In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Q.8:- In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

 

Answer:-

The Reserve Bank of India supervises the functioning of banks in the following ways

(a) The RBI monitors the banks in maintaining a minimum cash balance out of the deposits they receive.
(b) The RBI sees that the banks give loans not just to profit-making business and traders but also to small cultivators, small scale industries, small borrowers etc. This is done by periodical statements submitted by banks to RBI which contain information regarding how much the banks are lending to whom, at what rate of interest, etc.
(c) This supervision is necessary to ensure that equality is preserved in business and industry so that small industries also grow. Also, RBI makes sure that banks do not loan out more money than they are supposed to, as this can lead to crisis situations. An example is the great depression of the 1930s, as it affected the world economy.