Role of RBI | Economics Optional Notes for UPSC PDF Download

Nationalization of Banks – 1969

• Nationalization of banks was implemented under the Banking Companies (Acquisition and Transfer of Undertakings) Act of 1970. The ordinance came into force on 19 July 1969, “to better serve the needs of development of the economy in conformity with national policy objectives.”
• This move was aimed at aligning the banking system with the needs of economic policy and achieving a more equitable distribution of resources, especially in the context of development, where banks played a significant role. With the nationalization of 14 major banks by the government under the guidance of the RBI, the banking sector was given a significant boost towards achieving a more equitable distribution of resources and increasing financial inclusion.

Priority Sector Lending – 1972

• The roots of priority sector lending can be traced back to 1966 when Morarji Desai recognized the need for increased credit to agriculture and small industries. However, it wasn’t until a RBI report in the National Credit Council in 1972 that the definition for priority sector was formalized. In 1974, commercial banks were given a target of 33.33% of their ANBC, which was later increased to 40% on the recommendations of Dr. K.S. 
• Krishnaswamy committee. The introduction of priority sector lending also allowed the government to address important political lobbies after the nationalization of banks. Over time, the definition of priority sector lending has grown to cover important neglected sectors of the economy, with a focus on agriculture and small industries, which includes micro, small, and medium enterprises (MSME).

Liberalization of the Indian Economy – 1991

• In 1991, India faced a balance of payment crisis due to the increasing pressure on foreign reserves. The government of India initiated a series of economic reforms aimed at liberalizing and opening up the Indian economy. 
• RBI played a significant role in implementing these reforms, which included abolition of License Raj, reduction of import duties, liberalization of industrial licensing, and allowing foreign direct investment (FDI) in many sectors. As a result of these reforms, India’s international competitiveness increased in various sectors like auto components, telecommunications, software, pharmaceuticals, biotechnology, research and development, and professional services. Foreign investment in the country rose from US$132 million in 1991–92 to $5.3 billion in 1995–96. Poverty rates also decreased from 36% in 1993-94 to 26.1% in 1999-00.
• Overall, these reforms helped India shift from a protectionist and regulated economy to a market-oriented one, leading to increased economic growth, job creation, and a rise in living standards.

TReDS – 2014

• In order to address the issues of delayed payments and working capital inefficiencies faced by Micro, Small, and Medium Enterprises (MSMEs), the Reserve Bank of India (RBI) introduced Trade Receivables Discounting System (TReDS) in 2014. TReDS is an electronic platform where MSMEs can sell their trade receivables at a competitive rate to financiers, including banks and non-banking financial companies (NBFCs), through an auction mechanism. 
• As per RBI data, the number of invoices uploaded and financed through the TReDS has more than doubled in the financial year 2021-22 and the success rate has improved to 94.7 per cent from 91.3 per cent a year earlier. This indicates a growing acceptance of TReDS among MSMEs and financial institutions, which is expected to further improve cash flows and financing opportunities for MSMEs in the future.

Unified Payment Interface (UPI) – 2016

• The Unified Payment Interface (UPI) was launched by the National Payments Corporation of India (NPCI) in 2016 under the guidance of the Reserve Bank of India (RBI). The RBI played a significant role in conceptualizing and developing the UPI platform, which aimed to provide a seamless and instant payment experience to users across India.
• Since its launch, UPI has gained massive popularity among consumers and businesses alike, with the volume of UPI transactions increasing manifold from 0.45 crore in January 2017 to 804 crore in January 2023. The value of UPI transactions has also increased from just Rs 1,700 crore to Rs 12.98 lakh crore during the same period. These figures demonstrate the enormous impact that UPI has had on driving digital payments adoption in India, promoting financial inclusion, and reducing the dependency on cash transactions.

Bharat Bill Payment System (BBPS) – 2019

• Bharat Bill Payment System (BBPS) was launched in 2019 by the National Payments Corporation of India (NPCI) under the guidance of the Reserve Bank of India (RBI). It is an integrated bill payment system that offers interoperable and accessible bill payment services to customers through a network of agents or online channels. BBPS provides a one-stop solution for payment of various bills such as electricity, gas, water, DTH, mobile postpaid, broadband, landline, municipal taxes, and more. 
• The introduction of BBPS has helped in increasing the adoption of digital payments and has contributed towards the government’s goal of creating a less-cash economy. From April to November of FY23, BBPS processed ₹1.22-lakh crore or 689.63 million (in volume) transactions. Compared to FY18’s load of ₹9,099.3 crore (73.39 million) transactions, this is an exponential leap.

Aadhar-based eKYC – 2019

• In 2019, the Reserve Bank of India (RBI) approved new Aadhaar eKYC norms, paving the way for digital verification of identity and address. The Aadhaar eKYC process enables financial institutions to authenticate customers’ identities remotely, without the need for physical documentation.
• Since its introduction, Aadhaar eKYC has significantly streamlined the customer onboarding process for banks, insurance companies, and other financial institutions. In the third quarter of the financial year 2022-23, Aadhaar eKYC transactions jumped 18.53% to 84.8 crore, indicating the increasing adoption and popularity of the digital identity verification method.
• In another move to promote digitization, the RBI also allowed non-banking financial companies (NBFCs) to apply for Aadhaar eKYC authentication licenses, enabling them to perform online customer verifications. This decision is expected to boost the use of Aadhaar eKYC and further reduce the need for physical documentation, making financial transactions more seamless and efficient.

Emergency Credit Line Guarantee Scheme (ECLGS) – 2020

• The Emergency Credit Line Guarantee Scheme (ECLGS) was launched by the Government of India in May 2020 to provide immediate credit assistance to small and medium enterprises (SMEs) affected by the COVID-19 pandemic. The Reserve Bank of India (RBI) played a crucial role in the implementation of the scheme by providing necessary guidelines and regulatory support to banks and financial institutions.
• The scheme has been successful in providing much-needed liquidity support to SMEs, as the credit to MSMEs by scheduled commercial banks in the past eight years has grown by 71 per cent from Rs. 11.71 lakh crore deployed during the financial year 2014-15 to Rs. 20.11 lakh crore during the financial year 2021-22. This has helped to mitigate the financial stress faced by SMEs due to the COVID-19 pandemic and support the overall economic recovery.

Account Aggregator (AA) – 2021

• The Reserve Bank of India (RBI) launched the Account Aggregator (AA) framework in September 2021 to enable easier sharing of financial data across multiple financial institutions. The framework allows customers to manage their financial data from various financial entities in a secure and seamless manner through a consent-based mechanism.
• A year after its official release, India’s Account Aggregator ecosystem boasts of 1.1 billion AA-enabled accounts and has already seen 2.05 million users voluntarily share their financial data with banks and financial institutions to avail loans, etc. The launch of the Account Aggregator framework is expected to revolutionize the way individuals and small businesses manage their finances, making it easier and more convenient for them to access a range of financial services.