Banking Awareness: Functioning of RBI and The Rates Determined by RBI for Banking and Competitive Exams

Functioning of RBI and The Rates Determined by RBI

Working of bank is mentioned in the 1934 Reserve Bank of India Act. Working of Reserve Bank of India can be categorised in the following group.

Important Functions of the Reserve Bank of India
As a Central Bank	As an Ordinary Bank
Note Issuing Authority	Granting short-term loans
Banker of Government	Recovery short-term loans
Banker’s Bank	Buying/Selling of bills
Collects and Publishes Banking Data	Accepting deposits
Custodian of Foreign Exchange Reserve	Buying selling of agricultural bills
Provision of Agricultural Credit	Dealing with foreign securities
Provision of Industrial Credit	Dealing with costly metals
Training Facilities	Dealing with banks of other countries
Controller of Credit
Clearing House Function

Important Rates Determined by RBI

i ) Bank Rate: It is also called the re discount rate. It is the rate at which the RBI allows finance to commercial banks. Currently it is at 9%

ii ) Repo Rate: It was introduced in December, 1992 by RBI. It is the rate at which RBI lends short-term money to the banks against securities. It is currently at 8%.

iii ) Reserve Repo Rate: It was introduced in November, 1996. It is the rate at which banks park short-term excess liquidity with on RBI. It is currently at 7%.

iv ) Cash Reserve Ratio: It is the amount of funds that banks have to keep with RBI. If RBI increses CRR, the available amount with banks comes down, RBI uses it to drain out excessive money from the banks.

v ) Statutory Liquidity Ratio: It is the amount which a commercial banks is required to maintain in the form of cash or gold or government approved securities before providing credit to its customers. SLR is used to control inflation and promote growth.

vi ) Marginal Standing Facility: It is the rate at which scheduled banks could borrow funds overnight from RBI. In MSF, banks can use the securities under "SLR" to get loans from RBI. MSF rate is 1% higher than repo rate.

Banking Awareness: Departments in RBI and Hierarchy of Central Board of Members for Banking Exams and Interviews

Departments of RBI

i) Department of Currency Management:

It has the responsibility of administering the functions of currency management, a core function of the Reserve Bank in terms of the Reserve Bank of India Act, 1934.

ii ) Department of Banking Operations and Development:

It is entrusted with the responsibility of regulation of Commercial Banks under the regulatory provisions contained in the BR Act, 1949 and RBI Act, 1934 beside enunciation of banking policies.

iii ) Rural Planning and Credit Department:

It formulates policies relating to rural credit and monitors timely and adequate flow of credit to the rural population for agricultural activities and rural employment programmes.

iv ) Foreign Exchange Department:

With the introduction of the Foreign Exchange Management Act, 1999 (FEMA) with effect from 1st June, 2000, the objective of the Foreign Exchange Department has shifted from conservation of foreign exchange to facilitating external trade and payment and promoting the orderly development and maintenance of foreign exchange market in India.

v ) Inspection Department:

This Department would act as the eyes and ears of the top management and discharge its duties with utmost professionalism as the principal provider of independent and objective feedback on the working of the bank to the top management to enable it to ensure that the organisation functions efficiently and effectively.

Hierarchy of Central Board of Members:

Banking Awareness: Functions of Reserve Bank of India for Banking Interviews and other Competitive Exams

Functions of Reserve Bank of India

Quantitative Credit Control by Reserve Bank of India:

To control the flow of quantum of credit, Reserve Bank adopts all those measures that are generally adopted by the Central Banks in different countries.

Bank Rate:

Rate of interest that the Reserve Bank charges from other scheduled banks on the loans given to them is called bank rate. Policy of bank rate has not been used as a weapon to check price rise.

Differential Rates of Interest:

In October 1960 the Reserve Bank started differential rates of interest programme. According to this programme, if any bank borrows from the Reserve Bank beyond the quota fixed for it, it has to pay higher interest rate than the prevailing bank rate.

Open Market Operation:

It means that the bank controls the flow of credit through the sale and purchase of government securities in the open market.

Cash Reserve Ratio(CRR):

It is amount of funds that the banks have to keep with RBI. If RBI decides to increase this rate the available amount with the banks comes down. RBI uses this method (increase of CRR rate), to drain out the excessive money from the banks.

Statutory Liquidity Ratio (SLR):

It is the ratio of liquid asset, which all Commercial Banks have to keep in the form of cash, gold and unencumbered approved securities equal to not more than 40% of their total demand and time deposits liabilities.

Direct Action:

According to the 1949 Act, Reserve Bank can stop any Commercial Bank from any type of transaction. In case of defiance of the orders of Reserve Bank, it can resort to direct action against the member bank. It can stop giving loans and even recommend the closure of the member bank under pressing circumstances.

Credit Authorisation Scheme:

In 1965, Credit Authorisation Scheme was adopted. It aims at regularising of the credit given by the banks. Before sanctioning a credit limit of Rs. 2 crore or more to any one debtor, every bank will have to get authorisation from the Reserve Bank. Even after the authorisation the creditor bank can inspect the account books of the debtor to ascertain the use of the credit.

Liquidity Adjustment Facility (LAF):

It is the primary instrument of Reserve Bank of India for modulating liquidity and transmitting interest rate signals to the market. Liquidity Adjustment Facility was introduced for the first time for June, 2000 onwards. Subsequent revisions were made in 2001 and 2004.

Click Here for Current Policy Rates(CRR, SLR, REPO) of the Reserve Bank of India

Banking Awareness Topic: Organisation and Management of RBI for Banking Interviews and other Competitive Exams

Organisation and Management of RBI

Reserve Bank of India is managed by the Central Board of Directors. Presently, this board consists of 21 members. Besides Governor and four Deputy Governors, four directors are nominated, each by the four Local Boards. Besides, ten directors and two government officer are  nominated by the Government of India. These boards have been established, in Mumbai, Kolkata, Chennai and New Delhi respectively.

According to the Reserve Bank of India Act, the term of nominated members is for 4 years. Governor and Deputy Governors are appointed by the government for a period of 5 years. Central Board of Directors must hold at least one meeting in 3 months. Bank's Head Office is located in Mumbai. The bank has 28 regional offices, most of which are in state capital.

Structure of RBI Organisation:

RBI is wholly owned by the government in India. Central Board of directors oversees the Reserve Bank's Business.

Central Board:

The Central Board has primary authority for the oversight of the Reserve Bank. It delegates specific functions through its committees and sub-committees. It includes the Governor, Deputy Governors and a few Directors of relevant local boards. Currently Dr. Raghuram Rajan is the Governor.

Committee of Central Board Overseas:

The current business of the Central Bank and typically meets every week, on Wednesdays. The agenda focusses on current operations, including approval of the weekly statement of accounts related to the issue and banking departments.

Board of Financial Supervision:

It regulates and supervises Commercial Banks, Non-Banking Finance Companies (NBFCs), development finance institutions, urban Co-operative Banks and primary dealers.

Board for Payment and Settlement Systems:

Regulates and supervises the payment and settlement systems.

Sub-Committees of Central Board:

It includes those on inspection and audit, staff and building. Focus of each sub-committee is on specific areas of operations.

Local Boards:

In Chennai, Kolkata, Mumbai and New Delhi, representing the country's four regions. Local board members appointed by the Central Government for 4 year terms, represent regional and economic interests and the interests of Co-operative and Indigenous Banks.

Training Centres:

The Reserve Bank Staff College at Chennai addresses the training needs of RBI Officers, the College of agricultural banking at Pune trains staff of Co-operative and Commercial Banks, including Regional Rural Banks. The zonal training centres, located at regional offices, train non-executive staff.

Research Institutes:

RBI- funded institutions to advance training and research on banking issues, economic growth and banking technology, such as, National Institution of Bank Management (NIBM) at Pune, Indira Gandhi Institute of Development Research (IGIDR) at Mumbai and Institute for Development and Research in Banking Technology (IDRBT) at Hyderabad.

Subsidiaries:

Fully-owned subsidiaries include National Housing Bank (NHB), Deposit Insurance and Credit Guarantee Corporation (DICGC), Bharatiya Reseve Bank Note Mudran Private Limited (BRBNMPL). The Reserve Bank also has a majority stake in the National Bank of Agriculture and Rural Development (NABARD).

General Studies: National Income and Measuring National Income for Competitive Exams

General Studies: National Income and Measuring National Income

National Income:

It measures the net value of goods and services produced in a country during a year and it also includes net factor income from abroad. i.e., National Income measures the productive power of an economy in a given period to turn out goods and services of final consumption. In India, National Income estimates are related with the financial year. National Income can be measured by GND, GNP, GNI, NNP, NNI and per capita income. GNP and per capita income, through considered as the most standard measure of economic development have some limitation, since they excluded poverty, literacy, public health, gender equity and other measures of human prosperity.

Estimation of National Income in India:

In 1863, the first attempt was made by Dadabhai Naroji in his book "Poverty and UN-British Rule in India". He estimated the per capita annual income to be Rs. 20. The first scientific attempt to measure national income in India was made by Professor V.K.R.V Rao in 1931-32. He divided the Indian Economy in to 13 sectors. In 1949, National Income committee under the Chairmanship of Professor P.C. Mahalanobis was constituted. The other members being Professor V.K.R.V Rao and Professor D.R Gadgil.

      National Statistical Cimmission (NSO) was set-up on 1st June, 2005, for promoting statistical network in the country. It was then headed by Professor S.D. Tendulkar.

Methods of Measuring National Income:

i ) Production Method:

In this method, net value of goods and services produced in a country during a year is obtained, which is called total final product. This represents Gross Domestic Product (GDP). Net income earned in foreign boundaries by national is added and depreciation is subtracted from GDP.

ii ) Income Method:

In this method, a total of net income earned by working people in different sectors and commercial enterprises is obtained. Incomes of both categories of people, paying taxes and not paying taxes and added to obtain national income. By income method, National Income is obtained by adding receipts as total rent, total wages, total interest and total profit.

iii ) Consumption Method:

It is also called expenditure method. Income is either spent on consumption or saved. Hence, National Income is the addition of total consumption and total savings. In India, a combination of production method and income method is used for estimating National Income.

General Studies: Economic Growth and Development for UPSC, SSC and Banking Exams

General Studies: Economic Growth and Development 

Economic Growth:

It is a quantitative aspect, which generally refers to a long-term tendency reflected by an increase in the flow of goods and services produced by the economy. Economic growth is conventionally measured as a percentage in crease in GDP or GNP or per capital NDP during 1 year. Per capital NDP is the most appropriate measure of economic growth.

                                                     NNP₂ - NNP₁
 Economic Growth Rate =  ------------------------------
                                                       NNP₁

 Where,
                   NNP₂ = Net National Product of current year
                  NNP₁ = Net National Product of last year

Economic Development:

It is a qualitative aspect, unlike economic growth which is a quantitative aspect. It means growth accompanied by welfare or equity. Economic development is multi-dimensional measure, while economic growth emphasis on production. i.e., GDP and per capital income, economic development emphasis upon welfare, equality and quality.

                                                          GDP₂ - GDP₁
Economic Development Rate = --------------------------
                                                             GDP₁

Where,
                GDP₂= Growth Development Product of current year
                GDP₁= Growth Development Product of last year

Measurement of Economic Development:

There are various models to measure economic development and comparative situation of different countries.

• Purchasing Power Parity method
• Human Development Index
• Green GNP
• Net economic welfare
• Poverty Index
• Basic necessities
• Physical Quality of life index
• National prosperity index
• Gender based development index