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Published on:

February 11, 2025

Shaaransh Sharma

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Reserve Bank of India (RBI) Act, 1934

The Reserve Bank of India Act is a general act to regulate the working of the Reserve Bank of India. The bill was enacted on 6 March 1934 which played a crucial role in shaping India's monetary policy and financial stability mechanism.

The Act established the foundation for the Reserve Bank's function in guiding the monetary system, regulating the credit in the economy, and maintaining the stability of the financial system in the country. In this blog, we will discuss the salient features of the RBI Act, of 1934, the role and functioning of the RBI, and insights on the list of scheduled banks under the RBI.

Historical Context and Enactment

During the early decades of the 20th century, India was subject to severe economic turmoil, worsened first by the disruption of World War 1 and then the Great Depression of 1929. The absence of a singular power to oversee social systems of currency and credit had wrought economic disarray, and a central bank was needed. To overcome these issues the Reserve Bank of India was formed under the RBI Act, 1934 on 1st April 1935.

Originally based in Calcutta (now Kolkata), the RBI moved its central office to Mumbai in 1937. Hilton Young Commission recommendations were used as the basis for the Act, which proposed an independent regulator for the financial system of India. The RBI has come a long way since then and has grown into a strong institution that plays a crucial role in determining the economic policies of the country.

Salient Features of the RBI Act, 1934

Several key provisions of the RBI Act, 1934 that outline the structure and functions of the Reserve Bank of India are:

1. Establishment of the RBI

The Act established the Reserve Bank of India to regulate the issue of banknotes and keep reserves to ensure monetary stability in India. It also sought to control the credit and currency system of India to its advantage. This provision was key to establishing a single monetary authority.

2. Central Board of Directors

The Act lays down the governance structure of the RBI, specifying the composition of the Central Board of Directors. It is a board formed by the Governor, Deputy governors, and other directors, which is appointed by the government. The board supervises and directs the RBI’s affairs in general.

3. Regulation of Currency

Regulation of currency is one of the most important functions of the RBI under the Act. The Act empowers the RBI the sole authority to issue banknotes in India, providing uniformity and stability in the currency system. The RBI also has the responsibility to maintain adequate reserves to support the currency it issues.

4. Monetary Control

The Act has empowered the RBI to formulate and implement the monetary policy to ensure price stability, control general inflation, and availability of credit to productive sectors. This clause highlights the importance of the central bank in balancing the economy.

5. Regulation of Banking Institutions

This Act gives the RBI overarching authority to regulate and supervise banking institutions in India. This involves things like granting licenses to banks, monitoring their activities, and making sure they abide by banking regulations. The goal is to preserve public confidence in the banking system and protect depositors’ interests.

6. Public Debt Management

The government’s borrowing program is managed by the RBI. It manages the central and state government debt, providing for their borrowing requirements cost-effectively and sustainably.

You might also be interested in Maximizing Returns with Government Investment Schemes

Functions and Working of the RBI

The RBI is a multifactorial regulator whose functions are targeted at stabilizing India's financial system and ensuring its smooth operation. We will go into which action in detail here:

1. Monetary Authority

RBI Formulates and Implements Monetary Policy. The RBI uses tools like repo rates, reverse repo rates, and open market operations to control money supply and liquidity in the economy. The overall target is to strike a balance between growth and inflation.

Also read Fiscal Policy in India: Objectives, Types, Tools and Importance

2. Issuer of Currency

Except for one-rupee notes and coins, all others are issued by the Reserve Bank of India (RBI), which is the sole issuer of currency apart from the Government of India. Such is to maintain the integrity and security of the currency system, and thus build public confidence.

3. Regulator and Supervisor of Financial System

One of the primary roles of the RBI is to facilitate financial stability. Its purpose is to oversee banks and other financial institutions to ensure that they operate in a sound and prudent manner. This involves assessing factors like capital adequacy, liquidity ratios, and risk management practices.

4. Manager of Foreign Exchange

The RBI operates within the framework of the Foreign Exchange Management Act (FEMA), 1999, which governs foreign exchange reserves in India and manages the foreign exchange market. It seeks to promote trade as well as payments across borders while keeping the Indian rupee stable.

5. Developmental Role

The RBI also performs various developmental activities to cater to economic growth. These include promotion of financial inclusion, supporting small and medium enterprises, and provision of credit support to agriculture and rural sectors. RBI has its hands full with the banking sector, including digital payments, and innovations such as fintech solutions.

6. Banker to the Government

The RBI, as the government’s banker, maintains accounts for the government, loans money to the government through the issue of government securities and also provides short-term credit to address temporary mismatches in receipts and payments.

Scheduled Banks under the RBI

The list of scheduled banks under RBI consists of banks mentioned in the Second Schedule of the Reserve Bank of India Act, 1934. To get the scheduled bank status, a bank needs to meet some conditions prescribed by the RBI – Minimum paid-up capital and reserves, etc.

Public Sector Banks	Private Banks	Foreign Banks
1. State Bank of India	1. Axis Bank Ltd.	1. The Royal Bank of Scotland N.V
2. Bank of Baroda (Incl. Vijaya & Dena Bank)	2. Catholic Syrian Bank Ltd.	2. Abu Dhabi Commercial Bank Ltd.
3. Bank of India	3. City Union Bank Ltd.	3. Antwerp Diamond Bank N.V
4. Bank of Maharashtra	4. Development Credit Bank Ltd.	4. Arab Bangladesh Bank Ltd. (AB Bank)
5. Canara Bank (Incl. Syndicate Bank)	5. Dhanlaxmi Bank Ltd.	5. Bank International Indonesia
6. Central Bank of India	6. Federal Bank Ltd.	6. Bank of America
7. Indian Bank (Incl. Allahabad Bank)	7. HDFC Bank Ltd.	7. Bank of Bahrain & Kuwait B.S.C
8. Indian Overseas Bank	8. ICICI Bank Ltd.	8. Bank of Ceylon
9. Punjab National Bank (Incl. OBC & UBI)	9. IndusInd Bank Ltd.	9. Bank of Nova Scotia
10. Punjab & Sind Bank	10. Jammu & Kashmir Bank Ltd.	10. Bank of Tokyo-Mitsubishi Ltd.
11. Union Bank of India (Incl. Andhra & Corp Bank)	11. Karnataka Bank Ltd.	11. Barclays Bank
12. UCO Bank	12. Karur Vysya Bank Ltd.	12. BNP Paribas
	13. Kotak Mahindra Bank Ltd.	13. China Trust Bank
	14. Lakshmi Vilas Bank Ltd.	14. Shinhan Bank
	15. Nainital Bank Ltd.	15. Citibank N.A
	16. Ratnakar Bank Ltd.	16. Credit Agricole Corporate and Investment Bank
	17. South Indian Bank Ltd.	17. Deutsche Bank
	18. Tamilnad Mercantile Bank Ltd.	18. DBS Bank Ltd.
	19. Yes Bank Ltd.	19. Hongkong and Shanghai Banking Corporation Ltd.
	20. Bandhan Bank	20. J.P. Morgan Chase Bank N.A
	21. IDFC Bank Ltd.	21. Krung Thai Bank
	22. IDBI Bank Ltd.	22. Mashreqbank
		23. Mizuho Corporate Bank Ltd.
		24. Oman International Bank
		25. Societe Generale
		26. Sonali Bank
		27. Standard Chartered Bank
		28. State Bank of Mauritius
		29. JSC - VTB Bank
		30. UBS AG
		31. American Express Banking Corporation
		32. First Rand Bank Ltd.
		33. Commonwealth Bank of Australia
		34. United Overseas Bank Ltd.
		35. Credit Suisse A.G
		36. Sberbank
		37. Australia and New Zealand Banking Group Ltd.
		38. Rabobank International
		39. National Australia Bank
		40. Woori Bank
		41. Industrial & Commercial Bank of China
		42. Sumitomo Mitsui Banking Corporation
		43. Westpac Banking Corporation
		44. Doha Bank

Scheduled banks have a few privileges like:

RBI Loans and Refinance Facility Eligibility
Membership in clearinghouses.
Financial Assistant Of The Reserve Bank Of India (RBI) At Bank Rate

Types of Scheduled Banks

Scheduled Banks are classified into:

Public Sector Banks: These banks are owned and operated by the government and significantly participate in implementing social welfare schemes.
Private Sector Banks: These banks are run by private organizations.
Foreign Banks: These Banks are based outside of India but have branches in India.
Regional Rural Banks (RRBs): These types of banks meet the credit requirements of the rural and agricultural sectors.
Cooperative Banks: These banks are cooperative banks that mainly operate in rural areas.

Amendments and Evolution

The act has been amended several times since its enactment to meet the requirements of a changing economic environment and to cater to a dynamic financial system. The significant amendment of 1949 nationalised RBI making it a fully government-owned entity instead of a shareholders' bank.

Conclusion

The threads of the Reserve Bank of India Act, of 1934 have woven a large part of India’s financial architecture. The Act envisaged the creation of the RBI and empowered it to oversee the monetary policy, which is crucial to the safety and health of the economy. Knowledge of the provisions of this Act helps us to understand how India’s central bank functions and how it plays a critical role in the economy of our central bank. The RBI has proven itself to be a pillar of support for India's financial system with its adaptive strategies and progressive policies that keep the system resilient in the global landscape.

FAQs

What is the Reserve Bank of India Act, 1934?

The RBI was established with the introduction of the Reserve Bank of India Act, 1934, aiming at regulating the issuance and supply of the Indian rupee and controlling the Indian monetary and financial system.

When was the RBI established, and what was its purpose?

Founded on 1 April 1935, under the RBI Act, 1934, the Reserve Bank was nationalized in 1949 and serves the primary purpose of regulating the issue of banknotes and keeping credit and currency in the country stable.

What are the main functions of the RBI under the Act?

Its primary functions are to formulate monetary policy, issue currency, control and supervise banks, manage public debt, supervise foreign exchange, and develop the economy.

What is the significance of scheduled banks under the RBI Act?

According to the RBI Act, of 1934, scheduled banks are such it's listed in the Second Schedule and need to fulfill certain criteria such as minimum capital requirements. They enjoy services such as loans, refinancing, and clearinghouse membership.