Course Code: 19BMC205A

Course Title: Banking and Financial Institutions

Course Leader

Mrs. Savitha Kulkarni

savitha.ms.mc@msruas.ac.in

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 Lecture No. 1
Regulations Governing Banking Institutions

At the end of this session, students will be able to:

– Explain Banking Regulation Act 1949

– Explain CRR and SLR
– Explain the functions of Banks

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 Contents

• Banks
• Different Types of Banks
• Preamble of Regulatory Act
• Applicability of Banking Regulation Act
• Business of Banking Companies
• Cash Reserve Ratio
• Statutory Liquidity Ratio

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 Banks
• The banking industry handles finances in a country including cash
and credit. Banks are the institutional bodies that accept deposits
and grant credit to the entities and play a major role in maintaining
the economic stature of a country. Given their importance in the
economy, banks are kept under strict regulation in most of the
countries. In India, the Reserve Bank of India (RBI) is the apex
banking institution that regulates the monetary policy in the
country.

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 Services offered by Banks

• The banking industry handles finances in a country including cash

and credit. Banks are the institutional bodies that accept deposits
and grant credit to the entities and play a major role in maintaining
the economic stature of a country. Given their importance in the
economy, banks are kept under strict regulation in most of the
countries. In India, the Reserve Bank of India (RBI) is the apex
banking institution that regulates the monetary policy in the
country.

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 Services offered by Banks

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 Different Types of Banks

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 Commercial Banks

• Commercial Banks are regulated under the

Banking Regulation Act, 1949 and their business
model is designed to make profit. Their primary
function is to accept deposits and grant loans to
the general public, corporate and government.
Commercial banks can be divided into-

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 Commercial Banks

• There are 4 types of Commercial banks

– Public Sector Banks
– Private Sector Banks
– Foreign Banks
– Regional Rural banks

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 Public Sector Banks
• These are the nationalised banks and account for more than 75 per
cent of the total banking business in the country. Majority of stakes
in these banks are held by the government. In terms of volume, SBI
is the largest public sector bank in India and after its merger with its
5 associate banks (as on 1st April 2017) it has got a position among
the top 50 banks of the world.

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 Public Sector Banks

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 Private Sector Banks

• These include banks in which major stake or equity is held by

private shareholders. All the banking rules and regulations laid
down by the RBI will be applicable on private sector banks as well.
Given below is the list of private-sector banks in India-

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 Private Banks

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 Foreign Banks
• A foreign bank is one that has its headquarters in a foreign country
but operates in India as a private entity. These banks are under the
obligation to follow the regulations of its home country as well as
the country in which they are operating. Given below is the list of
foreign banks operating in India –

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 Foreign Banks

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 Regional Rural Banks

• These are also scheduled commercial banks but they are

established with the main objective of providing credit to weaker
sections of the society like agricultural labourers, marginal farmers
and small enterprises. They usually operate at regional levels in
different states of India and may have branches in selected urban
areas as well. Other important functions carried out by RRBs
include-
– Providing banking and financial services to rural and semi-urban areas
– Government operations like disbursement of wages of MGNREGA workers,
distribution of pensions, etc.
– Para-Banking facilities like debit cards, credit cards and locker facilities
https://en.wikipedia.org/wiki/Regional_Rural_Bank

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 Small Finance Banks

• This is a niche banking segment in the country and is aimed to

provide financial inclusion to sections of the society that are not
served by other banks. The main customers of small finance banks
include micro industries, small and marginal farmers, unorganized
sector entities and small business units. These are licensed under
Section 22 of the Banking Regulation Act, 1949 and are governed by
the provisions of RBI Act, 1934 and FEMA.

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 Small Finance Banks

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 Payment Banks

• This is a relatively new model of bank in the Indian Banking

industry. It was conceptualised by the RBI and is allowed to accept a
restricted deposit. The amount is currently limited to Rs. 1 Lakh per
customer. They also offer services like ATM cards, debit cards, net-
banking and mobile-banking.
https://en.wikipedia.org/wiki/Payments_bank

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 Co-operative banks
• Co-operative banks are registered under the Cooperative Societies
Act, 1912 and they are run by an elected managing committee.
These work on no-profit no-loss basis and mainly serve
entrepreneurs, small businesses, industries and self-employment in
urban areas. In rural areas, they mainly finance agriculture-based
activities like farming, livestock and hatcheries.
• Urban Co-operative banks
• Rural Co-operative banks

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 Urban Co-operative Banks

• Urban Co-operative Banks refer to the primary cooperative banks

located in urban and semi-urban areas. These banks essentially lent
to small borrowers and businesses centered around communities,
localities work place groups.
• According to the RBI, on 31st March, 2003 there were 2,104 Urban
Co-operative Banks of which 56 were scheduled banks. About 79%
of these are located in five states, – Andhra Pradesh, Gujarat,
Karnataka, Maharashtra and Tamil Nadu.

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 State Cooperative Bank

• A State Cooperative Bank is a federation of the central cooperative

bank which acts as custodian of the cooperative banking structure
in the State.
• Banks can also be classified on the basis of Scheduled and Non-
Scheduled Banks. It is essential for every individual to check if they
are holding their savings or deposit account with a Scheduled Bank
or Non-Scheduled Bank. Scheduled Banks are also covered under
the depositor insurance program of Deposit Insurance and Credit
Guarantee Corporation (DICGC), which is beneficial for all the
account holders holding a savings and fixed / recurring deposit
account. Under DICGC, bank deposits of up to Rs 1 lakh, including
the fixed, savings, current and recurring deposits, per depositor
per bank in the event of bank failure are insured.
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 Scheduled banks

• Scheduled banks are covered under the 2nd Schedule of the

Reserve Bank of India Act, 1934. To qualify as a scheduled bank, the
bank should conform to the following conditions:
• A bank that has a paid-up capital of Rs. 5 Lakh and above qualifies
for the schedule bank category
• A bank requires to satisfy the central bank that its affairs are not
carried out in a way that causes harm to the interest of the
depositors
• A bank should be a corporation rather than a sole-proprietorship or
partnership firm

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 Non-scheduled bank

• Non-scheduled banks refer to the local area banks which are not

listed in the Second Schedule of Reserve Bank of India. Non-
Scheduled Banks are also required to maintain the cash reserve
requirement, not with the RBI, but with them.

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 Preamble of Regulatory Act

• An Act to consolidate
and amend the law
relating to banking.
• whereas it is expedient to
consolidate and amend
the law relating to banking
.

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 Introduction

The Banking companies act, presently known as banking regulation act was
enacted owing to safeguard the interest of depositors, control abuse of
power by some bank personnel controlling the banks in particular and to
the interest of Indian economy in general.

The Banking Regulation Act was passed as the Banking Companies Act
1949 and came into force w.e.f 16.3.49. Subsequently it was changed to
Banking Regulations Act 1949 wef 01.03.66.

However, it should be remembered that this act does not supersede

the provision of companies act or any other law for the time being in
force in respect of banking business.

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 Definition of Banks

In India, the definition of the business of banking has been given in the
Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act,
'a banking company is a company which transacts the business of banking in
India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for
the purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable, by cheque, draft, order
or otherwise.'

This definition points to the three primary activities of a commercial bank

which distinguish it from the other financial institutions. These are: (i)
maintaining deposit accounts including current accounts, (ii) issue and pay
cheques, and (iii) collect cheques for the bank's customer

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 Different provisions of Banking
regulations
S. No. Parts Topics Act Sections covered
1. I Preliminary 1 to 5A
2. II
3. IIA Control over management 36AA to 36AC
4. IIB

5. IIC Acquisition of the undertakings of Banking 36AE to 36AJ

Companies in certain cases
6. III

7. IIIA Speedy provision for speedy disposal of winding 45A to 45X

up proceedings
8. IIIB

9. IV Miscellaneous 46 to 55A
10. V Application of the Act to cooperative Banks 56
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Commerce
Commerce © Ramaiah University of Applied Sciences
 Applicability of the Banking Regulation Act,
1949

•This Act applies to following categories of Banks:

1. Nationalized Banks

2. Non-Nationalized Banks

3.Cooperative Banks

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 Business of banking Companies Section 6(1)
and 6(2) r.w. 56(b)

• Borrowing, raising or taking of

money
• Giving advance
• Bills business
• L/C , Bank Guarantee,
Indemnity
• Foreign exchange
• Providing safe deposit vaults

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 Business of banking Companies Section 6(1) and
6(2) r .w. 56(b) cont.…

• Collecting and transmitting money

• Managing, selling and realizing any property that may come
into the possession of the bank in satisfaction or part
satisfaction of any of its dues
• Acquiring, holding and dealing with any property or any
right, title or interest in any such property that may form the
security or part of the security for any loans or advances or
which may be connected with such security
• Undertaking and executing trusts

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 Business of banking Companies Section 6(1) and
6(2) r .w. 56(b) cont.…

• Acquiring, constructing, maintaining and altering of any

building for the purpose of the bank
• Acquiring and undertaking the whole or part of the
business of any person or bank / company if its nature of
business is as per the allowed business for the bank

• Doing all such other things as are incidental or conducive to

the promotion or advancement of the business of the bank
• Any other business the Central Govt. may by notification
specify as a allowed business
• Banks are prohibited to do any other business

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 Use of words bank, banker, banking or
banking
company
(1) No company other than a banking company shall use as part of its
name 15[or, in connection with its business] any of the words bank, banker
or banking and no company shall carry on the business of banking in India
unless it uses as part of its name at least one
of such words.
(2) No firm, individual or group of individuals shall, for the purpose of carrying
on any
business, use as part of its or his name any of the words bank, banking or
banking company.
(3) Nothing in this section shall apply to-

(a) a subsidiary of a banking company formed for one or more of the

purposes mentioned in sub-section (1) of section 19, whose name indicates
that it is a subsidiary of that banking
company;
(b) any association of banks formed for the protection of their mutual
interests and registered under section 25 of the Companies Act,
1956 (1 of 1956).]

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Commerce
Commerce © Ramaiah University of Applied Sciences
 Banking Policy

“Banking Policy”means policy specified by RBI from time to time in the interest of

-Banking system

-Monetary stability

-Sound economic growth

-Interest of depositors

-Volume of deposits and other resources of the bank

-Efficient use of the deposits and resources …..Section 5(ca)

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 Cash Reserve (CRR)
Section 18 r. w. 56 (j)
•Every bank is required to keep cash reserve, with itself or
by way of balance in the current account with RBI or
Central / District Co-operative Bank or net balance in all such
way, of minimum prescribed % amount of its DTL as of last Friday
of fortnight

A return about this has to be submitted to RBI before 15thof

each month about alternate Friday

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 Statutory Liquid Ratio(SLR)

Bank shall maintain

unencumbered approved
securities, valued not
exceeding the current market
price, or an amount which shall
not be less than 24% of the
total of its demand and time
liabilities (DTL)

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 Restrictions on loans and advances

• Not withstanding anything to the contrary contained in section 77 of the

Companies Act, 1956 (1 of 1956), no banking company shall,
– (a) grant any loans or advances on the security of its own shares, or
– (b) enter into any commitment for granting any loan or advance to or on
behalf of
(i) any of its directors,
(ii) any firm in which any of its directors is interested as partner,
manager, employee or guarantor, or
(iii) any company [not being a subsidiary of the banking company or a
company registered under section 25 of the Companies Act, 1956 (1 of
1956), or a Government company] of which 61[or the subsidiary or the
holding company of which] any of the directors of the banking company
is a director, managing agent, manager, employee or guarantor or in
which he holds substantial interest, or
(iv) any individual in respect of whom any of its directors is a partner or
guarantor

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 Licensing of Banking Companies

68[(1) Save as hereinafter

provided, no company shall carry on
banking business in India unless it
holds a licence issued in that behalf
by the Reserve Bank and any such
licence may be issued subject of
such conditions as the Reserve Bank
may
think fit to impose.]

(2) Every banking company in

existence on the commencement
of
this Act, before the expiry of six
months from such commencement,
and every other company before
commencing banking business 69[in
India], shall apply in writing to the
Reserve Bank for a licence under
this section.
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 Power to publish information

The Reserve Bank or the National Bank, or both, if they

consider it in the public interest so to do, may publish any
information obtained by them under this Act in such
consolidated form as they think fit.

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 Power of the Reserve Bank to give
directions

(1) Where • (a) in the 134[public interest]; or

• 135[(aa) in the interest of banking policy;
•or](b) to prevent the affairs of any banking company being
the Reserve conducted in a manner detrimental to the interests of the
depositors or in a manner prejudicial to the interests of
the banking company; or
Bank is • (c) to secure the proper management of any banking
company generally,
• it is necessary to issue directions to banking companies
satisfied that— generally or to any banking company in particular, it may,
from time to time, issue such directions as it deems fit, and
the banking companies or the banking company, as the case
may be, shall be bound to comply with such directions.

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 Powers of the Reserve Bank to give directions cont.

(2) The Reserve Bank may, on representation made to it

or on its own motion, modify or cancel any direction
issued under sub-section (1), and in so modifying or
cancelling any direction may impose such conditions as it
thinks
fit, subject to which the modification or cancellation
shall have effect.

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 Powers and functions of Reserve Banks

• 1.
– caution or prohibit banking companies or any banking company
in particular against entering into any particular transaction or
class of transactions, and generally give advice to any banking
company;
– on a request by the companies concerned and subject to the
provision of section 149[44A], assist, as intermediary or
otherwise, in proposals for the amalgamation of such banking
companies;
– give assistance to any banking company by means of the grant
of a loan or advance to it underclause (3) of sub-section (1) of
section 18 of the Reserve Bank of India Act, 1934 (2 of 1934);

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 Powers and functions of Reserve Banks cont.

(2)The Reserve Bank shall make an annual report to the Central

Government on the trend and progress of banking in the country, with
particular reference to its activities under clause (2) of section 17 of
the Reserve Bank of India Act, 1934 (2 of 1934), including in such
report its suggestions, if any, for the strengthening of banking business
throughout the country.

(3)The Reserve Bank may appoint such staff at such places as it

considers necessary for the scrutiny of the returns, statements and
information furnished by banking companies under this Act, and
generally to ensure the efficient performance of its functions under
this Act.

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 Certain provisions of the Act not to apply to
certain banking companies

(1)The provisions of section II, sub-section (1) of section 12, and sections
17, 18, 24 and 25 shall not apply to a banking company—
• (a) which, whether before or after the commencement of the Banking Companies
(Amendment) Act, 1959 (33 of 1959), has been refused a licence under section 22, or
prohibited from accepting fresh deposits by a compromise, arrangement or scheme
sanctioned by a court or by any order made in any proceeding relating to such
compromise, arrangement or scheme, or prohibited from accepting deposits by virtue of
any alteration made in its memorandum; or
• (b) whose licence has been cancelled under section 22, whether before or after
the commencement of the Banking Companies (Amendment) Act, 1959 (33 of
1959).
• (2) Where the Reserve Bank is satisfied that any such banking company as is referred to
in sub-section (1) has repaid, or has made adequate provision for repaying all deposits
accepted by the banking company, either in full or to the maximum extent possible, the
Reserve Bank may, by notice published in the Official Gazette, notify that the banking
company has ceased to be a banking company within the meaning of this Act, and
thereupon all the provisions of this Act applicable to such banking company shall cease
to apply to it, except as respects things done or omitted to be done before such notice.]

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 Control over management

•36AA. Power of Reserve Bank to remove managerial and

•other persons from office.

(a)6AAA. Supersession of Board of directors of a multi- State co-

operative bank.

(b)6AAB. Order of winding up of multi-State co- operative bank to be

final in certain cases

(c)Reimbursement to Deposit Insurance Corporation by liquidator or

transferee bank

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 Control over management

36AB. Power of Reserve Bank to appoint additional

directors,

36AC. Part IIA to override other laws.

36AD. Punishments for certain activities

in relation to banking companies.
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 Suspension of business and winding
up of banking companies

High Court defined

Suspension of business

Winding up by High Court

Court liquidator

Reserve Bank to be official liquidator

Application of Companies Act to liquidators

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 Summary

• The Banking companies act, presently known as banking regulation act was enacted owing
to safeguard the interest of depositors, control abuse of power by some bank personnel
controlling the banks in particular and to the interest of Indian economy in general

• Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the
central bank.

• Statutory Liquidity Ratio  is the Indian government term for the reserve requirement that
the commercial banks in India are required to maintain in the form of cash, gold reserves,
RBI approved securities before providing credit to the customers.

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 References
a. Essential Reading
1. Class Notes
2. L M Bhole and Jitendra Mahakud (2017), financial institutions and Markets, 6th edition,
Mc Graw Hill.
3. Benton Gup (2016) Banking and Financial Institutions, Wiley Publications.

b. Recommended Reading
1. N Kannan, (2017),Banking sectors reforms in India, Abhijit publications
2. IIBF (2017) Legal and Regulatory Aspects of Banking, 3rd edition, Macmillan
3. Indian Institute Of Banking & Finance, (2015), Banking Products And Services,
Taxmann Publications Pvt. Ltd

c. Magazines and Journals

1. Business India, fortnight subscription (India Book House Ltd)
2. Business Today, fortnight subscription (Living media India Limited)
3. Money Today, monthly subscription (Living media India Limited)
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 Disclaimer

• All data and content provided in this presentation

are taken from the reference books, internet –
websites and links, for informational purposes only.

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