Any country needs a driver to drive its economy towards growth and to keep a check on that growth. The driver of India’s economy is the Banking System of India. Banking in India had its inception in the 18th century and since then, it has evolved a lot. Beginning from the traditional usage of humans as its resources to drive the system, it has entered the new era of modernisation by getting everything computerized. The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and Bengal Bank followed. Under the charters of the British East India Company, three of the presidency banks were established – Bank of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as independent units. These three banks merged together to form the Imperial Bank of India in 1921, which after India’s independence has transformed into the oldest and the largest bank in India which is still in existence – the State Bank of India (formed in 1955). Allahabad Bank was established, exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. For many years the three presidency banks acted as the quasi-central banks, as did their successors, until the Reserve Bank of India came into existence in 1935. The RBI began its operation on April 1, 1935, under the Reserve Bank of India Act, 1934. The Act (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted to meet the following requirements:
- Regulate the issuance of currency notes.
- Maintain reserves with a view to securing monetary stability.
- Operate the credit and currency system of the country to its advantage.
History of RBI:-
Here we will examine the history of RBI in two parts – Pre-Liberalization & Post-Liberalization.
Pre-Liberalization: The Reserve Bank of India was conceptualized as per the guidelines, working style and outlook presented by Ambedkar in front of the Hilton Young Commission. The bank was set up based on the recommendations of the 1926 Royal Commission on Indian Currency and Finance, also known as the Hilton–Young Commission. The Central Office of the RBI initially established in Calcutta (now Kolkata), was permanently moved to Bombay (now Mumbai) in 1937. After the Partition of India in 1947, the Bank served as the central bank for Pakistan until June 1948 when the State Bank of Pakistan commenced operations. Though originally set up as a shareholders’ bank, the RBI has been fully owned by the Government of India since its nationalization in 1949. In the 1950s the Indian government, under its first Prime Minister- Pandit Jawaharlal Nehru, developed a centrally planned economic policy that focused on the agricultural sector. The administration nationalized commercial banks and established, based on the Banking Companies Act of 1949 (later called the Banking Regulation Act), a central bank regulation as part of the RBI. Furthermore, the central bank was ordered to support the economic plan with loans. During the period of 1960’s as a result of bank crashes, the RBI was requested to establish and monitor a deposit insurance system. It should restore the trust in the national bank system and was initialized on 7 December 1961. The Indian government founded funds to promote the economy and used the slogan “Developing Banking”. The government of India restructured the national bank market and nationalized a lot of institutes. As a result, the RBI had to play the central part of control and support of this public banking sector. In 1969, the Indira Gandhi-headed government nationalized 14 major commercial banks. Upon Gandhi’s return to power in 1980, further six banks were nationalized. The central bank became the central player and increased its policies for a lot of tasks like interests, reserve ratio and visible deposits. These measures were aimed at better economic development and had a huge effect on the company policy of the institutes. The banks lent money in selected sectors, like agri-business and small trade companies. The branch was forced to establish two new offices in the country for every newly established office in a town. The oil crisis in 1973 resulted in increasing inflation, and the RBI restricted monetary policy to reduce the effects. A lot of committees analysed the Indian economy between 1985 and 1991. Their results had an effect on the RBI. The Board for Industrial and Financial Reconstruction, the Indira Gandhi Institute of Development Research and the Security & Exchange Board of India investigated the national economy as a whole, and the security and exchange board proposed better methods for more effective markets and the protection of investor interests. The Discount and Finance House of India began its operations on the monetary market in April 1988; the National Housing Bank, founded in July 1988, was forced to invest in the property market and a new financial law improved the versatility of direct deposit by more security measures and liberalisation.
Post-Liberalization: The national economy came down in July 1991 and the Indian rupee was devalued. The currency lost 18% relative to the US dollar, and the Narsimham Committee advised restructuring the financial sector by a temporal reduced reserve ratio as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish a private banking sector. This turning point should reinforce the market and was often called neo-liberal. The central bank deregulated bank interests and some sectors of the financial market like the trust and property markets. This first phase was a success and the central government forced a diversity liberalisation to diversify owner structures in 1998. The National Stock Exchange of India took the trade on in June 1994 and the RBI allowed nationalized banks in July to interact with the capital market to reinforce their capital base. The central bank founded a subsidiary company—the Bharatiya Reserve Bank Note Mudran Limited—in February 1995 to produce banknotes. The Foreign Exchange Management Act (FEMA Act) from 1999 came into force in June 2000. The Security Printing & Minting Corporation of India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes and coins.
Functions of RBI:-
The Reserve Bank of India Act of 1934 entrusts all the important functions of a central bank with the Reserve Bank of India.
- Bank of Issue:Under Section 22 of the Act, the Bank has the sole right to issue currency notes of all denominations. The distribution of one-rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as an agent of the government.
- Banker to the Government:The second important function of the RBI is to act as the government’s banker, agent, and adviser.
- Bankers’ Bank and Lender of the Last Resort:The RBI acts as the bankers’ bank. Since commercial banks can always expect the RBI to come to their help in times of banking crisis, the RBI becomes not only the banker’s bank but also the lender of the last resort.
- Controller of Credit:The RBI is the controller of credit, i.e., it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations.
- Custodian of Foreign Reserves:The RBI has the responsibility to maintain the official rate of exchange. Besides maintaining the rate of exchange of the rupee, the RBI has to act as the custodian of India’s reserve of international currencies.
- Supervisory Functions:In addition to its traditional central banking functions, the RBI has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949, have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation.
Article by: Ishan Mishra
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