Y V Reddy: Economic reforms and evolving role of RBI as banker to the
governments
Address by Dr Y V Reddy, Deputy Governor of the Reserve Bank of India, at the Conference of the
Silver Jubilee Celebrations of the Indian Civil Accounts Organization, New Delhi, 3 April 2002.
Dr Reddy is thankful to Mr K Venkatappa, Dr A Prasad, Mr G D Kallianpur and Mr P Loganathan for their
assistance.
* * *
Mr. Chairman, Mrs. Usha Sahajpal and friends,
I am thankful to the organizers for inviting me to the Silver Jubilee Year of founding of Accounts
Organisation and I recognize it as a reflection of the close cooperation and understanding that have
evolved between Reserve Bank of India (RBI) as a banker to Government of India and its Accounts
organisation. The title of the address refers to being banker to governments simply because RBI is a
banker not only to the Central Government, but also State Governments. RBI by virtue of its charter
performs several functions, the most important being to secure stability in the internal and external
value of the currency mainly through conduct of monetary policy, while at the same time, ensuring
adequate availability of credit to meet the genuine needs of a growing economy. Currency
Management is yet another function of the RBI which impacts the transactions of a large number of
people. Managing public debt is also assigned to RBI, but this is sought to be separated from RBI in
due course. Its regulation of money and forex markets flows from its primary responsibility while its
role in debt markets is closely linked to it being manager of public debt. RBI is also a regulator and
supervisor of banks, development financial institutions, and non-banking financial companies, but the
process of supervision is overseen by an independent Board for Financial Supervision, within RBI.
Incidentally, RBI is also a banker to banks. Payment System is also under the aegis of RBI, and the
technological infrastructure for the financial sector, especially in the money and Government Securities
market is provided by RBI to subserve its overall responsibilities. To the governments it renders advice
on financial matters, whenever called upon to do so. Being banker to governments is also an important
function, but is seldom in high profile, perhaps due to the reason that it does not directly or visibly
impinge on prices or output. However, as will be explained today, though it is not a big-ticket item on
RBI's balance-sheet, its role as a banker to governments is very significant and it has been evolving in
the recent years reflecting the process of economic reform.
The Bank provides banking services to both Central and State Governments such as acceptance of
moneys on Government account, payment / withdrawal of funds and collection and transfer of funds
by various means throughout India. The Governments' principal accounts are maintained at Central
Accounts Section of the Bank at Nagpur. Government accounts are handled by RBI at 15 Offices,
besides two State Government Cells at Bhopal and Chandigarh. Further, all public sector banks and
two private sector banks handle Governments accounts through their 20,800 branches. Currently, the
Agency banks handle Governments transactions of around Rs.12 lakh crore in a full financial year.
Over and above these, sizeable transactions are handled at Reserve Bank Offices. Some
transactions, though minimal, are handled in Governments' own treasuries and sub treasuries,
numbering 453, equipped with Currency Chests. This data gives the magnitude and spread of
transactions relating to Governments.
The first part of today's presentation will cover very briefly cross-country practices. The second part
provides the legal and institutional framework in India for conduct of Government's business in
banking. The third section describes the range of banking services provided by RBI to Governments.
The fourth part describes some of the reforms already undertaken in this area. The fifth section
describes major issues while the concluding section indicates a possible agenda for immediate
actions.
Cross-country practices
By custom and tradition or by express provision in the laws by which they have been established,
Central Banks are bankers to their respective Governments. In the view of Sir Montagu Norman of the
Bank of England and Benjamin Strong of the Federal Reserve System, the Central Bank should
undertake all the banking business on behalf of their own Governments. However, the actual practices
do vary among countries.
In the UK, Bank of England is the main banker to Government and maintains the Principal Central
Government Account. Individual Government departments are not obliged to use Bank of England as
their banker. Typically Government Department with significant requirements for banking service put
some or all of their banking business out to tender. In the case of South Africa, the South African
Reserve Bank acts as banker to the Central Government. Provincial Governments are, however, the
clients of private banking sector. In Japan, Bank of Japan carries out the transactions with the National
Government but not with local Governments. As regards USA, the Federal Reserve acts as the banker
to US Government. The Reserve Banks serve as depositories of the United States and perform
several payment-related services.
Legal and institutional framework
Government business in India was initially handled by the Presidency Banks of Bengal, Madras and
Bombay from 1862 to 1921 and thereafter by the Imperial Bank of India, which came into existence as
a result of amalgamation of the Presidency Banks. Since April 1, 1935, the Reserve Bank has been
the banker to the Central and State Governments.
According to Article 283(1) and (2) of the Indian Constitution, it is open to the Central Government and
to any State Government to make rules for the receipt, custody and disbursement of all the amounts
accruing to or held in its consolidated or contingency funds or in its public account. Sections 20 and 21
of the Reserve Bank of India Act, 1934 provide that the Central Government shall entrust the Bank
with all its money, remittance, exchange and banking transactions in India and the management of its
public debt, and shall also deposit all its cash balances with the Bank free of interest. The Bank may,
by agreement with any State Government, take over similar functions on behalf of that Government
under Section 21A of the RBI Act. Accordingly, the RBI is the common banker to the Central
Government and all the State Governments in the Indian Federation with the exception of Jammu &
Kashmir and Sikkim.
The Reserve Bank, as banker to various Governments, has well defined obligations and provides
several services. First, the Central Government Treasury Rules, the Central Government Account
(Receipts and Payments) Rules, in respect of the transactions of the Central departments, and the
corresponding provisions in the State Financial codes are deemed to be legally binding on the Bank.
Second, the Bank carries on the General Banking business of the Centre and the States in terms of
the working agreement between the Government and the Reserve Bank. The liability of the Bank to
the Governments in the conduct of the Government business is that of a banker to an ordinary
customer. Third, the Bank also undertakes to float loans and manage the loans on behalf of the
Governments on agreed terms. Fourth, where there is no full-fledged office of RBI, it appoints
commercial banks as agents of RBI and they are made responsible for transacting the entire
Government business. Fifth, the Bank does not charge to Governments, the cost of carrying on
Government business through its offices or the agency banks. Sixth, a facility for grant of ways and
means advances is provided by Reserve Bank to the Governments, to meet the temporary
mismatches in their income streams. Seventh, the RBI arranges for investments of surplus cash
balances of the Governments as a portfolio manager. Eighth, the RBI also acts as Adviser to
Government, whenever called upon to do so, on monetary and banking related matters besides
dispensing merchant banking services.
Range of banking services
Banker to central government
The work relating to Government business is attended by the Public Accounts Department of the RBI.
The discharge of the Bank's functions as banker to Government involves the receipt and payment of
money on behalf of the various Government departments. For this purpose, under Section 45 of the
RBI Act 1934, initially the RBI appointed State Bank of India as its sole agent at all places where the
Bank had no office or branch of its Banking Department. In turn, SBI entered into agency agreements
with all its associate banks and delegated the agency functions to some of the branches of the
associate banks at certain centres. Considering the increasing volume of Government business and
nationalisation of some commercial banks, the Government and the RBI associated nationalised
banks, which had a vast network of branches, to conduct Government business. In 1970, the
Government empowered the RBI to appoint them as agents at any centre. By 1976, the SBI,
Associate Banks and nationalised banks were acting as agents of the RBI for this business. In order to
facilitate the handling of Government receipts and payments, currency chests were established with a
number of branches of nationalised banks in addition to SBI and Associate Banks.
Prior to 1976, the responsibility for arranging payments and compiling accounts of receipts and
disbursals and auditing of transactions of all Central Government Ministries devolved on a single
authority, viz., Comptroller and Auditor General of India. The Government introduced from April 1976,
a scheme in stages for decentralisation and departmentalisation of accounts of individual Ministries at
the Centre, thereby transferring the responsibility for maintenance of accounts at all stages to the
Ministries / Departments themselves. Under this scheme each ministry/ department has been allotted
a specific public sector bank for handling its transactions based on the principle of 'one bank - one
ministry/department'. Hence, the Reserve Bank does not handle government's day-to-day transactions
as before, except where the Bank itself has been nominated as banker to a particular
ministry/department.
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.
Central Accounts
The Central Accounts Section (CAS) at the RBI maintains the principal accounts of both Central and
State Governments. The principal accounts in Nagpur are based on the daily position / aggregate
receipts and payments in respect of each Government, Ministry / department, received from RBI
offices and agency banks. Each of the accredited agency bank has set up a link office at Nagpur to
liaise with CAS for funds settlement. Thus, the Bank's offices and agency banks' branches function
like tributaries, which flow in the direction and merge into the Central Accounts Section. CAS, Nagpur,
thus plays a pivotal role in consolidating the transactions and working out the overall daily position of
each government.
The actual day-to-day transactions are handled by the Bank's offices and agency bank branches.
They render accounts to respective Government accounting authorities while effecting monetary
settlement with RBI. Since frequent adjustments between the various Governments are unavoidable,
settlement of these transactions through Central Accounts Section is convenient, accurate and
expeditious.
Reserve Bank through its Remittance Facilities Scheme operates a funds transfer system. It carries
out the adjustments as between the various Governments providing in effect, facilities for the transfer
of funds on a very large scale within the Government Sector. In order to facilitate the actual conduct of
Government transactions, the Reserve Bank has built up over the years, a network of currency chests,
repositories and small coins depots, all of which are intended to service all the Governments in the
country.
As banker to the Government, Reserve Bank works out the overall funds position and sends daily
advices showing the balances in its books, ways and means granted and investments made. The daily
advices are followed up with monthly statements, and are useful from the point of view of enabling the
Government to prepare their ways and means budgets.
The arrangement between the Government of India and the Reserve Bank on the one hand and the
public sector banks and the Reserve Bank on the other, are based largely on trust as well as being
merely contractual.
Treasury system
All payments on account of Central and State Governments are made either by cheques or by bills.
The Government of India, Reserve Bank and the banks, which serve the treasuries and sub-treasuries
normally, prefer cheques to bills. Certain States like Maharashtra, Gujarat, Karnataka, West Bengal
etc. have adopted the system of payments by cheques at their Treasuries. However, a large number
of States are yet to introduce the cheque System. In view of the advantages of cheques as compared
with bills, Official policy continues to be in favour of changing over to cheque system.
Since 1976, Treasuries and non-departmental Pay and Accounts Offices have ceased to be
responsible for handling transactions on behalf of the Central (Civil) Departments as integrated
financial advisers and principal accounts officers of these departments have taken over the
responsibility for receiving and paying money, compiling and maintaining the accounts, in respect of all
the transactions relating to these departments. The pay and accounts officer or a drawing and
disbursing officer of each Ministry or Department is linked to a designated public sector bank or RBI
and is not allowed to draw on a treasury.
Other services
In addition to being a pure banker to Government, RBI provides a full range of related services to
Government. These include exchange, remittance transactions, management of public debt and issue
of new loans, handling the forex transactions of the Government of India, investment of surplus funds
of Governments, providing safe custody facility, providing of ways and means advances, management
of special funds like Consolidated Sinking Fund, Guarantee Redemption Fund, Calamity Relief Funds,
National Defence Scheme, etc., issue and management of tap bonds like Relief Bonds, administration
of the Scheme for disbursal of pensions of Central and State Governments' employees through public
sector banks, and as Advisor to Government on all matters involving monetary and economic
perspective.
The fee recovered by the Bank for some of the above services, which are rendered as an adjunct to its
role as Banker to Government, are nominal and do not even cover the costs, while for most other
services no charge is levied.
Recent reforms undertaken
Focal point and beyond
The experience of the working of the "Departmentalised Scheme" has shown a few shortcomings.
With the large number of bank branches handling the work, delays often occurred in the transmission
of the relevant documents (paid cheques, challans scrolls etc) to Pay and Accounts Officers (PAOs)
for accounting. Besides, there were certain difficulties in reconciliation of figures between government
departments and banks.
In order to obviate these difficulties as well as making reconciliation easier, a Working Group was set
up in 1986 to review the working of the scheme, and on the basis of its recommendation existing
procedures were revised. This marked the beginning of focal point approach for reporting and
settlement of government transactions and set the pace for further refinement of the accounting
system. The focal point approach envisages "one focal point branch - one (Pay and Accounts Office)
PAO". This concept was incorporated into the system to bring about an interactive method of resolving
the day-to-day problems while achieving expeditious reconciliation. This system ensures updating of
accounts at PAO level and speedy settlement of funds at Central Accounts Section at Nagpur. It has,
sought to bridge the gap between RBI accounts and Government accounts. Based on its success, it
has been subsequently adopted in phases, in Central Board of Direct Taxes (CBDT) and extended to
Departmentalised Ministries Accounts (DMA) (both civil and non-civil ministries). There has been a
close alignment between accounting jurisdiction of the government and the dealing branches of the
bank.
However, in the envisaged computerized environment, with electronic connectivity, the settlement of
funds on real time basis, directly between the dealing branches and CAS at Nagpur for credit of
Government Account without the intervention of the Focal Point and Link Cell may be a distinct
possibility in the near future.
Standing Committee on Computerisation
Given the large magnitude of the transactions in Government account, the manual system results in
delays in handling transactions. Complete electronic data processing in the preparation and settlement
of the accounts of Government business by the agency banks as also for compilation of accounts at
Treasury/Pay and Accounts Office/Accountant General will eliminate the time lag in the flow of
information and improve standards of accuracy. During the last few years, RBI offices and agency
banks have initiated steps for computerization of Government transactions at their dealing branches.
The Committee on Technology Upgradation in Banking Sector laid down the road map for
computerization of bank branches handling Government business, to be achieved in phases. The first
phase envisaged computerization of all Focal Point branches of agencies by March 31, 2000 and
State government Link Cells / dealing branches in the second phase thereafter. The Committee
desired that efforts should be made to inter-connect the computerized branches dealing in
Government Accounts with Link Offices/ branches, and the Public Accounts Departments of the Bank
and also Central Accounts Section, Nagpur where it is ultimately accounted for in the books of
accounts. On Government side, the Committee suggested that all PAOs/Circle Offices of Government
should be computerized by March 31, 2001 and the Drawing Offices / Treasury Offices well before
March 31, 2002 in alignment with computerization of Focal Point and Dealing branches.
A Standing Committee comprising members from RBI, Government and agency banks is monitoring
the computerization of government transactions. There have been some delays in adhering to the time
schedule mentioned. RBI has been urging the agency banks to capture 80 per cent of Government
business by June 2002.
Payment systems reforms
Payment and Settlement Systems constitute the backbone of any economy and the existence of
competent payment and settlement systems have a positive impact on the efficient functioning of the
various sectors of the economy. Central Banks in the world are according great importance to well
established payment and settlement systems. The Reserve Bank, too, has taken up as its mission, the
establishment of a robust, safe, secure and efficient payment and settlement system for the country as
part of its initiatives aimed at financial sector reforms in this area. Constituted in 1999, the National
Payments Council is the Apex level body, which provides general policy directions and guidelines for
reforms in the Payment and Settlement Systems of the country.
Initiatives aimed at improvements in the payments and settlement systems are centered on the
threepronged strategies of consolidation, development and integration of the various components of the
payment and settlement systems. Consolidation takes its base from existing activities such as
computerised clearing, etc. Development envisages opening of new clearing houses, introduction of
systems such as the Centralised Funds Management System and Real Time Gross Settlement
(RTGS) and Integration of all these initiatives both within the Reserve Bank and for the banking Sector
as a whole would result in the culmination of the reform process.
Non-paper based payment systems, such as Electronic Funds Transfers (EFT) and Electronic
Clearing Services (debit and Credit Clearing), have been accepted widely for use within the country.
The proposed introduction of the Real Time Gross Settlement (RTGS) System would ensure
settlement of funds in real time and in an electronic manner. All these would have positive impact for
the government sector too, which could exploit the benefits of ECS and EFT for even their
conventional payments - such as tax collections, various payments, tax refunds, drawback payments,
etc.
Since movement of funds is scheduled to take place using electronic means, the need for providing for
a more elaborate and clear legal infrastructure has also been recognized. Accordingly, work has
commenced on draft legislation to regulate the payment systems, which may not only be restricted to
banks and financial institutions, but could also go beyond that. The proposed legislation will also have
powers to regulate EFT, except that the proposed EFT regulation will deal only with credit transfer.
The debit transfer transactions will continue to be governed by the Negotiable Instruments Act, 1881.
Further, in order to deal with electronic instruments like e-cheques, which are in the nature of debit
transfer, amendments to the Negotiable Instruments Act 1881 and IT Act 2000 have been suggested
for consideration of Government.
Improving connectivity between CGA and CAS
Computerisation in Central Accounts Section and connectivity to various user agencies:
Since July 1, 2001, a state-of-the-art technological Architecture for management of Government
Accounts at Central Accounts Section, Nagpur was set up. The system provides online data
processing capability in front office mode and on line connectivity to all the RBI offices, agency banks
and State Governments. The system is designed to provide information on a real-time on-line basis to
Central and State Governments for ascertaining their cash balance position and other transactions.
As a further improvement, a Virtual Private Network (VPN) is being established between CGA and
Principal Accounts Officers of various ministries. The network is also proposed to be extended to the
Pay & Accounts Office level. The network would act as a hub for electronic interchange of information
between CAS Nagpur and various civil and non-civil ministries. While Inter Government Transactions
would be handled on an online basis, the Agency Bank transactions will be available as and when
reported to CAS.
The above arrangements when fully put in place will enable the various Principal Accounts Offices to
send Inter-Government Transactions, along with details of the relative sanction orders to CAS
electronically, get confirmation advices (clearance memos) instantly and eliminate most of the
reconciliation problems not only at the level of Central Government but also facilitate proper
accounting in the States.
In fact State Governments have been complaining regarding delays in receipt of sanction orders as a
result of which they are unable to know the purpose of the funds being given from Central Government
at the time of such amount being credited by RBI to their accounts. RBI has also taken initiative in
redesigning the format of the IGA (Inter Government Adjustment) advice and Clearance Memo to
ensure that the advice being sent to CAS is comprehensive and meets requirements of the State
Governments as well. I would request the Office of CGA to examine the suggestions made by us in
this regard and implement the revised IGA format at the earliest.
Another benefit of the connectivity would be strong MIS support. From the Bank's view point, on-line
access will eliminate the need for periodical statements being sent to the accounting authorities as the
authorities will be able to choose the period (a week, fortnight, month or more) for which they want the
data and then can use it for any number of MIS purposes. Maintenance of parallel records can also be
eliminated.
The RBI is also examining the feasibility of using the Internet to connect all State Governments,
Central Government Departments and various agency banks to implement total workflow automation
in respect Government transaction.
Under the current procedure, the fund settlement at CAS Nagpur takes place after the rendering of
accounts by the focal point branches to the local PAO. The focal point branches receive the scrolls
and the documents from the dealing branches by post (normally by Registered post). This means that
settlement of funds is inevitably delayed for the period of postal transit plus the time for consolidation
at focal point branch creating a lag in final accounting in government account with CAS Nagpur.
During this lag, the funds remain in pipeline as a float at the cost of government departments. Often,
the banks also suffer opportunity loss due to delay in monetary settlement. With the computerization of
transactions both at the bank branches and government departments, it would be possible to
reengineer the process. Forwarding of paper scroll/receipted challans and paid cheques to government
offices could take place at a later stage than the electronic transmission of transactions. This means
that the focal point branch would transmit the transactions to CAS Nagpur without waiting for the
scrolls received from the branches to be consolidated and verified. The Committee on Technology
Upgradation in Banking Sector examined this aspect and felt that this would help in quicker finalisation
of government account and fund settlement at CAS Nagpur. The issue remains open.
Interaction with States
A forum has been provided by the Reserve Bank bringing all the Finance Secretaries of State
Governments and the Union for exchange of ideas and sorting out the problems. These conferences
are held in Reserve Bank for the last few years and the deliberations have proved useful in identifying
the common problems and developing best practices in regard to Government finances. Between
November 1997 and November 2001, nine such conferences have been held. A number of important
initiatives relating to ways and means advances, approach to market borrowing programme,
investment of surpluses, ceilings on State guarantees, apart from changes in the content and format
for reporting have emanated and taken shape as a result of interactions in these meetings.
Major issues
Minimum balances requirements in government
The RBI is authorized to provide Ways and Means Advances to Central and State Governments in
terms of Section 17(5) of the RBI Act. Until 1994-95, the needs of Government were accommodated
through automatic monetisation by issuing ad hoc Treasury Bills at 4.6 per cent. Considering the ill
effects of automatic monetisation of Government deficit, the Reserve Bank and the Government
agreed mutually in September 1994 to restrict the issue of ad hocs for the year-end and also within the
year and for scrapping the issue of ad hoc treasury bills from 1 April 1997. Accordingly the issue of ad
hoc treasury bills was discontinued with effect from 1 April 1997. Simultaneously, a scheme of granting
Ways and Means Advances by the Reserve Bank to Government of India has been introduced to
accommodate temporary mismatches in Government receipts and payments, interest on which was
initially concessional, is presently at Bank Rate. Currently, Central Government is required to maintain
a minimum balance of Rs.10 crore on a daily basis and Rs.100 crore on Fridays. The limit for Ways &
Means Advances for 2001-2002 to Central Government has been fixed at Rs. 10,000 crore for the first
half year and at Rs. 6,000 crore for the second half year. When the Government utilizes 75 per cent of
the WMA limit, the Reserve Bank considers fresh floatation of market loan depending on market
conditions.
State Governments were expected to match the outflows with inflows very carefully so as to avoid
recourse to ways and means advances from RBI. If a State Government allowed its account to
emerge in overdraft, this would have been regarded with extreme disfavour and also as reflecting on
the competence and ability of the State Government to manage its own finances. Over the years, the
State Governments resorted increasingly to WMA and overdraft. The WMA limits were fixed as a
multiple of minimum balance of States. However, while the multiples increased, the minimum balances
required to be maintained by the State Governments were not revised between 1976 and 1999. Since
1999, the WMA Scheme is being worked out on the basis of the recommendations of the B.P.R.Vittal
Committee (1998). The Committee recommended that the minimum balance should be revised and
linked to the same base as normal WMA which itself is worked out taking into account the sum of
revenue receipts and capital expenditure. The first revision after the implementation of the Vittal
Committee formula was effected from April 1, 1999, followed by the next revision from February 1,
2001. The latest revision took effect from April 1, 2002. However, the minimum balances have not
been revised since April 1, 1999. A review of the WMA scheme will be made in April 2003.
Automatic debit mechanism
The Technical Committee of State Finance Secretaries on the State Government Guarantees has
observed that such a mechanism runs the risk of resulting in insufficient funds for financing minimum
obligatory payments and other grounds as well. Using an automatic recovery mechanism for inviting
subscription to bonds issued by autonomous bodies with State Government Guarantees not only
erodes the credibility of the State Government, but also would prompt other States to request for such
assurance to offer additional comfort for investors. The matter is under the consideration of the
Reserve Bank and the Central Government.
Expansion in agency banks
At present, the RBI, SBI and nationalised banks conduct business relating to Governments. More
recently, private banks promoted by the all India Financial Institutions (AFI), which meet the defined
criteria, are also being considered for induction for conduct of Government business. The objective is
to help the State Governments to get better, quick service with safety of funds. The question is to
strike a balance between the two and this may have to be decided by the States with the help of RBI.
Thus, there can be competition for Government business in the future.
The Reserve Bank, being a Central Bank, for achieving the functional focus, may have to consider in
due course, shedding of the retail banking business in relation to Governments in favour of the agency
banks with a view to ensuring that in the long run, the Bank will maintain only the Principal Accounts of
the Governments, leaving the day-to-day banking business to the commercial banks functioning as its
agents.
Treasury
The treasury system has evolved very gradually over a number of years and has worked with
reasonable satisfaction. Nevertheless, there is scope for improvement with a view to providing more
facilities to the general public in a number of ways. First, the non-banking treasuries / sub-treasuries,
which handle the cash business itself, could be gradually converted into banking treasuries by
transferring their cash business to banks. Second, States may weigh the option of introducing
separation of audit and accounts and departmentalization of accounts on the lines of Centre gradually.
Third, as cheques for various reasons are preferable to bills, it is desirable to encourage wider use of
cheques. The treasury is the primary accounti