B Com Exam > B Com Notes > Indian Financial System > Introduction - Central Banking, Indian Financial System
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Introduction
The pattern of central banking in India was based on the Bank of England. England had a highly developed banking system in which the functioning of the central bank as a banker's bank and their regulation of money supply set the pattern. The central bank's, function as 'a: lender of last resort' was oil the condition that the banks maintain stable cash ratios as prescribed from time to time. The effective functioning of the British model depends on an active securities market where open market operations can be conducted at the discount rate. The effectiveness of open market operations however depends on the member banks' dependence on the central bank and the influence it wields on interest rates. Later models, especially those in developing countries showed that central banks play an advisory role and render technical services in the field of foreign exchange, foster the growth of a sound financial system and act as a banker to government.
|
Liabilities |
Rs. |
% |
Assets |
Rs. |
% |
|
|
Crores |
|
|
Crores |
|
|
1. Capital |
18,447 |
1.66 |
Cash and Balance |
85,371 |
7.69% |
|
2. Reserves & Surplus |
43,834 |
3.95 |
with RBI |
|
|
|
|
|
|
Balances with banks and money at call and short notice |
81,019 |
7.30 |
|
3. Deposits |
900,307 |
81.08 |
Investments |
4,13,871 |
37.27 |
|
Demand |
1,29,339 |
11.65 |
Government securities |
2,88,178 |
25.95 |
|
Savings |
1,88,483 |
16.97 |
|
|
|
|
Term |
5,82,485 |
52.46 |
Other approved |
25,243 |
2.27 |
|
|
|
|
Non approved |
1,00,450 |
9.05 |
|
4. Borrowings |
43,350 |
4.09 |
Loans and Advances |
4,43,469 |
39.94 |
|
5. Other |
1,02,420 |
9.22 |
Bills purchased and discount |
43,051 |
3.88 |
|
Liabilities and Provisions |
|
|
Cash Credit and over drafts |
2,41,596 |
21.76 |
|
(Unclassified |
|
|
Terms |
1,58,822 |
|
|
Total Liabilities |
11,10,368 |
100.0 |
Total assets |
11,10,368 | 100.0 |
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FAQs on Introduction - Central Banking, Indian Financial System - Indian Financial System - B Com
| 1. What is a central bank and what is its role in the Indian financial system? |  |
Ans. A central bank is a financial institution responsible for managing a country's money supply, controlling interest rates, and ensuring the stability of the financial system. In the Indian financial system, the Reserve Bank of India (RBI) acts as the central bank. Its role includes regulating and supervising banks, conducting monetary policy, issuing currency, and managing foreign exchange reserves.
| 2. How does the central bank control interest rates in India? | |
Ans. The central bank controls interest rates in India through its monetary policy. It uses various tools such as the repo rate, reverse repo rate, and the cash reserve ratio (CRR) to influence the liquidity in the banking system. By adjusting these rates, the central bank can either increase or decrease the cost of borrowing for commercial banks, which in turn affects the interest rates offered to borrowers.
| 3. What is the significance of the Reserve Bank of India (RBI) in the Indian financial system? | |
Ans. The Reserve Bank of India (RBI) plays a crucial role in the Indian financial system. It acts as the regulator and supervisor of banks, ensuring their stability and soundness. The RBI also formulates and implements monetary policy to control inflation and promote economic growth. Additionally, it manages the country's foreign exchange reserves and issues and regulates the Indian rupee.
| 4. How does the central bank regulate and supervise banks in India? | |
Ans. The central bank, i.e., the Reserve Bank of India (RBI), regulates and supervises banks in India through various mechanisms. It issues banking licenses, sets prudential norms and guidelines, and conducts regular inspections and audits to ensure compliance. The RBI also monitors banks' capital adequacy, asset quality, management efficiency, and liquidity to maintain the stability and integrity of the banking system.
| 5. What is the role of the central bank in managing the foreign exchange reserves of India? | |
Ans. The central bank, i.e., the Reserve Bank of India (RBI), manages the foreign exchange reserves of India. It aims to maintain stability in the foreign exchange market and ensure the availability of foreign currency to meet the country's international payment obligations. The RBI intervenes in the market by buying and selling foreign currencies to regulate the exchange rate and prevent excessive volatility. The foreign exchange reserves also act as a buffer to mitigate external shocks and maintain confidence in the Indian economy.
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