RBI

There are four zonal offices of RBI at Mumbai, Kolkata, Delhi and Chennai.

RBI has nineteen regional offices at: Thiruvananthapuram, Patna, Nagpur, Lucknow, Mumbai, Kochi, Kolkata, Jammu, Kanpur, Chennai, Delhi, Guwahati, Bhubaneshwar, Bhopal, Hyderabad, Ahmedabad, Chandigarh, Jaipur and Bangalore.

These offices are established mostly in the state capitals with few exceptions.

There are four Regional Representations of RBI. New Delhi represents North region, Mumbai represents West region, while Kolkata represents East and Chennai South region.

Eleven sub-offices of RBI are at: Agartala, Aizawl, Shillong, Dehradun, Gangtok, Imphal, Panaji, Srinagar, Raipur, Shimla and Ranchi. Previously RBI had nine sub-offices. Aizwal and Imphal are the latest additions.

RBI has two training establishments that are directly under its control. These are: Reserve Bank of India Staff College in Chennai and College of Agricultural Banking, located at Pune.

Apart from these, there are three other autonomous institutions run by RBI:

• Indira Gandhi Institute of Development Research (IGIDR) at Goregaon, Mumbai
• Institute for Development and Research in Banking Technology (IDRBT) at Hyderabad and
• National Institute of Bank Management (NIBM) located at Pune

Mumbai, Kolkata, Chennai and New Delhi also have Zonal training centres of RBI.

There are several subsidiaries which are fully or partially owned by Reserve Bank of India. These are:

• Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) – This was established in February 1995 by RBI as a fully-owned subsidiary with corporate office at Bangalore. This manages two presses that produce bank notes, one in Mysore, Karnataka and the other is in Salboni in West Bengal.  The function of BRBNMPL is to produce currency notes to balance the supply and demand of those.

• National Housing Bank (NHB) – This is a wholly-owned subsidiary of RBI that was established on July 9^th, 1988 under the National Housing Bank Act, 1987. This  acts as one of the top level institution for housing and works towards achieving certain objectives as follows:
• Promoting a robust and cost-effective housing finance system and network to help all sections of population to achieve their dreams
• Integration of housing finance with the entire financial system
• To enhance the supply of resources to housing sector, increasing supply of buildable land and house-building materials and upgrading the housing sector in the country
• Making provisions to provide more affordable housing credits
• Regulating activities of housing finance companies as per supervisory and regulatory authority under the Act
• Deposit Insurance and Credit Guarantee Corporation (DICGC) – This was created by merging Deposit Insurance Corporation and Credit Guarantee Corporation of India on July 15, 1978 under ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’ and is fully subsidised by RBI.  This insures all kinds of deposits like fixed, savings, current as well as recurrent deposits of all eligible banks and guarantees the credit facilities, thus helping to bring financial stability to banking system and benefiting the depositors. Every depositor is insured up to a maximum deposit of Rs 1 lakhs for both principal and interest amount.  The deposits that are exempted from this are: Deposits of foreign, Central or State governments, Inter-bank deposits, any deposit received outside India, Deposits made by State Land Development Banks to the State cooperative banks or any amount that is specifically exempted by any entity with the pre-approval of RBI.
• National Bank for Agriculture and Rural Development (NABARD) – RBI has a major stake in NABARD and this entity shoulders multiple responsibilities such as:

• Promoting agricultural and rural development by meeting the credit needs
• Providing refinancing to different approved financial institutions for financing of rural economic developments and activities
• Maintaining Research and development of rural and agricultural sectors
• Providing short, medium and long term credits to State Cooperative Banks, Regional Rural Banks and Land Development Banks to promote rural and agricultural development. Also NABARD inspects the activities of all these banks periodically
• Providing long term assistance to state governments

Reserve Bank of India consists of 33 Departments that focus on policy issues, internal operation and different functional areas of RBI. These broadly include corporate strategy and services, consumer education and protection, Banking and non-banking supervision and regulation, currency management, financial markets operation and regulation, Economic strategy and research, Foreign exchange, Internal and external investments, monetary policy, Risk monitoring, legal policy and so on.

1. Central Board — All the activities of RBI are governed by the Central Board of Directors in accordance with the Reserve Bank of India Act. This is the main committee of the Central bank responsible for superintendence of the general affairs of the bank. The Central Board consists of 21 members. The structure of the Central Board is as follows:

• One Governor and Four Deputy Governors – Governor is the chairperson of the Central Board. Governor can nominate one of the 4 Deputy Governors as chairman in his absence. Governor and 4 Deputy Governors are the full time officials and nominated by Government of India. The highest term in the office is up to 5 years or till the age of 62 years, whichever commences earlier. However the term may be fixed by the Government. Governor and Deputy Governors are eligible for extension of their terms as well as for re-appointment. Out of the four Deputy Governors, traditionally two are from RBI ranks and are selected from the Executive Directors of the bank. One is an economist and the other person will be nominated from the public sector banks who hold the designation of chairperson. Indian Administrative Services officers are also eligible to be selected as Deputy Governors of RBI.
• Four Directors to represent Local Boards – These are Non-official directors and nominated by Central Government. They are selected from the four local boards, one from each of the Delhi, Mumbai, Kolkata and Chennai Local Boards. Their term depends on their membership of the Local Boards.
• Ten directors nominated by Government of India – These are also non-official directors and nominated by central government as experts in different walks of life like Business, Finance and cooperation, Industry and so on. They are nominated for 4 years term with the possibility of re-appointment.
• Two government officials – They are nominated by Central Government from Finance Ministry or Secretary position and terms are determined by the government

Minimum six meetings are held by the members of Central Board each year with at least one for each quarter. But typically the members meet weekly on Wednesdays.

2. Assistive Board – For Central Board of Directors in RBI, there are two assistive entities. The Governor of RBI is the chairperson for both these entities. These are:

• Board of Financial Supervision (BFS) — Constituted in 1994, this entity was designated to supervise financial institutions that include commercial banks, non-banking financial companies and financial institutions and provide guidance to RBI on supervisory and regulatory issues. They focus on consolidated accounting and on legal issues involved in bank frauds. They are also involved in separation of non-performing assets and formulating banks’ supervisory rating models.

BFS has initiated several measures including:

• Restructuring of Bank Inspection system
• Introducing off-site surveillance
• Strengthening internal defences of institutions that are supervised
• Strengthening Statutory auditors’ role
• Board for Payment and Settlement System (BPSS) – This was constituted in the year 2005 by RBI as a committee. This supervises and regulates the payment and settlement systems. Chaired by Governor, this committee comprises of all four deputy Governors and two non-official directors from the Central Board.

3. Local Board – Four Local boards of RBI are located in Mumbai, Chennai, Kolkata and New Delhi. These Local Boards represent West, South, East and North regions respectively. Each Local Board consists of 5 members and appointed by Central Government. They are appointed for a term of 4 years. Local board represents regional and economic matters and advise the Central Board on specific matters as needed basis. They represent the co-operative and indigenous banks and are delegated with specific activity from Central Board as applicable.

RBI carries out a diverse range of monetary, financial and regulatory responsibilities as the Central Bank of India. The different functions of RBI are discussed as follows:

1) Issue of Currency – RBI monitors the currency and credit aspects by maintaining the optimum liquidity position of the country on a day to day basis. RBI issues bank notes and coins and withdraws the notes and coins that are no more suitable for circulation in the market. The RBI has also the authority to withdraw notes in exchange of issuing notes of different denominations. Reserve Bank is the single authorised entity or legal tender in the country to issue notes into circulation except for one rupee notes and coins (the Ministry of Finance of the Government of India issues One-rupee notes and coins). India has four note printing presses located at Nasik, Dewas, Mysore and Salboni. India’s four coin minting facilities at Mumbai, Noida, Kolkata and Hyderabad to fulfil the requirements of currency.

2) Monetary functions – RBI formulates the country’s monetary policy as part of its role as Central Bank. This is the macroeconomic policy that is intended to stabilize commodity prices, control inflation, manage consumption, monitor adequate flow of credit in the different sectors and increase the overall economic development of the country. Monetary policy is implemented through different instruments in the open market. Some of the major ones are discussed below:

• Bank Rate – RBI lends money to banks against government securities kept as collaterals to increase the liquidity position of the bank. The fixed interest rate charged for lending money by RBI is known as Repo (Repurchase) Rate. Also RBI absorbs liquidity from the bank against government securities as collaterals. This is called Reverse Repo. The control of these interest rates enables RBI to control economy by altering the credit supply to commercial banks.
• Cash Reserve Ratio (CRR) – is the percentage of deposit that the commercial banks need to make to RBI. The higher the CRR, the lower will be the cash reserve to banks and this controls the available liquidity in the market.
• Open Market Operations – is the tool to allow buying and selling of government securities from or to the banks and public. This alters the liquidity position of the banks by altering the cash reserve position of the banks. This also allows RBI to sell Government securities maintaining the stability in the Government securities market.
• Statutory Liquidity Ratio – is the non-cash liquid assets that all financial institutions need to maintain. This limits the capability of the banks to lend resulting in anti-inflationary effect.
• Credit Ceiling – RBI issues directions to commercial banks regarding a limit of loans to be given to them. This restricts commercial banks to their lending activity to public.

3) Banker of the banks – With the objective of developing and maintaining public confidence over the financial system of the country, RBI regulates and supervises certain parameters of banking operation in India. Reserve Bank acts like a bank to commercial banks where the latter borrow money from RBI. Statutory obligation makes every bank deposit a minimum cash reserve with RBI. RBI maintains the accounts for all the scheduled banks. RBI also supports the scheduled banks by providing financial assistance to them through loans and advances which banks can avail against approved securities.

As per the Banking Regulation Act of 1949 and the subsequent amendments, RBI is given the control and power of supervision over the banking system extensively. These include regulatory authority for offering bank licenses, opening new branches and extension counters, controlling the management and working methods of the banks, monitoring the liquidity of bank assets, collation of periodic information regarding various components of assets and liabilities, amalgamation, inspection of banks, liquidation and reconstruction of banks.

RBI has control over Non-Bank Financial Institutions (NBFIs) as well and can issue directives regarding their operation and functioning. RBI has the right of periodic inspection of NBFIs and thus exerts control over them.

4) Credit Control – This is one of the most important functions of RBI. RBI has the power and authority to take responsibility of credit control to ensure internal control of price and sustainable economic growth. This is an important tool for RBI to regulate the demand and supply of money (that is liquidity) in the economy. This measure prevents the inflation or deflation of economy and stabilises the market pricing, an essential component for economic development.

Power of credit control allows RBI to channelize adequate bank credits to the different sectors resulting in the economic boost. RBI restricts supply of money during inflation and allows the inflow of money during deflation by allowing commercial banks to pump more money in the system.

There are various Qualitative and Quantitative methods of attaining Optimal Credit Control for RBI.

• Qualitative Method – are the methods to control the uses of bank credit.

• Marginal Credit – This can be interpreted as follows:

If a bank is approached for loan for purchasing a vehicle that costs ₹100,000, and bank approves ₹80,000 as loan which is 80% of the value of the asset. In that case Marginal requirement is 20%. The flow of credit could be increased or decreased by decreasing or increasing the Marginal requirement respectively.

• Rationing of Credit – This enables RBI to restrict the maximum limit of loan or advance that can be sanctioned by a commercial bank. Such rationing or fixing the ‘ceiling’ is implemented to check the credit flow like particularly in cases of speculative activities

• Direct Action – In accordance with the banking regulation Act, the central bank has the right to take strict action against any of the commercial banks in case they refuse to follow the directions given by Reserve Bank of India. Reserve Bank can impose restriction on advancing of loans on such banks. RBI exercised its authority and issued certain restrictions on the working of the Metropolitan co-operative banks.

• Moral Persuasion – RBI persuades with the commercial banks to follow directions given by RBI regarding the flow of credit like restrict credit during inflation and to lend generously during deflation.

• Publicity – Though not very effective, yet RBI uses media to publicise its views regarding current market condition and the directives to be given to the commercial banks to correct the existing economic conditions. Due to lack of highly specialised knowledge among common public, this method is not that effective.

• Quantitative Methods – are the methods that control the manners in which cash and credit are channelized in the economy and these control the quantity of the credit offered.

• Bank Rate – Controlling the bank rate is the quantitative aspect of credit control for different economic conditions of the market. If a commercial bank has lent or invested all its available funds and running short on cash above the prescribed minimum, it may approach the Reserve Bank for funds either by re-discounting some of its bills with the central bank or by borrowing from the Reserve Bank against the collateral of its own promissory notes. In such cases, RBI will comply with the cash reserve of the bank. However, RBI will charge a higher rate of lending in case there is market inflation to control money supply. On the contrary, if the economy is in deflation, the lending rate of RBI is reduced. The change in the bank rate is reflected in all other interest rates in the market.

• Open Market Operations — This refers to the sale and purchase of securities by the Reserve Bank of India to and from commercial banks. When a commercial bank purchase of securities from RBI, that results in a fall in the total cash reserves of the commercial bank and vice versa.

A fall in the total cash reserves results in the reduction of credit creation capability of commercial banks resulting in an anti-inflationary measure of control.

Similarly, if Central Bank purchases securities from commercial banks, that will result in more cash flowing to commercials banks. With increased flow of cash, the commercial banks can generate more credit, and make more finance available and is the example of an anti-deflationary measure of control by RBI.

Thus, open market operations in India act as an instrument for making budgetary resources more available on the one hand and to siphon off the excess liquidity from the system on the other hand based on the economic condition.

• Variable Reserve Ratios – This is the new method of cash control. This is the minimum reserve to be kept with Central bank by the commercial banks in the form of cash to ensure liquidity for the credit created by them.

RBI has the authority to change the reserve requirements of the commercial banks. Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) are the two types of reserves that RBI uses for this purpose. A rise in CRR reduces the credit availability from the commercial banks and acts as an anti-inflationary control by RBI. On the other hand, a fall in CRR increases the lending capacity of the banks and acts as an anti-deflationary control of economy by RBI.

5) Foreign Exchange Control – The Reserve Bank is the upholder of the foreign exchange reserves of India. RBI looks after the different aspects of the Foreign Exchange Management Act, 1999 like facilitating foreign trade and Promoting the management of foreign exchange in India.

Exchange control is imperative for regulating the demand of foreign exchange for various purposes.The supply of foreign exchanges is short due to deficit in the external reserves balance of payment.

Exchange control refers to the rationing of foreign exchange due to its demand for various categories. The exchange control is implemented by RBI on a statutory basis in accordance with the Foreign Exchange Regulation Act, 1973. This control authorises the bank to regulate foreign investments and trading, commercial and industrial activities in India of foreign concerns (excluding banking), foreign nationals and non-resident individuals. Moreover, foreign exchange control by RBI also regulates the trading, commercial and industrial activities abroad and holding of immovable property abroad by Indian nationals.

The Reserve Bank follows the general policy of the Central Government regarding exchange control which is totally related to and supplemented by trade control. While trade control is limited to the physical exchange of goods, exchange control entails supervision over payments for the financial transactions pertaining to the exports and imports of the country.
Reserve Bank carries out foreign exchange control through authorised foreign exchange departments of commercial banks. The day-to-day transactions of buying and selling foreign exchange are taken care of by banks. Certain established firms, hotels, shops, etc., are given money changer’s licences by banks to deal in foreign currencies and travellers cheques to a limited extent.

Foreign Exchange control puts some restriction on foreign travel. An Indian travelling abroad is entitled for a fixed sum of U.S. $500 only. However, this limitation does not apply for the registered exporters for specified purposes.

Exchange control also governed all non-resident accounts. “Non-resident bank accounts” are the accounts opened in overseas branches and with correspondents of authorised dealers. The approval of RBI is needed to transfer money abroad from these overseas accounts held by Indians who went for business, employment or travel purposes.
RBI encourages Non-resident (External) Accounts holders to remit their savings in India.

6) Reserve Bank of India acts as the Banker for Government of India – RBI works as a banking agent and advisor for the Central and State Governments of India by carrying out a series of banking and financial services to the government as follows:

• RBI operates and maintains the deposits of Central and State Governments
• Helps Government to issue new loans, treasury bills and manage public debt
• Does payment and collection on behalf of Governments
• Supports Central and State governments by providing ‘ways and means’ advances which needs to be repaid within three months of borrowing.  This advance acts as the interim  solution between expenditure and flow of receipts of revenue
• RBI acts as financial advisor for Central and State Governments suggesting the timing, terms and significance of issuing new loans
• RBI provides advice regarding financial and banking issues, for financial planning and resource mobilization
• Central Government works with RBI on certain issues while formulating 5-year plans for India
• RBI advises Government on foreign trade and exchange policies and international finance and trade
• RBI represents the Government of India to the World Bank and the international Monetary Fund

7) Reserve Bank of India works for the detection of fake currency – In order to combat the problem of fake currency in the market, Reserve Bank of India has launched a website: www.paisaboltahai.rbi.org.in. This site has been developed to provide information and build awareness among the masses on how to identify fake notes. This would help RBI to trace the fake notes and eliminate from the system. The new notes are equipped with added security features.

Apart from traditional financial, regulatory and monetary activities, Reserve Bank of India is involved with an array of promotional and developmental activities which are very important for developing countries like India. These include:

• Development of Financial System – RBI works directly and indirectly to develop an efficient financial system that includes financial markets, financial instruments and financial institutions. These are of prime importance for a developing world to achieve overall economic development
• Establishment of Industrial Finance – RBI played a critical role to set up financial institutions which will provide adequate and timely credit to industries of all sizes. This credits are extremely important for the economic growth of our country
• Development of Agriculture – RBI paid special attention to direct the credit and cash flow towards the agriculture sector
• Data collection and publication of Reports – RBI collects important statistical data related to banking, finance, credit, currency, agricultural and industrial production and processes and disseminates those as reports and bulletins regularly for various economic sectors. These help in research and policy making for different sectors
• Promoting the banking habit – RBI works to promote the banking habit for the mass by establishing the habit and culture of saving and by initiating the expansion of banking network to semi-urban and rural sectors in India. This will reduce the activity of unorganised and many a times unauthorised sector of indigenous bankers and money lenders
• RBI established the Deposit Insurance Corporation. This helps to develop the banking system of the country, which will gain the confidence of the depositors and will prevent bank failures

However, there are certain aspects of business where the Reserve Bank of India is forbidden to venture out. Some of these are:

• RBI cannot participate in any trade, business or industry nor can provide any financial assistance to such entities or events
• Cannot buy shares of any banks, commercial or industrial entities
• Cannot grant loans and advances which are unsecured, neither can issue mortgage loans
• RBI is not allowed to pay interest on deposits
• If bills are not payable on demand, RBI cannot draw and accept such bills
• RBI is not allowed to purchase any immovable property except for using as its own offices