AHSEC Class 12 Finance Notes 2024
UNIT -1 : FINANCIAL INSTITUTIONS
CHAPTER-2
FUNCTIONS OF THE RESERVE BANK OF INDIA
A. Very Short Answer Questions:
1 Mark each
1. In which year the RBI has adopted the Proportionate Reserve System of Note Issue?
Ans:- The RBI adopted the Proportionate Reserve System of Note Issue in 1935.
2. In which year the RBI has adopted the Minimum Reserve System of Note Issue?
Ans:- The RBI adopted the Minimum Reserve System of Note Issue in 1957.
B.Short Answer Questions:
2 Marks each
1) Write two functions of the RBI.
Ans:- Two functions of the RBI are:
a) Issue of Currency Notes: The RBI has the sole authority to issue, circulate, withdraw, and exchange currency notes in India.
b) Banker's Bank: The RBI acts as the banker to other banks and maintains their cash reserves. It provides financial assistance to scheduled banks in times of emergency and acts as the lender of last resort.
2) What is Minimum Reserve System of Note Issue?
Ans:- Minimum Reserve System of Note Issue:
Under this system, the central bank (RBI) maintains a minimum reserve of gold and foreign securities for issuing currency notes. Since 1957, the RBI has adopted this system, and it has to maintain a minimum reserve of Rs. 200 crores in the form of gold and foreign securities.
3) Write two supervisory functions of the RBI.
Ans:- Two supervisory functions of the RBI are:
a) Issuing Licenses: The RBI issues licenses for setting up new banks and establishing new branches for existing banks.
b) Prescribing Regulations: It prescribes minimum requirements of paid-up capital, reserves, cash reserves, and other liquid assets for banks.
4) Write two promotional functions of the RBI.
Ans:- Two promotional functions of the RBI are:
a) Promoting Banking Habit: The RBI aims to promote a banking habit among the people of India.
b) Providing Refinance Facilities: It provides refinance facilities for export promotion and facilitates the expansion of banking facilities for agricultural credit, small-scale industries, and the cooperative sector.
5) Write two prohibited functions of the RBI.
Ans:- Two prohibited functions of the RBI are:
a) Undertaking Trade or Business: The RBI cannot engage in any trade or business activities.
b) Granting Unsecured Loans: It is not allowed to grant unsecured loans and advances.
6) What is Proportionate Reserve System?
Ans:- Proportionate Reserve System:
Proportionate Reserve System of note issue was used in India from 1935 to 1956. Under this system, the central bank (RBI) had to maintain a certain percentage (ranging from 25 to 40) of the total note issue in gold and convertible securities. The remaining portion of the note issue was covered by government securities. This system aimed to ensure both elasticity and public confidence in the currency supply.
C.Long Answer Questions (Type-I):
5 Marks each
1) Write any two traditional functions of the RBI.
Ans:- Traditional Functions of the RBI:
a) Issue of Currency Notes: The RBI has the sole authority to issue, circulate, withdraw, and exchange currency notes. It issues all currency notes except the one rupee note, which is issued by the Government of India.
b) Banker's Bank: The RBI acts as the banker's bank, where all other banks are required to maintain a certain percentage of their cash reserves with the RBI. It provides financial assistance to scheduled banks in times of emergency and acts as a lender of last resort.
c) Government's Banker: The RBI acts as the banker to both the Central and State Governments. It manages their deposits, withdrawals, payments, collections, and transfers of funds, as well as provides ways and means advances to the Governments.
d) Custodian of Foreign Exchange Reserves: The RBI is responsible for maintaining and managing India's foreign exchange reserves. It also represents the Government of India in international financial institutions and conferences.
e) Clearing House Functions: The RBI acts as the clearing house for settlement of inter-bank transactions in India. It facilitates the smooth settlement of claims among banks and ensures the efficiency of the payment system.
f) Controller of Money Supply and Credit: One of the crucial functions of the RBI is to control the money supply and credit in the economy. It uses various quantitative and qualitative tools to regulate inflation, interest rates, and overall economic growth.
g) Regulation of Banking System: The RBI exercises extensive regulatory powers over the banking system. It issues licenses for new banks and their branches, inspects and supervises banks to ensure their sound operations, and regulates various aspects of their functioning.
h) Banker's Bank for Government: Apart from acting as the banker to the government, the RBI also acts as an agent for the Government in managing public debt, issuing government securities, and conducting auctions.
2) Briefly state the promotional and supervisory functions of the RBI.
Ans:- Promotional and Supervisory Functions of the RBI:
Promotional Functions:
a) Promotion of Banking Habit: The RBI takes initiatives to promote banking habits among the general public, encouraging them to use banking services and facilities.
b) Expansion of Banking Systems: The RBI plays a proactive role in expanding the reach and coverage of the banking system, especially in underserved and rural areas.
c) Support for Export Promotion: The RBI provides refinance facilities to banks to encourage export promotion and facilitate smooth international trade.
d) Agricultural and Small-scale Industries Credit: Through institutions like NABARD, the RBI supports the expansion of credit facilities for agricultural activities and small-scale industries.
e) Development of Cooperative Sector: The RBI provides assistance for the development of the cooperative banking sector, which plays a vital role in rural and agricultural finance.
f) Innovations in Banking Business: The RBI encourages banks to adopt new technologies and innovations to improve banking services and operations.
Supervisory Functions:
a) Licensing and Branch Expansion: The RBI issues licenses for establishing new banks and opening new branches for existing banks, ensuring the stability and soundness of the banking sector.
b) Capital and Reserve Requirements: The RBI prescribes minimum capital and reserve requirements for banks to maintain financial stability and safeguard depositor interests.
c) Inspection and Regulation: The RBI conducts regular inspections and supervises the working of scheduled banks to ensure compliance with regulatory norms and detect irregularities.
d) Investigative Powers: The RBI has the authority to conduct ad hoc investigations into complaints and frauds related to banks to maintain the integrity of the banking system.
e) Appointment and Oversight: The RBI exercises control over the appointments and terminations of top executives, such as Chairpersons and CEOs, of private banks to ensure competent leadership and governance.
D. Long Answer Questions (Type-2): 8 Marks each
1. Discuss The traditional functions of the RBI.
Ans:- Discuss The Traditional Functions of the RBI.
The Reserve Bank of India (RBI), as the central bank of the country, performs various traditional functions that are crucial for the smooth functioning of the economy. These traditional functions can be categorized as follows:
a) Issue of Currency Notes: The RBI has the sole authority to issue, circulate, withdraw, and exchange currency notes in India. All currency notes, except the one-rupee note, are issued by the RBI. The government issues the one-rupee note and coins of small denominations, which are circulated through the RBI. To ensure the stability of the currency, the RBI must maintain a minimum reserve of Rs. 200 crores in the form of gold and foreign exchange reserves as security against note issuance. Out of this reserve, a minimum of Rs. 115 crores must be in the form of gold and Rs. 85 crores in foreign securities.
b) Banker's Bank: The RBI acts as the banker's bank in several ways. Every scheduled bank in India is required to maintain a certain percentage of its demand and time liabilities as cash reserves with the RBI. This enables the RBI to function as the lender of last resort, providing financial assistance to scheduled banks in times of emergencies. The RBI offers financial support to banks through discounting eligible bills and providing loans and advances against approved securities. It also has extensive regulatory powers over the banking system, including licensing, branch expansion, liquidity requirements, and inspection of banks.
c) Government's Banker: The RBI acts as the banker to both the Central and State Governments. It provides various banking services to the governments, such as holding their deposits, facilitating withdrawals and payments, managing public debt, and making "ways and means advances" to meet temporary mismatches in revenue and expenditure. The RBI also represents the Government of India in international financial institutions and advises the government on various financial matters.
d) Custodian of Foreign Exchange Reserves: The RBI acts as the custodian of India's foreign exchange reserves. It manages and stabilizes the value of the Indian currency in the foreign exchange market, imposing necessary controls and restrictions imposed by the government. All foreign remittances to and from India are made through the RBI, and it plays a vital role in maintaining the country's external financial stability.
e) Lender of Last Resort: As the lender of last resort, the RBI provides financial assistance to other member banks when they are unable to secure assistance from other sources. When commercial banks face a liquidity crisis, they can approach the RBI for credit facilities against eligible securities.
f) Clearing House Functions: The RBI acts as the clearing house for settlement of banking transactions in India. It facilitates the settlement of inter-bank claims, making the clearing process more efficient and cost-effective. The RBI carries out this function through its National Clearing Cell, and the operations are computerized to ensure smooth processing.
g) Controller of Money Supply and Credit: One of the most crucial functions of the RBI is to control the money supply and credit in the country. By using various quantitative and qualitative credit control measures, the RBI aims to achieve price stability and promote economic growth. These measures include open market operations, bank rate policy, reserve requirements, and selective credit controls.
2. Discuss the functions of the RBI.
Ans:- The Reserve Bank of India (RBI) plays a pivotal role in the Indian economy and is responsible for performing a wide range of functions to achieve monetary stability, financial development, and economic growth. The functions of the RBI can be categorized as follows:
A. Traditional Functions:
1. Issue of Currency Notes: The RBI has the sole authority to issue and manage currency notes in India, except for the one-rupee note and small denomination coins issued by the Government of India.
2. Banker's Bank: The RBI acts as the banker to other banks, ensuring their liquidity and solvency. Banks are required to maintain a certain percentage of their demand and time liabilities as cash reserves with the RBI. The RBI also provides financial assistance to scheduled banks in times of emergencies and supervises and regulates the banking system.
3. Government's Banker: The RBI serves as the banker to the Central and State Governments, managing their accounts, facilitating receipts and payments, and handling public debt.
4. Custodian of Foreign Exchange Reserves: The RBI manages and maintains India's foreign exchange reserves, safeguarding the value of the Indian rupee in international markets and promoting external trade and stability.
5. Lender of Last Resort: The RBI acts as the lender of last resort for banks facing financial crises, providing them with necessary financial assistance against eligible securities.
6. Clearing House Functions: The RBI operates as the clearing house for settling interbank transactions, facilitating efficient and secure clearing of checks and electronic payments.
7. Controller of Money Supply and Credit: The RBI regulates money supply and credit in the economy using various monetary policy tools, aiming to maintain price stability and support economic growth.
B. Promotional Functions:
1. Promoting Banking Habits: The RBI undertakes initiatives to promote banking awareness and financial inclusion, encouraging more people to participate in the formal banking system.
2. Expanding Banking Systems: The RBI supports the expansion of banking services to rural and remote areas, ensuring better access to banking facilities for all sections of society.
3. Export Promotion: The RBI provides refinance facilities to banks to promote export activities and supports export-oriented industries.
4. Agricultural and Small-Scale Industries Credit: Through institutions like NABARD, the RBI fosters the expansion of credit facilities for agricultural and small-scale industrial sectors, contributing to rural development and employment generation.
5. Development of Cooperative Sector: The RBI assists in the development of the cooperative banking sector, providing financial support and regulatory guidance.
C. Supervisory Functions:
1. Licensing and Regulation: The RBI issues licenses for setting up new banks and establishing branches for existing banks, ensuring compliance with regulatory guidelines.
2. Prudential Norms: The RBI prescribes minimum capital requirements, cash reserves, and other prudential norms for banks to ensure their stability and soundness.
3. Inspection and Supervision: The RBI conducts regular inspections of banks to assess their financial health, risk management, and compliance with regulations.
4. Fraud and Complaint Investigation: The RBI investigates complaints, irregularities, and frauds related to banks and takes appropriate actions.
D. Prohibited Functions:
The RBI is prohibited from undertaking commercial activities and cannot grant loans on the security of shares and immovable property. It also cannot pay interest on its deposits or grant unsecured loans and advances.
In conclusion, the functions of the RBI are multifaceted and play a crucial role in maintaining monetary stability, financial sector development, and overall economic growth in India.
Additional Very Short Question Answer
1. What are the traditional functions of the Reserve Bank of India?
Answer: Issue of Currency Notes, Banker's Bank, Government's Banker, Custodian of Foreign Exchange Reserves, Lender of Last Resort, Clearing House Functions, and Controller of Money Supply and Credit.
2. What is the minimum reserve required for note issue under the Minimum Reserve System?
Answer: Rs. 200 crores, out of which Rs. 115 crores must be in gold and Rs. 85 crores in foreign securities.
3. What role does the RBI play as the banker's bank?
Answer: RBI acts as the lender of last resort and maintains cash reserves for scheduled banks.
4. What are the supervisory functions of the Reserve Bank of India?
Answer: Issuing bank licenses, prescribing capital requirements, inspecting scheduled banks, and investigating complaints and irregularities.
5. How does the RBI promote banking habits among the people?
Answer: By undertaking various measures to expand banking systems and facilities.
6. What is the prohibited function of the Reserve Bank of India regarding trade and business?
Answer: The RBI cannot undertake or enter into any trade or business.
7. What are the two systems of note issue adopted by the RBI in its history?
Answer: Proportionate Reserve System (followed until 1956) and Minimum Reserve System (adopted from 1957).
8. What is the RBI's role as the custodian of foreign exchange reserves?
Answer: RBI manages and stabilizes India's foreign exchange reserves and handles remittances to and from foreign countries.
9. How often is the inter-bank cheque clearing settlement done in India?
Answer: The inter-bank cheque clearing settlement is done twice a day.
10. What is the primary aim of the RBI's control over money supply and credit?
Answer: To achieve price stability and promote economic growth in the country.
Short Question Answer
1) Q: What is the role of the Reserve Bank of India as the "banker's bank"?
A: As the "banker's bank," the RBI requires all banks to maintain a certain percentage of their demand and time liabilities as cash reserves with the RBI. This enables the RBI to act as a lender of last resort and provide financial assistance to scheduled banks in times of emergencies.
2) Q: How does the RBI act as the custodian of India's foreign exchange reserves?
A: The RBI is responsible for managing and stabilizing the value of the Indian rupee in foreign exchange markets. It holds and manages the country's foreign exchange reserves and implements policies to regulate foreign exchange transactions to ensure stability in the currency's value.
3) Q: What are the functions of the RBI as the banker to the government?
A: As the banker to the government, the RBI provides various banking services to the Central and State Governments, including handling their deposits, facilitating payments and receipts, managing public debt, and making "ways and means advances" to meet temporary mismatches in the government's receipts and expenditures.
4) Q: What are the supervisory functions of the Reserve Bank of India?
A: The supervisory functions of the RBI include issuing licenses for new banks and branches, setting minimum requirements for capital and reserves, inspecting the operations of scheduled banks to ensure their sound functioning, conducting investigations into complaints and irregularities related to banks, and controlling appointments of key bank executives.
5) Q: How does the RBI promote banking habit among the people?
A: The RBI promotes banking habit by implementing various financial inclusion initiatives, encouraging banks to expand their reach to remote areas, providing guidelines for the establishment of banking facilities, and educating the public about the benefits and importance of banking services.
6) Q: What is the Proportionate Reserve System of note issue?
A: The Proportionate Reserve System was used by the RBI from 1935 to 1956. Under this system, the RBI had to maintain a certain percentage of the total note issue in the form of gold and convertible securities. The remaining portion of the note issue was backed by government securities. This system allowed for elasticity and public confidence in the currency supply.
7) Q: What are the promotional functions of the Reserve Bank of India?
A: The promotional functions of the RBI include facilitating the expansion of the banking system, providing refinance facilities for export promotion, supporting agricultural credit through NABARD, promoting small-scale industries, and aiding the development of the cooperative sector.
8) Q: Why is the RBI prohibited from undertaking certain functions like trading, granting unsecured loans, and purchasing shares of companies?
A: The RBI is prohibited from engaging in activities like trading, granting unsecured loans, and investing in shares of companies to ensure its focus remains on its core functions as the central bank, maintaining monetary stability, and regulating the banking system without any potential conflicts of interest.
9) Q: How does the Reserve Bank of India act as the clearing house for banking transactions in India?
A: The RBI acts as the clearing house for settlement of inter-bank transactions in India. It facilitates the easy settlement of claims between banks and promotes efficient and cost-effective inter-bank transactions. The clearing house operations are now computerized for faster processing.
10) Q: What is the role of the RBI in controlling money supply and credit in India?
A: The RBI acts as the controller of money supply and credit to achieve price stability and promote economic growth. It uses various quantitative and qualitative credit control techniques such as open market operations, reserve ratios, and policy rates to regulate money supply and credit in the economy.
11) Q: How does the RBI represent the Government of India in international financial institutions and conferences?
A: The RBI represents the Government of India in international financial institutions like the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (World Bank). It also participates in international monetary conferences to discuss and address global financial and economic matters.
12) Q: What are the objectives of the RBI's promotional functions?
A: The RBI's promotional functions aim to foster the growth and development of various sectors, including agriculture, small-scale industries, and cooperatives. These functions support financial inclusion, economic development, and stability in the country's financial system.
13) Q: How does the Minimum Reserve System (MRS) of note issue differ from the Proportionate Reserve System (PRS)?
A: Under the MRS, the RBI maintains a minimum reserve of gold and foreign securities for issuing notes, while the PRS required a certain percentage of total note issue in gold and convertible securities. MRS provides more flexibility in issuing currency notes based on the country's needs, while PRS provided elasticity and public confidence.
14) Q: What are the consequences if the RBI fails to act as the lender of last resort?
A: If the RBI fails to act as the lender of last resort, commercial banks may face liquidity crises and be unable to meet their financial obligations. This could lead to a loss of public confidence in the banking system and potentially trigger a financial crisis in the economy.
15) Q: How does the RBI advise the government on financial matters?
A: The RBI advises the government on various financial matters such as loan operations, investment decisions, agricultural and industrial finance, banking policies, economic planning, and overall economic development. The advice is aimed at promoting fiscal and monetary stability in the country.
16) Q: What measures does the RBI take to ensure sound operations of scheduled banks?
A: The RBI conducts regular inspections of scheduled banks, both in India and abroad, to ensure their sound operations from various angles. It monitors their liquidity, asset quality, management practices, and compliance with regulatory guidelines to maintain a healthy banking system.
Long Question Answer
1) Question: What is the role of the Reserve Bank of India as the "Lender of Last Resort" to commercial banks?
Answer: As the "Lender of Last Resort," the Reserve Bank of India provides emergency financial assistance to commercial banks that are facing liquidity shortages and cannot obtain funds from other sources. In times of crisis or financial instability, the RBI extends credit facilities to these banks against eligible securities to ensure the stability of the banking system.
2) Question: How does the Reserve Bank of India control and regulate money supply in the country?
Answer: The Reserve Bank of India controls and regulates money supply through various quantitative and qualitative credit control measures. These include changes in the repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR). By adjusting these rates and ratios, the RBI influences the lending and borrowing behavior of banks, thus impacting the overall money supply in the economy.
3) Question: What are the functions of the Reserve Bank of India as the "Custodian of Foreign Exchange Reserves"?
Answer: As the "Custodian of Foreign Exchange Reserves," the Reserve Bank of India manages and safeguards India's foreign exchange reserves. It intervenes in the foreign exchange market to stabilize the value of the national currency (the Indian Rupee), manages external trade and payments, and implements policies to promote exchange rate stability and protect the country from external economic shocks.
4) Question: How does the Reserve Bank of India promote banking habit among the people?
Answer: The Reserve Bank of India promotes banking habit among the people through various initiatives. It conducts financial literacy programs, campaigns, and awareness drives to educate the public about the benefits of using formal banking services. The RBI also encourages banks to extend their services to remote and underserved areas, making banking accessible to a larger section of the population.
5) Question: What is the significance of the Minimum Reserve System (MRS) of note issue adopted by the Reserve Bank of India?
Answer: The Minimum Reserve System (MRS) ensures that the Reserve Bank of India maintains a minimum reserve of gold and foreign securities for issuing currency notes. This system provides flexibility in issuing currency as per the country's needs while maintaining adequate security against note issuance. The MRS replaced the Proportionate Reserve System (PRS) in 1957 and allows the RBI to control and regulate the money supply effectively.
Very Long Answers Type
1. Question: What are the regulatory powers of the RBI over the banking system?
Answer: The RBI has extensive regulatory powers over the banking system in India. These powers include licensing of banks and their branch expansion, setting minimum requirements for paid-up capital and reserves, monitoring liquidity and asset quality of banks, overseeing management and methods of working, and overseeing amalgamation, reconstruction, and liquidation of banks. The RBI also conducts periodic inspections of banks to ensure their sound operations and compliance with regulations.
2. Question: How does the RBI act as the custodian of India's foreign exchange reserves?
Answer: As the custodian of India's foreign exchange reserves, the RBI manages and safeguards the country's holdings of foreign currencies. It actively intervenes in the foreign exchange market to maintain the stability of the Indian rupee and manage the balance of payments. The RBI holds and manages foreign currency assets such as foreign securities and gold reserves to meet any balance of payments requirements and ensure external financial stability.
3. Question: What is the role of the RBI in promoting financial inclusion in India?
Answer: The RBI plays a significant role in promoting financial inclusion in India. It encourages banks to expand their outreach to underserved and unbanked areas, thereby bringing more people into the formal banking system. The RBI sets guidelines for priority sector lending, where banks are mandated to allocate a certain percentage of their loans to sectors such as agriculture, small businesses, and weaker sections of society. Additionally, the RBI promotes the use of digital financial services to enhance financial inclusion and accessibility.
4. Question: How does the RBI control and regulate money supply in the economy?
Answer: The RBI employs various monetary policy tools to control and regulate money supply in the economy. It uses instruments such as the repo rate, reverse repo rate, and the cash reserve ratio (CRR) to influence the liquidity in the banking system. By adjusting these rates, the RBI can either inject money into the economy or absorb excess liquidity. These measures impact the lending and borrowing behavior of banks and ultimately affect the overall money supply and credit conditions in the economy.
5. Question: Explain the role of the RBI as the "lender of last resort" to banks.
Answer: As the "lender of last resort," the RBI provides financial assistance to banks facing liquidity crises and unable to obtain funds from other sources. In times of emergencies or financial distress, banks can approach the RBI to avail credit facilities against eligible securities. This function ensures the stability of the banking system and prevents bank failures that could have adverse effects on the overall financial stability and confidence in the economy. The RBI's support as a lender of last resort helps maintain the trust and resilience of the banking sector.
Additional Question Answer
1. Explain central banking functions of RBI or traditional functions? 2013, 2015, 2016, 2017, 2018, 2019
Ans: The functions of RBI are can be classified as:
I. Traditional Functions
II. Supervisory Functions
III. Promotional Functions
I). TRADITIONAL FUNCTIONS:
1. Note Issue: The RBI possesses the exclusive authority to issue currency in India, excluding one rupee coins and all coins of small magnitude. It employs the minimum reserves system to regulate the issuance of currency notes across the nation. Currency notes of various denominations such as Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 200, Rs. 500 and Rs. 2000 are issued by the RBI. However, One Rupee notes are issued by the Ministry of Finance, Government of India.
2. Government Banker:
A. As a Government banker, the RBI undertakes various functions:
i.Maintaining and managing deposit accounts for both central and state governments.
ii. Handling the receipt and collection of payments on behalf of these governments.
iii. Making payments as required by the central and state governments.
iv. Offering short-term advances to the government, often referred to as ways and means advances
B. In the capacity of a Government agent, the RBI carries out the following tasks:
i.Collecting taxes and other payments on behalf of the government.
ii.Managing the issuance of loans from the public, thereby overseeing public debts.
iii. Facilitating fund transfers and providing remittance services for the government.
C. Acting as an advisor: Acting as an advisor, the RBI offers guidance to the government on a wide range of financial matters. These include advising on issues like loan structuring, investment decisions, agricultural and industrial finance, as well as banking planning. This advisory role extends to supporting the pursuit of national economic objectives.
3. Bankers Bank: The Central Bank is like the boss of all the other banks. It's the most important bank. If other banks need money, they can borrow it from the Central Bank.
4. Custodian of cash reserve of the bank: The Central Bank takes care of some money for all the other banks. Regular banks have to keep a part of the money people give them in the Central Bank as a safety measure.
5. Lender of the last resort(2017): When regular banks don't have enough money, they can ask the Central Bank for help. The Central Bank can lend them money to keep things going. This way, the Central Bank makes sure everything in the banking system works well.
6. Clearing Agent (2018): In India, either the RBI or the SBI is responsible for managing the central clearing functions. This means that they oversee the process where banks exchange cheques collected from other banks. If one bank owes money to another bank, the RBI steps in and transfers funds from the owing bank to the receiving bank's account. Because all banks have accounts with the RBI, they can easily sort out how much they owe or are owed without needing a lot of actual cash. The main role of RBI's clearing house is to settle transactions between banks.
II) SUPERVISORY FUNCTIONS
The Reserve Bank of India (RBI) carries out various supervisory functions, encompassing the following aspects:
a. Granting Licences: The RBI issues licences for the establishment of new banks and the expansion of existing banks by allowing them to open new branches.
b. Setting Financial Standards: The RBI sets minimum requirements for paid-up capital, reserves and the maintenance of cash reserves and liquid assets for banks.
c. Ensuring Sound Operations: The RBI conducts comprehensive inspections of scheduled banks in India and overseas to ensure their stable and secure functioning. It also conducts ad hoc investigations into complaints, irregularities and frauds related to banking operations
d. Appointments and Oversight: The RBI exercises control over the appointments, re appointments and termination of Chairpersons and Chief Executive Officers (CEOs) of private banks.
e. Merger Approval: The RBI approves or mandates the merger or amalgamation of two banks when deemed necessary
III) PROMOTIONAL FUNCTIONS: The RBI also plays a role in promoting various aspects of the financial sector through the following functions:
a. Fostering Banking Habits: The RBI encourages the adoption of banking habits among the populace. b. Banking System Expansion: It contributes to the growth and expansion of the banking system.
c. Export Refinancing: The RBI provides refinance facilities to support export promotion.
d. Agricultural Credit Enhancement: Through institutions like NABARD, it aids in expanding agricultural credit facilities.
e. Support for Small-scale Industries: The RBI helps extend financial facilities to small-scale industries.
f. Cooperative Sector Development: It contributes to the development of the cooperative sector.
g. Innovations in Banking: The RBI promotes innovation within the banking industry.
2. What are prohibitive functions of RBI? 2019
Ans: The Reserve Bank of India (RBI) is restricted from engaging in certain activities outlined in its mandate.
These prohibited functions, as given in Section 19 of the Reserve Bank of India Act, 1934, are:
i. Trade or Business: The RBI is precluded from participating in any trade or business activities, differentiating it from commercial banks.
ii. Share Purchase: It is not authorized to purchase its own shares or invest in the shares of any company. This extends to the prohibition of providing loans using shares and immovable property as collateral.
iii.Interest on Deposits: The RBI is not permitted to offer interest on deposits held by the institution.
iv. Unsecured Loans and Advances: Providing unsecured loans and advances is among the functions that the RBI is restricted from undertaking. Term Bills: The RBI cannot draw and discount term bills, which distinguishes it from typical banking operations.
vi. Immovable Property: The RBI is allowed to purchase immovable property only for the establishment of its own business premises and staff residences, barring other property-related investments.
3. Discuss the system of note issue of the reserve bank of India.
Ans: The Reserve Bank of India (RBI) has employed different systems for the issuance of currency notes over the years. Initially, the Proportionate Reserve System was adopted, which was in use from 1935 to 1956. Subsequently, from 1957 onwards, the RBI adopted the Minimum Reserve System for note issuance. Let's delve into these two systems in detail:
Proportionate Reserve System:
Originating in Germany in 1875, the Proportionate Reserve System of note issue was implemented in India during the period from 1935 to 1956. Under this system, the central bank was required to maintain a certain percentage of the total currency notes issued in the form of gold and convertible securities. This percentage typically ranged from 25% to 40%. The remaining portion of the note issue was backed by government securities. This system aimed to ensure both flexibility in the money supply and public confidence in the currency.
The Proportionate Reserve System facilitated a scenario where an inflow of gold could lead to a multiple expansion of the currency. For example, if the stipulated gold reserve percentage was set at 25% of the note issue, then four hundred crores of rupee notes could be issued against one hundred crores of rupees worth of gold. Conversely, if one hundred crores of rupees worth of gold was withdrawn, currency amounting to four hundred crores of rupees would be withdrawn from circulation. However, during times of currency contraction, financial crises could intensify, making this system more suitable for normal economic conditions.
Minimum Reserve System (MRS): (2014, 2016, 2017)
The Minimum Reserve System is a widely adopted framework for note issuance across various countries. Under this system, the central bank is mandated to uphold a minimum reserve comprising of gold and foreign securities to facilitate the issuance of currency notes. As long as this minimum reserve requirement is met, the central bank has the flexibility to print and distribute notes based on the country's economic needs.
The Reserve Bank of India embraced the Minimum Reserve System in 1957. Within this system, the RBI was required to maintain a minimum reserve of Rs. 200 crores, consisting of both gold and foreign securities. Out of this total reserve, Rs. 115 crores was maintained in gold reserves, while the remaining Rs. 85 crores were held in the form of foreign securities. This shift to the Minimum Reserve System allowed the RBI to exercise greater control over currency issuance and regulation, providing the necessary flexibility to respond to changing economic conditions and financial demands. Thus the Reserve Bank of India transitioned from the Proportionate Reserve System to the Minimum Reserve System in 1957. This shift reflected a strategic adjustment in the approach to currency issuance, enabling the central bank to better manage currency supply and respond effectively to economic dynamics.
A. Very Short Answer Questions:
1. In which year the RBI has adopted the Proportionate Reserve System of Note Issue?
Ans: The RBI adopted the Proportionate Reserve System of Note Issue in the year 1935.
2. In which year the RBI has adopted the Minimum Reserve System of Note Issue?
Ans: The RBI adopted the Minimum Reserve System of Note Issue in the year 1957.
3. What was the initial system of note issue adopted by the RBI called?
Ans: The initial system of note issue adopted by the RBI was called the Proportionate Reserve System.
4. When was the Proportionate Reserve System of note issue introduced in India?
Ans: The Proportionate Reserve System of note issue was introduced in India in the year 1935.
5. Under the Proportionate Reserve System, what assets did the central bank have to maintain a certain percentage of?
Ans: Under the Proportionate Reserve System, the central bank had to maintain a certain percentage of the total note issue in gold and convertible securities.
6. What were the two main types of securities that covered the rest of the note issue under the Proportionate Reserve System?
Ans: The two main types of securities that covered the rest of the note issue under the Proportionate Reserve System were government securities.
7. How did the Proportionate Reserve System ensure both elasticity and public confidence?
Ans: The Proportionate Reserve System ensured both elasticity (flexibility in the money supply) and public confidence in the currency.
8. Explain the concept of multiple expansion of currency under the Proportionate Reserve System.
Ans: The concept of multiple expansion of currency under the Proportionate Reserve System meant that an inflow of gold could lead to the issuance of more currency than the actual value of the gold
9. What potential issue could intensify during currency contraction in the Proportionate Reserve System?
Ans: Financial crisis could intensify during currency contraction in the Proportionate Reserve System.
10. What is the main feature of the Minimum Reserve System of note issue?
Ans: The main feature of the Minimum Reserve System of note issue is that the central bank maintains a minimum reserve of gold and foreign securities for issuing notes.
11. When did the Reserve Bank of India adopt the Minimum Reserve System?
Ans: The Reserve Bank of India adopted the Minimum Reserve System in the year 1957.
12. What is the minimum reserve requirement for the Minimum Reserve System and how is it divided between gold and foreign securities?
Ans: The minimum reserve requirement for the Minimum Reserve System is Rs. 200 crores, with Rs. 115 crores in gold reserves and Rs. 85 crores in foreign securities.
-00000000-
19
Dear Students, If you want to Download AHSEC Class 12 Finance Self Study Notes/Guide 2024 Edition in PDF Format Click on Download Now, Price Just Rs. 199/- (Rs.149/-Only)