BANKING LAW AND

REGULATIONS.
1.Reserve Bank of India
Act, 1934
2.Banking Regulation
Act, 1949.

RESERVE BANK OF INDIA

Established on 1st April, 1935 under

the RBI Act.
RBI was nationalized in the year 1948.
RBI is the Central Bank of our Country.
Important Functions performed by
RBI:
Central Banking Functions
Supervisory Control over other banks in
India
Promotion of Banking Industry
Control over Non-banking Institutions
receiving Deposits.

Central banking Functions

1. Issue of Currency: RBI issues and
regulates the issue of currency in
India. It is the only Bank that is
empowered to issue bank notes of
all denominations through a
separate Issue Department.
2. The RBI is required to maintain gold
and foreign exchange reserves
in the form of minimum reserve
system.

RBI is Banker to Government.

3. RBI acts as a banker to Government of

India and all State Governments. This
means, RBI transacts Government
Business by carrying out the following
functions:
Maintaining Cash balances;
Receiving and making payments on behalf of
the Government;
Managing public debt;
Advising Government on
- floating of loans,
- legislation affecting banking etc.

4. RBI is known as
- Bankers Bank and
- Lender of Last Resort
because
Scheduled Banks can borrow
funds from
the RBI on the basis of eligible
securities;
Also obtain financial
accommodation by
rediscounting

Supervision of banks

RBI has statutory power to

regulate the
volume of credit generated by
banks.
This means, RBI can control the
advances
against commodities under
Selective Credit Control
mechanism.
It can also stipulate
- the purpose

 Volume of credit is normally

controlled through the regulatory
instruments of
- bank rate
- open market operations
and - variable cash reserve
requirements
Now, RBI has liberalized the control
over the
rate of interest on deposits and
advances by
Banks.

 Bank rate means it is the rate of interest

at
which the RBI rediscounts the first class bills
of
exchange of commercial banks or other eligible
papers.
RBI can impound the banks reserves to
maintain the liquidity of assets in the form
of
Statutory Liquidity Ratio [SLR]. For this
purpose,
The following assets are taken into account:
1. Cash in hand (in India)
2. Balance in current account with RBI
3. Balance with RBI over the minimum reserve

 RBI can impose Cash Reserve Ratio (CRR).

- CRR is the minimum cash to be maintained
as percentage against
demand deposits
and time deposits.
RBI can appoint any Bank as its agent to
transact the business on its behalf.
[sec 45]
Statutory return: It is mandatory to all banks to
send Statutory return providing information on
the position of - assets and liabilities and
- maintenance of average daily
balances of cash reserves.
[sec 42 & 43]

Foreign Exchange Management.

RBI is authorized to act as
Controller of
Foreign Exchange position. It
deals in buying and selling of
foreign exchange
directly and
through authorized dealers
appointed by it
[Sec-40]

RBI supervises
Foreign reserve position and

Control over Non-banking

Financial Institutions.
Chapter III B of RBI Act:
Every Non-banking Financial Company is [Sec-45(1)]
Required to make an application for Registration
Required to invest in unencumbered approved
securities , a certain percentage of deposit (5%).
This is called Liquidity Provision.
Required to transfer not less than 25% of net
profit to Reserve Fund before declaring dividend
RBI can regulate or prohibit the issue of
Prospectus or Advertisement soliciting deposits
from Public.
It can call for information as to deposits and
give directions to NBFI or NBFC.

 Statutory Reporting: RBI is authorized to

call for any information pertaining to the
business, it is also vested with it Supervisory
powers on acceptance of Public Deposits.
RBI can prohibit - acceptance of deposits and
- alienation of assets
It can file an application for winding up of
NBFC
It can inspect any NBFC
RBI can prohibit the acceptance of deposits by
unincorporated bodies.
[Sec45]

Thus RBI is equipped with all powers that may

be needed to regulate the activities of Nonbanking Financial Companies in India.

Banking Regulation Act, 1949.

Definition: [Sec 5 (b)]
Banking means 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.
Permitted Business of Bank is detailed
in Sec 6

 Permitted Business of Bank

under Sec-6
1. Money Dealing with Public
2. Acting as Agents for any
Government or
Local authority or any other
person (s)
3. Contracting for Public and
Private Loans
and negotiating and issuing
the same
4. Carrying on and transacting

 Business Prohibited for Banks:

[Sec 8]

No Banking Company shall directly or indirectly

deal in the Buying
Selling
or bartering of goods
Except in connection with the realization of
security given to or held by it.
No Banking Company shall directly or indirectly
engage in any Trade or
Buy, sell or barter goods for others
Except in connection with bills of exchange
received for collection or negotiation.
Goods means every kind of movable property
Other than: actionable claims , stocks, shares etc.

Licensing of Banking Companies.

RBI will issue License to a Banking

Company
After inspecting the books of the banking
company
AND
After satisfaction of the certain conditions
like that - that the company is or will be
in a position pay its
present or future depositors in full as
their claims
accrue;
- that the affairs of the company are not
being or

- that the general character of the proposed

management of the company will not be prejudicial

to the public interest or the interest of its depositors;
- that the company has adequate capital structure and
earning prospects;
- that the public interest will be served by the grant of
a
license to the company to carry on banking business in
India;
- any other condition, the fulfillment of which
would, in the opinion of the RBI, be necessary to
ensure that the carrying on of banking business
in India by the company will not be prejudicial to
the public interest or the interests of the depositors.

Cancellation of License.

The RBI can cancel the License of

the Bank
If the company ceases to carry on
banking business in India;
If the company, at any time, fails to
comply with any of the conditions
imposed upon it;
If at any time, any of the conditions
referred to in sub-section (3) 2 and
sub-section 3A are not fulfilled.

Restrictions on Loans & Advances.

Management of Banking Company