The Reserve Bank of India (RBI) supervises the functioning of banks to ensure the smooth operation of the formal sources of loans. One of the key ways it does this is by monitoring whether banks are actually maintaining a minimum cash balance out of the deposits they receive.

In addition to monitoring cash balances, the RBI ensures that banks fulfill their social responsibility by giving loans not just to profit-making businesses and traders, but also to small cultivators, small scale industries, and small borrowers. To keep track of these activities, banks must periodically submit detailed information to the RBI regarding how much they are lending, to whom, and at what interest rate.

This supervision is necessary because, unlike the informal sector where there is no organization to supervise lenders, the formal sector requires oversight to prevent arbitrary practices. Without supervision, lenders in the informal sector can lend at whatever interest rate they choose. Therefore, the RBI's role is crucial to ensure that banks do not solely focus on profits but also support small borrowers and maintain financial stability.