Notes 1

Renaissance University
School of law
Synopsis
Unit 1: the evolution of banking services and its history in India.
• The evolution of banking in India
• History of banking in India

• Bank nationalization process:
• Bank nationalization case
• Types of banks & their functions
THE EVOLUTION OF BANKING IN INDIA
The banking history is interesting and reflects evolution in trade and commerce. It also throws
light on living style, political and cultural aspects of civilized mankind. The strongest faith of
people has always been religion and God. The seat of religion and place of worship were
considered safe place for money and valuables. Ancient homes didn't have the benefit of a steel
safe, therefore, most wealthy people held accounts at their temples. Numerous people, like
priests or temple workers were both devout and honest, always occupied the temples, adding a
sense of security. There are records from Greece, Rome, Egypt and Ancient Babylon that
suggest temples loaned money out, in addition to keeping it safe. The fact that most temples
were also the financial centers of their cities and this is the major reason that they were ransacked
during wars. The practice of depositing personal valuables at these places which were also
functioning as the treasuries in ancient Babylon against a receipt was perhaps the earliest form
of “Banking”.
Gradually as the personal possession got evaluated in term of money, in form of coins
made of precious metal like gold and silver, these were being deposited in the temple treasuries.
As these coins were commonly accepted form of wealth, ‘lending’ activity to those who needed
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it and were prepared to ‘borrow’ at an interest began. The person who conducted this ‘lending’
activity was known as the “Banker” because of the bench he usually set. It is also observed that
the term ‘bankrupt’ got evolved then as the irate depositors broke the bench and table of the
insolvent banker.
With the expansion of trade the concept of banking gained greater ground. The handling
of “banking” transcended from individual to groups to companies. Issuing currency was one of
the major functions of the banks. The earliest from of money – coins, were a certificate of value
stamped on a metal, usually gold, silver, and bronze or any other metal, by an authority, usually
the king. With the increasing belief and faith in such authority of their valuation and the
necessities of wider trade a substitute to metal was found in paper. The vagaries of monarchial
rule led to the issues of currency being vested with the banks since they enjoyed faith, controlled
credit and trading. All forms of money were a unit of value and promised to pay the bearer of
specified value. Due to failure on account of unwise loans, to rule and organize, a stable banking
system arose. The word’s earliest bank currency notes were issued in Sweden by stock holms
Banco in July 1661.
HISTORY OF BANKING IN INDIA
The story of Indian coinage itself is very vast and fascinating, and also throws
tremendous light on the various aspects of life during different periods. The Rig Veda speaks
only gold, silver copper and bronze and the later Vedic texts also mention tin, lead, iron and
silver. Recently iron coins were found in very early levels at Attranji Kheri(U.P.) and Pandu
Rajar Dhibi (Bengal). A money economy existed in India since the days of Buddha.
In ancient India during the Maurya dynasty (321 to 185 BC), an instrument called
adesha was in use, which was an order on a banker desiring him to pay the money of the note to
a third person, which corresponds to the definition of a bill of exchange as we understand it
today. During the Buddhist period, there was considerable use of these instruments. Merchants
in large towns gave letters of credit to one another.
Trade guilds acted as bankers, both receiving deposits and issuing loans. The larger
temples served as bankers and in the south the village communities economically advanced
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loans to peasants. There were many professional bankers and moneylenders like the sethi, the
word literally means “chief”. It has survived in the North India as seth. Small purchases were
regularly paid for in cowry shells (varataka), which remained the chief currency of the poor in
many parts of India. Indigenous banking grew up in the form of rural money lending with certain
individuals using their private funds for this purpose. The scriptures singled out the vaishyas as
the principal bankers. The earliest form of Indian Bill of Exchange was called “Hundi”. Exports
and import were regulated by barter system.
Kautilya’s Arthasastra mentions about a currency known as panas and even fines paid to
courts were made by panas. E. B. Havell in his work: The History of Aryas Rule in India says
that Muhammad Tughlaq issued copper coin as counters and by an imperial decree made them
pass at the value of gold and silver. The people paid their tribute in copper instead of gold, and
they bought all the necessaries and luxuries they desired in the same coin.
However, the Sultan’s tokens were not accepted in counties in which his decree did not
run. Soon the whole external trade of Hindustan come to a standstill. When as last the copper
tankas had become more worthless than clods, the Sultan in a rage repealed his edict and
proclaimed that the treasury would exchange gold coin for his copper ones. As a result of this
thousands of men from various quarters who possessed thousand of these copper coins bought
them to the treasury and received in exchangegoldtankas.Theoriginoftheword"rupee"isfoundin
the Sanskrit rūpya "shaped; stamped, impressed; coin" and also from the Sanskrit word "rupa"
meaning silver. The standardization of currency unit as Rupee in largely due to Sher Shah in
1542.
The English traders that came to India in the 17th century could not make much use of
the indigenous bankers, owing to their ignorance of the language as well the inexperience
indigenous people of the European trade. Therefore, the English Agency Houses in Calcutta and
Bombay began to conduct banking business, besides their commercial business, based on
unlimited liability. The Europeans with aptitude of commercial pursuit, who resigned from civil
and military services, organized these agency houses.
A type of business organization recognizable as managing agency took form in a period

from 1834 to 1847. The primary concern of these agency houses was trade, but they branched
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out into banking as aside line to facilitate the operations of their main business. The English
agency houses, that began to serve as bankers to the East India Company had no capital of
their own, and depended on deposits for their funds. They financed movements of crops, issued
paper money and established joint stock banks. Earliest of these was Hindusthan Bank,
established by one of the agency houses in Calcutta in1770.
Banking in India originated in the last decades of the 18th century. The first banks were
The General Bank of India, which started in 1786, and Bank of Hindustan, which started in
1790; both are now defunct. The oldest bank in existence in India is the State Bank of India,
which originated in the Bank of Calcutta in June 1806, which almost immediately became the
Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central banks,
as did their successors. The three banks merged in 1921 to form the Imperial Bank of India,
which, upon India's independence, became the State Bank of India.
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848
as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865
and still functioning today, is the oldest Joint Stock bank in India.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself
in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of
the British Empire, and so became a banking Centre.
The next was the Punjab National Bank, established in Lahore in 1895, which has
survived to the present and is now one of the largest banks in India. The presidency banks
dominated banking in India but there were also some exchange banks and a number of Indian
joint stock banks. All these banks operated in different segments of the economy. The exchange
banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock
banks were generally undercapitalized and lacked the experience and maturity to compete with
the presidency and exchange banks.
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Swadeshi Movement:
The period between 1906 and 1911, saw the establishment of banks inspired by
the Swadeshi movement. The Swadeshi movement inspired local businessmen and political
leaders to found banks for the Indian community. A number of banks established then have
survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda,
Canara Bank and Central Bank of India.
Ammem bal Subba rao Pai founded “Canara Bank Hindu Permanent Fund” in1906.
Central Bank of India was established in 1911 by Sir Sorabji Pochkhana wala and was the first
commercial Indian bank completely owned and managed by Indians. In 1923, it acquired the Tata
Industrial Bank.
The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannadaand Udupi district which were unified earlier and known by the name South Canara
(South Kanara )district. Four nationalized banks started in this district and also a leading private
sector bank. Hence, undivided Dakshina Kannada district is known as “Cradle of Indian
Banking".
Development after Freedom:
The second milestone in history of Indian banking was India becoming a sovereign
republic. The Government of India initiated measures to play an active role in the economic life
of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged
a mixed economy. This resulted into greater involvement of the state in different segments of
the economy including banking and finance. The banking sector also witnessed the benefits;
Government took major steps in this Indian Banking Sector Reform after independence.
• First major step in this direction was nationalization of Reserve Bank in1949.
• Enactment of Banking Regulation Act in1949
• Reserve Bank of India Scheduled Banks' Regulations, 1951.
• Nationalization of Imperial Bank of India in 1955, with extensive banking facilities on

a large scale especially in rural and semi-urban areas.
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• Nationalization of SBI subsidiaries in1959.
Government of India took many banking initiatives. These were aimed to provide banking
coverage to all section of the society and every sector of the economy.
The Industrial Credit and Investment Corporation of India Limited (ICICI) was incorporated at
the initiative of World Bank, the Government of India and representatives of Indian industry,
with the objective of creating a development financial institution for providing medium-term
and long-term project financing to Indian businesses.
BANK NATIONALIZATION PROCESS:

Nationalization of banks in India was an important phenomenon. Despite the provisions,
control and regulations of Reserve Bank of India, banks in India except the State Bank of India
or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking
industry had become an important tool to facilitate the development of the Indian economy. At
the same time, it had emerged as a large employer, and a debate had ensued about the
nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed
the intention of the Government of India in the annual conference of the All India Congress
Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The meeting received the
paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an
ordinance and nationalized the 14 largest commercial banks with effect from the midnight of
July 19, 1969. Within two weeks of the issue of the ordinance, the Parliament passed the
Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the
presidential approval on 9 August1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second dose of nationalization, the Government of India controlled around 91% of the
banking business of India. Later on, in the year 1993, the government merged New Bank of
India with Punjab National Bank. It was the only merger between nationalized banks and
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resulted in the reduction of the number of nationalized banks from 20 to 19. Currently there are
27 nationalized commercial banks.
Economic Liberalization:
The second major turning point in this phase was Economic Liberalization in India. After
Independence in 1947, India adhered to socialist policies. The extensive regulation was
sarcastically dubbed as the "License Raj". The Government of India headed by Narasimha Rao
decided to usher in several reforms that are collectively termed as liberalization in the Indian
media with Manmohan Singh whom he appointed Finance Minister. Dr. Manmohan Singh, an
acclaimed economist, played a central role in implementing these reforms.
In the early 1990s, the then Narasimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be known as New
Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation
banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis
Bank(earlier as UTI Bank),ICICI Bank and HDFC Bank. This move, along with the rapid
growth in the economy of India, revitalized the banking sector in India, which has seen rapid
growth with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private sector
and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are
considered to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to
manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time- especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong.
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BANK NATIONALIZATION CASE
#R.C. COOPER V. UNION OF INDIA
[AIR 1970 SC 564]
Socialism. This is the particular term which was the reason for everything which
happened in this case. It was due to a feat to achieve the ends of socialism in India that whatever
is about to get narrated through this article, took place. Let us first understand certain basics
pertaining to this particular case. The majority Judgement, which was given by 10 out of the 11
Judges, was drafted by Justice J. C. Shah for himself and on behalf of the other 9 Judges who
were for the majority opinion. The dissenting order was drafted by Justice A. N. Ray. Thus, the
Judgment was passed by a 10:1 majority in this particular case.
FACTS OF THE CASE:

For understanding the facts of the case, we need to understand a little bit of the history of
India as well. The first Prime Minister of India, that is, Pandit Jawaharlal Nehru, believed in
socialism to be the best model of development suited for the country to progress. In fact, the type
of socialism in which he believed was termed as Fabian Socialism. This meant that for the better
progress of the nation, its citizens’ good and development, it was necessary to exercise State
control over certain industries, which were considered to be important.
Post-Independence, many sectors which were instrumental in the development of the State
were nationalized. For example, the transport undertakings, insurance sector and the electricity
was completely provided a monopoly of the State! The oil and refineries sector was nationalized
a bit later in the 1960s, though.
Coming to the present case, which is popularly known as the Bank Nationalization case,
the proposal to nationalize the banking sector was really not very new to India. In fact, in the year
1948, the proposal to nationalize the banking sector had been actively debated upon by the All
India Congress Committee (A.I.C.C.). The first Finance Minister of India, R.K. Shanmugham
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Shetty, was strongly in favour of nationalizing the Imperial Bank of India, but Sardar Vallabhbhai
Patel had stopped him from doing so due to certain political reasons. However, very soon, in the
year 1955, the Imperial Bank of India, was nationalized under the State Bank of India Act and 7
of its subsidiaries too were taken over the by the Government. So, we may see from this point that
partial nationalisation of the banking sector had already started.
The role of the Reserve Bank of India too, is very noteworthy in this process of
nationalization. The Reserve Bank gradually decreased the number of commercial banking
institutions in India from 566, as in 1951, to merely 89 by the end of 1969.
Now, moving forward with our discussion, there were certain leaders in the Government
who were in the opposition of this nationalization of the banks. Morarji Desai, the then Finance
Minister, was seriously against the nationalization of 14 banks in India by Indira Gandhi, while
following the ideals of her father. Desai was also the Deputy Prime Minister at that time. Mr.
Desai’s main argument was that the amount of compensation which was going to be paid to these
banks, which amounted to Rs.85 crores, could be simply used to accelerate the economy of the
country. Another argument that Mr. Desai had put forward was that the credit could be diverted
towards the social sectors, simply by controlling the banks by amending the banking laws of the
country.
The differences between the two became so severe that Morarji Desai was dismissed from
the post of the Finance Minister on 17th of July, 1969. The very next day, he voluntarily resigned
from the post of the Deputy Prime Minister of India.
Amidst this, the then Acting President of India, Justice M. Hidyatullah, issued an
Ordinance just two days before the monsoon session of the Parliament was going to start. The
name of the Ordinance was ‘Banking Companies (Acquisition and Transfer of Property)
Ordinance of 1969’. Let us now firstly understand that what was this Ordinance all about? The
features of the Ordinance can be listed as follows:
1. 14 banks in India were listed in the Ordinance which were going to be nationalized.
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2. These 14 banks had been selected on the basis of the amount of deposits that they held.
That is, all of these banks held deposits of more than 50 crores, which was taken as the
criterion to choose them to be nationalized.
3. All the Directors of these 14 banks were asked to vacate their offices. However, apart
from the Directors, the rest of the staff was allowed to continue in their jobs under the
Government of India.
4. The Second Schedule of the Ordinance was the most unconstitutional part. It talked
about the compensation which was supposed to be paid to the banks which were being
undertaken by the Government. The Ordinance mentioned two major ways of providing
compensation to the aggrieved banks-
5. When an agreement was reached at- When the amount to be paid as compensation was
being able to be decided through an agreement, then it was alright.
6. When no agreement could be reached at- When no agreement was being able to reached
at, then, the dispute matter was supposed to be referred to a Tribunal, within three
months from the date of the failure to reach to an agreement. Whatever compensation
amount was to be decided by the Tribunal, was to be awarded in the form of
Government Securities. These Government Securities were not redeemable
immediately, but, 10 years after they were issued.
7. Once the Ordinance had been passed, after two days when the Parliament started its
monsoon session, immediately the Indira Gandhi Government formulated the ‘Banking
Companies (Acquisition and Transfer of Property) Act, 1969’ and every provision was
just the same as in the Ordinance.
After the news of the promulgation of the Ordinance reached Mr. Cooper, who was not only the
then Director of the Central Bank of India Ltd., but also held shares in Central Bank of India, Bank
of Baroda Ltd. and Bank of India Ltd., he filed a Writ petition under Article 32 of the Constitution
of India, before the Supreme Court of India, stating that his Fundamental Rights had been violated
by the promulgation of the Ordinance.
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The Writ petition had been filed on the 21st of July, 1969 and the interim application had been
heard on the 22nd of July, 1969. After hearing the interim application, the Court granted the
injunction to stop the Directors from being vacated from their offices immediately.
ISSUES RAISED:
The following issues had been raised by Mr. Cooper, through his advocate, Mr. Palkhiwala,
which are as follows-
1. Whether a shareholder could file a Writ petition for the violation of his Fundamental
Rights, when the company in which he is a shareholder is acquired by the Government?
2. Whether the Ordinance in question had been properly made or not?
3. Whether the Act was within the jurisdiction of the Parliament to get formulated or not?
4. Whether the impugned Act was violative of Article 19(1)(g) and Article 31(2) of the
Constitution of India or not?
5. Whether the method of ascertaining the compensation was valid or not?
ARGUMENTS SUBMITTED:
Petitioner:
1. The first argument submitted by Mr. Palkhiwala regarding the maintainability of the
petition was that the petition was maintainable, on the pretext that the petition was being
filed by Mr. Cooper in his individual capacity as a citizen of India and not as a
representative of his company. Since a company is not a citizen within the ambit of the
Indian Citizenship Act, 1955, so, it can’t claim any Fundamental Right under the
Constitution, of which Mr. Cooper was eligible by virtue of being a citizen.
2. According to Article 123, the President is empowered to pass any Ordinance, if he feels
that there is an absolute necessity and when both the Houses of the Parliament are not
in session. On the basis of this contention, we may see that the Ordinance was
promulgated just two days before the monsoon session of the Parliament, so there was
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no necessity to promulgate the same. Thus, in contravention of this provision, the
Supreme Court was empowered to strike it down.
3. The third argument was regarding the competency of the Parliament to pass the Act. It
was stated that the Seventh Schedule contained the three Lists, which demarcated the
limit of jurisdiction for both the Central as well as the State Governments. The Union
List contained entries upon which only the Central Government was empowered to
make laws, the State List contained entries upon which only the State Governments
were empowered to make laws and lastly, the Concurrent List contained entries upon
which both the Central and State Governments could make laws, subject to the Doctrine
of Repugnancy. The argument, thus, stated that the Central Government was entitled to
make laws on ‘banking’ only as defined under Section 5 (b) of the Banking Regulation
Act of 1949, as Entry 45 of the Union List empowered it to do so. Moreover, it was
argued that by virtue of Entry 42 of the Concurrent List, the Legislature was empowered
only to make laws in order to effectuate Entry 45 in the Union List. Thus, on the basis
of these logics, it was said that the Parliament was not empowered at all to pass the
impugned Act.
4. At that time, Right to Property was considered to be a Fundamental Right under Article
19(1)(f), which was later omitted after the Judgement of Keshavananda Bharati’s case.
However, when the present case had been instituted, the Right was officially recognized
and so it was said that it violated Article 19 (1) (g) Article 31 (2) (the whole article has
been repealed now) which dealt with compulsory acquisition of property.
5. Lastly and not the least, the Achilles’ heel of this whole Act was the provision for
compensation, which was argued to be entirely ‘draconian’ and extremely irrational and
illogical. The compensation, which would not be paid in cash, but, in Government
securities, which in turn were payable after 10 years, was completely biased in its
approach, with an aim to harass the public and also, to give an undue benefit to the
Government.
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Respondent:
1. The first argument of the respondent was regarding the maintainability of the Writ
petition and it said that the said petition was not maintainable, as the same was being
filed to claim the Rights in the name of a company, which, as we have seen, does not
fall under the definition of a citizen as per the Indian Citizenship Act, 1955.
2. The next argument was regarding the question about the President’s power to
promulgate the Ordinance. It was contended that the power of the President to
promulgate the Ordinance was completely subjective in nature, as the words ‘if he felt’
were used and also, he was not answerable to anyone for the reason of his actions done
during his term of office. Thus, the argument of the invalidity of the Ordinance was
condemned.
3. The other argument, regarding the competence of the Parliament was that the Court
must understand that there was an obligation upon the State to achieve a socialistic
society, with principles of egalitarianism and where no inequality existed. Considering
this definition, the argument was that the Court should interpret the term ‘banking’ in
the widest possible way, so as to include all the activities that could be included by the
respondent.
4. The fourth argument was regarding the mutual exclusivity of the Fundamental Rights
from one another, as held in the case of A. K. Gopalan Vs. State of Madras and stated
that the Act was not violative of Article 19 (1) (g), as it fell within the ambit of Article
31 of the Constitution.
JUDGMENT:
On the 2nd of February, 1970, the landmark judgment, by a majority of 10:1 was delivered
by the Supreme Court of India. Except Justice A.N. Ray, the other Judges gave the following
judgment that a shareholder was not entitled to move to the Supreme Court for enforcing the
Fundamental Rights in the name of his company, until and unless the action which was being
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complained of, directly or indirectly violated the petitioner’s Fundamental Rights as well.
The major findings of the Court in the present case are as follows-
1. The major contribution of this case was the overruling of the ‘Mutual Exclusivity
Theory’ which had been practiced for 20 years till this case happened, from A. K
Gopalan vs. State of Madras. The Court held that just on the basis of technicalities, it
can’t reject a petition which clearly shows that the Fundamental Rights of the citizens
are being violated. Just because a Legislative action was also violating the Rights of the
company didn’t mean that the Court was not having the jurisdiction to protect the Rights
of the shareholder of the company as well. The Court also struck down the ‘Object’ test
and laid down the ‘Effect’ test. The Effect test would now look into the Effect of any
particular legislative Act, rather than looking at the objective with which it had been
formulated. Thus, if any Act of the Legislature, even at a remote stage, violated the
Fundamental Rights of the citizens, then, it was liable to be struck down.
2. As far as whether the Ordinance was promulgated properly or not, to this the Court said
that since the Ordinance had already been converted into an Act, so it was unnecessary
for the Court to discuss the same. The Court said that the same had become a question
for academicians to ponder upon, but not for the present case.
3. As far as the arguments regarding the Parliament’s competence to acquire banking

companies was concerned, the Court, very interestingly, rejected both the petitioner’s
as well as the respondent’s arguments. The Court said that the term property included
all the Rights, liabilities, assets, etc., which were associated with the property. The
power of the Parliament to acquire any banking company was an independent power of
the Parliament and it required no separate Legislation to be enacted first under List II
and List III.
4. The Court declared the Act to be clearly violative of the Article 31, as Article 31 talked
about compensation for the acquired property. Now, the term ‘compensation’ meant
complete indemnification to the person, whose property was being acquired. Since it
was frankly clear from the objectives of the Act that equal indemnification was not
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going to be provided and also, after applying the test of severability, as the Act was not
independent enough to stand alone without the part in question, so it was liable to be
struck down.
5. The Court, however, for the contention of Articles 19(1)(g) held that the Act was not
violative of Article 19(1)(g), as the State had the complete Right to partially or
completely monopolise any business that it felt to.
6. However, the Court discovered that the Act was in clear violation of Article 14. This
was held on the basis of the following reason that the concerned Act barred the 14 banks
carrying out banking activities within the country, however, other banks, including the
foreign banks, had not been stopped from doing so. The Supreme Court, thus, held the
Act to be ‘flagrantly practicing discrimination’ and thus, held it to be violative of Article
14.
CONCLUSION:
The Bank Nationalisation case indeed served as a landmark judgement for guiding the
Parliament, as well as the Constitutional jurisprudence of the country for years to come. However,
the aftermath of the judgement maybe noted from the fact that the Parliament, in order to
strengthen its position, made the 25th Constitutional (Amendment) Act, in which the following
points were noted-
1. The word ‘compensation’ in Article 31(2) was replaced by the word ‘amount’. This
meant that the Government was now not liable to pay an ‘adequate’ amount to the
person whose property was being acquisitioned as earlier.
2. Article 19(1)(g) was clearly detached from Article 31(2).
3. Article 31C, a new provision was added to the Constitution to remove all difficulties
that-
4. Articles 14, 19 and 31 are not to be applied to any law enacted under the fulfilment of
objectives laid down under Articles 39(b) and 39(c).
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5. Any law to give effect to Articles 39(b) & 39(c) will be immunized from Court’s
intervention.
Hence, this was all about the R.C. Cooper vs. Union of India case, popularly known as the Bank
Nationalisation case of 1970.
TYPES OF BANKS & THEIR FUNCTIONS
Banks are financial institutions that deal with deposits and loans. In India, there are several
different sorts of banks, each with its own set of responsibilities. The bank accepts deposits from
the public at a considerably lower rate, known as the deposit rate, and lends money at a much
higher rate, known as the lending rate. The fundamental duties of banks are nearly identical,
however, the types of persons with whom each sector or type deals may vary. There are various
types of banks in India and each is responsible to perform different functions. The bank takes
deposit at a much lower rate from the public called the deposit rate and lends money at a much
higher rate called the lending rate.
Banks can be classified into various types. Given below are the bank types in India:-
• Central Bank
• Cooperative Banks
• Commercial Banks
• Regional Rural Banks (RRB)
Local Area Banks (LAB)
Specialized Banks
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Small Finance Banks
Payments Banks
FUNCTIONS OF BANKS
The major functions of banks are almost the same but the set of people each sector or type deals
with may differ. Given below the functions of the banks in India:
1. Acceptance of deposits from the public

2. Provide demand withdrawal facility
3. Lending facility
4. Transfer of funds
5. Issue of drafts
6. Provide customers with locker facilities
7. Dealing with foreign exchange
CENTRAL BANK:
The Reserve Bank of India is the central bank of our country. Each country has a central
bank that regulates all the other banks in that particular country.
The main function of the central bank is to act as the Government’s Bank and guide and
regulate the other banking institutions in the country. Given below are the functions of the central
bank of a country:
Guiding other banks
Issuing currency
Implementing the monetary policies
Supervisor of the financial system
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In other words, the central bank of the country may also be known as the banker’s bank as it
provides assistance to the other banks of the country and manages the financial system of the
country, under the supervision of the Government.
CO-OPERATIVE BANKS:
These banks are organised under the state government’s act. They give short term loans to the
agriculture sector and other allied activities.
The main goal of Cooperative Banks is to promote social welfare by providing concessional loans
They are organised in the 3 tier structure
• Tier 1 (State Level) – State Cooperative Banks (regulated by RBI, State Govt, NABARD)
• Funded by RBI, government, NABARD. Money is then distributed to the public
• Concessional CRR, SLR applies to these banks. (CRR- 3%, SLR- 25%)
• Owned by the state government and top management is elected by members
Tier 2 (District Level) – Central/District Cooperative Banks
Tier 3 (Village Level) – Primary Agriculture Cooperative Banks
COMMERCIAL BANKS:
• Organised under the Banking Companies Act, 1956
• They operate on a commercial basis and its main objective is profit.

They have a unified structure and are owned by the government, state, or any private entity.
They tend to all sectors ranging from rural to urban
These banks do not charge concessional interest rates unless instructed by the RBI
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Public deposits are the main source of funds for these banks
The commercial banks can be further divided into three categories:
1. Public sector Banks – A bank where the majority stakes are owned by the Government or
the central bank of the country.
2. Private sector Banks – A bank where the majority stakes are owned by a private
organization or an individual or a group of people
3. Foreign Banks – The banks with their headquarters in foreign countries and branches in
our country, fall under this type of bank
REGIONAL RURAL BANKS:
• These are special types of commercial Banks that provide concessional credit to agriculture
and rural sector.
• RRBs were established in 1975 and are registered under a Regional Rural Bank Act, 1976.
• RRBs are joint ventures between the Central government (50%), State government (15%),
and a Commercial Bank (35%).
• 196 RRBs have been established from 1987 to 2005.
• From 2005 onwards government started merger of RRBs thus reducing the number of
RRBs to 82
• One RRB cannot open its branches in more than 3 geographically connected districts.
LOCAL AREA BANKS (LAB):
Introduced in India in the year 1996
These are organized by the private sector
Earning profit is the main objective of Local Area Banks
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Local Area Banks are registered under Companies Act, 1956
At present, there are only 4 Local Area Banks all which are located in South India
SPECIALISED BANKS
Certain banks are introduced for specific purposes only. Such banks are called specialized banks.
These include:
• Small Industries Development Bank of India (SIDBI) – Loan for a small scale industry or
business can be taken from SIDBI. Financing small industries with modern technology and
equipment is done with the help of this bank
• EXIM Bank – EXIM Bank stands for Export and Import Bank. To get loans or other
financial assistance with exporting or importing goods by foreign countries can be done
through this type of bank
• National Bank for Agricultural & Rural Development (NABARD) – To get any kind of
financial assistance for rural, handicraft, village, and agricultural development, people can
turn to NABARD.
There are various other specialized banks and each possesses a different role in helping develop
the country financially.
SMALL FINANCE BANKS:
As the name suggests, this type of bank looks after the micro industries, small farmers, and
the unorganized sector of the society by providing them loans and financial assistance. These banks
are governed by the central bank of the country.
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PAYMENTS BANK:
A newly introduced form of banking, the payments bank have been conceptualized by the
Reserve Bank of India. People with an account in the payments bank can only deposit an amount
of up to Rs.1,00,000/- and cannot apply for loans or credit cards under this account.
Options for online banking, mobile banking, the issue of ATM, and debit card can be done through
payments banks. Given below is a list of the few payments bank in our country:
• Airtel Payments Bank
• India Post Payments Bank
• Fino Payments Bank
• Jio Payments Bank
• Paytm Payments Bank
• NSDL Payments Bank
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UNIT 2 – BANKING FRAMEWORK AND STRUCTURE
BANKING REGULATION ACT, 1949
Unit 2: banking framework and structure.
• Banking regulation act, 1949

➢ Introduction and general overview
➢ Some important provisions of the act
• Reserve bank of India act, 1934
➢ Introduction (in brief)
➢ Important provisions
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INTRODUCTION AND GENERAL OVERVIEW:
The Banking Regulation Act, 1949 is one of the important legal frame works. Initially the Act was
passed as Banking Companies Act, 1949 and it was changed to Banking Regulation Act 1949.
Along with the Reserve Bank of India Act 1935, Banking Regulation Act 1949 provides a lot of
guidelines to banks covering wide range of areas. Some of the important provisions of the Banking
Regulation Act 1949 are listed below.
– The term banking is defined as per Sec 5(i) (b), as acceptance of deposits of money from
the public forthe purpose of lending and/or investment. Such deposits can be repayable on
demand or otherwise and withdraw able by means of cheque, drafts, order or otherwise
– Sec 5(i)(c) defines a banking company as any company which handles the business of
banking.
– Sec 5(i)(f) distinguishes between the demand and time liabilities, as the liabilities which
are repayable on demand and time liabilities means which are not demand liabilities.
– Sec 5(i)(h) deals with the meaning of secured loans or advances. Secured loan or advance
granted on the security of an asset, the market value of such an asset in not at any time less
than the amount of such loan or advances. Whereas unsecured loans are recognized as a
loan or advance which is not secured.
– Sec 6(1) deals with the definition of banking business
– Sec 7 specifies banking companies doing banking business in India should use at least
on work bank, banking, banking company in its name
– Banking Regulation Act through a number of sections restricts or prohibits certain
activities for a bank.
For example:
(i) Trading activities of goods are restricted as per Section 8
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(ii) Prohibitions: Banks are prohibited to hold any immovable property subject to certain
terms andconditions as per Section 9 . Further, a banking company cannot create a charge
upon any unpaidcapital of the company as per Section 14. Sec 14(A) stipulates that a
banking company also cannot create a floating charge on the undertaking or any property
of the company without the prior permission of Reserve Bank of India.
SOME IMPORTANT PROVISIONS OF THE ACT:
SECTION 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.]
SECTION 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
theperiod of any suspension ordered under sub-section (1) or sub-section (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.
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(4). A copy of any notification issued under sub-section (3) shall be laid on the table of
8[Parliament] as soon as may be after it is issued.
SECTION 5. Interpretation
(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 withdrawable by cheque, draft, order or
otherwise.
(c) "banking company" means any company which transacts the business of banking [in India];
Explanation: Any company which is engaged in the manufacture of goods or carries on any trade
and which accepts deposits of money from the public merely for the purpose of financing its
business as such manufacturer or trader shall not be deemed to transact the business of banking
within the meaning of this clause;
(ca) "banking policy" means any policy which is specified from time to time by the Reserve Bank
in the interest of the banking system or in the interest of monetary stability or sound economic
growth, having due regard to the interests of the depositors, the volume of deposits and other
resources of the bank and the need for equitable allocation and the efficient use of these deposits
and resources;
SECTION 5A-- Act to override memorandum, articles, etc.

Save as otherwise expressly provided in this Act,
(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained
in the memorandum or articles of a banking company, or in any agreement executed by it, or in
any resolution passed by the banking company in general meeting or by its Board of Directors,
whether the same be registered, executed or passed, as the case may be, before or after the
commencement of the Banking
Companies (Amendment) Act, 1959 (33 of 1959); and
(b) any provision contained in the memorandum, articles, agreement or resolution aforesaid shall,
to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case
may be.
SECTION 6. Form and business in which banking companies may engage
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(1) In addition to the business of banking, a banking company may engage in any one or more of
the following forms of business, namely,-
(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon
or without security; and drawing, making, accepting, discounting, buying, selling, collecting and
dealing in bills of exchange, hundies, promissory notes, coupons, drafts, bill of lading, railway
receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether
transferable or negotiable or not; the granting and issuing of letters of credit, travellers' cheques
and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of
foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations,
securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms
of securities on behalf of constituents or others; the negotiating of loan and advances; the receiving
of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing
of safe deposit vaults; the collecting and transmitting of money and securities;
(b) acting as agents for any government or local authority or any other person or persons; the
carrying on of agency business of any description including the clearing and forwarding of goods,
giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but
excluding the business of a [Managing Agent or Secretary and Treasurer] of a company;
(c) contracting for public and private loans and negotiating and issuing the same;
(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out
of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures or
debenture stock of any company, corporation or association and the lending of money for the
purpose of any such issue;
(e) carrying on and transacting every kind of guarantee and indemnity business;
(f) managing, selling and realising any property which may come into the possession of the
company in satisfaction or part satisfaction of any of its claims;
(g) acquiring and holding and generally dealing with any property or any right, title or interest in
anysuch property which may form the security or part of the security for any loans or advances or
which maybe connected with any such security;
(h) undertaking and executing trusts;
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(i) undertaking the administration of estates as executor, trustee or otherwise;
(j) establishing and supporting or aiding in the establishment and support of associations,
institutions, funds, trusts, and conveniences calculated to benefit employees or ex-employees of
the company or the dependents or connections of such persons; granting pension and allowances
and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent object or for any exhibition or for any public, general or useful object;
(k) the acquisition, construction, maintenance and alteration of any building or works necessary or
convenient for the purpose of the company;
(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or
turning into account or otherwise dealing with all or any part of the property and rights of the
company;
(m) doing all such other things as are incidental or conducive to the promotion or advancement of
the business of the company;
(o) any other form of business which the Central Government may, by notification in the Official
Gazette, specify as a form of business in which it is lawful for a banking company to engage.
(2) No banking company shall engage in any form of business other than those referred to in sub-
section (1).
SECTION 7. Use of words "bank", "banker", "banking" or "banking company"

(1) No company other than a banking company shall use as part of its name 15[or, in connection
with its
business] any of the words "bank", "banker" or "banking" and no company shall carry on the
business of banking in India unless it uses as part of its name at least one of such words.
(2) No firm, individual or group of individuals shall, for the purpose of carrying on any business,
use as part of its or his name any of the words "bank", "banking" or "banking company".
(3) Nothing in this section shall apply to-
(a) a subsidiary of a banking company formed for one or more of the purposes mentioned in
subsection
(1) of section 19, whose name indicates that it is a subsidiary of that banking company;
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(b) any association of banks formed for the protection of their mutual interests and registered under
section 25 of the Companies Act, 1956 (1 of 1956).]
SECTION 8. Prohibition of trading

Notwithstanding anything contained in section 6 or in any contract, no banking company shall
directly or indirectly deal in the buying or selling or bartering of goods, except in connection with
the realization of security given to or held by it, or engage in any trade, or buy, sell or barter goods
for others otherwise than in connection with bills of exchange received for collection or negotiation
or with such of its business as is referred to in clause (i) of sub-section (1) of section 6:
10[PROVIDED that this section shall not apply to any such business as is specified in pursuance
of clause
(o) of sub-section (1) of section 6.]
Explanation: For the purposes of this section, "goods" means every kind of movable property,
other than actionable claims, stock, shares, money, bullion and specie and all instruments referred
to in clause (a) of sub-section (1) of section 6.
SECTION 9. 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.
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SECTION 10. Prohibition of employment of Managing Agents and restrictions on certain

forms of employment
(1) No banking company-
(a) shall employ or be managed by a Managing Agent; or
(b) shall employ or continue the employment of any person-
(i) who is, or at any time has been, adjudicated insolvent, or has suspended payment or has
compounded, with his creditors, or who, is or has been, convicted by a criminal court of an offence
involving moral turpitude; or
(ii) whose remuneration or part of whose remuneration takes the form of commission or of a share
in the profits of the company:
PROVIDED that nothing contained in this sub-clause shall apply to the payment by a banking
company of-
(a) any bonus in pursuance of a settlement or award arrived at or made under any law relating to
industrial disputes or in accordance with any scheme framed by such banking company or in
accordance with the usual practice prevailing in banking business;
(b) any commission to any broker (including guarantee broker), cashier-contractor, clearing and
forwarding agent, auctioneer or any other person, employed by the banking company under a
contract otherwise than as a regular member of the staff of the company; or
(iii) whose remuneration is, in the opinion of the Reserve Bank, excessive; or
(c) shall be managed by any person-
14[(i) who is a Director of any other company not being-
(a) a subsidiary of the banking company, or
(b) a company registered under section 25 of the Companies Act, 1956 (1 of 1956):
PROVIDED that the prohibition in this sub-clause shall not apply in respect of any such Director
for a temporary period not exceeding three months or such further period not exceeding nine
months as the Reserve Bank may allow; or
(ii) who is engaged in any other business or vocation; or
(iii) 9[whose term of office as a person managing the company is] for a period exceeding five years
at any one time:
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32[PROVIDED that the term of office of any such person may be renewed or extended by further
periodsnot exceeding five years on each occasion subject to the condition that such renewal or
extension shall notbe sanctioned earlier than two years form the date on which it is to come into
force:
PROVIDED ALSO that where the term of office of such person is for an indefinite period, such
term, unless it otherwise comes to an end earlier, shall come to an end immediately on the expiry
of five years from the date of his appointment or on the expiry of three months from the date of
commencement of section 8 of the Banking Laws (Miscellaneous Provisions) Act, 1963 (55 of
1963), whichever is later:]
PROVIDED FURTHER that nothing in this clause shall apply to a Director, other than the
Managing
Director, of a banking company by reason only of his being such Director.
Explanation: For the purpose of sub-clause (iii) of clause (b), the expression "remuneration ", in
relation to a persons employed or continued in employment, shall include salary, fees and
perquisites but shall not include any allowances or other amounts paid to him for the purpose of
reimbursing him in respect of the expenses actually incurred by him in the performance of his
duties.
(2) In forming its opinion under sub-clause (iii) of clause (b) of sub-section (1), the Reserve Bank
may have regard among other matters to the following:-
(i) the financial condition and history of the banking company, its size and area of operation, its
resources, the volume of its business, and the trend of its earning capacity;
(ii) the number of its branches or offices;
(iii) the qualifications, age and experience of the person concerned;
(iv) the remuneration paid to other persons employed by the banking company or to any person
occupying a similar position in any other banking company similarly situated; and
(v) the interests of its depositors.
(6) Any decision or order of the Reserve Bank made under this section shall be final for all
purposes.
SECTION 10A. Board of Directors to include persons with professional or other experience
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(1) Notwithstanding anything contained in any other law for the time being in force, every banking
company-
(a) in existence on the commencement of section 3 of the Banking Laws (Amendment) Act, 1968,
or
(b) which comes into existence thereafter, shall comply with the requirements of this section:
PROVIDED that nothing contained in this sub-section shall apply to a banking company referred
to in clause (a) for a period of three months from such commencement.
(2) Not less than fifty-one per cent of the total number of members of the Board of Directors of a
banking company shall consist of persons, who-
(a) shall have special knowledge or practical experience in respect of one or more of the following
matters, namely,-
(i) accountancy,
(ii) agriculture and rural economy,
(iii) banking,
(iv) co-operation,
(v) economics,
(vi) finance,
(vii) law,
(viii) small-scale industry,
(ix) any other matter the special knowledge of, and practical experience, which would, in the
opinion of the Reserve Bank, be useful to the banking company:
PROVIDED that out of the aforesaid number of Directors, not less than two shall be persons
having special knowledge or practical experience in respect of agriculture and rural economy, co-
operation or small-scale industry; and
(b) shall not-
(1) have substantial interest in, or be connected with, whether as employee, manager or managing
agent-
(i) any company, not being a company registered under section 25 of the Companies Act, 1956 (1
of 1956), or
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(ii) any firm, which carries on any trade, commerce or industry and which, in either case, is not a
small-scale industrial concern, or
(2) be proprietors of any trading, commercial or industrial concern, not being a small-scale
industrial concern.
(2A) Notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956),
or in any other law for the time being in force,-
(i) no Director of a banking company, other than its Chairman or whole-time Director, by whatever
name called, shall hold office continuously for a period exceeding eight years;
(ii) a Chairman or other whole-time Director of a banking company who has been removed from
office as such Chairman, or whole-time Director, as the case may be, under the provisions of this
Act shall also cease to be a Director of the banking company and shall also not be eligible to be
appointed as a
Director of such banking company, whether by election or co-option or otherwise, for a period of
four years from the date of his ceasing to be the Chairman or whole-time Director, as the case may
be.]
(3) If, in respect of any banking company, the requirements, as laid down in sub-section (2), are
not fulfilled at any time, the Board of Directors of such banking company shall re-constitute such
Board so as to ensure that the said requirements are fulfilled.
(4) If, for the purpose of re-constituting the Board under sub-section (3), it is necessary to retire
any Director or Directors, the Board may, by lots drawn in such manner as may be prescribed,
decide which Director or Directors shall cease to hold office and such decision shall be binding on
every Director of the Board.
(5) Where the Reserve Bank is of opinion that the composition of the Board of Directors of a
banking company is such that it does not fulfil the requirements of sub-section (2), it may, after
giving to such banking company a reasonable opportunity of being heard, by an order in writing,
direct the banking company to so re-constitute its Board of Directors as to ensure that the said
requirements are fulfilled and, if within two months from the date of receipt of that order, the
banking company does not comply with thedirections made by the Reserve Bank, that Bank may,
after determining, by lots drawn in such manner as may be prescribed, the person who ought to be
removed from the membership of the Board of Directors, remove such person from the office of
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the Director of such banking company and with a view to complying with provisions of sub-section
(2), appoint a suitable person as a member of the Board of Directors in the place of the person so
removed whereupon the person so appointed shall be deemed to have been duly elected by the
banking company as its Director.
(6) Every appointment, removal or reconstitution duly made, and every election duly held, under
this section shall be final and shall not be called into question in any court.
(7) Every Director elected or, as the case may be, appointed under this section shall hold office
until thedate up to which his predecessor would have held office, if the election had not been held,
or, as the case may be, the appointment had not been made.
(8) No act or proceeding of the Board of Director of a banking company shall be invalid by reason
only of any defect in the composition thereof or on the ground that it is subsequently discovered
that any of its members did not fulfil the requirements of this section.
SECTION 10B. Banking company to be managed by whole-time Chairman

(1) Notwithstanding anything contained in any law for the time being in force or in any contract
to thecontrary, every banking company in existence on the commencement of the Banking
Regulation (Amendment) Act, 1994, or which comes into existence thereafter shall have one of its
Directors, who may be appointed on a whole-time or a part-time basis as Chairman of its Board of
Directors, and where he is appointed on a whole-time basis as Chairman of its Board of Directors,
he shall be entrusted with the management of the whole of the affairs of the banking company:
PROVIDED that the Chairman shall exercise his powers subject to the superintendence, control
and direction of the Board of Directors.
(1A) Where a Chairman is appointed on a part-time basis-
(i) such appointment shall be with the previous approval of the Reserve Bank and be subject to
such conditions as the Reserve Bank may specify while giving such approval:
(ii) the management of the whole of the affairs of such banking company shall be entrusted to a
Managing Director who shall exercise his powers subject to the superintendence, control and
direction of the Board of Directors.]
(2) 35[Every Chairman of the Board of Directors who is appointed on a whole-time basis and
every Managing Director] of a banking company shall be in the whole-time employment to such
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company and shall hold office for such period, not exceeding five years, as the Board of Directors
may fix, but shall subject to the provision of this section, be eligible for re-election or re-
appointment:
PROVIDED that nothing in this sub-section shall be construed as prohibiting a chairman from
being a
Director of a subsidiary of the banking company or a Director of a company registered cinder
section 25 ofthe Companies Act, 1956 (1 of 1956).
(3) Every person holding office on the commencement of section 3 of the Banking Laws
(Amendment) Act, 1968 (58 of 1968), as Managing Director of a banking company shall-
(a) if there is a Chairman of its Board of Directors, vacate office on such commencement, or
(b) if there is no Chairman of its Board of Directors, vacate office on the date on which the
Chairman of its Board of Directors is elected or appointed in accordance with the provisions of
this section.
(4) 35[Every Chairman who is appointed on a whole-time basis and every Managing Director of a
banking company appointed under sub-section (1A)] shall be a person who has special knowledge
and practical experience of-
(a) the working of a banking company or of the State Bank of India or any subsidiary bank or a
financial institution, or
(b) financial, economic or business administration:
PROVIDED that a person shall be disqualified for being a 35[Chairman who is appointed on a
whole time basis or a Managing Director], if he-
(a) is a Director of any company other than a company referred to in the proviso to sub-section (2),
or
(b) is a Partner of any firm which carries on any trade, business or industry, or
(c) has substantial interest in any other company or firm, or
(d) is a Director, Manager, Managing Agent, Partner or Proprietor of any trading, commercial or
industrial concern, or
(e) is engaged in any other business or vocation.
(5) A Chairman of the Board of Directors appointed on a whole-time basis or a Managing Director]
of
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a banking company may, by writing under his hand addressed to the company, resign his office.
(5A) 35[A Chairman of the Board of Directors appointed on a whole-time basis or a Managing
Director] whose term of office has come to an end, either by reason of his resignation or by reason
of expiry of the period of this office, shall, subject to the approval of the Reserve Bank, continue
in office until his successor assumes office.]
(6) Without prejudice to the provisions of section 36AA,where the Reserve Bank is of opinion that
anyperson who is, or has been elected to be, the 35[Chairman of the Board of Directors who is
appointed on a
whole-time basis or the Managing-Director] of a banking company is not a fit and proper person
to hold such office, it may, after giving to such person and to the banking company a reasonable
opportunity of being heard, by order in writing, require the banking company to elect or appoint
any other person as the Chairman of the Board of Directors who is appointed on a whole-time
basis or the Managing-Director] and if, within a period of two months from the date of receipt of
such order, the banking company fails to elect or appoint a suitable person as 35[Chairman of the
Board of Directors who is appointed on a wholetime basis or the Managing Director], the Reserve
Bank may, by order, remove the first-mentioned person from the office, of the 35[Chairman of the
Board of Directors who is appointed on a whole-time basis or a Managing Director] of the banking
company and appoint a suitable person in his place whereupon the person so appointed shall be
deemed to have been duly elected or appointed, as the case may be, as the Chairman of the Board
of Directors who is appointed on a whole-time basis or the Managing Director] of such banking
company and any person elected or appointed as Chairman under this sub-section shall hold office
for the residue of the period of the person in whose place he has been so elected or appointed.
(7) The banking company and any person against whom an order of removal is made under sub-
section
(6) may, within thirty days from the date of communication to it or to him of the order, prefer an
appeal to the Central Government and the decision of the Central Government thereon, and subject
thereto, the order made by the Reserve Bank under sub-section (6), shall be final and shall not be
called into question in any court.
(8) Notwithstanding anything contained in this section, the Reserve Bank may, if in its opinion it
is necessary in the public interest so to do, permit the 35[Chairman of the Board of Directors who
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is appointed on a whole-time basis or a Managing Director] to undertake such part-time honorary
work as is not likely to interfere with his duties as 35[such Chairman or Managing Director.]
(9) Notwithstanding anything contained in this section, where a person 35[appointed on a whole-
time basis, as Chairman of the Board of Directors or Managing Director] dies or resigns or is by
infirmity or otherwise rendered incapable of carrying out his duties or is absent on leave or
otherwise in circumstances not involving the vacation of his office, the banking company may,
with the approval of the Reserve Bank,make suitable arrangements for carrying out the 35[duties
of Chairman or Managing Director] for a total period not exceeding four months.
SECTION 12. Regulation of paid-up capital, subscribed capital and authorised capital and
voting rights of shareholders. –
(1) No banking company shall carry on business in India, unless it satisfies the following
conditions, namely:-
(i) 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;
[(ii) that, notwithstanding anything contained in the Companies Act, 1956, the capital of such
banking company consists of-
(a) equity shares only; or
(b) equity shares and preference shares:
Provided that the issue of preference share shall be in accordance with the guidelines framed by
the Reserve Bank specific wing the class of preference shares, the extent of issue of each class of
such preference shares (whether perpetual or irredeemable or redeemable), and the terms and
conditions subject to which each class of preference shares may be issued :-
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Provided further that no holder of the preference share, issued by the company, shall be entitled to
exercise the voting right specified in clause (b) of sub-section (2) of section 87 of the Companies
Act, 1956;]
(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.
[Provided that the Reserve Bank may increase, in a phased manner, such ceiling on voting rights
from ten percent to twenty-six per cent.]
(3) Notwithstanding anything contained in any law for the time being in force or in any contract
or instrument no suit or other proceeding shall be maintained against any person registered as the
holder of a share in a banking company on the ground that the title to the said share vests in a
person other than the registered holder:
Provided that nothing contained in this sub-section shall bar a suit or other proceeding-
(a) by a transferee of the share on the ground that he has obtained from the registered holder a
transfer of the share in accordance with any law relating to such transfer; or
(b) on behalf of a minor or a lunatic on the ground that the registered holder holds the share on
behalf of the minor or lunatic.
(4) Every chairman, managing director or chief executive officer by whatever name called of a
banking company shall furnish to the Reserve Bank through that banking company returns
containing full particulars of the extent and value of his holding of shares, whether directly or
indirectly, in the banking company and of any change in the extent of such holding or any variation
in the rights attaching thereto and such other information relating to those shares as the Reserve
Bank may, by order, require and in such form and at such time as may be specified in the order.
SECTION 12A. Election of new directors. –
The Reserve Bank may, by order, require any banking company to call a general meeting of the
shareholders of the company within such time, not less than two months from the date of the order,
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as may be specified in the order or within such further time as the Reserve Bank may allow in this
behalf, to elect in accordance with the voting rights permissible under this Act fresh directors, and
the banking company shall be bound to comply with the order.
(2) Every director elected under sub-section (1) shall hold office until the date up to which his
predecessor would have held office, if the election had not been held.
(3) Any election duly held under this section shall not be called in question in any Court.
SECTION 12B. Regulation of acquisition of shares or voting rights.
(1) No person (hereinafter referred to as "the applicant") shall, except with the previous approval
of the Reserve Bank, on an application being made, acquire or agree to acquire, directly or
indirectly, by himself or acting in concert with any other person, shares of a banking company or
voting rights therein, which acquisition taken together with shares and voting rights, if any, held
by him or his relative or associate enterprise or person acting in concert with him, makes the
applicant to hold five per cent. or more of the paid-Up share capital of such banking company or
entitles him to exercise five per cent. or more of the voting rights in such banking company.
Explanation 1. - For the purposes of this sub-section,-
(a) "associate enterprise" means a company, whether incorporated or not, which,-
(i) is a holding company or a subsidiary company of the applicant; or
(ii) is a joint venture of the applicant; or
(iii) controls the composition of the Board of Directors or other body governing the applicant; or
(iv) exercises, in the opinion of the Reserve Bank, significant influence on the applicant in taking
financial or policy decisions; or
(v) is able to obtain economic benefits from the activities of the applicant;
(b) "relative" shall have the meaning assigned to it in section 6 of the Companies Act, 1956;
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(c) persons shall be deemed to be "acting in concert" who, for a common objective or purpose of
acquisition of shares or voting rights in excess of the percentage mentioned in this sub-section,
pursuant to an agreement or understanding (formal or informal), directly or indirectly cooperate
by acquiring or agreeing to acquire shares or voting rights in the banking company.
Explanation 2. - For the purposes of this Act, joint venture means a legal entity in the nature of a
partnership engaged in the joint undertaking of a particular transaction for mutual profit or an
association of persons or companies jointly undertaking some commercial enterprise wherein all
contribute assets and share risks.
(2) An approval under sub-section (1) may be granted by the Reserve Bank if it is satisfied that-
(a) in the public interest; or
(b) in the interest of banking policy; or
(c) to prevent the affairs of any banking company being conducted in a manner detrimental or
prejudicial to the interests of the banking company; or
(d) in view of the emerging trends in banking and international best practices; or
(e) in the interest of the banking and financial system in India, the applicant is a fit and proper
person to acquire shares or voting rights :-
Provided that the Reserve Bank may call for such information from the applicant as it may deem
necessary for considering the application referred to in sub-section (1):
Provided further that the Reserve Bank may specify different criteria for acquisition of shares or
voting rights in different percentages.
(3) Where the acquisition is by way of transfer of shares of a banking company and the Reserve
Bank is satisfied that such transfer should not be permitted, it may, by order, direct that no such
share shall be transferred to the proposed transferee and may further direct the banking company
not to give effect to the transfer of shares and in case the transfer has been registered, the transferee
shall not be entitled to exercise voting rights on poll in any of the meetings of the banking
company.
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(4) The approval for acquisition of shares may be subject to such conditions as the Reserve Bank
may deem fit to impose, including a condition that any further acquisition of shares shall require
prior approval of the Reserve Bank and that the applicant continues to be a fit and proper person
to hold the shares or voting rights.
(5) Before issuing or allotting any share to any person or registering the transfer of shares in the
name of any person, the banking company shall ensure that the requirements of sub-section (I) are
complied with by that person and where the acquisition is with the approval of the Reserve Bank,
the banking company shall further ensure that the' conditions imposed under sub-section (4), if
any, of such approval are fulfilled.
(6) The decision of the Reserve Bank on the application made under sub-section (1) shall be taken
within a period of ninety days from the date of receipt of the application by the Reserve Bank :-
Provided that in computing the period of ninety days, the period taken by the applicant for
furnishing the information called for by the Reserve Bank shall be excluded.
(7) The Reserve Bank may specify the minimum percentage of shares to be acquired in a banking
company if it considers that the purpose for which the shares are proposed to be acquired by the
applicant warrants such minimum shareholding.
(8) The Reserve Bank may, if it is satisfied that any person or persons acting in concert with him
holding shares or voting rights in excess of five per cent. of the total voting rights of all the
shareholders of the banking company, are not fit and proper to hold such shares or voting rights,
pass an order directing that such person or persons acting in concert with him shall not, in the
aggregate, exercise voting rights on poll in excess of five per cent. of the total voting rights of all
the shareholders of the banking company :-
Provided that the Reserve Bank shall not pass any such order without giving an opportunity of
being heard to such person or persons acting in concert with him.
SECTION 15. Restrictions as to payment of dividend. –
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[(1)] No banking company shall pay any dividend on its shares until all its capitalised expenses
(including preliminary expenses, organisation expenses, share-selling commission, brokerage,
amounts of losses incurred and any other item of expenditure not represented by tangible assets)
have been completely written off.
(2) Notwithstanding anything to the contrary contained in sub-section (1) or in the Companies Act,
1956 (1 of 1956), a banking company may pay dividends on its shares without writing off-
(i) the depreciation, if any, in the value of its investments in approved securities in any case where
such depreciation has not actually been capitalized or otherwise accounted for as a loss;
(ii) the depreciation, if any, in the value of its investments in shares, debentures or bonds (other
than approved securities) in any case where adequate provision for such depreciation has been
made to the satisfaction of the auditor of the banking company;
(iii) the bad debts, if any, in any case where adequate provision for such debts has been made to
the satisfaction of the auditor of the banking company.
SECTION 19. Restriction on nature of subsidiary companies. –
[(1) A banking company shall not form any subsidiary company except a subsidiary company
formed for one or more of the following purposes, namely:-
(a) the undertaking of any business which, under clauses (a) to (o) of sub-section (1) of section 6,
is permissible for a banking company to undertake, or
(b) with the previous permission in writing of the Reserve Bank, the carrying on of the business
of banking exclusively outside India, or
(c) the undertaking of such other business, which the Reserve Bank may, with the prior approval
of the Central Government, consider to be conducive to the spread of banking in India or to be
otherwise useful or necessary in the public interest.
Explanation. - For the purposes of section 8, a banking company shall not be deemed, by reason
of its forming or having a subsidiary company, to be engaged indirectly in the business carried on
by such subsidiary company.]
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(2) Save as provided in sub-section (1), no banking company shall hold shares in any company,
whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent. of the
paid-up share capital of that company or thirty per cent. of its own paid-up share capital and
reserves, whichever is less:
Provided that any banking company which is on the date of the commencement of this Act holding
any shares in contravention of the provisions of this sub-section shall not be liable to any penalty
therefor if it reports the matter without delay to the Reserve Bank and if it brings its holding of
shares into conformity with the said provisions within such period, not exceeding two years, as the
Reserve Bank may think fit to allow.
(3) Save as provided in sub-section (1) and notwithstanding anything contained in sub-section (2),
a banking company shall not, after the expiry of one year from the date of the commencement of
this Act, hold shares, whether as pledgee, mortgagee or absolute owner, in any company in the
management of which any managing director or manager of the banking company is in any manner
concerned or interested.
[(4) Save as provided in clause (c) of sub-section (1), a banking company may form a subsidiary
company to carry on the business of credit information in accordance with the Credit Information
Companies (Regulation) Act, 2005 (30 of 2005).]
SECTION 20. Restrictions on loans and advances. –
(1) Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956
(1 of 1956), no banking company shall,-
(a) grant any loans or advances on the security of its own shares, or
(b) enter into any commitment for granting any loan or advance to or on behalf of-
(i) any of its directors,
(ii) any firm in which any of its directors is interested as partner, manager, employee or guarantor,
or
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(iii) any company [not being a subsidiary of the banking company or a company registered under
section 25 of the Companies Act, 1956 (1 of 1956), or a Government company of which [,or the
subsidiary or the holding company ]of which any of the directors of the banking company is a
director, managing agent, manager, employee or guarantor or in which he holds substantial
interest, or
(iv) any individual in respect of whom any of its directors is a partner or guarantor.
(2) Where any loan or advance granted by a banking company is such that a commitment for
granting it could not have been made if clause (b) of sub-section (1) had been in force on the date
on which the loan or advance was made, or is granted by a banking company after the
commencement of section 5 of the Banking Laws (Amendment) Act, 1968 (58 of 1968), but in
pursuance of a commitment entered into before such commencement, steps shall be taken to
recover the amounts due to the banking company on account of the loan, or advance together with
interest, if any, due thereon within the period stipulated at the time of the grant of the loan or
advance, or where no such period has been stipulated, before the expiry of one year from the
commencement of the said section 5:
Provided that the Reserve Bank may, in any case, on an application in writing made to it by the
banking company in this behalf, extend the period for the recovery of the loan or advance until
such date, not being a date beyond the period of three years from the commencement of the said
section 5, and subject to such terms and conditions, as the Reserve Bank may deem fit:
Provided further that this sub-section shall not apply if and when the director concerned vacates
the office of the director of the banking company, whether by death, retirement, resignation or
otherwise.
(3) No loan or advance, referred to in sub-section (2), or any part thereof shall be remitted without
the previous approval of the Reserve Bank, and any remission without such approval shall be void
and of no effect.
(4) Where any loan or advance referred to in sub-section (2), payable by any person, has not been
repaid to the banking company within the period specified in that sub-section, then, such person
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shall, if he is a director of such banking company on the date of the expiry of the said period, be
deemed to have vacated his office as such on the said date.
Explanation. - In this section-
(a) "loans or advance" shall not include any transaction which the Reserve Bank may, having
regard to the nature of the transaction, the period within which, and the manner and circumstances
in which, any amount due on account of the transaction is likely to be realised, the interest of the
depositors and other relevant considerations, specify by general or special order as not being a loan
or advance for the purpose of this section;
(b) "director" include a member of any board or committee in India constituted by a banking
company for the purpose of managing, or for the purpose of advising it in regard to the
management of, all or any of its affairs.
(5) If any question arises whether any transaction is a loan or advance for the purposes of this
section, it shall be referred to the Reserve Bank, whose decision thereon shall be final.]
SECTION 20A. Restrictions on power to remit debts. –
(1 of 1956), a banking company shall not, except with the prior approval of the Reserve Bank,
remit in whole or in part any debt due to it by-
(a) any of its directors, or
(b) any firm or company in which any of its directors is interested as director, partner, managing
agent or guarantor, or
(c) any individual if any of its directors is his partner or guarantor.
(2) Any remission made in contravention of the provisions of sub-section (1) shall be void and of
no effect.
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SECTION 21. Power of Reserve Bank to control advances by banking companies.
(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, [as to-
(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.]
[(3) Every banking company shall be bound to comply with any directions given to it under this
section.]
SECTION 22. Licensing of banking companies.
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[(1) Save as hereinafter provided, no company shall carry on banking business in India unless it
holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued
subject to such conditions as the Reserve Bank may think fit to impose.]
(2) Every banking company in existence on the commencement of this Act, before the expiry of
six months from such commencement, and every other company before commencing banking
business [in India], shall apply in writing to the Reserve Bank for a licence under this section:
Provided that in the case of a banking company in existence on the commencement of this Act,
nothing in sub-section (1) shall be deemed to prohibit the company from carrying on banking
business until it is granted a licence in pursuance of [this section] or is by notice in writing
informed by the Reserve Bank that a licence cannot be granted to it:
Provided further that the Reserve Bank shall not give a notice as aforesaid to a banking company
in existence on the commencement of this Act before the expiry of the three years referred to in
sub-section (1) of section 11 or of such further period as the Reserve Bank may under that sub-
section think fit to allow.
(3) Before granting any licence under this section, the Reserve Bank may require to be satisfied
by an inspection of the books of the company or otherwise that [* * *] the following conditions
are fulfilled, namely:-
[(a) that the company is or will be in a position to pay its present or future depositors in full as
their claims accrue;
(b) that the affairs of the company are not being, or are not likely to be, conducted in a manner
detrimental to the interests of its present or future depositors;]
[(c) that the general character of the proposed management of the company will not be prejudicial
to the public interest or the interest of its depositors;
(d) that the company has adequate capital structure and earning prospects;
(e) that the public interest will be served by the grant of a licence to the company to carry on
banking business in India;
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(f) that having regard to the banking facilities available in the proposed principal area of operations
of the company, the potential scope for expansion of banks already in existence in the area and
other relevant factors the grant of the licence would not be prejudicial to the operation and
consolidation of the banking system consistent with monetary stability and economic growth;
(g) any other condition, the fulfilment of which would, in the opinion of the Reserve Bank, be
necessary to ensure that the carrying on of banking business in India by the company will not be
prejudicial to the public interest or the interests of the depositors.]
[(3-A) Before granting any licence under this section to a company incorporated outside India, the
Reserve Bank may require to be satisfied by an inspection of the books of the company or
otherwise that the conditions specified in sub-section (3) are fulfilled and that the carrying on of
banking business by such company in India will be in the public interest and that the Government
or law of the country in which it is incorporated does not discriminate in any way against banking
companies registered in India and that the company complies with all the provisions of this Act
applicable to banking companies incorporated outside India.]
[(4) The Reserve Bank may cancel a licence granted to a banking company under this section-
(i) if the company ceases to carry on banking business in India; or
(ii) if the company at any time fails to comply with any of the conditions imposed upon it under
sub-section (1); or
(iii) if at any time, any of the conditions referred to in sub-section (3) [and sub-section (3-A)] is
not fulfilled:
Provided that before cancelling a licence under clause (ii) or clause (iii) of this sub-section on the
ground that the banking company has failed to comply with or has failed to fulfil any of the
conditions referred to therein, the Reserve Bank, unless it is of opinion that the delay will be
prejudicial to the interests of the company's depositors or the public, shall grant to the company on
such terms as it may specify, an opportunity of taking the necessary steps for complying with or
fulfilling such a condition.
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(5) Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence
under this section may, within thirty days from the date on which such decision is communicated
to it, appeal to the Central Government.
(6) The decision of the Central Government where an appeal has been preferred to it under sub-
section (5) or of the Reserve Bank where no such appeal has been preferred shall be final.
SECTION 30. Audit. –
[(1) The balance-sheet and profit and loss account prepared in accordance with section 29 shall be
audited by a person duly qualified under any law for the time being in force to be an auditor of
companies.]
[(1-A) Notwithstanding anything contained in any law for the time being in force or in any contract
to the contrary, every banking company shall, before appointing, re-appointing or removing any
auditor or auditors, obtain the previous approval of the Reserve Bank.
(1-B) Without prejudice to anything contained in the Companies Act, 1956 (1 of 1956), or any
other law for the time being in force, where the Reserve Bank is of opinion that it is necessary in
the public interest or in the interest of the banking company or its depositors so to do, [it may at
any time by order direct that a special audit of the banking company's accounts, for any such
transaction or class of transactions or for such period or periods as may be specified in the order,
shall be conducted and may by the same or a different order either appoint a person duly qualified
under any law for the time being in force to be an auditor of companies or direct the auditor of the
banking company himself to conduct such special audit] and the auditor shall comply with such
directions and make a report of such audit to the Reserve Bank and forward a copy thereof to the
company.
(1-C) The expenses of, or incidental to, [the special audit] specified in the order made by the
Reserve Bank shall be borne by the banking company.]
(2) The auditor shall have the powers of, exercise the functions vested in, and discharge the duties
and be subject to the liabilities and penalties imposed on, auditors of companies by [section 227
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of the Companies Act, 1956 (1 of 1956)], [and auditors, if any, appointed by the law establishing,
constituting or forming the banking company concerned.]
(3) In addition to the matters which under the aforesaid Act the auditor is required to state in his
report, he shall, in the case of a banking company incorporated [in India], state in his report,-
(a) whether or not the information and explanation required by him have been found to be
satisfactory;
(b) whether or not the transactions of the company which have come to his notice have been within
the powers of the company;
(c) whether or not the returns received from branch offices of the company have been found
adequate for the purposes of his audit;
(d) whether the profit and loss account shows a true balance [of profit or loss] for the period
covered by such account;
(e) any other matter which he considers should be brought to the notice of the shareholders of the
company.
SECTION 35. Inspection. –
(1) Notwithstanding anything to the contrary contained in [section 235 of the Companies Act, 1956
(1 of 1956)], the Reserve Bank at any time may, and on being directed so to do by the Central
Government shall, cause an inspection to be made by one or more of its officers of any banking
company and its books and accounts; and the Reserve Bank shall supply to the banking company
a copy of its report on such inspection.
[(1-A)(a) Notwithstanding anything to the contrary contained in any law for the time being in force
and without prejudice to the provisions of sub-section (1), the Reserve Bank, at any time, may also
cause a scrutiny to be made by any one or more of its officers, of the affairs of any banking
company and its books and accounts; and
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(b) a copy of the report of the scrutiny shall be furnished to the banking company if the banking
company makes a request for the same or if any adverse action is contemplated against the banking
company on the basis of the scrutiny.]
(2) It shall be the duty of every director or other officer [or employee] of the banking company to
produce to any officer making an inspection under sub-section (1) or a scrutiny under sub-section
(1-A) all such books, accounts and other documents in his custody or power and to furnish him
with any statements and information relating to the affairs of the banking company as the said
officer may require of him within such time as the said officer may specify.
(3) Any person making an inspection under sub-section (1) [or a scrutiny under sub-section (1-
A)] may examine on oath any director or other officer [or employee] of the banking company in
relation to its business, and may administer an oath accordingly.
(4) The Reserve Bank shall, if it has been directed by the Central Government to cause an
inspection to be made, and may, in any other case, report to the Central Government on any
inspection [or scrutiny] made under this section, and the Central Government, if it is of opinion
after considering the report that the affairs of the banking company are being conducted to the
detriment of the interests of its depositors, may, after giving such opportunity to the banking
company to make a representation in connection with the report as, in the opinion of the Central
Government, seems reasonable, by order in writing-
(a) prohibit the banking company from receiving fresh deposits;
(b) direct the Reserve Bank to apply under section 38 for the winding up of the banking company:
Provided that the Central Government may defer, for such period as it may think fit, the passing
of an order under this sub-section, or cancel or modify any such order, upon such terms and
conditions as it may think fit to impose.
(5) The Central Government may, after giving reasonable notice to the banking company, publish
the report submitted by the Reserve Bank or such portion thereof as may appear necessary.
[ Explanation. - For the purposes of this section, the expression "banking company" shall include-
(i) in the case of a banking company incorporated outside India, all its branches in India; and
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(ii) in the case of a banking company incorporated in India-
(a) all its subsidiaries formed for the purpose of carrying on the business of banking exclusively
outside India; and
(b) all its branches whether situated in India or outside India.]
[(6) The powers exercisable by the Reserve Bank under this section in relation to regional rural
banks may (without prejudice to the exercise of such powers by the Reserve Bank in relation to
any regional rural bank whenever it considers necessary so to do) be exercised by the National
Bank in relation to the regional rural banks, and accordingly, sub-sections (1) to (5) shall apply in
relation to regional rural banks as if every reference therein to the Reserve Bank included also a
reference to the National Bank.]
SECTION 36AA. Power of Reserve Bank to remove managerial and other persons from
office. –
(1) Where the Reserve Bank is satisfied that in the public interest or for preventing the affairs of a
banking company being conducted in a manner detrimental to the interests of the depositors or for
securing the proper management of any banking company it is necessary so to do, the Reserve
Bank may, for reasons to be recorded in writing, by order, remove from office, with effect from
such date as may be specified in the order, [any chairman, director], chief executive officer (by
whatever name called) or other officer or employee of the banking company.
(2) No order under sub-section (1) shall be made [unless the chairman, director] or chief executive
officer or other officer or employee concerned has been given a reasonable opportunity of making
a representation to the Reserve Bank against the proposed order:
Provided that if, in the opinion of the Reserve Bank, any delay would be detrimental to the interests
of the banking company or its depositors, the Reserve Bank may, at the time of giving the
opportunity aforesaid or at any time thereafter, by order direct that, pending the consideration of
the representation aforesaid, if any, [the chairman or, as the case may be, director or chief executive
officer] or other officer or employee, shall not, with effect from the date of such order-
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(a)[act as such chairman or director] or chief executive officer or other officer or employee of the
banking company;
(b) in any way, whether directly or indirectly, be concerned with, or take part in the management
of, the banking company.
(3)(a) Any person against whom an order of removal has been made under sub-section (1) may,
within thirty days from the date of communication to him of the order, prefer an appeal to the
Central Government.
(b) The decision of the Central Government on such appeal, and subject thereto, the order made
by the Reserve Bank under sub-section (1), shall be final and shall not be called into question in
any Court.
(4) Where any order is made in respect of [a chairman, director] or chief executive officer or other
officer or employee of a banking company under sub-section (1), he shall cease to be [a chairman
or, as the case may be, a director,] chief executive officer or other officer or employee of the
banking company and shall not, in any way, whether directly or indirectly, be concerned with, or
take part in the management of, any banking company for such period not exceeding five years as
may be specified in the order.
(5) If any person in respect of whom an order is made by the Reserve Bank under sub-section (1)
or under the proviso to sub-section (2) contravenes the provisions of this section, he shall be
punishable with fine which may extend to two hundred and fifty rupees for each day during which
such contravention continues.
(6) Where an order under sub-section (1) has been made, the Reserve Bank may, by order in
writing, appoint a suitable person in place of [the chairman or director] or chief executive officer
or other officer or employee who has been removed from his office under that sub-section, with
effect from such date as may be specified in the order.
(7) Any person appointed as [chairman, director or chief executive officer] or other officer or
employee under this section, shall-
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(a) 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) not incur any obligation or liability by reason only of his being a [chairman, director or chief
executive officer] or other officer or employee or for anything done or omitted to be done in good
faith in the execution of the duties of his office or in relation thereto.
(8) Notwithstanding anything contained in any law or in any contract, memorandum or articles of
association, on the removal of a person from office under this section, that person shall not be
entitled to claim any compensation for the loss or termination of office.
SECTION 36AD. Punishments for certain activities in relation to banking companies. –
(1) No person shall-
(a) obstruct any person from lawfully entering or leaving any office or place of business of a
banking company or from carrying on any business there, or
(b) hold, within the office or place of business of any banking company, any demonstration which
is violent or which prevents, or is calculated to prevent, the transaction of normal business by the
banking company, or
(c) act in any manner calculated to undermine the confidence of the depositors in the banking
company.
(2) Whoever contravenes any provision of sub-section (1) without any reasonable excuse shall be
punishable with imprisonment for a term which may extend to six months, or with fine which may
extend to one thousand rupees, or with both.
[(3) For the purposes of this section "banking company" includes the Reserve Bank, [* * *] the
Exim Bank, [the Reconstruction Bank,] [the National Housing Banks,] the National Bank, [the
Small Industries Bank,] the State Bank of India, a corresponding new bank, a regional rural Bank
and a subsidiary bank.]
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SECTION 36AH. Constitution of the Tribunal –
(1) The Central Government may, for the purpose of this Part, constitute a Tribunal which shall
consist of a Chairman and two other members.
(2) The Chairman shall be a person who is, or has been, a Judge of a High Court or of the Supreme
Court, and, of the two other members, one shall be a person, who, in the opinion of the Central
Government, has had experience of commercial banking and the other shall be a person who is a
chartered accountant within the meaning of the Chartered Accountants' Act, 1949 (38 of 1949).
(3) If, for any reason, a vacancy occurs in the office of the Chairman or any other member of the
Tribunal, the Central Government may fill the vacancy by appointing another person thereto in
accordance with the provisions of sub-section (2), and any proceeding may be continued before
the Tribunal, so constituted, from the stage at which the vacancy occurred.
(4) The Tribunal may, for the purpose of determining any compensation payable under this Part,
choose one or more persons having special knowledge or experience of any relevant matter to
assist it in the determination of such compensation.
SECTION 37. Suspension of business. –
(1) The [[High Court] may on the application of a banking company which is temporarily unable
to meet its obligations make an order (a copy of which it shall cause to be forwarded to the Reserve
Bank) staying the commencement or continuance of all actions and proceedings against the
company for a fixed period of time on such terms and conditions as it shall think fit and proper,
and may from time to time extend the period so, however, that the total period of moratorium shall
not exceed six months.
(2) No such application shall be maintainable unless it is accompanied by a report of the Reserve
Bank indicating that in the opinion of the Reserve Bank the banking company will be able to pay
its debts if the application is granted:
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Provided that the [High Court] may, for sufficient reasons, grant relief under this section even if
the application is not accompanied by such report, and where such relief is granted, the [High
Court] shall call for a report from the Reserve Bank on the affairs of the banking company, on
receipt of which it may either rescind any order already passed or pass such further orders thereon
as may be just and proper in the circumstances.
[(3) When an application is made under sub-section (1), the High Court may appoint a special
officer who shall forthwith take into his custody or under his control all the assets, books,
documents, effects and actionable claims to which the banking company is or appears to be entitled
and shall also exercise such other powers as the High Court may deem fit to confer on him, having
regard to the interests of the depositors of the banking company.]
[(4) Where the Reserve Bank is satisfied that the affairs of a banking company in respect of which
an order under sub-section (1) has been made, are being conducted in a manner detrimental to the
interests of the depositors, it may make an application to the High Court for the winding up of the
company, and where any such application is made, the High Court shall not make any order
extending the period for which the commencement or continuance of all actions and proceedings
against the company were stayed under that sub-section.]
SECTION 38. Winding up by High Court. –
(1) Notwithstanding anything contained in section 391, section 392, section 433 and section 583
of the Companies Act, 1956 (1 of 1956), but without prejudice to its powers under sub-section (1)
of section 37 of this Act, the High Court shall order the winding up of a banking company-
(a) if the banking company is unable to pay its debts; or
(b) if an application for its winding up has been made by the Reserve Bank under section 37 or
this section.
(2) The Reserve Bank shall make an application under this section for the winding up of a banking
company if it is directed so to do by an order under clause (b) of sub-section (4) of section 35.
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(3) The Reserve Bank may make an application under this section for the winding up of a banking
company-
(a) if the banking company-
(i) has failed to comply with the requirements specified in section 11; or
(ii) has by reason of the provisions of section 22 become dis entitled to carry on banking business
in India; or
(iii) has been prohibited from receiving fresh deposits by an order under clause (a) of sub-section
(4) of section 35 or under clause (b) of sub-section (3-A) of section 42 of the Reserve Bank of
India Act, 1934 (2 of 1934); or
(iv) having failed to comply with any requirement of this Act other than the requirements laid
down in section 11, has continued such failure, or, having contravened any provision of this Act
has continued such contravention beyond such period or periods as may be specified in that behalf
by the Reserve Bank from time to time, after notice in writing of such failure or contravention has
been conveyed to the banking company; or
(b) if in the opinion of the Reserve Bank-
(i) a compromise or arrangement sanctioned by a Court in respect of the banking company cannot
be worked satisfactorily with or without modifications; or
(ii) the returns, statements or information furnished to it under or in pursuance of the provisions of
this Act disclose that the banking company is unable to pay its debts; or
(iii) the continuance of the banking company is prejudicial to the interests of its depositors.
(4) Without prejudice to the provisions contained in section 434 of the Companies Act, 1956 (1 of
1956), a banking company shall be deemed to be unable to pay its debts if it has refused to meet
any lawful demand made at any of its offices or branches within two working days, if such demand
is made at a place where there is an office, branch or agency of the Reserve Bank, or within five
working days, if such demand is made elsewhere, and if the Reserve Bank certifies in writing that
the banking company is unable to pay its debts.
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(5) A copy of every application made by the Reserve Bank under sub-section (1) shall be sent by
the Reserve Bank to the Registrar.]
SECTION 44. Powers of High Court in voluntary winding up –
(1 of 1956), no banking company may be voluntarily wound up unless the Reserve Bank certifies
in writing that the company is able to pay in full all its debts to its creditors as they accrue.
(2) The High Court may, in any case where a banking company is being wound up voluntarily,
make an order that the voluntary winding up shall continue, but subject to the supervision of the
Court.
(3) Without prejudice to the provisions contained in sections 441 and 521 of the Companies Act,
1956 (1 of 1956), the High Court may of its own motion and shall on the application of the Reserve
Bank, order the winding up of a banking company by the High Court in any of the following cases,
namely:-
(a) where the banking company is being wound up voluntarily and at any stage during the voluntary
winding up proceedings the company is not able to meet its debts as they accrue; or
(b) where the banking company is being wound up voluntarily or is being wound up subject to the
supervision of the Court and the High Court is satisfied that the voluntary winding up or winding
up subject to the supervision of the Court cannot be continued without detriment to the interests
of the depositors.]
SECTION 44A. Procedure for amalgamation of banking companies. –
(1) Notwithstanding anything contained in any law for the time being in force, no banking
company shall be amalgamated with another banking company, unless a scheme containing the
terms of such amalgamation has been placed in draft before the shareholders of each of the banking
companies concerned separately, and approved by a resolution passed by a majority in number
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representing two-thirds in value of the shareholders of each of the said companies, present either
in person or by proxy at a meeting called for the purpose.
(2) Notice of every such meeting as is referred to in sub-section (1) shall be given to every
shareholder of each of the banking companies concerned in accordance with the relevant articles
of association indicating the time, place and object of the meeting, and shall also be published at
least once a week for three consecutive weeks in not less than two newspapers which circulate in
the locality or localities where the registered offices of the banking companies concerned are
situated, one of such newspapers being in a language commonly understood in the locality or
localities.
(3) Any shareholder, who has voted against the scheme of amalgamation at the meeting or has
given notice in writing at or prior to the meeting of the company concerned or to the presiding
officer of the meeting that he dissents from the scheme of amalgamation, shall be entitled, in the
event of the scheme being sanctioned by the Reserve Bank, to claim from the banking company
concerned, in respect of the shares held by him in that company, their value as determined by the
Reserve Bank when sanctioning the scheme and such determination by the Reserve Bank as to the
value of the shares to be paid to the dissenting shareholder shall be final for all purposes.
(4) If the scheme of amalgamation is approved by the requisite majority of shareholders in

accordance with the provisions of this section, it shall be submitted to the Reserve Bank for
sanction and shall, if sanctioned by the Reserve Bank by an order in writing passed in this behalf,
be binding on the banking companies concerned and also on all the shareholders thereof.
(6) On the sanctioning of a scheme of amalgamation by the Reserve Bank, the property of the
amalgamated banking company shall, by virtue of the order of sanction, be transferred to and vest
in, and the liabilities of the said company shall, by virtue of the said order be transferred to, and
become the liabilities of, the banking company which under the scheme of amalgamation is to
acquire the business of the amalgamated banking company, subject in all cases to [the provisions
of the scheme as sanctioned].
[(6-A) Where a scheme of amalgamation is sanctioned by the Reserve Bank under the provisions
of this section, the Reserve Bank may, by a further order in writing, direct that on such date as may
be specified therein the banking company (hereinafter in this section referred to as the
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amalgamated banking company) which by reason of the amalgamation will cease to function, shall
stand dissolved and any such direction shall take effect notwithstanding anything to the contrary
contained in any other law.
(6-B) Where the Reserve Bank directs a dissolution of the amalgamated banking company, it shall
transmit a copy of the order directing such dissolution to the Registrar before whom the banking
company has been registered and on receipt of such order the Registrar shall strike off the name
of the company.
(6-C) An order under sub-section (4) whether made before or after the commencement of section
19 of the Banking Laws (Miscellaneous Provisions) Act, 1963 (55 of 1963), shall be conclusive
evidence that all the requirements of this section relating to amalgamation have been complied
with, and a copy of the said order certified in writing by an officer of the Reserve Bank to be a true
copy of such order and a copy of the scheme certified in the like manner to be a true copy thereof
shall, in all legal proceedings (whether in appeal or otherwise and whether instituted before or after
the commencement of the said section 19), be admitted as evidence to the same extent as the
original order and the original scheme.]
[(7) Nothing in the foregoing provisions of this section shall affect the power of the Central
Government to provide for the amalgamation of two or more banking companies [* * *] under
section 396 of the Companies Act, 1956 (1 of 1956):
Provided that no such power shall be exercised by the Central Government except after
consultation with the Reserve Bank.]
SECTION 44B. Restriction on compromise or arrangement between banking company and

creditors. –
[(1)] Notwithstanding anything contained in any law for the time being in force, no [High
Court] shall sanction a compromise or arrangement between a banking company and its creditors
or any class of them or between such company and its members or any class of them [or sanction
any modification in any such compromise or arrangement unless the compromise or arrangement
or modification, as the case may be,] is certified by the Reserve Bank [in writing as not being
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incapable of being worked and as not being detrimental to the interests of the depositors of such
banking company.]
[(2) Where an application under [section 391 of the Companies Act, 1956 (1 of 1956)], is made in
respect of a banking company, the High Court may direct the Reserve Bank to make an inquiry in
relation to the affairs of the banking company and the conduct of its directors and when such
direction is given, the Reserve Bank shall make such inquiry and submit its report to the High
Court.]
SECTION 46. Penalties. –
(1) Whoever in any return, balance-sheet or other document [or in any information required or
furnished] by or under or for the purposes of any provision of this Act, wilfully makes a statement
which is false in any material particular, knowing it to be false, or wilfully omits to make a material
statement, shall be punishable with imprisonment for a term which may extend to three years [or
with fine, which may extend to one crore rupees or with both].
(2) If any person fails to produce any book, account or other document or to furnish any statement
or information which under sub-section (2) of section 35 it is his duty to produce or furnish, or to
answer any question relating to the business of a banking company which he is asked by [an officer
making an inspection or scrutiny under that section], he shall be punishable with a fine which may
extend to [twenty lakh rupees] in respect of each offence, and if he persists in such refusal, to a
further fine which may extend to [fifty thousand rupees] for every day during which the offence
continues.
(3) If any deposits are received by a banking company in contravention of an order under clause
(a) of sub-section (4) of section 35, every director or other officer of the banking company, unless
he proves that the contravention took place without his knowledge or that he exercised all due
diligence to prevent it shall be deemed to be guilty of such contravention and shall be punishable
with a fine which may extend to twice the amount of the deposits so received.
[(4) If any other provision of this Act is contravened or if any default is made in-
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(i) complying with any requirement of this Act or of any order, rule or direction made or condition
imposed thereunder, or
(ii) carrying out the terms of, or the obligations under, a scheme sanctioned under sub-section (7)
of section 45, by any person, such person shall be punishable with fine which may extend to [one
crore rupees] [or twice the amount involved in such contravention or default where such amount
is quantifiable, whichever is more, and where a contravention or default is a continuing one, with
a further fine which may extend to] [one lakh rupees] for every day, during which the
contravention or default continues.]
(5) Where a contravention or default has been committed by a company, every person who, at the
time the contravention or default was committed, was in charge of, and was responsible to, the
company, for the conduct of the business of the company, as well as the company, shall be deemed
to be guilty of the contravention or default and shall be liable to be proceeded against and punished
accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to any
punishment provided in this Act if he proves that the contravention or default was committed
without his knowledge or that he exercised all due diligence to prevent the contravention or default.
(6) Notwithstanding anything contained in sub-section (5), where a contravention or default has
been committed by a company, and it is proved that the same was committed with the consent or
connivance of, or is attributable to any gross negligence on the part of, any director, manager,
secretary or other officer of the company, such director, manager, secretary or other officer shall
also be deemed to be guilty of that contravention or default and shall be liable to be proceeded
against and punished accordingly.
Explanation. - For the purposes of this section,-
(a) "company" means any body corporate and includes a firm or other association of individuals;
and
(b) "director", in relation to a firm, means a partner in the firm.
RESERVE BANK OF INDIA ACT, 1934
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(IMPORTANT PROVISIONS)
INTRODUCTION (IN BRIEF)
The Reserve Bank, as the central bank of the country, started their operations as a private
shareholder’s bank.RBI replaced the Imperial Bank of India and started issuing the currency notes
and acting as the banker to the government. Imperial Bank of India was allowed to act as the agent
of the RBI. RBI covered all over the undivided India. In order to have close integration between
policies of the Reserve Bank and those of the Government, It was decided to nationalize the
Reserve Bank immediately after the independence of the country. From 1st January 1949, the
Reserve Bank began functioning as a State-owned and State-controlled Central Bank... To
streamline the functioning of commercial banks, the Government of India enacted the Banking
Companies Act, 1949 which was later changed as the Banking Regulation Act 1949. RBI acts as
a regulator of banks, banker to the Government and banker’s bank. It controls financial system in
the country through various measures.
The Reserve Bank of India Act,1934 was enacted to constitute the Reserve Bank of India with an
objective to (a)regulate the issue of bank notes (b) for keeping reserves to ensure stability in the
monetary system (c) to operate effectively the nation’s currency and credit system
The RBI Act covers: (i) the constitution (ii) powers (iii) functions of the Reserve Bank of India.
The act does not directly deal with the regulation of the banking system except for few sections
like Sec 42 which relates to the maintenance of CRR by banks and Sec 18 which deals with direct
discount of bills of exchange and promissory notes as part of rediscounting facilities to regulate
the credit to the banking system. The RBI Act deals with:
(a) Incorporation, capital, management and business of the RBI
(b) The functions of the RBI such as issue of bank notes, monetary control, banker to the
Central and State Governments and banks, lender of last resort and other functions
(c) General provisions in respect of reserve fund, credit funds, audit and accounts
(d) Issuing directives and imposing penalties for violation of the provisions of the Act
SECTION 3. Establishment and incorporation of Reserve Bank. –
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(1) A bank to be called the Reserve Bank of India shall be constituted for the purposes of taking
over the management of the currency from the Central Government and of carrying on the business
of banking in accordance with the provisions of this Act.
(2) The bank shall be a body corporate by the name of the Reserve Bank of India, having perpetual
succession and a common seal, and shall by the said name sue and be sued.
SECTION 7. Management. –
(1) The Central Government may, from time to time, give such directions to the bank as it may,
after consultation with the Governor of the bank, consider necessary in the public interest.
(2) Subject to any such directions, the general superintendence and direction of the affairs and
business of the bank shall be entrusted to a Central Board of Directors which may exercise all
powers and do all acts and things which may be exercised or done by the bank.
(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his
absence the Deputy Governor nominated by him in this behalf, shall also have powers of general
superintendence and direction of the affairs and the business of the bank, and may exercise all
powers and do all acts and things which may be exercised or done by the bank.
SECTION 8. Composition of the Central Board, and term of office of Directors. –
[(1) The Central Board shall consist of the following Directors, namely:-
(a) a Governor and] [not more than four][Deputy Governors to be appointed by the Central
Government;
(b) Four Directors to be nominated by the Central Government, one from each of the four Local
Boards as constituted by section 9;
(c) [ten] Directors to be nominated by th [e Central Government; and
(d) One Government official to be nominated by the Central Government.
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(2) The Governor and Deputy Governors shall devote their whole time to the affairs of the bank,
and shall receive such salaries and allowances as may be determined by the Central Board, with
the approval of the Central Government:
Provided that the Central Board may, if in its opinion it is necessary in the public interest so to do,
permit the Governor or a Deputy Governor to undertake, at the request of the Central Government
or any State Government, such part-time honorary work, whether related to the purposes of this
Act or not, as is not likely to interfere with his duties as Governor or Deputy Governor, as the case
may be:
Provided further that the Central Government may, in consultation with the bank, appoint a Deputy
Governor as the Chairman of the National Bank, on such terms and conditions as the Government
may specify.
(3) A Deputy Governor and the Director nominated under clause (d) of sub-section (1) may attend
any meeting of the Central Board and take part in its deliberations but shall not be entitled to vote:
Provided that when the Governor is, for any reason, unable to attend any such meeting, a Deputy
Governor authorised by him in this behalf in writing may vote for him at that meeting.
[(4) The Governor and a Deputy Governor shall hold office for such term not exceeding five years
as the Central Government may fix when appointing them, and shall be eligible for re-
appointment.]
[A Director nominated under clause (c) of sub-section (1) shall hold office for a period of four
years shall be eligible for reappointment:-
Provided that any such Director shall not be appointed for more than two terms, that is, for a
maximum period of eight years either continuously or intermittently].
[A Director nominated under clause (d) of sub-section (1) shall hold office during the pleasure of
the Central Government.
(5) No act or proceeding of the Board shall be questioned on the ground merely of the existence
of any vacancy in, or any defect in the constitution of, the Board.
[(7) A retiring Director shall be eligible for renomination.
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SECTION 10. Disqualifications of Directors and Members of Local Boards. –
(1) No person may be a Director or a member of a Local Board who-
(a) is a salaried Government official [* * *] [* *], or
(b) is, or at any time has been, adjudicated an insolvent, or has suspended payment or has
compounded with his creditors, or
(c) is found lunatic or becomes of unsound mind, or
(d) is an officer or employee of any bank, or
[(e) is a director of a banking company within the meaning of clause (c) of section 5 of the
][Banking Regulation Act, 1949 (10 of 1949)][, or of a co-operative bank.]
(2) No two persons who are partners of the same mercantile firm, or are directors of the same
private company, or one of whom is the general agent of or holds a power of procuration from the
other, or from a mercantile firm of which the other is a partner, may be Directors or members of
the same Local Board at the same time.
(3) Nothing in clause (a), clause (d) or clause (e) of sub-section (1) shall apply to the Governor, or
to a Deputy Governor or to the Director nominated under clause (d) of sub-section (1) of section
8.
SECTION 13. Meetings of the Central Board. –
(1) Meetings of the Central Board shall be convened by the Governor at least six times in each
year and at least once in each quarter.
(2) Any [four Directors] may require the Governor to convene a meeting of the Central Board at
any time and the Governor shall forthwith convene a meeting accordingly.
(3) The Governor, or [if for any reason, he is unable to attend,] the Deputy Governor authorised
by the Governor under the proviso to sub-section (3) of section 8 to vote for him, shall preside at
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meetings of the Central Board, and, in the event of an equality of votes, shall have a second or
casting vote.
SECTION 18A. Validity of loan or advance not to be questioned. –
Notwithstanding anything to the contrary contained in any other law for the time being in force,-
(a) the validity of any loan or advance granted by the bank in pursuance of the provisions of this
Act shall not be called in question merely on the ground of non-compliance with the requirements
of such other law as aforesaid or of any resolution, contract, memorandum, articles of association
or other instrument:
Provided that nothing in this clause shall render valid any loan or advance obtained by any
company or co-operative society where such company or co-operative society is not empowered
by its memorandum to obtain loans or advances;
(b) where a loan or advance has been granted under clause (3-A) or under clause (3-B) of section
17 or a loan or advance granted under clause (3) of section 18 by the bank to any person has been
applied by such person, wholly or in part, in making a loan or advance to any borrower, any sum
received-
(i) by the borrowing bank on account of bills of exchange in respect of which the declaration under
clause (i) of the proviso to clause (3-A) of section 17 has been furnished or in repayment or
realisation of the outstanding loans and advances referred to in clause (ii) of the said proviso or in
the proviso to clause (3-B) of the said section, or
(ii) by the borrowing bank or any other person in repayment or realisation of loans and advances
granted to a borrower out of funds obtained by it or by him from the bank under section 18, shall
be utilised only for the repayment by the borrowing bank or other person, as the case may be, of
the amounts due to be repaid by it or by him to the bank, and shall be held by it or by him in trust
for the Bank, until such time as the amounts are so repaid.]
SECTION 19. Business which the bank may not transact. –
Save as otherwise provided in sections 17, 18, [42] and 45, the bank may not-
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(1) engage in trade or otherwise have a direct interest in any commercial, industrial, or other
undertaking except such interest as it may in any way acquire in the course of the satisfaction of
any of its claims: provided that all such interests shall be disposed of at the earliest possible
moment;
[(2) purchase the shares of any banking company or of any other company, or grant loans upon the
security of any such shares;]
(3) advance money on mortgage of, or otherwise on the security of, immovable property or
documents of title relating thereto, or become the owner of immovable property, except so far as
is necessary for its own business premises and residences for its officers and servants;
(4) make loans or advances;
(5) draw or accept bills payable otherwise than on demand;
(6) allow interest on deposits or current accounts.
SECTION 20. Obligation of the bank to transact Government business. –
The bank shall undertake to accept monies for account of [[* * *][the Central Government ][* *
*] and to make payments up to the amount standing to the credit of [its account], and to carry
out [its exchange], remittance and other banking operations, including the management of the
public debt of [the Union].
SECTION 21. Bank to have the right to transact Government business in India. –
(1) The Central Government [* * *] shall entrust the bank, on such conditions as may be agreed
upon, with all [its] money, remittance, exchange and banking transactions in India, and, in
particular, shall deposit free of interest all [its] cash balances with the bank:
Provided that nothing in this sub-section shall prevent the Central Government [* * *] from
carrying on money transactions at places where the bank has no branches or agencies, and the
Central Government [* * *] may hold at such places such balances as [it] may require.
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(2) The Central Government [* * *] shall entrust the bank, on such conditions as may be agreed
upon, with the management of the public debt and with the issue of any new loans.
(3) In the event of any failure to reach agreement on the conditions referred to in this section the
Central Government shall decide what the conditions shall be.
[(4) Any agreement made under this section shall be laid, as soon as may be after it is made, before
Parliament.]
SECTION 22. Right to issue bank notes. –
(1) The bank shall have the sole right to issue bank notes in [India] and may, for a period which
shall be fixed by the Central Government on the recommendation of the Central Board, issue
currency notes of the Government of India, supplied to it by the Central Government, and the
provisions of this Act applicable to bank notes shall, unless contrary intention appears, apply to all
currency notes of the Government of India issued either by the Central Government or by the bank
in like manner as if such currency notes were bank notes, and references in this Act to bank notes
shall be construed accordingly.
(2) On and from the date on which this Chapter comes into force the Central Government shall not
issue any currency notes.
SECTION 23. Issue Department. –
(1) The issue of bank notes shall be conducted by the bank in an Issue Department which shall be
separated and kept wholly distinct from the Banking Department, and the assets of the issue
Department shall not be subject to any liability other than the liabilities of the Issue Department
as hereinafter defined in section 34.
(2) The Issue Department shall not issue bank notes to the Banking Department or to any other
person except in exchange for other bank notes or for such coin, bullion or securities as are
permitted by this Act to form part of the Reserve.
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SECTION 24. Denominations of notes. –
(1) Subject to the provisions of sub-section (2), bank notes shall be of the denominational values
of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five
hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or of such
other denominational values, not exceeding ten thousand rupees, as the Central Government may,
on the recommendation of the Central Board, specify in this behalf.
(2) The Central Government may, on the recommendation of the Central Board, direct the non-
issue or the discontinuance of issue of bank notes of such denominational values as it may specify
in this behalf.]
SECTION 25. Form of bank notes. –
The design, form and material of bank notes shall be such as may be approved by the Central
Government after consideration of the recommendations made by the Central Board.
SECTION 26. Legal tender character of notes. –
(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place
in [India] in payment or on account for the amount expressed therein, and shall be guaranteed by
the Central Government.
(2) On recommendation of the Central Board the Central Government may, by notification in the
Gazette of India, declare that, with effect from such date as may be specified in the notification,
any series of bank notes of any denomination shall cease to be legal tender [save at such office or
agency of the Bank and to such extent as may be specified in the notification].
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SECTION 26A. Certain bank notes to cease to be legal tender. –
Notwithstanding anything contained in section 26, no bank note of the denominational value of
five hundred rupees, one thousand rupees or ten thousand rupees issued before the 13th day of
January, 1946, shall be legal tender in payment or on account for the amount expressed therein.]
SECTION 27. Re-issue of notes. - The bank shall not reissue bank notes which are torn, defaced
or excessively spoiled.
SECTION 31. Issue of demand bills and notes. –
[(1)] No person in [India] other than the bank or, as expressly authorised by this Act, the Central
Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or
engagement for the payment of money payable to bearer on demand, or borrow, owe or take up
any sum or sums of money on the bills, hundis or notes payable to bearer on demand of any such
person:
Provided that cheques or drafts, including hundis, payable to bearer on demand or otherwise may
be drawn on a person's account with a banker, shroff or agent.
[(2) Notwithstanding anything contained in the Negotiable Instruments Act, 1881 (26 of 1881), no
person in ][India][other than the bank or, as expressly authorised by this Act, the Central
Government shall make or issue any promissory note expressed to be payable to the bearer of the
instrument.]
SECTION 33. Assets of the Issue Department. –
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(1) The assets of the Issue Department shall consist of gold coin, gold bullion, [foreign securities],
rupee coin and rupee securities to such aggregate amount as is not less than the total of the
liabilities of the Issue Department as hereinafter defined.
[(2) The aggregate value of the gold coin, gold bullion and foreign securities held as assets and the
aggregate value of the gold coin and gold bullion so held shall not at any time be less than two
hundred crores of rupees and one hundred and fifteen crores of rupees, respectively.]
[(3) The remainder of the assets shall be held in rupee coin, Government of India rupee securities
of any maturity, promissory notes drawn by the National Bank for any loans or advances under
clause (4-E) of section 17 and such bills of exchange and promissory notes payable in India as are
eligible for purchase by the bank under sub-clause (a) or sub-clause (b) or sub-clause (bb) of clause
(2) of section 17 or under clause (1) of section 18.]
[* * *]
(4) For the purposes of this section, gold coin and gold bullion shall be valued at [a price not
exceeding the international market price for the time being obtaining], rupee coin shall be valued
at its face value, and securities shall be valued [at rates not exceeding the market rates] for the time
being obtaining.
(5) Of the gold coin and gold bullion held as assets, not less than seventeen-twentieths shall be
held in [India], and all gold coin and gold bullion held as assets shall be held in the custody of the
bank or its agencies:
Provided that gold belonging to the bank which is in any other bank or in any mint or treasury or
in transit may be reckoned as part of the assets.
[(6) For the purposes of this section, the foreign securities which may be held as part of the assets
shall be-
(i) securities of the following kinds payable in the currency of any foreign country which is a
member of the International Monetary Fund, namely:-
(a) balances with the bank which is the principal currency authority of that foreign country and
any other balances or securities in foreign currency maintained with or issued by the International
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Monetary Fund, the International Bank for Reconstruction and Development, the International
Development Association or the International Finance Corporation ] [or Asian Development
Bank][or the Bank for International Settlements or ] [any banking or financial institution
][approved][by the Central Government] [in this behalf, provided that they are repayable within a
][period of ten years];
[(b) bills of exchange bearing two or more good signatures and drawn on and payable at any place
in that foreign country and having a maturity not exceeding ninety days; and
(c) Government securities of that foreign country maturing ][within ten years;]
[(ii) any drawing rights representing a liability of the International Monetary Fund.]
SECTION 34. Liabilities of the Issue Department. –
(1) The liabilities of the Issue Department shall be an amount equal to the total of the amount of
the currency notes of the Government of India and bank notes for the time being in circulation.
SECTION 39. Obligation to supply different forms of currency. –
(1) The bank shall issue rupee coin on demand in exchange for bank notes and currency notes of
the Government of India, and shall issue currency notes or bank notes on demand in exchange for
coin which is legal tender under the Indian Coinage Act, 1906.
(2) The bank shall, in exchange for currency notes or bank notes of [two rupees] or upwards,
supply currency notes or bank notes of lower value or other coins which are legal tender under the
Indian Coinage Act, 1906 (3 of 1906), in such quantities as may, in the opinion of the bank, be
required for circulation; and the Central Government shall supply such coins to the bank on
demand. If the Central Government at any time fails to supply such coins, the bank shall be
released from its obligations to supply them to the public.
SECTION 40. Transactions in foreign exchange. –
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The bank shall sell to or buy from any authorised person who makes a demand in that behalf at its
office in Bombay, Calcutta, Delhi or Madras, ][or at such of its branches as the Central
Government may, by order, determine][, foreign exchange at such rates of exchange and on such
conditions as the Central Government may from time to time by general or special order determine,
having regard so far as rates of exchange are concerned to its obligations to the International
Monetary Fund:
Provided that no person shall be entitled to demand to buy or sell foreign exchange of a value less
than two lakhs of rupees.
Explanation .-In this section "authorised person" means a person who is entitled by or under the
][Foreign Exchange Regulation Act, 1973 (46 of 1973)][, to buy, or as the case may be, sell, the
foreign exchange to which his demand relates.]
SECTION 45A. Definitions. - In this Chapter, unless the context otherwise requires,-
(c) "credit information" means any information relating to-
(i) the amounts and the nature of loans or advances and other credit facilities granted by a banking
company to any borrower or class of borrowers;
(ii) the nature of security taken from any borrower [or class of borrowers] for credit
facilities [granted to him or to such class;]
(iii) the guarantee furnished by a banking company for any of its customers [or any class of its
customers;]
[(iv) the means, antecedents, history of financial transactions and the creditworthiness of any
borrower or class of borrowers;
(v) any other information which the bank may consider to be relevant for the more orderly
regulation of credit or credit policy.]
SECTION 45B. Power of bank to collect credit information. –
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The bank may-
(a) collect, in such manner as it may think fit, credit information from banking companies; and
(b) furnish such information to any banking company in accordance with the provisions of section
45-D.
SECTION 45C. Power to call for returns containing credit information. –
(1) For the purpose of enabling the bank to discharge its functions under this Chapter, it may at
any time direct any banking company to submit to it such statements relating to such credit
information and in such form and within such time as may be specified by the bank from time to
time.
(2) A banking company shall, notwithstanding anything to the contrary contained in any law for
the time being in force or in any instrument regulating the constitution thereof or in any agreement
executed by it, relating to the secrecy of its dealings with its constituents, be bound to comply with
any direction issued under sub-section (1).
SECTION 45D. Procedure for furnishing credit information to banking companies. –
(1) A banking company may, in connection with any financial arrangement entered into or
proposed to be entered into by it, with any person, make an application to the bank in such form
as the bank may specify requesting it to furnish the applicant with such credit information as may
be specified in the application.
(2) On receipt of an application under sub-section (1), the bank shall, as soon as may be, furnish
the applicant with such credit information relating to the matters specified in the application, as
may be in its possession:
Provided that the information so furnished shall not disclose the names of the banking companies
which have submitted such information to the bank.
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(3) The bank may in respect of each application levy such fees, not exceeding twenty-five rupees,
as it may deem fit for furnishing credit information.
SECTION45F. Certain claims for compensation barred. –
No person shall have any right, whether in contract or otherwise, to any compensation for any loss
incurred by reason of the operation of any of the provisions of this Chapter.
CHAPTER III-B
Provisions Relating To Non-Banking Institutions Receiving Deposits

&Financial Institutions
SECTION 45I. Definitions. - In this Chapter, unless the context otherwise requires,-
(c) "financial institution" means any non-banking institution which carries on as its business or
part of its business any of the following activities, namely:-
(i) the financing, whether by way of making loans or advances or otherwise, of any activity other
than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a Government or
local authority or other marketable securities of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in
clause (c) of section 2 of the Hire-Purchase Act, 1972 (26 of 1972);
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or
kuries as defined in any law which is for the time being in force in any State, or any business,
which is similar thereto;
(vi) Collecting, for any purpose or under any scheme or arrangement by whatever name called,
monies in lumpsum or otherwise, by way of subscriptions or by sale of units, or other instruments
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or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies
in any other way, to persons from whom monies are collected or to any other person]
[but does not include any institution, which carries on as its principal business,-
(a) agricultural operations; or
(aa) industrial activity; or]
[(b) the purchase or sale of any goods (other than securities) or the providing of any services; or
(c) the purchase, construction or sale of immovable property, so, however, that no portion of the
income of the institution is derived from the financing of purchases, constructions or sales of
immovable property by other persons;]
[ Explanation.-For the purposes of this clause, "industrial activity" means any activity specified in
sub-clauses (i) to (xviii) of clause (c) of section 2 of the Industrial Development Bank of India Act,
1964 (18 of 1964);]
(f) "non-banking financial company" means-
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its principal business the
receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any
manner;
(iii) such other non-banking institution or class of such institutions, as the Bank may, with the
previous approval of the Central Government and by notification in the Official Gazette, specify.]
SECTION 45IA. Requirement of registration and net owned fund. –
(1) Notwithstanding anything contained in this Chapter or in any other law for the time being in
force, no non-banking financial company shall commence or carry on the business of a non-
banking financial institution without-
(a) obtaining a certificate of registration issued under this Chapter; and
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(b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two
hundred lakh rupees, as the bank may, by notification in the Official Gazette, specify.
(2) Every non-banking financial company shall make an application for registration to the Bank in
such form as the bank may specify:
Provided that a non-banking financial company in existence on the commencement of the Reserve
Bank of India (Amendment) Act, 1997 shall make an application for registration to the bank before
the expiry of six months from such commencement and notwithstanding anything contained in
sub-section (1) may continue to carry on the business of a non-banking financial institution until a
certificate of registration is issued to it or rejection of application for registration is communicated
to it.
(3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in

existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having
a net owned fund of less than twenty-five lakh rupees may, for the purpose of enabling such
company to fulfil the requirement of the net owned fund, continue to carry on the business of a
non-banking financial institution-
(i) for a period of three years from such commencement; or
(ii) for such further period as the bank may, after recording the reasons in writing for so doing,
extend, subject to the condition that such company shall, within three months of fulfilling the
requirement of the net owned fund, inform the bank about such fulfilment:
Provided that the period allowed to continue business under this sub-section shall in no case exceed
six years in the aggregate.
(4) The bank may, for the purpose of considering the application for registration, require to be
satisfied by an inspection of the books of the non-banking financial company or otherwise that the
following conditions are fulfilled:-
(a) that the non-banking financial company is or shall be in a position to pay its present or future
depositors in full as and when their claims accrue;
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(b) that the affairs of the non-banking financial company are not being or are not likely to be
conducted in a manner detrimental to the interest of its present or future depositors;
(c) that the general character of the management or the proposed management of the non-banking
financial company shall not be prejudicial to the public interest or the interest of its depositors;
(d) that the non-banking financial company has adequate capital structure and earning prospects;
(e) that the public interest shall be served by the grant of certificate of registration to the non-
banking financial company to commence or to carry on the business in India;
(f) that the grant of certificate of registration shall not be prejudicial to the operation and
consolidation of the financial sector consistent with the monetary stability, economic growth and
considering such other relevant factors which the bank may, by notification in the Official Gazette,
specify; and
(g) any other condition, fulfilment of which in the opinion of the bank, shall be necessary to ensure
that the commencement of or carrying on of the business in India by a non-banking financial
company shall not be prejudicial to the public interest or in the interest of the depositors.
(5) The bank may, after being satisfied that the conditions specified in sub-section (4) are fulfilled,
grant a certificate of registration subject to such conditions which it may consider fit to impose.
(6) The bank may cancel a certificate of registration granted to a non-banking financial company
under this section if such company-
(i) ceases to carry on the business of a non-banking financial institution in India; or
(ii) has failed to comply with any condition subject to which the certificate of registration had been
issued to it; or
(iii) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-section
(4); or
(iv) fails-
(a) to comply with any direction issued by the bank under the provisions of this Chapter; or
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(b) to maintain accounts in accordance with the requirements of any law or any direction or order
issued by the bank under the provisions of this Chapter; or
(c) to submit or offer for inspection its books of account and other relevant documents when so
demanded by an inspecting authority of the bank; or
(v) has been prohibited from accepting deposit by an order made by the bank under the provisions
of this Chapter and such order has been in force for a period of not less than three months:
Provided that before cancelling a certificate of registration on the ground that the non-banking
financial company has failed to comply with the provisions of clause (ii) or has failed to fulfil any
of the conditions referred to in clause (iii) the bank, unless it is of the opinion that the delay in
canceling the certificate of registration shall be prejudicial to public interest or the interest of the
depositors or the non-banking financial company, shall give an opportunity to such company on
such terms as the bank may specify for taking necessary steps to comply with such provision or
fulfilment of such condition:
Provided further that before making any order of cancellation of certificate of registration, such
company shall be given a reasonable opportunity of being heard.
(7) A company aggrieved by the order of rejection of application for registration or cancellation
of certificate of registration may prefer an appeal, within a period of thirty days from the date on
which such order of rejection or cancellation is communicated to it, to the Central Government
and the decision of the Central Government where an appeal has been preferred to it, or of the
bank where no appeal has been preferred, shall be final:
Provided that before making any order of rejection of appeal, such company shall be given a
reasonable opportunity of being heard.
Explanation .-For the purposes of this section,-
(I) "net owned fund" means-
(a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance
sheet of the company after deducting therefrom-
(i) accumulated balance of loss;
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(ii) deferred revenue expenditure; and
(iii) other intangible assets; and
(b) further reduced by the amounts representing-
(1) investments of such company in shares of-
(i) its subsidiaries;
(ii) companies in the same group;
(iii) all other non-banking financial companies; and
(2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase
and lease-finance) made to, and deposits with,-
(i) subsidiaries of such company; and
(ii) companies in the same group, to the extent such amount exceeds ten per cent. of (a) above.
(II) "subsidiaries" and "companies in the same group" shall have the same meanings assigned to
them in the Companies Act, 1956 (1 of 1956).
SECTION 45-ID. Power of Bank to remove directors from office.
(1) Where the Bank is satisfied that in the public interest or to prevent the affairs of a non-banking
financial company being conducted in a manner detrimental to the interest of the depositors or
creditors, or financial stability or for securing the proper management of such company, it is
necessary so to do, the Bank may, by order and for reasons to be recorded in writing, remove from
office, a director (by whatever name called) of such company, other than Government owned
nonbanking financial company with effect from such date as may be specified in the said order.
(2) No order under sub-section (1) shall be made unless the director concerned has been given a
reasonable opportunity of making a representation to the Bank against the proposed order:
Provided that if, in the opinion of the Bank, any delay will be detrimental to the interest of the said
company or its depositors, the Bank may, at the time of giving the aforesaid opportunity or at any
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time thereafter, by order direct that, pending the consideration of the representation, if any, the
director, shall not, with effect from the date of such order–– (a) act as such director of that
company; (b) in any way, whether directly or indirectly, be concerned with or take part in the
management of that company.
(3) Where any order is made in respect of a director of a company under subsection (1), he shall
cease to be a director of that non-banking financial company and shall not, in any way, whether
directly or indirectly, be concerned with, or take part in the management of any non-
bankingfinancial company for such period not exceeding five years at a time as may be specified
in the order.
(4) Where an order under sub-section (1) has been made, the Bank may, by order in writing,
appoint a suitable person in place of the director, who has been so removed from his office, with
effect from such date as may be specified in such order.
(5) Any person appointed under sub-section (4) shall, — (a) hold office during the pleasure of the
Bank and subject thereto for a period not exceeding three years or such further periods not
exceeding three years at a time; (b) not incur any obligation or liability by reason only of his being
a director for anything done or omitted to be done in good faith in the execution of the duties of
his office or in relation thereto.
(6) Notwithstanding anything contained in any other law for the time being in force or in any
contract, memorandum or articles of association, on the removal of a director from office under
this section, such director shall not be entitled to claim any compensation for the loss or termination
from office.
SECTION 45MC. Power of Bank to file winding up petition.
(1) The Bank, on being satisfied that a non-banking financial company, – (a) is unable to pay its
debt; or (b) has by virtue of the provisions of section 45-IA become disqualified to carry on the
business of a non-banking financial institution; or (c) has been prohibited by the Bank from
receiving deposit by an order and such order has been in force for a period of not less than three
months; or (d) the continuance of the non-banking financial company is detrimental to the public
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interest or to the interest of the depositors of the company, may file an application for winding up
of such non-banking financial company under the Companies Act, 1956.
(2) A non-banking financial company shall be deemed to be unable to pay its debt if it has refused
or has failed to meet within five working days any lawful demand made at any of its offices or
branches and the Bank certifies in writing that such company is unable to pay its debt.
(3) A copy of every application made by the Bank under sub-section (1) shall be sent to the
Registrar of Companies.
(4) All the provisions of the Companies Act, 1956 relating to winding up of a company shall apply
to a winding up proceeding initiated on the application made by the Bank under this provision.]
SECTION 45ZA. Inflation target.
(1) The Central Government shall, in consultation with the Bank, determine the inflation target in
terms of the Consumer Price Index, once in every five years. (2) The Central Government shall,
upon such determination, notify the inflation target in the Official Gazette.
SECTION 45ZB. Constitution of Monetary Policy Committee.
(1) The Central Government may, by notification in the Official Gazette, constitute a Committee
to be called the Monetary Policy Committee of the Bank.
(2) The Monetary Policy Committee shall consist of the following Members, namely: — (a) the
Governor of the Bank—Chairperson, ex officio; (b) Deputy Governor of the Bank, in charge of
Monetary Policy—Member, ex officio; (c) one officer of the Bank to be nominated by the Central
Board—Member, ex officio; and (d) three persons to be appointed by the Central Government—
Members.
(3) The Monetary Policy Committee shall determine the Policy Rate required to achieve the
inflation target.
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(4) The decision of the Monetary Policy Committee shall be binding on the Bank.
SECTION 45ZD. Terms and conditions of appointment of Members of Monetary Policy

Committee.
(1) The Members of the Monetary Policy Committee appointed under clause (d) of subsection (2)
of section 45ZB shall hold office for a period of four years and shall not be eligible for re-
appointment.
(2) The terms and conditions of appointment of Members of the Monetary Policy Committee shall
be such as may be prescribed by the Central Government and the remuneration and other
allowances payable to such Members shall be such as may be specified by the regulations made
by the Central Board.
(3) A Member may resign from the Monetary Policy Committee, at any time before the expiry of
his tenure under sub-section (1), by giving to the Central Government, a written notice of not less
than six weeks, and on the acceptance of the resignation by the Central Government, he shall cease
to be a Member of the Monetary Policy Committee.
SECTION45ZM. Monetary Policy Report. (1) The Bank shall, once in every six months, publish a
document to be called the Monetary Policy Report, explaining— (a) the sources of inflation; and (b) the forecasts
of inflation for the period between six to eighteen months from the date of publication of the document. (2) The
form and contents of the Monetary Policy Report shall be such as may be specified by the regulations made by the
Central Board.
SECTION 45ZN. Failure to maintain inflation target.
Where the Bank fails to meet the inflation target, it shall set out in a report to the Central
Government–– (a) the reasons for failure to achieve the inflation target; (b) remedial actions
proposed to be taken by the Bank; and (c) an estimate of the time-period within which the inflation
target shall be achieved pursuant to timely implementation of proposed remedial actions.
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Explanation. —For the purposes of this section, the factors that constitute failure shall be such as
may be notified by the Central Government in the Official Gazette, within three months from the
date of the commencement of Part I of Chapter XII of the Finance Act, 2016.
SECTION 48. Exemption of Bank from income-tax and super-tax.
(1) Notwithstanding anything contained in 3[the Income-Tax Act, 1961], or any other enactment
for the time being in force relating to income-tax or super-tax, the Bank shall not be liable to pay
income-tax or super-tax on any of its income, profits or gains.
SECTION 50. Auditors.
(1) Not less than two auditors shall be appointed, and their remuneration fixed, by the Central
Government.
(2) The auditors shall hold office for such term not exceeding one year as the Central Government
may fix while appointing them and shall be eligible for reppointment.]
SECTION 52. Powers and duties of auditors.
(1) Every auditor shall be supplied with a copy of the annual balance-sheet, and it shall be his duty
to examine the same, together with the accounts and vouchers, relating thereto; and every auditor
shall have a list delivered to him of all books kept by the Bank, and shall at all reasonable times
have access to the books, accounts and other documents of the Bank, and may, at the expense of
the Bank, employ accountants or other persons to assist him in investigating such accounts, and
may, in relation to such accounts, examine any Director or officer of the Bank.
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(2) The auditors shall make a report to the [Central Government] upon the annual balance-sheet
and accounts, and in every such report they shall state whether, in their opinion, the balance-sheet
is a full and fair balance-sheet containing all necessary particulars and properly drawn up so as to
exhibit a true and correct view of the state of the Bank’s affairs, and, in case they have called for
any explanation or information from the Central Board, whether it has been given and whether it
is satisfactory.
SECTION 53. Returns.
(1) The Bank shall prepare and transmit to the [Central Government] a weekly account of the Issue
Department and of the Banking Department in [such] from as the [Central] Government] may,
by notification in the Gazette of India, prescribe. The [Central Government] shall cause these
accounts to be [published in the Gazette of India at such intervals and in such modified form as it
may deem fit].
(2) The Bank shall also, within two months from the date on which the annual accounts of the
Bank are closed, transmit to the [Central Government] a copy of the annual accounts signed by the
Governor, the Deputy Governors and the Chief Accounting Officer of the Bank, and certified by
the auditors, together with a report by the Central Board on the working of the Bank throughout
the year, and the [Central Government] shall cause such accounts and report to be published in the
Gazette of India.
SECTION 57. Liquidation of the Bank.
(1) Nothing in the [Companies Act, 1956], shall apply to the Bank, and the Bank shall not be
placed in liquidation save by order of the [Central Government] and in such manner as [it may
direct].
58B. Penalties.
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(1) Whoever in any application, declaration, return, statement, information or particulars made,
required or furnished by or under or for the purposes of any provisions of this Act, or any order,
regulation or direction made or given thereunder or in any prospectus or advertisement issued for
or in connection with the invitation by any person, of deposits of money from the public wilfully
makes a statement which is false in any material particular knowing it to be false or wilfully omits
to make a material statement shall be punishable with imprisonment for a term which may extend
to three years and shall also be liable to fine.
(2) If any person fails to produce any book, account or other document or to furnish any statement,
information or particulars which, under this Act or any order, regulation or direction made or given
thereunder, it is his duty to produce or furnish or to answer any question put to him in pursuance
of the provisions of this Act or of any order, regulation or direction made or given thereunder, he
shall be punishable with fine which may extend to [one lakh rupees] in respect of each offence and
if he persists in such failure or refusal, with further fine which may extend to [five thousand rupees]
for every day, after the first during which the offence continues.
(3) If any person contravenes the provisions of section 31, he shall be punishable with fine, which
may extend to the amount of the bill of exchange, hundi, promissory note or engagement for
payment of money in respect whereof the offence is committed.
(4) If any person discloses any credit information, the disclosure of which is prohibited under
section 45E, he shall be punishable with imprisonment for a term, which may extend to six months,
or with fine, which may extend to one thousand rupees, or with both. [(4A) If any person
contravenes the provisions of sub-section (1) of section 45- IA, he shall be punishable with
imprisonment for a term which shall not be less than one year but which may extend to five years
and with fine which shall not be less than one lakh rupees, but which may extend to 2 [twenty-five
lakh rupees].
(4AA) If any auditor fails to comply with any direction given or order made by the Bank under
section 45MA, he shall be punishable with fine, which may extend to 3 [ten lakh rupees]. (4AAA)
Whoever fails to comply with any order made by the Company Law Board under sub-section (2)
of section 45QA, shall be punishable with imprisonment for a term which may extend to three
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years and shall also be liable to a fine of not less than [five thousand rupees] for every day during
which such non-compliance continues.]
(5) If any person, [other than an auditor]- (a) receives [any deposit without being authorised so to
do or] in contravention of any direction given or order made under Chapter IIIB; or [(aa) fails to
comply with any direction given or order made by the Bank under any of the provisions of Chapter
IIIB; or] (b) issues any prospectus or advertisement otherwise than in accordance with 8[section
45J] or any order made under section 45J, as the case may be, he shall be punishable with
imprisonment for a term which may extend to three years and shall also be liable to fine which
may extend, – (i) in the case of a contravention falling under clause (a), to twice the amount of the
deposit received; and (ii) in the case of a contravention falling under clause (b), to twice the amount
of the deposit called for by the prospectus or advertisement.
[(5A) If any person contravenes any provision of section 45S, he shall be punishable with
imprisonment for a term which may extend to two years, or with fine which may extend to twice
the amount of deposit received by such person in contravention of that section, or two thousand
rupees, whichever is more, or with both: Provided that in the absence of special and adequate
reasons to the contrary to be mentioned in the judgement of the court, the imprisonment shall not
be less than one year and the fine shall not be less than one thousand rupees.
(5B) Notwithstanding anything contained in section 29 of the Code of Criminal Procedure, 1973,
it shall be lawful for a Metropolitan Magistrate or a Judicial Magistrate of the first class to impose
a sentence of fine in excess of the limit specified in that section on any person convicted under
subsection (5A).]
(6) If any other provision of this Act is contravened or if any default is made in complying with
any other requirement of this Act or of any order, regulation or direction made or given or condition
imposed thereunder, any person guilty of such contravention or default shall be punishable with
fine which may extend to [one lakh rupees] and where a contravention or default is a continuing
one, with further fine which may extend to 2[ten thousand rupees] for every day after the first,
during which the contravention or default continues.
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SECTION 58C. Offences by companies.
(1) Where a person committing a contravention or default referred to in section 58B is a company,
every person who, at the time the contravention or default was committed, was in charge of, and
was responsible to, the company for the conduct of the business of the company, as well as the
company, shall be deemed to be gulity of the contravention or default and shall be liable to be
proceeded against and punished accordingly: Provided that nothing contained in this sub-section
shall render any such person liable to punishment if he proves that the contravention or default
was committed without his knowledge or that he had exercised all due diligence to prevent the
contravention or default.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act has
been committed by a company and it is proved that the same was committed with the consent or
connivance of or is attributable to any neglect on the part of, any director, manager, secretary, or
other officer or employee of the company, such director, manager, secretary, other officer or
employee shall also be deemed to be guilty of the offence and shall be liable to be proceeded
against and punished accordingly.
Explanation 1. – Any offence punishable under this Act shall be deemed to have been committed
at the place where the registered office or the principal place of business, as the case may be, in
India, of the company is situated. Explanation 2. – For the purpose of this section, - (a) “a
company” means any body corporate and includes a corporation, a non-banking institution, a firm,
a co-operative society or other association of individuals; (b) “director”, in relation to a firm, means
a partner in the firm.
SECTION 58E. Cognizance of offences.
(1) No court shall take cognizance of any offence punishable under this Act except upon a
complaint in writing made by an officer of the Bank, generally or specially authorized in writing
in this behalf by the Bank, and no court other than that of a Metropolitan Magistrate or a Judicial
Magistrate of the first class or a court superior thereto shall try any such offence: [Provided that in
respect of any offence punishable under sub-section (5A) of section 58B, a complaint in writing
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may also be made by an officer of the State Government, generally or specially authorised in
writing in this behalf by that Government.]
(2) Notwithstanding anything contained in the Code of Criminal Procedure, 1973 a Magistrate
may, if he sees reason so to do, dispense with the personal attendance of the officer of the Bank
filing the complaint, but the Magistrate may in his discretion, at any stage of the proceedings,
direct the personal attendance of the complainant.
THE RECOVERY OF DEBTS AND BANKRUPTCY ACT, 1993
(IMPORTANT PROVISIONS)
BRIEF INTRODUCTION
The RDB Act, 1993 provides for establishment of Debts Recovery Tribunals (DRTs) with original
jurisdiction and Debts Recovery Appellate Tribunals (DRATs) with appellate jurisdiction, for
expeditious adjudication and recovery of debts due to banks and financial institutions, insolvency
resolution and bankruptcy of individuals and partnership firms and connected matters therewith.
The Act aims to safeguard the interest of banks and financial institutions as lenders, while not
discouraging borrowers. The Tribunals have not yet commenced taking up insolvency resolution
and bankruptcy matters as the related provisions are not yet in force. The Act is applicable to cases
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where the amount of debt due to any bank or financial institution defined under the Act or a
consortium of banks or financial institutions is Rs.20 lakh or more.
CHAPTER III
JURISDICTION, POWERS AND AUTHORITY OF TRIBUNALS
SECTION 17. Jurisdiction, powers and authority of Tribunals.—
(1) A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority
to entertain and decide applications from the banks and financial institutions for recovery of debts
due to such banks and financial institutions.
(1A) Without prejudice to sub-section (1),— (a) the Tribunal shall exercise, on and from the date
to be appointed by the Central Government, the jurisdiction, powers and authority to entertain and
decide applications under Part III of Insolvency and Bankruptcy Code, 2016 (31 of 2016). (b) The
Tribunal shall have circuit sittings in all district headquarters.
(2) An Appellate Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers
and authority to entertain appeals against any order made, or deemed to have been made, by a
Tribunal under this Act.
(2A) Without prejudice to sub-section (2), the Appellate Tribunal shall exercise, on and from the
date to be appointed by the Central Government, the jurisdiction, powers and authority to entertain
appeals against the order made by the Adjudicating Authority under Part III of the Insolvency and
Bankruptcy Code, 2016 (31 of 2016).
SECTION 17A. Power of Chairperson of Appellate Tribunal.—
(1) The Chairperson of an Appellate Tribunal shall exercise general power of superintendence and
control over the Tribunals under his jurisdiction including the power of appraising the work and
recording the annual confidential reports of Presiding Officers.
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(1A) For the purpose of exercise of general powers of superintendence and control over Tribunals
under sub-section (1), the Chairperson may— (i) direct the Tribunals to furnish, in such form, at
such intervals and within such time, information relating to pending cases both under this Act and
the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (54 of 2002), or under any other law for the time being in force, number of cases
disposed of, number of new cases filed and such other information as may be considered necessary
by the Chairperson; (ii) convene meetings of the Presiding Officers of Tribunals periodically to
review their performance.
(1B) Where on assessment of the performance of any Presiding Officer of the Tribunal or
otherwise, the Chairperson is of the opinion that an inquiry is required to be initiated against such
Presiding Officer for misbehavior or incapacity, he shall submit a report to the Central Government
recommending action against such Presiding Officer, if any, under section 15, and for reasons to
be recorded in writing for the same.
(2) The Chairperson of an Appellate Tribunal having jurisdiction over the Tribunals may, on the
application of any of the parties or on his own motion after notice to the parties and after hearing
them, transfer any case from one Tribunal for disposal to any other Tribunal.
SECTION 18. Bar of jurisdiction.—
On and from the appointed day, no court or other authority shall have, or be entitled to exercise,
any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising
jurisdiction under articles 226 and 227 of the Constitution) in relation to the matters specified in
section 17:
Provided that any proceedings in relation to the recovery of debts due to any multi-State co-
operative bank pending before the date of commencement of the Enforcement of Security Interest
and Recovery of Debts Laws (Amendment) Act, 2012 (1 of 2013) under the Multi-State Co-
operative Societies Act, 2002 (39 of 2002) shall be continued and nothing contained in this section
shall, after such commencement, apply to such proceedings.
CHAPTER IV
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PROCEDURE OF TRIBUNALS
SECTION 19. Application to the Tribunal.—
(1) Where a bank or a financial institution has to recover any debt from any person, it may make
an application to the Tribunal within the local limits of whose jurisdiction—
(a) the branch or any other office of the bank or financial institution is maintaining an account in
which debt claimed is outstanding, for the time being; or
(aa) the defendant, or each of the defendants where there are more than one, at the time of making
the application, actually and voluntarily resides, or carries on business, or personally works for
gain; or
(b) any of the defendants, where there are more than one, at the time of making the application,
actually and voluntarily resides, or carries on business, or personally works for gain; or (c) the
cause of action, wholly or in part, arises:
Provided that the bank or financial institution may, with the permission of the Debts Recovery
Tribunal, on an application made by it, withdraw the application, whether made before or after the
Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2004 (30 of
2004) for the purpose of taking action under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (54 of 2002), if no such action had been
taken earlier under that Act: Provided further that any application made under the first proviso for
seeking permission from the Debts Recovery Tribunal to withdraw the application made under
sub-section (1) shall be dealt with by it as expeditiously as possible and disposed of within thirty
days from the date of such application: Provided also that in case the Debts Recovery Tribunal
refuses to grant permission for withdrawal of the application filed under this sub-section, it shall
pass such orders after recording the reasons there for.
(1A) Every bank being, multi-State co-operative bank referred to in sub-clause (vi) of clause (d)
of section 2, may, at its option, opt to initiate proceedings under the Multi-State Co-operative
Societies Act, 2002 (39 of 2002) to recover debts, whether due before or after the date of
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commencement of the Enforcement of the Security Interest and Recovery of Debts Laws
(Amendment) Act, 2012 (1 of 2013) from any person instead of making an application under this
Chapter. (1B) In case, a bank being, multi-State co-operative bank referred to in sub-clause (vi) of
clause (d) of section 2 has filed an application under this Chapter and subsequently opts to
withdraw the application for the purpose of initiating proceeding under the Multi-State Co-
operative Societies Act, 2002 (39 of 2002) to recover debts, it may do so with the permission of
the Tribunal and every such application seeking permission from the Tribunal to withdraw the
application made under sub-section (1A) shall be dealt with by it as expeditiously as possible and
disposed of within thirty days from the date of such application: Provided that in case the Tribunal
refuses to grant permission for withdrawal of the application filed under this sub-section, it shall
pass such orders after recording the reasons there for.
(2) Where a bank or a financial institution, which has to recover its debt from any person, has filed
an application to the Tribunal under sub-section (1) and against the same person another bank or
financial institution also has claim to recover its debt, then, the later bank or financial institution
may join the applicant bank or financial institution at any stage of the proceedings, before the final
order is passed, by making an application to that Tribunal.
(3) Every application under sub-section (1) or sub-section (2) shall be in such form, and shall be
accompanied with true copies of all documents relied on in support of the claim along with such
fee, as may be prescribed:] Provided that the fee may be prescribed having regard to the amount
of debt to be recovered: Provided further that nothing contained in this sub-section relating to fee
shall apply to cases transferred to the Tribunal under sub-section (1) of section 31.
Explanation.—For the purposes of this section, documents includes statement of account or any
entry in banker’s book duly certified under the Bankers’ Books Evidence Act, 1891 (18 of 1891).
(3A) Every applicant in the application filed under sub-section (1) or sub-section (2) for recovery
of debt, shall— (a) state particulars of the debt secured by security interest over properties or assets
belonging to any of the defendants and the estimated value of such securities; (b) if the estimated
value of securities is not sufficient to satisfy the debt claimed, state particulars of any other
properties or assets owned by any of the defendants, if any; and (c) if the estimated value of such
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other assets is not sufficient to recover the debt, seek an order directing the defendant to disclose
to the Tribunal particulars of other properties or assets owned by the defendants.
(3B) if any application filed before the Tribunal for recovery of any debt is settled prior to the
commencement of the hearing before that Tribunal or at any stage of the proceedings before the
final order is passed, the applicant may be granted refund to the fees paid by him at such rates as
may be prescribed.
(4) On receipt of application under sub-section (1) or sub-section (2), the Tribunal shall issue
summons with following directions to the defendant— (i) to show cause within thirty days of the
service of summons as to why relief prayed for should not be granted; (ii) direct the defendant to
disclose particulars of properties or assets other than properties and assets specified by the
applicant under clauses (a) and (b) of sub-section (3A); and (iii) to restrain the defendant from
dealing with or disposing of such assets and properties disclosed under clause (c) of sub-section
(3A) pending the hearing and disposal of the application for attachment of properties.
(4A) Notwithstanding anything contained in section 65A of the Transfer of Property Act, 1882 (4
of 1882), the defendant, on service of summons, shall not transfer by way of sale, lease or
otherwise except in the ordinary course of his business any of the assets over which security
interest is created and other properties and assets specified or disclosed under sub-section (3A),
without the prior approval of the Tribunal: Provided that the Tribunal shall not grant such approval
without giving notice to the applicant bank or financial institution to show cause as to why approval
prayed for should not be granted:
Provided further that defendant shall be liable to account for the sale proceeds realised by
sale of secured assets in the ordinary course of business and deposit such sale proceeds in the
account maintained with the bank or financial institution holding security interest over such assets.
(5) (i) the defendant shall within a period of thirty days from the date of service of summons,
present a written statement of his defence including claim for set-off under sub-section (6) or a
counter-claim under sub-section (8), if any, and such written statement shall be accompanied with
original documents or true copies thereof with the leave of the Tribunal, relied on by the defendant
in his defence:
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Provided that where the defendant fails to file the written statement within the said period
of thirty days, the Presiding Officer may, in exceptional cases and in special circumstances to be
recorded in writing, extend the said period by such further period not exceeding fifteen days to file
the written statement of his defence; (ii) where the defendant makes a disclosure of any property
or asset pursuant to orders passed by the Tribunal, the provisions of sub-section (4A) of this section
shall apply to such property or asset; (iii) in case of non-compliance of any order made under
clause (ii) of sub-section (4), the Presiding Officer may, by an order, direct that the person or
officer who is in default, be detained in civil prison for a term not exceeding three months unless
in the meantime the Presiding Officer directs his release: Provided that the Presiding Officer shall
not pass an order under this clause without giving an opportunity of being heard to such person or
officer.
Explanation.—For the purpose of this section, the expression ‘officer who is in default’
shall mean such officer as defined in clause (60) of section 2 of the Companies Act, 2013 (18 of
2013).
(5A) On receipt of the written statement of defendant or on expiry of time granted by the Tribunal
to file the written statement, the Tribunal shall fix a date of hearing for admission or denial of
documents produced by the parties to the proceedings and also for continuation or vacation of the
interim order passed under sub-section (4).
(5B) Where a defendant makes an admission of the full or part of the amount of debt due to a bank
or financial institution, the Tribunal shall order such defendant to pay the amount, to the extent of
the admission within a period of thirty days from the date of such order failing which the Tribunal
may issue a certificate in accordance with the provisions of sub-section (22) to the extent of the
amount of debt due admitted by the defendant.
(6) Where the defendant claims to set-off against the applicant’s demand any ascertained sum of
money legally recoverable by him from such applicant, the defendant may, at the first hearing of
the application, but not afterwards unless permitted by the Tribunal, present a written statement
containing the particulars of the debt [the debt sought to be set-off along with original documents
and other evidence relied on in support of claim of set-off in relation to any ascertained sum of
money, against the applicant].
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(7) The written statement shall have the same effect as a plaint in a cross-suit so as to enable the
Tribunal to pass a final order in respect both of the original claim and of the set-off.
(8) A defendant in an application may, in addition to his right of pleading a set-off under sub-
section (6), set up, by way of counter-claim against the claim of the applicant, any right or claim
in respect of a cause of action accruing to the defendant against the applicant either before or after
the filing of the application but before the defendant has delivered his defence or before the time
limited for delivering his defence has expired, whether such counter-claim is in the nature of a
claim for damages or not.
(9) A counter-claim under sub-section (8) shall have the same effect as a cross-suit so as to enable
the Tribunal to pass a final order on the same application, both on the original claim and on the
counter-claim.
(10) The applicant shall be at liberty to file a written statement in answer to the counter-claim of
the defendant within such period 3 [as may be prescribed].
(10A) Every application under sub-section (3) or written statement of defendant under sub-section
(5) or claim of set-off under sub-section (6) or a counter-claim under sub-section (8) by the
defendant, or written statement by the applicant in reply to the counter-claim, under sub-section
(10) or any other pleading whatsoever, shall be supported by an affidavit sworn in by the applicant
or defendant verifying all the facts and pleadings, the statements pleading documents and other
documentary evidence annexed to the application or written statement or reply to set-off or
counter-claim, as the case may be: Provided that if there is any evidence of witnesses to be led by
any party, the affidavits of such witnesses shall be filed simultaneously by the party with the
application or written statement or replies filed under sub-section (10A).
(10B) If any of the facts or pleadings in the application or written statement are not verified in the
manner provided under sub-section (10A), a party to the proceedings shall not be allowed to rely
on such facts or pleadings as evidence or any of the matters set out therein.
(11) Where a defendant sets up a counter-claim in the written statement and in reply to such claim
the applicant contends that the claim thereby raised ought not to be disposed of by way of counter-
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claim but in an independent action, the Tribunal shall decide such issue along with the claim of
the applicant for recovery of the debt.]
(13)(A) Where, at any stage of the proceedings, the Tribunal on an application made by the
applicant along with particulars of property to be attached and estimated value thereof, or
otherwise is satisfied], that the defendant, with intent to obstruct or delay or frustrate the execution
of any order for the recovery of debt that may be passed against him,— (i) is about to dispose of
the whole or any part of his property; or (ii) is about to remove the whole or any part of his property
from the local limits of the jurisdiction of the Tribunal; or (iii) is likely to cause any damage or
mischief to the property or affect its value by misuse or creating third party interest, the Tribunal
may direct the defendant, within a time to be fixed by it, either to furnish security, in such sum as
may be specified in the order, to produce and place at the disposal of the Tribunal, when required,
the said property or the value of the same, or such portion thereof as may be sufficient to satisfy
the certificate for the recovery of the debt, or to appear and show cause why he should not furnish
security.
(B) Where the defendant fails to show cause why he should not furnish security, or fails to
furnish the security required, within the time fixed by the Tribunal, the Tribunal may order the
attachment of the whole or such portion of the properties claimed by the applicant as the properties
secured in his favour or otherwise owned by the defendant as appears sufficient to satisfy any
certificate for the recovery of debt.
(15) The Tribunal may also in the order direct the conditional attachment of the whole or any
portion of the property specified under sub-section (13).
(16) If an order of attachment is made without complying with the provisions of sub-section (13),
such attachment shall be void.
(17) In the case of disobedience of an order made by the Tribunal under sub-sections (12), (13)
and (18) or breach of any of the terms on which the order was made, the Tribunal may order the
properties of the person guilty of such disobedience or breach to be attached and may also order
such person to be detained in the civil prison for a term not exceeding three months, unless in the
meantime the Tribunal directs his release.
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(18) Where it appears to the Tribunal to be just and convenient, the Tribunal may, by order— (a)
appoint a receiver of any property, whether before or after grant of certificate for recovery of debt;
(b) remove any person from the possession or custody of the property; (c) commit the same to the
possession, custody or management of the receiver; (d) confer upon the receiver all such powers,
as to bringing and defending suits in the courts or filing and defending applications before the
Tribunal and for the realisation, management, protection, preservation and improvement of the
property, the collection of the rents and profits thereof, the application and disposal of such rents
and profits, and the execution of documents as the owner himself has, or such of those powers as
the Tribunal thinks fit; and (e) appoint a Commissioner for preparation of an inventory of the
properties of the defendant or for the sale thereof.
(19) Where a certificate of recovery is issued against a company as defined under the Companies
Act, 2013 (18 of 2013) and such company is under liquidation, the Tribunal may by an order direct
that the sale proceeds of secured assets of such company be distributed in the same manner as
provided in section 326 of the Companies Act, 2013 or under any other law for the time being in
force.
(20) The Tribunal may, after giving the applicant and the defendant, an opportunity of being heard,
in respect of all claims, set-off or counter-claim, if any, and interest on such claims, within thirty
days from the date of conclusion of the hearings, pass interim or final order as it deems fit which
may include order for payment of interest from the date on which payment of the amount is found
due up to the date of realisation or actual payment.
(20A) Where it is proved to the satisfaction of the Tribunal that the claim of the applicant has been
adjusted wholly or in part by any lawful agreement or compromise in writing and signed by the
parties or where the defendant has repaid or agreed to repay the claim of the applicant, the Tribunal
shall pass orders recording such agreement, compromise or satisfaction of the claim.
(20AA) while passing the final order under sub-section (20), the Tribunal shall clearly specify the
assets of the borrower which security interest is created in favour of any bank or financial
institution and direct the Recovery Officers to distribute the sale proceeds of such assets as
provided in sub-section (20AB).
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(20AB) Notwithstanding anything to the contrary contained in any law for the time being in force,
the proceeds from sale of secured assets shall be distributed in the following orders of priority,
namely: —
(i) the costs incurred for preservation and protection of secured assets, the costs of
valuation, public notice for possession and auction and other expenses for sale
of assets shall be paid in full;
(ii) debts owed to the bank or financial institution.
Explanation.—For the purposes of this sub-section, it is hereby clarified that on or after the
commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where
insolvency and bankruptcy proceedings are pending in respect of secured assets of the borrower,
the distribution of proceeds from the sale of secured assets shall be subject to the order of priority
as provided in that Code.
(21) (i) The Tribunal shall send a copy of its final order and the recovery certificate, to the applicant
and defendant.
(ii) The applicant and the defendant may obtain copy of any order passed by the Tribunal on
payment on such fee as may be prescribed.
(22) The Presiding Officer shall issue a certificate of recovery along with the final order, under
sub-section (20), for payment of debt with interest under his signature to the Recovery Officer for
recovery of the amount of debt specified in the certificate.
(22A) Any recovery certificate issued by the Presiding Officer under sub-section (22) shall be
deemed to be decree or order of the Court for the purposes of initiation of winding up proceedings
against a company registered under the Companies Act, 2013 (18 of 2013) or Limited Liability
Partnership registered under the Limited Liability Partnership Act, 2008 (6 of 2009) or insolvency
proceedings against any individual or partnership firm under any law for the time being in force,
as the case may be.
(23) Where the Tribunal, which has issued a certificate of recovery, is satisfied that the property is
situated within the local limits of the jurisdiction of two or more Tribunals, it may send the copies
of the certificate of recovery for execution to such other Tribunals where the property is situated:
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Provided that in a case where the Tribunal to which the certificate of recovery is sent for execution
finds that it has no jurisdiction to comply with the certificate of recovery, it shall return the same
to the Tribunal which has issued it.
(24) The application made to the Tribunal under sub-section (1) or sub-section (2) shall be dealt
with by it as expeditiously as possible and every effort shall be made by it to complete the
proceedings in two hearings, and] to dispose of the application finally within one hundred and
eighty days from the date of receipt of the application.
(25) The Tribunal may made such orders and give such directions as may be necessary or expedient
to give effect to its orders or to prevent abuse of its process or to secure the ends of justice.
SECTION 19A. Filing of recovery applications, documents and written statements in

electronic form.—
(1) Notwithstanding anything to the contrary contained in this Act, and without prejudice to the
provisions contained in section 6 of the Information Technology Act, 2000 (21 of 2000), the
CentralGovernmentmaybyrulesprovidethatfromsuchdateandbeforesuchTribunalandAppellateT
ribunal,as maybe notified,—
(a) application or written statement or any other pleadings and the documents to be
annexed thereto required to be filed shall be submitted in the electronic form and
authenticated with digital signature of the applicant, defendant or any other petitioner in such
form and manner as may be prescribed;
(b) any summons, notice or communication or intimation as may be required to be served

or delivered under this Act, may be served or delivered by transmission of pleadings and
documents by electronic formant authenticated in such manner as may be prescribed.
(2) Any interim or final order passed by the Tribunal or Appellate Tribunal displayed on the
websiteofsuchTribunalorAppellateTribunalshallbedeemedtobeapublicnoticeofsuchorderandtra
nsmissionof such order by electronic mail to the registered address of the parties to the
proceeding shall be deemed to be served on such party.

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(3) TheCentralGovernmentmaybyrulesprovidethattheelectronicformforthepurposespecified
inthissection shall be exclusive, origin the alternative or in addition to the physical form,
therefor.
(4) The Tribunal or the Appellate Tribunal notified under sub-section (1), for the purpose of
adopting electronic filing, shall maintain its own website or common website with other
Tribunals and Appellate Tribunal or such other universally accessible repositories of electronic
information and ensure that all orders or directions issued by the Tribunal or Appellate Tribunal
are displayed on the website of the Tribunal or Appellate Tribunal, in such manner as may be
prescribed.
Explanation.—For the purpose of this section,—
(a) ‘digital signature’ means the digital signature as defined under clause (p) of section
2 of the Information Technology Act, 2000(21 of 2000);
(b) ‘electronic form’ with reference to an information or a document means the electronic
form as defined under clause(r) of section2 of the Information Technology Act,
2000(21of2000).]
SECTION 20: Appeal to the Appellate Tribunal.—
(1) Save as provided in sub-section(2),any person aggrieved by an order made, or deemed to

have been made, by a Tribunal under this Act, may prefer an appeal to an Appellate Tribunal
having jurisdiction in the matter.
(2) No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the
consent of the parties.
(3) Every appeal under sub-section (1) shall be filed within a period of 1[thirty days] from
the date on which a copy of the order made, or deemed to have been made, by the Tribunal is
received by him and it shall be in such format be accompanied by such fee as maybe prescribed:
ProvidedthattheAppellateTribunalmayentertainanappealaftertheexpiryofthesaidperiodof
1
[thirty days]if it is satisfied that there was sufficient cause for not filing it with in that period.

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(4) On receipt of an appeal under sub-section (1), 2[or under sub-section (1) of section 181
of the Insolvency and Bankruptcy Code, 2016 (31 of 2016)] the Appellate Tribunal may, after
giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it
thinks fit, confirming, modifying or setting aside the order appealed against.
(5) The Appellate Tribunal shall send a copy of every order made by it to the parties to the
appeal and to the concerned Tribunal.
The appeal filed before the Appellate Tribunal under sub-section (1) shall be dealt with by it as
expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within
six months from the date of receipt of the appeal.
SECTION 21: Deposit of amount of debt due, on filing appeal.—
Where an appeal is preferred by any person from whom the amount of debt is due to a bank or a
financial institution or a consortium of banks or financial institutions, such appeal shall not be
entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal
3
[fifty per cent.] of the amount of debt so due from him as determined by the Tribunal under section
19
Provided that the Appellate Tribunal may, for reasons to be recorded in writing, 4[reduce
the amount to be deposited by such amount which shall not be less than twenty-five per cent. of the
amount of such debt so due]to be deposited under this section.
SECTION 22: Procedure and powers of the Tribunal and the Appellate Tribunal.—
(1) The Tribunal and the Appellate Tribunal shall not be bound the procedure laid down by the Code
of Civil Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and,
subject to the other provisions of this Act and of any rules, the Tribunal and the Appellate Tribunal
shall have powers to regulate their own procedure including the places at which they shall have their
sittings.
(2) The Tribunal and the Appellate Tribunal shall have, for the purposes of discharging their

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functions under this Act, the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:—
(a) Summoning and enforcing the attendance of any person and examining him on oath;
(b) Requiring the discovery and production of documents;
(c) Receiving evidence on affidavits;
(d) Issuing commissions for the examination of witnesses or documents;
(e) Reviewing its decisions;
(f) Dismissing an application for default or deciding it ex-parte;
(g) settingasideanyorderofdismissalofanyapplicationfordefaultoranyorderpassedbyit ex-

parte;
(h) Any other matter which may be prescribed.
(3) Any proceeding before the Tribunal or the Appellate Tribunal shall be deemed to be a judicial
proceeding within the meaning of sections 193 and 228, and for the purposes of section 196, of
the Indian Penal Code (45 of 1860) and the Tribunal or the Appellate Tribunal shall be deemed
to be a civil court for all the purposes of section 195 and Chapter XXVI of the Code of Criminal
Procedure, 1973 (2 of1974).
(4) For the purpose of proof of any entry in the ‘bankers books’, the provisions of the
Bankers’BooksEvidenceAct,1891(18of1891)shallapplytoalltheproceedingsbeforetheTribunalo
rAppellateTribunal.
SECTION 22A. Uniform procedure for conduct of proceedings.—The Central Government

may, for the purpose of this Act, by rules, lay down uniform procedure consistent with the
provisions of this Act for conducting the proceedings before the Tribunals and Appellate
Tribunals.
SECTION 23 Right to legal representation and Presenting Officers.—

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(1) A bank or a financial institution making an application to a Tribunal or an appeal
to an Appellate Tribunal may authorize one or more legal practitioners or any of
its officers to act as Presenting Officers and every person so authorised by it may
present its case before the Tribunal or the Appellate Tribunal.
(2) The defendant may either appear in person or authorise one or more legal practitioners or
any of his or its officers to present his or its case before the Tribunal or the Appellate
Tribunal.
SECTION 24 Limitation.—The provisions of the Limitation Act, 1963 (36 of 1963), shall, as
far as may be, apply to an application made to a Tribunal.
CHAPTER - V
RECOVERY OF DEBT DETERMINED BY

TRIBUNAL
SECTION 25: Modes of recovery of debts.—The Recovery Officer shall, on receipt of the copy
of the certificate under sub-section (7) of section 19, proceed to recover the amount of debt
specified in the certificate by one or more of the following modes, namely:—
(a) Attachment and sale of the movable or immovable property of the defendant;
3
[(aa) taking possession of property over which security interest is created or any other
property of the defendant and appointing receiver for such property and to sell the same;]
(b) arrest of the defendant and his detention in prison;
(c) appointing a receiver for the management of the movable or immovable properties
of the defendant;
3
[(d) any other mode of recovery as maybe prescribed by the Central Government.]

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THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
(SARFAESI ACT)
IMPORTANT PROVISIONS
INTRODUCTION
The SARFAESI Act, 2002 aims to regulate securitization and reconstruction of financial assets
and enforcement of security interest and to provide for a Central database of security interests
created on property rights and for connected matters therewith. The Act has simplified the recovery
procedure for banks and specified financial institutions for recovery of secured debts from
borrowers without intervention of Courts at the first stage. Borrowers can file applications in the
Debts Recovery Tribunals (DRTs) against action taken for enforcement of security interest under
this Act, with the appellate jurisdiction for such applications lying with the Debts Recovery
Appellate Tribunals (DRATs).The Act is applicable to cases where security interest for securing
repayment of any financial asset is more than Rs.1 lakh and the amount due is 20% or more of the

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principal amount and interest thereon. The Act is not applicable to any security interest created in
agricultural land and certain properties not liable to attachment under some specified Acts.
CHAPTER III
ENFORCEMENT OF SECURITY INTEREST
SECTION 13. Enforcement of security interest.—
(1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property
Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be
enforced, without the intervention of the court or tribunal, by such creditor in accordance with the
provisions of this Act.
(2) Where any borrower, who is under a liability to a secured creditor under a security agreement,
makes any default in repayment of secured debt or any instalment thereof, and his account in
respect of such debt is classified by the secured creditor as non-performing asset, then, the secured
creditor may require the borrower by notice in writing to discharge in full his liabilities to the
secured creditor within sixty days from the date of notice failing which the secured creditor shall
be entitled to exercise all or any of the rights under sub-section (4).
Provided that— (i) the requirement of classification of secured debt as non-performing
asset under this sub-section shall not apply to a borrower who has raised funds through issue of
debt securities; and (ii) in the event of default, the debenture trustee shall be entitled to enforce
security interest in the same manner as provided under this section with such modifications as may
be necessary and in accordance with the terms and conditions of security documents executed in
favour of the debenture trustee.

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(3) The notice referred to in sub-section (2) shall give details of the amount payable by the
borrower and the secured assets intended to be enforced by the secured creditor in the event of
non-payment of secured debts by the borrower.
(3A) If, on receipt of the notice under sub-section (2), the borrower makes any representation or
raises any objection, the secured creditor shall consider such representation or objection and if the
secured creditor comes to the conclusion that such representation or objection is not acceptable or
tenable, he shall communicate 3[within fifteen days] of receipt of such representation or objection
the reasons for non-acceptance of the representation or objection to the borrower: Provided that
the reasons so communicated or the likely action of the secured creditor at the stage of
communication of reasons shall not confer any right upon the borrower to prefer an application to
the Debts Recovery Tribunal under section 17 or the Court of District Judge under section 17A.
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-
section (2), the secured creditor may take recourse to one or more of the following measures to
recover his secured debt, namely:— (a) take possession of the secured assets of the borrower
including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the business of the borrower including the right to transfer by
way of lease, assignment or sale for realising the secured asset: Provided that the right to transfer
by way of lease, assignment or sale shall be exercised only where the substantial part of the
business of the borrower is held as security for the debt: Provided further that where the
management of whole of the business or part of the business is severable, the secured creditor shall
take over the management of such business of the borrower which is relatable to the security for
the debt;] (c) appoint any person (hereafter referred to as the manager), to manage the secured
assets the possession of which has been taken over by the secured creditor; (d) require at any time
by notice in writing, any person who has acquired any of the secured assets from the borrower and
from whom any money is due or may become due to the borrower, to pay the secured creditor, so
much of the money as is sufficient to pay the secured debt.

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(5) Any payment made by any person referred to in clause (d) of sub-section (4) to the secured
creditor shall give such person a valid discharge as if he has made payment to the borrower.
(5A) Where the sale of an immovable property, for which a reserve price has been specified, has
been postponed for want of a bid of an amount not less than such reserve price, it shall be lawful
for any officer of the secured creditor, if so authorised by the secured creditor in this behalf, to bid
for the immovable property on behalf of the secured creditor at any subsequent sale.
(5B) Where the secured creditor, referred to in sub-section (5A), is declared to be the purchaser of
the immovable property at any subsequent sale, the amount of the purchase price shall be adjusted
towards the amount of the claim of the secured creditor for which the auction of enforcement of
security interest is taken by the secured creditor, under sub-section (4) of section 13.
(5C)The provisions of section 9 of the Banking Regulation Act, 1949 (10 of 1949) shall, as far as
may be, apply to the immovable property acquired by secured creditor under sub-section (5A).]
(6) Any transfer of secured asset after taking possession thereof or takeover of management under
sub-section (4), by the secured creditor or by the manager on behalf of the secured creditor shall
vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer
had been made by the owner of such secured asset.
(7) Where any action has been taken against a borrower under the provisions of sub-section (4),
all costs, charges and expenses which, in the opinion of the secured creditor, have been properly
incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the
money which is received by the secured creditor shall, in the absence of any contract to the
contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and
expenses and secondly, in discharge of the dues of the secured creditor and the residue of the
money so received shall be paid to the person entitled thereto in accordance with his rights and
interests.

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(8) Where the amount of dues of the secured creditor together with all costs, charges and expenses
incurred by him is tendered to the secured creditor at any time before the date of publication of
notice for public auction or inviting quotations or tender from public or private treaty for transfer
by way of lease, assignment or sale of the secured assets,— (i) the secured assets shall not be
transferred by way of lease assignment or sale by the secured creditor; and (ii) in case, any step
has been taken by the secured creditor for transfer by way of lease or assignment or sale of the
assets before tendering of such amount under this sub-section, no further step shall be taken by
such secured creditor for transfer by way of lease or assignment or sale of such secured assets.
(9) Subject to the provisions of the Insolvency and Bankruptcy Code, 2016, in the case of financing
of a financial asset by more than one secured creditors or joint financing of a financial asset by
secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred
on him under or pursuant to sub-section (4) unless exercise of such right is agreed upon by the
secured creditors representing not less than 2[sixty per cent.] in value of the amount outstanding
as on a record date and such action shall be binding on all the secured creditors: Provided that in
the case of a company in liquidation, the amount realised from the sale of secured assets shall be
distributed in accordance with the provisions of section 529A of the Companies Act, 1956 (1 of
1956): Provided further that in the case of a company being wound up on or after the
commencement of this Act, the secured creditor of such company, who opts to realise his security
instead of relinquishing his security and proving his debt under proviso to sub-section (1) of section
529 of the Companies Act, 1956 (1 of 1956), may retain the sale proceeds of his secured assets
after depositing the workmen's dues with the liquidator in accordance with the provisions of
section 529A of that Act: Provided also that liquidator referred to in the second proviso shall
intimate the secured creditor the workmen's dues in accordance with the provisions of section
529A of the Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be
ascertained, the liquidator shall intimate the estimated amount of workmen's dues under that
section to the secured creditor and in such case the secured creditor may retain the sale proceeds
of the secured assets after depositing the amount of such estimate dues with the liquidator:
Provided also that in case the secured creditor deposits the estimated amount of workmen's dues,
such creditor shall be liable to pay the balance of the workmen's dues or entitled to receive the

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excess amount, if any, deposited by the secured creditor with the liquidator: Provided also that the
secured creditor shall furnish an undertaking to the liquidator to pay the balance of the workmen's
dues, if any.
Explanation.—For the purposes of this sub-section,— (a) “record date” means the date
agreed upon by the secured creditors representing not less than 2[sixty per cent.] in value of the
amount outstanding on such date; (b) “amount outstanding” shall include principal, interest and
any other dues payable by the borrower to the secured creditor in respect of secured asset as per
the books of account of the secured creditor.
(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of the secured
assets, the secured creditor may file an application in the form and manner as may be prescribed
to the Debts Recovery Tribunal having jurisdiction or a competent court, as the case may be, for
recovery of the balance amount from the borrower.
(11) Without prejudice to the rights conferred on the secured creditor under or by this section,
secured creditor shall be entitled to proceed against the guarantors or sell the pledged assets
without first taking any of the measured specifies in clauses (a) to (d) of sub-section (4) in relation
to the secured assets under this Act.
(12) The rights of a secured creditor under this Act may be exercised by one or more of his officers
authorised in this behalf in such manner as may be prescribed.
(13) No borrower shall, after receipt of notice referred to in sub-section (2), transfer by way of
sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets
referred to in the notice, without prior written consent of the secured creditor.
SECTION 17. Application against measures to recover secured debts.—

(1) Any person (including borrower), aggrieved by any of the measures referred to in sub-section
(4) of section 13 taken by the secured creditor or his authorised officer under this Chapter, [may
make an application along with such fee, as may be prescribed, to the Debts Recovery Tribunal
having jurisdiction in the matter within forty-five days from the date on which such measure had
been taken:

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Provided that different fees may be prescribed for making the application by the borrower
and the person other than the borrower.
Explanation.—For the removal of doubts, it is hereby declared that the communication of
the reasons to the borrower by the secured creditor for not having accepted his representation or
objection or the likely action of the secured creditor at the stage of communication of reasonsto
the borrower shall not entitle the person (including borrower) tomake an application to the Debts
Recovery Tribunal under this sub-section.
(1A) An application under sub-section (1) shall be filed before the Debts Recovery Tribunal within
the local limits of whose jurisdiction— (a) the cause of action, wholly or in part, arises; (b) where
the secured asset is located; or (c) the branch or any other office of a bank or financial institution
is maintaining an account in which debt claimed is outstanding for the time being.]
(2) The Debts Recovery Tribunal shall consider whether any of the measures referred to in sub-
section (4) of section 13 taken by the secured creditor for enforcement of security are in accordance
with the provisions of this Act and the rules made there under.
(3) If, the Debts Recovery Tribunal, after examining the facts and circumstances of the case and
evidence produced by the parties, comes to the conclusion that any of the measures referred to in
sub-section (4) of section 13, taken by the secured creditor are not in accordance with the
provisions of this Act and the rules made thereunder, and require restoration of the management
or restoration of possession, of the secured assets to the borrower or other aggrieved person, it
may, by order,— (a) declare the recourse to any one or more measures referred to in sub-section
(4) of section 13 taken by the secured creditor as invalid; and (b) restore the possession of secured
assets or management of secured assets to the borrower or such other aggrieved person, who has
made an application under sub-section (1), as the case may be; and (c) pass such other direction
as it may consider appropriate and necessary in relation to any of the recourse taken by the
secured creditor under sub-section (4) of section 13.
(4) If, the Debts Recovery Tribunal declares the recourse taken by a secured creditor under sub-
section (4) of section 13, is in accordance with the provisions of this Act and the rules made
thereunder, then, notwithstanding anything contained in any other law for the time being in force,

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the secured creditor shall be entitled to take recourse to one or more of the measures specified
under sub-section (4) of section 13 to recover his secured debt.
(4A) Where— (i) any person, in an application under sub-section (1), claims any tenancy or
leasehold rights upon the secured asset, the Debt Recovery Tribunal, after examining the facts of
the case and evidence produced by the parties in relation to such claims shall, for the purposes of
enforcement of security interest, have the jurisdiction to examine whether lease or tenancy,— (a)
has expired or stood determined; or (b) is contrary to section 65A of the Transfer of Property Act,
1882 (4 of 1882); or (c) is contrary to terms of mortgage; or (d) is created after the issuance of
notice of default and demand by the Bank under sub-section (2) of section 13 of the Act; and (ii)
the Debt Recovery Tribunal is satisfied that tenancy right or leasehold rights claimed in secured
asset falls under the sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) of clause
(i), then notwithstanding anything to the contrary contained in any other law for the time being
in force, the Debt Recovery Tribunal may pass such order as it deems fit in accordance with the
provisions of this Act.
(5) Any application made under sub-section (1) shall be dealt with by the Debts Recovery
Tribunal as expeditiously as possible and disposed of within sixty days from the date of such
application: Provided that the Debts Recovery Tribunal may, from time to time, extend the said
period for reasons to be recorded in writing, so, however, that the total period of pendency of the
application with the Debts Recovery Tribunal, shall not exceed four months from the date of
making of such application made under sub-section (1).
(6) If the application is not disposed of by the Debts Recovery Tribunal within the period of four
months as specified in sub-section (5), any part to the application may make an application, in
such form as may be prescribed, to the Appellate Tribunal for directing the Debts Recovery
Tribunal for expeditious disposal of the application pending before the Debts Recovery Tribunal
and the Appellate Tribunal may, on such application, make an order for expeditious disposal of
the pending application by the Debts Recovery Tribunal.
(7) Save as otherwise provided in this Act, the Debts Recovery Tribunal shall, as far as may be,
dispose of the application in accordance with the provisions of the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993 (51 of 1993) and the rules made there under.

RENAISANCE UNIVERSITY
SCHOOL OF LAW
2022
LAW OF INSURANCE NOTES
UNIT 4: General principles of Law of Insurance
SYNOPSIS
• Introduction
• Definition of insurance
• Features of insurance
• Advantages of insurance
• Benefits of insurance
• Classification of insurance
• Principles of insurance
• Insurance is a contract-
• Insurance – origin
• SPECIFIC PRINCIPLES OF INSURANCE
➢ Principle of indemnity
➢ Principle of subrogation
➢ Principle of contribution
➢ Principle of mitigation of loss

INTRODUCTION
An Introduction: Insurance may be described as a social device to reduce or eliminate risks or loss to life and
property. It is a provision which a prudent man makes against inevitable contingencies, loss or misfortune.
Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person
can avail this protection by paying premium to an insurance company.
A pool is created through contributions made by persons seeking to protect themselves from common risk.
Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured
in case of happening of an uncertain event is paid out of this pool. Insurance works on the basic principle of
risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of
people exposed to risk of similar type.
DEFINITION OF INSURANCE
Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in
exchange for consideration known as premium and promises to pay a fixed sum of money to the other party
on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or
to indemnify the other party on happening of an uncertain event in case of general insurance.
The party bearing the risk is known as the ‘insurer’ or the ‘assurer’ and the party whose risk is covered is
known as the ‘insured’ or ‘assured’.
RISK- The concept is closely related to an uncertainty. Risk is defined as an uncertainty, related to the
occurrence of a loss.
Important features of risk are-
• unpredictable,
• uncertainty about the future event,
• deviation from desired outcome &
• Not favorable.
In a competitive economy, risk bearing is essential. Since every one of us is exposed to some or other risk,
the best way is to accept the presence of risk and manage the affairs without being affected.
FEATURES OF INSURANCE
1. Principle of indemnity.
2. Pooling of risk principle.
3. Principle of spreading the risk.

ADVANTAGES OF INSURANCE
• Losses if occurred are compensated by insurer.

• Uncertainty is reduced and business can be transacted without having the fear of losing its
infrastructure and capabilities.
• Insurance premium is business expenditure. It reduces your income as well as income tax liability.
• In the case of certain insurances, especially in the nature of life insurance, mediclaim insurance etc.,
(income tax concessions are available.)
• You can also avail certain value added services from insurer like loss control advice, exposure
analysis, etc.
BENEFITS OF INSURANCE
• It is one of the techniques of risk management process.

• It reduces the fear and anxiety in the mind of an individual and also a business unit.
• It is compensatory in nature. It restores the insured position.
• When property or person is brought the umbrella of insurance cover, it adds to the credit worthiness.
CLASSIFICATION OF INSURANCE
There are two type of insurance namely life and non-life insurance. In life insurance, the protection is given
for the life of a human being while in the case of General (non-life) insurance the protection is extended for
assets and properties.
LIFE INSURANCE GENERAL INSURANCE
This is not a contract of indemnity. This is essentially an arrangement of indemnity

Because it is very difficult to ascertain the It is easy to ascertain the economic value of an
financial or monetary value of human life. asset.
Intention may be Risk cover and or savings. Intention is only to cover the risk.
It is life time contract. It is yearly contract, subject to renewal.
Death is certain, only timing is uncertain. Event is totally uncertain.
Earning capacity of the insured is relevant. Economic value of asset is relevant.
Premium is based on sum insured, age at the It is not relevant.
time of entry.
Premium is calculated with reference to Premium is calculated with reference to
mortality table. experience of past losses, probable risk factors
and fixed tariff plans.

PRINCIPLES OF INSURANCE
General principles:
• Offer- Insurance offer is made mostly in the shape of proposal form.

• Acceptance- As per provisions of the Insurance Act, 1938, the acceptance is subject to payment
of premium.
• Free consent- Mere consent is not sufficient for an Insurance contract. It means that the person
to whom offer was made has understood that, full and correct disclosure of all the material facts
has been made to him and then he has taken a decision to accept the offer without being compelled
by other person. Such consent is called as free consent. In absence of this free consent, the party
to a contract may repudiate the same.
• Consideration- consideration means “something in return”, in simple words something must
pass on from each party to another. In terms of Insurance contract, premium is paid by the insured
to insurer. In return, insurer gives a promise to compensate the insured at the happening of some
event. In fact in practice, the insurance protection starts only when the premium is paid. As per
section 64 VB of the Insurance Act, prior payment of premium is mandatory for getting the
insurance cover.
• Competency of the parties- competency should not be confused with capability. Under Indian
contract Act, a person is said to be competent to enter contract with other person if, he has attained
the age of majority i.e., he is not minor, not of unsound mind and not disqualified from entering
into contract due to any legal provision or law of the land.
• Lawful object- The subject matter of the Insurance contract must be for a lawful purpose. The
contract is said to be lawful unless:
➢ It is forbidden by law,
➢ Is fraudulent,
➢ It is of such nature that if permitted, would defeat the provisions and intention of the law
or court regards this as an immoral or is opposed to public policy. Eg: The goods which
are smuggled or stolen cannot be insured.
• Other legal formalities- The contract otherwise complete and valid in all other aspect must also
comply with any other formalities. E.g. - All policy documents must be duly stamped in
accordance with the provisions of the Indian stamp Act.
INSURANCE IS A CONTRACT-
“A contract is an agreement which is enforceable by law.” So we can say that:

AGREEMENT+ ENFORCEABILITY = CONTRACT
Enforceability means, if one of the parties violates the terms and conditions, the other party has a
right to take a legal action. Thus a contract essentially creates a set of mutual rights and obligations
between the parties, if one of the parties fails to fulfill his obligation, under a contract, the contract is
said to be breached. In such circumstance, the other party may knock the doors of court and ask for
relief.
INSURANCE – ORIGIN & ITS TYPES:
Insurance in the modern form originated in the Mediterranean during 13/14th century. The earliest
reference to insurance has been found in Babylonia, the Greeks and the Romans. The use of insurance
appeared in the account of North Italina merchant banks who then dominated the international trade
in Europe that time. Marine insurance is the oldest form of insurance followed by life insurance
and fire insurance. The patterns that have been used in England followed in other countries also in
these kinds of insurance.
CLASSIFICATION OF CONTRACT OF INSURANCE
Insurance can be classified into the following categories:-
• On the basis of nature of insurance:-

• Life insurance
• Fire insurance
• Marine insurance
• Social insurance, and (Sickness, Death, Disability, Old age insurance).
• Miscellaneous insurance (Vehicle, personal accident, Burglary, crop, cattle, medical, jewelry
insurance etc.).

SPECIFIC PRINCIPLES OF INSURANCE
• Principle of utmost good faith: -- Insurance contract are based on mutual trust and confidence
between the Insured and Insurer. The contracting parties must rely on each other’s honesty.
“UBERRIMAE FIDES” is the central theme on which Insurance contract are based. Basically
Insurance contracts are different from commercial contracts in which tangible goods ate dealt
under sale of Goods Act. In the case of Insurance contract, since the product is intangible, the
required facts which relate to the proposer and which are very personal are known only to him.
Both parties need to have utmost good faith in each other, which further implies full, true and
correct disclosure of all material facts by both parties to the contract of Insurance. The term
“Material” means all those facts which has a significant bearing and impacts on the two most
important factors namely Risk involved and its severity and also amount of premium. The breach
of utmost good faith arises due to misrepresentation, concealment of material facts etc.
• Principle of Insurable Interest: -- Basically insurance is a cover or protection against the losses
that may arise from a risk. Risk is treated as Insurable when it is capable of financial
measurement, actual/ statistical estimation of that. Insurable Interest in general it means that the
policy holder must have a pecuniary or monetary interest in the subject matter of Insurance. In
damage or loss to the subject matter must result in financial loss to the policy holder. Thus, there
has to be presence of a property, interest, right, life, or a potential liability, which is capable of
being insured.
• The presence of pecuniary interest is not applicable in the case of life Insurance.
Thus in the following cases of life Insurance, insurable interest need not be established.
a) Own life.
b) Spouse life.
c) Children’s life.
• In the following cases of life insurance, the extent of insurable interest/ monetary interest must
be proved-
a) Policies taken by employer in respect of employees.
b) Insurance taken by a creditor for the life of his debtor.
c) Insurance taken by a partner of a firm for the life of another partner.
d) Insurance taken by a Guarantor or a surety for the life of a debtor.
• The time when Insurable interest must be present, is as follows for different type of Insurance-

a) Property Insurance—Insurable interest must be present at the time of inception
and also at the time of loss.
b) Life insurance—Insurance interest must be present at the time of inception.
c) Marine insurance—Insurable interest must be present when the loss occurs.

PRINCIPLE OF INDEMNITY
The basic principle of Insurance is the compensation of the loss and not to earn profit. This principle is
applied to all other contracts of insurance except life Insurance, personal accident and sickness
Insurance. This principle is specially applied to fire, marine burglary or any other policy of indemnity.
Under the indemnity contract, the insurer undertakes to “indemnify “the insured agenized loss suffered
in the cases of non-life Insurance the Insurance Company shall be liable to pay only up to the extent of
loss occurred and not more than that. Its basic intention is to restore the position of the insured and to
keep him in the same position which existed immediately before the loss. In another word the intention
of this principle is to compensate and restore the insured and nothing more. In brief, this principle of
indemnity applies to all types of insurance contracts except Life Insurance. In the cases of fire and
marine Insurance where there is a total loss of the subject matter, the insured is indemnified for the total
loss, but subject to the limit of actual loss. In case of Average clause stated in the policy the indemnity
is worked out in proportion to insured sum and actual sum value of the subject matter.
Method of Indemnity
• Cash payment (most popular way)

• Replacement (Replacement of article itself/ no payment)
• Repairing of the article to the satisfaction of the insured, it is common in motor car, motor cycle,
scooter etc.
• Re-installment/Reconstruction (followed in fire insurance)
Once the insured is indemnified by any method, the insured is required to surrender all his rights relating
to the loss or damages to the insurer.
PRINCIPLE OF SUBROGATION
Basically this principle is applicable only in Non- life Insurance and with specific reference to fire and
marine Insurance. Subrogation means, after an event occurs which resulted in the loss to insured, and
insurer has paid the claim to insured,, then the insurance company i.e. insurer get a right to step into
shoes of the insured. Thus, after getting the claim, the insured releases all his rights over the subject
matter of insurance, in favor of Insurance Company.
PRINCIPLE OF CONTRIBUTION
Insurance companies are in a position to underwrite a liability on its own. However, sometimes the
value of a subject matter is so high, that for one insurance company it becomes difficult to assume so
much risk. In such situations, instead of avoiding the business, the Ins. Co. underwrites a part of
business. A part of the high value of asset is insured by a single insurer and the remaining part is insured
by other companies. At the time of claim the formula of contribution is applied in such cases.

The Insured has a right to recover the entire amount from one Insurance company on a priority basis.
After settling the entire claim, one insurance co. has a right to claim contribution from other Ins.
Companies. The concept of contribution simply means that finally the loss has to be shared by Insurance
companies, in the proportion of their underwriting.
Following conditions must prevail for invocation of principle of contribution:-
All the policies must be in force as on the date of event causing loss.
The insured (owner of asset) must be same.
The risk insured against (perils) must be the same in all policies.
The insured asset must be common in all policies.
Calculation of contribution: - The following formula is applicable to calculate the contribution by each:
Contribution= Sum assured with individual insurer X Total loss

Total sum assured
Example:-
A insures a building agenized fire with three fire insurance companies X,Y and Z with Rs. 30,000,
Rs. 40,000, and Rs. 30, 000respectively. A fire took place during the period of insurance and a total
loss of Rs. 60,000 was calculated. The contribution from X, Y, and Z shall be as under.
Calculation of X company= 30,000X 60,000/1, 00,000=18,000 Calculation of Y

company= 40,000X 60,000/1, 00,000=24,000 Calculation of Z company= 30,000X
60,000/1, 00,000=18,000
In case company X has made the payment of claim for Rs. 60.000 to A, X has right to claim Rs. 24,000 and
Rs. 18,000 from Y and Z respectively.
PRINCIPLE OF CAUSE PROXIMA OR PROXIMATE CAUSE:

The literal meaning of this concept is the look at the immediate and direct cause (peril) which resulted
into loss.
The cause due to which the subject matter of Insurance suffers losses may be classified into two parts-
INSURED PERILS EXCLUDED PERILS

The Insured perils are those for the protection of which, the subject matter is insured and in case of any
event happening during the period of Insurance gives loss to the subject matter, the Insurer can be made
liable. The perils that fall outside insured perils are called excluded perils. The Insurer cannot be made
liable for any type of loss that happens due to other causes.
Where the loss happened to the subject matter of insurance directly due to insured peril, the insurer can
be made liable for the payment of claim. In such situations, no dispute arises. But, the loss is caused by
insured perils and others, both simultaneously or one after another, it becomes difficult to lay the insurer
liable for the indemnity. In such a situation, it has to be seen that which one of those perils is more
important, effective and powerful, because of which the damages caused to the subject matter. The
causes that put no effect on the happening of losses, is known as ‘remote’ causes. This means proximate
cause is the nearest cause.
Proximate does not mean “nearest in time”. The time that elapses between cause and result may be long
or short, but will not affect the cause and effect. The cause which is truly proximate is that which is
proximate in efficiency. It is not the latest, but direct, dominant, operative and efficient cause.
Fire insurance and proximate cause –
In fire insurance, the insurer is liable to indemnity for the following losses:
• Falling of walls of the building due to fire in the building.

• Falling of the building by the fire brigade or throwing furniture from the building in a bid to
control the fire.
• The loss due to sprinkling of water for putting out the fire.
Marine insurance and proximate cause–
In Marine insurance, the insurer is liable to indemnity for the following losses:
• Where the loss is caused by insured peril irrespective of the negligence of captain of the ship or
of the crew.
• Whether the proximate cause was ‘exceeding time limit’ and as a result of any insured peril.
• Where the loss was due to breakage, depreciation, pilferage or bad smell of rat or failure of any
machinery.
Determination of the proximate cause-while determining the proximate cause for the loss, care be given
to the following-
• Where the loss is caused by a single cause, this is considered as proximate cause. If the
proximate cause is included in the insured perils, the insurer is liable for the payment of claim.

(A fire insurance for a building)
• Where the loss is caused by concurrent reasons that had happened altogether that are not the
excluded perils, the insurer is liable to the losses caused by concurrent causes. (A heart patient
dies due to accident).
• In case any loss is caused by the joint action of insured and excluded perils, there will not be
any liability on the part of the insurer. (Insurance policy for theft of household goods- Things
are gone by theft due to civil disturbance in the locality.
• In case any loss is caused by joint action of insured perils and excluded perils the loss happened
from each type of peril can be separated, the insurer shall be liable for the loss caused by insured
perils.
• In case any loss is happened due to the effect of various causes happened one after another and
the main cause is among the insured perils, the insurer liability exists.
• In case any line of excluded perils were behind the loss of the subject matter of Insurance, the
insurer is not liable to indemnity.
PRINCIPLE OF MITIGATION OF LOSS

This principle places a duty on the part of the insured to make every effort, and to take all such steps,
as a man of ordinary prudence to mitigate or minimize the loss in the event of some mishap to the
insured property.
This makes the insured be more careful or active tom protect the subject matter from any possible loss.
If he fails to act in such a manner, the insurer can avoid the claim of the insured, on the ground of
negligence on the part of insured.
In acting vigilantly in saving the property, the insured is not bound to risk his life in doing all
precautions as a man of ordinary prudence; the insurer shall be liable to bear the entire loss resulting
from the peril insured against.
DOUBLE INSURANCE AND REINSURANCE
Double insurance refers to the method of getting insurance of same subject matter with more than one
insurer or same insurer under different polices. Double insurance is possible in all type of insurance
contracts. A person can insure his life in different policies for different sums.
In life insurance the assured can claim the sum assured with different polices on the maturity or to his
nominee after his death. This is possible in life insurance because life insurance is not indemnity
insurance.

In indemnity insurance such as fire and marine, only the real loss can be claimed by the insured or only
the actual loss can be indemnified. In other words, the total claim cannot be exceeded the real loss,
payable proportionate by each insurer. If any one of the insurers pays more than his shares, he is entitled
to a contribution from other insurers.
In case the total loss is less than the value of insurance policies issued by the different insurance
companies, the insured can claim in full against all the policies.
Features of Double insurance
• More than one policy can be obtained against the same subject matter (life).
• All the policies relate to the same subject matter.
• The risk covered in all the policies is the same.
• The risk in all the policies is of the same period.
• The insured has equal insurable interest in the subject matter.
• The policies can be obtained either from the same insurer or from different insurers.
• Double insurance is beneficial in life insurance only.
• In case of life insurance, the money from all the policies can be claimed by the assured or his
nominee.
• One can get insurance policies issued on a subject matter more than its value.
RE-INSURANCE
It is a contract between two or more companies by which a portion of risk of loss is transferred to
another insurance company. This happens when an insurance company has undertaken more risk
burden on its shoulders than its bearing capacity. Double insurance is, thus, a device to reduce the risk.
By transferring the risk to any other insurance company, the insurer reduces his liability. Reinsurance
does not affect the contract between the original insurer and the assured. Reinsurance can be restored
in all types of insurance contracts.
Characteristics of Reinsurance:-
• It is an insurance contract between two insurance companies.

• In reinsurance, the insurer transfers the risk beyond the limit of his capacity to another insurance
company.
• The relationship of the assured remains with the original insurer only.
• It is a contract of indemnity.
• It does not affect the right of assured.
• The fundamental principles of insurance are applicable in re-insurance also.

• The original insurer cannot do re-insurance more than the insured sum.
• Re-insurer is bound only to those liabilities for which the original insurer is legally liable.
• Re-insurance can be possible in all types of insurance.

LIFE INSURANCE
NATURE AND SCOPE

Life insurance may be defined as a contract in which the insurer, in consideration of a certain premium,
either in a lump sum or by other periodical payments, agrees to pay the assured, or to the person for
whose benefit the policy is taken, the assured sum of money, on happening of a specified event
contingent on the human life.
In another word Life insurance is a corporate effort to provide security against economic hazards of
man. It is a contract between the insurer and the insured to pay a stated sum of money, for a
consideration in the form of premium, on happening of any future event on the life of the assured.
In the word of Huebner and Black-

“Life insurance is a contract whether for a specified consideration, called premium,
one party (the insurer) agrees to pay to the other (the insured) or a beneficiary, a
defined amount upon the death, disablement or some other specified event”
Characteristics of life insurance
• It is a contract between the insurer and insured.

• Insurance of human hazards is covered by life insurance policy.
• It is a promise to pay the money insured in consideration to a premium.
• The insurance premium is sometimes paid at a lump sum together or periodically.
• A default in remitting the premium may cause discharge of the insurance contract and the
insurer shall be relieved from his liability.
• The money insured is paid by the insurer to the insured or assignee on happening of the event
specified in the policy.
• The proposal for affecting an insurance policy is executed in the prescribed form.
• The policy is signed by the insurer only.
A contract of life insurance, as in other forms of insurance, requires that the assured must have at the
time of the contract an insurable interest in his life upon which the insurance is affected. Insurable
interest has only to be proved at the date of the contract of life insurance, and not necessarily present at
the time when the policy falls due.

A person can assure in his own life and every part of it, and can insure for any sum whatsoever, as he
likes. Similarly, a wife has an insurable interest in her husband and vice-versa. However, mere natural
love and affection is not sufficient to constitute an insurable interest. It must be shown that the person
affecting an assurance on the life of another is so related to that other person as to have a claim of
support.
For example, a sister has an insurable interest in the life of a brother who supports her.
Even a person not related to the other can have insurable interest on that other person.
For example- a creditor has insurable interest in the life of his debtor to the extent of the debt.
LIFE INSURANCE POLICIES
Life Insurance is an attempt to meet the varying wants of community, it has different forms.
• Duration of Insurance: - such as whole life policies, endowment policies and term policies.
• Profit sharing: such as profit policies or non- participating policies and with profit policies, or
participating policies.
• Payment of premium: - such as Guaranteed policies and annuity policies.
• Number of assured: - such as single life policies and Joint life policies.
On the basis of patterns of policies, the LIC has been issuing different types of insurance policies. The
insured has the choice to select from these policies according to his requirement.
The LIC provides the following categories of life policies, they are:-
• The whole life policies/ plans

• The endowment Assurance policies/ plans
• The double endowment policies/ plans
The types of whole life policies are as follows:-
• The whole life policies ( for whole life, it is issued for not less than Rs.10,000/ , assured to pay
premium money till the age of 80 years or 35 years of the policy insured, whichever is later)
• The limited payment whole life policy
• The single premium limited payment whole life policy ( sum assured is payable by a single
premium, assured sum payable on death of the assured to the nominee or the LR)
• The convertible whole life assurance policy ( option of conversion after 5 years to any other
policy)

ENDOWMENT ASSURANCE POLICIES/ PLANS
This is the most popular form of life Assurance since it not only makes provisions for the family of the
life assured in the event of his early death, but also assures a lump sum at any desired age. The amount
assured, if not paid by reason of his early death, becomes payable at the end of the endowment term
when it may be invested to provide an annuity during the remainder of his life or in any other way he
may think most suitable at the time.
Premiums are usually payable for a term of years equal to the endowment term or until death, if it
occurs within this period, but they may be limited to a shorter term of years, if so desired.
However, premium paying term will be restricted to maximum of 25 years for endowment without
profit plan.
GENERAL INSURANCE
Concept of General Insurance:
General Insurance provides much needed protection against unforeseen events such as accidents,
illness, fire; burglary etc. unlike life insurance, General insurance is not meant to offer returns but is a
protection against contingencies. Almost everything that has a financial value in life and has a
probability of getting lost, stolen or damaged can be covered through General insurance policy.
Property (both movable and immovable) vehicle, cash, household goods, health, dishonesty and also
one’s liability towards others can be covered under General insurance policy. Under certain acts of
parliament, some types of insurance like motor insurance and public liability insurance have been made
compulsory.
Meaning:
General insurance means managing risk against financial loss arising due to fire, marine or
miscellaneous events as a result of contingencies, which may or may not occur.
General insurance means to: cover the risk of the financial loss from any natural calamities viz. flood,
fire, earthquake, burglary etc., i.e. the events which are beyond the control of the owner the goods for
the things having insurable interest with the utmost good faith by declaring the facts about the
circumstances and the products by paying the stipulated sum, a premium and not having a motive of
making profit from the insurance contract.

General rules regarding General insurance:-
• In the case of mis-discription, mis-presentation or mis-declaration, or non- discloser of any

material facts the insurance policy shall be void and the entire premium paid by the insured may
be forfeited by the insurance company.
• The insured is bound to take all reasonable steps to safe guard the property insured against any
loss or damage by observing with all statuary or other regulations.
• If any claim under the policy may be in any respect fraudulent or if any fraudulent means are
used by the insured to obtain any benefit under the insurance policy, all the benefits under the
insurance policy may be forfeited.
• The loss or damage or liability or expenses whether direct or indirect occasion by happening
through or arising from any consequences of war, invasion, act of foreign enemy, civil war, loot
and loss or damage caused by depreciation or wear and tear, will not be covered under general
insurance.
FIRE INSURANCE
Fire insurance is a contract under which the insurer in return for a consideration (premium) agrees to
indemnify the insured for the financial loss which the later may suffer due to destruction of or damage
to property or goods, caused by fire, during a specified period. The contract specifies the maximum
amount, agreed to by the parties at the time of the contract, which the insured can claim in case of loss.
This amount is not, however, the measure of the loss. The loss can be ascertained only after the fire has
occurred. The insurer is liable to make good the actual amount of loss not exceeding the maximum
amount fixed under the policy.
A fire insurance policy cannot be assigned without the permission of the insurer because the insured
must have insurable interest in the property at the time of contract as well as at the time of loss.
The insurable interest in goods may arise out on account of (1) ownership (2) possession (3) contract.
A person with a limited interest in a property or goods may insure them to cover not only his own
interest but also the interest of others in them.
Under the fire insurance, the following persons have insurable interest in the subject matter:-
• Owner
• Mortgagee

• Pawnee
• Pawn broker
• Official receiver or assignee in insolvency proceedings
• Warehouse keeper in the goods of customer
• A person in lawful possession e.g. common carrier, wharfinger, commission agent.
The term ‘Fire’ is used in its popular and literal sense and means a fire which has ‘broken bounds’.
‘Fire’ which is used for domestic or manufacturing purposes is not fire as long as it is confined within
usual limits. In the fire insurance policy, ‘Fire means the production of light and heat by combustion or
burning. Thus, fire, must result from actual ignition and resulting loss must be proximately caused by
such ignition. The phrase’ loss or damage by fire’ also includes the loss or damage caused by efforts to
extinguish fire.
The types of losses covered by fire insurance are:-
• Goods spoiled or property damaged by water used to extinguish the fire.

• Pulling down of adjacent premises by the fire brigade in order to prevent the progress of flame.
• Breakage of goods in the process of their removal from the building where fire is raging.
The types of losses not covered by a fire insurance policy are:-
• Loss due to fire caused by earthquake, invasion, act of foreign enemy, hostilities or war, civil
strife, riots mutiny, martial law, military rising.
• Loss caused by subterranean (underground) fire.
• Loss caused by burning of property by border of any public authority.
• Loss by theft during or after the occurrence of fire.
• Loss of damage to property caused by its own fermentation or spontaneous combustion.
• E.g. exploding of a bomb due to an inherent defect in it.
• Loss or damage by lightening or explosion is not covered unless these cause actual ignition
which spread into fire.
A claim for loss by fire must satisfy the following conditions:-
• The loss must be caused by actual fire or ignition and not just by high temperature.
• The proximate cause of loss should be fire.
• The loss or damage must relate to subject matter of policy.

• The ignition must be either of the goods or of the premises where goods are kept.
• The fire must be accidental, not intentional. If the fire is caused through a malicious or deliberate
act of the insured or his agents, the insurer will not be liable for the loss.
MARINE INSURANCE
INTRODUCTION
Marine insurance is the oldest form of Insurance. In India till 1963, marine insurance was governed by
the provisions of the British Act, the contract Act and certain provisions of the Insurance Act. The law
relating to marine insurance has been codified by the marine insurance Act, 1963 which came into force
on 1st august 1963. The Act contains 92 sections and a schedule containing a form of marine insurance
policy and the rules of construction.
Contract of “marine insurance” means a contract of marine insurance as defined by section3.
A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the
assured, in the manner and to the extent agreed, against losses incidental to marine adventure. There is
a marine adventure when any insurable property is exposed to marine perils i.e. perils consequent to
navigation of the sea.
The term ‘perils of the sea’ refers only to accidents or casualties of the sea, and does not include the
ordinary action of the winds and waves. Besides, marine perils include, fire, war perils, pirates, seizures
and jettison etc.
“Freight” includes the profit derivable by a ship-owner from the employment of his ship to carry his
own goods or other movables, as well as freight payable by a third party, but does not include passage
money.
“Insurable property” means any ship, goods or other movable property which are exposed to maritime
perils.
“Marine adventure” includes any adventure where:
• Any insurable property is exposed to maritime perils;

• The earning or acquisition of any freight, passage money, commission, profit or other pecuniary
benefit, or the security for any other advances, loans or disbursements is endangered by
exposure of insurable property to maritime perils,

• Any liability to a third party may be incurred by the owner of, or other person interested in or
responsible for, insurable property by a reason of maritime perils.
“Maritime Perils” Means the perils consequent on,or incidental to, the navigation of the sea, that is to
say, perils of the sea, fire, war perils, pirates, rowers, thieves, captures, seizures, restraints, and
detainments of princes and peoples, jettisons, barratry and any other perils which are either of the like
kind or may be designed by the policy.
“Movables” Means any movable tangible property other than the ship, and includes money, valuable
securities and other documents.
“Ship” Includes every description of vessel used in navigation “Suit” Includes counter-claim and set-
off
“Policy” Means a marine policy. An instrument containing the contract of marine insurance. It contains
terms and conditions on which contract are entered between the two parties. Section 24 of the act
provides for the same. It is concluded when proposal is accepted by the insurer; it is deemed to be
accepted when ship or covering note of the instrument of contract is issued through undersigned section
23. Contract of “marine insurance” means a contract of marine insurance as defined by section3.
A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the
assured, in the manner and to the extent agreed, against losses incidental to marine adventure. There is
a marine adventure when any insurable property is exposed to marine perils i.e. perils consequent to
navigation of the sea.
The term ‘perils of the sea’ refers only to accidents or casualties of the sea, and does not include the
ordinary action of the winds and waves. Besides, marine perils include, fire, war perils, pirates, seizures
and jettison etc.
“Freight” includes the profit derivable by a ship-owner from the employment of his ship to carry his
own goods or other movables, as well as freight payable by a third party, but does not include passage
money.
“Insurable property” means any ship, goods or other movable property which are exposed to maritime
perils.
“Marine adventure” includes any adventure where:
Any insurable property is exposed to maritime perils;

The earning or acquisition of any freight, passage money, commission, profit or other pecuniary benefit,
or the security for any other advances, loans or disbursements is endangered by exposure of insurable
property to maritime perils,
Any liability to a third party may be incurred by the owner of, or other person interested in or
responsible for, insurable property by a reason of maritime perils.
“Maritime Perils” Means the perils consequent on,or incidental to, the navigation of the sea, that is to
say, perils of the sea, fire, war perils, pirates, rowers, thieves, captures, seizures, restraints, and
detainments of princes and peoples, jettisons, barratry and any other perils which are either of the like
kind or may be designed by the policy.
“Movables” Means any movable tangible property other than the ship, and includes money, valuable
securities and other documents.
“Ship” Includes every description of vessel used in navigation “Suit” Includes counter-claim and set-
off
“Policy” Means a marine policy. An instrument containing the contract of marine insurance. It contains
terms and conditions on which contract are entered between the two parties. Section 24 of the act
provides for the same. It is concluded when proposal is accepted by the insurer; it is deemed to be
accepted when ship or covering note of the instrument of contract is issued through undersigned section
23.
Essentials of a valid marine insurance policy:
• It must fulfill all the essentials of a valid contract

• It must be in writing and duly stamped under the stamp act
• Insured must have insurable interest in the subject matter at the time of loss
• Time period of insurance must not be more than one year
• Good faith must be observed between the parties
A Contract of marine insurance shall not be admitted in evidence unless it is embodied in a marine
policy in accordance with this act. The policy may be executed and issued either at the time when the
contract is concluded or afterwards.
A marine policy must specify:
• The name of the assured, or of some person who effects the insurance on his behalf,

• The subject matter insured and the risk insured against
• The voyage, or period of time, or both, as the case may be, covered by the insurance,
• The sum or sums insured
• The name or names of the insurer or insurers
A marine policy must be signed by or on behalf of the insurer. Where a policy is subscribed
by or on behalf of two or more insurers, each subscription, unless the contrary be expressed,
constitutes a distinct contract with the assured.
THERE ARE FOUR TYPES OF MARINE INSURANCE
HULL INSURANCE CARGO INSURANCE FREIGHT INSURANCE LIABILITY INSURANCE
Hull insurance: It covers the insurance of the vessel and its equipment’s. Furniture and
fittings, machinery, tools, fuel, etc.It is affected generally by the owner of the ship.
Cargo insurance: It includes the cargo or goods contained in the ship and the personal
belongings of the crew and passengers.
Freight insurance: It provides protection against the loss of freight. In many cases, the owner
of goods is bound to pay freight, under the terms of the contract, only when the goods are
safely delivered at the port of destination. If the ship is lost on the way or the cargo is damaged
or stolen, the shipping company loses the freight. Freight insurance is taken to guard against
such risk.
Liability insurance: It is one in which the insurer undertakes to indemnify against the loss
which the insured may suffer on account of liability to a third party caused by collision of the
ship and other similar hazards.
In a contract of marine insurance, the insured must have the insurable interest in the subject
matter insured at the time of loss. Insurable interest is not required at the time of taking the
policy. Under marine insurance, the following persons are deemed to have insurable interest:--
1. The owner of the ship,

2. The owner of the cargo,
3. A creditor who has advanced money on the security of the ship or cargo to the extent of his
loan,
4. The master and crew members of the ship in respect of their wages,
5. If the subject matter is mortgaged, the mortgager in respect of full value of the ship, and also in
respect of any sum due to him,
6. Any trustee holding any property in trust in respect of such property,
7. In incase of advance freight the person advancing the freight in so far as such freight is repayable
in case of loss, and
8. The insured in the charges of any insurance policy which he may take.
TYPES OF MARINE INSURANCE POLICIES
Voyage policy:
It is a policy in which the subject matter is insured for a particular voyage Irrespective of the time
involved in it. In this case the risk attaches only when the ship starts on the voyage.
Time policy:
It is a policy in which the subject matter is insured for a definite period of time. The ship may pursue
any course it likes; the policy would cover all the risk from perils of the sea for the stated period of
time. A time policy cannot be for a period exceeding one year, but it may contain a’ continuation
clause’. The ‘continuance clause’ means that if the voyage is not completed within the specified period,
the risk shall be covered until the voyage is completed, or till the arrival of the ship at the port of call.
Mixed policy:
It is a combination of voyage and time policies and covers the risk during particular voyage for a
specified period of time.
Valued policy:
It is a policy in which the value of the subject matter insured is agreed upon between the insurer and
the insured and it is specified in the policy itself.
Open or Un-valued policy:
It is the policy in which the value of the subject matter insured is not specified. Subject to the limit of
the sum assured, it leaves the value of the loss to be subsequently ascertained.

Floating policy:
It is a policy which only mentions the amount for which the insurance is taken out and leaves the name
of the ship(s) and other particulars to be defined by subsequent declarations. Such policies are very
useful to merchants who regularly dispatch goods through ships.
Wagering or Honor policy:
It is a policy in which the assured has no insurable interest and the underwriter is prepared to dispense
with the insurable interest. Such policies are also known as ‘policy proof of interest’ (P.P.I.)
Insurable Interest
A person has a insurable interest if he is interested in marine adventure in consequence of which he

may benefited by the safe arrival of insurable property or be prejudices by its laws, damage or
detention..
The following persons has insurable interest in the marine policy:
a) Owners of ship for full value

b) Owners of cargo
c) Mortgagee of a vessel to the extent of his mortgage
d) Bailee in respect of property left in his custody and care
e) Shippers and their agents
f) An underwriter for the risk insured by him which he may re-insure
g) Bottomry bond holder (security of the ship money is borrowed by a contract)
h) Respondentia bond holder (security of the cargo)
i) Master or any crew member of the ship for their wages
j) Assured (in the charges of any insurance which he may effect)
k) Persons advancing freight, if freight is recoverable in case of loss which must be present at the
time of loss.
According to Section 19 if the good faith which is required to be observed by both the parties and in
case it is not observed by either parties, the contract may be avoided by the either of the party.
According to Section 20 of the act assured must disclose to the insurer every material circumstances
which is known to him a circumstance is material if it would influence the judgment of a prudent insurer
in fixing or determining to take the risk.

SOCIAL INSURANCE IN INDIA
SOCIAL INSURANCE: Social Insurance has been developed to provide economic security to
weaker sections of the society who are unable to pay the premium for adequate insurance. The
following type of insurance can be included in social Insurance:
1. Sickness Insurance: In this type of insurance medical benefits, medicines and

reimbursement of pay during the sickness period, etc. are given to the insured person
who fell sick. The subsidiary companies of General Insurance Corporation issue
“Mediclaim” policies for this purpose.
2. Death Insurance: Economic assistance is provided to dependents of the assured in
case of death during employment. The employer can transfer his liability by getting
insurance policy against employees.
3. Disability Insurance: There is a provision for compensation in case of total or partial
disability suffered by factory employees due to accident while working in factories.
According to Employees compensation act, the responsibility to pay compensation is
vest with the employer. But the employer transfers his liability on the insurer by
taking Group Insurance policy.
4. Unemployment insurance: Insured in case of unemployment due to certain reason,
given economic support till he gets employment.
5. Old age Insurance: Insured or his dependents are paid, after certain age, economic
assistance.
“Apart from these insurance social security legislations like ESIC, Workmen compensation Act,
provident fund Act etc. are also enacted to provide social security in case of old age pension,
sickness, disablement, maternity etc”.
Under the concept of social justice, The Indian Government has extended the scope of social
insurance. This scheme is now extended to Daily- wagers, Rikshaw pullers, craftsmen etc.
through different Insurance plans.
The process of fast development in the society gave rise to a number of risks or hazards. To
provide security against such hazards, many other type of Insurance also have been developed.
Such as, crops, cattle, legal liability insurance etc.

WORKMEN COMPENSATION INSURANCE:
An employer is required to compensation to his workers who receive injuries or contract occupational
diseases during the course of their work. Such compensation is payable under the workmen’s
compensation act. An employer may obtain an insurance policy to cover such liability. The premiums
are payable on the basis of wages. It is also known as ‘Employers liability insurance”
Such an insurance policy provides insurance against the following risk-
Indemnity to insured against his liability as an Employer to accidental injuries (including fatal)
sustained by the worker while on duty,
Medical, surgical and hospital expenses etc. (on payment of extra premium)
Liability in respect of diseases mentioned under the Workmen compensation act, which arise out of
and in the course of employment.
Public liability Insurance:-
With the growth of hazardous industries, risks from accidents, processes and operations, not only
affects the persons employed in such undertakings but also to the public who may be in vicinity, have
increased. Such accidents lead to death and injury to human beings and other living beings and damage
private and public properties. Very often, the majority of the people affected is from the economically
weaker sections and suffer great hardships because of delayed relief and compensation. While workers
and employees of hazardous installations are protected under separate laws, member of the public are
not assured of any relief except through long legal process.
It is felt essential, therefore, to provide for mandatory public liability insurance for installations
handling hazardous substances to provide minimum relief to the victim. Such insurance, apart from
safeguarding the interests of the victim of accidents, would also provide cover and enable the industry
to discharge its liability to settle large claims arising out of major accidents. If the objective of providing
immediate relief is to be achieved, the mandatory public liability insurance should be on the principle
of “no fault liability “as it is limited to only relief on a limited scale. However, availability of immediate
relief would not prevent the victims to go to courts for claiming larger compensation. The public
liability insurance Act, 1991 plays an important role in this behalf. The present Act required factory
owners to insure against potential personal injury and property damage in surrounding communities.
Benefits of the Act are as follows:-
▪ Provides cover against claims

▪ Imposes no fault liability
▪ Relief and reimbursement
▪ Power to approach courts (u/s 13 of the act central Govt. /authorized person can approach
metropolitan Magistrate or JFC for restricting the owner.
▪ Imposes penalty for contravention and failure to comply with directions.
Third party insurance
In India, under the provisions of the Motor vehicle Act, 1988, it is mandatory that every vehicle should
have a valid insurance to drive on the road. Any vehicle used for social, domestic and pleasure purpose
and for the insurer’s business motor purpose should be insured.
There are two quite different kinds of insurance involved in the damages system. One is third party
liability insurance, which is just called liability insurance by insurance companies and the other one is
first party insurance.
A third party insurance policy is a policy under which the insurance company agrees to indemnify the
insured person, if he is sued or held legally liable for injuries or damage done to a third party. The
insured is one party, the insurance company is the second party, and the person you (the insured) injure
who claims damages against you is the third party.
Salient features of Third party Insurance:-
▪ It is compulsory for all motor vehicle and this provision cannot be overridden by any clause in
the insurance policy.
▪ It does not cover injuries to the insured himself but to the rest of the world who is injured by
the insured.
▪ Beneficiary of third party insurance is the injured third party, the insured or the policy holder is
only nominally the beneficiary of the policy.
▪ In third party insurance what is insured is ‘legal liability’ and it is not possible to know in
advance what the liability would be.
▪ It is purely fault based insurance.
▪ The maximum amount to be paid under the policy is not known in advance.

Motor vehicle Insurance
Under this insurance a personal or commercial vehicle is subjected to combined insurance againsed the
risk of-
▪ Loss or damage to the motor vehicle and its accessories on account of accident or theft,
▪ Death of or injury to the owner or passenger of the vehicle due to accident,
▪ Damages payable to third parties by the owner of the vehicle for accident.
A comprehensive insurance policy may be taken to cover all these risks. Insurance against the first two
types of risks is optional. But every owner of motor vehicle is required to take out an insurance policy
to cover the third party risks under the Motor Vehicle act, 1956. Such a policy is known as ‘Third party
insurance or liability insurance’.
Under such a policy, the third party who has suffered any loss can sue the insurer directly even though
he was not a party to the contract of insurance.
For Ex. motor insurance by united India insurance co. ltd. This policy provides insurance cover to
owners of the vehicle, financers or lessee, who have insurable interest in a motor vehicle.
Mediclaim and health Insurance:-
With medical costs sky rocketing daily there is a growing need of having a Mediclaim policy in your
name. It will help you cover the medical expenses in case you have to undergo certain medical treatment
or are hospitalization for some reason. It basically provides a health cover of a certain amount of money
and hence in the case of incurring any medical expenses, the expenses to a certain limit are borne by
the particular insurance / Mediclaim Company under whom you might have taken the Mediclaim
policy.
It can be taken on an individual basis or for the entire family if the need be. The insurance premium
will defer from company to company and will depend upon whether the policy has been taken for an
individual or for a group or the policy is cashless or not.
Group Insurance schemes:-
It is though a single policy {also knows as master policy} a large number of persons is covered under
such insurance. Insurance coverage is extended to a large segment of the population, especially where
it is neither convenient nor economical to take polices on case- to case basis, and for each person
separately. Normally the extent of coverage is determined not by ultimate beneficiary, but in

accordance with what has been agreed upon between the Insurance Company and the entity which takes
out Master Policy. Hence, it does not cover or insure an individual, but several individuals or class of
persons. Such type of contract is entered into between the insurance company and the entity purchasing
the policy. The most common example of Group Insurance is employer employee group in which
insurance cover is obtained for a number of employees. It is essential that the Group should be
homogenous and should not have been formed with a sole purpose of getting the benefits of Group
Insurance.

Unit 5: Recent Trends in Insurance:
Topic – The Insurance Regulatory & Development Authority Act, 2000
o Regulatory framework:
o Indian contract act, 1872
o Income tax act, 1961
o IRDA
o Duties, powers and functions of the IRDA [section 14]
o Social insurance

INSURANCE REGULATORY & DEVELOPMENT AUTHORITY (IRDA):
ROLE AND FUNCTIONS
REGULATORY FRAMEWORK:
Insurance has its own market. It comprises of Buyers (insured), sellers (Insurance companies), and
intermediaries. This marked is a regulated market. The market economy needs to function within the
boundaries framed by regulating authority as well as various laws which govern the insurance business.
Some of the laws which govern the Insurance sector are mentioned below:
INDIAN CONTRACT ACT, 1872
One must note that insurance is a contractual arrangement between insured and insurer it is a special
type of contract. It must comply all the requirements that are essential with a valid contract. In addition,
some specific essentials are also present and unique to the business, say insurable interest, subrogation
indemnity etc. In short, it must comply those terms and conditions so as to make it a valid contract
which is capable with of being enforced. Since insurance business is a matter of solicitation and is
generally marketed by intermediaries, the legal principle of agency creation (as spelt out in Indian
contract act) is also applicable in this business.
INCOME TAX ACT, 1961
Section 10 of this act gives certain exemptions in respect of proceeds out of insurance claim received
by the insured under Chapter VI-A of this Act, certain payments made (Like medi-claim insurance
premium) are deducted from taxable income of the tax payer. This reduces his taxable income and also
tax liability. Section 80 gives the tax rebate in respect of certain premium paid for life insurance.
IRDA
The office of controller of Insurance was replaced and a new authority, called as IRDA i.e. Insurance
Regulatory and development Authority came into existence. This act also put an end to the monopoly
of Life Insurance Corporation of India over life insurance business and other nationalized insurance
companies and opened the gates even to private sector players. Entry norms have been prescribed under
this act. The powers, functions of this IRDA inter alia include all those powers necessary to promote
and ensure an orderly growth of this business and reinsurance business. It is also intended to protect

the interest of the policyholders in matters relating to nomination, assignment, insurable interest,
settlement of claims, surrender value of the policy, condition relating to insurance contract, to supervise
the functioning of tariff advisory committee, etc.
This act has made elaborate provisions with respect to:
• Entry and registration of insurance company.

• Licenses for intermediaries, agents etc.
• Investment of funds collected from policy holders.
• Capital adequacy stipulations - Minimum contribution from the promoter must be Rs 100
crores in the case of Life Insurance business and Rs. 200 crores for General Insurance.
• Solvency Margin—the manner in which the assets and liabilities of insurance company are
to be ascertained.
• Settlement of disputes—IRDA have been given powers to settle the disputes amongst the
intermediaries and insurance companies. Rule and regulations with respect to the
advertisement to be issued by Insurance Company (code for advertisement)
• Minimum business—as per this IRDA Act, every insurance company has to do a minimum
rural or social business as prescribed by the authority.
• Deposit with RBI—the insurance company is required to deposit with RBI, certain
percentage of its total gross premium in any financial year. In case of Life Insurance
business this is 1% and it is 3% in the case of general Insurance.
• Regulations are also specified with reference to the appointment approval of surveyors and
loss assessors.
• Maintenance of accounts, audit etc.
IRDA is the administrative agency for Indian insurance industry, and was formed by the GOI for the
supervision and development of the Insurance sector in India. The IRDA was legally established by the
IRDA Act which was enacted by the Indian parliament in 1999.
The mission of the IRDA is to protect the interest of the policyholders, to regulate, promote and ensure
orderly growth of the insurance industry and matters connected therewith or incidental thereto.
The Authority is of a ten member team consisting of-
1. A chairman,
2. Five whole-time members and ,
3. Four part- time members.

Objectives of IRDA Act are as follows-
• To protect the investor’s interest

• To promote orderly growth of insurance industry in the country, including registration of
insurance companies
• To administer the provisions of insurance acts
• To devise control activities need for smooth functioning of the insurance companies
including investment of funds and solvency requirements to be maintained by insurance
companies
• To lay down the accounting methodology to be adopted
• To adjudicate on disputes.
DUTIES, POWERS AND FUNCTIONS OF THE IRDA [SECTION 14]

a) Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such
registration,
b) Protection of the interest of the policyholders in matters concerning assigning of policy, nomination
by policy holder, insurable interest, settlement of insurance claims, surrender value of policy and
other terms and conditions of contract of insurance,
c) Specifying requisite qualifications, code of conduct and practical training of intermediary or
insurance agents,
d) Specifying the code of conduct for surveyors and loss assessors,
e) Promoting efficiency in the conduct of insurance business, promoting and regulating professional
organizations connected with the insurance and re-insurance business,
f) Levying fees and other charges for carrying out vthe purposes of this act,
g) Calling for information, inspecting, conducting enquiries, investigation and audit of the insurer,
intermediaries, insurance agents and other organizations connected with the insurance business,
h) Controlling and regulating the rates, advantages and terms and conditions that may be offered by
the insurers in respect of general insurance business which is not been done by the insurance Act,
1938,
i) Specifying the forms and manner in which books of account shall be maintained and statement of
accounts shall be rendered by insurance and insurance intermediaries,
j) Regulating investment of funds by insurance companies,
k) Adjudication of disputes between insurer and intermediaries etc ,
l) Supervising the functioning of the Tariff Advisory committee;

m) Specifying the percentage of life and non-life business to be done by the insurer in the rural or social
sectors, and
n) Exercising such other powers as may be prescribed.
SOCIAL INSURANCE
Social insurance has been developed to provide economic security to weaker sections of the society
who are unable to pay the premium for adequate insurance. The following types of insurance can be
included in social insurance-
• Sickness Insurance: In this type of insurance medical benefits, medicines and reimbursement of
pay during the sickness period, etc. are given to the insured person who fell sick. The subsidiary
companies of General insurance corporation issue” Medi-claim” policies for this purpose.
• Death Insurance: Economic assistance is provided to dependents of the assured in case of death
during employment. The employer can transfer his liability by getting insurance policy against
employees.


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Renaissance University

• The evolution of banking in India

• History of banking in India

THE EVOLUTION OF BANKING IN INDIA

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HISTORY OF BANKING IN INDIA

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A type of business organization recognizable as managing agency took form in a period

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Development after Freedom:

• Enactment of Banking Regulation Act in1949

• Reserve Bank of India Scheduled Banks' Regulations, 1951.

• Nationalization of Imperial Bank of India in 1955, with extensive banking facilities on

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BANK NATIONALIZATION PROCESS:

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#R.C. COOPER V. UNION OF INDIA

[AIR 1970 SC 564]

FACTS OF THE CASE:

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2. Whether the Ordinance in question had been properly made or not?

5. Whether the method of ascertaining the compensation was valid or not?

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3. As far as the arguments regarding the Parliament’s competence to acquire banking

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2. Article 19(1)(g) was clearly detached from Article 31(2).

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TYPES OF BANKS & THEIR FUNCTIONS

• Regional Rural Banks (RRB)

Local Area Banks (LAB)

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1. Acceptance of deposits from the public

Guiding other banks

Implementing the monetary policies

Supervisor of the financial system

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They are organised in the 3 tier structure

• Funded by RBI, government, NABARD. Money is then distributed to the public

• Owned by the state government and top management is elected by members

Tier 2 (District Level) – Central/District Cooperative Banks

Tier 3 (Village Level) – Primary Agriculture Cooperative Banks

• Organised under the Banking Companies Act, 1956

• They operate on a commercial basis and its main objective is profit.

They tend to all sectors ranging from rural to urban

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The commercial banks can be further divided into three categories:

REGIONAL RURAL BANKS:

• 196 RRBs have been established from 1987 to 2005.

LOCAL AREA BANKS (LAB):

Introduced in India in the year 1996

These are organized by the private sector

Earning profit is the main objective of Local Area Banks

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SMALL FINANCE BANKS:

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• Airtel Payments Bank

• India Post Payments Bank