RBI

Reserve Bank of India: History, Structure and Function of RBI

 

One of the most important financial institutions in India is “The Reserve Bank Of India ( RBI)” which is also known as the Central Bank of India. It is like a parent organization of all the commercial banks and controls everything related to money in our country from issuing money to circulation and control of money, you name it and RBI has the responsibility to handle it. The entire market works on the policies laid by the RBI. RBI makes sure that there is a sufficient supply of money without causing inflation. The bank’s works based on the guidelines of RBI and no bank can lay down its own rules and regulation. but How does RBI become so important? How it started and what was the need? These are some of the basic questions that may intrigue a banking aspirant who has just started. So, in this article, we will be covering everything related to RBI like RBI History, RBI Structure, Functions of RBI, etc

RBI History

The Reserve Bank of India was founded in 1935,  under RBI Act 1934 on the recommendations of John Hilton Young Commission in 1926 which was also  called Royal Commission on Indian Currency & Finance), is the central bank of the country & was nationalized w.e.f 01st Jan 1949 and since then it is fully owned by Government Of India. Initially the Central Office of the Reserve Bank of India was  established in Calcutta but later on it was permanently moved to Mumbai in 1937.

 

Functions of RBI:

Issuance of currency: RBI is the main and sole authority in India to issue currency notes  under signatures of Governor of RBI. RBI distributes currency all across the nation with the help of currency chests.

Banker to Government: RBI is also known as the banker to government because it provides loan and monetary help to government with the help of an instrument know as ways and means advances.

Bankers’ bank: One of the important function that it does is to provide timely supply of credit to other banks whenever required by them through monetary instruments and thus acts as lender of last resort by providing financial assistance to banks. It also provides export credit refinance, Liquidity Adjustment Facility & MSF.

Controller of Banks: One of the greatest need of central bank was to control other banks and regulated them on the basis of the set guidelines so that there is no monopoly and timely credit is available to all the sectors of an economy. RBI as a controller of banks issues directions, carries inspection (on-site as well as off-site) & exercises management control.

Controller of credit: Liquidity in the market is maintained by RBI as it can fix interest rates (including Bank Rate) & exercise selective credit controls. There are various monetary tools such as change in cash reserve ratio, stipulation of margin on securities, directed credit guidelines etc. are used for this purpose.

Maintenance of external value: RBI is also responsible for maintaining external value of Indian currency as well as the internal value. Maintaining Foreign exchange reserves are held by RBI & it also holds a wide power to regulate foreign exchange transactions under Foreign Exchange Management Act.

Subsidiaries of RBI

Fully owned: Deposit Insurance and Credit Guarantee Corporation of India (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL), and National Housing Bank (NHB).

 

Deposit Insurance and Credit Guarantee Corporation of India (DICGC) 

 Deposit Insurance and Credit Guarantee Corporation (DICGC) is a subsidiary of Reserve Bank of India. It was established on 15 July 1978 under Deposit Insurance and Credit Guarantee Corporation Act, 1961 for the purpose of providing insurance of deposits and guaranteeing of credit facilities. 

Before DICGC, there were two corporations named Deposit Insurance Corporation (DIC) and Credit Guarantee Corporation of India Ltd. (CGCI) which were merged to form DICGC with a view to integrate the functions of both DIC and CGCI.

 DICGC insures all bank deposits, such as saving, fixed, current, recurring deposit for up to the limit of Rs. 100,000 of each deposit in a bank. However, if there are more accounts in same bank, all of those are treated as a single account. The insurance premium is paid by the insured banks itself.

The functions of the DICGC (Deposit Insurance and Credit Guarantee Corporation) are governed by the provisions of 'The Deposit Insurance and Credit Guarantee Corporation Act, 1961' (DICGC Act) and 'The Deposit Insurance and Credit Guarantee Corporation General Regulations, 1961' framed by the Reserve Bank of India in exercise of the powers conferred by sub-section (3) of Section 50 of the said Act. Chairman of DICGC - B.P.Kanungo. Its head office is located in Mumbai, Maharashtra. Banks covered by Deposit Insurance Scheme

  1. All commercial banks including the branches of foreign banks functioning in India, Local Area Banks and Regional Rural Banks.
  2. Co-operative Banks - All eligible co-operative banks as defined in Section

2(gg) of the DICGC Act are covered by the Deposit Insurance Scheme

 

Bharatiya Reserve Bank Note Mudran Private Limited:

 Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) is a wholly owned subsidiary of Reserve Bank of India which prints bank notes (Indian rupees) for the Reserve Bank of India (RBI). It was established in 1995 to address the demand of bank notes. Its headquarters is located in Bangalore, Karnataka. Chairman of BRBNMPL - B. P. Kanungo.  BRBNMPL supplies a major portion of bank note requirement in the country with the remaining requirements met through Security Printing and Minting Corporation of India Limited (SPMCIL), a public sector undertaking wholly owned by Government of India. BRBNMPL has two presses in Mysore and Salboni

 The company made a world record by printing more than 20,000 million pieces of bank notes in financial year 2016-17. The company has its own design cell. It has the capability to print all the denominations of Indian bank Notes. The other two bank note presses of SPMCIL are Currency Note Press (Nashik) and Bank Note Presses (Dewas) which print bank notes in small quantities.

 Under SPMCIL, Security Paper Mill (SPM), Hoshangabad was established in 1968 and notified as non-commercial undertaking under the administrative control of Ministry of Finance, Govt. of India. SPM, a IISO 9001:2000 unit is responsible for manufacturing of different types of Security Papers.

 The Mints are situated at Mumbai, Hyderabad, Kolkata and Noida have rich minting heritage and legacy of producing quality products. These mints are carrying out minting of all coins circulated in the country.

 

National Housing Bank:

 National Housing Bank (NHB), a wholly owned subsidiary of Reserve Bank of India (RBI), was set up on 9 July 1988 under the National Housing Bank Act, 1987. NHB is an apex financial institution for housing. NHB has been established with an objective to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support incidental to such institutions and for matters connected therewith.

Under the Chairmanship of Dr. C. Rangarajan, the then Deputy Governor, RBI to examine the proposal and recommended the setting up of National Housing Bank as an autonomous housing finance institution. NHB RESIDEX was launched first official residential housing price index. Its Headquarters is in New Delhi, India. MD & CEO of NHB - Sriram Kalyanaraman.

 

Ways and Means Advances (WMA)

WMA is a mechanism used by Reserve Bank of India (RBI) under its credit policy by which to provide to States banking with it to help them to tide over temporary mismatches in the cash flow of their receipts and payments. This is guided under Section 17(5) of RBI Act, 1934, and are repayable in each case not later than three months from the date of making that advance'.

 There are two types of WMA – Normal and Special. While Normal WMA are clean advances, Special WMA are secured advances provided against the pledge of government of India–dated securities. 

 Under Section 17(5) of RBI Act allows RBI to make WMA both to the Central and State Govt. Objective: To bridge the interval between expenditure and receipts. They are not a sources of finance but are meant to provide support, for purely temporary difficulties that arise on account of mismatch/shortfall in revenue or other receipts for meeting the govt. liabilities.

Minimum Reserve System

 For the issue of currencies, the RBI follows Minimum Reserve System at present. The Minimum Reserve System (MRS) is followed from 1956 onwards.

 Under the Minimum Reserve System, the RBI has to keep a minimum reserve of Rs.200 crore comprising of gold coin and gold bullion and foreign currencies. Out of the total Rs 200 crores, Rs.115 crore should be in the form of gold coins or gold bullion. The purpose of shifting to MRS was to expand money supply to meet the needs of increasing transactions in the economy.

Monetary Policy & Its Framework:

The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934.

Monetary policy refers to the use of monetary instruments under the control of the central bank to regulate magnitudes such as interest rates, money supply and availability of credit with a view to achieving the ultimate objective of economic policy, while keeping in mind the objective of growth specified in the Act.  

The framework aims at setting the policy (repo) rate based on an assessment of the current and evolving macroeconomic situation; and modulation of liquidity conditions to anchor money market rates at or around the repo rate.

MEMBERS:

As per the provisions of the RBI Act, out of the six Members of Monetary Policy Committee, three Members will be from the RBI and the other three Members of MPC will be appointed by the Central Government. The Governor of Reserve Bank of India is the chairperson ex officio of the committee. 

The committee was created in 2016 to bring transparency and accountability in fixing India's Monetary Policy. The current mandate of the committee is to maintain 4% annual inflation until March 31, 2021 with an upper tolerance of 6% and a lower tolerance of 2%.

Instruments of Monetary Policy

There are several direct and indirect instruments that are used for implementing monetary policy.

Credit Management Techniques:

The basic premise of macro-prudential and micro-prudential policies is early detection of such build-ups and initiation of suitable corrective action. Two types of techniques, i.e., Quantitative (Policy Rates, Reserve Ratios, and Open Market Operation) and Qualitative credit controls (Margin Requirements/ LTV, Consumer credit regulation, Selective credit control, Moral Suasion) have been used by the central banks world-wide to achieve their objective of managing flow of credit in the economy.

 

Quantitative Credit Control Policy Rates

Repo Rate: 

The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the liquidity adjustment facility (LAF).

Repo (Repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short-term (max. 90 days). When the repo rate increases, borrowing from RBI becomes more expensive.

 

Reverse Repo Rate: 

The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF. It is opposite to that of Repo Rate.

An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies etc.) which is always risky.

 

Liquidity Adjustment Facility (LAF) : 

LAF is a monetary policy which allows banks borrow money through repurchase agreements. LAF consists of repo and reverse repo operations. In LAF, money transaction is done via RTGS (Real time Gross settlement). RTGS is an online money transfer method.

The aim of term repo is to help develop the inter-bank term money market, which in turn can set market-based benchmarks for pricing of loans and deposits, and hence improve transmission of monetary policy. LAF is used to aid banks in adjusting the day to day mismatches in liquidity.

 

Marginal Standing Facility (MSF) : 

A facility under which scheduled commercial banks can borrow additional amount of overnight money from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system.

All Scheduled Commercial Banks having Current Account and SGL (Subsidiary General Ledger Account) Account with Reserve Bank, Mumbai will be eligible to participate in the MSF Scheme.

The Facility will be available on all working days in Mumbai, excluding Saturdays between 3.30 P.M. and 4.30 P.M. Requests will be received for a minimum amount of Rs. One crore and in multiples of Rs. One crore thereafter. MSF will be undertaken in all SLR-eligible transferable Government of India (GoI) dated Securities/Treasury Bills and State Development Loans (SDL).

Corridor: The MSF rate and reverse repo rate determine the corridor for the daily movement in the weighted average call money rate.