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Banking Theory and Practice

Notes Traditional Central Banking Functions (Monetary Functions)

Bank of Issue — The Minimum Reserve System
The Reserve Bank has a separate Issue Department, which is entrusted with the issue of
currency notes. The assets and liabilities of the Issue Department are kept separate from
those of the banking department.
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank
notes of all denominations.
The Government of India makes one rupee notes and coins and small coins and RBI on its
behalf, distributes all over the country as agent of the Government.

Originally, the assets of the Issue Department consisted of not less than two-fifths of gold
coin, gold bullion or securities, provided the amount of gold was not less than ` 40 crores
in value.
The remaining three-fifths of the assets might be in form of rupee coins, Government of
India rupee securities, eligible bills of exchange and promissory notes payable in India.

Due to the emergencies of the Second World War and the post-war period, these provisions
were considerably modified.

Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange
reserves of ` 200 crores, of which at least ` 115 crores should be in gold. The system as it
exists today is known as the minimum reserve system.

Banker to Government
Reserve Bank of India Acts as a government banker, agent and adviser.
The Reserve Bank is an agent of Central Government and of all State Governments in
India, except that of Jammu and Kashmir.
The Reserve Bank has the obligation to transact government business, to keep the cash
balances as deposits free of interest, to receive and to make payments on behalf of the
government.
Carry out government exchange remittances and other banking operations.

The Reserve Bank of India helps the government — both the Union and the states to float
new loans and to manage public debt.
It makes Ways and Means Advances (WMA) to the governments for 90 days.

It makes loans and advances to the states and local authorities.
It acts as adviser to the government on all monetary and banking matters.
Bankers’ Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers’ bank:

According to the provisions of the Banking Regulation Act of 1949, every scheduled bank
was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its
demand liabilities and 2% of its time liabilities in India. By an amendment in 1962, the
distinction between demand and time liabilities was abolished and banks have been
asked to keep cash reserves equal to 3% of their aggregate deposit liabilities. The Reserve
Bank of India can change the minimum cash requirements.

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