LAWS RELATING TO BANKING

Presented by.. SACHIN AMBADE

AGENDA
Basic Definitions
The Banking Regulation Act
The Reserve Bank Of India Act
The Negotiable Instrument Act
The Bankers Books Evidence Act
The State Bank Of India Act
The International Finance Corporation Act
The State Financial Corporation Act
LAW

Law is system rules, usually enforced through

a set of institutions

In general, a rule of being or of conduct,

established by an authority able to enforce its
will; a controlling regulation; the mode or
order according to which an agent or a power
acts.
LAW AND RULE: DIFFERENCE

Law is basically the enactment or statute

enacted by the legislature

Rules are the procedure to implement this

enactment those are made by the executive
REGULATION
Regulation means you must conform to a set
of rules or requirements or something has to
be done in a certain way.

Regulation: Milk must be removed from the

shelves on a certain date

Law: The milk was not removed and the law

was broken, people may get sick, and now
you get sued by the sick people, better to
stick to the regulation
BANKING REGULATION ACT, 1949
BANKING REGULATION ACT, 1949
PART I: PRELIMINARY
PART II: BUSINESS OF BANKING COMPANIES
PART IIA: CONTROL OVER MANAGEMENT
PART IIB: PROHIBITION OF CERTAIN ACTIVITIES IN RELATION TO
BANKING COMPANIES
PART IIC: ACQUISITION OF THE UNDERTAKINGS OF BANKING
COMPANIES IN CERTAIN CASES
PART III: SUSPENSION OF BUSINESS AND WINDING UP OF
BANKING COMPANIES
PART IIIA: SPECIAL PROVISIONS FOR SPEEDY DISPOSAL OF
WINDING UP PROCEEDINGS
PART IIIB: PROVISIONS RELATING TO CERTAIN OPERATIONS OF
BANKING COMPANIES
PART IV: MISCELLANEOUS
PART V: APPLICATION OF THE ACT TO CO-OPERATIVE BANKS
SCHEDULES 5
No of Sections 56
BANKING REGULATION ACT, 1949
Section 5.(1).(b)
Banking means accepting for the purpose of
lending or investment of deposits of money
from the public repayable on demand or
otherwise and withdrawable by cheque,
drafts order or otherwise.

Section 5.(1).(c)
Banking Company means any company which
transacts the business of banking
BANKING REGULATION ACT, 1949
Section 7
Prohibits the use of Bank ,banking or
banking company to a company other than
bank

Section 19-
Permits banks to form subsidiary company
for certain purposes
BANKING REGULATION ACT, 1949
Section 18.1
Cash Reserve Ratio
Scheduled Banks to maintain at-least 3% of the
demand and time liabilities by way of cash reserves
with themselves or by way of a balance in current
account with RBI.
2006 onwards the floor of 3 per cent and ceiling of
15 per cent on the CRR has been removed.

Section 24-
Section 24 of the Banking Regulation Act has been
amended to remove the floor limit on SLR (24 per
cent currently) while retaining the upper limit at 40
per cent.
BANKING REGULATION ACT, 1949
Section 21-
Power to Reserve Bank to issue directive to
banks to determine policy for advances

Section 22.4-
The Reserve Bank may cancel a license
granted to a banking company
BANKING REGULATION ACT, 1949
Section 29-

Every Bank has to publish its Balance Sheet

and Profit and Loss account as on 31st
March- As per the formats given in the 3rd
Schedule

The Central Government can amend the

format with a minimum period of 3 months
notice
BANKING REGULATION ACT, 1949
Section 34 A
Prevents banks from producing any
confidential information to any authority
under Industrial Disputes Act.

Section 35
RBI authorised to undertake inspection of
banks.
BANKING REGULATION ACT, 1949
Section 45Z-
Amendment carried in the Act during 1983
empowers Central Govt to frame rules
specifying the period for which a bank shall
preserve its books, nomination facilities and
return a paid instrument to a customer by
keeping a true copy
RESERVE BANK OF INDIA ACT 1934
RESERVE BANK OF INDIA ACT 1934

To regulate the issue of Bank notes and for

the keeping of reserves with a view to
securing monetary stability in British India
(now India)

To operate the currency and credit system of

the country to its advantage it was found
expedient to constitute a Reserve Bank of
India.
RESERVE BANK OF INDIA ACT 1934..
Functions entrusted.
Bank of issue (of currency)
Banker to the government (including management of
public debt)
Banker to commercial banks (lender of last resort)
Controller of volume of credit in India
Organization of sound and healthy commercial
banking system
Concerned with the development of
Rural banking;
Promotion of financial institutions; and
Development of money and capital markets
RESERVE BANK OF INDIA ACT 1934
Bankers bank
Lender of last resort for
Commercial banks
Commercial co-operative banks
Regional rural banks
RBI offers refinancing facility to its
scheduled banks
The banking institutions which figure in the
Second Schedule of the RBI Act
Before admitting the banking company in to the
schedule RBI satisfies itself that such banking
company is worth it
RBI also has the power to remove the banking
company from the schedule
RESERVE BANK OF INDIA ACT 1934
Chapter 1: Preliminary

1. Short title, extent, commencement

This Act may be called the Reserve Bank of India

Act, 1934.

It extends to the whole of India.

This section shall come into force at once, and the

remaining provisions of this Act shall come into
force on such date or dates as the Central
Government may, by notification in the Gazette of
India, appoint.
RESERVE BANK OF INDIA ACT 1934
Chapter 2
Section 4

Capital of bank shall be five crores of rupees

Section 8

Composition of the central board

(1) The Central Board shall consist of the following Directors,

namely:
(a) a Governor and not more than four Deputy Governors to be
appointed by the Central Government;
(b) four Directors to be nominated by the Central Government, one
from each of the four Local Boards as constituted by section 9;
(c) ten Directors to be nominated by the Central Government; and
(d) one Government official to be nominated by the Central
Government
RESERVE BANK OF INDIA ACT 1934
Chapter 2
Section 17
Business which bank may transact
The Bank shall be authorized to carry on and
transact the several kinds of business
hereinafter specified, namely:

the accepting of money on deposit without

interest from, and the collection of money
for, the Central Government, the State
Government, local authorities, banks and any
other persons:
RESERVE BANK OF INDIA ACT 1934
Chapter 2

Section 19
Bank may not:
Purchase the shares of any banking
company or of any other company, or grant
loans upon the security of any such shares
RESERVE BANK OF INDIA ACT 1934
Chapter 3
Section 20
Obligation of the Bank to transact
Government business:

The Bank shall undertake to accept monies

for account of the Central Government and to
make payments up to the amount standing
to the credit of its account, and to carry out
its exchange, remittance and other banking
operations, including the management of the
public debt of the Union.
RESERVE BANK OF INDIA ACT 1934
Section 42.1(amended)
The statutory minimum CRR requirement of 3
percent of total demand and time liabilities
no longer exists.
Reserve Bank having regard to the needs of
securing monetary stability in the country,
can prescribe the Cash Reserve Ratio (CRR)
for scheduled banks without any floor rate or
ceiling rate
NEGOTIABLE INSTRUMENT ACT 1881
NEGOTIABLE INSTRUMENT ACT 1881

Structure-
XVII chapters
147 sections
Amended more than 15 times
Latest is BANKERS PUBLIC FINANCIAL
INSTITUTIONS AND NEGOTIABLE
INSTRUMENTS LAWS (AMENDMENT) ACT
1988
2002 Electronic form of cheque
NEGOTIABLE INSTRUMENT ACT 1881

Meaning-

Negotiable means transferable by delivery

Instrument means written document by

which a right is created in favour of some
person
 NEGOTIABLE INSTRUMENT ACT 1881

Definition:
Section 13 - A negotiable instrument means
a promissory note,
bill of exchange or cheque payable either to
order or to bearer
Section 13(1) - A negotiable instrument may be
made payable to two or more payees jointly,
or it may be made payable in the alternative to
one of two, or one or some of several payees -
section 13(2)
NEGOTIABLE INSTRUMENT ACT 1881

Section 4-
Sum of money only to, or to the order of, a
certain Promissory Note - A promissory note
is an instrument in writing (not being a bank-
note or a currency-note)
containing an unconditional undertaking,
signed by the maker,
to pay a certain person,
or to the bearer of the instrument
NEGOTIABLE INSTRUMENT ACT 1881

Section 5-
Bill of Exchange a bill of exchange is an
instrument in writing
containing an unconditional order,
signed by the maker,
directing a certain person to pay a certain sum of money
only to,
or to the order of, a certain person or
to the bearer of the instrument.
A cheque is a special type of Bill of Exchange. It is
drawn on banker and is required to be made
payable on demand
NEGOTIABLE INSTRUMENT ACT 1881

Information Technology Act:

Section (1)(4)(a) of Information Technology Act
provides that
the Act will not apply to Bill of Exchange and
Promissory Notes
Thus, a Bill of Exchange or Promissory Note
cannot be made by electronic means.
However, cheque is covered under Information
Technology Act and hence can be made and / or
sent by electronic means.
NEGOTIABLE INSTRUMENT ACT 1881

Section 7-
DRAWER, DRAWEE AND PAYEE
The maker of a bill of exchange or cheque is called the
drawer;
the person thereby directed to pay is called the drawee
The person named in the instrument,
to whom,
or to whose order
the money is by the instrument directed to be paid,
is called the payee
However, a drawer and payee can be one person as he can
order to pay the amount to himself.
NEGOTIABLE INSTRUMENT ACT 1881

Section 123-
CHEQUE CROSSED GENERALLY
Where a cheque bears across its face an
addition of the words and company or any
abbreviation thereof, between two parallel
transverse lines,
or of two parallel transverse lines simply,
either with or without the words not
negotiable,
that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed
generally
NEGOTIABLE INSTRUMENT ACT 1881

Section 124-
CHEQUE CROSSED SPECIALLY
Where a cheque bears across its face an
addition of the name of a banker,
either with or without the words not
negotiable,
that addition shall be deemed a crossing,
and the cheque shall be deemed to be crossed
specially,
and to be crossed to that banker
 NEGOTIABLE INSTRUMENT ACT 1881

Penalty in case of dishonour of cheques for insufficiency of

funds

If a cheque is dishonoured even when presented before

expiry of 6 months,
the payee or holder in due course is required to give notice
to drawer of cheque within 30 days from receiving
information from bank
The drawer should make payment within 15 days of receipt
of notice
If he does not pay within 15 days, the payee has to lodge a
complaint with Metropolitan Magistrate or Judicial Magistrate
of First Class, against drawer within one month from the last
day on which drawer should have paid the amount
The penalty can be upto two years imprisonment or fine upto
twice the amount of cheque or both
NEGOTIABLE INSTRUMENT ACT 1881

Sec 8 Holder

The holder of a promissory note, bill of

exchange or cheque means
any person entitled in his own name to the
possession thereof and
to receive or recover the amount due thereon
from the parties thereto.
Where the note, bill or cheque is lost or
destroyed, its holder is the person so entitled
at the time of such loss or destruction.
NEGOTIABLE INSTRUMENT ACT 1881

Sec- 14 Negotiation

When a promissory note, bill of exchange or

cheque is transferred to any person
so as to constitute that person the holder
thereof
the instrument is said to be negotiated
NEGOTIABLE INSTRUMENT ACT 1881

Sec- 15 - Indorsement
When the maker or holder of a negotiable
instrument signs the same
otherwise than as such maker
for the purpose of negotiation
on the back or face thereof or
on a slip of paper annexed thereto
or so signs for the same purpose a stamped
paper intended to be completed as a
negotiable instrument
he is said to indorse the same, and is called
the indorser.
 NEGOTIABLE INSTRUMENT ACT 1881

Sec-16(1)-Indorsement
in blank and in full

If the indorser signs his name only, the

indorsement is said to be in blank
and if he adds a direction to pay the amount
mentioned in the instrument to
or to the order of, a specified person
the indorsement is said to be in full
and the person so specified is called the
indorsee of the instrument.
 NEGOTIABLE INSTRUMENT ACT 1881

Sec 31-Liability of a Paying Banker

The relationship between a banker and a
customer primarily is that of a Debtor &
Creditor
It is the primary duty of a banker to honour his
customer cheques unless there are valid reasons
Incase he dishonours a cheque without
justification he is liable to compensate the
customer for any loss or damage caused by such
default
NEGOTIABLE INSTRUMENT ACT 1881

When a banker must refuse

When customer countermands payment
Death , Insolvency or Insanity of the customer
Defective title of the party
Loss of cheque
When the cheque is irregular
Closing of account
NEGOTIABLE INSTRUMENT ACT 1881

When payment may be refused

Post dated
Insufficient funds
Doubtful legality of the cheque
Not duly presented
Irregular or ambiguous
Otherwise materially altered
Has become stale
BANKERS BOOK EVIDENCE ACT, 1891
BANKERS BOOK EVIDENCE ACT, 1891

PREAMBLE:

wef 1st October, 1981

An Act to amend Law of Evidence

with respect to Bankers' Books.
8 sections
BANKERS BOOK EVIDENCE ACT, 1891
Section 3
Powers to extend provisions of Act -

The State Government may from time to

time, by notification in the Official Gazette,
extend the provisions of this Act to the
books of any partnership or individual
carrying on business of bankers within the
territories under its administration, and
keeping a set of not less than three
ordinary account-books namely, a cash-
book, a day-book or journal, an a ledger,
and may in like manner rescind any such
notification.
BANKERS BOOK EVIDENCE ACT, 1891
Section 5
Case in which officer of bank not
comparable to produce books-

No officer of a bank shall in any legal

proceeding to which the bank is not a party be
comparable to produce any banker's book the
contents of which can be proved under this
Act, or to appear as a witness to prove the
matters, transactions and accounts therein
recorded, unless by order of the Court or a
Judge made for special cause.
BANKERS BOOK EVIDENCE ACT, 1891
Section 6
Inspection of Books by order of Court or Judge

On the application of any party to a legal proceeding the

Court or a Judge may order that such party be at liberty
to inspect and take copies of any entries in a Banker's
Book for any of the purposes of such proceeding

The Bank may at any time before the time limited for
obedience to any such order as aforesaid either offer to
produce their books at the trial or give notice of their
intention to show cause against such Order, and
thereupon the same shall not be enforced without
further order.
STATE BANK OF INDIA ACT 1955
STATE BANK OF INDIA ACT 1955
An Act to constitute a State Bank for India,
to transfer to it the undertaking of the
Imperial Bank of India and to provide for
other matters, connected therewith or
incidental thereto
Its purpose is to extend the banking
facilities on a large scale, more particularly
in the rural and semi-urban areas, and for
diverse other public purposes
It has 8 Chapters ,53 sections
STATE BANK OF INDIA ACT 1955
Section 5
Issued capital:
The Central Board may from time to
time increase the issued capital but no
increase in the issued capital shall be
made in such a manner that the
Reserve Bank holds at any time less
than fifty-five per cent. of the issued
capital of the State Bank.
STATE BANK OF INDIA ACT 1955
Section 6 and 7

Transfer of assets and liabilities of the

Imperial Bank to the StateBank
( section 6)

Transfer of service of existing officers and

employees of the ImperialBank to the State
Bank (section 7)
STATE BANK OF INDIA ACT 1955
Section 11

Restrictions on voting rights.-

No shareholder, other than the Reserve Bank,
shall be entitled to exercise voting rights in
respect of any shares held by him in excess of
ten per cent. of the issued capital
STATE BANK OF INDIA ACT 1955
Section 17

Composition of the Central Board

The Central Board shall consist of the
following, namely:--
(a) a chairman and a vice-chairman to be
appointed by the Central Government in
consultation with the RBI
(b) not more than two managing directors, if
any, appointed by the Central Government in
consultation with the RBI
STATE BANK OF INDIA ACT 1955
Section 32
The State Bank shall, if so required by the
RBI, act as agent of the RBI at all places in
India where it has a branch for

(a) paying, receiving, collecting and

remitting money, bullion and securities on
behalf of any Government in India; and

(b) undertaking and transacting any other

business which the RBI may from time to
time entrust to it.
STATE BANK OF INDIA ACT 1955
Section 32 contd

If a dispute arises between the State Bank

and the Reserve Bank as to the
interpretation of any agreement between
them, the matter shall be referred to the
Central Government and the decision of
the Central Government thereon shall be
final
THE INTERNATIONAL FINANCE CORPORATION
(STATUS, IMMUNITIES AND PRIVILEGES) ACT, 1958
THE INTERNATIONAL FINANCE CORPORATION (STATUS,
IMMUNITIES AND PRIVILEGES) ACT, 1958

An Act to implement the international

agreement for the establishment and operation
of the International Finance Corporation in so
far as it relates to the status, immunities and
privileges of that Corporation, and for matters
connected therewith.

4 sections
Section 3
Provided that nothing in Section 9 of Article VI of
the Agreement shall be construed as--
(a) entitling the Corporation to import into India
goods free of any duty of customs without any
restriction on their subsequent sale therein; or
(b) conferring on the Corporation any exemption
from duties or taxes which form part of the price
of goods sold; or
(c) conferring on the Corporation any exemption
from duties or taxes which are in fact no more
than charges for services rendered.
Article IV: Status, Immunities and Privileges

SECTION 1
Purposes of Article.
To enable the Corporation to fulfil the
functions with which it is entrusted, the
status, immunities and privileges set forth in
this Article shall be accorded to the
Corporation in the territories of each
member.
Article IV
SECTION 2
Status of the Corporation.
The Corporation shall possess full
juridical personality and, in particular,
the capacity:
(i) to contract;
(ii) to acquire and dispose of
immovable and movable property;
(iii) to institute legal proceedings.
Article IV
SECTION 4

Immunity of Assets from Seizure.

Property and assets of the Corporation,

wherever located and by whomsoever held,
shall be immune from search, requisition,
confiscation, expropriation or any other form
of seizure by executive or legislative action.
Article IV

SECTION 5

Immunity of Archives.

The archives of the Corporation shall be

inviolable.
Article IV
SECTION 9
Immunities from Taxation.
( a ) The Corporation, its assets, property, income and
its operations and transactions authorised by this
Agreement, shall be immune from all taxation and from
all customs duties. The Corporation shall also be immune
from liability for the collection or payment of any tax or
duty.

( b ) No tax shall be levied on or in respect of salaries

and emoluments paid by the Corporation to Directors,
Alternates, officials or employees of the Corporation who
are not local citizens, local subjects, or other local
nationals.
State Financial Corporations Act, 1951
State Financial Corporations Act, 1951
Overview:
A central Industrial Finance Corporation
was set up under the industrial Finance
corporation act, 1948
To provide medium and long term credit to
industrial undertakings.
State governments expressed the same
desire
State financial corporations were set up.
State Financial Corporations Act, 1951
The share capital shall be fixed by the state
government but shall not exceed Rs. 2
crores.

The issue of the shares to the public will be

limited to 25% of the share capital and rest
will be held by the state governments, The
Reserve Bank, Scheduled Banks, Insurance
companies, Investment Trusts, Co-operation
banks and other financial institutions.
State Financial Corporations Act, 1951
Corporation will be authorised to issue bonds
and debentures for amounts which together
with the contigent liabilities of the
corporations shall not exceed five times the
amount of the paid-up capital and the
reserve fund of the corporations.
The corporation may accept deposits from
the public repayable after not less than five
years, subject to the maximum not
exceeding the paid up capital.
State Financial Corporations Act, 1951

The corporation will be managed by a board

consisting of a majority of Directors
nominated by the State governments, The
Reserve Banks and the Industrial Finance
corporation of India.
State Financial Corporations Act, 1951

The corporation will be authorised to make

long term loans to industrial concerns which
are repayable within a period not exceeding
25 years.
Financial resources
The SFCs mobilizes their financial resources
from the following sources
Their own share capital
Income from investment and repayment of
loans
Sale of bonds
Loans from the IDBI
Borrowing from the Reserve banks of India
Deposits from the public
Loans from the state governments.
REFERENCES
indiacode.nic.in
rbi.org.in
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