Managing the government's banking transactions is the traditional central banking function of RBI. Like individuals, businesses and banks, governments also need a banker to carry out their financial transactions in an efficient and effective manner, including the raising of resources from the public. As per Section 20 of the RBI Act 1934, RBI has the obligation to undertake the receipts and payments of the Central Government and to carry out the exchange, remittance and other banking operations, including the management of the public debt of the Central Government. The Government also deposits its cash balances with the RBI.
As per section 21 A of the RBI Act 1934, RBI act as the banker and debt manager to State Governments. Currently, the RBI acts as banker to all the State Governments in India (including Union Territory of Puducherry), except Sikkim. For Sikkim, it has limited agreement for management of its public debt.
The RBI has well defined obligations and provides several banking services to the governments.
- As a banker to the Government, the RBI receives and pays money on behalf of the various Government departments.
- The RBI also undertakes to float loans and manage them on behalf of the Governments. It provides Ways and Means Advances (WMA)
Note: – WMA is a short-term interest bearing advance – to the Governments, to meet temporary mismatches in their receipts and payments.
- The Reserve Bank acts as adviser to Government, whenever called upon to do so, on monetary and banking related matters.
The banking functions for the governments are carried out by the Public Accounts Departments at the offices/branches of the RBI. The RBI appoints other banks to act as its agents for undertaking the banking business on behalf of the governments. The RBI pays agency bank charges to the banks for undertaking the government business on its behalf.
Banker to the Central Government:
RBI maintains the Principal Accounts of Central as well as State Governments at its Central Accounts Section, Nagpur. It has put in place a well structured arrangement for revenue collection as well as payments on behalf of Government across the country. At present all the public sector banks and three private sector banks viz. ICICI Bank Ltd., HDFC Bank Ltd. and Axis Bank Ltd. act as RBI's agents. Only authorised branches of Agency banks can conduct Govt. business.
Under the administrative arrangements, the Central Government is required to maintain a minimum cash balance with the RBI. Currently, this amount is Rs.10 crore on a daily basis.
Banker to State Governments
All the State Governments are required to maintain a minimum balance with the RBI which varies from state to state depending on the relative size of the state budget and economic activity. To surge over temporary mismatches in the cash flow of receipts and payments, the Reserve Bank provides Ways and Means Advances/Overdraft to the State Governments.
The WMA scheme for the State Governments has provision for Special Drawing Facility (SDF) and Normal WMA. The SDF is extended against the collateral of the government securities held by the State Government.
Management of Public Debt
The RBI manages public debt on behalf of the Central and the State Governments. It involves issue of new rupee loans, payment of interest and repayment of these loans and other operational matters such as debt certificates and their registration.