BRBL CAIIB notes – Unit 3
Unit-3 Regulation of Banking Business
RBI powers to issue directions
- 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
- Sec 35A – RBI has powers to give direction to the banks in public interest or in the interest of banking company.
- U/s 36, RBI can caution banking companies and prohibit to do a particular type of business.
Acceptance of Deposits
- Banks can accept demand deposits and time deposits from public. They can fix the maturity and interest rates.
- 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.
- 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
- Nomination rules are as per Sec 45 ZA to ZF of BR Act.
- 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:
- Paid up capital + reserves at least Rs. 5 lac.
- Affairs conducted not in a manner detrimental to interest of depositors
- 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
- CRR – U/s 42 (1) of RBI Act, banks are required to maintain cash with RBI to the extent of rate fixed by RBI, as a % of NDTLs.
- CRR is maintained as fortnightly average balance. On any day, it should not be lest than 90% of such average balance.
- No interest is paid by RBI on CRR balance ref 31.03.07.
- Banks are to submit to RBI, a fortnightly return on Form A within 7 days (final return within 20 days.)
- For default in maintenance of CRR, banks are to pay interest to RBI at 3% + bank rate for first day and 5% + bank rate for subsequent period.
- For non-scheduled banks, CRR is maintained u/s 18 of B R Act.
- SLR -U/s 24 of B R Act, the banks are to maintain Liquid assets at a rate to be fixed by RBI (max 40% of NDTLs as on last Friday of 2nd preceding fortnight).
- These assets can be in the form of
- cash balances and balance with other banks including excess balance in CRR account
- Investment in Gold
- investment in unencumbered approved securities.
- Banks are to furnish a monthly return on Form VIII within 20 days from close of the month.
- For default in maintenance of SLR, banks are to pay interest to RBI at 3% + BR for first day and 5% + BR for subsequent period.
Regulation of Banking Business
Assets in India (Sec 25 B R Act)
- Assets in India not less than 75% of DTL as on last Friday (on preceding day, if holiday) of every quarter. It is to see that resources are used in India.
- Paid up capital, reserves and credit balance in P & L account, not a liability for this purpose.
- Banks are to submit return to RBI (U/s 25(i) of B R Act) within one month from close of each quarter.
Dear CAIIB Aspirants,
These notes are a part of 2024 CAIIB Video library course of Banking Regulations and Business Laws (BRBL) by Motivational Banker. These notes are intended to help you prepare better for your CAIIB exam.
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