Under Sections 20 and 21 of the RBI Act, 1934, the RBI shall have an obligation and right respectively to accept monies for account of the Central Government and to make payments up to the amount standing to the credit of its account, and to carry out its exchange, remittance, and other banking operations.

Appendix-I

Under the administrative arrangements, the Central Government is required to maintain a minimum cash balance with the RBI. The following accounts of Central Government are maintained in the Regional Offices of RBI and the Principal account of these accounts are maintained at Central Accounts Section (CAS), RBI, Nagpur: i. Central Government - Civil; ii. Railway Fund; iii. Post Fund; iv. Telecommunication Fund; v. Defence Fund; and vi. Departmentalized Ministries. All receipts, payments /disbursements, clearing/remittance transactions take place through these accounts. The Reserve Bank is in the process of opening of more accounts for the Governments for processing the payments which were hitherto handled by the agency banks.

Under Section 21A of the RBI Act, 1934 ibid the Bank may, by agreement, with the Government of any State, undertake all its money, remittance, exchange, and banking transactions in India, including in particular, the deposit, free of interest, of all its cash balances with the Bank. Accordingly, as of now, the Bank is banker to all the States and the Union Territories in the country, except for the State of Sikkim. All the State Governments are required to maintain a minimum balance with the Reserve Bank, which varies from State to State, depending on the relative size of the State budget and its economic activity. To tide over temporary mismatches in the cash flow of receipts and payments, the Reserve Bank provides Special Drawing Facility (SDF), Normal Ways and Means Advances and Overdraft (OD) to the State Governments.

Under section 45(1) of RBI Act 1934, the Reserve Bank, may, having regard to public interest, convenience of banking, banking development and such other factors which in its opinion are relevant in this regard, appoint any scheduled bank as its agent at all places, or at any place in India for such purposes as the Bank may specify. Presently, the Reserve Bank has appointed 12 public sector banks, 20 private sector banks and 01 foreign sector bank (WOS) as its agency banks for conducting Government banking business. Business allocation to the agency banks is done in consultation with the Governments.

The current accounts of individual banks are being opened in e-Kuber (CBS of RBI) by Banking Departments of the Regional Offices. These current accounts are also maintained for participation in centralized and decentralized Payment Systems and are used for settling inter-bank obligations, such as clearing transactions or clearing money market transactions between two banks, buying and selling securities and foreign currencies. Thus, Reserve Bank acts as a common banker, known as ‘Banker to banks’ function, the operational instructions for which are issued by the concerned Central Office departments of the Reserve Bank. Among other provisions, the Reserve Bank stipulates minimum balances to be maintained by banks in these accounts. It is the responsibility of each bank maintaining current account with the Reserve Bank to ensure that sufficient balance is available in the account to avoid defaults in payments and settlements. As Banker to banks, the Reserve Bank provides short-term loans and advances to select banks, when necessary, to facilitate lending to specific sectors and for specific purposes.

As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last resort’. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and on the economy.