The Reserve Bank of India Act, 1934.pptx

This presentation is regarding the reserve bank of india act

1. Reserve Bank of India Act, 1934 Came into effect from on 6 th March, 1934

2. Introduction: The Reserve Bank of India was established following the Reserve Bank of India Act of 1934 and started operations on 1.4.1935. It was started as shareholder bank with capital of Rs. 5 Crores. The government held nominal value of shares of Rs. 220000 Though privately owned initially, it was nationalised in 1949 and since then fully owned by the Ministry of Finance, Government of India. Initially it was located in Kolkata. Later it was moved to Mumbai in 1937.

3. Objectives of RBI

4. Constitution of RBI

5. FUNCTIONS OF RBI: Issue and Management of Currency and Distribution of Coins Banker to the Government Banker to the Banks Lender of Last Resort Loans and Advances

6. Functions of RBI Issue and Management of Currency and distribution of coins: The currency of our country consists of One-rupee notes and coins (including lower denominations thereof) as well as Bank notes issued by RBI. Issuance of bank notes (currency) is one of the original central banking functions for which the RBI was established. In terms of section 22, of the RBI Act, 1934, RBI has the sole right to issue bank notes in India. Such bank notes are issued by a department of RBI known as Issue Department, which is a separate and wholly distinct department from the Banking Department which is responsible for banking business of the RBI.

7. However the design, form and material of bank notes are to be approved by the Central Government on the basis of recommendations of Central Board of the RBI. Every bank note shall be a legal tender at any place in India. On recommendation of the Central Board, the Central Government may declare any series of bank notes of any denomination to be not a legal tender. the RBI has the power to recommend to Central Government various denominations of bank notes. The issue department keeps its assets, which forms the backing for note issuance, distinctly separate from that of the assets of the banking department. (like gold, foreign securities etc.)

8. Within RBI, the Department of Currency Management (‘DCM’) has the responsibility of administering the functions of currency management. Currency management basically relates to the issue of notes and coins and retrieval of unfit notes from circulation. All branches of banks in all parts of the country are mandated to provide the customer services related to Issuing fresh/good quality notes and coins of all denominations on demand in exchange of soiled/ mutilated/ defective notes.

9. 2. Banker to the Government In terms of section 20 of RBI Act, 1934, RBI has an obligation to Act as a banker to the central government. Under this obligation RBI has to accept monies for account of the Central Government, to make payments up to the amount standing to the credit of Central Government, to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union of India.

10. For carrying out its duties as banker to the Government of India, it is not paid any remuneration. RBI is entitled for a commission for managing public debt functions. The Government transaction work also includes maintaining currency chests at places specified by the Central Government. RBI also provides investment services by deploying temporary surplus cash balances in Government accounts. RBI also advises the Government on monetary and banking issues when requested to do so. Also manages Consolidated Fund of India, contingency fund and public accounts as these accounts are maintained by RBI.

11. 3. Banker to the Banks This is a special relationship that is created due to statutory requirements under the RBI Act. Once the name of a bank is included in the Second Schedule, that Bank is eligible to be called as a Scheduled Bank. Among other conditions, it is bound to maintain the stipulated Cash reserves under section 42 in an account with RBI. The Scheduled Bank status to any bank also confers privileges such as availing financial accommodation from RBI under specified conditions.

12. Reserve Bank also provides means of transfer and settlement of funds between banks on account of clearing, remittances, lending and borrowing through such accounts. Thus RBI provides a platform for inter-bank financial transactions. Such accounts of banks are maintained by Deposit Accounts Department of RBI. Intra-bank funds transfers also takes place through an RBI portal known as e- Kuber .

13. 4. Lender of last resort When banks exhaust all other means for raising funds for their operations, they fall back on RBI as a source for finance as provided under the RBI Act. Hence RBI is known as Lender of last resort. RBI grants financial accommodation to banks - “sale, purchase and rediscount of eligible bills” as well as loans and to advances banks. Rediscount of bills with RBI by banks are confined to the following categories: Bonafide Commercial bills Bills related to financing agriculture operations or marketing of crops Bills that are associated with Cottage and Small Scale Industries Bills representing holding or trading in Government Securities A foreign bill

14. 5. Loans and Advances RBI Act empowers Reserve Bank to grant loans among others to, Scheduled Banks, State Co-operative Banks, and State Financial Corporations loans and advances, repayable on demand or on the expiry of fixed periods not exceeding ninety days. Such loans and advances are granted against the securities of • stocks, funds and other (than immovable property) securities, in which there is an authorization to a trustee to invest monies • Gold or silver or documents of title to these • Promissory Notes or Bills of Exchange eligible for purchase or rediscount by RBI or guaranteed by State Government regarding repayment of principal and interest due on them • Promissory notes of any scheduled bank or State Co-operative Bank which are supported by documents of title to goods (which have been already transferred, assigned or pledged to any other bank as a security for any advance or loan made of bonafide commercial or trade transactions or those in respect of financing agricultural operations or marketing of crops).

15. 6. Emergency Advances RBI, grants emergency advances to specified banks on special occasions as envisaged in Section 18 of the said Act in the interest of regulating credit to trade, commerce, agriculture and industries. This special provision is available despite any restrictions stated under Section 17 and Section 18 to RBI and extend such financial accommodation to banks on such bills which are not financeable by RBI, otherwise. Further under Section 18 RBI can make an advance to a State Cooperative Bank or to a cooperative society based on the recommendations of a State Cooperative Bank. Such advance is repayable on demand, or on the expiry of fixed period generally not exceeding 90 days under the terms and conditions specified by RBI.

16. What is Credit Control function of RBI? Credit control is a monetary policy tool used by the Reserve Bank of India to control the demand and supply of money, or liquidity, in the economy. The Reserve Bank of India (RBI) supervises the credit granted by commercial banks. The following are the broad aims of India’s credit control policy: To maintain an acceptable amount of liquidity in order to achieve a high rate of economic growth while maximizing resource use without causing severe inflationary pressure. To achieve stability in the country’s currency rate and money market. To meet financial obligations during a downturn in the economy as well as in regular times. Controlling the business cycle and meeting the needs of the company

17. Quantitative credit control measures 1. Bank rate policy: The discount rate is another name for the bank rate. It’s the official lowest rate at which the country’s central bank is willing to re-discount approved bills of exchange or lend on recognised securities. Bank Rate is defined as “the standard rate at which it (RBI) is prepared to acquire or re-discount bills of exchange. When a commercial bank, for example, has lent or invested all of its available funds and has little or no cash above the regulatory minimum, it may request funding from the central bank. 2. Open Market Operations: The open market operations means buying and selling of bonds and shares by RBI is open market. It is also called buying and selling of government security by the central bank from the public and commercial banks. Sale of securities: At the time of inflation the RBI starts selling of government securities in the market. The resources of commercial bank are reduced and they are not in a position to lend more to the business community. This reduces the investment and aggregate demand. Purchase of securities: At the time of deflation the RBI starts buying securities from open market. The reserves of commercial banks are raised and they lend more investment, output income and aggregate demand starts rising.

18. 3. Cash Reserve Ratio (CRR): It is the ratio of bank deposits that commercial bank has to keep with the central bank. At the time of inflation the RBI increases the rate of CRR, similarly at the time of deflation RBI decreases the rate of CRR. 4. Statutory Liquidity Ratio (SLR): Every bank required to maintain a fixed percentage of its assets in the form of cash or other liquid assets called SLR. At the time of inflation the RBI increases the SLR, similarly at the time of deflation RBI decreases the rate of SLR.

19. Qualitative credit control measures 1. Margin requirements: It is the difference between the market value of loan and the security value of loan. At the time of inflation the margin requirement value decreases by RBI for discouraging people and commercial banks for approaching more and more amount of loan. On the other hand at the time of deflation the RBI increases the value of margin just to encourage issuing of more amount of loan to the commercial banks and general public. 2. Moral suasion: It refers to written or oral advices given by central bank to commercial banks to restrict or expand credit. 3. Direct Action: Sometimes the RBI directly takes action against the commercial banks. It takes action to such type of commercial banks who are not following the rules regulation of RBI. It cancels their registration or nationalization of commercial banks. 4. Rationing of credit: It is the related to limiting the amount of credit, which is issued by all the commercial banks. RBI fixes the size of issuing the credit according to the requirement of the country.

20. Financial Inclusion Financial inclusion enhances the financial system of the country comprehensively. It strengthens the availability of economic resources. Most importantly, it toughens the concept of savings among poor people living in both urban and rural areas. This way, it contributes towards the progress of the economy in a consistent manner. Many poor people tend to get cheated and sometimes even exploited by rich landlords as well as unlicensed moneylenders due to the vulnerable condition of the poor people. With the help of financial inclusion, this serious and hazardous situation can be changed. Financial inclusion engages in including poor people in the formal banking industry with the intention of securing their minimal finances for future purposes. There are many households with people who are farmers or artisans who do not have proper facilities to save the money that they earn after putting in so much effort.

21. Financial Inclusion Programmes Organised by the Reserve Bank of India (RBI) The Reserve Bank of India works on exclusive programmes and plans in order to have financial inclusion in the nation effectively. It applies a bank-led strategy in order to attain financial inclusion smoothly. The central bank of India also has firm regulations in place that need to be followed by every bank. The RBI also is offering qualified assistance to every bank in the nation in order to attain its financial inclusion objectives.

22. Let us take a look at some of the programmes introduced by the RBI in order to achieve its goals: The RBI instructed every bank to have Basic Saving Bank Deposits (BDSD) accounts for the economically weaker sections of the society. These are no-frill accounts where account holders do not have to maintain any minimum balance or minimum deposit. These account holders can withdraw cash at any ATM or at the bank branch. They should also be given the opportunity to make use of electronic payment channels for receiving and transferring money to others. The RBI also asked banks to have simple Know Your Client (KYC) regulations for the less fortunate people of the society. There are many people in rural areas who are unable to open bank accounts due to strict KYC norms. Hence, the RBI wants banks to have simplified KYC requirements particularly if a low-income individual is interested in opening a bank account with an amount not above Rs.50,000. It also wants minimal KYC norms if the overall credit in the accounts does not go above Rs.1 lakh for 1 year. Recently, banks have been asked to accept Aadhaar Card as identity proof as well as address proof since most people belonging to low-income groups have made Aadhaar card in their names. Keeping in mind about the lack of bank branches in rural areas, the RBI has asked all banking institutions to open more and more branches in villages across the nation in order to provide good banking services to the villagers. There are many remote villages where there are no banks and also no good transportation services. It is very difficult for residents of these areas to commute to a far-off bank branch for availing banking services. Hence, with the compulsory rule of the RBI, banks are distributing the ratio of banks in villages and cities to have a balance.

23. Financial Inclusion Schemes in India Atal Pension Yojana (APY) Pradhan Mantri Vaya Vandana Yojana (PMVVY) Stand Up India Scheme Pradhan Mantri Mudra Yojana (PMMY) Pradhan Mantri Suraksha Bima Yojana (PMSBY) Sukanya Samriddhi Yojana Jeevan Suraksha Bandhan Yojana Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs) Venture Capital Fund for Scheduled Castes under the Social Sector Initiatives Varishtha Pension Bima Yojana (VPBY)