New Legal provisions for Interest free banking in India

Legal provisions for Interest free banking in India

Since the internal working group of RBI led by Anand Sinha was supposed to examine the feasibility of Islamic banking business in India, they concluded that Islamic Banking in India is not possible unless we amend the Banking Regulation Act. 

But had there been any objective of finding possibility to erode the hurdles for financial inclusion of any community who hate involvement in interest based transactions, one could have well concluded that ‘though Islamic banking need amendments, under prevailing acts in India, interest free banking is quite possible’. Interest free banking in India

We don’t need any amendment in any act to allow Interest free banking in India because there are already following legal provisions in the prevailing acts.Section 17 (1) of the Reserve Bank of India Act 1934 states that the bank shall be authorized to accept money on deposit without interest from and the collection of money for the central and state governments, local authorities, banks and other persons.

Interest free banking in India

Interest free banking in India New Legal provisions for Interest free banking in India

Interest free banking in India

Section 45W (1) of RBI Act 1934 states that RBI has the power to regulate transactions in derivatives, money market instruments, etc. in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time.

Sections 21 and 21A of the Banking Regulation Act 1949 states that RBI has the power to control advances by banking companies. Every banking company shall be bound to comply with any directions given to it under this section. RBI policy or bank’s practice of charging interest cannot be pulled to judicial discretion.  Reserve Bank may give directions to banking companies, either generally or to any banking company or group of banking companies in particular, as to

  • the purposes for which advances may or may not be made,
  • the margins to be maintained in respect of secured advances,
  • 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,
  • 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
  • the rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given.

Considering the above legal provisions for deposits without interest and RBI power to regulate policies related to advances and interest rates, RBI seems to be in a position to allow interest free deposits and advances with zero interest rate. RBI as sole monetary regulators of India is very much in a position to allow the banks accept deposits without interest and lend advances and loans with zero interest.

RBI can allow transaction of Interest free banking in India deposits and lending through specific windows in existing Scheduled commercial banks at least on pilot basis. It will help achieve target of financial inclusion of those who are just excluded because they don’t like to indulge into any interest based transactions.

RBI can just allow acceptance of deposits without interest and with object to financial inclusion it may also frame a special credit policy for poor by allowing credits at zero interest rate to those who don’t seek interest on their deposits.

Notably the Islamic NBFC can provide investment opportunities to financially better off section of Muslims but the need of interest free credit facility by poor farmers and enterprises would still be there.Compared to other religious communities in India, Muslims are most backward because they have worst credit deposit ratio due to unavailability of interest free credits as compatible to their religious faith.

Interest free banking in India


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About Rajendra Jarwal

My name is Rajendra Jarwal and I am a professional blogger and SMO manager at Kritika Web Developer Private Limited. I am sharing many information related toBanks, Finance, Insurance, Loan, Credit card, internet banking, saving account, Mobile Banking, Investment, Bank services, debit card and prepaid card with this blog. Hope you will enjoy my posts.
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