Final projet

RBI REGULATORY MEASURES FOR COMMERCIAL BANKS

AND CO-OPERATIVE BANK

BACHELOR OF COMMERCE

BANKING & INSURANCE

SEMESTER V

Submitted

In Partial Fulfillment of the requirements

For the Award of the Degree of

Bachelor of Commerce – Banking & Insurance

By

SHIVANAND .S. MALED

ROLL NO. 28

RBI REGULATORY MEASURES FOR COMMERCIAL & CO-OPERATIVE BANKS

C E R T I F I C A T E

This is to certify that Shri / Miss

_____________________________ of B.Com – Banking &

Insurance – Semester V (2008-09) has successfully completed

the project on _ ________________________

under the guidance of .

Course Coordinator Principal

Project Guide/ Internal Examiner

External Examiner

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE2


DECLARATION

I, __________________________________, the student of

B.Com – Banking & Insurance – Semester V (2008-09) hereby

declare that I have completed this project on

______________________________

The information submitted is true & original to the best of my

knowledge.

Student’s Signature

SHIVANAND .S. MALED

Roll No. 28



ACKNOWLEDGEMENT

At the outset, I take the privilege to convey my gratitude to

those who have cooperated, supported, helped and suggested me

to accomplish the project work. I would like to thank University of

Mumbai for handing over this project to me. This project bears

imprint of many persons who are either directly or indirectly

involved in the completion of the project.

I would like to thanks my guide Prof. Mrs. MINAL GANDHI

for her valuable guidance throughout the Semester.

I would also like to thank our principal Mrs. J.K. PHADNIS and

our coordinator Prof. Mr. SACHIN BHANDARKAR for their

cooperation and help.



EXECUTIVE SUMMARY

The Reserve Bank of India was constituted under section 3 of

the Reserve Bank of India Act, 1934 for taking over the

management of currency from the Central Government and

carrying on the business of banking in accordance with the

provisions of the Act. Originally, under the RBI Act, the Bank had

the responsibility of:

a. Regulating the issue of bank notes.

b. Keeping of reserves for ensuring monetary stability.

c. Generally to operate the currency and credit system of the

country to its advantage.

The role of the bank as regulator of banking sector is mainly by

virtue of the provisions of the Banking Regulation Act, 1949. In

exercise of the powers under that act, the bank regulates the entry

into banking business by licensing, exercises control over

shareholding and voting rights of shareholders, e-exercises

controls over the managerial persons and regulates the business

of banks. The bank also inspects banks and exercises supervisory

powers and may issue directions from time to time in public

interest of the banking system with respect to interest rates,

lending limits, investments and various other matters.

The major powers of the bank in the different roles as regulator

and supervisor can be summed as under:

a. Power to license.



b. Power of appointment and removal of banking

boards/personnel.

c. Power to regulate the business of banks.

d. Power of give directions.

e. Power to inspect and supervise banks.

f. Power regarding audit of banks.

g. Powers to collect and furnish credit information.

h. Power relating to moratorium, amalgamation and winding up.

i. Powers to impose penalties.

A Co-operative Bank is a co-operative society engaged in

the business of banking and may be a primary Co-operative bank,

a distinct central co-operative bank or a state c-operative bank.

Co-operative banks operating in one state only are registered

under the State co-operative Societies Act concerned. The

formation of such banks as well as their management and control

over personnel is regulated by the co-operative law of the state.

The Registrar of co-operative societies under the Co-operative

Societies Act exercises a wide range of powers on co-operative

societies from registration to winding up.

With the introduction of section 56 in the banking regulation

act, 1949 with effect from 1965 co-operative banks have come

under the regulatory purview of the reserve bank. While the

formation and management of co-operative societies operating in

one state only are under the control of the State Government,

licensing and regulation of banking business rests with the

Reserve Bank over these banks.



In the case of co-operative banks which are registered under

the Deposit Insurance and Credit Guarantee Corporation Act, the

Reserve Bank has the power to order their winding up. The

circumstances in which Reserve Bank may require winding up are

mentioned in Section 13D of the Act.

Commercial banks play an important role in directing the

affairs of the economy.

Commercial bank regulation involves three federal agencies

and fifty state agencies. Currently in most jurisdiction commercial

banks are regulated by Government entities and require a special

bank license to operate. Scheduled Commercial Banks are

required to maintain with RBI an average cash balance and

required to submit a provisional return in Form A.

These are the scheduled commercial banks, the regional

rural banks which operate in rural areas not covered by the

scheduled banks and the co-operative banks and special purpose

rural banks.

Banking regulation act, 1949 was enacted to consolidate and

amend the law relating to banking and to provide for a suitable

framework for regulating the banking companies. Initially the act

provided for regulation of banking companies only, but in 1965 the

Act was amended to cover Cooperative banks as well, with certain

modifications.



INDEX

SR.NO PARTICULARS PAGE NO

1. CENTRAL BANKING 2

2. CENTRAL BANKING IN INDIA 15

3. TYPES OF BANKS 25

4. COMMERCIAL BANKS 26

5. CO-OPERATIVE BANKS 31

6. RELATIONSHIP BETWEEN THE COMMERCIAL

BANKS AND CO-OPERATIVE BANKS

38

7. BANKING REGULATION ACT, 1949 43

8. BANKING REGULATIONS FOR COMMERCIAL

BANKS

46

9. BANKING REGULATIONS FOR CO-OPERATIVE

BANKS

55

10. CONCLUSION 65



RBI REGULATORY MEASURES FOR

COMMERCIAL BANKS AND CO-OPERATIVE

BANK



RBI REGULATORY MEASURES FOR

COMMERCIAL BANKS AND CO-OPERATIVE

BANK

INTRODUCTION TO CENTRAL BANKING

A central bank, reserve bank, or monetary authority is the

entity responsible for the monetary policy of a country or of a group

of member states. Its primary responsibility is to maintain the

stability of the national currency and money supply, but more

active duties include controlling subsidized-loan interest rates, and

acting as a "bailout" lender of last resort to the banking sector

during times of financial crisis (private banks often being integral to

the national financial system). It may also have supervisory

powers, to ensure that banks and other financial institutions do not

behave recklessly or fraudulently.

Most richer countries today have an "independent" central

bank, that is, one which operates under rules designed to prevent

political interference. Examples include the European Central Bank

and the U.S. Federal Reserve. Some central banks are publicly

owned, and others are privately owned. In practice, there is little

difference between public and private ownership, since in the latter

case almost all profits of the bank are paid to the government

either as a tax or a transfer to the government.


http://en.wikipedia.org/wiki/Federal_Reserve

http://en.wikipedia.org/wiki/United_States

http://en.wikipedia.org/wiki/European_Central_Bank

http://en.wikipedia.org/wiki/Bank

http://en.wikipedia.org/wiki/Lender_of_last_resort

http://en.wikipedia.org/wiki/Interest_rates

http://en.wikipedia.org/wiki/Loan

http://en.wikipedia.org/wiki/Money_supply

http://en.wikipedia.org/wiki/Currency

http://en.wikipedia.org/wiki/Monetary_policy


Activities and responsibilities

Functions of a central bank (not all functions are carried out

by all banks):

Implementation of monetary policy

Controls the nation's entire money supply

The Government's banker and the bankers' bank ("Lender of

Last Resort")

Manages the country's foreign exchange and gold reserves

and the Government's stock register;

Regulation and supervision of the banking industry:

Setting the official interest rate - used to manage both

inflation and the country's exchange rate - and ensuring that this

rate takes effect via a variety of policy mechanisms

MONETARY POLICY


http://en.wikipedia.org/wiki/Exchange_rate

http://en.wikipedia.org/wiki/Inflation

http://en.wikipedia.org/wiki/Gold_reserves

http://en.wikipedia.org/wiki/Foreign_exchange_market


Central banks implement a country's chosen monetary

policy. At the most basic level, this involves establishing what form

of currency the country may have, whether a fiat currency, gold-

backed currency (disallowed for countries with membership of the

IMF), currency board or a currency union. When a country has its

own national currency, this involves the issue of some form of

standardized currency, which is essentially a form of promissory

note: a promise to exchange the note for "money" under certain

circumstances. Historically, this was often a promise to exchange

the money for precious metals in some fixed amount. Now, when

many currencies are fiat money, the "promise to pay" consists of

nothing more than a promise to pay the same sum in the same

currency.

The ECB building in Frankfurt


http://en.wikipedia.org/wiki/Frankfurt

http://en.wikipedia.org/wiki/Building


http://en.wikipedia.org/wiki/Fiat_money

http://en.wikipedia.org/wiki/Promissory_note

http://en.wikipedia.org/wiki/Promissory_note

http://en.wikipedia.org/wiki/Currency_union

http://en.wikipedia.org/wiki/Currency_board

http://en.wikipedia.org/wiki/IMF

http://en.wikipedia.org/wiki/Gold_standard


http://en.wikipedia.org/wiki/Fiat_currency



http://en.wikipedia.org/wiki/Image:Eurotower_in_Frankfurt.jpg


In many countries, the central bank may use another

country's currency either directly (in a currency union), or indirectly,

by using a currency board. In the latter case, local currency is

directly backed by the central bank's holdings of a foreign currency

in a fixed-ratio; this mechanism is used, notably, in Hong Kong and

Estonia.

In countries with fiat money, monetary policy may be used as a

shorthand form for the interest rate targets and other active

measures undertaken by the monetary authority.

Currency Issuance

Many central banks are "banks" in the sense that they hold

assets (foreign exchange, gold, and other financial assets) and

liabilities. A central bank's primary liabilities are the currency

outstanding, and these liabilities are backed by the assets the

bank owns.

Central banks generally earn money by issuing currency

notes and "selling" them to the public for interest-bearing assets,

such as government bonds. Since currency usually pays no

interest, the difference in interest generates income. In most

central banking systems, this income is remitted to the

government. The European Central Bank remits its interest income

to its owners, the central banks of the member countries of the

European Union.

Although central banks generally hold government debt, in

some countries the outstanding amount of government debt is

smaller than the amount the central bank may wish to hold. In


http://en.wikipedia.org/wiki/Estonia

http://en.wikipedia.org/wiki/Hong_Kong

http://en.wikipedia.org/wiki/Currency_board


many countries, central banks may hold significant amounts of

foreign currency assets, rather than assets in their own national

currency, particularly when the national currency is fixed to other

currencies.

Naming of central banks

There is no standard terminology for the name of a central

bank, but many countries use the "Bank of Country" form (e.g.,

Bank of England, Bank of Canada, Bank of Russia). Some are

styled "national" banks, such as the National Bank of Ukraine; but

the term "national bank" is more often used by privately-owned

commercial banks, especially in the United States. In other cases,

central banks may incorporate the word "Central" (e.g. European

Central Bank, Central Bank of Ireland). Many countries have state-

owned banks or other quasi-government entities that have entirely

separate functions, such as financing imports and exports.

Interest Rate Interventions

Typically a central bank controls certain types of short-term

interest rates. These influence the stock- and bond markets as well

as mortgage and other interest rates. The European Central Bank

for example announces its interest rate at the meeting of its

Governing Council (in the case of the Federal Reserve, the Board

of Governors).


http://en.wikipedia.org/wiki/Board_of_Governors

http://en.wikipedia.org/wiki/Board_of_Governors

http://en.wikipedia.org/wiki/Federal_Reserve


http://en.wikipedia.org/wiki/Mortgage_loan

http://en.wikipedia.org/wiki/Bond_market

http://en.wikipedia.org/wiki/Stock_market

http://en.wikipedia.org/wiki/Interest_rate

http://en.wikipedia.org/wiki/Central_Bank_of_Ireland



http://en.wikipedia.org/wiki/United_States

http://en.wikipedia.org/wiki/National_bank

http://en.wikipedia.org/wiki/National_Bank_of_Ukraine

http://en.wikipedia.org/wiki/Bank_of_Russia

http://en.wikipedia.org/wiki/Bank_of_Canada

http://en.wikipedia.org/wiki/Bank_of_England


Both the Federal Reserve and the ECB are composed of one

or more central bodies that are responsible for the main decisions

about interest rates and the size and type of open market

operations, and several branches to execute its policies. In the

case of the Fed, they are the local Federal Reserve Banks, for the

ECB they are the national central banks.

Policy Instruments

The main monetary policy instruments available to central

banks are open market operation, bank reserve requirement,

interest rate policy, re-lending and re-discount (including using the

term repurchase market), and credit policy (often coordinated with

trade policy). While capital adequacy is important, it is defined and

regulated by the Bank for International Settlements, and central

banks in practice generally do not apply stricter rules.

To enable open market operations, a central bank must hold

foreign exchange reserves (usually in the form of government

bonds) and official gold reserves. It will often have some influence

over any official or mandated exchange rates: Some exchange

rates are managed, some are market based (free float) and many

are somewhere in between ("managed float" or "dirty float").

Interest Rates

By far the most visible and obvious power of many modern

central banks is to influence market interest rates; contrary to


http://en.wikipedia.org/wiki/Exchange_rate

http://en.wikipedia.org/wiki/Official_gold_reserves

http://en.wikipedia.org/wiki/Government_bond

http://en.wikipedia.org/wiki/Government_bond

http://en.wikipedia.org/wiki/Foreign_exchange_reserves

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

http://en.wikipedia.org/wiki/Capital_adequacy

http://en.wikipedia.org/wiki/Trade_policy

http://en.wikipedia.org/w/index.php?title=Credit_policy&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Term_repurchase&action=edit&redlink=1

http://en.wikipedia.org/wiki/Monetary_policy#Interest_rates

http://en.wikipedia.org/wiki/Reserve_requirement

http://en.wikipedia.org/wiki/Open_market_operation


popular belief, they rarely "set" rates to a fixed number. Although

the mechanism differs from country to country, most use a similar

mechanism based on a central bank's ability to create as much fiat

money as required.

The mechanism to move the market towards a 'target rate'

(whichever specific rate is used) is generally to lend money or

borrow money in theoretically unlimited quantities, until the

targeted market rate is sufficiently close to the target. Central

banks may do so by lending money to and borrowing money from

(taking deposits from) a limited number of qualified banks, or by

purchasing and selling bonds. As an example of how this

functions, the Bank of Canada sets a target overnight rate, and a

band of plus or minus 0.25%. Qualified banks borrow from each

other within this band, but never above or below, because the

central bank will always lend to them at the top of the band, and

take deposits at the bottom of the band; in principle, the capacity to

borrow and lend at the extremes of the band are unlimited. [1] Other

central banks use similar mechanisms.

It is also notable that the target rates are generally short-term

rates. The actual rate that borrowers and lenders receive on the

market will depend on (perceived) credit risk, maturity and other

factors.


http://en.wikipedia.org/wiki/Central_bank#cite_note-0

http://en.wikipedia.org/wiki/Overnight_rate

http://en.wikipedia.org/wiki/Bank_of_Canada




A typical central bank has several interest rates or monetary

policy tools it can set to influence markets.

Marginal Lending Rate (currently 5.00% in the Eurozone) A

fixed rate for institutions to borrow money from the CB.(In the US

this is called the Discount rate).

Main Refinancing Rate (4.25% in the Eurozone): This is the

publicly visible interest rate the central bank announces. It is also

known as Minimum Bid Rate and serves as a bidding floor for

refinancing loans. (In the US this is called the Federal funds rate).

Deposit Rate (3.00% in the Eurozone): The rate parties

receive for deposits at the CB.

These rates directly affect the rates in the money market, the

market for short-term loans.

Open Market Operations

Through open market operations, a central bank influences

the money supply in an economy directly. Each time it buys

securities, exchanging money for the security, it raises the money

supply. Conversely, selling of securities lowers the money supply.

Buying of securities thus amounts to printing new money while

lowering supply of the specific security.

The main open market operations are:

Temporary lending of money for collateral securities

("Reverse Operations" or "repurchase operations", otherwise


http://en.wikipedia.org/wiki/Repurchase_agreement

http://en.wikipedia.org/wiki/Collateral_(finance)

http://en.wikipedia.org/wiki/Security_(finance)

http://en.wikipedia.org/wiki/Open_market_operation

http://en.wikipedia.org/wiki/Money_market

http://en.wikipedia.org/wiki/Federal_funds_rate

http://en.wikipedia.org/wiki/Discount_rate

http://en.wikipedia.org/wiki/Interest_rate


known as the "repo" market). These operations are carried out on

a regular basis, where fixed maturity loans (of 1 week and 1 month

for the ECB) are auctioned off.

Buying or selling securities ("direct operations") on ad-hoc

basis.

Foreign exchange operations such as forex swaps.

All of these interventions can also influence the foreign

exchange market and thus the exchange rate.

Capital Requirements

All banks are required to hold a certain percentage of their

assets as capital, a rate which may be established by the central

bank or the banking supervisor. For international banks, including

the 55 member central banks of the Bank for International

Settlements, the threshold is 8% (see the Basel Capital Accords)

of risk-adjusted assets, whereby certain assets (such as

government bonds) are considered to have lower risk and are

either partially or fully excluded from total assets for the purposes

of calculating capital adequacy. Partly due to concerns about asset

inflation and repurchase agreements, capital requirements may be

considered more effective than deposit/reserve requirements in

preventing indefinite lending: when at the threshold, a bank cannot

extend another loan without acquiring further capital on its balance

sheet.


http://en.wikipedia.org/wiki/Repurchase_agreements

http://en.wikipedia.org/wiki/Asset_inflation

http://en.wikipedia.org/wiki/Asset_inflation

http://en.wikipedia.org/wiki/Capital_adequacy

http://en.wikipedia.org/wiki/Basel_Capital_Accords





http://en.wikipedia.org/wiki/Forex_swap


http://en.wikipedia.org/wiki/Direct_operations

http://en.wikipedia.org/wiki/Maturity_(finance)


Reserve Requirements

Another significant power that central banks hold is the ability

to establish reserve requirements for other banks. By requiring that

a percentage of liabilities be held as cash or deposited with the

central bank (or other agency), limits are set on the money supply.

In practice, many banks are required to hold a percentage of

their deposits as reserves. Such legal reserve requirements were

introduced in the nineteenth century to reduce the risk of banks

overextending themselves and suffering from bank runs, as this

could lead to knock-on effects on other banks. As the early 20th

century gold standard and late 20th century dollar hegemony

evolved, and as banks proliferated and engaged in more complex

transactions and were able to profit from dealings globally on a

moment's notice, these practices became mandatory, if only to

ensure that there was some limit on the ballooning of money

supply. Such limits have become harder to enforce. The People's

Bank of China retains (and uses) more powers over reserves

because the yuan that it manages is a non-convertible currency.

Even if reserves were not a legal requirement, prudence

would ensure that banks would hold a certain percentage of their

assets in the form of cash reserves. It is common to think of

commercial banks as passive receivers of deposits from their

customers and, for many purposes, this is still an accurate view.


http://en.wikipedia.org/wiki/Convertible_currency

http://en.wikipedia.org/wiki/Renminbi

http://en.wikipedia.org/wiki/People's_Bank_of_China

http://en.wikipedia.org/wiki/People's_Bank_of_China



http://en.wikipedia.org/wiki/Dollar_hegemony


http://en.wikipedia.org/wiki/Bank_run

http://en.wikipedia.org/wiki/Reserve_requirement

http://en.wikipedia.org/wiki/Bank_reserves


http://en.wikipedia.org/wiki/Cash


Exchange Requirements

To influence the money supply, some central banks may

require that some or all foreign exchange receipts (generally from

exports) be exchanged for the local currency. The rate that is used

to purchase local currency may be market-based or arbitrarily set

by the bank. This tool is generally used in countries with non-

convertible currencies or partially convertible currencies. The

recipient of the local currency may be allowed to freely dispose of

the funds, required to hold the funds with the central bank for some

period of time, or allowed to use the funds subject to certain

restrictions. In other cases, the ability to hold or use the foreign

exchange may be otherwise limited.

In this method, money supply is increased by the central

bank when the central bank purchases the foreign currency by

issuing (selling) the local currency. The central bank may

subsequently reduce the money supply by various means,

including selling bonds or foreign exchange interventions.

Margin Requirements And Other Tools

In some countries, central banks may have other tools that

work indirectly to limit lending practices and otherwise restrict or

regulate capital markets. For example, a central bank may regulate

margin lending, whereby individuals or companies may borrow

against pledged securities. The margin requirement establishes a


http://en.wikipedia.org/wiki/Margin_lending

http://en.wikipedia.org/w/index.php?title=Foreign_exchange_receipts&action=edit&redlink=1


minimum ratio of the value of the securities to the amount

borrowed.

Central banks often have requirements for the quality of

assets that may be held by financial institutions; these

requirements may act as a limit on the amount of risk and leverage

created by the financial system. These requirements may be

direct, such as requiring certain assets to bear certain minimum

credit ratings, or indirect, by the central bank lending to

counterparties only when security of a certain quality is pledged as

collateral.

Banking Supervision And Other Activities

In some countries a central bank through its subsidiaries

controls and monitors the banking sector. In other countries

banking supervision is carried out by a government department

such as the UK Treasury, or an independent government agency.

It examines the banks' balance sheets and behavior and policies

toward consumers. Apart from refinancing, it also provides banks

with services such as transfer of funds, bank notes and coins or

foreign currency. Thus it is often described as the "bank of banks".

Many countries such as the United States will monitor and

control the banking sector through different agencies and for

different purposes, although there is usually significant cooperation

between the agencies.


http://en.wikipedia.org/wiki/Coin

http://en.wikipedia.org/wiki/Bank_notes

http://en.wikipedia.org/wiki/Consumers

http://en.wikipedia.org/wiki/Balance_sheet

http://en.wikipedia.org/wiki/Collateral_(finance)

http://en.wikipedia.org/wiki/Credit_rating


Any cartel of banks is particularly closely watched and

controlled. Most countries control bank mergers and are wary of

concentration in this industry due to the danger of groupthink and

runaway lending bubbles based on a single point of failure, the

credit culture of the few large banks.


http://en.wikipedia.org/w/index.php?title=Credit_culture&action=edit&redlink=1

http://en.wikipedia.org/wiki/Single_point_of_failure

http://en.wikipedia.org/w/index.php?title=Bank_merger&action=edit&redlink=1


CENTRAL BANKING IN INDIA RBI

Establishment

The Reserve Bank of India was established on April 1, 1935

in accordance with the provisions of the Reserve Bank of India Act,

1934.

The Central Office of the Reserve Bank was initially

established in Calcutta but was permanently moved to Mumbai in

1937. The Central Office is where the Governor sits and where

policies are formulated.

Though originally privately owned, since nationalization in

1949, the Reserve Bank is fully owned by the Government of India.

Preamble

The Preamble of the Reserve Bank of India describes the

basic functions of the Reserve Bank as:

"...to regulate the issue of Bank Notes and 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."


http://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Act

http://www.rbi.org.in/scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Act


Central Board

The Reserve Bank's affairs are governed by a central board of

directors. The board is appointed by the Government of India in

keeping with the Reserve Bank of India Act.

Appointed/nominated for a period of four years

Constitution.

Financial Supervision

The Reserve Bank of India performs this function under the

guidance of the Board for Financial Supervision (BFS). The Board

was constituted in November 1994 as a committee of the Central

Board of Directors of the Reserve Bank of India.

Objective

Primary objective of BFS is to undertake consolidated

supervision of the financial sector comprising commercial banks,

financial institutions and non-banking finance companies.

Constitution

The Board is constituted by co-opting four Directors from the

Central Board as members for a term of two years and is chaired

by the Governor. The Deputy Governors of the Reserve Bank are

ex-officio members. One Deputy Governor, usually, the Deputy

Governor in charge of banking regulation and supervision, is

nominated as the Vice-Chairman of the Board.

Current Focus



Supervision of financial institutions

Consolidated accounting

Legal issues in bank frauds

Divergence in assessments of non-performing assets and

Supervisory rating model for banks

Main Functions

Monetary Authority:

Formulates, implements and monitors the monetary policy.

Objective: maintaining price stability and ensuring adequate

flow of credit to productive sectors.

Regulator And Supervisor Of The Financial System:

Prescribes broad parameters of banking operations within

which the country's banking and financial system functions.

Objective: maintain public confidence in the system, protect

depositors' interest and provide cost-effective banking services to

the public.

Issuer Of Currency:

Issues and exchanges or destroys currency and coins not fit

for circulation.

Objective: to give the public adequate quantity of supplies of

currency notes and coins and in good quality.



Functions of Reserve Bank:-

The Reserve Bank of India Act of 1934 entrust all the

important functions of a central bank the Reserve Bank of India.

BANK OF ISSUE

Under Section 22 of the Reserve Bank of India Act, the Bank

has the sole right to issue bank notes of all denominations. The

distribution of one rupee notes and coins and small coins all over

the country is undertaken by the Reserve Bank as agent of the

Government. The Reserve Bank has a separate Issue Department

which is entrusted with the issue of currency notes. The assets

and liabilities of the Issue Department are kept separate from

those of the Banking Department. Originally, the assets of the

Issue Department were to consist of not less than two-fifths of gold

coin, gold bullion or sterling securities provided the amount of gold

was not less than Rs. 40 crores in value. The remaining three-fifths

of the assets might be held in rupee coins, Government of India

rupee securities, eligible bills of exchange and promissory notes

payable in India. Due to the exigencies of the Second World War

and the post-war period, these provisions were considerably

modified. Since 1957, the Reserve Bank of India is required to

maintain gold and foreign exchange reserves of Ra. 200 crores, of

which at least Rs. 115 crores should be in gold. The system as it

exists today is known as the minimum reserve system.

Banker to Government:-



The second important function of the Reserve Bank of India

is to act as Government banker, agent and adviser. The Reserve

Bank is agent of Central Government and of all State

Governments in India excepting that of Jammu and Kashmir. The

Reserve Bank has the obligation to transact Government business,

via. to keep the cash balances as deposits free of interest, to

receive and to make payments on behalf of the Government and to

carry out their exchange remittances and other banking

operations. The Reserve Bank of India helps the Government -

both the Union and the States to float new loans and to manage

public debt. The Bank makes ways and means advances to the

Governments for 90 days. It makes loans and advances to the

States and local authorities. It acts as adviser to the Government

on all monetary and banking matters.

Bankers' Bank and Lender of the Last Resort:-

The Reserve Bank of India acts as the bankers' bank.

According to the provisions of the Banking Companies Act of 1949,

every scheduled bank was required to maintain with the Reserve

Bank a cash balance equivalent to 5% of its demand liabilites and

2 per cent of its time liabilities in India. By an amendment of 1962,

the distinction between demand and time liabilities was abolished

and banks have been asked to keep cash reserves equal to 3 per

cent of their aggregate deposit liabilities. The minimum cash

requirements can be changed by the Reserve Bank of India.



The scheduled banks can borrow from the Reserve Bank of India

on the basis of eligible securities or get financial accommodation in

times of need or stringency by rediscounting bills of exchange.

Since commercial banks can always expect the Reserve Bank of

India to come to their help in times of banking crisis the Reserve

Bank becomes not only the banker's bank but also the lender of

the last resort.

Controller of Credit:-

The Reserve Bank of India is the controller of credit i.e. it has

the power to influence the volume of credit created by banks in

India. It can do so through changing the Bank rate or through open

market operations. According to the Banking Regulation Act of

1949, the Reserve Bank of India can ask any particular bank or the

whole banking system not to lend to particular groups or persons

on the basis of certain types of securities. Since 1956, selective

controls of credit are increasingly being used by the Reserve Bank.

The Reserve Bank of India is armed with many more

powers to control the Indian money market. Every bank has to get

a licence from the Reserve Bank of India to do banking business

within India, the licence can be cancelled by the Reserve Bank of

certain stipulated conditions are not fulfilled. Every bank will have

to get the permission of the Reserve Bank before it can open a

new branch. Each scheduled bank must send a weekly return to

the Reserve Bank showing, in detail, its assets and liabilities. This

power of the Bank to call for information is also intended to give it

effective control of the credit system. The Reserve Bank has also



the power to inspect the accounts of any commercial bank.

As supreme banking authority in the country, the Reserve

Bank of India, therefore, has the following powers:

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative

and qualitative controls.

(c) It controls the banking system through the system of licensing,

inspection and calling for information.

(d) It acts as the lender of the last resort by providing rediscount

facilities to scheduled banks.

Custodian of Foreign Reserves:-

The Reserve Bank of India has the responsibility to maintain

the official rate of exchange. According to the Reserve Bank of

India Act of 1934, the Bank was required to buy and sell at fixed

rates any amount of sterling in lots of not less than Rs. 10,000.

The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the

Bank was able to maintain the exchange rate fixed at lsh.6d.

Though there were periods of extreme pressure in favour of or

against

The rupee. After India became a member of the International

Monetary Fund in 1946, the Reserve Bank has the responsibility of



maintaining fixed exchange rates with all other member countries

of the I.M.F

Besides maintaining the rate of exchange of the rupee, the

Reserve Bank has to act as the custodian of India's reserve of

international currencies. The vast sterling balances were acquired

and managed by the Bank. Further, the RBI has the responsibility

of administering the exchange controls of the country.

Supervisory functions:-

In addition to its traditional central banking functions, the

Reserve bank has certain non-monetary functions of the nature of

supervision of banks and promotion of sound banking in India. The

Reserve Bank Act, 1934, and the Banking Regulation Act, 1949

have given the RBI wide powers of supervision and control over

commercial and co-operative banks, relating to licensing and

establishments, branch expansion, liquidity of their assets,

management and methods of working, amalgamation,

reconstruction, and liquidation. The RBI is authorised to carry out

periodical inspections of the banks and to call for returns and

necessary information from them. The nationalisation of 14 major

Indian scheduled banks in July 1969 has imposed new

responsibilities on the RBI for directing the growth of banking and

credit policies towards more rapid development of the economy

and realisation of certain desired social objectives. The

supervisory functions of the RBI have helped a great deal in

improving the standard of banking in India to develop on sound

lines and to improve the methods of their operation.



Classification of RBIs functions:-

The monetary functions also known as the central banking

functions of the RBI are related to control and regulation of money

and credit, i.e., issue of currency, control of bank credit, control of

foreign exchange operations, banker to the Government and to the

money market. Monetary functions of the RBI are significant as

they control and regulate the volume of money and credit in the

country.

Equally important, however, are the non-monetary functions

of the RBI in the context of India's economic backwardness. The

supervisory function of the RBI may be regarded as a non-

monetary function (though many consider this a monetary

function). The promotion of sound banking in India is an important

goal of the RBI, the RBI has been given wide and drastic powers,

under the Banking Regulation Act of 1949 - these powers relate to

licencing of banks, branch expansion, liquidity of their assets,

management and methods of working, inspection, amalgamation,

reconstruction and liquidation. Under the RBI's supervision and

inspection, the working of banks has greatly improved.

Commercial banks have developed into financially and

operationally sound and viable units. The RBI's powers of

supervision have now been extended to non-banking financial

intermediaries. Since independence, particularly after its

nationalisation 1949, the RBI has followed the promotional

functions vigorously and has been responsible for strong financial

support to industrial and agricultural development in the country.



Subsidiaries:-

Fully owned: National Housing Bank (NHB), Deposit

Insurance and Credit Guarantee Corporation of India(DICGC),

Bharatiya Reserve Bank Note Mudran Private Limited(BRBNMPL)

Majority stake: National Bank for Agriculture and Rural

Development (NABARD) The Reserve Bank of India has recently

divested its stake in State Bank of India to the Government of

India.



TYPES OF BANKS

COMMERCIAL BANKS

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

RESERVE BANK OF

INDIA

RESERVE BANK OF

INDIA

COMMERC-IAL BANKS

COMMERC-IAL BANKS

CO-OPERATIVE

BANKS

CO-OPERATIVE

BANKS

PUBLIC BANK

PUBLIC BANK

PRIVATE

BANK

PRIVATE

BANK

STATE CO-OPERATIVE

BANK

STATE CO-OPERATIVE

BANK

STATE LAND DEVE CO-OP. BANK

DEVLOPMENT

STATE LAND DEVE CO-OP. BANK

DEVLOPMENT

SCHEDULE BANKS

SCHEDULE BANKS

NON SCHEDULE

BANKS

NON SCHEDULE

BANKS

SCHEDULE BANKS

SCHEDULE BANKS

NON SCHEDULE

BANKS

NON SCHEDULE

BANKS

CENTRALCO-OPERATIVE

CENTRALCO-OPERATIVE

CENTRAL LAND CO-OPERATIVE

CENTRAL LAND CO-OPERATIVE

PRIMARY AGRICULTURE CREDIT SOCIETY

PRIMARY AGRICULTURE CREDIT SOCIETY

PRIMARY URBAN CO-OPERATIVE

PRIMARY URBAN CO-OPERATIVE

FARMER SERVICES SOCIETY

FARMER SERVICES SOCIETY

33


Introduction

Commercial bank plays an important role in directing the

affairs of the economy in various ways as a matter of fact the

operation of commercial banks record the economic pulse of the

country. In 19th century economist David Ricardo had stated that a

bank was a dealer or transactor in money. Banks are thus financial

intermediaries collecting “deposits” and “loans”. But now they are

not only the purveyors of money but also the creator or

manufacturer of money in a financial system. It is the banks who

set the temps of aggregate activity in any economy.

Commercial banks are the financial institution dealing with

other’s money. Though it was meant for receiving deposits and

granting loans, but in the present day world they play a varieties of

roles and contribute a lot to the financial sector.

Banking has a major share in the world finance industry.

Commercial banks play a significant role in country’s financial

market. Opening policies adopted by the countries of the world

have given opportunities to the commercial banks to operate

globally in an environment of ore competition. Commercial banks

can be simply defined as the institution dealing with other’s money.

Meaning of commercial bank



A commercial bank is a type of financial intermediary and a

type of bank. It raises funds by collecting deposits from businesses

and consumers via checkable deposits, savings and time (or term)

deposits. It makes loans to businesses and consumers. It also

buys corporate bonds and government bonds. Its primary liabilities

are deposits and primary assets are loans and bonds.

A modern commercial bank reforms many reform. It renders

many services to its customers and to the public.

Scheduled commercial banks & non – scheduled banks

banking regulation act of India, 1949 defines banking as

“accepting, for the purpose of lending or investments of deposits of

money from the public, repayable on demand or otherwise and

withdraw able by cheques, draft and other or otherwise.

Developments in Commercial Banking



This provides a detailed account of the various policy

measures undertaken by the Reserve Bank during 2005-06 and

some major developments up to October 31, 2006. These relate to

monetary policy, credit delivery, regulation and supervision,

customer service, financial inclusion, payments and settlement

systems, technological developments and legal reforms. The

objective of various policy measures has been to ensure an

efficient and stable financial system for sustaining the growth

momentum, and to expand banking services to all sections of

society. Major policy initiatives undertaken by the Reserve Bank

include allowing banks to raise capital through innovative

instruments, advising banks to open ‘no frills’ accounts with nil or

low balances, one-time settlement scheme for SME accounts,

guidelines on securitisation of standard assets and sale/purchase

of NPAs, and introduction of the national electronic funds transfer

(NEFT) system.

Operations and Performance of Commercial Banks

This defines the operations and financial performance of

scheduled commercial banks, at the aggregate and bank group

levels, based on their audited balance sheets. The analysis in this

Chapter covers important aspects such as trends in overall bank

credit, credit to the priority sector, lending to sensitive sectors,

investment portfolio, trends in deposits, structure of interest rates,

financial performance and soundness parameters, extent of

technology application and regional spread of scheduled

commercial banks. The Chapter also covers the operations of



scheduled commercial banks in the capital market. An analysis of

the balance sheet parameters and financial performance of

regional rural banks is presented. Finally, the financial

performance of the four local area banks is also covered.

The main points emerging from the analysis are:

Bank credit growth remained robust for the second year in

succession.

Credit growth turned more broad-based even as credit

expansion was more pronounced in respect of retail sector,

particularly housing and loans to commercial real estate.

Net accretion to deposits was lower than expansion in credit,

with banks having to partially unwind their holdings of Government

securities.

Net profits of scheduled commercial banks, as a group,

increased during the year as against the decline in the previous

year due mainly to a turnaround in non-interest income.

Gross NPAs and net NPAs declined significantly during the

year and are now comparable with global levels.

Banks' capital to risk weighted assets ratio remained more or

less at the previous year's level, despite application of capital

charge for market risk; significant increase in risk-weighted assets

and increase in risk-weights for certain sensitive sectors. This, to

an extent, was facilitated by large resources raised by banks from

the capital market.

Till October 31, 2006, 137 RRBs were consolidated to form

43 new RRBs, sponsored by 18 banks in 15 States, bringing down



the total number of RRBs all over India from 196 at end-March

2005 to 102.

CO-OPERATIVE BANK



INTRODUCTION

The co-operative banks have a history of almost 100 years.

The co-operative banks are an important constituent of the Indian

Financial System, judging by the role assigned to them, the

expectations they are supposed to fulfill, their number, and the

number of offices they operate. The co-operative movement

originated in the West, but the importance that such banks have

assumed in India is rarely paralleled anywhere else in the world.

Their role in rural financing continues to be important even today,

and their business in the urban areas has increased phenomenally

in recent years mainly due to the sharp increase in the numbers of

primary co – operative.

Co-operative banks play an important role in the Indian

Financial System, especially at the village level. The growth of

cooperative movement commenced with the passing of the act of

1904, which officially launched this movement in India. The act

provided an easy legal framework for their formation as well as

governance by making the co-operative banks free from the

complicated provisions of the Indian Companies Act.

While the co-operative banks in rural areas mainly finance

agricultural based activities including farming, cattle, milk,

hatchery, personal finance etc along with some small scale

industries and self – employment driven activities.



The co-operative banks in urban areas mainly finance

various categories of people for self – employment, industries,

small-scale units, home finance, consumer finance, personal

finance etc.

Some of the co-operative banks are quite forward looking

and have developed sufficient core competencies to challenge

state and private sector banks.

According to NAFCUB the total deposits & lending’s of Co-

operative Banks in much ore than Old Private Sector Banks & also

the New Private Sector Banks. This exponential growth of Co-

operative Banks is attributed mainly to their much better local

reach, personal interaction with customers, and their ability to

catch the nerve of the local clientele.

Though registered under the Co-Operative Societies Act of

the Respective States (where formed originally) the banking

related activities of the co-operative banks area also regulated by

the reserve bank of India. They are governed by the Banking

Regulations Act 1949 And Banking Laws (Co-Operative Societies)

Act, 1965

STRUCTURE OF CO-OPERATIVE BANK



Developments in Co-operative Banking

VES COLLEGE OF ARTS, SCIENCE AND COMMERCE

CO-OPERATIVE BANK

INSTITUTION

CO-OPERATIVE BANK

INSTITUTION

URBAN CO-OPERATIVE BANK

URBAN CO-OPERATIVE BANK

RURAL CO-OPERATIVE BANK

RURAL CO-OPERATIVE BANK

SCHEDULED U.C.BANK

SCHEDULED U.C.BANK

NON- SCHEDULED U.C.BANK

NON- SCHEDULED U.C.BANK SHORT - TERMSHORT - TERM LONG - TERMLONG - TERM

MUTLI STATEMUTLI STATE

SINGLE STATESINGLE STATE

STATE CO-OPERTIVE BANK

STATE CO-OPERTIVE BANK

DISTRICT CO-OPERATIVE BANK

DISTRICT CO-OPERATIVE BANK

PRIMARY AGICULTURE CO-OPERATIVE BANK

PRIMARY AGICULTURE CO-OPERATIVE BANK

41


The outlines major policy initiatives, and operations and

performance of various segments of the co-operative credit

institutions in India, i.e., urban co-operative banks (UCBs) and

rural co-operative credit institutions. The data coverage for UCBs

has been widened to include complete balance sheet information

in respect of both scheduled and non-scheduled UCBs. Besides,

the analysis also covers non-scheduled UCBs with deposit size of

Rs.100 crore and above. The Chapter also covers, for the first

time, information on balance sheet, financial performance and

asset quality of State Co-operative Agriculture and Rural

Development Banks (SCARDBs) and Primary Co-operative

Agriculture and Rural Development Banks (PCARDBs).

The policy initiatives for UCBs during 2005-06 were guided

by the ‘Vision Document’ for revival of UCBs. Eight States have

entered into Memoranda of Understanding with the Reserve Bank

so far. As envisaged in the ‘Vision Document’ a differentiated

approach to regulation has been adopted with regulatory

forbearance for the smaller UCBs while at the same time

strengthening their operations. Regulatory measures undertaken

during the year related to improving credit delivery mechanism,

strengthening prudential norms, improving customer service and

enhancing business opportunities.

The major points emerging from the analysis of balance sheet,

financial performance and soundness indicators in this Chapter are

as follows:

Assets of urban co-operative banks (both scheduled and

non-scheduled) increased moderately during 2005-06.



Total assets of scheduled urban co-operative banks

increased at a higher rate during 2005-06 in comparison with

2004-05.

Net profits of scheduled UCBs more than doubled during

2005-06 in contrast to a decline in the previous year.

Asset quality of UCBs improved significantly during 2005-

06.

All segments of the rural co-operative sector were able to

expand their business operations during 2004-05. However, their

financial performance varied across the institutions.

Within the short-term structure, while the state co-operative

banks (StCBs) earned lower profits, the district central co-

operative banks (DCCBs) recorded higher profits. Primary

agricultural credit societies (PACS), on the whole, continued to

incur overall losses, although a sizable number of them earned

profit during 2004-05. In the case of long-term structure, while the

SCARDBs continued to incur losses, PCARDBs staged a

turnaround during 2004-05.

Asset quality of short-term structure of rural co-operative

banks including StCBs, DCCBs and PACS improved, while that of

long-term institutions including SCARDBs and PCARDBs declined.

The SHG-Bank linkage programme continued with 0.6

million new SHGs having been credit linked by the banking system

during 2005-06, benefiting over 32.9 million poor families at end-

March 2006.

Regulatory Environment



The urban co-operative banks are regulated and supervised

by State Registrars of Co-operative Societies, Central Registrar of

Co-operative Societies in case of Multi-state co-operative banks

and by Reserve Bank. The Registrars of Co-operative Societies of

the States exercise powers under the respective Co-operative

Societies Act of the States in regard to incorporation, registration,

management, amalgamation, reconstruction or liquidation. In case

of the urban co-operative banks having multi-state presence, the

Central Registrar of Co-operative Societies, New Delhi, exercises

such powers. The banking related functions, such as issue of

license to start new banks / branches, matters relating to interest

rates, loan policies, investments, prudential exposure norms etc.

are regulated and supervised by the Reserve Bank of India under

the provisions of the Banking Regulation Act, 1949(AACS).

Main functions of commercial bnaks as well as co-

operative bank

The borrowings, raising or taking of deposits of money.

The lending or advancing on money either upon or without

security.

The drawing, making, accepting, discounting, buying, selling,

collecting and dealing in bills of exchange, hundies, promissory

notes, coupons, drafts, bills of lading, railway receipts, warrants,

debentures, certificates, scripts and other instruments and other

instruments and securities, whether transferable or negotiable or

not.



The granting and issuing of letter of credit, travelers cheque

and circular notes.

The buying selling in billion and species.

The buying and selling of foreign exchange including foreign

banks notes.

The acquiring holding issuing of commission, underwriting

and dealing in stock, funds, shares and debentures, debentures

stocks, bonds obligations, securities and investment of all kinds.

The purchasing and selling of bonds and scripts or other

forms of securities on behalf of constituents or others.

The receiving of all kinds of bonds, scripts or valuable on

deposit or for safe custody or otherwise.

The providing of safe deposit vaults for custody of valuables

of customers and the collecting and transporting of money and

securities.

RELATIONSHIP BETWEEN THE COMMERCIAL

BANKS AND CO-OPERATIVE BANKS



In any type of economic system whether it is capitalism or

socialism, the banking sector is fundamentally very important. The

commercial banks, co-operative banks are the constituents of the

banking sector. Due to their support the different sectors get

strength. These banks do functioning of providing finance under

the control of the Central Bank. The functioning of commercial

banks and c0-operative banks is almost similar i.e. to accept

deposits, to provide credit facilities, to make use of cheques and

other negotiable instruments in transactions, to provide safe

deposit vault system, so the relationship between the two is close.

In India the relative progress of commercial banks in

comparison to co-operative banks is very slow. Commercial Banks

seem competing with co-operative banks. This competition is in

respect of branch expansion and facilities of credit supply.

However after nationalization, no difference is found in the working

of commercial banks. The trend to compare with co-operative

banks is changed now. Today, commercial banks do not give

much attention to bank expansion. It resulted into the growth of co-

operative banks. Co-operative credit societies have certain image

in the minds o the rural people. Co-operative banks have some

more freedom than commercial banks in their functioning.

DIFFERNCE BETWEEN CO-OPERATIVE BANKS

COMMERCIAL BANKS AND PUBLIC SECTOR BANKS

A.) Co-operative banks and commercial banks:



Co-operative banks have objective of fulfilling the needs of

their members, deposit holders. Especially these banks fulfill the

needs of short – term, medium - term and long – term loans. They

have social benefit outlook. On the contrary, commercial banks

have profit motivation through more and more supply of credit. Co-

operative banks do not have main objective of profit – making.

They aim at developing agriculture and other allied occupations to

agriculture. They try to provide maximum credit with minimum cost

to their members. On the other hand, loans from commercial

banks create more expenditure.

The commercial banks and co-operative banks have

difference in case of administration and management. The board

of members of co-operative banks supervises and control the day

to day working of co-operative banks. This board includes

representatives of primary committee, representatives appointed

by the government. The management of co-operative banks varies

according to organizational structure. The management is in the

hands of Board of Directors which consists of 7 to 10 members.

Out of these 2 or 3 directors are appointed by the government.

One director in the Board of Directors in case of the primary land

development bank is at appointed by the central land development

bank.

The management and working of commercial banks is

according to the act of nationalized banks. The working of co-

operative banks is according to the co-operative law. The



government and the members of the bank indirectly control the

working of co-operative banks.

B.) Co-operative banks and public sector banks:

The difference between the co-operative banks and public

sector banks is as follows:

1) The creation of co-operative banks is for providing credit to

industry rum on co-operative basis.

The creation of public sector banks is for providing credit to

industry and commercial trade.

2) The object of co-operative banks is not to make profit by providing

credit. The object of these banks is to promote social benefit to

maximum level.

The public sector banks do the function of credit expansion to

various sectors with the objective of accruing more and more

profit.

3) The share capital and so credit expansion of co-operative is

limited.

The share capital of public sector banks is unlimited and so their

credit expansion is on a large scale.



4) The banking regulation act of 1949 was not applicable

to co-operative banking upto 1966.

This act was applicable to public sector banks since beginning.

5) The government has partial control on co-operative banks.

The public sector banks are under felly control of the central

government.

6) The elected board of members of co-operative banks

keeps supervision on day to day working of these banks.

The administration and management of public sector banks is

according to the act of public sector banking.

7) There are certain limits on the branch expansion of co-operative

banks.

The public sector banks can expand their branches to any limit.

8) As the co-operative banks are partially private, they can give better

treatment to members, depositors and borrowers.

The public sector banks belong to the government, so the

administrative functioning of these banks is not so much

satisfactory.



BANKING REGULATION ACT, 1949

ORIGIN OF BANKING



Since the banking activities were started in different

periods in different countries there is no unanimous view regarding

the origin of the word ‘bank’. The word Bank is said to have

derived from the French word banco or bancus or banc or banque

which means a bench. In fact the early jews in Lombardly

transacted their banking business by sitting on benches. When

their business failed, the benches were broken and hence the

word bankrupt came into vogue.

Another common held view is that the word bank might be

original from the German word back which means a joint stock

fund. Of course a bank essentially deals with funds .In due course

it was Italiansied into banco Franchised into bank and finally

Angliesed into bank. This view is most prevalent even today.

A Banker who is doing the banking business is called a

banker. But it is not at all easy to define the term banker precisely

because a banker performs multifarious functions.

ORIGIN OF THE ACT



Banks are public service institution dealing with funds

of the public. Unlike joint stock companies which obtain the

required capital from the shareholders, banks obtain a very large

proportion of their working capital from the public in the form of

deposits. Hence in the national interest, there is a need to regulate

the working of banks by a separate Act.

Unfortunately in India there was no separate legislation

for Banking till 1949 and so banks were brought under the control

of the Indian Companies Act. Though the Central Banking Enquiry

Committee recommended the need for a separate legislation, it

was not given due consideration then. However subsequent

development like mushroom growth of banks with inadequate

capital, dishonest management, speculative investment,

appointment of incompetent directors for long periods with high

salaries, poor liquidity of funds etc, necessitated the passing of a

separate Act for Banking Companies. Accordingly, a bill was

introduced in March 1948 and was passed in the Parliament in

February 1949.It came into force from 16th of March 1949.This act

was originally called the Banking Companies Act 1949 and now it

is renamed as the Banking Regulation Act.

DEFINATION ON BANKING:-.



The business of banking has been defined in section5 (b)

of the act as follows:

“Accepting for the purpose of lending or

investment of deposit, of money from the public, repayable on

demand or otherwise, and withdraw able by cheque, draft,

order or otherwise.”

Again section 5(c) defines ‘Banking Company’ as ‘any

company which transacts the business of banking in India’.

Banking Regulations For Commercial Banks:-



Prohibition of trading:-

Anything contained in section 6 or in any contract, no

banking company shall directly or indirectly deal in the buying or

selling or bartering of goods, except in connection with the

realization of security given to or held by it, or engage in any trade,

or buy, sell or barter goods for others otherwise than in connection

with bills of exchange received for collection or negotiation or with

such of its business

Prohibition of employment of managing agents and

restrictions on certain forms of employment:-

No banking company Shall employ or be managed by a

managing agent or Shall employ or continue the employment of

any person

Who is, or at any time has been, adjudicated insolvent, or

has suspended payment or has compounded with his creditors, or

who is, or has been, convicted by a criminal court of an offence

involving moral turpitude or

Whose remuneration or part of whose remuneration takes

the form of commission or of a share in the profits of the company.

Requirement as to minimum paid-up capital and

reserves:-



No banking company in existence on the commencement of

this Act, shall, after the expiry of three years from such

commencement or of such further period not exceeding one year

as the Reserve Bank, having regard to the interests of the

depositors of the company, may think fit in any particular case to

allow, carry on business and no other banking company shall after

the commencement of this Act, commence or carry on business in

India, unless it complies with such of the requirements of this

section as are applicable to it

In the case of a banking company incorporated outside India:-

(a) The aggregate value of its paid-up capital and reserves shall

not be less than fifteen lakhs of rupees and if it has a place or

places of business in the city of Bombay or Calcutta or both,

twenty lakhs of rupees.

(b) The banking company shall deposit and keep deposited with

the Reserve Bank either in cash or in the form of unencumbered

approved securities, or partly in cash and partly in the form of such

securities:-

(i) An amount which shall not be less than the minimum required.

(ii) As soon as may be after the expiration of each year, an amount

calculated at twenty per cent of its profit for that year in respect of

all business transacted through its branches in India, as disclosed

in the profit and loss account prepared with reference to that year.



Regulation of paid-up capital, subscribed capital and

authorised capital and voting rights of shareholders:-

No banking company shall carry on business in India, unless

it satisfies the following conditions, namely:—

(i) That the subscribed capital of the company is not less than one-

half of the authorised capital, and the paid-up capital is not less

than one-half of the subscribed capital and that, if the capital is

increased, it complies with the conditions prescribed in this clause

within such period not exceeding two years as the Reserve Bank

may allow.

(ii) That the capital of the company consists of ordinary shares

only or of ordinary shares or equity shares and such preferential

shares as may have been issued prior to the 1st day of July, 1944:

Restriction on commission, brokerage, discount, etc.

on sale of shares:-

No banking company shall pay out directly or indirectly by

way of commission, brokerage, discount or remuneration in any

form in respect of any shares issued by it, any amount exceeding

in the aggregate two and one-half per cent of the paid-up value of

the said shares.

Reserve Fund:-

Every banking company incorporated in India shall create a

reserve fund and shall, out of the balance of profit of each year as

disclosed in the profit and loss account prepared under section 29



and before any dividend is declared, transfer to the reserve fund a

sum equivalent to not less than twenty per cent of such profit.

The Central Government may, on the recommendation of the

Reserve Bank and having regard to the adequacy of the paid-up

capital and reserves of a banking company in relation to its deposit

liabilities, declare by order in writing that the provisions of sub-

section (1) shall not apply to the banking company for such period

as may be specified in the order.

Cash reserve:-

Every banking company, not being a scheduled bank, shall

maintain in India by way of cash reserve with itself or by way of

balance in a current account with the Reserve Bank, or by way of

net balance in current accounts or in one or more of the aforesaid

ways, a sum equivalent to at least three per cent of the total of its

demand and time liabilities in India as on the last Friday of the

second preceding fortnight and shall submit to the Reserve Bank

before the twentieth day of every month a return showing the

amount so held on alternate Fridays during a month with

particulars of its demand and time liabilities in India on such

Fridays or if any such Friday is a public holiday.

Restrictions on loans and advances:-

No banking company shall grant any loans or advances on

the security of its own shares, or enter into any commitment for

granting any loan or advance to or on behalf of



(i) Any of its directors,

(ii) Any firm in which any of its directors is interested as partner,

manager, employee or guarantor, or

(iii) Any company [not being a subsidiary of the banking company

or a company registered under section 25 of the Companies Act,

1956 (1 of 1956), or a Government company] of which 61[or the

subsidiary or the holding company of which] any of the directors of

the banking company is a director, managing agent, manager,

employee or guarantor or in which he holds substantial interest, or

(iv) Any individual in respect of whom any of its directors is a

partner or guarantor.

Where any loan or advance granted by a banking company

is such that a commitment for granting it could not have been

made if had been in force on the date on which the loan or

advance was made, or is granted by a banking company after the

commencement, but in pursuance of a commitment entered into

before such commencement, steps shall be taken to recover the

amounts due to the banking company on account of the loan, or

advance together with interest, if any, due thereon within the

period stipulated at the time of the grant of the loan or advance, or

where no such period has been stipulated, before the expiry of one

year from the commencement.

Lending Limits

Lending limit regulations restrict the total amount of loans

and credits that a bank may extend to a single borrower. This

restriction is usually stated as a percentage of the bank's capital or



assets. For example, a national bank generally must limit its total

outstanding loans and credits to any single borrower to no more

than 15% of the bank's total capital and surplus. Some state

banking regulations also contain similar lending limits applicable to

state-chartered banks. Both federal and state laws generally allow

for a higher lending limit, up to 25% of capital and surplus for

national banks, when the portion of the credit that exceed the initial

lending limit is fully secured.

Restrictions on opening of new, and transfer of

existing, places of business:-

Without obtaining the prior permission of the Reserve Bank

no banking company shall open a new place of business in India

or change otherwise than within the same city, town or village, the

location of an existing place of business situated in India.

No banking company incorporated in India shall open a new

place of business outside India or change, otherwise than within

the same city, town or village in any country or area outside India,

the location of an existing place of business situated in that country

or area.

Before granting any permission under this section, the

Reserve Bank may require to be satisfied by an inspection or

otherwise as to the financial condition and history of the company,

the general character of its management, the adequacy of its

capital structure and earning prospects and that public interest will

be served by the opening or, as the case may be, change of

location, of the place of business.



The Reserve Bank may grant permission to such conditions

as it may think fit to impose either generally or with reference to

any particular case.

Where, in the opinion of the Reserve Bank, a banking

company has, at any time, failed to comply with any of the

conditions imposed on it under this section, the Reserve Bank

may, by order in writing and after affording reasonable opportunity

to the banking company for showing cause against the action

proposed to be taken against it, revoke any permission granted.

Accounts and balance-sheet:-

At the expiration of each calendar year or at the expiration of

a period of twelve months ending with such date, as the Central

Government may, by notification in the Official Gazette, specify

that every banking company incorporated in India, in respect of all

business transacted by it, and every banking company

incorporated outside India, in respect of all business transacted

through its branches in India, shall prepare with reference to that

year or period, as the case may be, a balance-sheet and profit and

loss account as on the last working day of that year or the period,

as the case may be in the Forms set out in the Third Schedule or

as near thereto as circumstances admit.

The balance-sheet and profit and loss account shall be signed:-



(a) In the case of a banking company incorporated in India, by the

manager or the principal officer of the company and where there

are more than three directors of the company, by at least three of

those directors, or where there are not more than three directors,

by all the directors, and

(b)In the case of banking company incorporated outside India by

the manager or agent of the principal office of the company in

India.

The balance-sheet of a banking company is to be prepared

in a form other than the form set out in Part I -of Schedule VI to the

Companies Act, 1956 the requirements of that relating to the

balance-sheet and profit and loss account of a company shall, in

so far as they are not inconsistent with this Act, apply to the

balance-sheet or profit and loss account, as the case may be, of a

banking company.

The contrary contained of the Companies Act, 1956 the

period to which the profit and loss account relates shall, in the

case of a banking company, be the period ending with the last

working day of the year immediately preceding the year in which

the annual general meeting is held.

Power of the Reserve Bank to give directions:-

Where the Reserve Bank is satisfied that

(a) In the public interest or in the interest of banking policy.



(b) To prevent the affairs of any banking company being

conducted in a manner detrimental to the interests of the

depositors or in a manner prejudicial to the interests of the banking

company.

(c) To secure the proper management of any banking company

generally,

It is necessary to issue directions to banking companies

generally or to any banking company in particular, it may, from

time to time, issue such directions as it deems fit, and the banking

companies or the banking company, as the case may be, shall be

bound to comply with such directions.

The Reserve Bank may, on representation made to it or on

its own motion, modify or cancel any direction issued, and in so

modifying or canceling any direction may impose such conditions

as it thinks fit, subject to which the modification or cancellation

shall have effect.

Certain provisions of the Act not to apply to certain

banking companies:-

The provisions shall not apply to a banking company to

(a) Which, whether before or after the commencement of the

Banking Companies (Amendment) Act, 1959 has been refused a

licence, or prohibited from accepting fresh deposits by a



compromise, arrangement or scheme sanctioned by a court or by

any order made in any proceeding relating to such compromise,

arrangement or scheme, or prohibited from accepting deposits by

virtue of any alteration made in its memorandum.

(b) Whose licence has been cancelled, whether before or after the

commencement of the Banking Companies (Amendment) Act,

1959.

Where the Reserve Bank is satisfied that any such banking

company as is referred to repay, or has made adequate provision

for repaying all deposits accepted by the banking company, either

in full or to the maximum extent possible, the Reserve Bank may,

by notice published in the Official Gazette, notify that the banking

company has ceased to be a banking company within the meaning

of this Act, and thereupon all the provisions of this Act applicable

to such banking company shall cease to apply to it, except as

respects things done or omitted to be done before such notice.

Reimbursement to Deposit Insurance Corporation by

liquidator or transferee bank:-

Where a multi-State co-operative bank, being an insured

bank within the meaning of the Deposit Insurance and Credit

Guarantee Corporation Act, 1961, is wound up and the Deposit

Insurance Corporation has become liable to the depositors' of the

insured bank, the Deposit Insurance Corporation shall be



reimbursed by the liquidator or such other person in the

circumstances, to the extent and in the manner provided.

Punishments for certain activities in relation to

banking companies:-

No person shall

(a) Obstruct any person from lawfully entering or leaving any office

or place of business of a banking company or from carrying on any

business there, or

(b) Hold, within the office or place of business of any banking

company, any demonstration which is violent or which prevents, or

is calculated to prevent, the transaction of normal business by the

banking company, or

(c) Act in any manner calculated to undermine the confidence of

the depositors in the banking company.

Whoever contravenes any provision without any reasonable

excuse shall be punishable with imprisonment for a term which

may extend to six months, or with fine which may extend to one

thousand rupees, or with both.

Banking Regulations for Co-operative Banks:-

Act to override bye-laws, etc:-

The provisions of this Act shall have effect, notwithstanding

anything to the contrary contained in the bye-laws of a co-

operative society, or in any agreement executed by it, or in any

resolution passed by it in general meeting, or by its Board of



Directors or other body entrusted with the management of its

affairs, whether the same be registered, executed or passed; as

the case may be before or after the commencement of the Banking

Laws.

Any provision contained in the bye-laws, agreement or

resolution aforesaid shall, to the extent to which it is repugnant to

the provisions of this Act, become or be void, as the case may be."

(i) The words, "but excluding the business of a managing agent or

secretary and treasurer of company" shall be omitted;

(ii) After the word "company", the words "co-operative society"

shall be inserted;

(iii) After the word "company", the words "or co-operative society"

shall be inserted

Use of words "bank", "banker" or "banking" :-

No co-operative society other than a co-operative bank shall

use as part of its name or in connection with its business any of

the words "bank", "banker" or "banking", and no co-operative

society shall carry on the business of banking in India unless it

uses as part of its name at least of such words.

Nothing in this section apply to:-

(a) A primary credit society, or

(b) A co-operative society formed for the protection of the mutual

interest of co-operative banks or co-operative land mortgage

banks, or



(c) Any co-operative society, not being a primary credit society,

formed by the employees of

(i) A banking company or the State Bank of India or a

corresponding new bank or a subsidiary bank of such banking

company, State Bank of India or a corresponding new bank, or

(ii) A co-operative bank or a primary credit society or a co-

operative land mortgage bank, insofar as the word "bank",

"banker" or "banking" appears as part of the name of the employer

bank, or as the case may be, of the bank whose subsidiary the

employer bank is."

Requirement as to minimum paid-up capital and

reserves:-

Any law relating to co-operative societies for the time being

in force, no co-operative bank shall commence or carry on the

business of banking in India unless the aggregate value of its paid-

up capital and reserves is not less than one lakh of rupees.

(a) Any such bank which is carrying on such business at the

commencement of the Banking Laws (Application to Co-operative

Societies) Act, 1965 for a period of three years from such

commencement.

(b) To a primary credit society which becomes a primary co-

operative bank after such commencement, for a period of two

years from the date it so becomes a primary co-operative bank or

for such further period not exceeding one year, the Reserve Bank,

having regard to the interests of the depositors of the primary co-

operative bank, may think fit in any particular case to allow.



For the purpose of this section, "value" means the real or

exchangeable value and not the nominal value which may be

shown in the books of the co-operative bank concerned.

If any dispute arises in computing the aggregate value of the

paid-up capital and reserves of any co-operative bank, a

determination thereof by the Reserve Bank shall be final for the

purposes of this section.

Cash reserve:-

Every co-operative bank, not being a State cooperative bank

for the time being included in the Second Schedule to the Reserve

Bank of India Act, 1934 (hereinafter referred to as a "scheduled

State Co-operative Bank"), shall maintain in India by way of cash

reserve with itself or by way of balance in a current account with

the Reserve Bank or the State co-operative bank of the State

concerned or by way of net balance in current accounts, or, in the

case of a primary co-operative bank, with the central cooperative

bank of the district concerned, or in one or more of the aforesaid

ways, a sum equivalent to at least three per cent of the total of its

demand and time liabilities in India, as on the last Friday of the

second preceding fortnight and shall submit to the Reserve Bank

before the fifteenth day of every month a return showing the

amount so held on alternate Fridays during a month with

particulars of its demand and time liabilities in India on such

Fridays or if any such Friday is a public holiday under the

Negotiable Instruments Act.



Restriction on holding shares in other co-operative

societies:-

No co-operative bank shall hold shares in any other co-

operative society except to such extent and subject to such

conditions as the Reserve Bank may specify in that behalf.

(i) Shares acquired through funds provided by the State

Government for that purpose;

(ii) In the case of a Central co-operative bank, the holding of

shares in the State co-operative bank to which it is affiliated;

(iii) In the case of a primary co-operative bank, the holding of

shares in the Central co-operative bank to which it is affiliated or in

the State cooperative bank of the State in which it is registered

Restrictions on loans and advances:-

No co-operative bank shall:-

(a) Make any loans or advances on the security of its own shares.

(b) Grant unsecured loans or advances

(i) To any of its directors.

(ii) To firms or private companies in which any of its directors is

interested as partner of managing agent or guarantor or to

individuals in cases where any of its directors is a guarantor; or

(iii) To any company in which the chairman of the Board of

directors of the co-operative bank (where the appointment of a

chairman is for a fixed term) is interested as its managing agent, or

where there is no managing agent, as its chairman or managing

director.



Accounts and Balance Sheet:-

At the expiration of each year ending with the 30th days of

June, or at the expiration of a period of twelve months ending with

such date as the Central Government may, by notification in the

Official Gazette, specify in this behalf every co-operative bank, in

respect of all business transacted by it, shall prepare with

reference to that year or the period a balance sheet and profit and

loss account as on the last working day of the year or the period in

the Forms set out in the Third Schedule as near there to as

circumstances admit:

Reimbursement to the Deposit Insurance Corporation

by liquidator or transferee bank:-

Where a multi-State co-operative bank, being an insured

bank within the meaning of the Deposit Insurance and Credit

Guarantee Corporation Act, 1961, is wound up and the Deposit

Insurance Corporation has become liable to the depositors of the

insured bank, the Deposit Insurance Corporation shall be

reimbursed by the liquidator or such other person in the

circumstances, to the extent and in the manner.

Order of winding up multi-State co-operative bank to

be final in certain cases:-

Where a multi-State co-operative bank, being an eligible

cooperative bank, has been registered under the Deposit

Insurance and Credit Guarantee Corporation Act, 1961 as an

insured bank, and subsequently –



(a) In pursuance of a scheme prepared with the previous approval

of the Reserve Bank under section 18 of the Multi-State Co-

operative Societies Act, 2002, an order sanctioning a scheme of

compromise and arrangement or reorganization or reconstruction

has been made.

(b) On requisition by the Reserve Bank, an order for winding up of

the multi-State co-operative bank has been made under of Multi-

State Co-operative Societies Act, 2002.

(c) An order for the super session of the Board and the

appointment of an Administrator therefore has been made for

sanctioning the scheme of compromise and arrangement or

reorganisation or reconstruction or the winding up of the multi-

State co-operative bank under clause or an order for the super

session of the Board and the appointment of an Administrator or

shall not be liable to be called in question in any manner.

Validation of licenses granted by Reserve Bank to

multi state co-operative societies:-

(a) No licence, granted to a multi-State co-operative society by the

Reserve Bank, which was subsisting on the date of

commencement of the Banking Regulation (Amendment) and

Miscellaneous Provisions Act, 2004, shall be invalid or be deemed

ever to have been invalid merely by the reason of such judgment,

decree or order



(b) Every licence, granted to a multi-State co-operative society by

the Reserve Bank, which was subsisting on the date of

commencement of the Banking Regulation (Amendment) and

Miscellaneous Provisions Act, 2004, shall be valid and be deemed

always to have been validly granted in accordance with law

(c) A multi-State co-operative society whose application for grant

of licence for carrying on banking business was pending with the

Reserve Bank on the date of commencement of the Banking

Regulation (Amendment) and Miscellaneous Provisions Act, 2004

shall be eligible to carry on banking business until it is granted a

licence in pursuance or by a notice in writing notified by the

Reserve Bank that the licence cannot be granted to it"

Power to exempt:-

Without prejudice to the provisions of, the Reserve Bank

may, by notification in the Official Gazette, declare that, for such

period and subject to such conditions as may be specified in such

notification the whole or any part of the provisions, as may be

specified therein, shall not apply to any co-operative bank or class

of co-operative banks, with reference to all or any of the offices of

such co-operative bank or banks, or with reference to the whole or



any part of the assets and liabilities of such co-operative bank or

banks."

CONCLUSION

The reserve bank of India is India‘s central bank. Reserve bank is

a regulation of banks but is also the dominant owner of the largest

commercial banks. With globalization and impact of technology,

several new challenges are likely to emerge for the fraternity of

central banks. The RBI has blamed the commercial banks,



charging them with negligence and extensive, violation of banking

of banking regulation. The commercial banks are in turn blaming

the RBI for inefficient functioning and ineffective supervision. The

banking system has three tiers. These are the scheduled

commercial banks, the regional rural banks which operate in rural

areas not covered by the scheduled banks and the co-operative

banks and special purpose rural banks. The RBI lays down

restriction on bank lending and other activities with large

companies. These restriction known as consortium guidelines

seem to have outlined their usefulness. All commercial banks face

stiff competition and restrictions on the use of both their assets and

liabilities. 40% of loans must be directed to priority sector and high

liquidity ratio and cash reserve requirements severely limit the

availability of deposits for lending. The co-operative banking

system has witnessed phenomenal growth during the last one and

half decades. The role of RBI thus is to frame a regulatory and

supervisory regime that is multi – layered to capture the

heterogeneity of the sector and implement policies that would

provide adequate elbowroom for the sector to grow in a non –

disruptive manner. Despite the importance of co-operative banks

in the Indian economy, of late there has been a huge debate

concerning the regulation of these banks. These concerns have

been trigged by a spate of failures that have been attributed to

mismanagement and frauds. This takes us to the central question

of what are the problems that plague this sector and what could be

the possible remedies. Commercial banks remain the key players.

More ever the central bank is most developing countries is

relatively well placed for funding, is a centre of technical



excellence and can maintain greater independence from the

lobbying of commercial and political interests on behalf of certain

favoured institutions.

RECOMMENDATIONS / SUGGESTIONS

The role of the bank as regulator of banking sector is mainly

by virtue of the provisions of the Banking Regulation Act, 1949.

As provided in Section 6 of the banking regulation act, banks

may undertake certain non – banking business in addition to the



business of banking. In that regard banks be subject to the

regulatory control of other agencies also.

Being in the business of banking, cooperative credit

societies, including the State- and district-level cooperative banks,

have to follow the principles of banking in their functioning. The

present structure of the State Cooperative Societies Act with the e

Registrar at its head, presiding over the destiny of the

cooperatives, is totally unsuitable for the cooperatives to operate

on sound prudential banking norms. The banking institutions being

governed by such archaic rules and regulations is an anachronism

in the present climate of economic liberalisation.

It is necessary that bank-related functions of the cooperative

banks be brought full under the purview of Banking Regulation Act,

1949 in line with the existing provisions of the BR Act as applicable

to banking companies -- commercial banks registered under the

Companies Act. The provisions of the BR Act should override the

provisions of the State Acts/bye-laws/rules which run counter to it.

This will lead to a clear demarcation of the a activities of

cooperative banks which fall under the domain of RBI vis-à-vis the

RCS.'

This should be made possible by bringing all cooperative

societies which are in the banking business under one umbrella

through a central legislative by strengthening and amending the

BR Act 1949. The cooperatives should be allowed the freedom to

conduct their affairs as enjoyed by other forms of enterprises. The

Act should lay down a simple procedure for registration,

amendment to bye-laws, change of liability, division,



amalgamation, merger and dissolution of a cooperative banking

institution. The conduct of election, audits, and so on, should be

specified by their bye-laws and decided by their own

members/general bodies as is case with other corporate entities.

However, this will be meaningful only when the cooperative

banks have the similar system and freedom of operations as the

commercial banks. As long as they are extended arms of State

governments, this will not be possible. It is, therefore, appropriate t

hat the RBI Governor has set the ball rolling for reforms in the

cooperative banking sector.

Firstly, it would be a very good beginning if cooperative

banks were brought under the purview of a single regulator. This

would help in detection and pre-emptive action to prevent

misallocation of resources. Also, placing the burden of monitoring

on a single entity would attenuate the blame game in case of

failure due to lack of supervision. While a single regulator would be

ideal, if dual regulation were to persist, clear demarcation of duties

must be specified.

Another problem that plagues cooperative banks is the

involvement of politicians in their functioning. It is commonly

argued that politicians use cooperative banks to allocate favours to

extract political rents. This makes banks weak as they are used to

allocate loans in exchange for political favours. The interference of

politicians also creates hurdles for regulators in implementing

corrective measures in mismanaged banks.



Another aspect that raises inefficiencies in cooperative banks

is the lack of professional management. Most often cooperative

banks are run like any other family business with the involvement

of friends and relatives. The lack of professional management and

the involvement of family in the running of banks also leads to

related lending. While the RBI has issued directives requiring

adequate representation of professionals on the boards of

cooperative banks, implementation of this policy remains

questionable. The RBI or the federation of cooperative banks could

also make it mandatory for managers and the staff of cooperative

banks to receive certification based on their functions.

(1) Improve the transparency of information and in turn use

depositors effectively as a market discipline tool.

(2) Address the issue of dual regulation by ideally allocating

regulatory authority to a single regulator or clearly specify the

regulatory domains and responsibilities.

(3) Minimise political interference.

(4) Improve management expertise.

In conclusion, cooperative banks act as a very important

channel for credit allocation to the small borrowers. Thus,

improving their functioning through a better regulatory structure

can provide further impetus to economic growth and poverty

alleviation.



BIBLOGRAPHY

BOOKS



CO-OPERATIVE BANKING

-R. NARAYAN

-A. T. VAZE

CENTRAL BANKING IN INDIA

-K. GOVINDA BHAT

COMMERCIAL BANKS IN INDIA

-KUNJUKUNJ

SEARCH ENGINE

www.google.com

www.yahoo.com

www.rbi.org.in

www.wikipedia.com


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