Regulation of Banking Business: Jaiib/DBF Paper 3 (Module A) Unit-3

Regulation of Banking Business: Jaiib/DBF Paper 3 (Module A) Unit-3

Dear bankers,

As we all know that  is Regulation of Banking Business for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Regulation of Banking Business (Unit-3), Regulations and Compliance (Module A), Legal & Regulatory Aspects of Banking -Paper 3.

♦Power to Issue Directions

The Banking Regulation: The Act authorized the Reserve Bank to issue directions to banks under Sections 21 and 35A of the Act.

  • Section 21 BR Act 1949: Gives the power to regulate advances by banking companies. RBI allows to control loans and advances extended by banking companies.
  • Section 35A BR Act 1949: vests power in the RBI to give directions to banks and can take action:  To prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company To ensure better governance and control
  • Section 36 BR Act 1949: RBI is empowered to caution or prohibit any banking company regarding any transaction or class of actions.

♦Acceptance of Deposits

  • Regulation of Acceptance of Deposits: The Banking Regulation Act does not contain any specific provisions for regulation of acceptance of deposits of banks. However, Section 35A which authorizes the RBI to give directions is wide enough to cover acceptance of deposit.
  • Returns on Unclaimed Deposits: Bank have to file a return every year on their unclaimed deposits under Section 26 of the Banking Regulation Act. The return has to be filed within 30 days of the end of each calendar year in the form and manner prescribed and should cover all deposit not operated for 10 yrs. In the case fixed deposits the period of 10years starts from the expiry of the period of the deposit.


  • Section 45ZA BR Act: Where a deposit is held by a banking company to the credit of one or more persons, the depositor or, as the case may be, all the depositors together, may nominate, in the prescribed manner, one person to whom in the event of the death of the sole depositor or the death of all the depositors. Unless the nomination is varied or cancelled, the nominee is entitled to all the rights of the depositor’s in the event of death of the depositor’s. In the case of minor nominees, there is also a provision to appoint a person to receive the deposit on behalf of the minor.
  • Article of safe custody and safety lockers: There are also provisions in the Banking Regulation Act for nomination in respect of articles kept in safe custody with bank and safety lockers. Sections 45ZC and 45ZE provide that any person, who leaves any article in safe custody and in safety lockers respectively with a banking company, may nomination one person as nominee to receive the article in the event of death of that person. The nomination has to be in the prescribed manner and on return of articles kept in safe custody or removal of contents of locker by nominees as provided; the bank gets a valid discharge. Rule 3 and 4 of banking companies (Nomination) rules, 1985 deal with the form and procedure applicable to articles in safe custody and safety lockers respectively in the case of banking companies and co-operative banks.

♦Regulation Loans, Advances & Interest Rates

  • Regulation of Loans and Advances: The RBI is empowered under Section 21 of the Banking Regulation Act to issue directions to control advances by banking companies.

The RBI issue directions from time to time regulating the lending operations of banking companies in exercise of these powers vested under Section 21. Apart from this, the general powers to give directions under Section 35A are also available for regulation of loans and advance.

  • Restriction on loans and advances: Section 20 of the Banking Regulation Act imposes certain restrictions on loans and advances.
  • Restrictions on power to remit debt: For remitting any debt to its directions, a banking company requires prior permission of the RBI under Section 20A of the BR Act.
  • Interest rates: RBI is authorized to regulate interest rates under Section 21 (with Section 35A) of the BR Act.

♦Regulation of Money Market Instruments

  • Section 45-W of RBI Act 1934: “Power to regulate transactions in derivatives, money market instruments, etc”
  • The Bank may, in public interest, or to regulate the financial system of the country to its advantage, determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them, dealing in securities, money market instruments, foreign exchange, derivatives, or other instruments of like nature as the Bank may specify from time to time:
  • Provided that the directions issued under this sub-section shall not relate to the procedure for execution or settlement of the trades in respect of the transactions mentioned therein, on the Stock Exchanges recognised under section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).
  • The Bank may, for the purpose of enabling it to regulate agencies referred to in sub-section (1), call for any information, statement or other particulars from them, or cause an inspection of such agencies to be made.

♦Reserve Funds

  • Creation of Reserve Fund: Every Banking Company incorporated in India has to create a reserve fund under Section 17(1) of the BR act out of the profits as shown in the profits and loss account prepared under Section 29 of the Act. Every year, a sum equivalent to not less than 20% of such profit has to be transferred to the reserve fund. Such transfer of profits to reserve fund has to be made before any dividend is declared.
  • Appropriation from Reserve fund/ Share Premium Account: Appropriation of any amount from the reserve fund or the share premium account has to be reported to the Reserve Bank within 21 days of such appropriation.
  • Foreign Bank: The provisions of Section 17(1) of the Banking Regulation Act for creating of reserve fund do not apply to foreign banks operating in India. In their case, instead of creating a reserve fund under section 17(1), section 11(2) of the Act requires them to deposit and keep deposited with the RBI an amount calculated at 20% of the profit for each year in respect of all the business transacted through their branches in India.

♦Maintenance of Cash Reserve

Every Bank company which is a scheduled bank has a duty to maintain certain cash reserve with the RBI under Section 42 of the RBI Act. In the case of non-scheduled banks Section 18 of the BR Act provides for the maintenance of cash reserve.

  • Scheduled Banks: A scheduled Bank is a bank included in the second schedule of the RBI Act. Under Section 42(6) of the Act, the RBI may include any bank in the second schedule if it satisfies. It has a paid-up capital and reserves of an aggregate value of not less than Rs 5 lacs.
  • Quantum of Cash Reserve: The cash reserve required to be maintained by a scheduled bank with the RBI Under Section 42(1) of the RBI Act (as amended in 2006)is an average daily balance, being such percent of the total of the demand and time liabilities in India of that bank as shown in the return referred to in the sub-section(2).
  • Interest: Until the amendment to the RBI Act in 2006, the Reserve bank was authorized under the Act (Section 42(1B)) to pay interest to a scheduled bank when it maintained reserve above the statutory minimum as required under the RBI notification under erstwhile proviso to the sub-Section (1) or under the sub-Section (1A)of section 42.
  • Returns: Every scheduled bank has to submit a return to the Reserve bank showing its demand and time liabilities and borrowing from banks in India, classifying them into demand and time liabilities and giving other details required under Section 42(2) of the RBI Act.
  • Penalties: Failure of file the return as required also attracts a penalty under section 45(4) of the act. Where Reserve Bank is satisfied that a bank has sufficient reason for committing the default, either in maintaining reserves or in filing return, the penalty may be waived.
  • Cash Reserves of Non-scheduled Bank: In the case of banking companies, which are not scheduled banks under Section 18 of the BR Act, the cash reserve need not be maintained with the RBI.

♦Banking Ombudsman

  • Banking ombudsman, a quasi-judicial authority is formed with an intent to resolve the complaints of the customers of the Bank.
  • Section 35A of the Banking Regulation Act, 1949 deals with Banking Ombudsman Scheme. It came into effect in 1995 and presently the Banking Ombudsman Scheme 2006 is in operation.
  • The scheme covers not just scheduled Commercial Banks but also Regional Rural Banks and Scheduled Primary Co-operative Banks. Recently, RBI also extended the concept of Banking Ombudsman to NBFC’s as well.

Areas of customer redressal available with the Ombudsman mechanism

  • Non-payment or unreasonable delay in the payment /collection/ issue of cheques, drafts, bills etc.;
  • Non-acceptance, without sufficient cause, of small denomination notes and coins tendered for any purpose, and for charging of commission in respect thereof;
  • Non-payment or delay in payment of inward remittances;
  • Non-adherence to prescribed working hours;
  • Delay/failure to provide any banking facility (other than loans and advances) which has been promised in writing by the Bank
  • Delay/ non-credit of proceeds to the respective parties’ accounts, non-payment of deposit or non-observance of the RBI directives, with respect to the rate of interest on bank deposits
  • Complaints from NRIs having accounts in India in relation to their remittances from abroad, deposits and other bank related matters;
  • Refusal to open deposit accounts without any valid reason for this refusal;
  • Levying charges without adequate prior notice to the customer;
  • Non-adherence to RBI instructions on ATM / Debit Card /Prepaid Card / Credit Card operations in India by the bank or its subsidiaries
  • Non-adherence to RBI instruction with regard to Mobile Banking / Electronic Banking service in India.
  • Non-disbursement or delay in disbursement of pension (to the extent the grievance can be attributed to the action on the part of the bank concerned, but not with regard to its employees);
  • Refusal to accept or delay in accepting payment towards taxes, as asked by Reserve Bank/Government;
  • Failure /Delay with regard to the issue, service or redemption of Government securities;
  • Forced closure of deposit accounts without any notice or without giving sufficient reason;
  • Refusal to close or delay in closing accounts;
  • Not following the fair practices code as adopted by the bank;
  • Non-observance of Reserve Bank guidelines on engagement of recovery agents by banks;
  • Non-adherence to RBI guidelines on allied-banking activities like sale of insurance or mutual fund or other investment products by banks
  • Any other matter relating to the violation of RBI directives

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