Central Banking Institution and Regulatory Framework

central banking authority in India

The banking sector in India as seen today was not developed and evolved until the last decade of the 18th Century. In the post-independent India the government started to recognise the importance of economy in the nation. India’s independence ended Laissez-Faire economies and we marched toward a mixed economic system this was established by the Industrial Policy Resolution of 1948. This led to a greater involvement of the government in different segments that also included the finance and the banking sector.

The Establishment of Reserve Bank

  • RBI or the central bank was established based on the recommendations of a Royal Commission for Indian Currency and Finance known as the Hilton Young Commission which led to the development of the Reserve Bank of India that was established as the central banking authority in India.
  • In 1949 Banking Regulations Act was passed that enabled the Reserve Bank to regulate, control and inspect the banks of India.
  • The central bank was established with the aim to regulate the issue of bank notes, to maintain reserves of the country, secure monetary stability and to operate the credit and currency system of the country.
  • Currently, the RBI’s headquarters is based in Mumbai and has four zonal offices at Chennai, Delhi, Kolkata and Mumbai.

Need to Nationalise Banks

In 1960, despite the presence of a central regulatory authority i.e. Central Bank that had controlling power over the banks, the majority of the banks were owned by private individuals. It was in the 1960s the process of Bank Nationalisation was initiated. The main objective behind this being was to accelerate the achievements of the then set objectives. 

Regulation of Banks

The Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1953 has thoroughly empowered the RBI to regulate the Indian banking system. The Indian banking sector can be classified as follows –

Scheduled Banks 

Non-Scheduled Banks. 

The regulatory functions of the Reserve Bank are as follows :

  • The Banking Regulation Act, 1949 empowers the RBI to issue a license to either commence with  new banking operations or to open a new branch of an existing bank.
  • The Reserve Bank also has a say in the appointment of the chairman and directors of Banks in India.
  • RBI has ensured that all the banks maintain transparency in regards to their bank charges. It has also made provisions that curbs money laundering through its KYC (Know Your Customer) guidelines. 
  • The Central bank has a monitoring procedure and system for audit and inspection

Banking Regulation Act

The Banking Regulation Act, 1949 was enacted with the aim to have a separate Act that regulated and controlled the Banking companies. Prior to the enactment of this Act, the banking companies were governed by the Indian Companies Act, 1913. 

The Banking Regulation Act introduced a Minimum Capital Requirement that was introduced to limit bank failures and also eliminate cut-throat competition by regulating and managing the opening of new branches. 

This Act has ensured a Balanced Growth for banks in India. The Act has also made its priority that the interests of the depositors are safeguarded and of the utmost importance.

There are a few banks that are not controlled and regulated by the Central Bank these are as follows:

  • Primary Agriculture Service Co-operative Banks
  • Land Development Banks
  • REPCO Bank Ltd.
  • State Bank of Sikkim

Banks and Regulator

The RBI sets certain norms that are legal obligations which are to be abided by every bank in India. To ensure such compliance the RBI has segregated the work to different departments which specialise in their specific fields and ensure that all the economic activities are functioning properly.

1. Board of Financial Supervision (BFS): It generally deals with new norms and initiatives and has been the main guiding force behind the Reverse Bank’s Regulatory and Supervisory initiatives since 1994.

2. Department of Banking Operations and Development (DBOD): this department frames regulations for the Commercial Banks in India.

3. Department of Banking Supervision (DBS): acts as a supervisor to the commercial banks. It’s main job is to control the audits and inspect the

4. Department of Non-Banking Supervision (DNBS): This department regulates and supervises the Non-Banking Financial Companies and their audit.

5. Urban Banks Department (UBD): This department regulates the urban cooperative banks.

6. Rural Planning and Credit Department (RPCD): This department regulates the regional rural banks and are supervised by National Bank for Agriculture and Rural Development.

Failure to Compliance 

  • There is a very sly chance where the commercial banks can be in non-compliance with the guidelines set by the regulator. RBI ensures control over banks through its quantitative and its qualitative measures i.e. policy rate and moral persuasion respectively.
  • The Central Bank has the power to take drastic measures to regulate the banks by imposing penalties, revoking license and to monitor frauds in banks. Banks submit their control returns and reports to RBI regularly.
  • Banks submit their annual reports to the Central Government that complies with various Central Banks guidelines.
  • If a bank fails to maintain the standard, the RBI can either merge banks, amalgamate them with bigger banks or can even be shut down by the RBI. Apart from this, any big or small default can be fined or their license can be cancelled.


With the emerging trends a greater need arises for regulation of Special Banking Laws and Special Central Authorities to regulate the national Banking systems. Furthermore, a greater need for Regulations and a watchdog arises due to the fact that banks are not the owner of the funds but a mere custodian of public’s savings and no government can look upon with equanimity. Hence, even a hint of misdirected activities by the banking institutions causes a tension within the economic activities throughout the country. Along with the deposit function of the banks, they offer a unique function i.e. to create credit which established the banking sector as a formidable sector that is subject to formal control and banking regulations.

Edited by Shikhar Shrivastava

Approved & Published – Sakshi Raje 

Shivani Sethi
I am Shivani Sethi indebted to the law for achieving my goal to become an inspiration. This life is so incomplete without research and skills and I feel so overwhelmed to welcome my happiness into this legal world.