Banking Regulation and the Role of the Reserve Bank of India

Banking in India is governed mainly by two statutes: the Reserve Bank of India Act, 1934, which creates the RBI and gives it its central banking functions, and the Banking Regulation Act, 1949, which controls who may do banking business and how. Under the 1949 Act, no company can carry on banking business in India without a licence from the RBI (section 22), and the RBI can lay down lending policy, inspect banks, issue binding directions, remove managers and impose penalties. For a law student, the core idea is simple: the RBI is both the gatekeeper and the day to day supervisor of every bank you deal with.

This explainer is written for B.A. LL.B. and LL.B. students preparing for banking law papers, and for any reader who wants to know where a bank's rules really come from. If you have ever wondered why your bank in Nagercoil follows the same complaint procedure as a bank in Delhi, the answer lies in these provisions.

Which laws make up the basic framework?

The RBI's own list of the laws it administers runs to more than thirty statutes, but for a first reading you need only a few:

• Reserve Bank of India Act, 1934: sets up the RBI and its functions as monetary authority, issuer of currency and banker to the government. The RBI began functioning in April 1935 and has been wholly owned by the Government of India since 1 January 1949.
• Banking Regulation Act, 1949 (Act 10 of 1949): enacted on 10 March 1949 and in force from 16 March 1949. Its long title says it is an Act "to consolidate and amend the law relating to banking."
• Supporting statutes: the Negotiable Instruments Act, 1881, the Bankers' Books Evidence Act, 1891, the Deposit Insurance and Credit Guarantee Corporation Act, 1961, the SARFAESI Act, 2002 and the Payment and Settlement Systems Act, 2007, among others.

What are the key provisions of the Banking Regulation Act?

Learn these section numbers and their headings. Examiners reward precision.

• Section 5(b): defines "banking" as accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. Section 5(c) defines a banking company as any company which transacts the business of banking in India.
• Section 6: forms of business in which banking companies may engage.
• Section 7: no company other than a banking company may use the words "bank", "banker" or "banking" as part of its name, subject to limited exceptions.
• Section 21: power of the RBI to control advances. Where it is satisfied that it is necessary in the public interest, in the interest of depositors or for banking policy, the RBI may determine policy on advances, and banks must comply.
• Section 22: licensing of banking companies. If the RBI cancels a licence, the bank may appeal to the Central Government within thirty days.
• Section 23: prior RBI permission is needed to open or shift a place of business.
• Section 35: inspection. Section 35A: power of the RBI to give directions. Sections 35AA and 35AB: directions on insolvency resolution and stressed assets.
• Section 36AA: power to remove managerial and other persons. Section 36ACA: supersession of the board of directors in certain cases.
• Section 45: RBI may apply to the Central Government for suspension of business (moratorium) and prepare a scheme of reconstruction or amalgamation.
• Section 47A: power of the RBI to impose penalties.
• Section 56: applies the Act to co-operative societies, subject to modifications.

What changed in 2020 and 2025?

Two recent amendments matter for any 2026 answer. The Banking Regulation (Amendment) Act, 2020 (Act 39 of 2020) substituted section 3 with effect from 26 June 2020, tightening RBI oversight of co-operative banks. Then the Banking Laws (Amendment) Act, 2025 (Act 16 of 2025) raised the "substantial interest" threshold in section 5(ne)(i) from five lakh rupees to two crore rupees (or any other amount the Central Government notifies), with effect from 1 August 2025. The 2025 Act made other changes too, so check the current India Code text before quoting anything else from it.

How does the RBI protect ordinary customers?

The clearest example is the Reserve Bank Integrated Ombudsman Scheme, 2021. It came into force on 12 November 2021 and was issued under section 35A of the Banking Regulation Act, section 45L of the RBI Act and section 18 of the Payment and Settlement Systems Act. It merged the Banking Ombudsman Scheme, 2006, the NBFC Ombudsman Scheme, 2018 and the Digital Transactions Ombudsman Scheme, 2019 into one.

According to the RBI notification, it covers all commercial banks, regional rural banks, scheduled and non-scheduled primary (urban) co-operative banks with deposits of Rs 50 crore or more, NBFCs (other than housing finance companies) that accept deposits or have a customer interface with assets of Rs 100 crore or more, and system participants. Suppose a pensioner in Marthandam finds an unexplained charge on her account:

1. She complains first to the bank's own grievance cell. The RBI website lists each bank's grievance link.
2. If unresolved, she files online at cms.rbi.org.in, the RBI's complaint portal.
3. If she prefers to write, the RBI lists two Ombudsman offices for Chennai, both at C/o Reserve Bank of India, Fort Glacis, Chennai 600 001.

Time limits, compensation caps and appeal periods are set out in the scheme document itself. Read the current version on the RBI site before advising anyone, because the scheme has been amended (the RBI complaints page links to a version incorporating amendments up to 5 August 2022).

How have the courts read the RBI's powers?

The leading modern case is Internet and Mobile Association of India v. Reserve Bank of India (Supreme Court, 4 March 2020). A three judge bench set aside the RBI's 2018 circular that barred regulated entities from dealing in virtual currencies. The Court accepted that the RBI has wide regulatory power, yet held that the measure failed the test of proportionality because the RBI had not shown any real damage to the entities it regulates. Use this case to show that RBI powers, though broad, are subject to judicial review under Article 19(1)(g).

How should you write about this in an exam?

• Open with the two statutes and one line on the RBI's dual role as central bank and regulator.
• Quote the section 5(b) definition, then list powers by section number.
• Bring in the 2020 and 2025 amendments to show your notes are current.
• Cite IAMAI v. RBI (2020) for the limits on RBI power.
• End with the consumer angle: the Integrated Ombudsman Scheme, 2021.

Students who want hands on exposure to banking complaints can volunteer with the college legal aid clinic, where such grievances come up often.

Sources

• Banking Regulation Act, 1949 (India Code PDF): official text with amendment footnotes, including Act 39 of 2020 and Act 16 of 2025.
• RBI: Legal Framework, Acts: list of statutes administered by the Reserve Bank.
• RBI notification on the Integrated Ombudsman Scheme, 2021: scheme dated 12 November 2021, coverage and legal basis.
• RBI: Ombudsman offices: addresses, including the Chennai offices.
• RBI: Complaints: links to the complaint portal and scheme documents.
• RBI: Banks in India: grievance redressal contact links for each bank.
• Reserve Bank of India (Wikipedia): secondary background on the RBI's history and the 2020 virtual currency ruling.