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Chapter: Business Science - Banking Financial Services Management - Overview of Indian Banking System

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Banking Regulation Act 1949

Sec 5 (b) of the Act defines Banking as, ―Accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or other wise, and withdrawable by cheque , draft, order or otherwise.‖

BANKING REGULATION ACT 1949

 

Introduction

    No separate Act for Banking in India. Till 1949,

 

    controlled by Indian Companies Act 1956.

 

 

 

   Recommendation of banking enquiry committee (inadequate capital, dishonest management, speculative business )

 

    A bill was introduced in parliament in March 1948.

 

   It was Passed in parliament in February 1949 and The Banking Regulation Act 1949 came to exist from 16 th March 1949.

 

Important Provisions of Act:

     Definition of Banking.

 

     Form of Business.

 

     Provision of Capital Management

 

     Maintenance of Liquid Assets.

 

     Licensing of Banks.

 

  Opening of New Banks.

 

  Provision Regarding Loans and Advances.

 

  Inspection of Banks.

 

  Powers of the Reserve Bank of India.

 

  Returns to Be Submitted.

 

  Acquisition of Business.

 

  Mergers/Amalgamations.

 

  Winding up of Banking Companies.

 

Definition of Banking:

 

Sec 5 (b) of the Act defines Banking as, ―Accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or other wise, and withdrawable by cheque , draft, order or otherwise.‖

 

Banking Company: Sec 5 (c) of the Act defines Banking as, ―A company which transacts the

 

business of banking in India.‖

 

Forms of business:SEC 5 (c) and 6

 

It consist of

 

Main Functions/Business

    Borrowing , raising up money& lending of money with or without security.

 

    Granting and issuing of letters of credit.

 

 

    Buying and selling of foreign exchange.

 

    Acquiring, holding, issuing on commission regarding all investments.

 

    Negotiating of loans and advances.

 

Subsidiary Functions/Business:

    Act as an agent of the government, local authority or person.

 

    Establish a good rapport between employees & banks.

 

A bank cannot carrying on trading activities. (Sec 8)

 

It cannot hold any immovable property except for its own use exceeding 7 years .(Sec 9) (Sec 10) KINDS of business CANNOT BE DONE

 

1 PROVISIONS OF CAPITAL

 

Banking Companies Incorporated In India

   aggregate value of paid up capital reserve should be Rs 50,000.

 

   aggregate minimum paid capital and reserves of Rs 5,00,000, plus in respect of each place of business .

 

   Subject of an overall limit of Rs 10,00,000.

 

Incorporated OUTSIDE India:

 

    Aggregate minimum paid up capital and reserves of Rs 20,00,000 (Bombay or Calcutta or Both)

 

    Aggregate minimum paid up capital and reserves of Rs 15,00,000. Incorporated OUTSIDE India

 

Capital:

 

Ordinary shares& pay dividend

 

Total voting rights of all the share holders shall not exceed 1 %

 

Reserve Fund: Sec 17

 

Before declaring dividend, transfer a sum not less than 20% of its net profit

 

Management of banking company

 

Management: Sec 10 A,

 

a) have special knowledge or practical experience in Accountancy, agriculture , rural economy, banking, economics and law.

 

b)At least 2 of them have in cooperation and small scale industry.

 

 

c) they shall not have any substantial interest or connection with anyone of any company or firm.

 

Chairman: It should have a Director as its whole time or part time chairman of the banking

 

company.

 

Maintainance of liquidity :

 

Statutory liquidity ratio: Sec 24,

 

Every banking company in India is required to maintain cash, gold, or unencumbered approved security, valued at a price not exceeding the current market price and not less than 23 % of its time and demand liabilities.

 

Cash Reserve: Sec 18

 

Every banking company should maintain 4.25% of total of its time and demand deposits in the form of cash reserves with RBI.

 

2 Powers of the Reserve Bank

   Powers of the reserve bank Election of New Directors.

 

   Maintaining Cash Reserves.

 

   Power to issue license to new banks.

 

   Power to cancel license.

 

   Power to give permission for starting new branches.

 

   Power of inspection.

 

   Power to issue directions.

 

   Power to control management.

 

   Power to advice banks.

 

   Power to call for information.

 

   Power to appoint liquidator.

 

Licensing of banks

    Obtain a license from the RBI before commencing the business.

 

    Grand license only after the detailed inspection considering so many factors.

 

 It should obtain prior permission from Reserve Bank of India for opening new place of business either in or abroad and also for changing the location.

 

Entry norms for private banks

 

 

Ø   Initial minimum paid up capital should be     200 Crore and have to be raised to 300 Crore

within 3 years of commencement of Business.

    Promoters contribution should be minimum of 40% paid up capital,

 

    NRI participation in banks equity shall not be exceed than 40 %.

 

    No large industrial house can promote a new bank.

 

 

Return filing

 

submit returns on the last Friday of every month or just preceding day if that day is a public holiday.

 

Acquisition of business (Sec 36 AE to 36 AJ)

    Recommendation of RBI

 

    Central government shall give a reasonable opportunity to the bank to explain their stand

 

Winding up of business ( Section 44 A)

 

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