Chapters :

Money & Banking - 03

CENTRAL BANK

Central Bank is an apex Institution in the banking and Financial structure of the country. It Plays a role in Organizing, Supervising, Regulating And Developing the banking and financial structure of the economy. In India, Reserve Bank of India acts as central bank.

RESERVE BANK OF INDIA

In 1926, the Royal Commission on Indian Currency and Finance aka Hilton Young Commission recommended the creation of a Central Bank for India. This was felt in the wake of 20th century financial crisis and wars.

Reserve Bank of India was established on 1st April, 1935 as a Private Shareholder’s bank. It was constituted under the provisions of the RBI act, 1934 in Calcutta. The Headquarters Was Shifted To Bombay In 1937. Its primary function was to regulate the banking industry and be the bank of the government. Later its role consolidated at the sole banker to the government and the head of financial regulation as it was nationalised in 1949.

FEATURES

  • RBI Executive Head is called the
  • It is not a profit making institution as it acts in the public Interest.
  • It does not perform ordinary commercial banking function.
  • It is owned by government and managed by officials.
  • It has sole monopoly of note issue.
  • It has 27 regional offices; major sub offices are in Chennai, Kolkatta, Mumbai, and Delhi.
  • There is a board of directors and there are four deputy governors.

FUNCTIONS

It performs a number of important functions the main functions are.

BANK OF ISSUE:

RBI is the bank of issue. It enjoys the monopoly of note issue. Currency notes and coins issued by the central bank are the legal tender.

Only the one rupee coins are issued by the Ministry of Finance. RBI also is the sole authority of circulation of legal money in the country.

BANKER TO THE BANK

Central bank provides credit, mainly short term credit to the commercial banks. It provides the guidance and direction and regulates their activities. It acts as the custodian of cash reserves of commercial and other banks.

CUSTODIAN OF NATION’S FOREIGN EXCHANGE RESERVES

Central bank is the custodian of foreign exchange reserves of the country. All foreign exchange transactions of the country are routed through central bank. It maintains stability of exchange rate.

LENDER OF LAST RESORT

The central bank acts as the lender of the last resort. When commercial banks have exhausted their resources and are in need of Funds, they approach the Central banks to overcome the financial crisis.

The central bank assists such institution in the times of financial crisis through discounting of approved securities and collateral loans and advances.

CONTROLLER OF CREDIT

Supply of credit must be regulated to ensure the smooth functioning of the economy. For this purpose, the central bank adopts quantitative and qualitative methods of credit control. In quantitative method, it aims at controlling the cost and availability of credit. While the qualitative methods influence the use and direction of credit.

BANKER, FISCAL AGENT AND ADVISER TO THE GOVERNMENT

The Central bank receives the deposits of cash, cheques, drafts etc. from the government. It makes payment on behalf of the government. It gives short term loan to the government. As a Fiscal Agent, it manages public debt and also government agent in enforcing foreign exchange control. It is a financial adviser to the government.

MONETARY POLICY

It includes formulation, implementation and monitoring of the monetary policy. Its main function is to maintain price stability keeping the objective of growth. performs these functions using some tools.

DEVELOPMENT FUNCTION

Promotional and Developmental activities to strengthen the banking system, and also publish Economic and statistical information.

Regulator and supervisor of payment and settlement system.

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