Relationship between Reserve Bank and Commercial banks

By virtue of the powers conferred upon it by the Reserve Bank of India Act 1934, and the Banking regulation Act, 1949 the relationship between the Reserve Bank of India and the scheduled commercial banks is very close and of varied nature.

As Supervisory and Controlling Authority over Banks >

The Baking 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 license 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 license if it is satisfied that the following conditions are fulfilled:
(a) The company is or will be in a position to pay its present or future depositors in full as their claims accrue;
(b) That the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interests of its present or future depositors;
(c) That the general character of the proposed management of the company will not be prejudicial to the public interest or the interests of its depositors;
(d) That the company has adequate capital structure and earning prospects;
(e) That the public interest will be served by the grant of a license to the company to carry on banking business in India;
(f) That the grant of license would not be prejudicial the operation and consolidation of the banking system consistent with monetary stability and economic growth.

Thus a license can be granted if the company has satisfactory financial position. In case of a foreign bank, the Reserve Bank must also be satisfied about the fact that (1) the carrying of banking business by such bank in India will be in the public interests, (2) that the government or law of the country of its origin does not discriminate against banking companies registered in India, and (3) that the company complies with all the provisions of the Act applicable to such companies. The Reserve Bank is also empowered it cancel the license granted to a banking company.

2. Permission for opening branches: Sc. 23 requires every banking company to take Reserve bank’s prior permission for opening a new place of business in India or to change the location of an existing place of business in India or outside. The Reserve bank takes into account the financial position, the history, the general character of management and adequacy of its capital structure and earning prospects and the fact whether public interest will be served or not before granting permission.
3. Power it Inspect Baking companies: Under Section 35, the Reserve Bank may either at its own initiative or at the instance of the Central Government, inspect any banking company’s books of accounts. If on the basis of the section report submitted by the Reserve bank, the Central Government is of the opinion that the affairs of the banking company are being conducted to the detriment of interests on its depositors, it may be order in writing prohibit the banking company from receiving fresh deposits, or direct the Reserve bank to apply for the winding up of the banking company.
4. Power to Issue Directions: Sections 35-A confers powers on the Reserve Bank to issue directions to a banking company or companies in the public interest or in the interests of banking policy or to prevent the affairs of the banking company being conducted in a manner detrimental to the interests of the depositors or in manner prejudicial to the interest of the banking company or to secure proper management of the banking company. Section 36 confers powers on the Reserve Bank to caution or prohibit banking companies against entering into any particular transaction, and generally gave advice to any banking company. It may pass orders requiring the banks to carry out the specified instructions.
5. Control over Top management: The Reserve Bank of India has wide powers of overall control over the top Management of banks Reserve Bank’s prior approval is necessary for appointment or re-appointment or termination of appointment of a chairman, managing director manager or chief executive officer. —