This article has been written by Mr. Rahul Kumar, a 3rd year 5th semester student of Faculty of Law, Banaras Hindu University.

ABSTRACT

The role of RBI has undergone through a rigorous change over the period of time. Earlier, it was a common perception that the roles of RBI is confined to credit control by changing different key policy rates depending on the economic environment of the national as well as international level. In the recent past the global banking practices faced a number of jugglery and malpractices such as window dressing, over and undervaluation of mortgage and collateral, overpricing the default risk and under pricing the credit risk. Basel III is a recently developed area of the banking sector where major impetus was provided towards the liquidity risk.

and conduct a critical analysis of the banks’ corporate governance framework. The research article will take into account the role of Reserve Bank Of India ( RBI ) in corporate regulations and conduct a critical analysis of the banks’ corporate governance framework and the corporate governance practices that Indian banks adhere to.

INTRODUCTION

Every country’s central bank is the highest authority inside its monetary system. The central bank is named the Reserve Bank of India (RBI) in India, Bangladesh Bank in Bangladesh, Federal Bank in the USA, and European Bank in Europe.

Bank Central. Regardless of the name or the country, the central banks’ previous roles and responsibilities were limited to certain stereotypical activities like managing credit in the economy, funding commercial banks as a last resort, lending money to the government of the country in the form of deficit financing, and managing foreign exchange by devaluating and, as a policy resolution, reevaluating the domestic currency to make sure that its value stays within a specific predetermined range. Thus, the RBI’s function in banking since 1992, which should be seen as a turning point in the development of the Indian banking industry, there have been substantial changes in supervision.

The Reserve Bank of India 

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of THE RESERVE BANK OF INDIA ACT, 1934. 

The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.

Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.

Its day to day affairs take care of the Board of Directors who are chosen by the government.

The Reserve Bank of India is the Central Bank of India, which means it is at the apex of the banking structure  of the economy. It is the main governing body and regulatory body in India and helps the government in its role as a business facilitator.

Preamble of RBI 

The Preamble of RBI describes the basic functions of the Reserve Bank as :

“to regulate the issue of Bank notes and keeoing of reserves with a view to securing 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.”

Central Board of RBI

The Reserve Bank`s affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act.

• Appointed / nominated for a period of four years
• Constitution :

• Official Directors 

• Full-time  :  Governor and not more than four Deputy Governor

• Non-Official Directors

• Nominated by Government  : ten Directors from various fields and two government  officials 
• Others : four Directors – one each from local boards

Functions of RBI 

Issuer of Currency : The RBI is the only authorised organisation in the nation with the authority to issue money. As a result, they print, distribute, and control the money supply in the economy. 

Government banker : Even state and federal governments require basic banking services. These services, including as money deposits and remittances, are offered by the RBI. Additionally, it has the ability to advance and lend money to the government as needed.

Banker to other Banks : Every other commercial bank in the nation is governed by the Reserve Bank of India. It offers these banks financial support in the form of advances and short-term loans. The commercial banks will also be subject to interest rate and CRR limits set by the RBI.

Foreign exchange regulator : The RBI’s job is to keep the rupee’s value stable in the world economy. It accomplishes this by serving as the nation’s guardian of its foreign exchange reserves. It keeps sufficient reserves to fend off changes.

Controls Credit in the Economy : It is possible to argue that the Reserve Bank of India’s main duty is to regulate credit and money in the marketplace. It makes use of both quantitative and qualitative techniques to adjust the amount of credit accessible in the economy based on the situation.

Objectives of RBI 

As the foundation of the nation’s financial system, the RBI has a number of goals, which are outlined in the RBI preamble. Following is a list of a few of them:

Principal Goals : The RBI’s principal goals include 

• Addressing the issue of banknotes
• Preserving the nation’s monetary stability
• To use the nation’s currency and credit system for its own benefit

Remain independent of political influence: The RBI should be free from political pressure and abstain from corrupt practices in order to preserve financial stability and foster economic progress. 

Primary goals: The RBI ought to function as the main regulator and as the bank for all other commercial banks. The only entity with the ability to issue notes is the Bank to the Government of India.
Encourage Economic Growth: In addition to preserving price stability, the RBI should create policies that, within the parameters, encourage economic growth.

RBI`s role in corporate sector 

As is well known, the government facilitates and encourages commerce and business in the economy. It accomplishes this through a number of commercial entities. In this capacity, the RBI is crucial. Let’s examine how the RBI promotes economic expansion and business.

Currency Policy 

As you may recall, the RBI was a key player in the most recent demonetization incident. This is so because the RBI is in charge of currency policy, or the monetization of the economy.

The amount of money that is available in the market affects the overall economy. Thus, the availability of money is essential to the operation and prosperity of businesses. Additionally, companies need foreign currency for cross-border transactions.


The economy’s foreign exchange system is under the RBI’s jurisdiction. Thus, the RBI directly contributes to the government’s efforts to encourage business in the economy.

Credit Policy

Loans and funding are crucial components of enterprises. The firms do not receive any direct funding from the RBI. It does, however, have authority over the credit that banks and other lending institutions make accessible to the market.

The amount of money available at the banks can be increased or decreased by employing quantitative techniques like the SLR and CRR ratios. The amount of loans the banks are able to offer their clients will therefore be determined by this. The bank rates, often known as the basis points method, are the most straightforward indicator.

In order to alter the availability of credit in the economy, the RBI may also employ qualitative measures. Let’s take an example where the steel sector feels that it needs additional loans to grow. Subsequently, it has the authority to ease regulations pertaining to this sector and direct banks to offer these loans. In addition, the RBI established the Priority Lending Sector.

Corporate Governance in Banking
When ownership diverges from control, good corporate governance becomes a vital component of any company’s success. Formerly serving as the Honourable President of  India stated that “Corporate Governance is about finding a balance between social and economic goals and working ethically.” It encompasses the capacity to operate financially while abiding by laws, rules, and regulations, as stated on February 12, 2008, in New Delhi, at the Lakshmipat Singhania-IIM Lucknow National Leadership Awards ceremony. In the banking industry, the corporate governance framework is much more important. The following have been identified as essential requirements by the global consensus for maintaining the stability of the financial system: an efficient risk management system, sufficient capital provision, prudent control and regulation, operational transparency, effective public policy intervention, preservation of macroeconomic stability, presence of suitable senior management oversight, and independent and competent

The establishment of strategic objectives and a set of corporate values that must be shared with the entire banking reorganisation, directors who are not subject to undue influence from management or outside concerns, and close attention to the audit report prepared by the internal and external auditors as a crucial control function (Bansal, 2005). Section 12 of the Prevention of the Money Laundering Act, 2002 imposes specific duties on financial institutions for the documentation and reporting of customer account data.

RBI’s powers and functions 

The RBI’s authority is mentioned in Section 36. The Reserve Bank has the authority to advise banking companies and to forbid them from engaging in a certain transaction. Additionally, it can help the banking institution by providing advances or loans under Section 18. It may order the banking institution to convene a meeting of its directors to address corporate issues. It may also designate officials to oversee the management of the banking company’s operations.

Suspension of Business

The financial company may request a moratorium from the High Court if it is temporarily unable to fulfil its obligations. As it sees fit, the High Court may approve the moratorium and put an end to the proceedings temporarily. The moratorium cannot last more than six months. The RBI report certifying that the banking company will be able to pay its debts in the event that the application is approved is the only document that makes the banking company legitimate.

Purchasing the equities of financial institutions
The Central Government shall undertake the undertaking of banking firms subsequent to conferring with the Reserve Bank of India. The endeavour must only be completed once the financial businesses have been given the chance to demonstrate their grounds for bankruptcy.


Dividend payments
The banking companies ought to hold off on paying dividends until all capital costs have been covered. It won’t start paying dividends until the value of investments in approved securities, shares, bonds, or debentures has decreased and been written off.

Reserve Fund

Each and every banking institution is required to establish a reserve fund and contribute at least twenty percent of its profits to it. If a banking institution appropriates any money from the reserve fund, it is required to notify the Reserve Bank.

Power of RBI to issue directions

RBI may frequently issue directions to the banking company if it is satisfied that the directions are in the interest of the public or to prevent the banking company from detrimentally conducting business. 

RBI can cause the inspection of the banking company and must state its report to the company. The directors of the banking company must submit all books, accounts, or documents for inspection.

Conclusion 

The credit policy of the Reserve Bank of India exists. This policy’s primary goal is to maintain price stability while promoting growth. Encouraging growth results in increased production of goods and services in India. This benefits India’s economy generally and contributes to GDP growth.

Contrarily, price stability only indicates that inflation should be kept under control and does not suggest that prices will not fluctuate. The RBI also wants to support advancements in agriculture and industry. 27 regional and 4 sub offices make up RBI. To guarantee that the state economy is managed properly, the majority of these offices are situated in the state capitals. With its capital, it keeps a state’s economy afloat. The RBI is in charge of regulating the Indian economy. It creates and advocates policies that can significantly improve human growth and strengthen our economy. Additionally, it remembers to monitor price stability.

References 

• THE RESERVE BANK OF INDIA ACT, 1934 ACT NO. 2 OF 1934
• THE BANKING REGULATION ACT, 1949 ACT NO. 10 OF 1949
• This article was originally written by S. Sarwar and published on www.Adda247.com. The link for the same is herein https://www.adda247.com/upsc-exam/the-banking-regulation-act-of-1949-provisions-and-amendment/
• This article was originally written by Sujoy Dhar and published on papers.ssrn.com. The link for the same is herein https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2600379
• This article was originally written by Priti Raj and published on clearias.com. The link of same is herein https://www.clearias.com/functions-of-rbi/