Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is India’s central bank and the apex monetary authority, responsible for regulating the issue and supply of the Indian rupee and maintaining the monetary and financial stability of the country.

Constitutional and Legal Status

• Statutory Body: RBI is not a constitutional body. It is a statutory body established under the Reserve Bank of India Act, 1934.
• Commencement: RBI commenced operations on April 1, 1935.
• Ownership: RBI was originally privately owned but was nationalised in 1949. It is now wholly owned by the Government of India.
• Central Office: RBI’s Central Office was initially established in Kolkata and was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.

History

Before RBI

• The Imperial Bank of India (formed in 1921) functioned both as a commercial bank and a central bank.
• The Imperial Bank was created by amalgamating the Presidency Banks of Bombay, Calcutta, and Madras.

Establishment and Legal Basis

• Reserve Bank of India (RBI) was established under the Reserve Bank of India Act, 1934, which came into effect in 1935.
• The Bank was created based on the recommendations of the Hilton Young Commission.

Transition

• In 1935, RBI took over the central banking functions from the Imperial Bank.
• RBI was privately owned when established.

Nationalisation and Further Developments

• RBI was nationalised in 1949, making the Government of India the sole owner.
• In 1955, the Imperial Bank was transformed into the State Bank of India (SBI) through an Act of Parliament.

Capital and Ownership

• As per the RBI Act, 1934, the authorised capital of RBI is five crore rupees.
• The Government of India is the sole owner of RBI.

Management Structure

1. Central Board

The Reserve Bank”s affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

• Appointed/nominated for a period of four years
• Constitution:
  • Official Directors
    • Full-time: Governor and not more than four Deputy Governors
  • Non-Official Directors
    • Nominated by Government: ten Directors from various fields and two government officials
    • Others: four Directors – one each from four local boards
• Functions: General superintendence and direction of the Bank’s affairs

2. Local Boards

• Constituted for Western Area, Eastern Area, Northern Area and Southern Area.
• Consist of five members each.
• Members are appointed by the Central Government.
• Members shall hold office for a term of four years.
• Functions of Local Boards:
  • To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks;
  • To perform such other functions as delegated by the Central Board from time to time.

3. Board for Financial Supervision

• The Board for Financial Supervision (BFS) was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India under the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994.
• The BFS was set up to strengthen supervision and surveillance over the financial system and provide sharper focus to supervisory policy and skills.
• The BFS exercises integrated supervision over commercial banks, financial institutions and non-banking financial intermediaries.
• The Department of Supervision assists and provides secretarial support to BFS.

Functions of Reserve Bank of India (RBI)

1. Monetary Authority

• The primary function of RBI is the formulation, implementation and monitoring of monetary policy.
• Objective: To maintain price stability while keeping in mind the objective of growth.
• Through monetary management, RBI:
  • Regulates the issue of bank notes and maintenance of reserves with a view to securing monetary stability in India.
  • Operates the currency and credit system of the country to its advantage, as envisaged in the preamble to the RBI Act, 1934.

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

RBI regulates and supervises banks and various non banking financial institutions to protect depositors, ensure the sound and orderly functioning of regulated entities, maintain their liquidity and solvency, and contribute to overall financial stability.

Legal Basis: The Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 grant the RBI extensive powers to supervise and regulate commercial and co-operative banks. These powers cover areas such as licensing and establishment of banks, branch expansion, and setting reserve requirements, among others.

Regulation and Supervision of Commercial Banks

RBI performs several regulatory and supervisory functions in relation to commercial banks:

• Licensing and Branch Regulation: Reserve Bank of India (RBI) strictly regulates the opening, closing, and relocation of bank branches.
• Merger and Amalgamation: RBI regulates merger, amalgamation and winding up of banks.
• Management and Governance:
  • Commercial banks (excluding Public Sector Banks) require prior RBI approval for the appointment, reappointment or termination of the Chairman, Whole Time Directors, Managing Director and CEO.
  • RBI has the power to appoint additional directors to the boards of banking companies (excluding PSBs).
  • RBI, in consultation with the Central Government, has the power to supersede the Board of Directors of a commercial bank (excluding PSBs).
• Maintenance of Reserves: RBI requires banks to maintain prescribed reserves such as CRR and SLR.
• Prudential Regulation: RBI prescribes prudential norms to be followed by banks relating to areas such as capital adequacy, asset classification, income recognition and provisioning.
• Interest Rate Regulation: Most deposit and lending rates are determined by banks. However, RBI continues to prescribe regulatory conditions and restrictions on interest rates for certain categories of deposits and loans.
  • RBI regulates the interest rate on NRI deposits, export credits (loans) and a few other categories.
• Inspection and Scrutiny: Inspect banks, their books and accounts, and scrutinise their affairs.
• Call for Information: Require banks to furnish information and account details.
• Special Audit: Direct a special audit of a bank where required.
• Stressed Asset Resolution: Issue directions relating to the resolution of stressed assets and, under the statutory framework, direct initiation of insolvency resolution proceedings in respect of defaults.

Regulation of Cooperative Banks

Cooperative banks operate under a dual regulatory framework.

• Banking related functions are regulated by RBI.
• Management related functions are regulated by respective State Governments or Central Government, as the case may be.

Financial Institutions, NBFCs, Primary Dealers and Credit Information Companies (CIC)

• NBFCs: RBI regulates and supervises Non Banking Financial Companies, including their registration, prudential requirements, governance and risk management.
• All India Financial Institutions: RBI regulates and supervises NABARD, NHB, EXIM Bank, SIDBI and NaBFID.
• Primary Dealers: RBI regulates Primary Dealers participating in the Government securities market.
• Credit Information Companies: RBI regulates Credit Information Companies under the Credit Information Companies (Regulation) Act, 2005.

3. Regulation of Government Securities Market

• Government Securities Market deals in securities issued by the Central Government and State Governments.
• RBI regulates the Government Securities Market and derives its regulatory powers primarily from the RBI Act, 1934.

4. Regulation of Money Market

• The Money Market deals primarily in short term financial instruments, generally with maturity of up to one year.
• RBI regulates important segments and instruments of the Money Market and derives its regulatory powers primarily from the RBI Act, 1934.

5. Manager of Foreign Exchange

• RBI manages the Foreign Exchange Management Act, 1999.
• The objective is to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

5. Management of Foreign Exchange Reserves

The RBI is the custodian and manager of India’s foreign exchange reserves and is responsible for their investment and management. The legal framework for management of the reserves is provided primarily by the RBI Act, 1934.

• Components of Foreign Exchange Reserves
  • India’s foreign exchange reserves consist of:
    • Foreign Currency Assets (FCA)
    • Special Drawing Rights (SDRs)
    • Gold
    • Reserve Tranche Position with the IMF
• Permitted Instruments for Investment
  • Under the RBI Act, the reserves can be invested in:
    • Deposits with the Bank for International Settlements and other central banks.
    • Deposits with foreign commercial banks.
    • Debt instruments that represent sovereign or sovereign-guaranteed liabilities.
    • Any other instruments approved by the Central Board of the RBI.
• The basic parameters of the Reserve Bank’s policies for foreign exchange reserves management are safety, liquidity and returns.

7. Banker to Central and State governments

Since its inception, the Reserve Bank of India has undertaken the traditional central banking function of managing the government’s banking transactions. The Reserve Bank of India Act, 1934 requires the Central Government to entrust the Reserve Bank with all its money, remittance, exchange, and banking transactions in India. The Reserve Bank may also, by an agreement, act as a banker to State Governments.

The Reserve Bank has well defined obligations and provides several banking services to the Governments.

• Government Banking Transactions
  • As a banker to the Government, the Reserve Bank receives and pays money on behalf of the various Government Departments.
  • Since RBI has offices only at limited locations, it appoints Agency Banks to undertake Government banking transactions on its behalf.
  • Both Private and Public Sector Banks can act as Agent Banks of RBI. Agency Banks undertake Government related business such as collection of taxes, pension payments and transactions relating to small savings schemes.
• Maintenance of Government Accounts
  • RBI maintains accounts relating to Government funds, including:
    • Consolidated Fund
    • Contingency Fund
    • Public Account
• Ways and Means Advances
  • RBI provides Ways and Means Advances (WMA) – a short-term interest-bearing advance – to the Central and State Governments to meet temporary mismatches between their receipts and payments.
• Besides, like a portfolio manager, it arranges for investment of surplus cash balances of the Governments.
• Adviser to Government
  • RBI acts as an adviser to the Government on monetary and banking related matters whenever called upon to do so.

*The banking functions for the Governments are carried out by the Government Banking Divisions at the offices/branches of the Reserve Bank

8. Debt manager of the Government

• RBI manages the public debt of the Central and State Governments.
• Conducts issuance of government securities and Treasury Bills.
• Manages servicing and repayment of government debt.

9. Banker to Banks

RBI enables banks to open current accounts with it. The current accounts of individual banks are opened in e-Kuber (Core Banking Solution (CBS) of RBI) by Banking Departments of the Regional Offices of RBI.

Banks use these accounts to maintain their Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) balances.

These current accounts are also maintained for participation in centralized and decentralized Payment Systems and are used for settling inter-bank obligations, such as clearing transactions or clearing money market transactions between two banks, buying and selling securities and foreign currencies. Thus, Reserve Bank acts as a common banker, known as ‘Banker to banks’ function

• Provision of Short-Term Liquidity
  • RBI provides short-term loans and advances to banks for specified purposes, supporting their liquidity needs.
• Lender of Last Resort
  • As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last resort’. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank.
  • The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and on the economy.

8. National Clearing House

RBI acts as the clearing house for the settlement of interbank transactions across the country. This function facilitates efficient settlement of interbank claims.

9. Promotional Functions

The RBI undertakes a range of developmental and promotional activities. It works to encourage banking habits, expand banking facilities in rural and semi-urban areas, and establish and support specialized financial institutions to mobilize savings and facilitate microfinance and financial inclusion.

10. RBI as Issuer of Currency

Along with the Government of India, RBI is responsible for the design, production and overall management of the nation’s currency, with the goal of ensuring an adequate supply of clean and genuine notes.

• Under Section 22 of the RBI Act, 1934, the Reserve Bank has the sole right to issue banknotes in India.
• The design, form, and material of banknotes are approved by the Central Government after consideration of the recommendations made by the Central Board of RBI.
• Process of Currency Issuance: The Reserve Bank, in consultation with the Central Government and other stake holders, estimates the quantity of banknotes that are likely to be needed denomination-wise in a year and places indents with the various currency printing presses for supply of banknotes.
• Clean Note Policy: The Reserve Bank endeavours to ensure circulation of good quality banknotes to the members of the public. With this objective in view, the banknotes received back from circulation at its Issue Offices and Currency Chests are examined and only notes considered fit for circulation are reissued while the others (soiled and mutilated) are destroyed.
• Role in Coins: The Government of India is the issuing authority of coins and supplies coins to the Reserve Bank on demand.
  • Coins are minted and designed by the Government of India under the Coinage Act, 2011.
  • RBI’s Role: The Reserve Bank puts the coins into circulation on behalf of the Central Government.

11. Regulator and Supervisor of Payment and Settlement Systems

• As the central bank, the RBI is the key institution driving the development and regulation of national payment systems. It introduces and upgrades safe and efficient modes of payment systems in the country to meet the requirements of the public at large.
• Objective: To maintain public confidence in payment and settlement system
• Legal Framework
  • Payment and settlement systems in India are governed by the Payment and Settlement Systems Act, 2007 (PSS Act).
  • The Reserve Bank of India, under the Payment and Settlement Systems Act, 2007, regulates and oversees payment and settlement systems to ensure they are safe, secure, efficient, accessible, and authorised.
  • Section 4 of the PSS Act provides that:
    • No person other than the RBI can commence or operate a payment system in India without prior authorisation from the RBI.

Acts administered by Reserve Bank of India

• Reserve Bank of India Act, 1934
• Public Debt Act, 1944/Government Securities Act, 2006
• Government Securities Regulations, 2007
• Banking Regulation Act, 1949
• Foreign Exchange Management Act, 1999
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Chapter II)
• Credit Information Companies (Regulation) Act, 2005
• Payment and Settlement Systems Act, 2007
• Factoring Regulation Act, 2011

Subsidiaries

Subsidiaries fully owned by

• Deposit Insurance and Credit Guarantee Corporation of India (DICGC),
• Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL),
• Reserve Bank Information Technology Private Limited (ReBIT),
• Indian Financial Technology and Allied Services (IFTAS),
• Reserve Bank Innovation Hub (RBIH).