Page 54 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 4: Reserve Bank of India

Bank of Central Clearance Notes

The Reserve Bank of India acts as a bank of central clearance in settling the mutual accounts of
commercial banks. If there is no RBI branch to do this service, the State Bank of India discharges
these functions.
Promotional Functions

With economic growth assuming a new urgency since Independence, 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. The Reserve Bank was asked to promote banking habit, extend banking facilities to
rural and semi-urban areas, and establish and promote new specialised financing agencies.
Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development
Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the
Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or
indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide
industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India
set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the
Bank's role in this field has become extremely important. The Bank has developed the co-
operative credit movement to encourage saving, to eliminate moneylenders from the villages
and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance
and Development Corporation to provide long-term finance to farmers.

Central Banking Functions

The monetary functions also known as the central banking functions of the RBI are related to
control and regulation of money and credit, i.e., issue of currency, control of bank credit, control
of foreign exchange operations, banker to the Government and to the money market. Monetary
functions of the RBI are significant as they control and regulate the volume of money and credit
in the country.
Equally important, however, are the non-monetary functions of the RBI in the context of India's
economic backwardness. The supervisory function of the RBI may be regarded as a non-monetary
function (though many consider this a monetary function). The promotion of sound banking in
India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the
Banking Regulation Act of 1949 - these powers relate to licencing of banks, branch expansion,
liquidity of their assets, management and methods of working, inspection, amalgamation,
reconstruction and liquidation. Under the RBI's supervision and inspection, the working of
banks has greatly improved. Commercial banks have developed into financially and
operationally sound and viable units.

Did u know? The RBI's powers of supervision have now been extended to non-banking
financial intermediaries. Since independence, particularly after its nationalisation 1949,
the RBI has followed the promotional functions vigorously and has been responsible for
strong financial support to industrial and agricultural development in the country.

LOVELY PROFESSIONAL UNIVERSITY 49