THE BACKBONE OF INDIAN ECONOMY

A Central Bank oversees a nation’s monetary system, and with their ability dictates the direction of an economy. They control monetary policy by issue currency and set interest rates on loans and bonds, and this they do by raising interest rates to slow growth and by the lowering of rates to spur up growth. Reserve Bank of India; RBI, is the Central Bank of India and plays an important role in strengthening, developing and diversifying country’s economic and financial structure.

At the very start

The Imperial Bank of India, which emerged as the consequence of combing the three Presidency Banks of Bengal, Bombay and Madras in 1921 was the main financial institute of its time. RBI was set up on the basis of the recommendations of the Hilton Young Commission; a Commission of enquiry appointed in 1926 by British mainly in Eastern and Central Africa. This commission recommended the British Government of India to set up a Central Bank and that is how in 1927 a bill was introduced in the Central Legislative assembly of British India, however, this bill was not passed because of the lack of agreement among the various members of the assembly. In 1933 this bill was freshly reintroduced by a Committee called White Paper on Constitutional Reforms. In 1934, the bill got passed in the name of Reserve Bank of India Act of 1934, and received the Governor General’s assent. The White Paper on Constitutional Reforms was the same committee that drafted the Government of India bill and that’s how the Government of Act of 1935 came, right after the RBI Act. This RBI Act 1934 included guidelines for the functioning of the bank. Then on April 1, 1935, the RBI started its operation. At that India was under British rule and the first Governor, Sir Osborne Smith, was an Australian, but the RBI was certainly not a British Institution, and has been working from the outset for Indian economic interest. The RBI issued first of its currency notes in January 1938 in denomination of Rs.5 and Rs.10, and later in the year notes of denomination Rs.100, Rs.1000 and Rs.10000 were also issued. At first RBI commenced its operation mainly as a Commercial Bank, meaning majority of its capital belonged to private shareholder. And, RBI continued to operate as a privately owned back till Independence. In 1937 British separated Burma province from British India, but RBI continued to operate as the RBI of Burma till April 1947. In the year 1947, the year British divided India into two independent dominions: India and Pakistan, by the act of partition. Even after partition RBI served as the Central Bank of Pakistan up to 1948, thereafter stopped rendering Central Banking services to Pakistan.

Right after Independence

In 1948 the Government of India passed a bill called Reserve Bank of 1948, under which the Government of India took RBI from private shareholders by paying them compensation, and finally in January 1, 1949, RBI started working as a Government owned Central Bank of India. After that Government of India had to pass Banking Regulation Act; Legislation in India which gave RBI the power to regulate or license all banking firms in India. Then in 1950 the constitution of India came into force and India became a Republic. From 1951 the planning era started which was initiated to overcome challenges of settling millions of homeless refuges, bringing different princely states under the Indian fold and spur up the economic condition as colonialism had major role to play in the exploitation of Indian economy. And for this India adopted the economic plan, the five year plan; i.e. national agenda that Government wanted to achieve in five years. The first five year plan, 1951, was mostly focused on agriculture, so RBI policies were also centered mostly on agriculture. And, from 1951-1960 RBI was playing a major role in the development of agriculture. In 1955 RBI acquired a controlling interest in the Imperial Bank of India, which was the oldest and the largest Commercial Bank of the Indian subcontinent, and this Imperial Bank was renamed as State Bank of India on April 1955.

First major huddle

One major problem which the RBI faced just after the first five year plan was that more was needed but financial institutions capable to do those jobs were less, so RBI supported new financial institutes, which resulted in the 1950s-1960s seeing many banks defaulting, such as Laxmi Bank. So to counter banks defaulting Government of India introduced a new policy called The Deposit Insurance Policy; for the purpose of financial stability. And DIC bill was introduced in parliament in 1961, which was subsequently passed by the President and came into effect in 1962; this gave RBI some control on banks and ensured that the depositors don’t have to suffer because of banks mistakes. By the end of 1967 many small and financially weak banks were merged with big banks, making the banking sector more stable, and in the process growing the authority of RBI. During 1969-1985 Government of India nationalized more and more banks, RBI introduced policies like, interest rates, reserve ratio, statutory liquidity ratio and visible deposit – these policies were aimed at better economic development to ensure sufficient liquidity with banks and it had a huge effect on the company’s policy. The banks lend money in selected sections, like, agri-business and small trade companies. During this period RBI also opened new branches in India. Time from early 1960s to the middle of the 1970s possessed great many obstacles for the RBI: the 1962 war with China, 1965 nationwide drought, also in 1965 war with Pakistan, in 1971 war with East Pakistan; also called Bangladesh Liberation War, in 1973 oil crisis and the 1975 Indira Gandhi declared emergency – which resulted in India’s GDP decreasing.

Contrasting fortunes

By 1985 India started to have the problem of balance of payment, i.e. India was importing more than what it was exporting. In 1991 the condition got so bad that India had no money to even support three weeks worth of import, and RBI had refused any new credit. This became an emotional national issue, so to meet the balance of payment crisis, the option of selling the Gold was considered, i.e. by selling Gold India would increase its foreign reserve and pay for the import. 20 metric tons of Gold from the Government of India’s account was airlifted and sold to UBS, after few months the Gold was repurchased and the Gold was bought by the State Bank of India, and then returned to the Government of India. An important point to remember - before 1991 the role of RBI was to regulate the banking sector, but after 1991 financial reforms; the main purpose of RBI was to reduce the role of RBI for a regulator to a facilitator: basically RBI started working towards creating a road map in the interest of the banks, and this meant that the financial sector was allowed to take decisions on its own without having to consult the RBI. And, because of this private sector banks started arriving, both Indian as well as foreigner. Then foreign investment limit in the bank of India was raised about 50%, and the banks were given the freedom to open branches without taking approval from the RBI and they were also given freedom to generate resources from abroad and within India without consulting the RBI.

More freedom to banks

In 1993 exchange rates became market driven, which previously RBI used to set. Then again in 1993 guidelines for the establishment of the private sector banks were issued. In 1994 all the nationalized banks were allowed to tap the capital market to strengthen their capital base. In 1994 lending rates of commercial banks were deregulated, i.e. banks were asked to ‘ask for their own lending rates.’ In 1995 banks were allowed to fix their own interests rates on domestic term deposit. In 1999 RBI issued guidelines to banks for the issuance of Debit cards and Smart cards, to ease pressure on physical cash. After 2000 the idea of National Electronic Fund Transfer; NEFT was introduced, which became a reality in November 2005. Then the Payment and Settlement Systems Act of 2007 gave RBI the oversight for the payment and settlement systems in the country, and it came into effect from August 12, 2008. RBI pursued an accommodative monetary policy beginning mid-September 2008 to mitigate the adverse impact of the global financial crisis on the economy. The recent years has seen the RBI play an active role in balancing the relationship between banks and customers, focusing on financial inclusion, settling up administrate machinery to handle customer grievance, pursuing clean note policy and ensuring development, and oversight of secure and robust payment and settlement systems. Few of the highlights - in 2011 Swabhiman Campaign under Financial Inclusion was launched. Then Bhartiya Mahila Bank formed on 19 November 2013. In 2014, RuPay; India’s first indigenous domestic payment card, was formally introduced by then President Pranab Mukherjee. In the same year Jan Dhan Yojana Scheme was launched. In the year 2015 RBI issued draft guidelines for setting up small banks and payments banks with minimum capital requirement of Rs. 1000 crores, and was allowed initially to holding a maximum balance of Rs. 100,000 per customer. And in 2015, PM Narendra Modi launched the ambitious MUDRA Bank on 8^th April 2015 with capital of Rs. 20,000 crores and credit guarantee corpus of Rs. 3000 crores. This year; 2019 the transition period for full implementation of Basel III Capital Regulation in India was extended up to March 31, 2019, instead of as on March 31, 2018.

Functions of RBI

The following are the primary function of Reserve Bank of India-

Banker of Government

The RBI accepts and makes payments on behalf of Central Government. It carries out its exchange, remittance, management of public debt and other banking functions.

Right to issue bank note

The RBI has the sole right to issue notes; legal tender guaranteed by the Central Government in India. The issue of bank notes is conducted by a separate department called issue department. The Central Government approves designs, form and material of bank notes on considerations of recommendation of the Central Board.

Formulates banking policy

RBI is empowered to formulate banking policy in the interest of the public or depositors banking policing in relation to advances and provide direction on the purpose of the advances, margins to be maintained in a secured advances, the maximum amount of advance may be made, the rate of interest, terms and condition for advances or guarantees may be given.

Licensing authority

The RBI is empowered to grant license to commercial banking business in India, including the power to cancel a license granted to a banking company.

Banker’s bank

The banks listed in second schedule and non schedule banks shall maintain a cash reserve ratio with the RBI with a view to securing the monetary stability in the country. It provides loan and advances in foreign currency to scheduled banks and to other financial institutions.

Depositor awareness and education

The RBI has constituted a fund ‘Depositor Education’ and ‘Awareness Fund’ – used for the protection of depositor interest, and other purposes in the interest of the depositor.

Regulation and management of foreign exchange

The RBI is also empowered to regulate, prohibit and restrict dealing in foreign exchange. It issues license to banks and other institutions to act as the authorized agency in the foreign exchange market.

Organization structure of RBI

The affairs of RBI are governed by a Central Board of Directors. This Board is appointed by the Government of India for a period of four years. Governor; Shaktikanta Das is the current Governor of RBI, and four Deputy Governors are full time officials. The Deputy Governors and Directors are eligible to attend meeting of the Central Board but are not entitled to vote. The Governor and Deputy Governors hold office for term of five years and are entitled for a re-appointment. The Directors are appointed for a term of four years. A Local Board is formed in each four zones consisting of five members who are appointed by the Central Government. There is a chairperson of the Board who is elected among the members. The members of the Board have to hold office for a term of four years and are eligible for reappointment. The Local Board advises on matters referred to it by the Central Board and performs duties delegated to it by the Central Board.

The RBI hierarchy is as follow-

Governors

 

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Deputy Governors

 

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Executive Directors

 

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Principal Chief General Managers

 

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Chief General Managers

 

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General Managers

 

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Deputy General Managers

 

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Assistant General Managers

 

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Managers

 

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Assistant Managers

 

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Support Staff

The journey of RBI so far

Some of the prominent RBI governors are Bengal Rama Rau, M. Narasimham, Dr I G Patel. Dr. Manmohan Singh, Dr. C Rangarajan, Dr. Bimal Jalan, Dr. Y V Reddy and Dr. D Subbarao. Many of these esteemed men were from the administrative services; nevertheless, all understood that RBI’s role to safeguard the monetary and financial stability of the country even while working towards its financial development. This is how RBI evolved as an institution, with time its role changed while giving structure to the Indian economy.

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