Government control in Banking system

Banking regulation Act, Government control in Banking system (RBI) regulatory regime, yearly finance bill. To facilitate the equal development in India. Opening + liquidation.

• In India the banking system has its own peculiar regulatory regime which can be basically described on the basis of two statues:
  • Banking regulation act, 1949.
  • Reserve bank of India act, 1934.
• The control on banks is exercised in the following:-
  • It’s Reserve bank of India which decides the rate of interest charged on loans.
  • Reserve bank of India decides the statutory liquidity ratio.
  • RBI decides the cash reserve ratio.
  • It’s Reserve bank of India only which also decides the withdrawal limit from ATM.
• In this way it could be said that its’s the central government which implement its financial policies to regulatory regime.

Objective of Banking regulation act and RBI act, Government control in Banking system

The abbreviation of the BRA is Banking regulation act, it contains, 56 sections and section 6(1) talks that:-

• Banking regulation act provides security and guarantee to the depositor.
• Regulate opening of branches.
• Regulate banking business.
• Minimum requirement of capital.
• Regulation on the acquisation of shares of banking companies.
• Provisions regarding liquidation proceeding for banking companies.

Functions of Banking section 6(1) Banking regulation act, Government control in Banking system

• Giving and depositing money.
• Agent- managing agent.
• Loan
• underwriting.
• Bank can be Guaranteer.

Section 8 Prohibition of trading, Banking regulation act, Government control in Banking system

Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it.

Or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) sub-section (1) of section 6.

Provided that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6.

Explanation:- For the purposes of this section, “goods” means every kind of moveable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instruments referred to in clause (a) of sub-section (1) of section 6.

Banking regulation act Section 10, Government control in Banking system

Prohibition of employment of managing agents and restrictions on certain forms of employment Banking regulation act Section 10.

Prohibition of employment of managing agents and restrictions on certain forms of employment section 10 BRA

1) No banking company employ or be managed – (a) shall employ or be managed by a managing agent, or (b) shall employ or continue the employment of any person-

• (i) who is, or at any time has been, adjudicated insolvent, or
• has suspended payment or
• has compounded with his creditors, or
• who is, or has been, convicted by a criminal court of an offence involving moral turpitude, or
• (ii) whose remuneration or part of whose remuneration takes the form of commission or of a share in the profits of the company.
• (iii) whose remuneration is, in the opinion of the Reserve Bank, excessive.

Nothing contained in section 10(1)(b)(ii) banking and regulations act

Provided that nothing contained in this sub-clause shall apply to the payment by a banking company of-

• (a) any bonus in pursuance of a settlement or award arrived at or made under any law relating to industrial disputes or
• in accordance with any scheme framed by such banking company or
• in accordance with the usual practice prevailing in banking business.
• (b) any commission to any broker (including guarantee broker), cashier-contractor,
• clearing and forwarding agent, auctioneer or any other person, employed by the banking
• company under a contract otherwise than as a regular member of the staff of the company.

Section 10(1)(c) Bank shall be managed by any person, Government control in Banking system

• (i) who is a director of any other company not being-
  • (a) a subsidiary of the banking company, or
  • (b) a company registered under section 25 of the Companies Act, 1956.
• Provided that the prohibition in this sub-clause shall not apply in respect of any such
• director for a temporary period not exceeding three months or such further period not exceeding nine months as the Reserve Bank may allow, or,
• (ii) who is engaged in any other business or vocation, or
• (iii) whose term of office as a person managing the company is for a period exceeding five years at any one time.

Provided that the term of office of any such person may be renewed or extended by further periods not exceeding five years on each occasion subject to the condition that such renewal or,

Extension shall not be sanctioned earlier than two years from the date on which it is to come into force.

Provided also that where the term of office of such person is for an indefinite period, such term, unless it otherwise comes to an end earlier, shall come to an end immediately on the expiry of five years from the date of his appointment.

Or on the expiry of three months from the date of commencement of section 8 of the Banking Laws (Miscellaneous Provisions) Act 1963, whichever is later.

Provided further that nothing in this clause shall apply to a director, other than the managing director, of a banking company by reason only of his being such director.

Expression “remuneration” in
relation to person employed

For the purpose of sub-clause (iii) of clause (b), the expression “remuneration”, in relation to person employed or continued in employment, shall include salary, fees and perquisites.

But shall not include any allowances or other amounts paid to him for the purpose of reimbursing him in respect of the expenses actually incurred by him in the performance of his duties.

Forming its opinion, Reserve Bank

(2) In forming its opinion under sub-clause (iii) of clause (b) sub-section (1), the Reserve Bank may have regard among other matters to the following:-

• (i) the financial condition and history of the banking company, its size and area of operation, its resources, the volume of its business, and the trend of its earning capacity.
• (ii) the number of its branches or offices,
• (iii) the qualifications, age and experience of the person concerned,
• (iv) the remuneration paid to other persons employed by the banking company or to any person occupying a similar position in any other banking company similarly situated.
• (v) the interests of its depositors.

(6) Any decision or order of the Reserve Bank made under this section shall be final for all purposes.

Board of directors to include persons with professional or other experience, Section 10A banking regulations act

Notwithstanding anything contained in any other law for the time being in force, every banking company:-

• (a) in existence on the commencement of section 3 of the Banking Laws (Amendment) Act, 1968, or
• (b) which comes into existence thereafter,
• shall comply with the requirements of this section:-
• Provided that nothing contained in this sub-section shall apply to a banking company referred to in clause (a) for a period of three months from such commencement.

Board of directors to include other experience, banking and regulations act

• (2) Not less than fifty-one per cent of the total number of members of the Board of directors of a banking company shall consist of persons, who:-
• (a) shall have special knowledge or practical experience in respect of one or more of the
• following matters, namely:—
• (i) accountancy,
• (ii) agriculture and rural economy,
• (iii) banking,
• (iv) co-operation,
• (v) economics
• (vi) finance,
• (vii) law,
• (viii) small-scale industry,

No act or proceeding of the Board of directors of a banking company shall be invalid by reason only of any defect in the composition thereof or on the ground that it is subsequently discovered that any of its members did not fulfil the requirements of this section.

Sections 11 recruitment as to minimum paid- up capital and reserve, banking and regulations act,

• Outside India
  • minimum paid up capital is 15 lakhs.
• Inside india
  • mimimum paid up capital is 5 lakh.
• authorised capital
• subscribed capital
• Paid-up capital.

To order to meet the demand deposit then this has to be fulfilled, subscribed will be the half of authorised and paid-up have to be half of subscribed capital.

Section 18 cash reserve, banking and regulations act

Every banking company, not being a scheduled bank, shall maintain in India on a daily basis by way of cash reserve with itself or by way of balance in a current account with the Reserve Bank, or by way of net balance in current accounts or in one or more of the aforesaid ways.

Banking and regulations act, Section 22 Licensing of banking companies

Licensing of bank companies, for banking businesses ther must be licence and that licence is granted by RBI.

Licensing of banking companies by Reserve Bank

(1) Save as hereinafter provided, no company shall carry on banking business in India unless it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject to such conditions as the Reserve Bank may think fit to impose.

Banking company in existence on the commencement of Banking and regulations act, Government control in Banking system

(2) Every banking company in existence on the commencement of this Act, before the expiry of six months from such commencement, and every other company before commencing banking business in India, shall apply in writing to the Reserve Bank for a licence under this section.

Licence by RBI, conditions must fulfilled by banking companies, Government control in Banking system

(3) Before granting any licence under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company or otherwise that the following conditions are fulfilled, namely:-

• (a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue.
• (b) that the affairs of the company are not being, or are not likely to be conducted in a manner detrimental to the interests of its present or future depositors.
• (c) that the general character of the proposed management of the company will not be prejudicial to the public interest or the interest of its depositors.
• (d) that the company has adequate capital structure and earning prospects.
• (e) that the public interest will be served by the grant of a licence to the company to carry on banking business in India.
• (f) that having regard to the banking facilities available in the proposed principal area of
• operations of the company, the potential scope for expansion of banks already in existence in the area and other relevant factors the grant of the licence would not be prejudicial to the operation and consolidation of the banking system consistent with monetary stability and economic growth.
• (g) any other condition, the fulfilment of which would, in the opinion of the Reserve Bank, be necessary to ensure that the carrying on of banking business in India by the company will not be prejudicial to the public interest or the interests of the depositors.

The Reserve Bank may cancel a licence granted to a banking company, Government control in Banking system

(4) The Reserve Bank may cancel a licence granted to a banking company under this section.

• (i) if the company ceases to carry on banking business in India; or
• (ii) if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1), or
• (iii) if at any time, any of the conditions referred to in sub-section (3) and sub-section (3A) is not fulfilled.

Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence

(5) Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government.

(6) The decision of the Central Government where an appeal has been preferred to it under sub-section (5) or of the Reserve Bank where no such appeal has been preferred shall be final.

Section 36 banking and regulations act, Further powers and functions of Reserve Bank

• Caution or prohibit banking companies
• On a request by the companies concerned and subject to the provisions of section 44A, amalgamation of such banking companies.
• Give assistance to any banking company by means of the grant of a loan or advance to it,
• Reserve Bank shall make an annual report to the Central Government on the trend and progress of banking in the country.

The Reserve Bank may appoint such staff at such places as it considers necessary for the scrutiny of the returns, statements and information furnished by banking companies under this Act, and generally to ensure the efficient performance of its functions under this Act.

Function being performed by Reserve Bank of India, Government control in Banking system

• Sale and perform the foreign currency.
• issuing letter of credit to expenditure on behalf of person.
• safe deposit value
• merchant banking
• General utility function on behalf of the government book mobilizies huge amount of foreign exchange in infrastructure.

Central Banking

Controling, regualtion, stability. It is independent institution and it has no political ideology. there are only one central bank i.e. RBI in 1935. it supports the function of the government.

• Fuctions of RBI
  • Controller of currency / issue bank.
  • banker to government. Government can take short or long term loans from the central bank, when export is less and import is more it is deficit, current account deficite, and when export is more then import, it is currernt account surplus.

Custodian of reserve cash Reserve Bank

• RBI can only have the custody of cash reserve it will give it as loan to government and commercial banks at interest.

Reserve Bank custodian to foreign currency

• custodian to foreign currency
  • to make certain reserve of foreign currency also . so that during import directly it may paid in foreign currency only.
• banker of last resort
  • when commercial banks , agricultural banks, or even the government did not find any way to take loans then rbi will give loans to all these at financial assessment.
• Clearing house
• protection of depositors
• Controlling the credit policy
  • SLR and CRR, RBI insures to make currency so that to control the inflation and deflation and can make the consistency between demand and supply.

Tools of RBI to regulate the money market

To control inflation and deflation RBI have been some of the tools to regulate and control the money market. Quantitative, Open market operation, Policy rate, Qualitative and the moral season.

Quantitative methods by RBI

CRR and SLR are the tools through which RBI used to measures the inflation and deflation, if inflation is being controlled by increasing CRR and SLR, and deflation, is being controlled by decreasing CRR and SLR.

Open market operation by RBI

RBI directly plays role in this , if the situation is of inflation then open market operation will be sale off, and if the situation is of deflation then RBI will start purchasing the open market operation, i.e. government securities, bonds and other assets of RBI which is being sale or purchased.

Policy rate by Reserve Bank

Bank rate repo rate and reserve repo rate in this RBI gives the loan if RBI wants to control inflation the interest will increase and in the case of deflation the interest will be decreased.

Qualitative and the moral season

It is the first and foremost tool to be used by RBI in the case of inflation and deflation, if there is inflation the loan is being stringent and if there is deflation the loan will be liberal.

Reconstruction and reorganisation of banking companies RBI

If any company or banking company facing any financial case, then in this case the company got restructering and reorganising.

• Restructure
  • To introduce the same firm with the restaffing and some new terms to work , it is also for the banking and non-banking companies.
• Reorganisation
  • Two banking companies merged with each other so that their capital together may increase, it is for the ompanies and banking companies both.

Section 38 banking and regulations act, Winding up by High Court

Notwithstanding anything contained in section 391 section 392, section 433 and section 583 of the Companies Act, 1956 , but without prejudice to its powers under sub-section (1) of section 37 of this Act, the High Court shall order the winding up of a banking company:-

• (a) if the banking company is unable to pay its debts, or
• (b) if an application for its winding up has been made by the Reserve bank under section 37 or this section.

ReOrganization and Amalgamation are same, when two company merged together to overcome from their losses, when pull in of two companies losses are amalgamation.

Section 44(A) procedure for Amalgamation of banking companies

Banking and regulations act, Section 44A(1) Amalgamation is not necessary or can not be done if the shareholders of both the companies is not ready for the resolution.

Section 44A(2) If the shareholders are agreed to merged the both companies, only if notice is being circulated and shareholders adopt the notice only consent of the shareholders with in majority.

Banking and regulations act Section 44(B), Government control in Banking system

Restriction on companies arangement between banking company and creditors. After shareholders, the creditors are playing the most important role in this, debenture holder i.e.

The second creditors are also important for the amalgamation of the company. The secured and unsecured creditors are the priority for the amalgamation of the companies.

Section 45 banking and regulations act, Government control in Banking system

Power of Reserve Bank to apply to Central Government for suspension of business by a banking company and to prepare scheme of reconstruction or amalgamation.

Section 45 It will be the RBI on the request of the companies to the consent of central government i.e. moratorium- almost died.

Bank moratorium

During the period of moratorium or at any other time, if the Reserve Bank is satisfied that-

• (a) in the public interest or
• (b) in the interests of the depositors or
• (c) in order to secure the proper management of the banking company or
• (d) in the interests of the banking system of the country as a whole,
• it is necessary so to do,
• the Reserve Bank may prepare a scheme-
  • (i) for the reconstruction of the banking company, or
  • (ii) for the amalgamation of the banking company with any other banking institution (in this section referred to as “the transferee bank”).

• suspension- may be reopen after the winding up.
• Dissolve- Permanently dissolve the company.

Within 6 months, the company have to get amalgamation reorganisation, reconstruction or else the company will permanently dissolve, but not to suspension , after getting moratorium from the central government.