UPSC Prelims 2013 Q42: Indian Economy – Banking & Financial Sector
The Reserve Bank of India regulates the commercial banks in matters of
1. Liquidity of assets
2. Branch expansion
3. Merger of banks
4. Winding - up of banks
Select the correct answer using the codes given below.
- (a) 1 and 4 only
- (b) 2, 3 and 4 only
- (c) 1, 2 and 3 only
- (d) 1, 2, 3 and 4
Answer: (d) 1, 2, 3 and 4
Explanation
RBI's regulation of commercial banks
The RBI regulates banks under the Banking Regulation Act, 1949 and the RBI Act, 1934.
| Matter | Regulated by the RBI? | How |
|---|---|---|
| 1. Liquidity of assets | Yes | CRR and SLR requirements |
| 2. Branch expansion | Yes | Licensing of new branches |
| 3. Merger of banks | Yes | Approves amalgamations |
| 4. Winding-up of banks | Yes | Can apply to the High Court for winding up |
Other regulatory powers:
| Power | Detail |
|---|---|
| Licensing | No bank can start without an RBI licence |
| Management | Approves appointment of chairman and chief executive |
| Inspection | Inspects books and accounts |
| Capital | Sets capital adequacy norms (Basel) |
Answer: (d) 1, 2, 3 and 4.
Why each option is right or wrong
- (a) Incorrect. The RBI also regulates branch expansion and merger of banks.
- (b) Incorrect. Liquidity of assets is also regulated, through CRR and SLR.
- (c) Incorrect. Winding-up of banks is also within the RBI's powers.
- (d) CORRECT. The RBI regulates liquidity, branch expansion, merger and winding-up.
Key point
RBI (Banking Regulation Act, 1949): licensing, branch expansion, liquidity (CRR, SLR), management, inspection, amalgamation and winding-up of banks.
Remember
RBI regulates banks from licence to winding-up.
Common mistakes
- Thinking mergers are decided only by the Government.
- Forgetting that even branch opening needs RBI approval.
- Confusing the RBI's role as regulator with its role as banker to the Government.
Exam tip
From birth (licence) to death (winding-up), a bank is under the RBI.
Sources
- Banking Regulation Act, 1949
- Reserve Bank of India — Functions: regulator and supervisor of the financial system