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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. 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.
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.
This could be because Ms Fernandes has deposited Rs 100 in the bank. Let this bank deposit the same amount with RBI as reserves. For a bank, the main liability is the deposits which people keep with it. Let us construct a fictional balance sheet for this bank. Balance sheet is a record of assets and liabilities of any firm. Conventionally, the assets of the firm are recorded on the left hand side and liabilities on the right hand side.
The Challenging Objectives of the Reserve Bank of India
In the following section we look at the commercial banking system in detail. They accept deposits from the public and lend out part of these funds to those who want to borrow. The interest rate paid by the banks to depositors is lower than the rate charged from the borrowers. This difference between these two types of interest rates, called the ‘spread’ is the profit appropriated by the bank.
Exchange of commodities without the mediation of money is called Barter Exchange. Money facilitates exchanges by acting as a commonly acceptable medium of exchange. In a modern economy, people hold money broadly for two motives – transaction motive and speculative motive. Supply of money, on the other hand, consists of currency notes and coins, demand and time deposits held by commercial banks, etc. It is classified as narrow and broad money according to the decreasing order of liquidity.
In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following?
As a result future payments are to be stated in term of specific goods or services. But there could be disagreement about quality of the goods, specific type of the goods and change in the value of the goods. The Question and answers have been prepared according to the Commerce exam syllabus. Information about What role of RBI is known as ‘ lender of last resort’? Find important definitions, questions, meanings, examples, exercises and tests below for What role of RBI is known as ‘ lender of last resort’?. RBI issues rules for the administration of Non-Performing Assets of banks.
- For example – if we assume that economy is showing inflationary trends & RBI wants to control this situation by adjusting SLR & CRR.
- Offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.
- Thus speculations regarding future movements in interest rate and bond prices give rise to the speculative demand for money.
Money is the link which connects the values of today with those of the future. It has become possible because value of money is stable and it has general acceptability and durability. ‘Direct exchange of goods against goods without use of money is called barter exchange’.
Important Functions of RBI (Reserve Bank of India)
The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is a legal requirement and is binding on the banks. This is called the ‘Required Reserve Ratio’ or the ‘Reserve Ratio’ or ‘Cash Reserve Ratio’ . Suppose Mr. Mathew comes to this bank for a loan of Rs 500. If it gives the loan and Mr Mathew deposits the loan amount in the bank itself, the total bank deposits and therefore, the total money supply will rise.
- Barter exchanges become extremely difficult in a large economy because of the high costs people would have to incur looking for suitable persons to exchange their surpluses.
- When thousands of articles are produced and exchanged, there will be unlimited number of exchange ratios.
- As a regulator and supervisor of the Indian banking system it ensures financial stability & public confidence in the banking system.
- In its report on Budget expectations, the economists said RBI should «seriously think» of providing liquidity to non-banking financial companies against the assets held by the lenders.
- Also, RBI is responsible for setting the benchmark rate such as MIBOR, commonly known as Mumbai Interbank Offer Rate.
Money as measure of value or a unit of account solves the barter problem of lack of common measure of value. Money measures exchange value of commodities and makes keeping of business accounts possible. Thus conventionally money performs the following four functions each of which overcomes one or the other difficulty of barter.
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In such an economy, a person gives his surplus goods and gets in return the goods he needs. For example, when a weaver gives cloth to the farmer in return for getting wheat from the farmer, this is called barter exchange. Similarly, the farmer can get other goods of his requirements like shoes, cow, plough, spade, etc. by giving his surplus wheat . Thus system of barter exchange fulfils to some extent the requirement of both the parties involved in exchange.
This ultimately led to evolution of money as medium of exchange. When commercial banks have exhausted all resources to supplement their funds at times of liquidity crisis they approach Central Bank as a last resort. This saves banks from possible failure and banking system from a possible breakdown. On the other hand Central Bank by providing temporary financial accommodation saves the financial structure of the country from collapse. This scheme was introduced in May, 2011 and all the scheduled commercial banks can participate in this scheme. Banks can borrow up to 2.5% of their respective Net Demand and Time Liabilities.
- Money is the most liquid of all assets in the sense that it is universally acceptable and hence can be exchanged for other commodities very easily.
- Although when RBI reduces Repo rate, banks are not legally required to reduce their base rate.
- RBI can decrease or increase to curb inflation or deflation respectively.
- RBI receives application under this facility for a minimum amount of Rs. 1 crore and in multiples of Rs. 1 crore thereafter.
- All the dealings that happen between two banks are done through this account.
- Different goods produced in the country are measured in different units, e.g., cloth in metres, milk in litres, sugar in kilograms.
«Given the crisis of confidence in the financial markets, it is imperative that the central bank doesn’t forget their primary function of being the lender of the last resort,» they said. Current affairs is the most important part of UPSC IAS exam. ForumIAS relevant and irrelevant cost provides a detailed analysis of important news articles through its 9PM brief. In current affairs reading Editorials Online needs an in-depth focus and hence we provide a separate analysis of daily editorials which is not found in any other website.
BANKER TO BANKS
The bank itself maintains these reserves for liquidity purposes. At present,reverse repo rate is 5.75% with effect from May 2019. If a bank has surplus money, they can park this excess liquidity with RBI and central bank will pay interest on this.
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 https://1investing.in/ to be at the centre of everything. One of the functions of RBI is to lay down policies for the effective functioning of the banks. This banker of banks can revise these policies whenever the situation demands.
Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. If we assume that there is no currency in circulation, then the total money supply in the economy will be equal to Rs 100. Let our fictional bank start with deposits equal to Rs 100.
It includes the cash reserve ratio and the statutory liquidity ratio . 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.