[short_answer] The Reserve Bank of India does not merely allow banks to operate freely in search of profit — it imposes specific obligations on them. What are TWO such obligations, and why does the RBI consider it necessary to impose these restrictions on commercial banks?
Generated by claude-sonnet-4-6 · 2026-06-26 13:25 · grounding rag
Model Answer
The RBI imposes two key obligations on commercial banks:
- Maintaining minimum cash balance – Banks must keep a minimum proportion of their deposits as cash (about 15%) to repay depositors on demand. The RBI monitors whether banks actually maintain this balance.
- Lending to priority sectors – Banks must give loans not just to profit-making businesses but also to small cultivators, small-scale industries, and small borrowers. Banks must periodically report to the RBI about how much they lend, to whom, and at what interest rate.
Why necessary: The RBI supervises banks to protect depositors' money, ensure fair distribution of credit, and prevent banks from lending only to the rich and profitable — which would exclude the poor from formal credit.
Source: Chapter 3, Money and Credit — Formal Sector Credit in India
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Explanation
The examiner is looking for:
- Two specific obligations (cash balance + priority sector lending) — name both clearly.
- Why RBI supervision is necessary — link it to protecting depositors and ensuring equitable credit access.
- The passage explicitly states both obligations, so quote or closely paraphrase it; don't invent obligations.
- Note: The textbook says banks hold "about 15%" as cash reserve (the passage says 5% as cash with themselves but the reserve requirement referred to in supervision context is higher). Stick to what the passage says if unsure — the key point is "minimum cash balance" is monitored by RBI.