Section 18 of the Reserve Bank of India Act, 1934 - Power of Direct Discount
Section 18 gives the Reserve Bank of India exceptional credit-regulation powers when RBI considers that a special occasion has arisen and action under the section is necessary or expedient in the interests of Indian trade, commerce, industry and agriculture. These powers operate notwithstanding limitations contained in Section 17.
When can RBI use Section 18?
The statutory trigger is RBI's opinion that a special occasion has arisen making action under Section 18 necessary or expedient for regulating credit in the interests of Indian trade, commerce, industry and agriculture.
Section 18 is therefore framed as a special enabling power rather than an ordinary lending entitlement. Its operation depends on RBI forming the statutory opinion described in the section.
Section 18 and the limitations in Section 17
Section 17 specifies the ordinary categories of business that RBI may transact and imposes conditions on many of those transactions. Section 18 expressly states that its special powers may be exercised notwithstanding any limitation contained in Section 17, once the statutory special-occasion test is satisfied.
Section 18(1) - Bills of exchange and promissory notes
RBI may purchase, sell or discount a bill of exchange or promissory note even though that bill or promissory note is not eligible for purchase or discount by RBI under Section 17.
This is the direct-discount power reflected in the heading of Section 18. It permits RBI, in the special circumstances contemplated by the section, to deal with an instrument that would otherwise fail the ordinary eligibility conditions under Section 17.
Section 18(2) - Omitted provision
Clause (2) is omitted from the current operative text. It should not be presented as a current substantive power.
Section 18(3) - Special loans and advances
In the same special circumstances, RBI may make loans or advances to the categories specified in clause (3):
Section 18(3)(a) - State co-operative bank
RBI may make a loan or advance to a State co-operative bank.
Section 18(3)(b) - Co-operative society
On the recommendation of a State co-operative bank, RBI may make a loan or advance to a co-operative society registered within the area in which that State co-operative bank operates.
Section 18(3)(c) - Any other person
RBI may also make a loan or advance to any other person.
Repayment period and terms under Section 18(3)
The loans or advances covered by clause (3) are repayable on demand or on expiry of fixed periods not exceeding ninety days, on such terms and conditions as RBI considers sufficient.
The ninety-day ceiling is an express statutory limit on the fixed repayment period under this special lending power. RBI retains discretion over the terms and conditions, subject to the section itself.
Meaning of direct discount
In this context, discounting broadly refers to acquiring an eligible negotiable credit instrument before maturity for a price reflecting the period remaining until payment. Section 18 is distinctive because clause (1) allows RBI to purchase, sell or discount a bill of exchange or promissory note even where the instrument is not eligible under the ordinary Section 17 framework.
Relationship with Section 18A
Section 18A expressly refers to loans and advances granted under Section 18. Among other matters, Section 18A deals with the validity of RBI loans and advances and the treatment of specified sums received in repayment or realisation where RBI-funded advances have been passed on to borrowers.
Key legal points under Section 18
- Exceptional trigger: RBI must form the opinion that a special occasion has arisen.
- Credit-regulation purpose: action must be necessary or expedient for regulating credit in the interests specified in the section.
- Override of Section 17 limitations: Section 18 operates notwithstanding limitations contained in Section 17.
- Direct discount: RBI may deal in bills of exchange or promissory notes even if they are not eligible under Section 17.
- Special lending power: RBI may lend to a State co-operative bank, a qualifying co-operative society on the State co-operative bank's recommendation, or any other person.
- Short duration: a fixed repayment period cannot exceed ninety days.
- Clause (2) omitted: it is not part of the present operative powers under Section 18.