REGULATORY FRAMEWORK FOR BANKING IN INDIA

An overview.

The Definition and Nature of Business of Banking

Banking in India is mainly governed by The Banking Regulation Act, 1949 and The Reserve Bank of India Act 1934. Banking is defined as the acceptance of deposits from the public for the purpose of lending or investment. Banker can refuse open an account from an undesirable person. Know your customer (KYC) has become more stringent now.

Non-Banking Finance Companies

In 1997, by an amendment to the RBI Act, a three tier supervisory frame work was introduced for NBFCs. CAMELS (Capital adequacy, asset quality, management earnings, liquidity and systems control) has been put in place for them. They cannot accept deposits without specific approval from RBI.

Licence for Banking.

It is necessary to have a licence from RBI to commence the business of Banking. Ever banking company has to use the word bank as part of its name and no company other than a banking company can use the word, bank',' banker, banking as part of its name. The forms business permissible are given in Section 6 (1) of the Banking Regulation Act.

Summary of Permissible Business.

Borrowing and lending. Bill discounting, accepting bills of exchange. Issue of letters of credit, travellers cheques, credit cards. Dealing in foreign exchange transactions. Money transfer, issue of demand drafts, bank guarantees etc. Negotiating loans and advances.

 Providing safe deposit vaults. Negotiating loans and advances. Providing, working capital, cash-credit and overdraft facilities to firms. Manage investments of clients- personal finance advisory services. Market shares, mutual funds, bonds, debentures, insurance etc

Prohibited Business.
Prohibited from engaging directly or indirectly in trading activities and undertaking trading risks. Buying or selling or bartering goods directly or indirectly is prohibited. However they can hold as securities against loans, goods, land properties etc which they can also sell or dispose off when the debtors default.

Cooperative Banks.
A cooperative Bank is a cooperative society engaged in the business of banking. All cooperative banks operating on one state only are registered under the respective State Cooperative Societies Act. The formation of such banks as well as their management and control over personnel is regulated by the cooperative law of the state.

 Registrar of Cooperative Societies under the Cooperative Societies Act exercises a wide range of powers on cooperative societies from registration to winding up. In the case of cooperative banks operating in more than one State, The Multi-unit Cooperative Societies Act, 1986 is applicable. In such cases the Registrar appointed by Central Government exercises control.

 However the licensing and regulation of banking business rests with the Reserve Bank. Thus there is a dual control of the state government and Reserve Bank over these banks. For example two years ago the RBI, banned cooperative banks from giving loans against security of shares. This was after the collapse of Madhavpura Coop. Bank in Gujerat after the Ketan Parekh scam.

Government as a Regulator of Banks

RBI is the primary regulator of banks. But GOI has extensive powers under RBI & BR Acts. GOI can issue directions to RBI. GOI can also decide on appeals against decisions of RBI. Power to acquire banks. Appoint a court liquidator when a bank is wound up. Can suspend business or order amalgamation of banks.

Regulation by other Authorities.

If banks market shares bonds etc, they come under SEBIs regulations. If they market Insurance Policies they come under the Insurance Regulatory & Development Authority of India.(IRDA). On labour and Trade Union issues they will be governed by the State Labour Commissioner. On tax matters by the tax authorities.