DAMODARAM SANJIVAYYA NATIONAL LAW

UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE

LEGAL CONTROL OVER BANK’S DEPLOYMENT OF FUNDS

SUBJECT

LAW RELATING TO BANKING AND NI

NAME OF THE FACULTY

P Bayola Kiran

SUBHASMITA PRIYADARSANI
 Roll No. -2018089

6th Semester

ACKNOWELGEMENT

I would like to express my special thanks of gratitude to my Law relating to Banking and
NI teacher PROF. P Bayola Kiran who gave me the golden opportunity to do this wonderful
project on the topic Legal control over bank’s deployment of funds , which also helped me
in doing a lot of research and I came to know about so many new things I am really thankful
to him.
 TABLE OF CONTENTS

1. LEGAL CONTROL OVER BANK’S DEPLOYMENT OF FUNDS

2. LIMITS ON BANKS’ EXPOSURE TO CAPITAL MARKETS

3. LICENCE FOR BANKING

4. PERMITTED BUSINESS

5. PROHIBITED BUSINESS

6. RESERVE BANK OF INDIA ACT

7. BANKING REGULATION ACT

8. RESERVE BANK AS CENTRAL BANK AND REGULATOR OF BANKS

9. GOVERNMENT AS A REGULATOR OF BANKS

10. CONTROL OVER CO-OPERATIVE BANKS

11. REGULATION BY OTHER AUTHORITIES

12. REGULATION OF CYPTOCURRENCY BY RBI

 LEGAL CONTROL OVER BANK’S DEPLOYMENT OF FUNDS

The Reserve Bank of India has prescribed credit exposure norms for banks to follow in order
to avoid excessive concentration of credit among a few borrowers and to keep risk potential
within limits. The ceiling limits within which a bank may grant loans, advances, and non-
fund-based facilities to a single borrower or a group of borrowers are known as exposure
norms. Credit exposure (funded and non-funded credit limits) and investment exposure are
both included (including underwriting and similar commitments) Ceilings for Individual and
Group Borrowers

- In the case of a single borrower, the exposure ceiling limits would be 15% of capital
funds and 40Lesson 6 Loans and Advance 191 percent of capital funds in the case of a
borrower group.
- Tier I and Tier II capital, as defined by capital adequacy standards, will be used to
finance the project.Tier I and Tier II capital will be used for this purpose, as defined
by capital adequacy standards and as reported in the previous year's published
accounts as of March 31.
- Credit exposure to a single borrower may exceed the exposure norm of 15% of the
bank's capital funds by an additional 5% (i.e. up to 20%) if the additional credit
exposure is due to credit extensions to infrastructure projects.
- Credit exposure to borrowers in a group may exceed the 40 percent exposure norm
(i.e., up to 50 percent) if the additional credit exposure is due to the extension of
credit to infrastructure projects.
- In addition to the exposure permitted above, banks may consider increasing their
exposure to a borrower (individual or group) up to 5% of capital funds in exceptional
circumstances, with the approval of their Boards, provided that the borrower consents
to the banks making appropriate disclosures in their Annual Reports.
- In the ‘Notes on account' to the annual financial statements, the bank should make
appropriate disclosures regarding exposures where the bank had exceeded the
prudential exposure limits during the year.
Limits on Banks’ Exposure to Capital Markets

Statutory limit on shareholding in companies

Except as provided in “sub-section (1) of Section 19 of the Act, no banking company shall
hold shares in any company in an amount exceeding 30 percent of the paid-up share capital of
that company or 30 percent of its own paid-up share capital and reserves, whichever is less,
under Section 19(2) of the Banking Regulation Act, 1949.This is a total holding limit for each
business. These statutory provisions should be strictly followed when granting any advance
against shares, underwriting any issue of shares, or acquiring any shares on an investment
account or even in lieu of debt” of any company.

Definition of Banking:

Section 5(b) of the Banking “Regulation Act defines banking as "the acceptance of money
deposits from the public for the purpose of lending or investment." Deposits may be repaid
on demand or in other ways, and withdrawals may be made by check, “draught, order, or
other means. As a result, a bank must perform two critical functions: accepting public
deposits and lending or investing those deposits. Deposits may be repaid immediately or over
a set period of time agreed upon by the banker and the customer. The banker is only allowed
to” accept "deposits" of money, according to the definition. Accepting deposits from the
"public" also implies that a banker will accept money from anyone who offers it for that
purpose. However, a banker has the discretion to refuse to open accounts for undesirable
individuals, and account opening is subject to certain conditions, such as proper introduction”
and identification.

The Reserve Bank's "Know Your Customer" guidelines require “banks to follow certain
customer identification procedures when opening accounts in order to protect themselves
from frauds and other financial crimes, as well as to monitor suspicious transactions for the
purpose of reporting to appropriate authorities and taking anti-money laundering and counter-
terrorism measures. In English common law, there is no comprehensive definition of”
banking.

Deposits Withdrawable by Cheque:

No organisation other than a bank is allowed to accept deposits that can be withdrawn by
check under Section 49 A of the Banking Regulation Act. This prohibition does not apply to
the government-run Savings Bank Scheme, a Primary Credit Society, or any other person or
firm notified by the government.

Acceptance of Deposits by Non-banking Entities:

Non-banking companies, firms, and other “unincorporated associations of persons and

individuals accept public deposits as well. The Reserve Bank of India regulates the
acceptance of deposits by non-banking financial companies under the Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998, and other
Reserve Bank of India directives issued under Chapter IIIB of the Reserve Bank of India Act.
Other businesses are governed by the Companies (Acceptance of Deposit) Rules, 1975,
which were enacted under Section 58A of the Companies Act 1956Individuals, firms, and
other unincorporated associations of persons whose business includes the business of a
financial institution or whose principal business is the acceptance of deposits are prohibited
from accepting deposits from the public, except relatives, under Section 45S of the RBI Act
(as amended in 1997) This prohibition does not apply to those who accept deposits for” the
primary purpose of manufacturing or trading.

Licence for Banking:

In India, starting or carrying on a banking business “requires obtaining a licence from the
Reserve Bank under Section 22 of the Banking Regulation Act. Every banking company”
must include the word "bank" in its name1, and no other company can include the words
"bank," "banker," or "banking" in its name. Furthermore, no firm, individual, or group of
individuals may use the words "bank," "banking," or "banking company" in their name or for
business purposes. Bank subsidiaries and bank associations, as well as Primary Credit
Societies, are exempt from this restriction in some cases.

Permitted Business:

Although banks' main business has traditionally been deposit acceptance and lending, they
have now expanded their wings to include a wide range of allied and even unrelated
activities. Apart from banking, the following types of business are permitted under Section
6(1) of the Banking Regulation Act:

(a) (i)Borrowing, raising, or taking up funds;

(ii) Lending or advancing funds, whether with or without security;

1 Section 7, Banking Regulation Act

 (iii) Drawing, making, accepting, discounting, buying, selling, collecting and dealing
in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway
receipts, warrants, debentures, certificates, scrips and other instruments and securities
whether transferable or negotiable or not;
(iv) Granting and issuing of letters of credit, travellers cheques and circular notes;
(v) Buying, selling, and dealing in bullion and specie;

Prohibited Business:

A banking company “is “prohibited from directly or indirectly engaging in trading activities
or taking trading risks under Section 8 of the Banking Regulation Act. It is illegal to buy, sell,
or barter goods directly or indirectly. This, however, has no bearing on the activities
permitted under Section 6(1) of the Act. As a result, if the need arises for the repayment of a
loan, a bank can realise the securities given to it or held by it. It can also buy, sell, or barter
for others in the following situations: (i) receiving bills of exchange for collection or
negotiation, and (ii) administering estates as executor, trustee, and so on. For the purposes of
this Section, "goods" includes all moveable property other than actionable claims, stocks,
shares, money, bullion, and specie, as well as all instruments referred” to in Clause (a) of sub
Section (1) of Section 6.

In the case of immovable “properties, Section 9 prohibits a banking company from holding
such property, however acquired, for more than seven years from the date of acquisition,
unless it is required for its own use. The Reserve Bank may extend this period by another five
years if it determines that it is in the best interests of the banking company's depositors. The
banking company will be required to sell the property within the time frame allowed.”

RESERVE BANK OF INDIA ACT

The Reserve Bank's constitution, powers, and functions are all covered by the Act. Except for
Section 42, which requires scheduled banks to keep cash reserves with the Reserve Bank in
order to regulate “the credit system and ensure monetary stability, it does not directly deal
with banking system regulation. Furthermore, Section 18 of the Act allows for direct
discounting of bills of exchange and promissory notes when a special occasion arises, making
it necessary or expedient to regulate credit in the interests of trade, industry, and”
agriculture.The Act, in short, deals with:

(i) the bank's incorporation, capital, management, and business;

 (ii) central banking functions such as issuing bank notes, monetary control, acting as a
banker to the government and banks, and lending as a lender of last resort;
(iii) credit information collection and furnishing;
(iv) deposit acceptance by non-banking financial institutions; and
(v) general provisions regarding reserve funds, credit funds, and public debt.

BANKING REGULATION ACT

Section 22 of the Act regulates entry into the banking business through licencing. The Act
also places “restrictions on banking companies' shareholding, directorship, voting rights, and
other aspects. The Act contains several provisions that regulate the banking industry,
including restrictions on loans and advances, interest rates to be charged, cash reserve
requirements, and asset percentage maintenance, among others. There are provisions for
auditing and inspecting balance sheets and accounts, as well as submitting balance sheets and
accounts. The Act establishes a framework for controlling the management of banking
companies, as well as the procedure for winding up a bank's operations and penalties for
violation of” its provisions. In short, the Act deals with:

(a) banking company business regulation;

(b) banking company management control;
(c) banking company suspension and winding up; and
(d) penalties for violations of the Act's provisions.
 RESERVE BANK AS CENTRAL BANK AND REGULATOR OF BANKS

The Reserve Bank of India was “established under Section 3 of the Reserve Bank of India
Act, 1934, to take over currency management from the Central Government and to carry on
banking business in accordance with the Act's provisions. Originally, under” the RBI Act, the
Bank had the responsibility of:

(a) regulating the issue of bank notes;

(b) keeping of reserves for ensuring monetary stability; and

(c) generally, to operate the currency and credit system of the country to its advantage.

Under Section 22 of the RBI Act, the “Reserve Bank is the sole authority for currency issue
and management in India. The bank may issue notes in various denominations ranging from
Rs. 2 to Rs. 10,000, depending on what the Central Government decides based on the bank's
recommendations. These notes will be accepted as legal tender in India. Section 20 of the Act
designates the bank as the Central Government's banker, and it is therefore required to
conduct banking business for the government. In the case of state governments, the bank
handles their banking business under the terms of Section 21 A agreements. The Bank
provides Central and State governments with financing options. When there is a gap between
expenditure and revenue flow, these are temporary” advances to meet immediate needs.

The Banking Regulation Act of 1949 primarily “defines the role of the bank as a regulator of
the banking sector. The bank regulates the entry into banking business through licencing,
exercises control over shareholding and voting rights of shareholders, exercises controls over
managerial persons, and regulates the business of banks in the exercise of its powers under
that Act. The bank also inspects banks and exercises supervisory powers, and it has the
authority to issue directives on interest rates, lending limits, investments, and other matters in
the public interest and in the best” interests of the banking system.

The major powers of the Reserve Bank in the different roles as regulator and supervisor can
be summed up as under:

(a) power to licence:

(b) power of appointment and removal of banking boards/personnel;

(c) power to regulate the business of banks;

(d) power to give directions;

(e) power to inspect and supervise banks;

(f) power regarding audit of banks;

(g) power to collect, collate and furnish credit information;

(h) power relating to moratorium, amalgamation and winding up; and

(i) power to impose penalties.

GOVERNMENT AS A REGULATOR OF BANKS

Banks are primarily regulated by the Reserve Bank. However, the “RBI Act and the BR Act
have given the Central Government extensive powers over banks, either directly or indirectly.
The government owns the Reserve Bank's entire capital, appoints the Governor and members
of the Central Board, and has the authority to fire them. After consulting with the Governor,
the government can also issue directions to the Reserve Bank under Section 7(I) of the RBI
Act whenever it is deemed necessary in the public interest. Thus, the government can exert
control over banks by influencing Reserve Bank decision-making, and it also has appellate
authority in a number of cases where the Reserve Bank has been given the authority to decide
in the first instance. Thus, under Sections 10B and 36AA of the Banking Regulation Act, the
Central Government has the right to appeal the removal of managerial personnel. There are
also appeal provisions for the cancellation of a banking licence2 and the refusal of a
certificate for” a floating charge on assets.3

On the representation/recommendation of the “Reserve Bank, the government has the power
to suspend the Banking Regulation Act's operations or to grant an exemption from any of the
Act's provisions under Sections 4 and 53 of the Act, respectively. Under Section 6(1 )(o) of
the Act, the government also has the authority to notify other types of business that a bank
may engage in. The Central Government has rule-making authority under” Sections 52 and
45. There are also other provisions under which the Central Government exercises powers as
under:

(a) Approval for formation of subsidiary for certain business under Section 19;

(b) Notification with reference to accounts and balance sheet under Section 29;

2 Section 22 of Banking Regulation Act.

3 Section 14A of Banking Regulation Act
(c) Issue of direction for inspection of banks under Section 35;

(d) Power to acquire undertakings of banks (Section 36AE);

(e) Appointment of court liquidator;

(f) Suspension of business and amalgamation of banks under Section 45.

The above provisions give the Central Government broad regulatory powers over banks.
These powers are in addition to those granted to the government as majority shareholder or
full owner of public sector banks by the statutes that established them.
 CONTROL OVER CO-OPERATIVE BANKS

The Multi-State Co-operative Societies Act, 2002, applies to co-operative “banks that operate
in multiple states. In such cases, the Registrar appointed by the Central Government replaces
the Registrar appointed by the State Government. Cooperative banks are now regulated by
the Reserve Bank, thanks to Section 56 of the Banking Regulation Act of 1949, which went
into effect in 1965. While the State Government is responsible for the formation and
management of co-operative societies that operate in a single state (including those that
conduct banking business), the Reserve Bank is responsible for the licencing and regulation
of banking businesses. As a result, these banks are under the control of both state
governments and the Reserve Bank. The Reserve Bank has the authority to order the winding
up of co-operative banks that are registered under the Deposit Insurance and Credit
Guarantee Corporation Act. Section 13D of the Act specifies” the circumstances in which the
Reserve Bank may be required to be wound up.

REGULATION BY OTHER AUTHORITIES

Banks may engage in certain non-banking activities in addition to “their banking activities, as
stated in Section 6 of the Banking Regulation Act. Banks may also be subject to regulatory
oversight from other agencies in this regard. Banks, for example, are regulated by the
Securities Exchange Board of India under the Securities Contract (Regulation) Act, 1956, as
amended by the Securities and Exchange Board of India Act, 1992, when dealing in securities
such as shares and debentures. The Bank must follow SEBI guidelines if it wishes to raise
capital through a public offering. In the case of insurance, the IRDA is in charge, and in the
case of mutual funds, the RBI and SEBI” are in charge.

REGULATION OF CYPTOCURRENCY BY RBI

“The Reserve Bank of India is concerned that cryptocurrencies may impact financial stability
in Asia’s third-largest economy, a view that could shape looming regulations on the asset
that is breaking price-records around the world. 4 It had banned banks and other regulated
entities from supporting crypto transactions in 2018 after digital currencies were used for
fraud following Modi’s landmark demonetization program that replaced India’s cash with
new bills. The Supreme Court cut the curbs last year in response to a petition by
cryptocurrency exchanges.”

CONCLUSION

4 India’s Central Bank Voices ‘Major Concerns’ About Crypto, Suvashree

Ghosh,.https://www.bloombergquint.com/economy-finance/india-s-central-bank-says-it-has-major-concerns-
about-crypto.
Accepting money deposits from the public for “lending or investment is referred to as
banking. Such deposits may be repaid on demand or for a specified period of time, as agreed
between the banker and the customer, and may be repaid by check, draught, or other means.
According to Section 6 of the Banking Regulation Act, banks are permitted to engage in other
business besides banking. Banks, on the other hand, are prohibited from engaging in any
trading activities. Companies incorporated under the Companies Act, 1956, statutory
corporations incorporated under Special Statutes, and co-operative societies incorporated
under the Central or State Co-operative Societies Acts are all examples of banks. The extent
to which the regulatory provisions of the Banking Regulation Act and the Reserve Bank of
India Act apply to a bank is” determined by the bank's constitution.

The Reserve Bank of India is the country's central bank and the “banking sector's primary
regulator. Banks are under direct and indirect government control. It can exercise indirect
control through the Reserve Bank and act directly in appeals arising from Reserve Bank
decisions under the Banking Regulation Act's various provisions. The Central Government
owns 50% or more of the shares in public sector banks like the State Bank of India and its
subsidiaries, nationalised banks, and regional rural banks. The management of these banks is
largely under the control of the central government. Only certain provisions of the BR Act, as
specified in that Act, apply to these banks. Cooperative banks that operate in a single state are
governed by the State Co-operative Societies Act and are overseen by both the state
government and the Reserve Bank. Other regulatory agencies are in charge of the” banks'
non-banking activities.