Banking Regulation Act — Power to Inspect (Section 35)

Section 35 of the Banking Regulation Act, 1949 is the statutory spine of banking supervision in India. It arms the Reserve Bank of India with a sweeping, on-demand power to send its officers into any banking company, throw open its books and accounts, examine its directors on oath, and report the results to the Central Government — which may then prohibit fresh deposits or move for winding up. For judiciary and CLAT-PG aspirants, Section 35 is where the abstract idea of a "central bank as regulator" becomes a concrete, coercive, court-tested power. This chapter dissects every sub-section, traces the line of authority from Joseph Kuruvilla Vellukunnel through Jayantilal N. Mistry to Dharani Sugars, and shows exactly how inspection feeds into the wider machinery of control under the Act and the RBI Act's functions and powers.

Where Section 35 sits in the scheme of the Act

The Banking Regulation Act, 1949 (originally the Banking Companies Act, 1949, renamed in 1966) was enacted against the backdrop of repeated bank failures in the 1940s, when depositors lost their savings because no public authority had a continuing window into how banks were run. Part II of the Act — "Business of Banking Companies" — and Part IIA onwards build a graded supervisory architecture: licensing under Section 22, control over management under Sections 10 to 16, and a cluster of intervention powers running from Section 35 to Section 45. Section 35 is the diagnostic instrument that sits at the head of this cluster: it is the tool by which the Reserve Bank actually finds out what is happening inside a bank, so that the remedial powers further down the Part can be exercised on an informed basis.

The provision deliberately overrides the general company-law machinery. Section 35(1) opens with a non obstante clause — "Notwithstanding anything to the contrary contained in section 235 of the Companies Act, 1956" — making clear that the RBI's inspection power is independent of, and not subordinate to, the Registrar-led investigation regime of the Companies Act. Banking is treated as a special activity requiring a specialist regulator with its own, faster, continuous power of inspection. To see how this fits the RBI's broader mandate, read this chapter alongside the Banking Regulation and RBI Act hub.

Section 35(1): the core power to inspect

Section 35(1) provides that 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. Three features deserve emphasis for an examiner.

First, the power is dual in character. When the RBI acts on its own motion it is discretionary ("may"); when the Central Government directs it, inspection becomes mandatory ("shall"). The RBI is thus simultaneously an autonomous regulator and an instrument of Government supervision over the banking system. Second, the power is exercisable "at any time" — it is not tied to any triggering complaint, default or annual cycle, and may be exercised periodically as a matter of routine prudential supervision. Third, the inspection extends not merely to the company abstractly but specifically to "its books and accounts", which the courts have read expansively to cover the full financial reality of the institution. The mandatory supply of the report to the inspected bank is an important fairness safeguard, ensuring the bank knows the case it must answer.

It is worth pausing on the word "officers". The inspection is carried out by officers of the Reserve Bank itself, not by an outside agency, reflecting the legislative judgment that banking supervision requires specialist, in-house expertise rather than generalist investigation. This institutional design is part of why the courts, beginning with Joseph Kuruvilla Vellukunnel, have been reluctant to second-guess the conclusions an inspection yields: the inspector is presumed to bring to bear precisely the technical competence the statute envisages. The breadth of "any banking company" is also significant — it sweeps in every entity licensed to carry on banking business in India, and, through the Explanation to the section, the Indian operations of foreign banks and the subsidiaries of Indian banks, leaving no licensed institution beyond the reach of the power.

Section 35(1A): scrutiny as a lighter-touch power

Section 35(1A), inserted by the Banking Laws (Amendment) Act, 1983, empowers the Reserve Bank, at any time, also to 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. The clause distinguishes "scrutiny" from the fuller "inspection" of sub-section (1): a scrutiny is a more targeted, often issue-specific examination, whereas an inspection is the comprehensive, formal exercise. A copy of the scrutiny report is to be furnished to the banking company if the bank applies for it, or where any adverse action is contemplated against the company on the basis of the scrutiny — again building in a measure of natural justice. The two powers together give the RBI a graduated toolkit, allowing it to calibrate the intensity of its intervention to the seriousness of the supervisory concern.

Section 35(2): the duty to produce books and information

An inspection power is only as effective as the cooperation it can compel. Section 35(2) therefore imposes a positive duty on every director, officer or employee of the banking company to produce to the inspecting or scrutinising officer all such books, accounts and other documents in his custody or power, and to furnish any statements and information relating to the affairs of the company as the officer may require within the stipulated time. The obligation is not confined to records that are convenient or favourable; it extends to everything in the person's "custody or power", a phrase that prevents officers from sheltering behind a claim that documents are technically held elsewhere within the organisation. Read with the offence and penalty provisions of the Act, this sub-section converts the inspection from a request into an enforceable command, and non-cooperation can itself become evidence of the very mismanagement the inspection seeks to uncover.

Section 35(3): examination on oath

Section 35(3) adds a quasi-judicial dimension. Any person making an inspection under sub-section (1), or a scrutiny under sub-section (1A), may examine on oath any director or other officer or employee of the banking company in relation to its business. This elevates the inspecting officer's fact-finding above a mere documentary review: testimony taken on oath carries the solemnity and legal consequences of sworn evidence, and a false statement attracts the ordinary penal consequences of perjury. The power to examine on oath is what allows the RBI to go behind the paperwork and probe the conduct and intentions of those running the bank, which is frequently where the true picture of imprudent or fraudulent management lies.

Section 35(4): the report and its consequences

Section 35(4) is where inspection turns into intervention. The Reserve Bank reports to the Central Government on the inspection or scrutiny. Where it appears to the RBI from the inspection that the affairs of the banking company are being conducted to the detriment of the interests of its depositors, the Central Government — on the RBI's report — may, after giving the banking company an opportunity of making a representation, by order in writing either (a) prohibit the banking company from receiving fresh deposits, or (b) direct the Reserve Bank to apply under Section 38 for the winding up of the banking company. These are extraordinarily serious consequences: a deposit ban can freeze a bank's lifeblood, and a winding-up reference can end its corporate existence. The structure makes clear that the inspection report is not an academic exercise but the evidentiary foundation for the gravest powers in the Act.

Importantly, the opportunity to make a representation is a built-in safeguard of natural justice, and the courts have insisted that the consequences in sub-section (4) cannot be visited on a bank without compliance with the procedure the section itself prescribes.

Section 35(5) and (6): publication and regional rural banks

Section 35(5) permits the Central Government, after giving the banking company a reasonable opportunity, to publish the report submitted by the Reserve Bank, or such portion of it as the Government may think fit. This is a discretionary power of disclosure that complements — but is conceptually distinct from — the citizen's right to seek the report under the Right to Information Act, a distinction the Supreme Court had to confront in Jayantilal N. Mistry (discussed below). Section 35(6), with its accompanying Explanation, extends the inspection and scrutiny machinery to regional rural banks, allowing the National Bank for Agriculture and Rural Development (NABARD) to exercise these powers in relation to RRBs and co-operative banks within its supervisory remit. The Explanation also clarifies that, for the purposes of the section, "banking company" includes the Indian branches of foreign banks and the subsidiaries of Indian banks, ensuring the inspection net is comprehensive.

Joseph Kuruvilla Vellukunnel v. RBI: inspection as the basis of winding up

The foundational decision on the supervisory scheme of which Section 35 forms part is Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371 (decided 7 March 1962). The case arose out of the collapse of the Palai Central Bank Ltd., then the foremost bank in Kerala and among the largest in India. After repeated inspections, the Reserve Bank formed the opinion that the bank could not pay its depositors in full and that its continuance was prejudicial to depositors' interests, and it applied for winding up under Section 38. A shareholder challenged the constitutionality of Sections 38(1) and 38(3)(b)(iii), contending that they allowed the RBI to procure a bank's death on its own opinion, unchecked by the court, in violation of Articles 14 and 19.

The Supreme Court, by majority, upheld the provisions. It held that in the specialised field of banking the Reserve Bank, as the expert regulator armed with the fruits of inspection, was best placed to judge a bank's soundness, and that the court would not substitute its own view for the RBI's expert opinion formed on inspection. The decision is the bedrock proposition that the RBI's inspection-based opinion commands judicial deference, a theme that recurs whenever Section 35 powers are litigated. It situates inspection not as an end in itself but as the evidentiary engine driving the Act's most drastic remedies.

The dissent in Vellukunnel is itself instructive for an answer that seeks nuance: it worried that leaving a bank's fate to the regulator's opinion, with the court confined to a supervisory role, sat uneasily with judicial review. The majority's answer — that the specialised, technical and time-sensitive nature of banking justifies a degree of curial restraint — has framed the relationship between courts and the banking regulator ever since. For an examinee, the case is best deployed to show why inspection findings carry such weight: it is not that the bank is denied a hearing, but that once the regulator has formed an expert opinion on inspection, the court will test that opinion for legality and good faith rather than re-decide the merits of the bank's soundness for itself.

Ganesh Bank of Kurundwad: from inspection to moratorium and amalgamation

The continuum from inspection to intervention is vividly illustrated by Ganesh Bank of Kurundwad Ltd. v. Union of India, (2006) 10 SCC 645 (decided 28 August 2006). Following supervisory concern about the bank's financial health, the Central Government imposed a moratorium under Section 45, the Reserve Bank exercised power under Section 35A to give directions during the moratorium, and a scheme of amalgamation of the ailing Ganesh Bank with the Federal Bank was sanctioned. The shareholders challenged the entire chain of action as arbitrary and as effected without adequate hearing.

The Supreme Court upheld the amalgamation. It reiterated that the RBI's assessment of a bank's viability — built on its supervisory and inspection findings — is entitled to weight, and that the statutory scheme of moratorium and amalgamation under Section 45, triggered by the regulator's supervisory judgment, is a legitimate mechanism for protecting depositors and the banking system. The case is a clean example of how the diagnostic power in Section 35 (and the directive power in Section 35A) operates as the first link in a chain that can end in the loss of a bank's independent existence, and is best studied with the RBI's functions and powers as background.

RBI v. Jayantilal N. Mistry: inspection reports and the right to information

The most consequential modern decision touching inspection is Reserve Bank of India v. Jayantilal N. Mistry, (2016) 3 SCC 525 (decided 16 December 2015). The question was whether the RBI could refuse to disclose, under the Right to Information Act, 2005, the inspection reports and related material it holds on banks, invoking the exemptions for economic interest (Section 8(1)(a)) and fiduciary relationship (Section 8(1)(e)). The RBI argued that disclosing such sensitive supervisory information — much of it generated through the Section 35 inspection process — would harm the economy and breach the confidence reposed in it by banks.

The Supreme Court rejected both defences. It held that the RBI is not in a fiduciary relationship with the banks it regulates; it is their statutory regulator and supervisor, and it holds inspection material in the discharge of a public, regulatory function, not as a trustee for the banks. Famously observing that "transparency can only foster public confidence; secrecy nurtures corruption and inefficiency," the Court held that the RBI was duty-bound to disclose inspection reports, lists of defaulters and similar information, subject to the genuine carve-outs of the RTI Act. Mistry thus reframed the inspection report: it is not the RBI's private possession but information held in the public interest, and Section 35(5)'s discretionary publication power coexists with the citizen's independent statutory right to seek disclosure.

Section 35A: the directive power that complements inspection

Section 35 rarely operates alone. Its natural companion is Section 35A, inserted in 1956, which empowers the Reserve Bank, where it is satisfied that it is necessary in the public interest, or in the interest of banking policy, or to prevent the affairs of a banking company being conducted in a manner detrimental to depositors, or to secure proper management, to give directions to banking companies generally or to any banking company in particular. If inspection under Section 35 is the eyes of the regulator, Section 35A is its hands: the power to act on what the inspection reveals by issuing binding directions. The two are routinely pleaded together — as in Ganesh Bank, where Section 35A directions were used to manage the bank during the moratorium that followed supervisory concern. The directive power is also the gateway to several modern controversies over the limits of RBI authority, examined next.

The contrast between the two provisions is a favourite of examiners. Section 35 produces information and a report; it does not, of itself, bind the bank to do or refrain from doing anything beyond cooperating with the inspection. Section 35A, by contrast, produces enforceable directions with which the bank must comply on pain of penalty. The thresholds also differ: Section 35 may be exercised at any time without any precondition, whereas Section 35A requires the RBI to be satisfied of one of the enumerated public-interest grounds before issuing directions. Keeping the two analytically separate — diagnosis under Section 35, prescription under Section 35A — is the surest way to avoid the conflation that the courts have repeatedly had to untangle.

Sections 35AA and 35AB: stressed-asset directions after 2017

The Banking Regulation (Amendment) Act, 2017 (No. 30 of 2017), following an Ordinance, inserted Sections 35AA and 35AB after Section 35A to address the problem of bad loans. Section 35AA empowers the Central Government, by order, to authorise the Reserve Bank to issue directions to a banking company to initiate the insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, in respect of a default. Section 35AB empowers the Reserve Bank, from time to time, to issue directions to banking companies for the resolution of stressed assets and to constitute authorities or committees to advise on such resolution. These provisions sit downstream of the supervisory information the RBI gathers, and they sharpened a constitutional question about how far the regulator's directive power can reach.

The drafting choices are deliberate and exam-relevant. Section 35AA conditions the insolvency-referral power on a prior authorisation by the Central Government and ties it to a default — language drawn from the IBC — whereas Section 35AB confers a freestanding power on the RBI to issue stressed-asset resolution directions without that governmental authorisation, because such directions do not by themselves drag a borrower into insolvency. The 2017 amendments therefore did not hand the RBI an open-ended mandate over bad loans; they created two distinct, carefully bounded powers, the precise scope of which fell to be decided almost immediately in Dharani Sugars.

Dharani Sugars v. Union of India: the limits of directive power

The boundaries of the post-2017 directive regime were settled in Dharani Sugars and Chemicals Ltd. v. Union of India, (2019) 5 SCC 480 (also reported as 2019 SCC OnLine SC 460; decided 2 April 2019). The Supreme Court struck down the RBI's circular of 12 February 2018, which had imposed a uniform resolution framework requiring banks to refer all large defaults above a threshold to insolvency. The Court held that the power to direct insolvency references under the IBC could be exercised only through Section 35AA, and only after specific authorisation by the Central Government and in respect of specific defaults by specific debtors — not by a blanket circular covering debtors generally. Because the February 2018 circular lacked such authorisation and operated generally, it was held ultra vires Section 35AA and struck down in its entirety.

Crucially, the Court drew a careful line: directions to initiate the IBC process must flow from Section 35AA, whereas directions for resolving stressed assets other than through the IBC fall within Section 35A read with Section 35AB. Dharani Sugars thus affirms the breadth of the RBI's regulatory and supervisory powers — the same powers underpinning Section 35 inspection — while insisting that each statutory power be exercised strictly within its own four corners. It is the leading authority on the disciplined exercise of RBI directive power and an indispensable companion to any study of Section 35.

Exam takeaways and comparison points

For revision, hold these threads together. Section 35 is the inspection and scrutiny power — discretionary for the RBI, mandatory on Central Government direction; exercisable at any time; backed by a duty to produce records (35(2)) and a power to examine on oath (35(3)); feeding a report (35(4)) that can lead to a deposit ban or winding-up reference; with discretionary publication (35(5)) and an RRB extension (35(6)). The case law supplies the doctrine: Vellukunnel for judicial deference to the RBI's expert, inspection-based opinion; Ganesh Bank for the inspection-to-amalgamation continuum; Mistry for the public, non-fiduciary character of inspection material under RTI; and Dharani Sugars for the strict, source-specific exercise of the related directive powers in Sections 35A, 35AA and 35AB.

A common examiner's trap is to conflate inspection (Section 35) with the directive power (Section 35A) or with investigation under the Companies Act — keep them distinct, and remember the non obstante clause in Section 35(1) that subordinates the company-law route. For the institutional context of who exercises these powers and why, study this chapter with the introduction to the subject and the wider subject hub.