Question

In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Answer 1

Functioning of Banks – Supervision by Reserve Bank of India (RBI)

• The banks have to maintain a certain cash balance out of the total deposits it receives and this is monitored by the Reserve bank of India (RBI).
• The functioning of formal sources of loans is supervised by the Reserve Bank of India (RBI).
• Information has to be submitted to the Reserve Bank of India (RBI), on a periodic basis, by the banks.
• Banks have to provide information related to interest rates, to whom the loans are given, how much the banks are lending etc.

Reserve Bank of India Monitors Banks – Why is this Necessary

• This monitoring done by the Reserve Bank of India (RBI) is necessary because for the development of the nation, cheap and affordable credit is a necessity.
• Reserve Bank of India (RBI) makes sure that banks not only provide loans to traders and profit making businesses but also to small borrowers, small scale industries and small cultivators.
• To make sure that the poor can benefit from the cheaper loans, it is important that the formal credit is distributed more equally.
• Usually the poor have to depend on informal sources of credit and it is the richer households who receive formal credit.
• Most loans from informal lenders do very little to increase the income of borrowers as they carry a very high interest rate.