Banking regulation act , 1949

Abhay Limaye
B.Com., LLB ., CAIIB
Ex Deputy Chief General Manager
Saraswat Coop Bank
Bank customer

 WHO IS A BANKER OR BANK

 According to some Authorities , the word Bank is derived from the word “
Bancus “ , “ Banque “ or “ Bangue “ that is bench. Earlier the Jews from
Lombardy , transacted their business on benches in market places, whence the
word bankrupt . There are also opinions that word bank is derived from the
German word “ Back “ which means a Joint Stock Fund which was Italianised
into Banco .
 Webster’s dictionary defines bank as --- “ Bank is an Institution which deals in
money , an establishment where money is deposited , maintained and issued ..
 Sir John Paget states – ‘ A Banker is a corporation or person ( group of persons
) who accept money on current account , pays cheques drawn upon such
account on demand and collect cheques for customers. ‘
 Definition of banking
 The earlier attempt in India in the direction of formulating a definition was that of the
Hilton Young Commission , put forward the recommendation that
 The Bank or Banker should be interpreted as meaning every person , firm or
company using its description or its title , “ Bank “ or “ Banker “ or “ Banking “ and
every company accepting deposits of money subject to withdrawal by cheque “
draft or order “ . The Indian Companies Act , 1936 though rejecting the former part
of the definition proposed above accepted the latter part “ .
 The term bank has not been defined in any statute , whereas Section 7 makes use
of words Bank, Banker, Banking or Banking Company. “ No company other than a
banking company shall use as a part of its name or in connection with its business
any of the words Bank , Banker or Banking and no Company shall carry on
business of banking in India unless it uses as part of its name at least one of such
words.
 Definition of banking
 The term Banking has been defined as under in Section 5( b ) , Banking
Regulation Act,1949 as under
 “ Banking means “ The 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.”
 We find following salient features of banking :-
 1) Accepting Deposits of Money from the Public
 2) Lending or Investment of such deposits
 3) Repayable on demand or otherwise
 4) Withdrawable of deposits by cheque , draft , order or otherwise.
Definition of banking by banking
Regulation ACT ,1949
 EXCEPTION OF BANKING COMPANY
 Explanation to Section 5( C ) provides
 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 manufacturing or trader shall
not be deemed to transact the business of banking in there the meaning of
this clause and it will not be called banking company.
 Section 58 A of the Companies Act also empowers companies to accept
deposits from the public. The Central Government has power to regulate
such deposits in consultations with Reserve bank of India. Merely accepting
such deposits by such companies shall not be deemed to carry the business
of banking within the meaning of section 5 ( b ) of the Banking Regulation Act
Business of banking ( section 6 )
 Vide section 5(b) and ( c) and section 6 in addition to the business of banking , a banking
company may engage in any one or more of the following forms of business
 1) The borrowing, raising or taking up of money , the lending or advancing of money
either upon or without security ; the drawing , making , accepting , discounting , buying,
selling , collecting and dealing in bills of exchange , hundis , promissory notes,
coupons , drafts , bills of lading , railway receipts , warrants , debentures, scripts and
other instruments , and securities whether transferable or negotiable or not, granting or
issuing of the letter of credit , travellers cheques and circular notes, buying and selling
and dealing in bullion and specie, the buying and selling of foreign exchange including
foreign bank notes ; the acquiring , funds , shares, debentures , debenture stock, bonds,
securities and investments of all kinds , the purchasing and selling of bonds ,scrips and
valuables on deposit or for safe custody or otherwise ; the providing of safe deposit
vaults ; the collecting and transmitting of money and securities .
 2) acting as agents for any Government or local authority or any other person or persons
; the carrying on of agency business of any description including the clearing and
forwarding of goods , giving of receipts and discharges and otherwise acting as an
attorney on behalf of customers , but excluding the business of a managing agent or
secretary and treasurer of a company.
Business of banking ( section 6 )
 3) contracting for public and private loans and negotiating and issuing the same.
 4) the effecting, insuring , guaranteeing , underwriting , participating in managing
and carrying out of any issue , public and private , of state , municipal or others
loans or of shares , stock , debentures , or debenture stock of any company ,
corporation or association and lending of money for the purpose of any such issue.
 5) carry on and transacting every kind of guarantee and indemnity of business
 6) managing, selling and realising any property may come in to possession of the
company in satisfaction or part satisfaction of any of its claims.
 7) acquiring and holding and generally dealing with any property or any right , title
or interest in any such property which may form the part of the security for any
loans or advances or which may be connected with any such security.
 8) Undertaking and executing Trusts
 9) undertaking and administration of estates / any properties as executor, trustees
or otherwise.
Business of banking ( section 6 )
 10)Establishing and supporting and adding in the establishment and support of
associations , institutions , funds and trusts and convenience calculated to
benefit employees or ex employees of the company or dependents or
connections of such persons; granting pensions and allowances and making
towards insurance , subscribing to or guaranteeing moneys for charitable or
benevolent objects or for any exhibition or for any public , general or useful
object,
 11) the acquisition , construction , maintenance and alteration of any building or
works necessary of convenient of the purposes of the company.
 12) selling, improving, managing and developing , exchanging , leasing,
mortgaging , disposing or turning into account or otherwise dealing with all or
any part of the property and rights of the company.
 13) acquiring and undertaking the whole or any part of the business of any
person or the company when such business is of a nature enumerated or
described in this sub section.
Business of banking ( section 6 )
 14) doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the company.
 15) any other form of business which the Central Government may by notification
in the official gazette , specify as form of business in which it is lawful for a banking
company to engage.
 A banking company is not permitted to engage in any form of business other than
those referred to above.
Types of banks

 Indian Banks and Foreign banks

 Scheduled banks and Non Scheduled banks
 Commercial banks and Cooperative banks
 Public Sector and Private Sector banks
Foreign banks
 Banks incorporated and established outside India ( In Foreign Country )
but have place of business in India are foreign banks
 American Express International Banking Corporation
 Bank of America
 Bank of Tokyo ltd.
 British Bank of Middle- East
 Bank National De Paris
 City Bank
 Grindlays bank Ltd.
Indian banks
 Scheduled Commercial Banks
 Section 2 ( e) of Reserve bank of India Act,1934 defines Scheduled bank as a bank
included in Second Schedule of the Act.
 Conditions for Inclusion in 2nd Schedule
 Reserve bank of India by notification in the Gazette of India , has directed the
inclusion in the Second schedule of any bank already so included which carries on
the business of banking in India and which fulfils the following conditions ;-
 A) has a paid up capital and reserves of an aggregate value of not less than five lakhs
of rupees , and
 B) satisfies the bank that its affairs are not being conducted in a manner detrimental
to the interests of its depositors, and
 C) It is a State Cooperative Bank or a company as defined in Section # of the
Companies Act , 1956 0r an Institution notified by the Central Government in this
behalf , or a corporation or a company incorporated by or under any law in force in
any place outside or in India .
Scheduled banks
 The Scheduled banks comprise as follows
 1) The State Bank of India
 2) Nationalized banks
 3) Private Sector Banks
 4) Co Operative Banks
 5) Regional Rural Banks
 6) Local Area Banks
 7) Payments Banks
 8) Small Finance Banks
 9) Foreign Banks
System of banking
 Structure of banking system is
 1) Central Banking
 2) Unit Banking
 3) Branch Banking
 4) Group Banking
 5) Chain Banking
 6) Merchant Banking
 7) Universal Banking
 8) Retail Banking
Central banking / unit banking
 Central Banking
 Central Banking we will study separately under Reserve Bank of India
Act.
 Unit Banking
 Under this system independent and isolated units perform banking
business . An independent Unit Bank is a corporation that operates one
office and that is not related to other banks through either ownership or
control.
Branch banking / group banking
 Branch Banking
 Under this system a bank operates as a single Institution under single ownership
with branches all over the country . Unit Banking with its branches at different
places is branch banking.
 In India all the banks are working under the system of branch banking.
 Group Banking
 Group banking is a system of operation of banking which combines both unit
and and branch banking as in group banking system two or more banks are
directly controlled by a corporation , an association or a business trust . The
Holding and Subsidiary system of companies also forms group banking.
 At present there is no such banking system.
Chain banking / merchant banking
 Chain Banking
 Chain banking system is another form of group banking. Under Chain banking ,
two or more banks are brought under common control by a device other than
holding company. The common management may be by a single person or group
of persons through stock ownership or otherwise.
 Merchant Banking Service
 Merchant banking stands for providing various services relating to capital market
and finance services relating to capital market and finance to corporate sector. This
includes not only the activities for the above purpose in the country but at times
arranging funds from outside the country.
 As per SEBI rules , a merchant banker means any person who is engaged in the
business of issue management either by making arrangement regarding selling,
buying or subscribing to securities or acting as manager , consultant or rendering
corporate advisory services in relation to such issues. The services include 1) Pre
Investment & feasibility studies to identify a project, 2) Liaison to obtain various
Government approvals and permissions for clients , 3) Assisting in formulation of
financial plans , 4) Management of Public Issues.
Universal banking
 Universal Banking means allowing financial institutions and banks to undertake
all kinds of activity of banking or development financing or activity associated with
that , subject to compliance of statutory and other requirements prescribed by
RBI. These activities may include accepting deposits , granting loans, investing in
securities , credit cards , project finance, remittances , payment systems, project
counselling , merchant banking , foreign exchange operations , insurance etc.
 The basic objective is to help bring harmony in the role of Financial Institutions /
Banks offered world class services to the clients by using world class information
technology and cross selling , reduce per customer cost and increase per
customer revenue , take benefit of economics of scale and compete with
International Banks by expanding business beyond the boundaries of the
countries .
 Compliance with the CRR / SLR requirements will be mandatory , only those
activities permitted under section 6(1) can be undertaken , all the non banking
assets to be disposed off within 7 years of its conversion as UB from NBFC. 51 %
of the members of board to have special knowledge and experience of banking.
narrow banking

 NARROW BANKING
 A “ Narrow bank “ concept was suggested as a solution to the problem of high
NPA’s and related matters after the submission of report on Capital Account
Convertibility. It was proposed that incremental resources of these banks should
be restricted only to investments in government securities.
 A ‘ Narrow Bank “ in its narrow sense , can be defined as a system of banking
under which a bank places its funds in risk free assets with maturity period
matching its liability maturity profile , so that there is no problem relating to asset
liability mismatch and the quality of assets remains intact without lending to
emergence of sub standard assets.
 The concept has been partly implemented in India
Retail banking

 RETAIL BANKING
 The emergence of middle class with substantial purchasing power in India during
the last one decade or so and its desire to spend according to the changing lifestyle
, has offered to the Indian Banking System , a ready market , for mobilization and
deployment of their funds . Given the rising purchasing power of this class , there is
huge untapped potential for business.
 Retail banking has following basic characteristics
 1) Multiple Products ( Deposits , Credit cards , Insurance , Investments etc. )
 2) Multiple Delivery Channels ( Call center, Branch , Internet and Kiosk )
Weekly banking

 WEEKLY BANKING
 It is new trade in banking business which is being tested first time in the country.
 Under this scheme a mobile van well equipped with banking service will visit
rural villages once in a week . This van will cater to the village deposits ,
withdrawal and loan services and other small banking services.
services rendered by banks

 The range of services offered differs from bank to bank , depending mainly on the
size and type of bankers , but the acceptance of deposits from the public and
provision of credit form the mainstay of the banking business. The services
rendered by commercial banks may be classified into
 1) General services to Depositors and Borrowers
 2) Ancillary services
 3) Special Banking Services
 4) General Utility Services for all
General services ( Services to depositors and borrowers )

 Banks open various types of deposit accounts and render the following services to the
depositors and borrowers
 1) opening and maintaining various types of account, such as current account , savings
account , fixed deposit account
 2) Collection of cheques , demand drafts , bills of exchange , promissory notes , hundis , inland
, inland and foreign documentary and clear bills.
 Purchase and sale of local and foreign currency.
 Purchase and sale of securities certificate , shares , bonds , debentures , foreign letters of
credit ,depository .
 Issuing of bank guarantees
 Carrying out the standing instructions for the payment of insurance , premium , subscriptions ,
certain taxes and gifts remittances.
 Granting of advances by means of cash credit , overdraft and loan accounts
 Providing remittance facilities such as bank drafts , mail and telegraphic transfers , electronic
transfer.
Ancillary service

 Safe custody of deeds and securities

 Safe deposit vault
 Collection of interest on securities / debentures and dividend on shares , collection of
pension bills.
 Executors and trustees
 Personal tax assistance ; preparing Income Tax, Sales Tax , Wealth Tax returns
 Investment Facilities – Underwriting , Guidance to Investment , Guidance as to new issues ,
Stock Exchange assistance.
 Credit transfers
 Executors and Trustees