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Tuesday, April 28, 2015

RBI - Need, Objectives and Functions


The Reserve Bank of India is the Central Bank of our country. The Reserve Bank of India is the apex financial institution of the country’s financial system entrusted with the task of control, supervision, promotion, development and planning. Reserve Bank of India came into existence on 1st April, 1935 as per the Reserve Bank of India act 1935. But the bank was nationalised by the government after Independence. It became the public sector bank from 1st January, 1949. Thus, Reserve Bank of India was established as per the Act 1935 and empowerment took place in Banking Regulation Act 1949.

The Reserve Bank of India influences the management of commercial banks through its various policies, directions and regulations. Its role in bank management is quite unique. In fact, the Reserve Bank of India performs the four basic functions of management, viz., planning, organising, directing and controlling in laying a strong foundation for the functioning of commercial banks. Reserve Bank of India has 4 local boards basically in North, South, East and West – Delhi, Chennai, Calcutta, and Mumbai.

Need and Objectives of RBI
The main objectives of the RBI are contained in the preamble of the RBI Act, 1934. It reads ‘Whereas it is expedient to constitute a Reserve Bank for India 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. RBI keeps importance because it was constituted for the following needs:

(i) To maintain monetary stability such that the business and economic life of the country can deliver the welfare gains of a mixed economy.

(ii) To maintain financial stability and ensure sound financial institutions so that economic units can conduct their business with confidence, 

(iii) To maintain stable payment systems, so that financial transactions can be safely and efficiently executed, 

(iv) To ensure that credit allocation by the financial system broadly reflects the national economic priorities and social concerns.

(v) To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of price stability, 

(vi) To promote the development of financial markets and systems to enable itself to operate/regulate efficiently.

Important functions of Reserve Bank of India are briefed below
i) Monopoly in Note Issue: - Reserve Bank of India enjoys monopoly of Notes issue since its establishment. The bank issues the currency notes of all denominations. Except coins which are issued by the ministry of finance in the government of India. But these coins are put into circulation only through the RBI. The Bank (RBI) issue currencies to a minimum reserve system under which Rs 200/- crores worth of Gold and foreign exchange reserve should be kept out of these 200 crores, 115 crores values should be in the form of Gold only. To undertake this function
RBI established 2 department i.e.
a) Issue Department
b) Banking department
Issue department is involved in issue of currencies and manages currencies circulation.

ii) Banker to the Government: - Reserve Bank of India acts as a banker to the central and state Government. As a banker it provides all the services like a commercial bank to these Governments. It accepts deposits of the Government and allows them to withdrawal of cheques.
It makes payments and collect receipts on behalf of the government. It also provides temporary advances for maximum period of 3 months to these governments. It is known as “Ways” and “Means advances”. It is also the financial advisor to the central and states. It also helps them in formulation of financial policies.

iii)Banker’s bank: - Reserve Bank of India is the apex financial institution acts as banker to other bank. RBI accepts deposits, maintains cash reserves and lends loans to all the banks operating under its preview. It is a banker’s bank in the following grounds: It provides short-term loans to the banks for 3 months against (security) i.e. eligible securities. It is known as lenders of last resort in the times of financial emergency. It also gives loans at concessional rate of Interest for a specific purpose. It also offers refinance facilities to all the eligible banks.

iv) Regulatory and Supervision Function: -The most significant provision of the Banking regulation act is supervision and regulation of banks. Further, it issued licensing for the banks and can establish new branches to maintain regional balance in the country. It also arranges for training colleges to the banks employees and officers.

v) Controller of Credit: - Reserve Bank of India is an important controller of credit in our credit. The credit created by bank leads to inflation or depression and disturbs the smooth functioning of the economy. Therefore, to regulate credit Reserve Bank of India uses qualitative as well as Quantitative credit control measures.