Functions of Reserve Bank of India - RBI

Functions of Central Bank

• Issuing of currency notes
• Acting as banker to the state / government
• Serving as the bankers bank
• Control of credit
• Acting as the custodian of the gold and foreign exchange reserves of a country

Issuing of currency notes:-

Principles of Note Issue:

• Currency Principles
• Banking Principles

System of Note Issue:

1. Fixed fiduciary system 
2. Maximum fiduciary system 
3. Proportional reserve system
4. Minimum reserve system

Acting as banker to the state / government:

1. As a banker
2. As a financial agent
3. As a financial adviser

Serving as the bankers bank: it acts as friend, philosopher and guide of commercial banks.

1. As the custodian of the cash reserves of commercial banks
2. As the lender of last resort
3. As the bank of clearance

Control of credit:-

Credit control means not mere credit restriction, but credit regulation (contracting or expanding the volume of credit) and direction. It’s the policy followed by a central bank to control credit.

 

Objectives of monetary policy or credit control:

1. Internal price stability
2. Economic stability
3. Full employment
4. Economic growth
5. Stability in money market
6. Stability in foreign exchange rate
7. International economic equilibrium

Limitation of credit control:

• To be successful in credit control program, full control over the money market is essential. But sometimes it is not possible.
• There are different terms of the loan period credit control method can only affect a short-term loan.
• The unorganized money market is not suitable for use of credit control method.
• There is not much co-operation between commercial banks with the central bank.
• An unstable economy is not suitable to use credit control method.
• If steps for credit control arc not taken at primary level, it will not be effective later.
• If the lengthy plan is taken for credit control it will not work as satisfactorily.

Weapons, Instruments / Methods of Credit Control

Quantitative / General methods	Qualitative, Selective / Particular methods
Bank rate policy Open market operation Variable cash reserve ratio Variation of statutory liquidity ratio	Regulation of margin requirement Regulation of consumer credit Control through directive Rationing of credit Moral suasion Direct action Publicity

 

Bank rate / Discount rate: is the rate at which the central bank grants short-term advances to the commercial banks and other financial institutions either in the form of rediscounting of eligible bills or in the form of loans against approved securities. It is the lending rate of central bank.

Bank rate policy / Discount rate policy: is the technique under which the central bank changes (i.e., raises or lowers) the bank rate for the purpose of controlling the volume of credit and correcting the inflationary or deflationary in a country.

Open market operation: Open market operations refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Securities' purchases inject money into the banking system and stimulate growth, while sales of securities do the opposite and contract the economy.  

Variable cash reserve ratio / Variation of cash reserves:  The Cash Reserve Ratio refers to a certain percentage of total deposits the commercial banks are required to maintain in the form of cash reserve with the central bank.

Variation of statutory liquidity ratio: Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and approved government securities etc.

Fixation of margin requirement on secured loans: This refers to difference between the securities offered and amount borrowed by the banks.

Regulation of consumer credit: This refers to issuing rules regarding down payments and maximum maturities of installment credit for purchase of goods.

Control through directive: The central bank issue frequent directives to commercial banks to guide their lending policys

Rationing of credit: The central bank seeks to limit the total amount of loans and advances or specific categories of loans and advances granted by commercial banks

Moral suasion: Psychological means and informal means of selective credit control.

Direct action: This step is taken by the central bank against banks that don’t fulfil conditions and requirements. It implies coercive or punitive measures taken by central bank against the erring commercial bank.

Publicity: This published information (reports) can help commercial banks to direct credit supply in the desired sectors. Through its weekly and monthly bulletins, the information is made public and banks can use it for attaining goals of monetary policy.

Acting as the custodian of the gold and foreign exchange reserves of a country

1. To maintain stability in the rate of exchange
2. To maintain international liquidity
3. To correct adverseness in the balance of payments.