If you're looking for an answer to the question, which bank is called bank of banks?, then you're at the right place. RBI (Reserve Bank of India) is known as the bank of banks or bankers' bank. In this article, we'll explain the reason behind the same.
The Indian banking sector is considered to be the backbone of our economy. The increase in the earnings of individuals and rising disposable income enhances the banking services’ need in India. The demand for their services increases subsequently, and it leads to the growth and development of the banking sector.
The Central bank of our country known as “The Reserve Bank of India” is the supreme authority responsible for the functioning, control, and management of India’s banking sector. It drafts several policies that ensure the stability, structure and changes of our economy. Along with numerous functions performed by RBI, one of the most important ones is that of Banker’s Bank. This article helps you understand the statement in-depth.
What Are The Objectives of RBI (Bankers' Bank)?
The preamble states that the prime objective of RBI is to regulate the issuance of banknotes and the creation of reserves for securing monetary stability in the country. It is responsible for operating the country’s credit and currency system and formulating the monetary policy framework that is beneficial and needed for our economy. The objective of growth and price stability needs to be at the centre of everything.
What Are The Functions of RBI?
It is important to understand various functions performed by RBI and how it plays a dominant role in the banking sector and the economy. The ten vital functions of RBI are enumerated as follows-
- Regulating the issue of currency notes and coins.
- Keeping a watch on the financial markets.
- Banker to the Central and State Government.
- Managing the foreign exchange.
- Looking after the payment and settlement system.
- Debt manager to the Government.
- Regulating different kinds of banks.
- Focusing on financial inclusion and development.
- Banker to the Banks.
- Ensuring consumer education and protection.
How Does The Bank of Banks Function?
Out of all the functions of RBI, one of the most important ones is that of a banker’s bank. But we never thought why RBI is known as the mother of all banks. So, let us understand in brief the various reasons behind the same.
1. Management of rates
There are different rates that RBI administers for all the banks. The RBI decides the rates, and that is mandatory for every bank to follow. The rates can be the policy rates which include bank rate, the repo rate, the reverse repo rate, and marginal standing facility rate. The percentage of reserves that every bank has to maintain with the RBI is also decided by the RBI. It includes the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). RBI also decides the foreign exchange rates. Also, RBI is responsible for setting the benchmark rate such as MIBOR, commonly known as Mumbai Interbank Offer Rate. The lending rates and deposit rates are also pre-decided by RBI. No bank can charge any rate lower than the rates fixed by the RBI. It also facilitates the rate in the money market and call market.
2. Maintaining Reserves
The cash reserve ratio is the amount of cash every bank has to keep as a reserve with the RBI. It is calculated as a percentage of NET demand and time liability. The NDTL is arrived at by adding up the savings account, current account, and fixed deposit balances held by the particular bank. RBI maintains this reserve to ensure liquidity is maintained in banks and the country’s economy.
Similarly, the Statutory Liquidity ratio is the reserve that is to be maintained by all the banks in addition to the CRR. It means that a specific percentage of reserves need to be held in cash, gold, bonds, or securities approved by RBI. The bank itself maintains these reserves for liquidity purposes. RBI revises the rates of CRR and SLR.
3. Account for inter-bank obligations
It is imperative for every bank to maintain an account with the RBI. All the dealings that happen between two banks are done through this account. RBI keeps a watch over the dealings. Many times it happens that any bank may need a loan, so it takes it from some other bank. The rate at which one bank can lend to the other bank is also decided by RBI. And the transfer of funds takes place from the account for inter-bank obligations. Any discrepancy if found by the RBI, gives them the right to stop the transaction from happening.
4. Monitoring operations and defaults
RBI lays down various policies for the working of the bank and revises them as and when necessary. It also releases a set of operational instructions. RBI records all the information related to credit. Rules and regulations for the functioning of a bank are also clearly defined. If RBI feels that any transaction is unethical, doubtful or any suspicious activity is undertaken, they can interrogate the bank.
5. Facilitate cash pooling
Cash pooling refers to the process in which all the transactions move to the parent branch or company. The cash is transferred based on surplus or deficit from the main branch to other branches. Suppose, a bank named ABC has two other branches, A and B. Branch A is facing a deficit of cash, and B has a surplus. So, ABC can transfer funds from B to A; RBI facilitates this process.
6. Fund management
RBI helps the bank to manage its funds. When the need arises, RBI provides short term loans and advances to the banks against any collateral. It has a mechanism for managing the funds of banks known as the Centralised Fund Management System. Banks can collect information about their balances, enquire, or transfer funds from the same.
7. Risk management
RBI must manage the various risks faced by banks such as liquidity risk, interest rate risk, credit risk, market risk, and operational risk. RBI has specified the norms concerning three major areas under the BASEL accord. To manage risk in a bank, it focuses on three areas: a minimum capital requirement, supervisory review processes, and the market discipline requirements.
8. Lender of last resort
When nobody extends credit to a particular bank then RBI acts as a lender of last resort. This means that RBI will provide loans to the bank at the prevailing rates. Also, RBI will take adequate steps to manage the liquidity of the bank and make sure they don’t prove to be insolvent. This helps in protecting the interest of the consumers and saves the bank from failure or collapse.
9. Management of NPA’s
RBI issues circulars and guidelines for the management of the Non-Performing assets of banks. A system is established where the NPAs should be identified on an on-going basis and classified accordingly. Any defaults need to be recognised within 30 days by the bank. It may take strict action if the NPAs are large in number and investigate the same.
10. Asset Liability management
RBI has to manage the risk and liquidity of the bank, or there is a high possibility that the bank may collapse. So various tools are undertaken by RBI to manage the liquidity such as the creation of the ALCO committee. By managing the assets and liabilities of the bank, liquidity can be ensured, and risk can be mitigated. Various tools for managing the asset-liability mismatch are used like maturity gap analysis, duration gap analysis, etc.
After these points, we can say that RBI is called the bank of banks because they play a vital role in the economy by supervising the working of every bank in the country. It also controls the flow of money in the economy and banking transactions. During the time of crisis, RBI proves to be a saviour.
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Q. What are the different types of banks in India?
Ans: The banks in India are classified as Public sector banks, Private sector banks, Foreign banks, Regional rural banks, Co-operative banks, an Urban co-operative bank, Rural co-operative banks, Credit institutions, etc.
Q. What are NPAs?
Ans: A non-performing asset is any loan or advance payment that remains unpaid for more than 90 days. When someone defaults on interest payment or principal amount payment, it is termed as NPA.
Q. What is e-Kuber?
Ans: e-Kuber is a computerised system where the funds can be transferred electronically from one bank branch to another in case of deficit or surplus. RBI maintains the computerised account and monitors the activities of the bank.
Q. Whose bank account does RBI maintain?
Ans: RBI maintains the bank account of all the scheduled banks. Also, it acts as a banker to the central and state government.
Q. How many offices does RBI have?
Ans: Currently, there are 27 regional offices and 4 sub-offices. The majority of the regional offices are located at the state capitals.
Q. What is the current CRR and SLR rate?
Ans: The current CRR is 3%, and the SLR is 18%. This ratio is changed at regular intervals of time.