Unit 1 - Important Question Answers

Q1. What are traditional Function of RBI?

Ans: Traditional Functions of Reserve Bank of India (RBI):
1. Issue of Currency:
• RBI issues currency notes of various denominations.
• Follows the minimum reserve system.
• One rupee notes and smaller coins issued by the government.
2. Banker to Government:
• Maintains accounts of both Central and State governments.
• Provides overdraft facilities.
• Manages public borrowings for the government.
3. Bankers’ Bank:
• Grants licenses to banks.
• Controls and inspects commercial banks.
• Manages top-level management appointments.
• Meets credit requirements by discounting securities.
4. Credit Control Functions:
• Uses quantitative measures like bank rate, open market operations, and reserve ratio.
• Applies selective credit control, especially for agricultural commodities.
• Balances seasonal fluctuations in the money market.
5. Lender of Last Resort:
• Maintains the Cash Reserve Ratio (CRR) to control funds available for lending.
• Acts as a source of funds for commercial banks facing crises.
6. Exchange Control Function:
• RBI has the authority over exchange control.
• Licenses required for dealing in foreign exchange.
• Maintains foreign exchange reserves.
7. Clearing House:
• RBI conducts clearing house operations in major cities.
• Commercial banks participate in clearing cheques.
Q2. What are Functions of RBI?
Ans:
1. Monetary Authority:
• Supervises and implements monetary policies.
• Ensures price stability.
2. Issuing Notes:
• Supplies currency coins and notes.
• Maintains quality and exchanges currency.
3. Banker to the Government:
• Acts as Agent, Banker, and Adviser to the government.
• Provides overdraft facilities.
4. Foreign Reserve Management:
• Manages foreign exchange rates.
• Buys/sells foreign currencies in Forex market.
5. Developmental Functions:
• Supports national objectives (agricultural finance, etc.).
6. Collection and Publication of Data:
• Regularly compiles data on various economic aspects.
7. Controls Credit Supply:
• Uses qualitative and quantitative techniques to control credit.
8. Promotional Functions:
• Promotes banking habits.
• Supports agriculture, cooperative sector, and industrial finance.
9. Supervisory Functions:
• Grants licenses to banks.
• Conducts inspections and reviews.
10. Lender of the Last Resort:
• Provides funds to banks in need.
Q3. What are RBI’s instruments of Monetary Policy?
Ans:
The RBI’s monetary policy is a set of regulatory policies wherein it maintains its control over the supply of
currency within the economy to achieve general economic goals. The main instruments of monetary policies
of the RBI are:

• Cash Reserve Ratio (CRR)

• Statutory Liquidity Ratio (SLR)
• Bank Rate
• Repo Rate
• Open Market Operations (OMO)
• Reverse Repo Rate
Now let us have a brief understanding of all these RBI’s instruments of monetary policy below:
1. CRR: The Cash Reserve Ratio (CRR) is the amount of bank deposits which the banks are required to keep
with the RBI in the form of balances or reserves. An increase in the CRR with the RBI results in a
decrease of the liquidity in the money supply and vice versa. During inflation, the RBI increases the CRR
and vice versa.
2. SLR: The Statutory Liquidity Ratio (SLR) is the number of liquid assets out of their total time and demand
liabilities which all the financial institutions are required to maintain at any given point of time. In case
of inflation, the RBI increases SLR and vice versa.
3. OMO: Open Market Operations (OMO) are the instruments which involve buying and/or selling of
securities like the government bonds to or from the public and banks. The RBI sells the government
securities to regulate the flow of credit in the economy and buys the government securities to increase
the credit flow.
4. Bank Rate Policy: Also known as the discount rate, the bank rate refers to the interest charged by the
RBI for lending loans and funds to the banking system. When the bank rate increases, the cost of
borrowing by commercial banks results in reduction in the credit volume to the banks and so the supply
of money reduces and vice versa.
5. Repo Rate: It is the rate of interest at which the RBI lends short-term money to the banks to control
inflation, money supply, and economic growth. During inflation, the government increases the repo rate
to reduce the money supply and vice versa when it is deflation.
Q4. What are the major functions of Banks in India?
Ans: The major functions of banks in India are:
• Banks act as safety deposits. They offer a reasonably secure location to store cash and protect
assets while collecting interest on these deposits.
• Commercial banks pay interest on deposits, and the amount is dependent on the kind of account.
o Money lending is a significant source of profit for banks. Banks use deposits to lend to eligible
individuals and businesses for investments or expansion.
• Regulation of Money Supply through credit creation.
• Banks deal with foreign exchange.
• Banks also provide miscellaneous functions such as overdraft facilities, locker facilities, and ATM
facilities.

Q5. What are the different types of Banks in India?

Ans: There are different types of banks in India, each with its own unique role and function:
1. Central Bank/Banker’s Bank: The central bank of India is the Reserve Bank of India (RBI). The RBI is
responsible for regulating and supervising the Indian banking system. It also manages the country's
monetary policy and foreign exchange reserves.
2. Scheduled Banks: Scheduled banks are commercial banks that are regulated by the RBI. They are
included in the Second Schedule of the Reserve Bank of India Act, 1934. Scheduled banks can be
classified into three categories:
a. public sector banks
b. private sector banks
c. foreign banks.
Commercial Banks: Commercial banks are the most common type of bank in India. They provide a wide
range of financial services to individuals and businesses, including savings accounts, loans, and investment
products.
1. Public Sector Banks: Public sector banks are owned and operated by the government of India. They
account for a significant share of the Indian banking system.
a. SBI (State Bank of India)
b. PNB (Punjab National Bank)
c. BOI (Bank of India)
d. BOM (Bank of Maharashtra)
e. BOB (Bank of Baroda)
2. Private Sector Banks: Private sector banks are owned and operated by private individuals or companies.
They have played an increasingly important role in the Indian banking system in recent years.
a. HDFC Bank
b. Axis Bank
c. ICICI Bank
d. Yes Bank
e. Kotak Mahindra Bank
3. Foreign Banks: Foreign banks are branches of foreign banks that operate in India. They offer a range of
financial services, including corporate banking, investment banking, and retail banking.
a. CITI Bank
b. National Australia Bank
c. J. P. Morgan Chase Bank
d. A. B Bank Ltd.
e. HSBC
Regional Rural Banks: Regional rural banks (RRBs) were established in 1975 to provide banking services to
rural areas. They are sponsored by commercial banks and the government of India. RRBs play an important
role in promoting financial inclusion and rural development.

• Assam Gramin Vikash Bank

• Baroda UP Bank
• Dakshin Bihar Gramin Bank
• Karnataka Gramin Bank
• Manipur Rural Bank
• Mizoram Rural Bank
• Punjab Gramin Bank
• Tamil Nadu Grama Bank

Cooperative Banks: Cooperative banks are owned and operated by their members. They provide a range of
financial services, including savings accounts, loans, and agricultural credit. Cooperative banks play an
important role in the rural economy.

• The Manipur State Cooperative Bank Ltd

• The Sikkim State Cooperative Bank Ltd.
• The Assam Cooperative Apex Bank Ltd.
• The Tirupati Cooperative Bank Ltd.
• Hindustan Cooperative Bank Ltd.

Local Area Banks: Local area banks (LABs) were established in 2013 to provide banking services to
underserved areas. They are sponsored by commercial banks and the government of India. LABs play an
important role in promoting financial inclusion.
Payment Banks: Payment banks were set up in 2015 to offer basic banking services such as savings accounts,
money transfers, and bill payments. They cannot offer loans or credit cards. Payment banks are designed to
promote financial inclusion and cashless transactions.

• Airtel Payments Bank Ltd

• Paytm Payments Bank Ltd
• Jio Payments Bank Ltd
• FINO Payments Bank Ltd
• NSDL Payments Bank Ltd
Small Finance Banks: Small finance banks (SFBs) were set up in 2015. They provide banking services to
underserved segments of the population, such as small businesses and farmers. SFBs can offer a range of
financial services, including savings accounts, loans, and investment products.

• Au Small Finance Bank Ltd

• Capital Small Finance Bank Ltd
• Fincare Small Finance Bank Ltd
• Equitas Small Finance Bank Ltd
• ESAF Small Finance Bank Ltd
• Suryoday Small Finance Bank Ltd