BANKING LAW AND REGULATIONS.

1. Reserve Bank of India Act, 1934 2. Banking Regulation Act, 1949.

RESERVE BANK OF INDIA

Established on 1st April, 1935 under the RBI Act. RBI was nationalized in the year 1948. RBI is the Central Bank of our Country. Important Functions performed by RBI:

Central Banking Functions Supervisory Control over other banks in IndiaPromotion of Banking Industry Control over Non-banking Institutions receiving

Deposits.

Central banking Functions1. Issue of Currency: RBI issues and regulates

the issue of currency in India. It is the only Bank that is empowered to issue bank notes of all denominations through a separate Issue Department.

2. The RBI is required to maintain gold and foreign exchange reserves in the form of minimum reserve system.

RBI is Banker to Government.

3. RBI acts as a banker to Government of India and all State Governments. This means, RBI transacts Government Business by carrying out the following functions:

Maintaining Cash balances; Receiving and making payments on behalf of the

Government; Managing public debt; Advising Government on

- floating of loans,- legislation affecting banking etc.

4. RBI is known as - Bankers’ Bank and

- Lender of Last Resort because

– Scheduled Banks can borrow funds from the RBI on the basis of eligible securities;

– Also obtain financial accommodation by rediscounting their bills of exchange.

Supervision of banks RBI has statutory power to regulate the

volume of credit generated by banks. This means, RBI can control the advances

against commodities under Selective Credit Control mechanism.

It can also stipulate- the purpose- margin

and - rate of interest in specific category of advance.

Volume of credit is normally controlled through the regulatory instruments of

- bank rate- open market operations

and - variable cash reserve requirements Now, RBI has liberalized the control over the

rate of interest on deposits and advances by Banks.

It is totally delinked from ‘bank rate’. However, bank rate remains as a benchmark in the fluctuating interest rate regime.

Bank rate means – it is the rate of interest at which the RBI rediscounts the first class bills of exchange of commercial banks or other eligible papers.

RBI can impound the banks’ reserves to maintain the liquidity of assets in the form of Statutory Liquidity Ratio [SLR]. For this purpose,

The following assets are taken into account:1. Cash in hand (in India)2. Balance in current account with RBI3. Balance with RBI over the minimum reserve requirement.4. Investments in Government Securities, treasury bills, and other approved securities in India - excluding borrowings from RBI against approved securities.

RBI can impose Cash Reserve Ratio (CRR).- CRR is the minimum cash to be maintained as percentage against – demand deposits and – time deposits.

RBI can appoint any Bank as its agent to transact the business on its behalf. [sec – 45]

Statutory return: It is mandatory to all banks to send Statutory return providing information on the position of - assets and liabilities and - maintenance of average daily balances of cash reserves. [sec – 42 & 43]

Foreign Exchange Management. RBI is authorized to act as ‘Controller of

Foreign Exchange’ position. It deals in buying and selling of foreign exchange – directly and

– through authorized dealers appointed by it [Sec-40]

RBI supervises – Foreign reserve position and

– Exchange stability of domestic currency.

Control over Non-banking Financial Institutions.

Chapter – III B of RBI Act:Every Non-banking Financial Company is [Sec-45(1)]

Required to make an application for Registration Required to invest in unencumbered approved

securities , a certain percentage of deposit (5%). This is called ‘Liquidity Provision’.

Required to transfer not less than 25% of net profit to Reserve Fund before declaring dividend

RBI can regulate or prohibit the issue of Prospectus or Advertisement soliciting deposits from Public.

It can call for information as to deposits and give directions to NBFI or NBFC.

Statutory Reporting: RBI is authorized to call for any information pertaining to the business, it is also vested with it ‘Supervisory powers on acceptance of Public Deposits’. RBI can prohibit - acceptance of deposits and

- alienation of assets It can file an application for winding up of NBFC It can inspect any NBFC RBI can prohibit the acceptance of deposits by

unincorporated bodies. [Sec-45]

Thus RBI is equipped with all powers that may be needed to regulate the activities of Non-banking Financial Companies in India.

Banking Regulation Act, 1949.Definition: [Sec 5 (b)]

Banking means accepting for the purpose of lending or investment, of deposits of money from the public – repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise.

Permitted Business of Bank is detailed in Sec – 6

Permitted Business of Bank under Sec-6 1. Money Dealing with Public 2. Acting as Agents for any Government or Local authority or any other person (s) 3. Contracting for Public and Private Loans and negotiating and issuing the same 4. Carrying on and transacting every kind of guarantee and indemnity business 5. Undertaking and executing trusts 6. Undertaking and administration of estates as executor, trustee or otherwise.

Business Prohibited for Banks: [Sec – 8] No Banking Company shall directly or indirectly

deal in the – Buying – Selling

or – bartering of ‘goods’ Except – in connection with the realization of

security given to or held by it. No Banking Company shall directly or indirectly

engage in any ‘Trade’ or Buy, sell or barter goods for others

Except – in connection with bills of exchange received for collection or negotiation.

Goods means every kind of movable propertyOther than: actionable claims , stocks, shares etc.

Licensing of Banking Companies. RBI will issue License to a Banking Company

After inspecting the books of the banking companyAND

After satisfaction of the certain conditions like that - that the company is or will be in a position pay its present or future depositors in full as their claims accrue;- that the affairs of the company are not being or are not likely to be conducted in a manner detrimental to the interests of its present or future depositors;

- that the general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors;

- that the company has adequate capital structure and earning prospects;

- that the public interest will be served by the grant of a license to the company to carry on banking business in India;

- any other condition, the fulfillment of which would, in the opinion of the RBI, be necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors.

Cancellation of License. The RBI can cancel the License of the Bank

If the company ceases to carry on banking business in India;

If the company, at any time, fails to comply with any of the conditions imposed upon it;

If at any time, any of the conditions referred to in sub-section (3) 2 and sub-section 3A are not fulfilled.

Restrictions on Loans & Advances.

Management of Banking Company