Banking Regulation act 1949 & Role of RBi Amiya kumar sahoo Innovation-The Business School
aBout RBi RBI established on 1st April, 1935 under the Reserve Bank of India Act 1934. Initially it was a private sector bank & nationalized on 1st January 1949 & with this the central Government owned 100% capital of the bank. The first Governer of the bank O. Smith & the first Indian Governer was Dr. C. Desmukh.
MANAGEMENT Managed by a Board of Directors (total directors twenty), which consists of :1. Governor2. Not more than four deputy governor3. Fifteen other directors
functions of RBi Note issuing Authority Banker to Government (Central & State) Banker’s Bank Controller of Credit Custodian of Foreign Exchange Reserve and Lender of the Last Resort
note issuing authoRity oR Bank of issue: Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations other than one rupee notes or coin & all coins issued by the Government of India. Issues note in denominations of rupees two, five, ten, Twenty, fifty, one hundred, five hundred & one thousand, known as bank Notes & carry a guarantee by the Central Government. RBI can issue notes against the security of gold coins, gold bullions, foreign securities, rupee coins, Govt. of India securities & bills of exchange, promissory notes. Out of this the value of gold coins & foreign securities should not be less than Rs. 200 crores.
Currency chest- Apart from its issues department, the RBI has appointed public sectors bank to acts as his agents for distribution of currency. These banks are required to maintain currency chests for this purpose. RBI reimburse expenses incurred by public bank for maintaining the currency chest. The balance in the currency chests are the property of the RBI. Small coins do not form a part of the currency chest & are stored on separate depots called as small coin depots.
Acting as Banker to Government RBI acts as a Government banker, agent and advisor to central & state Governments. RBI has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, accepting cheques, receiving & collecting payments, transferring funds ,to receive and to make payments on behalf of the Government and to carry out their exchange remittance and other banking operations.
The bank also provides ‘Ways & Means Advances (WMA) to both central & state Governments for bridging the temporary gaps between receipts & payments with a maturity of 3 months. RBI also permits the State Government to draw overdrafts apart from WMAs. It acts as adviser to the Government on all monetary and banking matters.
Controller of credit Quantitative credit control methods: Bank rate, CRR, SLR Open market operations (OMO)- The sale & purchase of Govt. securities by RBI is called OMO.Through OMO RBI controls- 1. Inflation2. Lending & borrowing power of banks3. Money supply to market4. Liquidity in the economy.
Custodian of Foreign Exchange Reserve(sec 40) Maintains the rate of exchange of the rupee The Reserve Bank has to act as the custodian of Indias reserve of international currencies. RBI has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F The vast sterling balances were acquired and managed by the Bank.
Bankers Bank and lender of last resort Provides financial help during crisis time Increases elasticity and liquidity of the credit structure in the market Enables commercial banks to carry their activities with their limited cash reserve Way of exercising control over banking system
Others Bank of settlement and clearance Information and research functions
Banking Regulation Act - 1949 Act was originally called as Banking Companies Act 1949. It came into force from 16th March 1949. Now it is renamed as Banking regulation Act 1949. Reasons for commencement of this Act.
Provisions of the Act1. Definition of Banking(sec 5(b))2. Business of Banking Company (sec 6) Main Functions Subsidiary Functions Kinds of business that can not be done3. Capital Requirement.
S. Foreign banking co. Amount(Rs.)N1. If it has a place of business in Bombay or Calcutta or both 20 lacs2. If it has no place of business in Bombay or Calcutta 15 lacs Indian banking co.1. Banking co. having place of business in more than 1 state 5 lacs2. Banking co. having place of business in more than 1 state & 10 lacs if any such place include Bombay or Calcutta or both3. Banking co. having place of business in 1 state but none in Bombay or Calcutta a) For principal place of business plus 1lacs b) For each of place in the same district plus 10000 c) For each of place in other district 25000 subject to overall limit of 5lacs4. Banking co. having only one place of business and also no 50000 branch in Bombay or Calcutta5. a) Banking co. having place of business in only 1 state, one or more or which is or are situated in Bombay or Calcutta or plus 5lacs b) For each place of business outside the city 25000 c) subject to overall limit of 10lacs
Continue……..4. Management Board of Directors Wholetime Chairman5. Maintenance of Liquid Assets CRR(sec 18) No loans & advances on its own shares(sec 20) No floating charge to any of its property(sec 14A) Credit policy need to be followed by Banks(sec21)
Continue… Cannot be a pledgee of any immovable property for period of exceeding 7 years(except official work)sec 9 Cannot hold shares in other co’s more than 30% of paid up capital of that co or their own(sec 19) Restriction on granting loans to any of the its directors or to any institution in which director is interested. SLR Foreign co. Should keep assets in India atleast to the extent of 75% of total liabilities at the end of every quarter
6. Licensing of Banks(sec 22) Financial status Companies affairs are in compliance with the rules Foreign banks1. No discrimination2. Business in public interest3. Comply with the provisions of Act
7.Opening of New branches(sec 23) Prior permission from RBI(in India or abroad) or changing location of the existing offices. Conditional license Conditions to be satisfied Prior consent not required New licensing policy
8. Loans and Advances(sec 21) Purpose of loan Margin for secured advances Amount of advances to a bank, company , individual or a firm Rate of interest and other terms Maximum amount upto which guarantee can be given Exceptions- No loan to director, or no loan on security of its own shares
9. Inspection of Banks(sec 35) RBI has a right to inspect books of accounts of any bank Obligation on every employee to produce all the books Right to examine any of the officer/Director/employee Either its own initiative or by order of central govt. Report to be prepared, send to bank and Central govt and decision to be taken.
10.Returns to be submitted Returns of liquid assets & liabilities(sec 23(3)) Returns of unclaimed deposits(sec 26) Monthly returns(sec 27) Return of annual accounts(sec 31)(auditors report) Additional information(advances)
11. Acquisition of business(sec 36 AE to AJ) When banking co fails to comply the directions given under sec 21 of 35A When banking business is carried on to the detriment of interest of the depositors When RBI feels to provide credit in a better way to a particular area. Compensation is paid to shareholders.
12. Winding up of a Banking co.1) If banking co. is unable to pay its debts a) if it refused to meet any lawful demand made at any of its offices with in 2 days(some cases 5 days). b) If RBI certifies in writing2) The RBI will make an application under the following circumstances : a) fails to comply with the provisions of Act. b) unable to pay debts c) fails to implement satisfactory compromise sanctioned by court d) against the interest of depositors e) Liquidator
13. Amalgamation of Banking Companies(sec 44(a)) Information to shareholders and approved by two-third majority of shareholders Details of meeting to be given to every shareholder, needs to be published in at least two newspapers for three consecutive weeks Discontented shareholders can claim their value of shares Amalgamation scheme has to be sanctioned by RBI Assets & liabilities are transferred A copy of order of amalgamation to be given to ROC
14. Powers of RBI Discussed earlier Power to grant moratorium Power to appoint liquidator Additional powers
15. Miscellaneous Provisions(penalties (sec 46)) False or inaccurate return – fine & imprisonment upto 3 years Failure to furnish documents, accounts or comply with the Act – penalty of Rs. 2000 (plus Rs.100 per day) Receiving deposits in contravention of order of RBI – fine upto twice of amount Persons responsible for fault ,shall be deemed guilty of the default
16. Application of the Act to Co-op Bank Co-op banks were brought under the purview of Banking Regulation Act 1949. The Act is not apply to all state and central Co-op banks This Act is not applicable to Land development banks and agriculture credit society.
Class Exercise Which of the following situations will lead to a fall in the interest rates?1. When there is excess money supply2. When the domestic currency offered at lower rates3. When the repos are offered at lowered rates4. Both 1) & 2)5. Both 1) & 3)