Section 45L of RBI Act : Section 45L: Power Of Bank To Call For Information From Financial Institutions And To Give Directions

Explanation using Example

Imagine a scenario where the Reserve Bank of India (RBI) observes an unusual surge in the credit being provided by non-banking financial companies (NBFCs), which could potentially lead to an overheated economy and increase the risk of defaults. To manage this situation and prevent any adverse effects on the financial system, the RBI decides to invoke Section 45L of the RBI Act, 1934.

The RBI issues a notice to all NBFCs instructing them to submit detailed reports every quarter, including information on their capital reserves, investment portfolios, and details of loans disbursed, such as the amount, purpose, tenure, and interest rates. This is done under subsection (1)(a) to monitor their activities closely and ensure they are not engaging in risky lending practices.

Additionally, the RBI, under subsection (1)(b), directs these institutions to cap the interest rates on loans at a certain level and to maintain a higher proportion of their investments in government securities. This directive takes into account the role of NBFCs in the financial market and aims to steer the credit flow into more stable and less speculative avenues, as mentioned in subsection (3).

By using Section 45L, the RBI effectively regulates the credit system and maintains financial stability in the country.