Section 35 of the Banking Regulation Act, 1949: RBI Inspection and Scrutiny Powers
Section 35 of the Banking Regulation Act, 1949 gives the Reserve Bank of India (RBI) statutory power to inspect banking companies and scrutinise their affairs, books and accounts. It also places duties on directors, officers and employees to produce records and information required during such inspection or scrutiny.
Meaning and Scope of Section 35
Section 35 is a supervisory provision. In practical terms, it allows RBI to examine whether a banking company is being conducted in a sound manner and whether its books, accounts and affairs require regulatory attention. RBI may order an inspection on its own, and it must do so when directed by the Central Government.
RBI materials describe inspection under Section 35 as an important part of bank supervision and as a means of checking continued compliance with the conditions and prudential expectations applicable to licensed banks.
- RBI may inspect a banking company and its books and accounts.
- The Central Government may direct RBI to conduct an inspection.
- RBI may conduct a separate scrutiny of the affairs, books and accounts of a banking company.
- Bank personnel must provide documents, statements and information required by the inspecting or scrutinising officer.
- An inspecting officer may examine directors, officers or employees on oath.
- The Central Government may take specified protective action where the affairs of the banking company are considered detrimental to depositors.
- For Regional Rural Banks, the inspection powers may also be exercised by the National Bank, i.e. NABARD, subject to the statutory framework.
Section 35: Inspection
Sub-section (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.
Sub-section (1A)(a): Notwithstanding anything to the contrary contained in any law for the time being in force and without prejudice to sub-section (1), the Reserve Bank may also cause a scrutiny to be made by one or more of its officers of the affairs of any banking company and its books and accounts.
Sub-section (1A)(b): A copy of the scrutiny report is to be furnished to the banking company if it requests the report or if adverse action is contemplated against it on the basis of the scrutiny.
Sub-section (2): Every director, officer or employee of the banking company must produce books, accounts and other documents in his or her custody or power and furnish statements and information relating to the affairs of the banking company as required by the inspecting or scrutinising officer within the time specified.
Sub-section (3): A person making an inspection or scrutiny may examine on oath any director, officer or employee of the banking company in relation to its business and may administer an oath for that purpose.
Sub-section (4): Where the Central Government directed the inspection, RBI shall report to the Central Government. In other cases RBI may report to it. If, after considering the report and giving the banking company a reasonable opportunity to make a representation, the Central Government considers that the affairs of the banking company are being conducted to the detriment of depositors, it may by written order prohibit the banking company from receiving fresh deposits or direct RBI to apply under section 38 for its winding up. The Central Government may defer, cancel or modify such an order subject to conditions.
Sub-section (5): After giving reasonable notice to the banking company, the Central Government may publish the RBI report or such part of it as appears necessary.
Explanation: For the purposes of Section 35, the expression "banking company" also extends, in the cases specified by the Act, to branches in India of banking companies incorporated outside India and to specified subsidiaries and branches of banking companies incorporated in India.
Sub-section (6): In relation to Regional Rural Banks, the powers exercisable by RBI under Section 35 may also be exercised by the National Bank, without prejudice to RBI's own powers, and sub-sections (1) to (5) apply accordingly.
For authoritative wording, amendments and footnotes, refer to the official India Code version of the Banking Regulation Act, 1949.
Inspection and Scrutiny by RBI
The provision distinguishes between an inspection under sub-section (1) and a scrutiny under sub-section (1A). Both may involve examination of the banking company's affairs and records, but the Act separately regulates when a scrutiny report must be furnished to the bank. A scrutiny report must be supplied if the bank asks for it or if adverse action is proposed on the basis of the scrutiny.
Section 35 therefore supports RBI's supervisory role by allowing direct examination of records rather than relying only on regulatory returns. RBI's own supervisory publications treat statutory inspection as one of the mechanisms used to assess a bank's financial condition, management, compliance and protection of depositor interests.
Duties of Directors, Officers and Employees
Sub-sections (2) and (3) impose direct duties on persons connected with the banking company. They must produce relevant books, accounts and other documents, furnish statements and information, and may be examined on oath in relation to the bank's business. These provisions are intended to ensure that an inspection or scrutiny is not frustrated by non-production of records or non-cooperation.
Central Government Action After Inspection
Where the statutory conditions in sub-section (4) are met, the Central Government may act to protect depositors. The banking company must first be given a reasonable opportunity to make a representation in connection with the report.
The two principal measures expressly mentioned are:
- prohibiting the banking company from receiving fresh deposits; and
- directing RBI to apply under Section 38 for winding up of the banking company.
Regional Rural Banks and NABARD
Sub-section (6) extends the inspection framework to Regional Rural Banks by permitting the National Bank to exercise Section 35 powers in relation to RRBs, without taking away RBI's powers. RBI publications explain this supervisory arrangement in the context of NABARD's role concerning Regional Rural Banks.
Related Provisions
Section 35 should be read with nearby supervisory and remedial provisions of the Banking Regulation Act, including Section 34A, Section 36 and Section 38.