Why Reserve Bank of India acts as a Banker's Bank?


Reserve bank of India is the central regulating body for all the banks in India. Ever thought why and how? I would be discussing here why reserve bank of India acts as a Banker's bank.

Reserve Bank of India is the Central Bank in our country. It was established in 1935. As a central bank, it has a control over the entire currency and the banking system in India. It acts as the banker to the state as well as Central Government. It has exclusive right to issue currency notes in the country. As an apex bank, it acts as as the banker's bank also. All the commercial banks in India are supposed to keep a cash reserve ratio with this bank.

Commercial banks create credit. It is the duty of the RBI to control the credit through the CRR, bank rate and open market operations. As banker's bank, the RBI facilitates the clearing of checks between the commercial banks and helps inter-bank transfer of funds. It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by providing emergency advances to the banks. It supervises the functioning of the commercial banks and take action against it if need arises.


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Comments

Author: dolly03 Jan 2014 Member Level: Silver   Points : 5

Very nice article on RBI and its functions. I want to add some point on ' Why RBI is called as banker's bank.'
1. Provides loan to banks/bankers :- As banker give the loan to their customer, similarly RBI gives loan to banks/bankers.

2. Accept Deposits of Banks:- The customer deposit their money to bank for getting interest, similarly RBI accept the deposits of banks and provide the interest to banks for deposit.

3. Rediscount the bills:- Banks discount the bills of its customer for financing uts customer, RBI rediscount these bill to re-finance the bankers.
Here discounting means to that banks provide the money to customers for exchange of bill before maturity date of bill and get the commission for that.



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