Roles and responsibilities of RBI as a banker

Since the very beginning, the Reserve Bank has taken responsibility for the traditional central banking function of managing the Government’s banking transactions. The Reserve Bank of India Act, 1934 wants the Central Government to entrust the Reserve Bank with all its money, exchange, consignment, and banking transactions in India and manage its public debt. The Government also deposits its monetary balances to the Reserve Bank. 

By the agreement, the RBI may also play a banker’s role in a State Government. Recently, the Reserve Bank has acted as the banker to all the State Governments in India. Since RBI was established, all the state govt except Jammu-Kashmir and Sikkim are getting provided the regulations by RBI. However, it has few or limited agreements for managing the public debt of these two respective State Governments.

As a banker to the Government, the functions of RBI are essential and strict. The Reserve Bank maintains the money transactions on behalf of the various government departments. As it has offices in only twenty-seven locations, the RBI employs other banks to undertake the banking business on behalf of the governments. The Reserve Bank pays agency bank charges to the undertaken banks for handling the government business on its behalf. The Reserve Bank has well-defined agreements that let RBI provide several services to the governments. For example, the Central Government and State Governments may make rules for the custody, receipt, and parcelling of money from the contracted fund, temporary fund, and general public account. These rules are legally binding on the policies of RBI.

Banker to the Central Government

Under the administrative agreements, the Central Government needs to maintain a minimum monetary balance with the Reserve Bank of India. The amount is currently Rs.10 crore daily and Rs.100 crore on Fridays, as also at the end of July and March. In addition, every ministry and department of the Central Government is allotted a particular public sector bank for regulating its transactions under a scheme introduced in 1976. So, the Reserve Bank does not handle Government’s day-to-day transactions with its own hands as before, except where it has been nominated as a banker to a particular department or ministry.

As a banker to the Government, the Reserve Bank had maintained some policies from when RBI was established. It works out with the overall funding position and sends daily advice showing the balances in its books, ways and means of Advances granted to the Government, and investments made from the balanced fund. They follow up the daily pieces of advice with monthly statements.

Banker to the State Governments

All the State Governments must maintain a minimum balance with the Reserve Bank. However, the amount is not fixed for every state. It varies from state to state depending on the relative size of the state’s budget and the geographic and economic activity. The function of RBI, to tide over the temporary mismatches in the cash flow of payments and receipts, is to provide Ways and Means of Advances to the State Governments. The WMA (Way and Means Advance) scheme for the State Governments has been arranged for Special and Normal WMA. The Special WMA is extended against the similarities of the government securities organized by the State Government. After the fatigue of the particular WMA limit, the State Government has been provided with an ordinary Ways and Means Advance. The three-year average of actual revenue and capital expenditure of the state is the main base of the normal WMA limits. The withdrawal of more than the WMA limit is argued as an overdraft. That means a deficit in the bank account is caused by drawing more money than the account actually holds.

A State Government’s account can be in overdraft for a maximum of 14 successive working days with a limitation of 36 days in a quarter. The interest rate on WMA is linked to the Repo Rate. Excess balances of State Governments are invested in the Government of India’s 14-day Intermediate Treasury bills by the regulations and instructions of the State Governments.

Reserve Bank as Banker to Banks

To cover up this function, the Reserve Bank opens current accounts of banks with itself. RBI enables these banks to maintain cash reserves and carry out inter-bank transactions through these existing accounts. Inter-bank accounts can also be settled by money transferring through an electronic fund transfer system, like the RTGS (Real Time Gross Settlement System). 

The Reserve Bank monitors the operations of these accounts all the time. These policies of RBI are maintained so that defaults do not take place. Among other provisions, the Reserve Bank instructs for the minimum balances to be supported by banks in these accounts. Furthermore, the banks are allowed to open accounts with different regional offices of the Reserve Bank only if they have to settle funds with each other at various places in India.

Banker to Banks, the RBI focuses on

• Providing smooth, quick, seamless clearing and arrangement of inter-bank obligations.
• Providing efficient funds shiftings for banks.
• Letting banks maintain their accounts with the Reserve Bank for regular reserve requirements and maintenance of transaction balances as per the rule.
• Acting as a shroff of the last resort.

Conclusion

However, The Reserve Bank performs various developmental works. These functions of RBI include the procedures of clearinghouse arranging credit that is for agriculture, which has been transferred to NABARD. It is to buy and sell the Government securities and trade bills, and collect and publish the economic data. It also acts as the proxy of the Government in the IMF (International Monetary Fund) and represents the membership of India. Along with the many other roles, the Reserve Bank of India plays the part of the banker of the country’s financial system.