Regulatory Framework for Banking in India
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Transcript of Regulatory Framework for Banking in India
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REGULATORY FRAMEWORK FOR
BANKING IN INDIA
An overview.
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The Definition and Nature of Business
of Banking
Banking in India is mainly governed by TheBanking Regulation Act, 1949 and The ReserveBank of India Act 1934.
Banking is defined as the acceptance ofdeposits from the public for the purpose oflending or investment.
Banker can refuse open an account from anundesirable person. Know your customer(KYC) has become more stringent now.
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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.
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Licence for Banking.
It is necessary to have a licence from RBI tocommence the business of Banking.
Ever banking company has to use the word
bank as part of its name and no companyother than a banking company can use theword, bank',' banker, banking as part of itsname.
The forms business permissible are given inSection 6 (1) of the Banking Regulation Act.
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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, bankguarantees etc.
Negotiating loans and advances.
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Providing safe deposit vaults.
Negotiating loans and advances.
Providing, working capital, cash-credit andoverdraft facilities to firms.
Manage investments of clients- personal
finance advisory services. Market shares, mutual funds, bonds,
debentures, insurance etc
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Prohibited Business.
Prohibited from engaging directly or indirectlyin trading activities and undertaking tradingrisks.
Buying or selling or bartering goods directly orindirectly is prohibited.
However they can hold as securities against
loans, goods, land properties etc which theycan also sell or dispose off when the debtors
default.
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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 thecooperative law of the state.
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Registrar of Cooperative Societies under theCooperative Societies Act exercises a widerange of powers on cooperative societies from
registration to winding up. In the case of cooperative banks operating in
more than one State, The Multi-unitCooperative Societies Act, 1986 is applicable.In such cases the Registrar appointed byCentral Government exercises control.
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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 ofMadhavpura Coop. Bank in Gujerat after the
Ketan Parekh scam.
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Government as a Regulator of Banks
RBI is the primary regulator of banks. But GOIhas 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.
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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.