RBI - Organizational Structure and Functions

Reserve Bank of India is the Central Bank of India, which was established on the recommendation of Hilton Young Commission on 1^st April, 1935 and was nationalised in 1949. RBI is wholly owned by government in India.

Reserve Bank’s Head Office is located in Mumbai.

Organisation and Management

RBI is managed by the Central Board of Directors.

Presently, there are 21 members:

Governor – for a period of 5 years

Four Deputy Governors – for a period of 5 years

Four Directors (Each nominated by four Local Boards)

Ten Directors (Nominated by Government of India)

Two government officers (Nominated by Government of India)

# GOVERNORS OF RBI

First Governor of RBI – Sir Osborne Smith

First Indian Governor of RBI – Sir CD Deshmukh
Current Govenor - Dr Raghuram Rajan (who took charge from Dr D Subbarao )

SUBSIDIARIES

RBI’s fully owned subsidiaries are:

National Housing Bank (NHB)
Deposit Insurance and Credit Guarantee Corporation (DICGC)
Bhartiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
Majority stake in National Bank of Agriculture and Rural Development (NABARD)

DEPARTMENTS OF RBI

DEPARTMENTS	FUNCTIONS
Currency Management	Responsible for administration of currency issuance. (Core function of RBI, RBI Act, 1934)
Banking Operations and Development	Responsible for regulations of Commercial Bank under provisions of Banking Regulation Act,1934 and RBI Act, 1934
Rural Planning and Credit	Formulates policies related to rural population (Rural credit and employment programmes)
Foreign Exchange	Facilitate external trade and payment and promote the development and maintain the foreign exchange market in India. (FEMA, 1999)
Inspection	Assign duties on behalf of top management and provide feedback to top management for efficient and effective working of organisation.

FUNCTIONS OF RBI

The functions of RBI are mentioned in RBI Act, 1934. It acts as Central bank as well as Ordinary bank.

Central Banking Functions

Issuance of Paper Currency

Sole note issuing authority (issue department)
Notes denomination – 20, 50, 100, 500 and 1000

Indian Currency System

Maintain Minimum Reserve System, adopted in 1957.

# Under Minimum Reserve System, RBI maintains minimum of gold and foreign securities to the extent of Rs. 200 crore (of which gold Rs 115 crore) and balance in rupee security is maintained.

Banker of the Government

Agent of Central and State government (both at national and international level)
Performs banking functions on behalf of government. (Accept deposits, taxes and make payments)
Maintains government accounts, provides financial advice and overdraft facility to government.

Banker of banks and Lender of Last Resort

All scheduled banks come under direct control of RBI
Both Commercial and Schedule bank have to maintain minimum reserve with RBI
Custodian of cash reserves of Commercial Bank

REGULATORY FUNCTIONS

Credit control is one of the principal functions of RBI. Credit Control means expansion and contraction of credit.

There are mainly two methods to control credit which are as follows:

Quantitative Credit Control

To control the flow of quantum of credit, RBI adopts the measures which are given below:

Bank Rate – It is the rate at which, RBI charges interest from the schedule banks on the loans (without security) given to them. It is also known as Re discount Rate.
Differential Rates of Interest - If any bank borrows before fixed quota, then it has to pay higher interest rate than prevailing bank rate.
Open Market Operations – It controls the flow of credit through sale and purchase of government securities in open market.
Cash Reserve Ratio – It is the amount of funds that the banks have to keep with the RBI.
Statutory Liquidity Ratio – It is the ratio of liquid asset, which all Commercial Banks keep in the form of cash, gold and unencumbered approved securities not more than 40 % of their demand and time deposits liabilities.

# Unencumbered Securities – An asset that is clear and free from any creditor’s claim

QUALITATIVE CREDIT CONTROL

Change in Margin Requirement on Loans – It can direct the bank to change the margin requirement on loan from time to time.

# Margin Requirement on Loans – It is the percentage value of security that can be used as collateral (additional) security at the time of loan.

Maximum Limit of Loans - RBI fix the maximum limit of loan by the Commercial Banks.
Rationing of Credit – RBI fix credit quota for member banks as well as their limits for the payment of bills.
Moral Suasion - RBI holds meeting with member banks and seek their cooperation in controlling the monetary system of country.

GENERAL BANKING FUNCTIONS

It accepts deposits of State and central government deposits without paying any interest and deals in bills and foreign securities.
It gives loan to Central and State government (not more than 90 days)

MINTS

Coins are minted by Government of India. RBI acts as an agent of government for distribution, issue and handling of coins.

IMPORTANT RATES DETERMINED BY RBI

Bank Rate - It is the rate at which, RBI charges interest from the schedule banks on the loans (without security) given to them. It is also known as Rediscount Rate.

Effect – When Bank Rate will increase then commercial bank’s interest rate will also increase which will result in decrease in demand and thus decrease in prices. (Decrease in inflation) and vice-versa

Repo Rate – It is the rate at which RBI lends money for short term against securities. It was introduced in December, 1992

Effect – If there will be increase in Repo rate than it will decrease the amount of funds with the banks or loans will be available at higher rate which will reduce the demand and thus decrease in the prices (Decrease in inflation) and vice-versa.

Reverse Repo Rate – It is the rate at which RBI borrows money from Commercial Banks.

Cash Reserve Ratio - It is the amount of funds that the banks have to keep with the RBI.

Effect – if CRR will be increase by the RBI than Banks have to keep more funds with RBI i.e. Banks will have less money to lend, which will result in decrease in demand and thus decrease in prices. (Decrease in inflation) and vice-versa

Statutory Liquidity Ratio - It is the ratio of liquid asset, which all Commercial Banks keep in the form of cash, gold and unencumbered approved securities not more than 40 % of their demand and time deposits liabilities.

Effect – If there will be increase the SLR, the bank will have to keep more money, this will result in decrease in the lending of money and thus decrease the demand of the people which will lead to decrease in the prices and thus decrease the inflation and vice-versa.

Marginal Standing Facility – It is the rate at which scheduled banks may borrow from funds overnight from RBI. Its rate is 1% higher than the Repo Rate.

CURRENT RATES

BANK RATE	7.75 %
REPO RATE	6.75 %
REVERSE REPO RATE	5.75 %
CASH RESEVE RATIO	4 %
STAUTORY LIQUIDITY RATIO	21.5 %
MARGINAL STANDARD FACILTIY	7.75 %

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