DR.

RAM MANOHAR LOHIA NATIONAL

LAW UNIVERSITY, LUCKNOW

BANKING ANDE INSURANCE LAW

Project

On

“Functions and management of RBI”

Submitted to: Submitted by:

Dr. Aparna Singh Shalini
Assistant Professor (Law) Roll No: 121

Sem: VIth

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ACKNOWLEDGEMENT

A major research project like this is never the work of anyone alone. Firstly, I would like to
thank my teacher for giving me such a golden opportunity to show my skills and capability
through this project.

This project is the result of the extensive ultra-pure study, hard work and labour, put into to
make it worth reading. This project has been completed through the generous co-operation of
various persons, my teacher, and my seniors, who, in their different potentials helped me a lot
in giving the finishing touch to the project.

This project couldn’t be completed without the help of my university’s library Dr. Madhu
Limaye Library and its internet facility.

Thank you…..

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Contents
Promotional Functions of Reserve Bank of India .......................................................................... 7
Organization and management of RBI ............................................................................................... 9

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INTRODUCTION

The Reserve Bank of India (RBI) is India's central banking institution, which controls
the monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 in
accordance with the Reserve Bank of India Act, 1934. The original share capital was divided
into shares of 100 each fully paid, which were initially owned entirely by private
shareholders. Following India's independence on 15 August 1947, the RBI was nationalised
on 1 January 1949.
The RBI plays an important part in the Development Strategy of the Government of India. It
is a member bank of the Asian Clearing Union. The general superintendence and direction of
the RBI is entrusted with the 21-member Central Board of Directors: the Governor, 4 Deputy
Governors, 2 Finance Ministry representatives, 10 government-nominated directors to
represent important elements of India's economy, and 4 directors to represent local boards
headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these local boards
consists of 5 members who represent regional interests, the interests of co-operative and
indigenous banks.
The Central Bank was an independent apex monetary authority which regulates banks and
provides important financial services like storing of foreign exchange reserves, control of
inflation, monetary policy report till 2016 August. A Central Bank is known by different
names in different countries. The functions of a Central Bank vary from country to country
and are autonomous or quasi-autonomous body and perform or through another agency vital
monetary functions in the country. A central bank is a vital financial apex institution of an
economy and the key objects of central banks may differ from country to country still they
perform activitie s and functions with the goal of maintaining economic stability and growth
of an economy.

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Functions of Reserve Bank of India

• Other Functions
• Prohibitory Functions
• Promotional & Devolopmental Functions
• Traditional Functions

A. Traditional Functions

1. Issue of Currency: RBI undertakes issue of currency and the system

adopted in India is the minimum reserve system. All the currency notes
from Rs. 2, Rs 5, Rs. 10, Rs. 50, Rs. 100, Rs. 500 and Rs. 1,000 are
issued by RBI and they carry the signature of Reserve Bank of India
Governor. They are called unlimited legal tender and any amount of
payment can be made with these currencies subject to the regulations of
Income Tax Act, 1961.
The one rupee note and smaller coins are issued by the government and they
are called limited legal tender which means that they can be demanded as a
medium of payment only to a limited extent. The one rupee note carries the
signature of secretary to the Ministry of Finance.

2. Banker to Government: Reserve Bank of India acts as a banker to the

government by maintaining the account of Central government and also
that of the State government. It also provides overdraft facility to both
State and Central governments. The public borrowings of government are
done through Reserve Bank of India. Payments to the government such as
income tax is also accepted by Reserve Bank of India.
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3. Bankers’ Bank: The other traditional functions of RBI consisting of bankers’
bank is done in the following manner:
1. Issuing license to banks and allowing them to open branches under the
provisions of Banking Regulation Act.
2. RBI also controls the working of commercial banks and undertakes
periodical inspection of these banks.
3. In case of violation of the Banking Regulation Act by any of the
commercial banks, RBI will order for the closure of these banks.
4. The management of the commercial banks will also be controlled by
Reserve Bank of India. All the top level management appointments of
commercial banks require prior approval of RBI.
5. The credit requirements of commercial banks are met by discounting and
re-discounting eligible securities at the bank rate.
4. Credit Control functions: RBI exercise the following credit control
measures
1. The quantitative weapons of bank rate, open market operation and variable
reserve ratio are exercised by Reserve Bank of India.
2. The modern weapon of selective credit control is also being exercised by
RBI particularly on agricultural commodities.
3. The seasonal fluctuations in the money market is balanced by Reserve
Bank of India through adequate finance during a period of financial
stringency.
5. RBI acts as lender of last resort: The commercial banks have to maintain as
a part of statutory requirements certain percentage of their deposits with RBI
which is called cash reserve ratio.
By increasing or decreasing this percentage of cash reserve ratio, RBI allows
adequate funds for lending purpose by commercial banks. When all the
commercial banks are depositing with Reserve Bank of India in the form of
cash reserve ratio, a sizable amount of fund is available with RBI. This fund
will be extended by RBI to any commercial bank which is facing crisis.

6. Exchange control function: In India, we have the exchange control since

independence and RBI is given enough powers to exercise exchange control.
Without the license of Reserve Bank of India no one can deal in foreign
exchange. The exchange rate with different foreign currencies is provided by
RBI to its authorized dealers consisting of nationalized and other private
commercial banks.
All the foreign exchange earnings in the country are kept by RBI in the form of
foreign exchange reserve. RBI also has the responsibility of maintaining the
value of domestic currency and take adequate measures so that its value does
not depreciate abnormally in relation to foreign currencies.

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7. Clearing house: In all big cities Reserve Bank of India has its branches and
clearing house operations are undertaken. Where RBI does not have its branch,
the clearing house operations are undertaken by State Bank of India and its
subsidiary banks. All the commercial banks in India are members in clearing
house and they take part in the clearing of cheques.

Promotional Functions of Reserve Bank of India

1. Promotion of Banking Habit: The Reserve Bank of India helps in
mobilizing the savings of the people for investment. It expanded banking
system throughout the nation by setting up of various institutions like
UTI, IDBI, IRCI, NABARD etc. Thereby it promoted banking habit among the
people.

2. Providing Refinance for Exports: The Reserve Bank of India is providing

refinance for export promotion. The Export Credit and Guarantee Corporation
(ECGC) and Export Import Bank were established initially by the Reserve Bank
of India to finance the foreign trade of India. They finance foreign trade in the
form of insurance cover, long-term finance and foreign currency credit.
However, they are now functioning separately.

3. Providing Credit to Agriculture: The Reserve Bank of India makes

institutional arrangements for rural or agricultural finance. For example, the
bank has set up special agricultural credit cells. It has promoted regional rural
banks with the help of commercial banks. It has also promoted NABARD.

4. Providing Credit to Small Scale Industrial Unit: Commercial banks lend

loans to small-scale industrial units as per the directives issued by the Reserve
Bank of India time to time. The Reserve Bank of India encourages commercial
banks to render guarantee services also to small-scale industrial sector. The
Reserve Bank of India considers advances given to small-scale sector as priority
sector advances. It also directed commercial banks to open specialized branches
to provide adequate financial and technical assistance to small-scale industrial
branches.

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5. Providing Indirect finance to Cooperative Sector: The RBI has directed
NABARD to give loans to State Cooperative Banks, which in turn lend loans to
cooperative sector. Hence, the Reserve Bank of India provides indirect finance
to cooperative sector in India.

6. Exercising Control over Monetary and Banking system of the Country:

The Reserve Bank of India is vested with enormous and extensive powers
regarding supervision and control over commercial banks, cooperative banks
and also non-banking institutions receiving deposits. The Banking Regulation
Act prescribes extensive requirements as minimum regarding the paid-up
capital, reserves, cash reserves and liquid assets.
The operation of the bank, the management, amalgamation, reconstruction and
liquidation etc. are thoroughly supervised by the officials of the Reserve Bank
of India. Every scheduled bank is required to furnish to the Reserve Bank a
weekly statement showing the principal items of its liabilities and assets in
India.

7. Making Industrial arrangement for Industrial Finance: The Reserve

Bank of India makes institutional arrangement for industrial finance. For
instance, it has brought into existence several development banks such as the
Industrial Finance Corporation of India, the Industrial Development Bank of
India, which provide long-term finance to industries.

PROHIBITORY FUNCTIONS OF RBI

 Not for competing with other banks

 For keeping its assets in liquid form to meet any eventuality

• Cannot buy its own or other banking company’s shares

• Cannot participate in business/ trade/industry
• Cannot give interest for its deposits

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 • Cannot purchase immovable property except for its offices
• Cannot give loans against immovable property

OTHER FUNCTIONS OF RBI

• Issues demand drafts, and makes, issues and circulates bank post-bills.
• Borrows money from a scheduled bank in India/central banks in other
countries.
• Make agency agreement with central banks in other countries, act as
agent and invest funds in their shares.
• Purchases and sells gold and bullion.

Organization and management of RBI

The regulatory framework for the financial sector in India broadly consist of the Ministry of
Finance Of the Government of India which administers the companies act 1956 and the
Security contract act ,1956;Reserve Bank of India and Board of Financial Supervision ;the
Security and Exchange Board of India ;Insurance Regulatory Authority;the governing board
of various stock exchanges and apex financial institution like IDBI ,SIDBI ,NCB etc.

RBI started functioning from 1 April 1935 on term of RBI Act ,1934.But till Jan 1949 it was
a private shareholder institution and after it it become state-owned institution under RBI Act
1948.

The bank is managed by Central Board Of Directors ,four Local Board of Directors ,
committee of Central board of Directors.The function of Local Board Of Directors is to
Central Board on matters referred to them.The Final control of Bank vests in Central board
which consist of Governor ,4 deputy governors , and 15 Director nominated by central
government.The committee of Central board consist of Governor , deputy Governor and such
other Director as may be present at a given meeting.RBI has four regional representation like
north in New Delhi , south in Chennai ,east in Kolkata, west in Mumbai .For each region
Local Board of directors are there ,each consisting 5 members appointed by Central
Government.Directors are appointed for 4 years.

The internal Organization set-up of Bank has been modified and expanded from time to time
but the underlying principal is functional specialization with adequate coordination.Bank has
been divided into large no of Departments .Apart from banking and Issue departments,there
are 20 more departments and 3 training establishment at the central office of the Bank.

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CONCLUSION

The basic functions of the Reserve Bank of India are to regulate the issue of Bank notes and
the keeping of reserves with a view to securing monetary stability in India and generally to
operate the currency and credit system of the country to its advantage .(From the Preamble of
the Reserve Bank of India Act, 1934) Evolving Role of RBI The Reserve Bank, established
through the Reserve Bank of India Act, 1934 commenced its operations in 1935. It draws its
powers and responsibilities through other legislations also such as the Banking Regulation
Act, 1949. The RBI has over the years been responding to changing economic circumstances
and these organizational developments have been documented in a recent Report on
Currency.

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REFERENCES

 https://www.slideshare.net/pyaareaman/term-paper-46640110
 http://www.yourarticlelibrary.com/project-reports/project-report-on-the-reserve-bank-
of-india-rbi/85055
 https://www.lawteacher.net/free-law-essays/finance-law/role-of-reserve-bank.php
 https://www.slideshare.net/akasharsh17/rbi-project-38834202
 https://www.investopedia.com/university/banking-system/banking-system12.asp

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