BANKING LAWS

Reserve Bank of India Act. 1934 – Important Sections

Sec. 2 (e) Definition of Scheduled Bank: Name in 2nd schedule
with minimum paid up Capital & Reserves of Rs. 5 lac.
Sec. 17 RBI can transact business like:
1. Accepting deposits of Central/State Govt. free of intt.
2. Purchase/rediscount of Bills of Exchange from banks
3. Purchase/sale of Foreign Exchange to/from banks
4. To give loans to banks, SFCs etc.
5. To provide advances to Central/State Govt.
6. To purchase/sale Govt. securities etc.
7. To deal in derivatives, repo or reverse repo.
Sec.18 Emergency loan to banks
Sec.21 Central Government is obliged to give its
banking business to RBI and to entrust
management of Public debt to RBI
Sec.22 Exclusive right to issue bank notes
Sec.24 Maximum denomination of bank note can be
Rs.10000/-
Sec.28 RBI can frame rules for refunding value of
mutilated, soiled or imperfect notes as a matter
of grace
Sec.31 Nobody other than RBI or Central Govt. is
authorized to make promissory note payable
to bearer Demand. Similarly, except the RBI
and Central Government, nobody is
authorized to draw/accept Bills of Exchange
payable to bearer on demand (Exception:
Cheques payable to bearer on demand can
be drawn by anybody).

Sec.42(1) Every scheduled bank shall maintain with RBI

an average daily balance the amount of which
shall not be less than a specified per cent of
its total demand and time liabilities in India.
Reserve Bank of India (Amendment) Act.2006: Provisions
relating to cash reserve ratio (CRR)

The Reserve Bank of India (Amendment) Act, 2006 was enacted in

June 2006
Government of India in their Extraordinary Gazetee notification No.
S.O.21(E) dated January 9,2007 have notified January 9,2007 as the
date on which all the provisions, except Section 3 of the Reserve
Bank of India (Amendment) Act, 2006 shall come into force.

Section 3 of Reserve Bank of India (Amendment) Act,

2006 provided for the removal of:
 The ceiling and floor on the CRR to be prescribed by the RBI
having regard to the need for securing monetary stability in the
country; and
 The provision for interest payment on eligible CRR
balances [i.e., the amount of reserves between
the statutory minimum CRR and the CRR
prescribed by RBI]

Since the above Section 3 is not notified so far, the

minimum CRR level of 3% and the maximum
CRR level of 20% if total of bank’s demand and time
liabilities shall remain in force from June 22, 2006 as
per the extant provisions of Section 42 (1) of the
Reserve Bank of India Act,1934.
 Accordingly, CRR maintained by Scheduled
Commercial Banks on total demand and time liabilities
shall not be less than 3% subject to the exemptions.
Further in exercise of the powers conferred on
Reserve Bank of India under sub section (1) of section
42 of the Reserve Bank of India Act, 1934. it has
been decided that every Scheduled Commercial Bank
should continue to maintain a Cash Reserve Ratio of
5.75% effective fortnight beginning from February 17,
2007 and 6.00% effective from the fortnight beginning
from March 3, 2007 of its total demand and
time liabilities.
In terms of the powers conferred on the Reserve Bank
under sub-section 42(5)(c) of the Reserve Bank of India
Act, 1934, it has been decided to exempt such banks
from payment of the penal interest who have breached
the statutory minimum CRR level of 3% during June 22,
2006 to March 2,2007 on account of CRR exemptions
reckoned for computation of demand and time liabilities
for CRR.

It has also been decided that the Reserve Bank of India

will also pay interest to all Scheduled commercial Banks
on the eligible CRR balance:
a) 3.50% per annum on eligible cash balances maintained
with the Reserve Bank of India under CRR required
from the fortnight beginning June 24,2006 to December
8,2006.
b) 2.00% on eligible cash balances maintained with the
Reserve Bank of India under CRR requirement from the
fortnight beginning from December 9,2006 to February
16,2007.
c) 1.00% on eligible cash balances maintained with the
Reserve Bank of India under CRR requirement from the
fortnight beginning from February 17,2007.
 Every Scheduled commercial Bank shall continue to be exempted
from maintaining average CRR with effect from June 22, 2006 on
the following liabilities, subject to the maintenance of statutory
minimum CRR of 3% on its total demand and time liabilities:

i. Liabilities to the banking system in India as computed under

Clause (d) of the Explanation to Section 42 (1) of the RBI Act,
1934;

ii. Credit balances in ACU (US$) Accounts;

iii. Transactions in Collateralised Borrowing and Lending Obligation

(CBLO) with clearing Corporation of India (CCIL); and

iv. Demand and time liabilities in respect of their Offshore Banking

Units (OBUs)
 Similarly, every Regional Rural Bank, Scheduled State Co-
operative Bank and Scheduled Primary

(Urban) Co-operative Bank shall continue to be exempted from

maintaining average CRR with effect from June 22, 2006 on the
following liabilities, subject to the maintenance of statutory
minimum CRR of 3% on its total demand and time liabilities:

i. Liabilities to the banking system in India as computed under

Clause (d) of the Explanation to Section 42(1) of the RBI Act,
1934; and

ii. Transactions in Collateralised Borrowing and Lending Obligation

(CBLO) with Clearing Corporation of India Ltd. (CCIL)
Sec. 45(A-F) Power to call for credit information from banks
Sec.45 (H-QB) NBFC- minimum Net Owned Fund Rs.25 lac
and maximum Rs.2 crore’ can invest in
approved securities in India min.5% & max.
25% of total deposits outstanding at the close
of business on last working day of second
preceding quarter; create a reserve fund of
minimum 25% of its annual net profit before
declaring any dividend.
Sec. 45(U-X) Definition of Derivatives, Money Market
instruments, repo, reverse repo, etc.;
transaction therein and other guidelines.
Sec.49 Publication of bank rate – presently 6.0%
Sec. 58 RBI’s Central Board is empowered to make
regulations consistent with the Act.
Banking Regulation Act, 1949
Sec. 5a Approved securities as defined in Clause a,b,bb,c,d,;
Sec 20 of Indian Trust Act.
Sec. 5b Definition of Banking
Sec.5c Definition of Banking Company
Sec. 5n “Secured Advances” Loans against assets, whose
market value is higher than loan at any time.
Sec. 6 Forms of business in which Banking Company may
engage
Sec. 8 Prohibits businesses like trading of goods, etc.
Sec. 9 Bank shall not acquire Immovable Property except
for its own use, for any period exceeding 7 years.
Sec. 13 Bank cannot pay commission, brokerage, etc. more
than 2.5% of paid-up value of one share
Sec. 16 Prohibits a person to be appointed as director of more
than one bank
Sec. 22 Empowers RBI to issue licence for opening a Bank
Sec. 23 Prior RBI permission required for opening a new
branch
Sec. 29 To prepare final P & L accounts and Balance sheet in
the form prescribed in the 3rd schedule, Sec 31. To
the publish balance sheet and auditor’s report within
three months from the end of period to which they
refer. RBI may extend the period by further three
months.
Sec.35 No bank can open an office abroad without the
permission of RBI, who only inspects such branches;
RBI has powers to give directions.
Sec. 36AD No person shall obstruct the transactions of normal
business by the bank in any manner.
Sec. 44A Provides procedure for amalgamation of Banking
Companies
Sec 45 powers of RBI to apply to the Central Government for
suspension of business by a banking company and to
prepare scheme of reconstruction or amalgamation
Sec. 45Y Central Government to specify period for which bank
may preserve books, accounts instruments etc.
(Presently 5 years)
Sec. 45 Z A customer has a right to ask the bank to return him a
paid instrument any time/period
Sec. 45ZY While returning a paid instrument, bank must retain
its true copy of all relevant parts, sec 45 ZA to 45 ZF
Nomination.