MODULE A

Regulations and Compliance

Legal Framework of Regulation of Banks =>

Banks regulated by BR Act 1949 & RBI Act 1934 through RBI & Central Govt.
Banking means accepting deposits from public, for lending and investment.
Deposits can be withdrawn by cheque, DD or otherwise. (Sec 5 (b) B R Act).
U/s 49A, banks can accept deposits, withdraw able by cheque. Other entities not.
Use of words ‘bank’ - Use of word bank in name is mandatory. Other persons cannot use this word.

Business of banking -
• It Includes borrowing, lending, accepting deposits, issuing LC, bank guarantee, buying and selling of FC, collection of
bills, providing safe deposit etc.
• U/s 5(b) of BR Act - Definition of Banking
• U/s 6 (O), Central Govt. can permit, any other business also.
• U/s 8, banks cannot do trading activities (other than securities).
• U/s 9, banks cannot hold non-bank assets (say IP) beyond 7 years, except for their own use.
• U/s 8 of the BRAct - Prohibited Business
• U/s 22 of the BRAct - License for Banking

Definition of Banking (U/s 5(b) of BR Act)

The acceptance of deposits of money from the public for the purpose of lending or investment. Such deposits may be repayable on
demand or otherwise and withdrawable by cheque, draft otherwise.
Thus, a bank must perform two essential functions:
(a) Acceptance of deposits from public
(b) Lending or investment of such deposits.

Deposits Withdrawable by cheque:

Under Sec 49A of BR Act, no organization other than bank is authorized to accept deposits withdrawable by cheque.
The Saving Bank Scheme run by govt, a Primary credit society and any other person or firm notified by the govt. are exempted from
this prohibition.

Acceptance of Deposits by Non-Banking Entities:

There are also non-banking companies, firms and other unincorporated associations of persons and individuals who accepst deposits
from the public.

License for Banking (U/s 22 of the BRAct):

Every banking company must use the word “bank” as part of its name and company other than a banking company can use the words
“bank” , “banker”, “banking” as part of its name further, no firm, individual or group of individuals is permitted to use the words
“bank”, “banking” or “banking company” as a part of the name or for the purpose of business.

Permitted Business:
(a) Borrowing, raising, or taking up of money.
(b) Lending or advancing of money either against security or without security.
(c) Accepting, discounting, buying, selling, collecting, and dealing in bills of exchange, promissory notes, drafts, bills of landing,
debentures etc
(d) Granting and issuing of letters of credit, travelers’ cheques, and currency notes.
(e) Buying and selling of foreign exchange including foreign bank notes.
(f) Acting as an agent of the govt, local authority or any other person and carrying on agency business.
(g) Manage, sell, and realize any property which may come into its possession in satisfaction of any of its calims.

Prohibited Business (U/s 8 of the BR Act):

(a) Sec of BR Act prohibits a banking company from engaging directly or indirectly in trading activities and undertaking
trading risk.
 (b) As regards immoveable properties, Sec 9 prohibits a banking company from holding such property, howsoever acquired,
except as is required for its own use, for a period exceeding seven years from the acquisition of the property. RBI may extend
this year further for 5 year.

Constitution of Banks
• Banks in India fall under one of the following categories::
(1) Body corporates under a special Law
(2) Banking companies registered under Companies Act 1956 .
(3) Coop societies registered under Central or State on Coop Societies.

• Public sector banks (created under respective Act)

1. SBI (SBI Act)
2. Nationalized banks (1970-1980) + IDBI
3. Regional Rural Banks (1976).
4. India Post Payment Bank

• Banking Companies
(a) All the private sector banks are banking companies.
(b) These banks are governed by the companies Act, 1956/2013 in respect of their constitution and by the banking
regulation act and the RBI Act about their business of banking.

•Cooperative Banks
Registered as a coop society under Central Act (if operating in more than one state) or State Act (operating in one State).

History of Banks
• Developed during the British era.
• British East India company established three banks.
• Banks of Bengal- 1809
• Bank of Bombay-1840
• Bank of Madras- 1843
• These three banks were later amalgamated and called imperial Bank
• Taken over by state bank of india in 1955
• The Reserve Bank of india was established in 1935
• Followed by Punjab National Bank, Bank of India, Canara Bank and Indian Bank.
• In 1969, 14 major banks were nationalized and in 1980, 6 major private sector banks were taken over by the govt.

Banking Regulation Act 1949

• Objective: It was enacted to consolidate and amendment law relating to banking and provide a framework to regulate
banking companies.
• Act extended in 1965, to cooperative banks.
• Does not apply to Primary Agr Coop Societies & Coop Land mortgage banks

Sec10 MANAGEMENT: The period of office of an MD, whole time chairman cannot exceed 5 years at a time.

Sec11 PAID UP CAPITAL AND RESERVE: for domestic banks min. paid up capital and reserves rs.5 lac.
Foreign banks min rs.15 lac and rs. 20 lac where bank has place of business in Bombay or Calcutta.
Sec12 CAPITAL STRUCTURE: The ratio of authorized, subscribed and paid up capital must be minimum 4:2:1.
Sec 13 COMMISSION/BROKERAGE/DISCOUNT: Bank not to pay commission, brokerage,discount,etc. more than 2.5% of
the paid-up vale of one share.
Sec15 RESTRICTION AS TO PAYMENT OF DIVIDEND:
No banking co. shall pay dividend on its shares until all its capitalized expenses, org.expenses, share selling commission,
brokerage, and amount of losses incurred have been completely written off.
Sec16 PROHIBITION OF COMMON DIRECTOR:
No banking co. incorporated in India shall have as a director in its board of directors any person, who is a director of any
other banking co.
Sec17(1) RESERVE FUND: Stipulates that a bank must create reserve fund equivalent to not less than 20% of profits out of
the balanced of profit of each year, before any dividend is declared.
Sec18 CASH RESERVE RATIO: Every banking co. not being a schedule bank shall maintain in india daily by way of cash
reserve with itself or by way of balance in current account with RBI.
Sec20 RESTRICATION ON ADVANCES AGAINST OWNS SHARES:
(a) No banking company grant loans/advances on security of its own shares.
Sec 21 CONTROL OVER ADVANCES BY RBI:
Power to reserve bank to issue directive to banks to determine policy for advances such as purpose, margin, extent, rate
of interest or other conditions.
Sec22 LICENSING: Obtain license from RBI to open a bank is essential.
Sec23 RESTRICTION ON OPENING OF NEW AND TRANSFER OF EXISTING PLACE OF BUSINESS: Prior permissionof RBI is
required for opening of new branch.
Sec24 MAINTENANCE OF SLR
(a) A banking company is required to maintain at the close of business on any day a certain percentage of its total
Net demand and time liabilities in india.
(b) In form of cash, gold and approved securities.
(c) Each alternate Friday during the month (fortnight basis).
(d) Min. floor limit abolished and max maintained (40%).
(e) Report sends by banks to RBI in FORM VIII.
Sec26 RETURN OF UNCLAIMED DEPOSITS:
Every bank shall within 30days after the close of each calander year submit a return to RBI on all deposit a/cs which have
not been operated for 10 years.
The RBI has launched the Depositer Education and Awareness Fund Scheme 2014, under which the amount to the credit
of any a/c in india with any bank which has not been operated upon for a period of 10 years or any deposit or any amount
remaining unclaimed for more than 10 years, shall be credited to the fund, within a period of three months from the
expiry of the period of 10 years.
Sec29 ACCOUNTS & BALANCE SHEET: Balance sheet and P&L a/c must be prepared as on last working day of march every
year in format given in schedule iii of BR Act.
Sec30 AUDIT OF ACCOUNTS:
Balance sheet and profit and loss account shall be audited by a person duly qualified under any law for the time being in
force to be an auditor of companies.
Sec31 SUBMISSION OF BS AND AUDITORS REPORT:
Accounts and BS with the auditor’s report shall be published in the prescribed manner and 3 of the same shall be
furnished to RBI within 3 months from the end of the period to which the BS pertains.

Sec35 INSPECTION OF BANKS:

Empowers RBI to undertake inspection of banks.
Sec35(A) POWER TO GIVE DIRECTIONS: RBI has been given powers to give directions to the banks in the public interest or
in the intrest of banking policy.
Sec36(AA) POWWER TO REMOVE MAMAGERIAL OR OTHER PERSONS:
Where the RBI is satisfied that in the public interest, RBI may remove from office any chairman, Director or other officers
or employees of the banking companies.
Sec45(Z) RETURNS OF PAID INSTRUMENTS:
Guidelines for returning the paid instruments to customer by keeping a true copy.
Sec46 PENALTIES:
Whoever in any return, BS or other documents willfully makes a statement which is false, or willfully omits to make a
material statement, shall be punishable with imprisonment upto 3 years and shall also be liable to fine.

RBI Act 1934 (6.3.1934)

• Objective: To constitute RBI for
(1) regulating issue of bank notes
(2) keeping reserve money - CRR
(3) operating currency and credit system.

• Act deals with constitution, powers and functioning of RBI.

• Does not deal with regulation of banking except Sec relating to cash reserves.

RBI :
• U/s 3, of RBI Act, RBI took over currency functional from Govt.
• RBI has responsibility to regulate issue of bank notes, keep reserves and operate currency and credit system.
• RBI functions under Central Board of Directors. It consists of Governor and 4 Deputy governors appointed by Central
Govt.
• Bank also has local Boards at Mumbai, Chennai, Delhi and Kolkata.
• RBI is sole authority for issue and management of currency (Sec 22). It can issue notes min Rs.2 and max Rs. 10000.
• RBI functions as a banker to Central Govt. (Sec 20). In case of State Govt., RBI functions as banker based on agreement.
• RBI provided ways and means advances to government.
• RBI is a body corporate. Capital held by Central Govt. Central Office in Mumbai and local boards at Mumbai, Kolkata,
Chennai and Delhi.
•Functions under supervision of Directors, headed by Governor appointed by Govt. Board also has 4 Dy. Governors.
RBI regulates the banking system under BR Act 1949.

RBI powers as regulator and supervisor

• licensing of banks and cancellation of license
• Conduct audit
• Collection of credit information
• Supersede BoD of a bank for max 12 months & appoint administrator
• Impose penalties
• Recommend moratorium, amalgamation or winding up.

Sec2(e) SCHEDULED BANK:

(a) As per this section , a scheduled bank means a bank whose name is included in the 2nd schedule of RBI Act 1934.
(b) The essential condition of capital is that such banks have paid-up capital and reserves of not less than 5 lacs.
(c) Banks which are not included in the 2nd schedule of RBI are called Non-scheduled Bank.
Sec 17 VARIOUS TYPES OF BUSINESS WHICH RBI CAN TRANSACT:
Defines various types of business which RBI may transact,which include acceptance of depost without intrest from
central/State govt, purchse sale of forex, securities, rediscounting the bills, P/N grant loans etc.
Sec18: RBI provides emergency loans to banks on liberal terms.
Sec20 BANKER TO GOVT: It performs various functions for the govt. It transats Govt. business and manages public debt of
the central govt.
Sec21 RIGHT TO TRANSACT GOVT. BUSINESS :
RBI to transact govt. business in India i.e. remittance, exchange, keeping deposit free of interest etc.
Sec22 BANK NOTES: Sole right to issue bank notes.
Sec23 ISSUE DEPARTMENT: Bank notes shall be issued by issue Dept. against security of gold coins, bullion, rupee coins,
foreign securities & other approved securities upto 200Cr.
Sec24 DENOMINAATION OF NOTES: RBI issues all currency notes for denominations of
2,5,10,20,50,100,200,500,1000,2000,5000,10000
Sec26: Bank notes issued by RBI shall be legal tender and shall be guaranteed by central govt.
Sec28 RULES FOR REFUNDING VALUE: RBI can frame rules for refunding value of mutilated, soiled, or imperfect notes as
a matter of grate.
Sec33 ASSETS OF THE ISSUE DEPARTMENT: The assest of issue dept. consists of gold coins, gold bullion, foreign securities
etc. The aggregate value of gold coins, gold bullion, and foreign securities helas as assets and the aggregate value of the
gold coins, and gold bullion shall not at any time be less than 200 cr and 115cr.
Sec42(1) CASH RESERVE RATIO: Consequent to GOI’s notification of sec. of RBI(Amendment)Act 2006 minimum statutory
floor and ceiling limit no longer exists.
Sec45(H-T) REGULATIONS RELATING TO NBFC

Control Over Organisation of Banks

LICENSING OF BANKING COMPANIES
To commence or carry on, the banking business in india, a company requires a license from the RBI under sec22 of the BR
Act 1949.
Discretion of RBI: The granting of a license by the reserve bank may be subject to such conditions as the RBI may think fit
in each case.
Conditions to be satisfied:
(a) Whether the company is or will be able to pay its present and future depositors in full as their claims accrue.
(b) Whether the affairs of the company are being conducted or likely to be conducted in a manner not detrimental to
the intrests of its present and future depositors.
(c) Whether the company has an adequate capital structure and earning prospects.
(d) Whether public interest will be served by the grant of license to the company.
(e) The fulfillment of any other condition which the RBI considers relevant in public interest.

Although Sec11 of BR Act specifies the min capital and reserves requirements of a banking company, the RBI can stipulate
a higher requirement of capital for licensing a banking company as under sec 22. The RBI has to be satisfied that the
company has an adequate capital structure and earnings prospects.
Cancellation of License: RBI may cancel license on basis of one or more of the following grounds.
(a) The company ceases to carry on banking business in india
(b) The company at any time fails to comply with any of the conditions imposed under sub-section (1) of sec 22 of the
BR Act.
(c) The company does not fulfill at any time, any of the conditions referred.

Before cancellation of a licence for non-compliance with any of the conditions as above. The company must be given an
opportunity for taking necessary steps for complying with or fulfilling the conditions. However, in cases where the RBI is
of the opinion that delay will be prejudicial to the interests of depositors or the public, the requirement of opportunity
can be dispensed.

In the case of banking companies(Indian Banks) incorporated in india, the requirement of min paid-up capital and
reserves are as follows:
(a) If it has a place of business in more than one state Rs. 5 Lacs
If such places of business include Mumbai and kolkata Rs. 10 Lacs
(b) If the place of business is in only one state and Rs. 1Lacs for its principal place of business, plus Rs.10000
does not include Mumbai and kolkatta for other places of business, in the same district in which
 the principal place of business is situated, + an additional
Rs.20000 for each place of business elsewhere: in total
not excedding Rs. 5Lacs
(c) If the bank has only one place of business, the Rs. 50000
amount is limited to
If places of business are in one state only, but one or more Rs. 5 Lacs, plus Rs.25000 for each place of business
of them is in Mumbai or kolkatta outside these cities and the aggregate not excedding Rs.
10 Lacs.

Foreign Banks: A foreign bank operating in india, has to deposit and keep deposited with the RBI, an amount of Rs. 15
Lacs and if it has a place of business in Mumbai or Kolkata, Rs.20 Lacs. Amount has to be kept in cash or unencumbered
approved securities or partly in both.
(a) An amount of 20% of the profit for each year, in respect of business transacted through the branches in india as
disclosed in the profit and loss account, must be deposited with the RBI.
(b) The cash/securities deposited can be replaced by other unencumbered approved securities or cash deposited can
be similarly replaced by securities.
(c) The central govt.could exempt ant foreign bank from this requirement on the recommendation of the RBI for a
specified period if the amounts deposited already by it are considered adequate.
(d) On the cessation of business by any foreign bank for any reason, these depsots shall form the assests of the
company on which the creditors in india shall have the first charge.

Paid-up Capital, subscribed capital and authorized capital (sec12)

(a) It stipulates that the subscribed capital of a banking company shall not be less than half of its authorized capital
and
(b) The paid-up capital shall not be less than half of its subscribed capital.
(c) That is authorized capital, subscribed capital, and paid-up capital should be in the ratio of 4:2:1
(d) If capital is increased, this requirement has to be complied within a period not exceeding 2 years as allowed by
RBI.

SHAREHOLDING IN BANKING COMPANIES (Sec12)

(a) Voting rights of shareholders: There is no specified ceiling on a person’s holding of shares in a banking company.
(b) However, no shareholder can exercise voting rights in respect of the shares held by him/her more than 10%.
(Which may be increased upto 12% by RBI) of the total voting rights of all the shareholders of the banking
company.

REPORTS ON SHAREHOLDINGS: A report regarding the particulars of shareholding of the chairman, MD, or CEO, by
whatever name called. Of every banking company, requires submission to the RBI.
(a) Such reports shoud contain the full particulars and extent of the value of shres held directly or indirectly and of
any change inn the extent of holding or of any variation in the rights attaching thereto.
(b) The RBI may also order for any other information relating to those shares.

COMMISSION, BROKERAGE, DISCOUNT: sec13 of BR Act imposes a ceiling on the commission, brokerage, discount, or
remuneration on the sale of shares of banking companies to 2.5% of the paid-up value of the share.
DIVIDEND (Sec15 BR Act):
(a) No dividend is payble until all capitalized expenses are completely written off.
(b) Such expenses include prelimany expenses, organization expenses, share-selling commission, brokerage, the loss
incurred, and any other item of expenditure not represented by tangible assets.
RESTRICATION IN SHAREHOLDING IN OTHER COMPANIES(Sec19(2)): No banking company shall be holding shares in any
company as pledgee, mortgagee or absolute owner excedding 30% of the paid-up share capital of that company or the
paid-up share capital and reserves of the banking company itself.
 (a) Holding of shares in any company in which MD or manager of a banking company is intreseted in or concerned
with in any manner, is prohibited exept in the case of subsidiaries.
BOARD OF DIRECTORS
Qualifications(Sec10A BR Act): At least 51% of the total number of directors shall have special knowledge or practical
experience, with respect of accountancy, agriculture and rural economy, banking, co-operation, economics, finance,
law small scale industry or any other matter, the special knowledge or practical experience, which is useful to the
banking company, in the opinion of the RBI.
(a) Period of office: Directors other than chairman or whole-time director shall not hold office for more than 8 years
continuously.
(b) When the chairman or whole-time director of a bank is removed from office, he/she ceases to be a director of the
bank and shall not be eligible for further appointment as director of that banking company for a period of 4 years.

TEMPORARY VACANCIES
(a) In case the whole-time chairman or the MD dies or he/she resigns or is not capable of discharging his/her
functions due to illness, temporary arrangements can be made to carry out the duties of the chairman or the MD
for a period not exceeding 4 months with the approval of the RBI.

CHAIRMAN OF BANKING COMPANY (Sec 10B BR Act)

Whole-time Chairman/MD
(a) Every banking company should have a full time or part time chairman, appointed from among its directors.
(b) The whole-time chairman and a MD shall hold office for a period not sxcedding 5 years as the board may fix and is
also eligible for re-election or re-appointment.
(c) In the absence of a chairman, the management of the whole of the affairs of the banking company shall be
entrusted to a MD.
Power of RBI to appoint Chairman(Sec 10BB BR Act)
(a) If the office of the whole-time chairman or the MD is vacant, RBI may appoint an eligible person to fill such
vacancy for a period not more than 3 years.
(b) If the chairman or the MD so appointed is not a director of the banking company, he/she shall be deemed to be a
director of he banking company.
(c) There is also a provision for reappointment after the initial period.

APPOINTMENT OF ADDITIONAL DIRECTORS(Sec 36AB BR Act)

(a) The appointment may be for a period not exceeding three years or further extended periods not excedding three
years at a time as specified by the RBI.
(b) The additional directors are protected from any liability or obligation for executing their functions in good faith.
(c) Appeal: An appeal against the order of removal can be made with the central govt. within 30 days from the date
of communication of the order.
(d) The appellate decision of the central govt. shall be final and not liable to challenge in any civil court.
(e) Effect of the order of removal: The person concerned ceases to hold office, which he/she was holding till then.
(f) He/she is prohibited from directly or indirectly taking part in the management of any banking company for a
period not exceeding 5 years as may be specified in the order.

CONTROL OVER MANAGEMENT

Power to remove management and other personnel(Sec36AA BR Act)
(a) RBI is empowered to remove any chairman, director, CEO or other officer or employee of a banking company.
(b) The RBI has the discretionary power to remove management and other personnel if it is in oublic intrest.
(c) The RBI must pass such an order recording the resaons in writing. Before paasing the order, the affected person must
be givena reasonable opprtunitiy of making a representation.
(d) Appeal: Am appeal against the order of removal can be made with the central govt. within 30days from the date of
communication of the order.
(e) The appellate decision of the central govt shall be final and not liable to challenge in any civil court.
(f) Appointment of a suitable person: When nay chairman, director, CEO, other officer or employee us removed under
sec 36AA, the RBI may aapointment a suitable person in his palce.
Such person shall not hold office at the pleasere of the RBI.
Appointment mat be for a oeriod not exceeding 3 years and is extendable for further period excedding 3 years at a
time.
Such appomtee shall not incur ant obligation or liability for action taken in good faith in the execution of the dutuied
of his office.

CORPORATE GOVERNANACE
(a) Corporate governance is a dynamic concept.
(b) It involves the promotion of corporate fairness, transparency, and accountability in the intrest of shreholders,
employees, customers, and other stakeholders.
(c) By this boards oversee the running of a company by its managers and accountabity of members toward
shareholders and the company.
(d) It is concerned with practices and procedure for trying to make sure that a company in run in such a way that it
achieves its objectives, while ensuring that stakeholders can have confidence that their trust in that company is
well founded.
(e) Bad corporate governance can cast doubt on a company’s operations and its ultimate profitability.

OECD(Org. for economic co-operation and development)

Principals of Corporate Governance,2004:
(a) To promote transparent and effiecent markets which are consisitent with the rule of law.
(b) To articulate clerly the division of responsibilities among the different supervisory, regulatory, and enforcement
authorities.
(c) To protect and facilitate the exercise of shareholder’s rights.

Govt. as regulator of banks

• RBI is primary regulator but Central Govt. has been conferred powers under RBI Act and BR Act
• Govt. holds entire capital of RBI and appoints Governor and members of Central Board or remove them.
• Govt. can issue directions to RBI u/s 7 of RBI Act, in public interest
• Govt. can suspend operation of BR Act or give exemption from any provisions.
• Govt. can notify different type of banking business (Sec 6).
• Govt. makes rules U/s 52 and 45Y (preservation of records) of B R Act.
• Approval for formation of subsidiary for certain business (Sec 19)
• Issue of directions for inspection of banks. (Sec 35)
• Power to acquire undertakings (Sec 36 AE)
• Suspension of business and amalgamation (Sec 45).
• Govt. has powers to take decision as majority shareholder in PSB
• Govt. collects information on financial transactions in banks through office of Financial Intelligence Unit, established in
Nov 2004, under PML Act.

Control over cooperative banks

• Cooperative banks are coop societies and can be
(a) a primary coop bank
(b) distt. Central coop bank
• Coop bank operating in one State, registered under State Coop Societies Act and operating in > one State, are registered
under Multi-State Coop Societies Act.
• Formation, management & control is regulated by Coop law of the State.
• Registrar of Coop societies has wide powers to regulate these banks. Central govt. appoints registrar in respect of Multi-
state coop societies.
• Coop banks registered under DICGC Act, can be ordered to be wound up by RBI.
• U/s 56 of B R Act, these banks are under regulatory purview (licensing and regulation) of RBI from 1965.

Other Regulators
• A bank registered as a company, is regulated for certain matters under Companies Act.
• A bank is regulated by Labour Laws in respect of workmen, time for opening and closing of branches.
• Income Tax Act provisions are also applicable to the Banks.
• For dealing with securities, banks are regulated by SEBI.
• For insurance business, banks have to follow IRDAI guidelines.
• For pension fund business, banks have to follow PFRDA.

Control over organization of Banks =>

Licensing of Banking Companies
1. Licensing requirement from RBI - U/s 22 B R Act. RBI discretion to grant or not.
2. Conditions for license are
I) whether company will be able to pay the deposits, of
II) conduct the business,
III) has adequate capital and making profits,
IV) public interest will be served
V) potential of banking business in area of operation, etc.
3. RBI can cancel the license u/s 22 (4) of B R Act, where RBI is satisfied that company has stopped the business or has not
complied with conditions.
4. Co. can appeal to Central Govt. RBI decision within 30 days of date of order.

||License for new privet sector banks

1. Public sector & NBFCs shall be eligible to set up a Bank through a wholly owned Non- operative financial Holding
Company (NOFHC).
2. It should have past record of sound credentials & integrity, be financially sound with a successful track record of 10
years.

||Corporate structure of NOFHC

1. Min voting Equity Capital requirements for bank &shareholding by NOFHC
• Initial min paid up capital shall be Rs 500 cr.
• NOFHC shall initially hold a min of 40% of the paid up voting equity Capital which shall be lock in for a period of 5 years
• Shall be brought to 15% in 12 years
• Share listed in the stock exchange with in 3 years

2. Regulatory frame work

• Foreign Shareholding by the bank-Aggregate Non-resident Shareholding in new bank shall not exit 49% for the first 5yr
• Corporate governance of NOFHC- At least 50% of the directors of the NOFHC should be in depended directors.
• Prudential Norms for the NOFHC
• Exposure norms
• Business plan of the bank

3. Other condition-
• The Board of the bank should have a majority of independent directors.
• The Bank should open at least 25% of its branch in rural areas ( population up to 9999).
• The bank shall comply with the priority sector landing targets and sub targets.
• Banks promoted by groups having 40% or more assets / income from non- financial business will require RBI's prior
approval for raising paid up voting equity capital beyond 1000 cr for every block of 500 cr.
• Any non compliance will attract panelty & even cancelation of license.

4. Additional conditions for NBFCs promoting/ converting into bank - Existing NBFCs , if considered eligible, may be
permitted to promoted a new bank or convert themselves in to banks

Branch Licensing
1. U/s 23 of BR Act, license required from RBI (RBI authorization policy).
• Domestic schedule commercial banks other than (RRB's) a permitted to open banking outlets in tier 1 to tier 6 centers
without taking permission from reserve Bank of India Subject to that At least 25% of the total banking out lets open in a
financial year should be open in un bank Rural centers.
• RBI may impose any conditions while granting the permission.

2. In case of RRBs, the application will be routed through NABARD.

• RRB's can open branches in tier 1 center after obtaining prior approval of RBI provided.
a) there is no default in maintenance of SLR, CRR during the last two years.
b) Operating profits are be made.
c) Net worth shows improvement
d) Net NPA ratio does not exceed 8%

• RRB's are permitted to open branches in Tier 2 to Tier 6 cities without prior permission of RBI provided as per last
inspection report their-
a) CRAR is at least 9%
b) Net NPA ratio is less than 5%
c) NO default in maintanence of CRR public SLR for the last year.
d) Net profit in last financial year
e) CBS complaint

Paid-up, subscribed capital and authorised capital: (Sec 12)

1. Subscribed capital should be min half of authorized and paid capital should be min half of subscribed capital.
reserves (Sec 11)
2. Banks can issue equity capital, preference shares as innovative instruments under Basel 3 guidelines of RBI.

Shareholding in Banking companies:

1. Voting rights of single shareholder - Max of total voting rights in PSBs and 26% for PVT banks.
2. Application for transfer of shares prescribed level (>5% of paid up capital by single person), it should be referred to RBI.
3. Commission, brokerage and discount - Max 2.5% of price, including premium, at which shares are issued. (Sec 13)
4. Dividend - Out of current year profits after writing off of capitalized expenses (Sec 15). Conditions - min CAR is 9% for 3
years and net NPAS Max dividend payout ratio is 40%.

Paid-up Capital and reserves (Sec11)

1. Foreign banks - Min Rs. 15 lac (for Mumbai + Kolkata Rs.20 lac). 20% of profits each year to be deposited with
RBI)
2. Indian banks - Branches > one State - Rs.5 lac (Mumbai to RBI. and Kolkata Rs. 10. In one State Rs. 1 lac. Min net owned
funds-Rs.500 cr under RBI's current rules

Subsidries of banking companies

1. Subsidiary can be formed as per Section 19 of B R Act for business as per Section 6 (1) and also for business of banking
exclusively outside India
2. For any other business RBI/Central Govt. permission required.
3. Banks can hold shares in other companies with max of 30% of their capital +reserves or 30% of capital of the company,
whicheve lower. [Sec 19(2)]

Board of Directors (Sec 10A)

• Min 51% of directors should have special knowledge or practical experience.
• Min 2 directors to have special knowledge.
• Period of office: 8 years.
• If chairman or whole-time director is removed, he is not eligible for re-appointment for 4 years

Whole-time Chairman of a banking company

• Approval with RBI permission (Sec 10-B)
• Term of office - max 5 years.
• To have special knowledge or experience of working of a banking company
• RBI can advise a banking company to remove the chairman or working director within max of 2 months. If not done, RBI
can remove. Removed person can appeal to Central Govt. within 30 days of such order.
• RBI can appoint chairman for a period up to 3 years.

Additional directors(Sec 36AB)

RBI can appoint one or more additional directors. Such director need not have shareholding.
Term of office- 3 years

Control over management

• Under sec. 36AA of BR Act, RBI can remove Chairman, director or CEO or any other officer or employee of a Banking
banking company.
• Appeal against RBI order can be made within 30 days to the Central Govt.
• Person cannot be in similar position for 5 years or more.
• Contravention of order is punishable with a fine of Rs.250 per day of contravention.
• RBI can supersede Board of a bank for a period up to 6 months, which can be extended up to 12 months.

Corporate Governance
1) Corporate governance stands for:
• overseeing by Board, of running of a company in a fair, transparent and accountable manner, by managers and
• accountability of Board to shareholders and company.
2) The concept evolved with a study by Cadbury Committee, 1992.
3) Corporate governance structure of Organization for Economic, Cooperation and Development (OECD) should take into
account, following aspects:
• Rights of shareholders and key functions.
• Equitable treatment of shareholder
• Role of stakeholders in corporate governance
• Disclosure and transparency
• Responsibilities of the Board.
4) Banks hold special position in corporate governance, because they accept large amount of public deposits in fiduciary
capacity.
5) In addition, the cross board exposure of banks, adds special dimension.
6)CBS issued guidance in Feb 2006 to promote sound governance that include:
• role of Board of Directors
• effective management of conflict of Role of internal and external auditors.
7) In India, RBI announced policy on Governance in Oct 2002 on the basis of AS Ganguly committee recommendations.
For private banks, these guidelines were issued in Feb 2005. For PSBs, the Banking Companies Act 2006 provides
corporate governance principles.
8) Not more than one member from a family, should be on the Board of a bank.
9) The board members should satisfy 'fit and proper' criteria.
10) Banks to provide all information for seeking RBI approval for appointment of Chairman / CEO

Regulation of Banking Business =>

RBI powers to issue directions
1. Section 21 of Banking Regulation Act gives power to regulate advances by banking companies
a) in Public Interest
b) in the interest of depositors
c) in the interest of Banking policy
The directions may be given on one or more of the following matters-
a) Purpose of advance
b) Margins in secured advances
c) Maximum amount of advance
d) Maximum amount of guarantee
e) Rate of interest and other terms and conditions (selective credit control)

2. Section 35A authorizes the Reserve Bank to give directions to cover acceptance of deposits.
Apart from this the general powers to give directions under section 35A are also available for regulation of loans and
advances.
3. Section 36 of the Banking Regulation Act provide that the Reserve Bank of India may caution or prohibit banking
companies generally or any banking company in particular against any transaction for class of transactions.

4. Section 45JA of Reserve Bank of India Act provide that the Reserve Bank can give directions to the NBFCs in particular
or generally to control and improve their functioning in various areas.

Note-
 Directions are statutory directions and binding on banks.
 Non-statutory circulars of RBI do not affect legal rights.

||Selective Credit Control

1. Regulation of credit to different sectors of the economy is known as Selective Credit Control.
2. While General Credit Controls operate on the cost and volume of credit, Selective credit Controls aim at regulating the
distribution or direction of bank resources to particulars sectors of the economy.
3. Selective Credit Control seeks to influence the demand for credit by
 Making borrowing costly for certain purposes, which are relatively inessential
 By imposing stringent conditions on lending for such purposes
 By giving concessions for certain desired types of activities
4. The tools employed for exercising selective credit control are
 Minimum margins for lending against selected commodities
 Ceiling on the levels of credit
 Charging minimum rate of interest on advances against specified commodities Scheduled Banks

Acceptance of Deposits
1. Banks can accept demand deposits and time deposits from public. They can fix the maturity and interest rates.
2. RBI can fix the interest rates in public interest. Earlier, NRI deposit rates and SB rates were fixed by RBI. Banks can fix
these rates at their discretion. At present FCNR interest ceiling is fixed by RBI.
3. Banks are to send return of unclaimed u/s 26 as on Dec 31st each year within 30 days where no operation was there for
10 years.

Nomination
1. Nomination rules are as per Sec 45 ZA to ZF of B R Act.
2. Nomination can be for bank deposit (1 nominee) or safe deposit of article accounts (1 nominee) and locker accounts (1
or 2 nominees).

Loans and advances

1.RBI regulates loans u/s 21 of B R Act.
2. Directions can be for max amount of loan, margin or rate of interest on loans etc. (called selective credit control)
3. U/s 20 (BR Act), banks can not give loan on security of their own shares.
4. Banks cannot grant loans to their directors.(sec20).
5. Loans to directors can be written off with RBI persmission.

Regulation of interest rates

1. Interest rates on deposits can be fixed by RBI in public interest. (presently deregulated)
2. RBI can also stipulate ROI on loans (presently E-Books deregulated) - Sec 21 and 35A of B R Act
3. Usurious Loans Act 1918 (Sec 21A) - If banks fix interest rates as per RBI direction, such ROI cannot be questioned
regulatory and supervisory

Payment systems
1. RBI can frame rules for payment system as per amendment to RBI Act through information Technology Act 2000.
2. RBI can frame rules under Payment and Settlement Systems Act 2007.
3. RBI constituted Board for Regulation and Supervision of Payment and Settlement Systems, as a committee of Central
Board. It prescribes related policies.
4. RBI issued internet banking guidelines covering technology, security, legal, regulatory and supervisory issues.

Regulation of Money Market Instruments:

RBI is vested authority U/S 45W of RBI Amendment Act 2006 to regulate the financial system, including money market.

Banking Ombudsman
1. An RBI scheme u/s 35-A of Banking Regulation Act.
2. Covers all banks, on all India basis. 15 Ombudsman at State capital.
3. Objective - To settle customer grievance with mutual agreement of bank and the customer.
4. Appointment : RBI for 3 years. It can be RBI's or CGM.
5.Role of Ombudsman : Like an arbitrator.

6. Procedure (complaint can be made within 1 year to Ombudsman)

• Complaint to be made first to bank resolution.
 If customer does not get any reply for one month or
 customer not satisfied with reply from bank, or
 if complaint is rejected by bank; .
7. Complaint can be a paper complaint or electronically.
8. Credit card complaint according to billing address
9. Advocate services cannot be engaged.

10.Types of complaints : Almost all areas of banking operations.

I) Complaints are not entertained by BO:
 Matter already settled by BO or court or pending in court
 Complaint is frivolous, vexatious, malafide, without sufficient cause.
 Limitation expired as per Limitation Act 1973.
II) Rejection of complaint by Ombudsman: Grounds of rejection of complaint can be against by customer, within 30 days
to Dy. Governor, RBI.
III) Action by Ombudsman
 Ombudsman to settle the complaint within one month.
 If not possible, Ombudsman to announce his AWARD.
 Copy of award is sent to customer / bank.
IV) Compensation to customer :
 For actual loss, max Rs.20 lac (Rs. 1 lac in case of credit card)
 Additionally Rs. 1 lac for time, expenses and mental agony

Action by Customer after receiving Ombudsman's order:

• Customer can send his acceptance within 30 days. (Award is binding on bank, only if customer accepts the award)
• Customer can appeal against Award within 30 days, to Deputy Governor RBI, the Appellate Authority. Period can be
extended by 30 days by Appellate Authority.

Bank Action after acceptance from customer:

1. Bank to implement the award within days under confirmation to Ombudsman.
2. Bank can appeal within 30 to Dy. Governor RBI, with permission of its CMD/ED/CEO
3. If not implemented for 3 month, report to Customer Service Committee of BOD.
4. Details of unimplemented Awards to be disclosed in balance sheet also

Reserve Funds
1. Reserve fund creation - U/s 17 (1) of BR Act banks are required to transfer at least 20% of profits (before dividend) to a
separate reserve fund account. (RBI can Banking recommend exemption from this requirement. RBI stipulated transfer of
25% of profits(wef 31.03.2001).
2.Appropriation from reserve fund to be reported to RBI within 21 days.
3. Foreign banks - 20% of profits from Indian operations and not total operations) to be deposited in the Reserve Fund or
invested in approved securities. (Sec 11-2 BR Act)

Scheduled Banks
1) A bank included in second schedule of RBI Act.
2) U/s 42 (6), RBI may include the bank in this schedule when satisfied about requirements such as:
• Paid up capital + reserves at least Rs.5 lac.
• Affairs conducted not in a manner detrimental to interest of depositors
• It is a (I) coop bank (II) company under companies Act (III) insitution notified by Govt. (IV) company incorporated
outside India.

Cash Reserve Ratio

• U/s 42 (1) of RBI Act, banks are required to maintain cash with RBI to the extent of rate fixed by RBI, as a % of NDTLs.
• CRR is maintained as fortnightly average balance. On any day, it should not be less than 90% of such a rage balance.
• No interest is paid by RBI on CRR balance wef 31.03.07
• Banks are to submit to RBI, a fortnightly retur on Form A within 7 days (final return within 20 days.)
• For default in maintenance of CRR, banks are to pay interest to RBI at 3% + bank rate for first day and 5% + BR for
subsequent period.
• non-scheduled banks, CRR maintained u/s 18 of B R Act.

Maintenance of Liquid Assets (Statutory Liquidity Ratio - SLR)

• U/s 24 of B R Act, the banks are to maintain liquid assets at a rate to be fixed by RBI (max 40% of NDTLs as on last Friday
of 2nd preceding fortnight).
• These assets can be in the form of (a) cash balances and balance with other banks including excess balance in CRR
account (2) Investment in Gold (3) investment in unencumbered approved securities.
• Banks are to furnish a monthly return on VIII within 20 days from close of the month.
• For default in maintenance of SLR, banks are to pay interest to RBI at 3% + bank rate for first day and 5% + BR for
subsequent period.

Assets in India (Sec 25 B R Act)

1. Assets in India not less than 75% of DTL as on last Friday (on preceding day, if holiday) of every quarter. It is to see that
resources are used in India.
2. Paid up capital, reserves and credit balance in P & L account, not a liability for this purpose.
3. Banks are to submit return to RBI (u/s of B R Act) within one month from close of each quarter.

Note - Under proposed new system the RBI as provided for banks to link their lending rates of retail loans with external
benchmark instead of MCLR the external options available to banks are-
a) RBI repo rate
b) the 91 day T-bill yield
c) the 182 day T-bill yield

Returns Inspection, winding up, Mergers & Acquisitions =>

Annual accounts and Balance sheet
1. U/s 29 of B R Act, (Accounts & Balance Sheet) all banks are to prepare a balance sheet and a profit and loss account on
the form as per Schedule III, as on last day of each financial years (announced by Central Govt. - presently 31st Mar)
2. Balance sheet and profit and loss account is to signed by at least 3 directors where no. is more than 3 or all directors,
where no. is up to 3.
3. U/s 30, balance sheet and P & L account is audited by a qualified account. U/s 30 (IB), RBI can order special audit of
counts. Auditor liable, if bank is found insolvent afterwards.( Audit & Auditors)
4. U/s 31, balance sheet and P & L accounts are to be published in a newspaper in circulation at place of principal office of
the bank, within 6 months. (Submission of Returns)
5. Banks that are listed on stock exchange have to publish their un-audited quarterly Video Lessons results as per SEBI
prescribed Performa.
6. Banks are to furnish to RBI 3 copies of balance sheet and P & L account within 3 months. Period can be extended by
RBI by another 3 months.
7. U/s 32, banking companies are to furnish 3 copies of balance sheet and P & L account to Registrar of Companies.

Returns to RBI
1. Monthly Return on liquid assets : U/s 24 (3) of B R Act, banks are to submit return within 20 days from end of month, to
which it relates.
2. Monthly Return of assets and liabilities in India : U/s 27 of B R Act, monthly return as on last Friday to be submitted
before close of the next month.
3. Quarterly return of assets in India : U/s 25 (1) B Act to be submitted within one month on form 14A.
4. Yearly return on unclaimed deposits : U/s 26 of BR Act to be submitted within 30 days.
5. Accounts and balance sheet : To be submitted within 3 months from close of financial year.
6. Fortnightly return on CRR : U/s 42 of RBI act to be submitted within 7 days on form no. 20A.

Record preservation & return of paid instruments

1. Preservation of records: U/s 45Y of B R Act, Central Govt. can make rules (Banking Companies Preservation of Records
Rules 1985) specifying the period of preservation of books, accounts and other documents.
2. Banks also to maintain record of transactions atleast for 5 years (from date of transactions), As per requirement of PML
Act.
3. Return of paid instruments : U/s 45Z of BRAD instruments to their customers even before period specified for
preservation of records, by keeping a true opy.

Inspection and scrutiny

Inspection :
1.U/s 35 B R Act, RBI has powers to conduct inspection of banks.
2.Central Govt. can also direct RBI to carry inspection Copy of such report to be sent to Govt.
3. Inspecting officers are authorised to examine director/officer of the banking company on oath.
4.U/s 35(1A), RBI can conduct scrutiny and books of a banking company.

Power of Central govt

In the interest of depositors, the can prohibit the banking company from receiving fresh deposit ok direct RBI to apply to
winding up of banking company (U/s 38 B R Act).

Board for Financial Supervision

1. The Reserve Bank of India performs the supervisory function under the guidance of the Board for Financial Supervision
(BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank
of India under the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994.

2. Objective
The primary objective of BFS is to undertake consolidated supervision of the financial sector comprising Scheduled
Commercial and Co-operative Banks, All India Financial Institutions, Local Area Banks, Small Finance Banks, Payments
Banks, Credit Information Companies, Non- Banking Finance Companies and Primary Dealers.
3. Constitution
The Board is constituted by co-opting four Directors from the Central Board as Members and is chaired by the Governor.
The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy Governor, traditionally, the Deputy
Governor in charge of supervision, is nominated as the Vice-Chairman of the Board.
4. BFS Meetings
The Board is required to meet normally once every month. It deliberates on inspection reports, periodic reviews related
to banking and non-banking sectors and policy matters arising out of or having relevance to the supervisory functions of
the Reserve Bank.

Acquisition by Govt.
Under Sec 36AE of B R Act, Govt. can acquire a banking company, on receiving report
from RBI if the banking company:
(a) failed to comply with RBI directions on more than one occasion of
(b) is managed in a manner detrimental to interest
On acquisition, all the assets and liabilities of bank are transferred to Central Govt.
U/s 36AF, Central govt. can make for acquired bank.
U/s 36AG, the shareholders of bank have right to get compensation.

Amalgamation of Banks
1. Voluntary amalgamation : U/s 44A of B R Act, a banking company may be amalgamated with another banking
company, after approval of shareholders (by 2/3rd majority). It requires RBI approval.
2. Amalgamation by Gov.: U/s Companies Act, Central govt. has power to order amalgamation of 2 banking companies in
consultation with RBI.
3. Moratorium and amalgamation: U/s 45 of B RBI can apply to Central Govt. for moratorium up to 6 months restricting
banking company to make payment to depositors.
4. Scheme of amalgamation : During moratorium period, RBI may prepare a scheme for reconstruction of amalgamation.
Such scheme is to provide for continuation of all workmen and other staff on the same terms and conditions.
5. Sanction of scheme by Gov.: Such schemes to be placed before Central Govt. for approval. If it is approved, it becomes
binding on all concerned.

Winding up of banks
• U/s 37 (B R Act), a banking company can apply to High Court for moratorium up to 6 months. High court can appoint a
special officer to take control of assets & books.
• RBI may apply to High Court for winding up.
• U/s 38, High Court may order winding up if it is pay its debts or application is made by RBI u/s 37 or 38.
• RBI is to apply u/s 38, if directed by Central Go to apply for winding up.
• Sec 38A of B R Act provides for of a Liquidator by Central Govt., who is attached to High Court.
• U/s 39, on RBI Application, liquidator can be RBI, SBI or any other bank.
• Preferential payments : U/43A preferential payment shall be as per Sec 320 of Companies Act 2013 to those who made
application within one month. After that to saving bank depositors up to Rs.250 and then other depositors up to Rs.250.
• Preferential payment provisions are not applicable for depositors covered by DICGC guarantee cover.

Penalties for Offences

1. Under RBI Act (Chapter V):
• Penalty for false information in the form of fine and imprisonment up to 3 years.
• Failure to produce books or contravention of provisions of the Act : Rs.2000 (Rs. 100 per day for continuance).
2. Under B R Act (Sec 46) :
Failure to produce books : Rs.2000 (Rs. 100 day for continuance).
Acceptance of deposit after prohibition: Double the amount of such deposit
Contravention of provision : Up to Rs.50000 (Rs.2500 per day for continuance) or double the amount of contravention
U/s 47A RBI can impose penalties for default or contravention.
BANKING REGULARION ACT-1949
Banking Regulation Act came in force-10th March 1949.
• Section 5(b)
“Banking" means the 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 other wise
• Sec. 6- Forms of business in which banking companies may engage Acting as agents for any Government or local
authority or any other person or persons.
• Sec. 7- Use of words "bank", "banker", "banking" or "banking company
• Sec. 8 - Prohibition of trading No banking company shall directly or indirectly deal in the buying or selling or bartering of
goods, except in connection with the realisation of security given to or held by it
• Sec. 9 - Disposal of non-banking assets
Bank cannot hold immovable property not over 7 years(except own property) RBI may extend this period by 5 years

• Sec. 10B- Banking company to be managed by whole time Chairman

Every Chairman of the board of Directors who is appointed on a whole-time basis and every Managing Director- not
exceeding 5 years
• Sec. 11- Requirement as to minimum paid-up
capital and reserves
Domestic Bank=5 Lakh
Foreign Bank- 15 Lakh/20 Lakh(Mumbai, Kolkata, Chennai, Delhi)
• Sec. 12- Regulation of paid-up capital, subscribed
capital and authorised capital and voting rights of shareholders
Capital Structure -Authorized capital/ subscribed/paid up 4:2:1
subscribed capital of the company is not less than one-half of the authorised capital, and the paid-up capital is not less
than one-half of the subscribed capital
• Sec. 13- Restriction on commission, brokerage, discount, etc. on sale of shares
Brokerage/commission on share max- 2.5% of paid up value share
•Sec.14- Prohibition of charge on unpaid capital
No banking company shall create any charge upon any unpaid capital of the company, and any such charge shall be
invalid.
• Sec. 16- Prohibition of common Directors
No banking company incorporated in India shall have as a Director in its Board of Directors any person who is a Director
of any other banking company
•Sec. 17- Reserve Fund
Every banking company incorporated in India shall create a reserve fund
Transfer to reserve and surplus- 25% of net profit before dividend
• Sec. 18- Cash Reserve (CRR)
Every banking company, not being a scheduled bank, shall maintain in India on a daily basis by way of cash reserve with
itself or by way of balance in a current account with the RBI.
• Sec. 20- Restrictions on loans and advances
No banking company Grant any loans or advances on the security of its own shares
• Sec. 21- Power of RBI to control advances by banking companies
Where the RBI is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or
banking policy so to do, it may determine the policy in relation to advances
• Sec. 22- Licensing of banking companies
• Section-24-Maintenance of SLR
• Sec. 26- Return of unclaimed deposits
Return of unclaimed deposits (10 years and above) within 30 days of close of each calendar year to RBI Depositor
Education and Awareness Fund
• Sec. 28- Power to publish information
Reserve Bank or the National Bank, or both, if they consider it in the public interest
• Sec. 29- Accounts and balance-sheet
Balance Sheet and Profit & Loss A/C must be prepared as on the last working day of FY in given format schedule-III
• Sec. 30- Audit
• Sec. 31- Submission of returns

Some important Sections of RBI Act, 1934

• Sec 2(e)- Scheduled Bank- A schedule bank means a bank whose name is included in the 2nd schedule of RBI Act 1934.
• Sec 4- Capital of the Bank
The capital of the Bank shall be five crores of rupees.
• Sec 5- Increase and reduction of share capital
• Sec. 8- Composition of the Central Board, and term of office of Directors
The Central Board shall consist of the following Directors, namely:-
(a) a Governor and (not more than 4] Deputy Governors to be appointed by the Central Government
(b) 4 Directors to be nominated by the Central Government, one from each of the 4 Local Boards
(c) 10 Directors to be nominated by the Central Government
(d) 2 Government officials to be nominated by the Central Government
• Sec.13- Meetings of the Central Board
Meetings of the Central Board shall be convened by the Governor at least 6 times in each year and at least 1 in each
quarter.
• Sec. 17- Types of Business
• Sec. 20- Obligation of the bank to transact Government business
Bank shall undertake to accept monies for account of the Central Government and to make payments up to the amount
standing to the credit of [its account) To carry out [its exchange] Remittance
• Sec. 21- RBI to have the right to transact Government business in India.
• Sec. 22- Right to issue bank notes
• Sec. 23- Issue Department
Bank notes will be issued by issue deptt. against security consisting of gold coins, bullion, foreign securities & other
approved securities
• Sec. 24- Denominations of notes
• Sec. 25- Form of bank notes
The design, form and material of bank notes shall be such as may be approved by the Central Government] after
consideration of the recommendations made by Central Board.
• Sec. 26-Legal tender character of notes
• Sec 26A- Certain bank notes to cease to be legal tender
No bank note of the denominational value of Rs. 500, Rs.1000 or Rs. 10,000 issued before the 13th day of January, 1946,
shall be legal tender in payment or on account for the amount expressed therein.
• Sec.27- Re-issue of notes
• Sec. 28- Recovery of notes lost, stolen, mutilated or imperfect.
• 29. Bank exempt from stamp duty on bank notes.
• Sec.31- Issue of demand bills and notes
• Sec.33- Assets of the Issue Department.
• Sec. 38- Obligations of Government and the RBI in respect of rupee coin.
The Central Government] shall undertake not to put into circulation any rupees, except through the RBI ; and the RBI shall
undertake not to dispose of rupee coin otherwise than for the purposes of circulation
• Sec.42- CRR of scheduled banks to be kept with the RBI
• Sec.-45 A-F. Collecting & Furnishing of Credit Information
Secured loan- 10 lakh and above
Unsecured loan- 5lakh and abovelas on last Friday of April)
• Sec 45-H-T Provisions relating to NBFC
No NBFC shall commence business or carry on business without obtaining a certificate of registration & having net owned
fund of Rs.2 cr.
• Sec. 45ZA- Inflation target.
Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer Price
Index, once in every five years.
• Sec. 45ZB- Constitution of Monetary Policy Committee
MPC is a 6-member committee constituted by the Central Government
• Sec. 45ZD-Terms and conditions of appointment of Members of Monetary Policy Committee.
Members of the Monetary Policy Committee appointed for a period of 4 years and shall not be eligible for re
appointment.
• Sec. 45ZI- Meetings of Monetary Policy Committee.
RBI shall organise at least 4 meetings of the Monetary Policy Committee in a year.
• Sec. 45ZL- Publication of proceedings of meeting of Monetary Policy Committee.
RBI shall publish, on the 14th day after every meeting of the MPC
• Sec. 45ZM-Monetary Policy Report
RBI shall, once in every six months, publish a document to be called
the Monetary Policy Report
• Sec. 46- Contribution by Central Government to the Reserve Fund
Central Government shall transfer to the Bank rupee securities of the value of 5 crores of rupees to be allocated by the
Bank to the Reserve Fund.
• Sec. 46C- National Industrial Credit (Long Term Operations) Fund
an initial sum of 10 crores of rupees by the RBI
• Sec. 49. Publication of bank rate

Public Sector Banks & Coop Bank =>

PSB include
(1) SBI
(2) Nationalized Banks (19)
(3) IDBI Bank
(3) RRBs (53)
Cooperative Banks include
(1) banks operating in one State on wh State Act applies
(2) banks operating in more than one State established under a Central Act.

Structure of Indian banking Industry:

Application of B R Act:
Many provisions of B R Act are applicable to these banks. But certain provisions relating to capital, com en directors,
control over management, acquisition and winding up are not applicable.
State Bank and associates
• SBI established under SBI Act 1955 taking over Imperial Bank.
• Majority share holding is held by Central Govt.
• SBI Management - Managed by a Central Board of Chairman (for 5 years), Dy. Chairman, 4 MDs(for 5 years) and are
eligible for reappointment. There are local Boards.
• Their services can be terminated by the Central Govt. by giving 3 months notice or notice pay in lieu thereof after
consultation with the Reserve Bank.
• Central Office is in Mumbai and Local Head Office at different centres.
• Business of SBI - Besides normal banking bu it acts as agent of RBI where RBI does not have branch.
• Account and audit - Bank closes on 31st Mar and submit B-Sheet within 3 months to RBI/Central Govt.
• There were 7 associate banks established under their respective Act and merged with SBI on 31.03.17
• No shareholder other than Reserve Bank can exercise voting rights above 10%.

Nationalized Banks
• Nationalised Banks are the new corresponding banks created by nationalizing the private banks in 1969 and 1980
through Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 and 1980.
•There were 20 such banks and one was merged with and presently there are 19 nationalized banks.
• Central Govt. holds majority shares (min 51% these banks. Other than central govt. no other shareholder can have more
than 10% of voting rights.
•These banks are body corporates and by Board of Directors.
• CMD and ED is appointed by Govt.
• Directors - 15 directors 4 whole time directors, 3 directors from shareholders.
• Directors should fulfill the fit and proper criteria.
•RBI can appoint one or more additional directors.
• Accounts and audit - as in case of SBI.

Regional Rural Banks

• RRBs are constituted under RRB Act 1976.
• RRBs established on 2nd OCT. 1975 In 5 districts of India (MORADABAD, GORAKHPUR, JAIPUR, MALDA, BHIWANI).
•Created to meet credit needs of rural population and develop rural economy.
•Banks are sponsored by a 'sponsor bank', which holds share capital.
•Shareholding - 50% Central Govt., 35% sponsor banks and 15% State Govt. and Authorized capital-2000 cr.
•Management - By a Board of Directors. Chairman from sponsor bank.
•RRBs can undertake all types of business as specified in Sec 5 of B R Act
•Audit and accounts guidelines are similar, as applicable to other banks.
•Initially 196 banks were but after merger, the no. of RRBs has come down to 53.
• With the third phase of amalgamation of RRB bringing down the number of such entities to 38 from 56. As of 1 st April
2020, there are 43 RRBs in India. AGB Aryavart Gramin Bank Sponsored by Bank of India
• Prathama Grameen Bank was the 1st RRB to be established in Moradabad and it was sponsored by Syndicate Bank.

RRB Act -
• Section-5
2000 crore of rupees, divided into 200 crore of fully paid-up shares of 10 rupees each
“1 crore of rupees, and the shares shall be, in all cases, fully paid-up shares of 10 rupees each
Issued capital not less than Rs. 1 crore of fully paid up shares of 10 rupees each
• Section-6
Ratio of subscribed capital Central govt/state govt/sponsor bank = 50:15:35
Regional Rural Bank raises its capital from sources other than the Central Government or the State Government or the
Sponsor Bank, the shareholding of the Central Government and the Sponsor Bank shall not be less than 51%
If state govt stake goes less than 15% central govt will consult with state govt
• Section-9
Board of Directors -9 (Max-15)
2- Directors - central government (2 years)
2-Directors - State government (2 years)
2-Directors – Sponsor Bank (2 years)
Directors – R.B.I. (2 years)
Directors – NABARD (2 years)
Chairman RRBs from sponsor bank (5 years)
• Section -20
Annual report to be furnished to the share holders
• Section -23A
• Amalgamation of RRB
• Section -24
Power of Central Government to give directions
• Section -24A
Inspection, audit and security by sponsor Bank

Cooperative Banks
• These are created under Coop Societies Registration Act.
• Banking Regulation Act is applicable subject to modification in Sec 56.
• Min paid up capital + reserves requirement for coop is Rs. 1 lac.
• Min cash reserve to be maintained by coop banks is 3% of total demand time liabilities. Also to maintain SLR. Se SLR.
• Restrictions on loans as per Sec 20 B applicable
• These banks require license from n RBI under B R Act to operate as bank or open a branch
• These have to prepare annual accounts and submit 3 copies to RBI and NABARD within 6 months.

Types of Coop Banks

• Primary Coop Bank: A coop society transacting banking business with paid up capital & reserves of min Rs. 1 lac.
• Distt. Central Coop : It is principal coop society operating at district level.
• State Coop Bank: It is a principal coop society operating at State level to finance other societies.

Financial Sector Legislative Reforms =>

Financial Sector Legislative Reforms Commission (FSLRC)
• A body set up by the Government of India, Ministry of Finance, on 24 March 2011
• To review and rewrite the legal-institutional architecture of the Indian financial sector Commission is chaired by a
former Judge of the Supreme Court of India, Justice B. N. Srikrishna
Need Financial Sector Legislative Reforms
• Legal and institutional structures of the financial sector in India need to be reviewed and recast in tune with the
contemporary requirements of the sector
• Analysis of the current regulatory architecture
• Draft Indian Financial Code to replace the bulk of the existing financial laws

FSLRC Objective
• Examining the architecture of the legislative and regulatory system governing the Financial sector in India
• Examine if legislation should mandate statement of principles of legislative intent behind every piece of subordinate
legislation in order to make the purposive intent of the legislation clear and transparent to
users of the law and to the Courts.
• Examine prescription of parameters for invocation of emergency powers where regulatory action may be taken on ex
parte basis.
• Examine the interplay of exchange controls under FEMA and FDI Policy with other regulatory regimes within the
financial sector.
• Examine the most appropriate means of oversight over regulators and their autonomy from government.
• Examine the need for re-statement of the law and immediate repeal of any out-dated legislation on the basis of judicial
decisions and policy shifts in the last two decades of the financial sector post-liberalisation.
• Examination of issues of data privacy and protection of consumer of financial services in the Indian market.
• Examination of legislation relating to the role of information technology in the delivery of financial services in India, and
their effectiveness.
• Examination of all recommendations already made by various expert committees set up by the government and by
regulators and to implement measures that can be easily accepted.
• Examine the role of state governments and legislatures in ensuring a smooth interstate financial services infrastructure
in India.

Approach for Financial Sector Legislative Reforms

• Adopting a principles-based approach

Important Reforms
• Reserve Bank of India: Regulator of Banking & Payments monetary policy.
• Unified Financial Agency: Regulator of financial firms and activities other than banking and payments.
• Resolution Corporation: Deals with closure of distress in firms.
• Financial Redressal Agency: Single window complaint mechanism against financial institutions and intermediaries.
• Financial Stability & Development Council: Recast as statutory body. Will mange systematic risks and development.
• Public Debt Management Agency: Government's debt manager.
• Financial Sector Appellate Tribunal: Will hear complaints against all financial regulators.

Recent Legislative Changes in RBI Act =>

• AMENDMENT TO THE RESERVE BANK OF INDIA ACT, 1934 (2018)
Section 17- Business which the Bank may transact
Amendment of section 17 of Act 2 of 1934
In the Reserve Bank of India Act, 1934, in section 17, after clause (1), the following clause shall be inserted, namely:-
(1A) The accepting of money as deposits, repayable with interest, from banks or any other person under the Standing
Deposit Facility Scheme, as approved by the Central Board, from time to time, for the purposes of liquidity management

• AMENDMENTS TO THE RESERVE BANK OF INDIA ACT, 1934 (2017)

The provisions of this part shall come into force on the 1st day of April, 2017.
In the Reserve Bank of India Act, 1934, in section 31, after sub-section (2), the following sub-section shall be inserted,
namely:-
(3) Notwithstanding anything contained in this section, the Central Government may authorise any scheduled bank to
issue electoral bond.
Explanation.— For the purposes of this sub-section, "electroal bond” means a bond issued by any scheduled bank under
the scheme as may be notified by the Central Government.

• AMENDMENTS TO THE RESERVE BANK OF INDIA ACT, 1934 (2016)

It is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy
The primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth
The monetary policy framework in India shall be operated by the Reserve Bank of India

• Section 31- Issue of demand bills and notes

• 45ZA. Inflation target

(1) The Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer
Price Index, once in every five years.
(2) The Central Government shall, upon such determination, notify the inflation target in the Official Gazette.

• 45ZB. Constitution of Monetary Policy Committee

(1) The Central Government may, by notification in the Official Gazette, constitute a Committee to be called the Monetary
Policy Committee of the Bank.
(2) The Monetary Policy Committee shall consist of the following Members, namely:
(a) Governor of the Bank-Chairperson, ex officio
(b) Deputy Governor of the Bank, in charge of Monetary Policy- Member, ex officio
(c) 1 officer of the Bank to be nominated by the Central Board - Member, ex officio
(d) 3 persons to be appointed by the Central Government-Members
(3) The Monetary Policy Committee shall determine the Policy Rate required to achieve the inflation target.
(4) The decision of the Monetary Policy Committee shall be binding on the Bank.

• 45ZC. Eligibility and Selection of Members appointed by Central Government.

Appointed by central govt. from amongst persons of ability, intergrity and standing, having knowledge and experience in
the field of economics or banking or finance or monetary policy.
Provided that no person shall be appointed as a Member, in case such person-
(i) has completed the age of seventy years on the date of appointment as Member
ii) is a Member of any Board or Committee of the Bank;
(iii) is an employee of the Bank
(iv) is a public servant as defined under section 21 of the Indian Penal Code
(v) is a Member of Parliament or any State Legislature
(vi) has been at any time, adjudged as an insolvent
(vii) has been convicted of an offence which is punishable with an imprisonment for a term of one hundred and eighty
days or more
(viii) is physically or mentally incapable of discharging the duties of a Member of the Monetary Policy Committee
(ix) has a material conflict of interest with the Bank and is unable to resolve such conflict.
(x) MPC member appointed by the Central Government on the recommendations made by Search-cum-Selection
Committee consisting of the following members, namely:
(a) Cabinet Secretary-Chairperson
(b) Governor of the Reserve Bank of India or his representative (not below the rank of Deputy Governor)-member
(c) Secretary, Department of Economic Affairs-member
(d) 3 experts in the field of economics or banking or finance or Monetary policy to be nominated by the Central
Government-members

• 45ZD. Terms and conditions of appointment of Members of Monetary Policy Committee

MPC appointed shall hold office for a period of 4 years and shall not be eligible for re-appointment
A Member may resign from the MPC, at any time before the expiry of his tenure by giving to the Central Government, a
written notice of not less than 6 weeks, and on the acceptance of the resignation by the Central Government, he shall
cease to be a Member of the MPC

• 45ZE. Removal of Members of Monetary Policy Committee

Central Government may remove from office any Member of the Monetary Policy Committee appointed Does not attend
3 consecutive meetings of the Monetary Policy Committee without obtaining prior leave

• 45ZF. Vacancies etc., not to invalidate proceedings of MPC

No act or proceeding of the Monetary Policy Committee shall be invalid merely by reason of-
(a) any vacancy in, or any defect in the constitution of the Monetary Policy Committee
(b) any defect in the appointment of a person acting as a Member of the Monetary Policy Committee
(c) any irregularity in the procedure of the Monetary Policy Committee not affecting the merits of the case

• 45ZG. Secretary to Monetary Policy Committee

(1) The Bank shall appoint a Secretary to the Monetary Policy Committee to provide secretariat support to the said
Committee.
(2) The Secretary shall perform such functions and, in such manner, as may be specified by the regulations made by the
Central Board

• 45ZG. Secretary to Monetary Policy Committee

(1) The Bank shall appoint a Secretary to the Monetary Policy Committee to provide secretariat support to the said
Committee.
(2) The Secretary shall perform such functions and, in such manner, as may be specified by the regulations made by the
Central Board

• 45ZH- Information for Monetary Policy Committee Members

• 45Z1- Meetings of Monetary Policy Committee
• 45ZJ- Steps to be taken to implement decisions of Monetary Policy Committee
1545ZK- Publication of decisions
• B45ZL- Publication of proceedings of meeting of Monetary Policy Committee
• R45ZM- Monetary Policy Report
• K 45ZN- Failure to maintain inflation target
• 45ZO- Power to make rules

Financial Stability and Development Council (FSDC)

• The FSDC was envisaged for performing two sets of core functions.
• First is to perform as an apex level forum to strengthen and institutionalize the mechanism for maintaining financial
stability
• Second is for enhancing inter-regulatory coordination and promoting financial sector development in the country.

Composition of the council

• Chairperson: The Union Finance Minister of India
• Members:
a) Governor Reserve Bank of India (RBI)
b) Finance Secretary and/ or Secretary, Department of Economic Affairs (DEA)
c) Secretary, Department of Financial Services (DFS)
d) Secretary, Ministry of Corporate Affairs
e) Secretary, Ministry of Electronics and Information Technology
f) Chief Economic Advisor, Ministry of Finance
g) Chairman, Securities and Exchange Board of India (SEBI
h) Chairman, Insurance Regulatory and Development Authority (IRDA)
i) Chairman, Pension Fund Regulatory and Development Authority (PERDA)
j) Chairman, Insolvency and Bankruptcy Board of India (IBBI)
k) Additional Secretary, Ministry of Finance, DEA, will be the Secretary of the Council

Objective of FSDC
• Financial Stability
• Financial Sector Development
• Inter-Regulatory Coordination
• Financial Literacy
• Financial Inclusion
• Macro prudential supervision of the economy including the functioning of large financial conglomerates
Coordinating India's international interface with financial sector bodies like the Financial Action Task Force (FATF),
Financial Stability Board (FSB)and any such body as may be decided by the Finance Minister from time to time.

Working Groups/Technical Groups under FSDC Sub-Committee

Inter regulatory technical group (IR-TG)
• This is a technical group set up, in September 2011 as per the terms of the decision of the 3rd meeting of the FSDC
Subcommittee meeting held on 16th August 2011, for inter-regulatory coordination among the financial sector
regulators.
• The Group is headed by ED in charge of Financial Stability, RBI and members being ED/CGM level officers of the other
regulators. The working of this Group is routinely presented, for information, to the FSDC Sub- committee.
The Group generally meets once every two to three months and discusses issues relating to risks to systemic financial
stability and inter-regulatory coordination and provides inputs to the Sub-committee.

Technical Group on financial inclusion and financial literacy:

• Technical Group on Financial Inclusion and Financial Literacy (TGFIL) has been set up in November 2011 as per the terms
of the decision of the 3rd meeting of the FSDC Sub-committee meeting held on 16th August 2011.
• The Group is chaired by the DG, RBI in charge of financial stability and has representatives from all regulators (at the
level of ED/CGM) as well as from DEA and DFS (at the level of Joint Secretary).

Inter regulatory forum for monitoring financial conglomerates (IRF-FC)

• The institutional structure for the oversight and monitoring of Financial Conglomerates (FCs) in the form of an Inter
Regulatory Forum (IRF) modelled around the “lead regulator” principle has been set up in August 2012 as approved by
the FSDC Sub Committee in its 6th meeting held in 19th March 2012.
• The IRF-FC is headed by the Deputy Governor, RBI (in-Charge of the Department of Banking Supervision) and other
Members are senior representatives of all the sectoral regulators at the level of Executive Directors (RBI, SEBI, IRDAI and
PERDA).

Early Warning Group

• A Group was set up by the FSDC Sub-committee in June 2012 as per decisions held in the 6th FSDC Sub Committee
• Meeting held in 19th March 2012 to coordinate the response of GOI/Regulators in the time of a crisis situation.
• It is chaired by the DG, RBI in-charge of Financial Markets Department.
• It has Joint Secretary level representative from DEA & DFS as members. It is represented by Member/ED level officers
from financial sector

Working Group on resolution regime for financial institutions

• This Working Group was constituted in January 2013 under the Co- Chairmanship of Shri Anand Sinha, DG, RBI, and
Secretary (DEA).
• The Financial sector regulators at the level of Executive Director/General Manager/Joint Director/Principal Legal Adviser
are members of this group.
• The mandate of the Group is to examine the existing resolution regime/ framework for the entire financial sector as a
whole and identify the current gaps in the national resolution regime/framework vis-à-vis the FSB Key Attributes. With
this background, the Group would recommend changes in the legal framework to facilitate the required resolution regime
including cross border resolution.

Macro Financial and Monitoring Group

• A Macro Financial Monitoring Group (MFMG) chaired the Chief Economic Adviser was set up in 16th May 2012 which
meets regularly in DEA to discuss any specific emergent issues.
• This Group has representation from all the Departments of the Ministry of Finance.
• It aims at keeping track of the macroeconomic and financial developments, identifying vulnerabilities, and providing
early warning signals.