PRINCIPLES AND PRACTICES OF BANKING

Module I
Banking System and Structure in India: Evolution of
Indian Banks-Types of banks-Public Sector, Regional Banks,
Performance of public Sector banks, Private Sector Banks.

Commercial Banking: Structure, Functions Primary &

Secondary function, Role of commercial banks in socio
economic development, services rendered. Credit creation
and Deployment of Funds Role Of Reserve Bank and GOI
as regulator of banking system Provisions of Banking
Regulation Act & Reserve Bank of India Act
MEANING AND DEFINITION OF BANKING

Bank is a German word which means to

collect.
The main function of the bank is
collection of funds as deposits.

According to Justice Homes, The real

business of a banker is to obtain deposits
of money which he may use for his own
profit by lending it out again
 Section 5(1)(b) of the Banking
Regulation Act, 1949 defines banking as-
The accepting for the purpose of lending
or investing or investment, of deposits from
the public, repayable on demand or
otherwise and withdrawal by cheque, draft,
order or otherwise.

Section 5(1)(c) defines a banking

company as,
Any company which transacts the
business of banking in India.
EVOLUTION OF INDIAN BANKS
Indigenous Banks & Money lenders have played vital
role

The modern banking system in India started with the

establishment of General Bank of India in 1786.

In the mid-nineteenth century the east India Company

established
The Bank of Bengal in 1809. Independent
The Bank of Bombay in 1840
Units
The Bank Of Madras in 1843. (Presidency
Banks)
Subsequently, these three banks were Amalgamated
and called Imperial Bank Of India in 1921.
 After Independence the imperial Bank Of India
(which till then functioned as a private bank) was nationalized
and became State Bank Of India (under the sate Bank
Of India Act of 1955).

19th June, 1969. 14 Banks were Nationalised.

To promote macro economic objective.
Economic Growth.

Better regional balance of economic activities.

Diffusion of economic power.

1980 Second Phase of Nationalisation 6

Banks
 Post Nationalisation in 1980 only
limited banks left in the private
sector.
Narasimham Committee Set up to
look at Financial Sector Reforms
New banking license was given in
1993
In order to introduce more competition
Higher productivity and efficiency
Old private sector banks were asked
attain a net worth of Rs.50 crore and
above by 2001

 TYPES OF BANKS

Central Bank:
A central bank functions as the apex
controlling institution in the banking and
financial system of the country. It
functions as
Controller of credit.
Bankers bank and

Also enjoys the monopoly of issuing currency

on behalf of the government.

The central bank has been established in
almost all the countries of the world.
 Commercial Bank:
A commercial bank is an institution that
operates for profit.
It accepts deposits from the general public
and extends loans to the households, the
firms and government.
According to the Banking Regulation Act,
1949, the commercial banking consists in
The accepting, for the purpose of lending or
investment, deposits of money from the
public repayable on demand or otherwise and
withdraw able by cheque, draft and order or
otherwise.
 Investment Banks Or Industrial Banks:
Investment Banks provide medium and long term
finance to industries to meet their fixed capital
requirements.
For Existing industries, they lend for expansion and
modernisation of industries.
They help to promote new industries by
undertaking the issue of securities.
The industrial banks secure funds through share
capital and debentures. They also receive deposits
from the public for long periods.
Now-a-days, the banks provide technical guidance
for the efficient management of industries.
 Indigenous Bank:
Before Independence, the financial needs of
framers and small business units were met by
indigenous banks in rural areas.
These bank were operated by.
sahukars,
Mahajans,
Sardars, etc.
The rate Of Interest is very high.
Farmers and borrowers may approach them at any
time. However, they have to pledge their
ornaments, land or valuables.
These banks are virtually exploiters of poor rural
people.
 Development Bank:
A development bank is a hybrid institution
which combines in itself the functions of a
finance corporation and a development
corporation.
As financial corporation these banks act in
providing medium-term assistance to business
undertakings in the form of loans, underwriting
and investment.
They also act as a catalytic agent in promoting
balanced and viable development by assuming
promotional role of discovering project ideas,
Undertaking feasibility studies, providing
technical, financial and managerial assistance
for the implementation of project.
 Co-operative Bank:
Aco-operative bankis a financial entity which

belongs to its members, who are at the same time the

owners and the customers of their bank.
Co-operative banks are often created by persons

belonging to the same local or professional

community or sharing a common interest.
The main business of co-operative banks is to provide

finance to agriculture.
They aim at developing a system of credit.

Commercial banks have not been able to provide

credit facilities to rural areas and therefore, the need

of rural credit is fulfilled by the co-operative banks.
Long-Term loans are provided by co-operative
societies. Long term loans are needed by the farmers
for purchasing implements, fertilizers and seeds, etc.
 Saving Bank:
Saving Banks are specialised institutions to collect
savings from the poor and middle income people of
the society.
These banks primarily intended to encourage habits of
thrift and savings among people with small incomes.
The depositors are allowed to withdraw the amount in
times of need . But, there are restrictions on the
number of withdrawals to be made in the month.
Separate savings banks are organised in various
countries . In India, the government runs savings bank
and they are managed by postal department. In most
of the countries including India commercial banks do
the function of savings banks and encourage people to
open savings account with them.
 Exchange Bank:
These banks finance mostly to the foreign trade of a country.
Their main function is to discount, accept and collect foreign
bills of exchange.
They also buy and sell foreign currencies and help
businessmen to convert their money into any foreign
currency they need.
Though they accept deposits and undertake normally
banking business, their main business is confined to the
financing of export and import trade.
Over a dozen foreign exchange banks branches are working
in India, have their head-offices in foreign countries.
In addition to this, many Indian banks are also doing
exchange business.
The Export Import Bank of India (EXIM Bank) was
established on January 1, 1982 as a statutory corporation
wholly owned by the central Government. It took over the
export finance function of the IDBI (Industrial Development
Bank Of India) and began functioning on March 1, 1982.
PUBLIC SECTOR BANKS
Public Sector Banks (PSBs) are banks where a majority
stake (i.e. more than 50%) is held by a government.
The shares of these banks are listed on stock
exchanges.
There are a total of27PSBs in India [21Nationalized
banks +6State bank group (SBI +5associates) ].

In Inidia Public Sector Banks are classified as:

1. State Bank Of India Group

2. Other Nationalised Banks

1. STATE BANK OF INDIA
The State Bank Of India was initially known as Imperial
Bank. The Imperial bank was formed in 1921 by the
amalgamation of three presidency Banks (i.e. Bank of
Bengal, Bank of Bombay, and Bank of Madras)

The Imperial Bank was nationalised under the state bank of

India Act, 1955, which was passed on May 8, 1955.

The State Bank Of India Came into existence on July 1, 1955.

This is the Beginning of the first phase of nationalisation of
Banks.

The Main objective of nationalisation was extending banking

facilities on a large scale (particularly in the rural and semi-
urban areas)
 SBI is the largest government owned
bank in India.
SBI along with its subsidiaries has.
more than 25,000 branches and
more than 40,000 ATMs across India.

SBI is Indias largest commercial bank.

The SBI isranked232nd on the
FortuneGlobal500 listof the world's
biggest corporations as of 2016. (With
Revenue $41,681 crores) .
 Subsidiaries of SBI
1. State Bank of Bikaner and Jaipur.
2. State Bank of Hyderabad.

3. State Bank of Mysore.

4. State Bank of Patiala.

5. State Bank of Travancore.

6. State Bank of Indore It was merged with

SBI in the year 2010
7. State Bank of Saurashtra It was merged
with SBI in the year 2008
At present SBI is having only 5 subsidiaries.
The government is planning to merge all other
subsidiaries also with SBI in coming future.
2. OTHER NATIONALISED BANKS
What Do You Mean By Nationalisation ?
Nationalization is a process whereby a national government or State
takes over the private industry, organisation or assets into public
ownership by an Act or ordinance or some other kind of orders.

Thus, now it becomes easier to understand thatall those banks

which were taken over through Banking companies (Acquisition and
Transfer of Undertaking) Ordinance/bill are called nationalised
banks. [Banking Companies (Acquisition of Transfer of
Undertakings) Act, 1970].

1969 Nationalisation of 14 major banks with deposits of not less

than Rs 50 Crore.
1980 Nationalisation of 6 banks with deposits over 200 crore.

Later in the year 1993, the Government merged New Bank of India

with Punjab National Bank.

List Of Nationalised Banks:
1. Allahabad Bank
2. Andhra Bank

3. Bank of Baroda

4. Bank of India

5. Bank of Maharashtra

6. Canara Bank

7. Central Bank of India

8. Corporation Bank

9. Dena Bank

10. Indian Bank

11. Indian Overseas Bank

12. Oriental Bank of Commerce

13. Punjab and Sind Bank

14. Punjab National Bank

15. Syndicate Bank

16. UCO Bank

17. Union Bank of India

18. United Bank of India

REGIONAL BANK

Abankthatonlyoperatesinonestate/provin
ce,or
inonlyafewneighbouringstates/provinces.A
regionalbank differsfromamoney central
bank,whichhasanationaland/orglobalpresence.R
egionalbanksusuallyspecializein retail
banking,makingloansandtakingdeposits. (For
Example: Netravathi Gramina Bank)

Abankthatoperatesin alimitedarea of thecountry,

rather than nationwide or internationally.
PRIVATE SECTOR BANK

Theprivate-sector banksin India

represent part of the Indianbanking
sectorthat is made up of
bothprivateand publicsector banks.
The "private-sector banks"
arebankswhere greater parts of equity
are held by theprivate shareholders
and not by government.
Examples: Dhanlaxmi Bank, ICICI Bank, Kotak
Mahindra Bank, Yes Bank, Bandhana Bank,
IDFC Bank etc
Private Banks Are Split into 2 Types
Old Private Sector Banks.
New Private Sector Banks.
Old Private Sector Banks:
The banks, which were not nationalized at the time of bank
nationalization that took place during 1969 and 1980 are
known to be the old private-sector banks.
These were not nationalized, because
small size
regional focus.
Most of the old private-sector banks are closely held by
certain communities their operations are mostly restricted
to the areas in and around their place of origin.
One of the positive points of thesebanksis that, they lean
heavily on service and technology.
Example: City Union Bank, Federal Bank, ING Vysya
Bank etc.
 New Private Sector Banks:
The banks, which came in operation after 1991, with the
introduction of economic reforms and financial sector
reforms are called "new private-sector banks".
Banking regulation act was then amended in 1993, which
permitted the entry of new private-sector banks in
theIndian bankingsector.
However, there were certain criteria set for the
establishment of the new private-sector banks, some of
those criteria being The bank should have a minimum net
worth of Rs. 200 crores.
Examples: Axis Bank, ICICI Bank, Kotak Mahindra
Bank, etc.
STRUCTURE OF INDIAN BANKING
SYSTEM
 Scheduled bank: A Scheduled Bank
inIndia, refers to abankwhich is listed in the
2ndScheduleof the ReserveBankofIndiaAct,
1934.

Non-scheduled banks: Bankswhich dose

not come under 2ndScheduleof the Reserve
Bank of India Act,1934 are called non-
scheduled banks.
 RESERVE BANK OF INDIA (R.B.I) Apex
Bank
The Reserve Bank of India was established on April
1, 1935 in accordance with the provisions of
theReserve Bank of India Act, 1934.

Reserve Bank Of India is a Central Bank of India.

The Central Office of the Reserve Bank was initially established in Calcutta
(Kolkata) but was permanently moved to Mumbai in 1937. The Central Office
is where the Governor sits and where policies are formulated.

Though originally privately owned, since Nationalisation in 1949, the Reserve

Bank is fully owned by the Government of India.

Preamble

To regulate the issue of Bank Notes and keeping of reserves with a

view to securing monetary stability in India and generally to operate
the currency and credit system of the country to its advantage."
 The Reserve Bank's affairs are governed by a central
board of directors.
The board is appointed by the Government of India
in keeping with the Reserve Bank of India Act.
Appointed/nominated for a period of four years
Official Directors : Governor + Deputy governors (Not
more than 4).
Non Official Directors : 16
FOREIGN BANKS

Foreign banks are private commercial

banks incorporated or established outside
India(i.e., in Foreign Countries), and carrying
on banking business in India through their
branches in India.

They are generally, called foreign

exchange banks as they mostly finance the
foreign exchange business of India.
REGIONAL RURAL BANK

Regional Rural Banks(alsoRRBs)

are local levelbankingorganizations
operating in different States ofIndia.
They have been created with a view to
serve primarily the rural areas of India
with basic banking andfinancial
services. However, RRBs may have
branches set up for urban operations
and their area of operation may include
urban areas too.
CO-OPERATIVE BANKS
Cooperative bankingis retail and commercial bankingorganized
on acooperativebasis.Cooperative bankinginstitutions take
deposits and lend money in most parts of the world.

1) Urban Co-Operative Banks: The term Urban Co-operative

Banks (UCBs), though not formally defined, refers to primary co-
operative banks located in urban and semi-urban areas. These
banks, till 1996, were allowed to lend money only for non-
agricultural purposes. This distinction does not hold today. These
banks were traditionally centred around communities, localities
work place groups. They essentially lent to small borrowers and
businesses. Today, their scope of operations has widened
considerably.

2) State Co-operative Banks: It is owned and controlled by the

state Government.
FUNCTIONS OF COMMERCIAL BANKS
1. Primary / Main Functions.
I. Receiving of Deposits.
Current Accounts. (Demand deposits or Demand Liabilities)

Saving Banks Accounts.

Fixed Deposit Accounts.

Recurring Deposit Account / Cumulative Deposit

Account
II. Lending of Funds.
Loans.
Overdrafts.
Cash Credit.
Discounting of Bills.
Money at Call.
III. Investment of funds on securities.
IV. Promote to Use of Cheques.
 V. Financing Internal and Foreign Trade.
VI. Remittance of Funds.

2. Secondary Function:
I. Agency Services.
Collection & Payment of Credit Instrument.
Purchase & Sale of Securities.
Collection Of Dividends on Shares .
Act As Correspondent.
Income Tax Consultancy.
Execution of Standing Orders.
Acts as Trustee and Executor.
II. General Utility Services.
Locker Facility.
Travellers Cheques and credit Cards.
Letter of Credit.
Collection Of Statistics.
Underwriting Securities.
III. Fulfilment Of Socio Economic Objectives.
ROLE OF COMMERCIAL BANKS IN SOCIO ECONOMIC
DEVELOPMENT

Banks Promote Capital Formation.

Investment In New Enterprises.

Promotion of Trade and Industry.

Development of Agriculture.

Balanced Development of Different Regions

Influencing Economic Activity.

Implementation of monetary Policy.

Monetisation of the Economy.

Expansion Of Credit.
CREDIT CREATION
Central bank is the first source of money supply in
the form of currency in circulation.
The Reserve Bank of Indian is the note issuing

authority of the country. The RBI ensures availability

of currency to meet the transaction needs of the
economy.
The Total Volume of money in the economy should be

adequate to facilitate the various types of economic

activities such as production, distribution and
consumption.
The commercial banks are the second most

important sources of money supply. The money that

commercial banks supply is called credit money.
 The process of 'Credit Creation' begins with banks
lending money out of primary deposits.
Primary deposits are those deposits which are deposited in

banks.
In fact banks cannot lend the entire primary deposits as

they are required to maintain a certain proportion of

primary deposits in the form of reserves with the RBI under
RBI & Banking Regulation Act.
After maintaining the required reserves, the bank can lend

the remaining portion of primary deposits.

Here bank's lend the money and the process of credit

creation starts.
Present CRR is 4%.
Suppose there are a number of Commercial Banks in
the Banking System Bank 1, Bank 2, Bank 3, & So on.
To begin with let us suppose that an individual "A"
makes a deposit of Rs. 100 in Bank 1.
Bank "1" is required to maintain a Cash Reserve

Requirement of 4% (Prevailing Rate) which is decided by

the RBI's Monetary Policy from the deposits made by
'A.
Bank "1" is required to maintain a cash reserve of Rs.

4 (4% of 100).
The bank has now lendable funds of Rs. 96(100 4).

Let the Bank "1" lend Rs. 94 to a borrower; say B

the method of lending is the same that is bank 1 opens

an account in the name of the borrower cheque for the

loan amount.
 At the end of the process of deposits &
lending, the balance sheet of bank
reads as given below:-
BalanceAmou
Liabilities Sheet of Bank "1
Assets Amou
nt nt
As Deposits 100 Cash Reserve 4
Loan To B 96

Total 100 Total 100

Now suppose money that borrowed from Bank "1" is paid by

B to individual "C" in settlement of his/her past debts.
The individual "C" deposits the money in his bank say, Bank 2.
Now bank 2 carries out its banking transaction. It keeps a cash
reserve to the extend of 4%, that is Rs. 3.84 (4% of 96) and
lend Rs. 92.16 to a borrower D.
 At the end of the process the
balance sheet of Bank 2 will be
look like:-
Liabilities Amou Assets Amou
nt nt
Cs Deposits 96 Cash Reserve 3.84
Loan To D 92.16

Total 96 Total 96
 The combined Balance sheet of Banks

Liabilities Liabilities Assets Reserv Total

Deposits Credited e Assets
Bank 1 100.00 96.00 4.00 100.00
Bank 2 96.00 92.16 3.84 96.00
Bank 3 92.16 88.47 3.68 92.68
-,,-
Bank n
Total 2,500.00 1,900.00 100.00 2,000.00
Itcan be seen from the combined balance sheet that a primary deposits of Rs. 100
in a bank 1 leads to the creation of the total deposit of Rs. 2,500.
The combined balance sheet also shows that the banks have created a total credit
of Rs. 2,500. And maintained a total cash reserve of Rs.100.Which equals the
primary deposits.
The total deposit created by the commercial banks constitutes the money supply
by the banks.

CONCLUSION:-
To conclude, we can say that credit creation by banks is one of the important &
only sources to generate income.
And when the reserve requirement increased by the central bank it would directly
affect on the credit creation by bank because then the lendable funds with the
bank decreases and vice versa.
 Functions/role of Reserve Bank Of India as
regulator of Banking System
The functions of the Reserve bank Of India can be
divided into three broad categories.
1. Monetary Functions.
2. Supervisory Functions
3. Promotional and Development Functions.
All the 3 functions are explained in detail as followes:
4. Issue Of Currency notes:
Under Section 22 Of the RBI Act of 1934 the reserve Bank Of India is
given the monopoly (i.e. The sole right) of note issue.
RBI Issues Currency notes of different denominations such as Rs. 10,
Rs. 20, Rs. 50. Rs. 100 Rs. 500 Rs. 1000. on its own account.
The RBI has separate department called the Issue department for
the Issue of currency notes.
It facilitates the expansion of currency notes required for spreading up
the process of economic development of the country.
2) Acting As a Banker to the Government:
The Reserve Bank acts as a banker to the Central and State
Governments.
As a Banker to the government, the Reserve Bank acts in three
capacities viz.
As a Banker.
As a financial agent.
As a Financial adviser.
As a Banker:
It accepts deposits from the Central and State Governments.
It Collects money (i.e Taxes and other charges) on be half of the governments.
It makes payments on behalf of the governments, in accordance with their
instructions.
It arranges for the transfer of funds from one place to another on behalf of
the government.
It makes arrangements for the supply of foreign exchange to the central and
state Governments.
It grants advances to State and Central Government for period not exceeding
3 months. These advances are granted upto certain specified limits without
any collateral securities.
As a Financial Agent:
It sells treasury bills at weekly auctions on behalf of the central government
and secure short term-term finance for the central government .
 It manages the public debts of the central and state governments.
It keeps the accounts of public debts of the government.
As an agent of the government of India, the Reserve Bank
represents the government of India in the International monitory
institution.
As a Financial Advisor:
It advises the Governments on all financial and Economic matter,
such as Agriculture, Industrial financing etc.
It also advice about how to plan about International Financing.

3) Acting As a Bankers Bank:

RBI enjoys supreme position in the money market. Further, as the central
bank is not a competitor to the commercial banks in the ordinary banking
business, but only their friend in times of stress and strain (i.e. financial
difficulties). All the Banks and financial institution accepted central bank as
their banker.
As a bankers bank, the central bank not only holds the cash reserves of the
commercial banks, but also lend them in the times of financial stringency (i.e
Difficulties). As a bankers bank, the central bank serves in three
important capacities. They are:
 As the Custodian of the cash Reserves of commercial Banks.
As central bank is accepted by the commercial banks as their banker, i
every country, every commercial bank keeps a certain percentage of its
deposits (i.e. 4% in India) with the central bank in the form of cash reserves,
either on account of banking tradition or on account of legal compulsion.
In country like England, for instant, commercial banks keep a part of their cash reserves
with the central bank because of banking tradition.
But in most of the other countries, including India and the USA, commercial banks keep a
portion of their cash reserves with the central bank on account of statutory obligation.

As the lender of last resort.

Generally, when an Individual commercial bank is in need of additional cash
to meet the demands of its depositors, it obtains the same from other banks
or financial institutions in the money market. But sometimes (i.e in the times
of financial crisis), when every bank or financial institution in the money
market is facing financial stringency, it may not be able to secure cash from
other banks or financial institutions in the money market. During such times,
as a last resort, it goes to the central bank for financial accommodation.
As a lender of last resort the RBI Provides financial accommodation
to the commercial banks in two ways.
By rediscounting eligible bills of exchange.
By granting short term loans against approved collateral securities.

As the bank of clearance.

 As a bank of clearance.
As the central bank holds the cash reserves of the commercial banks, it
is easy and convenient for the central bank to act as the bank of
clearance (i.e., to settle inter-bank claims). Inter-bank claims are settled
by central bank by simple transfers (i.e transfers from the account of one
bank to the account of another maintained in the books of the central
bank).
The work of central clearance was first developed by the Bank of
England. Later on, it was adopted by several other countries.

4) Exchange Control:
RBI is entrusted with the duty of maintaining the stability of the
external value of the national currency Indian Rupee.
It used to regulate the foreign exchange market in the country in
terms of the foreign Exchange Regulation Act (FERA), 1947.
The RBI performs the following tasks:
It administers foreign exchange control through its Exchange-Control Department.
It manages the exchange rate between the Indian Rupee and foreign currencies,
by selling and buying foreign exchange to/from the authorised dealers and by
other means.
It manages the foreign exchange reserves of the country and maintains reserves
in gold and foreign securities issued by foreign governments and international
financial institutions.
5) Control Of Credit or Monetary control:
The Term Credit Control dose not imply a mere restriction of the volume
or quantity of credit creation by commercial banks, other financial
institutions and business enterprises. On the contrary, it implies two things
Regulating the volume of credit (i.e., Contracting or expanding the volume of credit) in
accordance with the requirements of the economy.
Channelizing the credit into productive uses.
In Short, credit control means not mere credit restriction, but credit
regulation and direction.
Tools of monetary control
Cash Reserve Ratio (CRR)
Statutory Liquidity Ratio (SLR)
Bank Rate.
Open Market Operations (OMO).

6) Development of the financial System

Industrial Finance: IDBI in 1964 and Small Industries Development Bank of
India (SIDBI) 1989.
Agriculture Credit: National Bank for Agriculture and Rural Development
(NABARD) in 1981.
Export-Import Finance: Export Import Bank of India (EXIM Bank) in 1981.
BANKING REGULATION ACT, 1949

The Banking Regulation Act, 1949

is a legislation in India that regulates all
banking firms in India. Initially, the law
was applicable only to banking
companies.
PROVISION OF BANKING
REGULATION ACT
Important principal provisions of banking regulation act, 1949 are
as follows.
(1) Prohibition of Trading,
(2) Non-Banking Assets,
(3) Management,
(4) Minimum Capital,
(5) Capital Structure,
(6) Payment of Commission, Brokerage etc.
(7) Reserve Fund/Statutory Reserve.
(8) Restrictions on holding of shares in other companies.
(9) Restrictions on loans and advances.
(10) Maintenance Of percentage of liquidity.
(11) Maintenance of Assets in India.
(12) Inspection of books of accounts.
(13) Giving directions to banking companies.
1. PROHIBITION OF TRADING (SEC. 8)

According to Sec. 8 of the Banking

Regulation Act, a banking company
cannot directly or indirectly deal in
buying or selling or bartering of goods.
But it may, however, buy, sell or
barter the transactions relating to bills
of exchange received for collection or
negotiation.
2. NON-BANKING ASSETS (SEC. 9):

According to Sec. 9 A banking

company cannot hold any immovable
property, howsoever acquired, except
for its own use, for any period
exceeding seven years from the date of
acquisition thereof. The company is
permitted, within the period of seven
years, to deal or trade in any such
property for facilitating its disposal.
3. MANAGEMENT (SEC. 10):
Sec. 10 (a) states that not less than 51% of the total number of members
of the Board of Directors of a banking company shall consist of persons
who have special knowledge or practical experience in one or more of the
following fields:
(a) Accountancy;
(b) Agriculture and Rural Economy;
(c) Banking;
(d) Cooperative;
(e) Economics;
(f) Finance;
(g) Law;
(h) Small Scale Industry.
The Section also states that at least not less than two directors should
have special knowledge or practical experience relating to agriculture and
rural economy and cooperative. Sec. 10(b) (1) further states that every
banking company shall have one of its directors as Chairman of its Board
of Directors.
4. MINIMUM CAPITAL AND RESERVES (SEC. 11):

Sec. 11 of the Banking Regulation Act, 1949,

provides that no banking company shall commence
or carry on business in India, unless it has minimum
paid-up capital and reserve of such aggregate value
as is noted below:
As per RBI ,minimum paid-up capital of Rs.100
crore for setting up a new banking company
5. Payment of Dividend (Sec. 15):
According to Sec. 15, no banking company
shall pay any dividend on its shares until all
its capital expenses (including preliminary
expenses, organisation expenses, share
selling commission, brokerage, amount of
losses incurred and other items of
expenditure not represented by tangible
assets) have been completely written-off.
6. PAYMENT OF COMMISSION, BROKERAGE ETC.
(SEC. 13):

According to Sec. 13, a banking

company is not permitted to pay
directly or indirectly by way of
commission, brokerage, discount or
remuneration on issues of its shares in
excess of 2% of the paid-up value of
such shares.
7. RESERVE FUND/STATUTORY RESERVE (SEC.
17):

According to Sec. 17, every banking

company incorporated in India shall,
before declaring a dividend, transfer a
sum equal to 20% of the net profits of
each year (as disclosed by its Profit and
Loss Account) to a Reserve Fund.
8. RESTRICTIONS ON HOLDING OF SHARES IN
OTHER COMPANIES (SEC . 19)

Section 19 of the Banking regulation

Act. Prevents banking companies from
carrying on trading activities by
acquiring a controlling interest in non-
banking companies
9. RESTRICTIONS ON LOANS AND ADVANCES
(SECTIONS, 20 & 21 )

Restrictions on banking companies

from entering into any commitment
from granting any loan
To any of its director or
To any firm in which a director is
interested or
To any individual or whom a director
stands as a guarantor.
10. MAINTENANCE OF A PERCENTAGE OF LIQUID
ASSETS (SLR) (SECTION, 24)

Every banking company shall maintain

in India in liquid assets for an amount
not less than 25% of the total of its
time and demand liabilities at the close
of business on any day
11. MAINTENANCE OF ASSETS IN INDIA
(SECTION, 25 )

Maintenance of assets equivalent to at

least 75% of its demand and time
liabilities in India, at the close of
business of the last Friday of every
quarter
12. INSPECTION OF BOOKS OF ACCOUNTS
(SECTION 35 )

Wide powers to RBI to cause an

inspection of any banking company and
its books and accounts

13. GIVING DIRECTIONS TO BANKING

COMPANIES (SECTION 35A )
prior approval of RBI should be obtained for
the appointment, re-appointment,
remuneration and removal of the chairman or
a director of a banking company
PROVISIONS OF RBI ACT,1934

The Reserve Bank of India Act,1934 was

enacted to constitute the Reserve Bank of
India with an objective to
(a) Regulate the issue of bank notes
(b) For keeping reserves to ensure stability in the
monetary system
(c) To operate the nations currency and credit system
effectively.
THE RBI ACT DEALS WITH
Incorporation, Capital, management & business of the
Bank
The Central Banking functions
Collection & furnishing credit information
Acceptance of deposit by NBFCs
Provisions regarding reserve funds, credit funds,
publication of Bank rates, Audit and accounts
Penalties for violation of the provisions of the Act
IMPORTANT PROVISIONS OF RBI
ACT,1934
Section 22 Sole Authority for issue and management of
currencies
Section 20 RBI is the Banker to the Central Govt.

Section 21A undertakes banking business for the State

Govts based on agreement

Section 7(1) Central Govt. has the power to issue

directions to RBI in public interest

Section 42 Cash Reserve of Schedule Bank to be kept

with RBI
Section 47 Allocation of Surplus Profits

Section 49 Publication of Bank rates

Section 51 Appointment of Special Auditors by Govt.

Section 57 Liquidation of the Banks

Section 58G Power of the Bank to impose fine