LEGAL REGUIATORY ASPECTS OF BANKING

INDIAN INSTITUTE OF BANKING & FINANCE

MAC MIL LAN

LEGAL & REGULATORY ASPECTS OF BANKING

INDIAN INSTITUTE OF BANKING & FINANCE
T H E ARCADE', WORLD TRADE CENTRE, CUFFE PARADE MUMBAI400005

Established on 30th April 1928

MISSION
• To develop professionally qualified and competent bankers and financial professionals primarily through a process of education, training, examination, consultancy/counselling and continuing professional development programs.

VISION
To he the premier Institute for developing and nurturing competent professionals in banking and finance field.

OBJECTIVES
• • • • • To facilitate study of theory and practice of banking and finance. To test and certify attainment of competence in the profession of banking and finance. To collect, analyse and provide information needed by professionals in banking and finance. To promote continuous professional development. To promote and undertake research relating to Operations, Products, Instruments, Processes, etc., in banking and finance and to encourage innovation and creativity among finance professionals so that they could face competition and succeed.

COMMITTED TO PROFESSIONAL EXCELLENCE Website: www.iibf.org.in

LEGAL REGULATORY ASPECTS OF BANKING
(For JAIIB/Diploma in Banking & Finance Examination) 2nd Edition

Indian Institute of Banking & Finance

MACMILLAN

© INDIAN I N S T I T U T E OF B A N K I N G & F I N A N C E , M U M B A I , 2005, 2008 (This book has been published by Indian Institute of Banking & Finance. Permission of the Institute is essential for reproduction of any portion of this book. The views expressed herein are not necessarily the views of the Institute.) All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First edition, 2(X)5 Second edition, 2008 Reprinted. 200S 2009 (twice) 2010

MACMILLAN PUBLISHERS INDIA LIMITED
Delhi Bangalore Chennai Kolkata Mumbai Ahmedabad Bhopal Chandigarh Coimbatore Cuttack Guwahati Hubli Hyderabad Jaipur Lucknow Madurai Nagpur Patna Pune Thiruvananthapuram Visakhapatnam C o m p a n i e s and representatives throughout the world ISBN 10: 0230-63610-1 ISBN 13:978-0230-63610-1 Published by Rajiv Beri for Macmillan Publishers India Limited, 2/10 Ansari Road, Daryaganj, New Delhi 110 0 0 2 Printed by S.M. YOG AN at Macmillan India Press, Chennai 600 041.

L E G A L & R E G U L A T O R Y A S P E C T S OF B A N K I N G
Originally prepared by K.D. Zacharias (Module A), C.P. Ravindranath (Module B), P.R. Kulkarni (Module C), B. Gopalakrishnan (Module D) under the guidance of M.L. Chandak, Advocate, High Court, Mumbai. Revised and updated by K.D. Zacharias, Legal Adviser, RBI (Module A), G.M. Ramamurthy, Legal Adviser. IDBI Ltd. (Modules B, C and D)

This book is meant for educational and learning purposes. The a u t h o r s ) of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the a u t h o r s ) has/have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action.

The key features of the Diploma is that it aims at exposing students to real-life banking environment and that it is equivalent to JAIIB. Accounting & Finance for Bankers 3. Legal & Regulatory Aspects of Banking This book. wherever appropriate. etc. etc. 1. the courseware for the third paper on Legal & Regulatory Aspects of Banking.the institute has launched the Diploma in Banking & Finance in 2007 for graduation-plus level candidates. which have significantly changed the way banking operations are done.FOREWORD The world of banking and finance is changing very fast and banks are leveraging knowledge and technology in offering newer services to the customers. but also to build competence in handling various queries raised by customers.which will substantially reduce the training intervention at the bank level before/immediately after they are employed . being the main provider of banking education. reviews the syllabus for its associate examinations viz. .. As there is a growing demand for qualified manpower in the banking sector with accent on banking knowledge and skills.K. contact classes. The Institute acknowledges with gratitude the valuable services rendered by the authors in preparing the courseware in a short period of time. deals with legal and regulatory aspects that have a bearing on banking operations. The Institute had constituted teams consisting of eminent bankers and academicians to prepare the reading material for all the subjects as self-instructional study kits obviating the need for the intervention of a teacher. Right to Information Act. The JAIIB and the Diploma in Banking & Finance has three papers viz. This book and the other two books mentioned below are the courseware for JAIIB which aims to impart up-to-date knowledge in the field of banking and finance and equip the bankers to face the emerging challenges of today and tomorrow. Banks and technology are evolving so rapidly that bank staff must continually seek new skills that enable them not only to respond to change. The Diploma is offered in the distance learning mode with a mix of educational support services like provision of study kits. Principles & Practices of Banking 2. There are various newly enacted laws like Anti-money Laundering Act. Therefore. Case laws are included. Banking and business laws insofar as they relate to day-to-day banking operations. Bhushan. JAIIB/CAIIB and various other examinations with the help of Expert Groups from time to time to make the contents relevant and contemporary in nature. Information Technology Act. and these laws are explained in simple terms as needed to be understood by a practicing banker. together with technology-familiarity. have also been covered at appropriate places. Y. Candidates to the course will get extensive and detailed knowledge on banking & finance and details of banking operations. The latest revision has been done by an expert group under the Chairmanship of Prof. The Institute. there is a need for today s bank employees to keep themselves updated with a new set of skills and knowledge. customer-orientation and hands-on application skills . and are woven in to the units/chapters to make their relevance easily understandable. This book represents the outcome of this endeavour to bring out self-contained comprehensive courseware/book on the subject.

and other interested readers. we are sure that these books will also be useful to practitioners. has made all efforts to cover the entire syllabus prescribed for the subject. will enhance the professional competence of the candidates to still a higher degree. Mumbai K. We have no doubt that the study material will be found useful and will meet the needs of the candidates to prepare adequately for the examinations.The team. academicians. However. We welcome suggestions for improvement of the book. Bhaskaran Chief Executive Officer 3-7-2008 . In addition. who developed the book. the candidates could still refer to a few standard textbooks to supplement this material which we are sure.

RECOMMENDED READING The Institute has prepared comprehensive courseware in the form of study kits to facilitate preparation for the examination without intervention of the teacher. Latest Books and Publications in the subjects concerned. Candidates are also expected to take note of all the latest developments relating to the subject covered in the syllabus by referring to Financial Papers. . Economic Journals. An attempt has been made to cover fully the syllabus prescribed for each module/subject and the presentation of topics may not always be in the same sequence as given in the syllabus.

B. A.R E G U L A T I O N S A N D C O M P L I A N C E • The questions in this section will be with reference to legal issues and problems. Corporate Governance MODULE B .LEGAL & REGULATORY ASPECTS OF BANKING Objectives: The candidates would be able to acquire knowledge in: • • The legal & regulatory framework of the banking system and The various laws and enactments affecting day-to-day banking operations MODULE A . etc.L E G A L A S P E C T S OF B A N K I N G O P E R A T I O N S • • Case Laws on Responsibility of Paying/Collecting Banker Indemnities/Guarantees • • • • • Scope and Application Obligations of a Banker Precautions and Rights Laws Relating to Bill Finance.Modes of Charging Securities . Government and RBI's Powers: • • • • • • • Opening of New Banks and Branch Licensing Constitution of Board of Directors and their Rights Banks Shareholders and their Rights CRR/SLR Concepts Cash/Currency Management Winding Up . Pledge.PAPER 3 .Monetary and Credit Policy Audit and Inspection Supervision and Control-Board for Financial Supervision .Selective Credit Control . Provisions of RBI Act 1935. LC and Deferred Payments Laws Relating to Securities Valuation of Securities . Banking Regulation Act 1949. etc. Registration of Firms/Companies Creation of Charge and Satisfaction of Charge . Hypothecation. Mortgage.Its Scope and Role Disclosure of Accounts and Balance Sheets Submission of Returns to RBI.Lien.Amalgamation and Mergers Powers to Control Advances . Banking Companies [Acquisition and Transfer of Undertakings Act 1970 & 1980].

Bailment. Right of Unpaid Seller. Definitions. 2002 Right to Information Act. Effect of Non-Registration The Transfer of Property Act Foreign Exchange Management Act. 1930 (Sale and Agreement to Sell.Acquisition .BANKING RELATED LAWS • • • • • Law of Limitation Provisions of Bankers Book Evidence Act Special Features of Recovery of Debts Due to Banks and Financial Institutions Act. 1932. Membership of Company . Definition. Dissolution of Firm. 1872 (Indemnity. 2000 • • • • • . Minor Admitted to the Benefits of Partnership. Relation of Partners to One Another-Relation of Partners to Third Parties. Guarantee. etc. Indoor Management and Constructive Notice. 1986 Banking Ombudsman 2006 Lok Adalats Lender's Liability Act M O D U L E D . • Indian Partnership Act. 2002 • • • • The Consumer Protection Act. Memorandum. 2000 Prevention of Money Laundering Act.C O M M E R C I A L L A W S WITH R E F E R E N C E TO B A N K I N G O P E R A T I O N S Indian Contract Act.) The Sale of Goods Act. Doctrines of Ultra Vires. Rights and Duties of Members and Register of Members. Definition and Types of Partnership. Conditions and Warranties. 1993 TDS and Service Tax Banking Cash Transaction Tax Asset Reconstruction Companies The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. Articles of Association. Express and Implied.Cessation.MODULE C . Features of Company. Pledge and Agency. etc. 1956.) The Companies Act. Types of Companies. 2005 Information Technology Act. Prospectus and Directors.

Law Relating to Securities and Modes of Charging .II 16.R E G U L A T I O N S A N D C O M P L I A N C E 1. Incorporation of Companies 19. Control Over Organisation of Banks 3.L E G A L A S P E C T S OF B A N K I N G O P E R A T I O N S 6. Law Relating to Securities and Modes of Charging . 2002 22. Letters of Credit 11.I 15. Regulation of Banking Business 4. Secured and Unsecured Loans. Registration and Satisfaction of Charges MODULE C . Public Sector Banks and Co-operative Banks 3 15 31 49 65 MODULE B . Inspection. Laws Relating to Bill Finance 13. Winding Up 5. Returns. Regulation of Securitisation and Reconstruction of Financial Assets of Banks and Financial Institutions 205 209 219 . Types of Credit Facilities 18. 2002 21. Case Laws on Responsibility of Paying Bank 7. Definitions at SARFAESI Act. Introduction to SARFAESI Act. Bank Guarantees 83 93 101 107 119 131 135 143 155 163 173 181 187 197 10. Deferred Payment Guarantee 12. Case Laws on Responsibility of Collecting Bank S. Legal Framework of Regulation of Banks 2. Different T^pes of Borrowers 17.B A N K I N G R E L A T E D L A W S SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS ANI) ENFORCEMENT OF SECURITY INTEREST.CONTENTS Foreword MODULE A . Various Types of Securities 14. Indemnities 9. 2002 (SARFAESI ACT) 20. Registration of Firms.

Lok Adalats T H E C O N S U M E R P R O T E C T I O N ACT. Preliminary 30. Establishment of Tribunal and Appellate Tribunal 31. Recovery of Debts Determined by Tribunal and Miscellaneous Provisions T H E B A N K E R S ' B O O K S E V I D E N C E ACT. Contract of Bailment 45. Offences and Penalties 26. Consumer Disputes Redressal Agencies T H E LAW O F LIMITATION 39. 1987 35. Income Tax. Meaning and Essentials of a Contract 42. Transaction Tax. Preliminary. Enforcement of Security Interest 24. Banking Cash. Jurisdiction. Contracts of Guarantee 44. Meaning and Essentials of a Contract of Sale 48. Miscellaneous Provisions T H E BANKING O M B U D S M A N S C H E M E . Central Registry 25. Procedure for Redressal of Grievances REC<)VERV (>1 D E B T S D U E TO B A N K S AND 231 241 245 249 255 259 FINANCIAL INSTITUTIONS ACT. Procedure of Tribunals 33. Extent and Definitions 37. 1891 34. 2006 27. The Bankers' Books Evidence Act. Purpose. Limitations of Suits. 1987 36.23. Extent. 1993(DRTACT) 29. Powers and Authority of Tribunals 32. Establishment and Powers 28.C O M M E R C I A L L A W S WITH R E F E R E N C E TO B A N K I N G O P E R A T I O N S 41. 1891 T i n LI ( l A L S I R V I C E S A U T H O R I T I E S ACT. Contract of Agency 47. Contract of Pledge 46. Contracts of Indemnity 43. Definitions. Appeals and Applications TAX LAWS 40. Conditions and Warranties 341 345 347 353 357 359 365 369 . Fringe Benefit Tax and Service Tax 331 327 303 311 315 299 293 267 271 275 279 285 M O D U L E D . Consumer Protection Councils 38.

1999 64. Transfer of Property Act. Minor Admitted to the Benefits of Partnership 54. The Right to Information Act. 2005 66. Foreign Exchange Management Act. Relations of Partners to One Another 52. Relations of Partners to Third Parties 53. 1882 65. 2002 68. 2000 Bibliography 373 377 381 385 389 393 397 399 405 411 415 419 425 429 437 443 453 457 463 469 475 . Right to Information and Obligations of Public Authorities 67. Prospectus 62. Memorandum of Association and Articles of Association 59. Information Technology Act.XIII 49. Definition and Features of a Company 57. Directors 63. Meaning and Nature of Partnership 51. Dissolution of a Firm 55. Types of Companies 58. Unpaid Seller 50. The Prevention of Money Laundering Act. Doctrines of Ultra Vires/Constructive Notice/Indoor Management 60. Effect of Non-Registration 56. Definition. Membership 61.

Control over Organisation of Banks Unit 3. Inspection. Regulation of Banking Business Unit 4. Legal Framework of Regulation of Banks Unit 2. Winding Up Unit 5. Public Sector Banks and Co-operative Banks .REGULATIONS AND COMPLIANCE Unit 1. Returns.

REGULATIONS AND COMPLIANCE Unit 1. Winding Up Unit 5. Inspection. Regulation of Banking Business Unit 4. Legal Framework of Regulation of Banks Unit 2. Public Sector Banks and Co-operative Banks . Returns. Control over Organisation of Banks Unit 3.

1934 Banking Regulation A c t 1949 Reserve Bank as Central Bank and Regulator of Banks Government as a Regulator of Banks Control Over Co-operative Banks Regulation by Other Authorities Let Us Sum Up Kevwords w Check Your Progress Answer to 'Check Your Progress' Terminal Questions .1 1.13 1.14 Objectives Introduction Business of Banking Constitution of Banks Reserve Bank of India Act.2 1.8 1.10 1.11 1.12 1.0 1.5 1.4 1.7 1.9 1.6 1.LEGAL FRAMEWORK OF REGULATION OF BANKS STRUCTURE 1.3 1.

whether it is a statutory corporation. (See. pp. 1934. Further.. 107 to 109) ii.1 INTRODUCTION Banking in India is mainly governed by the Banking Regulation Act. (b) the payment of cheques. regulatory scheme of the RBI Act and the BR Act. 1949 and the Reserve Bank of India Act. All the regulatory provisions are not uniformly applicable to all banks. draft. the opening of accounts is subject to certain conditions like proper introduction and identification. vs Kirk wood ([I966| I All ER 968 at 975) are: (a) the conduct of current accounts. no organisation other than a bank is authorised to accept deposits withdrawable by cheque. Such deposits may be repayable on demand or otherwise and withdrawable by cheque. order or otherwise.. However. we look at the definition of banking. that is. and these are also not the only characteristics. 1.0 OBJECTIVES The objectives of this Unit are to understand: • • • • • the the the the the definition and nature of the business of banking. Thus. The "Know Your Customer" guidelines issued by the Reserve Bank require banks to follow certain customer identification procedure for opening of accounts for protecting the banks from frauds. a banker can refuse to open account for undesirable persons and further. The Savings Bank . Deposits Withdrawable by Cheque: Under Section 49 A of the Banking Regulation Act. role of the Reserve Bank and the Central Government as regulators. and also for monitoring transactions of a suspicious nature for the purpose of reporting to appropriate authorities for taking anti-money laundering measurers and combating financing of terrorism. the general framework of the regulatory laws and the role of regulators namely. Paget's Law of Banking. the constitution of different types of banks and applicability of regulatory laws. 12th Edn.4 1. In this unit. the Reserve Bank of India and the government. the banker can accept "deposits" of money and not anything else. The deposits may be repayable on demand or for a period of time as agreed by the banker and the customer. a bank must perform two essential functions: (i) acceptance of public deposits. and (ii) lending or investment of such deposits. a banking company or a co-operative society.2 BUSINESS OF BANKING i. and (c) the collection of cheques for customers. There is. The applicability of the provisions of these Acts to a bank depends on its constitution. etc. These characteristics are not equivalent to a definition. and special position of public sector banks and co-operative banks.no exhaustive definition of "banking" in Common Law of England. In terms of the definition. Definition of Banking: Banking is defined in Section 5(b) of the Banking Regulation Act as the acceptance of deposits of money from the public for the purpose of lending or investment. constitution of different types of banks. the usual characteristics of banking as identified by Lord Denning MR in United Dominions Trust Ltd. However. The Reserve Bank of India and the Government of India exercise control over banks from the opening of banks to their winding up by virtue of the powers conferred under these statutes. 1. accepting deposits from the "public" implies that a banker accepts deposits from anyone who offers money for such purpose.

railway receipts. raising or taking up of money. collecting and dealing in bills of exchange. underwriting and dealing in stock. traditionally. Section 7 of the Act) and no company other than a banking company can use the words "bank". warrants. "banking" as part of its name. This prohibition does not apply to acceptance of deposits by those who are mainly engaged in manufacturing or trading. the main business of banks is acceptance of deposits and lending. (ii) Lending or advancing of money either upon security or without security. coupons. except relatives. debentures. (vi) Buying and selling of foreign exchange including foreign bank notes. scrips and other instruments and securities whether transferable or negotiable or not. travellers* cheques and circular notes. scrips or valuables on deposit or for safe custody or otherwise. drafts. the banks have now spread their wings far and wide into many allied and even unrelated activities. Other companies are regulated by the Central Government under the Companies (Acceptance of Deposit) Rules. promissory notes. v. hundis. no firm. securities and investments of all kinds. selling. 1998 and other directions issued by it under Chapter IIIB of the Reserve Bank of India Act. individual or group of individuals is permitted to use the words "bank". 1975 issued under Section 58A of the Companies Act. bills of lading. The forms of business permissible under Section 6(1) of the Banking Regulation Act. discounting. debenture stock. (v) Buying. debentures. accepting. making. (vii) Acquiring. Acceptance of deposits by non-banking financial companies is regulated by the Reserve Bank under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions. . selling and dealing in bullion and specie. is prohibited under Section 45S of the RBI Act (as amended in 1997) from accepting deposits from the public. certificates. (iv) Granting and issuing of letters of credit. Further. (x) Receiving of all kinds of bonds. Individuals. it is necessary to have a licence from the Reserve Bank under Section 22 of the Banking Regulation Act for commencing or carrying on the business of banking. (iii) Drawing. are summarised below: (a) (i) Borrowing. Licence for Banking: In India. scrips and other forms of securities on behalf of constituents or others. iv. Permitted Business: Although. Subsidiaries of banks and association of banks in certain cases as also Primary Credit Societies are exempted from this restriction. iii. (ix) Negotiating of loans and advances. firms and other unincorporated associations of persons and individuals who accept deposits from the public. apart from banking business. obligations. buying. holding. issuing on commission. 1956.5 Scheme run by the government. "banker". Acceptance of Deposits by Non-banking Entities: There are also non-banking companies. funds. and (xii) Collecting and transmitting of money and securities. local authority or any other person and carrying on agency business. firms and other unincorporated associations of persons whose business includes the business of a financial institution or whose principal business is acceptance of deposits. (xi) Providing of safe deposit vaults. Every banking company has to use the word "bank" as part of its name (See. bonds. shares. "banking" or "banking company" as a part of the name or for the purpose of business. (b) Acting as an agent of the government. a Primary credit society and any other person or firm notified by the government are exempted from this prohibition. (viii) Purchasing and selling of bonds.

debentures or debenture stock of companies and lend money for the purpose of any such issue. As regards immoveable properties. etc. Goods for the purpose of this Section means every kind of moveable property. manage. funds. Banks in India fall under one of the following categories: (a) Body corporate constituted under a special statute. title or interest in any such property which may form the security for any loan or advance. exchange. municipal or other loans or of shares. develop. participate in managing and carrying out any issue of state. sell and realise any property which may come into its possession in satisfaction of any of its claims. dispose of or turn into account or otherwise deal with all or any part of the business of any person or company. and (ii) undertaking the administration of estates as executor. (c) Co-operative society registered under a central or state enactment on co-operative societies. (i) Undertake the administration of estates as executor.. howsoever acquired. when such business is of a nature described in Section 6. for a period exceeding seven years from the acquisition of the property. underwrite. Section 9 prohibits a banking company from holding such property. shares. (e) Carry on and transact every kind of guarantee and indemnity business. construct and maintain any building for its own purpose. stock. (k) Acquire. (m) Acquire and undertake the whole or any part of the business of any person or company. (1) Sell. bullion and specie and all instruments referred to in Clause (a) of subSection (1) of Section 6. grant money for charitable purposes. (j) Establish. a bank can realise the securities given to it or held by it for a loan. stocks. The banking company shall be required to dispose of such property within the permitted period. Buying or selling or bartering of goods directly or indirectly is prohibited. trustee. (o) Do any other business specified by the Central Government as the lawful business of a banking company. other than actionable claims. support and aid associations. this is without prejudice to the business permitted under Section 6(1) of the Act. mortgage. when such business is of a nature described in Section 6. (f) Manage. (h) Undertake and execute trusts. Prohibited Business: Section 8 of the Banking Regulation Act prohibits a banking company from engaging directly or indirectly in trading activities and undertaking trading risks. 1. trustee or otherwise. etc. institutions. However. lease. hold and deal with any property or any right. (n) Do all such things which are incidental or conducive to the promotion or advancement of the business of the company. if it is satisfied that such extension would be in the interest of the depositors of the banking company. trusts. money. if need arises for the realisation of the amount lent. (b) Company registered under the Companies Act. . vi. guarantee. for the benefit of its present or ex-employees. 1956 or a foreign company. It can also buy or sell or barter for others in connection with: (i) bills of exchange received for collection or negotiation. improve. The Central Government has accordingly specified leasing and factoring as permissible business for banks. except as is required for its own use. (d) Insure. Accordingly.6 (c) Contracting for public and private loans and negotiating and issuing the same. (g) Acquire. The Reserve Bank may extend this period by another five years.3 CONSTITUTION OF BANKS i.

(ii) for keeping reserves for securing monetary stability in India. The Reserve Bank of India Act. management and business of the bank. The regional rural banks are constituted under the Regional Rural Banks Act. which provides for cash reserves of scheduled banks to be kept with the Reserve Bank. The Act deals with the constitution. Co-operative Banks: A co-operative bank is a co-operative society registered or deemed to have been registered under any Central Act for the time being in force relating to the multi-state co-operative societies. All the private sector banks are banking companies. . Banking Companies: A banking company. State Bank of India and its associates (subsidiaries) and the Regional Rural Banks fall in the first category. 1980 the Central Government nationalised (took over the business undertakings) of certain banking companies and vested them in newly created statutory bodies (corresponding new banks) constituted under Section 3 of the 1970/1980 Act. It does not directly deal with regulation of the banking system except for Section 42. 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act. 1959 or other statutes (See Para 5. The Act. capital. in short. the Central Act applies. If a co-operative bank is operating in more than one state. Such company may be a company constituted under Section 3 of the Companies Act or a foreign company within the meaning of Section 591 of that Act. industry and agriculture. In other cases. 1. These banks are governed by the statutes creating them as also some of the provisions of the Banking Regulation Act and the Reserve Bank of India Act. and (iii) to operate the currency and credit system of the country to its advantage. These banks are governed by the Companies Act. 2004 was enacted to permit licensing of multi-state co-operative banks. 1965 extended certain provisions of the Banking Regulation Act and the Reserve Bank of India Act to the co-operative banking sector. the state laws apply. iii. 1934 i.2. 1955 and the six associate/subsidiary banks were constituted under the State Bank (Subsidiary Banks) Act. The last amendment to the Act was effected by the RBI (Amendment) Act.6). Section 18 of the Act provides for direct discount of bills of exchange and promissory notes when a special occasion arises. The Act has been amended from time to time to meet the demands of changing times. 1976. The details are discussed in Unit 5. The Banking Laws (Application to Co-operative Societies) Act.4 RESERVE BANK OF INDIA ACT. By the Banking Companies (Acquisition and Transfer of Undertakings) Act.ii. The Act came into force on 6th March 1934. After the Supreme Court held in Apex Cooperative Bank s case (AI R 2004 SC 141) that multi-state co-operative societies cannot be licensed as co-operative banks. The State Bank of India was constituted under the State Bank of India Act. A "multi-state cooperative bank" under this Act means a multi-state co-operative society which is a primary co-operative bank. 1934 was enacted to constitute the Reserve Bank of India: (i) to regulate the issue of bank notes. powers and functions of the Reserve Bank. as defined in Section 5(c) of the Banking Regulation Act is a company which transacts the business of banking. 2006. iv. deals with: (i) incorporation. 1956 in respect of their constitution and by the Banking Regulation Act and the RBI Act with regard to their business of banking. making it necessary or expedient for the purpose of regulating credit in the interests of trade. the Banking Regulation (Amendment) and Miscellaneous Provisions Act. Further. with a view to regulating the credit system and ensuring monetary stability. Public Sector Banks: The public sector banks including nationalised banks. ii. or any other central or state law relating to co-operative societies for the time being in force.

under the RBI Act. unless otherwise specifically provided in the Act.(ii) the central banking functions like issue of bank notes.5 BANKING REGULATION ACT. Section 56). the Act deals with: (a) (b) (c) (d) regulation business of banking companies. The Reserve Bank was constituted under Section 3 of the Reserve Bank of India Act. requirement as to cash reserve and maintenance of percentage of assets.6 RESERVE BANK AS CENTRAL BANK AND REGULATOR OF BANKS i. and (c) generally to operate the currency and credit system of the country to its advantage. 1. and branches at most of the state capitals and some other cities. In short. rates of interest to be charged. Originally. monetary control. Delhi and Chennai. The Reserve Bank is a body corporate having perpetual succession and common seal and shall sue and be sued in its name. The whole capital of the bank is held by the Central Government. The Bank has its central office in Mumbai and offices in Mumbai. the Act provided for regulation of banking companies only. voting rights and other aspects of banking companies. (b) keeping of reserves for ensuring monetary stability. Kolkata. The bank functions under the general superintendence and directions of the Central Board of . etc. the Bank had the responsibility of: (a) regulating the issue of bank notes. as provided in Section 3. does not apply to primary agricultural credit societies and co-operative land mortgage banks. ii. audit and accounts. and (vi) penalties for violation of the provisions of the Act or the directions issued thereunder. Thus. However. lender of last resort. suspension and winding up of banking business. 1934 for taking over the management of currency from the Central Government and carrying on the business of banking in accordance with the provisions of the Act. (iii) collection and furnishing of credit information. the Act. 1956 which deals with the incorporation and working of companies is applicable to banking companies except where special provisions are made in the Banking Regulation Act in that regard. The Banking Regulation Act. The Act also puts restrictions on the shareholding. publication of bank rate. 1949 i. Companies Act. There are several provisions in the Act regulating the business of banking such as restriction on loans and advances. Initially. The Act regulates entry into banking business by licensing as provided in Section 22 thereof. There are provisions regarding audit and inspection and submission of balance sheets and accounts. 1. (v) general provisions regarding reserve fund. The Act provides for control over the management of banking companies and also deals with the procedure for winding up of the business of the banks and penalties for violation of its provisions. credit funds. acting as banker to government and banks. iii. directorship. (iv) acceptance of deposits by non-banking financial institutions. and penalties for violation of the provisions of the Act. ii. The provisions of the Act are applicable to banking companies in addition to other laws which are applicable to such companies. control over the management of banking companies. 1949 was enacted to consolidate and amend the law relating to banking and to provide for a suitable framework for regulating the banking companies. but in 1965 the Act was amended to cover co-operative banks as well with certain modifications (See.

But the Central Government has also been conferred extensive powers under the RBI Act and BR Act either directly or indirectly over the banks. The government has also the power to issue directions to the Reserve Bank under Section 7( I) of the RBI Act whenever considered . The major powers of the Reserve Bank in the different roles as regulator and supervisor can be summed up as under: (a) power to licence: (b) power of appointment and removal of banking boards/personnel. vii. Bank provides ways and means of advances to the Central and state governments. (h) power relating to moratorium.9 Directors. the bank has also local boards situated at Mumbai. The Deputy Governors. (f) power regarding audit of banks. lending limits. (g) power to collect. The government holds the entire capital of the Reserve Bank and appoints the Governor and the members of the Central Board and has the power to remove them. vi. and regulates the business of banks. The bank also inspects banks and exercises supervisory powers. 2 to Rs. Kolkata. In the case of state governments.7 GOVERNMENT AS A REGULATOR OF BANKS i. These are temporary advances to meet immediate needs when there is interval between expenditure and flow of revenue. and (i) power to impose penalties. The bank may issue notes of different denominations from Rs. (d) power to give directions. collate and furnish credit information. 1949. Executive Directors and other officers in different grades assist the Governor in the discharge of the Bank s functions. investments and various other matters. The Reserve Bank is the sole authority for issue and management of currency in India under Section 22 of the RBI Act. The role of the bank as regulator of banking sector is mainly by virtue of the provisions of the Banking Regulation Act. In exercise of the powers under that Act the bank regulates the entry into banking business by licensing. The bank has to abide by the directions given by the Central Government in public interest after consultation with the Governor of the bank. ii. exercises controls over the managerial persons. Such notes shall be legal tender at any place in India. (e) power to inspect and supervise banks. Apart from the Central Board. v. which perform any duty delegated to them by the Central Board. The board shall consist of a Governor and not more than four Deputy Governors to be appointed by Central Government and other directors nominated by the Central Government. exercises control over shareholding and voting rights of shareholders. 10. The Governor has the power of general superintendence and direction of the affairs of the bank and exercise all powers of the bank unless otherwise provided in the regulations made by the Central Board. 1. (c) power to regulate the business of banks. their banking business is undertaken by the bank based on agreements as provided in Section 21 A. iv. amalgamation and winding up. and may issue directions from time to time in public interest and in the interest of the banking system with respect to interest rates. Delhi and Chennai. The bank is the banker to the Central Government under Section 20 of the Act. and accordingly it is obligatory to undertake banking business for the Central Government. The Reserve Bank is the primary regulator of banks.000 as the Central Government may decide on the recommendations of the Central Board of the bank.

The circumstances in which Reserve Bank may require winding up are mentioned in Section 13D of the Act. there are also provisions for appeal in respect of cancellation of banking licence (under Section 22) and refusal of certificate regarding floating charge on assets (Section 14A).8 CONTROL OVER CO-OPERATIVE BANKS i. 1. there is dual control of State Governments and the Reserve Bank over these banks. In the case of co-operative banks which are registered under the Deposit Insurance and Credit Guarantee Corporation Act. Thus. Thus. In that case. These are in addition to the powers conferred on the government as majority shareholder or full owner of public sector banks under the statutes constituting them. i v. ii. The government has the power to suspend the operations of the Banking Regulation Act or to give exemption from any of the provisions of the Act on the representation/recommendation of the Reserve Bank under Sections 4 and 53 of the Act. the Registrar appointed by the Central Government takes the place of the Registrar appointed by the State Government in other cases. . Appointment of court liquidator. under the Banking Regulation Act appeal lies with the Central Government on removal of managerial personnel under Sections 10B and 36AA of the BR Act. The formation of such banks as well as their management and control over personnel is regulated by the co-operative law of the state. Cooperative banks operating in one state only are registered under the State co-operative Societies Act concerned. Similarly. Rule-making powers under Sections 52 and 45Y are vested in the Central Government. The Registrar of co-operative societies under the Co-operative Societies Act exercises a wide range of powers on co-operative societies from registration to winding up. The above provisions confer wide powers on the Central Government to regulate banks.10 necessary in public interest after consultation with the Governor. The government has also the power to notify other forms of business which a bank may undertake under Section 6(1 )(o) of the Act. the Multi-State Co-operative Societies Act. A co-operative bank is a co-operative society engaged in the business of banking and may be a primary Co-operative bank. iii. 2002 is applicable. the government can exercise control over banks by influencing decision-making by the Reserve Bank and has also got appellate authority in respect of several matters in which the Reserve Bank has been conferred the power to decide at the first instance. Power to acquire undertakings of banks (Section 36AE). Suspension of business and amalgamation of banks under Section 45. Issue of direction for inspection of banks under Section 35. Thus. There are also other provisions under which the Central Government exercises powers as under: (a) (b) (c) (d) (e) (f) Approval for formation of subsidiary for certain business under Section 19. cooperative banks have come under the regulatory purview of the Reserve Bank. iii. the Reserve Bank has the power to order their winding up. While the formation and management of co-operative societies operating in one state only (including those conducting banking business) are under the control of the State Government. licensing and regulation of banking business rests with the Reserve Bank. In the case of co-operative banks operating in more than one state. Notification with reference to accounts and balance sheet under Section 29. With the introduction of Section 56 in the Banking Regulation Act. respectively. 1949 with effect from 1965. a district central co-operative bank or a state co-operative bank.

The government has direct and indirect control over banks. banks may be subject to the regulatory control of other agencies. In case of Insurance Business . 3. As provided in Section 6 of the Banking Regulation Act. 1956 read with the Securities and Exchange Board of India Act. Central Government has substantial control over the management of these banks. Body Corporate.by IRDA and in case of Mutual Fund Business RBI. a banking company will be subject to the control of the authorities under the Companies Act in respect of company matters. draft or otherwise. . 2. largely confined to the regulation of banks by the Reserve Bank and the Central Government under the Reserve Bank of India Act and the Banking Regulation Act. Regional Rural Bank. a bank is answerable to labour authorities in respect of the terms and conditions of service of its workmen. it has to comply with SEBI guidelines. Banks may be subject to the control of other regulatory agencies in the conduct of their business. The study herein is. In public sector banks like the State Bank of India and its subsidiaries. In that regard also. Apart from banking. by the banker and the customer. It can exercise indirect control through thx: Reserve Bank and also act directly in appeals arising from decisions of the Reserve Bank under the various provisions of the Banking Regulation Act. opening and closing of its premises. banks are authorised to carry on other business as specified in Section 6 of the Banking Regulation Act. prohibited from undertaking any trading activities. 1.11 KEYWORDS Banking. 1956. statutory corporations constituted under Special Statutes or Co-operative societies registered under the Central or State Co-operative Societies Acts. ii. If the Bank desires to raise capital through public issue. In the case of non-banking business of the banks. Only certain provisions of the BR Act are applicable to these banks as indicated in that Act. 1. service tax. 1992. Similarly.10 LET US SUM UP 1. however. Banking Company. Co-operative banks operating in one state only are registered under the State Co-operative Societies Act and are subject to the control of the State Government as also the Reserve Bank. SEBI. Banks are constituted as companies registered under the Companies Act. in the case of dealings in securities like shares and debentures. banks may undertake certain non-banking business in addition to the business of banking. Co-operative Bank. engagement of contract labour. The extent of applicability of the regulatory provisions under the Banking Regulation Act and the Reserve Bank of India Act to a bank depends on the constitution of the bank. and may be repayable by cheque. Banking means acceptance of deposits of money from the public for lending or investment. Such deposits may be repayable on demand or may be for a period of time as agreed to. 50% or more of their shares are held by the Central Government.. etc. Banks are. banks are subject to regulation by the Securities Exchange Board of India under the Securities Contract (Regulation) Act. Nationalised Bank. For instance. Banks are also liable to pay income tax like cash transaction tax. however. and other taxes and have to follow the rules and regulations in that regard. nationalised banks and the regional rural banks. Public Sector Bank.11 1. they are subject to control by other regulatory agencies.9 REGULATION BY OTHER AUTHORITIES i. etc. Reserve Bank of India is the central bank of the country and the primary regulator for the banking sector. For instance.

Companies Act) (ii) A Regional Rural Bank is (a body corporate created under a special statute. Company Law Board) 1. . (v) False. an appeal lies with Central Government. Central Bank of India. Authorities under the Companies Act. 2. RBI Act) (ii) Government can exempt a bank from the provisions of BR Act (on the recommendation of RBI. (v) Accepting deposits for safe custody would fall within the definition of "banking". RBI Act. Central Government can give direction to the Reserve Bank.12 1. a company) (iii) Banking companies are licensed by (Reserve Bank. (iv) Subsidiaries of the State Bank are companies registered under the Companies Act. A public sector bank is a body corporate created under a special statute. whenever the government is satisfied. Multi-State Co-operative Societies Act. Registrar of Companies. RBI Act) (v) BR Act was enacted for (regulating banking companies. On cancellation of licence of any bank. (iv) False. (ii) False. Fill in the gaps choosing the answers from the brackets. (iii) True.12 CHECK YOUR PROGRESS A . State (i) (ii) (iii) (iv) (v) whether the following statements are True or False. RBI Act (ii) a body corporate created under a special statute Reserve Bank (iv) BR Act for regulating banking companies. l . 1. (State Bank. regulating acceptance of deposits from public) B. (iii) False. creating Reserve Bank. State (i) (ii) (iii) whether the following statements are True or False. if requested by a bank) (iii) exercises the central banking function in India. (i) (i) (iii) (v) (i) (i) (ii) (iii) True. State governments have no control over co-operative banks. I. Co-operative banks are registered under the Multi-State Co-operative Societies Act or a State Co-operative Societies Act. a cooperative society. (v) True. SEBI) (v) Trading in shares and securities by banks is subject to regulation by (Controller of Capital Issues. 2. Multi-State Co-operative Societies Act On recommendation of RBI Reserve Bank B. Reserve Bank) (iv) Company matters of a banking company are regulated by (Reserve Bank. Company Law Board) (iv) Business which a banking company may undertake other than banking is as stipulated by (Reserve Bank.13 ANSWERS TO 'CHECK YOUR PROGRESS' A. SEBI. Fill in the gaps choosing the answers from the brackets. All kinds of business of banks is regulated only by the Reserve Bank. Central Government is the primary regulator of banks. (iv) False. BR Act. True. (i) Reserve Bank was constituted under (BR Act. (i) Co-operative banks operating in different states are registered under (State Cooperative Societies Act. (ii) False. I. 2. 2. A banking company is registered under the Banking Regulation Act.

non-banking financial companies. 1980. 1956 or a foreign company. 1. at par with commercial banks) 6. 1. insofar as its provisions are not inconsistent with the provisions of the Banking Regulation Act. society registered under the Societies Registration Act) 3. new generation banking companies registered under the Companies Act. can undertake banking business as a primary co-operative bank) 9. non-banking non-financial companies) 5.13 (iv) Authorities under the Companies Act (v) SEBI. acceptance of deposits from the public) 2. only in relation to registration and winding up) 4. central co-operative bank. investment in securities. Banking companies operating in India are constituted in the form of (body corporate constituted under a special statute.14 TERMINAL QUESTIONS Fill in the gaps choosing the answers from the brackets. the Central Board of the Reserve Bank. One of the essential characteristics of banking is (lending to traders. 1970 and the Banking Companies [Acquisition and Transfer of Undertakings] Act. the Finance Commission) 8. can be declared as a state co-operative bank. any Central Act for the time being in force relating to the multi-state cooperative societies or any other central or state law relating to co-operative societies for the time being in force) . Under the Reserve Bank of India Act. a "co-operative society" means a society registered or deemed to have been registered under (any Central Act for the time being in force relating to the multi-state co-operative societies only. A multi-state co-operative bank means a multi-state co-operative society which is a (primary co-operative bank. A co-operative society registered under the Multi-State Co-operative Societies Act (is prohibited from undertaking banking business. Reserve Bank regulates acceptance of deposits by (all companies. a new bank formed by amalgamation of two banking companies) 7. Companies Act applies to banking companies (notwithstanding the provisions of the Banking Regulation Act. For the purposes of the BR Act. BR Act is applicable to co-operative banks (to the extent as provided in the state laws on co-operative societies. Central Government may give directions to the Reserve Bank when considered necessary in public interest only after consulting (the Governor of Reserve Bank. company registered under the Companies Act. state co-operative bank) 10. "Corresponding new banks" means (new banks [nationalised banks] constituted under the Banking Companies [Acquisition and Transfer of Undertakings] Act. any state law relating to co-operative societies for the time being in force only. in a modified form as provided in Section 56 thereof.

.

17 2.5 2.6 2.12 2.9 2.13 2.16 2.2 2.0 2.11 2.CONTROL OVER ORGANISATION OF BANKS STRUCTURE 2.7 2.3 2.14 2.10 2.1 2.18 Objectives Introduction Licensing of Hanking Companies Branch Licensing Paid-up Capital and Reserves Shareholding in Banking Companies Subsidiaries of Banking Companies Board of Directors Chairman of Banking Company Appointment of Additional Directors Restrictions on Employment Control Over Management Corporate Governance Directors and Corporate Governance Let Us Sum Up Keywords Mi Check Your Progress Answers to 'Check Your Progress' Terminal Questions .4 2.15 2.8 2.

shareholder's rights. 2.2 LICENSING OF BANKING COMPANIES i. there arc also controls over the managerial and other personnel. There are further regulations over the paid-up capital and reserves. It is open to the RBI to consider the defects or improvements revealed in an inspection held under Section 35 of the BR Act while disposing of an application for licence. When the Act came into force. material and germane considerations. Only if the decision is based on extraneous considerations or is perverse. by way of licensing and then the requirement of permission for opening or shifting of branches.1 INTRODUCTION The Banking Regulation Act provides for regulation of the organisation of banking companies. Sajjan Bank Pvt. in respect of: • • • • • • • Licensing and branch licensing Paid up capital and reserves Shareholding and rights of shareholders Formation of subsidiaries and holding of shares of other companies Constitution and regulation of board of directors Exercise of control by the Reserve Bank and the Government over the appointment and removal of chairmen. Reserve Bank has the discretion to grant or refuse the licence and when such decision based on relevant. Commencing or carrying on a banking business without a licence is prohibited. unless and until their applications for licence were rejected by the Reserve Bank. Reserve Bank may have to be satisfied by an inspection of the books of the banking company or otherwise in respect of the following matters: . which were established and operating on sound lines and to prevent indiscriminate formation of banking companies. a company requires a licence from the Reserve Bank under Section 22 of the Banking Regulation Act.0 OBJECTIVES The objectives of this unit are to understand the laws that govern banking companies. 1949. (See. but it would still be open to the company to carry on other business like money lending. appointment of chairman and formation of subsidiaries. the decision cannot be assailed. AI R 1961 Mad 8). the banking companies. As held by the Gujarat High Court in Shivabhai vs RBI. providing for controls over the organisation and management of banking companies. managerial and other personnel Corporate governance 2. To start with. The refusal of licence to a company would make it ineligible to undertake banking business. Ltd. Apart from the above. there are restrictions at the entry point. In this unit. the banking business in India. The requirement of licence was meant to ensure the continuance of only those banks.16 2. vs RBI. Ahmedabad (AIR 1986 Guj 19). ii. including the power to remove unsuitable persons and to appoint suitable persons. Discretion of Reserve Bank: The granting of licence by the Reserve Bank may be subject to such conditions as the RBI may think fit in each case. Conditions to be Satisfied: Before granting a licence under Section 22. such banking companies were permitted to continue business. iii. But. we study various provisions of the Banking Regulation Act. the court will intervene. which were then in existence were required to apply for licence within six months from the commencement of the Act. constitution of the board of directors. License Requirement from RBI: To commence or carry on.

three additional conditions have been stipulated for consideration by the Reserve Bank. Although Section 11 of BR Act specifies the minimum capital and reserves requirements of a banking company. in which the company is incorporated discriminates in any way against banking companies registered in India. the Reserve Bank can stipulate a higher requirement of capital for licensing a banking company as under Section 22 the Reserve Bank has to be satisfied that the company has an adequate capital structure and earning prospects. Foreign Banks: In the case of companies incorporated outside India applying for a licence. A banking company. Before cancellation of a licence for non-compliance with any of the conditions as above. (d) Whether the company has an adequate capital structure and earning prospects. which it is competent to exercise. the company has to be given an opportunity for taking necessary steps for complying with or fulfilling the conditions. the grant of licence would be prejudicial to the operation and consolidation of banking system. the Reserve Bank has a wide range of administrative discretion under the Act. The licence issued to these banks would restrict their operations to the specified local area to ensure adequate banking services in that area. (b) Whether the affairs of the company are being conducted or likely to be conducted in a manner detrimental to the interests of its present and future depositors. the requirement of opportunity can be dispensed with. the potential scope for expansion of business by banks already in existence in that area and other relevant factors.17 (a) Whether the company is or will be in a position to pay its present and future depositors in full as their claims accrue. Cancellation of Licence: Sub-Section (4) of Section 22 of the Banking Regulation Act authorises the Reserve Bank to cancel the licence granted to any banking company. (b) Whether the government or the law of the country. As observed by the Madras High Court in Sajjan Bank Pvt. iv. in cases where the Reserve Bank is of the opinion that delay will be prejudicial to the interests of depositors or the public. v. (c) The company does not fulfil at any time. However. any of the conditions referred to in the sub-Section(3) or 3(A) of Section 22 of Banking Regulation Act. (b) The company at any time fails to comply with any of the conditions imposed under the subSection ( l ) of Section 22 of Banking Regulation Act. (c) Whether the general character of proposed management of the company will not be prejudicial to public interest or the interest of depositors. These are: (a) Whether carrying on of banking business by the company in India will be in public interest. . The cancellation of licence may be on any one or more of the following grounds: (a) The company ceases to carry on banking business in India. These arc banking companies operating only in a limited geographical area. 8). and it cannot be said that there is an excessive delegation of power. (e) Whether public interest will be served by grant of licence to the company. consistent with monetary stability and economic growth. ( f ) Whether considering the banking facilities available in the proposed area of operation. vs RBI (AIR 1961 Mad. Ltd. whose licence is cancelled. (g) The fulfilment of any other condition which the Reserve Bank considers relevant in public interest or in the interest of depositors. (c) Whether the company complies with provisions of the BR Act. as applicable to foreign companies. Local Area Banks: The Reserve Bank has recognised the concept of local area banks and licensed a few(four) such banks. can appeal to the Central Government within a period of 30 days from the date of the order rejecting licence. vi. apart from the conditions specified in the case of domestic companies.

the permission may be revoked after giving an opportunity to the bank to show cause. a foreign bank (banking company incorporated outside India) operating in India. the Reserve Bank may require to be satisfied of the following: (a) (b) (c) (d) Financial condition and history of the bank.l5 lacs and if it has a place of business in Mumbai or Kolkata or both. Adequacy of capital structure and earning prospects. and the national bank has to offer its comments on merits to the Reserve Bank. In the case of any dispute regarding computation of paid-up capital and reserves of any banking company. unencumbered approved securities or partly in both. When approved. conference or like occasion is exempt. the permission would be valid for a period of one year before which the branches/ offices should be operationalised. administrative offices. This may be done by an inspection of the bank under Section 35 or otherwise. In the case of regional rural banks. town or village where there is an existing branch or in the environs thereof. cheques cashed or moneys lent. 'Place of business' for this purpose includes any sub-office. General character of its management. sub-office. The present guidelines from RBI provide that Banks should submit their request for new branches. The securities deposited can be replaced by other unencumbered . While granting permission for opening or shifting a branch. the decision of the Reserve Bank shall be final. the applications for permission have to be routed through the National Bank (NABARD). iii.3 BRANCH LICENSING i. has to deposit and keep deposited with the Reserve Bank. Under Section 23 of the Banking Regulation Act. The amount has to be kept in cash. The amounts stipulated have reference to the places of business. 20 lacs. Apart from the requirement of licence for commencing or carrying on banking business. sub-pay office and any place at which deposits are received. sub-pay office or any place at which deposits are received. an amount of Rs. 'Place of business' for this purpose means any office. the temporary branch has to be within the limits of the city. ii. the Reserve Bank may impose any conditions which it thinks fit necessary. Any company wanting to commence banking business has to comply with these requirements. town or village would not need such permission. changing the location of an existing place of business within the same city. Rs.4 PAID-UP CAPITAL AND RESERVES Section 11 of the Banking Regulation Act provides for certain minimum requirements as to paid-up capital and reserves of banking companies. For granting permission under Section 23.18 2. Apart from this. i. However. However. an amount of twenty per cent of the profit for each year in respect of business transacted through the branches in India as disclosed in the profit and loss account has to be deposited with the Reserve Bank. If any bank fails to comply with such conditions. pay office. 2. Opening of a temporary place of business up to one month for purpose of affording banking facilities for any exhibition. banks have to obtain the prior permission of Reserve Bank for opening a new place of business or changing location of the existing place of business. mela. ATMs once in a year for consideration of RBI as against the earlier practice of making individual applications for each and every branch. cheques cashed or moneys lent. These restrictions also apply to foreign branches of banking companies incorporated in India. Public interest. Foreign Banks: Under the sub-Section (2) of Section 11 of the BR Act.

10 lac. for each place of business elsewhere. However. It only puts a limit on voting rights. but one or more of them is in Mumbai or Kolkata. However.000 for each place of business outside these cities and the aggregate not exceeding Rs. in accordance with the law or on behalf of minors or lunatics for whom the registered shareholder holds the shares. the provisions of Section 12(1) are not applicable to banks incorporated before 15 January 1937. RBI stipulated the minimum capital requirement for a new Private Bank at Rs 300 crore as a part of Corporate Governance guidelines and as a policy of Foreign Direct Investment. The Central Government can exempt any foreign bank from this requirement on the recommendation of the Reserve Bank for a specified period if the amounts deposited already by it are considered adequate. 5 lac and if such places of business include Mumbai.000 for other places of business. the requirements of minimum paid-up capital and reserves under Section 11 (3) are as follows: (a) If it has a place of business in more than one state. Section 12( 1) of the Banking Regulation Act stipulates that the subscribed capital of a banking company shall not be less than half of its authorised capital. 5 lacs. iii. Paid-up Capital. these deposits shall form the assets of the company on which the creditors in India shall have the first charge.000. Banking companies are permitted to have only ordinary or equity shares. Acknowledgement by Resarvc Bank: Reserve Bank has instructed banking companies that when . Since 2005. Banks have been permitted by RBI to raise capital even in the from of innovative debt instruments which are perpetual and perpetual non-cumulative preference shares in addition to the equity capital. plus Rs.19 approved securities or cash deposited can be similarly replaced by securities. and the paid-up capital shall not be less than half of its subscribed capital. (b) If the place of business is in only one state and does not include Mumbai or Kolkata. 25. On the cessation of business by any foreign bank for any reason. (c) If places of business are in one state only. This provision does not in any way affect the transfer of shares or the registration of such transfers. During 2005. Rupees l lac for its principal place of business. Rs. 2. paid-up capital is stipulated as Rs 5 lac. However. Now preference shares and other capital instruments are also allowed. If capital is increased. Subscribed Capital and Authorised Capital: Apart from the above. Section 12(2) of the Act puts certain restrictions on voting rights of shareholders. Rs. For banking companies commencing business after the commencement of the Act. Indian Banks: In case of banking companies incorporated in India. 10 lac. this requirement has to be complied within a period not exceeding two years as allowed by the Reserve Bank. Accordingly. 50. plus an additional Rs. no shareholder can exercise voting rights in respect of the shares held by him/her in excess of ten per cent of the total voting rights of all the shareholders of the banking company. 10. in total not exceeding Rs. Rs. Section 12(3) bars suits or other proceedings against registered shareholders by any other person claiming title except by a transferee of shares. If the bank has only one place of business. ii.5 SHAREHOLDING IN BANKING COMPANIES i. Further. preference shares issued before 1 July 1944 are exempt. plus Rs. The provisions of the Companies Act also govern transfer of shares of banking companies. ii.000. the amount is limited to Rs. 20. Voting rights of shareholders: There is no specified ceiling on a person's holding of shares in a banking company under the Banking Regulation Act or any other law. in the same district in which the principal place of business is situated. 5 lac. Kolkata or both.

. 2. subsidiaries are permissible only for the following purposes: (i) Undertaking any business which is permissible for banking companies under Section 6(1) clauses (a) to (o). Accordingly. which is not capitalised or accounted for as a loss. of every banking company. the bank's board must refer the matter to the Reserve Bank. Formation of Subsidiaries: There are certain restrictions under Section 19 of the Banking Regulation Act on the formation of subsidiaries by banking companies. The eligibility criteria require a minimum 9 % of CAR and Net NPAs not exceeding 7%. loss incurred and any other item. Commission. RBI has given detailed eligibility criteria for declaration of dividend by banks and also guidelines on the quantum of dividend that can be declared by banks. brokerage. no dividend is payable until all capitalised expenses are completely written off. The quantum of dividend that can be declared is based on the levels of net NPAs and in a graded level (Maximum 40% pay out ratio) and can be paid out of only current year's profits. as under: . (iii) Undertaking any other business which Reserve Bank with prior approval of the Central Government permits. iv. v. bad debt etc. discount: Section 13 of the Banking Regulation Act imposes a ceiling on the commission. Reserve Bank may permit only such other business which it considers conducive to the spread of banking in India or otherwise useful or necessary in the public interest. (a) Depreciation in value of approved securities. dividends are payable without writing off depreciation. Reports on shareholding: A report regarding the particulars of shareholding of the chairman. Prior permission of the Reserve Bank is a must for t h i s banking business. organisation expenses. Such report should contain the full particulars and extent of value of shares held directly or indirectly and of any change in the extent of holding or of any variation in the rights attaching thereto. This is for purpose of preventing banks from carrying on trading activities by acquiring a controlling interest in non-banking companies. Dividend: There are also certain restrictions on the payment of dividend to the shareholders of banking companies. (b) Depreciation in investment of shares. The undertaking of any business by a subsidiary will not be deemed to amount to the bank itself taking up that business directly or indirectly for the purpose of Section 8. (ii) Carrying on the business of banking exclusively outside India. iii.6 SUBSIDIARIES OF BANKING COMPANIES i. managing director or chief executive officer.20 they receive more than the specified percentage of their shares for transfer to one party. by whatever name called. This is with a view to ensure that the controlling interest in a banking company does not change hands without the knowledge and approval of the Reserve Bank. under Section 15 of the Banking Regulation Act. (c) Bad debts for which an adequate provision is provided. Accordingly. Such expenses include preliminary expenses. . The Reserve Bank may also order for any other information relating to those shares. brokerage. brokerage. bonds or debentures. The banks shall not transfer the shares without receiving Reserve Bank's acknowledgement. discount or remuneration on the sale of shares of banking companies. share-selling commission. Thus. of expenditure not represented by tangible assets. requires submission to the Reserve Bank. other than the approved securities for which adequate provision has been made. the payments on this account in any form should not exceed two-and-a-half per cent of the paid-up value of the shares. However.

within two months' time. Accordingly. such holding of beneficial interest exceeding ten per cent of the total capital of the firm amounts to substantial interest. The proprietors of trading. in the prescribed manner and such decision shall be binding on every director of the board. If any director has to be retired for such a reconstitution. who have special knowledge or practical experience. the holding of shares by a banking company in any company as pledgee. the Bank may then remove any director (determined by lots drawn in the prescribed manner) and such a person shall cease to hold office.21 ii. at least two of the directors should have special knowledge or practical experience in agriculture and rural economy or co-operation or small scale industry. Substantial interest: The directors of a banking company shall not have a substantial interest in or be connected with as employee. holding of shares in any company in which the managing director or manager of a banking company is interested in or concerned with in any manner. it may order such a bank to reconstitute the board after giving reasonable opportunity of being heard. However. 2. 'Substantial interest' for this purpose is defined in Section 2 of the Banking Regulation Act. The Reserve Bank may also appoint a new director in the place of the person removed and he/she shall continue in office until the date up to which his predecessor would have held office. the bank does not fulfil the order of the Reserve Bank. % agriculture and rural economy. whether singly or taken together in the shares of a company exceeding Rs. If. Reconstitution of Board: When the board of a banking company is not constituted in accordance with the requirements of Section 10A of the BR Act. he/she ceases to be a director of the bank and shall not be eligible for further appointment as director of that banking company for a period of four years. 5 lacs or ten per cent of the paid-up capital of the company amounts to substantial interest. law. If the Reserve Bank is of the opinion that the board of any banking company does not fulfil the requirements. the special knowledge or practical experience which is useful to the banking company. manager or managing agent in a company or firm which carries on trade. cooperation. commerce or industry as per Section I OA (2)(b) of the BR Act. this provision is not applicable to the chairman or a whole-time director. holding of beneficial interest by any individual or his spouse or minor child.7 BOARD OF DIRECTORS i. small scale industry or any other matter. Thus. . commercial or industrial concerns other than small scale industrial concerns are also disqualified for directorship. banking. However. In the case of firms. iii. economics. Qualifications: Section 1 OA of the Banking Regulation Act stipulates certain qualifications for directors of banking companies. there is also a ceiling [Section 19(2)] on shareholding in companies other than subsidiaries. mortgagee or absolute owner shall not be exceeding thirty per cent of the paid-up share capital of that company or the paid-up share capital and reserves of the banking company. When the chairman or a whole-time director of a bank is removed from office. is prohibited except in the case of subsidiaries. Shareholding in other companies: Apart from the restriction on subsidiaries. However. with respect of accountancy. finance. this may be done by lots. ii. in the opinion of the Reserve Bank. Further. iv. Period of office: The directors of a banking company shall not hold office for more than eight years continuously. Accordingly at least fifty-one per cent of the total number of directors shall be persons. any proceedings of a banking company will not be invalid only because of any defect in the composition of the board. to comply with the provisions. the board has to be reconstituted. companies registered under Section 25 of the Companies Act and small scale industrial concerns are not included for the purpose. Further.

where no appeal is filed shall be final and not liable to be challenged before any civil court. before taking such an action. Removal of Wholetime Chairman/Managing Director: If the Reserve Bank is of the opinion that the person elected to be the chairman of the board of directors and appointed on a whole time basis or the managing director is not a fit and proper person to hold such office. The exercise of powers by the whole-time chairman or managing director is subject to the superintendence. vi. The chairman on a part-time basis has to be appointed with the prior approval of the Reserve Bank and such an appointment shall be subject to any conditions that may be imposed by the Reserve Bank while granting approval. In the absence of a chairman. appointed from among its directors. However.8 CHAIRMAN OF BANKING COMPANY i.22 2. The Reserve Bank may also permit the whole-time chairman or the managing director to undertake part-time honorary work not likely to interfere with the duties of the chairman or the managing director. The banking company or the person affected by the Reserve Bank s order may appeal to the Central Government within thirty days. Temporary vacancies: In cases where the wholetime chairman or the managing director dies or . if appointed on a whole-time basis is entrusted with the management of the entire affairs of the bank. for the residual period of office of the person removed from office. as also the banking company. managing agent. If the banking company does not comply with the order within two months. iii. The whole-time chairman and a managing director shall hold office for a period not exceeding five years as the board may fix and is also eligible for reelection or reappointment. The whole-time chairman or the managing director will be disqualified under the following circumstances: (a) if he/she is director of a company other than a subsidiary of the banking company or a charitable company (registered under Section 25 of the Companies Act). Qualifications of Whole-time Chairman/Managing Director: The whole-time chairman or the managing director of a banking company should have special knowledge or practical experience of the working of a banking company or the State Bank or a subsidiary bank or a financial institution or financial. The order of the Government where an appeal is filed and the order of the Reserve Bank. the Reserve Bank may remove the person from the office and appoint a suitable person in his/her place. The whole-time chairman or the managing director of a banking company may continue in office at the end of the term of the office until his/her successor assumes office. control and directions of the board of directors. (b) if he/she is a partner of any firm which carries on trade. the management of the whole of the affairs of the banking company shall be entrusted to a managing director. manager. business or industry. he may be a director of a subsidiary of the bank or of a company registered under Section 25 of the Companies Act. the Reserve Bank may require the banking company to remove such a chairman or the managing director and appoint a suitable person. commercial or industrial concern. Although the chairman is in full-time employment of the bank. a reasonable opportunity of being heard. partner or proprietor of any trading. Such a chairman or managing director would continue in office. ii. subject to the approval of the Reserve Bank. (c) if he/she has substantial interest in any other company or firm or is director. the Reserve Bank has to give such a person. economic or business administration. The chairman. Whole-time Chairman/Managing Director: Section I OB of the Banking Regulation Act provides that every banking company should have a full-time or part-time chairman. or (d) if he/she is engaged in any other business or vocation.

ii. appointment may be for a period not exceeding three years or further extended periods not exceeding three years at a time as specified by the Reserve Bank. Qualification shares: The whole-time chairman or the managing director of a banking company is exempted under Section IOC of the Banking Regulation Act from the requirement of holding qualification shares. The provisions of Section 36AB have overriding effect over other laws. namely — (a) a person who is or has been adjudicated insolvent or has suspended payment or has compounded with his/her creditors. contracts. as determined by the Reserve Bank.10 RESTRICTIONS ON EMPLOYMENT i. They hold office during the pleasure of the Reserve Bank. There is also a provision for reappointment after the initial period. . Power of Reserve Bank to appoint ('hairman: In certain cases. If the Reserve Bank is of the opinion that continuation of such vacancy is likely to be against the interests of the banking company. The directors so appointed shall not require any qualification shares.23 he/she resigns or is not capable of discharging his/her functions due to illness. vii. The chairman or the managing director so appointed may be removed from office only by the Reserve Bank and shall draw pay and allowances from the banking company. However. etc. the office of the whole-time chairman or the managing director of a banking company may fall vacant and may not be filled up by the bank immediately. (b) a person who is or has been convicted by a criminal court of an offence involving moral turpitude. he/she shall be deemed to be a director of the banking company. Similar exemption is also available to a director of a banking company appointed by Reserve Bank under Section 10A of the Act. temporary arrangements can be made to carry out the duties of the chairman or the managing director for a period not exceeding four months. 2. One or more additional directors may be so appointed when the bank is of the opinion that it is necessary to do so in the interest of: (a) banking policy (c) banking company (b) public (d) depositors of the banking company. Overriding provisions: The provisions of Section 10A. 2. If the chairman or the managing director so appointed is not a director of the banking company. Section 10B and Section 10BB of the Banking Regulation Act regarding the appointment and removal of a director. this has to be done with the approval of the Reserve Bank. vi. managing director or the chairman shall have overriding effect over all other laws. The Reserve Bank has the power to appoint additional directors on the boards of banking companies under Section 36AB of the Banking Regulation Act. it may appoint an eligible person to fill such vacancy under Section 10BB of the Banking Regulation Act. The additional directors are protected from any liability or obligation for executing their functions in good faith. v. This may adversely affect the interests of the banking company.9 APPOINTMENT OF ADDITIONAL DIRECTORS i. Such appointment may be for a period not exceeding three years. The Banking Regulation Act (Section 10) prohibits employment of managing agents and imposes restrictions on employment of certain type of persons. Any person affected by any action taken under these provisions is not entitled to any compensation for any loss or for termination of office. Subject to this.

at the time of giving opportunity of making a representation that the person concerned shall not act in his/her official capacity or directly or indirectly take part in the management of the bank from the date of such order. Commission paid to brokers. the memorandum. The Reserve Bank has to pass such an order recording the reasons in writing. Power to remove Management and other personnel: The Reserve Bank is empowered under Section 36AA of the Banking Regulation Act to remove any chairman. and subject thereto the order of the Reserve Bank. Such an appeal has to be filed within thirty days from the date of communication of the order. the period of office can be renewed or extended for further periods not exceeding five years at a time. etc. the bank has to be satisfied that it is necessary to do so. qualifications. if allowed by the Reserve Bank. director. the Reserve Bank has to consider the financial condition and history of the banking company. ii. The above restrictions are applicable to workmen as well as management personnel. Persons who are directors of any company other than a subsidiary of a banking company or company registered under Section 25 of the Companies Act are also prohibited from managing a banking company. Where an urgent action is required and delay would be against the interests of the company or its depositors. the affected person has to be given a reasonable opportunity of making a representation against the proposed order. number of its branches. chief executive officer (by whatever name called). age and experience of the person concerned. However. The appellate decision of the Central Government. who are not regular members of the bank's staff..24 (c) a person whose remuneration or part thereof is by way of commission or share in the profits of the company. its area of operation. (d) a person whose remuneration is excessive in the opinion of the Reserve Bank.11 CONTROLS OVER MANAGEMENT i. auctioneers. business or vocation or whose term of office as a person managing the company is for a period exceeding five years also fall in the prohibited category. However. However. Apart from this. Before passing the order. is also not covered by these provisions. articles or any contract to the contrary as the provisions of Section 36AA have overriding effect. Appeal: An appeal against the order of removal lies with the Central Government. resources. For this purpose. . or a further period not exceeding nine months. or other officer or employee of a banking company. as held by the Supreme Court in Central Hank of India vs Their Workmen (AIR 1960 SC 12). Before forming an opinion regarding the remuneration. persons engaged in any other. The bank (RBI) has the discretionary power to remove management and other personnel in the following circumstances: (a) Public interest (b) Preventing the affairs of the banking company being conducted in a manner detrimental to the interest of depositors (c) Securing proper management of the banking company. the Reserve Bank is empowered to direct by order. volume of business and the trend of its earning capacity. 2. remuneration of other personnel in the bank or persons holding similar positions in other banks and the interest of depositors. forwarding agents. The person so removed shall not be entitled to any compensation for loss of office notwithstanding anything contained in any law. this prohibition shall not apply to a director for a temporary period of three months. the restriction on remuneration does not affect payment of bonus according to a settlement or award or in accordance with a scheme framed by the bank or in accordance with the prevailing practice in banking business. shall be final and not liable to challenge in any Civil Court. ii. pending consideration of the representation.

The concept has evolved since the first major study by the Cadbury Committee in 1992. there is considerable divergence in the understanding and practice of corporate governance across different jurisdictions. (f) The responsibilities of the board: Strategic guidance of the company. jobs. effective monitoring of management by the board and the board's accountability to the company and the shareholders are the important aspects. Corporate governance can be seen as kthe way in which boards oversee the running of a company by its managers. It is a concept of recent origin. 2004: The OECD principles of corporate governance. 250 for each day during which the contravention continues. 2. customers and other stakeholders. he/she is prohibited. other officer or employee is removed by the Reserve Bank under Section 36AA as above. 2(X)4 stipulate what the corporate governance framework should ensure. (e) Disclosure and transparency: Timely and accurate disclosures made on all material matters. Appointment of a suitable person: When any chairman. to articulate clearly the division of responsibilities among the different supervisory. established by law or through mutual agreements and encourage active cooperation between the corporations and stakeholders in creating wealth. including the financial situation. and the sustainability of financially sound enterprises. ownership. and how board members are in turn accountable to shareholders and the company* and it has implications for company behaviour towards employees. shareholders.iii. ii. chief executive officer. (d) The role of stakeholders in corporate governance: To recognise the rights of stakeholders. Further. Contravention of the order is punishable with a fine of Rs. The Concept: Corporate governance is a dynamic concept involving promotion of corporate fairness. Subject to this. good corporate governance plays a vital role in ensuring the integrity and efficiency of financial markets and the lack of it can pave the way for financial difficulties and sometimes even fraud. transparency and accountability in the interest of shareholders. Further. banks and other stakeholders. and governance of the company. However. iv. the first international code of good corporate governance approved by governments. director.12 CORPORATE GOVERNANCE i. Further. the Reserve Bank may appoint a suitable person in his place. all shareholders should have the opportunity to obtain an effective redress for violation of their rights. The DECO principles of corporate governance published in 1999. (b) The rights of shareholders and key ownership functions: To protect and facilitate the exercise of shareholders' rights. employees. regulatory and enforcement authorities. OECD Principles of Corporate Governance. Such person shall hold office at the pleasure of the Reserve Bank. regarding the corporation. the appointment may be for a period not exceeding three years and is extendable for further periods not exceeding three years at a time. was revised in 2004. Effect of the order of removal: On the Reserve Bank passing a removal order. performance. (c) The equitable treatment of shareholders: In the equitable treatment of shareholders are included the minority and foreign shareholders. from directly or indirectly taking part in the management of any banking company for a period not exceeding five years as may be specified in the order. . These principles are applicable to all types of companies including banks. which is briefly as under: (a) Ensuring the basis for an effective corporate governance framework: To promote transparent and efficient markets which are consistent with the rule of law. Also. Such appointee shall not incur any obligation or liability for action taken in good faith in the execution of the duties of his office. customers. the person concerned ceases to hold office which he/she was holding till then.

2001 under the chairmanship of Dr. In India. highlights the importance of: • • • • • the roles of boards of directors (with a focus on the role of independent directors) and senior management effective management of conflicts of interest the roles of internal and external auditors. R. that may impede transparency the role of supervisors in promoting and assessing sound corporate governance practices.S. Ganguly with a view to strengthen the internal supervisory role of the boards of banks.(See. A. the Reserve bank constituted a Consultative Group in November. Accordingly. http://www. as well as internal control functionaries governing in a transparent manner.bis. This provides an added impetus for convergence in standards internationally. 2005 (Paras 5 and 6) provide as under: Shareholding (i) The RBI guidelines on acknowledgement for acquisition or transfer of shares issued on 3 February. exercising due diligence and constitution of a nomination committee of the board to scrutinise the declarations made by the bank directors. Keeping all these recommendations in view and the cross-country experience. legal prescriptions for ownership and governance of banks laid down in the statutes are supplemented by regulatory prescriptions. 2002 and simultaneously to the Government of India for consideration. Verma which submitted its report in January.S. (ii) In the interest of diversified ownership of banks. in the mid term Review of the Monetary and Credit Policy. In almost all countries. entitled Enhancing Corporate Governance for Banking Organisations. including the public sector banks and made recommendations to bring the governance standards in India on par with the best international standards. Securities and Exchange Board of India (in respect of listed entities) are involved apart from the Reserve Bank in respect of banks. Earlier. in October. an advisory group on corporate governance under the chairmanship of Dr. 2001. including the concept of 4 fit and proper* criteria for directors of banks which included the process of collecting information. in any bank in excess of ten per ccnt of the paid-up capital of the private sector bank. the objective will be to ensure that no single entity or group of related entities has shareholding or control. Any higher level of . The position of banks is also important for the smooth functioning of the payment system. Reserve Bank's approach: Following the formal policy announcement in regard to corporate governance. especially where a bank operates in jurisdictions. The report of the group was transmitted to all the banks for their consideration in June. directly or indirectly. This guidance. There were also some relevant observations by the advisory group on banking supervision under the chairmanship of Shri M. the policy framework with regard to corporate governance involves a multiplicity of agencies. 2003. their cross-border operations add a special dimension. iv. The RBI guidelines on ownership and governance in the private sector banks released on February 28. the Reserve Bank initiated several measures to strengthen the corporate governance in the Indian banking sector. Corporate Governance and Banks: Banks hold a special position in corporate governance as they accept and deploy large amounts of public funds in fiduciary capacity and also leverage such funds through credit creation. 2001 which examined the issues relating to corporate governance in banks in India.htm).H. The Basel Committee on Banking Supervision has issued guidance (February 2006) for promoting the adoption of sound practices of corporate governance by banking institutions. or through structures. Apart from the fiduciary role of banks. 2004 will be applicable for any acquisition of shares of five per ccnt and above of the paid-up capital of the private sector bank.26 iii. the Department of Company Affairs.org/press/p060213. Patil had submitted its report in March.

(iv) Being a director. 2004. Furthermore. The banks will be required application to RBI for approval satisfy the requirements of the Tit and proper' criteria applicable may apply any additional requirements for the chairman and to provide all information that may be required while making an of appointment of chairman/CEO. 1956) or an associate (partner. not more than one member of a family or a close relative (as defined under Section 6 of the Companies Act. While the respective entities should perform the roles envisaged for them.e. etc. 2004. are indeed representatives of those sectors in a demonstrable fashion.) should be on the board of a bank. RBI CEO. widely held. in regard to important shareholders with other commercial affiliations.13 DIRECTORS AND CORPORATE GOVERNANCE (i) The board of directors should ensure that the responsibilities of directors are well defined and the banks should arrange need based training for the directors in this regard. (ii) As a matter of desirable practice. by way of strategic investment. For this purpose a declaration and undertaking is required from the proposed/existing directors. In addition. director. 2006. including by a bank.. if by such acquisition.R. such a limitation will also be considered. shares not exceeding ten per cent of the paid-up capital of the bank. (iv) Banks (including foreign banks having a branch presence in India)/FIs should not acquire any fresh stake in a bank's equity shares. the principles of corporate governance have been statutorily recognised as per Banking Companies (Acquisition and Transfer of Undertakings) Financial Institutions Laws (Amendment) Act. publicly listed and enjoys good standing in the financial community. the objective will be to ensure that no single individual/entity has ownership and control in excess of ten per cent of that entity. 2004 for grant of acknowledgement for acquisition of shares. the investing bank's/FYs holding exceeds five per cent of the investee bank's equity capital as indicated in RBI circular dated 6 July. if appropriate. they fulfil the criteria under corporate governance norms provided by the Ganguly Committee and they also fulfil the criteria applicable for determining 'fit and proper' status of important shareholders (i. 2. private sector banks will be required to ensure that the directors on their boards representing specific sectors. . (iii) Where ownership is that of a corporate entity. With regard to public sector banks. (v) As per the existing policy.27 acquisition will be with the prior approval of RBI and in accordance with the guidelines of 3 February. The Act as amended provides for shareholder directors to be a person having Tit and proper' status and the Reserve Bank has to notify the 'Fit and Proper' criteria (Section 9(2)1. subject to RBI's prior approval. the CEO should for directors. as provided under the B. shareholding of five per cent and above) as laid down in RBI circular dated 25 June. 2004 in accordance with the recommendations of the Ganguly Committee on corporate governance. RBI may permit a higher level of shareholding. large industrial houses will be allowed to acquire. employee. (vi) In case of a restructuring of the problem/weak banks or in the interest of consolidation in the banking sector. Where the ownership is that of a financial entity the objective will be to ensure that it is a well-established regulated entity. Act. (iii) Guidelines have been provided in respect of 'fit and proper' criteria for directors of banks by the RBI circular dated 25 June.

law. as stipulated. The maximum period of office is limited to eight years continuously. hundred per cent) (vi) Banking companies are not permitted to give dividend until all are written off. licence. The board of directors of a bank has to be constituted with persons hav ing special knowledge or experience in accountancy. (bad debts. Say whether True or False. Fill in the gaps choosing the answers from the brackets.16 CHECK YOUR PROGRESS 1. for opening new branches or shifting branches outside a city. if the board is not properly constituted. etc. Place of Business: Substantial Interest. Subscribed Capital. expenses. Section 6( I )(a) to (o) of the BR Act. The shareholders of a banking company are entitled to dividends only after all the capitalised expenses are written off.14 LET US SUM UP A company wanting to commence hanking business requires prior licence from the Reserve Bank. The Reserve Bank has powers to remove the chairman and appoint a suitable person in his place in certain cases. permission of the Reserve Bank is required. The principles of corporate governance including the Tit and proper' criteria for directors apply to banking companies as well as public sector banks. . The Reserve Bank is empowered to reconstitute the board.15 KEYWORDS Additional Director. (iii) The decision of Reserve Bank to revoke licence is final and no appeal lies from it. twenty per cent of the deposits collected . Banking companies have to have minimum capital and reserves as specified in the Banking Regulation Act. town or village) (iii) Foreign banks are required under Section 11 of the BR Act to deposit arising out of their business in India with the Reserve Bank.each year) (iv) Banks may float subsidiaries for carrying on the business specified in . Further. Overriding Provisions. town or village. thirty per cent of profit for each year. (registration. commencement certificate) (ii) Shifting of a bank's branch in the same does not require Reserve Bank's permission under Section 23. economics. (one per cent. Authorised Capital. Hvery banking company should have a full-time chairman (or a full-time managing director. (twenty per cent of profit for each year. Subsidiary. state. 2. A licence once given may also be cancelled after giving the bank an opportunity to be heard. Before granting licence. (district. (ii) A company whose banking licence is rejected can undertake business as a moneylender or undertake other business.28 2. capitalised expenses) 2. ten per cent. The commission or brokerage payable on selling shares is restricted to two and half per cent of the paid-up value of the shares. their Articles of Association) (v) A shareholder of a banking company can exercise voting rights up to of the total voting rights of all shareholders. city.. Paid-up Capital. The Reserve Bank also has powers to remove the directors or managerial personnel or other employees of banking companies. (i) A temporary branch for less than thirty days in a town where a bank has an existing branch does not require permission from Reserve Bank. 2. Reserve Bank has to be satisfied by inspection or otherwise of the suitability of the company for licence. banking. (their Memorandum of Association. (i) A company has to obtain a from the Reserve Bank to commence banking business in terms of Section 22 of the BR Act. if there is no full-time chairman) with the specified qualifications. The Reserve Bank has the discretion to reject licence or approve the licence on such conditions as it thinks fit. The directors should not have substantial interest in other companies or firms.

RBI. (vi) additional directors. (50 per cent. (v) True. persuasive effect) (vi) Reserve Bank is authorised to appoint under Section 36AB of the BR Act. town or village. overriding effect. (give compensation for loss of office. (iv) The chairman of a banking company can hold office only for a maximum period of eight years. (directors. (iii) The post of chairman of a banking company may be on part-time basis. (vi) True. 2. 3. (no effect. 51 per cent) (iii) When the board of a banking company is ordered to be reconstituted under Section 10A of the BR Act. any interest. (beneficial interest. (ii) False. directors will be removed for the purpose of reconstitution. (iii) by lots. 1. (i) A director of a banking company should not have in any other company. (vi) capitalised expenses. by majority decision) (iv) Before removing the chairman of a bank from office. (vii) The concept of Tit and proper' criteria for directors is not applicable to public sector banks. appeal lies to the Central Government within thirty days of the order. (v) From the order removing chairman of a banking company. Fill in the gaps choosing the answer from the brackets. (iv) False. (iii) 20 per cent of profit for each year. (v) False. (i) licence. (v) No person can hold the shares of banks beyond ceiling specified under the BR Act.(iv) Banking companies are permitted to give brokerage up to two-and-half per cent of the paid-up value of shares. give opportunity of being heard. (ii) True. substantial interest) (ii) At least of the directors should have the qualifications prescribed under Section 10A(2) of the BR Act. (i) True. additional directors. (iii) True. (iv) True. by lots. (ii) The decisions of the board of directors. 1 4. 75 per cent. (ii) 51 per cent. 3. (v) overriding effect. (vi) Reserve Bank has the power to remove any officer or other staff of a banking company under Section 36M of the BR Act. (by rotation. give an option to continue as director) (v) The provisions of Section 36AA of the BR Act regarding removal of managerial personnel have over other laws. (iii) False. (vii) RBI 4.17 ANSWERS TO 'CHECK YOUR PROGRESS 1. (i) substantial interest. (i) True.18 TERMINAL QUESTIONS Fill in the gaps choosing answers from the brackets. during the period when the board's constitution is defective shall be void. (vi) False. (i) The maximum period of office that may be held continuously by an ordinary director in a banking company is eight years. 2. SEBI) has stipulated the Tit and proper' criteria for directors of banking companies. (vii) False 2. (iv) Section 6(1 )(a) to (o) of BR Act. managing director) (vii) The (Central Government. (iv) give opportunity of being heard. Reserve Bank may issue licence to a banking company under Section 22 of the BR Act subject to . (v) 10 per cent. (ii) same city. Reserve Bank has to . (vi) A banking company cannot hold shares in any other company other than a subsidiary. Say whether True or False.

(iii) Banking companies are not permitted to pay dividend above ten per cent of net profits. 5. In addition to the requirements as to minimum capital and reserves under Section II of the BR Act. (i) There are no restrictions in the BR Act on payment of dividend by banking companies. 2. have to be completely written off. (cannot look into the capital structure of a banking company. has to consult the Central Government as to the adequacy of the capital structure of a banking company before licensing). a shareholder cannot exercise voting rights on poll . Choose the correct statements from the following. (ii) Every banking company has to maintain a reserve fund and transfer before declaring dividend. (i) There are no specific qualifications required for the directors of a banking company. 4. (to any new location from where it is situated. confirmation by the Central Government). A banking company can form subsidiaries for undertaking any business mentioned in Section 6(1) (a) to (o) of the BR Act. In the case of a banking company. (i) (ii) (iii) . (iii) At least fifty-one per cent of the directors of a banking company should be chartered accounts or experts in finance. (iii) The maintenance of a reserve fund is optional for a bank. town or village. The chairman of a banking company can be on part-time basis and a managing director can be appointed on whole-time basis who shall be entrusted with the whole of the affairs of the banking company. A banking company can form subsidiaries for undertaking any business approved by its board of directors. such conditions as the Reserve Bank may think fit to impose. (in excess of ten per cent of the total voting rights of all the shareholders of the company. (the company ceases to carry on any of its business. the company is not in a position to pay its depositors in full as their claims accrue). otherwise than within the same city. in excess of two per cent of the total voting rights of all the shareholders of the company. which is permissible for a banking company to undertake. not less than twenty per cent of the profit to the reserve fund. in excess of ten per cent of the total voting rights of all the shareholders except with prior permission of the Reserve Bank). entrusted with the management of the whole of the affairs of the banking company. Reserve Bank . the company changes its registered office from one state to another state. Reserve Bank is not empowered to cancel the licence granted to a banking company on the ground that .30 . (ii) Before payment of dividend by a banking company. 7. (such conditions as the Central Government may specify. 6. 8. (ii) At least fifty-one per cent of the directors of a banking company should consist of persons with professional or other experience as provided in the BR Act. A banking company does not require the permission of the Reserve Bank to form a subsidiary for doing banking business exclusively outside India. all its capitalised expenses. A bank requires permission of the Reserve Bank for opening a new branch or shifting an existing branch . has to satisfy itself under Section 22(3) of the BR Act as to adequacy of capital structure and earning prospects. 3. otherwise than in the same building). The chairman of a banking company can be on part-time basis and the whole of the affairs of the banking company shall be entrusted to a committee of the board of directors. (i) There is no provision for maintenance of reserves by a banking company under the BR Act. unless specifically exempted under the BR Act. (ii) (iii) 10.

17 3.REGULATION OF BANKING BUSINESS STRUCTURE 3.6 3.4 3.3 3.7 3.8 3.16 3.11 3.5 3.9 3.10 3.12 3.13 3.18 3.14 3.2 3.19 Objectives Introduction Power to Issue Directions Acceptance of Deposits Nomination Loans and Advances Regulation of Interest Kate Regulation of Payment Systems Internet Banking Guidelines Regulation of Money Market Instruments Banking Ombudsman Reserve Funds Maintenance of Cash Reserve Maintenance of Liquid Assets Assets in India Let Us Sum Up Keywords Check Your Progress A n t w e n to 'Check Your Progress' Terminal Questions .15 3.1 3.0 3.

vs.2 POWER TO ISSUE DIRECTIONS i. Section 35A gives wide powers generally to regulate banking companies. the Act empowers the Reserve Bank to issue directions for regulating terms and conditions of making of loans and advances and other matters including acceptance of deposits. Hence.1 INTRODUCTION The Banking Regulation Act provides for regulation of the business activities of banking companies. The Act contains provisions for creation of a reserve fund and transfer of a percentage of profits to that fund. the directions are addressed to banks only and not to customers or the public. CIT (AIR 1986 SC 757). The circulars of the Reserve Bank giving instructions to banks where it has statutory powers to give such instructions are also binding on the banks. The Banking Regulation Act also imposes certain restrictions on loans and advances to the directors of banking companies. Paras 3. . While Section 21 gives the power to regulate advances by banking companies. in particular the provisions of the Banking Regulation Act. Regulation of deposits and loans and advances are discussed below (See. has been considered by the Supreme Court in BOI Finance Ltd. being statutory directions.0 OBJECTIVES The objectives of this unit are to understand the law. The Reserve Bank's powers to issue directions are over the banks.32 3. However. Nature of Directions: The directions issued by the Reserve Bank in exercise of powers under Sections 21 and 35A of the BR Act. The effect of directions will be prospective and not retrospective in the absence of any statutory provisions providing for retrospective operation of directions. relating to: • • • • • • • • issue of directions by Reserve Bank to banks regulation of acceptance of deposits by banks regulation of loans and advances regulation of interest rates of banks on deposits and borrowing maintenance of reserve fund maintenance of cash reserve by scheduled banks and other banks maintenance of liquid assets maintenance of assets in India 3. liquid assets and assets in India. In this unit. as held by the Supreme Court in State Bank of India vs. There are also provisions for maintenance of cash reserve. The Custodian (AIR 1997 SC 1952) in the context of some banks entering into certain repo transactions against the circulars of the Reserve Bank prohibiting such transactions.4 and 3. even if they do not specifically refer to any statutory provisions. 3. respectively). The effect of violation of Reserve Bank s directions/ instructions which are binding on banks. are binding on the banks. we look at the relevant provisions of law in this regard. and companies and firms in which they are interested. Accordingly. The court found that the action of the banks violated the Reserve Bank's instructions and held that the violations would not invalidate the contracts with third parties but would render the banks liable to prosecution. non-statutory circulars of the Reserve Bank cannot affect legal rights. The Banking Regulation: Act authorises the Reserve Bank to issue directions to banks under Sections 21 and 35A of the Act.5. ii. The Reserve Bank has been issuing directions from time to time under Section 21 (read with Section 35A) regulating rates of interest and other terms and conditions of acceptance of deposits and making of loans and advances.

as held by the Gujarat High Court in RBI vs Harisidh Co-op. the banks are free to decide their rates accordingly. iv. Further. Accordingly. In that case the Court considered the power of the Reserve Bank to issue directions for superseding the board of a co-operative bank for securing its proper management and upheld the action taken by the Reserve Bank on the finding that it was without mala fide. Section 35A which authorises the Reserve Bank to give directions is wide enough to cover acceptance of deposits. The period of the deposit and rate of interest applicable to the deposit are matters to be agreed between the depositor and the bank under the terms of the deposit. from the public. 3. . the Reserve Bank may generally give advice to any banking company. like deposits in currcnt account and savings bank accounts. iii. NRI deposits. reduction of interest payable on premature withdrawal and payment of interest on renewal of overdue deposits. Bank Ltd. demand deposits. The definition of "banking" in Section 5(b) of the Banking Regulation Act acknowledges this position. The directions issued by the Reserve Bank may also stipulate conditions regarding minimum or maximum periods for which deposits may be accepted. currently RBI prescribes the minimum and maximum period for which deposits can be accepted and prescribes interest rates only in respect of Savings Deposits and NRI deposits leaving others for the individual banks. Regulation of acceptance of deposits: The Banking Regulation Act does not contain any specific provisions for regulation of acceptance of deposits of banks. The directions may either fix the rates or specify the minimum and/or maximum rate of interest on savings deposits and time deposits for various periods as also for special categories of deposits like senior citizen. subject to any directions given by the Reserve Bank in this regard. The return has to be filed within thirty days of the end of each calendar year in the form and manner prescribed and should cover all deposits not operated for ten years. However. The Reserve Bank issues directions from time to time regulating the rates of interest applicable to deposits. In the case of fixed deposits the period of ten years starts from the expiry of the period of the deposit. the Reserve Bank may also caution or give advice to banking companies. both time and demand deposits. Ltd. ii. Caution and Advice: Apart from giving directions. Section 36 of the Banking Regulation Act provides that the Reserve Bank may caution or prohibit banking companies generally or any banking company in particular against any transaction or class of transactions. While time deposits. Types of Deposits: Banks accept different types of deposits. As discussed in unit I. like fixed deposits or recurring deposits are repayable after an agreed period. If only minimum and/or maximum rates are specified or no rates are specified. subject to the terms and conditions of the deposits. the essence of banking business is the acceptance of deposits from the public withdrawable by cheque.33 iii. However. vs RBI (AIR 1961 Mad 8)1. [See also the judgement of Madras High Court in Sajjan Bank Pvt. Returns on unclaimed deposits: Banks have to file a return every year on their unclaimed deposits under Section 26 of the Banking Regulation Act. iv. Bonafides: The powers of the Reserve Bank to issue directions have to be exercised with bonafide intentions. acceptance of deposits may be regulated in the public interest or in the interest of banking policy or in the interests of depositors by issuing directions. are repayable on demand.3 ACCEPTANCE OF DEPOSITS i. (AIR 1988 Guj 107).

The policy on these matters may be specified having regard to the paid-up capital. lending or making of loans and advances is a core business of a banking company. the bank gets a valid discharge. to be maintained in respect of secured advances. Payment by a bank in accordance with these provisions gives a valid discharge to the bank.5 LOANS AND ADVANCES i. may nominate one person as nominee to receive the article in the event of death of that person. . Lending may be for short term or long term. (iii) Maximum amount of advances or other financial accommodation which may be made to any company. on secured or unsecured basis and for different purposes. 1985. and may be on one or more of the following matters: (i) Purpose for which advances may or may not be made. firm. but this does not affect the right or claim a person may have against the nominee in respect of the amount received by him. In the case of Co-operative banks. Regulation of Loans and Advances (a) The Reserve Bank is empowered under Section 21 of the Banking Regulation Act to issue directions to control advances by banking companies.34 3. The Reserve Bank may determine the policy in relation to advances and issue directions when it is satisfied that it is necessary to give directions: (i) In public interest (iii) In the interests of banking policy. Thus. 1985. Such directions may be issued to banking companies generally or to any particular banking company.4 NOMINATION i. ii. and also the Rules 3 and 4 of the Co-operative Banks (Nomination) Rules. Rule 2 of the Banking Companies (Nomination) Rules. ii. reserves and deposits of the banking company and other relevant considerations. Rules 3 and 4 of the Banking Companies (Nomination) Rules. association of persons or individual. Sections 45ZC and 45ZE provide that any person who leaves any article in safe custody and in safety lockers respectively with a banking company. 1985 provides for the procedure and forms for making nomination in respect of deposits with commercial banks. (ii) In the interests of depositors (b) The directions given by the Reserve Bank are binding on banking companies. there is also a provision to appoint a person to receive the deposit on behalf of the minor. 3. similar provisions are incorporated in the Co-operative Banks (Nomination) Rules. the nominee is entitled to all the rights of the depositor/s in the event of death of the depositor/s. Articles in Safe Custody and Safety Lockers: There are also provisions in the Banking Regulation Act for nomination in respect of articles kept in safe custody with banks and safety lockers. Unless the nomination is varied or cancelled. The nomination has to be in the prescribed manner and on return of articles kept in safe custody or removal of contents of locker by nominees as provided. The definition of "banking' in Section 5(b) of the Banking Regulation Act indicates that acceptance of deposits may be for lending or investment. 1985 deal with the form and procedure applicable to articles in safe custody and safety lockers respectively in the case of banking companies and co-operative banks. (ii) Margins. In the case of minor nominees. Repayment of Deposits: Section 45ZA of the Banking Regulation Act provides that a depositor or depositors of a banking company (including co-operative banks) may nominate one person in the prescribed manner as nominee to whom the deposit may be returned in the event of death of the sole depositor or depositors.

jaggery and cotton and textiles are not increased by certain sections of the business community with a motive of profit maximisation by hoarding with the help of bank finance. (v) Rate of interest and other terms and conditions on which accommodation may be made or guarantees may be given. employee or guarantor. capital. These cover the quantum of credit that can be extended and also the rate at which it can be extended. To ensure that prices of essential commodities like food grains. RBI had taken them out of the purview of selective credit control and currently restrictions are there only in case of levy sugar. edible oils. 8. manager. Selective Credit Control (a) Purpose: Banks have been traditionally financing trade and commerce and against items they deal in even before the country started industrializing. Accordingly. a banking company on behalf In this case. deposits and other relevant considerations for determining the maximum amount. Price control: In India. If the director of a banking company is a partner or guarantor of any individual. (ii) ceilings on the levels of credit. employee or guarantor. The tools employed for exercising selective credit control are: (i) minimum margins for lending against selected commodities. Restrictions on loans and advances: Section 20 of the Banking Regulation Act imposes certain restrictions on loans and advances. loans and advances to such individual are also barred. or (ii) by imposing stringent conditions on lending for such purposes. a banking company. Further. and (iii) charging of minimum rate of interest on advances against specified commodities. The prohibition also applies to loans and advances to: (a) firms in which any director is interested as a partner. manager. This is with a view to check the undue rise of prices of such sensitive commodities. selective credit control has been generally used for preventing speculative hoarding of essential commodities and basic raw materials using bank credit. sugar. is prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors. and (b) any company (other than a company registered under Section 25 of the Companies Act) in which a director of the banking company holds substantial interest as defined in Section 5(ne) of the Act or of which he is director. 'Director' includes a member of any board for managing or . these restrictions have been put in place. managing agent. the general powers to give directions under Section 35A are also available for regulation of loans and advances. firm. also the paid-up have to be taken into account advances and other financial The Reserve Bank issues directions from time to time regulating the lending operations of banking companies in exercise of these powers vested under Section 21. no banking company shall grant loans or advances on the security of its own shares. or (iii) by giving concessions for certain desired types of activities. With self-sufficiency achieved by our country over the years in almost all of the above. (b) Methods and tools: Selective credit control seeks to influence the demand for credit by (i) making borrowing more costly for certain purposes which are considered relatively inessential.REGULATION OF BANKING BUSINESS I 35 (iv) M a x i m u m amount up to which guarantees may be given by of any company. The quantum and cost of credit are regulated by operating these tools of control. pulses. reserves. association of persons or individual. Apart from this.

large-scale industries. The Reserve Bank tightens the regulations or gives relaxations thereby permitting banks to decide the rates on their own. Thereafter the Reserve Bank has been issuing directions from time to time regulating rates of interest applicable to different types of deposits. Hence.. Accordingly. As the directions are issued by virtue of the powers vested in the Reserve Bank under Section 35A of the Banking Regulation Act. It is open to the Reserve Bank to specify any transaction as not being a loan or advance for this purpose by a general or special order. much freedom has been given to banks to decide the rates themselves. there should not be any discrimination against any class of depositors or loanees or banks. vi. i. Interest rate on loans and advances: Interest rate on loans and advances is subject to regulation specifically under Section 21 (2)(e) of the Banking Regulation Act apart from the general provisions of Section 35 A. Interest on deposits: The rates of interest on deposits were not regulated by the Reserve Bank until 1964. a banking company requires prior permission of the Reserve Bank under Section 20A of the Banking Regulation Act.36 advising the bank regarding management of all or any of its affairs. depending on the position of money supply in the public interest or in the interest of depositors or of banking policy. . 3. it was open to the banks to decide their deposit rates freely. Any remission made in contravention of Section 20 is void and will have no effect. before issuing the directions the Bank has to be satisfied that the directions are necessary in public interest or in the interest of depositors or of banking policy. Any differential treatment should be justifiable in law as not being against the principles of equality. period. managing agent. and of late. Further. manner and circumstances in which the amount is likely to be realised. In Harjit Singh vs Union of India (AIR 1994 SC 1433). Of late. Restrictions on power to remit debt: For remitting any debt to its directors. partner. the interest of depositors and other relevant considerations. The Reserve Bank has been issuing directions from time to time under Section 21 (read with Section 35A) of the Act regulating different aspects of lending including lending rates. In so doing the bank has to consider the nature of the transaction. the decision of the Reserve Bank in the matter shall be final. Permission is also required for remission of loans to: (a) any firm or company in which a director is interested as director. thereby giving increased freedom to banks to decide the rates themselves. the movement has been in the direction of liberalisation of interest rates. If there is any doubt or dispute as to whether a transaction is a loan or advance. ii.6 REGULATION OF INTEREST RATE The Reserve Bank is authorised to regulate interest rates under Section 21 (read with Section 35A) of the Banking Regulation Act. as there was no basis for discrimination between loanees from banks and loanees from financial institutions. Reserve Bank may permit higher rate of interest in favour of certain categories of depositors like former/existing employees or depositors of certain classes of banks like co-operative banks. the Supreme Court held in the context of reduction of rate of interest on bank loans to riot victims that the concession should be extended to loanees from financial institutions also. different rates are permissible for different sectors like small-scale industries. or (b) any individual for whom a director is partner or guarantor. payment of interest on current account was prohibited. While giving directions on interest rates. Currently the directions of RBI regarding interest rates of advances cover only finance to exporters and small loans with limits up to Rs 2 lac and DRI loans. This includes rates of interest for loans and advances as well as deposits. the rate of interest may vary on the basis of the period of the loan. etc. Accordingly. agriculture.

the court did not express any opinion on the question whether Section 21A would debar the courts from interfering if the circulars or directives of the Reserve Bank do not fix the maximum and leave it to the discretion of the banks to fix the rate above the minimum. the regulation of payment systems has become important in the context of electronic payment systems becoming popular and the probability of complications in the absence of a suitable regulatory framework with statutory backing. Accordingly. Similarly. The court further held that where the Reserve Bank fixes both minimum and maximum rates of interest.37 iii. RBI is in the process of finalising the guidelines under the Payment and Settlement Systems Act. iv. debt relief legislation in different states attempts to protect the agriculturists and other weaker sections from unscrupulous lenders. Section 58 empowers the Bank to make regulations for giving effect to the provisions of the Act and Clause (g) of the sub-Section (2) thereof.) However.7 REGULATION OF PAYMENT SYSTEMS The Reserve Bank of India Act. However. The Board has the Governor of the Bank as its chairman and its functions include prescribing policies relating to the regulation and supervision of all types of payment and settlement systems. 1918: The Usurious Loans Act. This was coming in the way of the monetary policy decided by the central bank. 2005. courts would not interfere in the matter of interest rate. the Central Board of the Reserve Bank has framed the Reserve Bank of India (Board for Regulation and Supervision of Payment and Settlement Systems) Regulations. Gowda [(1994) 5 SCC 213]. provides for making provisions for regulation of clearing houses for the banks including post office saving banks. Financial institution for this purpose will have the same meaning as provided in the Clause (c) of Section 45 of the Reserve Bank of India Act. borrowers often used to resort to these laws for remitting loans or reducing rates of interest in respect of loans taken by them from banks. Although the lending rates of banks are regulated by the Reserve Bank. The law has been made to protect the weaker borrowers from the powerful moneylenders. 1918 or any other law relating to indebtedness in force in any state. Section 21A was held to be valid and not ultra vires the Constitution by the Supreme Court. 1918 prohibits lending at exorbitant rates. Protection to interest rate: Section 21A of the Banking Regulation Act provides that a transaction between a banking company and its debtor cannot be reopened by any court on the ground that the rate of interest charged is excessive. Further. In Corporation Bank vs D. the Information Technology Act. if the rate charged by the bank is not in violation of the Reserve Bank directive. has constituted a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) as a committee of its Central board. Usurious loans Act. This provision is given an overriding effect over the provisions of the Usurious Loans Act. S. did not contain any provision for regulation of payment systems. In the absence of specific powers under the Act. the Supreme Court held that banks can compound interest on annual rates and not half yearly rates in view of the express directives of the Reserve Bank. the Bank has not been able to frame any regulations relating to payment systems. 3. inserting the Clause (pp) in Section 58 (2) empowering the Reserve Bank to frame regulations for payment systems of banks and financial institutions. . (The clearing houses are now functioning under the uniform clearing house rules and regulations framed by the mutual consent of members and no statutory rules or regulations have been framed. 2007. Hence. setting standards for existing and future systems. 2000 has amended the Reserve Bank of India Act. by remitting debts or giving other concessions. in terms of the RBI (Board for Regulation and Supervision of Payment and Settlement Systems) Regulations. i. 2005. Accordingly. until recently. Board for regulation and supervision of Payment and Settlement Systems: The Reserve Bank. Section 21A was inserted in the Banking Regulation Act to make the rates of interest charged by banking companies beyond the scrutiny of courts.

Sign up to vote on this title
UsefulNot useful