Key Takeaways: Scope of RBI Act,1934 Banking functions and powers of RBI Provisions relating to NBFCs Regulation of derivative instruments Monetary Policy and inflation target Other provisions relating to functioning of banking system

1. Reserve Bank of India Act, 1934 –
Part I
CA Divakar Vijayasarathy

2. Research Credits
Gracelin Lita
CA Jugal Gala

3. Legends used in the Presentation
BOD Board of Directors
CG Central Government
CoR Certificate of Registration
FI Financial Institution
FM Finance Minister
GoI Government of India
IBRD International Bank for Reconstruction and
Development
IDBI Industrial Development Bank of India
IMF International Monetary Fund
IRBI Industrial Reconstruction Bank of India
IRDA Insurance Regulatory and Development
Authority
LIC Life Insurance Corporation
MD Managing Director
MPC Monetary Policy Committee
NABARD National Bank for Agriculture and Rural
Development
PFRDA Pension Fund Regulatory and Development
Authority
RBI Reserve Bank of India
SIDBI Small Industries Development Bank of India
SBI State Bank of India
SEBI Securities Exchange Board of India
SFC State Financial Corporation
SG State Government
UTI Unit Trust of India

4. Presentation Schema
Introduction Incorporation and Capital Management and Business
Transactions in Bill of
Exchange and Promissory
Notes
Business which RBI would
not Transact
Central Banking Functions
Returns and Penalties

5. Introduction
The Reserve Bank of India (RBI) was established on April 1st, 1935 in accordance with the provisions of the
Reserve Bank of India Act, 1934
The RBI Act, 1934 extends to the whole of India
The Act contains 11 chapters with around 60 sections governing the regulation of the currency and
credit system of India
The RBI has issued Directions, Regulations and Rules in accordance with the powers vested under this
Act, from time to time, for better supervision and regulation of the financial stability of the economy
Chapter I – Definitions have been incorporated wherever the context required

6. Chapter II
Incorporation, Capital,
Management and Business

7. Incorporation, Capital and Offices of RBI
Section Provision Description
3(2) Incorporation RBI shall be a body corporate
with perpetual succession and a
common seal, and shall by the
said name sue and be sued
4 Capital The capital of the bank shall be
Rs. 5 crores
6 Offices,
Branches and
Agencies
 RBI shall establish offices in
Bombay (Mumbai), Calcutta
(Kolkata), Delhi and Madras
(Chennai) and may establish
branches or agencies in any
other place in India (with the
previous sanction of the CG
for elsewhere apart from
these locations)
Currently, RBI has offices at 31 locations in India

8. Management – Sec 7
Central Government
Reserve Bank of India
Central Board
of Directors*
Governor/ Deputy Governor**
nominated by him in this behalf
shall also have such powers*
Directions
[after consultation with
Governor of the Bank] General Superintendence &
Direction of the Affairs and
Business of the Bank entrusted to
Subject to any directions
Unless expressly provided in
regulations made by Central Board
*Central Board and Governor shall exercise all powers which may be exercised by the RBI
TO
**The Governor may, either by general or special order, delegate his powers to a Deputy Governor, as he may deem
necessary for the efficient administration of the functions of the Bank – Sec 54A
Shall with the previous
sanction of CG, make all
such regulations which are
necessary for the purpose
of giving effect to the
provisions of this Act and
for the efficient conduct of
the business of the RBI [Sec
58]

9. Composition of the Central Board and Term of
Office – Sec 8
Central Board
2 Government
Officials
10 Directors
4 Directors, one from each
of the 4 Local Boards [Sec 9]
A Governor and not more
than 4 Deputy Governors
Appointed/Nominated by CG
Hold office for maximum 5 years and
eligible for re-appointment
Hold office for maximum 4 years and
eligible for re-appointment
Note: Maximum term of office: 2
terms i.e. 8 years continuously or
intermittently
Salaries and allowances as
determined by Central Board
[approved by CG]
Shall devote whole time to affairs of
the Bank
CG, if it considers it necessary in public interest may permit the
Governor/Deputy Governor to undertake part-time honorary work
CG may in consultation with RBI, appoint a Deputy Governor as the
Chairman of NABARD
Shall hold office
during the pleasure
of the CG
8(1)(a) 8(1)(b) 8(1)(c) 8(1)(d)
Exceptions
Note: Deputy Governor/
Director nominated by CG U/s
8(1)(d) may attend any meeting
of the Board but shall not vote
[Except in the absence of the
Governor, the Deputy Governor
may vote for him]

10. Local Boards – Sec 9
Local Board
For each of the four areas specified*
Objective: To represent territorial
and economic interests and
interests of co-operative and
indigenous banks
Duties: Shall advise the Central
Board on such matters and
perform such duties as the Central
Board may delegate to it
Members 5 [appointed by CG]
Chairman 1 [elected from amongst
themselves]
Term of Office 4 years and eligible for re-
appointment
Maximum no.
of terms
2 [i.e. 8 years continuously
or intermittently]
*Northern Area Jammu & Kashmir, Punjab, Haryana, Himachal Pradesh, Rajasthan and Uttar Pradesh,
Chandigarh and Delhi
Western Area Goa, Gujarat, Madhya Pradesh and Maharashtra, Dadra and Nagar Haveli and Daman and Diu
Eastern Area Arunachal Pradesh, Assam, Bihar, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Sikkim,
Tripura and West Bengal and Andaman and Nicobar Islands
Southern Area Andhra Pradesh, Karnataka, Tamil Nadu, Kerala, Pondicherry and Lakshadweep

11. Disqualifications of Directors and Members
of Local Boards – Sec 10
The following persons shall not be appointed as a Director or Member of Local Board
A salaried Government
official*
An insolvent or a person who
has suspended payment/has
compounded with his
creditors
A lunatic or a person of
unsound mind
An officer or employee
of any bank*
A Director of a banking
company or of a co-
operative bank*
*Such restrictions not applicable to the Governor/Deputy Governor or a Director appointed under Sec 8(1)(d) [Two
Government officials who are appointed by CG as directors of Central Board]
Note: No two persons who are partners of the same mercantile firm, or are Directors of the same private company,
or one of whom is the general agent of or holds a power of procuration from the other, or from a mercantile firm of
which the other is a partner, may be Directors or members of the same Local Board at the same time

12. Meetings of the Central Board – Sec 13
Meeting of Central Board
At least 6 times in each year and once in each quarter
Mandatory
Any time upon requisition of 4 Directors
Governor shall conduct a meeting accordingly
If Governor unable to attend
the meeting
Deputy Governor on his behalf
 Shall preside the meeting
 Vote on behalf of the Governor
 Shall have a casting vote in the
event of equality of votes

13. Business which the RBI may transact – Sec
17
Transaction of Business Max. Repayment
period
Security
Loans and advances to
Local Authorities,
Scheduled Banks, State
Co-operative banks and
State Financial
Corporations
Repayable on
demand/ within 90
days
Stocks, funds and securities (other than immovable property) in
which a trustee is authorized to invest trust money by any Act of
Parliament of the United Kingdom/ by any law in India
Gold/Silver/Documents of title to the same
Such bills of exchange and promissory notes* as are eligible for
purchase or rediscount by the Bank or as are fully guaranteed as to
the repayment of the principal and payment of interest by a SG
Promissory notes of an Scheduled/ State Co-operative bank,
supported by documents of title to goods
*Loans and advances made against the security of bills of exchange and promissory notes arising out of any
transaction relating to the export of goods from India shall be repayable on demand or on the expiry of fixed periods
not exceeding 180 days
Grant of Loans and Advances

14. Contd…
Transaction of Business Max. Repayment Period Security
Loans and advances to any
Scheduled Bank/ State Co-
operative Bank
Repayable on demand/ on
expiry of fixed periods not
exceeding 180 days
Against Promissory Notes of such bank*
*Declaration in writing to be made by the borrowing bank to the effect that,
It holds bills of exchange arising out
of any transaction relating to the
export of goods from India, of a value
not less than the amount of such
loans or advances -
Drawn in India and on any place in any country outside India which is a
member of the IMF or in any other country notified in this behalf by RBI in
the Gazette of India
Maturing not later than 180 days from the date of the loan or advance,
and it will, so long as any part of such loans and advances remains unpaid,
continue to hold such bills of exchange of a value not less than the amount
of such loans or advances outstanding for the time beingOR
It has granted a pre-shipment loan or
advance to an exporter or any other
person in India in order to enable him
to export goods from India -
The amount of the loan or advance drawn and outstanding at any time
being not less than the outstanding amount of the loan or advance
obtained
It has made loans and advances for bona fide commercial or trade transactions or for financing agricultural
operations or the marketing of crops or for other agricultural purposes
OR

15. Contd…
Transaction of Business Max. Repayment
period
Security Max. amount to be lent
Loans and advances to any
financial institution
Repayable on
demand or within
90 days
Securities of CG/SG
-
Repayable within
18 months
Securities of CG/SG of any maturity or
against bonds or debentures issued by
that financial institution and
guaranteed by the CG/SG and maturing
within a period of 18 months
Amount of loans and
advances shall not
exceed at any time in
aggregate 60% of the
paid-up share capital
Loans and advances to the UTI Repayable on
demand or within
90 days
Stocks, funds and securities (other than
immovable property) in which a trustee
is authorised to invest trust money by
any law in India
-
Repayable on
demand or within
18 months
Bonds of the UTI issued with the
approval of and guaranteed by the CG -
Loans and advances to UTI for
the purpose of any scheme
other than the first unit scheme
under the UTI Act, 1963
- Such other property of the UTI as may
be specified by RBI in this behalf
-

16. Contd..
Transaction of
Business
Max. Repayment period Security Approval and Max. amount
to be lent
Loans and advances
to State Financial
Corporation
Repayable on expiry of fixed
periods not exceeding 18
months
Securities of CG/SG of any maturity  Approval of SG
 Amount of loans and
advances shall not
exceed at any time in
aggregate twice the
paid-up share capital
Bonds or debentures issued by that
Corporation and guaranteed by the
SG concerned and maturing within a
period not exceeding 18 months
Loans and advances
to Industrial Finance
Corporation of India
Repayable on demand or on
expiry of fixed periods not
exceeding 90 days
Securities of CG/SG
-Repayable on expiry of fixed
periods not exceeding 18
months
Securities of CG of any maturity or
against bonds or debentures issued
by that Corporation and guaranteed
by the CG and maturing within a
period not exceeding 18 months
Loans and advances
to a Warehousing
Corporation
Repayable on demand or within 90 days against securities of CG/SG OR
Repayable within 18 months against securities of CG/SG of any maturity or against bonds or
debentures issued by that Corporation and guaranteed by the CG/SG and maturing within a period
not exceeding 18 months

17. Contd…
Transaction of Business Approval and Terms and
Conditions
Purpose of the Loan/Advance
Loans and advances to
Scheduled banks/Exim
bank*/IRBI/SIDBI/Industrial
Finance Corporation and any
other financial institution
 To be approved by the CG
 Shall be repayable on
demand or otherwise and
against such security and on
such other terms and
conditions as may be
approved in this behalf by
the Central Board
Enabling such banks or financial institutions to
purchase foreign exchange from RBI for the purpose
of financing the import of capital goods or for such
other purposes as may be approved by the CG
Transaction of Business Approval and Security Declaration in writing by the borrowing bank to the
effect that:
Loans and advances in foreign
currencies to Scheduled
banks/Exim
bank/Reconstruction
bank/Small Industries
bank/Industrial Finance
Corporation/ State Financial
Corporation and any other
financial institution
 Approved by CG
 Against promissory notes of
such bank/financial
institution
It has made loans and advances in foreign currencies
for financing international trade or for the import of
capital goods or for such other purposes as may be
approved by the CG (AND)
That the amount of loans or advances so made and
outstanding at any time will not be less than the
outstanding amount of the loans or advances
obtained by it from RBI
*Export-Import Bank of India established under Export-Import Bank of India Act, 1981

18. Contd…
Transaction of
Business
Max. Repayment
period
Security
Loans and Advances
to National Housing
Bank
Repayable on demand
or within 18 months
Stocks, funds and securities (other than immovable property) in which
a trustee is authorised to invest trust money by any law in India OR
On such other terms and conditions as specified by RBI
Loans and Advances
to SIDBI/Exim
Bank/IRBI
Repayable on demand
or within 90 days
Stocks, funds and securities (other than immovable property) in which
a trustee is authorised to invest trust money by any law in India
Bills of exchange or promissory notes, arising out of bona fide
commercial or trade transactions bearing two or more good signatures
and maturing within five years from the date of such loan or advance
Advances to CG/SG Repayable not later
than 3 months
-
Loans and Advances to Deposit Insurance Corporation and generally assisting the Corporation in such manner and on
such terms as may be determined by the Central Board
Loans and Advances to National Housing Bank and generally assisting the Corporation in such manner and on such
terms as may be determined by the Central Board
Loans and Advances to, and the purchasing of bonds and debentures of, the Exim Bank/IRBI/SIDBI out of the National
Industrial Credit (Long Term Operations) Fund
Loans and Advances to, and the purchasing of bonds and debentures of, the National Housing Bank out of the National
Housing Credit (Long Term Operations) Fund

19. Transactions in Bill of Exchange and
Promissory Notes
Transaction of Business Signatories and Approval Maturity Period
Purchase, Sale
and Rediscount
of bills of
exchange and
promissory
notes, drawn on
and payable in
India AND
Arising out of bona fide
commercial or trade
transactions
-Bearing 2/more good
signatures [One of which of a
Scheduled Bank/State Co-
operative bank/any financial
institution, which is
predominantly engaged in the
acceptance or discounting of
bills of exchange and promissory
notes]
-Approval by RBI
Transaction relating to export
of goods from India – within
180 days*
Any other case – within 90
days*
Drawn or issued for the
purpose of financing
agricultural operations or
the marketing of crops
Within 15 months*
Issued or drawn for the
purpose of holding or
trading in securities of
CG/SG
Bearing signature of a
Scheduled bank
Within 90 days*
*from the date of purchase/rediscount exclusive of days of grace

20. Contd…
Transaction of Business Signatories and Approval Maturity Period
Purchase, Sale and
Rediscount of bills of
exchange and promissory
notes, drawn on and
payable in India AND
Drawn or issued for
the purpose of
financing the
production or
marketing activities
of cottage and small
scale industries
approved by the Bank
-Bearing 2/more good signatures [One of
which of a State Co-operative bank/ SFC/
any financial institution, which is
predominantly engaged in the
acceptance or discounting of bills of
exchange and promissory notes]
-Approval by RBI
Within 12 months*
Purchase and sale of foreign exchange from and
to scheduled banks
- -
Purchase, Sale and Rediscount of Bills of Exchange (including Treasury bills) drawn in or on
any place in any country outside India which is a member of the IMF**
Bona fide transaction
relating to export of
goods from India –
within 180 days
Any other case –
within 90 days
**No such purchase, sale or rediscount shall be made in India except with a scheduled bank or a State Co-operative bank
*from the date of purchase/rediscount exclusive of days of grace, provided that the payment of the principal and interest
of such bills of exchange or promissory notes is fully guaranteed by the SG

21. Other Businesses which the RBI may
transact
Transaction of Business
Purchase and sale of securities of CG/SG of any maturity/securities of Local Authority – securities should be fully
guaranteed by such authorities
Purchase and sale of shares of NABARD, Deposit Insurance Corporation, State Bank or any other bank or financial
institution
Promoting, establishing, supporting or aiding any financial institution, whether as its subsidiary or otherwise
Keeping of deposits with the State Bank for such specific purposes as may be approved by the CG in this behalf
Accepting of money on deposit without interest from and collection of money for, the CG/SG, Local authorities,
banks and any other persons
Accepting of money as deposits, repayable with interest, from banks or any other person under the Standing Deposit
Facility Scheme
Issue of demand drafts, telegraphic transfers and other kinds of remittances made payable at its own offices or
agencies and the purchase of telegraphic transfers, and the making, issue and circulation of bank post bills
Dealing in derivatives and in any other financial instrument (with approval of the Central Board)
Annual contributions to National Rural Credit (Long Term Operations) and (Stabilisation) Fund
Contributing to the initial capital of the UTI [UTI was established in 1964 with an initial capital of Rs.5 crores which
was raised from RBI, LIC, SBI and its subsidiaries, scheduled banks and other financial institutions]

22. Contd…
Transaction of Business Purpose
Acting as agent for CG/SG/Local
authority/Industrial Finance
Corporation/any other body
corporate/Government of any
such country outside India or any
such person/authority as may be
approved by CG in this behalf
In the transaction of any of the following kinds of business:
1) Purchase and sale of gold or silver or foreign exchange
2) Purchase, sale, transfer and custody of bills of exchange, securities or shares in
any company
3) Collection of the proceeds of any securities or shares [Principal, interest or
dividends]
4) Remittance of such proceeds, at the risk of the principal, by bills of exchange
payable either in India or elsewhere
5) Management of public debt
6) Issue and management of bonds and debentures
Acting as agent for the CG 1) In guaranteeing the due performance by any small scale industrial concern,
of its obligations to any bank or other financial institution
2) In administering any scheme for subsidising the rate of interest or other
charges in relation to any loans or advances provided for the purpose of
financing or facilitating any export from India
Custody of monies, securities and other articles of value, and the collection of the proceeds, whether principal,
interest or dividends, of any such securities
Sale and realisation of all property, whether movable or immovable, which comes into the possession of RBI in
satisfaction of any of its claims

23. Contd….
Transaction of Business
Purchase and sale of gold or silver coins and gold and silver bullion and foreign exchange and the opening of a gold
account with the principal currency authority of any foreign country or any institution formed by such authority or the
Bank for International Settlements*
Purchase and sale of securities issued by the Government or institution of any country outside India and expressed to
be payable in a foreign currency or any international or composite currency unit, being in the case of purchase by RBI
maturing within a period of 10 years from the date of purchase
Lending or borrowing of securities of the CG/SG or of such securities of a local authority as may be specified in this
behalf by the CG or foreign securities
Dealing in repo or reverse repo [Lending or borrowing of funds by way of repo or reverse repo shall not be subject to
any limitation contained in Section 17]
 “Repo" means an instrument for borrowing funds by selling securities of the CG/SG or such specified securities of
Local authority or foreign securities, with an agreement to repurchase the said securities on a mutually agreed
future date at an agreed price which includes interest for the funds borrowed
 “Reverse repo" means an instrument for lending funds by purchasing securities of the CG/SG or such specified
securities of Local authority or foreign securities, with an agreement to resell the said securities on a mutually
agreed future date at an agreed price which includes interest for the funds lent
*Bank for International Settlements means the body corporate established with the said name under the law of
Switzerland in pursuance of an agreement dated the 20th January, 1930, signed at the Hague

24. Contd…
Transaction of Business Approval and
Security
Declaration in writing by the borrowing bank to the effect
that:
Loans and advances in foreign
currencies to Scheduled
banks/Exim bank/Reconstruction
bank/Small Industries
bank/Industrial Finance
Corporation/ State Financial
Corporation and any other
financial institution
 Approved by
CG
 Against
promissory
notes of such
bank/financia
l institution
It has made loans and advances in foreign currencies for
financing international trade or for the import of capital goods
or for such other purposes as may be approved by the CG
(AND)
That the amount of loans or advances so made and
outstanding at any time will not be less than the outstanding
amount of the loans or advances obtained by it from RBI
Opening of an account with an office outside India of any bank and acting as an agent or correspondent of, any bank
incorporated outside India, or the principal currency authority of any country or any institutions formed by such
authority or any international or regional bank and the investing of the funds in the shares and securities of any such
banks and institutions
Participation in any arrangement for the clearing and settlement of any amounts dues from, or to, any person or
authority on account of the external trade of India and becoming a member of any international or regional clearing
union of central banks, monetary or other authorities, or being associated with any such clearing arrangements

25. Contd..
Transaction of Business
Borrowing of money for a period not exceeding 1 month for the purposes of the business of the Bank and giving of
security for money so borrowed [ If in India – from a Scheduled Bank only; if outside India – from a bank which is the
principal currency authority of that country]
Making and issue of bank notes
Exercise of powers and functions and the performance of duties entrusted under this Act
Providing of facilities for training in banking and for the promotion of research which may facilitate the exercise by
RBI of its powers and functions or the discharge of its duties
All such matters and things as may be incidental to or consequential upon the exercise of its powers or the
discharge of its duties under this Act

26. Power of Direct Discount and Advancing
Loans – Sec 18
Make loans/advances to a State Co-operative Bank/Co-operative society/any other person repayable on demand
or within 90 days and on such terms and conditions as specified by RBI
Purchase, sell or discount any bill of exchange or promissory note though such bill or promissory note is not
eligible for purchase or discount by RBI,
RBI may without considering the limitation in Section 17,
For the purpose of regulating credit in the interests of Indian trade, commerce, industry and agriculture,
When in the opinion of the Bank, a special occasion has arisen,

27. Overriding Section – Sec 18A
Sec 18A provides overriding effect over the provisions of any other law that deals with validity of loan or advance
Any loan or advance granted by the Bank in pursuance with this Act shall not be questioned on grounds of non-
compliance with provisions of any other law
However, the above shall not apply in the case of a loan/advance obtained by any company or co-
operative, where its memorandum does not empower to obtain loans or advances
and such amount shall be held by in trust for RBI, until repayment
shall be utilised only for the purposes of repayment to RBI
any such sum received by the borrowing bank on realisation of loans or advances granted by the borrowing bank
out of the funds obtained by it from RBI
loans granted to Scheduled Bank/ State Co-operative bank/ any person under Sec 18,
Where loans and advances are granted by the RBI to a Scheduled bank/State Co-operative Bank under Sec 17(3A)
and (3B) against the declaration made by it with respect to holding of bills of exchange and lending of loans for
specified purposes or,

28. Business which RBI may not transact – Sec
19
Except when specifically provided in Sections 17 (Business which the RBI may transact), 18 (Direct Discount), 42
(Maintenance of cash reserves with RBI by Scheduled banks), 45 (Appointment of specified banks as agents of RBI),
RBI may not:
Engage in trade or have a direct interest in any commercial, industrial or other undertaking except such interest as
it may in any way acquire in the course of the satisfaction of any of its claims [All such interests shall be disposed of
at the earliest possible moment]
Purchase the shares of any banking company or of any other company, or grant loans upon the security of any such
shares
Advance money on mortgage of/on the security of, immovable property or documents of title relating thereto, or
become the owner of immovable property [Except when it is necessary for its own business premises and
residences for its officers and servants]
Make loans or advances (apart from mentioned in previous slides)
Draw or accept bills payable otherwise than on demand
Allow interest on deposits or current accounts

29. Chapter III
Central Banking Functions

30. Banker and Debt Manager to Government - Sec 20,
21, 21A
RBI shall undertake to manage the banking
transactions of CG and SG (upon agreement)
RBI shall carry out its exchange, remittance and
other banking operations, including the
management of the public debt of, and the issue of
any new loans by, the Union/State
The Governments shall deposit, free of interest, all
of its cash balances with RBI
The CG shall entrust RBI with all such business
mentioned above
However, CG may carry on money transactions at
places where RBI has no branches/agencies and
the CG may hold at such places such balances as it
may require
 Currently, RBI acts as banker to all the State
Governments in India (including Union Territory of
Puducherry), except Sikkim
 For Sikkim, it has limited agreement for
management of its public debt
 Under a scheme introduced in 1976, every ministry
and department of the Central Government has been
allotted a specific public sector bank for handling its
transactions
 Hence, the RBI does not handle government’s day-
to-day transactions as before, except where it has
been nominated as banker to a particular ministry or
department
Banking Functions Public Accounts Departments at
offices/branches of RBI
Management of
public debt
including flotation
of new loans
Internal Debt Management
Department at the Central
Office and Public Debt Office at
offices/branches of RBI

31. Issue of Bank Notes – Sec 22 to 26 and 29
RBI shall have the sole right to issue bank notes in India [The design, form and material of bank notes shall be such as
may be approved by the CG after consideration of the recommendations made by Central Board]
The issue of bank notes shall be conducted in an Issue Department which shall be separated and kept wholly distinct
from the Banking Department, and the assets of the Issue Department shall not be subject to any liability other than the
liabilities of the Issue Department as defined in Section 34
The Issue Department shall not issue bank notes to the Banking Department or to any other person except in exchange
for other bank notes or for such coin, bullion or securities as are permitted by this Act to form part of the Reserve
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 CG
RBI shall not be liable to the payment of any stamp duty, in respect of bank notes issued by it
Denomination of notes
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 [specified by CG] May declare that, 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
specified in the notification [w.e.f the date of notification]
Direct the non-issue or the discontinuance of issue of bank
notes of such denominational values as it may specify in this
behalf
However, the CG may, on the recommendation of Central
Board,
*Legal tender is the legally recognized money within
a given country

32. Demonetisation in India
January, 1946
The currency note of Rs.1000 and
Rs.10,000 were removed from
circulation
Both the notes were re-introduced
in 1954
January, 1978
The then CG announced the
currency ban taking Rs.1000,
Rs.5000 and Rs.10,000 out of
circulation
Denomination Bank Notes
(Demonetisation) Act, 1978
1000-rupee note was re-introduced
in 2000
November 8th,
2016
The CG announced demonetization
of 500-rupee and 1000-rupee notes
The new 500-rupee note was put into
circulation since November 10th,
2016 [part of Mahatma Gandhi
(New) Series]
Denomination Bank Notes
(Demonetisation) Act, 1978

33. Re-issue of Notes, Recovery of Notes
lost, stolen, etc. - Sec 27, 28
The RBI shall not re-issue bank notes which are torn, defaced or excessively soiled
No person shall of right be entitled to recover from the CG/RBI, the value of any lost, stolen, mutilated or
imperfect bank note
• However, RBI may prescribe the circumstances and the conditions subject to which the value of such currency
notes or bank notes may be refunded as of grace and such rules shall be laid before the Parliament
The RBI vide the Reserve Bank of India (Note Refund) Rules, 2009, extends facilities to the public for exchanging cut
and mutilated notes at all its Issue offices and currency chest branches of commercial banks
 Soiled note means a note which, has become dirty due to usage and also includes a two piece note pasted
together wherein both the pieces presented belong to the same note, and form the entire note
 Mutilated note means a note of which a portion is missing or which is composed of more than two pieces
 Imperfect note means any note, which is wholly or partially, destroyed, shrunk, washed, altered or illegible but
does not include a mutilated note

34. Special Bank Notes and Special One-Rupee
Notes – Sec 28A
The RBI can issue special notes which are different in design, form, and material solely for the purpose of
controlling the circulation of bank notes outside India, of denominational values of five rupees, ten rupees, and
one hundred rupees
The CG can also issue one rupee note of the approved design, form and material under the category of special
notes
Neither the special bank notes nor the special one-rupee notes shall be legal tender in India
The Special one-rupee note shall be deemed to be included in the expression “rupee coin” for all the purposes of
this Act except section 39 (Obligation to supply different forms of currency – discussed in further slides) , but shall
be deemed not to be a currency note for any of the purposes of this Act

35. Powers of CG to Supersede Central Board
–Sec 30
When such an action is taken, the CG shall present a full report of the circumstances leading to such action and of
the action taken, to the Parliament within 3 months from the issue of the notification superseding the Board
And thereafter the general superintendence and direction of the affairs of the RBI shall be entrusted to such
agency as the CG may determine
The CG may by notification, declare the Central Board to be superseded,
If in the opinion of the CG, the RBI fails to carry out any of the obligations imposed on it under this Act,

36. Issue of Demand Bills and Notes – Sec 31
Only RBI and CG (where expressly authorized by this Act) shall draw, accept, make or issue any bill of exchange, hundi,
promissory note or engagement for the payment of money payable to bearer on demand, or borrow, owe or take up
any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such person
Only RBI and CG (where expressly authorized by this Act) shall make or issue any promissory note expressed to be
payable to the bearer of the instrument
The CG may authorize any scheduled bank to issue electoral bond [Bond issued by any scheduled bank under the
scheme as may be notified by the CG]

37. Assets and Liabilities of the Issue Department –
Sec 33, 34, 37
The assets of the Issue Department shall consist of the following to such aggregate amount as is not less than the
total liabilities of the Issue Department
Gold coin Gold bullion Foreign securities Rupee Coin Rupee securities
Aggregate value of Gold coin, gold
bullion and foreign securities held –
Not be less than Rs.200 crores
Aggregate value of Gold coin and
Gold bullion – Not less than
Rs.115 crores
Remainder of assets shall be held in
Rupee coin, GoI rupee securities of any maturity
Promissory notes drawn by NABARD for loans and advance made to it by RBI
Bills of exchange and promissory notes payable in India as are eligible for purchase by the
RBI under Sec 17(2)(a),(b),(bb) [Bills of exchange and promissory notes arising from bona
fide commercial and trade transactions, drawn for the purpose of financing agricultural
operations or production and marketing activities of cottage and small scale industries] and
Sec 18(1) [Direct Discount]
 Gold coin & Gold bullion
– At a price not exceeding
international market
price
 Rupee Coin - At Face
value
 Securities – At rates not
exceeding market rates
As on June 30th, 2019
Valuation
 Gold coin & bullion – Rs.792.04 billion
 Rupee coin – Rs.8.28 billion
 Foreign investments – Rs.20,887.65 billion
Sec 33(2)

38. Contd..
At least 17/20ths i.e. 85% of the gold coin and gold bullion held as assets shall be held in India and they shall be in
held in the custody of the RBI or its agencies [Gold belonging to RBI which is any other bank/mint/treasury/in transit
may be reckoned as part of its assets]
Foreign Securities mean Securities of certain kinds* payable in the currency of any foreign country which is a member
of the IMF and any drawing rights representing a liability of the IMF
The liabilities of the Issue Department shall be an amount equal to the total of the amount of the currency notes of
the Government of India and bank notes for the time being in circulation [In 2018-19, liabilities (notes issued) were
Rs.21,687.97 billion]
*Such securities shall include:
- balances with the bank which is the principal currency authority of that foreign country
- any other balances or securities in foreign currency maintained with or issued by the IMF, IBRD, the International
Development Association or the International Finance Corporation or Asian Development Bank or the Bank for
International Settlements or any banking or financial institution approved by the CG in this behalf, provided that
they are repayable within a period of 10 years
- bills of exchange bearing two or more good signatures and drawn on and payable at any place in that foreign
country and having a maturity not exceeding 90 days
- Government securities of that foreign country maturing 10 years
However, RBI may with the previous sanction of CG shall for periods not exceeding 6 months in the first instance and
with the like sanction, by periods not exceeding 3 months at a time – Hold as assets foreign securities of less amount
in value than that is required U/s 33(2) [Assets of the Issue Department – discussed in previous slide]
Note: The RBI shall publish each fortnight a consolidated statement showing the aggregate liabilities and assets of
all the scheduled banks taken together

39. Obligation of Government and the RBI in
respect of Rupee Coin – Sec 38
The CG shall undertake not to put into circulation any rupees*, except through the RBI and the RBI shall
undertake not to dispose of rupee coin** otherwise than for the purposes of circulation
*GoI issues one-rupee note which is authorized by the Ministry of Finance
**Rupee coin means rupees which are legal tender in India under the provisions of the India Coinage Act, 1906
[At present, the coins in circulation are 50 paise, 1, 2, 5 and 10 Rupee] – The volume of such coins in circulation
as of March, 2019 was 120,324 million pieces and its value was Rs.258 billion

40. Obligation to Supply Different Forms of
Currency – Sec 39
The RBI shall issue rupee coin on demand in exchange for bank notes and currency notes of the GoI, and shall
issue currency notes or bank notes on demand in exchange for coin which is legal tender under the Coinage Act,
2011
The RBI shall, in exchange for currency notes or bank notes of two rupees or upwards, supply currency notes or
bank notes of lower value or other coins which are legal tender as required for circulation and the CG shall
supply such coins to the RBI on demand

41. Transactions in Foreign Exchange – Sec 40
However, a person shall not be entitled to demand to buy or sell foreign exchange of a value less than Rs.2 lakhs
at such rates of exchange and on such prescribed conditions determined by the CG
The RBI shall sell to or buy from any authorised person* who makes a demand of Foreign exchange
*An authorised person is a person who is entitled under the Foreign Exchange Management Act, 1999 to buy or
sell foreign exchange to which his demand relates

42. Maintenance of Minimum Cash Reserve with
RBI – Sec 42(1)
Every scheduled bank shall maintain a average daily balance with RBI which shall not be less than the prescribed %
(notified by RBI in this behalf from time to time) of the total of the demand and time liabilities of the bank
 Cash Reserve Ratio is important to regulate money supply in the economy
 Owing to the current COVID-19 situation, the minimum % of cash reserve to be maintained was reduced to a all-time
low of 3% from 4%
 CRR is reduced, with a motive to pump funds into the system which increases loanable funds with the banks
Average Daily
Balance
Average of the balances held at the close of business on each day of two weeks [A fortnight i.e.
period from Saturday to the second following Friday, both days inclusive]
Time Liabilities
Shall not
include
Paid-up capital or the reserves or any credit balance in the profit and loss account of
the bank
Loan from RBI, Exim Bank, Reconstruction Bank, National Housing Bank, NABARD or
Small Industries Bank
Shall also not
include
In case of a State Co-
operative Bank
1) Loan from SG/National Co-operative Development Corporation
2) Deposits representing the reserve fund/any part thereof maintained with it
by any co-operative society within its area of operation
3) If advance granted against any balance maintained with it, such balance to
the extent of the amount outstanding in respect of such advance
In case of a Regional
Rural Bank
1) Loan taken from its Sponsor Bank

43. Contd…
In case of a Scheduled Bank which is
not a State Co-operative Bank
Aggregate of Liabilities to the following banks and institutions to be reduced by aggregate of the liabilities of all such
banks and institutions to the Scheduled Bank
In case of a State Co-operative Bank
SBI, Subsidiary bank, Corresponding new bank, banking company, co-
operative bank or any other financial institution notified by CG in behalf
SBI, Subsidiary bank, Corresponding new bank, banking company or any
other financial institution notified by CG in behalf
Additional balance to be maintained
 The RBI may direct every scheduled bank to maintain an additional balance subject to a minimum prescribed
percentage, by notification
 Such additional balance shall be calculated with reference to the excess of the total of the demand and time
liabilities of the bank as shown in the return referred U/s 42(2) [discussed in next slide] over the total of its
demand and time liabilities at the close of business on the date specified in the notification as shown by such
return
 However, such additional balance shall not be more than such excess
 Different rates in respect of a bank may be separately notified
Note: The RBI may from time to time specify, with reference to transactions that shall be regarded as liability for the
purposes of this section

44. Fortnightly Return – Sec 42(2)
Every scheduled bank shall send to RBI a return signed by 2 responsible officers of such bank showing the following
particulars, at the close of business on each alternate Friday
Amount of its demand and time liabilities and the amount of its borrowings from banks in India classifying them into
demand and time liabilities
Total Amount of legal tender notes and coins held by it in India
Balance held by it with RBI in India
Balances held by it at other banks in current account and the money at call and short notice in India
Investments (at book value) in Central and State Government securities including treasury bills and treasury deposit
receipts
Amount of advances in India
Inland bills purchased and discounted in India and foreign bills purchased and discounted
 All Scheduled Commercial Banks (SCBs) are required to submit a provisional return in Form 'A' within 7 days from
the expiry of the relevant fortnight*
 The final Form 'A' / 'B' is required to be sent to RBI within 20 days from expiry of the relevant fortnight
*Fortnight shall mean the period from Saturday to the second following Friday, both days inclusive

45. Contd…
Note: RBI shall publish each fortnight, a consolidated statement showing the aggregate liabilities and assets of all
the scheduled banks together, based on the returns and information received - Sec 43
Where the last Friday of a month is not an alternate Friday, a special return giving the details specified (discussed in
previous slide) as at the close of business on such last Friday shall be sent to RBI [within 7 days from the relevant
date]
• Eg. If the last Friday of March falls on March 29th and the alternate Friday for the relevant fortnight falls on April
5th, a special return shall be filed relating to close of business as on March 29th and the original fortnightly
return shall relate to close of business as on April 5th
In case of the alternate Friday being a public holiday – Return as at the close of business of the preceding working
day to be sent [Applies the same if the last Friday falls on a public holiday]
• Eg. If the alternate Friday falls on August 15th , the return shall give the figures as at the close of business on
August 14th

46. Penal Provisions
Section Default Penalty
42(3) Average daily balance to be maintained
is below the prescribed limit
3% penal interest above the bank rate on the amount by which
such balance with RBI falls short
Shortfall continues during the next
succeeding fortnight
5% penal interest above the bank rate inn respect of that fortnight
and each subsequent fortnight during which the default continues
42(3A) When a bank becomes liable to pay penal
interest at 5%, and still thereafter the
default continues with respect to
average daily balance during the next
succeeding fortnight -
Every director, manager or
secretary of the bank, who is
knowingly and willfully a
party to the default
Fine of Rs.500 which may extend
to Rs.500 for each subsequent
fortnight during which the
default continues
The Scheduled Bank may be prohibited by RBI to accept any fresh
deposit after the said fortnight
If default made by the bank in respect of above, every director and
officer in default shall be punishable with fine of Rs.500 which may
extend to Rs.500 for each day of continuing default by the bank
42(4) Failure to furnish return under Sec 42(2) Bank shall pay a penalty of Rs.100 for each day during which the
failure continues
 The above penalties shall be payable within 14 days from the date on which a notice is issued by RBI demanding the
payment
 If the bank fails to pay the same, then on application made by the RBI, the Principal Civil Court in the jurisdiction of
the defaulting bank shall issue a certificate specifying the amount payable
 However, the RBI may not demand any penalty on sufficient cause for failure by the defaulting bank in this regard

47. Changes to Second Schedule – Sec 42(6)
The Second Schedule of this Act lists down the scheduled banks. The RBI may by notification direct inclusion/exclusion
of any bank in such Schedule [At present there are 225 scheduled banks in the Schedule of the Act as amended by the
Finance Act, 2019]
Include subject to the
conditions:
Whose aggregate value* of paid-up capital and reserves is not less than Rs.5 lakhs
Does not conduct its affairs in a manner detrimental to its depositors’ interests
Is a State Co-operative Bank or a company U/s 3 of Companies Act or an institution
notified by the CG in this behalf or a corporation or a company incorporated under any law
outside India
AND
AND
Exclude if :
Which goes into liquidation or cease to carry on banking business
Its affairs are detrimental to the interests of the depositors [On RBI making an inspection] OR
Its aggregate value* of paid-up capital and reserves is less than Rs.5 lakhs at any time OR
RBI may alter the description in that Schedule whenever any scheduled bank changes its name
However, RBI may on the application of the bank, give an opportunity for a certain period to increase its paid-up capital
and reserves or removing the defects in the conduct of its affairs
In case of inclusion/exclusion of a State Co-operative Bank/RRB in the Schedule, RBI may act on a certificate from NABARD
*Value means real or exchangeable value and not the nominal value in the books of account of the bank

48. Appointment of Agents – Sec 45
Accordingly, any payment required to be made into RBI or any bill/hundies/other securities required to be
delivered to RBI, shall be paid or delivered to the bank appointed as an agent and authorised in this behalf by the
RBI
As its agent at all places or at any place in India for such purposes as the Bank may specify
May appoint the NABARD or SBI or a corresponding new bank or any subsidiary bank,
The RBI having regard to public interest, convenience of banking, banking development and any such factors,

49. Thank You!
Scan the QR Code to Join our
Research Group on WhatsApp
Scan the QR Code to explore more
Research from our Website
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
Copyrights © 2020 DVS Advisors LLP