Laws Applicable in Banking sector

Laws Applicable in Banking sector

Reserve Bank of India Act,1934

The Reserve Bank of India Act,1934 was enacted to constitute the Reserve Bank of India with an objective to (a) regulate the issue of bank notes (b) for keeping reserves to ensure stability in the monetary system (c) to operate effectively the nation’s currency and credit system. 

The RBI Act covers: 

(i) the constitution 

(ii) powers 

(iii) functions of the Reserve Bank of India. The act does not directly deal with the regulation of the banking system except for a few sections like Sec 42 which relates to the maintenance of CRR by banks and Sec 18 which deals with direct discount of bills of exchange and promissory notes as part of rediscounting facilities to regulate the credit to the banking system. 

The RBI Act deals with: 

(a) incorporation, capital, management and business of the RBI

(b) the functions of the RBI such as issue of bank notes, monetary control, banker to the Central and State Governments and banks, lender of last resort and other functions 

(c) general provisions in respect of reserve fund, credit funds, audit and accounts

(d) issuing directives and imposing penalties for violation of the provisions of the Act

Banking Regulation Act, 1949 

The Banking Regulation Act, 1949 is one of the important legal frameworks. Initially the Act was passed as Banking Companies Act,1949 and it was changed to Banking Regulation Act 1949. Along with the Reserve Bank of India Act 1935, Banking Regulation Act 1949 provides a lot of guidelines to banks covering a wide range of areas. Some of the important provisions of the Banking Regulation Act 1949 are listed below. 

– The term banking is defined as per Sec 5(i) (b), as acceptance of deposits of money from the public for the purpose of lending and/or investment. Such deposits can be repayable on demand or otherwise and withdraw able by means of cheque, drafts, order or otherwise 

– Sec 5(i)(c) defines a banking company as any company which handles the business of banking – Sec 5(i)(f) distinguishes between the demand and time liabilities, as the liabilities which are repayable on demand and time liabilities means which are not demand liabilities

 – Sec 5(i)(h) deals with the meaning of secured loans or advances. Secured loan or advance granted on the security of an asset, the market value of such an asset in not at any time less than the amount of such loan or advances. Whereas unsecured loans are recognized as a loan or advance which is not secured 

– Sec 6(1) deals with the definition of banking business

 – Sec 7 specifies banking companies doing banking business in India should use at least on work bank, banking, banking company in its name

 – Banking Regulation Act through a number of sections restricts or prohibits certain activities for a bank. For example:

 (i) Trading activities of goods are restricted as per Section 8

 (ii) Prohibitions: Banks are prohibited to hold any immovable property subject to certain terms and conditions as per Section 9 . Further, a banking company cannot create a charge upon any unpaid capital of the company as per Section 14. Sec 14(A) stipulates that a banking company also cannot create a floating charge on the undertaking or any property of the company without the prior permission of Reserve Bank of India 

(iii) A bank cannot declare a dividend unless all its capitalized expenses are fully written off as per Section 15.

 Other important sections of Banking Regulation Act, 1949 

Sections 11 and 12 deals with the Paid up Capital, Reserves and their terms and conditions, Sec 18 specifies the Cash Reserve Ratio to be maintained by Non-scheduled banks and Sec 19 (2) clarifies about the shareholding of a banking company. No banking company shall hold shares in any company, (either as pledge, or mortgagee or absolute owners of any amount exceeding 30% of its own paid up share capital plus reserves (or) 30% of the paid up share capital of that company whichever is less 

Section 24 specifies the requirement of maintenance of Statutory Liquidity Ratio (SLR) as a percentage (as advised by Reserve Bank of India from time to time) of the bank’s demand and time liabilities in the form of cash, gold, unencumbered securities 

Other compliance requirements 

Section 29 – Every bank needs to publish its balance sheet as on March 31st 

Section 30(i) – Audit of Balance sheet by qualified auditors 

Section 35 gives powers to RBI to undertake inspection of banks 

Other various sections deal with important returns which are to be submitted by banks to Reserve Bank of India 

– Return of bank’s liquid assets and liabilities (Monthly) 

– Return of bank’s assets and liabilities in India (Quarterly) 

– Return of unclaimed deposits of 10 years and above (Yearly) 

With changing time and requirements from time to time, various other compliance issues which need to be handled by banks, have been amended/incorporated relating to:

 – Nomination facilities

 – Time period for preservation of bank books/records