Reserve Bank of India explain.
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Reserve Bank of India:
The Reserve Bank of India (RBI) is the central bank of India,
established on April 1, 1935, based on the recommendations
of the Hilton Young Commission. It plays a crucial role in regulating and
controlling the monetary policy, financial stability, and currency issuance in the country.
Reserve Bank of India was established in 1935. It is the central bank of India.
Thefollowing are the main objectives
of RBI:
(a) To manage and regulate
foreign exchange.
(b) To build a sound and adequate
banking and credit structure.
(c) To promote specialized
institutions to increase
the term finance to industry.
(d)
To give support
to government and planning authorities for the economic
development of the country.
(e)
To control and manage the banking system
in India.
(f) To execute the monetary
policy of the country.
EXPLAIN THE ORGANISATION AND ADMINISTRATION STRUCTURE OF RBI IN INDIA.
The Reserve
Bank of India is managed by well structured administrative machinery. The organization structure of the RBI
can be easily understand with the help of the following chart
|
We can observe
from the table that all members of Central Board are appointed by the
Central Government. The Governor of
the Deputy Governors is appointed as executives in the bank and by virtue of
their position in the bank; they
become members of the Central Board. The other directors of Central Board are
appointed for a four year term
(excepting the official of Government of India) by Government under RBI ACT,
1934. The Governor is assisted in the
performance of his duties by the Deputy Governor and the Executive Directors. The Governor and Deputy Governor
hold office as per their terms of appointment and eligible for appointment.
The executive directors are whole time officials of the bank with
salaries. They are however not members of
Central Board. Appointment of members of Central Board are so made that two
directors retire every year. A retiring director is eligible for reappointment.
The local Board consists of 5 members appointed by the Central Government.
The appointment will be made so as to
secure adequate representation of regional and economic interest of the areas
concerned. The local Board will have a Chairman elected
from amongst the members of the local Board.
Functions of RBI:
1. Issue of currency
note:
RBI is the sole authority for the issue
of currency notes
in India except
one rupee coin,
one rupee note
and subsidiary coins. These notes are printed
and issued by the issue department.
2. Banker to the Government:
RBI acts as the banker and agent of the government. It gives the following services:
a)
It maintains and operates the government cash balances.
b) It receives and makes
payments on behalf
of the government.
c)
It buys and sells government securities in the market.
d)
It sells treasury
bills on behalf of
the government.
e)
It advises the government on all banking and financial matters such as
financing offive year plans, balance
of payments etc.,
f)
It acts as the agent
of the government in dealings with International Monetary Fund, World Bank International
finance Corporations, EXIM Banks
etc.
3. Bankers’ Bank:
As per the Banking Regulation Act 1949, every bank has to keep certain
minimum cash balance with RBI. This
is called as Cash Reserve ratio. The scheduled banks can borrow money from the
reserve bank of India on eligible securities and by rediscounting bills of exchange.
Thusit acts as bankers‟ bank.
4. Controller of Credit:
RBI controls
money supply and credit to maintain price stability in the country.
Itcontrols credit by using the following methods:
i)
Bank Rate
ii) Open Market Operation
5. Custodian of Foreign Exchange
reserves:
RBI controls the
foreign exchange reserves and exchange value of the rupee in relation to
other country‟s currencies. Currencies should be exchanged only with RBI or its authorized banks.
6. Publication of data:
It collects data related to all economic matters such as finance,
production, balance of payments, prices etc. and are published
in the form of reports,
bulletins etc.
7. Bank of Central Clearance:
The central bank of India acts as a bank of central clearance in settling
the mutual accounts of commercial
banks. If there is no RBI branch to do this service, the State Bank of India
discharges these functions.
8. Promotional and Developmental Functions:
It provides finance for the development of Agriculture, industry and
export. RBI also gives credit to weaker
sections and priority sectors at concessional rate of interest. It takes an
active part in developing organized bill market to provide rediscounting facilities to commercial banks and other financial institutions. It helps for the development
and regulation of banking system in the country. The RBI has increased the banking facilities to the
remote corners of the country through lead bank
scheme. It has helped in promoting
the financial institutions such asIDBI, IFCI, ICICI, and SIDBI etc.
Credit control of RBI and its monetary measures
The Reserve Bank of India (RBI) implements various credit control
measures to manage liquidity, influence lending rates, and regulate
inflation in the economy. These measures fall under two categories: qualitative and quantitative measures.
Quantitative Measures:
1. Cash Reserve Ratio (CRR):
·
Definition: CRR is the
minimum portion of a bank's deposits that it must hold as reserves in the form
of cash with the RBI.
·
Purpose: By adjusting the CRR, the RBI controls
the liquidity in the banking
system. Increasing CRR reduces liquidity, while decreasing it injects
more funds into the system.
2.
Statutory Liquidity Ratio (SLR):
·
Definition: SLR is the percentage of a bank's Net Demand and Time Liabilities (NDTL) that it needs to maintain
in the form of government securities,
gold, or other approved
securities.
·
Purpose: SLR serves a dual purpose of
ensuring liquidity and financial stability. Banks invest in government securities, promoting stability in the financial
system. RBI changes SLR to control credit expansion.
3. Repo Rate:
·
Definition: Repo rate is
the rate at which the RBI lends money to commercial banks against government securities.
·
Purpose: Altering the repo rate
influences the cost of borrowing for banks. A higher repo rate curtails liquidity and controls inflation,
while a lower rate encourages borrowing and spurs economic activity.
4. Reverse Repo Rate:
·
Definition: Reverse repo rate is the
rate at which RBI borrows funds from commercial banks by selling securities.
·
Purpose: It helps the RBI absorb
excess liquidity from the banking system. An increase in the reverse repo rate incentivizes banks to
park more funds with the RBI, reducing liquidity in the market.
Qualitative Measures:
1. Credit Rationing:
·
Definition: RBI restricts the amount of
credit that banks can extend to certain sectors or activities.
·
Purpose: Used to control inflation
or restrain excessive
credit flow to specific sectors,
preventing overheating of the
economy.
2.
Moral Suasion:
·
Definition: Informal persuasion and
advice by the RBI to banks regarding credit policies and interest rates.
·
Purpose: To guide
banks towards specific lending or investment activities without using regulatory or legal measures.
3. Direct Action:
·
Definition: RBI can
issue directives to banks to control credit in specific sectors by issuing guidelines, regulating interest
rates, or directing lending priorities.
·
Purpose: Used when the RBI wants to
directly control lending activities in certain sectors to curb inflation or speculation.
4. Regulation of Margin Requirements:
·
Definition: RBI
regulates the amount of margin required for certain types
of loans, particularly in the case of advances
against shares and securities.
·
Purpose: Setting margin requirements helps control the flow of credit to speculative activities and ensures prudent
lending practices.
Benefits and Limitations of
Online Banking Benefits of Online Banking:
1. Convenience: Access to banking services 24/7 from anywhere with an internet
connection, allowing customers to
perform transactions, check balances, and pay bills conveniently without
visiting a physical bank branch.
2. Time-Saving: Eliminates the need for traveling to a bank, waiting in queues, and completing transactions quickly, thereby saving time for
customers.
3. Cost-Efficiency: Reduces operational costs for banks as they require fewer physical
infrastructures and staff at
branches, leading to potential cost savings, which can be passed on to
customers in the form of lower fees.
4. Accessibility: Provides access to account
information, transaction history, and financial services at any time, allowing customers to manage their finances
more efficiently.
5. Enhanced Services: Offers a wide range of services such as fund transfers, online bill payments,
account statements, loan applications, investment management, and
customer support through online channels.
6. Security Measures: Many online banking platforms
employ robust security
measures such as encryption,
secure logins, two-factor
authentication, and monitoring systems to protect customer data and prevent fraudulent
activities.
Limitations and Challenges of Online Banking:
1. Security Concerns: Despite security measures, online banking is vulnerable to cyber
threats such as phishing, hacking,
malware attacks, and identity theft. Customers need to remain vigilant and
adopt best security practices.
2. Technical Issues: Occasional technical
glitches, system downtimes, or maintenance can disrupt online banking
services, affecting customer transactions and access to
accounts.
3. Dependency on Technology: Reliance on
technology makes customers susceptible to disruptions due to internet
connectivity issues, power
outages, or hardware failures, hindering access to banking services.
4. Limited Services: Some complex banking
transactions or services may still require in-person visits to a branch,
such as large cash deposits,
notarization of documents, or specific account-related issues.
5. Digital Divide: Not all individuals have access to the internet or possess the
necessary digital literacy skills to utilize online banking services
effectively, leading to exclusion from convenient banking
facilities.
6. Fraud and Scams: Despite security measures,
there's always a risk of scams and fraudulent activities targeting unsuspecting customers
through various online channels,
necessitating caution and awareness.
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