Dr.

SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

FACULTY OF LAW
CLASS: B.Com., LL.B. (Hons.) 7th Semester
PAPER NAME: LAW OF BANKING &
INSURANCE

PRACTICAL WORK SHEET FOR MODULE

01

M.M.: 15 Marks

Assignment 01:

A company XYZ Pvt. Ltd which was engaged in providing small credit services to
the customers is willing to acquire a banking license from Reserve Bank of India under the
provisions of Banking Regulation Act, 1949. Prepare a checklist of all requirements for acquisition
of the banking license. Which among the requirements is the most important legal
requirement in your opinion?

Answer 01:

A. Non-Banking Financial Company (NBFC)

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business
but does not include any institution whose principal business is that of agriculture activity,
industrial activity, purchase or sale of any goods (other than securities) or providing any
services and sale/purchase/construction of immovable property. A non-banking institution
which is a company and has principal business of receiving deposits under any scheme or
arrangement in one lump sum or in installments by way of contributions or in any other manner,
is also a non-banking financial company (Residuary non-banking company.

Financial activity as principal business is when a company’s financial assets constitute more than 50
per cent of the total assets and income from financial assets constitute more than 50 per cent of the
gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The
term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has
defined it so as to ensure that only companies predominantly engaged in financial activity get
registered with it and are regulated and supervised by it. Hence if there are companies engaged in
agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase,
sale or construction of immovable property as their principal business and are doing some financial
business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is
popularly known as 50-50 test and is applied to determine whether or not a company is into financial
business.

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs

NBFCs lend and make investments and hence their activities are akin to that of banks; however there
are a few differences as given below:

i. NBFC cannot accept demand deposits;

ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on
itself;

iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available
to depositors of NBFCs, unlike in case of bank.

Assignment: 02

Discuss in brief about any two key challenges before Indian banking system. Do you think that RBI
has taken any initiative to prevent any mishap which may be likely caused? If yes, collect the legal
documents issued by RBI to respond to such challenges.

Answer:02

 The structure of the financial sector is a concept of public policy concern in view of its serious and
critical contribution to economic performance. Financial regulation and supervision assumes
importance in ensuring that the financial system operates along sound lines. As discussed in chapter
III, there has been a long tradition of regulating financial systems by central banks in several
countries.

The regulation and supervision of banks are key elements of a financial safety net as banks are often
found at the centre of systemic financial crises (Diamond and Rajan, 2005). The primary justification
for financial regulation by authorities is to prevent systemic risk, avoid financial crises and protect
depositors’ interest and reduce asymmetry of information between depositors and banks. As the costs
of financial crises were perceived to be very high, the authorities realised that they should be avoided
at all costs. As a result, banks came to be regulated everywhere. Besides, financial regulation attempts
to enhance the efficiency of the financial system and to achieve a broad range of social objectives.
Going by the experience in several countries, effective regulation is in the interests of all concerned,
though it cannot be based on a ‘one-size-fits-all’ approach (Mistry, 2003). However, it is important to
bear in mind that while financial institutions do benefit from an appropriate regulatory regime, there is
not much evidence that the existence of a regulatory jurisdiction makes institutions stronger and less
prone to shocks (Fiebig, 2001). There is neither a unique theoretical model, nor just one practical
approach to the regulation and supervision of a financial system. The existence of different types of
regulatory models of the financial system makes the ideal choice a difficult exercise.

The Indian financial system consists of commercial banks, cooperative banks, financial institutions
(FIs) and non-banking financial companies (NBFCs). The commercial banks can be divided into
certain categories depending on the ownership pattern, viz., public sector banks, private sector banks
and foreign banks. While the State Bank of India and its associates, nationalised banks and Regional
Rural Banks (RRBs) are constituted under respective enactments of the Parliament, the private sector
banks and foreign banks are considered as banking companies as defined in the Banking Regulation
Act, 1949. The cooperative credit institutions in the country are broadly classified into urban credit
cooperatives and rural credit cooperatives. The rural credit cooperatives are generally divided into
short-term and long-term cooperatives. However, in some states, cooperative banks have unitary
structure with a state level cooperatives operating through their own branches.

Assignment :03

RBI as a custodian of banking system in India undertakes and performs

mergers among banks to avoid the collective and collateral loss due to contagion. Prepare
a list of events where RBI has used preventive and punitive powers to avoid stress on
Indian banking system. Do you think that RBI has ever misused the power that has
been vested in it under the provisions of Banking Regulation Act, 1949?

Answer :03

Assignment: 04

Multifunctional banking has become an important component in the development of a

growing economy. Conduct a study on various banks in India and highlighted the
features of multifunctional banking in them. Conduct an assessment of suitability of
multifunctional banking for Indian banking system.
Answer: :04

The Indian banking sector is regulated by the Reserve Bank of India Act 1934 (RBI Act) and the
Banking Regulation Act 1949 (BR Act). The Reserve Bank of India (RBI), India’s central bank, issues
various guidelines, notifications and policies from time to time to regulate the banking sector. In
addition, the Foreign Exchange Management Act 1999 (FEMA) regulates cross-border exchange
transactions by Indian entities, including banks
Summarise the primary statutes and regulations that govern the banking industry.
India has both private sector banks (which include branches and subsidiaries of foreign banks) and
public-sector banks (ie, banks in which the government directly or indirectly holds ownership
interest). Banks in India can primarily be classified as:

 scheduled commercial banks (ie, commercial banks performing all banking functions);
 cooperative banks (set up by cooperative societies for providing financing to small
borrowers); and
 regional rural banks (RRBs) (for providing credit to rural and agricultural areas).
Recently, the RBI has also introduced specialised banks such as payments banks and small finance
banks that perform only some banking functions.
The key statutes and regulations that govern the banking industry in India and particularly scheduled
commercial banks are as follows:
Assignment :05
As explained in Module 01, competition is considered not beneficial for the health of a
banking system due to which licensing norms both for banks as well as branches have been
prescribed under Banking Regulation Act, 1949. Conduct a research to discover some
additional areas where banks appear competing with each other and analyze their effect on
the banking system as a whole
Answer:05

Financial sector reforms have been introduced in a calibrated and well-sequenced manner since the
early 1990s and have resulted in a competitive, healthy and resilient financial system. There has
been financial deepening: the deposits/ GDP ratio rose from 16.4 per cent in 1971-75 to 36.1 per
cent in 1989-90 and further to 60 per cent in 2004-05. Bank credit to commercial sector increased
from 15.6 per cent to 30.3 per cent of GDP in 1989-90 and 48 per cent in 2005-06.

The Annual Policy Statement for the year 2007-08 by Governor, Reserve Bank of India at para
185 states that ' with a view to directing the resources of banks to their niche areas and to sustain
efficiency in the banking system, a graded approach of licensing may be appropriate which can be
equally applicable to both domestic and foreign banks. A technical paper on this subject will be
placed on website inviting comments/suggestions from the public'

Accordingly, an internal study in RBI covered the background on banking regulation, licensing of
banks under Banking Regulation Act, 1949, extant policy relating to bank licensing, both Indian and
foreign banks international experience and practice on limited bank licensing.

Statutory background- Banking Regulation Act, 1949

Background

Prior to the enactment of Banking Regulation Act, 1949 which aims to consolidate the law relating to
banking and to provide for the nature of transactions which can be carried on by banks in India, the
provisions of law relating to banking companies formed a part of the general law applicable to
companies and were contained in Part XA of the Indian Companies Act, 1913. These provisions were
first introduced in 1936, and underwent two subsequent modifications, which proved inadequate
and difficult to administer. Moreover, it was recognised that while the primary objective of company
law is to safeguard the interests of the share holder, that of banking legislation should be the
protection of the interests of the depositor. It was therefore felt that a separate legislation was
necessary for regulation of banking in India. With this objective in view, a Bill to amend the law
relating to Banking Companies was introduced in the Legislative Assembly in November, 1944 and
was passed on 10th March, 1949 as the Banking Companies Act, 1949. By Section 11 of the Banking
Laws (Application to Cooperative Societies) Act, 1965, the nomenclature was changed to the Banking
Regulation Act, 1949.

Indian banking system

The Indian financial system currently consists of commercial banks, co-operative banks, financial
institutions and non-banking financial companies ( NBFCs). The commercial banks can be divided
into categories depending on the ownership pattern, viz. public sector banks, private sector banks,
foreign banks. While the State bank of India and its associates, nationalised banks and Regional Rural
Banks are constituted under respective enactments of the Parliament, the private sector banks are
banking companies as defined in the Banking Regulation Act. The cooperative credit institutions are
broadly classified into urban credit cooperatives and rural credit cooperatives.

 Powers and responsibilities of RBI in respect of regulation of banks

The Reserve Bank of India has been entrusted with the responsibility under the Banking Regulation
Act, 1949 to regulate and supervise banks' activities in India and their branches abroad. While the
regulatory provisions of this Act prescribe the policy framework to be followed by banks, the
supervisory framework provides the mechanism to ensure banks' compliance with the police.

Assignment:06

Conduct an analysis of recent consolidation that happened in Indian

banking system in which various banks were merged together to form large sized
banks. With the help of your research, comment on the following statements-

I. Merger of banks is not always beneficial to the banking system.

II. There was no requirement of consolidation among banks at this time in the Indian
banking system.
Answer:06
In another round of boosters for the economy, Finance Minister Niramala Sitharaman today
announced amalgamation of 10 public sector banks into four big banks. After this the total number
of Public Sector Banks in the country will come down to 12 from 27 banks in 2017. Apart from this
the government announced Rs 55,250 crore upfront capital infusion in the PSBs.
This comes a week after Finance Minister announced a series of measures to boost the economy. In
big banks merger, Sitharaman announcement .
Government also announced Rs 55,250 crore upfront capital for credit growth & regulatory compliance to support
economy. PNB will get Rs 16,000 crore; Union Bank Rs 11,700 crore; Canara Bank Rs 6,500 crore;
Indian Overseas Bank Rs 3,800 crore; Central Bank of India Rs 3,300 crore; Bank of Baroda Rs 7,000
crore; Indian Bank Rs 2,500 crore and Uco Bank Rs 2,100 crore.

* Big banks with enhanced capacity to increase credit and bigger risk appetite, with national
presence and glob .

Assignment :07

Briefly discuss the initiatives taken by Government of India and Reserve Bank of India to
revive the strength of Indian banking system after immense stress on banking due to recent
outbreak of COVID- 19. Do you think that the initiatives undertaken are enough to respond
to the immediate liquidity requirements of Indian economy.

Answer:07

As the world is battling on all fronts against the outbreak of COVID-19, India has also been
considerably affected by the pandemic. In order to contain the spread of the pandemic, Government
of India announced a nationwide lockdown starting from March 25, 2020. The ongoing pandemic has
posed a sizeable impact on life as well as business of the world's largest democracy. Though, the
magnitude of impact on different sectors varies, none of the sectors are completely out of the reach
of its repercussions.
The battle with COVID-19 is not only to save the country and its people but also to ensure that the
banking channels are working round the clock to cater to the needs of the public as well as financial
market. Needless to say, that banking system is the backbone of any country and its failure or
slowdown could lead to multiple issues for developing countries like India. Hence, in order to ease
out the unforeseen difficulties being faced by numerous sectors, Reserve Bank of India (RBI) being
the central bank of the country came up with a number of measures and reliefs post nationwide
lockdown which have been discussed in this article at length.

Operational and Business Continuity Measures:

Early March, before the announcement of lockdown, the pandemic had already started to show its
impact on all business establishments, irrespective of their strength and type of industry. In order to
prepare the banks for all kinds of unforeseen events, RBI on March 16, 2020 came out with a
notification with 'Operational and Business Continuity Measures' 1 involving the following steps:

(a) Taking stock of critical processes and revisiting Business Continuity Plan (BCP) in the emerging
situations/scenarios with the aim of continuity in critical interfaces and preventing any disruption of
services, due to absenteeism either driven by the individual cases of infections or preventive
measures;

(b) Taking steps of sharing important instructions/ strategy with the staff members at all levels, for
soliciting better response and participation and sensitizing the staff members about preventive
measures/steps to be taken in suspected cases, based on the instructions received from health
authorities, from time-to-time; and

(c) Encourage their customers to use digital banking facilities as far as possible.

Perhaps, the government had a premonition that the most overwhelming challenge was on its way.
Hence, these steps were introduced by the central bank before the commencement of the
nationwide lockdown and provided time to the banking fraternity to be prepared with the BCP and
other measures in order to help them face any kind of obstacles that may come in the future.

Post lockdown, in order to ensure normal business functioning by the entire banking sector,
maximum relaxations were introduced by RBI on March 27, April 17, 2020 and May 22, 2020 vide
different notifications. The first address by the RBI governor on March 27, 2020 2 introduced several
measures including, grant of a three months moratorium on term loans and the infusion of liquidity
by way of TLTRO scheme. The RBI Governor's address on April 17, 2020 3 was intended to introduce
further measures to maintain adequate liquidity in the financial system by easing out the financial
stress. The third address on May 22, 2020 4 extended deadlines, made changes in some previously
announced measures5 and introduced new measures including limit on Group Exposures under the
Large Exposures Framework and relaxation of guidelines for Consolidated Sinking Fund of State
Governments. These relaxations have been discussed in the following five sets of measures: