Reserve Bank of India

1. Table of Abbreviations used
Abbreviations Full Forms
RBI Reserve Bank of India
NHB National Housing Bank
DICGC Deposit Insurance and Credit Guarantee Corporation of India
BRBNMPL Bhartiya Reserve Bank Note Mudran Private Limited
Rs. Rupee

2. RBI AND ITS ROLE
Introduction
RBI is the central bank of India and it was established in 1935 during the British
period with provisions of RBI Act, 1934 on the recommendations of Young Hilton
Commission. The preamble of the RBI Act, 1934 says that the basic functions of
the RBI 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. Besides this RBI play many roles
as the financial regulator, Banker of the Indian government and also banker of the
banks. Here, the historical background of RBI and its role will be discussed.
Historical Background
In 1921, the Imperial Bank of India came into existence as the result of the
amalgamation of three banks, Bank of Bengal, Bank of Bombay and the bank of
Madras. The Imperial bank of India performed all the normal functions which a
commercial bank was expected to perform. In the absence of any central banking
institution in India until 1935, the Imperial bank was also performing a number of
functions which are normally carried out by a Central Bank.
In respond to the economic troubles after the First World War, the RBI was
founded on the recommendations of Hilton Young Commission, for this RBI Act
was passed in 1934. And RBI was established under section 3 of the RBI act, 1934.
The RBI commenced its operations on 1st April 1935. The RBI began its operation
by taking over from the government, the functions so far being performed by the
controller of currency and from the Imperial Bank, the management of government
accounts and public debt.
Initially, RBI was constructed as a private shareholders bank with fully paid-up
capital of Rs. 5 Crores. It was nationalized in 1949. RBI was nationalized with the
passing of the RBI (transfer tom public ownership) Act in 1948. In terms of the
Act, the entire share was transferred to the central government on payment of
compensation to the shareholders at the rate of Rs. 118.62 per share of Rs. 100.

3. There was strong opposition for nationalization of RBI from the Board of
Directors and shareholders of the bank. But the government of India ignored all the
opposition and nationalized RBI. The nationalization of the RBI somehow was
justified by passing of the Banking Regulation Act, 1949, conferring on the vast
power to the central bank to control the activities of the commercial banks in India.
RBI: Structure and Offices
Mr. Raghu ram Rajan is the present Governor of RBI. The head office of the bank
is situated in Mumbai and it has 22 regional offices and most of them are located in
state capital. The RBI has three fully owned subsidiaries, which are NHB, DICGC
and BRBNMPL. The functions of RBI are governed by the Central Board of
Directors. The Board is appointed by the Government of India. The directors are
nominated/ appointed for a period of four years. Central Board of Directors
consists of 20 members. It is constituted as follows:
a)One Governor
b)Four Deputy Governors
c)Fifteen Directors
Local Boards: There is local board for each of the four regions of the country in
Mumbai, Calcutta, Chennai and New Delhi, it consist of five members each &
appointed by the Central Government for a term of four years.
Main Role (Functions) of the Reserve Bank
The Reserve Bank of India is the controller of credit i.e. it has the power to
influence the volume of credit created by banks in India. It holds the cash reserves
of all the scheduled banks. It controls the credit operations of banks through
quantitative and qualitative controls. It controls the banking system through the
system of licensing, inspection and calling for information. It acts as the lender of
the last resort by providing rediscount facilities to scheduled banks. Besides these
functions, RBI also play role as follows:
 Monetary authority
 Issuer of currency
 Banker, Agent and Financial Advisor to the government

4.  Banker to the Banks
 Regulation and supervision of the banking and financial system
 Management of Foreign Exchange
 Regulation and Supervision of the Payment and Settlement Systems
 Development role
Monetary Authority: The main objectives of monetary policy are:
 Maintaining price stability
 Ensuring adequate flow of credit to the productive sectors of the
economy to support economic growth
 Financial stability
 RBI formulates, implements and monitors the monetary policy
Issuer of Currency: The Reserve Bank is the nation’s sole note issuing authority.
 Along with the Government of India, RBI is responsible for the design and
production and overall management of the nation’s currency, with the goal
of ensuring an adequate supply of clean and genuine notes.
 The Reserve Bank also makes sure there is an adequate supply of coins,
produced by the government and also destroys currency and coins not fit for
circulation.
 It brings uniformity to note issue and keeps the public faith in the paper
currency alive.
Banker, Debt Manager & financial advisor to Government:
 It keeps the banking accounts of the government.
 It advances short-term loans to the government and raises loans from the
public. It manages public debt.
 It purchases and sells through bills and currencies on behalf to the
government.
 It receives and makes payment on behalf of the government.

5.  It advises the government on economic matters like deficit financing price
stability, management of public debts, etc.
Banker to the Banks:
 Enabling smooth, swift clearing and settlement of inter-bank obligations.
 Providing an efficient means of funds transfer for banks.
 Enabling banks to maintain their accounts with RBI for purpose of statutory
reserve requirements and maintain transaction balances.
Regulation of the Banking & financial System:
 As the regulator and supervisor of the banking system, the Reserve Bank
protects the interests of depositors, ensures a framework for orderly
development and conduct of banking operations.
 RBI’s objectives are to maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to the public.
 RBI prescribes broad parameters of banking operations within which the
country’s banking and financial system functions.
 Granting license to banks & controlling the opening of new branches.
 Bank Inspection.
 Control over Non-Bank Financial Institutions: The Non-Bank Financial
Institutions are not influenced by the working of a monitory policy. RBI has
a right to issue directives to the NBFIs from time to time regarding their
functioning.
Management of foreign exchange:
 RBI regulates transactions related to the external sector and facilitates the
development of the foreign exchange market.
 RBI buys and sells foreign currency to maintain the exchange rate of Indian
Rupee v/s foreign currencies like dollar, euro etc.
 The RBI is the custodian of the country’s foreign exchange reserves, i.e., it
is vested with the responsibility of managing the investment and utilization
of the reserves in the most advantageous manner.
 Managing the foreign currency assets and gold reserves of the country.

6. Regulator and Supervisor of Payment and Settlement Systems:
 The Payment and Settlement Systems Act of 2007 (PSS Act) gives the
Reserve Bank oversight authority, including regulation and supervision, for
the payment and settlement systems in the country.
 In this role Reserve Bank focuses on the development and functioning of
safe, secure and efficient payment and settlement mechanisms.
Credit control function:
 In modern times credit control is considered as the most crucial and
important functional of a Reserve Bank.
 The Reserve Bank regulates and controls the volume and direction of credit
by using quantitative and qualitative controls.
 Quantitative controls include the bank rate policy, the open market
operations, and the variable reserve ratio.
 Qualitative or selective credit control, on the other hand includes rationing
of credit, margin requirements, direct action, moral suasion publicity, etc.
Developmental Role: This role includes the development of the quality of banking
system in India and ensuring that credit is available to the productive sectors of the
economy.
 RBI performs a wide range of promotional functions to support national
objectives.
 It also includes establishing institutions designed to build the country’s
financial infrastructure. E.g.: NABARD etc.
 Expanding access to affordable financial services and promoting financial
education and literacy.

7. BANKER AND CUSTOMER RELATIONSHIP
Introduction
The relationship between banker and the customer is determined as per the services
availed by the services offered by the banker to its customer. Generally, the
relationship is defined in six different types.
Types of Relationship
 As a Debtor-Creditor
 As a Trustee
 As a Bailee and Bailor
 As an Agent-Principal
 As a Lessor and Lessee
 As an Indemnifier and an Indemnified
Debtor-Creditor Relationship
a) Bank is a Debtor and Customer is a Creditor: When a customer deposits
money with his bank, the customer becomes a lender and the bank becomes
a borrower. The money handed over to the bank is a debt. The relationship
between the banker and the customer is that of a debtor and a creditor.
The features of this relationship are:
 The money is lent to the bank and the bank is free to use it in a way most
beneficial to it. The bank is not bound to keep such money intact.
 Demand of payment should be made by the customer. The bank is not
required to repay the debt voluntarily, unlike in the case of commercial debt.
 For the monies deposited, the creditors (customer) do not call for any
security from the debtor (bank) as in the case of commercial debts.

8. b) Bank is a Creditor and Customer is a Debtor: When the bank lends money to
the customer, the customer is the borrower and the bank is the lender. The
relationship between the banker and the customer is therefore that of a
creditor and a debtor.
Bank as Trustee
If customer keeps certain valuables or securities with the bank for safe keeping or
deposits a certain amount of money for a specific purpose, the banker, besides
becoming a bailee is also a trustee. The trustee holds money or assets and performs
certain functions for the benefits of other person called beneficiary.
Bailee-Bailor Relationship
When a customer deposits certain valuables, bonds, securities or other documents
with the bank, for their safe custody, the bank, besides becoming a trustee, also
becomes bailee and the customer is the bailor. According to section 148 of the
Indian Contract Act, 1872, the Bank become custodian of the customer and hence
as bailee is liable for any loss caused to the bailor due to negligence.
Agent-Principal Relationship
One of the ancillary service rendered by the bank is remittance, collection of
cheques, bills etc. on behalf of the customer. If further undertakes to pay regularly,
electricity bills, telephone biils, insurance premium, club fees, etc. In all such cases
bank acts as an agent, his principal being the customer. The relationship of agency,
however, terminates on the death, insolvency and lunacy of the customer or on
completion of the work assigned.
Lessor and Lessee Relationship
The bank provides safe deposits lockers to the customers who hire them on lease
basis. The relationship therefore, is that of lessor and lessee. The bank lease out the

9. space for the use of clients and it is not responsible for nay loss that arises to the
lessee in this form of transaction except due to negligence of that bank.
Indemnifier and Indemnified Relationship
A contract by which one party promises to save the other from loss to him by the
conduct of the promisor himself or the conduct of any other person is called a
contract of indemnity. Section 124 of Indian contract Act, 1872 provides for this.
In case of banking, this relationship happens in transaction of issue of duplicate
demand draft, fixed deposit receipt etc.