Banking System in India
The reserve bank of India (RBI) was established on 1st April, 1935. It is called as the supreme monetary authority or the central banking authority.
Basic function of RBI
Basic function of RBI is to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India. In simple term; RBI is aware of operating the currency and credit system of the country to its advantage.
All the functions of RBI (Reserve bank of India) is controlled by BFS(Board for financial supervision) , set up in November 1994. The main purpose of BFS is to oversee the Indian financial system, comprising commercial banks, state co-operative banks, All India financial institution (AIFI) and non-banking finance companies (NFFCs).
Main functions of RBI:
- Monetary authority: Oversee the monetary policy. Uses its monetary policy to controls inflationary and deflationary situations in the economy.
- RBI acts as regulator and supervisor of financial system: Provide wide functions to develop a sound banking system in the country. Protecting interest of depositors and providing cost effective banking services to the public.
- Foreign exchange control: Maintain the stability of the external value of the national currency-Indian rupee. Regulate the foreign exchange market in the country in terms of the foreign exchange regulation act (FERA), 1947.
- Currency issuance: Issues currency notes and coins and put them into circulation with exchanging them or destroying them to give the public adequate supply.
- Government's banker: RBI acts as the banker to the central and state government by providing them banking services of deposits, withdrawal and transfer of funds and manages public deposits.
- Banker to banks: RBI maintains accounts of all scheduled (Appearing in the second schedule of the RBI Act) bank.
Tools of monetary control:
Cash reserve ratio (CRR): Cash reserve ratio is the cash that all Scheduled and non-scheduled banks are required to maintain with RBI as a certain percentage of their customer deposits and notes or their demand and time liabilities (DTL).
The raw cash of those banks are stored in a cash vault or in form of deposits to central banking authority.
A cut in CRR will bring down the call rates. An increase in CRR increases the call rate.
Statutory liquidity ratio (SLR): Statutory liquidity ratio refers to the money that all the scheduled and non-scheduled banks are required to maintain in form of cash in hand, gold or government approved securities (Bond and shares of companies) before providing any credit to the customers.
Three objectives of SLR are; Restricts expansion of banks credit, Increase investment of banks in approved securities, and Ensure solvency of banks.
Bank rate: Bank rate is the rate of interest that the central banking authority (RBI) charges to all commercial banks and other financial institution on loanable resources and advances.