Reserve Bank of India

Establishment of RBI

Set up based upon recommendations of Hilton-Young Commission. Statutory Body under Reserve Bank of India Act 1934. Initially set up as Private shareholders’ bank with a paid-up capital of Rs 5 crores on April 1, 1935. Later, Nationalised on 1^st Jan 1949.

Functions of RBI

ROLE	DESCRIPTION
Monetary Authority	Formulates, implements and monitors the monetary policy.Objective: Maintaining price stability while keeping in mind the objective of growth.
Banker to the Banks	Offers loans to the Scheduled banks.Enabling smooth, swift, and seamless clearing and settlement of inter-bank transactions.Clearing House function.Enabling banks to maintain their accounts with the Reserve Bank for statutory reserve requirements.
Regulator and supervisor of the financial system	Prescribes broad parameters of banking operations within which the country's banking and financial system functions.FunctionsRegulation and supervision of banks under Banking Regulation Act 1949.Regulation and supervision of non-banking financial companies.Protecting depositors' interest
Manager of Foreign Exchanges	Manages the Foreign Exchange Management Act, 1999.Functions:Intervenes in the forex market and checks large scale volatility in exchange rates.promote development and maintenance of foreign exchange market in India.
Issuer of currency	RBI has the sole right to issue currency notes in India under RBI Act, 1934. As per the RBI Act, 1934, the RBI needs to maintain minimum reserves of Rs 200 crores (115 Crores- Gold, 85 crores- Foreign Currency Assets) to print the currency notes.
Lender of last resort	As a Banker to Banks, the Reserve Bank acts as the ‘lender of the last resort’. It can come to the rescue of a bank which is facing temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank.
Oversight of Payment and Settlement System	The Payment and Settlement Systems Act, 2007 and the Payment and Settlement Systems Regulations, 2008 entrust the responsibility of oversight of payment and settlement system to RBI.The Board for Regulation and Supervision of Payment and Settlement Systems, a sub-committee of the Central Board of the Reserve Bank of India is the highest policy making body on payment systems in India.
Banker and Debt Manager to Government	Performs merchant banking function for the central and the state governments; also manages public debt under Government Securities Act, 2006.

Subsidiaries of RBI

Deposit Insurance and Credit Guarantee Corporation(DICGC)

Statutory body under the DICGC Act, 1961.
The authorized capital of the Corporation is 50 crores, which is fully issued and subscribed by the RBI.
The management of the Corporation vests with its Board of Directors, of which a Deputy Governor of the RBI is the Chairman.

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

Wholly owned subsidiary of the RBI. The BRBNMPL has been registered as a Private Limited Company under the Companies Act 1956. The company manages 2 Presses one at Mysore in Karnataka and the other at Salboni in West Bengal.

Reserve Bank Information Technology Private Limited (REBIT)

Set up by Reserve Bank of India (RBI), to take care of IT requirements, including cyber security needs of the Reserve Bank and its regulated entities.

IIndian Financial Technology and Allied Services (IFTAS)

Provides critical infrastructure services to RBI, banks and other financial institutions. The services provided are:

Indian Financial Network (INFINET): Communication backbone for the Indian Banking and Financial Sector. All Banks, Public Sector, Private Sector, Cooperative, etc., and the premier Financial Institutions in the country are eligible to become members of the INFINET. The INFINET is a Closed User Group (CUG) Network for the exclusive use of Member Banks and Financial Institutions.
Structured Financial Messaging System (SFMS): Messaging system facilitating RTGS, NEFT, Government payments and receipts, etc.
Indian Banking Community Cloud (IBCC): Provides Core Banking Solution (CBS) and other software applications such as SFMS, mobile banking, etc. as web service/s.
Global Interchange for Financial Transactions (GIFT): integrated payment and settlement system. The GIFT supports (inter-bank) payments and messaging between a source bank and a destination bank.

RESERVE BANK INNOVATION HUB: Set-up to promote and facilitate an environment that accelerates innovation across the financial sector.

Central Board Of RBI

Highest decision-making body inside the RBI. It consists of a maximum of 21 members who are appointed/ nominated for a period of four years.

Composition: 1 Governor + 4 Deputy Governors + 4 Directors to be nominated by the Central Government, one from each of the four Local Boards + 10 Directors to be nominated by the Central Government + 2 Government officials to be nominated by Central Government.

About RBI Governor and Dy. Governors

Appointment: Appointed by the Appointments Committee of the Cabinet based upon the recommendations of Financial Sector Regulatory Appointments Search Committee (FSRASC), headed by the Cabinet Secretary.

Term: Governor and Deputy Governors shall hold office for such term not exceeding five years. They are eligible for re-appointment.

Qualifications: No specific qualification laid down.

Removal: Removed by the central government.

Board for Financial Supervision

RBI performs the supervisory function under the guidance of the Board for Financial Supervision (BFS).

Objective: Undertake consolidated supervision of the financial sector.

Composition: 4 Directors from the Central Board and is chaired by Governor.

Meetings: Required to meet at least once every month.

Current issues related to RBI

Transfer of funds by RBI to central government

Latest Development: The RBI has decided to transfer Rs 97,000 crores as dividend to the Government for the accounting year 2020-21.

Why does the RBI pay the dividend?

Section 47 of the RBI Act states that profits made by the RBI from its operations must be given to the Centre in the form of Dividend.

Sources of Income and Expenditure of RBI

INCOME	EXPENDITURE
Returns from foreign currency assets	Printing of currency
Interest on rupee-denominated government bonds	Staff expenditure
Interest on overnight lending to commercial banks	Commission given to commercial banks
Management commission on handling the borrowings of central and state governments	Commission to primary dealers

Recent tussle between RBI and government over transfer of surplus reserves

It is argued RBI has become the most capitalized central bank globally and has been stocking surplus capital over what is required to face contingency situations. While the central banks across the world have a surplus capital to the tune of 10-14% of their total assets, RBI maintains 26.8% of its total assets as reserves.

Usha Thorat Committee: (2004): RBI should maintain 18% of its total assets as reserves.

Malegam Committee (2014): Should transfer all entire net profits annually to RBI. Accordingly, since 2013-14, the RBI has been transferring the entire profits to the Centre without adding any profits to its Reserves.

Recommendations of Bimal Jalan Committee (2019)

Economic Capital: Capital that the RBI requires to hold as a counter against unforeseen risks or events or losses in the future is called as the Economic Capital and is defined under Economic Capital Framework.

ECONOMIC CAPITAL FRAMEWORK
	Realized Equity	Revaluation Reserves
Nature	Realized Profits	Unrealized profits/ Notional Profits
Sources of Profits	Interest on loans given to BanksInterest on G-SecsInterest on loans to State Governments etc.	Appreciation in foreign Currency with the RBIAppreciation in Gold etc.
Transferable to Govt.	Yes	No
How much Reserves to be maintained?	5.5%- 6.5% of the total Assets	15.3%-18.9% of total Assets

Transfer Policy: The Committee has stated that the surplus distribution policy must take into the account the total realized equity. Only if realized equity is above its requirement (6.5 per cent to 5.5 per cent), the entire net income should be transferable to the Government. If it is below the lower bound of requirement, risk provisioning will be made to the extent necessary and only the residual net income should be transferred to the Government.

Note: The RBI has recently decided to transfer Rs 57,000 crores as dividend to the Government for the accounting year 2019-20. Prior to this, last year, the RBI had transferred Rs 1.76 lakh crore based upon the recommendations of Bimal Jalan Committee on Economic Capital Framework.

Reasons for Lower Transfer of Profits in 21-22

In the year 2021-22, RBI sucked out excess liquidity from the economy through the Reverse Repo window. When the RBI sucks out money through the Reverse Repo, RBI is required to pay interest to Banks. Hence, it would lead to increase in RBI's expenditure and decrease in its profits.

Hence, lower surplus transfer is due to RBI's absorption of huge liquidity from Banks due to Reverse Repo window.

Section 7 of RBI Act, 1935

Section 7 of RBI Act 1934 empowers central government to supersede RBI Board and issue directions to RBI, after consulting governor of RBI, if they are “necessary in public interest”.

Section 36AB of Banking Regulation Act, 1949

Recently, the RBI appointed its official on the Board of Directors of RBL Bank in pursuance with section 36AB of Banking Regulation Act, 1949. Prior to this, the RBI had used this provision to appoint its official in the board of certain Banks such as Yes Bank, Laxmi Vilas Bank etc.

About Section 36AB of Banking Regulation Act, 1949

This provision empowers the RBI to appoint officials on the Board of Directors of the Bank. This is usually done if the financial health of the Banks is poor or in case of mismanagement.
The additional directors appointed by the Bank can then provide necessary support to the Board of Directors.
These officials hold office during the pleasure of the RBI subject to maximum period of 3 years.

Section 45 of RBI Act, 1935

Under Section 45 of Banking Regulation Act, 1949, RBI can apply to Central Government for suspension of Business by a Bank and to prepare a scheme for its revival. Based upon recommendations of RBI, the Central Government then can issue notification. Hence, the Government issues a notification to place a Bank under Moratorium based upon recommendations of RBI.

RBI Changes Its Accounting Year

Earlier, the RBI used to follow July-June as the financial year as opposed to April- March Financial year followed by the Government. Last year, the RBI decided to align its financial year with the Government and hence adopt April- March Financial year to ensure effective management of finances.

RBI Consumer Confidence Survey

Consumer Confidence survey is conducted by the RBI to measure consumer perception (current and future) on five economic variables - economic situation, employment, the price level, income and spending.
Components: Current situation index and Future expectations index. The current situation index measures the change in consumer perception over an economic issue in the last one year while the future expectations index measures what consumer thinks about the same variables, one year ahead.
A consumer confidence Index above 100 gives optimistic perception of the consumers while reading below 100 denotes pessimistic perception.

Inflation Expectation Survey

The survey is conducted at bi-monthly intervals by the Reserve Bank of India.
Survey aims at capturing subjective assessments on price movements and inflation, of approximately 6,000 households, based on their individual consumption baskets

DAKSH

DAKSH is RBI's Advanced Supervisory Monitoring System.
It is an example of SupTech (Supervision Technology) which is expected to make supervisory processes more efficient.
It is a web-based end-to-end workflow application through which RBI will monitor compliance requirements in a more focused manner with the objective of further improving compliance culture in Supervised Entities (SEs) like banks, NBFCs etc.
The application will enable seamless communication, inspection planning and execution, cyber incident reporting and analysis, provision for various MIS reports etc.
It will enable anytime-anywhere secure access.

Direct Monetisation of Deficit

Presently, the Government borrows money from Market by issuing various financial instruments such as T-Bills and Dated Securities. Similarly, in recent times, the RBI has been carrying out the Open Market Operations (OMOs) to indirectly lend money to the Government. However, in case of Direct Monetization, the Government borrows money directly from the RBI by using T-Bills and Dated Securities.

Restriction on Direct Monetization of Government's Deficit Under FRBM ACT

Government can borrow money from RBI for meeting its immediate and temporary cash requirements through the Ways and Means Advances (WMA).
Government cannot borrow money from RBI for meeting its deficit. It can do so only under exceptional circumstances.
Exceptional circumstances - National security, Act of war, National calamity, collapse of agriculture, Structural reforms, decline in real output growth of a quarter by at least three per cent. points below its average of the previous four quarters.

Deposit Insurance & Credit Guarantee Corporation

Deposit Insurance and Credit Guarantee Corporation (DICGC), established under the DICGC Act 1961, is one of the wholly owned subsidiaries of the RBI.

Deposit Insurance Cover: Rs 5 Lakh.

Banks Covered: Commercial banks, Regional rural banks, Local area banks (LABs) and Cooperative banks

Deposits Covered: All deposits such as savings, fixed, current, recurring, etc.

Deposits not Covered:

Deposits of foreign Governments.
Deposits of Central/State Governments.
Inter-bank deposits.
Deposits of the State Land Development Banks with the State co-operative bank.

Deposit Insurance and Credit Guarantee Corporation (Amendment) Act, 2021

Timeline for payment: New Amendment enables the depositors to withdraw up to Rs 5 lakh within 90 days upon placing a Bank under moratorium.

Premium paid by banks to the DICGC: Under the Act, insured banks are required to pay a premium to the DICGC on their deposits. The rate of premium for a bank is notified by the DICGC with the prior approval of RBI. The Act limits the rate of premium (per annum) for a bank at 0.15% of its total outstanding deposits. The act has now allowed the DICGC to increase this maximum limit with the prior approval of RBI.

Repayment by the bank to the Corporation: Under the Act, once the DICGC makes payment to the depositors, the insured bank becomes liable to repay the same amount to the Corporation. Presently, the bank is required to repay within such time as prescribed by the Board of Directors of the DICGC.

The new amendment provides that the Corporation may change this time limit for such period and on such terms as prescribed by the Board through regulations.

Mobile Aided Note Identifier (MANI) for Visually Impaired

RBI has launched MANI (Mobile Aided Note Identifier), a mobile application for aiding visually impaired persons to identify the denomination of Indian banknotes.

Payments Infrastructure Development Fund (PIDF)

Set up by the RBI to encourage acquirers to deploy Points of Sale (PoS) infrastructure (both physical and digital modes).
The RBI will make an initial contribution of Rs 250 crores to the PIDF covering half the fund and remaining contribution will be from card issuing banks and card networks operating in the country.

Digital Payments Index (DPI)

Unveiled by the RBI to capture the extent of digitisation of payments across the country.

Details: It comprises of 5 broad parameters that enable measurement of penetration of digital payments in the country over different time periods. These parameters are – Payment Enablers (weight 25%); Payment Infrastructure – Demand-side factors (10%); Payment Infrastructure – Supply-side factors (15%); Payment Performance (45%) & Consumer Centricity (5%).

Food & Non-Food Credit

According to RBI's classification, loans provided by the Banks are categorized into Food and Non-Food Credit.

Non-Food Credit includes the loans provided for various purposes such as Agriculture and Allied sector, Industries, Services and Personal loans.

Food Credit includes the loans provided by the Banks to the Food Corporation of India (FCI) and other agencies involved in the procurement of Food grains. Usually, these loans get repaid as and when the Central Government releases the subsidy amount to these procurement agencies.

A major chunk of Bank's credit is in form of Non-Food Credit while only a small share is in form of Food Credit.

RBI'S Centralised Processing System (CPS)

RBI has recently decided to allow non-bank entities to participate in the Centralised Processing System (CPS).

PRESENT STATUS: RBI's centralised processing system (CPS) includes NEFT and RTGS. As of now, only the Banks have access to RBI's CPS. Non-Banking entities such as Pre-paid Instrument (PPI) issuers, White label ATM Operators, Card networks etc. do not have direct access to RBI's CPS. These entities basically rely on the Banks for the purpose of payment and settlement of transactions.

ANNOUNCEMENT: Certain non-banking entities such as Pre-paid Instrument issuers (Paytm wallet, Ola money, Amazon pay, PhonePe etc.), White label ATM operators, Card networks would be allowed to have direct access to CPS.

EXAMPLE: Amazon is a PPI issuer. Now, Amazon can use CPS directly for making payment and settlement of transactions with the merchants. Earlier, it had to rely on Banks. Similarly, you can use NEFT or RTGS to load your PPIs such as Paytm Wallet, Amazon pay balance, Phonepe, PayU money etc.

BENEFITS: Reduce dependence on Banks + Competition and Innovation as non-Banks can compete with Banks + reduce delay in execution of funds transfer + Better risk management as the settlement is carried out through RBI.