BANKING LAW INCULDING NEGOTIABLE INSTRUMENT ACT

BY RAVI BUDGUJAR

UNIT-I
NATURE AND DEVELOPMENT OF BANKING:
Meaning of the terms Bank and Banking
Bank is an institution which deals in money and credit. It accepts deposits from the public and grants loans and
advances to those who are in need of funds for various purposes.
Banking is an activity which involves acceptance of deposits for the purpose of lending or investing. In addition to
accepting deposits and lending funds, banking also involves providing various other services alongwith its main
banking activity. These are mainly agency services, but include several general services as well.
A banker is one who undertakes banking activities, accepting deposits and lending money for different purposes. The
Banking Regulation Act, 1949 defines banking as an activity of accepting funds from the public for the purpose of
lending or investment.
The essential features of banking activities are as follows:-
i) accepting deposits from public;
ii) lending or investment of such deposits;
iii) incidental to the activities of accepting deposits for lending or investing, banks undertake activities like —
a) Promoting and mobilizing savings of the public;
b) Providing funds to trade and industry by way of discounting bills, overdraft, cash credit facility, and transfer of funds
from one place to another;
c) Providing agency services to customers, such as collection of bills, payment of insurance premium, purchase and sale
of securities, etc., and other general services, such as issue of travellers’ cheques, credit cards, locker facility, etc;
Money deposited with the bank is assured as far as its safety is concerned. Further the depositor is allowed to withdraw
it whenever required. Banks allow interest on deposits. Such interest helps in the growth of funds deposited with the
bank. Thus the rate of interest provided on deposits acts as an incentive to the depositors.

Development Banks
Development banks are special financial institutions which provide longterm capital to industry. Rapid development of
industries in India after independence requiring huge financial investment and promotional efforts led to the
establishment of these instutions. Development banks assist the promotion, expansion and modernisation of industries,
Besides providing long-term finance, these banks also subscribe to the capital issues of industrial undertakings, if the
public subscription falls short of the total issue. Thus they act as underwriters as well. Moreover, these banks provide
technical advice and assitance, if needed.
Development banks which have been established and functioning in India are:
Industrial Finance Corporation of India (I.F.C.I)
State Finance Corporation (S.F.Cs.)
Industrial Credit and Investment Corporation of India (ICICI)
Industrial Development Bank of India (I.D.B.I.)
Industrial Reconstruction Bank of India (I.R.B.I.)
Industrial Development Bank of India acts as an apex oganisation to co-ordinate and assist in long term industrial
finance by other institutions.

Nature and Scope of Banking Activities

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

HISTORICAL BACKGROUND OF BANKING INSTITUTION IN INDIA

Institutional Evolution of the Indian Banking: The indigenous system of banking had existed in India for many
centuries, and catered to the credit needs of the economy of that time. The famous Kautilya Arthashastra, which is
ascribed to be dating back to the 4th century BC, contains references to creditors and lending.
For instance, it says “If anyone became bankrupt, debts owed to the state had priority over other creditors”. Similarly,
there is also a reference to “Interest on commodities loaned” (PRAYOG PRATYADANAM) to be accounted as
revenue of the state. Thus, it appears that lending activities were not entirely unknown in the medieval India and the
concepts such as ‘priority of claims of creditors’ and ‘commodity lending’ were established business practices.
During the period of modern history, however, the roots of commercial banking in India can be traced back to the early
eighteenth century when the Bank of Calcutta was established in June 1806 –which was renamed as Bank of Bengal in
January 1809 – mainly to fund General Wellesley’s wars. This was followed by the establishment of the Bank of
Madras in July 1843, as a joint stock company, through the reorganization and amalgamation of four banks viz., Madras
Bank, Carnatic Bank, Bank of Madras and the Asiatic Bank. This bank brought about major innovations in banking
such as use of joint stock system, conferring of limited liability on shareholders, acceptance of deposits from the general
public, etc. The Bank of Bombay, the last bank to be set up under the British Raj pursuant to the Charter of the then
British East India Company, was established in 1868, about a decade after the India’s first war of independence.
The three Presidency Banks, as these were then known, were amalgamated in January 1921 to form the Imperial Bank
of India, which acquired the three-fold role: of a commercial bank, of a banker’s bank and of a banker to the
government.
It is interesting to note here that merger of banks and consolidation in the banking system in India, is not as recent a
phenomenon as is often thought to be, and dates back to at least 1843 – and the process, of course, still continues. With
the formation of the Reserve Bank of India in 1935, some of the central banking functions of the Imperial Bank were
taken over by the RBI and subsequently the State Bank of India, set up in July 1955, assumed the other functions of the
Imperial Bank and became the successor to the Imperial Bank of India.

Origin of ‘Banking’ the first bank was probably the religious temples of the ancient world wherein gold was stored in
the form of easy-to-carry compressed plates. Their owners justly felt that temples were the safest places to store their
gold as they were constantly attended, well built and were sacred, thus deterring would-be thieves. There are extent
records of loans from the 18th century BC in Babylon that were made by temple priests to merchants. Ancient Greece
holds further evidence of banking. Greek temples as well as private and civic entities conducted financial transactions
such as loans, deposits, currency exchange, and validation of coinage. There is evidence too of credit, whereby in return
for a payment from a client, a moneylender in one Greek port would write a credit note for the client who could “cash”
the note in another city, saving the client the danger of carting coinage with him on his journey. Ancient Rome
perfected the administrative aspect of banking and saw greater regulation of financial institutions and financial
practices. Charging interest on loans and paying interest on deposits became more highly developed and competitive.
The origin of banking in India can be traced back to almost the Vedic period. The transformation from pure money
lending to proper banking appears to have taken place before the times of Manu. Manu, a great Hindu jurist, had
devoted a section of his work explaining the deposits and advances and he even laid down certain rules on rates of
interest. Throughout Mauryan period and later on Desi bankers played some role in the economy of the country.
However, it was during the Mogul period that indigenous bankers started playing a vital role in lending money and
financing of the foreign trade and commerce. Banking during British period before independence. The first joint stock
bank, namely The General Bank of India was established in 1786. Later on Bank of Hindustan and Bengal Bank came
into existence. Bank of Hindustan carried on business till 1906. East India Company established the following three
banks, namely The Bank of Bengal in 1809, The Bank of Bombay in 1840, and Bank of Madras in 1843. They were
collectively called Presidency Banks and were well functioning independent units.
The three banks established by the East India Company were amalgamated in 1920 and a new bank called Imperial
Bank of India was established. A number of 10 private banks had been established by the businessmen from mid of the
19th century onwards.
In the surcharged atmosphere of Swadeshi movement, a number of banks with Indian management, namely, Punjab
National Bank Ltd., Bank of India Ltd., Canara Bank Ltd, Indian Bank Ltd. etc. were established. The Reserve Bank of
India was established as the Central bank of the country in 1935 under an act called Reserve bank of India Act. Later on
with the passage of the Banking Regulation Act passed in 1949, RBI was brought under government control.
Under this Act, RBI was conferred with supervision and control of the banks and licensing powers and the authority to
conduct inspections was also given to it.
After independence, in 1955, the Imperial Bank of India was nationalized and was given the name “State Bank of
India”. It was established under State Bank of India Act, 1955. In 1960, RBI was empowered to force the compulsory
merger of the weak banks with the strong ones. This led to reduction in the number of banks from 566 in 1951 to about
89 in 1969. On July 19, 1969, 14 major banks were nationalized. In1980, another six banks were nationalized, and thus
raising the number of nationalized banks to 20. On the suggestions of Narsimham Committee, the Banking Regulation
Act was amended in 1993 and thus the gates for the new private sector banks were opened. Normally chartered
accounting firms audit trading and manufacturing firms. The work of bank branch audit is a very specialized job and
comes once in a year. Number of CA firms eligible for Bank audits are limited. Auditors should update their knowledge
about RBI circulars as RBI on monthly /yearly basis keep on revising its guidelines. Audit in this field should be done
with extra precaution.

RELATIONSHIP OF BANK AND CUSTOMER:

The relationship between banker and customer is mainly that of a debtor and creditor. However, they also share other
relationships. Some of the important relationships they share are depicted below.

The banker-customer relationship is that of a:

1. Debtor and Creditor,
2. Pledger and Pledgee,
3. Licensor and Licensee,
4. Bailor and Bailee,
5. Hypothecator and Hypothecatee,
6. Trustee and Beneficiary,
7. Agent and Principal,
8. Advisor and Client, and
9. Other miscellaneous relationships.

Discussed below are important banker-customer relationships.

1. Relationship of Debtor and Creditor
When a customer opens an account with a bank and if the account has a credit balance, then the relationship is that of
debtor (banker / bank) and creditor (customer).
In case of savings / fixed deposit / current account (with credit balance), the banker is the debtor, and the customer is the
creditor.
This is because the banker owes money to the customer. The customer has the right to demand back his money
whenever he wants it from the banker, and the banker must repay the balance to the customer.
In case of loan / advance accounts, banker is the creditor, and the customer is the debtor because the customer owes
money to the banker. The banker can demand the repayment of loan / advance on the due date, and the customer has to
repay the debt.
A customer remains a creditor until there is credit balance in his account with the banker. A customer (creditor) does
not get any charge over the assets of the banker (debtor). The customer's status is that of an unsecured creditor of the
banker.
The debtor-creditor relationship of banker and customer differs from other commercial debts in the following ways:
1. The creditor (the customer) must demand payment. On his own, the debtor (banker) will not repay the debt. However,
in case of fixed deposits, the bank must inform a customer about maturity.
2. The creditor must demand the payment at the right time and place. The depositor or creditor must demand the
payment at the branch of the bank, where he has opened the account. However, today, some banks allow payment at all
their branches and ATM centres. The depositor must demand the payment at the right time (during the working hours)
and on the date of maturity in the case of fixed deposits. Today, banks also allow pre-mature withdrawals.
3. The creditor must make the demand for payment in a proper manner. The demand must be in form of cheques;
withdrawal slips, or pay order. Now-a-days, banks allow e-banking, ATM, mobile-banking, etc.

2. Relationship of Pledger and Pledgee

The relationship between customer and banker can be that of Pledger and Pledgee. This happens when customer pledges
(promises) certain assets or security with the bank in order to get a loan. In this case, the customer becomes the Pledger,
and the bank becomes the Pledgee. Under this agreement, the assets or security will remain with the bank until a
customer repays the loan.

3. Relationship of Licensor and Licensee

The relationship between banker and customer can be that of a Licensor and Licensee. This happens when the banker
gives a sale deposit locker to the customer. So, the banker will become the Licensor, and the customer will become the
Licensee.

4. Relationship of Bailor and Bailee

The relationship between banker and customer can be that of Bailor and Bailee.
1. Bailment is a contract for delivering goods by one party to another to be held in trust for a specific period and
returned when the purpose is ended.
2. Bailor is the party that delivers property to another.
3. Bailee is the party to whom the property is delivered.
So, when a customer gives a sealed box to the bank for safe keeping, the customer became the bailor, and the bank
became the bailee.

5. Relationship of Hypothecator and Hypothecatee

The relationship between customer and banker can be that of Hypothecator and Hypotheatee. This happens when the
customer hypothecates (pledges) certain movable or non-movable property or assets with the banker in order to get a
loan. In this case, the customer became the Hypothecator, and the Banker became the Hypothecatee.

6. Relationship of Trustee and Beneficiary

A trustee holds property for the beneficiary, and the profit earned from this property belongs to the beneficiary. If the
customer deposits securities or valuables with the banker for safe custody, banker becomes a trustee of his customer.
The customer is the beneficiary so the ownership remains with the customer.
7. Relationship of Agent and Principal
The banker acts as an agent of the customer (principal) by providing the following agency services:
Buying and selling securities on his behalf,
Collection of cheques, dividends, bills or promissory notes on his behalf, and
Acting as a trustee, attorney, executor, correspondent or representative of a customer.
Banker as an agent performs many other functions such as payment of insurance premium, electricity and gas bills,
handling tax problems, etc.

8. Relationship of Advisor and Client

When a customer invests in securities, the banker acts as an advisor. The advice can be given officially or unofficially.
While giving advice the banker has to take maximum care and caution. Here, the banker is an Advisor, and the
customer is a Client.
9. Other Relationships
Other miscellaneous banker-customer relationships are as follows:
Obligation to honour cheques : As long as there is sufficient balance in the account of the customer, the banker mus
honour all his cheques. The cheques must be complete and in proper order. They must be presented within six months
from the date of issue. However, the banker can refuse to honour the cheques only in certain cases.
Secrecy of customer's account : When a customer opens an account in a bank, the banker must not give information
about the customer's account to others.
Banker's right to claim incidental charges : A banker has a right to charge a commission, interest or other charges for
the various services given by him to the customer. For e.g. an overdraft facility.
Law of limitation on bank deposits : Under the law of limitation, generally, a customer gives up the right to recover
the amount due at a banker if he has not operated his account since last 10 years.
So, these were some important banker-customer relationships.

NATIONALISATION OF BANKS:
Introduction
After independence the Government of India (GOI) adopted planned economic development for the country (India).
Accordingly, five year plans came into existence since 1951. This economic planning basically aimed at social
ownership of the means of production. However, commercial banks were in the private sector those days. In 1950-51
there were 430 commercial banks. The
Government of India had some social objectives of planning. These commercial banks failed helping the government in
attaining these objectives. Thus, the government decided to nationalize 14 major commercial banks on 19th July, 1969.
All commercial banks with a deposit base over Rs.50 crores were nationalized. It was considered that banks were
controlled by business houses and thus failed in catering to the credit needs of poor sections such as cottage industry,
village industry, farmers, craft men, etc. The second dose of nationalisation came in April 1980 when banks were
nationalized.

Objectives Behind Nationalisation of Banks in India:

The nationalisation of commercial banks took place with an aim to achieve following major objectives.
1. Social Welfare : It was the need of the hour to direct the funds for the needy and required sectors of the indian
economy.
Sector such as agriculture, small and village industries were in need of funds for their expansion and further economic
development.
2. Controlling Private Monopolies : Prior to nationalisation many banks were controlled by private business houses
and corporate families. It was necessary to check these monopolies in order to ensure a smooth supply of credit to
socially desirable sections.

3. Expansion of Banking : In a large country like India the numbers of banks existing those days were certainly
inadequate. It was necessary to spread banking across the country. It could be done through expanding banking network
(by opening new bank branches) in the un-banked areas.

4. Reducing Regional Imbalance : In a country like India where we have a urban-rural divide; it was necessary for
banks to go in the rural areas where the banking facilities were not available. In order to reduce this regional imbalance
nationalisation was justified:

5. Priority Sector Lending : In India, the agriculture sector and its allied activities were the largest contributor to the
national income. Thus these were labeled as the priority sectors. But unfortunately they were deprived of their due share
in the credit. Nationalisation was urgently needed for catering funds to them.

6. Developing Banking Habits : In India more than 70% population used to stay in rural areas. It was necessary to
develop the banking habit among such a large population.

Demerits, Limitations - Bank Nationalisation in India:

Though the nationalisation of commercial banks was undertaken with tall objectives, in many senses it failed in
attaining them. In fact it converted many of the banking institutions in the loss making entities. The reasons were
obvious lethargic working, lack of accountability, lack of profit motive, political interference, etc. Under this backdrop
it is necessary to have a critical look to the whole process of nationalisation in the period after bank nationalisation.
The major limitations of the bank nationalisation in India are:-
1. Inadequate banking facilities : Even though banks have spread across the country; still many parts of the country
are unbanked. Especially in the backward states such as the Uttar Pradesh, Madhya Pradesh, Chhattisgarh and north-
eastern states
of India.
2. Limited resources mobilized and allocated : The resources mobilized after the nationalisation is not sufficient if we
consider the needs of the Indian economy. Some times the deposits mobilized are enough but the resource allocation is
not as per the expansions.
3. Lowered efficiency and profits : After nationalisation banks went in the government sector. Many times political
forces pressurized them. Banking was not done on a professional and ethical grounds. It resulted into lower efficiency
and poor profitability of banks.
4. Increased expenditure : Due to huge expansion in a branch network, large staff administrative expenditure, trade
union struggle, etc. banks expenditure increased to a dangerous levels.
5. Political and Administrative Inference : Many public sector banks badly suffered due to the political interference. It
was seen in arranging loan meals. It ultimately resulted in huge non-performing assets (NPA) of these banks and
inefficiency.
These are several limitations faced by the banks nationalisation in India.
Apart from this there are certain other limitations as well, such as weak infrastructure, poor competitiveness, etc.
But after Economic Reform of 1991, the Indian banking industry has entered into the new horizons of competitiveness,
efficiency and productivity. It has made Indian banks more vibrant and professional organizations, removing the bad
days of bank nationalisation.

SOCIAL CONTROL ON BANKS:

The banks are the custodians of savings and powerful institutions to provide credit. They mobilise the resources from all
the sections of the community by way of deposits and channelize them to industries and others by way of granting
loans. In 1955 the Imperial Bank of India was nationalised and SBI was constituted.
It was observed that the commercial banks were directing their advances to the large and medium scale industries and
the priority sectors such as agriculture, small-scale indus tries and exports were neglected.
The chairmen and directors of banks were mostly indus trialists and many of them were interested in sanctioning large
amount of loans and ad vances to the industries with which they were connected.
To overcome these deficiencies found in the working of the banks, the Banking Laws (Amendment) Act was passed in
December 1968 and came into force on 1-2-1969. It is known as the scheme of 'social control' over the banks.
The then deputy Prime Minister, Mr. Morarji Desai made a statement in the Parliament on the eve of introducing the bill
to amend the banking laws Act.
He explained that the aim of social control was, "to regulate our social and economic life so as to attain the optimum
growth rate for our economy and to prevent at the same time monopolistic trend, concentration of economic power and
misdirection of resources".
The following are the main provisions of this amendment,
banks had to be managed by whole time chairman possessing special knowl edge and practical experience of the
working of a banking company or of finance, economics or business administration.

The majority of directors had to be persons with special knowledge or practical experience in any of the areas such as
accountancy, agriculture and rural economy, banking, cooperative, economics, finance, law, small scale industries etc.

The banks were also prohibited from making any loans or advances, secured or unsecured to their directors or to any
companies in which they have substantial interest.

THE BANKING REGULATION ACT,1949:

PART I
PRELIMINARY
1. Short title, extent and commencement
(1) This Act may be called the Banking 3[Regulation] Act, 1949.(2)It extends to the whole of India 5[* * *].]
(3) It shall come into force on such date6 as the Central Government may, by notification in the Official Gazette,
appoint in this behalf.
2. Application of other laws not barred
The provisions of this Act shall be in addition to, and not, save as hereunder expressly PROVIDED, in derogation of the
[Companies Act, 1956 (1 of 1956 )], and any other law for the time being in force.
3. Act to apply to co-operative societies in certain cases.-
Nothing in this Act shall apply to.-
(a) a primary agricultural credit society;
(b) a co-operative land mortgage bank; and
(c) any other co-operative society, except in the manner and to the extent specified in Part V.]
4. Power to suspend operation of Act
(1) The Central Government, if on a representation made by the Reserve Bank in this behalf it is satisfied that it is
expedient so to do, may by notification in the Official Gazette suspend for such period, not exceeding sixty days, as
may be specified in the notification, the operation of all or any of the provisions of this Act, either generally or in
relation to any specified banking company.
(2) In a case of special emergency, the Governor of the Reserve Bank, or in his absence a Deputy Governor of the
Reserve Bank nominated by him in this behalf may, by order in writing, exercise the powers of the Central Government
under sub-section (1) so however that the period of suspension shall not exceed thirty days, and where the Governor or
the Deputy Governor, as the case may be, does so, he shall report the matter to the Central Government forthwith, and
the order shall, as soon as may be, be published in the Gazette of India.
(3) The Central Government may, by notification in the Official Gazette, extend from time to time the period of any
suspension ordered under sub-section (1) or subsection (2) for such period, not exceeding sixty days at any one time, as
it thinks fit so however that the total period does not exceed one year.
(4) A copy of any notification issued under sub-section (3) shall be laid on the table of 1[Parliament] as soon as may be
after it is issued.
5. Interpretation
[In this Act], unless there is anything repugnant in the subject or context, -
(a) "approved securities" means the securities issued by the Central Government or any State Government or such other
securities as may be specified by the Reserve Bank from time to time;
(b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawal by cheque, draft, order or other wise;
(c) "banking company" means any company which transacts the business of banking1 [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;]
(cc) "branch" or "branch office" , in relation to a banking company, means any branch or branch office, whether called a
pay office or sub-pay office or by any other name, at which deposits are received, cheques cashed or moneys lent, and
for the purposes of section 35 includes anyplace of business where any other form of business referred to in sub-
section(1) of section 6 is transacted;]
(d) "company" means any company as defined in section 3 of the Companies Act, 1956 (1 of 1956); and includes a
foreign company within the meaning of section 591 of that Act;)
(da) "corresponding new bank" means a corresponding new bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970); or under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980);]
(e)[***]
(f) "demand liabilities" means liabilities which must be met on demand, and "time liabilities" means liabilities which are
not demand liabilities;
[(ff) "Deposit Insurance Corporation" means the Deposit Insurance Corporation established under section 3 of the
Deposit Insurance Corporation Act, 1961 (47 of 1961);]
(ffa)[* * *]
[(ffb) "Exim Bank" means the Export-Import Bank of India established under section 3 of the Export-Import India Act,
1981 (28of 1981);]
[(ffc) "Reconstruction Bank" means the Industrial Reconstruction Bank of India established under section 3 of the
Industrial Reconstruction Bank of India Act, 1984 (62 of 1984);]
[(ffd) "National Housing Bank" means the National Housing Bank established under section 3 of the National Housing
Bank Act, 1987;]
(g) "gold" includes gold in the form of coin, whether legal tender or not, or in the form of bullion or ingot, whether
refined or not;
(gg) "managing agent" includes. -
(i) Secretaries and Treasurers;
(ii) Where the managing agent is a company, and Director of such company, and any member thereof who holds
substantial interest in such company;
(iii) Where the managing agent is a firm, any partner of such firm;]
(h) "managing Director", in relation to a banking company, means a Director who, by virtue of an agreement with the
banking company or of a resolution passed by the banking company in general meeting or by its Board of Directors or,
by virtue of its memorandum or articles of association, is entrusted with the management of the whole, or substantially
the whole of the affairs of the company, and includes a Director occupying the position of a Managing Director, by
whatever name called:]
[PROVIDED that the Managing Director shall exercise his powers subject to the superintendence, control and direction
of the Board of Directors;]
(ha) "National Bank" means the National Bank for Agriculture and Rural Development established under section 3 of
the National Bank for Agriculture and Rural Development Act, 1981;
(j) "prescribed" means prescribed by rules made under this Act;
(ja) "regional rural bank" means a regional rural bank established under section 3 of the Regional Rural Banks Act,
1976 (21 of 1976);
(k) 5[***]
(1) "Reserve Bank" means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act,
1934 (2 of 1934);
(m) 7[***]
(n) "secured loan or advance" means a loan or advance made on the security of assets the market value of which is not
at anytime less than the amount of such loan or advance; and "unsecured loan or advance" means a loan or advance not
so secured;
(ni) "Small Industries Bank" means the Small Industries Development Bank of India established under section 3 of the
Small Industries Development Bank of India, 1989;
(na) "small-scale industrial concern" means an industrial concern in which the investment in plant and machinery is not
in excess of seven and a half lakhs of rupees or such higher amount, not exceeding twenty lakhs of rupees, as the
Central Government may, by notification in the Official Gazette, specify in this behalf, having regard to the trends in
industrial development and other relevant factors;]
(nb) "Sponsor Bank" has the meaning assigned to it in the Regional Rural Banks Act, 1976 (21 of 1976);
(nc) "State Bank of India" means the State Bank of India constituted under section 3 of the State Bank of India Act,
1955 (23of 1955);
(nd)"subsidiary bank" has the meaning assigned to it in the State Bank of India (Subsidiary Banks) Act, 1959;
(ne)"substantial interest". -
(i) in relation to a company, means the holding of a beneficial interest by an individual or his spouse or minor child,
whether singly or taken together, in the shares thereof, the amount paid up on which exceeds five lakhs of rupees or ten
percent of the paid-up capital of the company, whichever is less;
(ii) in relation to a firm, means the beneficial interest held therein by an individual or his spouse or minor child, whether
singly or taken together, which represents more than ten per cent of the total capital subscribed by all the partners of the
said firm;
(o) all other words and expressions used herein but not defined and defined in the Companies Act, 1956 (1 of 1956),
shall have the meanings respectively assigned to them in that Act.
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 maybe, 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.
PART II
BUSINESS OF BANKING COMPANIES
PART IIA
CONTROL OVER MANAGEMENT
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, 2[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 3[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, 4[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--
(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 (I),shall be final and shall not be called into question in any court.
(4) Where any order is made in respect of 1[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 3[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 4[Chairman, Director or chief executive officer] or other officer or employee under this
section shall, -
(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 36AB - Power of Reserve Bank to appoint additional Directors
(1) If the Reserve Bank is of opinion that in the interest of banking policy or in the public interest or in the interests of
the banking company or its depositors it is necessary so to do, it may, from time to time by order in writing, appoint,
with effect from such date as may be specified in the order, one or more persons to hold office as additional Directors of
the banking company:
3[***]
(2) Any person appointed as additional Director in pursuance of this section-
(a) shall hold office during the pleasure of the Reserve Bank and subject thereto for a period not exceeding three years
or such further periods not exceeding three years at a time as the Reserve Bank may specify;
(b) shall not incur any obligation or liability by reason only of his being a Director or for anything done or omitted to be
done in good faith in the execution of the duties of his office or in relation thereto; and
(c) shall not be required to hold qualification-shares in the banking company.
(3) For the purpose of reckoning any proportion of the total number of Directors of the banking company, any
additional Director appointed under this section shall not be taken into account.
36AC. Part IIA to override other laws
Any appointment or removal of a Director, chief executive officer or other officer or employee in pursuance of section
36AA or section 36AB shall have effect notwithstanding anything to the contrary contained in the Companies Act, 1956
(1 of 1956) or any other law for the time being in force or in any contract or any other instrument.
PART III
SUSPENSION OF BUSINESS AND WINDING UP OF BANKING COMPANIES
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 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:
PROVIDED that the 1[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.]
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.
(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 disentitled 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 subsection (3A) 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 in section 11, has
continued such failure, or, having contravened any provision of this Act 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 (I 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.
(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.
38A. Court liquidator.-
(1) There shall be attached to every High Court a Court liquidator to be appointed by the Central Government for the
purpose of conducting all proceedings for the winding up of banking companies and performing such other duties in
reference thereto as the High Court may impose.
2[***]
(4) Where having regard to the number of banking companies wound up and other circumstances of the case, the
Central Government is of opinion that it is not necessary or expedient to attach for the time being a Court liquidator to a
High Court, it may, from time to time, by notification in the Official Gazette, direct that this section shall not have
effect in relation to that High Court.]
39. Reserve Bank to be official liquidator.-
4[(1)] Notwithstanding anything contained in section 38A of this Act or in section 448 or section 449 of the Companies
Act, 1956(1 of 1956), where in any proceeding for the winding up by the High Court of a banking company, an
application is made by the Reserve Bank in this behalf, the Reserve Bank, the State Bank of India or any other bank
notified by the Central Government in this behalf or any individual, as stated in such application shall be appointed as
the official liquidator of the banking company in such proceeding and the liquidator, if any, functioning in such
proceeding shall vacate office upon such appointment.]
5[(2) Subject to such directions as may be made by the High Court, the remuneration of the official liquidator appointed
under this section, the cost and expenses of this establishment and the cost and expenses of the winding up shall be met
out of the assets of the banking company which is being wound up, and
notwithstanding anything to the contrary contained in any other law for the time being in force, no fees shall be payable
to the Central Government, out of the assets of the banking company.]
39A. Application of Companies Act to liquidators.-
(1) All the provisions of the Companies Act, 1956 (1 of 1956), relating to a liquidator, in so far as they are not
inconsistent with this Act, shall apply to or in relation to a liquidator appointed under section 38A or section 39.
(2) Any reference to the "official liquidator" in this Part and Part IIIA shall be construed as including a reference to any
liquidator of a banking company.]
40. Stay of proceedings
Notwithstanding anything to the contrary contained in 2[section 466 of the Companies Act, 1956 (1 of 1956)], the [High
Court] shall not make any order staying the proceedings in relation to the winding up of a banking company, unless the
[High Court] is satisfied that an arrangement has been made whereby the company can pay its depositors in full as their
claims accrue.
41. Preliminary report by official liquidator.-
Notwithstanding anything to for the contrary contained in section 455 of the Companies Act, 1956 (1 of 1956), where a
winding up order has been made in respect of a banking company whether before or after the commencement of the
Banking Companies (Second Amendment) Act, 1960 (37 of 1960), the official liquidator shall submit a preliminary
report to the High Court within two months from the date of the winding up order or where the winding up order has
been made before such commencement, within two months from such commencement, giving the information required
by that section so far as it is available to him and also stating the amount of assets of the banking company in cash
which are in his custody or under his control on the date of the report and the amount of its assets which are likely to be
collected in cash before the expiry of that period of two months in order that such assets may be applied speedily
towards the making of preferential payments under section 530 of the Companies Act, 1956, and in the discharge, as far
as possible, of the liabilities and obligations of the banking company to its depositors and other creditors in accordance
with the provisions hereinafter contained; and the official liquidator shall make for the purposes aforesaid every
endeavour to collect in cash as such of the assets of the banking company as practicable.
41A. Notice to preferential claimants and secured and unsecured creditors
(1) Within fifteen days from the date of the winding up order of a banking company or where the winding up order has
been made before the commencement of the Banking Companies (Second Amendment) Act, 1960 (37 of 1960), within
one month from such commencement, the official liquidator shall, for the purpose of making an estimate of the debts
and liabilities of the banking company (other that its liabilities and obligations to its depositors), by notice served in
such manner as the Reserve Bank may direct, call upon—
(a) every claimant entitled to preferential payment under section 530 of the Companies Act, 1956(1 of 1956), and
(b) every secured and every unsecured creditor, to send to the official liquidator within one month from the date of the
service of the notice a statement of the amount claimed by him.
(2) Every notice under sub-section (1) sent to a claimant having a claim under section 530 of the Companies Act, 1956
(1 of 1956), shall state that if a statement of the claim is not sent to the official liquidator before the expiry of the period
of one month from the date of the service, the claim shall not be treated as a claim entitled to be paid under section 530
of the Companies Act, 1956, in priority to all other debts but shall be treated as an ordinary debt due by the banking
company.
(3) Every notice under sub-section (1) sent to a secured creditor shall require him to value his security before the expiry
of the period of one month from the date of the service of the notice and shall state that if a statement of the claim
together with the valuation of the security is not sent to the official liquidator before the expiry of the said period, then,
the official liquidator shall himself value the security and such valuation shall be binding on the creditor.
(4) If a claimant fails of comply with the notice sent to him under sub-section (1), his claim will not be entitled to be
paid under section 530 of the Companies Act, 1956 (1 of 1956), in priority to all other debts but shall be treated as an
ordinary debt due by the banking company; and if a secured creditor fails to comply with the notice sent to him under
sub-section (1), the official liquidator shall himself value the security and such valuation shall be binding on the
creditor.]
42. Power to dispense with meetings of creditors, etc
Notwithstanding anything to the contrary contained in [section 460] of the Companies Act, 1956 (1 of1956)], the [High
Court] may, in the proceedings for winding up a banking company, dispense with any meetings of creditors or
contributories if it considers that no object will be secured thereby sufficient to justify the delay and expense.
43. Booked depositors' credits to be deemed proved.-
In any proceeding for the winding up of a banking company, every depositor of the banking company shall be deemed
to have filed his claim for the amount shown in the books of the banking company as standing to his credit and,
notwithstanding anything to the contrary contained in [section 474 of the Companies Act, 1956 (1 of 1956)], the High
Court shall presume such claims to have been proved, unless the official liquidator shows that there is reason for
doubting its correctness.]
43A. Preferential payments to depositors.-
(1) In every proceeding for the winding up of a banking company where a winding up order has been made, whether
before or after the commencement of the Banking Companies (Second Amendment) Act, 1960, (37 of1960) within
three months from the date of the winding up order or where the winding up order has been made before such
commencement, within three months there from, the preferential payments referred to in section 530 of the Companies
Act, 1956 (1 of 1956), in respect of which statements of claims have been sent within one month from the date of the
service of the notice referred to in section 41 A, shall be made by the official liquidator or adequate provision for such
payments shall be made by him.
(2) After the preferential payments as aforesaid have been made or adequate provision has been made in respect thereof,
there shall be paid within the aforesaid period of three months-

(a) in the first place to every depositor in the savings bank account of the banking company a sum of two hundred and
fifty rupees or the balance at his credit, whichever is less; and thereafter;

(b) in the next place, to every other depositor of the banking company a sum of two hundred and fifty rupees or the balance
at his credit, whichever is less, in priority to all other debts from out of the remaining assets of the banking company
available for payment to general creditors:

PROVIDED that the sum total of the amounts paid under clause (a) and clause (b) to any one person who in his own name
(and not jointly with any other person) is a depositor in the savings bank account of the banking company and also a
depositor in any other account, shall not exceed the sum of two hundred and fifty rupees.

(3) Where within the aforesaid period of three months full payment cannot be made of the amounts required to be paid
under clause (a) or clause (b) of sub-section (2) with the assets in cash, the official liquidator shall pay within that period
to every depositor under clause (a) or, as the case may be, clause (b) of that sub-section on a pro rata basis so much of the
amount due to the deposit or under that clause as the official liquidator is able to pay with those assets; and shall pay the
rest of that amount to every such depositor as and when sufficient assets are collected by the official liquidator in cash.

(4) After payments have been made first to depositors in the savings bank account and then to the other depositors in
accordance with the foregoing provisions, the remaining assets of the banking company available for payment to general
creditors shall be utilised for payment on a pro rata basis of the debts of the general creditors and of the further sums, if
any, due to the depositors; and after making adequate provision for payment on a pro rata basis as aforesaid of the debts
of the general creditors, the official liquidator shall, as and when the assets of the company are collected in cash, make
payment on a pro rata basis as aforesaid, of the further sums, if any, which may remain due to the depositors referred to
in clause (a) and clause (b) of sub-section (2).
(5) In order to enable the official liquidator to have in his custody or under his control in cash as much of the assets of the
banking company as possible, the securities given to every secured creditor may be redeemed by the official liquidator-

(a) where the amount due to the creditor is more than the value of the securities as assessed by him or, as the case may
be, as assessed by the official liquidator, on payment of such value; and
(b) where the amount due to the creditor is equal to or less than the value of the securities as so assessed, on payment of
the amount due:
PROVIDED that where the official liquidator is not satisfied with the valuation made by the creditor, he may apply to
the High Court for making a valuation.
(6) When any claimant, creditor or depositor to whom any payment is to be made in accordance with [the provisions of
this section], cannot be found or is not readily traceable, adequate provision shall be made by the official liquidator for
such payment.
(7) For the purposes of this section, the payments specified in each of the following clauses shall be treated as payments
of a different class, namely: -
(a) payments to preferential claimants under section 530 of the Companies Act, 1956 (1 of1956);
(b) payments under clause (a) of sub-section (2) to the depositors in the savings bank account;
(c) payments under clause (b) of sub-section (2) to the other depositors;
(d) payments to the general creditors and payments to the depositors in addition to those specified in clause (a) and
clause (b) of sub-section (2).
(8) The payments of each different class specified in sub-section (7) shall rank equally among themselves and be paid in
full unless the assets are insufficient to meet them, in which case they shall abate in equal proportion.]]
(9) Nothing contained in sub-sections (2), (3), (4),(7) and (8) shall apply to a banking company in respect of the
depositors of which the Deposit Insurance Corporation is liable under section 16 of the Deposit Insurance Corporation
Act, 1961, (47 of 1961).
(10) After preferential payments referred to in sub-section (1) have been made or adequate provision has been made in
respect thereof, the remaining assets of the banking company referred to in sub-section (9)available for payment to
general creditors shall be utilised for payment on pro rata basis of the debts of the general creditors and of the sums due
to the depositors:
PROVIDED that where any amount in respect of any deposit is to be paid by the liquidator to the Deposit Insurance
Corporation under section 21 of the Deposit Insurance Corporation Act, 1961 (47 of 1961), only the balance, if any, left
after making the said payment shall be payable to the depositor
44. Powers of High Court in voluntary winding up.-
(1) Notwithstanding anything to the contrary contained in section 484 of the Companies Act, 1956 (1of 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.
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 2[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 4[in writing as not
being incapable of being worked and as not being detrimental to the interests of the depositors of such banking company.]

(2) Where an application under 6[section 39 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.
 UNIT-II
RESERVE BANK OF INDIA ACT, 1934
ORGANIZATION OF RBI:
Establishment
The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reser ve Bank of
India Act, 1934.
The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in
1937. The Central Office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government
of India.
Preamble
The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:
"to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to its advantage; to have a modern
monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price
stability while keeping in mind the objective of growth."

3. Establishment and incorporation of Reserve Bank.

(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.
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 8[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 the Central Government; and
(d) one Government official to be nominated by the Central Government;]
(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 that Government may specify.]
(3) A Deputy Governor and the Director nominated under clause (d) of subsection
(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 and thereafter until
his successor shall have been nominated].]
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 re-nomination.

9. Local Boards, their constitution and functions.

(1) A Local Board shall be constituted for each of the four areas specified in the First Schedule and shall consist of five
members to be appointed by the Central Government to represent, as far as possible, territorial and economic interests
and the interests of co-operative and indigenous banks.
(2) The members of the Local Board shall elect from amongst themselves one person to be the chairman of the Board.
(3) Every member of a Local Board shall hold office for a term of four years and thereafter until his successor shall
have been appointed and shall be eligible for re-appointment.]
(4) A Local Board shall advise the Central Board on such matters as may be generally or specifically referred to it and
shall perform such duties as the Central Board may delegate to it.

The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The
Board was constituted in November 1994 as a committee of the Central Board of Directors of the
Reserve Bank of India.
Objective
Primary objective of BFS is to under take consolidated supervision of the financial sector comprising commercial
banks, financial institutions and nonbanking finance companies.
Constitution
The Board is constituted by co-opting four Directors from the Central Board as members for a term of two years and is
chaired by the Governor. The Deputy Governors of the Reserve Bank are ex-officio members. One Deputy
Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-
Chairman of the Board.
BFS meetings
The Board is required to meet normally once every month. It considers inspection repor ts and other supervisory issues
placed before it by the supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and internal audit
functions in banks and financial institutions. The audit sub-committee includes Deputy Governor as the chairman and
two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision (DBS), Department of Non-Banking
Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on the regulatory and supervisory
issues.

POWERS AND FUNCTIONS OF RBI:

FUNCTIONS:
Functions of RBI can be classified into following categories:
a) Traditional functions
b) Development functions
c) Supervisory functions

(A) TRADITIONAL FUNCTIONS OF RBI

1. Issue of Currency Notes
As per the provisions of the Section 22 of the Reserve Bank of India Act 1934 the RBI has sole right or authority to
issue currency notes except one rupee note and coins of smaller denomination. RBI can exchange these currency notes
for other denominations. RBI issues these currency notes ( 2, 5, 10, 20, 50, 100, 500, 1000) against the security of gold
bullion, foreign securities, rupee coins, exchange bills, promissory notes and government of India bonds etc.
2. Banker to other Banks
RBI also guide, help and direct other commercial banks in the country.RBI can control the volume of bank reserves.
Every commercial bank has to maintain a part of their reserves with Its parent (RBI). If bank need fund they approach to
RBI for fund, that is called Lender of the Last Resort.
3. Banter to The Government
RBI works as an agent of the central and state governments. On the behalf of government it makes payments, taxes and
deposits etc. It also represent the government at international level also. It maintains government accounts and provide
financial advice to the government. It also manages government public debts and maintains foreign exchange reserves
on behalf of the government. RBI also provides overdraft facility to the government in case of financial shortage.
4. Exchange Rate Management
For maintenance of the external value of rupee, RBI prepares domestic policies.
Also it need to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate
stability. For maintenance of exchange rate stability it has to bring demand and supply of foreign currency (U.S.) dollar
close to each other.
5. Credit Control Function
Commercial banks creates credit according to demand in the economy. But if this credit creation is unchecked or
unregulated then it leads the economy into credit creation is unchecked or unregulated then it leads the economy into
inflationary cycles. If credit creation is below the required limit then it harms the growth of the economy. As a central
bank of India, RBI has to look for growth with price stability. Thus it creates the credit creation capacity of commercial
banks by using various credit control tools.
6. Supervisory Function:RBI supervise the banking system in India. RBI has power to issue licence for setting up new
banks, to open new branches, to decide minimum reserves. RBI inspects functioning of commercial banks in India and
abroad. RBI also guide and direct the commercial banks in India. RBI can conduct audit any of the bank
(B) DEVELOPMENTAL FUNCTIONS OF RBI
Developmental functions are described as under:
1. Development of the Financial System
The financial systems includes - financial institutions, financial markets and financial instruments. The sound and
efficient financial system is necessary for rapid economic development of the nation.
RBI encourages the banking and non - banking institution for maintenance of sound and healthy financial system.
2. Development of Agriculture
As we know, India is an agrarian economy so RBI always give attention to agriculture sector by assessing credit needs
of this sector. Regional Rural Banks (RRB), National Bank for Agriculture and Rural Development (NABARD) which
are only for agriculture finance comes under the control of the RBI.
3. Industrial Finance
For economic development of country, Industrial development is necessary. As we know industries includes small
industries, middle industries, large scale industries etc all these industries development is necessary for overall
economic development of country. For this purpose RBI supports the industrial sector also.
RBI had played the vital role for setting up of such industrial finance institutions like ICICI Limited, IDBI, SIDBI,
EXIM etc.
4. Training Provision
RBI always tried to provide essential training to the staff of the banking industry.
RBI has set up banker's training college at several places. The training institute namely National Institute of Bank
Management (NIBM), Bankers Staff College (BSC), College of Agriculture Banking (CAB) etc.
5. Data Collection
RBI always collects important statistical data on several topics such as interest rates, inflation, savings, investment,
deflation etc. This data is very much useful for policy makers and researchers.
6. Publication of the Reports
RBI has its separate publication division. This division collect and publish data on different sector of the economy. The
reports and bulletins are regularly published by the RBI. It includes RBI weekly reports, RBI annual reports, Report on
Trend and Progress of commercial banks. This information is made available to the public also at cheaper rates.
7. Promotion of Banking Habits
RBI always takes necessary steps to promote the banking habits among people for economic development of country.
RBI has set up many institutions such as Deposit Insurance Corporation 1962, UTI 1964, IDBI 1964, NABARD 1982,
NHB 1988 etc. These organizations develop and promote the banking habits among the people.
8. Export Promotion
RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The
Export - Import Bank of India (EXIM), and the Export Credit Guarantee Corporation of India (ECGC) are supported by
refinancing their lending for export purpose.

(C) SUPERVISORY FUNCTIONS

The supervisory functions of RBI are discussed as under:
1. Granting Licence to Banks
RBI grants licence to banks for carrying its business. RBI also provide licence for opening extension counters, new
branches even to close down existing branches.
2. Bank Inspection
RBI has power to ask for periodical information from banks on various components of assets and liabilities.
3. Control Over NBFIs
The non - bank financial institutions are not influenced by the working of a monitory policy. RBI has a right to issue
directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the
NBFIs.
4. Implementation of Deposit Insurance Scheme
The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposit of small depositors. All
bank deposits below Rs. 1 Lakh are insured with this corporation. The RBI work to implement the Deposit Insurance
Scheme in case of a bank failure.

RBI AND ITS PROMOTIONAL ROLE:

The Reserve Bank of India (RBI) has been playing an important role in the economy of the country both in its
regulatory and promotional aspects. Since the inception of planning in 1951, the developmental activities are gaining
momentum in the country.
Accordingly, more and more responsibilities have been entrusted with the RBI both in the regulatory and promotional
area. Now-adays, the RBI has been performing a wide range of regulatory and promotional functions in the country.
The following are some of the regulatory and promotional functions performed by the RBI:
1. Regulating the Volume of Currency:
The RBI is performing the regulatory role in issuing and controlling the entire volume of currency in the country
through its Issue Department. While regulating the volume of currency the RBI is giving priority on the demand for
currency and the stability of the economy equally.
2. Regulating Credit:
The RBI is also performing the role to control the credit money created by the commercial banks through its qualitative
and quantitative methods of credit control and thereby maintains a balance in the money supply of the country.
3. Control over Commercial Banks:
Another regulatory role performed by the RBI is to have control over the functioning of the commercial banks. It also
enforces certain prudential norms and rational banking principles to be followed by the commercial banks.
4. Determining the Monetary and Credit Policy:
The RBI has been formulating the monetary and credit policy of the country every year and thereby it controls the
Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), bank rate, interest rate, credit to priority sectors etc.
5. Mobilizing Savings:
The RBI is playing a vital promotional role to mobilize savings through its member commercial banks and other
financial institutions. RBI is also guiding the commercial banks to extend their banking network in the unbanked rural
and semi-urban areas and also to develop banking habits among the people. All these have led to the attainment of
greater degree of monetization of the economy and has been able to reduce the activities of indigenous bankers and
private money lenders.
6. Institutional Credit to Agriculture:
The RBI has been trying to increase the flow of institutional credit to agriculture from the very beginning. Keeping this
objective in mind, the RBI set up ARDC in 1963 for meeting the long term credit requirement of rural areas. Later on in
July 1982, the RBI set up NABARD and merged ARDC with it to look after its agricultural credit functions.
7. Specialized Financial Institutions:
The RBI has also been playing an important promotional role for setting specialized financial institutions for meeting
the long term credit needs of large and small scale industries and other sectors.
Accordingly, the RBI has promoted the development of various financial institutions like, WCI, 1DBI, ICICI, SIDBI,
SFCs, Exim Bank etc. which are making a significant contribution to industry and trade of the country.
8. Security to Depositors:
In order to remove the major hindrance to the deposit mobilization arising out of frequent bank failures, the RBI took
major initiative to set up the Deposit Insurance Corporation of India in 1962. The most important objective of this
corporation is to provide security to the depositors against such failures.
9. Advisory Functions:
The RBI is also providing advisory functions to both the Central and State Governments on both financial matters and
also on general economic problems.
10. Policy Support:
The RBI is also providing active policy support to the government through its investigation research on serious
economic problems and issues of the country and thereby helps the Government to formulate its economic policies in a
most rational manner. Thus, it is observed that the RBI has been playing a dynamic role in the economic development
process of the country through its regulatory and promotional framework.

Promotional Role of RBI

1. Promotion of commercial banking
2. Promotion of cooperative banking
3. Promotion of industrial finance
4. Promotion of export finance
5. Promotion of credit to weaker sections
6. Promotion of credit guarantees
7. Promotion of differential rate of interest scheme
8. Promotion of credit to priority sections including rural & agricultural sector.

RBI AND COMMERCIAL BANKS:

One of the most important functions of RBI is to work as regulator and supervisor of financial system. The financial
system in India includes Commercial Banks, Regional Rural Banks, Local Area Banks, Cooperative Banks, Financial
Institutions including Development Financial Institutions (DFIs) and Non-Banking Financial Companies.

RBI derives its regulating powers for Indian Banking System from the provisions of the Banking Regulation Act 1949.
For other entities, it derives power from the RBI act 1934. The objectives of this function are to protect the interest of
the depositors and maintain the safety and soundness of the banking and Financial System of the country.
After the liberalization of the Indian Economy and Banking reforms in 1990s, the amplitude of the supervisory
functions of RBI became has grown enormously. To keep up with the added importance of this function, the Board of
Financial Supervision was constituted in 1994. Since then, BFS is working as the main guiding force behind RBI’s
regulatory and supervisory initiatives.
Further, various departments have been created for effective supervisory functions. For example:
Department of Banking Operations and Development (DBOD) frames regulations for commercial banks.
Department of Banking Supervision (DBS) undertakes supervision of commercial banks, including the local area banks
and all-India financial institutions.
Department of Non-Banking Supervision (DNBS) regulates and supervises the Non-Banking Financial Companies
(NBFCs)
Urban Banks Department (UBD) regulates and supervises the Urban Cooperative Banks (UCBs).
Regulation of Regional Rural Banks (RRBs) and the Rural Cooperative Banks is done by Rural Planning and Credit
Department (RPCD); while the supervision of these comes under NABARD.

Licensing Requirements
To do a business of commercial banking in India, whether it is India or Foreign, a license from RBI is required.
Opening of Branches is handled by the Branch Authorization Policy. At present, Indian banks no longer require a
license from the Reserve Bank for opening a branch at a place with population of below 50,000.
Corporate Governance in Banks
One of the policy objectives of RBI is to ensure high-quality corporate governance in banks. RBI has issued guidelines
for ‘_t and proper’ criteria for director of banks. One of these guidelines is that the directors of the banks should have
special knowledge / experience in the various banking related areas. RBI can also appoint additional directors to the
board of a banking company.
Statutory Pre-emptions
Each commercial bank is required to maintain certain portion of their Net Demand and Time Liabilities (NDTL) in the
form of cash with the Reserve Bank, called Cash Reserve Ratio (CRR) and in the form of investment in approved
securities, called Statutory Liquidity Ratio (SLR). These are called statutory Pre-emptions.
Interest Rates
The interest rates on most of the categories of deposits and lending transactions have been deregulated and are largely
determined by banks.Reserve Bank regulates the interest rates on savings bank accounts and deposits of non-resident
Indians (NRI), small loans up to rupees two lakh, export credits and a few other categories of advances.
Prudential Norms
Prudential Norms refers to ideal / responsible norms maintained by the banks.
RBI issues “Prudential Norms” to be followed by the commercial banks to strengthen the balance sheets of banks. Some
of them are related to income recognition, asset classi_cation and provisioning, capital adequacy, investments portfolio
and capital market exposures. RBI has issued its guidelines under the Basel II for risk management.
Disclosure Norms
One of the important tools for marketing discipline is to maintain public disclosure of relevant information. As per
RBI’s directives, the banks are required to make disclosures of their annual reports and some other documents about
their capital adequacy, asset quality, liquidity, earnings aspects and penalties imposed on them by the regulator.
Anti-Money Laundering Norms
KYC norms ( Know Your Customer) Anti- Money Laundering (AML) and Combating Financing of Terrorism (CFT)
guidelines are some of the major issues on which RBI keeps issuing its norms and guidelines.
Protection of Small Depositors
RBI has set up the Deposit Insurance and Credit Guarantee Corporation (DICGC) to protect the interest of small
depositors, in case of bank failure. The DICGC provides insurance cover to all eligible bank depositors up to Rs.1 lakh
per depositor per bank.
Para – banking Activities
Parabanking activities are those activities which don’t come under the traditional banking activities. Examples of such
activities are asset management, mutual funds business, insurance business, merchant banking activities, factoring
services, venture capital, card business, equity participation in venture funds and leasing. The RBI has permitted banks
to under take these activities under the guidelines issued by it from time to time.
Annual Onsite Inspection
RBI undertakes annual on-site inspection of banks to assess their financial health and to evaluate their performance in
terms of quality of management, capital adequacy, asset quality, earnings, liquidity position as well as internal control
systems.
Based on the _ndings of the inspection, banks are assigned supervisory ratings based on the CAMELS rating.
OSMOS
OSMOS refers to Off Site Surveillance and Monitoring System. The RBI requires banks to submit detailed and
structured information periodically under OSMOS. On the basis of OSMOS, RBI analyzes the health of the banks.
E-Banking or Internet banking:
Online banking also known as internet banking, e-banking, or virtual banking, is an electronic payment system that
enables customers of a bank or other �nancial institution to conduct a range of financial transactions through the
financial institution's website. Internet banking is a term used to describe the process whereby a client executes banking
transactions via electronic means. This type of banking uses the internet as the chief medium of delivery by which
banking activities are executed. The activities clients are able to carry out are can be classified to as transactional and
non transactional.
Advantages of E-banking or Internet banking
1. Convenience: Banks that o�er internet banking are open for business transactions anywhere a client might be as
long as there is internet connection. Apart from periods of website maintenance, services are available 24 hours a day
and 365 days round the year. In a scenario where internet connection is unavailable, customer services are provided
round the clock via telephone.
2. Low cost banking service: E-banking helps in reducing the operational costs of banking services. Better quality
services can be ensured at low cost.
4. Transfer services: Online banking allows automatic funding of accounts from long established bank accounts via
electronic funds transfers.
5. Ease of monitoring: A client can monitor his/her spending via a virtual wallet through certain banks and applications
and enable payments.
6. Ease of transaction: The speed of transaction is faster relative to use of ATM’s or customary banking.
7. Discounts: The credit cards and debit cards enables the Customers to obtain discounts from retail outlets.
8. Quality service: E-Banking helps the bank to provide efficient, economic and quality service to the customers. It
helps the bank to create new customer and retaining the old ones successfully.
9. Any time cash facility: The customer can obtain funds at any time from ATM machines.

Disadvantages of E-banking Internet banking

1. High start-up cost: E-banking requires high initial startup cost.
It includes internet installation cost, cost of advanced hardware and software, modem, computers and cost of
maintenance of all computers.
2. Security Concerns: One of the biggest disadvantages of doing e-banking is the question of security. People worry
that their bank accounts can be hacked and accessed without their knowledge or that the funds they transfer may not
reach the intended recipients.
3. Training and Maintenance: E-banking requires 24 hours supportive environment, support of qualified staff.

MOBILE BANKING:
Mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct
financial transactions remotely using a mobile device such as a smartphone or tablet.
Unlike the related internet banking it uses software, usually called an app, provided by the financial institution for the
purpose.
Mobile banking is usually available on a 24-hour basis. Some financial institutions have restrictions on which accounts
may be accessed through mobile banking, as well as a limit on the amount that can be transacted.
Transactions through mobile banking may include obtaining account balances and lists of latest transactions, electronic
bill payments, and funds transfers between a customer's or another's accounts. Some apps also enable copies of
statements to be downloaded and sometimes printed at the customer's premises; and some banks charge a fee for
mailing hardcopies of bank statements.
From the bank's point of view, mobile banking reduces the cost of handling transactions by reducing the need for
customers to visit a bank branch for noncash withdrawal and deposit transactions.
Mobile banking does not handle transactions involving cash, and a customer needs to visit an ATM or bank branch for
cash withdrawals or deposits.
Many apps now have a remote deposit option; using the device's camera to digitally transmit cheques to their financial
institution.
Mobile banking differs from mobile payments, which involves the use of a mobile device to pay for goods or services
either at the point of sale or remotely,[1] analogously to the use of a debit or credit to effect an EFTPOS payment.

The Reserve Bank of India recently informed banks to encourage mobile banking. In coming days we will see more
number of people getting addicted to the ease of mobile banking.
In the internet era, mobile banking can be considered as boon as well as bane. However, many people still are not able
to relay on mobile banking due to its exposure to risk. Here are few safety tips which you can consider.
For people who are planning to go with mobile banking, here are few advantages and disadvantages to keep in mind.
Advantages of Mobile Banking
In Mobile banking, the user can transfer funds from your bank account to another bank account with a smartphone just
with the help of the internet, from anywhere to everywhere.
It is available for 24 hours and easy and convenient mode for many Mobile users in the rural areas.
Mobile Banking is said to be more secure and risk-free than online Internet Banking.
With the help of Mobile, Banking user can transfer funds, and pay bills, checking account balance, study your recent
transaction, block your ATM card, etc. Mobile Banking is cost-effective, and Banks
offer this service at less cost to the customers.

Disadvantages of Mobile Banking

Mobile Banking is not available on all mobile phone. Sometimes, it requires you to install apps on your phone to use the
Mobile Banking feature which is available on the high-end smartphone. If the customer does not have a smartphone
than the use of Mobile Banking becomes limited. A transaction like transfer of funds is only available on high-end
phones. Regular use of Mobile Banking may lead to extra charges levied by the bank for providing the service. Mobile
banking users are at risk of getting fake SMS messages and scams. The loss of a mobile customer device often means
that criminals can gain access to your mobile banking PIN and other sensitive information.

Risks associated with mobile banking

Apart from this there are the usual risks associated with mobile banking that could include hacking.
However, one needs to be careful and not share the password, just as you apply the same principal to the desktop. It is
believed that bulk of the banking frauds take place through known relatives. So be careful when you share your mobile
banking password. In fact, we strongly suggest that you have a screenlock for your mobile whereby nobody would be
able to open the same.

Steps to improve safety when banking with mobile

Make sure that you do not open a link through your email that is unknown. By doing so, you are making yourself more
vulnerable to mobile banking frauds. Also do not access your mobile banking from a wi fi spot. This can be extremely
dangerous. If you have your own data card that should be good enough.
Another mobile banking saftey tip that you must adopt is to ensure that you do not use easy passwords. That can be
extremely dangerous and full of risks.

AUTOMATED TELLER MACHINE:

DEFINITION OFATM
Automated Teller Machine can be terms as a computerized machine built to provide its user normally the clients of
banks with facility to have access over their bank account for withdrawing cash known as dispensing cash by
Automated teller machine as well to accept from the bank customers deposit in shape of currency notes or checks and
allow the customer to transfer money from his or her account to materialize the deals and to carry out all these banking
functions only though the machine thereby allowing the customer to carry transactions without visiting bank branch in
person. Since Automated teller machines are available for operation any time of the day without any restrictions, it is
also called 24-hour machines, thus Automated tellers machines are the electronic terminals allowing the customer of a
bank to perform his banking operation at almost any time. Automated teller machine works as a full-fledged branch of
the bank. Automated teller machine enables a customer to perform basic banking activities from locations far off from
the actual bank and being aligned to number of banks it acts branch outlet for all the connected banks from one location.

E-BANKING AND ROLE OF ATM IN BANKING:

E-banking is an abbreviation for electronic banking. E-banking is generally implies for a service which allows
customers to have account-specific information and also possibly conduct transactions from a remote location using
computer equipped with network. A user can use this facility from any remote locations be it home or ones workplace.
It allows a client to conduct online bank transactions and the client need not to visit either his own bank or need of
visiting an Automated teller machine. E-Banking is the automated delivery replacing traditional banking system and
fulfills the customers requirements through electronic facilities i.e. e-network which is interactive channels for
communication. E-banking is a systems of banking enabling financial institution and its customers, be it individuals or
businesses establishment to have access its accounts, freedom to transact business as well to obtain information of the
financial products and services using network either private or public. Internet .Customers can have access to e-banking
services which uses intelligent electronic device. Such electronic device may be a personal computer, or a personal
digital assistant or an automated teller machine or electronic kiosk, with touch tone telephone. facilities. Electronic
banking is also called on its function as electronic funds transfer (EFT), thereby transfer funds directly from one
account to another account by using simple electronic facilities.
ATM MANUFACTURERS AND SERVICE PROVIDERS
There are two types ATM service provider known as brown level and white level ATMs. In brown level Automated
teller machines the hardware of machine and its accessories with the lease has to be owned by the service provider.
However the connectivity, management and cash handling are to be dealt by the sponsor bank in the responsible
manner. Such Automated teller machines do carry the logo of the sponsor bank with brand name. Under this model
network has to be shared by banks thereby resulting in drastic cutting of costs within banks.
These Automated teller machines have two major advantages. First advantage, in this model is that the capital
investment has to be undertaken by the Automated teller machine vendors and thus relieves the banks from locking own
their funds as a depreciating assets. Secondly, vendors receive a fee from bank for each transaction from bank whose
card is used.
White Level ATMs: In case of White Level Automated teller machines, non banking entities have been permitted to set
up as well own and also operate the Automated teller machine. According to Reserve Bank of India’s Guidelines,
minimum net worth necessary for non banking entities to set up Automated teller machines services should be
minimum of 100 Crores. White level Automated teller machine providers can provide services to all customers of all
banks to increase the clienteles. White level Automated teller machine operators are “acquirer” for all transactions in
financial terms at a White level Automated teller machines and earn fees correspondingly. White level Automated teller
machine operators are being permitted to earn extra revenue through advertisement at White level Automated teller
machine counter and kiosks and also by offering value added services. Reserve Bank of India has allowed for placing of
the advertisements on such White level Automated teller machines are on conditionthat such advertisement must
confirm regulations set by Advertising Standard Council of India and under its codes and regulations. The operator has
to choose and tie up with a sponsor bank. The Sponsor bank has to bear the discharge the responsibility as the
settlement bank for transactions made at the White level Automated teller machines. In this case the maintenance and
servicing of Automated teller machine becomes the responsibility of operator.

Step by step data processing of machine for cash dispensing are described by which we can easily understand the step
by step data process functioning of Automated teller machine and its operation these steps are as follows:
Step 1: Enter PIN and verify PIN
Step 2 : prepare command for processing
Step 3: update display
Step 4: display customer options
Step 5: prepare message
Step 6: receive operator commands
Step 7: manage withdrawal
Step 8: prepare printout
Step 9: complete transaction and return to standby mode

TYPES OF ATM
There are five types of Automated teller machine these are:
Onsite ATM
Automated teller machine is located either within the branch premises or in very close proximity of the branch.
Offsite ATM
Automated teller machine is not located within the branch premises but is located at other places, such as shopping
centers, airports, railways station and petrol stations.
Worksite ATM
Automated teller machine is located within the premises of an organization and is generally meant only for the
employees of the organization.
Cash Dispenser-
Allows only cash withdrawals, balance enquiry and mini statement requests, cash dispenser(CD) is generally used as the
Automated teller machine, however the customer cannot deposit cash or cheques in a CD, whereas full Automated teller
machine is designed cash withdrawl as well as for depositing cash or cheque.
Mobile ATM
It refers to an Automated teller machine, which are installed on commercial vehicle that moves in various areas for the
customers. Such Automated teller machine is also known ATM on wheels and have been introduced by Few private
banks.
Objectives of ATM
The objective of Automated teller machine is that people can draw or save money at any time by themselves and reduce
staff’s work. The best use of user is not bound to perform transaction with a bank during banking hour of the day and
only working day of bank. Automated teller machine also to reduce labor costs for the bank and increase availability of
banking service in a safe and cost effective method. An ATM system enables the customers to have easier transaction of
money at anytime without standing or waiting in queue. Followings are the main objectives of Automated Teller
Machine or an ATM as it is commonly called is a machine that provides banking functions to customers. It is needed
because: Banks are open for particular hour on working day.
Not all bank branches are open on all days of the week Customers may need banking functions even on holidays and
weekends. Customers may not be in a position to visit the bank every time they want to withdraw or deposit money
So, the Automated teller machines help banks to provide banking services to their customers 24x7 on all 365 days of the
year.

ADVANTAGES OF ATM
Followings are the main advantages of ATM:
1. ATM provides 24 hours service: ATMs provide service round the clock. The customer can withdraw cash up to a
certain a limit during any time of the day or night.
2. ATM gives convenience to bank’s customers: ATMs provide convenience to the customers. Now-a-days, ATMs
are located at convenient places, such as at the air ports, railway stations, etc. and not necessarily at the Bank’s
premises. It is to be noted that ATMs are installed off-site (away from bank premises) as well as on site (installed within
bank’s premises). ATMs provide mobility in banking services for withdrawal.
3. ATM is cost beneficial: An executive/business man/any individual who has to travel can withdraw cash out station
without any additional cost, where he/she is required to pay commission to bank for issue of travelers cheque and has to
return unused travelers cheques as they have validity period with them and uses losses interest on traveler from date of
issue to date of use/refund.
4. ATM reduces the workload of bank’s staff: ATMs reduce the work pressure on bank’s staff and avoids queues in
bank premises.
5. ATM provides service without any error: ATMs provide service without error. The customer can obtain exact
amount. There is no human error as far as ATMs are concerned.
6. ATM is very beneficial for travelers: ATMs are of great help to travelers. They need not carry large amount of cash
with them. They can withdraw cash from any city or state, across the country and even from outside the country with
the help of ATM.
7. ATM may give customers new currency notes: The customer also gets brand new currency notes from ATMs. In
other words, customers do not get soiled notes from ATMs.
8. ATM provides privacy in banking transactions: Most of all, ATMs provide privacy in banking transactions of the
customer.

DISADVANTAGES OF ATM
Following are the main disadvantages of ATM :
People with disabilities experience a range of difficulties while attempting to interact with Automatic teller machines.
Level and quantum of difficulties may vary depending upon the nature of the disability, but the overall outcome is lack
of comfortable and effective use of ATM facilities. This may lead to over-the-counter surcharges or even denial of
access to funds.
Though there are talking ATMs for visually impaired but they very few and visually impaired can either make use
general ATMs with help of assistance, which is not without added risk or cannot use general ATMs as he cannot make
read directions on the screen and some or cannot use all of the keyboard functions.
In brief, for people with low vision, the problem is the difficulty encountered reading the ATM signage, screen, key
labels and receipts. Glare, poor lighting and the all-to-often small and low contrast print combine to make access
difficult. Newer ATMs with larger clearer screens are preferred by people with some residual vision.
Although keyboards are an important part of an ATM, from an accessibility perspective they really are secondary to the
screen output of the machine. Many ATMs in Australia now have some Braille on the keypad keys which is of
assistance to a number of people who are blind.
However, Braille on keys is neither not nearly as important nor of nearly as much benefit as the general public and even
most banking staff have been led to believe.
Glare, and the size and contrast of print on ATM screens are the main problems that people with low vision face when
conducting an ATM transaction. Lack of contrast and poor definition labeling on the machine and difficult to read
receipts are also a barrier.
Most people surveyed didn’t conduct advanced ATM transactions, as is probably the case for the majority of ATM
users. Cash withdrawal was the main function carried out via ATM, withtelephone banking and branches being used for
more demanding requirements.
Transactions on ATMs over and above permissible limit is at cost and the Reserve bank of India has further restricted
free use of ATMs of other bank.
 UNIT-III
THE STATE BANK OF INDIA ACT,1934
CHAPTER II
INCORPORATION AND SHARE CAPITAL OF STATE BANK
3. Establishment of the State Bank.—(1) A Bank to be called the State Bank of India shall be constituted to carry on
the business of banking and other business in accordance with the provisions of this Act and for the purpose of taking
over the undertaking of the Imperial Bank.
(2) The [Central Government], together with such other persons as may from time to time become shareholders in the
State Bank in accordance with the provisions of this Act, shall, so long as they are shareholders in the State Bank,
constitute a body corporate with perpetual succession and a common seal under the name of the State Bank of India,
and shall sue and be sued in that name.
(3) The State Bank shall have power to acquire and hold property, whether movable or immovable, for the purposes for
which it is constituted and to dispose of the same.
4. Authorised capital.—Subject to the provisions of this Act, the authorised capital of the State Bank shall be five
thousand crores of rupees divided into five hundred crores of fully paid-up shares often rupees each:
Provided that the Central Board may reduce the nominal or face value of the shares, and divide the authorised capital
into such denomination as it may decide with the approval of the Reserve Bank:
Provided further that the Central Government may, in consultation with the Reserve Bank, increase or reduce the
authorised capital so however that the shares in all cases shall be fully paid-up shares.]
5. Issued capital.—(1) The issued capital of the State Bank shall, on the appointed day, be five crores, sixty-two lakhs
and fifty thousand rupees divided into five lakhs, sixty-two thousand and five hundred shares, all of which shall, on the
appointed day, stand allotted to the Reserve Bank in lieu of the shares of the Imperial Bank 3[transferred to and vested
in it under section 6].
(2) The issued capital of the State Bank shall consist of equity shares or equity and preference shares:
Provided that the issue of preference shares shall be in accordance with the guidelines framed by the Reserve Bank
specifying 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:
Provided further that the Central Board may from time to time increase, with the previous approval of the Reserve Bank
and the Central Government, whether by public issue or rights issue or preferential allotment or private placement, in
accordance with the procedure as may be prescribed, the issued capital by the issue of equity or preference shares:
Provided also that the Central Government shall, at all times, hold not less than fifty-one per cent. of the issued capital
consisting of equity shares of the State Bank.
(3) No increase in the issued capital beyond twelve crores and fifty lakhs of rupees shall be made under sub-section (2)
without the previous sanction of the Central Government.
(4) Subject to the provisions contained in sub-section (2), the Central Board may increase from time to time, by way of
issuing bonus shares to existing equity shareholders, the issued capital in such manner as the Central Government may,
after consultation with the Reserve Bank, direct.
(5) The State Bank may, accept the money in respect of shares issued towards increase in the issued capital in
instalments, make calls, forfeit unpaid shares and re-issue them, in such manner as may be prescribed.
CHAPTER III
TRANSFER OF UNDERTAKING OF THE IMPERIAL BANK TO STATE BANK
6. Transfer of assets and liabilities of the Imperial Bank to the State Bank.—(1) Subject to the other provisions
contained in this Act, on the appointed day,
(a) all shares in the capital of the Imperial Bank shall be transferred to, and shall vest in, the Reserve Bank, free of all
trusts, liabilities and encumbrances, and
(b) the undertaking of the Imperial Bank shall be transferred to, and shall vest in, the State Bank.
(2) The undertaking of the Imperial Bank shall be deemed to include all rights, powers, authorities and privileges, and
all property, movable and immovable, including cash balances, reserve funds, investments and all other interests and
rights in, or arising out of, such property as may be in the possession of that bank immediately before the appointed day,
and all books, accounts, and documents relating thereto, and shall also be deemed to include all debts, liabilities and
obligations of whatever kind then existing of that bank.
(3) Unless otherwise expressly provided by or under this Act, all contracts, deeds, bonds, agreements, powers of
attorney, grants of legal representation and other instruments of whatever nature subsisting or having effect immediately
before the appointed day and to which the Imperial Bank is a party or which are in favour of the Imperial Bank shall be
of as full force and effect against or in favour of the State Bank, as the case may be, and may be enforced or acted upon
as fully and effectually as if instead of the Imperial Bank the State Bank had been a party thereto or as if they had been
issued in favour of the State Bank.
(4) If on the appointed day any suit, appeal or other legal proceeding of whatever nature, is pending by or against the
Imperial Bank, the same shall not abate, be discontinued or be in any way prejudicially affected by reason of the
transfer to the State Bank of the undertaking of the Imperial Bank or of anything contained in this Act, but the suit,
appeal or other proceeding may be continued, prosecuted and enforced by or against the State Bank.
7. Transfer of service of existing officers and employees of the Imperial Bank to the State Bank.—(1) Every
officer or other employee of the Imperial Bank (excepting the managing director, the deputy managing director and
other directors) in the employment of the Imperial Bank immediately before the appointed day shall, on and from the
appointed day, become an officer or other employee, as the case may be, of the State Bank, and shall hold his office or
service therein by the same tenure, at the same remuneration and upon the same terms and conditions and with the same
rights and privileges as to pension, gratuity and other matters as he would have held the same on the appointed day if
the undertaking of the Imperial Bank had not vested in the State Bank, and shall continue to do so unless and until his
employment in the State Bank is terminated or until his remuneration, terms or conditions are duly altered by the State
Bank.
(2) Any person who, on the appointed day, is entitled to or is in receipt of, a pension or other superannuation or
compassionate allowance or benefit from the Imperial Bank or any provident, pension or other fund or any authority
administering such fund shall be entitled to be paid by, and to receive from, the State Bank or any provident, pension or
other fund or any authority administering such fund the same pension, allowance or benefit so long as he observes the
conditions on which the pension, allowance or benefit was granted, and if any question arises whether he has so
observed such conditions, the question shall be determined by the Central Government and the decision of the Central
Government thereon shall be final.
(3) Notwithstanding anything contained in sub-section (1) or sub-section (2), no appointment made or promotion,
increment in salary, pension, allowance or any other benefit granted to any person after the 19th day of December,
1954, and before the appointed day which would not ordinarily have been made or granted or which would not
ordinarily have been admissible under the rules or authorisations of the Imperial Bank or of any provident, pension or
other fund in force prior to the 19th day of December, 1954, shall have effect or be payable or claimable from the State
Bank or from any provident, pension or other fund or from any authority administering the fund, unless the Central
Government has, by general or special order, confirmed the appointment, promotion or increment or has directed the
continued grant of the pension allowance or other benefit as the case may be.
(4) Notwithstanding anything contained in the Industrial Disputes Act, 1947 (14 of 1947), or in any other law for the
time being in force, the transfer of the services of any officer or other employes of the Imperial Bank from that Bank to
the State Bank shall not entitle such officer or other employees to any compensation under that Act or other law, and no
such claim shall be entertained by any Court, Tribunal or other authority.
(5) Any person holding office as managing director, deputy managing director, director or member of any Local Board
of the Imperial Bank immediately before the appointed day shall be deemed to have vacated his office as such on the
appointed day, and notwithstanding anything contained in this Act or in any other law for the time being in force or in
any agreement or contract, he shall not be entitled to any compensation from the Imperial Bank or the State Bank for the
loss of office or for the premature termination of any agreement or contract relating to his employment, except such
pension, compensation or other benefit which the State Bank may grant to him, having regard to what that person would
have received as an officer of the Imperial Bank if this Act had not been passed and if he had retired from his
employment in the ordinary course.
(6) Where any managing director, deputy managing director, director, officer or other employee of the Imperial Bank
has, after the 19th day of December, 1954, and before the appointed day, been paid any sum by way of compensation or
gratuity, the State Bank shall be entitled to claim refund of any sum so paid if the payment is not confirmed by the
Central Government by general or special order.
8. Existing provident and other funds of the Imperial Bank.—For the persons who immediately before the
appointed day are the trustees of the following funds, that is to say,—
(a) the Imperial Bank of India Employees Provident Fund;
(b) the Imperial Bank of India Employees Pension and Guarantee Fund;
(c) the Bank of Bombay Officers Pension and Guarantee Fund;
(d) the Bank of Madras Pension and Gratuity Fund; and
(e) the Bank of Madras Officers Provident and Mutual Guarantee Fund;
there shall be substituted as trustees such persons as the Central Government may, by general or special order, specify.
9. Compensation to be given to shareholders of Imperial Bank.—(1) Every person who immediately before the
appointed day is registered as a holder of shares in the Imperial Bank shall be entitled to compensation in accordance
with the provisions contained in the First Schedule.
(2) Nothing contained in sub-section (1) shall affect the rights inter se between the holder of any share in the Imperial
Bank and any other person who may have an interest in such share, and such other person shall be entitled to enforce his
interest against the compensation awarded to the holder of such share, but not against the Reserve Bank.
CHAPTER IV SHARES
10. Transferability of shares.—
(1) Save as otherwise provided in sub-section (2), the shares of the State Bank shall be freely transferable.
(2) Nothing contained in sub-section (1) shall entitle the [Central Government] to transfer any shares held by it in the
State Bank if such transfer will result in reducing the shares held by it to less than fifty-one per cent. of the issued
capital consisting of equity shares,] of the State Bank.
10A. Right of registered shareholders to nominate.—(1) Every individual registered shareholder may, at any time,
nominate, in the prescribed manner, an individual to whom all his rights in the shares shall vest in the event of his death.
(2) Where the shares are registered in the name of more than one individual jointly, the joint holders may together
nominate in the prescribed manner, an individual to whom all their rights in the shares shall vest in the event of the
death of all the joint holders.
(3) Notwithstanding anything contained in any other law tor the time being in force or in any disposition, whether
testamentary or otherwise, where a nomination in respect of shares is made in the prescribed manner and which purports
to confer on the nominee the right to vest the shares, the nominee shall, on the death of the shareholder or, as the case
may be, on the death of all the joint holders, become entitled to all the rights of the shareholder or, as the case may be,
of all the joint holders, in relation to such shares and all other persons shall be excluded unless the nomination is varied
or cancelled in the prescribed manner.
(4) Where the nominee is a minor, it shall be lawful for the individual registered holder of the shares to make
nomination to appoint, in the prescribed manner, any person to become entitled to the shares in the event of his death
during the minority of the nominee.
11. Restrictions on voting rights.—No shareholder, other than the [Central Government], shall be entitled to exercise
voting rights in respect of any shares held by him in excess of ten per cent. of the issued capital: Provided that such
shareholder shall be entitled to exercise voting rights at such higher percentage as the Central Government may, after
consultation with the 3[Central Government], specify.
Provided further that the shareholder holding any preference share capital in the State Bank shall, in respect of such
capital, have a right to vote only on resolutions placed before the State Bank which directly affect the rights attached to
his preference shares: Provided also that no preference shareholder, other than the Central Government, shall be entitled
to exercise voting rights in respect of preference shares held by him in excess of ten per cent, of total voting rights of all
the shareholders holding preference share capital only.
12. Shares to be approved securities.—Notwithstanding anything contained in the Acts hereinafter mentioned in this
section, the shares of the State Bank shall be deemed to be included among the securities enumerated in section 20 of
the Indian Trusts Act, 1882 (2 of 1882), and also to be approved securities for the purposes of the Insurance Act, 1938
(4 of 1938), and the 5[Banking Regulations Act, 1949 (10 of 1949)].
13. Register of shareholders.—(1) The State Bank shall keep at its Central Office, a register, in one or more books of
the shareholders, and shall enter therein the following particulars so far as they may be available:—
(i) the names, addresses and occupations, if any, of the shareholders and a statement of the shares held by each
shareholder, distinguishing each share by its denoting number;
(ii) the date on which each person is so entered as a shareholder;
(iii) the date on which any person ceases to be a shareholder; and
(iv) such other particulars as may be prescribed.
Provided that nothing in this sub-section shall apply to the shares held with a depository.
(2) Notwithstanding anything contained in sub-section (1), it shall be lawful for the State Bank to keep the register of
shareholders 1[in computer floppies or diskettes or any other electronic form] subject to such safeguards as may be
prescribed.
(3) Notwithstanding anything contained in the Indian Evidence Act, 1872 (1 of 1872), a copy of, or extract from, the
register of shareholders, certified to be a true copy under the hand of an officer of the State Bank authorised in this
behalf, shall, in all legal proceedings, be admissible in evidence.
13A. Register of beneficial owners.—The register of beneficial owners maintained by a depository under section 11 of
the Depositories Act, 1996 (22 of 1996), shall be deemed to be a register of shareholders for the purposes of this Act.]
14. [Branch registers.] Omitted by the State Bank of India (Amendment) Act, 1993 (3 of 1994), s. 6 (w.e.f. 15-10-
1993).
15. Trusts not to be entered on the register of shareholders.—No notice of any trust, express, implied or
constructive, shall be entered on the register of shareholders or be receivable by the State Bank.]
[Provided that nothing in this section shall apply to a depository in respect of shares held by it as a registered owner on
behalf of the beneficial owners.]
CHAPTER V
MANAGEMENT
16. Offices, branches and agencies.—(1) Unless otherwise provided by the Central Government, by notification in the
Official Gazette, the Central Office of the State Bank shall be at Mumbai, and shall also be known as Corporate Centre].
(2) The State Bank shall have local head offices in Mumbai, Kolkata and Chennai and at such other places in India as
the Central Government, in consultation with the Central Board, may determine.
(3) The State Bank shall maintain as its branches or agencies, all branches or agencies of the Imperial Bank which were
in existence 6[in India] immediately before the appointed day, and no such branch may be closed without the previous
approval of the Reserve Bank.
(4) The State Bank may establish branches or agencies at any place in or outside India in addition to the branches or
agencies referred to in sub-section (3).
(5) Notwithstanding anything contained in sub-section (4), the State Bank shall establish not less than four hundred
branches in addition to the branches referred to in sub-section (3) within five years of the appointed day or such
extended period as the Central Government may specify in this behalf, and the places where such additional branches
are to be established shall be determined in accordance with any such programme as may be drawn up by the Central
Government from time to time in consultation with the Reserve Bank and the State Bank, and no branch so established
shall be closed without the previous approval of the Reserve Bank.
17. Management.—(1) The general superintendence and direction of the affairs and business of the State Bank shall be
entrusted to the Central Board which may exercise all powers and do all such acts and things as may be exercised or
done by the State Bank and are not by this Act expressly directed or required to be done by the State Bank in general
meeting.
(2) The Central Board in discharging its functions shall act on business principles, regard being had to public interest.
18. Central Board to be guided by directions of Central Government.—(1) In the discharge of its functions
including those relating to a subsidiary bank] the State Bank shall be guided by such directions in matters of policy
involving public interest as the Central Government may, in consultation with the Governor of the Reserve Bank and
the chairman of the State Bank, give to it.
(2) All directions shall be given by the Central Government and, if any question arises whether a direction relates to a
matter of policy involving public interest, the decision of the Central Government thereon shall be final.
19. Composition of the Central Board.— The Central Board shall consist of the following, namely:
(a) a chairman 4*** to be appointed by the Central Government in consultation with the Reserve Bank 5***.
(b) such number of managing directors not exceeding four, as may be appointed by the Central Government in
consultation with the Reserve Bank;
(c) if the total amount of the holdings of the shareholders, other than the 8[Central Government], whose names are on
the [register of shareholders] three months before the date fixed for election of directors is—
(i) not more than ten per cent. of the total issued capital, two directors,
(ii) more than ten per cent. but not more than twenty-five per cent. of such capital three directors, and
(iii) more than twenty-five per cent. of such capital, four directors, to be elected in the prescribed manner by such
shareholders;
(ca) one director, from among the employees of the State Bank, who are workmen, to be appointed by the Central
Government in the manner provided in the rules made under this Act;
(cb) one director, from among such of the employees of the State Bank, as are not workmen, to be appointed by the
Central Government in the manner provided in the rules made under this Act];
(d) not less than two and not more than six directors to be nominated by the Central Government from among persons
having special knowledge of the working of co-operative institutions and of rural economy or experience in commerce,
industry, banking or finance;]
(e) one director to be nominated by the Central Government; and
(f) one director, possessing necessary expertise and experience in matters relating to regulation or supervision of
commercial banks to be nominated by the Central Government on the recommendation of the Reserve Bank.
19A. Qualifications for election of directors elected by shareholders.—(1) The directors elected under clause (c) of
section 19 shall—
(a) have special knowledge or experience in respect of one or more of the following areas, namely:—
(i) agriculture and rural economy,
(ii) banking,
(iii) co-operation,
(iv) economics,
(v) finance,
(vi) law,
(vii) small-scale industry,
(viii) any other area the special knowledge of, and experience in, which in the opinion of the Reserve Bank shall be
useful to the State Bank;
(b) represent the interests of depositors; or
(c) represent the interests of farmers, workers and artisans.
(2) Without prejudice to the provisions of sub-section (1) and notwithstanding anything to the contrary contained in this
Act or in any other law for the time being in force, no person shall be eligible to be elected as director under clause (c)
of section 19 unless he is a person having fit and proper status based upon track record, integrity and such other criteria
as the Reserve Bank may notify from time to time in this regard and the Reserve Bank may specify in the notification
issued under this sub-section, the authority to determine the fit and proper status, the manner of such determination, the
procedure to be followed for such determinations and such other matters as may be considered necessary or incidental
thereto.
(3) Where the Reserve Bank is of the opinion that any director of the State Bank elected under clause (c) of section 19
does not fulfil the requirements of sub-sections (1) and (2), it may, after giving to such director and the State Bank a
reasonable opportunity of being heard, by order, remove such director.
(4) On the removal of a director under sub-section (3), the Central Board shall co-opt any other person fulfilling the
requirements of sub-sections (1) and (2), as a director in place of the person so removed, till a director is duly elected by
the shareholders of the State Bank in the next annual general meeting; and the person so co-opted shall be deemed to
have been duly elected by the shareholders of the State Bank as a director.
19B. Power of Reserve Bank to appoint additional directors.—(1) If the Reserve Bank is of the opinion that in the
interest of banking policy or in the public interest or in the interests of the State Bank or its depositors, it is necessary so
to do, it may, from time to time and by order in writing appoint, with effect from such date as may be specified in the
order, one or more persons as additional directors of the State Bank.
(2) Any person appointed as additional director under sub-section (1) shall,—
(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, by order, specify;
(b) not incur any obligation or liability by reason only of his being an additional director 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; and
(c) not be required to hold qualification shares in the State Bank.
(3) For the purpose of reckoning any proportion of the total number of directors of the State Bank any additional
director appointed under this section shall not be taken into account.
20. Term of office of chairman, managing director, etc.—(1) The chairman, and each managing director shall hold
office for such term not exceeding five years, as the Central Government may fix when appointing them and shall be
eligible for reappointment.
(1A) Notwithstanding anything contained in sub-section (1), the Central Government shall have the right to terminate
the terms of office of the chairman, 2*** or a managing director, as the case may be, at any time before the expiry of
the term fixed under sub-section (1) by giving him notice of not less than three months in writing or three months’
salary and allowances in lieu of such notice; and the chairman, 2*** or a managing director, as the case may be, shall
also have the right to relinquish his office at any time before the expiry of the term so fixed by giving to the Central
Government notice of not less than three months in writing.]

(3) Subject to the provisions contained in section 19 and 5*** a director elected under clause (c) 6*** of 7[that section]
shall hold office for 8[three years] and 9*** 10*** and shall be eligible for re-election 11***:
[Provided that no such director shall hold office continuously for a period exceeding six years.]
(3A) 14[subject to the provisions contained in sub-section (4), a director] appointed under clause (ca) or clause (cb) of
section 19 or nominated under clause (d) of that section] shall hold office for such term, not exceeding three years, as
the Central Government may specify 16*** and shall be eligible 17[for re appointment or re-nomination, as the case
may be.
Provided that no such director shall hold office continuously for a period exceeding six years.
(4) A director appointed under clause (ca) or clause (cb) 19[of section 19 or nominated under clause (d) or clause (e) or
clause (f) of that section] shall hold office during the pleasure of the authority appointing or nominating him, as the case
may be.
21. Local Boards.—(1) There shall be constituted at each place where the State Bank has a local head office, a Local
Board which shall consist of the following members, namely:—
(a) the chairman, ex officio or the managing director nominated by the chairman;]
(b) all such directors elected or nominated to the Central Board under clause (c) or clause (d) of section 19 as are
ordinarily resident in the area falling within the jurisdiction of the local head office;]
(c) six members to be nominated by the Central Government ;
(e) the Chief General Manager of the local head office, appointed by the State Bank, ex officio.
(2) Where as a result of the establishment of any local head office (hereinafter referred to as the new local head office)
for any area which is already falling within the jurisdiction of another local head office (hereinafter referred to as the
existing local head office) a Local Board (hereinafter referred to as the new Local Board) is constituted for the new
local head office, any person who is, at the time of such Constitution, holding office as a member of a Local Board
(hereinafter referred to as the existing Local Board) for an existing local head office under clause (c) of sub-section (1)
and is ordinarily resident in the area falling within the jurisdiction of the new local head office, shall cease to hold office
as member of the existing Local Board and shall become a member of the new Local Board and shall on becoming such
member be deemed to have been nominated to the new Local Board and shall hold office as such member for the
unexpired portion of his term of office as a member of the existing Local Board;
(3) Any vacancy caused in the existing Local Board as a result of any member thereof becoming a member of the new
Local Board under sub-section (2) shall be deemed to be a casual vacancy and be filled in accordance with the
provisions of section 25.
(5) The [Central Government] shall, in consultation with the chairman, appoint—
(a) a member of a Local Board nominated under clause (c) of sub-section (1) to be the president thereof; and
(b) a member of a Local Board holding office under clause (b) or nominated under clause (c) of that sub-section to be
the vice-president thereof.
21A. Term of office of members of Local Board.—(1) Subject to the provisions contained in this section and in sub-
section (2) of section 21, a member of a Local Board—
(a) nominated under clause (c) of sub-section (1) of section 21 shall hold office for such term, not exceeding three
years, as the Central Government may specify in this behalf
(b) elected under clause (d) of sub-section (1) of section 21 shall hold office for three years and and shall be eligible for
re-nomination or re-election, as the case may be:
Provided that no such director shall hold office continuously for a period exceeding six years.]
(3) A director of the Central Board becoming a member of a Local Board by virtue of the provisions of clause (b) of
sub-section (1) of section 21 shall cease to hold office as such member on his ceasing to be a director or on his ceasing
to be ordinarily resident in the relevant area.
(4) The president and the vice-president of a Local Board shall each hold office for two years or the remaining period of
his office as a member of the Local Board, whichever is shorter, and shall be eligible for re-appointment so long as he is
a member of the Local Board.
(5) A member of a Local Board nominated under clause (c) of sub-section (1) of section 21 shall hold office during the
pleasure of the Central Government.
21B. Powers of Local Board.—In respect of the area falling within the jurisdiction of the local head office for which
the Local Board has been constituted, a Local Board shall, subject to such general or special direction as the Central
Board may give from time to time, exercise such powers and perform such duties and functions as may be entrusted or
delegated to it by the Central Board.
21C. Local Committees.—(1) A Local Committee may be constituted by the Central Board for any area and shall
consist of such number of members as may be prescribed.
(2) The chairman or the managing director nominated by him shall be an ex officio member of every such Local
Committee.
(3) A Local Committee shall exercise such powers and perform such functions and duties as the Central Board may
confer on or assign to it.
22. Disqualifications for directorship of Central Board or membership of Local Boards or Committees.—(1) No
person shall be qualified to be a director of the Central Board or a member of a Local Board or of a Local Committee
if—
(a) he holds the office of director, provisional director, promoter, agent or manager of any banking company already
established or advertised as about to be established; or
(b) he is a salaried officer of Government not specially authorised by the Central Government to be a director or
member; or
(c) he has been removed or dismissed from the service of Government on a charge of corruption or bribery; or
(d) he holds any office of profit under the State Bank other than the office of chairman, [managing director] or [ Chief
General Manager or legal or technical adviser; or
(da) in the case of a director appointed under clause (ca) or clause (cb) 2*** of section 19,—
(i) he is not serving in the State Bank or has not been serving in it for a continuous period of at least five years; and
(ii) he is of such age that there is a likelihood of his attaining the age of superannuation during his term of office as a
director; or]
(e) he is or at any time has been adjudicated an insolvent or has suspended payment of his debts or has compounded
with his creditors; or
(f) he is declared lunatic or becomes of unsound mind; or
(g) he is or has been convicted of any offence involving moral turpitude; or
(h) in the case of an elected director, he is not registered as a holder in his own right of unencumbered shares in the
State Bank, either as sole holder or as first named holder when jointly held, of a nominal value of at least five thousand
rupees.
(2) No two persons who are partners of the same firm or are directors of the same private company or one of whom is
an agent of the other or holds a power of attorney from a firm of which the other is a partner may be directors of the
Central Board or members of the same Local Board or Local Committee at the same time.
(3) The appointment, nomination or election as director or member of a Local Board or of a Local Committee of any
person who is a member of Parliament or the Legislature, of any State shall be void unless within two months of the
date of his appointment, nomination or election he ceases to be a member of Parliament or the State Legislature, and if
any director or member of a Local Board or of a Local Committee is elected or nominated as a member of Parliament or
any State Legislature, he shall cease to be a director or member of the Local Board or of Local Committee as from the
date of such election or nomination, as the case may be.
(4) In this section,—
(a) “banking company” has the same meaning as in the 5[Banking Regulation Act, 1949 (10 of 1949)];
(b) “manager” means the chief executive officer, by whatever name called, of a Banking company;
(c) “private company” has the same meaning as in the Companies Act, 1956 (1 of 1956)].
23 .Vacation of office of directors, etc.—If a director of the Central Board or a member of a Local Board or a Local
Committee—
(a) becomes subject to any of the disqualifications mentioned in section 22; or
(b) resigns his office by giving notice in writing under his hand, in the case of the [chairman and a managing director] to
the Central Government and in the case of other directors or members of Local Boards or Committees, to the Central
Board, and the resignation is accepted; or
(c) is absent without leave of the Central Board, the Local Board or the Local Committee of which he is a director or
member, as the case may be, for more than three consecutive meetings thereof;
his seat shall thereupon become vacant.
24. Removal from office of directors, etc.—(1) The Central Government may, after consulting the Reserve Bank,
remove from office [the chairman or a managing director.]
(3) The Central Government, 5*** may remove from office any director 6[appointed under clause (ca) or clause (cb) or
nominated under clause (d) of section 19 or any member of a Local Board nominated under clause (c)] of sub-section
(1) of section 21] and [appoint or nominate, as the case may be], in his stead another person to fill the vacancy.
(4) The shareholders, other than the [Central Government], may, by a resolution passed by majority, of the votes of such
shareholders holding in the aggregate not less than one-half of the share capital held by all such shareholders, remove
any director elected under clause (c) of section 19 and elect in his stead another person to fill the vacancy.
(6) No person shall be removed from his office under sub-section (1) or sub-section (3) unless he has been given an
opportunity of showing cause against his removal.
24A. Supersession of Central Board in certain cases.—(1) Where the Central Government, on the recommendation
of the Reserve Bank is satisfied that in the public interest or for preventing the affairs of the State Bank being conducted
in a manner detrimental to the interest of the depositors or the State Bank or for securing the proper management of the
State Bank, it is necessary so to do, the Central Government may, for reasons to be recorded in writing, by order,
supersede the Central Board for a period not exceeding six months as may be specified in the order:
Provided that the period of supersession of the Central Board may be extended from time to time, so, however, that the
total period shall not exceed twelve months.
(2) On supersession of the Central Board under sub-section (1), the Central Government may, in consultation with the
Reserve Bank, appoint an Administrator (not being an officer of the Central Government or a State Government) who
has experience in law, finance, banking, economics or accountancy, for such period as it may determine.
(3) The Central Government may issue such directions to the Administrator as it may consider necessary and the
Administrator shall be bound to follow such directions.
(4) Notwithstanding anything contained in this Act, upon making the order of supersession of the Central Board—
(a) the chairman, managing director and other directors shall, as from the date of supersession, vacate their offices as
such;
(b) all the powers, functions and duties which may, by or under the provisions of this Act or any other law for the time
being in force, be exercised and discharged by or on behalf of the Central Board, or by a resolution passed in the general
meeting of the State Bank, shall, until the Central Board is reconstituted, be exercised and discharged by the
Administrator appointed under sub-section (2):
Provided that the powers exercised by the Administrator shall be valid notwithstanding that such power is also
exercisable by a resolution passed in the general meeting of the State Bank.
(5) The Central Government may, in consultation with the Reserve Bank, constitute a committee of three or more
persons who have experience in law, finance, banking, economics or accountancy to assist the Administrator in the
discharge of his duties.
(6) The committee shall meet at such times and places and observe such rules of procedure as may be specified by the
rules made under this Act.
(7) The salary and allowances of the Administrator and the members of the committee shall be such as may be specified
by the rules made under this Act and be payable by the State Bank.
(8) On and before the expiration of two months before the expiry of the period of supersession of the Central Board, the
Administrator of the State Bank shall call the general meeting of the State Bank to elect new directors and re-constitute
the said Board.
(9) Notwithstanding anything contained in any other law for the time being in force or in any contract, no person shall
be entitled to claim any compensation for the loss or termination of his office on supersession of the Central Board.
(10) The Administrator appointed under sub-section (2) shall vacate office immediately after the re-constitution of the
Central Board.
25. Casual vacancies.—
(1) If the chairman, or a managing director is rendered incapable of discharging his duties by reason of infirmity or
otherwise or is absent on leave or otherwise in circumstances not involving the vacation of his office, the Central
Government may, in consultation with the Reserve Bank, appoint another person to officiate in the vacancy.]
(2) Where any vacancy occurs before the expiry of the term of office of a director, other than the Chairman, or a
managing director or 4[a director appointed under clause (ca) or [clause (cb) of section 19 or of a member of a Local
Board other than the Chief General Manager] the vacancy shall be filled—
(a) in the case of an elected director, by election; and
(b) in the case of a director nominated under clause (d) of section 19 or a member of a Local Board nominated under
clause (c) of sub-section (1) of section 21, by nomination :
Provided that where the duration of the vacancy in the office of an elected director is likely to be less than six months,
the vacancy may be filled by the remaining directors] by co-opting a person not disqualified under section 22.
(3) A person elected or nominated or co-opted, as the case may be, [under sub-section (2)] shall hold office for the
unexpired portion of the term of his predecessor.
(4) Where any vacancy occurs before the expiry of the term of office of a director appointed under clause (ca) or clause
(cb) of section 19, such vacancy shall be filled in accordance with the said clause (ca) or, as the case may be, clause
(cb), and the director so appointed shall hold office for the period specified under sub-section (3A) of section 20.
26. Remuneration of directors.—(1) Without prejudice to the provisions contained in sections 27, 28 and 29, the
directors shall be paid such fees and allowances for attending the meetings of the Central Board or of any of its
Committees and for attending to any other work of the State Bank as may be prescribed. (2) Notwithstanding anything
contained in sub-section (1), no fees shall be payable to a managing director or any other director who is an officer of
the Central Government or the Reserve Bank. 27. Powers and remuneration of chairman.—(1) The Chairman shall
preside at all meetings of the Central Board and, subject to such general or special directions as the Central Board may
give, exercise all such powers and do all such acts and things as may be exercised or done by the State Bank.
(2) The chairman shall receive such salary, fees, allowances and perquisites 1[as may be determined by the Central
Government].
28. [Power and remuneration of vice-chairman.] Omitted by the State Bank of India (Amendment) Act, 2010 (27 of
2010), s. 21 (w.e.f. 15-9-2010).
29. Powers and remuneration of managing director.—(1) A managing director—
(a) shall be a whole-time officer of the State Bank;
(b) subject to the general control of the chairman , shall exercise such powers and perform such duties as may be
entrusted or delegated to him by the Central Board 5; and
(c) when authorised by the chairman, shall preside at the meetings of the Central Board in his absence.
(2) A managing director shall receive such salary and allowances 6[as may be determined by the Central Government].
30. Executive and other committees of the Central Board.—The Central Board may constitute such and so many
committees, including an executive committee, of itself as it deems fit to exercise such powers and perform such duties
as may, subject to such conditions, if any, as the Central Board may impose, be delegated to them by the Central Board.
31. Meetings of the Central Board.—(1) The Central Board shall meet at such time and place and shall observe such
rules of procedure in regard to the transaction of business at its meetings as may be prescribed; and the meeting of the
Central Board may be held by participation of the directors of the Central Board through videoconferencing or such
other electronic means, as may be prescribed, which are capable of recording and recognising the participation of the
directors and the proceedings of such meetings are capable of being recorded and stored:
Provided that the Central Government may in consultation with the Reserve Bank, by notification in the Official
Gazette, specify the matters which shall not be discussed in a meeting of the Central Board held through
videoconferencing or such other electronic means.
(2) All questions at the meeting shall be decided by a majority of the votes of the directors present in the meeting or
through videoconferencing or such other electronic means and in the case of equality of votes the chairman or, in his
absence, the managing director authorised by the chairman shall have a second or casting vote.
(3) A director who is directly or indirectly concerned or interested in any contract, loan, arrangement or proposal
entered into or proposed to be entered into by or on behalf of the State Bank shall at the earliest possible opportunity
disclose the nature of his interest to the Central Board and shall not be present at any meeting of the Central Board when
any such contract, loan, arrangement or proposal is discussed unless his presence is required by the other directors for
the purpose of eliciting information, and no director so required to be present shall vote on any such contract, loan,
arrangement or proposal.
[Provided that nothing contained in this sub-section shall apply to such director by reason only of his being—
(i) a shareholder (other than a director) holding not more than two per cent. of the paid-up capital in any public
company as defined in the Companies Act, 1956 (1 of 1956) or any corporation established by or under any law for the
time being in force in India or any co-operative society with which or to which the State Bank has entered into or made,
or proposes to enter into or make, a contract, loan, arrangement or proposal; or
(ii) a director ex officio of the State Bank or a director of a subsidiary bank, 2[or]]
[(iii) an officer or other employee of the State Bank, if he is a director appointed under clause (ca) or clause (cb) of
section 19.]
(4) If for any reason neither the chairman nor the vice-chairman is able to be present at a meeting of the Central Board,
any director, authorised by the chairman in writing in this behalf, and in the absence of such authorisation, 6[any
director] elected by the directors present from amongst themselves, shall preside at the meeting and, in the event of
equality of votes, shall have a second or casting vote.
31A. Meetings of Local Boards.—(1) A Local Board shall meet at such time and place and shall observe such rules of
procedure in regard to the transaction of business at its meetings as may be prescribed.
(2) All questions at the meeting shall be decided by a majority of the votes of the members present and in the case of
equality of votes, the person presiding at the meeting shall have a second or casting vote.
(3) A member who is directly or indirectly concerned or interested in any contract, loan, arrangement or proposal
entered into or proposed to be entered into by or on behalf of the State Bank, shall, at the earliest possible opportunity,
disclose the nature of his interest to the Local Board and shall not be present at any meeting of the Local Board when
any such contract, loan, arrangement or proposal is discussed unless his presence is required by the other members for
the purpose of eliciting information, and no member so required to be present shall vote on any such contract, loan,
arrangement or proposal:
Provided that nothing contained in this sub-section shall apply to such member by reason only of his being—
(i) a shareholder (other than a director) holding not more than two per cent. of the paid-up capital in any public
company as defined in the Companies Act, 1956 (1 of 1956), or any corporation established by or under any law for the
time being in force in India or any co-operative society, with which or to which the State Bank has entered into or made
or proposes to enter into or make, a contract, loan, arrangement or proposal; or
(ii) a director ex officio of the State Bank or a director of a subsidiary bank.
(4) If for any reason neither the president nor the vice-president is able to be present at a meeting of the Local Board,
any member, 1[other than the Chief General Manager] elected by the members present from amongst themselves, shall
preside at the meeting.
(5) Notwithstanding anything contained in this section, the chairman shall preside at any meeting of a Local Board at
which he is present and in the absence of the chairman, the managing director authorised by the chairman], shall,
whenever he is present, preside at such meetings.
CHAPTER VI
BUSINESS OF THE STATE BANK
32. State Bank to act as agent of the Reserve Bank.—(1) The State Bank shall, if so required, by the Reserve Bank,
act as agent of the Reserve Bank at all places in India where it has a branch or where there is a branch of a subsidiary
bank] and where there is no branch of the banking department of the Reserve Bank, for—
(a) paying, receiving, collecting and remitting money, bullion and securities on behalf of any Government in India; and
(b) undertaking and transacting any other business which the Reserve Bank may from time to time entrust to it.
(2) The terms and conditions on which any such agency business shall be carried on by the State Bank on behalf of the
Reserve Bank shall be such as may be agreed upon.
(3) If no agreement can be reached on any matter referred to in sub-section (2) or if a dispute arises between the State
Bank and the Reserve Bank as to the interpretation of any agreement between them, the matter shall be referred to the
Central Government and the decision of the Central Government thereon shall be final.
(4) The State Bank may transact any business or perform any functions entrusted to it under sub-section (1) by itself or
through a subsidiary bank or through an agent approved by the Reserve Bank.
33. Other business which the State Bank may transact.—Subject to the other provisions contained in this Act, the
State Bank may carry on and transact the business of banking as defined in clause (b) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949), and may engage in one or more of the other forms of business specified in sub-
section (1) of section 6 of that Act.]
34. Business which the State Bank may not transact.—
(6) Save as otherwise provided in [this Act] the State Bank shall not own or, acquire any immovable property except
for the purpose of providing buildings or other accomodation in which to carry on the business of the State Bank or for
providing residences for its officers and other employees:
Provided that if any such building or other accommodation is not immediately required for any of the purposes of the
State Bank, the State Bank may utilise it to the best advantage by letting it out or in any other manner.
35. State Bank may acquire the business of other Banks.—(1) The State Bank may, with the sanction of the Central
Government, and shall, if so directed by the Central Government in consultation with the Reserve Bank, enter into
negotiations for acquiring the business, including the assets and liabilities, of any banking institution.
(2) The terms and conditions relating to such acquisition, if agreed upon by the Central Board of the State Bank and the
directorate or management of the banking institution concerned and approved by the Reserve Bank, shall be submitted
to the Central Government for its sanction and that Government may by order in writing (hereafter in this section
referred to as the order of sanction) accord its sanction thereto.
(3) Notwithstanding anything contained in this Act or any other law for the time being in force or any instrument
regulating the constitution of the banking institution concerned, the terms and conditions as sanctioned by the Central
Government shall come into effect on the date specified by the Central Government in this behalf in the order of
sanction and be binding upon the State Bank and the banking institution concerned as well as upon the shareholders (or,
as the case may be, proprietors) and creditors of that banking institution.
(4) If for any reason the terms and conditions cannot come into effect on the date specified in the order of sanction, the
Central Government may fix another suitable date for that purpose.
(5) On the date on which the terms and conditions as aforesaid come into effect the business and the assets and
liabilities of the banking institution concerned as covered by the acquisition shall, by virtue, and in accordance with the
provisions, of the order of sanction stand transferred to, and become respectively the business and the assets and
liabilities of, the State Bank.
(6) The consideration for the acquisition of the business and the assets and liabilities of any banking institution under
this section may, if so agreed upon, be paid either in cash or by allotment of shares in the capital of the State Bank or
partly in cash and partly by allotment of shares, and the State Bank may, for the purpose of any such allotment,
increase, subject to the other provisions contained in this Act relating to the increase of capital, the capital of the State
Bank by the issue of such number of shares as may be determined by the State Bank.
(7) Any business acquired under this section shall thereafter be carried on by the State Bank in accordance with the
provisions of this Act, subject to such exemptions or modifications as the Central Government may, by notification in
the Official Gazette, make in this behalf in consultation with the Reserve Bank:
Provided that no such exemption or modification shall be made so as to have effect for a period of more than seven
years from the date of acquisition.
(8) Notwithstanding anything contained in the Industrial Disputes Act, 1947 (14 of 1947), or in any other law or in any
agreement for the time being in force, on the acquisition of the business and the assets and liabilities of any banking
institution under this section, no officer or other employee of that banking institution shall be entitled to any
compensation to which he may be entitled under that Act or that other law or that agreement and no claim in respect of
such compensation shall be entertained by any Court, Tribunal or other authority, if on his having accepted in writing an
offer of employment by the State Bank on the terms and conditions proposed by it he has been employed in accordance
with such terms and conditions.
(9) The Central Government may, if it considers necessary or expedient in the case of any banking institution in relation
to which an order of sanction has been made under this section, appoint whether before or after the coming into effect of
the terms and conditions relating to the acquisition of the business and the assets and liabilities of that banking
institution, a suitable person to take over the management of that banking institution for the purposes of winding-up its
affairs and distributing its assets, and the expenditure incurred in connection with such management (including the
remuneration for the person so appointed and his staff, if any) shall be paid out of the assets of the banking institution or
by the State Bank as the Central Government may direct.
(10) Simultaneously with the appointment of a suitable person to take over the management of any banking institution
under sub-section (9) or immediately thereafter, the Central Government shall issue directions to be followed by that
person in the management of that banking institution for the purposes aforesaid and thereupon—
(a) the provisions of the Companies Act, 1956 (1 of 1956), or the [Banking Regulation Act, 1949 (10 of 1949),] or any
other law for the time being in force or any instrument having effect by virtue of any such Act or law, in so far as they
are inconsistent with such directions, shall cease to apply to or in relation to that banking institution;
(b) all persons in charge of the management, including any person holding office as manager or director of the banking
institution immediately before the issue of such directions, shall be deemed to have vacated their offices as such; and
(c) the persons appointed to take over the management of the banking institution shall in accordance with those
directions take all such steps as may be necessary to facilitate the winding-up of its affairs and distribution of its assets.
(11) The Central Government, when satisfied that nothing further remains to be done in order to wind up the affairs of
any such banking institution, may by another order in writing direct that as from such date as may be specified therein
the banking institution shall stand dissolved and thereupon any such direction shall have effect notwithstanding
anything to the contrary contained in any other law.
(12) No action under this section shall be questioned on the ground merely of any defect in the constitution of any
banking institution in relation to which such action has been taken or in the constitution of its Board of Directors or in
the appointment of any person entrusted with the management of its affairs.
(13) In this section “banking institution” includes any individual or any association of individuals (whether incorporated
or not, or whether a department of Government or a separate institution), carrying on the business of banking.]
35A. Arrangement with the State Bank on appointment of directors to prevail.—(1) Where any arrangement
entered into by the State Bank with a company provides for the appointment by the State Bank of one or more directors
of such company, such provisions and any appointment of directors made in pursuance thereof shall be valid and
effective 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 or in the memorandum, articles of association or any other instrument relating to the
company, and any provision regarding share qualification, age limit, number of directorships, removal from office of
directors and such like conditions contained in any such law or instrument aforesaid, shall not apply to any director
appointed by the State Bank in pursuance of the arrangement as aforesaid.
(2) Any director appointed as aforesaid shall—
(a) hold office during the pleasure of the State Bank and may be removed or substituted by any person by order in
writing of the State Bank;
(b) not incur any obligation or liability by reason only of his being a director or for anything done or omitted to be done
in good faith in the discharge of his duties as a director or anything in relation thereto;
(c) not be liable to retirement by rotation and shall not be taken into account for computing the number of directors
liable to such retirement.

THE RECOVERY OF DEBTS DUE TO BANKS AND

FINANCIAL INSTITUTIONS ACT, 1993
INTRODUCTION
Banks and financial institutions have been experiencing considerable difficulties in recovering loans and enforcement of
securities charge with them. The procedure for recovery of debts due to the banks and financial institutions, which is
being followed, has resulted in a significant portion of the funds being blocked.
The Committee on the Financial System has considered the setting up of the Special Tribunals with special powers for
adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector
reforms. An urgent need was, therefore, felt to work out a suitable mechanism through which the dues, to the banks and
financial institutions could be realised. In 1981 a committee had examined the legal and other difficulties, faced by
banks and financial institutions and suggested remedial measures including changes in law. This committee also
suggested setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a
summary procedure. Keeping in view the recommendations of the above Committees, the Recovery of Debts due to
Bank and Financial Institutions Bill, 1993 was introduced in the Parliament.

STATEMENT OF OBJECTS AND REASONS

Banks and financial institutions at present experience considerable difficulties in recovering loans and enforcement of
securities charged with them. The existing procedure for recovery of debts due to the banks and financial institutions
has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage
of time. The Committee on the Financial System headed by Shri M. Narasimham has considered the setting up of the
Special Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful
implementation of the financial sector reforms. An urgent need was, therefore, felt to work out a suitable mechanism
through which the dues to the banks and financial institutions could be realized without delay. In 1981, a Committee
under the Chairmanship of Shri T. Tiwari had examined the legal and other difficulties faced by banks and financial
institutions and suggested remedial measures including changes in law. The Tiwari Committee had also suggested
setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a summary
procedure. The setting up of Special Tribunals will not only fulfill a long-felt need, but also will be an important step in
the implementation of the Report of Narasimham Committee. Whereas on 30th September, 1990 more than fifteen lakhs
of cases filed by the public sector banks and about 304 cases filed by the financial institutions were pending in various
courts, recovery of debts involved more than Rs.5622 crores in dues of Public Sector Banks and about Rs.391 crores of
dues of the financial institutions. The locking up of such huge amount of public money in litigation prevents proper
utilisation and recycling of the funds for the development of the country.
The Bill seeks to provide for the establishment of Tribunal and Appellate Tribunals for expeditious adjudication and
recovery of debts due to banks and financial institutions. Notes on clauses explain in detail the provisions of the Bill.
1. Short title, extent, commencement and application.—(1) This Act may be called the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993.
(2) It extends to the whole of India except the State of Jammu and Kashmir.
(3) It shall be deemed to come into force on the 24th day of June, 1993.
(4) The provisions of this Act shall not apply where the amount of debt due to any bank or financial institution or to a
consortium of banks or financial institutions is less then ten lakh rupees or such other amount, being not less than one
lakh rupees, as the Central Government may, by notification, specify.
CHAPTER II
ESTABLISHMENT OF TRIBUNAL AND APPELLATE TRIBUNAL
3. Establishment of Tribunal.—(1) The Central Government shall, by notification, establish one or more Tribunals, to
be known as the Debts Recovery Tribunal, to exercise the jurisdiction, powers and authority conferred on such Tribunal
by or under this Act.
(2) The Central Government shall also specify, in the notification referred to in sub-section (1), the areas within which
the Tribunal may exercise jurisdiction for entertaining and deciding the applications filed before it.
4. Composition of Tribunal.—(1) A Tribunal shall consist of one person only (hereinafter referred to as the Presiding
Officer) to be appointed by notification, by the Central Government.
(2) Notwithstanding anything contained in sub-section (1), the Central Government may authorise the Presiding Officer
of one Tribunal to discharge also the functions of the Presiding Officer of another Tribunal.
5. Qualifications for appointment as Presiding Officer.—A person shall not be qualified for appointment as the
Presiding Officer of a Tribunal unless he is, or has been, or is qualified to be, a District Judge.
6. Term of Office.—The Presiding Officer of a Tribunal shall hold office for a term of five years from the date on
which he enters upon his office or until he attains the age of 1[sixty-two years], whichever is earlier.
7. Staff of Tribunal.—(1) The Central Government shall provide the Tribunal with one or more Recovery Officers and
such other officers and employees as that Government may think fit.
(2) The Recovery Officers and other officers and employees of a Tribunal shall discharge their functions under the
general superintendence of the Presiding Officer.
(3) The salaries and allowances and other conditions of service of the Recovery Officers and other officers and
employees of a Tribunal shall be such as may be prescribed.
8. Establishment of Appellate Tribunal.—(1) The Central Government shall, by notification, establish one or more
Appellate Tribunals, to be known as the Debts Recovery Appellate Tribunal, to exercise the jurisdiction, powers and
authority conferred on such Tribunal by or under this Act.
(2) The Central Government shall also specify in the notification, referred to in sub-section (1) the Tribunals in relation
to which the Appellate Tribunal may exercise jurisdiction.
(3). Notwithstanding anything contained in sub-sections (1) and (2), the Central Government may authorise the
Chairperson of one Appellate Tribunal to discharge also the functions of the Chairperson of other Appellate Tribunal.
9. Composition of Appellate Tribunal.—An Appellate Tribunal shall consist of one person only (hereinafter referred
to as [the Chairperson of the Appellate Tribunal] to be appointed, by notification, by the Central Government.
10. Qualifications for appointment as [Chairperson of the Appellate Tribunal].—A person shall not be qualified
for appointment as the Chairperson of an Appellate Tribunal unless he—
(a) is, or has been, or is qualified to be, a Judge of a High Court; or
(b) has been a member of the Indian Legal Service and has held a post in Grade I of that service for at least three years;
or
(c) has held office as the Presiding Officer of a Tribunal for at least three years.
11. Term of Office.—[The Chairperson of an Appellate Tribunal] shall hold office for a term of five years from the
date on which he enters upon his office or until he attains the age of 6[sixty-five years], whichever is earlier.
12. Staff of the Appellate Tribunal.—The provisions of section 7 (except those relating to Recovery Officer) shall, so
far as may be, apply to an Appellate Tribunal as they apply to a Tribunal and accordingly references in that section to
“Tribunal” shall be construed as references to “Appellate Tribunal” and references to “Recovery Officer” shall be
deemed to have
been omitted.
13. Salary and allowances and other terms and conditions of service of Presiding Officers.—The salary and
allowances payable to and the other terms and conditions of service (including pension, gratuity and other retirement
benefits) of, 1[the Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal] shall be such as may be
prescribed:
Provided that neither the salary and allowances nor the other terms and conditions of service of 2[the Presiding Officer
of a Tribunal or the Chairperson of an Appellate Tribunal shall be varied to his] disadvantage after appointment.
14. Filling up of vacancies.—If, for any reason other than temporary absence, any vacancy occurs in the officer of the
Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal, then the Central Government shall appoint
another person in accordance with the provisions of this Act to fill the vacancy and the proceedings may be continued
before the Tribunal or the Appellate Tribunal from the stage at which the vacancy is filled.
15. Resignation and removal.—(1) 1[The Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal]
may, by notice in writing under his hand addressed to the Central Government, resign his office:
Provided that 3[the Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal] shall, unless he is
permitted by the Central Government to relinquish his office sooner, continue to hold office until the expiry of three
months from the date of receipt of such notice or until a person duly appointed as his successor enters upon his office or
until the expiry of his term of officer, whichever is the earliest.
(2) [The Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal] shall not be removed from his
office except by an order made by the Central Government on the ground of proved misbehaviour or incapacity after
inquiry,--
(a) in the case of the Presiding Officer of a Tribunal, made by a Judge of a High Court;
(b) in the case of [the Chairperson of an Appellate Tribunal], made by a Judge of the Supreme Court, in which 2[the
Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal] has been informed of the charges against
him and given a reasonable opportunity of being heard in respect of these charges.
(3) The Central Government may, by rules, regulate the procedure for the investigation of misbehaviour or incapacity of
the Presiding Officer of a Tribunal or the Chairperson of an Appellate Tribunal.
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.
(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.
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.
(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.
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.

CHAPTER IV
PROCEDURE OF TRIBUNALS
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 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 party, arises.
(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 subsection (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 accompanied by such
documents or other evidence and by 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.
(4) On receipt of the application under sub-section (1) or sub-section (2), the Tribunal shall issue summons requiring the
defendant to show cause within thirty days of the service of summons as to why the relief prayed for should not be
granted.
(5) The defendant shall, at or before the first hearing or within such time as the Tribunal may permit, present a written
statement of his defence.
(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 sought to be set-off.
(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 as may be fixed by the Tribunal.
(11) Where a defendant sets up a counter-claim and the applicant contends that the claim thereby raised ought not be
disposed of by way of counter-claim but in an independent action, the applicant may, at any time before issues are
settled in relation to the counter-claim, apply to the Tribunal for an order that such counter-claim may be excluded, and
the Tribunal may, on the hearing of such application, make such order as it thinks fit.
(12) The Tribunal may make an interim order (whether by way of injunction or stay or attachment) against the
defendant to debar him from transferring, alienating or otherwise dealing with, or disposing of, any property and assets
belonging to him without the prior permission of the Tribunal.
(13) (A) Where, at any stage of the proceedings, the Tribunal is satisfied, by affidavit or otherwise, 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.
(14) The applicant shall, unless the Tribunal otherwise directs, specify the property required to be attached and the
estimated value thereof.
(15) The Tribunal may also in the order direct the conditional attachment of the whole or any portion of the property
specified under subsection (14).
(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 an 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.
(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 he 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
application before the Tribunal and for the realization, 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 registered under the Companies Act, 1956 (1 of 1956)
the Tribunal may order the sale proceeds of such company to be distributed among its secured creditors in accordance
with the provisions of section 529A of the Companies Act, 1956 and to pay the surplus, if any, to the company.
(20) The Tribunal may, after giving the applicant and the defendant an opportunity of being heard, pass such interim or
final order, including the order for payment of interest from the date on or before which payment of the amount is found
due up to the date of realization or actual payment, on the application as it thinks fit to meet the ends of justice.
(21) The Tribunal shall send a copy of every order passed by it to the applicant and the defendant.
(22) The Presiding Officer shall issue a certificate under his signature on the basis of the order of the Tribunal to the
Recovery Officer for recovery of the amount of debt specified in the certificate.
(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:
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 endeavour shall be made by it 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.]
20. Appeal to the Appellate Tribunal.—(1) Save as provided in subsection (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 forty-five 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 form and be
accompanied by such fee as may be prescribed:
Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is
satisfied that there was sufficient cause for not filing it within that period.
(4) On receipt of an appeal under sub-section (1), 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.
(6) 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.
COMMENTS
An order which is made by the Tribunal with the consent of the parties, shall not be appealable. The period for filing an
appeal is 45 days from the date on which a copy of the order is received by the appellant. However, the Tribunal may
condone the delay in preferring an appeal beyond 45 days. The Appellate Tribunal may confirm, modify or set aside the
order appealed against.
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
seventy-five 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, waive or reduce the amount to be
deposited under this section.
COMMENTS
For preferring an appeal it is necessary to deposit with the Appellate Tribunal 75% of the amount of debt due from him
as determined by the Tribunal under section 19.
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 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) setting aside any order of dismissal of any application for default or any order passed by it 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 of 1974).
23. Right to legal representation and Presenting Officer.—(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 authorized by it may present its case before the Tribunal or the
Appellate Tribunal.
(2) The defendant may either appear in person or authorize 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.
COMMENTS
A bank or a financial institution may authorize (i) one or more legal practitioners, or (ii) any of its officers to act as
Presenting Officer for presenting its case before the Tribunal or the Appellate Tribunal. On the other hand, the
defendant may (i) appear in person, or (ii) authorize one or more legal practitioners, or (iii) authorize any of his or its
officers, to present his or its case before the Tribunal or the Appellate Tribunal.
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
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;
(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.
26. Validity of certificate and amendment thereof.—(1) It shall not be open to the defendant to dispute before the
Recovery Officer the correctness of the amount specified in the certificate, and no objection to the certificate on any
other ground shall also be entertained by the Recovery Officer.
(2) Notwithstanding the issue of a certificate to a Recovery Officer, the Presiding Officer shall have power to withdraw
the certificate or correct any clerical or arithmetical mistake in the certificate by sending intimation to the Recovery
Officer.
(3) The Presiding Officer shall intimate to the Recovery Officer any order withdrawing or canceling a certificate or any
correction made by him under sub- section (2).
27. Stay of proceedings under certificate and amendment or withdrawal thereof.—(1) Notwithstanding that a
certificate has been issued to the Recovery Officer for the recovery of any amount, the Presiding Officer may grant time
for the payment of the amount, and thereupon the Recovery Officer shall stay the proceedings until the expiry of the
time so granted.
(2) Where a certificate for the recovery of amount has been issued, the Presiding Officer shall keep the Recovery
Officer informed of any amount paid or time granted for payment, subsequent to the issue of such certificate to the
Recovery Officer.
(3) Where the order giving rise to a demand of amount for recovery of debt has been modified in appeal, and, as a
consequence thereof the demand is reduced, the Presiding Officer shall stay the recovery of such part of the amount of
the certificate as pertains to the said reduction for the period for which the appeal remains pending.
(4) Where a certificate for the recovery of debt has been received by the Recovery Officer and subsequently the amount
of the outstanding demands is reduced 1[or enhanced] as a result of an appeal, the Presiding Officer shall, when the
order which was the subject-matter of such appeal has become final and conclusive, amend the certificate or withdraw
it, as the case may be.
28. Other modes of recovery.—(1) Where a certificate has been issued to the Recovery Officer under sub-section (7)
of section 19, the Recovery Officer may, without prejudice to the modes of recovery specified in section 25, recover the
amount of debt by any one or more of the modes provided under this section.
(2) If any amount is due from any person to the defendant, the Recovery Officer may require such person to deduct
from the said amount, the amount of debt due from the defendant under this Act and such person shall comply with any
such requisition and shall pay the sum so deducted to the credit of the Recovery Officer:
Provided that nothing in this sub-section shall apply to any part of the amount exempt from attachment in execution of a
decree of a civil court under section 60 of the Code of Civil Procedure, 1908 (5 of 1908).
(3) (i) The Recovery Officer may, at any time or from time to time, by notice in writing, require any person from whom
money is due or may become due to the defendant or to any person who holds or may subsequently hold money for or
on account of the defendant, to pay to the Recovery Officer either forthwith upon the money becoming due or being
held or within the time specified in the notice (not being before the money becomes due or is held) so much of the
money as is sufficient to pay the amount of debt due from the defendant or the whole of the money when it is equal to
or less than that amount.
(ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or
on account of the defendant jointly with any other person and for the purposes of this subsection, the shares of the joint
holders in such amount shall be presumed, until the contrary is proved, to be equal.
(iii) A copy of the notice shall be forwarded to the defendant at his last address known to the Recovery Officer and in
the case of a joint account to all the joint holders at their last addresses known to the Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under the sub-section shall
be bound to comply with such notice, and, in particular, where any such notice is issued to a post office, bank, financial
institution, or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be
produced for the purpose of any entry, endorsement or the like to be made before the payment is made notwithstanding
any rule, practice or requirement to the contrary.
(v) Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after
the date of the notice shall be void as against any demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum
demanded or the part thereof is not due to the defendant or that he does not hold any money for or on account of the
defendant, then, nothing contained in this sub-section shall be deemed to require such person to pay any such sum or
part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such
person shall be personally liable to the Recovery Officer to the extent of his own liability to the defendant on the date of
the notice, or to the extent of the defendant’s liability for any sum due under this Act, whichever is less.
(vii) The Recovery Officer may, at any time or from time to time, amend or revoke any notice under this sub-section or
extend the time for making any payment in pursuance of such notice.
(viii) The Recovery Officer shall grant a receipt for any amount paid in compliance with a notice issued under this sub-
section, and the person so paying shall be fully discharged from his liability to the defendant to the extent of the amount
so paid.
(ix)Any person discharging any liability to the defendant after the receipt of a notice under this sub-section shall be
personally liable to the Recovery Officer to the extent of his own liability to the defendant so discharged or to the extent
of the defendant’s liability for any debt due under this Act, whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the
Recovery Officer, he shall be deemed to be a defendant in default in respect of the amount specified in the notice and
further proceedings may be taken against him for the realization of the amount as if it were a debt due from him, in the
manner provided in sections 25, 26 and 27 and the notice shall have the same effect as an attachment of a debt by the
Recovery Officer in exercise of his powers under section 25.
(4) The Recovery Officer may apply to the court in whose custody there is money belonging to the defendant for
payment to him of the entire amount of such money, or if it is more than the amount of debt due an amount sufficient to
discharge the amount of debt so due.
(4A) The Recovery Officer may, by order, at any stage of the execution of the certificate of recovery, require any
person, and in case of a company, any of its officers against whom or which the certificate of recovery is issued, to
declare on affidavit the particulars of his or its assets.
(5) The Recovery Officer may recover any amount of debt due from the defendant by distraint and sale of his movable
property in the manner laid down in the Third Schedule to the Income-Tax Act, 1961 (43 of 1961).
30. Appeal against the order of Recovery Officer.—(1) Notwithstanding anything contained in section 29, any person
aggrieved by an order of the Recovery Officer made under this Act may, within thirty days from the date on which a
copy of the order is issued to him, prefer an appeal to the Tribunal.
(2) On receipt of an appeal under sub-section (1), the Tribunal may, after giving an opportunity to the appellant to be
heard, and after making such inquiry as it deems fit, confirm, modify or set aside the order made by the Recovery
Officer in exercise of his powers under sections 25 to 28 (both inclusive).
 UNIT-IV
THE NEGOTIABLE INSTRUMENT ACT,1881
CHAPTER II
OF NOTES, BILLS AND CHEQUES
4. “Promissory note.”—A “Promissory note” is an instrument in writing (not being a bank-note or a currency-note)
containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of,
a certain person, or to the bearer of the instrument.
Illustrations
A Signs instruments in the following terms:
(a ) “I promise to pay B or order Rs. 500.”
(b) “I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received.”
(c) “Mr. B, I O U Rs. 1,000.”
(d) “I promise to Pay B Rs. 500 and all other sums which shall be due to him.”
(e) “I promise to Pay B Rs. 500, first deducting thereout any money which he may owe me.”
(f) “I promise to Pay B Rs. 500 seven days after my marriage with C.”
(g) “I, promise to Pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum.”
(h) “I promise to Pay B Rs. 500 and to deliver to him my black horse on 1st January next.”
The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e),
(f), (g) and (h) are not promissory notes.

5. “Bill of exchange”.—A “bill of exchange” is an instrument in writing containing an unconditional order, signed by
the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the
bearer of the instrument.
A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time
for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the
occurrence of a specified even which, according to the ordinary expectation of mankind, is certain to happen, although
the time of its happening may be uncertain.
The sum payble may be “certain”, within the meaning of this section and section 4, although it includes future interest
or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument
provides that, on default of payment of an instalment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person”,
within the meaning of this section and section 4, although he is mis-named or designated by description only.

6. “Cheque”.—A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise
than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form.
Explanation I.—For the purposes of this section, the expressions—
2[(a) “a cheque in the electronic form” means a cheque drawn in electronic form by using any computer resource and
signed in a secure system with digital signature (with or without biometrics signature) and asymmetric crypto system or
with electronic signature, as the case may be;
(b) “a truncated cheque” means a cheque which is truncated during the course of a clearing cycle, either by the clearing
house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for
transmission, substituting the further physical movement of the cheque in writing.
Explanation II.— For the purposes of this section, the expression “clearing house” means the clearing house managed
by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India.
Explanation III.—For the purposes of this section, the expressions “asymmetric crypto system”, “computer resource”,
“digital signature”, “electronic form” and “electronic signature” shall have the same meanings respectively assigned to
them in the Information Technology Act, 2000 (21 of 2000).

7. “Drawer.” “Drawee”.—The maker of a bill of exchange or cheque is called the “drawer”; the person thereby
directed to pay is called the “drawee”.
“Drawee in case of need”.— When in the Bill or in any indorsement thereon the name of any person is given in
addition to the drawee to be resorted to in case of need, such person is called a “drawee in case of need.”
“Acceptor”.—After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one,
upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his
behalf, he is called the “acceptor”.
“Acceptor for honour”.— When a bill of exchange has been noted or protested for non-acceptance or for better
security, and any person accepts it supra protest for honour of the drawer or of any one of the indorsers, such person is
called an “acceptor for honour”.
“Payee”.—The person named in the instrument, to whom or to whose order the money is by the instrument directed to
be paid, is called the “Payee”.
8. “Holder”.—The “holder” of a promissory note, bill of exchange or cheque means any person entitled in his own
name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the
note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.
9. “Holder in due course”.—“Holder in due course” means any person who for consideration became the possessor of
a promissory note, bill of exchange or cheque if payable to bearer,
or the payee or indorsee thereof, if 1[payable to order,] before the amount mentioned in it became payable, and without
having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
10. “Payment in due course”.—“Payment in due course” means payment in accordance with the apparent tenor of the
instrument in good faith and without negligence to any person in possession thereof under circumstances which do not
afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.

15. Indorsement.—When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker,
for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same
purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is
called the “indorser”.
16. Indorsement “in blank” and “in full”.—5[(1)] If the indorser signs his name only, the indorsement is said to be
“in blank,” and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified
person, the indorsement is said to be “in full”; and the person so specified “Indorsee”.—is called the “indorsee” of the
instrument.
(2) The provisions of this Act relating to a payee shall apply with the necessary modifications to an indorsee.

CHAPTER III
PARTIES TO NOTES, BILLS AND CHEQUES
26. Capacity to make, etc., promissory notes, etc.—Every person capable of contracting, according to the law to
which he is subject, may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and
negotiation of a promissory note, bill of exchange or cheque.
Minor.—A minor may draw, indorse, deliver and negotiate such instrument so as to bind all parties except himself.
Nothing herein contained shall be deemed to empower a corporation to make, indorse or accept such instruments except
in cases in which, under the law for the time being in force, they are so empowered.
27. Agency.— Every person capable of binding himself or of being bound, as mentioned in section 26, may so bind
himself or be bound by a duly authorized agent acting in his name. A general authority to transact business and to
receive and discharge debts does not confer upon an agent the power of accepting or indorsing bills of exchange so as to
bind his principal. An authority to draw bills of exchange does not of itself import an authority to indorse.
28. Liability of agent signing.—An agent who signs his name to a promissory note, bill of exchange or cheque
without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is
liable personally on the instrument, except to those who induced him to sign upon the belief that the principal only
would be held liable.
29. Liability of legal representative signing.—A legal representative of a deceased person who signs his name to a
promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the
extent of the assets received by him as such.
30. Liability of drawer.—The drawer of a bill of exchange or cheque is bound, in case of dishonour by the drawee or
acceptor thereof, to compensate the holder, provided due notice of dishonour has been given to, or received by, the
drawer as hereinafter provided.
31. Liability of drawee of cheque.—The drawee of a cheque having sufficient funds of the drawer in his hands
properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and , in default of
such payment, must compensate the drawer for any loss or damage caused by such default.
32. Liability of maker of note and acceptor of bill.—In the absence of a contract to the contrary, the maker of a
promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity
according to the apparent tenor of the note or acceptance respectively, and the acceptor of a bill of exchange at or after
maturity is bound to pay the amount thereof to the holder on demand. In default of such payment as aforesaid, such
maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and
caused by such default.
33. Only drawee can be acceptor except in need or for honour.—No person except the drawee of a bill exchange, or
all or some of several drawees, or a person named therein as a drawee in case of need, or an acceptor for honour, can
bind himself by an acceptance.
34. Acceptance by several drawees not partners.—Where there are several drawees of a bill of exchange who are not
partners, each of them can accept it for himself, but none of them can accept it for another without his authority.
 35. Liability of indorser.—In the absence of a contract to the contrary, whoever indorses and delivers a negotiable
instrument before maturity without, in such it indorsement, expressly excluding or making conditional his own liability,
is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such
holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to, or
received by, such indorser as hereinafter provided.
Every indorser after dishonour is liable as upon an instrument payable on demand.
36. Liability of prior parties to holder in due course.—Every prior party to a negotiable instrument is liable thereon
to a holder in due course until the instrument is duly satisfied.
37. Maker, drawer and acceptor principals.—The maker of a promissory note or cheque, the drawer of a bill of
exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary, respectively liable thereon
as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or acceptor, as the
case may be.
38. Prior party a principal in respect of each subsequent party.—As between the parties so liable as sureties, each
prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each
subsequent party.
39. Suretyship.—When the holder of an accepted bill of exchange enters into any contract with the acceptor which,
under section 134 or 135 of the Indian Contract Act, 1872 (9 of 1872), would discharge the other parties, the holder may
expressly reserve his right to charge the other parties, and in such case they are not discharged.
40. Discharge of indorser's liability.—Where the holder of a negotiable instrument, without the consent of the
indorser, destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from liability to the
holder to the same extent as if the instrument had been paid at maturity.
Illustration
A is the holder of a bill of exchange made payable to the order of B, which contains the following indorsements in
blank:—
First indorsement, “B”.
Second indorsement, “Peter Williams”.
Third indorsement, “Wright & Co.”
Fourth indorsement. “John Rozario”.
This bill A puts in suit against John Rozario and strikes out, without John Rozario's consent, the indorsements by Peter
Williams and Wright & Co. A is not entitled to recover anything from John Rozario.
41. Acceptor bound, although, indorsement forged.—An acceptor of a bill of exchange already indorsed is not
relieved from liability by reason that such indorsement is forged, if he knew or had reason to believe the indorsement to
be forged when he accepted the bill.
42. Acceptance of bill drawn in fictitious name.—An acceptor of a bill of exchange drawn in a fictitious name and
payable to the drawer's order is not, by reason that such name is fictitious, relieved from liability to any holder in due
course claiming under an indorsement by the same hand as the drawer's signature, and purporting to be made by the
drawer.
43. Negotiable instrument made, etc., without consideration.—A negotiable instrument made, drawn, accepted,
indorsed or transferred without consideration, or for a consideration which fails, creates no obligation of payment
between the parties to the transaction. But if any such party has transferred the instrument with or without indorsement
to a holder for consideration, such holder, and every subsequent holder deriving title from him, may recover the amount
due on such instrument from the transferor for consideration or any prior party thereto.
Exception I.—No party for whose accommodation a negotiable instrument has been made, drawn, accepted or indorsed
can, if he have paid the amount thereof, recover thereon such amount from any person who became a party to such
instrument for his accommodation.
Exception II.—No party to the instrument who has induced any other party to make, draw, accept, indorse or transfer
the same to him for a consideration which he has failed to pay or perform in full shall recover thereon an amount
exceeding the value of the consideration (if any) which he has actually paid or performed.
44. Partial absence or failure of money-consideration.—When the consideration for which a person signed a
promissory note, bill of exchange or cheque consisted of money, and was originally absent in part or has subsequently
failed in part, the sum which a holder standing in immediate relation with such signer is entitled to receive from him is
proportionally reduced. Explanation.—The drawer of a bill of exchange stands in immediate relation with the acceptor.
The maker of a promissory note, bill of exchange or cheque stands in immediate relation with the payee, and the
indorser with his indorsee. Other signers may by agreement stand in immediate relation with a holder.
Illustration
A draws a bill on B for Rs. 500 payable to the order of A, B accepts the bill, but subsequently dishonours, it by non-
payment. A sues B on the bill, B proves that it was accepted for value as to Rs. 400, and as an accommodation to the
plaintiff as to the residue. A can only recover Rs. 400.
45. Partial failure of consideration not consisting of money.—Where a part of the consideration for which a person
signed a promissory note, bill of exchange or cheque, though not consisting of money, is ascertainable in money
without collateral enquiry, and there has been a failure of that part, the sum which a holder standing in immediate
relation with such signer is entitled to receive from him is proportionally reduced.
45A. Holder's right to duplicate of lost bill.—Where a bill of exchange has been lost before it is over-due, the person
who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the
drawer, if required, to indemnify him against all persons whatever in case the bill alleged to have been lost shall be
found again. If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do so.

CHAPTER VII
OF DISCHARGE FROM LIABILITY ON NOTES, BILLS AND CHEQUES
82. Discharge from liability.—The maker, acceptor or indorser respectively of a negotiable instrument is discharged
from liability thereon—
(a) by cancellation.—to a holder thereof who cancels such acceptor's or indorser’s name with intent to discharge him,
and to all parties claiming under such holder;
(b) by release.—to a holder thereof who otherwise discharges such maker, acceptor or indorser, and to all parties
deriving title under such holder after notice of such discharge;
(c) by payment.—to all parites thereto, if the instrument is payable to bearer, or has been indorsed in blank, and such
maker, acceptor or indorser makes payment in due course of the amount due thereon.
83. Discharge by allowing drawee more than forty-eight hours to accept.—If the holder of a bill of exchange allows
the drawee more than 5[forty-eight] hours, exclusive of public holidays, to consider whether he will accept the same, all
previous parties not consenting to such allowance are thereby discharge from liability to such holder.
84. When cheque not duly presented and drawer damaged thereby.—(1) Where a cheque is not presented for
payment within a reasonable time of its issue, and the drawer or person on whose account it is drawn had the right, at
the time when presentment ought to have been made, as between himself and the banker, to have the cheque paid and
suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to
which such drawer or person is a creditor of the banker to a larger amount than he would have been if such cheque had
been paid.
(2) In determining what is a reasonble time, regard shall be had to the nature of the instrument, the usage of trade and of
bankers, and the facts of the particular case.
(3) The holder of the cheque as to which such drawer of person is so discharged shall be a creditor, in lieu of such
drawer or person, of such banker to the extent of such discharge and entitled to recover the amount from him.
Illustrations (a) A draws a cheque for Rs. 1,000, and, when the cheque ought to be presented, has funds at the bank to
meet it. The bank fails before the cheque is presented. The drawer is discharged, but the holder can prove against the
bank for the amount of the cheque. (b) A draws a cheque at Umballa on a bank in Calcutta. The bank fails before the
cheque could be [presented in ordinary course. A is not discharged, for he has not suffered actual damage through any
delay in presenting the cheque.]
85. Cheque payable to order.—(1)Where a cheque payable to order purports to be endorsed by or on behalf of the
payee, the drawee is discharged by payment in due course.
(2) Where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course
to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing, thereon, and
notwithstanding that any such endorsement purports to restrict or exclude further negotiation.]
85A. Drafts drawn by one branch of a bank on another payable to order.—where any draft, that is, an order to pay
money, drawn by one office of a bank upon another office of the same bank for a sum of money payable to order on
demand, purports to be endorsed by or on behalf of the payee, the bank is discharged by payment in due course.
86. Parties not consenting discharged by qualified or limited acceptance.—If the holder of a bill of exchange
acquiesces in a qualified acceptance, or one limited to part of the sum mentioned in the bill, or which substitutes a
different place or time for payment, or which, where the drawees are not partners, is not signed by all the drawees, all
previous parties whose consent is not obtained to such acceptance are discharged as against the holder and those
claiming under him, unless on notice given by the holder they assent to such acceptance.
Explanation.—An acceptance is qualified
(a) where it is conditional, declaring the payment to be dependent on the happening of an event therein stated;
(b) where it undertakes the payment of part only of the sum ordered to be paid;
(c) where, no place of payment being specified on the order, it undertakes the payment at a specified place, and not
otherwise or elsewhere; or where, a place of payment being specified in the order, it undertakes the payment at some
other place and not otherwise or elsewhere;
(d) where it undertakes the payment at a time other than that at which under the order it would be legally due.
87. Effect of material alteration.—Any material alteration of a negotiable instrument renders the same void as against
anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in
order to carry out the common intention of the original parties;
Alteration by indorsee.—And any such alteration, if made by an indorsee, discharges his indorser from all liability to
him in respect of the consideration thereof. The provisions of this section are subject to those of sections 20, 49, 86 and
125.
88. Acceptor or indorser bound notwithstanding previous alteration.—An acceptor or indorser of a negotiable
instrument is bound by his acceptance or indorsement notwithstanding any previous alteration of the instrument.
89. Payment of instrument on which alteration is not apparent.—(1)Where a promissory note, bill of exchange or
cheque has been materially altered but does not appear to have been so altered,
or where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have
had a crossing which has been obliterated,
payment thereof by a person or banker liable to pay, and paying the same according to the apparent tenor thereof at the
time of payment and otherwise in due course, shall discharge such person or banker from all liability thereon; and such
payment shall not be questioned by reason of the instrument having been altered or the cheque crossed.
(2) Where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic
image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house,
as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while
truncating and transmitting the image.
(3) Any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from
the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.
90. Extinguishment of rights of action on bill in acceptor's hands.—If a bill of exchange which has been negotiated
is, at or after maturity, held by the acceptor in his own right, all rights of action thereon are extinguished.

CHAPTER XVII
OF PENALTIES IN CASE OF DISHONOUR OF CERTAIN CHEQUES FOR INSUFFICIENCY
OF FUNDS IN THE ACCOUNTS
138. Dishonour of cheque for insufficiency, etc., of funds in the account.—Where any cheque drawn by a person on
an account maintained by him with a banker for payment of any amount of money to another person from out of that
account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either
because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it
exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be
deemed to have committed an offence and shall, without prejudice to any other provision of this Act, be punished with
imprisonment for a term which may be extended to two years’ or with fine which may extend to twice the amount of the
cheque, or with both:
Provided that nothing contained in this section shall apply unless—
(a) the cheque has been presented to the tank within a period of six months from the date on which it is drawn or within
the period of its validity, whichever is earlier;
(b) the payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said
amount of money by giving a notice; in writing, to the drawer of the cheque, within thirty days of the receipt of
information by him from the bank regarding the return of the cheque as unpaid; and
(c) the drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may
be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.
Explanation.—For the purposes of this section, “debt of other liability” means a legally enforceable debt or other
liability.