The History Of Reserve Bank of India- Structure, Divisions, Information Technology, Functions, financial supervision, system, Issue, NB Inspire

 The History Of Reserve Bank of India- Structure, Divisions, Information Technology, Functions, financial supervision, system, Issue, NB Inspire

The Reserve Bank of India, chiefly known as RBI, is India's central bank and regulatory body responsible for regulation of the Indian banking system. It is under the ownership of Ministry of Finance, Government of India. It is responsible for the issue and supply of the Indian rupee. It also manages the country's main payment systems and works to promote its economic development. Bharatiya Reserve Bank Note Mudran is one of the specialized divisions of RBI through which it prints & mints Indian bank notes and coins. RBI established the National Payments Corporation of India as one of its specialized division to regulate the payment and settlement systems in India. Deposit Insurance and Credit Guarantee Corporation was established by RBI as one of its specialized division for the purpose of providing insurance of deposits and guaranteeing of credit facilities to all Indian banks.

Until the Monetary Policy Committee was established in 2016,it also had full control over monetary policy in the country. 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.Following India's independence on 15 August 1947, the RBI was nationalized on 1 January 1949 .

The overall direction of the RBI lies with the 21-member central board of directors, composed of: the governor; four deputy governors; two finance ministry representatives (usually the Economic Affairs Secretary and the Financial Services Secretary); ten government-nominated directors; and four directors who represent local boards for Mumbai, Kolkata, Chennai, and Delhi. Each of these local boards consists of five members who represent regional interests and the interests of co-operative and indigenous banks.

It is a member bank of the Asian Clearing Union. The bank is also active in promoting financial inclusion policy and is a leading member of the Alliance for Financial Inclusion (AFI). The bank is often referred to by the name 'Mint Street'.

On 12 November 2021, the Prime Minister of India, Narendra Modi, launched two new schemes which aim at expanding investments and ensuring more security for investors. The two new schemes include the RBI Retail Direct Scheme and the Reserve Bank Integrated Ombudsman Scheme. The RBI Retail Direct Scheme is targeted at retail investors to invest easily in government securities. According to RBI, the scheme will allow retail investors to open and maintain their government securities account free of cost. The RBI Integrated Ombudsman Scheme aims to further improve the grievance redress mechanism for resolving customer complaints against entities regulated by the central bank. The RBI makes it mandatory for all the banks in India to have a safe box in their own respect strong room. However, the exception is given to the Regional Banks and the SBI branches located in the rural areas but a strong room is compulsory.

History

A 2010 stamp dedicated to the 75th anniversary of the Reserve Bank of India

The Reserve Bank of India was established[13] following the Reserve Bank of India Act of 1934.Though privately owned initially, it was nationalized in 1949 and since then fully owned by the Ministry of Finance , Government of India (GoI).

The Reserve Bank of India was conceptualised in accordance with the guidelines presented by Dr Ambedkar to the Hilton Young Commission (also known as Royal Commission on Indian Currency and Finance) based on his book, The Problem of the Rupee – Its Origin and Its Solution

In 1926, the Hilton Young Commission recommended the setting up of the Reserve Bank of India.

At the time of establishment, the authorized capital of the Reserve Bank of India was ₹5 crores. The government's share in this was only ₹20-22 lakhs.

Structure

The central board of directors is the main committee of the central bank. The Government of India appoints the directors for a four-year term. The board consists of a governor, and not more than four deputy governors; four directors to represent the regional boards;two – usually the Economic Affairs Secretary and the Financial Services Secretary – from the Ministry of Finance and ten other directors from various fields. The Reserve Bank – under Raghuram Rajan's governorship – wanted to create a post of a chief operating officer (COO), in the rank of deputy governor and wanted to re-allocate work between the five of them (four deputy governor and COO).

The bank is headed by the governor, currently Shaktikanta Das. There are currently four deputy governors Mahesh Kumar Jain,M. Rajeshwar Rao,[46] Michael Patra and T. Rabi Shankar.

Two of the four deputy governors are traditionally from RBI ranks and are selected from the bank's executive directors. One is nominated from among the chairpersons of public sector banks and the other is an economist. An Indian Administrative Service officer can also be appointed as deputy governor of RBI and later as the governor of RBI as with the case of Y. Venugopal Reddy and Duvvuri Subbarao. Other persons forming part of the central board of directors of the RBI are Nachiket Mor, Y. C. Deveshwar, Prof Damodar Acharya, Ajay Tyagi and Anjuly Duggal.

Executive Directors (ED) consist of M. Rajeshwar Rao, Lily Vadera, Rabi N. Mishra, Smt. Nanda S. Dave, Anil K. Sharma, S. C. Murmu, T. Rabi Sankar, Janak Raj, P. Vijayakumar, Indrani Banerjee, O.P. Mall and Sudha Balakrishnan (Chief Financial Officer).

Sudha Balakrishnan, a former vice-president at National Securities Depository Limited, assumed charge as the first chief financial officer (CFO) of the Reserve Bank on 15 May 2018; she was given the rank of an executive director.

Branches and support bodies

The RBI has four regional representations: North in New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are formed by five members, appointed for four years by the central government and with the advice of the central board of directors serve as a forum for regional banks and to deal with delegated tasks from the Central Board.

RBI has 31 branches in India. Mostly all are in Capital cities, exceptions are the Nagpur Reserve Bank branch which is actually a Second capital of Maharashtra and the Ahmedabad Reserve Bank branch. Nagpur Reserve Bank was established in 1956, while the Ahmedabad branch was established in 1950.

It has two training colleges for its officers, viz. Reserve Bank Staff College, Chennai and College of Agricultural Banking, Pune. There are three autonomous institutions run by RBI namely National Institute of Bank Management (NIBM), Indira Gandhi Institute of Development Research (IGIDR), Institute for Development and Research in Banking Technology (IDRBT). There are also four zonal training centers at Mumbai, Chennai, Kolkata, and New Delhi.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee to control the financial institutions. It has four members, appointed for two years, and takes measures to strength the role of statutory auditors in the financial sector, external monitoring, and internal controlling systems. The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of former RBI deputy governor S. S. Tarapore to "lay the road map" to capital account convertibility. The five-member committee recommended a three-year time frame for complete convertibility by 1999–2000.

On 8 December 2017, Surekha Marandi, Executive Director (ED) of Reserve Bank of India, said RBI will open an office in the north-eastern state of Arunachal Pradesh.

Bharatiya Reserve Bank Note Mudran

Bharatiya Reserve Bank Note Mudran It was established by RBI on 3 February 1995 for the purpose to enable RBI to bridge the gap between demand and supply of Indian notes in the country. bank notes and coins.

Deposit Insurance and Credit Guarantee Corporation

Deposit Insurance and Credit Guarantee Corporation was established by RBI for the purpose of providing insurance of deposits and guaranteeing of credit facilities to all Indian banks.

National Payments Corporation of India

National Payments Corporation of India was established by RBI in Dec 2008 for the purpose of management of the payment and settlement systems in India.

Reserve Bank Information Technology

It has been set up by RBI to serve its Information Technology and cybersecurity needs and to improve the cyber resilience of the Indian banking industry.

Indian Financial Technology and Allied Services

It was established by RBI, mandated to design, deploy and support IT-related services to all Banks and Financial Institutions in the country and also to the Reserve Bank of India. It manages and operates the Financial Messaging Platform (SFMS) that comprises Real-Time Gross Settlement and National Electronic Funds Transfer. INFINET is also managed by IFTAS. The IFTAS has taken over the Indian FInancial Network (INFINET), Structured Financial Messaging System (SFMS) and the Indian Banking Community Cloud (IBCC) from the IDRBT, effective 1 April 2016.

Functions

The central bank of any country executes many functions such as overseeing monetary policy, issuing currency, managing foreign exchange, working as a bank for government and as a banker of scheduled commercial banks. It also works for overall economic growth of the country. The preamble of the Reserve Bank of India describes its main functions 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."

financial supervision

The primary objective of RBI 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 the Department of Banking Supervision (DBS), the Department of Non-Banking Supervision (DNBS) and the Financial Institutions Division (FID) and gives directions on the regulatory and supervisory issues.

Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and prescribes broad parameters of banking operations within which the country's banking and financial system functions. Its objectives are to maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The RBI controls the monetary supply, monitors economic indicators like the gross domestic product and has to decide the design of the rupee banknotes as well as coins.

Regulator and supervisor of the payment and settlement systems

Payment and settlement systems play an important role in improving overall economic efficiency . The Payment and Settlement Systems Act of 2007 (PSS Act)[61] gives the Reserve Bank oversight authority, including regulation and supervision, for the payment and settlement systems in the country. In this role, the RBI focuses on the development and functioning of safe, secure and efficient payment and settlement mechanisms. Two payment systems National Electronic Fund Transfer (NEFT) and Real-Time Gross Settlement (RTGS) allow individuals, companies and firms to transfer funds from one bank to another. These facilities can only be used for transferring money within the country.

From 16 December 2019, one can transfer money online using the National Electronic Funds Transfer (NEFT) route 24x7, i.e., any time of the day and any day of the week. The Reserve Bank of India stated earlier in December 2019 that bank customers will be able to transfer funds through NEFT around the clock on all days including weekends and holidays from 16 December. In RTGS, transactions are processed continuously 24x7.

Banker and debt manager to government

Just as individuals need a bank to carry out their financial transactions effectively and efficiently, governments also need a bank to carry out their financial transactions. The RBI serves this purpose for the Government of India (GoI). As a banker to the Government of India, the RBI maintains its accounts, receive payments into and make payments out of these accounts. The RBI also helps the GoI to raise money from the public via issuing bonds and government-approved securities. In Sep 2019, a decision at RBI directors meet was taken to change the RBI financial accounting year to March–April to align itself with the central government calendar instead of the current June–July year.

RBI issues taxable bonds for investments. From 1 July 2020, RBI is offering Floating Rate Savings Bonds, 2020 (Taxable) – FRSB 2020 (T). The interest on the bonds is payable semi-annually on 1 Jan and 1 July every year. The coupon on 1 January 2021 shall be paid at 7.15%. The Interest rate for next half-year will be reset every six months, the first reset being on 1 January 2021. There is no option to pay interest on cumulative basis.

Managing foreign exchange

The central bank manages to reach different goals of the Foreign Exchange Management Act, 1999. Their objective is to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

With the increasing integration of the Indian economy with the global economy arising from greater trade and capital flows, the foreign exchange market has evolved as a key segment of the Indian financial market and the RBI has an important role to play in regulating and managing this segment . The RBI manages forex and gold reserves of the nation.

On a given day, the foreign exchange rate reflects the demand for and supply of foreign exchange arising from trade and capital transactions. The RBI's Financial Markets Department (FMD) participates in the foreign exchange market by undertaking sales/purchases of foreign currency to ease volatility in periods of excess demand for/supply of foreign currency.

Issue of currency

Other than the Government of India, the Reserve Bank of India is the sole body authorized to issue banknotes in India.

The bank also destroys banknotes when they are not fit for circulation. All the money issued by the central bank is its monetary liability, i.e., the central bank is obliged to back the currency with assets of equal value, to enhance public confidence in paper currency. The objectives are to issue banknotes and give the public adequate supply of the same, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves.

The RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development because both objectives are diverse in themselves.

Bankers' bank

Nagpur branch holds most of India's gold deposits.

Reserve Bank of India also works as a central bank where commercial banks are account holders and can deposit money. RBI maintains banking accounts of all scheduled banks.Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, repo rate, and open market operations. As the bankers' bank, the RBI facilitates the clearing of checks between the commercial banks and helps the inter-bank transfer of funds. It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by providing emergency advances to the banks.

Regulator of the Banking System

RBI has the responsibility of regulating the nation's financial system. As a regulator and supervisor of the Indian banking system it ensures financial stability & public confidence in the banking system. RBI uses methods like on-site inspections, off-site surveillance, scrutiny & periodic meetings to supervise new bank licenses, setting capital requirements and regulating interest rates in specific areas. RBI is currently focused on implementing norms.

Detection of fake currency

To curb the counterfeit money problem in India, RBI has launched a website to raise awareness among masses about fake banknotes in the market. www.paisaboltahai.rbi.org.in provides information about identifying fake currency.

On 22 January 2014; RBI gave a press release stating that after 31 March 2014, it will completely withdraw from circulation of all banknotes issued prior to 2005. From 1 April 2014, the public will be required to approach banks for exchanging these notes. Banks will provide exchange facility for these notes until further communication. The reserve bank has also clarified that the notes issued before 2005 will continue to be legal tender. This would mean that banks are required to exchange the notes for their customers as well as for non-customers. From 1 July 2014, however, to exchange more than 15 pieces of '500 and '1000 notes, non-customers will have to furnish proof of identity and residence as well as show adhar to the bank branch in which he/she wants to exchange the notes.

This move from the reserve bank is expected to unearth black money held in cash. As the new currency notes have added increased security features, they would help in curbing the menace of fake currency.

Developmental role

The central bank has to perform a wide range of promotional functions to support national objectives and industries.[19] The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of these problems are results of the dominant part of the public sector.

Key tools in this effort include Priority Sector Lending such as agriculture, micro and small enterprises (MSE), housing and education. RBI work towards strengthening and supporting small local banks and encourage banks to open branches in rural areas to include large section of society in banking net.

Related functions

The RBI is also a banker to the government and performs merchant banking for the central and the state governments function. It also acts as their banker. The National Housing Bank (NHB) was established in 1988 to promote private real estate acquisition.The institution maintains banking accounts of all scheduled banks, too. RBI on 7 August 2012 said that Indian banking system is resilient enough to face the stress caused by the drought-like situation because of poor monsoon this year.

Custodian to foreign exchange

The Reserve Bank has custody of the country's reserves of international currency, and this enables the Reserve Bank to deal with crisis connected with adverse balance of payments position.

CSD for G-Sec (Government Securities)

Public Debt Office (PDO) acts as CSD (Central Securities Depository) for G-Sec.

MIFOR (Mumbai Interbank Forward Offer Rate)

With LIBOR cessation in 2021, RBI is set to replace MIFOR with a new benchmark. MIFOR has LIBOR as one of the components and used in interest rate swap (IRS) markets.

Policy rates and reserve ratios

Repo rate

Repo (repurchase) rate also known as the benchmark interest rate is the rate at which the RBI lends money to the commercial banks for a short-term (a maximum of 90 days). When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. If the repo rate is increased, banks can't carry out their business at a profit whereas the very opposite happens when the repo rate is cut down. Generally, repo rates are cut down whenever the country needs to progress in banking and economy.

If banks want to borrow money (for short term, usually overnight) from RBI then banks have to charge this interest rate. Banks have to pledge government securities as collateral. This kind of deal happens through a re-purchase agreement. If a bank wants to borrow, it has to provide government securities at least worth ₹ 1 billion (could be more because of margin requirement which is 5%–10% of loan amount) and agree to repurchase them at ₹ 1.07 billion (US$13) million) at the end of borrowing period. So the bank has paid ₹65 million (US$810,000) as interest. This is the reason it is called repo rate.

The government securities which are provided by banks as collateral can not come from SLR quota (otherwise the SLR will go below 19.5% of NDTL and attract penalties).

To curb inflation, the RBI increases repo rate which will make borrowing costs for banks. Banks will pass this increased cost to their customers which make borrowing costly in the whole economy. Fewer people will apply for loans and aggregate demand will be reduced. This will result in inflation coming down. The RBI does the opposite to fight deflation. When the RBI reduces the repo rate, banks are not legally required to reduce their own base rate.

The present repo rate is 4%

Reverse repo rate (RRR)

As the name suggest, reverse repo rate is just the opposite of repo rate. Reverse repo rate is the short term borrowing rate in which commercial bank Park their surplus in RBI The reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it to others (people, companies, etc.) which is always risky.

Repo rate signifies the rate at which liquidity is injected into the banking system by RBI, whereas reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks. Currently, reverse repo rate is 3.35%.

Statutory liquidity ratio (SLR)

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.

In well-developed economies, central banks use open market operations—buying and selling of eligible securities by the central bank in the money market—to influence the volume of cash reserves with commercial banks and thus influence the volume of loans and advances they can make to the commercial and industrial sectors. In the open money market, government securities are traded at market-related rates of interest. The RBI is resorting to increasing open market operations in recent years. Generally, the RBI uses

1. Minimum margins for lending against specific securities.

2. A ceiling on the amounts of credit for certain purposes.

3. The discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

1. Part of the interest rate structure, i.e., on small savings and provident funds, are administratively set.

2. Banks are mandatory required to keep 18% of their NDTL (net demand and time liabilities) in the form of liquid assets.

3. Banks are required to lend to the priority sectors to the extent of 40% of their advances.

The share of net demand and time liabilities that banks must maintain in safe and liquid assets, such as government securities, cash, and gold. Here it would be pertinent to mention the gold swap of July 2014.The present SLR is 18.00%.

bank rate

Bank rate is defined in Section 49 of the RBI Act of 1934 as the 'standard rate at which RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase'. When banks want to borrow long term funds from the RBI, it is the interest rate which the RBI charges to them. It is currently set to 4.65%.The bank rate is not used to control money supply, but penal rates continue to be linked to the bank rate. If a bank fails to meet SLR or CRR requirements then the RBI will impose a penalty of 300 basis points above bank rate.

Liquidity adjustment facility (LAF)

Liquidity adjustment facility was introduced in 2000. LAF is a facility provided by the Reserve Bank of India to scheduled commercial banks to avail of liquidity in case of need or to park excess funds with the RBI on an overnight basis against the collateral of government securities.

RBI accepts applications for a minimum amount of ₹5 crore (US$630,000) and in multiples of ₹ 50 million thereafter.

ash reserve ratio (CRR)

CRR refers to the ratio of bank's cash reserve balances with RBI with reference to the bank's net demand and time liabilities to ensure the liquidity and solvency of the scheduled banks. The share of net demand and time liabilities that banks must maintain as cash with the RBI. The RBI has set CRR at 4.5% A 1% change in CRR affects the economy by 1,37,000 crore.[114] An increase draw this amount from the economy, while a decrease injects this amount into the economy. So if a bank has ₹2 billion (US$25 million) of NDTL then it has to keep ₹80 million (US$1.0 million) in cash with RBI. RBI pays no interest on CRR.

Let's assume the economy is showing inflationary trends and the RBI wants to control this situation by adjusting SLR and CRR. If the RBI increases SLR to 50% and CRR to 20% then bank will be left only with ₹600 million (US$7.5 million) for operations. Now it will be very difficult for the bank to maintain profitability with such a small amount of capital. The bank will be left with no choice but to raise its interest rate which will make borrowing by its customers more costly. This will in turn reduce the overall demand and hence prices will eventually come down.

Open Market Operation (OMO)

Open market operation is the activity of buying and selling of government securities in open market to control the supply of money in banking system. When there is excess supply of money, central bank sells government securities thereby sucking out excess liquidity. Similarly, when liquidity is tight, RBI will buy government securities and thereby inject money supply into the economy.

On 23 March 2020, Reserve Bank of India infuse Rs 1 trillion (short scale) through term repo auction, a massive OMOs (open market operations) purchase of government securities. The Reserve Bank is monitoring the financial market conditions and liquidity situation in the economy as COVID-19 pandemic in India fears of a recession.

Marginal standing facility (MSF)

This scheme was introduced in May 2011 and all the scheduled commercial bank can participate in this scheme. Banks can borrow up to 2.5%per cent of their respective net demand and time liabilities. The RBI receives application under this facility for a minimum amount of ₹ 10 million and in multiples of ₹ 10 million thereafter.

The important difference from repo rate is that bank can pledge government securities from its SLR quota (up to one per cent). So even if SLR goes below 20.5% by pledging SLR quota securities under MSF, the bank will not have to pay any penalty. The marginal standing facility rate currently stands at 4.25%

Regulation of variable pay of bank management

In November, RBI introduced a set of draft guidelines to regulate the variable pay of CEOs and top management at private banks. The new rules are in line with the Sound Compensation Practices issued by the Financial Stability Board in April 2009. The rules will apply to CEOs, wholetime directors, and material risk takers at private banks, small finance banks and domestic executives of foreign banks. As per the new rules at least 50% of the pay should be based on individual, unit, business and firm wide performance evaluation which will be capped at 300% of the fixed pay. In case of variable pay above 200% then at least 50% of this amount should be via non-cash instruments. Share linked instruments are included as part of variable pay. Guaranteed bonus should not be part of the compensation package except in case of joining bonus. The RBI also has put clauses in place to clawback/malus in case of deteriorating performance. The bank shall identify a representative set of conditions when the recovery clause for clawback /malus can be invoked.

Publications

A report titled "Trend and Progress of Banking in India" is published annually, as required by the Banking Regulation Act, 1949. The report sums up trends and developments throughout the financial sector. Starting in April 2014, the Reserve Bank of India publishes bi-monthly policy updates.

Committees set up by RBI

KV Kamath Committee

In August 2020, RBI set up a five membered committee under the chairmanship of KV Kamath, the former CEO of the ICICI bank in order to make recommendations on the norm for resolution of COVID-19 related stressed loans. In order to restructure the loans up to ₹15,000 crores the expert committee was tasked with coming up with a sector specific plan for successful resolution of the stressed loans. The parameters were to include aspects related to leverage, liquidity and debt serviceability.

Attempt to caution customers against virtual currencies

In April 2018, RBI had banned banks from supporting crypto transactions after cases of fraud through virtual currencies were reported. However, the Supreme Court had struck down the ban in March 2020. Among the reasons cited was that cryptocurrencies were not illegal though unregulated in India.