SUBJECT :- ECONOMICS

TOPIC :- BANKING REGULATION (AMENDMENT) ACT,1949

SR.NO Name of students ROLLNO.

1 EZEKIEL 8392

2 AAYUSHI 8376

3 JOJAN 88415

4 HITESH 8393

5 UJWALA 8379

6 ROHIT 8389

7 KIRAN . P 8428

8 OMKAR . G 8398

1
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth is so enormous.

I would like to knowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this project.

I would like to thank my I/C Principal DR. GAJANAN P. WADER for providing the necessary facilities
required for completion of this project.

I take this opportunity to thank our Coordinator Mrs. ABIDA KHAN, for her moral support and
guidance.

I owe my profound gratitude to our project guide MR. SHABAB RIZVI who have been a perpetual
source of inspiration and offered valuable suggestions to improve my knowledge.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the
completion of the project especially my Parents and Peers who supported me throughout my project.

2
 INDEX

SR NO TOPIC STUDENT/ ROLL NO PAGE NO

1. INTRODUCTION EZEKIEL ( 8392) 4-7

 DEFINITIONS AND HITESH ( 8393) / EZEKIEL 8- 23
PROVISIONS (8392)
 NATURE AND SCOPE EZEKIEL ( 8392 ) 24

2. OBJECTIVES AAYUSHI ( 8376) 5-27

3. CHARACTERISTICS / JOJAN ( 8415 ) 28-31

SALIENT FEATURES

4. NEED OF THE AMENDMENT EZEKIEL ( 8392) 32

5. IMPACT ON ECONOMY 33

6. IMPACT BANKING SECTOR UJWALA ( 8379 ) 34

7. POSITIVE IMAPCT ROHIT ( 8389 ) 35-37

8. NEGATIVE IMPACT KIRAN . P ( 8428 ) 38-42

9. CONCLUSION OMKAR . G( 8398 ) 43-44

10. BIBLIOGRAPHY 45

3
INTRODUCTION

BRIEF HISTORY

The Banking Regulation Act, 3949 is a legislation in India that regulates all banking firms in India. Passed
as the Banking Companies Act 1949, it came into force from 16 March 1949 and changed to Banking
Regulation Act 1949 from 1 March 1966. It is applicable in Jammu and Kashmir from 1956. Initially, the
law was applicable only to banking companies. But, 1965 it was amended to make it applicable to
cooperative banks and to introduce other changes.

OVERVIEW

The Act provides a framework under which commercial banking in India is supervised and regulated. The
Act supplements the Companies Act, 1956. Primary Agricultural Credit Society and cooperative land
mortgage banks are excluded from the Act.

The Act gives the Reserve Bank of India (RBI) the power to license banks, have regulation over
shareholding and voting rights of shareholders; supervise the appointment of the boards and management;
regulate the operations of banks; lay down instructions for audits;
control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking
policy, and impose penalties.

In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56.
Cooperative banks, which operate only in one state, are formed and run by the state government. But, RBI
controls the licensing and regulates the business operations. The Banking Act was a supplement to the
previous acts related to banking.

4
The Banking Regulation (Amendment) Bill, 2017

The Banking Regulation (Amendment) Bill, 2017 was introduced in Lok Sabha by the Minister of
Finance, Mr. Arun Jaitley, on July 24, 2017. It seeks to amend the Banking Regulation Act, 1949 to
insert provisions for handling cases related to stressed assets. Stressed assets are loans where the
borrower has defaulted in repayment or where the loan has been restructured (such as by changing the
repayment schedule). It will replace the Banking Regulation (Amendment) Ordinance, 2017.

Initiating insolvency proceedings: The central government may authorise the Reserve Bank of India
(RBI) to issue directions to banks for initiating proceedings in case of a default in loan repayment.
These proceedings would be under the Insolvency and Bankruptcy Code, 2016.

Issuing directions on stressed assets: The RBI may, from time to time, issue directions to banks for
resolution of stressed assets.

Committee to advise banks: The RBI may specify authorities or committees to advise banks on
resolution of stressed assets. The members on such committees will be appointed or approved by the
RBI.

Applicability to State Bank of India: The Bill inserts a provision to state that it will also be applicable
to the State Bank of India, its subsidiaries, and Regional Rural Banks.

In the Banking Regulation Act, 1949, after section 35A, the following sections shall be inserted, namely: —

Section 35AA: Power of Central Government to authorize Reserve Bank for issuing directions to banking
companies to initiate insolvency resolution process.

Section 35AB: Power of Reserve Bank to issue directions in respect of stressed assets.

5
 Banking Regulation Act, 1949: Bare Act

 PART I: PRELIMINARY
1. Short title, extent and commencement: -
(1) This Act may be called the Banking Regulation Act, 1949.
(2) It extends to the whole of India.
(3) It shall come into force on such date as the Central Government may, by notification in the Official
Gazette, appoint in this behalf.

2. Application of other laws not barred. :-

The provisions of this Act shall be in addition to, and not, save as hereunder expressly provided, in
derogation of the Companies Act, 1956 (1 of 1956), and any other law for the time being in force.

3. Act to apply to co-operative societies in certain cases.:-

Nothing in this Act shall apply to :-
(a) a primary agricultural credit society;
(b) a co-operative land mortgage bank; and
(c) any other co-operative society, except in the manner and to the extent specified in Part V.

4. Power to suspend operation of Act. :-

(1) The Central Government, if on a representation made by the Reserve Bank in this behalf it is satisfied
that it is expedient so to do, may by notification in the Official Gazette suspend for such period, not
exceeding sixty days, as may be specified in the notification, the operation of all or any of the provisions of
this Act, either generally or in relation to any specified banking company.
(2) In a case of special emergency, the Governor of the Reserve Bank, or in his absence a Deputy Governor
of the Reserve Bank nominated by him in this behalf may, by order in writing, exercise the powers of the
Central Government under sub-section (1) so however that the period of suspension shall not exceed thirty
days, and where the Governor or the Deputy Governor, as the case may be, does so, he shall report the
matter to the Central Government forthwith, and the order shall, as soon as may be, be published in the
Gazette of India.
(3) The Central Government may, by notification in the Official Gazette, extend from time to time the period
of any suspension ordered under sub-section (1) or subsection (2) for such period, not exceeding sixty days
at any one time, as it thinks fit so however that the total period does not exceed one year.
(4) A copy of any notification issued under sub-section (3) shall be laid on the table of Parliament as soon as
may be after it is issued.

6
5. Interpretation. —In this Act, unless there is anything repugnant in the subject or context, —
(a) "approved securities" means--
(i) securities in which a trustee may invest money under clause (a), clause (b), clause (bb), clause (c) or
clause (d) of section 20 of the Indian Trusts Act, 1882 (2 of 1882);
(ii) such of the securities authorised by the Central Government under clause (f) of section 20 of the Indian
Trusts Act, 1882 (2 of 1882), as may be prescribed;
(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the
public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or otherwise;
(c) "banking company" means any company which transacts the business of banking in India;

7
 Important Definitions and Provisions of the Banking Regulation Act ,1949

1.Meaning of the terms Bank and Banking Bank

Bank is an institution which deals in money and credit. It accepts deposits from the public and grants loans
and advances to those who are in need of funds for various purposes. Banking is an activity which involves
acceptance of deposits for the purpose of lending or investing. In addition to accepting deposits and lending
funds, banking also involves providing various other services alongwith its main banking activity. These are
mainly agency services, but include several general services as well. A banker is one who undertakes
banking activities, accepting deposits and lending money for different purposes. The Banking Regulation
Act, 1949 defines banking as an activity of accepting funds from the public for the purpose of lending or
investment. The essential features of banking activities are as follows:-

i) accepting deposits from public;

ii) lending or investment of such deposits;

iii) incidental to the activities of accepting deposits for lending or investing, banks undertake activities like —
a) Promoting and mobilizing savings of the public;

b) Providing funds to trade and industry by way of discounting bills, overdraft, cash credit facility, and
transfer of funds from one place to another;

c) Providing agency services to customers, such as collection of bills, payment of insurance premium,
purchase and sale of securities, etc., and other general services, such as issue of travellers’ cheques, credit
cards, locker facility, etc; Money deposited with the bank is assured as far as its safety is concerned

2.Distinction between Banks and Money Lenders

In order to distinguish between banks and money lenders, it is necessary to known who is a money lender. A
money lender is an individual who lends money to meet the cash requirements of people. He may or may not
be a professional money lender. A professional money lender is one who is exclusively engaged in money
lending activity. He may occasionally accept deposits and provide agency services to his customers. A non–
professional money lender, on the other hand, is either a merchant, or a trader, or a member of the business
community, whose main activity is not money lending. Such money lenders engage in money lending as a
side activity. A money lender normally meets the cash requirements of the public. He gives loans for
consumption purposes such as marriages and other social functions. The rate of interest charged by him is
generally very high. He may give loans against the security of jewellery, household items, property and

8
3.Reserve Bank of India (Central Bank)

In every country, the bank which is entrusted with the responsibility of guiding and regulating the banking
system is known as the Central Bank. In India the central banking authority is the Reserve Bank of India.
The Reserve Bank does not deal directly with the members of public. It acts as bankers’ bank maintaining
deposit accounts of all other banks and advances money to banks whenever needed. It regulates the volume
of currency and credit, and has powers of control and supervision over all banking institutions. The Reserve
Bank also acts as goverment banker and maintains the record of goverment receipts, payments and
borrowings under various heads. It advises the government on monetary and credit policy, besides deciding
on the rate of interest on bank deposits and bank loans. It is the custodian of currency reserves consisting of
foreign exchange, gold and other securities. Another important function of the Reserve Bank is the issue of
currency notes and regulation of the money supply.

4.Commercial banks

Commercial banks are banking institutions which accept deposits from the public and grant short-term loans
and advances to their customers. In India, there are nationalised (public sector) commercial banks as well as
private sector banks which are corporate organisations. The largest commercial bank is the State Bank of
India which was established in 1955 under a special Act. The main source of income of commercial banks is
the difference between the interest they charge on loans and Nature and Scope of Banking :: 7 the interest
they allow on deposits. Commercial banks generally grant short-term loans repayable within one year. But
they also meet the medium-term and long-term requirements of business enterprises. Besides accepting
deposits and lending money, commercial banks provide other services such as issue of bank drafts,
traveller’s cheques and letters of credit, collection of bills, dividends and interest safe keeping of valuables,
transfer of money from one place to another, payment of insurnace premium etc. All these functions are
discussed in the next lesson under the head “Functions of Banks”.

9
5. Industrial Banks

Industrial Banks are corporate organisations which specialise in providing industrial capital by subscribing to
the share and debenture issues of public companies. Industrial banks normally meet the long term
requirements of funds for purchase of land, plant and machinery, and financing of expansion and
diversification activities of industrial companies. These banks generally secure representation on the board
of directors, and provide technical guidance in the management of industrial companies.

6. Foreign Exchange Banks

Business firms engaged in foreign trade receive and make payment through foreign currency. In order to
facilitate such transactions and also help exporters and importers, there are banking institutions which
primarily engage in transactions involving foreign exchange. These are known as Foreign Exchange Banks.
In India, Export and Import Bank of India (EXIM Bank) has been set up by the Government to help export
and import trade and other related activities. Such activities are also undertaken by the foreign exchange
division of commercial banks. Exchange banks which are foreign in origin have their head offices located
outside India. Besides financing foreign trade, the exchange banks also render services incidental to their
main function, such as acting as referees, collecting and supplying information about the foreign customers,
providing remittance facilities. They engage in other kinds of banking business as well, like acceptance of
deposits, grant of loans and advances, etc. 8 :: Business Studies However, financing foreign trade remains
their field of specialisation. Licensing of these banks is required under the Banking Regulation Act 1949.
Their operations are subject to general control of the Reserve Bank of India. Regarding their foreign
exchange transactions, these banks are governed by the Exchange Control Regulations.

10
7. Development Banks

Development banks are special financial institutions which provide longterm capital to industry. Rapid
development of industries in India after independence requiring huge financial investment and promotional
efforts led to the establishment of these instutions. Development banks assist the promotion, expansion and
modernisation of industries, Besides providing long-term finance, these banks also subscribe to the capital
issues of industrial undertakings, if the public subscription falls short of the total issue. Thus they act as
underwriters as well. Moreover, these banks provide technical advice and assitance, if needed.

Development banks which have been established and functioning in India are: Industrial Finance Corporation
of India (I.F.C.I) State Finance Corporation (S.F.Cs.) Industrial Credit and Investment Corporation of India
(ICICI) Industrial Development Bank of India (I.D.B.I.) Industrial Reconstruction Bank of India (I.R.B.I.)
Industrial Development Bank of India acts as an apex oganisation to co-ordinate and assist in long term
industrial finance by other institutions.

8. Regional Rural Banks

Commercial and industrial banks cater to the financial needs of trade and industry. In rural areas, there are
small farmers, farm labourers, artisans and small entrepreneurs, who need financial assistance. To meet their
financial needs, a separate category of banks known as Regional Rural Banks have been set up in India.
These banks are financed Nature and Scope of Banking :: 9 by nationalised banks. The central goverment
specifies the local limits within which regional rural banks shall operate. The banks are allowed to establish
their own branches or agencies within the specified area. They grant loans at lower rates of interest than the
rates charged by other banks. These banks are rural based, rural oriented and organised like commercial
banks. The purpose of these banks is to finance agricultural operations and provide employment to rural
educated youth who possess the requisite orientations. Regional Rural Banks have been conceived to
combine the strong points of both the co-operative and commercial banks eliminating the weaknesses of
both. The Regional Rural Banks have been included in the second schedule of the Reserve Bank of India Act
and, therefore, they enjoy the same privileges and facilities as the scheduled banks, including access to the
Reserve Bank for financial accommodation.

11
9. Co-operative Banks/Society

Co-operative Banks in India are established under the provisions of the Co-operative Societies Act 1912. These
are organised on co-operative basis. It was with a view to provide adequate credit at economical rates of
interest to the farmers, that co-operative credit societies were first, organised in villages for providing
financial help to agriculturist and rural artisans. Co-operatives banks are organised both at primary and
district level. Co-operative Credit Societies (banks) at the primary level/local level are members of central
co-operative banks at the district level. Similarly, at the state level, there are state co-operative bank, which
finance, co-ordinate and control the central co-operative banks in each state. Thus the structure of co-
operative banks in India is pyramidal in nature. A co-operative credit society (bank) at the primary level can
be formed by the local people having common interest and common purposes. The co-operative banks
generally grant loans for productive purposes but they can also do so for other purposes. The rate of interest
charged is very moderate. The mode of recovery of loan is not very rigid.

10. Unorganised Banking Sector

The unorganised sector of banking in India consists of money lenders and indigenous bankers known as shroffs,
sahukars, mahajans, chettis, etc. These are individuals doing banking business, along with trading and
commission business in many cases. Their activities are not organised. They follow rules of their own. But
they are trusted people in their own locality. The people of the area deposit their savings with them. They
lend money to people who need it for purchasing fertilisers, seeds, agricultural equipments or even for social
obligations. Loans are given on the security of jewellery and other valuable assets. The rate of interest
charged by them is very high. Besides, money lenders manipulate the book of accounts. They realize more
money than what they had lent. In most of the cases the poor borrowers are unable to repay the loans and
lose their valuables kept as security. Inspite of these, people borrow money from sahukars or money lenders
as they are easily approachable. However, their significance is gradually declining due to the spread of
modern banking institutions.

12
11. Section 5(b) of the BANKING REGULATION ACT,1949

Section 5(b) of the Banking Regulation Act, 1949, provides that “banking” means the accepting, for the
purpose of lending or investment, of deposits of money from the public,repayable on demand or otherwise,
and withdrawable by cheque, draft, and order or otherwise.

12. Section 5(n) in BANKING REGULATION ACT,1949

Section 5(n) of the Banking Regulation Act, 1949, provides that secured loan or advance means the loans
and advances made on the security of assets the market value of which is not at any less than the amount of
such loan or advances.

13. Section 6(1) in BANKING REGULATION ACT,1949

Section 6(1) of the Banking Regulation Act, 1949, provides that a banking company in addition to the
business of banking engage in one or more of the following forms of business.(i) Acting as agents for any
Government orlocalauthority or any other person or (ii) persons or contracting for public and privateloans
and negotiating and issuing the same or (iii) undertaking and executingtrusts.

14. Prohibition on trading (Section 8)

A banking company cannot get in directly or indirectly contracts in buying or selling or exchange of goods.

15. Section 9 in BANKING REGULATION ACT,1949

Disposal of non-banking assets.—Notwithstanding anything contained in section 6, no banking company

shall hold any immovable property howsoever acquired, except such as is required for its own use, for any
period exceeding seven years from the acquisition thereof or from the commencement of this Act, whichever
is later or any extension of such period as in this section provided, and such property shall be disposed of
within such period or extended period, as the case may be: Provided that the banking company may, within
the period of seven years as aforesaid deal or trade in any such property for the purpose of facilitating the
disposal thereof: Provided further that the Reserve Bank may in any particular case extend the aforesaid
period of seven years by such period not exceeding five years where it is satisfied that such extension would
be in the interests of the depositors of the banking company..

13
16. Section 12 in BANKING REGULATION ACT,1949

1. No banking company shall carry on business in India, unless it satisfies the following conditions, namely:—
 that the subscribed capital of the company is not less than one-half of the authorised capital, and the paid-up
capital is not less than one-half of the subscribed capital and that, if the capital is increased, it complies with
the conditions prescribed in this clause within such period not exceeding two years as the Reserve Bank may
allow;
 that the capital of the company consists of ordinary shares only or of ordinary shares or equity shares and
such preferential shares as may have been issued prior to the 1st day of July, 1944: Provided that nothing
contained in this sub-section shall apply to any banking company incorporated before the 15th day of
January, 1937.

2. No person holding shares in a banking company shall, in respect of any shares held by him, exercise
voting rights [on poll] [in excess of [ten per cent.]] of the total voting rights of all the shareholders of the
banking company.

17. Section 14A in BANKING REGULATION ACT,1949

 Notwithstanding anything contained in section 6, no banking company shall create a floating charge on the
undertaking or any property of the company or any part thereof, unless the creation of such floating charge is
certified in writing by the Reserve Bank as not being detrimental to the interests of the depositors of such
company.
 Any such charge created without obtaining the certificate of the Reserve Bank shall be invalid.
 Any banking company aggrieved by the refusal of a certificate under sub-section (1) may, within ninety days
from the date on which such refusal is communicated to it, appeal to the Central Government.
 The decision of the Central Government where an appeal has been preferred to it under sub-section (3) or of
the Reserve Bank where no such appeal has been preferred shall be final.

14
18. Section 16 in BANKING REGULATION ACT,1949

No banking company incorporated in India shall have as a director in its Board of directors any person who
is a director of any other banking company.
a. No banking company referred to in sub-section (1) shall have in its Board of directors, more than
three directors who are directors of companies which among themselves are entitled to exercise voting rights
in excess of twenty per cent. of the total voting rights of all the shareholders to that banking company.]
If immediately before the commencement of the Banking Companies (Amendment) Act, 1956 (95 of 1956),
any person holding office as a director of a banking company is also a director of companies which among
themselves are entitled to exercise voting rights in excess of twenty per cent. of the total voting rights .

19. Reserve fund (section 17)

Every banking company must generate a reserve fund out of its earnings after tax and interest. Such reserve
amount should be at any rate 20 percent of such profits. Exemption can be provided only if the cumulative
amount of reserve fund & securities premium is greater than the paid up capital of the company.
21. Section 18 in BANKING REGULATION ACT,1949

1. Every banking company, not being a scheduled bank, shall maintain in India by way of cash reserve
with itself or by way of balance in a current account with the Reserve Bank, or by way of net balance
in current accounts or in one or more of the aforesaid ways, a sum equivalent to at least three per cent
of the total of its demand and time liabilities in India as on the last Friday of the second preceding
fortnight and shall submit to the Reserve Bank before the twentieth day of every month a return
showing the amount so held on alternate Fridays during a month with particulars of its demand and
time liabilities in India on such Fridays or if any such Friday is a public holiday under the Negotiable
Instruments Act, 1881 (26 of 1881), at the close of business on the preceding working day.
Explanation.—In this section, and in section 24,—
A. “liabilities in India” shall not include
a. The paid-up capital or the reserves or any credit balance in the profit and loss account of the banking
company;
b. Any advance taken from the reserve bank or from the development bank or from the exim bank [or
from the reconstruction bank] [or from the national housing bank] or from the national bank [or from the
small industries bank] by the banking company;
c. In the case of a regional rural bank, also any loan taken by such bank from its sponsor bank.

.
15
22. Section 21 in BANKING REGULATION ACT,1949

1. Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the
interests of depositors or banking policy] so to do, it may determine the policy in relation to advances
to be followed by banking companies generally or by any banking company in particular, and when
the policy has been so determined, all banking companies or the banking company concerned, as the
case may be, shall be bound to follow the policy as so determined.
2. Without prejudice to the generality of the power vested in the Reserve Bank under sub-section (1) the
Reserve Bank may give directions to banking companies, either generally or to any banking company
or group of banking companies in particular,
a. the purposes for which advances may or may not be made,
b. the margins to be maintained in respect of secured advances,
c. the maximum amount of advances or other financial accommodation which, having regard to the
paid-up capital, reserves and deposits of a banking company and other relevant considerations, may be made
by that banking company to any one company, firm, association of persons or individual
d. the maximum amount up to which, having regard to the considerations referred to in clause (c),
guarantees may be given by a banking company on behalf of any one company, firm, association of persons
or individual, and
e. the rate of interest and other terms and conditions on which advances or other financial
accommodation may be made or guarantees may be given.

23. Section 23 in BANKING REGULATION ACT,1949

1. Without obtaining the prior permission of the Reserve Bank—

a. no banking company shall open a new place of business in India or change otherwise than within the
same city, town or village, the location of an existing place of business situated in India; and
b. no banking company incorporated in India shall open a new place of business outside India or
change, otherwise than within the same city, town or village in any country or area outside India, the
location of an existing place of business situated in that country or area: Provided that nothing in this sub-
section shall apply to the opening for a period not exceeding one month of a temporary place of business
within a city, town or village or the environs thereof within which the banking company already has a place
of business, for the purpose of affording banking facilities to the public on the occasion of an exhibition, a
conference or a mela or any other like occasion.

.
16
24. Section 29 in BANKING REGULATION ACT,1949
At the expiration of each calendar year 1[or at the expiration of a period of twelve months ending with such
date2 as the Central Government may, by notification in the Official Gazette, specify in this behalf, every
banking company incorporated 3 in India, in respect of all business transacted by it, and every banking
company incorporated 4[outside India], in respect of all business transacted through its branches 3 in India,
shall prepare with reference to 5[that year or period, as the case may be,] a balance-sheet and profit and loss
account as on the last working day of 6[that year or the period, as the case may be, in the Forms set out in
the Third Schedule or as near thereto as circumstances admit: 7 Provided that with a view to facilitating the
transition from one period, of accounting to another period of accounting under this sub-section, the Central
Government may, by order published in the Official Gazette, make such provisions as it considers necessary
or expedient for the preparation of, or for other matters relating to, the balance sheet or profit and loss
account in respect of the concerned year or period, as the case may be

2. The balance-sheet and profit and loss account shall be signed-

a. in the case of a banking company incorporated 3 in India , by the manager or the principal officer of
the company and where there are more than three directors of the company, by at least three of those
directors, or where there are not more than three directors, by all the directors, and
b. in the case of a banking company incorporated 4 outside India by the manager or agent of the
principal office of the company 3

25. Auditing of Banking Company (section 30)

3. Balance sheet and Profit & Loss made compliant with section 29 must be audited by a person
qualified under law to discharge his duties as an auditor. The banking company must obtain the approval
of Reserve Bank of India before removing/ appointing and re - appointment of auditors. When Reserve
Bank of India is not satisfied with financial statements of the bank, it can give order for carrying out a
special audit. And cost of such special audit must be put up by the banking company itself..The
liabilities, powers and scope of the auditor are same as given in section 227 of companies act 1956.

17
26. Section 36AB in BANKING REGULATION ACT,1949

1. If the Reserve Bank is of 2[opinion that in the interest of banking policy or in the public interest or] in the
interests of the banking company or its depositors it is necessary so to do, it may, from time to time by
order in writing, appoint, with effect from such date as may be specified in the order, one or more persons
to hold office as additional directors of the banking company.
2. Any person appointed as additional director in pursuance of this section—

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

b. shall not incur any obligation or liability by reason only of his being a director or for any thing done or
omitted to be done in good faith in the execution of the duties of his office or in relation thereto; and

c. shall not be required to hold qualification-shares in the banking company.

Additional disclosure requirements

Whether the details given are correct & present fair and true view, whether transactions done by the
company comes under the purview of companies powers.
Safety of assetsAny other matter which needs to be disclosed . Such report of auditor must be submitted
to Reserve Bank of India in three copies in prescribed manner. Reserve Bank of India may extend the
period of three months for furnishing of such returns, if Reserve Bank of India finds it justified to do so.

18
 This act applies to the following categories of banks :

 Nationalized banks
-Nationalization refers to the transfer of public sector assets to be operated or owned by the state or central
government. In India, the banks which were previously functioning under private sector were transferred to
the public sector by the act of nationalization and thus nationalized banks came into exsistence.

Reasons for the Nationalization of Banks

• For Social Welfare
• For Developing Banking Habits
• For Expansion of Banking Sector
• For Controlling Private Monopolies
• To Reduce Regional Imbalance
• For Prioritizing Sector Lending

 Non-nationalized banks
- Non nationalized banks are those banks which are privately owned and operated privately.
These private sector banks in India are banks where the majority of the shares or equity are not held
by the government but by private share holders.
-In 1969 all major banks were nationalised by the Indian government. However, since a change in
government policy in the 1990s, old and new private sector banks have re-emerged. The private
sector banks are split into two groups by financial regulators in India, old and new. The old private
sector banks existed prior to nationalisation in 1968 and kept their independence because they were

19
 either too small or specialist to be included in nationalisation. The new private sector banks are those
that have gained their banking license since the change of policy in the 1990s.
-The Nedungadi Bank was the first private sector bank in India, founded in 1899 by Rao Bahadur
T.M. Appu Nedungadi in Kozhikode, Kerala.

For eg. Axis Bank, ICICI Bank, Kotak Mahindra

 Co-operative banks in the manner and to the extent specified in the act

- Co-operative banks are financial entities established on a co-operative basis and belonging to their
members. This means that the customers of a co-operative bank are also its owners.
-These banks provide a wide range of regular banking and financial services.
Cooperative banks serve an important role in the Indian economy, especially in rural areas. In urban
areas, they mainly serve to small industry and self-employed workers. They are registered under
the Cooperative Societies Act, 1912.They are licensed by RBI to do banking business.
-These private sector banks in India are banks where the majority of the shares or equity are not held
by the government but by private share holders.
-In 1969 all major banks were nationalised by the Indian government. However, since a change in
government policy in the 1990s, old and new private sector banks have re-emerged. The private
sector banks are split into two groups by financial regulators in India, old and new. The old private
sector banks existed prior to nationalisation in 1968 and kept their independence because they were
either too small or specialist to be included in nationalisation. The new private sector banks are those
that have gained their banking license since the change of policy in the 1990s.

20
-The Nedungadi Bank was the first private sector bank in India, founded in 1899 by Rao Bahadur
T.M. Appu Nedungadi in Kozhikode.

21
 BUSINESS OF BANKING COMPANIES

In banking regulation act 1949, section 6 it provides a list of activities which a banking company may
engage in the business of banking. The Main functions are as follows
o Acting as agents for any Government or local authority or any other person carrying the agency’s
business of any description but excluding of the managing agent or secretary and treasurer of a
company.
o Managing the public loan and private loan and solving issues respectively.
o The insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue
public or private of the State municipal or other loans or of shares, stock, debentures, stock of any
company, corporation or association and the lending of money for any purpose
o May carrying on every kind of guarantee business.
o Managing, selling and realizing any property which may come into the possession of the company in
satisfaction in any of its claims.
o Can acquire, hold and deal with any property or any right, title or interest in any such property which
may form the security for any loan or advance which may be connected to any of that security.
o Undertaking and executing trusts.
o Undertaking the administration of estates as executor, trustee.
o Establishing and supporting of associations, institutions, funds, trusts and conveniences calculated to
benefit employees or ex-employees of the company.
o The acquisition, construction, maintenance and alteration of any building or works necessary for the
purposes of the company.
o Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning
into account or otherwise dealing with the property and rights of the company.
o Acquiring and undertaking the whole or part of the business of any person or a company, when such
business is of a nature enumerated or described in the act.

22
OTHER SERVICES PROVIDED BY THE BANKING COMPANIES
1.AGENCY SERVICES
Carrying and transacting guarantee business on behalf of its clients, collection of bills, securities etc.
purchasing and selling of shares, bonds, debenture, etc. on behalf of constituents negotiating of loans
and advances, mail transfer etc. and many more agency services are grouped as follows
o Non-fund Business
o Collection of instruments and securities on behalf of customers
o Portfolio Management or Merchant Banking
o Facility of remittance of funds
o Money Exchange business as Authorized dealer under foreign exchange business
o Other agency business on behalf of Government or local body
o Factoring Services
o Special Purpose Vehicle(SPV) services for securitization of assets under securitization and
reconstruction of Financial assets and Enforcement of security interest act
o Collection of taxes on behalf of the people
o Collection of different dues of the people like telephone, electricity, municipal taxes

2.GENERAL UTILITY SERVICES

o Providing Safe-custody facility to its customers for keeping their valuables
o Providing the facility of Safe deposit vault under lease agreement to its customers for keeping their
valuables
o Technology based utility services like Tele-banking, Mobile banking, Online banking, DEMAT
services for securities trading, ATM services, etc.

3.CONSULTANCY SERVICES
ECS services for payment of different dues of the people
o Payment of pension
o Payment of salaries of the employees

23
 NATURE AND SCOPE OF BANKING ACTIVITIES

 Banking activities are considered to be the life blood of the national economy. Without banking
services, trading and business activities cannot be carried on smoothly. Banks are the distributors and
protectors of liquid capital which is of vital significance to a developing country. Efficient
administration of the banking system helps in the economic growth of the nation.
 Banking is useful to trade and commerce. Banking activities are useful to trade and industry in the
following ways.
a) Money deposited in a bank remains safe. Precious articles too can be kept in the safe custody of
banks in lockers.
b) Banks provide credit facilities to their customers. Customers with bank accounts also enjoy better
credit in the business world.
c) Banks encourage the habit of saving and thrift among people. They mobilise savings and invest
them in productive activities. Thus, they help in increasing the rate of savings and investment in the
country.
d) Banks provide a convenient and safe means of transferring money from one place to another and
facilitate business dealings/ transactions.
e) Banks collect and realise bills, cheques, interest and dividend warrants etc. on behalf of their
customers.
f) Foreign trade is facilitated considerably with the help of banks 12 :: Business Studies which
receive and make payments, provide credit and deal in foreign exchange. They protect importers
from the risk of loss on account of exchange rate fluctuations. They issue letter of credit and provide
information on the credit worthiness of importers. They also act as referees of their customers.
g) Banks meet the financial needs of small-scale business units which are located in economically
backward areas.
h) Farmers and artisans in rural areas can also avail of bank credit for financing their activities.
i) Commercial banks provide many other services to the general public which include locker facility,
issue of traveller’s cheques and gift cheques, payment of insurance premium, etc.

24
 OBJECTIVES OF THE BANKING REGULATION ACT , 1949

In any country the major portion of monetary resources lies with banking institutions. They regulate the flow
of money throughout the economy. Any economy needs these banking institutions to facilitate the normal
conduct of the day to day industry, trade and commerce activity of the country. The Banking Regulation Act
contains the provisions & rules necessary for the conduct of healthy banking business and to safeguard the
interest of the economy of the country and the interest of depositor.

The business of banking is defined in the act as follows “Accepting for purpose of lending and investment of
deposit of money from the public repayable on demand or otherwise withdraw able by check draft order or
otherwise.” Other than this the other business of banking companies is also regulated by section 6. Section 6
provides the other businesses in which a banking company can indulge in itself. Section 8 of the act provides
that any bank cannot directly or indirectly enter into trade of goods whether as agent or otherwise. The act
does not want the banking institution to take risks other than the banking risks it take. The provision was
given because of the reason that the banks where found indulging in trading practices. The banks used there
resources in these activities. Section 8 though provides certain exemptions to this rule, as in case of
realization of securities and in case3 of bill of exchanges.

It also prohibits the banking institutions other than a company to transact business under the name of “bank”
“banker” or “banking company”. And prohibits the use the banking company to transact business without it
[section 7]. It also prohibits banks to acquire any immovable property that is not of its use and provide for
its speedy removal after 7 years of acquisition. [Section 9].

Section 10 clearly states that the bank cannot appoint any person who:

1] Is declared insolvent.

2] Compounded with creditor or suspended payments.

3] Got convicted in any Criminal charge involving moral turpitude.

Section 11 & 12 of the cat provide for the minimum requirement of capital that a company must have.
Section 12 provides that a company shall not have any other shares than the Equity share. So the act wants
no person to have preferential rights. It also regulates the voting rights of the holders. According to the
section no person irrespective of the number of shares he hold shall not hold voting rights in respect of more
than 10% of total holding. It also states that the managing officials shall furnish there shareholding
information to the Apex bank. These are to regulate that a person shall not control the bank’s business.

25
The underwriting commission on issue of shares I been limited to 2.5 %. There is a restriction on creation of
charge on the unpaid capital of any banking company. The banking company cannot create a floating charge
on its fixed assets.

Section 19 states that a banking company shall not make subsidiaries for any reason other than:

1] Undertaking of any business section 6 permits.

2] For banking business outside India subject to rbi permission in writing

3] As government and RBI thinks fit.

They do not want the bank to indulge in any other business and take risks. It also states that the bank shall
not hold shares of another bank of an amount exceeding 30% of the capital. Banking regulation act wants
the depositors to be safeguarded. Thus it is clear from these sections the banking regulation act sticks to its
objectives.

26
 A DETAILED OBJECTIVE OF THE BANKING REGULATION AMENDMENT
ACT 1949

1. Comprehensive Legislation: The Indian Companies Act, 1913 was inadequate and unsatisfactory to regulate
and control the business of banking in India and therefore, there was a need to have specific legislation
containing comprehensive provisions, particularly to the business of banking in India.
2. To Prevent Bank Failures: The bank failures were common in those days due to the inadequacy of capital
and hence prescribing minimum capital requirements was necessary. The Banking Regulation Act, 1949 was
enacted to prevent such bank failures by certain minimum capital requirements.
3. To Avoid Cut Throat Competition: The Act passed aims for avoiding cutthroat and wasteful competition
among the banking companies. The Act also regulates the opening of branches and changing the location of
the existing branches.
4. Ensuring Balanced Development of Banks: In order to avoid indiscriminate opening of new branches and
thereby ensuring the balanced development of banking companies, the system of licensing is provided in this
Act.
5. Regulation of Bank Credit and Working of Banks: The RBI has been given powers to approve the
appointment, reappointment, and removal of the chairman, directors, and officers of the banks. This will
ensure the efficient and smooth working of banks in India.
6. Safeguarding the Interests of Depositors: The Act protects the interest of the depositors at the public at large
by incorporating certain provisions such as prescribing cash reserves and liquidity ratios. This would enable
the banks to meet the demand of the depositors.
7. Strengthening the Banking System: This Act provides for compulsory amalgamation of weaker banks with
stronger ones to facilitate strengthening the banking system of our country.
8. Controlling Foreign Banks: The Act contains certain provisions which restrict the foreign banks to invest
funds of the Indian depositors outside India.
9. Providing Quick and Easy Liquidation: The Banking Regulation Act also provides for quick and easy
liquidation of the banks if they are not able to continue further or amalgamate with other banks.

The Banking Regulation Act, 1949 as amended up-to-date is divided into five parts and contains five
schedules. This Act is applicable to all banking companies including co-operative banks. The provisions of
this Act provide for achieving the above-mentioned objectives for which the Act was enacted.

27
CHARACTERISTICS OF BANKING REGULATION ACT 1949

 Power to call for and publish the information .preparation of accounts and balance sheets and profit
and loss account publication of audited accounts and balance sheet inspection of books and accounts
of banking companies by RBI giving direction to banking companies.
 Prior approval from RBI for appointment of managing directors.
 Removal of managerial and any person from office.
 Power of RBI to appoint additional directors.
 Moratrium under the order of a high court.
 Winding up of banking companies.
 Scheme of amalgamation to be sanctioned by the RBI.
 Central government for an order of mortal rim in respect of a banking company and for a scheme of
reconstruction or amalgamation.
 Power of RBI to examine the record of proceedings and tender advice in winding up proceedings.
 Power of RBI to inspect and make its report to winding up.
 Power of RBI to call for returns and information from the liquidator of a banking company.
 Issue of no objection certificate for change of name.
 Issue of no objection certificate for the alteration of memorandum of a banking company central
government to consult the RBI for making rules regarding banking companies recommend to the
central government for exempting any bank from the provision of the Banking Regulation Act 1949.
 The requirements regarding the minimum paid-up capital and reserves for commence mint of
banking business. prohibition of charge on unpaid capital .payment of dividends only after writing
off all capitalized expenses
 Transfer to reserve fund out of profit.(minimum 20 per cent) maintainance of cash reserves by the
non-scheduled banks.(minimum 3 per cent) restrictions on holding shares in other companies.
 Restrictions on loans and advances to directors and others .licensing of banking companies. licences
for opening of new branches and transfer of existing place of business .maintenance of a percentage
of liquid as (minimum 25 per cent and maximum 40 per cent)
 Maintenance of assets in India by banking company company.(minimum 75 per cent of DTL)
submission of return of unclaimed deposits.
 Bank cannot buy ,sell or barter goods, directly or indirectly.
 A bank cannot hold any immovable property beyond seven years of the date of acquisition.
 A bank shall have one of its directors as chairman on its board of directors and a minimum 51%
people of the members of the board of directors should have finance or banking experience.
 A bank should have the cash reserve minimum paid-up capital as stipulated by the reserve bank of
India.

28
 A bank cannot pay in excess of 2.5% shares in the form of commission ,discount ,remuneration or
brokerage.

29
 SALIENT FEATURES OF BANKING REGULATION
(AMENDMENT) ACT, 1949

 The Banking Laws (Amendment) Bill 2011 was introduced in order to amend the Banking
Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970/1980. The said Bill has been passed by both the Houses of Parliament during its just concluded
Winter Session.
 This Bill would strengthen the regulatory powers of Reserve Bank of India (RBI) and to further
develop the banking sector in India. It will also enable the nationalized banks to raise capital by issue
of preference shares or rights issue or issue of bonus shares. It would also enable them to increase or
decrease the authorized capital with approval from the Government and RBI without being limitedny
the ceiling of a maximum of Rs. 3000 crore.
 Beside above, the Bill would pave the way for new bank licenses by RBI resulting in opening of new
banks and branches. This would not only help in achieving the goal of financial inclusion by
providing more banking facilities but would also provide extra employment opportunities to the
people at large in the banking sector
.
 The salient features of the Bill are as follows:

• To enable banking companies to issue preference shares subject to regulatory guidelines by the
RBI;
•To increase the cap on restrictions on voting rights;
• To create a Depositor Education and Awareness Fund by utilizing the inoperative deposit accounts;
• To provide prior approval of RBI for acquisition of 5% or more of shares or voting rights in a
banking company by any person and empowering RBI to impose such conditions as it deems fit in
this regard;
• To empower RBI to collect information and inspect associate enterprises of banking companies;
• To empower RBI to supersede the Board of Directors of banking company and appointment of
administrator till alternate arrangements are made;
• To provide for primary cooperative societies to carry on the business of banking only after
obtaining a license from RBI;
• To provide for special audit of cooperative banks at instance of RBI by extending applicability of
Section 30 to them; and
• To enable the nationalized banks to raise capital through “bonus” and “rights” issue and also enable
them to increase or decrease the authorized capital with approval from the Government and RBI

30
without being limited by the ceiling of a maximum of Rs. 3000 crore under the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970/1980.

Certain additional official amendments have been proposed on the basis of recommendations
of the Standing Committee of Finance which gave its report on the Bill on the 13th December,
2011 and has recommended enactment of the Bill, subject to the following modifications:

i) Voting rights in banks may be restricted up to 26%.

ii) The Depositors’ Education and Awareness Fund may be used for the purpose of promoting
depositors’ interests
.
Further, pursuant to the discussion with Indian Banks’ Association (IBA), RBI and Industry
Associations, the following additional amendments are proposed:

a) to exempt guarantee agreements of banks from the purview of the section 28 of the Indian
Contract Act, 1872 to bring finality to redemption of such guarantees;
b) to allow select Directors on the Board of RBI a fixed maximum tenure of eight years with terms of
not more than two terms of four years each either continuously or intermittently in consonance with
the directions of the ACC;
c) to exempt conversion of branches of foreign banks to wholly owned subsidiary entities of foreign
banks and transfer of shareholding of banks to the Holding Company structure pursuant to guidelines
of RBI from payment of stamp duty; and
d) to ensure that unnecessary inspections are avoided and to encourage regulatory coordination, a
condition has been added such that the inspection of the associate enterprise of a banking company
would be conducted by RBI jointly with the sector regulator.

31
NEED FOR AMENDMENT

NPAs in the banks stand at Rs. 6.41 lakh crore in the public sector banks while total stressed assets are at Rs.
8.02 lakh crore. It has resulted in choking the banking system. So, it had become necessary for the RBI to
intervene in order to take urgent measures for their speedy resolution. The government in May had
promulgated an ordinance authorising the Reserve Bank of India (RBI) to issue directions to banks to initiate
insolvency resolution process under the Insolvency and Bankruptcy Code, 2016.

Following the ordinance, the RBI had identified 12 accounts each having more than Rs 5,000 crore of
outstanding loans and accounting for 25 per cent of total NPAs of banks for immediate referral for resolution
under the bankruptcy law. Under the Banking Regulation (Amendment) Act, 2017, the RBI can issue
directions to banks for resolution of stressed assets. The RBI can specify authorities or committees to advise
banks on resolution of stressed assets. The members on the committees will be appointed or approved by the
RBI.

Indian bank has been suffering from NPA, Bad loans, and stressed assets problem from many years. This
problem has been worsening with the time despite several efforts made by the banks and the government of
India. In the starting stages of the problem, the reasons for this problem were attributed to the so-called
policy paralysis with many big projects being stuck because of raw material supply and land acquisition
problems. India economy saw a downturn in last five years this reduced the demand which led to surplus
capacity in many industries, thus finally impairing debt servicing capacity.

Before 2008, many banks had been extravagant in lending without adequate checks and safeguards during
the boom days leading up to the 2008 financial crisis. Apart from it, data suggest that Indian public sector
banks have a whopping Rs9.64 trillion stressed assets which are strangulating the development and growth
in Indian banking sector. The RBI’s December Financial Stability Report 2016 said that large borrowers (the
central bank defines these as debtors to whom lenders have an exposure of at least Rs5 crore) account for
56% of bank debt and 88% of their NPAs.

32
IMPACT ON ECONOMY

An emerging market economy (EME) is an economy that has some characteristics of a developed economy
but is not yet a developed economy; it has aspirations to be a developed economy one day; it has certain
distinct characteristics and differs from developed economies in multifarious ways. An EME is as an
economy with low to middle per capita income with dominance of the proportion of the global population.
EMEs are typically classified as emerging because of the relatively recent initiatives at development and
reforms and beginning to open up their markets and "emerge" on to the global scene. EMEs are expected to
be fast-growing economies; the need for, as also the level of savings, investments, both domestic and
foreign, consumptions and rate of growth are all expected to be higher and much faster due to the smaller
base effect.

Accordingly, the EMEs have their specific economic and developmental needs and agenda. The global
banking regulatory standards, or for that matter, the regulatory framework for any other financial sector
segment is designed more to suit the needs and the level of development in the advanced economies. The
fundamental reason for this is their dominant presence and role in the global standard setting fora as also the
more advanced stages of their financial sector development including the higher level of complexity, variety
and sophistication of financial products and services innovated /offered in these economies. However, the
existing financial intermediaries and the available financial products and services in the EMEs often fall
grossly short of meeting the requirements of higher and faster growth, savings, investments etc. Moreover,
the requirements of funding infrastructure and social sectors, as also the real sector, are unprecedented,
particularly in view of the serious constraints on funding, muted investor and international confidence, under
developed condition of the social and public institutions, lower levels of appropriate skills, specialisation and
expertise, etc. The risks and volatility emerging from the foregoing are equally large and often alien to the
EME milieu. That is why the regulatory standards, often designed keeping in view the ground realities in the
advanced economies, may not also always be a perfect fit for the emerging economies and the EMEs use
national discretion in this respect while at the same time making sincere attempts at aligning their regulatory
framework with the global best practices.

33
IMPACT ON THE BANKING SECTOR

 Initiating insolvency proceedings: The central government may authorise the Reserve Bank of India
(RBI) to issue directions to banks for initiating proceedings in case of a default in loan repayment.
These proceedings would be under the Insolvency and Bankruptcy Code, 2016.

 Issuing directions on stressed assets: The RBI may, from time to time, issue directions to banks for
resolution of stressed assets.

 Committee to advise banks: The RBI may specify authorities or committees to advise banks on
resolution of stressed assets. The members on such committees will be appointed or approved by the
RBI.

 Applicability to State Bank of India: The Bill inserts a provision to state that it will also be applicable
to the State Bank of India, its subsidiaries, and Regional Rural Banks.

 After this, the central bank will be able to directly ask banks to sit down with defaulters and reach a
settlement as part of the package.

 Presently, there is a provision for an oversight committee consisting of “eminent persons under the
Scheme for Sustainable Structuring of Stressed Assets (S4A) which is recommended by the Indian
Banks’ Association in consultation with RBI.

 Under this ordinance, the Section 35 of the Banking Regulation Act, will be amended which
currently deals with powers of inspection for RBI.

 Now the RBI will prepare a timeline of 6-9 months for banks to deal with their big bad loan
accounts.

 The scheme will be started off with banks being told to resolve the top 40-50 cases.

 Under the amended act or the ordinance, if banks aren’t able to find a solution to the problem by the
specified time, the central bank will step in directly.

 The RBI will be given some punitive powers to ensure that banks act quickly on these bad loans.

 There is a common perception among the banks and investors that the government takes an implicit
guarantee to bear the cost of defaults and losses. The amended act will try to correct that perception.

 This new ordinance will also empower The RBI to help bankers overcome concerns about their
decisions being probed by vigilance agencies. The new framework will raise the bar for questioning
business decisions of the bankers by vigilance authorities but there would be no explicit protection to
bankers from the vigilance authorities.

34
POSITIVE IMAPCT OF THE AMENDMENT

The measures contained in the Banking Amendment bill are expected to create more confidence among
investors, depositors and the public in the banking system. But a lot more requires to be done in the area of
improving corporate governance, better customer service, and more importantly freeing the public sector
banks from the political interference and the dual control of banks by the finance ministry and the RBI

Now that the Banking Laws (Amendment) Bill has been passed by the Lok Sabha, it will easily go through
the Rajya Sabha also as it has the approval of the main opposition party, the BJP after finance minister P
Chidambaram dropped the controversial clause relating to allowing banks to trade in commodity futures and
keeping the sector outside the purview of Competition Commission of India. When the bill becomes law,
which is a formality now, what are its benefits to the ordinary banking public? The main purpose of this bill
is to strengthen the hands of the Reserve Bank of India (RBI) with powers to supersede the entire boards of
the recalcitrant banks which fail to comply with the directions of RBI. At present the RBI has powers only to
remove a director or officers of a banking company, but not the full board. This amendment gives powers to
the RBI to supersede the entire board in public interest and appoint an administrator to run the bank for a
period not exceeding 12 months.

The amendment also gives powers to the central bank to call for information and returns from the associate
and group companies of the banking companies and to inspect them, if necessary. These powers will come
handy if and when the RBI proposes to grant licenses to industrial houses for setting up new banks, which
is on the anvil now. The bill also substantially increases the penalties and fines for some of the violations
of the Banking Regulation Act and the rules framed there under. These powers are expected to create an
environment for better compliance of regulations by banks, ultimately benefiting the banking public and
the economy of the country. At present there is a cap of 1% on voting rights to private investors in public
sector banks. This in effect means that the private investors had no meaningful role to play in the
functioning of the bank even as a shareholder. This cap is now proposed to be raised to 10%, paving the
way for more investment in public sector banks by the foreign institutional investors, who have been
sitting on the sidelines so far in
respect of investing in these banks.

Similarly, there is a cap of 10% on voting rights to investors in private sector banks, which is now proposed
to be raised to 26% through this bill. This in effect means that the promoters and their group can have voting
powers up to 26%, which, in fact, is a double edged sword. On the one hand, it gives the promoters a better
say in the management of the bank and coupled with the higher commitment of the promoters it could be a
spring board for the faster growth of the bank. On the other hand, it can influence the decisions of the

35
Management, which may or may not be in the best interest of the bank and its other stakeholders. The RBI
should, therefore, keep a close watch on the functioning of all private banks.

The bill paves the way for new banking licenses

The central government has been persuading the RBI to issue new banking licenses for expanding the
banking network, mainly for financial inclusion and expansion of banking facilities to unbanked areas in the
country. The RBI has been insisting on getting the additional powers mentioned above, so as to ensure a
healthy growth of the banking institutions. Now that the bill has been cleared, the RBI may consider
permitting new banks to be set up in the private sector, which in turn will create more competition among
banks in the country. More the competition, better it is for bank customers, as it will provide more choices to
the banking public and might bring down bank charges to some extent. The RBI should, however, ensure
that new banking licenses are given only to the deserving applicants, which have a record of total dedication
to provide transparent, committed and superior customer service and not to fly-by-night operators, who wish
to make quick money by floating a bank and then resort to all sorts of manipulations at the cost of the
banking public.

The bill raises the voting rights in banks

At present there is a cap of 1% on voting rights to private investors in public sector banks. This in effect
means that the private investors had no meaningful role to play in the functioning of the bank even as a
shareholder. This cap is now proposed to be raised to 10%, paving the way for more investment in public
sector banks by the foreign institutional investors, who have been sitting on the sidelines so far in respect
of investing in these banks.

Similarly, there is a cap of 10% on voting rights to investors in private sector banks, which is now
proposed to be raised to 26% through this bill. This in effect means that the
promoters and their group can have voting powers up to 26%, which, in fact, is a double edged sword. On
the one hand, it gives the promoters a better say in the management of the bank and coupled with the higher
commitment of the promoters it could be a spring board for the faster growth of the bank. On the other hand,
it can influence the decisions of the management, which may or may not be in the best interest of the bank
and its other stakeholders. The RBI should, therefore, keep a close watch on the functioning of all private
banks, so that these additional voting rights serve the interest of all stakeholders equitably.

The bill provides for issue of bonus shares by public sector banks
36
So far only private sector banks, particularly old generation banks have been giving away free shares to
their shareholders as bonus shares, though all private sector banks are allowed to issue bonus shares
according to the Companies Act, under which they are incorporated. But public sector banks, though
holding huge reserves, have not issued any bonus shares so far. This is mainly because there were no
provisions to issue bonus shares in the enactments through which they were nationalized. The present bill,
therefore, provides for issue of bonus and rights shares, including splitting of shares into lower
denomination, by the public sector banks, which is good news for banks’ shareholders.

The biggest bank in the country, State Bank of India (SBI) has the largest free reserves Rs83,280 cr. against
its paid up capital of Rs.671 cr. These huge reserves, nearly 125 times its paid up capital, are by far the
largest reserves held by any bank in our country and if it decides to issue bonus shares, it will surely cheer
the stock market, which has been giving a low valuation for all public sector banks on account of investor-
unfriendly image of these banks. Now that the decks have been cleared for them to issue bonus shares, the
government should encourage all those banks having substantial reserves to issue bonus shares to their
shareholders, as the government will be the biggest beneficiary of such a move because of its majority
holding in all the public sector banks. This step will also create a conducive environment for banks to raise
fresh capital more easily from the market and thus help in meeting their capital adequacy requirements
prescribed under Basel III norms.

If these are the benefits of this Banking Amendment Bill to the banking public,
why are bank unions against this bill?

The left parties had opposed the bill and voted against it in the LOK SABHA. The banks unions are also
against this bill as they feel that these amendments will dilute the interest of the public sector banks.
Besides, these amendments will facilitate corporate entry into banking, which they feel is not desirable, as
the public money deposited in these banks can be misused for the benefit of few corporate bigwigs and not
for the benefit of the general public. They are also opposed to the increase in voting rights to shareholders,
as it may dilute the powers of the government in public sector banks. It is because of these reasons that they
have threatened to go on a day’s strike on 20th December 2012.

37
NEGATIVE IMPACT OF AMENDMENT:

The first applications of this modified law are visible. Under these new provisions, the government has
issued an order authorising the Reserve Bank of India (RBI) to give directions to the banks. RBI, in turn, has
issued a notification imposing additional conditions on banks with regard to the Joint Lenders’ Forum (JLF)
and corrective action plan processes.
It may be worthwhile to note at the start that the BRA already gives RBI expansive powers to issue
directions to banks. This begs the question as to why was it necessary to amend the BRA to give powers to
the RBI that it already has.
Many experts think that this specific amendment will help resolve the banking crisis. In this article, we ask
three questions:
1) Will the ordinance help solve the decision paralysis in banks?
2) Will it help solve the ongoing NPA (non-performing asset) crisis?
3) Will it help prevent a future NPA crisis?

Understanding the ordinance

The ordinance adds two new sections to BRA:

Section 35AA: The Central Government may by order authorise the Reserve Bank to issue directions to any
banking company or banking companies to initiate insolvency resolution process in respect of a default,
under the provisions of the Insolvency and Bankruptcy Code, 2016.

Explanation – For the purposes of this section, “default” has the same meaning assigned to it in clause (12)
of section 3 of the Insolvency and Bankruptcy Code, 2016.

Section 35AB:
(1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue
directions to the banking companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve
Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets.

38
Decision paralysis
Will the ordinance help solve the problem of decision paralysis in banks? When the banker has to trigger the
IBC resolution process against a politically connected corporate defaulter, he is likely to face political
pressure to not trigger the IBC. Even in the resolution process, the banker has to take decisions related to the
restructuring of the company. There could be allegations that the banker colluded with the promoter of the
defaulting company for mala fide purposes such as helping the promoter buy off the company’s assets at a
cheaper price or approving large loan write-offs etc. More generally, there could be allegations of a corrupt
nexus between banks, insolvency professionals and bidders.
Section 35AA of the amended BRA aspires to address the first problem. If an honest banker wants to initiate
a resolution process against a corporate defaulter under IBC, but is under political pressure not to, he can
turn to RBI. RBI can issue a direction to the relevant bank to trigger IBC. If RBI comes under political
pressure, it can turn to the government which will authorise RBI to issue such directions. Will this work? It
depends on the extent to which politically connected borrowers are able to influence RBI and the
government.
Section 35AB of the amended BRA aspires to address the second element of the problem. If a banker wants
to take tough decisions during the resolution process or choose a specific restructuring plan, but is afraid of
the investigative agencies, then RBI can give regulatory cover to the banker by issuing specific directions
under this section, requiring the banker to take the restructuring decision. The government does not have any
role here. RBI on its own can issue directions to banks for resolution of stressed assets. Effectively, RBI’s
direction will give plausible deniability to the banker, using which he can subsequently justify his conduct
and be free of the fear of investigation and prosecution.

39
Solving the current NPA crisis
Will the ordinance help solve the current NPA crisis? Let us consider two possibilities:
1) What happens if RBI directs banks under section 35AA to trigger IBC against the corporate defaulter?
2) What happens if RBI not only directs the banks to trigger IBC but also passes directions under section
35AB to the banks on what specific resolution plan to approve as part of IBC or directs the banks to initiate
any non-IBC restructuring mechanism?
In the first case, while triggering IBC may provide a resolution outcome faster than other restructuring
mechanisms, the recoveries from such resolution are likely to result in large losses, particularly in the early
years. Banks will then have to recognise large losses on their balance sheets, losses that have been hidden
until then. The implicit equity capital crisis will morph into an explicit capital crisis. As yet, there is no sign
of additional equity capital even if banks were to trigger IBC under directions from RBI.
In the second case, this ordinance gives powers to RBI to issue directions, and even to overrule the
commercial judgement of the bankers during any resolution process. Will this help? This seems unlikely.
Maximising the recoveries from an NPA requires commercial decision making. Bureaucracies in banks have
done this badly; it is unlikely that the bureaucracy in RBI will do better. Commercial decision making is best
done in for-profit private sector environments.

Preventing future NPAs

Will this ordinance help prevent NPAs in future? Banking is a business and giving a loan to a borrower is a
commercial decision. The corporate borrower maybe unable to repay the loan for any number of reasons.
Lending decisions taken by an honest banker can also give rise to NPAs. The problem turns into a crisis
when the NPAs are allowed to linger on for years and their volume become so large that banks’ balance
sheets become severely impaired. This eventually leads to a credit crunch in the economy and starts to affect
investment and growth, as has been the case over the last few years in the Indian economy.
The job of a sound banking regulator is to prevent such possibilities through prevention (micro-prudential
regulation) backed by cure (resolution). For years, RBI adopted a lax approach which helped banks hide bad
news. Had RBI been more vigilant and taken appropriate actions early on, the ongoing NPA crisis could
have been prevented from metastasising. The amendment to BRA through this ordinance further increases
the RBI’s involvement in the commercial decisions taken by banks. However, the roots of the banking crisis
lay in RBI’s own internal functioning. This calls for improving the regulatory architecture, accountability
mechanisms, and processes for executive/legislative/judicial functions. These are not seen in the ordinance.

40
Impartial referee:
A financial regulator should be like a referee in a football match. In a football match, typically a higher
organisation (for example, the International Football Association Board) writes the rules of the game and the
referee enforces the rules on the players while supervising their actions. The players are free to play the
game on their own within the framework of the rules.
In the case of banking, parliament writes the Banking Regulation Act, and RBI writes the subordinate
legislation under this. After this, banks should be commercially motivated, and RBI should blow the whistle
when the rules are being violated. In reality, however, the way RBI does banking regulation is akin to the
referee telling the players how to give passes and when to strike the ball. This is an extraordinary power
given to a banking regulator which is unique to India. Resolution of stressed assets is fundamentally a
commercial decision, not a regulatory one. Is it really the RBI’s job to direct the banks on how to restructure
stressed assets? The RBI’s job is to insist that bad assets are recognised, provided for, and that banks have
adequate equity capital.

41
VIEWPOINT

Ideally a new law should be released along with its rationale and background so that there is no ambiguity
about its objective. This ordinance does not have a clear rationale. It starts with a short preamble which is
vague, and does not clarify the purpose of the amendment. Ideally, the full strategy for resolving the banking
crisis should be visible as a single document.
Given that RBI is already empowered by the BRA to direct the banks, the ordinance seems much ado about
nothing. As we have argued, it gives rise to new troublesome questions and will do little to solve the crisis at
hand. The Indian banking crisis is a major challenge to our economic policy establishment. A full strategy
for addressing the banking crisis is required. As yet, this is not visible.

42
CONCLUSION

This amendment can be considered a progressive step and gives huge enabling powers to RBI which would
play a key role in solving the existing problems related to bad loan and stress assets. Apart from
Amendments to the Banking Regulations Act, amendments to the SARFAESI and Debt Recovery Tribunal
Acts, and the enactment of the Insolvency and Bankruptcy Code indicate the Government’s firm
determination to find a satisfactory solution to the NPA resolution problem.

The Ordinance amending the Banking Regulation Act will fasten the NPA resolution process by
empowering the RBI in giving specific directions to banks. It will also protect bankers from any
investigative counterblast in future as the resolution process will have the support of Oversight Committees
certified by the RBI.

Optimal banking structure defined by relative size, accessibility and outreach, and allocation of credit is
evaluated from empirical data for changes consistent with dynamic needs of Indian economy during reform
era. Despite significant movements on the above parameters, ideal accomplishments were far from
satisfactory, and thus further reforms were needed. Reserve Bank of India imposed deregulation and
prudential norms for reforming banks that have made substantial impact on banks’ balance sheet and other
performance variables. Consolidation and restructuring initiatives muted by policy constraints and
consequences were marginal variations in the level of concentration and competition in Indian banking.
Market-oriented banking reforms contributed to performance of banks. Notable achievements were lower
average cost combined with growth of total factor productivity, superior profitability and intensive
advanced technology adoption. But current high non-performing assets ratio is a drag on banks’ profitability
as it was the case in 1990s despite a drastic fall in the ratio in intervening years followed by its upward
trend in post-global crisis.

The Act provides a framework under which commercial banking in India is supervised and regulated. The
Act supplements the Companies Act, 1956. Primary Agricultural Credit Society and cooperative land
mortgage banks are excluded from the Act. The Act gives the Reserve Bank of India (RBI) the power to
license banks, have regulation over shareholding and voting rights of shareholders; supervise the
appointment of the boards and management; regulate the operations of banks; lay down instructions for
audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and
on banking policy, and impose penalties. In 1965, the Act was amended to include cooperative banks
under its purview by adding the Section 56. Cooperative banks, which operate only in one state, are
formed and run by the state government. But, RBI controls the licensing and regulates the business
operations. The Banking Act was a supplement to the previous acts related to banking.

43
Future Outlook:

Although, the adoption of technology in banks continues at a rapid pace ,the concentration is perceptibly
more in the metros and urban areas. The benefit of Information Technology is yet to percolate sufficiently to
the common man living in his rural hamlet. More and more programs and software in regional languages
could be introduced to attract more and more people from the rural segments also. Standards based
messaging systems should be increasingly deployed in order to address cross platform transactions. The
surplus manpower generated by the use of IT should be used for marketing new schemes and banks should
form a 'bra ins trust comprising domain experts and technology specialists.

44
 BIBLIOGRAPHY

1. https://www.rbi.org.in/Scripts/BS_ViewSpeeches.aspx

2. https://bankingschool.co.in/

3. en.wikipedia.org

4. www.findevgateway.org

5. www.gpahelp.com

6. mbaofindia.blogspot.com

7. moneybankblog.wordpress.com

8. www.papertyari.com

9. m.economictimes.com

10. indianmoney.com

45