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Contents
1. Understanding the term banking
2. Quick overview of Indian banking sector
its evolution and development
3. The regulation of banks (with India as
focal point)
However
By referring to many major definitions we
can say
Banks accept deposits from the public;
Banks advance loans to the needy person; and
Also perform those permitted agency functions
Acceptance of Deposits
Advancing loans
Investment of funds
Promote use of cheques
Other agency functions
Banking related agency functions
Other utility agency functions
Acceptance of deposits
Two types of deposits
Demand deposits; and
Time deposits
Advancing of loans
Advances can be broadly classified as
Advances with security
Advances without security
Investment of funds
Besides loans & advances banker also
invest a part of its surplus funds in
government securities
In India, the banks are mandated to
invest a part of their funds in government
and other approved securities
Though the returns are not high funds
are near liquid but also secure for risk
perspective
The period ended with the crash of 191317 overtaking these initiatives
SBI Subsidiaries
SBI (Subsidiary Banks) Act, 1959
Accountancy;
Agriculture & rural economy;
Banking;
Cooperation;
Economics;
Finance;
Law;
Small Scale Industry
Any other matter (in the opinion of RBI useful)
Further
provided that, out of aforesaid number of
directors, not less than two shall be persons
having special knowledge or practical
experience in respect of agriculture and
rural economy, cooperation or small-scale
industry
Other mandates
Directors shall not have substantial interest
In any other company, except S.25 company
Any firm (carrying trade, commerce or industry, except
small scale industry)
Restriction on tenure
For continues period of eight years (not applicable to
Chairman)
Not to be re-elected for four years if he is removed
from his office as chairman or whole-time director
Restriction on loans
S.20 no loans or advances on the security
of banks own shares
No loan or advance, to
Any of its directors;
Any firm; or
Any company (except its own subsidiary or S.25
company); or
Any individual
Provided the director is interested in such entity as
partner, manager, employee or guarantor etc.,
Miscellaneous
Additional powers were conferred on RBI
to supervise and enforce social
control initiative
Punishment provided for
Obstructing any person from entering or leaving a
bank;
Holding demonstrations within the bank; and
Acting to undermine the depositors confidence in
a bank
Modalities of nationalization
The official point
public ownership of major banks will help most
effectively the mobilization and development of
national resources and its utilization for productive
purposes in accordance with the plans and priorities
Legal mode
Saturday, July 19, 1969 Banking
Companies (Acquisition and Transfer of
Undertaking) Ordinance, 1969 was
passed
14 major banks (with deposit of Rs.50 crores or
more) were purported to be transferred to 14 new
body corporate viz. corresponding new banks
The machinery of management
Compensation package for shareholders
Legal mode
Monday, July 21, 1969 Ordinance was
challenged before SC
Before it was heard (on August 9, 1969)
Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1969 was
passed (which repealed the ordinance)
The act was also challenged in the SC
interim injunction was granted against
the operation of the Act
Legal mode
Decision on February 10, 1970
10:1 decision by majority
Post SC decision
February 14, 1970 Another Ordinance
promulgated
This was followed by the Banking Companies
(Acquisition and Transfer of Undertakings)
Act, 1970
March 31, 1970 The Act receives Presidents
assent
Most of provisions were deemed to have
come into force from July 19, 1969
The enactment stood the test of
constitutionality
Bank regulation
Recent past
Crash of world economy of 1929-33
(interim periods of world war)
Banking crises of UK during 1973-76
life boat operation
Similar crises in Germany
Recent melt-down
Systemic risk
Prevention of fraud
Money laundering & terrorism
Consumer protection
Competitive (or antitrust) policy
Banking
Banking means the accepting, for the
purpose of lending or investment, of
deposits of money from the public,
repayable on demand or otherwise, and
withdrawal by cheque, draft, order or
otherwise S. 5(b)
Essential functions
Acceptance of public deposits
Lending or investment of such deposits;
and
Agency functions
Organization
Dual control
For entry
For expansion
Entry license
Sec. 22
Criteria
The capacity of the company to pay its present and
future depositors
Whether there is anything to indicate the permit
would affect the interests of the depositors
detrimentally
Impact upon the public interest
Companys capital structure and its adequacy
Other banking facilities available in the proposed area
Such other condition which RBI considers relevant
Expansion
To open new branches RBI sanction is
mandatory
Sec. 23
While grant of such licences RBI may
impose appropriate conditions
There are exceptions
Capital composition
Narasimham Committee has
recommended for public issue
Hence, the Banking Companies
(Acquisition and Transfer of Undertakings)
Act, 1970/1980 were amended
To enable public to subscribe to the capital of the
nationalized banks up to 49% of their total capital
Reserve funds
Sec. 17
Creation of reserve fund (not applicable
to foreign banks)
To be created out of profit
Not less than 20% of the profits have to be
transferred to the reserve fund (before any
dividend to be declared)
However, the Central Government (on the
recommendation of RBI) may exempt the bank for
certain period of time
Cash reserves
Sec. 42 (RBI Act) cash reserve to be
maintained by the Scheduled Bank (as to
be determined by RBI from time to time)
Sec. 18 (for non scheduled banks) at
least 3% of its demand and time deposits
in India
Special audit
Sec. 30(1B)
The RBI may order for special audit
Such order may relate to any transaction or class of
transactions; or
Such period or periods as RBI may specify in the order
The RBI appoints such auditor (or can ask the regular
auditor)
The directors are binding upon the auditor of the
banking company and to make report directly to RBI
by furnishing the copy to the bank)
Amalgamation
Voluntary amalgamation
U/sec. 44A
Procedure
Scheme has to be prepared & the same to be placed
before the shareholders (notice to all shareholders is
must)
Seeking sanction from the shareholders with 2/3rd
majority
Dissenting share holders may take out their share
value
Then the scheme has to be presented to RBI
On sanction of RBI the amalgamation may happen
Compulsory amalgamation
Induced or forced by RBI
U/Sec. 45
Amalgamation by government
Central Government may order for
amalgamation of two banks after due
consultation with the RBI
u/sec. 396 of Companies Act, 1956
Winding up
Suspension of business and winding up
Sec. 37
Voluntary Winding up
Sec. 44
Suspension of business
When the bank is temporarily unable to
meet its obligations
Procedure
Winding up by the HC
To be initiated by RBI by applying for
winding up
Inability to pay debts
If RBI is asked by the Central Government to make an
application
Failure to comply with requirements of Sec. 11
If the bank becomes incapable of carrying out the
banking business by rejection or cancellation of
license
Failure to comply with the requirements of the BR Act
other than Sec. 11 and continuance of such failure
beyond the period specified by RBI in this behalf
Voluntary winding up
Not possible unless RBI certifies
The HC during this stage intervene (i) by
itself; or (ii) by the application of RBI
And may order for continuation of the business for
some time
It may even supervise the winding up proceedings