Laws Relating to Banking

LAWS RELATING TO BANKING Presented by.. SACHIN AMBADE

AGENDA        

Basic Definitions The Banking Regulation Act The Reserve Bank Of India Act The Negotiable Instrument Act The Bankers Books Evidence Act The State Bank Of India Act The International Finance Corporation Act The State Financial Corporation Act

LAW  Law is system rules, usually enforced through a set of institutions  In general, a rule of being or of conduct, established by an authority able to enforce its will; a controlling regulation; the mode or order according to which an agent or a power acts.

LAW AND RULE: DIFFERENCE  Law is basically the enactment or statute enacted by the legislature  Rules are the procedure to implement this enactment those are made by the executive

REGULATION  Regulation means you must conform to a set of rules or requirements or something has to be done in a certain way.  Regulation: Milk must be removed from the shelves on a certain date  Law: The milk was not removed and the law was broken, people may get sick, and now you get sued by the sick people, better to stick to the regulation

BANKING REGULATION ACT, 1949

BANKING REGULATION ACT, 1949            

PART I: PRELIMINARY PART II: BUSINESS OF BANKING COMPANIES PART IIA: CONTROL OVER MANAGEMENT PART IIB: PROHIBITION OF CERTAIN ACTIVITIES IN RELATION TO BANKING COMPANIES PART IIC: ACQUISITION OF THE UNDERTAKINGS OF BANKING COMPANIES IN CERTAIN CASES PART III: SUSPENSION OF BUSINESS AND WINDING UP OF BANKING COMPANIES PART IIIA: SPECIAL PROVISIONS FOR SPEEDY DISPOSAL OF WINDING UP PROCEEDINGS PART IIIB: PROVISIONS RELATING TO CERTAIN OPERATIONS OF BANKING COMPANIES PART IV: MISCELLANEOUS PART V: APPLICATION OF THE ACT TO CO-OPERATIVE BANKS SCHEDULES – 5 No of Sections – 56

BANKING REGULATION ACT, 1949  Section 5.(1).(b) Banking means accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise.  Section 5.(1).(c) Banking Company means any company which transacts the business of banking

BANKING REGULATION ACT, 1949  Section 7 Prohibits the use of “Bank ”,”banking” or “banking company” to a company other than bank  Section 19Permits banks to form subsidiary company for certain purposes

BANKING REGULATION ACT, 1949  Section 18.1 Cash Reserve Ratio – Scheduled Banks to maintain at-least 3% of the demand and time liabilities by way of cash reserves with themselves or by way of a balance in current account with RBI. 2006 onwards the floor of 3 per cent and ceiling of 15 per cent on the CRR has been removed.

 Section 24Section 24 of the Banking Regulation Act has been amended to remove the floor limit on SLR (24 per cent currently) while retaining the upper limit at 40 per cent.

BANKING REGULATION ACT, 1949  Section 21Power to Reserve Bank to issue directive to banks to determine policy for advances  Section 22.4The Reserve Bank may cancel a license granted to a banking company

BANKING REGULATION ACT, 1949 Section 29 Every Bank has to publish its Balance Sheet and Profit and Loss account as on 31st MarchAs per the formats given in the 3rd Schedule  The Central Government can amend the format with a minimum period of 3 months notice

BANKING REGULATION ACT, 1949  Section 34 A Prevents banks from producing any confidential information to any authority under Industrial Disputes Act.  Section 35 RBI authorised to undertake inspection of banks.

BANKING REGULATION ACT, 1949  Section 45ZAmendment carried in the Act during 1983 empowers Central Govt to frame rules specifying the period for which a bank shall preserve its books, nomination facilities and return a paid instrument to a customer by keeping a true copy

RESERVE BANK OF INDIA ACT 1934

RESERVE BANK OF INDIA ACT 1934  To regulate the issue of Bank notes and for the keeping of reserves with a view to securing monetary stability in British India (now India)  To operate the currency and credit system of the country to its advantage it was found expedient to constitute a Reserve Bank of India.

RESERVE BANK OF INDIA ACT 1934.. Functions entrusted….      

Bank of issue (of currency) Banker to the government (including management of public debt) Banker to commercial banks (lender of last resort) Controller of volume of credit in India Organization of ‘sound and healthy commercial banking system’ Concerned with the development of – Rural banking; – Promotion of financial institutions; and – Development of money and capital markets

RESERVE BANK OF INDIA ACT 1934 Banker’s bank

 Lender of last resort for – Commercial banks – Commercial co-operative banks – Regional rural banks  RBI offers – refinancing facility to its ‘scheduled banks’ – The banking institutions which figure in the Second Schedule of the RBI Act – Before admitting the banking company in to the schedule – RBI satisfies itself that such banking company is worth it – RBI also has the power to remove the banking company from the schedule

RESERVE BANK OF INDIA ACT 1934 Chapter 1: Preliminary 1.

Short title, extent, commencement



This Act may be called the Reserve Bank of India Act, 1934.

 

It extends to the whole of India. This section shall come into force at once, and the remaining provisions of this Act shall come into force on such date or dates as the Central Government may, by notification in the Gazette of India, appoint.


Chapter 2 

Section 4 Capital of bank shall be five crores of rupees



Section 8 Composition of the central board

(1) The Central Board shall consist of the following Directors, namely: — (a) a Governor and not more than four Deputy Governors to be appointed by the Central Government; (b) four Directors to be nominated by the Central Government, one from each of the four Local Boards as constituted by section 9; (c) ten Directors to be nominated by the Central Government; and (d) one Government official to be nominated by the Central Government


Chapter 2

 Section 17 Business which bank may transact The Bank shall be authorized to carry on and transact the several kinds of business hereinafter specified, namely:— the accepting of money on deposit without interest from, and the collection of money for, the Central Government, the State Government, local authorities, banks and any other persons:


Chapter 2

 Section 19 Bank may not: Purchase the shares of any banking company or of any other company, or grant loans upon the security of any such shares


Chapter 3

 Section 20 Obligation of the Bank to transact Government business: The Bank shall undertake to accept monies for account of the Central Government and to make payments up to the amount standing to the credit of its account, and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union.

RESERVE BANK OF INDIA ACT 1934 Section 42.1(amended)  The statutory minimum CRR requirement of 3 percent of total demand and time liabilities no longer exists.  Reserve Bank having regard to the needs of securing monetary stability in the country, can prescribe the Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate

NEGOTIABLE INSTRUMENT ACT 1881

NEGOTIABLE INSTRUMENT ACT 1881

Structure XVII chapters  147 sections  Amended more than 15 times  Latest is BANKERS PUBLIC FINANCIAL INSTITUTIONS AND NEGOTIABLE INSTRUMENTS LAWS (AMENDMENT) ACT – 1988  2002 – Electronic form of cheque

NEGOTIABLE INSTRUMENT ACT 1881 Meaning Negotiable means “ transferable by delivery” 

Instrument means “written document by which a right is created in favour of some person”

NEGOTIABLE INSTRUMENT ACT 1881 Definition:  Section 13 - A “negotiable instrument” means  a promissory note,  bill of exchange or cheque payable either to order or to bearer  Section 13(1) - A negotiable instrument may be made payable to two or more payees jointly,  or it may be made payable in the alternative to one of two, or one or some of several payees section 13(2)

NEGOTIABLE INSTRUMENT ACT 1881 Section 4 Sum of money only to, or to the order of, a certain Promissory Note - A “promissory note” is an instrument in writing (not being a banknote or a currency-note)  containing an unconditional under-taking,  signed by the maker,  to pay a certain person,  or to the bearer of the instrument

NEGOTIABLE INSTRUMENT ACT 1881 Section 5Bill of Exchange – a “bill of exchange” is an instrument in writing  containing an unconditional order,  signed by the maker,  directing a certain person to pay a certain sum of money only to,  or to the order of, a certain person or  to the bearer of the instrument.

A cheque is a special type of Bill of Exchange. It is drawn on banker and is required to be made payable on demand

NEGOTIABLE INSTRUMENT ACT 1881 Information Technology Act: Section (1)(4)(a) of Information Technology Act provides that  the Act will not apply to Bill of Exchange and Promissory Notes  Thus, a Bill of Exchange or Promissory Note cannot be made by electronic means.  However, cheque is covered under Information Technology Act and hence can be made and / or sent by electronic means.

NEGOTIABLE INSTRUMENT ACT 1881 Section 7 DRAWER, DRAWEE AND PAYEE  The maker of a bill of exchange or cheque is called the “drawer”;  the person thereby directed to pay is called the “drawee”  The person named in the instrument,  to whom,  or to whose order  the money is by the instrument directed to be paid,  is called the “payee”  However, a drawer and payee can be one person as he can order to pay the amount to himself.

NEGOTIABLE INSTRUMENT ACT 1881 Section 123CHEQUE CROSSED GENERALLY

 Where a cheque bears across its face an addition of the words “and company” or any abbreviation thereof, between two parallel transverse lines,  or of two parallel transverse lines simply, either with or without the words “not negotiable”,  that addition shall be deemed a crossing,  and the cheque shall be deemed to be crossed generally

NEGOTIABLE INSTRUMENT ACT 1881 Section 124CHEQUE CROSSED SPECIALLY

 Where a cheque bears across its face an addition of the name of a banker,  either with or without the words “not negotiable”,  that addition shall be deemed a crossing,  and the cheque shall be deemed to be crossed specially,  and to be crossed to that banker

NEGOTIABLE INSTRUMENT ACT 1881 Penalty in case of dishonour of cheques for insufficiency of funds

 If a cheque is dishonoured even when presented before expiry of 6 months,  the payee or holder in due course is required to give notice to drawer of cheque within 30 days from receiving information from bank  The drawer should make payment within 15 days of receipt of notice  If he does not pay within 15 days, the payee has to lodge a complaint with Metropolitan Magistrate or Judicial Magistrate of First Class, against drawer within one month from the last day on which drawer should have paid the amount  The penalty can be upto two years imprisonment or fine upto twice the amount of cheque or both

NEGOTIABLE INSTRUMENT ACT 1881 Sec – 8 – Holder  The “holder” of a promissory note, bill of exchange or cheque means  any person entitled in his own name to the possession thereof and  to receive or recover the amount due thereon from the parties thereto.  Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.

NEGOTIABLE INSTRUMENT ACT 1881 Sec- 14 –Negotiation  When a promissory note, bill of exchange or cheque is transferred to any person  so as to constitute that person the holder thereof  the instrument is said to be negotiated

NEGOTIABLE INSTRUMENT ACT 1881 Sec- 15 - Indorsement  When the maker or holder of a negotiable instrument signs the same  otherwise than as such maker  for the purpose of negotiation  on the back or face thereof or  on a slip of paper annexed thereto  or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument  he is said to indorse the same, and is called the “indorser”.

NEGOTIABLE INSTRUMENT ACT 1881 Sec-16(1)-Indorsement “in blank” and “in full”  If the indorser signs his name only, the indorsement is said to be “in blank”  and if he adds a direction to pay the amount mentioned in the instrument to  or to the order of, a specified person  the indorsement is said to be “in full”  and the person so specified is called the “indorsee” of the instrument.

NEGOTIABLE INSTRUMENT ACT 1881 Sec – 31-Liability of a Paying Banker  The relationship between a banker and a customer primarily is that of a Debtor & Creditor  It is the primary duty of a banker to honour his customer cheques unless there are valid reasons  Incase he dishonours a cheque without justification he is liable to compensate the customer for any loss or damage caused by such default

NEGOTIABLE INSTRUMENT ACT 1881 When a banker must refuse  When customer countermands payment  Death , Insolvency or Insanity of the customer  Defective title of the party  Loss of cheque  When the cheque is irregular  Closing of account

NEGOTIABLE INSTRUMENT ACT 1881 When payment may be refused

 Post dated  Insufficient funds  Doubtful legality of the cheque  Not duly presented  Irregular or ambiguous  Otherwise materially altered  Has become stale

BANKERS BOOK EVIDENCE ACT, 1891


PREAMBLE: 

wef 1st October, 1981



An Act to amend Law of Evidence with respect to Bankers' Books. 8 sections




Section 3

Powers to extend provisions of Act The State Government may from time to time, by notification in the Official Gazette, extend the provisions of this Act to the books of any partnership or individual carrying on business of bankers within the territories under its administration, and keeping a set of not less than three ordinary account-books namely, a cashbook, a day-book or journal, an a ledger, and may in like manner rescind any such notification.


Section 5

Case in which officer of bank not comparable to produce booksNo officer of a bank shall in any legal proceeding to which the bank is not a party be comparable to produce any banker's book the contents of which can be proved under this Act, or to appear as a witness to prove the matters, transactions and accounts therein recorded, unless by order of the Court or a Judge made for special cause.


Section 6

Inspection of Books by order of Court or Judge  On the application of any party to a legal proceeding the Court or a Judge may order that such party be at liberty to inspect and take copies of any entries in a Banker's Book for any of the purposes of such proceeding  The Bank may at any time before the time limited for obedience to any such order as aforesaid either offer to produce their books at the trial or give notice of their intention to show cause against such Order, and thereupon the same shall not be enforced without further order.

STATE BANK OF INDIA ACT 1955

STATE BANK OF INDIA ACT 1955  An Act to constitute a State Bank for India, to transfer to it the undertaking of the Imperial Bank of India and to provide for other matters, connected therewith or incidental thereto  Its purpose is to extend the banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes  It has 8 Chapters ,53 sections

STATE BANK OF INDIA ACT 1955 Section 5 Issued capital: The Central Board may from time to time increase the issued capital but no increase in the issued capital shall be made in such a manner that the Reserve Bank holds at any time less than fifty-five per cent. of the issued capital of the State Bank.

STATE BANK OF INDIA ACT 1955 Section 6 and 7  Transfer of assets and liabilities of the Imperial Bank to the StateBank ( section 6)  Transfer of service of existing officers and employees of the ImperialBank to the State Bank (section 7)

STATE BANK OF INDIA ACT 1955 Section 11

 Restrictions on voting rights.No shareholder, other than the Reserve Bank, shall be entitled to exercise voting rights in respect of any shares held by him in excess of ten per cent. of the issued capital

STATE BANK OF INDIA ACT 1955 Section 17 Composition of the Central Board  The Central Board shall consist of the following, namely:-(a) a chairman and a vice-chairman to be appointed by the Central Government in consultation with the RBI (b) not more than two managing directors, if any, appointed by the Central Government in consultation with the RBI

STATE BANK OF INDIA ACT 1955 Section 32  The State Bank shall, if so required by the RBI, act as agent of the RBI at all places in India where it has a branch for– (a) paying, receiving, collecting and remitting money, bullion and securities on behalf of any Government in India; and (b) undertaking and transacting any other business which the RBI may from time to time entrust to it.

STATE BANK OF INDIA ACT 1955 Section 32 contd…  If a dispute arises between the State Bank and the Reserve Bank as to the interpretation of any agreement between them, the matter shall be referred to the Central Government and the decision of the Central Government thereon shall be final

THE INTERNATIONAL FINANCE CORPORATION (STATUS, IMMUNITIES AND PRIVILEGES) ACT, 1958

THE INTERNATIONAL FINANCE CORPORATION (STATUS, IMMUNITIES AND PRIVILEGES) ACT, 1958

 An Act to implement the international agreement for the establishment and operation of the International Finance Corporation in so far as it relates to the status, immunities and privileges of that Corporation, and for matters connected therewith.  4 sections

Section 3  Provided that nothing in Section 9 of Article VI of the Agreement shall be construed as-(a) entitling the Corporation to import into India goods free of any duty of customs without any restriction on their subsequent sale therein; or (b) conferring on the Corporation any exemption from duties or taxes which form part of the price of goods sold; or (c) conferring on the Corporation any exemption from duties or taxes which are in fact no more than charges for services rendered.

Article IV: Status, Immunities and Privileges SECTION 1 Purposes of Article.  To enable the Corporation to fulfil the functions with which it is entrusted, the status, immunities and privileges set forth in this Article shall be accorded to the Corporation in the territories of each member.

Article IV SECTION 2 Status of the Corporation. The Corporation shall possess full juridical personality and, in particular, the capacity: (i) to contract; (ii) to acquire and dispose of immovable and movable property; (iii) to institute legal proceedings.

Article IV SECTION 4 Immunity of Assets from Seizure. Property and assets of the Corporation, wherever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation or any other form of seizure by executive or legislative action.

Article IV SECTION 5 Immunity of Archives. The archives of the Corporation shall be inviolable.

Article IV SECTION 9

Immunities from Taxation. ( a ) The Corporation, its assets, property, income and its operations and transactions authorised by this Agreement, shall be immune from all taxation and from all customs duties. The Corporation shall also be immune from liability for the collection or payment of any tax or duty. ( b ) No tax shall be levied on or in respect of salaries and emoluments paid by the Corporation to Directors, Alternates, officials or employees of the Corporation who are not local citizens, local subjects, or other local nationals.

State Financial Corporations Act, 1951

State Financial Corporations Act, 1951 Overview:  A central Industrial Finance Corporation was set up under the industrial Finance corporation act, 1948  To provide medium and long term credit to industrial undertakings.  State governments expressed the same desire  State financial corporations were set up.

State Financial Corporations Act, 1951  The share capital shall be fixed by the state government but shall not exceed Rs. 2 crores.  The issue of the shares to the public will be limited to 25% of the share capital and rest will be held by the state governments, The Reserve Bank, Scheduled Banks, Insurance companies, Investment Trusts, Co-operation banks and other financial institutions.

State Financial Corporations Act, 1951  Corporation will be authorised to issue bonds and debentures for amounts which together with the contigent liabilities of the corporations shall not exceed five times the amount of the paid-up capital and the reserve fund of the corporations.  The corporation may accept deposits from the public repayable after not less than five years, subject to the maximum not exceeding the paid up capital.


 The corporation will be managed by a board consisting of a majority of Directors nominated by the State governments, The Reserve Banks and the Industrial Finance corporation of India.


 The corporation will be authorised to make long term loans to industrial concerns which are repayable within a period not exceeding 25 years.

Financial resources The SFC’s mobilizes their financial resources from the following sources  Their own share capital  Income from investment and repayment of loans  Sale of bonds  Loans from the IDBI  Borrowing from the Reserve banks of India  Deposits from the public  Loans from the state governments.

REFERENCES  indiacode.nic.in  rbi.org.in

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Laws Relating to Banking

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