Functions and Roles of RBI : 12 Major Functions of Reserve Bank of India (RBI)

Reserve Bank of India, Kolkata

Functions and Roles of Reserve Bank of India (RBI) 

Reserve Bank of India (RBI) is the Central Bank of India. RBI is the regulator of the entire banking in India. RBI plays an important part in the development strategy of the Government of India. 

The Reserve Bank of India was established on 1st April, 1935 and it was nationalized on 1st January, 1949. The Finance Ministry issues Currency Notes and Coins of rupee one, all other Currency Notes are issued by the Reserve Bank of India.

Reserve Bank of India (RBI) regulates commercial banks and non-banking finance companies working in India. It serves as the leader of the banking system and the money market. It regulates money supply and credit in the country. The RBI carries out India's monetary policy and exercises supervision and control over banks and non-banking finance companies in India.

Monetary Function :-

1) Issue of bank notes - 

Except for the One Rupee coins and notes, which is issued by Ministry of Finance, everything else is printed by the RBI.

• What is the Base ? - Its based on the assets of issue departments                   

1. Gold coins & Bullion 
2. Foreign Securities
3. Rupee Coins
4. Government of India Rupee Securities & 
5. The bill of exchange and promissory notes payable in India, which are eligible for purchase by the bank.

• Why only RBI ?

1. To keep uniformity in notes issue. 
2. To makes effective state supervision possible. 
3.  It is easier to control and regulate credit in accordance with the requirements in the economy.
4. It keeps faith of the public in the paper currency.

Notes :-

There are currently 4 printing presses in India where currency notes are printed - Mysore, Dewas, Salboni and Nasik. There are 4 mint where coins are minted - Kolkata, Hyderabad, Mumbai and Noida. Security Paper Mill was established in 1968 at Hoshangabad, Madhya Pradesh, to make papers for bank notes.

2) Banker to the government - 

The central bank acts as a banker and financial advisor to the government. As a banker to the government, it performs the following functions.

• It manages the account of the government. 
• It accepts receipts from the government and makes payment on behalf of it.
• RBI maintains, operates, receives of funds, makes payments etc. of the Indian Government.
• It grants short-term loans and credit to the government.
• It performs the task of managing the public debt.
• The central bank advises the government on all the banking and financial matter.
• It represents Government of India in IMF as well as World Bank.

3) Bankers Bank - 

Maintains banking accounts of all scheduled banks. It ensures that all the N.B.F.S follow the Know Your Customer guidelines. Second Schedule of RBI Act, 1934 makes RBI, a Bankers Bank such as 

• Commercial Banks - Indian and Foreign
• Regional Rural Banks
• State Co-operative Banks

4) Custodian of Cash Reserves of Commercial Banks -  

Central bank is an apex regulatory institution that controls the entire banking system of a country. The central bank act as a custodian of the cash reserves of the commercial bank as the commercial banks have to maintain a proportion of their total deposits as reserves in the form of cash with the central bank as a part of legal requirement. 

This is convention as well as compulsion. They withdraw during busy season and deposit during slack seasons.

5) Custodian of Country's Foreign Currency Reserves - 

The RBI acts as the custodian of the country's foreign exchange reserves, manages exchange control and acts as the agent of the government in respect of India’s membership of the IMF. Exchange control was first imposed in India in September 1939 at the outbreak of World War II and has been continued since. Under it, control was imposed on both the receipts and payments of foreign exchange. Foreign Currencies as are maintained by the RBI along with gold to meet any adverse balance of payments with any other country.

6) Lender of last resort - 

RBI helps Commercial Banks during their emergency time. This is done by re-discounting the bills, loans, advance etc. Though such help is coming in higher rate of interest, such help is the last opportunity for the other banks. 

7) Central clearance and accounts settlement - 

One of the essential function of RBI these days is to play the role of central clearance and account settlement for all other banks as it will have the fund of them. By having the fund, it becomes easy for RBI to manage the same.

8) Currency Chest - 

Currency Chest is the place where the RBI kept all the excess money of banks under custody. Whenever, RBI prints new currency notes, first it delivers to currency chests and then currency deliver these new currency notes to banks. A currency chest is a depository of RBI.

• The RBI has set up over 4,075 currency chests all over the country. Besides these, there are around 3,746 bank branches that act as small coin deports to stock small coins.
• The currency chests should have Chest Balance Limit (CBL) of Rs 1,000 crore, subject to ground realities and reasonable restrictions, at the discretion of the Reserve Bank. 

9) Banker, Agent & Adviser to the Government - 

Funding during financial difficulties via short-term loans, advising etc.

10) Controller of the Credit - 

To ensure stable economic and supply of money, RBI ensures that there  is control over the credits and the same is done based on the priorities of the Government of India.

Non-Monetary Function :-

1) Supervisory Function - 

• Such powers are given under RBI Act, 1934 & Banking Regulation Act, 1949
• Supervision, Control over Branches Expansion
• Liquidity of their assets
• Amalgamation and Reconstruction etc
• New responsibility were also given to RBI via Nationalization of Banks

2) Promotional Function - 

RBI was asked to promote Banking habit via extending banking to facilities to rural and semi-urban areas & to establish and promote new and specialized agencies and below are impacts of the same.

• Deposit Insurance Corporation, 1962
• Unit Trust of India, 1964
• Industrial Re-constructions Corporations of India, 1972
• National Bank For Agriculture & Rural Development (NABARD), 1982