According to the preamble of the Reserve Bank of India Act, the main functions of the bank is “to regulate the issue of bank notes and the 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.” The various functions performed by the RBI can be conveniently classified in three parts as follows:
A. Central banking function B. Promotional functions C. Supervisory functions

A. Central Banking Functions "Issue of Currency : Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denomination. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. Note: The One Rupees notes and coins are issued by the Central Govt., The Ministry of Finance. Banker to the Government : The Reserve Bank of India serves as a banker to the Central Government and the State Governments. It is its obligatory function as a central bank. It provides a full range of banking services to these Governments, such as:- a. Maintaining and operating of deposit accounts of the Central and State Government. b. Receipts and collection of payments to the Central and State Government. c. Making payments on behalf of the Central and State Government. d. Transfer of funds and remittance facilities of the Central and State Governments. e. Managing the public debt and issue of new loans and Treasury Bills of the Central Government. f. It acts as adviser to the Government on all monetary and banking matters. g. It accepts money, makes payment and also carries out their exchange and remittances for the Govt. h. Providing ways and means advances to the Central and State governments to bridge the interval between expenditure and flow of receipts of revenue. Such advances are to be repaid by the government within three months from the date of borrowable. Banker’s Bank : The RBI has extensive power to control and supervise commercial banking system under the RBI Act, 1934 and the Banking Regulation Act, 149. (i) The Banks are required to maintain a minimum of Cash Reserve Ratio (CRR) with RBI. (ii) The RBI provides financial assistance to scheduled banks and state cooperative banks. (iii) Enables banks to maintain their accounts with RBI for statutory reserve requirements and maintenance of transaction balances. Lender of the Last Resort: Lender of the last resort means “Central Bank (RBI) helps all the commercial and other banks in time of financial crises. (i) 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. (ii) 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. National Clearing House : The Reserve Bank acts as the national clearing house and helps the member banks to settle their mutual indebtedness without physically transferring cash from place to place. The Reserve Bank is managing many clearing houses in the country with the help of which cheques worth crores of rupees are cleared every year. The ultimate balances are settled by the banks through cheques on the Reserve Bank. Controller of credit: Credit control is generally considered to be the principal function of Central Bank. By making frequent changes in monetary policy, it ensures that the monetary system in the economy functions according to the nation’s need and goals. (i) It can do so through changing the Bank rate or through open market operations. (ii) It controls the credit operations of banks through quantitative and qualitative controls. (iii) It controls the banking system through the system of licensing, inspection and calling for information. Custodian of foreign exchange reserves : The RBI functions as the custodian and manager of forex reserves, and operates within the overall policy framework agreed upon with Government of India. (i) The ‘ reserves ’ refer to both foreign reserves in the form of gold assets in the Banking Department and foreign securities held by the Issue Department, and domestic reserves in the form of ‘bank reserves’. (ii) Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations. (iii) Its commonly includes foreign exchange and gold, special drawing rights,(SDRs) and International Monetary Fund(IMF) reserve positions.
B. Promotional Functions: Reserve Bank of India and Agricultural Credit:

• • • The bank’s responsibility in this field has been occasioned by the predominantly agricultural basis of the Indian economy and the urgent need to expand and coordinate the credit facilities available to the rural sector.

 

• • • The RBI has set up a separate agricultural department to maintain an expert staff to study all questions of agricultural credit and coordinate the operation of the bank with other agencies providing agricultural finance.

 

• • • The RBI does not provide finance directly to the agriculturists, but through agencies like cooperative banks, land development banks, commercial bank etc.

 

• • • After the establishment of the National Bank for Agriculture and Rural Development (NABARD) on July 12, 1982, all the functions of the RBI relating to rural credit have been transferred to this new agency.

Reserve Bank of India and Industrial Finance:

• • • The Reserve Bank of India has taken initiative in setting up statutory corporations at the all-India and regional levels to function as specialised institutions for term lending.

 

• • • The first of these institutions was the Industrial Finance Corporation of India set up in 1948. Followed by the State Finance Corporations in each of the state from 1953 onwards.

 

• • • The RBI has also helped in the establishment of other financial institutions such as the Industrial Development Bank of India, the Industrial Reconstruction Bank of India, Small Industries Development Bank of India, Unit Trust of India, etc.

 

• • • For the promotion of foreign trade the Reserve Bank has established the Export and Import Bank of India. Similarly, for the development of the housing industry the RBI has established the National Housing Bank.

C. Supervisory Functions The various aspects of the supervisory/regulatory functions exercised by the Reserve Bank may be briefly mentioned as under:- Licensing of Banks: There is a statutory provision that a company starting banking business in India has first to obtain a license from the Reserve Bank. If the Reserve Bank is dissatisfied on account of the defective features of the proposed company, it can refuse to grant the license. The bank is also empowered to cancel the license of a bank when it will cease to carry on banking business in India. Approval of Capital, Reserves and Liquid Assets of Bank: The Reserve Bank examines whether the minimum requirements of capital, reserve and liquid assets are fulfilled by the banks and approves them. Branch Licensing Policy: The Reserve Bank exercises its control over expansion of branches by the banks through its branch licensing policy. Inspection of Banks: The Reserve Bank is empowered to conduct inspection of banks. The inspection may relate to various aspects such as the bank’s organizational structure, branch expansion, mobilization of deposits, investments, credit portfolio management, credit appraisal profit planning, manpower planning, as well as assessment of the performance of banks in developmental areas such as deployment of credit to the priority sectors, etc. The bank may conduct investigation whenever there are complain about major irregularities or frauds by certain banks. The inspections are basically meant to improve the working of the banks and safeguard the interests of depositors and thereby develop a sound banking system in the country. Control Over Management: The Reserve Bank also looks into the management side of the banks. The appointments, re-appointment or termination of appointment of the chairman and chief executive officer of a private sector bank is to be approved by the Reserve Bank. The bank’s approval is also required for the remuneration, perquisites and post-retirement benefits given by a bank to its chairman and chief executive officer. Control Over Methods: The Reserve Bank exercises strict control over the methods of operation of the banks to ensure that no improver investment and injudicious advances made by them. Audit: Banks are required to get their balance sheets and profits and loss accounts duly audited by the auditors approved by the Reserve Bank. In the case of the SBI, the auditors are appointed by the Reserve Bank. Credit Information Service: The Reserve Bank is empowered to collect information about credit facilities granted by individual bank and supply the relevant information in a consolidated manner to the bank and other financial institutions seeking such information. Control Over Amalgamation and Liquidation: The banks have to obtain the sanction of the Reserve Bank for any voluntary amalgamation. The Reserve Bank in consultation with the central government can also suggest compulsory reconstruction or amalgamation of a bank. It also supervises banks in liquidation. The liquidation have to submit to the Reserve Bank returns showing their positions. The Reserve Bank keeps a watch on the progress of liquidation proceedings and the expenses of liquidation.
Training and Banking Education: The RBI has played an active role in making institutional arrangement for providing training and banking education to the bank personnel, with a view to improve their efficiency.