Legal Framework Of Regulation of Banks

Legal Framework Of Regulation of Banks

RBI Act 1934 : The act deals with the constitution, powers and functions of Reserve Bank. The act does not deal with the regulation of the banking except Section 42 which provides for cash reserves of Scheduled Banks to be kept with bank, with a view to regulating the credit system and ensuring monetary stability.

The Business Of Banking (4)

·         Definition of Banking

·         Section 49A

·         Acceptance Of Deposits by Non-Banking Entities

·         Licence For Banking

·         Permitted Business

·         Prohibited Business

Constitution Of Banks

Bank in India fall under one of the following Categories

Public Sector Banks

Banking Companies

Cooperative Banks

Reserve Bank Of India Act, 1934 (9)

The RBI Act, 1934 was enacted to constitute the RBI.

to regulate the issue of Bank Notes

for keeping reserves for securing the monetary stability in India, and

to operate the currency and credit system of the country to its advantage.

The  last  major  amendment  to  the  Act  by  the  RBI(Amendment)  Act,  1997.

Recently a provision was inserted by the IT Act, 2000 for enabling the Reserve Bank to make regulations for regulating payment systems of banks and financial institutions

The Act deals with the constitution, powers and functions of the RBI. The act does not directly deal with the regulation of the banking system except for Section 42 and Section 18

The Reserve Bank – Central Bank and Regulator of Banks (11)

·         The Reserve Bank is constituted under Section 3 of the RBI, 1934 for taking over the management of currency from the Central Government and carrying the business of Banking in accordance with the provisions of the Act.

·         The Reserve Bank is a body corporate having perpetual succession and common seal and shall sue and can be sued by others.

Sriniva Kante

·         The bank functions under the general superintendence and directions of central board of directors. The board has to abide by direction given by the cental govt. in a public interest after consultation with the governor of the RBI.

·         Section 22 : Licence of banking

·         Section 20 : banker to central and state fovt.

·         Bank Regulator :

Government as a Regulator of Banks

The Reserve Bank is Primary regulator of banks. But the government has also conferred extensive powers under the RBI Act and the BR Act either directly or indirectly over the banks.

The Government holds the entire capital of the Reserve Bank and appoints the Governor and the members of the Central Board and has power to remove them.

Act	Section
RBI Act	7(1)	Power to issue directions to the RBI in public interest after
		consultation with the governor
BR Act	4 & 53	Power to suspend operations of the BR Act / to give
		exemptions from any of the provisions of the Act on the
		recommendations of the RBI.
BR Act	6(1)(0)	Power to notify other forms of business which bank may
		undertake.
BR Act	10B	Removal of managerial personnel
BR Act	14A
BR Act	19	Approval of  Central Govt.  is required for formation of
		subsidiary.
BR Act	22	Licence for banking
BR Act	24(2)	Notification of banks for the purpose of Maintenance of
		assets
BR Act	29	Notification with reference to accounts and balance sheet
BR Act	35	Issue of directions for inspection of banks
BR Act	36AA	Removal of managerial personnel
BR Act	36AE	Power to acquire undertaking of banks
BR Act	45	Suspension of business and amalgamation of banks
BR Act	52	Rule making powers (details to be furnished in various
		returns,  List  of  debtors  to  be  submitted  by  Official
		Liquidator.

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Negotiable Instruments Act

			Negotiable Instruments Act
4		Promissory Note
5		Bill of Exchange
6		Cheque
7
8		Holder
9		Holder In Due Course
10		Payment in Due Course
16		Endorsement in Blank / Full
26		Minor may draw, endorse, deliver and negotiate a N.I. so minor can draw a
		cheque. No Overdraft / LOAN can be given to the banker
31		Liability of the Paying Bank
50		Restrictive Endorsement
52		Conditional Endorsement
52		Sans Recourse
85		Cheque Payable to Order : Paying Bankers' Protection
87		Material Alternation
89		Payment according to apparent tenor thereof at the time of payment and
		otherwise in due course, shall discharge the person/banker from all liability
		thereon.
123		General Crossing
124		Special Crossing
125		Crossing of Cheque
130		Not Negotiable Crossing
131		Protection to Banker While collecting cheques
138		Drawer of cheque is liable to be punished if the cheque is bounced for
		Insufficiency funds, the drawer is punishable with and imprisonment which
		may extend to one year and or a fine may extend to twice the amount of the
		cheque or with both.
141		Offences By Company
143		Summary Trial by Court
144		Mode Of Service of Summons
145		Evidence On Affidavit
146		BANKS' SLIP Prima facie evidence
147		Offences to be Compoundable
10/31/		Payment Of Cheques
85/126
126 to		Payment in Due Course of Cross Cheques
129
131A		Protection to Banker While collecting Drafts
85A		Draft Payable to Order : Paying Bankers' Protection
85A		Drafts Payable to Order

Banking Regulation Act 1949

Banking Regulation Act 1949
The BR Act does not apply to Primary Agricultural Credit Societies
Section
4 & 53 The Govt. has power to suspend operations BR Act / give exemptions from any of
the provisions of the Act on the recommendations of the RBI.
5(a) Approved Securities: In which a trustee may invest money under section 20 of
the Indian trusts act, 1882
5(b)
Banking is defined as the acceptance of deposits of money from the public for the
purpose of lending or investment
5©
A banking company, is a company which transacts business of banking
May be constituted under section 3 of companies Act
Section 51 of Companies act – foreign company
6
Govt. has also power to notify the other forms of Business permissible apart from
banking business. Section 6(1)(0)
Discounting of bills, Collection of cheque and bills. Remittances, safe custody of
articles, safe custody of articles, hiring safe custody of articles, conducting
foreign exchange transactions, conducting (Central/State) government
transactions.
7
Every banking company has to use word bank as part of its name, no other
company can use the word bank, banker, banking as part of its name.
7(1) Prohibits use of words ‘Banker’ or ‘Banking’ or ‘Banking Company’ by a company
other than Banking Company.
7(2) Prohibits use of such words by individual or group of individuals or a firm.
8 Prohibited Business
9 No banking company shall hold any immoveable property howsoever acquired,
except for its own use, for any period exceeding Seven years
10 No Banking company shall be managed by Managing Agent
10A
(28) Board Of Directors: Qualifications for directors of banking companies. At
least 51% of the total number of directors shall be persons who have expertise in
accountancy, agriculture and rural economy, banking, cooperation, economics,
finance, law etc.
Max. period of office for Chairman, Ordinary Director in a banking company is 8
years
If Chairman is removed by the order, he has to apply to Central Govt within 30
days.
10B (29) Whole Time Director / Managing Director
11
If a foreign bank wishes to carry on business in India the aggregate value of
PaidUp share capital and reserves shall not be less than
at a place other than Bombay /Kolkatta Rs. 15 lakh
in Bombay / Kolkatta or both Rs. 20 lakh
An amount of 20% of the profit for each year has to be deposited with RBI.
11(3)(i): The aggregate value of paid-up capital and reserves a banking

company incorporated in India and having place in more than one state
but not in Bombay / Kolkatta Rs. 5 lakhs
and in Bombay / Kolkatta Rs. 10 lakhs
12
The minimum ratio between authorised, Subscribed, and paid-up capital of a
banking company should be: 4 : 2 : 1
12(2)
No person holding shares in a banking company shall exercise voting rights on
poll in excess of 10% of the total voting rights of all shareholders of the banking
company
12A(1)
RBI may ask a banking company to : call a general meeting of shareholders and
elect fresh directors.
13
Prohibits banks from making payment of commission, brokerage, discount or
remuneration on any shares issued by it in excess of 2.5% of the paid-up value of
such shares.
14A(1)
Prohibits a banking company from creating floating charge on the undertaking or
any property of the company or any part thereof.
15
Prohibits a banking company from paying any dividend on its shares until all its
capitalized expenses have been completely written off
16 Prohibits a person to be appointed as director of more than one banking company
17
Reserve Fund(53)
Every banking company incorporated in India is required to transfer each year to a
reserve fund a sum equivalent to not less than 20% of profit before dividend
18
Every banking company not being scheduled bank, cash reserve need not be
maintained with the Reserve Bank. It may be with bank itself, or in current account
with the Reserve Bank.
The balance maintained should not be less than 30% of the demand and time
liabilities as on the last Friday of the 2nd Fort Night.
Return of Cash Reserve of Non-scheduled Banks
19(1)
Approval of Central Govt. is required for formation a subsidiary for the purpose
 carrying on business of banking exclusively outside India
 effecting, insuring, guaranteeing, underwriting, participating in managing and
carrying out of any issue, public or private
 undertaking and executing trusts
19(2)
No banking company shall hold shares in any company, whether as pledge,
mortgagee or absolute owner of an amount exceeding 20% of the paid-up share
capital of that company or 30% of its own paid-up share capital and reserves,
whichever less.
20(1)
Banking Company is prohibited from granting any loan or advance against the
security of its own shares.
20A(1)
Banking Company shall not, except with the prior approval of the RBI, remit in
whole or in part any debt due to it by
any of its directors
any firm or company in which any of its directors is interested
21 Empowers RBI to control advances by banking companies
21A Transaction between a banking company and its debtor cannot be reopened by

any court on the ground that rate of interest charged is excessive.
22(1) Licence from RBI required
22(3) Adequacy of Capital Structure and earning prospectus
23(b) Permission to open office outside India from RBI
23(1) Permission for change of premised within the same city, town or village not
required