Whether the guidelines, policy issued by RBI are mandatory or discretionary on the banks

The Reserve Bank of India (RBI)  is the Central Bank of our country. The Reserve Bank of India established on 1st April, 1935 under the Reserve Bank of India Act, which was passed in the year 1934.

As the Central Bank of the country , the Reserve Bank of  India performs both the traditional functions of a central bank and a variety of developmental and promotional functions.

As per law and Supreme Court judgments, the Reserve Bank of India Guidelines are statutory and mandatory. The violations of RBI Guidelines by banks constitute an important defence for the borrowers and guarantors. Certain guidelines are given to the clients subject wise, date wise, etc. Certain actions are given as follows-

Mandatory Actions:

a. Submission and implementation of capital restoration plan

b. Restriction on expansion of risk-weighted assets

c. Prior approval of RBI for new branches and lines of business

d. Paying off costly deposits and CDs

e. Reduce / suspend dividend

Discretionary Actions:

a. Order recapitalisation

b. Reduce stake in subsidiaries

c. Shedding of risky business

d. Cap on deposit interest rates

e. Restriction on borrowings from inter bank market

f. Revise credit / investment strategy and controls.

Now coming to the Policies issued by RBI, there are two kinds of policies- Monetary policies and Credit policies.

Under the provisions of Section 21, the Reserve Bank has been empowered to determine the policy in relation to advances to be followed by banking companies in the interests of public. The Reserve Bank in particular may give directions to banking companies, either generally or to any banking company or group of banking companies particularly, as to the purpose for which advances may or may not be made, the margins to be maintained in respect of secured advances, etc.Policies by RBI are non-discretionary on the banks.

Circulars are a one-point reference of instructions issued by the Reserve Bank of India on a particular subject between July-June. These are issued on 1st July every year and automatically expire on June 30 next year. Circulars are Prudential Guidelines on Capital adequacy and Market Discipline. Circulars issued by RBI is mandatory on the banks and non-discretionary.

STATUTORY RELATIONSHIP BETWEEN RESERVE BANK AND COMMERCIAL BANKS

By virtue of the powers conferred upon it by the Reserve Bank of India Act, 1949, the relationship between the Reserve Bank of India and the scheduled commercial banks is very close and of varied nature:

(a)  As Supervisory and Controlling Authority over Banks-

The Banking Regulation Act , 1949, confers wide powers upon the Reserve Bank to supervise and control the affairs of banking companies as follows:

1. Licensing of Banking Companies- Section 22 requires every banking company to hold a licence from the Reserve Bank to carry on the business of banking in India. The Reserve Bank is empowered to conduct an inspection of the books of the banking company for this purpose and to issue a licence if it is satisfied.

2. Permission for Opening Branches- Sec. 23 requires every banking company to take Reserve Bank’s prior permission for opening a new place of business in India or outside.

3. Power to Inspect Banking Companies- Under Sec.35, the Reserve Bank may, either at its own initiative or at the instance of the Central Government, inspect any banking company and its books and accounts.

4. Power to Issue Directions- Sec.35-A confers powers on the Reserve Bank to issue directions to a banking company or companies in the public interest or in the interest of banking policy.

5. Control over Top Management- The RBI has wide powers of overall control over the top management of banks.

(b)   As controller of credit- Reserve Bank of  India exercises control over the credit granted by the commercial banks in the following ways:

i) By changing the statutory requirement regarding maintenance of liquid assets.

ii)  The Reserve Bank is empowered to issue directives to the banking companies to determine  the policy in relation to advances to be followed by them.

iii) By changing the Statutory reserve maintained by Scheduled Banks with the Reserve Bank under Sec.42 of the Reserve Bank of  India Act.

iv) By changing the Bank Rate and its policy of granting accommodation to the commercial banks.

v) Through its Credit Monitoring Arrangement.

vi) By exercising moral influence on the banks.

(c) As Banker to the Banks-

As banker to the banks, the Reserve Bank acts as the lender of  last resort and grants accommodation to the scheduled banks in the following forms:

i)  Re-discounting or purchase of eligible bills.

ii) Loans and advances.

ANWESHA SAHA

4th YEAR

HALDIA LAW COLLEGE