Banking Law and Regulations

PUTTU GURU PRASAD

INC GUNTUR

The laws related to the banking

The Banking Regulations Act, 1949 The Reserve Bank of India Act, 1934 The Negotiable Instruments Act, 1881 The Companies Act, 1956 Indian Contract Act, 1872 Information Technology Act, 2000 Limitation Act,1963, Stamp Act, 1899, Registration Act, 1908 Transfer of Property Act, 1882 Sale of Goods Act,1930 The Consumer Protection Act, 1986 Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) (For DRT) The Prevention of Money Laundering Act, 2002 The Competition Act, 2002

Banking Regulation Act,1949

Definition -

Banking accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheques, draft, order or otherwise
Banking Company any company which transacts the business of banking in India

Activities of the Banking Company

Borrowing Raising Lending Advancement Bill of Exchange Bill of Lading Promissory notes Transfer of Securities Letters of Credit

Exchange of Foreign

currency Underwriting and dealing with shares and stocks Binds Deposits Safe lockers Transmitting money etc
continued

Other activities
Acting as agent of the
Carrying and transacting

government or local authority Clearing and forwarding goods Contracting public loans and negotiating and issuing the same Managing and selling of property Undertaking and executing the trusts

every kind of guarantee and indemnity Administration of estates Supporting and aiding associations , institutions etc Constructions and acquisition of the property All business which is incidental to the banking business

Businesses Prohibited for the Banks

No banking company shall directly or indirectly deal in the buying and the selling or bartering of goods except in connection with the realization of the security given to be held by it, To engage in any trade, or buy, sell or barter goods for others otherwise than in connection with the bills of exchange received for collection or negotiation.. It can have a subsidiary company as specified under the BR Act, 1949

Licensing of the Banking Companies

RBI will issue license to the banking company- after satisfying the conditions specified under the BR Act If the company is incorporated outside India- RBI has to inspect the books of the company or be satisfied with the functioning of the company, This should be in the interest of the public or meet the law of the country in which it is to be incorporated without any discrimination to the foreign banks

Cancellation of the Licenses

If the company ceases to carry on banking business in India If the company fails to comply with any of the conditions imposed under the BR Act If at any time the conditions have been fulfilled or followed

Branches

Branches can be opened with the prior permission of the RBI (The banking company may be Indian or Foreign)

Restrictions on Loans and Advances

No banking company can grant any loans or advances on

the security of its own shares Enter into any commitment for granting any loan or advance to or on behalf of
i) any of its directors ii) any firm of which its directors is interested as partner, manager employee or guarantor iii) any company ( if it is not a subsidiary) where the director of the banking company is a director, managing agent etc iv) any individual in respect of whom any of its directors is a partner or guarantor.

Return and Inspection

Every banking company to submit a return monthly statement to the RBI, showing its assets and liabilities (last Friday of the month)
The Regional Rural banks have to submit a copy of the return to the sponsoring bank, which will in turn submit to the RBI

Management of Banking Company

51% of directors to have special and practical knowledge of banking, accountancy, agriculture and rural economy, co-operation, economics, finance, law, small scale industries, or any other subject as the RBI considers to be useful to banking. The directors shall not have substantial interest as an employee, managing director or managing agent,--in any company (Section 25) If they do not fulfill the criteria, RBI can ask to reconstruct the constitution of the board, if the direction is not followed , RBI can remove the director's and appoint a suitable person.

Directors and Chairman

Any director cannot be in office continuously for more than for 8 yrs.

Whole time director/chairman cannot be reappointed as director for the next 14 years.
A person being a director in a banking company is barred from directorship in any other banking company. Directors appointed by the RBI are exempted from this rule.

The Reserve Bank of India Act, 1934

Central Bank of India

Nationalized in the year 1948 It functions as a central bank, with supervisory control of banks and promotional banking

Is also acts as a banker to the central and state governments

It issues bank notes of all denominations

It transacts the government business by carrying out the functions such as:
Maintaining cash balances
Receiving and making payments for the government Managing public debt Providing ways and means advances to government for

90 days
Advises government on floating loans and legislation that

affect banking.

Bankers bank and Lender of Last Resort

Schedule banks to borrow from the RBI, based on the eligible securities To obtain financial accommodation by rediscounting their bills of exchange It has a supervisory power on other banks, it regulates the volume of credit generated by banks and it also makes the selective credit control mechanism. Margin of interest rate in specific category of advances The volume of credit is normally controlled through the regulatory instruments of bank rate( is the rate of interest at which the RBI rediscounts the first class bills of exchange of commercial banks or other eligible paper), open market operations and variable cash reserves. It has a control, over the interest rate on deposits and advances by banks

Computation of statutory Liquidity Ratio ( The assets are)

For Computation of statutory Liquidity Ratio the assets are: Cash in hand ( India) Balance in current account Balance with the RBI over the minimum reserve requirement Investment in government securities, treasury bills and other securities But this excludes the borrowings from the RBI against approved securities As per the provisions of the BR, Act of 1949 the RBI has the supervision over the management of banks

CRR
It is another regulatory ratio imposed by the RBI
It is the minimum cash to be maintained as percentage

against demand deposits and time deposits

Reduction in the CRR will stimulate more cash for the

banks to stimulate credit expansion

It fixed the percentage of the CRR It does fix the CRR for the NBFC also.

Other supervisory powers

A New department called Department of Banking Supervision (DBS) has been set up. It has been set up with a purpose to undertake offsite supervision It receives statutory returns which are presented by the branches for submission to the RBI It controls the Foreign Exchange management as a controller and deals with buying and selling of foreign exchange Foreign reserve position and exchange stability position also are dealt by the RBI