BANKING DRIVE: RBI’S ROLE AS A BANKER’S BANK
In continuation with new series i.e. “Banking Drive” today
we are providing an article on RBI’s Role as Banker’s Bank, read the article to
know the important function of RBI as a Banker’s Bank. It is expected that you
may face questions on this topic during IBPS PO V interview, so this article
will help you in exploring details and few initiatives related to RBI’s
Reserve Bank of India acts as Banker’s Bank. Like individual
consumers, businesses and organisation of all kinds, banks need their own
mechanism to transfer funds and settle inter-bank transaction such as borrowing
from and lending to other banks and customer transactions. As the banker’s
bank, the Reserve Bank fulfills this role.
As Banker’s Bank, Reserve bank of India enables smooth and
swift clearing and settlements of inter-bank transactions. RBI provides
efficient means of funds transfer for all banks. It also enables banks to
maintain their accounts with RBI for statutory reserve requirements and
maintenance of transaction balances.
In order to facilitate a smooth inter-bank transfer of
funds, or to make payments and to receive funds on their behalf, banks need a
common banker. By providing the facility of opening accounts for banks, the
Reserve Bank becomes this common banker, known as ‘Banker to Banks’ function.
How RBI performed the function of Banker’s Bank
The RBI performed the function of Banker’s Bank through the
Deposit Accounts Department (DAD) at the Reserve Bank’s Regional offices. The
Department of Government and Bank Accounts oversees this function and
formulates policy and issues operational instructions to DAD.
(RBI has 19 regional offices, most of them in state capitals
and 9 Sub-offices.).
CENTRALISED FUNDS MANAGEMENT SYSTEM
The Reserve Bank has also introduced the Centralised Funds
Management System (CFMS) to facilitate centralised funds enquiry and transfer
of funds across DADs. This helps banks in their fund management as they can
access information on their balances maintained across different DADs from a
single location. Currently, 75 banks are using the system and all DADs are
connected to the system.
The Reserve Bank facilitates remittance of funds from a
bank’s surplus account at one location to its deficit account at another. Such
transfers are electronically routed through a computerised system called
e-Kuber. The computerisation of accounts at the Reserve Bank has greatly
facilitated banks’ monitoring of their funds position in various accounts across
different locations on a real-time basis.
Why banks are allowed to open their account in RBI
The Reserve Bank continuously monitors operations of banks
accounts to ensure that defaults do not take place. Among other provisions, the
Reserve Bank stipulates minimum balances to be maintained by banks in their
accounts. Since banks need to settle transactions with each other occurring at
various places in India, they are allowed to open accounts with different
regional offices of the Reserve Bank.
LENDER OF LAST RESORT
As a Banker to Banks, the Reserve Bank also acts as the
‘lender of the last resort’. 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. The
Reserve Bank extends this facility to protect the interest of the depositors of
the bank and to prevent possible failure of the bank, which in turn may also
affect other banks and institutions and can have an adverse impact on financial
stability and thus on the economy.
As Banker’s Bank, the Reserve Bank of India focuses on:
1. Enabling smooth, swift and seamless clearing and
settlement of inter-bank.
2. Providing an efficient means of funds transfer for banks.
3. Enabling banks to maintain their accounts with the
Reserve Bank for statutory reserve requirements and maintenance of transaction
4. Acting as a lender of last resort.
According to the Reserve Bank of India Act, 1934 and the
Banking Regulation Act, 1949 (as amended from time to time), the RBI enjoys
extensive powers of supervision, regulation, and control over commercial and
The Bank’s regulatory functions relating to banks cover
their establishment (i.e. licensing), branch expansion, liquidity of their
assets, management and methods of working, amalgamation, reconstruction and
liquidation. The control by the Bank is exercised through periodic inspec¬tion
of banks and follow-up action and by calling for returns and other information
from them. The objective of such supervision and control is to ensure the
development of a sound banking system in the country.