CENTRAL BANK – RBI
RBI is an apex institution in the banking and financial structure of the country which plays a crucial role in organizing, running, supervising, regulating and developing the banking and financial structure of the economy. India’s Central Bank is known as the Reserve Bank of India.
Historical Background of RBI
• In 1926, the Royal Commission on Indian Currency and Finance which is also known as the Hilton-Young Commission recommended the creation of a central bank.
• The idea was twofold
– To separate the control of currency and credit from the government.
– To augment banking facilities throughout the country.
• The Reserve Bank of India Act of 1934 established the Reserve Bank as the banker to the central government and set in motion a series of actions culminating in the start of operations on April 1, 1935.
• RBI was nationalizedin 1949.
• It has four Zonal offices at Delhi, Kolkata, Chennai and Mumbai for four regions: Northern, Eastern, Southern and Western regions respectively. RBI has 19 offices, which are located in state capitals and a few major cities in India. In addition, there are 9 sub-offices of RBI.
• In 1926, the Royal Commission on Indian Currency and Finance which is also known as the Hilton-Young Commission recommended the creation of a central bank.
• The idea was twofold
– To separate the control of currency and credit from the government.
– To augment banking facilities throughout the country.
• The Reserve Bank of India Act of 1934 established the Reserve Bank as the banker to the central government and set in motion a series of actions culminating in the start of operations on April 1, 1935.
• RBI was nationalizedin 1949.
• It has four Zonal offices at Delhi, Kolkata, Chennai and Mumbai for four regions: Northern, Eastern, Southern and Western regions respectively. RBI has 19 offices, which are located in state capitals and a few major cities in India. In addition, there are 9 sub-offices of RBI.
Functions of Central Bank (RBI)
• Bank of Issue: It has a sole authority to issue currency notes and coins through the issue department, which is solely responsible for the issue of notes and coins.
• Banker to Banks and Government: As the Banker’s bank, RBI acts as the custodian of cash reserves of commercial and other Banks.
• Commercial banks are under statutory obligation to keep a part of their deposits as reserves with the central bank.
• The central bank provides credit, mainly short-term credit, to the commercial banks. It provides them guidance and direction and regulates their activities.
• Commercial banks are required to shape their policy in accordance with these directions and guidance of the central bank.
• As the banker and financial adviser to the government the central bank receives the deposits of cash, cheques, drafts etc. from the government.
• It provides cash to the government for paying salaries and wages and other cash disbursements. It makes payments on behalf of the government.
• It gives short-period loans to the government. It buys and sells foreign currencies on behalf of the government.
• Lender to Last Resort: RBI helps commercial banks when they have exhausted their resources and are in financial need. In its capacity as the lender of the last resort, the central bank provides, directly or indirectly all reasonable financial assistance to commercial banks.
• Controller of Credit: RBI controls the credit creation by the commercial banks which are regarded as the most important function of Central Bank.
• At present, Credit Money or Bank Money is the dominant form of money and essentially requires the supply of credit to be regulated so as to ensure the smooth functioning of the economy.
• For this, the central bank adopts quantitative and qualitative methods of credit control. Quantitative methods aim at controlling the cost and availability of credit, while the qualitative method influences the use and direction of credit.
• Bank of Issue: It has a sole authority to issue currency notes and coins through the issue department, which is solely responsible for the issue of notes and coins.
• Banker to Banks and Government: As the Banker’s bank, RBI acts as the custodian of cash reserves of commercial and other Banks.
• Commercial banks are under statutory obligation to keep a part of their deposits as reserves with the central bank.
• The central bank provides credit, mainly short-term credit, to the commercial banks. It provides them guidance and direction and regulates their activities.
• Commercial banks are required to shape their policy in accordance with these directions and guidance of the central bank.
• As the banker and financial adviser to the government the central bank receives the deposits of cash, cheques, drafts etc. from the government.
• It provides cash to the government for paying salaries and wages and other cash disbursements. It makes payments on behalf of the government.
• It gives short-period loans to the government. It buys and sells foreign currencies on behalf of the government.
• Lender to Last Resort: RBI helps commercial banks when they have exhausted their resources and are in financial need. In its capacity as the lender of the last resort, the central bank provides, directly or indirectly all reasonable financial assistance to commercial banks.
• Controller of Credit: RBI controls the credit creation by the commercial banks which are regarded as the most important function of Central Bank.
• At present, Credit Money or Bank Money is the dominant form of money and essentially requires the supply of credit to be regulated so as to ensure the smooth functioning of the economy.
• For this, the central bank adopts quantitative and qualitative methods of credit control. Quantitative methods aim at controlling the cost and availability of credit, while the qualitative method influences the use and direction of credit.
How is Central Bank different from Commercial Banks?
• On the basis of Profit: A central bank does not aim at making profits like a commercial bank and hence is not a profit making institution. It acts in the public interest so as to control and regulate the banking and financial system of the country.
• On the basis of functions performed: A central bank does not perform ordinary commercial banking functions such as accepting deposits from the general public of the country.
• Ownership: A central bank is an organ of the government and, therefore, is owned by the government and managed by the government officials. But a commercial bank is generally maybe owned by both, private individuals as shareholders and by the government.
• Issuer of Currency: A central bank has sole monopoly of note issue, but commercial banks cannot issue notes.
• On the basis of Profit: A central bank does not aim at making profits like a commercial bank and hence is not a profit making institution. It acts in the public interest so as to control and regulate the banking and financial system of the country.
• On the basis of functions performed: A central bank does not perform ordinary commercial banking functions such as accepting deposits from the general public of the country.
• Ownership: A central bank is an organ of the government and, therefore, is owned by the government and managed by the government officials. But a commercial bank is generally maybe owned by both, private individuals as shareholders and by the government.
• Issuer of Currency: A central bank has sole monopoly of note issue, but commercial banks cannot issue notes.
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