CHAPTER III of RBI Act, 1934 — CENTRAL BANKING FUNCTIONS
Section 20 — RBI’s obligation to transact Government business
RBI is obliged to undertake specified Government banking functions.
Think
Central Government’s banker.
Section 21 — RBI’s right to transact Government business
RBI has statutory right to:
- Undertake Government banking business.
- Manage Government public debt where applicable.
- Handle Government receipts/payments.
Difference
S.20 = obligation
S.21 = right
Section 21A — State Government business
RBI may transact State Government banking business by agreement with the State.
Memory
Centre → S.20/21
State → S.21A agreement
Section 21B
Deals with effect of certain pre-1 November 1956 agreements with States.
Exam importance
Low.
Section 22 — Right to issue bank notes
Extremely important
Only RBI has the right to issue bank notes in India, subject to the Act.
Exception
₹1 note is issued by Central Government, not RBI.
Memory
RBI → Banknotes
Central Government → ₹1 note/coinage
Section 22A — Digital bank notes
Inserted by Finance Act, 2022.
Simple meaning
Certain provisions relating to physical notes are made inapplicable/modified for digital form of bank notes.
Exam Hook
S.22A = Digital Currency/legal framework entry into RBI Act.
The uploaded Act specifically records this insertion by Finance Act, 2022.
Section 23 — Issue Department
RBI’s note issue business is organised through the Issue Department.
Core idea
Historically separates:
- Note issue function
from - Banking department.
Exam Hook
S.23 = Issue Department structure.
Section 24 — Denominations of bank notes
Deals with denominations in which RBI may issue bank notes.
Central Government can, on recommendation of Central Board, direct:
- Non-issue
- Discontinuance of issue
of specified denominations.
Section 25 — Form of bank notes
Simple meaning
Design, form and material of banknotes:
- Approved by Central Government
- After considering Central Board recommendations.
Memory
RBI recommends → Central Government approves.
Section 26 — Legal tender character
S.26(1)
Every bank note is:
- Legal tender in India
- For amount expressed on it
- Guaranteed by Central Government.
S.26(2)
Central Government can declare a series/denomination no longer legal tender:
- On recommendation of Central Board
- Through Gazette notification.
Exam Hook
RBI does not itself demonetise under S.26(2).
Recommendation → Central Government notification.
Section 26A — Certain old notes cease to be legal tender
Historical provision concerning old ₹500, ₹1,000 and ₹10,000 notes issued before 13 January 1946.
Exam importance
Low, but possible factual MCQ.
Section 27 — Reissue of notes
RBI cannot reissue:
- Torn
- Defaced
- Excessively soiled notes.
Section 28 — Lost/stolen/mutilated/imperfect notes
Simple meaning
There is no automatic legal right to recover value of lost/stolen/mutilated/imperfect notes.
RBI may frame rules for refund subject to conditions.
Section 28A — Special bank notes
Historical provision concerning special notes for circulation outside India.
Exam importance
Very low.
Section 29 — Stamp duty
RBI is exempt from stamp duty on banknotes issued by it.
Easy
RBI notes → no stamp duty.
Section 30 — Central Government can supersede Central Board
If statutory conditions are met:
- Central Government can supersede Central Board.
- Government must report circumstances/action to Parliament.
Exam Hook
Extreme governance intervention.
Section 31 — Issue of demand bills/notes
Very important concept
No person in India, other than:
- RBI, or
- Central Government where expressly authorised,
can issue:
- Demand bills
- Hundis
- Promissory notes
- Other instruments payable to bearer on demand,
subject to statutory exceptions.
Exam Hook
Currency-like bearer-on-demand instruments are tightly restricted.
Section 32 — Penalty
Status
Repealed.
Section 33 — Assets of Issue Department
Issue Department assets include permitted:
- Gold
- Foreign securities
- Rupee coin
- Rupee securities etc.
The assets must correspond to liabilities of Issue Department.
Core concept
Currency issue must be backed by prescribed assets.
Section 34 — Liabilities of Issue Department
Defines liabilities corresponding to notes/currency issued and other specified obligations.
Think
S.33 = Assets
S.34 = Liabilities
Sections 35–36
Status
Historical/omitted provisions dealing with:
- Initial assets/liabilities
- Fluctuation in rupee coin assets.
Exam
Know that they are not operative provisions in the ordinary sense.
Section 37 — Foreign securities requirement
Deals with circumstances in which requirements concerning foreign securities backing may be suspended.
Core idea
Flexibility in currency backing requirements during exceptional circumstances.
Section 38 — Rupee coin
Government
Supplies rupee coins to RBI as required.
RBI
Distributes/supplies them to public as required.
Section 39 — Obligation to supply different forms of currency
RBI is required to provide forms of currency as contemplated by law, subject to availability/statutory framework.
Section 40 — Foreign exchange transactions
The uploaded Act contains provisions empowering RBI to buy/sell foreign exchange from authorised persons at rates/conditions determined in the statutory framework.
Exam Hook
S.40 = RBI + foreign exchange transactions.
Sections 41 & 41A
Status
Repealed.
Historical:
- Sterling purchase
- India-Burma remittance.
Section 42 — Cash reserves of scheduled banks
🔥 VERY IMPORTANT
Every bank included in the Second Schedule must maintain an average daily balance with RBI at the prescribed percentage of its relevant demand and time liabilities.
RBI can prescribe the applicable percentage.
Default consequence
If bank maintains less than required:
- Penal interest.
- Higher penal interest if shortfall continues.
Exam Hook
S.42 = CRR statutory foundation.
But don’t make the stupid mistake of writing that “Section 42 fixes CRR at X%.”
It doesn’t.
RBI determines the percentage within the statutory framework.
Section 43 — Consolidated statement
RBI publishes a consolidated statement of:
- Assets
- Liabilities
of scheduled banks collectively.
Frequency
Fortnightly.
Section 43A — Good-faith protection
No suit/legal proceeding against RBI/officers for things done:
- In good faith
- Under Sections 42/43/Chapter III-A.
Core idea
Good-faith statutory action gets legal protection.
Section 44 — Returns from co-operative banks
Status
Repealed.
Section 45 — Appointment of agents
RBI may appoint specified banks as its agents for carrying out banking functions at places where necessary.
Easy
RBI can use banks as its agents.
CHAPTER III-A — CREDIT INFORMATION
Section 45A — Definitions
Important:
Banking company
Includes specified categories of banks/financial institutions.
Borrower
Very wide:
- Person to whom credit limit is sanctioned.
- Includes connected entities/persons in specified cases.
Credit information
Includes:
- Loans/advances
- Credit facilities
- Securities
- Guarantees
- Financial history
- Creditworthiness
- Other information relevant for credit regulation.
Section 45B — RBI can collect credit information
RBI can:
- Collect credit information from banks.
- Furnish information to banks according to Section 45D.
Section 45C — RBI can call for credit returns
RBI can require banks to submit:
- Statements
- Information
- Particulars
in prescribed form/time.
Important
Bank cannot hide behind customer confidentiality to refuse a statutory RBI direction.
Section 45D — Furnishing credit information
Bank can request RBI for credit information concerning a financial arrangement.
RBI can furnish information available with it.
Safeguard
Names of banks providing information are not disclosed.
Section 45E — Confidentiality of credit information
Rule
Credit information is confidential.
Exceptions
Disclosure may occur:
- With RBI permission
- In consolidated/public-interest form
- Between banks according to banking practice/law
- Under Credit Information Companies law
- Where otherwise legally permitted.
Exam Hook
45C = Collect
45D = Furnish
45E = Protect
Section 45F — Compensation barred
No person gets compensation merely because of operation of Chapter III-A.
Section 45G — Penalties
Status
Repealed.