LEGAL & REGULATORY ASPECTS OF BANKING

MODULE A. REGULATIONS &COMPLIANCE

The questions in this section will be with reference to legal issues and problems.
A.Provisions of RBI Act 19!" Ban#ing Regulation Act 19$9" Ban#ing %ompanies &Acquisition and Transfer of
'nderta#ings Act 19() * 19+),.
B. -overnment and RBIs Powers.
/pening of 0ew Ban#s and Branch 1icensing
%onstitution of Board of 2irectors and their Rights
Ban#s 3hareholders and their Rights
%RR431R %oncepts
%ash4%urrenc5 6anagement
7inding 'p 8 Amalgamation and 6ergers
Powers to %ontrol Advances 8 3elective %redit %ontrol 8 6onetar5 and %redit Polic5
Audit and Inspection
3upervision and %ontrol8Board for 9inancial 3upervision 8 Its 3cope and Role
2isclosure of Accounts and Balance 3heets
3ubmission of Returns to RBI" etc.
%orporate -overnance
MODULE B - LEGAL ASPECTS OF BANKING OPERATIONS
%ase 1aws on Responsibilit5 of Pa5ing4%ollecting Ban#er
Indemnities4-uarantees
3cope and Application
/bligations of a Ban#er
Precautions and Rights
1aws Relating to Bill 9inance" 1% and 2eferred Pa5ments
1aws Relating to 3ecurities
:aluation of 3ecurities 8 6odes of %harging 3ecurities 8 1ien" Pledge" 6ortgage" ;5pothecation" etc.
Registration of 9irms4%ompanies
%reation of %harge and 3atisfaction of %harge
MODULE C - BANKING RELATED LAWS
1aw of 1imitation
Provisions of Ban#ers Boo# <vidence Act
3pecial 9eatures of Recover5 of 2ebts 2ue to Ban#s and 9inancial Institutions Act" 199
T23 and 3ervice Ta=
Ban#ing %ash Transaction Ta=
1
Asset Reconstruction %ompanies
The 3ecuritisation and Reconstruction of 9inancial Assets and <nforcement of 3ecurit5 Interest Act" >))>
The %onsumer Protection Act" 19+?
Ban#ing /mbudsman >))?
1o#Adalats
1ender@s 1iabilit5 Act
MODULE D - COMMERCIAL LAWS WITH REFERENCE TO BANKING OPERATIONS
Indian %ontract Act" 1+(> AIndemnit5" -uarantee" Bailment" Pledge and Agenc5" etc.B
The 3ale of -oods Act" 19) A3ale and Agreement to 3ell" 2efinitions" %onditions and 7arranties" <=press and
Implied" Right of 'npaid 3eller" etc.B
The %ompanies Act" 19!?" 2efinition" 9eatures of %ompan5" T5pes of %ompanies" 6emorandum" Articles of
Association" 2octrines of 'ltra :ires" Indoor 6anagement and %onstructive 0otice" 6embership of %ompan5 8
Acquisition 8 %essation" Rights and 2uties of 6embers and Register of 6embers" Prospectus and 2irectors.
Indian Partnership Act" 19>" 2efinition and T5pes of Partnership" Relation of Partners to /ne Another8
Relation of Partners to Third Parties" 6inor Admitted to the Benefits of Partnership" 2issolution of 9irm" <ffect
of 0on8Registration
The Transfer of Propert5 Act
9oreign <=change 6anagement Act" >)))
Prevention of 6one5 1aundering Act" >))>
Right to Information Act" >))!
Information Technolog5 Act" >)))
CONTENTS
MODULE A - REGULATIONS AND COMPLIANCE
1. 1egal 9ramewor# of Regulation of Ban#s
>. %ontrol /ver /rganisation of Ban#s
. Regulation of Ban#ing Business
$. Returns" Inspection" 7inding 'p
!. Public 3ector Ban#s and %o8operative Ban#s
MODULE B - LEGAL ASPECTS OF BANKING OPERATIONS
?. %ase 1aws on Responsibilit5 of Pa5ing Ban#
(. %ase 1aws on Responsibilit5 of %ollecting Ban#
+. Indemnities
9. Ban# -uarantees
>
1). 1etters of %redit
11. 2eferred Pa5ment -uarantee
1>. 1aws Relating to Bill 9inance
1. :arious T5pes of 3ecurities
1$. 1aw Relating to 3ecurities and 6odes of %harging 81
1!. 1aw Relating to 3ecurities and 6odes of %harging 8 II
1?. 2ifferent T5pes of Borrowers
1(. T5pes of %redit 9acilities
1+. 3ecured and 'nsecured 1oans" Registration of 9irms" Incorporation of %ompanies
19. Registration and 3atisfaction of %harges
MODULE C - BANKING RELATED LAWS
3<%'RITI3ATI/0 A02 R<%/03TR'%TI/0 /9 9I0A0%IA1 A33<T3 A02 <09/R%<6<0T /9
3<%'RITC I0T<R<3T" >))> A3AR9A<3I A%TB
>). Introduction to 3AR9A<3I Act" >))>
>1. 2efinitions at 3AR9A<3I Act" >))>
>>. Regulation of 3ecuritisation and Reconstruction of 9inancial Assets of Ban#s and 9inancial Institutions
>. <nforcement of 3ecurit5 Interest
>$. %entral Registr5
>!. /ffenses and Penalties
>?. 6iscellaneous Provisions
T;< BA0DI0- /6B'236A0 3%;<6<" >))?
>(. Purpose" <=tent" 2efinitions" <stablishment and Powers
>+. Procedure for Redressal of -rievances
R<%/:<RC /9 2<BT3 2'< T/ BA0D3 A02 9I0A0%IA1 I03TIT'TI/03 A%T" 199 A2RTA%TB
>9. Preliminar5
). <stablishment of Tribunal and Appellate Tribunal
1. Eurisdiction" Powers and Authorit5 of Tribunals
>. Procedure of Tribunals
. Recover5 of 2ebts 2etermined b5 Tribunal and 6iscellaneous Provisions
T;< BA0D<R3@ B//D3 <:I2<0%< A%T" 1+91
$. The Ban#ers@ Boo#s <vidence Act" 1+91
T;< 1<-A1 3<R:I%<3 A'T;/RITI<3 A%T" 19+(
!. 1o# Adalats
T;< %/03'6<R PR/T<%TI/0 A%T" 19+(
?. Preliminar5" <=tent and 2efinitions
(. %onsumer Protection %ouncils
+. %onsumer 2isputes Redressal Agencies

T;< 1A7 /9 1I6ITATI/0

9. 1imitations of 3uits" Appeals and Applications
TAF 1A73
$). Income Ta=" Ban#ing %ash" Transaction Ta=" 9ringe Benefit Ta= and 3ervice Ta=
MODULE D - COMMERCIAL LAWS WITH REFERENCE TO BANKING OPERATIONS
$1. 6eaning and <ssentials of a %ontract
$>. %ontracts of Indemnit5
$. %ontracts of -uarantee
$$. %ontract of Bailment
$!. %ontract of Pledge
$?. %ontract of Agenc5
$(. 6eaning and <ssentials of a %ontract of 3ale
$+. %onditions and 7arranties
$9. 'npaid 3eller
!). 2efinition" 6eaning and 0ature of Partnership
!1. Relations of Partners to /ne Another
!>. Relations of Partners to Third Parties
!. 6inor Admitted to the Benefits of Partnership
!$. 2issolution of a 9irm
!!. <ffect of 0on8Registration
!?. 2efinition and 9eatures of a %ompan5
!(. T5pes of %ompanies
!+. 6emorandum of Association and Articles of Association
!9. 2octrines of 'ltra :ires4%onstructive 0otice4Indoor 6anagement
?). 6embership
?1. Prospectus
?>. 2irectors
?. 9oreign <=change 6anagement Act" 1999
?$. Transfer of Propert5 Act" 1++>
?!. The Right to Information Act" >))!
??. Right to Information and /bligations of Public Authorities
?(. The Prevention of 6one5 1aundering Act" >))>
?+. Information Technolog5 Act" >)))
$
MODULE-A REGULATIONS AND COMPLIANCE
'nit 1. 1egal 9ramewor# of Regulation of Ban#s
'nit >. %ontrol over /rganisation of Ban#s
'nit . Regulation of Ban#ing Business
'nit $. Returns" Inspection" 7inding 'p
'nit !. Public 3ector Ban#s and %o8operative Ban#s
UNIT 1: LEGAL FRAMEWORK OF REGULATION OF BANKS
3TR'%T'R<
1.) /bGectives
1.1 Introduction
1.> Business of Ban#ing
1. %onstitution of Ban#s
1.$ Reserve Ban# of India Act" 19$
1.! Ban#ing Regulation Act" 19$9
1.? Reserve Ban# as %entral Ban# and Regulator of Ban#s
1.( -overnment as a Regulator of Ban#s
1.+ %ontrol /ver %o8operative Ban#s
1.9 Regulation b5 /ther Authorities
1.1) 1et 's 3um 'p
1.0 OBJECTIVES
The obGectives of this 'nit are to understand.
The definition and nature of the business of ban#ingH
The constitution of different t5pes of ban#sH
The regulator5 scheme of the rbi act and the br actH
The role of the reserve ban# and the central government as regulatorsH and
The special position of public sector ban#s and co8operative ban#s.
1.1 INTRODUCTION
Ban#ing in India is mainl5 governed b5 the Ban#ing Regulation Act" 19$9 and the Reserve Ban# of India Act" 19$. The
Reserve Ban# of India and the -overnment of India e=ercise control over ban#s from the opening of ban#s to their winding
up b5 virtue of the powers conferred under these statutes.
All the regulator5 provisions are not uniforml5 applicable to all ban#s. The applicabilit5 of the provisions of these Acts to a
ban# depends on its constitutionH that is" whether it is a statutor5 corporation" a ban#ing compan5 or a co8operative societ5.
In this unit" we loo# at the definition of ban#ing" the constitution of different t5pes of ban#s and applicabilit5 of regulator5
laws" the general framewor# of the regulator5 laws and the role of regulators namel5" the Reserve Ban# of India and the
government.
!
1.2 BUSINESS OF BANKING
I. Def!"#! #f B$!%!&: Ban#ing is defined in 3ection !AbB of the Ban#ing Regulation Act as the acceptance of
deposits of mone5 from the public for the purpose of lending or investment. 3uch deposits ma5 be repa5able on
demand or otherwise and withdrawable b5 cheque" draft" order or otherwise. Thus" a ban# must perform two
essential functions. iB acceptance of public deposits" and iiB lending or investment of such deposits. The deposits
ma5 be repa5able on demand or for a period of time as agreed b5 the ban#er and the customer. In terms of the
definition" the ban#er can accept IdepositsI of mone5 and not an5thing else. 9urther" accepting deposits from the
IpublicI implies that a ban#er accepts deposits from an5one who offers mone5 for such purpose. ;owever" a ban#er
can refuse to open account for undesirable persons and further" the opening of accounts is subGect to certain
conditions li#e proper introduction and identification.
The IDnow Cour %ustomerI guidelines issued b5 the Reserve Ban# require ban#s to follow certain customer
identification procedure for opening of accounts for protecting the ban#s from frauds" etc." and also for monitoring
transactions of a suspicious nature for the purpose of reporting to appropriate authorities for ta#ing anti8mone5
laundering measurers and combating financing of terrorism.There is no e=haustive definition of Iban#ingI in
%ommon 1aw of <ngland. ;owever" the usual characteristics of ban#ing as identified b5 1ord 2enning 6R in
'nited 2ominions Trust 1td. vs Dir#wood A&19??, 1 All <R 9?+ at 9(!B are.
aB the conduct of current accountsH
bB the pa5ment of chequesH and
cB the collection of cheques for customers.
These characteristics are not equivalent to a definition" and these are also not the onl5 characteristics. A3ee" Paget@s
1aw of Ban#ing" 1>th <dn." pp. 1)( to 1)9B
II. De'#("( W")*+$,$-.e -/ C)e01e: 'nder 3ection $9A of the Ban#ing Regulation Act" no organisation other than
a ban# is authorised to accept deposits withdrawable b5 cheque. The 3avings Ban# 3cheme run b5 the government"
a Primar5 credit societ5 and an5 other person or firm notified b5 the government are e=empted from this
prohibition.
III. A22e'"$!2e #f De'#("( -/ N#!--$!%!& E!""e(: There are also non8ban#ing companies" firms and other
unincorporated associations of persons and individuals who accept deposits from the public. Acceptance of deposits
b5 non8ban#ing financial companies is regulated b5 the Reserve Ban# under the 0on8Ban#ing 9inancial %ompanies
Acceptance of Public 2eposits AReserve Ban#B 2irections" 199+ and other directions issued b5 it under %hapter IIIB
of the Reserve Ban# of India Act. /ther companies are regulated b5 the %entral -overnment under the %ompanies
AAcceptance of 2epositB Rules" 19(! issued under 3ection !+A of the %ompanies Act" 19!?. Individuals" firms and
other unincorporated associations of persons whose business includes the business of a financial institution or
whose principal business is acceptance of deposits" is prohibited under 3ection $!3 of the RBI Act Aas amended in
199(B from accepting deposits from the public" e=cept relatives. This prohibition does not appl5 to acceptance of
deposits b5 those who are mainl5 engaged in manufacturing or trading.
I:. L2e!2e f#+ B$!%!&: In India" it is necessar5 to have a licence from the Reserve Ban# under 3ection >> of the
Ban#ing Regulation Act for commencing or carr5ing on the business of ban#ing. <ver5 ban#ing compan5 has to use
?
the word Iban#I as part of its name A3ee" 3ection ( of the ActB and no compan5 other than a ban#ing compan5 can
use the words Iban#I" Iban#erI" Iban#ingI as part of its name. 9urther" no firm" individual or group of individuals is
permitted to use the words Iban#I" Iban#ingI or Iban#ing compan5I as a part of the name or for the purpose of
business. 3ubsidiaries of ban#s and association of ban#s in certain cases as also Primar5 %redit 3ocieties are
e=empted from this restriction.
:. Pe+3""e* B1(!e((: Although" traditionall5" the main business of ban#s is acceptance of deposits and lending" the
ban#s have now spread their wings far and wide into man5 allied and even unrelated activities. The forms of
business permissible under 3ection ?A1B of the Ban#ing Regulation Act" apart from ban#ing business" are
summarised below.
AaB
1. ABorrowing" raising or ta#ing up of mone5H
>. 1ending or advancing of mone5 either upon securit5 or without securit5H
. 2rawing" ma#ing" accepting" discounting" bu5ing" selling" collecting and dealing in bills of e=change"
hundis" promissor5 notes" coupons" drafts" bills of lading" railwa5 receipts" warrants" debentures"
certificates" scrips and other instruments and securities whether transferable or negotiable or notH
$. -ranting and issuing of letters of credit" travellers@ cheques and circular notesH
!. Bu5ing" selling and dealing in bullion and specieH
?. Bu5ing and selling of foreign e=change including foreign ban# notesH
(. Acquiring" holding" issuing on commission" underwriting and dealing in stoc#" funds" shares" debentures"
debenture stoc#" bonds" obligations" securities and investments of all #indsH
+. Purchasing and selling of bonds" scrips and other forms of securities on behalf of constituents or othersH
9. 0egotiating of loans and advancesH
1). Receiving of all #inds of bonds" scrips or valuables on deposit or for safe custod5 or otherwiseH
11. Providing of safe deposit vaultsH and
1>. %ollecting and transmitting of mone5 and securities.
AbB
AcB %ontracting for public and private loans and negotiating and issuing the same.
AdB Insure" guarantee" underwrite" participate in managing and carr5ing out an5 issue of state" municipal or other
loans or of shares" stoc#" debentures or debenture stoc# of companies and lend mone5 for the purpose of an5
such issue.
AeB %arr5 on and transact ever5 #ind of guarantee and indemnit5 business.
AfB 6anage" sell and realise an5 propert5 which ma5 come into its possession in satisfaction of an5 of its claims.
AgB Acquire" hold and deal with an5 propert5 or an5 right" title or interest in an5 such propert5 which ma5 form the
securit5 for an5 loan or advance.
AhB 'nderta#e and e=ecute trusts.
AiB 'nderta#e the administration of estates as e=ecutor" trustee or otherwise.
AGB <stablish" support and aid associations" institutions" funds" trusts" etc." for the benefit of its present or e=8
emplo5eesH grant mone5 for charitable purposes"
(
A#B Acquire" construct and maintain an5 building for its own purpose.
AlB 3ell" improve" manage" develop" e=change" lease" mortgage" dispose of or turn into account or otherwise deal
with all or an5 part of the business of an5 person or compan5" when such business is of a nature described in
3ection ?.
AmB Acquire and underta#e the whole or an5 part of the business of an5 person or compan5" when such business is
of a nature described in 3ection ?.
AnB 2o all such things which are incidental or conducive to the promotion or advancement of the business of the
compan5"
AoB 2o an5 other business specified b5 the %entral -overnment as the lawful business of a ban#ing compan5. The
%entral -overnment has accordingl5 specified leasing and factoring as permissible business for ban#s.
:I. P+#)-"e* B1(!e((: 3ection + of the Ban#ing Regulation Act prohibits a ban#ing compan5 from engaging directl5
or indirectl5 in trading activities and underta#ing trading ris#s. Bu5ing or selling or bartering of goods directl5 or
indirectl5 is prohibited. ;owever" this is without preGudice to the business permitted under 3ection ?A1B of the Act.
Accordingl5" a ban# can realise the securities given to it or held b5 it for a loan" if need arises for the realisation of
the amount lent. It can also bu5 or sell or barter for others in connection with. AiB bills of e=change received for
collection or negotiation" and AiiB underta#ing the administration of estates as e=ecutor" trustee" etc. -oods for the
purpose of this 3ection means ever5 #ind of moveable propert5" other than actionable claims" stoc#s" shares" mone5"
bullion and specie and all instruments referred to in %lause AaB of sub83ection A1B of 3ection ?.
As regards immoveable properties" 3ection 9 prohibits a ban#ing compan5 from holding such propert5" howsoever acquired"
e=cept as is required for its own use" for a period e=ceeding seven 5ears from the acquisition of the propert5. The Reserve
Ban# ma5 e=tend this period b5 another five 5ears" if it is satisfied that such e=tension would be in the interest of the
depositors of the ban#ing compan5. The ban#ing compan5 shall be required to dispose of such propert5 within the permitted
period.
1.4 CONSTITUTION OF BANKS
I. B$!%( ! I!*$ f$.. 1!*e+ #!e #f ")e f#..#,!& 2$"e&#+e(:
AaB Bod5 corporate constituted under a special statuteH
AbB %ompan5 registered under the %ompanies Act" 19!? or a foreign compan5H
AcB %o8operative societ5 registered under a central or state enactment on co8operative societies.
II. P1-.2 Se2"#+ B$!%(: The public sector ban#s including nationalised ban#s" 3tate Ban# of India and its associates
AsubsidiariesB and the Regional Rural Ban#s fall in the first categor5. B5 the Ban#ing %ompanies AAcquisition and
Transfer of 'nderta#ingsB Act" 19() and the Ban#ing %ompanies AAcquisition and Transfer of 'nderta#ingsB Act"
19+) the %entral -overnment nationalised Atoo# over the business underta#ingsB of certain ban#ing companies and
vested them in newl5 created statutor5 bodies Acorresponding new ban#sB constituted under 3ection of the
19()419+) Act. The 3tate Ban# of India was constituted under the 3tate Ban# of India Act" 19!! and the si=
associate4subsidiar5 ban#s were constituted under the 3tate Ban# A3ubsidiar5 Ban#sB Act" 19!9 or other statutes
A3ee Para !.>.?B. The regional rural ban#s are constituted under the Regional Rural Ban#s Act" 19(?. These ban#s
are governed b5 the statutes creating them as also some of the provisions of the Ban#ing Regulation Act and the
+
Reserve Ban# of India Act. The details are discussed in 'nit !.
III. B$!%!& C#3'$!e(: A ban#ing compan5" as defined in 3ection !AcB of the Ban#ing Regulation Act is a compan5
which transacts the business of ban#ing. 3uch compan5 ma5 be a compan5 constituted under 3ection of the
%ompanies Act or a foreign compan5 within the meaning of 3ection !91 of that Act. All the private sector ban#s are
ban#ing companies. These ban#s are governed b5 the %ompanies Act" 19!? in respect of their constitution and b5
the Ban#ing Regulation Act and the RBI Act with regard to their business of ban#ing.
I:. C#-#'e+$"5e B$!%(: A co8operative ban# is a co8operative societ5 registered or deemed to have been registered
under an5 %entral Act for the time being in force relating to the multi8state co8operative societies" or an5 other
central or state law relating to co8operative societies for the time being in force. If a co8operative ban# is operating
in more than one state" the %entral Act applies. In other cases" the state laws appl5. The Ban#ing 1aws AApplication
to %o8operative 3ocietiesB Act" 19?! e=tended certain provisions of the Ban#ing Regulation Act and the Reserve
Ban# of India Act to the co8operative ban#ing sector. After the 3upreme %ourt held in Ape= %oJoperative Ban#@s
case AAI R >))$ 3% 1$1B that multi8state co8operative societies cannot be licensed as co8operative ban#s" the
Ban#ing Regulation AAmendmentB and 6iscellaneous Provisions Act" >))$ was enacted to permit licensing of
multi8state co8operative ban#s. A Imulti8state coJoperative ban#I under this Act means a multi8state co8operative
societ5 which is a primar5 co8operative ban#.
1.6 RESERVE BANK OF INDIA ACT7 1846
I. The Reserve Ban# of India Act" 19$ was enacted to constitute the Reserve Ban# of India. AiB to regulate the issue
of ban# notes" AiiB for #eeping reserves for securing monetar5 stabilit5 in India" and AiiiB to operate the currenc5 and
credit s5stem of the countr5 to its advantage. The Act came into force on ?th 6arch 19$. The Act has been
amended from time to time to meet the demands of changing times. The last amendment to the Act was effected b5
the RBI AAmendmentB Act" >))?.
II. The Act deals with the constitution" powers and functions of the Reserve Ban#. It does not directl5 deal with
regulation of the ban#ing s5stem e=cept for 3ection $>" which provides for cash reserves of scheduled ban#s to be
#ept with the Reserve Ban#" with a view to regulating the credit s5stem and ensuring monetar5 stabilit5. 9urther"
3ection 1+ of the Act provides for direct discount of bills of e=change and promissor5 notes when a special occasion
arises" ma#ing it necessar5 or e=pedient for the purpose of regulating credit in the interests of trade" industr5 and
agriculture. The Act" in short" deals with.
AaB Incorporation" capital" management and business of the ban#.
AbB The central ban#ing functions li#e issue of ban# notes" monetar5 control" acting as ban#er to government and
ban#s" lender of last resortH
AcB %ollection and furnishing of credit informationH
AdB Acceptance of deposits b5 non8ban#ing financial institutionsH
AeB -eneral provisions regarding reserve fund" credit funds" publication of ban# rate" audit and accountsH and
AfB Penalties for violation of the provisions of the act or the directions issued thereunder.
9
1.9 BANKING REGULATION ACT7 1868
I. The Ban#ing Regulation Act" 19$9 was enacted to consolidate and amend the law relating to ban#ing and to provide
for a suitable framewor# for regulating the ban#ing companies. Initiall5" the Act provided for regulation of ban#ing
companies onl5" but in 19?! the Act was amended to cover co8operative ban#s as well with certain modifications
A3ee" 3ection !?B. ;owever" the Act" as provided in 3ection " does not appl5 to primar5 agricultural credit societies
and co8operative land mortgage ban#s. The provisions of the Act are applicable to ban#ing companies in addition to
other laws which are applicable to such companies" unless otherwise specificall5 provided in the Act. Thus"
%ompanies Act" 19!? which deals with the incorporation and wor#ing of companies is applicable to ban#ing
companies e=cept where special provisions are made in the Ban#ing Regulation Act in that regard.
II. The Act regulates entr5 into ban#ing business b5 licensing as provided in 3ection >> thereof. The Act also puts
restrictions on the shareholding" directorship" voting rights and other aspects of ban#ing companies. There are
several provisions in the Act regulating the business of ban#ing such as restriction on loans and advances" rates of
interest to be charged" requirement as to cash reserve and maintenance of percentage of assets" etc. There are
provisions regarding audit and inspection and submission of balance sheets and accounts. The Act provides for
control over the management of ban#ing companies and also deals with the procedure for winding up of the
business of the ban#s and penalties for violation of its provisions. In short" the Act deals with.
Regulation business of ban#ing companiesH
%ontrol over the management of ban#ing companiesH
3uspension and winding up of ban#ing businessH and
Penalties for violation of the provisions of the act.
1.: RESERVE BANK AS CENTRAL BANK AND REGULATOR OF BANKS
I. The Reserve Ban# was constituted under 3ection of the Reserve Ban# of India Act" 19$ for ta#ing over the
management of currenc5 from the %entral -overnment and carr5ing on the business of ban#ing in accordance with
the provisions of the Act. /riginall5" under the RBI Act" the Ban# had the responsibilit5 of.
AaB regulating the issue of ban# notesH
AbB #eeping of reserves for ensuring monetar5 stabilit5H and
AcB generall5 to operate the currenc5 and credit s5stem of the countr5 to its advantage.
II. The Reserve Ban# is a bod5 corporate having perpetual succession and common seal and shall sue and be sued in its
name. The whole capital of the ban# is held b5 the %entral -overnment. The Ban# has its central office in 6umbai
and offices in 6umbai" Dol#ata" 2elhi and %hennai" and branches at most of the state capitals and some other cities.
III. The ban# functions under the general superintendence and directions of the %entral Board of 2irectors. The ban#
has to abide b5 the directions given b5 the %entral -overnment in public interest after consultation with the
-overnor of the ban#. The board shall consist of a -overnor and not more than four 2eput5 -overnors to be
appointed b5 %entral -overnment and other directors nominated b5 the %entral -overnment. Apart from the %entral
Board" the ban# has also local boards situated at 6umbai" Dol#ata" 2elhi and %hennai" which perform an5 dut5
delegated to them b5 the %entral Board. The -overnor has the power of general superintendence and direction of
the affairs of the ban# and e=ercise all powers of the ban# unless otherwise provided in the regulations made b5 the
1)
%entral Board. The 2eput5 -overnors" <=ecutive 2irectors and other officers in different grades assist the -overnor
in the discharge of the Ban#@s functions.
I:. The Reserve Ban# is the sole authorit5 for issue and management of currenc5 in India under 3ection >> of the RBI
Act. The ban# ma5 issue notes of different denominations from Rs. > to Rs. 1)"))) as the %entral -overnment ma5
decide on the recommendations of the %entral Board of the ban#. 3uch notes shall be legal tender at an5 place in
India.
:. The ban# is the ban#er to the %entral -overnment under 3ection >) of the Act" and accordingl5 it is obligator5 to
underta#e ban#ing business for the %entral -overnment. In the case of state governments" their ban#ing business is
underta#en b5 the ban# based on agreements as provided in 3ection >1 A. Ban# provides wa5s and means of
advances to the %entral and state governments. These are temporar5 advances to meet immediate needs when there
is interval between e=penditure and flow of revenue.
:I. The role of the ban# as regulator of ban#ing sector is mainl5 b5 virtue of the provisions of the Ban#ing Regulation
Act" 19$9. In e=ercise of the powers under that Act the ban# regulates the entr5 into ban#ing business b5 licensing"
e=ercises control over shareholding and voting rights of shareholders" e=ercises controls over the managerial
persons" and regulates the business of ban#s. The ban# also inspects ban#s and e=ercises supervisor5 powers" and
ma5 issue directions from time to time in public interest and in the interest of the ban#ing s5stem with respect to
interest rates" lending limits" investments and various other matters.
:II. The maGor powers of the Reserve Ban# in the different roles as regulator and supervisor can be summed up
as under.
AaB Power to licenceH
AbB Power of appointment and removal of ban#ing boards4personnelH
AcB Power to regulate the business of ban#sH
AdB Power to give directionsH
AeB Power to inspect and supervise ban#sH
AfB Power regarding audit of ban#sH
AgB Power to collect" collate and furnish credit informationH
AhB Power relating to moratorium" amalgamation and winding upH and AiB power to impose penalties.
1.; GOVERNMENT AS A REGULATOR OF BANKS
I. The Reserve Ban# is the primar5 regulator of ban#s. But the %entral -overnment has also been conferred e=tensive
powers under the RBI Act and BR Act either directl5 or indirectl5 over the ban#s.
II. The government holds the entire capital of the Reserve Ban# and appoints the -overnor. The government has also
the necessar5 in public interest after consultation with the -overnor. Thus" the government can e=ercise control over
ban#s b5 influencing decision8ma#ing b5 the Reserve Ban# and has also got appellate authorit5 in respect of several
matters in which the Reserve Ban# has been conferred the power to decide at the first instance. Thus" under the
Ban#ing Regulation Act appeal lies with the %entral -overnment on removal of managerial personnel under
3ections 1)B and ?AA of the BR Act. 3imilarl5" there are also provisions for appeal in respect of cancellation of
ban#ing licence Aunder 3ection >>B and refusal of certificate regarding floating charge on assets A3ection 1$AB.
11
III. The government has the power to suspend the operations of the Ban#ing Regulation Act or to give e=emption from
an5 of the provisions of the Act on the representation4recommendation of the Reserve Ban# under 3ections $ and !
of the Act" respectivel5. The govt has also the power to notif5 other forms of business which a ban# ma5 underta#e
under 3ection ?A1BAoB of the Act. Rule8ma#ing powers under 3ections !> and $!C are vested in the %entral -ovt.
There are also other provisions under which the %entral -overnment e=ercises powers as under.
AaB Approval for formation of subsidiar5 for certain business under 3ection 19H
AbB 0otification with reference to accounts and balance sheet under 3ection >9H
AcB Issue of direction for inspection of ban#s under 3ection !H
AdB Power to acquire underta#ings of ban#s A3ection ?A<BH
AeB Appointment of court liquidatorH
AfB 3uspension of business and amalgamation of ban#s under 3ection $!.
The above provisions confer wide powers on the %entral -overnment to regulate ban#s. These are in addition to the
powers conferred on the government as maGorit5 shareholder or full owner of public sector ban#s under the statutes
constituting them.
1.< CONTROL OVER CO-OPERATIVE BANKS
I. A co8operative ban# is a co8operative societ5 engaged in the business of ban#ing and ma5 be a primar5 %o8
operative ban#" a district central co8operative ban# or a state co8operative ban#. %oJoperative ban#s operating in
one state onl5 are registered under the 3tate co8operative 3ocieties Act concerned. The formation of such ban#s as
well as their management and control over personnel is regulated b5 the co8operative law of the state. The Registrar
of co8operative societies under the %o8operative 3ocieties Act e=ercises a wide range of powers on co8operative
societies from registration to winding up.
II. In the case of co8operative ban#s operating in more than one state" the 6ulti83tate %o8operative 3ocieties Act" >))>
is applicable. In that case" the Registrar appointed b5 the %entral -overnment ta#es the place of the Registrar
appointed b5 the 3tate -overnment in other cases.
III. 7ith the introduction of 3ection !? in the Ban#ing Regulation Act" 19$9 with effect from 19?!" coJoperative ban#s
have come under the regulator5 purview of the Reserve Ban#. 7hile the formation and management of co8operative
societies operating in one state onl5 Aincluding those conducting ban#ing businessB are under the control of the 3tate
-overnment" licensing and regulation of ban#ing business rests with the Reserve Ban#. Thus" there is dual control
of 3tate -overnments and the Reserve Ban# over these ban#s.
I:. In the case of co8operative ban#s which are registered under the 2eposit Insurance and %redit -uarantee
%orporation Act" the Reserve Ban# has the power to order their winding up. The circumstances in which Reserve
Ban# ma5 require winding up are mentioned in 3ection 12 of the Act.
1.8 REGULATION B= OTHER AUTHORITIES
I. Ban#s ma5 be subGect to the control of other regulator5 agencies in the conduct of their business. 9or instance" a
ban#ing compan5 will be subGect to the control of the authorities under the %ompanies Act in respect of compan5
matters. 3imilarl5" a ban# is answerable to labour authorities in respect of the terms and conditions of service of its
wor#men" opening and closing of its premises" engagement of contract labour" etc. Ban#s are also liable to pa5
1>
income ta= li#e cash transaction ta=" service ta=" etc." and other ta=es and have to follow the rules and regulations in
that regard.
II. As provided in 3ection ? of the BR Act" ban#s ma5 underta#e certain non8ban#ing business in addition to the
business of ban#ing. In that regard also" ban#s ma5 be subGect to the regulator5 control of other agencies. 9or
instance" in the case of dealings in securities li#e shares and debentures" ban#s are subGect to regulation b5 the
3ecurities <=change Board of India under the 3ecurities %ontract ARegulationB Act" 19!? read with the 3ecurities
and <=change Board of India Act" 199>. If the Ban# desires to raise capital through public issue" it has to compl5
with 3<BI guidelines. In case of Insurance Business 8 b5 IR2A and in case of 6utual 9und Business 8RBI" 3<BI.
The stud5 herein is" however" largel5 confined to the regulation of ban#s b5 the Reserve Ban# and the %entral -overnment
under the Reserve Ban# of India Act and the Ban#ing Regulation Act.
1.10 LET US SUM UP
1. Ban#ing means acceptance of deposits of mone5 from the public for lending or investment. 3uch deposits ma5 be
repa5able on demand or ma5 be for a period of time as agreed to" b5 the ban#er and the customer" and ma5 be
repa5able b5 cheque" draft or otherwise. Apart from ban#ing" ban#s are authorised to carr5 on other business as
specified in 3ection ? of the BR Act. Ban#s are" however" prohibited from underta#ing an5 trading activities.
>. Ban#s are constituted as companies registered under the %ompanies Act" 19!?" statutor5 corporations constituted
under 3pecial 3tatutes or %o8operative societies registered under the %entral or 3tate %o8operative 3ocieties Acts.
The e=tent of applicabilit5 of the regulator5 provisions under the Ban#ing Regulation Act and the Reserve Ban# of
India Act to a ban# depends on the constitution of the ban#.
. Reserve Ban# of India is the central ban# of the countr5 and the primar5 regulator for the ban#ing sector. The
government has direct and indirect control over ban#s. It can e=ercise indirect control through the Reserve Ban# and
also act directl5 in appeals arising from decisions of the Reserve Ban# under the various provisions of the Ban#ing
Regulation Act. In public sector ban#s li#e the 3tate Ban# of India and its subsidiaries" nationalised ban#s and the
regional rural ban#s" !)K or more of their shares are held b5 the %entral -overnment. %entral -overnment has
substantial control over the management of these ban#s. /nl5 certain provisions of the BR Act are applicable to
these ban#s as indicated in that Act. %o8operative ban#s operating in one state onl5 are registered under the 3tate
%o8operative 3ocieties Act and are subGect to the control of the 3tate -overnment as also the Reserve Ban#. In the
case of non8ban#ing business of the ban#s" the5 are subGect to control b5 other regulator5 agencies.
1
UNIT > CONTROL OVER ORGANISATION OF BANKS
STRUCTURE
>.) /bGectives
>.1 Introduction
>.> 1icensing of Ban#ing %ompanies
>. Branch 1icensing
>.$ Paid8up %apital and Reserves
>.! 3hareholding in Ban#ing %ompanies
>.? 3ubsidiaries of Ban#ing %ompanies
>.( Board of 2irectors
>.+ %hairman of Ban#ing %ompan5
>.9 Appointment of Additional 2irectors
>.1) Restrictions on <mplo5ment
>.11 %ontrol /ver 6anagement
>.1> %orporate -overnance
>.1 2irectors and %orporate -overnance
>.1$ 1et 's 3um 'p
>.0 OBJECTIVES
The obGectives of this unit are to understand the laws that govern ban#ing companies" in respect of.
1icensing and branch licensing
Paid up capital and reserves
3hareholding and rights of shareholders
9ormation of subsidiaries and holding of shares of other companies
%onstitution and regulation of board of directors
<=ercise of control b5 the Reserve Ban# and the -overnment over the appointment and removal of chairmen"
managerial and other personnel
%orporate governance
>.1 INTRODUCTION
The Ban#ing Regulation Act provides for regulation of the organisation of ban#ing companies. To start with" there are
restrictions at the entr5 point" b5 wa5 of licensing and then the requirement of permission for opening or shifting of
branches. There are further regulations over the paid8up capital and reserves" shareholder@s rights" constitution of the board
of directors" appointment of chairman and formation of subsidiaries. Apart from the above" there are also controls over the
managerial and other personnel" including the power to remove unsuitable persons and to appoint suitable persons. In this
unit" we stud5 various provisions of the Ban#ing Regulation Act" providing for controls over the organisation and
management of ban#ing companies.
1$
>.> LICENSING OF BANKING COMPANIES
I. L2e!(e Re01+e3e!" f+#3 RBI: To commence or carr5 on" the ban#ing business in India" a compan5 requires a
licence from the Reserve Ban# under 3ection >> of the Ban#ing Regulation Act" 19$9. %ommencing or carr5ing on
a ban#ing business without a licence is prohibited. 7hen the Act came into force" the ban#ing companies" which
were then in e=istence were required to appl5 for licence within si= months from the commencement of the Act.
But" such ban#ing companies were permitted to continue business" unless and until their applications for licence
were reGected b5 the Reserve Ban#. The requirement of licence was meant to ensure the continuance of onl5 those
ban#s" which were established and operating on sound lines and to prevent indiscriminate formation of ban#ing
companies.
II. D(2+e"#! #f Re(e+5e B$!%: The granting of licence b5 the Reserve Ban# ma5 be subGect to such conditions as the
RBI ma5 thin# fit in each case. As held b5 the -uGarat ;igh %ourt in 3hivabhai vs RBI" Ahmedabad AAIR 19+? -uG
19B" Reserve Ban# has the discretion to grant or refuse the licence and when such decision based on relevant"
material and germane considerations" the decision cannot be assailed. /nl5 if the decision is based on e=traneous
considerations or is perverse" the court will intervene.
It is open to the RBI to consider the defects or improvements revealed in an inspection held under 3ection ! of the
BR Act while disposing of an application for licence. A3ee" 3aGGan Ban# Pvt. 1td. vs RBI" AI R 19?1 6ad +B. The
refusal of licence to a compan5 would ma#e it ineligible to underta#e ban#ing business" but it would still be open to
the compan5 to carr5 on other business li#e mone5 lending.
III. C#!*"#!( "# -e S$"(fe*: Before granting a licence under 3ection >>" Reserve Ban# ma5 have to be satisfied b5
an inspection of the boo#s of the ban#ing compan5 or otherwise in respect of the following matters8
aB 7hether the compan5 is or will be in a position to pa5 its present and future depositors in full as their claims
accrueH
bB 7hether the affairs of the compan5 are being conducted or li#el5 to be conducted in a manner detrimental to the
interests of its present and future depositorsH
cB 7hether the general character of proposed management of the compan5 will not be preGudicial to public interest
or the interest of depositorsH
dB 7hether the compan5 has an adequate capital structure and earning prospectsH
eB 7hether public interest will be served b5 grant of licence to the compan5H
fB 7hether considering the ban#ing facilities available in the proposed area of operation" the potential scope for
e=pansion of business b5 ban#s alread5 in e=istence in that area and other relevant factors" the grant of licence
would be preGudicial to the operation and consolidation of ban#ing s5stem" consistent with monetar5 stabilit5
and economic growthH
gB The fulfilment of an5 other condition which the Reserve Ban# considers relevant in public interest or in the
interest of depositors.
Although 3ection 11 of BR Act specifies the minimum capital and reserves requirements of a ban#ing compan5" the
Reserve Ban# can stipulate a higher requirement of capital for licensing a ban#ing compan5 as under 3ection >> the
Reserve Ban# has to be satisfied that the compan5 has an adequate capital structure and earning prospects.
I:. F#+e&! B$!%(: In the case of companies incorporated outside India appl5ing for a licence" apart from the
1!
conditions specified in the case of domestic companies" three additional conditions have been stipulated for
consideration b5 the Reserve Ban#. These are.
aB 7hether carr5ing on of ban#ing business b5 the compan5 in India will be in public interestH
bB 7hether the government or the law of the countr5" in which the compan5 is incorporated discriminates in an5
wa5 against ban#ing companies registered in IndiaH
cB 7hether the compan5 complies with provisions of the BR Act" as applicable to foreign companies.
:. L#2$. A+e$ B$!%(: The Reserve Ban# has recognised the concept of local area ban#s and licensed a fewAfourB such
ban#s. These are ban#ing companies operating onl5 in a limited geographical area. The licence issued to these ban#s
would restrict their operations to the specified local area to ensure adequate ban#ing services in that area.
:I. C$!2e..$"#! #f L2e!2e: 3ub83ection A$B of 3ection >> of the Ban#ing Regulation Act authorises the Reserve Ban#
to cancel the licence granted to an5 ban#ing compan5. The cancellation of licence ma5 be on an5 one or more of the
following grounds.
aB The compan5 ceases to carr5 on ban#ing business in IndiaH
bB The compan5 at an5 time fails to compl5 with an5 of the conditions imposed under the sub83ection A1B of
3ection >> of Ban#ing Regulation ActH
cB The compan5 does not fulfil at an5 time" an5 of the conditions referred to in the sub83ectionAB or AAB of
3ection >> of Ban#ing Regulation Act.
Before cancellation of a licence for non8compliance with an5 of the conditions as above" the compan5 has to be given an
opportunit5 for ta#ing necessar5 steps for compl5ing with or fulfilling the conditions. ;owever" in cases where the Reserve
Ban# is of the opinion that dela5 will be preGudicial to the interests of depositors or the public" the requirement of
opportunit5 can be dispensed with. As observed b5 the 6adras ;igh %ourt in 3aGGan Ban# P5t. 1td. vs RBI AAIR 19?1 6ad.
+B" the Reserve Ban# has a wide range of administrative discretion under the Act" which it is competent to e=ercise" and it
cannot be said that there is an e=cessive delegation of power. A ban#ing compan5" whose licence is cancelled" can appeal to
the %entral -overnment within a
>.4 BRANCH LICENSING
I. Apart from the requirement of licence for commencing or carr5ing on ban#ing business" ban#s have to obtain the
prior permission of Reserve Ban# for opening a new place of business or changing location of the e=isting place of
business. 'nder 3ection > of the Ban#ing Regulation Act" @Place of business@ for this purpose includes an5 sub8
office" pa5 office" sub8pa5 office or an5 place at which deposits are received" cheques cashed or mone5s lent.
;owever" changing the location of an e=isting place of business within the same cit5" town or village would not
need such permission. These restrictions also appl5 to foreign branches of ban#ing companies incorporated in India.
/pening of a temporar5 place of business up to one month for purpose of affording ban#ing facilities for an5
e=hibition" mela" conference or li#e occasion is e=empt. ;owever" the temporar5 branch has to be within the limits
of the cit5H town or village where there is an e=isting branch or in the environs thereof. The present guidelines from
RBI provide that Ban#s should submit their request for new branches" administrative offices" AT6s once in a 5ear
for consideration of RBI as against the earlier practice of ma#ing individual applications for each and ever5 branch.
7hen approved" the permission would be valid for a period of one 5ear before which the branches4 offices should
1?
be operationalised.
II. 9or granting permission under 3ection >" the Reserve Ban# ma5 require to be satisfied of the following.
AaB 9inancial condition and histor5 of the ban#H
AbB -eneral character of its managementH
AcB Adequac5 of capital structure and earning prospectsH
AdB Public interest.
This ma5 be done b5 an inspection of the ban# under 3ection ! or otherwise.
7hile granting permission for opening or shifting a branch" the Reserve Ban# ma5 impose an5 conditions which it
thin#s fit necessar5. If an5 ban# fails to compl5 with such conditions" the permission ma5 be revo#ed after giving
an opportunit5 to the ban# to show cause.
III. In the case of regional rural ban#s" the applications for permission have to be routed through the 0ational Ban#
A0ABAR2B" and the national ban# has to offer its comments on merits to the Reserve Ban#.
>.6 PAID-UP CAPITAL AND RESERVES
3ection 11 of the Ban#ing Regulation Act provides for certain minimum requirements as to paid8up capital and reserves of
ban#ing companies. An5 compan5 wanting to commence ban#ing business has to compl5 with these requirements. The
amounts stipulated have reference to the places of business. @Place of business@ for this purpose means an5 office" sub8office"
sub8pa5 office and an5 place at which deposits are received" cheques cashed or mone5s lent. In the case of an5 dispute
regarding computation of paid8up capital and reserves of an5 ban#ing compan5" the decision of the Reserve Ban# shall be
final.
I. F#+e&! B$!%(: 'nder the sub83ection A>B of 3ection 11 of the BR Act" a foreign ban# Aban#ing compan5
incorporated outside IndiaB operating in India" has to deposit and #eep deposited with the Reserve Ban#" an amount
of Rs.1! lacs and if it has a place of business in 6umbai or Dol#ata or both" Rs. >) lacs. The amount has to be #ept
in cash" unencumbered approved securities or partl5 in both. Apart from this" an amount of twent5 per cent of the
profit for each 5ear in respect of business transacted through the branches in India as disclosed in the profit and loss
account has to be deposited with the Reserve Ban#. The securities deposited can be replaced b5 other unencumbered
approved securities or cash deposited can be similarl5 replaced b5 securities. The %entral -overnment can e=empt
an5 foreign ban# from this requirement on the recommendation of the Reserve Ban# for a specified period if the
amounts deposited alread5 b5 it are considered adequate. /n the cessation of business b5 an5 foreign ban# for an5
reason" these deposits shall form the assets of the compan5 on which the creditors in India shall have the first
charge.
II. I!*$! B$!%(: In case of ban#ing companies incorporated in India" the requirements of minimum paid8up capital
and reserves under 3ection 11 AB are as follows.
aB If it has a place of business in more than one state" Rs. ! lac and if such places of business include 6umbai"
Dol#ata or both" Rs. 1) lac.
bB If the place of business is in onl5 one state and does not include 6umbai or Dol#ata" Rupees 1 lac for its
principal place of business" plus Rs. 1)"))) for other places of business" in the same district in which the
1(
principal place of business is situated" plus an additional Rs. >)")))" for each place of business elsewhereH in
total not e=ceeding Rs. ! lacs. If the ban# has onl5 one place of business" the amount is limited to Rs. !)"))).
9or ban#ing companies commencing business after the commencement of the Act" paid8up capital is stipulated
as Rs ! lac.
cB If places of business are in one state onl5" but one or more of them is in 6umbai or Dol#ata" Rs. ! lac" plus Rs.
>!"))) for each place of business outside these cities and the aggregate not e=ceeding Rs. 1) lac.
2uring >))!" RBI stipulated the minimum capital requirement for a new Private Ban# at Rs )) crore as a part of
%orporate -overnance guidelines and as a polic5 of 9oreign 2irect Investment.
III. P$*-1' C$'"$.7 S1-(2+-e* C$'"$. $!* A1")#+(e* C$'"$.: Apart from the above" 3ection 1>A1B of the
Ban#ing Regulation Act stipulates that the subscribed capital of a ban#ing compan5 shall not be less than half of its
authorised capitalH and the paid8up capital shall not be less than half of its subscribed capital. If capital is increased"
this requirement has to be complied within a period not e=ceeding two 5ears as allowed b5 the Reserve Ban#.
Ban#ing companies are permitted to have onl5 ordinar5 or equit5 shares. ;owever" preference shares issued before 1 Eul5
19$$ are e=empt. 9urther" the provisions of 3ection 1>A1B are not applicable to ban#s incorporated before 1! Eanuar5 19(.
0ow preference shares and other capital instruments are also allowed. 3ince >))!" Ban#s have been permitted b5 RBI to
raise capital even in the from of innovative debt instruments which are perpetual and perpetual non8cumulative preference
shares in addition to the equit5 capital.
>.9 SHAREHOLDING IN BANKING COMPANIES
I. V#"!& +&)"( #f ()$+e)#.*e+(: There is no specified ceiling on a person@s holding of shares in a ban#ing compan5
under the Ban#ing Regulation Act or an5 other law. ;owever" 3ection 1>A>B of the Act puts certain restrictions on
voting rights of shareholders. Accordingl5" no shareholder can e=ercise voting rights in respect of the shares held b5
him4her in e=cess of ten per cent of the total voting rights of all the shareholders of the ban#ing compan5. This
provision does not in an5 wa5 affect the transfer of shares or the registration of such transfers. It onl5 puts a limit on
voting rights. ;owever" 3ection 1>AB bars suits or other proceedings against registered shareholders b5 an5 other
person claiming title e=cept b5 a transferee of shares" in accordance with the law or on behalf of minors or lunatics
for whom the registered shareholder holds the shares. The provisions of the %ompanies Act also govern transfer of
shares of ban#ing companies.
II. A2%!#,.e*&e3e!" -/ Re(e+5e B$!%: Reserve Ban# has instructed ban#ing companies that when the5 receive
more than the specified percentage of their shares for transfer to one part5" the ban#@s board must refer the matter to
the Reserve Ban#. The ban#s shall not transfer the shares without receiving Reserve Ban#@s ac#nowledgement. This
is with a view to ensure that the controlling interest in a ban#ing compan5 does not change hands without the
#nowledge and approval of the Reserve Ban#.
III. Re'#+"( #! ()$+e)#.*!&: A report regarding the particulars of shareholding of the chairman" managing director or
chief e=ecutive officer" b5 whatever name called" of ever5 ban#ing compan5" requires submission to the Reserve
Ban#. 3uch report should contain the full particulars and e=tent of value of shares held directl5 or indirectl5 and of
an5 change in the e=tent of holding or of an5 variation in the rights attaching thereto. The Reserve Ban# ma5 also
order for an5 other information relating to those shares.
1+
I:. C#33((#!7 -+#%e+$&e7 *(2#1!": 3ection 1 of the Ban#ing Regulation Act imposes a ceiling on the
commission" bro#erage" discount or remuneration on the sale of shares of ban#ing companies. Accordingl5" the
pa5ments on this account in an5 form should not e=ceed two8and8a8half per cent of the paid8up value of the shares.
:. D5*e!*: There are also certain restrictions on the pa5ment of dividend to the shareholders of ban#ing companies.
Thus" under 3ection 1! of the Ban#ing Regulation Act" no dividend is pa5able until all capitalised e=penses are
completel5 written off. 3uch e=penses include preliminar5 e=penses" organisation e=penses" share8selling
commission" bro#erage" loss incurred and an5 other item" of e=penditure not represented b5 tangible assets.
;owever" dividends are pa5able without writing off depreciation" bad debt etc." as under.
aB 2epreciation in value of approved securities" which is not capitalised or accounted for as a loss.
bB 2epreciation in investment of shares" bonds or debentures" other than the approved securities for which
adequate provision has been made.
cB Bad debts for which an adequate provision is provided.
RBI has given detailed eligibilit5 criteria for declaration of dividend b5 ban#s and also guidelines on the quantum of
dividend that can be declared b5 ban#s. The eligibilit5 criteria require a minimum 9 K of %AR and 0et 0PAs not
e=ceeding 1K. The quantum of dividend that can be declared is based on the levels of net 0PAs and in a graded level
A6a=imum $)K pa5 out ratioB and can be paid out of onl5 current 5ear@s profits.
>.: SUBSIDIARIES OF BANKING COMPANIES
I. F#+3$"#! #f S1-(*$+e(: There are certain restrictions under 3ection 19 of the Ban#ing Regulation Act on the
formation of subsidiaries b5 ban#ing companies. This is for purpose of preventing ban#s from carr5ing on trading
activities b5 acquiring a controlling interest in non8ban#ing companies. Accordingl5" subsidiaries are permissible
onl5 for the following purposes.
i. 'nderta#ing an5 business which is permissible for ban#ing companies under 3ection ?A1B clauses AaB to AoB.
ii. %arr5ing on the business of ban#ing e=clusivel5 outside India. Prior permission of the Reserve Ban# is a must
for this ban#ing business.
iii. 'nderta#ing an5 other business which Reserve Ban# with prior approval of the %entral -overnment permits.
Reserve Ban# ma5 permit onl5 such other business which it considers conducive to the spread of ban#ing in
India or otherwise useful or necessar5 in the public interest. The underta#ing of an5 business b5 a subsidiar5
will not be deemed to amount to the ban# itself ta#ing up that business directl5 or indirectl5 for the purpose of
3ection +.
II. S)$+e)#.*!& ! #")e+ 2#3'$!e(: Apart from the restriction on subsidiaries" there is also a ceiling &3ection 19A>B,
on shareholding in companies other than subsidiaries. Thus" the holding of shares b5 a ban#ing compan5 in an5
compan5 as pledgee" mortgagee or absolute owner shall not be e=ceeding thirt5 per cent of the paid8up share capital
of that compan5 or the paid8up share capital and reserves of the ban#ing compan5. 9urther" holding of shares in an5
compan5 in which the managing director or manager of a ban#ing compan5 is interested in or concerned with in an5
manner" is prohibited e=cept in the case of subsidiaries.
>.; BOARD OF DIRECTORS
I. ?1$.f2$"#!(: 3ection l/Aofthe Ban#ing RegulationAct stipulates certain qualifications fordirectors of ban#ing
19
companies. Accordingl5 at least fift58one per cent of the total number of directors shall be persons" who have
special #nowledge or practical e=perience" with respect of accountanc5" agriculture and rural econom5" ban#ing"
cooperation" economics" finance" law" small scale industr5 or an5 other matter" the special #nowledge or practical
e=perience which is useful to the ban#ing compan5" in the opinion of the Reserve Ban#. 9urther" at least two of the
directors should have special #nowledge or practical e=perience in agriculture and rural econom5 or co8operation or
small scale industr5.
II. S1-("$!"$. !"e+e(": The directors of a ban#ing compan5 shall not have a substantial interest in or be connected
with as emplo5ee" manager or managing agent in a compan5 or firm which carries on trade" commerce or industr5
as per 3ection 1)A A>BAbB of the BR Act. ;owever" companies registered under 3ection >! of the %ompanies Act
and small scale industrial concerns are not included for the purpose. The proprietors of trading" commercial or
industrial concerns other than small scale industrial concerns are also disqualified for directorship. @3ubstantial
interest@ for this purpose is defined in 3ection > of the Ban#ing Regulation Act. Accordingl5" holding of beneficial
interest b5 an5 individual or his spouse or minor child" whether singl5 or ta#en together in the shares of a compan5
e=ceeding Rs. ! lacs or ten per cent of the paid8up capital of the compan5 amounts to substantial interest. In the case
of firms" such holding of beneficial interest e=ceeding ten per cent of the total capital of the firm amounts to
substantial interest.
III. Pe+#* #f #ff2e: The directors of a ban#ing compan5 shall not hold office for more than eight 5ears continuousl5.
;owever" this provision is not applicable to the chairman or a whole8time director. 7hen the chairman or a whole8
time director of a ban# is removed from office" he4she ceases to be a director of the ban# and shall not be eligible for
further appointment as director of that ban#ing compan5 for a period of four 5ears.
I:. Re2#!(""1"#! #f B#$+*: 7hen the board of a ban#ing compan5 is not constituted in accordance with the
requirements of 3ection 1)A of the BR Act" the board has to be reconstituted" to compl5 with the provisions. If an5
director has to be retired for such a reconstitution" this ma5 be done b5 lots" in the prescribed manner and such
decision shall be binding on ever5 director of the board. If the Reserve Ban# is of the opinion that the board of an5
ban#ing compan5 does not fulfil the requirements" it ma5 order such a ban# to reconstitute the board after giving
reasonable opportunit5 of being heard. If" within two months@ time" the ban# does not fulfil the order of the Reserve
Ban#" the Ban# ma5 then remove an5 director Adetermined b5 lots drawn in the prescribed mannerB and such a
person shall cease to hold office. The Reserve Ban# ma5 also appoint a new director in the place of the person
removed and he4she shall continue in office until the date up to which his predecessor would have held office.
;owever" an5 proceedings of a ban#ing compan5 will not be invalid onl5 because of an5 defect in the composition
of the board.
>.< CHAIRMAN OF BANKING COMPAN=
I. W)#.e-"3e C)$+3$!@M$!$&!& D+e2"#+: 3ection 1 /B of the Ban#ing Regulation Act provides that ever5
ban#ing compan5 should have a full8time or part8time chairman" appointed from among its directors. The chairman"
if appointed on a whole8time basis is entrusted with the management of the entire affairs of the ban#. The chairman
on a part8time basis has to be appointed with the prior approval of the Reserve Ban# and such an appointment shall
be subGect to an5 conditions that ma5 be imposed b5 the Reserve Ban# while granting approval. In the absence of a
>)
chairman" the management of the whole of the affairs of the ban#ing compan5 shall be entrusted to a managing
director. The e=ercise of powers b5 the whole8time chairman or managing director is subGect to the superintendence"
control and directions of the board of directors. The whole8time chairman and a managing director shall hold office
for a period not e=ceeding five 5ears as the board ma5 fi= and is also eligible for reelection or reappointment.
Although the chairman is in full8time emplo5ment of the ban#" he ma5 be a director of a subsidiar5 of the ban# or of
a compan5 registered under 3ection >! of the %ompanies Act. The Reserve Ban# ma5 also permit the whole8time
chairman or the managing director to underta#e part8time honorar5 wor# not li#el5 to interfere with the duties of the
chairman or the managing director.
The whole8time chairman or the managing director of a ban#ing compan5 ma5 continue in office at the end of the
term of the office until his4her successor assumes office" subGect to the approval of the Reserve Ban#.
II. ?1$.f2$"#!( #f W)#.e-"3e C)$+3$!@M$!$&!& D+e2"#+: The whole8time chairman or the managing director
of a ban#ing compan5 should have special #nowledge or practical e=perience of the wor#ing of a ban#ing compan5
or the 3tate Ban# or a subsidiar5 ban# or a financial institution or financial" economic or business administration.
The whole8time chairman or the managing director will be disqualified under the following circumstances.
aB if he4she is director of a compan5 other than a subsidiar5 of the ban#ing compan5 or a charitable
bB compan5 Aregistered under 3ection >! of the %ompanies ActBH
cB if he4she is a partner of an5 firm which carries on trade" business or industr5H
dB if he4she has substantial interest in an5 other compan5 or firm or is director" manager" managing
eB agent" partner or proprietor of an5 trading" commercial or industrial concernH or
fB if he4she is engaged in an5 other business or vocation.
III. Re3#5$. #f W)#.e"3e C)$+3$!@M$!$&!& D+e2"#+: If the Reserve Ban# is of the opinion that the person
elected to be the chairman of the board of directors and appointed on a whole time basis or the managing director is
not a fit and proper person to hold such office" the Reserve Ban# ma5 require the ban#ing compan5 to remove such
a chairman or the managing director and appoint a suitable person. ;owever" before ta#ing such an action" the
Reserve Ban# has to give such a person" as also the ban#ing compan5" a reasonable opportunit5 of being heard. If
the ban#ing compan5 does not compl5 with the order within two months" the Reserve Ban# ma5 remove the person
from the office and appoint a suitable person in his4her place. 3uch a chairman or managing director would continue
in office" for the residual period of office of the person removed from office.
The ban#ing compan5 or the person affected b5 the Reserve Ban#@s order ma5 appeal to the %entral -overnment
within thirt5 da5s. The order of the -overnment where an appeal is filed and the order of the Reserve Ban#" where
no appeal is filed shall be final and not liable to be challenged before an5 civil court.
I:. Te3'#+$+/ 5$2$!2e(: In cases where the wholetime chairman or the managing director dies or he4she resigns or is
not capable of discharging his4her functions due to illness" temporar5 arrangements can be made to carr5 out the
duties of the chairman or the managing director for a period not e=ceeding four months. ;owever" this has to be
done with the approval of the Reserve Ban#.
:. P#,e+ #f Re(e+5e B$!% "# $''#!" C)$+3$!: In certain cases" the office of the whole8time chairman or the
managing director of a ban#ing compan5 ma5 fall vacant and ma5 not be filled up b5 the ban# immediatel5. This
ma5 adversel5 affect the interests of the ban#ing compan5. If the Reserve Ban# is of the opinion that continuation of
>1
such vacanc5 is li#el5 to be against the interests of the ban#ing compan5" it ma5 appoint an eligible person to fill
such vacanc5 under 3ection 1)BB of the Ban#ing Regulation Act. If the chairman or the managing director so
appointed is not a director of the ban#ing compan5" he4she shall be deemed to be a director of the ban#ing compan5.
3uch appointment ma5 be for a period not e=ceeding three 5ears. There is also a provision for reappointment after
the initial period. The chairman or the managing director so appointed ma5 be removed from office onl5 b5 the
Reserve Ban# and shall draw pa5 and allowances from the ban#ing compan5" as determined b5 the Reserve Ban#.
:I. ?1$.f2$"#! ()$+e(: The whole8time chairman or the managing director of a ban#ing compan5 is e=empted under
3ection I/% of the Ban#ing Regulation Act from the requirement of holding qualification shares. 3imilar e=emption
is also available to a director of a ban#ing compan5 appointed b5 Reserve Ban# under 3ection 1)A of the Act.
:II. O5e++*!& '+#5(#!(: The provisions of 3ection 1)A" 3ection 1)B and 3ection 1)BB of the Ban#ing Regulation
Act regarding the appointment and removal of a director" managing director or the chairman shall have overriding
effect over all other laws" contracts" etc. An5 person affected b5 an5 action ta#en under these provisions is not
entitled to an5 compensation for an5 loss or for termination of office.
>.8 APPOINTMENT OF ADDITIONAL DIRECTORS
I. The Reserve Ban# has the power to appoint additional directors on the boards of ban#ing companies under 3ection
?AB of the Ban#ing Regulation Act. /ne or more additional directors ma5 be so appointed when the ban# is of the
opinion that it is necessar5 to do so in the interest of.
AaB ban#ing polic5 AbB public
AcB ban#ing compan5 AdB depositors of the ban#ing compan5.
II. The directors so appointed shall not require an5 qualification shares. The5 hold office during the pleasure of the
Reserve Ban#. 3ubGect to this" appointment ma5 be for a period not e=ceeding three 5ears or further e=tended
periods not e=ceeding three 5ears at a time as specified b5 the Reserve Ban#. The additional directors are protected
from an5 liabilit5 or obligation for e=ecuting their functions in good faith. The provisions of 3ection ?AB have
overriding effect over other laws.
>.10 RESTRICTIONS ON EMPLO=MENT
I. The Ban#ing Regulation Act A3ection 1)B prohibits emplo5ment of managing agents and imposes restrictions on
emplo5ment of certain t5pe of persons" namel5 L
aB a person who is or has been adGudicated insolvent or has suspended pa5ment or has compounded with his4her
creditorsH
bB
cB a person whose remuneration or part thereof is b5 wa5 of commission or share in the profits of the compan5H
dB a person whose remuneration is e=cessive in the opinion of the Reserve Ban#. Before forming an opinion
regarding the remuneration" the Reserve Ban# has to consider the financial condition and histor5 of the ban#ing
compan5" its area of operation" resources" volume of business and the trend of its earning capacit5" number of its
branches" qualifications" age and e=perience of the person concerned" remuneration of other personnel in the
ban# or persons holding similar positions in other ban#s and the interest of depositors.
The above restrictions are applicable to wor#men as well as management personnel" as held b5 the 3upreme %ourt
>>
in %entral Ban# of India vs Their 7or#men AAIR 19?) 3% 1>B. ;owever" the restriction on remuneration does not
affect pa5ment of bonus according to a settlement or award or in accordance with a scheme framed b5 the ban# or
in accordance with the prevailing practice in ban#ing business. %ommission paid to bro#ers" auctioneers"
forwarding agents" etc." who are not regular members of the ban#@s staff" is also not covered b5 these provisions.
II. Persons who are directors of an5 compan5 other than a subsidiar5 of a ban#ing compan5 or compan5 registered
under 3ection >! of the %ompanies Act are also prohibited from managing a ban#ing compan5. ;owever" this
prohibition shall not appl5 to a director for a temporar5 period of three months" or a further period not e=ceeding
nine months" if allowed b5 the Reserve Ban#. Apart from this" persons engaged in an5 other" business or vocation or
whose term of office as a person managing the compan5 is for a period e=ceeding five 5ears also fall in the
prohibited categor5. ;owever" the period of office can be renewed or e=tended for further periods not e=ceeding
five 5ears at a time.
>.11 CONTROLS OVER MANAGEMENT
I. P#,e+ "# +e3#5e M$!$&e3e!" $!* #")e+ 'e+(#!!e.: The Reserve Ban# is empowered under 3ection ?AA of
the Ban#ing Regulation Act to remove an5 chairman" director" chief e=ecutive officer Ab5 whatever name calledB" or
other officer or emplo5ee of a ban#ing compan5. 9or this purpose" the ban# has to be satisfied that it is necessar5 to
do so. The ban# ARBIB has the discretionar5 power to remove management and other personnel in the following
circumstances.
aB Public interest
bB Preventing the affairs of the ban#ing compan5 being conducted in a manner detrimental to the interest of
depositors
cB 3ecuring proper management of the ban#ing compan5.
The Reserve Ban# has to pass such an order recording the reasons in writing. Before passing the order" the affected
person has to be given a reasonable opportunit5 of ma#ing a representation against the proposed order. 7here an
urgent action is required and dela5 would be against the interests of the compan5 or its depositors" the Reserve Ban#
is empowered to direct b5 order" at the time of giving opportunit5 of ma#ing a representation that the person
concerned shall not act in his4her official capacit5 or directl5 or indirectl5 ta#e part in the management of the ban#
from the date of such order" pending consideration of the representation. The person so removed shall not be entitled
to an5 compensation for loss of office notwithstanding an5thing contained in an5 law" the memorandum" articles or
an5 contract to the contrar5 as the provisions of 3ection ?AA have overriding effect.
II. A''e$.: An appeal against the order of removal lies with the %entral -overnment. 3uch an appeal has to be filed
within thirt5 da5s from the date of communication of the order. The appellate decision of the %entral -overnment"
and subGect thereto the order of the Reserve Ban#" shall be final and not liable to challenge in an5 %ivil %ourt.
III. Effe2" #f ")e #+*e+ #f +e3#5$.: /n the Reserve Ban# passing a removal order" the person concerned ceases to hold
office which he4she was holding till then. 9urther" he4she is prohibited" from directl5 or indirectl5 ta#ing part in the
management of an5 ban#ing compan5 for a period not e=ceeding five 5ears as ma5 be specified in the order.
%ontravention of the order is punishable with a fine of Rs. >!) for each da5 during which the contravention
continues.
>
I:. A''#!"3e!" #f $ (1"$-.e 'e+(#!: 7hen an5 chairman" director" chief e=ecutive officer" other officer or emplo5ee
is removed b5 the Reserve Ban# under 3ection ?AA as above" the Reserve Ban# ma5 appoint a suitable person in
his place. 3uch person shall hold office at the pleasure of the Reserve Ban#. 3ubGect to this" the appointment ma5 be
for a period not e=ceeding three 5ears and is e=tendable for further periods not e=ceeding three 5ears at a time. 3uch
appointee shall not incur an5 obligation or liabilit5 for action ta#en in good faith in the e=ecution of the duties of his
office.
>.1> CORPORATE GOVERNANCE
I. T)e C#!2e'": %orporate governance is a d5namic concept involving promotion of corporate fairness" transparenc5
and accountabilit5 in the interest of shareholders" emplo5ees" customers and other sta#eholders. It is a concept of
recent origin. ;owever" there is considerable divergence in the understanding and practice of corporate governance
across different Gurisdictions. The concept has evolved since the first maGor stud5 b5 the %adbur5 %ommittee in
199>. The 2<%/ principles of corporate governance published in 1999" the first international code of good
corporate governance approved b5 governments" was revised in >))$. %orporate governance can be seen as @the wa5
in which boards oversee the running of a compan5 b5 its managers" and how board members are in turn accountable
to shareholders and the compan5@ and it has implications for compan5 behaviour towards emplo5ees" shareholders"
customers" ban#s and other sta#eholders. 9urther" good corporate governance pla5s a vital role in ensuring the
integrit5 and efficienc5 of financial mar#ets and the lac# of it can pave the wa5 for financial difficulties and
sometimes even fraud.
II. OECD P+!2'.e( #f C#+'#+$"e G#5e+!$!2e7 >006: The /<%2 principles of corporate governance" >))$ stipulate
what the corporate governance framewor# should ensure" which is briefl5 as under.
aB <nsuring the basis for an effective corporate governance framewor#. To promote transparent and efficient
mar#ets which are consistent with the rule of law. Also" to articulate clearl5 the division of responsibilities
among the different supervisor5" regulator5 and enforcement authorities.
bB The rights of shareholders and #e5 ownership functions. To protect and facilitate the e=ercise of shareholders@
rights.
cB The equitable treatment of shareholders. In the equitable treatment of shareholders are included the minorit5
and foreign shareholders. 9urther" all shareholders should have the opportunit5 to obtain an effective redress for
violation of their rights.
dB The role of sta#eholders in corporate governance. To recogniMe the rights of sta#eholders" established b5 law or
through mutual agreements and encourage active cooperation between the corporations and sta#eholders in
creating wealth" Gobs" and the sustainabilit5 of financiall5 sound enterprises.
eB 2isclosure and transparenc5. Timel5 and accurate disclosures made on all material matters" regarding the
corporation" including the financial situation" performance" ownership" and governance of the compan5.
fB The responsibilities of the board. 3trategic guidance of the compan5" effective monitoring of management b5
the board and the board@s accountabilit5 to the compan5 and the shareholders are the important aspects. These
principles are applicable to all t5pes of companies including ban#s.
III. C#+'#+$"e G#5e+!$!2e $!* B$!%(: Ban#s hold a special position in corporate governance as the5 accept and
>$
deplo5 large amounts of public funds in fiduciar5 capacit5 and also leverage such funds through credit creation. The
position of ban#s is also important for the smooth functioning of the pa5ment s5stem. Accordingl5" legal
prescriptions for ownership and governance of ban#s laid down in the statutes are supplemented b5 regulator5
prescriptions. The Basel %ommittee on Ban#ing 3upervision has issued guidance A9ebruar5 >))?B for promoting the
adoption of sound practices of corporate governance b5 ban#ing institutions. This guidance" entitled <nhancing
%orporate -overnance for Ban#ing /rganisations" highlights the importance of.
The roles of boards of directors Awith a focus on the role of independent directorsB and senior management
<ffective management of conflicts of interest
The roles of internal and e=ternal auditors" as well as internal control functionaries
-overning in a transparent manner" especiall5 where a ban# operates in Gurisdictions" or through structures" that
ma5 impede transparenc5
The role of supervisors in promoting and assessing sound corporate governance practices.A3ee"
http.44www.bis.org4press4p/?/>1.htniB.
Apart from the fiduciar5 role of ban#s" their cross8border operations add a special dimension. This provides an
added impetus for convergence in standards internationall5. In almost all countries" the polic5 framewor# with
regard to corporate governance involves a multiplicit5 of agencies. In India" the 2epartment of %ompan5 Affairs"
3ecurities and <=change Board of India Ain respect of listed entitiesB are involved apart from the Reserve Ban# in
respect of ban#s.
I:. Re(e+5e B$!%A( $''+#$2): 9ollowing the formal polic5 announcement in regard to corporate governance" in the
mid term Review of the 6onetar5 and %redit Polic5" in /ctober" >))1" the Reserve ban# constituted a %onsultative
-roup in 0ovember" >))1 under the chairmanship of 2r. A.3. -angul5 with a view to strengthen the internal
supervisor5 role of the boards of ban#s. The report of the group was transmitted to all the ban#s for their
consideration in Eune" >))> and simultaneousl5 to the -overnment of India for consideration. <arlier" an advisor5
group on corporate governance under the chairmanship of 2r. R.;. Patil had submitted its report in 6arch" >))1
which e=amined the issues relating to corporate governance in ban#s in India" including the public sector ban#s and
made recommendations to bring the governance standards in India on par with the best international standards.
There were also some relevant observations b5 the advisor5 group on ban#ing supervision under the chairmanship
of 3hri 6.3. :erma which submitted its report in Eanuar5" >)). Deeping all these recommendations in view and
the cross8countr5 e=perience" the Reserve Ban# initiated several measures to strengthen the corporate governance in
the Indian ban#ing sector" including the concept of @fit and proper@ criteria for directors of ban#s which included the
process of collecting information" e=ercising due diligence and constitution of a nomination committee of the board
to scrutinise the declarations made b5 the ban# directors. The RBI guidelines on ownership and governance in the
private sector ban#s released on 9ebruar5 >+" >))! AParas ! and ?B provide as under.3hareholding
aB The RBI guidelines on ac#nowledgement for acquisition or transfer of shares issued on 9ebruar5" >))$ will be
applicable for an5 acquisition of shares of five per cent and above of the paid8up capital of the private sector
ban#.
bB In the interest of diversified ownership of ban#s" the obGective will be to ensure that no single entit5 or group of
>!
related entities has shareholding or control" directl5 or indirectl5" in an5 ban# in e=cess of ten per cent of the
paid8up capital of the private sector ban#. An5 higher level of acquisition will be with the prior approval of RBI
and in accordance with the guidelines of 9ebruar5" >))$ for grant of ac#nowledgement for acquisition of
shares.
cB 7here ownership is that of a corporate entit5" the obGective will be to ensure that no single individual4entit5 has
ownership and control in e=cess of ten per cent of that entit5. 7here the ownership is that of a financial entit5
the obGective will be to ensure that it is a well8established regulated entit5" widel5 held" publicl5 listed and
enGo5s good standing in the financial communit5.
dB Ban#s Aincluding foreign ban#s having a branch presence in IndiaB49Is should not acquire an5 fresh sta#e in a
ban#@s equit5 shares" if b5 such acquisition" the investing ban#@s49I@s holding e=ceeds five per cent of the
investee ban#@s equit5 capital as indicated in RBI circular dated ? Eul5" >))$.
eB As per the e=isting polic5" large industrial houses will be allowed to acquire" b5 wa5 of strategic investment"
shares not e=ceeding ten per cent of the paid8up capital of the ban#" subGect to RBI@s prior approval.
9urthermore" such a limitation will also be considered" if appropriate" in regard to important shareholders with
other commercial affiliations.
fB In case of a restructuring of the problem4wea# ban#s or in the interest of consolidation in the ban#ing sector"
RBI ma5 permit a higher level of shareholding" including b5 a ban#.
>.14 DIRECTORS AND CORPORATE GOVERNANCE
I. The board of directors should ensure that the responsibilities of directors are well defined and the ban#s should
arrange need based training for the directors in this regard. 7hile the respective entities should perform the roles
envisaged for them" private sector ban#s will be required to ensure that the directors on their boards representing
specific sectors" as provided under the B.R. Act" are indeed representatives of those sectors in a demonstrable
fashion" the5 fulfil the criteria under corporate governance norms provided b5 the -angul5 %ommittee and the5 also
fulfil the criteria applicable for determining @fit and proper@ status of important shareholders Ai.e." shareholding of
five per cent and aboveB as laid down in RBI circular dated >! Eune" >))$.
II. As a matter of desirable practice" not more than one member of a famil5 or a close relative Aas defined under 3ection
? of the %ompanies Act" 19!?B or an associate Apartner" emplo5ee" director" etc.B should be on the board of a ban#.
III. -uidelines have been provided in respect of @fit and proper@ criteria for directors of ban#s b5 the RBI circular dated
>! Eune" >))$ in accordance with the recommendations of the -angul5 %ommittee on corporate governance. 9or
this purpose a declaration and underta#ing is required from the proposed4e=isting directors.
I:. Being a director" the %</ should satisf5 the requirements of the @fit and proper@ criteria applicable for directors. In
addition" RBI ma5 appl5 an5 additional requirements for the chairman and %</. The ban#s will be required to
provide all information that ma5 be required while ma#ing an application to RBI for approval of appointment of
chairman4%</.
7ith regard to public sector ban#s" the principles of corporate governance have been statutoril5 recognised as per Ban#ing
%ompanies AAcquisition and Transfer of 'nderta#ingsB 9inancial Institutions 1aws AAmendmentB Act" >))?. The Act as
amended provides for shareholder directors to be a person having @fit and proper@ status and the Reserve Ban# has to notif5
>?
the @9it and Proper@ criteria &3ection 9A>B,.
>.16 LET US SUM UP
A compan5 wanting to commence ban#ing business requires prior licence from the Reserve Ban#. The Reserve Ban# has
the discretion to reGect licence or approve the licence on such conditions as it thin#s fit. Before granting licence" Reserve
Ban# has to be satisfied b5 inspection or otherwise of the suitabilit5 of the compan5 for licence. A licence once given ma5
also be cancelled after giving the ban# an opportunit5 to be heard. 9urther" for opening new branches or shifting branches
outside a cit5" town or village" permission of the Reserve Ban# is required. Ban#ing companies have to have minimum
capital and reserves as specified in the Ban#ing Regulation Act. The shareholders of a ban#ing compan5 are entitled to
dividends onl5 after all the capitalised e=penses are written off. The commission or bro#erage pa5able on selling shares is
restricted to two and half per cent of the paid8up value of the shares. The board of directors of a ban# has to be constituted
with persons having special #nowledge or e=perience in accountanc5" ban#ing" economics" law" etc." as stipulated. The
directors should not have substantial interest in other companies or firms. The ma=imum period of office is limited to eight
5ears continuousl5. The Reserve Ban# is empowered to reconstitute the board" if the board is not properl5 constituted. <ver5
ban#ing compan5 should have a full8time chairman Aor a full8time managing director" if there is no full8time chairmanB with
the specified qualifications. The Reserve Ban# has powers to remove the chairman and appoint a suitable person in his place
in certain cases. The Reserve Ban# also has powers to remove the directors or managerial personnel or other emplo5ees of
ban#ing companies. The principles of corporate governance including the @fit and proper@ criteria for directors appl5 to
ban#ing companies as well as public sector ban#s.
UNIT 4 REGULATION OF BANKING BUSINESS
.) /bGectives
.1 Introduction
.> Power to Issue 2irections
. Acceptance of 2eposits
.$ 0omination
.! 1oans and Advances
.? Regulation of Interest Rate
.( Regulation of Pa5ment 35stems
.+ Internet Ban#ing -uidelines
.9 Regulation of 6one5 6ar#et Instruments
.1) Ban#ing /mbudsman
.11 Reserve 9unds
.1> 6aintenance of %ash Reserve
.1 6aintenance of 1iquid Assets
.1$ Assets in India
.1! 1et 's 3um 'p
>(
4.0 OBJECTIVES
The obGectives of this unit are to understand the law" in particular the provisions of the Ban#ing Regulation Act" relating to.
Issue of directions b5 reserve ban# to ban#s
Regulation of acceptance of deposits b5 ban#s
Regulation of loans and advances
Regulation of interest rates of ban#s on deposits and borrowing
6aintenance of reserve fund
6aintenance of cash reserve b5 scheduled ban#s and other ban#s
6aintenance of liquid assets
6aintenance of assets in india
4.1 INTRODUCTION
The Ban#ing Regulation Act provides for regulation of the business activities of ban#ing companies. Accordingl5" the Act
empowers the Reserve Ban# to issue directions for regulating terms and conditions of ma#ing of loans and advances and
other matters including acceptance of deposits. The Ban#ing Regulation Act also imposes certain restrictions on loans and
advances to the directors of ban#ing companies" and companies and firms in which the5 are interested. The Act contains
provisions for creation of a reserve fund and transfer of a percentage of profits to that fund. There are also provisions for
maintenance of cash reserve" liquid assets and assets in India. In this unit" we loo# at the relevant provisions of law in this
regard.
4.> POWER TO ISSUE DIRECTIONS
I. T)e B$!%!& Re&1.$"#!: Act authorises the Reserve Ban# to issue directions to ban#s under 3ections >1 and
!Aof the Act. 7hile 3ection >1 gives the power to regulate advances b5 ban#ing companies" 3ection !A gives
wide powers generall5 to regulate ban#ing companies. The Reserve Ban# has been issuing directions from time to
time under 3ection >1 Aread with 3ection !AB regulating rates of interest and other terms and conditions of
acceptance of deposits and ma#ing of loans and advances. Regulation of deposits and loans and advances are
discussed below A3ee" Paras .$ and .!" respectivel5B.
II. N$"1+e #f D+e2"#!(: The directions issued b5 the Reserve Ban# in e=ercise of powers under 3ections >1 and !A
of the BR Act" being statutor5 directions" are binding on the ban#s. The circulars of the Reserve Ban# giving
instructions to ban#s where it has statutor5 powers to give such instructions are also binding on the ban#s" even if
the5 do not specificall5 refer to an5 statutor5 provisions. ;owever" as held b5 the 3upreme %ourt in 3tate Ban# of
India vs. %IT AAIR 19+? 3% (!(B" non8statutor5 circulars of the Reserve Ban# cannot affect legal rights. The
Reserve Ban#@s powers to issue directions are over the ban#s. ;ence" the directions are addressed to ban#s onl5 and
not to customers or the public. The effect of violation of Reserve Ban#@s directions4 instructions which are binding
on ban#s" has been considered b5 the 3upreme %ourt in B/I 9inance 1td. vs. The %ustodian AAIR 199( 3% 19!>B in
the conte=t of some ban#s entering into certain repo transactions against the circulars of the Reserve Ban#
prohibiting such transactions. The court found that the action of the ban#s violated the Reserve Ban#@s instructions
and held that the violations would not invalidate the contracts with third parties but would render the ban#s liable to
>+
prosecution. The effect of directions will be prospective and not retrospective in the absence of an5 statutor5
provisions providing for retrospective operation of directions.
III. B#!$f*e(: The powers of the Reserve Ban# to issue directions have to be e=ercised with bonafide intentions" as
held b5 the -uGarat ;igh %ourt in RBI vs ;arisidh %o8op. Ban# 1td. AAIR 19++ -uG 1)(B. In that case the %ourt
considered the power of the Reserve Ban# to issue directions for superseding the board of a co8operative ban# for
securing its proper management and upheld the action ta#en b5 the Reserve Ban# on the finding that it was without
mala fide.
I:. C$1"#! $!* A*52e: Apart from giving directions" the Reserve Ban# ma5 also caution or give advice to ban#ing
companies. 3ection ? of the Ban#ing Regulation Act provides that the Reserve Ban# ma5 caution or prohibit
ban#ing companies generall5 or an5 ban#ing compan5 in particular against an5 transaction or class of transactions.
9urther" the Reserve Ban# ma5 generall5 give advice to an5 ban#ing compan5.
4.4 ACCEPTANCE OF DEPOSITS
I. As discussed in unit I" the essence of ban#ing business is the acceptance of deposits from the public withdrawable
b5 cheque. &3ee also the Gudgement of 6adras ;igh %ourt in 3aGGan Ban# Pvt. 1td. vs RBI AAIR 19?1 6ad +B,. The
definition of Iban#ingI in 3ection !AbB of the Ban#ing Regulation Act ac#nowledges this position.
II. T/'e( #f De'#("(: Ban#s accept different t5pes of deposits" both time and demand deposits" from the public. 7hile
time deposits" li#e fi=ed deposits or recurring deposits are repa5able after an agreed period" demand deposits" li#e
deposits in current account and savings ban# accounts" are repa5able on demand" subGect to the terms and conditions
of the deposits. The period of the deposit and rate of interest applicable to the deposit are matters to be agreed
between the depositor and the ban# under the terms of the deposit" subGect to an5 directions given b5 the Reserve
Ban# in this regard.
III. Re&1.$"#! #f $22e'"$!2e #f *e'#("(: The Ban#ing Regulation Act does not contain an5 specific provisions for
regulation of acceptance of deposits of ban#s. ;owever" 3ection ! A which authorises the Reserve Ban# to give
directions is wide enough to cover acceptance of deposits. Accordingl5" acceptance of deposits ma5 be regulated in
the public interest or in the interest of ban#ing polic5 or in the interests of depositors b5 issuing directions. The
Reserve Ban# issues directions from time to time regulating the rates of interest applicable to deposits. The
directions ma5 either fi= the rates or specif5 the minimum and4or ma=imum rate of interest on savings deposits and
time deposits for various periods as also for special categories of deposits li#e senior citiMen" 0RI deposits. If onl5
minimum and4or ma=imum rates are specified or no rates are specified" the ban#s are free to decide their rates
accordingl5. The directions issued b5 the Reserve Ban# ma5 also stipulate conditions regarding minimum or
ma=imum periods for which deposits ma5 be accepted" reduction of interest pa5able on premature withdrawal and
pa5ment of interest on renewal of overdue deposits.
;owever" currentl5 RBI prescribes the minimum and ma=imum period for which deposits can be accepted and
prescribes interest rates onl5 in respect of 3avings 2eposits and 0RI deposits leaving others for the individual
ban#s.
I:. Re"1+!( #! 1!2.$3e* *e'#("(: Ban#s have to file a return ever5 5ear on their unclaimed deposits under 3ection
>? of the Ban#ing Regulation Act. The return has to be filed within thirt5 da5s of the end of each calendar 5ear in
>9
the form and manner prescribed and should cover all deposits not operated for ten 5ears. In the case of fi=ed
deposits the period of ten 5ears starts from the e=pir5 of the period of the deposit.
4.6 NOMINATION
I. Re'$/3e!" #f De'#("(. 3ection $!NA of the Ban#ing Regulation Act provides that a depositor or depositors of a
ban#ing compan5 Aincluding co8operative ban#sB ma5 nominate one person in the prescribed manner as nominee to
whom the deposit ma5 be returned in the event of death of the sole depositor or depositors. 'nless the nomination is
varied or cancelled" the nominee is entitled to all the rights of the depositor4s in the event of death of the depositor4s.
In the case of minor nominees" there is also a provision to appoint a person to receive the deposit on behalf of the
minor. Pa5ment b5 a ban# in accordance with these provisions gives a valid discharge to the ban#" but this does not
affect the right or claim a person ma5 have against the nominee in respect of the amount received b5 him. Rule > of
the Ban#ing %ompanies A0ominationB Rules" 19+! provides for the procedure and forms for ma#ing nomination in
respect of deposits with commercial ban#s. In the case of %o8operative ban#s" similar provisions are incorporated in
the %o8operative Ban#s A0ominationB Rules" 19+!.
II. A+"2.e( ! S$fe C1("#*/ $!* S$fe"/ L#2%e+(: There are also provisions in the Ban#ing Regulation Act for
nomination in respect of articles #ept in safe custod5 with ban#s and safet5 loc#ers. 3ections $!N% and $!N<
provide that an5 person who leaves an5 article in safe custod5 and in safet5 loc#ers respectivel5 with a ban#ing
compan5" ma5 nominate one person as nominee to receive the article in the event of death of that person. The
nomination has to be in the prescribed manner and on return of articles #ept in safe custod5 or removal of contents
of loc#er b5 nominees as provided" the ban# gets a valid discharge. Rules and $ of the Ban#ing %ompanies
A0ominationB Rules" 19+!" and also the Rules and $ of the %o8operative Ban#s A0ominationB Rules" 19+! deal
with the form and procedure applicable to articles in safe custod5 and safet5 loc#ers respectivel5 in the case of
ban#ing companies and co8operative ban#s.
4.9 LOANS AND ADVANCES
I. The definition of @ban#ing@ in 3ection !AbB of the Ban#ing Regulation Act indicates that acceptance of deposits ma5
be for lending or investment. Thus" lending or ma#ing of loans and advances is a core business of a ban#ing
compan5. 1ending ma5 be for short term or long term" on secured or unsecured basis and for different purposes.
II. Regulation of 1oans and Advances
aB The Reserve Ban# is empowered under 3ection >1 of the Ban#ing Regulation Act to issue directions to control
advances b5 ban#ing companies. 3uch directions ma5 be issued to ban#ing companies generall5 or to an5 particular
ban#ing compan5. The Reserve Ban# ma5 determine the polic5 in relation to advances and issue directions when it
is satisfied that it is necessar5 to give directions.
AiB In public interest AiiB In the interests of depositors
AiiiB In the interests of ban#ing polic5.
bB The directions given b5 the Reserve Ban# are binding on ban#ing companies" and ma5 be on one or more of the
following matters.
i. Purpose for which advances ma5 or ma5 not be made.
ii. 6argins" to be maintained in respect of secured advances.
)
iii. 6a=imum amount of advances or other financial accommodation which ma5 be made to an5 compan5" firm"
association of persons or individual. The polic5 on these matters ma5 be specified having regard to the paid8up
capital" reserves and deposits of the ban#ing compan5 and other relevant considerations.
iv. 6a=imum amount up to which guarantees ma5 be given b5 a ban#ing compan5 on behalf of an5 compan5" firm"
association of persons or individual. In this case" also the paid8up capital" reserves" deposits and other relevant
considerations have to be ta#en into account for determining the ma=imum amount.
v. Rate of interest and other terms and conditions on which advances and other financial accommodation ma5 be
made or guarantees ma5 be given.
The Reserve Ban# issues directions from time to time regulating the lending operations of ban#ing companies in
e=ercise of these powers vested under 3ection >1. Apart from this" the general powers to give directions under
3ection !A are also available for regulation of loans and advances.
III. 3elective %redit %ontrol
AB P1+'#(e: Ban#s have been traditionall5 financing trade and commerce and against items the5 deal in even
before the countr5 started industrialiMing. To ensure that prices of essential commodities li#e food grains"
pulses" edible oils" sugar" Gagger5 and cotton and te=tiles are not increased b5 certain sections of the business
communit5 with a motive of profit ma=imisation b5 hoarding with the help of ban# finance" these restrictions
have been put in place. These cover the quantum of credit that can be e=tended and also the rate at which it can
be e=tended.
7ith self8sufficienc5 achieved b5 our countr5 over the 5ears in almost all of the above" RBI had ta#en them out
of the purview of selective credit control and currentl5 restrictions are there onl5 in case of lev5 sugar.
BB Me")#*( $!* "##.(: 3elective credit control see#s to influence the demand for credit b5
aB 6a#ing borrowing more costl5 for certain purposes which are considered relativel5 inessenJtial" or
bB B5 imposing stringent conditions on lending for such purposes" or AiiiB b5 giving concessions for certain
desired t5pes of activities.
The tools emplo5ed for e=ercising selective credit control are.
i. 6inimum margins for lending against selected commoditiesH
ii. %eilings on the levels of creditH and
iii. %harging of minimum rate of interest on advances against specified commodities.
The quantum and cost of credit are regulated b5 operating these tools of control.
%B P+2e 2#!"+#.: In India" selective credit control has been generall5 used for preventing speculative hoarding of
essential commodities and basic raw materials using ban# credit. This is with a view to chec# the undue rise of
prices of such sensitive commodities.
2B Re("+2"#!( #! .#$!( $!* $*5$!2e(: 3ection >) of the Ban#ing Regulation Act imposes certain restrictions on
loans and advances. Accordingl5" no ban#ing compan5 shall grant loans or advances on the securit5 of its own
shares. 9urther" a ban#ing compan5" is prohibited from entering into an5 commitment for granting an5 loans or
advances to or on behalf of an5 of its directors. The prohibition also applies to loans and advances to.
9irms in which an5 director is interested as a partner" manager" emplo5ee or guarantor" and An5 compan5
Aother than a compan5 registered under section >! of the companies actB in which a director of the ban#ing
1
compan5 holds substantial interest as defined in section !AneB of the act or of which he is director" manager"
managing agent" emplo5ee or guarantor.
If the director of a ban#ing compan5 is a partner or guarantor of an5 individual" loans and advances to such
individual are also barred. @2irector@ includes a member of an5 board for managing or advising the ban#
regarding management of all or an5 of its affairs. It is open to the Reserve Ban# to specif5 an5 transaction
as not being a loan or advance for this purpose b5 a general or special order. In so doing the ban# has to
consider the nature of the transaction" period" manner and circumstances in which the amount is li#el5 to be
realised" the interest of depositors and other relevant considerations. If there is an5 doubt or dispute as to
whether a transaction is a loan or advance" the decision of the Reserve Ban# in the matter shall be final.
<B Re("+2"#!( #! '#,e+ "# +e3" *e-": 9or remitting an5 debt to its directors" a ban#ing compan5 requires prior
permission of the Reserve Ban# under 3ection >)A of the Ban#ing Regulation Act. Permission is also required
for remission of loans to.
An5 firm or compan5 in which a director is interested as director" partner" managing agent" or
An5 individual for whom a director is partner or guarantor. An5 remission made in contravention of section
>) is void and will have no effect.
4.: REGULATION OF INTEREST RATE
The Reserve Ban# is authorised to regulate interest rates under 3ection >1 Aread with 3ection !AB of the Ban#ing
Regulation Act. This includes rates of interest for loans and advances as well as deposits. 7hile giving directions on interest
rates" there should not be an5 discrimination against an5 class of depositors or loanees or ban#s. An5 differential treatment
should be Gustifiable in law as not being against the principles of equalit5. In ;arGit 3ingh vs 'nion of India AAIR 199$ 3%
1$B" the 3upreme %ourt held in the conte=t of reduction of rate of interest on ban# loans to riot victims that the concession
should be e=tended to loanees from financial institutions also" as there was no basis for discrimination between loanees from
ban#s and loanees from financial institutions.
I. I!"e+e(" #! *e'#("(: The rates of interest on deposits were not regulated b5 the Reserve Ban# until 19?$. ;ence" it
was open to the ban#s to decide their deposit rates freel5. Thereafter the Reserve Ban# has been issuing directions
from time to time regulating rates of interest applicable to different t5pes of deposits. Accordingl5" pa5ment of
interest on current account was prohibited. As the directions are issued b5 virtue of the powers vested in the Reserve
Ban# under 3ection !A of the Ban#ing Regulation Act" before issuing the directions the Ban# has to be satisfied
that the directions are necessar5 in public interest or in the interest of depositors or of ban#ing polic5. Reserve Ban#
ma5 permit higher rate of interest in favour of certain categories of depositors li#e former4e=isting emplo5ees or
depositors of certain classes of ban#s li#e co8operative ban#s. /f late" the movement has been in the direction of
liberalisation of interest rates" thereb5 giving increased freedom to ban#s to decide the rates themselves.
II. I!"e+e(" +$"e #! .#$!( $!* $*5$!2e(: Interest rate on loans and advances is subGect to regulation specificall5 under
3ection >1A>BAeB of the Ban#ing Regulation Act apart from the general provisions of 3ection !A. The Reserve
Ban# has been issuing directions from time to time under 3ection >1 Aread with 3ection !AB of the Act regulating
different aspects of lending including lending rates. Accordingl5" different rates are permissible for different sectors
li#e small8scale industries" agriculture" large8scale industries" etc." and of late" much freedom has been given to
>
ban#s to decide the rates themselves. 9urther" the rate of interest ma5 var5 on the basis of the period of the loan. The
Reserve Ban# tightens the regulations or gives rela=ations thereb5 permitting ban#s to decide the rates on their own"
depending on the position of mone5 suppl5 in the public interest or in the interest of depositors or of ban#ing polic5.
%urrentl5 the directions of RBI regarding interest rates of advances cover onl5 finance to e=porters and small loans
with limits up to Rs > lac and 2RI loans.
III. U(1+#1( .#$!( A2"7 181<: The 'surious 1oans Act" 191+ prohibits lending at e=orbitant rates. The law has been
made to protect the wea#er borrowers from the powerful mone5lenders. 3imilarl5" debt relief legislation in different
states attempts to protect the agriculturists and other wea#er sections from unscrupulous lenders" b5 remitting debts
or giving other concessions. Although the lending rates of ban#s are regulated b5 the Reserve Ban#" borrowers often
used to resort to these laws for remitting loans or reducing rates of interest in respect of loans ta#en b5 them from
ban#s. This was coming in the wa5 of the monetar5 polic5 decided b5 the central ban#. Accordingl5" 3ection >1A
was inserted in the Ban#ing Regulation Act to ma#e the rates of interest charged b5 ban#ing companies be5ond the
scrutin5 of courts.
I:. P+#"e2"#! "# !"e+e(" +$"e: 3ection >1A of the Ban#ing Regulation Act provides that a transaction between a
ban#ing compan5 and its debtor cannot be reopened b5 an5 court on the ground that the rate of interest charged is
e=cessive. This provision is given an overriding effect over the provisions of the 'surious 1oans Act" 191+ or an5
other law relating to indebtedness in force in an5 state.
3ection >1A was held to be valid and not ultra vires the %onstitution b5 the 3upreme %ourt. In %orporation Ban# vs 2. 3.
-owda &A199$B ! 3%% >1," the 3upreme %ourt held that ban#s can compound interest on annual rates and not half 5earl5
rates in view of the e=press directives of the Reserve Ban#. The court further held that where the Reserve Ban# fi=es both
minimum and ma=imum rates of interest" courts would not interfere in the matter of interest rate" if the rate charged b5 the
ban# is not in violation of the Reserve Ban# directive. ;owever" the court did not e=press an5 opinion on the question
whether 3ection >1A would debar the courts from interfering if the circulars or directives of the Reserve Ban# do not fi= the
ma=imum and leave it to the discretion of the ban#s to fi= the rate above the minimum.
4.; REGULATION OF PA=MENT S=STEMS
The Reserve Ban# of India Act" until recentl5" did not contain an5 provision for regulation of pa5ment s5stems. 3ection !+
empowers the Ban# to ma#e regulations for giving effect to the provisions of the Act and %lause AgB of the sub83ection A>B
thereof" provides for ma#ing provisions for regulation of clearing houses for the ban#s including post office saving ban#s.
AThe clearing houses are now functioning under the uniform clearing house rules and regulations framed b5 the mutual
consent of members and no statutor5 rules or regulations have been framed.B ;owever" the regulation of pa5ment s5stems
has become important in the conte=t of electronic pa5ment s5stems becoming popular and the probabilit5 of complications
in the absence of a suitable regulator5 framewor# with statutor5 bac#ing. In the absence of specific powers under the Act"
the Ban# has not been able to frame an5 regulations relating to pa5ment s5stems. ;ence" the Information Technolog5 Act"
>))) has amended the Reserve Ban# of India Act" inserting the %lause AppB in 3ection !+ A>B empowering the Reserve Ban#
to frame regulations for pa5ment s5stems of ban#s and financial institutions. 9inancial institution for this purpose will have
the same meaning as provided in the %lause AcB of 3ection $! of the Reserve Ban# of India Act. Accordingl5" the %entral
Board of the Reserve Ban# has framed the Reserve Ban# of India ABoard for Regulation and 3upervision of Pa5ment and

3ettlement 35stemsB Regulations" >))!. 9urther" RBI is in the process of finalising the guidelines under the Pa5ment and
3ettlement 35stems Act" >))(.
i. Board for regulation and supervision of Pa5ment and 3ettlement 35stems. The Reserve Ban#" in terms of the RBI ABoard
for Regulation and 3upervision of Pa5ment and 3ettlement 35stemsB Regulations" >))!" has constituted a Board for
Regulation and 3upervision of Pa5ment and 3ettlement 35stems ABP33B as a committee of its %entral board. The Board has
the -overnor of the Ban# as its chairman and its functions include prescribing policies relating to the regulation and
supervision of all t5pes of pa5ment and settlement s5stems" setting standards for e=isting and future s5stems" authorising the
pa5ment and settlement s5stems" determining criteria for membership to these s5stems including continuation" termination
and reGection of membership.
4.< INTERNET BANKING GUIDELINES
The Reserve Ban# has issued guidelines in respect of internet ban#ing. These guidelines cover.
AiB technolog5 and securit5 issuesH AiiB legal issuesH
AiiiB regulator5 and supervisor5 issues.
These guidelines appl5" in addition to Internet ban#ing" to other forms of electronic ban#ing to the e=tent relevant. All
ban#s offering internet ban#ing have to ma#e a review of their s5stems in the light of these guidelines and report to
the Reserve Ban# the t5pes of services offered" e=tent of their compliance with the recommendations" deviations" if
an5 and their proposal indicating a timeframe for compliance.
4.8 REGULATION OF MONE= MARKET INSTRUMENTS
The Reserve Ban# of India AAmendmentB Act" >))? A3ection $!7B empowers the Ban#" in public interest or to regulate the
financial s5stem of the countr5 to its advantage" to determine the polic5 relating to interest rates or interest rate products and
give directions in that behalf to all agencies or an5 of them" dealing in securities" mone5 mar#et instruments" foreign
e=change" derivatives" or other instruments of li#e nature as the Ban# ma5 specif5 from time to time. 9urther" the Ban# ma5"
for the purpose of enabling it to regulate these agencies call for an5 information" statement or other particulars from them" or
cause an inspection of such agencies to be made. ;owever" the directions issued b5 the Ban# in this behalf shall not relate to
the procedure for e=ecution or settlement of the trades in respect of the transactions on the recognised 3toc# <=changes.
<ver5 director or member or other bod5 for the time being vested with the management of the affairs of the agencies falling
under 3ection $! 7 has to compl5 with the directions given b5 the Reserve Ban# and submit the information or statement or
particulars as required.
4.10 BANKING OMBUDSMAN
/mbudsman is generall5 an authorit5 AofficialB appointed to receive and investigate on the public grievances against the
-overnment or an5 other authorit5 or institution or organisation and redress such grievances as a non8adversarial
adGudicator" or an alternative to the adversar5 s5stem for resolution of disputes. The position is that of an independent and
non8partisan officer who deals with specific complaints from the public against administrative inGustice and
maladministration. The ban#ing ombudsman is an authorit5 originall5 established under the Ban#ing /mbudsman 3cheme"
199! b5 the Reserve Ban# of India in e=ercise of the powers vested in it under 3ection !A of the Ban#ing Regulation Act.
The scheme aimed at resolution and settlement of complaints of the ban#ing public against the commercial ban#s Ae=cluding
$
RRBsB and the scheduled primar5 co8operative ban#s without resorting to courts. It was modified b5 the Ban#ing
/mbudsman 3cheme" >))> and later b5 the Ban#ing /mbudsman 3cheme" >))? to enlarge the e=tent and scope of the
authorit5 and functions of ban#ing ombudsman for @redressal of grievances against deficienc5 in ban#ing services"
concerning loans and advances and other specified matters@. All commercial ban#s" regional rural ban#s and scheduled
primar5 co8operative ban#s are required to compl5 with the modified scheme.
1. O-Be2" #f ")e (2)e3e. The obGect of the scheme is to enable resolution of complaints relating to specified services
rendered b5 the ban#s and to facilitate the satisfaction or settlement of such complaints.
>. G+#1!*( #f 2#3'.$!": The grounds on which complaints ma5 be made to the ban#ing ombudsman are.
.
i. 2eficienc5 in ban#ing or other services in respect of.
AaB non8pa5ment or inordinate dela5 in the pa5ment or collection of cheques" drafts" bills" etc.H AbB non8acceptance" without
sufficient cause" of small denomination notes tendered for an5 purpose" and for charging of commission in respect thereofH
AcB non8acceptance" without sufficient cause" of coins tendered and for charging of commission in respect thereofH AdB non8
pa5ment or dela5 in pa5ment of inward remittancesH AeB failure to issue or dela5 in issue of drafts" pa5 orders or ban#ers@
chequesH AfB non8adherence to prescribed wor#ing hoursH AgB failure to honour guarantee or letter of credit commitmentsH AhB
failure to provide or dela5 in providing a ban#ing facilit5 Aother than loans and advancesB promised in writing b5 a ban# or
its direct selling agentsH AiB dela5s" non8credit of proceeds to parties@ accounts" non8pa5ment of deposit or non8observance of
the Reserve Ban# directives" if an5" applicable to rate of interest on deposits in an5 savings" current or other account
maintained with a ban#H AGB dela5s in receipt of e=port proceeds" handling of e=port bills" collection of bills" etc." for
e=porters provided the said complaints pertain to the ban#@s operations in IndiaH A#B complaints from 0on Resident Indians
having accounts in India in relation to their remittances from abroad" deposits and other ban#8related mattersH A1B refusal to
open deposit accounts without an5 valid reasonH AmB lev5ing of charges without adequate prior notice to the customerH AnB
non8adherence b5 the ban# or its subsidiaries to the instructions of Reserve Ban# on AT64 2ebit card operations or credit
card operationsH AoB non8disbursement or dela5 in disbursement of pension Ato the e=tent the grievance can be attributed to
the action on the part of the ban# concerned" but not with regard to its emplo5eesBH ApB refusal to accept or dela5 in accepting
pa5ment towards ta=es" as required b5 Reserve Ban#4-overnmentH AqB refusal to issue or dela5 in issuing" or failure to
service or dela5 in servicing or redemption of -overnment securitiesH ArB forced closure of deposit accounts without due
notice or without sufficient reasonH AsB refusal to close or dela5 in closing the accountsH AtB non8adherence to the fair
practices code as adopted b5 the ban#H AuB an5 other matter relating to the violation of the directives issued b5 the Reserve
Ban# in relation to ban#ing services.
ii. 2eficienc5 in ban#ing service in respect of loans and advances pertaining to.
aB non8observance of Reserve Ban# 2irectives on interest ratesH
bB dela5s in sanction" disbursement or non8observance of prescribed time schedule for disposal of loan
applications but not declining creditH
cB non8acceptance of application for loans without furnishing valid reasons to the applicantH
dB non8observance of an5 other direction or instruction of the Reserve Ban# as ma5 be specified b5 the
Reserve Ban# for this purpose from time to timeH
iii. 3uch other matters as ma5 be specified b5 the Reserve Ban# from time to time in this behalf.
!
$. J1+(*2"#! $!* P+#2e*1+e: The location and the territorial Gurisdiction of the ombudsman are as specified b5 the
Reserve Ban#. A complaint ma5 be made in writing b5 a person himself or through an authorised representative. 0o
complaint to the ban#ing ombudsman shall lie unless"
aB The complainant had" before ma#ing a complaint to the ban#ing ombudsman" made a written representation to
the concerned ban# and the ban# had reGected the complaint or the complainant had not received an5 repl5
within a period of one month after the ban# received his representation or the complainant is not satisfied with
the repl5 given to him b5 the ban#H
bB The complaint is made not later than one 5ear after the complainant has received the repl5 of the ban# to his
representation or" where no repl5 is received" not later than one 5ear and one month after the date of the
representation to the ban#H
cB The complaint is not in respect of the same subGect matter which was settled or dealt with on merits b5 an5
previous ban#ing ombudsman proceedings whether or not received from the same complainant or along with
one or more complainants or one or more of the parties concerned with the subGect matterH
dB The complaint does not pertain to the same subGect matter for which an5 proceedings before an5 court" tribunal
or arbitrator or an5 other forum is pending or a decree or award or order has been passed b5 an5 such court"
tribunal" arbitrator or forumH
eB The complaint is not frivolous or ve=atious in natureH
fB The complaint is made before the e=pir5 of the period of limitation prescribed under the indian limitation act"
19? for such claims.
The 3upreme %ourt has in a recent case" 64s 2urga ;otel %omple= vs. Reserve Ban# of India and /rs. &Appeal
AcivilB 1+9 of >))(," observed that a ban#ing ombudsman" though might have initiall5 Gurisdiction to entertain a
complaint on the basis that it has a legal foundation" in terms of the scheme" he ma5 be divested of that Gurisdiction"
or the foundation in law might be lost" on either of the parties" approaching the %ourt" the arbitrator or the debts
recover5 tribunal in respect of the same subGect matter. This is on the basis that the complaint must continue to have
a foundation in law at the time the ombudsman ta#es up the claim for his consideration and renders his decision or
award and that foundation would be lost when the complaint is ta#en to a %ourt" Arbitrator" Tribunal or an5 other
competent forum. The ombudsman being an authorit5 or tribunal of limited Gurisdiction conferred b5 the scheme"
the e=ercise of Gurisdiction or power b5 the ombudsman would depend on his having Gurisdiction" not onl5 to
entertain a claim but also to end it. Accordingl5" once he4she is deprived of his Gurisdiction or gets deprived of his
Gurisdiction over the subGect matter" he4she could no more proceed with a complaint which was earlier filed and
therefore" a complaint goes out of his4her purview when the subGect matter of it is ta#en to a court" arbitrator"
tribunal or forum. 6oreover" the relief that can be granted b5 the ombudsman ma5 not conflict with a more
comprehensive adGudication b5 a court" arbitrator" tribunal or forum with wider powers.
In short" when the ombudsman is about to pronounce his award" he finds that the subGect matter of the dispute has
been ta#en to the debts recover5 tribunal or a civil court or an arbitrator or to an5 other competent forum" the
ombudsman will have to decline Gurisdiction to pass an5 order or award on the complaint to bring about a resolution
of the complaint b5 wa5 of a non adversarial adGudication.
The ombudsman ma5 call for information from the ban# concerned and ma#e endeavour to promote a settlement
?
with the ban#. The ombudsman is free to follow the procedure considered appropriate. 7here a complaint is not
settled b5 agreement within a period of one month from the date"of receipt of the complaint or such further period as
the ban#ing ombudsman ma5 consider necessar5" he ma5 pass an award after affording the parties reasonable
opportunit5 to present their case. ;e shall be guided b5 the evidence placed before him b5 the parties" the principles
of ban#ing law and practice" directions" instructions and guidelines issued b5 the Reserve Ban# from time to time
and such other factors which in his4her opinion are necessar5 in the interest of Gustice. An award shall not be binding
on a ban# against which it is passed unless the complainant furnishes a letter of acceptance of the award in full and
final settlement of his claim within a period of fifteen da5s from the date of receipt of cop5 of the award. If the
complainant fails to furnish his4her letter of acceptance within this time or within e=tended time of fifteen da5s" the
award will lapse. ;owever" on a written request for e=tension of time" the ban#ing ombudsman ma5 grant e=tension
of time up to a further period of fifteen da5s for such compliance. 7ithin one month from the date of receipt b5 the
ban# of the acceptance in writing of the award b5 the complainant Aor within such time not e=ceeding a period of
fifteen da5s that ma5 be granted b5 the ban#ing ombudsmanB" the ban# has to compl5 with the award. ;owever" if
the ban# or the complainant is aggrieved b5 the award" it4 he can ma#e an appeal to the appellate authorit5 A2eput5
-overnor" Reserve Ban#B under the scheme.
!. B$!%!& O3-1*(3$! $!* Re(e+5e B$!% D+e2"#!(: The legal position of ban#ing ombudsman visJa8vis the
Reserve Ban# has been considered b5 the 3upreme %ourt in %anara Ban# vs P.R.0. 'padh5a5a AAIR 199+ 3%
)))B. The court observed that since an ombudsman is appointed b5 virtue of the scheme framed under 3 !A of the
Ban#ing Regulation Act" 19$9" he4she is obliged to compl5 with the directions4circulars and notifications issued b5
the Reserve Ban# under 3ection !A or >1 of the Act. ;e43he is also required to issue directions to ban#s based on
the Reserve Ban# directions4circulars and ensure their compliance. The ombudsman cannot ignore these circulars
and directions while dealing with the complaints filed b5 customers of ban#s. The impugned award having been
made" ignoring various circulars4directions issued b5 the Reserve Ban#" the same was held to be not sustainable.
The court" therefore" set aside the impugned award and remitted the complaint to the ombudsman for its fresh
disposal in the light of the circulars4directions issued b5 the Reserve Ban# with regard to charging of rate of interest
from the landlord loanees" whose buildings were ta#en on lease4rent b5 the concerned ban# and calculating the
interest rate at quarterl5 rests.
?. B$!%!& O3-1*(3$! $!* De-" Re2#5e+/ T+-1!$.(: As regards the position of ban#ing ombudsman vis8a8vis
the debt recover5 tribunal" the Allahabad ;igh %ourt in 64s ;industan 9erro and Industries 1td. vs 2ebt Recover5
Tribunal AAIR >))1 All 1!!B observed that while the obGect of the scheme is to enable resolution of complaints
relating to provision of ban#ing services and the satisfaction or settlement of such complaints" the purpose of the
Act is to provide for the establishment of tribunals for e=peditious adGudication and recover5 of debts due to ban#s
and financial institutions and for matters connected therewith or incidental thereto. The procedure prevailing prior to
the enactment of the Act for recover5 of debts due to the ban#s and financial institutions has bloc#ed a significant
portion of their funds in unproductive assets" the value of which deteriorated with the passage of time. It was for this
compelling reason and to obviate the difficulties in recovering debts due to the ban#s and financial Institutions that
the Act was enacted. The scheme has nothing to do with the proceedings of recover5 of debts due to the ban#s and
financial institutions. The scheme formulated b5 the Reserve Ban# under the Ban#ing Regulation Act" 19$9 cannot
(
override the provisions of the Act.
4.11 RESERVE FUNDS
I. C+e$"#! #f Re(e+5e F1!*: <ver5 ban#ing compan5 incorporated in India has to create a reserve fund under
3ection 1(A1B of the BR Act out of the profits as shown in the profits and loss account prepared under 3ection >9 of
the Act. <ver5 5ear" a sum equivalent to not less than twent5 per cent of such profits has to be transferred to the
reserve fund. 3uch transfer of profits to reserve fund has to be made before an5 dividend is declared.
II. ECe3'"#! f+#3 C#!"+-1"#!: If an5 ban#ing compan5 has an adequate paid8up capital and reserves in relation to
its deposit liabilities" the Reserve Ban# ma5 recommend to the -overnment of India for e=emption from the
requirement of transfer of profits to reserve fund. Thereupon" the -overnment ma5 pass an order in writing"
e=empting the ban#ing compan5 from 3ection 1(A1B for such period as ma5 be specified in the order. 0o such order
shall be made unless the amount alread5 in the reserve fund together with the amount in the share premium account
is not less than the paid8up capital of the ban#ing compan5.
III. A''+#'+$"#! f+#3 Re(e+5e F1!*@S)$+e P+e313 A22#1!": Appropriation of an5 amount from the reserve
fund or the share premium account has to be reported to the Reserve Ban# within twent58one da5s of such
appropriation. The ban#ing compan5 has also to e=plain the circumstances in which such appropriation was made. It
is open to the Reserve Ban# in an5 particular case to e=tend the period for submitting the report or to condone the
dela5 in ma#ing the report.
I:. F#+e&! B$!%(: The provisions of 3ection 1(A1B of the Ban#ing Regulation Act for creating a reserve fund do not
appl5 to foreign ban#s operating in India. In their case" instead of creating a reserve fund under 3ection 1(A1B"
3ection 11A>B of the Act requires them to deposit and #eep deposited with the Reserve Ban# an amount calculated at
twent5 per cent of the profit for each 5ear in respect of all the business transacted through their branches in India.
The amount ma5 be deposited in cash or unencumbered approved securities or partl5 in cash and partl5 in
unencumbered approved securities. 3ection 11 A>AB also provides for e=emption b5 %entral -overnment on the
recommendation of the Reserve Ban#" where the deposits alread5 made are considered adequate in relation to the
deposit liabilities of the ban#ing compan5.
4.1> MAINTENANCE OF CASH RESERVE
<ver5 ban#ing compan5 which is a scheduled ban# has a dut5 to maintain certain cash reserve with the Reserve Ban# under
3ection $> of the Reserve Ban# of India Act. In the case of non8scheduled ban#s" 3ection 1+ of the Ban#ing Regulation Act
provides for the maintenance of cash reserve.
I. S2)e*1.e* B$!%(: A scheduled ban# is a ban# included in the second schedule of the Reserve Ban# of India Act.
'nder 3ection $>A?B of the Act" the Reserve Ban# ma5 include an5 ban# in the second schedule if it satisfies the
following requirements 8
aB It has a paid8up capital and reserves of an aggregate value of not less than rs. ! lacH
bB It satisfies the reserve ban# that its affairs are not conducted in a manner detrimental to the interests of
depositorsH
cB It is.
i. a state co8operative ban#" or
+
ii. a compan5 as defined in 3ection of the %ompanies Act" or
iii. an institution notified b5 the %entral -overnment in this behalf" or
iv. a corporation or a compan5 incorporated outside India under the foreign laws.
Thus" a ban#ing compan5 which has the requisite capital and reserves of Rs. ! lac and the affairs of which are not
conducted in a manner detrimental to the interests of depositors is eligible to be included in the second schedule.
The Reserve Ban#" ma5 e=clude an5 ban# from the second schedule" if the aggregate value of its paid8up capital
falls below Rs. ! lac" or its affairs are found to be conducted in a manner detrimental to the interests of depositors on
an inspection under 3ection ! of the Ban#ing Regulation Act" or if it goes into liquidation" or otherwise ceases to
carr5 on ban#ing business.
II. ?1$!"13 #f C$() Re(e+5e: The cash reserve required to be maintained b5 a scheduled ban# with the Reserve
Ban# under 3ection $>A1B of the Reserve Ban# of India Act Aas amended in >))?B is an average dail5 balance" being
@such per cent of the total of the demand and time liabilities in India of that ban# as shown in the return referred to in
the sub83ection A>B" as the Reserve Ban# ma5 from time to time" having regard to the needs of securing the
monetar5 stabilit5 in the countr5" notif5 in the -aMette of India@. Thus" under the amended statute" the Reserve Ban#
can" in order to secure monetar5 stabilit5 in the countr5" determine the %RR for scheduled ban#s without an5 ceiling
or floor rate Aas against a statutor5 minimum of three per cent earlierB. @Average dail5 balance@ for this purpose
means the average of the balances held at the close of business of each da5 for a fortnight. The liabilities" for this
purpose do not include paid8up capital and reserves and an5 credit balance in the profit and loss account.
9urther" the amounts borrowed from the Reserve Ban#" I2BI" <=im Ban#" IIBI" 0ational ;ousing Ban# and
0ational Ban# for Agriculture and Rural 2evelopment" are also e=cluded. Apart from this" in case of a scheduled
ban#" other than a state co8operative ban#" the aggregate of liabilities of the scheduled ban# to the 3tate Ban#"
subsidiar5 ban#s" 0ationalised ban#s" ban#ing companies" coJoperative ban#s and an5 financial institutions notified
b5 the -overnment in this behalf" shall be reduced b5 the aggregate of liabilities of these ban#s and institutions to
that scheduled ban#. 9urther" the Reserve Ban# is empowered under the sub83ection A1%B of 3ection $> to specif5"
from time to time whether an5 transaction shall be regarded as liabilit5 in India of a scheduled ban#.
III. I!"e+e(": 'ntil the amendment to the RBI Act in >))?" the Reserve Ban# was authorised under the Act &3ection
$>A1 BB, to pa5 interest to a scheduled ban# when it maintained reserves above the statutor5 minimum as required
under the Reserve Ban#@s notification under the erstwhile proviso to the sub83ection A1B or under the sub83ection
A1AB of 3ection $>. As the sub83ection AIBB providing for interest has been omitted now" the Reserve Ban# cannot
pa5 interest on an5 portion of the %RR balances of ban#s.
I:. Re"1+!(: <ver5 scheduled ban# has to submit a return to the Reserve Ban# showing its demand and time liabilities
and borrowings from ban#s in India" classif5ing them into demand and time liabilities and giving other details
required under 3ection $>A>B of the Reserve Ban# of India Act. The return has to be as at the close of business on
each alternate 9rida5 and has to be sent not later than seven da5s after the date to which it relates. In some cases" it
ma5 be impracticable to furnish fortnightl5 returns b5 reason of the geographical position of the ban#s and its
branches. If so" the Reserve Ban# ma5 permit presentation of a provisional return fortnightl5" to be followed b5 a
final return within twent5 da5s after the date to which it relates. Alternativel5" such a ban# ma5 be permitted to file
a monthl5 return within twent5 da5s after the end of the month. In addition to the above" where the last 9rida5 of the
9
month is not an alternate 9rida5 for the purpose of return" a special return as at the close of business on that da5 has
to be submitted within seven da5s. 7here the relevant 9rida5 is a holida5 under the 0egotiable Instruments Act" the
return has to be prepared as at the close of the preceding wor#ing da5.
:. Pe!$."e(: 7hen the balance maintained b5 an5 scheduled ban# falls below the stipulated minimum" such a ban#
shall be liable to pa5 a penal interest to the Reserve Ban#. 2uring the first fortnight" when such shortage occurs" the
penal interest shall be three per cent above the ban# rate and if the shortage continues in the ne=t fortnight" the penal
interest shall increase to five per cent above the ban# rate. 7here the shortfall still persists in the third fortnight"
ever5 director" manager or secretar5 of the ban# who is a wilful part5 thereto shall be punishable with a fine. In that
case" the Reserve Ban# ma5 also prohibit the ban# from accepting fresh deposits. %ontravention of the order of
prohibition is also punishable with a fine. 9ailure to file the return as required" also attracts a penalt5 under 3ection
$!A$B of the Act. 7here Reserve Ban# is satisfied that a ban# had sufficient reason for committing the default" either
in maintaining reserves or in filing return" the penalt5 ma5 be waived. 7hen penalt5 is imposed for a default" the
amount has to be paid within fourteen da5s of the notice demanding pa5ment. /n failure to pa5 accordingl5"
Reserve Ban# ma5 obtain a direction from the Principal %ivil %ourt for lev5ing the penalt5 and obtain a certificate
for the amount which ma5 be enforced li#e a decree of a civil court.
:I. C$() Re(e+5e( #f N#!-S2)e*1.e* B$!%(: In the case of ban#ing companies" which are not scheduled ban#s under
3ection 1+ of the Ban#ing Regulation Act" the cash reserve need not be maintained with the Reserve Ban#. It ma5
be with the ban# itself" or in a current account with the Reserve Ban# or b5 wa5 of net balance in current accounts
or in one or more of these wa5s. The balance maintained should not be less than three per cent of the demand and
time liabilities as on the last 9rida5 of the second preceding fortnight. The ban# has also to submit a return to the
Reserve Ban# before the twentieth da5 of ever5 month showing the amount so held on alternate 9rida5s during the
month" along with particulars of its demand and time liabilities in India on such 9rida5s. If the 9rida5s concerned
fall on holida5s under the 0egotiable Instruments Act" the returns have to be filed as on the preceding wor#ing da5.
4.14 MAINTENANCE OF LI?UID ASSETS
<ver5 ban#ing compan5 has a dut5 to maintain a certain percentage of their assets in India under 3ection >$ of the Ban#ing
Regulation Act in the form and manner specified b5 the Reserve Ban# b5 notification in the official gaMette. Recentl5" the
Ban#ing Regulation AAmendmentB /rdinance" >))( amended the provisions of 3ection >$" omitting the sub83ections A1B
and A>B of 3ection >$ which provided for a statutor5 minimum requirement of >! per cent. 'nder the sub83ection A>AB" as
modified b5 the /rdinance" a scheduled ban#" in addition to the average dail5 balance which it is" or ma5 be required to
maintain under 3ection $> of the Reserve Ban# of India Act" 19$ shall maintain in India" assets" the value of which shall
not be less than such percentage not e=ceeding $) per cent of the total of its demand and time liabilities in India as on the
last 9rida5 of the second preceding fortnight. Ban#ing companies other than scheduled ban#s have also to maintain such
assets in addition to the cash reserve" which the5 are required to maintain under 3ection 1+ of the BR Act.
I. Re"1+!(: 9or ensuring compliance with the above provisions" a monthl5 return has to be submitted to the Reserve
Ban# b5 ever5 ban#ing compan5. The return has to be submitted not later than twent5 da5s from the end of the
month to which it relates" in the prescribed form and manner and giving particulars of assets and demand and time
liabilities at the close of business of each alternate 9rida5. If such a 9rida5 is a public holida5" the return has to be
$)
prepared as at the close of the preceding wor#ing da5. 7ithout preGudice to the above" the Reserve Ban# is also
empowered to require a ban#ing compan5 to furnish a return showing particulars of the assets and demand and time
liabilities as at the close of each da5 of a month.
II. Pe!$."/ f#+ Def$1.": If the balance on an5 alternate 9rida5 Aor the preceding wor#ing da5" when such 9rida5 is a
holida5B falls below the minimum requirement" the ban#ing compan5 is liable to pa5 to the Reserve Ban# penal
interest at the rate of three per cent above ban# rate on the shortfall for the da5. If the default recurs on the
succeeding alternate 9rida5" the penal interest is raised to five per cent above the ban# rate on the shortfall. If the
default occurs on the ne=t succeeding 9rida5" then ever5 director" manager and secretar5 of the ban#ing compan5 is
punishable with a fine. The Reserve Ban# is also empowered to impose a similar penal interest for shortfall in the
assets on an5 da5 and if shortfall continues on the succeeding wor#ing da5" the higher penal interest is pa5able as
above. If the Reserve Ban# is satisfied on the application of a ban#ing compan5 that it had sufficient cause not to
compl5 with the provisions as to maintenance of assets" penal interest ma5 be waived.
4.16 ASSETS IN INDIA
I. ?1$+"e+./ '#("#! #f $((e"(: <ver5 ban#ing compan5 has to maintain in India certain amount of assets as required
under 3ection >! of the Ban#ing Regulation Act. Accordingl5" at the close of business on the last 9rida5 of ever5
quarter" such assets shall not be less than sevent5 five per cent of the demand and time liabilities of the ban#ing
compan5 in India. If the last 9rida5 is a holida5 under the 0egotiable Instruments Act" the assets are based upon as
at the close of business on the preceding wor#ing da5. @Ouarter@ for this purpose means the period of three months
ending on the last da5 of 6arch" Eune" 3eptember and 2ecember. This provision is meant to ensure that the
resources mobilised b5 ban#s operating in India" especiall5 the foreign ban#s" are largel5 invested within the
countr5. The assets ma5 be in cash" gold or unencumbered approved securities. @Assets in India@ also include e=port
bills drawn in and import bills drawn on and pa5able in India and e=pressed in currencies approved b5 the Reserve
Ban# for this purpose. 3uch bills and securities approved b5 the Reserve Ban# in this behalf are treated as assets in
India even if these assets were held outside India. The paid8up capital" reserves and an5 credit balance in the profit
and loss account of a ban#ing compan5 shall not be treated as @liabilities in India@ for this purpose.
II. Re"1+!(: A return regarding the assets maintained in India under 3ection >!A1B of the Ban#ing Regulation Act has
to be submitted to the Reserve Ban# within one month from the end of ever5 quarter. 3uch return has to be filed in
the form and manner prescribed b5 the rules made under the Act.
4.19 LET US SUM UP
I. The Ban#ing Regulation Act empowers the Reserve Ban# to issue directions to ban#ing companies in public
interest" in the interest of ban#ing polic5 and in the interest of depositors. 3ection >1 provides for the issue of
directions to regulate loans and advances b5 ban#ing companies. This ma5 be done b5 regulating the purposes of
lending" margins in respect of secured loans" rate of interest and terms and conditions of lending. 3ection !A gives
wide general powers to issue directions. The Reserve Ban# issues directions from time to time under 3ection >1
Aread with 3ection ! AB regulating acceptance of deposits and lending. 'nder 3ection >1A of the Act" the rate of
interest on loans and advances contracted between a ban# and its customer is not liable to be reopened b5 a court of
law. 3ection >) of the Act imposes restrictions on loans and advances to directors" and companies and firms in
$1
which directors are interested as director" partner" etc.
II. A ban#ing compan5 which is a scheduled ban# has to maintain a certain percentage of the time and demand
liabilities as cash reserve with the Reserve Ban# under 3ection $> of the Reserve Ban# of India Act" as notified b5
the Reserve Ban# from time to time. 9ailure to do so renders the ban#ing compan5 liable to penalt5. 9or non8
scheduled ban#ing companies" 3ection 1+ of the BR Act provides for cash reserve. Ban#ing companies have also to
maintain a certain percentage of their demand and time liabilities in liquid assets as stipulated under 3ection >$ of
the BR Act. These assets ma5 be maintained to the e=tent and in the form and manner as notified b5 the Reserve
Ban#. Apart from this" ban#ing companies are required to maintain such assets in India at not less than sevent5 five
per cent of demand and time liabilities as at the close of business of the last 9rida5 of ever5 quarter. Ban#ing
companies also have to transfer to the reserve fund twent5 per cent of their annual profits as disclosed in the profit
and loss account.
UNIT 6 - RETURNS7 INSPECTION7 WINDING UP
$.) /bGectives
$.1 Introduction
$.> Annual Accounts and Balance 3heet
$. Audit and Auditors
$.$ 3ubmission of Returns
$.! Preservation of Records and Return of Paid Instruments
$.? Inspection and 3crutin5
$.( Board for 9inancial 3upervision
$.+ Acquisition of 'nderta#ings
$.9 Amalgamation of Ban#s
$.1) 7inding up of Ban#s
$.11 Penalties for /ffences
$.1> 1et 's 3um 'p
6.0 OBJECTIVES
The obGectives of this unit are to understand the laws applicable to ban#ing companies in respect of
Preparation of accounts and balance sheet
Audit of accounts
9iling of returns
Inspection and scrutin5
Acquisition of assets b5 the central government
Amalgamation with other ban#s
7inding up
Penalties for default or contravention
$>
6.1 INTRODUCTION
Ban#ing companies have to prepare their balance sheet and accounts annuall5 as provided in the Ban#ing Regulation Act.
The accounts have to be audited b5 dul5 qualified auditors as stipulated in the Act. The audited balance sheet and accounts
have to be submitted as returns to the Reserve Ban# and copies thereof have to be submitted to the Registrar of %ompanies.
Ban#ing companies have to file man5 other returns to the Reserve Ban#. The Ban#ing Regulation Act also provides for
inspection and scrutin5 of the boo#s and accounts of ban#ing companies. The board for financial supervision has been set up
for this purpose. The %entral -overnment is authorised to acquire the assets of ban#ing companies and order the
amalgamation of an5 ban#ing compan5 with another ban#ing compan5. The Reserve Ban# has the power to appl5 to the
;igh %ourt for the winding up of ban#ing companies. 0on8compliance with the provisions of the Reserve Ban# of India
Act" the Ban#ing Regulation Act and the orders" rules" regulations" or directions issued under them is punishable under these
acts. In this chapter" we e=amine the law relating to the above matters.
6.> ANNUAL ACCOUNTS AND BALANCE SHEET
I. All Ban#s whose shares are listed with 3toc# <=changes are required to publish their unaudited quarterl5 results as
per proforma prescribed b5 the 3<BI. <ver5 ban#ing compan5 has to prepare its balance sheet and profit and loss
account as stipulated in 3ection >9 of the Ban#ing Regulation Act. The balance sheet and profit and loss account"
has to be prepared at the end of each calendar 5ear or on e=pir5 of the twelve months period" ending with an5 other
date which the %entral -overnment ma5 notif5 in the official gaMette in this behalf" as on the last wor#ing da5 of the
5ear or the period" as the case ma5 be. 9or this purpose" ban#ing companies incorporated in India" have to cover
their entire business and in the case of foreign ban#s operating in India" the business transacted through all their
branches in India. 7hile preparing the accounts" the ban#ing compan5 has to compl5 with the directions and
instructions issued b5 the Reserve Ban# in respect of income recognition" asset classification" provisioning" etc."
from time to time.
II. The balance sheet and profit and loss account of a ban#ing compan5 incorporated in India has to be signed b5 the
manager or principal officer of the compan5 and at least three directors if there are more than three directors and b5
all directors if there are not more than three directors. In the case of foreign ban#s" the manager or the agent of its
principal office in India can sign.
III. The balance sheet and profit and loss account have to be prepared in the forms set out in the III 3chedule to the BR
Act or as near thereto as circumstances permit. The %ompanies Act requires ever5 compan5 to prepare its balance
sheet and profit and loss account in the forms set out in the part I of schedule :I to that Act. ;owever" the
respective provisions of the Ban#ing Regulation Act have overriding effect in respect of ban#ing companies. ;ence"
the provisions of the %ompanies Act that are inconsistent with the provisions of the Ban#ing Regulation Act are not
applicable to ban#ing companies. ;owever" those provisions of the %ompanies Act that are consistent with the
Ban#ing Regulation Act are applicable. The forms specified in the third schedule of the Ban#ing Regulation Act
ma5 be modified b5 the %entral -overnment from time to time b5 notification in the official gaMette.
I:. In the case of ban#ing companies" the profit and loss account" which has to be placed before the annual general
meeting should relate to the period ending with the last wor#ing da5 of the 5ear immediatel5 preceding the 5ear in
which the annual general meeting is held. The provisions of 3ection >1) of the %ompanies Act" in this behalf have
$
been specificall5 made inapplicable to ban#ing companies b5 3ection >5PAB of the Ban#ing Regulation Act.
:. P1-.2$"#! #f A22#1!"( $!* B$.$!2e S)ee". The accounts and balance sheet prepared under 3ection >9 of the
Ban#ing Regulation Act along with the auditors@ report have to be published" as provided in 3ection 1 thereof read
with Rule 1! of the Ban#ing Regulation A%ompaniesB Rules" 19$9. Accordingl5" the publication has to be made in a
newspaper" which is in circulation at the place where the ban#ing compan5 has its principal office" within a period
of si= months from the end of the period to which the account and balance sheet relate. 9or this purpose" @newspaper@
means an5 newspaper or Gournal published at least once a wee# but does not include a Gournal other than a ban#ing"
commercial" financial or economic Gournal. As per current guidelines" Ban#s whose shares are listed in the capital
mar#et are required to publish their unaudited quarterl5 results as per proforma prescribed b5 3<BI.
:I. S1-3((#! "# Re(e+5e B$!%: <ver5 ban#ing compan5 has to submit three copies of its balance sheet and profit
and loss account to the Reserve Ban# within three months from the end of the period to which the5 relate. This
period ma5 be e=tended b5 the Reserve Ban# b5 a further period not e=ceeding three months.
:II. F1+!()!& #f A22#1!"( $!* B$.$!2e S)ee" "# Re&("+$+: 3ection >>) of the %ompanies Act provides for
submission b5 companies of copies of accounts and balance sheet along with the auditor@s report to the Registrar of
%ompanies. ;owever" in the case of ban#ing companies" 3ection > of the Ban#ing Regulation Act provides for
furnishing to the registrar three copies of the accounts" balance sheet and auditor@s report submitted to the Reserve
Ban# under 3ection 1 of the Act" which would be dealt with in all respects" as if these were submitted under
3ection >>) of the %ompanies Act. 7hen an5 compan5 submits additional information relating to balance sheet and
profit and loss account to the Reserve Ban# under 3ection >(A>B of the Ban#ing Regulation Act" the compan5 has to
send a cop5 thereof to the Registrar as well.
:III. D('.$/ #f B$.$!2e S)ee" $!* A22#1!"(: 9oreign ban#s Aban#ing companies incorporated outside IndiaB
operating in India have to displa5 in a conspicuous place" in their principal office a cop5 of the last audited balance
sheet and profit and loss account. This has to be done not later than the first 6onda5 in August of an5 5ear in which
it carries on business. The accounts and balance sheet have to be #ept displa5ed until replaced b5 a cop5 of the
subsequent balance sheet and profit and loss account. 3imilarl5" foreign ban#s have also to displa5 copies of their
complete audited balance sheet and profit and loss account relating to their ban#ing business as soon as these are
available and #eep displa5ed till the subsequent accounts are available.
6.4 AUDIT AND AUDITORS
The balance sheet and profit and loss account of a ban#ing compan5 have to be audited" as stipulated under 3ection ) of the
Ban#ing Regulation Act. Accordingl5" a person dul5 qualified under an5 law for the time being to be an auditor of
companies is eligible to be the auditor of a ban#ing compan5.
I. P#,e+( $!* F1!2"#!( #f A1*"#+(: The powers" functions and duties of the auditors and the liabilities and
penalties to which the5 are subGected to under 3ection >>( of the %ompanies Act are applicable to auditors of
ban#ing companies. In addition to the above" the auditor of a ban#ing compan5 has to give certain additional
information in his audit report. In the case of ban#s incorporated in India" the additional matters are as under.
7hether or not information and e=planation" required b5 him were found to be satisfactor5H
7hether or not the transactions of the compan5" as noticed b5 him were within the powers of the compan5H
$$
7hether or not returns from branches were adequate for the auditH
7hether or not profit and loss account shows a true picture of the profit and loss for the period coveredH
An5 other matter" which the auditor considers necessar5 to bring to the notice of the shareholders of the
compan5.
In dealing with ban# accounts" the responsibilit5 of the auditor is not confined to safeguarding the interests of the
proprietors. The auditor will be reasonabl5 blamed" if after signing the usual auditor@s report on an apparentl5 sound
balance sheet" the ban# is afterwards found insolvent A3ee the Gudgment of the Derala ;igh %ourt in Institute of
%hartered Accountants vs. 3rinivasa" AIR 19?) Derala. )9 at 11 and the Gudgment of 6adras ;igh %ourt in
Registrar of %ompanies vs. R6. ;egde" AIR 19!$ 6adras 1)+) at 1)+$B.
II. S'e2$. A1*": Reserve Ban# is empowered under 3ection )A IBB of the Ban#ing Regulation Act to order a special
audit of the accounts of an5 ban#ing compan5. 3uch an order ma5 be passed when the Reserve Ban# is of the
opinion that special audit is necessar5 in the public interest or in the interest of the ban#ing compan5 or its
depositors. An order" on special audit ma5 relate to an5 transaction or class of transactions or such period or periods
as the Reserve Ban# ma5 specif5 in the order. The ban# ma5 b5 the same order or b5 a different order appoint a
dul5 qualified auditor for this purpose or ma5 direct the auditor of the ban#ing compan5 himself to conduct such a
special audit. The Reserve Ban#@s directions are binding on the auditor of the ban#ing compan5 and the auditor has
to ma#e a report of such an audit to the Reserve Ban# and also give a cop5 thereof to the ban#ing compan5. The
e=penses in relation to the special audit have to be borne b5 the ban#ing compan5.
6.6 SUBMISSION OF RETURNS
<ver5 ban#ing compan5 has to furnish several returns to the Reserve Ban# under various provisions of the Ban#ing
Regulation Act and under the Reserve Ban# of India Act. The details of these returns are discussed below.
I. Re"1+! #! L01* A((e"(: <ver5 ban#ing compan5 has to submit a return of its liquid assets under 3ection >$AB of
the Ban#ing Regulation Act. The return has to be submitted within twent5 da5s from the end of the month to which
it relates. The return has to be in the form prescribed under Rule 1A of the Ban#ing Regulation A%ompaniesB Rules"
19$9. The return should contain particulars of assets and the demand and time liabilities" as at the close of business
of each alternate 9rida5 or when such a 9rida5 is a holida5" as at the close of business of the preceding wor#ing da5.
The Reserve Ban# is also empowered to require a ban#ing compan5 to furnish returns showing particulars of assets
and demand and time liabilities as at the close of each da5 of the month.
II. M#!")./ Re"1+!(: <ver5 month" a ban#ing compan5 has to submit to the Reserve Ban# a return under 3ection >(
of the BR Act" showing its assets and liabilities in India as at the close of business on the last 9rida5 of the previous
month. 3uch a return has to be submitted before the close of the month succeeding to which it relates. The return has
to be in the form prescribed under Rule 1$A of the Ban#ing Regulation A%ompaniesB Rules" 19$9. Apart from this"
the Reserve Ban# ma5 also call for statements and information relating to the business or affairs of a ban#ing
compan5 at an5 time. The ban# ma5 direct the ban#ing compan5 to submit such statement or information within
such time as it ma5 direct. The Ban# ma5 also call for information ever5 half 5ear regarding investments of a
ban#ing compan5 or the classification of its advances in respect of industr5" commerce or agriculture.
III. A22#1!"( $!* B$.$!2e S)ee": The annual accounts and balance sheet have to be submitted to the Reserve Ban#
$!
within three months from the end of the period to which the5 relate. The Reserve Ban# ma5 e=tend the time b5 a
further period of three months.
I:. Re"1+! #f A((e"( ! I!*$: A ban#ing compan5 has to submit to Reserve Ban# under 3ection >!A1B of the Ban#ing
Regulation Act" a quarterl5 return regarding its assets in India. The return has to be submitted within one month of
the end of the quarter. The return has to be filed in the form specified in the Rule 1$A of the Ban#ing Regulation
A%ompaniesB Rules.
:. Re"1+! #f U!2.$3e* De'#("(: 'nder 3ection >? of the BR Act" a ban#ing compan5 has to file within thirt5 da5s
of the close of each calendar 5ear a return on unclaimed deposits Anot operated for ten 5earsB. This has to be
submitted as specified in the Rule 1$B of the Ban#ing Regulation A%ompaniesB Rules.
:I. Re"1+! #f C$() Re(e+5e #f N#!-S2)e*1.e* B$!%(: <ver5 ban#ing compan5" not being a scheduled ban#" has to
furnish a return to the Reserve Ban# under 3ection 1+A1B of the BR Act relating to cash reserve. The return has to be
submitted before the twentieth da5 of ever5 month showing the amounts held on the alternate 9rida5s during a
month along with the particulars of demand and time liabilities in the form stipulated in the Rule 1A of the BR
A%ompaniesB Rules.
:II. Re"1+! -/ S2)e*1.e* B$!%(: 'nder 3ection $> of the RBI Act" scheduled ban#s have to submit returns to the
Reserve Ban# of their demand and time liabilities as specified in the sub83ection A>B thereof.
6.9 PRESERVATION OF RECORDS AND RETURN OF PAID INSTRUMENTS
I. P+e(e+5$"#! #f Re2#+*(: The %entral -overnment is empowered under 3ection $! C of the Ban#ing Regulation
Act to ma#e rules specif5ing the periods of preservation of boo#s" accounts and other documents b5 ban#s and the
periods of preservation of different instruments paid b5 ban#s. Accordingl5" the -overnment has notified the
Ban#ing %ompanies APreservation of RecordsB Rules" 19+! and the %ooperative Ban#s APeriod of Preservation of
RecordsB Rules" 19+!. These rules specif5 the period of preservation of different t5pes of ledgers and registers" and
records other than ledgers and registers. The rules further provide that" notwithstanding this" the Reserve Ban# ma5"
having regard to the factors specified in 3ection !AA1B of the BR Act" direct an5 ban# b5 an order in writing for
preserving an5 boo#s" accounts or registers for a longer period than the period specified under the rules.
II. Re"1+! #f P$* I!("+13e!"(: 'nder 3ection $!N of the Ban#ing Regulation Act" a ban# is authorised to return paid
instruments to their customers even before the end of the period of preservation specified under the Act. ;owever"
in that case" the ban# shall not return the instrument without ma#ing and #eeping in its possession a true cop5 of all
relevant parts of the instruments b5 a mechanical or another process ensuring accurac5 of the cop5. Ban#s are not
entitled to charge the customers Aincluding -overnment departments and corporationsB for giving such copies of
instruments.
6.: INSPECTION AND SCRUTIN=
I. I!('e2"#!: The Reserve Ban# is empowered under 3ection ! of the Ban#ing Regulation Act to conduct an
inspection of an5 ban#ing compan5. The ban# ma5 conduct such an inspection at an5 time. The %entral
-overnment ma5 also direct the Reserve Ban# to conduct inspection of an5 ban# and in that case" the Reserve Ban#
is bound to compl5 with such a direction. After inspection of the boo#s and accounts of the ban#ing compan5" a
cop5 of the inspection report has to be given to the ban#ing compan5. The directors and officers of a ban#ing
$?
compan5 are bound to produce for inspection all boo#s" accounts and other documents in their custod5. The
inspecting team ma5 also require the ban# to furnish an5 statements or information relating to the affairs of the
ban#ing compan5 within the time specified b5 them. The inspecting officer is authorised to e=amine an5 director or
officer of a ban#ing compan5 on oath.
II. P#,e+( #f ")e G#5e+!3e!": A cop5 of the report of inspection has to be sent to the %entral -overnment in all
cases where inspections have been conducted as directed b5 the %entral -overnment. In other cases" it is optional
for the Reserve Ban# to send copies of inspection to the -overnment. /n consideration of the report" if the %entral
-overnment is of the opinion that the affairs of a ban#ing compan5 are being conducted to the detriment of the
interests of the depositors" the -overnment ma5 8
Prohibit the ban#ing compan5 from receiving fresh deposits.
2irect the Reserve Ban# to appl5 for winding up of the ban#ing compan5 under 3ection + of the BR Act.
;owever" before ta#ing such action" the -overnment has to give an opportunit5 to the ban#ing compan5 to ma#e a
representation in respect of the report. The %entral -overnment is authoriMed to defer the passing of such an order
or to cancel or modif5 such an order subGect to an5 terms and conditions imposed b5 it. It is also open to the %entral
-overnment to publish an inspection report or a portion thereof after giving the ban#ing compan5 a reasonable
notice.
III. S2+1"!/: Apart from ma#ing regular inspections" Reserve Ban# is also empowered to conduct a scrutin5 of the
affairs and the boo#s and accounts of an5 ban#ing compan5 under the sub83ection A1 AB of 3ection ! of the
Ban#ing Regulation Act. /ne or more officers of the Reserve Ban# ma5 conduct such a scrutin5. A cop5 of the
report has to be furnished to the ban#ing compan5" if it ma#es a request for the same or if adverse action is
contemplated against the ban#ing compan5" based on the scrutin5. /therwise" unli#e in the case of inspection" it is
not mandator5 to give a cop5 of the report to the ban#ing compan5. The powers of the Reserve Ban# to call for
boo#s" accounts and documents or statements and information as for e=amination of an5 director or officer of the
ban#ing compan5 on oath e=tend to scrutin5 as well.
6.; BOARD FOR FINANCIAL SUPERVISION
I. C#!(""1"#! #f ")e B#$+*: The Board for 9inancial 3upervision ABoardB is a committee established under
Regulation $ of the Reserve Ban# of India ABoard for 9inancial 3upervisionB Regulations" 199$. These regulations
were framed b5 the Reserve Ban# under 3ection !+ of the Reserve Ban# of India Act" 19$ with the previous
sanction cf the %entral -overnment. The Board has Gurisdiction over the ban#ing companies" 0ationaliMed ban#s"
3tate Ban# and its subsidiaries.
II. C#3'#("#! #f ")e B#$+*: The Board consists of the following members.
-overnor of the Reserve Ban# of India" A3Bhe is the chairperson of the board.
2eput5 -overnors of the Reserve Ban# of India" one of the deput5 -overnors shall be nominated b5 the
-overnor as the full time vice chairman.
9our directors from the central board of the Reserve Ban# nominated b5 the -overnor as members" the
-overnor has to ma#e the nominations to the board in consultation with the central board of the Reserve Ban#
A%entral BoardB for a specified period"
$(
III. F1!2"#!( $!* P#,e+(: The board performs the functions and e=ercises the powers of supervision and inspection
under the Reserve Ban# of India Act and the Ban#ing Regulation Act" in relation to different sectors of the financial
s5stem" including ban#ing companies. The board shall also perform an5 other function as ma5 be notified b5 the
central board of the Reserve Ban#. The board is assisted b5 the department of supervision in the Reserve Ban# and
ma5 also draw personnel from outside. The chairman" vice8chairman and members can Gointl5 and severall5
e=ercise the powers vested in the board" as ma5 be specified b5 the central board from time to time. The board can
also authoriMe senior officers of the department of supervision with prior approval of the central board to carr5 out
certain functions. The board has to report to the central board on a half 5earl5 time line.
I:. Mee"!&( #f ")e B#$+*: The board meets at least once in a month. Three members" of whom" one shall be the
chairman or the vice chairman shall form a quorum for the meeting. A member who absents himself4herself without
leave of the chairman for three consecutive meetings of the board" would cease to hold office.
:. ECe21"5e C#33""ee. The board has the power to constitute sub8committees. /ne such subJcommittee is the
e=ecutive committee. The vice chairman of the Board" is the e=8official chairman of the committee and there shall
also be not less than two members of the board in that committee. The committee meets as often as necessar5.
:I. A*5(#+/ C#1!2.: -overnor ma5 constitute an advisor5 council to tender advice from time to time to the board.
This council will have not less than five members having special #nowledge of accountanc5" law" economics"
ban#ing" finance and management. The -overnor presides over the meetings of the council and the vice8chairman
and other members are members of the council.
6.< AC?UISITION OF UNDERTAKINGS
The %entral -overnment can acquire the underta#ings of ban#ing companies in certain cases as mentioned in 3ection ?A<
of the Ban#ing Regulation Act. @'nderta#ing@ means the entire organisation A3ee the Gudgement of the 3upreme %ourt in
R.%. %ooper vs 'nion of India" AIR 19() 3% !?$B. Acquisition ma5 be made if on receipt of a report from the Reserve
Ban#" the -overnment is satisfied that it is necessar5 to acquire an5 underta#ing on certain grounds. Before passing the
order" the %entral -overnment ma5 ma#e such consultation with the Reserve Ban# as it thin#s fit. The grounds for
acquisition are as under.
Ban#ing compan5 has failed on more than one occasion to compl5 with the Reserve Ban#@s directions under 3ection
>1 or !A of the Ban#ing Regulation Act.
Ban#ing compan5 is managed in a manner detrimental to the interests of depositors and it is necessar5 to acquire its
underta#ing in the interests of depositors or in the interests of ban#ing polic5 or for better provision of credit
generall5 or to an5 particular section of the communit5 or an5 particular area.
Before acquiring the assets of a ban#ing compan5" it has to be given a reasonable opportunit5 of showing cause
against the proposal.
I. /n acquisition of the underta#ing all the assets and liabilities of the acquired ban# stand transferred to and vests in
the %entral -overnment. It is also open to the %entral -overnment to order the vesting of the underta#ing of the
acquired ban# in a compan5 or corporation instead of vesting in the -overnment. In that case" the transferee ban#
ta#es over all the acquired assets and liabilities of the transferer ban#.
II. P#,e+ "# 3$%e (2)e3e: The %entral -overnment is empowered under 3ection ?A9 to ma#e a scheme for an5
$+
acquired ban#. 3uch a scheme is framed in consultation with the Reserve Ban#. The scheme ma5 provide for all
matters relating to propert5" assets" liabilities" board of management" service of emplo5ees and their terms and
conditions" pa5ment of compensation to shareholders of acquired ban# and other matters. The %entral -overnment
ma5 modif5 or var5 an5 such scheme after consulting the Reserve Ban#. The scheme and an5 subsequent
modification thereof is published in the official gaMette and laid down before the Parliament. The provisions of part
II% of the Act providing for acquisition of underta#ings of ban#s b5 the -overnment and of an5 scheme framed
there under shall have an overriding effect on other laws. The scheme shall have binding effect on the -overnment"
the acquired ban#" members" creditors and depositors of the acquired ban# and all other persons having an5 rights or
liabilities in respect of the acquired ban#.
III. C#3'e!($"#! "# ()$+e)#.*e+(: The shareholders of an acquired ban# have a right to get compensation under
3ection ?A- of the Ban#ing Regulation Act. The amount thereof will be determined as provided in the fifth
schedule to the Act" after consultation with the Reserve Ban#. There is also a provision A3ection ?A;B for a
reference to a tribunal for hearing claims relating to compensation. If the compensation offered b5 the -overnment
or the transferee ban# is not acceptable to an5 person to whom such compensation is pa5able" he ma5 request the
%entral -overnment to refer the matter to the tribunal" and a reference has to be made to the tribunal" subGect to the
satisfaction of certain conditions. In the case of acquisition of the underta#ing of a foreign ban# in India" a reference
has to be made to the tribunal" if requested b5 the foreign ban#.
6.8 AMALGAMATION OF BANKS
I. V#.1!"$+/ A3$.&$3$"#!: A ban#ing compan5 ma5 be amalgamated with another ban#ing compan5 under
3ection $$A of the Ban#ing Regulation Act. 9or this purpose" a scheme has to be prepared" containing the terms of
such an amalgamation in a draft and placed before the shareholders of the two companies separatel5. The scheme
has to be approved b5 a resolution passed b5 maGorit5 of members representing two8thirds in value of the
shareholders of each compan5 present in person or b5 pro=5. 0otice has to be given to ever5 shareholder in this
behalf. A share holder who votes against such scheme or dissents to the scheme and gives notice as stipulated" ma5
claim the value of his shares from the ban#ing compan5" in the event of sanction of the scheme b5 the Reserve
Ban#. After the scheme is approved b5 the requisite maGorit5" the scheme has to be submitted to the Reserve Ban#
for sanction. /n sanction b5 Reserve Ban#" the assets and liabilities of the amalgamated compan5 pass to the
ban#ing compan5" with which it is to be amalgamated. The Reserve Ban# ma5 also direct that the amalgamated
compan5 will stand dissolved from an5 specified date and intimate the Registrar of %ompanies accordingl5. The
order of sanction of amalgamation b5 Reserve Ban# will be the conclusive evidence of amalgamation.
II. A3$.&$3$"#! -/ G#5e+!3e!": The %entral -overnment is empowered to order amalgamation of two ban#ing
companies under 3ection 9? of the %ompanies Act. ;owever" such power has to be e=ercised onl5 after
consultation with the Reserve Ban#.
III. M#+$"#+13 $!* A3$.&$3$"#!: The Reserve Ban# is authorised under 3ection $! of the Ban#ing Regulation Act
to appl5 to the %entral -overnment for an order of moratorium in respect of an5 ban#ing compan5 where it appears
to it that there is good reason to do so. After considering the application" the %entral -overnment ma5 pass an order
of moratorium sta5ing the commencement or continuation of an5 action or proceedings against the ban#ing
$9
compan5 for a fi=ed period. This ma5 be on such terms and conditions as the -overnment thin#s fit and prefers to
impose. The period of moratorium is e=tendable from time to time. ;owever" the total period of moratorium shall
not e=ceed si= months. 2uring the period of moratorium" the ban#ing compan5 shall not ma#e an5 pa5ment to
depositors or discharge an5 liabilities or obligations to an5 other creditors unless otherwise directed b5 the %entral
-overnment in the order of moratorium or at an5 time thereafter.
IV. S2)e3e #f A3$.&$3$"#!:
AB 2uring the period of moratorium" Reserve Ban# ma5 prepare a scheme either for reconstruction of the ban#ing
compan5" or for amalgamation of the ban#ing compan5 with an5 other ban#ing institution. 3uch a scheme ma5 be
prepared if the Reserve Ban# is satisfied that it is necessar5 to do so.
in the public interestH
in the interests of the depositorsH
for securing the proper management of the ban#ing compan5H
in the interest of the ban#ing s5stem of the countr5 as a whole.
BB The scheme of amalgamation or reconstruction ma5 contain provisions for all or an5 of the matters specified in the
clauses AaB to AIB of the sub83ection A!B of 3ection $!. These include.
AiB constitution" name" registered office" capital assets" powers" rights" duties and obligations of the ban#ing
compan5 after reconstruction of the transferee compan5H AiiB transfer of assets from transferrer ban# to transferee
ban#" and terms and conditions thereof in the case of amalgamationH AiiiB change in or appointment of board of
directorsH AivB alteration in memorandum and articlesH AvB continuation of action b5 or against the ban#ing compan5
after amalgamation or reconstructionH AviB reduction of the interest or rights of members" depositors or other
creditors considered necessar5 in public interest or in the interest of members" depositors or creditors or for
maintenance of the business of ban#ing compan5H AviiB pa5ment in cash or otherwise to creditors and other
depositorsH AviiiB allotment of shares of the transferrer ban# to the shareholders of transferrer ban# for shares held b5
them in the transferrer ban#H Ai=B continuance of service of emplo5ees after reconstruction or amalgamation.
The scheme has to provide for the continuance of all wor#men and other staff Ae=cepting those specificall5 e=cluded
b5 name in terms of the schemeB on the same terms and conditions of service as before. The scheme should also
provide that within three 5ears" these emplo5ees have to be given the same pa5 and terms and conditions as are
applicable to the other emplo5ees of the transferee ban# of corresponding ran# or status of equivalent qualifications
and e=perience. 3ee the Gudgements of the 3upreme %ourt in 3tate Ban# of Travancore vs <lias A19()B> 3%% (?1
and also D.I. 3hepherd and others vs 'nion of India and others AIR 19++ 3% ?+?. In the case of an5 dispute
regarding ran#" status" etc." of emplo5ees in this regard" the decision of the Reserve Ban# shall be final.
3cheme has also to provide for pa5ment of terminal benefits to wor#ers who have opted not to continue in service
on amalgamation or reconstruction and other emplo5ees" who have been specificall5 mentioned in the scheme for
e=clusion from service. The scheme ma5 contain other terms and conditions of amalgamation or reconstruction and
also incidental matters.
%B Sanction of Scheme by Government: A cop5 of the draft of the scheme prepared b5 the Reserve Ban# has to be sent
to the -overnment and also to the ban#ing compan5" transferee ban# and an5 other ban#ing compan5 concerned in
!)
the amalgamation" for their suggestions and obGections" if an5. The Reserve Ban# ma5 specif5 the period for receipt
of such suggestions and obGections. In the light of an5 suggestions and obGections received" modification ma5 be
made in the draft" as considered necessar5 b5 the Reserve Ban#. Thereafter" the scheme" ma5 be placed before the
%entral -overnment for sanction. The -overnment ma5 sanction the scheme with such modifications as it ma5
consider necessar5. The scheme shall come into force from the date of the sanction.
2B Effect of Sanction . /n the %entral -overnment sanctioning the scheme" it becomes binding on the ban#ing
compan5" transferee ban# and the members" depositors and other creditors" emplo5ees and an5 person having an5
right or liabilit5 in relation to the ban#ing compan5. The sanction b5 the %entral -overnment is the conclusive
evidence that the amalgamation or reconstruction has been done in compliance with the provisions of 3ection $! of
the Act. The assets and properties of the ban#ing compan5 shall stand transferred to and vest in" and liabilities shall
stand transferred and become liabilities of the transferee ban# as provided in the scheme.
If an5 difficult5 arises in implementing the scheme" the %entral -overnment ma5 pass the necessar5 orders for removing the
difficulties. A cop5 of the scheme and an5 orders passed for removing difficulties has to be placed before the Parliament.
%onsequent to amalgamation" the transferee ban# has to carr5 on the business of the ban#ing compan5 acquired b5 the
transferee ban#" according to the law governing the transferee ban#. The %entral -overnment ma5 give necessar5
e=emptions and modifications in this behalf on the recommendation of the Reserve Ban#. ;owever" such modification or
e=emption should not last for more than seven 5ears.
A single scheme of amalgamation can be made in respect of several ban#ing companies under moratorium. The provision of
3ection $! and the scheme sanctioned there under shall have overriding effect on other laws" agreements" awards or
instruments.
6.10 WINDING UP OF BANKS
I. S1('e!(#! #f B1(!e(( $!* W!*!& U': A ban#ing compan5 which is temporaril5 unable to meet its obligations
ma5 appl5 to the ;igh %ourt under 3ection ( of the Ban#ing Regulation Act for sta5ing the commencement or
continuance of an5 proceedings against it. 3uch sta5 will be for a fi=ed period and subGect to an5 terms and
conditions imposed b5 the ;igh %ourt as it ma5 thin# fit. The total period of such moratorium shall not e=ceed si=
months. An application for moratorium shall be supported b5 a report of the Reserve Ban# indicating that the
ban#ing compan5 will be able to pa5 its debts if the application is allowed. The %ourt" for sufficient reasons" ma5
grant the relief" even if the application is not supported b5 the Reserve Ban#@s report. In that case" a report will be
called for and the order" ma5 be modified or rescinded based on the report. /n passing of moratorium order the
court ma5 appoint a special officer to ta#e custod5 and control of the assets" boo#s" etc." of the ban#ing compan5 in
the interests of the depositors.
If the Reserve Ban# is satisfied that the affairs of a ban#ing compan5 under moratorium as above" are being
conducted in a manner detrimental to the interests of the depositors" it ma5 appl5 to the ;igh %ourt for winding up
of the compan5. Thereafter" the ;igh %ourt shall not e=tend the period of moratorium.
II. W!*!& U' -/ H&) C#1+":
aB The ;igh %ourt shall order the winding up of a ban#ing compan5 in the circumstances mentioned in 3ection +
of the Ban#ing Regulation Act. The5 are.
!1
The ban#ing compan5 is unable to pa5 its debtsH
An application for winding up has been made b5 the Reserve Ban# under 3ection ( or 3ection + of the
Act.
bB The Reserve Ban# is bound to ma#e an application for winding up under 3ection +" if directed b5 the %entral
-overnment under 3ection !A$B of the Ban#ing Regulation Act. The %entral -overnment ma5 issue such
direction under 3ection !A$B when" on consideration of the report of inspection or scrutin5 made b5 the
Reserve Ban# at the direction of the %entral -overnment" it is of opinion that the affairs of the ban# are being
conducted to the detriment of the interests of the depositors. ;owever" before giving such direction" the ban#ing
compan5 has to be given an opportunit5 to ma#e a representation in connection with the report of inspection or
scrutin5.
cB It is open to the Reserve Ban# to appl5 for winding up of a ban#ing compan5 in certain other cases as follows.
iB failure to compl5 with the requirements of 3ection 11 regarding minimum paid8up capital and reservesH AiiB
ban# being not entitled to carr5 on ban#ing business in India under 3ection >> of the BR Act b5 reason of
reGection or cancellation of licenceH AiiiB prohibition to accept fresh deposits under 3ection !A$B of the BR Act
or 3ection $> AABAbB of the Reserve Ban# of India ActH AivB failure to compl5 with the requirements of the BR
Act other than 3ection 11 and continuance of such failure or contravention be5ond the period or periods
specified b5 the Reserve Ban# in this behalf and after notice in writing of such failure or contravention.
In addition to the above" the Reserve Ban# ma5 appl5 for winding up of a ban#ing compan5 if it is of the
opinion that.
A compromise or arrangement sanctioned for a ban#ing compan5 cannot be wor#ed satisfactoril5 with
or without modificationH or
The returns" statements and information given b5 the ban# under the act show that it cannot pa5 its
debtsH or
The continuance of the ban#ing compan5 is preGudicial to the interests of the depositors.
A ban#ing compan5 shall be deemed to be unable to pa5 its debts if it has refused to meet an5 lawful demand made
at an5 of its offices or branches within the stipulated time and the Reserve Ban# certifies in writing that the ban#ing
compan5 is unable to pa5 its debts. If the demand is made at a place where the Reserve Ban# has an office" branch
or agenc5" the time limit is two da5s and in other cases five da5s. 7hen the Reserve Ban# ma#es an application for
winding up" the court is bound to allow the application. As held b5 the 3upreme %ourt in the Palai %entral Ban#
case AAIR 19?> 3% 1(1 at 1+B" as between the %ourt and the Reserve Ban#" the momentous decision to wind up
in the interests of depositors ma5 reasonabl5 be left to the Reserve Ban#.
III. Off2$. L01*$"#+: 3ection +A of the BR Act provides for a liquidator to be appointed b5 the %entral
-overnment" attached to respective ;igh %ourt" for conducting the winding up proceedings relating to ban#ing
companies. 3uch a liquidator need not be appointed where enough cases of winding up of ban#ing companies are
not available in an5 ;igh %ourt.
I:. Re(e+5e B$!% $( L01*$"#+: Although there is a provision for an official liquidator as above" if the Reserve Ban#
applies to the %ourt under 3ection 9 of the Act" the Reserve Ban#" 3tate Ban# or an5 other ban# notified b5 the
!>
%entral -overnment in this behalf or an5 individual stated in the application ma5 be appointed as the official
liquidator. The remuneration of the liquidator and other costs and e=penditure of winding up shall be borne b5 the
ban#ing compan5. All provisions of the %ompanies Act" which are not inconsistent with the Ban#ing Regulation
Act shall be applicable to such a liquidator. The liquidator has to ma#e a preliminar5 report to the ;igh %ourt within
two months of the winding up order on the availabilit5 of assets for ma#ing preferential pa5ments under 3ection !)
of the %ompanies Act and for discharging liabilities to depositors and other creditors. 7ithin fifteen da5s of the
winding up order" the liquidator has to give notice calling for claims for preferential pa5ment and other claims from
ever5 secured and unsecured creditor. 'nder 3ection $ of the Act" the depositors need not ma#e claims. The claims
of ever5 depositor of a ban#ing compan5 is deemed to have filed for the amount as shown in the boo#s of the
ban#ing compan5 standing to his credit.
:. P+efe+e!"$. P$/3e!": In the winding up proceedings" the liquidator of a ban#ing compan5 has to ma#e certain
preferential pa5ments under 3ection $ A of the Ban#ing Regulation Act. Accordingl5" the preferential pa5ments
referred to in 3ection !) of the %ompanies Act" in respect of which" claims have been made within one month of
service of notice" get the first preference. After that" depositors in savings ban# account up to Rs. >!) and then other
depositors up to Rs. >!) get priorit5 over all other creditors. After ma#ing these pa5ments" the balance available will
be utilised for pa5ment to general creditors and then for pa5ment of further amounts due to the depositors. The
provision for preferential pa5ment b5 liquidator will not appl5 to depositors covered b5 the 2I%-% Act.
:I. V#.1!"$+/ W!*!& U': Apart from the provision for compulsor5 winding up as above" 3ection $$ provides for
voluntar5 winding up b5 ban#ing companies. ;owever" no such winding up will be permissible unless the Reserve
Ban# certifies that the ban# will not be able to pa5 in full all its debts as the5 accrue. It is open to the ;igh %ourt to
order during voluntar5 winding up of a ban#ing compan5 that it shall continue" subGect to the supervision of the
%ourt. The ;igh %ourt ma5 also order winding up b5 %ourt either on its own motion or on the application b5 the
Reserve Ban#" if during voluntar5 winding up it becomes clear that the compan5 is not able to meet its debts as the5
accrue or if continuing voluntar5 winding up or winding up under supervision of the court ma5 be detrimental to the
interests of depositors.
6.11 PENALTIES FOR OFFENCES
A ban#ing compan5 has to abide b5 the requirements of the Reserve Ban# of India Act and the Ban#ing Regulation Act and
the subordinate legislation there under" namel5 statutor5 rules" directions" etc." issued under these Acts. 9ailure to do so
invites penalties.
I. Pe!$."e( U!*e+ ")e RBI A2": %hapter : of the Reserve Ban# of India Act deals with penalt5 for violation of the
Act. Ban#ing companies have to ma#e applications and furnish returns" statements" etc." under different provision of
the Act" regulations" orders" directions" etc. 7hile doing so" the ma#ing of an5 statement which is false in an5
particular material" #nowing it to be false or wilfull5 omitting to ma#e an5 material statement" is punishable with
imprisonment up to a period of three 5ears and also a fine.
9ailure to produce an5 boo#s" accounts or other documents or statements" or information which a person is dut5
bound to ma#e under the Act" or an5 order" regulation or direction is punishable with fine up to Rs. >"))) for each
offence. 9or continuing offences" there is a provision for fine of Rs. 1)) for each da5 when the offence continues.
!
There are penalties under the sub83ection AB to A!BB of 3ection !+B for contravention of specific provisions of the
Act or orders" direction" etc." made there under. Apart from this" for contravention of an5 other provisions or not
compl5ing with an5 requirements under the Act" order" regulation or direction" the guilt5 shall be punishable with
fine up to Rs. >")))" and further Rs. 1)) ever5 da5 for continuing the offence.
In the case of offences b5 companies" ever5 person who was in charge of or responsible for conduct of the
compan5@s business shall be deemed guilt5 of the contravention or default unless he proves that the offence was
committed without his #nowledge or that he had e=ercised due diligence to prevent the offence. The court will not
ta#e cogniMance of an offence under the Act Ae=cept offences relating to acceptance of deposits under the %hapter
III%B otherwise than on a complaint b5 an officer of the ban# generall5 or speciall5 authorised in writing in this
behalf b5 the Ban#. A metropolitan magistrate or magistrate of the first class or court superior thereto shall tr5 the
offences.
II. Pe!$."e( 1!*e+ ")e BR A2": The provisions of the Ban#ing Regulation Act" relating to penalties" are provided in
3ection $? thereof. Accordingl5" ma#ing wilfull5 an5 false statement in an5 return" balance sheet or other document
or information given under the Act is punishable. 3imilarl5" wilful omission to ma#e an5 material statement is also
punishable. In both cases" punishment is up to three 5ears imprisonment and fine.
9ailure to produce an5 boo#" account or other document or to furnish a statement or information that is obligator5 to
be produced under 3ection !A>B" during inspection or scrutin5 is punishable with fine up to Rs. >"))). 3imilarl5"
failure to answer an5 question relating to the business of the ban#ing compan5 during inspection is also punishable.
%ontinuance of the offence is punishable with fine of Rs. 1)) for ever5 da5 during which the offence continues.
Acceptance of deposits against an order prohibiting acceptance of deposits under 3ection !A$B is punishable with a
fine up to twice the amount of deposits accepted. <ver5 director or officer is punishable in this case" unless he
proves that the contravention was without his #nowledge or that he had e=ercised all diligence to prevent it. An5
contravention of other provisions of the Act" or an5 rule" order or direction made or condition imposed" is
punishable with fine up to Rs. !)"))) or twice the amount involved in the contravention. In the case of continuing
offences" a fine up to Rs. >"!)) for each da5 ma5 be imposed. In the case of offences b5 companies" ever5 person
who was in charge of the compan5 at the time of commission of the offence is punishable unless he proves that the
offence was committed without his #nowledge or in spite of his e=ercising due diligence to prevent it.
'nder 3ection $(" the offences are cogniMable onl5 b5 a metropolitan magistrate" Gudicial first class or a court superior
thereto on a complaint b5 an officer of the Reserve Ban# and in some cases b5 the 0ational Ban#.
'nder 3ection $(A" the Reserve Ban# is empowered to impose a penalt5 for default or contravention. If the Reserve Ban#
e=ercises that power" no complaint shall be filed in a %ourt in respect of the same contravention or default.
6.1> LET US SUM UP
<ver5 ban#ing compan5 has to prepare its balance sheet and profit and loss account annuall5 as at the end of the calendar
5ear or at the end of twelve months as on a date notified b5 the %entral -overnment. The accounts have to be audited b5
auditors dul5 qualified to be auditors of companies. Three copies of the balance sheet" profit and loss account and the
auditor@s report have to be submitted as returns to the Reserve Ban# and to the Registrar of %ompanies. Ban#ing companies
have also to furnish other returns li#e return on maintenance of cash reserve" maintenance of liquid assets" etc. The Reserve
!$
Ban# is authorised to inspect or conduct" scrutin5 of ban#ing companies" their boo#s and accounts. The Board for 9inancial
3upervision set up b5 the Reserve Ban# b5 statutor5 regulations framed under the Reserve Ban# of India Act supervises the
affairs of ban#ing companies. The -overnment ma5 acquire the underta#ings of ban#ing companies in certain
circumstances based on a report from the Reserve Ban#. The %entral -overnment ma5 also order moratorium on ban#ing
companies on the application of the Reserve Ban#. 2uring moratorium" the Reserve Ban# ma5 prepare a scheme for
amalgamation" which ma5 be sanctioned b5 the %entral -overnment. 3uch an amalgamation scheme will have overriding
effect on an5 laws" agreements" etc. The Reserve Ban# ma5 also appl5 to the ;igh %ourt for winding up of a ban#ing
compan5 when it is not able to pa5 its debts and also in certain other circumstances. The Reserve Ban# of India Act and the
Ban#ing Regulation Act impose certain penalties for contravention or default committed b5 ban#ing companies or other
persons.
UNIT 9 - PUBLIC SECTOR BANKS AND CO-OPERATIVE BANKS
STRUCTURE
!.) /bGectives
!.1 Introduction
!.> 3tate Ban# and Its 3ubsidiaries
!. Regional Rural Ban#s
!.$ 0ationalised Ban#s
!.! Application of Ban#ing Regulation Act to Public 3ector Ban#s
!.? 2isinvestment of 3hares b5 -overnment
!.( %o8operative Ban#s
!.+ 1et 's 3um 'p
9.0 OBJECTIVES
The obGectives of this unit are to understand.
The special laws governing the public sector ban#s" namel5" state ban# and its subsidiaries" nationalised ban#s" and
regional rural ban#sH
The applicabilit5 of ban#ing regulation act and the reserve ban# of india act to these ban#sH
1aws governing the co8operative ban#s" in particular applicabilit5 of ban#ing regulation act to co8operative ban#sH
<=tent of legal control of state governments over co8operative ban#s.
9.1 INTRODUCTION
I. The public sector ban#s" namel5" the 3tate Ban# of India and its subsidiaries" 0ationalised ban#s and regional rural
ban#s are established b5 special statutes. These statutes and the rules" regulations and4or schemes framed thereunder
provide the powers" functions and management of these ban#s. The Ban#ing Regulation Act is applicable to these
ban#s onl5 in a limited wa5" as some of the provisions are not applicable.
II. In the case of co8operative ban#s" these ban#s being created and governed b5 the laws relating to co8operative
societies" if the5 operate onl5 in one state" the 3tate Act and if the5 operate in different states" the %entral Act
!!
applies. The Ban#ing Regulation Act is applicable to co8operative ban#s in a modified manner as provided in
3ection !? of the Act.
III. In this unit" we stud5 the special laws applicable to the public sector ban#s and co8operative ban#s as also the
Ban#ing Regulation Act and Reserve Ban# of India Act as the5 appl5 to these ban#s.
9.> STATE BANK AND ITS SUBSIDIARIES
I. E("$-.()3e!" #f S"$"e B$!%: 3tate Ban# of India was established under 3ection of the 3tate Ban# of India Act"
19!! for ta#ing over the underta#ing of the Imperial Ban# and to carr5 on the business of ban#ing and other
business in accordance with that Act. It is a bod5 corporate" with perpetual succession and common seal and shall
sue and be sued in its name. The maGorit5 of H shares are held b5 the -/I. 9urther" no shareholder other than the
-/I can e=ercise voting right above ten per cent" unless otherwise specified b5 the %entral -overnment in
consultation with the Reserve Ban#. 0ow the complete holding of RBI is acquired b5 the central government.
II. M$!$&e3e!": The 3tate Ban# has its central office in 6umbai and local head offices at 6umbai" Dol#ata" %hennai
and other places as decided b5 its %entral Board in consultation with the %entral -overnment. The superintendence
and direction of the affairs of the ban# is vested in the %entral Board" which has to function according to the
business principles having regard to public interest. The %entral -overnment can give directions to the ban# on
matters of polic5 involving public interest in consultation with the -overnor of the Reserve Ban# and the %hairman
of the 3tate Ban#. The directions have to be given through the Reserve Ban#. The board is empowered to ma#e
regulations for carr5ing out the purposes of the Act in consultation with the Reserve Ban# and with the previous
sanction of the %entral -overnment.
III. C#3'#("#! #f ")e B#$+*: The Board shall consist of %hairman" :ice8%hairman" not more than two 6anaging
2irectors appointed b5 the %entral -overnment" presidents of local boards and other directors. There are directors
falling in different categories" namel5" appointed b5 the -overnment to represent wor#men and officers" nominated
b5 the %entral -overnment in consultation with the Reserve Ban# from among persons with special #nowledge of
co8operatives and rural econom5" nominated b5 Reserve Ban#" nominated b5 %entral -overnment and elected b5
shareholders other than Reserve Ban#.
The chairman and managing directors are appointed for a period not e=ceeding five 5ears and are eligible for
reappointment. Their services can be terminated b5 the %entral -overnment b5 giving a three month@s notice or
notice pa5 in lieu thereof" after consultation with the Reserve Ban#.
1ocal boards are set up at each place where there is a local head office to e=ercise all powers and to perform the
functions and duties of the ban# delegated under 3ection > IB of the Act. The local board consists of the chairman
and other elected and nominated members as specified in 3ection >1 of the Act.
I:. B1(!e(( #f S"$"e B$!%: The 3tate Ban# shall act as an agent of the Reserve Ban# at the places where it has a
branch and where Reserve Ban# has no branch" if so required" b5 the Reserve Ban#" for transacting -overnment
business and other business entrusted to it b5 the Reserve Ban#. The terms and conditions thereof shall be as agreed
between the Reserve Ban# and the 3tate Ban#. If agreement is not reached" the terms shall be decided b5 the %entral
-overnment. The 3tate Ban# ma5 transact the wor# through its subsidiaries or an agent approved b5 the Reserve
Ban#. Apart from this" the 3tate Ban# ma5 carr5 on the business of ban#ing as defined in 3ection !AbB of the
!?
Ban#ing Regulation Act and other business specified in 3ection ?A1B of that Act. The ban# is permitted to acquire
business of other ban#s with the sanction of the %entral -overnment or if so directed b5 the %entral -overnment in
consultation with the Reserve Ban#.
:. A22#1!"( $!* A1*": The 3tate Ban# has to close its boo#s and balance accounts each 5ear as on 1 6arch or such
other date as ma5 be specified b5 the %entral -overnment. 7ithin three months of the closing date" it has to furnish
to the %entral -overnment and the Reserve Ban# its balance sheet and profit and loss account together with
auditors@ report and a report b5 the %entral Board on the wor#ing and activities of the ban#. The audit ma5 be
conducted b5 an5 person dul5 qualified to be auditors of companies under 3ection >>? of the %ompanies Act. 0o
2irector" member of local board" local committee or an officer of the 3tate Ban# shall be eligible to be the auditor.
The appointment of auditors is done b5 the Reserve Ban# in consultation with the %entral -overnment. The
auditors@ report and report of the %entral Board have to be placed before the Parliament. The 3tate Ban# has also to
transmit to the %entral -overnment and the Reserve Ban# within two months of the date of annual closing of
accounts" the particulars of its shareholders as on that date. The balance sheet and profit and loss account" auditor@s
report and report of the %entral Board shall be open for discussion b5 the shareholders at the annual general
meeting. The annual general meeting has to be held within si= wee#s of the date of sending the balance sheet" etc."
to the %entral -overnment and the Reserve Ban#.
:I. S1-(*$+/ B$!%(: The subsidiar5 ban#s of the 3tate Ban# of India were established b5 different special statutes.
The 3tate Ban# of ;5derabad was constituted as ;5derabad 3tate Ban# under the ;5derabad 3tate Ban# Act and
later renamed as 3tate Ban# of ;5derabad under the 3tate Ban# of ;5derabad Act" 19!?. The 3tate Ban# of
3aurashtra was constituted under the 3aurashtra 3tate Ban#s AAmalgamationB /rdinance" 19!). The other ban#s
were established under 3ection of the 3tate Ban# of India A3ubsidiar5 Ban#sB Act" 19!9. <ver5 subsidiar5 ban# is
a bod5 corporate with perpetual succession and common seal and shall sue and be sued in its own name. The
maGorit5 of the issued share capital of the subsidiar5 ban#s is held b5 the 3tate Ban#. The shares of the subsidiar5
ban#s are freel5 transferable as provided in 3ection 1+ of the Act. ;owever" the 3tate Ban# is not entitled to transfer
the shares if such transfer would result in reducing its shareholding to less than fift5 per cent of the issued capital.
:II. 6anagement of 3uhsidiarv Ranlrs8
ban# vests in its board of directors and the board ma5 e=ercise all the powers and carr5 out all functions with the
assistance of the managing director" subGect to the directions and instructions given b5 the 3tate Ban# from time to
time.
The board consists of the chairman A3tate Ban# %hairman" e=8officioB" managing director and other directors. The
directors are nominated or appointed b5 the %entral -overnment" Reserve Ban# or the 3tate Ban# e=cept for the
directors to be elected b5 the shareholders other than the 3tate Ban#. The 3tate Ban# appoints the managing director
after consulting the board of the subsidiar5 ban# and with the approval of the Reserve Ban#. The da58to8da5
administration vests in the managing director. The 3tate Ban# ma5" with the approval of the Reserve Ban# and after
giving opportunit5 to show cause" remove the managing director from office. The Act provides for an e=ecutive
committee" consisting of directors" which ma5 deal with an5 matter within the competence of the board subGect to
an5 regulations made under the Act.
:III. B1(!e(( #f S1-(*$+/ B$!%(: A subsidiar5 ban# has to act as agent of the 3tate Ban# under 3ection ? of
!(
the A3BI 3ubsidiar5 Ban#sB Act" at an5 place as required b5 the 3tate Ban# to receive" collect and remit mone5"
bullion and -overnment securities on behalf of the -overnment of India" and underta#e other business which the
Reserve Ban# ma5 entrust the 3tate Ban# from time to time" with the approval of the Reserve Ban#. 'nder 3ection
?A" a subsidiar5 ban# has also act as an agent of the Reserve Ban# if required b5 it" to underta#e -overnment wor#
or other wor# entrusted b5 the Reserve Ban#. The terms and conditions of agenc5 with the Reserve Ban# will be as
agreed between the Reserve Ban# and the subsidiar5 ban# and if no agreement is reached or dispute arises" the
decision of the %entral -overnment shall be final. A subsidiar5 ban# shall also transact the business of ban#ing as
defined in 3ection !AbB of the Ban#ing Regulation Act and an5 other business specified in 3ection ?A1B of that Act.
The %entral -overnment ma5 after consultation with the 3tate Ban# and Reserve Ban#" b5 order in writing
authorise a subsidiar5 ban# to underta#e other form of business or prohibit it from carr5ing on an5 business" which
is otherwise lawful for it to engage in. It is open to a subsidiar5 ban# to acquire the business of other ban#s with the
approval of 3tate Ban#. The Reserve Ban# ma5 direct the ban# in consultation with 3tate Ban# to acquire the
business of an5 ban#.
IF. A22#1!"( $!* A1*": 3ubsidiar5 ban#s have to close and balance their accounts annuall5 as on 1 6arch or such
other date as ma5 be specified b5 the %entral -overnment b5 notification in the official gaMette. After providing for
bad and doubtful debts and other matters specified in 3ection $) of the 3BI Asub8Ban#sB Act" a subsidiar5 ban# ma5
declare a dividend out of its profits.
The audit of accounts has to be done b5 a qualified auditor of companies as specified under 3ection >>? of the
companies Act who shall be appointed b5 the 3tate Ban# in consultation with the Reserve Ban#.
The balance sheet and profit and loss account together with auditors@ report and report of the board on the wor#ing
and activities of the ban# have to be submitted as returns to the 3tate Ban#" Reserve Ban# and the %entral
-overnment within three months of the date of closing accounts. The Reserve Ban# ma5 e=tend the period b5
further three months in consultation with the 3tate Ban#.
A general meeting of shareholders shall be held annuall5 as required under 3ection $$ of the Act within si= wee#s
of sending the accounts" etc." to the 3tate Ban# and others. The shareholders are entitled to discuss the balance sheet"
profit and loss account" auditor@s report and the board@s report at such meeting.
The 3tate Ban# is empowered under 3ection $( to inspect the subsidiar5 ban#s.
F. R1.e( $!* Re&1.$"#!(: The %entral -overnment is empowered to ma#e rules under 3ection ?> of the Act for
giving effect to the purposes of the Act. The 3tate Ban# is also empowered to ma#e regulations under 3ection ?
with the approval of the Reserve Ban# for giving effect to the purposes of the Act.
9.4 REGIONAL RURAL BANKS
The Regional Rural Ban#s ARRBsB are public sector institutions" regionall5 based" rural oriented and engaged in commercial
ban#ing. The5 were first set up in 19(! under the Regional Rural Ban#s /rdinance" 19(!. The ordinance was later replaced
b5 the Regional Rural Ban#s Act" 19(?. The formation of these ban#s was the result of the growing realisation that the ethos
and attitude of the e=isting public sector ban#s were not full5 conducive to meet the credit needs of the rural people. As
stated in the preamble to the Act" the obGect of setting up regional rural ban#s is to develop rural econom5 b5 providing
credit and other facilities for the purpose of development of agriculture" trade" commerce" industr5 and other productive
!+
activities in rural areas" particularl5 to small and marginal farmers" agricultural labourers" artisans and small entrepreneurs.
I. E("$-.()3e!" #f RRB(: 3ection of the Act authorises the %entral -overnment to establish regional rural ban#s
b5 notification in the official gaMette at the request of a sponsor ban# to operate within specified local limits.
@3ponsor Ban#@ is a ban# b5 which a regional rural ban# is sponsored and it holds ! per cent of the issued capital of
the RRB" while the %entral -overnment holds !) per cent and the 3tate -overnment holds the remaining fifteen per
cent of the issued capital. <ver5 RRB is a bod5 corporate with perpetual succession and common seal with power to
acquire" hold and dispose of propert5 and to sue and be sued in its name. -enerall5" a regional rural ban# is allotted
a compact area of operation comprising a few districts with homogeneous agro8climatic conditions and rural
clientele. These ban#s ma5 accept all t5pes of deposits from the public and engage in the business of @ban#ing@ as
defined in 3ection !AbB of the Ban#ing Regulation Act.
II. M$!$&e3e!" #f ")e Aff$+( #f $! RRB: The management of RRB vests in the board of directors. The board has to
function on business principles with due regard to public interest. The board is empowered to ma#e regulations for
giving effect to the provisions of the Act in consultation with the sponsor ban# and with previous approval of the
%entral -overnment. The %entral -overnment is empowered to give directions to RRBs on matters of polic5
involving public interest.
The board consists of a chairman appointed b5 the sponsor ban# from among its officers in consultation with the
0ational Ban#" or otherwise in consultation with the %entral -overnment. The chairman holds office on whole8time
basis and is removable b5 the sponsor ban#" where the chairman is an officer of the sponsor ban#" in consultation
with the 0ational Ban# and in other cases in consultation with the %entral -overnment.
A person who is adGudged insolvent or is convicted of an offence involving moral turpitude is disqualified to be a
director and has to vacate office. Absence from three meetings consecutivel5 without leave of the board also results
in vacation of office.
III. B1(!e(( #f Re&#!$. R1+$. B$!%(: Regional rural ban#s ma5 transact the business of ban#ing as defined in
3ection !AbB of the Ban#ing Regulation Act and an5 other business permissible for a ban# to underta#e under
3ection ?A1B of that Act. ;owever" the main thrust of the business would be granting of loans and advances to small
and marginal farmers" agricultural labourers" agricultural mar#eting societies" farmers@ service societies" artisans"
small entrepreneurs" etc." within the notified area of operation.
I:. other date as the %entral -overnment ma5 specif5. The auditors have to be appointed with the approval of the
%entral -overnment. A person qualified to act as an auditor of companies under 3ection >>? of the %ompanies Act
is qualified to be an auditor of a regional rural ban#. The auditor@s report and report on the wor#ing of the ban# has
to be laid before the Parliament. The sponsor ban# is empowered to monitor the progress of the RRBs b5 inspection"
internal audit and scrutin5 and suggest corrective measures.
:. A3$.&$3$"#!: Two or more RRBs ma5 be amalgamated b5 the %entral -overnment b5 notification in the official
gaMette. 3uch notification shall provide for all terms and conditions of amalgamation including continuation of
service of emplo5ees and shall be binding on the ban#s and all other parties concerned.
9.6 NATIONALISED BANKS
The Ban# 0ationalisation Acts &Ban#ing %ompanies AAcquisition and Transfer of 'nderta#ingsB Act" 19() and Ban#ing
!9
%ompanies AAcquisition and Transfer of 'nderta#ingsB Act" isfe/, transferred the underta#ings of then e=isting private
ban#s to the corresponding new ban#s established under these Acts. These corresponding new ban#s" are popularl5 #nown
as 0ationalised ban#s. /riginall5" the entire paid8up capital Aequit5 sharesB" of the 0ationalised ban#s were held b5 the
%entral -overnment. 3ome of these ban#s have recentl5 made public issues of shares" but the %entral -overnment still
holds the maGorit5 of shares in all these ban#s. The Ban#ing %ompanies AAcquisition and Transfer of 'nderta#ingsB and
9inancial Institutions 1aws AAmendmentB Act" >))? enables these ban#s to raise capital b5 wa5 of public issue or
preferential allotment or private placement of equit5 shares or preference shares. The %entral -overnment shall" however" at
all times hold not less than fift5 one per cent of the equit5 of these ban#s. The shares other than those held b5 the %entral
-overnment are freel5 transferable. The guidelines for issue of preference shares Aincluding those on the classes of
preference sharesB shall be issued b5 the Reserve Ban#. 0o equit5 shareholder other than the %entral -overnment can
e=ercise voting rights in e=cess of one per cent of the total voting rights of all the shareholders. In the case of the preference
shareholders" the5 shall have a right to vote in respect of those shares onl5 on resolutions which directl5 affect the rights
attached to the preference shares. 9urther" no preference shareholder shall be entitled to e=ercise voting rights in respect of
the preference shares held b5 him in e=cess of one per cent of the total voting rights of all the shareholders holding
preference share capital onl5.
<ver5 0ationalised ban# is a bod5 corporate having perpetual succession and common seal and power to acquire" hold and
dispose of propert5 and enter into contracts and to sue and be sued in its name. These ban#s ma5 carr5 on the business of
ban#ing as defined in 3ection !AbB of the Ban#ing Regulation Act and other forms of business specified in 3ection ?A1B of
that Act. The 0ationalised ban#s have also to act as agents of the Reserve Ban#" if so required b5 the Reserve Ban# to
underta#e the ban#ing business of %entral -overnment and an5 other business entrusted b5 the Reserve Ban#.
AB M$!$&e3e!": The general superintendence" direction and management of the affairs of a 0ationalised ban# vests
in the board of directors. The board can e=ercise all the powers and functions of the ban# and shall be entitled to
discuss" approve and adopt the annual accounts. The %entral -overnment is empowered to issue directions to the
ban# in the discharge of its functions on matters of polic5 involving public interest after consultation with the
-overnor of the Reserve Ban#" to supersede the board on the recommendation of the Reserve Ban# and also to
appoint an administrator. 9urther" under 3ection 9 of both the 0ationalisation Acts" the %entral -overnment has the
power to ma#e a scheme for carr5ing out the provisions of the Act after consultation with the Reserve Ban#. The
-overnment ma5 also amend or var5 the scheme in consultation with the Reserve Ban#. 3uch a scheme has to be
laid before Parliament and is binding on the ban# and an5 person having an5 right or liabilit5 in relation to the ban#.
BB D+e2"#+(: The directors of 0ationalised ban#s are nominated b5 the %entral -overnment or elected from the
shareholders. The nomination of directors is as under.
AiB not more than four whole8time directors Aas against two earlierBH AiiB one director who is an official of the %entral
-overnment to be nominated b5 the %entral -overnmentH AiiiB one director" possessing necessar5 e=pertise and
@e=perience in matters relating to regulation or supervision of commercial ban#s" to be nominated b5 the %entral
-overnment on the recommendation of the Reserve Ban#H AivB a director representing wor#men emplo5ees of the
ban#H AvB a director representing officers of the ban#H AviB one chartered accountant with not less than fifteen 5ears
e=perience nominated in consultation with Reserve Ban#H AviiB not more than si= directors to be nominated b5
%entral -overnment.
?)
The other shareholders can elect up to a ma=imum of three directors to the board. 0o person shall be eligible to be
elected as director" unless he is a person having fit and proper status based upon trac# record" integrit5 and such
other criteria as the Reserve Ban# ma5 notif5 from time to time in this regard. The Reserve Ban# ma5 also specif5
in the notification" the authorit5 to determine the fit and proper status" the manner of such determination" the
procedure to be followed for such determination and such other matters as ma5 be considered necessar5 or
incidental thereto.
The directors nominated under Item AviiB and the elected directors should have special #nowledge or practical
e=perience of agriculture and rural econom5" ban#ing" cooperation" economics" finance" law" small scale industr5 or
other #nowledge or e=perience useful to the ban# in the opinion of the Reserve Ban# or must represent the interest
of depositors or farmers or wor#ers and artisans. An elected director" who in the Reserve Ban#@s opinion does not
qualif5 the requirements" can be removed b5 the Reserve Ban# after giving an opportunit5 of being heard. The
board can co8opt an5 other qualified persons in his place who will continue until another director" is dul5 elected in
the ne=t annual general meeting. Apart from the direction and management of affairs of the ban#" the board has also
the power to frame regulations under 3ection 19 for giving effect to the provisions of the Act. This has to be done in
consultation with the Reserve Ban# and with the sanction of the %entral -overnment.
%B A**"#!$. *+e2"#+(: The Reserve Ban# ma5 appoint one or more additional directors on the board of a
0ationalised ban#" if it is of the opinion that in the interest of ban#ing polic5 or in the public interest or in the
interests of the ban# or its depositors" it is necessar5 to do so. The appointment ma5 be made from time to time" b5
order in writing" with effect from such date" as ma5 be specified in the order and the additional directors shall hold
office during the pleasure of the Reserve Ban# and subGect thereto" for a period not e=ceeding three 5ears or such
further periods not e=ceeding three 5ears at a time as the Reserve Ban# ma5 specif5. The5 shall not incur an5
obligation or liabilit5 b5 reason onl5 of being a director or for an5thing done or omitted to be done in good faith in
the e=ecution of the duties of this office or in relation thereto.
2B A22#1!"( $!* A1*": <ver5 0ationalised ban# has to close its account as on 1 6arch or such other date specified
b5 the %entral -overnment b5 notification in the official gaMette as provided in 3ection 1) of the Act. The auditor
shall be a person dul5 qualified to be an auditor of a compan5 under 3ection >>? of the %ompanies Act. The auditor
shall ma#e a report to the %entral -overnment upon the balance sheet as stipulated in 3ection 1) of the Act. The
auditor shall send copies of the report to the ban# and the Reserve Ban#. The ban# has to furnish copies of the
balance sheet" profit and loss account and auditor@s report along with the report of the board of directors on the
wor#ing and activities of the ban# to the %entral -overnment and the Reserve Ban#. The auditor@s report and report
of the board have to be laid before the Parliament. 7ithout preGudice to the above" the %entra, -overnment is also
empowered to appoint auditors as it thin#s fit at an5 time to e=amine and report on the accounts of a 0ationalised
ban#.
A 0ationalised ban# ma5 pa5 dividends out of profits after ma#ing the necessar5 provisions under the law or as
usuall5 provided b5 ban#ing companies. An annual general meeting of shareholders has to be held within si= wee#s
of the date of forwarding the balance sheet" etc." to the %entral -overnment. In such meeting" the shareholders will
be free to discuss the balance sheet" accounts" auditors@ report and report of the board. 9or the purpose of Income
Ta= Act" a 0ationalised ban# is treated as an Indian compan5.
?1
<B S2)e3e( #f M$!$&e3e!": In e=ercise of the powers under 3ection 9 of the Ban#ing %ompanies AAcquisition and
Transfer of 'nderta#ingsB Act" 19() and 3ection 9 of the Ban#ing %ompanies AAcquisition and Transfer of
'nderta#ingsB Act" 19+)" the %entral -overnment has framed two schemes" namel5.
1. 0ationalised Ban#s A6anagement and 6iscellaneous ProvisionsB 3cheme" 19().
>. 0ationalised Ban#s A6anagement and 6iscellaneous ProvisionsB 3cheme" 19+).
These schemes provide in detail for constitution of board of directors" appointment of chairman and managing director" term
of office of whole8time director including managing director" term of office of other directors" disqualifications of directors
and vacation of office" meetings of board and committees of the board Amanagement committee and advisor5 committeeB"
regional consultative committees" increase in paid8up capital and other miscellaneous matters.
9.9 APPLICATION OF BANKING REGULATION ACT TO PUBLIC SECTOR BANKS
3ection !1 of the Ban#ing Regulation Act provides that certain provisions of the Act would appl5 to 3tate Ban# and its
subsidiaries" 0ationalised ban#s and Regional Rural Ban#s as the5 appl5 to ban#ing companies. The applicable provisions
are 3ections 1)" 1 to 1!" 1(" 19 to >1 A" > to >+" >9 &e=cluding the sub83ection AB," the sub83ections AIBB" A1%B and A>B of
3ections )" 1" $" !" !A" ? &e=cluding clause AdB of the sub83ection A1B," $!C to $!N9" $? to $+" !)" !> and !. The
proviso to 3ection !1 also gives certain e=emptions from the applicable provisions regarding holding of office in approved
institutions under 3ection 1)AlBAcB" to the chairman and the managing director of 3tate Ban#" granting of loan" etc." under
3ection >)AlBAbBAiiiB to all ban#s and nominee directors in respect of 3ections $? and $(A.
The provisions which are not made applicable" are mainl5 the preliminar5 provisions up to 3ection 9" provisions relating to
capital A3ections 11 and 1>B" prohibition of common directors A3ection 1?B" licensing A3ection >>B audit e=cept special audit
A3ection )B" control over management &Part IIA A3ections ?AA to ?A2B," acquisition of underta#ing in Part % A3ections
?A< to ?AEB and winding up in Part III and Part IIIA A3ections ?B to $!FB.
i. Public 3ector Ban#s as 3cheduled Ban#s. All the public sector ban#s are scheduled ban#s under 3ection $> of the Reserve
Ban# of India Act and have to compl5 with the requirements of maintaining cash reserve as provided therein.
9.: DISINVESTMENT OF SHARES B= GOVERNMENT
In the conte=t of the -overnment polic5 to dilute the holdings in public sector ban#s" certain amendments were made in the
statutes governing public sector ban#s. The 3tate Ban# of India Act" was amended b5 the 3tate Ban# of India AAmendmentB
Act" 199. 3ection $ was modified to divide capital into shares of Rs. 1) each instead of Rs. 1)). The restriction on voting
rights Awhich e=isted under 3ection 11" being up to two hundred shares onl5B was modified as up to ten per cent of the
issued capital and restriction on dividends was deleted.
The Ban#ing %ompanies AAcquisition and Transfer of 'nderta#ingsB Act" 19() Aand also the 19+) ActB were modified b5
Amendment Acts of 199$ and 199!" for facilitating public holding of shares. 3ection was amended to provide for an
authorised capital of Rs. 1"!)) crore" divided into shares of Rs. 1) each" to increase or reduce the authorised capital between
Rs. 1"!)) crore and Rs. "))) crore" for transferabilit5 of shares" other than those held b5 the -overnment" raising of capital
through public issue" voting rights of shareholders Alimited to one per cent per shareholderB and #eeping register of
shareholders including in floppies. 3ection 1)A was amended to declare dividends" as earlier balance of profits was to be
transferred to the %entral -overnment..
?>
9.; CO-OPERATIVE BANKS
I. A''.2$-."/ #f BR A2":
AB %o8operative ban#s are registered either under the state laws governing co8operatives or under the multi8state %o8
operative 3ocieties Act. If a co8operative ban# operates onl5 in one state" the state law applies and in the case of co8
operative ban#s operating in more than one state" the %entral Act applies. 7hile the state law4%entral law governs
the constitution and related matters" the business of ban#ing is regulated b5 the Ban#ing Regulation Act as
applicable to co8operative societies.
BB The Ban#ing Regulation Act is applicable to co8operative societies subGect to the modifications stipulated in Part :
A3ection !?B of the Act. The Act was made applicable to co8operative societies b5 the Ban#ing 1aws AApplication to
%o8operative 3ocietiesB Act" 19?!. As defined in 3ection ! AcciB of the BR Act Aas applicable to co8operative
societiesB" a co8operative ban# means a state co8operative ban#" a central co8operative ban# and a primar5 co8
operative ban#. A primar5 co8operative ban# is a co8operative societ5 other than a primar5 agricultural credit
societ5" which satisfies the following criteriaD-
AiB The primar5 obGect or principal business is the transaction of ban#ing business" AiiB The paid8up share capital and
reserves are not less than Rs. 1 lac. AiiiB The b5elaws do not permit admission of an5 other co8operative societ5 as a
member Ae=cept the membership of a co8operative ban# b5 subscribing to the share capital of the societ5 out of the
funds provided b5 the state -overnmentB.
%B A state co8operative ban# is the principal co8operative societ5 in a state with the primar5 obGective of financing
other societies. A central co8operative ban# is the principal co8operative societ5 in a district with the primar5
obGective of funding other co8operative societies in the district The reference to ban#ing compan5 in the Act shall be
construed as a reference to co8operative ban#s unless the conte=t otherwise requires.
II. B$!%7 B$!%e+7 B$!%!&: 0o co8operative societ5 other than a co8operative ban# is permitted to use as part of its
name or in connection with the business" the words @ban#@" @ban#er@ and @ban#ing@. 9urther" a co8operative societ5
carr5ing on ban#ing business has to use at least one of such words as part of its name. ;owever" certain categories
of co8operative societies are e=empt from these provisions as follows.
aB a primar5 credit societ5H
bB a co8operative societ5 formed for the protection of the mutual interest of co8operative ban#s or co8operative
land development ban#sH
cB a co8operative societ5 other than a primar5 credit societ5 formed b5 emplo5ees of the 3tate Ban#" a subsidiar5
ban#" a 0ationalised ban# or a co8operative ban#" a primar5 credit societ5" or a co8operative land development
ban#.
III. P$*-1' C$'"$. $!* Re(e+5e(: The minimum paid8up capital and reserves required to commence or carr5 on
ban#ing business b5 a co8operative ban# is not less than Rs. 1 la#h under 3ection 11 Aas applicable to co8operative
ban#sB. ;owever" this provision is not applicable to a primar5 credit societ5" which becomes a primar5 co8operative
ban# after the commencement of the Act" for a period of two 5ears from the date it becomes a primar5 co8operative
ban#. The Reserve Ban# ma5 give a further period of one 5ear in the interests of depositors of the primar5 co8
operative ban# in an5 particular case. 9or calculating the value of paid8up capital and reserves" the real and
e=changeable value and not the nominal value would be considered. In the case of a dispute regarding the value of
?
paid8up capital and reserves" Reserve Ban#@s decision shall be final.
I:. C$() Re(e+5e: %o8operative ban#s other than scheduled %o8operative Ban#s and scheduled state co8operative
ban#s have to maintain in India b5 wa5 of cash reserve with itself or b5 wa5 of balance in current account with the
Reserve Ban# or the state co8operative ban# of the state concerned or district %o8operative Ban# or b5 wa5 of net
balance in current accounts or an5 one or more of these wa5s a sum equivalent to at least three per cent of its total
demand and time liabilities in India. In the case of a primar5 co8operative ban# the balance in current accounts with
the central co8operative ban# of the district concerned ma5 also be ta#en into account. The balance has to be
rec#oned as on the last 9rida5 of the second preceding fortnight. The co8operative ban# has to submit a return ever5
month showing such amount held b5 it on alternate 9rida5s during a month along with the particulars of its demand
and time liabilities in India on such 9rida5s. 7hen the relevant 9rida5 is a holida5 under the 0egotiable Instruments
Act" the return shall be required as at the close of business on the preceding wor#ing da5. The demand and time
liabilities have to be calculated as stipulated in 3ection 1+ Aas applicable to co8operative societiesB. 9or scheduled
Primar5 %o8operative Ban#s and 3tate co8operative Ban#s" %RR has to be maintained as per 3ection $> of RBI Act.
V. Re("+2"#!( #! L#$!( $!* A*5$!2e(:
aB 3ection >) of the Ban#ing Regulation Act Aas applicable to co8operative societiesB la5s down certain restrictions on
loans and advances b5 co8operative ban#s. Accordingl5" a co8operative ban# shall not grant loans and advances as
under.
i. loans and advances on the securit5 of its own sharesH
ii. unsecured loans or advances to an5 of its directorsH
iii. unsecured loans or advances to firms or private companies in which an5 of its directors are interested as partner"
managing agent or guarantor" or to individuals in cases where an5 of its directors is a guarantor for the loans or
advancesH
iv. unsecured loans or advances to an5 compan5 in which the chairman of the co8operative ban# is interested as
managing agent or chairman or managing director.
;owever" these restrictions do not appl5 to unsecured loans or advances made b5 a coJoperative ban# against bills
for supplies or services made to -overnment or bills of e=change arising out of bona fide" commercial or trade
transactions. 9urther" unsecured loans or advances in respect of which trust receipts are furnished to the co8operative
ban# and loans to directors or an5 other persons within the limits and on terms and conditions approved b5 the
Reserve Ban# are also e=empted.
bB <ver5 co8operative ban# has to submit a return in the prescribed form showing the unsecured loans and advances
granted b5 it to companies in which its directors are interested as director" managing agent" or guarantor. 3uch
returns have to be filed before the close of the month succeeding to which the return relates. If it appears to the
Reserve Ban# on e=amination of an5 return that the loans or advances were granted to the detriment of the interest
of depositors" Reserve Ban# ma5 prohibit granting of such further loans or advances. The Reserve Ban# ma5 also
impose other restrictions on the grant of such loans and direct the co8operative ban# to secure the repa5ment of the
loan or advance within a stipulated time.
cB 0ote. It must be noted here that RBI with effect from 1 /ctober >))" has prohibited co8operative ban#s from
providing" renewing secured or unsecured loans and advances or an5 other funded or non8funded financial
?$
accommodation to their directors or their relatives and firm4companies in which their relatives are interested.
VI. L2e!(!& #f C#-#'e+$"5e B$!%(:
AaB <ver5 co8operative societ5 requires a licence from the Reserve Ban# under 3ection >> of the Ban#ing Regulation
Act Aas applicable to co8operative societiesB to carr5 on ban#ing business in India. ;owever" primar5 credit societies
are e=empt from the requirement.
The Reserve Ban# ma5 impose such conditions as it ma5 deem fit while granting licence to a co8operative ban#. %o8
operative societies carr5ing on ban#ing business at the commencement of the Ban#ing 1aws AApplication to %o8
operative 3ocietiesB Act" 19?! were given e=emption for a period of one 5ear. <ver5 co8operative societ5 carr5ing on
ban#ing business at the commencement of the Act had to appl5 for a licence within three months from such
commencement and ever5 primar5 co8operative societ5" which becomes a primar5 co8operative ban# after such
commencement has to appl5 for a licence before three months from the date of it becoming a primar5 co8operative
ban#. After appl5ing for licence the co8operative ban# can continue to carr5 on ban#ing business unless its licence is
reGected.
AbB A co8operative ban# requires the prior permission of the Reserve Ban# for opening a new place of business or
changing an e=isting place of business otherwise within the same cit5" town or village where it has an e=isting place
of business. ;owever" opening of temporar5 branches for a period not e=ceeding one month within the cit5" town or
village where it has a place of business" on the occasion of an e=hibition" conference" mela or an5 li#e occasion is
permissible.
The opening or changing of location of branches b5 a central co8operative ban# within its area of operation is also
e=empt. The application of a co8operative ban# for permission to open a branch" other than of a primar5 co8
operative ban#" has to be routed through the 0ational Ban#.
;owever" an advance cop5 of the application has to be sent directl5 to Reserve Ban#.
:II. L01* A((e"(: %o8operative ban#s have to maintain liquid assets as provided in 3ection >$A1B of the Ban#ing
Regulation Act. In computing the amount of liquid assets an5 balances maintained b5 a coJoperative ban# in
current account with the Reserve Ban# or b5 wa5 of net balances in current accounts would be ta#en into account.
In the case of state co8operative ban#s" which are scheduled ban#s" the balances required under 3ection $> of the
RBI Act will also be accounted. In the case of the %entral co8operative ban#s" balances maintained with the state co8
operative ban# concerned and in the case of primar5 co8operative ban#s the balances maintained with %entral co8
operative ban#s or the state co8operative ban# concerned shall be accounted. The co8operative ban#s have also to
maintain as specified in 3ection >$A>AB liquid assets being not less than >! per cent or such other percentage not
e=ceeding fort5 per cent as the Reserve Ban# ma5 stipulate b5 notification in the -aMette. The amount has to be
maintained as at the close of business on an5 da5. 9or this purpose" an5 balance maintained b5 a scheduled private
co8operative ban#s and state co8operative ban# with the Reserve Ban# in e=cess of the balance required under
3ection $> of the RBI Act shall be accounted. 3imilarl5" cash or balances maintained in India b5 a non8scheduled
co8operative ban# with itself or with the state co8operative ban# or in current account with Reserve Ban# or net
balance in current accounts in e=cess of the requirement of 3ection 1+ would be accounted. In the case of primar5
co8operative ban#s" such balances maintained with the %entral co8operative ban# of the district concerned will also
be ta#en into account.
?!
The co8operative ban#s have to file a return with the Reserve Ban# and ever5 co8operative ban#" other than a
primar5 co8operative ban# has also to furnish a cop5 thereof to the 0ational Ban#.
:III. A22#1!"( $!* A1*": <ver5 co8operative ban# has to prepare a balance sheet and profit and loss account of
its business as on the last wor#ing da5 of the 5ear. The balance sheet and accounts have to be prepared in the forms
set out in the third schedule to the Act or as near thereto as circumstances admit. Three copies of such balance sheet
and accounts" along with statutor5 auditor@s report has to be submitted to the Reserve Ban# within si= months. A
state co8operative ban# and a central coJoperative ban# have to submit such return to the 0ational Ban# also.
IF. I!('e2"#!: The provisions of 3ection ! relating to inspection are applicable to co8operative ban#s with minor
modifications. It is also open to Reserve Ban# to call for inspection of a primar5 coJoperative ban# b5 one or more
officers of the state co8operative ban# in the state where the primar5 co8operative ban# is registered. The Reserve
Ban# ma5 suppl5 a cop5 of the report on an5 inspection or scrutin5 to the state co8operative ban# or the Registrar of
%o8operative 3ocieties concerned.
E. I!(1+e* C#-#'e+$"5e B$!%(:
AB Registration with DICGC: The 2eposit Insurance and %redit -uarantee %orporation Act" 19?1" which provides for
insuring deposits of ban#s" is applicable to co8operative ban#s also.
Accordingl5" under 3ection 1% of the Act" co8operative ban#s have to be registered with the corporation for this
purpose. The registration of a co8operative ban# ma5 be cancelled if.
1. It is prohibited from accepting depositsH
>. Its licence is cancelled and ordered to be wound upH
. It has ceased to be a co8operative ban# under the sub8section A>B of section ?a of the bractH
$. It has converted into a non8ban#ing co8operative societ5H
!. It has been amalgamated with an5 other co8operative societ5H AviiB it has transferred its deposit liabilities to an5
other institute orH
?. It ceases to be an eligible co8operative ban#.
BB Eligile Co!o"erati#e Ban$: An eligible co8operative ban# is defined in 3ection >AggB of the Act.
Accordingl5" for a co8operative ban# to become an eligible co8operative ban#" the law governing that co8operative
ban# should have the following provisions.
1. An order for the winding up" or an order sanctioning a scheme of compromise or arrangement or of
amalgamation or reconstruction of the ban#" ma5 be made onl5 with the previous sanction in writing of the
Reserve Ban#.
>. An order for the winding up of the ban# shall be made" if so required b5 the Reserve Ban# in the circumstances
referred to in 3ection 1).
. An order shall be made for the supersession of the committee of management or other managing bod5 of the
ban# and the appointment of an administrator therefore for such period or periods not e=ceeding five 5ears in
the aggregate as ma5 be specified b5 the Reserve Ban# if so required b5 the Reserve Ban# in the public interest
or for preventing the affairs of the ban# being conducted in a manner detrimental to the interests of the
depositors or for securing the proper management of the ban#.
$. An order for the winding up of the ban#" or an order sanctioning a scheme of compromise or arrangement or of
??
amalgamation or reconstruction or an order for the supercession of the committee of management or other
managing bod5 of the ban# and the appointment of an administrator therefore made with the previous sanction
in writing or on the requisition of the Reserve Ban# shall not be liable to be called in question in an5 manner.
!. The liquidator or the insured ban# or the transferee ban#" as the case ma5 be" shall be under an obligation to
repa5 the corporation as provided in 3ection >1 of the Act.
%B Re%&isition ' Reser#e Ban$ (or )in*ing U": 3ection 1) of the 2I%-% Act mentions the circumstances in which
Reserve Ban# ma5 require winding up of a co8operative ban#. 3uch circumstances are that.
i. the co8operative ban# has failed to compl5 with the requirements as to minimum paid8up capital and reserves
specified in 3ection 1 , of the Ban#ing Regulation ActH
ii. the co8operative ban# has under 3ection >> of the Act Adealing with licenceB become disentitled to carr5 on
ban#ing business in IndiaH
iii. the co8operative ban# has been prohibited from receiving fresh deposits b5 an order under 3ection !A$B of the
Act or under 3ection $>AABAbB of the Reserve Ban# of India ActH
iv. the co8operative ban# having failed to compl5 with an5 requirement of the Ban#ing Regulation Act" 19$9" other
than the requirements laid down in 3ection 11 thereof" has continued such failure or having contravened an5
provisions of the Act" has continued such contravention be5ond such period or periods as ma5 be specified b5
the Reserve Ban#" after notice in writing of such failure or contravention has been conve5ed to the co8operative
ban#H
v. the co8operative ban# is unable to pa5 its debtsH
vi. in the opinion of the Reserve Ban#" a compromise or arrangement sanctioned b5 a competent authorit5 in
respect of the co8operative ban# cannot be wor#ed satisfactoril5 with or without modification" or the
continuance of the co8operative ban# is preGudicial to the interests of its depositors.
A co8operative ban#" shall be deemed to be unable to pa5 its debts if" AiB on the basis of the returns" statements or
information furnished to the Reserve Ban# under or in pursuance of the provisions of the Ban#ing Regulation Act" the
Reserve Ban# is of opinion that the co8operative ban# is unable to pa5 its debts" AiiB if the co8operative ban# has refused to
meet an5 lawful demand made at an5 of its offices or branches within two wor#ing da5s" if such demand is made at a place
where there is an office" branch or agenc5 of the Reserve Ban#" or within five wor#ing da5s if such demand is made
elsewhere and" in either case" the Reserve Ban# certifies in writing that the co8operative ban# is unable to pa5 its debts
9.< LET US SUM UP
1. The P3's" namel5" 3tate Ban# and its subsidiaries" the 0ationalised ban#s and the regional rural ban#s are statutor5
corporations established under special statutes. 3tate Ban# and its subsidiaries" as 0ationalised ban#s" are
commercial ban#s engaged in the business of ban#ing and other forms of business permissible for ban#ing
companies. The RRBs are also commercial ban#s but operating in limited local areas to cater to rural industries"
trade" farmers" artisans" etc. The 3tate Ban# and its subsidiaries and the 0ationalised ban#s also act as agents of the
Reserve Ban# to transact the ban#ing business of the %entral -ovt. All P3's are governed b5 their respective"
statutes and the rules" regulations or schemes made under these statutes. In addition to this" these ban#s are also
governed b5 certain provisions of the BR Act as stipulated in 3ection !1 of that Act. The provisions of the Reserve
?(
Ban# of India Act are also applicable to them.
>. The co8operative ban#s" functioning in one state onl5 are registered under the state laws on co8operative societies.
The co8operative ban#s operating in more than one state" are registered under the multi8state %o8operative 3ocieties
Act. The Ban#ing Regulation Act is applicable to co8operative ban#s as provided in 3ection !? of that Act with
certain modifications. 9or this purpose" a co8operative ban# means a state co8operative ban#" %entral co8operative
ban# and a primar5 co8operative ban#. 7hile" the constitution of the ban# is governed b5 the coJoperative laws" the
business of ban#ing underta#en b5 them is regulated b5 the Reserve Ban# under the BR Act.
?+