Section 7 of RBI Act

Section 7 of RBI Act

Section 7 empowers government to issue directions to RBI

Government decided never before used powers issuing any directions to RBIgovernor to seek resolutions differences with central bank .Government sent three letters to RBIranging from prompt corruptive framework to liquidity management & sort consultation under  Section 7 of RBI Act which gives it power to issue any direction to central bank  by government on matters of public interest.

Government invoked Section 7:

“The autonomy for  the Central Bank ,within the framework of the RBI Act, is an essential& accepted governance requirement. Both the government and RBI, in their functioning , have to be guided by public interest  requirement of the Indian economy. For this purpose ,extensive consultations on several issues takes place between the government  & the RBI from time to time”.

Finance Ministry & RBI has said to have differ on Weak public sector banks and Tight liquidity in market

RBI vs Centre

Government invoked  Letters  3 times ,matters are as follows :

1.     To carve out exemption for power companies under PCA (prompt corrective Action)

PCA: To ensure banks don’t go bust, RBI has put in place some trigger points to access, monitor, control &take corrective Actions on banks which are weak &troubled .The process or mechanism under such Action is PCA.

    Government view that easing lending for banks under PCA could help reduce               pressure on MSMEs. However RBI argued such a move could  undo clean up efforts.

2.      To use RBI’s capital reserves for providing liquidity to market.

3.      For relaxing constraints on banks for lands to SMEs.

Besides government also want to cut interest rates, considering it a necessity to give the much needed impetus to the Indian economy. But the RBI has not only refused to bring down the key  interest rates but also raise them.

Section 7 of RBI Act deals with management has never been invoked in the history of independent India.

Court asked central government to hold consultation with RBI under Section 7 of RBI Act 1934 on the way forward for stressed assets within 15 days.Even though the HC had stressed the Section 7 of RBI Act was put on statued book in a bit to arrive at a harmonious conclusion & evolve conceptional position the government at that time had decided against using the provision, since the clause was never invoked in the past their were various ways to interpreted.

History …RBI

•     RBI drafted provision combining provisions of Bank of England Act,1946 & Common Wealth Bank of Australia ,1945.
•         Provisions on Central Governments powers to issue directions to Central Bank. It had however suggested the Act make it clear that government take responsibility when it acts against Governor’s advice. However government that time not in favour of provision then, clause redrafted.
•        Section 7 Amended in 1949, to empower centre to issue directions to RBI in      public interest.
•         RBI was established in 1935 under the provisions of RBI Act 1934 in Calcutta. Though originally privately owned, it was nationalised in 1949 various roles has been outlined from traditional to supervisory to promotional development.
•         RBI established 1^st April 1935 during British Raj on recommendation of Hilton Young Commission that was made in 1926.
•           RBI Act 1934, is the legislative Act under which India’s Central Bank (RBI) was formed on 1^st  April 1935. The Act which was Amended in 1936 provides the framework for supervision of banking firms in India.

      There are 61 sections in RBI Act 1934 ,some important sections are

      Listed below…..

Section 3:   Establishment & Incorporation of the RBI.

Section 4:   Capital of the Bank fixed at Rs.5 Crore.

Section 8:   Composition of Central Board of the RBI.

Section 17:  Business to be carried out by the RBI.

Section 18:  Emergency loans to Banks.

Section 21:  RBI must conduct Banking Affairs for Central Government &

                     manage Public Debt.

Section 22:  RBI has exclusive rights to issue Currency notes in India.

Section 24:  Maximum denomination of currency can be 10,000 Rupees.

Section 42:  Cash Reserve of Scheduled Banks to be kept with the bank .

Section 45:   Defines Repo, Reverse Repo, Derivative, Money Market

                     Instruments & Securities.  

RBI Sections & what they deal with??

1^st Schedule: Lists areas under which Indian states should fall.

2^nd Schedule: Lists all scheduled banks in India.

The government of  India can in the Public Interest from time to time & after consultation with RBI issue directions in the interest of public policies(ie; section 7), whenever RBI doesn’t follow the directions of the central government, under section 7 of RBI Act Government can issue a written directive. Till date no Government issued any directive.

Central Government may from time to time give such direction to the bank as it may ,after consultation with the Governor of the Bank ,consider necessary in the public interest.

Subject to directions , general superintendence & directions of the affairs & business of the bank shall be entrusted to a Central Board of directors which may exercise all powers & do all acts & things which may be exercised or done by the bank.

Unless otherwise provided in regulations made by the Central Board, the Governor & in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence & directions of the affairs & the  business of the bank & may exercise all powers & do all acts  & things which may be exercised or done by the bank.

FUNCTIONS OF RBI

.      

       Regulating the issue of bank notes & keeping of reserves to secure monetary stability & operate India’s currency & credit system.

Maintain a modern monetary policy framework to maintain price stability while keeping in mind the objective of growth.

Preamble in the RBI Act amended by Finance Act 2016, thus provided the objectives of Monetary policy - to maintain price stability while keeping in mind the objective of growth.

RBI Governed by Central Board of Directors appointed by Government for 4 years.

Full time officials are Governor & not more than 4 Deputy Governors.

Government nominates 10 Directors from various fields & 2 Government officials ,4 Directors(one each from 4 local boards)

• RBI 4 zonal offices: Chennai, Delhi, Kolkata ,Mumbai
• 20 Regional Offices, most of them in state capitals & 11in sub offices.

Five Training establishments: 2 of them are part of  RBI, they are…

1.   College of Agriculture Banking
2.  RBI Staff College

Other 3 are Autonomous….

1   .     National Institute of Banking   Management

2   .     Indra Gandhi Institute of Development Research

3   .     Institute for Development & Research in Banking Technology.

RBI perform traditional Central Banking functions & also undertake different promotional & developmental measurements to meet the dynamic requirement of the  economy.

Non monetary/supervisory functions

·        Supervises bank & promotes sound banking in India

·        Granting licenses to banks.

·        Inspection & Enquiry.

·        Implementing the deposit insurance scheme, periodical review of the working of commercial banks.

·        Controlling the non banking financial corporations.

Promotional role: promotional functions are non monetary in nature

•         Promoter of the financial system since its inception
•         Promotion of banking habits
•         Providing refinance for export promotion, facilities of agriculture.
•         Facilities for small scale industries
•         Helps co-operative sector.
•         Prescribes minimum statutory requirements for banks.

Developmental functions:

•          RBI plays a vital role in developing banking system, financial institutions in      backward areas
•              Ensuring economic stability, growth
•              Maintaining proper interest rate structure.
•         RBI’s Liquidity Adjustment facility helps bank in adjust daily liquidity mismatches.

Intermediate Goals

RBI  have some short term ways which can lead to achieving the intermediate goals of RBI. These ways are called 'Instruments of Monetary Policy', which are

1.     Cash Reserve Ratio (CRR)

2.     Statutory Liquidity Ratio

3.     Repo Rate & Reverse Repo Rate.

4.     Open Market Operations

5.     Marginal Cost of Funds Lending Rate (MCLR)

Cash Reserve Ratio

Cash Reserve Ratio is a certain minimum amount of deposit that the commercial banks have to hold as reserves with the central bank. CRR is set according to the guidelines of the central bank of a country.

Cash reserve ratio is also reffered as…

·        The amount of funds which the banks have to keep with the Reserve Bank of  India (RBI)

·        It's a vice-versa process

·        If a central bank increases CRR then the available amount with the banks decreases or comes down.

·        The CRR is used by RBI to wipe out excessive money from the system.

Commercial banks are required to maintain an average cash balance with the RBI, the amount of which shall not be less than 3 per cent of the total Net Demand and Time Liability (NDTL).

Statutory Liquidity Ratio

The ratio of liquid assets to net demand and time liabilities (NDTL) is called Statutory Liquidity Ratio (SLR).

Apart from Cash Reserve Ratio (CRR), banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash, gold and unencumbered securities. Treasury bills, dated securities issued under market borrowing programme and market stabilisation schemes (MSS), etc also form part of the SLR.

Repo Rate & Reverse Repo Rate

Repo Rate

·        Rate at which RBI lends short term money to banks against securities.

·        When Repo Rate increases, borrowing from RBI become expensive.

Reverse Repo Rate

·        Rate at which RBI borrows money from banks.

·        Banks purchase Government Securities from RBI & lend money to the banking regulator, thus earning interest.

Open Market Operations

Open market operations (OMO) refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.

Marginal Standing Facility

·        Introduced by RBI in its monetary policy(2011-12).Marginal Standing Fcility is  a penal rate for banks.

·        Banks can borrow funds by pledging Government  Securities within the limits of the Statutory Liquidity Ratio.

·        RBI intended to function as the backbone of economy & facilitates Crores in exports , FOREX, Capital Market & other sectors.

·        Central Banks are responsible for setting down monetary policy of their countries.

·        When economy is in trouble it is the Central Bank which is called upon to save the day.

                                                 

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