BRIEF HISTORY OF RESERVE BANK OF INDIA

The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century.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.

 RBI act extends to the whole of India. 

IMPORTANT DEFINITION AS PER SECTION 2 OF ACT

• ‘’Scheduled bank’’ means a bank included in the Second Schedule.

Establishment and incorporation of Reserve Bank.

• Reserve Bank of India shall be constituted for the purposes of taking over the management of the currency from the Central Government and of carrying on the business of banking in accordance with the provisions of this Act.
• The Bank shall be a body corporate by the name of the Reserve Bank of India, having perpetual succession and a common seal, and shall by the said name sue and be sued.
• Capital of RBI shall be 5 crores of rupees.

Office and Management of RBI

Central government give directions to RBI after consulting Governor that affairs of RBI shall be handled by  Central Board of Directors.

Composition of the Central Board, and term of office of Directors.

• The number of directors in Central Board- 21.
• 1 Governor, 4 deputy governor, 4 directors from each of four Local Board, 10 directors nominated by central government , 2 govt. officials. Salary and allowances of governor, deputy governor may be determined by central board with approval of central government.
• Tenure of Office of Governor and deputy governor - Not exceeding 5 years and eligible for reappointment.
• Tenure of office of directors -  4 years and eligible for reappointment.
• Retiring director shall be eligible for renomination.

Local Boards, their constitution and functions.

 First Schedule has mentioned the areas served by various local boards.Local Board shall be constitute for each of 4 areas and should consist 5 members appointed by Central Government. These members elect 1 chairperson from themselves and tenure of office of each member has 4 years and max 8 years not they cannot be appointed continuously for more than 2 terms

Disqualifications of Directors and members of Local Boards

• Is a salaried Government official 
• Adjudicated an insolvent
•  Found lunatic 
•  Unsound mind
•  No two persons who are partners of the same mercantile firm, or are Directors of the same private company may be Directors or members of the same Local Board at the same time.
   

Meetings of the Central Board

 Meetings of the Central Board shall be convened by the Governor at least six times in each year and at least once in each quarter.
 

Purpose of RBI

• To regulate the issue of banknotes
• To regulate keeping of reserves with a view to securing monetary stability in India;
• To operate the currency and credit system of the country to its advantage;
• To maintain price stability while keeping in mind the objective of growth;
• To look after the monetary policy framework in India.

Functions of RBI

• Issue bank notes
• Monetary Policy Function
• Public Debt Functions
• Foreign Exchange Management
• Banking Regulation & Supervision
• Regulation and Supervision of NBFCs
• Regulation & Supervision of Co-operative banks
• Regulation of Money Market Instrument
• Payment and Settlement Function
• Consumer Protection Functions
• Financial Inclusion and Development Functions

Banking Functions

1) CBD exercises all the powers and functions and does all acts for RBI.

2) RBI may transact various businesses such as –

• acceptance of deposits without good interest from Central Government and State Governments,
• purchase, sale and rediscount of Bills of Exchange, short term Loans and Advances to banks,
• annual Contributions to National Rural Credit Funds,
• d) dealing in Derivatives,
• e) purchase and sale of Government Securities,
• f) purchase and sale of shares of State Bank of India, National Housing Bank, Deposit Insurance and Credit Guarantee Corporation, etc.,
• g) keeping of deposits with SBI for specific purposes, making and issue of Banknotes.

 3) RBI also act as ‘Lender of Last Resort’.

 4) RBI also act as banker to Central Government and State Governments.

RBI cannot transact following business

• purchase the shares of any banking company or of any other company, or grant loans upon the security of any such shares
• advance money on mortgage of, immovable property or become the owner of immovable property, except so far as is necessary for its own business premises and residences for its officers and servants;
• make loans or advances;
• draw or accept bills payable otherwise than on demand;
• allow interest on deposits or current accounts.
• engage in trade or have a direct interest in any commercial, industrial or other undertaking except such interest as it may in any way acquire in the course of the satisfaction of any of its claim.

Issue Functions

•  Right to issue bank notes is one of the key central banking functions of the RBI.
•  This function is performed by the Issue Department and is kept wholly distinct from Banking Department.

ISSUE DEPARTMENT

Issue department which issue bank and currency notes against securities   consisting of gold coins, bullions, foreign securities and other approved securities. The aggregate value of the gold coin, gold bullion and foreign securities held as assets and the aggregate value of the gold coin and gold bullion so held shall not at any time be less than two hundred crores of rupees and one hundred and fifteen crores of rupees, respectively.

•  The RBI Act gives power to the RBI to recommend to CG the denomination of bank notes i.e. two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, two thousand rupees, five thousand rupees and ten thousand rupees or other denominations not exceeding ten thousand rupees.
• The design, form and material of bank notes is approved by Central Government on the recommendations of Central Board of the RBI.
•  Another important function is exchange of mutilated or torn notes, which under the RBI Act is not a matter of right, but a matter of grace.
•  The bank notes that are being issued by RBI are exempt from payment of stamp duty.
• RBI  or  the Central Government shall only draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand.