LEGAL & REGULATORY ASPECTS OF BANKING

MODULE A. REGULATIONS &COMPLIANCE

The questions in this section will be with reference to legal issues and problems.
A.Provisions of RBI Act 1935, Banking Regulation Act 1949, Banking Companies [Acquisition and Transfer of
Undertakings Act 1970 & 1980].
B. Government and RBIs Powers:
Opening of New Banks and Branch Licensing
Constitution of Board of Directors and their Rights
Banks Shareholders and their Rights
CRR/SLR Concepts
Cash/Currency Management
Winding Up - Amalgamation and Mergers
Powers to Control Advances - Selective Credit Control - Monetary and Credit Policy
Audit and Inspection
Supervision and Control-Board for Financial Supervision - Its Scope and Role
Disclosure of Accounts and Balance Sheets
Submission of Returns to RBI, etc.
Corporate Governance
MODULE B - LEGAL ASPECTS OF BANKING OPERATIONS
Case Laws on Responsibility of Paying/Collecting Banker
Indemnities/Guarantees
Scope and Application
Obligations of a Banker
Precautions and Rights
Laws Relating to Bill Finance, LC and Deferred Payments
Laws Relating to Securities
Valuation of Securities - Modes of Charging Securities - Lien, Pledge, Mortgage, Hypothecation, etc.
Registration of Firms/Companies
Creation of Charge and Satisfaction of Charge
MODULE C - BANKING RELATED LAWS
Law of Limitation
Provisions of Bankers Book Evidence Act
Special Features of Recovery of Debts Due to Banks and Financial Institutions Act, 1993
TDS and Service Tax
Banking Cash Transaction Tax

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 Asset Reconstruction Companies
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
The Consumer Protection Act, 1986
Banking Ombudsman 2006
LokAdalats
Lender's Liability Act
MODULE D - COMMERCIAL LAWS WITH REFERENCE TO BANKING OPERATIONS
Indian Contract Act, 1872 (Indemnity, Guarantee, Bailment, Pledge and Agency, etc.)
The Sale of Goods Act, 1930 (Sale and Agreement to Sell, Definitions, Conditions and Warranties, Express and
Implied, Right of Unpaid Seller, etc.)
The Companies Act, 1956, Definition, Features of Company, Types of Companies, Memorandum, Articles of
Association, Doctrines of Ultra Vires, Indoor Management and Constructive Notice, Membership of Company -
Acquisition - Cessation, Rights and Duties of Members and Register of Members, Prospectus and Directors.
Indian Partnership Act, 1932, Definition and Types of Partnership, Relation of Partners to One Another-
Relation of Partners to Third Parties, Minor Admitted to the Benefits of Partnership, Dissolution of Firm, Effect
of Non-Registration
The Transfer of Property Act
Foreign Exchange Management Act, 2000
Prevention of Money Laundering Act, 2002
Right to Information Act, 2005
Information Technology Act, 2000

CONTENTS
MODULE A - REGULATIONS AND COMPLIANCE
1. Legal Framework of Regulation of Banks
2. Control Over Organisation of Banks
3. Regulation of Banking Business
4. Returns, Inspection, Winding Up
5. Public Sector Banks and Co-operative Banks

MODULE B - LEGAL ASPECTS OF BANKING OPERATIONS

6. Case Laws on Responsibility of Paying Bank
7. Case Laws on Responsibility of Collecting Bank
8. Indemnities
9. Bank Guarantees

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 10. Letters of Credit
11. Deferred Payment Guarantee
12. Laws Relating to Bill Finance
13. Various Types of Securities
14. Law Relating to Securities and Modes of Charging -1
15. Law Relating to Securities and Modes of Charging - II
16. Different Types of Borrowers
17. Types of Credit Facilities
18. Secured and Unsecured Loans, Registration of Firms, Incorporation of Companies
19. Registration and Satisfaction of Charges

MODULE C - BANKING RELATED LAWS

SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST, 2002 (SARFAESI ACT)
20. Introduction to SARFAESI Act, 2002
21. Definitions at SARFAESI Act, 2002
22. Regulation of Securitisation and Reconstruction of Financial Assets of Banks and Financial Institutions
23. Enforcement of Security Interest
24. Central Registry
25. Offenses and Penalties
26. Miscellaneous Provisions
THE BANKING OMBUDSMAN SCHEME, 2006
27. Purpose, Extent, Definitions, Establishment and Powers
28. Procedure for Redressal of Grievances
RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 (DRTACT)
29. Preliminary
30. Establishment of Tribunal and Appellate Tribunal
31. Jurisdiction, Powers and Authority of Tribunals
32. Procedure of Tribunals
33. Recovery of Debts Determined by Tribunal and Miscellaneous Provisions
THE BANKERS' BOOKS EVIDENCE ACT, 1891
34. The Bankers' Books Evidence Act, 1891
THE LEGAL SERVICES AUTHORITIES ACT, 1987
35. Lok Adalats
THE CONSUMER PROTECTION ACT, 1987
36. Preliminary, Extent and Definitions
37. Consumer Protection Councils
38. Consumer Disputes Redressal Agencies

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 THE LAW OF LIMITATION
39. Limitations of Suits, Appeals and Applications
TAX LAWS
40. Income Tax, Banking Cash, Transaction Tax, Fringe Benefit Tax and Service Tax

MODULE D - COMMERCIAL LAWS WITH REFERENCE TO BANKING OPERATIONS

41. Meaning and Essentials of a Contract
42. Contracts of Indemnity
43. Contracts of Guarantee
44. Contract of Bailment
45. Contract of Pledge
46. Contract of Agency
47. Meaning and Essentials of a Contract of Sale
48. Conditions and Warranties
49. Unpaid Seller
50. Definition, Meaning and Nature of Partnership
51. Relations of Partners to One Another
52. Relations of Partners to Third Parties
53. Minor Admitted to the Benefits of Partnership
54. Dissolution of a Firm
55. Effect of Non-Registration
56. Definition and Features of a Company
57. Types of Companies
58. Memorandum of Association and Articles of Association
59. Doctrines of Ultra Vires/Constructive Notice/Indoor Management
60. Membership
61. Prospectus
62. Directors
63. Foreign Exchange Management Act, 1999
64. Transfer of Property Act, 1882
65. The Right to Information Act, 2005
66. Right to Information and Obligations of Public Authorities
67. The Prevention of Money Laundering Act, 2002
68. Information Technology Act, 2000

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 MODULE-A REGULATIONS AND COMPLIANCE
Unit 1. Legal Framework of Regulation of Banks
Unit 2. Control over Organisation of Banks
Unit 3. Regulation of Banking Business
Unit 4. Returns, Inspection, Winding Up
Unit 5. Public Sector Banks and Co-operative Banks

UNIT 1: LEGAL FRAMEWORK OF REGULATION OF BANKS

STRUCTURE
1.0 Objectives
1.1 Introduction
1.2 Business of Banking
1.3 Constitution of Banks
1.4 Reserve Bank of India Act, 1934
1.5 Banking Regulation Act, 1949
1.6 Reserve Bank as Central Bank and Regulator of Banks
1.7 Government as a Regulator of Banks
1.8 Control Over Co-operative Banks
1.9 Regulation by Other Authorities
1.10 Let Us Sum Up
1.0 OBJECTIVES
The objectives of this Unit are to understand:
The definition and nature of the business of banking;
The constitution of different types of banks;
The regulatory scheme of the rbi act and the br act;
The role of the reserve bank and the central government as regulators; and
The special position of public sector banks and co-operative banks.

1.1 INTRODUCTION
Banking in India is mainly governed by the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934. The
Reserve Bank of India and the Government of India exercise control over banks from the opening of banks to their winding
up by virtue of the powers conferred under these statutes.
All the regulatory provisions are not uniformly applicable to all banks. The applicability of the provisions of these Acts to a
bank depends on its constitution; that is, whether it is a statutory corporation, a banking company or a co-operative society.
In this unit, we look at the definition of banking, the constitution of different types of banks and applicability of regulatory
laws, the general framework of the regulatory laws and the role of regulators namely, the Reserve Bank of India and the
government.

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1.2 BUSINESS OF BANKING
I. Definition of Banking: Banking is defined in Section 5(b) of the Banking Regulation Act as the acceptance of
deposits of money from the public for the purpose of lending or investment. Such deposits may be repayable on
demand or otherwise and withdrawable by cheque, draft, order or otherwise. Thus, a bank must perform two
essential functions: i) acceptance of public deposits, and ii) lending or investment of such deposits. The deposits
may be repayable on demand or for a period of time as agreed by the banker and the customer. In terms of the
definition, the banker can accept "deposits" of money and not anything else. Further, accepting deposits from the
"public" implies that a banker accepts deposits from anyone who offers money for such purpose. However, a banker
can refuse to open account for undesirable persons and further, the opening of accounts is subject to certain
conditions like proper introduction and identification.
The "Know Your Customer" guidelines issued by the Reserve Bank require banks to follow certain customer
identification procedure for opening of accounts for protecting the banks from frauds, etc., and also for monitoring
transactions of a suspicious nature for the purpose of reporting to appropriate authorities for taking anti-money
laundering measurers and combating financing of terrorism.There is no exhaustive definition of "banking" in
Common Law of England. However, the usual characteristics of banking as identified by Lord Denning MR in
United Dominions Trust Ltd. vs Kirkwood ([1966] 1 All ER 968 at 975) are:
a) the conduct of current accounts;
b) the payment of cheques; and
c) the collection of cheques for customers.
These characteristics are not equivalent to a definition, and these are also not the only characteristics. (See, Paget's
Law of Banking, 12th Edn., pp. 107 to 109)
II. Deposits Withdrawable by Cheque: Under Section 49A of the Banking Regulation Act, no organisation other than
a bank is authorised to accept deposits withdrawable by cheque. The Savings Bank Scheme run by the government,
a Primary credit society and any other person or firm notified by the government are exempted from this
prohibition.
III. Acceptance of Deposits by Non-banking Entities: There are also non-banking companies, firms and other
unincorporated associations of persons and individuals who accept deposits from the public. Acceptance of deposits
by non-banking financial companies is regulated by the Reserve Bank under the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and other directions issued by it under Chapter IIIB
of the Reserve Bank of India Act. Other companies are regulated by the Central Government under the Companies
(Acceptance of Deposit) Rules, 1975 issued under Section 58A of the Companies Act, 1956. Individuals, firms and
other unincorporated associations of persons whose business includes the business of a financial institution or
whose principal business is acceptance of deposits, is prohibited under Section 45S of the RBI Act (as amended in
1997) from accepting deposits from the public, except relatives. This prohibition does not apply to acceptance of
deposits by those who are mainly engaged in manufacturing or trading.
IV. Licence for Banking: In India, it is necessary to have a licence from the Reserve Bank under Section 22 of the
Banking Regulation Act for commencing or carrying on the business of banking. Every banking company has to use

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 the word "bank" as part of its name (See, Section 7 of the Act) and no company other than a banking company can
use the words "bank", "banker", "banking" as part of its name. Further, no firm, individual or group of individuals is
permitted to use the words "bank", "banking" or "banking company" as a part of the name or for the purpose of
business. Subsidiaries of banks and association of banks in certain cases as also Primary Credit Societies are
exempted from this restriction.
V. Permitted Business: Although, traditionally, the main business of banks is acceptance of deposits and lending, the
banks have now spread their wings far and wide into many allied and even unrelated activities. The forms of
business permissible under Section 6(1) of the Banking Regulation Act, apart from banking business, are
summarised below:
(a)
1. (Borrowing, raising or taking up of money;
2. Lending or advancing of money either upon security or without security;
3. 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;
4. Granting and issuing of letters of credit, travellers' cheques and circular notes;
5. Buying, selling and dealing in bullion and specie;
6. Buying and selling of foreign exchange including foreign bank notes;
7. Acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures,
debenture stock, bonds, obligations, securities and investments of all kinds;
8. Purchasing and selling of bonds, scrips and other forms of securities on behalf of constituents or others;
9. Negotiating of loans and advances;
10. Receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise;
11. Providing of safe deposit vaults; and
12. Collecting and transmitting of money and securities.
(b)
(c) Contracting for public and private loans and negotiating and issuing the same.
(d) Insure, guarantee, underwrite, participate in managing and carrying out any issue of state, municipal or other
loans or of shares, stock, debentures or debenture stock of companies and lend money for the purpose of any
such issue.
(e) Carry on and transact every kind of guarantee and indemnity business.
(f) Manage, sell and realise any property which may come into its possession in satisfaction of any of its claims.
(g) Acquire, hold and deal with any property or any right, title or interest in any such property which may form the
security for any loan or advance.
(h) Undertake and execute trusts.
(i) Undertake the administration of estates as executor, trustee or otherwise.
(j) Establish, support and aid associations, institutions, funds, trusts, etc., for the benefit of its present or ex-
employees; grant money for charitable purposes,

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 (k) Acquire, construct and maintain any building for its own purpose.
(l) Sell, improve, manage, develop, exchange, lease, mortgage, dispose of or turn into account or otherwise deal
with all or any part of the business of any person or company, when such business is of a nature described in
Section 6.
(m) Acquire and undertake the whole or any part of the business of any person or company, when such business is
of a nature described in Section 6.
(n) Do all such things which are incidental or conducive to the promotion or advancement of the business of the
company,
(o) Do any other business specified by the Central Government as the lawful business of a banking company. The
Central Government has accordingly specified leasing and factoring as permissible business for banks.
VI. Prohibited Business: Section 8 of the Banking Regulation Act prohibits a banking company from engaging directly
or indirectly in trading activities and undertaking trading risks. Buying or selling or bartering of goods directly or
indirectly is prohibited. However, this is without prejudice to the business permitted under Section 6(1) of the Act.
Accordingly, a bank can realise the securities given to it or held by it for a loan, if need arises for the realisation of
the amount lent. It can also buy or sell or barter for others in connection with: (i) bills of exchange received for
collection or negotiation, and (ii) undertaking the administration of estates as executor, trustee, etc. Goods for the
purpose of this Section means every kind of moveable property, other than actionable claims, stocks, shares, money,
bullion and specie and all instruments referred to in Clause (a) of sub-Section (1) of Section 6.
As regards immoveable properties, Section 9 prohibits a banking company from holding such property, howsoever acquired,
except as is required for its own use, for a period exceeding seven years from the acquisition of the property. The Reserve
Bank may extend this period by another five years, if it is satisfied that such extension would be in the interest of the
depositors of the banking company. The banking company shall be required to dispose of such property within the permitted
period.

1.3 CONSTITUTION OF BANKS

I. Banks in India fall under one of the following categories:

(a) Body corporate constituted under a special statute;
(b) Company registered under the Companies Act, 1956 or a foreign company;
(c) Co-operative society registered under a central or state enactment on co-operative societies.
II. Public Sector Banks: The public sector banks including nationalised banks, State Bank of India and its associates
(subsidiaries) and the Regional Rural Banks fall in the first category. By the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act,
1980 the Central Government nationalised (took over the business undertakings) of certain banking companies and
vested them in newly created statutory bodies (corresponding new banks) constituted under Section 3 of the
1970/1980 Act. The State Bank of India was constituted under the State Bank of India Act, 1955 and the six
associate/subsidiary banks were constituted under the State Bank (Subsidiary Banks) Act, 1959 or other statutes
(See Para 5.2.6). The regional rural banks are constituted under the Regional Rural Banks Act, 1976. These banks
are governed by the statutes creating them as also some of the provisions of the Banking Regulation Act and the

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 Reserve Bank of India Act. The details are discussed in Unit 5.
III. Banking Companies: A banking company, as defined in Section 5(c) of the Banking Regulation Act is a company
which transacts the business of banking. Such company may be a company constituted under Section 3 of the
Companies Act or a foreign company within the meaning of Section 591 of that Act. All the private sector banks are
banking companies. These banks are governed by the Companies Act, 1956 in respect of their constitution and by
the Banking Regulation Act and the RBI Act with regard to their business of banking.
IV. Co-operative Banks: A co-operative bank is a co-operative society registered or deemed to have been registered
under any Central Act for the time being in force relating to the multi-state co-operative societies, or any other
central or state law relating to co-operative societies for the time being in force. If a co-operative bank is operating
in more than one state, the Central Act applies. In other cases, the state laws apply. The Banking Laws (Application
to Co-operative Societies) Act, 1965 extended certain provisions of the Banking Regulation Act and the Reserve
Bank of India Act to the co-operative banking sector. After the Supreme Court held in Apex Cooperative Bank's
case (AI R 2004 SC 141) that multi-state co-operative societies cannot be licensed as co-operative banks, the
Banking Regulation (Amendment) and Miscellaneous Provisions Act, 2004 was enacted to permit licensing of
multi-state co-operative banks. A "multi-state cooperative bank" under this Act means a multi-state co-operative
society which is a primary co-operative bank.

1.4 RESERVE BANK OF INDIA ACT, 1934

I. The Reserve Bank of India Act, 1934 was enacted to constitute the Reserve Bank of India: (i) to regulate the issue
of bank notes, (ii) for keeping reserves for securing monetary stability in India, and (iii) to operate the currency and
credit system of the country to its advantage. The Act came into force on 6th March 1934. The Act has been
amended from time to time to meet the demands of changing times. The last amendment to the Act was effected by
the RBI (Amendment) Act, 2006.
II. The Act deals with the constitution, powers and functions of the Reserve Bank. It does not directly deal with
regulation of the banking system except for Section 42, which provides for cash reserves of scheduled banks to be
kept with the Reserve Bank, with a view to regulating the credit system and ensuring monetary stability. Further,
Section 18 of the Act provides for direct discount of bills of exchange and promissory notes when a special occasion
arises, making it necessary or expedient for the purpose of regulating credit in the interests of trade, industry and
agriculture. The Act, in short, deals with:
(a) Incorporation, capital, management and business of the bank:
(b) The central banking functions like issue of bank notes, monetary control, acting as banker to government and
banks, lender of last resort;
(c) Collection and furnishing of credit information;
(d) Acceptance of deposits by non-banking financial institutions;
(e) General provisions regarding reserve fund, credit funds, publication of bank rate, audit and accounts; and
(f) Penalties for violation of the provisions of the act or the directions issued thereunder.

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1.5 BANKING REGULATION ACT, 1949
I. The Banking Regulation Act, 1949 was enacted to consolidate and amend the law relating to banking and to provide
for a suitable framework for regulating the banking companies. Initially, the Act provided for regulation of banking
companies only, but in 1965 the Act was amended to cover co-operative banks as well with certain modifications
(See, Section 56). However, the Act, as provided in Section 3, does not apply to primary agricultural credit societies
and co-operative land mortgage banks. The provisions of the Act are applicable to banking companies in addition to
other laws which are applicable to such companies, unless otherwise specifically provided in the Act. Thus,
Companies Act, 1956 which deals with the incorporation and working of companies is applicable to banking
companies except where special provisions are made in the Banking Regulation Act in that regard.
II. The Act regulates entry into banking business by licensing as provided in Section 22 thereof. The Act also puts
restrictions on the shareholding, directorship, voting rights and other aspects of banking companies. There are
several provisions in the Act regulating the business of banking such as restriction on loans and advances, rates of
interest to be charged, requirement as to cash reserve and maintenance of percentage of assets, etc. There are
provisions regarding audit and inspection and submission of balance sheets and accounts. The Act provides for
control over the management of banking companies and also deals with the procedure for winding up of the
business of the banks and penalties for violation of its provisions. In short, the Act deals with:
Regulation business of banking companies;
Control over the management of banking companies;
Suspension and winding up of banking business; and
Penalties for violation of the provisions of the act.

1.6 RESERVE BANK AS CENTRAL BANK AND REGULATOR OF BANKS

I. The Reserve Bank was constituted under Section 3 of the Reserve Bank of India Act, 1934 for taking over the
management of currency from the Central Government and carrying on the business of banking in accordance with
the provisions of the Act. 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.
II. The Reserve Bank is a body corporate having perpetual succession and common seal and shall sue and be sued in its
name. The whole capital of the bank is held by the Central Government. The Bank has its central office in Mumbai
and offices in Mumbai, Kolkata, Delhi and Chennai, and branches at most of the state capitals and some other cities.
III. The bank functions under the general superintendence and directions of the Central Board of Directors. The bank
has to abide by the directions given by the Central Government in public interest after consultation with the
Governor of the bank. The board shall consist of a Governor and not more than four Deputy Governors to be
appointed by Central Government and other directors nominated by the Central Government. Apart from the Central
Board, the bank has also local boards situated at Mumbai, Kolkata, Delhi and Chennai, which perform any duty
delegated to them by the Central Board. The Governor has the power of general superintendence and direction of
the affairs of the bank and exercise all powers of the bank unless otherwise provided in the regulations made by the

10
 Central Board. The Deputy Governors, Executive Directors and other officers in different grades assist the Governor
in the discharge of the Bank's functions.
IV. The Reserve Bank is the sole authority for issue and management of currency in India under Section 22 of the RBI
Act. The bank may issue notes of different denominations from Rs. 2 to Rs. 10,000 as the Central Government may
decide on the recommendations of the Central Board of the bank. Such notes shall be legal tender at any place in
India.
V. The bank is the banker to the Central Government under Section 20 of the Act, and accordingly it is obligatory to
undertake banking business for the Central Government. In the case of state governments, their banking business is
undertaken by the bank based on agreements as provided in Section 21 A. Bank provides ways and means of
advances to the Central and state governments. These are temporary advances to meet immediate needs when there
is interval between expenditure and flow of revenue.
VI. The role of the bank as regulator of banking sector is mainly by virtue of the provisions of the Banking Regulation
Act, 1949. In exercise of the powers under that Act the bank regulates the entry into banking business by licensing,
exercises control over shareholding and voting rights of shareholders, exercises controls over the managerial
persons, and regulates the business of banks. The bank also inspects banks and exercises supervisory powers, and
may issue directions from time to time in public interest and in the interest of the banking system with respect to
interest rates, lending limits, investments and various other matters.
VII. 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.

1.7 GOVERNMENT AS A REGULATOR OF BANKS

I. The Reserve Bank is the primary regulator of banks. But the Central Government has also been conferred extensive
powers under the RBI Act and BR Act either directly or indirectly over the banks.
II. The government holds the entire capital of the Reserve Bank and appoints the Governor. The government has also
the necessary in public interest after consultation with the Governor. Thus, the government can exercise control over
banks by influencing decision-making by the Reserve Bank and has also got appellate authority in respect of several
matters in which the Reserve Bank has been conferred the power to decide at the first instance. Thus, under the
Banking Regulation Act appeal lies with the Central Government on removal of managerial personnel under
Sections 10B and 36AA of the BR Act. Similarly, there are also provisions for appeal in respect of cancellation of
banking licence (under Section 22) and refusal of certificate regarding floating charge on assets (Section 14A).

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 III. The government has the power to suspend the operations of the Banking Regulation Act or to give exemption from
any of the provisions of the Act on the representation/recommendation of the Reserve Bank under Sections 4 and 53
of the Act, respectively. The govt has also the power to notify other forms of business which a bank may undertake
under Section 6(1)(o) of the Act. Rule-making powers under Sections 52 and 45Y are vested in the Central Govt.
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;
(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 confer wide powers on the Central Government to regulate banks. These are in addition to the
powers conferred on the government as majority shareholder or full owner of public sector banks under the statutes
constituting them.

1.8 CONTROL OVER CO-OPERATIVE BANKS

I. A co-operative bank is a co-operative society engaged in the business of banking and may be a primary Co-
operative bank, a district central co-operative bank or a state co-operative bank. Cooperative banks operating in
one state only are registered under the State co-operative Societies Act concerned. The formation of such banks as
well as their management and control over personnel is regulated by the co-operative law of the state. The Registrar
of co-operative societies under the Co-operative Societies Act exercises a wide range of powers on co-operative
societies from registration to winding up.
II. In the case of co-operative banks operating in more than one state, the Multi-State Co-operative Societies Act, 2002
is applicable. In that case, the Registrar appointed by the Central Government takes the place of the Registrar
appointed by the State Government in other cases.
III. With the introduction of Section 56 in the Banking Regulation Act, 1949 with effect from 1965, cooperative banks
have come under the regulatory purview of the Reserve Bank. While the formation and management of co-operative
societies operating in one state only (including those conducting banking business) are under the control of the State
Government, licensing and regulation of banking business rests with the Reserve Bank. Thus, there is dual control
of State Governments and the Reserve Bank over these banks.
IV. In the case of co-operative banks which are registered under the Deposit Insurance and Credit Guarantee
Corporation Act, the Reserve Bank has the power to order their winding up. The circumstances in which Reserve
Bank may require winding up are mentioned in Section 13D of the Act.

1.9 REGULATION BY OTHER AUTHORITIES

I. Banks may be subject to the control of other regulatory agencies in the conduct of their business. For instance, a
banking company will be subject to the control of the authorities under the Companies Act in respect of company
matters. Similarly, a bank is answerable to labour authorities in respect of the terms and conditions of service of its
workmen, opening and closing of its premises, engagement of contract labour, etc. Banks are also liable to pay

12
 income tax like cash transaction tax, service tax, etc., and other taxes and have to follow the rules and regulations in
that regard.
II. As provided in Section 6 of the BR Act, banks may undertake certain non-banking business in addition to the
business of banking. In that regard also, banks may be subject to the regulatory control of other agencies. For
instance, in the case of dealings in securities like shares and debentures, banks are subject to regulation by the
Securities Exchange Board of India under the Securities Contract (Regulation) Act, 1956 read with the Securities
and Exchange Board of India Act, 1992. If the Bank desires to raise capital through public issue, it has to comply
with SEBI guidelines. In case of Insurance Business - by IRDA and in case of Mutual Fund Business -RBI, SEBI.
The study herein is, however, largely confined to the regulation of banks by the Reserve Bank and the Central Government
under the Reserve Bank of India Act and the Banking Regulation Act.

1.10 LET US SUM UP

1. Banking means acceptance of deposits of money from the public for lending or investment. Such deposits may be
repayable on demand or may be for a period of time as agreed to, by the banker and the customer, and may be
repayable by cheque, draft or otherwise. Apart from banking, banks are authorised to carry on other business as
specified in Section 6 of the BR Act. Banks are, however, prohibited from undertaking any trading activities.
2. Banks are constituted as companies registered under the Companies Act, 1956, statutory corporations constituted
under Special Statutes or Co-operative societies registered under the Central or State Co-operative Societies Acts.
The extent of applicability of the regulatory provisions under the Banking Regulation Act and the Reserve Bank of
India Act to a bank depends on the constitution of the bank.
3. Reserve Bank of India is the central bank of the country and the primary regulator for the banking sector. The
government has direct and indirect control over banks. It can exercise indirect control through the Reserve Bank and
also act directly in appeals arising from decisions of the Reserve Bank under the various provisions of the Banking
Regulation Act. In public sector banks like the State Bank of India and its subsidiaries, nationalised banks and the
regional rural banks, 50% or more of their shares are held by the Central Government. Central Government has
substantial control over the management of these banks. Only certain provisions of the BR Act are applicable to
these banks as indicated in that Act. Co-operative banks operating in one state only are registered under the State
Co-operative Societies Act and are subject to the control of the State Government as also the Reserve Bank. In the
case of non-banking business of the banks, they are subject to control by other regulatory agencies.

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 UNIT 2 CONTROL OVER ORGANISATION OF BANKS
STRUCTURE
2.0 Objectives
2.1 Introduction
2.2 Licensing of Banking Companies
2.3 Branch Licensing
2.4 Paid-up Capital and Reserves
2.5 Shareholding in Banking Companies
2.6 Subsidiaries of Banking Companies
2.7 Board of Directors
2.8 Chairman of Banking Company
2.9 Appointment of Additional Directors
2.10 Restrictions on Employment
2.11 Control Over Management
2.12 Corporate Governance
2.13 Directors and Corporate Governance
2.14 Let Us Sum Up

2.0 OBJECTIVES
The objectives of this unit are to understand the laws that govern banking companies, in respect of:
Licensing and branch licensing
Paid up capital and reserves
Shareholding and rights of shareholders
Formation of subsidiaries and holding of shares of other companies
Constitution and regulation of board of directors
Exercise of control by the Reserve Bank and the Government over the appointment and removal of chairmen,
managerial and other personnel
Corporate governance

2.1 INTRODUCTION
The Banking Regulation Act provides for regulation of the organisation of banking companies. To start with, there are
restrictions at the entry point, by way of licensing and then the requirement of permission for opening or shifting of
branches. There are further regulations over the paid-up capital and reserves, shareholder's rights, constitution of the board
of directors, appointment of chairman and formation of subsidiaries. Apart from the above, there are also controls over the
managerial and other personnel, including the power to remove unsuitable persons and to appoint suitable persons. In this
unit, we study various provisions of the Banking Regulation Act, providing for controls over the organisation and
management of banking companies.

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2.2 LICENSING OF BANKING COMPANIES
I. License Requirement from RBI: To commence or carry on, the banking business in India, a company requires a
licence from the Reserve Bank under Section 22 of the Banking Regulation Act, 1949. Commencing or carrying on
a banking business without a licence is prohibited. When the Act came into force, the banking companies, which
were then in existence were required to apply for licence within six months from the commencement of the Act.
But, such banking companies were permitted to continue business, unless and until their applications for licence
were rejected by the Reserve Bank. The requirement of licence was meant to ensure the continuance of only those
banks, which were established and operating on sound lines and to prevent indiscriminate formation of banking
companies.
II. Discretion of Reserve Bank: The granting of licence by the Reserve Bank may be subject to such conditions as the
RBI may think fit in each case. As held by the Gujarat High Court in Shivabhai vs RBI, Ahmedabad (AIR 1986 Guj
19), Reserve Bank has the discretion to grant or refuse the licence and when such decision based on relevant,
material and germane considerations, the decision cannot be assailed. Only if the decision is based on extraneous
considerations or is perverse, the court will intervene.
It is open to the RBI to consider the defects or improvements revealed in an inspection held under Section 35 of the
BR Act while disposing of an application for licence. (See, Sajjan Bank Pvt. Ltd. vs RBI, AI R 1961 Mad 8). The
refusal of licence to a company would make it ineligible to undertake banking business, but it would still be open to
the company to carry on other business like money lending.
III. Conditions to be Satisfied: Before granting a licence under Section 22, Reserve Bank may have to be satisfied by
an inspection of the books of the banking company or otherwise in respect of the following matters-
a) Whether the company is or will be in a position to pay its present and future depositors in full as their claims
accrue;
b) Whether the affairs of the company are being conducted or likely to be conducted in a manner detrimental to the
interests of its present and future depositors;
c) Whether the general character of proposed management of the company will not be prejudicial to public interest
or the interest of depositors;
d) Whether the company has an adequate capital structure and earning prospects;
e) Whether public interest will be served by grant of licence to the company;
f) Whether considering the banking facilities available in the proposed area of operation, the potential scope for
expansion of business by banks already in existence in that area and other relevant factors, the grant of licence
would be prejudicial to the operation and consolidation of banking system, consistent with monetary stability
and economic growth;
g) The fulfilment of any other condition which the Reserve Bank considers relevant in public interest or in the
interest of depositors.
Although Section 11 of BR Act specifies the minimum capital and reserves requirements of a banking company, the
Reserve Bank can stipulate a higher requirement of capital for licensing a banking company as under Section 22 the
Reserve Bank has to be satisfied that the company has an adequate capital structure and earning prospects.
IV. Foreign Banks: In the case of companies incorporated outside India applying for a licence, apart from the

15
 conditions specified in the case of domestic companies, three additional conditions have been stipulated for
consideration by the Reserve Bank. These are:
a) Whether carrying on of banking business by the company in India will be in public interest;
b) Whether the government or the law of the country, in which the company is incorporated discriminates in any
way against banking companies registered in India;
c) Whether the company complies with provisions of the BR Act, as applicable to foreign companies.
V. Local Area Banks: The Reserve Bank has recognised the concept of local area banks and licensed a few(four) such
banks. These are banking companies operating only in a limited geographical area. The licence issued to these banks
would restrict their operations to the specified local area to ensure adequate banking services in that area.
VI. Cancellation of Licence: Sub-Section (4) of Section 22 of the Banking Regulation Act authorises the Reserve Bank
to cancel the licence granted to any banking company. The cancellation of licence may be on any one or more of the
following grounds:
a) The company ceases to carry on banking business in India;
b) The company at any time fails to comply with any of the conditions imposed under the sub-Section (1) of
Section 22 of Banking Regulation Act;
c) The company does not fulfil at any time, any of the conditions referred to in the sub-Section(3) or 3(A) of
Section 22 of Banking Regulation Act.
Before cancellation of a licence for non-compliance with any of the conditions as above, the company has to be given an
opportunity for taking necessary steps for complying with or fulfilling the conditions. However, in cases where the Reserve
Bank is of the opinion that delay will be prejudicial to the interests of depositors or the public, the requirement of
opportunity can be dispensed with. As observed by the Madras High Court in Sajjan Bank Pyt. Ltd. vs RBI (AIR 1961 Mad.
8), the Reserve Bank has a wide range of administrative discretion under the Act, which it is competent to exercise, and it
cannot be said that there is an excessive delegation of power. A banking company, whose licence is cancelled, can appeal to
the Central Government within a

2.3 BRANCH LICENSING

I. Apart from the requirement of licence for commencing or carrying on banking business, banks have to obtain the
prior permission of Reserve Bank for opening a new place of business or changing location of the existing place of
business. Under Section 23 of the Banking Regulation Act, 'Place of business' for this purpose includes any sub-
office, pay office, sub-pay office or any place at which deposits are received, cheques cashed or moneys lent.
However, changing the location of an existing place of business within the same city, town or village would not
need such permission. These restrictions also apply to foreign branches of banking companies incorporated in India.
Opening of a temporary place of business up to one month for purpose of affording banking facilities for any
exhibition, mela, conference or like occasion is exempt. However, the temporary branch has to be within the limits
of the city; town or village where there is an existing branch or in the environs thereof. The present guidelines from
RBI provide that Banks should submit their request for new branches, administrative offices, ATMs once in a year
for consideration of RBI as against the earlier practice of making individual applications for each and every branch.
When approved, the permission would be valid for a period of one year before which the branches/ offices should

16
 be operationalised.
II. For granting permission under Section 23, the Reserve Bank may require to be satisfied of the following:
(a) Financial condition and history of the bank;
(b) General character of its management;
(c) Adequacy of capital structure and earning prospects;
(d) Public interest.
This may be done by an inspection of the bank under Section 35 or otherwise.
While granting permission for opening or shifting a branch, the Reserve Bank may impose any conditions which it
thinks fit necessary. If any bank fails to comply with such conditions, the permission may be revoked after giving
an opportunity to the bank to show cause.
III. In the case of regional rural banks, the applications for permission have to be routed through the National Bank
(NABARD), and the national bank has to offer its comments on merits to the Reserve Bank.

2.4 PAID-UP CAPITAL AND RESERVES

Section 11 of the Banking Regulation Act provides for certain minimum requirements as to paid-up capital and reserves of
banking companies. Any company wanting to commence banking business has to comply with these requirements. The
amounts stipulated have reference to the places of business. 'Place of business' for this purpose means any office, sub-office,
sub-pay office and any place at which deposits are received, cheques cashed or moneys lent. In the case of any dispute
regarding computation of paid-up capital and reserves of any banking company, the decision of the Reserve Bank shall be
final.
I. Foreign Banks: Under the sub-Section (2) of Section 11 of the BR Act, a foreign bank (banking company
incorporated outside India) operating in India, has to deposit and keep deposited with the Reserve Bank, an amount
of Rs.15 lacs and if it has a place of business in Mumbai or Kolkata or both, Rs. 20 lacs. The amount has to be kept
in cash, unencumbered approved securities or partly in both. Apart from this, an amount of twenty per cent of the
profit for each year in respect of business transacted through the branches in India as disclosed in the profit and loss
account has to be deposited with the Reserve Bank. The securities deposited can be replaced by other unencumbered
approved securities or cash deposited can be similarly replaced by securities. The Central Government can exempt
any foreign bank from this requirement on the recommendation of the Reserve Bank for a specified period if the
amounts deposited already by it are considered adequate. On the cessation of business by any foreign bank for any
reason, these deposits shall form the assets of the company on which the creditors in India shall have the first
charge.
II. Indian Banks: In case of banking companies incorporated in India, the requirements of minimum paid-up capital
and reserves under Section 11 (3) are as follows:
a) If it has a place of business in more than one state, Rs. 5 lac and if such places of business include Mumbai,
Kolkata or both, Rs. 10 lac.
b) If the place of business is in only one state and does not include Mumbai or Kolkata, Rupees 1 lac for its
principal place of business, plus Rs. 10,000 for other places of business, in the same district in which the

17
 principal place of business is situated, plus an additional Rs. 20,000, for each place of business elsewhere; in
total not exceeding Rs. 5 lacs. If the bank has only one place of business, the amount is limited to Rs. 50,000.
For banking companies commencing business after the commencement of the Act, paid-up capital is stipulated
as Rs 5 lac.
c) If places of business are in one state only, but one or more of them is in Mumbai or Kolkata, Rs. 5 lac, plus Rs.
25,000 for each place of business outside these cities and the aggregate not exceeding Rs. 10 lac.
During 2005, RBI stipulated the minimum capital requirement for a new Private Bank at Rs 300 crore as a part of
Corporate Governance guidelines and as a policy of Foreign Direct Investment.
III. Paid-up Capital, Subscribed Capital and Authorised Capital: Apart from the above, Section 12(1) of the
Banking Regulation Act stipulates that the subscribed capital of a banking company shall not be less than half of its
authorised capital; and the paid-up capital shall not be less than half of its subscribed capital. If capital is increased,
this requirement has to be complied within a period not exceeding two years as allowed by the Reserve Bank.
Banking companies are permitted to have only ordinary or equity shares. However, preference shares issued before 1 July
1944 are exempt. Further, the provisions of Section 12(1) are not applicable to banks incorporated before 15 January 1937.
Now preference shares and other capital instruments are also allowed. Since 2005, Banks have been permitted by RBI to
raise capital even in the from of innovative debt instruments which are perpetual and perpetual non-cumulative preference
shares in addition to the equity capital.

2.5 SHAREHOLDING IN BANKING COMPANIES

I. Voting rights of shareholders: There is no specified ceiling on a person's holding of shares in a banking company
under the Banking Regulation Act or any other law. However, Section 12(2) of the Act puts certain restrictions on
voting rights of shareholders. Accordingly, no shareholder can exercise voting rights in respect of the shares held by
him/her in excess of ten per cent of the total voting rights of all the shareholders of the banking company. This
provision does not in any way affect the transfer of shares or the registration of such transfers. It only puts a limit on
voting rights. However, Section 12(3) bars suits or other proceedings against registered shareholders by any other
person claiming title except by a transferee of shares, in accordance with the law or on behalf of minors or lunatics
for whom the registered shareholder holds the shares. The provisions of the Companies Act also govern transfer of
shares of banking companies.
II. Acknowledgement by Reserve Bank: Reserve Bank has instructed banking companies that when they receive
more than the specified percentage of their shares for transfer to one party, the bank's board must refer the matter to
the Reserve Bank. The banks shall not transfer the shares without receiving Reserve Bank's acknowledgement. This
is with a view to ensure that the controlling interest in a banking company does not change hands without the
knowledge and approval of the Reserve Bank.
III. Reports on shareholding: A report regarding the particulars of shareholding of the chairman, managing director or
chief executive officer, by whatever name called, of every banking company, requires submission to the Reserve
Bank. Such report should contain the full particulars and extent of value of shares held directly or indirectly and of
any change in the extent of holding or of any variation in the rights attaching thereto. The Reserve Bank may also
order for any other information relating to those shares.

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 IV. Commission, brokerage, discount: Section 13 of the Banking Regulation Act imposes a ceiling on the
commission, brokerage, discount or remuneration on the sale of shares of banking companies. Accordingly, the
payments on this account in any form should not exceed two-and-a-half per cent of the paid-up value of the shares.
V. Dividend: There are also certain restrictions on the payment of dividend to the shareholders of banking companies.
Thus, under Section 15 of the Banking Regulation Act, no dividend is payable until all capitalised expenses are
completely written off. Such expenses include preliminary expenses, organisation expenses, share-selling
commission, brokerage, loss incurred and any other item, of expenditure not represented by tangible assets.
However, dividends are payable without writing off depreciation, bad debt etc., as under:
a) Depreciation in value of approved securities, which is not capitalised or accounted for as a loss.
b) Depreciation in investment of shares, bonds or debentures, other than the approved securities for which
adequate provision has been made.
c) Bad debts for which an adequate provision is provided.
RBI has given detailed eligibility criteria for declaration of dividend by banks and also guidelines on the quantum of
dividend that can be declared by banks. The eligibility criteria require a minimum 9 % of CAR and Net NPAs not
exceeding 1%. The quantum of dividend that can be declared is based on the levels of net NPAs and in a graded level
(Maximum 40% pay out ratio) and can be paid out of only current year's profits.

2.6 SUBSIDIARIES OF BANKING COMPANIES

I. Formation of Subsidiaries: There are certain restrictions under Section 19 of the Banking Regulation Act on the
formation of subsidiaries by banking companies. This is for purpose of preventing banks from carrying on trading
activities by acquiring a controlling interest in non-banking companies. Accordingly, subsidiaries are permissible
only for the following purposes:
i. Undertaking any business which is permissible for banking companies under Section 6(1) clauses (a) to (o).
ii. Carrying on the business of banking exclusively outside India. Prior permission of the Reserve Bank is a must
for this banking business.
iii. Undertaking any other business which Reserve Bank with prior approval of the Central Government permits.
Reserve Bank may permit only such other business which it considers conducive to the spread of banking in
India or otherwise useful or necessary in the public interest. The undertaking of any business by a subsidiary
will not be deemed to amount to the bank itself taking up that business directly or indirectly for the purpose of
Section 8.
II. Shareholding in other companies: Apart from the restriction on subsidiaries, there is also a ceiling [Section 19(2)]
on shareholding in companies other than subsidiaries. Thus, the holding of shares by a banking company in any
company as pledgee, mortgagee or absolute owner shall not be exceeding thirty per cent of the paid-up share capital
of that company or the paid-up share capital and reserves of the banking company. Further, holding of shares in any
company in which the managing director or manager of a banking company is interested in or concerned with in any
manner, is prohibited except in the case of subsidiaries.

2.7 BOARD OF DIRECTORS

I. Qualifications: Section lOAofthe Banking RegulationAct stipulates certain qualifications fordirectors of banking

19
 companies. Accordingly at least fifty-one per cent of the total number of directors shall be persons, who have
special knowledge or practical experience, with respect of accountancy, agriculture and rural economy, banking,
cooperation, economics, finance, law, small scale industry or any other matter, the special knowledge or practical
experience which is useful to the banking company, in the opinion of the Reserve Bank. Further, at least two of the
directors should have special knowledge or practical experience in agriculture and rural economy or co-operation or
small scale industry.
II. Substantial interest: The directors of a banking company shall not have a substantial interest in or be connected
with as employee, manager or managing agent in a company or firm which carries on trade, commerce or industry
as per Section 10A (2)(b) of the BR Act. However, companies registered under Section 25 of the Companies Act
and small scale industrial concerns are not included for the purpose. The proprietors of trading, commercial or
industrial concerns other than small scale industrial concerns are also disqualified for directorship. 'Substantial
interest' for this purpose is defined in Section 2 of the Banking Regulation Act. Accordingly, holding of beneficial
interest by any individual or his spouse or minor child, whether singly or taken together in the shares of a company
exceeding Rs. 5 lacs or ten per cent of the paid-up capital of the company amounts to substantial interest. In the case
of firms, such holding of beneficial interest exceeding ten per cent of the total capital of the firm amounts to
substantial interest.
III. Period of office: The directors of a banking company shall not hold office for more than eight years continuously.
However, this provision is not applicable to the chairman or a whole-time director. When the chairman or a whole-
time director of a bank is removed from office, he/she ceases to be a director of the bank and shall not be eligible for
further appointment as director of that banking company for a period of four years.
IV. Reconstitution of Board: When the board of a banking company is not constituted in accordance with the
requirements of Section 10A of the BR Act, the board has to be reconstituted, to comply with the provisions. If any
director has to be retired for such a reconstitution, this may be done by lots, in the prescribed manner and such
decision shall be binding on every director of the board. If the Reserve Bank is of the opinion that the board of any
banking company does not fulfil the requirements, it may order such a bank to reconstitute the board after giving
reasonable opportunity of being heard. If, within two months' time, the bank does not fulfil the order of the Reserve
Bank, the Bank may then remove any director (determined by lots drawn in the prescribed manner) and such a
person shall cease to hold office. The Reserve Bank may also appoint a new director in the place of the person
removed and he/she shall continue in office until the date up to which his predecessor would have held office.
However, any proceedings of a banking company will not be invalid only because of any defect in the composition
of the board.

2.8 CHAIRMAN OF BANKING COMPANY

I. Whole-time Chairman/Managing Director: Section 1 OB of the Banking Regulation Act provides that every
banking company should have a full-time or part-time chairman, appointed from among its directors. The chairman,
if appointed on a whole-time basis is entrusted with the management of the entire affairs of the bank. The chairman
on a part-time basis has to be appointed with the prior approval of the Reserve Bank and such an appointment shall
be subject to any conditions that may be imposed by the Reserve Bank while granting approval. In the absence of a

20
 chairman, the management of the whole of the affairs of the banking company shall be entrusted to a managing
director. The exercise of powers by the whole-time chairman or managing director is subject to the superintendence,
control and directions of the board of directors. The whole-time chairman and a managing director shall hold office
for a period not exceeding five years as the board may fix and is also eligible for reelection or reappointment.
Although the chairman is in full-time employment of the bank, he may be a director of a subsidiary of the bank or of
a company registered under Section 25 of the Companies Act. The Reserve Bank may also permit the whole-time
chairman or the managing director to undertake part-time honorary work not likely to interfere with the duties of the
chairman or the managing director.
The whole-time chairman or the managing director of a banking company may continue in office at the end of the
term of the office until his/her successor assumes office, subject to the approval of the Reserve Bank.
II. Qualifications of Whole-time Chairman/Managing Director: The whole-time chairman or the managing director
of a banking company should have special knowledge or practical experience of the working of a banking company
or the State Bank or a subsidiary bank or a financial institution or financial, economic or business administration.
The whole-time chairman or the managing director will be disqualified under the following circumstances:
a) if he/she is director of a company other than a subsidiary of the banking company or a charitable
b) company (registered under Section 25 of the Companies Act);
c) if he/she is a partner of any firm which carries on trade, business or industry;
d) if he/she has substantial interest in any other company or firm or is director, manager, managing
e) agent, partner or proprietor of any trading, commercial or industrial concern; or
f) if he/she is engaged in any other business or vocation.
III. Removal of Wholetime Chairman/Managing Director: If the Reserve Bank is of the opinion that the person
elected to be the chairman of the board of directors and appointed on a whole time basis or the managing director is
not a fit and proper person to hold such office, the Reserve Bank may require the banking company to remove such
a chairman or the managing director and appoint a suitable person. However, before taking such an action, the
Reserve Bank has to give such a person, as also the banking company, a reasonable opportunity of being heard. If
the banking company does not comply with the order within two months, the Reserve Bank may remove the person
from the office and appoint a suitable person in his/her place. Such a chairman or managing director would continue
in office, for the residual period of office of the person removed from office.
The banking company or the person affected by the Reserve Bank's order may appeal to the Central Government
within thirty days. The order of the Government where an appeal is filed and the order of the Reserve Bank, where
no appeal is filed shall be final and not liable to be challenged before any civil court.
IV. Temporary vacancies: In cases where the wholetime chairman or the managing director dies or he/she resigns or is
not capable of discharging his/her functions due to illness, temporary arrangements can be made to carry out the
duties of the chairman or the managing director for a period not exceeding four months. However, this has to be
done with the approval of the Reserve Bank.
V. Power of Reserve Bank to appoint Chairman: In certain cases, the office of the whole-time chairman or the
managing director of a banking company may fall vacant and may not be filled up by the bank immediately. This
may adversely affect the interests of the banking company. If the Reserve Bank is of the opinion that continuation of

21
 such vacancy is likely to be against the interests of the banking company, it may appoint an eligible person to fill
such vacancy under Section 10BB of the Banking Regulation Act. If the chairman or the managing director so
appointed is not a director of the banking company, he/she shall be deemed to be a director of the banking company.
Such appointment may be for a period not exceeding three years. There is also a provision for reappointment after
the initial period. The chairman or the managing director so appointed may be removed from office only by the
Reserve Bank and shall draw pay and allowances from the banking company, as determined by the Reserve Bank.
VI. Qualification shares: The whole-time chairman or the managing director of a banking company is exempted under
Section IOC of the Banking Regulation Act from the requirement of holding qualification shares. Similar exemption
is also available to a director of a banking company appointed by Reserve Bank under Section 10A of the Act.
VII. Overriding provisions: The provisions of Section 10A, Section 10B and Section 10BB of the Banking Regulation
Act regarding the appointment and removal of a director, managing director or the chairman shall have overriding
effect over all other laws, contracts, etc. Any person affected by any action taken under these provisions is not
entitled to any compensation for any loss or for termination of office.

2.9 APPOINTMENT OF ADDITIONAL DIRECTORS

I. The Reserve Bank has the power to appoint additional directors on the boards of banking companies under Section
36AB of the Banking Regulation Act. One or more additional directors may be so appointed when the bank is of the
opinion that it is necessary to do so in the interest of:
(a) banking policy (b) public
(c) banking company (d) depositors of the banking company.
II. The directors so appointed shall not require any qualification shares. They hold office during the pleasure of the
Reserve Bank. Subject to this, appointment may be for a period not exceeding three years or further extended
periods not exceeding three years at a time as specified by the Reserve Bank. The additional directors are protected
from any liability or obligation for executing their functions in good faith. The provisions of Section 36AB have
overriding effect over other laws.

2.10 RESTRICTIONS ON EMPLOYMENT

I. The Banking Regulation Act (Section 10) prohibits employment of managing agents and imposes restrictions on
employment of certain type of persons, namely
a) a person who is or has been adjudicated insolvent or has suspended payment or has compounded with his/her
creditors;
b)
c) a person whose remuneration or part thereof is by way of commission or share in the profits of the company;
d) a person whose remuneration is excessive in the opinion of the Reserve Bank. Before forming an opinion
regarding the remuneration, the Reserve Bank has to consider the financial condition and history of the banking
company, its area of operation, resources, volume of business and the trend of its earning capacity, number of its
branches, qualifications, age and experience of the person concerned, remuneration of other personnel in the
bank or persons holding similar positions in other banks and the interest of depositors.
The above restrictions are applicable to workmen as well as management personnel, as held by the Supreme Court

22
 in Central Bank of India vs Their Workmen (AIR 1960 SC 12). However, the restriction on remuneration does not
affect payment of bonus according to a settlement or award or in accordance with a scheme framed by the bank or
in accordance with the prevailing practice in banking business. Commission paid to brokers, auctioneers,
forwarding agents, etc., who are not regular members of the bank's staff, is also not covered by these provisions.
II. Persons who are directors of any company other than a subsidiary of a banking company or company registered
under Section 25 of the Companies Act are also prohibited from managing a banking company. However, this
prohibition shall not apply to a director for a temporary period of three months, or a further period not exceeding
nine months, if allowed by the Reserve Bank. Apart from this, persons engaged in any other, business or vocation or
whose term of office as a person managing the company is for a period exceeding five years also fall in the
prohibited category. However, the period of office can be renewed or extended for further periods not exceeding
five years at a time.

2.11 CONTROLS OVER MANAGEMENT

I. Power to remove Management and other personnel: The Reserve Bank is empowered under Section 36AA of
the Banking Regulation Act to remove any chairman, director, chief executive officer (by whatever name called), or
other officer or employee of a banking company. For this purpose, the bank has to be satisfied that it is necessary to
do so. The bank (RBI) has the discretionary power to remove management and other personnel in the following
circumstances:
a) Public interest
b) Preventing the affairs of the banking company being conducted in a manner detrimental to the interest of
depositors
c) Securing proper management of the banking company.
The Reserve Bank has to pass such an order recording the reasons in writing. Before passing the order, the affected
person has to be given a reasonable opportunity of making a representation against the proposed order. Where an
urgent action is required and delay would be against the interests of the company or its depositors, the Reserve Bank
is empowered to direct by order, at the time of giving opportunity of making a representation that the person
concerned shall not act in his/her official capacity or directly or indirectly take part in the management of the bank
from the date of such order, pending consideration of the representation. The person so removed shall not be entitled
to any compensation for loss of office notwithstanding anything contained in any law, the memorandum, articles or
any contract to the contrary as the provisions of Section 36AA have overriding effect.
II. Appeal: An appeal against the order of removal lies with the Central Government. Such an appeal has to be filed
within thirty days from the date of communication of the order. The appellate decision of the Central Government,
and subject thereto the order of the Reserve Bank, shall be final and not liable to challenge in any Civil Court.
III. Effect of the order of removal: On the Reserve Bank passing a removal order, the person concerned ceases to hold
office which he/she was holding till then. Further, he/she is prohibited, from directly or indirectly taking part in the
management of any banking company for a period not exceeding five years as may be specified in the order.
Contravention of the order is punishable with a fine of Rs. 250 for each day during which the contravention
continues.

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 IV. Appointment of a suitable person: When any chairman, director, chief executive officer, other officer or employee
is removed by the Reserve Bank under Section 36AA as above, the Reserve Bank may appoint a suitable person in
his place. Such person shall hold office at the pleasure of the Reserve Bank. Subject to this, the appointment may be
for a period not exceeding three years and is extendable for further periods not exceeding three years at a time. Such
appointee shall not incur any obligation or liability for action taken in good faith in the execution of the duties of his
office.

2.12 CORPORATE GOVERNANCE

I. The Concept: Corporate governance is a dynamic concept involving promotion of corporate fairness, transparency
and accountability in the interest of shareholders, employees, customers and other stakeholders. It is a concept of
recent origin. However, there is considerable divergence in the understanding and practice of corporate governance
across different jurisdictions. The concept has evolved since the first major study by the Cadbury Committee in
1992. The DECO principles of corporate governance published in 1999, the first international code of good
corporate governance approved by governments, was revised in 2004. Corporate governance can be seen as 'the way
in which boards oversee the running of a company by its managers, and how board members are in turn accountable
to shareholders and the company' and it has implications for company behaviour towards employees, shareholders,
customers, banks and other stakeholders. Further, good corporate governance plays a vital role in ensuring the
integrity and efficiency of financial markets and the lack of it can pave the way for financial difficulties and
sometimes even fraud.
II. OECD Principles of Corporate Governance, 2004: The OECD principles of corporate governance, 2004 stipulate
what the corporate governance framework should ensure, which is briefly as under:
a) Ensuring the basis for an effective corporate governance framework: To promote transparent and efficient
markets which are consistent with the rule of law. Also, to articulate clearly the division of responsibilities
among the different supervisory, regulatory and enforcement authorities.
b) The rights of shareholders and key ownership functions: To protect and facilitate the exercise of shareholders'
rights.
c) The equitable treatment of shareholders: In the equitable treatment of shareholders are included the minority
and foreign shareholders. Further, all shareholders should have the opportunity to obtain an effective redress for
violation of their rights.
d) The role of stakeholders in corporate governance: To recognize the rights of stakeholders, established by law or
through mutual agreements and encourage active cooperation between the corporations and stakeholders in
creating wealth, jobs, and the sustainability of financially sound enterprises.
e) Disclosure and transparency: Timely and accurate disclosures made on all material matters, regarding the
corporation, including the financial situation, performance, ownership, and governance of the company.
f) The responsibilities of the board: Strategic guidance of the company, effective monitoring of management by
the board and the board's accountability to the company and the shareholders are the important aspects. These
principles are applicable to all types of companies including banks.
III. Corporate Governance and Banks: Banks hold a special position in corporate governance as they accept and

24
 deploy large amounts of public funds in fiduciary capacity and also leverage such funds through credit creation. The
position of banks is also important for the smooth functioning of the payment system. Accordingly, legal
prescriptions for ownership and governance of banks laid down in the statutes are supplemented by regulatory
prescriptions. The Basel Committee on Banking Supervision has issued guidance (February 2006) for promoting the
adoption of sound practices of corporate governance by banking institutions. This guidance, entitled Enhancing
Corporate Governance for Banking Organisations, highlights the importance of:
The roles of boards of directors (with a focus on the role of independent directors) and senior management
Effective management of conflicts of interest
The roles of internal and external auditors, as well as internal control functionaries
Governing in a transparent manner, especially where a bank operates in jurisdictions, or through structures, that
may impede transparency
The role of supervisors in promoting and assessing sound corporate governance practices.(See,
http://www.bis.org/press/pO6O213.htni).
Apart from the fiduciary role of banks, their cross-border operations add a special dimension. This provides an
added impetus for convergence in standards internationally. In almost all countries, the policy framework with
regard to corporate governance involves a multiplicity of agencies. In India, the Department of Company Affairs,
Securities and Exchange Board of India (in respect of listed entities) are involved apart from the Reserve Bank in
respect of banks.
IV. Reserve Bank's approach: Following the formal policy announcement in regard to corporate governance, in the
mid term Review of the Monetary and Credit Policy, in October, 2001, the Reserve bank constituted a Consultative
Group in November, 2001 under the chairmanship of Dr. A.S. Ganguly with a view to strengthen the internal
supervisory role of the boards of banks. The report of the group was transmitted to all the banks for their
consideration in June, 2002 and simultaneously to the Government of India for consideration. Earlier, an advisory
group on corporate governance under the chairmanship of Dr. R.H. Patil had submitted its report in March, 2001
which examined the issues relating to corporate governance in banks in India, including the public sector banks and
made recommendations to bring the governance standards in India on par with the best international standards.
There were also some relevant observations by the advisory group on banking supervision under the chairmanship
of Shri M.S. Verma which submitted its report in January, 2003. Keeping all these recommendations in view and
the cross-country experience, the Reserve Bank initiated several measures to strengthen the corporate governance in
the Indian banking sector, including the concept of 'fit and proper' criteria for directors of banks which included the
process of collecting information, exercising due diligence and constitution of a nomination committee of the board
to scrutinise the declarations made by the bank directors. The RBI guidelines on ownership and governance in the
private sector banks released on February 28, 2005 (Paras 5 and 6) provide as under:Shareholding
a) The RBI guidelines on acknowledgement for acquisition or transfer of shares issued on 3 February, 2004 will be
applicable for any acquisition of shares of five per cent and above of the paid-up capital of the private sector
bank.
b) In the interest of diversified ownership of banks, the objective will be to ensure that no single entity or group of

25
 related entities has shareholding or control, directly or indirectly, in any bank in excess of ten per cent of the
paid-up capital of the private sector bank. Any higher level of acquisition will be with the prior approval of RBI
and in accordance with the guidelines of 3 February, 2004 for grant of acknowledgement for acquisition of
shares.
c) Where ownership is that of a corporate entity, the objective will be to ensure that no single individual/entity has
ownership and control in excess of ten per cent of that entity. Where the ownership is that of a financial entity
the objective will be to ensure that it is a well-established regulated entity, widely held, publicly listed and
enjoys good standing in the financial community.
d) Banks (including foreign banks having a branch presence in India)/FIs should not acquire any fresh stake in a
bank's equity shares, if by such acquisition, the investing bank's/FI's holding exceeds five per cent of the
investee bank's equity capital as indicated in RBI circular dated 6 July, 2004.
e) As per the existing policy, large industrial houses will be allowed to acquire, by way of strategic investment,
shares not exceeding ten per cent of the paid-up capital of the bank, subject to RBI's prior approval.
Furthermore, such a limitation will also be considered, if appropriate, in regard to important shareholders with
other commercial affiliations.
f) In case of a restructuring of the problem/weak banks or in the interest of consolidation in the banking sector,
RBI may permit a higher level of shareholding, including by a bank.

2.13 DIRECTORS AND CORPORATE GOVERNANCE

I. The board of directors should ensure that the responsibilities of directors are well defined and the banks should
arrange need based training for the directors in this regard. While the respective entities should perform the roles
envisaged for them, private sector banks will be required to ensure that the directors on their boards representing
specific sectors, as provided under the B.R. Act, are indeed representatives of those sectors in a demonstrable
fashion, they fulfil the criteria under corporate governance norms provided by the Ganguly Committee and they also
fulfil the criteria applicable for determining 'fit and proper' status of important shareholders (i.e., shareholding of
five per cent and above) as laid down in RBI circular dated 25 June, 2004.
II. As a matter of desirable practice, not more than one member of a family or a close relative (as defined under Section
6 of the Companies Act, 1956) or an associate (partner, employee, director, etc.) should be on the board of a bank.
III. Guidelines have been provided in respect of 'fit and proper' criteria for directors of banks by the RBI circular dated
25 June, 2004 in accordance with the recommendations of the Ganguly Committee on corporate governance. For
this purpose a declaration and undertaking is required from the proposed/existing directors.
IV. Being a director, the CEO should satisfy the requirements of the 'fit and proper' criteria applicable for directors. In
addition, RBI may apply any additional requirements for the chairman and CEO. The banks will be required to
provide all information that may be required while making an application to RBI for approval of appointment of
chairman/CEO.
With regard to public sector banks, the principles of corporate governance have been statutorily recognised as per Banking
Companies (Acquisition and Transfer of Undertakings) Financial Institutions Laws (Amendment) Act, 2006. The Act as
amended provides for shareholder directors to be a person having 'fit and proper' status and the Reserve Bank has to notify

26
the 'Fit and Proper' criteria [Section 9(2)].

2.14 LET US SUM UP

A company wanting to commence banking business requires prior licence from the Reserve Bank. The Reserve Bank has
the discretion to reject licence or approve the licence on such conditions as it thinks fit. Before granting licence, Reserve
Bank has to be satisfied by inspection or otherwise of the suitability of the company for licence. A licence once given may
also be cancelled after giving the bank an opportunity to be heard. Further, for opening new branches or shifting branches
outside a city, town or village, permission of the Reserve Bank is required. Banking companies have to have minimum
capital and reserves as specified in the Banking Regulation Act. The shareholders of a banking company are entitled to
dividends only after all the capitalised expenses are written off. The commission or brokerage payable on selling shares is
restricted to two and half per cent of the paid-up value of the shares. The board of directors of a bank has to be constituted
with persons having special knowledge or experience in accountancy, banking, economics, law, etc., as stipulated. The
directors should not have substantial interest in other companies or firms. The maximum period of office is limited to eight
years continuously. The Reserve Bank is empowered to reconstitute the board, if the board is not properly constituted. Every
banking company should have a full-time chairman (or a full-time managing director, if there is no full-time chairman) with
the specified qualifications. The Reserve Bank has powers to remove the chairman and appoint a suitable person in his place
in certain cases. The Reserve Bank also has powers to remove the directors or managerial personnel or other employees of
banking companies. The principles of corporate governance including the 'fit and proper' criteria for directors apply to
banking companies as well as public sector banks.

UNIT 3 REGULATION OF BANKING BUSINESS

3.0 Objectives
3.1 Introduction
3.2 Power to Issue Directions
3.3 Acceptance of Deposits
3.4 Nomination
3.5 Loans and Advances
3.6 Regulation of Interest Rate
3.7 Regulation of Payment Systems
3.8 Internet Banking Guidelines
3.9 Regulation of Money Market Instruments
3.10 Banking Ombudsman
3.11 Reserve Funds
3.12 Maintenance of Cash Reserve
3.13 Maintenance of Liquid Assets
3.14 Assets in India
3.15 Let Us Sum Up

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3.0 OBJECTIVES
The objectives of this unit are to understand the law, in particular the provisions of the Banking Regulation Act, relating to:
Issue of directions by reserve bank to banks
Regulation of acceptance of deposits by banks
Regulation of loans and advances
Regulation of interest rates of banks on deposits and borrowing
Maintenance of reserve fund
Maintenance of cash reserve by scheduled banks and other banks
Maintenance of liquid assets
Maintenance of assets in india

3.1 INTRODUCTION
The Banking Regulation Act provides for regulation of the business activities of banking companies. Accordingly, the Act
empowers the Reserve Bank to issue directions for regulating terms and conditions of making of loans and advances and
other matters including acceptance of deposits. The Banking Regulation Act also imposes certain restrictions on loans and
advances to the directors of banking companies, and companies and firms in which they are interested. The Act contains
provisions for creation of a reserve fund and transfer of a percentage of profits to that fund. There are also provisions for
maintenance of cash reserve, liquid assets and assets in India. In this unit, we look at the relevant provisions of law in this
regard.

3.2 POWER TO ISSUE DIRECTIONS

I. The Banking Regulation: Act authorises the Reserve Bank to issue directions to banks under Sections 21 and
35Aof the Act. While Section 21 gives the power to regulate advances by banking companies, Section 35A gives
wide powers generally to regulate banking companies. The Reserve Bank has been issuing directions from time to
time under Section 21 (read with Section 35A) regulating rates of interest and other terms and conditions of
acceptance of deposits and making of loans and advances. Regulation of deposits and loans and advances are
discussed below (See, Paras 3.4 and 3.5, respectively).
II. Nature of Directions: The directions issued by the Reserve Bank in exercise of powers under Sections 21 and 35A
of the BR Act, being statutory directions, are binding on the banks. The circulars of the Reserve Bank giving
instructions to banks where it has statutory powers to give such instructions are also binding on the banks, even if
they do not specifically refer to any statutory provisions. However, as held by the Supreme Court in State Bank of
India vs. CIT (AIR 1986 SC 757), non-statutory circulars of the Reserve Bank cannot affect legal rights. The
Reserve Bank's powers to issue directions are over the banks. Hence, the directions are addressed to banks only and
not to customers or the public. The effect of violation of Reserve Bank's directions/ instructions which are binding
on banks, has been considered by the Supreme Court in BOI Finance Ltd. vs. The Custodian (AIR 1997 SC 1952) in
the context of some banks entering into certain repo transactions against the circulars of the Reserve Bank
prohibiting such transactions. The court found that the action of the banks violated the Reserve Bank's instructions
and held that the violations would not invalidate the contracts with third parties but would render the banks liable to

28
 prosecution. The effect of directions will be prospective and not retrospective in the absence of any statutory
provisions providing for retrospective operation of directions.
III. Bonafides: The powers of the Reserve Bank to issue directions have to be exercised with bonafide intentions, as
held by the Gujarat High Court in RBI vs Harisidh Co-op. Bank Ltd. (AIR 1988 Guj 107). In that case the Court
considered the power of the Reserve Bank to issue directions for superseding the board of a co-operative bank for
securing its proper management and upheld the action taken by the Reserve Bank on the finding that it was without
mala fide.
IV. Caution and Advice: Apart from giving directions, the Reserve Bank may also caution or give advice to banking
companies. Section 36 of the Banking Regulation Act provides that the Reserve Bank may caution or prohibit
banking companies generally or any banking company in particular against any transaction or class of transactions.
Further, the Reserve Bank may generally give advice to any banking company.

3.3 ACCEPTANCE OF DEPOSITS

I. As discussed in unit I, the essence of banking business is the acceptance of deposits from the public withdrawable
by cheque. [See also the judgement of Madras High Court in Sajjan Bank Pvt. Ltd. vs RBI (AIR 1961 Mad 8)]. The
definition of "banking" in Section 5(b) of the Banking Regulation Act acknowledges this position.
II. Types of Deposits: Banks accept different types of deposits, both time and demand deposits, from the public. While
time deposits, like fixed deposits or recurring deposits are repayable after an agreed period, demand deposits, like
deposits in current account and savings bank accounts, are repayable on demand, subject to the terms and conditions
of the deposits. The period of the deposit and rate of interest applicable to the deposit are matters to be agreed
between the depositor and the bank under the terms of the deposit, subject to any directions given by the Reserve
Bank in this regard.
III. Regulation of acceptance of deposits: The Banking Regulation Act does not contain any specific provisions for
regulation of acceptance of deposits of banks. However, Section 35 A which authorises the Reserve Bank to give
directions is wide enough to cover acceptance of deposits. Accordingly, acceptance of deposits may be regulated in
the public interest or in the interest of banking policy or in the interests of depositors by issuing directions. The
Reserve Bank issues directions from time to time regulating the rates of interest applicable to deposits. The
directions may either fix the rates or specify the minimum and/or maximum rate of interest on savings deposits and
time deposits for various periods as also for special categories of deposits like senior citizen, NRI deposits. If only
minimum and/or maximum rates are specified or no rates are specified, the banks are free to decide their rates
accordingly. The directions issued by the Reserve Bank may also stipulate conditions regarding minimum or
maximum periods for which deposits may be accepted, reduction of interest payable on premature withdrawal and
payment of interest on renewal of overdue deposits.
However, currently RBI prescribes the minimum and maximum period for which deposits can be accepted and
prescribes interest rates only in respect of Savings Deposits and NRI deposits leaving others for the individual
banks.
IV. Returns on unclaimed deposits: Banks have to file a return every year on their unclaimed deposits under Section
26 of the Banking Regulation Act. The return has to be filed within thirty days of the end of each calendar year in

29
 the form and manner prescribed and should cover all deposits not operated for ten years. In the case of fixed
deposits the period of ten years starts from the expiry of the period of the deposit.

3.4 NOMINATION
I. Repayment of Deposits: Section 45ZA of the Banking Regulation Act provides that a depositor or depositors of a
banking company (including co-operative banks) may nominate one person in the prescribed manner as nominee to
whom the deposit may be returned in the event of death of the sole depositor or depositors. Unless the nomination is
varied or cancelled, the nominee is entitled to all the rights of the depositor/s in the event of death of the depositor/s.
In the case of minor nominees, there is also a provision to appoint a person to receive the deposit on behalf of the
minor. Payment by a bank in accordance with these provisions gives a valid discharge to the bank, but this does not
affect the right or claim a person may have against the nominee in respect of the amount received by him. Rule 2 of
the Banking Companies (Nomination) Rules, 1985 provides for the procedure and forms for making nomination in
respect of deposits with commercial banks. In the case of Co-operative banks, similar provisions are incorporated in
the Co-operative Banks (Nomination) Rules, 1985.
II. Articles in Safe Custody and Safety Lockers: There are also provisions in the Banking Regulation Act for
nomination in respect of articles kept in safe custody with banks and safety lockers. Sections 45ZC and 45ZE
provide that any person who leaves any article in safe custody and in safety lockers respectively with a banking
company, may nominate one person as nominee to receive the article in the event of death of that person. The
nomination has to be in the prescribed manner and on return of articles kept in safe custody or removal of contents
of locker by nominees as provided, the bank gets a valid discharge. Rules 3 and 4 of the Banking Companies
(Nomination) Rules, 1985, and also the Rules 3 and 4 of the Co-operative Banks (Nomination) Rules, 1985 deal
with the form and procedure applicable to articles in safe custody and safety lockers respectively in the case of
banking companies and co-operative banks.

3.5 LOANS AND ADVANCES

I. The definition of 'banking' in Section 5(b) of the Banking Regulation Act indicates that acceptance of deposits may
be for lending or investment. Thus, lending or making of loans and advances is a core business of a banking
company. Lending may be for short term or long term, on secured or unsecured basis and for different purposes.
II. Regulation of Loans and Advances
a) The Reserve Bank is empowered under Section 21 of the Banking Regulation Act to issue directions to control
advances by banking companies. Such directions may be issued to banking companies generally or to any particular
banking company. The Reserve Bank may determine the policy in relation to advances and issue directions when it
is satisfied that it is necessary to give directions:
(i) In public interest (ii) In the interests of depositors
(iii) In the interests of banking policy.
b) The directions given by the Reserve Bank are binding on banking companies, and may be on one or more of the
following matters:
i. Purpose for which advances may or may not be made.
ii. Margins, to be maintained in respect of secured advances.

30
 iii. Maximum amount of advances or other financial accommodation which may be made to any company, firm,
association of persons or individual. The policy on these matters may be specified having regard to the paid-up
capital, reserves and deposits of the banking company and other relevant considerations.
iv. Maximum amount up to which guarantees may be given by a banking company on behalf of any company, firm,
association of persons or individual. In this case, also the paid-up capital, reserves, deposits and other relevant
considerations have to be taken into account for determining the maximum amount.
v. Rate of interest and other terms and conditions on which advances and other financial accommodation may be
made or guarantees may be given.
The Reserve Bank issues directions from time to time regulating the lending operations of banking companies in
exercise of these powers vested under Section 21. Apart from this, the general powers to give directions under
Section 35A are also available for regulation of loans and advances.
III. Selective Credit Control
A) Purpose: Banks have been traditionally financing trade and commerce and against items they deal in even
before the country started industrializing. To ensure that prices of essential commodities like food grains,
pulses, edible oils, sugar, jaggery and cotton and textiles are not increased by certain sections of the business
community with a motive of profit maximisation by hoarding with the help of bank finance, these restrictions
have been put in place. These cover the quantum of credit that can be extended and also the rate at which it can
be extended.
With self-sufficiency achieved by our country over the years in almost all of the above, RBI had taken them out
of the purview of selective credit control and currently restrictions are there only in case of levy sugar.
B) Methods and tools: Selective credit control seeks to influence the demand for credit by
a) Making borrowing more costly for certain purposes which are considered relatively inessential, or
b) By imposing stringent conditions on lending for such purposes, or (iii) by giving concessions for certain
desired types of activities.
The tools employed for exercising selective credit control are:
i. Minimum margins for lending against selected commodities;
ii. Ceilings on the levels of credit; and
iii. Charging of minimum rate of interest on advances against specified commodities.
The quantum and cost of credit are regulated by operating these tools of control.
C) Price control: In India, selective credit control has been generally used for preventing speculative hoarding of
essential commodities and basic raw materials using bank credit. This is with a view to check the undue rise of
prices of such sensitive commodities.
D) Restrictions on loans and advances: Section 20 of the Banking Regulation Act imposes certain restrictions on
loans and advances. Accordingly, no banking company shall grant loans or advances on the security of its own
shares. Further, a banking company, is prohibited from entering into any commitment for granting any loans or
advances to or on behalf of any of its directors. The prohibition also applies to loans and advances to:
Firms in which any director is interested as a partner, manager, employee or guarantor, and Any company
(other than a company registered under section 25 of the companies act) in which a director of the banking

31
 company holds substantial interest as defined in section 5(ne) of the act or of which he is director, manager,
managing agent, employee or guarantor.
If the director of a banking company is a partner or guarantor of any individual, loans and advances to such
individual are also barred. 'Director' includes a member of any board for managing or advising the bank
regarding management of all or any of its affairs. It is open to the Reserve Bank to specify any transaction
as not being a loan or advance for this purpose by a general or special order. In so doing the bank has to
consider the nature of the transaction, period, manner and circumstances in which the amount is likely to be
realised, the interest of depositors and other relevant considerations. If there is any doubt or dispute as to
whether a transaction is a loan or advance, the decision of the Reserve Bank in the matter shall be final.
E) Restrictions on power to remit debt: For remitting any debt to its directors, a banking company requires prior
permission of the Reserve Bank under Section 20A of the Banking Regulation Act. Permission is also required
for remission of loans to:
Any firm or company in which a director is interested as director, partner, managing agent, or
Any individual for whom a director is partner or guarantor. Any remission made in contravention of section
20 is void and will have no effect.

3.6 REGULATION OF INTEREST RATE

The Reserve Bank is authorised to regulate interest rates under Section 21 (read with Section 35A) of the Banking
Regulation Act. This includes rates of interest for loans and advances as well as deposits. While giving directions on interest
rates, there should not be any discrimination against any class of depositors or loanees or banks. Any differential treatment
should be justifiable in law as not being against the principles of equality. In Harjit Singh vs Union of India (AIR 1994 SC
1433), the Supreme Court held in the context of reduction of rate of interest on bank loans to riot victims that the concession
should be extended to loanees from financial institutions also, as there was no basis for discrimination between loanees from
banks and loanees from financial institutions.
I. Interest on deposits: The rates of interest on deposits were not regulated by the Reserve Bank until 1964. Hence, it
was open to the banks to decide their deposit rates freely. Thereafter the Reserve Bank has been issuing directions
from time to time regulating rates of interest applicable to different types of deposits. Accordingly, payment of
interest on current account was prohibited. As the directions are issued by virtue of the powers vested in the Reserve
Bank under Section 35A of the Banking Regulation Act, before issuing the directions the Bank has to be satisfied
that the directions are necessary in public interest or in the interest of depositors or of banking policy. Reserve Bank
may permit higher rate of interest in favour of certain categories of depositors like former/existing employees or
depositors of certain classes of banks like co-operative banks. Of late, the movement has been in the direction of
liberalisation of interest rates, thereby giving increased freedom to banks to decide the rates themselves.
II. Interest rate on loans and advances: Interest rate on loans and advances is subject to regulation specifically under
Section 21(2)(e) of the Banking Regulation Act apart from the general provisions of Section 35A. The Reserve
Bank has been issuing directions from time to time under Section 21 (read with Section 35A) of the Act regulating
different aspects of lending including lending rates. Accordingly, different rates are permissible for different sectors
like small-scale industries, agriculture, large-scale industries, etc., and of late, much freedom has been given to

32
 banks to decide the rates themselves. Further, the rate of interest may vary on the basis of the period of the loan. The
Reserve Bank tightens the regulations or gives relaxations thereby permitting banks to decide the rates on their own,
depending on the position of money supply in the public interest or in the interest of depositors or of banking policy.
Currently the directions of RBI regarding interest rates of advances cover only finance to exporters and small loans
with limits up to Rs 2 lac and DRI loans.
III. Usurious loans Act, 1918: The Usurious Loans Act, 1918 prohibits lending at exorbitant rates. The law has been
made to protect the weaker borrowers from the powerful moneylenders. Similarly, debt relief legislation in different
states attempts to protect the agriculturists and other weaker sections from unscrupulous lenders, by remitting debts
or giving other concessions. Although the lending rates of banks are regulated by the Reserve Bank, borrowers often
used to resort to these laws for remitting loans or reducing rates of interest in respect of loans taken by them from
banks. This was coming in the way of the monetary policy decided by the central bank. Accordingly, Section 21A
was inserted in the Banking Regulation Act to make the rates of interest charged by banking companies beyond the
scrutiny of courts.
IV. Protection to interest rate: Section 21A of the Banking Regulation Act provides that a transaction between a
banking company and its debtor cannot be reopened by any court on the ground that the rate of interest charged is
excessive. This provision is given an overriding effect over the provisions of the Usurious Loans Act, 1918 or any
other law relating to indebtedness in force in any state.
Section 21A was held to be valid and not ultra vires the Constitution by the Supreme Court. In Corporation Bank vs D. S.
Gowda [(1994) 5 SCC 213], the Supreme Court held that banks can compound interest on annual rates and not half yearly
rates in view of the express directives of the Reserve Bank. The court further held that where the Reserve Bank fixes both
minimum and maximum rates of interest, courts would not interfere in the matter of interest rate, if the rate charged by the
bank is not in violation of the Reserve Bank directive. However, the court did not express any opinion on the question
whether Section 21A would debar the courts from interfering if the circulars or directives of the Reserve Bank do not fix the
maximum and leave it to the discretion of the banks to fix the rate above the minimum.

3.7 REGULATION OF PAYMENT SYSTEMS

The Reserve Bank of India Act, until recently, did not contain any provision for regulation of payment systems. Section 58
empowers the Bank to make regulations for giving effect to the provisions of the Act and Clause (g) of the sub-Section (2)
thereof, provides for making provisions for regulation of clearing houses for the banks including post office saving banks.
(The clearing houses are now functioning under the uniform clearing house rules and regulations framed by the mutual
consent of members and no statutory rules or regulations have been framed.) However, the regulation of payment systems
has become important in the context of electronic payment systems becoming popular and the probability of complications
in the absence of a suitable regulatory framework with statutory backing. In the absence of specific powers under the Act,
the Bank has not been able to frame any regulations relating to payment systems. Hence, the Information Technology Act,
2000 has amended the Reserve Bank of India Act, inserting the Clause (pp) in Section 58 (2) empowering the Reserve Bank
to frame regulations for payment systems of banks and financial institutions. Financial institution for this purpose will have
the same meaning as provided in the Clause (c) of Section 45 of the Reserve Bank of India Act. Accordingly, the Central
Board of the Reserve Bank has framed the Reserve Bank of India (Board for Regulation and Supervision of Payment and

33
Settlement Systems) Regulations, 2005. Further, RBI is in the process of finalising the guidelines under the Payment and
Settlement Systems Act, 2007.
i. Board for regulation and supervision of Payment and Settlement Systems: The Reserve Bank, in terms of the RBI (Board
for Regulation and Supervision of Payment and Settlement Systems) Regulations, 2005, has constituted a Board for
Regulation and Supervision of Payment and Settlement Systems (BPSS) as a committee of its Central board. The Board has
the Governor of the Bank as its chairman and its functions include prescribing policies relating to the regulation and
supervision of all types of payment and settlement systems, setting standards for existing and future systems, authorising the
payment and settlement systems, determining criteria for membership to these systems including continuation, termination
and rejection of membership.

3.8 INTERNET BANKING GUIDELINES

The Reserve Bank has issued guidelines in respect of internet banking. These guidelines cover:
(i) technology and security issues; (ii) legal issues;
(iii) regulatory and supervisory issues.
These guidelines apply, in addition to Internet banking, to other forms of electronic banking to the extent relevant. All
banks offering internet banking have to make a review of their systems in the light of these guidelines and report to
the Reserve Bank the types of services offered, extent of their compliance with the recommendations, deviations, if
any and their proposal indicating a timeframe for compliance.

3.9 REGULATION OF MONEY MARKET INSTRUMENTS

The Reserve Bank of India (Amendment) Act, 2006 (Section 45W) empowers the Bank, in public interest or to regulate the
financial system of the country to its advantage, to determine the policy relating to interest rates or interest rate products and
give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign
exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time. Further, the Bank may,
for the purpose of enabling it to regulate these agencies call for any information, statement or other particulars from them, or
cause an inspection of such agencies to be made. However, the directions issued by the Bank in this behalf shall not relate to
the procedure for execution or settlement of the trades in respect of the transactions on the recognised Stock Exchanges.
Every director or member or other body for the time being vested with the management of the affairs of the agencies falling
under Section 45 W has to comply with the directions given by the Reserve Bank and submit the information or statement or
particulars as required.

3.10 BANKING OMBUDSMAN

Ombudsman is generally an authority (official) appointed to receive and investigate on the public grievances against the
Government or any other authority or institution or organisation and redress such grievances as a non-adversarial
adjudicator, or an alternative to the adversary system for resolution of disputes. The position is that of an independent and
non-partisan officer who deals with specific complaints from the public against administrative injustice and
maladministration. The banking ombudsman is an authority originally established under the Banking Ombudsman Scheme,
1995 by the Reserve Bank of India in exercise of the powers vested in it under Section 35A of the Banking Regulation Act.
The scheme aimed at resolution and settlement of complaints of the banking public against the commercial banks (excluding

34
RRBs) and the scheduled primary co-operative banks without resorting to courts. It was modified by the Banking
Ombudsman Scheme, 2002 and later by the Banking Ombudsman Scheme, 2006 to enlarge the extent and scope of the
authority and functions of banking ombudsman for 'redressal of grievances against deficiency in banking services,
concerning loans and advances and other specified matters'. All commercial banks, regional rural banks and scheduled
primary co-operative banks are required to comply with the modified scheme.
1. Object of the scheme: The object of the scheme is to enable resolution of complaints relating to specified services
rendered by the banks and to facilitate the satisfaction or settlement of such complaints.
2. Grounds of complaint: The grounds on which complaints may be made to the banking ombudsman are:
3.
i. Deficiency in banking or other services in respect of:
(a) non-payment or inordinate delay in the payment or collection of cheques, drafts, bills, etc.; (b) non-acceptance, without
sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof;
(c) non-acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof; (d) non-
payment or delay in payment of inward remittances; (e) failure to issue or delay in issue of drafts, pay orders or bankers'
cheques; (f) non-adherence to prescribed working hours; (g) failure to honour guarantee or letter of credit commitments; (h)
failure to provide or delay in providing a banking facility (other than loans and advances) promised in writing by a bank or
its direct selling agents; (i) delays, non-credit of proceeds to parties' accounts, non-payment of deposit or non-observance of
the Reserve Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account
maintained with a bank; (j) delays in receipt of export proceeds, handling of export bills, collection of bills, etc., for
exporters provided the said complaints pertain to the bank's operations in India; (k) complaints from Non Resident Indians
having accounts in India in relation to their remittances from abroad, deposits and other bank-related matters; (1) refusal to
open deposit accounts without any valid reason; (m) levying of charges without adequate prior notice to the customer; (n)
non-adherence by the bank or its subsidiaries to the instructions of Reserve Bank on ATM/ Debit card operations or credit
card operations; (o) non-disbursement or delay in disbursement of pension (to the extent the grievance can be attributed to
the action on the part of the bank concerned, but not with regard to its employees); (p) refusal to accept or delay in accepting
payment towards taxes, as required by Reserve Bank/Government; (q) refusal to issue or delay in issuing, or failure to
service or delay in servicing or redemption of Government securities; (r) forced closure of deposit accounts without due
notice or without sufficient reason; (s) refusal to close or delay in closing the accounts; (t) non-adherence to the fair
practices code as adopted by the bank; (u) any other matter relating to the violation of the directives issued by the Reserve
Bank in relation to banking services.
ii. Deficiency in banking service in respect of loans and advances pertaining to:
a) non-observance of Reserve Bank Directives on interest rates;
b) delays in sanction, disbursement or non-observance of prescribed time schedule for disposal of loan
applications but not declining credit;
c) non-acceptance of application for loans without furnishing valid reasons to the applicant;
d) non-observance of any other direction or instruction of the Reserve Bank as may be specified by the
Reserve Bank for this purpose from time to time;
iii. Such other matters as may be specified by the Reserve Bank from time to time in this behalf.

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4. Jurisdiction and Procedure: The location and the territorial jurisdiction of the ombudsman are as specified by the
Reserve Bank. A complaint may be made in writing by a person himself or through an authorised representative. No
complaint to the banking ombudsman shall lie unless,
a) The complainant had, before making a complaint to the banking ombudsman, made a written representation to
the concerned bank and the bank had rejected the complaint or the complainant had not received any reply
within a period of one month after the bank received his representation or the complainant is not satisfied with
the reply given to him by the bank;
b) The complaint is made not later than one year after the complainant has received the reply of the bank to his
representation or, where no reply is received, not later than one year and one month after the date of the
representation to the bank;
c) The complaint is not in respect of the same subject matter which was settled or dealt with on merits by any
previous banking ombudsman proceedings whether or not received from the same complainant or along with
one or more complainants or one or more of the parties concerned with the subject matter;
d) The complaint does not pertain to the same subject matter for which any proceedings before any court, tribunal
or arbitrator or any other forum is pending or a decree or award or order has been passed by any such court,
tribunal, arbitrator or forum;
e) The complaint is not frivolous or vexatious in nature;
f) The complaint is made before the expiry of the period of limitation prescribed under the indian limitation act,
1963 for such claims.
The Supreme Court has in a recent case, M/s Durga Hotel Complex vs. Reserve Bank of India and Ors. [Appeal
(civil) 1389 of 2007], observed that a banking ombudsman, though might have initially jurisdiction to entertain a
complaint on the basis that it has a legal foundation, in terms of the scheme, he may be divested of that jurisdiction,
or the foundation in law might be lost, on either of the parties, approaching the Court, the arbitrator or the debts
recovery tribunal in respect of the same subject matter. This is on the basis that the complaint must continue to have
a foundation in law at the time the ombudsman takes up the claim for his consideration and renders his decision or
award and that foundation would be lost when the complaint is taken to a Court, Arbitrator, Tribunal or any other
competent forum. The ombudsman being an authority or tribunal of limited jurisdiction conferred by the scheme,
the exercise of jurisdiction or power by the ombudsman would depend on his having jurisdiction, not only to
entertain a claim but also to end it. Accordingly, once he/she is deprived of his jurisdiction or gets deprived of his
jurisdiction over the subject matter, he/she could no more proceed with a complaint which was earlier filed and
therefore, a complaint goes out of his/her purview when the subject matter of it is taken to a court, arbitrator,
tribunal or forum. Moreover, the relief that can be granted by the ombudsman may not conflict with a more
comprehensive adjudication by a court, arbitrator, tribunal or forum with wider powers.
In short, when the ombudsman is about to pronounce his award, he finds that the subject matter of the dispute has
been taken to the debts recovery tribunal or a civil court or an arbitrator or to any other competent forum, the
ombudsman will have to decline jurisdiction to pass any order or award on the complaint to bring about a resolution
of the complaint by way of a non adversarial adjudication.
The ombudsman may call for information from the bank concerned and make endeavour to promote a settlement

36
 with the bank. The ombudsman is free to follow the procedure considered appropriate. Where a complaint is not
settled by agreement within a period of one month from the date,of receipt of the complaint or such further period as
the banking ombudsman may consider necessary, he may pass an award after affording the parties reasonable
opportunity to present their case. He shall be guided by the evidence placed before him by the parties, the principles
of banking law and practice, directions, instructions and guidelines issued by the Reserve Bank from time to time
and such other factors which in his/her opinion are necessary in the interest of justice. An award shall not be binding
on a bank against which it is passed unless the complainant furnishes a letter of acceptance of the award in full and
final settlement of his claim within a period of fifteen days from the date of receipt of copy of the award. If the
complainant fails to furnish his/her letter of acceptance within this time or within extended time of fifteen days, the
award will lapse. However, on a written request for extension of time, the banking ombudsman may grant extension
of time up to a further period of fifteen days for such compliance. Within one month from the date of receipt by the
bank of the acceptance in writing of the award by the complainant (or within such time not exceeding a period of
fifteen days that may be granted by the banking ombudsman), the bank has to comply with the award. However, if
the bank or the complainant is aggrieved by the award, it/ he can make an appeal to the appellate authority (Deputy
Governor, Reserve Bank) under the scheme.
5. Banking Ombudsman and Reserve Bank Directions: The legal position of banking ombudsman visa-vis the
Reserve Bank has been considered by the Supreme Court in Canara Bank vs P.R.N. Upadhyaya (AIR 1998 SC
3000). The court observed that since an ombudsman is appointed by virtue of the scheme framed under S 35A of the
Banking Regulation Act, 1949, he/she is obliged to comply with the directions/circulars and notifications issued by
the Reserve Bank under Section 35A or 21 of the Act. He/She is also required to issue directions to banks based on
the Reserve Bank directions/circulars and ensure their compliance. The ombudsman cannot ignore these circulars
and directions while dealing with the complaints filed by customers of banks. The impugned award having been
made, ignoring various circulars/directions issued by the Reserve Bank, the same was held to be not sustainable.
The court, therefore, set aside the impugned award and remitted the complaint to the ombudsman for its fresh
disposal in the light of the circulars/directions issued by the Reserve Bank with regard to charging of rate of interest
from the landlord loanees, whose buildings were taken on lease/rent by the concerned bank and calculating the
interest rate at quarterly rests.
6. Banking Ombudsman and Debt Recovery Tribunals: As regards the position of banking ombudsman vis-a-vis
the debt recovery tribunal, the Allahabad High Court in M/s Hindustan Ferro and Industries Ltd. vs Debt Recovery
Tribunal (AIR 2001 All 155) observed that while the object of the scheme is to enable resolution of complaints
relating to provision of banking services and the satisfaction or settlement of such complaints, the purpose of the
Act is to provide for the establishment of tribunals for expeditious adjudication and recovery of debts due to banks
and financial institutions and for matters connected therewith or incidental thereto. The procedure prevailing prior to
the enactment of the Act for recovery of debts due to the banks and financial institutions has blocked a significant
portion of their funds in unproductive assets, the value of which deteriorated with the passage of time. It was for this
compelling reason and to obviate the difficulties in recovering debts due to the banks and financial Institutions that
the Act was enacted. The scheme has nothing to do with the proceedings of recovery of debts due to the banks and
financial institutions. The scheme formulated by the Reserve Bank under the Banking Regulation Act, 1949 cannot

37
 override the provisions of the Act.

3.11 RESERVE FUNDS

I. Creation of Reserve Fund: Every banking company incorporated in India has to create a reserve fund under
Section 17(1) of the BR Act out of the profits as shown in the profits and loss account prepared under Section 29 of
the Act. Every year, a sum equivalent to not less than twenty per cent of such profits has to be transferred to the
reserve fund. Such transfer of profits to reserve fund has to be made before any dividend is declared.
II. Exemption from Contribution: If any banking company has an adequate paid-up capital and reserves in relation to
its deposit liabilities, the Reserve Bank may recommend to the Government of India for exemption from the
requirement of transfer of profits to reserve fund. Thereupon, the Government may pass an order in writing,
exempting the banking company from Section 17(1) for such period as may be specified in the order. No such order
shall be made unless the amount already in the reserve fund together with the amount in the share premium account
is not less than the paid-up capital of the banking company.
III. Appropriation from Reserve Fund/Share Premium Account: Appropriation of any amount from the reserve
fund or the share premium account has to be reported to the Reserve Bank within twenty-one days of such
appropriation. The banking company has also to explain the circumstances in which such appropriation was made. It
is open to the Reserve Bank in any particular case to extend the period for submitting the report or to condone the
delay in making the report.
IV. Foreign Banks: The provisions of Section 17(1) of the Banking Regulation Act for creating a reserve fund do not
apply to foreign banks operating in India. In their case, instead of creating a reserve fund under Section 17(1),
Section 11(2) of the Act requires them to deposit and keep deposited with the Reserve Bank an amount calculated at
twenty per cent of the profit for each year in respect of all the business transacted through their branches in India.
The amount may be deposited in cash or unencumbered approved securities or partly in cash and partly in
unencumbered approved securities. Section 11 (2A) also provides for exemption by Central Government on the
recommendation of the Reserve Bank, where the deposits already made are considered adequate in relation to the
deposit liabilities of the banking company.

3.12 MAINTENANCE OF CASH RESERVE

Every banking company which is a scheduled bank has a duty to maintain certain cash reserve with the Reserve Bank under
Section 42 of the Reserve Bank of India Act. In the case of non-scheduled banks, Section 18 of the Banking Regulation Act
provides for the maintenance of cash reserve.
I. Scheduled Banks: A scheduled bank is a bank included in the second schedule of the Reserve Bank of India Act.
Under Section 42(6) of the Act, the Reserve Bank may include any bank in the second schedule if it satisfies the
following requirements -
a) It has a paid-up capital and reserves of an aggregate value of not less than rs. 5 lac;
b) It satisfies the reserve bank that its affairs are not conducted in a manner detrimental to the interests of
depositors;
c) It is:
i. a state co-operative bank, or

38
 ii. a company as defined in Section 3 of the Companies Act, or
iii. an institution notified by the Central Government in this behalf, or
iv. a corporation or a company incorporated outside India under the foreign laws.
Thus, a banking company which has the requisite capital and reserves of Rs. 5 lac and the affairs of which are not
conducted in a manner detrimental to the interests of depositors is eligible to be included in the second schedule.
The Reserve Bank, may exclude any bank from the second schedule, if the aggregate value of its paid-up capital
falls below Rs. 5 lac, or its affairs are found to be conducted in a manner detrimental to the interests of depositors on
an inspection under Section 35 of the Banking Regulation Act, or if it goes into liquidation, or otherwise ceases to
carry on banking business.
II. Quantum of Cash Reserve: The cash reserve required to be maintained by a scheduled bank with the Reserve
Bank under Section 42(1) of the Reserve Bank of India Act (as amended in 2006) is an average daily balance, being
'such per cent of the total of the demand and time liabilities in India of that bank as shown in the return referred to in
the sub-Section (2), as the Reserve 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'. Thus, under the amended statute, the Reserve Bank
can, in order to secure monetary stability in the country, determine the CRR for scheduled banks without any ceiling
or floor rate (as against a statutory minimum of three per cent earlier). 'Average daily balance' for this purpose
means the average of the balances held at the close of business of each day for a fortnight. The liabilities, for this
purpose do not include paid-up capital and reserves and any credit balance in the profit and loss account.
Further, the amounts borrowed from the Reserve Bank, IDBI, Exim Bank, IIBI, National Housing Bank and
National Bank for Agriculture and Rural Development, are also excluded. Apart from this, in case of a scheduled
bank, other than a state co-operative bank, the aggregate of liabilities of the scheduled bank to the State Bank,
subsidiary banks, Nationalised banks, banking companies, cooperative banks and any financial institutions notified
by the Government in this behalf, shall be reduced by the aggregate of liabilities of these banks and institutions to
that scheduled bank. Further, the Reserve Bank is empowered under the sub-Section (1C) of Section 42 to specify,
from time to time whether any transaction shall be regarded as liability in India of a scheduled bank.
III. Interest: Until the amendment to the RBI Act in 2006, the Reserve Bank was authorised under the Act [Section
42(1 B)] to pay interest to a scheduled bank when it maintained reserves above the statutory minimum as required
under the Reserve Bank's notification under the erstwhile proviso to the sub-Section (1) or under the sub-Section
(1A) of Section 42. As the sub-Section (IB) providing for interest has been omitted now, the Reserve Bank cannot
pay interest on any portion of the CRR balances of banks.
IV. Returns: Every scheduled bank has to submit a return to the Reserve Bank showing its demand and time liabilities
and borrowings from banks in India, classifying them into demand and time liabilities and giving other details
required under Section 42(2) of the Reserve Bank of India Act. The return has to be as at the close of business on
each alternate Friday and has to be sent not later than seven days after the date to which it relates. In some cases, it
may be impracticable to furnish fortnightly returns by reason of the geographical position of the banks and its
branches. If so, the Reserve Bank may permit presentation of a provisional return fortnightly, to be followed by a
final return within twenty days after the date to which it relates. Alternatively, such a bank may be permitted to file
a monthly return within twenty days after the end of the month. In addition to the above, where the last Friday of the

39
 month is not an alternate Friday for the purpose of return, a special return as at the close of business on that day has
to be submitted within seven days. Where the relevant Friday is a holiday under the Negotiable Instruments Act, the
return has to be prepared as at the close of the preceding working day.
V. Penalties: When the balance maintained by any scheduled bank falls below the stipulated minimum, such a bank
shall be liable to pay a penal interest to the Reserve Bank. During the first fortnight, when such shortage occurs, the
penal interest shall be three per cent above the bank rate and if the shortage continues in the next fortnight, the penal
interest shall increase to five per cent above the bank rate. Where the shortfall still persists in the third fortnight,
every director, manager or secretary of the bank who is a wilful party thereto shall be punishable with a fine. In that
case, the Reserve Bank may also prohibit the bank from accepting fresh deposits. Contravention of the order of
prohibition is also punishable with a fine. Failure to file the return as required, also attracts a penalty under Section
45(4) of the Act. Where Reserve Bank is satisfied that a bank had sufficient reason for committing the default, either
in maintaining reserves or in filing return, the penalty may be waived. When penalty is imposed for a default, the
amount has to be paid within fourteen days of the notice demanding payment. On failure to pay accordingly,
Reserve Bank may obtain a direction from the Principal Civil Court for levying the penalty and obtain a certificate
for the amount which may be enforced like a decree of a civil court.
VI. Cash Reserves of Non-Scheduled Banks: In the case of banking companies, which are not scheduled banks under
Section 18 of the Banking Regulation Act, the cash reserve need not be maintained with the Reserve Bank. It may
be with the bank itself, or in a current account with the Reserve Bank or by way of net balance in current accounts
or in one or more of these ways. The balance maintained should not be less than three per cent of the demand and
time liabilities as on the last Friday of the second preceding fortnight. The bank has also to submit a return to the
Reserve Bank before the twentieth day of every month showing the amount so held on alternate Fridays during the
month, along with particulars of its demand and time liabilities in India on such Fridays. If the Fridays concerned
fall on holidays under the Negotiable Instruments Act, the returns have to be filed as on the preceding working day.

3.13 MAINTENANCE OF LIQUID ASSETS

Every banking company has a duty to maintain a certain percentage of their assets in India under Section 24 of the Banking
Regulation Act in the form and manner specified by the Reserve Bank by notification in the official gazette. Recently, the
Banking Regulation (Amendment) Ordinance, 2007 amended the provisions of Section 24, omitting the sub-Sections (1)
and (2) of Section 24 which provided for a statutory minimum requirement of 25 per cent. Under the sub-Section (2A), as
modified by the Ordinance, a scheduled bank, in addition to the average daily balance which it is, or may be required to
maintain under Section 42 of the Reserve Bank of India Act, 1934 shall maintain in India, assets, the value of which shall
not be less than such percentage not exceeding 40 per cent of the total of its demand and time liabilities in India as on the
last Friday of the second preceding fortnight. Banking companies other than scheduled banks have also to maintain such
assets in addition to the cash reserve, which they are required to maintain under Section 18 of the BR Act.
I. Returns: For ensuring compliance with the above provisions, a monthly return has to be submitted to the Reserve
Bank by every banking company. The return has to be submitted not later than twenty days from the end of the
month to which it relates, in the prescribed form and manner and giving particulars of assets and demand and time
liabilities at the close of business of each alternate Friday. If such a Friday is a public holiday, the return has to be

40
 prepared as at the close of the preceding working day. Without prejudice to the above, the Reserve Bank is also
empowered to require a banking company to furnish a return showing particulars of the assets and demand and time
liabilities as at the close of each day of a month.
II. Penalty for Default: If the balance on any alternate Friday (or the preceding working day, when such Friday is a
holiday) falls below the minimum requirement, the banking company is liable to pay to the Reserve Bank penal
interest at the rate of three per cent above bank rate on the shortfall for the day. If the default recurs on the
succeeding alternate Friday, the penal interest is raised to five per cent above the bank rate on the shortfall. If the
default occurs on the next succeeding Friday, then every director, manager and secretary of the banking company is
punishable with a fine. The Reserve Bank is also empowered to impose a similar penal interest for shortfall in the
assets on any day and if shortfall continues on the succeeding working day, the higher penal interest is payable as
above. If the Reserve Bank is satisfied on the application of a banking company that it had sufficient cause not to
comply with the provisions as to maintenance of assets, penal interest may be waived.

3.14 ASSETS IN INDIA

I. Quarterly position of assets: Every banking company has to maintain in India certain amount of assets as required
under Section 25 of the Banking Regulation Act. Accordingly, at the close of business on the last Friday of every
quarter, such assets shall not be less than seventy five per cent of the demand and time liabilities of the banking
company in India. If the last Friday is a holiday under the Negotiable Instruments Act, the assets are based upon as
at the close of business on the preceding working day. 'Quarter' for this purpose means the period of three months
ending on the last day of March, June, September and December. This provision is meant to ensure that the
resources mobilised by banks operating in India, especially the foreign banks, are largely invested within the
country. The assets may be in cash, gold or unencumbered approved securities. 'Assets in India' also include export
bills drawn in and import bills drawn on and payable in India and expressed in currencies approved by the Reserve
Bank for this purpose. Such bills and securities approved by the Reserve Bank in this behalf are treated as assets in
India even if these assets were held outside India. The paid-up capital, reserves and any credit balance in the profit
and loss account of a banking company shall not be treated as 'liabilities in India' for this purpose.
II. Returns: A return regarding the assets maintained in India under Section 25(1) of the Banking Regulation Act has
to be submitted to the Reserve Bank within one month from the end of every quarter. Such return has to be filed in
the form and manner prescribed by the rules made under the Act.

3.15 LET US SUM UP

I. The Banking Regulation Act empowers the Reserve Bank to issue directions to banking companies in public
interest, in the interest of banking policy and in the interest of depositors. Section 21 provides for the issue of
directions to regulate loans and advances by banking companies. This may be done by regulating the purposes of
lending, margins in respect of secured loans, rate of interest and terms and conditions of lending. Section 35A gives
wide general powers to issue directions. The Reserve Bank issues directions from time to time under Section 21
(read with Section 35 A) regulating acceptance of deposits and lending. Under Section 21A of the Act, the rate of
interest on loans and advances contracted between a bank and its customer is not liable to be reopened by a court of
law. Section 20 of the Act imposes restrictions on loans and advances to directors, and companies and firms in

41
 which directors are interested as director, partner, etc.
II. A banking company which is a scheduled bank has to maintain a certain percentage of the time and demand
liabilities as cash reserve with the Reserve Bank under Section 42 of the Reserve Bank of India Act, as notified by
the Reserve Bank from time to time. Failure to do so renders the banking company liable to penalty. For non-
scheduled banking companies, Section 18 of the BR Act provides for cash reserve. Banking companies have also to
maintain a certain percentage of their demand and time liabilities in liquid assets as stipulated under Section 24 of
the BR Act. These assets may be maintained to the extent and in the form and manner as notified by the Reserve
Bank. Apart from this, banking companies are required to maintain such assets in India at not less than seventy five
per cent of demand and time liabilities as at the close of business of the last Friday of every quarter. Banking
companies also have to transfer to the reserve fund twenty per cent of their annual profits as disclosed in the profit
and loss account.

UNIT 4 - RETURNS, INSPECTION, WINDING UP

4.0 Objectives
4.1 Introduction
4.2 Annual Accounts and Balance Sheet
4.3 Audit and Auditors
4.4 Submission of Returns
4.5 Preservation of Records and Return of Paid Instruments
4.6 Inspection and Scrutiny
4.7 Board for Financial Supervision
4.8 Acquisition of Undertakings
4.9 Amalgamation of Banks
4.10 Winding up of Banks
4.11 Penalties for Offences
4.12 Let Us Sum Up

4.0 OBJECTIVES
The objectives of this unit are to understand the laws applicable to banking companies in respect of
Preparation of accounts and balance sheet
Audit of accounts
Filing of returns
Inspection and scrutiny
Acquisition of assets by the central government
Amalgamation with other banks
Winding up
Penalties for default or contravention

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4.1 INTRODUCTION
Banking companies have to prepare their balance sheet and accounts annually as provided in the Banking Regulation Act.
The accounts have to be audited by duly qualified auditors as stipulated in the Act. The audited balance sheet and accounts
have to be submitted as returns to the Reserve Bank and copies thereof have to be submitted to the Registrar of Companies.
Banking companies have to file many other returns to the Reserve Bank. The Banking Regulation Act also provides for
inspection and scrutiny of the books and accounts of banking companies. The board for financial supervision has been set up
for this purpose. The Central Government is authorised to acquire the assets of banking companies and order the
amalgamation of any banking company with another banking company. The Reserve Bank has the power to apply to the
High Court for the winding up of banking companies. Non-compliance with the provisions of the Reserve Bank of India
Act, the Banking Regulation Act and the orders, rules, regulations, or directions issued under them is punishable under these
acts. In this chapter, we examine the law relating to the above matters.

4.2 ANNUAL ACCOUNTS AND BALANCE SHEET

I. All Banks whose shares are listed with Stock Exchanges are required to publish their unaudited quarterly results as
per proforma prescribed by the SEBI. Every banking company has to prepare its balance sheet and profit and loss
account as stipulated in Section 29 of the Banking Regulation Act. The balance sheet and profit and loss account,
has to be prepared at the end of each calendar year or on expiry of the twelve months period, ending with any other
date which the Central Government may notify in the official gazette in this behalf, as on the last working day of the
year or the period, as the case may be. For this purpose, banking companies incorporated in India, have to cover
their entire business and in the case of foreign banks operating in India, the business transacted through all their
branches in India. While preparing the accounts, the banking company has to comply with the directions and
instructions issued by the Reserve Bank in respect of income recognition, asset classification, provisioning, etc.,
from time to time.
II. The balance sheet and profit and loss account of a banking company incorporated in India has to be signed by the
manager or principal officer of the company and at least three directors if there are more than three directors and by
all directors if there are not more than three directors. In the case of foreign banks, the manager or the agent of its
principal office in India can sign.
III. The balance sheet and profit and loss account have to be prepared in the forms set out in the III Schedule to the BR
Act or as near thereto as circumstances permit. The Companies Act requires every company to prepare its balance
sheet and profit and loss account in the forms set out in the part I of schedule VI to that Act. However, the
respective provisions of the Banking Regulation Act have overriding effect in respect of banking companies. Hence,
the provisions of the Companies Act that are inconsistent with the provisions of the Banking Regulation Act are not
applicable to banking companies. However, those provisions of the Companies Act that are consistent with the
Banking Regulation Act are applicable. The forms specified in the third schedule of the Banking Regulation Act
may be modified by the Central Government from time to time by notification in the official gazette.
IV. In the case of banking companies, the profit and loss account, which has to be placed before the annual general
meeting should relate to the period ending with the last working day of the year immediately preceding the year in
which the annual general meeting is held. The provisions of Section 210 of the Companies Act, in this behalf have

43
 been specifically made inapplicable to banking companies by Section 2y^3A) of the Banking Regulation Act.
V. Publication of Accounts and Balance Sheet: The accounts and balance sheet prepared under Section 29 of the
Banking Regulation Act along with the auditors' report have to be published, as provided in Section 31 thereof read
with Rule 15 of the Banking Regulation (Companies) Rules, 1949. Accordingly, the publication has to be made in a
newspaper, which is in circulation at the place where the banking company has its principal office, within a period
of six months from the end of the period to which the account and balance sheet relate. For this purpose, 'newspaper'
means any newspaper or journal published at least once a week but does not include a journal other than a banking,
commercial, financial or economic journal. As per current guidelines, Banks whose shares are listed in the capital
market are required to publish their unaudited quarterly results as per proforma prescribed by SEBI.
VI. Submission to Reserve Bank: Every banking company has to submit three copies of its balance sheet and profit
and loss account to the Reserve Bank within three months from the end of the period to which they relate. This
period may be extended by the Reserve Bank by a further period not exceeding three months.
VII. Furnishing of Accounts and Balance Sheet to Registrar: Section 220 of the Companies Act provides for
submission by companies of copies of accounts and balance sheet along with the auditor's report to the Registrar of
Companies. However, in the case of banking companies, Section 32 of the Banking Regulation Act provides for
furnishing to the registrar three copies of the accounts, balance sheet and auditor's report submitted to the Reserve
Bank under Section 31 of the Act, which would be dealt with in all respects, as if these were submitted under
Section 220 of the Companies Act. When any company submits additional information relating to balance sheet and
profit and loss account to the Reserve Bank under Section 27(2) of the Banking Regulation Act, the company has to
send a copy thereof to the Registrar as well.
VIII. Display of Balance Sheet and Accounts: Foreign banks (banking companies incorporated outside India)
operating in India have to display in a conspicuous place, in their principal office a copy of the last audited balance
sheet and profit and loss account. This has to be done not later than the first Monday in August of any year in which
it carries on business. The accounts and balance sheet have to be kept displayed until replaced by a copy of the
subsequent balance sheet and profit and loss account. Similarly, foreign banks have also to display copies of their
complete audited balance sheet and profit and loss account relating to their banking business as soon as these are
available and keep displayed till the subsequent accounts are available.

4.3 AUDIT AND AUDITORS

The balance sheet and profit and loss account of a banking company have to be audited, as stipulated under Section 30 of the
Banking Regulation Act. Accordingly, a person duly qualified under any law for the time being to be an auditor of
companies is eligible to be the auditor of a banking company.
I. Powers and Functions of Auditors: The powers, functions and duties of the auditors and the liabilities and
penalties to which they are subjected to under Section 227 of the Companies Act are applicable to auditors of
banking companies. In addition to the above, the auditor of a banking company has to give certain additional
information in his audit report. In the case of banks incorporated in India, the additional matters are as under:
Whether or not information and explanation, required by him were found to be satisfactory;
Whether or not the transactions of the company, as noticed by him were within the powers of the company;

44
 Whether or not returns from branches were adequate for the audit;
Whether or not profit and loss account shows a true picture of the profit and loss for the period covered;
Any other matter, which the auditor considers necessary to bring to the notice of the shareholders of the
company.
In dealing with bank accounts, the responsibility of the auditor is not confined to safeguarding the interests of the
proprietors. The auditor will be reasonably blamed, if after signing the usual auditor's report on an apparently sound
balance sheet, the bank is afterwards found insolvent (See the judgment of the Kerala High Court in Institute of
Chartered Accountants vs. Srinivasa, AIR 1960 Kerala. 309 at 311 and the judgment of Madras High Court in
Registrar of Companies vs. RM. Hegde, AIR 1954 Madras 1080 at 1084).
II. Special Audit: Reserve Bank is empowered under Section 30( IB) of the Banking Regulation Act to order a special
audit of the accounts of any banking company. Such an order may be passed when the Reserve Bank is of the
opinion that special audit is necessary in the public interest or in the interest of the banking company or its
depositors. An order, on special audit may relate to any transaction or class of transactions or such period or periods
as the Reserve Bank may specify in the order. The bank may by the same order or by a different order appoint a
duly qualified auditor for this purpose or may direct the auditor of the banking company himself to conduct such a
special audit. The Reserve Bank's directions are binding on the auditor of the banking company and the auditor has
to make a report of such an audit to the Reserve Bank and also give a copy thereof to the banking company. The
expenses in relation to the special audit have to be borne by the banking company.

4.4 SUBMISSION OF RETURNS

Every banking company has to furnish several returns to the Reserve Bank under various provisions of the Banking
Regulation Act and under the Reserve Bank of India Act. The details of these returns are discussed below.
I. Return on Liquid Assets: Every banking company has to submit a return of its liquid assets under Section 24(3) of
the Banking Regulation Act. The return has to be submitted within twenty days from the end of the month to which
it relates. The return has to be in the form prescribed under Rule 13A of the Banking Regulation (Companies) Rules,
1949. The return should contain particulars of assets and the demand and time liabilities, as at the close of business
of each alternate Friday or when such a Friday is a holiday, as at the close of business of the preceding working day.
The Reserve Bank is also empowered to require a banking company to furnish returns showing particulars of assets
and demand and time liabilities as at the close of each day of the month.
II. Monthly Returns: Every month, a banking company has to submit to the Reserve Bank a return under Section 27
of the BR Act, showing its assets and liabilities in India as at the close of business on the last Friday of the previous
month. Such a return has to be submitted before the close of the month succeeding to which it relates. The return has
to be in the form prescribed under Rule 14A of the Banking Regulation (Companies) Rules, 1949. Apart from this,
the Reserve Bank may also call for statements and information relating to the business or affairs of a banking
company at any time. The bank may direct the banking company to submit such statement or information within
such time as it may direct. The Bank may also call for information every half year regarding investments of a
banking company or the classification of its advances in respect of industry, commerce or agriculture.
III. Accounts and Balance Sheet: The annual accounts and balance sheet have to be submitted to the Reserve Bank

45
 within three months from the end of the period to which they relate. The Reserve Bank may extend the time by a
further period of three months.
IV. Return of Assets in India: A banking company has to submit to Reserve Bank under Section 25(1) of the Banking
Regulation Act, a quarterly return regarding its assets in India. The return has to be submitted within one month of
the end of the quarter. The return has to be filed in the form specified in the Rule 14A of the Banking Regulation
(Companies) Rules.
V. Return of Unclaimed Deposits: Under Section 26 of the BR Act, a banking company has to file within thirty days
of the close of each calendar year a return on unclaimed deposits (not operated for ten years). This has to be
submitted as specified in the Rule 14B of the Banking Regulation (Companies) Rules.
VI. Return of Cash Reserve of Non-Scheduled Banks: Every banking company, not being a scheduled bank, has to
furnish a return to the Reserve Bank under Section 18(1) of the BR Act relating to cash reserve. The return has to be
submitted before the twentieth day of every month showing the amounts held on the alternate Fridays during a
month along with the particulars of demand and time liabilities in the form stipulated in the Rule 13A of the BR
(Companies) Rules.
VII. Return by Scheduled Banks: Under Section 42 of the RBI Act, scheduled banks have to submit returns to the
Reserve Bank of their demand and time liabilities as specified in the sub-Section (2) thereof.

4.5 PRESERVATION OF RECORDS AND RETURN OF PAID INSTRUMENTS

I. Preservation of Records: The Central Government is empowered under Section 45 Y of the Banking Regulation
Act to make rules specifying the periods of preservation of books, accounts and other documents by banks and the
periods of preservation of different instruments paid by banks. Accordingly, the Government has notified the
Banking Companies (Preservation of Records) Rules, 1985 and the Cooperative Banks (Period of Preservation of
Records) Rules, 1985. These rules specify the period of preservation of different types of ledgers and registers, and
records other than ledgers and registers. The rules further provide that, notwithstanding this, the Reserve Bank may,
having regard to the factors specified in Section 35A(1) of the BR Act, direct any bank by an order in writing for
preserving any books, accounts or registers for a longer period than the period specified under the rules.
II. Return of Paid Instruments: Under Section 45Z of the Banking Regulation Act, a bank is authorised to return paid
instruments to their customers even before the end of the period of preservation specified under the Act. However,
in that case, the bank shall not return the instrument without making and keeping in its possession a true copy of all
relevant parts of the instruments by a mechanical or another process ensuring accuracy of the copy. Banks are not
entitled to charge the customers (including Government departments and corporations) for giving such copies of
instruments.

4.6 INSPECTION AND SCRUTINY

I. Inspection: The Reserve Bank is empowered under Section 35 of the Banking Regulation Act to conduct an
inspection of any banking company. The bank may conduct such an inspection at any time. The Central
Government may also direct the Reserve Bank to conduct inspection of any bank and in that case, the Reserve Bank
is bound to comply with such a direction. After inspection of the books and accounts of the banking company, a
copy of the inspection report has to be given to the banking company. The directors and officers of a banking

46
 company are bound to produce for inspection all books, accounts and other documents in their custody. The
inspecting team may also require the bank to furnish any statements or information relating to the affairs of the
banking company within the time specified by them. The inspecting officer is authorised to examine any director or
officer of a banking company on oath.
II. Powers of the Government: A copy of the report of inspection has to be sent to the Central Government in all
cases where inspections have been conducted as directed by the Central Government. In other cases, it is optional
for the Reserve Bank to send copies of inspection to the Government. On consideration of the report, if the Central
Government is of the opinion that the affairs of a banking company are being conducted to the detriment of the
interests of the depositors, the Government may -
Prohibit the banking company from receiving fresh deposits.
Direct the Reserve Bank to apply for winding up of the banking company under Section 38 of the BR Act.
However, before taking such action, the Government has to give an opportunity to the banking company to make a
representation in respect of the report. The Central Government is authorized to defer the passing of such an order
or to cancel or modify such an order subject to any terms and conditions imposed by it. It is also open to the Central
Government to publish an inspection report or a portion thereof after giving the banking company a reasonable
notice.
III. Scrutiny: Apart from making regular inspections, Reserve Bank is also empowered to conduct a scrutiny of the
affairs and the books and accounts of any banking company under the sub-Section (1 A) of Section 35 of the
Banking Regulation Act. One or more officers of the Reserve Bank may conduct such a scrutiny. A copy of the
report has to be furnished to the banking company, if it makes a request for the same or if adverse action is
contemplated against the banking company, based on the scrutiny. Otherwise, unlike in the case of inspection, it is
not mandatory to give a copy of the report to the banking company. The powers of the Reserve Bank to call for
books, accounts and documents or statements and information as for examination of any director or officer of the
banking company on oath extend to scrutiny as well.

4.7 BOARD FOR FINANCIAL SUPERVISION

I. Constitution of the Board: The Board for Financial Supervision (Board) is a committee established under
Regulation 4 of the Reserve Bank of India (Board for Financial Supervision) Regulations, 1994. These regulations
were framed by the Reserve Bank under Section 58 of the Reserve Bank of India Act, 1934 with the previous
sanction cf the Central Government. The Board has jurisdiction over the banking companies, Nationalized banks,
State Bank and its subsidiaries.
II. Composition of the Board: The Board consists of the following members:
Governor of the Reserve Bank of India, (S)he is the chairperson of the board.
Deputy Governors of the Reserve Bank of India, one of the deputy Governors shall be nominated by the
Governor as the full time vice chairman.
Four directors from the central board of the Reserve Bank nominated by the Governor as members, the
Governor has to make the nominations to the board in consultation with the central board of the Reserve Bank
(Central Board) for a specified period,

47
 III. Functions and Powers: The board performs the functions and exercises the powers of supervision and inspection
under the Reserve Bank of India Act and the Banking Regulation Act, in relation to different sectors of the financial
system, including banking companies. The board shall also perform any other function as may be notified by the
central board of the Reserve Bank. The board is assisted by the department of supervision in the Reserve Bank and
may also draw personnel from outside. The chairman, vice-chairman and members can jointly and severally
exercise the powers vested in the board, as may be specified by the central board from time to time. The board can
also authorize senior officers of the department of supervision with prior approval of the central board to carry out
certain functions. The board has to report to the central board on a half yearly time line.
IV. Meetings of the Board: The board meets at least once in a month. Three members, of whom, one shall be the
chairman or the vice chairman shall form a quorum for the meeting. A member who absents himself/herself without
leave of the chairman for three consecutive meetings of the board, would cease to hold office.
V. Executive Committee: The board has the power to constitute sub-committees. One such subcommittee is the
executive committee. The vice chairman of the Board, is the ex-official chairman of the committee and there shall
also be not less than two members of the board in that committee. The committee meets as often as necessary.
VI. Advisory Council: Governor may constitute an advisory council to tender advice from time to time to the board.
This council will have not less than five members having special knowledge of accountancy, law, economics,
banking, finance and management. The Governor presides over the meetings of the council and the vice-chairman
and other members are members of the council.

4.8 ACQUISITION OF UNDERTAKINGS

The Central Government can acquire the undertakings of banking companies in certain cases as mentioned in Section 36AE
of the Banking Regulation Act. 'Undertaking' means the entire organisation (See the judgement of the Supreme Court in
R.C. Cooper vs Union of India, AIR 1970 SC 564). Acquisition may be made if on receipt of a report from the Reserve
Bank, the Government is satisfied that it is necessary to acquire any undertaking on certain grounds. Before passing the
order, the Central Government may make such consultation with the Reserve Bank as it thinks fit. The grounds for
acquisition are as under:
Banking company has failed on more than one occasion to comply with the Reserve Bank's directions under Section
21 or 35A of the Banking Regulation Act.
Banking company is managed in a manner detrimental to the interests of depositors and it is necessary to acquire its
undertaking in the interests of depositors or in the interests of banking policy or for better provision of credit
generally or to any particular section of the community or any particular area.
Before acquiring the assets of a banking company, it has to be given a reasonable opportunity of showing cause
against the proposal.
I. On acquisition of the undertaking all the assets and liabilities of the acquired bank stand transferred to and vests in
the Central Government. It is also open to the Central Government to order the vesting of the undertaking of the
acquired bank in a company or corporation instead of vesting in the Government. In that case, the transferee bank
takes over all the acquired assets and liabilities of the transferer bank.
II. Power to make scheme: The Central Government is empowered under Section 36AF to make a scheme for any

48
 acquired bank. Such a scheme is framed in consultation with the Reserve Bank. The scheme may provide for all
matters relating to property, assets, liabilities, board of management, service of employees and their terms and
conditions, payment of compensation to shareholders of acquired bank and other matters. The Central Government
may modify or vary any such scheme after consulting the Reserve Bank. The scheme and any subsequent
modification thereof is published in the official gazette and laid down before the Parliament. The provisions of part
IIC of the Act providing for acquisition of undertakings of banks by the Government and of any scheme framed
there under shall have an overriding effect on other laws. The scheme shall have binding effect on the Government,
the acquired bank, members, creditors and depositors of the acquired bank and all other persons having any rights or
liabilities in respect of the acquired bank.
III. Compensation to shareholders: The shareholders of an acquired bank have a right to get compensation under
Section 36AG of the Banking Regulation Act. The amount thereof will be determined as provided in the fifth
schedule to the Act, after consultation with the Reserve Bank. There is also a provision (Section 36AH) for a
reference to a tribunal for hearing claims relating to compensation. If the compensation offered by the Government
or the transferee bank is not acceptable to any person to whom such compensation is payable, he may request the
Central Government to refer the matter to the tribunal, and a reference has to be made to the tribunal, subject to the
satisfaction of certain conditions. In the case of acquisition of the undertaking of a foreign bank in India, a reference
has to be made to the tribunal, if requested by the foreign bank.

4.9 AMALGAMATION OF BANKS

I. Voluntary Amalgamation: A banking company may be amalgamated with another banking company under
Section 44A of the Banking Regulation Act. For this purpose, a scheme has to be prepared, containing the terms of
such an amalgamation in a draft and placed before the shareholders of the two companies separately. The scheme
has to be approved by a resolution passed by majority of members representing two-thirds in value of the
shareholders of each company present in person or by proxy. Notice has to be given to every shareholder in this
behalf. A share holder who votes against such scheme or dissents to the scheme and gives notice as stipulated, may
claim the value of his shares from the banking company, in the event of sanction of the scheme by the Reserve
Bank. After the scheme is approved by the requisite majority, the scheme has to be submitted to the Reserve Bank
for sanction. On sanction by Reserve Bank, the assets and liabilities of the amalgamated company pass to the
banking company, with which it is to be amalgamated. The Reserve Bank may also direct that the amalgamated
company will stand dissolved from any specified date and intimate the Registrar of Companies accordingly. The
order of sanction of amalgamation by Reserve Bank will be the conclusive evidence of amalgamation.
II. Amalgamation by Government: The Central Government is empowered to order amalgamation of two banking
companies under Section 396 of the Companies Act. However, such power has to be exercised only after
consultation with the Reserve Bank.
III. Moratorium and Amalgamation: The Reserve Bank is authorised under Section 45 of the Banking Regulation Act
to apply to the Central Government for an order of moratorium in respect of any banking company where it appears
to it that there is good reason to do so. After considering the application, the Central Government may pass an order
of moratorium staying the commencement or continuation of any action or proceedings against the banking

49
 company for a fixed period. This may be on such terms and conditions as the Government thinks fit and prefers to
impose. The period of moratorium is extendable from time to time. However, the total period of moratorium shall
not exceed six months. During the period of moratorium, the banking company shall not make any payment to
depositors or discharge any liabilities or obligations to any other creditors unless otherwise directed by the Central
Government in the order of moratorium or at any time thereafter.
IV. Scheme of Amalgamation:
A) During the period of moratorium, Reserve Bank may prepare a scheme either for reconstruction of the banking
company, or for amalgamation of the banking company with any other banking institution. Such a scheme may be
prepared if the Reserve Bank is satisfied that it is necessary to do so:
in the public interest;
in the interests of the depositors;
for securing the proper management of the banking company;
in the interest of the banking system of the country as a whole.
B) The scheme of amalgamation or reconstruction may contain provisions for all or any of the matters specified in the
clauses (a) to (I) of the sub-Section (5) of Section 45. These include:
(i) constitution, name, registered office, capital assets, powers, rights, duties and obligations of the banking
company after reconstruction of the transferee company; (ii) transfer of assets from transferrer bank to transferee
bank, and terms and conditions thereof in the case of amalgamation; (iii) change in or appointment of board of
directors; (iv) alteration in memorandum and articles; (v) continuation of action by or against the banking company
after amalgamation or reconstruction; (vi) reduction of the interest or rights of members, depositors or other
creditors considered necessary in public interest or in the interest of members, depositors or creditors or for
maintenance of the business of banking company; (vii) payment in cash or otherwise to creditors and other
depositors; (viii) allotment of shares of the transferrer bank to the shareholders of transferrer bank for shares held by
them in the transferrer bank; (ix) continuance of service of employees after reconstruction or amalgamation.
The scheme has to provide for the continuance of all workmen and other staff (excepting those specifically excluded
by name in terms of the scheme) on the same terms and conditions of service as before. The scheme should also
provide that within three years, these employees have to be given the same pay and terms and conditions as are
applicable to the other employees of the transferee bank of corresponding rank or status of equivalent qualifications
and experience. See the judgements of the Supreme Court in State Bank of Travancore vs Elias (1970)2 SCC 761
and also K.I. Shepherd and others vs Union of India and others AIR 1988 SC 686. In the case of any dispute
regarding rank, status, etc., of employees in this regard, the decision of the Reserve Bank shall be final.
Scheme has also to provide for payment of terminal benefits to workers who have opted not to continue in service
on amalgamation or reconstruction and other employees, who have been specifically mentioned in the scheme for
exclusion from service. The scheme may contain other terms and conditions of amalgamation or reconstruction and
also incidental matters.
C) Sanction of Scheme by Government: A copy of the draft of the scheme prepared by the Reserve Bank has to be sent
to the Government and also to the banking company, transferee bank and any other banking company concerned in

50
 the amalgamation, for their suggestions and objections, if any. The Reserve Bank may specify the period for receipt
of such suggestions and objections. In the light of any suggestions and objections received, modification may be
made in the draft, as considered necessary by the Reserve Bank. Thereafter, the scheme, may be placed before the
Central Government for sanction. The Government may sanction the scheme with such modifications as it may
consider necessary. The scheme shall come into force from the date of the sanction.
D) Effect of Sanction: On the Central Government sanctioning the scheme, it becomes binding on the banking
company, transferee bank and the members, depositors and other creditors, employees and any person having any
right or liability in relation to the banking company. The sanction by the Central Government is the conclusive
evidence that the amalgamation or reconstruction has been done in compliance with the provisions of Section 45 of
the Act. The assets and properties of the banking company shall stand transferred to and vest in, and liabilities shall
stand transferred and become liabilities of the transferee bank as provided in the scheme.
If any difficulty arises in implementing the scheme, the Central Government may pass the necessary orders for removing the
difficulties. A copy of the scheme and any orders passed for removing difficulties has to be placed before the Parliament.
Consequent to amalgamation, the transferee bank has to carry on the business of the banking company acquired by the
transferee bank, according to the law governing the transferee bank. The Central Government may give necessary
exemptions and modifications in this behalf on the recommendation of the Reserve Bank. However, such modification or
exemption should not last for more than seven years.
A single scheme of amalgamation can be made in respect of several banking companies under moratorium. The provision of
Section 45 and the scheme sanctioned there under shall have overriding effect on other laws, agreements, awards or
instruments.

4.10 WINDING UP OF BANKS

I. Suspension of Business and Winding Up: A banking company which is temporarily unable to meet its obligations
may apply to the High Court under Section 37 of the Banking Regulation Act for staying the commencement or
continuance of any proceedings against it. Such stay will be for a fixed period and subject to any terms and
conditions imposed by the High Court as it may think fit. The total period of such moratorium shall not exceed six
months. An application for moratorium shall be supported by a report of the Reserve Bank indicating that the
banking company will be able to pay its debts if the application is allowed. The Court, for sufficient reasons, may
grant the relief, even if the application is not supported by the Reserve Bank's report. In that case, a report will be
called for and the order, may be modified or rescinded based on the report. On passing of moratorium order the
court may appoint a special officer to take custody and control of the assets, books, etc., of the banking company in
the interests of the depositors.
If the Reserve Bank is satisfied that the affairs of a banking company under moratorium as above, are being
conducted in a manner detrimental to the interests of the depositors, it may apply to the High Court for winding up
of the company. Thereafter, the High Court shall not extend the period of moratorium.
II. Winding Up by High Court:
a) The High Court shall order the winding up of a banking company in the circumstances mentioned in Section 38
of the Banking Regulation Act. They are:

51
 The banking company is unable to pay its debts;
An application for winding up has been made by the Reserve Bank under Section 37 or Section 38 of the
Act.
b) The Reserve Bank is bound to make an application for winding up under Section 38, if directed by the Central
Government under Section 35(4) of the Banking Regulation Act. The Central Government may issue such
direction under Section 35(4) when, on consideration of the report of inspection or scrutiny made by the
Reserve Bank at the direction of the Central Government, it is of opinion that the affairs of the bank are being
conducted to the detriment of the interests of the depositors. However, before giving such direction, the banking
company has to be given an opportunity to make a representation in connection with the report of inspection or
scrutiny.
c) It is open to the Reserve Bank to apply for winding up of a banking company in certain other cases as follows:
i) failure to comply with the requirements of Section 11 regarding minimum paid-up capital and reserves; (ii)
bank being not entitled to carry on banking business in India under Section 22 of the BR Act by reason of
rejection or cancellation of licence; (iii) prohibition to accept fresh deposits under Section 35(4) of the BR Act
or Section 42 (3A)(b) of the Reserve Bank of India Act; (iv) failure to comply with the requirements of the BR
Act other than Section 11 and continuance of such failure or contravention beyond the period or periods
specified by the Reserve Bank in this behalf and after notice in writing of such failure or contravention.
In addition to the above, the Reserve Bank may apply for winding up of a banking company if it is of the
opinion that:
A compromise or arrangement sanctioned for a banking company cannot be worked satisfactorily with
or without modification; or
The returns, statements and information given by the bank under the act show that it cannot pay its
debts; or
The continuance of the banking company is prejudicial to the interests of the depositors.
A banking company shall be deemed to be unable to pay its debts if it has refused to meet any lawful demand made
at any of its offices or branches within the stipulated time and the Reserve Bank certifies in writing that the banking
company is unable to pay its debts. If the demand is made at a place where the Reserve Bank has an office, branch
or agency, the time limit is two days and in other cases five days. When the Reserve Bank makes an application for
winding up, the court is bound to allow the application. As held by the Supreme Court in the Palai Central Bank
case (AIR 1962 SC 1371 at 1383), as between the Court and the Reserve Bank, the momentous decision to wind up
in the interests of depositors may reasonably be left to the Reserve Bank.
III. Official Liquidator: Section 38A of the BR Act provides for a liquidator to be appointed by the Central
Government, attached to respective High Court, for conducting the winding up proceedings relating to banking
companies. Such a liquidator need not be appointed where enough cases of winding up of banking companies are
not available in any High Court.
IV. Reserve Bank as Liquidator: Although there is a provision for an official liquidator as above, if the Reserve Bank
applies to the Court under Section 39 of the Act, the Reserve Bank, State Bank or any other bank notified by the

52
 Central Government in this behalf or any individual stated in the application may be appointed as the official
liquidator. The remuneration of the liquidator and other costs and expenditure of winding up shall be borne by the
banking company. All provisions of the Companies Act, which are not inconsistent with the Banking Regulation
Act shall be applicable to such a liquidator. The liquidator has to make a preliminary report to the High Court within
two months of the winding up order on the availability of assets for making preferential payments under Section 530
of the Companies Act and for discharging liabilities to depositors and other creditors. Within fifteen days of the
winding up order, the liquidator has to give notice calling for claims for preferential payment and other claims from
every secured and unsecured creditor. Under Section 43 of the Act, the depositors need not make claims. The claims
of every depositor of a banking company is deemed to have filed for the amount as shown in the books of the
banking company standing to his credit.
V. Preferential Payment: In the winding up proceedings, the liquidator of a banking company has to make certain
preferential payments under Section 43 A of the Banking Regulation Act. Accordingly, the preferential payments
referred to in Section 530 of the Companies Act, in respect of which, claims have been made within one month of
service of notice, get the first preference. After that, depositors in savings bank account up to Rs. 250 and then other
depositors up to Rs. 250 get priority over all other creditors. After making these payments, the balance available will
be utilised for payment to general creditors and then for payment of further amounts due to the depositors. The
provision for preferential payment by liquidator will not apply to depositors covered by the DICGC Act.
VI. Voluntary Winding Up: Apart from the provision for compulsory winding up as above, Section 44 provides for
voluntary winding up by banking companies. However, no such winding up will be permissible unless the Reserve
Bank certifies that the bank will not be able to pay in full all its debts as they accrue. It is open to the High Court to
order during voluntary winding up of a banking company that it shall continue, subject to the supervision of the
Court. The High Court may also order winding up by Court either on its own motion or on the application by the
Reserve Bank, if during voluntary winding up it becomes clear that the company is not able to meet its debts as they
accrue or if continuing voluntary winding up or winding up under supervision of the court may be detrimental to the
interests of depositors.

4.11 PENALTIES FOR OFFENCES

A banking company has to abide by the requirements of the Reserve Bank of India Act and the Banking Regulation Act and
the subordinate legislation there under, namely statutory rules, directions, etc., issued under these Acts. Failure to do so
invites penalties.
I. Penalties Under the RBI Act: Chapter V of the Reserve Bank of India Act deals with penalty for violation of the
Act. Banking companies have to make applications and furnish returns, statements, etc., under different provision of
the Act, regulations, orders, directions, etc. While doing so, the making of any statement which is false in any
particular material, knowing it to be false or wilfully omitting to make any material statement, is punishable with
imprisonment up to a period of three years and also a fine.
Failure to produce any books, accounts or other documents or statements, or information which a person is duty
bound to make under the Act, or any order, regulation or direction is punishable with fine up to Rs. 2,000 for each
offence. For continuing offences, there is a provision for fine of Rs. 100 for each day when the offence continues.

53
 There are penalties under the sub-Section (3) to (5B) of Section 58B for contravention of specific provisions of the
Act or orders, direction, etc., made there under. Apart from this, for contravention of any other provisions or not
complying with any requirements under the Act, order, regulation or direction, the guilty shall be punishable with
fine up to Rs. 2,000, and further Rs. 100 every day for continuing the offence.
In the case of offences by companies, every person who was in charge of or responsible for conduct of the
company's business shall be deemed guilty of the contravention or default unless he proves that the offence was
committed without his knowledge or that he had exercised due diligence to prevent the offence. The court will not
take cognizance of an offence under the Act (except offences relating to acceptance of deposits under the Chapter
IIIC) otherwise than on a complaint by an officer of the bank generally or specially authorised in writing in this
behalf by the Bank. A metropolitan magistrate or magistrate of the first class or court superior thereto shall try the
offences.
II. Penalties under the BR Act: The provisions of the Banking Regulation Act, relating to penalties, are provided in
Section 46 thereof. Accordingly, making wilfully any false statement in any return, balance sheet or other document
or information given under the Act is punishable. Similarly, wilful omission to make any material statement is also
punishable. In both cases, punishment is up to three years imprisonment and fine.
Failure to produce any book, account or other document or to furnish a statement or information that is obligatory to
be produced under Section 35(2), during inspection or scrutiny is punishable with fine up to Rs. 2,000. Similarly,
failure to answer any question relating to the business of the banking company during inspection is also punishable.
Continuance of the offence is punishable with fine of Rs. 100 for every day during which the offence continues.
Acceptance of deposits against an order prohibiting acceptance of deposits under Section 35(4) is punishable with a
fine up to twice the amount of deposits accepted. Every director or officer is punishable in this case, unless he
proves that the contravention was without his knowledge or that he had exercised all diligence to prevent it. Any
contravention of other provisions of the Act, or any rule, order or direction made or condition imposed, is
punishable with fine up to Rs. 50,000 or twice the amount involved in the contravention. In the case of continuing
offences, a fine up to Rs. 2,500 for each day may be imposed. In the case of offences by companies, every person
who was in charge of the company at the time of commission of the offence is punishable unless he proves that the
offence was committed without his knowledge or in spite of his exercising due diligence to prevent it.
Under Section 47, the offences are cognizable only by a metropolitan magistrate, judicial first class or a court superior
thereto on a complaint by an officer of the Reserve Bank and in some cases by the National Bank.
Under Section 47A, the Reserve Bank is empowered to impose a penalty for default or contravention. If the Reserve Bank
exercises that power, no complaint shall be filed in a Court in respect of the same contravention or default.

4.12 LET US SUM UP

Every banking company has to prepare its balance sheet and profit and loss account annually as at the end of the calendar
year or at the end of twelve months as on a date notified by the Central Government. The accounts have to be audited by
auditors duly qualified to be auditors of companies. Three copies of the balance sheet, profit and loss account and the
auditor's report have to be submitted as returns to the Reserve Bank and to the Registrar of Companies. Banking companies
have also to furnish other returns like return on maintenance of cash reserve, maintenance of liquid assets, etc. The Reserve

54
Bank is authorised to inspect or conduct, scrutiny of banking companies, their books and accounts. The Board for Financial
Supervision set up by the Reserve Bank by statutory regulations framed under the Reserve Bank of India Act supervises the
affairs of banking companies. The Government may acquire the undertakings of banking companies in certain
circumstances based on a report from the Reserve Bank. The Central Government may also order moratorium on banking
companies on the application of the Reserve Bank. During moratorium, the Reserve Bank may prepare a scheme for
amalgamation, which may be sanctioned by the Central Government. Such an amalgamation scheme will have overriding
effect on any laws, agreements, etc. The Reserve Bank may also apply to the High Court for winding up of a banking
company when it is not able to pay its debts and also in certain other circumstances. The Reserve Bank of India Act and the
Banking Regulation Act impose certain penalties for contravention or default committed by banking companies or other
persons.

UNIT 5 - PUBLIC SECTOR BANKS AND CO-OPERATIVE BANKS

STRUCTURE
5.0 Objectives
5.1 Introduction
5.2 State Bank and Its Subsidiaries
5.3 Regional Rural Banks
5.4 Nationalised Banks
5.5 Application of Banking Regulation Act to Public Sector Banks
5.6 Disinvestment of Shares by Government
5.7 Co-operative Banks
5.8 Let Us Sum Up
5.0 OBJECTIVES
The objectives of this unit are to understand:
The special laws governing the public sector banks, namely, state bank and its subsidiaries, nationalised banks, and
regional rural banks;
The applicability of banking regulation act and the reserve bank of india act to these banks;
Laws governing the co-operative banks, in particular applicability of banking regulation act to co-operative banks;
Extent of legal control of state governments over co-operative banks.

5.1 INTRODUCTION
I. The public sector banks, namely, the State Bank of India and its subsidiaries, Nationalised banks and regional rural
banks are established by special statutes. These statutes and the rules, regulations and/or schemes framed thereunder
provide the powers, functions and management of these banks. The Banking Regulation Act is applicable to these
banks only in a limited way, as some of the provisions are not applicable.
II. In the case of co-operative banks, these banks being created and governed by the laws relating to co-operative
societies, if they operate only in one state, the State Act and if they operate in different states, the Central Act

55
 applies. The Banking Regulation Act is applicable to co-operative banks in a modified manner as provided in
Section 56 of the Act.
III. In this unit, we study the special laws applicable to the public sector banks and co-operative banks as also the
Banking Regulation Act and Reserve Bank of India Act as they apply to these banks.

5.2 STATE BANK AND ITS SUBSIDIARIES

I. Establishment of State Bank: State Bank of India was established under Section 3 of the State Bank of India Act,
1955 for taking over the undertaking of the Imperial Bank and to carry on the business of banking and other
business in accordance with that Act. It is a body corporate, with perpetual succession and common seal and shall
sue and be sued in its name. The majority of ; shares are held by the GOI. Further, no shareholder other than the
GOI can exercise voting right above ten per cent, unless otherwise specified by the Central Government in
consultation with the Reserve Bank. Now the complete holding of RBI is acquired by the central government.
II. Management: The State Bank has its central office in Mumbai and local head offices at Mumbai, Kolkata, Chennai
and other places as decided by its Central Board in consultation with the Central Government. The superintendence
and direction of the affairs of the bank is vested in the Central Board, which has to function according to the
business principles having regard to public interest. The Central Government can give directions to the bank on
matters of policy involving public interest in consultation with the Governor of the Reserve Bank and the Chairman
of the State Bank. The directions have to be given through the Reserve Bank. The board is empowered to make
regulations for carrying out the purposes of the Act in consultation with the Reserve Bank and with the previous
sanction of the Central Government.
III. Composition of the Board: The Board shall consist of Chairman, Vice-Chairman, not more than two Managing
Directors appointed by the Central Government, presidents of local boards and other directors. There are directors
falling in different categories, namely, appointed by the Government to represent workmen and officers, nominated
by the Central Government in consultation with the Reserve Bank from among persons with special knowledge of
co-operatives and rural economy, nominated by Reserve Bank, nominated by Central Government and elected by
shareholders other than Reserve Bank.
The chairman and managing directors are appointed for a period not exceeding five years and are eligible for
reappointment. Their services can be terminated by the Central Government by giving a three month's notice or
notice pay in lieu thereof, after consultation with the Reserve Bank.
Local boards are set up at each place where there is a local head office to exercise all powers and to perform the
functions and duties of the bank delegated under Section 2 IB of the Act. The local board consists of the chairman
and other elected and nominated members as specified in Section 21 of the Act.
IV. Business of State Bank: The State Bank shall act as an agent of the Reserve Bank at the places where it has a
branch and where Reserve Bank has no branch, if so required, by the Reserve Bank, for transacting Government
business and other business entrusted to it by the Reserve Bank. The terms and conditions thereof shall be as agreed
between the Reserve Bank and the State Bank. If agreement is not reached, the terms shall be decided by the Central
Government. The State Bank may transact the work through its subsidiaries or an agent approved by the Reserve
Bank. Apart from this, the State Bank may carry on the business of banking as defined in Section 5(b) of the

56
 Banking Regulation Act and other business specified in Section 6(1) of that Act. The bank is permitted to acquire
business of other banks with the sanction of the Central Government or if so directed by the Central Government in
consultation with the Reserve Bank.
V. Accounts and Audit: The State Bank has to close its books and balance accounts each year as on 31 March or such
other date as may be specified by the Central Government. Within three months of the closing date, it has to furnish
to the Central Government and the Reserve Bank its balance sheet and profit and loss account together with
auditors' report and a report by the Central Board on the working and activities of the bank. The audit may be
conducted by any person duly qualified to be auditors of companies under Section 226 of the Companies Act. No
Director, member of local board, local committee or an officer of the State Bank shall be eligible to be the auditor.
The appointment of auditors is done by the Reserve Bank in consultation with the Central Government. The
auditors' report and report of the Central Board have to be placed before the Parliament. The State Bank has also to
transmit to the Central Government and the Reserve Bank within two months of the date of annual closing of
accounts, the particulars of its shareholders as on that date. The balance sheet and profit and loss account, auditor's
report and report of the Central Board shall be open for discussion by the shareholders at the annual general
meeting. The annual general meeting has to be held within six weeks of the date of sending the balance sheet, etc.,
to the Central Government and the Reserve Bank.
VI. Subsidiary Banks: The subsidiary banks of the State Bank of India were established by different special statutes.
The State Bank of Hyderabad was constituted as Hyderabad State Bank under the Hyderabad State Bank Act and
later renamed as State Bank of Hyderabad under the State Bank of Hyderabad Act, 1956. The State Bank of
Saurashtra was constituted under the Saurashtra State Banks (Amalgamation) Ordinance, 1950. The other banks
were established under Section 3 of the State Bank of India (Subsidiary Banks) Act, 1959. Every subsidiary bank is
a body corporate with perpetual succession and common seal and shall sue and be sued in its own name. The
majority of the issued share capital of the subsidiary banks is held by the State Bank. The shares of the subsidiary
banks are freely transferable as provided in Section 18 of the Act. However, the State Bank is not entitled to transfer
the shares if such transfer would result in reducing its shareholding to less than fifty per cent of the issued capital.
VII. Management of Suhsidiarv Ranlrs-
bank vests in its board of directors and the board may exercise all the powers and carry out all functions with the
assistance of the managing director, subject to the directions and instructions given by the State Bank from time to
time.
The board consists of the chairman (State Bank Chairman, ex-officio), managing director and other directors. The
directors are nominated or appointed by the Central Government, Reserve Bank or the State Bank except for the
directors to be elected by the shareholders other than the State Bank. The State Bank appoints the managing director
after consulting the board of the subsidiary bank and with the approval of the Reserve Bank. The day-to-day
administration vests in the managing director. The State Bank may, with the approval of the Reserve Bank and after
giving opportunity to show cause, remove the managing director from office. The Act provides for an executive
committee, consisting of directors, which may deal with any matter within the competence of the board subject to
any regulations made under the Act.
VIII. Business of Subsidiary Banks: A subsidiary bank has to act as agent of the State Bank under Section 36 of

57
 the (SBI Subsidiary Banks) Act, at any place as required by the State Bank to receive, collect and remit money,
bullion and Government securities on behalf of the Government of India, and undertake other business which the
Reserve Bank may entrust the State Bank from time to time, with the approval of the Reserve Bank. Under Section
36A, a subsidiary bank has also act as an agent of the Reserve Bank if required by it, to undertake Government work
or other work entrusted by the Reserve Bank. The terms and conditions of agency with the Reserve Bank will be as
agreed between the Reserve Bank and the subsidiary bank and if no agreement is reached or dispute arises, the
decision of the Central Government shall be final. A subsidiary bank shall also transact the business of banking as
defined in Section 5(b) of the Banking Regulation Act and any other business specified in Section 6(1) of that Act.
The Central Government may after consultation with the State Bank and Reserve Bank, by order in writing
authorise a subsidiary bank to undertake other form of business or prohibit it from carrying on any business, which
is otherwise lawful for it to engage in. It is open to a subsidiary bank to acquire the business of other banks with the
approval of State Bank. The Reserve Bank may direct the bank in consultation with State Bank to acquire the
business of any bank.
IX. Accounts and Audit: Subsidiary banks have to close and balance their accounts annually as on 31 March or such
other date as may be specified by the Central Government by notification in the official gazette. After providing for
bad and doubtful debts and other matters specified in Section 40 of the SBI (sub-Banks) Act, a subsidiary bank may
declare a dividend out of its profits.
The audit of accounts has to be done by a qualified auditor of companies as specified under Section 226 of the
companies Act who shall be appointed by the State Bank in consultation with the Reserve Bank.
The balance sheet and profit and loss account together with auditors' report and report of the board on the working
and activities of the bank have to be submitted as returns to the State Bank, Reserve Bank and the Central
Government within three months of the date of closing accounts. The Reserve Bank may extend the period by
further three months in consultation with the State Bank.
A general meeting of shareholders shall be held annually as required under Section 44 of the Act within six weeks
of sending the accounts, etc., to the State Bank and others. The shareholders are entitled to discuss the balance sheet,
profit and loss account, auditor's report and the board's report at such meeting.
The State Bank is empowered under Section 47 to inspect the subsidiary banks.
X. Rules and Regulations: The Central Government is empowered to make rules under Section 62 of the Act for
giving effect to the purposes of the Act. The State Bank is also empowered to make regulations under Section 63
with the approval of the Reserve Bank for giving effect to the purposes of the Act.

5.3 REGIONAL RURAL BANKS

The Regional Rural Banks (RRBs) are public sector institutions, regionally based, rural oriented and engaged in commercial
banking. They were first set up in 1975 under the Regional Rural Banks Ordinance, 1975. The ordinance was later replaced
by the Regional Rural Banks Act, 1976. The formation of these banks was the result of the growing realisation that the ethos
and attitude of the existing public sector banks were not fully conducive to meet the credit needs of the rural people. As
stated in the preamble to the Act, the object of setting up regional rural banks is to develop rural economy by providing
credit and other facilities for the purpose of development of agriculture, trade, commerce, industry and other productive

58
activities in rural areas, particularly to small and marginal farmers, agricultural labourers, artisans and small entrepreneurs.
I. Establishment of RRBs: Section 3 of the Act authorises the Central Government to establish regional rural banks
by notification in the official gazette at the request of a sponsor bank to operate within specified local limits.
'Sponsor Bank' is a bank by which a regional rural bank is sponsored and it holds 35 per cent of the issued capital of
the RRB, while the Central Government holds 50 per cent and the State Government holds the remaining fifteen per
cent of the issued capital. Every RRB is a body corporate with perpetual succession and common seal with power to
acquire, hold and dispose of property and to sue and be sued in its name. Generally, a regional rural bank is allotted
a compact area of operation comprising a few districts with homogeneous agro-climatic conditions and rural
clientele: These banks may accept all types of deposits from the public and engage in the business of 'banking' as
defined in Section 5(b) of the Banking Regulation Act.
II. Management of the Affairs of an RRB: The management of RRB vests in the board of directors. The board has to
function on business principles with due regard to public interest. The board is empowered to make regulations for
giving effect to the provisions of the Act in consultation with the sponsor bank and with previous approval of the
Central Government. The Central Government is empowered to give directions to RRBs on matters of policy
involving public interest.
The board consists of a chairman appointed by the sponsor bank from among its officers in consultation with the
National Bank, or otherwise in consultation with the Central Government. The chairman holds office on whole-time
basis and is removable by the sponsor bank, where the chairman is an officer of the sponsor bank, in consultation
with the National Bank and in other cases in consultation with the Central Government.
A person who is adjudged insolvent or is convicted of an offence involving moral turpitude is disqualified to be a
director and has to vacate office. Absence from three meetings consecutively without leave of the board also results
in vacation of office.
III. Business of Regional Rural Banks: Regional rural banks may transact the business of banking as defined in
Section 5(b) of the Banking Regulation Act and any other business permissible for a bank to undertake under
Section 6(1) of that Act. However, the main thrust of the business would be granting of loans and advances to small
and marginal farmers, agricultural labourers, agricultural marketing societies, farmers' service societies, artisans,
small entrepreneurs, etc., within the notified area of operation.
IV. other date as the Central Government may specify. The auditors have to be appointed with the approval of the
Central Government. A person qualified to act as an auditor of companies under Section 226 of the Companies Act
is qualified to be an auditor of a regional rural bank. The auditor's report and report on the working of the bank has
to be laid before the Parliament. The sponsor bank is empowered to monitor the progress of the RRBs by inspection,
internal audit and scrutiny and suggest corrective measures.
V. Amalgamation: Two or more RRBs may be amalgamated by the Central Government by notification in the official
gazette. Such notification shall provide for all terms and conditions of amalgamation including continuation of
service of employees and shall be binding on the banks and all other parties concerned.

5.4 NATIONALISED BANKS

The Bank Nationalisation Acts [Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking

59
Companies (Acquisition and Transfer of Undertakings) Act, isfeO] transferred the undertakings of then existing private
banks to the corresponding new banks established under these Acts. These corresponding new banks, are popularly known
as Nationalised banks. Originally, the entire paid-up capital (equity shares), of the Nationalised banks were held by the
Central Government. Some of these banks have recently made public issues of shares, but the Central Government still
holds the majority of shares in all these banks. The Banking Companies (Acquisition and Transfer of Undertakings) and
Financial Institutions Laws (Amendment) Act, 2006 enables these banks to raise capital by way of public issue or
preferential allotment or private placement of equity shares or preference shares. The Central Government shall, however, at
all times hold not less than fifty one per cent of the equity of these banks. The shares other than those held by the Central
Government are freely transferable. The guidelines for issue of preference shares (including those on the classes of
preference shares) shall be issued by the Reserve Bank. No equity shareholder other than the Central Government can
exercise voting rights in excess of one per cent of the total voting rights of all the shareholders. In the case of the preference
shareholders, they shall have a right to vote in respect of those shares only on resolutions which directly affect the rights
attached to the preference shares. Further, no preference shareholder shall be entitled to exercise voting rights in respect of
the preference shares held by him in excess of one per cent of the total voting rights of all the shareholders holding
preference share capital only.
Every Nationalised bank is a body corporate having perpetual succession and common seal and power to acquire, hold and
dispose of property and enter into contracts and to sue and be sued in its name. These banks may carry on the business of
banking as defined in Section 5(b) of the Banking Regulation Act and other forms of business specified in Section 6(1) of
that Act. The Nationalised banks have also to act as agents of the Reserve Bank, if so required by the Reserve Bank to
undertake the banking business of Central Government and any other business entrusted by the Reserve Bank.
A) Management: The general superintendence, direction and management of the affairs of a Nationalised bank vests
in the board of directors. The board can exercise all the powers and functions of the bank and shall be entitled to
discuss, approve and adopt the annual accounts. The Central Government is empowered to issue directions to the
bank in the discharge of its functions on matters of policy involving public interest after consultation with the
Governor of the Reserve Bank, to supersede the board on the recommendation of the Reserve Bank and also to
appoint an administrator. Further, under Section 9 of both the Nationalisation Acts, the Central Government has the
power to make a scheme for carrying out the provisions of the Act after consultation with the Reserve Bank. The
Government may also amend or vary the scheme in consultation with the Reserve Bank. Such a scheme has to be
laid before Parliament and is binding on the bank and any person having any right or liability in relation to the bank.
B) Directors: The directors of Nationalised banks are nominated by the Central Government or elected from the
shareholders. The nomination of directors is as under:
(i) not more than four whole-time directors (as against two earlier); (ii) one director who is an official of the Central
Government to be nominated by the Central Government; (iii) one director, possessing necessary expertise and
'experience in matters relating to regulation or supervision of commercial banks, to be nominated by the Central
Government on the recommendation of the Reserve Bank; (iv) a director representing workmen employees of the
bank; (v) a director representing officers of the bank; (vi) one chartered accountant with not less than fifteen years
experience nominated in consultation with Reserve Bank; (vii) not more than six directors to be nominated by
Central Government.

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 The other shareholders can elect up to a maximum of three directors to the board. No person shall be eligible to be
elected as director, unless he is a person having fit and proper status based upon track record, integrity and such
other criteria as the Reserve Bank may notify from time to time in this regard. The Reserve Bank may also specify
in the notification, the authority to determine the fit and proper status, the manner of such determination, the
procedure to be followed for such determination and such other matters as may be considered necessary or
incidental thereto.
The directors nominated under Item (vii) and the elected directors should have special knowledge or practical
experience of agriculture and rural economy, banking, cooperation, economics, finance, law, small scale industry or
other knowledge or experience useful to the bank in the opinion of the Reserve Bank or must represent the interest
of depositors or farmers or workers and artisans. An elected director, who in the Reserve Bank's opinion does not
qualify the requirements, can be removed by the Reserve Bank after giving an opportunity of being heard. The
board can co-opt any other qualified persons in his place who will continue until another director, is duly elected in
the next annual general meeting. Apart from the direction and management of affairs of the bank, the board has also
the power to frame regulations under Section 19 for giving effect to the provisions of the Act. This has to be done in
consultation with the Reserve Bank and with the sanction of the Central Government.
C) Additional directors: The Reserve Bank may appoint one or more additional directors on the board of a
Nationalised bank, if it is of the opinion that in the interest of banking policy or in the public interest or in the
interests of the bank or its depositors, it is necessary to do so. The appointment may be made from time to time, by
order in writing, with effect from such date, as may be specified in the order and the additional directors shall hold
office during the pleasure of the Reserve Bank and subject thereto, for a period not exceeding three years or such
further periods not exceeding three years at a time as the Reserve Bank may specify. They shall not incur any
obligation or liability by reason only of being a director or for anything done or omitted to be done in good faith in
the execution of the duties of this office or in relation thereto.
D) Accounts and Audit: Every Nationalised bank has to close its account as on 31 March or such other date specified
by the Central Government by notification in the official gazette as provided in Section 10 of the Act. The auditor
shall be a person duly qualified to be an auditor of a company under Section 226 of the Companies Act. The auditor
shall make a report to the Central Government upon the balance sheet as stipulated in Section 10 of the Act. The
auditor shall send copies of the report to the bank and the Reserve Bank. The bank has to furnish copies of the
balance sheet, profit and loss account and auditor's report along with the report of the board of directors on the
working and activities of the bank to the Central Government and the Reserve Bank. The auditor's report and report
of the board have to be laid before the Parliament. Without prejudice to the above, the Centra] Government is also
empowered to appoint auditors as it thinks fit at any time to examine and report on the accounts of a Nationalised
bank.
A Nationalised bank may pay dividends out of profits after making the necessary provisions under the law or as
usually provided by banking companies. An annual general meeting of shareholders has to be held within six weeks
of the date of forwarding the balance sheet, etc., to the Central Government. In such meeting, the shareholders will
be free to discuss the balance sheet, accounts, auditors' report and report of the board. For the purpose of Income
Tax Act, a Nationalised bank is treated as an Indian company.

61
 E) Schemes of Management: In exercise of the powers under Section 9 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 and Section 9 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980, the Central Government has framed two schemes, namely:
1. Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1970.
2. Nationalised Banks (Management and Miscellaneous Provisions) Scheme, 1980.
These schemes provide in detail for constitution of board of directors, appointment of chairman and managing director, term
of office of whole-time director including managing director, term of office of other directors, disqualifications of directors
and vacation of office, meetings of board and committees of the board (management committee and advisory committee),
regional consultative committees, increase in paid-up capital and other miscellaneous matters.

5.5 APPLICATION OF BANKING REGULATION ACT TO PUBLIC SECTOR BANKS

Section 51 of the Banking Regulation Act provides that certain provisions of the Act would apply to State Bank and its
subsidiaries, Nationalised banks and Regional Rural Banks as they apply to banking companies. The applicable provisions
are Sections 10, 13 to 15, 17, 19 to 21 A, 23 to 28, 29 [excluding the sub-Section (3)], the sub-Sections (IB), (1C) and (2) of
Sections 30, 31, 34, 35, 35A, 36 [excluding clause (d) of the sub-Section (1)], 45Y to 45ZF, 46 to 48, 50, 52 and 53. The
proviso to Section 51 also gives certain exemptions from the applicable provisions regarding holding of office in approved
institutions under Section 10(l)(c), to the chairman and the managing director of State Bank, granting of loan, etc., under
Section 20(l)(b)(iii) to all banks and nominee directors in respect of Sections 46 and 47A.
The provisions which are not made applicable, are mainly the preliminary provisions up to Section 9, provisions relating to
capital (Sections 11 and 12), prohibition of common directors (Section 16), licensing (Section 22) audit except special audit
(Section 30), control over management [Part IIA (Sections 36AA to 36AD)], acquisition of undertaking in Part C (Sections
36AE to 36AJ) and winding up in Part III and Part IIIA (Sections 36B to 45X).
i. Public Sector Banks as Scheduled Banks: All the public sector banks are scheduled banks under Section 42 of the Reserve
Bank of India Act and have to comply with the requirements of maintaining cash reserve as provided therein.

5.6 DISINVESTMENT OF SHARES BY GOVERNMENT

In the context of the Government policy to dilute the holdings in public sector banks, certain amendments were made in the
statutes governing public sector banks. The State Bank of India Act, was amended by the State Bank of India (Amendment)
Act, 1993. Section 4 was modified to divide capital into shares of Rs. 10 each instead of Rs. 100. The restriction on voting
rights (which existed under Section 11, being up to two hundred shares only) was modified as up to ten per cent of the
issued capital and restriction on dividends was deleted.
The Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (and also the 1980 Act) were modified by
Amendment Acts of 1994 and 1995, for facilitating public holding of shares. Section 3 was amended to provide for an
authorised capital of Rs. 1,500 crore, divided into shares of Rs. 10 each, to increase or reduce the authorised capital between
Rs. 1,500 crore and Rs. 3,000 crore, for transferability of shares, other than those held by the Government, raising of capital
through public issue, voting rights of shareholders (limited to one per cent per shareholder) and keeping register of
shareholders including in floppies. Section 10A was amended to declare dividends, as earlier balance of profits was to be
transferred to the Central Government..

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5.7 CO-OPERATIVE BANKS
I. Applicability of BR Act:
A) Co-operative banks are registered either under the state laws governing co-operatives or under the multi-state Co-
operative Societies Act. If a co-operative bank operates only in one state, the state law applies and in the case of co-
operative banks operating in more than one state, the Central Act applies. While the state law/Central law governs
the constitution and related matters, the business of banking is regulated by the Banking Regulation Act as
applicable to co-operative societies.
B) The Banking Regulation Act is applicable to co-operative societies subject to the modifications stipulated in Part V
(Section 56) of the Act. The Act was made applicable to co-operative societies by the Banking Laws (Application to
Co-operative Societies) Act, 1965. As defined in Section 5 (cci) of the BR Act (as applicable to co-operative
societies), a co-operative bank means a state co-operative bank, a central co-operative bank and a primary co-
operative bank. A primary co-operative bank is a co-operative society other than a primary agricultural credit
society, which satisfies the following criteria;-
(i) The primary object or principal business is the transaction of banking business, (ii) The paid-up share capital and
reserves are not less than Rs. 1 lac. (iii) The byelaws do not permit admission of any other co-operative society as a
member (except the membership of a co-operative bank by subscribing to the share capital of the society out of the
funds provided by the state Government).
C) A state co-operative bank is the principal co-operative society in a state with the primary objective of financing
other societies. A central co-operative bank is the principal co-operative society in a district with the primary
objective of funding other co-operative societies in the district The reference to banking company in the Act shall be
construed as a reference to co-operative banks unless the context otherwise requires.
II. Bank, Banker, Banking: No co-operative society other than a co-operative bank is permitted to use as part of its
name or in connection with the business, the words 'bank', 'banker' and 'banking'. Further, a co-operative society
carrying on banking business has to use at least one of such words as part of its name. However, certain categories
of co-operative societies are exempt from these provisions as follows:
a) a primary credit society;
b) a co-operative society formed for the protection of the mutual interest of co-operative banks or co-operative
land development banks;
c) a co-operative society other than a primary credit society formed by employees of the State Bank, a subsidiary
bank, a Nationalised bank or a co-operative bank, a primary credit society, or a co-operative land development
bank.
III. Paid-up Capital and Reserves: The minimum paid-up capital and reserves required to commence or carry on
banking business by a co-operative bank is not less than Rs. 1 lakh under Section 11 (as applicable to co-operative
banks). However, this provision is not applicable to a primary credit society, which becomes a primary co-operative
bank after the commencement of the Act, for a period of two years from the date it becomes a primary co-operative
bank. The Reserve Bank may give a further period of one year in the interests of depositors of the primary co-
operative bank in any particular case. For calculating the value of paid-up capital and reserves, the real and
exchangeable value and not the nominal value would be considered. In the case of a dispute regarding the value of

63
 paid-up capital and reserves, Reserve Bank's decision shall be final.
IV. Cash Reserve: Co-operative banks other than scheduled Co-operative Banks and scheduled state co-operative
banks have to maintain in India by way of cash reserve with itself or by way of balance in current account with the
Reserve Bank or the state co-operative bank of the state concerned or district Co-operative Bank or by way of net
balance in current accounts or any one or more of these ways a sum equivalent to at least three per cent of its total
demand and time liabilities in India. In the case of a primary co-operative bank the balance in current accounts with
the central co-operative bank of the district concerned may also be taken into account. The balance has to be
reckoned as on the last Friday of the second preceding fortnight. The co-operative bank has to submit a return every
month showing such amount held by it on alternate Fridays during a month along with the particulars of its demand
and time liabilities in India on such Fridays. When the relevant Friday is a holiday under the Negotiable Instruments
Act, the return shall be required as at the close of business on the preceding working day. The demand and time
liabilities have to be calculated as stipulated in Section 18 (as applicable to co-operative societies). For scheduled
Primary Co-operative Banks and State co-operative Banks, CRR has to be maintained as per Section 42 of RBI Act.
V. Restrictions on Loans and Advances:
a) Section 20 of the Banking Regulation Act (as applicable to co-operative societies) lays down certain restrictions on
loans and advances by co-operative banks. Accordingly, a co-operative bank shall not grant loans and advances as
under:
i. loans and advances on the security of its own shares;
ii. unsecured loans or advances to any of its directors;
iii. unsecured loans or advances to firms or private companies in which any of its directors are interested as partner,
managing agent or guarantor, or to individuals in cases where any of its directors is a guarantor for the loans or
advances;
iv. unsecured loans or advances to any company in which the chairman of the co-operative bank is interested as
managing agent or chairman or managing director.
However, these restrictions do not apply to unsecured loans or advances made by a cooperative bank against bills
for supplies or services made to Government or bills of exchange arising out of bona fide, commercial or trade
transactions. Further, unsecured loans or advances in respect of which trust receipts are furnished to the co-operative
bank and loans to directors or any other persons within the limits and on terms and conditions approved by the
Reserve Bank are also exempted.
b) Every co-operative bank has to submit a return in the prescribed form showing the unsecured loans and advances
granted by it to companies in which its directors are interested as director, managing agent, or guarantor. Such
returns have to be filed before the close of the month succeeding to which the return relates. If it appears to the
Reserve Bank on examination of any return that the loans or advances were granted to the detriment of the interest
of depositors, Reserve Bank may prohibit granting of such further loans or advances. The Reserve Bank may also
impose other restrictions on the grant of such loans and direct the co-operative bank to secure the repayment of the
loan or advance within a stipulated time.
c) Note: It must be noted here that RBI with effect from 1 October 2003, has prohibited co-operative banks from
providing, renewing secured or unsecured loans and advances or any other funded or non-funded financial

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 accommodation to their directors or their relatives and firm/companies in which their relatives are interested.
VI. Licensing of Co-operative Banks:
(a) Every co-operative society requires a licence from the Reserve Bank under Section 22 of the Banking Regulation
Act (as applicable to co-operative societies) to carry on banking business in India. However, primary credit societies
are exempt from the requirement.
The Reserve Bank may impose such conditions as it may deem fit while granting licence to a co-operative bank. Co-
operative societies carrying on banking business at the commencement of the Banking Laws (Application to Co-
operative Societies) Act, 1965 were given exemption for a period of one year. Every co-operative society carrying on
banking business at the commencement of the Act had to apply for a licence within three months from such
commencement and every primary co-operative society, which becomes a primary co-operative bank after such
commencement has to apply for a licence before three months from the date of it becoming a primary co-operative
bank. After applying for licence the co-operative bank can continue to carry on banking business unless its licence is
rejected.
(b) A co-operative bank requires the prior permission of the Reserve Bank for opening a new place of business or
changing an existing place of business otherwise within the same city, town or village where it has an existing place
of business. However, opening of temporary branches for a period not exceeding one month within the city, town or
village where it has a place of business, on the occasion of an exhibition, conference, mela or any like occasion is
permissible.
The opening or changing of location of branches by a central co-operative bank within its area of operation is also
exempt. The application of a co-operative bank for permission to open a branch, other than of a primary co-
operative bank, has to be routed through the National Bank.
However, an advance copy of the application has to be sent directly to Reserve Bank.
VII. Liquid Assets: Co-operative banks have to maintain liquid assets as provided in Section 24(1) of the Banking
Regulation Act. In computing the amount of liquid assets any balances maintained by a cooperative bank in
current account with the Reserve Bank or by way of net balances in current accounts would be taken into account.
In the case of state co-operative banks, which are scheduled banks, the balances required under Section 42 of the
RBI Act will also be accounted. In the case of the Central co-operative banks, balances maintained with the state co-
operative bank concerned and in the case of primary co-operative banks the balances maintained with Central co-
operative banks or the state co-operative bank concerned shall be accounted. The co-operative banks have also to
maintain as specified in Section 24(2A) liquid assets being not less than 25 per cent or such other percentage not
exceeding forty per cent as the Reserve Bank may stipulate by notification in the Gazette. The amount has to be
maintained as at the close of business on any day. For this purpose, any balance maintained by a scheduled private
co-operative banks and state co-operative bank with the Reserve Bank in excess of the balance required under
Section 42 of the RBI Act shall be accounted. Similarly, cash or balances maintained in India by a non-scheduled
co-operative bank with itself or with the state co-operative bank or in current account with Reserve Bank or net
balance in current accounts in excess of the requirement of Section 18 would be accounted. In the case of primary
co-operative banks, such balances maintained with the Central co-operative bank of the district concerned will also
be taken into account.

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 The co-operative banks have to file a return with the Reserve Bank and every co-operative bank, other than a
primary co-operative bank has also to furnish a copy thereof to the National Bank.
VIII. Accounts and Audit: Every co-operative bank has to prepare a balance sheet and profit and loss account of
its business as on the last working day of the year. The balance sheet and accounts have to be prepared in the forms
set out in the third schedule to the Act or as near thereto as circumstances admit. Three copies of such balance sheet
and accounts, along with statutory auditor's report has to be submitted to the Reserve Bank within six months. A
state co-operative bank and a central cooperative bank have to submit such return to the National Bank also.
IX. Inspection: The provisions of Section 35 relating to inspection are applicable to co-operative banks with minor
modifications. It is also open to Reserve Bank to call for inspection of a primary cooperative bank by one or more
officers of the state co-operative bank in the state where the primary co-operative bank is registered. The Reserve
Bank may supply a copy of the report on any inspection or scrutiny to the state co-operative bank or the Registrar of
Co-operative Societies concerned.
X. Insured Co-operative Banks:
A) Registration with DICGC: The Deposit Insurance and Credit Guarantee Corporation Act, 1961, which provides for
insuring deposits of banks, is applicable to co-operative banks also.
Accordingly, under Section 13C of the Act, co-operative banks have to be registered with the corporation for this
purpose. The registration of a co-operative bank may be cancelled if:
1. It is prohibited from accepting deposits;
2. Its licence is cancelled and ordered to be wound up;
3. It has ceased to be a co-operative bank under the sub-section (2) of section 36a of the bract;
4. It has converted into a non-banking co-operative society;
5. It has been amalgamated with any other co-operative society; (vii) it has transferred its deposit liabilities to any
other institute or;
6. It ceases to be an eligible co-operative bank.
B) Eligible Co-operative Bank: An eligible co-operative bank is defined in Section 2(gg) of the Act.
Accordingly, for a co-operative bank to become an eligible co-operative bank, the law governing that co-operative
bank should have the following provisions:
1. An order for the winding up, or an order sanctioning a scheme of compromise or arrangement or of
amalgamation or reconstruction of the bank, may be made only with the previous sanction in writing of the
Reserve Bank.
2. An order for the winding up of the bank shall be made, if so required by the Reserve Bank in the circumstances
referred to in Section 130.
3. An order shall be made for the supersession of the committee of management or other managing body of the
bank and the appointment of an administrator therefore for such period or periods not exceeding five years in
the aggregate as may be specified by the Reserve Bank if so required by the Reserve Bank in the public interest
or for preventing the affairs of the bank being conducted in a manner detrimental to the interests of the
depositors or for securing the proper management of the bank.
4. An order for the winding up of the bank, or an order sanctioning a scheme of compromise or arrangement or of

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 amalgamation or reconstruction or an order for the supercession of the committee of management or other
managing body of the bank and the appointment of an administrator therefore made with the previous sanction
in writing or on the requisition of the Reserve Bank shall not be liable to be called in question in any manner.
5. The liquidator or the insured bank or the transferee bank, as the case may be, shall be under an obligation to
repay the corporation as provided in Section 21 of the Act.
C) Requisition by Reserve Bank for Winding Up: Section 130 of the DICGC Act mentions the circumstances in which
Reserve Bank may require winding up of a co-operative bank. Such circumstances are that:
i. the co-operative bank has failed to comply with the requirements as to minimum paid-up capital and reserves
specified in Section 1 ] of the Banking Regulation Act;
ii. the co-operative bank has under Section 22 of the Act (dealing with licence) become disentitled to carry on
banking business in India;
iii. the co-operative bank has been prohibited from receiving fresh deposits by an order under Section 35(4) of the
Act or under Section 42(3A)(b) of the Reserve Bank of India Act;
iv. the co-operative bank having failed to comply with any requirement of the Banking Regulation Act, 1949, other
than the requirements laid down in Section 11 thereof, has continued such failure or having contravened any
provisions of the Act, has continued such contravention beyond such period or periods as may be specified by
the Reserve Bank, after notice in writing of such failure or contravention has been conveyed to the co-operative
bank;
v. the co-operative bank is unable to pay its debts;
vi. in the opinion of the Reserve Bank, a compromise or arrangement sanctioned by a competent authority in
respect of the co-operative bank cannot be worked satisfactorily with or without modification, or the
continuance of the co-operative bank is prejudicial to the interests of its depositors.
A co-operative bank, shall be deemed to be unable to pay its debts if, (i) on the basis of the returns, statements or
information furnished to the Reserve Bank under or in pursuance of the provisions of the Banking Regulation Act, the
Reserve Bank is of opinion that the co-operative bank is unable to pay its debts, (ii) if the co-operative bank has refused to
meet any lawful demand made at any of its offices or branches within two working days, if such demand is made at a place
where there is an office, branch or agency of the Reserve Bank, or within five working days if such demand is made
elsewhere and, in either case, the Reserve Bank certifies in writing that the co-operative bank is unable to pay its debts

5.8 LET US SUM UP

1. The PSUs, namely, State Bank and its subsidiaries, the Nationalised banks and the regional rural banks are statutory
corporations established under special statutes. State Bank and its subsidiaries, as Nationalised banks, are
commercial banks engaged in the business of banking and other forms of business permissible for banking
companies. The RRBs are also commercial banks but operating in limited local areas to cater to rural industries,
trade, farmers, artisans, etc. The State Bank and its subsidiaries and the Nationalised banks also act as agents of the
Reserve Bank to transact the banking business of the Central Govt. All PSUs are governed by their respective,
statutes and the rules, regulations or schemes made under these statutes. In addition to this, these banks are also
governed by certain provisions of the BR Act as stipulated in Section 51 of that Act. The provisions of the Reserve

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 Bank of India Act are also applicable to them.
2. The co-operative banks, functioning in one state only are registered under the state laws on co-operative societies.
The co-operative banks operating in more than one state, are registered under the multi-state Co-operative Societies
Act. The Banking Regulation Act is applicable to co-operative banks as provided in Section 56 of that Act with
certain modifications. For this purpose, a co-operative bank means a state co-operative bank, Central co-operative
bank and a primary co-operative bank. While, the constitution of the bank is governed by the cooperative laws, the
business of banking undertaken by them is regulated by the Reserve Bank under the BR Act.

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