Section 21 of the Banking Regulation Act, 1949: Power of Reserve Bank to Control Advances by Banking Companies
Updated: 13 September 2026
Section 21 of the Banking Regulation Act, 1949 empowers the Reserve Bank of India (RBI) to determine policy concerning advances made by banking companies and to issue binding directions on specified lending matters. The provision enables RBI to regulate how bank credit is extended when regulatory intervention is considered necessary or expedient in the public interest, in the interests of depositors, or in furtherance of banking policy.
Meaning and scope of Section 21
Section 21 is a statutory credit-control provision. It authorizes RBI to determine lending policy for banking companies generally, for a particular banking company, or for a group of banking companies. Once such policy is determined, the banking company concerned is bound to follow it.
The section also identifies specific matters on which RBI may issue directions, including the purposes for which advances may be made, margins for secured advances, limits on financial accommodation or guarantees, and the rate of interest and other lending terms.
Section 21 - Power of Reserve Bank to control advances by banking companies
(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.
(2) Without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1), the Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to-
(a) the purposes for which advances may or may not be made,
(b) the margins to be maintained in respect of secured advances,
(c) the maximum amount of advances or other financial accommodation which, having regard to the paid-up capital, reserves and deposits of a banking company and other relevant considerations, may be made by that banking company to any one company, firm, association of persons or individual,
(d) the maximum amount up to which, having regard to the considerations referred to in clause (c), guarantees may be given by a banking company on behalf of any one company, firm, association of persons or individual, and
(e) the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.
(3) Every banking company shall be bound to comply with any directions given to it under this section.
For authoritative statutory text and amendment notes, refer to the official India Code version of the Banking Regulation Act, 1949.
What powers does Section 21 give RBI?
| Provision | Regulatory power |
|---|---|
| Section 21(1) | RBI may determine policy relating to advances when the statutory public-interest, depositor-interest or banking-policy conditions are satisfied. |
| Section 21(2)(a) | RBI may regulate the purposes for which bank advances may or may not be made. |
| Section 21(2)(b) | RBI may prescribe margins for secured advances. |
| Section 21(2)(c) | RBI may regulate the maximum advances or other financial accommodation that may be extended to a person or entity. |
| Section 21(2)(d) | RBI may regulate limits on guarantees given by banking companies. |
| Section 21(2)(e) | RBI may regulate interest rates and other terms and conditions of advances, financial accommodation and guarantees. |
| Section 21(3) | Directions given under Section 21 are binding on banking companies. |
Legal and practical effect
In practical banking regulation, Section 21 operates as one of the statutory foundations for RBI directions concerning credit and lending conditions. RBI directions may also invoke other provisions, including Section 35A of the Banking Regulation Act, depending on the subject and regulatory purpose.
For banks, the compliance consequence is direct: where RBI has issued a valid direction under Section 21, the regulated banking company must comply with that direction. The current operational position on a particular lending subject should therefore be checked against the applicable RBI Master Directions, circulars and notifications in force at the relevant time.
Related provisions of the Banking Regulation Act, 1949
Section 21 should be read with nearby provisions dealing with loans, interest and licensing. In particular, see Section 20 - Restrictions on loans and advances, Section 20A - Restrictions on power to remit debts, Section 21A - Rates of interest charged by banking companies not to be subject to scrutiny by courts, and Section 22 - Licensing of banking companies.
Frequently asked questions
Is an RBI direction under Section 21 binding on a bank?
Yes. Section 21(3) states that every banking company shall be bound to comply with directions given to it under the section.
Can RBI control the purposes for which advances are made?
Yes. Section 21(2)(a) specifically permits RBI to give directions regarding the purposes for which advances may or may not be made.
Does Section 21 cover interest rates on advances?
Yes. Section 21(2)(e) includes the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given. The applicable regulatory position should be checked in the RBI directions currently in force.