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Regulatory Framework for Banking in India

Regulatory Framework for Banking in India

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Published by Sidhant Naik

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Published by: Sidhant Naik on May 03, 2012
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An overview.

.The Definition and Nature of Business of Banking • Banking in India is mainly governed by The Banking Regulation Act. • Banker can refuse open an account from an undesirable person. ‘Know your customer’ (KYC) has become more stringent now. • Banking is defined as the acceptance of deposits from the public for the purpose of lending or investment. 1949 and The Reserve Bank of India Act 1934.

. liquidity and systems control) has been put in place for them. • CAMELS (Capital adequacy.Non-Banking Finance Companies • In 1997. • They cannot accept deposits without specific approval from RBI. asset quality. management earnings. by an amendment to the RBI Act. a three tier supervisory frame work was introduced for NBFCs.

• Ever banking company has to use the word ‘bank’ as part of its name and no company other than a banking company can use the word. .’ ‘banking’ as part of its name.Licence for Banking.' banker. • It is necessary to have a licence from RBI to commence the business of Banking. • The forms business permissible are given in Section 6 (1) of the Banking Regulation Act. ‘bank'.

• Issue of letters of credit. . • Bill discounting. • Money transfer. issue of demand drafts. • Dealing in foreign exchange transactions. • Borrowing and lending. bank guarantees etc. accepting bills of exchange. travellers cheques. • Negotiating loans and advances. credit cards.Summary of Permissible Business.

bonds. working capital. • Providing. • Market shares. cash-credit and overdraft facilities to firms. debentures. • Manage investments of clients.• Providing safe deposit vaults. • Negotiating loans and advances. insurance etc .personal finance advisory services. mutual funds.

• Prohibited from engaging directly or indirectly in trading activities and undertaking trading risks. • Buying or selling or bartering goods directly or indirectly is prohibited. goods. .Prohibited Business. • However they can hold as securities against loans. land properties etc which they can also sell or dispose off when the debtors default.

The formation of such banks as well as their management and control over personnel is regulated by the cooperative law of the state. • A cooperative Bank is a cooperative society engaged in the business of banking.Cooperative Banks. . All cooperative banks operating on one state only are registered under the respective State Cooperative Societies Act.

• In the case of cooperative banks operating in more than one State. 1986 is applicable.• Registrar of Cooperative Societies under the Cooperative Societies Act exercises a wide range of powers on cooperative societies from registration to winding up. The Multi-unit Cooperative Societies Act. . In such cases the Registrar appointed by Central Government exercises control.

• Thus there is a dual control of the state government and Reserve Bank over these banks. Bank in Gujerat after the Ketan Parekh scam. • For example two years ago the RBI.• However the licensing and regulation of banking business rests with the Reserve Bank. . This was after the collapse of Madhavpura Coop. banned cooperative banks from giving loans against security of shares.

But GOI has extensive powers under RBI & BR Acts. GOI can issue directions to RBI. • Appoint a court liquidator when a bank is wound up.Government as a Regulator of Banks • RBI is the primary regulator of banks. • Can suspend business or order amalgamation of banks. . GOI can also decide on appeals against decisions of RBI. • Power to acquire banks.

. • If they market Insurance Policies they come under the Insurance Regulatory & Development Authority of India. • If banks market shares bonds etc. • On labour and Trade Union issues they will be governed by the State Labour Commissioner. • On tax matters by the tax authorities.Regulation by other Authorities.(IRDA). they come under SEBI’s regulations.

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