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Powers and Functions of the Reserve Bank

Today there is a central bank for each and every country in the world. The Reserve Bank of India is the Central Bank of our country. It was established under the Reserve Bank of India Act, 1934 and started functioning from April 1, 1935. It was nationalized with effect from January 1, 1949. It performs variety of functions, both traditional and promotional. Organisation of the Reserve Bank of India The affairs of the Reserve Bank of India are managed by the Central Board of Directors. The Central Board of Directors consists of:

  1. A Governor and not more than four Deputy – Governors appointed by the Central Government under Section 8(1) (a) of the Reserve Bank of India Act, 1934.
  2. Four Directors nominated by the Central Government, one from each of the four Local Boards in terms of Section 8(1) (b).
  3. Ten Directors nominated by the Central Government under Section 8(1)(c), and
  4. One Government official nominated by the Central; Government under Section 8(1) (d).

The Reserve Bank of India has Local Boards with Headquarters at Bombay (Mumbai), Calcutta (Kolkata), Madras (Chennai) and New Delhi. Local Boards consist of five members and these members are appointed by the Central Government as far as possible to represent territorial and economic interest, the interest of co-operatives and indigenous banks.

The Chairman of the Central Board of Directors of the Reserve Bank of India is called the Chief Executive Authority of the Bank and he is known as the Governor. The Governor has the powers of general Superintendence and direction of the affairs and business of the bank and he is authorized to exercise all powers, which may be exercised or done by the bank. In the absence of the Governor, the Deputy Governor nominated by him in this behalf exercises his powers.

Objectives of RBI

The Reserve Bank of India was established in order to fulfil the following objectives –

  1. To maintain stability in the internal and external value of Indian rupee.
  2. To establish co-ordination between money and credit in the country.
  3. To act as banker to the government.
  4. To regulate banking system in the country.
  5. To control and regulate credit and foreign exchange.
  6. To arrange agricultural finance.
  7. To establish monetary relation with foreign countries.
  8. To collect and publish statistical data relating to money, credit and banking business.

Functions of Reserve Bank of India

There are types of functions of Reserve Bank of India.

Functions as Central Bank

Note-Issue

The sole power of issuing the bank-notes is vested with the Reserve Bank of India in our country. Except one rupee note, which is issued by the Government of India, all the other notes up to 2000 rupee denomination, are issued by Reserve Bank of India, under Section 24 of the Reserve Bank of India Act.

Reserve Bank as Government Bank

As per Section 20 and 21 of the Reserve Bank of India Act, the Reserve Bank of India functions as the Government’s Banker and takes up the following functions:

  1. Remitting money to foreign Countries on Government order: As a government banking the Reserve banker, the Reserve Bank of India manages to transfer the amounts to the overseas on the orders of the government.
  2. Transferring of Government Funds : On behalf of government the Reserve Bank of India also effects the transfer of the various funds.
  3. Providing for Foreign exchange for Government : The Reserve Bank of India also provides for the foreign exchange to the government for the state activities.
  4. Accepting and making payments for Government : The Reserve Bank of India receives all the payments on behalf of the government. It has not to pay any interest on the government deposits.
  5. Arranging the public loans for Government: The Reserve Bank of India manages and provides the short term public loans for Central Government.
  6. Advances to the state government: In case of emergent needs, the Reserve Bank of India also provides for short terms loans in the state government.
  7. Acting as Government’s Financial Advisor: In connection with vario0us national and international problems, the Reserve Bank of India extends as consultation to the Central and State Government.

Reserve Bank of Banker’s Bank

The Reserve Bank of India has been granted some very special rights and privileges in order to establish a sound banking system in our country. Right from the setting up of the banks up to their winding up, all the functions are performed with the consent of Reserve Bank of India. The following are some such important functions as are performed by the Reserve Bank of India.

  1. Obtaining licences regarding setting up: Every bank set up in India, has to obtain licence from Reserve Bank of India. Before granting of the licence, Reserve Bank of India investigates about the financial stability of the applying bank, whether its incorporation has been in the interest of the depositors or not.
  2. Management and direction: The Reserve Bank of India has power to intervene sufficiently in the management and control of the banks. If any director of some bank does something undue, he maybe removed from his office by the Reserve Bank of India.
  3. Granting permission for branch expansion and shifting: Without the permission of Reserve Bank of India, neither any bank could open its new branch nor could transfer its branches from one place to the other.
  4. Carrying on Inspection: In order to strengthen the Indian banking system, Reserve Bank of India is empowered to inspect any bank. Inspection can be taken up anytime without any prior information.
  5. Checking up of final accounts: In our country every bank is required to prepare its annual accounts for each year, as closing on 31st March, and three copies of its care to be submitted to the Reserve Bank of India.
  6. Keeping liquidity Reserve: Every bank is required to keep in deposit some percentage as part of its deposits with the Reserve Bank of India. On such deposits, the Reserve Bank of India doesn’t give any interest.
  7. Working as final grantor of loans: As banker’s bank, the Reserve Bank of India extends the financial help from time-to-time to scheduled banks in case of need. Besides giving direct loans or against the mortgage of the approved securities, it also makes full deduction of the bank’s bills.
  8. Working clearing house to banks: For clearing the mutual payments and dues, Reserve Bank of India acts as the clearing house of the banks. After the setting-up of the Reserve Bank of India, every year the number of clearing houses is increasing in the country.
  9. Credit Control: In order to mobilize properly the monetary system of the country, Reserve Bank of India acts as a central bank for the credit control. For controlling credit by the Reserve Bank of India, several different devices are used.

Foreign exchange system

On account of the increasing significance of the foreign currency for economic development and to check up all the unwanted acts in this sphere, Reserve Bank of India as opened with it, a credit control department.

Compilation and publication of data

Reserve Bank of India also arranges to collect facts and figures pertaining in the Indian economy and publish them for the use and benefit of various classes of Indian masses.

Providing agricultural credit

The Reserve Bank of India has separately set up an agricultural credit department for the purpose of conducting research pertaining to agricultural problem, bringing co-ordination among of agricultural credit, and extending consultations regarding agriculture.

Providing for training of banking employees

In order to increase the efficiency in the working of the banking employees and to provide better services to the customers, the Reserve Bank of India also provides for the training of the employees of the Indian banks.

Functions as ordinary Bank

  1. Purchase, sale and re-discounting of agricultural bills: The Reserve Bank of India also works as purchaser, seller and re-discounter for the agricultural bills maturing within a maximum of 15 months period, as drawn up within India. It is the work of an ordinary bank.
  2. Purchase, sale and re-discounting of commercial bills: Apart from the agricultural bills, the Reserve Bank of India also acts for the purchase, sale or re-discounting of the commercial bills maturing within a maximum period of 90 days.
  3. Accepting securities without interest : The securities without interest, are also accepted by the Reserve Bank of India from the private institutions, banks and central and state governments.
  4. Acquiring the loans: The Reserve Bank of India also procure loan from any scheduled bank of the country or from any central bank of some other country, in case of need, for a maximum period of 90 days.
  5. Granting loans to the central and state government: The Reserve Bank of India also grants loans to the central and state governments, in case of need, on the security of investment, promissory notes, bills of exchange and valuable metals, bullion etc. Such loans are usually granted for routine activities, for a maximum period of 90 days.

Powers of RBI

Election of New Directors

Section. 12A: The Reserve bank may, by order, require any banking company to call a general meeting of the shareholders of the company within such time, not less than 2 months from the Date of the order, as may be specified in the order or within such further time as the Reserve bank may allow in this behalf, to elect, in accordance with the voting rights permissible under this Act, fresh directors.

Cash Reserve

Section. 18: Under Section 42 of the Reserve Bank of India Act, every scheduled bank has to maintain a sum equal to at least 3% of its time and demand liabilities in India as cash reserve with the RBI. The Reserve bank has the power to increase the percentage up to 20% by a notification in the government Gazette.

Licensing of Banking companies

Section. 22: Prior to granting license to a banking company, the Reserve bank may require to be satisfied by an inspection of the books of the banking company or all or any of the following conditions should be fulfilled, namely:

  1. What the company is or will be in a position to pay its present or future depositors in full as they become due
  2. That the affairs of the company are not being, or are not likely to be conducted in a manner detrimental to the interest of the depositors.
  3. In the case of a company incorporated outside India that the carrying on of banking business by such company in India will be in the public interest and that the government or law of the country in which it is incorporated does not discriminate in any way against banking companies registered in India.

Cancellation of the License: The license of any banking company may be cancelled by the Reserve Bank due to the following reasons:

  1. If the company ceases to carry on banking business in India; or
  2. If any of the conditions imposed by the Reserve bank are not fulfilled.

Any banking company aggrieved by the decision of the Reserve bank cancelling a license may, within thirty days from the date on which such decision is communicated to it, appeal to the central government.

Opening of New and Transfer of Existing place of Business

Section. 23: Without obtaining prior approval of the Reserve Bank:

  1. 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.
  2. No banking company incorporated in India shall open a new place of business outside India or change, otherwise than within the same city, town or village in any country or area outside India, location of an existing place of business situated in that country or area.

The permission of the Reserve bank is not necessary where a banking company opens a temporary place of business for a period not exceeding one month, within a city, town or village within which the company has already a place of business, for the purpose of affording the banking facilities to the public on the occasion of an exhibition, a conference or a mela or any other like occasion.

Power to call for information relating to the business of any banking company

Section. 27(2): Sec. 28 gives power to the Reserve Bank to publish such information if it considers it proper to do so in the public interest.

The Reserve bank can at any time a banking company to furnish within the specified time, with such statements and information relating to business of the banking company as the Reserve bank may consider necessary.

Power of Inspection

Section. 35: The Reserve Bank may at any time, and shall at the direction of the central government inspect a banking company and its books and accounts to find out whether or not the affairs of the banking company are conducted in the interest of the depositors. The central government may after giving reasonable notice to the banking company, publish the report submitted by the Reserve Bank of such portion thereof as may appear necessary

Power to give Directions

Section. 34: The Reserve Bank may from time to time issue directions to banking companies generally or to any banking company particularly. The Reserve Bank shall do so when it deems it necessary to issue such directions :

  1. in the public interest; or
  2. to secure the proper management of any banking company generally.
  3. to prevent the affairs of any banking company being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interests of the banking company;

Reserve Bank's approval necessary for the amendment of provisions relating to appointment of managing directors

Section. 35B: The appointment or reappointment of a managing or a whole time director, manager or chief executive officer, by whatever name called, shall not have any effect unless it is made with the previous approval of the Reserve Bank.

Power of Reserve Bank to appoint additional directors

Section. 36AB: The Reserve Bank, if considers necessary for the protection of the interest of depositors, from time to time may appoint additional directors but the number should not exceed five or one third of the maximum strength fixed for the Board by the articles whichever is less. Additional directors shall hold office at the pleasure of the Reserve bank not exceeding three years at a time.

Power of Reserve Bank to remove managerial and other persons from office

Section. 36AA: For preventing the affairs of the banking company, the Reserve bank may remove any director, chief executive officer by writing an order the order shall contain reasons for his removal and the date from which it is effective. Reasonable opportunity should also be given to such a person for explaining his position before such order is actually passed against him. Such person, within 30 days, can appeal to central government.

Further powers and functions of the Reserve Bank

Section. 36

  1. It may on a request being made, assist in a proposal for the amalgamation of banking companies concerned.
  2. It may assist any banking company by means of the grant of a loan or advance to it.
  3. It shall make an annual report to the central government on the trend and progress of the banking in the country. It shall also include in such report its suggestions for the strengthening of banking business throughout the country.


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