The Reserve Bank of India and its functions
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  • The Reserve Bank of India and its functions

    The Reserve Bank of India was established in the year 1935 in accordance with the Reserve Bank of India Act, 1934. The Reserve Bank of India is the central Bank of India entrusted with the multidimensional role. It performs important monetary functions from issue of currency note to maintenance of monetary stability in the country.

    Author Name:   Yogesh Kolekar


    The Reserve Bank of India was established in the year 1935 in accordance with the Reserve Bank of India Act, 1934. The Reserve Bank of India is the central Bank of India entrusted with the multidimensional role. It performs important monetary functions from issue of currency note to maintenance of monetary stability in the country.

    The Reserve Bank of India and its functions

    The Reserve Bank of India was established in the year 1935 in accordance with the Reserve Bank of India Act, 1934. The Reserve Bank of India is the central Bank of India entrusted with the multidimensional role. It performs important monetary functions from issue of currency note to maintenance of monetary stability in the country. Initially the Reserve Bank of India was a private share holder’s company which was nationalized in 1949. Its affairs are governed by the Central Board of Directors appointed by the Government of India. Since its inception the Reserve Bank of India had played an important role in the economic development and monetary stability in the country.

    Pre Independence

    The Royal Commission on Indian Currency and Finance appointed on August 25, 1925 has suggested the establishmentof the Central Bank in India, later the Indian Central Banking Enquiry Committee, 1931 stressed the establishment of the Central Bank in India. The Reserve of Bank was established on April 1, 1935 under the Reserve Bank of India Act, 1934.The main object of Reserve of India is,

    “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 any credit system of the country to its advantage”

    The Reserve Bank of India was established as a private share holder’s bank. The Central office of Reserve Bank of India was initially located in Calcutta which was later shifted to Bombay. The Reserve Bank of India issued first of its currency notes in January 1938 in denomination of Rs.5 and Rs.10 and later in the same year denomination of Rs.100, Rs.1000 and Rs.10000 were issued

    Post Independence

    The Reserve Bank of India was nationalized in the year 1949 through the Reserve Bank (Transfer of Public Ownership) Act, i948 and all shares were transferred to Central Government. The Reserve bank of India is constituted for the management of currency and for carrying the business of banking in accordance with provisions of the Act. It is a body corporate having perpetual succession, common seal and can be sued or sue in its name. The general supervision and direction of the affairs of the Reserve Bank is entrusted with Central Board of Directors.

    Composition of Central Board

    The Central Board consists of Governor, deputy Governor, Ten Director nominated by the Central Government and two Government official nominated by the Central Government. The deputy Governor and Director are eligible to attend meeting of the Central Board but are not entitled to vote. The Governor and deputy Governor hold office for term of five years and are entitled for a re-appointment. The Directors are appointed for a term of four and hold office during the pleasure of the president. The meeting of the Central Board is convened at least six times in a year.

    Composition of Local Board

    A local board is formed in each four zones consisting of five members which are appointed by the Central Government. There is Chairperson of the Board who is elected among the member. The members of the Board have a hold office for a term of four years and eligible for reappointment. The Local Board advice on matters referred to it by the Central Board and performs duties delegated to it by the Central Board.

    Functions of Reserve bank of India

    Banker to Government

    The Reserve Bank of India accepts and makes payment on behalf of Central Government. It carries out its exchange, remittance, management of public debt and other banking function of the Central Government. The Central Government entrusts its money, remittance, exchange and banking transactions in India with the Reserve Bank of India. It deals in repo or reverse repo.

    Right to Issue Bank note

    The Reserve Bank of India has the sole right to issue bank notes in India. The bank notes are legal tender guaranteed by the Central Government. The issue of bank note is conducted by a separate department called issue department. The Central Government on the recommendation of Central Board specifies denomination of bank notes including discontinuance of bank notes. The Central Government approves design, form and material of Bank notes on consideration of recommendations of the Central Board.

    Formulates Banking policy

    The Reserve is empowered to formulate banking policy in the interest of the public or depositors banking policy in relation to advances and provide direction on the purpose of the advances, margins to be maintained in a secured advances, the maximum amount of advance may be made, the rate of interest, terms and conditions for advances or guarantees may be given.

    Licensing Authority

    The Reserve Bank of India is empowered to grant license to commence banking business in India, including the power to cancel a license granted to a banking company.

    A petition was filed under Article 226 of the Constitution, challenging the constitutional validity of section 22 of the Banking Companies Act, 1949. Section 22 empowers, Reserve Bank of India to grant license to Banks and banks which were already in existence on the commencement of the Act have to apply for license before the expiry of six months from commence.The petitioner contended that the section 22 of the Banking Regulating Act, 1949 is in restraint of trade and business hence unconstitutional. The writ was dismissed and the High Court declared section 22 of the Banking Regulating Act, 1949 as constitutionally valid and cherished the role of Reserve Bank of India in the economic development of the country. The Madras High Court meticulously said,

    “The Reserve Bank of India was established with a view to fostering the banking business and not for impeding the growth of such business. The powers vested in it under Section 22 are not one invested with a mere officer of the Bank. The standards for the exercise of the power have been laid down in Section 22 itself. The Reserve Bank is a non-political body concerned with the finances of the country. When a power is given to such a body under a statute which prescribes the regulations of a Banking Company, it can be assumed that such power would be exercised so that genuine: banking concerns could be allowed to function as a bank, while institutions masquerading as banks or those run on unsound lines or which would affect the interests of the public could be weeded out.”

    Banker’s Bank

    The banks listed in second schedule and non schedule banks shall maintain a cash reserve ratio with the Reserve bank of India with a view to securing the monetary stability in the country. It provides loans and advances in foreign currency to scheduled Banks and to other financial institution. It purchases, sells or discount any bill of exchange or promissory note or makes a loan or advances to schedule bank.

    Depositor Awareness and Education

    The Reserve Bank of India has constituted a fund called “Depositor Education and Awareness Fund.” The fund is utilized for the promotion of depositors’ interest and other purposes in the interest of the depositor.

    Regulation and Management of Foreign Exchange

    The Reserve Bank of India is empowered to regulate, prohibit, and restrict dealing in foreign exchange. It issues license to banks and other institution to act as the authorized agency in the foreign exchange market.

    Conclusion
    The Reserve Bank of India holds a vital in the banking and economic stability of the country. It formulates and implements monetary policy in the country to maintain stability and growth in the economy. As a banker’s bank its role is essential for the proper operation of the banking sector of the country. The Reserve Bank of India is entrusted with multidimensional role and its role as a regulator had been crucial in recent global crisis where Indian banking and financial system remained strong with capital adequacy and stability. Thus, considering the role and functions of the Reserve Bank of India, it can be termed as one of the most vital organizations of Indian economy and ‘super regulator of banking sector.’
    ************************
    # Presentation made by Deputy Governor, Smt. Usha Thorat on June 29, 2009 at the 56th EXCOM Meeting and FinPower CEO Forum organised by APRACA at Seoul, Korea
    # Also known as Hilton Young Commission
    # The Commission published its report on August 4, 1926.
    # To implement the recommendation, the Reserve Bank of India Bill, 1927 was introduced which could not be passed.
    # S. L. N. Simha, History of the Reserve Bank of India, Vol 1,1970 , The Reserve Bank of India
    # Sec 3 of the Reserve Bank of India Act, 1934, Establishment and incorporation of Reserve Bank
    (1) A bank to be called the Reserve Bank of India shall be 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 Act.
    (2) The Bank shall be a body corporate by the name of the Reserve Bank of India, having perpetual succession and a common seal, and shall by the said name sue and be sued.
    # The Act consisted of 61 Sections with 242 clauses and 5 Schedules
    # Preamble, Reserve Bank of India Act, 1934
    # The Act however provided for close cooperation between the Bank and Government. For example the Governor and deputy Governor were appointed by the Governor-General in Council on the recommendation of Central Board of Directors.
    # In December 1937
    # Ibid at 5
    # With effect from 1st January 1949
    # Sec. 3, Transfer of Bank Shares (a) all shares in the capital of the Bank shall by virtue of this Act be deemed    to be transferred free of all trusts, liabilities and encumbrances to the Central Government.
    # Section 3(1) of the Reserve Bank of India Act 1934, Establishment and incorporation of Reserve Bank
    # Section 3(2) of the Reserve Bank of India Act 1934, Establishment and incorporation of Reserve Bank
    # According to Sec.7(1) of the of Reserve Bank of India Act 1934, the Central is empowered to give direction      after consultation with the Governor
    # Section 7(2) of the Reserve Bank of India Act 1934, Establishment and incorporation of Reserve Bank
    # Section 8(a) of the Reserve Bank of India Act 1934
    # Section 8(b) of the Reserve Bank of India Act 1934
    # Section 8(c) of the Reserve Bank of India Act 1934
    # Section 8(d) of the Reserve Bank of India Act 1934
    # Section 8(3) of the Reserve Bank of India Act 1934
    # Section 8(4) of the Reserve Bank of India Act 1934
    # A Director nominated under clause (c) of sub-section (1)
    # A Director nominated under clause (d) of sub-section (1)
    # Section 13(1) of the Reserve Bank of India Act 1934
    # Schedule 1 of the Reserve Bank of India
    # Section 9(2) of the Reserve Bank of India Act 1934 Or until successor is appointed
    # Section 9(3) of the Reserve Bank of India Act 1934
    # Section 9(4) of the Reserve Bank of India Act 1934
    # Section 20 of the Reserve Bank of India Act 1934
    # Similar function is also performed for state Government on agreement, Section 21A of the Reserve Bank of    India Act 1934
    # Section 21(1) of the Reserve Bank of India Act 1934
    # Section 12AB of the Reserve Bank of India Act 1934
    # Section 22 of the Reserve Bank of India Act 1934
    # Section 26(1) of the Reserve Bank of India Act 1934
    # Section 23 of the Reserve Bank of India Act 1934
    # Section 24(2) of the Reserve Bank of India Act 1934
    # Section 24(3) of the Reserve Bank of India Act 1934
    # Section 25 of the Reserve Bank of India Act 1934
    # Section 21(1) of the Banking Regulation Act 1949
    # Section 21(2)(a) of the Banking Regulation Act 1949
    # Section 21(2)(b) of the Banking Regulation Act 1949
    # Section 21(2)(c) of the Banking Regulation Act 1949
    # Section 21(2)(e) of the Banking Regulation Act 1949
    # Section 22(1) of the Banking Regulation Act 1949
    # Section 22(4) of the Banking Regulation Act 1949
    # Section 5(c) of the Banking Regulation Act 1949 "banking company" means any company which transacts the business of banking in India. Explanation.--Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause;
    # Power of High Courts to issue certain writs
    # Section 22(1) of the Banking Regulation Act, 1949
    # Section 22(2) of the Banking Regulation Act, 1949
    # Article 19(1)(g) of the Constitution of India, 1949
    # Reserve Bank of India, 1934.
    # Every banking Company, not being a schedule bank under section 18 and section 24 of the Banking Regulation Act, 1949
    # Sec 42(1) of the Reserve Bank of India, 1934
    # Including the Exim Bank, the Reconstruction Bank or the Small Industries Bank, the Industrial Finance Corporation, any State Financial Corporation and any other financial institution
    # Including local authorities, Schedule banks, State cooperative banks and State Cooperative banks, Section 17(4) of the Reserve Bank of India, 1934
    # Section 26A of the Banking Regulation Act, 1949
    # Section 26A(2) of the Banking Regulation Act, 1949
    # Section 3 and The Foreign Exchange Management Act, 1999
    # Presentation made by Deputy Governor, Smt. Usha Thorat on June 29, 2009 at the 56th EXCOM Meeting and FinPower CEO Forum organised by APRACA at Seoul, Korea

    Yogesh Prasad Kolekar, BAL,LLM,NET, Assistant Professor, Ismailsaheb Mulla Law College, Satara




    ISBN No: 978-81-928510-1-3

    Author Bio:   Yogesh Prasad Kolekar BAL,LLM,NET, Assistant Professor, Ismailsaheb Mulla Law College, Satara
    Email:   profkolekar@gmail.com
    Website:   ISBN No: 978-81-928510-1-3


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