Functions of Banks

&
Banking Regulation Act 1949
Prof. Divya Gupta
Functions of Banks:
Functions can be categorized under two
categories:
 Primary functions of commercial banks

 Secondary functions of commercial banks

Primary Functions of a bank are:
 Accepting Deposits
Savings
Fixed Deposits
Current Deposits

 Lending money to the public

Loans
Cash credit
Overdraft
Discounting of bills
Secondary functions of commercial banks

 Agency services
 General utility services
Banking Regulation Act - 1949
 Act was originally called as Banking Companies
Act 1949.

 It came into force from 16th March 1949.

 Now it is renamed as Banking regulation Act

1949.

 Reasons for commencement of this Act.

Reasons for commencement of
this Act.

This Act was passed to consolidate and

amend the laws relating to banking
companies.
 Provisions of the Act
1. Definition of Banking (sec 5(b))

2. Business of Banking Company (sec 6)

Main Functions
Subsidiary Functions
Kinds of business that can not be done

3. Capital Requirement. (sec 11)

S. Foreign banking co. Amount(Rs.)
N

1. If it has a place of business in Bombay or Calcutta or both 20 lacs

2. If it has no place of business in Bombay or Calcutta 15 lacs

  Indian banking co.  

1. Banking co. having place of business in more than 1 state 5 lacs

2. Banking co. having place of business in more than 1 state & 10 lacs
if any such place include Bombay or Calcutta or both

3. Banking co. having place of business in 1 state but none in

Bombay or Calcutta
a) For principal place of business plus 1lacs
b) For each of place in the same district plus 10000
c) For each of place in other district 25000
subject to overall limit of 5lacs
4. Banking co. having only one place of business and also no 50000
branch in Bombay or Calcutta  

5. a) Banking co. having place of business in only  

1 state, one or more or which is or are situated in Bombay
or Calcutta or plus 5lacs
b) For each place of business outside the city 25000
c) subject to overall limit of 10lacs
 
To start a new Bank
 Minimum capital required is 200 crores.

 And shall be increased to 300 crores in

subsequent 3 years.
 Continue……..
4. Management Sec 10(A)
 Board of Directors
 Wholetime Chairman

5. Maintenance of Liquid Assets

 CRR(sec 18)
 No loans & advances on its own shares(sec 20)
 No floating charge to any of its property(sec 14A)
 Credit policy need to be followed by Banks(sec21)
Important Rates acc to (Credit
Policy in 2010-11)
 Bank rate – 6%
 Repo rate – 6.25%
 Reverse repo rate - 5.25%
 CRR – 6%
 SLR – 24%
 Money Market- 4% to 6.6%
Credit Policy 2010-11(Second Quarter)
 Rep rate and reverse repo increased
 Credit growth rises to 23% and deposits grow by
15% by December 2010.
 RBI had planned for 18% growth in deposits.
 RBI reduces SLR to 24% on 16th Dec 2010,
with effect from 18th Dec 2010
 OMO operations will be done to inject Rs.48000
crores in the market through by back
 GDP growth rate is 8.9%
 Continue…
 Cannot be a pledgee of any immovable property for
period of exceeding 7 years (except official work) sec 9
 Cannot hold shares in other company more than 30% of
paid up capital of that co or their own (sec 19)
 Restriction on granting loans to any of the its directors or
to any institution in which director is interested.
 SLR - Every banking co. is expected to maintain at least
24% of total deposits in India in the form of cash, gold and
approved securities at the close of every day of its
business. (sec 24)
 Every Banking co. Should keep assets in India atleast to
the extent of 75% of total liabilities at the end of every
quarter (Sec 25)
News in Economic Times on 1st
Feb,2009
 Regulator prescribes an overall cap of
40% of consolidated net worth of the bank
for capital market exposure .
6. Licensing of Banks (sec 22)
 Financial status
 Companies affairs are in compliance with
the rules
 Foreign banks
1. No discrimination
2. Business in public interest
3. Comply with the provisions of Act
7.Opening of New branches(sec 23)

 Prior permission from RBI(in India or

abroad) or changing location of the
existing offices.
 Conditions to be satisfied
 Prior consent not required
 New licensing policy
8. Loans and Advances (sec 21)

 Purpose of loan
 Margin for secured advances
 Amount of advances to a bank, company ,
individual or a firm
 Rate of interest and other terms
 Maximum amount up to which guarantee can be
given
 Exceptions- No loan to director, or no loan on
security of its own shares
9. Inspection of Banks(sec 35)

 RBI has a right to inspect books of accounts of

any bank
 Obligation on every employee to produce all the
books
 Right to examine any of the
officer/Director/employee
 Either its own initiative or by order of central govt.
 Report to be prepared, send to bank and Central
govt and decision to be taken.
10.Returns to be submitted

 Returns of liquid assets & liabilities(sec 23(3))

 Returns of unclaimed deposits (sec 26)

 Monthly returns (sec 27)

 Return of annual accounts (sec 31)(auditors report)

 Additional information (advances)

11. Acquisition of business(sec 36 AE to AJ)

 When banking co fails to comply the

directions given under sec 21 or 35A
 When banking business is carried on to
the detriment of interest of the depositors
 When RBI feels to acquire a bank in case
of liquidity problem.
 Compensation is paid to shareholders.
12. Winding up of a Banking co.

1) If banking co. is unable to pay its debts

a) if it refused to meet any lawful demand made at any of its
offices with in 2 days(some cases 5 days).
b) If RBI certifies in writing
2) The RBI will make an application under the following
circumstances :
a) fails to comply with the provisions of Act.
b) unable to pay debts
c) fails to implement satisfactory compromise sanctioned by court
d) against the interest of depositors
e) Liquidator(sec 39)
13. Amalgamation of Banking Companies
(sec 44(a))

 Information to shareholders and approved by two-third

majority of shareholders of each bank
 Details of meeting to be given to every shareholder,
needs to be published in at least two newspapers for
three consecutive weeks
 Discontented shareholders can claim their value of
shares
 Amalgamation scheme has to be sanctioned by RBI
 Assets & liabilities are transferred
 A copy of order of amalgamation to be given to ROC
14. Powers of RBI

 Power to grant moratorium (sec 45)

 Power to appoint liquidator
 Additional powers
15. Miscellaneous Provisions(penalties (sec 46))

 False or inaccurate return – fine & imprisonment

upto 3 years
 Failure to furnish documents, accounts or
comply with the Act – penalty of Rs. 2000 (plus
Rs.100 per day)
 Receiving deposits in contravention of order of
RBI – fine upto twice of amount
 Persons responsible for fault ,shall be deemed
guilty of the default
16. Application of the Act to Co-op Bank

 Co-op banks were brought under the purview

of Banking Regulation Act 1949 in 1965.
 The Act is applies to all state and central Co-
op banks irrespective of their paid up capital
and reserves.
 This Act is not applicable to Land
development banks and agriculture credit
society.
THANK YOU!!!