How does the Reserve Bank of India supervise the functioning of the banks? Why is this necessary?

OR

Why is cheap and affordable credit important for a country's development? Explain with reasons.

The Reserve Bank of India is the central monetary authority of India which regulates the monetary policy of Indian rupee. It started functioning under the RBI Act 1934 and started its operation on 1 April 1935. It functions differs from country to the country. In India, RBI is the apex monetary authority and has many powers for the functioning of the Indian rupee.

The Reserve Bank supervises the functioning of the banks in many ways:

1. RBI maintains an account of all the commercial banks. All the commercial bank has to keep a minimum amount of cash reserve with the RBI. It is the custodian of their cash reserves. In this way, the RBI is the ultimate holder of the cash reserves of the commercial banks.

2. The central bank is the lender of the last resort. Whenever the commercial banks are short of funds, they can take loans from the RBI and get their trade bills discounted. This provides great strength to the central banks.

3. It is a bank of central clearance, settlements and transfers. Its moral persuasion is very effective as far as commercial banks are concerned.

4. RBI ensures that the banks give loans not only to the big industrialists, and rich businessmen but also to small peasants, farmers, and small industries.

5. RBI makes sure that commercial banks do not give an excessive amount of loans. This will lead to a crisis situation.

6. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.

This supervision by RBI is important because of the following:

1. It helps to collect economic data from all over the country.

2. It ensures the safety of deposits of the people.

3. It helps to keep a check on the corrupt practices of the country.

4. The information passed from the RBI to the Ministry of Statistics. This helps the formation of the national budget.

OR

Cheap or affordable credit is important for a country’s development due to the following reasons:

1. Cheap credit means that the borrower as more money left to invest which would have otherwise been invested in the return of credit. This increases the level of economic activity.

2. It helps to continue the ongoing production and meet all the expenses incurred by the businessmen.

3. It reduces the dependence on informal sources of credit.

4. It allows the weaker sections of the society to borrow easily without falling into the trap of the vicious moneylenders.

5. It helps to end the cycle of the debt trap.

6. It improves the standard of living by providing the common man to purchase items such as automobiles and electronics.