Reserve Bank of India RBI - Need, Objectives and Functions [Indian Financial System Notes BCOM NEP syllabus]

1. Note Issue: The reserves bank of India is the sole authority for the issue of currency in India other than one rupee coins/notes and subsidiary coins. The RBI has adopted the minimum reserves system of note issue to issue currency notes in the country. Under this system the RBI maintains a minimum reserve of Rs. 200 crores of which Rs. 115 crores are in gold and the rest in securities. The issue department of RBI has the responsibility to issue paper money. It is responsible for getting its periodical requirements of notes printed from the currency presses of the Government of India, distribution of currency among the public and withdrawal of unserviceable notes and coins from circulation. The Issue Department deals directly with the public in exchange of currency for coins and vice versa and exchange of notes of one denomination for another.

2. Bankers to Government: The RBI acts as banker to the Central and State Government as a banker as an adviser as an agent into their capacities:

a) As a banker.

b) As an agent.

c) As an advisor.

As a Government banker the RBI performs the following functions: -

a) It maintains and operates deposit account of the central and state governments.

b) It receives and collects payment on behalf of the Central and state governments.

c) It makes payments on behalf of the central and state governments.

d) It provides short term advances to government for which are called ways and means advances etc.

As a Government agent the RBI perform the followings functions: -

a) Collect tax and other payments on behalf of the government.

b) Raise loan from the public and thus manages public debts.

c) Transfer funds and provide remittances facilities to the government etc.

As an adviser the RBI acts as an advising the Government on all financial matters such as loan separations investment, agricultural and industrial finance, banking planning etc. It also advices to promote the attainment of the national economic goals.

3. Bankers Bank: The Central Bank is a banker to all the other banks. It is the supreme bank of all the banks. As the supreme bank it performs various functions. Some of the functions are:

a) Custodian of cash reserve of the bank: The Central Bank acts as the custodian of cash reserve of the banks. Every Commercial bank has to keep a certain portion of their deposits and time and demand liabilities to the Central Bank in the form of cash reserves. The Central Bank maintains this cash reserve as the custodian and grants money to the commercial bank in times of emergency.

b) Lender of the last resort (2017): The Central Bank is the Lender of the last resort of the commercial banks. When the other banks shortage of funds, then they can approach to the Central Bank for financial assistance. The Central Bank lends money to them by discounting their bills. This enables the Central Bank to establish control over the banking system of the country. The RBI is ultimate source of money and credit provide fund to money market participate thus the RBI act as lender of last resort for the commercial banks.

c) Clearing agent (2018): In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers. One bank may have to pay certain amount to another bank again the RBI will transfer fund from debtor to creditors account. Since all banks have their accounts with the RBI, the RBI can easily settle the claims of various banks each other with least use of cash. The clearing house functions of RBI are:

Ø For settlement of banking transactions between two banks.

Ø To helps in economizing the uses of cash by banks.

Ø Look-over the liquidity position of the bank.

4.    Control of credit:  As a central bank, the RBI take the responsibility to control of credit in order to economic development and price stability in the country under credit control policy different method are used to control the volume of credit in the economy. Important of them are General Credit Control and Selective Credit Control.

5. Custodian of gold and foreign exchange reserves: The RBI act as a custodian of gold and foreign exchange reserves for both on its own and on behalf of the Government. 

The RBI, as a Central Bank of the Country has assumed greater responsibility as developmental and promotional agency. Its promotional functions and activities have been mainly directed towards building up and strengthening financial infrastructure and filling the institutional gap by setting up new financial institutions and by ensuring the allocation of credit in the socially desired directions. The Development and Promotional functions of the Central Banks are listed below:

a) To promote and strengthen commercial banking in our country by taking various steps such as putting regulation on banks, setting up of deposit insurance corporation, amalgamation and consolidation of banks.

b) To promote agricultural and rural credit by setting up and developing key financial institutions like NABARD and RRBS.

c) To promote short, medium and long term industrial finance by setting up various institutions such as IDBI, SIDBI, SFCs, SSIDC etc.

d) To promote exports through refinance to banks against export credit.

e) To maintain internal price and exchange rate stable.

f) To promote the market for investments in Govt. securities.

g) To promote housing finance by promoting the national housing bank in 1988 to organise and augment resources for housing.

h) To promote co-operative banking by providing funds to co-operative banks.

i) RBI also encourages and promotes research in the areas of banking.

The prohibitive functions of RBI are:

1) It can neither participate non-provide any direct financial assistance to any industry, trade or business.

2) It cannot purchase its own shares.

3) It cannot purchase shares of any banking company or of any corporation.

4) It cannot purchase immovable property except for the establishment of its offices.

5) It cannot give loans on the security of shares and immovable property.

6) It cannot give interest on deposits held by it.

7) It cannot accept draw bills not payable on demand.