Jan 5, 2021

The Reserve Bank of India, RBI is India's Central Bank, also known as the Banker’s Bank. It's the key regulator for the banking system in India. In accordance with the provisions of the Reserve Bank of India Act, 1934, the Reserve Bank of India was established on April 1, 1935. The Reserve Bank has been permanently situated in Mumbai since 1937.  Reserve bank of India being the biggest financial institute of India has plenty of powers and functions to dispense. The basic functions of the reserve bank are defined in the Preamble of the Reserve Bank of India as:

"to regulate the issue of Banknotes and to keep of reserves to secure monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth." 

To regulate financial institutions sanctioned by it, it conceptualizes and recommends to the legislature for all kinds of statutory norms, regulations, rules, and issues from time-to-time directions/guidelines it deems necessary so that the highest standards of Corporate Governance are maintained. The power of RBI to make rules and regulations comes under the purview of Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949. The Reserve Bank of India Act, 1934 (RBI Act) empowers the Reserve Bank of India (RBI) to issue rules, regulations, directions and guidelines on a wide range of issues relating to banking and the financial sector. It also provides a framework for the supervision of banking firms in India. Banking Regulation Act 1949 provides rules regarding the framework within which banks are supposed to operate. The Act imparts RBI with many powers that include the license to control and regulate the voting rights of the shareholders, supervising the appointment process of the management and abroad, giving license to banks, imposing penalties and so on.

The Reserve Bank regulates and supervises the nation’s financial system. Different departments of the RBI oversee the various entities that comprise India’s financial infrastructure. RBI oversee (a)Commercial banks and all-India development financial institutions, regulated by the Department of Banking Operations and Developments, (b) Urban Cooperative Banks, regulated and supervised by the Urban Banks Department, (c) Regional Rural Banks (RRB), District Central Cooperative Banks and State Cooperative Banks, regulated by the Rural Planning and Credit department and supervised by NABARD, (d) Non-banking financial companies (NBFC): regulated and supervised by the department of non-banking supervision. The RBI aimed to protect the interests of depositors, to establish and conduct banking operations in an orderly manner and to promote the overall health of the banking system and financial stability. RBI conducts its power of regulation by Issuance of license for the opening of banks, RBI exercises its regulatory authority by issuing bank opening licenses, authorizing banks in India to open branches, controlling the entry and expansion of foreign banks and authorizing Indian banks to operate overseas, policy formulation, analysis and implementation of Prudential Standards, validation of credit, market and operational risk quantitative models, stress testing.  Monitoring of banks' maintenance of SLR and CRR, acceptance of appointments and pay packages of Whole Time Directors & Part-Time Chairpersons of Private Sector Banks and Chief Executive Officers of foreign banks operating in India, supervision of the amalgamation, restructuring and liquidation of banking firms, customer service policy problems, Anti-Money Laundering and Combating Financing of Terrorism, Regulation of financial institutions, According to prior approval for the acquisition of 5% or more of the shares or voting rights of Private Sector Bank, Inspect and supervise banks..


Under the provisions of Sections 22 and 23 of the Banking Regulation Act, 1949 RBI regulates the banking functions of Urban Cooperative Banks, District Co-operative Central Banks, and Scheduled Commercial Banks. The RBI is also vested with the power of Selective Credit Management, i.e. the advances issued by commercial banks can be controlled. According to this authority in relation to advances to be followed by all banks or any particular bank, the RBI can decide the policy. The RBI may guide the purpose of the advance, the margins to be retained in relation to the advances secured, the interest rates and any other terms and conditions relating to the advances. The provisions of Section 35A of the Banking Regulation Act, 1949 vests power in the RBI to give directions to banks and can take action, 'to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or a manner prejudicial to the interests of the banking company'. To ensure better governance and control, the RBI can under the Act, also impose restrictions on banks. Section 56, meanwhile, of the Act. applies to cooperative societies.

The Reserve Bank of India Act, 1934, includes provisions that define the Composition of the Central Board, and term of office of Directors, Local Boards etc. A central board of directors governs the Reserve Bank's affairs. The Government of India appoints the board in keeping with the Reserve Bank of India Act. Local boards have the role of advising the Central Board on local matters and representing the territorial and economic interests of local cooperative and indigenous banks; performing other duties as assigned from time to time.

In enforcing and controlling the nation's monetary policy, the RBI also plays a crucial role. Besides, the administration of the Foreign Exchange Management Act, 1999, is also liable.