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Powers and functions of RBI and other Banks — Transcript

by NPTEL-NOC IITM · 3,340 words · 509 segments · language en · Watch on YouTube

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0:21Welcome, welcome to banking and finance
0:24laws course. This is the fourth week. We
0:28will discuss the powers and functions of
0:30Reso Bank of India and other banks in
0:33this week. Today is the 16th session.
0:37Last week we have discussed about
0:39different kinds of finance, debt
0:41finance, equity finance, project finance
0:44etc. This week we will discuss about the
0:47Reserve Bank of India and other banks.
0:50So this week mostly we will concentrate
0:53about banks and the Reserve Bank. We
0:56will not discuss the role of other
0:58financial institutions in this week.
1:00Mostly it will be related to Reserve
1:04Bank of India establishment, its role as
1:06central bank, currency issue, power and
1:09function, currency management, credit
1:12control, banking regulation act, banker,
1:15customer relationship. These kind of
1:17topics we will discuss this week and in
1:20this session we will discuss the
1:22establishment of Reserve Bank of India
1:25and the role of Reserve Bank of India in
1:28terms of currency issue. Now, Reserve
1:31Bank of India is established before
1:34independence only and there was this
1:37Hilton younger commission which was
1:40studying the finance sector and the
1:43finance management in India and the
1:46monetary policy and all that. They have
1:48recommended setting up a central bank
1:51for India and under that the government
1:55function the state bank of India was
1:58doing at that time we were calling it
2:00the imperial bank of India but then
2:03because the central bank has certain
2:06other obligations like to act for the
2:08government and to issue currency it was
2:11thought that a bank which is having
2:13commercial activity should not be doing
2:16a central bank role.
2:18So this commission recommended an
2:20independent central bank. Accordingly,
2:22the Reserve Bank of India Act was
2:24enacted in the year 1934
2:27and the Reserve Bank of India came into
2:30existence in the year 1935
2:33and initially it started as a private
2:35shareholders bank but it got
2:38nationalized in the year 1948
2:41immediately after independence that is
2:44through the Reserve Bank of India
2:46transferred to public ownership act
2:481948.
2:50So this act Reserve Bank of India
2:52transferred to public ownership act is
2:55the act through which Reserve Bank of
2:57India which started as a private bank
3:00became a government and a nationalized
3:03fully owned government bank. So this is
3:06how the Reserve Bank of India was
3:08established and immediately after the
3:11establishment and nationalization of the
3:13Reserve Bank of India, the currency
3:16issue power which was solely exercised
3:19by the government came to the Reserve
3:21Bank of India through the Reserve Bank
3:23of India Act. We will study about bank
3:26note and currency note and the issue
3:28power and it also took the credit
3:31control power which Imperial Bank was
3:33doing. Imperial Bank was doing the
3:36selective credit control power that was
3:38also taken over from the Imperial Bank
3:41and Reserve Bank of India started
3:43exercising it.
3:46Now Reserve Bank of India how does it
3:49operate? Who are the people who run this
3:52Reserve Bank of India? At the Apex
3:54level, the executive officer is the
3:56governor of Reserve Bank we call him. So
3:59and to assist him or to support him
4:02there are four deputy governors and
4:04these deputy governors head the four
4:07zonal offices and there are directors of
4:11the central board and there is a central
4:13board actually we put the pyramid where
4:16governor as the top but the governor is
4:18the executive who executes the decisions
4:22of the reserve bank's central board. So
4:24if we were to say in terms of the powers
4:27of the reserve bank central board has
4:30the maximum power to make all decisions
4:33to lay down the policies to give
4:35guidance to the executing officers but
4:39the executing officer governor is at the
4:41top. So this is how we have to
4:43understand the RBI structure and there
4:46are also local boards at the four zonal
4:49offices. So these people and the staff
4:52and other officers of the reserve bank
4:54collectively manage and operate the
4:57reserve bank. But the main top level
5:00executives are the governor and deputy
5:02governors and the central board
5:04directors. So this is how we can
5:07understand basic uh structure of the
5:10reso bank and the main functions of what
5:14does the reserve bank mainly do. It has
5:17to maintain the healthy banking sector
5:20and of course reserve bank also does the
5:22financial institutions also it manage
5:25non-banking finance companies and
5:27development financial institutions to
5:29the extent the uh statute of that
5:33financial institution provide and of
5:36course finance monetary policy that is
5:38the credit policy and credit management
5:41it does and it also advises the
5:44government on fiscal policies like
5:47taxation and other fiscal
5:50policy aspects and it also promotes
5:53measures for financial stability in the
5:57country and it manages public debt. So
6:00public debt is in a way the debt that
6:03collectively public are in a way our
6:06deficit in the finance deficit budgets
6:09that we present. So whatever deficit and
6:11government borrowings it is called uh
6:14the debt that comes to the public to
6:16repay either in the manner of tax or
6:18cutting down on the welfare schemes is
6:21known as public debt managing that also
6:24is the RBI's main function because it is
6:27a banker to the government and RBI act
6:30empowers RBI to act as a banker to the
6:33government
6:36and RBI also has some boards and certain
6:40departments. And when we look at mainly
6:43about the RBI, how it operates to the
6:46through the departments, it has a board
6:48of financial supervision. And under that
6:51there are two boards which collectively
6:53help to manage the financial supervision
6:56role of the RBI that is department of
6:59banking supervision and department of
7:02non-banking supervision. So we can
7:04understand here very clearly RBI looks
7:08at banks management as one specific
7:11department or one specific domain and
7:14through which it regulates banks. That
7:16is also the reason why we call RBI also
7:19as the regulator of the banks. So it
7:23directly does it through this department
7:25and all other non-banking institutions
7:28and supervision it does through the
7:30other department and this bank note and
7:33currency note. Now the right to issue
7:36bank notes. The bank shall have the sole
7:38right that is the Reserve Bank section
7:4022 says that this bank that means only
7:43the RBI shall have the sole right to
7:45issue bank notes in India and may for a
7:49period which shall be fixed by the
7:50central government on the recommendation
7:53of the central board issue currency
7:55notes. So for a period determined by the
7:59government and on the recommendation of
8:01the central board of RBI, it can also
8:04issue currency notes otherwise it will
8:06issue bank notes and supplied to it by
8:09the central government and the
8:10provisions of this act applicable to
8:13bank notes shall unless contrary
8:16intention appears applied to all
8:18currency notes of government of India
8:21issued either by the central government
8:23or by the bank in a like manner as if
8:26such Currency notes were bank notes and
8:28references in this act to bank notes
8:31shall be construed accordingly on and
8:34from the date on which this chapter
8:36comes into force. The central government
8:38shall not issue any currency notes. Now
8:41what is this bank note and currency
8:44note? What is the distinction between
8:46that? A bank note is a note on which the
8:49RBI promises to repay. Like if you open
8:52a 100 rupee note or a 500 rupee note, we
8:55look at it that there is a statement
8:58called I promise to pay in a way similar
9:01to the promisory notes undertaking where
9:04I promise to pay X or somebody but here
9:06it is like universal that is whoever
9:09carries the note they carry it and we
9:11can't compare bank notes or currency
9:13notes to promisory notes because that is
9:16a total different law governing them and
9:18their characteristics are very distinct.
9:20But here it is the note promises to pay.
9:24That means there is also something
9:25backed to it that is either gold,
9:28bullion or something based on which they
9:30generally issue bank notes. But currency
9:33notes as opposite to that is a straight
9:35currency and it is printed by the
9:38government and under its authority. But
9:40the government has delegated this power
9:42to the Reserve Bank of India. And when
9:45currency notes are issued by the Reserve
9:47Bank of India under the delegated power
9:50of the central government and through
9:52the Reserve Bank's central board's
9:55approval, they are also deemed like bank
9:58notes only and they are all bank notes
10:00also are deemed like currency notes and
10:02they can be used as legal tender. Both
10:05of them in a way both operate as same
10:08but the manner in which they are issued
10:10are slightly distinct. Bank note
10:12promises to pay on the basis of
10:14something which is backed to it and
10:16currency notes are issued generally and
10:19the government has in a way withdrawn
10:21its uh total power to issue currency
10:24notes and it has completely delegated
10:26that power to the Reserve Bank of India
10:29and we can see section 22 subsection two
10:33which states that on and from the date
10:35on which this chapter comes into force
10:37the central government shall not issue
10:40any currency notes. That means all
10:42currency notes of whatever denomination
10:45that is decided by the central
10:46government they will also be issued by
10:49the Risa Bank of India. So in effect
10:52Reserve Bank of India emerged as a kind
10:54of sole uh currency issue authority in
10:58India. Now from where did the Reserve
11:01Bank of India get this power? Section 22
11:04of this Reserve Bank of India Act
11:06empowers the Reserve Bank to issue bank
11:08notes as well as currency notes which we
11:11just saw the whole section be ready.
11:13Section 23 allows the notes will not be
11:16given to the banks. RBI will not give
11:19these notes to the banks unless they
11:21provide some kind of security to that.
11:23That means they return the equivalent
11:25value of bills, notes, gold or something
11:29like that. So no bank can take these
11:32currency notes without providing
11:34equivalent security or any guarantee
11:37promise something like that then denom
11:39so to maintain the value for that
11:41currency it is not just paper to be
11:44given so there must be some value to
11:45that that's the essence reason why this
11:48notes will be given only on some
11:50security like that it is repayable etc
11:53this denomination that is 500 note or
11:56thousand note or 10 rupee note or 100
11:58rupee note It will be determined by the
12:01central government and the central
12:03government will also consider the
12:05recommendations of the Reserve Bank of
12:07India's central board while determining
12:09and whatever denomination the central
12:12government determines the Reserve Bank
12:13of India will issue that currency and
12:17the design the form of the currency
12:19notes also shall be as approved by the
12:21central government and the central
12:24government will make this approval upon
12:26the recommendation of the central board
12:29of the Reserve Bank of India only and
12:31the other important aspect of the
12:33currency is it is legal tender of these
12:36notes. So whatever notes that are issued
12:38will have legal tender. That means the
12:41exchange value. You can go and use it as
12:44legally enforcable currency. That is you
12:46go to shop, buy them, you go to any
12:49market, take it and then issue it. That
12:52is called legal tender, exchange value
12:54in a way.
12:56Now in 2016 on 8th November the central
13:02government demonetized
13:05500,000 rupee bank notes that is with
13:08immediate effect and gave some time to
13:10surrender those notes into the bank and
13:12take the other notes. This constituted
13:1686% of the currency which was withdrawn.
13:19And there is a case filed by this person
13:22Vive Narayan Sharma against the Union of
13:26India and in 2023 Supreme Court has
13:29given decision on this. Now the this is
13:33not the first time that India has gone
13:35for demonetization.
13:37Earlier also demonetization was done and
13:40sometimes withdrawing of notes also will
13:43be done. There is a difference between
13:45demonetization and withdrawal of a
13:48series of nodes. Sometimes for the sake
13:50of uh uh any kind of clean note policy
13:54the notes security features are not
13:56proper then the reserve bank may call
13:58that notes from the market. Whenever
14:00those notes are returned into the bank
14:03they will be deposited and then they
14:05will not be issued any further and
14:07people will be given some time to return
14:09those notes. Those are called
14:11withdrawing the notes. Demonetization
14:14means the minute the uh demonetization
14:17is announced or the effect from the date
14:20on which the demonetization comes into
14:22effect, the note loses its legal tender
14:26value. That is it is no more cannot be
14:28used as exchange. It does not have any
14:31exchange value in the market. So this
14:34demonetization usually it it was done
14:37earlier two times. Once just before n
14:40independence and once in between after
14:43nationalization we can say uh after
14:46independence. This we can say as the
14:48second time and high value not generally
14:51are demonetized to cub money laundering
14:54or terrorism or black money these kind
14:58of activities. If the central government
15:01and the RBI thinks so they demonetize
15:03the notes or there could be other
15:06reasons but these are generally the
15:08reasons. So the section 26 subsection 2
15:11of the reserve bank of India act
15:14empowers the central government on the
15:17recommendation of the central board of
15:19the RBI to declare any series of the
15:23bank notes of any denomination to seize
15:26as legal tender. That means under
15:29section 26 subsection 2 of the Reserve
15:32Bank of India act, Reserve Bank of India
15:35has such power to uh to advise to
15:38recommend to the central government and
15:40the central government also upon the
15:42recommendation of the central board can
15:45declare any series of notes as uh
15:48demonetized that is they are no more
15:51they cease to be the legal tender. Now
15:54in 2016 when the demonetization was done
15:58it was done with a notification and
16:01there was no ordinance or a statute that
16:04means there was no act that was there
16:07and the earlier demonetization that
16:10happened in India
16:12that was two times one just before the
16:15independence and one after the
16:16independence they were done through an
16:19ordinance or statute in a way
16:21notification is a kind of subordinate
16:24legislation as opposed to an ordinance
16:26or a statute.
16:28So the argument of this particular
16:31person and the contention of this person
16:33Vive Narin Sharma who filed the case
16:36against the Union of India was that the
16:40demonetization process or the
16:42demonetization that was done in India
16:45does not is not done according to proper
16:48law. That is demonetization firstly was
16:51done through a notification. There was
16:53no ordinance or statute and when the
16:57government is withdrawing 86% of the
17:01currency which is in circulation doing
17:04it with such a subordinate legislation
17:06is not is not proportionate to the
17:09impact that it is creating in the
17:11market. Earlier demonetizations were
17:14very minimal percentage. This is huge
17:16percentage of currency. So major 86%
17:20currency withdrawn from the market means
17:22it will create a kind of crunch of
17:25liquidity crunch in the market and it
17:27will have huge impact on the people
17:30which was witnessed on the daily wage
17:33earners or laborers. So there was the
17:36impact was felt. So that was the ark one
17:39contention and secondly the central
17:43government has to do the demonetization
17:46on the recommendation of the central
17:48board but here the recommendation was
17:51taken very hurriedly. It was said just
17:54one day was given. So the recommendation
17:57was not proper recommendation and the
17:59recommendation did not come from the
18:01board rather the central government
18:04initiated the uh idea of demonetization
18:07and then the reserve bank of India
18:10central board recommended is the
18:12contention of this person and third
18:15contention is that section 26 subsection
18:182 empowers the central government to
18:21demonetize any series of bank notes of
18:25any denomination that means series these
18:281,000 or one lakh or 10,000 series. So
18:31those particular series but not all
18:34nodes of 500 and all notes of thousand
18:37cannot be demonetized. So these are the
18:40three contentions that he has raised in
18:43his argument. The firstly that it is
18:45done with a subordinate legislation a
18:47notification.
18:48Two, this recommendation was just mere
18:52uh superficial and not proper
18:55recommendation coming from RBI. And
18:57third, section 26 subsection 2 only
19:01allows for any denomination and any
19:04series not all. These are the three
19:07contentions.
19:09The Supreme Court has upheld the
19:12demonetization and the reasonings given
19:14by the Supreme Court are notification.
19:17Even if it is a subordinate legislation,
19:19it has legislative force and the central
19:22government is free to choose what kind
19:25of legislation or what kind of
19:27legislative action it want to initiate.
19:31So that cannot be said that just because
19:33it is with notification it is not law.
19:36So it is proper law. So it cannot be
19:39questioned. And secondly, the
19:41recommendation of the RBI the court said
19:44it is the anyway the power of the
19:46central government to demonetize and
19:49central government has exercised it and
19:51it is the central board or the RBI's
19:54power is only recommendatory power. In
19:56any case, it is recommendatory power and
19:59the recommendation can come either on
20:02the initiation of central government or
20:04RBI on its own and there is no timeline
20:07fixed for it to recommend that it has to
20:10be very long drawn or shortrun and there
20:12is nothing that prevents central
20:14government to debate discuss it with
20:16RBI's board without formally bringing it
20:20into the recommendatory thing. So while
20:23it is the Reserve Bank of India's power
20:25is only recommendatory and the central
20:27government is the sole authority to
20:29demonetize and it is the central
20:32government only which did it. So
20:34recommendatory power cannot be
20:36elaborated to mean to that extent that
20:38the main authorities power be questioned
20:41that the recommendation is not done
20:43properly. So that is not a valid
20:45argument is what the Supreme Court said.
20:48And the third one any any series of any
20:51denomination any always includes any few
20:55or all which is very clear any itself
20:58gives wide power and wide interpretation
21:00possibilities and many times it was held
21:04by the courts that any includes any few
21:06and all. So here the co government took
21:10the interpretation as all and hence this
21:14is a valid interpretation. So these
21:17three contentions of Vivec Naran Sharma
21:20were not accepted by the Supreme Court
21:22and the Supreme Court upheld the
21:24demonetization
21:26and the decision was delivered in 2023.
21:29By then the new notes were infused into
21:32the market to freeze the liquidity
21:35crunch. The Reserve Bank of India
21:37immediately released high denomination
21:402,000 rupee notes for few years and then
21:43withdrawn those notes later.
21:45subsequently after the liquidity crisis
21:48was over from the market. So this is a
21:51measure that the government has taken to
21:53bring s some kind of regulation into
21:57these high value notes to corrupaing
22:01to corrup black money and those kind of
22:04activities. And to conclude we can say
22:08that the currency issue power and the
22:11establishment of RBI in accordance with
22:14the RBI act has brought in to the India
22:18very needed requirement of the central
22:21government and the RBI has been doing
22:24the central bank's role since then and
22:28the RBI act provided for the
22:31establishment of central bank and also
22:34the RBI has proved its efficiency that
22:37it has completely taken away the
22:39currency issue power and the central
22:41government has delegated its complete
22:43power to RBI and now the RBI is the sole
22:47authority to be in charge of the
22:49currency after 2022 amendment. The
22:52central government power to issue
22:54currency notes is completely transferred
22:57to RBI and RBI is the sole bank which
23:01manages the currency issue today in
23:03India and we will discuss about the
23:06Reserve Bank of India's credit control
23:08power and management in the next class.
23:11Thank you.

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