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Banking law
Dr. Nandimath Omprakash V,
Associate Professor in Law & Coordinator,
Distance Education Department,
National Law School of India University,
Bangalore-560 072
Email: [email protected]
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Course No. II (MBL)
1. Structure and Functions of Commercial Bankers &
Financial Institutions (Module I)
2. Reserve Bank of India Structure and Functions
(Module II)
3. Law of Banking Regulations (Module III)
4. Negotiable Instruments Law and Procedure(Module IV & V)
5. Banker and Customer relation (Module VI)
6. Advances, Loans and Securities (Module VII & VIII)7. Procedural Aspects of Banking Law (Module IX)
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Evolution of banking services in India
British brought the modern concept of banking
to India
But the concept of banking was known to us Banking was used in synonymous with money
lending
Vedic literature records the details of bankingtransactions
Manusmrithi speaks about deposits, pledge, loansand interest rates etc.,
Sons pious obligation to discharge the loan ofthe father
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Indian modern banking
Alexander & Company a leading agency house
started managing the Bank of Hindustan in
1770s The Bank of Calcutta was established by the
East India Company in 1806
Commercial Bank in 1819
The concept of limited liability was not known
hence, till 1860 banks had to either obtain a
special charter from the crown or had to
operate under unlimited liability
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1921 three Presidency Banks at Calcutta,
Bombay and Madras were merged into the
Imperial Bank (vide Imperial Bank of IndiaAct, 1920)
Reserve Bank of India was established in 1934
It was given the right of note issue; Was also to act as bankers bank;
However, Imperial Bank was allowed to operate as
the agent of RBI, especially in those places whereRBI had no branches.
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The RBI was initially a shareholders bank
but was nationalized in 1948 [vide Reserve
Bank (Amendment) Act, 1948] State Bank of India Act, 1955
Imperial Bank was taken over by SBI
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Bank Nationalization an important milestone
Nationalization was perceived as a major step
in achieving the socialistic pattern of society
July 19, 1969 14 major banks werenationalized
1980 6 more banks were nationalized
A detailed scheme of objectives, regulations,
management etc., was drawn-up for these
banks
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the branch network which was 8262 in June 1969expanded to 60000 by1992 with major expansion(80%) in rural areas. The average number of people
served by a branch came down from 60000 to 11000.the development of credit is more widely spread allover the country as against only in advanced states. In1969 deposits amounted to 13% of GDP and advances
to 10%. By 1990 deposits grew to 30% and advancesto 25% of the GDPDeposits grew from a figure ofRs.4669 crores in July 1969 to Rs.2,75,000 crores on31.3.1993. More than 45% of the total credit wasdirected to the priority sector. More than 45% of thetotal deposits were used by the government to fund itsfive year plans
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Types of banking services in India
CENTRAL BANKCENTRAL BANK
NONNON--BANKING FIBANKING FISS
INSTITUTIONAL BANKSINSTITUTIONAL BANKS
COMMERCIAL BANKCOMMERCIAL BANK
SPECIALIZED BANKSSPECIALIZED BANKS
Commercial banking service include
(i) Receiving various types of deposits;(ii) Giving various types of loans(iii) Extending some non-baking facilities
(i) Locker;(ii) Electricity bill;
(iii) Payment of insurance premium etc.,
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Types of banking services in India
CENTRAL BANKCENTRAL BANK
NONNON--BANKING FIBANKING FISS
INSTITUTIONAL BANKSINSTITUTIONAL BANKS
COMMERCIAL BANKCOMMERCIAL BANK
SPECIALIZED BANKSSPECIALIZED BANKS
Special banking institutions are established for definite
specialized banking servicesThe types of banks accept all types of deposits but mobilize
the amount in its specially focused area
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Types of banking services in India
CENTRAL BANKCENTRAL BANK
NONNON--BANKING FIBANKING FISS
INSTITUTIONAL BANKSINSTITUTIONAL BANKS
COMMERCIAL BANKCOMMERCIAL BANK
SPECIALIZED BANKSSPECIALIZED BANKS
Many institutions are established for carrying on non-banking
financial services but to a great extent resemble thebanking activity Ex: Mutual funds, financial institutionsacting as portfolio managers
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Types of banking services in India
CENTRAL BANKCENTRAL BANK
COMMERCIAL BANKCOMMERCIAL BANK
SBI AND ASSOCIATE BANKSSBI AND ASSOCIATE BANKS
PRIVATE BANKSPRIVATE BANKSNATIONALIZED BANKS (20)NATIONALIZED BANKS (20)
NATIONALIZED BANKS (20)NATIONALIZED BANKS (20) NATIONALIZED BANKS (20)NATIONALIZED BANKS (20)
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Types of banking services in India
CENTRAL BANKCENTRAL BANK
SPECIALIZED BANKSSPECIALIZED BANKS
LAND MORTGAGELAND MORTGAGE
RURAL CREDITRURAL CREDIT
IND. DEVELOPMENTIND. DEVELOPMENT
COCO--OPERATIVEOPERATIVE
HOUSING FINANCEHOUSING FINANCE
EXPORT IMPORTEXPORT IMPORT
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Types of banking services in India
CENTRAL BANKCENTRAL BANK
INSTITUTIONAL BANKSINSTITUTIONAL BANKS
IFCIIFCI
SFCSFCSS
IDBIIDBI
ICICIICICI
NABARDNABARD
HDFCHDFC
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The Narasimham Committee
1990s India had traumatic moments
Banks were burdened with large percentage of
non-performing loans Customer service had suffered and out-moded
practices were in vogue
Overall re-hauling was needed for entire
financial systems in general and banking sector
in particular
The Narasimham Committee was set up to
recommend changes in financial system
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Committee recommends
Overall emphasis upon de-regulation
No further nationalization to be adhered to
No distinction between public and private sector
banks Control of banking sector to be centralized (and
not to be divided between RBI and Dept. ofBanking)
SLR and CRR should be reduced to prudent levels Concessional lending to be phased out
The capital base of banks should meet
international standards the appointment of Chief Executive of the banks
to be de-politicized
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Role of a commercial and centralbank
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Commercial bank
There is no specific definition (although
Banking Regulation Act defines banking)
The banker is one who deals in money Two essential functions of banking
1. Borrowing (accepting of deposits) of money; and
2. Lending of money for needy purposes
Besides these essential function a banking
company also performs
Other agency and
General utility functions
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a commercial bank mobilizes the savings of the society.This money is then provided to those who are in needof it by granting overdrafts or fixed loans or by
discounting bills of exchange or promissory notes. Inshort, the primary function of a commercial bank isthat of a broker and a dealer in money. By dischargingthis function efficiently and effectively, a commercial
bank renders a very valuable service to the communityby increasing the productive capacity of the countryand thereby accelerating the pace of economicdevelopment. It gathers the small savings of thepeople, thus reducing to the lowest limits the quantityof idle money
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the banker should always bear in mind that it
is the guardian of a very delicate mechanism
which paves the way for failure of economicdevelopment and which, if disturbed, will
create monetary disequilibrium with all the evil
effects incidental thereto
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Banking liquidity & profitability
PRO
FITABILITY
PRO
FITABILITY
LIQUIDITY
LIQUIDITY
cash in hand money at call & short
notice bills discounted investments loans & Advances
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Commercial banks & credit creation
Every loan creates a deposit Hartly Withers
The commercial banks as a system can and do
increase the total amount of money incirculation by increasing the purchasing power
of the people through the deposit money
created by them
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Model
10,000Total10,000Total
10,000Cash in hand10,000Deposits
ASSETSLIABILITIES
19,000Total19,000Total
9,000Loans to clients9,000Deposits
(creditbalance)
10,000Cash in hand10,000Deposits
ASSETSLIABILITIES
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Investment & mixed banking
Investment banks are organizations, which
assist business corporations and governmental
bodies to raise funds for long term capitalrequirements through the sale of shares, stocks,
bonds etc.,
Mixed banking lies in extension of operationsof investment banker to commercial banking
filed
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Universal banking
Often referred to as financial service
supermarket
An universal bank offers entire (or often mostof) financial services within the bank or
through its subsidiaries, like
Commercial banking solutions Investment banking
Other related financial services including
insurance
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Merchant banking
No specific universally accepted definition
But the financial institution which centers itsoperations on all or most of the following Corporate financial advice (on matter as new
shares and bond issues, capital reconstructions,mergers and acquisitions)
Taking deposits and money market operations Foreign exchange dealings
Medium term lending
Export finance Fund management on behalf of clients (pensionfunds, unit trusts, investment trusts etc.,)
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Virtual banking
relationship banking to electronic banking
Extensive use of IT based solutions
Automated Teller Machines (ATMs) Shared ATM networks
Electronic Fund Transfer @ Point of Sale (EFTPoS)
Smart cards Stored value cards
Phone Banking
Internet Banking
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Central banking
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The Central Bank is an institution charged with
the responsibility of managing the expansion
and contraction of the volume of money in theinterest of the general public welfare
-- R. P. Kent, Money and Banking, p. 351
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Central banks world view
Today almost all nations in the globe have their
Central Banks
The idea of having central bank attainedpopularity during 20th century (although some
central banks in existence earlier as well)
International Monetary Conference held inBrussels (1929) strongly emphasized the need
of central banking unit
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Necessity of central bank
Control of credit in any nationControl of credit in any nation
monopoly power of currency issuemonopoly power of currency issue
Friend, philosopher & guide to commercial banksFriend, philosopher & guide to commercial banks
Implementation of governmentImplementation of governments monetary policiess monetary policies
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Principles of central banking
Nationalwelfar
e
Nationalwelfar
e
Autonomy
Autonomy
Monetarystability Monetarystability No competitionNo competition
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Functions of central bank
Monopoly of note issue
Lender of last resort
Central clearance & settlement Bankers bank
Controller of credit
Banker to the government
Publishes economic statistics and other useful
information Research & development
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RBI Act, 1934 preamble
Whereas it is expedient to constitute a RBI to regulate the issue of Banknotes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit
system of the country to its advantage;
And whereas in the present disorganization of the monetary systems of the
world it is not possible to determine what will be suitable as permanent
basis for the Indian monetary system;
But whereas it is expedient to make temporary provision on the basis of theexisting monetary system, and to leave the question of the monetary
standard best suited to India to be considered when the international
monetary position has become sufficiently clear and stable to make it
possible to frame permanent measures
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RBI an introduction
Established in 1935
Overtook
Currency issue from central government of India;and
Credit control from the then Imperial Bank of India
Nationalized in 1948
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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
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RBI in its promotional role
The establishment of BILL MARKET scheme
(1952)
Establishments of financial corporations For agricultural sector; and
Industrial sector
Promotion of Regional Rural Banks (with theable assistance of commercial banks)
Assistance (to commercial banks) to open
foreign branches
Establishment of Export-Import bank
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Organization of the RBI
Ss. 8 & 9 of the Act
Governor
Central Board 4 Deputy Governors 10 Directors (nominated by the Central Government) 4 Directors from Local Boards
1 Government Representative (nominated by theCentral Government)
Local Boards Delhi
Mumbai Calcutta Madras
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Department in the Central Office
Secretariat
Banking operations & development
Industrial credit
Agricultural credit
Rural planning & credit
Exchange control
Currency management
Expenditure & budgetary control
Government accounts
Economic analysis & Policy
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Credit planning cell
Statistical analysis and computer
Management service
Administration & personnel
Legal services
Inspection
Premises
Banking training colleges Mumbai
Pune; and Madras
RBI & C i l B k
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RBI & Commercial Banks
Controller to commercial banks
By virtue of Banking Regulation Act, 1949; and
Reserve Bank of India Act, 1934
G l t l i l b k
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General control over commercial banks
License to commence banking business
Licensing the commercial banks to open
branches Revoke the license if the banking company is
operating improperly
Power to inspect (sec. 35)
Power to appoint additional directors on the
Board of Directors
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Approval of RBI is necessary for
appointment, re-appointment or termination of
an appointment of a Chairman
Power to prevent a commercial bank from
undertaking certain type of activities
Licensing the banking company
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Licensing the banking company
The RBI will satisfy itself about
The capital structure and earning prospectus of thecompany
The general character of the proposedmanagement (that it is of high order and notdetrimental to the interests of the depositors
That granting of license will be in the publicinterest
That the proposed banks working will be inconsistent with the monetary stability of theeconomy
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RBI has sufficient power to
Remove any managerial personnel from the office
Appoint another alternative suitable person in thevacancy so caused
Power to Audit
Prior approval before appointing, re-appointingor removing any auditor or auditors
Order for special audit Of such transactions; or Class of transactions; or
Transactions for particular period RBI can direct the auditor to conduct special audit
and submit his report independently
Quantative control of credit
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Quantative control of credit
Uses globally accepted tools
The bank rate
Open market operations
Variable cash reserve requirements
Formulation of credit policies (by way of an
order)
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Bankers bank
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Banker s bank
Lender of last resort for Commercial banks
Commercial co-operative banks
Regional rural banks
RBI offers refinancing facility to itsscheduled banks
The banking institutions which figure in theSecond Schedule of the RBI Act
Before admitting the banking company in to theschedule RBI satisfies itself that such bankingcompany is worth it
RBI also has the power to remove the bankingcompany from the schedule
Miscellaneous powers
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Miscellaneous powers
Prohibit certain transactions of any banking
company
Advise to any banking company to tie-up looseends in its operation
Act as an intermediary to the amalgamating
banks (but only upon the request)
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In the public interest to prevent matters
detrimental to the depositors etc.,
Order the banking company to call a meeting of itsdirectors to discuss any matters of relevance
Depute one or more of its officers to watch theproceedings at any meeting of the board
Appoint one or more of its officers to observe themanner in which the affairs of the bankingcompany or of its offices or branches are beingconducted and make a report thereon
Compel the bank to change its managementapproach with regard to certain matter
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Thanks very much
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Thanks very much