Glossary of central banking related terms

The Reserve Bank of India, established under the Reserve Bank of India Act, 1934, started functioning in April 1935 as a shareholders bank. In January 1949, the bank was transformed to a state-owned institution. The broad core functions of the bank, which is one of the oldest central banks in the developing countries, have been (i) to serve as banker to Government (ii) to issue bank notes, (iii) to serve as banker to other banks and (iv) to manage the foreign exchange assets and exchange rate of the country. It has also played an active role in the sphere of agricultural credit and building up a machinery for the provision of industrial finance in the post-war era itself, and more particularly after its nationalisation.

The responsibilities and functions of the Bank widened after the Government of India embarked on planned development, within a mixed economy framework. The evolution in this regard was rather rapid in the past 35 years or so following the social control over the banks which culminated in the nationalisation of major banks in 1969. Since then, many policies and programmes like the 20-point programme, lead bank scheme, service area approach, priority sector lending, export promotion schemes, linking of self help groups with banks etc., were implemented. The underlying objective was to move away from class banking to mass banking and to ensure participation of the poor and lower strata of the society in the development process.

Following financial sector reforms, policy measures were also taken to enhance operational efficacy of monetary policy, to strengthen prudential norms, to develop technological infrastructure and to strengthen institutional framework. On the monetary policy front there has been distinct shift from the use of direct instruments of monetary policy to market based instruments. In order to strengthen the financial institutions, prudential regulations in the area of capital adequacy, income recognition, asset classification and provisioning, exposure norms, classification/valuation of investment and risk management as also asset liability management were also introduced. Extensive reforms in the external sector have transformed India from a closed economy to a fairly open economy while following a cautious approach to capital account convertibility, exchange rate management and trade liberalisation.