SPECIAL ENTITIES ACCOUNTING

AND INNOVATION ACCOUNTING

Project concept
Role of RBI in banking sector
--S.Y.BCOM GROUP II
 Group members
Roll no. Name

013 Ujjwala agrawal

014 Deepika agarwal

015 Sanket Agrawal

016 Yash Agrawal

017 Manoj ahir

018 Sonu ahir

019 Abhishek Patel

020 Radhika bagtharia

 OVERVIEW-RBI

Central bank of India, established on April 1, 1935 in accordance

with the provisions of the Reserve Bank of India Act, 1934.

The Central Office initially established in Kolkata but was

permanently moved to Mumbai in 1937.

Though originally privately owned, been fully owned by the

Government of India since nationalization in 1949.

Duvvuri Subbarao is the current Governor of RBI.

22 regional offices. Started with a paid up share capital of 5 crore.

 PREAMBLE
The Preamble of the Reserve Bank of India describes the
basic functions of the Reserve Bank as: "...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.”

The Preamble of the Reserve Bank of India describes the basic

functions of the Reserve Bank as 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.
 ROLE OF RBI

Bank of Issue

Banker to Government

Bankers' Bank and Lender of the Last Resort

Controller of Credit

Custodian of Foreign Reserves

Supervisory functions

Promotional functions
 BANK OF ISSUE
Bank of Issue Under Section 22 of the Reserve Bank of India Act, has the sole right
to issue bank notes of all denominations.

The distribution of one rupee notes and coins and small coins undertaken as agent
of the Government.

Has a separate Issue Department entrusted with the issue of currency notes.

Originally, assets of Issue Department were to consist of not less than two-fifths of
gold coin, gold bullion or sterling securities provided the amount of gold was not
less than Rs. 40 crores in value.

The remaining three-fifths of the assets might be held in rupee coins, Government
of India rupee securities, eligible bills of exchange and promissory notes payable in
India.

Since 1957, required to maintain gold and foreign exchange reserves of Rs. 200
crores, of which at least Rs. 115 crores in gold. The system as it exists today is
known as the minimum reserve system.
 BANKER TO
GOVERNMENT
Agent of Central Government and of all State Governments in
India excepting that of Jammu and Kashmir.

Obligation to transact Government business, via. to keep the cash

balances as deposits free of interest, to receive and to make
payment exchange remittances and other banking operations.

Helps the Government - both the Union and the States to float new
loans and to manage public debt.

The Bank makes ways and means advances to the Governments

for 90 days.

Makes loans and advances to the States and local authorities. Acts
as adviser to the Government on all monetary and banking
matters.
BANKERS BANK AND LENDER OF THE LAST RESORT

Every scheduled bank required to maintain a cash balance equivalent to

5% of its demand liabilities and 2 per cent of its time liabilities in India.

By an amendment of 1962, the distinction between demand and time

liabilities was abolished and banks have been asked to keep cash reserves
equal to 3 per cent of their aggregate deposit liabilities.

The minimum cash requirements can be changed by the Reserve Bank of

India.

Scheduled banks can borrow on the basis of eligible securities or get

financial accommodation in times of need or stringency by rediscounting
bills of exchange. Since commercial banks can always expect the RBI to
come to their help in times of banking crisis it is also the lender of the last
resort.
CUSTODIAN OF FOREIGN RESERVES

Responsibility to maintain the official rate of

exchange.

After India became a member of the International

Monetary Fund in 1946, it has the responsibility of
maintaining fixed exchange rates with all other
member countries of the I.M.F.

Acts as the custodian of India's reserve of

international currencies. RBI has the responsibility of
administering the exchange controls of the country.
SUPERVISORY FUNCTIONS
Has certain nonmonetary functions of the nature of supervision of
banks and promotion of sound banking in India.

The Reserve Bank Act, 1934, and the Banking Regulation Act,
1949 have given the RBI wide powers of supervision and control
over commercial and co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their assets,
management and methods of working, amalgamation,
reconstruction, and liquidation.

Authorised to carry out periodical inspections of the banks and to

call for returns and necessary information from them.

Helped a great deal in improving the standard of banking in India

to develop on sound lines and to improve the methods of their
operation.
PROMOTIONAL FUNCTIONS
The Reserve Bank was asked to promote banking habit, extend banking facilities
to rural and semi-urban areas, and establish and promote new specialised
financing agencies.

Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the
SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India
in 1964, the Industrial Development Bank of India also in 1964, the Agricultural
Refinance Corporation of India in 1963 and the Industrial Reconstruction
Corporation of India in 1972.

These institutions were set up directly or indirectly by the Reserve Bank to

promote saving habit and to mobilise savings, and to provide industrial finance
as well as agricultural finance.

The Bank has developed the co-operative credit movement to encourage saving,
to eliminate moneylenders from the villages and to route its short term credit to
agriculture. The RBI has set up the Agricultural Refinance and Development
Corporation to provide long-term finance to farmers.
REGULATION OF BANKING SYSTEM

The objectives of bank regulation, and the emphasis, varies

between jurisdiction. The most common objectives are:

Prudential -- to reduce the level of risk bank creditors are

exposed to (i.e. to protect depositors)

Systemic risk reduction -- to reduce the risk of disruption

resulting from adverse trading conditions for banks causing
multiple or major bank failures

Avoid misuse of banks -- to reduce the risk of banks being used

for criminal purposes, e.g. laundering the proceeds of crime

To protect banking confidentiality

Credit allocation -- to direct credit to favored sectors

 CREDIT CONTROL
To obtain stability in the internal price level.

To attain stability in exchange rate.

To stabilize money market of a country.

To eliminate business cycles-inflation and depression-by

controlling supply of credit.

To maximize income, employment and output in a country.

To meet the financial requirements of an economy not only

during normal times but also during emergency or war.

To help the economic growth of a country within specified

period of time. This objective has become particularly necessary
for the less developed countries of present day world
 METHOD OF CREDIT
CONTROL
There are two method of credit control:

Quantitative method Qualitative method

Bank Rate Policy Direct Action

Open Market Operations Moral persuasion

Change in Reserve Ratios Legislation

Credit Rationing Publicity

1. Bank Rate Policy:

Rate of interest charged on rediscounting the first class bills of

exchange and advancing loans against approved securities.

Also known as Discount Rate Policy.

Current rate is 6 %.

2. Open Market Operations

Purchase or sale by a central bank of any kind of paper in

which it deals.

Purchase or sale of government securities, short-term as well as

long-term, at the initiative of the central bank, as a deliberate
credit policy
3. Change in Reserve Ratios:

Every commercial bank is required to deposit with the central bank a certain part of its total
deposits. Thus, when the RBI wants to expand credit it decreases the reserve ratio as required
for the commercial banks and vice-versa.

4. CRR (Cash Reserve Ratio):

Amount of Cash (liquid cash like gold) that the banks have to keep with RBI to secure solvency
of the bank and to drain out the excessive money from the banks.

If RBI decides to increase the percent of this, the available amount with the banks comes down
and if RBI reduce the CRR then available amount with Banks increased and they are able to
lend more. RBI has reduced this ratio three times and reduced it from 9 % to 5.5% in last one
month or so. Current rate is 6%.

5. SLR (Statutory Liquidity Ratio)

The amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved
securities (Bonds) before providing credit to its customers.

Present rate of SLR is 25 % but Banks average is 27.5 % ,the reason behind it is that in deficit
budgeting Govt landing is more so they borrow money from banks by selling their bonds to
banks. so banks have invested more than required percentage and use these excess bonds as
collateral security ( over and above SLR ) to avail short term Funds from the RBI at Repo rate.
6. Repo Rate:

Rate at which our banks borrow rupees from RBI.

This facility is for short term measure and to fill gaps between demand and supply of money
in a bank .

When a bank is short of funds they they borrow from bank at repo rate and if bank has a
surplus fund then the deposit the funds with RBI and earn at Reverse repo rate .

A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo
rate increases borrowing from RBI becomes more expensive.

To borrow bank have to submit liquid bonds /Govt Bonds as collateral security , bank does
not use this facility to Lend more to their customers.

Present rate is 6.25% and reverse repo rate is 5.25%.

7. Credit Rationing:

Credit rationing means restrictions placed by the central bank on demands for
accommodation made upon it during times of monetary stringency and declining gold
reserves.

This method of controlling credit can be justified only as a measure to meet exceptional
emergencies because it is open to serious abuse.
 Qualitative method

1. Direct Action:

The central bank may take direct action against commercial banks that violate the rules,
orders or advice of the central bank. This punishment is very severe of a commercial bank.

2. Moral persuasion:

It is another method by which central bank may get credit supply expanded or contracted. By
moral pressure it may prohibit or dissuade commercial banks to deal in speculative business.

3. Legislation:

The central bank may also adopt necessary legislation for expanding or contracting credit
money in the market.

4. Publicity:

The central bank may resort to massive advertising campaign in the news papers, magazines
and journals depicting the poor economic conditions of the country suggesting commercial
banks and other financial institutions to control credit either by expansion or by contraction.
 Bibliography
www.rbi.org.in

Economic times

Indian financial system by m.y.khan