THE IRON HAND OF RESERVE BANK OF INDIA

An analysis of judicial precedents and trends

BANKING LAW CIA- III

Rajveer Singh Gurdatta 1750431

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 TABLE OF CASES

Cases Pg No.
Ashok Kumar v. District Industries Officers (1992), 75 Comp. Cases 669 3
Bank of India v. O.P. Swarnakar, (2003), 2 SCC 721 3
Bari Doab Bank Ltd. v. Union of India And Others AIR 1998 Delhi 95 4
Simco Rubber Products (P) Ltd. v. Bank of India (2004) 51 SCL 272 ( All) 5
M.M. Accessories v. U.P. Financial Corporation, 2002 (46) ALR 261 5
Dhirendra Chandra Pal v. Associated Bank of Tripura, AIR 1955 SC 213 6
Muhammed Usman v. Registrar Of Co-Operative, AIR 2003 Ker 299 6
Dharani Sugars and Chemicals Ltd. v. Union of India WRIT PETITION 7
(CIVIL) NO.1399 OF 2018
Kamal Kumar Kalia v. Union of India WRIT PETITION (CIVIL) NO.10955 7
OF 2020
Sajjan Bank (Pvt.) Ltd. v. Reserve Bank AIR 1961 Mad 8 8
Vishwas Utagi v. State of Maharashtra 2020 SCC Online Bom 725 8
Indian Power Producers Association v. Union of India Writ Petition (Civil) 9
No. 23181 of 2018
Joseph Kuruvilla Vellukunnel v. The Reserve Bank of India AIR 1962 SC 10
1361

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 THE IRON HAND OF RESERVE BANK OF INDIA
An analysis of judicial precedents and trends
INTRODUCTION

A centralized and liberalized Banking system places a huge onus on the regulator to direct the
functioning of the monetary system: with an iron hand in some cases and a softer hand in some.
Starting with cases on the legal status of banks, the cases go on to elaborate upon: the exclusive
power of RBI and non-interference from Article 226, the iron hand of banking regulation
(statutory and regulatory frameworks), cancellation of banking licenses and the adversarial
tendencies of the RBI vs. the Government. The symbolic ‘iron hand’ of regulation is the
common thread connecting all the cases.

LEGAL STATUS OF BANKS (Harshita Kakar 1750448)

An effective banking system is the true reflection of the financial opportunities for a rising level
of income.1 Before elaborating on the hierarchical mechanism in Indian banking system there is a
need to understand the legal status of banks.

I. Ashok Kumar v. District Industries Officers (1992)2

Facts: A writ petition was filed against the refusal by the respondent bank to grant a loan to the
petitioner for starting a brick manufacturing unit on the ground that the petitioner had no
experience in brick manufacturing.

Analysis: It was observed that the loan could not be allowed unless the terms of agreement were
met and therefore could not be claimed as a matter of right. The court could not substitute its
own discretion while deciding on the grant of loan by exercising extraordinary jurisdiction under
Art.226 of the Constitution of India. Conclusively, it is for the bank authorities to exercise their
discretion in the matter of granting loan and prescribing the conditions for such grant. Hence, it
can be established that there has been no violation of statutory rules or principles of natural
justice while restricting the grant of loan to the petitioner. An agreement for loan stands on the
premises of mutual conditions of borrower and the banker, therefore the same cannot be enforced
as a legal right. Since the RBI guidelines of January 1993, the private banks have experienced a
drastic change in the functioning of commercial banks in India keeping up with the pacing
privatization, liberalization and globalization.

II. Bank of India v. O.P. Swarnakar (2003)3

1
Raiender Singh. “Towards Sound and Strong Banking”. Journal of Professional Banker, Nov. (2008), p.54
Hyderabad
2
Ashok Kumar v. District Industries Officer’s, (1992), 75 Comp. Cases 669
3
Bank of India v. O.P. Swarnakar, (2003), 2 SCC 721

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Facts: The State Bank of India, constituted under the State Bank of India Act, 1955 and other
banks taken over under the Banking Act, 19704 adopted a scheme known as the "Employees
Voluntary Retirement Scheme". In the Bank of India case, a large pool of employees submitted
their offer, which was accepted despite having been withdrawn by some minority. The issue for
consideration pertained to whether an employee who opts for voluntary retirement pursuant to or
in furtherance of a scheme floated by the nationalized banks would be precluded from
withdrawing the said offer.

Analysis: The Court observed that nationalized banks are covered under the scope of the term
‘State’ within Art.12 of the Constitution of India. These banks cannot take recourse to ‘hire &
fire’ for the purpose of terminating the services of its employees, their actions must conform
within the ambit of Art.14 and 21 of the Indian Constitution. The bank reserves its rights to
rescind/alter the conditions of scheme. While the option to voluntarily retire, indisputably, can be
made to a group of persons collectively and therefore is capable of collective or individual
acceptance; the VRS scheme has to be treated in a contractual nature as per the Indian Contracts
Act, 1872.

ARTICLE 226 v. RESERVE BANK OF INDIA (Gouri Krishnan Thampi 1750447)

Judicial review and writs is the oft-misused weapon in the hands of unscrupulous entities to
evade banking regulation. The Court has taken a strict stance and declared that Article 226 is
neither a ground for questioning the expert judgement of the RBI, nor is it a tool to embed
statutory obligation within RBI guidelines to evade contractual obligations.

III. Bari Doab Bank Ltd. v. Union of India And Others (1998)5

Facts: The petitioner Bank was orderd from the Central government to increase its paid-up
capital. After this order, they were ordered to restructure their Bank to comply with RBI
regulations. The bank contended that its financial position was strong and that it has remained
profitable and has expanded despite the grave situation in the State. However, the RBI contended
that it had an investment that earned no income, violating s. 19(3) of the Act, had no system of
internal or concurrent audit, did not have an adequate credit appraisal or a management system,
did not dispose of its non-banking assets. Under s. 38 of the Act, the Moratorium order was
served upon the Bank to stop all business activities. 6 The case decided on whether the High
Court, under Article 226 can examine the correctness of orders issued on the behest of the RBI
under s. 45?

Analysis: However, the RBI is an autonomous Body which has been empowered under s.45 to
request the Central Government to issue orders of moratorium, reconstruction or amalgamation
of the Bank. Therefore, the Court held that, the petitioners have no standing under Article 226 to
4
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
5
Bari Doab Bank Ltd. v. Union of India And Others AIR 1998 Delhi 95
6
Laws:s.11, 19(3), 45, 38 of the Banking Regulation Act, 1949

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approach the Court with reference to an order by the Government, as it has the requisite expertise
to arrive at its finding, when it involves the computation of facts and figures under s. 11. 7 It is not
the purview of the Court to determine the correctness of the conclusion.

IV. Simco Rubber Products (P) Ltd. v. Bank of India (2004)8

Simco, classified as an NPA, tried to coerce its creditor, X bank, to enforce a onetime settlement,
alleging that the RBI guidelines classified itself as such, and created a statutory duty within the
bank to accept such a settlement. The bank wrote a letter alleging that Simco was not an NPA
under the RBI guidelines, and that it cannot accept any one-time settlement. Simco then prayed
under Article 2269 for a mandamus against that letter. Court decided on whether a writ of
mandamus could be granted against the respondent bank to accept the proposal of one-time
settlement in the absence of a statute or rule casting such a duty on the bank?

Analysis: The petitioner alleged that the nationalized bank, in non-compliance with RBI
guidelines, refused to classify it as an NPA without reason and refused to grant the OTS facility.
The bank alleged that the guidelines were merely directive and not imperative, and that forceful
self-classification as NPA for availing OTS against its contractual obligations would open a
Pandora’s Box of other NPAs trying to evade responsibility. Guidelines are framed under s. 36
by the RBI, are issued to facilitate recovery of dues from NPAs and not to enable them to
wilfully default in loans and divert funds via other banks in defiance of their banking contract. 10
In a defaulter’s case, he has no legal right to claim that it be settled on favourable terms proposed
by him when the claim of the creditor is reduced. The Court held that no party has a legal right to
an OTS, i.e., to evade contractual responsibilities, that there is no error of law in the face of the
record, in order to issue mandamus.

THE ‘IRON HAND’ OF BANKING REGULATION: STATUTORY FRAMEWORK

(Rajveer Singh Gurdatta 1750431)

The banks in India have been subject to criticism in the past, the reason being inadequate
regulatory measures to control the governance of the banks. The enactment of a specific
legislation i.e. the Banking Regulation Act, 1949 was required to administer the capital
requirements, to cut the competition amongst banks, monitor opening of branches and
managerial positions, to protect the interests of the depositors and weaker banks, and to introduce
guidelines for foreign investments in the Indian Markets. Thus, this comprehensive regulation is
a step towards control mechanism and functioning of the banks.

7
Joseph Kuruvila v RBI (1962 AIR 1371); KI Shepard v Union of India 1988 SCR (1) 188, Life Insurance
Corporation of India v. Escorts Ltd. 1986 AIR 1370 , Dwarkadas Marfatia and Sons v. Board of Trustees of Port of
Bombay 1989 SCR (2) 751.
8
Simco Rubber Products (P) Ltd. v. Bank of India (2004) 51 SCL 272 ( All).
9
Art. 226 Constitution of India, 1950, s.36 Banking Regulation Act, 1949
10
M.M. Accessories v. U.P. Financial Corporation, 2002 (46) ALR 261

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 V. Dhirendra Chandra Pal v. Associated Bank of Tripura, (1955)11

Facts –The respondent, Associated Bank of Tripura Ltd., went into liquidation. A month prior to
the liquidation, the appellant and the Bank entered into an agreement whereby the appellant
became a tenant of the Bank in respect of a certain parcel of land.  One of the terms of the
tenancy-agreement was that the appellant should vacate the land demised on 24 hours’ notice.
After the Bank went into liquidation the Liquidator served the appellant, a notice terminating his
tenancy and calling upon him to vacate the land and to hand  over possession by the end of.  This
was not duly followed by the appellant and hence the Liquidator filed an application to which
subsequently, the appellant filed  the present  suit asking for a declaration that the ex parte
decree against him was made without jurisdiction  and that  he  continued  to  be  a  tenant
notwithstanding  the said ex parte decree.

Analysis –The case dealt exclusively with the Banking Regulation Act, 1949 and its requirement
for (i) checking the abuse of powers by persons who controlled some banks and (ii) the absence
of measures for safeguarding the depositors of the banking companies and the country's
economic interest in general (iii) The Act also provided a machinery by which proceedings in
liquidation of banking companies could be expedited and speedily terminated. It was held in the
case that under Banking Companies Act12, the proceedings there under are not proceedings in the
nature of suit, but summary proceedings specially provided for expeditious disposal of winding
up proceedings in the case of Banking Companies with liberty or power to the Court to frame its
own procedure for the disposal of such applications.

VI. Muhammed Usman v. Registrar of Co-Operative, (2003)13

Facts –The case relate to the registration and functioning of unlicensed urban banks. The
examination becomes relevant as the unlicensed banking is attempted to be conducted by co-
operative societies registered under the Kerala Co-operative Societies Act, 1969. The scope of
the expressions "Co-operative Society" and various types of such societies and "banking" as in
the regulations in various acts14 are in question.

Analysis–The case highlights the relevance of the regulations and in determining the duty and
functions of the Reserve Bank of India to take prompt steps provided under the Banking
Regulation Act, 1949. The RBI is expected to take action in the events of violation of the
provisions of the Act, for safeguarding public interest, protecting banking policy, preventing the
disorderly functioning of the co-operative banks and for the proper management of banking
business in co-operative banks and it is for the public to alert the Reserve Bank of India

11
Dhirendra Chandra Pal v. Associated Bank of Tripura, AIR 1955 SC 213
12
Sec.45b Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
13
Muhammed Usman v. Registrar Of Co-Operative, AIR 2003 Ker 299
14
Kerala Co-operative Societies Act, 1969 (Act 21, 1969), Banking Regulation Act, 1949 (Act 10 of 1949), Reserve
Bank of India Act 1934 (Act 2 of 1934), National Bank for Agriculture and Rural Development Act, 1981 and The
Deposit Insurance and Credit Guarantee Corporation Act, 1961 (Act 47 of 1961)

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regarding their duties and functions, in the event of violation of the provisions of the Banking
Regulation Act, 1949. The case brings to light the provisions of this specific legislation
governing the banking activities and the urge for its enactment to regulate the co-operative
societies under its purview.

FRAMED NET: RBI’S REGULATORY FRAMEWORK (Chaitya Hiremath 1750444)

Being the “Central Bank of India”, RBI is vested with several powers including regulatory
powers empowering it to make regulatory framework for various aspects pertaining to the
banking sector of the country. The Supreme Court has discussed this in many cases including the
following:

VII. Dharani Sugars and Chemicals Ltd. v. Union of India, (2018)15

Facts: This case was brought to the Supreme Court challenging the RBI Circular (dated
12/02/2018) issued by the Reserve Bank of India which embodied the revised framework for
resolution of stressed assets contending that such circular or regulating power was ultra vires of
section 35AA, Banking Regulation Act,1949

Analysis: The Supreme Court after deliberation upheld the regulatory powers of RBI which
allows it to issue directions to any bank(s) as provided under Sec 35AA however, it also
emphasized on the role of the Central Government. Therefore, it proceeded to strike down the
impugned circular as the same had been issued without the authorization of the Central
Government. A pertinent observation in this case was brought about centrally regarding the
reference to IBC but SC struck down the entire circular and all the consequent provisions and
application. SC emphasizes on RBI’s powers but, definitely halts RBI from assuming that such
powers are not curtailed. By striking down the entire circular it showed that without
authorization from the Central Government, all of RBI’s powers in this matter are in vain and the
Central Government cannot make such decisions itself. They can never exercise their powers
mutually exclusive to each other.

VIII. Kamal Kumar Kalia v. Union of India (2020)16

Facts: Due to the COVID-19 pandemic, RBI issued a circular (dated 27/03/2020) allowing banks
to grant moratorium on all types of loans and credit card payment for 3 months. However, the
implementation of this ’relief package policy’ was improper. The petitioners through a PIL
approached the SC pointing out the failure of banks the implementation of the said circular and
acts of banks charging ‘interest on interest’

Analysis: The Supreme Court directed RBI to force implementation of the Circular and the
‘relief package policy’ in letter and spirit. Owing to the writ petition filed challenging the

15
Dharani Sugars and Chemicals Ltd. v. Union of India WRIT PETITION (CIVIL) NO.1399 OF 2018
16
Kamal Kumar Kalia v. Union of India WRIT PETITION (CIVIL) NO.10955 OF 2020

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charging additional interest under this scheme, SC forced RBI to implement the circular and
ensure that the policy is implemented in letter and spirit. Here, though the Central Government
was not intruding in the business, SC was pressured to intervene in this matter to protect the
rights of the borrowers. Couple other pleas by the said banks also surfaced challenging this
forced waiver by RBI but SC favored the intentions of RBI and issued direction to continue with
proper implementation of the circular. The relationship is always pushing and pulls in order to
keep the other in check. But we often have instances where either of these entities out step their
boundaries.

CANCELLATION OF LICENSES: RBI’S SANCTION (Shefali Fernandes 1750463)

The Reserve Bank of India is vested with powers to grant as well as cancel licenses to banks.
The jurisdiction and the extent of validity of its powers, has however been challenged in many
cases:

IX. Sajjan Bank (Pvt.) Ltd. v. Reserve Bank (1961)17

Facts: The constitutional validity of Section 22 of the Banking Regulation Act, 1949 on the
grounds of violating fundamental rights was challenged in this case. Here the RBI revoked the
license to practice banking business of company after conducting inspections and being satisfied
that the company was working contrary to the interests of the depositors.

Analysis: The Supreme Court held that impugned section did not violate any fundamental right
as it only laid down a system of licensing for the purpose of regulating the functioning of banks
to ensure that they worked in public interest. I concur with the opinion of the Hon’ble court as if
there was no monitoring of the working of banks, or sanctions, and then there would be mayhem
in the system. The court also stated that the jurisdiction of the RBI with regard to the licensing
could not be questioned in this regard as it was correct. Furthermore, it was added that the
powers to cancel the license does not vest with any other officer of the RBI. In this manner, there
is no bias while deciding on such cases as the RBI as a whole is a body which is not political/nor
is affiliated to any other position where prejudices may creep in. It has been endowed with the
responsibility of taking care of finances of the country and has full powers in this regard.

X. Vishwas Utagi v. State of Maharashtra (2020)18

Facts: The Petitioners were aggrieved by the cancellation of banking license of CKP
Cooperative Ltd Bank by the RBI and challenged the same in the High Court of Maharashtra.

Analysis: The High Court of Maharashtra held that RBI has power of managing all the other
banks in the country. It is well within its rights under the Banking Regulation Act, 1949 to do so.
It is entrusted with guarding the interests of the general public who are depositors in the bank
and whose rights will be at stake if not guarded. Furthermore, the court stated that RBI came to
17
Sajjan Bank (Pvt.) Ltd. v. Reserve Bank AIR 1961 Mad 8
18
Vishwas Utagi v. State of Maharashtra 2020 SCC Online Bom 725

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its decision only after a thorough inspection when it noted that the bank was conducting its
affairs in a manner than was injurious to the public. The court also added that the scope to
interfere with the decisions of the RBI was extremely low. As the RBI had not exceeded any of
its powers while taking this decision, the court was satisfied that there was no error in the
decision of the RBI and the interim relief was refused to the petitioners.

These cases show a glimpse of the magnitude of the powers and jurisdiction, that RBI has over
all the banks in the country, and that the wide ambit of powers under Section 22, permits it to
cancel licenses of banks if satisfied

LOCKING HORNS: THE RBI v. THE CENTRAL GOVERNMENT

(Srivijay Sastry 1750437)

There have been episodes when ill feeling between the two, adversarial exchanges of words has
happened from time to time typically having to do with the rate of interest. Government of India
wanted a lower rate of interest to promote growth, conversely, the RBI wanted to have a higher
rate of interest so as to contain inflation. The outbreak of a particular hostility which commanded
the interests of the entire country was that the Government for the very first time invoked Section
7(1) of the RBI Act, 1934 under which the Government of India could demand consultations
with the Reserve Bank on certain issues and consequent upon the consultation to those issues,
could issue directives or directions to the Reserve Bank.

XI. Indian Power Producers Association v. Union of India (2018)19

Facts: The Reserve Bank of India in its circular tightened norms for settling bad debt by setting
timelines for resolving non-performing assets. It allowed lenders to initiate insolvency
proceedings against defaulting corporate even though the banks had one hundred and eighty days
to explore options and arrive at a resolution plan. The reason for power sectors being sore was
that producers did not have adequate power purchase agreements. The reason for which the
matter is in consideration is that the new guidelines will only deepen the crisis in the power
sector and that the sub optimal bids were thwarting the resolution project. And by forcing the
companies to sell under the circular of the NCLT will erode public money and the status of
promoter. In its petition, the petitioner questioned as to why the Central Government had not
given any directions when it was evident that the power sector was the most affected one.

Analysis: The Court held that the Central Government was having the power to issue directions
to the RBI on matters concerning regulatory and policy matters. However, the court also held
that those guidelines must not be random or indiscriminate but must be based on sufficient
material fact. The court further observed that if the RBI and Central Government are at a
variance on any policy or regulatory issue, then the Central Government must initiate the
procedures and formalities under section 7 of the RBI Act. The court further referred to the case
19
Indian Power Producers Association v. Union of India Writ Petition (Civil) No. 23181 of 2018

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of Joseph Kuruvilla Vellukunnel v. RBI20 where it was held that the RBI is answerable to the
Central Government and should the RBI act in a malafide manner, the Central Government can
intervene. Sec.7 of the RBI Act was incorporated to the Act to arrive at a harmonious conclusion
and evolve a consensual position and not to show one’s supremacy over the other.

XII. Joseph Kuruvilla Vellukunnel V The Reserve Bank of India (1962)21

Facts: The case dealt with the constitutional validity of the Banking Companies Act, 1949 22. The
Court had ordered the winding up of banking companies under the above mentioned sections
based on the opinion of the Reserve Bank of India. The petitioners questioned the validity of the
above mentioned sections with respect to the discriminating law between banking and non-
banking companies and the accountability of the RBI.

Analysis: The court upheld the constitutional validity of section 38(1) and section 38(3)(b) in
terms of Article 14 of the Constitution of India. The court observed that discrimination in the law
was needed as there was sufficient cause to show the requirement of a special law to regulate
banking companies. Further, the court also held that the RBI is answerable to the Central
Government and should the RBI act in a malifide manner, the Central Government can intervene
and use its power under Section 7 of the RBI Act, 1934. The Court also observed that if the
Central Government’s intervention was not sufficient, the courts could intervene as well.

The Central Government can issue guidelines to the RBI on any issues relating to policy or
regulatory matters. The RBI is allowed to function independently but is answerable to the
Central Government.

CONCLUSION

An in-depth case analyses of the relation between Reserve Bank of India and the Government of
India gives us a useful insight to analyze and determine the control mechanism over Indian
Banking system. The authors of this article are of a consensus that the iron hand of RBI while
regulating the banks in India is a pertinent and much needed regulatory hold for efficient
banking. The autonomy and centralization of power in regard of control is the soubriquet of
effective administration. As per the inter-relation between Government of India and the Reserve
Bank of India, is akin to that of the ‘husband and wife’, as rightly pointed by the former Prime
Minister Manmohan Singh. However, the RBI is the custodian of financial and macroeconomic
stability and best judge of the markets; undermining its independence will have an adverse
effect. 

20
Joseph Kuruvilla Vellukunnel V The Reserve Bank of India AIR 1962 SC 1361
21
Id.
22
Sections 38(1) and Section 38(3)(b) Banking Companies Act, 1949

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