THE REGULATIONS THAT GOVERN BANKING IN INDIA

History of Banking in India:

Prior to the advent of occidental ideas, loans and usury were well prevalent in ancient days in India. Provisions of banking are amply found in Kautilyas Arthashastra, Gautama, Brihaspati and Budhayana.

In 1806 Bank of Bengal was established by the charter with a capital of Rs. 50 lakhs. The Bank of Bombay and Madras were established in 1840 and 1843, respectively. The introduction of principle of limited liability in 1855 marked a new era in the history of public banks in India. Many banks sprung up like mushrooms and failed due to speculation, mismanagement and fraud on the part of those responsible for their floatation, organisation and management. The period of 1862 to 1865 witnessed crisis for banking business. Between 1865 and 1870 only one bank, the Allahabad Bank Ltd. was established in 1865, the Punjab National Bank was established in 1895. Thanks to Swadeshi Movement, the People’s Bank of India Ltd., The Central bank of India Ltd., Indian Bank Ltd., and the Bank of Baroda Ltd. were started.

The Presidency banks of Calcutta, Bombay and madras were amalgamated into the Imperial Bank of India on 27th January, 1921. With the passing of the State Bank of India Act, 1955, the Imperial bank of India was taken over by the newly constituted State Bank of India. Pursuant to the provisions of the State Bank of India (Subsidiary Banks) Act, 1959, the Bank of Bikaner, Indore, Jaipur, Mysore, Patiala, the Travancore Bank, the State Bank of Hyderabad and the State Bank of Saurashtra were constituted as subsidiaries of the State Bank of India.

Some important enactments during this period:

The Negotiable Instruments Act, 1881: It is intended to define and amend the law relating to ‘promissory notes’, ‘bills of exchange’ and ‘cheques’. It extends to the whole of India, but does not affect local usages relating to instruments in Indian languages.

The Banker’s Book Evidence Act, 1891: the next important piece of legislation which is made for Bankers alone in this country is the Bankers’ Books Evidence Act, 1891. It is a special Act giving certain privileges to banks as regard the mode of providing of entries in their books and production thereof in the Courts of Law.

The Reserve Bank of India Act, 1934: the Preamble of the Act says whereas it is expedient to constitute a Reserve Bank of India to regulate the issue of bank notes and the keeping of reserves with a view to secure monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

Industrial Re-Construction Bank of India Act, 1984: IRBI is an all India financial institution providing financial assistance to sick and non-sick industries needing modernisation, diversification and technological updating. It was established in April 1971 in the background of the growing problem of industrial sickness.

Regional Rural Banks (RRB): On the recommendation of a working group to examine, the setting up of new rural banks to cater to the credit needs of the rural people. RRBs, were established on 2nd October, 1975 with the authorised capital of Rs. 5 crores, divided into 5 lakhs of fully paid up shares of Rs. 100 each of which 50% shall be subscribed by the Central Government, 15% by the concerned State Government and 35% by the sponsor banks.

Security and Exchange Board of India (SEBI): SEBI was constituted by the Government of India during 1988 and accorded statutory powers under SEBI Act, 1992, with the objectives to protect interest of investors, to promote the development of security market and to regulate the security market.

?THE RESERVE BANK OF INDIA ACT, 1934 AND THE BANKING REGULATION ACT, 1949

The Reserve Bank of India Act, 1934: The Royal Commission on Indian Currency and Finance was constituted and known as John Hilton Young Commission of 1926. On its recommendation, Reserve Bank of India was established in 1935 by Reserve Bank of India Act, 1934, with the objectives to issue Bank notes in India, to stabilize monetary condition of the country, to control the deposits and reserve of the Bank and to carry on credit arrangement in the interest of the country.

Functions of the Reserve Bank of India:

Issuer of currency in India: the RBI is the sole authority to issue, control and regulate currency in India. The RBI issues and exchanges or destroys currency and coins not fit for circulation. The objective is to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Banker to the Government: the RBI performs merchant banking function for the central and state governments and also acts as a banker to the Government of India and the state governments. As a banker to the government, the RBI has the obligation to transact the bank business of the Central Government.

Banker to Commercial Banks: the RBI acts as banker to banks and maintains banking accounts of all scheduled banks. The commercial banks keep and maintain their accounts with the RBI. The commercial banks keep deposits with the RBI and they borrow money from the RBI when necessary.

Organiser of commercial Banking system: the RBI is largely concerned with the organisation of a sound and healthy commercial banking system, ensuring effective coordination and control over credit through appropriate monetary and credit policies followed from time to time.

Regulator and Supervisor of the Financial System: The RBI prescribes broad parameters of banking operations within which the country’s banking and financial system functions. The objective is to maintain public confidence in the system, protect depositor’s interest and provide cost effective banking services to the public.

Financial Supervision: RBI performs the function under the guidance of the Board for Financial Supervision (BFS) which was constituted in November, 1994 as a committee of the Central Board of Directors of the RBI. Primary objective of BFS is to undertake consolidated supervision of financial sector comprising commercial banks, financial institutions and non-banking finance companies.

Monetary Authority: The RBI formulates, implements and monitors the monetary policy. The main objective is maintaining price stability and ensuring adequate flow of credit to productive sectors.

Monetary and Credit Policies: In addition to the foregoing major functions of the central bank, the RBI exercises control over money and credit through appropriate monetary and credit policies followed from time to time.

Controls the volume of Credit: The RBI exercises its control over the volume of credit created by the commercial banks in order to ensure price stability. The RBI has been empowered to control the volume of credit quantitatively through the use of the Bank Rate, Repo Rate, Reverse Repo Rate, Open Market Operations, Variable Reserve Requirements, Selective Credit Control etc.

Authority to regulate and Supervise Payment Systems: The RBI has been designated under the payment and settlement systems at, 2007 as the authority to regulate and supervise payment systems in the country including those operated by non banks such as the CCIL, Card Companies and other payment system providers.

Manager of Foreign Exchange: Under the Foreign Exchange Management Act, 1999, RBI manages the foreign exchanges with the objective to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Maintains the value of Currency: The RBI has the responsibility to maintain not only the internal value of the currency i.e. the Indian Rupee, but it has also to maintain the external value of the currency.

Development of Rural Banking: In India, the RBI is also concerned with the development of Rural banking.

Money and Capital market: the RBI plays an important role in the development of money and capital market in India.

Promotion of Financial Institutions: the RBI plays an active role in the promotion of financial institutions in India.

Developmental Role of RBI: the RBI performs a wide range of promotional functions to support national objectives.

The Banking Regulation Act, 1949: the banking regulation Act, 1949 (10 of 1949) consolidated and amended the law relating to banking companies. It must, however, be added that the provisions of the Act are ‘in addition to, and not, save as expressly provided, in derogation of the Companies Act, 1956 (1 of 1956) and any other law for the time being in force (section 2) [now Companies Act, 2013]

Some important sections of BR Act, 1949:

Section 5(b) and (c) – They define the terms ‘banking’ and ‘Banking Company’ as:

(b) ‘Banking’ means the accepting for the purpose of lending or investment of deposits of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.’

(c) ‘Banking Company’ means any company which transacts the business of banking in India.

Section 6 – This section provides for the form of business, in which the banking companies may engage in, which are as follows: (1) In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely:-

(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and species; the buying and selling of foreign exchange including foreign bank notes; the acquiring holding, issuing on commission, underwriting and dealing in stocks, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities;

(b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a36[managing agent or secretary and treasurer] of a company;

(c) contracting for public and private loans and negotiating and issuing the same;

(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and the lending of money for the purpose of any such issue;

(e) carrying on and transacting every kind of guarantee and indemnity business;

(f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims;

(g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;

(h) undertaking and executing trusts;

(i) undertaking the administration of estates as executor, trustee or otherwise;

(j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit employees or ex- employees of the company or the dependants or connections of such persons; granting pensions and allowances and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public, general or useful object;

(k) the acquisition; construction, maintenance and alteration of any building or works necessary or convenient for the purposes of the company;

(l) selling, improving, managing, developing, exchanging, leasing mortgaging disposing of or turning into account or otherwise dealing with all or any part of the property and rights of the company;

(m) acquiring and undertaking the whole or any part of the business of any person or company, when such business is of a nature enumerated or described in this sub-section:

(n) doing all such other things as are incidental or conducive to the promotion or advancement of the business of the company:

(o) any other form ol business which the Central Government may by notification37in the Official Gazette, specify as a form of business in which it is lawful for a banking company to engage.

(2) No banking company shall engage in any form of business other than those referred to in subsection (1).

Section 6(1)(o) – Acting as Pension Fund Manager has been notified under this section as a Form of Business in which the Banking Companies may engage.

Section 8 - This section provides for the form of business, in which the banking companies shall not engage in, stating that:

Notwithstanding 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 realisation 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 as is referred to in clause (i) sub-section (1) of section 6:

[Provided that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6.]

Explanation.- For the purposes of this section, "goods" means every kind of moveable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instruments referred to in clause (a) of sub-section (1) of section 6.

Section 11 – This Section lays down the requirements regarding the minimum standard of paid-up capital and reserves as a condition for the formation and commencement of business for the banking company.

Section 12 – The provisions of section 12 provides for the regulation of paid-up capital, subscribed capital and authorised capital and voting rights of shareholders.

Section 12(2) – Under the provisions of this section the voting rights of a shareholder on poll in respect of any shares held by him are limited to 10% of the total rights of all the shareholders of the banking company.

Section 13 – This section states as follows:

Notwithstanding anything to the contrary contained in 1[sections 76 and 79 of the Companies Act, 1956 (1 of 1956)], 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 2[price at which the said shares are issued].

[Explanation: For the removal of doubts, it is hereby declared that the expression "price at which the said shares are issued" shall include amount or value of premium on such shares.]

Section 14 – This section stipulates that no banking company shall create any charge upon its unpaid capital, and any such charge, if created, shall be invalid.

Section 14A – This section stipulates as follows:

Notwithstanding anything contained in section 6, no banking company shall create a floating charge on the undertaking or any property of the company or any part thereof, unless the creation of such floating charge is certified in writing by the Reserve Bank as not being detrimental to the interests of the depositors of such company.

(1) Any such charge created without obtaining the certificate of the Reserve Bank shall be invalid.

(2) Any banking company aggrieved by the refusal of a certificate under sub-section may, within ninety days from the date on which such refusal is communicated to it, appeal to the Central Government.

(3) [The decision of the Central Government where an appeal has been preferred to it under sub-section (3) or of the Reserve Bank where no such appeal has been preferred shall be final.]

Section 19 – This section states as follows:

Restriction on nature of subsidiary companies.

(1)?A banking company shall not form any subsidiary company except a subsidiary company formed for one or more of the following purposes, namely:—

(a)?the undertaking of any business which, under clauses (a) to (o) of sub-section (1) of section 6, is permissible for a banking company to undertake, or

(b)?with the previous permission in writing of the Reserve Bank, the carrying on of the business of banking exclusively outside India, or

(c)?the undertaking of such other business, which the Reserve Bank may, with the prior approval of the Central Government, consider to be conducive to the spread of banking in India or to be otherwise useful or necessary in the public interest. Explanation.—For the purposes of section 8, a banking company shall not be deemed, by reason of its forming or having a subsidiary company, to be engaged indirectly in the business carried on by such subsidiary company.]

(2)?Save as provided in sub-section (1), no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding thirty per cent. of the paid-up share capital of that company or thirty per cent. of its own paid-up share capital and reserves, whichever is less: Provided that any banking company which is on the date of the commencement of this Act holding any shares in contravention of the provisions of this sub-section shall not be liable to any penalty therefore if it reports the matter without delay to the Reserve Bank and if it brings its holding of shares into conformity with the said provisions within such period, not exceeding two years, as the Reserve Bank may think fit to allow.

(3)?Save as provided in sub-section (1) and notwithstanding anything contained in sub-section (2), a banking company shall not, after the expiry of one year from the date of the commencement of this Act, hold shares, whether as pledgee, mortagagee or absolute owner, in any company in the management of which any managing director or manager of the banking company is in any manner concerned or interested.

(4)?Save as provided in clause (c) of sub?section (1), a banking company may form a subsidiary company to carry on the business of credit information in accordance with the Credit Information Companies (Regulation) Act, 2005.

THE REGULATIONS THAT GOVERN BANKING IN INDIA

The banking system in India is regulated by the?Reserve Bank of India (RBI), through the provisions of the Banking Regulation Act, 1949. Some important aspects of the regulations that govern banking in this country, as well as RBI circulars that relate to banking in India,?are:

Exposure limits: Lending to a single borrower is limited to 15% of the bank’s capital funds (tier 1?and?tier 2 capital), which may be extended to 20% in the case of infrastructure projects. For group borrowers, lending is limited to 30% of the bank’s capital funds, with an option to extend it to 40% for infrastructure projects. The lending limits can be extended by a further 5% with the approval of the bank's board of directors. Lending includes both fund-based and non-fund-based exposure.

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): Banks in India are required to keep a?minimum?of?4% of their net demand and time liabilities (NDTL) in the form of cash with the RBI. These currently earn no interest. The CRR needs to be maintained on a fortnightly basis, while the daily?maintenance?needs to be at least 95% of the required reserves. In case of?default?on daily maintenance, the penalty is 3% above the?bank rate?applied on the number of days of default multiplied by the amount by which the amount falls short of the prescribed level.

Over and above the CRR, a minimum of 22% and a?maximum of 40% of NDTL, which is?known as?the SLR,?is needed to be maintained in the form of gold, cash or certain approved securities. The excess SLR?holdings?can be used to borrow under the Marginal Standing Facility (MSF) on an overnight basis from the RBI. The interest charged under MSF is higher than the?repo?rate by 100?bps, and the amount that can be borrowed is limited to 2% of NDTL. (To learn more about how interest rates are determined, particularly in the U.S., consider reading more about?who determines interest rates.)

Provisioning: Non-performing assets (NPA)?are classified under 3 categories: substandard, doubtful and loss. An asset becomes non-performing if there have been no interest or principal payments for more than 90 days in the case of a?term loan. Substandard assets are those assets with?NPA status?for less than 12 months, at the end of which they are?categorized as doubtful assets. A loss asset is one for which the bank or?auditor?expects no?repayment?or recovery and is generally written off the books.

For substandard assets, it is required that a provision of 15% of the outstanding loan amount for secured loans and 25% of the outstanding loan amount for?unsecured loans?be made. For doubtful assets, provisioning for the secured part of the loan varies from 25% of the outstanding loan for NPAs that have been in existence for?less than one year, to 40% for NPAs in existence between one and three years, to 100% for NPA’s with a duration of more than three years, while for the unsecured part it is 100%.

Provisioning is also required on standard assets. Provisioning for agriculture and small and medium enterprises is 0.25% and for?commercial real estate?it is 1% (0.75% for housing), while it is 0.4% for the remaining sectors. Provisioning for standard assets cannot be deducted from gross NPA’s to arrive at net NPA’s. Additional provisioning over and above the standard provisioning is required for loans given to companies that have unhedged?foreign exchange?exposure.?

Priority sector lending: The priority sector broadly consists of?micro and small enterprises, and initiatives related to agriculture, education, housing and lending to low-earning or less privileged groups (classified as "weaker sections"). The lending target of 40% of adjusted net?bank credit?(ANBC) (outstanding bank credit minus certain bills and non-SLR bonds) – or the credit equivalent amount of?off-balance-sheet?exposure (sum of current?credit exposure?+ potential future credit exposure that is calculated using a credit conversion factor), whichever is higher – has been set for domestic?commercial banks?and foreign banks with greater than 20 branches, while a target of 32% exists for foreign banks with less than 20 branches.

The amount that is disbursed as loans to the agriculture sector should either be the credit equivalent of off-balance-sheet exposure, or 18% of ANBC – whichever of the two figures is higher. Of the amount that is loaned to micro-enterprises and small businesses, 40% should be advanced to those enterprises?with equipment that has a maximum value of 200,000 rupees, and plant and machinery valued at a maximum of half a million rupees, while 20% of the total amount lent is to be advanced to micro-enterprises with plant and machinery ranging in value from just above 500,000 rupees to a maximum of a million rupees and equipment with a value above 200,000 rupees but not more than 250,000 rupees.

The total value of loans given to weaker sections should either be 10% of ANBC or the credit equivalent amount of off-balance sheet exposure, whichever is higher.?Weaker sections include specific castes and tribes that have been assigned that categorization, including small farmers. There are no specific targets for foreign banks with less than 20 branches.

The private banks in India until now have been reluctant to directly lend to farmers and other weaker sections. One of the main reasons is the disproportionately higher amount of NPA’s from priority sector loans, with some estimates indicating it to be 60%?of the total NPAs. They achieve their targets by buying out loans and securitized portfolios from other non-banking finance corporations (NBFC) and investing in the Rural Infrastructure Development Fund (RIDF) to meet their?quota.

New bank license norms: The new guidelines state that the groups applying for a license should have a successful track record of at least 10 years and the bank should be operated through a non-operative?financial holding company?(NOFHC) wholly owned by the promoters. The minimum?paid-up?voting?equity capital?has to be five billion rupees, with the NOFHC holding at least 40% of it and gradually bringing it down to 15% over 12 years. The shares have to be listed within three years of the start of the bank’s operations.

The foreign shareholding is?limited to 49% for the first five years of its operation, after which RBI approval would be needed to increase the stake to a maximum of 74%. The board of the bank should have a majority of independent directors and it would have to comply with the priority sector lending targets discussed earlier. The NOFHC and the bank are prohibited from holding any securities issued by the?promoter?group and the bank is prohibited from holding any financial securities held by the NOFHC. The new regulations also stipulate that 25% of the branches should be opened in previously?unbanked?rural areas.

Wilful defaulters: A wilful default takes place when a loan isn’t repaid even though resources are available, or if the money lent is used for purposes other than the designated purpose, or if a property secured for a loan is sold off without the bank's knowledge or approval. In case a company within a group defaults and the other group companies that have given guarantees fail to honour their guarantees, the entire group can be termed as a wilful defaulter.

Wilful defaulters (including the directors) have no access to funding, and criminal proceedings may be initiated against them. The RBI recently changed the regulations to include non-group companies under the wilful defaulter tag as well if they fail to honour a guarantee given to another company outside the group.

The Bottom Line: The way a country regulates its financial and banking sectors is in some senses a snapshot of its priorities, its goals, and the type of financial landscape and society it would like to engineer. In the case of India, the regulations passed by its reserve bank give us a glimpse into its approaches to financial governance and shows the degree to which it prioritizes stability within its banking sector, as well as economic inclusiveness.

Though the regulatory structure of India's banking system?seems a bit conservative, this has to be seen in the context of the relatively under-banked nature of the country. The excessive?capital requirements?that have been set are required to build up trust in the banking sector while the priority lending targets are needed to provide financial inclusion to those to whom the banking sector would not generally lend given the high level of NPA’s and small transaction sizes.

Since the private banks, in reality, do not directly lend to the priority sectors, the public banks have been left with that burden. A case could also be made for adjusting how the priority sector is defined, in light of the high priority given to agriculture, even though its share of?GDP?has been going down.

REGULATORY REGIME OVER BANKING COMPANIES

Regulatory regime over banking companies means the regulation of control over banking companies. In India, banking companies are regulated by?Banking Regulation Act, 1949 and Reserve Bank of India Act, 1934.

Reserve Bank of India holds the status of apex bank of India it is empowered to supervise the functioning of all the banks in India. Only Reserve Bank of India has the power of printing of currency notes.

Since India has very large geographical area and population, it also has huge no. of banks which are needed to be regulated to keep the economy stable. If the banks are not regulated it would create imbalance in the economy.

Regulatory Regime Exercises its control on Banks in the following ways:

RBI (Reserve Bank of India) decides the rate of interest charged on loans.

RBI (Reserve Bank of India) decides the rate of interest given on FDRs which usually is higher for senior citizens.

RBI (Reserve Bank of India) decides the Statutory Liquidity Ratio (SLR) which a commercial bank has to maintain in order to control the expansion of credit.

RBI (Reserve Bank of India) decides the Cash Reserve Ratio (CRR) it is the ratio of cash which the bank has to deposit to RBI without and interest.

RBI (Reserve Bank of India) decides the withdrawal limit from ATM.

All the above-mentioned points are needed to be checked to ensure smooth running of the economy.

Central Government implements its financial policy through the regulatory regime:

Recently our Central Government has undergone the policy of?DEMONETISATION of Rs. 500 and Rs.1000 notes?which mean that the currency notes ceases to have the legal tender. Demonetisation was a step against black money government has carried its policy through RBI.

RBI had restricted the withdrawal limit of cash from banks and had also converted the old currency notes.

Demonetisation process was carried out in a very effective manner by banks throughout the India which could not have been possible without the?regulatory regime over banking companies.

Regulatory regime prohibits the banking company to indulge in trading:

Under Section 8 of Banking Regulation Act, 1949 banks are not allowed to indulge in the practices of trading of goods. Bank Regulation Act, 1949 permits a bank to do trade of securities, bills of exchange and other negotiable instruments but not of any goods directly or indirectly through barter system.

Reserve Bank of India controls inflation and deflation in the economy:

Inflation is a situation in an economy where the demand increases and supply decreases, this leads to rise in value of goods which reduces the purchasing power of the people. To control such situation the RBI sells the securities held with it by the commercial banks. This step by RBI reduces the cash lending power of banks which leads to increase in rate of interest on lending money by bank. This causes the decrease in demand as the people will opt to savings. In this way inflation is controlled by the RBI.

On the other hand in situation of deflation, demand decreases which increases the supply. This reduces the value of goods causing an increase in purchasing power of people. To control the situation the RBI buys the securities from commercial banks which increases their cash lending capacity which further results in fall in interest rate on lending money by bank. This causes people to spend money rather than saving it, which helps to increase the demand and making the market stable. Controlling of Inflation and Deflation is one of the most important regulatory measure performed by RBI.

Supervision and Control:

Reserve Bank of India for better supervision and control over banking companies has constituted a separate board viz. “The Board for Financial Supervision”. This board meets on monthly basis it has power to constitute sub-committees.

RBI regulates the licensing of banking companies:

Under Section 22 of Banking Regulation Act, 1949 a company to function as a banking company must hold a license of banking issued by Reserve Bank of India.

Board of Directors and Chairman:

Section 10A of Banking Regulation Act, 1949 says that every banking company shall have the board of directors who shall have special knowledge and practice experience in banking field and a Chairman.

If RBI is of opinion that composition of the board of directors of any banking company does not fulfil the requirement of the provisions of BR Act, 1949 it can after giving such banking company an opportunity of being heard, directs?the banking company to re-constitute the board of directors.

RBI as lender of last resort:

Usually, banks perform the function of lending money to people, but in a situation where bank runs out of cash and does not have left cash for its operation, then RBI comes to rescue the bank from such crisis. RBI?lends loans to the bank so that bank could operate.

Amalgamation of Banks:

Banking Regulation Act, 1949 regulates the process of amalgamation of banking companies. The banking companies planning to amalgamate shall have to create a draft copy of scheme of amalgamation covering terms and conditions, such draft should be approved by the resolution passed by members of banking companies. RBI holds the power of sanctioning the draft, once the draft is sanctioned by RBI then the assets and liabilities of banking companies are amalgamated.

Submission of returns by banks:

Every bank in India as a measure of regulation has to prepare and submit returns of liquid assets, unclaimed deposits, balance sheets, liabilities, etc.?to the Reserve Bank of India under provisions of Banking Regulation Act, 1949 and RBI Act, 1934.

The returns sent by the banks are analyzed by Reserve Bank of India this is kind of a measure through which RBI gets to know about the performance of the bank in the economy.

Conclusion:

The conclusion derived from above article is that, that regulatory regime over banking companies plays very important functions for maintaining equilibrium in the economy of a country. Regulatory regime lays the uniform code of conduct which the banking companies has to follow, the uniform code helps in maintaining balance and stability in the economy, without following it no economy can ever boom. Without the provisions of regulatory regime over banking companies, the economy would not and could not grow.

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