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 19-
Permits 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 24-
Section 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 21-
Power to Reserve Bank to issue directive to
banks to determine policy for advances

 Section 22.4-
The 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 March-
As 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 45Z-
Amendment 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.
RESERVE BANK OF INDIA ACT 1934
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
RESERVE BANK OF INDIA ACT 1934
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:
RESERVE BANK OF INDIA ACT 1934
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
RESERVE BANK OF INDIA ACT 1934
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 bank-
note 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 5-
Bill 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 123-
CHEQUE 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 124-
CHEQUE 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
BANKERS BOOK EVIDENCE ACT, 1891

PREAMBLE:

 wef 1st October, 1981

 An Act to amend Law of Evidence

with respect to Bankers' Books.
 8 sections
BANKERS BOOK EVIDENCE ACT, 1891
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 cash-
book, a day-book or journal, an a ledger,
and may in like manner rescind any such
notification.
BANKERS BOOK EVIDENCE ACT, 1891
Section 5
Case in which officer of bank not
comparable to produce books-

No 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.
BANKERS BOOK EVIDENCE ACT, 1891
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.
State Financial Corporations Act, 1951

 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.
State Financial Corporations Act, 1951

 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
THANK YOU