Role and Function of the Reserve Bank of India (RBI)

 Role and Function of the Reserve Bank of

India (RBI)
In every country there is one organization which works as the central
bank. The function of the central bank of a country is to control and
monitor the banking and financial system of the country. In India, the
Reserve Bank of India (RBI) is the Central Bank.
The RBI was established in 1935. It was nationalised in 1949. The RBI
plays role of regulator of the banking system in India. The Banking
Regulation Act 1949 and the RBI Act 1953 has given the RBI the power
to regulate the banking system.
The RBI has different functions in different roles. Below, we share and
discuss some of the functions of the RBI.
RBI is the Regulator of Financial System
The RBI regulates the Indian banking and financial system by issuing
broad guidelines and instructions. The objectives of these regulations
include:
• Controlling money supply in the system,
• Monitoring different key indicators like GDP and inflation,
• Maintaining people’s confidence in the banking and financial
system, and
• Providing different tools for customers’ help, such as acting as the
“Banking Ombudsman.
RBI is the Issuer of Monetary Policy
The RBI formulates monetary policy twice a year. It reviews the
policy every quarter as well. The main objectives of monitoring
monetary policy are:
• Inflation control
• Control on bank credit
• Interest rate control
The tools used for implementation of the objectives of monetary
policy are:
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR),
• Open market operations,
• Different Rates such as repo rate, reverse repo rate, and bank
rate.RBI is the Issuer of Currency
Section 22 of the RBI Act gives authority to the RBI to issue
currency notes. The RBI also takes action to control circulation of
fake currency.
RBI is the Controller and Supervisor of Banking Systems
The RBI has been assigned the role of controlling and supervising
the bank system in India. The RBI is responsible for controlling the
overall operations of all banks in India. These banks may be:
• Public sector banks
• Private sector banks
• Foreign banks
• Co-operative banks, or
• Regional rural banks
The control and supervisory roles of the Reserve Bank of India is
done through the following:
Issue Of Licence: Under the Banking Regulation Act 1949, the RBI
has been given powers to grant licenses to commence new banking
operations. The RBI also grants licenses to open new branches for
existing banks. Under the licensing policy, the RBI provides banking
services in areas that do not have this facility.
Prudential Norms: The RBI issues guidelines for credit control and
management. The RBI is a member of the Banking Committee on
Banking Supervision (BCBS). As such, they are responsible for
implementation of international standards of capital adequacy
norms and asset classification.
Corporate Governance: The RBI has power to control the
appointment of the chairman and directors of banks in India. The
RBI has powers to appoint additional directors in banks as well.
KYC Norms: To curb money laundering and prevent the use of the
banking system for financial crimes, The RBI has “Know Your
Customer“ guidelines. Every bank has to ensure KYC norms are
applied before allowing someone to open an account.
Transparency Norms: This means that every bank has to disclose
their charges for providing services and customers have the right to
know these charges.
Risk Management: The RBI provides guidelines to banks for taking
the steps that are necessary to mitigate risk. They do this through
risk management in basel norms.
Audit and Inspection: The procedure of audit and inspection is
controlled by the RBI through off-site and on-site monitoring
system. On-site inspection is done by the RBI on the basis of
“CAMELS”. Capital adequacy; Asset quality; Management;
Earning; Liquidity; System and control.
Foreign Exchange Control: The RBI plays a crucial role in foreign
exchange transactions. It does due diligence on every foreign
transaction, including the inflow and outflow of foreign exchange. It
takes steps to stop the fall in value of the Indian Rupee. The RBI
also takes necessary steps to control the current account deficit.
They also give support to promote export and the RBI provides a
variety of options for NRIs.
Development: Being the banker of the Government of India, the
RBI is responsible for implementation of the government’s policies
related to agriculture and rural development. The RBI also ensures
the flow of credit to other priority sectors as well. Section 54 of the
RBI gives stress on giving specialized support for rural
development. Priority sector lending is also in key focus area of the
RBI.
Apart from the above, the RBI publishes periodical review and data
related to banking. The role and functions of the RBI cannot be
described in a brief write up. The RBI plays a very important role in
every aspect related to banking and finance. Finally the control of
NBFCs and others in the financial world is also assigned with RBI.