Which government body supervises the functioning of formal sources of loans in India? Explain its functioning.

The Reserve Bank of India (RBI) is the central institution in India responsible for monitoring and supervising the functioning of formal sources of loans, which include commercial banks and other financial institutions.

The core functions of the Reserve Bank of India are as follows:

1. Maintaining the Cash Reserve Ratio (CRR): The RBI mandates that commercial banks maintain a certain minimum cash balance, often expressed as a percentage of their total deposits, known as the Cash Reserve Ratio (CRR). This is to ensure that banks have enough liquidity to meet customer withdrawal demands. The RBI is responsible for monitoring compliance with this requirement.

2. Promoting Inclusive Growth: To foster inclusive growth, the RBI takes measures to ensure that credit is accessible to various sectors of the economy, including small-scale industries, small cultivators, small borrowers, Self Help Groups (SHGs), and others. This is done to encourage entrepreneurship, promote small businesses, and stimulate economic growth.

3. Regulating Interest Rates: The RBI issues guidelines that dictate the interest rates that banks can charge for loans and pay on deposits. These rates play a crucial role in controlling inflation and stabilizing the economy.

4. Monitoring Lending Activities: The RBI requires banks to submit periodic reports detailing their lending activities, including the volume of loans, the borrowers’ profiles, interest rates charged, and other related information. This enables the RBI to monitor the overall health of the banking sector and make necessary adjustments to monetary policy as needed.

By performing these functions, the RBI helps maintain financial stability, foster economic growth, and ensure the fairness and transparency of the banking system in India.

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