Powers of Reserve Bank of India in maintaining the advances of banks under Banking Regulation Act, 1949 by VEDANT JAIN at LEXCLIQ

The Reserve Bank of India is India’s central bank and regulatory body under the jurisdiction of the Ministry of Finance, Government of India. It is responsible for the issue and supply of the Indian rupee and the regulation of the Indian banking system.

Under the Banking Regulation Act, 1949 the RBI was given the power with respect to the scheduled banks in controlling the advances which the banks give to their borrowers under section 21 of the said Act. The powers given are as such:-

Under section 21(1) the RBI can under certain rules given under the section formulate certain policies for advances that are:-

  1. Public interest – the RBI can put the restrictions on banks in general or in particular banks the limit of advances in the interest of the public at large.
  2. The interest of depositors – the RBI can restrict the advances in the interest of the depositors of the banks in general or wrt to any bank in particular.
  3. Banking Policy – In India, the RBI has the power to formulate a banking policy for the functioning of a banking company so in the interest of the banking policy the RBI can limit the grant of advance to banks in general or to a particular bank.

Under section 21(2) the RBI was given the power on how to regulate this power or restriction on the advances by the banks. The RBI can form policy in general to whole banks or in respect of a particular banks company that is:-

  1. Purpose – the RBI can decide the purpose when can or cannot the banks can make advances. The RBI should not put any unreasonable restrictions but three should be a genuine purpose for putting those restrictions.
  2. The margin of secure advances – the RBI can decide the limit on the margin given by the banks in case of secured advances on banks in general or on a particular bank.
  3. Maximum advances – the RBI has got the power to set the limit on the banks in general or on a specific bank the maximum limit it can give as an advance on the basis of paid-up capital, free reserves and deposits with the bank.
  4. Maximum Guarantee – the RBI has got the power to set the limit on the banks in general or on a specific bank the maximum limit of guarantee a bank can take on the basis of paid-up capital, free reserves and deposits of the bank.
  5. Rate of Interest and Terms of Conditions – the RBI has also got the power with the banks in general or on a particular bank to decide on the rate of interest banks can charge and also the terms of which it can provide advances.

Under section 21A the rate of interest charged is not to be scrutinized by the court.

All the above restrictions and powers given to the RBI is for the public interest at large, the interest of the depositors and banking policy. These regulatory powers are necessary to keep the banks or specific bank in check so that that don’t function in a detrimental manner or prejudicial manner.

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