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RBI as Bankers’ Bank

25 Dec, 2019 Divesh Mishra

Reserve Bank of India plays multiple roles in the financial services sector of our country. Some of these roles are hidden from the public purview. A few of these roles are:

RBI as the Banker to Bank: As we all know that the banks are required to maintain Cash Reserve Ratio (CRR) on the deposits which they take from the public. These deposits fall in the category of Liabilities in the Balance Sheet of the Banks. Banks are liable to pay back this money to the depositor, hence, classification as liability. These deposits could either be as Current Accounts & Savings Account (CASA) or as Fixed Deposits & Recurring Deposits. The former are Demand Liabilities and the latter are known as Time Liabilities. Currently, the CRR on Demand & Time Liabilities is at 4% of all such liabilities of any given bank. Suppose a bank has Rs. 40 cr of Demand Liabilities and Rs. 60 cr of Time liabilities (Totalling Rs. 100 cr), then it will have to deposit Rs. 4 cr in form of hard cash with RBI. To ensure that cash does not have to travel to RBI each time, banks are empowered with Currency Chests in their own premises. The needed cash deposited in the Chests becomes property of RBI with MIS flowing to them.

To maintain this CRR, each bank has to open an account with RBI. Banks also have transactions with each other. A common bank is needed to perform completion of transactions without any partiality. Settlement of such accounts is also through the RBI Account. RBI account of individual banks is also required for settlement of clearing transactions. Have you ever imagined how you pay your tuition fees to your college who has an SBI account while you have an HDFC Bank account. Taking money from your HDFC Bank account through your cheque and depositing the same amount with all details into the SBI account of your college is ensured by the clearing system. The clearing system is supervised by RBI and all the banks maintain a clearing account with it.

Similarly, banks often run short / surplus of money which they either borrow from or lend to each other. Such transactions are facilitated through RBI account of these banks.

There is designated department in RBI for this purpose: Deposit Accounts Department (DAD). DAD has presence in various regional offices of RBI.

Hope the function of RBI as Banker to Banks is clear to you.

Lender of the Last Resort: Banks often face temporary liquidity crunch in form of excess lending, less maintenance (deficit) in maintain statutory ratios etc. The banks at such times rush to other banks. In case other banks can’t come to their rescue, RBI pitches in with the required help. But RBI also ensures that lending to the borrowing banks is within the rules set for lending. It can’t play blind. Whatever, RBI also follows the principle that the lending is need based, to protect the customers’ interest and to save the bank from a possible crash.