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Chapter 1: LEGAL FRAMEWORK OF company in satisfaction or part satisfaction of

REGULATION OF BANKS any of its claims etc.

➢ Section 8 of the Banking Regulation Act

prohibits a banking company from engaging
➢ Banking in India is mainly governed by the directly or indirectly in trading activities and
Banking Regulation Act, 1949 and the Reserve undertaking trading risks.
Bank of India Act, 1934.
➢ Goods for the purpose of this section means
➢ "Banking means the accepting for the purpose every kind of moveable property, other than
of lending or investing, of deposits of money actionable claims, stocks, shares, money,
from the public, repayable on demand or bullion.
otherwise and withdrawable by cheque, draft,
➢ Under Section 3 of the aforesaid Acts the Central
order or otherwise."
Government nationalized certain banking
➢ Under Section 49A of the Banking Regulation companies.
Act 1949, no person other than a banking
➢ The State Bank of India was constituted under
company, Reserve Bank of India, the State Bank
the State Bank of India Act, 1955 while the
of India or any other banking institution, firm or
seven associate/subsidiary banks were
other person notified by the Central
constituted under the State Bank (Subsidiary
Government in this behalf is authorized to
Banks) Act, 1959. Over the time seven
accept deposits withdraw able by cheque.
subsidiaries/associates were merged with the
➢ In India, it is necessary to have a license from parent SBI and this process was completed in
the Reserve Bank under Section 22 of the the FY 2017-18.
Banking Regulation Act 1949 for commencing or
➢ The RRBs were constituted under the Regional
carrying on the business of banking.
Rural Banks Act, 1976. These banks are
➢ Every banking company has to use the word governed by the RRB Act 1976 as also some of
"bank" as part of its name (vide, Section 7 of the the provisions of the Banking Regulation Act and
Act) and no company other than a banking the Reserve Bank of India Act.
company can use the words "bank”, “Banker",
➢ Most Private Sector Banks (including Micro and
"banking" as part of its name.
Small Finance Banks) are Companies constituted
➢ Some of the activities permitted under Section under Section 3 of the Companies Act, 1956 or
6(1) of the Banking Regulation Act, includes incorporated under the Companies Act, 2013.
dealing in Bills of Exchange including drawing,
➢ Foreign Banks are basically foreign companies
accepting, buying, selling etc. and managing,
constituted as per statutes abroad and treated
selling and realizing any property which may
as such under section 2(42) of the Companies
come into the possession of the banking
Act, 2013.
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➢ Co-operative Societies Act in 1904 main bankruptcy due to adverse impact of liquidity or
objectives was the establishment and growth of other risks.
co-operative credit societies "to encourage
➢ The Banking Regulation Act, 1949 is a legislation
thrift, self-help and co-operation among
that regulates Banks in India. It became
agriculturists, artisans and persons of limited
applicable in Jammu and Kashmir from 1956.
means".
➢ The objectives of the Banking Regulation Act is
➢ The Banking Regulation (Amendment) Act. 2020
to Provide specific legislation to the business of
was therefore introduced in Parliament and
banking in India, Prevent bank failures by
became law w.e.f. 29-09-2020.
prescribing minimum capital requirements and
➢ The Reserve Bank of India Act, 1934 was Ensure balanced development and growth of
enacted to constitute the Reserve Bank of India banking companies.
and came into force from 06-03-1934. The Act
➢ The Reserve Bank was constituted under Section
deals with the constitution, powers and
3 of the Reserve Bank of India Act, 1934 for
functions of the Reserve Bank.
taking over the management of currency from
➢ The general superintendence and direction of the Central Government and carrying on the
the affairs and business of the bank have been business of banking in accordance with the
vested with the Central Board of Directors which provisions of the Act.
consists of A governor and not more than 4
➢ The Banking Regulation Act 1949 empowers the
deputy governors appointed by the central
RBI to act as a regulator and supervisor of
government, 4 directors nominated by the
banking activities in India.
central government, one from each of the local
boards (Mumbai, Delhi, Kolkata, Chennai), 10 ➢ The Reserve Bank is the primary regulator of
directors nominated by the central government banks But the Central Government has also
and Two government officials nominated by the been conferred extensive powers under the RBI
central government. (Two finance ministry Act and BR Act to regulate banks either directly
representatives (usually the Economic Affairs or indirectly.
Secretary and the Financial Services Secretary))
➢ The GOI is the sole shareholder of the RBI.
➢ A Scheduled Bank is one which has been
➢ If the Bank desires to raise capital through
included in the Second Schedule of the Reserve
public issue, it has to comply with SEBI
Bank of India, 1934.
guidelines.
➢ A lender of last resort is an entity/institution
that offers funds to banks or other financial
institutions that are experiencing financial
difficulty or are considered highly risky or near
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Chapter 2: CONTROL OVER ORGANISATION ➢ The Reserve Bank may cancel a license granted
OF BANKS to a banking company under this section:(i) If
the company ceases to carry on banking
business in India, or (ii) If the company at any
time fails to comply with any of the conditions
➢ To commence or carry on, the banking business imposed upon it under sub section (1) or (iii) If
in India, a company requires a license from the at any time, any of the conditions referred to in
Reserve Bank under Section 22 of the Banking sub-section (3) and sub-section (3A) is not
Regulation Act, 1949. Commencing or carrying fulfilled.
on a banking business without a license is
prohibited. ➢ As per Subsection (5) any banking company
aggrieved by the decision of the Reserve Bank
➢ Based on the experience of licensing two cancelling a license under this section may,
universal banks (Bandha Bank and IDFC Bank) in within thirty days from the date on which such
2014 and that of granting in principle approvals decision is communicated to it, appeal to the
for Small Finance Banks and Payments Banks, Central Government.
the Reserve Bank released the "Draft Guidelines
for 'on tap' Licensing of Universal Banks in the ➢ As per Subsection (6) the decision of the Central
Private Sector". Government where an appeal has been
preferred to it under sub-section shall be final.
➢ Universal banking refers to when banks provide
a wide array of financial services, including ➢ In the case of Regional Rural Banks also license
commercial banking, investment banking, and is given by RBI but the applications for
retail banking. ‘On-tap' license means that the permission have so be routed through the
window for obtaining a bank license from the National Bank (NABARD) (Section 23 Sub-
RBI is open all year, or that the RBI will accept section 43).
applications and issue licenses to banks at any ➢ Section 11 of the Banking Regulation Act
time. provides for certain minimum requirements as
➢ The Small Finance Bank shall be registered as a to paid-up capital and reserves of banking
public limited company under the Companies companies. Any company wanting to commence
Act, 2013.The Small Finance Banks will be given banking business has to comply with these
scheduled bank status once they commence requirements.
their operations. ➢ Foreign bank (Banking company incorporated
➢ The RBI powers to cancel a license of a banking outside India) operating in India, has to deposit
company is derived from sub-sections (4), of and keep deposited with the Reserve Bank
Section 22 of the BR Act 1949. under Section 11(2) of the BR Act 1949: If it has
a place of business in Mumbai or Kolkata or
both Rs 20 lakh Otherwise, an amount of Rs 15
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lakh. The amount has to be kept in cash or banking companies. Accordingly, at least 51% of
unencumbered approved securities or partly in the total number of directors shall be persons,
both. who have special knowledge or practical
experience, with respect of accountancy,
➢ Apart from this, an amount of 20% of the profit
agriculture and rural economy, banking,
for each year, in respect of business transacted
economics, finance etc. Further, at least two of
through the branches in India as disclosed in the
the directors should have special knowledge or
profit and loss account, has to be deposited with
practical experience in agriculture and rural
the Reserve Bank as Reserve Fund.
economy or cooperation or small-scale industry.
➢ Provided further that in the case of every
➢ The directors of a banking company shall not
banking company to which this clause applies
hold office for more than 8 years continuously.
and which commences banking business for the
However, this provision is not applicable to the
first time after the commencement of the
chairman or a whole-time director (WTD).
Banking Companies (Amendment) Act, 1962, the
value of its paid-up capital shall not be less than ➢ MD&CEO or WTD cannot be held by the same
₹5 lakhs. incumbent for more than 15 years. No person
can continue as MD&CEO or WTD beyond the
➢ Authorized Capital: It is sometimes referred to
age of 70 years.
as registered capital is the maximum amount of
capital a company can receive to ensure its ➢ When the chairman or a whole-time director of
smooth operations. a bank is removed from office, he ceases to be a
director of the bank and shall not be eligible for
➢ Subscribed Capital: It is referred to as that part
further appointment as director of that banking
of the issued capital that is actually subscribed
company for a period of four years.
by the public.
➢ If the Reserve Bank is of the opinion that the
➢ Section 12(1) of the Banking Regulation Act
board of any banking company does not fulfill
stipulates that: Subscribed Capital of a banking
the requirements, it may order such a bank to
company shall not be less than half of its
reconstitute the board after giving reasonable
Authorized Capital. Paid-up Capital shall not be
opportunity of being heard.
less than half of its subscribed capital. Paid-up
Capital = ½ Subscribed Capital = ½ Authorized ➢ The Reserve Bank may also appoint a new
Capital. director in the place of the person removed and
he shall continue in office until the date up to
➢ If capital is increased, this requirement has to be
which his predecessor would have held office.
complied within a period not exceeding two
years as allowed by the Reserve Bank. ➢ Under Section 36AB of the BR Act the RBI has
powers to appoint additional directors.
➢ Section 10A of the Banking Regulation Act
stipulates certain qualifications for directors of
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➢ Any person appointed as Additional Director in While time deposits, like fixed deposits or
pursuance of this section Shall hold office during recurring deposits are repayable after an agreed
the pleasure of the Reserve Bank and subject period, demand deposits, like deposits in
thereto for a period not exceeding three years or current account and savings bank accounts, are
such further periods not exceeding 3 years at a repayable on demand.
time as the Reserve Bank may specify and Shall
➢ Acceptance of Deposits is one of the main
not incur any obligation or liability by reason
activities carried out by Banks and this has been
only of his being a Director or for anything done
acknowledged in the definition of 'Banking' as
or omitted to be done in good faith in the
per Section 5(b) of the BR Act 1949.
execution of the duties of his office and Shall
not be required to hold qualification-shares in ➢ As per Deposit Insurance and Credit Guarantee
the banking company. Corporation (DICGC) Amendment Act, 2021 and
funds up to Rs. 5 Lacs are returnable by a Bank
➢ Qualification shares are the minimum number
to an account holder within 90 days in the event
of shares a person must own to become a
of a bank winding up for premium of 12 paise
director of a company.
per ₹100.

➢ Banks have to file a return every year on their

Chapter 3: REGULATION OF BANKING unclaimed deposits under Section 26 of the
BUSINESS Banking Regulation Act. The return has to be
filed within 30 days of the end of each calendar
year in the form and manner prescribed and
should cover all deposits not operated for ten
➢ The Banking Regulation Act provides for
years.
regulation of the business activities of banking
companies accordingly, the Act empowers the ➢ The Amendment Act of 2013 has introduced the
Reserve Bank to issue directions for regulating setting up of a Depositor Education and
terms and conditions etc. of sanction of loans Awareness Fund (DEAF), under Section 26A to
and advances and other matters including take over inoperative deposit accounts which
acceptance of deposits. have not been claimed or operated for a period
of 10 years or more, within a period of 3 months
➢ Section 36(1) (a) of BR Act stipulates "The
from the expiry of the said period of ten years,
Reserve Bank may-caution or prohibit banking
with provision for the amount to be claimed
companies against entering into any particular
back by the original depositor/legal
transaction or class of transactions, and
heirs/nominees an any time by following due
generally give advice to any banking company".
procedure.
➢ Banks accept different types of deposits, both
➢ Depositor of a Banking Company is empowered
time and demand deposits, from the public.
by Section 45ZA of the Banking Regulation Act
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1949 to nominate one person, as nominee. The bank shall give access of the locker and the
nominee would be the person entitled to all the liberty to remove the contents jointly to the
rights of the depositor and to whom the amount survivor and the nominee after an inventory
comprising of deposit would be returned in the was taken in the prescribed manner.
event of death of the sole depositor or
➢ The Reserve Bank of India (Amendment) Act,
depositors, under the nomination.
2006 (Section 45W) empowers in public interest
➢ Where the nominee is a minor, the Act provides to regulate the financial system of the country
for appointment of a person to receive the to its advantage, to determine the policy
deposit amount, on death of the depositor, on relating to interest rates and give directions in
behalf of the minor. that behalf to all agencies or any of them,
dealing in securities, money market
➢ Rule 2 of the Banking Companies (Nomination)
instruments, foreign exchange, derivatives, or
Rules, 1985 provides for the procedure and
other instruments of like nature as the Bank
forms for making nomination in respect of
may specify from time to time.
deposits with commercial banks.
➢ Call Money is the borrowing or lending of funds
➢ Rules 3 and 4 of the Banking Companies
for 1 day. Where money is borrowed or lend for
(Nomination) Rules, 1985, and also the Rules 3
period between 2 days and 14 days it is known
and 4 of the Co-operative Banks (Nomination)
as Notice Money. Term Money refers to
Rules, 1985 deal with the form and procedure
borrowing/lending of funds for period exceeding
applicable to articles in safe custody and Safe
14 days.
Deposit lockers.
➢ RBI vide Master Direction dated 4th June 2021
➢ If locker is operated in Individual mode: As per
has permitted the following entities to issue the
extant rules, if the sole locker hirer nominates
certificate of deposits like Scheduled
an individual to receive the contents in the
Commercial Banks, Regional Rural Banks, and
locker, in case of his death, after verification of
Small Finance Banks.
the death certificate and satisfying the identity
and genuineness of such individual approached, ➢ RBI vide notification dated 10th August 2017,
the banks shall give access of the locker to such has issued Commercial Paper (CP) Directions to
nominee with liberty to remove the contents of all market participants. A Commercial Paper is
the locker, after an inventory was taken in the defined as a 'money market instrument’ under
prescribed manner. Section 45W of the Reserve Bank of India Act
1934.
➢ If locker is operated in Joint mode: In case the
locker was hired jointly with the instructions to ➢ Companies, including Non-Banking Finance
operate it under joint signatures, and the locker Companies (NBFCs) and All India Financial
hirer nominates any other individual, in the Institutions (AIFIs), are eligible to issue CPs
event of death of any of the locker hirers, the subject to the condition that any fund-based
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facility availed from bank or financial ➢ The revised scheme (INTEGRATED OMBUDSMAN
institutions is classified as a standard asset by all SCHEME, 2021) shall extend to the whole of
financing banks/ institutions at the time of India. This Scheme shall apply to the services
issue. provided by a Regulated Entity in India to its
customers under the provisions of the RBI Act,
➢ All residents, and non-residents permitted to
1934, the BR Act, 1949, the Payment and
invest in CPs under Foreign Exchange
Settlement Systems Act, 2007, and the Credit
Management Act (FEMA), 1999 are eligible to
Information Companies Act, 2005.
invest in CPs.
➢ The Regulated Entity shall appoint a Principal
➢ The Banking Ombudsman is an authority
Nodal Officer at their head office who shall not
originally established under the Banking
be a rank less than a General Manager or an
Ombudsman Scheme, 1995 by the RBI in
officer of equivalent rank and shall be
exercise of the powers vested in it under Section
responsible for representing the Regulated
35A of the BR Act 1949. The scheme aimed at
Entity and furnishing information on behalf of
resolution and settlement of complaints of the
the Regulated Entity in respect of complaints
banking public against the commercial banks
filed against the Regulated Entity.
(excluding RRBs) and the scheduled primary co-
operative banks without resorting to courts. ➢ Ombudsman shall not have the power to pass
an Award directing payment by way of
➢ It was modified in 2002 and later by the Banking
compensation, an amount which is more than
Ombudsman Scheme 2006 to enlarge the extent
the consequential loss suffered by the
and scope of the authority and functions of
complainant or ₹20 lakh whichever is lower. The
banking ombudsman for 'redressal of grievances
compensation that can be awarded by the
against deficiency in banking services,
Ombudsman shall be exclusive of the amount
concerning loans and advances and other
involved in the dispute.
specified matters. All commercial banks,
regional rural banks (RRB) and scheduled
primary co-operative banks were required to
comply with the modified scheme.

➢ The Scheme adopts "One Nation One

Ombudsman” approach.

➢ A Centralized Receipt and Processing Centre has

been set up at RBI, Chandigarh for receipt and
initial processing of physical and email
complaints in any language.
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Chapter 4: RETURNS, INSPECTION, ➢ The accounts and balance sheet prepared under
WINDING UP, MERGERS & ACQUISITIONS Section 29 of the Banking Regulation Act along
with the auditor’s report have to be published
within a period of 6 months as provided in
Section 31 the Banking Regulation (Companies)
➢ All Banks whose shares are listed with Stock Rules, 1949.
Exchanges are required to publish their
unaudited quarterly results as per format ➢ Section 220 of the Companies Act 1956 (Section
prescribed by the SEBI. 129 of the Companies Act 2013) provides for
submission by companies of the copies of
Every banking company has to prepare its accounts and balance sheet along with the
balance sheet and profit and loss account as auditor's report to the Registrar of Companies.
stipulated in Section 29 of the BR Act.
➢ Foreign banks (banking companies incorporated
➢ The balance sheet and profit and loss account of outside India) operating in India have to display
a banking company incorporated in India has to in a conspicuous place, in their principal office a
be signed by the manager or principal officer of copy of the last audited balance sheet and profit
the company and at least 3 directors if there are and loss account.
more than three directors and by all directors if
there are not more than three directors. This has to be done not later than the first
Monday in August of any year in which it carries
In the case of foreign banks, the manager or the on business.
agent of its principal office in India can sign.
➢ Every banking company has to submit a return
➢ The balance sheet and profit and loss account of its liquid assets under Section 24(3) of the
have to be prepared in the forms set out in the Banking Regulation Act within 20 days from the
Third Schedule to the BR Act 1949. end of the month to which it relates.
➢ As per Section 29(4) of the BR Act the Central ➢ Every month, a banking company has to submit
Government is empowered to amend the Form to the Reserve Bank a return under Section 27 of
set out in Schedule III of the Act, after giving not the BR Act, showing its assets and liabilities in
less than 3 months' notice of its intention to do India as at the close of business on the last
so by a notification in the Official Gazette. Friday of the previous month.
➢ Moreover Clause 41 of the SEBI Listing The return has to be in the form prescribed
Agreement requires listed Companies (which under Rule 14A of the Banking Regulation
includes listed Banking Companies) to furnish (Companies) Rules, 1949.
unaudited financial results on a quarterly basis
with effect from the Quarter ending on March ➢ A banking company has to submit to Reserve
31, 2000 in format provided therein. Bank under Section 25(1) of the Banking
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Regulation Act, a quarterly return regarding its ➢ The auditors also have the responsibility
assets in India. towards the public, depositors and all other
stakeholders, as the bank deals with public
The return has to be submitted within 1 month
money.
of the end of the quarter.
➢ Section 30(1B) of the BR Act empowers the RBI
➢ By Amendment in the Act, section 26A has been
to order a 'Special Audit' of the accounts of any
introduced to establish the "Depositor
banking company.
Education and Awareness Fund" (DEAF Fund) to
create awareness among the customers and to This order is given usually only where the RBI is
carry out such other promotional activities as of the opinion that the audit is necessary either
specified by the RBI. in the interest of the banking company or the
interest of the depositor or in public interest.
For this Fund, the RBI will utilize the money in
any account / deposits with a bank which has ➢ All charges or expenses of the auditor in respect
not been operated upon for a period of 10 years of the special audit is to be borne by the
or more. banking company.

➢ Section 30(1) of the BR Act 1949, stipulates that: ➢ The RBI conducts Annual Financial Inspection
"The balance-sheet and profit and loss account (AFI) of banking companies under Section 35 of
prepared in accordance with section 29 shall be the BR Act every year.
audited by a person duly qualified, under any
Now a days this consists mainly in assessing all
law for the time being in force, to be an auditor
types of risks under “Risk Based Supervision"
of companies".
(RBS) through a 'Supervisory Program on
➢ Accordingly, a person duly qualified under any Assessment of Risk and Capital' (SPARC) and
law for the time being to be an auditor of issue of 'Risk Assessment Reports’.
companies is eligible to be the auditor of a
➢ The inspecting officer is authorized to examine
banking company.
any director or officer of a banking company.
RBI approval is a must before a Bank appoints,
➢ In terms of Section 35 (1A) a&b of the BR Act
re- appoints or removes any auditor or auditors
1949 Reserve Bank, at any time, may also cause
[Section 30(1) A].
a scrutiny to be made by any one or more of its
➢ The powers, functions and duties of the auditors officers, of the affairs of any banking company
and the liabilities and penalties to which they and its books and accounts; and
are subjected to under Section 227 of the
➢ Thus, unlike in the case of inspection, it is not
Companies Act, 1956 (Section 143 of the
mandatory for the RBI to provide a copy of the
Companies Act 2013 as amended from time to
scrutiny report to the banking company.
time) are applicable to auditors of banking
companies.
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➢ Amalgamation results in the formation of an in the order of moratorium or at any time
entirely new company. thereafter.

However, a merger is a consolidation process ➢ A copy of the draft of the scheme prepared by
wherein the resultant company may be a new or the Reserve Bank has to be sent to the
existing company. Government and also to the banking company
(transferor bank), transferee bank and any other
➢ Reconstruction of a company is the process of
banking company concerned in the
reorganising a company's legal, operational,
amalgamation, for their suggestions and
ownership, and other structures.
objections, if any.
➢ A banking company may be amalgamated with
➢ The Government may sanction the scheme with
another banking company under Section 44A of
such modifications as it may consider necessary.
the BR Act 1949.
➢ A copy of the scheme and any orders passed for
For this purpose, a scheme has to be prepared,
removing difficulties has to be placed before the
containing the terms of such an amalgamation
Parliament.
in a draft and placed before the shareholders of
the two companies separately. ➢ The Central Government may give necessary
exemptions and modifications in this behalf on
➢ The scheme has to be approved by a resolution
the recommendation of the Reserve Bank.
passed by majority of members representing
However, such modification or exemption
2/3 in value of the shareholders of each
should not last for more than 7 years.
company present in person or by proxy.

➢ The Central Government is empowered to order

amalgamation of two banking companies under Chapter 5: PUBLIC SECTOR BANKS, PRIVATE
Section 396 of the Companies Act, 1956. SECTOR BANKS, REGIONAL RURAL BANKS,
(Section 237 of Companies Act 2013). DIFFERENTIATED BANKS, CO-OPERATIVE BANKS
AND LOCAL AREA BANKS
➢ The Reserve Bank is authorized 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 ➢ Private Sector Banks are those banks where the
appears to it that there is good reason to do so. majority stake is held by private parties.

➢ During the period of moratorium, the banking ➢ In the case of co-operative banks, these banks
company shall not make any payment to being created and governed by the laws relating
depositors or discharge any liabilities or to co-operative societies, if they operate only in
obligations to any other creditors unless one state, the State Act and if they operate in
otherwise directed by the Central Government different states, the Central Act applies.
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The Banking Regulation Act is applicable to co- loss account together with auditors' report and
operative banks in a modified manner as a report by the Central Board on the working
provided in Section 56 of the Act. and activities of the bank.

➢ 'Differentiated Bank' is the name given to those ➢ The appointment of auditors is done by the
banks which cater to the needs of a specific State Bank with the previous approval of the
sector of society or a certain demographic Reserve Bank.
segment of the population.
➢ There were seven subsidiary banks of SBI.
Fintech Banks, Digital Banks, Small Finance
➢ The five banks were State Bank of Bikaner and
Banks and Payments Banks are examples of
Jaipur, State Bank of Hyderabad, State Bank of
differentiated Banks.
Travancore, State Bank of Mysore and State
➢ Local Area Banks are a type of differentiated Bank of Patiala being part of consolidation
banks that were earlier set up by the efforts and presently remain only one entity i.e.
Government of India for pooling and mobilizing
State Bank of India.
rural savings and making these funds available
as credit for the economic development of these All the 5 subsidiaries along with Bharatiya
local areas. Mahila Bank have been merged with SBI w.e.f.
1st April 2017.
➢ State Bank of India was done under Section 3 of
the State Bank of India Act, 1955. ➢ The Regional Rural Banks (RRBs) are public
sector institutions, regionally based, rural
It is a body corporate, with perpetual succession
oriented and engaged in commercial banking.
and common seal and shall sue and be sued in
its name. They were first set up in 1975 under the
Regional Rural Banks Ordinance, 1975. The
➢ State Bank has its central office also known as
ordinance was later replaced by the Regional
corporate centre in Mumbai and local head
Rural Banks Act, 1976.
offices at Mumbai, Kolkata, and Chennai.
➢ Sponsor Bank is a bank by which a regional rural
➢ The Board shall consist of Chairman, not more
bank is sponsored and in holds 35% of the
than four Managing Directors appointed by the
issued capital of the RRB, while the Central
Central Government and other directors.
Government holds 50% and the State
The Chairman and Managing Directors are Government holds the remaining 15% of the
appointed for a period not exceeding 5 years issued capital.
and are eligible for reappointment.
➢ Every RRB is a body corporate with perpetual
➢ Within 3 months of the closing date, it has to succession and common seal with power to
furnish to the Central Government and the acquire, hold and dispose of property and to sue
Reserve Bank its balance sheet and profit and and be sued in its name.
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➢ The management of RRB vests in the board of The payments bank should have a leverage ratio
directors. of not less than 3%, i.e., its outside liabilities
should not exceed 33.33% times its net worth
The board consists of a chairman appointed by
(paid-up capital and reserves).
the sponsor bank from among its officers in
consultation with NABARD, or otherwise in ➢ The payments bank cannot undertake lending
consultation with the Central Government. activities.

➢ A person qualified to act as an auditor of ➢ Apart from amounts maintained as Cash

companies under Section 226 of the Companies Reserve Ratio (CRR) with the Reserve Bank on
Act, 1956 the auditor's report and report on the its outside demand and time liabilities, it will be
working of the bank has to be laid before the required to invest minimum 75% of its "demand
Parliament. deposit balances" in Statutory Liquidity Ratio
(SLR) eligible Government securities/treasury
➢ There are presently 43 RRBs and there are
bills with maturity up to 1 year and hold
further plans to amalgamate RRBs, in a road
maximum 25% in current and time/fixed
map prepared in consultation with NABARD, to
deposits with other scheduled commercial
bring down the number of RRBs pan India.
banks for operational purposes and liquidity
➢ The committee came up with two broad designs management.
for the banking system in the country:
➢ The promoter's minimum initial contribution to
Horizontally Differentiated Banking System
the paid-up equity capital of such payments
(HDBS) and the Vertically Differentiated Banking
bank shall at least be 40% for the first 5 years
System (VDBS) based on the most basic
from the commencement of its business.
functions of banks in India being that of
payments, deposits and credit. ➢ PBs have been prohibited from undertaking any
Para banking activity (portfolio management or
➢ In furtherance to its efforts to promote Financial
insurance business or underwriting of bonds of
Inclusion in the country RBI, based on the
PSUs) except those allowed as per the Licensing
recommendations of the Nachiket Mot
Guidelines.
Committee (2013) issued the key features of the
Payments Banks with the objectives of setting ➢ RBI vide circular dated 27 November 2014
up of payments banks by providing Small issued guidelines for licensing of Small Finance
savings accounts and Payments/remittance Banks in the private sector with the basic
services to migrant labour workforce, low- objective of setting up of small finance banks to
income households, small businesses, other further financial inclusion by Provision of
unorganised sector entities and other users. savings vehicles, and Supply of credit to small
business units; small and marginal farmers;
➢ The minimum paid-up equity capital for
micro and small industries; and other
payments banks shall be Rs. 100 crores.
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unorganised sector entities, through high Licensing of Small Finance Banks in the Private
technology low-cost operations. Sector'.

➢ The minimum paid-up equity capital for small ➢ It was in the year 1996 that a decision was taken
finance banks shall be Rs. 100 crores. to allow the establishment of Local Area Banks
in the private sector.
➢ Resident individuals/professionals with 10 years
of experience in banking and finance, and These banks were expected to bridge the gaps in
companies and societies owned and controlled credit availability and enhance the institutional
by residents will be eligible to set up small credit framework in the rural and semi-urban
finance banks. areas and provide efficient and competitive
financial intermediation services in their area of
➢ Existing Non-Banking Finance Companies
operation.
(NBFCs), Micro Finance Institutions (MFIs), and
Local Area Banks (LABs) that are owned and ➢ It was expected that the minimum start-up
controlled by residents can also opt for capital of a LAB would be Rs. 5 crores with the
conversion into small finance banks. promoters bringing in the entire minimum share
capital up-front.
➢ The promoter's minimum initial contribution to
the paid-up equity capital of such small finance ➢ The area of operation of an LAB is usually
bank shall at least be 40% and gradually brought restricted to a maximum of three geographically
down to 26% within 12 years from the date of contiguous districts.
commencement of business of the bank.
➢ LABs are normally required to finance
➢ SFBs shall be subjected to the requirement of agriculture and allied activities, MSME, agro-
maintenance of Cash Reserve Ratio (CRR) and industrial activities, trading activities and non-
Statutory Liquidity Ratio (SLR) as applicable to farm sector.
the other SCBs.
➢ Such banks are registered as a public limited
SPBs shall be required to extend 75% of its company under the Companies Act, 1956/ the
Adjusted Net Bank Credit (ANBC) to the sectors Companies Act, 2013/partnership firms under
eligible for classification as priority sector The Partnership Act, 1932, The Limited Liability
lending (PSL) by the Reserve Bank. Partnership Act 2008 etc.

➢ On tap, facility means that licensing banks by ➢ Supervision over LABs lies with the relevant
RBI throughout the year i.e., RBI will give license department of the RBI.
to banks during entire year.
➢ Their main function is to aid in the development
➢ RBI vide Press Release dated 5th December of the area where they operate mainly by
2019, released the Guidelines for 'on tap offering loans for agriculture and related
activities, small scale industries, agro-based
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industries, trading, and non-farming activities to above and every NBFC- Investment and Credit
the local population. Company registered with the RBI under Section
3 of the Factoring Regulation Act, 2011.

➢ Under section 45-IA of the Reserve Bank of India

Chapter 6: NON-BANKING FINANCIAL Act, 1934 the Reserve Bank has specified Rs. 2
COMPANIES (NBFCs) crores as the net owned fund (NOF) required for
a non-banking financial company to commence
or carry on the business of non-banking financial
➢ A Non-Banking Financial Company (NBFC) is a institution, except wherever otherwise a specific
company registered under the Companies Act, requirement as to NOF is prescribed by the RBI.
1956/2013 engaged in the business of loans and
➢ The NBFCs have been divided into 4 layers based
advances, acquisition of shares/stocks issued by
on their size, activity, and perceived riskiness
Government or local authority etc.
namely Base Layer, Middle Layer, Upper Layer
➢ The Department of Non-Banking Supervision and Top Layer.
(DNBS) of RBI is entrusted with the
➢ From October 01, 2022, all references to NBFC-
responsibility of regulation and supervision of
ND (Non-Deposit taking NBFC) shall mean NBFC-
NBFCs under Chapter III B and III C and Chapter
BL and all references to NBFC-D(Deposit taking
V of the Reserve Bank of India Act, 1934.
NBFC) and NBFC-ND-SI(Systemically Important
➢ The focus of regulation and supervision is three- Non-Deposit taking NBFC) shall mean NBFC-ML
fold, viz., Depositor protection, Consumer or NBFC-UL, as the case may be. Existing NBFC-
protection and financial stability. ND-SIs having asset size of Rs. 500 crore and
above but below Rs. 1000 crore will be known as
➢ Net owned Fund will consist of paid-up equity
NBFC-BL.
capital, free reserves, balance in share premium
account and capital reserves representing ➢ Currently, the NBFCs-ND with an asset size of
surplus arising out of sale proceeds of assets but less than ₹500 crore (i.e. non-systemically
not reserves created by revaluation of assets. important, non-deposit taking NBFCs) classify
assets with an overdue period of more than 180
➢ In terms of Section 45-IA of the RBI Act, 1934, it
days as NPA.
is mandatory that every NBFC should be
registered with RBI to commence or carry on All other NBFCs have an NPA norm of 90 days.
any business of non-banking financial
➢ Considering the need for professional
institution.
experience in managing the affairs of NBFCs, at
➢ NBFC-Factor registered with the RBI under least one of the directors shall have relevant
section 3 of the Factoring Regulation Act, 2011 experience of having worked in a bank/NBFC.
and having an asset size of Rs. 500 crore and
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➢ There shall be a ceiling of Rs. 1 crore per ➢ NBFCs with 10 and more branches are mandated
borrower for financing subscription to Initial to adopt Core Banking Solution (CBS).
Public Offer (IPO).
➢ A glide path of 3 years with effect from October
NBFCs can fix more conservative limits. 01, 2022 is being provided.

➢ Exposure to capital market (direct and indirect) ➢ Norms in respect of NBFCs which do not require
and commercial real estate shall be reckoned as to be registered with RBI are Insurance
sensitive exposure for NBFCs. Companies registered under Section 3 of the
Insurance Act, 1938, Nidhi Companies notified
NBFCs shall fix Board-approved internal limits
under Section 620A of the Companies Act, 1956
for SSE separately for capital market and
and Chit Fund Companies carrying on Chit Fund
commercial real estate exposures.
business as their principal business as per
➢ NBFCs shall be subject to regulatory restrictions Section 45-1(bb) of the Reserve Bank of India
in respect of Granting loans and advances to Act, 1934.
directors, their relatives and to entities where
➢ Banks may take their credit decisions on the
directors or their relatives have major
basis of usual factors like the purpose of credit,
shareholding and Granting loans and advances
nature and quality of underlying assets,
to Senior Officers of the NBFC.
repayment capacity of borrowers as also risk
➢ In order that the Board is able to focus on risk perception, etc.
management, NBFCs are required to constitute a
➢ The ceiling on bank credit linked to Net Owned
Risk Management Committee (RMC) either at
Fund (NOF) of NBFCs has been withdrawn in
the Board or executive level.
respect of all NBFCs which are statutorily
The RMC would be responsible for evaluating registered with RBI and are engaged in principal
the overall risks faced by the NBFC including business of asset financing, loan, factoring and
liquidity risk and will report to the Board. investment activities.

➢ Key Managerial Personnel: Except for ➢ RNBCs are the companies classified and
directorship in a subsidiary, Key Managerial registered with Department of Non-Banking
Personnel shall not hold any office (including Supervision of RBI.
directorships) in any other NBFC-ML or NBFC-UL.
➢ Residuary Non-Banking Companies (RNBCs) are
A timeline of two years is provided with effect also required to be mandatorily registered with
from October 01, 2022 to ensure compliance Reserve Bank of India.
with these norms.
➢ The following activities undertaken by NBFCs,
➢ NBFCs are required to appoint a Chief are not eligible for bank credit Bills
Compliance Officer (CCO), who should be discounted/rediscounted by NBFCs, Investments
sufficiently senior in the organization hierarchy. of NBFCs in both i.e., of current and long-term
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nature, in any company/entity by way of shares, ➢ The Narasimham Committee 2 was termed
debentures, etc. “Committee on Banking Sector Reforms” and set
up in December 1997 to review the progress of
➢ Under the CLM arrangement a Master
implementation of financial sector reforms
Agreement may be entered into between the
recommended by the Committee on Financial
two partner institutions which shall include,
Systems (CFS) (1991). legislative/technological
terms and conditions of the arrangement, the
changes etc.
criteria for selection of partner institutions, the
specific product lines and areas of operation, The Committee submitted its report in April
along with provisions related to segregation of 1998.
responsibilities as well as customer interface
➢ Financial Sector Legislative Reforms Commission
and protection issues.
(FSLRC), headed by Justice BN. Srikrishna, was
set up by Ministry of Finance in March 2011 to
review, simplify and rewrite the legal and
Chapter 7: FINANCIAL SECTOR LEGISLATIVE institutional structures of the financial sector,
REFORMS & FINANCIAL STABILITY AND which submitted its report in March 2013.
DEVELOPMENT COUNCIL
➢ The main objective of banking sector reforms
was to promote a diversified, efficient and
competitive financial system with the ultimate
➢ The financial system in India including banking, goal of improving the allocative efficiency of
insurance, capital, taxation, etc. had many resources through operational flexibility,
regulators, each having a separate mandate. improved financial viability and institutional
➢ Government of India set up the first Narasimha strengthening.
Committee I (Committee on the Financial ➢ More recent RBI introduction of the ‘Targeted
System - CFS) in 1991 followed by the second Long Term Repo Operations Scheme’ whereby
Narasimha Committee II (Committee on Banking Banks are allowed to borrow, on tap, at Repo
Sector Reforms) in 1998. Rates for periods up to 3 years for investing in
➢ Narasimham Committee 1 (1991) The specific assets, thereby infusing liquidity in the
Committee was set up in August 1991, to market.
examine all aspects relating to the ‘Structure, ➢ The introduction of frameworks on
Organization, Functions and Procedures’ of the Countercyclical Capital Buffer (CCCB), Leverage
financial system. Ratio, Liquidity Coverage Ratio (LCR) and Net
It was also called the Committee on Financial Stable Funding Ratio (NSFR) and guidelines on
Systems (CMS). large exposures which became effective from
April 1, 2019 etc. were introduced.
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➢ Setting up of Clearing Corporation of India ➢ An Open Market Operation (OMO) is the buying
Limited (CCIL) to act as central counter party for and selling of government securities in the open
facilitating payments and settlement system market
relating to fixed income securities and money
➢ Market Stabilization Scheme (MSS): The main
market instruments.
aim of this scheme is to withdraw excess money
➢ The Government of India introduced the supply from the system by selling securities in
‘Enhanced Access & Service Excellence’ (EASE) in the economy.
January 2018 which represented a
The sale of government bonds achieves this.
comprehensive reforms agenda required to be
put in place in a time bound manner by PSBs ➢ Call Money: is the borrowing or lending of funds
thereby institutionalizing clean and smart for 1 day.
banking.
➢ Notice Money: Where money is borrowed or
➢ Setting up of INFINET (Indian Financial Network) lend for period between 2 days and 14 days.
as the communication backbone for the
➢ Term Money: Period exceeding 14 days.
financial sector, introduction of Negotiated
Dealing System (NDS) for screen-based trading ➢ Primary market witnessed a significant
in government securities. movement away from Controller of Capital
Issues (CCI) regime imposing primary issuance at
➢ Twin objectives of “maintaining price stability”
sub-market rates to free pricing and book-
and “ensuring availability of adequate credit to
building system along with mandatory
productive sectors of the economy to support
disclosures as prescribed by SEBI.
growth” continue to govern the stance of
monetary policy. ➢ The process of economic reform in India
embraced also the foreign exchange market.
➢ Introduction of Liquidity Adjustment Facility
The measures of reform included, adoption of
(LAF), which operates through repo, and reverse
managed floating exchange rate arrangement,
repo auctions, effectively provide a corridor for
rationalization of the structure of the market,
short-term interest rate.
introduction of variety of products, such as
➢ On 8th April 2022 RBI has introduced Standing options and swaps, etc., gradual move towards
Deposit facility (SDF) which is the floor limit the capital account convertibility and infusion of
(Minimum) of the Policy corridor while Marginal stability in the market, sometimes even through
Standing Facility (MSF) being the cap intervention strategies by RBI.
(Maximum) of the corridor.
➢ There are different regulators for various
A Standing Deposit Facility is an overnight segments of financial sectors, like the RBI for
deposit facility that allows banks to park excess commercial banks and NBFCs, SEBI for capital
liquidity (money) and earn interest.
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market, IRDA for insurance, PFRDA for pension ➢ A Macro Financial Monitoring Group (MFMG)
funds, etc. chaired the Chief Economic Adviser which meets
regularly in DEA to discuss any specific emergent
➢ The primary objective of FSDC is to strengthen
issues.
and institutionalize the mechanism for
maintaining financial stability, promoting This Group has representation from all the
financial sector development. Departments of the Ministry of Finance.

➢ In this direction the Government of India

(promoter) set up Financial Stability and
Development Council (FSDC) in December 2010 Chapter 8: THE PREVENTION OF MONEY
with the finance minister as the Chairman. LAUNDERING
➢ The functions of FSDC To strengthen and
institutionalize the mechanism for maintaining
➢ The Prevention of Money Laundering Act, 2002
financial stability and development and
or PMLA Act 2002 was enacted to prevent
Monitoring of macro-prudential supervision of
money laundering and to provide for the
the economy including the functions of large
confiscation of property derived from, or
financial conglomerates.
involved in, money laundering.
➢ An important wing of the FSDC, in terms of
➢ The Central Government in consultation with
functional responsibility, is the Sub-committee
the Reserve Bank of India has framed the rules,
chaired by the Governor of the RBI.
viz., The Prevention of Money Laundering,
It meets more often than the full Council. Maintenance of Records of the Nature and Value
All the members of the FSDC are also the of Transactions etc., Rules, 2004.
members of the Sub-committee. ➢ A person shall be guilty of offence of money-
Additionally, all four Deputy Governors of the laundering if such person is found to have
RBI and Additional Secretary, DEA, in charge of directly or indirectly attempted to indulge or
FSDC, are also members of the Sub Committee. knowingly assisted or knowingly is a party or is
actually involved in one or more of the following
➢ Technical Group on Financial Inclusion and processes or activities connected with proceeds
Financial Literacy (TGFIFL) was set up in of crime, namely Concealment or Possession or
November 2011. Acquisition or Use or Projecting as untainted
The Group is chaired by the Deputy Governor, property or Claiming as untainted property, in
RBI, in charge of financial stability and has any manner whatsoever.
representatives from all regulators (at the level ➢ In terms of Section 4 of the Act "Whoever
of ED /CGM) as well as from DEA and DFS (at the commits the offence of money-laundering shall
level of Joint Secretary). be punishable with rigorous imprisonment for a
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term which shall not be less than 3 years but ➢ Individual: One certified copy of an officially
which may extend to 7 years and shall also be valid document (OVD) containing details of his
liable to fine. If offence fall under paragraph 2 of permanent address, current address including in
Part A of the Schedule, then rigorous respect of the nature of business and financial
imprisonment may extend to 10 years. status.

➢ Under Section 12 dealing with maintenance of ➢ Company: Certificate of incorporation,

records: Every reporting entity shall Maintain a Memorandum and articles of association, Board
record of all transactions, including information resolution or the power of attorney and
relating to transactions covered under clause officially valid document in respect of the
(b), in such manner as to enable it to reconstruct person, operating the account.
individual transactions.
➢ Partnership firm: Registration certificate,
➢ The records shall be maintained for a period of Partnership deed and officially valid document
five years from the date of transaction between in respect of the person acting in the
a client and the reporting entity. The records transaction.
shall be maintained for a period of five years
➢ Trust: Registration certificate, Trust deed and
after the business relationship between a client
officially valid document in respect of the
and the reporting entity has ended or the
person acting in the transaction.
account has been closed.
➢ Unincorporated association: Resolution of the
➢ As per requirement of Rule 6 the information as
managing body, Power of attorney granted to
to the transactions should be maintained in hard
the person conducting the transaction and
and soft copies in accordance with the
Information as may be required by the banking
procedure and manner as may be specified by
company to establish the legal existence of the
the RBI or SEBI.
association or body of individuals.
➢ The rules mandate that every banking company
➢ The records relating to the identity of clients
shall at the time of opening an account or
shall be maintained for a period of five years
executing any transaction with it, verify and
from the date of cessation of the transactions
maintain the record of identity and current
between the client and the banking company.
address or addresses including permanent
address of the client, the nature of business of
the client and his financial status.

➢ The documents required to be taken for

verification of the identity of clients differ for
different types of clients:
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Chapter 9: NEGOTIABLE INSTRUMENTS proof of the protest, presume the fact of
ACT, 1881 dishonour, unless and until such fact is
disproved."

➢ According to Section 4 of the Act that defines a

➢ The Negotiable Instruments Act 1881 came into promissory note: A “Promissory note" is an
force from the first day of March 1882 and instrument in writing (not being a bank-note or
presently extends to the whole of India a currency-note) containing an unconditional
governing the making, negotiation and payment undertaking, signed by the maker, to pay a
of negotiable instrument including a customer's certain sum of money only to, or to the order of,
cheque by a banker, Bill of Exchange, Promissory a certain person, or to the bearer of the
Note, and the respective rights, obligations of instrument.
the parties to a negotiable instrument including
➢ Section 5 states A "bill of exchange” is an
protections available to the parties.
instrument in writing containing an
➢ A negotiable instrument is a 'financial unconditional order, signed by the maker,
instrument' and hence exhibits all characteristics directing a certain person to pay a certain sum
generally attributable to financial instruments. of money only to, or to the order of, a certain
person or to the bearer of the instrument.
➢ Sections 118 and 119 of the Negotiable
Instrument Act lay down certain presumptions ➢ As per Section 6, A cheque is a bill of exchange
as to Negotiable Instruments. drawn on a specified banker and not expressed
to be payable otherwise than on demand and it
This means that in cases of disputes as regards
includes the electronic image of a truncated
these instruments the courts would take
cheque and a cheque in the electronic form.
cognizance of these aspects and they are not
required to be proved and will be presumed to ➢ A truncated cheque means a cheque which is
exist in every negotiable instrument. truncated during the course of a clearing cycle,
either by the clearing house or by the bank
➢ As per Section 118, unless the contrary is
whether paying or receiving payment,
proved, it shall be presumed that every
immediately on generation of an electronic
negotiable instrument was made or drawn for
image for transmission, substituting the further
consideration, and that every such instrument,
physical movement of the cheque in writing.
when it has been accepted, endorsed,
negotiated or transferred, was accepted, ➢ The maker of a bill of exchange or cheque is
endorsed, negotiated or transferred for called the drawer, the person thereby directed
consideration. to pay is called the drawee.

➢ As per Section 119 "In a suit upon an instrument ➢ The person named in the instrument, to whom
which has been dishonoured, the Court shall, on or to whose order the money is by the
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instrument directed to be paid, is called the It should be ensured that any material alteration
"payee". is made with the consent or authority of the
drawer and is confirmed by his/her signature.
➢ In terms of Section 31 of the Negotiable
Instruments Act (NI ACT) 1881 "The drawee of a ➢ Section 89 of the NI Act 1881 deals with cases
cheque having sufficient funds of the drawer, in where payment is made by a bank on
his hands, properly applicable to the payment of presentation of an instrument which is forged by
such cheque, must pay the cheque when duly alterations which are not apparent.
required so to do, and, in default of such
➢ From Section 89 it is discernible (clear) that for
payment, must compensate the drawer for any
an altered cheque to be treated as void,
loss or damage caused by such default".
erroneous or fraudulent, alteration made
➢ In terms of Section 10, ‘Payment in due course' therein should be visible to the naked eye.
means payment in accordance with the
➢ In terms of Section 8 of the NI Act 1881: "The
apparent tenor of the instrument in good faith
holder of a promissory note, bill of exchange or
and without negligence to any person in
cheque means, any person entitled in his own
possession thereof under circumstances which
name to the possession and to receive or
does not afford a reasonable ground for
recover the amount due from the parties.
believing that he is not entitled to receive
payment of the amount therein mentioned. ➢ Consideration is a legal term that describes the
benefit each party receives in a contract. It can
➢ Apparent tenor means that the payment should
be anything of value, such as: Money, Property,
be in accordance with the intention of the
Service, Work performance, Equipment.
drawer as it appears on the face of instrument.
➢ Section 9 of N.I. Act, define holder in due
➢ In terms of Section 85 of the NI Act additional
course. "Holder in due course means any person
protection to the paying banker is available
who for consideration became the possessor of
against fraudulent endorsements of the
a promissory note, bill of exchange or cheque
payee/other endorsees in an order or bearer
before the amount mentioned in it became
cheque provided payment is made in due
payable, and without having sufficient cause to
course.
believe that any defect existed in the title of the
➢ An alteration in a Negotiable Instrument is person from whom he derived his title."
material, which substantially alters the
➢ When a Bank to oblige a customer for any
instrument and the liabilities of the parties to it,
reason, pays the amount of the cheque drawn
irrespective, of whether the alteration is
on another bank before its collection, the
beneficial or prejudicial to the payee.
position of the bank obliging the customer is
that of a holder for value.
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➢ According to Section 131: A banker who has in
good faith and without negligence received
payment for a customer of a cheque crossed
generally or specially to himself shall not, in case
the title to the cheque proves defective, incur
any liability to the true owner of the cheque by
reason only of having received such payment.

➢ The Statutory protection available to the

collecting bank is for crossed cheques only but is
not available for cheques where drawer's
signatures are forged, even if crossed Collection
on behalf of Customer.

➢ Protection is further only available if collection

is done in good faith and without negligence.