History of Banking: 1.Nationalisation phase: RBI was created in 1934 as private bank and it is nationalized in 1949. It has its headquarters in Mumbai. In the earlier days after independence there were tendency towards the nationalization of private bank. In 1969 14 banks were nationalized. Similarly in 1980 6 more banks were nationalized. 2.Privatisation Phase For the first time after independence RBI invited private companies to apply for a bank licence in 1993 and as a result they gave license to 10 private companies. Same move was followed by RBI in 2001 and gave license to 2 private companies. Recently in 2013 RBI invited private companies to apply for bank licenses ,so 25 companies applied for it but RBI gave approval to open bank branches to only two companies named Bandhan and IDFC within 18 months.From the above passage, we could infer that banking regulation became stricter as the time passes.
Functions of RBI
Monetary policy: RBI uses CRR,SLR, LAF, Market Stablisation Scheme and Open Market operation as monetary policy tool. RBI reviews the use of above tools twice a month in its Bi monthly Monetary report.
Regulating Banks and NBFC: RBI regulates Bank ,Development Financial Institution and Non banking Financial Companies (NBFC) under banking regulation act,1949. The difference between Bank and NBFC is in later organisation customer cannot hold a deposit account. NBFC is a company registered under companies act,1959 while bank were registered under banking regulation act,1949.
Regulation of Forex and management of Foreign exchange Reserves : RBI regulates Foreign exchange under Foreign Exchange and Regulation act,1947. RBI acts as a reserve of Foreign currency for Government of India.
Selling and buying Government security: It regulates Selling and buying of Government security. As we have have discussed in previous articles, RBI acts as a central agency to sell/buy Government security under Open Market Operation.
Debt and Cash Management for central and state government: RBI manages both Debt liability and cash needs of central and state government.
Bankers of Banks:RBI acts as bankers of banks to facilitate Inter bank transactions and to act as Lender of Last Resort for Banks(RBI will give loan to banks under extreme situations even when there is no other lender available to help the bank) .
Regulates Credit Rating Companies: Credit Rating Companies assess the ability of borrower to repay the borrowed money. CRISIL(Credit Rating Information of India Limited) ,ICRA (Investment Information and Credit rating agency of India Limited) and CARE(Credit Analysis and Research Limited) are some of the famous credit rating agencies of India.
Issuing currency notes: RBI issues all currency notes except one rupee note which is issued by Government of India.On the other hand, Coins were minted and issued by Government of India through RBI. On other words RBI circulates Coins issued by Government of India.
Regulates Payment and settlement system: RBI Regulates Payment and settlement system. Payment and settlement system will be discussed in later articles.
Organisation under the control of RBI:
1.Deposit Insurance and Credit Guarantee Corporation ( DICGC)
DICGC was setup in 1978 and it is fully owned by RBI.It has its headquarters in Mumbai. This organisation insures all the deposits of customer in all the banks in India and hence it also provide Credit Guarantee to them.
2.National Housing Bank(NHB)
NHB was setup in 1988 and it is fully owned by RBI.It has its headquarters in New Delhi. It regulates NBFC that finance housing projects.
Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)
BRBNMPL was setup in 1995 under companies act,1959 and it is fully owned by RBI.It has its headquarters in Bangalore. It minimizes demand and supply gap of bank notes.
National Bank for Agricultural and Rural Development(NABARD):
NABARD was setup in 1982.Majority of the shares Of NABARD are hold by RBI. It has its headquarters in Mumbai. It is apex/top crediting institute for Agricultural and Rural development.
Major Regulators in India will be discussed tomorrow.