Rizvi College Of Arts, Science And Commerce

SUBJECT: Foundation Course TOPIC: Banking Legislation CLASS: SYBBI SEMESTER: III

By Ms. Bushra Qureshi Assistant Professor

Department Of BBI (Bachelor Of Banking And Insurance)

BANKING LEGISLATION

C H A P T E R 3

INDEX

Banking Regulation Act, 1949

Banking Regulation Act (Amendment) 2015

Payment and Settlement Act 2007

Negotiable Instrument Act 1881

Basel I, II, III

BANKING REGULATION ACT, 1949:

The legal framework of banking in India, can be understood with the help of the following special points in the Banking Regulation Act, 1994. The important provisions of the Act have been discussed under the following heads: (1) Definition of Banking. (2) Business of banking company and Prohibited Business. (3) Capital requirements. (4) Management. (5) Maintenance of Liquid Assets. (6) Licensing of Banks. (7) Opening of New Branches. (8) Inspection of Banks. (9) Restriction on Advances.

DEFINITION OF BANKING:

The Banking Regulation Act, 1949 defines “a banking company as a company which transacts the business of banking in India.”

The Banking Regulation Act, 1949 defines the term ‘Banking Company’ as a ‘a company which transact the business of banking in India’, and the term ‘Banking’ has been defined as ‘Accepting for the purpose of lending and investment of deposits of money from the public, repayable on demand, order or otherwise and withdrawal by cheque, draft or order or otherwise.’

BUSINESS OF BANKING COMPANY AND PROHIBITED BUSINESS: Section 7 of the Act, makes it essential for every company carrying on the business of banking in India to use as part of its name at least one of the words - bank, banker, banking or banking company. It also prohibits any other company, or film, individual or group of individuals, from using any of these words as part of its/his name.

BUSINESS OF BANKING COMPANY: Under section 6 of the Act, the following business may be undertaken by a banking company, they can be classified as follows: (A) Main functions i.e. regular banking activities. Borrowing raising or taking money and lending or advancing money, discounting of bills, granting letter of credit, traveler’s cheques, buying and selling of bullion and species, buying and selling of foreign exchange, providing safe deposit vaults, collection and transmitting money and securities, underwriting and dealing in shares, debentures, bonds and investments of all kinds. (B) Subsidiary functions/ services The banking companies are allowed to render the following subsidiary functions: a) Acting as agents for individuals, governments etc. b) Carrying on agency business of any description. c) Contracting, negotiating and issuing public and private loans. d) Acting as trustees for customers. e) Dealing with all or any part of the property and rights of the company. Etc

BUSINESS PROHIBITED FOR A BANKING COMPANY (SECTION 8):

Section 8, of the Banking Regulation Act, 1949, prohibits a banking company from engaging directly or indirectly in trading activities and undertaking trading risks. However, a banking company is permitted to deal in buying or selling or bartering of goods or engage in any trade or buy, sell or barter goods for others in order to:

(a) Realize the securities given to it or held by if for a loan, if need arises for realization of the amount lent.

(b) In connection with the bills of exchange received for collection or negotiation and undertaking the administration of estates as executor, trustee, etc.

Again section 19 of the Act prohibits a banking company from entering into trading activities by acquiring a control in non-banking companies by:

(1) The formation of subsidiary companies.

(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.

(4) Undertaking and executive trusts.

(5) Providing safe deposit vault.

RESTRICTION ON NATURE OF SUBSIDIARY COMPANY (SECTION 19):

Section 11, contains provisions to ensure adequacy of minimum paid up capital and reserves. Adequacy of capital is essential for the soundness of a banking company. The Banking Companies (Amendment) Act, 1962, raised the minimum amount of the value of paid up capital to Rs.5 lakhs for any Indian bank commencing business after the commencement of the Act. The minimum paid up capital and reserves of different banks are given below:

(1) INDIAN BANKS

(2) FOREIGN BANKS

CAPITAL REQUIREMENTS (SECTION 11):

(1) Board of directors

(2) Whole time chairman

MANAGEMENT:

MAINTENANCE OF LIQUID ASSETS (SECTION 24)

Section 24, of the Banking Regulation Act, (Amendment) of 1983, provides that every banking company is required to maintain in India, in cash, gold or unencumbered approved securities an amount which shall not all the close business on any day be less that 25 per cent of the total of its demand and time liabilities in India.

LICENSING OF BANKING COMPANIES (SECTION 22): Section 22, provides that it is essential for every banking company to hold a license issued by the Reserve Bank. The license is issued by the Reserve Bank after conducting the inspection of the books of accounts of the banking company.

Section 23, provides that every banking company should take Reserve Bank’s prior permission for opening a new place of business in India, or to change the location of an existing place of business in India.

INSPECTION OF BANKS (SECTION 35):

OPENING OF NEW BRANCHES (SECTION 23):

Section 20, of the Act lays down certain restrictions on the loans granted by the banks to the persons interested in the management of the banks.

RESTRICTION ON ADVANCES:

The Banking Regulation Act permits the RBI to conduct inspection of banks on its own initiative with a view to established sound banking traditions by drawing the attention of banks concerned to their defects and unsatisfactory working methods.

BANKING REGULATION (AMENDMENT) ACT:

Following amendments were made from time to time. They are Regulation Act, 1949, the following clause shall be submitted, namely ‘approved securities’ means the securities issued by the central Government or any State Government or such other securities as may be specified by the Reserve Bank from time to time.

PAYMENT AND SETTLEMENT SYSTEM ACT, 2007:

The Payment and Settlement System Act (PSS Act) received the approval of the President on 20th December 2007 and it comes into force with effect from 12th August 2008.

OBJECTIVES OF THE PSS ACT, 2007:

The PSS Act, 2007 provides for the regulation and supervision of payment system in India and designates the RBI as the authority for that purpose and all related matter. Under PSS Act, 2007, two Regulations have been made by the RBI, namely:

(1) The Board for Regulation, and

(2) Supervision of Payment and Settlement System.

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IMPORTANT DEFINITIONS:

NEGOTIABLE INSTRUMENT ACT, 1881:

Section 13 of the Act states that “negotiable instrument means a promissory note, bill of exchange, or cheque payable either to order or to the bearer.” The Act deals with only three instruments – promissory notes, bill of exchange and cheques. FEATURES OF A NEGOTIABLE INSTRUMENT: 1) Free transfer 2) Title 3) Right to sue 4) Unconditional order/promise 5) Payable to order bearer 6) Instrument in writing 7) Presumptions to Negotiable Instruments

TYPES OF NEGOTIABLE INSTRUMENTS:

(1) PROMISSORY NOTE: Promissory Note is defined in Section 4 of the Negotiable Instruments Act, 1881. It is an instrument signed by the maker containing an unconditional undertaking to pay a certain sum of money only to the order of a certain person or to the bearer to the instruments. A promissory note is drawn and signed by the debtor. ESSENTIAL FEATURES OF A PROMISSORY NOTE: 1) In writing 2) Signed by maker 3) Must be certain 4) Unconditional promise 5) Express promise to pay 6) Parties 7) Stamped 8) Others

(2) BILL OF EXCHANGE: A bill of exchange is defined under Section 5 of the Negotiable Instruments Act, 1881. It is an instrument containing an unconditional order, signed by the maker, directing a person to pay a certain sum of money only to, or to the order of, a certain person or the bearer of the instrument. ESSENTIAL FEATURES OF BILL OF EXCHANGE: 1) In writing 2) Order to pay 3) Parties 4) Sign 5) Liability 6) Unconditional 7) Stamped 8) Money

(3) CHEQUE:

Section 6 of the Negotiable Instruments Act defines what a 'cheque' means. According to this provision, a cheque is basically a bill of exchange drawn on a specific banker. Furthermore, it is not payable otherwise than on demand.

ESSENTIAL FEATURES OF A CHEQUE:

1) Instrument in writing

2) Unconditional

3) Specified banker only

4) Specified name and money

5) Payable on demand

6) Sign

DIFFERENCE BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE:

Promissory note Bill of exchange 1) Promise and order: It contains unconditional promise to

pay money. It contains an order to pay a certain sum of money.

2) Number of parties: There are two parties: maker and payee.

There are three parties: drawer, drawee and payee. At times drawer and payee may be the same person

3) Acceptance: A promissory note does not require any acceptance because the maker himself is the promisor undertaking to pay.

It requires acceptance by the drawee to become a legal instrument.

4) Conditions: Conditions cannot be attached with promissory note.

A bill may be acceptance conditionally.

5) Dishonour: It may be dishonoured by non-payment.

A bill of exchange is to be accepted before it is presented for payment. It may be dishonoured by non-acceptance or non-payment.

6) Formalities in case of dishonor: Notice of dishonour is not necessary. Notice of dishonour must be given by the holder to all price parties.

Cheque Bill of Exchange

1) Printed form: A cheque is always drawn on a printed form.

A bill need not be drawn on a printed form.

2) Acceptance: The banker (drawer) need not accept a cheque.

Acceptance by the drawee is essential.

3) Payment period: A cheque is an instrument for immediate payment.

It is drawn for a specified period and so it is intended for circulation. Therefore, it is entitiled to 3 days of grace.

4) Liability: The liability of the drawer continues for three months.

Unreasonable delay in the presentation will discharge the bill.

5) Sets: It is nor drawn is sets. Foreign bills are always drawn in sets.

6) Crossed: It may be crossed to ensure safety. It cannot be crossed.

7) Dishonour: In case of dishonour, notice of dishonour to the drawer is not essential.

Notice of dishonour must be sent to hold the party liable.

8) Statutory protection: Statutory protection as given under Sec. 85 & 131 of NI Act applies only to cheques.

Statutory protection is not available in case of bills.

DIFFERENCE BETWEEN A PROMISSORY NOTE AND A BILL OF EXCHANGE:

BASEL I, II AND III: The Basel Committee on Banking Supervision (BCBs) is a committee of banking supervisory authorities that was established by the central bank governors of a group of ten countries in 1985. BASEL I: The BCBs first came out with 1988 Capital Accord for banks, taking into account the element of risk in various types of assets in the balance sheet as well as off-balance sheet business. BASEL II: BASEL III: As per a recent circular issued by the RBI on March 27, 2014 it was stated that, “in view of the implementation of Basel III capital regulations, banks need to improve and strengthen their capital planning processes.

BASEL II

Pillar I

Minimum capital requirement

Pillar II

Supervisory review

Pillar III

Market discipline

CAPITAL REFORMS: Sr. No. Capital reforms Ratio 1 Tier I capital – Tier I core tire

core tier 6%

2 Tier I + Tier II 4.5% 3 Conservation Buffer 4.5% 4 Counter – cyclical buffer 2.5% 5 Total capital Requirement 10.5% - 13%

LIQUIDITY REFORMS: The new norms relating to liquidity reforms are:

• Introduction of long term ratio like net stable funding ratio (NSFR)

• Introduction of short term ratio like Liquidity coverage ratio (LCR)

THANK YOU !!