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SCERT Class 12 Banking Chapter 2 Reserve Bank Of India
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Reserve Bank Of India
Chapter: 2
Answer Questions
Q.1. In which year the Reserve Bank of India was established ?
Ans :- In 1st April 1935 the Reserve Bank of India was established.
Q.2. Where is the head office of the Reserve Bank of India ?
Ans :- The Head office of the Reserve Bank of India is in Mumbai.
Q.3. Who issues the one rupee notes ?
Ans :- The Government of India issues the one rupee notes.
Q.4. How many directions consist of the Board of Directors of RBI ?
Ans :- 20 Directors consist of the Board of Directors of R.B.I.
Q.5. In which year the RBI was nationalised ?
Ans :- In 1st January 1949 the R.B.I. was nationalised.
Q.6. In which year RBI becomes a state owned institution ?
Ans :- In January 1, 1949 the Reserve Bank of India becomes a state owned institution.
Q.7. Which method is adopted by the Reserve Bank of India for issuing notes ?
Ans :- Minimum Reserve system method is adopted by the Reserve Bank of India for issuing notes.
Q.8. Expand :
a) SLR.
Ans :- S.L.R. : Statutory Liquidity Ratio.
b) CRR.
Ans :- C.R.R. : Cash Reserve Ratio.
B. Short answer questions : Type-I
Q.8. What is Central bank ?
Ans :- Central Bank is an open financial institution of a country. It is needed to regulate and control the monetary system of an economy. The Central bank issue notes and at the same time function as banker to the Government.
Q.9. What is Minimum Reserve System ?
Ans :- Minimum Reserve System is the system of rate issue under which the central bank is obliged to maintain only a minimum gold reserve as prescribed by law. Economy and elasticity are the main advantages for the system because, against the minimum reserves, the Central Bank can issue any amount of currency notes.
Q.10. Name any two departments of the Reserve Bank of India.
Ans :- The two departments of the Reserve Bank of India are :
(i) Department of currency Management.
(ii) Inspection Department.
Q.11. Give the meaning of Cash Reserve Ratio.
Ans :- Meaning of Cash Reserve Ratio.
Cash Reserve Ratio is the ratio which affect the bank credit creation capacity. An increase in the cash-reserve ratio reduces the excess reserves of the bank and a decrease in the cash reserve ratio increases their excess reserves.
Q.12. What is Full Reserve System ?
Ans :- Full Reserve System :- Under this system the currency notes issued by the Central Bank are fully banked by the reserves of gold and silver. This is also known as hundred percent reserve system of note issue.
C. Short answer questions : Type-II
Q.13. What is Bank Rate ?
Ans :- Bank rate is the rate at which the central bank of the country allow finance to commercial banks. Bank rate is the tool which central bank uses for short-term purpose. Any upward revision in Bank rate by central bank is an indication that bank should also increase deposit rates as well as Base rate/ Benchmark Prime Lending rate. Thus any revision in the Bank rate indicates that it is likely that interest rates on our deposits are likely to either go up or go down.
Q.14. State the meaning of Statutory Liquidity Ratio.
Ans :- Statutory Liquidity Ratio refers to the amount that the commercial banks require to maintain in the form of cash or gold or government approved securities before providing credit to the customers. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as percentage of total demand and percentage of time liabilities.
Q.15. State the Minimum Reserve System of note issue.
Ans :- Minimum Reserve System of Note Issue under this system of note issue the central bank is obliged to maintain only a minimum gold reserve as prescribed by law. Economy and elasticity are the main advantages for the system because against the minimum reserve the central bank can issue any amount of currency notes.
Q.16. Explain in brief the Open Market Operations of the RBI.
Ans :- Open Market Operations of R.B.I. : In the technique of Open Market Operations the central bank seeks to influence the cash reserves position of the banks by purchasing and selling of government securities, commercial papers etc. When the central bank purchases securities from the banks it increases their cash reserve position, and hence their credit creation capacity. On the other hand under the central bank sells securities to the banks it reduces that cash reserves and credit creation capacity.
Q.17. Briefly explain the functions of the Reserve Bank of India as bankers bank.
Ans :- Functions of the Reserve Bank of India as Bankers Bank. As Bankers Bank the Reserve Bank acts as a custodian of the statutory cash reserves of the banks. The Reserve Bank act as a clearing house for the banks. It provides free of charge or cheap remittance facilities to banks. It also makes arrangement for the training of banking personnel. The Bank has set up Deposit Insurance and Credit Guarantee Corporation which serves to infuse greater confidence in banks and depositors of small means.
Q.18. Explain in brief about Statutory Liquidity Ratio.
Ans :- Statutory Liquidity Ratio : Under the original Banking Regulation Act 1949, banks were required to maintain liquid assets in the form of cash, gold and unencumbered approved securities equal to not less than 25% of their total demand and time deposits liabilities. The minimum statutory liquidity ratio is in addition to the statutory cash reserve ratio. The Reserve Bank has to been empowered to change the minimum liquidity ratio.
Q.19. Explain in brief about Credit Authorisation Scheme.
Ans :- Credit Authorisation Scheme :- Credit Authorisation Scheme is a type of selective credit control introduction by the Reserve Bank of India. In November, 1965. Under this scheme, the commercial bank had to obtain Reserve Banks authorisation before granting any fresh credit to any single party. Under this scheme the Reserve Bank requires the commercial banks to collect examine and supply detailed information regarding the borrowing concerns. The main purpose of this scheme is to keep a close watch on the flow of credit to the borrowers.
D. Long answer Questions : Type-I
Q.20. State in brief the external organisation of Reserve Bank of India.
Ans :- See Ans. to Question No. 23.
Q.21. Explain the cleaning function of the Reserve Bank of India.
Ans :- Cleaning Function of the Reserve Bank of India : In India R.B.I acts as the cleaning house for settlement of banking transactions. This function of cleaning house enables the other banks to settle their inter-bank claims easily. Further it facilities the settlement economically.
Where the R.B.I has no offices of its own the function of clearing house is carried out in the premises of the State Bank of India. The entire clearing house operations carried on by R.B.I. are computerised. The inter-bank cheque clearing settlement is done twice a day.
There is a separate roule for clearing high value cheques of Rs. 1.00 lakh and above. Cheques drawn on banks in metropolitan cities are cleared on the same day.
The R.B.I. carries out this function through a cell known as National Clearing Cell. In 1998 there were all 860 cleaning houses in operation of which 14 were run by R.B.I. 578 by SBI and others by public sector banks.
Q.22. Write short notes on any two credit control techniques adopted by the RBI.
Ans :- Credit Control Techniques adopted by R.B.I. The two credit control techniques adopted by R.B.I. are
(i) Bank Rate :- Bank Rate is the rate of interest charged by the Reserve Bank for loans to its member bank On November 15, 1935 the bank rate was fixed at 3%. This rate continued till November 15, 1951 when it was raised to 3.5%. This was with a view to check the rise in prices as also to check unfavourable trend in the balance of payments. In February 1957, bank rate was further raised to 4%. Now it was 9.00% (w.e.f. close of business of 17.04.2021). Three main reasons for this were.
(a) To check inflation.
(b) To bring parity between the Bank Rate and the rate of Hundies.
(c) To bring parity between Bank rate and interest rate on Treasury Bills.
(ii) Open Market Operations :- Open Market Operations is yet another technique adopted by the Reserve Bank of Quantitative Credit Control. This means that the bank controls the flow of credit through the sale and purchase of securities in the open market. This technique was rarely used before Second World War. But after the war it has become fairly popular. Since 1962, the objective of open market operations has been to contain inflation. In 1998-99, R.B.I. sold securities worth Rs. 8,330 cr. and purchased securities worth Rs. 1,194 cr. respectively.
Q.23. Explain the organisation and management of Reserve Bank of India.
Ans :- Organisation And Management of R.B.I. :
The organisation of R.B.I. can be divided into three parts.
(1) Central Board of Directors.
(2) Local Boards and
(3) Offices of R.B.I.
Details of the organisation of R.B.I. are as follows.
1. Central Board of Directors :- The organisation and management of R.B.I. is vested on the Central Board of Directors. It is responsible for the management of R.B.I. Central Board of Directors consists of 20 members. It is constituted as follows :
(a) One Governor :- It is the highest authority of R.B.I. He is appointed by the Government of India for a term of 5 years.
(b) Four Deputy Governor :- Four Deputy Governors are nominated by Central Government for a term of 5 years.
(c) Fifteen Directors :- Other fifteen members of the Central Board are appointed by the Central Government. Out of these four directors one each from the four local boards are nominated by the Government ten directors and one Government Officer is also nominated separately by the Central Government.
2. Local Boards :- Besides the Central Boards, there are local Boards for four regional areas of the country with their headquarters at Mumbai, Kolkata Chennai and New Delhi, Local Boards consist of five members eash, appointed by the Central Government for a term of 4 years to represent territorial and economic interest and the interests of Co-operatives and indigenous banks.
3. Offices of R.B.I. :- The Head office of the bank is situated in Mumbai and the offices of Local Boards are situated in Delhi, Kolkata, Mumbai and Chennai. In order to maintain the smooth working of banking system, R.B.I. has opened local Offices or branches in Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthapuram, Kochi, Lucknow and Byculla (Mumbai).
Q.24. Describe the prohibited functions of Reserve Bank of India.
Ans :- Prohibited Functions of R.B.I. : Following are the prohibited function of R.B.I. are :
Under section 19 of the Reserve Bank of India Act (1934), R.B.I. can not undertake following functions :
(i) It cannot undertake or enter into any trade or business.
(ii) It can neither purchase or invest in the shares of any company nor can grant loans on the securities of any such shares.
(iii) It cannot grant unsecured loans and advances.
(iv) It cannot give interest on deposits on current account.
(v) It cannot advance mortgage of immovable property or became the owner of immovable property, except its own business premises and residence for its staff.
(vi) It can neither right nor discount term bills.
Q.25. What are the objectives for establishment of Reserve Bank of India as the Central Bank of India ?
Ans :- Objectives for Establishment of R.B.I. as the C.B.I.
The main objectives for establishment of R.B.I. as the Central Bank of India were as follows :
(i) To manage the monetary and credit system of the country.
(ii) To stabilise internal and external value of rupee.
(iii) For balanced and systematic development of banking in the country.
(iv) For the development of organised money market in the country.
(v) For proper arrangement of agricultural finance.
(vi) For proper arrangement of industrial finance.
(vii) For proper management of public debts.
(viii) To establish monetary relations with other countries of the world and international financial institution.
(ix) For Centralisation of cash reserves of commercial banks.
(x) To maintain balance between demand and supply of currency.
Q.26. What are the various administrative departments of Reserve Bank of India ?
Ans :- Administrative Departments of R.B.I. : The various administrative departments of R.B.I. are as follows :
(i) Department of Currency Management.
(ii) Department of Banking supervision.
(iii) Rural Planning and Credit Department.
(iv) Department of Banking operations and Development.
(v) Exchange Control Department.
(vi) Secretary’s Department.
(vii) Industrial and Expart Credit Department.
(viii) Department of Administration and Personnel Management.
(ix) Department of Governments and Bank Accounts.
(x) Department of Non Banking Supervision.
(ix) Internal Debt Management Cell.
(xii) Inspection Department.
(xiii) Department of Information and Technology.
Q.27. Write a short note on selective credit controls of RBI.
Ans :- Selective Credit Controls of R.B.I : Selective credit controls are qualitative credit control measures undertaken by the Central bank to divert the flow of credit from speculative and unproductive activities to productive and more urgent activities. The Reserve Bank of India has undertaken the following selective credit controls to checks speculative activities and inflationary pressures and extend credit in developmental lines.
(i) Directives :- The Reserve banks has been making extensive use of the selective controls and has issued many directives to the banks.
(a) The first directives was issued on May 17, 1956 to restrict advances against paddy and rice. Later on other commodities of common use were also included.
(b) The Reserve Bank has fixed minimum margins to be maintained by the banks regarding their advances against the commodities subject to selective controls.
(ii) Credit Authorisation Scheme (CAS) :- Credit Authorisation Scheme is a type of selective credit control introduction by the Reserve Bank of India in November, 1965. Under this scheme, the commercial banks had to obtain Reserve Banks authorisation before granting any fresh credit to any single party.
(iii) Moral Suasion :- The Reserve Bank has also been using moral suasion as a selective credit control measure. It has been sending periodic letters to the commercial banks to use restraints over their credit policies in general and in respect to certain modesties and unsecured loans in particular.
E. Long answer questions : Type-II
Q.28. State briefly the system ‘of note issue’.
Ans :- System of Note Issue :- There are different system of Note Issue.
(i) The Full Reserve System :- Under this system the currency notes issued by the central bank are fully backed by the reserves of gold and silver. This is also Known as hundred percent reserve system of note issue.
(ii) The Proportional Fiduciary System :- The proportional fiduciary system suggest that notes issued by the Central Bank have to be secured by a minimum proportion of gold reserve to be determined by statute.
(iii) The Minimum Reserve System :- Under this system of note issue the central bank is obliged to maintain only a minimum gold reserve as prescribed by law. Economy and elasticity are the main advantages for the system because, against the minimum reserves, the central bank can issue any amount of currency notes.
(iv) The Maximum Fiduciary System :- Under the maximum fiduciary system the law prescribed the maximum amount of notes issued by the Central Bank. This maximum may be raised by the Central Bank to meet the needs of the circumstances.
(v) The Fixed Fiduciary System :- The fixed fiduciary system suggests that the issuing authority be authorised by law to issue a fixed amount of notes against securities. This fixed fiduciary amount shall be fixed by law.
Q.29. Explain the methods used by Reserve Bank of India to control money and credit.
Ans :- Methods used by Reserve Bank of India to control Money and Credit.
Following are the methods used by Reserve Bank of India to control money and credit are classified into two categories :
1. Quantitative or general methods.
2. Qualitative or selective methods.
1. Quantitative or general methods :- The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control. The important quantitative methods of credit control are :
(a) Bank rate.
(b) Open market operation. and
(c) cash reserve ratio.
(a) Bank Rate Policy :- The bank rate policy is the traditional method of credit control used by a central bank. The bank rate or the discount rate is the rate at which a central bank is prepared to discounts the first class bills of exchange.
(b) Open Market Operations :- Open Market Operations refer to the deliberate and direct buying and selling of securities in the money market by the central banks. In the narrow sense, open market operations refer to the purchase and sale by the central bank of government securities in the money market.
(c) Variable Cash Reserve Ratio :- Changes in the cash reserve ratio is powerful method for influencing not only the value of excess reserves with the commercial banks but also the credit multiplier of the banking system.
2. Qualitative or Selective Methods :- The methods used by the central bank to regulate the flows of credit into particular directions of the economy are called qualitative or selective methods of credit control. The important qualitative or selective methods of credit control are :
(a) Marginal requirements.
(b) Regulation of consumer credit.
(c) Control through directives.
(d) Credit rationing.
(e) Moral suasion and publicity. and
(f) Direct action.
(a) Marginal Requirements :- Reserve Bank directs the member banks to change their margin requirement from time to time. First such direction was given by the Reserve Bank in May and September 1956 regarding rice trade. In 1957, margin requirement for wheat was fixed at 40%. In 1958, it was raised to 80%. In 1970 it was again brought down to 40%. In 1997, it was raised 45 percent.
(b) Regulation of Consumer Credit :- According to this system, a certain percentage of the price of the durable consumer goods is paid by the consumers in downright cash. The remaining part of the price of the goods is financed by bank credit which is payable by the consumer in instalments spread over a specified period of time.
(c) Control Through Directives :- Sometimes, selective credit controls may be enforced on the commercial banks through directives issued by the Central Bank from time to time.
(d) Credit Rationing :- The terms ‘rationing of credit’ implies two things. First, it means that the Central Bank of fixes a limit upon its rediscounting facilities for any particular bank. Second, it mean that the Central Bank fixes the quote of every affiliated bank for financial accommodation from the Central Bank.
(e) Moral Suasion and Publicity :- The method of moral suasion is still another method frequently employed by the Central Bank to exercise control on the commercial banks. This method involves advice, request and persuasion with the commercial banks to cooperate with the Central Bank in implementing its credit policies.
Q.30. Explain the traditional functions of Reserve Bank of India.
Ans :- Traditional Functions of Reserve Bank of India :
Following are the traditional functions of Reserve Bank of India :
(i) Issue of Paper Currency :- Reserve Bank of India has the monopoly right of note issue. It issue notes of the denomination of Rs. 2, 5, 10, 20, 50, 100, 500 and 1000. The bank has separate department of note issuing. This is known as Issue Department. In accordance with the Reserve Bank of India Act, this bank is required to maintain Reserve Fund for note issuing.
(ii) Regulation of Credit :- Regulation of credit implies control over the credit policy of the commercial bank. Being the central Bank the Reserve Bank controls the creation of credit by the commercial banks. According to the Reserve Bank of India Act, this bank can adopt several measures to control credit creation viz, changing the Bank Rate, open market operations etc.
(iii) Bank of Banks :- Being the Central Bank, Reserve Bank of India is the bank of all the Banks in the country. Reserve Bank acts as a guide of the Commercial Banks besides controlling and regulating their officers. During the times of emergency it is the lender of the last resort for the commercial Banks.
(iv) Banker of the Governments :- Reserve Bank is the banker of the central and State Government. All banking functions of the Government are handled by the Reserve Bank of India. Thus the Reserve Bank keeps cash balances of the Central and State Governments and makes payment out of these balances on the advice of the Government.
(v) Regulation of Foreign Exchange :- Being the Central Banks of the country. Reserve Bank of India also regulates exchange rate of rupee in terms of foreign currencies. It tries to maintain stability of exchange rates. For this the Reserve Bank deals in foreign exchange only at fixed rates right from the beginning.
Q.31. Explain briefly how the Reserve Bank of India controls credit.
Ans :- Same as Ans. to Question No. 29.
Q.32. What is Central Bank ? Explain the functions of central Bank of India.
Ans :- Meaning of Central Bank :- Central Bank is an apex financial institution of a country. It is needed to regulate and control the monetary system of an economy. The Central bank issue notes and at the same time function as a banker to the Government.
Functions of Central Bank of India :- The following are the functions of Central Bank of India are :
(i) Issue of Notes :- The Reserve Bank of India enjoys monopoly in the issue of Currency notes as Central Bank, of the country. All the currency notes as Central Bank of the country. All currency notes except one rupee note are issued by R.B.I. One rupee note and all coins of small magnitude are issued by R.B.I.
(ii) Banker, Agent and Advisor to the Government :- The Reserve Bank of India act as the banker, agent and advisor to the Government of India. It accepts payments for the account of the Union and State Governments and also makes payment on behalf of the governments. On behalf of the government, R.B.I. carries out remittances, managing foreign exchange reserves and public debts and other banking operations.
(iii) Banker’s Bank :- As bankers bank, the Reserve Bank act as a custodian of the statutory cash reserves of the bank. The Reserve Bank acts as a clearing house for the banks. It provides free of charge or cheap remittance facilities to banks.
(iv) Controller of Credit :- As the Central Bank of the country the Reserve bank undertakes the responsibility of the controlling credit in order to ensure Internal price stability and promote economic growth. Through this function, the Reserve Bank attempts to achieve price stability in the country and avoids inflationary and deflationary tendencies in the country.
(v) Regulation of Foreign Exchange :- The Reserve Bank has the responsibility to maintain the external value of the rupee. This is secured by the Centralisation of almost the entire foreign exchange reserves of the country with the Bank. The Reserve Bank has authority to enter into foreign exchange transactions both on its own account and on behalf of the Government.
(vi) Regulation of Banking System :- The prime duty of the Reserve Bank is to regulate the banking system of our country in such a way that the people of the country can trust in the banking system.
Q.33. Discuss the role of Reserve Bank of India in economic development of India.
Ans :- Role of Reserve Bank of India in Economic Development of India : Following are the role of R.B.I. in economic development of India :
(i) Issue and control of Money :- Only Reserve Bank enjoys monopoly in issue and control of Currency. It also play an important role in controlling credit and monetary policy. Along with economic development. The demand for currency also increases.
(ii) Development of Banking and Financial institutions :-The economic development of any country depends on the availability of credit and banking facilities. Reserve bank has played an important roll in economic development by developing banking and financial institutions.
(iii) Increase in Capital Formation :- Reserve bank has collected scattered money in rural areas by establishing financial institution. It has inspired mobility of small servings. The R.B.I. helped in capital formation through investing small savings in productive purpose.
(iv) Administration of Foreign Reserves :- Reserve Bank also managed by scare foreign reserves. India always faces problem of foreign currency due to more import and less export. To cape up with this, bank provides protection to foreign reserve and control exchange rate.
(v) Balanced Development :- Reserve Bank has important role in the balanced development of the country. It attracts peoples saving towards Industries and thus contributes in balanced economic development of are country.
(vi) Control of Inflation :- Controlling of inflation is also the function of Reserve Bank. Reserve Bank followed policy of credit control, decreasing exports and encouraging imports, reduction in expenditures etc. Which could control inflationary conditions in small duration.
(vii) Credit Control :- Reserve Bank Controls credit by increasing or decreasing supply of money according to requirement and this Control prices. This prevents inflationary trends in the economy and maintains economic stability.
(viii) Economic and Technical Advice :- Reserve Bank not only provides finance and advice to industries but also collects statistical data, for economical and technical development of a developing country.
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Class 12 Banking Chapter 2 Reserve Bank Of India Question answer to each chapter is provided in the list so that you can easily browse through different chapters HS 2nd Year Banking Chapter 2 Reserve Bank Of India Notes and select needs one.
SCERT Class 12 Banking Chapter 2 Reserve Bank Of India
Also, you can read the SCERT book online in these sections Solutions by Expert Teachers as per SCERT (CBSE) Book guidelines. These solutions are part of SCERT All Subject Solutions. Here we have given Class 12 Banking Chapter 2 Reserve Bank Of India Solutions for All Subjects, You can practice these here.
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