Section 18 of the Banking Regulation Act, 1949: Cash Reserve
Section 18 of the Banking Regulation Act, 1949 deals with the cash reserve to be maintained by a banking company that is not a scheduled bank. It also defines important expressions used for computing liabilities and gives the Reserve Bank of India powers relating to reserve requirements, defaults, exemptions, and classification of liabilities.
What Section 18 requires
In substance, Section 18 requires a non-scheduled banking company to maintain the prescribed cash reserve in India on a daily basis. The reserve may be maintained with the bank itself, as a balance in a current account with the Reserve Bank of India, as a qualifying net balance in current accounts, or through one or more of the permitted methods. The applicable percentage is the percentage specified by RBI by notification, having regard to monetary stability.
Scheduled banks are principally governed by Section 42 of the Reserve Bank of India Act, 1934 for CRR purposes. Section 18 remains particularly relevant to non-scheduled banks, and Section 56 modifies the provision in its application to co-operative banks.
Text of Section 18: Cash reserve
(1) Every banking company, not being a scheduled bank, shall maintain in India on a daily basis by way of cash reserve with itself or by way of balance in a current account with the Reserve Bank, or by way of net balance in current accounts or in one or more of the aforesaid ways, a sum equivalent to such per cent. of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight as the Reserve Bank may specify, by notification in the Official Gazette, from time to time, having regard to the needs of securing the monetary stability in the country and shall submit to the Reserve Bank before the twentieth day of every month a return showing the amount so held on alternate Fridays during a month with particulars of its demand and time liabilities in India on such Fridays or if any such Friday is a public holiday under the Negotiable Instruments Act, 1881 (26 of 1881), at the close of business on the preceding working day.
Explanation. In this section, and in section 24:
(a) "liabilities in India" shall not include:
(i) the paid-up capital or the reserves or any credit balance in the profit and loss account of the banking company;
(ii) any advance taken from the Reserve Bank or from the Exim Bank or from the Reconstruction Bank or from the National Housing Bank or from the National Bank or from the Small Industries Bank by the banking company;
(iii) in the case of a Regional Rural Bank, also any loan taken by such bank from its Sponsor Bank;
(b) "fortnight" shall mean the period from Saturday to the second following Friday, both days inclusive;
(c) "net balance in current accounts" shall, in relation to a banking company, mean the excess, if any, of the aggregate of the credit balances in current account maintained by that banking company with the State Bank of India or a subsidiary bank or a corresponding new bank over the aggregate of the credit balances in current account held by the said banks with such banking company;
(d) for the purposes of computation of liabilities, the aggregate of the liabilities of a banking company to the State Bank of India, a subsidiary bank, a corresponding new bank, a regional rural bank, another banking company, a co-operative bank or any other financial institution notified by the Central Government in this behalf, shall be reduced by the aggregate of the liabilities of all such banks or institutions to the banking company;
(e) the expression "co-operative bank" shall have the meaning assigned to it in clause (cci) of section 56.
(1A) If the balance held by such banking company at the close of business on any day is below the minimum specified under sub-section (1), such banking company shall, without prejudice to the provisions of any other law for the time being in force, be liable to pay to the Reserve Bank, in respect of that day, penal interest at a rate of three per cent. above the bank rate on the amount by which such balance falls short of the specified minimum, and if the shortfall continues further, the penal interest so charged shall be increased to a rate of five per cent. above the bank rate in respect of each subsequent day during which the default continues.
(1B) Notwithstanding anything contained in this section, if the Reserve Bank is satisfied, on an application in writing by the defaulting banking company, that such defaulting banking company had sufficient cause for its failure to comply with the provisions of sub-section (1), it may not demand the payment of the penal interest.
(1C) The Reserve Bank may, for such period and subject to such conditions as may be specified, grant to any banking company such exemptions from the provisions of this section as it thinks fit with reference to all or any of its offices or with reference to the whole or any part of its assets and liabilities.
(2) The Reserve Bank may, for the purposes of this section and section 24, specify from time to time, with reference to any transaction or class of transactions, that such transaction or transactions shall be regarded as liability in India of a banking company and, if any question arises as to whether any transaction or class of transactions shall be regarded for the purposes of this section and section 24 as liability in India of a banking company, the decision of the Reserve Bank thereon shall be final.
Meaning of important expressions
Demand and time liabilities
The reserve requirement is calculated by reference to demand and time liabilities in India. In practice, the computation must follow the Banking Regulation Act, the applicable RBI directions and notifications, and the regulatory return framework relevant to the category of bank concerned.
Fortnight
For Section 18 and Section 24, a "fortnight" means the period beginning on a Saturday and ending on the second following Friday, both days included.
Liabilities in India
The Explanation excludes specified items from "liabilities in India", including paid-up capital, reserves, credit balance in the profit and loss account, and certain advances from specified financial institutions. The provision also contains a netting rule for liabilities between the banking company and specified banks or financial institutions.
Shortfall and penal interest
Where the balance maintained at the close of business on a day falls below the required minimum, sub-section (1A) provides for penal interest. The statutory rate is three per cent. above the bank rate for the shortfall day and five per cent. above the bank rate for subsequent days if the default continues.
Under sub-section (1B), RBI may waive the demand for penal interest where the defaulting banking company applies in writing and RBI is satisfied that sufficient cause existed for the failure.
RBI power to grant exemptions
Sub-section (1C) permits RBI to grant exemptions for a specified period and subject to specified conditions. An exemption may relate to all or any offices of a banking company or to the whole or a part of its assets and liabilities.
RBI power to classify liabilities
Sub-section (2) authorises RBI, for the purposes of Sections 18 and 24, to specify whether a transaction or class of transactions is to be treated as a liability in India. If a question arises on that classification, the decision of RBI is final for the purposes of those sections.
Related provisions
Section 18 should be read with Section 24 on maintenance of a percentage of assets, and, where applicable, with Section 56 concerning application of the Banking Regulation Act to co-operative societies. For scheduled banks, CRR is principally governed by Section 42 of the Reserve Bank of India Act, 1934.