Reserve Bank as banker to Government and Banker’s Bank

The Resave bank of India acts as banker to the Central and State Governments. According to Section 20, it is obligatory for the Bank to transact government business including the management of the public debt of the Union, Section 21 requires the Central Government to entrust the bank all its money, remittance, exchange and banking transactions in India and in particular deposit free of interests all its cash balances with bank. In terms of Section 21-A the Reserve Bank performs similar functions on behalf of the Sate governments. The bank has entered into agreements with the central and State governments for carrying to these functions. For conducting ordinary banking business of the central Governments, the Bank is not entitled to any remuneration: it holds cash balances of the Government free of interests. For the management of the public debt, the Bank is entitled to charge a commission. The Bank is also required to maintain currency chests of its Issue Department at places prescribed by the Government and to maintain sufficient notes and coins therein.

According to Section 45, it is obligatory on the part of the Reserve Bank to appoint the State bank of India as its sole agent at all places where the bank has no branch or office of its banking Department but where there is a branch of the State bank or its subsidiary bank. The State bank has entered into agency arrangements with all its subsidiary banks. Each of agency and sub-agency banks transact government’s general banking business and receive commission or the same.

The Reserve Bank is also authorized to make to the Central and State Governments ways and means advances which are repayable within 3 months from the date of making the advance. The Bank also acts as adviser to the government on important economic and financial matters.

Reserve Bank as Bankers’ Bank:

Reserve Bank is the banker to the banks – commercial, co-operative and Regional Rural banks. This relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934. Such banks, called the scheduled banks, are entitled to avail of the facilities of refinance from the Reserve Bank. They have, on the other hand, to fulfill certain obligation as laid down in the said Act.

The classification of commercial banks into scheduled and nonscheduled was introduced at the time of inauguration of the Reserve Bank of India in 1935. The object was to establish contact between the Reserve Bank and the commercial banks with sound financial position. The Act, therefore, provided certain eligibility conditions for the inclusion of a bank in the list of scheduled banks. Since 1966 the State Co-operative banks have also been made eligible for inclusion in the Second Schedule. The Regional Rural Banks, established since 1975 also enjoy the status of scheduled banks. The public sector banks (including the State Bank group) have been notified as scheduled banks by the Central Government. The category of scheduled banks thus includes (i) commercial banks – Indian and foreign, (ii) State Co-operative Banks and (iii) Regional Rural banks.

A Scheduled Bank means a bank included in the Second Schedule to the reserve bank of India act, 1934. The Reserve Bank is empowered to include in the Second Schedule the name of a bank which carries on the business of banking in India and which satisfies the following conditions laid down in Section 42 (6):

(1) It must have a paid up capital and reserves of an aggregate value of not less than Rs 5 lakhs;
(2) It must satisfy the Reserve Bank that its affairs are not being conducted in a manner detrimental to the interests of its depositors, and,
(3) It must be —

(a) a State co-operative bank, or
(b) a company as defined in the Companies ct, 1956 , or
(c) am institution notified by the Central Government in this behalf, or
(d) a corporation or a company incorporated by or under any law in force in any place outside India.