FUNCTIONS OF RESERVE BANK

OF INDIA
The preamble of 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….”

FUNCTIONS OF THE BANK

(1) Traditional functions
(2) Supervisory functions
(3) Promotional Role
TRADITIONAL FUNCTIONS
1 Issue notes and Currency management: The Bank issues and regulate the issue
of currency in India, for which it derives the necessary statutory powers from section
22 of the RBI Act,1934.
22. Right to issue bank notes.—(1) The Bank shall have the sole right to
issue bank notes
in 1 [India], and may, for a period which shall be fixed by the 2 [Central
Government] on the
recommendation of the Central Board, issue currency notes of the Government
of India supplied to it by
the 2[Central Government], and the provisions of this Act applicable to bank
notes shall, unless a contrary
intention appears, apply to all currency notes of the Government of India issued
either by the 2[Central
Government] or by the Bank in like manner as if such currency notes were bank
notes, and references in
this Act to bank notes shall be construed accordingly.
(2) On and from the date on which this Chapter comes into force the 2[Central
Government] shall not
issue any currency notes.
The Bank has a separate ‘issue Department’ for this purpose. Along with the
government of India, the reserve bank is responsible for the design,
production and overall management of the nation’s currency, with the goal
of ensuring a adequate supply of clean and genuine notes. In consultation
with Government the Reserve Bank routinely addresses security issues and
target ways to enhances security features to reduce the chance of
counterfeiting or forgery of currency notes. The Paper currency Act of 1861
conferred upon the Government of India the monopoly of note issues, thus
ending the practice of private and presidency banking issuing currency.
Between 1861 and 1935, the Government of India managed the issue of
paper currency. In 1935, when Reserve Bank began operation it took over
the function of note issue from the office of the controller of currency
government of India. The government of India has sole right to mint coins,
in terms of the Coinage Act, 1906 as amended from time to time. The
designing and minting of coins in various denominations is also the
responsibility of the government of India. The coins are issued for
circulation only through the Reserve Bank in terms of RBI Act
Section 26 of the Act provides that every Bank note shall be a legal tender
at any place in India in payment or on account for the amount expressed
there in and shall be guaranteed by the central government. On
recommendation of the central government may by notification in the
gazette of India declare that with effect from such date as may be specified
in notification , any series of Bank notes of any denomination shall cease
to be a legal tender.
Section 27 empowers reissue of bank notes , which are tone , defaced or
excessively spoiled.

2. Banker to the Government – The reserve of Bank of India requires the

Central Government to entrust the Reserve Bank with all its money,
exchange and banking transactions in India and the management of its
public debt. The Government also deposits its cash balance with the
Reserve Bank. As a banker to the Government, the Reserve Bank receives
and pays money on behalf of the various government departments. As per
section 20 of the Act, the Bank shall undertake to accept money for
account of the Central Government and to make payments up to the
amount standing to the credit of its account and it carry out its exchange
Including the management of the public debt of the union. Section 21 gives it
right to transact Government business in India. According to section 45 it is
obligatory on the part of the Reserve Bank to appoint the State Bank of India as
its sole agent at the place where bank has no branch or office.
3 Regulation of Monetary Mechanism of the Economy- The primary
function of the Reserve Bank is to regulate the monetary system of the country
so as to promote the growth of the economy within the framework of the general
economic policy of the government consistent with the need for the maintenance
of price stability. The regulation of the monetary mechanism comprises the
control of currency, banking and credit system of the country. The goal of the
monetary policy is to achieve specific economic objectives, such as low and
stable inflation and promoting growth. The main objectives of monetary policy
in India are:-
(a) Maintaining price stability
(b) Ensuring adequate flow of credit to the productive sectors of the economy
to support economic growth.
(c) Financial stability
Cash Reserve Ratio- The reserve bank requires banks to maintain itself a
certain amount of cash in reserve as a percentage of their net demand and time
liabilities to ensure that banks have sufficient cash to cover customer
withdrawals . Reserve Bank does not pay any interest on the cash reserve ratio.

Statutory Liquidity Ratio-The Reserve Bank requires that bank should

maintain a certain percentage of net demand and time liabilities in safe and liquid
assets, such as government securities cash and gold
4 Bankers Bank- RBI keeps deposits of commercial banks and acts as lender of
last resort by providing financial assistance as provided under section 17 of the
Act. Section 17(4) enables the RBI to grant loans and advances to the banks.

5 Custodian of Foreign Exchange reserves: The RBI plays a key role in the
regulation and development of the foreign exchange market and assumes the
three broad roles relating to foreign exchange-
(a) Regulating transactions related to the external sector and facilitating the
development of the foreign exchange market.
(b) Ensuring smooth conduct and orderly conditions in the domestic foreign
exchange market.
(c) Managing the foreign currency assets and gold.
The Reserve Bank is responsible for administration of the Foreign Exchange
Management Act, 1999 and regulate the market by issuing licenses to banks and other
select institutions to act as a authorized dealers in foreign exchange

6 Payment and Settlement System-Payment and settlement systems play an

important role in improving overall economic efficiency. They consist of all the
diverse arrangements used to systematically transfer money, currency, paper
instruments such as cheques, and various electronic channels. In this role RBI focuses
on the development and functioning of safe, secure and efficient payment and
settlement mechanism. The Payment and Settlement Act of 2007 (PSS Act) gives the
reserve bank oversight authority, including regulation and supervision for the
payments and settlement system in India.
Regulatory and Supervisory functions
Reserve Bank’s regulatory and supervisory policy initiatives are
aimed at protection of the depositors interests, orderly
development and control of banking operations and liquidity and
solvency of banks. There are various departments in reserve bank
that performs these regulatory and supervisory functions. The
Department of Banking Operations and Development frames
regulations for commercial banks. The Department of Banking
Supervision undertakes supervision of commercial banks,
including the local area banks and all- India financial institutions.
The Department of Non-Banking Supervision regulates and
supervise the Non- Banking Financial Companies. While the
urban banks development regulates and supervise the urban
cooperative banks, rural planning and credit department regulates
the regional rural banks and the rural cooperative banks.
1 Control of Banks- The Banking Regulatory Act, 1949 gives enormous power
to control the banks. Virtually Reserve Bank of India acts as supervisor and
controller of banks in India. They are:-
(i) Issue of licence to banks for the conduct of banking business (section 22)
(ii) Control on issue of new branch or change in location of existing branch
(section 23)
(iii) To inspect books and accounts of commercial banks(section 35)
(iv) To give directions to the banks (section 35-A)
(v) To remove the management and other persons from office (section 35-AA)
(vi) To appoint additional directors (section 36-AB)

(2) Controller of credits – The Reserve Bank exercise the control over the
volume of credit created by the commercial banks. Each scheduled bank
must send a weekly return to the Reserve Bank showing in detail, its assets
and liabilities. This power of the Reserve 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.
3 Bank Inspection- The RBI grants license to banks working as per the
directives and in a prudent manner without undue risk. In addition to this it
can ask for periodical information from banks on various components of
assets and liabilities.

4. Control over NBFIs- The Non-Bank Financial Institutions are not

influenced by the working of a monitory policy. However RBI has a right to
issue directives to the NBFIs from time to time regarding their functioning.
Through periodic inspection, it can control the NBFIs.

5 Implementation of the Deposit Insurance Scheme- The RBI has

set up the Deposit Insurance Guarantee Corporation in order to protect the
deposits of small depositors. All bank deposits below Rs. One lakh are insured
with this corporation. The RBI work to implement the Deposit Insurance
Scheme in case of a bank failure.
5- Onsite inspection and off site surveillance- The Reserve Bank of India undertakes
the supervision of banks to monitor and ensure compliance by them with its regulatory
policy framework. This is achieved through:

Onsite Inspection- The Reserve Bank annual on-site inspections of a bank to access
their financial health and to evaluate their performance in terms of quality of
management, capital adequacy, asset quality, earnings, liquidity position as well as
internal control system. Based on the finding of the inspection, banks are assigned
supervisory ratings.

Off site Inspections- The Reserve Bank requires bank to submit detailed and structural
information periodically under its off site surveillance and monitoring system. This
information is thoroughly analyzed by the RBI to asses the health of individual banks.
Promotional functions and
Development Role
1 Promotion of Banking Habit-Though non-monetary in nature but promotional
functions of the Reserve Bank is to promote financial institutions and banking
services to benefit the growing and healthy economy reach all the segments of
population to promote banking habits : Many parts of our country are still
unbanked and basic banking services are not available to people. The Reserve
Bank of India helps in mobilizing the savings of the people for investment. It
expanded banking system throughout the nation by setting up of various
institutions like UTI, IDBI, etc. Thereby it promoted banking habit among the
people.
2 Providing Refinance for Exports-The Reserve Bank of India is providing
refinance for export promotion. The Export Credit and Guarantee Corporation
(ECGC) and Export Import Bank were established initially by the Reserve Bank of
India to finance the foreign trade of India. They finance foreign trade in the form
of insurance cover, long-term finance and foreign currency credit. However, they
are now functioning separately.
3 Providing Credit to Agriculture-The Reserve Bank of India makes institutional
arrangements for rural or agricultural finance. For example, the bank has set up special
agricultural credit cells. It has promoted regional rural banks with the help of
commercial banks. It has also promoted NABARD

4- Providing Credit to Small Scale Industrial Unit- Commercial banks lend loans
to small-scale industrial units as per the directives issued by the Reserve Bank of India
time to time. The Reserve Bank of India encourages commercial banks to render
guarantee services also to small-scale industrial sector. The Reserve Bank of India
considers advances given to small-scale sector as priority sector advances. It also
directed commercial banks to open specialized branches to provide adequate financial
and technical assistance to small-scale industrial branches.

5-Providing Indirect finance to Cooperative Sector- The RBI has directed

NABARD to give loans to State Cooperative Banks, which in turn lend loans to
cooperative sector. Hence, the Reserve Bank of India provides indirect finance to
cooperative sector in India.
6- Exercising Control over Monetary and Banking system of the
Country- The Reserve Bank of India is vested with enormous and extensive
powers regarding supervision and control over commercial banks, cooperative
banks and also non-banking institutions receiving deposits. The Banking
Regulation Act prescribes extensive requirements as minimum regarding the paid-
up capital, reserves, cash reserves and liquid assets. The operation of the bank, the
management, amalgamation reconstruction and liquidation etc. are thoroughly
supervised by the officials of the Reserve Bank of India. Every scheduled bank is
required to furnish to the Reserve Bank a weekly statement showing the principal
items of its liabilities and assets in India.

7 Making Industrial arrangement for Industrial Finance- The Reserve Bank of

India makes institutional arrangement for industrial finance. For instance, it has
brought into existence several development banks such as the Industrial Finance
Corporation of India, the Industrial Development Bank of India, which provide
long-term finance to industries.
Important Development and
Promotional Functions
1 By encouraging the commercial banks to extend their branches in the semi
urban and rural areas to reduce the dependence of the people on indigenous
bankers and money lenders, and to develop the banking habit of the people.
2. By establishing the Deposit Insurance Corporation, the RBI helps to
develop the banking system of the country, instills confidence of the
depositors and avoids bank failures.
3. The RBI has established the Discount and Finance House of India Ltd.
(DFHI) in 1988 to provide security to depositors with the banks.
4. The RBI appoints adhoc committees and expert groups from time to time
to enquire banking problems and make recommendations to solve them.
5 . Banker's Training college has been set up to extend training facilities to
supervisory staff of commercial banks.
6. Since its inception, the RBI has making efforts to promote institutional
agricultural credit by developing co-operative credit institutions.
7 It issues directives to security market for its proper functioning.
 Review of RBI
 The Reserve Bank of India was established on 1st April, 1935 under the Reserve
Bank of India Act, 1934 as the Central Bank of the country to regulate the issue
of bank notes and the keeping of reserves for monetary stability in India and
generally to operate the currency and credit system of the country to its
advantage. Reserve Bank of India, besides being the Central Bank of the country,
is the principal regulatory authority in the Indian money market. It derives its
powers from two principal enactments, namely the Reserve Bank of India Act,
1934 and the Banking Regulations act, 1949. The Reserve Bank of India Act,
1934, apart from providing for the definition, nature, principles, objectives,
Constitution management and functions of the RBI, also empowers it to exercise
control and regulations, over India Act, Commercial Banks, the non-banking
finance companies and the financial institutions.
It also acts as a banker, agent and adviser to the government in all financial and
monetary matters. A central bank is also the custodian of the foreign balances of
the country and is responsible to maintain the rate of exchange fixed by the
government and manages exchange control. The most important function of a
central bank is to regulate the volume of currency and credit in a country.
It will be no exaggeration to say that a modem central bank is the central
arch to the monetary and fiscal framework in almost all the countries
developed or developing in the world. In developing economies, the
Central bank has also to perform certain promotional and developmental
functions to accelerate the pace of economic growth. The Reserve Bank's
responsibilities include, in addition to the traditional central banking
functions, the development of an adequate and sound banking system for
catering to the needs of industry, agriculture, trade and commerce.