Q. The Reserve Bank of India regulates the commercial banks in matters of

  1. Liquidity of assets
  2. Branch expansion
  3. Merger of banks
  4. Winding-up of banks

Select the correct answer using the codes given below:

  • 1 and 4 only
  • 2, 3 and 4 only
  • 1, 2 and 3 only
  • 1, 2, 3 and 4

Answer: (d) 1, 2, 3 and 4

Notes:
  • RBI is called the banker’s bank and regulates the banking sector in India.
  • By using mechanisms like CRR, SLR etc, it keeps a check on liquidity of assets of the banks.
  • Moreover, RBI also sets rules and regulations concerning merger of banks, their winding-up operations and branch expansion.
Functions of the RBI:
  • Monetary Authority:
    • It implements and monitors the monetary policy and ensures price stability while keeping in mind the objective of growth.
    • An amendment to RBI Act, 1934, was made in May 2016, providing the statutory basis for the implementation of the flexible inflation targeting framework. 
    • Section 45ZB of the amended RBI Act, 1934, also provides for an empowered six-member Monetary Policy Committee (MPC) to be constituted by the Central Government by notification in the Official Gazette.
  • Regulator and Supervisor of the Financial System:
    • Prescribes broad parameters of banking operations within which the country’s banking and financial system functions such as issuing licenses, branch expansion, liquidity of assets, amalgamation of banks etc.
    • Objective: maintain public confidence in the system, protect depositors’ interest and provide cost-effective banking services such as commercial banking, co-operative banking, to the public.
  • Manager of Foreign Exchange:
    • Manages the Foreign Exchange reserves of India.
    • It facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India.
    • It also maintains external value of rupee.
  • 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.
  • Developmental Role:
    • Performs a wide range of promotional functions to support national objectives such as making institutional arrangements for rural or agricultural finance.
    • Commercial banks lend loans to small-scale industrial units as per the directives (Priority Sector Lending) issued by the Reserve Bank of India time to time.
  • Financial Inclusion:
    • The Reserve Bank has selected a bank led model for financial inclusion in India. RBI has undertaken a series of policy measures. Some of the important ones are:
      • No Frills Accounts – account either with nil or very low minimum balance as well as charges that would make such accounts accessible to vast sections of population.
      • Use of Technology – devices such as ATMs, hand held devices to identify user accounts through a card and biometric identifier, Deposit taking machines and Internet banking and Mobile banking facility to provide the banking services to all sections of society with more ease.
  • Related Functions:
    • Banker to the Government: performs merchant banking function for the central and the state governments.
    • It is entrusted with central govt.’s money, remittances, exchange and manages its public debt as well.
    • Banker to banks: maintains banking accounts of all scheduled banks. It also acts as lender of last resorts by providing fund to banks.