A STUDY ON CENTRAL BANKING INSTITUTIONS AND THE REGULATORY FRAMEWORK: ANUSHKA RUNGTA

 

INTRODUCTION

 

Established in 1935, in pursuance to the Reserve Bank of India Act, 1934, the Reserve Bank of India (hereinafter referred to as RBI) is the central bank of India, owned fully by the Government of the country.¹ Its preamble dictates that its functions includes issuance of currency, maintenance of price stability, operation of the economic system of the country, setting up the monetary policy framework et al. It is the central banking authority of the nation and is currently headquartered in Mumbai, Maharashtra. It has four zonal offices: Chennai, Delhi, Kolkata and Mumbai.

The RBI confers the power to regulate the entire banking system of the country by the virtue of the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1953.²

 

 

REGULATORY FUNCTIONS

 

The RBI has been conferred by a host of regulatory duties and rights, some of which are as follows:

 

1.       Issuance of license to initiate new banking operations and/or to open a new branch or pre- existing banking institution.

2.       Appointing the chairman and directors of banking institutions in the country.

3.       Ensuring maintenance of transparency from the banks with regards to the bank rates and charges and adherence of Know Your Customer (KYC) guidelines and other provisions against money laundering practices.

4.         Implementation of audit and inspection procedure for monitoring banks across the country.

 

 

 

 

 

¹ Errol D’Souza, Reserve Bank of India, Rethinking Public Institutions in India (2017)

² Raj Bhala, Reserve Bank of India, Research Handbook on Central Banking , 68–93

THE BANKING REGULATION ACT, 1949

 

With respect to the banking regime of the country, other acts such as the Companies Act, 1956³; Negotiable Instruments Act, etcetera are secondary to the umbrella legislation of the Banking Regulation Act, 1949. This act came into force on 16 March 1949 and is applicable to the entire nation including Jammu and Kashmir. However, this legislation is not applicable and relevant on primary agricultural credit societies, non-agricultural primary credit societies and cooperative land mortgage banks.⁴

This act initiated the Minimum Capital Requirement scheme/policy of the RBI in the country to curb the strong competition amidst banks, thus mitigating failures and management of new branches of existing banks. This act promotes balanced and harmonious growth of the banking system. The interests of the depositors is are also prioritized via this Act.⁵

 

 

REGULATORY DEPARTMENTALIZATION

 

Compliance of RBI norms is imperative for all the banks of the country. Such devisation of compliance and its enforcement is handled by various departments established under the garb of the RBI, each having its own specific specialization and duties.⁶ Some of them are as follows:

1.          Department of Banking Operations and Development: Regulating policies for Commercial Banks

2.          Board of Financial Supervision: Dealing with transforming new norms and initiative

3.          Department of Non-Banking Supervision: Supervising and auditing Non-Banking Companies

4.          Urban Banks Department: Regulating Urban Cooperative banking institutions

5.          Rural Planning and Credit Department: Regulating regional rural banks

6.          Department of Banking Supervision: Supervising and inspecting Commercial Banks

 

³ Yogesh Prasad Kolekar, Central Bank A Vital Organization of an Economy, SSRN Electronic Journal (2015)

⁴ Banking Regulation Act, 1949 Jagranjosh.com, https://www.jagranjosh.com/general-knowledge/banking- regulation-act-1949-1415099414-1 (last visited Aug 29, 2020)

⁵ Central Banking Institution and Regulatory Framework Law Times Journal, https://lawtimesjournal.in/central- banking-institution-and-regulatory-framework/ (last visited Aug 29, 2020)

⁶               Reserve               Bank               of               India:               Central                Banking              Shodhganga, https://shodhganga.inflibnet.ac.in/bitstream/10603/129436/11/11_chapter 2.pdf (last visited Aug 29, 2020)

CONCLUSION

 

The regulation of the banking system is imperative to the growth of the national economy and global presence as well as for the security of depositors. The need for special banking laws and subsequent central authorities for implementation and enforcement is dire for the Indian banking sector. Banks, as we know, are not the fund owner but the custodian of depositors’ funds. Public savings needs to be protected by the Government and its authorities. A misdirection or fallacy in the banking regime can cost the hard earned money of citizens and hamper the entire economic equilibrium of the country. Apart from the depositary role of banks, the credit lending functions of banks is a catalyst for the entire development of the country, from loans for small scale farmers to project financing for entire national highways of the country. These roles can be performed without any misdirections only with the due and proper regulation of the central authorities and its interference.