CHANAKYA NATIONAL LAW UNIVERSITY

SUBJECT- BANKING LAWPROJECT WORK ON

R.B.I FUNCTIONS AS BANKERS BANK

SUBMITTED TODr. Ajay Kumar(FACULTY OF BANING LAW)

SUBMITTED BYROHIT SINHA

ROLL NO. 6018th semester

ACKNOWLEDGEMENT

Making a project is one of the most significant academic challenges I have ever faced. Any

attempt at any level can't be satisfactorily completed without the support and guidance of

learned people. I am overwhelmed with my gratitude to acknowledge all those who have

helped me put these ideas, well above the level of simplicity and into something concrete

effectively and moreover on time.

I am very thankful to my subject teacher Dr.Ajay Kumar for his valuable help. He was always

there to show me the right track whenever I needed his help. He lent his valuable suggestions,

guidance and encouragement, on different matters pertaining to the topic. He has been very

kind and patient while suggesting me the outlines of this project and clearing my doubts. I

thank him for his overall support without which I would not have been able to complete this

project. I would also like to thank my colleagues, who often helped and gave me support at

critical junctures, during the making of this project. Last but not the least, I would like to

thank my family members for their emotional support.

ContentsContentsResearch Methodology...............................................................................................................5

INTRODUCTION......................................................................................................................6

MEANING OF A BANK...........................................................................................................7

DEFENITION OF BANK..........................................................................................................7

TYPES OF BANKS...................................................................................................................8

1. SCHEDULED BANKS.....................................................................................................8

2. NATIONALIZED BANKS...............................................................................................8

3. NON NATIONALIZED BANKS.....................................................................................8

4. OLD PRIVATE BANKS..................................................................................................9

5. NEW PRIVATE BANKS.................................................................................................9

6. FOREIGN BANKS...........................................................................................................9

8. CO-OPERATIVE BANKS................................................................................................9

HISTORY OF RBI.....................................................................................................................9

First Move Towards Banking Legislation................................................................................10

Reserve Bank and Banking Legislation...................................................................................12

SOUTH INDIAN BANKING CRISIS....................................................................................14

Proposals for an Indian Bank Act............................................................................................15

FUNCTION OF RESERVE BANK OF INDIA......................................................................17

[A] TRADTIONAL FUNCTIONS......................................................................................17

(i) ISSUE OF THE CURRENCY NOTES....................................................................17

(ii) BANKER TO THE BANKS.....................................................................................18

Acts as lender of last resort ( LORL)...................................................................................18

Overview Of Payment Systems In India..........................................................................18

Payment Systems.............................................................................................................19

Paper-based Payments......................................................................................................19

Electronic Payments.........................................................................................................20

Electronic Clearing Service (ECS) Credit........................................................................20

Regional ECS (RECS).....................................................................................................20

Electronic Clearing Service (ECS) Debit.........................................................................21

Electronic Funds Transfer (EFT).....................................................................................21

National Electronic Funds Transfer (NEFT) System.......................................................21

Real Time Gross Settlement (RTGS)System...................................................................22

Clearing Corporation of India Limited (CCIL)................................................................22

OTHER PAYMENT SYSTEMS.............................................................................................23

Pre-paid Payment Systems...................................................................................................23

Mobile Banking System.......................................................................................................23

ATMs / Point of Sale (POS) Terminals / Online Transactions............................................23

National Payments Corporation of India..............................................................................24

Oversight of Payment and Settlement Systems...................................................................25

Lender of Last Resort...........................................................................................................25

Reserve Bank as Banker to Banks...........................................................................................26

Research MethodologyResearch Methodology

Method of ResearchThe researcher has adopted a purely doctrinal method of research. The researcher has made extensive use of the available resources at library of the Chanakya National Law University and also the internet sources.

Aims and ObjectivesThe aim of the project is to present an overview of various aspects of the RBI and its Functions, an analysis of the various case laws and juristic opinions in this regard subsequent to the enactment of the Banking Regulation Act, and R.B.I Act..

Scope and LimitationsThough the current topic is an immense project and pages can be written over the topic but due to certain restrictions and limitations the researcher has not been able to deal with the topic in great detail.

Sources of Data:The following sources of data have been primarily used in the project-

1. Books

2. Journals

3. Cases

Method of Writing:The method of writing followed in the course of this research paper is primarily analytical.

Mode of CitationThe researcher has followed the bluebook method of citation (19th ed.) throughout the course of this research paper. The author has followed the foot note system for citation.

INTRODUCTIONINTRODUCTION

"With the monetary system we have now, the careful saving of a lifetime can be wiped

out in an eye blink”

Larry Parks, Executive Director, FAME

Banking system plays an important role in growth of economy. The banking sector is the

lifeline of any modern economy. It is one of the important pillars of financial system, which

plays a vital role in the success or failure of an economy. It is a well known fact that banks

are one of the oldest financial intermediaries in the financial system. They play a crucial role

in the mobilization of deposits from the disbursement of credit to various sectors of the

economy. The banking system reflects the economic health of the country. The strength

of the economy of any country basically hinges on the strength and efficiency of its

financial system, which in turn depends on a sound and solvent banking system.

A Banking Sector performs three primary function in economy, the operation of the payment

system, the mobilization of savings and the allocation of saving to investment products.1

Banking industry has been changed after reforms process. The Government has taken this

sector in a basic priority and this service sector has been changed according to the

need of present days. Banking sector reforms in India Strive to increase efficiency and

profitability of the banking institutions as well as brought the existing banking institutions

face to face with global competition in globalization process. Different type of banks

differs from each other in terms of operations, efficiency, productivity, profitability and

credit efficiency. Indian banking sector is an important constituent of the Indian

Financial System. The banking sector plays a vital role through promoting business in

urban as well as rural area in recent year, without a sound and effective banking system,

India can not be considered as a healthy economy.2

1 Ahluvaliya Montek,S. “ Economic Reforms in India since 1991:Has Gradualism Worked ? Journal of Economic Perspective 16(3) pp 67-882 Sheth, Neha “Banking Reforms In India: Problems and Prospects” URL: Http;//ssrn.com/abstract, 15, May. 2010. 11:00 PM

MEANING OF A BANKMEANING OF A BANK

A Bank is an institution which accepts deposits from the general public and extends

loans to the households, the firms and the government. Banks are those institutions which

operate in money. Thus, they are money traders, with the process of development

functions of banks are also increasing and diversifying now, the banks are not nearly the

traders of money, they also create credit. Their activities are increasing and diversifying.

Hence it is very difficult to give a universally acceptable definition of bank.

DEFENITION OF BANKDEFENITION OF BANK

Indian Banking Regulation act 1949 section 5 (1) (b) of the banking Regulation act 1949

Banking is defined as.

“Accepting for the purpose of the landing of investment of deposits of money from public

repayable on demand or other wise and withdraw able by cheques, draft, order or

otherwise.”3

“Bank means a bench or table for changing money.”4

--Greek History

“Bank is an establishment for custody of money received from or on Behalf of its

customers. Its essential duty is to pay their drafts unit. Its profits arise from the use of the

money left employed them.”5

--Oxford Dictionary

“A bank is an establishment which makes to individuals such advances of money or other

means of payment as may be required and safely made and to which individuals entrust

money or means of payment when not required by them for use.6

--Pro Kinely

3 Kaptan S.S.: “Indian Banking in the Electronic Era” Published by SAROP & SONS, New Delhi –2003 Page -2.4 Ibid5 Desai, Vasant: “Indian Financial System” Himalaya Publishing House, 2005 Page 162.6 Tannan, M.L.: “Banking Law and Practice in India”, Indian Law house, Delhi, 2002, Page No. 2

TYPES OF BANKSTYPES OF BANKS

In 1935, ‘The State Bank of India Act, was passed, accordingly, ‘The Imperial Bank

of India’ was nationalized and State Bank of India emerged with the objective of

extension of banking facilities on a large scale, specifically rural and semi – urban area and

for various of the public purposes. In 1969, fourteen major Indian Commercial Banks were

nationalized and in 1980, six more were added on to constitute the public sector banks.

Commercial Banks in India are classified in Scheduled Bank and Non Scheduled Banks.

Scheduled Banks are including nationalized Bank, SBI and its subsidiaries, private sector

banks and foreign banks. Non Scheduled Banks are those included in the second Scheduled

of the RBI Act, 1934.

1. SCHEDULED BANKS1. SCHEDULED BANKS

The second scheduled of RBI act, create a list of banks which are described as “Scheduled

Banks” In the terms of section 42 (6) of RBI act, 1934, the required amount is only Rs. 5

Lakh. The Scheduled Banks enjoy several privileges. It means that scheduled banks

carries safety and prestige value compared to non scheduled banks. It is entailed to receive

refinance facility as applicable

2. NATIONALIZED BANKS2. NATIONALIZED BANKS

The nationalized banks include 14 banks nationalized on 19th July, 1969 and the 6 more

nationalized on 15th April, 1980. They are also scheduled banks, after this nationalization the

governments try to implement various welfare schemes.

3. NON NATIONALIZED BANKS3. NON NATIONALIZED BANKS

The commercial banks not included in the 2nd schedule of the RBI act are known as non

scheduled banks. They are not entitled to facilities like refinance and rediscounting of

bills etc, from RBI. They are engaged in lending money discounting and collection bills

and various agency services. They insist higher security for loans.

4. OLD PRIVATE BANKS4. OLD PRIVATE BANKS

These banks all registered under Companies Act, 1956. Basic difference between Co-

operative bank and Private Banks is its aim. Co-operative banks work for its member and

private banks are work for own profit.

5. NEW PRIVATE BANKS5. NEW PRIVATE BANKS

These banks lead the market of Indian banking business in very short period because

of its variety of services and approach to handle customer and also because of long

working hours and speed of services. This is also registered under the Company Act

1956. Between old and new private banks there is wide difference.

6. FOREIGN BANKS6. FOREIGN BANKS

Foreign Banks mean multi-countries bank. In case of Indian foreign banks are such banks

which open its branch office in India and their head office are outside of India. E.g. HSBC

Bank, City Bank, Standard Chartered Bank etc.

8. CO-OPERATIVE BANKS8. CO-OPERATIVE BANKS

Co-operative Banks another component of the Indian bank with the enactment of the Co-

operative Credit Societies were sated owing to the increasing demand of Co-operative

Credit, a new Act of the 1994, which provide for the increasing demand of Co-

operative Central banks by a union of primary credit societies or by a union of primary credit

socialites and individuals.

HISTORY OF RBIHISTORY OF RBI

The basic purpose of the establishment of the Reserve Bank of India was the unification of

the authority for the regulation of currency and of credit. In regard to the banking system of

the country, the primary role of the Reserve Bank was conceived as that of the lender of last

resort for the purpose of ensuring the liquidity of the short-term assets of banks. Hence, the

provision of credit facilities to banks through discounts and advances was to constitute the

centre of relationship between the central banking authority and the scheduled banks. The

custody of the cash reserves of banks vested in the Bank was primarily meant to serve as a

central pool to be available for use in times of emergency for supporting scheduled banks,

rather than constitute an instrument of credit control. The Bank’s Statute did not provide for

any detailed regulation by it of commercial banking operations towards ensuring sound

banking practices. The submission of weekly returns by scheduled banks under Section 42(2)

of the Act was mainly intended to keep a watch over their compliance with the requirements

regarding maintenance of cash reserves with the Bank. Inspection of banks by the Reserve

Bank was also visualised for the limited purpose of determining the eligibility of banks for

inclusion or retention in the Second Schedule to the Act. Thus, apart from the limited scope

of the Bank’s powers of supervision and control over scheduled banks, the large number of

small banking institutions, which came to be known as non-scheduled banks, lay entirely

outside the purview of its control. Besides, but for the few relatively minor provisions in the

Indian Companies Act, 1913 governing companies engaged in the business of banking, there

was a virtual absence of specific laws or regulations for controlling the operations of

commercial banks. Soon after the Bank commenced operations, it became clear enough that

the lacuna in regard to banking legislation was bound to prove a serious handicap in the

sphere of its regulatory functions over the banking system. The urgency of such a measure

was also highlighted by the South Indian banking crisis of 1938 which brought to the fore

several of the undesirable features in the working of banking institutions. Accordingly, the

Bank’s attention, as bankers’ bank, was mainly occupied during this period with the problems

of banking regulation.

First Move Towards Banking LegislationFirst Move Towards Banking Legislation

The first attempt at banking legislation in India was the passing of the Indian Companies

(Amendment) Act, 1936, incorporating a separate chapter on provisions relating to banking

companies. Prior to its enactment, banks were governed in all important matters such as

incorporation, organisation, management, etc., by the Indian Companies Act, 1913, which

applied commonly to banking as well as non-banking companies. There were only certain

relatively innocuous provisions in the Companies Act which made a distinction between

banks and other companies. These were: Section 4, which prohibited a partnership exceeding

ten from carrying on the business of banking unless it was registered as a company; Section

136, which required every limited company doing banking business to display a statement

regarding its assets and liabilities in the prescribed form (Form G in the Third Schedule to the

Act) every half year; Section 138, which empowered the local Government to appoint

inspectors to investigate the affairs of a banking company on the application of members

holding not less than 1/5th of the shares issued (as against 1/10th of the shares in the case of

other companies) ; and, Section 145, which provided that if a banking company had branches

beyond the limits of India, it was sufficient if the auditor was allowed access to such copies

and extracts from the accounts of the branches as had been transmitted to the head office of

the company.

There were two important features of the new legislation which embodied some of the

recommendations of the Central Banking Enquiry Committee. For the first time, a determined

effort was made to evolve a working definition of ‘banking’ and to segregate banking from

other commercial operations. Secondly, the special status of scheduled banks was recognised

inasmuch as certain provisions of the amended Act, such as building up reserves, were made

applicable only to non-scheduled banks, on the ground that the scheduled banks could be left

to the general supervision and control of the Reserve Bank. The principal banking provisions

of the amended Companies Act, which came into force on January 15, 1937, were:

(i) the definition of a banking company as ‘a company which carries on as its

principal business the accepting of deposits of money on current account or

otherwise, subject to withdrawal by cheque, draft or order’, notwithstanding that it

engaged in any one or more of the forms of business specified in the Section

(Section 277F);

(ii) prohibition of banking companies from engaging in business other than that

specified in Section 277F [Section 277G(2)];

(iii) restriction on the managing agency system in respect of a banking company by

providing that it should not employ or be managed by a managing agent other than

a banking company (Section, 277H);

(iv) prescription of minimum paid-up capital of Rs. 50,000 for banking companies

incorporated after the commencement of the Act (Section 277I);

(v) prohibition of creation of charge on unpaid capital (Section 277J);

(vi) transfer by non-scheduled banking companies, before any dividend was declared,

of not less than 20 per cent of the annual profits to the reserve fund until such fund

equalled the paid-up capital, and for the investment of the reserve fund in

Government or trustee securities or in a special account with a scheduled bank

(Section 277K) ;

(vii) maintenance by non-scheduled banking companies of, a cash reserve of at least

1½ per cent against their time liabilities and 5 per cent against demand liabilities

(Section 277L) ;

(viii) restriction on formation of a subsidiary company or holding of shares in any

subsidiary company except a subsidiary company formed for the purpose of

undertaking the administration of estates as executor trustee or otherwise and for

other purposes set forth in Section 277F as were incidental to the business of

accepting deposits on current account or otherwise (Section 277M); and

(ix) the grant of a moratorium by the court to a banking company in temporary

difficulties (Section 277N).

Reserve Bank and Banking LegislationReserve Bank and Banking Legislation

While the initiative for the amendment of the Indian Companies Act came from the Central

Government, the Reserve Bank was actively consulted on the portions of the measure

pertaining to banking companies. The vexed question of definition of ‘banking’ appears to

have given rise to a cleavage of views at the highest executive level inside the Bank. The

definition, incorporated in the Amendment Bill, was welcomed by the Governor, Sir Osborne

Smith, whose personal view, recorded in November 1935, was that the activities constituting

banking had never been defined in this country and it was high time that the permissible

duties and limitations were defined by Statute. However, Sir James Taylor, the ‘senior’

Deputy Governor, was more concerned with the difficulty of framing such a definition; a

difficulty which, he said, had been emphasised by every authority which had examined the

subject both in this and other countries, e.g., in England the Macmillan Committee, and in

India the Hilton Young Commission and the Central Banking Enquiry Committee. In his

opinion, the enumeration of the various lines of business which a banking company could

undertake would involve Government in expensive litigation on difficult border-line cases,

hamper legitimate current activities and impede future development. There could also be

evasion by some banks, claiming that banking was not their ‘principal’ business, which

would ‘drive a coach and four’ through the Bill’s whole object, namely, to effect a clear

separation between banking and other companies. In July 1936, the Reserve Bank conveyed

to the Government its opinion that the attempt to frame a comprehensive definition should be

abandoned and a banking company should be merely described as a company which carried

on the business of banking. The Bank, however, suggested that, if it was thought desirable,

there could be a statutory ‘objects’ clause in the memorandum of association for banking

companies, to prevent the growth of mushroom institutions. The views of the Bank did not

have much practical effect and the Select Committee appointed to consider the amendments

(under the chairmanship of Sir N. N. Sircar, the Law Member of the Viceroy’s Executive

Council) adopted a definition of ‘banking company’ almost in the same form as was

originally proposed and incorporated a more detailed list of activities in which a banking

company might engage. The stand taken by Sir James was, however, vindicated later, when

the difficulties envisaged by him in determining whether a company was a banking company

or not posed knotty problems for the Registrars of Companies.

Apart from the question of definition, the Bank was also averse to the clauses regarding

(a) Maintenance of a cash reserve by non-scheduled banks, in the absence of a provision for

statutory returns necessary for its enforcement and

(b) Grant of moratorium to an individual institution, since, in any case, a sound bank in

difficulties could count on the Reserve Bank for assistance and the sooner that an unsound

bank closed its doors the better, so as to make the winding-up process fair to all concerned.

About the other clauses, the Bank was of the view that the minimum paid-up capital for a

banking company suggested in the Amendment Bill was too low at Rs. 50,000 and should be

raised to Rs.1 lakh and that the annual transfer by non-scheduled banks to the reserve fund

before any dividend was declared, should be not less than 2½ per cent of the paid up capital

till the former equalled the latter. The other suggestions made by the Bank related to

(i) the examination of the question of extending the clause regarding prohibition of loans to

directors of companies (Section 86D, which was inapplicable to banking companies) to the

directors of a banking company and

(ii) the prohibition of loans to auditors.

None of these suggestions found a place in the Amendment Act of 1936 in the manner the

Bank wanted. Perhaps, the Central Government was in a hurry to see the Amendment Act

through, recognising that some legislation for banks was better than no legislation. In his

minute of dissent to the Select Committee’s Report, a member, Mr. Mathuradas Vissanji,

emphasised the desirability of a separate comprehensive legislation to regulate and govern

banking business in the country and asked for a public undertaking from Government, as had

already been given with regard to insurance companies, to bring forward the necessary

legislation for banking business also.

SOUTH INDIAN BANKING CRISISSOUTH INDIAN BANKING CRISIS

The failure of the TNQ Bank and the banking crisis in South India led to the view that, in the

interests of the depositors, adequate powers of obtaining information and exercising control

and supervision over the affairs of banks should be assumed by the Reserve Bank, so that it

could come to the rescue of sound banks in times of such emergency, prevent the gross

abuses prevalent in the banking system and help build a sound banking tradition. The banking

crisis of 1988 was thus the immediate cause of the proposals for a Bank Act made by the

Reserve Bank in 1939, the whole of the draft of which was initially prepared by Sir James

Taylor himself. Bank’s Policy Regarding Discounts and Advances One of the results of the

banking crisis was the elucidation of the Bank’s policy regarding discounts and advances to

scheduled banks. With a view to removing any misunderstanding about the nature and extent

of the financial assistance which scheduled banks could expect from the Reserve Bank, a

circular letter was issued by the Reserve Bank to all scheduled banks on September 1, 1938.

The main purport of the letter was to explain that a central bank was, in essence, the lender of

last resort and it could use the resources at its command only at times when the resources of

the member banks had been exhausted. It would also assist individual member banks when in

difficulty, so long as it was satisfied that they were strong. There was also ‘the obvious

difficulty that the Reserve Bank is being asked to help a bank in circumstances in which the

credit bills of the country have not been exhausted, when other banks have funds but are not

prepared to lend to it, in short, when the problem is as to the solvency of the member bank or

group of banks, and not dearth of money in the credit system as a whole’. The circular went

on to say that the Reserve Bank did not have in its possession adequate data to enable it to

judge the true financial position of the scheduled banks and that full information would be

necessary if the Bank was to be in a position to extend assistance to deserving institutions

without delay. There was, therefore, imperative need for scheduled banks to submit to the

Bank periodical returns of their investments, bills and advances portfolios. The Bank also

offered to depute an officer to establish informal contacts with banks. Later, speaking at the

annual general meeting of the shareholders of the Bank, in February 1939, the Governor

stated that the Bank had succeeded in establishing closer contacts with some of the South

Indian banks in pursuance of the policy set out above. Such contacts, which were entirely

voluntary on both sides, had afforded, he mentioned, an opportunity for frank and

confidential discussions, enabling the Bank to give advice and guidance in suitable cases. In

December 1938, the Bank also circulated an Explanatory Memorandum to the scheduled

banks, indicating the circumstances under which accommodation from the Bank might be

sought by scheduled banks, the lending policy of the Bank and the ‘ eligible securities ’ under

the Reserve Bank Act which could be offered as collateral. It was mentioned that the Reserve

Bank might be called upon to assist the scheduled banks (a) to meet some unexpected and

temporary demands for which the scheduled banks concerned might not have been able to

make provision in advance ; (b) to meet seasonal needs when there was stringency in the

money market; and (c) in special circumstances affecting one bank or group of banks (e.g., a

slump affecting the trade or industry with which certain banks were more particularly

concerned or a scare imperilling banking habit in one particular part of the country). The very

nature of the functions permitted under Sections 17 and 18 of the Reserve Bank Act required

that business which the Reserve Bank undertook should be liquid, short-term and generally

self-liquidating the securities eligible under Section 17 would consist of bills of exchange and

time promissory notes, Government and trustee securities, bullion and documents of title to

goods.

Proposals for an Indian Bank ActProposals for an Indian Bank Act

In June 1939, the Governor circulated to the Local Boards of the Bank a memorandum

prepared by him containing proposals for an Indian Bank Act which was designed to bring

within the orbit of the Bank’s control the entire joint-stock banking sector. These proposals

were formulated after a study of the banking laws of several foreign countries such as

Canada, Australia, Denmark, U.S.A., Norway, Sweden, South Africa and Switzerland. The

objective was limited to what was immediately necessary and practical, but at the same time

the framework of the new measure possessed sufficient flexibility to provide room for further

additions as experience accumulated.

The proposals, in the first instance, envisaged a clear-cut definition of ‘banking’ as the

accepting of deposits on current account or otherwise subject to withdrawal by cheque and of

a ‘banking company’ as a company defined in the Indian Companies Act including a foreign

company which did the business of banking in British India; cooperative banks were

therefore excluded from the purview of the Act. It was also provided that a company which

did banking business should include as part of its name the word ‘ bank’, ‘banker’ or

‘banking ’ and no company which did not do banking business should use any of these words

as part of its name. A list of the forms of business in which a banking company could engage,

as enumerated in Section 277F of the Indian Companies Act, 1936, was also incorporated in

the new proposals along with the provision that it should engage in no other business except

such as the Government might notify in the Gazette of India.

A major objective of the measure was to safeguard the interests of the depositor.

The case for affording adequate protection to the depositor was admirably and forthrightly

set out by the Governor as follows:

To achieve the desired objective, the proposals included, inter alia,

(a) Minimum capital standards, the amount of capital depending up on the area of a bank’s

operation and the population of the towns in which it operated,

(b) A minimum proportion of assets to be held in British India and in liquid form and

(c) Certain provisions for expediting liquidation proceedings, besides incorporating some of

the provisions of the Indian Companies Act relating to banking companies.

The Governor was not inclined to provide for elaborate periodical inspections by the Bank or

any separate Government Inspection Department which would ‘merely tend to create a false

sense of security in the minds of the public and throw all the onus of responsibility on those

responsible for inspection in the event of a bank failing ‘. His view was that ‘if the work is to

be done properly, it must involve legal power to summon books for inspection which it would

be somewhat invidious to give to the Reserve Bank, as this would tend to give the latter the

role rather of a policeman than of a colleague and helper of other banks which is the obvious

ideal’.

He was also not in favour of extending the Act to private and indigenous bankers. The

reasons given were that

(a) these bankers rarely took deposits on current account and as such, no case had been made

for protecting their depositors,

(b) the regulation of usurious money lending practices was an item of Provincial legislation

and would almost certainly be considered ultra vires of a Central Act, and

(c) any assistance that such bankers might require from the Bank would be difficult to give,

in the absence of their keeping proper accounts segregating their banking from other

businesses

FUNCTION OF RESERVE BANK OF INDIAFUNCTION OF RESERVE BANK OF INDIA

As a central bank, the Reserve Bank has significant powers and duties to perform. For

smooth and speedy progress of the Indian Financial System, it has to perform some important

tasks. Among others it includes maintaining monetary and financial stability, to develop

and maintain stable payment system, to promote and develop financial infrastructure

and to regulate or control the financial institutions.

[A] TRADTIONAL FUNCTIONS[A] TRADTIONAL FUNCTIONS ..

Traditional functions are those functions which every central bank of each nation performs

all over the world. Basically these functions are in line with the objectives with which

the bank is set up. It includes fundamental functions of the Central Bank. They comprise the

following tasks.

(i) ISSUE OF THE CURRENCY NOTES(i) ISSUE OF THE CURRENCY NOTES

The RBI has the sole right or authority or monopoly of issuing currency notes except

one rupee note and coins of smaller denomination. These currency notes are legal tender

issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and

1,000. The RBI has powers not only to issue and withdraw but even to exchange these

currency notes for other denominations. It issues these notes against the security of gold

bullion, foreign securities, rupee coins, exchange bills and promissory notes and government

of India bonds.

(ii) BANKER TO THE BANKS(ii) BANKER TO THE BANKS

The RBI being an apex monitory institution has obligatory powers to guide, help and direct

other commercial banks in the country. The RBI can control the volumes of banks

reserves and allow other banks to create credit in that proportion. Every commercial

bank has to maintain a part of their reserves with its

RBI is bank of all banks in India. As a banker of banks, RBI:

Enables smooth and swift clearing and settlements of inter-bank transactions

Provides efficient means of funds transfer for all banks

Enables banks to maintain their accounts with RBI for statutory reserve requirements

and maintenance of transaction balances

Acts as lender of last resort ( LORL)Acts as lender of last resort ( LORL)

Overview Of Payment Systems In IndiaOverview Of Payment Systems In India

The central bank of any country is usually the driving force in the development of national

payment systems. The Reserve Bank of India as the central bank of India has been playing

this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient,

Accessible and Authorised payment systems in the country.

The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a

sub-committee of the Central Board of the Reserve Bank of India is the highest policy

making body on payment systems in the country. The BPSS is empowered for authorising,

prescribing policies and setting standards for regulating and supervising all the payment and

settlement systems in the country. The Department of Payment and Settlement Systems of the

Reserve Bank of India serves as the Secretariat to the Board and executes its directions.

In India, the payment and settlement systems are regulated by the Payment and Settlement

Systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as well

as the Payment and Settlement System Regulations, 2008 framed there under came into effect

from August 12, 2008. In terms of Section 4 of the PSS Act, no person other than the Reserve

Bank of India (RBI) can commence or operate a payment system in India unless authorised

by RBI. Reserve Bank has since authorised payment system operators of pre-paid payment

instruments, card schemes, cross-border in-bound money transfers, Automated Teller

Machine (ATM) networks and centralised clearing arrangements. 

PaymentPayment  SystemsSystems

The Reserve Bank has taken many initiatives towards introducing and upgrading safe and

efficient modes of payment systems in the country to meet the requirements of the public at

large. The dominant features of large geographic spread of the country and the vast network

of branches of the Indian banking system require the logistics of collection and delivery of

paper instruments. These aspects of the banking structure in the country have always been

kept in mind while developing the payment systems.

Paper-based PaymentsPaper-based Payments

Use of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60% of

the volume of total non-cash transactions in the country. In value terms, the share is presently

around 11%. This share has been steadily decreasing over a period of time and electronic

mode gained popularity due to the concerted efforts of Reserve Bank of India to popularize

the electronic payment products in preference to cash and cheques.

Since paper based payments occupy an important place in the country, Reserve Bank had

introduced Magnetic Ink Character Recognition (MICR) technology for speeding up and

bringing in efficiency in processing of cheques.

Later, a separate High Value Clearing was introduced for clearing cheques of value Rupees

one lakh and above. This clearing was available at select large centres in the country (since

discontinued). Recent developments in paper-based instruments include launch of Speed

Clearing (for local clearance of outstation cheques drawn on core-banking enabled branches

of banks), introduction of cheque truncation system (to restrict physical movement of

cheques and enable use of images for payment processing), framing CTS-2010 Standards (for

enhancing the security features on cheque forms) and the like.

While the overall thrust is to reduce the use of paper for transactions, given the fact that it

would take some time to completely move to the electronic mode, the intention is to reduce

the movement of paper – both for local and outstation clearance of cheques.

Electronic PaymentsElectronic Payments

The initiatives taken by RBI in the mid-eighties and early-nineties focused on technology-

based solutions for the improvement of the payment and settlement system infrastructure,

coupled with the introduction of new payment products by taking advantage of the

technological advancements in banks. The continued increase in the volume of cheques

added pressure on the existing set-up, thus necessitating a cost-effective alternative system.

Electronic Clearing Service (ECS) CreditElectronic Clearing Service (ECS) Credit

The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive

payment requirements (like salary, interest, dividend payments) of corporates and other

institutions. ECS (Credit) facilitates customer accounts to be credited on the specified value

date and is presently available at all major cities in the country.

During September 2008, the Bank launched a new service known as National Electronic

Clearing Service (NECS), at National Clearing Cell (NCC), Mumbai. NECS (Credit)

facilitates multiple credits to beneficiary accounts with destination branches across the

country against a single debit of the account of the sponsor bank. The system has a pan-India

characteristic and leverages on Core Banking Solutions (CBS) of member banks, facilitating

all CBS bank branches to participate in the system, irrespective of their location across the

country.

Regional ECS (RECS)Regional ECS (RECS)

Next to NECS, RECS has been launched during the year 2009.RECS, a miniature of the

NECS is confined to the bank branches within the jurisdiction of a Regional office of RBI.

Under the system, the sponsor bank will upload the validated data through the Secured Web

Server of RBI containing credit/debit instructions to the customers of CBS enabled bank

branches spread across the Jurisdiction of the Regional office of RBI. The RECS centre will

process the data, arrive at the settlement, generate destination bank wise data/reports and

make available the data/reports through secured web-server to facilitate the destination bank

branches to afford credit/debit to the accounts of beneficiaries by leveraging the CBS

technology put in place by the bank. Presently RECS is available in Ahmedabad, Bengaluru,

Chennai and Kolkata

Electronic Clearing Service (ECS) DebitElectronic Clearing Service (ECS) Debit

The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting

periodic and repetitive collections of utility companies. ECS (Debit) facilitates consumers /

subscribers of utility companies to make routine and repetitive payments by ‘mandating’

bank branches to debit their accounts and pass on the money to the companies. This

tremendously minimises use of paper instruments apart from improving process efficiency

and customer satisfaction. There is no limit as to the minimum or maximum amount of

payment. This is also available across major cities in the country.

Electronic Funds Transfer (EFT)Electronic Funds Transfer (EFT)

This retail funds transfer system introduced in the late 1990s enabled an account holder of a

bank to electronically transfer funds to another account holder with any other participating

bank. Available across 15 major centers in the country, this system is no longer available for

use by the general public, for whose benefit a feature-rich and more efficient system is now

in place, which is the National Electronic Funds Transfer (NEFT) system.

National Electronic Funds TransferNational Electronic Funds Transfer    (NEFT) System(NEFT) System

In November 2005, a more secure system was introduced for facilitating one-to-one funds

transfer requirements of individuals / corporates. Available across a longer time window, the

NEFT system provides for batch settlements at hourly intervals, thus enabling near real-time

transfer of funds. Certain other unique features viz. accepting cash for originating

transactions, initiating transfer requests without any minimum or maximum amount

limitations, facilitating one-way transfers to Nepal, receiving confirmation of the date / time

of credit to the account of the beneficiaries, etc., are available in the system.

Real Time Gross SettlementReal Time Gross Settlement    (RTGS)System(RTGS)System

RTGS is a funds transfer systems where transfer of money takes place from one bank to

another on a "real time" and on "gross" basis. Settlement in "real time" means payment

transaction is not subjected to any waiting period. "Gross settlement" means the transaction is

settled on one to one basis without bunching or netting with any other transaction. Once

processed, payments are final and irrevocable. This was introduced in in 2004 and settles all

inter-bank payments and customer transactions above `2 lakh.

Clearing Corporation of India Limited (CCIL)Clearing Corporation of India Limited (CCIL)

CCIL was set up in April 2001 by banks, financial institutions and primary dealers, to

function as an industry service organisation for clearing and settlement of trades in money

market, government securities and foreign exchange markets.

The Clearing Corporation plays the crucial role of a Central Counter Party (CCP) in the

government securities, USD –INR forex exchange (both spot and forward segments) and

Collaterised Borrowing and Lending Obligation (CBLO) markets. CCIL plays the role of a

central counterparty whereby, the contract between buyer and seller gets replaced by two new

contracts - between CCIL and each of the two parties. This process is known as ‘Novation’.

Through novation, the counterparty credit risk between the buyer and seller is eliminated with

CCIL subsuming all counterparty and credit risks. In order to minimize the these risks, that it

exposes itself to, CCIL follows specific risk management practices which are as per

international best practices.In addition to the guaranteed settlement, CCIL also provides non

guaranteed settlement services for National Financial Switch (Inter bank ATM transactions)

and for rupee derivatives such as Interest Rate Swaps.

CCIL is also providing a reporting platform and acts as a repository for Over the Counter

(OTC) products.

OTHER PAYMENT SYSTEMSOTHER PAYMENT SYSTEMS

Pre-paid Payment SystemsPre-paid Payment Systems

Pre-paid instruments are payment instruments that facilitate purchase of goods and services

against the value stored on these instruments. The value stored on such instruments represents

the value paid for by the holders by cash, by debit to a bank account, or by credit card. The

pre-paid payment instruments can be issued in the form of smart cards, magnetic stripe cards,

internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers, etc.

Subsequent to the notification of the PSS Act, policy guidelines for issuance and operation of

prepaid instruments in India were issued in the public interest to regulate the issue of prepaid

payment instruments in the country.

The use of pre-paid payment instruments for cross border transactions has not been permitted,

except for the payment instruments approved under Foreign Exchange Management Act,1999

(FEMA).

Mobile Banking SystemMobile Banking System

Mobile phones as a medium for providing banking services have been attaining increased

importance. Reserve Bank brought out a set of operating guidelines on mobile banking for

banks in October 2008, according to which only banks which are licensed and supervised in

India and have a physical presence in India are permitted to offier mobile banking after

obtaining necessary permission from Reserve Bank. The guidelines focus on systems for

security and inter-bank transfer arrangements through Reserve Bank's authorized systems. On

the technology front the objective is to enable the development of inter-operable standards so

as to facilitate funds transfer from one account to any other account in the same or any other

bank on a real time basis irrespective of the mobile network a customer has subscribed to.

ATMs / Point of Sale (POS) Terminals / Online TransactionsATMs / Point of Sale (POS) Terminals / Online Transactions

Presently, there are over 61,000 ATMs in India. Savings Bank customers can withdraw cash

from any bank terminal up to 5 times in a month without being charged for the same. To

address the customer service issues arising out of failed ATM transactions where the

customer's account gets debited without actual disbursal of cash, the Reserve Bank has

mandated re-crediting of such failed transactions within 12 working day and mandated

compensation for delays beyond the stipulated period. Furthermore, a standardised template

has been prescribed for displaying at all ATM locations to facilitate lodging of complaints by

customers.

There are over five lakh POS terminals in the country, which enable customers to make

payments for purchases of goods and services by means of credit/debit cards. To facilitate

customer convenience the Bank has also permitted cash withdrawal using debit cards issued

by the banks at PoS terminals.

The PoS for accepting card payments also include online payment gateways. This facility is

used for enabling online payments for goods and services. The online payment are enabled

through own payment gateways or third party service providers clled intermediaries. In

payment transactions involving intermediaries, these intermediaries act as the initial recipient

of payments and distribute the payment to merchants. In such transactions, the customers are

exposed to the uncertainty of payment as most merchants treat the payments as final on

receipt from the intermediaries. In this regard safeguard the interests of customers and to

ensure that the payments made by them using Electronic/Online Payment modes are duly

accounted for by intermediaries receiving such payments, directions were issued in

November 2009. Directions require that the funds received from customers for such

transactions need to be maintained in an internal account of a bank and the intermediary

should not have access to the same.

Further, to reduce the risks arising out of the use of credit/debit cards over internet/IVR

(technically referred to as card not present (CNP) transactions), Reserve Bank mandated that

all CNP transactions should be additionally authenticated based on information not available

on the card and an online alert should be sent to the cardholders for such transactions.

National Payments Corporation of IndiaNational Payments Corporation of India

The Reserve Bank encouraged the setting up of National Payments Corporation of India

(NPCI) to act as an umbrella organisation for operating various Retail Payment Systems

(RPS) in India. NPCI became functional in early 2009. NPCI has taken over National

Financial Switch (NFS) from Institute for Development and Research in Banking Technology

(IDRBT). NPCI is expected to bring greater efficiency by way of uniformity and

standardization in retail payments and expanding and extending the reach of both existing

and innovative payment products for greater customer convenience.

Oversight of Payment and Settlement SystemsOversight of Payment and Settlement Systems

Oversight of the payment and settlement systems is a central bank function whereby the

objectives of safety and efficiency are promoted by monitoring existing and planned systems,

assessing them against these objectives and, where necessary, inducing change. By

overseeing payment and settlement systems, central banks help to maintain systemic stability

and reduce systemic risk, and to maintain public confidence in payment and settlement

systems.

The Payment and Settlement Systems Act, 2007 and the Payment and Settlement Systems

Regulations, 2008 framed thereunder, provide the necessary statutory backing to the Reserve

Bank of India for undertaking the Oversight function over the payment and settlement

systems in the country.

Lender of Last ResortLender of Last Resort

As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last resort’. It can

come to the rescue of a bank that is solvent but faces temporary liquidity problems by

supplying it with much needed liquidity when no one else is willing to extend credit to that

bank. The Reserve Bank extends this facility to protect the interest of the depositors of the

bank and to prevent possible failure of the bank, which in turn may also affect other banks

and institutions and can have an adverse impact on financial stability and thus on the

economy.

RBI:

Enables smooth and swift clearing and settlements of inter-bank transactions Provides

efficient means of funds transfer for all banks Enables banks to maintain their accounts with

RBI for statutory reserve requirements and maintenance of transaction balances Acts as

lender of last resort ( LORL) Reserve Bank maintains current account of all other banks and

provides them facility to maintain cash reserves and also to carry out inter-bank transactions.

RBI provides the Real Time Gross Settlement System (RTGS) facility to the banks for inter-

bank transactions. Statuary Reserves As per the Banking Regulations Act 1949, Banks have

to keep a portion of their demand and time liabilities as cash reserves with the Reserve Bank,

thus necessitating a need for maintaining accounts with the Bank. Earlier, (originally in the

BR act) it was as follows – 5% of demand liabilities and 2% of time liabilities. But now it is

the portion of Net Demand and Time Liabilities (NDTL). So, the RBI provides banks with

the facility of opening accounts with itself. This is the ‘Banker to Banks’ function of the

Reserve Bank, which is delivered through the Deposit Accounts Department (DAD) of RBI

at regional offices. RBI continuously monitors the transactions and operations of these

accounts so that defaults don’t take place. Lender of the Last Resort The banks can borrow

from the RBI by keeping eligible securities as collateral or any other arrangement and at the

time of need or crisis, they approach RBI for financial help. Thus RBI works as Lender of the

Last Resort (LORL) for banks.

Reserve Bank as Banker to BanksReserve Bank as Banker to Banks

The Reserve Bank continuously monitors operations of these accounts to ensure that defaults

do not take place. Among other provisions, the Reserve Bank stipulates minimum balances to

be maintained by banks in these accounts. Since banks need to settle transactions with each

other occurring at various places in India, they are allowed to open accounts with different

regional offices of the Reserve Bank. The Reserve Bank also facilitates remittance of funds

from a bank’s surplus account at one location to its deficit account at another. Such transfers

are electronically routed through a computerised system called e-Kuber. The computerisation

of accounts at the Reserve Bank has greatly facilitated banks’ monitoring of their funds

position in various accounts across different locations on a real-time basis.

In addition, the Reserve Bank has also introduced the Centralised Funds Management System

(CFMS) to facilitate centralised funds enquiry and transfer of funds across DADs. This helps

banks in their fund management as they can access information on their balances maintained

across different DADs from a single location. Currently, 75 banks are using the system and

all DADs are connected to the system. As Banker to Banks, the Reserve Bank provides short-

term loans and advances to select banks, when necessary, to facilitate lending to specific

sectors and for specific purposes. These loans are provided against promissory notes and

other collateral given by the banks.

RBI is bank of all banks in India. As a banker of banks,

Banks are required to maintain a portion of their demand and time liabilities as cash reserves

with the Reserve Bank. For this purpose, they need to maintain accounts with the Reserve

Bank. They also need to keep accounts with the Reserve Bank for settling inter-bank

obligations, such as, clearing transactions of individual bank customers who have their

accounts with different banks or clearing money market transactions between two banks,

buying and selling securities and foreign currencies.

In order to facilitate a smooth inter-bank transfer of funds, or to make payments and to

receive funds on their behalf, banks need a common banker. By providing the facility of

opening accounts for banks, the Reserve Bank becomes this common banker, known as

‘Banker to Banks’ function. The function is performed through the Deposit Accounts

Department (DAD) at the Reserve Bank’s Regional offices. The Department of Government

and Bank Accounts oversees this function and formulates policy and issues operational

instructions to DAD.

CONCLUSIONCONCLUSION

The Reserve Bank of India i.e RBI is the central bank of our country. It was established in the

year 1935, under the Reserve Bank of India Act, 1934.

Being a central bank, RBI has control over the entire currency and banking system in India. It

acts as a banker to both the state and the central government in India. It has the exclusive

right to issue currency, notes in the country.

The Reserve Bank of India has to act as a Bankers' Bank. All the commercial banks operating

in India are mandatory to keep a cash reserve with RBI. Further, they have to maintain their

current accounts with it.

As a banker's bank, the Reserve Bank of India facilitates the clearing of cheques between

commercial banks and helps in inter bank transfer of funds.

Being Bankers' bank, the Reserve Bank of India can grant financial help to scheduled banks.

It also acts as "Lender of Last Resort" by providing emergency advances to banks.

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