Background of Reserve Bank of India

The Reserve Bank of India (“RBI”) was established on 01.04.1935 in accordance with the Reserve Bank of India Act, 1934, in Kolkata; in 1937, it was permanently moved to Mumbai. The basic functions of the RBI are, “to regulate the issue of Bank notes and 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; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.”

Appointment and Constitution

  • The affairs of the Reserve Bank are governed by a Central Board of Directors who are appointed by the Government of India for a period of four years.
  • Constitution of the Board:
  • Official Directors:

Full-time Governor and not more than four Deputy Governors

  • Non-Official Directors:

Nominated by Government – ten Directors from various fields and two government Official

Others – four Directors, one each from four local boards

  • The major function of the board is the general superintendence and direction of the Bank’s affairs.

Financial Supervision under RBI

The RBI performs the supervisory function under the guidance of the Board for Financial Supervision (“BFS”). The BFS is constituted by appointing four Directors from the Central Board as Members and is chaired by the Governor. The Deputy Governors of the RBI are ex officio members. The BFS usually meets once a month to discuss and decide upon inspection reports, periodic reviews related to banking and non-banking sectors and policy matters arising out of or having relevance to the supervisory functions of the Reserve Bank. Generally, it oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking Supervision (DNBS) and Department of Co-operative Bank Supervision (DCBS) and gives directions on regulatory and supervisory issues.

Its main objective is to undertake consolidated supervision of the financial sector of India comprising Scheduled Commercial and Co-operative Banks, All India Financial Institutions, Local Area Banks, Small Finance Banks, Payments Banks, Credit Information Companies, Non-Banking Finance Companies and Primary Dealers. In April 2018, a sub-committee of the BFS was constituted which performs the functions and exercises the powers of supervision and inspection in relation to Payments Banks, Small Finance Banks, Local Area Banks, small Foreign Banks, select scheduled Urban Co-operative Banks, select Non-Banking Financial Companies and Credit Information Companies.

Regulatory Functions of BFS

Some of the common functions that the BFS performs are:

  • It fine-tunes the supervisory processes adopted by the Bank for regulated entities
  • It introduces the off-site surveillance system to complement the on-site supervision of regulated entities
  • It helps in strengthening the statutory audit processes of banks and enlarging the role of auditors in the supervisory process
  • It aids in strengthening the internal defenses within supervised institutions such as corporate governance, internal control and audit functions, management information and risk control systems, review of housekeeping in banks
  • It introduces supervisory rating system for banks and financial institutions
  • It aids in supervision of overseas operations of Indian banks, consolidated supervision of banks
  • It provides technical assistance programme for cooperative banks
  • It helps in introduction of scheme of Prompt Corrective Action Framework for weak banks
  • It guides banks regarding fraud risk management framework in banks
  • It helps in introduction of risk based supervision of banks
  • It aids in introduction of an enforcement framework in respect of banks
  • It provides for an establishment of a credit registry in respect of large borrowers of supervised institutions; and
  • It helps in setting up a subsidiary of RBI to take care of the IT requirements, including the cyber security needs of the Reserve Bank and its regulated entities, etc.

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