Functions of RBI

1. The RBI is the main authority responsible for formulating and implementing monetary policy in India. It aims to
maintain price stability and ensure adequate credit flow to support economic growth. Through tools like interest rate
adjustments and open market operations, it regulates the money supply in the economy.
2. Issuer of Currency: One of the most visible functions of the RBI is its role as the sole issuer of currency in India. It
designs, prints, and circulates currency notes and coins, ensuring an adequate supply of currency to meet the
demands of the economy while safeguarding against counterfeiting.
3. Developmental Role: Apart from its regulatory functions, the RBI plays a crucial role in promoting the development of
financial markets and institutions. It implements policies and initiatives to enhance financial inclusion, improve
payment and settlement systems, and foster innovation and efficiency in the financial sector.
4. Regulator of Non-Banking Financial Institutions: In addition to banks, the RBI also regulates non-banking financial
companies (NBFCs) to ensure their stability and integrity. It formulates prudential regulations, issues licenses, and
supervises NBFCs to prevent risks to the financial system and protect consumer interests.
5. esearch and Policy Analysis: The RBI engages in research and policy analysis to enhance its understanding of
economic and financial issues and formulate evidence-based policies. It conducts studies, publishes research
papers, and participates in international forums to contribute to the global discourse on monetary and financial
matters.
6.Regulator of banking system:RBI has the responsibility of regulating the nation’s financial system.As a regulator and
supervisor of the indian banking system, it ensures financial stability and public confidence in the banking system. It uses
methods like on-site inspections, off-site surveillance. Scrutiny and periodic meetings to supervise new bank licenses,
setting capital requirements and regulating interest rates in specific areas. RBI is currently focused on implementing norms.

7. Bankers bank:The RBI also wants to work as a central bank where commercial banks deposit money. RBI maintains
banking accounts of all scheduled banks, commercial banks, etc..It is the duty of the Rbi to control their credit through Cash
Reserve Ratio(CRR), bank rate and open market operations. As a banker’s bank, the RBI facilitates the clearing of cheques
between the commercial banks and helps inter-bank transfer of funds. It an grant financial accommodation to schedule
banks.It acts as the lender of last resort by providing emergency advances to the banks.

3. Custodian Of foreign exchange:The RBI has custody of the country’s reserve of international currency, and this enables
the reserve bank of deal with crisis connected with Adverse balance of payment position
. Issue of Currency:Other than the Government of India, the Reserve Bank of India is the sole body authorised to issue
banknotes in India.The bank also destroys banknotes when they are not fit for circulation. All the money issue by the central
bank is its monetary liabilities, the central bank is obliged to back the currency with assets of equal value and to enhance
public confidence in paper currency. The objective are to issue banknotes and give the public adequate supply of the same
to maintain the currency and credit system of the country to utilize it in the best advantage, and to maintain the reserve.The
RBI maintains the economic structure of the country, so that it can achieve the objective of the price stability as well as
economic development because both objectives are diverse in themselves.

Regulation of Microfinance Institutions: Microfinance institutions (MFIs) play a crucial role in providing financial services to
underserved populations, and the RBI regulates them to ensure their sustainability and client protection. It formulates
regulations, conducts supervision, and promotes best practices in microfinance to support inclusive growth and poverty alle
Credit methods:
Quantitative methods-
1. Bank rate:

Bank rate refers to the interest rate at which the central bank issues funds to the
commercial banks. During times of excess demand of inflation, the central bank
increases the bank rate and the borrowings become costly, furthermore the
commercial banks reduce their borrowings from the central bank.

During times of less demand or deflationary gap, the central bank decreases its
interest rate and it becomes cheap to borrow form the central bank at that time as
their lending rates decrease.
2. Open market operations:

Open market operations refer to the buying and selling of bonds and shares by the
RBI. it is also known as buying and selling of government securities by the central
bank from the public and commercial banks.

3. Repo rate:

Repo refers to the ‘repurchase agreement’, it is a form of short term,

collateral-backed borrowing instrument which has an interest rate charged on it
which is known as ”repo rate” The repo rate is the rate at which the RBI lends
money to the commercial banks of india if they face any problems like scarcity of
funds.
4. Reverse repo rate:

Reverse repo rate as the name suggests, is the opposite contract to the repo rate.
The refers to the interest rate at which the RBI borrows money from the
commercial banks.

5.Cash reserve ratio:

It is the ratio of bank deposits that commercial bank has to keep with the central
bank. At the time of inflation,the central bank(RBI) increases the rate or CRR(cash
reserve ratio) similarly, at times of deflation, the RBI decreases its rate of CRR

6.Statutory Liquidity Ratio (SLR): Similar to the CRR, the Statutory Liquidity Ratio mandates banks to maintain a certain
percentage of their net demand and time liabilities (NDTL) in the form of specified liquid assets such as government
securities, gold, or cash. By altering the SLR, the RBI can influence the liquidity position of banks and their lending capacity.
Higher SLR requirements reduce funds available for lending, while lower SLR requirements increase
Qualitative method:
1. Margin requirements:
Margin requirements refers to the market value of loan and the security value of a loan.
In times of inflations, the margin requirement value decreases by the RBI for
discouraging people and commercial banks for approaching more and more amount of
loan. On the other hand, at the time of deflation the rbi increases the value of margin just
to encourage issuing of more amounts of lean to the commercial banks and general
public.
2. Moral Suasion:
It refers to the written and oral advices given by the central bank to commercial banks to
restrict and expand credit.
● Credit Rationing: This involves setting limits on the amount of credit that banks can extend to certain sectors or
borrowers. The RBI may impose credit ceilings on specific sectors to prevent overheating or speculative bubbles. By
restricting credit to certain sectors, the RBI can channel funds into priority areas such as agriculture, small-scale
industries, or infrastructure development.
● Margin Requirements: Margin requirements refer to the proportion of funds that borrowers must contribute from
their own resources when obtaining loans. By increasing margin requirements, the RBI can reduce the amount of
credit available for speculative or high-risk activities, thereby promoting financial stability and discouraging excessive
risk-taking.
● Directives and Guidelines: The RBI issues directives and guidelines to banks on various aspects of credit
management, risk assessment, and lending practices. These directives may include guidelines on asset
classification, provisioning norms, loan restructuring, and risk management practices. By enforcing prudent lending
standards, the RBI aims to maintain the soundness and stability of the banking system.
● Special Refinance Schemes: In certain situations, the RBI may introduce special refinance schemes to provide
targeted credit support to specific sectors facing liquidity constraints or credit shortages. These schemes may offer
subsidized interest rates or relaxed collateral requirements to encourage banks to extend credit to priority sectors
such as agriculture, export-oriented industries, or micro, small, and medium enterprises (MSMEs
Need for credit control
1. Cash Flow Management: Effective credit control ensures a steady flow of cash into the business, preventing liquidity
problems and enabling timely payments of expenses and debts.
2. Risk Management: Assessing the creditworthiness of customers helps mitigate the risk of bad debts and financial
losses due to defaulters.
3. Profitability: By controlling credit effectively, businesses can optimize profitability by reducing the cost of borrowing
and minimizing the impact of bad debts on their bottom line.
4. Customer Relationships: Balancing credit control with maintaining positive customer relationships is essential. Clear
credit policies and effective communication can help prevent disputes and maintain trust.
5. Compliance: Adhering to legal and regulatory requirements regarding credit extension and debt collection is
necessary to avoid penalties and legal issues.
6. Data Management: Maintaining accurate records of customer credit profiles, payment histories, and outstanding
debts is crucial for informed decision-making and effective credit control.
7. Credit Terms: Establishing appropriate credit terms tailored to the needs of both the business and its customers
helps ensure timely payments and minimizes the risk of default.
1. Monitoring and Analysis: Regularly monitoring credit performance and analyzing trends can identify potential issues
early, allowing for proactive measures to be taken to address them.
2. Debt Collection: Having a structured process for debt collection, including clear escalation procedures for overdue
accounts, helps recover outstanding payments promptly while maintaining customer relationships.
3. Continuous Improvement: Constantly reviewing and refining credit control policies and procedures based on
feedback and changing business dynamics is necessary to adapt to evolving circumstances and optimize outcomes.
limitations:
1. impact on Economic Growth: Excessive credit control measures, such as high interest rates or strict lending criteria,
can restrict access to credit for businesses and consumers. This limitation may slow down economic growth by
reducing investment, consumption, and overall economic activity.
2. Risk of Over-Regulation: Overly stringent credit control regulations can stifle innovation and entrepreneurship by
making it difficult for small businesses and startups to access the necessary funding. This can hinder economic
dynamism and competitiveness in the long run.
3. Credit Market Distortions: Credit control policies, such as caps on interest rates or credit allocation quotas, can
distort the credit market by artificially influencing supply and demand dynamics. This can lead to misallocations of
capital and inefficiencies within the financial system.
4. Impact on Financial Inclusion: Stringent credit control measures may exclude certain segments of the population,
such as low-income individuals or those with limited credit history, from accessing affordable credit. This can
exacerbate income inequality and hinder efforts to promote financial inclusion and social mobility.
5. Pro-Cyclical Nature: Credit control measures often exhibit a pro-cyclical nature, meaning that they can exacerbate
economic booms and busts. For example, tightening credit during economic downturns can amplify the severity of
recessions, while loosening credit during expansions can fuel asset bubbles and speculative behavior.
6. Lack of Effectiveness: In some cases, credit control measures may fail to achieve their intended objectives due to
various factors such as regulatory arbitrage, financial innovation, or global economic conditions. For instance, banks may
find ways to circumvent regulations through off-balance-sheet transactions or complex financial products.
7. Unintended Consequences: Credit control measures can have unintended consequences that may outweigh their
benefits. For example, imposing strict lending standards to reduce default risk may inadvertently lead to a decline in lending
to productive sectors of the economy, resulting in slower growth and job creation.
Demonetization on india 2016
The demonetization initiative in India was announced on November 8, 2016, with the sudden invalidation of 500 and 1000
rupee banknotes. The government cited several objectives behind this move, including combating corruption, curbing black
money, promoting digital transactions, and fostering economic transparency. India's informal economy, extensive cash
usage, and prevalence of unaccounted wealth made it a prime candidate for such a policy intervention.The implementation
of demonetization in India involved several phases. Firstly, the government announced the immediate withdrawal of 500 and
1000 rupee banknotes as legal tender, effective midnight on November 8, 2016. Citizens were given a limited window to
deposit or exchange their old currency notes at banks and post offices. Additionally, new currency notes of 500 and 2000
rupees were introduced to replace the demonetized notes.

The primary objectives behind demonetization were multifaceted. Firstly, the government aimed to combat corruption and
curb the flow of illicit funds, often referred to as "black money," by rendering high-denomination currency notes useless for
transactions. This was expected to disrupt the operations of individuals and entities engaged in corrupt practices and tax
evasion. Additionally, demonetization sought to address the problem of counterfeit currency circulating in the economy,
which undermined the integrity of the Indian currency and posed a threat to financial stability.
The implementation of demonetization unfolded rapidly and caught many by surprise. On the evening of November 8, 2016,
Prime Minister Modi addressed the nation and announced the immediate invalidation of 500 and 1000 rupee banknotes as
legal tender, effective midnight. Citizens were given a limited window to exchange their old currency notes for new ones at
banks and post offices, with certain restrictions imposed on the amount that could be exchanged or withdrawn. New
currency notes of 500 and 2000 rupees were introduced to replace the demonetized notes.

n conclusion, demonetization in India in 2016 was a bold and unprecedented move aimed at addressing deep-rooted issues
of corruption, black money, and counterfeit currency. While the policy was intended to promote financial transparency and
digitization, its implementation challenges and adverse effects underscored the complexities of such drastic measures. As
India continues its journey towards economic reform and development, the lessons learned from demonetization will inform
future policy decisions, emphasizing the importance of balanced and evidence-based approaches to addressing
socio-economic challenges.