BANKING LAW AND PRACTICE

UNIT-I: Introduction-Evolution of Banking system in India-Definition and objectives of

Bank-Types of Banks-Public/Private banks – Co-Operative Sectors Banks- Payment
Banks Small Finance Banks-Land Development Bank, Forex Bank. Banking in GIFTY
City.

Evolution of Banking system in India

The banking sector in India plays a vital role in this country’s economic development.
Over the centuries, numerous changes have occurred within this industry, from
technological advancement to the diversification of financial services and products.

Currently, the Indian banking system includes commercial banks, small finance banks,
and cooperative banks. Banks operating within the boundaries of India abide by the
Banking Regulation Act 1949.

 Phase 1 (1786-1969)

This is the pre-independence phase, which lasted nearly 200 years. During this period,
there were close to 600 banks. At the same time, some significant developments in
the banking industry also took place.

Bank of Hindustan is the first bank to exist, marking the foundation of India’s banking
system. But it ceased to exist in 1932.

o Presidency Banks

The East India Company founded three key presidency banks. These include the Bank
of Bombay (1840), Bank of Madras (1843) and Bank of Calcutta (1806).

These three banks merged and became the Imperial Bank of India. In 1955, it was
renamed the State Bank of India. Besides these, more banks, including Punjab
National Bank and Allahabad Bank, came into existence.

Between 1913 and 1948, there was stagnation in India’s banking space as growth was
slow. Multiple banks encountered periodic failures. The lack of confidence in the
country’s banking system played a part in the slow mobilisation of funds and the
growth of this sector. There were around 1100 banks during this period.
To streamline these banks' operations, the Indian Government introduced the Banking
Regulation Act 1949.

Phase 2 (1969-1991)

Post-independence, Indians were doubtful about the private ownership of banks.

Instead, they preferred to rely on moneylenders for necessary financial assistance. To
combat this issue, the Indian Government nationalised 14 commercial banks in 1969.

The main objective of this move was to reduce the concentration of power and wealth
of certain families that owned and controlled these financial institutions.

There were other reasons too for nationalisation:

 To support India’s agricultural sector

 Mobilise savings among individuals

 Facilitate the expansion of India’s banking network by opening more branches

 Boost the priority sectors through banking services

Some of the banks that were nationalised in 1961 include:

 Central Bank of India

 United Bank

 Canara Bank

 Indian Overseas Bank

 Dena Bank

 Union Bank of India

 Bank of Baroda

 Bank of India

 Allahabad Bank

In 1980, the Government nationalised six more banks, including:

 Corporation Bank

 Punjab & Sind Bank

  New Bank of India

 Vijaya Bank

 Andhra Bank

 Oriental Bank of Commerce

o Financial Institutions

Besides nationalising private banks, the Indian Government established a few

financial institutions (between 1982 and 1990) to fulfil specific objectives.

 EXIM Bank – for promoting import as well as export

 National Housing Board- for funding housing projects

 National Bank for Agriculture and Rural Development (NABARD) – for supporting
agricultural activities

 Small Industries Development Bank of India (SIDBI) – for providing financial

assistance to small-scale Indian industries

Benefits of Nationalisation

 Increased efficiency in the industry

 Empowered small-scale industries

 Provided a massive boost to India’s agricultural sector

 Increased public deposits

 Ensured better outreach

 Provided employment opportunities

Phase 3 (1991- Present)

Since 1991, the Indian banking system has been evolving. The Indian Government
encouraged foreign investment, which opened the economy to foreign and private
investors, which has led to the introduction of mobile banking, internet banking, ATMs,
and more.

Some foreign banks in India include:

  HSBC

 Citibank

 Bank of America

 Standard Chartered Bank

 DBS Bank

 Royal Bank of Scotland

To stabilise the nationalised public sector banks, the Indian Government formed the
Narasimham Committee in 1991 to manage reforms in the banking sector. During this
time, the Government approved various private banks. These include Axis Bank,
IndusInd Bank, and ICICI Bank.

Other noteworthy developments or changes:

 Small finance banks became eligible to open new branches anywhere in India

 The Government and RBI began to treat both private and public sector banks
equally

 Banks started digitising transactions along with other banking operations

 Payments banks were established

Banking

Banking refers to the system of financial institutions, such as banks and credit unions
that provide various financial services to individuals, businesses, and governments.
Banking services mainly include accepting deposits, lending money, facilitating
transactions, and offering various financial products like savings accounts, loans, and
credit cards.

“Bank is a financial intermediary institution which deals in loans and advances”---

Cairn Cross.

“Bank is an institution which collects idle money temporarily from the public and lends
to other people as per need.”----

R.P. Kent.
“Bank provides service to its clients and in turn receives perquisites in different
forms.”--- P.A. Samuelson.

“Bank is such an institution which creates money by money only.”-----W. Hock.

Objectives of Banking:

1. To establish as an institution for maximizing profits and to conduct overall

economic activities.

2. To collect savings or idle money from the public at a lower rate of interests and
lend these public money at a higher rate of interests.

3. To create propensity of savings amongst the people.

4. To motivate people for investing money with a view to bringing solvency in them.

5. To create money against money as an alternative for enhancing supply of money.

6. To build up capital through savings.

7. To expedite investments.

8. To extend services to the customers.

9. To maintain economic stability by means of controlling money market.

10. To extend co-operation and advices to the Govt. on economic issues.

11. To assist the Govt. for trade& business and socio-economic development.

12. To issue and control notes and currency as a central bank.

13. To maintain and control exchange rates as a central bank

Types of Banks in India

The Banking System in India is divided into several types, each serving specific
functions and purposes. The table below represents the different types of banks in
India and how it is further divided:

1) Central Bank

The Reserve Bank of India (RBI) serves as the Central Bank of India and is responsible
for regulating and controlling the monetary and banking system in the country.
2) Commercial Banks

These are the most common types of banks and include public sector banks, private
sector banks, and foreign banks. They provide various services like savings and
current accounts, loans, and investments.

 Public Sector Banks: Owned and operated by the government, examples include
State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda
(BOB).

 Private Sector Banks: These are privately owned and managed banks, such as
HDFC Bank, ICICI Bank, and Axis Bank.

 Foreign Banks: These banks have branches in India and are headquartered in
foreign countries. Some examples are Citibank, Standard Chartered, and HSBC.

 Regional Rural Banks (RRBs): These banks cater to rural and semi-urban areas
and are owned by the government, commercial banks, and state governments.

3) Co-operative Bank

A Co-operative Bank is registered under the Co-operative Societies Act of 1912 and is
run by an elected managing committee. It works on a non-profit, no-loss basis and
mainly serves entrepreneurs, small businesses, self-employment, and more in urban
areas.

In rural areas, it mainly functions to finance agriculture-based activities like farming,

livestock, and hatcheries. There are mainly two types of Co-operative Banks: State Co-
operative Banks and Urban Co-operative Banks

4) Payment Banks

The payment banks are a relatively new banking model in the country that has been
conceptualised by the RBI. This bank is allowed to accept a restricted deposit. This
amount is limited to Rs. 1 lakh for a customer. The bank also offers services such as
ATM cards, net banking and more.

5) Small Finance Banks

These banks primarily serve the unserved and underserved sections of the population,
including small businesses and low-income individuals.

This type of bank is licensed under Section 22 of the Banking Regulation Act 1949,
and it is governed by the Provisions Act of 1934.

6) Scheduled Banks

These banks are covered under the 2nd Schedule of RBI Act 1934, and they need to
have a paid-up capital of Rs. 5 lahks or more.

7) Non-Scheduled Banks

The non-scheduled banks are local area banks that are not listed in the 2nd Schedule
of the RBI Act 1934.

Public sector & Private banks

Public sector banks are those in which the union or state government owns more than
50% of the stock. Private sector banks are those in which private firms or individuals
own the majority of the stock. Acts of parliament are used to establish public sector
banks. There are currently 34 nationalised banks in India, with 12 being Indian
government banks and 22 being private sector banks.

Private banks-

Banks in the private sector are known for their fierce competition and technological
prowess. As a result, careers in private banking are more competitive, with
professionals being obliged to fulfil strict targets and perform above par in order to
advance their careers. The risk-to-reward ratio is also higher, and income may be
better, but job security may not be as good as it is at publicly-owned institutions.

Required Education- A bachelor’s degree in economics, business, or finance is

usually sufficient to lay a solid foundation for a banking career. Most private banks will
require a bachelor’s degree in one of these fields as well as an MBA from a reputable
college. Instead of depending on newspaper advertisements, they prefer to hire fresh
talent through campus recruitment, referrals, and walk-ins through consultants.
However, depending on the amount of openings, they may or may not be advertised.
They are not required to follow reservation regulations in terms of giving a fixed
number of positions to certain pre-designated groups of people. Private banks are
looking for youthful, competitive individuals who appreciate working under duress and
believe in giving it their all.

Employment- Private sector banks have been steadily developing, providing high-
end services to a diverse customer base while maximising technological capabilities.
Private banks compete in a fiercely competitive market, and they frequently employ
aggressive client engagement techniques to capitalise on their ability to provide high-
quality services in the shortest amount of time.

Public Banks-

Public sector banks are known for having a more organised organisational structure
and a larger customer base. In comparison to privately-owned banks, the work climate
is also less competitive, and professionals are less likely to be focused on hitting
targets and being the best performance in a team. There is usually a larger emphasis
on offering appropriate training to their employees in order to help them refresh their
knowledge and abilities in order to improve their performance in the long run. When
compared to private sector banks, job security is substantially stronger, and for some,
this may be the most important factor in establishing a long-term career.

Required education- Candidates are chosen after passing a series of common

entrance exams administered by public sector banks. A government banking job is
open to graduates from any subject. As a public banker, candidates should have a
strong understanding of finance, accounting, and banking processes, as well as great
communication skills.

However, the standards are less stringent than those of private banks, but one must
pass the test. As government-owned financial organisations, they are bound by
specific state-imposed norms and restrictions when it comes to hiring. Typically, they
must post any job openings in major publications and follow reservation criteria to
determine how many positions will be reserved for people from underrepresented
groups in society.

Employment- The demand for banking professionals is increasing as the government

continues to expand the scope and reach of publicly-owned banks to the most remote
corners of the country. However, because of the greater perks and job stability
available, a far higher number of people apply for a relatively small number of posts,
increasing competitiveness. In 2013, for example, roughly 40 lakh applications were
submitted for 80,000 government bank jobs. Despite all of the claimed benefits of a
career in public banking, passing the exam can be a difficult nut to crack.

The Reserve Bank of India (RBI) is India’s highest banking regulator, and it was
established in 1934 under the RBI Act. Scheduled Banks and Non-Scheduled Banks are
the two major types of banks in India. Commercial banks are divided into two groups
based on ownership: Private Sector Banks and Public Sector Banks, as well as two
additional groupings: Regional Rural Banks and Foreign Banks. We will, however, be
able to see a list of PSU and private banks in India.

Public Sector Private Sector Foreign Banks

Banks Banks
Bank of Maharashtra I.C.I.C.I. Bank Here is a list of foreign banks that
Indian Bank R.B.L. Bank operate in India:
Bank of Baroda I.D.F.C. Bank Australia and New Zealand Banking
Canara Bank South Indian Bank Group Ltd.
State Bank of India IDBI Bank National Australia Bank
Central Bank of India Tamilnadu Mercantile Deutsche Bank
Union Bank of India Bank HSBC Bank
Indian Overseas YES Bank PT Bank Maybank Indonesia TBK
Bank Axis Bank Mizuho Bank Ltd.
UCO Bank City Union Bank Sumitomo Mitsui Banking Corporation
Punjab & Sind Bank Karnataka Bank M.U.F.G. Bank, Ltd.
Bank of India Dhanlaxmi Bank Coöperatieve Rabobank U.A.
Punjab National Kotak Mahindra Bank Sonali Bank Ltd.
Bank D.C.B. Bank Bank of Nova Scotia
Karur Vysya Bank Industrial & Commercial Bank of China
Federal Bank Ltd.
Lakshmi Vilas Bank BNP Paribas
H.D.F.C. Bank Doha Bank Q.P.S.C.
Citibank

Cooperative Banking
Cooperative banks work on the principle of cooperation and are owned and operated
by their members. In order to support the financial needs of a community, such as a
village or a specific community, people come together to pool resources and provide
banking services such as loans, savings accounts etc.
Cooperative banking refers to a small financial institution started by a group of
individuals to address the capital needs of their specific community. Such financial
institutions are owned and controlled by their members, and the board members are
democratically selected to oversee the operations.
How does a Cooperative Bank work?

Individuals or businesses who meet specific eligibility criteria can

become members by purchasing shares or making an initial
Membership deposit

Every member has equal voting rights regardless of the number

of shares they hold. Members elect a board of directors among
Democratic themselves to oversee the bank’s operations and make key
Governance decisions.

Members contribute to the bank’s capital by purchasing shares

or making deposits. These funds serve as the primary source of
Capital capital for the bank’s lending activities and other financial
Formation services.

Structure of Cooperative Banking

Since the Indian economy is primarily agriculture-based, most cooperative banks
cater to this segment. However, they can be further subdivided into short and long-
term financial institutions depending on the services offered.
Let’s dive deeper into short-term credit institutions since these are the most popular
form of cooperative banks found in India.

State Cooperative Banks

A state cooperative bank, as the name suggests is organised at a

Definition state level.

Regulatory They are regulated by both the Reserve Bank of India (RBI) and the
body respective state governments.

Segment They provide financial services to rural and low-income populations

served across the country.

 They are often the primary source of credit for agricultural and
allied activities, small-scale industries, & other small businesses.
 These banks also provide banking services to cooperatives,
Services
including credit unions, dairy cooperatives, and agricultural
offered
cooperatives.

Source of The working capital of SCB is obtained from deposits, funds,

capital borrowings from RBI, state governments and other resources.

Central Cooperative Banks (CCBs)

Central Cooperative Banks (CCBs) are cooperatives that are

established and managed in accordance with the Cooperative
Definition Societies Act.

Regulatory They are supervised by the State cooperative department and are
body regulated by the Reserve Bank of India

Segment They provide financial services to rural & semi-urban populations

served across the country.

Services  They provide services such as deposits, loans, and other banking
offered services to their members.
  They also promote and finance agricultural activities, such as crop
insurance and input supply services.

Source of The working capital for the central cooperative banks is primarily
capital raised from individual funds, deposits, borrowings etc.

Primary Agricultural Credit Societies

These financial cooperatives are typically organized by farmers and

other agricultural professionals to provide credit and other services
Definition to farmers.

Regulatory They are regulated by the Reserve Bank of India & registered under
body the Co-operative Societies Act

Segment Primary agricultural credit societies are often organized in rural

served areas where access to traditional banking services may be limited.

 The primary purpose of these societies is to provide loans to

members, often at low-interest rates, in order to facilitate the
purchase of resources and other necessities required to operate a
successful farm.
 They also offer other services, such as crop insurance, storage
Services
services, and help marketing, that help farmers to manage their
offered
operations.

Source of These societies are funded by their members who contribute both
capital capital and labour for the benefit of the cooperative.

Unique Features of Cooperative Banks

Cooperative banking model differs from traditional banking models as their main goal
is social welfare. Let’s take a closer look at the most unique features of Cooperative
Banking:

 ‘One person, One Vote’: this is what Cooperative Banks follow. A chosen Board
of Directors is held responsible for the administration of the organisation.
 Profit Distribution: Cooperative banks are not-for-profit entities & their primary
focus is to serve the financial needs of their members. Any surplus generated by
 the bank is distributed among the members in the form of dividends or reinvested
to strengthen the bank’s capital base.
 Community Development: They also play a vital role in community
development by promoting financial literacy, supporting local businesses, and
investing in community projects. They foster a sense of solidarity and mutual
support among their members.
Advantages of Cooperative Banks
These banks offer a host of advantages such as providing access to banking services
to low service areas. Now let’s have a closer look at some major advantages of
cooperative banking:
1. Alternative Source of Credit
The rural population benefits from cooperative banking as they provide credit at a
lower rate as compared to the money lenders who tend to provide credit at a higher
rate of interest. This protects the rural population from the monopoly of the money
lenders.
2. Encourages Savings and Investment
Cooperative banking has enabled the rural population to save more and invest rather
than hoard money. This will have a long-term benefit on the money management of
the rural population.
3. Improvement in Farming Methods
Due to the lower interest rates of the credits provided by the Cooperative banks, the
rural population can now utilise the same for better farming methods eg: purchasing
seeds, chemical fertilizers etc.
Limitations of Cooperative Banks
Despite the various advantages of these banks, there are certain limitations of this
type of banking as well. We have highlighted the biggest limitations of cooperative
banking below.
1. Inadequate Coverage
The membership of the rural population of cooperative banking is just 45%, hence the
inadequate coverage is a matter of concern. It is restricted only to a few states like
Gujrat, Maharashtra, Punjab etc.
2. Inefficient Societies
Since these banks are often run by the members themselves, they are not run
efficiently and hence lose out on alternate streams of revenue
3. Problem of Overdues
The overdue loans of the cooperative institutions have been increasing over the
years.
The overdue in the short-term credit structure is most alarming in the North-Eastern
States. In the long-term loaning sector, the problem of overdue has almost crippled
the land development banks in 9 states, viz., Maharashtra, Gujarat, Madhya Pradesh,
Bihar, Karnataka, Assam, West Bengal, Orissa and Tamil Nadu.
4. Regional Disparities
The distribution of credit is not equally divided in these banks. According to an RBI
report, 8 states account for about 80 per cent of the total credit whereas the credit
disbursed varied from Rs. 4 in Assam to Rs. 718 in Kerala.

Small Finance Banks and Payments Banks

Small Finance Banks

Small Finance Banks provide basic banking services such as accepting deposits and
lending capital to underserved populations. However Payment banks also work to
increase financial inclusion by offering services such as small savings accounts,
payments/remittance services to migrating labour workforces, small businesses, and
low-income families, among other things.

Small finance banks are financial institutions that provide financial services to
underserved and unbanked areas of the country. They are a public limited company
registered under the Companies Act of 2013.

Like other commercial banks, these institutions can engage in all basic banking
activities, such as lending and accepting deposits. Small finance banks will be
established with the goal of increasing financial inclusion through (1) savings vehicles
and (2) credit to small businesses, small and marginal farmers, micro and small
industries, and other unorganised sector entities via high-tech, low-cost operations.
SFBs were proposed by the NachiketMor committee on financial inclusion. Small
finance banks are unable to make large loans. It is not possible to establish
subsidiaries or trade in high-tech products.

Payments Banks

Payment banks were formed to promote financial inclusion by providing modest

savings accounts and payments/remittance services to migratory labour workforce,
low-income households, small businesses, other unorganised sector entities, and
other users.’ The goal of establishing payments banks is to increase financial inclusion
by offering (1) small savings accounts and (2) payments/remittance services to
migrant workers, low-income families, small businesses, other unorganised sector
entities, and other users. Customers will be unable to borrow from them, and their
funds will be forced to be invested in government bonds and bank deposits.

Payments Banks were conceptualised by the Reserve Bank of India as a new type of
bank in India (RBI). These banks can accept restricted deposits, which are currently
limited to Rs 200,000 per person but may be increased in the future. These banks do
not offer loans or credit cards. This type of bank can handle both current and savings
accounts. ATM and debit cards, as well as online and mobile banking, can be provided
by payment banks.

Small Finance Bank vs Payments Bank

Small Finance Banks Payments Bank

Definition – Small Finance Banks Definition – A Payments Bank is like any

are financial institutions that intend other bank, but operating on a smaller
to fund the financial needs of the scale without involving any credit risk. It
underprivileged sections through can carry out most banking operations
basic banking activities but can’t advance loans or issue credit
cards.

Objectives: Objectives:
The primary objective of setting up
These have been set up to payments banks will be to further
further financial inclusion by: financial inclusion by providing:

 supply of credit to small  small savings accounts

business units; small and
 payments/remittance services to
marginal farmers; micro and
migrant labour workforce, low-
small industries; and other
income households, small
unorganised sector entities
businesses, other unorganised
sector entities

How many Small Finance Banks How many Payments banks are in
are in India? India?
As of December 2021, there are 11 As of December 2021, there are 6
Small Finance Banks in the country: Payments Bank in India:

1. Au Small Finance Bank Ltd. 1. Airtel Payments Bank Ltd

2. Capital Small Finance Bank Ltd 2. India Post Payments Bank Ltd

3. Fincare Small Finance Bank 3. FINO Payments Bank Ltd

Ltd. 4. Paytm Payments Bank Ltd
4. Equitas Small Finance Bank Ltd 5. Jio Payments Bank Ltd
5. ESAF Small Finance Bank Ltd. 6. NSDL Payments Bank Limited
6.

Capital Requirement: Capital Requirement:

The minimum paid-up equity capital The minimum paid-up equity capital of
for small finance banks is Rs.100 the payments bank is Rs.100 crore
crore
Scope of Activities: Scope of Activities:

 Take up all primary banking  ATM/Debit cards can be issued

activities only in the  Credit cards cannot be issued
underserved section
 Mobile banking available

Time Deposit: Time Deposit:

Time Deposit such as Fixed Deposit These do not accept time deposits like FD
(FD) and Recurring Deposit (RD) are and RD
both accepted
They can offer small loans They cannot offer loans
There is no restriction in the area of The payments bank cannot set up
operations of small finance banks subsidiaries to undertake non-banking
financial services activities
Capital Small Finance Bank, launched Airtel Payments Bank, introduced in
in 2016 was India’s first Small 2016, became India’s first entity to
Finance Bank receive a payments bank license from
RBI

Land development bank

A land development bank , abbreviated LDB, is a special kind of development bank in

India. It is a quasi-commercial type that provides services such as accepting deposits,
making business loans, and offering basic investment products. The main objective of
the LDB is to promote the development of land, agriculture and increase the
agricultural production. The LDB provides long-term finance to members directly
through its branches.

Depending on their bye-laws or constitutions they provide different functions and

structures. Some are organized on a state basis, some on a co-operative basis and
some on a private basis, incorporating joint stock principles.

Structure

These Banks have two-tier structure,

1. Primary Land Development Bank at district level with branches at taluk level.

2. State Land Development Bank. All primary Land Development Banks are federated
into Central

Land Development Bank at the State Level. In some States, there is “ Unitary
structure” wherein, there is only one State Land Development Bank at the state level
operating through its branches and sub-branches at district and below levels.

Primary Land Development Banks (PLDB):

These banks were originally organized to cover one or a few taluks in the district. At
present they are eligible to cover one development block. All land owners are eligible
to become members and borrow funds by mortgaging their land. The principal
borrower is enrolled as „A‟ class member and others who have interest in the
mortgaged property are admitted as „B‟ class members.

Central Land Development Bank (CLDB):

These members of the CLDBs are the PLDBs and a few individual promoters. It grants
long-term loans to agriculturists through the PLDBs and branches of CLDBs. It raises
funds through floating debentures, which are guaranteed by the State Government.
When PLDB obtains loan from the CLDB, it assigns the mortgage deeds obtained from
the borrowers to the CLDB. The CLDB floats debentures and raises funds against the
security of these properties. The NABARD and LIC subscribe for the debentures in
large amounts and the former also extends refinance assistance to LDBs.

Raising Funds:

The main function of raising funds is carried out by the Central or State Land
Development Bank which can really deal with the money market of the country
effectively and advance loans to primary LDB‟s.
The sources of funds of State LDB‟s are:-

 Share capital.

 Issue of debentures

 Loans from NABARD

 Reimbursements of subsidies from the Govt.

 Other funds.

Issue of debentures is the main source of funds for the LDB‟s. Debentures is a `Bond‟
conveying and acknowledging the debt and also containing the provision of promise
for payment of interest at stipulated rate and return of the principal amount. The
period of debentures varies from 7 to 15 years. As LDB‟s require funds of longer
duration to advance LT loans to borrowers, the debenture is a convenient instrument
of raising funds. Because it guarantees that funds will remain with the Banks for a
specified period.

There are three types of debentures,

 Regular debentures

 Rural debentures

 Special development debentures.

These debentures are mostly purchased by financial institutions like LIC, Commercial
Banks, Co-op. Banks, NABARD, and State Governments, as there is limited response
from the public. The State Govt. give incentive subsidies for many development
activities by individual farmer including purchase of tractor. The amounts of subsidies
are reimbursed to the LDB‟s.

Interest rate:

The rates of interest for LT Loans are generally low and within the paying capacity of
farmers. They are around 11 to 12%.

Loan Procedure:

The Branch offices receive applications from the prospective borrower. Then
Agricultural Finance Officer or Inspector scrutinizes these applications, they visit
places of the application and ascertain the purpose of borrowing, verify the
genuineness of the proposal and it economic viability, repaying ability of the farmers,
adequacy of security etc. After completing those formalities, the loan is granted by
the appropriate authority at appropriate level depending upon the delegation of
powers by the Banks.

Forex banks

Forex banking refers to the process of exchanging one currency for another in the
foreign exchange (forex) market.

Banking in GIFTY City

GIFT City in Gujarat is India’s first operational smart city and hosts India’s first and
only International Financial Services Centre (IFSC). It’s a hub for financial and IT
companies from around the world, offering an ideal ecosystem for both local and
international businesses. The IFSC at GIFT City enables onshore and offshore financial
services and its mission is to offer cross-border financial products and services within
a competitive tax environment.

Permissible Businesses

 Aircraft Leasing
 Banking
 BATF Services
 Bullion Exchange
 Capital Markets
 Finance Company
 FinTech
 Foreign University
 Fund Management
 Global In-house Centres
 Insurance
 Payment Services
 Ship Leasing
 Ancillary Services

Incentives

S. NAME OF THE DESCRIPTION

NO. COMPANIES
01 Interest Income GIFT IFSC offers 100% income tax exemption for a
Exemption period of 10 out of 15 years. The flexibility is granted
to GIFT IFSC units to select any 10 consecutive years
from within the 15-year block
02 Transaction-related Transactions executed on GIFT IFSC exchanges are
Exemptions exempt from Securities Transaction Tax (STT),
Commodities Transaction Tax (CTT), and stamp duty,
further enhancing the attractiveness of the centre
03 Minimum Alternate Companies established as units in GIFT IFSC are
Tax (MAT) subject to MAT at a rate of 9% of book profits, with
exceptions for certain companies
04 Interest Income Interest paid to non- residents on money lent to GIFT
Exemption IFSC units is not subject to taxation, making it a highly
appealing prospect for investors
05 Capital Gains Tax Transfers of specified securities listed on GIFT IFSC
Exemptions exchanges by non-residents are exempt from capital
gains tax
06 Goods and Services Units within GIFT IFSC, as well as services providers in
Tax (GST) and GIFT IFSC/SEZ units and offshore clients, are given
Customs Exemption exemptions/relaxations under the GST and Customs
07 State Subsidies GIFT IFSC extends state subsidies for prescribed
eligible activities under the IT/ITES policy, including
incentives for capital expenditure, operational
expenditure, contributions to provident funds, and
employee upskilling
08 Exemption from Units within GIFT IFSC are exempt from FEMA
FEMA Regulations regulations, thereby simplifying financial transactions
09 Open Market Indian residents are permitted to contribute to
Investment investment vehicles in GIFT IFSC as Other Persons
Resident in India, thereby allowing them to establish
and sponsor contributions towards funds in GIFT IFSC
UNIT-II: Banking Regulation Act 1949: Provisions under Part I – Preliminary -Short title,
extent and commencement. Definitions. Provisions under Part II – Business of Banking
Companies.

Banking Regulation Act, 1949

The Banking Regulation Act, 1949 supervises the banks that have been established in
India. This acts as in charge of regulating and managing the operations of all banking
corporations in India.

The RBI is the governing body that regulates the banks. The introduction of Section
56, gave the Reserve Bank of India the authority to regulate its operations in the
same way other banks in the country are functioning. This Act also gives RBI, the
authority to license banks, regulate shareholder voting and shareholding, oversee
board and management appointments, and set auditing instructions. RBI is also
involved in mergers and liquidations of the banks.

Features of Banking Regulation Act, 1949

The Act has been divided into five parts and comprises 56 sections. The main
features of the act are mentioned below:
 It prevents non-banking enterprises from taking demand-repayable deposits.
 It restricts trading related to non-banking entities to remove potential risks.
 It also establishes minimum capital requirements for the bank.
 It limits dividend payouts of the bank.
 This act provides the legal framework for banks registered outside of India's
provinces.
 It helps in implementing an extensive licensing program for banks and their
branches.
 It determines a unique format for the balance sheet and gives the Reserve Bank
authority to call for periodic reports.
 This act gives the Reserve Bank the right to examine a bank's books of accounts.
 Enabling the central government, the authority to take action against banks that
conduct in a way that harms depositors' interests.
 A clause that calls for the Reserve Bank of India to communicate with banking
institutions regularly.
 This act also establishes a quick liquidation procedure for the bank.
 It increases the capability of the Reserve Bank of India to assist banking
institutions when emergencies arise.
Objectives of the Banking Regulation Act, 1949
 To prevent banking companies from engaging in fierce competition, this act
regulated the opening of new branches and the relocating of existing ones.
 To ensure the balanced growth of banks through a licensing system and to stop
the indiscriminate openings of additional branches.
 To assign RBI the authority to appoint, remove, and reappoint the
chairman, directors, and bank officers. This might help in the effective and
smooth functioning of Indian banks.
 To safeguard the interests of depositors and the general public by implementing
certain measures which include maintaining ratios for cash reserve and liquidity
reserve. This enables the bank to meet the demand of depositors.
 To strengthen India's financial system by mandating the merging of weaker banks
with senior banks.
 To include certain clauses that can limit the ability of foreign banks to invest
funds from Indian depositors outside of India.
 To assist banks in quick and easy liquidation when they are unable to continue or
merge with other banks.
Important Provisions of the Banking Regulation Act, 1949
1. Definitions
The Banking Regulations Act, 1949 provides definitions for several terminology,
including branch offices, banking companies, and banking. Under this act, a
company engaged in banking activities within India is called a Banking Company.
Bank includes the acceptance of public deposits of money for lending or investment
that can be repaid on demand. As per the State Bank of India (Subsidiary Banks) Act,
1959, subsidiary banks are defined in the same way. An advance or loan secured
against the security of assets is a secured loan or advance.
2. Business which can be undertaken by the Banking Companies
A banking company may engage in the following activities under Section
6(1): borrowing or lending money; purchasing or disposing of bills of
exchange, promissory notes, coupons, drafts, bills of lading, railway receipts,
warrants, and debentures; trading in stocks and funds; and buying or selling foreign
exchange bonds, debentures; managing agency activities such as clearance and
shipment of goods; managing guarantee and indemnity, etc.
3. Prohibition of Trading
As per Section 8 of this Act, Trading is not permitted. Banking companies are
prohibited from engaging in the purchasing, selling, or bartering of products unless
they are selling goods held in its security. In addition, the bank is prohibited from
trading, buying, selling, or bartering anything other than bills of exchange that are
obtained through negotiation or collection.
4. Management of Bank
As specified by Section 10 of the Act, the bank should not employ managing
partners or be employed by them. An individual whose compensation is dependent
on the company's profitability or who has been declared insolvent should not be
employed by the bank. A minimum of 51% of the board's members must have
professional expertise in fields such as accounting, small-scale industry, banking,
cooperatives, agriculture, rural economy, economics, and finance. In addition, the
director's tenure should not exceed eight years.
5. Minimum Paid-up Capital and Reserves
According to Section 11, a banking company's paid-up capital should not be more
than Fifteen Lakhs if it was incorporated outside of India, and Twenty Lakhs if it
holds its principal place of business in Calcutta, Bombay, or both.
The banking company is required to deposit 20% of its annual profit. The minimum
paid-up capital required for a company that is incorporated in India and has
branches in multiple states is five lakhs of rupees. If the company's place of business
is located in Bombay, Calcutta, or both, it must have ten lakhs of rupees as minimum
paid-up capital. If a company maintains all of its branches within the same state,
none of which are located in Bombay or Calcutta, the paid-up capital requirement is
one lakh rupees for the company's principal place of business, ten thousand rupees
for each branch located within the same district as the principal place of business,
and twenty-five thousand rupees for each branch located outside of the same
district. The company's paid-up capital and subscribed capital cannot be less than
half of the authorised capital or subscribed capital, respectively. The bank can not
place a charge on unpaid capital. A minimum of twenty percent of the company's
annual profits must be transferred to the Reserve Fund. The banking company is
required to notify the RBI of the Reserve Fund's allocation within twenty-one days of
the date of appropriation.
6. Limitations on the Nature of Subsidiary Companies
A Banking Company should not establish a subsidiary unless the company is being
used for a business venture or the Reserve Bank of India has granted written
permission. The banking company can hold up to 30% of the company's paid-up
share capital or its own paid-up capital.
7. Licensing of Banking Companies
Banking companies are not permitted to conduct business in India unless they hold
an RBI license. The RBI can grant the license after the books of accounts have been
inspected. If the company stops conducting banking operations in India, RBI has the
authority to terminate the license.
8. Opening of New Branches and Transfer of Existing Branches
A Banking Company must have RBI approval before starting a new branch or moving
an existing branch to a new city, town, or state. Without RBI's prior approval, no
banking company with its headquarters in India may operate a new branch outside
of the country. On the other hand, a new branch may open for only a short period of
not more than a month.
9. Accounts and Balance Sheet
On the last working day, the banking companies must create a balance sheet and a
profit and loss account.
10. Inspection
RBI has the authority to order a banking company inspection and is required to send
the company a report. The directors must bring all books, accounts, and documents
related to the banking company must be submitted for investigation.
11. RBI's Authority to give Instructions
If RBI believes that giving instructions to a banking company is in the public interest
or will prevent the company from conducting harmful business, it may do so
regularly.
12. Prohibition of Specific Operations by the Banking Company
The banking company is not allowed to prevent anyone from entering its location of
business. It is not permitted to keep anything violent in the workplace. If the
bank violates any of the mentioned acts, it is accountable under Section 36AD.
13. Powers and Functions of RBI
The powers of RBI are mentioned in Section 36. The Reserve Bank has the authority
to advise banking companies and prevent them from engaging in certain
transactions. Further, as per Section 18, it can help the banking institution by
providing advances or loans. Reserve Bank of India can also order the banking
company to organise a meeting of its directors to consider company issues. It may
also designate officials to look after the operations of a banking company.
14. Business Suspension
The financial company may request a pause in operations from the High Court if it
is unable to fulfill its obligations temporarily. The High Court may approve the pause
in action and put an end to the proceedings temporarily. The pause in operations
cannot last more than six months. The RBI report certifies that the banking company
will be able to pay its debts is the only way that makes the banking company valid.
15. Acquisition of the Undertakings of Banking Companies
The central government must establish banking companies after consultation with
the Reserve Bank of India. The process can be completed once the financial
businesses have been given the chance to show their reasons for carrying the
business.
16. Payment of Dividends
Banking companies must pay dividends only when all the capital expenses have
been paid. Dividends must not be paid until the value of investments in approved
securities, shares, bonds, or debentures has declined and is written off.
17. Reserve Fund
Every single banking company is required to establish a reserve fund and allocate at
least 20% of its profits to it. If the bank appropriates any funds from the reserve
fund, it must inform the Reserve Bank.
18. Power of Central Government with Respect of the Liquidation of
Companies
If the banking companies have violated the Insolvency and Bankruptcy Code, of
2016 the Central Government may direct the RBI to start the process of insolvency.
Offences and Punishments under the Banking Regulation Act, 1949
The Act contains several provisions which describe the consequences of violation of
the act, including fines and imprisonment of the same. The following is mentioned
in Section 46:
 In case a person purposefully presents false information or promotes fraudulent
acts, they risk imprisonment of up to three years and a fine of up to one crore
rupees.
 In case a person does not share the records or documents or refuses to answer
the inquiries of the inspection officer, then a fine of up to twenty lakh rupees,
and another fine of fifty thousand rupees in case of continuing offence.
 In case the banking company has received any deposits illegally, all of the
directors will be held accountable and charged twice the value of the deposits
made with the banking company.
 In case there is a default and it is caused by the banking company, or by
directors' negligence, then the directors or the secretary will be held responsible
for the same.

Part I – PRELIMINARY

1. Short title, extent and commencement

(1) This Act may be called the Banking Companies Act, 1949.

(2) It extends to the whole of India except the State of Jammu and Kashmir. [Subs.by
Act 20 of 1950 s.2, for the former sub-section.]

(3) It shall come into force on such date {16th March, 1949, see Notification
No.F.4(46)-FI / 49, dated the 10th March 1949, Gazette of India, 1949, Pt.I, p.326.} as
the Central Government may, by notification in the Official Gazette, appoint in this
behalf.

2. Application of other laws not barred

The provisions of this Act shall be in addition to, and not, save as hereinafter
expressly provided, in derogation of the Indian Companies Act, 1913, and any other
law for the time being in force.

3. Act not to apply to co-operative banks

Nothing in this Act shall apply to a co-operative bank registered under the Co-
operative Societies Act, 1912, or any other law for the time being in force in any
{Subs.by Act 20 of 1950, s.4, for ” State “.} [part of India] relating to co-operative
societies.

4. Power to suspend operation Act

(1) The Central Government, if on a representation made by the Reserve Bank in this
behalf it is satisfied that it is expedient so to do may by notification in the Official
Gazette suspend for such period, not exceeding sixty days, as may be specified in the
notification, the operation of all or any of the provisions of this Act, either generally or
in relation to any specified banking company.

(2) In a case of special emergency, the Governor of the Reserve Bank, or in his
absence a Deputy Governor of the Reserve Bank nominated by him in this behalf may,
by order in writing, exercise the powers of the Central Government under sub-section
(1) so however that the period of suspension shall not exceed thirty days, and where
the Governor or the Deputy Governor, as the case may be does so, he shall report the
matter to the Central Government forthwith, and the order shall, as soon as may be,
be published in the Gazette of India.

(3) The Central Government may, by notification in the Official Gazette, extend from
time to time the period of any suspension ordered under sub-section (1) or sub-
section (2) for such period, not exceeding sixty days at any one time, as it thinks fit so
however that the total period does not exceed one year.

(4) A copy of any notification issued under sub-section (3) shall be laid on the table of
Parliament as soon as may be after it is issued.

5. Interpretation

(1) In this Act, unless there is anything repugnant in the subject or context,—

(a) ”approved securities ” means securities in which a trustee may invest money
under clause (a), clause (b), clause (bb), clause (c) or clause (d) of section 20 of the
Indian Trusts Act, 1882, and such securities of, or fully guaranteed by Part B States as
the Reserve Bank may be authorized to purchase under clause (8) of section 17 of the
Reserve Bank of India Act, 1934;

(b) ” banking ” means the accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise;

(c) ” banking company ” means any company which transacts the business of banking
{ “Subs.by Act 20 of 1950, s.3 for ” in any State “.} [in India];

Explanation.—Any company which is engaged in the manufacture of goods or carries

on any trade and which accepts deposits of money from the public merely for the
purpose of financing its business as such manufacturer or trader shall not be deemed
to transact the business of banking within the meaning of this clause;

(d) ” company ” means any company which may be wound up under the Indian
Companies Act,1913;

{Cl.(e) omitted by Act 52 of 1953, s.2}

(f) ” demand liabilities ” means liabilities which must be met on demand and ” time
liabilities ” means liabilities which are not demand liabilities;

(g) ” gold ” includes gold in the form of coin.whether legal tender or not, or in the
form of bullion or ingot, whether refined or not;
{Ins.by Act 20 of 1950, s.5.}[(gg) ” India ” means tne States to which this Act extends
;]

(h) ” managing agent ” means a person, firm or company entitled to the management
of the whole affairs of a banking company by virtue of an agreement with the
company or by virtue of the memorandum or articles of association relating thereto,
and under the control and direction of the directors except to the extent, if any,
otherwise provided for in the agreement, memorandum or articles of association, and
includes any person, firm or company occupying such position by whatever name
called;

Explanation.—If a person occupying the position of managing agent calls himself

manager or managing director, he shall nevertheless be deemed to be a managing
agent for the purposes of this Act;

(i) ” private company ” has the same meaning as in the Indian Companies Act, 1913;

(j) “prescribed” means prescribed by rules made under this Act;

(k) ” registrar ” has the same meaning as in the Indian Companies Act, 1913;

(I) ” Reserve Bank ” means the Reserve Bank of India;

(m) ” scheduled bank ” means a bank for the time being included in the Second
Schedule to the Reserve Bank of India Act, 1934; and

(n) ” secured loan or advance ” means a loan or advance made on the security of
assets the market value of which is not at any time less than the amount of such loan
or advance; and “unsecured loan or advance ” means a loan or advance not so
secured.

{ Sub-section (2) was omitted by the A.O.1950.}

Part II – BUSINESS OF BANKING COMPANIES

6. Forms of business in which banking companies may engage

(1) In addition to the business of banking, a banking company may engage in any one
or more of the following forms of business, namely:—

(a) the borrowing, raising, or taking up of money; the lending, or advancing of money
either upon or without security; the drawing.making, accepting.discounting.buying,
selling collecting and dealing in bills of exchange, hoondees, promissory notes,
coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates,
scrips and other instruments, and securities whether transferable or negotiable or not;
the granting and issuing of letters of credit, traveller’s cheques and circular notes; the
buying, selling and dealing in bullion and species; the buying and selling of foreign
exchange including foreign bank notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds,
obligations, securities and investments of all kinds; the purchasing and selling of
bonds scrips or other forms of securities on behalf of constituents or, others the
negotiating of loans and advances; the receiving of all kinds of bonds, scrips or
valuables on deposit or for safe custody or otherwise; the providing of safe deposit
vaults; the collecting and transmitting of money and securities;

(b) acting as agents for any Government or local authority or any other person or
persons; the carrying on of agency business of any description including the clearing
and forwarding of goods, giving of receipts and discharges and otherwise acting as an
attorney on behalf of customers, but excluding the business of a managing agent of a
company;

(c) contracting for public and private loans and negotiating and issuing the same;

(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and

carrying out of any issue, public or private, of State, municipal or other loans or of
shares, stock, debentures, or debenture stock of any company, corporation or
association and the lending of money for the purpose of any such issue;

(e) carrying on and transacting every kind of guarantee and indemnity business;

(f) managing, selling and realising any property which may come into the possession
of the company in satisfaction or part satisfaction of any of its claims;

(g) acquiring and holding and generally dealing with any property or any right, title or
interest in any such property which may form the security or part of the security for
any loans or advances or which may be connected with any such security;

(h) undertaking and executing trusts;

(i) undertaking the administration of estates as executor, trustee or otherwise;

(j) establishing and supporting or aiding in the establishment and support of

associations.institutions, funds, trusts and conveniences calculated to benefit
employees or employees of the company or the dependents or connections of such
persons; granting pensions and allowances and making payments towards insurance;
subscribing to or guaranteeing moneys for charitable or benevolent objects or for any
exhibition or for any public, general or useful object;
(k) the acquisition, construction, maintenance and alteration of any building or works
necessary or convenient for the purposes of the company;

(l) selling, improving, managing, developing, exchanging, leasing.mortgaging,

disposing of or turning into account or otherwise dealing with all or any part of the
property and rights of the company;

(m) acquiring and undertaking the whole or any part of the business of any person or
company, when such business is of a nature enumerated or described in this sub-
section:

(n) doing all such other things as are incidental or conducive to the promotion or
advancement of the business of the company;

(o) any other form of business which the Central Government may; by notification in
the Official Gazette, specify as a form of business in which it is lawful for a banking
company to engage.

(2) No banking company shall engage in any form of business other than those
referred to in sub-section (1).

7. Use of word bank banker banking

After the expiry of two years from the commencement of this Act no company, other
than a banking company, shall use as part of its name any of the words ” bank “, ”
banker ” or ” banking ” and no company shall carry on the business of banking
{ Subs.by Act 20 of 1950, s.3, for ” in any State “.} [in India], unless it uses as part of
its name at least one of such words:

Provided that nothing in this section shall apply to any association of banks formed for
the protection of their interests and registered under section 26 of the Indian
Companies Act, 1913.

8. Prohibition of trading

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 realization 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) of sub-section (1) of section 6:
Provided that this section shall not apply to any such business as aforesaid which was
in the course of being transacted on the commencement of this Act, so however, that
the said business shall be completed before the expiry of one year from such
commencement.

Explanation.—For the purposes of this section, “goods ” means every kind of movable
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.

9. Disposal of non-banking assets

Notwithstanding anything contained in section 6, no banking company shall hold any

immovable property howsoever acquired, except such as is recuired for its own use,
for any period exceeding seven years from the acquisition thereof or from the
commencement of this Act, whichever is later or any extension of such period as in
this section provided, and such property shall be disposed of within such period or
extended period, as the case may be:

Provided that the banking company may, within the period of seven years as
aforesaid, deal or trade in any such property for the purpose of facilitating the
disposal thereof:

Provided further that the Reserve Bank may in any particular case extend the
aforesaid period of seven years by such period not exceeding five years where it is
satisfied that such extension would be in the interests of the depositors of the banking
company.

10. Prohibition of employment of managing agents and restrictions on certain forms of

employment

(1) No banking company—

(a) shall employ or be managed by a managing agent, or

(b) shall employ 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 or 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; or
(iii) whose remuneration is, according to the normal standards prevailing in banking
business, on a scale disproportionate to the resources of the company; or

(c)

shall be managed by any person—

(i) who is a director of any other company, not being a subsidiary company of the
banking company; or

(ii) who is engaged in any other business or vocation; or

(iii) who has a contract with the company for its management for a period exceeding
five years at any one time:

Provided that the said period of five years shall, in relation to contracts subsisting on
the 1st day of July, 1944, be computed from that date:

Provided further that any contract with the company for its management may be
renewed or extended for a further period not exceeding five years at a time if and so
often as the directors so decide.

(2) If any question arises in any particular case whether the remuneration is,
according to the normal standards prevailing in banking business, on a scale
disproportionate to the resources of the company for the purpose of sub-clause (iii) of
clause (b) of sub-section (1), the decision of the Reserve Bank thereon shall be final
for all purposes.

11. Requirement as to minimum paid-up capital and reserves

(1) Notwithstanding anything contained in section 103 of the Indian Companies Act,
1913, no banking company in existence on the commencement of this Act, shall, after
the expiry of three years from such commencement or of such further period not
exceeding , one year as the Reserve Bank, having regard to the interests of the
depositors of the company, may think fit in any particular case to allow, carry on
business {Subs, by Act 20 of 1950,s.3, for ” in any State”.} [in India], and no other
banking company shall, after the commencement of this Act, commence or carry on
business {Subs, by Act 20 of 1950,s.3, for ” in any State”.} [in India], unless it has
paid-up capital and reserves of such aggregate value as is hereinafter required by this
section.

(2) In the case of a banking company incorporated {Subs., ibid., for “elsewhere than
in a State”.} [outside India], the aggregate value of its paid-up capital and reserves
shall not be less than fifteen lakhs of rupees, and, if it has a place or places of
business in the city of Bombay or Calcutta or both, twenty lakhs of rupees:

Provided that no such banking company shall be deemed to have complied with the
provisions of this sub-section, unless it deposit and keeps deposited with the Reserve
Bank an amount not less than the minimum required by this sub-section, either in
cash or in unencurnbered approved securities or partly in cash and partly in such
securities.

(3) In the case of any banking company to which the provisions of sub-sectlon (2) do
not apply, the aggregate value of its paid-up capital and reserves shall not be less
than—

(i) if it has places of business in more than one State, five lakhs of rupees, and if any
such place or places of business is or are situated in the city of Bombay or Calcutta or
both, ten lakhs of rupees;

(ii) if it has all its places of business in one State none of which is situated in the city
of Bombay or Calcutta, one lakh of rupees in respect of its principal place of business,
plus ten thousand rupees in respect of each of its other places of business situated in
the same district in which it has its principal place of business, plus twenty-five
thousand rupees in respect of each place of business situated elsewhere in the State
otherwise than in the same district:

Provided that no banking company to which tllis clause applies shall be required to
have paid-up capital and reserves exceeding an aggregate value of five lakhs rupees:

Provided further that no manking company to which this clause applies and which has
only one place of business shall be required to have paid-up capital and reserves
exceeding an aggregate value of fifty thousand rupees;

(iii) if it has all its places of business in one State, one or more of which is or are
situated in the city of Bombay or Calcutta, five lakhs of rupees, plus twenty-five
thousand rupees in respect of each place of business situated outside the city of
Bombay or Calcutta, as the case may be

Provided that no banking company to which this clause applles shall be required to
have paid-up capital and reseves exceeding an aggregate value of ten lakhs of
rupees.

Explanation.—For the purposes of this sub-section, a place of business

situated{Subs.by Act 20 of 1950, s.3, for ” in a State “.} [in India] other than that in
which the principal place of business of the banking company is situated shail, if it is
not rnore than twenty-five miles distant from such principal place of business, be
deemed to be situated within the same State as such principal place of business.

(4) Any amount deposited and kept deposited with the Reserve Bank under the
proviso to sub-section (2) by any banking company incorporated {Subs, ibid., for
“elsewhere than in a State “.}[outside India] shall, in the event of the company
ceasing for any reason to carry on banking business {Subs, ibid., for ” in the States
“.} [in India], be an asset of the company on which the claims of all the creditors of
the company { Subs, ibid., for ” in the States “.} [in India] shall be a first charge.

(5) For the purposes of this section ” value ” means the real or exehangeable value,
and not the nominal value which may be shown in the books of the banking company
concerned.

(6) If any dispute arises in computing the aggregate value of the paid-up capital and
reserves of any banking company, a determination thereof by the Reserve Bank shall
be final for the purposes of this section.

12. Regulation of Paid-up capital, subscribed capital and authorised capital, and voting
rights of share holders

:- No banking company shall carry on business {Subs.ibid., for ” in any State “.} [in
India], unless it satisfies the following conditions, namely:—

(i) that the subscribed capital of the company is not less than one-half of the
authorised capital, and the paid-up capital is not less than one-half of the subscribed
capital and that, if the capital is increased, it complies with the conditions of
prescribed in this clause within such period not exceeding two years as the Reserve
Bank may allow;

(ii) that the capital of the company consists of ordinary shares only or of ordinary
shares and such preference shares as may have been issued prior to the 1st day of
July, 1944;

(iii) that, subject to the provisions contained in clause (iv) here of, the voting rights of
any one shareholder, whether a preference shareholder or an ordinary shareholder,
are strictly proportionate to the contribution made by him to the paid-up capital of the
company;

(iv) that the voting rights of any one shareholder do not exceed five per cent.of the
total voting rights of all the share holders:
Provided that nothing contained in this section shall apply to any banking company
incorporated before the 15th day of January, 1937.

13. Restriction on commission, broker-age, discount, etc., on sale of shares

Notwithstanding anything to the contrary contained in sections 105 and 105A of the
Indian Companies Act, 1913, no banking company shall pay out directly or indirectly
by way of commission, brokerage, discount or remuneration in any form in respect of
any shares issued by it, any amount exceeding in the aggregate two and one-half per
cent.of the paid-up value of the said shares.

14. Prohibition of charge on unpaid capital

No banking company shall create any charge upon any unpaid capital of the company,
and any such charge shall be invalid.

15. Restrictions as to payment of dividend

No banking company shall pay any dividend on its shares until all its capitalised
expenses (including preliminary expenses, organisation expenses, share-selling
commission, brokerage, amounts of losses incurred and any other item of expenditure
not represented by tangible assets) have been completely written off.

16. Prohibition of common directors

No banking company incorporated {Subs.by Act 20 of 1950, s.3, for “in a State”.} [in
India] shall have as a director any person who is a director of another banking
company.

17. Reserve fund

Every banking company incorporated {Subs.by Act 20 of 1950, s.3, for “in a State”.}
[in India] shall maintain a reserve fund, and shall, out of the net profits of each year
and before any dividend is declared, transfer a sum equivalent to not less than twenty
per cent.of such profits to the reserve fund until the amount of the said fund is equal
to the paid-up capital.

Explanation.—For the purposes of this section, the expression ” net profits ” shall
have the meaning assigned to it in sub-section (3) of section 87C of the Indian
Companies Act, 1913.

18. Cash reserve

Every banking company not being a scheduled bank shall maintain by way of cash
reserve in cash with itself, or in an account opened with the Reserve Bank, or partly in
cash with itself and partly in such account, a sum equivalent to at least two per
cent.of its time liabilities and five per cent.of its demand liabilities and shall file with
the Reserve Bank before the fifteenth day of every month three copies of a statement
of the amount so held on Friday of each week of the preceding month with particulars
of its time and demand liabilities on each Friday.

19. Restriction on nature of subsidiary companies

(1) A banking company shall not form any subsidiary company except a subsidiary
company formed for one or more of the following purposes, namely, the undertaking
and executing of trusts, the undertaking of the administration of estates as executor,
trustee or otherwise, the providing of safe deposit vaults or, with the previous
permission in writing of the Reserve Bank, such other purposes as are incidental to
the business of banking.

(2) Save as provided in sub-section (1), no banking company shall hold shares in any
company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding
thirty per cent.of the paid-up share capital of that company or thirty per cent.of its
own paid-up share capital and reserves, whichever is less:

Provided that any banking company which is on the date of the commencement of
this Act holding any shares in contravention of the provisions of this sub-section shall
not be liable to any penalty therefor if it reports the matter without delay to the
Reserve Bank and if it brings its holding of shares into conformity with the said
provisions within such period, not exceeding two years, as the Reserve Bank may
think fit to allow.

(3) Save as provided in sub-section (1) and notwithstanding anything contained in

sub-section (2), a banking company shall not, after the expiry of one year from the
date of the commencement of this Act, hold shares, whether as pledgee, mortgagee
or absolute owner, in any company in the management of which any managing
director or manager of the banking company is in any manner concerned or
interested.

20. Restrictions on loans and advances

(1) Notwithstanding anything to the contrary contained insection 54A of the Indian
Companies Act, 1913, no banking company shall make any loans or advances on the
security of its own shares, or grant unsecured loans or advances to any of its directors
or to firms or private companies in which it or any of its directors is interested as
partner or managing agent or to any individuals, firms or private companies in cases
where any of the directors is a guarantor.

(2) Every banking company shall, before the close of the month succeeding that to
which the return relates, submit to the Reserve Bank a return in the prescribed form
and manner, showing all unsecured loans and advances granted by it to companies in
which it or any of its directors is interested as director or managing agent or
guarantor.

(3) If on examination of any return submitted under sub-section (2) it appears to the
Reserve Bank that any loans or advances referred to in that sub-section are being
granted to the detriment of the interests of the depositors of the banking company,
the Reserve Bank may, by order in writing, prohibit the banking company from
granting any such further loans or advances or impose such restrictions on the grant
thereof as it thinks fit, and may by like order direct the banking company to secure
the repayment of any such loan or advance within such time as may be specified in
the order.

21. Power of Reserve Bank to control advances by banking companies

(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public
interest so to do, it may determine the policy in relation to advances to be followed by
banking companies generally or by any banking company in particular, and when the
policy has been so determined, all banking companies or the banking company
concerned, as the case may be, shall be bound to follow the policy as so determined.

(2) Without prejudice to the.generality of the power vested in the Reserve Bank under
sub-section (1), the Reserve Bank may give directions to banking companies, either
generally or to any banking company or group of banking companies in particular, as
to the purposes for which advances may or may not be made, the margins to be
maintained in respect of secured advances and the rates of interest to be charged on
advances, and each banking company shall be bound to comply with any directions as
so given.

22. Licensing of banking companies

(1) Save as hereinafter provided, no company shall carry on banking

business{Subs.by Act 20 of 1950, s.3, for ” in any State “.} [in India] unless it holds a
licence granted by the Reserve Bank in such behalf.
(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 {Subs.by Act 20 of 1950, s.3, for ” in any State “.} [in
India], shall apply in writing to the Reserve Bank for a licence under this section:

(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 all or any
of the following conditions are fulfilled, namely:—

(a) that the company is in a position to pay its depositors in full as their claims accrue;

(b) that the affairs of the company are not being conducted to the detriment of the
interests of its depositors;

(c) in the case of a company incorporated {Subs.by Act 20 of 1950, s.3, for ‘
elseswhere than in a State “} [outside India] that the Government or law of the
country in which it is incorporated does not discriminate in any way against banking
companies registered {Subs., ibid., for ‘ in a State “.} [in India], and that the company
complies with all the provisions of this Act, applicable to banking companies
incorporated {Subs., ibid, for ” outside the States’} [outside India].

(4) The Reserve Bank may—

(a) cancel any licence granted under this section where any of the conditions set out
in sub-section (3), on the fulfilment of which it required to be satisfied when granting
the licence, ceases to be fulfilled or if the company ceases to carry on banking
business {Subs., ibid-, for ” in the States “.} [in India] or goes into liquidation;

(b) at any time after granting a licence under this section require that any of the said
conditions, on the fulfilment of which it did not require to be satisfied when granting
the licence, shall be fulfilled to its satisfaction within such time as it may specify, and
if the condition is not so fulfilled, cancel the licence.

(5) Any banking company aggrieved by the cancellation of its licence under sub-
section (4) may appeal to the Central Government, and the decision of the Central
Government on such appeal shall be final.

UNIT-III: Banking Regulation Act 1949: Provisions under Part II A Control

over Management; Part IIAB Suppression of Board of Directors of Banking
Company; Part II B Prohibition of certain activities in relation to banking
companies

Provisions under Part II A Control over Management

36AA. Power of Reserve Bank to remove managerial and other persons from office.—

(1) Where the Reserve Bank is satisfied that in the public interest or for preventing the
affairs of a banking company being conducted in a manner detrimental to the
interests of the depositors or for securing the proper management of any banking
company it is necessary so to do, the Reserve Bank may, for reasons to be recorded in
writing, by order, remove from office, with effect from such date as may be specified
in the order, 4 [any chairman, director,] chief executive officer (by whatever name
called) or other officer or employee of the banking company.

(2) No order under sub-section (1) shall be made 5 [unless the chairman, director] or
chief executive officer or other officer or employee concerned has been given a
reasonable opportunity of making a representation to the Reserve Bank against the
proposed order:

Provided that if, in the opinion of the Reserve Bank, any delay would be detrimental to
the interests of the banking company or its depositors, the Reserve Bank may, at the
time of giving the opportunity aforesaid or at any time thereafter, by order direct that,
pending the consideration of the representation aforesaid, if any, 1 [the chairman or,
as the case may be, director or chief executive

officer] or other officer or employee, shall not, with effect from the date of such order
—

(a) 2 [act as such chairman or director] or chief executive officer or other officer or
employee of the banking company;

(b) in any way, whether directly or indirectly, be concerned with, or take part in the
management of, the banking company.

(3) (a) Any person against whom an order of removal has been made under sub-
section (1) may, within thirty days from the date of communication to him of the
order, prefer an appeal to the Central Government.

(b) The decision of the Central Government on such appeal, and subject thereto, the
order made by the Reserve Bank under sub-section (1), shall be final and shall not be
called into question in any court.

(4) Where any order is made in respect of 3 [a chairman, director] or chief executive
officer or other officer or employee of a banking company under sub-section (1), he
shall cease to be 4 [a chairman or, as the case may be, a director,] chief executive
officer or other officer or employee of the banking company and shall not, in any way,
whether directly or indirectly, be concerned with, or take part in the management of,
any banking company for such period not exceeding five years as may be specified in
the order.

(5) If any person in respect of whom an order is made by the Reserve Bank under sub-
section (1) or under the proviso to sub-section (2) contravenes the provisions of this
section, he shall be punishable with fine which may extend to two hundred and fifty
rupees for each day during which such contravention continues.

(6) Where an order under sub-section (1) has been made, the Reserve Bank may, by
order in writing, appoint a suitable person in place of 5 [the chairman or director] or
chief executive officer or other officer or employee who has been removed from his
office under that sub-section, with effect from such date as may be specified in the
order.

(7) Any person appointed as 6 [chairman, director or chief executive officer] or other
officer or employee under this section, shall—

(a) hold office during the pleasure of the Reserve Bank and subject thereto for a
period not exceeding three years or such further periods not exceeding three years at
a time as the Reserve Bank may specify;

(b) not incur any obligation or liability by reason only of his being a [chairman,
director or chief executive officer] or other officer or employee or for anything done or
omitted to be done in good faith in the execution of the duties of his office or in
relation thereto.

(8) Notwithstanding anything contained in any law or in any contract, memorandum

or articles of association, on the removal of a person from office under this section,
that person shall not be entitled to claim any compensation for the loss or termination
of office.

36AB. Power of Reserve Bank to appoint additional directors.—(1) If the

Reserve Bank is of 7 [opinion that in the interest of banking policy or in the public
interest or] in the interests of the banking company or its depositors it is necessary so
to do, it may, from time to time by order in writing, appoint, with effect from such
date as may be specified in the order, one or more persons to hold office as additional
directors of the banking company.

(2) Any person appointed as additional director in pursuance of this section—

(a) shall hold office during the pleasure of the Reserve Bank and subject thereto for a
period not exceeding three years or such further periods not exceeding three years at
a time as the Reserve Bank may specify;

(b) shall not incur any obligation or liability by reason only of his being a director or for

anything done or omitted to be done in good faith in the execution of the duties of his
office or in relation thereto; and

(c) shall not be required to hold qualification shares in the banking company.

(3) For the purpose of reckoning any proportion of the total number of directors of the
banking company, any additional director appointed under this section shall not be
taken into account.

36AC. Part IIA to override other laws.—Any appointment or removal of a director,

chief

executive officer or other officer or employee in pursuance of section 36AA or section

36AB shall have effect notwithstanding anything to the contrary contained in the
Companies Act, 1956 (1 of 1956), or any other law for the time being in force or in any
contract or any other instrument.]

PART IIAB

SUPERSESSION OF BOARD OF DIRECTORS OF BANKING COMPANY

36ACA. Supersession of Board of Directors in certain cases.—(1) Where the Reserve

Bank is satisfied, in consultation with the Central Government, that in the public
interest or for preventing the

affairs of any banking company being conducted in a manner detrimental to the

interest of the depositors or any banking company or for securing the proper
management of any banking company, it is necessary so to do, the Reserve Bank
may, for reasons to be recorded in writing, by order, supersede the Board of Directors
of such banking company for a period not exceeding six months as may be specified
in the order:

Provided that the period of supersession of the Board of Directors may be extended
from time to time, so, however, that the total period shall not exceed twelve months.

(2) The Reserve Bank may, on supersession of the Board of Directors of the banking
company under sub-section (1) appoint in consultation with the Central Government
for such period as it may determine, an Administrator (not being an officer of the
Central Government or a State Government) who has experience in law, finance,
banking, economics or accountancy.

(3) The Reserve Bank may issue such directions to the Administrator as it may deem
appropriate and the Administrator shall be bound to follow such directions.

(4) Upon making the order of supersession of the Board of Directors of a banking
company, notwithstanding anything contained in the Companies Act, 1956 (1 of
1956),—

(a) the chairman, managing director and other directors shall, as from the date of
supersession, vacate their offices as such;

(b) all the powers, functions and duties which may, by or under the provisions of the

Companies Act, 1956 (1 of 1956) or this Act, or any other law for the time being in
force, be exercised and discharged by or on behalf of the Board of Directors of such
banking company, or by a resolution passed in general meeting of such banking
company, shall, until the Board of Directors of such banking company is reconstituted,
be exercised and discharged by the

Administrator appointed by the Reserve Bank under sub-section (2):

Provided that the power exercised by the Administrator shall be valid notwithstanding
that such power is exercisable by a resolution passed in the general meeting of such
banking company.

(5) The Reserve Bank may constitute, in consultation with the Central Government, a
committee of three or more persons who have experience in law, finance, banking,
economics or accountancy to assist the Administrator in the discharge of his duties.

(6) The committee shall meet at such times and places and observe such rules of
procedure as may be specified by the Reserve Bank.

(7) The salary and allowances to the Administrator and the members of the committee
constituted under sub-section (5) by the Reserve Bank shall be such as may be
specified by the Reserve Bank and be payable by the concerned banking company.

(8) On and before the expiration of two months before the expiry of the period of
supersession of the Board of Directors as specified in the order issued under sub-
section (1), the Administrator of the banking company, shall call the general meeting
of the company to elect new directors and reconstitute its Board of Directors.
(9) Notwithstanding anything contained in any other law or in any contract, the
memorandum or articles of association, no person shall be entitled to claim any
compensation for the loss or termination of his office.

(10) The Administrator appointed under sub-section (2) shall vacate office
immediately after the Board of Directors of such banking company has been
reconstituted.]

PART IIB

PROHIBITION OF CERTAIN ACTIVITIES IN RELATION TO BANKING COMPANIES

36AD. Punishments for certain activities in relation to banking companies.—(1) No

person

shall—

(a) obstruct any person from lawfully entering or leaving any office or place of
business of a banking company or from carrying on any business there, or

(b) hold, within the office or place of business of any banking company, any
demonstration which is violent or which prevents, or is calculated to prevent, the
transaction of normal business by the banking company, or

(c) act in any manner calculated to undermine the confidence of the depositors in the
banking company.

(2) Whoever contravenes any provision of sub-section (1) without any reasonable
excuse shall be punishable with imprisonment for a term which may extend to six
months, or with fine which may extend to one thousand rupees, or with both.

[(3) For the purposes of this section “banking company” includes the Reserve Bank,
3*** the Exim Bank 4 [the Reconstruction Bank], 5 [the National Housing Bank], the
National Bank, 6 [the Small Industries Bank 7 [, the National Bank for Financing
Infrastructure and Development or the other development financial institution,]] the
State Bank of India, a corresponding new bank, a regional rural bank and a subsidiary
bank].

UNIT-IV: Reserve Bank of India: Establishment, Preamble, Central Board,

functions, Monetary Authority, Regulator and Supervisor of Financial
System, Manager of Foreign Currency, Issuer of Currency, Developmental
role, Regulator and Supervisor of Payment and Settlement System and
related functions.

Reserve Bank of India

RBI is an institution of national importance and the pillar of the surging Indian
economy. It is a member of the International Monetary Fund (IMF).

The concept of the Reserve Bank of India was based on the strategies formulated by
Dr. Ambedkar in his book named “The Problem of the Rupee – Its Origin and Its
Solution”.

This central banking institution was established based on the suggestions of the
“Royal Commission on Indian Currency & Finance” in 1926. This commission was also
known as the Hilton Young Commission.

In 1949, the Reserve Bank of India was nationalized and became a member bank of
the Asian Clearing Union.

RBI regulates the credit and currency system in India.

The chief objectives of the RBI are to sustain the confidence of the public in the
system, protect the interests of the depositors, and offer cost-effective banking
services like cooperative banking and commercial banking to the people.

Reserve Bank of India (RBI) – Timeline

Year Event

1934 The British enacted the Reserve Bank of India Act

1935 Reserve Bank of India was established on 1st of April in Calcutta

1937 Reserve Bank of India was permanently moved to Mumbai

1949 It was nationalized after independence. The bank was held by private
stakeholders before this.

In the year 2016, the original RBI Act of 1934 was amended and that provided the
statutory basis for the implementation of the flexible inflation-targeting framework.

The Preamble of Reserve Bank of India

Another thing to know about RBI is its Preamble. It describes the basic functions of the
Reserve Bank as:
“…to regulate the issue of Bank Notes and keeping of reserves to secure monetary
stability in India and generally to operate the currency and credit system of the
country to its advantage.”

Central Board

Composition of RBI

The Reserve Bank of India is controlled by a central board of directors. The directors
are appointed for a 4-year term by the Government of India in keeping with the
Reserve Bank of India Act.

The Central Board consists of:

 Governor
 4 Deputy Governors
 2 Finance Ministry representatives
 4 directors to represent local boards headquartered in Mumbai,
Kolkata, Chennai, and New Delhi

The executive head of RBI is the Governor.

The Governor is accompanied by 4 deputy governors.

The First Governor of RBI was Sir Osborne Smith and the First Indian Governor of RBI
was C D Deshmukh.

The First woman Deputy Governor of RBI was K J Udeshi.

The only Prime Minister who had been the Governor of RBI was Manmohan Singh.

Central Board of Director appointed/nominated under RBI Act, 1934

Section of RBI Sr. No. Name
Act
8 (1) (a) 1. Shri Shaktikanta Das
Governor
2. Dr. M.D. Patra
Deputy Governor
3. Shri M. Rajeshwar Rao
Deputy Governor
4. Shri T. Rabi Sankar
Deputy Governor
5. Shri Swaminathan J
 Deputy Governor
8 (1) (b) 6. Ms. Revathy Iyer
7. Prof. Sachin Chaturvedi
8 (1) (c) 8. Shri Satish Kashinath Marathe
9. Shri Swaminathan Gurumurthy
10. Shri Anand Gopal Mahindra
11. Shri Venu Srinivasan
12. Shri Pankaj Ramanbhai Patel
13. Dr. Ravindra H. Dholakia
8 (1) (d) 14. Shri Ajay Seth
15. Shri Nagaraju Maddirala

Functions of RBI (The India's Central Bank)

Reserve Bank of India being an apex court of the center enjoys enormous power and
functions under banking system in India. It has monopoly over the issue of bank-notes
and monetary system of the country. These power and functions as to issue of bank
notes and currency system are governed by the Reserve Bank of India Act, 1934.
Besides it the Banking Regulation Act, 1949 also empowers certain power and
Function of the Reserve Bank.

• Main Functions of RBI

Main functions are those functions which every central bank of each nation performs
all over the world. Basically, these functions are in line with the objectives with which
the bank is set up. It includes fundamental functions of the Central Bank. They
comprise the following tasks.

1. Issue of Currency Notes: The RBI has the sole right or authority or monopoly of
issuing currency notes except one rupee note and coins of smaller denomination.
These currency notes are legal tender issued by the RBI. Currently it is in
denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not
only to issue and withdraw but even to exchange these currency notes for other
denominations. It issues these notes against the security of gold bullion, foreign
securities, rupee coins, exchange bills and promissory notes and government of India
bonds.

2. Banker to other Banks: The RBI being an apex monitory institution has
obligatory powers to guide, help and direct other commercial banks in the country.
The RBI can control the volumes of banks reserves and allow other banks to create
credit in that proportion. Every commercial bank has to maintain a part of their
reserves with its parent's viz. the RBI. Similarly, in need or in urgency these banks
approach the RBI for fund. Thus, it is called as the lender of the last resort.

3. Banker to the Government: The RBI being the apex monitory body has to work
as an agent of the central and state governments. It performs various banking
function such as to accept deposits, taxes and make payments on behalf of the
government. It works as a representative of the government even at the international
level. It maintains government accounts, provides financial advice to the government.
It manages government public debts and maintains foreign exchange reserves on
behalf of the government. It provides overdraft facility to the government when it
faces financial crunch.

4. Exchange Rate Management: It is an essential function of the RBI. In order to

maintain stability in the external value of rupee, it has to prepare domestic policies in
that direction. Also, it needs to prepare and implement the foreign exchange rate
policy which will help in attaining the exchange rate stability. In order to maintain the
exchange rate stability, it has to bring demand and supply of the foreign currency (U.S
Dollar) close to each other.

5. Credit Control Function: Commercial bank in the country creates credit

according to the demand in the economy. But if this credit creation is unchecked or
unregulated then it leads the economy into inflationary cycles. On the other credit
creation is below the required limit then it harms the growth of the economy. As a
central bank of the nation the RBI has to look for growth with price stability. Thus, it
regulates the credit creation capacity of commercial banks by using various credit
control tools.

6. Supervisory Function: The RBI has been endowed with vast powers for supervising
the banking system in the country. It has powers to issue license for setting up new
banks, to open new branches, to decide minimum reserves, to inspect functioning of
commercial banks in India and abroad, and to guide and direct the commercial banks
in India. It can have periodical inspections an audit of the commercial banks in India.

• Developmental / Promotional Functions of RBI

Along with the routine traditional functions, central banks especially in the developing
country like India have to perform numerous functions. These functions are country
specific functions and can change according to the requirements of that country. The
RBI has been performing as a promoter of the financial system since its inception.
Some of the major development functions of the RBI are maintained below.

1. Development of the Financial System: The financial system comprises the

financial institutions, financial markets and financial instruments. The sound and
efficient financial system is a precondition of the rapid economic development of the
nation. The RBI has encouraged establishment of main banking and nonbanking
institutions to cater to the credit requirements of diverse sectors of the economy.

2. Development of Agriculture: In an agrarian economy like ours, the RBI has to

provide special attention for the credit need of agriculture and allied activities. It has
successfully rendered service in this direction by increasing the flow of credit to this
sector. It has earlier the Agriculture Refinance and Development Corporation (ARDC)
to look after the credit, National Bank for Agriculture and Rural Development
(NABARD) and Regional Rural Banks (RRBs).

3. Provision of Industrial Finance: Rapid industrial growth is the key to faster

economic development. In this regard, the adequate and timely availability of credit
to small, medium and large industry is very significant. In this regard the RBI has
always been instrumental in setting up special financial institutions such as ICICI Ltd.
IDBI, SIDBI and EXIM BANK etc.

4. Provisions of Training: The RBI has always tried to provide essential training to
the staff of the banking industry. The RBI has set up the bankers' training colleges at
several places. National Institute of Bank Management i.e NIBM, Bankers Staff College
i.e BSC and College of Agriculture Banking i.e CAB are few to mention.

5. Collection of Data: Being the apex monetary authority of the country, the RBI
collects process and disseminates statistical data on several topics. It includes interest
rate, inflation, savings and investments etc. This data proves to be quite useful for
researchers and policy makers.

6. Publication of the Reports: The Reserve Bank has its separate publication
division. This division collects and publishes data on several sectors of the economy.
The reports and bulletins are regularly published by the RBI. It includes RBI weekly
reports, RBI Annual Report, Report on Trend and Progress of Commercial Banks India.,
etc. This information is made available to the public also at cheaper rates.

7. Promotion of Banking Habits: As an apex organization, the RBI always tries to

promote the banking habits in the country. It institutionalizes savings and takes
measures for an expansion of the banking network. It has set up many institutions
such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982,
NHB-1988, etc. These organizations develop and promote banking habits among the
people. During economic reforms it has taken many initiatives for encouraging and
promoting banking in India.

8. Promotion of Export through Refinance: The RBI always tries to encourage the
facilities for providing finance for foreign trade especially exports from India. The
Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee
Corporation of India (ECGC) are supported by refinancing their lending for export
purpose.

The reserve bank also performs many supervisory functions. It has authority to
regulate and administer the entire banking and financial system. Some of its
supervisory functions are given below.

1. Granting license to banks: The RBI grants license to banks for carrying its
business. License is also given for opening extension counters, new branches, even to
close down existing branches.

2. Bank Inspection: The RBI grants license to banks working as per the directives
and in a prudent manner without undue risk. In addition to this it can ask for
periodical information from banks on various components of assets and liabilities.

3. Control over NBFIs: The Non-Bank Financial Institutions are not influenced by the
working of a monitory policy. However, RBI has a right to issue directives to the NBFIs
from time to time regarding their functioning. Through periodic inspection, it can
control the NBFIs.

4. Implementation of the Deposit Insurance Scheme: The RBI has set up the
Deposit Insurance Guarantee Corporation in order to protect the deposits of small
depositors. All bank deposits below Rs. One lakh are insured with this corporation. The
RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

• Reserve Bank of India's Credit Policy

The Reserve Bank of India has a credit policy which aims at pursuing higher growth
with price stability. Higher economic growth means to produce more quantity of goods
and services in different sectors of an economy; Price stability however does not
mean no change in the general price level but to control the inflation. The credit
policy aims at increasing finance for the agriculture and industrial activities. When
credit policy is implemented, the role of other commercial banks is very important.
Commercial banks flow of credit to different sectors of the economy depends on the
actual cost of credit and arability of funds in the economy.

UNIT-V: Digital Banking: Evolution-Meaning-features-merits-demerits-

security measures traditional banking v/s Digital banking, E-banking
transactions-RTGS-NEFT-SWIFT-Digital banks apps-Mobile Banking.

Digital Banking Meaning

Digital banking refers to the use of online and electronic platforms to conduct various
banking activities and services, such as checking account balances, transferring
funds, paying bills, applying for loans, and more. It eliminates the need for physical
visits to brick-and-mortar bank branches by allowing customers to access and manage
their financial accounts through websites, mobile apps, and other digital channels.
This approach offers greater convenience and accessibility, making banking services
available 24/7 from anywhere with an internet connection.

Digital banking, a transformative trend in the financial industry, has revolutionized the
way individuals and businesses interact with their finances. Digital banking, also
known as online banking or internet banking, represents a fundamental shift from
traditional in-person banking services to a digital landscape where financial
transactions and services are conducted electronically.

Evolution of Digital Banking in India

The history of digital banking in India can be traced back to the late 1990s and early
2000s when the concept of online banking started gaining attention. Banks began to
offer basic online services like balance inquiries and fund transfers. However, the real
transformation began in the 2010s with the growth of smartphones and internet
accessibility.

Around 2010, mobile banking apps started emerging, allowing customers to perform
various banking tasks through their smartphones. The launch of the Unified Payments
Interface (UPI) in 2016 was a significant milestone. UPI revolutionized digital
payments by enabling instant and seamless fund transfers between bank accounts
through mobile apps.

The Indian government’s push towards a digital economy, especially with initiatives
like “Digital India” and “Jan Dhan Yojana,” further accelerated the adoption of digital
banking. In 2016, the demonetization drive acted as a catalyst, prompting many
Indians to adopt digital payment methods.

By the mid-2010s, several fintech startups entered the scene, offering innovative
solutions for payments, lending, wealth management, and more. These startups
capitalized on India’s large unbanked and underbanked population, creating financial
inclusion through digital means.

The pandemic in 2020 further highlighted the importance of digital banking as people
turned to online transactions due to lockdowns and safety concerns. Traditional banks
also embraced the digital transformation, enhancing their online and mobile banking
services.

The Reserve Bank of India (RBI) played a crucial role in shaping the digital banking
landscape. It introduced regulations and guidelines to ensure the security of digital
transactions and customer data. The RBI’s “Know Your Customer” (KYC) norms were
adapted to digital platforms, allowing for remote customer verification through
Aadhaar or other approved methods.

The need for digital banking in India was realized in the early 2000s when the
country’s economy started growing rapidly, and there was an increasing demand for
more convenient and accessible banking services. With advancements in technology
and the internet becoming more widespread, banks and financial institutions
recognized the opportunity to offer online banking solutions to cater to the evolving
needs of their customers. This led to the development and adoption of digital banking
services in India.

Features of Digital Banking

Digital banking offers a variety of features, including:

Accessibility

Customers can access their accounts and perform transactions from anywhere, at any
time, using a computer, tablet, or mobile phone.

Convenience

Digital banking eliminates the need to visit a physical bank branch, saving time and
effort.

Efficiency
Digital banking reduces the need for paper-based transactions, which can save time
and money.

Security

Digital banking platforms use advanced security measures to protect customer data.

Cost savings

Digital banking reduces the cost of maintaining physical bank branches and
processing paper-based transactions.

Activity tracking

Users can track their account activities in real-time, including viewing their
transaction history and account balances.

Personalization

Users can configure designs with personalized menus for accessing preferred
functions.

Products and services

Digital banks offer products and services similar to traditional banks, including savings
accounts, current accounts, cash withdrawals and deposits, fund transfers, and loans.

Advantages of digital banking

Digital banking has indeed transformed the way we conduct our banking activities.
Let's explore several advantages of digital banking:

1. Ease of transacting

Customers' convenience is one of the biggest advantages of digital banking.

Customers of all demographics found common ground in the idea of "anytime,
anywhere" accessibility.

Visiting a physical bank is no longer necessary because of this convenience.

Consumers can use laptops or smartphones to access their bank accounts at home,
work, or on the go. Digital channels can be used for money transfers, bill payments,
account balance checks, and even loan and credit card requests.

2. Enhanced security
When it comes to banking, digital banking is more secure than traditional banking.
Multiple-factor authentication is among many online banking platforms' most common
security features.

Users can set up passwords, PINs, and biometric identification to prevent illegal
access to the account. Most digital banking services now provide real-time alerts to
inform consumers about suspicious conduct on their accounts.

3. Go cash free

The Covid-19 pandemic and demonetisation encouraged the transition to cashless

transactions. This shift aligns with the Government of India's objectives of minimising
the risks associated with excessive use of fiat currency, improving digital financial
literacy, and transforming India into a cashless economy. India's developing digital
society is significantly supported by digital banking.

Due to the widespread use of UPI, mobile wallets, and digital banking, consumers can
now make sales and purchases online while saving a huge amount of money.

4. Less expensive

Digital banking is less expensive than traditional banking because many operations
are automated. Since they have fewer overhead expenses, most banks have less
expensive fees and charges for transactions on digital platforms than in physical
branches.

This makes it easier to save money on bank fees, ATM fees, and transaction fees.
Furthermore, many online banks provide no-fee checking accounts and overdraft
protection at no cost or lower rates.

5. 24*7*365 days banking

Unlike traditional banks that only operate a few days a week for a fixed number of
hours each day, digital banking allows customers to bank anytime they want. The
emergence of digital banking services eliminates the lack of free time to visit a bank.

6. Efficient financial management

Various resources and software are available through digital banking to facilitate
efficient financial management. Consumers can monitor their expenditures and
savings using financial calculators, budgeting tools, and other services.
Additionally, it is possible to set financial goals, enhance how liquid money is
managed, and make wise financial decisions.

Disadvantages of digital banking

Overdependence on technology also subjects it to certain demerits compared to

traditional branch banking. Let us take an in-depth look at some of the key
disadvantages of e-banking and how they can impact customers:

1. Technical issues

Digital banking exclusively relies on stable internet connectivity and the functioning of
devices, applications and remote servers, which are prone to technical failures.
Network outages, app errors or server downtimes can freeze transactions and block
access to funds during emergencies.

Troubleshooting such technical glitches takes time and could mean compromised
security during this period. The lack of offline backups or alternatives further
exacerbates problems.

Must Read: Advantages & Disadvantages Digital Savings Account

2. Lack of personal relationships

Banking virtually removes the personal bond developed over time between customers
and branch staff. Complex finances requiring detailed advice and frequent queries are
better addressed face-to-face as digital modes fail to replicate human empathy,
attention to individual needs and personalised service. Having in-person banking
relationships can also assist you in creating a business account that is customised to
meet your needs.

3. Internet fraud

Internet fraud is one of the major drawbacks of Internet banking. Digital banking
widens opportunities for scammers due to the exchange of sensitive data on public
networks without physical verification. Information stolen online through malware,
phishing emails or sim-jacking is irreversibly misused to syphon money.

Even educated people fall prey due to the evolving modus operandi of net fraud.
Banking sites and apps themselves may also have unpatched vulnerabilities hacked
by expert criminals abroad beyond the reach of local laws.

4. Limited services

There are many services available via digital banking, but some still need business
owners to visit banks in person to "wet sign" documents. This includes credit and loan
applications, large cash withdrawals, and large deposits.

However, you might be able to electronically sign for things in the future as online
banking technology advances.

Conclusion

Digital banking far outweighs its traditional counterpart due to the massive benefits of
ease of transaction, enhanced security, and less expensive and efficient financial
management. However, users must employ prudent cyber security and have
alternatives ready to escape technical issues to reap their full potential securely.

Banks, too, need to enhance their digital infrastructure and continuously educate
customers to address individual needs.