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Special: RBI Act: Section-7


Every government in the world wants to run its country’s economy according to its own purpose, which is to improve the economic condition of the country and to give it a new direction. In addition to ensuring the path of development for small and medium industries, besides improving the infrastructure and large industries, the economic condition of the people has to be corrected. In addition to the government, banks also have a very important contribution in governing and retaining the economy in the country. The central bank, which means the Reserve Bank of India’s special contribution, is conducive to the operation of banks and to favor the economic and monetary situation of the country. The Reserve Bank not only issues notes in the country, but also maintains the accounts of the loans taken by the government from abroad. other than this, The Reserve Bank is responsible for the operation and maintenance of all the banks of the country. The Reserve Bank also oversees the interest rate and other things related to the banking sector. The Reserve Bank performs these activities largely autonomously. But for past few days, the news of the tension between the government and the central bank in the use of Section 7 of the RBI Act is in the Sukhoi. In this special issue of today, we will talk about Section 7 of the RBI Act and will know what is the whole issue of Section 7. Apart from this, the RBI will also look into the facts related to establishment and functioning. Know what is the whole issue of Section 7. Apart from this, the RBI will also look into the facts related to establishment and functioning. Know what is the whole issue of Section 7. Apart from this, the RBI will also look into the facts related to establishment and functioning.

Background of Section 7 of RBI Act

  • The RBI had drafted the provisions of the Bank of England Act, 1946 and the Commonwealth Bank of Australia Act, 1945, in which the center has been given the power to instruct the RBI.
  • It states that when the government decides to work against the RBI governor’s advice, it will have to take responsibility for the action that is applicable to the RBI.
  • Although the government was not in favor of this provision at the time and it was redone
  • Section 7 was amended in 1949 for the purpose of strengthening the government for issue of instructions to the banks in public interest.
  • Section 7 of the RBI Act is associated with management and it has not been used before in the history of independent India.
  • Actually, the case of directing the RBI under Section 7 came into existence for the first time when Allahabad High Court was hearing the petition of electricity companies in the beginning of this year.
  • In this, some power generation companies challenged the circular issued on February 12 in the Allahabad High Court of RBI. The loan defaulted in this circular has been prevented from putting in the restructuring scheme.
  • When the RBI said that legally the government can order the central bank, the court said in its order issued in August that the government can consider giving such direction.
  • The High Court said that considering the facts of the court’s decision, the Central Government should think about giving directions to RBI within 15 days based on existing evidence under Section 7.

What is Section 7 of RBI Act?

  • Through this section, the government gets the right to issue instructions to the RBI.
  • Actually, Section-7 deals with management. This section contains 3 sub-sections in which all the provisions have been made.
  • Whenever the RBI does not comply with the Central Government’s instructions, written instructions can be issued under section 7.
  • According to Section 7 (1), the Central Government may issue instructions to the central bank in the public interest from time to time after consultation with the Governor of the Reserve Bank.
  • According to Section 7 (2), the government gives the right to operate the functioning of the Reserve Bank to the Board of Directors of its central board. After any such direction, the bank’s work will be handed over to the Central Board of Directors. This board of directors can use all the powers of the bank and can do all the work done by the Reserve Bank.
  • In the presence of the Governor of the Reserve Bank and the deputy governor nominated in his absence under Section 7 (3), the Central Board of Directors will have powers to supervise and direct the general affairs and affairs of the bank and he will be able to use all those powers. Which is near RBI

What is the whole matter?

  • For the first time in the history of the Central Government, under the provisions of Section 7 of the RBI Act, under the powers of the RBI, providing cash to the weaker banks, providing loans to small and medium enterprises and cash for non-banking financial companies, Have asked to solve.
  • For this, the government sent three letters to the RBI, in addition to fixing the matter quickly besides improving the structure of the work, there were separate issues related to cash management.
  • The Government also sought consultation under Section 7 of the RBI Act which gives the power to issue instructions to the central bank governor on matters of public interest.
  • On this matter, the Finance Ministry said that the government has respected the autonomy of RBI and promoted it.
  • According to the ministry, from time to time, he has been discussing a wide range of issues with the central bank.
  • The Ministry believes that both the RBI and the Government have to keep in mind the public interest and needs of the country’s economy in its functioning.
  • The Finance Ministry said that the Government of India has never made public the subject of deliberations and the final decision is made public.

Due to differences between the Finance Ministry and the RBI

  • Indeed, there are many reasons for the differences between the finance ministry and the RBI. The Finance Ministry believes that the central bank is not able to handle the weak banks in the public sector properly. Also, the lack of cash flows in the market and the bad credit in the electricity sector is not being done properly.
  • The government wants the distressed power sector to be relieved and kept out of the bankruptcy process. Government feels that doing this will benefit the economy.
  • The Government believes that under the Prompt Corrective Action (PCA), some relaxation should be given in the rules of procedure so that public sector banks can lend more than 10000 more to the small scale industries.
  • At present, there is a bad situation of small industries and there is a dire need of capital. On the other hand, the RBI believes that if the power sector gets exemption, then everyone will want the discount.
  • Also, due to easing of rules under the PCA, the weak banks of the public sector will rapidly lend to small industries and thus another debt crisis will arise.
  • Apart from this, the government also wants the RBI to cut interest rates to boost the economy, but RBI has increased it instead of reducing interest rates.

When did this dispute between the government and the RBI come out?

  • The dispute between the government and the RBI came to light when on October 26, RBI’s Deputy Governor, Viral Acharya, raised a question about the government regarding the autonomy of the reserve in one of its statements.
  • He said that the government should respect the freedom of the RBI. If he does not do this, then the RBI will have to face resentment.
  • In response to this, the Finance Minister on October 30 had held the RBI responsible for the poor credit crisis in the country. The Finance Minister said that the RBI failed to prevent arbitrary loans from banks between 2008 and 2014 and this has led to the present NPA crisis in the banking sector.

RBI Act, 1934: Major Streams

  • For the past few days, Section 7 of the RBI Act is in the headlines. This law was amended in 1936, through which arrangements were made for the maintenance of banking firms in India.
  • There are 61 streams in this Act. Some of these important sections are:
  • Section 3: The establishment of the Reserve Bank and the talk of Incorporation.
  • Section 4: Explains the central bank’s capital. It was 5 crores at that time.
  • Section 8: It mentions the establishment of a central bank.
  • Section 17: Describe in detail about the functioning of RBI.
  • Section 18: Emergency Loan for Banks
  • Section 21: Management of operating and operating of banking affairs by the Government of India.
  • Section 22: Only the special powers of issuing currency (notes) to RBI in India.
  • Section 24: The maximum value of the note is Rs. 10000.
  • Section 42: Regarding cash reserves of scheduled banks.
  • Section 45 U: Defines Repo, Reverse Repo, Money Market Instruments and Securities.
  • The first schedule of the RBI Act, 1934, defines the 4 areas under which Indian states come. These are four zones – western, eastern, northern and southern regions.
  • In the second schedule of the Act, there is a list of all Scheduled Banks in India.

RBI’s responsibilities and structure

  • Being a central bank, RBI has a very important responsibility in the economy. The main function of the RBI is to prepare and monetize the monetary policy of India.
  • The RBI itself does not act as retail banking nor takes deposits from the public. It acts as a central bank where commercial banks are account holders and can deposit money.
  • The RBI was established on the basis of the Hilton Young Commission’s recommendations. This commission was formed in 1926.
  • The headquarter of the RBI was initially established in Kolkata, which was permanently transferred to Mumbai in 1937.
  • Initially, the RBI was a privately owned bank. The country got independence in August 1947 and the nationalization of the RBI in 1949. Since nationalization, it has full ownership of the Government of India.
  • In the preamble of RBI, the basic functions of the bank have been described. Regulating the issue of bank notes and maintaining reserves of notes from monetary stability perspective in India and operating currency and credit system in the interest of the country is its main function. That is, RBI is responsible for regulating the country’s currency and credit system.
  • The preamble of RBI law has been amended by the Finance Act 2016. It states that the purpose of monetary policy is to maintain consistency in prices keeping in view the objectives of growth.
  • The functioning of the RBI is governed by the Central Board of Directors. According to the RBI Act, the Indian government employs this board for four years.
  • There are full-time governors on board and maximum four deputy governors. Apart from this, the government recruits 10 directors and 2 government officials from different areas. Also 4 directors are also appointed for 4 local boards.
  • There are local boards of RBI in four areas of the country – Mumbai, Kolkata, Chennai and Delhi.
  • The RBI has 27 regional offices and 4 sub-offices, most of which are in state capitals.

The main function of RBI

  • Function of Central Banking
  • Monopoly to issue notes
  • Regarding its currency with issuance of currency
  • Destruction of currency and coins on not being operational.
  • Protector of foreign exchange reserves.
  • Selling and buying foreign currency to keep foreign exchange rates stable.
  • Facilitate foreign trade and payments and develop and maintain foreign exchange market in India.
  • Preparation, implementation and monitoring of monetary policy.
  • Keeping the value constant, keeping in mind the purpose of development.
  • The credit controller means credit.
  • Responsibility for controlling the jobs given to commercial banks Use policy monetary measures to fulfill this objective. Quantitative and qualitative measures like Repo Rate, Reverse Repo Rate, CRR Cash Reserve Ratio, Statutory Liquidity Ratio (SLR)
  • The banker of government means that it plays the role of merchant bank for the central and state governments.
  • Banker for Commercial Banks and Final Lender for them
  • Keeping bank accounts of scheduled banks.
  • Monitoring of banks with licensing of banks under non-monetary activities.
  • Setting norms for banking operations under which the country’s banking and financial system works.
  • Protecting the interests of depositors and providing affordable banking services to the general public.
  • Monitoring of non-banking financial companies
  • An interesting aspect linked to the Reserve Bank is that our central bank has also worked as a central bank of Pakistan and Myanmar besides India.
  • It acts as a representative of the government in the International Monetary Fund and represents India’s membership.


On the standoff between the government and the RBI, the International Monetary Fund has said that it is monitoring the ongoing affairs between the RBI and the government. The IMF has said that it supports the autonomy of central banks across the world.
However, the dispute between the government and the RBI is not new. Among them, there have been differences on various issues on different occasions. Usually, the interest rates are different in relation to liquidity and management in banking, but eventually the disputes are settled. Hopefully this dispute will also be sorted out.
Updated: January 3, 2019 — 5:58 am

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