Role of the RBI in the Economic Development of India – AHSEC Class 12 Finance Chapter 4

Here is a comprehensive study note for the AHSEC Class 12 Finance textbook, focusing on Chapter 4: Role of the RBI in the Economic Development of India.

Chapter 4:

Role of the RBI in the Economic Development of India

Summary Note

This chapter highlights the developmental and promotional role of the Reserve Bank of India (RBI), moving beyond its traditional regulatory functions. The RBI plays a significant part in facilitating the balanced and inclusive economic development of the country.

• Promotional Role of RBI:
  1. Promotion of Banking Habit: The RBI fosters public confidence in the banking system by ensuring it is organized and well-regulated. It introduces schemes like the Banking Ombudsman to protect customer interests and formulates policies to popularize formal banking, especially among vulnerable groups.
  2. Promotion of Foreign Trade: The RBI has supported the establishment of institutions like the Export Credit and Guarantee Corporation (ECGC) and the Export-Import Bank (EXIM) by providing refinancing facilities, thereby promoting India’s foreign trade.
  3. Promotion of Agriculture: The RBI is entrusted with promoting agricultural credit. It has established key institutions like Regional Rural Banks (RRBs) and the National Bank for Agriculture and Rural Development (NABARD). It has also implemented schemes like Priority Sector Lending, Kisan Credit Card, and the Lead Bank Scheme to ensure credit flow to the agriculture sector.
  4. Promotion of Industry: The RBI has been instrumental in creating institutional arrangements for industrial finance. It helped establish development financial institutions (DFIs) like the Industrial Finance Corporation of India (IFCI), State Finance Corporations (SFCs), and the Industrial Development Bank of India (IDBI) to finance industrial activities.
  5. Development of the Financial System: The RBI has encouraged the establishment of a robust financial system comprising banking and non-banking institutions to meet the diverse credit needs of the economy, which is a prerequisite for rapid economic development.
• RBI and Industrial Finance:
  Industrialization is crucial for tackling poverty and unemployment. While the RBI does not directly finance industries, it has played a key role in setting up term-lending institutions:
  • It subscribed to the capital of IFCI and UTI.
  • It provided technical assistance for the organization of SFCs.
  • IDBI was established in 1964 as a fully owned subsidiary of the RBI to provide direct finance and act as a developmental agency.
  • It also implemented schemes like the Credit Guarantee Scheme and Credit Authorization Scheme to regulate and encourage bank lending to industries, especially small-scale industries (SSIs).
• RBI and Agricultural Finance:
  Agriculture is the backbone of the Indian economy. The RBI has a special responsibility to expand and coordinate rural credit.
  1. Agricultural Credit Department: Established in 1935, this department studies all aspects of agricultural credit and coordinates with various government and banking organizations.
  2. All India Rural Credit Survey Committee (1951): Appointed by the RBI, this committee recommended the ‘Integrated Scheme of Rural Credit’ to strengthen the cooperative movement.
  3. Establishment of Key Institutions: The RBI set up RRBs (1975) and ARDC (1963, later NABARD in 1982) to enhance the flow of institutional credit to the farm sector.
  4. Creation of Special Funds: It created funds like the National Agricultural Credit (Long-Term Operations) Fund and (Stabilization) Fund to provide long-term and medium-term loans to cooperative banks, especially during natural calamities.
  5. Priority Sector Lending: The RBI mandated that commercial banks must lend a specific portion of their credit to ‘priority sectors’, with agriculture being a major component.

Complete Textual Question Answers (from Page 42)

Here are the answers to all the questions given at the end of Chapter 4.

A. Very Short Answer Questions (1 Mark each)

1. In which year was the IDBI established?
   Ans: The IDBI was established in 1964.
2. In which year was the Credit Guarantee Corporation of India Ltd. established?
   Ans: The Credit Guarantee Corporation of India Ltd. was established in 1971.
3. In which year were the RRBs established?
   Ans: The RRBs (Regional Rural Banks) were established in 1975.
4. In which year was the Agriculture Refinance and Development Corporation established?
   Ans: The Agriculture Refinance and Development Corporation (ARDC) was established in 1963. (It was initially named Agricultural Refinance Corporation or ARC).

B. Short Answer Questions (2 Marks each)

1. Write two names of priority sector.
   Ans: Two important categories under the priority sector are (i) Agriculture and (ii) Micro, Small and Medium Enterprises (MSMEs).
2. Write two financing facility provided by the RBI to the cooperative sector.
   Ans: Two financing facilities provided by the RBI to the cooperative sector are:
   i. It provides short-term and medium-term loans to State Co-operative Banks.
   ii. It provides long-term loans to State Land Development Banks by purchasing their debentures.

C. Long Answer Questions (Type-I) (5 Marks each)

1. Explain the promotional role of the RBI.Ans: The promotional role of the RBI is a crucial aspect of its functions, aimed at fostering economic development. The key promotional activities are:
   • Promotion of Banking Habit: It creates a regulated and reliable banking system, which boosts public confidence and encourages people to save and transact through banks.
   • Promotion of Foreign Trade: It has supported institutions like ECGC and EXIM Bank, which provide insurance cover and finance for foreign trade, thus promoting exports.
   • Promotion of Agriculture: It has been pivotal in developing rural credit by establishing NABARD and RRBs and implementing schemes like Priority Sector Lending to ensure farmers get adequate finance.
   • Promotion of Industry: It has facilitated industrial growth by helping to set up a network of development financial institutions like IFCI, SFCs, and IDBI to provide long-term finance to industries.
   • Development of the Financial System: It has encouraged the growth of a diverse financial system, including banks and non-banking institutions, to meet the credit requirements of all sectors of the economy.

D. Long Answer Questions (Type-2) (8 Marks each)

1. Discuss the role of the RBI in the field of industrial finance.
   Ans: The RBI plays a significant, though indirect, role in the field of industrial finance. Its contributions are as follows:
   • Establishment of Term Lending Institutions: The RBI has been instrumental in setting up major industrial finance institutions.
     • It subscribed to 20.7% of the initial capital of the Industrial Finance Corporation of India (IFCI) in 1948.
     • It provided technical assistance and subscribed to the share capital of various State Finance Corporations (SFCs).
     • The Industrial Development Bank of India (IDBI) was established in 1964 as a fully owned subsidiary of the RBI to act as the apex institution for industrial finance.
     • It also subscribed to 50% of the initial capital of the Unit Trust of India (UTI) in 1964.
   • Industrial Credit Department: In 1957, the RBI established this department to administer the Credit Guarantee Scheme for small-scale industries, encouraging banks to lend to them.
   • Credit Guarantee Schemes: The RBI actively participated in implementing various credit guarantee schemes devised by the Government of India to protect banks against losses on loans to small-scale industries and other small borrowers.
   • Credit Authorization Scheme (1965): The RBI introduced this scheme to regulate large-value loans by commercial banks to single parties. This was done to control inflation and ensure that credit was used for productive purposes in line with national planning, thus preventing the monopolistic use of credit.
2. Discuss the role of the RBI in the field of agriculture finance.
   Ans: The RBI has a special responsibility to develop and coordinate credit facilities for the rural and agricultural sectors. Its role can be discussed as follows:
   • Agricultural Credit Department: The RBI established this department right from its inception in 1935 to study agricultural credit problems and advise governments and banks.
   • All India Rural Credit Survey Committee (1951): Based on the recommendations of this RBI-appointed committee, an ‘Integrated Scheme of Rural Credit’ was launched. This led to state partnership in cooperative institutions and the creation of special funds.
   • Creation of Special Funds: The RBI established the National Agricultural Credit (Long-Term Operations) Fund and (Stabilization) Fund in 1956 to provide long-term and medium-term loans to cooperative banks, especially during droughts or famines.
   • Establishment of Specialized Institutions: The RBI promoted the establishment of the Agricultural Refinance and Development Corporation (ARDC) in 1963, which was later transformed into the National Bank for Agriculture and Rural Development (NABARD) in 1982, the apex institution for rural credit. It also set up Regional Rural Banks (RRBs) in 1975 to cater specifically to rural credit needs.
   • Priority Sector Lending: The RBI mandated that commercial banks must allocate a certain percentage of their loans to priority sectors, with agriculture being a key component. This has ensured a continuous flow of credit to the farm sector.
   • Financing Facility to Co-operative Banks: The RBI provides short, medium, and long-term credit to cooperative banks, which are crucial for extending agricultural credit at the grassroots level.

Previous Year AHSEC Question Answers (2015-2025)

Short Questions (1-2 Marks)

• In which year was NABARD established? (AHSEC 2015, 2019)
  Ans: NABARD was established on July 12, 1982.
• Mention two financial institutions set up for providing industrial finance in India. (AHSEC 2016)
  Ans: Two financial institutions set up for providing industrial finance are (i) Industrial Finance Corporation of India (IFCI) and (ii) Industrial Development Bank of India (IDBI).
• What is Priority Sector Lending? (AHSEC 2018)
  Ans: Priority Sector Lending is a mandate from the RBI to banks, requiring them to lend a certain portion of their funds to specific sectors of the economy that are considered crucial for national development, such as agriculture and small-scale industries.
• Name two schemes implemented by RBI for promotion of agriculture. (AHSEC 2022)
  Ans: Two schemes implemented by RBI for the promotion of agriculture are (i) Priority Sector Lending and (ii) Kisan Credit Card scheme.

Long Questions (5-8 Marks)

• Discuss the role of RBI in agricultural finance. (AHSEC 2017, 2020)
  Ans: (This answer is the same as the textual Long Answer Question D.2. Please refer to that answer above).
• Explain the promotional role of the Reserve Bank of India. (AHSEC 2018)
  Ans: (This answer is the same as the textual Long Answer Question C.1. Please refer to that answer above).

10 Most Important Questions in English

1. What is the primary role of NABARD?
   Ans: The primary role of NABARD is to act as the apex institution for providing and regulating credit and other facilities for the promotion and development of agriculture, small-scale industries, and other rural economic activities.
2. How did the RBI promote industrial finance without directly lending to industries?
   Ans: The RBI promoted industrial finance by establishing and supporting specialized development financial institutions like IFCI, SFCs, and IDBI, which provide long-term finance to industries.
3. What was the main recommendation of the All India Rural Credit Survey Committee (1951)?
   Ans: The main recommendation was the ‘Integrated Scheme of Rural Credit’, which emphasized state partnership in cooperative credit institutions to strengthen them.
4. Define ‘Priority Sector’. Name any two sectors included in it.
   Ans: The priority sector refers to those sectors of the economy that are considered important for the country’s development and are given priority for credit allocation by banks. Two such sectors are Agriculture and Micro, Small and Medium Enterprises (MSMEs).
5. What was the purpose of the Credit Authorization Scheme (CAS)?
   Ans: The purpose of the Credit Authorization Scheme (1965) was to regulate large loans given by commercial banks to a single borrower to control inflation and ensure that credit was used for productive purposes aligned with national planning.
6. Why was the Industrial Development Bank of India (IDBI) established?
   Ans: IDBI was established in 1964 as an apex institution to provide direct finance to industrial concerns, and to plan, promote, and develop industries to fill the gaps in India’s industrial structure.
7. What is the role of the Agricultural Credit Department of the RBI?
   Ans: The Agricultural Credit Department of the RBI was set up to maintain an expert staff to study all questions of agricultural credit and to be available for consultation by governments and banks involved in rural finance.
8. How does the RBI promote banking habits among the general public?
   Ans: The RBI promotes banking habits by ensuring a regulated and stable banking system, licensing branches in unbanked areas, and introducing consumer protection schemes like the Banking Ombudsman, which builds public trust.
9. What are Regional Rural Banks (RRBs)?
   Ans: Regional Rural Banks (RRBs) are specialized banks established in 1975 to provide credit and other banking facilities specifically to the rural and agricultural sectors of the economy.
10. What is the difference between the role of RBI in industrial finance and agricultural finance?
    Ans: The RBI’s role in agricultural finance has been more direct and extensive, with a special statutory responsibility to develop it. In contrast, its role in industrial finance has been more indirect, primarily focused on establishing and supporting other financial institutions.