Inspection (Section 35 )of Banking companies by Reserve Bank of India (RBI)

                Section 35 of the Banking Regulation Act 1949 have been incorporated to check the malpractices in Banking Companies. Section 35 of the said Act, gives powers to Reserve Bank of India (RBI) to undertake inspection of banks.  The work of inspection is carried by the department of banking operation and development of Reserve Bank of India (RBI)

  The department carries out two types of inspection -

 1) Financial

 2) Annual appraisal

In the financial inspection, the Reserve Bank of India inspects the assets and liabilities of the banking company and the method of operation.

Inspection (Section 35 of the Banking Regulation Act 1949)

(1) Notwithstanding anything to the contrary contained in section 235 of the Companies Act, 1956 (1 of 1956), the Reserve Bank at any time may, and on being directed so to do by the Central Government shall, cause an inspection to be made by one or more of its officers of any banking company and its books and accounts; and the Reserve Bank shall supply to the banking company a copy of its report on such inspection.

(1A) (a) Notwithstanding anything to the contrary contained in any law for the time being in force and without prejudice to the provisions of sub-section (1), the Reserve Bank, at any time, may also cause a scrutiny to be made by any one or more of its officers, of the affairs of any banking company and its books and accounts; and

         (b) a copy of the report of the scrutiny shall be furnished to the banking company if the banking company makes a request for the same or if any adverse action is contemplated against the banking company on the basis of the scrutiny.

(2) It shall be the duty of every director or other officer or employee of the banking company to produce to any officer making an inspection under sub-section (1) or a scrutiny under sub-section (1A) all such books, accounts and other documents in his custody or power and to furnish him with any statements and information relating to the affairs of the banking company as the said officer may require of him within such time as the said officer may specify.

(3) Any person making an inspection under sub-section (1) for scrutiny under sub-section (1A) may examine on oath any director or other officers or employee of the banking company in relation to its business, and may administer an oath accordingly.

(4) The Reserve Bank shall, if it has been directed by the Central Government to cause an inspection to be made, and may, in any other case, report to the Central Government on any inspection or scrutiny made under this section, and the Central Government, if it is of opinion after considering the report that the affairs of the banking company are being conducted to the detriment of the interests of its depositors, may, after giving such opportunity to the banking company to make a representation in connection with the report as, in the opinion of the Central Government, seems reasonable, by order in writing —

            (a) prohibit the banking company from receiving fresh deposits;

           (b) direct the Reserve Bank to apply under section 38 for the winding up of the banking company:

Provided that the Central Government may defer, for such period as it may think fit, the passing of an order under this sub-section, or cancel or modify any such order, upon such terms and conditions as it may think fit to impose.

(5) The Central Government may, after giving reasonable notice to the banking company, publish the report submitted by the Reserve Bank or such portion thereof as may appear necessary.

Explanation — For the purpose of this section, the expression “banking company” shall include —

     (i) in the case of a banking company incorporated outside India, all its branches in India; and

    (ii) in the case of a banking company incorporated in India —

            (a) all its subsidiaries formed for the purpose of carrying on the business of banking exclusively outside India; and

             (b) all its branches whether situated in India or outside India.

(6) The powers exercisable by the Reserve Bank under this section in relation to regional rural banks may without prejudice to the exercise of such powers by the Reserve Bank in relation to any regional rural bank whenever it considers necessary so to do) be exercised by the National Bank in relation to the regional rural banks, and accordingly, sub-sections (1) to (5) shall apply in relation to regional rural banks as if every reference therein to the Reserve Bank included also a reference to the National Bank.

Relevant Case Law - 

Canara Bank V/s P.R.N Upadhyaya (1998) 6 SCC 526

  in this case, Supreme Court held that since an ombudsman is appointed by virtue of this scheme framed under Section 53 of the Banking Regulation Act 1949 if he is Obliged to comply with the directions circulars and notifications issued by the Reserve Bank of India under Section 35 or Section 21 of the Act. He is also required to issue directions to the bank based on the direction/circulars and ensure their Compliance. The learned ombudsman could not have ignored the circulars and directions while dealing with the complaint filed by th respondent. The impugned award having been made ignoring various circular/directions issued by the Reserve Bank of India the same cannot be sustained.

See also...

1. Audit (Section 30) under the Banking Regulation Act 1949

2. Write a short note on powers of Court to award interest Pendent Lite

3. Advantages and Disadvantages of Unit Banking system | Banking Law

4. Commercial Bank : Primary, Secondary and Modern Functions of Commercial Bank

5. Negotiation: Meaning, Definition and Modes of negotiation