India adopted the strategy of planned development programme with a view to accelerate the rate of growth. In these programmes the contribution of Reserve Bank of India cannot be over-emphasized.
Economic progress of a country depends upon the growth and development of its industry, agriculture, trade and commerce, as well as the stability of domestic price level and foreign exchange rate. The Reserve Bank of India has very actively catered to the financial needs of industries over the last 50 years.
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It has been encouraging exports also. In the field of agriculture, the Reserve Bank of India has been actively engaged in the provision of agricultural credit, fertilizers and machinery. Research, Statistics and Publication Division of the Reserve Bank of India has been providing useful information to the planners.
It has appreciably contributed to the growth process of the economy. It has indeed succeeded as a central bank of the country. Following points should bring out the contribution of the Reserve Bank of India to the process of economic growth.
1. Promotion of Agricultural Finance:
Right from the beginning, Reserve Bank of India has an Agricultural Credit Department. The principal function of this department is to conduct research regarding various problems of agricultural credit. Besides this, the bank advises the central Government, state Governments and co-operative societies on the various aspects of agricultural growth.
It also helps the central Governments and state Governments in establishing godowns and warehouses in different parts of the country. Contribution of the Reserve Bank in the field of agricultural credit is notable. However, the bank does not fulfil credit needs of the farmers directly.
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Contribution of the Reserve Bank to the field of agricultural credit may be described as under:
(i) Short term Agricultural Credit:
Reserve Bank arranges short-period credit for the State Co-operative Banks for the sale of agricultural produce and other seasonal agricultural operations, at less than 2% rate of interest. The Bank offers credit to State Co-operative Banks on the sureties or the securities of state Governments.
(ii) Medium Term Agricultural Credit:
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Medium term credit is generally offered for a period ranging between 3 to 5 years. The Reserve Bank did not have the right to offer medium- term loans till the Year 1953. But from 1953 onwards, medium term loans could be advanced on the securities of the State Governments to Agricultural Co-operatives for agricultural purposes. This type of credit is given for the following purposes:
(a) Irrigation, purchase of pumpsets, boring of tubewell and digging of wells,
(b) Land Reclamation,
(c) Purchase of agricultural implements and cattle.
(d) ‘Gobar’ Gas Plants,
(e) Purchase of shares of the Co-operative Sugar Mills. In 1956, the Reserve Bank established National Agricultural Credit (Stabilization) Fund. When crop productivity suffers due to certain reasons, farmers are not in a position to pay back their loans to the co-operatives, In turn the co-operatives fail to return their short-period loans. In such situations, the co-operatives can seek loans from National Agricultural Credit Stabilisation Fund and get their short term loans converted into medium term loans,
(iii) Long Term Credit:
National Agricultural Credit (Long Term Operations) Fund caters to the long period credit requirements of the agricultural sector. Reserve Bank used so advance loans to the state Governments for the purchase of shares of Co- operatives.
It also used to buy debentures of Land Development Banks Joint efforts of the Reserve Bank and the Government of India led to the establishment of National Bank for Agriculture and Rural Development. (NABARD) Now all functions of the Reserve Bank relating to agricultural sector of the economy are handled by this bank.
Authorized capital of this bank has been fixed to be Rs. 500 crs., and it’s paid-up capital is Rs. 100 crs. Of this, shares worth Rs. 50 crores have been purchased each by the Government of India and Reserve Bank of India. Thus, National Bank for Agriculture and Rural Development is in fact the joint venture of the Government of India and Reserve Bank.
This bank can raise capital from within the country and abroad, by selling debentures. All assets and liabilities of National Agricultural Credit (Stabilization) Fund and National Agricultural Credit (Long Term Operations) Fund have been transferred to the National Bank for Agriculture and Rural Development.
In short, Reserve Bank has made an important contribution in the field of agricultural credit. Besides arranging credit for agricultural operations, the Bank also performs various related activities:
(a) It inspects Co-operative Banks,
(b) Standing Advisory Committees on Agriculture have been established to render advice on matters of agricultural credit. Since 1982-83 all functions of the Reserve Bank relating to agricultural sector have been entrusted to National Bank for Agriculture and Rural Development (NABARD).
2. Promotion of Industrial Finance:
Reserve Bank provides significant financial assistance for the industrial development of the country. It established Industrial Finance Department in 1957. This department executes all plans of the Reserve Bank regarding industrial finance. The following observations should bring out the contribution of Reserve Bank in the field of industrial finance.
(i) Establishment of Specialized Institutions:
To cope with the growing need of industrial finance in India, Reserve Bank has established various specialised institutes. Industrial Finance Corporation of India, Industrial Development Bank of India, State Finance Corporations and Industrial Credit and Investment Corporation and Small Industries Development Bank of India are some of the notable names in this regard.
(ii) National Industrial Credit (Long Term Operations) Fund:
With a view to satisfy credit needs of the large scale industries, Reserve Bank started National Industrial Credit (Long- Term Operations) Fund in 1964. This Fund was started with Rs. 10 crores in the first year, and Rs. 5 crores were to be added to it annually. This Fund is used for several purposes:
(a) To give loan to Industrial Development Bank for the purchase of shares and debentures of Finance Corporation of India and State Finance Co-operations.
(b) To buy Debentures issued by the Development Bank.
(iii) Credit Guarantee Scheme for Small Scale Industries:
From July 1, 1960 onwards, Reserve Bank has arranged for guaranteeing the credit raised by small scale industries. Credit Guarantee Organisation of the Reserve Bank looks after this scheme. Under this scheme 75% of the standing loans of the small industries are guaranteed by Credit Guarantee Organisation.
(iv) Help to Sick Industrial Units:
Reserve Bank also arranges for financial assistance to the sick industrial units. Sick Industrial Unit Division of the Reserve Bank looks after this function of the bank. This Division identifies sick units of large, medium and small industries and arranges loans for them from the Nationalized Banks.
(v) Export Assistance:
Export Houses get financial assistance from the Reserve Bank, both directly as well as indirectly by way of ‘Refinance’ of the loans given by other financial institutes. In 1963 Export Credit Bill Plan was also started. And, in 1982 it was with the assistance of Reserve Bank that the Government established Export-Import Bank. This Bank avails of the credit facility from Reserve Bank.
3. Promotion of Export Finance:
The Reserve Bank has adopted several measures for promotion of export finance.
(i) Special Schemes:
Reserve banks have been offering special refinance facilities to banks to encourage them to provide larger credit for exports. Several schemes have been introduced from time to time to achieve this objective. Some of the notable schemes are:
(a) Export Bill Credit Scheme,
(b) Pre-shipment Credit Scheme,
(c) Duty Drawback Credit Scheme,
(d) Concessional Rates of Interest on Bank Credit for Exports.
(ii) Export-Import Bank of India:
The Reserve Bank helped in setting up Export-Import Bank of India on 1st January, 1982. The main objective of this bank is to provide financial facilities to export import trade.
4. Promotion of Banking:
The Reserve Bank has undertaken several measures to promote the banking structure of the country. The main steps undertaken in this direction are:
(i) Strengthening of Banking Structure:
The Reserve Bank has strengthened the banking structure of the country. A large number of weak, unsound or improperly managed banks have been eliminated or reconstructed. Amalgamation has been brought about either voluntarily or compulsorily.
(ii) Extension of Banking Facilities:
The banking facilities have been extended throughout the country, especially in small towns and rural areas so as to improve the geographical coverage of banks. The relatively unbanked states have been given preference in the matter of setting up new offices.
(iii) Extension of Functional Coverage:
The functional coverage of the banks has also been extended. The sectoral distribution of banks credit in favour of the priority sectors such as agriculture, small scale industries etc. has been improved. Now more credit is available to small borrowers. Regional rural banks have been set up to meet the credit requirements of small farmers, artisans and other persons of small means in rural areas.
(iv) Deposit Insurance:
To inspire greater public confidence in bank deposits and thereby spread banking habit in the country, insurance of deposits with commercial banks was introduced in 1962. The Deposit Insurance and Credit Guarantee Corporation has been set up to provide protection to depositors and guarantee cards to eligible institutions.
(v) Development of Bill Market:
The Reserve Bank has introduced several schemes with a view to encouraging the growth of a bill market in India. It has been helpful in meeting genuine credit needs of the trade and industry and in strengthening the banking system in the country.
(vi) Training in Banking:
The Reserve Bank has also arranged the education and training of different categories of banking personnel. Several institutions like Banker’s Training College at Mumbai College of Agricultural Banking, Staff Training College and Indira Gandhi Institute of Development Research etc., have been started. The Reserve Bank took the initiative in establishing the National Institute of Bank Management at Mumbai to serve as an apex institution.
We can conclude that the Reserve Bank has been doing valuable work in aiding development and promoting saving and banking habits. The Bank pursues a variety of developmental and promotional functions to accelerate the rate of growth.