Important sections and schedules of RBI act 1934 and background of enactment

(RBI Act 1934 comprises various sections, the important sections of the act are mentioned in this post)

The Reserve Bank of India the Central Bank of India, was set up based on the recommendations of the Hilton Young Commission in 1935 as a private bank with the enactment of the RBI act 1934.  The Reserve Bank of India was established and started operating on April 1, 1935, by the provisions of the Reserve Bank of India Act, 1934 with a capital of Rs.5 Crore. The Central Office of the Reserve Bank was initially established in Kolkata but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. The bank was nationalised with effect from 1st January 1949 based on the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. All shares in the capital of the Bank were deemed transferred to the Central Government on payment of a suitable compensation. With nationalisation, the Bank’s focus has shifted to core central banking functions like Monetary Policy, Bank Supervision and Regulation, Overseeing the Payments System, and developing the financial markets.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

“to regulate the issue of Bank notes and keeping of reserves to secure monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.

Key functions include issuing currency (except 1 rupee notes), acting as a banker to the government, managing cash reserves of commercial banks, managing foreign currency reserves, acting as lender of last resort, facilitating clearing and settlement between banks, and controlling credit. – Management is overseen by a Central Board of Directors including government nominees. Local Boards also provide advisory functions.

RBI Act 1934 comprises various sections, the important sections of the act are mentioned below:

Section 3: Establishment and incorporation of Reserve Bank:(1) A bank to be called the Reserve Bank of India shall be constituted to take over the management of the currency from the [Central Government] and carry on the business of banking by the provisions of this Act.

Section 17: Manner in which the RBI (the Central Bank of India) can conduct business. The RBI can accept deposits from the central and state governments without interest. It can purchase and discount bills of exchange from commercial banks. It can purchase foreign exchange from banks and sell it to them. It can provide loans to banks and state financial corporations. It can provide advances to the central government and state governments. It can buy or sell government securities. It can deal in derivative, repo, and reverse repo.

Section 24: Denominational value of bank notes: In terms of Section 24 of the Reserve Bank of India Act, 1934, 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.

Section 26 of the Act describes the legal tender character of Indian bank notes: (1). 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. (2). on the recommendation of the Central Board (Central Government) may by notification in the Gazette of India declare that with the effect of such dates 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 notified in the notification.

Section 27: Section 27 deals with Re-issue notes: The Bank shall not re-issue bank notes that are torn, defaced, or excessively spoiled.

Section 28: Recovery of notes lost, stolen, mutilated, or imperfect:[ Section 28 allows the RBI to form rules regarding the exchange of damaged and imperfect notes.]

Section 31: In India, only the RBI or the central government can issue and accept promissory notes that are payable on demand. However, cheques, that are payable on demand, can be issued by anyone.

Section 40: Transactions in foreign exchange. — The Bank shall sell to or buy from any authorized person who makes a demand on that behalf at its office in Bombay, Calcutta, Delhi, or Madras or at such or its branches as the Central Government may, by order determine.

The Bank shall sell to or buy from any authorized person who makes a demand on that behalf at its office in Bombay, Calcutta, Delhi, or Madras or at such or its branches as the Central Government may, by order determine. foreign exchange at such rates of exchange and on such conditions as the Central Government may from time to time by general or special order determine, having regard so far as rates of exchange are concerned to its obligations to the Inter­national Monetary Fund:

Provided that no person shall be entitled to demand to buy or sell foreign exchange of a value less than two lakhs of rupees.

Explanation.— In the section “authorized person” means a person who is entitled by or under the Foreign Exchange Regulation Act, 1973 (46 of 1973) to buy, or as the case may be, sell, the foreign exchange to which his demand relates.

Section 42: Section 42(1) says that every scheduled bank must have an average daily balance with the RBI. The amount of the deposit shall be more than a certain percentage of its net time and demand liabilities in India.

Section 45(u): Repo, reserve, derivative, money market instruments, and securities are defined in section 45(u).

Definitions:

(a) “derivative” means an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate, credit rating or credit index, price of securities (also called “underlying”), or a combination of more than one of them and includes interest rate swaps, forward rate agreements, foreign currency swaps, foreign currency-rupee swaps, foreign currency options, foreign currency-rupee options or such other instruments as may be specified by the Bank from time to time;

(b) “money market instruments” include call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper, and such other debt instruments of original or initial maturity up to one year as the Bank may specify from time to time;

(c) “repo” means an instrument for borrowing funds by selling securities with an agreement to repurchase the securities on a mutually agreed future date at an agreed price which includes interest for the funds borrowed;

(d) “reverse repo” means an instrument for lending funds by purchasing securities with an agreement to resell the securities on a mutually agreed future date at an agreed price which includes interest for the funds lent;

(e) “Securities” means securities of the Central Government or a State Government or such securities of a local authority as may be specified on this behalf by the Central Government and, for “repo” or “reverse repo”, including corporate bonds and debentures.]

Schedules to RBI Act 1934:

First Schedule: The first schedule provides the list of areas served by various local boards of RBI (namely Western area, Eastern area, Northern area, and Southern area):

Second Schedule: In the RBI Act, of 1934, schedule banks are the banks that are listened to in the second schedule. Under this schedule, the banks should raise at least Rs 5 lakhs and capital. The banks added in the second schedule are known as scheduled banks, and these banks include scheduled cooperative banks and scheduled commercial banks. Scheduled banks comprise five non-similar groups, and scheduled commercial banks are urban and state cooperatives.

Third schedule:[Repealed by Act 23 of 1955, s. 52 and Sch. III (w.e.f. 1-7-1955)

Fourth schedule: [Repealed by Act 62 of 1948, s. 7 and Sch. (w.e.f. 1-1-1949)

Fifth schedule: [Repealed by the M.O. 1937]

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