Functions of RBI

About Reserve Bank of India

1. Origins in Hilton-Young Commission (1926):
   • The idea for the Reserve Bank of India (RBI) originated from the recommendations of the Royal Commission on Indian Currency and Finance, also known as the Hilton-Young Commission.
   • The Commission proposed the creation of a central bank in India to separate currency and credit control from the government’s purview.
2. Establishment through the RBI Act (1934):
   • The Reserve Bank of India Act of 1934 formalized the establishment of the RBI.
   • This legislation laid the groundwork for the RBI’s structure and operations.
3. Commencement of Operations (1935):
   • Following the enactment of the RBI Act, the RBI commenced its operations from 1 April 1935.
   • This marked the beginning of its role in regulating monetary policy, managing currency, and overseeing banking operations in India.
4. Transition to Nationalization:
   • Initially structured as a shareholder’s bank, the RBI was nationalized in 1949.
5. Development Focus:
   • From its inception, the RBI held a special developmental role, particularly in agriculture.
   • In the 1960s, during India’s planning phase, the RBI pioneered utilizing finance for development.
6. Institutional Contributions:
   • Played a pivotal role in institutional development, establishing entities like the Deposit Insurance and Credit Guarantee Corporation of India, Unit Trust of India, Industrial Development Bank of India, National Bank of Agriculture and Rural Development, and the Discount and Finance House of India.
7. Shift in Focus with Liberalization:
   • With the advent of liberalization, the RBI redirected its focus to core central banking functions such as Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System.
   • Additionally, it engaged in developing financial markets.

Organistional Structure of RBI

Regional Offices of RBI

Roles and Functions of RBI

• The Preamble to the Reserve Bank of India Act, 1934, under which it was constituted,
  specifies its objective as “to regulate the issue of Bank notes and the 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 primary role of the RBI, as the Act suggests, is
  monetary stability, that is, to sustain confidence in the value of the country’s money or
  preserve the purchasing power of the currency. In addition, the RBI has two other important mandates; inclusive growth and development, as well as financial stability.
• The major functions of RBI, viz.,
  • monetary policy operations through OMO, LAF, MSS, etc.
  • currency management
  • its role as bankers to bank and Governments and
  • management of foreign exchange reserves, largely impact the balance sheet of RBI.
• The Central Banks have to keep abreast with the changing economic scenarios and respond to the situation accordingly using various tools at their disposal as indicated by some of its major
  functions above.

Banking Functions

• Banker to the Government:
  • The RBI serves as the government’s banker, facilitating its financial transactions efficiently and effectively.
• Managing Government Banking Transactions:
  • Since its establishment, the RBI has managed the government’s banking transactions, performing traditional central banking functions.
• Agent and Adviser to the Government:
  • As the government’s agent, the RBI manages public debt and oversees the issuance of new loans and Treasury Bills on behalf of the government.
  • Acting as a financial adviser, the RBI provides guidance to the government on crucial economic policy matters, including deficit financing, currency devaluation, trade policy, and foreign exchange policy.
• Banker to Banks:
  • The RBI functions as a banker to banks, providing mechanisms for funds transfer and inter-bank transactions, including borrowing and lending between banks and handling customer transactions.
• Lender of Last Resort:
  • In its role as a lender of last resort, the RBI can intervene to assist a solvent bank facing temporary liquidity issues by providing much-needed liquidity when other sources of credit are unavailable.
• Authorization to Make Loans and Advances:
  • The RBI is authorized to extend loans, grant advances, and discount bills for scheduled banks, State Co-operative Banks, and various other institutions.
  • Details regarding the types of loans and advances, as well as the entities eligible to receive them, are specified in Sections 17 and 18 of the Reserve Bank of India Act, 1934.

Issue Functions

• Currency Management as Core Function:
  • Currency management is a core function of the RBI, as stipulated in the Preamble of the Reserve Bank of India Act, 1934.
• Right to Issue Banknotes:
  • Section 22 of the RBI Act grants the RBI the sole right to issue banknotes of various denominations, excluding one rupee notes issued by the Government of India.
• Separate Issue Department:
  • Section 23 mandates that the issuance of banknotes is conducted by the RBI through a separate department called the Issue Department.
  • The RBI has Issue Departments at its Regional Offices to handle the operational aspects, while overall management is overseen by the Department of Currency Management (DCM) at its Central Office in Mumbai.
• Decision on Printing Quantity:
  • The RBI, in consultation with the Government of India, decides the quantity of notes required to be printed.
• Distribution of Notes and Coins:
  • Notes and coins are distributed through a semi-retail model involving RBI Issue Offices, Currency Chests (CCs), Small Coin Depots (SCDs), bank branches, and ATMs.
• Mandate for Clean Notes:
  • Section 27 of the RBI Act mandates the RBI to ensure that only clean notes are in circulation.
  • Soiled notes are removed from circulation and sent back to Issue Offices for further verification and processing before destruction.
• Currency Verification and Processing System (CVPS):
  • The RBI employs the Currency Verification and Processing System (CVPS) for mechanized online examination, authentication, counting, sorting, and destruction of received notes.

Monetary Policy Functions

• Statutory Basis for Monetary Policy:
  • Chapter III-F, Section 15 of the RBI Act establishes the statutory framework for the Monetary Policy and the Monetary Policy Committee (MPC).
  • The Central Government, in consultation with RBI, determines the inflation target in terms of the Consumer Price Index every five years, to be notified in the Official Gazette.
• Constitution of the Monetary Policy Committee (MPC):
  • The Central Government forms the Monetary Policy Committee through notification in the Official Gazette.
  • The MPC comprises:
    • The Governor of the RBI.
    • The Deputy Governor of the RBI in charge of Monetary Policy.
    • One officer of the RBI nominated by the Central Board.
    • Three persons appointed by the Central Government.
• Role and Responsibilities of the Monetary Policy Committee:
  • The MPC is tasked with determining the Policy Rate necessary to achieve the inflation target.
  • Its decisions are binding on the RBI.
  • The RBI is obligated to publish a document explaining the steps it will take to implement the MPC’s decisions.
• Meeting Frequency and Decision Publicity:
  • The MPC must hold meetings at least four times a year.
  • It is required to publicize its decisions after each meeting.

Public Debt Functions

1. Internal Debt Management: The Internal Debt Management Department at the Central Office and Public Debt Office at various Reserve Bank offices are responsible for managing the public debt.
2. Loan Floating: The Reserve Bank undertakes the task of floating loans on behalf of the central and state governments. This involves issuing government securities to raise funds from the market.
3. Loan Management: Once loans are raised, the Reserve Bank manages them on behalf of the governments. This includes ensuring timely payment of interest and principal amounts to investors who hold government securities.
4. Ways and Means Advances: The Reserve Bank provides Ways and Means Advances (WMAs) to governments to help them manage temporary mismatches in their receipts and payments. WMAs act as a short-term borrowing facility for governments to meet their immediate cash flow needs.
5. Surplus Cash Investments: The Reserve Bank also arranges for the investment of surplus cash balances of the governments. This ensures that idle funds are invested in appropriate instruments to generate returns for the government.

Foreign Exchange Management

The Reserve Bank of India Act 1934 contains the enabling provisions for the RBI to act
as the custodian of foreign exchange reserves, and manage reserves with defined objectives.

• Powers and Responsibilities under FEMA:
  • The RBI is entrusted with powers and responsibilities regarding external trades and payments, as well as the development and maintenance of the foreign exchange market in India under the Foreign Exchange Management Act, 1999 (FEMA).
• Authorization of Authorized Persons:
  • Section 10 of FEMA empowers the RBI to authorize individuals or entities as authorized persons to deal in foreign exchange or foreign securities, whether as authorized dealers, money changers, offshore banking units, or in any other capacity deemed fit by the RBI.
• Revocation of Authorization:
  • The RBI has the authority to revoke the authorization of an authorized dealer if it determines that it is in the public interest, or if the authorized person fails to comply with the conditions set forth in the authorization, or violates any provisions of FEMA, or any rules, regulations, notifications, directions, or orders issued by the RBI.
  • Revocation procedures are outlined in FEMA or the regulations made thereunder.
• Contraventions and Penalties:
  • Section 13 of FEMA specifies contraventions and penalties for non-compliance.
  • The RBI is empowered to compound certain contraventions under Section 15 of FEMA, offering a mechanism for settling offenses through payment of a prescribed penalty without prosecution.

Banking Regulation & Supervision

• Regulation and Supervision of Banks:
  • The RBI is tasked with regulating and supervising all types of banks in the country, although the powers exercised may vary depending on the type of bank.
• Banking Regulation Act, 1949 (BR Act, 1949):
  • The powers to regulate and supervise banking companies are conferred upon the RBI through the provisions of the Banking Regulation Act, 1949.
• Appointment and Control over Management:
  • The appointment of the chairman and whole-time directors of a banking company requires prior approval from the RBI.
  • Section 36-AB empowers the RBI to appoint additional directors on the boards of banking companies, and Section 36-AA enables the RBI to remove executives, officers, and employees under certain conditions.
  • The RBI has the authority under the BR Act, 1949, to supersede the boards of banking companies.
• Issuance of Directions:
  • Section 35-A of the BR Act, 1949, grants the RBI the power to issue directions to banking companies in the public interest, to safeguard banking policy, or to ensure proper management, preventing activities detrimental to depositors’ interests or the bank itself.
• Supervisory Powers:
  • The RBI is empowered to inspect banking companies either independently or at the request of the Central Government under the provisions of the BR Act, 1949.

Regulation and Supervision of NBFC

• Regulation and Supervision of Non-Banks:
  • The RBI is entrusted with the critical function of regulating and supervising non-banking financial companies (NBFCs).
• Mandatory Registration:
  • Section 45-IA of the RBI Act mandates every NBFC to obtain a certificate of registration from the RBI before commencing non-banking financial business.
  • NBFCs are required to maintain a net owned fund as specified by the RBI in the Official Gazette.
• Regulatory Powers:
  • The RBI has statutory powers to regulate or prohibit the issuance of prospectuses or advertisements soliciting deposits by NBFCs.
  • It also has the authority to determine policy and issue directions to NBFCs.
• Information Gathering and Direction Issuance:
  • Under Section 45-L of the RBI Act, the RBI can call for information and issue directions to NBFCs for specified reasons.
• Supervisory Control:
  • The RBI has the power to inspect NBFCs as part of its supervisory control, as stipulated in Section 45-N of the RBI Act, 1934.

Regulation & Supervision of Co-operative banks

• Regulatory Powers from Banking Regulation Act, 1949 (AACS) and RBI Act, 1934:
  • The Reserve Bank of India (RBI) derives its authority to regulate Urban Cooperative Banks (UCBs) primarily from the Banking Regulation Act, 1949 (AACS) and the Reserve Bank of India Act, 1934.
• Branch Licences and Area of Operation:
  • RBI regulates UCBs by issuing branch licenses and authorizations for extending their area of operation.
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) Requirements:
  • RBI prescribes the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements for UCBs.
• Prudential Norms:
  • RBI establishes prudential norms for UCBs concerning capital adequacy, income recognition, asset classification, and provisioning norms.
• Exposure Norms:
  • RBI sets exposure norms for UCBs to manage their risks effectively.
• Priority Sector Lending Targets:
  • RBI specifies targets for priority sector lending that UCBs are required to meet.
• Inclusion in Second Schedule of RBI Act, 1934:
  • RBI has the authority to include UCBs in the Second Schedule of the RBI Act, 1934, which affects their regulatory status and privileges.

Regulation of Derivatives and Money Market Instrument

• Introduction of Chapter III-D in the RBI Act:
  • Chapter III-D was inserted into the RBI Act with effect from January 9, 2007, through an amendment to the RBI Act, 1934.
• Purpose of the Chapter:
  • The Parliament of India deemed it appropriate to introduce provisions in this chapter to regulate transactions involving derivatives, money market instruments, securities, etc., under the supervision of the RBI.
• Power of RBI to Regulate:
  • Section 45W of the RBI Act grants the RBI the power to regulate these money market instruments.
  • The RBI may determine policies related to interest rates or interest rate products and issue directions to all agencies or specific ones dealing in securities, money market instruments, foreign exchange, derivatives, or similar instruments, as specified by the RBI.

Payment and Settlement Functions

• Role in Payment and Settlement Systems:
  • The RBI has historically played a significant role in developing and nurturing payment and settlement systems in India.
• Designated Authority under the Payment and Settlements Act, 2007:
  • Section 3 of the Payment and Settlements Act, 2007 designates the RBI as the regulatory and supervisory authority for payment systems under the Act.
• Regulation and Supervision Mandate:
  • The Payment and Settlement Systems Act, 2007 (PSS Act) regulates and supervises payment systems in India, with the RBI designated as the authoritative body for these purposes and related matters.
• Constitution of the Board for Regulation and Supervision:
  • Under the PSS Act, the RBI is empowered to establish a Committee of its Central Board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS).
  • This BPSS is tasked with exercising the RBI’s powers, performing its functions, and fulfilling its duties under the Act.

Credit Information Companies Regulation Functions

• Regulation and Supervision of Credit Information Companies:
  • The Reserve Bank of India (RBI) is entrusted with the task of regulating and supervising Credit Information Companies under the Credit Information Companies (Regulation) Act, 2005.
• Key Entities under the Act:
  • The Act establishes three essential pillars: Credit Information Companies, Credit Institutions, and Specified Users.
• Authority to Issue Directions and Inspect:
  • The Act empowers the RBI to issue directions to Credit Information Companies and conduct inspections of their operations.
• Policy Determination:
  • The RBI is authorized by the statute to determine policy related to the functioning of credit information companies, including matters concerning amalgamation and other operational issues.

Consumer Protection and promotion Functions

Consumer Education and Protection Department (CEPD) of RBI entrusted with the following functions:

• Dissemination of instructions / information relating to customer service and grievance redress by banks and RBI;
• Overseeing the grievance redress mechanism in respect of services rendered by various
  RBI offices / departments;
• Administering the Banking Ombudsman (BO) Scheme, 2006, Ombudsman Scheme for NBFCs – 2018, Ombudsman Scheme for Non-bank System Participants – 2019
• Acting as a nodal department for the Banking Codes and Standards Board of India (BCSBI);
• Ensuring redress of complaints received directly by RBI on customer service in banks;
• Liaison between banks, Indian Banks Association, Offices of Banking Ombudsman and
  RBI regulatory departments on matters relating to customer services and grievance redress.
• Creating awareness and educating public on banking and financial services;
• Issuing cautionary advices / notifications to the public a) on fictitious offers made in the name of RBI,
• Nodal department for enforcing ethical behaviour by the Financial Service Providers under the regulatory purview of RBI.

Summary of Functions of RBI

1. Monetary Authority/Management: The RBI is tasked with designing and implementing monetary policy to ensure stability in India’s financial system. It manages financial and credit systems to achieve this goal.
2. Supervision Of Financial System: Through robust regulatory measures, the RBI safeguards the interests of depositors and maintains oversight of banks’ operations and solvency. It also ensures overall financial stability through various policy decisions.
3. Regulation of Financial Markets: The RBI regulates the foreign exchange market, government securities market, and money market to maintain stability and integrity. It oversees foreign exchange transactions, government securities trading, and short-term debt securities issuance.
4. Foreign Exchange Reserve Management: Managing India’s foreign exchange reserves is a crucial responsibility of the RBI. It invests these reserves in various instruments permitted under legislative regulations to maintain stability in foreign exchange markets.
5. Bankers to the Central and State Governments: Serving as the government’s banker, the RBI handles funds on behalf of government agencies, maintains government accounts, and extends loans to central, state, and territorial governments.
6. Government Advisor: The RBI advises the government on financial and banking matters when required.
7. Debt Manager Of Central And State Governments: The RBI manages the debt of both central and state governments, issuing fresh loans and implementing debt management strategies to minimize borrowing costs and maintain a balanced maturity structure.
8. Banker To Banks: Acting as the central banker for individual banks, the RBI assists banks in maintaining statutory liquidity ratio (SLR) and cash reserve ratio (CRR) requirements. It facilitates interbank money transfers and provides short-term loans and advances to banks.
9. Issuer Of Currency: Alongside the government, the RBI designs, produces, and administers the national currency. It manages currency chests in authorized bank branches to ensure the availability of genuine and clean currency notes and coins across the country.
10. Developmental Role: The RBI plays a pivotal role in fostering economic growth by establishing financial infrastructure, ensuring credit flow to productive sectors, and promoting financial inclusion through accessible financial systems.