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Slide 1 : LEGAL ASPECTS OF BANKING MODULE: A Regulations and compliance

Legal Framework of Regulation of Banks : Legal Framework of Regulation of Banks What is banking : (Sec 5-b of BR Act 1949): Banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque , draft, order or otherwise. No firm, individual and no company other than a banking company shall use, as part of its name words “bank”, ‘Banker” or “banking”. What is a banking company: (Sec 5 C): It means any company which transacts the business of banking in India. Any company which accepts deposits of money from the public for its business shall not be deemed to transact the business of banking. ‘ Demand liabilities ’ liabilities which must be met on demand and ‘Time liabilities ‘ means liabilities which are not demand liabilities. Secured loan or advances : A loan or advance made on the security of assets the market value is not less than the amount of such loan or advance. Unsecured loan or advance means a loan or advance not so secured.

Prohibition of business (section 8- BR act) : Prohibition of business (section 8- BR act) No banking company shall deal in the buying or selling or bartering of goods, except in connection with the realization of security given to or held by it For this purpose, “goods” means every kind of movable property, other than actionable claims, stock, shares, money, bullion etc.

Non banking assets (section 9) : Non banking assets (section 9) No banking company can hold any IP except for its own use, for any period exceeding 7 years. or any extension of such period provided, and such property shall be disposed of within such period or extended period, RBI may in any particular case extend the aforesaid period of 7 years by such period not exceeding 5 years

Constitution of banks : Constitution of banks Banks in India fall under one of the following categories: Body corporate constituted under a special statute. Company registered under the Indian Companies Act or a Foreign Company. Co-operative Society registered under a central or state act on co-operative societies.

Public Sector Banks (PSBs) : Public Sector Banks (PSBs) PSBs includes: ( i ) Nationalized banks (ii) SBI & its associates (iii) RRBs. Acts for PSBs : The Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970. The Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980. The SBI was constituted under SBI Act 1955. Associate/subsidiary banks were constituted under the State Bank (Subsidiary Banks) Act 1959. RRBs are constituted under the RRBs Act 1976. These banks are governed by the statutes creating them as also some of the provisions of the BRA and the RBI Act.

Slide 7 : Banking Companies: A banking company is a company which transacts the business of banking. (Sec 5 C of BRA). Such company may be a company or a foreign company within the meaning of companies act. All the private sector banks are banking companies, governed by the Companies and by the BRA and the RBI act with regard to their business of banking. Co-operative Banks: If a cooperative bank is operating in more than one state, the Central Act applies. In other cases, the state laws apply. Certain provisions of the BRA and the RBI act applicable to the co-operative banking sector.

RBI Act 1934 : RBI Act 1934 RBI Act deals with the constitution, powers and functions of RBI. It does not directly deal with regulation of the banking system except of Sec 42 for CRR. Sec 18 provides for direct discount of BOE and PN. The act deals with: Incorporation, capital, management and business of banks. Issue of bank notes, monetary control, acting as banker to govt. and banks, lender of last resort. Collection and furnishing of credit information. Acceptance of deposits by NBFCs. General provisions regarding reserve funds, credit funds, publication of bank rate, audit and accounts and. Penalties for violation of provision or the directions issued.

Banking Regulation Act 1949 : Banking Regulation Act 1949 Law relating to banking and for regulating the banking companies and co-operative banks. The Act regulates entry into banking business by licensing. The Act also puts restrictions on the shareholding, directorship, voting rights and other aspects of banking companies. There are provisions regulating the business of banking such as restriction on loans and advances, rate of interest, CRR and submission of BS & accounts. Provisions regarding audit & inspection and submission of BS & accounts. Provides for control over the management of banking companies and Deals with the procedure for winding up of the banks and penalties for violation of its provisions. Setting of Depositor Education and Awareness Fund to take over inoperative deposit a/ cs which have not been claimed or operated for a period of 10 years or more, within a period of 3 months from the expiry of the said period of 10 years.

Role of RBI : Role of RBI RBI had the responsibility of: a) Regulating the issue of bank notes. b) Keeping of reserves fro ensuring monetary stability c) Generally to operate the currency & credit system of country to its advantage. Capital is held by Central Govt. Central office at Mumbai & offices/local boards at Mumbai, Kolkata, Delhi & Chennai & branches at state capital & other cities. RBI functions under the directions of Central Board of Directors. Board consists of a Governor, not more than 4 Dy. Governors and other directors. The bank may issue notes of different denominations from Rs 2 to Rs 10000. Such notes shall be a legal tender at any place in India. RBI is the banker of central Govt. (sec 20). In case of state Govt., their banking business is undertaken by RBI based on agreements. RBI regulates entry into banking business by licensing, exercises control over shareholding and voting rights, exercises controls over managerial persons and regulates of banks.

Slide 11 : Major powers of RBI as regulator and supervisor : to issue banking licence appointment and removal of banking boards/personnel to regulate the business of banks to give directions to inspect and supervise banks audit of banks. to collect, collate and furnish credit information moratorium, amalgamation and winding up and to impose penalties.

Govt. as a Regulator of Bank : Govt. as a Regulator of Bank Central Govt. has extensive powers under RBI act and BRA. Govt. holds entire capital of RBI & appoints Governor & Central Board. Govt can exercise control over banks by influencing decision making of RBI appellate authority in respect of several matters. Power for approval for formation of subsidiary for certain business, issue of direction for inspection of banks, power to acquire undertaking of banks, suspension of business and amalgamation of banks. Financial intelligence Unit (FIU) – India was set by the GoI . It works as the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions.

Control over cooperative Banks : Control over cooperative Banks A co-operative bank is a co-operative society engaged in banking business & may be: a primary co-operative bank, a district central co-operative bank or a state co-operative bank. Co-operative banks operating in one state only are registered under the State co-operative Societies Act concerned. Co-operative banks operating in more than one state, the Multi- State co-operative Societies Act, 2002 is applicable. Licensing and regulation of banking business rests with RBI. There is a dual control of State Govt. and RBI over these banks. In the case of co-operative bank which are registered under DICGC Act, the RBI has the power to order their winding up.

Regulation by other Authorities : Regulation by other Authorities A banking company will be under companies Act in respect of company matters. A bank is answerable to labour authorizes 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 income tax like CTT, Service tax etc and other taxes and have to follow the rules and regulations in that regard. Banks may undertake certain non banking business, in that regard also, banks may be subject to the regulatory control of other agencies. In the case of dealings in securities like share and debentures, banks are regulated by SEBI. In case of Insurance Business - by IRDA and in case of Mutual Fund and Merchant Banking Business – by RBI, SEBI. Largely regulation of banks by the RBI and Central Govt. under RBI act and BRA.

Slide 15 : Control over organization of banks

Licensing of Banking companies : Licensing of Banking companies Licence from RBI is must to commence the banking business in India. Granting of licence may be subject to such conditions as the RBI may think fit. Conditions to be Satisfied : Whether company will be in a position to pay depositors in full. Whether adequate capital and earning prospects. Not detrimental to the interest of its depositors. Banking facilities available in the proposed area of business . Foreign Banks : Three additional conditions: Whether banking business will be in public interest. Whether company not discriminates in any way against banking companies. Where company complies with provision of BR Act. Local Area Banks: RBI licensed 4 such banks. Operating only in limited area. Licence may be cancelled on any one of following grounds: Ceased to carry on banking business Fails to comply with the conditions. Before cancellation of a licence for non-compliance, the company has to be given an opportunity for taking necessary steps for complying with. New Private Banks : Latest two new banks opened: Bandhan Bank and IDFC bank. Small (10) and Payment banks (11) In principal approval by RBI.

Branch licensing : Branch licensing Banks have to obtained the prior permission of RBI for opening a new place of business or changing location (Sec 23 of BRA). Changing of location within same city/ town/village would not need permission. Restriction also apply to foreign branches of Indian banks. Opening of temporary place of business up to one month, for mela etc is exempt. Banks submit request for new offices, ATM once in a year to RBI. When approved permission would be valid for one year. For granting permission RBI to be satisfied of : financial condition and history of bank, management, capital structure and earning prospects public interest. In case of RRBs , application for permission to be routed through NABARD.

Paid up capital and Reserves (sec 11 of BRA) : Paid up capital and Reserves (sec 11 of BRA) Foreign Banks: Rs 15 lac (Rs 20 lacs if place of business at Mumbai or Kolkata ) 20% profit has to be deposited with RBI as encumbered approved securities. India Banks: Rs 5 lacs , If place of business more than one state Rs 10 lacs , if Business place Mumbai or Kolkata Paid up capital, Subscribed Capital and Authorized Capital : Subscribed capital shall not be less than half of its authorized capital Paid up capital shall not be less than half of its subscribed capital. If capital is increased, this requirement to be complied within 2 years.

Shareholding in Banking Companies : Shareholding in Banking Companies Voting rights of shareholders : No specified ceiling on a person’s holding of shares. But no shareholder can exercise voting rights in excess of 10% (which may be increased to 20% by RBI). Prior approval of RBI is required if acquisition together with voting rights exceed 5% of paid up share capital. Acknowledgement by RBI : Banks when receive more than 5% of their paid up capital for transfer to one party, such banks must refer to RBI. Reports on shareholding : A report of shareholding of Chairman, MD or CEO is requires submission to RBI. Commission, brokerage, discount : Should not exceed 2.5% of issue price. Dividend : No dividend is payable until all capitalized expenses are written off. Eligibility criteria : CARA 9%, NNPA not exceeding 7%. It can be paid out of only current year’s profits.

Subsidiaries of Banking companies : Subsidiaries of Banking companies Formation of Subsidiaries : Subsidiaries are permissible for the following purposes: Undertaking any business permissible for banking companies. Carrying on banking business outside India. Prior permission of RBI is must. Undertaking any other business which RBI permits with prior approval of GoI . Shareholding in other companies : Holding of shares by a banking companies in any company as pledgee , mortgagee or absolute owner shall not be exceeding 30% of the paid up share capital of that company or 30% of Paid up share capital and reserve of the banking company. Whichever is less. Holding of share in any company in which MD or manager is interested is prohibited.

Board of Directors : Board of Directors Qualifications : 51% directors shall have special knowledge or practical experience, of accountancy, agriculture & rural economy, banking, co-operation, economics, finance, law, SSI. At least 2 directors have special knowledge or practical experience of agriculture & rural economy or co-operation or SSI. Substantial interest : Directors shall not have a substantial interest in a connected with an employee, manager or MD in a company which carries trade, business or industry. Period of office: shall not hold office for more than 8 years continuously. These provisions are not applicable for whole time directors. When whole time director is removed from office, cease to be director and not eligible for further appointment of director of that bank for a period of 4 years.

Chairman of Banking Company : Chairman of Banking Company Whole time Chairman/Managing Director : Chairman, a whole time basis manages affairs of bank. If part time basis has to be appointed with the prior approval of RB. If no chairman, the management of bank shall be entrusted to a MD. Whole time chairman or MD term 5 years & is eligible for re-appointment. Qualifications of whole time Chairman/MD: The whole time chairman or MD should have special knowledge or practical experience of the working of a bank. Temporary vacancies : Temporary arrangements can be made for a period not exceeding 4 months. Qualification shares : exempted for whole time director or directors. Overriding provisions : Any person affected by any action taken under these provisions is not entitled to any compensation for any loss or for termination of office.

Restrictions on Employment (Sec 10) : Restrictions on Employment (Sec 10) Sec 10 of BRA imposes restrictions on employment of certain type of persons: Insolvent Convicted by a criminal court of an offence involving moral turpitude. Whose remuneration is excessive in the opinion of RBI. These restrictions are applicable to workman and management personnel. Control over Management Power to remove Management and other personnel : The RBI has the discretionary power to remove in the following circumstances: Public interest affairs being conducted in a manner detrimental to depositors. Securing proper management of the banking company. Before passing the order, the affected person has to be given a reasonable opportunity of making a representation against the proposed order. Appeal : An appeal against the order lies with the Central Govt.

Corporate Governance (CG) : Corporate Governance (CG) CG is a dynamic concept involving promotion of corporate fairness, transparency and accountability in the interest of stake holders. CG can be seen as ‘the way in which boards oversee the running of a company by its managers, How board members are in turn accountable to shareholders company’s and its implications for company behaviour towards stakeholders. Corporate governance and Banks: CG is important in banks as they accept and deploy large amounts of public funds in fiduciary capacity and also leverage such funds through credit creation. Banks is also important for smooth functioning of payment system. Basel committee has issued guidelines for promoting sound practices of CG. Reserve Bank’s approach: Fit and proper criteria for directors and constitution of nomination committee of board to scrutinize the declarations made by the bank directors. Shareholding: Single individual note more than 10% Banks/FIs should not acquire any fresh stake in bank’s equity.

Slide 25 : Regulation of banking business

Slide 26 : Power of RBI to issue directions The directions issued by RBI are binding on the banks. RBI may caution or prohibit banking companies generally or any banking company in particular against any transaction or class of transaction. Acceptance of deposits Essence of banking business is the acceptance of deposits from the public withdrawable by cheque . (Sec. 5(b) of BRA. Bank accept both time and demand deposits. Time deposit like FD & RD, are repayable after an agreed period, Demand deposits, like deposit in CA & SB are repayable on demand. Period and ROI of deposits are matters to be agreed between deposits & bank under the terms of the deposit. RBI to give directions is wide enough to cover acceptance of deposits. Currently RBI prescribes minimum & maximum period of deposits.

Slide 27 : Return on unclaimed deposits: Banks have to file a return every year on their unclaimed deposits u/s 26 of BRA. The return has to be filed within 30 days of the end of each calendar year and should cover all deposits not operated for 10 years. For FD the period of 10 years start from the expiry of the period of the deposit. Depositor Education and Awareness fund has been set up to take over inoperative deposit accounts which have not been claimed or operated from a period of 10 years or more, within a period of 3 months from the expiry of the said period of 10 years.

Nomination (Sections 45ZA to 45ZF of the BRA, 1949) : Nomination (Sections 45ZA to 45ZF of the BRA, 1949) Nomination is available only for deposit accounts in individual capacity . It is not available for representative capacity accounts including partnership, trust, limited company, club etc or loan accounts. Proprietorship a/ cs – available if the sole proprietor is an individual. Joint Accounts : available in joint account of individuals. Minor a/ cs – Nomination by guardian in a/c operated by guardian. Pension a/ cs : Nomination under pension will not be valid for the deposit a/c for which a separate nomination will have to be taken. Non-resident a/ cs : available. Time for nomination : at any time during the deposit

Slide 29 : Who can be nominee : Nominee individual only including minor or NRI. How to nominate: by getting form DA- A signed from the depositor (witnessed by two, in case of illiterate). Minor as nominee: a 3 rd person is appointed to act on behalf of the minor for receiving money, who may be anybody. Status of nominee –as an Trustee for receiving money after death. He is not the owner. He is duty bound to pass on the money to the legal heirs. So the legal heir can claim money from the nominee but the bank, on payment to nominee, is fully discharged. Premature payment to the nominee before due date is a valid discharge to bank in case of deceased account. By granting loan to the nominee before maturity of deposits against deposits, bank does not get valid discharge

Slide 30 : Variation/Cancellation in nomination : changed any number of times. In case of a deposit held in name of more than one depositor the cancellation or variation will be valid only if signed by all. applicable to deposits having instructions either or survivor. More than one accounts : Separate nomination for each term deposit having separate account opening form should be taken. Change in style of accounts: Where the changes in the style of accounts is made due to addition/deletion etc. the nomination stands cancelled. Procedure on death of depositor: On death of a person, if 6 months lapse and no person turns up. The bank has to inform the nominee about nomination in case of deposit a/cs. This information is to be given within 3 months in case of locker account.

Slide 31 : Safe Custody : Nomination is available where articles are held in single name (not available for joint name) of individual accounts. Only one person can be appointed to receive the articles. Separate nomination form is to be obtained for each lodgment. Safe deposit lockers: There could be more than one nominee in case of joint locker accounts (one for each holder). Contents are deliverable to nominee along with the surviving joint hirer in case of joint hirer. Other issues in nomination – Nomination facility is obligatory for bank Mentioning of number, date and registration of nomination is obligatory, but mentioning the name of nominee is optional. Summary of nomination provisions Type of account Nature of Account No. of nominees Deposit Single/Joint One only Safe Custody Only single One only Lockers Single, Joint- E/s, F/s One only Lockers Joint operation More than one (As per IBA Max. 2)

Loans and advances : Loans and advances Lending is a core business of a banking company. Lending may be for short term or long term, on secured or unsecured. Regulation of loans and advances : RBI is empowered to control advances in public interest, in the interest of depositors and banking policy. Directions may be for purpose of advance, margins, maxi. amount of advance, maxi. amount of guarantee, ROI & other T & C. Selection Credit Control: Purpose : to ensure prices of essential commodities are not increased. Method and tools: Making borrowing costly, min. margin & ROI, ceiling of credit. Restriction on loans and advances: No banking company shall grant loans on security of its own shares. Prohibition on giving loan to directors, or where directors have interest. For remitting any debt to its directors, requires prior permission of RBI.

Regulation of Interest Rate : Regulation of Interest Rate RBI regulate rates of interest for loans as well as deposits. Not be any discrimination against any class of depositors or loanees or banks. Payment of interest on Current account was prohibited. May permit higher ROI in certain categories like ex/existing employees, Sr. citizens. Currently the direction of RBI regarding interest rates of advances cover only finance to weaker section, exporters and certain small loan and DRI loans. Base Rate: Base rate is the min. rate for all loans, banks are not permitted any lending below the Base Rate. All category of loans could be priced only with reference to the Base Rate. Exception of base rate: DRI advances, loans to banks’ own employees and loans to banks’ depositors against their own deposit.

Regulation of Payment Systems : Regulation of Payment Systems The Payment and Settlement System (PSS) Act , 2007 provides for the regulation and supervision of payment systems in India RBI is the authority for the purpose and all related matters. The act provides the legal basis for ‘netting’ and ‘settlement finality’. Under PSS Act, 2007 two regulations have been made by RBI, namely: The Board for Regulation & Supervision of Payment & Settlement System Regulation, 2008. The Payment and Settlement Systems Regulations, 2008. It covers matters like form of application for authorization for commencing/carrying on a payment system and grant of authorization, payment instructions determination of standards of payment systems, furnishing of returns/documents/other information, furnishing of accounts balance sheet by payment providers etc.

Internet Banking Guidelines : Internet Banking Guidelines The RBI has issued guidelines in respect of internet banking. These guidelines covers: Technology and security issues. Legal issues Regulatory and supervisory issues. Regulation of Money Market Instruments RBI, in public interest to regulate the financial system of the country to its advantage, To determine the policy relating to interest rate or interest rate products 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.

Reserve Funds : Reserve Funds Every year, a sum equivalent to not less than 20% of profits has to be transferred to the reserve fund. Such transfer of fund has to be made before any dividend is declared. Appropriation of any amount from reserve fund or share premium a/c has to be reported to RBI within 21 days of such appropriation. For Foreign Banks: Instead of creating a reserve fund, Act requires them to deposit with RBI an amount 20% of profit for each year in respect of all the business in India. The amount may be deposited in cash or unencumbered approved securities. Note: Central Govt. on the recommendation of the RBI may provide exemption.

Maintenance of Cash Reserve (CRR): RBI Sec. 42 : Maintenance of Cash Reserve (CRR): RBI Sec. 42 Scheduled bank: Sec 42 of RBI Act : Every bank has a duty to maintain CRR with RBI. Scheduled Bank: A bank included in the 2 nd schedule of RBI Act. RBI may include any bank in the 2 nd schedule if it satisfy the following requirement: Paid up capital and reserves not less than Rs 5 lac , Satisfied to RBI that its affairs are not detrimental to interest of depositors. It is a state co-operative bank /company/an institution notified by GOI/ a corporation or company incorporated outside India under the foreign laws . Quantum of CRR : an average daily balance, being ‘such % of the total of the DTL in India of that bank’. Interest on CRR : NIL. Returns: showing its DTL has to be sent at each alternate Friday. Penalty : If balance maintained falls below, bank be liable to pay a penal interest: Bank Rate + 3% for shortage during 1 st fortnight. Bank rate + 5% if shortage continues in the next fortnight. From third fortnight, every director shall be punishable with fine. RBI may also prohibit the bank from accepting fresh deposits . Non-scheduled Banks: Sect 18 of BRA provides for the maintenance of CRR. CRR need not be maintained with RBI. It may be with the bank itself, or with RBI. .

Slide 38 : Maintenance of liquid assets (SLR) : BRA Sec. 24 Every banking company to maintain a certain % of their DTL in India presently 21.5% . Share of NDTL in Cash/Gold/Specified Govt Securities. Return has to be submitted not later than 21 days from the end of the month to which it relates. Penalties for non maintenance of SLR: 1 st day Bank rate + 3%, next succeeding Friday: Bank rate + 5%. Default continues on next succeeding Friday, then every director, manager and secretary of bank is punishable with fine. Assets in India At the close of last Friday of every quarter, assets in India shall not be less than 75% of the DTL of bank banking company in India. This provision is meant to ensure that resources mobilized by banks operating in India, especially the foreign banks are largely invested within the country.

Slide 39 : Returns, Inspection, Winding up, Mergers & Acquisitions

Annual accounts & Balance Sheet (Section 29) : Annual accounts & Balance Sheet (Section 29) On expiration of each calender year or at the expiration of a period of 12 months ending with such date as the Central Govt may specify, every banking company shall prepare a Bs & P/L as on the last working day of the year or the period. Who is to sign the balance sheet: BS & P/L shall be singed, in the case of banking company incorporated in India, by the manager or the principal officer of the company where more than 3 directors, by at least 3, or where not more than 3, by all. banking company incorporated outside India by Manager or Agent of the principal office of the company in India.

Audit & Auditors (Section 30) : Audit & Auditors (Section 30) The BS & P/L a/c prepared shall be audited by a person duly qualified under any law for the time being in force to be an Auditor of companies. before appointing, reappointing or removing any Auditor or Auditors, obtain the previous approval of the RBI. Special Audit: RBI may direct the special audit of the banking company’s a/ cs , for any such transaction or class of transactions or for such period or periods, shall be conducted. It may appoint a periods duly qualified, to be an Auditor of Companies or direct the Auditor of the banking company himself to conduct such special audit. Auditor shall comply with such directions and make a report of such audit to the RBI and forward a copy thereof to the company.

Submission of Returns : Submission of Returns Return on liquid assets: to be submitted within 21 days from the end of month to which it relates. Monthly Returns : showing assets and liabilities in India as at the close of business on the last Friday of the previous month. Return has to be submitted before close of month succeeding to which it relates. A/ cs & Balance Sheet : Within 3 months from end of period to which they relates. Return of Assets in India : A quarterly return regarding its assets in India. The return has to be submitted within one month of the end of the quarter. Return of Unclaimed Deposits : Within 30 days of the close of each calendar year a return on unclaimed deposits (not operated for 10 years). Return of CRR of non-Scheduled Banks : The return has to be submitted before 20 th day of every month showing the amounts held on the alternate Friday during a month along with the particulars of DTL.

Preservation of Records and Return of Paid Instruments : Preservation of Records and Return of Paid Instruments Preservation of Records : Banking companies (preservation of Records) Rules, 1985 specify period of preservation of ledgers, registers and other records. Information to be preserved under PML Act, 2002 : (a) the nature of transaction (b) amount & currency of transaction. (c) date of transaction (d) parties to the transaction. Maintenance and Preservation of Records: Maintain for at least 5 years from date of transaction between bank & client Records ID & address of customer properly preserved for at least 5 years after business relationship is ended. Unusual large transactions which have no apparent economic or visible lawful purpose: preserved for 10 years Return of paid instruments: (Sec 45Z of BRA): Bank is authorized to return paid instruments to their customers even before the end of specified period of preservation. Bank shall keep in its possession a true copy of all relevant part of instrument. Banks are not to charge customers for giving such copies of instruments.

Inspection and Scrutiny : Inspection and Scrutiny Inspection: RBI is empowered to conduct an inspection of any bank. (u/s 35 of BRA). Central Govt. may also direct RBI to conduct inspection of any bank. Directors and officers are bound to produce for inspection all books, accounts and other documents in their custody. Powers of the Government: A copy of report of inspection to be sent to Central Govt , where inspection is directed by Central Govt. In other cases, it is optional for RBI to send copies of inspection to Govt. If Central Govt. is of the opinion that affairs of a bank are detriment of the interest of depositors the Govt. may: Prohibit the bank from receiving fresh deposits. Direct RBI to apply for winding up of bank u/s 38 of BRA. Scrutiny: Apart from making regular inspections, RBI is also empowered to conduct a scrutiny of the affairs and the books and accounts of any banking company.

Board for Financial Supervision : Board for Financial Supervision The board has jurisdiction over the banking companies, NBs, SBI & its subsidiaries. The board consist of the following members: Governor of RBI – Chairman of Board Dy Governors – One be nominated by Governor as full time vice chairman. 4 Directors from central Board nominated by Governor for a specified period. Board the functions and exercises the power of supervision and inspection to different sectors of the financial system. Board meets at least once in a month. Board has the power to constitute sub-committees. One such sub committee is the executive committee. Governor may constitute an advisory council to tender advice from time to time to the board.

Acquisition of undertakings : Acquisition of undertakings The Central Govt can acquire the banks in certain cases as under: Bank has failed on more than one occasion to comply with RBI’s directions. Bank is managed in a manner detrimental to the interests of depositors and it is necessary to acquire its undertaking in the interest of deposits or in the interests of banking policy or for better provisions of credit generally or to any particular section of the community or any particular area. On acquisition of the undertaking all the assets and liabilities of the acquired bank stand transferred to and vest in the Central Govt. Power to make scheme: Central Govt. is empowered to make a scheme for any acquired bank in consultation with RBI. Compensation to shareholders : Shareholders of an acquired bank have a right to get compensation. Amount will be determined as per 5 th schedule of Act after consultation with RBI.

Amalgamation of banks : Amalgamation of banks Voluntary Amalgamation: A banking company may be amalgamated with another banking company. Preparation of draft scheme of amalgamation placed before shareholder of the two companies for approval. After passing scheme to be submitted to RBI. Assets & liabilities of amalgamated company pass to the banking company. The order of RBI of sanction will be conclusive evidence of amalgamation. Amalgamation by Govt.: After Consultation with RBI Central Govt is empowered to order amalgamation of two banking companies. (u/s 396 of Companies act) Moratorium and Amalgamation: RBI is authorized to apply to Central Govt for an order of moratorium in respect of any bank, where it appears to it that there is good reason to do so. The total period of moratorium shall not exceed 6 months.

Slide 48 : Scheme of Amalgamation: During moratorium RBI may prepare a scheme either for reconstruction or for amalgamation of bank with any other bank. If scheme is: In the public interest In the interest of the depositors. iii. For securing the proper management of the bank iv. In the interest of the banking system of the country as a whole. Sanction of Scheme of Govt .: Draft scheme prepared by RBI has to be sent to Govt & also to bank, transferee bank & any other bank concerned in amalgamation, for their suggestions and objections. The Govt may sanction the scheme with such modifications as it may consider necessary. Effect of Sanction: After sanction of scheme by Central Govt , it becomes binding on the bank, transferee bank and members, depositors and other creditors, employees & any person having any right or liability in relation to the bank.

Winding up of Banks : Winding up of Banks Suspension of Business and Winding up: A bank which is temporarily unable to meet obligation may apply to High Court for staying commencement /continuance of any proceedings against it. Such stay will be for a fixed period. Winding up by High court: The High Court shall order the winding up of a banking company if: The banking company is unable to pay its debts. An application for winding up has been made by RBI. RBI makes an application for winding up if directed by Central Govt. RBI to apply for winding up of a banking company if : Failure to comply of minimum paid up capital and reserve Bank not entitled to carry on banking business in India Prohibition to accept fresh deposits Official liquidator: A liquidator to be appointed by Central Govt. attached to respective High Court, for conducting winding up proceedings relating to banks. RBI as Liquidator: RBI, SBI or any other bank notified by Central Govt. or any individual stated in application may be appointed as official liquidator. Liquidator make a preliminary report to High Court within 2 months of order.

Slide 50 : 5. Preferential Payment: Preferential payments in respect of which claims have been made within one month of service of notice., get 1 st preference. After that SB depositors up to Rs 250 Other depositors up to Rs 250 General Creditors , thereafter amounts due to the depositors. Preferential payment will not apply to depositor covered by DICGC. 6. Voluntary Winding Up : No such winding up will be permissible unless the RBI 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 Penalties for offences Penalties under the RBI Act/BRA : 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 2000 for each offence. For continuing offences, fine of Rs 100 for each day when offence continues.

Slide 51 : Public Sector Banks and Cooperative Banks

Introduction : Introduction The PSBs are established by special statues, namely SBI and its subsidiaries, Nationalized Banks RRBs. These statues & rules, regulations and/or schemes framed there under provide the powers, functions and management of these banks. Cooperative banks are being created and governed by the laws relating to co-operative societies, if they operate only in one state, the State Act if they operate in different states, the Central Act applies. The BRA is applicable to co-operative banks in a modified manner.

SBI and its Subsidiaries : SBI and its Subsidiaries SBI was established u/s 3 of SBI act 1955 for taking over the Imperial Bank and to carry on the business of banking and other business in accordance with Act. The majority of share are held by the GOI. No shareholder other than GOI can exercise voting right above 10%, unless otherwise specified by the Central Govt. in consultation with RBI. Management: Central office, Mumbai & LHO at Mumbai, Kolkata, Chennai & other places as decided by its Central Board in consultation with the Central Govt. The Central Govt. can give direction to the bank through RBI on matters of policy involving public interest.

Slide 54 : Composition of the Board: Board consist of Chairman, not more than 4 MD and other directors. Chairman & MDs are appointed for a period not exceeding 5 years & are eligible for reappointment. Local boards are set up at each place where there is a local HO. Business of State Bank: SBI shall act as an agent of RBI & where RBI has no branch for transacting Government business and other business. Business of Banking as defined in Sect 5(B) of BRA. Accounts and Audit: Within 3 months of the closing date, it has to furnish to Central Govt. & RBI its BS & P&L together with auditors’ report. Auditor can be any person duly qualified to be auditors under Companies Act. The appointment of auditors is done by RBI in consultation with Central Govt. Auditors’ report & report of Board have to be placed before the Parliament. The SBI has also to transmit to Central Govt. & RBI within 2 months of annual closing, of its shareholders as on that date. AGM to be held within 6 weeks of date of sending BS to Central Govt and RBI.

: Subsidiary Banks: The subsidiary banks of SBI were established by different special statutes. The majority of issued capital of subsidiary banks is held by the SBI. Management of Subsidiary Banks: Management by board and carry out all functions with the assistance of the MD subject to directions & instructions given by SBI from time to time. Business of Subsidiary Banks: Act as agent of SBI at the place as required by SBI to receive, collect and remit money, bullion & Govt. Securities on behalf of the GoI , and undertake other business which RBI may entrust from time to time. Accounts and Audit: Close & balance accounts annually as on 31 March. After providing for bad & doubtful debts, may declare dividends out of profit. Audit of accounts has to be done by a qualified auditor of companies. BS & P/L, auditors report, report of board on working of bank to be submitted to SBI, RBI & Central Govt. within 3 months of date of closing a/cs. AGM shall be held annually within 6 weeks of sending account to SBI & others. SBI is empowered to inspect the subsidiary banks.

Regional Rural Banks (RRBs) : Regional Rural Banks (RRBs) RRBs were first set up in 1975 under the RRB ordinance, 1975. The ordinance was later replaced by the RRB act, 1976. The object of setting up RRBs is to develop rural economy by providing credit & other facilities for the purpose of development of agriculture, trade, commerce, industry other productive activities in rural, particularly to small & marginal farmers, agriculture labourers , artisans and small entrepreneurs. Central Govt may establish RRB by notification in official gazette at the request of a sponsor bank to operate within specified local limits. Capital holding : Sponsor bank, Central & State Govt : 35%, 50% &15% RRBs may accept all types of deposits from public and engage in business of banking as defined in Sec 5(b) of BRA. Generally, a RRB is allotted a compact area of operation comprising a few districts with homogeneous agro-climatic conditions and rural clientele.

Slide 57 : Management of an RRBs: Management by Board of directors, empowered to make regulations for giving effect to provision of act in consultation with sponsor bank and central govt. Chairman of Board (whole time basis) is appointed by sponsor bank in consultation with NABARD or Central Govt and is removable by sponsor bank. Absence from 3 meeting consecutively without leave of the board also results in vacation of office. Accounts and Audit: RRBs to close a/ cs as on 31 st March or such other date as specify by Central Govt. Auditors have to be appointed with the approval of the Central Govt. A person qualified to act as an auditor of Companies Act, 1956. The auditor’s report & report on working of bank has to be laid before parliament. The sponsor bank is empowered to monitor the progress of the RRBs by inspection, internal audit and scrutiny and suggest corrective measures. Amalgamation: Two or more RRBs may be amalgamated by the Central Govt.

Nationalized Banks (NBs) : Nationalized Banks (NBs) The Bank Nationalization Acts {Banking Co (Acquisition & Transfer of Undertakings) Act, 1970 & 1980} transferred undertakings of then existing private banks. The corresponding new banks, are popularly known as Nationalized banks. Central Govt holds the majority of shares in all these banks. The shares other than those held by Central Govt. are freely transferable. No equity shareholders other than Central Govt. can exercise voting rights in excess of 1% of the total voting rights of all the shareholders. These banks may carry on the business of banking as defined in Sec 5(b) of BRA. The NBs have also to act as agents of RBI, to undertake banking business of Central Govt. & any other business entrusted by RBI. Management: General superintendence, direction & management of affairs vests in board. The board can exercise all powers and functions. The Central Govt. is empowered to issue directions to the bank.

Slide 59 : Directors: Directors of NBs are nominated by Central Govt. or elected from shareholders. Not more than 4 whole-time directors. One directors who is an official of Central Govt., one director from RBI, Workmen representative, Officer representative, One CA not less than 15 years of experience, not more than 6 directors to be nominated by Central Govt. Other shareholders can elect up-to a maxi of 3 directors to the board. Directors should have fit and proper status based upon track record, integrity and other criteria specified by RBI. The elected directors have special knowledge or practical experience of agriculture & rural economy, banking, cooperation, economics, finance, law, SSI or other knowledge or experience useful to the bank in the opinion of RBI. Accounts and Audit: The Auditor shall be a person duly qualified to be an auditor of a company. The auditor shall make a report to Central Govt upon BS. Bank to furnish copies of BS, P/L & auditors & board report to Central Govt. & RBI. Auditors report and board report have to be laid before parliament. NBs may paid dividends out of profit after making the necessary provisions. AGM to be held within 6 W of the date of forwarding the BS to Central Govt.

Disinvestment of Shares by Govt : Disinvestment of Shares by Govt To dilute the holdings in PSBs, certain amendments were made in the statutes governing PSBs: The SBI act was amended in1993. Sec 4: divided capital into shares of Rs 10 each instead of Rs 100. The restriction on voting rights up-to 10% of the issued capital and restriction on dividends. (previously up-to 200 shares only). The Banking companies (acquisition and Transfer of undertakings) Act 1970 amended in 1994 and 1995 for facilitating public holding of shares. Sec 3 amended authorized capital Rs 1500 cr divided into shares of Rs 10 each for transferability of shares. Raising of capital through public issue, voting rights of shareholders (limited to 1% per shareholder). Sec 10A amended to declare dividends.

Cooperative Banks : Cooperative Banks If a Co-operative bank operates only in one state, the state law applies Co-operative banks operating in more than one state, the Central Act applies. State law/Central law governs the constitution and related matters, Business of banking is regulated by the BRA as applicable to Co-operative societies. As defined in Sec 5( cci ) of BRA (as applicable to Co-operative societies): A Co-operative bank means: A primary Co-operative bank is a Co-operative society other than a primary agriculture credit society, which satisfy the following criteria: The object or Principal business is transaction of banking business. The paid up share capita and reserves are not less than Rs 1 lac Byelaws not permit admission of any other Co-operative society as a member . A state Co-operative bank is the principal Co-operative society in a state with primary objective of financing other societies. A central Co-operative bank is the principal Co-operative society in a district with primary objective of funding other Co-operative societies in the district.

Slide 62 : 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 word ‘bank’, ‘banker ‘ and ‘banking’. A Co-operative society carrying on business has to use at least one of such words as part of its name. However following are exempted from the provisions as follows: A primary credit society A Co-operative society formed for the protection of mutual interest of Co-operative banks or Co-operative land development banks. A Co-operative society other than a primary credit society formed by employees of the State Bank, a subsidiary bank, a NB or a Co-operative bank, a primary credit society, or a Co-operative land development bank. Paid up capital and Reserves : Min paid up capital & reserves Rs 1 lakh . This provision is not applicable to a primary credit society, which becomes a primary Co-operative bank for a period of 2 years. Restriction on loans and advances: Loans and advances on the security of its own shares Unsecured loans to any of its directors. Unsecured loans to firms or private companies in which directors are interested as a partner, managing agent or guarantor.

Slide 63 : Licensing of Co-operative banks: Every co-operative bank requires a license from RBI u/s 22 of BRA. Primary credit societies are exempt from license. A co-operative bank requires the prior permission of RBI for opening a new place of business or changing an existing place of business, Except a central co-operative bank within its area of operation. Liquid assets: CRR: 3% of NDTL with RBI/state Co-operative bank or district Co-operative bank or by way of net balance in current account. (Section 42 of RBI Act) SLR: as prescribed by RBI. Accounts & audit: Every co-operative bank has to prepare BS & P/L of its business as on the last working day of the year. 3 copies along with auditor’s report have to be submitted to RBI within 6 months. A state & a central co-operative bank have to submit such returns to NABARD also. Inspection: Power to RBI for inspection u/s 35 of BRA. Insured Co-operative banks : Registration with DICGC : DICGC insurance is also applicable to co-operative banks.

Slide 64 : Financial Sector Legislative Reforms

Approach for Financial Sector Legislative Reforms : Approach for Financial Sector Legislative Reforms RBI Act, 1934 was amended in 2006: to provide legality to certain OTC derivative transactions to give explicit regulatory powers over derivatives & money market instruments. The BRA, 1949 was amended in 2007 for : removing the lower limit prescribed in maintenance of SLR conferring wide powers on RBI in stipulating SLR requirements to control liquidity in the market. The SBI, 1955 was amended in 2007 for : enabling transfer of ownership from RBI to GoI In 2010 to provide for enhancement of capital, issue of shares The SBI(Subsidiary Banks) Act, 1959 was amended in 2007 : to facilitate enhancement of capital, raise resources from the market

Slide 66 : 5. The Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 & 1980 were amended in 2006 : to enable NBs to issue preference shares in accordance with the guidelines framed by the RBI to raise capital with the approval of the Reserve Bank. 6. The NI Act, 1881 was amended in 2002: to introduce the concepts of 'electronic cheque ' and ' cheque truncation' by expanding the definition of ' cheque '. 7. The Securities Contracts (Regulation) Amendment Act, 2007 : to providing a legal framework for enabling listing and trading of securitized debt instruments. 8. The Government Securities Act, 2006: to consolidate & amend laws relating to Govt. securities & its management. simplifies the procedure for settlement of claims of legal representatives, provides for admissibility of computerized information as evidence, contains provisions for effectively dealing with misuse of SGL A/ cs facilitates pledging and hypothecation of Government securities.

Slide 67 : 9. The PSS Act, 2007: - empowering RBI to regulate & supervise payment & settlement systems - provides a legal basis for multilateral netting and settlement finality. 10. The Prevention of Money- Laundering Act, 2002 : - provides for preventing money laundering and connected activities, - enables confiscation of proceeds of crime, - setting up mechanisms for combating money laundering, etc. 11. The Foreign Contribution (Regulation) Act (FCRA), 2010: - to rectify several deficiencies found in the previous Act. - Act covers the electronic media and organizations, other than political parties, apart from entities in the prohibited list in FCRA, 1976. 12. The Credit Information Companies (Regulation) Act, 2005: - empowers the RBI to regulate the Credit Information Companies (CIC) - to facilitate efficient distribution of credit & matters concerned or incidental to it.

Budget 2015-16: Important Reforms : Budget 2015-16: Important Reforms Bankruptcy code: Will make it easier for companies & entrepreneurs to exit unviable ventures. The code will replace the SICA and BIFR. Comprehensive law  to deal with black money parked abroad: for prosecution & rigorous imprisonment of up to 10 years for those concealing income & assets & evading tax on foreign assets. It also provides for prosecution of those not filing returns on, or filing returns with inadequate disclosure of foreign assets. Benami Transactions (Prohibition) Bill: The legislation will enable confiscation of benami properties. It is aimed at preventing circulation of black money in the domestic economy. Public Contracts (Resolution of Disputes) Bill: Expected to streamline the process of resolving disputes in public contracts. Quick resolution of disputes is expected to ease the cash-flow stress of companies involved in public contracts. Indian Financial Code: a unified financial authority will be set up as a regulator. Proposes to set up a financial redress agency to resolve consumer complaints.

Slide 69 : Regulatory Reform Bill: create environment for smooth rollout of public-private partnership projects. to bring about consistency in regulators with tariff decisions across sectors. Procurement law: This is aimed at preventing malfeasance in public procurement. Amendment to RBI Act to help constitute a monetary policy committee: Committee will guide central bank's policy stance & help in inflation targeting. to bring better coordination between the ministry and the central bank. Public debt management agency: The new agency will manage both external and domestic debt.

Slide 70 : Financial Sector Development Council

Role and functions of Financial Sector Development Council(FSDC) : Role and functions of Financial Sector Development Council(FSDC) Strengthening & institutionalizing the mechanism for maintaining financial stability, enhancing inter-regulatory coordination promoting financial sector development, Chairman of the Council is Finance Minister & its members include the heads of financial sector Regulators (RBI, SEBI, PFRDA, IRDA & FMC) Finance Secretary and/or Secretary, Department of Economic Affairs, Secretary, Department of Financial Services, and Chief Economic Adviser. The Council can invite experts to its meeting if required . Mandate Without prejudice to the autonomy of regulators, this Council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates. Address inter-regulatory coordination issues & thus spur financial sector development. It will also focus on financial literacy and financial inclusion. additional mandate given for development of financial sector.

Slide 72 : Thanks

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