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Unit 3: Indian Banking System

Commercial banks can always expect the Reserve Bank of India to come to their help in Notes
times of banking crisis; the Reserve Bank becomes not only the banker’s bank but also the
lender of the last resort.
The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities.

Can get financial accommodation in times of need or strictness by rediscounting bills of
exchange.
Controller of Credit

The Reserve Bank of India is the controller of credit. Some of its features are as follows:
Through open market operations, a central bank influences the money supply in an economy
directly.

According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any
particular bank or the whole banking system not to lend to particular groups or persons
on the basis of certain types of securities.
Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.
Every bank has to get a license from the Reserve Bank of India to do banking business
within India.
The license can be cancelled by the Reserve Bank if certain stipulated conditions are not
fulfilled. Every bank will have to get the permission of the Reserve Bank before it can
open a new branch.
Each scheduled bank must send a weekly report to the Reserve Bank showing, in detail, its
assets and liabilities.
The Reserve Bank has also the power to inspect the accounts of any commercial bank.
These powers of the bank, to call for information, are also intended to give it effective
control of the credit system.
Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of exchange.

According to the Reserve Bank of India Act, of 1934, the Bank was required to buy and sell
at fixed rates any amount of sterling in lots of not less than ` 10,000. The rate of exchange
fixed was ` 1 = sh. 6d. Since 1935, the Bank was able to maintain the exchange rate fixed at
lsh. 6d. Though there were periods of extreme pressure in favour of or against the rupee.
After India became a member of the International Monetary Fund in 1945, the Reserve
Bank has the responsibility of maintaining fixed exchange rates with all other member
countries of the IMF.

The Reserve Bank has to act as the custodian of India’s reserve of international currencies
i.e., forex balances are acquired and managed by the Bank.
The RBI has the responsibility of administering the exchange controls of the country.
Thus, as a supreme banking authority in the country, the Reserve Bank of India, therefore, has
the following powers:
It holds the cash reserves of all the scheduled banks.

It controls the credit operations of banks through quantitative and qualitative controls.

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