Deshmukh, prior to nationalization





Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank
notes of all denominations. The distribution of one rupee notes and coins and small coins all over
the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank
has a separate Issue Department which is entrusted with the issue of currency notes. The assets
and liabilities of the Issue Department are kept separate from those of the Banking Department.
Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold
coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40
crores in value. The remaining three-fifths of the assets might be held in rupee coins,
Government of India rupee securities, eligible bills of exchange and promissory notes payable in
India. Due to the exigencies of the Second World War and the post-was period, these provisions
were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold
and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in
gold. The system as it exists today is known as the minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of India is to act as Government banker,
agent and adviser. The Reserve Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the
obligation to transact Government business, via. to keep the cash balances as deposits free of
interest, to receive and to make payme exchange remittances and other banking operations. The
Reserve Bank of India helps the Government - both the Union and the States to float new loans
and to manage public debt. The Bank makes ways and means advances to the Governments for
90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the
Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking
Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a
cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in
India. By an amendment of 1962, the distinction between demand and time liabilities was
abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate
deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of


The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by rediscounting bills of
exchange. Since commercial banks can always expect the Reserve Bank of India to come to their
help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the
lender of the last resort.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume
of credit created by banks in India. It can do so through changing the Bank rate or through open
market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India
can ask any particular bank or the whole banking system not to lend to particular groups or
persons on the basis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the Indian money
market. Every bank has to get a licence from the Reserve Bank of India to do banking business
within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions
are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can
open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank
showing, in detail, its assets and liabilities. This power of the Bank to call for information is also
intended to give it effective control of the credit system. The Reserve Bank has also the power to
inspect the accounts of any commercial bank.

As supereme banking authority in the country, the Reserve Bank of India, therefore, has the
following powers:
(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative controls.

(c) It controls the banking system through the system of licensing, inspection and calling for

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of exchange.
According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at
fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed
was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d.
though there were periods of extreme pressure in favour of or against


the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve
Bank has the responsibility of maintaining fixed exchange rates with all other member countries
of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the
custodian of India's reserve of international currencies. The vast sterling balances were acquired
and managed by the Bank. Further, the RBI has the responsibility of administering the exchange
controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking in
India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI
wide powers of supervision and control over commercial and co-operative banks, relating to
licensing and establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to
carry out periodical inspections of the banks and to call for returns and necessary information
from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed
new responsibilities on the RBI for directing the growth of banking and credit policies towards
more rapid development of the economy and realisation of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the standard of banking
in India to develop on sound lines and to improve the methods of their operation.

Promotional functions

With economic growth assuming a new urgency since Independence, the range of the Reserve
Bank's functions has steadily widened. The Bank now performs a varietyof developmental and
promotional functions, which, at one time, were regarded as outside the normal scope of central
banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to
rural and semi-urban areas, and establish and promote new specialised financing agencies.
Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial
Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in
1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set
up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings,
and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve
Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only
since 1951 the Bank's role in this field has become extremely important. The Bank has
developed the co-operative credit movement to encourage saving, to eliminate moneylenders
from the villages and to route its short term credit to agriculture. The RBI has set up the
Agricultural Refinance and Development Corporation to provide long-term finance to farmers.


Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI are related to
control and regulation of money and credit, i.e., issue of currency, control of bank credit, control
of foreign exchange operations, banker to the Government and to the money market. Monetary
functions of the RBI are significant as they control and regulate the volume of money and credit
in the country.

Equally important, however, are the non-monetary functions of the RBI in the context of India's
economic backwardness. The supervisory function of the RBI may be regarded as a non-
monetary function (though many consider this a monetary function). The promotion of sound
banking in India is an important goal of the RBI, the RBI has been given wide and drastic
powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks,
branch expansion, liquidity of their assets, management and methods of working, inspection,
amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the
working of banks has greatly improved. Commercial banks have developed into financially and
operationally sound and viable units. The RBI's powers of supervision have now been extended
to non-banking financial intermediaries. Since independence, particularly after its nationalisation
1949, the RBI has followed the promotional functions vigorously and has been responsible for
strong financial support to industrial and agricultural development in the country.


 Objective
The objectives of bank regulation, and the emphasis, varies between jurisdiction. The
most common objectives are:

1. Prudential -- to reduce the level of risk bank creditors are exposed to (i.e. to
protect depositors)
2. Systemic risk reduction -- to reduce the risk of disruption resulting from adverse
trading conditions for banks causing multiple or major bank failures
3. Avoid misuse of banks -- to reduce the risk of banks being used for criminal
purposes, e.g. laundering the proceeds of crime
4. To protect banking confidentiality
5. Credit allocation -- to direct credit to favored sectors

General principles of bank regulation

Banking regulations can vary widely across nations and jurisdictions. This section of the
article describes general principles of bank regulation throughout the world.

Minimum requirements

Requirements are imposed on banks in order to promote the objectives of the regulator.
The most important minimum requirement in banking regulation is maintaining minimum
capital ratios.

Supervisory review

Banks are required to be issued with a bank license by the regulator in order to carry on
business as a bank, and the regulator supervises licenced banks for compliance with the
requirements and responds to breaches of the requirements through obtaining
undertakings, giving directions, imposing penalties or revoking the bank's licence.


Market discipline

The regulator requires banks to publicly disclose financial and other information, and
depositors and other creditors are able to use this information to assess the level of risk
and to make investment decisions. As a result of this, the bank is subject to market
discipline and the regulator can also use market pricing information as an indicator of the
bank's financial health.

Instruments and requirements of bank regulation

Capital requirement

The capital requirement sets a framework on how banks must handle their capital in
relation to their assets. Internationally, the Bank for International Settlements' Basel
Committee on Banking Supervision influences each country's capital requirements. In
1988, the Committee decided to introduce a capital measurement system commonly
referred to as the Basel Capital Accords. The latest capital adequacy framework is
commonly known as Basel II. This updated framework is intended to be more risk
sensitive than the original one, but is also a lot more complex.

Reserve requirement

The reserve requirement sets the minimum reserves each bank must hold to demand
deposits and banknotes. This type of regulation has lost the role it once had, as the
emphasis has moved toward capital adequacy, and in many countries there is no
minimum reserve ratio. The purpose of minimum reserve ratios is liquidity rather than
safety. An example of a country with a contemporary minimum reserve ratio is Hong
Kong, where banks are required to maintain 25% of their liabilities that are due on
demand or within 1 month as qualifying liquefiable assets.

Reserve requirements have also been used in the past to control the stock of banknotes
and/or bank deposits. Required reserves have at times been gold coin, central bank
banknotes or deposits, and foreign currency.

Corporate governance

Corporate governance requirements are intended to encourage the bank to be well

managed, and is an indirect way of achieving other objectives. Requirements may


1. To be a body corporate (i.e. not an individual, a partnership, trust or other
unincorporated entity)
2. To be incorporated locally, and/or to be incorporated under as a particular type of
body corporate, rather than being incorporated in a foreign jurisdiction.
3. To have a minimum number of directors
4. To have an organizational structure that includes various offices and officers, e.g.
corporate secretary, treasurer/CFO, auditor, Asset Liability Management
Committee, Privacy Officer etc. Also the officers for those offices may need to be
approved persons, or from an approved class of persons.
5. To have a constitution or articles of association that is approved, or contains or
does not contain particular clauses, e.g. clauses that enable directors to act other
than in the best interests of the company (e.g. in the interests of a parent
company) may not be allowed.

Financial reporting and disclosure requirements

1. Prepare annual financial statements according to a financial reporting standard,

have them audited, and to register or publish them
2. Prepare more frequent financial disclosures, e.g. Quarterly Disclosure Statements
3. Have directors of the bank attest to the accuracy of such financial disclosures
4. Prepare and have registered prospectuses detailing the terms of securities it issues
(e.g. deposits), and the relevant facts that will enable investors to better assess the
level and type of financial risks in investing in those securities.

Credit rating requirement

Banks may be required to obtain and maintain a current credit rating from an approved
credit rating agency, and to disclose it to investors and prospective investors. Also, banks
may be required to maintain a minimum credit rating.

Large exposures restrictions

Banks may be restricted from having imprudently large exposures to individual

counterparties or groups of connected counterparties. This may be expressed as a
proportion of the bank's assets or equity, and different limits may apply depending on the
security held and/or the credit rating of the counterparty.

Related party exposure restrictions

Banks may be restricted from incurring exposures to related parties such as the bank's
parent company or directors. Typically the restrictions may include:

 Exposures to related parties must be in the normal course of business and on

normal terms and conditions


 Exposures to related parties must be in the best interests of the bank
 Exposures to related parties must be not more than limited amounts or proportions
of the bank's assets or equity.

One of the more pleasant aspects of the latest quarterly Monetary Policy Review is the
attempt by the Reserve Bank of India to be as predictable as possible, or at least less
disruptive than it has been before. The notion that some elements of a tighter money
policy would be announced was pretty much to be expected. While raising repo rates by
25 basis points and leaving other indicators of liquidity unchanged, the RBI Governor, Dr
Y. V. Reddy, has tried to play both policeman and purveyor of optimism, the former by
raising marginally the cost of capital for banks through the repo rate hike, and the latter
by selectively pushing up the provisioning norms for certain categories of borrowers
hoping thereby to catch inflation by the scruff and pull it back within the 5.5 per cent

Lest the markets think the RBI is a killjoy, in its combat against inflation, the Governor
has raised the bar on growth expectations jettisoning his earlier forecast and the prognosis
of North Block for a 9 per cent GDP target for this waning fiscal. He has tried therefore
to be all things to all men, in the bargain creating a dilemma that may not augur well for
the economy in the medium to long term. The basic problem is that the RBI cannot hope
to both fight inflation and propel growth to the levels it wants with the measures it has so
far set in motion. Controls on credit expansion for select categories with inflation
potential — capital markets and commercial real-estate — through higher provisioning
may choke demand only if it is sensitive to the cost of credit. But in a booming economy,
higher costs can be transmitted down the line; witness the rising housing loan rates. In
many a high-flying sector banks may, therefore, still find takers for expensive credit.
Regardless of the RBI's marginal increase in repo rates, the perception of a tighter money
regime will push up interest rates all around, thus contributing to the price rise instead of
combating it.

Given the nature of inflation, currently at a two-year high, the task of fighting it lies with
New Delhi. The Government must put together a gamut of measures to remove the
supply bottlenecks that are causing the price rise. The RBI admits that the growth in
agriculture has "not been sanguine" with the declining output in major cereals pushing up
prices. Focusing its Monetary Policy weapons on "credit quality" and, therefore, the
health of the banking system, the RBI has prudently left this initiative to New Delhi.



The central bank makes efforts to control the expansion or contraction of credit in order
to keep it at the required level with a view to achieving the following ends.

1. To save Gold Reserves: The central bank adopts various measures of credit control to
safe guard the gold reserves against internal and external drains.

2. To achieve stability in the Price level: Frequently changes in prices adversely affect the
economy. Inflationary and deflationary trends need to be prevented. This can be achieved
by adopting a judicious of credit control.

3. To achieve stability in the Foreign Exchange Rate: Another objective of credit control
is to achieve the stability of foreign exchange rate. If the foreign exchange rate is
stabilized, it indicates the stable economic conditions of the country.

4. To meet Business Needs: According to Burgess, one of the important objectives of

credit control is the “Adjustment of the volume of credit to the volume of Business”
credit is needed to meet the requirements of trade an industry. So by controlling credit
central bank can meet the requirements of business.



There are two method of credit control:-

 Quantitative method
1. Bank Rate Policy
2. Open Market Operations
3. Change in Reserve Ratios
4. Credit Rationing

 Qualitative method
1. Direct Action
2. Moral persuasion
3. Legislation
4. Publicity

Quantitative method

1. Bank Rate Policy: Bank rate is the rate of interest which is charged by the central
bank on rediscounting the first class bills of exchange and advancing loans against
approved securities. This facility is provided to other banks. It is also known as Discount
Rate Policy.

2. Open Market Operations: The term “Open Market Operations” in the wider sense
means purchase or sale by a central bank of any kind of paper in which it deals, like
government securities or any other public securities or trade bills etc. in practice,


however the term is applied to purchase or sale of government securities, short-term as
well as long-term, at the initiative of the central bank, as a deliberate credit policy.

3. Change in Reserve Ratios: Every commercial bank is required to deposit with the
central bank a certain part of its total deposits. When the central bank wants to expand
credit it decreases the reserve ratio as required for the commercial banks. And when the
central bank wants to contract credit the reserve ratio requirement is increased.

4. Credit Rationing: Credit rationing means restrictions placed by the central bank on
demands for accommodation made upon it during times of monetary stringency and
declining gold reserves. This method of controlling credit can be justified only as a
measure to meet exceptional emergencies because it is open to serious abuse.

5. CRR(Cash Reserve Ratio):Cash reserve Ratio (CRR) is the amount of Cash(liquid

cash like gold)that the banks have to keep with RBI. This Ratio is basically to secure
solvency of the bank and to drain out the excessive money from the banks. If RBI decides
to increase the percent of this, the available amount with the banks comes down and if
RBI reduce the CRR then available amount with Banks increased and they are able to
lend more.RBI has reduced this ratio three times and reduced it from 9 % to 5.5% in last
one month or so.
6. Repo Rate:Repo rate is the rate at which our banks borrow rupees from RBI. This
facility is for short term measure and to fill gaps between demand and supply of money in
a bank .when a bank is short of funds they they borrow from bank at repo rate and if bank
has a surplus fund then the deposit the funds with RBI and earn at Reverse repo rate .So
reverse Repo rate is the rate which is paid by RBI to banks on Deposit of funds with
RBI.A reduction in the repo rate will help banks to get money at a cheaper rate. When the
repo rate increases borrowing from RBI becomes more
expensive.To borrow from RBi bank have to submit liquid bonds /Govt Bonds as
collateral security
,so this facility is a short term gap filling facility and bank does not use this facility to
Lend more to
their customers.present rate is 7.5% and reverse repo rate is 6%.

7. SLR((Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain

in the form of cash, or gold or govt. approved securities (Bonds) before providing credit
to its customers. SLR rate is determined and maintained by the RBI (Reserve Bank of
India) in order to control the expansion of bank credit.Generally this mandatory ration is
complied by investing in Govt bonds.present rate of SLR is 24 %.But Banks average is
27.5 % ,the reason behind it is that in deficit budgeting Govt landing is more so they
borrow money from banks by selling their bonds to banks have invested more
than required percentage and use these excess bonds as collateral security ( over and
above SLR )to avail short term Funds from the RBI at Repo rate.


Qualitative method

1. Direct Action: The central bank may take direct action against commercial
banks that violate the rules, orders or advice of the central bank. This
punishment is very severe of a commercial bank.

2. Moral persuasion: It is another method by which central bank may get

credit supply expanded or contracted. By moral pressure it may prohibit or
dissuade commercial banks to deal in speculative business.

3. Legislation: The central bank may also adopt necessary legislation for
expanding or contracting credit money in the market.

4. Publicity: The central bank may resort to massive advertising campaign in

the news papers, magazines and journals depicting the poor economic
conditions of the country suggesting commercial banks and other financial
institutions to control credit either by expansion or by contraction.




 M.Y. Khan –Indian financial system

 Sudhir shah-Indian economy