ROLE OF THE RESERVE BANK OF INDIA

INDEX

CHAPTER TOPIC PAGE NO

1 INTRODUCTION 1-6
Introduction of Reserve Bank of India 1
Definitions of RBI 2
Establishment of RBI 3
Origin timeline and History of RBI 4-5
Preamble and Legal Framework of RBI 6
2 ORGANISATION AND FUNCTIONS 7-14
Organisation Structure 7
Central Board 8
Objectives of RBI 9
Role / Functions of RBI 10-13
Objectives of the study 14
3 REVIEW OF THE LITERATURE 15-17
4 DATA ANALYSIS 18-30
5 CONCLUSION 31
6 BIBLIOGRAPHY 32
7 ANNEXURE 33-35
 CHAPTER 1
INTRODUCTION
 INTRODUCTION OF RESERVE BANK OF INDIA

Reserve Bank of India is also known as India’s Central Bank. It was established
on 1st April 1935. Although the bank was initially owned privately, it has been
taken up the Government of India ever since, it was nationalized. The bank has
been vested with immense responsibility of reviewing and reconstructing the
economic stability of the country by formulating economic policies and
ensuring a proper exchange of currency. In this regard, the Reserve Bank of
India is also known as the banker of banks.
The Central Office of the Reserve Bank was initially established in Calcutta but
was permanently moved to Mumbai in 1937. The Central Office is where the
Governor sits and where policies are formulated.

The Preamble of the RBI describes the basic functions of the Reserve Bank 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.”

1
 DEFINITIONS OF CENTRAL BANK OF INDIA

Today every country has such an apex institution called Central Bank. The
Central Bank operating in India is the Reserve Bank of India.

Professor Sayers has defined Central Bank’s business as one of controlling the
commercial banks in such a way as general monetary policy of the state.

According to De Kock, “A Central Bank is a bank which constitutes the apex of

the monetary and banking structure. It is the lender of last resort and has
monopoly of Note Issue.”

According to Samuelson, “A Central Bank is a bank of bankers. Its duty is to

control the monetary base and through control of this high powered money, to
control the community’s supply of money.”

2
 ESTABLISHMENT OF RESERVE BANK OF INDIA

The Reserve Bank of India (RBI) is India’s central bank, also known as the
banker’s bank. The RBI controls monetary and other banking policies of the
Indian government. The Reserve Bank of India (RBI) was established on April
1, 1935, in accordance with the Reserve Bank of India Act, 1934. The Reserve
Bank is permanently situated in Mumbai since 1937.

The Central Office of the Reserve Bank was initially established in Calcutta 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 nationalization in 1949, the Reserve

Bank is fully owned by the Government of India.

3
 HISTORY OF RESERVE BANK OF INDIA

Origin Timeline
1926: The Royal Commission on Indian Currency and Finance recommended the
creation of a central bank for India.

1927: A bill to give effect to the above recommendation was introduced in the
Legislative Assembly. But it was later withdrawn due to lack of agreement among
various sections of people.

1933: The White Paper on Indian Constitutional Reforms recommended the

creation of a Reserve Bank. A fresh bill was introduced in the Legislative
Assembly.

1934: The Bill was passed and received the Governor General’s assent

1935: The Reserve Bank commenced operations as India’s central bank on April
1 as a private shareholders’ bank with a paid up capital of rupees five crores
(rupees fifty million).

1942: The Reserve Bank ceased to be the currency issuing authority of Burma
(now Myanmar).

1947: The Reserve Bank stopped acting as banker to the Government of Burma.

1948: The Reserve Bank stopped rendering central banking services to Pakistan.

4
1949: The Government of India nationalized the Reserve Bank under the Reserve
Bank (Transfer of Public Ownership) Act, 1948.

Currently, the Bank’s Central Office, located at Mumbai, has twenty-seven

departments. These departments frame policies in their respective work areas.
They are headed by senior officers in the rank of Chief General Manager.

Historic Details

The origins of the Reserve Bank of India can be traced to 1926 when the Royal
Commission on Indian Currency and Finance – also known as the Hilton-Young
Commission – recommended the creation of a central bank for India to separate
the control of currency and credit from the Government and to
augment banking facilities throughout the country. The Reserve Bank of India Act
of 1934 established the Reserve Bank and set in motion a series of actions
culminating in the start of operations in 1935. Since then, the Reserve Bank’s role
and functions have undergone numerous changes, as the nature of the Indian
economy and financial sector changed.

There were several causes for the creation of a central bank. Though the rupee
was the common currency, there were several species of rupee coins of different
values in circulation. The authorities, however, endeavored to evolve a standard
coin. For many years, the Sicca of Murshidabad was, in theory, the standard coin,
and the rates of exchange of the various rupees in terms of the Sicca rupee varied,
the discount being called the batta.

The Government received enquiries from the Collectors as to the batta they should
charge on the different species they received from zamindars and farmers. The
proposed bank was to fix the value, in Sicca rupees, of the bills it had to issue in
return for the money received from the Collectors, on the basis of the same batta.
Thus, the bank was expected to assist in stabilizing inland exchange and in
enforcing the Sicca coin as the standard coin of the Provinces.

The history of Reserve Bank of India not only traces the evolution of the Central
Banking in India but also serves as a work of reference and an important
contribution to the literature on monetary, central banking and development
history of India.

5
 PREAMBLE OF RESERVE BANK OF INDIA

The Preamble of the Reserve Bank of India describes the basic functions of the
Reserve Bank 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; 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.”

In simple words, The Preamble of the Reserve Bank of India describes the basic
functions of the Reserve Bank as:

 Regulating the issue of Banknotes

 Securing monetary stability in India
 Modernizing the monetary policy framework to meet economic challenges

LEGAL FRAMEWORK

The Reserve Bank of India comes under the purview of the following Acts:

 Reserve Bank of India Act, 1934

 Public Debt Act, 1944
 Government Securities Regulations, 2007
 Banking Regulation Act, 1949
 Foreign Exchange Management Act, 1999
 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002
 Credit Information Companies(Regulation) Act, 2005
 Payment and Settlement Systems Act, 2007
 Factoring Regulation Act, 2011

6
 CHAPTER 2

ORGANISATION AND FUNCTIONS

ORGANISATION STRUCTURE OF RBI

7
ORGANISATION STRUCTURE: CENTRAL BOARD OF DIRECTORS
 CENTRAL BOARD

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 Governors

A. Non-Official Directors

Nominated by Government: ten Directors from various fields and two

government Official

B. Others

Four Directors – one each from four local boards

C. Functions : General superintendence and direction of the Bank's

affairs

8
 OBJECTIVES OF RBI

 To manage the monetary and credit system of India.

 To stabilize internal and external value of rupee.

 To balance and systematically develop the banking sector in India

 To develop organized money market in India

 To properly arrange for agricultural and industrial finance.

 To manage public debt.

 To establish monetary relations with other countries and international financial

institutions.

 To centralize cash reserves of commercial banks.

 To maintain balance between the demand and supply of currency. The objective
of RBI is to ensure stability of interest and exchange rates to provide liquidity and
an adequate supply of currency and credit for real sector.

 To ensure bank penetration and safety of depositors’ fund.

 To promote and develop financial institutions and markets in India.

 To play a crucial role in growth of Indian economy.

9
 ROLE / FUNCTIONS OF RBI

The various functions the RBI performs can be broadly classified into three
categories as follows:

A. TRADITIONAL FUNCTIONS
Traditional functions are those functions which every central bank of each
nation performs all over the world. Basically these functions are in line with
the objectives with which the bank is set up. It includes fundamental functions
of the Central Bank. They comprise the following tasks.
1. Issue of Currency Notes: The RBI has the sole right or authority or
monopoly of issuing currency notes except one rupee note and coins of smaller
denomination. These currency notes are legal tender issued by the RBI.
Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The
RBI has powers not only to issue and withdraw but even to exchange these
currency notes for other denominations. It issues these notes against the security
of gold bullion, foreign securities, rupee coins, exchange bills and promissory
notes and government of India bonds.
2. Banker to other Banks: The RBI being an apex monitory institution has
obligatory powers to guide, help and direct other commercial banks in the
country. The RBI can control the volumes of banks reserves and allow other
banks to create credit in that proportion. Every commercial bank has to maintain
a part of their reserves with its parent's viz. the RBI. Similarly in need or in
urgency these banks approach the RBI for fund. Thus it is called as the lender of
the last resort.
3. Banker to the Government: The RBI being the apex monitory body has to
work as an agent of the central and state governments. It performs various
banking function such as to accept deposits, taxes and make payments on behalf
of the government. It works as a representative of the government even at the
international level. It maintains government accounts, provides financial advice
to the government. It manages government public debts and maintains foreign
exchange reserves on behalf of the government. It provides overdraft facility to
the government when it faces financial crunch.

10
4. Exchange Rate Management: It is an essential function of the RBI. In order
to maintain stability in the external value of rupee, it has to prepare domestic
policies in that direction. Also it needs to prepare and implement the foreign
exchange rate policy which will help in attaining the exchange rate stability. In
order to maintain the exchange rate stability it has to bring demand and supply
of the foreign currency (U.S Dollar) close to each other.
5. Credit Control Function: Commercial bank in the country creates credit
according to the demand in the economy. But if this credit creation is unchecked
or unregulated then it leads the economy into inflationary cycles. On the other
credit creation is below the required limit then it harms the growth of the
economy. As a central bank of the nation the RBI has to look for growth with
price stability. Thus it regulates the credit creation capacity of commercial
banks by using various credit control tools.
B. DEVELOPMENTAL /POMOTIONAL FUNCTIONS
Along with the routine traditional functions, central banks especially in the
developing country like India have to perform numerous functions. These
functions are country specific functions and can change according to the
requirements of that country. The RBI has been performing as a promoter of the
financial system since its inception. Some of the major development functions
of the RBI are maintained below.
1. Development of the Financial System: The financial system comprises the
financial institutions, financial markets and financial instruments. The sound
and efficient financial system is a precondition of the rapid economic
development of the nation. The RBI has encouraged establishment of main
banking and non-banking institutions to cater to the credit requirements of
diverse sectors of the economy.
2. Development of Agriculture: In an agrarian economy like ours, the RBI has
to provide special attention for the credit need of agriculture and allied
activities. It has successfully rendered service in this direction by increasing the
flow of credit to this sector. It has earlier the Agriculture Refinance and
Development Corporation (ARDC) to look after the credit, National Bank for
Agriculture and Rural Development (NABARD) and Regional Rural Banks
(RRBs).

11
3. Provision of Industrial Finance: Rapid industrial growth is the key to faster
economic development. In this regard, the adequate and timely availability of
credit to small, medium and large industry is very significant. In this regard the
RBI has always been instrumental in setting up special financial institution
such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.
4. Provisions of Training: The RBI has always tried to provide essential
training to the staff of the banking industry. The RBI has set up the bankers'
training colleges at several places. National Institute of Bank Management i.e
NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e
CAB are few to mention.
5. Collection of Data: Being the apex monetary authority of the country, the
RBI collects process and disseminates statistical data on several topics. It
includes interest rate, inflation, savings and investments etc. This data proves to
be quite useful for researchers and policy makers.
6. Publication of the Reports: The Reserve Bank has its separate publication
division. This division collects and publishes data on several sectors of the
economy. The reports and bulletins are regularly published by the RBI. It
includes RBI weekly reports, RBI Annual Report, Report on Trend and
Progress of Commercial Banks India., etc. This information is made available to
the public also at cheaper rates.
7. Promotion of Banking Habits: As an apex organization, the RBI always
tries to promote the banking habits in the country. It institutionalizes savings
and takes measures for an expansion of the banking network. It has set up many
institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-
1964, NABARD-1982, NHB-1988, etc. These organizations develop and
promote banking habits among the people. During economic reforms it has
taken many initiatives for encouraging and promoting banking in India.
8. Promotion of Export through Refinance: The RBI always tries to
encourage the facilities for providing finance for foreign trade especially
exports from India. The Export-Import Bank of India (EXIM Bank India) and
the Export Credit Guarantee Corporation of India (ECGC) are supported by
refinancing their lending for export purpose.

12
C. SUPERVISORY FUNCTIONS
The reserve bank also performs many supervisory functions. It has authority to
regulate and administer the entire banking and financial system. Some of its
supervisory functions are given below.
1. Granting license to banks: The RBI grants license to banks for carrying its
business. License is also given for opening extension counters, new branches,
even to close down existing branches.
2. Bank Inspection: The RBI grants license to banks working as per the
directives and in a prudent manner without undue risk. In addition to this it can
ask for periodical information from banks on various components of assets and
liabilities.
3. Control over NBFIs: The Non-Bank Financial Institutions are not
influenced by the working of a monitory policy. However RBI has a right to
issue directives to the NBFIs from time to time regarding their functioning.
Through periodic inspection, it can control the NBFIs.
4. Implementation of the Deposit Insurance Scheme: The RBI has set up the
Deposit Insurance Guarantee Corporation in order to protect the deposits of
small depositors. All bank deposits below Rs. One lakh are insured with this
corporation. The RBI work to implement the Deposit Insurance Scheme in case
of a bank failure.
5. Reserve Bank of India's Credit Policy: The Reserve Bank of India has a
credit policy which aims at pursuing higher growth with price stability. Higher
economic growth means to produce more quantity of goods and services in
different sectors of an economy; Price stability however does not mean no
change in the general price level but to control the inflation. The credit policy
aims at increasing finance for the agriculture and industrial activities. When
credit policy is implemented, the role of other commercial banks is very
important. Commercial banks flow of credit to different sectors of the economy
depends on the actual cost of credit and arability of funds in the economy.

13
 OBJECTIVES OF THE STUDY

The major objectives of the study are to assess the impact of reform measures
on the efficiency, profitability and overall performance of RBI.

The specific objectives of the study are;

1. To find out some glaring reasons of lower efficiency in RBI and suggest
ways and means to improve the efficiency of this RBI.

2. To make comparative analysis of the financial performance of RBI and other

Commercial Banks

3. To suggest future prospect for the RBI.

4. To analyze the financial performance of Reserve Bank of India.

5. To analyze the financial performance of ICICI bank.

6. To compare State Bank of India and ICICI bank on the basis of their financial
performance.

14
 CHAPTER 3

REVIEW OF THE LITERATURE

 REVIEW OF THE LITERATURE

RBI is a prime mover in the economic development of a nation and research is

so essential to improve its working results. The management without any right
policy is like "building a house on sand". It means an effective management
always needs a thorough and continuous search into the nature of the reasons
for, and the consequences of organization. In line with this, some related earlier
studies conducted by individuals and institutions are reviewed to have an in-
depth insight into the problem and exploring the reformation of banking policy.
The main theme and essence of few relevant studies are presented below.

Divatia and Venkatachalam (1978), in their study of operational efficiency

and performance. They recognized the problems in creating such a composite
index, some of which will be due to understanding of the term: operational
efficiency. This study divided the chosen indicators into operational efficiency
in terms of productivity, operational efficiency in terms of social objectives, and
profitability. The approach was taking to the approach profitability of banks
proposed to create a composite index that would explore certain indicators that
would suitably represent varied aspects of banks of PEP Committee.

Venkatachalam (1979), give the reasons for erosion in bank profits and
profitability in recent years. This study is purely based on published figures.
They argued that there is a trade-off between social obligations to be performed
by the banks and increasing profits.

Singh (1990), has studied the productivity in the Indian Banking Industry. He
has studied Intra-bank, Inter-Bank groups and inter-bank groups productivity of
public sector banks and SBI group. He has analyzed branch productivity,
peremployee productivity, and financial parameters at constant prices. But his
study does not consider nationalized banks and causes of varying productivity
in banks.

15
Satyamurty (1988), stressed the imperative need for improving efficiency,
productivity and profits, profitability and productivity applicable to the banking
industry. It is agreed by the bank managements that the pressure on the
profitability is more due to the factors beyond their control. He has suggested
the technique of ratio analysis to evaluate the profit and profitability
performance of banks. He is of the opinion that endeavors should be made to
improve the spread performance through better funds management. In another
paper, he has made customer service in banks to help them in accelerating their
consolidation process. He suggested the action points that may be paid
attention. Satyamurty clarified the concepts of an attempt to bring out the
factors generally affecting efficiency and productivity. It recognized that
business per employee and relation of average business to establishment
expenses are the most popular indicators of productivity. However, it was
favoured a disaggregated approach for measuring the efficiency and
productivity of banks. It was favoured that the performance of a bank could be
assessed in the different areas of business development at a disaggregated level
in terms of profitability, income generated, costs involved and customer
services. The level of desegregation may be decided in the light of-guidelines of
RBI and government of India from time to time.

Sarker and Das (1997), compared performance public, private and foreign
banks for the year 1994-95 by using measures of profitability, productivity and
financial management. They found that Public Sector Banks compare poorly
with 19 Chapter 1 Introduction the other two categories. However, they caution
that no firm inference can be derived from a comparison done for a single year.

Abhiman Das (1997), stated that "State bank group is more efficient that the
nationalized banks. The main source of inefficient was technical in nature,
rather than allocative inefficiency in public sector banks is due to under
utilization or wasting of resources rather than incorrect input combination.
Public sector banks improved +their allocative efficiency significantly in the
post liberalization period".

Das (1997), compares performance among public sector banks for three years in
the post-reform period, 1992, 1995 and 1998. He enalysed a certain
convergence in performance. He also find that while there is a welcome increase
in emphasis on non-interest income, banks have tended to show risk-averse
behaviour by opting for risk-free investments over risky loans".

16
Shri S.R. Mittal (2001), Chairman of Committee on Intemet Banking,
Constituted by R.B.I, strongly urged to use the fast growing Internet medium in
banking transactions. The Government of India set up a nine-member
committee under the chairmanship of Narasimham, former Governor of Reserve
Bank of India. He is to examine the structure and functioning of the existing
financial system of India and suggest financial sector reforms. The report of the
committee was tabled in the Parliament on December 17, 1991 .The Finance
Ministry of Govt, of India appointed once again a committee under the
chairmanship of Sri M. Narasimhan to recommend reforms for Indian banking
sector. Reviewing the developments that have taken place during the period
1991-98, the committee made recommendations for reforming the banking
sector. The Report was submitted in April 1998.

Pramod Guptha (2003), "Both public and private banks are spending large
amounts of money on technology to provide innovative products and services to
their customers with more convenience and satisfaction. Technology is reducing
the cost of transaction and helping to increase customer base and enable wider
reach".

Shri M.S. Verma (1999), Chairman, Working Group on Restructuring Weak

Public Sector Banks, Constituted by R.B.I, submitted its report in 1999. MS.
Verma, suggested many measures which include a major aspect namely weak
PSBs should be allowed for Public issue.

17
 CHAPTER 4

DATA ANALYSIS
 RECENT ACHIEVEMENTS OF RBI

1. Flexible Monetary Policy:

The Reserve Bank has adopted a flexible monetary policy. It has introduced
changes in monetary regulations keeping in view the seasonal character of
Indian money market. The pressure of seasonal demand has been adequately
met.

On account of it the seasonal fluctuations in money rates have been negligible.

2. Stable Structure of Interest Rates:

The interest rate policy of the Reserve Bank has resulted into a relatively stable
structure of interest rates in the economy. The bank initially adopted cheap
money policy from its beginning.

The bank rate remained unchanged at the low level of 3 percent upto 1951.
Some upward changes have been made in subsequent years to combat
inflationary pressure. The Bank rate has remained substantially lower than the
market rate of interest. The bank rate has remained more or less stable.

3. Modern Banking and Credit structure:

The Reserve Bank has succeeded in building up a sound modern banking and
credit structure. The Bank enjoyed vast supervisory powers which enabled it to
guide the development of banking on sound lines. Training of bank personnel
has improved their efficiency. The geographical and fundamental coverage of
the banking has also increased substantially.

4. Cheap Remittance Facilities:

The Reserve Bank has introduced very cheap remittance facilities. These have
been widely used by the commercial banks, the Government and cooperative
banks.

5. Successful Management of Public Debt:

The Reserve Bank has successfully managed the public debt. It has floated
loans for the Government at low rates of interest. It has helped in raising funds
for the expansion of public sector in the economy. It has also provided short
term advances to the Government.

18
6. Exchange Stability:
The Reserve Bank has succeeded in maintaining the exchange stability to a
large extent. The Bank has maintained the exchange value of the rupee at a
relatively higher rate than would have prevailed in the market.

It has made judicious use of exchange control measures to keep the demand for
foreign exchange within the limits of the available supplies.

7. Enhanced Public Confidence in Banking Sector:

The Reserve Bank has taken appropriate measures to enhance public confidence
in the banking systems. Bank strictly supervises the working of the Commercial
banks so as to avoid their failures.

The Deposits Insurance System has also been introduced to protect the interests
of the depositors. It has proved an important factor in promoting depositors’
confidence in banks.

8. Central Authority of Indian Money Market:

The Reserve Bank has functioned as the central authority in the Indian money
market. It has supervised and controlled commercial banks, cooperative banks
and non-banking finance companies accepting deposits from the public.

9. Development of Bill Market:

The Reserve Bank has made serious efforts to develop a sound bill market in
India. It has imparted a substantial degree of elasticity to the credit structure of
the country by introducing the several Bill Market Schemes.

10. Rational Allocation of Credit:

The Reserve Bank has adopted measures to distribute credit to all productive
sectors in accordance with social objectives and priorities. The scheme of
Differential Interest Rates was introduced to grant loans at concessional rates to
weaker sections of the society. The priority sector including agriculture, small
scale industries, exports, trades etc., get credit at low rate of interest.

19
11. Monetary Stability:
The Bank has made a rational use of quantitative and qualitative measures of
credit control to maintain monetary stability. These controls were generally
employed in the direction of greater restraint in the context of persistent
imbalances in the economy. It has tried to control the pace of monetary
expansion.

12. Contribution to Economic Development:

The Reserve Bank has played an active role in promoting economic
development of the Indian economy. It has helped in setting up a sound
structure of Development Banking. Several Industrial, Agricultural, Export and
other specialised financial institutions have been established.

The Reserve Bank has helped in building up a well-differential structure of

financial institutions to cater to the requirements of the different sectors of the
economy.

20
 MAIN FAILURES FACED BY THE RBI

Looking at the performance of Reserve Bank of India, we can state with a sense
of pride that Reserve Bank of India has appreciably contributed to the growth
and stability of the economy. Yet there have been certain failures of the Bank
too.

1. Lack of Adjustment in the Money Market:

Reserve Bank has succeeded in controlling the organised sector of the Money
Market, but not the unorganised one. It has virtually failed in regulating or
controlling the activities of rural money lenders and other indigenous bankers.

These bankers just do not come within the scope of the Reserve Bank.

2. Lack of Uniformity in the Rate of Interest:

Because of the lack of control on different sectors of the money market,
different rates of interest continue to prevail. Outside the organised sector of the
money market, rates of interest are exorbitantly higher than the bank rate.
Reserve Bank has rather miserably failed in this regard.

3. Lack of Bill Market:

Reserve Bank prepared a plan for the development of Bill Market in 1952. But
till date there is no independent and organised widespread bill market in India.
Bill Market in India does not receive first-rate Discountable Bills.

4. Insufficient Availability of Agricultural Credit:

Despite the fact that lot of steps have been initiated by the Reserve Bank to
provide enough agricultural credit, its availability continues to be far behind its
requirement. Agricultural credit it still being dominated by rural money lenders
and other indigenous bankers who charge very high interest rates.

5. Insufficient Banking Facility:

During 46-years, after independence, Reserve Bank has tried to spread banking
activity in all parts of the country. Yet it is not sufficient in view of the large
size of population. Also, most of the banking activity is concentrated in urban
areas. People in small villages and sub-urban areas still deprived of the banking
facility.

21
6. Instability in the Internal Value of the Rupee:
Instability in the internal value of the rupee has been the biggest failure of the
Reserve Bank. Because of the ever increasing circulation of money, prices have
been rising almost non-stop. Value of the rupee has been reduced to just 7 Paise
during the last 47-years or so.

7. Failure of the Banks:

Reserve Bank has also failed as a Bank of the Bankers its lack of assistance to
the Commercial Banks caused their closure. Between 1939 to 1946 nearly 444
banks failed in the country. Closure of three banks in 1985 is also a notable
point. Failure of the banks erodes faith of the people in the banking system.

8. Failure in Getting Sufficient Share in Foreign Exchange Business for the

Indian Banks:
The Reserve Bank has yet not succeeded in getting the Commercial Banks any
notable foreign exchange business. Foreign exchange business almost continues
to be a monopoly of foreign banks. Some of the Indian Banks have opened their
branches abroad, but not with any notable success so far.

9. Share Scam:
In 1992-93, country witnessed large scale share scam involving hundreds of
crores of rupees. It was a glaring example of the failure of Reserve Bank of
India.

22
Agenda for 2019-20
Introduction of Varnished Banknotes - Field Trial

VIII.21 The Reserve Bank will introduce varnished banknotes of ₹100

denomination on a field trial basis in order to increase the life of Indian banknotes.

Aiding Visually Impaired in Identification of Denomination of Banknotes

VIII.22 The Reserve Bank will develop a mechanism/device for aiding the
visually impaired in identification of denomination of banknotes. Indian
banknotes have several features which enable the visually impaired (colour blind,
partially sighted and blind people) to identify them, viz., intaglio printing and
tactile mark, variable banknote size, large numerals, variable colour,
monochromatic hues and patterns. Once the old series banknotes are withdrawn
from circulation, identification of the new series banknotes will automatically
become easy for the visually impaired. As indicated in the Statement on
Developmental and Regulatory Policies of June 6, 2018, the Reserve Bank has
embarked upon exploring alternative technological solutions to help the visually
impaired in identifying the denomination of banknotes.

Other Areas of Focus

VIII.23 As part of the medium-term strategy framework, the scope for enhancing
manufacturing capacities and indigenisation of banknotes, effecting
improvements in the processing capabilities and logistics for efficient inventory
management of currency and fine-tuning the models for estimation of demand for
banknotes and coins are the areas which would receive increased focus during the
year 2019-20.

Bhartiya Reserve Bank Note Mudran Private Ltd. (BRBNMPL)

VIII.24 BRBNMPL has set up an ink factory at Mysuru with an annual production
capacity of 1,500 metric tonnes, which has started its commercial production
from August 2018. Consequently, dry offset inks, Quickset Intaglio Inks (QSI),
numbering inks and colour shifting inks used in the printing of banknotes are
being manufactured at the Mysuru ink factory. This is a significant milestone
achieved in the long journey towards indigenisation.

23
 EMPIRICAL ESTIMATION AND ANALYSIS

1) Credit growth convergence

Before analysing the factors explaining credit divergence across states RBI
attempt to evaluate whether there has been a convergence in credit growth across
states over the years. To empirically investigate the presence of credit disparity
across Indian states, the β-convergence method was used. The fixed effect panel
regression consisted of 22 major states for 2004-12 with nine year average credit
growth as a dependent variable and the base period credit growth as an
independent variable. The coefficient of β was found to be positive and
statistically insignificant at the conventional level. This finding suggests no
statistically significant evidence of convergence of credit growth across states
over time.

2) Panel regressions

Having established significant divergence in credit off-take across states and

insignificant convergence in them, RBI now attempt to identify some of the
factors that could help in explaining the persisting divergence across Indian
states. The list of variables used to explain credit divergence across states and
their economic rationale is now discussed.

In line with the arguments extended by various authors including Gurley and
Shaw (1967), Goldsmith (1969) and Jung (1986), RBI examine whether the high
growth of a particular state helps in attracting more bank credit to that particular
state and vice versa. Second, amongst the three sectors of agriculture, industry
and services, the share of industry in non-food credit in India has always remained
the highest. However, since there have been studies relating the industrial sector
to credit distribution and in view of the recent emphasis on financial inclusion
and SMEs, RBI considered the share of the non-industrial sector in gross state
domestic product to represent the comparative size of the agriculture and services
sectors in a state.

Further, state deposit is taken as a proxy representing the resources available to

the financial sector for its lending activities in line with the argument proposed
by Beck et al. (2009) and Resende (2008). In today’s world of a technology driven
banking sector, deposits garnered from a particular region need not be a constraint
in extending credit to that particular region.

24
However, the deposit base of a particular region can also be taken as a proxy of
the presence of the banking sector in the region. It is clear that higher the
penetration of the banking sector in a region, greater would be the credit
extended through formal channels. RBI also considered banking centres which
are taken as representative of the level of financial deepening in the state.

Before analysing data for panel regression, RBI consider evaluating their
properties, by running Levin-Lin-Chu Test (LLC) test, which tests the hypothesis
H0: each time series contains a unit root against H1: each time series is stationary.
The finding of this procedure is reported in Table 1.

25
 Table 1: Panel Unit Root: Levin, Lin & Chu Test (Null:
unit root)

Statistic Prob. sections Obs

Log(credit) -8.89 0 22 154

log(deposit) -3.91 0 22 154

log(bank_centres)* 16.15 1 22 154

log(Rail)* 0.07 0.54 18 126

log(electicity) -0.66 0.25 22 153

Power Deficit -7.17 0 21 121

log(crime) -7.23 0 22 154

Note: *: variables found to be difference stationary.

26
In the following section, we use different indicators of state-wise outstanding
credit (both in levels and in standardized form). We start with level of credit (as
it was found stationary) and estimate coefficients of deposit, banking network
and other infrastructure variables. We controlled for gross state domestic
product (GSDP) for the size and cycles of economic activity in the state.
However we used one period lagged value of GSDP to avoid an endogeneity
problem. The model with cross-section and period fixed effect was chosen on
the basis of the F-statistics and redundant fixed effect chi-square test statistics.
The estimated coefficients are reported in Table 2 (Model-1).

As some of the variables (for example, bank centres, railways and electricity
generation) were found to be unit root process, we replace them by first difference
(D(Rail) and D(bank_centres)) and by power_def. The cross-section and period
fixed effect model was identified by the redundant fixed effect likelihood ratio
test; their coefficients are reported in Table 3 (Model-2).

In both of these estimates, the coefficient diagnostics clearly rejected the null of
redundancy of financial inclusion variables and infrastructure variables; the
coefficient and their significance indicate a strong positive relationship between
credit with deposit mobilization and change in the number of banking centres in
line with Beck et al. (2009) and Resende (2008). Further, among the
infrastructure variables, increase in railway operational routes had a positive
coefficient (Model-2). Power deficit had a positive coefficient, which could
indicate increase in the cost of production in the deficit states; however it is only
significant at the 10 per cent level.

27
 Table 2: Panel Estimates Explaining Credit Disbursement
Coefficient Prob. Coefficient Prob. Coefficient Prob.
Cross & Time Cross & Time
Variable Panel GMM
Fixed Fixed
Model-1 Model-2 Model-3
log(credit(-1) 0.28 0.42
C 4.72 0.04 0.75 0.71
L_DEPOSIT 0.13 0.09 0.19 0.08 0.42 0.35
LOG(BANK_CENTERS) 0.74 0.00
DLOG(BANK_CENTERS) 0.71 0.05 2.85 0.19
L_SDP(-1) 0.19 0.07 0.69 0.00 1.26 0.04
SHARE_NonIND 0.001 0.65 0.003 0.43 0.01 0.42
LOG(RAIL) -0.67 0.00
LOG(ELECTRICITY) 0.07 0.06
LOG(CRIME) -0.01 0.69
DLOG(RAIL) 0.26 0.05 0.01 0.97
POWER_DEF 0.003 0.10 -0.003 0.74
CONVICTION_RATE -0.0003 0.68 0.01 0.11
R2 0.97 0.98 0.20
Arellano Bond AR(2)
M-stat 0.01

28
To evaluate the persistence of credit flows or lag dependence of the state credit
factor, we included first lag of credit in the equation and estimated this dynamic
model in the Panel GMM framework, using the Arellano–Bond two-step
procedure. Here 2-period lagged value of credit was used as an instrument for
GMM estimation. However, the estimation results indicate (Table 3, Model-3)
that the coefficient of the lagged credit variable was not significantly different
from zero, the R-square value was low and finally the Arellano-Bond second lag
autocorrelation was found to be serially correlated, indicating that the dynamic
panel is not a good fit in this context.

Indian states vary considerably in terms of their size, population and sectoral
activities. So it is expected that the absolute level of credit disbursement would
be different across states. Empirically, in the fixed effect panel regression, the
state specific scale effect is likely to be addressed by cross-section fixed
dummies. However, to address the scale effect explicitly we used different
transformations of credit disbursement, which include state credit as a ratio of all
India credit (credit_ai), state credit as a ratio to state GDP (credit_gsdp) and credit
growth rate (Gr_credit). The deposit and GSDP was appropriately standardized.
For instance, for estimating credit_ai, credit_gsdp and credit_gr we used state
deposit to the all-India deposit ratio, state deposit to GSDP ratio and deposit
growth respectively. Using each of credit_ai, credit_sdp and credit_gr as
dependent variables and appropriately normalized set of independent variables,
we estimated three sets of panel regressions (Table 3).

The results indicate that deposit mobilization and the banking network play an
important role in credit creation in a particular state. This emphasizes the role of
financial sector inclusion and development in credit creation and is in line with
the findings of Love (2003). The coefficients of increase in rail network remain
positive (except for credit growth equation), state power deficit has a positive
coefficient, and conviction rate has a positive and significant coefficient (Model-
6). The positive coefficient of power deficit (Model-4) though counter-intuitive
could indicate shortage of power in the credit-starved industrial states or increase
in the cost of production due to power shortage; in either case it calls for more
infra-investment in the power sector.

29
 Table 3: Panel Estimate Explaining Credit Dispersion Ratios
State Credit to State Credit to State Credit
all India Credit GSDP Growth
Coefficie Prob Coefficie Prob Coefficie Prob
Variable nt . nt . nt .
Cross & Time Time Fixed Time Fixed
Fixed Effect Effect
Model-4 Model-5 Model-6
C 0.24 0.47 -0.42 0.00 11.76 0.01
LOG(DEP_AI) 0.22 0.07
DEP_GSDP 0.68 0.00
DEP_Growth 0.20 0.04
DLOG(BANK_CENTER
0.90 0.02 2.21 0.00 17.29 0.43
S)
GSDP_AI(-1) 0.15 0.00
GR_GSDP(-1) 0.06 0.53
FD_GSDP -0.04 0.00
SHARE_NonIND 0.0004 0.92 0.01 0.00 0.03 0.58
DLOG(RAIL) 0.27 0.06 -0.09 0.74 -33.53 0.00
POWER_DEF 0.01 0.02 0.0003 0.87 0.09 0.13
CONVICTION_RATE -0.0001 0.24 0.0001 0.86 0.04 0.01
R-square 0.97 0.84 0.46
Note: Models selected on the basis of Redundant Fixed effect likelihood ratio
test.

30
CHAPTER 5
CONCLUSION
 CONCLUSION

Heterogeneity of credit distribution across regions has been attracting

considerable academic and policy attention for a long time. While the studies so
far have only documented credit heterogeneity across Indian states, our main
objective was to examine factors that may explain some of the observed
divergence. India provides a natural laboratory for studying heterogeneity given
the considerable regional differences in terms of income, financial inclusion and
infrastructure development.

Using data from a large number of Indian states from 2004 to 2012, after
appropriately controlling for cross-section and time specific effects, empirical
evidence suggests availability of funds (deposits) and the banking network as the
most important variables explaining heterogeneity of credit disbursement.
Among infrastructure facilities, rail and power deficit emerge as factors that
affect credit disbursement. State GDP and fiscal deficit are also found to be
important factors influencing credit disbursements.

These results motivate a few important policy implications. First, financial

deepening is crucial, which not only helps in garnering more resources from the
state but also helps in channelizing more resources to the state. The Reserve
Bank’s recent policy initiatives such as setting up differentiated banks (such as
payments banks) with a primary focus on the provision of basic financial services
using new technologies could be helpful in achieving greater financial inclusion.
The policy vision is to promote the spread of the formal banking channel, which
will give impetus to formal credit lines, thus providing support to the growth
aspirations of all the states. The government’s Jan Dhan Yojana to provide a bank
account for each poor Indian family, where each account would include a debit
card, accident and life insurance coverage and an overdraft facility is also a major
step in this direction.

Second, this paper also emphasizes the importance of infrastructure in explaining

credit diversity across states. Providing better infrastructure to create an investor
friendly environment and reining in the fiscal deficit of the state at the same time
are factors that play an important role.

31
 CHAPTER 6
BIBLIOGRAPHY
References:

1. Divatia,V.V. and T.R.Ventatachalam (1978), "Operational Efficiency and

Profitability of Public Sector Banks", RBI Occasional Papers, pp.1-16.
2. Venkatachalam (1979), "Operational Efficiency and Profitability of
Public Sector Banks", RBI Staff Occasional Paper, June
3. Singh, J. (1990), "Productivity in "The Indian Banking Industry", Deep &
Deep Publications, New Delhi
4. Satyamurty, B. (1988), "Efficiency, Productivity and Customer Services
in Banks", Conference Paper, National Conference on Banking
Development, RBI, Bombay
5. Sarker, P.C. and Das, A. (1997), "Development of Composite Index of
Banking Efficiency: The Indian Case", RBI Occasional Papers, 18, p 1
6. Abhiman Das (1997), "Technical, Allocative and Scale Efficiency of
PSB's in India", June & September, RBI, Occasional Papers, p. 279
7. Das. A. (1997), "Technical, Allocative and Scale Efficiency of PSB' S in
India", RBI Occasional Papers, June-Sept., p. 18
8. S.R. Mittal (2001), Report of Committee on Internet Banking, RBI, New
Delhi, p 2
9. Pramod Gupta (2003), "Indian Banks-Going Innovative "October,
Professional Banker, ICFAI, Hyderabad, p 35
10.M.S.Verma (1999), "Report of the Working Group on Restructuring
Weak Public Sector Banks", RBI, New Delhi
11.Vepa Kamesam (2003), Report of the Committee on Micro Finance, RBI,
New Delhi, August
12.Dr. A. Vasudevan (1999), Report of the Committee on Technology
Upgradation in the Banking Sector, RBI, New Delhi
13.Reserve Bank of India (2004), "Report on Trend and Progress of Banking
in India 2003-04", Delhi
14.Reddy, Y.V,(2000), "Financial Sector Reform, Review and Prospects",
Monetary and Financial Sector Reform in India, A Central Banker's
Perspective, UBSPD New Delhi pp.24-31
15.Chatterjee, A, K. Bhattacharya and S. Gayen (1997), ‘Migration of Credit
Across States: An Empirical Investigation with Some New Measures’,
Banking Statistics Division, Department of Statistical Analysis and
Computer Services, Reserve Bank of India, Mumbai (mimeo).
16.Samolyk, K. (1989), ‘The Role of Banks in Influencing Regional Flows
of Funds’, Working Paper No. 9204, Federal Reserve Bank of Cleveland .

32
CHAPTER 7

ANNEXURE
 Banknotes in Circulation (end-March)
Volume Value
Denomination
(million pieces) (₹ billion)
(₹)
2017 2018 2019 2017 2018 2019
1 2 3 4 5 6 7
2 and 5 11,557 11,425 11,302 45 44 44
(11.5) (11.2) (10.4) (0.3) (0.2) (0.2)
10 36,929 30,645 31,260 369 307 313
(36.8) (29.9) (28.7) (2.8) (1.7) (1.5)
20 10,158 10,016 8,713 203 200 174
(10.2) (9.8) (8.0) (1.5) (1.1) (0.8)
50 7,113 7,343 8,601 356 367 430
(7.1) (7.2) (7.9) (2.7) (2.0) (2.0)
100 25,280 22,215 20,074 2,528 2,222 2,007
(25.2) (21.7) (18.5) (19.3) (12.3) (9.5)
200 - 1,853 4,000 - 371 800
- (1.8) (3.7) - (2.1) (3.8)
500 5,882 15,469 21,518 2,941 7,734 10,759
(5.9) (15.1) (19.8) (22.5) (42.9) (51.0)
1000 89 66 - 89 66 -
(…) (…) - (0.7) (0.4) -
2000 3,285 3,363 3,291 6,571 6,726 6,582
(3.3) (3.3) (3.0) (50.2) (37.3) (31.2)
Total 100,293 102,395 108,759 13,102 18,037 21,109
(100.0) (100.0) (100.0) (100.0) (100.0) (100.0)
- : Not applicable. … : Negligible.
Note: Figures in parentheses represent the percentage share in total
volume/value.
Source: RBI.

33
 Coins in Circulation (end-March)
Volume Value
Denomination
(million pieces) (₹ billion)
(₹)
2017 2018 2019 2017 2018 2019
1 2 3 4 5 6 7
Small coins 14,788 14,788 14,788 7 7 7
(12.7) (12.4) (12.3) (2.8) (2.7) (2.7)
1 48,347 49,636 50,326 48 50 50
(41.6) (41.7) (41.8) (19.2) (19.5) (19.4)
2 32,059 32,855 33,154 64 66 66
(27.6) (27.6) (27.6) (25.6) (25.8) (25.6)
5 15,783 16,650 17,151 79 83 86
(13.6) (14.0) (14.2) (31.6) (32.4) (33.3)
10 5,205 5,049 4,905 52 50 49
(4.5) (4.2) (4.1) (20.8) (19.5) (19.0)
Total 116,182 118,978 120,324 250 256 258
(100.0) (100.0) (100.0) (100.0) (100.0) (100.0)
Note: 1. Figures in parentheses represent the percentage share in
total volume/value.
2. Figures in parentheses may not add up to 100 due to rounding
off of numbers.
Source: RBI.

34
 Disposal of Soiled Banknotes (April-March)
(Million pieces)
Denomination
2016-17 2017-18 2018-19
(₹)
1 2 3 4
2000 .. .. 1
1000 1,514 6,847 2
500 3,506 20,024 15
200 - - ..
100 2,586 105 3,795
50 778 83 835
20 546 114 1,163
10 3,540 497 6,524
Up to 5 34 8 59
Total 12,503 27,678 12,393
- : Not Applicable. .. : Nil.

35