Powers, History, Functions of the Reserve Bank of India (RBI)
- Establishment of Reserve Bank of India
- History of Reserve Bank of India
- Functions of Reserve Bank of India
- Initiatives taken by Reserve Bank of India
- Powers of RBI under Reserve Bank of India Act, 1934
- Powers of RBI under Banking Regulation Act, 1949
The Reserve Bank of India was established in the year 1935 according to the Reserve Bank of India Act, 1934. It is the central Bank of India which has various roles. It performs important monetary functions. From issuing currency note to maintaining monetary stability in the country is one of the reserve bank’s roles.
The Reserve Bank of India was a private share holder’s company initially, which later was nationalized in 1949. Affairs of RBI are governed by the Central Board of Directors which is appointed by the Government of India. Since, after becoming the central bank of India, the Reserve Bank of India had played an important role in the economic development and monetary stability in the country.
Establishment of Reserve Bank of India
Reserve Bank of India Act, 1934 is the legislative act by which the Reserve Bank of India was formed. On April 1, 1935 the reserve Bank of India was established. The central office of the reserve bank was established in Calcutta but later it was permanently moved to Mumbai in year 1937.
The central office is where the governor of RBI sits and where policies are formulated of the market. Through originally it was privately owned, but since nationalization in 1949, the reserve Bank is fully owned by the Government of India.
History of Reserve Bank of India[i]
The Royal Commission on Indian Currency and Finance which was appointed on August 25, 1925 suggested the establishment of a Central Bank in India, later the Indian Central Banking Enquiry Committee, 1931 also stressed on the establishment of the Central Bank in India. The main object of the Reserve Bank of India is, as preamble of RBI Act says,
- to regulate the issue of Bank notes
- keeping of reserves with a view to securing monetary stability in India
- generally to operate the currency any credit system of the country
The Reserve Bank of India issued its first currency notes in January 1938 in denomination of Rs.5 and Rs.10 and later denomination of Rs.100, Rs.1000 and Rs.10000 in the same year were issued.
Through the Reserve Bank (Transfer of Public Ownership) Act, 1948 the Reserve Bank of India was nationalized in the year 1949 after which all shares were transferred to Central Government. The Reserve bank of India is constituted for the management of currency and for carrying the business of banking in according to the provisions of the Act.
- It is a body corporate which has perpetual succession,
- It has common seal and it can be sued or sue in its name.
- Central Board of Directors is entrusted with the general supervision and direction of the affairs of the Reserve Bank.
Functions of Reserve Bank of India[ii]
There are various functions which are performed by Reserve Bank of India, which are following:
- Traditional functions
- Development functions
- Supervisory functions
a) Traditional functions
There are some traditional functions which are as followed:
i. RBI issues Currency Notes-
Section 22 of the Reserve Bank of India Act 1934 provides that RBI has sole right to issue currency notes except one rupee note and coins of smaller denomination. RBI issues, against the security of gold bullion, foreign securities, rupee coins, exchange bills, promissory notes and government of India bonds etc, currency notes of Rs. 2, 5, 10, 20, 50, 100, 500, 1000.
ii. As a banker to other Banks-
RBI guides, helps and directs other commercial banks of the country. RBI keeps control the bank reserves. Every commercial bank has to maintain a part of their reserves with RBI which is called Cash Reserve. If bank need fund they approach to RBI for fund and RBI lend to them.
iii. Banker of the Government-
RBI also works as an agent of the governments. RBI makes payments, taxes and deposits etc on the behalf of governments. It represents the government at international level also. It maintains accounts of government and also provides financial advice to the government whenever required.
iv. Management of Exchange Rate-
RBI prepares domestic policies for maintaining value of rupee. It also prepares and implements also the foreign exchange rate policy which helps in attaining the exchange rate stability. It brings demand and supply of foreign currency (U.S.) dollar close to each other for maintenance of exchange rate stability.
v. Credit Control-
RBI has to balance growth with stability. Thus it checks the credit creation capacity of commercial banks by using various credit control tools. If the credit creation by commercial banks is unregulated then it may lead the economy into inflationary cycles.
RBI has to supervise the commercial banks. It has the power to give license to new banks which are going to open or to new branches to be established. It guides and conducts the audit of other banks.
B) Developmental functions
· Financial System Development-
The financial system includes many things like, financial institutions, financial markets and financial instruments. For rapid economic development of the nation’s economy, sound and efficient financial system is necessary for which RBI encourages the banking and non – banking institutions.
· Agricultural Development-
RBI always pays attention to agriculture sector by assessing credit needs of this particular sector. Regional Rural Banks (RRBs), National Bank for Agriculture and Rural Development (NABARD) which are only for agriculture finance are under the direct control of RBI.
· Industrial Finance-
For economic growth of the country, Industrial development is necessary and for this purpose RBI supports the industrial sector as well. RBI plays vital role for setting up of industrial finance institutions like ICICI Limited, IDBI, SIDBI, EXIM etc.
· Promotion of Export-
RBI always encourage the facilities for providing finance for foreign trade especially exports from India. The Export Import Bank of India (EXIM), and the Export Credit Guarantee Corporation of India (ECGC) are supported by RBI.
· Reports Publication-
RBI has a separate publication division. It collects and publishes data on different sector of the economy. The reports and bulletins are regularly published by the RBI and available for public.
· Collection of Data-
RBI collects important statistical data about several topics like interest rates, inflation, savings, investments, deflation etc. the data collected by RBI is very much useful for policy makers and researchers.
C) Supervisory Functions
· License to Banks-
RBI provides license to the banks going established. It also provide license to the new branches of existing banks.
· Inspection of Banks-
RBI may as and when required, may inspect the assets and liabilities of the banks which are under its control.
· Control on Non-Bank Financial Institutions-
RBI may issue directives to the NBFIs from time to time with regard to their functioning. It can control the NBFIs through periodic inspection.
Initiatives taken by Reserve Bank of India
- Pre-paid payment instruments
- Cheque Truncation System (CTS)
- Electronic Clearing Service (ECS)
- National Electronic Clearing Service (NECS)
- Electronic Funds Transfer (EFT)
- The Real Time Gross Settlement (RTGS) system
Powers under Reserve Bank of India Act, 1934
RBI Act 1934 is the Act by which RBI was formed, through this act only numerous powers are given to it just to perform its duties and functions such are-
- Section 18 talks about power of RBI of direct discount.
- Section 45B talks about power of bank to collect credit information.
- Section 45C talks about power to call for returns containing credit information.
- Section 45JA talks about power of bank to determine policy and issue directions.
- Section 45k talks about power of bank to collect information from non-banking institutions as to deposits and to give directions.
- Section 45L talks about power of bank to call for information from financial institutions and to give directions.
- Section 45MB talks about power of bank to prohibit acceptance of deposit and alienation of assets.
- Section 45MC talks about power of bank to file winding up petition.
- Section 45NC talks about power of bank to exempt.
- Section 45T talks about power to issue warrants.
- Section 54AA talks about power of bank to depute its employees to other institutions.
- Section 58G talks about power of bank to impose fine.
Powers of RBI under Banking Regulation Act, 1949 [iii]
Banking Regulation Act, 1949 also provide powers of Reserve Bank of India such as:
- Section 10bb provides power to reserve bank to appoint chairman of the board of directors appointed on a whole time basis or managing director of any banking company.
- Section 21 gives power to reserve bank to control advances by banking companies.
- Section 28 gives power to reserve bank to publish any information obtained.
- Section 36 gives numerous powers to RBI-
- It may caution or prohibit any banking company regarding any transaction or class of transaction.
- On a request, in case of amalgamation of banking companies it may assist as intermediary or otherwise.
- Give assistance by way of advancement of loans.
- In the interest of a public policy or banking company, may call meeting of its directors.
- May depute its one or more officer to be heard the meeting of directors of banking company.
- May require the board of directors of the banking company or so to give in writing to officer specified, communication related to meeting.
- Appoint officer to observe the manner in which the affairs are being conducted of banking company.
- May require by order to make changes in management within specified time.
- RBI shall make a annual report to central government regarding progress of banking and suggestions, if any.
- May appoint staff to ensure its efficient performance.
- Section 36 aa gives power to RBI for removal of managerial and other persons from office.
- Section 36 ab gives power to RBI to appoint additional directors a banking company.
- Section 45 gives power to RBI to apply to central government for suspension of business by a company and for preparing scheme of reconstitution of amalgamation.
- Section 45q talks about the power of RBI on direction of High Court or central government to inspect books of account of a company being wound up.
- Section 45r gives power to high court to call for returns and other information.
- Section 47 a gives power to RBI to impose penalty in case of default by any banking company.
Reserve Bank of India is the central bank of India which plays important role for the banking industry, development and growth of economy. From formulating policies, issuing currency to monetary stability in and maintenance of such monetary stability is the duty of RBI. It plays the parent role to the commercial banks and other banking institutions.