The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.
The Reserve Bank of India is the central bank of the country entrusted with monetary stability, the management of currency and the supervision of the financial as well as the payments system.
Established in 1935, its functions and focus have evolved in response to the changing economic environment. Its history is not only intrinsically interwoven with the economic and financial history of the country, but also gives insights into the thought processes that have helped shape the country's economic policies. Here we present some facets of the Bank's history for the layperson. We look forward to the viewer's suggestions and comments.
The Bank was constituted to
Regulate the issue of banknotes
Maintain reserves with a view to securing monetary stability and
To operate the credit and currency system of the country to its advantage.
The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon.
Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan upto June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949.
An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavours, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to catalyse development. The Bank was also instrumental in institutional development and helped set up insitutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country.
With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
"...to regulate the issue of Bank Notes and 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."
The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.
Appointed/nominated for a period of four years
Full-time : Governor and not more than four Deputy Governors
Nominated by Government: ten Directors from various fields and one government Official
Others: four Directors - one each from four local boards
Profile of Central Board Directors
One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi
consist of five members each appointed by the Central Government for a term of four years
Functions : To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks; to perform such other functions as delegated by Central Board from time to time.
The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India.
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising commercial banks, financial institutions and non-banking finance companies.
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board.
The Board is required to meet normally once every month. It considers inspection reports and other supervisory issues placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision (DBS),Department of Non-Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.
Some of the initiatives taken by BFS include:
restructuring of the system of bank inspections
introduction of off-site surveillance,
strengthening of the role of statutory auditors and
strengthening of the internal defences of supervised institutions.
The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of empanelment and appointment of statutory auditors, the quality and coverage of statutory audit reports, and the important issue of greater transparency and disclosure in the published accounts of supervised institutions.
supervision of financial institutions
legal issues in bank frauds
divergence in assessments of non-performing assets and
supervisory rating model for banks.
Reserve Bank of India Act, 1934: governs the Reserve Bank functions
Banking Regulation Act, 1949: governs the financial sector
Acts governing specific functions
Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market
Securities Contract (Regulation) Act, 1956: Regulates government securities market
Indian Coinage Act, 1906:Governs currency and coins
Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market
"Payment and Settlement Systems Act, 2007: Provides for regulation and supervision of payment systems in India"
Acts governing Banking Operations
Companies Act, 1956:Governs banks as companies
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks
Bankers' Books Evidence Act
Banking Secrecy Act
Negotiable Instruments Act, 1881
Acts governing Individual Institutions
State Bank of India Act, 1954
The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003
The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993
National Bank for Agriculture and Rural Development Act
National Housing Bank Act
Deposit Insurance and Credit Guarantee Corporation Act
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country's banking and financial system functions.
Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
Manager of Foreign Exchang
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
Performs a wide range of promotional functions to support national objectives.
Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks.
Has 19 regional offices, most of them in state capitals and 9 Sub-offices.
Has five training establishments
Two, namely, College of Agricultural Banking and Reserve Bank of India Staff College are part of the Reserve Bank
Others are autonomous, such as, National Institute for Bank Management, Indira Gandhi Institute for Development Research (IGIDR),Institute for Development and Research in Banking Technology (IDRBT)
For details on training establishments, please check their websites links for which are available in Other Links.
Fully owned: National Housing Bank(NHB),Deposit Insurance and Credit Guarantee Corporation of India(DICGC),Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)
Majority stake: National Bank for Agriculture and Rural Development (NABARD)
The Reserve Bank of India has recently divested its stake in State Bank of India to the Government of India
For more details visit :http://www.rbi.org.in/scripts/briefhistory.aspx