CHAPTER - 3
RESERVE BANK OF INDIA ACT, 1934
Established on 1st April, 1935, under RBI Act, 1934 on the recommendations of John
Hilton Young Commission (known as Royal Commission on Indian Currency & Finance)
Nationalized on Jan. 1, 1949
Paid up capital – Rs. 5 crore (100% owned by CG)
Management – Managed by a Central Board of Directors – (one Governor, 4 Dy.
Governors & 15 other Directors) and 4 Local Boards (at Mumbai, Chennai, Kolkata &
New Delhi)
1st Governor – Mr. O Smith, 1st Indian Governor – Dr. C Desmukh, Present Governor –
Raghuram Rajan
Bank of England is central bank of UK and Federal Reserve Bank is that of USA.
Functions:
A) Issuance of Currency (Section 22 of RBI Act)
Sole authority to issue currency notes of various denominations under signatures of
Governor (except One rupee note, which is issued by Central Govt. under Signature of
Finance Secretary). Issue Department of RBI undertakes the job.
B) Banker to the Government
RBI transacts Govt. business & manages debt U/s 20 of RBI Act (for Central Govt. & U/s
21-A (for State Govt.), advises Govt. on monetary policy matters, provides ways and
means advance (U/s 17(5) of RBI Act) to Govt. (Central / State) for meeting temporary
mismatch / shortfall in revenue (Maximum for a period of 3 Months)
C) Banker’s Bank
Acts as a banker to the Scheduled banks and the lender of the last resort by providing
financial assistance by way of refinance / rediscounting (Sec 17 (2) & (3) and Liquidity
Adjustment Facility (injection of liquidity through repo auctions & absorption of liquidity
through reverse repo auctions).
D) Controller of Banks
Grants license to carry on banking business, issue directions, carries out inspection
(onsite as well as off site) and exercises management control.
E) Controller of Credit
U/s 21 & 35A of Banking Regulations Act, RBI can fix interest rates (including Bank rate)
and also exercises selective credit controls in order to control inflation and money supply
for ensuring growth of economy and price stability.
Various methods used by RBI for this purpose are:
Change in Cash Reserve Ratio, Statutory Liquidity Ratio
Stipulation of margin on securities
Directed credit guidelines
Open market operations (Sale and purchase of securities).
Repo, Reverse Repo and MSF.
(Annual Monetary & Credit Policy is issued by RBI once in a year with Quarterly
Reviews)
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F) Collection of Information
RBI collects information on borrowers enjoying credit limits up to Rs.10 lac on secured
basis & Rs. 5 lac on unsecured basis (u/s 45C) and shares this information with other
Banks (Sec. 45-D). It also collects information on BSR
(Basic Statistical Return); BSR-I – Part A: Containing particulars of borrowal a/cs
enjoying credit limits above Rs. 2 lac, Part B: aggregate figures of limits of Rs.2 lac and
less), - BSR-II (containing information on deposits with break up in to current, Savings
and term deposits) & also the information on suit filed accounts and willful defaulters.
G) Managing Payment System
Acts as a regulator of payment & settlement system, manages cheque clearing system
(introduced Magnetic Ink Character Recognition System (MICR), Cheque truncation
system (CTS), Electronic Clearing Service (ECS), National Electronic Fund Transfer
(NEFT), Real Time Gross Settlement (RTGS) system for faster cheque clearance /
settlement. NPCI (National Payment Corporation of India was set up to coordinate and
implement all payment systems in India.
H) Maintenance of value of Indian currency
RBI maintains and regulates foreign exchange transactions under the Foreign
Exchange Management Act (FEMA) through its Exchange Control Department.
I) Supervision of Financial System
Board for Financial Supervision (BFS) has been set up u/s 58 of RBI Act on
16.11.1994, with Governor, RBI as its ex-officio Chairman. Its functions include
empanelment and selection of statutory auditors and exercise of integrated supervision
over commercial banks. Financial Institutions & NBFCs and other para-banking financial
institutions through onsite inspection & off-site supervision through DSB Returns (eight
Returns, DSB-I is monthly return, DSB-VIII is daily return of structured liquidity) & other
returns are quarterly returns.
SALIENT PROVISIONS OF SOME IMPORTANT SECTIONS
Sec. 17 Defines various types of business which RBI may transact which include:
i. Accepting deposits of Central / State Governments free of interest
ii. Purchase Purchase/rediscount of Bills of Exchange from banks.
iii. Purchase/sale of Foreign Exchange to/from banks
iv. To give loans to banks, SFCs, etc.
v. To provide advances to Central/State Governments.
vi. To purchase/sale Government securities, etc.
Sec. 18 Grant of Emergency loan to banks on liberal terms
Sec. 19 Specifies business which RBI may not transact
Sec. 20 Banker to Govt.- Obligation of the Bank to transact Govt. business
Sec. 21 Confers right to transact govt. business in India
Sec.22 Exclusive right to issue bank notes.
Sec.24 Denomination of bank note may be maximum Rs.10, 000/-. Central Govt. may direct
discontinuance or non-issuance to bank note of any denomination
Sec 26 Banks notes issued by RBI shall be Legal tender money and Guaranteed by Central
Government.
Sec.28 RBI can frame rules for refunding value of mutilated, soiled or imperfect notes as a matter
of grace.
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Sec. 29 Bank note exempted from stamp duty under Indian Stamp Act.
Sec.31 No Body other than RBI or Central Government is authorized to issue promissory note
payable to bearer on Demand. Similarly, except RBI and Central Government, no one is
authorized to draw/accept / make or issue Bills of Exchange payable to bearer on
demand (Exception: Cheques payable to bearer on demand can be drawn by anybody).
Sec.33 Assets of the Issue department shall consist of gold coins, gold bullion and foreign
securities which will not be less than Rs.200 cr. at any time, of which gold coin and bullion
will not be less than Rs.115 crore.
Sec. 42 Maintenance of CRR by scheduled banks.
Sec. 45C Power to call for credit information from banks.
Sec. 48 Exemption to RBI from paying income tax and super tax
Sec. 49 Publication of Bank Rate. Standard rate at which RBI is prepared to buy or rediscount
bills of exchange or other commercial papers eligible for purchase under this Act. Current
rate is 9.00%
Sec. 58 RBI’s Central Board is empowered to make regulations consistent with the Act.
CASH RESERVE RATIO
With a view to monitoring compliance of maintenance of statutory reserve requirements viz.
Cash Reserve Ratio and Statutory Liquidity Ratio by the Scheduled Commercial Banks
(SCBs), the Reserve Bank of India has prescribed statutory returns i.e. Form A return (for
CRR) under Section 42 (2) of the RBI Act, 1934 and Form VIII return (for SLR) under
Section 24 of the Banking Regulation Act, 1949. These guidelines are applicable to all
Scheduled Commercial Banks excluding Regional Rural Banks.
The Reserve Bank In terms of Section 42 (1) of the Reserve Bank of India Act, 1934 having
regard to the needs of securing the monetary stability in the country, prescribes the
CRR for Scheduled Commercial Banks (SCBs) without any floor or ceiling rate.
CRR is 4.00 % at present w.e.f. 9.2.2013
No Interest Payment on Eligible Cash Balances maintained by SCBs with RBI under CRR In
view of the amendment carried out to RBI Act 1934, omitting sub-section (1B) of section 42, the
Reserve Bank of India does not pay any interest on the CRR balances maintained by
Scheduled Commercial Banks with effect from the fortnight beginning March 31, 2007. Minimum
Daily CRR balance on average basis be maintained at 95% (Previously 70%).
Fortnightly Return in Form A
Under Section 42 (2) of RBI Act, 1934, all SCBs are required to submit to RBI a provisional
return in Form 'A' within 7 days from the expiry of the relevant fortnight. The final Form 'A' is
required to be sent to RBI within 20 days from expiry of the relevant fortnight.
For reporting in Form 'A' return, banks should convert their overseas foreign currency
assets and bank credit in India in foreign currency in four major currencies viz., US
dollar, GBP, Japanese Yen and Euro into rupees at the Foreign Exchange Dealers
Association of India's (FEDAI) noon mean rate on reporting Friday.
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STATUTORY LIQUIDITY RATIO (SLR)
Consequent upon amendment to the Section 24 of the Banking Regulation Act, 1949 , the
Reserve Bank can prescribe the Statutory Liquidity Ratio (SLR) for SCB in
specified assets. The value of such assets of a SCB shall not be less than such
percentage not exceeding 40 per cent of its total demand and time liabilities in India as
on the last Friday of the second preceding fortnight as the Reserve Bank may, by
notification in the Official Gazette, specify from time to time.
SLR is 23% of DTL at present
Reserve Bank has decided that all SCBs shall continue to maintain a uniform SLR of 23 per
cent on their total net demand and time liabilities (NDTL) with effect from 11.8.2012.
a. in cash, or
b. in gold valued at a price not exceeding the current market price, or
c. in unencumbered investment in the following instruments which will be referred to
as “SLR securities":
I. Treasury Bills of the Government of India;
II. Existing Dated securities of the Government of India with SLR Status
III. State Development Loans (SDLs) of the State Governments issued from time
to time under their market borrowing programme; and
IV. Any other instrument as may be notified by the Reserve Bank of India.
The proposed cash management bill will be treated as Government of India Treasury Bill and
accordingly shall be treated as SLR securities
CRR & SLR AT A GLANCE
CRR SLR
Statutory basis Sec. 42 (1) of RBI Act, 1934 Sec. 24 (2.a) of Banking Regulation Act, 1949
Min. and Max. % to RBI Discretion Minimum :RBI discretion
NDTL Maximum :40%
Rate 4.00 % 23%
How maintained Cash balance with RBI Cash in hand, Gold/ investment in approved
Govt. Securities / net Bank balance with
scheduled commercial banks
Basis for %age of NDTL on fortnightly %age of NDTL on daily basis on last Friday of
computation average basis. (Min. 95% of average 2nd preceding fortnight
balance to be maintained on daily
basis)
Interest No interest payable w.e.f. 31.3.2007 According to class of securities in which
investment is made
Penal interest for 3% p.a. above bank rate(shortfall in 3% p.a. above bank rate- 1st day
default – same fortnight) 5% p.a. above bank rate- Next day
5% p.a. above bank rate (shortfall in
next fortnight)
Return to RBI Form A (fortnightly) Form VIII (by 20th every month)
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OTHER IMPORTANT GUIDELINES
Bank cannot declare dividend if CRAR is less than 9% of RWAs or Net NPAs
are more than 7%.
There is no restriction on Share holding. However Voting Rights are restricted up
to 1% for PSBs and 10% for Private Banks.(Revised 10% for PSBs and 26% for
Private Banks)
Dividend Payout Ratio should not exceed 40%. Out of current profits.
No bank can allow Commission/brokerage on sale of shares exceeding 2-1/2%
of paid up value of shares.
Banks cannot issue FD in name of Chit Fund Companies.
Banks cannot make loan against FD of other banks.
Banks cannot make loan against security of own shares or partly paid shares of
a Company.
Banks cannot grant loan against Certificate of Deposits or Money Market Mutual
Funds.
Banks cannot make loans to its own directors or firms in which Director is
Manager/partner/employee/guarantor (with certain exemptions).
Banks cannot make loan to spouse/children of directors except their earning is
separate.
Banks cannot make additional loans to Willful defaulters for a period of 5 years.
Banks’ aggregate investment in Shares/CDs/Bonds should not exceed limit of
40% of bank’s Net Owned Funds as at end of previous year.
RBI keeps Cash of CG free of interest and also accepts no remuneration for
conducting ordinary CG business. However, Commission is charged for
managing public debts.
RBI supervises the banks through “Board of Financial Supervision”
Minimum Paid up Capital Requirement for New Private Bank is Rs. 500 lacs.
At least 51% Directors should be in Specialized Fields.
Directors should not be a partner of a firm or have substantial interest in a
Company/Firm which carries on Trade or Business. Substantial Interest in a
Company means Holding of beneficial interest by individual or spouse of minor
child exceeding 5.00 lac or 10% of Paid up Capital of a Company.
Period of Office for a Director is 8 years whereas that of a CMD is 5 years.
Every Bank must have Assets in India not less than 75% of NDTL.
LATEST AMENDMENTS OF BANKING LAWS AMENDMENT BILL – DEC 2012
Paid up Capital can be raised by banks through Public Issue, Right Issue and
Bonus Issue.
Banks can acquire Equity and Preference Shares with Voting Rights
Revised Voting rights: This Bill also enables the government to raise voting
rights in state banks such as the State Bank of India to 10 (ten) per cent from the
current1(one)per cent, acceding partially to foreign investors’ demands to have
more say in Indian banking.
Unclaimed Bank Accounts
The Bill gives power to RBI to transfer the money lying in the bank
account which is not operated by the account holder for more than 10
years, to the “Depositor Education and Awareness Fund”.
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But in a case where the account holder returns then, the account holder
can claim this money and that bank shall be bound to pay him interest as
well.
Authorized Capital of Nationalized Banks
This bill aims to address the issue of capital raising capacity of banks in India by
enabling nationalized banks to raise capital by issue of preference shares or
rights issue or issue of bonus shares. It would also enable them to increase or
decrease the authorized capital with approval from the Government and RBI
without being limited by the ceiling of a maximum of Rs. 3000 crore.
Voting rights (%)
Before After
Private Banks 10% 26%
Public Sector Banks 1% 10%
Acquisition of Shares and Voting Rights
Prior approval of RBI shall be needed for acquisition of 5% or more of shares or
voting rights in a banking company by any person. The RBI shall be empowered
to impose such conditions as it deems fit in this regard..
Regulating Cooperative Societies:
A license from the RBI is to be taken by primary cooperative societies to carry
on the business of banking.
LAF (Liquidity Adjustment Facility)
Repo and Reverse Repo
It is Lending and Borrowing money for short term period (1 day to 1 year)
Under Repo, RBI purchases securities with commitment to sell at a later date in
order to Inject Liquidity. Presently, Govt. securities are dealt with. All Repo
transactions are routed through CCIL. RBI has permitted Repo in Corporate
securities for only “AA” rated companies. But the market is yet to be activated.
There will now be a cap of 0.5% of NDTL (instead of 1% previously)
Under Reverse Repo, RBI sells securities with a commitment to buy at a later
date in order to Contain Liquidity.
Repo and Reverse Repo transactions are generally conducted for Overnight
period through Auction Twice Daily. The minimum Bid is Rs. 5.00 crore and its
multiples. Margin is normally 5%.
Special Repo Window for Liquidity Requirement of Mutual Funds
Notified amount Rs. 25000 crore
Tenor of Special Repo will be 3 days
Interest on amount availed @10.25%
Banks can seek waiver of penal interest for any shortfall in maintenance of SLR up to 0.5% of
NDTL
MSF (Marginal Standing Facility)
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The banks will use Marginal Standing Facility to borrow overnight money from RBI only
when they have exhausted all other existing channels like Collateralized Borrowing and
Lending Obligations (CBLO) and Liquidity Adjustment Facility (LAF). The features of the
scheme are as under:
The eligible entities can avail overnight, up to 2% of their respective NDTL
nd
outstanding at the end of the 2 preceding fortnight.
For the intervening holidays, the MSF facility will be for one day except on
Fridays when the facility will be for 3 days or more, maturing on the following
working day.
The facility is available on all working days in Mumbai, excluding Saturdays
between 3.30 P.M. and 4.30 P.M.
Interest on amount availed will be 100 basis points above the LAF repo rate, or
as decided by RBI from time to time.
Requests will be received for a minimum amount of Rs. One Crore and in
multiple of Rs. One Crore thereafter.
MSF will be undertaken in all SLR-eligible transferable Government of India
dated Securities/Treasury Bills and State Development Loans (SDL).
A margin of 5% will be applied in respect of GOI dated securities and Treasury
Bills. In respect of SDLs, a margin of 10 per cent will be applied.
PRESENT RATES AT A GLANCE
Previous Rate Present Rate
(w.e.f 29.10.13) (w.e.f. 28.1.2014)
Repo 7.75 % 8.00 %
Reverse 6.75 % 7.00 %
Repo
MSF 8.75 % 9.0 %
Bank Rate 8.75 % 9.0 %
CRR 4% 4%
SLR 23% 23%
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