Banking General Awareness Banking System Banking and Banking Structure - Legal Aspects

DEFINITION OF BANK AND BANKING

After independence, steps were taken to regulate the banking and banking business in India. Government brought in a law in this regard, wherein banking and banking business has been defined. This law became an Act and called the Banking Regulation Act, (BR Act), 1949.

As per the Act, Section 5(c) provides that 'a banking company is a company which transacts the business of banking in India.' Further, Section 5(b) of the Act defines banking business as, 'accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

STRUCTURE OF BANKING IN INDIA

Reserve Bank of India (RBI):

The country had no central bank prior to the establishment of the RBI. The RBI is the supreme monetary and banking authority in the country and controls the banking system in India. It is called the Reserve Bank as it keeps the reserves of all commercial banks.

Development banks and other financial institutions:

A development bank is a financial institution, which provides long term funds to the industries for development purposes. These include banks like Development Credit Bank, IDBL ICICI, IFCI etc. State level institutions like SFC's SIDC's etc. They also include investment institutions like UTI, LIC, and GIC etc.

Long-term agriculture credit is provided by the Land Development Banks. The funds of the RBI meant for the agriculture sector actually pass through SCBs and CCBs. Originally based in rural sector, the cooperative credit movement has now spread to urban areas also and there are many urban cooperative banks coming under SCBs.

LEGAL REQUIREMENTS FOR SETTING UP NEW BANKS AND BRANCH AUTHORIZATION POLICY

• The minimum statutory requirements for setting up new banks in India are stipulated in the BR Act, 1949.
• The RBI explicates the eligibility criteria for the entry of new banks. At present, the capital requirement for any new bank entry is ` 500 crores.
• Reserve Bank of India also releases some guidelines / directives on various issues relating to banking operations including expansion/ control etc. Some areas on which guidelines /directives are issued are:

Guidelines / Directives

• To update its branch authorization policy, which governs the opening of new branches by all Scheduled Commercial Banks in the country
• Under the banking structure, private moneylenders do not form the part of scheduled banking structure.
• Legally, banks are not permitted to create a charge upon any unpaid capital of the company as per Banking Regulation Act/ 1949 (section-14).
• Under the   Banking   Companies (Acquisition & Transfer of Undertaking) Acts of 1970 and 1980, as amended in 1994, public sector banks are permitted to offer their equity shares to public up to 49 per cent of the capital of the bank.
• For the uniform and fair conduct of the banking business by banks in India, Banking Codes and Standard Board of India (BCSBI) were created.
• Government introduced the Banking Companies (Acquisition and Transfer of Undertaking) and Financial Institution Laws (Amendment) Bill, 2000 which allowed Government to dilute its sharing holding to 33 per cent, mainly for the purpose of raising fresh equity.
• This bill empowers the Government to supersede the Board of Directors of public sector banks.