Banking
Banking
Business of Banking
Definition of Banking: - Banking is defined in Section 5(B) of the Banking
Regulation Act, as accepting the deposit of money from public for the
purpose of lending or investment. Such deposit may be repayable on demand
and withdrawal by cheque, demand draft or otherwise.
Under Section 49(A) of the Banking Regulation Act, no person other than a
bank is authorized to accept deposits, withdrawals, and etc. The savings
bank scheme run by the government and any other person notified by the
government are exempted from this prohibition.
Permitted Businesses: -
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Prohibited Businesses: - Section 8 of the Banking Regulation Act prohibits
a banking company from engaging directly or indirectly in trading activities
and undertaking trading risks except under Section 6(1) of the act where a
bank can release the security given to it or held by it against a loan.
Constitution of Banks
Banks in India fall under the following categories:
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THE RESERVE BANK OF INDIA ACT 1934
RBI as India’s Central bank was established under the RBI Act 1934 as on
1st April 1935 and was nationalized on 1st Jan 1949. It is a corporate body.
The ministry of finance however owns the bank by its directive right. The
bank has special powers and obligations for serving the national interest.
Organization of RBI
The RBI consists of the following 2 boards: -
1. Local Board
2. Central Board of Directors
• Governor
• Deputy Governor
• Executive Director
i. Central Office Department
ii. Training Establishment
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a) It must have a paid up capital and reserves of an aggregate value of
not less than Rs. 5 lakhs.
b) It must satisfy the Reserve Bank that its affairs are not being
conducted in a manner detrimental to the interest of its depositors.
c) It must be a
• State Cooperative Bank
• Company under Indian Companies Act 1956.
• An institution notified by the Central Government in this
behalf.
• Corporation or a company incorporated by or under any law in
force in any place outside India.
Powers of RBI
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6. Central clearance and accounts settlement: - Since commercial banks
have their surplus cash reserves deposited in the Reserve Bank. It is now
easier to deal with each commercial bank separately and settle the claims of
each bank on the other through book keeping entries in the books of the
RBI.
A) Quantitative Measures
1) Bank Rate Policy: - When a commercial bank invests all of its available
funds or when its cash reserves tend to fall below the legal minimum
requirement, it may obtain additional cash from the central bank. The
commercial bank either rediscounts some of its eligible bills with the central
bank or it may borrow cash from RBI against eligible securities. For this
service the Central Bank charges at a rate, which is called Bank Rate or
Discount Rate.
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Assumptions
Limitations
• Relation between bank rate and interest rate sometimes may not exist.
• Non-Existence of eligible bills.
• Practice of rediscounting.
• No direct relation between interest rate and investment.
Conclusion
4) Open Market Operations: - This policy refers to sale and purchase of the
securities by the RBI to the commercial banks. A sale of security to the
commercial bank results in a fall in the total cash reserves. With reduced
cash reserves, the commercial bank can only create lower volume of credit.
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Uses
Limitations
It may not be useful to control deflation and bring about business revival
because during the period of recession and falling prices, the bank will not
expand credit deposit and keep higher cash reserves.
B) Qualitative Measures
1) Margin Requirements: - The commercial banks generally advance loans
to their customers against some securities. The commercial banks do not
plan up to the full amount of the security. The RBI determines the margin
requirements against specific securities. A rise in the margin requirements
results in the contraction in the borrowing value of the security.
4) Moral Suasion: - This policy will succeed only if the RBI is strong
enough to influence the commercial banks. In India, from 1949, the RBI
uses this method to bring the commercial banks fall in line with its policies
regarding credit control.
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BANKING REGULATION ACT 1949
This act as amended up to date contains the following 5 parts.
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2. Minimum Capital Requirement
The Act describes minimum capital requirements for Banking Companies.
Banking Company incorporated outside India is required to have its paid up
capital and reserves not less than Rs. 15 lacs. But if it has a place of business
in the city of Bombay or Calcutta, it is required to have its paid up capital
and reserves not less than Rs. 20 lacs. It is also required to deposit with the
RBI at the end of each calendar year 20% of its profits earned in India. On
the other hand Banking Company within India has paid up capital and
reserves of Rs. 5 lacs, if it has business in more than one state, then Rs. 10
lacs. The subscribed capital of Banking Company should not be less than
one half of its authorized capital and the paid up capital should not be less
than one half of the subscribed capital.
4. Reserve Fund
Every Banking Company incorporated in India is required to create a reserve
fund and transfer to such fund, before any dividend is declared, 20% of its
profit.
5. Cash Reserve
Every scheduled bank is required to keep minimum 3% of the total of its
time and demand liabilities with the RBI as cash reserve, which is interest
free. But a non- scheduled bank has to maintain its cash reserves either
i. With itself.
ii. In any current account opened with RBI or any bank notified by the
government.
iii. Partly in cash with itself and partly in such an account.
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6. Maintenance of Liquid Assets
Section 24 of the Act lays down minimum limit in this regard. Every
Banking Company is required to maintain in India, cash, gold or approved
securities and amount which should not, at the close of business on any day,
be less than 25% of the total of its demand and time liabilities in India. This
is also called Statutory Liquidity Ratio (SLR). RBI is empowered to set up
this ratio up to 40%.
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9. Opening of New Branches
a) According to Section 23 of the Act, every banking company should have
obtained prior permission from the RBI for opening a new place of business.
b) The consent of RBI is not necessary when the Banking Company changes
place for a time period not exceeding 6 months.
c) The RBI grants permission if the capital structure is adequate and the
earning prospect of the branch is good.
d) The RBI may also grant conditional license in case the permission is
revoked.
New Licensing Policy: - Till 1995, all commercial banks were permitted to
open a new branch only after getting prior approval from RBI. In 1995, this
policy was reversed. As per the new policy, banks with good financial health
need not take permission from the RBI. But now this policy again has been
reversed and according to Section 23, full freedom cannot be given to profit
making banks to open new branches.
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Additional powers: - The RBI may require any Banking Company to call a
meeting of its directors to discuss any affair of the company.
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16. Miscellaneous Provisions
Under Section 46, the Act deals with penalties for the following: -
ACTIVITY PENALTY
Submitting false return Imprisonment for 3 years plus fine.
Failure to furnish documents during Rs. 2000, and Rs. 100 per day of
inspection delay.
Receiving deposit in contravention. 2 times the amount received.
Failure to fulfill with the provisions Rs. 2000.
of the Act.
Default is committed by a Company Every person who is responsible to
the Company shall be deemed for the
default.
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