Regulatory Framework for Banking in India

8/2/2019 Regulatory Framework for Banking in India

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REGULATORY FRAMEWORK FOR

BANKING IN INDIA

An overview.


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The Definition and Nature of Business

of Banking

Banking in India is mainly governed by TheBanking Regulation Act, 1949 and The ReserveBank of India Act 1934.

Banking is defined as the acceptance ofdeposits from the public for the purpose oflending or investment.

Banker can refuse open an account from anundesirable person. Know your customer(KYC) has become more stringent now.


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Non-Banking Finance Companies

In 1997, by an amendment to the RBI Act, a

three tier supervisory frame work was

introduced for NBFCs.

CAMELS (Capital adequacy, asset quality,

management earnings, liquidity and systems

control) has been put in place for them.

They cannot accept deposits without specific

approval from RBI.


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Licence for Banking.

It is necessary to have a licence from RBI tocommence the business of Banking.

Ever banking company has to use the word

bank as part of its name and no companyother than a banking company can use theword, bank',' banker, banking as part of itsname.

The forms business permissible are given inSection 6 (1) of the Banking Regulation Act.


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Summary of Permissible Business.

Borrowing and lending.

Bill discounting, accepting bills of exchange.

Issue of letters of credit, travellers cheques,credit cards.

Dealing in foreign exchange transactions.

Money transfer, issue of demand drafts, bankguarantees etc.

Negotiating loans and advances.


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Providing safe deposit vaults.

Negotiating loans and advances.

Providing, working capital, cash-credit andoverdraft facilities to firms.

Manage investments of clients- personal

finance advisory services. Market shares, mutual funds, bonds,

debentures, insurance etc


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Prohibited Business.

Prohibited from engaging directly or indirectlyin trading activities and undertaking tradingrisks.

Buying or selling or bartering goods directly orindirectly is prohibited.

However they can hold as securities against

loans, goods, land properties etc which theycan also sell or dispose off when the debtors

default.


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Cooperative Banks.

A cooperative Bank is a cooperative society

engaged in the business of banking. All

cooperative banks operating on one state only

are registered under the respective State

Cooperative Societies Act. The formation of

such banks as well as their management and

control over personnel is regulated by thecooperative law of the state.


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Registrar of Cooperative Societies under theCooperative Societies Act exercises a widerange of powers on cooperative societies from

registration to winding up. In the case of cooperative banks operating in

more than one State, The Multi-unitCooperative Societies Act, 1986 is applicable.In such cases the Registrar appointed byCentral Government exercises control.


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However the licensing and regulation of banking

business rests with the Reserve Bank.

Thus there is a dual control of the state

government and Reserve Bank over these banks.

For example two years ago the RBI, banned

cooperative banks from giving loans against

security of shares. This was after the collapse ofMadhavpura Coop. Bank in Gujerat after the

Ketan Parekh scam.


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Government as a Regulator of Banks

RBI is the primary regulator of banks. But GOIhas extensive powers under RBI & BR Acts.GOI can issue directions to RBI. GOI can also

decide on appeals against decisions of RBI. Power to acquire banks.

Appoint a court liquidator when a bank is

wound up. Can suspend business or order amalgamation

of banks.


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Regulation by other Authorities.

If banks market shares bonds etc, they come

under SEBIs regulations.

If they market Insurance Policies they come

under the Insurance Regulatory &

Development Authority of India.(IRDA).

On labour and Trade Union issues they will be

governed by the State Labour Commissioner.

On tax matters by the tax authorities.

Regulatory Framework for Banking in India

Documents

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