BANKING REGULATION ACT,1949

&

THE BANKING OMBUDSMAN SCHEME,1995

DEFINITION OF BANKING

“Accepting, for the purpose of lending or investment of deposit, of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”

- Banking Company- “any company which transacts the business of banking in India.”

(they follow withdrawal by cheque, draft, order etc.- Payment Mechanism)

BUSINESS OF BANKING COMPANY & PROHIBITED

Permitted Business: 1. Main functions- usual banking activities &2. Subsidiary functions or servicesProhibited Business:Prohibits banking co. from entering into trading activities by

acquiring a control in non-banking companies by-1. The formation of subsidiary co.2. The holding of shares in other companies beyond a

certain limit, 3. The holding of shares in any company in the

management of which any managerial personnel of the bank is interested.

CAPITAL REQUIREMENT

Banking Companies (Amendment) Act, 1962, shall have a paid up capital of not less than Rs.5lakhs irrespective of the number of places of business

Further the subscribed capital of the banking company should not be less than one-half of the authorized capital and the paid up capital should not be less than one-half of the subscribed capital.

If capital has to be increased above rules must be complied within a maximum period of 2 years

For setting up new banking co. Rs.100cr which should be raised to Rs.300 cr. Of commencement of Business

Minimum capital to set up a local Area Bank is Rs.5cr. Foreign Bank setting up of business in India is required to

bring in a minimum of $10mn to India as Capital

Share Capital: Issue equity as well as preference shares subject to

regulation of RBI It can pay dividend only after all its capitalized expenses

are completely written off. Voting right of one shareholder should not exceed 1% of

the total voting rights of all the shareholders Reserve Fund

Before declaring dividend transfer a sum not less than 20% of its net profit to a Reserve Fund until the amount of the Reserve Fund is equal to the paid up capital of the company.

Thereafter, exemption may be obtained from the Central Government on the recommendation of RBI

MANAGEMENT

Board of Directors:Atleast 51% of Board of Directors of a Banking Company

must consist of persons who have specialized knowledge & should not be proprietors of any trading, commercial or industrial concern.

Wholetime Chairman: Not be adjudicated insolvent Not be convicted for criminal offence Be a managing agent or take remuneration in the form

of commission or of a share in the profits of company or whose remuneration is excessive in the opinion of RBI

MAINTENANCE OF LIQUID ASSETS

Maintain 3% of total time and demand liabilities in the form of CRR (increase upto 15%)

Not to hold shares in other companies more than 30% of the paid up capital of the company or 30% of its own paid up capital whichever is less

Prohibited from making loans on security of that company’s own shares.

Prohibited from granting unsecured loans & advances to any of its directors or to any institution in which any such director is interested provided they should submit a monthly return showing all such unsecured loans to RBI

Prohibited from creating a floating charge to any of its property without obtaining a certificate from the RBI

Credit policy to be followed by banks Prevent Overtrading at the cost of liquidity Prevent foreign banks from taking funds from India- should keep assets

in India atleast 75% of its total liabilities at the end of every quarter

LICENSING OF BANKS

For Indian Banks- Whether in position to pay depositors in full their claims Whether the affairs of the company arenot being

conducted to the detriment of the interest of the depositors

In case of foreign Banks, Origin does not discriminate against Indian bank Will be in public interest They comply with all provisions of the Act of their

country

OPENING OF NEW BRANCHES

Prior permission for opening new place of business either in India or abroad and slso for changing the location of its existing offices

The consent not necessary when the banking company changes the place of business within the same city or when an office is opened in temporary period not exceeding 6months

Will get permission only after inspection May grant conditional license NEW LICENSING POLICY: banks with Net profits for 3

years in row, CAR atleast 8%, NPA less than 15%, minimum owned funds of Rs.100cr. Could open branches without permission.

POWERS OF RBI

Power to issue license Power to determine the credit policy Power of inspection Power to issue directions Power to control management Power to advice banks Power to assist in proposals for amalgamation Power to receive and scrutinize the returns Power to grant Moratorium at time of reconstruction Power to appoint liquidator Additional power Power to give advice to central govt. Power to supersede the BOD

WINDING UP OF BANKING COMPANIES

HIGH COURT SHALL ORDER WINDING UP – COMPULSORILY

OR VOLUNTARILY

THE BANKING OMBUDSMAN SCHEME,1995

OBJECT APPOINTMENT POWERS & DUTIES PROCEDURE FOR REDRESSAL SETTLEMENT BY AGREEMENT SETTLEMENT BY RECOMMENDATION SETTLEMENT BY AWARD REJECTION OF COMPLAINT