CHANAKYA NATIONAL LAW

UNIVERSITY

SUBJECT- BANKING LAW

PROJECT WORK ON
R.B.I FUNCTIONS AS BANKERS
BANK
SUBMITTED TO
Dr. Ajay Kumar
(FACULTY OF BANING LAW)
SUBMITTED BY
ROHIT SINHA
ROLL NO. 601
8th semester

ACKNOWLEDGEMENT
Making a project is one of the most significant academic challenges I have ever faced. Any
attempt at any level can't be satisfactorily completed without the support and guidance of
learned people. I am overwhelmed with my gratitude to acknowledge all those who have
helped me put these ideas, well above the level of simplicity and into something concrete
effectively and moreover on time.
I am very thankful to my subject teacher Dr.Ajay Kumar for his valuable help. He was always
there to show me the right track whenever I needed his help. He lent his valuable suggestions,
guidance and encouragement, on different matters pertaining to the topic. He has been very
kind and patient while suggesting me the outlines of this project and clearing my doubts. I
thank him for his overall support without which I would not have been able to complete this
project. I would also like to thank my colleagues, who often helped and gave me support at
critical junctures, during the making of this project. Last but not the least, I would like to
thank my family members for their emotional support.

Contents
Research Methodology...............................................................................................................5
INTRODUCTION......................................................................................................................6
MEANING OF A BANK...........................................................................................................7
DEFENITION OF BANK..........................................................................................................7
TYPES OF BANKS...................................................................................................................8
1. SCHEDULED BANKS.....................................................................................................8
2. NATIONALIZED BANKS................................................................................................8
3. NON NATIONALIZED BANKS.....................................................................................8
4. OLD PRIVATE BANKS...................................................................................................9
5. NEW PRIVATE BANKS..................................................................................................9
6. FOREIGN BANKS...........................................................................................................9
8. CO-OPERATIVE BANKS.................................................................................................9
HISTORY OF RBI.....................................................................................................................9
First Move Towards Banking Legislation................................................................................10
Reserve Bank and Banking Legislation...................................................................................12
SOUTH INDIAN BANKING CRISIS....................................................................................14
Proposals for an Indian Bank Act.............................................................................................15
FUNCTION OF RESERVE BANK OF INDIA......................................................................17
[A] TRADTIONAL FUNCTIONS......................................................................................17
(i) ISSUE OF THE CURRENCY NOTES.....................................................................17
(ii) BANKER TO THE BANKS.....................................................................................18
Acts as lender of last resort ( LORL)...................................................................................18
Overview Of Payment Systems In India..........................................................................18
Payment Systems.............................................................................................................19
Paper-based Payments......................................................................................................19
Electronic Payments.........................................................................................................20
Electronic Clearing Service (ECS) Credit........................................................................20
Regional ECS (RECS).....................................................................................................20
Electronic Clearing Service (ECS) Debit.........................................................................21
Electronic Funds Transfer (EFT).....................................................................................21
National Electronic Funds Transfer (NEFT) System.......................................................21
Real Time Gross Settlement (RTGS)System...................................................................22

Clearing Corporation of India Limited (CCIL)................................................................22

OTHER PAYMENT SYSTEMS..............................................................................................23
Pre-paid Payment Systems...................................................................................................23
Mobile Banking System.......................................................................................................23
ATMs / Point of Sale (POS) Terminals / Online Transactions.............................................23
National Payments Corporation of India..............................................................................24
Oversight of Payment and Settlement Systems...................................................................25
Lender of Last Resort...........................................................................................................25
Reserve Bank as Banker to Banks...........................................................................................26

Research Methodology

Method of Research

The researcher has adopted a purely doctrinal method of research. The researcher has made
extensive use of the available resources at library of the Chanakya National Law University
and also the internet sources.

Aims and Objectives

The aim of the project is to present an overview of various aspects of the RBI and its
Functions, an analysis of the various case laws and juristic opinions in this regard subsequent
to the enactment of the Banking Regulation Act, and R.B.I Act..

Scope and Limitations

Though the current topic is an immense project and pages can be written over the topic but
due to certain restrictions and limitations the researcher has not been able to deal with the
topic in great detail.

Sources of Data:

The following sources of data have been primarily used in the project-

Books

Journals

Cases

Method of Writing:

The method of writing followed in the course of this research paper is primarily analytical.

Mode of Citation

The researcher has followed the bluebook method of citation (19th ed.) throughout the course
of this research paper. The author has followed the foot note system for citation.

INTRODUCTION
"With the monetary system we have now, the careful saving of a lifetime can be wiped
out in an eye blink
Larry Parks, Executive Director, FAME
Banking system plays an important role in growth of economy. The banking sector is the
lifeline of any modern economy. It is one of the important pillars of financial system, which
plays a vital role in the success or failure of an economy. It is a well known fact that banks
are one of the oldest financial intermediaries in the financial system. They play a crucial role
in the mobilization of deposits from the disbursement of credit to various sectors of the
economy. The banking system reflects the economic health of the country. The strength
of the economy of any country basically hinges on the strength and efficiency of its
financial system, which in turn depends on a sound and solvent banking system.
A Banking Sector performs three primary function in economy, the operation of the payment
system, the mobilization of savings and the allocation of saving to investment products.1
Banking industry has been changed after reforms process. The Government has taken this
sector in a basic priority and this service sector has been changed according to the
need of present days. Banking sector reforms in India Strive to increase efficiency and
profitability of the banking institutions as well as brought the existing banking institutions
face to face with global competition in globalization process. Different type of banks
differs from each other in terms of operations, efficiency, productivity, profitability and
credit efficiency. Indian banking sector is an important constituent of the Indian
Financial System. The banking sector plays a vital role through promoting business in
urban as well as rural area in recent year, without a sound and effective banking system,
India can not be considered as a healthy economy.2

1 Ahluvaliya Montek,S. Economic Reforms in India since 1991:Has Gradualism

Worked ? Journal of Economic Perspective 16(3) pp 67-88

MEANING OF A BANK
A Bank is an institution which accepts deposits from the general public and extends
loans to the households, the firms and the government. Banks are those institutions which
operate in money. Thus, they are money traders, with the process of development
functions of banks are also increasing and diversifying now, the banks are not nearly the
traders of money, they also create credit. Their activities are increasing and diversifying.
Hence it is very difficult to give a universally acceptable definition of bank.

DEFENITION OF BANK
Indian Banking Regulation act 1949 section 5 (1) (b) of the banking Regulation act 1949
Banking is defined as.
Accepting for the purpose of the landing of investment of deposits of money from public
repayable on demand or other wise and withdraw able by cheques, draft,

order or

otherwise.3
Bank means a bench or table for changing money.4
--Greek History
Bank is an establishment for custody of money received from or on Behalf

of

its

customers. Its essential duty is to pay their drafts unit. Its profits arise from the use of the
money left employed them.5
--Oxford Dictionary

2 Sheth, Neha Banking Reforms In India: Problems and Prospects URL: Http;//ssrn.com/abstract, 15, May.
2010. 11:00 PM

3 Kaptan S.S.: Indian Banking in the Electronic Era Published by SAROP & SONS, New Delhi 2003 Page
-2.

4 Ibid
5 Desai, Vasant: Indian Financial System Himalaya Publishing House, 2005 Page 162.

A bank is an establishment which makes to individuals such advances of money or other

means of payment as may be required and safely made and to which individuals entrust
money or means of payment when not required by them for use.6
--Pro Kinely

TYPES OF BANKS
In 1935, The State Bank of India Act, was passed, accordingly, The Imperial Bank
of India was nationalized and State Bank of India emerged with the objective of extension
of banking facilities on a large scale, specifically rural and semi urban area and for
various of the public purposes. In 1969, fourteen major Indian Commercial Banks were
nationalized and in 1980, six more were added on to constitute the public sector banks.
Commercial Banks in India are classified in Scheduled Bank and Non Scheduled Banks.
Scheduled Banks are including nationalized Bank, SBI and its subsidiaries, private sector
banks and foreign banks. Non Scheduled Banks are those included in the second Scheduled
of the RBI Act, 1934.
1. SCHEDULED BANKS
The second scheduled of RBI act, create a list of banks which are described as Scheduled
Banks In the terms of section 42 (6) of RBI act, 1934, the required amount is only Rs. 5
Lakh. The Scheduled Banks enjoy several privileges. It means that scheduled banks
carries safety and prestige value compared to non scheduled banks. It is entailed to receive
refinance facility as applicable
2. NATIONALIZED BANKS
The nationalized banks include 14 banks nationalized on 19th July, 1969 and the 6 more
nationalized on 15th April, 1980. They are also scheduled banks, after this nationalization the
governments try to implement various welfare schemes.
3. NON NATIONALIZED BANKS
The commercial banks not included in the 2nd schedule of the RBI act are known as non
scheduled banks. They are not entitled to facilities like refinance and rediscounting of
6 Tannan, M.L.: Banking Law and Practice in India, Indian Law house, Delhi, 2002, Page
No. 2

bills etc, from RBI. They are engaged in lending money discounting and collection bills
and various agency services. They insist higher security for loans.

4. OLD PRIVATE BANKS

These banks all registered under Companies Act, 1956. Basic difference between Cooperative bank and Private Banks is its aim. Co-operative banks work for its member and
private banks are work for own profit.
5. NEW PRIVATE BANKS
These banks lead the market of Indian banking business in very short period because
of its variety of services and approach to handle customer and also because of long
working hours and speed of services. This is also registered under the Company Act 1956.
Between old and new private banks there is wide difference.
6. FOREIGN BANKS
Foreign Banks mean multi-countries bank. In case of Indian foreign banks are such banks
which open its branch office in India and their head office are outside of India. E.g. HSBC
Bank, City Bank, Standard Chartered Bank etc.
8. CO-OPERATIVE BANKS
Co-operative Banks another component of the Indian bank with the enactment of the Cooperative Credit Societies were sated owing to the increasing demand of Co-operative
Credit, a new Act of the 1994, which provide for the increasing demand of Cooperative Central banks by a union of primary credit societies or by a union of primary credit
socialites and individuals.

HISTORY OF RBI

The basic purpose of the establishment of the Reserve Bank of India was the unification of
the authority for the regulation of currency and of credit. In regard to the banking system of
the country, the primary role of the Reserve Bank was conceived as that of the lender of last
resort for the purpose of ensuring the liquidity of the short-term assets of banks. Hence, the
provision of credit facilities to banks through discounts and advances was to constitute the
centre of relationship between the central banking authority and the scheduled banks. The
custody of the cash reserves of banks vested in the Bank was primarily meant to serve as a
central pool to be available for use in times of emergency for supporting scheduled banks,
rather than constitute an instrument of credit control. The Banks Statute did not provide for
any detailed regulation by it of commercial banking operations towards ensuring sound
banking practices. The submission of weekly returns by scheduled banks under Section 42(2)
of the Act was mainly intended to keep a watch over their compliance with the requirements
regarding maintenance of cash reserves with the Bank. Inspection of banks by the Reserve
Bank was also visualised for the limited purpose of determining the eligibility of banks for
inclusion or retention in the Second Schedule to the Act. Thus, apart from the limited scope
of the Banks powers of supervision and control over scheduled banks, the large number of
small banking institutions, which came to be known as non-scheduled banks, lay entirely
outside the purview of its control. Besides, but for the few relatively minor provisions in the
Indian Companies Act, 1913 governing companies engaged in the business of banking, there
was a virtual absence of specific laws or regulations for controlling the operations of
commercial banks. Soon after the Bank commenced operations, it became clear enough that
the lacuna in regard to banking legislation was bound to prove a serious handicap in the
sphere of its regulatory functions over the banking system. The urgency of such a measure
was also highlighted by the South Indian banking crisis of 1938 which brought to the fore
several of the undesirable features in the working of banking institutions. Accordingly, the
Banks attention, as bankers bank, was mainly occupied during this period with the problems
of banking regulation.

First Move Towards Banking Legislation

The first attempt at banking legislation in India was the passing of the Indian Companies
(Amendment) Act, 1936, incorporating a separate chapter on provisions relating to banking
companies. Prior to its enactment, banks were governed in all important matters such as

incorporation, organisation, management, etc., by the Indian Companies Act, 1913, which
applied commonly to banking as well as non-banking companies. There were only certain
relatively innocuous provisions in the Companies Act which made a distinction between
banks and other companies. These were: Section 4, which prohibited a partnership exceeding
ten from carrying on the business of banking unless it was registered as a company; Section
136, which required every limited company doing banking business to display a statement
regarding its assets and liabilities in the prescribed form (Form G in the Third Schedule to the
Act) every half year; Section 138, which empowered the local Government to appoint
inspectors to investigate the affairs of a banking company on the application of members
holding not less than 1/5th of the shares issued (as against 1/10th of the shares in the case of
other companies) ; and, Section 145, which provided that if a banking company had branches
beyond the limits of India, it was sufficient if the auditor was allowed access to such copies
and extracts from the accounts of the branches as had been transmitted to the head office of
the company.
There were two important features of the new legislation which embodied some of the
recommendations of the Central Banking Enquiry Committee. For the first time, a determined
effort was made to evolve a working definition of banking and to segregate banking from
other commercial operations. Secondly, the special status of scheduled banks was recognised
inasmuch as certain provisions of the amended Act, such as building up reserves, were made
applicable only to non-scheduled banks, on the ground that the scheduled banks could be left
to the general supervision and control of the Reserve Bank. The principal banking provisions
of the amended Companies Act, which came into force on January 15, 1937, were:
(i)

the definition of a banking company as a company which carries on as its

principal business the accepting of deposits of money on current account or
otherwise, subject to withdrawal by cheque, draft or order, notwithstanding that it
engaged in any one or more of the forms of business specified in the Section

(ii)

(Section 277F);
prohibition of banking companies from engaging in business other than that

(iii)

specified in Section 277F [Section 277G(2)];

restriction on the managing agency system in respect of a banking company by
providing that it should not employ or be managed by a managing agent other than

(iv)

a banking company (Section, 277H);

prescription of minimum paid-up capital of Rs. 50,000 for banking companies
incorporated after the commencement of the Act (Section 277I);

(v)
(vi)

prohibition of creation of charge on unpaid capital (Section 277J);

transfer by non-scheduled banking companies, before any dividend was declared,
of not less than 20 per cent of the annual profits to the reserve fund until such fund
equalled the paid-up capital, and for the investment of the reserve fund in
Government or trustee securities or in a special account with a scheduled bank

(vii)

(Section 277K) ;
maintenance by non-scheduled banking companies of, a cash reserve of at least
1 per cent against their time liabilities and 5 per cent against demand liabilities

(viii)

(Section 277L) ;
restriction on formation of a subsidiary company or holding of shares in any
subsidiary company except a subsidiary company formed for the purpose of
undertaking the administration of estates as executor trustee or otherwise and for
other purposes set forth in Section 277F as were incidental to the business of

(ix)

accepting deposits on current account or otherwise (Section 277M); and

the grant of a moratorium by the court to a banking company in temporary
difficulties (Section 277N).

Reserve Bank and Banking Legislation

While the initiative for the amendment of the Indian Companies Act came from the Central
Government, the Reserve Bank was actively consulted on the portions of the measure
pertaining to banking companies. The vexed question of definition of banking appears to
have given rise to a cleavage of views at the highest executive level inside the Bank. The
definition, incorporated in the Amendment Bill, was welcomed by the Governor, Sir Osborne
Smith, whose personal view, recorded in November 1935, was that the activities constituting
banking had never been defined in this country and it was high time that the permissible
duties and limitations were defined by Statute. However, Sir James Taylor, the senior
Deputy Governor, was more concerned with the difficulty of framing such a definition; a
difficulty which, he said, had been emphasised by every authority which had examined the
subject both in this and other countries, e.g., in England the Macmillan Committee, and in
India the Hilton Young Commission and the Central Banking Enquiry Committee. In his
opinion, the enumeration of the various lines of business which a banking company could
undertake would involve Government in expensive litigation on difficult border-line cases,
hamper legitimate current activities and impede future development. There could also be

evasion by some banks, claiming that banking was not their principal business, which would
drive a coach and four through the Bills whole object, namely, to effect a clear separation
between banking and other companies. In July 1936, the Reserve Bank conveyed to the
Government its opinion that the attempt to frame a comprehensive definition should be
abandoned and a banking company should be merely described as a company which carried
on the business of banking. The Bank, however, suggested that, if it was thought desirable,
there could be a statutory objects clause in the memorandum of association for banking
companies, to prevent the growth of mushroom institutions. The views of the Bank did not
have much practical effect and the Select Committee appointed to consider the amendments
(under the chairmanship of Sir N. N. Sircar, the Law Member of the Viceroys Executive
Council) adopted a definition of banking company almost in the same form as was
originally proposed and incorporated a more detailed list of activities in which a banking
company might engage. The stand taken by Sir James was, however, vindicated later, when
the difficulties envisaged by him in determining whether a company was a banking company
or not posed knotty problems for the Registrars of Companies.
Apart from the question of definition, the Bank was also averse to the clauses regarding
(a) Maintenance of a cash reserve by non-scheduled banks, in the absence of a provision for
statutory returns necessary for its enforcement and
(b) Grant of moratorium to an individual institution, since, in any case, a sound bank in
difficulties could count on the Reserve Bank for assistance and the sooner that an unsound
bank closed its doors the better, so as to make the winding-up process fair to all concerned.
About the other clauses, the Bank was of the view that the minimum paid-up capital for a
banking company suggested in the Amendment Bill was too low at Rs. 50,000 and should be
raised to Rs.1 lakh and that the annual transfer by non-scheduled banks to the reserve fund
before any dividend was declared, should be not less than 2 per cent of the paid up capital
till the former equalled the latter. The other suggestions made by the Bank related to
(i) the examination of the question of extending the clause regarding prohibition of loans to
directors of companies (Section 86D, which was inapplicable to banking companies) to the
directors of a banking company and
(ii) the prohibition of loans to auditors.

None of these suggestions found a place in the Amendment Act of 1936 in the manner the
Bank wanted. Perhaps, the Central Government was in a hurry to see the Amendment Act
through, recognising that some legislation for banks was better than no legislation. In his
minute of dissent to the Select Committees Report, a member, Mr. Mathuradas Vissanji,
emphasised the desirability of a separate comprehensive legislation to regulate and govern
banking business in the country and asked for a public undertaking from Government, as had
already been given with regard to insurance companies, to bring forward the necessary
legislation for banking business also.

SOUTH INDIAN BANKING CRISIS

The failure of the TNQ Bank and the banking crisis in South India led to the view that, in the
interests of the depositors, adequate powers of obtaining information and exercising control
and supervision over the affairs of banks should be assumed by the Reserve Bank, so that it
could come to the rescue of sound banks in times of such emergency, prevent the gross
abuses prevalent in the banking system and help build a sound banking tradition. The banking
crisis of 1988 was thus the immediate cause of the proposals for a Bank Act made by the
Reserve Bank in 1939, the whole of the draft of which was initially prepared by Sir James
Taylor himself. Banks Policy Regarding Discounts and Advances One of the results of the
banking crisis was the elucidation of the Banks policy regarding discounts and advances to
scheduled banks. With a view to removing any misunderstanding about the nature and extent
of the financial assistance which scheduled banks could expect from the Reserve Bank, a
circular letter was issued by the Reserve Bank to all scheduled banks on September 1, 1938.
The main purport of the letter was to explain that a central bank was, in essence, the lender of
last resort and it could use the resources at its command only at times when the resources of
the member banks had been exhausted. It would also assist individual member banks when in
difficulty, so long as it was satisfied that they were strong. There was also the obvious
difficulty that the Reserve Bank is being asked to help a bank in circumstances in which the
credit bills of the country have not been exhausted, when other banks have funds but are not
prepared to lend to it, in short, when the problem is as to the solvency of the member bank or
group of banks, and not dearth of money in the credit system as a whole. The circular went

on to say that the Reserve Bank did not have in its possession adequate data to enable it to
judge the true financial position of the scheduled banks and that full information would be
necessary if the Bank was to be in a position to extend assistance to deserving institutions
without delay. There was, therefore, imperative need for scheduled banks to submit to the
Bank periodical returns of their investments, bills and advances portfolios. The Bank also
offered to depute an officer to establish informal contacts with banks. Later, speaking at the
annual general meeting of the shareholders of the Bank, in February 1939, the Governor
stated that the Bank had succeeded in establishing closer contacts with some of the South
Indian banks in pursuance of the policy set out above. Such contacts, which were entirely
voluntary on both sides, had afforded, he mentioned, an opportunity for frank and
confidential discussions, enabling the Bank to give advice and guidance in suitable cases. In
December 1938, the Bank also circulated an Explanatory Memorandum to the scheduled
banks, indicating the circumstances under which accommodation from the Bank might be
sought by scheduled banks, the lending policy of the Bank and the eligible securities under
the Reserve Bank Act which could be offered as collateral. It was mentioned that the Reserve
Bank might be called upon to assist the scheduled banks (a) to meet some unexpected and
temporary demands for which the scheduled banks concerned might not have been able to
make provision in advance ; (b) to meet seasonal needs when there was stringency in the
money market; and (c) in special circumstances affecting one bank or group of banks (e.g., a
slump affecting the trade or industry with which certain banks were more particularly
concerned or a scare imperilling banking habit in one particular part of the country). The very
nature of the functions permitted under Sections 17 and 18 of the Reserve Bank Act required
that business which the Reserve Bank undertook should be liquid, short-term and generally
self-liquidating the securities eligible under Section 17 would consist of bills of exchange and
time promissory notes, Government and trustee securities, bullion and documents of title to
goods.

Proposals for an Indian Bank Act

In June 1939, the Governor circulated to the Local Boards of the Bank a memorandum
prepared by him containing proposals for an Indian Bank Act which was designed to bring

within the orbit of the Banks control the entire joint-stock banking sector. These proposals
were formulated after a study of the banking laws of several foreign countries such as
Canada, Australia, Denmark, U.S.A., Norway, Sweden, South Africa and Switzerland. The
objective was limited to what was immediately necessary and practical, but at the same time
the framework of the new measure possessed sufficient flexibility to provide room for further
additions as experience accumulated.
The proposals, in the first instance, envisaged a clear-cut definition of banking as the
accepting of deposits on current account or otherwise subject to withdrawal by cheque and of
a banking company as a company defined in the Indian Companies Act including a foreign
company which did the business of banking in British India; cooperative banks were
therefore excluded from the purview of the Act. It was also provided that a company which
did banking business should include as part of its name the word bank, banker or
banking and no company which did not do banking business should use any of these words
as part of its name. A list of the forms of business in which a banking company could engage,
as enumerated in Section 277F of the Indian Companies Act, 1936, was also incorporated in
the new proposals along with the provision that it should engage in no other business except
such as the Government might notify in the Gazette of India.
A major objective of the measure was to safeguard the interests of the depositor.
The case for affording adequate protection to the depositor was admirably and forthrightly
set out by the Governor as follows:
To achieve the desired objective, the proposals included, inter alia,
(a) Minimum capital standards, the amount of capital depending up on the area of a banks
operation and the population of the towns in which it operated,
(b) A minimum proportion of assets to be held in British India and in liquid form and
(c) Certain provisions for expediting liquidation proceedings, besides incorporating some of
the provisions of the Indian Companies Act relating to banking companies.
The Governor was not inclined to provide for elaborate periodical inspections by the Bank or
any separate Government Inspection Department which would merely tend to create a false
sense of security in the minds of the public and throw all the onus of responsibility on those
responsible for inspection in the event of a bank failing . His view was that if the work is to

be done properly, it must involve legal power to summon books for inspection which it would
be somewhat invidious to give to the Reserve Bank, as this would tend to give the latter the
role rather of a policeman than of a colleague and helper of other banks which is the obvious
ideal.
He was also not in favour of extending the Act to private and indigenous bankers. The
reasons given were that
(a) these bankers rarely took deposits on current account and as such, no case had been made
for protecting their depositors,
(b) the regulation of usurious money lending practices was an item of Provincial legislation
and would almost certainly be considered ultra vires of a Central Act, and
(c) any assistance that such bankers might require from the Bank would be difficult to give,
in the absence of their keeping proper accounts segregating their banking from other
businesses

FUNCTION OF RESERVE BANK OF INDIA

As a central bank, the Reserve Bank has significant powers and duties to perform. For
smooth and speedy progress of the Indian Financial System, it has to perform some important
tasks. Among others it includes maintaining monetary and financial stability, to develop
and maintain stable payment system, to promote and develop financial infrastructure
and to regulate or control the financial institutions.
[A] TRADTIONAL FUNCTIONS.
Traditional functions are those functions which every central bank of each nation performs
all over the world. Basically these functions are in line with the objectives with which
the bank is set up. It includes fundamental functions of the Central Bank. They comprise the
following tasks.
(i) ISSUE OF THE CURRENCY NOTES
The RBI has the sole right or authority or monopoly of issuing currency notes except
one rupee note and coins of smaller denomination. These currency notes are legal tender
issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and

1,000. The RBI has powers not only to issue and withdraw but even to exchange these
currency notes for other denominations. It issues these notes against the security of gold
bullion, foreign securities, rupee coins, exchange bills and promissory notes and government
of India bonds.
(ii) BANKER TO THE BANKS
The RBI being an apex monitory institution has obligatory powers to guide, help and direct
other commercial banks in the country. The RBI can control the volumes of banks
reserves and allow other banks to create credit in that proportion. Every commercial
bank has to maintain a part of their reserves with its
RBI is bank of all banks in India. As a banker of banks, RBI:
Enables smooth and swift clearing and settlements of inter-bank transactions
Provides efficient means of funds transfer for all banks
Enables banks to maintain their accounts with RBI for statutory reserve requirements
and maintenance of transaction balances
Acts as lender of last resort ( LORL)

Overview Of Payment Systems In India

The central bank of any country is usually the driving force in the development of national
payment systems. The Reserve Bank of India as the central bank of India has been playing
this developmental role and has taken several initiatives for Safe, Secure, Sound, Efficient,
Accessible and Authorised payment systems in the country.
The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a
sub-committee of the Central Board of the Reserve Bank of India is the highest policy
making body on payment systems in the country. The BPSS is empowered for authorising,
prescribing policies and setting standards for regulating and supervising all the payment and
settlement systems in the country. The Department of Payment and Settlement Systems of the
Reserve Bank of India serves as the Secretariat to the Board and executes its directions.

In India, the payment and settlement systems are regulated by the Payment and Settlement
Systems Act, 2007 (PSS Act) which was legislated in December 2007. The PSS Act as well
as the Payment and Settlement System Regulations, 2008 framed there under came into effect
from August 12, 2008. In terms of Section 4 of the PSS Act, no person other than the Reserve
Bank of India (RBI) can commence or operate a payment system in India unless authorised
by RBI. Reserve Bank has since authorised payment system operators of pre-paid payment
instruments, card schemes, cross-border in-bound money transfers, Automated Teller
Machine (ATM) networks and centralised clearing arrangements.
Payment Systems
The Reserve Bank has taken many initiatives towards introducing and upgrading safe and
efficient modes of payment systems in the country to meet the requirements of the public at
large. The dominant features of large geographic spread of the country and the vast network
of branches of the Indian banking system require the logistics of collection and delivery of
paper instruments. These aspects of the banking structure in the country have always been
kept in mind while developing the payment systems.
Paper-based Payments
Use of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60% of
the volume of total non-cash transactions in the country. In value terms, the share is presently
around 11%. This share has been steadily decreasing over a period of time and electronic
mode gained popularity due to the concerted efforts of Reserve Bank of India to popularize
the electronic payment products in preference to cash and cheques.
Since paper based payments occupy an important place in the country, Reserve Bank had
introduced Magnetic Ink Character Recognition (MICR) technology for speeding up and
bringing in efficiency in processing of cheques.
Later, a separate High Value Clearing was introduced for clearing cheques of value Rupees
one lakh and above. This clearing was available at select large centres in the country (since
discontinued). Recent developments in paper-based instruments include launch of Speed
Clearing (for local clearance of outstation cheques drawn on core-banking enabled branches
of banks), introduction of cheque truncation system (to restrict physical movement of
cheques and enable use of images for payment processing), framing CTS-2010 Standards (for
enhancing the security features on cheque forms) and the like.

While the overall thrust is to reduce the use of paper for transactions, given the fact that it
would take some time to completely move to the electronic mode, the intention is to reduce
the movement of paper both for local and outstation clearance of cheques.

Electronic Payments
The initiatives taken by RBI in the mid-eighties and early-nineties focused on technologybased solutions for the improvement of the payment and settlement system infrastructure,
coupled with the introduction of new payment products by taking advantage of the
technological advancements in banks. The continued increase in the volume of cheques added
pressure on the existing set-up, thus necessitating a cost-effective alternative system.
Electronic Clearing Service (ECS) Credit
The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive
payment requirements (like salary, interest, dividend payments) of corporates and other
institutions. ECS (Credit) facilitates customer accounts to be credited on the specified value
date and is presently available at all major cities in the country.
During September 2008, the Bank launched a new service known as National Electronic
Clearing Service (NECS), at National Clearing Cell (NCC), Mumbai. NECS (Credit)
facilitates multiple credits to beneficiary accounts with destination branches across the
country against a single debit of the account of the sponsor bank. The system has a pan-India
characteristic and leverages on Core Banking Solutions (CBS) of member banks, facilitating
all CBS bank branches to participate in the system, irrespective of their location across the
country.
Regional ECS (RECS)
Next to NECS, RECS has been launched during the year 2009.RECS, a miniature of the
NECS is confined to the bank branches within the jurisdiction of a Regional office of RBI.
Under the system, the sponsor bank will upload the validated data through the Secured Web
Server of RBI containing credit/debit instructions to the customers of CBS enabled bank
branches spread across the Jurisdiction of the Regional office of RBI. The RECS centre will
process the data, arrive at the settlement, generate destination bank wise data/reports and
make available the data/reports through secured web-server to facilitate the destination bank

branches to afford credit/debit to the accounts of beneficiaries by leveraging the CBS

technology put in place by the bank. Presently RECS is available in Ahmedabad, Bengaluru,
Chennai and Kolkata

Electronic Clearing Service (ECS) Debit

The ECS (Debit) Scheme was introduced by RBI to provide a faster method of effecting
periodic and repetitive collections of utility companies. ECS (Debit) facilitates consumers /
subscribers of utility companies to make routine and repetitive payments by mandating bank
branches to debit their accounts and pass on the money to the companies. This tremendously
minimises use of paper instruments apart from improving process efficiency and customer
satisfaction. There is no limit as to the minimum or maximum amount of payment. This is
also available across major cities in the country.
Electronic Funds Transfer (EFT)
This retail funds transfer system introduced in the late 1990s enabled an account holder of a
bank to electronically transfer funds to another account holder with any other participating
bank. Available across 15 major centers in the country, this system is no longer available for
use by the general public, for whose benefit a feature-rich and more efficient system is now in
place, which is the National Electronic Funds Transfer (NEFT) system.
National Electronic Funds Transfer (NEFT) System
In November 2005, a more secure system was introduced for facilitating one-to-one funds
transfer requirements of individuals / corporates. Available across a longer time window, the
NEFT system provides for batch settlements at hourly intervals, thus enabling near real-time
transfer of funds. Certain other unique features viz. accepting cash for originating
transactions, initiating transfer requests without any minimum or maximum amount
limitations, facilitating one-way transfers to Nepal, receiving confirmation of the date / time
of credit to the account of the beneficiaries, etc., are available in the system.
Real Time Gross Settlement (RTGS)System
RTGS is a funds transfer systems where transfer of money takes place from one bank to
another on a "real time" and on "gross" basis. Settlement in "real time" means payment
transaction is not subjected to any waiting period. "Gross settlement" means the transaction is

settled on one to one basis without bunching or netting with any other transaction. Once
processed, payments are final and irrevocable. This was introduced in in 2004 and settles all
inter-bank payments and customer transactions above `2 lakh.
Clearing Corporation of India Limited (CCIL)
CCIL was set up in April 2001 by banks, financial institutions and primary dealers, to
function as an industry service organisation for clearing and settlement of trades in money
market, government securities and foreign exchange markets.
The Clearing Corporation plays the crucial role of a Central Counter Party (CCP) in the
government securities, USD INR forex exchange (both spot and forward segments) and
Collaterised Borrowing and Lending Obligation (CBLO) markets. CCIL plays the role of a
central counterparty whereby, the contract between buyer and seller gets replaced by two new
contracts - between CCIL and each of the two parties. This process is known as Novation.
Through novation, the counterparty credit risk between the buyer and seller is eliminated with
CCIL subsuming all counterparty and credit risks. In order to minimize the these risks, that it
exposes itself to, CCIL follows specific risk management practices which are as per
international best practices.In addition to the guaranteed settlement, CCIL also provides non
guaranteed settlement services for National Financial Switch (Inter bank ATM transactions)
and for rupee derivatives such as Interest Rate Swaps.
CCIL is also providing a reporting platform and acts as a repository for Over the Counter
(OTC) products.

OTHER PAYMENT SYSTEMS

Pre-paid Payment Systems
Pre-paid instruments are payment instruments that facilitate purchase of goods and services
against the value stored on these instruments. The value stored on such instruments represents
the value paid for by the holders by cash, by debit to a bank account, or by credit card. The
pre-paid payment instruments can be issued in the form of smart cards, magnetic stripe cards,
internet accounts, internet wallets, mobile accounts, mobile wallets, paper vouchers, etc.

Subsequent to the notification of the PSS Act, policy guidelines for issuance and operation of
prepaid instruments in India were issued in the public interest to regulate the issue of prepaid
payment instruments in the country.
The use of pre-paid payment instruments for cross border transactions has not been permitted,
except for the payment instruments approved under Foreign Exchange Management Act,1999
(FEMA).
Mobile Banking System
Mobile phones as a medium for providing banking services have been attaining increased
importance. Reserve Bank brought out a set of operating guidelines on mobile banking for
banks in October 2008, according to which only banks which are licensed and supervised in
India and have a physical presence in India are permitted to offier mobile banking after
obtaining necessary permission from Reserve Bank. The guidelines focus on systems for
security and inter-bank transfer arrangements through Reserve Bank's authorized systems. On
the technology front the objective is to enable the development of inter-operable standards so
as to facilitate funds transfer from one account to any other account in the same or any other
bank on a real time basis irrespective of the mobile network a customer has subscribed to.
ATMs / Point of Sale (POS) Terminals / Online Transactions
Presently, there are over 61,000 ATMs in India. Savings Bank customers can withdraw cash
from any bank terminal up to 5 times in a month without being charged for the same. To
address the customer service issues arising out of failed ATM transactions where the
customer's account gets debited without actual disbursal of cash, the Reserve Bank has
mandated re-crediting of such failed transactions within 12 working day and mandated
compensation for delays beyond the stipulated period. Furthermore, a standardised template
has been prescribed for displaying at all ATM locations to facilitate lodging of complaints by
customers.
There are over five lakh POS terminals in the country, which enable customers to make
payments for purchases of goods and services by means of credit/debit cards. To facilitate
customer convenience the Bank has also permitted cash withdrawal using debit cards issued
by the banks at PoS terminals.

The PoS for accepting card payments also include online payment gateways. This facility is
used for enabling online payments for goods and services. The online payment are enabled
through own payment gateways or third party service providers clled intermediaries. In
payment transactions involving intermediaries, these intermediaries act as the initial recipient
of payments and distribute the payment to merchants. In such transactions, the customers are
exposed to the uncertainty of payment as most merchants treat the payments as final on
receipt from the intermediaries. In this regard safeguard the interests of customers and to
ensure that the payments made by them using Electronic/Online Payment modes are duly
accounted for by intermediaries receiving such payments, directions were issued in
November 2009. Directions require that the funds received from customers for such
transactions need to be maintained in an internal account of a bank and the intermediary
should not have access to the same.
Further, to reduce the risks arising out of the use of credit/debit cards over internet/IVR
(technically referred to as card not present (CNP) transactions), Reserve Bank mandated that
all CNP transactions should be additionally authenticated based on information not available
on the card and an online alert should be sent to the cardholders for such transactions.
National Payments Corporation of India
The Reserve Bank encouraged the setting up of National Payments Corporation of India
(NPCI) to act as an umbrella organisation for operating various Retail Payment Systems
(RPS) in India. NPCI became functional in early 2009. NPCI has taken over National
Financial Switch (NFS) from Institute for Development and Research in Banking Technology
(IDRBT). NPCI is expected to bring greater efficiency by way of uniformity and
standardization in retail payments and expanding and extending the reach of both existing
and innovative payment products for greater customer convenience.
Oversight of Payment and Settlement Systems
Oversight of the payment and settlement systems is a central bank function whereby the
objectives of safety and efficiency are promoted by monitoring existing and planned systems,
assessing them against these objectives and, where necessary, inducing change. By
overseeing payment and settlement systems, central banks help to maintain systemic stability
and reduce systemic risk, and to maintain public confidence in payment and settlement
systems.

The Payment and Settlement Systems Act, 2007 and the Payment and Settlement Systems
Regulations, 2008 framed thereunder, provide the necessary statutory backing to the Reserve
Bank of India for undertaking the Oversight function over the payment and settlement
systems in the country.
Lender of Last Resort
As a Banker to Banks, the Reserve Bank also acts as the lender of the last resort. It can
come to the rescue of a bank that is solvent but faces temporary liquidity problems by
supplying it with much needed liquidity when no one else is willing to extend credit to that
bank. The Reserve Bank extends this facility to protect the interest of the depositors of the
bank and to prevent possible failure of the bank, which in turn may also affect other banks
and institutions and can have an adverse impact on financial stability and thus on the
economy.
RBI:
Enables smooth and swift clearing and settlements of inter-bank transactions Provides
efficient means of funds transfer for all banks Enables banks to maintain their accounts with
RBI for statutory reserve requirements and maintenance of transaction balances Acts as
lender of last resort ( LORL) Reserve Bank maintains current account of all other banks and
provides them facility to maintain cash reserves and also to carry out inter-bank transactions.
RBI provides the Real Time Gross Settlement System (RTGS) facility to the banks for interbank transactions. Statuary Reserves As per the Banking Regulations Act 1949, Banks have
to keep a portion of their demand and time liabilities as cash reserves with the Reserve Bank,
thus necessitating a need for maintaining accounts with the Bank. Earlier, (originally in the
BR act) it was as follows 5% of demand liabilities and 2% of time liabilities. But now it is
the portion of Net Demand and Time Liabilities (NDTL). So, the RBI provides banks with
the facility of opening accounts with itself. This is the Banker to Banks function of the
Reserve Bank, which is delivered through the Deposit Accounts Department (DAD) of RBI at
regional offices. RBI continuously monitors the transactions and operations of these accounts
so that defaults dont take place. Lender of the Last Resort The banks can borrow from the
RBI by keeping eligible securities as collateral or any other arrangement and at the time of
need or crisis, they approach RBI for financial help. Thus RBI works as Lender of the Last
Resort (LORL) for banks.

Reserve Bank as Banker to Banks

The Reserve Bank continuously monitors operations of these accounts to ensure that defaults
do not take place. Among other provisions, the Reserve Bank stipulates minimum balances to
be maintained by banks in these accounts. Since banks need to settle transactions with each
other occurring at various places in India, they are allowed to open accounts with different
regional offices of the Reserve Bank. The Reserve Bank also facilitates remittance of funds
from a banks surplus account at one location to its deficit account at another. Such transfers
are electronically routed through a computerised system called e-Kuber. The computerisation
of accounts at the Reserve Bank has greatly facilitated banks monitoring of their funds
position in various accounts across different locations on a real-time basis.
In addition, the Reserve Bank has also introduced the Centralised Funds Management System
(CFMS) to facilitate centralised funds enquiry and transfer of funds across DADs. This helps
banks in their fund management as they can access information on their balances maintained
across different DADs from a single location. Currently, 75 banks are using the system and
all DADs are connected to the system. As Banker to Banks, the Reserve Bank provides shortterm loans and advances to select banks, when necessary, to facilitate lending to specific
sectors and for specific purposes. These loans are provided against promissory notes and
other collateral given by the banks.
RBI is bank of all banks in India. As a banker of banks,
Banks are required to maintain a portion of their demand and time liabilities as cash reserves
with the Reserve Bank. For this purpose, they need to maintain accounts with the Reserve
Bank. They also need to keep accounts with the Reserve Bank for settling inter-bank
obligations, such as, clearing transactions of individual bank customers who have their
accounts with different banks or clearing money market transactions between two banks,
buying and selling securities and foreign currencies.
In order to facilitate a smooth inter-bank transfer of funds, or to make payments and to
receive funds on their behalf, banks need a common banker. By providing the facility of
opening accounts for banks, the Reserve Bank becomes this common banker, known as
Banker to Banks function. The function is performed through the Deposit Accounts

Department (DAD) at the Reserve Banks Regional offices. The Department of Government
and Bank Accounts oversees this function and formulates policy and issues operational
instructions to DAD.

CONCLUSION

The Reserve Bank of India i.e RBI is the central bank of our country. It was established in the
year 1935, under the Reserve Bank of India Act, 1934.
Being a central bank, RBI has control over the entire currency and banking system in India. It
acts as a banker to both the state and the central government in India. It has the exclusive
right to issue currency, notes in the country.
The Reserve Bank of India has to act as a Bankers' Bank. All the commercial banks operating
in India are mandatory to keep a cash reserve with RBI. Further, they have to maintain their
current accounts with it.
As a banker's bank, the Reserve Bank of India facilitates the clearing of cheques between
commercial banks and helps in inter bank transfer of funds.
Being Bankers' bank, the Reserve Bank of India can grant financial help to scheduled banks.
It also acts as "Lender of Last Resort" by providing emergency advances to banks.

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