RBI Timeline

1926- Hilton Young Commission

1927- Bill proposed in British Parliament fails
1933- A bill was passed
1934- RBI Act is implemented
1st April 1935- Establishment of RBI HQ in Calcutta
October 1937- HQ shifted to Bombay
1st January 1949- Nationalization of RBI

Central Board:

10 directors
1 official by
nominated by
4 members nominated central govt
1 governor+ 4 central govt
by local board
deputy Governeor

Hardly No
Attend voting
meeting rights

Functions of RBI:

 Issue of Bank Notes

 Banker to the Government
 Custodian of the Cash Reserves of Commercial Banks
 Custodian of country’s forex reserves
 Lender of last resort
 Controller of credit
 The Issuer of Bank Notes
The most important function of RBI is the issuance of currency notes and
coins, except the one rupee note and coin which are issued by the Ministry
of Finance. All other notes bear the signature of the RBI Governor.
However, the agency of distribution of all notes and coins issued by the
Government of India is the Reserve Bank of India.
 Banker to the Government
Another chief function of RBI is that it takes care of the banking needs of
the government, which includes maintaining & operating the deposit
accounts of the government, collecting the receipts of funds, and making
payments on behalf of the Government of India. It also represents the Indian
Government, as a member of the International Monetary Fund and the World
Bank.
 Custodian of Cash Reserves of Commercial Banks
Commercial banks are required to maintain the cash reserves at a rate
decided by the RBI in its monetary policy.
 Custodian of Foreign Exchange Reserve
Another of the important functions of RBI is maintaining a reserve of
foreign currencies that enables the RBI to deal with any crisis situation.
 Bankers’ bank
Often regarded as the banker of banks, the RBI acts as a parent to all
commercial banks in India. Thus, it becomes the lender of the last resort for
all banks when they are in a crisis situation. RBI helps them by lending
money, although at higher RoI, to sail through the tide of financial
difficulties.
 Controller of Credit
RBI controls the credit created by the commercial banks in India, in
accordance with the economic priorities of the government of India. RBI
uses quantitative and qualitative methods to control and regulate the flow of
money in the market. These are implemented by announcing monetary
policies at regular intervals. The monetary policy involves the management
of interest rates and money supply. The central bank of India tweaks the
money supply to achieve objectives such as liquidity, inflation, and
consumption.
 In this case two directions were given by the rbi.
The first direction was that the normal donation made by the cooperative
banks may not exceed one percent of the published previous year profits.
The second direction was that such donation along with those made to
national and other funds may not exceed to person of previous year
published profits.
Held: The court held that the rbi was not within its authority to issue such
directions and that these directions were validly issued by rbi.

Banking Regulation Act 1949:

Introduction:
The act controls the banking institutions from their birth to death. If any
bank has to start business, it cannot do unless it has obtained the licence and
if it has to close the winding of operations, will be as per the provisions of
the act.
It has a two-fold purpose.
1. To consolidate and amend the law relating to banking companies
2. To check the abuse of powers by managers of banks and also to
safeguard the interests of depositors and interests of the country in
general
 “banking” means the accepting, for the purpose of lending or investment, of deposits
of money from the public, repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise;
 “banking company” means any company which transacts the business of banking [in
India];

Q. A goes to B and tells him to take care of Rs 700 crores cash. Given the scenario,
will this fit into the ambit of 5(b)?

Q. A goes to Edwin Bank and gives him a check of 20 crores to be credited in his
account. Whether this deposit falls under the ambit of 5(b) or not?

Q. A is a human trafficker and gives Rs 300 crores to Edwin and Rs. 250 crores to
Veena. They both take their money to the bank. The Bank asked them the proof.
Just to be at a safer side, Edwin gives 100 crores to the bank manager as a bribe
and the bank manager accepts the money from both.

a. Is this morally correct?

b. Whether the whole incident falls under the ambit of banking?

In a bank called X, the deposit is Rs. 1600. How much withdrawal can be done?

a. 1600
b. 1650
c. 1590
d. Nota

CRR- cash reserve ratio (4% of NDTL)

{NDTL- Net Demand and time liability}

{SLR-Statutory Liquidity Ratio}- The bank keeps the 18% of the SLR within themselves for
investment of the future/current.

Fractional Ratio- CRR+SLR=22% [untouched by the bank]

Q. The NDTL of SBI bank is Rs.700 crores. Calculate the amount the sbi branch cannot use
as loan? Calculate CRR at 4%, 8% and 9.5%. The SLR needs to be calculated but the
fractional reserve cannot be more than 25%.

A. 4%- 28, 8%-56, 9.5%- 66.5

NBFC- Non Banking Financial Company are financial institutes that provide banking
services to people but do not hold banking licence. These institutions are not allowed to take
deposits from public. All their operations are covered under banking regulation. The working
and operations are regulated by RBI within the framework of Reserve Bank of India Act,
1934 and the direction issued by it under the act.

Under Sec.45(1)(f),

i. NBFC is a financial institution which is a company.

 ii. A non banking institution which is a company and which has its principal business of
receiving of deposits under any scheme or arrangement or any other manner or in
lending in any manner.
iii. Such other non banking institution or class of institution as the bank may with the
previous approval of the central govt and by notification in the official gazette
specifically

A man went to the bank and withdrew the money, the bank did not check the
credentials of the person before encashing the amount. The cheque was stolen by
the person. The question that arose in this case was ‘Whether the person can be
termed as customer?’ The court held that even a single transaction will make a
person customer and bank will be held liable.

Mere opening of account without actual drawing of money was sufficient to

constitute a customer. It was further held that the relationship of a banker and a
customer begins as soon as the first transaction takes place.

Explain as to why the primary relationship between a banker and a customer is that
of between debtor and creditor in light of Sec. 5?

Illustration:

Suvarna Bank Loans Atul(Debtor)

(creditor)

X Suvarna Bank(debtor)

(creditor)

Suppose Roshini goes to her bank and deposits Rs 1000 in coins in her saving bank
account. The banker becomes ______?

a. Debtor
b. Creditor
c. Trustee
d. benefi ciary
If Shivam gives 500 gold coins in a sealed bag to his banker and leaves it for safe custody.
The banker becomes __?
a. trustee
b. beneficiary
c. both
d. none

1. Sealed box given to the bank for safekeeping.

2. Jewellery given to the bank for bank locker facility
Duties of Customers:
1. Banking hours: A customer must present cheques for payment and collection during
banking hours.
2. Out-dated Cheque: A customer is required to present cheques for payment before they
become stale or out-dated.
3. Unauthorized person: A customer should keep his cheque book under lock and key, so
that it may not go into the hands of an authorized person.
4. Warning: If a customer knows or has reasonable grounds for believing that his
signature is being forged on a cheque, it is duty to warn the banker of the fact at the
earliest opportunity.
5. Careful Draw of Cheque: A customer should draw the cheques in such a careful way
that there is no room left for raising the amount.
Rights of a Customer:
1. Right to fair treatment
2. Right of transparent, fair and honest dealing
3. Right to privacy
4. Right to grievance redressal and compensation
5. Right to draw a cheque
6. Right to receive pass book
7. Right to sue
8. Right of receiving deposit
9. Right of receiving profit
Duties of a banker towards Customer:
1. To honour cheque
2. Collection of cheque and other instruments
3. Supply bank statement
4. Maintain Secrecy
 Disclosure compulsion under law
 Disclosure in the interest of public
 Disclosure in the interest of bank Exceptions
 Disclosure under banker’s enquiry
 Disclosure under consent of customer
Rights of banker towards the customer:
1. Right to Lien
2. Right of compound interest
3. Right to claim Charges
Attributes of Good Security (MAST Principle):
1. Marketability (freely traded in the market and easily convertible in cash)
2. Ascertainability (value and location of security should be easily ascertainable)
3. Stability (Value of Security should not fluctuate widely)
4. Transferability (Ownership of security should be legally transferable)
Features :
 The time and date when the payment is due must also be specified.
 The bill should also outline the amount of money that is due.
 The payment of the bill must be demanded to be paid in the legal currency of the
country
 The amount that is to be paid must either be payable or demand or within a stipulated
time.