Vista Academy

Vista Academy

Meaning characteristic and types of banks in banking system India    

Meaning characteristic and types of banks in banking system India

Meaning of Banks

A bank is financial institution that provides banking and other financial services to their customer.

Indian Banking systemFree stock photos from

A bank allows a person with excess money (Saver) to deposit his money in the bank and earns an interest rate. Similarly, the bank lends to a person who needs money (investor/borrower) at an interest rate. Thus, the banks act as an intermediary between the saver and the borrower.

The bank usually takes a deposit from the public at a much lower rate called deposit rate and lends the money to the borrower at a higher interest rate called lending rate.

The difference between the deposit and lending rate is called ‘net interest spread’, and the interest spread constitutes the banks income.

The banking industry handles finances in a country including cash and credit. Banks are the institutional bodies that accept deposits and grant credit to the entities and play a major role in maintaining the economic stature of a country. Given their importance in the economy, banks are kept under strict regulation in most of the countries. In India, the Reserve Bank of India (RBI) is the apex banking institution that regulates the monetary policy in the country.


The following function of bank

  • To provide the security to the saving of customer
  • To control the supply of money and credit.
  • To avoid focus of financial power in the hands of few individuals and institutions.
  • To set equal norms and conditions rate of interest period of lending etc to all types of customers.

Reserve Bank of India

The Reserve Bank of India (RBI) is India’s central bank, also known as the banker’s bank. The RBI controls monetary and other banking policies of the Indian government. The Reserve Bank of India (RBI) was established on April 1, 1935, in accordance with the Reserve Bank of India Act, 1934. The Reserve Bank is permanently situated in Mumbai since 1937.

Objectives of RBI

The primary objectives of RBI are to supervise and undertake initiatives for the financial sector consisting of commercial banks, financial institutions and non-banking financial companies (NBFCs).

Some key initiatives are:

  • Restructuring bank inspections
  • Fortifying the role of statutory auditors in the banking system


Major Functions of RBI

  • Monetary Authority Formulating and implementing the national monetary policy.
  • Maintaining price stability across all sectors while also keeping the objective of growth.
  • Regulatory and Supervisory Set parameters for banks and financial operations within which banking and financial systems function.
  • Protect investors interest and provide economic and cost-effective banking to the public.
  • Foreign Exchange Management Oversees the Foreign Exchange Management Act, 1999.
  • Facilitate external trade and development of foreign exchange market in India.
  • Currency Issuer Issues, exchanges or destroys currency and not fit for circulation.
  • Provides the public adequately with currency notes and coins and in good quality.
  • Developmental role Promotes and performs promotional functions to support national banking and financial objectives.
  • Related Functions Provides banking solutions to the central and the state governments and also acts as their banker.
  • Chief Banker to all banks: maintains banking accounts of all scheduled banks.

Traditional function of RBI

These are those function which every central bank of nation performs all over the world. These function are in the line with the objectives with which the bank is set up .It includes fundamental function of central bank.

General Banking functions

Reserve bank is not a commercial bank yet being the central bank. It perform certain banking function as well

To accept deposits

The bank accepts deposit of the central government. State government and poet trust without paying any interest.

To deal in bills

Reserve bank buys sells and re discounts the bills, promissory notes and underlies. However these bill should not be of duration exceeding 90 days and should be payable within the country.

Lending of money

As central bank the reserve bank of India gives loans are of duration of not more than 90 days .The loans are given against securities credit notes of the banks and gold or silver.

To deal in agricultural bills

Reserve bank also buy sells and discounts agricultural bills. These bill should be payable in India and should not be of duration exceeding 15 months.

To deal in foreign securities

The RBI deals in all such foreign securities which are cash able within 10 years from the date of purchase.

Taking of loan

Reserve bank of India can borrow loan on the security of assets from scheduled banks .Duration of such loan should not exceed 30 days nor should it exceed the total capital of the bank.

To deal in Costly metals

Reserve bank deals in the sale and purchase of gold,silver as well as the coins of these metals.

To deal with the bank of other countries

Being a member of IMF .Reserve bank established business of IME ,reserve bank establishes business relations with the central bank of other members countries. It can open accounts with those banks and may act as their agent  or handle IMF dealings.

Central Bank Functions

Issue of paper currency :

The reserve bank is issues notes of the denomination of 2,5,10,20,50,100,500 and 2000 .The bank has separate department for note issuing .This is known as Issue department.In accordance with the reserve bank of india Act RBI Bank is required to maintain Reserve Fund for now issuing .

The Indian Currency System 

The present Monetary system of India is based on inconvertible paper currency and is managed by the reserve bank of India.The Present currency system is based on minimum reserve system of note issue.It was adopted in 1957 under the minimum reserve system,minimum of gold and foreign securities to the extent of Rs 200 crore of which gold should be of value Rs 115 crore and the balance in rupee securities maintained.

banker of the Government





Structure of RBI

Central Board

The Reserve Bank’s affairs are governed by a central board of directors. The Central Board of Directors is the apex body in the governance structure of the Reserve Bank. There are also four Local Boards for the Northern, Southern, Eastern and Western areas of the country which take care of local interests. The central government appoints/nominates directors to the Central Board and members to the Local Boards in accordance with the Reserve Bank of India (RBI) Act. The composition of the Central Board is enshrined under Section 8(1) of the RBI Act, 1934.


The Central Board consists of:


  • The Governor
  • 4 Deputy Governors of the Reserve Bank
  • 4 Directors nominated by the central government, one from each of the four Local Boards as constituted under Section 9 of the Act
  • 10 Directors nominated by the central government
  • 2 government officials nominated by the central government


The Central Board is assisted by three committees:

  • The Committee of the Central Board (CCB)
  • The Board for Financial Supervision (BFS)
  • The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS)




Updated: September 13, 2019 — 8:39 am

Leave a Reply

Your email address will not be published. Required fields are marked *

Vista Academy © 2019 Frontier Theme