RESERVE BANK OF INDIA: AN ANALYSIS OF

BANKING VIS A VIS GLOBALIZATION

ABSTRACT

One of the most revolutionary things that has happened in the 21st century is the
modernization and revamping of the banking system. Banks have existed for a very long time
but today’s modern banking system is a major leap from the age-old system of banking.
Banking has become a quintessential part of human existence without which there will be
chaos. From a simple act of withdrawing money to buying and selling products online,
everything is associated with the aspect of banking. In India, when one talks about banking
the first institution that comes to one’s mind is the Reserve Bank of India. The RBI is the
parent bank of all responsible to supervise all financial activities in the country. From printing
the currency of the country to supervising all private and other banks, the RBI has a lot of
duties. In this research project I am started by writing about the powers of the RBI over the
banking sector to the recent trends in global banking and have lastly analyzed the features of
the RBI from the global perspective.
INTRODUCTION

The Reserve Bank, established through the Reserve Bank of India Act, 1934 commenced its
operations in 1935. “It draws its powers and responsibilities through other legislations also
such as the Banking Regulation Act, 1949. The RBI has over the years been responding to
 changing economic circumstances and these organizational developments have been
documented in a recent Report on Currency and Finance for the year 2009-10, the theme of
which was ―The Evolution of Central Banking in India‖. Through this project, I would like to
highlight some recent developments and discuss certain issues of contemporary relevance
relating to the evolving role of RBI in Globalized Banking.”1 First, the Indian experience
indicates an evolution or adaptation of central banking to new economic circumstances, as
opposed to several nations that implemented quick reforms in central banking law and
governance in the last two decades. These modifications came about as a result of legal
changes as well as changes in operating processes. Second, this evolution has, among other
things, contributed to the central bank gaining some de facto autonomy, particularly in the
fields of monetary policy and financial governance.

Third, “in sharp contrast to the situation before 1991, since then, apart from a transparent
communications policy and a broad-based consultative approach to policy making,
Governor’s speeches and appearances on the electronic media and the press have been
substantial, having significant influence on markets and opinions. In the process, the RBI has
gained reputational bonus and public credibility”2. Fourth, Financial and external sectors in
India have also become more efficient and robust as a result of related improvements during
the last 15 years. Fifth, While the efficacy of the monetary policies has increased greatly to
meet changing demands, several obstacles remain, limiting our policy framework's choice
and effectiveness.

In reviewing the evolving role of RBI, “it is necessary to distinguish between an exclusive
monetary authority and a generic central bank, which performs not only monetary functions,
but also other functions, in particular, banking supervision. A recent survey by the Bank for”
“International Settlements (BIS) has shown that over sixty per cent of central banks across
developed and developing countries have banking supervisor’s role exercised by a central” 3
bank. India has chosen a medium ground. Banking supervision is still under the control of the
RBI, but it has been given a quasi-independent status.

1
Chandavarkar, A(2005). “Towards anIndependent FederalReserve Bank of India : APoliticalEconomy Agenda
for Reconstitution”. Economic and Political Weekly.
2
Balachandran, G. (1998). “The Reserve Bank of India: 1951-1967”. Oxford University Press, Delhi.
3
Encyclopedia, evolution of RBI, https://www.encyclopedia.com/international/encyclopedias-almanacs-transcripts-
and-maps/reserve-bank-india-evolution, accessed on 20.10.2021.
2
 The Board for Financial Supervision (BFS), a committee of the RBI's Central Board, was
established in 1994 to advise and monitor the RBI's oversight functions. It meets at least once
a month. Four independent members of the BFS are chosen from the RBI's Central Board of
Directors and have significant technical backgrounds and experience.

While it is correct that there has been a recent worldwide trend to emphasize central bank
independence or autonomy in general, and monetary administration in particular, this has
been achieved by different countries through a variety of means, including constitutional
reforms, legal modifications, international commitments, policy readjustment, or changes in
procedures and the overall environment of policy making. “Evolution, thus, does not exclude
legislative changes to meet the challenges of globalization and new economic realities,
though in India most changes have thus far been effected within the basic structure of the
original legislation in terms of mandate, governance procedures and instruments. A notable
legislative measure in the recent past nevertheless relates to greater flexibility to RBI in
regard to cash reserve requirements, deployment of forex reserves, and clarity in regulation
over money, forex and government securities markets.”4

A central bank's independence is sometimes firmly linked to a specific goal, such as price
stability. In actuality, however, there are many examples of dual or numerous objectives with
equal or different priorities, as well as many instances of a central bank's objectives being
organized in a hierarchy. In terms of its general policies and operations, the RBI is bound by
the existing legal framework and acts as a monetary institution with many aims and functions.
Within such a mandate, efforts are made to: increase transparency through improved
communication; “emphasize the interactive nature of decision-making in its activities,
including monetary management, through advisory committees”5; and move toward increased
independence in monetary policy operations while maintaining macro-policy harmony in co -
ordination with the government.

REVIEW OF LITERATURE

MONEY, BANKING AND FINACE IN INDIA: EVOLUTION AND PRESENT

STRUCTURE

4
The reserve bank of India amendment act, 2006.
5
Ibid.
3
The centre of any economic system is money, banking, and finance. With a focus on the post-
1991 period, this book covers the evolution and current structure of India's monetary, banking,
and financial system. The book is split into three sections. Part I discusses the different types
and purposes of money (including e-money), the Reserve Bank of India's (RBI) role in
monetary and credit management, and the evolution of monetary policy in India from 1947.
Part II covers commercial banks, regional rural banks, urban co-operative banks, rural co-
operative credit institutions, and development banks, and analyses and critically analyses their
operations. Non-banking financial companies, mutual funds, and insurance companies are
among the three other financial institutions covered. The importance of the financial system in
economic development is the first topic in Part III. It analyses India's financial system's growth
since independence and explains its current form. It focuses on the money market, government
securities market, capital market, corporate loan market, credit market, and foreign currency
market reforms.

RESEARCH OBJECTIVES

The research objectives for the project are as follows:

1) To analyse and understand the aspect of powers and external powers of the RBI.

2) To analyse the recent trends in global banking

3) To analyse the RBI from the perspective of globalization.

RESEARCH QUESTION

The research question for the project are as follows:

1) What are the powers and external powers of the RBI over the banking sector?

2) What are the recent trends in Global Banking?

4
 3) What is global perspective towards the reserve bank of India?

METHODOLOGY

The research report is based on doctrinal approach and draws conclusion and suggestions with the aid of
secondary sources of data. Online repositories, articles and digitally available material has been used to
conduct research for the report.

PTO

CHAPTER 1
RBI’S AUTONOMY AND EXTENDED POWERS ON BANKING SECTOR

The Reserve Bank of India was founded on April 1, 1935, as a private shareholders' bank
under the Reserve Bank of India Act, 1934, but has been completely controlled by the
Government of India ever since its nationalization in 1949. The Reserve Bank of India is
listed in “Entry 38 of List 1 of Schedule VII of the Indian Constitution” 6, which is known as
the Union List.

The Preamble to the RBI Act describes the basic objective as “to regulate the issue of Bank
notes and keeping 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”.

6
Consitution of India.
5
 Therefore, neither price stability nor formal inflation targeting are explicitly guaranteed. In
India, the dual objectives of monetary policy have developed over time to include sustaining
price stability and guaranteeing an appropriate supply of credit to aid growth. The relative
importance of the dual goals is regulated according to the circumstances and expressed in
policy declarations. In the formulation of policy, macro - financial stability are also taken into
account.

The Reserve Bank of India is also in charge of overseeing foreign exchange reserves, which
are shown on its balance sheet. While the RBI is primarily a monetary body, its founding
legislation requires it to handle the Government of India's public debt and serve as a banker to
the government. “In terms of Section 20 of the RBI Act 1934, RBI has the obligation to
undertake the receipts and payments of the Central Government and to carry out the
exchange, remittance and other banking operations, including the management of the public
debt of the Union”7. A structural division of monetary and debt administration has been
proposed recently, with the Union Budget for 2007-08 proposing the establishment of an
autonomous Debt Management Office to maintain debt administration separate from
monetary management. Further, as per Section 21 of the said Act, “RBI has the right to
transact Government business of the Union in India.”

It is significant to note that the RBI Act, Section 19 “precludes RBI from performing certain
business which protects the integrity of the institution, such as trading or taking any direct
interest in commercial, industrial or other undertaking, purchasing shares or giving loans
against shares, and advancing money on security of immovable property, drawing or
accepting bills payable otherwise than on demand.”8 The RBI developed the Market
Stabilization Scheme through an MoU with the government to carry out stabilisation
operations as a result of the last provision.

On practical considerations, central bank independence may be viewed as related broadly to

three areas, viz., “management including personnel matters; financial aspects; and conduct of
policy. Managerial independence refers to the procedures for appointment, term of office and
dismissal procedures of top central bank officials and the governing board. It also includes the
7
Section 20, banking regulation act, 1949.
8
section 19, banking regulation act, 1949.
6
 extent and nature of representation of the Government in the governing body of the central
bank and Government’s powers to issue directions. Financial independence relates to the
freedom of the central bank to decide the extent to which Government expenditure is either
directly or indirectly financed via central bank credits”9. “Direct or automatic access of
Government to central bank credits would naturally imply that monetary policy is
subordinated to fiscal policy. Finally, policy independence is related to the flexibility given to
the central bank in the formulation and execution of monetary policy, under a given
mandate”10.

While the Central Government may provide the RBI such orders as it deems appropriate in
the public interest after consulting the Governor, the Central Board of Directors is responsible
for the overall administration of the Bank's activities and business. The Governor is appointed
by the federal government and can be dismissed at any time for any reason. The Central
Government appoints all Deputy Governors, who can be ousted in the same way. The Central
Government nominates all of the Central Board's Directors, with one government official
participating in the Board's discussions.

On financial aspects of RBI vis-à-vis Government, however, “there have been several
positive developments. Since the 1990s, as the case for according greater operational
flexibility to the RBI in the conduct of monetary policy and regulation of the financial system
became stronger,” “the practice of automatic monetisation of the Government’s fiscal deficit
through the issue of ad hoc treasury bills came under severe criticism” 11. “In subsequent
years, the phasing out of automatic monetisation of fiscal deficits by 1997 and the enactment
of FRBM legislation in 2003 are two important milestones in the direction of providing
safeguards to monetary policy from the consequences of expansionary fiscal policy and
ensuring a degree of de facto autonomy of the RBI”12.

CHAPTER 2

RECENT TRENDS IN GLOBAL BANKING

9
Rangarajan, C. (1993),“Autonomy of Central Banks’, Fifty Years of Central Banking: Governors Speak”. Reserve Bank of
India, Mumbai.
10
Reddy, Y. V. (2002),„Lectures on Economic and Financial Sector Reforms in India’, Oxford University Press,
New Delhi.
11
Rangarajan 1993.
12
Reddy, Y. V. (2001). Autonomyofthe Central Bank: Changing Contoursin India, speechdelivered at Indian Institute of
Management, Indore.
7
 During the 2011-12 fiscal year, the banking sector faced headwinds from both foreign and
domestic economic trends. While banks' profits remained stable, their asset quality
deteriorated. Several projects are underway to tighten the regulatory and accounting
structures in order to increase the institutions' robustness. Higher capital regulations, stricter
liquidity and leverage ratios, and a more measured approach to risk, on the other hand, are all
expected to increase banks' funding costs. “Compliance with Basel III stipulations along with
the credit needs of a growing economy will require banks to tap various avenues to raise
capital. Broad estimates suggest that for public sector banks, the incremental equity
requirement due to implementation of Basel III norms by March 2018 is expected to be
approximately 750-800 billion. Meeting these capital requirements will entail the use of
innovative and attractive market-based funding channels by the banks. The convergence with
the International Financial Reporting Standards (IFRS) may also place additional demands on
the banks’ technical as well as human resources. Considering the granularity of data required
for effective supervisory review, efforts should be to automate data flow from reporting
entities through the adoption of straight-through processing systems”13. Quantitative coverage
of financial inclusion has improved, but true financial inclusion must be delivered through the
development of sustainable business and delivery systems. Regulatory actions and intrinsic
strengths underlying the Indian economy should ensure that the banking system continues to
play a beneficial role in supporting our developing economy's finance needs, despite the
numerous hurdles.

The weakening of global economy, the deepening of the sovereign debt crisis, and financial
market pressure all had an impact on the global banking system. While US banks have been
able to lower their debt and reliance on wholesale finance, European banks continue to rely
heavily on wholesale funding. The banking sector's fundamentals improved in emerging
nations, indicating faster economic growth and relative financial statement strength as a result
of increased domestic financing and a large capital base. On the regulatory front, significant
progress has been made, such as Basel III, SIFIs, and shadow banking, but concerns remain.

CHAPTER 3

ANALYSIS VIS A VIS GLOBALIZATION

13
Marco, Anone; BernardL. Laurens; Jean-FrancoisSegalottoand MartinSommer.(2007). “Central Bank Autonomy:
Lessons from Global Trends”. IMF Working Paper No.WP/07/88.

8
 Section 21 was introduced with a view to enable the Reserve Bank to give directions to Banks
regarding their policies, so that it may control facilities and check any speculative activities 14.
The Banking Company are bound to follow the directives issued by RBI under Section 21. In
Jameela Devi v. State Bank of Travancore, it has been held that “the circulars issued by RBI
regulating rate of interest chargeable on the loan and the manner of charging interest are
statutory circulars issued with landable purpose and are abiding on the banks.”15

Only branches of foreign banks are permitted to operate in India. A new foreign bank wishing
to create a branch in India must submit an application to the RBI detailing its shareholders,
financial position, and dealings with the India Parties. The request is reviewed in light of the
bank's financial position, international and home country standings, international presence,
economic and trade links between the two countries, and home country supervisory standards,
among other factors. A foreign bank whose application to establish a branch in India is
accepted in principle must provide designated capital of US$ 25 million, divided as follows:
US$ 10 million at the time of the first branch, another US$ 10 million at the time of the
second branch, and the remaining US$ 5 million at the time of the third branch. Approval to
open the second and subsequent branches is granted based on a number of factors, including
the policy in effect at the time. The Indian company must maintain a minimum capital fund of
at least 8% of its capital to risk-weighted assets in its Indian activities (raised to 9 percent
with effect from March 31, 2000).

As already mentioned, no bank incorporated in India can open an office (place of business)
outside India without obtaining the prior permission to the RBI. Such permission is given by
the bank taking into account various factors such as the importance of place as a center of
International Finance, pattern of India’s trade with and investment in the country concerned,
size of Indian population/ expatriates there, prevailing local banking laws, exchange control
regulations, etc16.

The additional powers of the RBI under the Banking Regulation Act, 1949 are:

14
Section 21, banking regulation act, 1949.
15
1991 Bank J 427 at p. 429 (Ker).
16
Reserve Bank of India. (2006). Report on Currency and Finance, 2004-05.

9
 1. Scheme of amalgamation to be sanctioned by the Reserve Bank – (Section 44-A);
2. Reserve Bank to apply to the Central Government for and order of moratorium in
respect of a Banking Company and to prepare a scheme of reconstitution or
amalgamation – (Section 45);
3. Reserve Bank to examine the record of proceedings and tender advice in winding up
proceedings – (Section 45-P);
4. Reserve Bank’s power to inspect and make its report in winding up – (Section 45-Q);
5. Reserve Bank’s power to call for return and information from the Liquidator of a
banking Company – (Section 45-R)
6. Cognizance of offence by the Court only on a complaint by RBI in writing – (Section
47);
7. Change in name by a Banking Company only when RBI has certified that it has no
objection to such name – (Section 49-B);
8. Alteration of Memorandum of a Banking Company only when RBI has certified that
it has no objection to such alteration – (Section 49-C);
9. Central Government to consult RBI before making rules – (Section 52);
10. RBI’s power to recommend the Central Government for exempting any bank from the
provisions of the Banking Regulation Act, 1949 – (Section 53)

CONCLUSION

Over the years there have been several changes in the policy followed by India in the
globalized banking sector. But as always, the RBI as the guardian and the supervisor of these
policies has been coming to the rescue of any contingency to the banking sector. Every year it
comes out with detailed analysis of the past year and with further policies and goals to
achieve in the coming year. With the setbacks the global banking sector has been facing for
the last two years, the role and importance of RBI for India has become more crucial that it
could ever be. With the constant updates that the RBI is getting it has geared up for the
challenges and is certainly shaping up the monetary and the banking policy in the way that
would bring the best out of the Indian economy.

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 LIST OF REFERENCES

1) Rangarajan, C. (1993),“Autonomy of Central Banks’, Fifty Years of Central Banking: Governors

Speak”. Reserve Bank of India, Mumbai.

2) Marco, Anone; BernardL. Laurens; Jean-FrancoisSegalottoand MartinSommer.(2007).

“Central Bank Autonomy: Lessons from Global Trends”. IMF Working Paper
No.WP/07/88.

3) Reserve Bank of India. (2006). Report on Currency and Finance, 2004-05.

11