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WEST BENGAL NATIONAL UNIVERSITY OF

JURIDICAL SCIENCES

(WBNUJS)

INTRODUCTION
The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the
Indian rupee. The RBI plays an important part in the Development Strategy of the Government of India. It is a
member bank of the Asian Clearing Union.
It commenced its operations on 1 April 1935 during the British Rule in accordance with the provisions of the
Reserve Bank of India Act, 1934. The original share capital was divided into shares of 100 each fully paid, which

were initially owned entirely by private shareholders. Following India's independence on 15


August 1947, the RBI was nationalized on 1 January 1949.
The general superintendence and direction of the RBI is entrusted with the 21-member Central
Board of Directors: the Governor (Dr. Raghuram Rajan), 4 Deputy Governors, 2 Finance
Ministry representatives, 10 government-nominated directors to represent important elements
from India's economy, and 4 directors to represent local boards headquartered at Mumbai,
Kolkata, Chennai and New Delhi.
Each of these local boards consists of 5 members who represent regional interests, and the
interests of co-operative and indigenous banks. Its headquarters are in Mumbai (Maharashtra)
since 1937. It has 22 regional offices; most of them are in State capitals. It has 26 offices in
which four are regional offices located in metropolitan cities
The bank is also active in promoting financial inclusion policy and is a leading member of the
Alliance for Financial Inclusion (AFI).

BRIEF HISTORY
In the first half of the nineteenth century, three Presidency Banks were started in Madras,
Bombay and Bengal with the financial participation of the government for conducting banking
business and issue currency notes.
The Imperial Bank came into existence on the 27th January, 1921 by the Imperial Bank of India
Act of 1920. It was established by the amalgamation of the three Presidency Banks. The Imperial
Bank was the biggest bank until 1935. Until the establishment of the Reserve Bank of India in
1935, the Imperial Bank performed certain central banking functions, although it was purely a
commercial bank. It acted as the sole-banker to the Government.
It was set up on the recommendations of the Hilton Young Commission. The Reserve Bank of
India was conceptualized based on the guidelines presented by Dr. Ambedkar to the "Royal
Commission on Indian Currency & Finance in 1925. Initially it was located in Kolkata. It
moved to Mumbai in 1937.
Initially it was privately owned. The govt. had a nominal value of shares of INR 2,20,000. After
the Partition of India in 1947, the bank served as the central bank for Pakistan until June 1948
when the State Bank of Pakistan commenced operations. Though set up as a shareholders bank,
the RBI has been fully owned by the Government of India since its nationalization in 1949.
Towards the end of the 19th Century the cash balances of the government were kept in the
government treasuries and the government shed its connections with the Presidency Banks.
The Reserve Bank of India has fully-owned four subsidiaries which include
1. National Housing Bank (NHB).
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2. Deposit Insurance and Credit Guarantee Corporation of India (DICGC).


3. Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL).
4. National Bank for Agriculture and Rural Development (NABARD, 12 July, 1982).
The Reserve Bank of India has recently divested its stake in State Bank of India to the
Government of India. The Reserve bank of India has also two training colleges for its officers,
viz. Reserve Bank Staff College, Chennai and College of Agricultural Banking, Pune. There are
three autonomous institutions run by RBI namely National Institute of Bank Management
(NIBM), Indira Gandhi Institute for Development Research (IGIDR), Institute for Development
and Research in Banking Technology (IDRBT). There are also four Zonal Training Centres at
Mumbai, Chennai, Kolkata and New Delhi.

PREAMBLE
The Preamble of the RBI describes its basic functions to regulate the issue of bank notes, keep
reserves to secure monetary stability in India, and generally to operate the currency and credit
system in the best interests of the country.
The Preamble of the Reserve Bank of India describes the basic objectives 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 preamble prescribes the objectives as:
1. To secure monetary stability within the country.
2. To operate the currency and credit system to the advantage of the country.

STRUCTURE OF RBI
The Central Board of Directors is the main committee of the Central Bank. The Government of
India appoints the directors for a 5-year term. The Board consists of a Governor, and not more
than 4 Deputy Governors, 4 Directors to represent the regional boards, 2 from the Ministry of
Finance and 10 other directors from various other fields. RBI wants to create a post of Chief
Operating Officer (COO) and re-allocate work between the five of them, i.e. 4 Deputy Governors
and COO).
The bank is headed by the Governor and the post is currently held by eminent economist of our
country Mr. Raghuram Rajan. There are 4 Deputy Governors. Two of the four Deputy Governors
are traditionally from RBI ranks, and are selected from the Bank's Executive Directors. One is
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nominated from among the Chairpersons of public sector banks and the other is an economist.
An Indian Administrative Service officer can also be appointed as Deputy Governor of RBI and
later as the Governor of RBI.

Board for Financial Supervision [BFS]

The Reserve Bank of India performs this function under the guidance of the Board for Financial
Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central
Board of Directors of the Reserve Bank of India.

Objective
Primary objective of BFS is to undertake consolidated supervision of the financial sector
comprising commercial banks, financial institutions and non-banking finance companies.The
Board is required to meet normally once every month. It considers inspection reports and other
supervisory issues placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit
and internal audit functions in banks and financial institutions. The audit sub-committee includes
Deputy Governor as the chairman and two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of
Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions
on the regulatory and supervisory issues.
Functions
Some of the initiatives taken by BFS include:
1.
2.
3.
4.

Restructuring of the system of bank inspections


Introduction of off-site surveillance,
Strengthening of the role of statutory auditors and
Strengthening of the internal defenses of supervised institutions.

The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of
empanelment and appointment of statutory auditors, the quality and coverage of statutory audit

reports, and the important issue of greater transparency and disclosure in the published accounts
of supervised institutions.

Current Focus
1.
2.
3.
4.
5.

Supervision of financial institutions


Consolidated accounting
Legal issues in bank frauds
Divergence in assessments of non-performing assets and
Supervisory rating model for banks.

Legal Framework
I. 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
Securitization 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
Payment and Settlement Systems Regulations, 2008 and Amended up to 2011 and BPSS
Regulations, 2008
The Payment and Settlement Systems (Amendment) Act, 2015 - No. 18 of 2015
Factoring Regulation Act, 2011

II. Other Relevant Acts

Negotiable Instruments Act, 1881


Bankers' Books Evidence Act, 1891
State Bank of India Act, 1955
Companies Act, 1956/ Companies Act, 2013
Securities Contract (Regulation) Act, 1956
State Bank of India Subsidiary Banks) Act, 1959
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Deposit Insurance and Credit Guarantee Corporation Act, 1961


Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
Regional Rural Banks Act, 1976
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
National Bank for Agriculture and Rural Development Act, 1981
National Housing Bank Act, 1987
Recovery of Debts Due to Banks and Financial Institutions Act, 1993
Competition Act, 2002
Indian Coinage Act, 2011 : Governs currency and coins
Banking Secrecy Act
The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993

MAIN FUNCTIONS
1. Financial Supervision
The Reserve Bank of India performs this function under the guidance of the Board for Financial
Supervision (BFS). Primary objective of BFS is to undertake consolidated supervision of the
financial sector comprising commercial banks, financial institutions and non-banking finance
companies.
The Board is constituted by co-opting four Directors from the Central Board as members for a
term of two years and is chaired by the Governor. The Board is required to meet normally once
in every month. It considers inspection reports and other supervisory issues placed before it by
the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit
and internal audit functions in banks and financial institutions. The BFS oversees the functioning
of Department of Banking Supervision (DBS), Department of Non-Banking Supervision
(DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and
supervisory issues.
2. Regulator and Supervisor of the Financial System
The institution is also the regulator and supervisor of the financial system and prescribes broad
parameters of banking operations within which the country's banking and financial system
functions. Its objectives are to maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the public.
The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for
effective addressing of complaints by bank customers. The RBI controls the monetary supply,
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monitors economic indicators like the gross domestic product and has to decide the design of the
Rupee bank notes as well as coins.
3. Managerial of Exchange Control
The central bank manages to reach different goals of the Foreign Exchange Management Act
[FEMA]. Its main objective to facilitate external trade and payment, to promote orderly
development and maintenance of foreign exchange market in India.
4. Issue of Currency
The bank issues and exchanges currency notes and coins and destroys the same when they are
not fit for circulation. The objectives are to issue bank notes and giving public adequate supply
of the same, to maintain the currency and credit system of the country to utilize it in its best
advantage, and to maintain the reserves.
RBI maintains the economic structure of the country so that it can achieve the objective of price
stability as well as economic development, because both objectives are diverse in themselves.
For printing of notes, the Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), a
wholly owned subsidiary of the Reserve Bank, also has set up printing presses at Mysuru in
Karnataka and Salboni in West Bengal.
5. Banker's Bank
RBI also works as a central bank where commercial banks are account holders and can deposit
money. RBI maintains banking accounts of all scheduled banks. Commercial banks create credit.
It is the duty of the RBI to control the credit through the CRR, bank rate and open market
operations. As banker's bank, the RBI facilitates the clearing of cheques between the commercial
banks and helps inter-bank transfer of funds.
It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by
providing emergency advances to the banks. It supervises the functioning of the commercial
banks and take action against it if need arises.
6. Detection of Fake Currency
In order to curb the fake currency menace, RBI has launched a website to raise awareness among
masses about fake notes in the market. This website provides information about identifying fake
currency.
RBI recently gave a press release stating that after 31 March 2014, it will completely withdraw
from circulation all banknotes issued prior to 2005. Banks will provide exchange facility for
these notes until further communication.
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The Reserve Bank has also clarified that the notes issued before 2005 will continue to be legal
tender. This would mean that banks are required to exchange the notes for their customers as well
as for non-customers. From 1 July 2014, however, to exchange more than 10 pieces of 500 and
1000 notes, non-customers will have to furnish proof of identity and residence to the bank branch
in which she/he wants to exchange the notes.
This move from the Reserve Bank is expected to unearth black money held in cash. As the new
currency notes have added security features, they would help in curbing the menace of fake
currency.
7. Developmental Role
The central bank has to perform a wide range of promotional functions to support national
objectives and industries. The RBI faces a lot of inter-sectoral and local inflation-related
problems. Some of these problems are results of the dominant part of the public sector.
8. Related functions
The RBI is also a banker to the government and performs merchant banking function for the
central and the state governments. It also acts as their banker. The National Housing Bank (NHB)
was established in 1988 to promote private real estate acquisition. The institution maintains
banking accounts of all scheduled banks too. RBI on 7 August 2012 said that Indian banking
system is resilient enough to face the stress caused by the drought like situation because of poor
monsoon this year.

Policy Rates and Reserve Ratios


1. Bank rate
RBI lends to the commercial banks through its discount window to help the banks meet
depositors' demands and reserve requirements for long term. The interest rate the RBI charges
the banks for this purpose is called bank rate or repo rate. If the RBI wants to increase the
liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to
reduce the liquidity and money supply in the system, it will increase the bank rate. The bank rate
has lost its significance as a monetary policy tool as the central bank signals stance through
changes in repo, the rate at which banks borrow short term funds from RBI. The bank rate, which
is the standard rate at which the RBI buys or re-discount bills of exchange or other commercial
paper, is presently used in the country.

2. Reserve Requirement - Cash Reserve Ratio (CRR)


Every commercial bank has to keep certain minimum cash reserves with Reserve Bank of India.
Consequent upon amendment to sub-section 42(1), the Reserve Bank, having regard to the needs
of securing the monetary stability in the country, RBI can prescribe Cash Reserve Ratio (CRR)
for scheduled banks without any floor rate or ceiling rate. Before the enactment of this
amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for
scheduled banks between 5% and 20% of total of their demand and time liabilities. RBI uses this
tool to increase or decrease the reserve requirement depending on whether it wants to effect a
decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will
make it mandatory on the part of the banks to hold a large proportion of their deposits in the form
of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This
will in turn decrease the money supply.
3. Statutory Liquidity Ratio (SLR)
Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and
approved securities. Higher liquidity ratio forces commercial banks to maintain a larger
proportion of their resources in liquid form and thus reduces their capacity to grant loans and
advances, thus it is an anti inflationary impact. A higher liquidity ratio diverts the bank funds
from loans and advances to investment in government and approved securities. In well developed
economies, central banks use open market operationsbuying and selling of eligible securities
by central bank in the money marketto influence the volume of cash reserves with commercial
banks and thus influence the volume of loans and advances they can make to the commercial and
industrial sectors. In the open money market, government securities are traded at market related
rates of interest. The RBI is resorting more to open market operations in the more recent years.
Generally RBI uses
1. Minimum margins for lending against specific securities.
2. Ceiling on the amounts of credit for certain purposes.
3. Discriminatory rate of interest charged on certain types of advances.
Direct credit controls in India are of three types:
1. Part of the interest rate structure, i.e., on small savings and provident funds, are
administratively set.
2. Banks are mandatory required to keep 21.50% of their deposits in the form of government
securities.

3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

Deposit Rates as of 29 September 2015


Bank Rate

7.75%

Repo Rate

6.75%

Reverse Repo Rate

5.75%

Cash Reserve Ratio (CRR)

4%

Statutory Liquidity Ratio


(SLR)

21.50%

Base Rate

9.70%10.00%

Savings Deposit Rate

4%

Term Deposit Rate

7.25%8.00%

Conclusion
The Reserve Bank of India holds a vital in the banking and economic stability of the country. It
formulates and implements monetary policy in the country to maintain stability and growth in the
economy. As a bankers bank its role is essential for the proper operation of the banking sector of
the country. The Reserve Bank of India is entrusted with multidimensional role and its role as a
regulator had been crucial in recent global crisis where Indian banking and financial system
remained strong with capital adequacy and stability. Thus, considering the role and functions of
the Reserve Bank of India, it can be termed as one of the most vital organizations of Indian
economy and super regulator of banking sector.

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ACKNOWLEGEMENT

In making this project, I have taken resources from the Bare Act, study material issued by
The Institute of Company Secretaries of India (ICSI), The Study Materials provided by West
Bengal National University of Juridical Science (WBNUJS) etc.
I have also collected some information from Wikipedia, Manupatra and from some other
websites.

________________________________

______________________________

(SIGNATURE OF THE EXAMINER)

(RAKTIM MUKHOPADHYAY)

DATE: 11th December, 2015


PLACE: Howrah

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