Question on RBI and NBFC
1. What is the Functions of RBI?
The Reserve Bank of India is the central bank of India, was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
"...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."
1. Monetary Authority:
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.
2. Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country's banking and financial system functions.
Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.
3. Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
4. Issuer of currency: Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.
5. Developmental role: Performs a wide range of promotional functions to support national objectives.
6. Related Functions: Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks.
2. What is monetary policy?
Monetary policy is the macroeconomic policy laid down by the central bank. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve economic growth and stability, to lower unemployment, and to maintain predictable exchange rates with other currencies.
3. What is a Non-Banking Financial Company (NBFC)?
Non-banking financial companies, or NBFCs, are financial institutions that provide certain types of banking services, but do not hold a banking license. Generally, these institutions are not allowed to take deposits from the public, which keeps them outside the scope of traditional oversight required under banking regulations.
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).
NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
1. NBFC cannot accept demand deposits;
2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
3. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.