Functions of Banks & Banking Regulation Act 1949

Prof. Divya Gupta

Functions of Banks:
Functions can be categorized under two categories: Primary functions of commercial banks Secondary functions of commercial banks

Primary Functions of a bank are:

Accepting Deposits Savings Fixed Deposits Current Deposits

Lending money to the public Loans Cash credit Overdraft Discounting of bills

Secondary functions of commercial banks

Agency services General utility services

Banking Regulation Act - 1949

Act was originally called as Banking Companies Act 1949. It came into force from 16th March 1949. Now it is renamed as Banking regulation Act 1949. Reasons for commencement of this Act.

Reasons for commencement of this Act.

This Act was passed to consolidate and amend the laws relating to banking companies.

Provisions of the Act

1.

Definition of Banking (sec 5(b)) Business of Banking Company (sec 6) Main Functions Subsidiary Functions Kinds of business that can not be done Capital Requirement. (sec 11)

2.

3.

S. N

Foreign banking co.

Amount(Rs.)

1.

If it has a place of business in Bombay or Calcutta or both

20 lacs

2.

If it has no place of business in Bombay or Calcutta

15 lacs

Indian banking co.

1.

Banking co. having place of business in more than 1 state

5 lacs

2.

Banking co. having place of business in more than 1 state & if any such place include Bombay or Calcutta or both

10 lacs

3.

4.

Banking co. having place of business in 1 state but none in Bombay or Calcutta a) For principal place of business plus 1lacs b) For each of place in the same district plus 10000 c) For each of place in other district 25000 subject to overall limit of 5lacs Banking co. having only one place of business and also no branch in Bombay or Calcutta

50000

5.

a) Banking co. having place of business in only 1 state, one or more or which is or are situated in Bombay or Calcutta or plus 5lacs b) For each place of business outside the city 25000 c) subject to overall limit of 10lacs

To start a new Bank

Minimum capital required is 200 crores. And shall be increased to 300 crores in subsequent 3 years.

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4. Management Sec 10(A)

Board of Directors Wholetime Chairman

5. Maintenance of Liquid Assets

CRR(sec 18) No loans & advances on its own shares(sec 20) No floating charge to any of its property(sec 14A) Credit policy need to be followed by Banks(sec21)

Important Rates acc to (Credit Policy in 2010-11)

Bank rate 6% Repo rate 6.25% Reverse repo rate - 5.25% CRR 6% SLR 24% Money Market- 4% to 6.6%

Credit Policy 2010-11(Second Quarter)

Rep rate and reverse repo increased Credit growth rises to 23% and deposits grow by 15% by December 2010. RBI had planned for 18% growth in deposits. RBI reduces SLR to 24% on 16th Dec 2010, with effect from 18th Dec 2010 OMO operations will be done to inject Rs.48000 crores in the market through by back GDP growth rate is 8.9%

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Cannot be a pledgee of any immovable property for period of exceeding 7 years (except official work) sec 9 Cannot hold shares in other company more than 30% of paid up capital of that co or their own (sec 19) Restriction on granting loans to any of the its directors or to any institution in which director is interested. SLR - Every banking co. is expected to maintain at least 24% of total deposits in India in the form of cash, gold and approved securities at the close of every day of its business. (sec 24) Every Banking co. Should keep assets in India atleast to the extent of 75% of total liabilities at the end of every quarter (Sec 25)

News in Economic Times on Feb,2009

st 1

Regulator prescribes an overall cap of 40% of consolidated net worth of the bank for capital market exposure .

6. Licensing of Banks (sec 22)

1. 2.

3.

Financial status Companies affairs are in compliance with the rules Foreign banks No discrimination Business in public interest Comply with the provisions of Act

7.Opening of New branches(sec 23)

Prior permission from RBI(in India or abroad) or changing location of the existing offices. Conditions to be satisfied Prior consent not required New licensing policy

8. Loans and Advances (sec 21)

Purpose of loan Margin for secured advances Amount of advances to a bank, company , individual or a firm Rate of interest and other terms Maximum amount up to which guarantee can be given Exceptions- No loan to director, or no loan on security of its own shares

9. Inspection of Banks(sec 35)

RBI has a right to inspect books of accounts of any bank Obligation on every employee to produce all the books Right to examine any of the officer/Director/employee Either its own initiative or by order of central govt. Report to be prepared, send to bank and Central govt and decision to be taken.

10.Returns to be submitted

Returns of liquid assets & liabilities(sec 23(3)) Returns of unclaimed deposits (sec 26)

Monthly returns (sec 27)

Return of annual accounts (sec 31)(auditors report) Additional information(advances)

11. Acquisition of business(sec 36 AE to AJ)

When banking co fails to comply the directions given under sec 21 or 35A When banking business is carried on to the detriment of interest of the depositors When RBI feels to acquire a bank in case of liquidity problem. Compensation is paid to shareholders.

12. Winding up of a Banking co.

If banking co. is unable to pay its debts a) if it refused to meet any lawful demand made at any of its offices with in 2 days(some cases 5 days). b) If RBI certifies in writing 2) The RBI will make an application under the following circumstances : a) fails to comply with the provisions of Act. b) unable to pay debts c) fails to implement satisfactory compromise sanctioned by court d) against the interest of depositors e) Liquidator(sec 39)
1)

13. Amalgamation of Banking Companies (sec 44(a))

Information to shareholders and approved by two-third majority of shareholders of each bank Details of meeting to be given to every shareholder, needs to be published in at least two newspapers for three consecutive weeks Discontented shareholders can claim their value of shares Amalgamation scheme has to be sanctioned by RBI Assets & liabilities are transferred A copy of order of amalgamation to be given to ROC

14. Powers of RBI

Power to grant moratorium (sec 45) Power to appoint liquidator Additional powers

15. Miscellaneous Provisions(penalties (sec 46))

False or inaccurate return fine & imprisonment upto 3 years Failure to furnish documents, accounts or comply with the Act penalty of Rs. 2000 (plus Rs.100 per day) Receiving deposits in contravention of order of RBI fine upto twice of amount Persons responsible for fault ,shall be deemed guilty of the default

16. Application of the Act to Co-op Bank

Co-op banks were brought under the purview of Banking Regulation Act 1949 in 1965. The Act is applies to all state and central Co-op banks irrespective of their paid up capital and reserves. This Act is not applicable to Land development banks and agriculture credit society.

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