OVERVIEW OF RBI

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. 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.

ROLE OF RESERVE BANK OF INDIA

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. 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 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. 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.

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. 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. Supervisory functions In addition to its traditional central banking functions, the Reserve bank has certain nonmonetary 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. 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 variety of 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 semiurban areas, and establish and promote new specialised financing agencies. 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.

REGULATION OF BANKING SYSTEM

Objective The objectives of bank regulation, and the emphasis, vary between jurisdictions. The most common objectives are: 1. Prudential 2. Systemic risk reduction 3. Avoid misuse of banks 4. To protect banking confidentiality 5. Credit allocation 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. Reserve requirement The reserve requirement sets the minimum reserves each bank must hold to demand deposits and banknotes. Corporate governance Corporate governance requirements are intended to encourage the bank to be well managed, and is an indirect way of achieving other objectives. Financial reporting and disclosure requirements Prepare annual financial statements according to a financial reporting standard, have them audited, and to register or publish them 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. Related party exposure restrictions Banks may be restricted from incurring exposures to related parties such as the bank's parent company or directors.

CREDIT CONTROL
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 limit.

OBJECTIVE OF CREDIT CONTROL

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 2. To achieve stability in the Price level. 3. To achieve stability in the Foreign Exchange Rate. 4. To meet Business Needs.

METHOD OF CREDIT CONTROL 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

Bibliography:BOOKS M.Y. Khan Indian financial system Sudhir shah-Indian economy Website www.rbi.org.in

Dr Ram Manohar Lohiya National Law University

ROUGH DRAFT

Economics :- Methods of Credit Control by R.B.I

Submitted to :- Mrs. Madhuri Srivastava Submitted by :- Varnit Pratap Singh Roll num :-147