CAIIB BRBL Module A Unit 2 : Control Over Organisation Of Banks

CAIIB Paper 4 BRBL Module A Unit 2 : Control Over Organisation 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 “Control Over Organisation 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 2 : Control Over Organisation Of Banks, Aspirants must go through this article to better understand the topic, Control Over Organisation Of Banks and practice using our Online Mock Test Series to strengthen their knowledge of Control Over Organisation Of Banks. Unit 2 : Control Over Organisation Of Banks

Licensing Of Banking Companies

License Requirement from RBI:

  • To commence or carry on, the banking business in India, a company requires a license from the Reserve Bank under Section 22 of the Banking Regulation Act, 1949. Commencing or carrying on a banking business without a license is prohibited.

Discretion of Reserve Bank:

  • Reserve Bank has the discretion to grant or refuse the license and when such decision based on relevant material and germane considerations, the decision cannot be reversed or set aside. It is thus well settled that courts would intervene in the decision of RBI only if there is sufficient ground to believe that it has been made on extraneous considerations or unreasonable grounds.
  • Although Section 11 of BR Act specifies the minimum capital and reserve requirements of a banking company, the Reserve Bank may stipulate a higher requirement of capital before granting a licence to a banking company under Section 22.

Licensing Of Foreign Banks:

Foreign banks applying to the RBI for license for setting up their WOS/branches in India must satisfy RBI that they are subject to adequate prudential supervision in their home country.

  • The setting up of Wholly Owned Subsidiaries (WOS)/branches in India should have the approval of the home country regulator.
  • Economic and political relations between India and the country of incorporation of the foreign bank
  • Financial soundness of the foreign bank
  • Ownership pattern of the foreign bank
  • International and home country ranking of the foreign bank
  • Rating of the foreign bank by international rating agencies
  • International presence of the foreign bank
  • Government or laws of the country in which the foreign bank is incorporated does not discriminate in any way against banking companies registered in India.

Licensing Of Small Finance Banks:

  • The RBI had first issued guidelines for licensing of “Small Finance Banks” in the Private Sector in 2014. The Small Finance Bank shall be registered as a public limited company under the Companies Act, 2013. It will be licensed under Section 22 of the Banking Regulation Act, 1949 and governed by the provisions of the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934.

Cancellation of License: 

  • The RBI powers to cancel a license of a banking company is derived from subsections (4), of Section 22 of the BR Act 1949. Any banking company aggrieved by the decision of the Reserve Bank cancelling a license under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government.

Approval for Opening of Places of Business:

According to Section 23 of the BR Act 1949- Without obtaining the prior permission of the Reserve Bank: 

  • No banking company shall open a new place of business in India or change otherwise than within the same city, town or village, the location of an existing place of business situated in India; and
  • No banking company incorporated in India shall open a new place of business outside India

Paid-Up Capital and Reserves

Section 11 of the Banking Regulation Act provides for certain minimum requirements as to paid-up capital and reserves of banking companies.

Foreign Banks:

  • Under sub-Section (2) of Section 11 of the BR Act, a foreign bank operating in India, has to deposit and keep deposited with the Reserve Bank, an amount of Rs. 15 lakh and if it has a place of business in Mumbai or Kolkata or both, Rs. 20 lakh.
  • The amount has to be kept in cash or unencumbered approved securities or partly in both.
  • Apart from this, an amount of twenty per cent of the profit for each year, in respect of business transacted through the branches in India as disclosed in the profit and loss account, has to be deposited with the Reserve Bank.

Indian Banks:

  • Aggregate value of its paid-up capital and reserves shall not be less than—
  • if it has places of business in more than one State, five lakhs of rupees, and if any such place or places of business is or are situated in the city of Bombay or Calcutta or both, ten lakhs of rupees.

Paid-up Capital, Subscribed Capital and Authorized Capital:

  • Apart from the above, Section 12(1) of the Banking Regulation Act stipulates that the subscribed capital of a banking company shall not be less than half of its authorized capital; and the paid-up capital shall not be less than half of its subscribed capital.
  • If capital is increased, this requirement has to be complied within a period not exceeding two years as allowed by the Reserve Bank.

Shareholding In Banking Companies

Voting rights of shareholders:

  • According to Section 12(2) of the BR Act 1949 “No person holding shares in a banking company shall, in respect of any shares held by him, exercise voting rights on poll in excess of ten per cent of the total voting rights of all the shareholders of the banking company.
  • With a view to ensure that the control of banking companies is in the hands of fit and proper persons, it has been made mandatory for applicants to obtain prior approval from the Reserve Bank to acquire five percent or more of the share capital of a banking company.

Reports on shareholding:

  • A report regarding the particulars of shareholding of the Chairman, Managing Director or Chief Executive Officer of every banking company, requires submission to the Reserve Bank.

Commission, brokerage, discount: 

  • Under the 2013 Act, Section 13 of the Banking Regulation Act imposes a ceiling on the commission, brokerage, discount or remuneration on the sale of shares of banking companies. The payments on this account in any form should not exceed two-and-a-half per cent of the price at which the said shares are issued.

Payment of Dividend:

  • The proposed dividend should be payable out of the current year’s Net profit.
  • The Bank should have CRAR of at least 9% for preceding two completed years and the accounting year for which it proposes to declare dividend and Net NPA is less than 7%.
  • In case the Bank does not meet the above CRAR norm, but is having a CRAR of at least 9% for the accounting year for which it proposes to declare dividend, it would be eligible to declare dividend provided its Net NPA is less than 5%.
  • Normally the dividend payout ratio shall not exceed 40%

Board Of Directors


  • Section 10A of the Banking Regulation Act stipulates certain qualifications for directors of banking companies.
  • Accordingly, at least fifty-one per cent of the total number of directors shall be persons, who have special knowledge or practical experience, with respect of accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small scale industry
  • Further, at least two of the directors should have special knowledge or practical experience in agriculture and rural economy or cooperation or small scale industry.

Substantial interest:

  • The directors of a banking company shall not have a substantial interest in or be connected with as employee, manager or managing agent in a company or firm which carries on trade, commerce or industry as per Section 10A (2)(b) of the BR Act.
  • Holding of beneficial interest by any individual or his spouse or minor child, whether singly or taken together in the shares of a company exceeding Rs. 5 lakh or ten per cent of the paid-up capital of the company amounts to substantial interest.

Period of office:

  • The directors of a banking company shall not hold office for more than eight years continuously. However, this provision is not applicable to the chairman or a whole-time director.

Chairman Of Banking Company

Whole-time/Part-time Chairman/Managing Director:

  • Section 10B of the Banking Regulation Act provides that every banking company should have a whole-time or part-time chairman, appointed from among its directors.
  • The whole-time chairman and a managing director shall hold office for a period not exceeding five years as the board may fix and is also eligible for re-election or re-appointment.

Qualifications of whole-time Chairman/Managing Director:

According to Section 10 B (4) of the BR Act “Every Chairman who is appointed on whole-time basis and every Managing Director of a banking company appointed under sub-section (1A)] shall be person who has special knowledge and practical experience of –

  • The working of a banking company, or of the State Bank of India or any subsidiary bank or a financial institution, or
  • Financial, economic or business administration.

Removal of Whole-time Chairman/Managing Director:

  • If the Reserve Bank is of the opinion that the person elected to be the chairman of the board of directors is not a fit and proper person to hold such office, the Reserve Bank may require the banking company to remove such a chairman or the managing director and appoint a suitable person.

Power of Reserve Bank to appoint Chairman:

  • In certain cases, the office of the whole-time chairman or the managing director of a banking company may fall vacant and may not be filled up by the bank immediately. This may adversely affect the interests of the banking company.
  • If the Reserve Bank is of the opinion that continuation of such vacancy is likely to be against the interests of the banking company, it may appoint an eligible person to fill such vacancy under Section 10BB of the Banking Regulation Act.

Restrictions On Employment

The Banking Regulation Act (Section 10) prohibits employment of managing agents and imposes restrictions on employment of certain type of persons, namely – 

  • A person who is or has been adjudicated insolvent or has suspended payment or has compounded with his/her creditors
  • A person who is or has been convicted by a criminal court of an offence involving moral turpitude
  • A person whose remuneration or part thereof is by way of commission or share in the profits of the company
  • A person whose remuneration is excessive in the opinion of the Reserve Bank.

Persons who are directors of any company other than a subsidiary of a banking company or company registered under Section 25 of the Companies Act, 1956 are also prohibited from managing a banking company.

Control Over Management

  • The Reserve Bank is empowered under Section 36AA of the Banking Regulation Act to remove any chairman, director, chief executive officer or other officer or employee of a banking company.
  • An appeal against the order of removal lies with the Central Government. Such an appeal has to be filed within thirty days from the date of communication of the order.
  • On the Reserve Bank passing a removal order, the person concerned ceases to hold office which he/she was holding till then. Contravention of the order is punishable with a fine of Rs. 250 for each day during which the contravention continues.
  • Section 36 ACA of Banking Regulation Act empowers Reserve Bank to supersede Board of Banking Company for a period of six months which may be extended up to twelve months. During the interim period, an Administrator is appointed who shall act as per directions of Reserve Bank.

Corporate Governance

Organisation for Economic Cooperation and Development (OECD) has defined the purpose of Corporate Governance as follows:

“The purpose of corporate governance is to help build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies.”

OECD Principles of Corporate Governance, 2004:

  • Ensuring the basis for an effective corporate governance framework to promote transparent and efficient markets which are consistent with the rule of law.
  • To protect and facilitate the exercise of shareholders’ rights.
  • The equitable treatment of shareholders
  • Disclosure and transparency: Timely and accurate disclosures made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company.
  • The responsibilities of the board: Strategic guidance of the company, effective monitoring of management by the board and the board’s accountability to the company and the shareholders are the important aspects.

Corporate Governance and Banks: The Basel Committee on Banking Supervision has issued guidance (February 2006) for promoting the adoption of sound practices of corporate governance by banking institutions.

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CAIIB Paper 4 Module A Unit 2-Control Over Organisation Of Banks (Ambitious_Baba)

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