TITLE OF THE RESEARCH PAPER

Commercial Bankers in India and Law Relating to it Regulations

By
ALLU. SAI SARAYU

2018007

Semester VI

Name of the Program: 5 year (B.A., LL.B. / LL.M.)

Subject

Banking Law

Name of the Faculty Member

Prof. P. Bayola Kiran,

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA, SABBAVARAM, VISAKHAPATNAM - 531035
ANDHRA PRADESH, INDIA

Date of Submission: 30 – 04- 2020

1
Table of Contents
INTRODUCTION.....................................................................................................................................2
ROLE OF RBI IN REGULATING COMMERCIAL BANKS..............................................................................5
LAW RELATING TO REGULATIONS.........................................................................................................6
RECENT DEVELOPMENTS IN LAW..........................................................................................................8
POWERS OF RBI OVER COMMERCIAL BANKS......................................................................................12
REGULATIONS BY RBI...........................................................................................................................17
CONCLUSION.......................................................................................................................................21

2
 INTRODUCTION

Commercial banks form a significant part of the country’s Financial Institution System.
Commercial Banks are those profit seeking institutions which accept deposits from general
public and advance money to individuals like household, entrepreneurs, businessmen etc.
with the prime objective of earning profit in the form of interest, commission etc. The
operations of all these banks are regulated by the Reserve Bank of India, which is the central
bank and supreme financial authority in India. The main source of income of a commercial
bank is the difference between these two rates which they charge to borrowers and pay to
depositers. Examples of commercial banks – ICICI Bank, State Bank of India, Axis Bank,
and HDFC Bank.1

Classification of commercial banks

1. Private Sector Banks:

Private Sector Banks refer to those banks where most of the capital is in private
hands. In India, there are two types of private sector banks viz. Old Private Sector Banks and
New Private Sector Banks. Old private sector banks are those which existed in India at the
time of nationalization of major banks but were not nationalized due to their small size or
some other reason. After the banking reforms, these banks got license to continue and have
existed in India along with new private banks and government banks.The Private Sector
Banks in India are divided into two groups. They are Old Private Sector Banks and New
Private Sector Banks.2

 Old Private Sector Banks existed prior to the nationalization in 1969 and kept their
independence because they were either too small or specialist to be included in
nationalization.

 The new private sector banks are those that have gained their banking license since
the liberalization in the 1990s.

The Local banks were also considered as Private sector.

Total private sector banks as on 31st March 2013 were 22. As per the data from Reserve
Bank of India’s Official Website, there are 21 Private Indian Banks. Reserve Bank of India.
The bank shall have a minimum net worth of 500 crore rupees at all times.

2. Public Sector Banks

Public sector banking refers to the banking activities of a certain class

of commercial bank. The specific use of this term depends on the country or region of the
world where it is used, but generally speaking, public sector banks are those that are owned
or operated by national governments. The term ‘public sector banks’ by itself connotes a
situation where the major/full stake in the banks are held by the Government. Till July,1969,
1
Commercial Banks in India (mapsofindia.com)
2
Commercial Banks in India, List of Commercial Banks in India (tm-india.com)

3
 there were only 8 Public Sector Banks (SBI & its 7 associate banks). By default the minimum
51% shares would be kept by the Government of India, and the management control of these
nationalized banks is only with Central Government. Since all these banks have ownership of
Central Government, they can be classified as public sector banks. Apart from the
nationalized banks, State Bank of India, and its associate banks, IDBI Bank and Regional
Rural Banks are also included in the category of Public Sector banks. The total number of
public sector banks as on March, 2013 were 82. After this massive amalgamation, the total
number of Public Sector Banks (PSBs) in India has come down from 27 banks in 2017 to 12
in 2021., with the merger of few banks.RBI is the central authority that manages all the
banking operations in India.

3. Foreign Banks

A foreign bank is a type of International Bank that is obligated to follow the regulations of
both the home and host countries. Because the foreign banks’ loan limits are based on the
parent bank’s capital, foreign banks can provide more loans than subsidiary banks.” Foreign
Banks are present in India either as representative offices or as branches. A bank may choose
to open foreign bank branches to meet the needs of multinational corporate customers.
The branch form of presence which means that the foreign bank has its physical branch in
India. Second is the presence through Representative Offices in India, which are not actually
a branch. Foreign banks often have correspondent banking relationships with domestic banks
and provide a useful platform for foreign banks to access opportunities for foreign currency
lending to Indian corporate and financial institutions 3. Foreign banks are defined as banks
from a foreign country working in India through branches. RBI has provided rules and
guidelines for a foreign bank to establish and operate in India. 

Total foreign banks as on 31st March 2013 were 43 having 331 branches. Besides these, 46
foreign banks have their representative offices in India as on 31st March 2013. As of
November 2018, India has 45 foreign banks with total 286 branches operating in India.

Sections 5 & 6 of Banking Regulation Act, 1949 contain the functions which a commercial
banks can transact.

Activities of Commercial Banks:-

The modern Commercial Banks in India cater to the financial requirements of different
sectors. The main functions of the commercial banks comprise:

 Transfer of funds.
 Acceptance of deposits.
 Offering those deposits as loans for the establishment of industries.
 Purchase of houses, capital investment purposes and equipments, etc.

3
Commercial Banks in India - Overview of 10 Notable Indian Banks (corporatefinanceinstitute.com)

4
 The banks are allowed to act as trustees. On description of the knowledge of the financial
market of India the financial companies are attracted towards them to act as trustees to
take the responsibility of the security for the financial instrument like a debenture.
 The Indian Government presently hires the commercial banks for different purposes like
tax collection and refunds, payment of pensions etc.4

ROLE OF RBI IN REGULATING 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 incorporates Commercial Banks, Regional
Rural Banks, Local Area Banks, Cooperative Banks, Financial Institutions including
Development Financial Institutions (DFIs) and Non-Banking Financial Companies. RBI infers
its controlling forces for Indian Banking System from the arrangements of the Banking
Regulation Act 1949. For different substances, it gets control from the RBI demonstration
1934. The goals of this capacity are to secure the enthusiasm of the contributors and keep up
the wellbeing and soundness of the banking and Financial System of the nation. After the
progression of the Indian Economy and Banking changes in 1990s, the abundance of the
supervisory functions of RBI moved toward becoming has developed massively. To stay
aware of the additional significance of this capacity, the Board of Financial Supervision was
comprised in 1994. From that point forward, BFS is filling in as the principle managing power
behind RBI's regulatory and supervisory activities. The Banking Regulation Act, 1949 came
into force on March 16, 1949. It contained various aspects related to banking in India. Its
purpose is to provide safety in the interest of depositors and prevent misuse of powers by
managers of banks Act is a supplement to Companies Act, 1956. Initially it was called as
Banking Companies Act, 1949 but from March 1, 1966, the name of the Act was changed to
Banking Regulation Act, 1949. Initially, the law was applicable only to all banking
companies. But, 1965 it was amended to make it applicable to all cooperative banks and to
introduce other changes. The Act gives power to the Reserve Bank of India (RBI) to license
banks, have regulation on shareholding and voting rights of shareholders; supervise the rules
of appointment of the boards and management; regulate the operations of the banks; lay down
instructions for the audits; control moratorium, mergers and liquidation; issue directives in the
best interests of public good and on banking policy, and also impose penalties. In 1965, the
Act was amended to included cooperative banks under its purview by the addition of the
Section 56. Cooperative banks, which operate only in one state and are formed and run by the
state government.

The commercial banks maintain accounts with the Reserve Bank of India and borrow
money when necessary from the Reserve Bank of India. The Reserve Bank of India thus
provides credit to commercial banks and commercial banks in turn provide credit to their
clients to promote economic growth and development. However, credit cannot be extended to
an unlimited extent because it would disturb price stability in the country. Therefore, it
4
Commercial Banks in India, List of Commercial Banks in India (tm-india.com)

5
becomes necessary for the Reserve Bank of India to control the act ivities of the commercial
banks in the interestof price stability. The Reserve Bank of India controls the activities of the
commercial banks by virtue of the powers vested in it under the Banking Regulations Act of
1949 (10 of 1949) and the Reserve Bank of India Act, 1934 (2 of 1934).

The Banking Companies Act was passed in the year 1949 in order to remove the defects in the
banking system and to strengthen the banking structure so that the banking system can be used
as an instrument of economic change in the country. The Banking Regulation Act, 1949 also
gives powers to the Reserve Bank of India to control and supervise the activities of the
commercial banks in the country.

Under the Banking Regulation Act, 1949, the Reserve Bank of India is given a power to issue
licenses to commercial banks to open branches. No commercial bank can commence the
business of banking without obtaining alicense from the Reserve Bank of India. The Reserve
Bank of India has also power to withdraw the license once granted in case it is found that the
affairs of the bank are not managed properly. The Reserve Bank of India has been given a
power to inspect the commercial banks under Section 35 of the Banking Regulation Act.
Under this power, the Reserve Bank can itself at any time cause an inspection to be carried
out by one or more of its officers of any bank and its books and accounts and if there are
defects, the banks concerned are required to rectify them.As per Section 36 AB of the
Banking Regulation Act, the Reserve Bank of India has the power to appoint Additional
Directors on the Board of Directors.

LAW RELATING TO REGULATIONS

1. RESERVE BANK OF INDIA ACT, 1934:

One of the most important functions of RBI is to work as regulator and supervisor of
financial system. The Reserve Bank of India Act,1934 was enacted to constitute the Reserve
Bank of India with an objective to (a) regulate the issue of bank notes (b) for keeping
reserves to ensure stability in the monetary system (c) to operate effectively the nation’s
currency and credit system The RBI Act covers: (i) the constitution (ii) powers (iii) functions
of the Reserve Bank of India. The act does not directly deal with the regulation of the
banking system except for few sections like Sec 42 which relates to the maintenance of CRR
by banks and Sec 18 which deals with direct discount of bills of exchange and promissory
notes as part of rediscounting facilities to regulate the credit to the banking system. The RBI
Act deals with:

6
(a) incorporation, capital, management and business of the RBI

(b) the functions of the RBI such as issue of bank notes, monetary control, banker to the
Central and State Governments and banks, lender of last resort and other functions

(c) general provisions in respect of reserve fund, credit funds, audit and accounts

(d) issuing directives and imposing penalties for violation of the provisions of the Act

BANKING REGULATION ACT, 1949:

The Banking Regulation Act, 1949 is one of the important legal frame works. Initially the
Act was passed as Banking Companies Act,1949 and it was changed to Banking Regulation
Act 1949. Along with the Reserve Bank of India Act 1935, Banking Regulation Act 1949
provides a lot of guidelines to banks covering wide range of areas. Some of the important
provisions of the Banking Regulation Act 1949 are listed below. – The term banking is
defined as per Sec 5(i) (b), as acceptance of deposits of money from the public for the
purpose of lending and/or investment. Such deposits can be repayable on demand or
otherwise and withdraw able by means of cheque, drafts, order or otherwise – Sec 5(i)(c)
defines a banking company as any company which handles the business of banking – Sec 5(i)
(f) distinguishes between the demand and time liabilities, as the liabilities which are
repayable on demand and time liabilities means which are not demand liabilities – Sec 5(i)(h)
deals with the meaning of secured loans or advances. Secured loan or advance granted on the
security of an asset, the market value of such an asset in not at any time less than the amount
of such loan or advances. Whereas unsecured loans are recognized as a loan or advance
which is not secured – Sec 6(1) deals with the definition of banking business – Sec 7
specifies banking companies doing banking business in India should use at least on work
bank, banking, banking company in its name – Banking Regulation Act through a number of
sections restricts or prohibits certain activities for a bank.

THE DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION ACT,

1961:

All commercial banks including the branches of foreign banks functioning in India, Local
Area Banks and Regional Rural Banks are covered under the Deposit Insurance Scheme.
Commercial Banks : All commercial banks including branches of foreign banks functioning
in India, local area banks and regional rural banks are insured by the DICGC. All State,

7
Central and Primary cooperative banks, also called urban cooperative banks, functioning in
States / Union Territories which have amended the local Cooperative Societies Act
empowering the Reserve Bank of India (RBI) to order the Registrar of Cooperative Societies
of the State / Union Territory to wind up a cooperative bank or to supersede its committee of
management and requiring the Registrar not to take any action regarding winding up,
amalgamation or reconstruction of a co-operative bank without prior sanction in writing from
the RBI are covered under the Deposit Insurance Scheme. At present all co-operative banks
are covered by the DICGC. Primary cooperative societies are not insured by the DICGC.

RECENT DEVELOPMENTS IN LAW

THE BANKING REGULATION (AMENDMENT) BILL, 2020:

Co-operative banks are exempted from several provisions of the Banking Regulation
Act, 1949. The Bill applies some of these provisions to them, making their regulation under
the Act similar to that of commercial banks. Co-operative banks provide banking facilities to
people of small means. However, absence of regulatory oversight by RBI on par with
commercial banks has contributed to the poor performance of co-operative banks. The Bill
seeks to extend RBI regulation of co-operative banks with respect to management, capital,
audit and winding up. The banking sector in India consists of scheduled commercial banks,
regional rural banks, small finance banks and co-operative banks. Co-operative banks
provide banking facilities to persons of small means thereby fulfilling the objective of
financial inclusion.5 As of 2015, nearly 90% of loans made by co-operative banks were of
less than five lakh rupees each, accounting for 33% of total lending by these banks. Co-
operative banks are those co-operative societies whose principal business is banking. These
societies are owned, promoted, controlled and managed by their members and seek to provide
support to them. Under the Bill, audit of co-operative banks would be conducted on par with
scheduled commercial banks. Accounts would be audited by a qualified person and RBI
approval would be required before appointing, re-appointing or removing an auditor.

5
Report of the High Powered Committee on Urban Cooperative Banks (Chairman: R. Gandhi),
2015, https://rbidocs.rbi.org.in/rdocs//PublicationReport/Pdfs/HPC3934E91FA21241B8B0ABC4C4DBF28A40.
PDF.

8
RBI GUIDELINES:

Building a heterogeneous banking system

 The Reserve Bank is striving towards a more competitive, efficient and heterogeneous
banking structure. It believes that a heterogeneous banking system can meet varied
customer needs in a more efficient manner. As different banks would operate
differently based on their reach, liquidity, capitalization and market power
considerations, they will be able to offer a wider range of customer service enhancing
consumer welfare. The licensing policies regarding Universal Banks, Small Finance
Banks and Payments Banks are a step in the direction of building a heterogeneous
banking system.

Licensing of Universal Banks

 Two banks viz., IDFC Bank Limited and Bandhan Bank Limited, were issued
banking licence in terms of the 'Guidelines on Licensing of New Banks in the Private
Sector dated February 22, 2013'. Based on the experience gained from this licensing
exercise, the Reserve Bank has moved towards accepting applications for universal
bank licence on a continuous basis under the 'Guidelines for 'on tap' Licensing of
Universal Banks in the Private Sector dated August 1, 2016.

Licensing of Differentiated Banks

 Guidelines for Licensing of Small Finance Banks and Payments Banks were issued on
November 27, 2014. Banking licenses have been issued to Small Finance Banks and
Payments Banks under these guidelines. These banks are "niche" or "differentiated"
banks, with the common objective of furthering financial inclusion.

Capital for banks

 Basel III Capital Regulations for Indian banks will be fully phased in as on March 31,
2019, closer to the internationally agreed date of January 1, 2019, instead of March
31, 2018 as was announced earlier.

Special knowledge or practical experience useful to banking companies:

9
  In the backdrop of innovations in banking and technology, to guide the banks in
managing their diversified business portfolios and risks, the areas of special
knowledge and practical experience enumerated under various statutory provisions for
the directors on the boards of commercial banks (excluding RRBs) have been
broadened to include (i) Information Technology (ii) Payment & Settlement Systems
(iii) Human Resources (iv) Risk Management and (v) Business Management.

Minimum qualifications and experience for CFO and CTO:

 A Chief Financial Officer and Chief Technology Officer would play a crucial role in
strengthening and sustaining the banks' risk governance framework in light of rapid
innovations in banking and technology. Therefore, minimum qualification and
experience were stipulated for adherence by banks while inviting applications for
these positions.6

Management of Stressed Assets

 To ensure effective stressed asset management, guidelines were issued to banks which
among other things, covered the need to ensure that the banking system recognises
financial distress early and takes prompt steps to resolve it.

Appointment of Chief Risk Officers in Banks

 Banks are required to keep the credit risk management function separate from the
credit sanction process towards effective risk management. For bringing uniform
approach and alignment of risk management system with the best practices, banks are
required to frame a Board-approved policy, clearly defining the roles and
responsibilities of the Chief Risk Officer (CRO) who shall not have any reporting
relationship with business verticals or business targets. Under no circumstances, “dual
hatting” will be allowed i.e., CRO shall not function as CEO/COO/CFO/Chief of
Internal Audit.
6
How RBI regulates Commercial Banks?

10
 APPOINTMENT OF AUDIT

 The Reserve Bank of India (RBI) on Tuesday 28-04-2021 made it mandatory for

commercial banks and urban cooperative banks (UCBs) to seek its approval before
appointing auditors. The banking regulator also ruled that the auditors will have to be
appointed for a continuous period of three years with a maximum assignment tenure
of six years7.

FURTHER DEVELOPMENTS:

Basel III Leverage Ratio Framework

 The experience drawn from the global financial crisis suggests that the build-up of
excessive on-balance sheet, as well as off-balance sheet leverage in the banking
system was at the core of the financial fragilities that were witnessed during the global
financial crisis. Based on recent recommendations of the Basel Committee on
Banking Supervision (BCBS), the Reserve Bank will issue revised guidelines on the
leverage ratio .

Improving the financial system’s ability to cope with distress

 It is important to improve the financial system’s ability to cope with stress and
distress by not only providing for counter-cyclical buffers, but also by directly dealing
with stress through effective resolution regimes. The Reserve Bank in 2013-14 has
taken several initiatives in this regard and plans to carry the agenda forward by
strengthening the corporate debt restructuring mechanism, credit information and the
resolution regime. In coordination with Financial Stability and Development C ouncil
(FSDC), the Reserve Bank intends to take the process forward by seeking necessary
legal and institutional changes and by creating of a resolution fund.

7
https://www.business-standard.com/article/news-cm/rbi-issues-guidelines-for-appointment-of-auditors-of-
com

11
 POWERS OF RBI OVER COMMERCIAL BANKS

1. SELECTIVE CREDIT CONTROL:

Under Section 21, the Reserve Bank of India has been given a power to control
advances granted by the commercial banks. This power is known as the power of Selective
Credit Control. Under this Section, the Reserve Bank of India is empowered to determine the
policy in relation to advances to be followed by banks generally or by any bank in particular
and under this Section, the Reserve Bank of India has been uthorized to issue directions to
banks as regards the purpose of the advances, the margins to be maintained in respect of the
secured advances and it can also prescribe the rate of interest and other terms and conditions
on which advances may be made.

2. QUANTITATIVE CONTROL OF CREDIT:

Apart from the Selective Control of Credit exercised by the Reserve Bank of India,
the Reserve Bank of India controls the volume of credit in a quantitative way so as to
influence the total volume of bank credit. The Reserve Bank of India does this through the
use of following instruments:

1. The bank rate

2. Open market operations
3. Variable reserve requirements

1. Bank rate:
The bank rate is the rate of interest at which the Reserve Bank of India re-discounts the
first class bills of exchange from commercial banks or other eligible paper. Whenever the
Reserve Bank of India wants to reduce credit, the bank rate is raised and whenever the
volume of bank credits is to be expanded the bank rate is reduced. This is because by
change in the bank rate, the Reserve Bank of India seeks to influence the cost of bank
credit. In India the bank rate has been changed frequently from 1951 onwards and as of
November 2013, the bank rate stands at 8.75%. However, the efficacy of the bank rate
depends on the extent of integration in the money market and also it depends upon how
far the commercial banks resort to borrowings from the Reserve Bank of India.

12
2. Open market operations:
The Reserve Bank of India can influence the reserves of commercial banks, i.e., the cash
base of commercial banks by buying or selling government securities in open market. If
the Reserve Bank of India buys government securities in the market from commercial
banks, there is transfer of cash from the Reserve Bank of India to the commercial banks
and this increases the cash base of the commercial banks enabling them to expand credit
and conversely if the Reserve Bank of India sells government securities to the
Commercial Banks, the commercial banks transfer cash to the Reserve Bank of India and
therefore their cash base is reduced thus adversely affecting the capacity of commercial
banks to expand credit. The success of open market operation as a technique of credit
control depends upon of size of government securities available, their range in variety
and the ability of the market to absorb them.
3. Banking policy vis--vis deposits

In the matter of formulation of policy by the Reserve Bank of India for safeguarding
the interest of depositors, it was held that the High Court could not examine the merits of the
policy under writ jurisdiction. Banking policy requires economic and fiscal expertise. The
courts should refrain from interfering unless the policy is contrary to some statutory
provisions, or is otherwise arbitrary or unconstitutional. 8 Mere receipt of deposits and
payment of interest cannot be termed as a banking business. The case involved the question
whether the State Government was, in this respect, over stepping its legislative competence.9

4. Licenses to Banking Companies

The Bank is empowered to grant licenses for banking companies which have requested for
them under Section 22 of the Act, for carrying on the business of banking in India. Before
granting the licence, the Bank will satisfy itself that the applicant bank fulfills the following
conditions:

1. that the capital structure and earning prospects of the company are adequate;
2. the general character of the proposed management is of a high order and not
detrimental to the interests of the depositors;
3. that the granting of licence will be in public interest;

8
MulrajJayantilalSheth v. Governor, RBI, (2004) 1 BC 43 : AIR 2003 Bom 318 [LNIND 2003 BOM 373](Bom
—
DB)(Bom—DB).
9
ThiruMuruga Finance v. State of TN, (2001) 1 BC 618 [LNIND 1999 MAD 558] (Mad).

13
 that the granting of licence would not be prejudicial to the operation and consolidation
of the banking system, and that it will be consistent with the monetary stability and
economic growth.

5. Variable reserve requirements:

The commercial banks are required to keep a certain percentage of deposits as
reserves with the Reserve Bank of India. The Reserve Bank of India is legally
authorised to raise or lower the minimum reserves that the bank must maintain against
the total deposits. If the percentage of reserves to be maintained is increased, the
commercial banks will be left with less cash and therefore, they have to contract
credit and if this limit is reduced, the commercial banks will have more cash with
them and they would be able to expand credit. The Reserve Bank of India has got the
power to use the variable reserve requirements as an instrument of monetary control.
Consequent upon the amendment of sub-section (1) of Section 42 of RBI Act 1934,
effective from 22-6-2006, the Reserve Bank having regard to the needs of securing
monetary stability in the country can prescribe the Cash Reserve Ratio (CRR) for
Scheduled Commercial Banks without any floor rate or ceiling rate.In addition to this,
the Reserve Bank of India was empowered to impound banks' reserves in excess of a
certain level reached in a phased period.

6. Issue of Credit Policy

The Bank formulates credit policies, normally by way of an order, by laying down the
bank rate, lending restrictions, merger restrictions, nature of security to be obtained
for credit extension, defining the scope and eligibility of the priority sector for
borrowing, determining the cash reserve ratio and statutory liquidity ratio, and any
other matter having a bearing on commercial lending in the first instance, and the
economy of the country in the second.
7. Banker to Schedule Banks
The Reserve Bank act s as a lender of the last resort to commercial, co-operative and
Regional Rural Banks. The bank establishes such a relationship with the banking
company by including its name in the Second Schedule ofthe Reserve Bank of India
Act, thereby calling it a Schedule Bank. The advantage of a Schedule Bank is that it
becomes entitled to the facilities of re-finance from the Reserve Bank. Since 1966, the
State Cooperative Banks were also made eligible for inclusion in the Second Schedule

14
 of the Act. The public sector banks, including State Bank of India and its subsidiaries,
have been notified as Scheduled Banks by the Central Government. A condition for a
commercial bank to be included in the Second Schedule is that such bank should carry
a minimum value of rupees five lakhs as its paid-up capital and reserves. ‘Value’
means exchangeable value and not the normal value as done in the books of the
banks. The value is ascertained by deducting the liabilities declared in the balance
sheet from the aggregate realisable value of the assets of the bank.

Before admitting the banking company as a Scheduled Bank, the Reserve Bank
satisfies itself that the affairs of the bank are not being conducted in the manner detrimental
to the interests of the depositors. The parameters for evaluating the affairs of the banking
company will be the quality of its management, the profile of the directors, the state of the
reserves in comparison with the time and demand liabilities, and the quality and extent of
securities obtained for investments and advances. The Bank has also the power to remove the
name of the banking company from the Second Schedule at any time, in case it does not see
the Scheduled Bank meeting required standards.

8. Removal of managerial persons

Where the Reserve Bank is convinced that a banking company is not conducting its
affairs in the public interest, or is conducting them in a manner detrimental to the
interests of the depositors, or where the Reserve Bank is satisfied that for securing the
proper management of a banking company it would be necessary so to do, the
Reserve Bank may after recording the reasons and by order, remove from office, with
effect from a specified date, any Chairman, Director, Chief Executive Director (by
whatever name called) or other officer or employee of the Banking Company. The
Reserve Bank shall however give such Chairman, Director, or Chief Executive
Officer or other officer or employee, a reasonable opportunity for making a
representation to the Reserve Bank against the proposed order.

Where, however, the Bank is convinced that any delay would be detrimental to the
interests of the banking company or its depositors, Reserve Bank may, at the time of giving
an opportunity aforesaid or any time thereafter, by order direct, that pending consideration of
the representation received by it, if any, such Chairman or, as the case may be, the Director or
the Chief Executive Officer, or other officer or employee, shall not, with effect from the date
of such order, act —

15
 a. as a 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.

Where an order of removal is made as stated, the Bank may also appoint a suitable
person in the vacancy so caused. Any person so appointed as Chairman, Director or Chief
Executive Officer or other officer or employee will hold office during the pleasure of the
Reserve Bank. Such appointment may be for a period not exceeding threeyears or such
further periods not exceeding three years at a time, as the Reserve Bank may specify.

16
 REGULATIONS BY RBI
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 ‘fit 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 classification and
provisioning, capital adequacy, investments portfolio and capital market exposures. RBI has
issued its guidelines under the Basel II for risk management.

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

17
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.

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.

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 RESERVE BANK OF INDIA AND CORPORATE GOVERNANCE IN THE
BANKING SECTOR IN INDIA

In India, the Reserve Bank of India ("RBI") is the gatekeeper of Corporate Governance. RBI
is the central bank of India which controls all the real issues identified with currency, foreign
exchange reserves and so on. To put it plainly, RBI is the bank responsible for anchoring the
monetary stability in India. The preamble of the Reserve Bank of India Act, 1934 elucidates
as “An Act to constitute a Reserve Bank of India. Whereas it is expedient to constitute a
Reserve Bank for India to regulate the issue of Bank notes and the keeping of reserves with a
view to securing monetary stability in India and generally to operate the currency any credit
system of the country to its advantage; And whereas in the present disorganisation of the
monetary systems of the world it is not possible to determine what will be suitable as a
permanent basis for the Indian monetary system; But whereas it is expedient to make
temporary provision on the basis of the existing monetary system, and to leave the question
of the monetary standard best suited to India to be considered when the international
monetary position has become sufficiently clear and stable to make it possible to frame
permanent measures…” There is nobody who could deny the reality banks are critical to the
economic stability of any economy. In the event that a bank crashes then it doesn't crash
alone, it additionally removes the lifelong venture and investment funds of its whole account
holders as well. This isn't the only reason because of which corporate governance in the
banking area is required. Corporate Governance is additionally required for the bank to keep
a mind money laundering, financing improper and criminal acts and transaction of money to
the fear mongers. The latest demonstration of RBI job in the Indian economy is
demonetization, through which it has (under the decisionproduction limit of Indian
Parliament), strike hard at the general population storing dark money or individuals printing
counterfeit currency. In any case, it's a very surprising issue this could have been done in a
progressively professional manner, diminishing the issues looked by the general population.
RBI plays a leading role in formulating and implementing corporate governance. The
corporate governance mechanism is followed by the Reserve Bank of India is based on three
categories for governing the banks. They are as follows:

(i) Disclosure and transparency,

(ii) Off-site surveillance,

(iii) Prompt Corrective Action

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RESTRICTIONS ON LENDING

 Analysis demonstrates that a long way from being excessively stringent, the central
bank has indicated abstinence with a portion of the banks that are not effectively
under PCA.
 No less than four additional banks should be rebuffed for not meeting the central
bank's specified risk thresholds, if RBI pursues a strict guideline based methodology.
 These are Andhra Bank, Canara Bank, Punjab National Bank (PNB) and Union Bank
of India.
 Each of these has broken the maximum permissible dimensions of 6% for net non-
performing propels as a percentage of aggregate advances.
 RBI decides express that PCA can be imposed if any of the risk thresholds for capital,
asset quality, profitability or use is broken.
 Anyway these banks met the minimum capital requirements expected to stay away
from PCA.
Norms are Conservative
1. While recognition of NPAs has enhanced in the Indian banking system, provisioning
norms are as yet conservative.
2. In jurisdictions where only capital ratios are considered in the PCA structure, NPA
provisioning norms are increasingly stringent.
3. Perhaps RBI's self control has to do with an expectation that the legislature will
recapitalize these banks, so that provisioning for their NPAs don't drag their capital down to
low dimensions.

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 CONCLUSION

The financial systems of the greater part of the developing countries are portrayed by
conjunction and participation between the formal and informal financial sectors. The Indian
financial system can likewise be extensively ordered into the formal (composed) financial
system and the informal (disorderly) financial system. In India, the financial part involves
banking and non-banking financial foundations. There is no rigid standard to recognize
banking and non-banking organizations. The banking system is at the core of the financial
system. The Indian financial system involves an expansive number of commercial and
cooperative banks specific formative banks for industry, agriculture and so forth. The Indian
banking system has the Reserve Bank of India at the zenith. It is the operational hub of the
Indian money related system. Since beginning, the RBI has been directing, observing,
managing, controlling and advancing the predetermination of the financial system in India.
The commercial banks encourage the financial improvement of a nation by steadfastly
following the money related arrangement of the national bank i.e. RBI. Each specialist
worried about Co-agent segment should have its impact in guaranteeing that the goals of the
Urban Co-agent Banking segment are sustained in a way that investor premium and general
society enthusiasm everywhere is ensured. The job of RBI could, in this manner, be to outline
an administrative and supervisory routine that is multi-layered to catch the heterogeneity of
the part and execute arrangements that would give sufficient breathing room to the area to
develop in a nondisruptive way. The State and Central Governments could perceive that the
UCBs are co-agent societies as well as they are basically banking substances whose
administration structure is that of a co-agent. They ought to perceive the systemic effect that
wasteful working of the elements in the division could have. Thus, it would be in light of a
legitimate concern for the division in the event that they bolster, encourage and enable the
RBI to set up components and systems that would empower these UCBs to play out their
banking functions in a way that is in the general enthusiasm of the investor and the general
population on the loose.

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