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IBPS
SPECIALIST OFFICERS
CRP SPL
COMMON RECRUITMENT PROCESS
LAW OFFICERS MAIN EXAM PROFESSIONAL KNOWLEDGE
PRACTICE WORK BOOK S.K. LALL M. Com., LL.B., CAIIB Dy. Secretary (Retd.) Banking Ombudsman Office, RBI Chief Instructor (Training), SBI
Banking Regulation & Compliance and Legal Aspects Banking Related Important Laws Commercial Laws with Refrence to Banking Operation Model Practice Sets and Previous Years’ Solved Paper FOR FRANCHISEE CONTACT :
RU-67, PITAMPURA, DELHI-110034, Ph : 27345258, 27342249, Fax : 27345258 LMP–1
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© KIRAN INSTITUTE OF CAREER EXCELLENCE PVT. LTD. (KICX) NEW EDITION The copyright of this book is entirely with the Kiran Institute of Career Excellence Pvt. Ltd. The reproduction of this book or a part of this will be punishable under the Copyright Act. All disputes subject to Delhi jurisdiction. Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors. Compiled by : Think Tank of PRATIYOGITA KIRAN, KIRAN PRAKASHAN & KICX Assistance : ● Ratnesh Kumar Singh ● Sanket Sah Design & Layout by : KICX COMPUTER SECTION, New Delhi.
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CONTENTS ■ Important Information & Guidelines ....................................................................... LMP–5
Banking Regulation & Compliance and Legal Aspects ..................... LMP–7-39 ➡ RBI’S Constitution and Objectives ......................................................................LMP–7 ➡ Banking Regulation Act, 1949 ......................................................................... LMP–11 ➡ Reserve Bank of India Act, 1934 ...................................................................... LMP–13 ➡ Credit Information Bureau (India) .................................................................. LMP–13 ➡ Banker-Customer Relationship ........................................................................ LMP–15 ➡ Payment and Collection of Cheques and other Negotiable Instruments ............ LMP–20 ➡ Documentation ............................................................................................... LMP–32 ➡ Different modes of Charging Securities ............................................................ LMP–33 ➡ Types of Collaterals and their Characteristics .................................................. LMP–33 ➡ Foreign Exchange Management Act, 1999 ....................................................... LMP–34 ➡ The Prevention of Money Laundering Act, 2002 ............................................. LMP–37 ■ Banking Regulated Important Laws ............................................ LMP–40-96 ➡ Limitation Act, 1993 ........................................................................................ LMP–40 ➡ Bankers’ Books Evidence Act, 1891 ................................................................. LMP–46 ➡ The Recovery of Debts due to Banks and Financial Institutions (DRT) Act, 1993 LMP–48 ➡ Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 ........................................................... LMP–59 ➡ Miscellaneous Provisions ................................................................................ LMP–73 ➡ Consumer Protection Act, 1986 ....................................................................... LMP–78 ➡ The Banking Ombudsman Scheme, 2006 ........................................................ LMP–89 ➡ Procedure for Redressal of Grievance .............................................................. LMP–92 ➡ Lok Adalats ..................................................................................................... LMP–95 ■ Commercial Laws with Reference to Banking Operation ......... LMP–97-128 ➡ Contracts of Guarantee ................................................................................... LMP–97 ➡ Contracts of Bailment ................................................................................... LMP–100 ➡ Contracts of Pledge ....................................................................................... LMP–101 ➡ Contracts of Agency ...................................................................................... LMP–102 ➡ Meaning and Essentials of a Contract of Sale ................................................. LMP–104 ➡ Conditions and Warranties ............................................................................ LMP–105 ➡ Unpaid Seller ............................................................................................... LMP–106 ➡ Definition, Meaning and Nature of Partnership .............................................. LMP–107 ➡ Relations of Partners to one another.............................................................. LMP–108 ➡ Relations of Partners to Third Parties ............................................................. LMP–110 ➡ Minor Admitted to the benefits of Partnership ............................................... LMP–111 ➡ Dissolution of a Firm ..................................................................................... LMP–111 ➡ Effects of Non-Registration ............................................................................ LMP–112 ➡ Definition and Features of Company ............................................................. LMP–112 ➡ Types of Companies ...................................................................................... LMP–114 LMP–3
➡ Memorandum of Association and Articles of Association................................ LMP–116 ➡ Doctrines of Ultra Vires/Constructive Notice/Indoor Management ................ LMP–117 ➡ Prospectus .................................................................................................... LMP–118 ➡ Transfer of Property Act, 1882 ...................................................................... LMP–119 ➡ The Right to Information Act, 2005 ............................................................... LMP–122 ➡ Right to Information and Obligations of Public Authorities ............................ LMP–123 ➡ Information Technology Act, 2000 ................................................................ LMP–126 ■ Important Objective Questions .................................................. LP–129-140 ■ Indian Constitution .................................................................... LP–141-150
MODEL PRACTICE SET Model Practice Set–01 .................................................................. LMP–151-155 Model Practice Set–02 .................................................................. LMP–156-160 Model Practice Set–03 .................................................................. LMP–161-165 Model Practice Set–04 .................................................................. LMP–166-170 Model Practice Set–05 .................................................................. LMP–171-175 Model Practice Set–06 .................................................................. LMP–176-181 Model Practice Set–07 .................................................................. LMP–182-186 Model Practice Set–08 .................................................................. LMP–187-192 Model Practice Set–09 .................................................................. LMP–193-197 Model Practice Set–10 .................................................................. LMP–198-202 Model Practice Set–11 .................................................................. LMP–203-208 Model Practice Set–12 .................................................................. LMP–209-213 Model Practice Set–13 .................................................................. LMP–214-218 Model Practice Set–14 .................................................................. LMP–219-223 Model Practice Set–15 .................................................................. LMP–224-228
MODEL SOLVED PAPERS SET 16 : IBPS Law Officer Exam, 11.03.2012 .............................................. LMP–229-234 SET 17 : IBPS Law Officer Exam, 17.03.2013 .............................................. LMP–235-240 SET 18 : IBPS SPECIALIST OFFICER (LAW) CWE-III, 08.02.2014 ................ LMP–241-250 SET 19 : SBI LAW OFFICER MMGS SCALE - II ONLINE EXAM, 19.04.2014 .... LMP–251-259 SET 20 : IBPS SPECIALIST OFFICER (LAW) OFFICER CWE-IV, 14.02.2015 .... LMP–260-265 SET 21 : IBPS SPECIALIST OFFICER (LAW) OFFICER CWE, 14.02.2016 ...... LMP–266-272
LMP–4
IMPORTANT INFORMATION IMPORTANT INFORMATION
INSTITUTE OF BANKING PERSONNEL SELECTION (IBPS) COMMON RECRUITMENT PROCESS FOR RECRUITMENT OF SPEACIALIST OFFICERS IN PARTICIPATING ORGANISATIONS-(CRPSPL-VII)
Website : www.ibps.in The online examination for the next Common Recruitment Process (CRP) for selection of personnel in Specialist Officers’ cadre posts in the Participating Organisations is tentatively scheduled in December 2017/January 2018. Sr. No.
POSTS
01
I.T. Officer
02
Agricultural Field Officer (Scale I)
03
Rajbhasha Adhikari (Scale I)
04
Law Officer (Scale I)
05
HR/Personnel Officer (Scale I)
06
Marketing Officer (Scale I)
Any eligible candidate, who aspires to join any of the Participating Organisations as an Officer in one of the Specialist Officers’ posts mentioned
above, is required to register for the Common Recruitment Process-(CRP SPL-VI). Candidates who appear and are shortlisted in the examination, will subsequently be called for a Common Interview to be conducted by the Participating Organisations and co-ordinated by the Nodal Bank with the help of IBPS. Depending on the vacancies to be filled in during the financial year 2018-19 based on the business needs of the Participating Organisations and as reported to IBPS, candidates shortlisted will be provisionally allotted to one of the Participating Organisations keeping in view the spirit of Government Guidelines on reservation policy, administrative convenience, etc. The validity for CWE SPL-VII will automatically expire at the close of business on 31.03.2019 with or without giving any notice.
The tentative schedule of events is as follows :
● ● ●
Events On-line registration including Edit/ Modification of Application by candidates Payment of Application Fees/Intimation Charges (Online) Download of call letters for Online examination – Preliminary Online Examination – Preliminary Result of Online exam – Preliminary Download of Call letter for Online exam – Main Online Examination – Main Declaration of Result of Online Main Examination Download of call letters for interview Conduct of interview
Tentative Dates 07.11.2017- 27.11.2017 07.11.2017- 27.11.2017 December 2017 30.12.2017 and 31.12.2017 January 2018 January 2018 28.01.2018 February 2018 February 2018 February 2018
Provisional Allotment
April 2018
Age (As on 01.11.2017) : Minimum 20 years; Maximum 30 years There is relaxation in upper age limit for the candidates to certain categories Educational Qualifications (As on 27.11.2017) : Visit the website of IBPS ONLINE CWE : The structure of the Online CWE will be as follows : The structure of the Online CWE will be as follows: Law Officer- Scale & Rajbhasha Adhikari Scale
Sr. No.
Name of Tests
1 2 3
English Language Reasoning General Awareness with Special Reference to Banking Industry
Total
No. of Questions 50 50
Maximum Marks 25 50
Medium of Exam English English and Hindi
50 150
50 125
English and Hindi
LMP–5
Duration 2 hours
IMPORTANT INFORMATION IT Officer, Agricultural Field Officer, HR/Personnel Officer & Marketing Officer Sr. No.
Name of Tests
No. of
Maximum
Medium of
Questions
Marks
Exam
1
English Language
50
25
English
2
Reasoning
50
50
English and Hindi
3
Quantitative Aptitude
50
50
English and Hindi
150
125
Total
Duration 2 hours
Candidates have to qualify in each of the three tests by securing minimum cut-off marks to be decided by IBPS. Adequate number of candidates in each category as decided by IBPS depending upon requirements will be shortlisted for Online Main Examination. MAIN EXAMINATION For the Post of Law Officer, IT Officer, Agriculture Field Officer, HR/Personnel Officer and Marketing Officer Name of the Test
Professional Knowledge
No. of
Maximum
Medium of
Questions
Marks
Exam
Duration
60
60
English & Hindi
45 minutes
Duration
For the Post of Rajbhasha Adhikari Name of the Test
No. of
Maximum
Medium of
Questions
Marks
Exam
Professional Knowledge (Objective)
45
60
English & Hindi
30 minutes
Professional Knowledge (Descriptive)
2
English & Hindi
30 minutes
IBPS reserves the right to modify the structure of the examination which will be intimated through its website. Other detailed information regarding the examination will be given in an Information Handout, which will be made available for the candidates to download along with the call letters from the authorised IBPS website www.ibps.in
PENALTY FOR WRONG ANSWERS There will be penalty for wrong answers marked in the Objective Tests. For each question for which a wrong answer has been given by the candidate one fourth or 0.25 of the marks assigned to that question will be deducted as penalty to arrive at corrected score. If a question is left blank, i.e. no answer is marked by the candidate; there will be no penalty for that question. INTERVIEW Candidates who have been shortlisted in the examination for CRP SPL-VI will subsequently be called for an Interview to be conducted by the Participating Organisations and coordinated by the nodal banks with the help of IBPS. Interviews will be conducted at select centres. The centre, address of the venue, time & date of Interview will be informed to the shortlisted candidates in the call letter. Candidates are required to download their interview call letters from authorised IBPS website www.ibps.in. Please note that any request regarding change in date, centre etc. of interview will not be entertained. However the conducting agencies reserve the right to change the date/ venue/ time/ centre etc. of interview or hold supplementary process for particular date / session / venue / centre / set of candidates at its discretion, under unforeseen circumstances, if any. Note : The information given above is indicative only. For further deatils visit the website of IBPS.
❐❐❐
LMP–6
BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS
BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS RBI’S CONSTITUTION AND OBJECTIVES The Reserve Bank of India (RBI) was constituted under the Reserve Bank of India Act, 1934 and started functioning with effect from 1 April, 1935. (1) The Share capital was divided into shares of 100 each fully paid which was entirely owned by private shareholders in the beginning. Following India’s independence in 1947, the RBI was nationalised in the year 1949. RBI is the oldest among the central banks operating in developing countries, though it is younger than the Bank of England and the Federal Reserve Board operating as the Central banks in UK and USA respectively, being developed countries. RBI is a state owned institution under the Reserve Bank (Transfer of Public Ownership) of India Act, 1948. This Act empowers the Union Government, in consultation with the Governor of the RBI, to issue such directions to RBI as considered necessary in public interest. The Governor and four Deputy Governors of RBI are appointed by the Union Government. The control of the RBI vests in the Central Board of Directors, that comprises the Governor, four Deputy Governors and 15 Directors nominated by the Union Government. The RBI’s internal management is based on functional specialisation and coordination amongst about 20 departments, with its headquarters at Mumbai, which is the financial capital of the country. (2) The RBI plays an important part in the development strategy of the government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 20-member-strong Central Board of Directors — the Governer (currently Duwuri Subbarao), four Deputy Governers, one Finance Ministry's representative, ten Government-nominated Directors to represent important elements from Indian Economy, and four directors to represent Local Boards Headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of these Local Boards consist of five members who represent regional interests, as well as the interests of co-operative and indegenous banks. The RBI plays an important part in the development strategy of the government of India. It is a member bank of the Asian Clearing Union. The general superintendence and direction of the RBI is entrusted with the 20-member-strong Central Board of Directors — the Governer (currently Duwuri Subbarao), four Deputy Governers, one Finance Ministry's representative, ten Government-nominated Directors to represent important elements from Indian Economy, and four directors to represent Local Boards Head-quartered at Mumbai, Kolkata, Chennai and New Delhi.
Each of these Local Boards consist of five members who represent regional interests, as well as the interests of co-operative and indegenous banks. The main objectives of the RBI are contained in the preamble of the RBI Act, 1934. It reads “Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage”. The main objectives of RBI may be stated as follows in specific terms: (i) To maintain monetary stability such that the business and economic life of the country can deliver the welfare gains of a mixed economy, (ii) To maintain financial stability and ensure sound financial institutions so that economic units can conduct their business with confidence, (iii) To maintain stable payment systems, so that financial transactions can be safely and efficiently executed, (iv) To ensure that credit allocation by the financial system broadly reflects the national economic priorities and social concerns. (v) To regulate the overall volume of money and credit in the economy to ensure a reasonable degree of price stability. (vi) To promote the development of financial markets and systems to enable itself to operate/ regulate efficiently. RBI’S MAIN FUNCTIONS We will now discuss the essential functions of RBI that helps to achieve the objectives mentioned above. These are as follows: Notes Issuance RBI has the sole authority for the issuance of currency notes and putting them into circulation, withdrawing them or exchanging them. RBI has issued and put in circulation notes in the denomination of Rs. 2, 5, 10, 20, 50, 100. 500 and 1000, except Re. 1 notes and all coins, which are issued by the Government of India, but put into circulation by RBI. The RBI has about seventeen Issue Offices and above 4,000 currency chests where new and reissuable notes are stored. The currency chests are kept by various banking groups as agents of RBI. The RBI Group has over 2,800 currency chests, Nationalised banks have about 800, Treasuries about 420 and private sector banks have about 20 currency chests. As a cover for the notes issue, RBI keeps a minimum value of gold coin, bullion and foreign securities as a part of the total approved assets.
LMP–7
BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS Government’s Banker RBI acts as the banker to the Central and State Governments. As such, it provides them banking services of deposits, withdrawal of funds, making payments and receipts, collection and transfer of funds and management of public debt. Government deposits are received free of interest and RBI does not receive any remuneration for the routine banking business of the government. RBI also makes ‘ways and means advance’ to central and state governments, subject to certain rules and limits on the amount of overdrafts with a view to contain the fiscal deficit as decided by the central government. RBI charges a commission for managing the public debt and interest on overdrafts from the concerned governments. Bankers’ Bank Every Central bank acts as a “bankers” bank and so does RBI. Commercial Banks including foreign banks, co-operative banks and RRB's are eligible to be included in the second schedule of RBI Act, subject to fulfilling conditions laid down under Section 42(6) of the RBI Act. The commercial banks and state cooperative banks which are scheduled banks have to keep stipulated reserves in cash and in approved securities as a percentage of their Demand and Time Liabilities (DTL). These reserves, as discussed in a later section of this Unit, regulate the banks’ ability to create credit and affect money supply in the economy. RBI also changes its Bank Rate to regulate the cost of bank credit and thereby its volume indirectly. RBI also acts as a ‘lender of the last resort, for banks by rediscounting bills and by refinance mechanism for certain kinds of credit, subject to the conditions laid down in its Credit Policy announced annually. Acts as a National Clearing House In India, RBI, acts as the clearing house for settlement of Banking transactions. This function of clearing house enables the other banks to settle their interbank claims easily. Further it fascilitates the settlement economically. Where as the RBI has no offices of its own, the function of clearing house is carried out in the premises of the State Bank of India. The entire clearing house operations carried out by RBI are computerized. The inter-bank cheque clearing settlement is done twice a day. The RBI acts as a lender of last resort or emergency fund provider to the other member banks. As such, if the commercial banks are not able to get finnancial assistance from any other sources, then as a last resort, they can approach the RBI for the necessary financial assistance. In such situations, the RBI provides credit facilities to the commercial banks on eligible securities including genuine trade bills which are usually made available at Bank Rate. RBI rediscounts bills under section 17(2) and section 17(3) and grants advances against securities under section 17(4) of the RBI Act. However, many of these transactions are particularly carried out through
separate agencies like DHFI, Securities Trading Corporation of India, primary dealers. The RBI now mainly provides refinance facilities as direct assistance. Rediscounting of bills fall under the following categories: – Commerial Bill – Bills for financing Agricultural Operations – Bill for financing Cottage & Small Scale Industries – Foreign Bills Bank’s Supervision From November 1993, RBI’s banking supervisory function has been separated from its traditional central banking functions. The Board of Financial Supervision (BFS) was set up in 1994, to oversee the Indian Financial System, comprising not only commercial banks, state cooperative banks, but also the All India Financial Institutions (AIFIs) and Non-Banking Finance Companies (NBFCs). The BFS has a full time vice-chairman and six other members, apart from the RBI Governor as its chairman. RBI’s supervisory powers over commercial banks are quite wide as mentioned below and their objective is to develop a sound banking system in the country; (i) To issue licences for new banks and new branches for the existing banks. (ii) To prescribe the minimum requirements for the paid-up capital and reserves, maintenance of cash reserves and other liquid assets. (iii) To inspect the working of the scheduled banks in India and abroad from all relevant angles to ensure their sound working. (iv) To conduct ad hoc investigations into complaints, irregularities and frauds pertaining to the banks. (v) To control appointments, reappointments, termination of Chairmen and CEOs of private banks. (vi) To approve or force amalgamation or merger of two banks. The recent example is the merging of Global Trust Bank with Oriental Bank of Commerce, after the RBI’s moratorium of the former in early 2004. Development of the Financial System This represents RBI’s developmental role as against its regulatory and supervisory role over banks as mentioned above. RBI has created specialised financial institutions for: (i) Industrial finance: Industrial Development Bank of India (IDBI) in 1964, Small Industries Development Bank of India (SIDBI) in 1989. (ii) Agricultural credit: National Bank for Agriculture and Rural Development (NABARD) in 1981. (iii) Export-import finance: Export-Import Bank of India (EXIM Bank) in 1981. (iv) Deposits Insurance Corporation of India in 1961. which later became Deposit Insurance and Credit Guarantee Corporation of India (DICGC).
LMP–8
BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS RBI has also initiated several schemes in relation to the various facts of the banking system, which has had a significant impact on the development of the banking sector of the country over the last five decades. Some of these are as follows : (i) Bill Market Scheme of 1952 and 1970. (ii) Lead Bank Scheme for backward districts development (1970s). (iii) P.L. Tandon Committee on Inventory norms for Bank Credit, 1974. (iv) Credit Authorisation Scheme (1960s). (v) Consortium Financing Scheme (1970s). (vi) Priority Sector Advances Scheme (discussed later in this Unit). Note: The schemes marked with an asterisk (*) have been discontinued after the liberalisation since 1991. RBI has also tried to integrate the large unorganised financial sector (indigenous bankers, various kinds of non-banking finance companies etc.) into the organised financial system by regulating them to some extent. However, the task is so enormous and complex that it will take longer for RBI to have the desired integration of the two sectors, so as to work as a single financial system in the country. Custodian of Foreign Exchange Reserves The RBI acts as the custodian of foriegn exchange reserves. Adequate reserves may help maintain foreign exchange rates. In order to minimise the undue fluctuations in the rates, it may buy and sell foreign currencies depending upon the situations. Its purchase and sale of foreign currencies from the market is done like commercial banks. However, the object of the RBI will not be profit booking. It may buy the foreign currency to build up adequate reserves or to arrest unwarrented rise in the value of rupee which may be due to sudden inflow of foreign currencies into India. It may also buy and sell foreign currencies in international market to switch the portfolio of investments denominated in different international currencies depending upon circumstances and needs. Exchange Control RBI is entrusted with the duty of maintaining the stability of the external value of the national currency - Indian Rupee. It used to regulate the foreign exchange market in the country in terms of the Foreign Exchange Regulation Act (FERA), 1947 (amended and enlarged in 1973). The FERA, 1973 has been replaced by the Foreign Exchange Management Act, 1999 (FEMA) and RBI is now guided by the provisions of the new Act. The RBI performs the following tasks: (i) It administers foreign exchange control through its Exchange-Control Department. It authorises the bank’s specified branches and other dealers, called Authorised Dealers (ADs) to deal in the prescribed kinds of foreign exchange transactions and issues the AD series of circulars for regulating such transactions. (ii) It manages the exchange rate between the Indian Rupee and foreign currencies, by selling
and buying foreign exchange to/from the Authorised Dealers and by other means. (iii) It manages the foreign exchange reserves of the country and maintains reserves in gold and foreign securities issued by foreign governments and international financial institutions. Monetary Control The RBI controls the money supply, volume of bank credit and also cost of bank credit (via the Bank Rate) and thereby the overall money supply in the economy. Money supply change is a technique of controlling inflationary or deflationary situations in the economy. The RBI issues monetary policy for the country as the Ministry of Finance issues fiscal policy and the Ministry of Commerce issues the EXIM policy of the country from time to time. All these policies are among the important macroeconomic policies that influence various businesses in the country. RBI issues monetary and credit policies annually. TOOLS OF MONETARY CONTROL RBI uses its monetary policy for controlling inflationary or deflationary situations in the economy by using one or more of the following tools of monetary control. Quantitative Measures:- Measures which aim to control the money supply directly such as: (a) Cash Reserve Ratio (CRR) (b) Statutory Liquidity Ratio (SLR) (c) Open Market Operations (OMOs) (d) Selective Credit Control (SCC) (a) Cash Reserve Ratio (CRR) : It refers to the cash that all banks (scheduled and non-scheduled) are required to maintain with RBI as a certain percentage of their demand and time liabilities (DTL). As you know, demand liabilities of a bank represent its deposits which are payable on demand of the depositors (viz., current and savings deposits) and time liabilities refer to its time deposits which are repayable on the specified maturities. In order to meet these liabilities in time (i.e. to keep liquidity), a bank has to keep a regulatory cash reserve with RBI (currently, it is 6.5 per cent for scheduled commercial banks). If a bank fails to maintain the prescribed CRR at prescribed intervals, it has to pay penal interest on the shortfall by adjustment from the interest receivable on the balances with RBI. A cut in the CRR enhances loanable funds with banks and reduces their dependence on the call and term money market. This will bring down the call rates. An increase in CRR will squeeze the liquidity in the banking system and reduce their lending operations and the call rate will tend to increase. (b) Statutory Liquidity Ratio (SLR) : It refers to the supplementary liquid reserve requirements of banks, in addition to CRR. SLR is maintained by all banks (scheduled and non-scheduled) in the form of cash in hand (exclusive of the minimum CRR), current account balances with SBI and other public sector commercial banks, unencumbered approved securities and gold. RBI can prescribe SLR from 0 per cent to 40 per cent of bank’s DTL (presently it is 24 per cent). SLR has three objectives:
LMP–9
BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS To restrict expansion of banks’ credit, To increase banks’ investment in approved securities and To ensure solvency of banks. The effect of an increase in SLR by RBI is the reduction in the lending capacity of banks by pre-empting a certain portion of their DTL for government or other approved securities. It has therefore a deflationary impact on the economy, not only by reducing the supply of loanable funds of banks, but also by increasing the lending rates in the face of an increasing demand for bank credit. The reverse phenomena happens in case of a cut in SLR. (c) Open Market Operations (OMOs) : This refers to sale or purchase of government securities (of Central or State governments or both) by RBI in the open market with a view to increase or decrease the liquidity in the banking system and thereby affect the loanable funds with banks. RBI can also alter the interest rate structure through its pricing policy for open market sale/purchase. (d) Selective Credit Control (SCC) : The RBI issues directives, under Sections 21 and 35A of the Banking Regulation Act, stipulating certain restrictions on bank advances against specified sensitive commodities as follows: Pulses, other food grains (viz.. coarse grains), oilseeds, oils including vanaspati, all imported oil seeds and oil, sugar including imported sugar (except buffer stocks and unreleased stock of sugar with sugar mills). Gur and Khandsari, Cotton and Kapas, Paddy/Rice and Wheat. RBI’s objective in issuing Selective Credit Control (SCC) directives is to prevent speculative holding of essential commodities and the resultant rise in their prices. RBI’s general guidelines on SCC are: (i) Banks should not allow customers dealing in SCC commodities any credit facilities (including against book debts/receivables or even collateral securities like insurance policies, shares, stocks and real estate) that would directly or indirectly defeat the purpose of the SCC directives. (ii) Credit limits against each commodity covered by SCC directives should be segregated and the SCC restrictions be applied to each of such segregated limits. Presently, only buffer stocks of sugar, unreleased stocks of sugar with sugar mills representing free sale sugar and levy sugar are covered by SCC directives. Qualitative measures: They aim to control the quality of money supply indirectly through cost of credit. These measures are — (a) Bank Rate— Bank Rate is the standard rate at which RBI is prepared to buy or rediscount bills of exchange or other eligible commercial paper from banks. It is the basic cost of rediscounting and refinance facilities from RBI. The Bank Rate is
therefore used by RBI to affect the cost and availability of refinance and to change the loanable resources of banks and other financial institutions. Change in the Bank Rate by RBI affects the interest rates on loans and deposits in the banking system across the board in the same direction, if not to the same extent. After deregulation and banking reforms since 1991, RBI has gradually loosened its direct regulation of deposit and lending rates and these are left to banks to decide through their boards, with only a few exceptions. However, RBI can still affect the interest rates via changes in its Bank Rate, whenever the situation of the economy warrants it. (b) Repo Rate — Repo and Reserve Repo Rates are Liquidity adjustments facility [LAF] tools used by RBI. Repo is an instrument meant for injecting the funds required and Reserve Repo for absorbing the exess liquidity out of system. OTHER TOOLS : RBI has used other tools of regulation in the past. However, after the liberalisation policy of 1991. most of these tools have since been discontinued and are no longer used by RBI. These tools are: Credit Rationing/Allocation Credit Authorisation Scheme Credit Planning Inventory and Credit Norms In bond market, interest rates are the most important factor, and the RBI controls interest rates. Repo refers to 'repurchase obligation'. In case of tight liquidity conditions (as in 2008), when banks need funding for the short term, they approach the RBI and ask for a temporary loan. RBI gives them the loan only after taking some collateral. This collateral is goverment securities. So, the banks give these securities to RBI and take money to meet their temporary requirements. The interest rate which the RBI charges to Banks for such short- term loan is known as the Repo Rate. After the short term period is over, banks have the obligation to repay the money back to RBI, along with the interest and 'buys back' its securities hence, the words repurchase obligation. In short, Banks borrow from RBI and RBI lends to Banks at this rate. It must be understood that when RBI does not want more money to go into the economy, it will raise its rate. When repo rate increases, the cost of money for banks also increases. Banks in turn increase their rates for their borrowers. This prevents borrowers from taking loans from banks and thus, RBI's objective of controlling money supply is achieved. (c) Reverse Repo Rate — Reverse rate is that rate which RBI pays to banks. When banks have surplus liquidity and there are not enough borrowings from banks by consumers, banks park their surplus money with RBI and earn some minimum interest. The rate at which RBI pays interest is known as reverse repo rate.
LMP–10
BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS When the RBI wants the economy to grow, it will reduce reverse repo rate. REGULATORY RESTRICTIONS ON LENDING There are certain regulatory restrictions on lending by banks in terms of RBI directives or the Banking Regulation Act, 1949 (BRA) as follows: (i) No advance or loan can be granted against the security of the bank’s own shares or partly paid shares of a company. (ii) No bank can hold shares in a company: (a) As pledgee or mortgagee in excess of the limit of 30 per cent of the Paid-up capital of that company or 30 per cent of the Bank’s Paid-up capital and Reserves, whichever is less (Sec.l9(ii) of BRA). (b) in the management of which Managing Director or Manager of the Bank is interested (Sec. 19(iii) of BRA). (iii) Bank’s aggregate investment in shares, Certificate of Deposits (CDs), bonds, etc., should not exceed the limit of 40 per cent of Bank’s net owned funds as at the end of the previous year. (iv) No bank should grant loans against: (a) CDs (b) FDs issued by other banks (c) Money Market Mutual Funds (v) Bank should adhere to the RBI guidelines relating to the level of credit, margin and interest rate etc. for loans against the security of commodities covered by the Selective Credit Control Directives of RBI. No loan should be granted by banks to:
GOVERNORS (RESERVE BANK OF INDIA) 1. Sir O.A. Smith : 01.04.1935 - 30.06.1937 2. Sir J.B. Tailor : 01.07.1937 - 17.02.1943 3. C.D. Deshmukh : 11.08.1943 - 30.06.1949 4. Sir B.R. Rao : 01.07.1949 - 14.01.1957 5. K.G. Ambeygaonkar : 14.01.1957 - 28.02.1957 6. H.B.R. Aynegar : 01.03.1957 - 28.02.1962 7. P.C. Bhattacharya : 01.03.1962 - 30.06.1967 8. L.K. Jha : 01.07.1967 - 03.05.1970 9. B.N. Adarkar : 04.05.1970 -15.05.1970 10. S. Jaganathan : 16.05.1970 - 19.05.1975 11. N.C. Sengupta : 19.05.1975 - 19.08.1975 12. K.R. Puri : 20.08.1975 - 02.05.1977 13. N. Narasimhan : 02.05.1977 - 30.11.1977 14. I.G. Patel : 01.12.1977 - 15.09.1982 15. Dr. Manmonhan Singh : 16.09.1982 - 14.01.1985 16. A. Ghosh : 15.01.1985 - 04.02.1985 17. R.N. Malhotra : 04.02.1985 - 22.12.1990 18. S. Venkataraman : 22.12.1990 - 21.12.1992 19. C. Rangarajan : 22.12.1992-22.11.1997 20. Dr. Bimal Jalan : 22.11.1997-05.09.2003 21. Y.B. Reddy : 05.09.2003- 4.09.2008 22. Dr. D. Subba Roa : 05.09.2008- 05.08.2013 23. Raguram Govind Rajan : 06.08.2013- 04.09.2016 24. Urjit Patel : 04.09.2016 - Till date
The Bank’s directors or firms in which a director is interested as a partner/manager/employee/ guarantor (certain exemptions allowed). Relatives of other bank’s directors (‘relatives’ defined by RBI) - Such loans can be sanctioned by higher authorities or the Bank’s Board as per RBI guidelines. (vi) Banks should not sanction a new or additional facility to borrowers appearing in RBI’s list of “Willful Defaulters” for a period of 5 years from the date of publication of the list by RBI. BANKING REGULATION ACT, 1949 The Banking Companies Act, 1949 came into force on 16th March 1949 which was changed to Banking Regulation Act in 1966. Section 5b The term ‘Banking’ is defined as “accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, drafts, order, or otherwise. Section 5c ‘Banking company’ means any company which transacts the business of banking ( In India) Section 7 (1) Use of words “Bank”, “Banker”, “Banking” or “banking Company”. No company other than a Banking company shall use as part of its name (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. Section 8. [Prohibition of Trading] No banking company shall engage in any trade of goods except in connection with the realisation of security given to or held by it. Section 9. [Disposal of Non-banking assets] No banking company shall hold any immovable property, except required for its own use for any period exceeding seven years from the acquisition of the asset. Section 10. [Prohibition of employment of Managing Agents and restriction on certain forms of employment] No banking company shall employ or continue employment of an insolvent person or who is convicted by a criminal court of an offence involving moral turpitude. Banking company shall not be managed by a person who is director of any other company or who is engaged in any other business or vocation. Section 18. Cash Reserve - Every banking company, not being a scheduled bank, shall maintain in India by way of cash reserve with itself or by way of balance in current account with the Reserve Bank or by way of net balance in current account or in one or more of the aforesaid ways a sum equivalent to at least 3% of the total its demand and time liabilities in India as on the last Friday of the second preceding fortnight.
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BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS Section 19(2) No banking company shall hold shares in ai company, whether as a pledgee, mortgagee or absolute owner of an amount exceeding 30% of the paid-up share capital of that company, or 30% of its own paid-up share capital and reserves whichever is less. Section 20. [Restrictions on Loans & Advances] No banking company can grant loans and advances on the security of its own shares. No banking company should enter into any commitment for giving any loan or advance to any of its directors or to a firm or company in which any of its directors is interested as partner, guarantor or director. Section 21 [Power of Reserve Bank to control advances by banking companies] The Reserve Bank of India is empowered to issue directions to a banking company to determine the policy in relation to advances to be followed by banking companies either generally or by any of them in particular. Such direction may relate: to the purpose for which any advance may or may not be made, the margin to be maintained inrespect of several advances the maximum amount that can be advanced the rate of interest and other terms and conditions on which such advance can be sanctioned. Section 22 [Licensing of Banking Companies ] Every banking company should hold a license issued by the Reserve Bank. The Reserve Bank can issue a license only if it is satisfied with regard to the following conditions after an inspection of the books of the banking company. The banking company must be in a position to pay its present or future depositors in full as their claims accrue, and the affairs of the banking company must not be conducted in a manner detrimental to the interest of the depositors. The Reserve Bank can cancel the license already granted to a banking company in case any of the above conditions is violated or the company ceases to carry on the banking business. Section 23 [Restrictions on opening of new and transfer of existing places of business] Every banking company shall obtain prior permission for opening new branches or for changing the location of the existing branches, either in India or overseas. Section 24. AMENDMENT OF SECTION 24 OF THE BANKING REGULATION ACT 1949 BY THE BANKING REGULATION (AMENDMENT) ACT, 2007 [Maintenance of percentage of assets] Amendent of Section 24. – In section 24 of the Banking Regulation Act, 1949 (herein after referred to as principal Act),
(a) sub-section (1) and (2) shall be omitted; (b) for subsection 2(A), the following sub-section shall be substituted, namely 2(A) [*refer to text] (c) sub-section 2(B) shall be omitted. A scheduled bank, in addition to the average daily balance which it is or may be, required to maintain under section 42 of RBI act 1934 and every other banking company, in addition to the cash reserve which it is required to maintain under section 18, shall maintain in India, assets the value of which shall not be less than such percentage not exceeding 40% of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight as the Reserve bank may by notification in the official gazette, specify from time to time and such assets shall be maintained in such form and manner, as may be specified in such notification. Section 35. [INSPECTION] The Reserve Bank of India may inspect one or more offices of any banking company and its books of accounts. Section 45. ZA NOMINATION FOR PAYMENT OF DEPOSITORS’ MONEY Where a deposit is held by a banking company to the credit of one or more persons, the depositor or all the depositors together, may nominate, in the prescribed manner one person to whom in the event of the death of the sole depositor or the death of all the depositors the amount of deposit may be returned by the banking company. Where a nomination has been done as above, on the death of the depositor the nominee become entitled to all the rights of the depositor in relation to such deposit to the exclusion of all other persons, unless the nomination is varied or cancelled. Where the nominee is a minor, it shall be lawful for the depositor making the nominee to appoint in the prescribed manner any person to receive the amount of deposit in the event of his death during the minority of the nominee. Payment by a banking company in accordance with the provisions of this section shall constitute a full discharge to the banking company of its liability in respect of the deposit. Section 45. ZB NOTICE OF CLAIMS OF OTHER PERSONS REGARDING DEPOSITS NOT RECEIVABLE No notice of the claim of any person, other than the person or persons in whose name a deposit is held by a banking company, shall be receivable by the banking company nor shall the banking company be bound by any such notice even though expressly given to it provided that where any decree, order, certificate or other authority from a competent jurisdiction relating to such deposit is produced before a banking company, the banking company shall take due note of such decree, order, certificate or other authority.
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BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS Section 45ZC NOMINATION FOR RETURN OF ARTICLES KEPT IN SAFE CUSTODY WITH BANKING COMPANY Where any person leaves any article in safe custody with a banking company, such person may nominate in the prescribed manner, any person to whom, in the event of the death of the person leaving the article in safe custody such article may be returned by the banking company. Section 45ZE RELEASE OF CONTENTS OF SAFETY LOCKERS Where an individual is the sole hirer of a locker from a banking company, such individual may nominate one person to whom, in the event of the death of such individual the banking company may give access to the locker and liberty to remove the contents of the locker. Where any such locker is hired by two or more individuals jointly and under the contract of hire, the locker is to be operated under the joint signatures of the two or more of such hirers such hirers may nominate one or more persons to whom in the event of the death of such joint hirer or hirers, the banking company may give jointly with the surviving joint hirer or joint hirers as the case may be access to the locker and liberty to remove the contents of such locker. The Banking company shall, before permitting the removal of contents of any locker by any nominee or jointly by any nominee and survivors as aforesaid, prepare, in such manner as may be directed by the RBI from time to time, an inventory of the contents of the locker which shall be signed by such nominee or jointly by such nominee and survivors and shall deliver a copy of the inventory so prepared to such nominee or nominee and survivors. On removal of the contents of any locker by any nominee or jointly by any nominee and survivors as aforesaid, the liability of the banking company in relation to the contents of the locker shall stand discharged. No suit, prosecution or other legal proceedings shall lie against a banking company for any damage caused or likely to be caused, for allowing access to any locker, and liberty to remove the contents of such locker.
RESERVE BANK OF INDIA ACT, 1934 Section 20 Obligation of the bank to transact Government business - The bank shall undertake to accept money for account of the Central Government and to make payments up to the amount standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the union. Section 22 The RBI has the sole right to issue bank notes in India. Section 31 Notwithstanding anything contained in Negotiable Instruments Act, 1881, no person in India other than RBI shall issue any promissory notes expressed to be payable to the bearer of the instrument.
Section 42 Cash reserves of scheduled banks to be kept with the bank Every bank included in the second schedule shall maintain with the bank an average daily balance the amount of which shall not be less than such percent of the total of the demand and time liabilities in India as the bank may from time to time having regard to the needs of securing the monetary stability in the country notify in the Gazette of India. Section 43 The RBI shall publish each fortnight consolidated position of aggregate liabilities and assets of all the scheduled banks based on the returns and information received.
CREDIT INFORMATION BUREAU (INDIA) LIMITED (CIBIL), FAIR PRACTICES CODE FOR DEBT COLLECTION AND BANKING CODES AND STANDARDS BOARD OF INDIA CREDIT INFORMATION BUREAU (INDIA) LIMITED (CIBIL) CIBIL, India’s first credit information bureau was established by SBI and HDFC, with a shareholding of 40 per cent each, while Dun & Bradstreet Information Services India Private Limited (D&B) and Trans Union International Inc. (TU) held 10 per cent each. D&B and TU have also provided the necessary technical and software support to CIBIL. CIBIL is a repository of information, which contains the credit history of commercial and consumer borrowers. CIBIL provides this information to its members in the form of credit information reports (CIRs). Functions of CIBIL CIBIL is a composite credit bureau, which caters to both commercial and consumer segments. The Consumer Credit Bureau covers credit availed by individuals while the Commercial Credit Bureau covers credit availed by non-individuals such as partnership firms, proprietary concerns, private and public limited companies, etc. The aim of CIBIL’s Commercial Credit Bureau is to minimise instances of concurrent and serial defaults by providing credit information, pertaining to non-individual borrowers such as public limited companies, private limited companies, partnership firms, proprietorships, etc. CIBIL maintains a central database of information as received from its members. IT collates and disseminates this information on demand to members in the form of commercial Credit Information Reports (CIR) to assist them in their loan appraisal process. Banking Ombudsman Service The banks will display on their website and in all their branches, a notice explaining that it is covered by the Banking Ombudsman Scheme, 2006 of the Re-
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BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS serve Bank of India and the copies of the scheme will be made available on request at a nominal charge. Within thirty days of lodging a complaint with a bank, if the customer does not get a satisfactory response from it and the customer wishes to pursue other avenues for redressal of grievances, he/she may approach the Banking Ombudsman appointed by the Reserve Bank of India under Banking Ombudsman Scheme, 2006. Salient features of the Banking Ombudsman Scheme are displayed in the branch notice boards and the scheme itself is displayed on the bank’s website. The bank’s staff would explain the procedure in this regard. BANKING CODES AND STANDARDS BOARD OF INDIA (BCSBI) In November 2003, RBI constituted the Committee on Procedures and Performance Audit of Public Services under the Chairmanship of Shri S.S.Tarapore (former Deputy Governor) to address the issues relating to availability of adequate banking services to the common man. The committee recommended setting up of the Banking Codes and Standards Board of India, broadly on the lines of Banking Codes and Standards Board functioning in the UK. Formation of Banking Codes and Standards Board of India (BCSBI) The BCSBI has been registered as a separate society under the Societies Registration Act. I860 on 18 February 2006. The BSCBI functions as an autonomous body, to monitor and assess the compliance with codes and minimum standards of service to individual customers to which the banks agreed to. BSCBI is not a department of the RBI. It is an independent banking industry watch dog to ensure that the consumer of banking services get what they are promised by the banks. To ensure that the board really functions as an autonomous and independent watch dog of the industry, the RBI has decided to extend financial support to the board by way of meeting its full expenses for the first five years. This will enable the board to reach its economic critical mass that will make it truly independent in its functioning and take a view on any bank without its existence coming under any threat. On its part, RBI would derive supervisory comfort in case of banks which are members of the board. In substance, the board has been set up to ensure that the common man, as a consumer of financial services from the banking Industry, is in no way at a disadvantageous position and really gets what he has been promised. The Role of IBA, INDIAN BANKS’ ASSOCIATION The IBA had brought out its ‘Bankers’ Fair Practice’ code in June 2004 and all member banks had adopted it voluntarily. The code was essentially a commitment to be fair and transparent in dealing with individual customers. The IBA has also separately come up with ‘Fair Practice Code for Credit Card Operations’ and ‘Model Code for Collection of Dues and Repossession of Security’ to address specific concerns voiced by customers about banking practices in these areas.
Code of Bank’s Commitment to Customers The Reserve Bank of India, while announcing the formation of the BCSBI in the Annual Policy Statement, had requested the IBA to set up a working group to draft a comprehensive fair practice code, covering all the areas of customer service for uniform adoption by banks. Accordingly, the IBA had set up a working group to study the international practices and review the existing codes. The working group had examined fair practice codes adopted by bankers in other domains like UK, Canada, Hong Kong, Singapore and Australia and prepared a draft Bankers’ Fair Practice Code, duly incorporating some of the finer points from those documents. The working group further refined the draft code, incorporating the suggestions from the member banks and submitted it to the BCSBI. BCSBI had made further refinements to the code and the ‘Code of Bank’s Commitment to Customers’ was brought out. The code sets minimum standards of banking practices for banks to follow, when they deal with individual customers. The ‘Code of Bank’s Commitment to Customers’ was released by Dr. Y.V. Reddy, Governor, Reserve Bank of India, in an inaugural function held at RBI on 1st July, 2006. Banks will be required to register themselves with BCSBI as members and have the Code adopted by their respective boards. Thereafter, when they are ready to implement the commitments contained in the Code, the banks will enter into a covenant with BCSBI, binding them to be monitored by BCSBI as far as implementation of the code is concerned. The banks would also be required to make necessary changes in certain policy and procedural aspects around their products and services. With the adoption of ‘Code of Bank’s Commitment to Customers’ by member banks who are members of BCSBI, the following voluntary codes of IBA would not be applicable to them: (a) Bankers’ Fair Practice Code - w.e.f. June 2004 (b) Fair Practice Code for Credit Card Operations (c) Model Code for Collection of Dues and Repossession of Security However, member banks who are not members of BCSBI or eligible to become members of BCSBI would continue to follow these codes. The code represents each member bank’s commitment to minimum standards of service to individual customers in relation to products and services offered by the bank, like: Deposit accounts Safe deposit lockers Settlement of accounts of deceased account holders Foreign exchange services Remittances within India Loans and advances and guarantees Credit cards Internet banking In these areas the code, inter alia, dwells upon: Interest rates Tariff schedule
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BANKING REGULATION & COMPLIANCE AND LEGAL ASPECTS Terms and conditions governing relationship between the bank and the customer Compensation for loss, if any, to the customer due the acts of omission or commission on the part of the bank Privacy and confidentiality of the information relating to the customer Norms governing advertisements, marketing and sales by banks. Every member bank is required to: Have a help desk/helpline at the branch Have a code compliance officer at each controlling office above the level of the branch. Display, at each branch, name and contact number of the code compliance officer. Display name and address of the banking ombudsman. This is to help the customer in case his bank does not provide services as promised in the code. Function of BCSBI The main function of the board is to ensure adherence to the ‘Code of Bank’s Commitment to Customers’. The code is voluntary and sets minimum standards of banking practices for banks to follow when they are dealing with individual customers in their day-to-day operations. The code is not only meant to provide protection to the individual customers but is also expected to generate awareness in the common man about his rights as a consumer of banking services. The common man is, therefore, the raison d’etre of the BCSBI. Grievance Redressal Member banks of BCSBI would put in place the following grievance redressal mechanism in their banks: Have a help desk/helpline at the branch and display at each branch name and contact number of code compliance officer and Display name and address of the banking ombudsman Have a code compliance officer at each controlling office above the level of the branch. The customer should first approach the help desk of the branch/bank. In case the issue is not resolved, the code compliance officer of the bank may be approached by the complainant. In case the issue is still not resolved to the satisfaction of the customer, he should take it up with the banking ombudsman. Difference between the Banking Ombudsman and the Banking Codes and Standards Board of India : The difference between the banking ombudsman and the banking codes and Standard Board of India is that the banking ombudsman is a redressal mechanism to attend to disputes between banks and its customer as also to attend to individual complaints relating to deficiencies in banking services. On the other hand, the BCSBI is an industry watch dog to oversee compliance with the “Code of Bank’s Commitment to Customers.” It is not a redressal mechanism and will look into an individual complaint only to the extent it points to any systemic failure in compliance with the code.
BANKER-CUSTOMER RELATIONSHIP The basic function of a banker is accepting of money from the public by way of deposits and deploying the same by means of loans and investments. Apart from this function, bankers render a variety of services to their customers, like providing locker facility, keeping articles in safe custody, collecting bills, cheques and so on. REQUIREMENTS TO BE CALLED A BANK The term ‘Banking’ has been comprehensively defined under the Banking Regulation Act 1949. According to Section 5(b) of the Banking Regulation Act, the term ‘Banking’ means accepting for the purpose of lending or investment of deposits of money received from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise. The essentials are laid down by the definition, so that we understand the ‘scope’ of the term ‘Banking’. Essentials to satisfy the requirements of the above definition are laid down as below: (a) Acceptance of deposits should be for the purpose of lending and investment. Thus, companies accepting deposits for the purpose of financing their trading or manufacturing business cannot be considered as a bank. (b) The deposit should be accepted from the public, i.e. ‘Nidhis’ and multi-benefit societies that accept deposit from their members, do not fall under this definition. Even the Cooperative Societies are outside the purview. (c) Acceptance of deposit should be in the form of cash. Banks obtain large funds from millions of depositors. The depositors do not have any control over the management of the banks. The government of the country has therefore to take such steps that would safeguard the interest of the , depositors and the public in general and hence there exists a need to have a comprehensive legislation in this regard. The Act not only defines the term ‘Banking’ but also provides information about certain essential ingredients to be fulfilled before an entity can be termed as a ‘Bank’. The important aspects are: (a) Only a firm or company and not an individual are permitted to act as a bank. (b) An individual is not allowed to act as a bank and he/she cannot use this term in the business. A firm consisting of not more than ten partners or a company incorporated under Indian Companies Act, 1956 can be a bank, a banker or a banking company. Under Section 5(c) of the Banking Regulation Act, ‘Banking Company’ means any company that transacts the business of banking in India. Section 7(1) of the Banking Regulation Act prohibits use
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