Functions of RBI | Functions of Reserve Bank of India

The functions of RBI include maintaining monetary stability keeping in mind the objective of growth. The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. It was started with a paid up capital of rupees fifty million. The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937

Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. The primary role of the RBI, as the Act suggests, is monetary stability and stable expectations of inflation

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History of RBI

Hilton-Young Commission – recommended the creation of a central bank for India
To separate the control of currency and credit from the Government
To augment banking facilities throughout the country.
Reserve Bank of India Act of 1934 established the Reserve Bank
Started operations on 1^st April, 1935
Started as a private shareholders’ bank, the Reserve Bank was nationalised in 1949
Started with paid-up capital of Rs 5 crore and still maintains the same paid up capital

Preamble of RBI

to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth

Central Board of RBI

The Reserve Bank’s affairs are governed by a central board of directors. The board is appointed by the Government of India.

Official Directors
- Full-time : Governor and not more than four Deputy Governors
Non-Official Directors
- Nominated by Government: ten Directors from various fields and two government Official
- Others: four Directors – one each from four local boards
Appointed/nominated for a period of four years

Local Boards of RBI

One each for the four regions of the country in Mumbai, Kolkata, Chennai and New Delhi

To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time.

Regional offices of RBI

27 regional offices, most of them in state capitals and 04 Sub-offices
six training establishments

Subsidiaries of RBI

Deposit Insurance and Credit Guarantee Corporation of India (DICGC)
Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
Reserve Bank Information Technology Private Limited (ReBIT)
Indian Financial Technology and Allied Services (IFTAS)

Functions of RBI

Banking:
- Section 17 of the RBI Act enables RBI to do banking business, such as accepting deposits, without interest, from any person.
- Section 18 facilitates the RBI to act as a ‘Lender of Last Resort’
- Section 19 states the list of businesses which the RBI may not transact.
- Sections 20 and 21 of the RBI Act the RBI shall have an obligation and right respectively to accept monies for account of the Central Government and
- banking functions may be undertaken by way of an agreement between the RBI and the State Government concerned as provided in Section 21-A of the RBI Act.
Monetary Authority
- RBI Act provides for a statutory basis for the Monetary Policy Framework and the Monetary Policy Committee
Regulator and supervisor of the financial system:
1. Banking Companies
  - Power to regulate and supervise banks has been provided under the provisions of the Banking Regulation Act, 1949 (BR Act, 1949) to the RBI
  - to formulate banking policy , regulate banking business, protect the interests of banking companies, supervision of banking companies
  - to appoint a Chairman or Managing Director of a banking company
  - to appoint additional directors on the boards of banking companies. Even remove them
  - to control advances by banking companies
  - to issue license and also to cancel licenses of banking companies
  - to issue directions to banking companies in the public interest or in the interest of banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company or to secure the proper management of any banking company
  - to issue directions to banking companies for resolution of stressed assets
  - to inspect banking companies on its own or at the instance of Central Government
  - well-being of banking company, in improving monetary stability and economic growth
2. NBFC
  - Every non-banking financial company to obtain a certificate of registration from the RBI
  - to maintain net owned fund as may be specified by the RBI
  - statutory powers to regulate or prohibit issue of prospectus or advertisements soliciting deposits of money by non-banking financial companies
  - power to determine policy and issue directions to non-banking financial companies,
  - power to inspect them
3. Co-operative banks
  - Regulation and supervision of the urban co-operative banks is entrusted with RBI
  - duality of jurisdiction over cooperative banks both by the Reserve Bank of India, in terms of the Banking Regulation Act, 1949, and the Registrar of Cooperative Societies, in 38 terms of the respective State Cooperative Societies Act, of the State concerned
4. Manager of Foreign Exchange
  - The powers and responsibilities with respect to external trades and payments, development and maintenance of foreign exchange market in India are conferred on the RBI under the provisions of the Foreign Exchange Management Act, 1999
  - RBI to authorize any person to be known as authorized person to deal in foreign exchange or in foreign securities, as an authorized dealer, money changer or off-shore banking unit or in any other manner as it deems fit
5. Issuer of currency
  - Right to issue bank notes is one of the key central banking functions the RBI is mandated to do
  - Section 22 of the RBI Act confers the RBI with the sole right to issue bank notes in India
  - The RBI Act enables the RBI to recommend to Central Government the denomination of bank notes, which shall be two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or other denominations not exceeding ten thousand rupees
  - The bank notes that are being issued by the RBI are exempt from payment of stamp duty
6. Developmental role
  - to promote financial inclusion
  - Section 26-A casts a responsibility on the RBI to focus towards achieving financial literacy in the country
7. Regulator and Supervisor of Payment and Settlement Systems
  - Payment and Settlement Systems Act, 2007 provide for the regulation and supervision of payment systems in India and to designate the Reserve Bank of India as the authority for that purpose
8. Banker to the Government
9. Banker to banks
10. Public Debt
  - Government Securities Act, 2006 prescribes the procedure and modalities to be followed by the RBI in the management of the public debt and also confers various powers on the RBI including the power to determine the title to a Government security.
  - The GST Act Applies to Government securities created and issued by the Central Government or a State Government
11. Regulation of Derivatives and Money Market Instruments
  - Regulation of transactions relating to derivatives, money market instruments, securities, etc. by the RBI
  - The power of RBI to regulate these money market instruments have been provide under Section 45W of the RBI Act
12. Consumer Protection
  - Protection of the interests of the depositors

Important

The power of the RBI to regulate and supervise banking companies emanates from the provisions of the BR Act whereas the powers to regulate and supervise non-banks has the source from RBI Act
Regional Rural Banks (RRBs), State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs) are supervised by National Bank for Agriculture and Rural Development
Housing Finance Companies (HFCs) are supervised by National Housing Bank (NHB)
Ministry of Company Affairs (MCA), Government of India regulates deposit taking activities of companies, other than NBFCs, registered under the Companies Act, but not those which are under separate statutes.
RBI/NABARD is concerned with the banking function of the co-operatives, the management control rests with the State/Central Governments. The Registrar of Co-operative Societies (RCS) of respective states in case of single state co-operative banks and the Central Registrar of Co-operative Societies (CRCS) in the case of multi-state co-operative banks are joint regulators with the RBI for UCBs and with the NABARD for rural co-operatives
The Insurance Regulatory and Development Authority (IRDA) regulates the insurance sector
The capital market, credit rating agencies, etc., are regulated by Securities and Exchange Board of India (SEBI).