Documentos de Académico
Documentos de Profesional
Documentos de Cultura
CENTRAL BANKING
The central bank of country as the name signifies, is the central monetary institution
that regulates the supply, availability and cost of money in the interest of the general
public. The central controls and directs other banking institutions and renders services
to them.
The establishment of a central bank for India was the result of a well thought out plan
after several discussions. According to the white paper, the transfer of responsibility at
the centre from British to Indian hands was made dependent on the condition that a
Reserve Bank, free of political influence, be established. Accordingly, a new bill was
introduced in the Indian Legislative Assembly on8th September 1933 and was passed
on 6th march 1934. The reserve bank of India (RBI) commenced business on the 1 st of
April 1935.
The central office of the Reserve Bank is in Mumbai. The central office is where the
Reserve Bank Governor whop along his team (Board members) is formulating policies.
Originally, the Reserve Bank of India was set up as a shareholders’ bank with a share
capital of Rs. 5 crore divided into 5 lakh fully paid-up shares of Rs. 100 each. The entire
share capital was owned by private shareholders with the exception of Rs. 2,20,000
which was reserved for allotment to the Government.
For the successful operation of the Bank, the country is divided into four regions, viz.
Mumbai, Kolkata, Chennai and New Delhi. RBI is governed by a Central Board and
four Local Boards each for the four regions of the country.
Close integration between the policies of the Reserve Bank and the Government was
found to be essential; therefore the question of its nationalization was discussed from
time to time. However, the decision in this regard was taken only after the attainment
of Independence. Finally, the Reserve Bank of India [Transfer of Public Ownership]
Act, 1948 was passed and as per provisions of the Act, the entire share capital of the
Bank was acquired by the Government of India with effect from 1st January 1949.
MANAGEMENT
The management of the Bank is vested in the hands of a Central Board of Directors and
four local boards. The Central Board consists of 20 members. It consists of the
following:
The Board is expected to meet at least six times in a year and at least once in each
quarter. The directors are appointed for a period of four years and the appointments are
made in such a manner that two directors retire every year. The Governor is the
chairman of the Central Board of Directors and the Chief Executive Authority of the
Bank.
The RBI performs all the functions; a typical central bank is expected to do. The
Preamble of the RBI Act, 1934 defines the main functions of the Bank as “to regulate
the issue of bank notes and the keeping of reserve with a view to securing monetary
stability in India and generally to operate the currency and credit system of the country
to its advantage.”
Monetary Functions: The monetary functions of the Reserve Bank are related to
control and regulation of money and credit. They are:
▪ Note issue
▪ Banker to the Government
▪ Bankers’ Bank and lender of last resort
▪ Custodian of foreign reserves
▪ Controller of credit
Note Issue
The Reserve Bank of India has the sole authority to issue currency in the country. All
currencies (except one rupee coins, one rupee notes and other smaller coins) are issued
by the Reserve Bank of India. Since the bank has the monopoly to issue currency, it
controls the supply of currency in India.
Controller of Credit:
This is the most important function performed by the Central Bank. The RBI has all the
instruments of credit control which are ordinarily available to the central banks, at its
disposal.
Methods of Credit control: The various methods which are employed by the central
bank to control the creation of credit by the commercial banks are classified under two
heads:
a. Quantitative Methods
b. Qualitative Methods
a. Quantitative Methods:
i. Bank Rate: Bank rate may be defined as the minimum official rate at
which the Central bank as a bank of rediscount rediscounts the bills of
exchange brought to it by commercial banks. The Section 49 of the RBI
Act defines bank rate as “the standard rate which is prepared to buy or
rediscounts bills of exchange or other commercial papers eligible for
purchase under this Act. RBI tries to control credit through bank rate
policy. There is an intimate relationship between bank rates and other
interest rates prevailing in the market. If there is any change made by the
RBI in its bank rate, it will lead to corresponding changes in the other
interest rates of the market, thereby making credit either dearer or cheaper
as the case may be. Bank rate has certain limitations, which are as follows:
✓ The commercial banks are able to get other refinance facilities; therefore
they do not wish to go to the Reserve Bank for rediscounting their
eligible securities at bank rate.
✓ The bill market in India is not developed; therefore the sub-markets of
Indian money market are not influenced by the bank rate.
ii. Open Market Operations: In India, Open Market Operations refer to the
purchase and sale of govt. securities by the RBI from / to the Public and
banks on its own account. The RBI does not use open market operations
as a means of credit control instead these operations have been employed
to assist the govt. in its borrowing programmes. The open market
operations are also used to provide seasonal finance to commercial banks
by purchase of securities from them.
iii. Variable Reserve Ratio: As per section 42 of RBI “every bank included
in the second schedule shall maintain with the bank an average daily
balance, the amount of which shall not be less be 3% of the total demand
and total liability in India of such bank.”
❖ Cash Reserve Ratio: By changing the CRR, the cash reserves of the
commercial banks can be directly changed affecting thereby their ability
to create credit in the economy.
b. Qualitative Methods:
The objective of qualitative methods is to divert the flow of credit into particular
uses or channels in the economy, so it encourage the flow of credit into those
uses or channels which help the growth of the economy. The following three
kinds of qualitative credit control methods are generally exercised by the banks: