Rbi, exim bank, NABARD, MOST IMPORTANT eNotes For BCOM Entrance Exam 2022

Role and Functions of RBI(SUMMARY)

The structure of RBI with elaboration on its board is discussed. 

The role and functions of the institution is delineated. How RBI manages the tradeoff between economic growth and inflation is explained as a part of its monetary policy. 

The various monetary tools at its disposal like bank rate, CRR, SLR, Repo, Reverse Repo, etc are discussed. 

Reserve Bank of India 

The Reserve Bank of India was established in 1935 under the provisions of the Reserve Bank of India Act, 1934. It was located earlier in Calcutta but later moved to Bombay. 

Though originally privately owned, RBI was nationalized in 1949 Organization and Management: 

• The Reserve Bank is headed by a Central Board of Directors. 

• The board is appointed by the Government of India for a period of four years, under the Reserve Bank of India Act. 

• The board comprises of a Governor and not more than four Deputy Governors. 

• The current Governor of RBI is Mr. Shaktikanta Das. 

• Ten directors amongst whom two are government officials and others are distinguished personalities in their respective fields are nominated by Government.

• There are four more directors who are from four local boards respectively. 

Roles and Functions of RBI 

Monetary Authority: 

• It formulates, implements and monitors the monetary policy. 

• It is entrusted with maintaining price stability, and keeping inflation in check 

• It ensures adequate flow of credit to productive sectors. Regulation and monitoring of the financial system: 

• It sets the standards of banking operations according to which the country’s banking and financial system functions 

• It maintains public confidence in the financial system • It protects the interests of the depositors 

• It provides cost-effective banking services to the general public Regulation and monitoring of the payment systems:

• It authorizes and directs the setting up of payment systems • It lays down parameters for functioning of the payment system • It prescribes the policies for transition from paper-based 

payment systems to electronic modes of payments. 

• It establishes the regulatory framework of newer payment methods. 

• It works for enhancement of customer convenience in payment systems. 

• It stresses on improving the security and efficiency in modes of payment. 

Regulation of Foreign Exchange: 

• RBI regulates foreign exchange under the FEMA- Foreign Exchange Management Act, 1999 

• It facilitates allforeign trade and payment 

• It advancesthe development of foreign exchange market. Issuer of currency:

• RBI issues and exchanges currency as well as destroys currency & coins notfit for circulation to avoid public inconvenience. 

• It ensures that the public has an adequate quantity of supplies of currency notes and in good quality to avoid artificial bottlenecks forthe economy. 

Promotional role: 

• RBI is entrusted with a wide range of promotional functions in furtherance of national objectives. 

• It has set up institutionslikeNABARD, IDBI, SIDBI, NHB, etc. Banker to the Government: 

• It performs banking function for the central and the state governments ofthe country. 

Banker to banks: 

• RBI is entrusted with maintaining the banking accounts of all scheduled banks

• It acts as the banker of last resort. Being an expert on financial and economic matters it acts as an agent of Government of India in the IMF. 

Offices and Training Centers 

RBI has 20 regional offices and 11 Sub-offices. In 

total it hasits offices at 31 locations. 

• It has five training establishments. Amongst these five, College of Agricultural Banking and Reserve Bank of India Staff College are part of the Reserve Bank. 

• National Institute for Bank Management; Indira Gandhi Institute for Development Research (IGIDR); Institute for Development and Research in Banking Technology (IDRBT) are autonomous entities. 

Monitoring of Monetary Policy 

• The RBI formulates, operationalizes and monitors the monetary policy 

• The Monetary Policy Committee (MPC) is responsible for fixing the benchmark policy interestrate (repo rate) 

Themain objectives of monitoring monetary policy are:

• Maintaining price stability as well as ensuring the growth of the economy as a whole. 

• Inflation control (containing inflation at 4%, with a standard deviation of 2%) 

• Ensuring the proper flow of bank credit 

• Controlling the Interest rate levels in the interests of the economy. Bank rate 

• The rate at which central bank provides loan to commercial banks 

• This is the most significant tool with the RBI to control the money supply in long term lending. 

• At present it is 4.25%. 

• When RBI increases the bank rate the loan becomes more expensive for the commercial banks with the result that 

they also in turn raise their rate of lending. 

• The cumulative effect of the above measure is that the common borrowers find it tougher to take loans which ultimately brings about a fall in the volume of the lending activity. 

• The reverse happens in case of a decrease in the bank rate which in turn causes a rise in the lending activity.

• So it is an effective tool to pump or such money from the economy as a whole. 

Cash Reserve Ratio (CRR) 

• It refers to the minimum amount of funds in the form of cash deposits that a commercial bank has to maintain with the Reserve Bank of India. 

• An increase in this ratio will deprive commercial banks of much of their cash funds which they could have used for lending purposes. 

• The consequence of the above measure would be a decrease of money supply in the economy as a whole. 

• On the contrary, a fall in CRR will lead to an increase in the money supply as commercial banks would have surplus cash funds for lending purposes. 

• Currently, it is 3%. 

Statuary Liquidity Ratio (SLR) 

• It refers to the minimum amount of assets in the form of non-cash deposits that a commercial bank has to maintain with itself. 

• When SLR is increased by RBI the lending power of the commercial banks goes down.

• Consequently the overall money supply decreases as liquidity is sucked out of the economy as a whole. 

• When SLR is decreased by RBI the lending power of the commercial banks goes up. 

• In this case the money supply in the economy increases and the liquidity is pumped into the economy as a whole. 

• Currently, SLR is 18%. 

Liquidity Adjustment Facility 

• Liquidity Adjustment Facility helps banks to adjust their daily liquiditymismatches. 

Repo Rate 

• Repo (Repurchase) rate is the rate at which the RBI lends short-term money against securities to variousscheduled commercial banks. 

• When the repo rate increases short term borrowing from RBI becomes more expensive. 

• Repo rate is always higher than the reverse repo rate. • At presentit is 4.00% 

Reverse Repo Rate

• It is the exact opposite of repo. 

• In a reverse repo transaction, banks lend money to RBI against government securities and earn interest on it. 

• So, Reverse repo rate is the rate at which RBI borrows money from banks. 

• The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns. 

• The rate of interest is kept low so as to discourage banksfrom resorting to this measure. 

• At present it is 3.35% 

National Bank for Agriculture And Rural Development 

• The National Bank for Agriculture And Rural Development is popularly referred to as NABARD. 

• NABARD is designated as an apex development bank in the country. 

• Established in 1982 by a Special Act of the Parliament, with a mandate to uplift rural India by facilitating credit flow in agriculture, cottage and village industries, handicrafts and small-scale industries 

• It is also required to support non-farm sector 

• Government of India holds 99% stake in NABARD. 

Role of NABARD:

• It has power to deal with all matters concerning policy, planning as well as operations in giving credit for agriculture and other economic activities in the rural areas. 

• It is a refinancing agency for those institutions working for rural development. 

• Monitoring, restructuring of credit institutions, and training of personnel 

• It co-ordinates the rural credit financing activities 

• Liaison with Government of India, and State Governments, and also RBI and other national level institutions 

• It prepares rural credit plans, annually, for all districts in the country. 

It also promotes research in rural banking, and the field of agriculture and rural development 

Functions of NABARD: 

• NABARD gives high priority to projects formed under IRDP. 

• IRDP- Integrated Rural Development Programme launched on 2nd October, 1980 for providing self employment to rural poor. 

• It is making efforts to establish linkages between Self-help Group(SHG) that are organized by voluntary agencies for poor and needy in rural areas and other official credit agencies. 

• It refinances those projects that are taken under the “National Watershed Development Programme” and the “National Mission of Wasteland Development”.

• District Oriented Monitoring Studies to ascertain their performance and to identify the constraints in their 

implementation, It also initiates appropriate action to remedy them. 

EXIM BANK 

✔ It is only during the 1980s, the need to increase India’s export was felt, owing to increased foreign debts, 

✔ It compelled India to go for an Apex institution and the Export Import Bank (Exim Bank) was set up in 1982. 

✔Change in the world market and the creation of World Trade Organization (WTO) further validated the move 

Functions of Exim Bank 

Finance for exports and Imports: 

• Exim bank helps by providing finance for exports and imports of goods as well as services from India 

• One of the major export policies adopted by government of India is the export of value added items 

• The exporter who was earning 1 or 2 dollars while exporting Hades and skins will now earn 25 to 30 dollars when he exports in the form of leather goods 

• Import of raw materials such as gold will be financed by Exim bank, since it will be exported as jewels which is again a value added export.

Finance on deferred basis 

• Exim bank provides finance on deferred basis for importing capital equipment and other machinery 

• Provides guarantee on behalf on the importer and enables making payment on installment basis 

• Bank itself may pay in bulk to the foreign exporter and receive installment payments from the Indian importer. 

Finance to export projects: 

• Export projects in Third World countries are financed • Railway project in Tanzania 

• Oil wells in Kuwait and Iraq taken up by Oil and Natural Gas Commission (ONGC) 

• All the necessary equipment and the manpower required for such projects will be financed by the Exim bank. 

Line of credit 

• Provides line of credit to foreign importers so that exports from India can increase.

• Exim bank will provide finance to the Central bank of the borrowing country which in turn will provide to the commercial bank and importer. 

• This kind of credit is safe as there is guarantee of funds at every stage that ultimately the credit will reach the importer 

Refinance in foreign exchange 

• Different types of exporters may require different foreign currencies and these are obtained by the Exim bank at a competitive interest rate and are given to commercial banks for lending to exporters 

Contribution to Equity fund 

• Export companies while raising capital, may issue shares which may be partly financed by Exim bank. 

• The bank may extend this facility as a temporary finance as it will not retain the shares permanently. 

Consultancy Services 

• Provides technical, administrative and other assistance to exporters.

• Export projects are analyzed by the Exim bank from the point of view of technical, managerial, marketing and financial feasibility. 

• When it finds a project viable, on the above grounds, it will not hesitate to fund it. 

The total assistance provided by the Exim bank has exceeded more than Rs. 3,000 crores. 

In the coming years, the bank is likely to play a major role in the export of automobiles and other non traditional items. 

Small Industries and Development Bank of India (SIDBI) 

• SIDBI deals with the financing, promotion and development of the Micro, Small and Medium Enterprises(MSMEs) 

• SIDBI’s main emphasis is on bolstering the MSME sector by looking into the credit and fund requirements.

• The institution helps the MSMEs in getting credit for the development, commercialization and marketing of their innovative ideas and products. 

• SIDBI has several customized offerings which it provides by way of several loan schemes and services in order to meet the diverse requirements of the industries. 

Functions of SIDBI 

• SIDBI provides financial aid to MSMEs, Small Scale Industries (SSIs), and other service sectors. 

• It provides various credit requirements through various banks, NBFCs, and other financial bodies. 

• Apart from providing general credit SIDBI is also concerned about the development of skills and their sustenance by proper funding. 

SCHEMES OF SIDBI

Direct Loans 

SMILE (SIDBI Make in India Soft Loan Fund for MSME): 

• SMILE emphasizes on covering the financial requirements of new ventures which are in the manufacturing/servicessector. 

• The minimum loan amount offered under this scheme is Rs. 10 lakh for finance of plant and machinery and Rs. 25 lakh for general purposes. 

• The tenure for repayment is maximum of 10 years, in which moratorium period of maximum 36 months is offered. 

SMILE Equipment Finance (SEF): 

• SEF is popular because of very simplified application procedure with very competitive interest rates.

• MSMEs which require funding for buying plant and machinery are targeted in this loan scheme. 

• The minimum loan amount is Rs. 10 Lakhs and the repayment period is 72 months. 

Loans under Partnership with OEM (Original Equipment Manufacturer): 

• This loan scheme is designed for the MSMEs that require purchasing machines from the OEMs. 

• For availing this loan a minimum of 3 years of existence is required and 60 months are allowed for repayment. 

• The maximum loan amount offered under this scheme is Rs. 1 crores. 

Working Capital (Cash Credit):

• Under this scheme working capital requirement of the MSMEs is taken care of. 

• This scheme entails seamless approvals based on the exact needs of the borrower. 

SIDBI Trader Finance Scheme (STFS) 

• This scheme is meant for retailers and wholesalers who have been in existence for 3 years and have a creditable financialstanding. 

• The range for the loan under this scheme is betweenRs. 10 lakhsto Rs. 1 crores. 

• Rather than providing a repayment period beforehand it is decided keeping in mind the cash flow and capacity of the business entity. 

• The maximum repayment period offered under this scheme is 60 months.

Loan for Purchase of Equipment for Enterprise’s Development (SPEED) 

• This scheme provides an opportunity for 100% financing and the loan amount is Rs. 1 crores for first time borrowers and Rs. 2 crores for past customers. 

• The repayment period allowed is from 2 to 5 years with added facility of a moratorium of 3 to 6 months. Minimum 3 years of existence is mandatory. 

• The interest rate applicable under this scheme is from 9.25% to 10% per annum. 

SIDBI’s Venture Capital 

Start-ups Lifecycle along with SIDBI’sinterventions: 

• The new ventures keep on needing funds intermittently rather than a lump sum at the beginning.

This requirement of these start ups is catered to by SIDBI underthis. 

• This initiative aids in generating the funding in collaboration with other commercial banks,NBFCs and SFBs Funds of Fundsfor Start-ups: 

• The Government of India embarked on this initiative so that alternate sources of investment are institutionalized under the 

Alternate Investment Funds (AIFs) provision to promote startup eco systemin the country. 

• It aims to encourage the growth and development of culture of innovation in various ventures for betterment of the economy as a whole. 

Aspire Fund:

As the name suggests, Aspire fund is aimed at aiding those start ups which are aspiring for a profitable venture and require some support in the initial stages. 

India Aspiration Fund: 

This fund was established with the help of RBI in order to promote equity based investments in the MSME sector which would be helpful to many companies in the sector. 

SIDBI’s Micro-Lending 

Micro-Lending Development: The aim of this is to help support people who are not financially independent through small funds appropriate to kick start some micro venture which is profitable and sustainable. 

Responsible Finance Initiatives: In order to promote cooperation and the right credit practices, this loan scheme is a considerable support to the banks and

other financial institutions in the country Beyond Microfinance: This loan scheme helps the micro entrepreneurs to graduate from micro to higher levels of credit at competitive rates. 

Microfinance Institutions in India 

• Reserve bank of India defines MFI as “a nondeposit taking NBFC with Minimum Net Owned Funds of Rs 5 crores and having not less than 85% of its net assets as “qualifying assets”. 

• The purpose of microfinance sector is to help out the lower income people to become financial independent which otherwise could not have been met by the existing financial institutions. 

• Muhammad Yunus started Grameen Bank in Bangladesh in 1976 which laid the foundation for the microfinance sector. He was awarded Nobel Prize for this at the start of the 21st century. 

• Microfinance came up to bridge the gap which was created as the lower income group was not being catered by the traditional banking and allied services. 

• Microfinance should not be considered as just a credit providing mechanism rather it is an economic tool to help the downtrodden being pulled out of their

poverty. 

• Though it is known mostly as a small loan provider but it also provides various other services like savings, remittance, insurance, apart from non financial services like training and counseling support to start own business and that too in a convenient way. 

• Microfinance Institutions (MFIs) in India exist as NGOs (registered as societies or trusts), Section 25 companies and Non-Banking Financial 

Companies(NBFCs). 

• The MFIs usually are provided finance by the financial entities like Commercial Banks, Regional Rural Banks(RRBs), cooperative societies, etc. 

• The Self-Help Groups (SHGs) have been instrumental in collaborating with the MFIs in the provision of credit directly to the group borrowers. 

Salient Features of Microfinance 

• Usually the lower income group is targeted as borrowers by the MFIs. • Loans are in the very low range which averages usually in few thousands. • The loans are usually of very short duration. 

• No collateral is demanded againstthe loans. 

• The repayment rate has had been very high before the crisisthat erupted in 2010. 

• Loans are given usually for generating income

which could be in turn used for repayments of loan. 

Gaps in Financial System and Need for Microfinance 

• Based on various research and surveys done by national and international institutions it has been established that India is home to almost one third of the world’s poor. 

• Government has been trying to eradicate poverty through various schemes for long but not much progress has been achieved as these schemes lack sustainability. This task of helping people to stand on their feet has been commendably done by the MFIs. 

• Various reports reveal that MFIs have been able to help people raise their incomes and quality of life. 

• Most of the people till very recently had been left out of the banking services ambit but have found finan