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Complete Notes with QA for CMA Final Gr-3
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7.1 BANKING REGULATION ACT, 1949
| The table below shows the past trend of this chapter in last 11 exams | ||||||||||
| June 17 | Dec 17 | June 18 | Dec 18 | June 19 | Dec 19 | Dec 21 | Dec 22 | June 23 | Dec 23 | June 24 |
| 6 | 5 | 0 | 4 | 0 | 0 | 1 | 10 | 0 | 0 | 5 |
| Concept 1. OVERVIEW |
| 1. Power of Parliament | As per Entry 45 of Union List, Parliament has power to make Banking Laws. |
| 2. Banking Regulation Act, 1949 | It’s a Central Law. |
| 3. Framework provided by the act | Supervision and Regulation of Commercial Banking in India. |
| 4. Exclusions from the Act | Primary Agricultural Credit Society and cooperative land mortgage banks |
| 5. Overview of powers given by act to RBI | 1. To license banks, 2. have regulation over shareholding and 3. voting rights of shareholders, 4. supervise the appointment of the boards and management, 5. regulate the operations of banks, 6. lay down instructions for audits, 7. impose moratorium, 8. mergers and liquidation, 9. issue directives in the interests of public good and 10. on banking policy and 11. impose penalties. |
| Concept 2. Forms of business in which banking companies may engage [Section 6] |
| 6. What is Banking | ‘Banking’ means accepting, for the purpose of lending and investment of deposit of money from the parties, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. |
| 7. Other Business | (a) Agent for any government or local authority or persons but not as a managing agent or secretary and treasurer of a company. Agent of others, but not managing agent. Others means Government and non-government both. (b) May effect, insure/ guarantee/underwrite, participate in managing or carrying out of any issue of loans or any other securities made by state, local body, company, corporation, association and may also lend for the purpose. Can operate, manage, guarantee, underwrite any issue of loan or security Can also give loan for the same. (c) May carry on or transact every kind of guarantee or indemnity business. Can do guarantee business or indemnity business. (d) May manage, sell and realize any property which may come its possession in satisfaction of its claims. Can manage and sell property acquired after default in loans. (e) May acquire, hold and deal with any property or any right, title or interest therein which forms the security for any loans or advances sanctioned. Can acquire, hold and deal assets and rights of collateral security for loan given. (f) May undertake and execute trusts. Can establish and operate trusts. (g) May undertake the administration of estates as executor, trustee or otherwise. Can become administrator of estates. (h) May establish and support or aid in the establishment of associations, institutions, funds, trusts and conveniences for the benefit of its present or past employees and their dependents and may grant or guarantee moneys for charitable purposes. Can work for welfare for employees and past employees. Can also make associations for them. Can also donate in these associations. (i) May acquire, construct, maintain and alter any building or works necessary for its purposes. Can acquire or build or maintain or alter immovable property but only for own use. (j) May sell, improve, manage, develop, exchange, lease, mortgage dispose off or otherwise deal with any of its properties and rights. Can deal with its properties in a way it wants. (k) May take over and undertake the whole or any part of the business of any person or company when such business is of a nature described above. Can acquire similar nature businesses. (l) May do all such other things as are incidental or conducive to the promotion or advancement of its business. Can promote banking and other businesses. (m) May engage in any other form of business which the Central Govt. specifies to be lawful. Can perform other business as approved by CG and RBI |
| Concept 3. Board of Directors to include persons with professional and other experience |
| 8. Majority Directors should be from | 51% or more directors should have specialized knowledge or practical experience in following fields: · accountancy, · agriculture and rural economy, · banking, · co-operation, · finance, · law, · small scale industry or · any other field specified by RBI |
| 9. Minimum 2 Directors from | Agriculture and rural economy, co-operation and small-scale industry. |
| 10. Tenure | 8 Years, other than Chairman and Whole-time director |
| 11. Connection with Industry | Small industrial concern/firms: allowed. Rest not allowed. |
| 12. Conflict of interest | To be always avoided. |
| 13. Reconstitution | Maybe ordered by RBI |
| 14. One Director One Bank | Same person can not be director in more than 1 bank. |
| 15. Removal of Director | Ordered by RBI Appeal to CG Dec 2014 Mr. Anuj is a director in State Bank of India. On the ground of his misconduct to the interest of the depositors, the Reserve Bank of India terminates his service. Decide whether the Reserve Bank of India can do so under the Banking Regulation Act, 1949. 3 marks Under section 36AA of the Banking Regulation Act, 1949, RBI can terminate any Chairman, Director, Chief Executive, other officials or any employee of the bank where it considers desirable to do so particularly when RBI is of the opinion that conduct of such persons is detrimental to the interest of the depositors or for securing proper management of the banking company. Before such termination concerned person should be given opportunity to be heard of. Such terminate officials can make appeal to the Central Govt. within 30 days from the date of communication of such termination order. The decision of the Central Govt. cannot be called into question. In case an order is issued pursuant to this section the concerned person shall cease to hold his office for a period of not exceeding 5 years as may be specified in the order. Contravention of the above provision shall be punishable with a fine, which may extent to Rs. 250 per day. |
| 16. Vacancies | Firstly, by Bank itself. Otherwise, By CG |
| Concept 4. Banking company to be managed by whole time Chairman [Section10B] |
| 17. Chairman Conditions | · Chairman must be director · May be whole time or part time · Shall handle complete management only if he is full time, else MD will take care of complete management · Shall exercise powers subject to the superintendence, control and direction of the Board of Directors · MD and Chairman both need RBI Approval for appointment · Approval period 5 Years. |
| Concept 5. Power of Reserve Bank to appoint Chairman of the Board of Directors appointed on a whole-time basis or a Managing Director of a banking company [Section10BB] |
| 18. RBI appointing Chairman and MD | · To fill the vacancy · If the vacancy continuation may adversely affect the Bank · Appointed Chairman May be whole time or part time · MD must be whole time if Chairman is part time · Tenure 5 Years · Person appointed by RBI deemed to be director, even if not a director |
| Concept 6. Requirements regarding minimum paid up capital and reserves [Sections 11 & 12] |
| 19. Ratio of Capital to be maintained | · Subscribed Capital should not be less than half of Authorised Capital Subscribed Capital ½ Authorised Capital · Paid Up Capital should not be less than half of Subscribed Capital Paid Up Capital ½ Subscribed Capital |
| 20. What if the capital amount changes | · 2 Years shall be given to maintain the same ratio |
| 21. Kind of shares | · Shares can be Equity and Preference |
| 22. CAR maintenance | · Capital adequacy ratio must be maintained |
| 23. NPA (Non-Performing Assets) | · NPA must be provided for in the financial statements. During the last two quarters, the public sector banks in general have declared lower net profits or ran into losses in comparison to the previous years in compliance with the stipulations of the Reserve Bank of India. The rising NPA of the Banks is a matter of concern for the banks as well as regulators. MCQ Given in Study Mat: NPA stands for: a) Non-Productive asset b) Non Performance Asset c) National Productivity asset d) none of the above Note: Below mentioned is a question asked in Syllabus 2016 Dec 2022 attempt. This is shown here only for knowledge purpose. The rules underlying below question are not present in New Syllabus 2022 Dec 22 Gupta and Co. has been appointed as an internal auditor of TCB Bank Ltd., a private sector bank, registered with RBI. Mr. Gupta, the engagement partner, while performing the audit as per the checklist, noted down the following points, which would be part of the audit queries, as tabulated below: 1 Interest on State Government Guaranteed Advance has been taken to income even though such advance has remained overdue for more than 90 days. 2 There is an account for which an ad hoc limit has not been reviewed for 180 days from the date of such ad hoc sanction and such account has been treated as a performing asset in the books. 3 One of the NPAs was sold for a value higher than the net book value. Profit was not recognized but the excess provision in respect of the same has been reversed. 4 In case of one of the accounts, an additional temporary limit has been sanctioned for 25% of the existing limit and for 120 days tenure. 5 On verification of outstanding forward exchange contracts, the 'net position' in respect of one of the foreign currencies was not squared and was uncovered by a substantial amount. You are required to provide the reasons to which such queries would have been raised by Mr. Gupta and describe the actions that may be taken by the person responsible on behalf of TCB Bank Ltd. for solving such queries. 10 marks Answer |
| 24. Why sufficient capital is important | · Banks are required to engage with other banks for their business relationship and the loss of capital in one bank can impact the other banks as well. |
| 25. Basel Committee Guidelines | Indian commercial banks are required to be compliant with the Basel III Recommendations. Following are the major guidelines: · Maximum voting rights 10% irrespective to shareholding · This 10% can be increased to 20% in phases. · Minimum total capital of 9 % of total risk weighted assets must be maintained · Should have better capital quality and buffers · 3 Pillars of Capital Adequacy must be maintained · Minimum common Equity tier I and Tier II must be maintained |
| 26. 3 Pillars of Capital Adequacy | · Market discipline: Making Correct Disclosures · Supervisory review Process: Tolls to regulate and review things to mitigate risk · Minimum capital requirement based on risk weighted assets (RWAs) |
| Concept 7. Limiting the payment of dividends [Section 15] |
| 27. Pre-condition of Dividend | · Dividend cannot be paid without Complete writing off the capitalized expenses/Deferred Revenue Expense like Preliminary Expenses, Brokerage and Commission on issue of shares |
| 28. Exception of this condition | · However, following items are exceptions, which means even if these items are not completely written off, dividend can still be paid. a. Depreciation in the value of Investments in approved securities b. Depreciation in the value of other than approve securities after making provision, subject to approval of auditor on this provision |
| 29. Dividend after RBI Approval | · If Pre-condition is fulfilled, RBI approval not needed. · If Pre-condition is NOT fulfilled, RBI approval is a way to legally avoid pre-condition. |
| Concept 8. Transfer to Reserve Fund [Section 17] |
| 30. Applicability | · Only Indian Banks (As per Act) · All scheduled commercial banks operating in India including foreign banks (As per RBI Circular of Capital Adequacy Norms) |
| 31. Amount of Transfer | · 20% of the Net Profits (As per Act) · 25% of the Net Profits (As per RBI Circular of Capital Adequacy Norms) · To be transferred to Reserve Fund · Each Year · Net Profit means before appropriation Dec 2015 The Board of Directors of MKR Ltd., a banking company incorporated in India, for the accounting year ended 31-03-2015 transferred 15% of its net profit to its Reserve Fund. Certain shareholders of the company object to the above act of the Board of Directors on the ground that it is violative of the provisions, of the Banking Regulation Act, 1949. Examine the provision of Banking Act and decide: (a) Whether contention of the Shareholders is tenable. (b) Would your answer be still the same in case the Board of Directors transfer 30% of the company's net profits to Reserve Fund. 5 marks In accordance with the provisions of the Banking Regulation Act, 1949 as contained in Section 17, every banking company incorporated in India must create a reserve fund and transfer a sum equivalent to not less than 20% of its net profits each year (as disclosed in the Profit and Loss Account prepared under section 29 and before any dividend is declared). However, Central Government is empowered to exempt any banking company from this requirement on the recommendation of the RBI. Such exemption will be allowed only: 1. When the amount in the reserve fund and the share premium account are equal to the paid-up share capital of the banking company. 2. When the Central Govt., feels that its paid-up share capital and reserves are adequate to safeguard the interest of the depositors. If the banking company appropriates any sum from the Reserve Fund or the Share Premium account, it must be reported to RBI within 21 days from the date of such appropriation explaining the circumstances leading to such appropriation. Therefore, applying the above provisions: (a) Contention of share holders shall be tenable since the 15% of transfer of profits to Reserve Fund is lower than statutory limits, as provided in the Act. (b) In the second case the contention of shareholders shall not be tenable, since 30% is more than the minimum statutory limit of 20% of the net profits |
| 32. Stopping of Transfer | · Reserve Fund + Securities Premium Account Paid Up Share Capital + · Approval of CG after recommendation of RBI Dec 2018 The Board of Directors of M/s. S.K. Limited, a banking company incorporated in India, for the accounting year ended 31st March, 2018 has transferred 10% of its net profit during the year to the Reserve Fund Account. A few shareholders of the company have objected the above act of the Board on the ground that it is violative of the provisions of the Banking Regulation Act, 1949. The Board of Directors of the Company in their defense have stated that the company has received an order dated 30th April, 2018 from the Central Government exempting the company from the provisions of sub section (1) of section 17 of the Act. It is further informed that on the date of the Central Government order i.e. 30.04.2018 the paid up capital of the company was Rs. 200 crores and the amount standing in the Reserve Fund Account and Share Premium Account was Rs. 100 crores and Rs. 75 crores respectively. Decide whether the order of the Central Government exempting the company is justified as per the provisions of the Banking Regulation Act, 1949. 4 marks Reserve Fund: According to Section 17 of the Banking Regulation Act, 1949, every Banking Company incorporated in India must create a Reserve Fund and transfer a sum equal to not less than 20% of its net profits. However, the Central Government is empowered to exempt from this requirement on the recommendation of the RBI. Such exemption will be allowed only :- - When the amounts in the reserve fund and the share premium account are not less than the paid-up capital of the banking company. - When the Central Govt. feel that its paid-up capital and reserves are adequate to safe guard the interest of the depositors. If a banking company appropriates any sum from the Reserve fund or the share premium account, it must be reported to RBI within 21 days explaining the circumstances leading to such appropriation. In the instant case, the total amount in the reserve fund and the share premium account is Rs. 175 crores which is less than the paid-up capital of the banking company i.e. Rs. 200 crore. In view of the above the transfer of 10% of its net profits to reserve fund is violative of the provisions of the Banking Regulation Act, 1949. Moreover, the Order of the Central Government exempting the company is not justified as per the provisions of the Banking Regulation Act, 1949. |
| 33. Appropriation of Reserves | · Appropriation means use · Use of Reserve or Securities Premium · To be intimated to RBI · Within 21 days of use. · 21 days may be extended by RBI |
| Concept 9. Maintenance of cash reserve by non-scheduled banks [Section 18] |
| 34. Cash Reserve for Non-Scheduled Banks Section 18 | · How much: At least 3% of its total time and demand liabilities · Where to keep: Option 1 Cash reserve with itself Option 2 in current account opened with RBI or SBI or notified Bank Option 3 Combination of above options |
| 35. Cash Reserve for Scheduled Banks Section 42 | · How much: At least 4.5% of its total time and demand liabilities · Where to keep: Option 1 Cash reserve with itself Option 2 in current account opened with RBI or SBI or notified Bank Option 3 Combination of above options |
| Concept 10. Restrictions on nature of companies [Section 19] |
| 36. Prohibition on | · Creating Subsidiaries · Holding shares in other companies |
| 37. Exception | · Subsidiaries can be created subject to 2 conditions: a. RBI Approval and b. Purpose incidental to banking business |
| Concept 11. Restrictions on loans and advances [Sections 20 & 21] |
| 38. Prohibition on | · Loan to Directors · Loan to an entity in which director is interested · Loan to an entity in which Director is guarantor · Loan to anyone on security of its own shares |
| 39. Power of RBI to restrict loans and advances | · RBI can control advances by any bank, on public interest. |
| 40. RBI Directions | RBI gives directions to banking companies on the following matters: a. Purpose for which, loan to be given or not to be given b. Margins to be maintained in case of secured loans c. Rate of interest to be charged d. Maximum assistance to be given to a single party |
| Concept 12. Licensing of banking companies [Section 22] |
| 41. Bank License | · Issued by RBI · Licenses are issued on Tap Basis. (Means as and when applied) |
| 42. Conditions to be satisfied and verified | · Company can pay its present or future depositors · Affairs of the company shall be conducted in the best interest of present or future depositors · Banks whether Indian or Foreign will not do any discrimination · Banks shall comply with Act and RBI · Name of the Bank must contain Bank word · Entity must be either a Company or a Co-operative Society |
| 43. Cancelation of License | · Cancelled by RBI |
| 44. Grounds of Cancellation | · Banking Business stopped by the Bank · Fails to fulfil conditions |
| 45. Appeal to CG | · Appeal against RBI decision of cancellation · Appeal to CG · In 30 days · CG decision shall be final |
| Concept 13. Control on the opening of new business [Section 23] |
| 46. New Branch | · New Business means new branch · RBI approval needed for both Indian and Foreign Branch |
| 47. Exceptions | · Opening a branch within the same city, town or village · Opening a temporary branch in mela, conference, exhibition etc. for a maximum period of 1 month at a place where a normal branch is already present |
| Concept 14. Maintenance of a percentage of liquid assets (SLR) [Section 24] |
| 48. Liquid assets (SLR) | · SLR = · Rate of SLR as per Act = 25% · Rate of SLR as per RBI = 18% · Calculation = 25% of the total of its time and demand liabilities at the close of business on any day. · Liquid Assets= Cash, gold or unencumbered approved securities · RBI approval needed for both Indian and Foreign Branch |
| 49. Valuation of Liquid Assets | · To be done at Market Price |
| Concept 15. Maintenance of Assets in India [Section 25] |
| 50. Assets to be maintained | · How much: 75% of its demand and time liabilities · Where to maintain: In India · Calculation Date: Close of business of the last Friday of every quarter. |
| Concept 16. Submission of Returns of unclaimed Deposits [Section 26] |
| 51. Unclaimed Deposits | · Means Deposits done but never came back to claim or withdraw |
| 52. Reporting to RBI | · Only for Unoperated accounts for 10 years or more. |
| 53. Reporting to NABARD | · Regional Rural Banks will report to NABARD (National Bank for Agriculture and Rural Development) and not RBI |
| 54. Return Date | · Within 30 days after the close of each calendar year. (30th January) |
| 55. Relevant Date | · For FD, From the maturity date · For others, last transaction date. |
| Concept 17. Submission of Return, Forms, etc., to RBI [Section 27] |
| 56. Return for what | · Showing its assets and liabilities in India on the last Friday of every month |
| 57. Power of RBI to ask for further return | · RBI can ask for further information and return anytime. |
| 58. Half Yearly return | · Only when asked by RBI · Will contain 2 things: a. Investments of banking company b. Classifications of advance given in respect of industry, commerce and agriculture. |
| Concept 18. Audit of the Balance Sheet and Profit & Loss Account [Section 30] |
| 59. Annual Accounts | · As per the format prescribed by the Act. · Third Schedule · Signed by Principal officer or manager and at least 3 directors · Submitted to RBI in triplicate (3 copies) with Audit Report in 3 months from end of FY · 3 more months can be provided by RBI · Also submitted to RoC , same in triplicate |
| 60. Inspection | · May be ordered by RBI Dec 2017 Various complaints have been made against the activities of a Co-operative Banking company to the effect that, if unchecked, the shareholders, depositors and others will suffer heavily, and the complainants requested for the appointment of directors by Reserve Bank of India. Discuss whether the Reserve Bank has any powers to inspect the records of the Co-operative Bank to ascertain the truth or otherwise in the complaints and to appoint directors in the Co-operative Bank under the Banking Regulation Act, 1949. 5 marks Power of Reserve Bank of India to inspect banks (Section 35 of the Banking Regulation Act, 1949): RBI is empowered to conduct inspection of any bank and to give them direction as it deems fit. All banks are bound to comply with such directions. Every directors or other officer of the bank shall produce all such books, documents as required by the inspector. The inspector may examine on oath any director or other officers. RBI shall supply the bank a copy of such report of the inspection. RBI submits report to Central Government and the latter, on scrutiny, if is of the opinion that the affairs of the bank are being conducted detrimental to the interest of its depositors, it may, after giving an opportunity of being heard, to the bank, may order in writing prohibiting the bank from receiving fresh deposits, direct the RBI to apply section 38 for winding up of the bank. Power of RBI to appoint Directors (Section 36AB of the Banking Regulation Act, 1949): RSI is empowered to appoint additional Directors for the banking company with effect from the date to be specified in the order, in the interest of the bank or that of depositors. Such additional directors shall hold office for a period not exceeding three years or such further period not exceeding three years at a time. |
| 61. Audit | · As per the rules laid down under the act. |
| Concept 19. Giving directions to Banking Companies [Section 35A] |
| 62. Power of RBI | · To issue directions |
| 63. To whom | · To one or more or all Banks |
| 64. To protect | · Public Interest and Banking Industry |
| 65. Objectives of Instructions | · To protect public interest · To protect Banking Industry · To prevent the affairs being done in detrimental manner · To secure the proper management of any banking company |
| 66. Duty of bank | · To follow the directions in letter and spirit |
| Concept 20. Power of RBI |
| 67. 5 Specified Powers | · Power to issue direction in respect of stressed assets (35AB) · Prior approval from RBI for appointment of Managing Director, etc. [Section 35B] · Removal of managerial and any other persons from office [Section 36AA and Section 36AB] · Suspension of Board of Directors in certain cases. · Suspension of Business [Section 37] |
| 68. Power 1 | · Power to issue direction in respect of stressed assets (35AB) To issue direction to bank for resolution of stressed assets To form authorities/committees for the same |
| 69. Power 2 | · Prior approval from RBI for appointment of Managing Director, etc. [Section 35B] RBI approval mandatory for ü appointment, re-appointment, remuneration and removal of the chairman or a director of a banking company and also ü the amendments of MoA AoA ü the amendments of Resolutions of a General Meeting or Board of Directors. |
| 70. Power 3 | · Removal of managerial and any other persons from office [Section 36AA and Section 36AB] RBI can remove managerial and other persons from office and can appoint additional directors. |
| 71. Power 4 | · Suspension of Board of Directors in certain cases. ü Either by RBI ü Or by CG in consultation with RBI ü In public interest or to protect depositors · Power of CG to acquire Banks Central Government has the power to acquire the undertaking of the banking company, under above situation. |
| 72. Power 5 | · Suspension of Business [Section 37] ü When a banking company is temporarily unable to meet its obligations ü it may apply to the High Court ü requesting an order for Moratorium ü Request must contain RBI report in this regard |
| 73. Moratorium means: | · Staying the commencement or continuance of all legal actions and proceedings against it for a period of not exceeding 6 months. |
| Concept 21. Winding up of Banking Companies [Section 38 to 44] |
| 74. Application by RBI | · Application shall be given by RBI and not to RBI · RBI certification necessary on its ability to pay its debts |
| 75. Grounds of such application | · Fails to follow capital conditions · Not entitled to carry on banking business · Prohibited by CG/RBI to take fresh deposits · Fails to follow RBI instructions or Act · Failed scheme of Compromise or Arrangement · Unable to pay its debts · Working against the interest of depositors |
| 76. Voluntary Winding Up | · Application shall be given to RBI · RBI will further apply along with its certification of Solvency |
| Concept 22. Power of CG to acquire a banking business. |
| 77. Application by RBI | · CG may acquire a banking company by compulsorily transferring shares or otherwise |
| Concept 23. Amalgamation of Banking Companies [Section 44A] |
| 78. Majority Vote needed | · 2/3rd Majority of voting rights of the shareholders in a general meeting |
| 79. What about unwilling shareholders | · They are entitled to receive the value of their shares as may be determined by the RBI. |
| 80. RBI approval | · Only after and not before shareholders’ approval |
| 81. Scheme of Amalgamation | · Transfer of assets and liabilities · Dissolution of transferor bank · Suspension of business with CG approval for interim period |
| 82. RBI power | · To carry out reconstruction and amalgamation without imposing moratorium. |
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