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RBI and the History of Banking in India

RBI and the History of Banking in India

Based on the report of the Hilton Young Commission, the Reserve Bank of India was established on 1 April 1935. In 1937 the headquarters of RBI was moved from Kolkata to Mumbai. RBI was nationalised in 1949.

RBI continued to work as the Central Bank of:

a) Burma (till 1948)
b) Pakistan (till 1948)
c) Kuwait (till 1959)


Key Functions of RBI

Issuer of Notes - The Reserve Bank of India has the sole right to issue currency notes of various denominations except one rupee notes and coins (which are issued by the Ministry of Finance).

Banker to the Government - The second important function of the Reserve Bank is to act as the Banker, Agent and Adviser to the Government of India and states. It performs all the banking functions of the State and Central Government and it also tenders useful advice to the government on matters related to economic and monetary policy. It also manages the public debt of the government.

The Banker's Bank - The RBI lends money to all the commercial banks of the country.

Regulation of the Flow of Credit - When RBI observes that the economy has sufficient money supply and it may cause an inflationary situation in the country then it squeezes the money supply through its tight monetary policy and vice versa.
The State Bank of India works as RBI's agent at places where it has no office of its own.

The Quantitative Tools of Monetary Policy of RBI

CRR, SLR, Bank Rate, Repo Rate, Reverse Repo Rate, Open Market Operations.

The Qualitative Tools of Monetary Policy

Change in the margin money, direct action, moral suasion.

Repo Rate (Repurchase Rate): It is a rate at which RBI lends to banks for short periods against government securities. Its objective is to inject liquidity into the system. An increase in repo rate squeezes liquidity out of the system and increases interest rates, which will then reduce demand for funds and reduce inflation.

Reverse Repo Rate: It is defined as the rate at which the Reserve Bank of India (RBI) borrows money from banks for the short term. The Reverse Repo Rate helps the RBI get money from the banks when it needs.

Cash Reserve Ratio (CRR): The percentage of cash required to be kept in reserves, vis-a-vis a bank's total deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank's vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI under the CRR requirements.

Statutory Liquidity Ratio (SLR): SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers.

Governors of RBI

The first Indian-origin governor of the Reserve Bank of India was C.D. Deshmukh, while the very first Governor of RBI was Osborne Smith, an Englishman. The 23rd governor of RBI was Raghuram Rajan. The 24th governor of RBI was Urjit Patel. And the 25th governor of RBI is Shaktikanta Das.

The Logo of RBI

The logo of RBI consists of a tiger with a palm tree in the background.

Structure of Banking System in India:

All banks can be classified as scheduled banks and non scheduled banks based on the RBI Act, 1934.


  • Scheduled Banks: These banks are listed in the second schedule of RBI Act, 1934. These banks are eligible for obtaining loans from RBI on Bank Rate.


  • Non Scheduled Banks: These banks are not listed in the second schedule of RBI Act, 1934. These banks are not eligible for obtaining loans from the RBI. These banks keep CRR with itself, not with RBI.


Types of Scheduled Banks:

  • Commercial Banks

  • Cooperative Banks

  • Development Banks


Commercial Banks:

Commercial banks are regulated under Banking Regulation Act, 1949. They can accept deposits, provide loans and other financial services to earn profit. Commercial banks can be categorised as follows:


  • Public Sector Banks: In these banks, the majority of shares (more than 50%) are held by the Government.


  • Private Sector Banks: In these banks, the majority shares are not held by the government.


  • Regional Rural Banks (RRB): The Regional Rural Banks (RRBs) were established in 1975 with a view to developing the rural economy by providing, for the purpose of development of agriculture, trade, commerce, industry and other productive activities. They were started by M. Swaminathan who is called the father of regional rural banks. Prathama Bank, with head office in Moradabad, Uttar Pradesh was the first RRB. After the Kelkar committee’s recommendations in April 1987, no new RRBs were opened. The RRBs are regulated by NABARD.


  • Foreign Sector Banks: Foreign sector banks are defined as banks from a foreign country working in India through branches. RBI released guidelines for these banks in 2005.


Cooperative Banks:

Established with the aim of funding agriculture, cottage industries etc. They can perform both deposits and lending activities.


Development Banks:

  • Industrial Development Bank of India (IDBI): It was established in 1964 to provide credit and other financial facilities for the development of Indian industry.


  • Industrial Credit and Investment Corporation of India (ICICI): ICICI Bank Limited is an Indian multinational bank and financial services company with its corporate office in Mumbai, Maharashtra. It was founded in 1994.


  • Small Industries Development Bank of India (SIDBI): Founded in 1990, SIDBI is mandated to serve as the Principal Financial Institution for executing the triple agenda of promotion, financing and development of the MSME sector and coordination of the functions of the various Institutions engaged in similar activities.


  • National Bank for Agriculture and Rural Development (NABARD): Founded in 1982 and headquartered in Mumbai, NABARD, as a Development Bank, is mandated for providing and regulating credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas.


  • Export and Import Bank of India (EXIM): The main function of the Export and Import Bank of India (EXIM) is to provide financial and other assistance to importers and exporters of the country. And it oversees and coordinates the working of other institutions that work in the import-export sector. It was founded in 1982 and it is headquartered in Mumbai.


  • National Housing Bank of India (NHB): National Housing Bank is the apex regulatory body for overall regulation and licensing of housing finance companies in India. It is under the jurisdiction of the Ministry of Finance, Government of India. It was set up on 9 July 1988 under the National Housing Bank Act, 1987. It is headquartered in New Delhi.


  • Micro Units Development and Refinance Agency Bank (MUDRA Bank): It is a public sector financial institution in India. It provides loans at low rates to micro-finance institutions and non-banking financial institutions which then provide credit to MSMEs. It was launched by Prime Minister Narendra Modi on 8 April 2015.


The History of Banking in India

Allahabad bank founded in 1865 is India’s oldest joint stock bank. It is also known as India’s oldest public sector bank.

The Bank of Bengal, The Bank of Bombay and The Bank of Madras were known as the presidency banks which introduced savings accounts in India for the first time. These banks were amalgamated in 1921 to form the Imperial Bank of India. The Bengal presidency Bank was the first bank to introduce the cheque system in India.

Bank of India is the first Indian bank to open a branch outside India at London in 1946.

The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in India.

The Reserve Bank of India was nationalised in 1949. The State Bank of India (erstwhile Imperial Bank of India) was nationalised in 1955, with RBI taking 60% of its stake. The SBI is the largest public sector bank in India.

In 1969 the government of India decided to nationalise 14 largest banks, these include Punjab National Bank, Central Bank of India, Allahabad Bank, Dena Bank, Bank of Baroda, Syndicate Bank, UCO Bank, United Bank of India, Bank of Maharashtra, etc. Another six commercial banks were nationalised in April 1980.

The liberalisation of Indian Banking and Regulation was done based on recommendation of M. Narasimham committee in 1991.

The Bull and Bear Market

Terms Bull market and Bear market are associated with the share market.

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