MANAGEMENT OF BANKS

Assignment:1
RbI and banking regulations act,1949

Submitted By
Archita De
Registration No.:-BIM0409BM012
In partial fulfillment of requirements for award of the degree of Post Graduation
Diploma In management (PGDM), 2009-2011

Under the Guidance of

Mrs. Pragyan Sarangi (Faculty),
Bharatiya Vidya Bhavan(BCCM),Bhubaneswar.

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Acknowledgement

It is with the deep sense of gratitude that I express my sincere indebtedness to Mrs. Pragyan Sarangi

(Faculty) Bharatiya Vidya Bhavan, Bhubaneswar under whose guidance, supervision and

encouragement the present study was undertaken and completed. Her sympathetic, accommodating

and constructive nature remained a constant source of inspiration for me throughout the duration of

this project.

Thanking You,

Archita De

Bharatiya Vidya Bhavan.(BCCM),

Bhubaneswar.

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Executive Summary

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 Table of Contents

Page no.

Executive Summary

Chapter I Introduction
 Scope of study
 Limitations of the Research
 Objectives of the Research

Chapter II Organization Study

 Brief History
 Main Functions
 RBI has various tools to control
 Organization structure

Chapter III Research Methodology

 Review of the Literature
 Research
– Type of the Research
– Collection of Data
– Software Used for Data Analysis

Chapter IV Data Presentation and its Analysis

 Introduction of Research Topic
 Business of Banking Companies
 Control over Management
 Prohibition of Certain Activities in Relation to Banking Companies
 Provisions Relating to Certain Operations of Banking Companies

Chapter V Summary of the Project

 In a nutshell- A Summary of Some Important Sections

Bibliography

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 BANKING
REGULATIONS
ACT, 1949

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CHAPTER -I

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Introduction

The enactment of the Banking Regulation Act in 1949 has been a milestone in the history of Indian
joint stock banking .This present work attempts to highlight certain important provisions in the said
Act, which are intended to foster a sound and healthy banking system in India and the various other
measures taken by the authorities in the recent past to reform and regulate the banking system.

The Act lays down specifically the form of business in which banking companies may engage. The
forms of business specified are in consonance with accepted banking principles. This section
prohibits banking companies from taking part in trading and speculative activities, thereby landing
themselves in danger. The importance of this section lies in the fact that one of the main causes that
led to the failure of Indian joint stock during the early part of their development was the varied
nature of the transactions which many of them under took and which could never be characterized as
banking transactions.

The Act lays down certain important provisions regarding the minimum paid-up capital and reserves.
According to the original provision (section 11), it was possible for a bank with only one place of
business to be started with as low a capital as Rs 50,000.In terms of the amendment Act of 1962,the
limit of minimum paid-up capital in the case of an Indian Banking company commencing banking
business for the first time after the commencement of the Banking Companies Amendment)Act,1962
is fixed at Rs 5 lakh, irrespective of whether it has only one place of business or places of business in
only one state. Further, if a bank has places of business in more than one state and if any such place
is situated either in Mumbai or Kolkata or both, the minimum amount of paid-up capital is Rs.10
lakh.

The Act as amended in 1962 requires every banking company to transfer to its reserve fund a sum
equivalent to not less than 20% of its profits irrespective of whether or not its reserves have equaled
the paid up capital. This provision is intended to Act as a break on the policy of declaring large
dividends to satisfy the share holders, thus undermining sound banking principles. The Amendment
Act was necessitated as a result of the fact that the paid up capital and the reserves of the banks have
not kept pace with the increase in deposits brought about by the growing economic activity during
the past few years. It may be noted in this connection that with effect from the year ending 31 March
2001, all scheduled commercial banks operating in India (including exchange banks) are required to
transfer not less than 25 % of the net profit to the reserve fund. This transfer may be made after the
adjustment /provision towards bonus to staff.

Certain unscrupulous banks used to misled the ignorant public by showing large figures of
authorization capital as against very frictional amount of paid up capital. The maximum voting rights
of any one shareholder is fixed by the Act, as amended in 1992, at 10% of the total voting rights.

To promote the interest of the depositors and to impose restrictions on indiscriminate loans and
advances to directors and concerns in which the bank or the directors are interested, the Act prohibits
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the banking company from making loans or advances on the security of its own shares; or granting
unsecured loans or advances to any of its directors or firms or private concerns in which the bank or
any of its directors is interested as partners or managing agent.

To safeguard the interest of the depositors, the Amendment Act 1958 provides for the simplification
and speedy disposal of winding up proceeding of banks.

The Act provides for the public examination of the directors and auditors for any bank under
liquidation who are found guilty in the promotion, formation or proper conduct of business of the
bank. Special provisions for accessing damages against delinquent directors, etc are also laid down
in the Act.

Scope of Study
I mainly used the secondary data for the study. The collection of secondary data is mainly from the
official website of Reserve Bank of India, other web sites, books, magazines, etc. To study the
Banking Regulations Act and how those regulations affect the banking sector as a whole. I have
given a brief overview of the regulations that are being imposed by the Reserve bank of India for the
proper exercise of the monetary and fiscal policies. The study is made only for the purpose of partial
fulfillment of the PGDM (2009-2011).

Limitations of the Research

During the completion of this project there are Certain Limitations and difficulties I had to face.
Some of them are:

 Data are collected from secondary sources and historical in nature

 Data collected are not sufficient for my project work
 Within this limited time period of six week is very difficult
 Despite all these hindrances utmost care has been taken throughout the research project

Objective of the Research

 To study the main role of RBI for the economic development of the country
 To study the RBI Regulatory Act as a whole and its implication
 To study the changes in Regulatory Act post liberalization.


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 CHAPTER -II

THE RESERVE BANK OF INDIA

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Brief History

The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent
innovation and most central banks, as we know them today, were established around the early
twentieth century.

The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young
Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the
functioning of the Bank, which commenced operations on April 1, 1935.

The Bank was constituted to

  * Regulate the issue of banknotes
  * Maintain reserves with a view to securing monetary stability and
  * To operate the credit and currency system of the country to its advantage.

The Bank began its operations by taking over from the Government the functions so far being
performed by the Controller of Currency and from the Imperial Bank of India, the management of
Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras,
Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department.
Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and
Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as
the Central Bank for Burma till Japanese Occupation of Burma and later up to April, 1947. After the
partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948 when the
State Bank of Pakistan commenced operations. The Bank, which was originally set up as a
shareholder's bank, was nationalized in 1949.

An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen
as playing a special role in the context of development, especially Agriculture. When India
commenced its plan endeavours, the development role of the Bank came into focus, especially in the
sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to

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catalyze development. The Bank was also instrumental in institutional development and helped set
up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust
of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural
Development, the Discount and Finance House of India etc. to build the financial infrastructure of
the country.

With liberalization, the Bank's focus has shifted back to core central banking functions like
Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto
developing the financial markets.

Main Functions.

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Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central
bank acts as the bank of the national and state governments. It formulates implements and monitors
the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors.
Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors.
The national economy depends on the public sector and the central bank promotes an expansive
monetary policy to push the private sector since the financial market reforms of the 1990s.
The institution is also the regulator and supervisor of the financial system and prescribes broad
parameters of banking operations within which the country's banking and financial system functions.
Objectives are to maintain public confidence in the system, protect depositors' interest and provide
cost-effective banking services to the public. The Banking Ombudsman Scheme has been formulated
by the Reserve Bank of India (RBI) for effective addressing of complaints by bank customers. The
RBI controls the monetary supply, monitors economic indicators like the gross domestic product and
has to decide the design of the rupee banknotes as well as coins.

Manager of exchange control

The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.

Issuer of currency
The bank issues and exchanges or destroys currency and coins not fit for circulation. The objectives
are giving the public adequate supply of currency of good quality and to provide loans
to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank
notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and
to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve
the objective of price stability as well as economic development, because both objectives are diverse
in themselves.

Developmental role
The central bank has to perform a wide range of promotional functions to support national objectives
and industries. The RBI faces a lot of inter-sectoral and local inflation-related problems. Some of
these problems are results of the dominant part of the public sector.

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Related functions
The RBI is also a banker to the government and performs merchant banking function for the central
and the state governments. It also acts as their banker. The National Housing Bank(NHB) was
established in 1988 to promote private real estate acquisition. The institution maintains banking
accounts of all scheduled banks, too.

There is now an international consensus about the need to focus the tasks of a central bank upon
central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate
described above. The recent financial turmoil world-over, has however, vindicated the Reserve
Bank's role in maintaining financial stability in India.

RBI has various tools to control which are listed below :-

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(a) Bank Rate: RBI (Reserve Bank of India) lends to the commercial banks through its discount
window to help the banks meet depositor’s demands and reserve requirements. The interest rate the
RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity
and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity
and money supply in the system, it will increase the bank rate. The current rate is 6%.

(b) Cash Reserve Requirements (CRR): Every commercial bank has to keep certain minimum
cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase
or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase
in the money supply. An increase in CRR will make it mandatory on the part of the banks to hold a
large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of
their deposits and they will lend less. This will in turn decrease the money supply. The current rate is
6%.

(c) Statutory Liquidity Requirements (SLR): Apart from the CRR, banks are required to maintain
liquid assets in the form of gold, cash and approved securities. RBI has stepped up liquidity
requirements for two reasons: - Higher liquidity ratio forces commercial banks to maintain a larger
proportion of their resources in liquid form and thus reduces their capacity to grant loans and
advances – thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from
loans and advances to investment in government and approved securities.

In well developed economies, central banks use open market operations- buying and selling of
eligible securities by central bank in the money market- to influence the volume of cash reserves
with commercial banks and thus influence the volume of loans and advances they can make to the
commercial and industrial sectors. In the open money market, government securities are traded at
market related rates of interest. The RBI is resorting more to open market operations in the more
recent years.

Generally RBI uses three kinds of selective credit controls:

a) Minimum margins for lending against specific securities.

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b) Ceiling on the amounts of credit for certain purposes.

c) Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:-

a) Part of the interest rate structure i.e. on small savings and provident funds, are administratively
set.

b) Banks are mandatorily required to keep 25% of their deposits in the form of government
securities.

c) Banks are required to lend to the priority sectors to the extent of 40% of their advances

Organization Structure

The organization structure of RBI is as follows:- It has …

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  Central Board of Directors - The Central Board of Directors is the main committee of the
central bank. The Government of India appoints the directors for a four year term. The Board
consists of a governor, four deputy governors, four directors to represent the regional boards,
and ten other directors from various fields.

 Governors - The central bank had 21 governors . Current Governor of Reserve Bank of India
is D. Subbarao.

 Supportive bodies - The Reserve Bank of India has four regional representations: North in
New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The representations are
formed by five members, appointed for four years by the central government and serve -
beside the advice of the Central Board of Directors - as a forum for regional banks and to
deal with delegated tasks from the central board. The institution has 22 regional offices.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD committee

to control the financial institutions. It has four members, appointed for two years, and takes measures
to strength the role of statutory auditors in the financial sector, external monitoring and internal
controlling systems.

The Tarapore Committee was set-up by the Reserve Bank of India under the chairmanship of former
RBI deputy governor S S Tarapore to "lay the road map" to capital account convertibility. The five-
member committee recommended a three-year time frame for complete convertibility by 1999-2000.

On 1 July 2006, in an attempt to enhance the quality of customer service and strengthen the
grievance redressal mechanism, the Reserve Bank of India constituted a new department
— Customer Service Department (CSD).
 Offices and branches - The Reserve Bank of India has 4 regional offices ,15 branches and 5
sub-offices. It has 22 branch offices at most state capitals and at a few major cities in India.
Few of them are located
in Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati,Hy
derabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna,
and Thiruvananthapuram.

Besides it has sub-offices

atDehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla and Srinagar.

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The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at Chennai
and College of Agricultural Banking at Pune. There are also four Zonal Training
Centres at Belapur, Chennai, Kolkata and New Delhi.

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 CHAPTER -IIi

Review of the Literature

To give a complete shape, the researcher has gone through the following books, policies and
websites about which the researcher has given in details record below:

BOOKS

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  Banking –Theory and Practice (20th Edition) by K.C.Shekhar and Lekshmy
Shekhar
Publisher: Vikas Publishing House Pvt.Ltd
Findings: Introduction to the topic and various details about the Act
 Indian Banking by R.Parameswaran and S.Natarajanra
Publisher: S. Chand Group
Findings: The history of RBI and its functions
 Money and Banking- Theory with Indian Banking by T.N.Hajela
Publisher: Ane Books Pvt.Ltd.
Findings: The knowledge of the banking practice in India.
 Indian Banking by B.Suryakant
Publisher: Palak Publications.
Findings: The Banking Regulations Act, 1949.

POLICIES and MAGAZINES



WEBSITES

 http://www.rbi.org.in
 http://www.helplinelaw.com
 http://prkulkarni.com
 http://www.bankingindiaupdate.com
 http://en.wikipedia.org
 http://fiuindia.gov.in/relatedacts-bankingregu.htm

Research

I have done this project based on the theory studied on the RBI and the Banking Regulations Act ,
1949.I have tried to analyze every aspect of the Act, from point of view of RBI, and the different
steps it has taken to control and govern the banking sector in India.

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Type of the Research
Here the type of research is exploratory research.

Exploratory research is a type of research conducted for a problem that has not been clearly
defined. Exploratory research helps determine the best research design, data collection method and
selection of subjects. It should draw definitive conclusions only with extreme caution. Given its
fundamental nature, exploratory research often concludes that a perceived problem does not actually
exist.
Exploratory research often relies on secondary research such as reviewing available literature and/or
data, or qualitative approaches such as informal discussions with consumers, employees,
management or competitors, and more formal approaches through in-depth interviews, focus,
projective methods, case studies or pilot studies. The Internet allows for research methods that are
more interactive in nature. 
Collection of Data
The relevant materials and data for this project are secondary in nature and they are obtained by a
through literature survey to ascertain the kind of framework which would fit into the operations
related to presentation of this Banking Regulations Act,1949. A lot of relevant data were collected
from the banking (theory and practice )books, magazines and browsing through internet.
Published data and the data collected in the past or other party is called secondary data.

Software Used for Data Analysis

After the collection of data I have used Microsoft Word for the typing of my study and latter on to
present them.

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 CHAPTER -Iv

Introduction of the Research Topic

About the Act

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.

Made applicable to Co-operative Banks in 1964.As per the Act Reserve Bank of India is the
regulatory authority for Banks .Reserve Bank of India has some powers for regulation of Banks
under the RBI Act, 1935.

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Commencement

By introducing Section 56 in the Banking Regulation Act, 1949 w.e.f. 1stMarch, 1966 the Act was
made applicable to the Co-operative Banks .Section 56 modifies the provisions of the Act as
applicable to the Co-operative Banks.

Applicability against other laws

 Provisions of the Banking regulation Act, 1949 are not in substitution of other laws
applicable, unless otherwise expressly said (Section 2 r.w. 56 (b)
 Act is not applicable to

1) Primary Agricultural Society

2) Co-operative Land Mortgage Bank
3) Any other co-operative society except as provided by Sec. 56(Section 3)

Approved Securities

“Approved Securities”means securities in which a trustee may invest money under applicable
provisions of the Indian Trust Act, 1882 and the securities approved by the Central govt. under
Section 20(f) of the said Act Section 5(a)

Banking definition

“Banking”means the accepting, for the purpose of lending or investment, of the deposits of money
from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or
otherwise Section 5(b)

Banking Policy
“Banking Policy” means policy specified by RBI from time to time in the interest of
-- Banking system
-- Monitory stability
-- Sound economic growth
-- Interest of depositors
-- Volume of deposits and other resources of the bank
-- Efficient use of the deposits and resources …..Section 5(ca)

Demand and Time Liabilities (DTL)

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“Demand Liabilities “means liabilities which must be met on demand and “Time Liabilities’ means
liabilities which are not demand liabilities Section 5(f)

Secured and Unsecured Loan or Advance

“Secured Loan or Advance”means a loan or advance made on the security of assets the market value
of which is not at any time less than the amount of such loan or advance and “Unsecured Loan or
Advance”means a loan or advance not so secured ……Section 5(n)

Act to supersede By-law etc.

If any provision in the By-law or any resolution passed by the Board or the General Body or any
body entrusted with the management of the society by the Board contradicts the provisions of the
Act, then the same are void and the Act supersedes…..Section 5A r. w. 56(d)

Business of Banking Companies

Forms of business in which banking companies may engage.

In addition to the business of banking, banking company may engage in any one or more of the
following forms of business, namely:

(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or
without security; the drawing, making, accepting, discounting, buying, selling, collecting and
dealing in bills of exchange, hundis promissory notes, coupons, drafts, bills of lading, railway
receipts, warrants, debentures, certificates, scripts and other instruments, and securities whether

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transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and
circular notes; the buying, selling and dealing in bullion and specie; the buying and selling, of
foreign exchange including foreign bank notes; the acquiring holding, issuing on commission,
underwriting and dealing in stock, funds, shares debentures, debenture stock, bonds, obligations,
securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of
securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of
all kinds of bonds, scrip’s or valuables on deposit or for safe custody or otherwise; the providing of
safe deposit vaults; the collecting and transmitting of money and securities;

(b) acting as agents for any Government or local authority or any other person or persons; the
carrying on of agency business of any description including the clearing and forwarding of goods,
giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but
excluding the business of a [managing agent or secretary and treasurer] of a company;

(c) contracting for public and private loans and negotiating and issuing the same;

(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of
any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or
debenture stock of any company, corporation or association and the lending of money for the
purpose of any such issue;

(e) carrying on and transacting every kind of guarantee and indemnity business;

(f) managing, selling and realizing any property which may come into the possession of the company
in satisfaction or part satisfaction of any of its claims;

(g) acquiring and holding and generally dealing with any property or any right, title or interest in any
such property which may form the security or part of the security for any loans or advances or which
may be connected with any such security;

(h) undertaking and executing trusts;

( i) undertaking the administration of estates as executor, trustee or otherwise;

(j) establishing and supporting or aiding in the establishment and support of association., institutions,
funds, trusts and conveniences calculated to benefit employees or ex-employees of the company or
the dependents or connections of such persons; granting pensions and allowances and making
payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent
objects or for any exhibition or for any public, general or useful object;

(k) the acquisition, construction, maintenance and alteration of any building or works necessary or
convenient for the purposes of the company;

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(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or
turning into account or otherwise dealing with all or any part of the property and rights of the
company;

(m) acquiring and undertaking the whole or any part of the business of any person or company, when
such business is of nature enumerated or described in this sub-section;

(n) doing all such other things as are incidental or conducive to the promotion or advancement of the
business of the company;

(o) any other forms of business which the Central Government may by notification in the Official
Gazette, specify as a form of business in which it is lawful for a banking company to engage.

Business bank can do Section 6(1) and 6(2) r.w. 56(b)

 Borrowing, raising or taking of money

 Giving advance
 Bills business
 L/C , Bank Guarantee, Indemnity
 Foreign exchange
 Providing safe deposit vaults
 Collecting and transmitting money
 Managing, selling and realizing any property that may come into the possession of the bank
in satisfaction or part satisfaction of any of its dues
 Acquiring, holding and dealing with any property or any right, title or interest in any such
property that may form the security or part of the security for any loans or advances or which
may be connected with such security.
 Undertaking and executing trusts.
 Acquiring, constructing, maintaining and altering of any building for the purpose of the bank
 Acquiring and undertaking the whole or part of the business of any person or bank / company
if its nature of business is as per the allowed business for the bank
 Doing all such other things as are incidental or conducive to the promotion or advancement
of the business of the bank
 Any other business the Central Govt. may by notification specify as a allowed business
 Banks are prohibited to do any other business.

Bank holding acquired immovable property

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  The property acquired by the bank in satisfaction of the whole or part of the dues can be
disposed by the bank within seven years from the date of acquisition
 The period can be extended by RBI up to five more years if doing so is in the interest of the
depositors
 Bank can use the property for its own use and may retain it for self use and then it may not be
disposed .Section 9 r. w. 56 (fii)

Minimum paid up capital

 No Co-operative bank shall commence or carry on the business of banking unless the
aggregate value of its paid-up capital and reserves is not less than Rs. 1.00 lac
 Value means the real and exchangeable value and such value drawn by the Reserve Bank
shall be final. Section 11 r. w. 56 (h)

Cash Reserve (CRR) Section 18 r. w. 56 (j)

 Every bank is required to keep cash reserve, with itself or by way of balance in the current
account with RBI or Central / District Co-operative Bank or net balance in all such way, of
minimum prescribed % amount of its DTL as of last Friday of fortnight
 A return about this has to be submitted to RBI before 15thof each month about alternate
Friday
 For schedule Co-operative banks the minimum cash reserve prescribed is 5% under Section
42(1) of the Reserve Bank of India Act, 1935
 For non-schedule UCBscash reserve is 3% as per Section 18 r.w. 56(j) of the Banking
Regulation Act, 1949
 Master Circular on this issue is UBD.CO.RET/MC No 12/12.33.000/2006-07 dated Nov. 1,
2006

Fortnight –for CRR

“Fortnight” means period from Saturday to the second following Friday Section 18 r. w. 56(j)(b)

Restriction on holding shares of other Co-operative society

 Co-operative bank shall not hold shares in any other co-operative society, except to the
extent and on conditions as prescribed by RBI
 The exception allowed by the Act is holding shares of central or State co-operative bank to
which the investing bank is affiliated

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  Other exception allowed by the RBI is for holding shares of Associations and Federations of
Banks of which the investing bank is member,
Section 19 r. w. Section 56(k)

Restrictions on loans and advances

No co-operative bank shall grant any loans or advances,

1) On the security of its own shares or

2) To any of its directors or
3) To firms or private companies in which any of its directors is interested as partner or
managing director or
4) To any individual in case a director is a guarantor
[ Section 20(1) r. w. Section 56(l) ]
5) Every co-operative bank is required to file a monthly return in prescribed form to RBI about
unsecured loans and advances to its directors and their related accounts
[Section 20(2) r. w. Section 56(l)]
6) If from the return submitted by the bank RBI is of the view that the loans or advances are to
the detriment of the interests of the depositors, the RBI may prohibit the bank from granting
any such further loans or advances or give such order as it deems fit
[Section 20(3) r. w. 56(l)]

Restriction on remitting director related debts [Section 20-A r. w. 56(m)(i) and

(ii)]
No co-operative bank shall, except with the prior approval of the RBI, remit in whole or part any
debt due to it by,

1) Any of its past or present directors

2) Any firm or company in which any of its directors is interested as director, partner, managing
agent or guarantor
3) Any individual if any of its director is his partner or guarantor

Rate of interest –not subject to scrutiny by Courts

A transaction between a bank and its debtor shall not be reopened by any Court on the ground that
the rate of interest charged by the bank is excessive [Section 21-A]

Licensing of banks
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No co-operative society shall carry on banking business in India unless it is a cooperative bank and
holds a license issued in that behalf by the RBI, subject to such conditions as the RBI may deem fit.
[Section 22(1) r. w. 56(o)(i)(b)]

Branch licensing

No co-operative bank shall without prior permission of RBI open new place of business or change
otherwise than within the same city, town or village, the location of an existing place of business.
[Section 23 r. w. 56(p)(i)]

Branch licensing -exception

No permission as contemplated for branch licensing under section 23(1) is required from RBI if
there is opening of place of business, in the area where the bank already has a place of business, for
less than one month for the purpose of affording banking facilities to the public on the occasion of an
exhibition, a conference or a mela or any like occasion [Section 23 r. w. 56(p)(i) –proviso (a)]

(Statutory Liquidity Ratio) SLR

Bank shall maintain unencumbered approved securities, valued not exceeding the current market
price, or an amount which shall not be less than 25% of the total of its demand and time liabilities
(DTL) [Section 24(1) r. w. 56(q)(i) ]

SLR (Statutory Liquidity Ratio –what is included)

1. Balances maintained in India in current account/s with RBI

2. Any balance maintained with central co-operative bank of the district concerned or with the
State co-operative bank concerned.
3. Gold valued at a price not exceeding the current market price
4. Unencumbered approved securities
5. Cash maintained by the bank with itself (only for non-scheduled banks)
[Section 24 (2) and (2A) r. w. 56(q)(ii)]
SLR –Reporting to RBI

Every bank is required to furnish a prescribed monthly return to RBI not later than 21 days after the
month end giving position at the close of alternate Fridays of that month about,

 Particulars of assets maintained in accordance with section 24 and

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  Demand and term liabilities
 If any Friday is a holiday next day’s position is required to be given
 RBI has powers to call this position on daily basis also
[Section 24(3) and (5) r. w. 56 (q)(iii) ]

SLR –Default -Penalty

 If there is default in maintaining the SLR, a penalty of interest @ 3% p. a. above bank rate
for per day of default is imposed on the defaulted amount
 If the default continues or occurs on next alternate Friday the penal interest rate is increased
to 5% p. a.
 The penalty payable as above shall be payable within 30 days from the date of demand by
RBI [Section 24(4) and (6) r. w. 56(q)(iv)]

SLR –Default -Penalty

If RBI is satisfied that the SLR default is knowingly and willful every director, manager or secretary
responsible shall be punished with fine of Rs. 500/-and further fine of Rs. 500/-for each alternate
Friday if default continues [Section 24(7)]

SLR –Default -Exemption

If the RBI is satisfied on the application made by the bank that there are sufficient grounds for not
maintaining the SLR the RBI may not impose penalties [Section 24(8)]

CRR / SLR Maintenance -Exemption

RBI can by issuing notification in the Official Gazette exempt any co-operative bank or class of co-
operative banks from the requirements of maintaining CRR or SLR with reference to whole or part
of assets and liabilities of such bank or banks [Section 24(A) r. w. 56(qq)]

Unclaimed deposits
 Every bank is required to submit to RBI within 30 days of close of each year a
return in prescribed format and manner of all accounts which have not been
operated upon for ten years
 In case of fixed deposit accounts the period of ten years shall be calculated
from the date of maturity [Section 26 r. w. 56(ri)]

Monthly and other returns RBI powers

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Every bank is required to submit a monthly return in prescribed form and manner, before the close of
succeeding month to which it relates, showing the assets and liabilities of the bank at the close of last
Friday of the month to which it relates [Section 27(1)]

RBI powers to call information

 RBI has powers to call at any time such statements and information in such manner and form
as it deems fit relating to the business and affairs of the bank
 RBI has also powers to call for half yearly information regarding the investment of the bank
and classification of advances [Section 27(2) ]

RBI powers to publish information about bank

RBI has powers to publish any information obtained by them under the Banking Regulation Act,
1949 (aacs) in such consolidated form as it deems fit if according to RBI doing so is in the public
interest [Section 28]

Accounts and Balance-sheet

 Every co-operative bank is required to prepare balance-sheet and profit and loss
account at the expiration of the year ending with 31stMarch in the form set out in
the Third Schedule of the Act
 The balance-sheet and profit and loss account needs to be signed by the principle
officer of the bank and at least three directors [Section 29(1) and (2) r. w. 56(s)]
 The balance-sheet and profit and loss accounts along with auditors report are
required to be published in the manner as prescribed by RBI within six months
from year end and three copies thereof are required to be submitted to RBI as
returns [Section 31 r. w. 56(t)(i) ]

Production of documents of confidential nature Section 34-A(1)

 Notwithstanding anything contained in any law, no bank can be compelled by any authority,
in any proceeding, to produce or give inspection of any of its books of accounts or
documents or furnish or disclose any information when the bank claims that such document
or information is of confidential nature.
 Bank can refuse production or inspection of document or the furnishing of information
relating to,
1) Any reserve not shown as such in its published balance-sheet
2) Any particulars not shown in the balance-sheet in respect of BDDR or other usual or
necessary provisions

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Production of documents of confidential nature –RBI intervention Section 34-
A(2)
 If in any proceeding a question arises as to whether any reserve or provision stated above at
section 34A(1) should be taken into account or not, the authority before whom the
proceeding is pending may refer the matter to RBI.
 RBI shall after considering the sound banking practices and relevant circumstances, furnish
to the authority a certificate stating how much amount the authority should consider or not
consider.
 The certificate issued by the RBI shall be final and shall not be called in question in any
proceeding.

Inspection of Banks –Section 35

 35(1) –RBI on its own or if directed by the Central Govt. may cause a inspection to be made
by one or more of its officials of any bank and its books of accounts. On inspection RBI has
to give a copy of the report to the bank and may give a copy to the Registrar of Co-operative
Societies
 35(1A)(a) –Additionally RBI may make a scrutiny of the affairs of the bank
and its books of accounts
 35(1A)(b) –Copy of the scrutiny report may be given to the bank if requested so by the bank.
But if any action against the bank is contemplated based on the scrutiny the report has to be
given to the bank
 35 (2)–Every director, officer and employee of the bank shall produce to any officer making
inspection under 35(1) or scrutiny under 35(1A) all such books, accounts, documents in his
custody or power and furnish him any statement and information relating to the affairs of the
bank as the said officer may require and in such time as asked
 35(3) –any person making the inspection under section 35(1) or scrutiny under 35(1A) may
examine on oath any director, officer or employee and administer oath to him.
 35(4) –If the RBI is of the opinion that the affairs of the bank are being conducted to he
detriment of the interests of the depositors, it may report it to the Central Govt. and the
Central Govt. may after giving opportunity to the bank prohibit the bank from receiving
deposits
 35(5) –The Central Govt. may after giving reasonable opportunity to the bank publish the
report submitted by RBI or part of such report as may be necessary

Directions from RBI

RBI can issue directions to any co-operative bank or class of co-operative banks if RBI is satisfied
that doing so is necessary,

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 1) In the public interest or
2) In the interest of banking policy or
3) To prevent the affairs of the bank being conducted in a manner detrimental to the interests of
the depositors or prejudicial to the interests of bank or
4) To secure the management of the bank generally, and the banks are bound to follow the
directions. [Section 35A r. w. 56(x)]

RBI powers to depute officers at Urban Co-operative Bank Section 36-A(1)(d) r.

w. 56 (z)

If RBI is satisfied that for reorganization or expansion of co-operative credit on sound linens it is
necessary so to do, by an order in writing and on terms ad conditions may

1) Depute one or more officers to watch the proceedings at any meeting of the Board of
Directors or any other body constituted by it and speak in the meeting and give advice as the
officer may deem fit
2) Appoint one or more of its officers to observe the manner in which the affairs of the co-
operative bank or its offices or branches are being conducted.
3) In both the above cases the officer is required to give a report to RBI about the proceedings
and observations.

Control Over Management

Power of Reserve Bank to remove managerial and other persons from office.

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(1) Where the Reserve Bank is satisfied that in the public interest or for preventing the affairs of a
banking company being conducted in a manner detrimental to the interests of the depositors or for
securing the proper management of any banking company it is necessary so to do, the Reserve Bank
may, for reasons to be recorded in writing, by order remove from office, with effect from such date
as may be specified in the order [any chairman, director,] chief executive officer (by whatever name
called) or other officer or employee of the banking company.

(2) No order under sub-section (1) shall be made [unless the chairman, director] or chief executive
officer or other officer or employee concerned has been given a reasonable opportunity of making a
representation to the Reserve Bank against the proposed order:

Provided that if in the opinion of the Reserve Bank, any delay would be detrimental to the interests
of the banking company or its depositors the Reserve Bank may, at the time of giving the
opportunity aforesaid or at any time thereafter, by order direct, that pending the consideration of the
representation aforesaid, if any [the chairman or, as the case maybe director or chief executive
officer] or other officer or employee, shall not, with effect from the date of such order.—

[act as such chairman or director] or chief executive officer or other officer or employee of the
banking company;

(b) in any way, whether directly or indirectly be concerned with, or take part in the management of,
the banking company.

(3) (a) Any person against whom an order of removal has been made under sub-section (1) may,
within thirty days from the date of communication to him of the order, prefer an appeal to the
Central Government.

(b) The decision of the Central Government on such .appeal and subject thereto, the order made
by the Reserve Bank under sub-section (1), shall be final and shall not be called into question in any
Court.

(4) Where any order is made in respect of [a chairman, director] or chief executive officer or other
officer or employee of a banking company under sub-section (1), he shall cease to be [a chairman or
as the case may be, a director,] chief executive officer or other officer or employee of the banking
company and shall not, in any way, whether directly or indirectly, be concerned with, or take part in
the management of, any banking company for such period not exceeding five years as may be
specified in the order.

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(5) If any person in respect of whom an order is made by the Reserve Bank under sub-section (1) or
under the proviso to sub-section (2) contravenes the provisions of this section, he shall be punishable
with fine which may extend to two hundred and fifty rupees for each day during which such
contravention continues.

(6) Where an order under sub-section (1) has been made, the Reserve Bank may, by order in writing,
appoint a suitable person in place of [the chairman or director] or chief executive officer or other
officer or employee who has been removed from his office under that sub-section, with effect from
such date as may be specified in the order.

(7) Any person appointed as [chairman, director or chief executive officer] or other officer or
employee under this section, shall––

(a) hold office during the pleasure of the Reserve Bank and subject thereto for a period not
exceeding three years or such further periods not exceeding three years at a time as the Reserve
Bank may specify;

(b) not incur any obligation or liability by reason only of his being a [chairman, director or chief
executive officer] or other officer or employee or for anything done or omitted to be done in good
faith in the execution of the duties of his office or in relation thereto.

(8) Notwithstanding anything contained in any law or in any contract, memorandum or articles of
association, on the removal of a person from office under this section that person shall not be entitled
to claim any compensation the loss or termination of office.

Prohibition of Certain Activities in Relation to Banking

Companies

Certain activities in relation to bank –punishable Section 36-AD

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Following activities are punishable with six month imprisonment or fine or both,

1) 1.Obstructing any person from lawfully entering or leaving any office or place of business of
the bank or from carrying on any business there

3. Holding within the office or place of business of the bank, any demonstration which is
violent or which prevents or is likely to prevent the transaction of normal banking business
4. Acting in any manner calculated to undermine the confidence of the depositors in the bank

Power to suspend business of bank Moratorium Section 45(1), 45(2) and 45(3)

 If it appears to RBI for good reasons so to do, the RBI may apply to Central Govt. for an
order of moratorium in respect of the bank.
 The Central Govt., considering application of RBI, may make order of moratorium staying
the continuation of all actions and proceedings against the bank for not more than six months
 Except as provided in the directions given by the Central Govt., no bank against whom
moratorium orders are issued shall make any payment to any depositor or discharge any
liability or obligation to any creditor

Preservation of record by bank

 The Central Govt., after consultation with RBI makes the rules specifying the period for
which the bank shall,
1) Preserve its books, accounts and other documents and
2) Preserve and keep with itself different instruments paid by it [Section 45Y]

Return of paid instruments to customers

 If the customer asks, before the expiry of preservation period, for return of original
instrument issued by him and paid by the bank the bank has to give the same to him keeping
a copy with the bank
 Cost of copying has to be recovered by the bank from the customer [Section 45Z]

Nomination for –Deposit [Section 45ZA]

 When the deposit is held by the bank to the credit of one or more persons, the depositor or
all the depositors together may nominate in the prescribed manner one person to whom in
the event of death of depositor or all depositors the amount of deposit be returned by the
bank

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  After the death of depositor/s the nominee becomes entitled to all the rights of
the depositor/s to the exclusion of other persons
 Nomination once made can be cancelled or modified by the depositor/s in the prescribed
manner
 If the nominee is a minor the depositor/s making nomination is entitled to
appoint a guardian for the minor till his/her minority
 Payment made by the bank in accordance with the nomination under section
45ZA gives full discharge to the bank for its liability in respect of deposit

Notice of claim on deposit Section 45ZB

 No notice of the claim of deposit, other than the person or persons in whose name the deposit
is held, shall be receivable by the bank, nor shall the bank be bound by the notice even if
expressly given.
 Bank shall, however, take a note of the decree, order, certificate or such other document from
the competent court, having jurisdiction, about the deposit.

Nomination –Safe Custody and Locker

 For safe custody articles provisions regarding nomination and notice are
similar to that for deposit are at section 45ZC and 45ZD
 For safety lockers provisions regarding nomination and notice are similar to that for deposit
are at section 45ZE and 45ZF

Penalties
 For giving false information to RBI, for not giving the information or called documents, for
contravening the directives issued by RBI and such other issues the Act provides elaborate
penal provisions at section 46 r. w. 56(zc) prescribing the imprisonment or fine or both to the
erring staff or director of the bank.
 RBI has also powers to impose monitory penalties on the bank under section 47A

Protection to Central Govt. / RBI

 No action, suit, proceeding or case can be initiated in any court against the Central Govt. or
RBI and its officers when they have taken any action in good faith under the Banking
Regulation Act, 1949 [Section 54]

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 CHAPTER -v

IN A NUTSHELL –A SUMMARY OF SOME IMPORTANT SECTIONS

 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) (b)).
 Banking company means any company which transacts the business of banking (5(i)(c)

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 Transact banking business in India (5 (i) (e).
 Demand liabilities are the liabilities which must be met on demand and time liabilities means
liabilities which are not demand liabilities (5(i)(f)
 Secured loan or advances means a loan or advance made on the security of asset the market
value of which is not at any time less than the amount of such loan or advances and
unsecured loan or advances means a loan or advance not secured (5(i)(h).
 Defines business a banking company may be engaged in like borrowing, lockers, letter of
credit, traveler cheques, mortgages etc (6(1).
 States that no company shall engage in any form of business other than those referred in
Section 6(1) (6(2).
 For banking companies carrying on banking business in India to use at least one word bank,
banking, banking company in its name (7).
 Restrictions on business of certain kinds such as trading of goods etc. (8)
 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 (9)
 Prohibitions on employments like Chairman, Directors etc (10)
 Paid up capital, reserves and rules relating to these (11 & 12)
 Banks not to pay any commission, brokerage, discount etc. more than 2.5% of paid up value
of one share (13)
 Prohibits a banking company from creating a charge upon any unpaid capital of the
company. (14) Section 14(A) prohibits a banking company from creating a floating charge on
the undertaking or any property of the company without the RBI permission.
 Prohibits payment of dividend by any bank until all of its capitalised expenses have been
completely written off (15)
 To create reserve fund and 20% of the profits should be transferred to this fund before any
dividend is declared (17 (1))
 Cash reserve - Non-scheduled banks to maintain 3% of the demand and time liabilities by
way of cash reserves with itself or by way of balance in a current account with RBI (18)
 Permits banks to form subsidiary company for certain purposes (19)

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  No banking company shall hold shares in any company, whether as pledgee, mortgagee or
absolute owners of any amount exceeding 30% of its own paid up share capital + reserves or
30% of the paid up share capital of that company whichever is less. (19(2).
 Restrictions on banks to grant loan to person interested in management of the bank (20)
 Power to Reserve Bank to issue directive to banks to determine policy for advances (21)
 Every bank to maintain a percentage of its demand and time liabilities by way of cash, gold,
unencumbered securities 25%-40% as on last Friday of 2nd preceding fortnight (24).
 Return of unclaimed deposits (10 years and above) (26)
 Every bank has to publish its balance sheet as on March 31st (29).
 Balance sheet is to be got audited from qualified auditors (30 (i))
 Publish balance sheet and auditors report within 3 months from the end of period to which
they refer. RBI may extend the period by further three month (31)
 Prevents banks from producing any confidential information to any authority under Indi
Disputes Act. (34A)
 RBI authorised to undertake inspection of banks (35).
 Amendment carried in the Act during 1983 empowers Central Govt to frame rules specifying
the period for which a bank shall preserve its books (45-y), nomination facilities (45ZA to
ZF) and return a paid instrument to a customer by keeping a true copy (45Z).

Certain returns are also required to be sent to RBI by banks such as monthly return of liquid assets
and liabilities (24-3), quarterly return of assets and liabilities in India (25), return of unclaimed
deposits i.e. 10 years and above (26) and monthly return of assets and liabilities (27-1).

BIBLIOGRAPHY

1) Banking –Theory and Practice (20th Edition) by K.C.Shekhar and Lekshmy Shekhar
Publisher: Vikas Publishing House Pvt.Ltd
2) Indian Banking by R.Parameswaran and S.Natarajanra

Page | 39
 Publisher: S. Chand Group
3) Indian Banking by B.Suryakant
Publisher: Palak Publications

4) Money and Banking- Theory with Indian Banking by T.N.Hajela

Publisher: Ane Books Pvt.Ltd.

9) http://www.rbi.org.in

10)http://www.helplinelaw.com

11)http://prkulkarni.com

12)http://www.bankingindiaupdate.com

13)http://en.wikipedia.org

14)http://fiuindia.gov.in/relatedacts-bankingregu.htm

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