Reserve Bank of India Act, 1934
The Reserve Bank of India (RBI) was constituted under the Reserve Bank of India Act, 1934 and started functioning with effect from 1 April, 1935. RBI is the oldest among the central banks operating in developing countries, though it is much younger than the Bank of England and the Federal Reserve Board operating as the central banks in UK and USA respectively, being developed countries.
RBI is a state owned institution under the Reserve Bank (Transfer of Public Ownership) of India Act, 1948. This Act empowers the Union Government, in consultation with the Governor of the RBI, to issue such directions to RBI as considered necessary in public interest. The Governor and four Deputy Governors of RBI are appointed by the Union Government. The control of the RBI vests in the Central Board of Directors, that comprises the Governor, four Deputy Governors and 15 Directors nominated by the Union Government.
The RBI's internal management is based on functional specialisation and coordination amongst about 20 departments, with headquarters at Mumbai, which is the financial capital of the country.
The main objectives of the RBI are contained in the preamble of the RBI Act, 1934. It reads 'Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of bank notes and 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'. The main objectives of RBI may be stated as follows in specific terms:
I. To maintain monetary stability such that the business and economic life of the country can deliver the welfare gains of a mixed economy,
II. To maintain financial stability and ensure sound financial institutions so that economic units can conduct their business with confidence,
III. To maintain stable payment systems, so that financial transactions can be safely and efficiently executed,
IV. To ensure that credit allocation by the financial system broadly reflects the national economic priorities and social concerns,
V. To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of price stability,
VI. To promote the development of financial markets and systems to enable itself to operate/regulate efficiently.
Banking Regulation (Amendment) Ordinance, 2020.
In June, the union cabinet approved the ordinance to bring 1,482 urban and 58 multi-state cooperative banks under the supervision of the central bank.
Important Features of new Banking Regulation (Amendment) Bill, 2020:
1) The Bill allows the central bank to initiate a scheme for reconstruction or amalgamation of a bank without placing it under moratorium.
2) If the central bank imposes moratorium on a bank, the lender can not grant any loans or make investments in any credit instruments during the moratorium tenure, according to the Bill.
3) The co-operative banks will be allowed to issue equity, preference, or special shares on face value or at a premium to its members, or to any other person residing within their area of operations. The banks may also issue unsecured debentures or bonds or similar securities with maturity of ten or more years to such persons. However, a prior approval from RBI is mandatory for such issuance.
4) No person will be entitled to demand payment towards surrender of shares issued to him by a co-operative bank, the Bill states.
5) The Bill mentions that RBI may exempt a cooperative bank or a class of cooperative banks from certain provisions of the Act through notification. These provisions are related to employment, the qualification of the board of directors and, the appointment of a chairman.
6) RBI may supersede the board of directors of a multi-state co-operative bank for up to five years under certain conditions. These conditions include cases where it is in the public interest for RBI to supersede the Board, and to protect depositors.
7) The Bill discards the provision of Banking Regulation Act, 1949 that cooperative banks cannot open a new place of business or change the location of the banks outside of the village, town, or city in which it is currently located without permission from RBI.
8) The changes will not affect the existing powers of the state registrars of co-operative societies under state laws. "This Bill does not regulate cooperative banks. The amendment is not for central govt to take over the cooperative banks," Sitharaman said.
Exclusion: The Banking Regulation Amendment Bill, 2020 will not be applicable to a) Primary agricultural credit societies, b) Cooperative societies whose principal business is long term financing for agricultural development.
These two societies must not: a) use the term ‘bank’, ‘banker’ or ‘banking’ in their name or in connection with their business, b) Act as an entity that clears cheque.
RESERVE BANK OF INDIA – FUNCTIONS AND OBJECTIVES
RBI performs multifarious functions to achieve the above said objectives. Its main functions include Notes Issuance, Government's Banker, Bankers' Bank, Banks' Supervision, Development of the Financial System, Exchange Control, and Monetary Control.
RBI's main tools of Monetary Control are Cash Reserve Ratio, Statutory Liquidity Ratio, Open Market Operations, Bank Rate and Selective Credit Control. RBI uses these tools singly or in combination to control and rectify specific monetary situations in the economy or banking system from time to time. These measures affect the volume and cost of bank credit, besides maintaining the stability of the financial system.
In accordance with the government policy of poverty alleviation and improving the economic condition of the disadvantaged sections of the society, RBI has directed banks to lend to the specified Priority Sector with a minimum target of 40 per cent of their Net bank credit, with specified sub-targets for agriculture, weaker sections and the very poor sections of the society. Certain concessions in the lending terms and operations have also been prescribed by RBI for Priority Sector Advances.
Regulatory Functions of RBI
There are certain regulatory restrictions on lending by banks in terms of RBI directives or the Banking Regulation Act, 1949 (BRA) as follows:
i) No advance or loan can be granted against the security of the bank's own shares or partly paid shares of a company,
ii) No bank can hold shares in a company:
a) As pledgee or mortgagee in excess of the limit of 30 per cent of the Paid-up capital of that company or 30 per cent of the Bank's Paid-up capital and Reserves, whichever is less (Sec. 19(ii) of BRA). b) in the management of which Managing Director or Manager of the Bank is interested (Sec. 19(iii) of BRA).
iii) Bank's aggregate investment in shares, Certificate of Deposits (CDs), bonds, etc., should not exceed the limit of 40 per cent of Bank's net owned funds as at the end of the previous year,
iv) No bank should grant loans against:
a) CDs
b) FDs issued by other banks
c) Money Market Mutual Funds
(v) Bank should adhere to the RBI guidelines relating to the level of credit, margin and interest rate etc. for loans against the security of commodities covered by the Selective Credit Control Directives of RBI. No loan should be granted by banks to:
• The Bank's directors or firms in which a director is interested as a partner/manager/ employee/ guarantor (certain exemptions allowed).
• Relatives of other bank's directors ('relatives' defined by RBI) - Such loans can be sanctioned by higher authorities or the Bank's Board as per RBI guidelines.
vi) Banks should not sanction a new or additional facility to borrowers appearing in RBI's list of "Willful Defaulters" for a period of 5 years from the date of publication of the list by RBI.
DONATIONS by Banks
The profit making banks may make donations during a financial year, aggregating up to one percent of the published profit of the bank for the previous year. However, the contributions/ subscriptions made by banks to Prime Minister’s Relief Fund and to professional bodies/ institutions like Indian Banks’ Association, National Institute of Bank Management, Indian Institute of Banking and Finance, Institute of Banking Personnel Selection, Foreign Exchange Dealers Association of India, during a year will be exempted from the above ceiling. Unutilised amount of the permissible limit of a year should not be carried forward to the next year for the purpose of making donations.
Loss-making banks can make donations up to Rs.5 lakh only in a financial year.
Overseas branches of the banks can make donations abroad, provided the banks do not exceed the prescribed ceiling of one per cent of their published profit of the previous year.
AMENDMENTS (2019) TO THE RESERVE BANK OF INDIA ACT, 1934
Amendment of section 45-IA.
In the Reserve Bank of India Act, 1934 (hereafter in this Part referred to as the principal Act), in section 45-IA, in sub-section (1), for clause (b), the following shall be substituted, namely:—
“(b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding 40 hundred crore rupees, as the Bank may, by notification in the Official Gazette, specify:
Provided that the Bank may notify different amounts of net owned fund for different categories of non-banking financial companies.”.
After section 45-IC of the principal Act, the following sections shall be inserted, namely:—Insertion of new sections 45-ID and 45-IE.
“45-ID.(1) Where the Bank is satisfied that in the public interest or to prevent the affairs of a non-Power of Bank to remove directors from office
banking financial company being conducted in a manner detrimental to the interest of the depositors or creditors, or financial stability or for securing the proper management of such company, it is necessary so to do, the Bank may, by order and for reasons to be recorded in writing, remove from office, a director (by whatever name called) of such company, other than Government owned non-banking financial company with effect from such date as may be specified in the said order.
(2) No order under sub-section (1) shall be made unless the director concerned has been given a reasonable opportunity of making a representation to the Bank against the proposed order:
Provided that if, in the opinion of the Bank, any delay will be detrimental to the interest of the said company or its depositors, the Bank may, at the time of giving the aforesaid opportunity or at any time thereafter, by order direct that, pending the consideration of the representation, if any, the director, shall not, with effect from the date of such order––
(a) act as such director of that company;
(b) in any way, whether directly or indirectly, be concerned with or take part in the management of that company.
(3) Where any order is made in respect of a director of a company under sub-section (1), he shall cease to be a director of that non-banking financial company and shall not, in any way, whether directly or indirectly, be concerned with, or take part in the management of any non-banking financial company for such period not exceeding five years at a time as may be specified in the order.
(4) Where an order under sub-section (1) has been made, the Bank may, by order in writing, appoint a suitable person in place of the director, who has been so removed from his office, with effect from such date as may be specified in such order.
(5) Any person appointed under sub-section (4) shall,—
(a) hold office during the pleasure of the Bank and subject thereto for a period not exceeding three years or such further periods not exceeding three years at a time; (b) not incur any obligation or liability by reason only of his being a director for anything done or omitted to be done in good faith in the execution of the duties of his office or in relation thereto.
(6) Notwithstanding anything contained in any other law for the time being in force or in any contract, memorandum or articles of association, on the removal of a director from office under this section, such director shall not be entitled to claim any compensation for the loss or termination from office. Supersession of Board of directors of non-banking financial company (other than Government Company). 45-IE. (1) Where the Bank is satisfied that in the public interest or to prevent the affairs of a non-banking financial company being conducted in a manner detrimental to the interest of the depositors or creditors, or of the non-banking financial company (other than Government Company), or for securing the proper management of such company or for financial stability, it is necessary so to do, the Bank may, for reasons to be recorded in writing, by order, supersede the Board of Directors of such company for a period not exceeding five years as may be specified in the order, which may be extended from time to time, so, however, that the total period shall not exceed five years.
(2) The Bank may, on supersession of the Board of Directors of the non-banking financial company under sub-section (1), appoint a suitable person as the Administrator for such period as it may determine. (3) The Bank may issue such directions to the Administrator as it may deem appropriate and the Administrator shall be bound to follow such directions.
(4) Upon making the order of supersession of the Board of Directors of a non-banking financial company,––
(a) the chairman, managing director and other directors shall from the date of supersession of the Board of Directors vacate their offices;
(b) all the powers, functions and duties, which may, by or under the provisions of this Act or any other law for the time being in force, be exercised and discharged by or on behalf of the Board of Directors of such non-banking financial company or by a resolution passed in general meeting of such non-banking financial company, shall, until the Board of Directors of such company is reconstituted, be exercised and discharged by the Administrator referred to in sub-section (2).
(5) (a) The Bank may constitute a committee consisting of three or more members who have experience in law, finance, banking, administration or accountancy to assist the Administrator in discharge of his duties.
(b) The committee shall meet at such times and places and observe such rules of procedure as may be specified by the Bank.
(6) The salary and allowances payable to the Administrator and the members of the committee constituted by the Bank shall be such as may be specified by the Bank and be paid by the concerned non-banking financial company.
(7) On or before the expiration of the period of supersession of the Board of Directors as specified in the order issued under sub-section (1), the Administrator of the non-banking financial company shall facilitate reconstitution of the Board of Directors of the non-banking financial company.
(8) Notwithstanding anything contained in any other law for the time being in force or in any contract, no person shall be entitled to claim any compensation for the loss or termination of his office.
(9) The Administrator referred to in sub-section (2) shall vacate office immediately after the Board of Directors of the non-banking financial company has been reconstituted.”.
After section 45MA of the principal Act, the following section shall be inserted, namely:— Insertion of new section 45MAA
Power to take action against auditors.
‘‘45MAA. Where any auditor fails to comply with any direction given or order made by the Bank under section 45MA, the Bank, may, if satisfied, remove or debar the auditor from exercising the duties as auditor of any of the Bank regulated entities for a maximum period of three years, at a time.”.
Insertion of new section 45MBA. - Resolution of non-banking financial company
After section 45MB of the principal Act, the following section shall be inserted, namely:— ‘45MBA. (1) Without prejudice to any other provision of this Act or any other law for the time being in force, the Bank may, if it is satisfied, upon an inspection of the Books of a non-banking financial company that it is in the public interest or in the interest of financial stability so to do for enabling the continuance of the activities critical to the functioning of the financial system, frame schemes which may provide for any one or more of the following, namely:––
(a) amalgamation with any other non-banking institution;
(b) reconstruction of the non-banking financial company;
(c) splitting the non-banking financial company into different units or institutions and vesting viable and non-viable businesses in separate units or institutions to preserve the continuity of the activities of that non-banking financial company that are critical to the functioning of the financial system and for such purpose establish institutions called “Bridge Institutions”.
Explanation.––For the purposes of this sub-section, “Bridge Institutions” mean temporary institutional arrangement made under the scheme referred to in this sub-section, to preserve the continuity of the activities of a non-banking financial company that are critical to the functioning of the financial system.
(2) Without prejudice to the generality of the foregoing provisions, the scheme referred to in sub-section (1) may provide for––
(a) reduction of the pay and allowances of the chief executive officer, managing director, chairman or any officer in the senior management of the non-banking financial company;
(b) cancellation of all or some of the shares of the non-banking financial company held by the
chief executive officer, managing director, chairman or any officer in the senior management of the non-banking financial company or their relatives;
(c) sale of any of the assets of the non-banking financial company.
(3) The chief executive officer, managing director, chairman or any officer in the senior management of the non-banking financial company whose pay and allowances are reduced or the shareholders
whose shares are cancelled under the scheme shall not be entitled to any compensation.’.
After section 45NA of the principal Act, the following section shall be inserted, namely:—
Insertion of new section 45NAA.
Power in respect of group companies
“45NAA. (1) The Bank may, at any time, direct a non-banking financial company to annex to its financial statements or furnish separately, within such time and at such intervals as may be specified by the Bank, such statements and information relating to the business or affairs of any group companyof the non-banking financial company as the Bank may consider necessary or expedient to obtain for the purposes of this Act.
(2) Notwithstanding anything to the contrary contained in the Companies Act, 2013, the Bank may, at any time, cause an inspection or audit to be made of any group company of a non-banking.
financial company and its books of account.
Explanation.––For the purposes of this section,––
(a) “group company” shall mean an arrangement involving two or more entities related to each other through any of the following relationships, namely:––
(i) subsidiary— parent (as may be notified by the Bank in accordance with Accounting Standards);
(ii) joint venture (as may be notified by the Bank in accordance with Accounting Standards);
(iii) associate (as may be notified by the Bank in accordance with Accounting Standards);
(iv ) promoter-promotee (under the Securities and Exchange Board of India Act, 1992 or the rules or regulations made thereunder for listed companies);
(v) related party;
(vi) common brand name (that is usage of a registered brand name of an entity by another entity for business purposes); and
(vii) investment in equity shares of twenty per cent. and above in the entity;
(b) “Accounting Standards” means the Accounting Standards notified by the Central Government under section 133, read with section 469 of the Companies Act, 2013 and sub- section (1) of section 210A of the Companies Act, 1956.”.
Amendment of section 58B
In section 58B of the principal Act,––
(i) in sub-section (2), for the words “two thousand rupees” and “one hundred rupees”, the words “one lakh rupees” and “five thousand rupees” shall respectively be substituted;
(ii) in sub-section (4A), for the words “five lakh rupees”, the words “twenty-five lakh rupees” shall be substituted;
(iii) in sub-section (4AA), for the words “five thousand rupees”, the words “ten lakh rupees” shall be substituted;
(iv) in sub-section (4AAA), for the words “rupees fifty”, the words “five thousand rupees” shall be substituted;
(v) in sub-section (5),–– (A) in clause (a), for the words “any deposit”, the words “any deposit without being authorised so to do or” shall be substituted;
(B) in clause (b), for the word, figures and letters “section 45NA”, the word, figures and letter 30 “section 45J” shall be substituted;
(vi) in sub-section (6), for the words “two thousand rupees” and “one hundred rupees”, the words “one lakh rupees” and “ten thousand rupees” shall respectively be substituted.
Amendment of section 58G.
In section 58G of the principal Act, in sub-section (1),—
(A) in clause (a) for the words ‘‘five thousand’’, the words ‘‘twenty-five thousand ’’ shall be substituted;
(B) in clause (b) for the words ‘‘five lakh’’ and ‘‘twenty-five thousand’’, the words ‘‘ten lakh’’ and ‘‘one lakh’’ respectively shall be substituted.