Page 47 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes It controls the banking system through the system of licensing, inspection and calling for
information.

It acts as the lender of the last resort by providing rediscounting facilities to scheduled
banks.
Controller of Forex Reserves of the country.

In addition to its traditional central banking functions, the Reserve Bank has certain
non-monetary functions of the nature of supervision of banks and promotion of sound
banking in India.

Supervisory Functions (Non-monetary Functions)

The Reserve Bank of India Act, 1934, and the Banking Regulation Act, 1949 have given the
RBI wide powers.
The RBI has to supervise and control commercial and co-operative banks in relation to
licensing and establishments, branch expansion, liquidity of their assets, management
and methods of working, amalgamation, reconstruction, and liquidation.

The RBI is authorized to carry out periodical inspections of the banks and to call for
returns and necessary information from them.
The nationalization of 14 major Indian scheduled banks in July 1969 imposed new
responsibilities on the RBI for directing the growth of banking and credit policies towards
more rapid development of the economy and realization of certain desired social objectives.

The supervisory functions of the RBI have helped a great deal in improving the standard
of banking in India to develop on sound lines and to improve the methods of their
operation.

Promotional Functions (Non-monetary Functions)

Since Independence, with economic growth, the range of the Reserve Bank’s functions has steadily
widened. The Bank now performs a variety of developmental and promotional functions, which,
at one time, were regarded as outside the normal scope of central banking.

1. The Reserve Bank promotes the banking habit.
2. Extends banking facilities to rural and semi-urban areas.
3. Establishes and promotes new specialized financing agencies i.e., Industrial Development
Banks.
4. Development of the co-operative credit movement to encourage savings and to eliminate
moneylenders from the villages and to route its short-term credit to agriculture.

Example: Agricultural Refinance and Development Corporation to provide long-term
finance to farmers.

Miscellaneous Functions

Following are the miscellaneous functions of RBI:
Interest Rate Interventions: The most visible and obvious power of many modern central banks
is to influence market interest rates; contrary to popular belief, they rarely ‘set’ rates to a fixed

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