Regulation of Banking Companies

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Prof. (Dr.) Nandimath Omprakash V,
Professor of Law &Registrar,
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Nagarbhavi,
Bangalore-560 072.
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Email: ovnandimath@nls.ac.in

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What we will discuss…

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Background information

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Why banks are to be regulated?
• Standing & stability

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• Confidence of public
• Equitable economic development
• Depositors interest protection

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• Sub serving public interest
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Entry licensing
• Mandatory license requirement [s. 22 of BR Act, 1949]

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• ‘no company shall carry on banking business in India, unless it holds a
license issued in that behalf by the RBI’
• Statutory directives
• The company would be in a position to pay its present and future depositors

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in full their claims;
• The affairs of the company are not conducted in a manner detrimental to the
interest of the present or future depositors;
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• The management of the company is not be prejudicial to the public interest
or depositors;
• Company has adequate capital and earning prospects;
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• Public interest would be served;
• The existing banking facilities;
• Any such other condition.
License – foreign banks
• S. 22(3A) – mandates license

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• RBI has to satisfy
• Such grant of license does not affect the public policy detrimentally;
• No discrimination to Indian banks in the home land (of the applicant foreign
bank);

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• The foreign bank is willing to comply with all the provisions of Banking
Regulation Act, as applicable to banking companies incorporated outside
India.
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Differentiated bank licensing
• FM’s Budget Speech (2014-15)

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• “after making suitable changes to current framework, a structure will be put
in place for continuous authorization of universal banks in the private sector
in the current financial year. RBI will create a framework for licensing small
banks and other differentiated banks. Differentiated banks serving niche
interests, local areas banks, payment banks etc., are contemplated to meet

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credit and remittance needs of small business, unorganized sector, low
income households, farmers and migrant work force”
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• Has given emergence to
• SMALL FINANCE BANKS; AND
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• PAYMENT BANKS.
Small Finance Bank (SFM)
• Provided for since 2014 (in private sector)

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• Objective
• Provision of savings vehicles; and
• Supply of credit to small business units, small and marginal farmers, micro
& small industries and other unorganized sector entities

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• Through high technology-low-cost operations
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• Registered as public limited company & will be licensed
u/s 22 of BR Act
• Eligibility

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• Resident individuals/professionals with 10 years of experience in banking &
finance;
• Companies and societies owned and controlled by residents will be eligible
as promoters to set up small finance banks;
• Existing NBFCs;

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• Micro finance institutions, Local Area Banks (LABs) that are owned and
controlled by residents can also opt for conversion into small finance banks
after complying the guidelines;
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• Joint ventures by different promoter groups for the purpose of setting up
small finance banks would not be permitted.
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• Shall use ‘Small Finance Bank’ in its name
• Minimum paid up capital shall be INR 100 Cr.
• Foreign shareholding in SMB – shall be as per the FDI
• 49% direct route & up to 74% through approval route

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• Corporate governance
• SFB shall have a majority of independent directors;
• Shall comply with the corporate governance guidelines including ‘fit and
proper’ criteria Directors as issued by RBI form time to time.

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Payments bank
• Nachiket Mor committee recommended for payments

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bank to overcome difficulties faced by Pre-paid payment
instruments issuers (PPI)
• Objective

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• further financial inclusion initiatives
• Provide for small savings account
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• Payments/remittance services to migrant workers, low income households,
small businesses, other unorganized sector entities and others
• Facilitate high volume-low-value transactions in payments
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• Driven by secured technology environment
• Eligibility
• The existing non-bank, pre-paid payment instrument (PPI) issuers
authorized under the Payment and Settlement Systems Act, 2007
• Other entities such as individuals/professionals;

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• NBFCs;
• Corporate BCs;
• Mobile Telephone companies;
• Super market chains;

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• Companies;
• Real sector cooperatives;
• Public sector entities.
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• PB can’t undertake lending activities
• PB will be required to use the words ’Payments Bank’ in
order to differentiate it from other banks

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• PB can’t set up subsidiaries to undertake non-banking
financial services activities
• Minimum paid up captial of the payments bank shall be
INR 100 Cr.

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• Foreign shareholding in the payments bank would be as
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per the FDI norms
• Corporate governance
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• Board shall have majority of independent directors
• PB shall comply with corporate governance guidelines
Regulating – banking activities
• S. 6 restricts the activities in which a banking company

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may engage
• Borrowing, raising or taking up money;
• Lending – with or without security;
• Issuance of letters of credit, travelers cheques

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• Dealing in bullion and specie
• Dealing in stocks and shares
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Underwriting
• Providing of safe deposit vaults
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• Collecting and transmitting of money and securities
 • Acting as agents of the government

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• Transact any kinds of guarantee and indemnity business
• Undertake and execute trusts
• Acquire, construct and maintain any building for its own purpose
• Do all such things which are incidental or conducive to the promotion or

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advancement of the business of the company
• Do any other business specified by the Central Government as the lawful
business of banking company
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• S. 8 – Prohibits trading by banks
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Expansion / opening branches
• S. 23 mandates permission of RBI while opening of new

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branches (pleases of business)
• No permission is needed
• If place of business is changed within the same city;

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• Temporary business place for less than one month
• Statutory guidance
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Financial condition of the banking company
• History and general character of its management
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• Capital structure and adequacy
• Public interest.