This book offers a comprehensive coverage of laws and practices relating to banking. It begins with a module on the legal framework of regulations and the. JAIIB MADE EASY 3: LEGAL & REGULATORY ASPECTS OF BANKING- A Complete Book: Updated specially for exam eBook: EXPERIENCED . JAIIB FAST 3: MCQs ON LEGAL & REGULATORY ASPECTS OF BANKING - Pass in Just 4 days: Updated specially for Exam eBook.

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Practice Teat Papers / Teat Yourself based on latest IIBF syllabus for JAIIB examination. . Third paper: Legal & Regulatory Aspects of Banking – or read book online for free. One of the three books required for JAIIB exams held under IIBF, principles and practices of banking, only chapter is prominent in this pdf. Legal and Regulatory Aspects of Banking - JAIIB. Uploaded by. Legal & Regulatory Aspects of Banking - Download as PDF File .pdf), Text File . txt) or read online.

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More filters. Sort order. Ashutosh Kumar rated it liked it Nov 28, The directors so appointed shall not require any qualification shares. They hold office during the pleasure of the Reserve Bank.

Subject to this, appointment may be for a period not exceeding three years or further extended periods not exceeding three years at a time as specified by the Reserve Bank. The additional directors are protected from any liability or obligation for executing their functions in good faith. The provisions of Section 36AB have overriding effect over other laws. Before forming an opinion regarding the remuneration, the Reserve Bank has to consider the financial condition and history of the banking company, its area of operation, resources, volume of business and the trend of its earning capacity, number of its branches, qualifications, age and experience of the person concerned, remuneration of other personnel in the bank or persons holding similar positions in other banks and the interest of depositors.

However, the restriction on remuneration does not affect payment of bonus according to a settlement or award or in accordance with a scheme framed by the bank or in accordance with the prevailing practice in banking business. Commission paid to brokers, auctioneers, forwarding agents, etc. Persons who are directors of any company other than a subsidiary of a banking company or company registered under Section 25 of the Companies Act are also prohibited from managing a banking company.

However, this prohibition shall not apply to a director for a temporary period of three months, or a further period not exceeding nine months, if allowed by the Reserve Bank. Apart from this, persons engaged in any other, business or vocation or whose term of office as a person managing the company is for a period exceeding five years also fall in the prohibited category. However, the period of office can be renewed or extended for further periods not exceeding five years at a time.

Power to remove Management and other personnel: The Reserve Bank is empowered under Section 36AA of the Banking Regulation Act to remove any chairman, director, chief executive officer by whatever name called , or other officer or employee of a banking company.

For this purpose, the bank has to be satisfied that it is necessary to do so. The bank RBI has the discretionary power to remove management and other personnel in the following circumstances: The Reserve Bank has to pass such an order recording the reasons in writing.

Before passing the order, the affected person has to be given a reasonable opportunity of making a representation against the proposed order. The person so removed shall not be entitled to any compensation for loss of office notwithstanding anything contained in any law, the memorandum, articles or any contract to the contrary as the provisions of Section 36AA have overriding effect. An appeal against the order of removal lies with the Central Government.

Such an appeal has to be filed within thirty days from the date of communication of the order. The appellate decision of the Central Government, and subject thereto the order of the Reserve Bank, shall be final and not liable to challenge in any Civil Court.

Effect of the order of removal: Contravention of the order is punishable with a fine of Rs. Appointment of a suitable person: When any chairman, director, chief executive officer, other officer or employee is removed by the Reserve Bank under Section 36AA as above, the Reserve Bank may appoint a suitable person in his place.

Such person shall hold office at the pleasure of the Reserve Bank. Subject to this, the appointment may be for a period not exceeding three years and is extendable for further periods not exceeding three years at a time. Such appointee shall not incur any obligation or liability for action taken in good faith in the execution of the duties of his office.

The Concept: Corporate governance is a dynamic concept involving promotion of corporate fairness, transparency and accountability in the interest of shareholders, employees, customers and other stakeholders. It is a concept of recent origin. However, there is considerable divergence in the understanding and practice of corporate governance across different jurisdictions.

The concept has evolved since the first major study by the Cadbury Committee in The DECO principles of corporate governance published in , the first international code of good corporate governance approved by governments, was revised in Corporate governance can be seen as 'the way in which boards oversee the running of a company by its managers, and how board members are in turn accountable to shareholders and the company' and it has implications for company behaviour towards employees, shareholders, customers, banks and other stakeholders.

Further, good corporate governance plays a vital role in ensuring the integrity and efficiency of financial markets and the lack of it can pave the way for financial difficulties and sometimes even fraud.

The OECD principles of corporate governance, stipulate what the corporate governance framework should ensure, which is briefly as under: To promote transparent and efficient markets which are consistent with the rule of law.

Category: JAIIB Chapterwise Notes

Also, to articulate clearly the division of responsibilities among the different supervisory, regulatory and enforcement authorities. To protect and facilitate the exercise of shareholders' rights. In the equitable treatment of shareholders are included the minority and foreign shareholders.

Further, all shareholders should have the opportunity to obtain an effective redress for violation of their rights. To recognise the rights of stakeholders, established by law or through mutual agreements and encourage active cooperation between the corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. Timely and accurate disclosures made on all material matters, regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

Strategic guidance of the company, effective monitoring of management by the board and the board's accountability to the company and the shareholders are the important aspects.

These principles are applicable to all types of companies including banks. Corporate Governance and Banks: Banks hold a special position in corporate governance as they accept and deploy large amounts of public funds in fiduciary capacity and also leverage such funds through credit creation. The position of banks is also important for the smooth functioning of the payment system. Accordingly, legal prescriptions for ownership and governance of banks laid down in the statutes are supplemented by regulatory prescriptions.

The Basel Committee on Banking Supervision has issued guidance February for promoting the adoption of sound practices of corporate governance by banking institutions.

This guidance, entitled Enhancing Corporate Governance for Banking Organisations, highlights the importance of: See, http: Apart from the fiduciary role of banks, their cross-border operations add a special dimension. This provides an added impetus for convergence in standards internationally. In almost all countries, the policy framework with regard to corporate governance involves a multiplicity of agencies. Reserve Bank's approach: Following the formal policy announcement in regard to corporate governance, in the mid term Review of the Monetary and Credit Policy, in October, , the Reserve bank constituted a Consultative Group in November, under the chairmanship of Dr.

Ganguly with a view to strengthen the internal supervisory role of the boards of banks. The report of the group was transmitted to all the banks for their consideration in June, and simultaneously to the Government of India for consideration.

Earlier, an advisory group on corporate governance under the chairmanship of Dr. Patil had submitted its report in March, which examined the issues relating to corporate governance in banks in India, including the public sector banks and made recommendations to bring the governance standards in India on par with the best international standards.

There were also some relevant observations by the advisory group on banking supervision under the chairmanship of Shri M. Verma which submitted its report in January, Keeping all these recommendations in view and the cross-country experience, the Reserve Bank initiated several measures to strengthen the corporate governance in the Indian banking sector, including the concept of 'fit and proper' criteria for directors of banks which included the process of collecting information, exercising due diligence and constitution of a nomination committee of the board to scrutinise the declarations made by the bank directors.

The RBI guidelines on ownership and governance in the private sector banks released on February 28, Paras 5 and 6 provide as under: Any higher level of. Where the ownership is that of a financial entity the objective will be to ensure that it is a well-established regulated entity, widely held, publicly listed and enjoys good standing in the financial community. Furthermore, such a limitation will also be considered, if appropriate, in regard to important shareholders with other commercial affiliations.

While the respective entities should perform the roles envisaged for them, private sector banks will be required to ensure that the directors on their boards representing specific sectors, as provided under the B. Act, are indeed representatives of those sectors in a demonstrable fashion, they fulfil the criteria under corporate governance norms provided by the Ganguly Committee and they also fulfil the criteria applicable for determining 'fit and proper' status of important shareholders i.

With regard to public sector banks, the principles of corporate governance have been statutorily recognised as per Banking Companies Acquisition and Transfer of Undertakings Financial Institutions Laws Amendment Act, The Act as amended provides for shareholder directors to be a person having 'fit and proper' status and the Reserve Bank has to notify the 'Fit and Proper' criteria [Section 9 2 ].

The Reserve Bank has the discretion to reject licence or approve the licence on such conditions as it thinks fit. Before granting licence, Reserve Bank has to be satisfied by inspection or otherwise of the suitability of the company for licence. A licence once given may also be cancelled after giving the bank an opportunity to be heard. Further, for opening new branches or shifting branches outside a city, town or village, permission of the Reserve Bank is required.

Banking companies have to have minimum capital and reserves as specified in the Banking Regulation Act. The shareholders of a banking company are entitled to dividends only after all the capitalised expenses are written off.

The commission or brokerage payable on selling shares is restricted to two and half per cent of the paid-up value of the shares.

The board of directors of a bank has to be constituted with persons having special knowledge or experience in accountancy, banking, economics, law, etc. The directors should not have substantial interest in other companies or firms.

The maximum period of office is limited to eight years continuously. The Reserve Bank is empowered to reconstitute the board, if the board is not properly constituted. Every banking company should have a full-time chairman or a full-time managing director, if there is no full-time chairman with the specified qualifications.

The Reserve Bank has powers to remove the chairman and appoint a suitable person in his place in certain cases. The Reserve Bank also has powers to remove the directors or managerial personnel or other employees of banking companies. The principles of corporate governance including the 'fit and proper' criteria for directors apply to banking companies as well as public sector banks. Say whether True or False, i A temporary branch for less than thirty days in a town where a bank has an existing branch does not require permission from Reserve Bank.

Fill in the gaps choosing the answer from the brackets. Say whether True or False.

In the case of a banking company, a shareholder cannot exercise voting rights on poll. Choose the correct statements from the following. Accordingly, the Act empowers the Reserve Bank to issue directions for regulating terms and conditions of making of loans and advances and other matters including acceptance of deposits.

The Banking Regulation Act also imposes certain restrictions on loans and advances to the directors of banking companies, and companies and firms in which they are interested. The Act contains provisions for creation of a reserve fund and transfer of a percentage of profits to that fund.

There are also provisions for maintenance of cash reserve, liquid assets and assets in India. In this unit, we look at the relevant provisions of law in this regard.

The Banking Regulation: While Section 21 gives the power to regulate advances by banking companies, Section 35A gives wide powers generally to regulate banking companies. The Reserve Bank has been issuing directions from time to time under Section 21 read with Section 35A regulating rates of interest and other terms and conditions of acceptance of deposits and making of loans and advances.

Regulation of deposits and loans and advances are discussed below See, Paras 3. Nature of Directions: The directions issued by the Reserve Bank in exercise of powers under Sections 21 and 35A of the BR Act, being statutory directions, are binding on the banks. The circulars of the Reserve Bank giving instructions to banks where it has statutory powers to give such instructions are also binding on the banks, even if they do not specifically refer to any statutory provisions.

The Reserve Bank's powers to issue directions are over the banks. Hence, the directions are addressed to banks only and not to customers or the public. The Custodian AIR SC in the context of some banks entering into certain repo transactions against the circulars of the Reserve Bank prohibiting such transactions.

The court found that the action of the banks violated the Reserve Bank's instructions and held that the violations would not invalidate the contracts with third parties but would render the banks liable to prosecution. The effect of directions will be prospective and not retrospective in the absence of any statutory provisions providing for retrospective operation of directions. Bank Ltd. AIR Guj In that case the Court considered the power of the Reserve Bank to issue directions for superseding the board of a co-operative bank for securing its proper management and upheld the action taken by the Reserve Bank on the finding that it was without mala fide.

Caution and Advice: Apart from giving directions, the Reserve Bank may also caution or give advice to banking companies. Section 36 of the Banking Regulation Act provides that the Reserve Bank may caution or prohibit banking companies generally or any banking company in particular against any transaction or class of transactions.

Further, the Reserve Bank may generally give advice to any banking company. As discussed in unit I, the essence of banking business is the acceptance of deposits from the public withdrawable by cheque.

The definition of "banking" in Section 5 b of the Banking Regulation Act acknowledges this position. Types of Deposits: Banks accept different types of deposits, both time and demand deposits, from the public.

While time deposits, like fixed deposits or recurring deposits are repayable after an agreed period, demand deposits, like deposits in current account and savings bank accounts, are repayable on demand, subject to the terms and conditions of the deposits. The period of the deposit and rate of interest applicable to the deposit are matters to be agreed between the depositor and the bank under the terms of the deposit, subject to any directions given by the Reserve Bank in this regard.

Regulation of acceptance of deposits: The Banking Regulation Act does not contain any specific provisions for regulation of acceptance of deposits of banks. However, Section 35 A which authorises the Reserve Bank to give directions is wide enough to cover acceptance of deposits.

Accordingly, acceptance of deposits may be regulated in the public interest or in the interest of banking policy or in the interests of depositors by issuing directions. The Reserve Bank issues directions from time to time regulating the rates of interest applicable to deposits. The directions issued by the Reserve Bank may also stipulate conditions regarding minimum or maximum periods for which deposits may be accepted, reduction of interest payable on premature withdrawal and payment of interest on renewal of overdue deposits.

However, currently RBI prescribes the minimum and maximum period for which deposits can be accepted and prescribes interest rates only in respect of Savings Deposits and NRI deposits leaving others for the individual banks.

Returns on unclaimed deposits: Banks have to file a return every year on their unclaimed deposits under Section 26 of the Banking Regulation Act. The return has to be filed within thirty days of the end of each calendar year in the form and manner prescribed and should cover all deposits not operated for ten years. In the case of fixed deposits the period of ten years starts from the expiry of the period of the deposit. Repayment of Deposits: Section 45ZA of the Banking Regulation Act provides that a depositor or depositors of a banking company including co-operative banks may nominate one person in the prescribed manner as nominee to whom the deposit may be returned in the event of death of the sole depositor or depositors.

In the case of minor nominees, there is also a provision to appoint a person to receive the deposit on behalf of the minor.

Payment by a bank in accordance with these provisions gives a valid discharge to the bank, but this does not affect the right or claim a person may have against the nominee in respect of the amount received by him. Rule 2 of the Banking Companies Nomination Rules, provides for the procedure and forms for making nomination in respect of deposits with commercial banks.

In the case of Co-operative banks, similar provisions are incorporated in the Co-operative Banks Nomination Rules, Articles in Safe Custody and Safety Lockers: There are also provisions in the Banking Regulation Act for nomination in respect of articles kept in safe custody with banks and safety lockers. Sections 45ZC and 45ZE provide that any person who leaves any article in safe custody and in safety lockers respectively with a banking company, may nominate one person as nominee to receive the article in the event of death of that person.

The nomination has to be in the prescribed manner and on return of articles kept in safe custody or removal of contents of locker by nominees as provided, the bank gets a valid discharge.

Rules 3 and 4 of the Banking Companies Nomination Rules, , and also the Rules 3 and 4 of the Co-operative Banks Nomination Rules, deal with the form and procedure applicable to articles in safe custody and safety lockers respectively in the case of banking companies and co-operative banks. The definition of 'banking' in Section 5 b of the Banking Regulation Act indicates that acceptance of deposits may be for lending or investment.

Thus, lending or making of loans and advances is a core business of a banking company. Lending may be for short term or long term, on secured or unsecured basis and for different purposes.

Regulation of Loans and Advances a The Reserve Bank is empowered under Section 21 of the Banking Regulation Act to issue directions to control advances by banking companies. Such directions may be issued to banking companies generally or to any particular banking company.

The Reserve Bank may determine the policy in relation to advances and issue directions when it is satisfied that it is necessary to give directions: The policy on these matters may be specified having regard to the paid-up capital, reserves and deposits of the banking company and other relevant considerations. In this case, also the paid-up capital, reserves, deposits and other relevant considerations have to be taken into account for determining the maximum amount.

The Reserve Bank issues directions from time to time regulating the lending operations of banking companies in exercise of these powers vested under Section Apart from this, the general powers to give directions under Section 35A are also available for regulation of loans and advances. Selective Credit Control a Purpose: Banks have been traditionally financing trade and commerce and against items they deal in even before the country started industrializing.

To ensure that prices of essential commodities like food grains, pulses, edible oils, sugar, jaggery and cotton and textiles are not increased by certain sections of the business community with a motive of profit maximisation by hoarding with the help of bank finance, these restrictions have been put in place. These cover the quantum of credit that can be extended and also the rate at which it can be extended. With self-sufficiency achieved by our country over the years in almost all of the above, RBI had taken them out of the purview of selective credit control and currently restrictions are there only in case of levy sugar.

Selective credit control seeks to influence the demand for credit by i making borrowing more costly for certain purposes which are considered relatively inessential, or ii by imposing stringent conditions on lending for such purposes, or iii by giving concessions for certain desired types of activities.

The tools employed for exercising selective credit control are: The quantum and cost of credit are regulated by operating these tools of control. Price control: In India, selective credit control has been generally used for preventing speculative hoarding of essential commodities and basic raw materials using bank credit. This is with a view to check the undue rise of prices of such sensitive commodities. Restrictions on loans and advances: Section 20 of the Banking Regulation Act imposes certain restrictions on loans and advances.

The Psychology of Self-Esteem

Accordingly, no banking company shall grant loans or advances on the security of its own shares. Further, a banking company, is prohibited from entering into any commitment for granting any loans or advances to or on behalf of any of its directors.

The prohibition also applies to loans and advances to: If the director of a banking company is a partner or guarantor of any individual, loans and advances to such individual are also barred.

It is open to the Reserve Bank to specify any transaction as not being a loan or advance for this purpose by a general or special order.

In so doing the bank has to consider the nature of the transaction, period, manner and circumstances in which the amount is likely to be realised, the interest of depositors and other relevant considerations.

If there is any doubt or dispute as to whether a transaction is a loan or advance, the decision of the Reserve Bank in the matter shall be final. Restrictions on power to remit debt: For remitting any debt to its directors, a banking company requires prior permission of the Reserve Bank under Section 20A of the Banking Regulation Act. Permission is also required for remission of loans to: Any remission made in contravention of Section 20 is void and will have no effect.

This includes rates of interest for loans and advances as well as deposits. While giving directions on interest rates, there should not be any discrimination against any class of depositors or loanees or banks. Any differential treatment should be justifiable in law as not being against the principles of equality. In Harjit Singh vs Union of India AIR SC , the Supreme Court held in the context of reduction of rate of interest on bank loans to riot victims that the concession should be extended to loanees from financial institutions also, as there was no basis for discrimination between loanees from banks and loanees from financial institutions.

Interest on deposits: The rates of interest on deposits were not regulated by the Reserve Bank until Hence, it was open to the banks to decide their deposit rates freely. Thereafter the Reserve Bank has been issuing directions from time to time regulating rates of interest applicable to different types of deposits. Accordingly, payment of interest on current account was prohibited. As the directions are issued by virtue of the powers vested in the Reserve Bank under Section 35A of the Banking Regulation Act, before issuing the directions the Bank has to be satisfied that the directions are necessary in public interest or in the interest of depositors or of banking policy.

Of late, the movement has been in the direction of liberalisation of interest rates, thereby giving increased freedom to banks to decide the rates themselves. Interest rate on loans and advances: Interest rate on loans and advances is subject to regulation specifically under Section 21 2 e of the Banking Regulation Act apart from the general provisions of Section 35A.

The Reserve Bank has been issuing directions from time to time under Section 21 read with Section 35A of the Act regulating different aspects of lending including lending rates. Accordingly, different rates are permissible for different sectors like small-scale industries, agriculture, large-scale industries, etc.

Further, the rate of interest may vary on the basis of the period of the loan. The Reserve Bank tightens the regulations or gives relaxations thereby permitting banks to decide the rates on their own, depending on the position of money supply in the public interest or in the interest of depositors or of banking policy.

Currently the directions of RBI regarding interest rates of advances cover only finance to exporters and small loans with limits up to Rs 2 lac and DRI loans. Usurious loans Act, The Usurious Loans Act, prohibits lending at exorbitant rates.

The law has been made to protect the weaker borrowers from the powerful moneylenders. Similarly, debt relief legislation in different states attempts to protect the agriculturists and other weaker sections from unscrupulous lenders, by remitting debts or giving other concessions.

Although the lending rates of banks are regulated by the Reserve Bank, borrowers often used to resort to these laws for remitting loans or reducing rates of interest in respect of loans taken by them from banks. This was coming in the way of the monetary policy decided by the central bank. Accordingly, Section 21A was inserted in the Banking Regulation Act to make the rates of interest charged by banking companies beyond the scrutiny of courts.

Protection to interest rate: Section 21A of the Banking Regulation Act provides that a transaction between a banking company and its debtor cannot be reopened by any court on the ground that the rate of interest charged is excessive.

This provision is given an overriding effect over the provisions of the Usurious Loans Act, or any other law relating to indebtedness in force in any state. Section 21A was held to be valid and not ultra vires the Constitution by the Supreme Court. In Corporation Bank vs D. Gowda [ 5 SCC ], the Supreme Court held that banks can compound interest on annual rates and not half yearly rates in view of the express directives of the Reserve Bank.

The court further held that where the Reserve Bank fixes both minimum and maximum rates of interest, courts would not interfere in the matter of interest rate, if the rate charged by the bank is not in violation of the Reserve Bank directive. However, the court did not express any opinion on the question whether Section 21A would debar the courts from interfering if the circulars or directives of the Reserve Bank do not fix the maximum and leave it to the discretion of the banks to fix the rate above the minimum.

Section 58 empowers the Bank to make regulations for giving effect to the provisions of the Act and Clause g of the sub-Section 2 thereof, provides for making provisions for regulation of clearing houses for the banks including post office saving banks. The clearing houses are now functioning under the uniform clearing house rules and regulations framed by the mutual consent of members and no statutory rules or regulations have been framed.

However, the regulation of payment systems has become important in the context of electronic payment systems becoming popular and the probability of complications in the absence of a suitable regulatory framework with statutory backing.

In the absence of specific powers under the Act, the Bank has not been able to frame any regulations relating to payment systems. Hence, the Information Technology Act, has amended the Reserve Bank of India Act, inserting the Clause pp in Section 58 2 empowering the Reserve Bank to frame regulations for payment systems of banks and financial institutions.

Financial institution for this purpose will have the same meaning as provided in the Clause c of Section 45 of the Reserve Bank of India Act. Board for regulation and supervision of Payment and Settlement Systems: The Board has the Governor of the Bank as its chairman and its functions include prescribing policies relating to the regulation and supervision of all types of payment and settlement systems, setting standards for existing and future systems,.

These guidelines cover: These guidelines apply, in addition to Internet banking, to other forms of electronic banking to the extent relevant. All banks offering internet banking have to make a review of their systems in the light of these guidelines and report to the Reserve Bank the types of services offered, extent of their compliance with the recommendations, deviations, if any and their proposal indicating a timeframe for compliance.

Further, the Bank may, for the purpose of enabling it to regulate these agencies call for any information, statement or other particulars from them, or cause an inspection of such agencies to be made. However, the directions issued by the Bank in this behalf shall not relate to the procedure for execution or settlement of the trades in respect of the transactions on the recognised Stock Exchanges. Every director or member or other body for the time being vested with the management of the affairs of the agencies falling under Section 45 W has to comply with the directions given by the Reserve Bank and submit the information or statement or particulars as required.

The position is that of an independent and non-partisan officer who deals with specific complaints from the public against administrative injustice and maladministration. The banking ombudsman is an authority originally established under the Banking Ombudsman Scheme, by the Reserve Bank of India in exercise of the powers vested in it under Section 35A of the Banking Regulation Act.

The scheme aimed at resolution and settlement of complaints of the banking public against the commercial banks excluding RRBs and the scheduled primary co-operative banks without resorting to courts. It was modified by the Banking Ombudsman Scheme, and later by the Banking Ombudsman Scheme, to enlarge the extent and scope of the authority and functions of banking ombudsman for 'redressal of grievances against deficiency in banking services, concerning loans and advances and other specified matters'.

All commercial banks, regional rural banks and scheduled primary co-operative banks are required to comply with the modified scheme. Object of the scheme: The object of the scheme is to enable resolution of complaints relating to specified services rendered by the banks and to facilitate the satisfaction or settlement of such complaints.

Grounds of complaint: The grounds on which complaints may be made to the banking ombudsman are:. Jurisdiction and Procedure: The location and the territorial jurisdiction of the ombudsman are as specified by the Reserve Bank.

A complaint may be made in writing by a person himself or through an authorised representative.


No complaint to the banking ombudsman shall lie unless,. Reserve Bank of India and Ors. This is on the basis that the complaint must continue to have a foundation in law at the time the ombudsman takes up the claim for his consideration and renders his decision or award and that foundation would be lost when the complaint is taken to a Court, Arbitrator, Tribunal or any other competent forum.

The ombudsman being an authority or tribunal of limited jurisdiction conferred by the scheme, the exercise of jurisdiction or power by the ombudsman would depend on his having jurisdiction, not only to entertain a claim but also to end it. Moreover, the relief that can be granted by the ombudsman may not conflict with a more comprehensive adjudication by a court, arbitrator, tribunal or forum with wider powers.

In short, when the ombudsman is about to pronounce his award, he finds that the subject matter of the dispute has been taken to the debts recovery tribunal or a civil court or an arbitrator or to any other competent forum, the ombudsman will have to decline jurisdiction to pass any order or award on the complaint to bring about a resolution of the complaint by way of a non adversarial adjudication.

The ombudsman may call for information from the bank concerned and make endeavour to promote a settlement with the bank. The ombudsman is free to follow the procedure considered appropriate. Where a complaint is not settled by agreement within a period of one month from the date,of receipt of the complaint or such further period as the banking ombudsman may consider necessary, he may pass an award after affording the parties reasonable opportunity to present their case.

An award shall not be binding on a bank against which it is passed unless the complainant furnishes a letter of. However, on a written request for extension of time, the banking ombudsman may grant extension of time up to a further period of fifteen days for such compliance. Within one month from the date of receipt by the bank of the acceptance in writing of the award by the complainant or within such time not exceeding a period of fifteen days that may be granted by the banking ombudsman , the bank has to comply with the award.

In short, the Act deals with: a b c d regulation business of banking companies; control over the management of banking companies; suspension and winding up of banking business; and penalties for violation of the provisions of the Act. The Reserve Bank was constituted under Section 3 of the Reserve Bank of India Act, for taking over the management of currency from the Central Government and carrying on the business of banking in accordance with the provisions of the Act.

Originally, under the RBI Act, the Bank had the responsibility of: a regulating the issue of bank notes; b keeping of reserves for ensuring monetary stability; and c generally to operate the currency and credit system of the country to its advantage.

The Reserve Bank is a body corporate having perpetual succession and common seal and shall sue and be sued in its name. The whole capital of the bank is held by the Central Government. The Bank has its central office in Mumbai and offices in Mumbai, Kolkata, Delhi and Chennai, and branches at most of the state capitals and some other cities. The bank functions under the general superintendence and directions of the Central Board of 9 Directors.

The bank has to abide by the directions given by the Central Government in public interest after consultation with the Governor of the bank. The board shall consist of a Governor and not more than four Deputy Governors to be appointed by Central Government and other directors nominated by the Central Government. Apart from the Central Board, the bank has also local boards situated at Mumbai, Kolkata, Delhi and Chennai, which perform any duty delegated to them by the Central Board.

The Governor has the power of general superintendence and direction of the affairs of the bank and exercise all powers of the bank unless otherwise provided in the regulations made by the Central Board.

The Deputy Governors, Executive Directors and other officers in different grades assist the Governor in the discharge of the Bank s functions. The bank may issue notes of different denominations from Rs. Such notes shall be legal tender at any place in India. The bank is the banker to the Central Government under Section 20 of the Act, and accordingly it is obligatory to undertake banking business for the Central Government. In the case of state governments, their banking business is undertaken by the bank based on agreements as provided in Section 21 A.

Bank provides ways and means of advances to the Central and state governments. These are temporary advances to meet immediate needs when there is interval between expenditure and flow of revenue. The role of the bank as regulator of banking sector is mainly by virtue of the provisions of the Banking Regulation Act, In exercise of the powers under that Act the bank regulates the entry into banking business by licensing, exercises control over shareholding and voting rights of shareholders, exercises controls over the managerial persons, and regulates the business of banks.

The bank also inspects banks and exercises supervisory powers, and may issue directions from time to time in public interest and in the interest of the banking system with respect to interest rates, lending limits, investments and various other matters. The Reserve Bank is the primary regulator of banks. The government holds the entire capital of the Reserve Bank and appoints the Governor and the members of the Central Board and has the power to remove them.

The government has also the power to issue directions to the Reserve Bank under Section 7 I of the RBI Act whenever considered 10 necessary in public interest after consultation with the Governor. Thus, the government can exercise control over banks by influencing decision-making by the Reserve Bank and has also got appellate authority in respect of several matters in which the Reserve Bank has been conferred the power to decide at the first instance. Similarly, there are also provisions for appeal in respect of cancellation of banking licence under Section 22 and refusal of certificate regarding floating charge on assets Section 14A.

The government has also the power to notify other forms of business which a bank may undertake under Section 6 1 o of the Act. Rule-making powers under Sections 52 and 45Y are vested in the Central Government.

There are also other provisions under which the Central Government exercises powers as under: a b c d e f Approval for formation of subsidiary for certain business under Section 19; Notification with reference to accounts and balance sheet under Section 29; Issue of direction for inspection of banks under Section 35; Power to acquire undertakings of banks Section 36AE ; Appointment of court liquidator; Suspension of business and amalgamation of banks under Section The above provisions confer wide powers on the Central Government to regulate banks.

These are in addition to the powers conferred on the government as majority shareholder or full owner of public sector banks under the statutes constituting them. A co-operative bank is a co-operative society engaged in the business of banking and may be a primary Co-operative bank, a district central co-operative bank or a state co-operative bank. Cooperative banks operating in one state only are registered under the State co-operative Societies Act concerned.

The formation of such banks as well as their management and control over personnel is regulated by the co-operative law of the state. The Registrar of co-operative societies under the Co-operative Societies Act exercises a wide range of powers on co-operative societies from registration to winding up.

In the case of co-operative banks operating in more than one state, the Multi-State Co-operative Societies Act, is applicable. In that case, the Registrar appointed by the Central Government takes the place of the Registrar appointed by the State Government in other cases. With the introduction of Section 56 in the Banking Regulation Act, with effect from , cooperative banks have come under the regulatory purview of the Reserve Bank.

While the formation and management of co-operative societies operating in one state only including those conducting banking business are under the control of the State Government, licensing and regulation of banking business rests with the Reserve Bank.

Thus, there is dual control of State Governments and the Reserve Bank over these banks. In the case of co-operative banks which are registered under the Deposit Insurance and Credit Guarantee Corporation Act, the Reserve Bank has the power to order their winding up.

The circumstances in which Reserve Bank may require winding up are mentioned in Section 13D of the Act. Banks may be subject to the control of other regulatory agencies in the conduct of their business. For instance, a banking company will be subject to the control of the authorities under the Companies Act in respect of company matters.

Similarly, a bank is answerable to labour authorities in respect of the terms and conditions of service of its workmen, opening and closing of its premises, engagement of contract labour, etc.

Banks are also liable to pay income tax like cash transaction tax, service tax, etc. As provided in Section 6 of the Banking Regulation Act, banks may undertake certain non-banking business in addition to the business of banking.

In that regard also, banks may be subject to the regulatory control of other agencies. For instance, in the case of dealings in securities like shares and debentures, banks are subject to regulation by the Securities Exchange Board of India under the Securities Contract Regulation Act, read with the Securities and Exchange Board of India Act, Banking means acceptance of deposits of money from the public for lending or investment.

Such deposits may be repayable on demand or may be for a period of time as agreed to, by the banker and the customer, and may be repayable by cheque, draft or otherwise. Apart from banking, banks are authorised to carry on other business as specified in Section 6 of the Banking Regulation Act.

Banks are, however, prohibited from undertaking any trading activities. Banks are constituted as companies registered under the Companies Act, , statutory corporations constituted under Special Statutes or Co-operative societies registered under the Central or State Co-operative Societies Acts. The extent of applicability of the regulatory provisions under the Banking Regulation Act and the Reserve Bank of India Act to a bank depends on the constitution of the bank.

Reserve Bank of India is the central bank of the country and the primary regulator for the banking sector. The government has direct and indirect control over banks.

It can exercise indirect control through thx: Reserve Bank and also act directly in appeals arising from decisions of the Reserve Bank under the various provisions of the Banking Regulation Act. Central Government has substantial control over the management of these banks.

Only certain provisions of the BR Act are applicable to these banks as indicated in that Act. Co-operative banks operating in one state only are registered under the State Co-operative Societies Act and are subject to the control of the State Government as also the Reserve Bank.

In the case of non-banking business of the banks, they are subject to control by other regulatory agencies. State i ii iii whether the following statements are True or False. A public sector bank is a body corporate created under a special statute. A banking company is registered under the Banking Regulation Act. Fill in the gaps choosing the answers from the brackets.

State i ii iii iv v whether the following statements are True or False. Central Government can give direction to the Reserve Bank. All kinds of business of banks is regulated only by the Reserve Bank. Central Government is the primary regulator of banks. State governments have no control over co-operative banks. On cancellation of licence of any bank, an appeal lies with Central Government. True; ii False; iii False; iv False; v True.

One of the essential characteristics of banking is lending to traders; investment in securities; acceptance of deposits from the public 2. Banking companies operating in India are constituted in the form of body corporate constituted under a special statute; company registered under the Companies Act, or a foreign company; society registered under the Societies Registration Act 3.

Companies Act applies to banking companies notwithstanding the provisions of the Banking Regulation Act; insofar as its provisions are not inconsistent with the provisions of the Banking Regulation Act; only in relation to registration and winding up 4. Under the Reserve Bank of India Act, Reserve Bank regulates acceptance of deposits by all companies; non-banking financial companies; non-banking non-financial companies 5.

BR Act is applicable to co-operative banks to the extent as provided in the state laws on co-operative societies; in a modified form as provided in Section 56 thereof; at par with commercial banks 6. Central Government may give directions to the Reserve Bank when considered necessary in public interest only after consulting the Governor of Reserve Bank; the Central Board of the Reserve Bank; the Finance Commission 8.

A co-operative society registered under the Multi-State Co-operative Societies Act is prohibited from undertaking banking business; can be declared as a state co-operative bank; can undertake banking business as a primary co-operative bank 9. A multi-state co-operative bank means a multi-state co-operative society which is a primary co-operative bank; central co-operative bank; state co-operative bank To start with, there are restrictions at the entry point, by way of licensing and then the requirement of permission for opening or shifting of branches.

There are further regulations over the paid-up capital and reserves, shareholder's rights, constitution of the board of directors, appointment of chairman and formation of subsidiaries. Apart from the above, there arc also controls over the managerial and other personnel, including the power to remove unsuitable persons and to appoint suitable persons. In this unit, we study various provisions of the Banking Regulation Act, providing for controls over the organisation and management of banking companies.

Commencing or carrying on a banking business without a licence is prohibited. When the Act came into force, the banking companies, which were then in existence were required to apply for licence within six months from the commencement of the Act.

But, such banking companies were permitted to continue business, unless and until their applications for licence were rejected by the Reserve Bank. The requirement of licence was meant to ensure the continuance of only those banks, which were established and operating on sound lines and to prevent indiscriminate formation of banking companies.

As held by the Gujarat High Court in Shivabhai vs RBI, Ahmedabad AIR Guj 19 , Reserve Bank has the discretion to grant or refuse the licence and when such decision based on relevant, material and germane considerations, the decision cannot be assailed. Only if the decision is based on extraneous considerations or is perverse, the court will intervene. It is open to the RBI to consider the defects or improvements revealed in an inspection held under Section 35 of the BR Act while disposing of an application for licence.

See, Sajjan Bank Pvt. The refusal of licence to a company would make it ineligible to undertake banking business, but it would still be open to the company to carry on other business like money lending.The definition of "banking' in Section 5 b of the Banking Regulation Act indicates that acceptance of deposits may be for lending or investment.

Permission of the Institute is essential for reproduction of any portion of this book. Popular in Securities. A public sector bank is a body corporate created under a special statute. However, the court did not express any opinion on the question whether Section 21A would debar the courts from interfering if the circulars or directives of the Reserve Bank do not fix the maximum and leave it to the discretion of the banks to fix the rate above the minimum.

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