RBI Act 1934: Reserve Bank of India Act 1934

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Reserve Bank of India Act, 1934

RBI Act 1934 is legislation in India under which the central bank of India that is Reserve Bank of India was formed and it defines the function of RBI

What is Banking Regulation Act 1949?

Banking Regulation Act, 1949 is legislation in India that regulates all banking institutions comes under RBI. Initially, the law was applicable only to banking companies. But, in 1965 it was amended to make it applicable to cooperative banks and to introduce other changes.

Difference between RBI Act 1934 and BR Act 1949

The Central Bank of India i.e. the Reserve Bank of India is governed by RBI Act, 1934. Conversely, the Commercial Banks are regulated by the Banking Regulation Act 1949.

What are RBI Act 1934 and its objectives?

Objective of Reserve Bank of India Act, 1934 “To regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

Exception regarding RBI Act 1934 execution

There was not any RBI office in Jammu and Kashmir due to article 370 of the constitution of India, but Jammu and Kashmir follows the RBI Act 1934.

Sikkim is the only state which does not follow RBI Act 1934. Sikkim follows SBI Act 1955. Sikkim has it’s specialised bank “State Bank of Sikkim”.

List of RBI Act 1934

RBI Act 1934, Section – 1

“Short title, extent and commencement” This is an act which constitutes the Reserve Bank for India. This act describes the commencement and extent of Reserve Bank of India. Reserve Bank of India is to regulate the issue of Bank notes and keeping of reserves for securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

RBI Act 1934, Section – 2

Definitions

  • Section – 2 (b): defines the “Central Board” means the Central Board of Directors of the Bank.
  • Section – 2 (d): defines the “rupee coin” means rupees which are legal tender in India under the provisions of the Coinage Act, 2011 (11 of 2011)
  • Section – 2 (e): defines the “scheduled bank” means a bank included in the Second Schedule.

As per History of Banking in India, different types of banks in India are regulated in Reserve Bank of India.

RBI Act 1934, Section – 3

Establishment and incorporation of Reserve Bank of India was done under this section. Reserve Bank of India was constituted for the purposes of taking over the management of the currency from the Central Government and of carrying on the business of banking in accordance with the provisions of this RBI Act 1934 section 3.

RBI Act 1934, Section – 4

Capital of the Bank: The capital of the Reserve Bank of India shall be five crores of rupees.

RBI Act 1934, Section – 6

This section gives permission to RBI to establish offices in Bombay, Calcutta, Delhi and Madras and may establish branches or agencies in any other place in India.

RBI Act 1934, Section – 7 (1)

 Management: The central government might direct the Reserve Bank on issue of public interest with consultation of the governor.

RBI Act 1934, Section – 8

Composition of the central board, appointment of Governors and Directors, term of office of Directors.

The Central Board shall consist of the following Directors, mainly a Governor and not more than four Deputy Governors to be appointed by the Central Government. Four Directors to be nominated by the Central Government, one from each of the four Local Boards.

RBI Act 1934, Section – 9

Local Boards, their constitution and functions.

A Local Board shall be constituted for each of the four areas specified in the First Schedule and shall consist of five members to be appointed by the Central Government to represent. The members of the Local Board shall elect from amongst themselves one person to be the chairman of the Board.

Every member of a Local Board shall hold office for a term of four years and thereafter until his successor shall have been appointed and shall be eligible for re-appointment. A Local Board shall advise the Central Board on such matters as may be generally or specifically referred to it and shall perform such duties as the Central Board may delegate to it.

RBI Act 1934, Section – 13

Describes the meetings of the Central Board.

Meetings of the Central Board shall be convened by the Governor at least six times in each year and at least once in each quarter. Anyone director may require the Governor to convene a meeting of the Central Board at any time and the Governor shall forthwith convene a meeting accordingly.

If the Governor is unable to attend the meeting for any reason, the Deputy Governor authorized by the Governor under the provision of subsection (3) of section 8 to vote for him at meetings of the Central Board in the event of an equality of votes.

RBI Act 1934, Section – 17

Describes the Business which the Reserve Bank may transact. The Reserve Bank shall be authorized to carry on and transact the several kinds of business hereinafter specified, namely:-

  1. The accepting of money on deposit without interest from and the collection of money for, Central Government, State] Governments, local authorities, banks.
  2. Purchase, sale and re-discounting of bills of exchange and promissory notes.
  3. Providing loans and advances to scheduled banks, co-operative banks, State Financial Corporations and repayable on demand or on the expiry of fixed periods not exceeding ninety days, against the security of – gold or silver or documents of title to the same, such bills of exchange and promissory notes as are eligible for purchase or rediscount by the Bank.
  4. The acting as agent for Central Government or any State Government or any local authority or the Industrial Finance Corporation of India or any other body corporate which is established or constituted by or under any other law or the Government of any such country outside India or any authority as may be approved in this behalf by the Central Government in the transaction of any of the following kinds of businesses like the purchase and sale of gold or silver or foreign exchange, the purchase, sale, transfer and custody of bills of exchange, securities or shares in any company, the collection of the proceeds, whether principal, interest or dividends, of any securities or shares, the management of public debt.
  5. Lending or borrowing of securities of the Central Government or a State Government or of such securities of a local authority as may be specified in this behalf by the Central Government or foreign securities
  6. Dealing in repo or reverse repo

RBI Act 1934, Section – 19

Business which the Bank may not transact.

The Reserve Bank may not –

(1) Engage in trade or have a direct interest in any commercial, industrial activity

(2) Purchase the shares of any banking company or of any other company, or grant loans upon the security of any such shares

(3) Advance money on mortgage of, or otherwise on the security of, immovable property or documents of title relating thereto, or become the owner of immovable property, except so far as is necessary for its own business premises and residences for its officers and servants

(4) Make loans or advances

(5) Draw or accept bills payable otherwise than on demand

(6) Allow interest on deposits or current accounts.

RBI Act 1934, Section – 20

Obligation of the Bank to transact Central Government business.

The Reserve Bank accepts money for account of the Central Government and to make payments up to the amount standing to the credit of its account. RBI carries out its exchange, remittance and other banking operations, including the management of the public debt.

RBI Act 1934, Section – 21

ReserveBank to have the right to transact Government business in India. Section 21, RBI Act 1934 describes that RBI is the banker of Central Government. RBI does all transactions on behalf of Central Government.

RBI Act 1934, Section – 21(A)

Reserve Bank to transact Government business of State Government on agreement.

(1) The Reserve Bank may by agreement with the Government of any State undertake–

  • All its money, remittance, exchange and banking transactions in India, including in particular, the deposit, free of interest, of all its cash balances with the Bank.
  • The management of the public debt of, and the issue of any new loans by, that State.

 (2) Any agreement made under this section shall be laid, as soon as may be after it is made, before Parliament.

RBI Act 1934, Section – 22

Right to issue bank notes.

(1) The Reserve Bank shall have the sole right to issue bank notes in India for a period which shall be fixed by the Central Government on the recommendation of the Central Board, issue currency notes of the Government of India supplied to it by the Central Government, and the provisions of this Act applicable to bank notes shall, unless a contrary intention appears, apply to all currency notes of the Government of India issued either by the Central Government or by the Reserve Bank in like manner as if such currency notes were bank notes, and references in this Act to bank notes shall be construed accordingly.

(2) On and from the date on which this Chapter comes into force the Central Government shall not issue any currency notes.

RBI Act 1934, Section – 24

Describes the denominations of notes.

(1) Bank notes shall be of the denominational values of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or of such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify in this behalf.

(2) The Central Government may, on the recommendation of the Central Board, direct the non-issue or the discontinuance of issue of bank notes of such denominational values as it may specify in this behalf.

RBI Act 1934, Section – 25

Design, form and material of bank notes.

The design, form and material of bank notes shall be such as may be approved by the Central Government after consideration of the recommendations made by Central Board.

RBI Act 1934, Section – 26

Legal tender character of notes

Every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein and shall be guaranteed by the Central Government.

RBI Act 1934, Section – 26 (A)

Cease to be legal tender character of notes

On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender, save at such office or agency of the Bank and to such extent as may be specified in the notification.

No bank note of the denominational value of five hundred rupees, one thousand rupees or ten thousand rupees issued before the 13th day of January, 1946, shall be legal tender in payment or on account for the amount expressed therein.

RBI Act 1934, Section – 27

Re-issue of notes. The Bank shall not re-issue bank notes which are torn, defaced or excessively soiled.

RBI Act 1934, Section – 28

Recovery of notes lost, stolen, mutilated or imperfect.

RBI Act 1934, Section – 28 (A)

Issue of special bank notes and special one-rupee notes in certain cases.

Neither the special bank notes nor the special one-rupee notes shall be legal tender in India.

The design, form and material of the special bank notes shall be such as may be approved by the Central Government after consideration of the recommendations made by the Governor and of the special one-rupee notes shall be such as the Central Government may think fit to adopt. Special Notes and Coins are issued on special occasion say for birth century of any one, Special achievement in any field by legends etc.

RBI Act 1934, Section – 30

Powers of Central Government to supersede Central Board.

If the Reserve Bank fails to carry out any of the obligations imposed on it by the Central Government, by notification in the Gazette of India.

The Central Board to be superseded and thereafter the general superintendence and direction of the affairs of the Bank shall be entrusted to such agency as the Central Government. Such agency may exercise the powers and do all acts and things which may be exercised or done by the Central Board under this Act.

When action is taken under this section the Central Government shall cause a full report of the circumstances leading to such action and of the action taken to be laid before Parliament at the earliest possible opportunity and in any case within three months from the issue of the notification superseding the Board.

RBI Act 1934, Section – 42

Cash reserves of scheduled banks to be kept with the Bank

Every bank included in the Second Schedule shall maintain Cash Reserve Ratio with the Bank an average daily balance the amount of which shall not be less than defined per cent of the total of the demand and time liabilities by Reserve Bank.

RBI Act 1934, Section – 43

Publication of consolidated statement by the Reserve Bank.

The Bank shall cause to be published each fortnight a consolidated statement showing the aggregate liabilities and assets of all the scheduled banks together, based on the returns and information received under this Act.

RBI Act 1934, Section – 45ZB

Constitution of Monetary Policy Committee.

(1) The Central Government may, by notification in the Official Gazette, constitute a Committee to be called the Monetary Policy Committee of the Bank.

(2) The Monetary Policy Committee shall consist of the following Members, namely: —

(a) The Governor of the Bank— Chairperson

(b) Deputy Governor of the Bank, in charge of Monetary Policy— Member

(c) One officer of the Bank to be nominated by the Central Board—Member

(d) Three persons to be appointed by the Central Government—Members.

(3) The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target.

(4) The decision of the Monetary Policy Committee shall be binding on the Bank.

RBI Act 1934, Section – 45ZC

Eligibility and Selection of Members appointed by Central Government

Members appointed by the Central Government from amongst persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy.

Member appointed by the Central Government on the recommendations made by Search-cum-Selection Committee consisting of the following members, namely: ––

 (A) Cabinet Secretary—Chairperson

(B) Governor of the Reserve Bank of India or his representative (not below the rank of Deputy Governor)—member

(C) Secretary, Department of Economic Affairs—member

(D) Three experts in the field of economics or banking or finance or Monetary policy to be nominated by the Central Government—members

RBI Act 1934, Section – 45ZE

Removal of Members of Monetary Policy Committee.

RBI Act 1934, Section – 49

Publication of bank rate.

The Bank shall make public from time to time the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under this Act.

RBI Act 1934, Section 54

Rural credit and development

RBI Act, 1934 Section 54: states that the Bank may maintain expert staff to study various aspects of rural credit and development and in particular, it may tender expert guidance and assistance to the National Bank (NABARD) and conduct special studies in such areas as it may consider necessary to do so for promoting integrated rural development.

Reference : “Reserve Bank of India“

RBI