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Banking Awareness play a vital role in all  Examination. we can expect  Questions from different Topics.In Banking and other competitive exams like RRB, CDS, LIC AO, RBI, SSC, UPSC, FCI, UIIC, OICL, SBI Clerks and PO the questions on  The role of RBI as a lender and Banker to Government are being asked. Here we have given Banking Notes on ” The role of RBI as a lender and Banker to Government “ for SSC CGL Examinations 2019-20 & other examination. Candidates those who are all preparing for the Examination can use this study material.

[box type=”shadow” align=”” class=”” width=””]The role of RBI as a lender and Banker to Government[/box]


Before the formation of the RBI, the Imperial Bank of India performed many of the functions as banker to the Government. With the establishment of the RBI, the Imperial Bank ceased to be the banker to the Government, but entered into an agreement with the RBI for providing its services as the sole agent of the RBI in places where it had branch and there was no branch of the Banking Department of the RBI.

As the banker to the Central Government and to the State Governments by virtue of agreements entered into with them, the RBI provides a range of banking services for these Governments such as acceptance of money on government account payment/withdrawals of funds and collection and transfer of funds through different means.

RBI’s role with regard to conduct of Government’s banking transaction

In terms of 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 Union. Further, as per Section 21 of the said Act, RBI has the right to transact Government business of the Union in India.

State Government transactions are carried out by RBI in terms of the agreement entered into with the State Governments in terms of section 21 A of the Act. As of now, such agreements exist between RBI and all the State Governments except Government of Sikkim. Thus, the legal provisions vest Reserve Bank of India with both the right and obligation to function as banker to the government.

How does Reserve Bank of India discharge its statutory obligation of being ‘Banker to Government’

RBI carries out the general banking business of the governments through its own offices and commercial banks, both public and private, appointed as its agents. Section 45 of the Reserve Bank of India Act, 1934, provides for appointment of scheduled commercial banks as agents at all places or at any place in India, for purposes that it may specify, “having regard to public interest, convenience of banking, banking development and such other factors which in its opinion are relevant in this regard”.

Reserve Bank of India 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. A network comprising the Government Banking Divisions of RBI and branches of agency banks appointed under Section 45 of the RBI Act carry out the government transactions. At present all the public sector banks and select private sector banks act as RBI’s agents. Only designated branches of agency banks can conduct government banking business.

Banker to State Governments

The financial transactions of the State Governments are carried out at a number of offices, including those of the RBI SBI, nationalised banks, Treasuries, etc. The Government transactions conducted at all such places are allowed without any reference to the actual position of the cash balance of the State Government, the accounts of which are maintained at the Central Accounts Section of the RBI at Nagpur. The transactions that are put through at various agency bank branches in the State concerned are consolidated at the link cell in the respective State capitals and settled with the Reserve Bank Office in the State. Currently, Reserve Bank also handles directly, banking business of four State Governments viz., Karnataka, Maharashtra, Tamilnadu and West Bengal. The consolidated position including the State Government transactions put through at RBI Offices is ultimately booked in the Principal Account of the respective State maintained at CAS, Nagpur.

Role of RBI as Banker to Government

  • It transacts all banking business of the government. In return, the government keep their cash balances on current account deposit with the RBI
  • It provides short term credits to the government
  • The central government is empowered to borrow through treasury bills and amounts it likes from RBI. Thus, the Central Government is the ultimate monetary authority of the country.
  • The RBI provides short term advances to the state government called ways and means advances. But, the state governments are not empowered to borrow any amount they like from RBI.
  • It acts as advisor to the government.


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