ASSIGNMENT

ON
Chapter 2: Indian Banking System
Course Name: Comparative Banking
Course Code : BIN-206
Submitted By:
Group – 2
(ID- 111 to 120)
Submitted To:
MD. Rakibul Islam Nirob
Assistant Professor
Dept. of Banking & Insurance

University of Rajshashi
 Team Leader
Kaushik Banik (2010237117)

Team Members
Tanzila Bente Kashem Boishakhy (2012037111)
Md. Ramzan Hossain (2010937112)
Md. Arman Hossen (2010937113)
Mahmudul Amin (2010137114)
Nahida Parvin (2012037116)
Debu Das (2010437118)
Mst. Tanjim Nowrin (2012037119)
Md Hafizul Islam (2010337120)

Q-1: Describe the history of Indian Banking system?

 Ans: In 1921, the Imperial Bank of India was set up to proceed as the national
bank of India by the British Government. However, the Imperial Bank weakened
to express its achievement sufficiently and didn’t make any progress as the
Central Bank. At that point, the government asked the Hilton Young Commission
in 1925 to see this matter. The commission presented their reports saying that
one single association can’t have the option to go about as two separate
organizations, both credit and cash control. Modern banking in India originated in
the mid of 18th century. Among the first banks were the Bank of Hindustan,
which was established in 1770 and liquidated in 1829-32; and the General Bank of
India, established in 1786 but failed in 1791. The largest and oldest bank which is
still in existence is the State Bank of India (SBI). It originated and started working
as the Bank of Calcutta in mid-June 1806.In 1809, it was renamed as the Bank of
Bengal. This was one of the three banks founded by a Presidency Government,
the other two were the Bank of Bombay in 1840 and the Bank of Madras in
1843.The three banks were merged in 1921 to form the Imperial Bank of India,
which upon India’s independence, became the State Bank of India in
1955.Reserve Bank of India was established in 1935, under the Reserve Bank of
India Act, 1934.In January 1949, RBI was nationalized. The preamble of the
Reserve Bank of India describes the basic functions of RBI 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.
Major banks were privately owned throughout independence, which was a severe
source of concern because people and farmers still relied on moneylenders. As a
result, the govt. decided to nationalize banks, and the Banking Regulation Act of
1949 went into effect. Banks are nationalized after the country gains
independence. The history of banking in India can be broadly classified as:
1. Pre-independence phase (1770-1947)
2. Post-independence phase (1947-till date)
The Indian banking sector is broadly classified into scheduled and non-scheduled
banks. The scheduled banks the scheduled banks are those included under the
2nd schedule of the reserve bank of India act 1934.The scheduled banks are
further classified into: nationalized banks: State bank of India and its associates;
Regional Rural Banks: foreign banks: and other Indian private sector banks. The
SBI has merged its associate banks into itself to create the largest bank in India on
1 April 2017.With this merger SBI has a global ranking of 236 on fortune 500
index. The term commercial banks refer to both scheduled and non-scheduled
commercial banks regulated under the Banking Regulation Act 1949.

Q-2: Describe the term suasion and credit rationing?

Ans:” Moral Suasion” is a request by the RBI to the commercial banks to take
specific measures as per the economy’s trends. For instance, RBI may direct banks
not to give out certain loans. It includes psychological means and informal means
of selective credit control. Under this method, the central bank merely uses its
moral influence on the commercial banks. It includes the advice, suggestion
request and persuasion with the commercial banks to co-operate with the central
bank. If the commercial bank does not follow the advice extended by the central
bank, no penal action is taken against them. The success if this method depends
upon the co-operation between the central bank and commercial banks and the
respect the central bank commands from other banks. There is no element of
compulsion in his persuasion and as such the efficacy of this measure depends on
the active cooperation of banks and their goodwill to fall in line with the advices
of the RBI. That is why certain quarters have expressed doubts about the success
of this instrument of monetary policy. However, the success which the RBI could
achieve has been somewhat encouraging. After the devaluation of the rupee, as
speculative activities were feared, the banks were advised to restrict their
advances to genuine trade requirements and not to grant accommodation for any
speculative purposes. During the recent years, the Governor of the RBI advises
informally the commercial banks to follow the policy measures generally. The
effect which these advices invoked has been, by and large, satisfactory, if not
speculator. The bank’s activities in this direction are facilitated by the
concentration of resources in the hands of a few big banks which enables the
bank officials to have frequent informal consultations with the officials of these
big banks and achieve satisfactory results.
‘Direct action’ implies the refusal of the RBI to extend rediscounting facilities and
other financial accommodation to banks following unsound banking principles, or
to grant further accommodation to banks whose capitals and reserves are
considered inadequate. The bank is not resorting to this weapon very often; but
cases of willful and persistent violates of the rules could be met with the sharp
blades of direct action with which the bank is armored.
Q-3: What are the objectives of Reserve Bank of India?
Ans: Important aspects relating to objectives of the Reserve Bank of India (RBI)
are as follows:
(1) Primary objects: Preamble to the RBI Act, 1934 spells out the objectives of the
RBI as:
 To regulate the issue of bank notes.
 To keep reserves with a view to securing monetary stability in India.
 To operate currency and credit system of the country to its advantage.
Prior to the establishment of the RBI, the Indian financial system was totally
inadequate on account of the inherent weakness of the dual control of currency
by the Central Government and of credit by the Imperial Bank of India. The Hilton-
Young Commission, therefore, recommended division of functions and
responsibility for control of currency and credit and the divergent policies by
setting-up of a central bank called the RBI – which would regulate the financial
policy and develop banking facilities throughout the country. Hence, the RBI was
established with this primary object in view.
(2) Remain free from political influence: Another objective of the RBI has been to
remain free from political influence and be in successful operation for maintaining
financial stability and credit.
(3) Fundamental objects: Fundamental object of the RBI is to discharge purely
central banking functions in the Indian money market i.e., to act as –
 Note-issuing authority
 Bankers’ bank
 Banker to government
(4) Promote the growth of the economy: RBI aims to promote the growth of the
economy within the framework of the general economic policy of the
Government, consistent with the need of maintenance of price stability.
(5) Development of Indian Economy: A significant object of the RBI has also been
to assist the planned process of development of the Indian economy. Besides the
traditional central banking functions, with the launching of the 5-year plans in the
country, the RBI has been moving ahead in performing a host of developmental
and promotional functions, which are normally beyond the purview of a
traditional Central Bank.

Q-4: What is selective credit control?

Ans: It refers to discriminatory policy of the central bank relating to select sectors
of the economy. Flow of credit to certain sectors (priority sectors) may be
encouraged with a view to stimulate production in these sectors. This is a positive
application of selective credit controls. On the other hand, the central bank may
decide to restrict the availability of credit to certain (non-priority) sectors.
Generally, during periods of inflation, availability of credit for speculative activities
(like storage of food grains) is discouraged. This is a negative application of the
selective credit controls.

Q-5: Brierly explain the organization of the RBI?

Ans: Reserve Bank of India is the Central bank of India. It is also known as the
Banker’s Bank. It controls the monetary policy with respect to the national
currency, the Indian Rupee. RBI is headquartered in Mumbai.
Reserve Bank of India is entrusted with monetary stability, the management of
currency, and the supervision of the financial as well as the payments system.
Reserve Bank of India is the regulator of the Banking Industries in India. It
supervises, guides, and regulates all the banks that are operating in our country.
The RBI was originally constituted as a shareholder’s bank with a share capital of
Rs. 5 crores divided into 5 lakhs fully paid-up shares of Rs. 100 each. The entire
share capital was owned by private individuals with the exception of shares of the
nominal value of Rs. 230000, which were allotted to the Government for disposal
at par to Directors of the Central Board of the Bank seeking to obtain the
minimum share qualification. For the successful operation of the Bank, the
country was divided into five areas, Bombay, Calcutta, Madras and Rangoon.

Q-6: How the RBI prevented concentration of shares?

Ans: To prevent concentration of shares in a few hands, it was further
provided in the Act that each shareholder should be entitled to one vote for every
five shares held, subject to a maximum of 10 votes. However, in course of time,
the shares got concentrated in the Bombay region. Even the amendment to the
RBI Act in 1940 did not stop this evil concentration of shares in the Bombay
register. This defect was effectively remedied only with the nationalization of the
RBI in 1949.
The nationalization of banks was expected to vastly speed up branch expansion;
help mobilize deposit resources from all parts of the country and from all sections
of the people; meet diverse production needs irrespective of size, assets and the
social status of borrowers; create fresh opportunities for backward areas; and
finally, ensure that large borrowers did not have more  access to the resources of
the banks than was actually required for productive use and to prevent the use of
credit for speculative and other unproductive purposes.
Nationalization was aimed at redressing these inequities and prevent
concentration of shares. Banks needed a license from the RBI if they wanted to
open a new branch. After nationalization, branch expansion was deliberately
directed towards previously unbanked or under-banked rural and semi-urban
areas. In 1980 six more banks were nationalized

Q-7: “The affairs of the RBI are controlled by a central Board of Directors”. How
that central Board of Directors are formed?
Ans: The affairs of the RBI are controlled by a central Board of Directors,
consisting of the following members:
1. One Governor and not more than four Deputy Governors appointed by the
Central Government for such periods not exceeding five years as may be
fixed by the Central Government at the time of their appointment.
2. Four directors nominated by the Central Government, one from each of the
four local boards. The term of office of these directors is related to their
membership in the local boards.
3. Three other directors, nominated by the Central Government. These
directors hold office for four years and there is provision in the Act for their
retirement by rotation.
4. One Government official.
Besides the Central Board, there are local boards for the four regional areas of the
country with headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local
board consists of five members appointed by the Central Government for a term
of four years to represent, as far as possible, territorial and economic interests
and interests of cooperative and indigenous banks. The functions of the local
boards are to advise the Central Board on such matters as may generally or
specifically be referred to them and to perform such duties as the Central Board
may by regulations delegate to them.

Q-8: What are the functions of RBI?

Ans: The Reserve Bank of India (RBI), is the Central Bank of the country which is
responsible for the regulation and function of the Indian Banking System. RBI, also
called the Monetary Authority of India, was set up on the recommendation of the
Hilton Young Commission.
The RBI performs the following functions:

1)Monetary Management/Authority
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. As the monetary authority of India, It ensures
price stability in India concerning the country’s economic growth.
2) Supervision and Regulation of Banking and Non-Banking Financial
Institutions
RBI functions to protect the Interest of depositors through an effective regulatory
framework. Keeping a keen eye over the conduct of banking operations and
solvency of the banks along with maintaining the overall financial stability
through various policy measures. These powers of RBI come from RBI ACT 1934
and Banking Regulation Act 1949.This regulatory and supervisory function of the
RBI extends to Indian Banking System as well as Non-Banking Financial
Institutions.
3) Regulation of Foreign Exchange Market, Government Securities Market, and
Money Market

 Foreign Exchange Market: The Foreign Exchange Management Act 1999

came into light after the liberalization measures introduced in 1991. FEMA
1991 replaced the FERA 1973 and came into effect in June 2022.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.
 Government Securities Market: RBI regulates the trade securities issued by
the Central and State governments. For regulation of this, RBI derives its
power from the RBI Act of 1934.
 Money Market: Short-term and highly liquid debt securities are also
regulated by RBI and for this RBI derives its powers from the RBI Act 1934.

4) Foreign Exchange Reserve Management

Foreign exchange reserve includes-

 Foreign Currency Assets (FRAs)

 Special Drawing Rights (SDRs)
 Gold

RBI is the custodian of India’s foreign exchange reserves. The legal provision
regarding the management of foreign exchange reserves is mentioned in RBI Act
1934.The RBI Act of 1934 permits the RBI to invest these foreign exchange
reserves in the following instruments-

 Deposit with Banks for International Settlement

 Deposit with foreign Commercial Banks
 Debt Instruments
 Other instruments with approval of the Central Banks of RBI

5) Bankers to Central and State Government

RBI acts as a banker to the government. RBI is the responsible agency for
receiving and paying money on behalf of the various government departments.
RBI is also authorized to appoint other banks to act as its agent and undertake
banking business on the behalf of the government. RBI maintains Central and
State Government funds like Consolidated Funds, Contingency Funds, and Public
Account. RBI also provides loans to the central/State/UT Government as a banker
to the government.
6) Advisor to the Government
RBI acts as an advisor to the government when called upon to do so on financial
and banking-related matters.
7) Central and State Government’s Debt Manager
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.
8) Banker to Banks
Banks open their current account with RBI to maintain SLR and CRR.RBI is a
common banker for the different banks that enables the settlement of interbank
transfers of funds. For special purposes or in need, RBI provides short-term loans
and advances to banks
9) RBI- Lender of last resort
That means RBI comes to rescue the banks that are solvent (facing temporary
liquid problems) but have not gone bankrupt. RBI provides this facility to protect
the interest of depositors and to prevent the possible failure of the bank.
10) RBI- Issuer of Currency
The RBI and the government are in charge of the creation, manufacturing, and
overall administration of the national currency with the aim of releasing a
sufficient quantity of authentic and clean notes. The Reserve Bank of India has
given some bank branches permission to set up currency chests in order to
simplify the circulation of rupee notes and coins around the nation (A currency
chest is a storehouse where currency notes and rupee coins are stocked on behalf
of RBI)
11) Developmental Role
RBI’s developmental role includes creating institutions to build financial
infrastructure, ensuring credit to the productive sector of the economy, and
expanding access to affordable financial systems. The RBI supports and enhances
the country’s developmental efforts.
12.Oversees Market Operations: The RBI regulates and develops repo markets,
money markets, and other market instruments. It implements money market
operations, foreign exchange, and government securities.

Q-9: What are the types of banks under RBI?

Ans: Banks are financial institutions that perform deposit and lending functions.
There are various types of banks in India and each is responsible to perform
different functions. The bank takes deposit at a much lower rate from the public
called the deposit rate and lends money at a much higher rate called the lending
rate. Banks can be classified into various types.
Given below are the bank types in India along with broad discussion:
• Central Bank
• Cooperative Banks
• Commercial Banks
• Regional Rural Banks (RRB)
• Local Area Banks (LAB)
• Specialized Banks
• Small Finance Banks
• Payments Banks.
1.Central Bank
The Reserve Bank of India is the central bank of our country. Each country has a
central bank that regulates all the other banks in that particular country. The main
function of the central bank is to act as the Government’s Bank and guide and
regulate the other banking institutions in the country. Given below are the
functions of the central bank of a country:

 Guiding other banks

 Issuing currency
 Implementing the monetary policies
 Supervisor of the financial system.

2.Cooperative Banks
These banks are organized under the state government’s act. They give short
term loans to the agriculture sector and other allied activities. The main goal of
Cooperative Banks is to promote social welfare by providing concessional loans.
They are organized in the 3-tier structure

 Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt,
NABARD)
 Funded by RBI, government, NABARD.
 Money is then distributed to the public
 Concessional CRR, SLR applies to these banks.
 (CRR- 3%, SLR- 25%)
 Owned by the state government and top management is elected by
members
 Tier 2 (District Level) – Central/District Cooperative Banks
 Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

3.Commercial Banks

 Organized under the Banking Companies Act, 1956

 They operate on a commercial basis and its main objective is profit.
 They have a unified structure and are owned by the government, state, or
any private entity.
 They tend to all sectors ranging from rural to urban
 These banks do not charge concessional interest rates unless instructed by
the RBI
 Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:
1.Public sector Banks – A bank where the majority stakes are owned by the
Government or the central bank of the country.
2.Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people
3.Foreign Banks – The banks with their headquarters in foreign countries and
branches in our country, fall under this type of bank.
4.Regional Rural Banks (RRB)

 These are special types of commercial Banks that provide concessional

credit to agriculture and rural sector.
 RRBs were established in 1975 and are registered under a Regional Rural
Bank Act, 1976.
 RRBs are joint ventures between the Central government (50%), State
government (15%), and a Commercial Bank (35%).
 196 RRBs have been established from 1987 to 2005.
 From 2005 onwards government started merger of RRBs thus reducing the
number of RRBs to 82
 One RRB cannot open its branches in more than 3 geographically connected
districts.

5.Specialized Banks
Certain banks are introduced for specific purposes only. Such banks are called
specialized banks. These include:

 Small Industries Development Bank of India (SIDBI) – Loan for a small-

scale industry or business can be taken from SIDBI. Financing small
industries with modern technology and equipment is done with the help of
this bank
 EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or
other financial assistance with exporting or importing goods by foreign
countries can be done through this type of bank
  National Bank for Agricultural & Rural Development (NABARD) – To get
any kind of financial assistance for rural, handicraft, village, and agricultural
development, people can turn to NABARD.

6.Small Finance Banks

This type of bank looks after the micro industries, small farmers, and the
unorganized sector of the society by providing them loans and financial
assistance. These banks are governed by the central bank of the country.
Given below is the list of the Small Finance Banks in our country:

 AU Small Finance Bank

 Equitas Small Finance Bank
 Jana Small Finance Bank
 Northeast Small Finance Bank
 Capital Small Finance Bank
 Fincare Small Finance Bank

7.Payments Banks
A newly introduced form of banking, the payments bank has been conceptualized
by the Reserve Bank of India. People with an account in the payments bank can
only deposit an amount of up to Rs.1,00,000/- and cannot apply for loans or credit
cards under this account. Options for online banking, mobile banking, the issue of
ATM, and debit card can be done through payments banks. Given below is a list of
the few payments bank in our country:

 Airtel Payments Bank

 India Post Payments Bank
 Fino Payments Bank
 Jio Payments Bank
 Paytm Payments Bank
 NSDL Payments Bank
Q-10: What are the principal governmental and regulatory policies that govern
the banking sector?
Ans: The Reserve Bank of India Act, 1934 (the RBI Act) and the Banking Regulation
Act, 1949 (the BR Act) are the primary pieces of legislation governing the banking
sector in India.
The RBI Act constituted the Reserve Bank of India (RBI), which is the central bank
of India and the primary regulatory authority for the banking sector. To
implement regulatory policies in India, the RBI Act and the BR Act empower the
RBI to issue rules, regulations, directions and guidelines on a wide range of issues
relating to the banking and financial sector. 
Transactions related to foreign exchange, current and capital account transactions
are also regulated by the RBI by virtue of the powers granted to it under
the Foreign Exchange Management Act, 1999 (FEMA).
There are also other supplementary pieces of legislation regulating the banking
sector, such as:
 The Recovery of Debts Due to Banks and Financial Institutions Act,
1993 (the RDDB Act);
 The Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (the SARFAESI Act);
 The Insolvency and Bankruptcy Code, 2016 (the 2016 Code); and
 The Payment and Settlement Systems Act, 2007 (the PSS Act).

Q-11: What is Monetary Policy and what are the objectives of monetary policy?
Ans: Monetary policy is a set of tools used by a nation’s central bank to control
the overall money supply and promote economic growth and employ strategies
such as revising interest rates and changing bank reserve requirements. The basic
aim of monetary policy is to determine how much money an economy should
have in circulation. The monetary policies of countries may differ, but most major
economies aim for low and stable inflation, and have publicly announced inflation
targets. Here we detail about the three objectives of monetary policy of Reserve
Bank of India (RBI). The three objectives are:
 (1) Price Stability or Control of Inflation,
(2) Economic Growth, and
(3) Exchange Rate Stability.

1)Price Stability or Control of Inflation: It may be noted that each instrument of

economic policy is better suited to achieve a particular objective. Monetary policy
is better suited to the achievement of price stability, that is, containing inflation.
Faced with multiple objectives that are equally relevant and desirable, there is
always the problem of assigning to each instrument the most appropriate target
or objective of the various objectives, price stability is perhaps the one that can
be pursued most effectively by monetary policy. In a developing country like
India, acceleration of investment activity in the context of supply shocks in the
agricultural sector tends to be accompanied by pressures on prices and,
therefore, monetary policy has much to contribute in the short-run management.
Thus, achieving price stability has remained the dominant objective of monetary
policy of Reserve Bank of India. It may however be noted that price stability does
not mean absolutely no change in price at all. In a developing economy like India
where structural changes take place during the process of economic growth some
changes in relative prices do occur that generally put upward pressure on prices.
2)Economic Growth: Promoting economic growth is another important objective
of the monetary policy. In the past Reserve Bank has often been criticized that it
pursued the objective of controlling inflation and achieving price stability and
neglected the objective of promoting economic growth. Monetary policy can
promote economic growth through ensuring adequate availability of credit and
lower cost of credit. There are two types of credit requirements of businesses.
First, they have to finance their requirements of working capital and for importing
needed raw materials and machines from abroad. Secondly, they need credit for
financing investment in projects for building fixed capital. Easy availability of
credit at low interest rate stimulates investment and thereby quickens economic
growth. However, during the periods of high inflation, Reserve Bank followed a
tight monetary policy under which Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR) were raised to restrict the availability of credit for private
sector. Besides, by raising bank rate and repo rate at which banks borrow from
Reserve Bank of India lending rates of interest of banks were kept at high levels
which discouraged private investment.
3)Exchange Rate Stability: Until 1991, India followed fixed exchange rate system
and only occasionally devalued the rupee with the permission of IMF. The policies
of floating exchange rate and increasing openness and globalization of the Indian
economy, adopted since 1991, have made the exchange rate of rupee quite
volatile.
The changes in capital inflows and capital outflows and changes in demand for
and supply of foreign exchange, particularly US dollar, arising from the imports
and exports cause great fluctuations in the foreign exchange rate of rupee. In
order to prevent large depreciation and appreciation of foreign exchange rate
Reserve Bank has to take suitable monetary measures to ensure foreign exchange
rate stability.
Owing to the fixed exchange rate system prior to 1991 the concern about foreign
exchange rate had not played a significant role in the formulation of monetary
policy.
Today, the exchange rate of rupee is determined by demand for and supply of
foreign exchange (say, US dollar). When there is mismatch between demand for
and supply of foreign exchange, external value of rupee changes.

Q-12: What is the process of making monetary policy by RBI?

Ans: In India, monetary policy of the Reserve Bank of India is aimed at managing
the quantity of money in order to meet the requirements of different sectors of
the economy and to increase the pace of economic growth.
The process of making monetary policy in India is an elaborate one, and there are
a number of technical, analytical, institutional, and dynamic inputs that go into
the process. Using any of these instruments will lead to change in the interest
rate, or the money supply in the economy. Monetary policy can be expansionary
and contractionary in nature.
 A. Firstly, the whole process is directed by the Governor of the RBI, assisted by
deputy governors and guided by deliberations of the board of directors.
B. Monetary, economic, and financial conditions are reviewed every week by
a committee of the board of directors so that advices are given or decisions
are taken approximately.
C. Periodical consultations with academics, market participants, and financial
intermediaries take place through standing committees and Ad Hoc groups,
in addition to mechanisms such as resource management discussions with
banks.
D. The financial market committee focuses on day-to-day market operations
and tactics while a monetary policy strategy group analyzes strategies on an
on-going basis.
E. In order to ensure coordination, periodical consultations with Government,
mainly, with the ministry of Finance are made.
F. The stance on the monetary policy and the rationale are communicated to
the public mainly through the annual monetary policy statement by the
governor of the RBI in April and the mid-term review in October.
As part of the ongoing process of reforms, one of the advisory groups assessed
the extent to India's compliance with international standards and codes in the
area of "Transparency in Monetary and Fiscal policies." The group while noting
that the policies and operations of the RBI largely conform to the IMF code, made
a set of recommendations for making India fully compliant with the code.

Q-13: What are the instruments of monetary policy of Reserve Bank of India?
Ans: Bank rate is the rate at which the Reserve Bank of India rediscounts certain
defined bills. The bank rate policy has been defined as 'the varying of the terms
and of the conditions, in the broadest sense, under which the market may have
temporary access to the central bank through discount of selected short-term
assets or through secured advances'. By manipulating the bank rate, the Reserve
Bank can, to a certain extent, regulate commercial bank credit and the general
credit situation in the country. At the very beginning it may be pointed out that
the bank rate policy has not been very successful in the past, the bank rate was
maintained constantly at 3%. The announcement of the bank in 1951 increasing
the bank rate to a three and half percent marks. Since 1951, the RBI resorted to
changes in bank rate from time to time in order to exercise a restraining influence
in an environment of serious imbalance in the economy. During the pre-reform
period (prior to early 1990s), the bank rate had only a limited role as a monetary
policy instrument. After that, bank rate was activated and made a signaling and
reference rate in April 1997 linking it to the rates at which accommodation is
provided by the RBI. Since then, changes in bank rate are seen as an integral part
of the monetary policy stance of the RBI announced from time to time and
provide a direction to general level of interest rates in the system as well as the
cost and availability of credit in the economy.

Q-14: What are the objectives of exchange control of RBI?

Ans: The Reserve Bank of India (RBI) has implemented exchange control measures
with the aim of achieving various objectives related to managing the country's
foreign exchange reserves, promoting economic growth, and maintaining stability
in the foreign exchange market. The objectives of exchange control of RBI include:
1. Regulating foreign exchange transactions: RBI aims to regulate the flow of
foreign exchange into and out of the country, ensuring that it is consistent with
the country's economic policies and objectives. This includes regulating imports,
exports, and capital flows to maintain balance in the foreign exchange market.
2.Conservation of foreign exchange reserves: RBI aims to conserve the country's
foreign exchange reserves by restricting the use of foreign exchange for non-
essential purposes. This helps to maintain a stable level of reserves and provides a
buffer against external shocks.
3.Promotion of exports: RBI aims to promote exports by providing incentives
such as subsidized exchange rates, export credits, and other facilities. This helps
to boost the country's foreign exchange earnings and improve the balance of
payments.
4.Control of inflation: RBI uses exchange controls as a tool to control inflation by
regulating the supply of foreign exchange in the economy. By restricting the flow
of foreign exchange, RBI can limit the availability of foreign goods and services,
which can help to reduce inflationary pressures.
5.Monitoring of foreign investment: RBI aims to monitor foreign investment in
the country and ensure that it is consistent with the country's economic policies
and objectives. This includes regulating the entry and exit of foreign capital, and
ensuring that foreign investment does not pose a threat to national security or
sovereignty. Overall, the objectives of exchange control of RBI are aimed at
maintaining stability in the foreign exchange market and promoting economic
growth and development in the country.

Q-15: What is the qualitative credit control of RBI?

Ans: Under the banking Regulation Act, 1949, the RBI of vested with powers to.
control the entire banking system. In of Section 21 of the Act, the RBI may give
directions to bank- which they are following companies, which they bound to
comply with. The Section run as follows:
1. Where the Reserve bank is satisfied that it is NEC the necessary or expedient, in
public interest so to do, it may determine the policy in relation to advances to be
followed by banking companies generally company in particular by any banking.
2. The Reserve Bank may give direction may be banking companies, either
generally to any banking company or group of banking companies.
3. This reduces the banks credit exposure unfavorable industries. This device also
regulates bill rediscounting.
4. The central bank (RBI) can punish and impose sanctions & on banks for not
following the guidelines provided under, the monetary policy. Where the Reserve
Bank is satisfied that:
 In the national interest; or
 To prevent the affairs of any banking company being conducted in a
manner detrimental to the interests of depositors or in a manner
prejudicial to the interests of the banking company; or
 To secure the proper management of any banking company generally; it is
necessary to issue directions to banking companies generally or to any
banking company in particular, it may, from time to time, issue such
directions as it deems fit, and the banking companies or the banking
 company, as the case may be, shall be bound to comply with such
directions.
5. The Reserve Bank may, on representation made to it or on its own motion,
modify or cancel any directive issued under sub section (1), and in so modifying or
canceling any directive may impose such conditions as it thinks fit, subject to
which the modification or cancellation shall have effect. Further, under Section 36
(1) (a) of the RBI Act, the RBI is empowered to caution or prohibit banking
companies generally, or any banking company in particular against entering into
any particular transaction or class of transactions. It may call for periodical as well
as ad hoc returns and in the public interest may also publish such information as it
deems fit.