RBI Act, 1934 – PART III — SECTION 20 TO SECTION 31
We continue from Section 20, with the granularity for: every sub-section, clause, proviso and explanation appearing in the uploaded Act, with the legal text converted into simple exam language.
Source basis: RBI Act, 1934 — latest updated in 2022.
CHAPTER III — CENTRAL BANKING FUNCTIONS
20. Obligation of the Bank to transact Government business.
20 — Main provision
The Bank shall undertake:
20(a)
To accept monies for the account of the Central Government.
Simplified
RBI is required to receive money on behalf of the Central Government.
20(b)
To make payments up to the amount standing to the credit of the Central Government’s account.
Simplified
If money is available in the Government’s RBI account, RBI must make payments on behalf of Government up to the amount available.
20(c)
To carry out:
- exchange operations;
- remittance operations;
- other banking operations;
including:
- management of the public debt of the Union.
Simplified
RBI is the Government’s banker and also performs specified public-debt management functions.
Memory
S.20 = RBI’s OBLIGATION to conduct Central Government banking business.
The uploaded Act places Section 20 immediately before Sections 21 and 21A, which separately deal with the Government’s right/arrangements and State Government business.
21. Bank to have the right to transact Government business in India.
21(1)
The Central Government shall entrust RBI, on agreed conditions, with:
21(1)(a)
All its:
- money transactions;
- remittance transactions;
- exchange transactions;
- banking transactions
in India.
Simplified
Central Government’s banking transactions in India are to be handled by RBI on agreed terms.
21(1)(b)
In particular, the Central Government shall deposit:
all its cash balances with RBI, free of interest.
Simplified
Government keeps its cash balances with RBI.
Exam Hook
Government’s cash balance with RBI = free of interest.
Proviso to 21(1)
Nothing prevents Central Government from carrying on money transactions at places where RBI has:
- no branch; and
- no agency.
At such places, Central Government may hold such balances as it requires.
Simplified
Normally Government banking is with RBI.
But where RBI has no branch/agency, Government can maintain cash balances and conduct transactions there itself.
21(2)
Central Government shall entrust RBI, on agreed conditions, with:
21(2)(a)
Management of the public debt.
21(2)(b)
Issue of new loans.
Simplified
RBI handles:
Government public debt + issue of new Government loans
on agreed terms.
21(3)
If RBI and Central Government fail to agree on the conditions referred to in Section 21:
→ Central Government decides the conditions.
Exam Trap
Do not write that disagreement automatically means RBI decides.
CG decides.
21(4)
Any agreement made under Section 21 shall:
→ be laid before Parliament as soon as possible after it is made.
Simplified
Government-RBI agreement under Section 21 must be placed before Parliament.
21A. Bank to transact Government business of States on agreement.
Unlike Central Government business, State Government business is based on an agreement with RBI.
21A(1)
RBI may, by agreement with the Government of any State, undertake:
21A(1)(a)
All its:
- money;
- remittance;
- exchange;
- banking transactions
in India.
This specifically includes:
deposit, free of interest, of all its cash balances with RBI.
Simplified
A State Government can enter into an agreement with RBI for RBI to act as its banker.
21A(1)(b)
RBI may undertake:
- management of the public debt of that State; and
- issue of new loans by that State.
Simplified
By agreement, RBI can also manage:
State Government debt + State Government borrowing.
21A(2)
Any agreement under Section 21A shall:
→ be laid before Parliament as soon as possible after it is made.
Exam Hook
Central Government
S.21 → statutory entrustment
State Government
S.21A → agreement with RBI
21B. Effect of agreements made between the Bank and certain States before 1 November 1956.
This is a historical transitional provision arising from the reorganisation of States.
21B(1)
Any agreement made under:
- Section 21; or
- Section 21A
between RBI and a specified State which was in force immediately before:
1 November 1956
would, from that date, operate as though it were an agreement under Section 21A between RBI and the corresponding State.
Modifications
Modifications could be made if:
- RBI and corresponding State Government agreed; or
- if no agreement was reached, the Central Government could modify it by order.
Simplified
Old agreements with pre-1956 States were converted into agreements with the corresponding post-reorganisation States.
Explanation to 21B(1)
“Corresponding State” means:
21B Explanation (a)
Agreement with State of Andhra
→ corresponding State = Andhra Pradesh.
21B Explanation (b)
Agreement with any other Part-A State existing before 1 November 1956:
→ corresponding State = State having the same name.
21B Explanation (c)
Agreement with:
- Part-B State of Mysore → State of Mysore
- Part-B State of Travancore-Cochin → State of Kerala
21B(2)
Any agreement under Section 21A with:
- Hyderabad;
- Madhya Bharat; or
- Saurashtra
was deemed to have terminated on:
31 October 1956.
Exam Point
This is essentially a historical transition provision.
22. Right to issue bank notes.
22(1)
RBI has the:
sole right to issue bank notes in India.
Simplified
RBI = exclusive banknote issuer in India.
Special historical power in 22(1)
For a period fixed by the Central Government, on recommendation of the Central Board, RBI could issue:
- currency notes of Government of India;
- supplied to RBI by Central Government.
The provisions of the RBI Act applicable to banknotes would, unless contrary intention appears, also apply to such Government currency notes.
Simplified
Historically, RBI could issue Government currency notes supplied to it by Government, with the Act treating them similarly to banknotes.
22(2)
From the date this Chapter came into force:
→ Central Government shall not issue currency notes.
Simplified
The normal currency-note issuing function shifted to RBI.
Exam Hook
S.22(1) = sole right of RBI to issue banknotes.
22A. Non-applicability of certain provisions to digital form of bank notes.
22A — Main provision
Sections:
- 24
- 25
- 27
- 28
- 39
do not apply to banknotes in digital form issued by RBI.
Simplified
The statutory rules dealing with:
- denominations;
- physical form/design/material;
- reissue of damaged notes;
- lost/stolen/mutilated notes;
- exchange/supply of physical currency;
do not apply to digital banknotes.
Exam Hook
Digital banknote → 24, 25, 27, 28 & 39 excluded.
This section was inserted by the Finance Act, 2022.
23. Issue Department.
23(1)
Issue of banknotes shall be conducted by RBI through an:
Issue Department
The Issue Department must be:
- separate from;
- wholly distinct from
the Banking Department.
Further requirement
Assets of Issue Department:
→ cannot be subject to liabilities other than the liabilities of the Issue Department defined under Section 34.
Simplified
RBI’s:
currency-issue function
is legally separated from its:
ordinary banking functions.
Memory
S.23 = Issue Department ≠ Banking Department.
23(2)
Issue Department shall not issue banknotes to:
- Banking Department; or
- any other person;
except in exchange for:
- other banknotes; or
- coin;
- bullion; or
- securities
which are permitted under the Act to form part of the Reserve.
Simplified
Issue Department cannot simply create and hand out notes without receiving permitted reserve assets in exchange.
Exam Hook
Issue Department issues notes against permitted reserve assets.
24. Denominations of notes.
24(1)
Subject to Section 24(2), banknotes may be issued in denominations of:
- ₹2
- ₹5
- ₹10
- ₹20
- ₹50
- ₹100
- ₹500
- ₹1,000
- ₹5,000
- ₹10,000
OR
other denominations:
- specified by Central Government;
- on recommendation of Central Board;
- not exceeding ₹10,000.
Simplified
The Act contains a statutory framework for permitted denominations.
Central Government can specify other denominations, but under this provision:
Maximum = ₹10,000.
Important exam point
This is the text of the uploaded 2022 Act. Do not confuse this statutory provision with denominations currently in circulation.
24(2)
Central Government may, on recommendation of Central Board:
→ direct non-issue or discontinuance of issue of banknotes of specified denominations.
Simplified
Government can tell RBI:
“Do not issue this denomination anymore.”
or
“Stop issuing this denomination.”
Chain
Central Board recommends → Central Government directs.
25. Form of bank notes.
Main provision
The:
- design;
- form; and
- material
of banknotes shall be as approved by:
Central Government
after considering recommendations made by:
Central Board.
Simplified
RBI Central Board recommends → Central Government approves.
Exam Trap
Do not write:
RBI alone decides the design of banknotes.
Under Section 25:
Central Government approves after considering Central Board’s recommendations.
26. Legal tender character of notes.
26(1)
Subject to Section 26(2):
Every banknote is:
- legal tender
- at any place in India;
- for payment/on account;
- for the amount expressed on the note.
The note is guaranteed by:
Central Government.
Simplified
If a banknote is valid under the statutory framework:
it is legal tender throughout India for its face value.
And:
Central Government guarantees it.
Exam Hook
Banknote legal tender + Central Government guarantee.
26(2)
On recommendation of Central Board:
Central Government may, by notification in the Gazette of India, declare that:
- any series of banknotes; or
- any denomination;
shall cease to be legal tender.
The notification specifies the effective date.
It may also specify:
- a particular RBI office/agency where the notes remain acceptable; and
- the extent to which they remain acceptable.
Simplified
Central Government can withdraw legal-tender status of a note series/denomination:
Central Board recommendation → Central Government notification → specified date.
Exam Trap
The legal authority under Section 26(2) is:
Central Government, acting on Central Board recommendation.
Not RBI acting alone.
26A. Certain bank notes to cease to be legal tender.
26A — Main provision
Notwithstanding Section 26:
Banknotes of:
- ₹500;
- ₹1,000;
- ₹10,000
issued before 13 January 1946:
→ are not legal tender.
Simplified
This is a historical provision declaring certain pre-13 January 1946 high-denomination notes non-legal-tender.
Exam Point
Do not confuse this historical provision with the later demonetisation framework under Section 26(2).
27. Re-issue of notes.
Main provision
RBI shall not re-issue banknotes which are:
- torn;
- defaced; or
- excessively soiled.
Simplified
A damaged/soiled note withdrawn from circulation should not simply be put back into circulation.
Memory
Torn + defaced + excessively soiled = No reissue.
28. Recovery of notes lost, stolen, mutilated or imperfect.
Main provision
Notwithstanding anything in:
- any enactment; or
- rule of law;
no person has an automatic legal right to recover from:
- Central Government; or
- RBI
the value of any:
- lost;
- stolen;
- mutilated; or
- imperfect
Government currency note or banknote.
Simplified
If your banknote is:
- lost;
- stolen;
- mutilated;
- otherwise imperfect;
you do not automatically have a legal right to demand its value from RBI/Government.
Proviso to Section 28
RBI may, with previous sanction of Central Government, prescribe:
- circumstances;
- conditions;
- limitations;
under which the value of such notes may be refunded as a matter of grace.
Further requirement
Rules made under this proviso must be laid before:
Parliament.
Simplified
Refund is not an automatic legal entitlement.
But:
RBI + prior CG sanction → may create rules allowing refund in specified circumstances.
Exam Hook
Section 28 = no right; possible refund by grace under RBI rules with prior CG sanction.
28A. Issue of special bank notes and special one-rupee notes in certain cases.
This is a special provision concerning circulation outside India.
28A(1) — Special bank notes
For controlling circulation of banknotes outside India, RBI may:
notwithstanding anything in other provisions of the Act,
issue special banknotes of:
- ₹5;
- ₹10;
- ₹100.
These are called:
“special bank notes.”
Their:
- design;
- form;
- material
must be approved under Section 28A(3).
Simplified
RBI can issue special-format ₹5/₹10/₹100 notes specifically to control circulation outside India.
28A(2) — Special one-rupee notes
For controlling circulation of Government of India ₹1 notes outside India:
→ Central Government may issue special ₹1 Government notes.
These can have:
- special design;
- special form;
- special material.
Simplified
Special ₹1 notes can be issued by Central Government, not RBI, for this specific external-circulation purpose.
28A(3) — Approval/design
Special banknotes
Design/form/material:
→ approved by Central Government
after considering recommendations of:
→ Governor.
Special ₹1 notes
Design/form/material:
→ adopted as Central Government considers appropriate.
Simplified
Special banknotes → CG approval after Governor’s recommendation.
Special ₹1 notes → CG decides.
28A(4) — Legal tender
Neither:
- special banknotes; nor
- special one-rupee notes
shall be:
legal tender in India.
Exam Hook
These are for controlling circulation outside India.
Therefore:
Not legal tender in India.
28A(5) — Treatment of special one-rupee note
A special one-rupee note is treated as:
“rupee coin”
for all purposes of the RBI Act except Section 39.
But it is not treated as a currency note for purposes of the Act.
Simplified
Special ₹1 note gets a special statutory status:
Rupee coin → yes, except S.39
Currency note → no
This is a classic MCQ trap.
28A(6) — Payment of special banknote
Where a special banknote states on its face that it is payable at a specified:
- RBI office; or
- RBI branch;
the obligation under Section 39 applies:
→ only to that specified office/branch.
And:
→ it is subject to regulations made under Section 28A.
Simplified
If the special note specifies a particular RBI office:
that specified office/branch bears the Section 39 obligation, subject to regulations.
28A(7) — RBI regulations
RBI may, with previous sanction of Central Government, make regulations for giving effect to Section 28A.
In particular, regulations can prescribe:
28A(7)(i)
How, and under what conditions/limitations:
- banknotes; and
- ₹1 notes
circulating outside India may be replaced by special notes issued under Section 28A.
28A(7)(ii)
How such special notes may be exchanged for:
- other banknotes; or
- other ₹1 notes.
Simplified
RBI can make the operational rules for:
replacement + exchange of special external-circulation notes, but requires prior Central Government sanction.
29. Bank exempt from stamp duty on bank notes.
Main provision
RBI is not liable to pay stamp duty under the:
Indian Stamp Act, 1899
in respect of banknotes issued by RBI.
Simplified
RBI-issued banknotes → no stamp duty under Indian Stamp Act.
30. Powers of Central Government to supersede Central Board.
This is a serious governance intervention power.
30(1)
If Central Government is of the opinion that RBI has failed to carry out:
- any obligation imposed on it by/under the RBI Act;
then Central Government may:
→ by notification in the Gazette of India,
declare the:
Central Board to be superseded.
Effect
After supersession:
General superintendence and direction of RBI’s affairs shall be entrusted to:
→ such agency as Central Government determines.
That agency may:
- exercise the powers of Central Board; and
- perform all acts/things that Central Board could perform under the Act.
Simplified
If RBI fails to fulfil its statutory obligations:
Central Government → can supersede Central Board → appoint another agency to run RBI affairs.
Exam Hook
This is an extraordinary statutory power.
30(2)
When Central Government takes action under Section 30:
It must cause a full report to be laid before Parliament containing:
- circumstances leading to the action; and
- action taken.
Time limit
The report must be laid:
- at the earliest possible opportunity; and
- in any case within 3 months from the notification superseding the Board.
Memory
S.30 = supersede Board
Report to Parliament = ≤ 3 months
31. Issue of demand bills and notes.
This provision restricts private parties from creating instruments that function like currency.
31(1)
No person in India other than:
- RBI, or
- Central Government where expressly authorised by the RBI Act,
may:
31(1)(a)
Draw:
- bill of exchange;
- hundi;
- promissory note;
- other engagement for payment of money;
where payment is:
payable to bearer on demand.
31(1)(b)
Accept such an instrument.
31(1)(c)
Make or issue such an instrument.
31(1)(d)
Borrow/owe/take up money on:
- bills;
- hundis;
- notes;
payable to bearer on demand of such person.
Simplified
Private persons cannot create currency-like bearer-on-demand instruments.
Core principle
RBI / expressly authorised Central Government = permitted
Others = prohibited
Proviso to 31(1)
The prohibition does not prevent:
- cheques;
- drafts, including hundis;
payable:
- to bearer on demand; or
- otherwise;
from being drawn on a person’s account with:
- banker;
- shroff; or
- agent.
Simplified
Normal banking instruments such as cheques/drafts drawn against a person’s account are not prohibited.
Exam Trap
Don’t interpret Section 31 as:
“No bearer cheque is allowed.”
Wrong.
The proviso expressly preserves qualifying cheques/drafts.
31(2)
Notwithstanding anything in the:
Negotiable Instruments Act, 1881,
no person in India other than:
- RBI; or
- Central Government where expressly authorised by RBI Act
may:
make or issue any promissory note expressed to be payable to the bearer of the instrument.
Simplified
Even if the Negotiable Instruments Act might otherwise permit something:
RBI Act prohibits private bearer promissory notes.
Exam Hook
S.31(2) specifically targets bearer promissory notes.
31(3)
The uploaded 2022 Act contains a provision stating that:
Central Government may authorise any scheduled bank to issue an electoral bond.
Explanation
“Electoral bond” means:
a bond issued by a scheduled bank under the scheme notified by the Central Government.
Simplified
Under the text of the uploaded Act:
Central Government → may authorise scheduled bank → issue electoral bonds under notified scheme.
Important source note
I am reproducing this because it is present in your uploaded 2022 version of the Act. I am not silently modifying the provision based on later developments.
SECTION 20–31 — EXAM MASTER TABLE
| Section | Core provision |
|---|---|
| 20 | RBI’s obligation to conduct Central Government banking |
| 21(1) | CG entrusts banking/money/remittance/exchange business to RBI |
| 21(1) proviso | CG can transact where RBI has no branch/agency |
| 21(2) | RBI manages CG public debt + new loans |
| 21(3) | If terms can’t be agreed → CG decides |
| 21(4) | Agreement laid before Parliament |
| 21A(1) | State Government banking business by agreement |
| 21A(1)(a) | State money/remittance/exchange/banking + cash balances |
| 21A(1)(b) | State public debt + new loans |
| 21A(2) | Agreement laid before Parliament |
| 21B | Historical transition of pre-1956 State agreements |
| 22(1) | RBI has sole right to issue banknotes |
| 22(2) | CG cannot issue currency notes after Chapter III commencement |
| 22A | Digital banknotes exempt from S.24, 25, 27, 28, 39 |
| 23(1) | Separate Issue Department |
| 23(2) | Issue notes only against permitted reserve assets |
| 24(1) | Statutory denominations / CG can specify others ≤ ₹10,000 |
| 24(2) | CG can stop/non-issue denominations on CB recommendation |
| 25 | CG approves design/form/material after CB recommendation |
| 26(1) | Banknotes = legal tender + CG guarantee |
| 26(2) | CG can withdraw legal-tender status on CB recommendation |
| 26A | Certain pre-13 Jan 1946 ₹500/₹1,000/₹10,000 notes non-legal tender |
| 27 | No reissue of torn/defaced/excessively soiled notes |
| 28 | No automatic right to recover value of lost/stolen/mutilated notes |
| 28 proviso | RBI may provide refund as grace with prior CG sanction |
| 28A(1) | Special ₹5/₹10/₹100 notes for outside-India circulation |
| 28A(2) | Special ₹1 Government notes for outside-India circulation |
| 28A(3) | Approval/design mechanism |
| 28A(4) | Special notes not legal tender in India |
| 28A(5) | Special ₹1 note deemed rupee coin except S.39 |
| 28A(6) | Section 39 obligation tied to specified RBI office/branch |
| 28A(7) | Regulations for replacement/exchange |
| 29 | RBI exempt from stamp duty on banknotes |
| 30(1) | CG can supersede Central Board |
| 30(2) | Report to Parliament within 3 months |
| 31(1) | Restriction on bearer-on-demand bills/hundis/notes |
| 31(1) proviso | Cheques/drafts on banker’s/shroff’s/agent’s account permitted |
| 31(2) | No private bearer promissory notes |
| 31(3) | Uploaded Act contains electoral-bond provision |
🔥 NUMBERS TO DRILL
Government banking
S.21(4)
→ Agreement laid before Parliament.
S.30(2)
→ Supersession report within 3 months.
Currency
S.24(1)
→ Other denomination specified by CG cannot exceed ₹10,000 under the text.
S.26(2)
→ Legal tender withdrawal = CG notification, based on CB recommendation.
S.26A
→ Historical notes issued before 13 January 1946.
Digital currency
S.22A
Digital banknotes are outside:
24 + 25 + 27 + 28 + 39
Memorise this as:
“Digital = D-24/25/27/28/39”
🧠 THE CONCEPTUAL CHAIN
Don’t memorise Sections 20–31 as isolated facts.
Think of the sequence:
Government banking
20 → RBI’s obligation
↓
21 → Central Government business
↓
21A → State Government business
↓
21B → historical State transition
Currency
22 → Who issues?
↓
23 → Where is issuance conducted?
↓
24 → What denominations?
↓
25 → What design/form/material?
↓
26 → Is it legal tender?
↓
27 → Can damaged notes be reissued?
↓
28 → What about lost/mutilated notes?
↓
28A → Special external-circulation notes
↓
29 → Stamp duty
RBI governance
30 → What happens if RBI fails its statutory obligations?
↓
Central Board can be superseded by Central Government
Anti-private-currency provision
31 → Who cannot create bearer-on-demand currency-like instruments?
⚠️ Three distinctions you should absolutely not mix up
1. Section 20 vs Section 21
S.20 = RBI’s obligation
S.21 = Central Government’s banking arrangement/right with RBI
2. Section 22 vs Section 26
S.22 = Who has the right to issue banknotes?
→ RBI
S.26 = Who can declare a banknote/series no longer legal tender?
→ Central Government, on Central Board recommendation
3. Section 24 vs Section 25
S.24 = denomination
S.25 = design, form and material
4. Section 27 vs Section 28
S.27 = RBI cannot reissue damaged notes
S.28 = person has no automatic right to recover value of lost/stolen/mutilated/imperfect notes
5. Section 30 vs Section 57
S.30 = Central Board can be superseded
S.57 = RBI itself can be liquidated only by Central Government order
Don’t confuse supersession of Board with liquidation of RBI.
Next part: Sections 32–45 — Issue Department assets/liabilities, foreign securities, rupee coin, supply of currency, foreign exchange, CRR of scheduled banks, returns, and the beginning of the Credit Information chapter. This is where the Act gets much more numerical and MCQ-heavy.