BANKING LAW AND

REGULATION
FM305
SAMRITI GOEL
 MEANING OF BANK
A bank is a financial institution licensed by a government.

Its primary activities include providing financial services to

customers while enriching its investors. Many financial

activities were allowed over time.
For example banks are important players in financial markets

and offer financial services such as investment funds.

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 Banking law and regulation

Banking law is based on a contractual analysis of the

relationship between the bank and the customer—defined as

any entity for which the bank agrees to conduct an account.
Bank regulations are a form of government regulation which

subject banks to certain requirements, restrictions and

guidelines.

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 The law implies rights and obligations
 The bank account balance is the financial position between the bank and the customer: when
the account is in credit, the bank owes the balance to the customer; when the account is
overdrawn, the customer owes the balance to the bank.
 The bank agrees to pay the customer's cheques up to the amount standing to the credit of the
customer's account, plus any agreed overdraft limit.
 The bank must not disclose details of transactions through the customer's account—unless the
customer consents, there is a public duty to disclose, the bank's interests require it, or the law
demands it.
 The bank must not close a customer's account without reasonable notice, since cheques are
outstanding in the ordinary course of business for several days.

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 Laws related to the banking

 The Banking Regulations Act, 1949

 The Reserve Bank of India Act, 1934
 The Companies Act, 1956
 Indian Contract Act, 1872
 Information Technology Act, 2000
 Sale of Goods Act,1930
 The Consumer Protection Act, 1986
 The Prevention of Money Laundering Act, 2002
 The Competition Act, 2002

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 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”

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BANKING REGULATIONS ACT 1949
The Banking Regulation Act was passed as the Banking
Companies Act 1949 and came into force wef 16.3.49.
Subsequently it was changed to Banking Regulations Act
1949 wef 01.03.66.

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BANKING REGULATION ACT
 ACT Requires
 Compulsory License Issued by RBI
 No company can use word bank, Banking or banker.
 Act Provides
 A minimum capital required to start a banking company
 Amendment in banking regulation Act 1966
 Act Defined
 Should accept money for lending or Investment.
 Money should be repayable on Demand.

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 IMPORTANT SECTIONS UNDER
THE BR ACT 1949
 (5 (i) (b)) - Banking means accepting for the purpose of

lending or investment of deposits of money from public

repayable on demand or otherwise and withdrawable by
cheque, drafts order or otherwise.

 (5(i)(c)) - Banking company means any company which

transacts the business of banking.

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 CONTD…
 (5 (i) (e)) - Transact banking business in India.

 (6(1)) - Defines business a banking company may be engaged in like

borrowing, lockers, letter of credit, traveller cheques, mortgages etc.

 (6(2)) - States that no company shall engage in any form of business

other than those referred in Section 6(1).

 (7) - For banking companies carrying on banking business in India to

use at least one word bank, banking, banking company in its name.

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 CONTD….
 (8) - Restrictions on business of certain kinds such as trading of goods etc.

 (9) - Prohibits banks from holding any immovable property howsoever

acquired except as acquired for its own use for a period exceeding 7 years
from acquisition of the property. RBI may extend this period by five years.
 (19) - Permits banks to form subsidiary company for certain purposes.

 (35) - RBI authorised to undertake inspection of banks.

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 General principles of bank regulation

Banking regulations can vary widely across nations and jurisdictions.

 Minimum requirements: Requirements are imposed on banks in order to
promote the objectives of the regulator. The most important minimum
requirement in banking regulation is maintaining minimum capital ratios.
 Supervisory review: Banks are required to be issued with a bank license
by the regulator in order to carry on business as a bank, and the regulator
supervises licenced banks.
 Market discipline: The regulator requires banks to publicly disclose
financial and other information, and depositors and other creditors are able
to use this information to assess the level of risk and to make investment
decisions.

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 Objectives of banking law and
regulation
The most common objectives are:
 Prudential -- to reduce the level of risk bank creditors are exposed to (i.e. to
protect depositors)
 Systemic risk reduction -- to reduce the risk of disruption resulting from adverse
trading conditions for banks causing multiple or major bank failures
 Avoid misuse of banks -- to reduce the risk of banks being used for criminal
purposes, e.g. laundering the proceeds of crime
 To protect banking confidentiality

 Credit allocation -- to direct credit to favored sectors

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Business 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 .

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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.

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THANKYOU