BRBL CAIIB notes – Unit 3

Unit-3 Regulation of  Banking Business

RBI powers to issue directions

1. U/s 21 – RBI can issue directions. RBI can restrict the banks from lending against certain notified commodities, maintenance of min. margin, ceiling limit on advances or charging of min.rate of interest
2. Sec 35A – RBI has powers to give direction to the banks in public interest or in the interest of banking company.
3. U/s 36, RBI can caution banking companies and prohibit to do a particular type of business.

Acceptance of Deposits

1. Banks can accept demand deposits and time deposits from public. They can fix the maturity and interest rates.
2. RBI can fix the interest rates in public interest. Earlier, NRI deposit rates and SB rates were fixed by RBI. Now banks can fix these rates at their discretion. At present FCNR interest ceiling is fixed by RBI.
3. Banks are to send return of unclaimed deposits U/s 26 as on Dec.31st each year within 30 days where no operation was there for 10 years.

Nomination

1. Nomination rules are as per Sec 45 ZA to ZF of BR Act.
2. Nomination can be for bank deposit (1 nominee) or safe deposit of article accounts (1 nominee) and locker accounts (1 or 2 nominees).

Loans and advances

• RBI regulates loans U/s 21 of B R Act.
• Directions can be for max amount of loan, margin or rate of interest on Loans etc. (called selective credit control)
• U/s 20 (BR Act), banks can not give loan on security of their own shares.
• Banks cannot grant loans to their directors (Sec 20)
• Loans to directors can be written off with RBI permission.

Regulation of interest rates

• Interest rates on deposits can be fixed by RBI in public interest. (presently deregulated)
• RBI can also stipulate ROI on loans (presently deregulated) – Sec 21 and 35A of B R Act
• Usurious Loans Act 1918 (Sec 21A) – If banks fix interest rates as per RBI direction, such ROI cannot be questioned in a court for being excessive.

Payment System

• RBI can frame rules for payment system as per amendment to RBI Act through Information Technology Act 2000.
• RBI can frame rules under Payment and Settlement Systems Act 2007.
• RBI constituted Board for Regulation and Supervision of Payment and Settlement Systems, as a committee of Central Board. It prescribes related policies.
• RBI issued Internet banking guidelines covering technology, security, Legal, regulatory and supervisory issues

Regulation of Money Market Instruments:

RBI is vested authority U/S 45W of RBI Amendment Act 2006 to regulate the financial system, including money market.

Reserve Funds

• Reserve fund creation – U/s 17 (1) of BR Act banks are required to transfer at least 20% of profits (before dividend) to a separate reserve fund account. (RBI can recommend exemption from this requirement. RBI stipulated transfer of 25% of profits(wef 31.03.2001).
• Appropriation from reserve fund to be reported to RBI within 21 days.
• Foreign banks – 20% of profits from Indian operations (and not total operations) to be deposited in the Reserve Fund or invested in approved securities. (Sec 11-2 B R Act)

Scheduled Banks

• A bank included in second schedule of RBI Act.
• U/s 42 (6), RBI may include the bank in this schedule when satisfied about requirements such as:

1. Paid up capital + reserves at least Rs. 5 lac.
2. Affairs conducted not in a manner detrimental to interest of depositors
3. It is a (1) co-op bank (2) company under Companies Act (3) institution notified by Govt.  (4) company incorporated outside India.

Regulation of  Banking Business – CRR & SLR