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As a result, the central bank acts as a guarantor for commercial banks, ensuring that the financial system remains sound and healthy. When the commercial banks have used all their resources to meet their financial needs, they resort to the central bank of the country in times of liquidity crisis. As a lender of last resort, the central bank gives them financial accommodation. This is done either by redeeming their eligible securities or bills of exchange. This saves the bank from any possible case of failure and avoids a breakdown. This is because when a commercial bank faces a financial crisis and fails to obtain funds from other sources, then the central bank provides them with financial assistance in the form of credit.
The percentage of reserves that every bank has to maintain with the RBI is also decided by the RBI. It includes the cash reserve ratio and the statutory liquidity ratio . Also, RBI is responsible for setting the benchmark rate such as MIBOR, commonly known as Mumbai Interbank Offer Rate. The lending rates and deposit rates are also pre-decided by RBI. No bank can charge any rate lower than the rates fixed by the RBI. It also facilitates the rate in the money market and call market.
RBI also provides loans to the central/State/UT Government as a banker to the government. RBI is also authorized to appoint other banks to act as its agent and undertake banking business on the behalf of the government. RBI is the responsible agency for receiving and paying money on behalf of the various government departments. Whenever a bank needs funds, and nobody extends credits to them, RBI steps in and acts as a lender of last resort. Is responsible for undertaking various initiatives for the financial sector. The levels of offering credit have made many banks suffer losses.
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The central bank of India tweaks the money supply to achieve objectives such as liquidity, inflation, and consumption. When a commercial bank faces financial crisis and fails to obtain funds from other sources then the central bank plays a vital role of lender of last resort. This role of Central Bank saves the commercial bank from bankruptcy. Thus the central bank plays the role of guarantor for the commercial banks and maintains sound and healthy banking system in the economy. The Reserve Bank of India is known as the Lender of Last Resort. This is because when a commercial bank faces financial crisis and fails to obtain funds from other sources, then the central bank provides them with the financial assistance in the form of credit.
When the need arises, RBI provides short term loans and advances to the banks against any collateral. It has a mechanism for managing the funds of banks known as the Centralised Fund Management System. Banks can collect information about their balances, enquire, or transfer funds from the same. The Indian banking sector is considered to be the backbone of our economy. The increase in the earnings of individuals and rising disposable income enhances the banking services’ need in India.
- One of the other main objectives of the RBI is to function as the bankers’ bank and as the bank of the government.
- This includes the statutory liquidity ratio , and the cash reserve ratio .
- This banker of banks plays a key role in facilitating the money market and call market rates.
- If RBI finds any discrepancy in the transaction, it can prevent the processing of the transaction.
- The demand for their services increases subsequently, and it leads to the growth and development of the banking sector.
Both When a commercial bank faces a financial crisis and fails to obtain funds from others. Sources, then the central bank plays the vital role of ‘lender of last resort’ and provides them with https://1investing.in/ financial assistance in the form of credit. And this role of the central bank saves the commercial bank from bankruptcy. The central bank’s role saves the commercial bank from failure.
This in turn, reduces the prices of assets and impacts business operations. Another of the important functions of RBI is maintaining a reserve of foreign currencies that enables the RBI to deal with any crisis situation. Mobile-based solution for small business owners and their customers to enable recording of credit/payment transactions digitally across the country.
RBI issues circulars and guidelines for the management of the Non-Performing assets of banks. A system is established where the NPAs should be identified on an on-going basis and classified accordingly. It may take strict action if the NPAs are large in number and investigate the same. RBI is authorized to issue various guidelines for bank directors and has the power to appoint additional directors to the board of a banking company.
Important Functions of RBI (Reserve Bank of India)
So, let us understand in brief the various reasons behind the same. RBI has permitted the banks to undertake some non-traditional banking activities such as venture capital, insurance, mutual fund business, etc. As per RBI, priority sectors are those sectors of the economy that may not get timely and sufficient credit in the absence of these special schemes. The debt management policy mainly aims at minimizing the cost of borrowing and smoothening the maturity structure of debt. RBI manages the public debt and also issue new loans on behalf of central and state government. RBI acts as an advisor to the government when called upon to do so on financial and banking-related matters.
Hence, a thorough knowledge of the structure and functions of RBI will help you in understanding it better. Further, over the years, questions from the RBI functions, structure, or the latest announcements/ notifications/guidelines that RBI announces are asked in the exam. The most important function of RBI is the issuance of currency notes and coins, except the one rupee note and coin which are issued by the Ministry of Finance. However, the agency of distribution of all notes and coins issued by the Government of India is the Reserve Bank of India. The questions posted on the site are solely user generated, Doubtnut has no ownership or control over the nature and content of those questions. Doubtnut is not responsible for any discrepancies concerning the duplicity of content over those questions.
Everything About the Master Service Agreement and its Benefits
All the dealings that happen between two banks are done through this account. Many times it happens that any bank may need a loan, so it takes it from some other bank. The rate at which one bank can lend to the other bank is also decided by RBI. And the transfer of funds takes place from the account for inter-bank obligations. Any discrepancy if found by the RBI, gives them the right to stop the transaction from happening. If you’re looking for an answer to the question, which bank is called bank of banks?
So now, the RBI is responsible to oversee the foreign exchange market in India. RBI supervises and regulates the Foreign Exchange Market through the provision of the FEMA Act 1999. One of the most important functions of RBI is the formulation and execution of Monetary Policy and securing monetary stability in India It functions the currency and credit system to its advantage.
It might resort to severe action in case the number of NPAs is large, in which case, the RBI starts its investigation immediately. Fulfil its responsibility as a Banker to both, the state governments as well as the central government. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much-needed liquidity when no one else is willing to extend credit to that bank. If you’ve any difficulty in preparing for these topics, you can consider joining our detailed course on RBI Grade B Mains.
The reason behind maintaining this reserve is to make sure there is a reasonable amount of liquidity maintained in the banks. In addition to the CRR, the SLR or the Statutory Liquidity Ratio is what role of rbi is known as lender of last resort another reserve that the banks have to maintain with the RBI. A certain amount of reserves are held by the bank in the form of cash, bonds, securities, or gold after being approved by the RBI.
This role of the central bank saves the commercial bank from bankruptcy. Thus, the RBI plays the role of guarantor for the commercial banks and maintains a sound banking system in the economy. Since RBI is the one that administers these rates, it is also the one that decides them, which makes it imperative for all the other banks to follow the same. Some of these rates include the policy rates, bank rates, marginal standing facility rates, repo rates, and reverse repo rates. The percentage of the reserves of the other banks that the RBI keeps with itself is also decided by RBI. This includes the statutory liquidity ratio , and the cash reserve ratio .
Understanding the Key Functions of the Reserve Bank of India
To understand this process, we can look at the example of XYZ bank. Suppose the X branch faces a cash deficit, but the Z branch has a cash surplus. When nobody extends credit to a particular bank then RBI acts as a lender of last resort.
The cash is transferred based on surplus or deficit from the main branch to other branches. So, ABC can transfer funds from B to A; RBI facilitates this process. RBI lays down various policies for the working of the bank and revises them as and when necessary. Rules and regulations for the functioning of a bank are also clearly defined. If RBI feels that any transaction is unethical, doubtful or any suspicious activity is undertaken, they can interrogate the bank. It is imperative for every bank to maintain an account with the RBI.
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Commercial banks are required to maintain the cash reserves at a rate decided by the RBI in its monetary policy. Its immense responsibilities and the efficient manner in which it executes all its functions have earned it many interesting nicknames. The RBI Act 1934 states that the Reserve Bank of India will perform three main functions like other central banks. The three primary functions are banking, supervisory, and promotional functions.