Skip to main content

Reserve Bank of India Act, 1934 – Part-IV – Section 42 to 45

The Reserve Bank of India Act, 1934 provides the statutory basis of the functioning of the Reserve Bank of India (RBI). In a series of articles, we will briefly go through the provisions of RBI Act, 1934. This is the fourth article in the series. 

Section 42 – Cash reserves of scheduled banks to be kept with the Bank

42(1) – Every bank included in the Second Schedule shall maintain with RBI an average daily balance at a percent (notified by RBI) of its total demand and time liabilities in India.

42(1A) – RBI may direct every scheduled bank to maintain with RBI, in addition to the balance prescribed under Section 42(1), an additional average daily balance at a rate (specified by RBI).

42(1C) – RBI may specify any transaction or class of transactions to be regarded as liability in India of a scheduled bank. If any question arises as to whether any transaction or class of transactions shall be regarded as liability in India of a schedule bank, the decision of RBI thereon shall be final.

42(2) – Every scheduled bank shall send to RBI, a return within 7 days from the date to which it relates. If the reporting Friday is a public holiday, the return shall give the preceding working day’s figures. If required, RBI may allow bank to –

  • Furnish a provisional return within 7 days followed by a final return within 20 days from the date to which it relates or
  • Furnish a monthly return within 20 days from the end of the month to which it relates.

42(2A) – If last Friday of the month is not an alternate (reporting) Friday, every scheduled bank shall send to RBI, a special return within 7 days from the date to which it relates.

42(3) – If the average daily balance held at RBI by a scheduled bank during any fortnight is below the minimum prescribed, such scheduled bank shall pay to RBI penal interest @ (3% + Bank Rate) on the shortfall amount, for that fortnight. If the shortfall continues, penal interest shall become payable @ (5% + Bank Rate) on the shortfall amount, for that fortnight and each subsequent fortnight.

42(3A) – If the penal interest becomes payable @ (5% + Bank Rate) and the shortfall still continues –

  • Every director / manager / secretary of the scheduled bank responsible for the default, shall be punishable with fine up to Rs.500 and with further fine up to Rs.500 for each subsequent fortnight during which the default continues.
  • RBI may prohibit the scheduled bank from receiving fresh deposit. If the scheduled bank defaults to comply with the prohibition, every director and officer of the scheduled bank responsible for the default, shall be punishable with fine up to Rs.500 and with further fine up to Rs.500 for each day the contravention continues.

42(4) – Any scheduled bank failing to send return under Section 42(2), shall pay to RBI a penalty of Rs.100 for each day during which the failure continues.

42(5) – Penalties imposed under Section 42(3) and 42(4), shall be paid within 14 days from the date the notice is served on the scheduled bank. If the scheduled bank fails to pay the penalty within the prescribed time, the penalty may be levied by the order of the Court. When order is issued by the Court, it shall issue a certificate specifying the sum payable by the scheduled bank. If satisfied that the defaulting bank had sufficient cause for its failure, RBI may waive the penalty.

42(6)(a) – RBI shall direct the inclusion in the Second Schedule of any bank which – 

  • Has a paid-up capital and reserves of an aggregate value of not less than Rs.5 lakh.
  • Satisfies RBI that its affairs are not detrimental to the interest of its depositors.
  • Is a State co-operative bank or company as defined in section 3 of Companies Act, 1956 or institution notified by the Central Government or corporation / company incorporated by or under any law in force outside India.

42(6)(b) – RBI shall direct the exclusion from the Second Schedule of any bank – 

  • The aggregate value of whose paid-up capital and reserves becomes at any time less than Rs.5 lakhs.
  • Which is conducting its affairs to the detriment of the interests of its depositor.
  • Which goes into liquidation or otherwise ceases to carry on banking business.

42(6)(c) – RBI shall alter the description in the Second Schedule whenever any scheduled bank changes its name.

42(6A) – In considering whether a State co-operative bank or a regional rural bank should be included in / excluded from the Second Schedule, RBI shall obtain a certificate from National Bank on whether the bank satisfies the conditions of section 42(6)(a).

42(7) – RBI may exempt any scheduled bank from the provisions of section 42.

Section 43 – Publication of consolidated statement by the Bank

RBI shall publish each fortnight a consolidated statement showing the aggregate liabilities and assets of all the scheduled banks together.

Section 43A – Protection of action taken in good faith

No suit or legal proceedings shall lie against RBI or any of its officers for anything done in good faith or for damage caused by anything done in good faith under Section 42 or 43 or Chapter IIIA.

Section 45 - Appointment of Agents

RBI may appoint National Bank / State Bank / any new bank as its agent.


References

Reserve Bank of India. (2022, August 29). 'The Reserve Bank of India Act, 1934'. Retrieved from https://rbi.org.in/Scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Act


Follow at - Telegram   Instagram   LinkedIn   Twitter

Comments

Popular Posts

Highlights of RBI Annual Report 2023-24 – Chapter 7 to 12

Reserve Bank of India (RBI) has published its annual report for the financial year 2023-24. In a series of articles, we will go through the highlights of the report. This is the fifth and last article in the series.  Chapter 7 – Public Debt Management Ways And Means Advances (WMA) limit for the Government of India (GoI) for H1:2023-24 (April to September 2023) was fixed at ₹1,50,000 crore and for H2:2023-24 (October 2023 to March 2024) was fixed at ₹50,000 crore. RBI issued an ultra-long security of 50-year tenor aggregating ₹30,000 crore to cater to the growing needs of long-term institutional players. Issuance of Sovereign Green Bonds (SGrBs) for an aggregate amount of ₹20,000 crore included maiden issuance of 30-year (₹10,000 crore) SGrB in addition to 5-year (₹5,000 crore) and 10-year (₹5,000 crore) SGrBs. A new 3-year benchmark security was introduced as part of government market borrowing programme during H1:2023-24.  The basket of products offered through the ‘Retail ...

Lending against Gold and Silver collateral

Reserve Bank of India (RBI) has issued directions on lending against the collateral of gold and silver. To whom are the directions applicable? The directions are applicable to the following regulated entities (REs) – Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks, but excluding Payments Banks). Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs). Non-Banking Financial Companies (NBFCs), including Housing Finance Companies (HFCs). Which loans are covered under the directions? The directions shall apply to all loans offered by an RE for the purpose of consumption or income generation (including farm credit) where eligible gold or silver collateral is accepted as a collateral security. What is eligible collateral? Eligible collateral means the collateral of jewellery, ornaments or coins made of gold or silver. A lender shall not grant any ad...

Prior approvals from or intimations / reporting to RBI by NBFC-BL

Non-Banking Financial Companies (NBFCs) are required to obtain prior approvals from Reserve Bank of India (RBI) or intimate / report to RBI various events. This article lists out some of such important events where prior approvals or intimations / reporting is required for Base Layer NBFCs (NBFC-BL). Events requiring prior approval from RBI  Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 dated October 19, 2023 Para 30 – NBFCs shall prepare its balance sheet and profit and loss account as on March 31 every year. Whenever an NBFC intends to extend the date of its balance sheet as per provisions of the Companies Act, 2013, it shall take prior approval of RBI before approaching the Registrar of Companies for this purpose. Even in cases where RBI and the Registrar of Companies grant extension of time, the NBFC shall furnish to RBI a proforma balance sheet (unaudited) as on March 31 of the year and the statutory returns ...

RBI’s Monetary Policy (June 06, 2025): In A Nutshell

The bi-monthly monetary policy of Reserve Bank of India (RBI) was announced on June 06, 2025. Here are some of the highlights of the monetary policy announcement. Rates   Change Rate Policy repo rate Reduced by 0.50% 5.50% Standing deposit facility (SDF) rate 5.25% Marginal standing facility (MSF) rate 5.75% Bank rate 5.75% Monetary policy stance Monetary policy stance was changed from ‘accommodative’ to ‘neutral’. Domestic Economy  The Indian economy presents a picture of strength, stability, and opportunity. The 5x3x3 matrix of fundamentals provides the necessary core strength to cushion the Indian economy against global spillovers and propel it to grow at a faster pace.  First, strength comes from the strong balance sheets of the 5 major sectors - corporates, banks, households, government, and the external sector.  Second, there is stability on all 3 fronts – price, financial, and political – providing policy and economic certainty.  Third, the Indian ec...

What is KYC?

Be it opening a new bank account, applying for a new credit card, registering for new e-wallet, or any other account or facility involving financial matters, the application process is incomplete until KYC is done.  What is KYC? KYC or Know Your Customer is a process of customer identification and verification while opening an account or undertaking a financial transaction. Why is KYC process needed? To prevent money laundering To combat financing of terrorism What is verified under KYC? The banks / financial institutions collect the relevant documents from the customers to verify the following – Proof of identity Proof of address Which documents can be collected for KYC? As per RBI’s Master Direction - Know Your Customer (KYC) Direction, 2016 (Updated as on May 10, 2021), “Officially Valid Document” (OVD) means – Passport Driving licence Proof of possession of Aadhaar number Voter's Identity Card issued by the Election Commission of India Job card issued by NREGA duly signed by an...