Microsoft Power Point - Bankinglaw-mbl

8/8/2019 Microsoft Power Point - Bankinglaw-mbl

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Banking law

Dr. Nandimath Omprakash V,

Associate Professor in Law & Coordinator,

Distance Education Department,

National Law School of India University,

Bangalore-560 072

Email: [email protected]


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Course No. II (MBL)

1. Structure and Functions of Commercial Bankers &

Financial Institutions (Module I)

2. Reserve Bank of India Structure and Functions

(Module II)

3. Law of Banking Regulations (Module III)

4. Negotiable Instruments Law and Procedure(Module IV & V)

5. Banker and Customer relation (Module VI)

6. Advances, Loans and Securities (Module VII & VIII)7. Procedural Aspects of Banking Law (Module IX)


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Evolution of banking services in India

British brought the modern concept of banking

to India

But the concept of banking was known to us Banking was used in synonymous with money

lending

Vedic literature records the details of bankingtransactions

Manusmrithi speaks about deposits, pledge, loansand interest rates etc.,

Sons pious obligation to discharge the loan ofthe father


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Indian modern banking

Alexander & Company a leading agency house

started managing the Bank of Hindustan in

1770s The Bank of Calcutta was established by the

East India Company in 1806

Commercial Bank in 1819

The concept of limited liability was not known

hence, till 1860 banks had to either obtain a

special charter from the crown or had to

operate under unlimited liability


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1921 three Presidency Banks at Calcutta,

Bombay and Madras were merged into the

Imperial Bank (vide Imperial Bank of IndiaAct, 1920)

Reserve Bank of India was established in 1934

It was given the right of note issue; Was also to act as bankers bank;

However, Imperial Bank was allowed to operate as

the agent of RBI, especially in those places whereRBI had no branches.


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The RBI was initially a shareholders bank

but was nationalized in 1948 [vide Reserve

Bank (Amendment) Act, 1948] State Bank of India Act, 1955

Imperial Bank was taken over by SBI


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Bank Nationalization an important milestone

Nationalization was perceived as a major step

in achieving the socialistic pattern of society

July 19, 1969 14 major banks werenationalized

1980 6 more banks were nationalized

A detailed scheme of objectives, regulations,

management etc., was drawn-up for these

banks


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the branch network which was 8262 in June 1969expanded to 60000 by1992 with major expansion(80%) in rural areas. The average number of people

served by a branch came down from 60000 to 11000.the development of credit is more widely spread allover the country as against only in advanced states. In1969 deposits amounted to 13% of GDP and advances

to 10%. By 1990 deposits grew to 30% and advancesto 25% of the GDPDeposits grew from a figure ofRs.4669 crores in July 1969 to Rs.2,75,000 crores on31.3.1993. More than 45% of the total credit wasdirected to the priority sector. More than 45% of thetotal deposits were used by the government to fund itsfive year plans


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Types of banking services in India

CENTRAL BANKCENTRAL BANK

NONNON--BANKING FIBANKING FISS

INSTITUTIONAL BANKSINSTITUTIONAL BANKS

COMMERCIAL BANKCOMMERCIAL BANK

SPECIALIZED BANKSSPECIALIZED BANKS

Commercial banking service include

(i) Receiving various types of deposits;(ii) Giving various types of loans(iii) Extending some non-baking facilities

(i) Locker;(ii) Electricity bill;

(iii) Payment of insurance premium etc.,


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Special banking institutions are established for definite

specialized banking servicesThe types of banks accept all types of deposits but mobilize

the amount in its specially focused area


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Many institutions are established for carrying on non-banking

financial services but to a great extent resemble thebanking activity Ex: Mutual funds, financial institutionsacting as portfolio managers


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SBI AND ASSOCIATE BANKSSBI AND ASSOCIATE BANKS

PRIVATE BANKSPRIVATE BANKSNATIONALIZED BANKS (20)NATIONALIZED BANKS (20)

NATIONALIZED BANKS (20)NATIONALIZED BANKS (20) NATIONALIZED BANKS (20)NATIONALIZED BANKS (20)


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LAND MORTGAGELAND MORTGAGE

RURAL CREDITRURAL CREDIT

IND. DEVELOPMENTIND. DEVELOPMENT

COCO--OPERATIVEOPERATIVE

HOUSING FINANCEHOUSING FINANCE

EXPORT IMPORTEXPORT IMPORT


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IFCIIFCI

SFCSFCSS

IDBIIDBI

ICICIICICI

NABARDNABARD

HDFCHDFC


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The Narasimham Committee

1990s India had traumatic moments

Banks were burdened with large percentage of

non-performing loans Customer service had suffered and out-moded

practices were in vogue

Overall re-hauling was needed for entire

financial systems in general and banking sector

in particular

The Narasimham Committee was set up to

recommend changes in financial system


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Committee recommends

Overall emphasis upon de-regulation

No further nationalization to be adhered to

No distinction between public and private sector

banks Control of banking sector to be centralized (and

not to be divided between RBI and Dept. ofBanking)

SLR and CRR should be reduced to prudent levels Concessional lending to be phased out

The capital base of banks should meet

international standards the appointment of Chief Executive of the banks

to be de-politicized


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Role of a commercial and centralbank


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Commercial bank

There is no specific definition (although

Banking Regulation Act defines banking)

The banker is one who deals in money Two essential functions of banking

1. Borrowing (accepting of deposits) of money; and

2. Lending of money for needy purposes

Besides these essential function a banking

company also performs

Other agency and

General utility functions


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a commercial bank mobilizes the savings of the society.This money is then provided to those who are in needof it by granting overdrafts or fixed loans or by

discounting bills of exchange or promissory notes. Inshort, the primary function of a commercial bank isthat of a broker and a dealer in money. By dischargingthis function efficiently and effectively, a commercial

bank renders a very valuable service to the communityby increasing the productive capacity of the countryand thereby accelerating the pace of economicdevelopment. It gathers the small savings of thepeople, thus reducing to the lowest limits the quantityof idle money


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the banker should always bear in mind that it

is the guardian of a very delicate mechanism

which paves the way for failure of economicdevelopment and which, if disturbed, will

create monetary disequilibrium with all the evil

effects incidental thereto


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Banking liquidity & profitability

PRO

FITABILITY

PRO

FITABILITY

LIQUIDITY

LIQUIDITY

cash in hand money at call & short

notice bills discounted investments loans & Advances


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Commercial banks & credit creation

Every loan creates a deposit Hartly Withers

The commercial banks as a system can and do

increase the total amount of money incirculation by increasing the purchasing power

of the people through the deposit money

created by them


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Model

10,000Total10,000Total

10,000Cash in hand10,000Deposits

ASSETSLIABILITIES

19,000Total19,000Total

9,000Loans to clients9,000Deposits

(creditbalance)

10,000Cash in hand10,000Deposits

ASSETSLIABILITIES


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Investment & mixed banking

Investment banks are organizations, which

assist business corporations and governmental

bodies to raise funds for long term capitalrequirements through the sale of shares, stocks,

bonds etc.,

Mixed banking lies in extension of operationsof investment banker to commercial banking

filed


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Universal banking

Often referred to as financial service

supermarket

An universal bank offers entire (or often mostof) financial services within the bank or

through its subsidiaries, like

Commercial banking solutions Investment banking

Other related financial services including

insurance


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Merchant banking

No specific universally accepted definition

But the financial institution which centers itsoperations on all or most of the following Corporate financial advice (on matter as new

shares and bond issues, capital reconstructions,mergers and acquisitions)

Taking deposits and money market operations Foreign exchange dealings

Medium term lending

Export finance Fund management on behalf of clients (pensionfunds, unit trusts, investment trusts etc.,)


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Virtual banking

relationship banking to electronic banking

Extensive use of IT based solutions

Automated Teller Machines (ATMs) Shared ATM networks

Electronic Fund Transfer @ Point of Sale (EFTPoS)

Smart cards Stored value cards

Phone Banking

Internet Banking


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Central banking


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The Central Bank is an institution charged with

the responsibility of managing the expansion

and contraction of the volume of money in theinterest of the general public welfare

-- R. P. Kent, Money and Banking, p. 351


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Central banks world view

Today almost all nations in the globe have their

Central Banks

The idea of having central bank attainedpopularity during 20th century (although some

central banks in existence earlier as well)

International Monetary Conference held inBrussels (1929) strongly emphasized the need

of central banking unit


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Necessity of central bank

Control of credit in any nationControl of credit in any nation

monopoly power of currency issuemonopoly power of currency issue

Friend, philosopher & guide to commercial banksFriend, philosopher & guide to commercial banks

Implementation of governmentImplementation of governments monetary policiess monetary policies


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Principles of central banking

Nationalwelfar

e

Nationalwelfar

e

Autonomy

Autonomy

Monetarystability Monetarystability No competitionNo competition


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Functions of central bank

Monopoly of note issue

Lender of last resort

Central clearance & settlement Bankers bank

Controller of credit

Banker to the government

Publishes economic statistics and other useful

information Research & development


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RBI Act, 1934 preamble

Whereas it is expedient to constitute a RBI to regulate the issue of Banknotes and the keeping of reserves with a view to securing monetary

stability in India and generally to operate the currency and credit

system of the country to its advantage;

And whereas in the present disorganization of the monetary systems of the

world it is not possible to determine what will be suitable as permanent

basis for the Indian monetary system;

But whereas it is expedient to make temporary provision on the basis of theexisting monetary system, and to leave the question of the monetary

standard best suited to India to be considered when the international

monetary position has become sufficiently clear and stable to make it

possible to frame permanent measures


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RBI an introduction

Established in 1935

Overtook

Currency issue from central government of India;and

Credit control from the then Imperial Bank of India

Nationalized in 1948


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Functions entrusted

Bank of issue (of currency)

Banker to the government (including management of

public debt)

Banker to commercial banks (lender of last resort)

Controller of volume of credit in India

Organization of sound and healthy commercial

banking system

Concerned with the development of

Rural banking;

Promotion of financial institutions; and

Development of money and capital markets


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RBI in its promotional role

The establishment of BILL MARKET scheme

(1952)

Establishments of financial corporations For agricultural sector; and

Industrial sector

Promotion of Regional Rural Banks (with theable assistance of commercial banks)

Assistance (to commercial banks) to open

foreign branches

Establishment of Export-Import bank


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Organization of the RBI

Ss. 8 & 9 of the Act

Governor

Central Board 4 Deputy Governors 10 Directors (nominated by the Central Government) 4 Directors from Local Boards

1 Government Representative (nominated by theCentral Government)

Local Boards Delhi

Mumbai Calcutta Madras


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Department in the Central Office

Secretariat

Banking operations & development

Industrial credit

Agricultural credit

Rural planning & credit

Exchange control

Currency management

Expenditure & budgetary control

Government accounts

Economic analysis & Policy


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Credit planning cell

Statistical analysis and computer

Management service

Administration & personnel

Legal services

Inspection

Premises

Banking training colleges Mumbai

Pune; and Madras

RBI & C i l B k


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RBI & Commercial Banks

Controller to commercial banks

By virtue of Banking Regulation Act, 1949; and

Reserve Bank of India Act, 1934

G l t l i l b k


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General control over commercial banks

License to commence banking business

Licensing the commercial banks to open

branches Revoke the license if the banking company is

operating improperly

Power to inspect (sec. 35)

Power to appoint additional directors on the

Board of Directors


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Approval of RBI is necessary for

appointment, re-appointment or termination of

an appointment of a Chairman

Power to prevent a commercial bank from

undertaking certain type of activities

Licensing the banking company


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Licensing the banking company

The RBI will satisfy itself about

The capital structure and earning prospectus of thecompany

The general character of the proposedmanagement (that it is of high order and notdetrimental to the interests of the depositors

That granting of license will be in the publicinterest

That the proposed banks working will be inconsistent with the monetary stability of theeconomy


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RBI has sufficient power to

Remove any managerial personnel from the office

Appoint another alternative suitable person in thevacancy so caused

Power to Audit

Prior approval before appointing, re-appointingor removing any auditor or auditors

Order for special audit Of such transactions; or Class of transactions; or

Transactions for particular period RBI can direct the auditor to conduct special audit

and submit his report independently

Quantative control of credit


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Quantative control of credit

Uses globally accepted tools

The bank rate

Open market operations

Variable cash reserve requirements

Formulation of credit policies (by way of an

order)


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Bankers bank


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Banker s bank

Lender of last resort for Commercial banks

Commercial co-operative banks

Regional rural banks

RBI offers refinancing facility to itsscheduled banks

The banking institutions which figure in theSecond Schedule of the RBI Act

Before admitting the banking company in to theschedule RBI satisfies itself that such bankingcompany is worth it

RBI also has the power to remove the bankingcompany from the schedule

Miscellaneous powers


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Miscellaneous powers

Prohibit certain transactions of any banking

company

Advise to any banking company to tie-up looseends in its operation

Act as an intermediary to the amalgamating

banks (but only upon the request)


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In the public interest to prevent matters

detrimental to the depositors etc.,

Order the banking company to call a meeting of itsdirectors to discuss any matters of relevance

Depute one or more of its officers to watch theproceedings at any meeting of the board

Appoint one or more of its officers to observe themanner in which the affairs of the bankingcompany or of its offices or branches are beingconducted and make a report thereon

Compel the bank to change its managementapproach with regard to certain matter


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Thanks very much


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Thanks very much

Microsoft Power Point - Bankinglaw-mbl

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