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CAIIB Paper 4 BRBL Module A Unit 1 : Legal Framework Of Regulation Of Banks (New Syllabus)
IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 4 (BANKING REGULATIONS AND BUSINESS LAWS) includes an important topic called “Legal Framework Of Regulation Of Banks”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.
In this article, we are going to cover all the necessary details of CAIIB Paper 4 (BRBL) Module A (REGULATIONS AND COMPLIANCE) Unit 1 : Legal Framework Of Regulation Of Banks, Aspirants must go through this article to better understand the topic, Legal Framework Of Regulation Of Banks and practice using our Online Mock Test Series to strengthen their knowledge of Legal Framework Of Regulation Of Banks. Unit 1 : Legal Framework Of Regulation Of Banks
Business Of Banking
- Banking in India is mainly governed by the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934.
- Banking is defined in Section 5(b) of the Banking Regulation Act, 1949 as follows – “Banking means the accepting for the purpose of lending or investing, of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.”
- Under Section 49A of the Banking Regulation Act, no person other than a banking company, Reserve Bank of India, the State Bank of India or any other banking institution, firm or other person notified by the Central Government in this behalf is authorised to accept deposits withdrawable by cheque.
- Acceptance of deposits by non-banking financial companies is regulated by the Reserve Bank under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.
- In India, it is necessary to have a licence from the Reserve Bank under Section 22 of the Banking Regulation Act for commencing or carrying on the business of banking.
- Every banking company has to use the word “bank” as part of its name (vide, Section 7 of the Act) and no company other than a banking company can use the words “bank”, “banker”, “banking” as part of its name.
Constitution Of Banks
Banks in India fall under one of the following categories:
- Body corporate constituted under a special statute
- Company registered under the Companies Act, 1956 (Companies Act 2013) or a foreign company
- Co-operative society registered under a Central or State enactment.
Public Sector Banks (other than SBI)
- These Public Sector Banks are constituted under the Banking Companies (Acquisition) and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
State Bank of India (SBI)
- The State Bank of India was constituted under the State Bank of India Act, 1955 while the seven associate/subsidiary banks were constituted under the State Bank (Subsidiary Banks) Act, 1959.
Regional Rural Banks (RRBs)
- The RRBs were constituted under the Regional Rural Banks Act, 1976. These banks are governed by the statutes creating them as also some of the provisions of the Banking Regulation Act and the Reserve Bank of India Act.
Private Sector Banks/Foreign Banks
- Most Private Sector Banks (including Micro and Small Finance Banks) are Companies’ constituted under Section 3 of the Companies Act, 1956 or incorporated under the Companies Act, 2013. Foreign Banks are basically foreign companies constituted as per statutes abroad and treated as such under section 2(42) of the Companies Act, 2013.
- A co-operative bank conducts ordinary banking business but is established on a co-operative basis. If a co-operative bank is operating in more than one state, the Central Act i.e. Multi State Cooperative Societies Act applies. In other cases, the respective State Co-operative Societies Act would apply.
However as of today there are different types of co-operative credit institutions working in India. Their structure in India is given in the chart below:
Reserve Bank Of India, 1934
The Reserve Bank of India Act, 1934 was enacted to constitute the Reserve Bank of India and came into force from 6th March 1934.
The general superintendence and direction of the affairs and business of the bank have been vested with the Central Board of Directors which consists of –
- A governor and not more than four deputy governors appointed by the central government.
- Four directors nominated by the central government, one from each of the local boards.
- Ten directors nominated by the central government
- Two government officials nominated by the central government.
- The RBI Act defines a Scheduled Bank as under: A Scheduled Bank is one which has been included in the Second Schedule of the Reserve Bank of India, 1934 which in turn includes only those banks which satisfy the criteria mentioned on section 42 (6) (a) of this statute.
- The RBI may act as lender of the last resort as per provisions under Section 17 and 18 of the RBI Act. It offers funds to banks or other financial institutions that are experiencing financial difficulty or are considered highly risky or near bankruptcy due to adverse impact of liquidity or other risks.
The government came up with a proposal, for introduction of laws and regulations, to give the regulator (RBI) more control over NBFCs Consequently, Chapter VI of the Finance (No. 2) Act 2019 which took effect from 9th August 2019 provides for amendments inter alia to the RBI Act 1934 with respect to Non-Banking Finance Companies (NBFCs).
- Limit of net owned funds has been enhanced to Rs. 100 crores from the existing limit of Rs. 2 crores.
- Under newly inserted sections 45-ID and 45-IE, the RBI has been provided with two ways to control the management of a regulated NBFC i.e. by either replacing directors or by superseding its board.
- The new section 45MAA introduced, gives the RBI the power to remove or debar an auditor room exercising duties as an auditor for an RBI regulated entity for a period of 3 years, if, the RBI is satisfied that such auditor has failed to comply with its directions.
- Under newly inserted section 45MBA RBI is given powers to frame schemes for amalgamation, reconstruction or splitting of an NBFC into viable and non-viable businesses to ensure the smooth functioning of the financial system.
- The RBI has also been given additional powers, under new section 45NAA, to direct an NBFC to furnish statements and information relating to its group company(s) and order inspection or audit for the same.
Banking Regulation Act, 1949
- Banking Regulation Act, 1949 is a legislation in Indiathat regulates all banking firms in India. Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and changed to Banking Regulation Act 1949 from 1 March 1966. It is applicable in Jammu and Kashmir from 1956.
- Initially, the law was applicable only to banking companies. But, in 1965 it was amended to make it applicable to cooperative banks and to introduce other changes. In 2020 it was amended to bring the cooperative banks under the supervision of the Reserve Bank of India.
This Act shall not apply to:
- Aprimary agricultural credit society; or
- A Co-operative society whose primary object and principal business is providing of long-term finance for agricultural development.
- The Act was also amended in 2017 through the Banking Regulation (Amendment) Act, 2017 by inserting two new sections viz., 35AA and 35AB authorizing the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
- The RBI draws its power to conduct Annual Financial Inspection (AFI) of banking companies under Section 35 of the BR Act.
- Earlier the Amending Act (2012) introduced the setting up of a Depositor Education and Awareness Fund (DEAF) to take over inoperative deposit account(s) which have not been claimed or operated for a period of ten years or more, within a period of three months from the expiry of the said period of ten years.
The objectives of the Banking Regulation Act is to:
- Provide specific legislation to the business of banking in India
- Prevent bank failures by prescribing minimum capital requirements
- Ensure balanced development and growth of banking companies
- Give specific powers to RBI
- Safeguard the interest of Depositor.
Reserve Bank As A Central Bank And Regulator Of Non-banking Financial Institutions/Banks
- The Reserve Bank 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:
- Regulating the issue of bank notes;
- Keeping of reserves for ensuring monetary stability and
- Generally, to operate the currency and credit system of the country to its advantage.
- The Banking Regulation Act 1949 empowers the RBI to act as a regulator and supervisor of banking activities in India. The powers include powers to issue licenses, control over voting rights/ quantum of shareholding of shareholders, managerial personnel, etc.
The major powers of the Reserve Bank in the different roles as regulator and supervisor can be summed up as under:
- Power to issue banking licenses
- Power of appointment and removal of banking boards/personnel
- Power to regulate the business of banks
- Power to give directions
- Power to inspect and supervise banks
- Power regarding audit of banks
- Power to collect, collate and furnish credit information
- Power relating to moratorium, amalgamation and winding up and
- Power to impose penalties.
Government As A Regulator Of Banks
- The Reserve Bank is the primary regulator of banks. But the Central Government has also been conferred extensive powers under the RBI Act and BR Act to regulate banks either directly or indirectly.
- The Governor and the members of the Central Board of the RBI are appointed by the Government of India (GOI) who also has powers to remove them. The GOI is the sole shareholder of the RBI.
A few areas where the power lies with the Government to do certain acts to regulate/supervise Banks are as follows:-
- Appeal against removal of managerial personnel of a Bank exercised by RBI, under Section 10B and 36AAof the Banking Regulation Act.
- Similarly appeal against, cancellation of banking license (under Section 22) and refusal of certificate regarding floating charge on assets (under Section 14A), may be preferred by the aggrieved banks, with the Government
- Suspension of operations and exemption from any of the provisions of the BR Act (under Section 4 and 53 respectively of the Act) may be permitted by the GOI on representation/ recommendation of the RBI.
- Under Section 6(1) of the Act the GOI notifies which other business a banking company may engage, in addition to the business of banking.
Control Over Co-operative Banks
- A co-operative bank is a co-operative society engaged in the business of banking and may be a primary Co-operative bank, a district central Co-operative bank or a State Co-operative bank.
- With the introduction of Section 56 in the Banking Regulation Act, 1949 with effect from 1965, Co- operative banks came 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 while licensing and regulation of banking business rests with the Reserve Bank. Thus, there is a dual control of State Governments and the Reserve Bank over these banks.
- The Banking Regulation (Amendment) Act 2020 was enacted with effect from 26th June 2020 to give more powers to the RBI to restructure Co-operative Banks,
Provide more control over management through powers of Supersession of Board of directors of a Cooperative Bank (Section 36AAA as amended) etc. and allow RBI to frame the revival plan for these Banks and protect the interests of the depositors.
- Co-operative Banks have also been permitted to raise capital through public/private issues, preferential shares, debentures etc. The amendments however do not affect the existing powers of the State Registrars of co-operative societies under the State laws.
- 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.