Unit 3: The Reserve Bank of India Act, 1934
Banking Laws notes · PTU syllabus (MCOPBI421-18)
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Unit summary
The Reserve Bank of India Act, 1934 establishes the central bank and its powers. This unit covers incorporation, capital and management of RBI, the business RBI may transact, central banking functions, collection of credit information, RBI's control over non-banking and financial institutions, credit control and RBI's changing role.
After this unit you can
- Explain incorporation, capital, management and business of RBI
- Explain RBI's central banking functions
- Explain collection of credit information and control over NBFCs
- Explain credit control and RBI's changing role
PTU syllabus topics
- Incorporation
- capital
- management and business of banking companies
- RBI's central banking functions
- collection of credit information
- RBI's control over non-banking and financial institutions
- credit control
- RBI's changing role
Quantitative
Repo rate, CRR, SLR, open market operations
Qualitative
Margin requirements, credit rationing
Moral suasion
Persuasion and guidance
Direct action
Against non-compliant banks
Topic 1
Incorporation, capital and management of RBI
- Incorporation (Section 3): RBI constituted as a body corporate with perpetual succession and a common seal; started operations on 1 April 1935; original share capital ₹5 crore held by private shareholders, nationalised from 1 January 1949.
- Management (Sections 7–8): Central Board of Directors — Governor, up to four Deputy Governors, four directors from local boards, ten directors nominated by the Central Government, two government officials; the Central Government may issue directions to RBI in public interest after consultation with the Governor (Section 7).
- Preamble (amended 2016): to regulate the issue of bank notes, keep reserves for monetary stability, operate the currency and credit system, and operate a modern monetary policy framework — price stability while keeping in mind growth.
Topic 2
Central banking functions under the RBI Act
Note issue (Sections 22–27)
Sole right to issue bank notes; minimum reserve of ₹200 crore (gold ₹115 crore)
Banker to the Central and State Governments (Sections 20–21A)
Accounts, public debt management
Banker's bank (Section 42)
CRR maintained by scheduled banks
Lender of last resort (Section 17)
Loans and advances to banks
Monetary policy (Section 45ZA–45ZO)
Inflation target, Monetary Policy Committee
Foreign exchange management
With FEMA, reserves management
Credit information (Section 45C)
Collection of credit information
Payment systems
Under the Payment and Settlement Systems Act, 2007
- Section 17: permitted business of RBI — accepting deposits, discounting bills, granting loans against securities, buying and selling gold and government securities.
- Section 42: scheduled banks maintain CRR as a percentage of NDTL; penal interest on shortfall.
Topic 3
Collection of credit information
- Chapter IIA (Sections 45A–45G): RBI may collect credit information from banks and furnish it to banks; confidentiality of information.
- Credit Information Companies (Regulation) Act, 2005: CICs (CIBIL, Experian, Equifax, CRIF) licensed by RBI; lenders must report credit data; borrowers' rights to correct errors.
- CRILC (Central Repository of Information on Large Credits, 2014) — exposures of ₹5 crore and above, used for early warning of stress.
Topic 4
Control over non-banking and financial institutions
- Chapter III-B (Sections 45H–45QB): regulation of NBFCs — compulsory registration with RBI (Section 45-IA) with minimum net owned funds; maintain liquid assets for deposits (Section 45-IB); transfer 20% of net profit to a reserve fund (Section 45-IC); RBI may issue directions on deposits, prudential norms, and inspect NBFCs.
- Chapter III-C: prohibition of acceptance of deposits by unincorporated bodies (beyond limits).
- Penalties (Section 58B–58G): for false statements, failure to comply with directions, unauthorised deposit acceptance — fines and imprisonment; RBI can impose monetary penalties (Section 58G) on NBFCs.
Topic 5
Credit control techniques
Aim
Regulate total credit volume
Regulate direction and use of credit
Instruments
Bank rate (Section 49), repo/reverse repo, CRR (Section 42), SLR (BR Act Section 24), OMO
Margin requirements, credit ceilings, credit rationing, moral suasion, direct action, regulation of consumer credit
Coverage
Whole economy
Specific sectors or borrowers
- Section 21 and 35A of the BR Act empower RBI to issue directions on advances (selective credit control).
Topic 6
RBI's changing role
- 11935–1949
Private shareholders' bank; note issue and government banking
- 21949–1990
Nationalised; developmental role — DFIs (IDBI, NABARD), directed credit, administered rates
- 31991–2015
Deregulation, prudential regulation, market development, multiple-indicator approach
- 42016 onwards
Inflation targeting with MPC, digital payments (UPI), resolution (IBC), financial inclusion, CBDC (e₹), climate risk and fintech regulation
- Present priorities: price stability, financial stability (FSR reports), consumer protection, digital payment security, regulation of NBFCs and digital lending.
Key terms
- RBI Act, 1934
- Law constituting RBI
- Section 42
- CRR maintenance by scheduled banks
- CRILC
- Repository of large credit information
- Chapter III-B
- RBI's regulation of NBFCs
- Monetary Policy Committee
- Six-member body setting the repo rate
Quick revision
- RBI 1935, nationalised 1949; capital ₹5 crore; Central Board.
- Functions: note issue, banker to government and banks, lender of last resort, monetary policy, forex, payments.
- Credit information: Chapter IIA, CICRA 2005, CRILC.
- NBFC control: registration, reserve fund, directions, penalties.
- Credit control; RBI's shift to inflation targeting and digital/financial stability roles.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.When was RBI established?
- Q2.State any four central banking functions.
- Q3.What is CRILC?
- Q4.What is Section 45-IA?
- Q5.Name two qualitative credit control methods.
- Q6.What is flexible inflation targeting?
Long-answer questions
- Q1.Explain the incorporation, capital, management and business of RBI.
- Q2.Explain RBI's central banking functions.
- Q3.Explain RBI's powers regarding credit information and control over NBFCs.
- Q4.Explain credit control and the changing role of RBI.
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