RESERVE BANK OF INDIA (RBI)

The Reserve Bank Of India was established on April 1 1935, according to the provision of RBI Act 1934.Initially the Central Office of the RBI was in Calcutta, which was later shifted to Mumbai in 1937.The RBI policies are formulated by the governor at the Central Office. The RBI was nationalized in 1949.

Preamble

The Preamble of RBI states:
"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Central Board
The RBI is monitored by a central board of directors. The board is appointed by the Government of India in accordance with the RBI act.

Local Boards

• Local Boards are present in the four metros of Mumbai, Calcutta, Chennai and New Delhi.
• Local Board consists of five members.
• Local Board is appointed by the Central Government.
• Local Board is for a period of four years.

Financial Supervision
The RBI accomplishes the role of financial supervision through the Board For Financial Supervision (BFS).The BFS was initiated in November 1994.

Functions Of BFS

• Streamlining the system of bank inspections.
• Induction of offsite surveillance.
• Consolidating the role of statutory auditors and
• Consolidating the internal defenses of supervised institutions.

Current Focus Of BFS

• Supervise financial institutions.
• Consolidate accounts.
• Deal with legal issues in bank frauds.
• Variance in assessment of nonperforming assets and
• Supervisory rating model for banks.

Legal Framework

Umbrella Acts

• Reserve Bank Of India Act 1934 governs the Reserve Bank functions.
• Banking Regulation Act 1949 governs the financial sector.

Functions of RBI

Monetary Authority:
The RBI is responsible for implementing, formulating and monitoring the monetary policy of India.

Objective: Keeping this authority in mind the RBI is required to maintain price stability and ensure adequate flow of credit to productive sectors.

Regulator And Supervisor Of The Financial System:
The Supreme Financial Body sets down broad parameters of banking operations within which the country's banking and financial system operates.

Objective: This reasonably helps in maintaining public confidence in the system. It in turn protects depositors' interest and provides lucrative banking services to the public.

Manager of Exchange Control:
The RBI is responsible for managing the Foreign Exchange Management Act, 1999.

Objective: It is the nodal agency which facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India.

Issuer Of Currency:
It is the only supreme body which issues and exchanges or destroys currency and coins not fit for circulation.

Objective: This facilitates in giving the public adequate quantity of currency notes and coins and in good quality.

Developmental Role
The RBI since its inception performs a wide range of promotional functions to support national objectives and generate goodwill among the citizens of the country.

Related Functions

Banker to the Government: The RBI performs merchant banking function for the central and the state governments and also acts as their banker. The RBI often advises the Government of the current monetary condition in the state.

Banker to Banks: maintains banking accounts of all scheduled banks. The RBI looks after the functioning of the state banks and grants them license and even cancels the same on account of fraud practice.

How do central banks inject money into the economy?

Central banks use several different methods to increase (or decrease) the amount of money in the banking system. These actions are referred to as monetary policy. While the Federal Reserve Board (the Fed) could print paper currency at its discretion in an effort to increase the amount of money in the economy, this is not the measure used. Here are three methods the Fed uses in order to inject (or withdraw) money from the economy:

1. The Fed can influence the money supply by modifying reserve requirements, which is the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply.
   
   
2. The Fed can also alter the money supply by changing short-term interest rates. By lowering (or raising) the discount rate that banks pay on short-term loans from the Federal Reserve Bank, the Fed is able to effectively increase (or decrease) the liquidity of money. Lower rates increase the money supply and boost economic activity; however, decreases in interest rates fuel inflation, so the Fed must be careful not to lower interest rates too much for too long.
   
   
3. Finally, the Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply. Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system.

The central bank has been described as "the lender of last resort", which means that it is responsible for providing its economy with funds when commercial banks cannot cover a supply shortage. In other words, the central bank prevents the country's banking system from failing. However, the primary goal of central banks is to provide their countries' currencies with price stability by controlling inflation. A central bank also acts as the regulatory authority of a country's monetary policy and is the sole provider and printer of notes and coins in circulation. Time has proved that the central bank can best function in these capacities by remaining independent from government fiscal policy and therefore uninfluenced by the political concerns of any regime. The central bank should also be completely divested of any commercial banking interests.

The Rise of the Central Bank
Today the central bank is government owned but separate from the country's ministry of finance. Although the central bank is frequently termed the "government's bank" because it handles the buying and selling of government bonds and other instruments, political decisions should not influence central bank operations. Of course, the nature of the relationship between the central bank and the ruling regime varies from country to country and continues to evolve with time. To ensure the stability of a country's currency, the central bank should be the regulator and authority in the banking and monetary systems.

Historically, the role of the central bank has been growing, some may argue, since the establishment of the Bank of England in 1694. It is, however, generally agreed upon that the concept of the modern central bank did not appear until the 20th century as problems developed in the commercial banking system. Thus, the central bank's modern function emerged in response to an already present commercial banking structure.



Between 1870 and 1914, when world currencies were pegged to the gold standard (GS), maintaining price stability was a lot easier because the amount of gold available was limited. Consequently, monetary expansion could not occur simply from a political decision to print more money, so inflation was easier to control. The central bank at that time was primarily responsible for maintaining the convertibility of gold into currency; it issued notes based on a country's reserves of gold.



At the outbreak of WWI, the GS was abandoned, and it came apparent that, in times of crisis, governments, facing budget deficits (because it costs money to wage war) and needing greater resources, will order the printing of more money. As governments did so, they encountered inflation. After WWI, many governments opted to go back to the GS to try to stabilize their economies. With this rose the awareness of the importance of the central bank's independence from the political machine.



During the unsettling times of the Great Depression and the aftermath of WWII, world governments predominantly favored a return to a central bank dependent on the political decision making process. This view emerged mostly from the need to establish control over war-shattered economies; furthermore, countries with newly-acquired independence opted to keep control over all aspects of their countries - a backlash against colonialism. The rise of managed economies in the Eastern Bloc was also responsible for increased government interference in the macroeconomy. Soon after the effects of WWII, however, the independence of the central bank from the government came back into fashion in Western economies and has prevailed as the optimal way to achieve a liberal and stable economic regime.



How the Bank Influences an Economy
A central bank can be said to have two main kinds of functions: (1) macroeconomic when regulating inflation and price stability and (2) microeconomic when functioning as a lender of last resort.

Macroeconomic Influences
As it is responsible for price stability, the central bank must regulate the level of inflation by controlling money supplies by means of monetary policy. The central bank performs open market transactions that either inject the market with liquidity or absorb extra funds, directly affecting the level of inflation. To increase the amount of money in circulation and decrease the interest rate (cost) for borrowing, the central bank can buy government bonds, bills, or other government-issued notes. This buying can, however, also lead to higher inflation. When it needs to absorb money to reduce inflation, the central bank will sell government bonds on the open market, which increases the interest rate and discourages borrowing. Open market operations are the key means by which a central bank controls inflation, money supply, and price stability.




Microeconomic Influences
The establishment of central banks as lender of last resort has pushed the need for their freedom from commercial banking. A commercial bank offers funds to clients on a first come, first serve basis. If the commercial bank does not have enough liquidity to meet its clients' demands (commercial banks typically do not hold reserves equal to the needs of the entire market), the commercial bank can turn to the central bank to borrow additional funds. This provides the system with stability in an objective way; central banks cannot favor any particular commercial bank. As such, many central banks will hold commercial-bank reserves that are based on a ratio of each commercial bank's deposits. Thus, a central bank may require all commercial banks to keep, for example, a 1:10 reserve/deposit ratio. Enforcing a policy of commercial bank reserves functions as another means to control money supply in the market. Not all central banks, however, require commercial banks to deposit reserves. The United Kingdom, for example, does not have this policy while the United States does.



The rate at which commercial banks and other lending facilities can borrow short-term funds from the central bank is called the discount rate (which is set by the central bank and provides a base rate for interest rates). It has been argued that, for open market transactions to become more efficient, the discount rate should keep the banks from perpetual borrowing, which would disrupt the market's money supply and the central bank's monetary policy. By borrowing too much, the commercial bank will be circulating more money in the system. Use of the discount rate can be restricted by making it unattractive when used repeatedly. (To learn more, read Understanding Microeconomics.)


Transitional Economies
Today developing economies are faced with issues such as the transition from managed to free market economies. The main concern is often controlling inflation. This can lead to the creation of an independent central bank but can take some time, given that many developing nations maintain control over their economies in an effort to retain control of their power. But government intervention, whether direct or indirect through fiscal policy, can stunt central bank development. Unfortunately, many developing nations are faced with civil disorder or war, which can force a government to divert funds away from the development of the economy as a whole. Nonetheless, one factor that seems to be confirmed is that, for a market economy to develop, a stable currency (whether achieved through a fixed or floating exchange rate) is needed. However, the central banks in both industrial and emerging economies are dynamic because there is no guaranteed way to run an economy regardless of its stage of development.




Conclusion

Central banks are responsible for overseeing the monetary system for a nation (or group of nations), along with a wide range of other responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. The role of the central bank has grown in importance over time, but in U.S., its activities continue to evolve.

Macroeconomic and Monetary Developments in 2009-10

Macroeconomic and Monetary Developments in 2009-10 -Released on April 19, 2010


The Reserve Bank of India on 19th April 2010 released the document Macroeconomic and Monetary Developments in 2009-10, which serves as a background to the Monetary Policy Statement 2010-11 to be announced on April 20, 2010.

The highlights of macroeconomic and monetary developments during 2009-10 are:

Overall Assessment

With the improving growth outlook, monetary and fiscal exit measures have started.


While recovery in private demand needs to be stronger to reinforce the growth momentum, already elevated headline inflation suggests that the weight of policy balance may have to shift to containing inflation, since high inflation itself will dampen recovery in growth.


In the emerging macroeconomic scenario, monetary policy management in 2010-11 will be dominated by the challenge of moderating inflation and anchoring inflation expectations, while remaining supportive of growth impulses.

Global Economic Conditions

Recovery in the global economy picked up momentum in the fourth quarter of 2009. The speed of recovery, however, remains significantly divergent. The projections for global output for 2010 generally point to consolidating recovery, led by the Emerging Market Economies (EMEs). The WTO projects world trade to stage a strong recovery in 2010.


The risks to the overall global macroeconomic environment have, however, increased because of large public debt in advanced economies, on the back of concerns relating to reduction in potential output, high unemployment rates, impaired financial systems and premature exit from the policy stimulus.


With stronger recovery in EMEs driven largely by domestic demand, improving exports and return of capital flows, EMEs face the risks of inflation and asset price build up. Indian Economy

Output

The Indian economy exhibited clear momentum in recovery, and despite the impact of a deficient monsoon on agricultural production, GDP growth for 2009-10 has been estimated at 7.2 per cent, up from 6.7 per cent recorded in 2008-09.


Concerns about domestic output growth are now subdued as the recovery is getting more broad-based. This is the result of a rebound in industrial output, better prospects for the Rabi crop and continuing resilience of the services sector.


Survey data suggest pick up in capacity utilization levels in recent months, which still remain below the previous peaks.

Output growth in 2010-11 is expected to be higher than in 2009-10, assuming a normal monsoon. Support for sustained momentum in growth can be expected from all three major components, viz., agriculture, industry and services.

Aggregate Demand

Final consumption expenditure remained subdued during 2009-10, as growth in both private final consumption expenditure and government final consumption expenditure decelerated. Investment demand, particularly gross fixed capital formation, however, showed a gradual recovery during the year.


While the momentum in investment demand is expected to continue, pick-up in private consumption demand could drive the recovery in growth. Growth in corporates sales, after remaining significantly depressed over four consecutive quarters, staged a strong recovery in Q3 of 2009-10, indicating improving private demand conditions.


The fiscal exit, as planned in the Union Budget for 2010-11, would contribute to improving the overall medium-term growth outlook, even as going forward, greater emphasis on quality of fiscal adjustment would be necessary.


External Economy

India’s external sector position improved alongside the recovery in the global economy. After declining for 12 consecutive months, exports recovered in October 2009. Similarly, imports recovered in November 2009 following a phase of decline.

Despite a lower trade deficit, the current account deficit widened during April–December 2009, as compared with the corresponding period of the previous year. This is attributable to a fall in invisibles, particularly on account of business services.

During 2009-10, foreign exchange reserves increased by US$ 27.1 billion, comprising mainly of increase in gold holdings (US$ 8.4 billion), SDRs (US$ 5.0 billion) and foreign currency assets (US$ 13.3 billion). The bulk of the increase in foreign currency assets was on account of valuation.

Net capital inflows can be expected to increase further during the current year reflecting the prospects of higher growth and larger interest rate differentials between India and the advanced economies. Like other EMEs, however, higher capital inflows could influence asset prices, domestic liquidity conditions and the exchange rate. This will have implications for monetary management.

Monetary Conditions

Reflecting the stronger recovery in economic activities, growth in broad money (M3) and flow of credit to the private sector exceeded the Reserve Bank’s indicative projections for 2009-10.

While the increase in CRR effected by the Reserve Bank in its Third Quarter Policy Review of January 2010 led to some moderation in excess liquidity, overall liquidity conditions remain comfortable as reflected in the daily reverse repo operations.

The banking system’s credit to the government was the prime driver of monetary expansion during the year. The flow of resources to commercial sector distinctly improved from both bank as well as non-bank sources.

Going forward, the demand for money may increase with acceleration in recovery and the elevated level of inflation.

Financial Markets

With market activity returning to the pre-global crisis level, volatility in the domestic financial markets was much lower during 2009-10 than in the year before, when the crisis erupted.

Despite considerable stability and the commencement of exit, markets faced concerns emerging from large government borrowings and the increase in inflation. This affected yields in the government bond market.

The transmission of lower policy rates to the credit markets improved, albeit, slowly.

Asset prices increased at a relatively faster pace in the recent months, reflecting optimism about the economy’s prospects as well as easy liquidity conditions.

With the revival of capital inflows, nominal exchange rate appreciated. Given higher domestic inflation, the appreciation in real terms was even higher.

Inflation Situation

Headline WPI inflation firmed up significantly during the fourth quarter of 2009-10.

The initial inflationary pressure was predominantly conditioned by rising food and fuel prices, reflecting the impact of a deficient monsoon on agricultural output and the increase in international crude prices. In the second half of the year, with persistent supply side pressures, inflation became increasingly generalised.

This is evident from the acceleration of inflation in non-food manufactured products from -0.4 per cent in November 2009 to 4.7 per cent in March 2010.

Inflation, as measured by consumer price indices (CPIs) also remained high, though there was some moderation in February 2010.

These inflationary conditions, coupled with the stronger momentum seen in the pace of economic recovery, created the compelling ground for altering the Reserve Bank’s policy focus to anchoring inflation expectations.

Risks to Growth

Apart from monsoon-related uncertainty, there are downside risks to growth:

First, private consumption demand needs to improve significantly to support the growth momentum.

Second, global recovery, despite gaining strength, is expected to remain fragile, which has implications for exports.

Third, the exit from fiscal stimulus and the growth-supportive monetary policy, unless calibrated carefully, could impact the growth process.

Finally, the domestic saving rate has exhibited some decline, led by significant decline in public sector savings. This has adverse implications for the potential growth of the economy.

Reserve Bank’s Survey of Professional Forecasters suggests (median) growth for 2010-11 at about 8.2 per cent.

Inflation Outlook

Inflation can be expected to moderate over the next few months, from the peak levels seen in recent months. There are, however, upside risks to inflation:

First, international commodity prices, particularly oil, have started to increase again. In several commodities, the import option for India to contain domestic inflation is limited, because of higher international prices.

Second, the revival in private consumption demand and the bridging of the output-gap will add to inflationary pressures.

Finally, it is important to guard against the risk of hardening of inflation expectations conditioned by near double digit headline WPI inflation.

Annual Policy Statement for the Year 2010-11- 20th April 2010

Part A. Monetary Policy

IV. Monetary Measures

42. On the basis of the current assessment and in line with the policy stance as outlined in Section III, the Reserve Bank announces the following policy measures:

Bank Rate

43. The Bank Rate has been retained at 6.0 per cent.

Repo Rate

44. It has been decided to:

increase the repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0 per cent to 5.25 per cent with immediate effect. Reverse Repo Rate

45. It has been decided to:

increase the reverse repo rate under the LAF by 25 basis points from 3.5 per cent to 3.75 per cent with immediate effect. Cash Reserve Ratio

46. It has been decided to:

increase the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 5.75 per cent to 6.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning April 24, 2010.

47. As a result of the increase in the CRR, about Rs. 12,500 crore of excess liquidity will be absorbed from the system.

48. The Reserve Bank will continue to monitor macroeconomic conditions, particularly the price situation, closely and take further action as warranted.

Expected Outcomes

49. The expected outcomes of the actions are:

(i) Inflation will be contained and inflationary expectations will be anchored.

(ii) The recovery process will be sustained.

(iii) Government borrowing requirements and the private credit demand will be met.

(iv) Policy instruments will be further aligned in a manner consistent with the evolving state of the economy.

RBI measures- Payment Systems

Payment and settlement systems in India have had a long history. The current predominant mode of funds settlement is through the clearing process - achieved by the functioning of about 1050 clearing houses in the country. These clearing houses function on the basis of the ‘Uniform Regulations and Rules for Bankers’ Clearing Houses’ (URR), a model regulation propounded by the Reserve Bank. Though the systems are predominantly confined to cheque clearing, many other types have also gained significance - such as electronic payment and settlement, securities settlement, and foreign exchange settlement. All these are regulated by their respective rules and procedures, as in the case of the Rules relating to Electronic Clearing Service (ECS), the Electronic Fund Transfer (EFT) Regulations and the bye-laws relating to the operations of the systems of the Clearing Corporation of India Ltd.



The Bank for International Settlements, Basel, has formulated a set of ‘Core Principles for Systemically Important Payment Systems’ which are the minimum requirements for a sound payment system. These requirements were also highlighted in the year 2000 by the Bhide Advisory Group which examined the International Standards and Codes relating to payment systems, from the perspective of conformity in the Indian context.

With the growing importance being ascribed towards payment and settlement systems the world over, and in view of their significance for financial stability, most central banks have set up an appropriate machinery to regulate and supervise such systems to provide for an explicit legal base for payment and settlement systems. In this background, a draft ’Payment and Settlement Systems’ bill was prepared by the Reserve Bank and forwarded to the Government of India.



In anticipation of the statutory changes, certain preliminary steps are proposed to be taken by the Reserve Bank to build the requisite infrastructure for having effective supervision over payment and settlement systems. A Board for Payment and Settlement Systems (BPSS) is proposed to be constituted soon. The Board would function in a manner similar to the Board for Financial Supervision. BPSS would provide policy directions in areas relating to regulation and supervision of payment and settlement systems, approval of payment systems, criteria for membership, various aspects relating to admission, continuation and denial of membership, handling of offences etc. This initiative would ensure that all the payment and settlement systems in the country are subject to good and efficient governance and that they adopt the best practices in risk management which is a prime requirement relating to a safe, secure and efficient payment and settlement systems. These arrangements should facilitate easy transition to a more formal statutory system.

RBI measures- Consolidation in the Banking Sector

At the outset it must be recognized that the improvements in efficiency of the financial sector in India, in particular banking sector have won the respect and admiration of most observers, including capital markets. The banking sector in India is poised for a quantum jump in productivity and scope for expansion in view of the competitive strengths acquired in Indian industry. Public sector banks have shown substantial improvements, though in view of their large presence and some institutional constraints, further progress in reform is desirable.


The analysis in the Report on Trends and Progress of Banking in India a few weeks ago provides an excellent overview of problems, prospects, and areas for further reforms, and hence that will not be covered here. The ongoing efforts of RBI, in close co-ordination with Government and consultations with market participants, especially in moving up the policy as well as regulatory regimes to global standards, have been narrated in successive announcements on Monetary and Credit Policy statements by Dr. Rangarajan, Dr.Bimal Jalan, and most recently in the Mid-term Review. These narrations would indicate that RBI’s effort is to open up the economy, maximize benefits from globalization while minimizing risks and enable as well as equip banks to face global competition. This is an ongoing process and I believe we in India are better equipped now than ever before to globalise with a sense of confidence and pride. Having said this, it is useful to mention a few initiatives being considered by RBI at this juncture. Governor Jalan in his Inaugural address to this forum in January 2001, said –

"The long term vision for India’s banking system to transform itself from being a domestic one to the global level may sound far fetched at present. However, it is not beyond our capacity provided we have the will and the determination". It is interesting that this year, the subject chosen relates to globalization and perhaps I should enlist a few measures taken by RBI to demonstrate the will and determination to make our banking industry really global.


Consolidation


As mentioned by Governor Jalan in his address to this forum in 2002, "In financial systems worldwide, todays buzzwords are competition, consolidation and stability". There has been impressive stability and considerable competition in India but the process of consolidation in banking industry has just commenced. The issue of consolidation has been addressed by the Narasimham Committee Report on Banking Sector Reforms (1998) but the issue in regard to policy is yet to be pursued vigorously. There are three aspects to consolidation viz. clear cut legal and regulatory regime governing consolidation, enabling policy framework especially where several banks are owned by Government, and market conditions that facilitate such consolidation, recognising that all mergers and acquisitions may not necessarily be in the interests of either the parties concerned or the system as a whole.

As regards the legal framework, the Reserve Bank is not very comfortable with lack of clear statutory provision regarding takeover of management of banks. In 1970, the Reserve Bank had issued directions to the banks requiring them to seek the Reserve Bank’s permission or acknowledgement before effecting any transfer of shares in favour of any person which would take the holding of shares to more than one per cent (subsequently raised to five per cent) of the total paid up capital of such banking company. Since shares are acquired first and then lodged for registration, the Reserve Bank’s directions create a somewhat piquant situation. To plug the gap, a Bill has now been introduced in the Parliament relating to banking regulation. The RBI’s proposals in this regard should reasonably take care of takeover of the management by one from another and Reserve Bank will have appropriate regulatory power to satisfy itself that persons proposing to acquire such shares are fit and proper persons.


The procedure for amalgamation of two banking companies under Section 44A of the Banking Regulation Act, 1949 (the Act) is easy to follow and cost effective. After the two banking companies have passed the necessary resolution in their general meetings representing not less than two third value of the shareholding of each of the two banking companies, proposing for the amalgamation of one bank with another bank, such resolution containing scheme of amalgamation is submitted to the Reserve Bank for its sanction and if sanctioned, by an order in writing by the Reserve Bank, is binding not only on the banking company concerned, but also on all shareholders thereof. While sanctioning the scheme of amalgamation, the Reserve Bank takes into account the financial health of the two banking companies to ensure, inter alia, that after the amalgamation, the new entity will emerge as much stronger bank. The experience of the Reserve Bank has been by and large satisfactory in approving several schemes of amalgamation in the recent past.


These provisions, however, do not apply to the banks in public sector, viz., the nationalised banks, State Bank of India and its subsidiary banks. As regards the nationalised banks, the Act authorises the Central Government, after consultation with Reserve Bank, to prepare or make a scheme, inter alia, for transfer of undertaking of a corresponding new bank (i.e. a nationalised bank) to another corresponding new bank or transfer of whole or part of any banking institution to a corresponding new bank. Under this procedure, the New Bank of India was amalgamated with Punjab National Bank but the experience in this regard was considered to be not altogether satisfactory. Unlike the sanction of schemes by the Reserve Bank under Section 44A of the Act, the scheme framed by the Central Government is required under Section 9(6) of the Nationalisation Act to be placed before the two Houses of Parliament.

The State Bank of India Act, 1955, empowers the State Bank of India with the consent of the management of any banking institution (which would also include a banking company) to acquire the business, including the assets and liabilities of any bank. Under this provision, what is required is the consent of the concerned bank and the approval of the Reserve Bank and the sanction of such acquisition by the Central Government. Several banks were acquired by the State Bank of India by invoking this section.



Section 23A of the Regional Rural Banks Act, 1976 (RRBs Act), empowers the Central Government, in consultation with the NABARD, concerned State Government and sponsored bank, to amalgamate two RRBs, by issue of notification in the official gazette, with such liabilities, duties and obligations as may be specified in the notification. As in the case of amalgamation of a nationalised bank under Section 9(2) of the Nationalisation Act, every notification under this section is also required to be laid before both the Houses of Parliament.


Of course, in the case of a banking company in financial distress and having been placed under the order of moratorium, on an application being made by the Reserve Bank to the Central Government under sub-section (2) of Section 45 of the Act, the Reserve Bank can frame a scheme of amalgamation for transferring the assets and liabilities of such distressed bank to a much better and stronger bank. Such a scheme framed by the Reserve Bank is required to be sanctioned by the Central Government and has to be notified in the official gazette. As in case of amalgamation sanctioned by the Central Government under the Nationalisation Act and RRBs Act, the notification issued for compulsory amalgamation under Section 45 of the Act is also required to be placed before the two Houses of Parliament.


One area of concern to the Reserve Bank is amalgamation of non-banking companies with banking companies as the law does not impose any obligation on the part of such non-banking company (for that matter, even of the concerned banking company) to seek the Reserve Bank’s regulatory approval before filing the scheme of amalgamation in the High Courts under Sections 391 of the Companies Act, 1956. To take care of these gaps, Reserve Bank has proposed some amendments to the legislation on Banking Regulation Act that amalgamation of a non-banking company with a banking company will be made by following the similar procedure which is applicable for amalgamation of two banking companies.

Bank Deposits

Bank Deposits

Accepting deposits is one of the two major activities of the Banks.

Banks are also called custodians of public money. Basically, the money is accepted as deposit for safe keeping. But since the Banks use this money to earn interest from people who need money, Banks share a part of this interest with the depositors. The quantum of interest depends upon the tenor - length of time for which the depositor wishes to keep the money with the Bank - and the ease of withdrawal. The thumb rule is, longer the tenor, higher the rate of interest and lesser the restrictions on withdrawal, lesser the interest. Exceptions, however, exist. Deposits are accepted from both resident (domestic) or non-resident Indian customers.

It is the business of the banker to accept deposits so that he can lend it to others and earn interest. Depending upon the liquidity position of the market and the size of deposit, the earnings can vary and if the size of the deposit is big enough, it is advisable to shop around and get the best rate.

Type of deposit accounts (Domestic Customers)

1. Fixed Deposit Accounts

2. Demand Deposits

o Savings Account

o Current account

Most of the other products offered by the Banks viz. Recurring Deposit Account, Multi Option Deposit Account, Special Term Deposit Accounts, Current Fixed Account etc. are essentially combinations of the above basic type of accounts and are packaged by different Banks to attract different groups of customers.

Banking Basics

Banking Basics

Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheques, draft, order or otherwise." Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank's relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money - both domestic and foreign - from one place to another. This activity is generally known as "remittance business" in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies. The law governing Banking Activities in India is called "Negotiable Instruments Act 1881". The banking activities can be classified as : Accepting Deposits from public/others (Deposits) Lending money to public (Loans) Transferring money from one place to another (Remittances) Acting as trustees Acting as intermediaries Keeping valuables in safe custody Collection Business Government business Bank Account A Bank Account is the record of financial relationship a customer has with the Bank. It contains details of all the moneys deposited with the Bank and withdrawn from it. There are many Bank accounts, but basically there are two types: DEPOSITS LOANS

Reserve Bank Of India

The Reserve Bank of India

Reserve Bank of India, the Central Bank of the country, is at the center of the Indian Financial and Monetary system. RBI is among the oldest among the developing countries . It was inaugurated on April 1, 1935 as a private shareholders' institution under the Reserve Bank of India Act 1934. It was nationalised in January 1949, under the Reserve Bank (Transfer to Public Ownership) of India Act, 1948.

This act empowers the central government, in consultation with the Governor of the Bank, to issue such directions to RBI as might be considered necessary in the public interest . RBI is governed by a Central Board of Directors with 20 members consisting of the Governor and the Deputy Governors. The Governor and the deputy Governors of the Bank are Government of India appointees.


The preamble to the Reserve Bank of India Act lays down the purpose of establishing RBI as “to regulate issue of Bank notes, to keep the reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage”.

RBI took a leading role in designing and implementing policies for agricultural and industrial development and for laying the foundations for financial markets. Some of today’s premier development and market institutions such as the National Bank for Agriculture and Rural Development (NABARD), the Industrial Development Bank of India (IDBI) and the Unit Trust of India (UTI) had their beginnings as specialized departments and divisions within the RBI.

When RBI started in 1935, there were just three departments, namely the Banking Department, the Issue Department and the Agricultural Credit Department. Today, RBI has 26 departments in the Central Office, have 26 regional and field offices across the country, four subsidiaries (BRB Note Mudran Press Ltd., DICGC, NABARD and NHB,) and a staff of over 20,000 employees.

Today, RBI is the monetary authority, and regulator and supervisor for banks and non-banking financial companies. RBI is the issuer of currency and the debt manager for the central and state governments. Besides, RBI manage the country’s foreign exchange reserves, manage the capital account of the Balance of payments, and design and operate payment systems. RBI also operate a grievance redressal scheme for bank customers through the Banking Ombudsmen and formulate policies for treating customers fairly.

Contact list of all RBI Offices

Reserve Bank of India

Contact list of all RBI Offices

Office	Telephone	Fax	Office Address
Ahmedabad	7540093	7541993	Near Gandhi Bridge, P.B. No. 1, Ashram Road, Ahmedabad-380014.
Bangalore	2212789	2210185	10/3/8 Nrupathunga Rd, P. B. No. 5467, Bangalore-560001.
Bhopal	550233	552283	Hoshangabad Road, P. B. No. 32, Bhopal-462011.
Bhubaneshwar	406702	405911	Pandit Jawaharlal Nehru Marg, P. B. No. 16, Bhubaneshwar-751001.
Mumbai	3076103	3099122	Opp. Mumbai Central Rly. Stn., Mumbai Central Post Office, P. B. No. 4528, Mumbai-400008.
Calcutta	2203299	2209589	15, Netaji Subhas Road, P. B. No. 552, Calcutta-700001.
Chandigarah	704845	703181	Central Vista, Opp. Telephone Bhawan, Sector-17, Chandigarh-160017.
Chennai	5361631	5365220	Fort Glacis, Rajaji-Salai, P. B. No. 40, Chennai-600001.
Guwahati	540256	540033	Station Road, Pan Bazar, P. B. No. 120, Guwahati-781001.
Hyderabad	230863	230533	6-1-56 Secretariat Road, Saifabad, P. B. No. 1, Hyderabad-500004.
jaipur	563794	563016	Rambagh Circle, Tonk Road, P. B. No. 12, Jaipur-302004.
Jammu	431061	431576	Rail Head Complex, Jammu-180012.
kanpur	311443	314202	Mahatma Gandhi Marg, kanpur-208001.
Kochi	400985	402715	Exchange Control Dept., Ernakulam North, P. B. No. 3065, Kochi-682018.
Lucknow	221329, 215466	220890	Sahakari Kisan Bhawan, 2, M. G. Road, P. B. No. 24, Lucknow-226001.
Mumbai	2662533	2660817	Main Bldg., P. B. No. 901, Shahid Bhagatisngh Road, Mumbai-400001.
Nagpur	532655	536756	Main Office Building, P. B. No. 15, Civil Lines, Nagpur-440001.
New Delhi	3711333	4697922	6, Sansad Marg, New Delhi-110001.
Panaji	223937	227504	Exchange Control Dept., Dada Vaidya Road, P. B. No. 20, Panaji-403001.
Patna	655291	655407	South of Gandhi Maidan, P. B. No. 162, Patna-800001.
Srinagar	478133	-	Exchange Control Dept., Kohli House, Opp. Iqbal Park, Airport Road, Srinagar-190009.
Thiruvananthapuram	320621	330843	Bakery Junction, P. B. No. 6507, Thiruvananthapuram-695033.