Banking Law and Regulation

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BANKING LAW ANDREGULATION

FM305

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MEANING OF BANK A bank is a financial institution licensed by a government.

Its primary activities include providing financial services to

customers while enriching its investors. Many financial

activities were allowed over time.

For example banks are important players in financial marketsand offer financial services such as investment funds.

2MANAGEMENT OF FINANCIAL INSTITUTION

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Banking law and regulation

Banking law is based on a contractual analysis of the

relationship between the bank and the customer defined as

any entity for which the bank agrees to conduct an account.

Bank regulations are a form of government regulation which

subject banks to certain requirements, restrictions and

guidelines.


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The law implies rights and obligationsThe bank account balance is the financial position between the bank and the customer: when

the account is in credit, the bank owes the balance to the customer; when the account is

overdrawn, the customer owes the balance to the bank.

The bank agrees to pay the customer's cheques up to the amount standing to the credit of the

customer's account, plus any agreed overdraft limit.

The bank must not disclose details of transactions through the customer's accountunless the

customer consents, there is a public duty to disclose, the bank's interests require it, or the law

demands it.The bank must not close a customer's account without reasonable notice, since cheques are

outstanding in the ordinary course of business for several days.


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Laws related to the banking

The Banking Regulations Act, 1949

The Reserve Bank of India Act, 1934

The Companies Act, 1956Indian Contract Act, 1872

Information Technology Act, 2000

Sale of Goods Act,1930

The Consumer Protection Act, 1986

The Prevention of Money Laundering Act, 2002

The Competition Act, 2002


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BANKING REGULATIONS ACT 1949The Banking Regulation Act was passed as the Banking

Companies Act 1949 and came into force wef 16.3.49.

Subsequently it was changed to Banking Regulations Act

1949 wef 01.03.66 .


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BANKING REGULATION ACTACT Requires

Compulsory License Issued by RBI

No company can use word bank, Banking or banker.Act Provides

A minimum capital required to start a banking company

Amendment in banking regulation Act 1966

Act Defined

Should accept money for lending or Investment.

Money should be repayable on Demand.


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IMPORTANT SECTIONS UNDER

THE BR ACT 1949(5 (i) (b) ) - Banking means accepting for the purpose of

lending or investment of deposits of money from public

repayable on demand or otherwise and withdrawable by

cheque, drafts order or otherwise .

(5(i)(c)) - Banking company means any company whichtransacts the business of banking.


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CONTD(5 (i) (e)) - Transact banking business in India.

(6(1)) - Defines business a banking company may be engaged in like

borrowing, lockers, letter of credit, traveller cheques, mortgages etc.

(6(2)) - States that no company shall engage in any form of business

other than those referred in Section 6(1).

(7) - For banking companies carrying on banking business in India to

use at least one word bank, banking, banking company in its name.


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CONTD.(8) - Restrictions on business of certain kinds such as trading of goods etc.

(9) - Prohibits banks from holding any immovable property howsoever

acquired except as acquired for its own use for a period exceeding 7 years

from acquisition of the property. RBI may extend this period by five years.

(19) - Permits banks to form subsidiary company for certain purposes.

(35) - RBI authorised to undertake inspection of banks.


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General principles of bank regulation

Banking regulations can vary widely across nations and jurisdictions.Minimum requirements: Requirements are imposed on banks in order to

promote the objectives of the regulator. The most important minimum

requirement in banking regulation is maintaining minimum capital ratios.Supervisory review: Banks are required to be issued with a bank license

by the regulator in order to carry on business as a bank, and the regulator supervises licenced banks.Market discipline: The regulator requires banks to publicly disclose

financial and other information, and depositors and other creditors are ableto use this information to assess the level of risk and to make investmentdecisions.


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Objectives of banking law and

regulationThe most common objectives are:

Prudential -- to reduce the level of risk bank creditors are exposed to (i.e. to

protect depositors)

Systemic risk reduction -- to reduce the risk of disruption resulting from adverse

trading conditions for banks causing multiple or major bank failures

Avoid misuse of banks -- to reduce the risk of banks being used for criminal

purposes, e.g. laundering the proceeds of crimeTo protect banking confidentiality

Credit allocation -- to direct credit to favored sectors


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Business Prohibited for the Banks

No banking company shall directly or indirectly deal in the buying and the

selling or bartering of goods except in connection with the realization of the

security given to be held by it,To engage in any trade, or buy, sell or barter goods for others otherwise than

in connection with the bills of exchange received for collection or

negotiation.

It can have a subsidiary company as specified under the BR Act, 1949 .


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Licensing of the Banking CompaniesRBI will issue license to the banking company- after satisfying the

conditions specified under the BR Act.

If the company is incorporated outside India- RBI has to inspect the

books of the company or be satisfied with the functioning of the

company,

This should be in the interest of the public or meet the law of thecountry in which it is to be incorporated without any discrimination

to the foreign banks.


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THANKYOU

Banking Law and Regulation

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