Functions of RBI

The Reserve Bank of India (RBI), is the Central Bank of the country. The Functions of RBI include the regulation and function of the Indian Banking System.

RBI, also called the Monetary Authority of India, was set up on the recommendation of the Hilton Young Commission.

The statutory status of the RBI is provided under the Reserve Bank of India Act of 1934 and became operational on April 1, 1935.

Moreover, when RBI came into force it took over the functions of Government so far being performed by the Controller of Currency and from the Imperial Bank of India.

Additionally, after India’s Partition, The RBI served as the Central Bank of Pakistan up to June 1948.

Also read: History of Banking in India

Objective of RBI

RBI was nationalized 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.

The organization also aims to maintain macroeconomic stability, financial stability, and a modern monetary policy framework in order to address the challenges posed by an increasingly complex economy.

Structure of RBI

The affairs of RBI are governed by a central board of directors.

There could be a maximum of 21 members on the central board of directors including the governor and four deputy governors who are appointed by the Government of India in keeping with the RBI Act, 1934 for a period of 4 years.

Also read: Government Securities Market

Functions of RBI

The RBI performs the following functions:

1)Monetary Management/Authority

One of the most important functions of RBI is the formulation and execution of Monetary Policy and securing monetary stability in India It functions the currency and credit system to its advantage.

2) Supervision and Regulation of Banking and Non-Banking Financial Institutions

RBI functions to protect the Interests of depositors through an effective regulatory framework. Keeping a keen eye over the conduct of banking operations and solvency of the banks along with maintaining the overall financial stability through various policy measures.

These powers of RBI come from the RBI ACt 1934 and the Banking Regulation Act 1949.

This regulatory and supervisory function of the RBI extends to the Indian Banking System as well as Non-Banking Financial Institutions.

3) Regulation of Foreign Exchange Market, Government Securities Market, and Money Market

Foreign Exchange Market: The Foreign Exchange Management Act 1999 came into light after the liberalization measures introduced in 1991. FEMA 1991 replaced the FERA 1973 and came into effect in June 2022.

So now, the RBI is responsible for overseeing the foreign exchange market in India. RBI supervises and regulates the Foreign Exchange Market through the provision of the FEMA Act 1999.

Government Securities Market: RBI regulates the trade securities issued by the Central and State governments. For regulation of this, RBI derives its power from the RBI Act of 1934.

Money Market: Short-term and highly liquid debt securities are also regulated by RBI and for this RBI derives its powers from the RBI Act 1934.

4) Foreign Exchange Reserve Management

Foreign exchange reserves include-

• Foreign Currency Assets (FRAs)
• Special Drawing Rights (SDRs)
• Gold

RBI is the custodian of India’s foreign exchange reserves. The legal provision regarding the management of foreign exchange reserves is mentioned in the RBI Act 1934.

The RBI Act of 1934 permits the RBI to invest these foreign exchange reserves in the following instruments-

• Deposit with Banks for International Settlement
• Deposit with foreign Commercial Banks
• Debt Instruments
• Other instruments with approval of the Central Banks of RBI

5) Bankers to Central and State Government

RBI acts as a banker to the government. RBI is the responsible agency for receiving and paying money on behalf of the various government departments.

RBI is also authorized to appoint other banks to act as its agent and undertake banking business on the behalf of the government.

RBI maintains Central and State Government funds like Consolidated Funds, Contingency Funds, and Public Account.

RBI also provides loans to the central/State/UT Government as a banker to the government.

Also read: Loan Loss Provisions

6) Advisor to the Government

RBI acts as an advisor to the government when called upon to do so on financial and banking-related matters.

7) Central and State Government’s Debt Manager

The debt management policy mainly aims at minimizing the cost of borrowing and smoothening the maturity structure of debt. RBI manages the public debt and also issues new loans on behalf of central and state governments.

8) Banker to Banks

Banks open their current account with RBI to maintain SLR and CRR.

RBI is a common banker for the different banks that enables the settlement of interbank transfers of funds.

For special purposes or in need, RBI provides short-term loans and advances to banks

9) RBI- Lender of last resort

That means RBI comes to rescue the banks that are solvent (facing temporary liquid problems) but have not gone bankrupt. RBI provides this facility to protect the interest of depositors and to prevent the possible failure of the bank.

10) RBI- Issuer of Currency

The RBI and the government are in charge of the creation, manufacturing, and overall administration of the national currency to release a sufficient quantity of authentic and clean notes.

The Reserve Bank of India has given some bank branches permission to set up currency chests to simplify the circulation of rupee notes and coins around the nation (A currency chest is a storehouse where currency notes and rupee coins are stocked on behalf of RBI)

11) Developmental Role

RBI’s developmental role includes creating institutions to build financial infrastructure, ensuring credit to the productive sector of the economy, and expanding access to affordable financial systems.

Following are the several schemes that come under RBI’s developmental roles-

Priority Sector Lending

As per RBI, priority sectors are those sectors of the economy that may not get timely and sufficient credit in the absence of these special schemes.

Priority sector guidelines don’t provide a preferential interest rate for loans to the sector. These small-value loans typically run to those sections of the population that are weaker sections of society and need special attention and to the section intensively employed in agriculture and small enterprises.

A list of Priority Sectors are-

1. Agriculture
2. MSME
3. Export
4. Education
5. Housing
6. Social Infrastructure
7. Renewable Energy
8. Others
9. Weaker Sections

• Commercial Banks including foreign banks- 40% of total loan to PSL
• Regional Rural Banks- 75%
• Small Finance Banks- 75%
• Payment Bank- They do not give Credit
• Urban (primary) cooperative banks- 40% (will increase to 75% by 2024 in a phased manner)

Lead Bank Scheme

lead Bank Scheme Introduced by RBI in 1969 aims at coordinating the activities of banks and other developmental agencies to enhance the flow of bank finance to priority sectors and other sectors to promote the bank’s role in overall development.

12) Data Dissemination/Policy Research

Such research undertaken by RBI focuses on issues and problems arising at the national and international levels, having a critical impact on the Indian economy.

India is a signatory of Special Data Dissemination Standards (SDDS) as defined by IMF to release data.

RBI has some legal obligations over him under the RBI Act. One of them is to publish two reports every year. One is, the Annual Report, and the other is the Report on Trends and Progress of Banking in India.

RBI conducts Consumer Confidence Survey and Inflation Expectation Survey every quarter.

Key Features Related to the Functions of RBI

• RBI is authorized 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.
• As per RBI’s regulation, Banks needed to maintain certain reserves in the form of CRR and SLR.
• 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 the 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. However, 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 the 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.
• Note: RBI is authorized to regulate banks and NBFCs but till July 2019, RBI had the power to take the place of the Board of Banks (in case of any mismanagement or default) but not of NBFCs. In July 2019 an amendment was made to the RBI Act 1934 that empowers the RBI to supersede the bank of NBFCs also in case of mismanagement or default. RBI now has the power to appoint administrators as well in the public interest.

Article Written By: Priti Raj