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Regulating ‘banks’ [Module II & III]

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Dr. O V Nandimath,
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Professor in Law,
National Law School of India University, Nagarbhavi,
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Bangalore-560072
ovnandimath@nls.ac.in
Nationalization

“the nationalization of the commercial banks

was a ‘revolution’ in the Indian Banking

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system. This revolution did not merely signify
a change in the ownership of these Banks but
it was the beginning of a coordinated

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endeavor to use an important part of the
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financial mechanism for the country’s
economic development”
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- M L Tannan, Banking Law & Practice
Entry of foreign banks

• Narsihman Committee
– No more nationalization

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– Recommendation for public issue of shares (up
to 49%),
– The discrimination between public and private

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sector banks to be eliminated
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Bank categorization in India

1. Body corporates under special statutes

1. State Bank of India Act, 1955

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2. State Bank (subsidiary Banks) Act, 1959
3. Regional Rural Banks Act, 1976
4. Banking Companies (Acquisition & Transfer of

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Undertakings) Act, 1970
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5. Banking Companies (Acquisition & Transfer of
Undertakings) Act, 1980
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2. Banking Companies Registered under the
Companies Act

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3. Foreign Banks (those incorporated abroad
& having business in India)
4. Cooperative banks

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The regulatory environment

• Instruments
– The Reserve Bank of India Act, 1934

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– The Banking Regulation Act, 1949
• Institutions
– The Central Bank (RBI)

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– The Central Government; and
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– Courts
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The Central Bank (RBI)

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Central bank – few facts

• They are different from commercial banks

• It does not aim at profit – although it may

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actually earn good amount of profit
• It aims at controlling the banking system
and supporting the economic policy of the

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government
• It is empowered with special powers to
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control and regulate the working of the
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commercial banking systems of the country
• It is rather popularly known for its action to
control credit in the economy
The evolution of RBI

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Institutions who regulate

• Reserve Bank of India

• Central Government; and

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• Courts

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Understanding ‘banking’

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What is banking?

• Sec. 5(b) – ‘banking’ defined

• Sec. 6 – forms of business in which banking

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companies may engage; and
• Sec. 49A – Restriction on acceptance of
deposits withdrawable by cheque

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• Sec. 7 – Use of words ‘bank’, ‘banker’,
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‘banking’ or ‘banking company’
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• Sec. 8 – prohibition of trading
• Sec. 5(b) Banking
– “means accepting, for the purpose of lending or

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investment, of deposits of money from the
public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or

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otherwise”
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• Sec. 6 – permissible banking activities
– borrowing and maintaining

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• Current accounts
• Saving bank account etc.,
– Lending money

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• With or
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• Without securities
– Several agency functions
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– Any other form of business as permitted by the
Central Government [s. 6(o)]
• Sec. 49A
– “no person other than a banking company, the

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Reserve Bank, the State Bank of India or any
other banking institution, firm or other person
notified by the Central Government in this behalf

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on the recommendation of the Reserve Bank
shall accept from the public deposits of money
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withdrawable by cheque:
– Provided that nothing contained in this section
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shall apply to any savings bank scheme run by
the government.
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Regulating banks –

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Paradigm shift

CAMELS RBS

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Capital Adequacy

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Asset Quality
Risk
Management
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Based
Earnings
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Supervision
Liquidity; and
Systems & Control
Entry point regulation

• ‘License’ to start banking business [Sec.

22]

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• to expand the business (i.e., open
branches) – [Sec. 23]

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Capital

• Structure of the capital [Sec.12(1)]

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Reserves

• Create reserve fund [Sec. 17]

• Cash reserves to be maintained

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– By scheduled banks [Sec. 42 RBI Act]
– By non-scheduled banks [Sec. 18]
• Mandatory maintenance of liquid assets
[Sec. 24]
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Issuance of directions

• Directions regarding the advances [Sec. 21]

• General power to issue directions [Sec.

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35A]
• RBI may advise the bank [Sec.36]

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Annual accounts & audit

• Preparation of ‘final accounts’ (in accordance

with the third schedule) [Sec. 29]

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• The Balance Sheet and Profit & Loss accounts
have to be audited [Sec. 31 r/w Rule 15 of
Banking Regulation (Companies) Rules, 1949]

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• Final Accounts and auditors report to the
Registrar of Companies [Sec. 220 of
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Companies Act]
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• Additional information to be provided [Sec. 227
of Companies Act]
• Special Audit [Sec. 30(IB)]
Amalgamation & acquisition

• Procedure for amalgamation of banking

companies [Sec. 44-A]
– Notwithstanding clause

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– ‘Draft Scheme’ of amalgamation prepared
– Placing (in shareholder’s meeting) and getting
special majority’s approval
– Dissenting shareholder to be paid their ‘value’ (as

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determined by the RBI)
– Approved ‘Scheme’ to be presented to RBI for
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sanction
• Such sanction shall be final and binding on all the
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shareholders; and
• Shall be conclusive evidence of compliance [Sec.
44-A(6-C)]
Amalgamation by Central Government

• Power of the Central Government will not be

affected [Sec. 44-A(7)]

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– The said power is under Sec. 396 of Companies
Act, 1956
– However, such power shall be exercised in

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consultation with RBI
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Suspension of business

• under Sec. 37
• By the order of HC the banking business be

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suspended up to six months
– Upon the application by the bank
– Accompaniment of Report of RBI

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Winding up of the banking business

• Two modes
– Voluntary [Sec. 44]

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– Winding up by the HC [Sec. 38]

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Voluntary winding up

• No banking company be voluntarily wound

up unless RBI certifies

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• Procedures of Ss. 484 (as far as they do not
contradict) shall be applicable here as well
• The interest of ‘depositors’ if paramount in

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this process
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Winding up by High Court

• HC may order for winding up

– If the bank is unable to pay its debt; or

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– If the application is made by RBI

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