Important Provisions of Acts

relating to Banking

© BIRD, LUCKNOW
Session Objective

To discuss and understand

1. Important Sections of B R Act 1949

2. Important Sections of RBI Act 1934

3. Important Sections of NABARD Act 1981

4. Important Sections of NI Act 1881

 Banking Regulation Act 1949
- Need for Enactment

1. There was little control & regulation over Banks

2. Mushroom growth of banks, many getting into trouble
3. Deficiency in functioning viz., poor mgt, skewed loan and investment
portfolio, inadequate liquidity maintenance, etc.
4. Closure and failure of banks.
5. General loss of faith in banking system.
6. Need for amalgamation / merger of small / weak banks .

ग ाँव बढ़े तो दे श बढ़े Taking Rural India >> Forward

 Objective of B R Act 1949

The Banking Act was enacted in February1949 with the following objectives:
1. Provision of the Indian Companies Act, 1913 was found inadequate to regulate
banking companies. Therefore a need was felt to have a specific legislation having
comprehensive coverage on banking.
2. To protect the interest of depositors and public at large by incorporating certain provisions,
viz. prescribing Cash Reserve and Liquidity Reserve Ratios. This enabled bank to meet demand
depositors.
3. One of the key objectives, was to avoid cut throat competition among banking
companies. It prevented indiscriminate opening of new branches  balanced
development by system of licensing.
4. Provided for power to RBI to appoint, reappoint and removal of Chairman, Director and
officers of the banks, to ensure smooth and efficient functioning of banks.
 The Act

 The Act was originally in force from 16 March 1949 as the Banking
Companies Act, 1949.
 It was amended and renamed as Banking Regulation Act, 1949.
 It was extended to the Cooperative Banks from 1 March 1966 as the
Banking Regulation Act, 1949 (As Applicable to Cooperative Societies)
[B R Act, 1949 (AACS)].
 The provisions for Cooperative banks are indicated in Part V  Sec 56.
 Sections 3 & 5 of B R Act
Sec 3
 The provisions of this Act not Applicable to :
 PACS
 ARDBS

Sec 5  Interpretation

 5(a)  Approved securities are securities issued by CG/SG or as

approved by RBI
 5(b) Banking means = Accepting deposits for the purpose of lending or
investment, Repayable on demand or otherwise and withdrawable by
cheque, draft or otherwise.
 Section 6 –
Banking Business
 Banking Business: Businesses a bank may carry on are summarised into
three categories:
1. Main business : Banking i.e., borrowing, taking or lending money,
dealing in Bills of Exchange, Bills of lading, Debentures, issuing letters
of credit, buying / selling foreign exchange, Acquiring or underwriting
stocks.
2. Allied business: Acting as agent/trustee/administrator, carrying on
guarantee business, providing safe custody.
3. Dealing in Property  is restricted to
 Property coming in satisfaction of claims as security and
 Property necessary for its own use
 Sec 7

Section 7
 (1) No company other than the banking company shall
use the words ‘Bank’ , ‘Banker’ , ‘Banking Company’ & no
company can indulge in business of banking till it uses
atleast one of such words in its organisational name.
 Section-9 : Disposal of
Non-banking assets

1. Banks are prohibited from holding immovable property unless it

is required for their own use.
2. All properties acquired not for their own use should be
disposed of within 7 years from the date of acquisition.
3. RBI may extend the aforesaid period of 7 years by such period
not exceeding 5 years in specific cases.
 Sec 11 [Min capital] &
Sec 17 – Reserve Fund
Section 11 (Non Scheduled Banks)
1. Cooperative bank not to commence banking business unless the aggregrate
value of its “Paid up Capital and Reserves” is not less than “One lakh rupees”.
[AACS]
2. Value means “Real & Exchangeable” value and not the nominal value as shown in
the books of accounts.
3. RBI final authority in case of dispute/s

Section 17. Reserve Fund

 (1) Every banking company … shall create a Reserve Fund and shall, out of the
balance of profit of each year … before any dividend is declared, transfer to the
reserve fund not less than 20% of such profit.
 (1A) …. the CG may, on the recommendation of RBI ……, declare by order in writing
that the provisions of sub-section (1) shall not apply for such period as may be
specified in the order.
Section -18 : Cash Reserve Ratio
(CRR)

a) All Non scheduled Co-operative banks , shall maintain

 By way of cash reserve with itself, or
 By way of balance in current account with RBI or SCB of the state
concerned, or
 By way of net balance in current account.
b) A sum equivalent to such %** of its demand and time liabilities (DTL) as on
last Friday of the second preceding fortnight, as specified by RBI
c) Shall submit the Return to RBI before 20th day of every month
d) Penal interest to be charged for non maintenance of CRR

 Substituted by the Banking Laws (Amendment) Act, 2012 (Act No. 4 of 2013) w.e.f.
18.01.2013 for the following : - "at least 3%"
 Section -18 - Cash
Reserve Ratio

a) Liabilities for CRR calculation, does not include;

1. Paid-up capital, Reserves, or any credit balance in the PL A/C.
2. Any advances taken from a State Govt., RBI, EXIM Bank, NHB,
SIDBI, NCDC, NABARD
3. Reserve Fund Deposits of PACS / CCBs
4. In case of a CCB, any advance taken from the concerned StCB.
5. In case of any Cooperative bank, any borrowings against
approved securities.
b) Dispute over computation of DTL – RBI’s decision is final
 Section-18 : CRR 
Major Changes by RBI
1. The cap of CRR (3% to 20%) removed. RBI can decide CRR rate, depending on
requirement. [RBI (Amendment) Act, 2006  Applicable to Sch. Banks]
2. CRR stipulation of all banks, including Co-operative banks, now same. (from July
2012.)
3. Calculation of CRR, based on daily average balance for a particular fortnight.
4. Daily average, can be a minimum of 70% of required CRR stipulation, for
Scheduled banks only.
5. Provision of penalty for bank@ 3% above Bank Rate, if CRR is not maintained for
a fortnight. It shall go up to 5%, if default persists for subsequent fortnights.
6. CRR was reduced from a level of 8.5% in August 2008 to 6% in September, 2008 &
further to 5% in January 2009. The CRR was maintained at this level throughout 2009
and eventually raised to 6% in April, 2010. ?????????
7. From February 09, 2013, the CRR is prescribed at 4% , till date.
 Section 19 – Restrictions on holding
shares in Other Cooperative Societies

a) No cooperative bank shall hold shares in any other cooperative

society except to such extent and subject to such conditions as
may be specified by RBI
b) Exemption :
 Shares acquired through funds provided by State Government
for that purpose
 In the case of CCB, holding of shares in SCB to which it is
affiliated
 Section-22 : Licensing Banking Companies

Section 22
 Banking business to be carried out by only those banks which are licensed by
RBI . Banks to apply for license to RBI
 Unlicensed working banks which have applied for license to RBI, will continue to
function till the license is refused in writing by RBI.
22 (3) Conditions for License - For Granting license, RBI may require to be
satisfied by an inspection or otherwise,
a. Position to pay its present & future depositors, on demand and at the time of
maturity
b. Affairs of the bank are not conducted in a manner detrimental to the interest of
depositors
c. Acts of Management are not construed as not in depositors’ and/or public
interest.
d. Bank has adequate capital structure & earning prospects
 Section - 22 (3) (b) :
Not detrimental  for License

 For recommending grant or continuation of license , major aspects to be

seen by NABARD, for compliance to Sec 22 (3) (b) are :
1. Bank has adequate Capital structure  Compliance to Sec 11(1).
2. Attained adequate CRAR  Regulatory Requirement.
3. No defaults to CRR & SLR requirements [Ignore 1 or 2 defaults]
4. Satisfactory Level of NPAs  [GNPA <15%, NNPA<10%]
5. Profit during the last 2 years.
6. Sound Internal checks & control system  No major frauds
7. No serious Governance issue  Board taking decisions as per
norms.
 First 3 compulsory. Any 2 of the next 4 should comply. Then Okay.
 Section-24 : Maintenance of
Statutory Liquid Assets [SLR]

Section 24 - SLR
 A schedule bank , in addition to average daily balances required to be maintained
U/S 42 of RBI Act & every other banking company , in addition to CRR required
to be maintained U/S 18 of BR Act shall maintain-
(A) In cash
(B) In gold valued at price not exceeding current market price
(C) In unencumbered securities
 Amounts which shall not at close of business on any day be below such %, not
exceeding 40% of its total DTL in India , as on the last friday of the second
preceding fortnight
 Submit a return before 20th of every month showing particulars of liquid assets &
DTL as on each alternate friday during the month. RRBs to submit a copy to
NABARD too.
 Section-24 : Maintenance of Statutory
Liquid Assets [SLR] – Revised Norms

 RBI, vide circular dated 25.07.2014, advised CCBs to convert their

SLR into Govt. Securities, in a gradual manner, for the purpose of
Statutory Liquid Asset as given below; [On NDTL as on 25.07.14]
 5% of DTL = by 31.03.2015.
 10% of DTL = by 31.03.2016.
 100% of DTL = by 31.03.2017.

 On Incremental NDTL after 25 July 2014, 100% of SLR in Approved

Securities only.
 Term deposits held by CCBs with StCB/ PS Banks will also be SLR
in the interim period, upto 31.03.2017.
 Section - 26, 27, 29, 30 & 31
of B R Act

 Section 26 : Submit, within 30 days from close of each calendar year a return of
all deposit accounts not operated upon for last 10 years (copy to NABARD).
Unclaimed deposits to be deposited , within 3 months to ‘DEAF’ maintained by
RBI.
 Section 27 : Banks to submit a monthly return (Form ix/x) before close of the
month succeeding that to which it relates indicating its assets & liabilities in india at
close of business on last friday of every month (copy to NABARD)
 Sec 27 (3) : Powers exercisable by the RBI under sub-section (2) may also be
exercised by the National Bank in relation to Coop Banks & RRBs.  OSS Returns.
 Section 29 , 30 & 31 : P&L, B/S as on the last working day for a period of
12 months as per third schedule within 3 months from end of the year.
 Section 35(A) : Power of RBI to
Give Direction

 In the public interest

 In the interest of banking policy,
 To prevent the affairs being conducted in a manner detrimental to
the interest of the depositors,
 To secure proper management of any banking company,
 RBI may issue direction and the banking company is bound to
comply with such direction.
 New Initiative of RBI under Sec 35 (A)  M…. D….
 Section – 35, 46 & 53 of B R Act

Section 35 – Powers of RBI/ NABARD for Inspection of Banks

1(A) RBI at anytime cause scrutiny of affairs of the bank
(2) Duty of every director & officer to make available books of accounts , documents as called
for to an inspecting officer
(3) Directors or officers can be examined on oath by inspectors
(6) Powers of RBI under this section, without prejudice to RBIs powers, be exercised by
NABARD.
Section 46 :
 Penalties in the nature of imprisonment upto 3 years can be imposed if willful false
statements are made in any returns , B/S or other documents and also for non compliant to
Section 35(2).
Section 53
 Central government on recommendation of RBI can exempt banking companies from any
or all the provisions of this Act.
Reserve Bank of India Act 1934
 The Act
 Five Chapters
 I Chapter  Preliminary  Title & Definitions
 II Chapter  Incorporation, Capital, Management and Business.
 III Chapter  Central Banking Functions  Govt. bank, Issue of Notes,
Regulation of Banks, Assets & Liabilities of Bank, Foreign Currency
Transactions, etc.,
 IV Chapter  General Provisions  Contribution to RF, NRC (LTO),
Publication of Bank Rate, etc.
 V Chapter  PENALTIES for non compliances
 58 Sections & 2 schedules [I  Area of Local Boards (4), II  Scheduled
banks].
 Section – 42 (1)

1. SECTION 42
 (1) CRR - Every bank included in the Second Schedule shall maintain
with the Bank [RBI] an average daily balance the amount of which
shall not be less than [such per cent. of the total of the DTL ……having
regard to the needs of securing the monetary stability in the country]
 (a) ‘‘average daily balance’’ shall mean the average of the balances
held at the close of business on each day [of a fortnight];
 (b) ‘‘fortnight’’ shall mean the period from Saturday to the second
following Friday, both days inclusive;
 (c) Definition of liabilities is available in this sub section.
 Section 42(6) : Inclusion in
the Second Schedule

 The RBI shall by notification in the Gazette of India, under Section

42(6)(a) direct the inclusion in the second schedule of a bank which
carries on the business of banking in India
 Conditions:
1. Has a paid -up capital and reserves of an aggregate value of not less
than “Five Lakhs” of rupees;
2. Satisfies the RBI that its affairs are not being conducted in a manner
detrimental to the interest of the depositors;
3. Is a State Co-operative Bank or an Institution notified by the Central
Govt in this behalf.
 Sec 42 – Other Aspects

 42(3) : Penalty on non compliance to section 42 (1) & (2)

 42(6) (a): RBI, by notification in gazette of India include a bank

under Second Schedule

 42(6)(b) : Exclusion from second schedule

 42(7) : RBI may grant to any schedule bank such exemptions from
the provisions as it may deem fit.
NABARD Act 1981
 PREAMBLE
 An Act to establish a development bank to be known as the National Bank
for Agriculture and Rural Development for
 Providing and Regulating credit and other facilities for the promotion and
development of agriculture small-scale industries, cottage and village
industries, handicrafts and other rural crafts and other allied economic
activities in rural areas.
 With a view to promoting integrated rural development and
 Securing prosperity of rural areas, and for matters connected therewith or
incidental thereto.
 Section 4, 6 & 7 –
Authorised & Issued Capital

 Section 4 - Authorised Capital : Rs.5000.00 crore - can be increased by

GoI in Consultation with RBI. [Amended in 2000]

 NABARD can raise from other than the 2 sources, but the SC of GoI
& RBI not be less than 51%. [Amended in 2000].

 Section 6 – BoD : 16 members  Chairman + 3 Experts + 3 GoI + 3 RBI

+ 4 SG + 2 DMDs. [Provision for 4 shareholders representative also, if any]

 Sec 7 : Tenure of Chairman  5 years. However GoI has right to terminate.

 Borrowings & Credit
Functions of NABARD
 Sec 19 : NABARD may, for the purpose of carrying out its functions  Issue Bonds, Borrow
from RBI, Govt. of India, or any other Institutions, accept deposits & receive donations from GoI,
SG or any other source.
 Sec 20 : NABARD may borrow, with the previous approval of the GoI and in consultation with
the RBI, foreign currency from any bank or FI in India or elsewhere.
 Sec 21 : NABARD may provide by way of refinance, loans, for fixed periods not exceeding 18
months for Production and marketing credit [ Agri & Non Agri].
 Sec 22 : Loans for Conversion of Production credit  STCCS & RRBs only.
 Sec 24 & 25 : Loans for Investment credit  For all agencies.
 Sec 27 : Loans to State Governments for share capital contributions  upto 20 years  to
enable them to contribute to share capital of Coop Credit Society.
 Sec 27 A : Loans to State Governments corporations for the purpose of development of
infrastructure facilities for promotion of agriculture and rural development  RIDF loans.
 Sec 30 : Direct Loans to any person or class of persons or body corporate,  upto 25 years.
 Incidental Powers of
NABARD

 Section 17 : Power to impose conditions for accommodation on its borrowers

 Section-34 : Power to call for repayment before agreed period. [If misleading
info given, failed to comply with terms & Conditions, for fear of default, etc..]
 Section 35 : NABARD shall have free access to all such records of a borrower
seeking to avail of any credit or other facilities from the National Bank under this
Act.
 Section 41 : NABARD may, collect from or furnish to GoI, RBI or any banking
company or such other financial institution as may be notified by GoI in this behalf,
credit information or other information.
Negotiable Instruments Act, 1881
Negotiable instrument

 Section - 13 : A negotiable instrument means

 a promissory note,
 Bill of Exchange or
 Cheque
 Payable either to the order or to the bearer
 Drawer, Drawee,
Payee, Acceptor

 Drawer : Maker of a bill of exchange or cheque

 Drawee : The person who is directed to pay 

 Payee : The person named in the instrument, to whom or to whose

order the money is to be paid .

 Acceptor : On signing his assent on the bill, the drawee becomes the
acceptor.
 Section 4 -
Promissory Note

 An instrument in writing (not being a bank note or a currency

note)
 Containing an unconditional undertaking
 Signed by the maker,
 To pay certain sum of money
 Only to, or to the order of a certain person, or to the bearer of
the instrument.
 Requisites of
Promissory Note

 It must be in writing, Must contain an undertaking to pay

 The promise to pay should be unconditional; It must be signed by the maker;

 The maker, payee and the amount payable must be certain.

 The instrument must contain a promise to pay money and money only;

 Mention of consideration (value received), place and date are not essential of
the promissory note and their omission does not render the instrument invalid.

 Promissory notes are chargeable with stamp duty as per Indian stamp Act,
1899.
 Section 6 - Cheque

 A cheque is a bill of exchange

 Drawn on a specified banker and

 Expressed to be payable on demand.
 A cheque is always drawn on a banker

 Whereas a bill may be drawn on anyone including a banker.

 Thus, the drawee of a cheque is always a banker
 Undated, Incomplete and
Impossible Dated Cheques
 Undated Cheque :
 A cheque not bearing any date is known as undated cheque.
 The proper date should be filled in preferably by the drawer himself.
 Banker should not fill the date by himself.
 Incomplete : When the date is not written in full, the cheque is said to be
incompletely dated. Such cheques are usually returned for corrections by the
drawer under his signature.
 Impossible dated :
 A date which never occurs in the calendar, is known as impossible date.
 The cheques bearing such impossible dates may be paid treating them as
being drawn on the last day of the month in which they are drawn.
 Material Alteration
in a Cheque

 Material alterations are those alterations which affect the

rights and liabilities of the parties to the instrument.

 All material alterations have to be authenticated by the

drawer under his full signature.
 Alterations
in a Cheque

Material Alterations Non - Material Alterations

 Alterations in essentials of a cheque viz.
Date, Amount, Payee's name, Drawee's ____________
name, Signature of the drawer

 Converting an order cheque into bearer  Converting a bearer cheque into an order
cheque cheque by striking off the word “bearer”

 Converting a crossed cheque into an open  Converting an open cheque into a crossed
cheque by cancelling the crossing (except cheque or converting a generally crossed
cancellation of special crossing by bankers) cheque into a specially crossed cheque .
Protection to a paying Banker

 The paying banker gets protection only if he makes

payment of a cheque according to the provisions of N I Act.

 Section 10 of the N I Act is one of the most important

sections which affords such a protection to the paying banker
Sec. 10 - Payment in due Course

 Payment in due course means payment in accordance with the

 Apparent tenor of the instrument;

 In good faith and without negligence;

 To any person in possession thereof.

 Under circumstances which do not afford a reasonable ground

for believing that he is not entitled to receive payment of the
amount therein mentioned.
Any Questions ???
 K Praveen Raj Udupa, DGM / FM

Thank You All,

for being with me.
44