Role Of Rbi Under Banking Regulation Act, 1949.docx

Synopsis 1. 2. 3. 4. 5. 6. 7. 8.

Introduction Establishment of Reserve Bank of India History of Reserve Bank of India Function of reserve Bank of India Initiatives taken by Reserve Bank of India Powers of RBI under Banking Regulation Act, 1949 Conclusion Bibliography

Introduction 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 one of the reserve bank's roles. The Reserve Bank of India was a private shareholders 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 has 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 1943, the Reserve Bank is fully owned by the government of India.

History of Reserve Bank of India Before Independence 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 say,   

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 and Rs.10000 inn the same year were issued. After Independence 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 provisio9n of the Act.   

It is a body corporate which has perpetual succession, It has common seal and it can be sued or sue inn 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 There are various function which are performed by Reserve Bank of India, which are following: 1. 2. 3.

Traditional functions Development functions Supervisory functions

a. Traditional functions There are some traditional functions which are as followed:

1. Issue of Currency Notes The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds. 2. Banker to other Banks The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort. 3. Banker to the Government The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch. 4. Exchange Rate Management It is an essential function of the RBI. In order to maintain stability in the external value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U.S Dollar) close to each other. 5. Credit Control Function

Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other credit creation is below the required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look for growth with price stability. Thus it regulates the credit creation capacity of commercial banks by using various credit control tools. 6. Supervision: The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue license for setting up new banks, to open new branches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India. It can have periodical inspections an audit of the commercial banks in India.

b. Developmental functions 1.

Financial System developmentThe 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.

2.

Agricultural developmentRBI always pays attention to agriculture sector by assisting credit needs of this particular sector. Regional Rural Banks (RRB’s), National Bank for Agriculture and Rural Development (NABARD) which are only for agriculture finance are under the direct control of RBI.

3.

Industrial FinanceFor 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.

4.

Promotion of ExportRBI always encourage the facilities for providing finance foe 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.

5.

Reports PublicationRBI 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..

6.

Collection of DataRBI 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 1.

License to BanksRBI provides license to the banks going established. It also provide license to the new branches of existing banks.

2.

Inspection of Banks-

RBI may as and when required, may inspect the asset and liabilities of the banks which are under its control. 3.

Control on Non-Bank Financial institutionsRBI may issue directives to the NBFIs from time with regard to their functioning. It can control the NBFIs through periodic inspection.

Initiatives taken by Reserve Bank of India       

Computerization 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 of RBI under Banking Regulation Act, 1949 Banking Regulation Act, 1949 also provide powers of Reserve Bank of India as: i.

ii.

iii.

iv. v.

vi.

vii. viii.

Power of Reserve Bank of India to appoint Chairman of a Banking Company:- 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. Minimum paid-up capital and reserves:- Section 11 of the act imposes that every banking company should deposit the prescribed minimum paid-up capital and reserves with the RBI either in cash or in the form of unencumbered approved securities , or partly in cash and partly in the form of such securities within prescribed time prescribed in this section. Reserve Bank control over Banking companies:-Under Sec. 12-A of the Act, the RBI may, by order, require any banking company to call a general meeting of the shareholders of the company within such time, not less than two months from the date of the order or within such further time as RBI may allow in this behalf, to elect in accordance with the voting rights permissible under this act fresh directors, and the banking company shall be bound to comply with the order. Section 18 talks about power of RBI of direct discount. Power of the Reserve Bank of India to control advances by banking companies:- According to section 21 of the Act the RBI may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined. Licensing of banking companies:- As per Section 22 of the Act, no company shall carry on banking business in India unless it holds a licence issued in that behalf by the RBI and any such licence may be issued subject to such conditions as the RBI may think fit to impose. According section 23 of the Act , no banking company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India without obtaining the prior permission of the RBI. Section 28 gives power to reserve bank to publish any information obtained. Section 36 gives numerous powers to RBI:(a) caution or prohibit banking companies generally or any banking company in particular against entering into any particular transaction or class of transactions, and generally give advice to any banking company;

ix. x. xi. xii. xiii. xiv.

(b) on a request by the companies concerned and subject to the provisions of section 44A, assist, as intermediary or otherwise, in proposals for the amalgamation of such banking companies; (c) give assistance to any banking company by means of the grant of a loan or advance to it under clause (3) of sub-section (1), of section 18 of the Reserve Bank of India Act, 1934 (2 of 1934) [(d) at any time, if it satisfied that in the public interest or in the interest of banking company or its depositors it is necessary so to do,] by order in writing and on such terms and conditions as may be specified therein: (i) require the banking company to call a meeting of its Directors for the purpose, of considering any matter relating to or arising out of the affairs of the banking company, or require an officer of the banking company to discuss any such matter with an officer of the Reserve Bank. (ii) depute one or more of its officers to watch the proceedings at any meeting of the Board of Directors of the banking company or of any committee or of any other body constituted by it; require the banking company to give an opportunity to the officers so deputed to be heard at such meetings and also require such officers to send a report of such proceedings to the Reserve Bank; (iii) require the Board of Directors of the banking company or any committee or any other body constituted by it to give in writing to any officer specified by the Reserve Bank in this behalf at his usual address all notices of, and other communications relating to, any meeting of the Board, committee or other body constituted by it; (iv) appoint one or more of its officers to observe the manner in which the affairs of the banking company or of its officers or branches are being conducted and make a report thereon; (v) require the banking company to make, within such time as may be specified in the order, such changes in the management as the Reserve Bank may consider necessary. (2) The Reserve Bank shall make an annual report of the Central Government on the trend and progress of banking in the country, with particular reference to its activities under clause (2) of section 17 of the Reserve Bank of India Act, 1934 (2 of 1934), including in such report its suggestions, if any, for the strengthening of banking business throughout the country. (3) The Reserve Bank may appoint such staff at such places as it considers necessary for the scrutiny of the returns, statements and information furnished by banking companies under this Act, and generally to ensure the efficient performance of its functions under this Act. Section 36 aa gives power to RBI for removal of managerial and other persons from office. Section 36ab gives power to RBI to appoint additional directors for 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 to RBI on direction of High Court or central government to inspect books of account of a company being wound up. Section45r gives power to high court to call for returns and other information. Section47a gives poer to RBI to impose penalty in case of default by any banking company.

Conclusion 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.