The Reserve Bank of India Act, 1934

Introduction:

The Reserve Bank of India Act, 1934 (hereinafter referred to as the RBI Act), was first enacted by the Parliament on March 6, 1934. The Reserve Bank of India (hereinafter referred to as RBI) is empowered by its establishing Act to ensure action upon numerous issues, including rules, regulations, guidelines, and directions with regard to services in the banking and financial sector.

The establishment and incorporation of RBI are stated u/s 3 of the RBI Act for the purpose of undertaking the management of the currency from the Central Government of India and for carrying on the business of banking in accordance with the provisions of this Act. Under sub-section 2, it is stated that the bank shall be a corporate body and have perpetual succession as well as a common seal and can sue and be sued. The capital of the bank, u/s 4, shall be five crore rupees.

History

Since the beginning of the 18^th century, the joint-stock bank has been linked with the agency houses for the purpose of doing banking business. Over time, indigenous bankers and money lenders also started acting as bankers. The growth of such joint-stock banking with help from agency houses urged the need for a Regulating Act, which would govern all related matters. The need for a central banking system in India arose roughly during the 1770s.[1]

In 1926, the Hilton Young Committee proposed a central bank shall be established in India. It took the Parliament seven years to pass the RBI Act and establish RBI as a shareholders’ bank. Finally, a number of banking companies were formed were registered under the Companies’ Act, 1956 of which the RBI Act protects the interests of their depositors, ensuring and exercising control over credit, develop banking on good terms, and avoiding failures of the banks.[2]

Management and Composition of The Central Board, and Term of Office of Directors

U/s 7 of the RBI Act, the Central Government is empowered to give directions to the bank after consultation with the Governor of the bank if they are considered necessary in the public interest. A Central Board of Directors is to be constituted, which shall be responsible for the general superintendence and direction of the business and affairs of the bank.[3] The Governor, and when they are absent, the Deputy Governor who shall be nominated by them, shall also have powers of general superintendence and managing the direction of the business and affairs of the bank. They may also exercise all those powers and discharge all acts that the RBI itself can exercise or do.[4]

U/s 8, the Central Board of Directors shall consist of:

1. a Governor and not more than four Deputy Governors who shall be appointed by the Central Government;
2. four Directors who shall be nominated by the Central Government, one from each of the four Local Boards as established u/s 9;
3. ten Directors also proposed by the Central Government; and
4. two Government officials proposed by the Central Government.

The Central Board, when it gets the assent of the Central Government, shall determine the remuneration and other allowances of the Governor as well as the Deputy Governor(s) who shall commit their uninterrupted time to the management of the affairs of the bank.[5]

U/s 8, the Director and the Deputy Governor are permitted to be present at the meeting of the Central Board but are not empowered to vote. They shall administer the office for a term of five years and shall be qualified for re-appointment.[6]

Business that The RBI May and May not Transact

Section 17 and 19 of the Act provide for the business that RBI may or may not transact respectively.

According to section 17, RBI may accept monetary deposit in the absence of interest from and collecting money for the Central Government and the State Governments. It can do the same for local authorities, banks, and any other persons.[7] It may carry on the purchase and sale, rediscount of bills of exchange as well as promissory notes that are drawn on and are receivable in India and arise out of a legitimate commercial and trade transactions.[8]

The RBI may also govern the purchase from and selling to the scheduled banks of foreign exchange; the purchase and sale, and rediscount of the bills of exchange that are payable in or on any country besides India, although, it should be a participant of the International Monetary Fund (IMF) and which is maturing, if it arises out of a bona fide commercial transaction, within one hundred and eighty days, and in any other case, ninety days from the date of such purchase or rediscount.[9]

It may make loans and advance payments to local authorities, scheduled banks, State co-operative banks, and State Financial Corporations, which shall be refundable on request or at the end of the term of validity of ninety days and shall be effected against the security of:

1. stocks, or funds, or securities;
2. either gold or silver, or any documents that prove their title;
3. any bills of exchange or promissory notes qualified to purchased and rediscounted by the RBI;
4. promissory notes of any scheduled banks or State co-operative banks;[10]

RBI may make advances to the Governments, both Central and State, which shall be repayable after a duration not exceeding six months from the date of entry into force of that advance.[11]

It shall also regulate the purchase and selling of securities of the Central Government and the Government of the State;[12] and the custody of monies, securities and other valuables and the accumulation of proceeds, whether principal, interest or dividend, of any such securities;[13] the selling and realisation of any movable or immovable property that may have been in the possession of RBI.[14]

In the transaction of any business which may involve the purchase and sale of gold or silver; the purchase, sale, transfer and retention of shares in any company, bill of exchange or securities; the accumulation of proceeds, irrespective of their existence (primary, interest or dividend) of any securities or shares; the transfer of such proceeds by bill of exchange, whether payable in India or otherwise; the management of public debt, or the issue and management of bonds and bonds; the RBI may act as an agent of the Central Government, the State Government, any local authority, the Industrial Financial Corporation of India, any other corporate body formed or constituted by any other statute, any country other than India, or any other authority which the Central Government may authorise.[15]

Section 19 of the RBI Act provides for a business which the RBI may not engage in. This includes the following:

1. to engage in trade or otherwise have a direct interest in any financial, manufacturing or other undertaking, except interest that may in any way accrue to it in the course of the fulfilment of any of its claims:
   In view of the fact that all such interests shall be disposed of as soon as possible;
2. to buy shares of any banking company or any other company or to issue loans on the basis of the security of any such shares;
3. advance money on the mortgage of, or otherwise on the security of, immovable property or documents of title relating thereto, or become the owner of immovable property, except in so far as it is necessary for its own premises of business and for the residence of its officers and servants;
4. to make loans or advances;
5. draw or accept invoices payable otherwise than on request;
6. to allow returns on deposits or on current accounts.

Obligation and Right of The RBI to Transact the Government’s Business

U/s 20, the RBI shall accept monies for the account Central Government’s account and shall also make payments within the limits of the amount to be credited to its account and shall carry out its exchange, remittance and other banking functions, including the management of the Union’s public debt.

U/s 21, the Central Government shall endow all its money, exchange, remittance, and transactions concerning banking in India to the RBI and shall deposit all its interest-free cash balances with the RBI. However, the Central Government shall not be stopped from carrying out money transactions in places where the RBI does not have agencies or branches, and may also keep such balances as may be needed in such places. The Central Government shall also assign to the RBI the functions that may be necessary to manage the public debt with the issuance of any new loans.

Right of The RBI to Issue Banknotes

As per section 22, the RBI has the exclusive right to issue banknotes to India. The Central Government shall set a fixed duration for which, on the suggestions of the Central Board, the RBI will have the powers to issue currency notes to the Government of India that are submitted to it by the Central Government. When any contrary intention is absent, the provisions of this Act that are applicable to banknotes shall also extend in a similar way to all currency notes that are issued by the Government of India, either by the RBI or the Central Government. These currency notes shall be considered the equivalent of banknotes, and any reference in this Act that has been made to banknotes shall be interpreted accordingly.

U/s 23, The Issue Department shall be established which is responsible for issuing banknotes and shall be separate and kept wholly separate from the Banking Department. The denomination of the banknotes shall not exceed ten thousand rupees, as provided by section 24. After considering the recommendations of the Central Board, the Central Government may approve the design, type and material of the banknotes.

Cash Reserves of Scheduled Banks to be Kept with The RBI

According to section 42, each bank included in the Second Schedule shall maintain with the RBI an average daily balance of not less than such percentage of the total demand and time liabilities of that bank in India, as may be specified from time to time by the RBI with regard to the necessities to ensure monetary stability in that country. As of now, this number is 4.[16]

The Cash Reserve Ratio (CRR) is a fixed minimum fraction of the total customer deposits that commercial banks are needed to hold either in cash or as deposits with the central bank. The CRR shall be specified in accordance with the guidelines of the central bank of the country.[17]

Functions of the RBI

Following are the functions of the RBI:

1. Banker to Government: The RBI both receives and pays on behalf of the Government. It also relays its exchange and remittance, and also manages its public debt.
2. Formulates Banking Policy: The RBI is entrusted with powers to frame and formulate banking policies that, at large, serve the public and work in their interest.
3. Licensing Authority: The RBI has powers to grant licenses required to establish and commence banking business in India. It is also empowered to cancel the same.
4. Banker’s Bank: While maintaining cash reserves of scheduled banks with it as stated earlier, the RBI acts as a banker’s bank by making advances to such scheduled banks and other financial institutions.
5. Right to Issue Bank Note: As mentioned earlier, u/s 22, the RBI has the exclusive right to issue bank notes in India which is supervised by a separate department known as the Issue Department.

Penalties under the RBI Act, 1934

Penalties in the RBI Act are covered u/s 58B of the Act and are as follows:

U/s 58B, any person who makes untrue claims in any statement including any application, return, or declaration intentionally, they shall be punishable with a term of up to 3 years and shall be imposed with fine.

Failure to produce any book or account required under the Act, any order or regulation, they may be punishable with fine up to Rs. 1 lakh for each offence, and in case of persistent failure, a fine of Rs. 5,000 for each day shall be imposed.

Disclosure of any prohibited credit information shall attract the punishment of imprisonment up to 6 months, or fine which shall not exceed Rs. 1,000, or both.

Contravention of any provision of the RBI Act, or any default made in compliance with any requirement of this Act, or any other order or regulation, the person guilty shall be punishable with fine up to Rs. 1 lakh, and on continuation of the offence, further fine of up to Rs. 10,000 shall be imposed for each day while the default continues.

Conclusion

Ever since the growth of the banking sector has presented itself in India, the Reserve bank of India has maintained an accountancy and transparency which is seldom witnessed in independent institutions. One of its main functions is to maintain the financial stability of the country as well as keep the economy floating to which it has devoted all of its services.

It is truly commendable that the Reserve Bank of India is making an effort to protect people and to provide them with a fair quality of service by keeping the banks accountable. However, knowledge is needed to make the most of these efforts. If citizens are uneducated about the grievance resolution process and the grounds on which they can hold banks to account, they may feel disconnected from the system and may not approach it. Awareness must be at grassroots level, which will entail a joint effort by the RBI and the Central Government of India to introduce unique policies in the banking sector.

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References:

[1] Reserve Bank of India, 1934, BANK EXAMS TODAY (Dec. 25, 2017), https://www.bankexamstoday.com/2017/12/rbi-act-1934-summarised.html

[2] Ibid.

[3] Section 7(2).

[4] Section 7(3).

[5] Section 8(2).

[6] Section 8(4).

[7] Section 17(1).

[8] Section 17(2).

[9] Section 17(3).

[10] Section 17(4).

[11] Section 17(5).

[12] Section 17(8).

[13] Section 17(9).

[14] Section 17(10).

[15] Section 17(11).

[16] Dejargoned: Repo Rate, Reverse Repo Rate, CRR, SLR & Base Rate, PROPTIGER (May 21, 2020), https://www.proptiger.com/guide/post/dejargoned-repo-rate-reverse-repo-rate-crr-slr-base-rate#:~:text=Currently%2C%20the%20CRR%20is%204,can%20lend%20out%20or%20invest.

[17] Cash Reserve Ratio, THE ECONOMIC TIMES (Apr. 15, 2015, 04:38 PM), https://economictimes.indiatimes.com/c/cash-reserve-ratio/articleshow/19339693.cms