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Ba n k i n g La wssrshetty.coBanking Law4 th Semister, 3 Year LLBKarnataka Law UniversityCA Sh i va Sh an k ar a R Sh et t y BCom, ACACh ar t er ed Accou n t an t sSSR She t t y & CoCh a r t e r e d A cco u n t a n t sNo. 15, 2nd Cr o ss, 2nd Main Road Ba l a j i N a g a r a , D RC Po st Ben...

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Banking Law

BankingLaw 4thSemister,3YearLLB KarnatakaLawUniversity

CA Sh i va Sh an k ar a R Sh et t y BCom , ACA Ch ar t er ed Accou n t an t s

SSR Shetty & Co Chartered Accountants

No. 15, 2nd Cross, 2nd Main Road Balaji N agara, DRC Post Bengaluru – 560 029 M: 9980195919, 9035846043 O: 080 2678 0452 E: [email protected] w w w .ssrshetty.co.in 1

Banking Law

BankingRegulationAct,1949 Salient features of the Banking Regulation Act, 1949 1) A comprehensive definition of ‘Banking – covers all institutions which receive deposits, repayable on demand or otherwise, for lending or investment; 2) Prohibiting non-banking companies from accepting deposits repayable on demand; 3) Prohibiting to conduct bank activities by non-banking companies; 4) Prescribe minimum capital standards; 5) Limiting the payment of dividends; 6) Covers the banks incorporated or registered outside India within the scope of the Banking Regulation Act, 1949; 7) Issue the banking license and their branches; 8) Prescribe the special form of balance sheet, Profit and Loss Account, etc. 9) Confer the powers of RBI to call for periodical returns; 10) Inspection of books and accounts of the bank by the RBI; 11) Empowering the Central Government to take action against banks conducting their affairs in a manner detrimental to the interests of the depositors; 12) Provisions to bring the RBI in to closer touch with the banking companies; 13) Procedure for liquidation; 14) Bringing the SBI within the purview of the some of the provisions of the Banking Regulation Act, 1949; 15) Widening the powers of the RBI so as to enable it to come to the aid of banking companies in times of emergency; 16) Provisions for the extension of the Act to whole of India. The provisions of this Act shall be in addition to and not in derogation of the Companies Act, 1956 and any other law for the time being in force.

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Banking Law

ReserveBankofIndia The Banking Regulation Act, 1949 empowers the Reserve Bank of India [RBI] to control the banking institutions of India. Some of them are as under: 1)

Power to appoint Chairman to a Banking Company: In case where, office of the chairman appointed on whole time basis or managing director of a banking company is vacant, then RBI can appoint a person as Chairman. A person who has special knowledge and practical experience of the banking activities and working in any banking company or SBI or any subsidiary bank of SBI or a financial institution can be appointed as a chairman. In case where, such person is not a director of such banking company, after the appointment as a ‘Chairman”. He deemed to be a director of such banking company.

2)

Minimum Paid-up Capital and Reserves: Every banking company should deposit the prescribed minimum paid-up capital and reserves with the RBI either in cash or in the form of unencumbered approved securities. However, it can be pay in partly in cash and partly in the form of such securities.

3)

Cash Reserves: Every banking company, not being a scheduled bank, shall maintain cash reserve on daily basis, with RBI. The percentage of cash reserve will be computed on the basis of total demand and time liabilities as on the last Friday of the second preceding fortnight. The percentage will be prescribed by the RBI and it will be vary time to time.

4)

Reserve Bank control over the Banking Companies: RBI empowers to issue a order to any banking company, to call a general meeting of the shareholders within 2 months or within such further time as RBI may allow in this behalf, to elect an fresh directors and the banking company shall bound to comply with such order.

5)

Regulation of Acquisition of shares or Voting Rights: RBI prior approval required for acquire the share or voting rights in excess of 5%of the paid up share capital of any banking company.

6)

Power of the RBI to control the Advances by the Banking Companies: RBI can formulate an policy in relation to advances of the banking companies. The policy may be applicable to all the banking companies or particular banking company. In such case, banking company shall be bound to follow the policy.

7)

RBI may give directions relating to any or all of the following: a) The purpose for which advances may be or may not be made; b) The margins to be maintained in respect of secured advances; c) The maximum amount of advances to be made to any company, firm, AoA or individual and having regard to the paid-up capital, reserves, etc. d) The maximum amount of guarantees may be given by a banking company on behalf of any one company, firm, AoA or individuals. e) The rate of interest and other terms and conditions on which advances or other financial accommodation may be made or guarantees may be given. w w w .ssrshetty.co.in 3

Banking Law

Every banking company shall be bound to comply with any directions given to it by RBI. However, as per Section 21-A of the Banking Regulation Act, 1949, the rate of interest charged by the banking companies cannot be subject to scrutiny by the Courts. 8)

Licensing of New Banking Companies: No company shall carry on banking business in India, unless it holds a license issued in that behalf by the RBI and any such license may be issued subject to such conditions as the RBI may think fit to impose. Further, no banking company shall open a new branch without obtaining the prior permission of the RBI. However, new branch within the same city, town or village of an existing place of the business situated, can be opened without prior approval of the RBI.

9)

Monthly Returns: Every bank should submit monthly returns to the RBI in the prescribed form. The RBI has the power to call for other returns and information, if required. The banking companies are bound to submit every return and information which are required by the RBI.

10) Accountsand Balance sheet: Every banking company shall prepare a balance sheet and profit and loss account as on the last working day of the calendar year in the prescribed form and submit to the RBI. 11) Audit: Every bank should get audited its accounts periodically and shall submit the reports to the RBI. Every banking company shall, before appointing, re-appointing or removing any auditor or auditors obtain the previous approval of RBI. 12) Submission of Returns: Three copies of the accounts, balance sheet together with the Auditor’s Report shall be furnished as a returns to the RBI within 3 months from the end of the period which they refer. 13) Inspection: RBI empowered to inspect the books and accounts of a banking company. After the inspection it sends a copy of it to the concerned bank. When the RBI is inspecting the particular Bank, every Director or Officer or Employee of the Bank is under an obligation to produce all the books, accounts and documents in his custody and furnish the information required. 14) Direction: RBI may issue a directions as it deems fit, to a banking company in particular or to the banking companies in general and the banking company or companies shall be bound to comply with the such directions. 15) Power to remove Managerial and other persons from the Office: To control over management, RBI empowered to remove the managerial and other persons from the office of the banking companies, whose conduct is detrimental to the interests of the deposits and to secure proper management. RBI empowered to appoint additional directors. 16) Power of RBI to impose Penalty. Functionsof the RBI a) Note Issue: RBI shall have the sole right to issue currency note in India. Currency notes are issued under the signature of the Governor of the RBI. Notes issued by the RBI are known as‘BANKNOTES’ while One Rupee notes of the Central Government are known as ‘Currency Notes’. However, the w w w .ssrshetty.co.in 4

Banking Law

Central Govt. shall put into circulation of rupee coins and reupee currency notes through RBI only. One Rupee note shall bear the signature of the Finance Secretary, Ministry of Finance, Government of India. All bank notes are legal tender throughout the country and are guaranteed by the Central Government. At present, the highest bank note issued is the bank note of denomination of Rs. 1,000/b)

Banker to the Government: The RBI is the banker to the Central Government statutorily and to the State Governments by virtue of agreement entered into with them. The Central Government conduct all its transactions through the RBI. The RBI conducting banking business of the Central Government free of charges viz., accepting the money on government account, making payment on its behalf, effecting exchange remittance, management of public debts, floating of new loans and treasury bills, etc. The RBI also provides advisory services to the Government on all monetary and banking matters e.g., industrial and agricultural finance, legislation affecting banking and credit, financial aspects of planning, cooperative organisations, international finance, etc. Apart from, the RBI provides funds to the Government to tide over its short-term financial needs by issue of Treasury Bills. According to Section 45, it is obligatory on the part of the RBI to appoint the SBI as its sole agent of all places where the RBI has no branch office of its banking department.

c)

Banker’s Bank: The RBI serves as a banker to the scheduled commercial banks in India. All the scheduled commercial banks keep their accounts with the RBI for the purpose of maintaining cash reserves as also for settlement of clearing transactions.

d)

Lender of the Lost Resort: In case a commercial bank is not in a position to raise the financials from other sources, then as a lost resort, it may approach RBI for necessary financial accommodation.

e)

Custodial of the Funds: The RBI holds the cash reserves of commercial and other banks and thus acts as custodian of the ultimate reserves of the country which support its credit and banking system.

f)

Clearing House: The RBI acts as a clearing house for member banks for settling their mutual transactions by book entries.

g)

Control of the Banks: The RBI acts as supervisor and controller of the banks in India, i. Each bank is required to obtain license from RBI before conducting the banking business, ii. RBI prior permission required for open new branch or change in the location of any existing branch, iii. It has power to inspect books and accounts of commercial banks, iv. It may issue a directions to the commercial banks and may prohibit banks to enter in to the particular transaction, v. RBI may remove any top executive of a bank, vi. RBYmay appoint additional director of any Bank.

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Banking Law

h)

Control of the Credit: The RBI exercise its control over the volume of the credit created by the commercial banks. The measure of credit control may be classified in to the 2 categories: i. Quantitative Methods: Bank rate policy. Open market operations, statutory liquidity requirements, etc. ii. Qualitative Methods: Selective credit control, credit authorisation monitoring and moral suasion.

i)

Custodial of Exchange Reserves: The RBI is the custodial of the country’s foreign exchange reserves. It has authority to enter into foreign exchange transactions both on its own and on behalf of the Govt. all Indian remittances to the foreign countries and foreign remittance to India are made through the RBI.

j)

Collection of Data and Publications: The RBI empowered to collect credit information from banking companies and to furnish such information in a consolidated form to any banking company applying for the same along with the prescribed fee. The RBI is the principal source of certain financial and banking data. It publishes a monthly bulletin with weekly statistical supplements and annual reports.

k)

Promotional and Developmental Functions: i. Encourage the commercial banks to extend their branches in the semi-urban and rural areas; ii. Helps to develop the banking system, increase the depositors confidence and avoids the bank failure, iii. Helps to mobilise the savings in a country through the institutions like, UTI, iv. It provides a security to the depositors, v. Appoints ad-hoc committees/expert groups from time to time to enquire banking problems and make recommendations to solve them, vi. Banker’s Training College has been set-up to extend training to supervisory staff of commercial banks, vii. Promote institutional agricultural credit by developing co-operative credit institutions, viii. Undertakes measures for developing bill market in the country.

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Banking Law

BankingSystem A banking company defined in the Banking Regulation Act, 1949 as one ‘which transacts the business of banking which means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise”. Difference betw een Banking and Money Lending Banking Money Lending 1. Banker accepts the deposits from the 1. A money lender usually advances his own public and lent to needy customers against funds. goods or securities or by discounting bills. 2. The bank pays interest to its deposits and 2. A money lender do not receive deposits the deposits are withdrawal by the from public. Therefore, no interest is cheques. payable. Money lender can’t issue cheques for withdrawal. 3. Bank can b orrow from other banks or RBI 3. Money lender has no option to borrow from to lend to their customers. banks and RBI. However, they may go to other moneylenders for adjustments. Functionsof the Commercial Banks 1. Accepting the deposits from public: Generally, banks accept the deposits in the following types of accounts: a. Saving Bank Account; b. Current Bank Account; c. Fixed Deposit Account, and d. Recurring Deposit Account. 2.

Lendingof Funds: After keeping required cash reserves, the bank lend their surplus deposits to the needy borrowers against approved securities such as gold, stock and shares, etc. Bank advances to the customer may be made in the following ways: a. Overdraft facility, b. Cash credit, c. Discounting on bill of exchange, d. Short term loan, Term loans, and e. House loan, personal loan, vehicle loan, gold loan, etc.

3. 4. 5.

Use of Cheque system, Remittance of the Funds, Agency Services: Bank may act as agent of the customer, such as – a. Collect and make the payment for bills, cheques, interest, dividend, rent, insurance premium, etc. b. Remit funds behalf of the client by draft or mail or telegraphic transfers, c. To act as executor, trustee and attorney for customer’s will, d. Preparing the Income Tax Returns for their customers.

6.

General utility services: Modern commercial banks usually perform certain general utility services for the community; a. Issue of Demand Draft [DD] and Traveller’s Cheque, w w w .ssrshetty.co.in 7

Banking Law

b. Deed in foreign currency cheque, c. Arrange the safe deposit locker facility, d. Advisory services to the customers, i.e., investment in share, mutual funds, insurance policies, etc. Typesof the Banks 1. Scheduled Commercial Banks a) Scheduled Bank means a bank included in the second schedule to the RBI Act, 1944. The scheduled banks are entitled to avail of certain facilities from the RBI such as i. Obtain a finance facilities, ii. Grant of authorised dealer’s license to handle foreign exchange business, b) Banks should maintain the cash reserves with the RBI, as per prescribed level. A fortnightly return has to be submitted to the RBI. c) The following conditions must be fulfilled before a bank is included in the second schedule: i. Paid up capital and reserves shall not less than 5 lakh rupees; and ii. The affairs of the company are not being conducted in a manner detrimental to the interest of its depositors, and iii. It musts be State Co-operative Bank or a Company as defined under the Companies Act or an institution notified by the Central Government. 2.

Non-Scheduled Commercial Banks Those banks are not included in the second schedule to the RBI Act, 1934 are called non-scheduled commercial banks. On account of failure to comply with the minimum requirement for being scheduled, these banks are excluded in the second schedule. Today, there is no non-scheduled commercial bank in the country.

3.

Public Sector Banks In India, public sector banks are reached in 3 stages: a) Conversion of Imperial Bank of India into the State Bank of India [SBI] in 1955 followed by the establishment of its 7 subsidiary banks; b) Nationalisation of 14 major commercial banks on 1966; and c) The nationalisation of 6 more commercial banks on 1980. One of them, the New Bank of India was later merged with the Punjab National bank. Thus, today 27 banks constitute in Indian Commercial Banks. Under the privatisation policy of India, the shares of these banks were issued to the public in open market. Objectivesof the Nationalisation of Banks a) Elimination of concentration of economic power in the hands of few, b) Diversification of funds towards priority sectors such as agriculture, small industry and exports, weaker sections and backward areas, c) Professionalization of bank’s management, d) Providing adequate training to the bank staff, e) Extending banking facilities to un-banked rural areasand semi-urban areasto mobilise savings of people to the largest possible extent and to utilise for productive purposes, f) To curb the use of bank credit for speculative and other un-productive purposes.

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4.

Private Banks Private Banks can be classified into 2 category. They are: a) Indian Banks: Other than nationalised banks, owned and controlled by the Indian entrepreneurs. Example: ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd. b) Foreign Bank: Banks incorporated outside India but having place of business in India. Example: Citi Bank NA, Standard Chartered Bank, HSBC

5.

Regional Rural Banks[RRB’s] a) The authorised share capital is 5 crore and issued share capital shall be 1 crore. 50%shall be subscribed by the Central Govt., 15% shall be subscribed by State Govt. and 35% by the sponsor bank. b) There are 196 RRB’s having a network of multiplied branches in the states. They are closely linked with some commercial banks. These are separate body corporate with perpetual succession and common seal. The local limits of such banks are specified to the function. c) The RRB’s are the scheduled commercial banks having been included in the second schedule to the RBI Act, 1934 and therefore, they enjoy the same privileges and facilities as the scheduled banks, including access to the central money market. d) A rural bank carries on the normal business of banking. The main object of these banks to develop the rural economy by providing credit and other facilities to small and marginal formers, agricultural labourers, small entrepreneurs, small traders, etc. e) The area of operation is limited specified region comprising one or more districts in any state. f) The lending rate of these banks will not be higher than the lending rates of co-operative societies in any particular State. g) The establishment of RRB’s will help in providing employment to the rural educated youth’s.

6.

Local Area Banks Local area banks are setup in the private sector to cater to credit needs of the local people and to provide financial assistance in their area of the operation. These banks may be promoted by the individuals, corporate entities, trusts and societies. Normally, these banks are s...