Banking Laws

BANKING LAWS Reserve Bank of India Act. 1934 – Important Sections Sec. 2 (e)

Definition of Scheduled Bank: Name in 2nd schedule with minimum paid up Capital & Reserves of Rs. 5 lac.

Sec. 17

RBI can transact business like:

1. Accepting deposits of Central/State Govt. free of intt. 2. Purchase/rediscount of Bills of Exchange from banks 3. Purchase/sale of Foreign Exchange to/from banks 4. To give loans to banks, SFCs etc. 5. To provide advances to Central/State Govt. 6. To purchase/sale Govt. securities etc. 7. To deal in derivatives, repo or reverse repo.

Sec.18

Emergency loan to banks

Sec.21

Central Government is obliged to give its banking business to RBI and to entrust management of Public debt to RBI

Sec.22

Exclusive right to issue bank notes

Sec.24

Maximum denomination of bank note can be Rs.10000/-

Sec.28

RBI can frame rules for refunding value of mutilated, soiled or imperfect notes as a matter of grace

Sec.31

Nobody other than RBI or Central Govt. is authorized to make promissory note payable to bearer Demand. Similarly, except the RBI and Central Government, nobody is authorized to draw/accept Bills of Exchange payable to bearer on demand (Exception: Cheques payable to bearer on demand can be drawn by anybody).

Sec.42(1)

Every scheduled bank shall maintain with RBI an average daily balance the amount of which shall not be less than a specified per cent of its total demand and time liabilities in India.

Reserve Bank of India (Amendment) Act.2006: Provisions relating to cash reserve ratio (CRR) The Reserve Bank of India (Amendment) Act, 2006 was enacted in June 2006 Government of India in their Extraordinary Gazetee notification No. S.O.21(E) dated January 9,2007 have notified January 9,2007 as the date on which all the provisions, except Section 3 of the Reserve Bank of India (Amendment) Act, 2006 shall come into force.

Section 3 of Reserve Bank of India (Amendment) Act, 2006 provided for the removal of: 

The ceiling and floor on the CRR to be prescribed by the RBI having regard to the need for securing monetary stability in the country; and



The provision for interest payment on eligible CRR balances

[i.e., the amount of reserves between

the statutory minimum

CRR and the CRR

prescribed by RBI] Since the above Section 3 is not notified so far, the minimum

CRR level of 3% and the maximum

CRR level of 20% if total of bank’s demand and time liabilities shall remain in force from per the extant provisions of Reserve Bank of India Act,1934.

June 22, 2006

Section 42

as

(1) of the

Accordingly, CRR maintained by Scheduled Commercial Banks on total demand and time liabilities shall not be less than 3% subject to the exemptions. Further in exercise of the powers conferred on Reserve Bank of India under sub section (1) of section 42 of the Reserve Bank of India Act, 1934. it has been decided that every Scheduled Commercial Bank should continue to maintain a Cash Reserve Ratio of 5.75% effective fortnight beginning from February 17, 2007 and 6.00% effective from the fortnight beginning from March 3, 2007 of its total demand and time liabilities. 

In terms of the powers conferred on the Reserve Bank under sub-section 42(5)(c) of the Reserve Bank of India Act, 1934, it has been decided to exempt such banks from payment of the penal interest who have breached the statutory minimum CRR level of 3% during June 22, 2006 to March 2,2007 on account of CRR exemptions reckoned for computation of demand and time liabilities for CRR. It has also been decided that the Reserve Bank of India will also pay interest to all Scheduled commercial Banks on the eligible CRR balance:

a) 3.50% per annum on eligible cash balances maintained with the Reserve Bank of India under CRR required from the fortnight beginning June 24,2006 to December 8,2006. b) 2.00% on eligible cash balances maintained with the Reserve Bank of India under CRR requirement from the fortnight beginning from December 9,2006 to February 16,2007. c) 1.00% on eligible cash balances maintained with the Reserve Bank of India under CRR requirement from the fortnight beginning from February 17,2007.

Every Scheduled commercial Bank shall continue to be exempted from maintaining average CRR with effect from June 22, 2006 on the following liabilities, subject to the maintenance of statutory minimum CRR of 3% on its total demand and time liabilities: i. Liabilities to the banking system in India as computed under Clause (d) of the Explanation to Section 42 (1) of the RBI Act, 1934; ii. Credit balances in ACU (US$) Accounts; iii. Transactions in Collateralised Borrowing and Lending Obligation (CBLO) with clearing Corporation of India (CCIL); and iv. Demand and time liabilities in respect of their Offshore Banking Units (OBUs)

Similarly, every Regional Rural Bank, Scheduled State Cooperative Bank and Scheduled Primary (Urban) Co-operative Bank shall continue to be exempted from maintaining average CRR with effect from June 22, 2006 on the following liabilities, subject to the maintenance of statutory minimum CRR of 3% on its total demand and time liabilities: i. Liabilities to the banking system in India as computed under Clause (d) of the Explanation to Section 42(1) of the RBI Act, 1934; and ii. Transactions in Collateralised Borrowing and Lending Obligation (CBLO) with Clearing Corporation of India Ltd. (CCIL)

Sec. 45(A-F)

Power to call for credit information from banks

Sec.45 (H-QB)

NBFC- minimum Net Owned Fund Rs.25 lac and maximum Rs.2 crore’ can invest in approved securities in India min.5% & max. 25% of total deposits outstanding at the close of business on last working day of second preceding quarter; create a reserve fund of minimum 25% of its annual net profit before declaring any dividend.

Sec. 45(U-X)

Definition of Derivatives, Money Market instruments, repo, reverse repo, etc.; transaction therein and other guidelines.

Sec.49

Publication of bank rate – presently 6.0%

Sec. 58

RBI’s Central Board is empowered to make regulations consistent with the Act.

Banking Regulation Act, 1949 Sec. 5a

Approved securities as defined in Clause a,b,bb,c,d,; Sec 20 of Indian Trust Act.

Sec. 5b

Definition of Banking

Sec.5c

Definition of Banking Company

Sec. 5n

“Secured Advances” Loans against assets, whose market value is higher than loan at any time.

Sec. 6

Forms of business in which Banking Company may engage

Sec. 8

Prohibits businesses like trading of goods, etc.

Sec. 9

Bank shall not acquire Immovable Property except for its own use, for any period exceeding 7 years.

Sec. 13

Bank cannot pay commission, brokerage, etc. more than 2.5% of paid-up value of one share

Sec. 16

Prohibits a person to be appointed as director of more than one bank

Sec. 22

Empowers RBI to issue licence for opening a Bank

Sec. 23

Prior RBI permission required for opening a new branch

Sec. 29

To prepare final P & L accounts and Balance sheet in the form prescribed in the 3rd schedule, Sec 31. To the publish balance sheet and auditor’s report within three months from the end of period to which they refer. RBI may extend the period by further three months.

Sec.35

No bank can open an office abroad without the permission of RBI, who only inspects such branches; RBI has powers to give directions.

Sec. 36AD

No person shall obstruct the transactions of normal business by the bank in any manner.

Sec. 44A

Provides procedure for amalgamation of Banking Companies

Sec 45

powers of RBI to apply to the Central Government for suspension of business by a banking company and to prepare scheme of reconstruction or amalgamation

Sec. 45Y

Central Government to specify period for which bank may preserve books, accounts instruments etc. (Presently 5 years)

Sec. 45 Z

A customer has a right to ask the bank to return him a paid instrument any time/period

Sec. 45ZY

While returning a paid instrument, bank must retain its true copy of all relevant parts, sec 45 ZA to 45 ZF Nomination.