RBI as Banker to other Banks and as Lender of Last Resort (LOLR)

RBI is bank of all banks in India. As a banker of banks, RBI:

• Enables smooth and swift clearing and settlements of inter-bank transactions
• Provides efficient means of funds transfer for all banks
• Enables banks to maintain their accounts with RBI for statutory reserve requirements and maintenance of transaction balances
• Acts as lender of last resort (LORL)

Reserve Bank maintains current account of all other banks and provides them facility to maintain cash reserves and also to carry out inter-bank transactions.  RBI provides the Real Time Gross Settlement System (RTGS) facility to the banks for inter-bank transactions.

Statuary Reserves

As per the Banking Regulations Act 1949, Banks have to keep a portion of their demand and time liabilities as cash reserves with the Reserve Bank, thus necessitating a need for maintaining accounts with the Bank. Earlier, (originally in the BR act) it was as follows – 5% of demand liabilities and 2% of time liabilities. But now it is the portion of Net Demand and Time Liabilities (NDTL). So, the RBI provides banks with the facility of opening accounts with itself. This is the ‘Banker to Banks’ function of the Reserve Bank, which is delivered through the Deposit Accounts Department (DAD) of RBI at regional offices.

RBI continuously monitors the transactions and operations of these accounts so that defaults don’t take place.

Lender of the Last Resort (LORL)

The banks can borrow from the RBI by keeping eligible securities as collateral or any other arrangement and at the time of need or crisis, they approach RBI for financial help. Thus RBI works as Lender of the Last Resort (LORL) for banks.

How RBI regulated and supervises the Financial System?

One of the most important functions of RBI is to work as regulator and supervisor of financial system. RBI not only regulates and supervises the Indian Banks but also Foreign Banks, Regional Rural Banks, Local Area Banks, Cooperative Banks, Financial Institutions including Development Financial Institutions (DFIs) and Non-Banking Financial Companies.